AS FILED WITH THE SEC ON _____________________________ REGISTRATION NO. 2-80896
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 33 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 36 [X]
(Check appropriate box or boxes)
----------------
THE PRUDENTIAL SERIES FUND, INC.
--------------------------------
(Exact Name of Registrant)
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
-------------------------------------------
(Name of Depositor)
PRUDENTIAL PLAZA
NEWARK, NEW JERSEY 07102-3777
(800) 445-4571
-------------------------------------------------------------
(Address and telephone number of principal executive offices)
----------------
THOMAS EARLY
SECRETARY
THE PRUDENTIAL SERIES FUND, INC.
PRUDENTIAL PLAZA
NEWARK, NEW JERSEY 07102-3777
---------------------------------------
(Name and address of agent for service)
Copy to:
JEFFREY C. MARTIN
SHEA & GARDNER
1800 MASSACHUSETTS AVENUE, N.W.
WASHINGTON, D.C. 20036
----------------
The Registrant has registered an indefinite amount of securities pursuant to
Rule 24f-2 under the Investment Company Act of 1940. The Rule 24f-2 notice for
fiscal year 1996 was filed on February 28, 1997.
It is proposed that this filing will become effective (check appropriate space):
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on May 1, 1997 pursuant to paragraph (b) of Rule 485
-------------
[ ] on _________________ pursuant to paragraph (a)(1) of Rule 485
[ ] on _________________ pursuant to paragraph (a)(2) of Rule 485
================================================================================
<PAGE>
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
(AS REQUIRED BY 495(A) UNDER THE 1933 ACT)
N-1A ITEM NUMBER AND CAPTION LOCATION
- ---------------------------- --------
<S> <C> <C>
PART A
1. Cover Page ....................................... Cover Page
2. Synopsis ......................................... Not Applicable
3. Condensed Financial Information................... Financial Highlights; Portfolio Rates of Return;
Investment Objectives and Policies of the Portfolios
4. General Description of Registrant................. The Series Fund; Investment Objectives and Policies
of the Portfolios; Investment Restrictions Applicable
to the Portfolios
5. Management of the Fund............................ Investment Manager; Investment Management
Arrangements and Expenses; Portfolio Brokerage and
Related Practices; Portfolio Transactions and
Brokerage; Custodian, Transfer Agent and Dividend
Disbursing Agent; Monitoring for Possible Conflict
6. Capital Stock and Other Securities............... Investment Objectives and Policies of the Portfolios;
Dividends, Distributions and Taxes; Voting Rights;
Additional Information
7. Purchase of Securities Being Offered............. Purchase and Redemption of Shares; Determination
of Net Asset Value
8. Redemption or Repurchase......................... Purchase and Redemption of Shares; Other
Information Concerning the Series Fund
9. Pending Legal Proceedings........................ Not Applicable
PART B
10. Cover Page....................................... Cover Page
11. Table of Contents................................ Contents
12. General Information and History.................. Not Applicable
13. Investment Objectives and Policies............... Investment Objectives and Policies of the Portfolios;
Investment Restrictions
14. Management of the Fund........................... Management of the Series Fund
15. Control Persons and Principal Holders
of Securities.................................... Not Applicable
16. Investment Advisory and Other Services........... Investment Management Arrangements and
Expenses; Custodian, Transfer Agent, and Dividend
Disbursing Agent; Experts
17. Brokerage Allocation............................. Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities............... Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
N-1A ITEM NUMBER AND CAPTION LOCATION
- ---------------------------- --------
<S> <C> <C>
19. Purchase, Redemption and Pricing of
Securities Being Offered......................... Determination of Net Asset Value
20. Tax Status....................................... Not Applicable
21. Underwriters..................................... Determination of Net Asset Value
22. Calculations of Performance Data................. Not Applicable
23. Financial Statements............................. Financial Statements of The Prudential Series Fund, Inc.
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered in Part C to this Registration
Statement.
<PAGE>
PART A
INFORMATION REQUIRED IN A PROSPECTUS
<PAGE>
PROSPECTUS
MAY 1, 1997
THE PRUDENTIAL
SERIES FUND, INC.
The Prudential Series Fund, Inc. (the "Series Fund") is a diversified, open-end
management investment company (commonly known as a "mutual fund") that is
intended to provide a range of investment alternatives through its fifteen
separate portfolios, each of which is, for investment purposes, in effect a
separate fund. The portfolios are: the Money Market Portfolio, the Diversified
Bond Portfolio, the Government Income Portfolio, two Zero Coupon Bond Portfolios
with different liquidation dates--2000 and 2005, the Conservative Balanced
Portfolio, the Flexible Managed Portfolio, the High Yield Bond Portfolio, the
Stock Index Portfolio, the Equity Income Portfolio, the Equity Portfolio, the
Prudential Jennison Portfolio, the Small Capitalization Stock Portfolio, the
Global Portfolio, and the Natural Resources Portfolio. A separate class of
capital stock is issued for each portfolio. Shares of the Series Fund are
currently sold only to separate accounts (the "Accounts") of The Prudential
Insurance Company of America ("Prudential") and certain other insurers to fund
the benefits under variable life insurance and variable annuity contracts (the
"Contracts") issued by those 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.
NOT EVERY PORTFOLIO IS AVAILABLE UNDER ALL OF THE VARIABLE CONTRACTS. THE
PROSPECTUS FOR EACH CONTRACT LISTS THE PORTFOLIOS CURRENTLY AVAILABLE UNDER THAT
PARTICULAR CONTRACT.
SHARES OF THE MONEY MARKET PORTFOLIO AND THE GOVERNMENT INCOME PORTFOLIO ARE
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. WHILE THE MONEY MARKET
PORTFOLIO SEEKS TO MAINTAIN A STABLE PRICE PER SHARE, THERE IS NO ASSURANCE THAT
THE PORTFOLIO WILL BE ABLE TO DO SO.
------------------------
THE INVESTMENT OBJECTIVES OF THE PORTFOLIOS CAN BE FOUND ON THE NEXT PAGE
------------------------
Information contained in this prospectus should be read carefully by a
prospective investor before an investment is made. Additional information about
the Series Fund has been filed with the Securities and Exchange Commission in a
statement of additional information, dated May 1, 1997 which information is
incorporated herein by reference and is available without charge upon written
request to The Prudential Series Fund, Inc., Prudential Plaza, Newark, New
Jersey 07102-3777, or by telephoning (800) 445-4571.
------------------------
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE PRUDENTIAL SERIES FUND, INC.
Prudential Plaza
Newark, New Jersey 07102-3777
Telephone: (800) 445-4571
PSF-1 Ed 5-97
<PAGE>
INVESTMENT OBJECTIVES OF THE PORTFOLIOS ARE AS FOLLOWS:
FIXED INCOME PORTFOLIOS
MONEY MARKET PORTFOLIO. The maximum current income that is consistent with
stability of capital and maintenance of liquidity through investment in
high-quality short-term debt obligations.
DIVERSIFIED BOND PORTFOLIO. A high level of income over the longer term while
providing reasonable safety of capital through investment primarily in readily
marketable intermediate and long-term fixed income securities that provide
attractive yields but do not involve substantial risk of loss of capital through
default.
GOVERNMENT INCOME PORTFOLIO. Achievement of a high level of income over the
longer term consistent with the preservation of capital through investment
primarily in U.S. Government securities, including intermediate and long-term
U.S. Treasury securities and debt obligations issued by agencies of or
instrumentalities established, sponsored or guaranteed by the U.S. Government.
At least 65% of the total assets of the portfolio will be invested in U.S.
Government securities.
ZERO COUPON BOND PORTFOLIOS 2000 AND 2005. Achievement of the highest
predictable compounded investment return for a specific period of time,
consistent with the safety of invested capital, by investing primarily in debt
obligations of the United States Treasury and investment-grade corporations that
have been issued without interest coupons or stripped of their unmatured
interest coupons, interest coupons that have been stripped from such debt
obligations, and receipts and certificates for such stripped debt obligations
and stripped coupons.
To obtain the predicted investment return an investor must plan to retain his or
her investment in the selected portfolio until the designated year in which the
portfolio will be liquidated. Redemption prior to that time may result in a
loss. Moreover, since the portfolios will be actively managed with the objective
of obtaining a yield higher than the predicted yield, there is a risk that the
actual yield may be lower.
BALANCED PORTFOLIOS
CONSERVATIVE BALANCED PORTFOLIO. Achievement of a favorable total investment
return consistent with a portfolio having a conservatively managed mix of money
market instruments, fixed income securities, and common stocks, in proportions
believed by the investment manager to be appropriate for an investor desiring
diversification of investment who prefers a relatively lower risk of loss than
that associated with the Flexible Managed Portfolio while recognizing that this
reduces the chances of greater appreciation.
FLEXIBLE MANAGED PORTFOLIO. Achievement of a high total return consistent with a
portfolio having an aggressively managed mix of money market instruments, fixed
income securities, and common stocks, in proportions believed by the investment
manager to be appropriate for an investor desiring diversification of investment
who is willing to accept a relatively high level of loss in an effort to achieve
greater appreciation.
HIGH YIELD BOND PORTFOLIOS
HIGH YIELD BOND PORTFOLIO. Achievement of a high total return through investment
in high yield/high risk fixed income securities in the medium to lower quality
ranges. SUCH SECURITIES MAY HAVE SPECULATIVE CHARACTERISTICS AND GENERALLY
INVOLVE GREATER RISKS OF LOSS OF INCOME AND PRINCIPAL THAN HIGHER RATED
SECURITIES.
DIVERSIFIED STOCK PORTFOLIOS
STOCK INDEX PORTFOLIO. Achievement of investment results that correspond to the
price and yield performance of publicly traded common stocks in the aggregate by
following a policy of attempting to duplicate the price and yield performance of
the Standard & Poor's 500 Composite Stock Price Index.
EQUITY INCOME PORTFOLIO. Both current income and capital appreciation through
investment primarily in common stocks and convertible securities that provide
favorable prospects for investment income returns above those of the Standard &
Poor's 500 Composite Stock Price Index or the NYSE Composite Index.
EQUITY PORTFOLIO. Capital appreciation through investment primarily in common
stocks of companies, including major established corporations as well as smaller
capitalization companies, that appear to offer attractive prospects of price
appreciation that is superior to broadly-based stock indices. Current income, if
any, is incidental.
PRUDENTIAL JENNISON PORTFOLIO. Long-term growth of capital through investment
primarily in equity securities of established companies with above-average
growth prospects. Current income, if any, is incidental.
SMALL CAPITALIZATION STOCK PORTFOLIO. Long-term growth of capital through
investment primarily in equity securities of publicly-traded companies with
small market capitalization. Current income, if any, is incidental.
GLOBAL PORTFOLIO. Long-term growth of capital through investment primarily in
common stock and common stock equivalents of foreign and domestic issuers.
Current income, if any, is incidental.
<PAGE>
SPECIALIZED PORTFOLIOS
NATURAL RESOURCES PORTFOLIO. Long-term growth of capital through investment
primarily in common stocks and convertible securities of "natural resource
companies" (as defined in this prospectus) and in securities (typically debt
securities and preferred stock) the terms of which are related to the market
value of a natural resource.
There can be no assurance that the objectives of any portfolio will be realized.
See INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS, page 10. The Series
Fund may in the future establish other portfolios with different investment
objectives.
<PAGE>
CONTENTS
Page
-----
FINANCIAL HIGHLIGHTS................................................... 1
PORTFOLIO RATES OF RETURN.............................................. 9
THE SERIES FUND........................................................ 10
THE ACCOUNTS AND THE CONTRACTS......................................... 10
INVESTMENT MANAGER..................................................... 10
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS................... 10
FIXED INCOME PORTFOLIOS....................................... 11
Money Market Portfolio........................................ 11
Diversified Bond Portfolio.................................... 11
Government Income Portfolio................................... 12
Zero Coupon Bond Portfolios 2000 and 2005.................... 14
BALANCED PORTFOLIOS........................................... 15
Conservative Balanced Portfolio............................... 15
Flexible Managed Portfolio.................................... 16
HIGH YIELD BOND PORTFOLIOS.................................... 17
High Yield Bond Portfolio..................................... 17
DIVERSIFIED STOCK PORTFOLIOS.................................. 19
Stock Index Portfolio......................................... 19
Equity Income Portfolio....................................... 21
Equity Portfolio.............................................. 22
Prudential Jennison Portfolio................................. 22
Small Capitalization Stock Portfolio.......................... 23
Global Portfolio.............................................. 24
SPECIALIZED PORTFOLIOS........................................ 25
Natural Resources Portfolio................................... 25
CONVERTIBLE SECURITIES........................................ 26
LOAN PARTICIPATIONS........................................... 27
FOREIGN SECURITIES............................................ 27
OPTIONS ON EQUITY SECURITIES.................................. 28
OPTIONS ON DEBT SECURITIES.................................... 29
OPTIONS ON STOCK INDICES...................................... 30
OPTIONS ON FOREIGN CURRENCIES................................. 30
FUTURES CONTRACTS............................................. 31
OPTIONS ON FUTURES CONTRACTS.................................. 31
REPURCHASE AGREEMENTS......................................... 32
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS................ 32
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES................... 32
SHORT SALES................................................... 33
SHORT SALES AGAINST THE BOX................................... 33
INTEREST RATE SWAPS........................................... 33
LOANS OF PORTFOLIO SECURITIES................................. 33
INVESTMENT RESTRICTIONS APPLICABLE TO THE PORTFOLIOS................... 34
INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES........................ 34
PURCHASE AND REDEMPTION OF SHARES...................................... 35
DETERMINATION OF NET ASSET VALUE....................................... 35
DIVIDENDS, DISTRIBUTIONS, AND TAXES.................................... 36
OTHER INFORMATION CONCERNING THE SERIES FUND........................... 37
INCORPORATION AND AUTHORIZED STOCK............................ 37
VOTING RIGHTS................................................. 38
MONITORING FOR POSSIBLE CONFLICT.............................. 38
PERIODIC REPORTS.............................................. 38
PORTFOLIO BROKERAGE AND RELATED PRACTICES..................... 38
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT.................. 39
ADDITIONAL INFORMATION........................................ 39
APPENDIX: SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO
MAY CURRENTLY INVEST....................................... A1
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the periods indicated)
The following highlights for the year ended December 31, 1996 have been audited
by Price Waterhouse LLP, independent accountants, whose report thereon was
unqualified. In addition, the financial highlights for each of the years prior
to and including the period ended December 31, 1995 have been audited by
Deloitte & Touche LLP, independent auditors, whose report thereon was also
unqualified. Their reports are included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
MONEY MARKET
-------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A) 1991(A) 1990(A) 1989(A) 1988(A) 1987(A)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of year...... $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Income From Investment
Operations:
Net investment income and
net realized gains..... 0.51 0.56 0.40 0.29 0.37 0.60 0.78 0.88 0.72 0.63
Dividends and
distributions.......... (0.51) (0.56) (0.40) (0.29) (0.37) (0.60) (0.78) (0.88) (0.72) (0.63)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Net Asset Value, end of
year................... $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
TOTAL INVESTMENT RATE OF
RETURN:(B)............. 5.22% 5.80% 4.05% 2.95% 3.79% 6.16% 8.16% 9.25% 7.35% 6.52%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in millions).......... $668.8 $613.3 $583.3 $474.7 $528.7 $529.6 $434.2 $236.1 $155.9 $107.2
Ratios to average net
assets:
Expenses............... 0.44% 0.44% 0.47% 0.45% 0.47% 0.46% 0.50% 0.55% 0.57% 0.53%
Net investment
income................. 5.10% 5.64% 4.02% 2.90% 3.72% 5.96% 7.80% 8.77% 7.17% 6.30%
</TABLE>
<TABLE>
<CAPTION>
DIVERSIFIED BOND
-------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A) 1991(A) 1990(A) 1989(A) 1988(A) 1987(A)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of year...... $ 11.31 $ 10.04 $ 11.10 $ 10.83 $ 11.00 $ 10.33 $ 10.32 $ 9.94 $ 10.04 $ 11.05
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.76 0.76 0.68 0.68 0.76 0.80 0.83 0.89 0.88 0.86
Net realized and
unrealized gains
(losses) on
investments............ (0.27) 1.29 (1.04) 0.40 0.01 0.84 (0.01) 0.42 (0.07) (0.82)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total from investment
operations........... 0.49 2.05 (0.36) 1.08 0.77 1.64 0.82 1.31 0.81 0.04
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net
investment income...... (0.73) (0.75) (0.68) (0.66) (0.72) (0.78) (0.81) (0.85) (0.91) (0.99)
Distributions from net
realized gains......... -- (0.03) (0.02) (0.15) (0.22) (0.19) -- (0.08) -- (0.06)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total
distributions........ (0.73) (0.78) (0.70) (0.81) (0.94) (0.97) (0.81) (0.93) (0.91) (1.05)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Net Asset Value, end of
year................... $ 11.07 $ 11.31 $ 10.04 $ 11.10 $ 10.83 $ 11.00 $ 10.33 $ 10.32 $ 9.94 $ 10.04
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
TOTAL INVESTMENT
RETURN:(B)............. 4.40% 20.73% (3.23%) 10.13% 7.19% 16.44% 8.32% 13.49% 8.19% 0.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in millions).......... $720.2 $655.8 $541.6 $576.2 $428.8 $318.7 $227.7 $191.1 $148.8 $139.5
Ratios to average net
assets:
Expenses............... 0.45% 0.44% 0.45% 0.46% 0.47% 0.49% 0.47% 0.53% 0.53% 0.53%
Net investment
income................. 6.89% 7.00% 6.41% 6.05% 6.89% 7.43% 8.06% 8.56% 8.52% 8.15%
Portfolio turnover
rate................... 210% 199% 32% 41% 61% 131% 42% 273% 222% 238%
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns.
This information should be read in conjunction with the financial statements of
The Prudential Series Fund, Inc. and notes thereto, which appear in the
Statement of Additional Information.
Further information about performance of the portfolios is contained in the
Annual Report to Contract Owners which may be obtained without charge.
1 - SERIES FUND
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED)
The following highlights for the year ended December 31, 1996 have been audited
by Price Waterhouse LLP, independent accountants, whose report thereon was
unqualified. In addition, the financial highlights for each of the years prior
to and including the period ended December 31, 1995 have been audited by
Deloitte & Touche LLP, independent auditors, whose report thereon was also
unqualified. Their reports are included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
GOVERNMENT INCOME
---------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MAY 1,
1989(D)
TO
DECEMBER
31,
1996 1995(A) 1994(A) 1993(A) 1992(A) 1991(A) 1990(A) 1989(A)
-------- -------- -------- -------- -------- -------- -------- --------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of period.... $ 11.72 $ 10.46 $ 11.78 $ 11.09 $ 11.13 $ 10.15 $ 10.32 $10.02
-------- -------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.75 0.74 0.70 0.70 0.73 0.73 0.79 0.54
Net realized and
unrealized gains
(losses) on
investments............ (0.51) 1.28 (1.31) 0.68 (0.09) 0.85 (0.17) 0.61
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations........... 0.24 2.02 (0.61) 1.38 0.64 1.58 0.62 1.15
-------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net
investment income...... (0.74) (0.76) (0.71) (0.64) (0.59) (0.60) (0.77) (0.49)
Distributions from net
realized gains......... -- -- -- (0.05) (0.09) -- (0.02) (0.36)
-------- -------- -------- -------- -------- -------- -------- --------
Total
distributions........ (0.74) (0.76) (0.71) (0.69) (0.68) (0.60) (0.79) (0.85)
-------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value, end of
period................. $ 11.22 $ 11.72 $ 10.46 $ 11.78 $ 11.09 $ 11.13 $ 10.15 $10.32
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL INVESTMENT
RETURN:(B)............. 2.22% 19.48% (5.16%) 12.56% 5.85% 16.11% 6.34% 11.60%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in millions).......... $482.0 $501.8 $487.6 $540.1 $315.5 $95.0 $23.7 $17.0
Ratios to average net
assets:
Expenses............... 0.46% 0.45% 0.45% 0.46% 0.53% 0.58% 0.74% 0.50%(c)
Net investment
income................. 6.38% 6.55% 6.30% 5.91% 6.58% 6.97% 7.86% 5.06%(c)
Portfolio turnover
rate................... 95% 195% 34% 19% 81% 127% 379% 209%
</TABLE>
<TABLE>
<CAPTION>
ZERO COUPON BOND 2000
--------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A) 1991(A) 1990(A) 1989(A) 1988(A) 1987(A)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of year...... $ 13.27 $ 11.86 $ 13.72 $ 12.55 $ 12.40 $ 11.28 $ 11.88 $ 11.00 $ 10.69 $ 12.48
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.55 0.59 0.92 0.85 0.89 0.91 1.11 0.92 0.92 0.93
Net realized and
unrealized gains
(losses) on
investments............ (0.36) 1.95 (1.91) 1.16 0.14 1.30 (0.59) 1.28 0.29 (1.62)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total from investment
operations........... 0.19 2.54 (0.99) 2.01 1.03 2.21 0.52 2.20 1.21 (0.69)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net
investment income...... (0.54) (0.60) (0.85) (0.84) (0.88) (0.94) (1.12) (0.92) (0.90) (1.10)
Distributions from net
realized gains......... -- (0.53) (0.02) (0.01) -- (0.15) -- (0.40) -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total
distributions........ (0.54) (1.13) (0.87) (0.84) (0.88) (1.09) (1.12) (1.32) (0.90) (1.10)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Net Asset Value, end of
year................... $ 12.92 $ 13.27 $ 11.86 $ 13.72 $ 12.55 $ 12.40 $ 11.28 $ 11.88 $ 11.00 $ 10.69
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
TOTAL INVESTMENT
RETURN:(B)............. 1.53% 21.56% (7.18%) 16.15% 8.59% 20.71% 5.11% 20.38% 11.56% (5.51%)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in millions).......... $44.7 $25.3 $20.6 $22.2 $16.7 $14.6 $13.9 $13.1 $10.9 $9.0
Ratios to average net
assets:
Expenses............... 0.52% 0.48% 0.51% 0.62% 0.66% 0.68% 0.75% 0.75% 0.75% 0.64%
Net investment
income................. 4.88% 4.53% 6.69% 6.21% 7.24% 7.77% 9.99% 7.73% 8.24% 8.19%
Portfolio turnover
rate................... 13% 71% 9% 1% -- -- -- 39% -- --
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns. Total investment return for
periods of less than one year are not annualized.
(c) Annualized.
(d) Commencement of investment operations.
This information should be read in conjunction with the financial statements of
The Prudential Series Fund, Inc. and notes thereto, which appear in the
Statement of Additional Information.
Further information about performance of the portfolios is contained in the
Annual Report to Contract Owners which may be obtained without charge.
2 - SERIES FUND
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED)
The following highlights for the year ended December 31, 1996 have been audited
by Price Waterhouse LLP, independent accountants, whose report thereon was
unqualified. In addition, the financial highlights for each of the years prior
to and including the period ended December 31, 1995 have been audited by
Deloitte & Touche LLP, independent auditors, whose report thereon was also
unqualified. Their reports are included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
ZERO COUPON BOND 2005
---------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MAY 1,
1989(D)
TO
DECEMBER
31,
1996 1995(A) 1994(A) 1993(A) 1992(A) 1991(A) 1990(A) 1989(A)
-------- -------- -------- -------- -------- -------- -------- --------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of period.... $ 13.19 $ 10.74 $ 12.68 $ 11.03 $ 10.87 $ 9.80 $ 10.46 $10.02
-------- -------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.66 0.66 0.75 0.77 0.80 0.82 0.85 0.56
Net realized and
unrealized gains
(losses) on
investments............ (0.82) 2.73 (1.97) 1.62 0.21 1.14 (0.65) 0.60
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations........... (0.16) 3.39 (1.22) 2.39 1.01 1.96 0.20 1.16
-------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.64) (0.65) (0.72) (0.74) (0.79) (0.83) (0.86) (0.53)
Distributions from net
realized gains......... (0.14) (0.29) -- -- (0.06) (0.06) -- (0.19)
-------- -------- -------- -------- -------- -------- -------- --------
Total
distributions........ (0.78) (0.94) (0.72) (0.74) (0.85) (0.89) (0.86) (0.72)
-------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value, end of
period................. $ 12.25 $ 13.19 $ 10.74 $ 12.68 $ 11.03 $ 10.87 $ 9.80 $10.46
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL INVESTMENT
RETURN:(B)............. (1.01%) 31.85% (9.61%) 21.94% 9.66% 21.16% 2.56% 11.67%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in millions).......... $25.8 $23.6 $16.5 $14.5 $9.8 $8.7 $7.3 $7.2
Ratios to average net
assets:
Expenses............... 0.53% 0.49% 0.60% 0.66% 0.75% 0.75% 0.75% 0.49%(c)
Net investment
income................. 5.42% 5.32% 6.53% 6.17% 7.46% 8.08% 8.83% 5.25%(c)
Portfolio turnover
rate................... 10% 69% 6% 4% 11% 6% 4% 60%
</TABLE>
<TABLE>
<CAPTION>
CONSERVATIVE BALANCED
-------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A) 1991(A) 1990(A) 1989(A) 1988(A) 1987(A)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of year...... $ 15.31 $ 14.10 $ 14.91 $ 14.24 $ 14.32 $ 13.06 $ 13.36 $ 12.30 $ 11.89 $ 12.57
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.66 0.63 0.53 0.49 0.56 0.69 0.82 0.89 0.77 0.66
Net realized and
unrealized gains
(losses) on
investments............ 1.24 1.78 (0.68) 1.23 0.41 1.74 (0.14) 1.15 0.43 (0.40)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total from investment
operations........... 1.90 2.41 (0.15) 1.72 0.97 2.43 0.68 2.04 1.20 0.26
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.66) (0.64) (0.51) (0.47) (0.54) (0.67) (0.81) (0.89) (0.79) (0.71)
Distributions from net
realized gains......... (1.03) (0.56) (0.15) (0.58) (0.51) (0.50) (0.17) (0.09) -- (0.23)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total
distributions........ (1.69) (1.20) (0.66) (1.05) (1.05) (1.17) (0.98) (0.98) (0.79) (0.94)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Net Asset Value, end of
year................... $ 15.52 $ 15.31 $ 14.10 $ 14.91 $ 14.24 $ 14.32 $ 13.06 $ 13.36 $ 12.30 $ 11.89
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
TOTAL INVESTMENT
RETURN:(B)............. 12.63% 17.27% (0.97%) 12.20% 6.95% 19.07% 5.27% 16.99% 10.19% 1.54%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in millions).......... $4,478.8 $3,940.8 $3,501.1 $3,103.2 $2,114.0 $1,500.0 $1,100.2 $976.0 $815.6 $803.9
Ratios to average net
assets:
Expenses............... 0.59% 0.58% 0.61% 0.60% 0.62% 0.63% 0.65% 0.64% 0.65% 0.66%
Net investment
income................. 4.13% 4.19% 3.61% 3.22% 3.88% 4.89% 6.21% 6.81% 6.22% 5.05%
Portfolio turnover
rate................... 295% 201% 125% 79% 62% 115% 44% 154% 111% 141%
Average commission rate
paid per share......... $0.0554 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns. Total investment return for
periods of less than one year are not annualized.
(c) Annualized.
(d) Commencement of investment operations.
This information should be read in conjunction with the financial statements of
The Prudential Series Fund, Inc. and notes thereto, which appear in the
Statement of Additional Information.
Further information about performance of the portfolios is contained in the
Annual Report to Contract Owners which may be obtained without charge.
3 - SERIES FUND
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED)
The following highlights for the year ended December 31, 1996 have been audited
by Price Waterhouse LLP, independent accountants, whose report thereon was
unqualified. In addition, the financial highlights for each of the years prior
to and including the period ended December 31, 1995 have been audited by
Deloitte & Touche LLP, independent auditors, whose report thereon was also
unqualified. Their reports are included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
FLEXIBLE MANAGED
-------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A) 1991(A) 1990(A) 1989(A) 1988(A) 1987(A)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of year...... $ 17.86 $ 15.50 $ 16.96 $ 16.01 $ 16.29 $ 14.00 $ 14.45 $ 13.12 $ 12.33 $ 13.56
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.57 0.56 0.47 0.57 0.58 0.65 0.72 0.82 0.72 0.57
Net realized and
unrealized gains
(losses) on
investments............ 1.79 3.15 (1.02) 1.88 0.61 2.81 (0.47) 1.99 0.84 (0.75)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total from investment
operations........... 2.36 3.71 (0.55) 2.45 1.19 3.46 0.25 2.81 1.56 (0.18)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.58) (0.56) (0.45) (0.57) (0.56) (0.66) (0.70) (0.81) (0.77) (0.67)
Distributions from net
realized gains......... (1.85) (0.79) (0.46) (0.93) (0.91) (0.51) -- (0.67) -- (0.38)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total
distributions........ (2.43) (1.35) (0.91) (1.50) (1.47) (1.17) (0.70) (1.48) (0.77) (1.05)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Net Asset Value, end of
year................... $ 17.79 $ 17.86 $ 15.50 $ 16.96 $ 16.01 $ 16.29 $ 14.00 $ 14.45 $ 13.12 $ 12.33
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
TOTAL INVESTMENT
RETURN:(B)............. 13.64% 24.13% (3.16%) 15.58% 7.61% 25.43% 1.91% 21.77% 12.83% (1.83%)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in millions).......... $4,896.9 $4,261.2 $3,481.5 $3,292.2 $2,435.6 $1,990.7 $1,507.8 $1,386.5 $1,103.9 $1,062.4
Ratios to average net
assets:
Expenses............... 0.64% 0.63% 0.66% 0.66% 0.67% 0.67% 0.69% 0.69% 0.70% 0.71%
Net investment
income................. 3.07% 3.30% 2.90% 3.30% 3.63% 4.23% 5.13% 5.66% 5.52% 4.09%
Portfolio turnover
rate................... 233% 173% 124% 63% 59% 93% 52% 141% 128% 124%
Average commission rate
paid per share......... $0.0563 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD BOND
-------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FEBRUARY
23,
1987(D)
TO
DECEMBER
31,
1996 1995(A) 1994(A) 1993(A) 1992(A) 1991(A) 1990(A) 1989(A) 1988(A) 1987(A)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of period.... $ 7.80 $ 7.37 $ 8.41 $ 7.72 $ 7.21 $ 5.84 $ 7.67 $ 8.90 $ 8.74 $10.00
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.80 0.81 0.87 0.82 0.82 0.83 0.94 1.07 1.07 0.97
Net realized and
unrealized gains
(losses) on
investments............ 0.06 0.46 (1.10) 0.63 0.42 1.40 (1.79) (1.22) 0.06 (1.43)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total from investment
operations........... 0.86 1.27 (0.23) 1.45 1.24 2.23 (0.85) (0.15) 1.13 (0.46)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.78) (0.84) (0.81) (0.76) (0.73) (0.86) (0.98) (1.08) (0.97) (0.80)
Dividends in excess of
net investment
income................. (0.01) -- -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total
distributions........ (0.79) (0.84) (0.81) (0.76) (0.73) (0.86) (0.98) (1.08) (0.97) (0.80)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Net Asset Value, end of
period................. $ 7.87 $ 7.80 $ 7.37 $ 8.41 $ 7.72 $ 7.21 $ 5.84 $ 7.67 $ 8.90 $8.74
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
TOTAL INVESTMENT
RETURN:(B)............. 11.39% 17.56% (2.72%) 19.27% 17.54% 39.71% (11.84%) (2.05%) 13.17% (4.91%)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in millions).......... $432.9 $367.9 $306.2 $282.9 $153.7 $78.7 $49.8 $60.0 $65.8 $40.4
Ratios to average net
assets:
Expenses............... 0.63% 0.61% 0.65% 0.65% 0.70% 0.75% 0.75% 0.71% 0.75% 0.73%(c)
Net investment
income................. 9.89% 10.34% 9.88% 9.91% 10.67% 12.05% 13.42% 12.29% 11.60% 10.13%(c)
Portfolio turnover
rate................... 88% 139% 69% 96% 75% 57% 35% 61% 71% 17%
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns. Total investment return for
periods of less than one year are not annualized.
(c) Annualized.
(d) Commencement of investment operations.
This information should be read in conjunction with the financial statements of
The Prudential Series Fund, Inc. and notes thereto, which appear in the
Statement of Additional Information.
Further information about performance of the portfolios is contained in the
Annual Report to Contract Owners which may be obtained without charge.
4 - SERIES FUND
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED)
The following highlights for the year ended December 31, 1996 have been audited
by Price Waterhouse LLP, independent accountants, whose report thereon was
unqualified. In addition, the financial highlights for each of the years prior
to and including the period ended December 31, 1995 have been audited by
Deloitte & Touche LLP, independent auditors, whose report thereon was also
unqualified. Their reports are included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
STOCK INDEX
-------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OCTOBER
19,
1987(D)
TO
DECEMBER
31,
1996 1995(A) 1994(A) 1993(A) 1992(A) 1991(A) 1990(A) 1989(A) 1988(A) 1987(A)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of period.... $ 19.96 $ 14.96 $ 15.20 $ 14.22 $ 13.61 $ 10.76 $ 11.73 $ 9.45 $ 8.53 $8.07
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.40 0.40 0.38 0.36 0.35 0.35 0.36 0.33 0.36 0.05
Net realized and
unrealized gains
(losses) on
investments............ 4.06 5.13 (0.23) 1.00 0.60 2.82 (0.79) 2.57 0.95 0.55
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total from investment
operations........... 4.46 5.53 0.15 1.36 0.95 3.17 (0.43) 2.90 1.31 0.60
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.40) (0.38) (0.37) (0.35) (0.33) (0.31) (0.31) (0.35) (0.39) (0.14)
Distributions from net
realized gains......... (0.28) (0.15) (0.02) (0.03) (0.01) (0.01) (0.23) (0.27) -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total
distributions........ (0.68) (0.53) (0.39) (0.38) (0.34) (0.32) (0.54) (0.62) (0.39) (0.14)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Net Asset Value, end of
period................. $ 23.74 $ 19.96 $ 14.96 $ 15.20 $ 14.22 $ 13.61 $ 10.76 $ 11.73 $ 9.45 $8.53
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
TOTAL INVESTMENT
RETURN:(B)............. 22.57% 37.06% 1.01% 9.66% 7.13% 29.72% (3.63%) 30.93% 15.44% 7.35%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in millions).......... $1,581.4 $1,031.3 $664.5 $615.1 $433.5 $236.9 $104.5 $53.8 $36.0 $24.5
Ratios to average net
assets:
Expenses............... 0.40% 0.38% 0.42% 0.42% 0.46% 0.47% 0.60% 0.69% 0.78% 0.45%(c)
Net investment
income................. 1.95% 2.27% 2.50% 2.43% 2.56% 2.82% 3.23% 2.95% 3.87% 0.53%(c)
Portfolio turnover
rate................... 1% 1% 2% 1% 1% 1% 18% 15% 16% --
Average commission rate
paid per share......... $0.0250 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
EQUITY INCOME
--------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FEBRUARY
19,
1988(D)
TO
DECEMBER
31,
1996 1995(A) 1994(A) 1993(A) 1992(A) 1991(A) 1990(A) 1989(A) 1988(A)
-------- -------- -------- -------- -------- -------- -------- -------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of period $ 16.27 $ 14.48 $ 15.66 $ 13.67 $ 13.21 $ 11.24 $ 12.25 $ 10.62 $10.13
-------- -------- -------- -------- -------- -------- -------- -------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.58 0.64 0.67 0.55 0.58 0.58 0.51 0.54 0.45
Net realized and
unrealized gains
(losses) on
investments............ 2.88 2.50 (0.45) 2.46 0.72 2.43 (0.98) 1.84 0.69
-------- -------- -------- -------- -------- -------- -------- -------- ---------
Total from investment
operations........... 3.46 3.14 0.22 3.01 1.30 3.01 (0.47) 2.38 1.14
-------- -------- -------- -------- -------- -------- -------- -------- ---------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.71) (0.62) (0.56) (0.50) (0.52) (0.54) (0.46) (0.46) (0.42)
Distributions from net
realized gains......... (0.51) (0.73) (0.82) (0.52) (0.32) (0.50) (0.08) (0.29) (0.23)
-------- -------- -------- -------- -------- -------- -------- -------- ---------
Total
distributions........ (1.22) (1.35) (1.38) (1.02) (0.84) (1.04) (0.54) (0.75) (0.65)
-------- -------- -------- -------- -------- -------- -------- -------- ---------
Net Asset Value, end of
period................. $ 18.51 $ 16.27 $ 14.48 $ 15.66 $ 13.67 $ 13.21 $ 11.24 $ 12.25 $10.62
-------- -------- -------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- -------- -------- ---------
TOTAL INVESTMENT
RETURN:(B)............. 21.74% 21.70% 1.44% 22.28% 10.14% 27.50% (3.73%) 22.67% 11.31%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in millions).......... $1,363.5 $1,110.0 $859.7 $602.8 $234.4 $106.9 $55.5 $34.9 $11.3
Ratios to average net
assets:
Expenses............... 0.45% 0.43% 0.52% 0.54% 0.57% 0.57% 0.60% 0.74% 0.64%(c)
Net investment
income................. 3.36% 4.00% 3.92% 3.56% 4.32% 4.53% 4.53% 4.48% 4.08%(c)
Portfolio turnover
rate................... 21% 64% 63% 41% 40% 60% 55% 57% 61%
Average commission rate
paid per share......... $0.0553 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns. Total investment return for
periods of less than one year are not annualized.
(c) Annualized.
(d) Commencement of investment operations.
This information should be read in conjunction with the financial statements of
The Prudential Series Fund, Inc. and notes thereto, which appear in the
Statement of Additional Information.
Further information about performance of the portfolios is contained in the
Annual Report to Contract Owners which may be obtained without charge.
5 - SERIES FUND
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED)
The following highlights for the year ended December 31, 1996 have been audited
by Price Waterhouse LLP, independent accountants, whose report thereon was
unqualified. In addition, the financial highlights for each of the years prior
to and including the period ended December 31, 1995 have been audited by
Deloitte & Touche LLP, independent auditors, whose report thereon was also
unqualified. Their reports are included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
EQUITY
-------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A) 1991(A) 1990(A) 1989(A) 1988(A) 1987(A)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of year...... $ 25.64 $ 20.66 $ 21.49 $ 18.90 $ 17.91 $ 15.45 $ 18.54 $ 15.46 $ 13.62 $ 14.82
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.71 0.55 0.51 0.42 0.44 0.48 0.58 0.47 0.40 0.39
Net realized and
unrealized gains
(losses) on
investments............ 3.88 5.89 0.05 3.67 2.05 3.42 (1.58) 4.07 1.91 (0.07)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total from investment
operations........... 4.59 6.44 0.56 4.09 2.49 3.90 (1.00) 4.54 2.31 0.32
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.67) (0.52) (0.49) (0.40) (0.44) (0.48) (0.56) (0.50) (0.47) (0.50)
Distributions from net
realized gains......... (2.60) (0.94) (0.90) (1.10) (1.06) (0.96) (1.53) (0.96) -- (1.02)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total
distributions........ (3.27) (1.46) (1.39) (1.50) (1.50) (1.44) (2.09) (1.46) (0.47) (1.52)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Net Asset Value, end of
year................... $ 26.96 $ 25.64 $ 20.66 $ 21.49 $ 18.90 $ 17.91 $ 15.45 $ 18.54 $ 15.46 $ 13.62
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
TOTAL INVESTMENT
RETURN:(B)............. 18.52% 31.29% 2.78% 21.87% 14.17% 26.01% (5.21%) 29.73% 17.05% 1.67%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in millions).......... $4,814.0 $3,813.8 $2,617.8 $2,186.5 $1,416.6 $1,032.8 $700.5 $675.5 $500.1 $451.0
Ratios to average net
assets:
Expenses............... 0.50% 0.48% 0.55% 0.53% 0.53% 0.51% 0.56% 0.56% 0.57% 0.51%
Net investment
income................. 2.54% 2.28% 2.39% 1.99% 2.33% 2.66% 3.37% 2.66% 2.67% 2.34%
Portfolio turnover
rate................... 20% 18% 7% 13% 16% 21% 85% 74% 62% 80%
Average commission rate
paid per share......... $0.0524 N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
PRUDENTIAL JENNISON
-------------------
<S> <C> <C>
APRIL
25,
1995(D)
YEAR TO
ENDED DECEMBER
DECEMBER 31,
31, 1996 1995(A)
-------- --------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of period.... $12.55 $10.00
-------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.02 0.02
Net realized and
unrealized gains
(losses) on
investments............ 1.78 2.54
-------- --------
Total from investment
operations........... 1.80 2.56
-------- --------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.03) (0.01)
Distributions from net
realized gains......... -- --
-------- --------
Total
distributions........ (0.03) (0.01)
-------- --------
Net Asset Value, end of
period................. $14.32 $12.55
-------- --------
-------- --------
TOTAL INVESTMENT
RETURN:(B)............. 14.41% 24.2%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in millions).......... $226.5 $63.1
Ratios to average net
assets:
Expenses............... 0.66% 0.79%(c)
Net investment
income................. 0.20% 0.15%(c)
Portfolio turnover
rate................... 46% 37%
Average commission rate
paid per share......... $0.0603 N/A
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns. Total investment return for
periods of less than one year are not annualized.
(c) Annualized.
(d) Commencement of operations.
This information should be read in conjunction with the financial statements of
The Prudential Series Fund, Inc. and notes thereto, which appear in the
Statement of Additional Information.
Further information about performance of the portfolios is contained in the
Annual Report to Contract Owners which may be obtained without charge.
6 - SERIES FUND
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED)
The following highlights for the year ended December 31, 1996 have been audited
by Price Waterhouse LLP, independent accountants, whose report thereon was
unqualified. In addition, the financial highlights for each of the years prior
to and including the period ended December 31, 1995 have been audited by
Deloitte & Touche LLP, independent auditors, whose report thereon was also
unqualified. Their reports are included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
SMALL
CAPITALIZATION
STOCK
-------------------
<S> <C> <C>
APRIL
25,
1995(D)
YEAR TO
ENDED DECEMBER
DECEMBER 31,
31, 1996 1995(A)
-------- --------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of period.... $11.83 $10.00
-------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.09 0.08
Net realized and
unrealized gains
(losses) on
investments............ 2.23 1.91
-------- --------
Total from investment
operations........... 2.32 1.99
-------- --------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.09) (0.04)
Distributions from net
realized gains......... (0.27) (0.12)
-------- --------
Total
distributions........ (0.36) (0.16)
-------- --------
Net Asset Value, end of
period................. $13.79 $11.83
-------- --------
-------- --------
TOTAL INVESTMENT
RETURN:(B)............. 19.77% 19.74%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in millions).......... $147.9 $47.5
Ratios to average net
assets:
Expenses............... 0.56% 0.60%(c)
Net investment
income................. 0.87% 0.68%(c)
Portfolio turnover
rate................... 13% 32%
Average commission rate
paid per share......... $0.0307 N/A
</TABLE>
<TABLE>
<CAPTION>
GLOBAL
--------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SEPTEMBER
19,
1988(D)
TO
DECEMBER
31,
1996 1995(A) 1994(A) 1993(A) 1992(A) 1991(A) 1990(A) 1989(A) 1988(A)
-------- -------- -------- -------- -------- -------- -------- -------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of period.... $ 15.53 $ 13.88 $ 14.64 $ 10.37 $ 10.79 $ 9.87 $ 11.55 $ 10.51 $9.82
-------- -------- -------- -------- -------- -------- -------- -------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.11 0.06 0.02 0.02 0.05 0.09 0.20 0.08 0.05
Net realized and
unrealized gains
(losses) on
investments............ 2.94 2.14 (0.74) 4.44 (0.42) 1.02 (1.80) 1.81 0.79
-------- -------- -------- -------- -------- -------- -------- -------- ---------
Total from investment
operations........... 3.05 2.20 (0.72) 4.46 (0.37) 1.11 (1.60) 1.89 0.84
-------- -------- -------- -------- -------- -------- -------- -------- ---------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.11) (0.24) (0.02) (0.08) (0.05) (0.10) (0.07) (0.07) (0.15)
Distributions from net
realized gains......... (0.62) (0.31) (0.02) (0.11) -- (0.09) (0.01) (0.78) --
-------- -------- -------- -------- -------- -------- -------- -------- ---------
Total
distributions........ (0.73) (0.55) (0.04) (0.19) (0.05) (0.19) (0.08) (0.85) (0.15)
-------- -------- -------- -------- -------- -------- -------- -------- ---------
Net Asset Value, end of
period................. $ 17.85 $ 15.53 $ 13.88 $ 14.64 $ 10.37 $ 10.79 $ 9.87 $ 11.55 $10.51
-------- -------- -------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- -------- -------- ---------
TOTAL INVESTMENT
RETURN:(B)............. 19.97% 15.88% (4.89%) 43.14% (3.42%) 11.39% (12.91%) 18.82% 8.57%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in millions).......... $580.6 $400.1 $345.7 $129.1 $34.0 $34.3 $26.2 $29.4 $26.9
Ratios to average net
assets:
Expenses............... 0.92% 1.06% 1.23% 1.44% 1.87% 1.62% 1.67% 1.47% 0.42%(c)
Net investment
income................. 0.64% 0.44% 0.20% 0.18% 0.49% 0.92% 1.92% 0.70% 0.51%(c)
Portfolio turnover
rate................... 41% 59% 37% 55% 78% 136% 43% 48% 6%
Average commission rate
paid per share......... $0.0358 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns. Total investment return for
periods of less than one year are not annualized.
(c) Annualized.
(d) Commencement of operations.
This information should be read in conjunction with the financial statements of
The Prudential Series Fund, Inc. and notes thereto, which appear in the
Statement of Additional Information.
Further information about performance of the portfolios is contained in the
Annual Report to Contract Owners which may be obtained without charge.
7 - SERIES FUND
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED)
The following highlights for the year ended December 31, 1996 have been audited
by Price Waterhouse LLP, independent accountants, whose report thereon was
unqualified. In addition, the financial highlights for each of the years prior
to and including the period ended December 31, 1995 have been audited by
Deloitte & Touche LLP, independent auditors, whose report thereon was also
unqualified. Their reports are included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
NATURAL RESOURCES
--------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FEBRUARY
19,
1988(D)
TO
DECEMBER
31,
1996 1995(A) 1994(A) 1993(A) 1992(A) 1991(A) 1990(A) 1989(A) 1988(A)
-------- -------- -------- -------- -------- -------- -------- -------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of period.... $ 17.27 $ 14.44 $ 15.56 $ 12.95 $ 12.45 $ 11.62 $ 12.71 $ 10.14 $9.91
-------- -------- -------- -------- -------- -------- -------- -------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.15 0.21 0.18 0.23 0.32 0.37 0.41 0.36 0.26
Net realized and
unrealized gains
(losses) on
investments............ 5.11 3.66 (0.85) 3.00 0.59 0.82 (1.14) 3.22 0.27
-------- -------- -------- -------- -------- -------- -------- -------- ---------
Total from investment
operations........... 5.26 3.87 (0.67) 3.23 0.91 1.19 (0.73) 3.58 0.53
-------- -------- -------- -------- -------- -------- -------- -------- ---------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.14) (0.21) (0.15) (0.21) (0.31) (0.36) (0.34) (0.36) (0.25)
Distributions from net
realized gains......... (2.62) (0.83) (0.30) (0.41) (1.00) -- (0.02) (0.65) (0.05)
-------- -------- -------- -------- -------- -------- -------- -------- ---------
Total
distributions........ (2.76) (1.04) (0.45) (0.62) (0.41) (0.36) (0.36) (1.01) (0.30)
-------- -------- -------- -------- -------- -------- -------- -------- ---------
Net Asset Value, end of
period................. $ 19.77 $ 17.27 $ 14.44 $ 15.56 $ 12.95 $ 12.45 $ 11.62 $ 12.71 $10.14
-------- -------- -------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- -------- -------- ---------
TOTAL INVESTMENT
RETURN:(B)............. 30.88% 26.92% (4.30%) 25.15% 7.30% 10.30% (5.76%) 35.64% 5.42%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in millions).......... $438.4 $293.2 $227.3 $158.8 $77.5 $62.6 $50.6 $17.9 $9.5
Ratios to average net
assets:
Expenses............... 0.52% 0.50% 0.61% 0.60% 0.72% 0.68% 0.75% 0.86% 0.58%(c)
Net investment
income................. 0.75% 1.25% 1.09% 1.50% 2.44% 2.97% 3.45% 3.04% 2.46%(c)
Portfolio turnover
rate................... 36% 46% 18% 20% 29% 21% 42% 49% 59%
Average commission rate
paid per share......... $0.0454 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns. Total investment return for
periods of less than one year are not annualized.
(c) Annualized.
(d) Commencement of investment operations.
This information should be read in conjunction with the financial statements of
The Prudential Series Fund, Inc. and notes thereto, which appear in the
Statement of Additional Information.
Further information about performance of the portfolios is contained in the
Annual Report to Contract Owners which may be obtained without charge.
8 - SERIES FUND
<PAGE>
PORTFOLIO RATES OF RETURN
The following table, based upon the immediately preceding financial highlights
for the Series Fund, shows first the average annual compounded net rates of
return for each Portfolio for the year ended December 31, 1996, for the 5 year
and 10 year periods ending on that date, and from the inception date of each
Portfolio to December 31, 1996. These rates of return should not be regarded as
an estimate or prediction of future performance. They may be useful in assessing
the competence and performance of the Series Fund's investment advisor and in
helping you to decide which portfolios to choose. THIS INFORMATION RELATES ONLY
TO THE SERIES FUND AND DOES NOT REFLECT THE VARIOUS OTHER CHARGES MADE UNDER THE
CONTRACTS.
<TABLE>
<CAPTION>
5 YEARS 10 YEARS INCEPTION
INCEPTION YEAR ENDED ENDED ENDED DATE TO
PORTFOLIO DATE 12/31/96 12/31/96 12/31/96 12/31/96
<S> <C> <C> <C> <C> <C>
- -------------------------- ------------- ----------- ----------- ----------- -------------
MONEY MARKET 5/83 5.22% 4.36% 5.91% 6.53%
DIVERSIFIED BOND 5/83 4.40% 7.56% 8.38% 9.45%
GOVERNMENT INCOME 5/89 2.22% 6.65% N/A 8.74%
ZERO COUPON BOND 2000 2/86 1.53% 7.64% 8.81% 10.60%
ZERO COUPON BOND 2005 5/89 -1.01% 9.55% N/A 10.76%
CONSERVATIVE BALANCED 5/83 12.63% 9.43% 9.92% 10.60%
FLEXIBLE MANAGED 5/83 13.64% 11.18% 11.35% 11.77%
HIGH YIELD BOND 2/87 11.39% 12.27% N/A 8.85%
STOCK INDEX 10/87 22.57% 14.80% N/A 16.40%
EQUITY INCOME 2/88 21.74% 15.15% N/A 14.77%
EQUITY 5/83 18.52% 17.34% 15.16% 14.91%
PRUDENTIAL JENNISON 5/95 14.41% N/A N/A 24.20%
SMALL CAPITALIZATION STOCK 5/95 19.77% N/A N/A 24.10%
GLOBAL 9/88 19.97% 12.82% N/A 10.48%
NATURAL RESOURCES 5/88 30.88% 16.38% N/A 14.25%
</TABLE>
9 - SERIES FUND
<PAGE>
THE SERIES FUND
The Prudential Series Fund, Inc. (the "Series Fund"), a diversified open-end
management investment company, is a Maryland corporation organized on November
15, 1982. The Series Fund is currently made up of fifteen separate portfolios:
the Money Market Portfolio, the Diversified Bond Portfolio, the Government
Income Portfolio, the Zero Coupon Bond Portfolios 2000 and 2005, the
Conservative Balanced Portfolio, the Flexible Managed Portfolio, the High Yield
Bond Portfolio, the Stock Index Portfolio, the Equity Income Portfolio, the
Equity Portfolio, the Prudential Jennison Portfolio, the Small Capitalization
Stock Portfolio, the Global Portfolio, and the Natural Resources Portfolio. Each
portfolio is, for investment purposes, in effect a separate investment fund, and
a separate class of capital stock is issued for each portfolio. In other
respects the Series Fund is treated as one entity. Each share of capital stock
issued with respect to a portfolio has a pro-rata interest in the assets of that
portfolio and has no interest in the assets of any other portfolio. Each
portfolio bears its own liabilities and also its proportionate share of the
general liabilities of the Series Fund. The Series Fund is registered under the
Investment Company Act of 1940 (the "1940 Act") as an open-end, diversified,
management investment company. This registration does not imply any supervision
by the Securities and Exchange Commission over the Series Fund's management or
its investment policies or practices.
THE ACCOUNTS AND THE CONTRACTS
Shares in the Series Fund are currently sold only to separate accounts of The
Prudential Insurance Company of America ("Prudential") and certain other
insurers to fund benefits under variable life insurance and variable annuity
contracts issued by those Companies. All the separate accounts are referred to
as the "Accounts," and all the contracts are referred to as the "Contracts."
Each Contract owner allocates the net premiums and the assets relating to the
Contract, within the limitations described in the Contracts, among the
subaccounts of the Accounts which in turn invest in the corresponding portfolios
of the Series Fund. Not all portfolios of the Series Fund are currently
available to all Contracts. The attached prospectus for the Contracts lists the
portfolios that are currently available and describes the particular type of
Contract selected and the relationship between changes in the value of shares of
each portfolio and changes in the benefits payable under the Contracts. The
rights of the Accounts as shareholders should be distinguished from the rights
of a Contract owner which are described in the Contracts. The terms
"shareholder" or "shareholders" in this prospectus refer to the Accounts.
INVESTMENT MANAGER
Prudential is the investment advisor of the Series Fund. Prudential's principal
business address is Prudential Plaza, Newark, New Jersey 07102-3777.
Prudential has entered into a Service Agreement with its wholly-owned subsidiary
The Prudential Investment Corporation ("PIC"), which provides that PIC will
furnish to Prudential such services as Prudential may require in connection with
the performance of its obligations under an Investment Advisory Agreement with
the Series Fund. One of PIC's business groups is Prudential Investments. In
addition, Prudential has entered into a Subadvisory Agreement with its
wholly-owned subsidiary Jennison Associates Capital Corp. ("Jennison"), under
which Jennison furnishes investment advisory services in connection with the
management of the Prudential Jennison Portfolio. See INVESTMENT MANAGEMENT
ARRANGEMENTS AND EXPENSES, page 34.
Prudential will continue to have responsibility for all investment advisory
services under its Investment Advisory Agreement with respect to the Series
Fund.
INVESTMENT OBJECTIVES AND POLICIES
OF THE PORTFOLIOS
Each portfolio of the Series Fund has a different investment objective which it
pursues through separate investment policies as described below. Since each
portfolio has a different investment objective, each can be expected to have
different investment results and incur different market and financial risks. The
Series Fund may in the future establish other portfolios with different
investment objectives.
The investment objectives of each portfolio are fundamental and may not be
changed without the approval of the holders of a majority of the outstanding
shares of the portfolio affected (which for this purpose and under the 1940 Act
means the lesser of: (i) 67% of the shares represented at a meeting at which
more than 50% of the outstanding shares are represented; or (ii) more than 50%
of the outstanding shares). The policies by which a portfolio seeks to achieve
its investment objectives, however, are not fundamental. They may be changed by
the Board of Directors of the Series Fund without the approval of the
shareholders.
10 - Series Fund
<PAGE>
The portfolio turnover rate of the portfolios that were available for investment
as of December 31, 1996 can be found in the FINANCIAL HIGHLIGHTS table on pages
1 through 8. The portfolio turnover rate is, generally, the percentage computed
by dividing the lesser of portfolio purchases or sales by the average value of
the portfolio, in each case excluding securities with maturities of 1 year or
less. Generally, the higher the portfolio turnover rate, the greater the
brokerage costs incurred by a portfolio.
The following paragraphs describe the investment objectives and policies of each
portfolio. There is no guarantee that any of these objectives will be met.
FIXED INCOME PORTFOLIOS
MONEY MARKET PORTFOLIO. The objective of this portfolio is to achieve, through
investment in high-quality short-term debt obligations, the maximum current
income that is consistent with stability of capital and maintenance of
liquidity.
The portfolio seeks to achieve this objective by following the policy of
investing primarily in money market instruments denominated in U.S. dollars that
mature in 397 days or less from the date the portfolio acquires them. Money
market instruments include short-term obligations of the United States and
foreign governments, their agencies, instrumentalities, and political
subdivisions, and of domestic and foreign banks and corporations. They also
include commercial paper, other corporate obligations, obligations of savings
and loan associations and savings banks, and variable amount demand master
notes. The portfolio may also enter into repurchase and reverse repurchase
agreements and may purchase and sell securities on a when-issued and delayed
delivery basis. These investment techniques may involve additional risks. A
detailed description of the money market instruments in which the portfolio may
invest, of the repurchase and reverse repurchase agreements it may enter into,
and of the risks associated with those instruments and agreements may be found
in the Appendix to this prospectus.
Because of the high quality, short-term nature of the portfolio's holdings,
increases in the value of an investment in the portfolio will be derived almost
entirely from interest on the securities held by it. Accordingly, the results
for the portfolio are subject to the risk of fluctuation in short-term interest
rates.
DIVERSIFIED BOND PORTFOLIO. The objective of this portfolio is to achieve a high
level of income over the longer term while providing reasonable safety of
capital through investment primarily in readily marketable intermediate and
long-term fixed income securities that provide attractive yields but do not
involve substantial risk of loss of capital through default.
The portfolio seeks to achieve this objective by following the policies of
purchasing primarily debt securities of investment grade or, if not rated, of
comparable quality in the opinion of the portfolio manager and of investing from
time to time a portion of its assets in high quality money market instruments of
the kind held in the Money Market Portfolio as described in the Appendix to this
prospectus. Moreover, when conditions dictate a temporary defensive strategy or
during temporary periods of portfolio structuring and restructuring, the
Diversified Bond Portfolio may invest, without limit, in high quality money
market instruments of the kind held by the Money Market Portfolio.
Since the value of fixed income securities generally fluctuates inversely with
changes in interest rates, the proportions of intermediate or longer-term
securities and short-term debt obligations held in the portfolio will vary to
reflect Prudential's assessment of prospective changes in interest rates, so
that the portfolio may benefit from relative price appreciation when interest
rates decline and suffer lesser declines in value when interest rates rise. The
success of this strategy will depend on Prudential's ability to forecast changes
in interest rates, and there is a corresponding risk that the value of the
securities held in the portfolio will decline.
At least 80% of the portfolio's holdings (including short-term debt obligations)
will generally consist of debt securities that at the time of purchase have a
rating within the four highest grades determined by Moody's Investor Services,
Inc. ("Moody's"), Standard & Poor's Rating Group ("S&P"), or a similar
nationally-recognized rating service. The portfolio may retain a security whose
rating has dropped below the four highest grades as determined by a commercial
rating service. Without limitation, the portfolio may invest in obligations of
the U.S. Government and its agencies and instrumentalities. The Appendix to the
statement of additional information defines the ratings that are given to debt
securities by Moody's and S&P and describes the standards applied by them in
assigning these ratings.
The remaining assets of the portfolio may be invested in, among other things,
debt securities that are not rated within the four highest grades or convertible
debt securities, preferred stocks or convertible preferred stocks of any
quality. On occasion, however, the portfolio may acquire common stock, not
through direct investment but by the conversion of convertible debt securities
or the exercise of warrants. For additional information regarding warrants, see
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS in the statement of
additional information. No more than 10% of the value of the total assets of the
portfolio will be held in common stocks, and those will usually be sold as soon
as a favorable opportunity is available.
11 - Series Fund
<PAGE>
The portfolio may invest up to 20% of its total assets in United States currency
denominated debt securities issued outside the United States by foreign or
domestic issuers. For additional information regarding such securities, see
FOREIGN SECURITIES on page 27.
In addition, the portfolio may: (i) purchase and sell options on debt
securities; (ii) purchase and sell interest rate futures contracts and options
thereon; (iii) purchase securities on a when-issued or delayed delivery basis;
(iv) use interest rate swaps; and (v) make short sales. These techniques are
described on pages 29 through 33, and further information about some of them is
included in the statement of additional information.
Barbara Kenworthy, Managing Director, Prudential Investments, has been portfolio
manager of the Diversified Bond Portfolio since 1995. Ms. Kenworthy is also
portfolio manager of the Prudential Diversified Bond Fund, Inc., the Prudential
Government Income Fund, Inc., and the Government Income and Zero Coupon Bond
Portfolios 2000 and 2005 of the Series Fund. Prior to 1994, Ms. Kenworthy was a
portfolio manager and president of several taxable fixed-income funds for The
Dreyfus Corp.
GOVERNMENT INCOME PORTFOLIO. The objective of this portfolio is to achieve a
high level of income over the longer term consistent with the preservation of
capital through investment primarily in intermediate and long-term U.S. Treasury
securities and debt obligations issued by agencies of or instrumentalities
established, sponsored or guaranteed by the U.S. Government. At least 65% of the
total assets of the portfolio will be invested in U.S. Government securities.
The portfolio seeks to achieve this objective by investing at least 65% of its
assets in U.S. Treasury securities, obligations issued or guaranteed by U.S.
Government agencies and instrumentalities, mortgage-related securities issued by
U.S. Government instrumentalities or non-governmental corporations, or related
collateralized mortgage obligations. These instruments are described below. The
portfolio may invest up to a total of 35% of its assets in the following three
categories: (1) money market instruments of the kind held in the Money Market
Portfolio; (2) securities of issuers other than the U.S. Government and related
entities, usually foreign governments, where the principal and interest are
substantially guaranteed (generally to the extent of 90% thereof) by U.S.
Government agencies whose guarantee is backed by the full faith and credit of
the United States and where an assurance of payment on the unguaranteed portion
is provided for in a comparable way; (3) Foreign Government Securities including
debt securities issued or guaranteed, as to payment of principal and interest,
by governments, governmental agencies, supranational entities and other
governmental entities denominated in U.S. dollars. A supranational entity is an
entity constituted by the national governments of several countries to promote
economic development. Examples of such supranational entities include, among
others, the World Bank (International Bank for Reconstruction and Development),
the European Investment Bank and the Asian Development Bank; and (4)
asset-backed securities rated in either of the top two ratings by Moody's or
Standard & Poor's, or if not rated, determined by the portfolio manager to be of
comparable quality. A description of corporate bond ratings is contained in the
Appendix to the statement of additional information. When conditions dictate a
temporary defensive strategy or during temporary periods of portfolio
structuring and restructuring, the Government Income Portfolio may invest,
without limit, in high quality money market instruments of the kind held by the
Money Market Portfolio.
U.S. Treasury Securities. U.S. Treasury securities include bills, notes, and
bonds issued by the U.S. Treasury. These instruments are direct obligations of
the U.S. Government and, as such, are backed by the full faith and credit of the
United States. They differ primarily in their coupons, the lengths of their
maturities, and the dates of their issuances.
Obligations Issued or Guaranteed by U.S. Government Agencies and
Instrumentalities. Obligations issued by agencies of the U.S. Government or
instrumentalities established or sponsored by the U.S. Government include
securities that are guaranteed by federal agencies or instrumentalities, and may
or may not be backed by the full faith and credit of the United States.
Obligations of the Government National Mortgage Association ("GNMA"), the
Farmers Home Administration, and the Export-Import Bank are backed by the full
faith and credit of the United States. Securities in which the portfolio may
invest that are not backed by the full faith and credit of the United States
include obligations issued by the Tennessee Valley Authority, The Federal
National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC"), the United States Postal Service, each of which has the
right to borrow from the United States Treasury to meet its obligations, and
obligations of the Federal Farm Credit Bank and the Federal Home Loan Bank, the
obligations of which may be satisfied only by the individual credit of the
issuing agency. In the case of securities not backed by the full faith and
credit of the U.S. Government, the portfolio must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment and may not be
able to assert a claim against the U.S. Government if the agency or
instrumentality does not meet its commitments.
U.S. Government Securities are considered among the most creditworthy of fixed
income investments. The yields available from U.S. Government Securities are
generally lower than the yields available from corporate debt securities. The
values of U.S. Government Securities (like those of fixed income securities,
generally) will change as interest rates fluctuate. During periods of falling
U.S. interest rates, the values of outstanding long-term U.S.
12 - Series Fund
<PAGE>
Government Securities generally rise. Conversely, during periods of rising
interest rates, the values of such securities generally decline. The magnitude
of these fluctuations will generally be greater for securities with longer
maturities. Although changes in the value of U.S. Government Securities will not
affect investment income from those securities, they will affect the portfolio's
net asset value. The proportions of intermediate and long-term securities held
in the portfolio will vary to reflect Prudential's assessment of prospective
changes in interest rates, so that the portfolio may benefit from relative price
appreciation when interest rates decline and suffer lesser declines in value
when interest rates rise. The success of this strategy will depend on
Prudential's ability to forecast changes in interest rates, and there is a
corresponding risk that the value of the securities held in the portfolio will
decline.
Mortgage-Related Securities Issued by U.S. Government Instrumentalities or by
Non-Governmental Corporations. The portfolio may invest in the following three
types of mortgage-backed securities: (i) those issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities, such as Government
National Mortgage Association (GNMA), Federal National Mortgage Association
(FNMA) and Federal Home Loan Mortgage Corporation (FHLMC); (ii) those issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. Government or one of
its agencies or instrumentalities; and (iii) those issued by private issuers
that represent an interest in or are collateralized by whole mortgage loans or
mortgage-backed securities without government guarantee but usually having some
form of private credit enhancement. The portfolio may invest in adjustable rate
and fixed rate mortgage securities. With respect to private mortgage-backed
securities not collateralized by securities of the U.S. Government or its
agencies, the portfolio will only purchase such securities rated not lower than
Aa by Moody's or AA by Standard & Poor's or similarly rated by another
nationally recognized rating service or, if unrated, of comparable quality in
the opinion of the portfolio manager. The mortgages backing these securities
include conventional 30 year fixed rate mortgages, 15 year fixed rate mortgages,
graduated payment mortgages, and adjustable rate mortgages ("ARMs"). The
mortgage-backed securities may include those representing an undivided ownership
interest in a pool of mortgages, e.g. GNMA, FNMA and FHLMC certificates. The
U.S. Government or the issuing agency guarantees the payment of interest and
principal of mortgage-backed securities issued by the U.S. Government or its
agencies/instrumentalities. However, these guarantees do not extend to the
securities' yield or value, which are likely to vary inversely with fluctuations
in interest rates, nor do the guarantees extend to the yield or value of the
portfolio's shares. Mortgage-backed securities are in most cases pass-through
instruments, through which the holders receive a share of all interest and
principal payments from the mortgages underlying the securities, net of certain
fees. Because the prepayment characteristics of the underlying mortgages vary,
it is not possible to predict accurately the average life of a particular issue
of pass-through securities. Mortgage-backed securities are often subject to more
rapid repayment then their stated maturity date would indicate as a result of
the pass-through of prepayments of principal on the underlying mortgage
obligations. For example, securities backed by mortgages with 30 year maturities
are customarily treated as prepaying fully in the 12th year and securities
backed by mortgages with 15 year maturities are customarily treated as prepaying
fully in the seventh year. While the timing of prepayments of graduated payment
mortgages differs somewhat from that of conventional mortgages, the prepayment
experience of graduated payment mortgages is basically the same as that of the
conventional mortgages of the same maturity dates over the life of the pool.
During periods of declining interest rates, prepayment of mortgages underlying
mortgage-backed securities can be expected to accelerate. When the mortgage
obligations are prepaid, the portfolio reinvests the prepaid amounts in
securities, the yields of which reflect interest rates prevailing at the time.
Therefore, the portfolio's ability to maintain a portfolio of high yielding
mortgage-backed securities will be adversely affected to the extent that
prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid mortgages. Moreover, prepayments of mortgages which
underlie securities purchased at a premium could result in capital losses.
Mortgage-backed securities of the types described under (i) and (ii) above are
considered to be U.S. Government Securities for purposes of meeting the
requirement that at least 65% of the portfolio's assets be invested in U.S.
Government Securities.
Adjustable rate mortgage securities are pass-through mortgage securities
collateralized by mortgages with adjustable rather than fixed rates. Generally
ARMs have a specified maturity date and amortize principal over their life. In
periods of declining interest rates, there is a reasonable likelihood that ARMs
will experience increased rates of pre-payment of principal. However, the major
difference between ARMs and fixed rate mortgage securities is that the interest
rate and the rate of amortization of principal of ARMs can and do change in
accordance with movements in a particular pre-specified, published interest rate
index.
CMOs. The portfolio may also purchase collateralized mortgage obligations
("CMOs"). A CMO is a security issued by a corporation or a U.S. Government
instrumentality that is backed by a portfolio of mortgages or mortgage-backed
securities. The issuer's obligation to make interest and principal payments is
secured by the underlying portfolio of mortgages or mortgage-backed securities.
CMOs are partitioned into several classes with a ranked priority by which the
classes of obligations are redeemed. The portfolio may invest in CMOs issued by
agencies or instrumentalities of the U.S. Government or by private originators
of, or investors in mortgage loans, including depository institutions, mortgage
banks, investment banks and special purpose subsidiaries of the
13 - Series Fund
<PAGE>
foregoing. With respect to privately issued CMOs, the portfolio will only
purchase such securities rated not lower than Aa by Moody's or AA by Standard &
Poor's or similarly rated by another nationally recognized rating service, or if
unrated, of comparable quality in the opinion of the portfolio manager.
Privately issued CMOs that are collateralized by mortgage-backed securities
issued by GNMA, FHLMC or FNMA, and CMOs issued by agencies or instrumentalities
of the U.S. Government are considered to be U.S. Government Securities for
purposes of meeting the requirement that at least 65% of the portfolio's assets
be invested in U.S. Government Securities. Neither the United States Government
nor any U.S. Government agency guarantees the payment of principal or interest
on these securities.
Asset-Backed Securities. Asset-backed securities represent a participation in,
or are secured by and payable from, a stream of payments generated by particular
assets, such as automobile or credit card receivables. Asset-backed securities
present certain risks, including the risk that the underlying obligor on the
asset, such as the automobile purchaser or the credit card holder, may default
on his or her obligation. In addition, asset-backed securities often do not
provide a security interest in the related collateral. For example, credit card
receivables are generally unsecured, and for automobile receivables the security
interests in the underlying automobiles are often not transferred when the pool
is created, with the resulting possibility that the collateral could be resold.
In addition, the portfolio may: (i) purchase and sell options on debt
securities; (ii) purchase and sell interest rate futures contracts and options
thereon; (iii) purchase securities on a when-issued or delayed delivery basis;
(iv) use interest rate swaps; and (v) make short sales. These techniques are
described on pages 29 through 33, and further information about some of them is
included in the statement of additional information.
Under normal circumstances, this portfolio's turnover rate is not expected to
exceed 200%. Purchases of U.S. Government Securities are generally made from
dealers at prices which usually include a profit to the dealer. See PORTFOLIO
BROKERAGE AND RELATED PRACTICES, page 38.
Barbara Kenworthy, Managing Director, Prudential Investments, has been portfolio
manager of the Government Income Portfolio since 1995. Ms. Kenworthy is also
portfolio manager of the Prudential Diversified Bond Fund, Inc., the Prudential
Government Income Fund, Inc., and the Diversified Bond and Zero Coupon Bond
Portfolios 2000 and 2005 of the Series Fund. Prior to 1994, Ms. Kenworthy was a
portfolio manager and president of several taxable fixed-income funds for The
Dreyfus Corp.
ZERO COUPON BOND PORTFOLIOS 2000 AND 2005. The objective of both of these
portfolios is to achieve the highest predictable compounded investment return
for a specific period of time, consistent with the safety of invested capital,
by investing primarily in debt obligations of the United States Treasury and
investment-grade corporations that have been issued without interest coupons or
stripped of their unmatured interest coupons, interest coupons that have been
stripped from such debt obligations, and receipts and certificates for such
stripped debt obligations and stripped coupons (collectively "stripped
securities"). The two portfolios differ only in their liquidation dates, which
for each portfolio is November 15 of the specified year.
In pursuing this objective, each Zero Coupon Bond Portfolio invests only in
readily marketable debt securities that do not involve substantial risk of loss
of capital through default, although their value may vary because of changes in
the general level of interest rates. It is the policy of each Zero Coupon Bond
Portfolio to invest at least 70% of its assets in stripped securities that are
obligations of the United States Government maturing within 2 years of the
portfolio liquidation date. Up to 30% of the assets may be invested and held
either in stripped securities issued by investment-grade corporations or in
high-grade interest bearing corporate debt securities, in each case with a
quality rating of Baa or better, provided that no more than 20% of the assets of
the portfolio may be invested in interest bearing securities. However, as a
defensive position, as the liquidation date of each portfolio draws near, more
than 20% of assets may be invested in interest bearing securities when deemed
appropriate in the view of the portfolio manager given prevailing market
conditions and investment opportunities available at the time. Prudential will
evaluate the creditworthiness of potential investments in corporate securities
in order to determine whether such securities are suitable for purchase by the
portfolios. A small portion of the portfolios may be invested in money market
instruments of the kind held in the Money Market Portfolio in order to make
effective use of cash reserves pending investments in the securities described
above. Moreover, when conditions dictate a temporary defensive strategy or
during temporary periods of portfolio structuring and restructuring, each Zero
Coupon Bond Portfolio may invest, without limit, in high quality money market
instruments of the kind held by the Money Market Portfolio.
At the beginning of each week, Prudential will calculate the anticipated
compounded growth rate that investors purchasing shares of each portfolio that
day are predicted to achieve if their investment is maintained until the
portfolio liquidation date. That rate will change from day to day depending on
various factors, including particularly the general level of interest rates, but
daily changes will generally not be significant. If there is a significant
change in interest rates (greater than a 0.30% change in the yield of a zero
coupon Treasury bond maturing in the specified year), Prudential will
recalculate the predicted yield. Prudential will furnish the anticipated
compounded growth rate on request.
14 - Series Fund
<PAGE>
In order to achieve a predictable compounded investment return to each
portfolio's liquidation date that will be as little affected as possible by
variations in the general level of interest rates, the composition of the
securities held in each portfolio is such that the weighted average period of
time until receipt of scheduled cash payments (whether of principal or
interest)--sometimes referred to as the portfolio's "duration"--will be kept
within 1 year of the period remaining until the portfolio liquidation date. When
the portfolio's duration is thus maintained, differences between the market
value and the face amount of unmatured bonds on the portfolio's liquidation date
resulting from changes in the general level of interest rates will be
approximately equal in magnitude to, but opposite in direction from, the
difference between the amount of interest accumulated through the reinvestment
of earlier coupon or principal payments and the amount that would have been
accumulated at the originally predicted rate. Each portfolio is thus able to
hold interest bearing securities and stripped securities with maturity dates
before, during, and after the portfolio's liquidation date. The concept of
"duration" is explained more fully in the statement of additional information.
On the liquidation date of a Zero Coupon Bond Portfolio, all of the securities
held by the portfolio will be sold and all outstanding shares of the portfolio
will be redeemed. The redemption proceeds will, except as otherwise directed by
Contract owners, be used to purchase shares of the Money Market Portfolio.
Each portfolio seeks to realize a higher yield than would be obtained simply by
maintaining the portfolio's initial investments. The portfolios are actively
managed by Prudential to take advantage of trading opportunities that may exist
from time to time due to price and yield distortions resulting from changes in
the supply and demand characteristics or perceived differences in quality or
liquidity characteristics of the securities available for purchase by the
portfolio. There is a corresponding risk that, to the extent that this strategy
is unsuccessful, the initial yield objective will not be met.
The stripping of interest coupons will cause the stripped securities to be
purchased at a substantial (or "deep") discount from their principal amounts
payable at maturity. If held to maturity, these obligations provide a
predictable yield. But because interest on stripped securities is not paid in
cash on a current basis but rather is in effect compounded until maturity (or
the payment date in the case of a coupon), the market values of securities of
this type are subject to greater fluctuations, as a result of changes in
interest rates, than are the values of debt securities that provide for the
periodic payment of interest; and the longer the term to maturity of a
portfolio, the greater the risk of such fluctuations. In light of these factors,
investors who desire to attain the anticipated growth rate on their investment
expected at the time of purchase must plan to hold the portfolio's shares and to
reinvest all dividends and distributions until the portfolio matures. Any
investor who redeems his or her interest in the portfolio prior to the portfolio
liquidation date or who fails to reinvest dividends is likely to achieve quite a
different investment return than the return that was predicted on the date the
investment was made, and may even suffer a loss.
Barbara Kenworthy, Managing Director, Prudential Investments, has been portfolio
manager of the Zero Coupon Bond Portfolios 2000 and 2005 since 1995. Ms.
Kenworthy is also portfolio manager of the Prudential Diversified Bond Fund,
Inc., the Prudential Government Income Fund, Inc., and the Diversified Bond and
Government Income Portfolios of the Series Fund. Prior to 1994, Ms. Kenworthy
was a portfolio manager and president of several taxable fixed-income funds for
The Dreyfus Corp.
BALANCED PORTFOLIOS
CONSERVATIVE BALANCED PORTFOLIO. The objective of this portfolio is to achieve a
favorable total investment return consistent with a portfolio having a
conservatively managed mix of money market instruments, fixed income securities,
and common stocks in proportions believed by the investment manager to be
appropriate for an investor desiring diversification of investment who prefers a
relatively lower risk of loss than that associated with the Flexible Managed
Portfolio while recognizing that this reduces the chances of greater
appreciation.
To achieve this objective, the Conservative Balanced Portfolio will follow a
policy of maintaining a more conservative asset mix among stocks, bonds and
money market instruments than the Flexible Managed Portfolio. In general, the
portfolio manager will observe the following range of target asset allocation
mixes:
Asset Type Minimum Normal Maximum
---------- ------- ------ -------
Stocks 15% 35% 50%
Bonds and Money Market 25% 65% 70%
The portfolio manager will make variations in the proportions of each investment
category in accordance with its judgment about the expected returns and risks of
the various investment categories, but will maintain at least 25% of the value
of the portfolio's assets in fixed-income senior securities.
The bond portion of this portfolio will be invested primarily in securities with
maturities of 2 to 10 years and ratings at the time of purchase within the four
highest grades determined by Moody's, S&P, or a similar nationally-recognized
rating service or if unrated, of comparable quality in the opinion of the
portfolio manager. However, the portfolio may purchase below-investment grade
debt. The risks of medium to lower rated securities,
15 - Series Fund
<PAGE>
also known as high risk securities, are described below in connection with the
High Yield Bond Portfolio. A description of corporate bond ratings is contained
in the Appendix to the statement of additional information. Because of their
shorter maturities, the value of the notes and bonds in this portfolio will be
less sensitive to changes in interest rates than the longer-term bonds likely to
be held in the Flexible Managed Portfolio. Thus, there will be less of a risk of
loss of principal, but not as much of a likelihood for greater appreciation in
value. 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 stock portion of this portfolio will be
invested primarily in the equity securities of major, established corporations
in sound financial condition that appear to offer attractive prospects of a
total return from dividends and capital appreciation that is superior to broadly
based stock indices. The portfolio may also invest in preferred stock, including
below investment grade preferred stock. 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 Conservative Balanced Portfolio may invest, without limit, in
high quality money market instruments of the kind held by the Money Market
Portfolio.
To the extent permitted by applicable insurance law, this portfolio may invest
up to 30% of its total assets in non-United States currency denominated debt and
equity securities of foreign and U.S. issuers. The particular risks of
investments in foreign securities are described under FOREIGN SECURITIES on
page 27.
In addition, the portfolio may: (i) purchase and sell options on equity
securities, debt securities, stock indices and foreign currencies; (ii) purchase
and sell stock index, interest rate and foreign currency futures contracts and
options thereon; (iii) enter into forward foreign currency exchange contracts;
(iv) purchase securities on a when-issued or delayed delivery basis; (v) use
interest rate swaps; and (vi) make short sales. These techniques are described
on pages 28 through 33, and further information about some of them is included
in the statement of additional information.
The Conservative Balanced Portfolio is managed by a team of portfolio managers.
Mark Stumpp, Senior Managing Director, Prudential Investments, has been lead
portfolio manager of the Conservative Balanced Portfolio since 1994 and is
responsible for the overall asset allocation decisions. Mr. Stumpp has
supervisory responsibility of the portfolio management team. Warren Spitz,
Managing Director, Prudential Investments, has been the portfolio manager of the
equity portion of the portfolio since 1995. It is the intention of the portfolio
to appoint Patricia Bannan, Managing Director, Prudential Investments, to manage
a portion (to be determined by Mr. Stumpp) of the portfolio's equity holdings.
Upon Ms. Bannan's appointment, Mr. Spitz will continue to manage the other
portion of the portfolio's equity holdings. Tony Rodriguez, Vice President,
Prudential Investments, has been the portfolio manager of the fixed income
portion of the portfolio since 1993. Mr. Stumpp also supervises the team of
portfolio managers for the Flexible Managed Portfolio. Mr. Stumpp is also
portfolio manager for several employee benefit trusts including The Prudential
Retirement System for U.S. Employees and Special Agents. Prior to 1994, he was
responsible for corporate pension asset management for Prudential Diversified
Investment Strategies' corporate clients. Mr. Spitz is also portfolio manager of
the Prudential Equity Income Fund and the Equity Income and Flexible Managed
Portfolios of the Series Fund. Ms. Bannan has been portfolio manager of the
equity portion of the Flexible Managed Portfolio since 1996. Prior to 1996, Ms.
Bannan was President of Phoenix Investment Counsel where she personally managed
$3 billion in assets, including a $2.5 billion balanced mutual fund. Mr.
Rodriguez is also portfolio manager for the Prudential Structured Maturity Fund,
Inc. and the Flexible Managed Portfolio of the Series Fund.
FLEXIBLE MANAGED PORTFOLIO. The objective of this portfolio is achievement of a
high total return consistent with a portfolio having an aggressively managed mix
of money market instruments, fixed income securities, and common stocks, in
proportions believed by the investment manager to be appropriate for an investor
desiring diversification of investment who is willing to accept a relatively
high level of loss in an effort to achieve greater appreciation.
To achieve this objective, the Flexible Managed Portfolio will follow a policy
of maintaining a more aggressive asset mix among stocks, bonds and money market
investments than the Conservative Balanced Portfolio. In general, the portfolio
manager will observe the following range of target asset allocation mixes:
Asset Type Minimum Normal Maximum
---------- ------- ------ -------
Stocks 25% 60% 100%
Bonds 0% 40% 75%
Money Market 0% 0% 75%
The portfolio manager may make short-run, and sometimes substantial, variations
in the asset mix based upon its judgment about the expected returns and risks of
the various investment categories. In varying the asset mix in accordance with
these judgments, Prudential will also seek to take advantage of imbalances in
fundamental values among the different markets.
The bond component of this portfolio is expected under normal circumstances to
have a weighted average maturity of greater than 10 years. The values of bonds
with long maturities are generally more sensitive to changes in
16 - Series Fund
<PAGE>
interest rates than those of shorter maturities. 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, also
known as high risk securities. The risks of medium to lower rated securities,
are described below 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. 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.
To the extent permitted by applicable insurance law, this portfolio may invest
up to 30% of its total assets in non-United States currency denominated debt and
equity securities of foreign and U.S. issuers. The particular risks of
investments in foreign securities are described under FOREIGN SECURITIES, page
27.
In addition, the portfolio may: (i) purchase and sell options on equity
securities, debt securities, stock indices and foreign currencies; (ii) purchase
and sell stock index, interest rate and foreign currency futures contracts and
options thereon; (iii) enter into forward foreign currency exchange contracts;
(iv) purchase securities on a when- issued or delayed delivery basis; (v) use
interest rate swaps; and (vi) make short sales. These techniques are described
on pages 28 through 33, and further information about some of them is included
in the statement of additional information.
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 it will invest in bonds with longer
maturities; 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.
The Flexible Managed Portfolio is managed by a team of portfolio managers. Mark
Stumpp, Senior Managing Director, Prudential Investments, has been lead
portfolio manager of the Flexible Managed Portfolio since 1994 and is
responsible for the overall asset allocation decisions. Mr. Stumpp has
supervisory responsibility of the portfolio management team. Patricia Bannan,
Managing Director, Prudential Investments, has been the portfolio manager of the
equity portion of the portfolio since 1996. It is the intention of the portfolio
to appoint Warren Spitz, Managing Director, Prudential Investments, to manage a
portion (to be determined by Mr. Stumpp) of the portfolio's equity holdings.
Upon Mr. Spitz's appointment, Ms. Bannan will continue to manage the other
portion of the portfolio's equity holdings. Tony Rodriguez, Vice President,
Prudential Investments, has been the portfolio manager of the fixed income
portion of the portfolio since 1993. Mr. Stumpp also supervises the team of
portfolio managers for the Conservative Balanced Portfolio. Mr. Stumpp is also
portfolio manager for several employee benefit trusts including The Prudential
Retirement System for U.S. Employees and Special Agents. Prior to 1994, he was
responsible for corporate pension asset management for Prudential Diversified
Investment Strategies' corporate clients. Prior to 1996, Ms. Bannan was
President of Phoenix Investment Counsel where she personally managed $3 billion
in assets including a $2.5 billion balanced mutual fund. Mr. Spitz has been
portfolio manager of the equity portion of the Conservative Balanced Portfolio
since 1995 and is also portfolio manager of the Prudential Equity Income Fund
and the Equity Income Portfolio of the Series Fund. Mr. Rodriguez is also
portfolio manager for the Prudential Structured Maturity Fund, Inc., and the
Flexible Managed Portfolio of the Series Fund.
HIGH YIELD BOND PORTFOLIOS
HIGH YIELD BOND PORTFOLIO. The objective of this portfolio is to achieve a high
total return through investment in a diversified portfolio of high yield/high
risk fixed income securities.
The portfolio seeks to achieve its objective by following a policy of generally
investing in fixed income securities rated in the medium to lower categories by
recognized rating services or in unrated fixed income securities of comparable
quality. The portfolio expects to invest principally in fixed income securities
rated Baa or lower by Moody's, or BBB or lower by S&P. These securities are
sometimes known as "junk bonds." Corporate bonds
17 - Series Fund
<PAGE>
which are rated Baa by Moody's are described by Moody's as being investment
grade, but are also characterized as having speculative characteristics.
Corporate bonds rated below Baa by Moody's and BBB by S&P are considered
speculative. A description of corporate bond ratings is contained in the
Appendix to the statement of additional information.
Medium to lower rated and comparable non-rated securities tend to offer higher
yields than higher rated securities with the same maturities because the
historical financial condition of the issuers of such securities may not have
been as strong as that of other issuers. Since medium to lower rated securities
generally involve greater risks of loss of income and principal than higher
rated securities, investors should consider carefully the relative risks
associated with investments in high yield/high risk securities which carry
medium to lower ratings and in comparable non-rated securities. Investors should
understand that such securities are not generally meant for short-term
investing.
The achievement of the portfolio's investment objectives will depend on
Prudential's analytical and portfolio management skills. These skills are more
important in connection with the investment in medium to lower rated and
comparable unrated securities and to the portfolio's performance than would be
the case if the portfolio invested in higher quality fixed income securities. In
selecting securities for the portfolio, Prudential will evaluate, among other
things, an issuer's financial history, condition, prospects and management. A
credit rating assigned by a commercial rating service will not measure the
market risk of high yield/high risk bonds and may not be a timely reflection of
the condition and economic viability of an individual issuer. In its credit
analysis, Prudential therefore will not rely principally on the ratings assigned
by the ratings services (e.g., Moody's and S&P), although such ratings will be
considered. Through careful selection and by investment in a diversified mix of
securities, Prudential will seek to reduce the risks that are associated with
investing in medium to lower rated and comparable unrated debt securities.
Fixed income securities are subject to the risk of an issuer's inability to meet
principal and interest payments on the obligations (credit risk) and may also be
subject to price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness of the issuer and general market
liquidity (market risk). The value of the fixed income securities in the
portfolio will be directly impacted by the market perception of the
creditworthiness of the securities' issuers and will fluctuate inversely with
changes in interest rates. Lower rated or unrated securities are more likely to
react to developments affecting market and credit risk than are more highly
rated securities, which react primarily to movements in the general level of
interest rates. For example, because investors generally perceive that there are
greater risks associated with investing in medium or lower rated securities, the
yields and prices of such securities may tend to fluctuate more than those of
higher rated securities. Moreover, in the lower quality segments of the fixed
income securities market, changes in perception of the creditworthiness of
individual issuers tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the fixed income securities
market. The yield and price of medium to lower rated securities therefore may
experience greater volatility than is the case with higher rated securities.
Prudential considers both credit risk and market risk in selecting securities
for the portfolio. By holding a diversified selection of such securities, the
portfolio seeks to reduce this volatility.
The secondary market for high yield/high risk securities, which is concentrated
in relatively few market makers, may not be as liquid as the secondary market
for more highly rated securities. Under adverse market or economic conditions,
the secondary market for high yield/high risk securities could contract further,
independent of any specific adverse changes in the condition of a particular
issuer. As a result, Prudential could find it more difficult to sell such
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such lower
rated or unrated securities therefore may be less than the prices used in
calculating the portfolio's net asset value. In the absence of readily available
market quotations, high yield/high risk securities will be valued by the Series
Fund's Board of Directors using a method that, in the good faith belief of the
Board, accurately reflects fair value. Valuing such securities in an illiquid
market is a difficult task. The Board's judgment plays a more significant role
in valuing such securities than those securities for which more objective market
data are available.
From time to time, federal laws have been enacted which have required the
divestiture by companies of their investments in high yield bonds and have
limited the deductibility of interest by certain corporate issuers of high yield
bonds. These types of laws could adversely affect the portfolio's net asset
value and investment practices, the secondary market for high yield securities,
the financial condition of issuers of these securities and the value of
outstanding high yield securities. There is currently no legislation pending
that would adversely impact the market for high yield/high risk securities.
However, there can be no assurance that such legislation will not be proposed or
enacted in the future.
During the fiscal year ended December 31, 1996, the monthly dollar weighted
average ratings of the debt obligations held by the High Yield Bond Portfolio,
expressed as a percentage of the portfolio's total investments, were as follows:
18 - Series Fund
<PAGE>
- --------------------------------------------------------------------------------
| PERCENTAGE OF TOTAL
RATINGS | INVESTMENTS
- ----------------------------------------|---------------------------------------
AAA/Aaa | 0%
AA/Aa | 0%
A/A | 0%
BBB/Baa | 0.3%
BB/Ba | 18.5%
B/B | 60.0%
CCC/Caa or lower | 8.3%
Unrated | 12.9%
- --------------------------------------------------------------------------------
Consistent with its investment objective, the portfolio anticipates that under
normal conditions at least 80% of the value of its total assets will be invested
in high yield/high risk, medium to lower rated fixed income securities. Fixed
income securities appropriate for the portfolio may include both convertible and
nonconvertible debt securities and preferred stock. The portfolio will not
acquire common stocks, except when attached to or included in a unit with fixed
income securities which otherwise would be attractive to the portfolio.
The portfolio may invest up to 20% of its total assets in United States currency
denominated fixed-income securities issued outside the United States by foreign
and domestic issuers. For additional information regarding such securities, see
FOREIGN SECURITIES on page 27.
The portfolio may, when it has temporary cash available, invest in money market
instruments of the kind held by the Money Market Portfolio. The portfolio may
also invest in commercial paper of domestic corporations that does not meet the
quality restrictions applicable to the investments of the Money Market
Portfolio. Moreover, when conditions dictate a temporary defensive strategy or
during temporary periods of portfolio structuring and restructuring, the High
Yield Bond Portfolio may invest, without limit, in high quality money market
instruments of the kind held by the Money Market Portfolio. The portfolio may
also: (i) purchase and sell options on debt securities; (ii) purchase and sell
interest rate futures contracts and options thereon; (iii) purchase securities
on a when-issued or delayed delivery basis; (iv) use interest rate swaps; and
(v) make short sales. These techniques are described on pages 29 through 33, and
further information about some of them is included in the statement of
additional information.
Although the portfolio is not expected to engage in substantial short-term
trading, it may sell securities it owns without regard to the length of time
they have been held. The portfolio's turnover rate is not expected to exceed
150%.
Lars Berkman, Managing Director, Prudential Investments, and Michael Snyder,
Vice President, Prudential Investments, have been co-managers of the High Yield
Bond Portfolio since 1995. Mr. Berkman is also portfolio manager of the
Prudential High Yield Fund and has been employed as a portfolio manager in the
mutual fund unit since 1990. Mr. Snyder is also the portfolio manager of the
High Yield Income Fund, Inc. for Prudential and has been employed as a portfolio
manager in the mutual fund unit since 1993.
DIVERSIFIED STOCK PORTFOLIOS
STOCK INDEX PORTFOLIO. The objective of this portfolio is to achieve investment
results that correspond to the price and yield performance of publicly-traded
common stocks in the aggregate.
The portfolio seeks to achieve this objective by following the policy of
attempting to duplicate the price and yield performance of the Standard & Poor's
500 Composite Stock Price Index (the "S&P 500 Index"), an index which represents
more than 70% of the total market value of all publicly-traded common stocks and
is widely viewed among investors as representative of the performance of
publicly-traded common stocks as a whole. The S&P 500 Index is composed of 500
selected common stocks, over 95% of which are listed on the New York Stock
Exchange ("NYSE"). Standard & Poor's Corporation chooses the stocks to be
included in the index on a statistical basis taking into account market values
and industry diversification. Inclusion in the index in no way implies an
opinion by Standard & Poor's Corporation as to a stock's attractiveness as an
investment. "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 Series
Fund is not sponsored, endorsed, sold or promoted by S&P and S&P makes no
representation regarding the advisability of investing in the Series Fund.
Reference is made to the statement of additional information which sets forth
certain additional disclaimers and limitations of liabilities on behalf of S&P.
The S&P 500 Index is a "weighted" index in which the weighting of each stock
depends on its relative total market value: its market price per share times the
number of shares outstanding. Because of this weighting, approximately 11% of
the S&P 500 Index's value is accounted for by the stocks of the five largest
companies by relative market
19 - Series Fund
<PAGE>
value. As of December 31, 1996 those companies were: General Electric Co.,
Coca-Cola Co., Exxon Corp., Intel, and Microsoft Corp.
This portfolio will not be "managed" in the traditional sense of using economic,
financial or market analysis to determine the stocks to be purchased by the
portfolio. Rather, the portfolio manager will purchase stocks for the portfolio
in proportion to their weighting in the S&P 500 Index. Thus, adverse financial
performance by a company will not result in reduction or elimination of the
portfolio's holdings of its stock and, conversely, superior financial
performance by a company will not lead the portfolio to increase its holdings of
the company's stock. If a stock held by this portfolio is eliminated from the
S&P 500 Index, the portfolio will sell its holdings of the stock regardless of
the prospects of the company. Because the portfolio will not be "managed" in the
traditional sense, portfolio turnover is expected to be low and is generally not
expected to exceed 10%. A 10% portfolio turnover rate would occur if one-tenth
of the portfolio's securities were sold and either repurchased or replaced
within 1 year. Because of the expected low turnover, transaction costs, such as
brokerage commissions, are also expected to be relatively low.
The following table shows the performance of the S&P 500 Index for the 25 years
ending in 1996. The period covered by this table is one of generally rising
stock prices, and the performance of the S&P 500 Index in this period should not
be viewed as a representation of any future performance by that index. In
addition, the fees and costs involved in the operation of the Stock Index
Portfolio mean that the performance of a share of stock in the portfolio may not
equal the performance of the S&P 500 Stock Index even if the assets held by the
portfolio do equal that performance.
- --------------------------------------------------------------------------------
*S&P 500 WITH DIVIDENDS REINVESTED
ANNUAL PERCENTAGE CHANGE
- --------------------------------------------------------------------------------
|
1972 +18.90 | 1985 +31.57
1973 -14.77 | 1986 +18.56
1974 -26.39 | 1987 +5.10
1975 +37.16 | 1988 +16.61
1976 +23.57 | 1989 +31.69
1977 -7.42 | 1990 -3.10
1978 +6.38 | 1991 +30.47
1979 +18.20 | 1992 +7.61
1980 +32.27 | 1993 +10.08
1981 -5.01 | 1994 +1.32
1982 +21.44 | 1995 +37.58
1983 +22.38 | 1996 +22.96
1984 +6.10 |
- --------------------------------------------------------------------------------
Source: Standard & Poor's Corporation. Percentage change calculated in
accordance with specifications of Sec release number IA-327.
In the nine full years since this portfolio was established its total return,
compared to that of the S&P 500 Index, was as follows:
- --------------------------------------------------------------------------------
Annual Percentage Change Total Return
S&P 500 with Stock Index Portfolio
Dividends Reinvested (after deduction of expenses)
- --------------------------------------------------------------------------------
1988 | +16.61 | +15.44
1989 | +31.69 | +30.93
1990 | -3.10 | -3.63
1991 | +30.47 | +29.72
1992 | +7.61 | +7.13
1993 | +10.08 | +9.66
1994 | +1.32 | +1.01
1995 | +37.58 | +37.06
1996 | +22.96 | +22.57
- --------------------------------------------------------------------------------
Under normal circumstances, the portfolio generally intends to purchase all 500
stocks represented in the S&P 500 Index and to invest its assets as fully in
those stocks (in proportion to their weighting in the index) as is feasible in
light of cash flows into and out of the portfolio. In order to reduce
transaction costs, a weighted investment in the 500 stocks comprising the S&P
500 Index is most efficiently made in relatively large amounts. As additional
cash is received from the purchase of shares in the portfolio, it may be held
temporarily in short-term, high quality
20 - Series Fund
<PAGE>
Investments of the sort in which the Money Market Portfolio invests, until the
portfolio has a sufficient amount of assets in such investments to make an
efficient weighted investment in the 500 stocks comprising the S&P 500 Index. If
net cash outflows from the portfolio are anticipated, the portfolio may sell
stocks (in proportion to their weighting in the S&P 500 Index) in amounts in
excess of those needed to satisfy the cash outflows and hold the balance of the
proceeds in short-term investments if such a transaction appears, taking into
account transaction costs, to be more efficient than selling only the amount of
stocks needed to meet the cash requirements. The portfolio will not, however,
increase its holdings of cash in anticipation of any decline in the value of the
S&P 500 Index or of the stock markets generally. The portfolio will instead
remain as fully invested in the S&P 500 Index stocks as feasible in light of its
cash flow patterns during periods of market declines as well as advances, and
investors in the portfolio thus run the risk of remaining fully invested in
common stocks during a period of general decline in the stock markets.
Tracking accuracy is measured by the difference between total return for the S&P
Index with dividends reinvested and total return for the portfolio with
dividends reinvested before deductions of portfolio fees and expenses. Tracking
accuracy is monitored by the portfolio manager on a daily basis. All tracking
accuracy deviations are reviewed to determine the effectiveness of investment
policies and techniques.
If the portfolio does hold short-term investments as a result of the patterns of
cash flows to and from the portfolio, such holdings may cause its performance to
differ from that of the S&P 500 Index. the portfolio will attempt to minimize
any such difference in performance through transactions involving stock index
futures contracts, options on stock indices, and/or options on stock index
future contracts. These derivative investment instruments are described under
OPTIONS ON STOCK INDICES, FUTURES CONTRACTS, and OPTIONS ON FUTURES CONTRACTS on
pages 30 through 31. The portfolio will not use such instruments for speculative
purposes or to hedge against any decline in the value of the stocks held in the
portfolio, but instead will employ them only as a temporary substitute for
investment of cash holdings directly in the 500 stocks when the portfolio's cash
holdings are too small to make such an investment in an efficient manner.
For example, if the portfolio's cash reserves are insufficient to invest
efficiently in another unit of the basket of stocks comprising the S&P 500
Index, the portfolio may purchase S&P 500 futures contracts to hedge against a
rise in the value of the stocks the portfolio intends to acquire. In its attempt
to minimize any difference in performance between the portfolio and the S&P 500
Index, the portfolio currently intends to engage in transactions involving the
S&P 500 Index futures contracts, the NYSE Composite Index futures contracts,
options on the S&P 500 Index, the S&P 100 Index, and the NYSE Composite Index,
and options on the S&P 500 Index futures contracts and the NYSE Composite Index
futures contracts. There can be no assurance that the portfolio's attempt to
minimize such performance difference through the use of any of these instruments
will succeed. See the statement of additional information for a more detailed
discussion of the manner in which the portfolio will employ these instruments
and for a description of other risks involved in the use of such instruments.
The above described investment policies and techniques of the Stock Index
Portfolio are non-fundamental and may be changed without shareholder approval if
it is determined that alternative investment techniques would be more effective
in achieving the portfolio's objective.
EQUITY INCOME PORTFOLIO. The objective of this portfolio is both current income
and capital appreciation through investment primarily in common stocks and
convertible securities that provide favorable prospects for investment income
returns above those of the Standard & Poor's 500 Stock Index or the NYSE
Composite Index. In selecting these securities, the portfolio will put emphasis
on earnings, balance sheet and cash flow analysis, and the relationships that
these factors have to the price and return of a given security. Under normal
circumstances, the portfolio intends to invest at least 65% of its total assets
in such securities.
The portfolio may invest the balance of its assets in other stocks, other
securities convertible into common stocks, debt securities (including money
market instruments), options on stocks and stock indices, and stock index
futures. The portfolio may under normal circumstances invest up to 35% of its
total assets in 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 Equity
Income Portfolio may invest, without limit, in high quality money market
instruments of the kind held by the Money Market Portfolio.
In addition, up to 35% of the portfolio's total assets may be invested in other
fixed-income obligations including convertible and nonconvertible preferred
stock. The portfolio anticipates that these will primarily be rated A or better
by Moody's or S&P. However, the portfolio may also invest in lower-rated
fixed-income securities, although it will not invest in securities rated lower
than CC or Ca by Moody's or S&P, respectively. The risks of medium to lower
rated securities, also known as high risk securities, are described above in
connection with the High Yield Bond Portfolio. A description of debt ratings is
contained in the Appendix to the statement of additional information. The
portfolio may also invest in non-rated fixed-income securities which, in the
opinion of the manager, are of a quality comparable to rated securities in which
the portfolio may invest.
21 - Series Fund
<PAGE>
To the extent permitted by applicable insurance law, the portfolio may invest up
to 30% of its total assets in non-United States currency denominated debt and
equity securities of foreign and U.S. issuers. The particular risks of
investments in foreign securities are described under FOREIGN SECURITIES on page
27.
In addition, the portfolio may: (i) purchase and sell options on equity
securities, stock indices and foreign currencies; (ii) purchase and sell stock
index and foreign currency futures contracts and options thereon; (iii) enter
into forward foreign currency exchange contracts; and (iv) purchase securities
on a when-issued or delayed delivery basis. These techniques are described on
pages 28 through 32, and further information about some of them is included in
the statement of additional information.
As a result of its investment policies, the portfolio's turnover rate may exceed
100%, although it is not expected to exceed 200%.
Warren Spitz, Managing Director, Prudential Investments, has been portfolio
manager of the Equity Income Portfolio since 1988. Mr. Spitz is also portfolio
manager of the Prudential Equity Income Fund and the Conservative Balanced and
Flexible Managed Portfolios of the Series Fund.
EQUITY PORTFOLIO. The objective of this portfolio is to achieve capital
appreciation through investment primarily in common stocks of companies,
including major established corporations as well as smaller capitalization
companies, that appear to offer attractive prospects of price appreciation that
is superior to broadly-based stock indices.
Current income, if any, is incidental.
Although the portfolio will be invested primarily in common stocks, it may also
invest to a limited extent in short, intermediate or long term debt, either
convertible or nonconvertible into common stock, as well as in nonconvertible
preferred stock. In addition, it may also invest up to 5% of its assets in below
investment grade debt securities. The risks of medium to lower rated securities,
also known as high risk securities, are described above in connection with the
High Yield Bond Portfolio. A description of corporate bond ratings is contained
in the Appendix to the statement of additional information. The portfolio will
attempt to maintain a flexible approach to the selection of common stocks of
various types of companies whose valuations appear to offer opportunities for
above-average appreciation. Thus, the portfolio may invest in securities of
companies whose estimated growth in earnings exceeds that projected for the
market as a whole because of factors such as expanding market share, new
products or changes in market environment. Or it may invest in "undervalued"
securities which are often characterized by a lack of investor recognition of
the basic value of a company's assets. Securities of companies with sales and
earnings trends which are currently unfavorable but which are expected to
reverse may also be in the portfolio. The effort to achieve price appreciation
that is superior to broadly based stock indices necessarily involves accepting a
greater risk of declining values. During periods when stock prices decline
generally, it can be expected that the value of the portfolio will also decline.
To the extent permitted by applicable insurance law, this portfolio may invest
up to 30% of its total assets in non-United States currency denominated common
stock and fixed-income securities convertible into common stock of foreign and
U.S. issuers. The particular risks of investments in foreign securities are
described under FOREIGN SECURITIES on page 27.
In addition, the portfolio may: (i) purchase and sell options on equity
securities, stock indices and foreign currencies; (ii) purchase and sell stock
index and foreign currency futures contracts and options thereon; (iii) enter
into forward foreign currency exchange contracts; and (iv) purchase securities
on a when-issued or delayed delivery basis. These techniques are described on
pages 28 through 32, and further information about some of them is included in
the statement of additional information.
A portion of the portfolio may be invested in money market instruments of the
kind held by the Money Market Portfolio in order to make effective use of cash
reserves pending investment in common stocks. Moreover, when conditions dictate
a temporary defensive strategy or during temporary periods of portfolio
structuring and restructuring, the Equity Portfolio may invest, without limit,
in high quality money market instruments of the kind held by the Money Market
Portfolio.
Thomas Jackson, Managing Director, Prudential Investments, has been portfolio
manager of the Equity Portfolio since 1990. Mr. Jackson is also portfolio
manager of the Prudential Equity Fund, Inc.
PRUDENTIAL JENNISON PORTFOLIO. The objective of the Prudential Jennison
Portfolio is to achieve long-term growth of capital through investment primarily
in equity securities of established companies with above-average growth
prospects. Current income, if any, is incidental.
In order to achieve this objective, the Prudential Jennison Portfolio will
follow a policy of selecting stocks on a company-by-company basis primarily
through the use of fundamental analysis. The portfolio manager will look for
companies that have demonstrated growth in earnings and sales, high returns on
equity and assets, or other strong financial characteristics, and in the opinion
of the portfolio manager, are attractively valued. These companies tend to have
a unique market niche, a strong new product profile or superior management.
Under normal market
22 - Series Fund
<PAGE>
conditions, at least 65% of the value of the total assets of the portfolio will
be invested in common stocks and preferred stocks of companies which exceed $1
billion in market capitalization.
The portfolio may invest up to 35% of its total assets in: (i) common stocks,
preferred stocks, and other equity- related securities of companies that are
undergoing changes in management or product and marketing dynamics which have
not yet been reflected in reported earnings but which are expected to impact
earnings in the intermediate term -- these securities often lack investor
recognition and are often favorably valued; (ii) other equity-related
securities; (iii) with respect to a maximum of 30% of its total assets, common
stocks, preferred stocks and other equity-related securities of non-United
States currency denominated issuers or American Depository Receipts ("ADRs");
(iv) investment grade fixed income securities and mortgage-backed securities,
including lower rated securities [rated in the fourth highest rating category by
a nationally recognized rating service (e.g. Baa by Moody's Investor Services or
BBB by Standard & Poor's)] or, if not rated, determined by the portfolio manager
to be of comparable quality to securities so rated (a description of debt
ratings is contained in the Appendix to the statement of additional
information); and (v) obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities.
In addition, the portfolio may: (i) purchase and sell options on equity
securities, stock indices, and foreign currencies; (ii) lend its portfolio
securities; (iii) purchase and sell stock index and foreign currency futures
contracts and options thereon; (iv) enter into forward foreign currency exchange
contracts; and (v) enter into repurchase agreements and purchase securities on a
when-issued or delayed delivery basis. These techniques are described on pages
28 through 32, and further information about some of them is included in the
statement of additional information.
The effort to achieve superior investment returns necessarily involves a risk of
exposure to declining values. Securities in which the portfolio may primarily
invest have historically been more volatile than the Standard & Poor's 500
Composite Stock Price Index. Accordingly, during periods when stock prices
decline generally, it can be expected that the value of the portfolio will
decline more than the market indices.
David Poiesz, Director and Senior Vice President of Jennison Associates Capital
Corp. ("Jennison"), is the portfolio manager, and Peter Reinemann, Director and
Senior Vice President of Jennison, is the associate portfolio manager of the
Prudential Jennison Portfolio. Mr. Poiesz is responsible for the day to day
management of the portfolio and has been portfolio manager of the Prudential
Jennison Portfolio since its inception in 1995. Mr. Poiesz also manages the
Prudential Jennison Growth Fund. Mr. Poiesz joined Jennison in 1983 as an equity
research analyst and has been an equity portfolio manager since 1991. Mr.
Reinemann is also the associate portfolio manager for the Prudential Jennison
Growth Fund, the Prudential Jennison Growth & Income Fund, and the Prudential
Active Balanced Fund. Mr. Reinemann has been with Jennison since 1992 as an
associate portfolio manager. Prior to 1992, he served as a Vice President at
Paribas Asset Management, Inc.
SMALL CAPITALIZATION STOCK PORTFOLIO. The objective of this portfolio is to
achieve long-term growth of capital through investment primarily in equity
securities of publicly-traded companies with small market capitalization.
Current income, if any, is incidental.
The portfolio seeks to achieve this objective by following the policy of
attempting to duplicate the price and yield performance of the Standard & Poor's
Small Capitalization Stock Index (the "S&P SmallCap 600 Index"), an index which
consists of six-hundred smaller capitalization domestic stocks chosen for market
size, liquidity, and industry group representation. Stocks in the index have
market capitalizations between $35 million and $1.215 billion. However, to be
included in the index, stock selections are also screened for trading volume,
share turnover, ownership concentration, share price and bid/ask spreads. The
initial sector weightings were selected to reflect the industry distribution of
all small capitalization stocks followed by S&P. The S&P SmallCap 600 Index has
above average risk and may fluctuate more than the S&P 500 Index which invests
in stocks of larger, more established firms.
The S&P SmallCap 600 Index is a market weighted index (stock price times shares
outstanding), with each stock affecting the index in proportion to its market
value. Standard & Poor's Corporation is responsible for selecting and
maintaining the list of stocks to be included in the index. Inclusion in the
index in no way implies an opinion by Standard & Poor's Corporation as to a
stock's attractiveness as an investment. "Standard & Poor's," "Standard & Poor's
Small Capitalization Stock Index" and "Standard & Poor's SmallCap 600" are
trademarks of McGraw Hill, Inc. The Series Fund is not sponsored, endorsed, sold
or promoted by S&P and S&P makes no representation regarding the advisability of
investing in the Series Fund. Reference is made to the statement of additional
information which sets forth certain additional disclaimers and limitations of
liabilities on behalf of S&P.
The following table shows the performance of the S&P SmallCap 600 Index for the
10 years ending in 1996. Although the index was first published in 1994, S&P
reconstructed its performance for earlier years. The performance of the S&P
SmallCap 600 Index in this period should not be viewed as a representation of
any future performance by that index. In addition, the fees and costs involved
in the operation of the Small Capitalization
23 - Series Fund
<PAGE>
Stock Portfolio mean that the performance of a share of stock in the portfolio
may not equal the performance of the S&P SmallCap 600 Stock Index even if the
assets held by the portfolio do equal that performance.
S&P SMALLCAP 600 WITH DIVIDENDS REINVESTED
ANNUAL PERCENTAGE CHANGE
------------------------------------------
1987 -13.50
1988 +19.49
1989 +13.89
1990 -9.90
1991 +48.49
1992 +21.04
1993 +18.79
1994 -4.77
1995 +29.96
1996 +21.32
Source: Standard & Poor's Corporation. Percentage change calculated in
accordance with specifications of SEC release number IA-327.
Under normal circumstances, this portfolio intends to be invested in all or a
representative sample of the stocks in the S&P SmallCap 600 Index. The portfolio
may hold cash or its equivalent, which may cause its performance to differ from
that of the S&P SmallCap 600 Index. The portfolio will attempt to minimize any
such differences in performance through transactions involving stock index
futures contracts, options on stock indices, and/or options on stock index
future contracts. These investment instruments are described under OPTIONS ON
STOCK INDICES, FUTURES CONTRACTS, and OPTIONS ON FUTURES CONTRACTS on pages 30
through 31.
In addition, the portfolio may: (i) purchase and sell options on equity
securities; (ii) lend its portfolio securities; and (iii) purchase securities on
a when-issued or delayed delivery basis. These techniques are described on pages
28 through 32, and further information about some of them is included in the
statement of additional information.
The investment policies and techniques of the Small Capitalization Stock
Portfolio are not fundamental and may be changed without shareholder approval if
it is determined that alternative investment techniques would be more effective
in achieving the portfolio's objective.
Wai Chiang, Vice President, Prudential Investments, has been portfolio manager
of the Small Capitalization Stock Portfolio since its inception in 1995. Mr.
Chiang also manages the unregistered commingled domestic equity index separate
accounts, Pridex and Pridex 500 for Prudential. Mr. Chiang has been employed by
Prudential as a portfolio manager since 1986.
GLOBAL PORTFOLIO. The objective of this portfolio is long-term growth of capital
through investment primarily in common stocks and common stock equivalents (such
as convertible debt securities) of foreign and domestic issuers. Current income,
if any, is incidental.
The portfolio is intended to provide investors with the opportunity to invest in
a portfolio of securities of companies located throughout the world. In making
the allocation of assets among the various countries and geographic regions, the
portfolio manager ordinarily considers such factors as: prospects for relative
economic growth between foreign countries; expected levels of inflation and
interest rates; government policies influencing business conditions; the range
of individual investment opportunities available to international investors; and
other pertinent financial, tax, social, political and national factors--all in
relation to the prevailing prices of the securities in each country or region.
There are, generally, no geographic limitations on companies in which the
portfolio may invest. Depending upon market conditions, the portfolio may be
invested primarily in foreign securities. Investments may be made in companies
based in the Pacific Basin (for example, Japan, Australia, New Zealand,
Singapore, Malaysia, and Hong Kong) and Western Europe (for example, the United
Kingdom, Spain, Germany, Switzerland, the Netherlands, France, and Scandinavia),
as well as the United States, Canada, and such other areas and countries as the
portfolio manager may determine from time to time. The portfolio may seek to
hedge its position in foreign currencies as more fully described herein.
The portfolio is not required to maintain any particular geographic or currency
mix of its investments. The portfolio intends to maintain investments in at
least three countries (including the United States), but may, when market
24 - Series Fund
<PAGE>
conditions warrant, invest up to 35% of its assets in companies located in any
one country (other than the United States).
In analyzing companies for investment, the portfolio manager ordinarily looks
for one or more of the following characteristics: prospects for above-average
earnings growth per share; high return on invested capital; healthy balance
sheet; sound financial and accounting policies and overall financial strength;
strong competitive advantages; effective research and product development and
marketing; efficient service; pricing flexibility; strength of management; and
general operating characteristics which will enable the companies to compete
successfully in their marketplace--all in relation to the prevailing prices of
the securities of such companies.
Investing in securities of foreign companies and countries involves special
risks. The particular risks of investments in foreign securities are described
under FOREIGN SECURITIES on page 27.
When conditions dictate a temporary defensive strategy or during temporary
periods of portfolio structuring and restructuring, the Global Portfolio may
invest, without limit, in high quality money market instruments of the kind held
by the Money Market Portfolio.
In addition, the portfolio may: (i) purchase and sell options on equity
securities, stock indices and foreign currencies; (ii) purchase and sell stock
index, interest rate and foreign currency futures contracts and options thereon;
(iii) enter into forward foreign currency exchange contracts; and (iv) purchase
securities on a when-issued or delayed delivery basis. These techniques are
described on pages 27 through 32, and further information about some of them is
included in the statement of additional information.
The operating expense ratio of the portfolio can be expected to be significantly
higher than that of a fund investing exclusively in domestic securities since
the expenses of the portfolio, such as custodial, valuation and communication
costs, as well as the rate of the investment management fee (0.75% of the
portfolio's average daily net assets), though similar to such expenses of other
global funds, are higher than those generally incurred by funds investing solely
in the securities of U.S. issuers.
As a result of its investment policies, the portfolio's turnover rate may exceed
100% although it is not expected to exceed 200%.
Daniel Duane, Managing Director, Prudential Investments, has been the portfolio
manager of the Global Portfolio since 1990. Mr. Duane also manages several
mutual funds including the Prudential Global Fund, Inc.
SPECIALIZED PORTFOLIOS
NATURAL RESOURCES PORTFOLIO. The objective of this portfolio is long-term growth
of capital through investment primarily in common stocks and convertible
securities of "natural resource companies" (as defined below) and in securities
(typically debt securities and preferred stocks) the terms of which are related
to the market value of some natural resource ("asset-indexed securities"). Under
normal circumstances, the portfolio will invest at least 65% of its total assets
in such securities.
Companies that primarily own, explore, mine, process or otherwise develop
natural resources, or supply goods and services primarily to such companies,
will be considered "natural resource companies." Natural resources generally
include precious metals (e.g., gold, silver and platinum), ferrous and
nonferrous metals (e.g., iron, aluminum and copper), strategic metals (e.g.,
uranium and titanium), hydrocarbons (e.g., coal, oil and natural gases), timber
land, undeveloped real property and agricultural commodities.
The value of equity securities of natural resource companies (including those
companies that are primarily involved in providing goods and services to natural
resource companies) will fluctuate pursuant to market conditions generally, as
well as to the market for the particular natural resource in which the issuer is
involved. In addition, the values of natural resources are affected by numerous
factors including events occurring in nature, inflationary pressures and
international politics. For instance, events in nature (such as earthquakes or
fires in prime natural resource areas) and political events (such as coups or
military confrontations) can affect the overall supply of a natural resource and
thereby the value of companies involved in such natural resources. In addition,
rising interest rates (i.e., inflationary pressures) may affect the demand for
natural resources such as timber. The portfolio manager will seek securities
that are attractively priced relative to the intrinsic values of the relevant
natural resource or that are of companies which are positioned to benefit under
existing or anticipated economic conditions. Accordingly, the portfolio may
shift its emphasis from one natural resource industry to another depending upon
prevailing trends or developments, provided that the portfolio will not invest
25% or more of its total assets in the securities of companies in any one
natural resource industry. See INVESTMENT RESTRICTIONS in the statement of
additional information for information concerning the industry classifications.
The portfolio is not required to maintain any particular mix of investments
among the natural resource industries.
In addition to common stocks and common stock equivalents, the portfolio may
invest in securities, the principal amount, redemption terms or conversion terms
of which are related to the market price of a natural resource asset,
25 - Series Fund
<PAGE>
referred to herein as "asset-indexed securities." The portfolio expects to
purchase asset-indexed securities which are rated, or are issued by issuers that
have outstanding obligations which are rated, at least BBB or Baa by S&P or
Moody's, respectively, or commercial paper rated at least A-2 or P-2 by S&P or
Moody's, respectively, or in unrated securities that the portfolio manager has
determined to be of comparable quality. The portfolio reserves the right,
however, to invest in asset-indexed securities rated as low as CC or Ca by
Moody's or S&P, respectively, or in unrated securities of comparable quality,
also known as high risk securities. A description of security ratings is set
forth in the Appendix to the statement of additional information. If the
asset-indexed security is backed by a letter of credit or other similar
instrument, the manager may take such backing into account in determining the
quality of the security.
Although it is expected that the market prices of the asset-indexed securities
will fluctuate on the basis of the natural resources on which such securities
are based, there may not be a perfect correlation between the price movements of
the asset-indexed securities and the underlying natural resources. Asset-indexed
securities are not always secured with a security interest in the underlying
natural resource asset. Further, asset-indexed securities typically bear
interest or pay dividends at below market rates (and in certain cases at nominal
rates). Although the value of asset-indexed securities that bear interest may
fluctuate inversely with market interest rates, such fluctuations are
anticipated generally to be minimal since the value of such securities is
typically based on the natural resources on which the securities are based.
Certain asset-indexed securities may be payable at maturity in cash, or, at the
option of the holder, directly in a stated amount of the asset to which the
securities are related. The portfolio does not intend to invest directly in
natural resources and, therefore, would elect to be paid in cash or would
attempt to sell the asset-indexed security prior to maturity to realize the
appreciation in the underlying asset.
As indicated above, the portfolio intends to invest primarily in common stocks
and convertible securities of natural resource companies and asset-indexed
securities. The portfolio may invest the balance of its assets in other stocks,
other securities convertible into common stocks, debt securities (including
money market instruments), and options on stocks and on natural resource-related
stock indices. The portfolio may under normal circumstances invest up to 35% of
its total assets in money market instruments of the type held by the Money
Market Portfolio. Moreover, when conditions dictate a temporary defensive
strategy or during temporary periods of portfolio structuring and restructuring,
the Natural Resources Portfolio may invest, without limit, in high quality money
market instruments of the kind held by the Money Market Portfolio. In addition,
up to 35% of the portfolio's total assets may be invested in other fixed-income
obligations. The portfolio anticipates that these will primarily be rated A or
better by Moody's or S&P. However, the portfolio may also invest in lower-rated
fixed-income securities, also known as high risk securities, although it will
not invest in securities rated lower than CC or Ca by Moody's or S&P,
respectively. The portfolio may also invest in non-rated fixed-income securities
which, in the opinion of the manager, are of a quality comparable to rated
securities in which the portfolio may invest.
To the extent permitted by applicable insurance law, this portfolio may invest
up to 30% of its total assets in nonUnited States currency denominated common
stock and fixed-income securities convertible into common stock of foreign and
U.S. issuers. The particular risks of investments in foreign securities are
described under FOREIGN SECURITIES on page 27.
In addition, the portfolio may: (i) purchase and sell options on equity
securities, stock indices and foreign currencies; (ii) purchase and sell stock
index and foreign currency futures contracts and options thereon; (iii) enter
into forward foreign currency exchange contracts; and (iv) purchase securities
on a when-issued or delayed delivery basis. These techniques are described on
pages 28 through 33, and further information about some of them is included in
the statement of additional information.
As a result of its investment policies, the portfolio's turnover rate may exceed
100%, although it is not expected to exceed 200%.
Leigh Goehring, Vice President, Prudential Investments, has been portfolio
manager of the Natural Resources Portfolio since 1992. Mr. Goehring also manages
the Prudential Natural Resources Fund, Inc. Prior to 1992, Mr. Goehring was
portfolio manager of The Prudential-Bache Option Growth Fund.
CONVERTIBLE SECURITIES
The Conservative Balanced, Flexible Managed, Equity Income, Equity, Prudential
Jennison, Small Capitalization Stock, Global, and Natural Resources Portfolios
may invest in convertible securities and such securities may constitute a major
part of the holdings of the Equity Income, Global and Natural Resources
Portfolios. A convertible security is a fixed-income security (a bond or
preferred stock) which may be converted at a stated price within a specified
period of time into a certain quantity of the common stock of the same or a
different issuer. Convertible securities are senior to common stocks in a
corporation's capital structure, but are usually subordinated to similar
nonconvertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from a common stock but lower than
that afforded by a similar nonconvertible security), a convertible
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<PAGE>
security also affords an investor the opportunity, through its conversion
feature, to participate in the capital appreciation attendant upon a market
price advance in the convertible security's underlying common stock. The price
of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
LOAN PARTICIPATIONS
The Diversified Bond, Conservative Balanced, Flexible Managed, and High Yield
Bond Portfolios may invest in fixed and floating rate loans ("Loans") arranged
through private negotiations between a corporate borrower and one or more
financial institutions ("Lenders"). The portfolios may invest in such Loans
generally in the form of participations in Loans ("Participations").
Participations typically will result in the Series Fund having a contractual
relationship only with the Lender, not with the borrower. The Series Fund will
have the right to receive payments of principal, interest and any fees to which
it is entitled only from the Lender selling the Participation and only upon
receipt by the Lender of the payments from the borrower. In connection with
purchasing Participations, the Series Fund generally will have no right to
enforce compliance by the borrower with the terms of the loan agreement relating
to the Loan, nor any rights of set-off against the borrower, and the Series Fund
may not benefit directly from any collateral supporting the Loan in which it has
purchased the Participation. As a result, the Series Fund will assume the credit
risk of both the borrower and the Lender that is selling the Participation. In
the event of the insolvency of the Lender selling a Participation, the Series
Fund may be treated as a general creditor of the Lender and may not benefit from
any set-off between the Lender and the borrower.
FOREIGN SECURITIES
The Global Portfolio may invest up to 100% of its total assets in common stock
and convertible securities denominated in a foreign currency and issued by
foreign or domestic issuers. The Diversified Bond and High Yield Bond Portfolios
may each invest up to 20% of their assets in United States currency denominated
debt securities issued outside the United States by foreign or domestic issuers.
In addition, the bond components of the Conservative Balanced and Flexible
Managed Portfolios may each invest up to 20% of their assets in such securities.
To the extent permitted by applicable law, the Conservative Balanced, Flexible
Managed, and Equity Income Portfolios may invest up to 30% of their total assets
in debt and equity securities denominated in a foreign currency and issued by
foreign or domestic issuers. Further, to the extent permitted by applicable
insurance law, the Equity, Prudential Jennison, and Natural Resources Portfolios
may invest up to 30% of their total assets in non-United States currency
denominated common stock and fixed-income securities convertible into common
stock of foreign and U.S. issuers. Securities issued outside the United States
and not publicly traded in the United States, as well as American Depository
Receipts ("ADRs"), and securities denominated in a foreign currency are referred
to collectively in this prospectus as "foreign securities."
ADRs are U.S. dollar-denominated certificates issued by a United States bank or
trust company and represent the right to receive securities of a foreign issuer
deposited in a domestic bank or foreign branch of a United States bank and
traded on a United States exchange or in an over-the-counter market. Investment
in ADRs has certain advantages over direct investment in the underlying foreign
securities because they are easily transferable, have readily available market
quotations, and the foreign issuers are usually subject to comparable auditing,
accounting, and financial reporting standards as domestic issuers.
Foreign securities involve certain risks, which should be considered carefully
by an investor. These risks include political or economic instability in the
country of the issuer, the difficulty of predicting international trade
patterns, the possibility of imposition of exchange controls and, in the case of
securities not denominated in United States currency, the risk of currency
fluctuations. Such securities may be subject to greater fluctuations in price
than domestic securities. Under certain market conditions, foreign securities
may be less liquid than domestic securities. In addition, there may be less
publicly available information about a foreign company than about a domestic
company. Foreign companies generally are not subject to uniform accounting,
auditing, and financial reporting standards comparable to those applicable to
domestic companies. There is generally less government regulation of securities
exchanges, brokers, and listed companies abroad than in the United States, and,
with respect to certain foreign countries, there is a possibility of
expropriation, confiscatory taxation or diplomatic developments which could
affect investment in those countries. Finally, in the event of a default of any
foreign debt obligations, it may be more difficult for a portfolio to obtain or
to enforce a judgment against the issuers of such securities.
If the security is denominated in foreign currency, it may be affected by
changes in currency rates and in exchange control regulations, and costs may be
incurred in connection with conversions between currencies. The portfolios that
may invest in foreign securities may, but need not, enter into forward foreign
currency exchange contracts for the purchase or sale of foreign currency for
hedging purposes, including: locking-in the U.S. dollar price equivalent of
interest or dividends to be paid on such securities which are held by the
portfolio; and protecting the
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<PAGE>
U.S. dollar value of such securities which are held by the portfolio. The
portfolios will not enter into such forward contracts or maintain a net exposure
to such contracts where the consummation of the contracts would obligate the
portfolio to deliver an amount of foreign currency in excess of the value of the
portfolio's portfolio securities or other assets denominated in that currency.
See FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS in the statement of additional
information. In addition, the portfolios may, for hedging purposes, enter into
certain transactions involving options on foreign currencies, foreign currency
futures contracts and options on foreign currency futures contracts. See OPTIONS
ON FOREIGN CURRENCIES, FUTURES CONTRACTS, and OPTIONS ON FUTURES CONTRACTS on
pages 30 through 31.
OPTIONS ON EQUITY SECURITIES
The Conservative Balanced, Flexible Managed, Equity Income, Equity, Prudential
Jennison, Small Capitalization Stock, Global, and Natural Resources Portfolios
may purchase and write (i.e., sell) put and call options on equity securities
that are traded on securities exchanges, are listed on the National Association
of Securities Dealers Automated Quotation System ("NASDAQ"), or that result from
privately negotiated transactions with broker-dealers ("OTC options"). A call
option is a short-term contract pursuant to which the purchaser or holder, in
return for a premium paid, has the right to buy the equity security underlying
the option at a specified exercise price at any time during the term of the
option. The writer of the call option, who receives the premium, has the
obligation, upon exercise of the option, to deliver the underlying equity
security against payment of the exercise price. A put option is a similar
contract which gives the purchaser or holder, in return for a premium, the right
to sell the underlying equity security at a specified price during the term of
the option. The writer of the put, who receives the premium, has the obligation
to buy the underlying equity security at the exercise price upon exercise by the
holder of the put.
A portfolio will write only "covered" options on stocks. A call option is
covered if: (1) the portfolio owns the security underlying the option; or (2)
the portfolio has an absolute and immediate right to acquire that security
without additional cash consideration (or for additional cash consideration held
in a segregated account by its custodian) upon conversion or exchange of other
securities it holds; or (3) the portfolio holds on a share-for-share basis a
call on the same security as the call written where the exercise price of the
call held is equal to or less than the exercise price of the call written or
greater than the exercise price of the call written if the difference is
maintained by the portfolio in cash, Treasury bills or other high grade
short-term debt obligations in a segregated account with its custodian. A put
option is covered if: (1) the portfolio deposits and maintains with its
custodian in a segregated account cash, U.S. Government securities or other
liquid unencumbered assets having a value equal to or greater than the exercise
price of the option; or (2) the portfolio holds on a share-for-share basis a put
on the same security as the put written where the exercise price of the put held
is equal to or greater than the exercise price of the put written or less than
the exercise price if the difference is maintained by the portfolio in cash,
Treasury bills or other high grade short-term debt obligations in a segregated
account with its custodian.
The Conservative Balanced, Flexible Managed, Equity Income, Equity, Prudential
Jennison, Small Capitalization Stock, Global, and Natural Resources Portfolios
may also purchase "protective puts" (i.e., put options acquired for the purpose
of protecting a portfolio security from a decline in market value). In exchange
for the premium paid for the put option, the portfolio acquires the right to
sell the underlying security at the exercise price of the put regardless of the
extent to which the underlying security declines in value. The loss to the
portfolio is limited to the premium paid for, and transaction costs in
connection with, the put plus the initial excess, if any, of the market price of
the underlying security over the exercise price. However, if the market price of
the security underlying the put rises, the profit the portfolio realizes on the
sale of the security will be reduced by the premium paid for the put option less
any amount (net of transaction costs) for which the put may be sold. Similar
principles apply to the purchase of puts on debt securities and stock indices,
as described under OPTIONS ON DEBT SECURITIES, page 29 and OPTIONS ON STOCK
INDICES, page 30.
These portfolios may purchase call options for hedging and investment purposes.
No portfolio intends to invest more than 5% of its net assets at any one time in
the purchase of call options on stocks. These portfolios may also purchase
putable and callable equity securities, which are securities coupled with a put
or a call option provided by the issuer.
If the writer of an exchange-traded option wishes to terminate the obligation,
he or she may effect a "closing purchase transaction" by buying an option of the
same series as the option previously written. Similarly, the holder of an
exchange-traded option may liquidate his or her position by exercise of the
option or by effecting a "closing sale transaction" by selling an option of the
same series as the option previously purchased. A portfolio will realize a
profit from a closing transaction if the price of the transaction is less than
the premium received from writing the option or is more than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from a closing purchase transaction with respect to a call option
is likely to be offset in whole or in part by appreciation of the underlying
equity security owned by the portfolio. Unlike exchange-traded options, OTC
options generally
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<PAGE>
do not have a continuous liquid market. Consequently, the portfolio will
generally be able to realize the value of an OTC option it has purchased only by
exercising it or reselling it to the dealer who issued it. Similarly, when the
portfolio writes an OTC option, it generally will be able to close out the OTC
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the portfolio originally wrote the OTC
option. There is, in general, no guarantee that closing purchase or closing sale
transactions can be effected.
There are certain special risks associated with the portfolios' transactions in
stock options, in addition to a risk that the market value of the security will
move adversely to the portfolio's option position. These risks, which relate
primarily to liquidity, are discussed in the statement of additional
information.
OPTIONS ON DEBT SECURITIES
The Diversified Bond, Government Income, Conservative Balanced, Flexible
Managed, and High Yield Bond Portfolios may purchase and write (i.e., sell) put
and call options on debt securities (including U.S. Government debt securities)
that are traded on U.S. securities exchanges or that result from privately
negotiated transactions with primary U.S. Government securities dealers
recognized by the Federal Reserve Bank of New York ("OTC options"). Options on
debt are similar to options on stock, except that the option holder has the
right to take or make delivery of a debt security, rather than stock.
A portfolio will write only "covered" options. Options on debt securities are
covered in the same manner as options on stocks, discussed above, except that,
in the case of call options on U.S. Treasury Bills, the portfolio might own U.S.
Treasury Bills of a different series from those underlying the call option, but
with a principal amount and value corresponding to the option contract amount
and a maturity date no later than that of the securities deliverable under the
call option. The principal reason for a portfolio to write an option on one or
more of its securities is to realize through the receipt of the premiums paid by
the purchaser of the option a greater current return than would be realized on
the underlying security alone. Calls on debt securities will not be written
when, in the opinion of Prudential, interest rates are likely to decline
significantly, because under those circumstances the premium received by writing
the call likely would not fully offset the foregone appreciation in the value of
the underlying security.
These portfolios may also write straddles (i.e., a combination of a call and a
put written on the same security at the same strike price where the same issue
of the security is considered "cover" for both the put and the call). In such
cases, the portfolio will also segregate or deposit for the benefit of the
portfolio's broker cash or liquid high-grade debt obligations equivalent to the
amount, if any, by which the put is "in the money." It is contemplated that each
portfolio's use of straddles will be limited to 5% of the portfolio's net assets
(meaning that the securities used for cover or segregated as described above
will not exceed 5% of the portfolio's net assets at the time the straddle is
written). The writing of a call and a put on the same security at the same
strike price where the call and the put are covered by different securities is
not considered a straddle for purposes of this limit.
These portfolios may purchase "protective puts" in an effort to protect the
value of a security that it owns against a substantial decline in market value.
Protective puts are described in OPTIONS ON EQUITY SECURITIES, page 28. A
portfolio may wish to protect certain portfolio securities against a decline in
market value at a time when put options on those particular securities are not
available for purchase. A portfolio may therefore purchase a put option on
securities other than those it wishes to protect even though it does not hold
such other securities in its portfolio. While changes in the value of the put
option should generally offset changes in the value of the securities being
hedged, the correlation between the two values may not be as close in these
transactions as in transactions in which the portfolio purchases a put option on
an underlying security it owns.
These portfolios may also purchase call options on debt securities for hedging
or investment purposes. No portfolio currently intends to invest more than 5% of
its net assets at any one time in the purchase of call options on debt
securities. A portfolio may also purchase putable and callable debt securities,
which are securities coupled with a put or call option provided by the issuer.
If the writer of an exchange-traded option wishes to terminate the obligation,
he or she may effect a "closing purchase transaction" or a "closing sale
transaction" in a manner similar to that discussed above in connection with
options on equity securities.
The staff of the Securities and Exchange Commission has taken the position that
purchased OTC options and the assets used as "cover" for written OTC options are
illiquid for purposes of a portfolio's 15% limitation on investment in illiquid
securities. However, pursuant to the terms of certain no-action letters issued
by the staff, the securities used as cover for written OTC options may be
considered liquid provided that the portfolio sells OTC options only to
qualified dealers who agree that the portfolio may repurchase any OTC option it
writes for a maximum price to be calculated by a predetermined formula. In such
cases, the OTC option would be considered illiquid only to the extent that the
maximum repurchase price under the formula exceeds the intrinsic value of the
option.
29 - Series Fund
<PAGE>
There are certain risks associated with the portfolios' transactions in debt
options, in addition to a risk that the market value of the security will move
adversely to the portfolio's option position. These risks, which relate
primarily to liquidity, are discussed in the statement of additional
information.
OPTIONS ON STOCK INDICES
The Conservative Balanced, Flexible Managed, Equity Income, Equity, Prudential
Jennison, Global, and Natural Resources Portfolios may purchase and sell put and
call options on stock indices traded on securities exchanges, listed on NASDAQ
or that result from privately negotiated transactions with broker-dealers ("OTC
options"). The Stock Index and Small Capitalization Stock Portfolios may utilize
options on stock indices by constructing "put/call" combinations that are
economically comparable to a long stock index futures position, as described in
the statement of additional information. Options on stock indices are similar to
options on stock except that, rather than the right to take or make delivery of
stock at a specified price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of the stock index upon which the option is based is greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
option. This amount of cash is equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
times a specified multiple (the "multiplier"). The writer of the option is
obligated, in return for the premium received, to make delivery of this amount.
Unlike stock options, all settlements are in cash, and gain or loss depends on
price movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements in individual stocks.
The multiplier for an index option performs a function similar to the unit of
trading for a stock option. It determines the total dollar value per Contract of
each point in the difference between the exercise price of an option and the
current level of the underlying index. A multiplier of 100 means that a
one-point difference will yield $100. Options on different indices may have
different multipliers.
A portfolio will write only "covered" options on stock indices. The manner in
which these options are covered is discussed in the statement of additional
information.
These portfolios may purchase put and call options for hedging and investment
purposes. No portfolio intends to invest more than 5% of its net assets at any
time in the purchase of puts and calls on stock indices. A portfolio may effect
closing sale and purchase transactions involving options on stock indices, as
described above in connection with stock options.
OPTIONS ON FOREIGN CURRENCIES
The Conservative Balanced, Flexible Managed, Equity Income, Equity, Prudential
Jennison, Global, and Natural Resources Portfolios may purchase and write put
and call options on foreign currencies traded on U.S. or foreign securities
exchanges or boards of trade for hedging purposes in a manner similar to that in
which forward foreign currency exchange contracts (discussed under FOREIGN
SECURITIES, page 27 and futures contracts on foreign currencies (discussed under
FUTURES CONTRACTS, page 31) will be employed. Options on foreign currencies are
similar to options on stock, except that the option holder has the right to take
or make delivery of a specified amount of foreign currency, rather than stock.
A portfolio may purchase and write options to hedge the portfolio's securities
denominated in foreign currencies. If there is a decline in the dollar value of
a foreign currency in which the portfolio's securities are denominated, the
dollar value of such securities will decline even though the foreign currency
value remains the same. To hedge against the decline of the foreign currency, a
portfolio may purchase put options on such foreign currency. If the value of the
foreign currency declines, the gain realized on the put option would offset, in
whole or in part, the adverse effect such decline would have on the value of the
portfolio's securities. Alternatively, a portfolio may write a call option on
the foreign currency. If the foreign currency declines, the option would not be
exercised and the decline in the value of the portfolio securities denominated
in such foreign currency would be offset in part by the premium the portfolio
received for the option.
If, on the other hand, the portfolio manager anticipates purchasing a foreign
security and also anticipates a rise in such foreign currency (thereby
increasing the cost of such security), a portfolio may purchase call options on
the foreign currency. The purchase of such options could offset, at least
partially, the effects of the adverse movements of the exchange rates.
Alternatively, a portfolio could write a put option on the currency and, if the
exchange rates move as anticipated, the option would expire unexercised.
A portfolio's successful use of currency exchange options on foreign currencies
depends upon the manager's ability to predict the direction of the currency
exchange markets and political conditions, which requires different skills and
techniques than predicting changes in the securities markets generally. For
instance, if the currency being hedged has moved in a favorable direction, the
corresponding appreciation of the portfolio's securities denominated in such
currency would be partially offset by the premiums paid on the options. Further,
if the currency exchange
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rate does not change, the portfolio net income would be less than if the
portfolio had not hedged since there are costs associated with options.
The use of these options is subject to various additional risks. The correlation
between movements in the price of options and the price of the currencies being
hedged is imperfect. The use of these instruments will hedge only the currency
risks associated with investments in foreign securities, not market risks. The
portfolio's ability to establish and maintain positions will depend on market
liquidity. The ability of the portfolio to close out an option depends upon a
liquid secondary market. There is no assurance that liquid secondary markets
will exist for any particular option at any particular time.
FUTURES CONTRACTS
The Conservative Balanced, Flexible Managed, Stock Index, Equity Income, Equity,
Prudential Jennison, Small Capitalization Stock, Global, and Natural Resources
Portfolios may, to the extent permitted by applicable regulations, attempt to
reduce the risk of investment in equity securities by hedging a portion of their
equity portfolios through the use of stock index futures contracts. A stock
index futures contract is an agreement in which the seller of the contract
agrees to deliver to the buyer an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made.
The Diversified Bond, Government Income, Conservative Balanced, Flexible
Managed, High Yield Bond, and Global Portfolios may, to the extent permitted by
applicable regulations, purchase and sell for hedging purpose futures contracts
on interest-bearing securities (such as U.S. Treasury bonds and notes) or
interest rate indices (referred to collectively as "interest rate futures
contracts").
The Conservative Balanced, Flexible Managed, Equity Income, Equity, Prudential
Jennison, Global, and Natural Resources Portfolios may, to the extent permitted
by applicable regulations, purchase and sell futures contracts on foreign
currencies or groups of foreign currencies for hedging purposes.
When the futures contract is entered into, each party deposits with a futures
commission merchant (or in a segregated custodial account) approximately 5% of
the contract amount, called the "initial margin." Subsequent payments to and
from the futures commission merchant, called the "variation margin," will be
made on a daily basis as the underlying security, index or rate fluctuates
making the long and short positions in the futures contracts more or less
valuable, a process known as "marking to the market." The Board of Directors
currently intends to limit futures trading for hedging purposes so that a
portfolio will not enter into futures contracts or related options if the
aggregate initial margins and premiums exceed 5% of the fair market value of its
assets, after taking into account unrealized profits and unrealized losses on
any such contracts and options.
In addition, as permitted by applicable regulations, the Conservative Balanced
and Flexible Managed Portfolios may purchase and sell stock index futures
contracts and interest rate futures contracts to adjust the portfolio's asset
mix. For example, if the investment manager expects bonds to outperform stocks,
it may purchase interest rate futures contracts rather than actually selling
stocks and buying bonds. Neither portfolio will enter into futures contracts or
related options for this purpose if the aggregate initial margins and premiums
for futures and options for this purpose exceed 5% of the fair market of that
portfolio's assets, taking into account unrealized profits and unrealized losses
on any such futures and options.
A portfolio's successful use of futures contracts depends upon the investment
manager's ability to predict the direction of the relevant market. The
correlation between movement in the price of the futures contract and the price
of the securities or currencies being hedged is imperfect. The ability of a
portfolio to close out a futures position depends on a liquid secondary market.
There is no assurance that liquid secondary markets will exist for any
particular futures contract at any particular time.
OPTIONS ON FUTURES CONTRACTS
To the extent permitted by applicable insurance law and federal regulations, the
Conservative Balanced, Flexible Managed, Stock Index, Equity Income, Equity,
Prudential Jennison, Small Capitalization Stock, Global and Natural Resources
Portfolios may enter into certain transactions involving options on stock index
futures contracts; the Diversified Bond, Government Income, Conservative
Balanced, Flexible Managed, High Yield Bond and Global Portfolios may enter into
certain transactions involving options on interest rate futures contracts; and
the Conservative Balanced, Flexible Managed, Equity Income, Equity, Prudential
Jennison, Global and Natural Resources Portfolios may enter into certain
transactions involving options on foreign currency futures contracts. An option
on a futures contract gives the purchaser or holder the right, but not the
obligation, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
price at any time during the option exercise period. The writer of the option is
required upon exercise to assume an offsetting futures position (a short
position if the option is a call and long position if the option is a put). Upon
exercise of the option, the assumption of offsetting futures positions by the
writer and holder of the option will
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be accomplished by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the futures contract.
As an alternative to exercise, the holder or writer of an option may terminate a
position by selling or purchasing an option of the same series. There is no
guarantee that such closing transactions can be effected. The Stock Index and
Small Capitalization Stock Portfolios intend to utilize options on stock index
futures contracts by constructing "put/call" combinations that are economically
comparable to a long stock index futures position, as described in the statement
of additional information. The other portfolios intend to utilize options on
futures contracts for the same purposes that they use the underlying futures
contracts.
REPURCHASE AGREEMENTS
The portfolios may enter into repurchase agreements, subject to each portfolio's
investment limit in short-term debt obligations, whereby the seller of a
security agrees to repurchase that security from the portfolio at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the portfolio's
money is invested in the repurchase agreement. The repurchase agreements will at
all times be fully collateralized in an amount at least equal to the resale
price. The instruments held as collateral are valued daily, and if the value of
the instruments declines, the portfolio will require additional collateral. If
the seller defaults and the value of the collateral securing the repurchase
agreement declines, the portfolio may incur a loss. All portfolios, except the
Global Portfolio, participate in a joint repurchase account pursuant to an order
of the SEC. On a daily basis, any uninvested cash balances of the portfolios may
be aggregated and invested in one or more repurchase agreements. Each portfolio
participates in the income earned or accrued in the joint account based on the
percentage of its investment.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The Diversified Bond, Government Income and High Yield Bond Portfolios, as well
as the fixed income portions of the Conservative Balanced and Flexible Managed
Portfolios, may use reverse repurchase agreements and dollar rolls. The Money
Market Portfolio and the money market portion of any portfolio may use reverse
repurchase agreements. Reverse repurchase agreements involve the sale of
securities held by a portfolio with an agreement by the portfolio to repurchase
the same securities at an agreed upon price and date. During the reverse
repurchase period, the portfolio often continues to receive principal and
interest payments on the sold securities. The terms of each agreement reflect a
rate of interest for use of the funds for the period, and thus these agreements
have the characteristics of borrowing by the portfolio. Dollar rolls involve
sales by a portfolio of securities for delivery in the current month with a
simultaneous contract to repurchase substantially similar securities (same type
and coupon) from the same party at an agreed upon price and date. During the
roll period, the portfolio forgoes principal and interest paid on the
securities. A portfolio is compensated by the difference between the current
sales price and the forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale. A "covered roll" is a specific type of dollar roll for which there
is an offsetting cash position or a cash equivalent security position which
matures on or before the forward settlement date of the dollar roll transaction.
A portfolio will establish a segregated account with its custodian in which it
will maintain cash, U.S. Government securities or other liquid unencumbered
assets equal in value to its obligations in respect of reverse repurchase
agreements and dollar rolls. Reverse repurchase agreements and dollar rolls
involve the risk that the market value of the securities retained by the
portfolio may decline below the price of the securities the portfolio has sold
but is obligated to repurchase under the agreement. In the event the buyer of
securities under a reverse repurchase agreement or dollar roll files for
bankruptcy or becomes insolvent, the portfolio's use of the proceeds of the
agreement may be restricted pending a determination by the other party, or its
trustee or receiver, whether to enforce the portfolio's obligation to repurchase
the securities. The Diversified Bond, Government Income and High Yield Bond
Portfolios, as well as the fixed income portions of the Conservative Balanced
and Flexible Managed Portfolios, will not obligate more than 30% of their net
assets in connection with reverse repurchase agreements and dollar rolls. No
other portfolio will obligate more than 10% of its net assets in connection with
reverse repurchase agreements.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
From time to time, in the ordinary course of business, the Diversified Bond,
Government Income, Conservative Balanced, Flexible Managed, High Yield Bond,
Equity Income, Equity, Prudential Jennison, Small Capitalization Stock, Global
and Natural Resources Portfolios may purchase or sell securities on a
when-issued or delayed delivery basis, that is, delivery and payment can take
place a month or more after the date of the transaction. A portfolio will make
commitments for such when-issued transactions only with the intention of
actually acquiring the securities. A portfolio's custodian will maintain, in a
separate account, cash, U.S. Government securities or other liquid unencumbered
assets having a value equal to or greater than such commitments. If a portfolio
chooses to
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dispose of the right to acquire a when-issued security prior to its acquisition,
it could, as with the disposition of any other portfolio security, incur a gain
or loss due to market fluctuations.
In addition, the Money Market Portfolio and short-term portions of the other
portfolios may purchase money market securities on when-issued or delayed
delivery basis on the terms set forth in the Appendix to this prospectus.
SHORT SALES
The Diversified Bond, Government Income, Conservative Balanced, Flexible Managed
and High Yield Bond Portfolios may sell securities they do not own in
anticipation of a decline in the market value of those securities ("short
sales"). To complete such a transaction, the portfolio will borrow the security
to make delivery to the buyer. The portfolio is then obligated to replace the
security borrowed by purchasing it at the market price at the time of
replacement. The price at such time may be more or less than the price at which
the security was sold by the portfolio. Until the security is replaced, the
portfolio is required to pay to the lender any interest which accrues during the
period of the loan. To borrow the security the portfolio may be required to pay
a fee which would increase the cost of the security sold. The proceeds of the
short sale will be retained by the broker to the extent necessary to meet margin
requirements until the short position is closed out. Until the portfolio
replaces the borrowed security, it will (a) maintain in a segregated account
cash, U.S. Government securities or other liquid unencumbered assets at such a
level that the amount deposited in the account plus the amount deposited with
the broker as collateral will equal the current market value of the security
sold short and will not be less than the market value of the security at the
time it was sold short or (b) otherwise cover its short position.
The portfolio will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the portfolio replaces the borrowed security. The portfolio will realize a gain
if the security declines in price between those dates. This result is the
opposite of what one would expect from a cash purchase of a long position in a
security. The amount of any gain will be decreased, and the amount of any loss
will be increased, by the amount of any fee or interest paid in connection with
the short sale. No more than 25% of any portfolio's net assets will be, when
added together: (i) deposited as collateral for the obligation to replace
securities borrowed to effect short sales and (ii) allocated to segregated
accounts in connection with short sales.
SHORT SALES AGAINST THE BOX
All portfolios (other than the Money Market and Zero Coupon Bond Portfolios) may
make short sales of securities or maintain a short position, provided that at
all times when a short position is open the portfolio owns an equal amount of
such securities or securities convertible into or exchangeable, with or without
payment of any further consideration, for an equal amount of the securities of
the same issuer as the securities sold short (a "short sale against the box");
provided, that if further consideration is required in connection with the
conversion or exchange, cash, U.S. Government securities or other liquid
unencumbered assets in an amount equal to such consideration must be put in a
segregated account.
INTEREST RATE SWAPS
The Diversified Bond, Government Income and High Yield Bond Portfolios and the
fixed income portions of the Conservative Balanced and Flexible Managed
Portfolios may use interest rate swaps to increase or decrease a portfolio's
exposure to long- or short-term interest rates. No portfolio currently intends
to invest more than 5% of its net assets at any one time in interest rate swaps.
For more information, see the statement of additional information.
LOANS OF PORTFOLIO SECURITIES
All of the portfolios except the Money Market Portfolio may from time to time
lend the securities they hold to broker-dealers, provided that such loans are
made pursuant to written agreements and are continuously secured by collateral
in the form of cash, U.S. Government securities or irrevocable standby letters
of credit in an amount equal to at least the market value at all times of the
loaned securities plus the accrued interest and dividends. During the time
securities are on loan, the portfolio will continue to receive the interest and
dividends or amounts equivalent thereto, on the loaned securities while
receiving a fee from the borrower or earning interest on the investment of the
cash collateral. The right to terminate the loan will be given to either party
subject to appropriate notice. Upon termination of the loan, the borrower will
return to the lender securities identical to the loaned securities. The
portfolio will not have the right to vote securities on loan, but would
terminate the loan and retain the right to vote if that were considered
important with respect to the investment.
The primary risk in lending securities is that the borrower may become insolvent
on a day on which the loaned security is rapidly advancing in price. In such
event, if the borrower fails to return the loaned securities, the existing
collateral might be insufficient to purchase back the full amount of the
security loaned, and the borrower
33 - Series Fund
<PAGE>
would be unable to furnish additional collateral. The borrower would be liable
for any shortage; but the portfolio would be an unsecured creditor with respect
to such shortage and might not be able to recover all or any of it. However,
this risk may be minimized by a careful selection of borrowers and securities to
be lent and by monitoring collateral.
No portfolio will lend securities to broker-dealers affiliated with Prudential,
including Prudential Securities Incorporated. This will not affect a portfolio's
ability to maximize its securities lending opportunities.
INVESTMENT RESTRICTIONS APPLICABLE
TO THE PORTFOLIOS
The Series Fund is subject to certain investment restrictions which are
fundamental to the operations of the Series Fund and may not be changed except
with the approval of a majority vote (as defined under INVESTMENT OBJECTIVES AND
POLICIES OF THE PORTFOLIOS on page 10) of the persons participating in the
affected portfolio.
The investments of the various portfolios are generally subject to certain
additional restrictions under state laws. In the event of future amendments to
the applicable statutes, each portfolio will comply, without the approval of the
shareholders, with the statutory requirements as so modified.
For a detailed discussion of investment restrictions applicable to the Series
Fund, see INVESTMENT RESTRICTIONS in the statement of additional information.
INVESTMENT MANAGEMENT ARRANGEMENTS
AND EXPENSES
The Series Fund has entered into an Investment Advisory Agreement with
Prudential under which Prudential will, subject to the direction of the Board of
Directors of the Series Fund, be responsible for the management of the Series
Fund, and provide investment advice and related services to each portfolio. The
directors, in addition to reviewing the actions of the Series Fund's investment
advisor, decide upon matters of general policy. The Series Fund's officers
conduct and supervise the daily business operations of the Series Fund.
Prudential, founded in 1875 under the laws of New Jersey, is subject to
regulation by the Department of Insurance of the State of New Jersey as well as
by the insurance departments of all the other states and jurisdictions in which
it does business. Prudential is registered both as a broker-dealer under the
Securities Exchange Act of 1934 and as an investment advisor under the
Investment Advisers Act of 1940. Prudential's principal business address is
Prudential Plaza, Newark, New Jersey 07102-3777.
Subject to Prudential's supervision, substantially all of the investment
advisory services provided to the Series Fund by Prudential are furnished, with
respect to fourteen of the Series Fund's fifteen portfolios, by its wholly-owned
subsidiary PIC, pursuant to the Service Agreement between Prudential and PIC.
The Agreement provides that a portion of the fee received by Prudential for
providing investment advisory services will be paid to PIC. Investment advisory
services with respect to the Prudential Jennison Portfolio provided by
Prudential are furnished by another wholly-owned subsidiary, Jennison Associates
Capital Corp. ("Jennison"), pursuant to an Investment Subadvisory Agreement
between Prudential and Jennison. That Agreement provides that a portion of the
fee received by Prudential for providing investment advisory services to the
Prudential Jennison Portfolio will be paid to Jennison. PIC and Jennison are
both registered as investment advisors under the Investment Advisers Act of
1940.
Under the Investment Advisory Agreement, Prudential receives an investment
management fee as compensation for its services to the Series Fund. The fee is a
daily charge, payable quarterly, equal to an annual percentage of the average
daily net assets of each individual portfolio.
The investment management fee for the Stock Index Portfolio is equal to an
annual rate of 0.35% of the average daily net assets of the portfolio. For the
Money Market, Diversified Bond, Government Income, Equity Income, Zero Coupon
Bond, and Small Capitalization Stock Portfolios that fee is equal to an annual
rate of 0.4% of the average daily net assets of each of the portfolios. For the
Equity and Natural Resources Portfolios, the fee is equal to an annual rate of
0.45% of the average daily net assets of each of the portfolios. The fee for the
Conservative Balanced and the High Yield Bond Portfolios is equal to an annual
rate of 0.55% of the average daily net assets of each of the portfolios. For the
Flexible Managed and Prudential Jennison Portfolios, the fee is equal to an
annual rate of 0.6% of the average daily net assets of each of the portfolios.
The fee for the Global Portfolio is equal to an annual rate of 0.75% of the
average daily net assets of the portfolio. For further information about the
expenses of the Series Fund, see INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES
in the statement of additional information.
34 - Series Fund
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
Shares in the Series Fund are currently offered continuously, without sales
charge, at prices equal to the respective net asset values of the portfolios,
only to the Accounts to fund benefits payable under the Contracts. The Series
Fund may at some later date also offer its shares to other separate accounts of
Prudential or other insurers. Pruco Securities Corporation ("Prusec"), an
indirect wholly-owned subsidiary of Prudential, acts as the principal
underwriter of the Series Fund. Prusec's principal business address is 213
Washington Street, Newark, New Jersey 07102-2992.
The Series Fund is required to redeem all full and fractional shares of the
Series Fund for cash within 7 days of receipt of proper notice of redemption.
The redemption price is the net asset value per share next determined after the
initial receipt of proper notice of redemption.
The right to redeem shares or to receive payment with respect to any redemption
may be suspended only for any period during which trading on the NYSE is
restricted as determined by the Securities and Exchange Commission or when such
exchange is closed (other than customary weekend and holiday closings), for any
period during which an emergency exists as defined by the Securities and
Exchange Commission as a result of which disposal of a portfolio's securities or
determination of the net asset value of each portfolio is not reasonably
practicable, and for such other periods as the Securities and Exchange
Commission may by order permit for the protection of shareholders of each
portfolio.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each portfolio is determined once daily, as
of 4:15 p.m. New York City time (12:00 noon New York City time in the case of
the Money Market Portfolio) on each day during which the NYSE is open for
business. The NYSE is open for business Monday through Friday except for the
days on which the following holidays are observed: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day. In the event the New York Stock Exchange closes early on any
business day, the net asset value of each portfolio shall be determined at a
time between such closing and 4:15 p.m. New York City time. The net asset value
per share of each portfolio except the Money Market Portfolio is computed by
adding the sum of the value of the securities held by that portfolio plus any
cash or other assets it holds, subtracting all its liabilities, and dividing the
result by the total number of shares outstanding of that portfolio at such time.
Expenses, including the investment management fee payable to Prudential, are
accrued daily.
In determining the net asset value of the Diversified Bond, Government Income
and High Yield Bond Portfolios, securities (other than debt obligations with
remaining maturities of less than 60 days, which are valued at amortized cost)
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.
The net asset value of shares of the Money Market Portfolio will normally remain
at $10 per share, because the net investment income of this portfolio (including
realized and unrealized gains and losses on portfolio holdings) will be declared
as a dividend each time the portfolio's net income is determined, see DIVIDENDS,
DISTRIBUTIONS, AND TAXES, page 36. If in the view of the Board of Directors of
the Series Fund it is inadvisable to continue to maintain the net asset value of
the Money Market Portfolio at $10 per share, the Board reserves the right to
alter the procedure. The Series Fund will notify shareholders of any such
alteration.
All short-term debt obligations in the Money Market Portfolio of 397 days'
maturity or less are valued on an amortized cost basis. This means that each
obligation will be valued initially at its purchase price and thereafter by
amortizing any discount or premium uniformly to maturity, regardless of the
impact of fluctuating interest rates on the market value of the obligation. This
highly practical method of valuation is in widespread use and almost always
results in a value that is extremely close to the actual market value. In order
to continue to utilize the amortized cost method of valuation, the Money Market
Portfolio may not purchase any security with a remaining maturity of more than
397 days and must maintain a dollar-weighted average of portfolio maturity of 90
days or less. In the event of sizeable changes in interest rates, however, the
value determined by this method may be higher or lower than the price that would
be received if the obligation were sold. The Board of Directors has established
procedures to determine whether, on these occasions, if any should occur, the
deviation might be enough to affect the value of shares in the portfolio by more
than 1/2 of one percent, and, if it does, an appropriate adjustment will be made
in the value of the obligations. The portfolio may only be invested in
securities of high quality as described in detail in the Appendix to this
prospectus.
The net asset value of the Stock Index, Equity Income, Equity, Prudential
Jennison, Small Capitalization Stock, Global and Natural Resources Portfolios
will be determined in the following manner. Any security for which the primary
market is on an exchange is generally valued at the last sale price on such
exchange as of the close of the
35 - Series Fund
<PAGE>
NYSE (which is currently 4:00 p.m. New York City 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.
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. Corporate bonds (other than convertible debt securities) and
Government bonds held by the Equity Income and Natural Resources Portfolios are
valued on the same basis as securities in the Diversified Bond and High Yield
Bond Portfolios, as described above. Short-term debt instruments which mature in
less than 60 days are valued at amortized cost. For valuation purposes,
quotations of foreign securities in a foreign currency are converted to U.S.
dollar equivalents.
In determining the net asset value of each of the Balanced Portfolios, the
method of valuation of a security depends on the type of investment involved.
Intermediate or long-term fixed income securities are valued in the same way as
such securities in the Diversified Bond Portfolio, and common stocks and
convertible debt securities are valued in the same way as such securities are
valued in the Equity Portfolio. Short-term debt obligations with a maturity of
12 months or less are valued on an amortized cost basis in accordance with an
order obtained from the Securities and Exchange Commission. Each Balanced
Portfolio must maintain a dollar-weighted average maturity for its short-term
debt obligations of 120 days or less. As discussed above in connection with the
Money Market Portfolio, the values determined by the amortized cost method may
deviate from market value under certain circumstances. The Board of Directors
has established procedures to monitor whether any material deviation occurs and,
if so, will promptly consider what action, if any, should be initiated to
prevent unfair results to Contract owners. The short-term portion of these
portfolios may be invested only in high quality instruments, as described in the
Appendix to this prospectus.
In determining the net asset value of shares of Zero Coupon Bond Portfolios 2000
and 2005, securities (other than debt obligations with maturities of less than
60 days, which are valued at amortized cost) 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.
With respect to all the portfolios which utilize such investments, options on
stock and stock indices traded on national securities exchanges are valued at
the average of the bid and asked prices as of the close of the respective
exchange (which is currently 4:10 p.m. New York City time). Futures contracts
and options thereon are valued at the last sale price at the close of the
applicable commodities exchanges or board of trade (which is currently 4:15 p.m.
New York City time) or, if there was no sale on the applicable commodities
exchange or board of trade on such day, at the mean between the most recently
quoted bid and asked prices on such exchange or board of trade.
Securities or assets for which market quotations are not readily available will
be valued at fair value as determined by Prudential under the direction of the
Board of Directors of the Series Fund.
At the beginning of each week, after the net asset value of each Zero Coupon
Bond Portfolio has been determined, Prudential will calculate the compounded
annual yield that would result if all securities in the portfolio were held
until the liquidation date or until their maturity dates, if earlier (with the
proceeds reinvested until the liquidation date). This is the predicted yield for
that date. It can also be expressed as the amount to which a premium payment of
$10,000 is predicted to grow by the portfolio's liquidation date. Prudential
will furnish both of these numbers on request. Unless there is a significant
change in the general level of interest rates--in which case a recalculation
will be made--the predicted yield is not likely to vary materially over the
course of each week.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
The Series Fund intends to continue to qualify as a regulated investment company
under certain provisions of the Internal Revenue Code (the "Code"). Under such
provisions, the Series Fund will not be subject to federal income tax on the
part of its net ordinary income and net realized capital gains that it
distributes to the Accounts. The Series Fund intends to meet the requirements
for treatment as a regulated investment company both on a portfolio-by-portfolio
basis and for the Series Fund as a whole. The Series Fund's compliance with
those requirements may prevent a portfolio from utilizing options and futures
contracts as much as the portfolio manager might otherwise believe to be
desirable.
The Series Fund intends to distribute as dividends substantially all the net
investment income, if any, of each portfolio. For dividend purposes, net
investment income of each portfolio, other than the Money Market Portfolio and
the Zero Coupon Bond Portfolios, will consist of all payments of dividends
(other than stock dividends) or interest received by such portfolio less the
estimated expenses of such portfolio (including fees payable to the Investment
Manager). Net investment income of the Money Market Portfolio consists of: (i)
interest accrued and/or
36 - Series Fund
<PAGE>
discount earned (including both original issue and market discount); (ii) plus
or minus all realized and unrealized gains and losses; (iii) less the expenses
of the portfolio (including the fees payable to the Investment Manager). The
Internal Revenue Service has ruled that the owner of a zero coupon bond, for
federal income tax purposes, realizes taxable interest each year equal to a
portion of the difference between the face value of the zero coupon bond and its
purchase price. For dividend purposes, the net investment income of each Zero
Coupon Bond Portfolio will be equal to the sum of such taxable interest realized
by such portfolio and the interest upon the interest-bearing securities less the
estimated expenses of the portfolio. Therefore, each portfolio may be required
to distribute more cash than it actually has received. Each portfolio will raise
the cash necessary to make such distributions by selling securities or from
interest income. This may require the portfolio to sell securities when it would
not do so for investment reasons, and may cause the portfolio to realize
additional gains. The Contract owner is not subject to federal or state income
taxes on distributions from the Series Fund portfolios to the corresponding
subaccounts.
Dividends on the Money Market Portfolio will be declared and reinvested daily in
additional full and fractional shares of the portfolio. Shares will begin
accruing dividends on the day following the date on which they are issued.
Dividends from investment income of the other portfolios will normally be
declared and reinvested in additional full and fractional shares
quarter-annually.
The Series Fund will also declare and distribute annually all net realized
capital gains of the Series Fund, other than short-term gains of the Money
Market Portfolio, which are declared as dividends daily.
The Code generally imposes a 4% excise tax on a portion of the undistributed
income of a regulated investment company if that company fails to distribute
required percentages of its ordinary income and capital gain net income. The
Series Fund intends to employ practices that will eliminate or minimize the
imposition of this excise tax.
In addition, Section 817(h) of the Code requires that assets underlying variable
life insurance and variable annuity contracts must meet certain diversification
requirements if the contracts are to qualify as life insurance and annuity
contracts. The diversification requirements ordinarily must be met within 1 year
after Contract owner funds are first allocated to the particular portfolio, and
within 30 days after the end of each calendar quarter thereafter. In order to
meet the diversification requirements set forth in Treasury Regulations issued
pursuant to Section 817(h), each portfolio must meet one of two alternative
tests. Under the first test, no more than 55% of the portfolio's assets can be
invested in any one investment; no more than 70% of the assets can be invested
in any two investments; no more than 80% of the assets can be invested in any
three investments; and no more than 90% can be invested in any four investments.
Under the second test, the portfolio must meet the tax law diversification
requirements for a regulated investment company and no more than 55% of the
value of the portfolio's assets can be invested in cash, cash items, Government
securities, and securities of other regulated investment companies. A third test
is available for portfolios that underlie only variable life insurance
contracts, such as the Zero Coupon Bond Portfolios. Under this test, such
portfolios can be invested without limit in Treasury securities and, where the
portfolio is invested in part in Treasury securities, the percentages of the
first test are revised and applied to the portion of the portfolio not invested
in Treasury securities.
For purposes of determining whether a variable account is adequately
diversified, each United States Government agency or instrumentality is treated
as a separate issuer for purposes of determining whether a variable account is
adequately diversified. The Series Fund's compliance with the diversification
requirements will generally limit the amount of assets that may be invested in
federally insured certificates of deposit and all types of securities issued or
guaranteed by each United States Government agency or instrumentality.
The Global Portfolio may be required to pay withholding or other taxes to
foreign governments. If so, the taxes will reduce the portfolio's dividends.
Foreign tax withholding from dividends and interest (if any) is typically set at
a rate between 10% and 15%. While Contract owners will thus bear the cost of
foreign tax withholding, they will not be able to claim a foreign tax credit or
deduction for foreign taxes paid by the portfolio.
The foregoing is a general and abbreviated summary of the applicable provisions
of the Code and Treasury Regulations currently in effect. For the complete
provisions, reference should be made to the pertinent Code sections and the
Treasury Regulations promulgated thereunder. The Code and these Regulations are
subject to change by legislative or administrative actions.
OTHER INFORMATION CONCERNING THE SERIES FUND
INCORPORATION AND AUTHORIZED STOCK
The Series Fund was incorporated under Maryland law on November 15, 1982. The
authorized Capital Stock of the Series Fund consists of 2 billion shares, par
value $0.01 per share. As of the date of this prospectus, the shares of Capital
Stock are divided into fifteen classes: Money Market Portfolio Capital Stock
(225 million shares), Diversified Bond Portfolio Capital Stock (200 million
shares), Government Income Portfolio Capital Stock (100 million shares), Zero
Coupon Bond Portfolio 2000 Capital Stock (25 million shares), Zero Coupon Bond
Portfolio
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2005 Capital Stock (50 million shares), Conservative Balanced Portfolio Capital
Stock (300 million shares), Flexible Managed Portfolio Capital Stock (300
million shares), High Yield Bond Portfolio Capital Stock (100 million shares),
Stock Index Portfolio Capital Stock (100 million shares), Equity Income
Portfolio Capital Stock (100 million shares), Common Stock Portfolio Capital
Stock (200 million shares), Prudential Jennison Portfolio Capital Stock (50
million shares), Small Capitalization Stock Portfolio Capital Stock (50 million
shares), Global Portfolio Capital Stock (100 million shares), Natural Resources
Portfolio Capital Stock (100 million shares). The shares of each portfolio, when
issued, will be fully paid and non-assessable, will have no conversion, exchange
or similar rights, and will be freely transferable.
Each share of stock will have a pro rata interest in the assets of the portfolio
to which the stock of that class relates and will have no interest in the assets
of any other portfolio. Holders of shares of any portfolio are entitled to
redeem their shares as set forth under PURCHASE AND REDEMPTION OF SHARES, page
35.
From time to time, Prudential has purchased Series Fund shares to provide
initial capital for the Series Fund and to enable portfolios to avoid
unrealistically poor investment performance that might otherwise result because
the amounts available for investment were too small. Prudential will not redeem
any of its shares until a portfolio is large enough so that redemption will not
have an adverse effect upon investment performance. As of December 31, 1996,
Prudential held $14,361,824 worth of shares in the Prudential Jennison
Portfolio, and $14,367,378 worth of shares in the Small Capitalization Stock
Portfolio. Prudential will vote its shares in the same manner and in the same
proportion as the shares held in the Accounts, which generally are voted in
accordance with instructions of Contract owners.
VOTING RIGHTS
The voting rights of Contract owners, and limitations on those rights, are
explained in the accompanying prospectus for the Contracts. Prudential and
certain other insurers with separate accounts which invest in the Series Fund,
as the owners of the assets in the Accounts, vote all of the shares of the
Series Fund, but they will generally do so in accordance with the instructions
of Contract owners pursuant to the current SEC requirements and staff
interpretations regarding pass-through voting. Under certain circumstances,
however, the Companies may disregard voting instructions received from Contract
owners. The Series Fund does not hold annual meetings of shareholders in any
year in which it is not required to do so either under Maryland law or the
Investment Company Act of 1940. For additional information describing how the
Companies will vote the shares of the Series Fund, see VOTING RIGHTS in the
accompanying prospectus for the Contracts.
MONITORING FOR POSSIBLE CONFLICT
As stated above, Series Fund shares will be sold to separate accounts of
Prudential and certain other insurers to fund both variable life insurance and
variable annuity contracts. The Board of Directors of the Series Fund intends to
monitor events for the existence of any material conflict between the interests
of variable life insurance and variable annuity contract owners. The Companies
have agreed to be responsible for reporting any potential or existing conflicts
to the Board of Directors. Moreover, the Companies have agreed to be
responsible, at their cost, to remedy any material irreconcilable conflict up to
and including establishing a new registered management investment company and
segregating the assets underlying the variable life insurance and variable
annuity contracts.
PERIODIC REPORTS
The Series Fund will send each shareholder, at least annually, statements
showing as of a specified date the number of shares in each portfolio credited
to the shareholder. The Series Fund will also send Contract owners annual and
semi-annual reports showing the financial condition of the portfolios and the
investments held in each. If a single individual or company invests in the
Series Fund through more than one variable insurance contract, then the
individual or company will receive only one copy of each annual or semi-annual
report issued by the Series Fund. However, if such individual or company wishes
to receive multiple copies of any such report, a request may be made by calling
the toll-free telephone number listed on the cover page of this prospectus. The
annual report may take the form of an updated copy of this prospectus and its
accompanying statement of additional information.
PORTFOLIO BROKERAGE AND RELATED PRACTICES
Prudential is responsible for decisions to buy and sell securities for the
portfolios, the selection of brokers and dealers to effect the transactions and
the negotiation of brokerage commissions, if any. Transactions on a stock
exchange in equity securities will be executed primarily through brokers that
will receive a commission paid by the portfolio. The Money Market, Diversified
Bond, High Yield Bond, Government Income, and Zero Coupon Bond Portfolios, on
the other hand, will not normally incur any brokerage commissions. Fixed income
securities, as well as equity securities traded in the over-the-counter market,
are generally traded on a "net" basis with dealers acting
38 - Series Fund
<PAGE>
as principals for their own accounts without a stated commission, although the
price of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price that includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. Certain of these securities may also be purchased
directly from an issuer, in which case neither commissions nor discounts are
paid.
An affiliated broker may be employed to execute brokerage transactions on behalf
of the portfolios, as long as the commissions are reasonable and fair compared
to the commissions received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. The Series Fund may not
engage in any transactions in which Prudential or its affiliates, including
Prudential Securities Incorporated, acts as principal, including
over-the-counter purchases and negotiated trades in which such a party acts as a
principal. Additional information about portfolio brokerage and related
transactions is included in the statement of additional information.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Prudential is the transfer agent and dividend disbursing agent for the Series
Fund. Prudential as transfer agent issues and redeems shares of the Series Fund
and maintains records of ownership for the shareholders. Prudential's principal
business address is Prudential Plaza, Newark, New Jersey 07102-3777.
ADDITIONAL INFORMATION
This prospectus and the statement of additional Information referred to on the
cover page do not contain all the information set forth in the registration
statement, certain portions of which have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The omitted information
may be obtained from the Commission's principal office in Washington, D.C., upon
payment of the fees prescribed by the Commission.
For further information, shareholders may also contact the Series Fund's office,
the address and phone number of which are set forth on the cover of this
prospectus.
39 - Series Fund
<PAGE>
APPENDIX
SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO
MAY CURRENTLY INVEST
The Money Market Portfolio, and the other portfolios to the extent their
investment policies so provide, may invest in the following liquid, short-term,
debt securities regularly bought and sold by financial institutions:
1. U.S. Treasury Bills and other obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. These are debt securities
(including bills, certificates of indebtedness, notes, and bonds) issued or
guaranteed by the U.S. Treasury or by an agency or instrumentality of the U.S.
Government that is established under the authority of an act of Congress.
Although all obligations of agencies and instrumentalities are not direct
obligations of the U.S. Treasury, payment of the interest and principal on them
is generally backed directly or indirectly by the U.S. Government. This support
can range from the backing of the full faith and credit of the United States, to
U.S. Treasury guarantees or to the backing solely of the issuing instrumentality
itself. Securities which are not backed by the full faith and credit of the
United States include but are not limited to obligations of the Tennessee Valley
Authority, the Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation, and the United States Postal Service, each of which has
the right to borrow from the U.S. Treasury to meet its obligations, and
obligations of the Federal Farm Credit System and the Federal Home Loan Banks,
the obligations of which may only be satisfied by the individual credit of the
issuing agency. Obligations of the Government National Mortgage Association, the
Farmers Home Administration, and the Export-Import Bank are examples of
securities that are backed by the full faith and credit of the United States.
2. Obligations (including certificates of deposit, bankers' acceptances, and
time deposits) of domestic banks, foreign branches of U.S. banks, U.S. branches
of foreign banks, and foreign offices of foreign banks provided that such bank
has, at the time of the portfolio's investment, total assets of at least $1
billion or the equivalent. Obligations of any savings and loan association or
savings bank organized under the laws of the United States or any state thereof,
provided that such association or savings bank has, at the time of the
portfolio's investment, total assets of at least $1 billion. The term
"certificates of deposit" includes both Eurodollar certificates of deposit,
which are traded in the over-the-counter market, and Eurodollar time deposits,
for which there is generally not a market. "Eurodollars" are dollars deposited
in banks outside the United States. An investment in Eurodollar instruments
involves risks that are different in some respects from an investment in debt
obligations of domestic issuers, including future political and economic
developments such as possible expropriation or confiscatory taxation that might
adversely affect the payment of principal and interest on the Eurodollar
instruments.
"Certificates of deposit" are certificates evidencing the indebtedness of a
commercial bank to repay funds deposited with it for a definite period of time
(usually from 14 days to 1 year). "Bankers' acceptances" are credit instruments
evidencing the obligation of a bank to pay a draft which has been drawn on it by
a customer. These instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity. "Time deposits"
are non-negotiable deposits in a bank for a fixed period of time.
3. Commercial paper, variable amount demand master notes, bills, notes, and
other obligations issued by a U.S. company, a foreign company or a foreign
government, its agencies, instrumentalities or political subdivisions,
denominated in U.S. dollars, and, at the date of investment, rated at least A or
A-2 by Standard & Poor's Rating Group ("S&P"), A or Prime-2 by Moody's Investors
Service ("Moody's") or, if not rated, issued by an entity having an outstanding
unsecured debt issue rated at least A or A-2 by S&P or A or Prime-2 by Moody's.
A description of corporate bond ratings is contained in the Appendix to the
statement of additional information. If such obligations are guaranteed or
supported by a letter of credit issued by a bank, such bank (including a foreign
bank) must meet the requirements set forth in paragraph 2 above. If such
obligations are guaranteed or insured by an insurance company or other non-bank
entity, such insurance company or other non-bank entity must represent a credit
of high quality, as determined by the Series Fund's investment advisor under the
supervision of the Series Fund's Board of Directors.
As stated above in paragraphs 2 and 3, the Money Market Portfolio and short-term
portions of the other portfolios may contain obligations of foreign branches of
domestic banks and domestic branches of foreign banks, as well as commercial
paper, bills, notes, and other obligations issued in the United States by
foreign issuers, including foreign governments, their agencies, and
instrumentalities. This involves certain additional risks. These risks include
future political and economic developments in the country of the issuer, the
possible imposition of withholding taxes on interest income payable on such
obligations held by the Series Fund, the possible seizure or nationalization of
foreign deposits, and the possible establishment of exchange controls or other
foreign governmental laws or restrictions which might affect adversely the
payment of principal and interest on such obligations held by the Series Fund.
In addition, there may be less publicly available information about a foreign
issuer than about a domestic one, and foreign issuers may not be subject to the
same accounting, auditing and financial recordkeeping standards, and
requirements as domestic issuers. Securities issued by foreign issuers may
A1 - Series Fund
<PAGE>
be subject to greater fluctuations in price than securities issued by U.S.
entities. Finally, in the event of a default with respect to any such foreign
debt obligations, it may be more difficult for the Series Fund to obtain or to
enforce a judgment against the issuers of such securities.
4. Repurchase Agreements. When the Money Market Portfolio purchases money market
securities of the types described above, it may on occasion enter into a
repurchase agreement with the seller wherein the seller and the buyer agree at
the time of sale to a repurchase of the security at a mutually agreed upon time
and price. The period of maturity is usually quite short, possibly overnight or
a few days, although it may extend over a number of months. The resale price is
in excess of the purchase price, reflecting an agreed-upon market rate effective
for the period of time the portfolio's money is invested in the security, and is
not related to the coupon rate of the purchased security. Repurchase agreements
may be considered loans of money to the seller of the underlying security, which
are collateralized by the securities underlying the repurchase agreement. The
Series Fund will not enter into repurchase agreements unless the agreement is
"fully collateralized" (i.e., the value of the securities is, and during the
entire term of the agreement remains, at least equal to the amount of the "loan"
including accrued interest). The Series Fund will take possession of the
securities underlying the agreement and will value them daily to assure that
this condition is met. The Series Fund has adopted standards for the parties
with whom it will enter into repurchase agreements which it believes are
reasonably designed to assure that such a party presents no serious risk of
becoming involved in bankruptcy proceedings within the time frame contemplated
by the repurchase agreement. In the event that a seller defaults on a repurchase
agreement, the Series Fund may incur a loss in the market value of the
collateral, as well as disposition costs; and, if a party with whom the Series
Fund had entered into a repurchase agreement becomes involved in bankruptcy
proceedings, the Series Fund'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 bankruptcy proceedings.
The Series Fund will not enter into repurchase agreements with Prudential or its
affiliates, including Prudential Securities Incorporated. This will not affect
the Series Fund's ability to maximize its opportunities to engage in repurchase
agreements.
5. Reverse Repurchase Agreements. The Money Market Portfolio may use reverse
repurchase agreements, which are described on page 32 of the prospectus. No
portfolio may obligate more than 10% of its net assets in connection with
reverse repurchase agreements, except that the Diversified Bond, High Yield
Bond, and Government Income Portfolios, as well as the fixed income portions of
the Conservative Balanced and Flexible Managed Portfolios, may obligate up to
30% of their net assets in connection with reverse repurchase agreements and
dollar rolls.
6. When-Issued and Delayed Delivery Securities. From time to time, in the
ordinary course of business, the Money Market Portfolio may purchase securities
on a when-issued or delayed delivery basis (i.e., delivery and payment can take
place a month or more after the date of the transaction). The purchase price and
the interest rate payable on the securities are fixed on the transaction date.
The securities so purchased are subject to market fluctuation, and no interest
accrues to the portfolio until delivery and payment take place. At the time the
portfolio makes the commitment to purchase securities on a when-issued or
delayed delivery basis, it will record the transaction and thereafter reflect
the value, each day, of such securities in determining its net asset value. The
portfolio will make commitments for when-issued transactions only with the
intention of actually acquiring the securities and, to facilitate such
acquisitions, the Series Fund's custodian bank will maintain in a separate
account securities of the portfolio having a value equal to or greater than such
commitments. On delivery dates for such transactions, the portfolio will meet
its obligations from maturities or sales of the securities held in the separate
account and/or from then available cash flow. If the portfolio chooses to
dispose of the right to acquire a when issued security prior to its acquisition,
it could, as with the disposition of any other obligation, incur a gain or loss
due to market fluctuation. No when-issued commitments will be made if, as a
result, more than 15% of the portfolio's net assets would be so committed.
The Board of Directors of the Series Fund has adopted policies for the Money
Market Portfolio to conform to amendments of an SEC rule applicable to money
market funds, like the portfolio. These policies do not apply to any other
portfolio. The policies are as follows: (1) The portfolio will not invest more
than 5% of its assets in the securities of any one issuer (except U.S.
Government securities); however, the portfolio may exceed the 5% limit with
respect to a single security rated in the highest rating category for up to
three business days after the purchase thereof; (2) To be eligible for
investment, a security must be a United States dollar-denominated instrument
that the Series Fund's Board has determined to present minimal credit risks and
must be rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations ("NRSROs") assigning a
rating to the security or issue, or if only one NRSRO has assigned a rating,
that NRSRO. An unrated security must be deemed to be of comparable quality as
determined by the Series Fund's Board. In other words, the portfolio will invest
in only first tier or second tier securities. First tier securities are
securities which are rated by at least two NRSROs, or by the only NRSRO that has
rated the security, in the highest short-term rating category, or unrated
securities of comparable quality as determined by the Series Fund's Board.
A2 - Series Fund
<PAGE>
Second tier securities are eligible securities that are not first tier
securities; (3) The portfolio will not invest more than 5% of its total assets
in second tier securities; (4) The portfolio may not invest more than 1% of its
assets in second tier securities of any one issuer; (5) In the event a first
tier security held by the portfolio is downgraded and becomes a second tier
security, or in the case of an unrated security the Series Fund's Board
determines it is no longer of comparable quality to a first tier security, or in
the event Prudential becomes aware that a NRSRO has rated a second tier security
or an unrated portfolio security below its second highest rating, the Board will
reassess promptly whether the security presents minimal credit risks and shall
cause the portfolio to take such action as the Board determines is in the best
interests of the portfolio and its shareholders; (6) In the event of a default
or because of a rating downgrade a security held in the portfolio is no longer
an eligible investment, the portfolio will sell the security as soon as
practicable unless the Series Fund's Board makes a specific finding that such
action would not be in the best interest of the portfolio; and (7) The
portfolio's dollar-weighted average maturity will be no more than 90 days. The
Series Fund's Board of Directors has adopted written procedures delegating to
the investment advisor under certain guidelines the responsibility to make
several of the above-described determinations, including certain credit quality
determinations.
A3 - Series Fund
<PAGE>
PROSPECTUS
MAY 1, 1997
THE PRUDENTIAL
SERIES FUND, INC.
THIS PROSPECTUS IS FOR USE ONLY WITH THE PRUDENTIAL VARIABLE CONTRACT
ACCOUNT-24, AS IT DESCRIBES ONLY THE PORTFOLIOS AVAILABLE FOR INVESTMENT THROUGH
THAT ACCOUNT. THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE CURRENT
PROSPECTUS FOR THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT-24.
The Prudential Series Fund, Inc. (the "Series Fund") is a diversified, open-end
management investment company (commonly known as a "mutual fund") that is
intended to provide a range of investment alternatives through its fifteen
separate portfolios, each of which is, for investment purposes, in effect a
separate fund. Seven of the Series Fund's Portfolios are currently available for
investment by Participants in Prudential's MEDLEY(SM) Program through
corresponding subaccounts of The Prudential Variable Contract Account-24. The
Portfolios are: the Diversified Bond Portfolio, the Government Income Portfolio,
the Conservative Balanced Portfolio, the Flexible Managed Portfolio, the Stock
Index Portfolio, the Equity Portfolio, and the Global Portfolio. A separate
class of capital stock is issued for each portfolio. Shares of the Series Fund
are currently sold only to separate accounts (the "Accounts") of The Prudential
Insurance Company of America ("Prudential") and certain other insurers to fund
the benefits under variable life insurance and variable annuity contracts (the
"Contracts") issued by those 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.
----------------------
THE INVESTMENT OBJECTIVES OF THE SEVEN PORTFOLIOS CAN BE
FOUND ON THE NEXT PAGE.
----------------------
Information contained in this prospectus should be read carefully by a
prospective investor before an investment is made. Additional information about
the Series Fund has been filed with the Securities and Exchange Commission in a
statement of additional information, dated May 1, 1997, which information is
incorporated herein by reference and is available without charge upon written
request to The Prudential Insurance Company of America, c/o Prudential Defined
Contribution Services, 30 Scranton Office Park, Moosic, Pennsylvania 18507-1789,
or by telephoning 1 (800) 458-6333.
-----------------------
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE PRUDENTIAL SERIES FUND, INC.
Prudential Plaza
Newark, New Jersey 07102-3777
Telephone: (800) 445-4571
PSF-1A Ed 5-97
<PAGE>
INVESTMENT OBJECTIVES OF THE PORTFOLIOS ARE AS FOLLOWS:
FIXED INCOME PORTFOLIOS
DIVERSIFIED BOND PORTFOLIO. A high level of income over the longer term while
providing reasonable safety of capital through investment primarily in readily
marketable intermediate and long-term fixed income securities that provide
attractive yields but do not involve substantial risk of loss of capital through
default.
GOVERNMENT INCOME PORTFOLIO. Achievement of a high level of income over the
longer term consistent with the preservation of capital through investment
primarily in U.S. Government securities, including intermediate and long-term
U.S. Treasury securities and debt obligations issued by agencies of or
instrumentalities established, sponsored or guaranteed by the U.S. Government.
At least 65% of the total assets of the portfolio will be invested in U.S.
Government securities.
BALANCED PORTFOLIOS
CONSERVATIVE BALANCED PORTFOLIO. Achievement of a favorable total investment
return consistent with a portfolio having a conservatively managed mix of money
market instruments, fixed income securities, and common stocks, in proportions
believed by the investment manager to be appropriate for an investor desiring
diversification of investment who prefers a relatively lower risk of loss than
that associated with the Flexible Managed Portfolio while recognizing that this
reduces the chances of greater appreciation.
FLEXIBLE MANAGED PORTFOLIO. Achievement of a high total return consistent with a
portfolio having an aggressively managed mix of money market instruments, fixed
income securities, and common stocks, in proportions believed by the investment
manager to be appropriate for an investor desiring diversification of investment
who is willing to accept a relatively high level of loss in an effort to achieve
greater appreciation.
DIVERSIFIED STOCK PORTFOLIOS
STOCK INDEX PORTFOLIO. Achievement of investment results that correspond to the
price and yield performance of publicly traded common stocks in the aggregate by
following a policy of attempting to duplicate the price and yield performance of
the Standard & Poor's 500 Composite Stock Price Index.
EQUITY PORTFOLIO. Capital appreciation through investment primarily in common
stocks of companies, including major established corporations as well as smaller
capitalization companies, that appear to offer attractive prospects of price
appreciation that is superior to broadly-based stock indices. Current income, if
any, is incidental.
GLOBAL PORTFOLIO. Long-term growth of capital through investment primarily in
common stock and common stock equivalents of foreign and domestic issuers.
Current income, if any, is incidental.
There can be no assurance that the objectives of any portfolio will be realized.
See INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS, page 5. The Series
Fund may in the future establish other portfolios with different investment
objectives.
<PAGE>
CONTENTS
PAGE
FINANCIAL HIGHLIGHTS................................................. 1
THE SERIES FUND...................................................... 5
THE ACCOUNTS AND THE CONTRACTS....................................... 5
INVESTMENT MANAGER................................................... 5
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS................. 5
FIXED INCOME PORTFOLIOS..................................... 6
Diversified Bond Portfolio.................................. 6
Government Income Portfolio................................. 6
BALANCED PORTFOLIOS......................................... 9
Conservative Balanced Portfolio............................. 9
Flexible Managed Portfolio.................................. 10
DIVERSIFIED STOCK PORTFOLIOS................................ 11
Stock Index Portfolio....................................... 11
Equity Portfolio............................................ 13
Global Portfolio............................................ 13
CONVERTIBLE SECURITIES...................................... 14
LOAN PARTICIPATIONS......................................... 15
FOREIGN SECURITIES.......................................... 15
RISK FACTORS RELATING TO INVESTING IN FIXED INCOME
SECURITIES RATED BELOW INVESTMENT GRADE................... 16
OPTIONS ON EQUITY SECURITIES................................ 16
OPTIONS ON DEBT SECURITIES.................................. 17
OPTIONS ON STOCK INDICES.................................... 18
OPTIONS ON FOREIGN CURRENCIES............................... 19
FUTURES CONTRACTS........................................... 19
OPTIONS ON FUTURES CONTRACTS................................ 20
REPURCHASE AGREEMENTS....................................... 20
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS.............. 21
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES................. 21
SHORT SALES................................................. 21
SHORT SALES AGAINST THE BOX................................. 22
INTEREST RATE SWAPS......................................... 22
LOANS OF PORTFOLIO SECURITIES............................... 22
INVESTMENT RESTRICTIONS APPLICABLE TO THE PORTFOLIOS................. 22
INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES...................... 23
PURCHASE AND REDEMPTION OF SHARES.................................... 23
DETERMINATION OF NET ASSET VALUE..................................... 23
DIVIDENDS, DISTRIBUTIONS, AND TAXES.................................. 24
OTHER INFORMATION CONCERNING THE SERIES FUND......................... 25
INCORPORATION AND AUTHORIZED STOCK.......................... 25
VOTING RIGHTS............................................... 25
MONITORING FOR POSSIBLE CONFLICT............................ 26
PERIODIC REPORTS............................................ 26
PORTFOLIO BROKERAGE AND RELATED PRACTICES................... 26
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT................ 26
ADDITIONAL INFORMATION...................................... 26
APPENDIX: SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO
MAY CURRENTLY INVEST....................................... A1
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the periods indicated)
The following highlights for the year ended December 31, 1996 have been audited
by Price Waterhouse LLP, independent accountants, whose report thereon was
unqualified. In addition, the financial highlights for each of the years prior
to and including the period ended December 31, 1995 have been audited by
Deloitte & Touche LLP, independent auditors, whose report thereon was also
unqualified. Their reports are included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
DIVERSIFIED BOND
-------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995(a) 1994(a) 1993(a) 1992(a) 1991(a) 1990(a) 1989(a) 1988(a) 1987(a)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of year...... $ 11.31 $ 10.04 $ 11.10 $ 10.83 $ 11.00 $ 10.33 $ 10.32 $ 9.94 $ 10.04 $ 11.05
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.76 0.76 0.68 0.68 0.76 0.80 0.83 0.89 0.88 0.86
Net realized and
unrealized gains
(losses) on
investments............ (0.27) 1.29 (1.04) 0.40 0.01 0.84 (0.01) 0.42 (0.07) (0.82)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total from investment
operations........... 0.49 2.05 (0.36) 1.08 0.77 1.64 0.82 1.31 0.81 0.04
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net
investment income...... (0.73) (0.75) (0.68) (0.66) (0.72) (0.78) (0.81) (0.85) (0.91) (0.99)
Distributions from net
realized gains......... -- (0.03) (0.02) (0.15) (0.22) (0.19) -- (0.08) -- (0.06)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total
distributions........ (0.73) (0.78) (0.70) (0.81) (0.94) (0.97) (0.81) (0.93) (0.91) (1.05)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Net Asset Value, end of
year................... $ 11.07 $ 11.31 $ 10.04 $ 11.10 $ 10.83 $ 11.00 $ 10.33 $ 10.32 $ 9.94 $ 10.04
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
TOTAL INVESTMENT
RETURN:(b)............. 4.40% 20.73% (3.23%) 10.13% 7.19% 16.44% 8.32% 13.49% 8.19% 0.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in millions).......... $720.2 $655.8 $541.6 $576.2 $428.8 $318.7 $227.7 $191.1 $148.8 $139.5
Ratios to average net
assets:
Expenses............... 0.45% 0.44% 0.45% 0.46% 0.47% 0.49% 0.47% 0.53% 0.53% 0.53%
Net investment
income................. 6.89% 7.00% 6.41% 6.05% 6.89% 7.43% 8.06% 8.56% 8.52% 8.15%
Portfolio turnover
rate................... 210% 199% 32% 41% 61% 131% 42% 273% 222% 238%
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT INCOME
---------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MAY 1,
1989(d)
TO
DECEMBER
31,
1996 1995(a) 1994(a) 1993(a) 1992(a) 1991(a) 1990(a) 1989(a)
-------- -------- -------- -------- -------- -------- -------- --------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of period.... $ 11.72 $ 10.46 $ 11.78 $ 11.09 $ 11.13 $ 10.15 $ 10.32 $ 10.02
-------- -------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.75 0.74 0.70 0.70 0.73 0.73 0.79 0.54
Net realized and
unrealized gains
(losses) on
investments............ (0.51) 1.28 (1.31) 0.68 (0.09) 0.85 (0.17) 0.61
-------- -------- -------- -------- -------- -------- -------- -------
Total from investment
operations........... 0.24 2.02 (0.61) 1.38 0.64 1.58 0.62 1.15
-------- -------- -------- -------- -------- -------- -------- -------
LESS DISTRIBUTIONS:
Dividends from net
investment income...... (0.74) (0.76) (0.71) (0.64) (0.59) (0.60) (0.77) (0.49)
Distributions from net
realized gains......... -- -- -- (0.05) (0.09) -- (0.02) (0.36)
-------- -------- -------- -------- -------- -------- -------- -------
Total
distributions........ (0.74) (0.76) (0.71) (0.69) (0.68) (0.60) (0.79) (0.85)
-------- -------- -------- -------- -------- -------- -------- -------
Net Asset Value, end of
period................. $ 11.22 $ 11.72 $ 10.46 $ 11.78 $ 11.09 $ 11.13 $ 10.15 $ 10.32
-------- -------- -------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------- -------- -------
TOTAL INVESTMENT
RETURN:(b)............. 2.22% 19.48% (5.16%) 12.56% 5.85% 16.11% 6.34% 11.60%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in millions).......... $482.0 $501.8 $487.6 $540.1 $315.5 $95.0 $23.7 $17.0
Ratios to average net
assets:
Expenses............... 0.46% 0.45% 0.45% 0.46% 0.53% 0.58% 0.74% 0.50%(c)
Net investment
income................. 6.38% 6.55% 6.30% 5.91% 6.58% 6.97% 7.86% 5.06%(c)
Portfolio turnover
rate................... 95% 195% 34% 19% 81% 127% 379% 209%
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns. Total investment return for
periods of less than one year are not annualized.
(c) Annualized.
(d) Commencement of investment operations.
This information should be read in conjunction with the financial statements of
The Prudential Series Fund, Inc. and notes thereto, which appear in the
Statement of Additional Information.
Further information about performance of the portfolios is contained in the
Annual Report to Contract Owners which may be obtained without charge.
1 - SERIES FUND
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED)
The following highlights for the year ended December 31, 1996 have been audited
by Price Waterhouse LLP, independent accountants, whose report thereon was
unqualified. In addition, the financial highlights for each of the years prior
to and including the period ended December 31, 1995 have been audited by
Deloitte & Touche LLP, independent auditors, whose report thereon was also
unqualified. Their reports are included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
CONSERVATIVE BALANCED
-------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995(a) 1994(a) 1993(a) 1992(a) 1991(a) 1990(a) 1989(a) 1988(a) 1987(a)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of year...... $ 15.31 $ 14.10 $ 14.91 $ 14.24 $ 14.32 $ 13.06 $ 13.36 $ 12.30 $ 11.89 $ 12.57
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.66 0.63 0.53 0.49 0.56 0.69 0.82 0.89 0.77 0.66
Net realized and
unrealized gains
(losses) on
investments............ 1.24 1.78 (0.68) 1.23 0.41 1.74 (0.14) 1.15 0.43 (0.40)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total from investment
operations........... 1.90 2.41 (0.15) 1.72 0.97 2.43 0.68 2.04 1.20 0.26
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.66) (0.64) (0.51) (0.47) (0.54) (0.67) (0.81) (0.89) (0.79) (0.71)
Distributions from net
realized gains......... (1.03) (0.56) (0.15) (0.58) (0.51) (0.50) (0.17) (0.09) -- (0.23)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total
distributions........ (1.69) (1.20) (0.66) (1.05) (1.05) (1.17) (0.98) (0.98) (0.79) (0.94)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Net Asset Value, end of
year................... $ 15.52 $ 15.31 $ 14.10 $ 14.91 $ 14.24 $ 14.32 $ 13.06 $ 13.36 $ 12.30 $ 11.89
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
TOTAL INVESTMENT
RETURN:(b)............. 12.63% 17.27% (0.97%) 12.20% 6.95% 19.07% 5.27% 16.99% 10.19% 1.54%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in millions).......... $4,478.8 $3,940.8 $3,501.1 $3,103.2 $2,114.0 $1,500.0 $1,100.2 $976.0 $815.6 $803.9
Ratios to average net
assets:
Expenses............... 0.59% 0.58% 0.61% 0.60% 0.62% 0.63% 0.65% 0.64% 0.65% 0.66%
Net investment
income................. 4.13% 4.19% 3.61% 3.22% 3.88% 4.89% 6.21% 6.81% 6.22% 5.05%
Portfolio turnover
rate................... 295% 201% 125% 79% 62% 115% 44% 154% 111% 141%
Average commission rate
paid per share......... $0.0554 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
FLEXIBLE MANAGED
-------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995(a) 1994(a) 1993(a) 1992(a) 1991(a) 1990(a) 1989(a) 1988(a) 1987(a)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of year...... $ 17.86 $ 15.50 $ 16.96 $ 16.01 $ 16.29 $ 14.00 $ 14.45 $ 13.12 $ 12.33 $ 13.56
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.57 0.56 0.47 0.57 0.58 0.65 0.72 0.82 0.72 0.57
Net realized and
unrealized gains
(losses) on
investments............ 1.79 3.15 (1.02) 1.88 0.61 2.81 (0.47) 1.99 0.84 (0.75)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total from investment
operations........... 2.36 3.71 (0.55) 2.45 1.19 3.46 0.25 2.81 1.56 (0.18)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.58) (0.56) (0.45) (0.57) (0.56) (0.66) (0.70) (0.81) (0.77) (0.67)
Distributions from net
realized gains......... (1.85) (0.79) (0.46) (0.93) (0.91) (0.51) -- (0.67) -- (0.38)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total
distributions........ (2.43) (1.35) (0.91) (1.50) (1.47) (1.17) (0.70) (1.48) (0.77) (1.05)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Net Asset Value, end of
year................... $ 17.79 $ 17.86 $ 15.50 $ 16.96 $ 16.01 $ 16.29 $ 14.00 $ 14.45 $ 13.12 $ 12.33
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
TOTAL INVESTMENT
RETURN:(b)............. 13.64% 24.13% (3.16%) 15.58% 7.61% 25.43% 1.91% 21.77% 12.83% (1.83%)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in millions).......... $4,896.9 $4,261.2 $3,481.5 $3,292.2 $2,435.6 $1,990.7 $1,507.8 $1,386.5 $1,103.9 $1,062.4
Ratios to average net
assets:
Expenses............... 0.64% 0.63% 0.66% 0.66% 0.67% 0.67% 0.69% 0.69% 0.70% 0.71%
Net investment
income................. 3.07% 3.30% 2.90% 3.30% 3.63% 4.23% 5.13% 5.66% 5.52% 4.09%
Portfolio turnover
rate................... 233% 173% 124% 63% 59% 93% 52% 141% 128% 124%
Average commission rate
paid per share......... $0.0563 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns.
This information should be read in conjunction with the financial statements of
The Prudential Series Fund, Inc. and notes thereto, which appear in the
Statement of Additional Information.
Further information about performance of the portfolios is contained in the
Annual Report to Contract Owners which may be obtained without charge.
2 - SERIES FUND
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED)
The following highlights for the year ended December 31, 1996 have been audited
by Price Waterhouse LLP, independent accountants, whose report thereon was
unqualified. In addition, the financial highlights for each of the years prior
to and including the period ended December 31, 1995 have been audited by
Deloitte & Touche LLP, independent auditors, whose report thereon was also
unqualified. Their reports are included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
STOCK INDEX
-------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OCTOBER
19,
1987(d)
TO
DECEMBER
31,
1996 1995(A) 1994(a) 1993(a) 1992(a) 1991(a) 1990(a) 1989(a) 1988(a) 1987(a)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of period.... $ 19.96 $ 14.96 $ 15.20 $ 14.22 $ 13.61 $ 10.76 $ 11.73 $ 9.45 $ 8.53 $ 8.07
-------- -------- -------- -------- -------- -------- -------- -------- --------- ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.40 0.40 0.38 0.36 0.35 0.35 0.36 0.33 0.36 0.05
Net realized and
unrealized gains
(losses) on
investments............ 4.06 5.13 (0.23) 1.00 0.60 2.82 (0.79) 2.57 0.95 0.55
-------- -------- -------- -------- -------- -------- -------- -------- --------- ------
Total from investment
operations........... 4.46 5.53 0.15 1.36 0.95 3.17 (0.43) 2.90 1.31 0.60
-------- -------- -------- -------- -------- -------- -------- -------- --------- ------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.40) (0.38) (0.37) (0.35) (0.33) (0.31) (0.31) (0.35) (0.39) (0.14)
Distributions from net
realized gains......... (0.28) (0.15) (0.02) (0.03) (0.01) (0.01) (0.23) (0.27) -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------- ------
Total
distributions........ (0.68) (0.53) (0.39) (0.38) (0.34) (0.32) (0.54) (0.62) (0.39) (0.14)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ------
Net Asset Value, end of
period................. $ 23.74 $ 19.96 $ 14.96 $ 15.20 $ 14.22 $ 13.61 $ 10.76 $ 11.73 $ 9.45 $ 8.53
-------- -------- -------- -------- -------- -------- -------- -------- --------- ------
-------- -------- -------- -------- -------- -------- -------- -------- --------- ------
TOTAL INVESTMENT
RETURN:(b)............. 22.57% 37.06% 1.01% 9.66% 7.13% 29.72% (3.63%) 30.93% 15.44% 7.35%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in millions).......... $1,581.4 $1,031.3 $664.5 $615.1 $433.5 $236.9 $104.5 $53.8 $36.0 $24.5
Ratios to average net
assets:
Expenses............... 0.40% 0.38% 0.42% 0.42% 0.46% 0.47% 0.60% 0.69% 0.78% 0.45%(c)
Net investment
income................. 1.95% 2.27% 2.50% 2.43% 2.56% 2.82% 3.23% 2.95% 3.87% 0.53%(c)
Portfolio turnover
rate................... 1% 1% 2% 1% 1% 1% 18% 15% 16% --
Average commission rate
paid per share......... $0.0250 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
EQUITY
-------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995(a) 1994(a) 1993(a) 1992(a) 1991(a) 1990(a) 1989(a) 1988(a) 1987(a)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of year...... $ 25.64 $ 20.66 $ 21.49 $ 18.90 $ 17.91 $ 15.45 $ 18.54 $ 15.46 $ 13.62 $ 14.82
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.71 0.55 0.51 0.42 0.44 0.48 0.58 0.47 0.40 0.39
Net realized and
unrealized gains
(losses) on
investments............ 3.88 5.89 0.05 3.67 2.05 3.42 (1.58) 4.07 1.91 (0.07)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total from investment
operations........... 4.59 6.44 0.56 4.09 2.49 3.90 (1.00) 4.54 2.31 0.32
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.67) (0.52) (0.49) (0.40) (0.44) (0.48) (0.56) (0.50) (0.47) (0.50)
Distributions from net
realized gains......... (2.60) (0.94) (0.90) (1.10) (1.06) (0.96) (1.53) (0.96) -- (1.02)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total
distributions........ (3.27) (1.46) (1.39) (1.50) (1.50) (1.44) (2.09) (1.46) (0.47) (1.52)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Net Asset Value, end of
year................... $ 26.96 $ 25.64 $ 20.66 $ 21.49 $ 18.90 $ 17.91 $ 15.45 $ 18.54 $ 15.46 $ 13.62
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
TOTAL INVESTMENT
RETURN:(b)............. 18.52% 31.29% 2.78% 21.87% 14.17% 26.01% (5.21%) 29.73% 17.05% 1.67%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in millions).......... $4,814.0 $3,813.8 $2,617.8 $2,186.5 $1,416.6 $1,032.8 $700.5 $675.5 $500.1 $451.0
Ratios to average net
assets:
Expenses............... 0.50% 0.48% 0.55% 0.53% 0.53% 0.51% 0.56% 0.56% 0.57% 0.51%
Net investment
income................. 2.54% 2.28% 2.39% 1.99% 2.33% 2.66% 3.37% 2.66% 2.67% 2.34%
Portfolio turnover
rate................... 20% 18% 7% 13% 16% 21% 85% 74% 62% 80%
Average commission rate
paid per share......... $0.0524 N/A N/A N/A N/A
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns. Total investment return for
periods of less than one year are not annualized.
(c) Annualized.
(d) Commencement of investment operations.
This information should be read in conjunction with the financial statements of
The Prudential Series Fund, Inc. and notes thereto, which appear in the
Statement of Additional Information.
Further information about performance of the portfolios is contained in the
Annual Report to Contract Owners which may be obtained without charge.
3 - SERIES FUND
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED)
The following highlights for the year ended December 31, 1996 have been audited
by Price Waterhouse LLP, independent accountants, whose report thereon was
unqualified. In addition, the financial highlights for each of the years prior
to and including the period ended December 31, 1995 have been audited by
Deloitte & Touche LLP, independent auditors, whose report thereon was also
unqualified. Their reports are included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
GLOBAL
--------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SEPTEMBER
19,
1988(d)
TO
DECEMBER
31,
1996 1995(a) 1994(a) 1993(a) 1992(a) 1991(a) 1990(a) 1989(a) 1988(a)
-------- -------- -------- -------- -------- -------- -------- -------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of period.... $ 15.53 $ 13.88 $ 14.64 $ 10.37 $ 10.79 $ 9.87 $ 11.55 $ 10.51 $ 9.82
-------- -------- -------- -------- -------- -------- -------- -------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.11 0.06 0.02 0.02 0.05 0.09 0.20 0.08 0.05
Net realized and
unrealized gains
(losses) on
investments............ 2.94 2.14 (0.74) 4.44 (0.42) 1.02 (1.80) 1.81 0.79
-------- -------- -------- -------- -------- -------- -------- -------- ---------
Total from investment
operations........... 3.05 2.20 (0.72) 4.46 (0.37) 1.11 (1.60) 1.89 0.84
-------- -------- -------- -------- -------- -------- -------- -------- ---------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.11) (0.24) (0.02) (0.08) (0.05) (0.10) (0.07) (0.07) (0.15)
Distributions from net
realized gains......... (0.62) (0.31) (0.02) (0.11) -- (0.09) (0.01) (0.78) --
-------- -------- -------- -------- -------- -------- -------- -------- ---------
Total
distributions........ (0.73) (0.55) (0.04) (0.19) (0.05) (0.19) (0.08) (0.85) (0.15)
-------- -------- -------- -------- -------- -------- -------- -------- ---------
Net Asset Value, end of
period................. $ 17.85 $ 15.53 $ 13.88 $ 14.64 $ 10.37 $ 10.79 $ 9.87 $ 11.55 $ 10.51
-------- -------- -------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- -------- -------- ---------
TOTAL INVESTMENT
RETURN:(b)............. 19.97% 15.88% (4.89%) 43.14% (3.42%) 11.39% (12.91%) 18.82% 8.57%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in millions).......... $580.6 $400.1 $345.7 $129.1 $34.0 $34.3 $26.2 $29.4 $26.9
Ratios to average net
assets:
Expenses............... 0.92% 1.06% 1.23% 1.44% 1.87% 1.62% 1.67% 1.47% 0.42%(c)
Net investment
income................. 0.64% 0.44% 0.20% 0.18% 0.49% 0.92% 1.92% 0.70% 0.51%(c)
Portfolio turnover
rate................... 41% 59% 37% 55% 78% 136% 43% 48% 6%
Average commission rate
paid per share......... $0.0358 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns. Total investment return for
periods of less than one year are not annualized.
(c) Annualized.
(d) Commencement of operations.
This information should be read in conjunction with the financial statements of
The Prudential Series Fund, Inc. and notes thereto, which appear in the
Statement of Additional Information.
Further information about performance of the portfolios is contained in the
Annual Report to Contract Owners which may be obtained without charge.
4 - SERIES FUND
<PAGE>
THE SERIES FUND
The Prudential Series Fund, Inc. (the "Series Fund"), a diversified open-end
management investment company, is a Maryland corporation organized on November
15, 1982. The Prudential Variable Contract Account-24 may currently invest in
seven of the Series Fund's Portfolios: the Diversified Bond Portfolio, the
Government Income Portfolio, the Conservative Balanced Portfolio, the Flexible
Managed Portfolio, the Stock Index Portfolio, the Equity Portfolio, and the
Global Portfolio. Each portfolio is, for investment purposes, in effect a
separate investment fund, and a separate class of capital stock is issued for
each portfolio. In other respects the Series Fund is treated as one entity. Each
share of capital stock issued with respect to a portfolio has a pro-rata
interest in the assets of that portfolio and has no interest in the assets of
any other portfolio. Each portfolio bears its own liabilities and also its
proportionate share of the general liabilities of the Series Fund. The Series
Fund is registered under the Investment Company Act of 1940 (the "1940 Act") as
an open-end, diversified, management investment company. This registration does
not imply any supervision by the Securities and Exchange Commission over the
Series Fund's management or its investment policies or practices.
THE ACCOUNTS AND THE CONTRACTS
Shares in the Series Fund are currently sold only to separate accounts of The
Prudential Insurance Company of America ("Prudential") and certain other
insurers to fund benefits under variable life insurance and variable annuity
contracts issued by those Companies. All the separate accounts are referred to
as the "Accounts," and all the contracts are referred to as the "Contracts."
Each Contract owner or Participant allocates the net premiums and the assets
relating to the Contract, within the limitations described in the Contracts,
among the subaccounts of the Accounts which in turn invest in the corresponding
portfolios of the Series Fund. The attached prospectus for the Contracts
describes the particular type of Contract selected and the relationship between
changes in the value of shares of each portfolio and changes in the benefits
payable under the Contracts. The rights of the Accounts as shareholders should
be distinguished from the rights of a Contract owner or Participant which are
described in the Contracts. The terms "shareholder" or "shareholders" in this
prospectus refer to the Accounts.
INVESTMENT MANAGER
Prudential is the investment advisor of the Series Fund. Prudential's principal
business address is Prudential Plaza, Newark, New Jersey 07102-3777.
Prudential has entered into a Service Agreement with its wholly-owned subsidiary
The Prudential Investment Corporation ("PIC"), which provides that PIC will
furnish to Prudential such services as Prudential may require in connection with
the performance of its obligations under an Investment Advisory Agreement with
the Series Fund. One of PIC's business groups is Prudential Investments. See
INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES, page 23.
Prudential will continue to have responsibility for all investment advisory
services under its Investment Advisory Agreement with respect to the Series
Fund.
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
Each portfolio of the Series Fund has a different investment objective which it
pursues through separate investment policies as described below. Since each
portfolio has a different investment objective, each can be expected to have
different investment results and incur different market and financial risks. The
Series Fund may in the future establish other portfolios with different
investment objectives.
The investment objectives of each portfolio are fundamental and may not be
changed without the approval of the holders of a majority of the outstanding
shares of the portfolio affected (which for this purpose and under the 1940 Act
means the lesser of: (i) 67% of the shares represented at a meeting at which
more than 50% of the outstanding shares are represented; or (ii) more than 50%
of the outstanding shares). The policies by which a portfolio seeks to achieve
its investment objectives, however, are not fundamental. They may be changed by
the Board of Directors of the Series Fund without the approval of the
shareholders.
The portfolio turnover rate of the portfolios that were available for investment
as of December 31, 1996 can be found in the FINANCIAL HIGHLIGHTS table on pages
1 through 4. The portfolio turnover rate is, generally, the percentage computed
by dividing the lesser of portfolio purchases or sales by the average value of
the portfolio, in each case excluding securities with maturities of 1 year or
less. Generally, the higher the portfolio turnover rate, the greater the
brokerage costs incurred by a portfolio.
5 - Series Fund
<PAGE>
The following paragraphs describe the investment objectives and policies of each
portfolio available for investment by Participants in Prudential's MEDLEY
Program through corresponding subaccounts of The Prudential Variable Contract
Account-24. There is no guarantee that any of these objectives will be met.
FIXED INCOME PORTFOLIOS
DIVERSIFIED BOND PORTFOLIO. The objective of this portfolio is to achieve a high
level of income over the longer term while providing reasonable safety of
capital through investment primarily in readily marketable intermediate and
long-term fixed income securities that provide attractive yields but do not
involve substantial risk of loss of capital through default.
The portfolio seeks to achieve this objective by following the policies of
purchasing primarily debt securities of investment grade or, if not rated, of
comparable quality in the opinion of the portfolio manager and of investing from
time to time a portion of its assets in high quality money market instruments of
the kind held by the Money Market Portfolio as described in the Appendix to this
prospectus. Moreover, when conditions dictate a temporary defensive strategy or
during temporary periods of portfolio structuring and restructuring, the
Diversified Bond Portfolio may invest, without limit, in high quality money
market instruments of the kind held by the Money Market Portfolio.
Since the value of fixed income securities generally fluctuates inversely with
changes in interest rates, the proportions of intermediate or longer-term
securities and short-term debt obligations held in the portfolio will vary to
reflect Prudential's assessment of prospective changes in interest rates, so
that the portfolio may benefit from relative price appreciation when interest
rates decline and suffer lesser declines in value when interest rates rise. The
success of this strategy will depend on Prudential's ability to forecast changes
in interest rates, and there is a corresponding risk that the value of the
securities held in the portfolio will decline.
At least 80% of the portfolio's holdings (including short-term debt obligations)
will generally consist of debt securities that at the time of purchase have a
rating within the four highest grades determined by Moody's Investor Services,
Inc. ("Moody's"), Standard & Poor's Rating Group ("S&P"), or a similar
nationally-recognized rating service. The portfolio may retain a security whose
rating has dropped below the four highest grades as determined by a commercial
rating service. Without limitation, the portfolio may invest in obligations of
the U.S. Government and its agencies and instrumentalities. The Appendix to the
statement of additional information defines the ratings that are given to debt
securities by Moody's and S&P and describes the standards applied by them in
assigning these ratings.
The remaining assets of the portfolio may be invested in, among other things,
debt securities that are not rated within the four highest grades or convertible
debt securities, preferred stocks or convertible preferred stocks of any
quality. On occasion, however, the portfolio may acquire common stock, not
through direct investment but by the conversion of convertible debt securities
or the exercise of warrants. For additional information regarding warrants, see
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS in the statement of
additional information. No more than 10% of the value of the total assets of the
portfolio will be held in common stocks, and those will usually be sold as soon
as a favorable opportunity is available.
The portfolio may invest up to 20% of its total assets in United States currency
denominated debt securities issued outside the United States by foreign or
domestic issuers. For additional information regarding such securities, see
FOREIGN SECURITIES on page 15.
In addition, the portfolio may: (i) purchase and sell options on debt
securities; (ii) purchase and sell interest rate futures contracts and options
thereon; (iii) purchase securities on a when-issued or delayed delivery basis;
(iv) use interest rate swaps; and (v) make short sales. These techniques are
described on pages 17 through 22, and further information about some of them is
included in the statement of additional information.
Barbara Kenworthy, Managing Director, Prudential Investments, has been portfolio
manager of the Diversified Bond Portfolio since 1995. Ms. Kenworthy is also
portfolio manager of the Prudential Diversified Bond Fund, Inc., the Prudential
Government Income Fund, Inc., and the Government Income and Zero Coupon Bond
Portfolios 2000 and 2005 of the Series Fund. Prior to 1994, Ms. Kenworthy was a
portfolio manager and president of several taxable fixed-income funds for The
Dreyfus Corp.
GOVERNMENT INCOME PORTFOLIO. The objective of this portfolio is to achieve a
high level of income over the longer term consistent with the preservation of
capital through investment primarily in intermediate and long-term U.S. Treasury
securities and debt obligations issued by agencies of or instrumentalities
established, sponsored or guaranteed by the U.S. Government. At least 65% of the
total assets of the portfolio will be invested in U.S. Government securities.
The portfolio seeks to achieve this objective by investing at least 65% of its
assets in U.S. Treasury securities, obligations issued or guaranteed by U.S.
Government agencies and instrumentalities, mortgage-related securities issued by
U.S. Government instrumentalities or non-governmental corporations, or related
collateralized mortgage
6 - Series Fund
<PAGE>
obligations. These instruments are described below. The portfolio may invest up
to a total of 35% of its assets in the following three categories: (1) money
market instruments of the kind held by the Money Market Portfolio as described
in the Appendix to this prospectus; (2) securities of issuers other than the
U.S. government and related entities, usually foreign governments, where the
principal and interest are substantially guaranteed (generally to the extent of
90% thereof) by U.S. Government agencies whose guarantee is backed by the full
faith and credit of the United States and where an assurance of payment on the
unguaranteed portion is provided for in a comparable way; (3) Foreign Government
Securities including debt securities issued or guaranteed, as to payment of
principal and interest, by governments, governmental agencies, supranational
entities and other governmental entities denominated in U.S. dollars. A
supranational entity is an entity constituted by the national governments of
several countries to promote economic development. Examples of such
supranational entities include, among others, the World Bank (International Bank
for Reconstruction and Development), the European Investment Bank and the Asian
Development Bank; and (4) asset-backed securities rated in either of the top two
ratings by Moody's or Standard & Poor's, or if not rated, determined by the
portfolio manager to be of comparable quality. A description of corporate bond
ratings is contained in the Appendix to the statement of additional information.
When conditions dictate a temporary defensive strategy or during temporary
periods of portfolio structuring and restructuring, the Government Income
Portfolio may invest, without limit, in high quality money market instruments of
the kind held by the Money Market Portfolio.
U.S. Treasury Securities. U.S. Treasury securities include bills, notes, and
bonds issued by the U.S. Treasury. These instruments are direct obligations of
the U.S. Government and, as such, are backed by the full faith and credit of the
United States. They differ primarily in their coupons, the lengths of their
maturities, and the dates of their issuances.
Obligations Issued or Guaranteed by U.S. Government Agencies and
Instrumentalities. Obligations issued by agencies of the U.S. Government or
instrumentalities established or sponsored by the U.S. Government include
securities that are guaranteed by federal agencies or instrumentalities, and may
or may not be backed by the full faith and credit of the United States.
Obligations of the Government National Mortgage Association ("GNMA"), the
Farmers Home Administration, and the Export-Import Bank are backed by the full
faith and credit of the United States. Securities in which the portfolio may
invest that are not backed by the full faith and credit of the United States
include obligations issued by the Tennessee Valley Authority, The Federal
National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC"), the United States Postal Service, each of which has the
right to borrow from the United States Treasury to meet its obligations, and
obligations of the Federal Farm Credit Bank and the Federal Home Loan Bank, the
obligations of which may be satisfied only by the individual credit of the
issuing agency. In the case of securities not backed by the full faith and
credit of the U.S. Government, the portfolio must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment and may not be
able to assert a claim against the U.S. Government if the agency or
instrumentality does not meet its commitments.
U.S. Government Securities are considered among the most creditworthy of fixed
income investments. The yields available from U.S. Government Securities are
generally lower than the yields available from corporate debt securities. The
values of U.S. Government Securities (like those of fixed income securities,
generally) will change as interest rates fluctuate. During periods of falling
U.S. interest rates, the values of outstanding long-term U.S. Government
Securities generally rise. Conversely, during periods of rising interest rates,
the values of such securities generally decline. The magnitude of these
fluctuations will generally be greater for securities with longer maturities.
Although changes in the value of U.S. Government Securities will not affect
investment income from those securities, they will affect the portfolio's net
asset value. The proportions of intermediate and long-term securities held in
the portfolio will vary to reflect Prudential's assessment of prospective
changes in interest rates, so that the portfolio may benefit from relative price
appreciation when interest rates decline and suffer lesser declines in value
when interest rates rise. The success of this strategy will depend on
Prudential's ability to forecast changes in interest rates, and there is a
corresponding risk that the value of the securities held in the portfolio will
decline.
Mortgage-Related Securities Issued by U.S. Government Instrumentalities or by
Non-Governmental Corporations. The portfolio may invest in the following three
types of mortgage-backed securities: (i) those issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities, such as Government
National Mortgage Association (GNMA), Federal National Mortgage Association
(FNMA) and Federal Home Loan Mortgage Corporation (FHLMC); (ii) those issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. Government or one of
its agencies or instrumentalities; and (iii) those issued by private issuers
that represent an interest in or are collateralized by whole mortgage loans or
mortgage-backed securities without government guarantee but usually having some
form of private credit enhancement. The portfolio may invest in adjustable rate
and fixed rate mortgage securities. With respect to private mortgage-backed
securities not collateralized by securities of the U.S. Government or its
agencies, the portfolio will only purchase such securities rated not lower than
As by Moody's or AA by Standard & Poor's or similarly rated by another
7 - Series Fund
<PAGE>
nationally recognized rating service or, if unrated, of comparable quality in
the opinion of the portfolio manager. The mortgages backing these securities
include conventional 30 year fixed rate mortgages, 15 year fixed rate mortgages,
graduated payment mortgages, and adjustable rate mortgages ("ARMs"). The
mortgage-backed securities may include those representing an undivided ownership
interest in a pool of mortgages, e.g. GNMA, FNMA and FHLMC certificates. The
U.S. Government or the issuing agency guarantees the payment of interest and
principal of mortgage-backed securities issued by the U.S. Government or its
agencies/instrumentalities. However, these guarantees do not extend to the
securities' yield or value, which are likely to vary inversely with fluctuations
in interest rates, nor do the guarantees extend to the yield or value of the
portfolio's shares. Mortgage-backed securities are in most cases pass-through
instruments, through which the holders receive a share of all interest and
principal payments from the mortgages underlying the securities, net of certain
fees. Because the prepayment characteristics of the underlying mortgages vary,
it is not possible to predict accurately the average life of a particular issue
of pass-through securities. Mortgage-backed securities are often subject to more
rapid repayment then their stated maturity date would indicate as a result of
the pass-through of prepayments of principal on the underlying mortgage
obligations. For example, securities backed by mortgages with 30 year maturities
are customarily treated as prepaying fully in the 12th year and securities
backed by mortgages with 15 year maturities are customarily treated as prepaying
fully in the seventh year. While the timing of prepayments of graduated payment
mortgages differs somewhat from that of conventional mortgages, the prepayment
experience of graduated payment mortgages is basically the same as that of the
conventional mortgages of the same maturity dates over the life of the pool.
During periods of declining interest rates, prepayment of mortgages underlying
mortgage-backed securities can be expected to accelerate. When the mortgage
obligations are prepaid, the portfolio reinvests the prepaid amounts in
securities, the yields of which reflect interest rates prevailing at the time.
Therefore, the portfolio's ability to maintain a portfolio of high yielding
mortgage-backed securities will be adversely affected to the extent that
prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid mortgages. Moreover, prepayments of mortgages which
underlie securities purchased at a premium could result in capital losses.
Mortgage-backed securities of the types described under (i) and (ii) above are
considered to be U.S. Government Securities for purposes of meeting the
requirement that at least 65% of the portfolio's assets be invested in U.S.
Government Securities.
Adjustable rate mortgage securities are pass-through mortgage securities
collateralized by mortgages with adjustable rather than fixed rates. Generally
ARMs have a specified maturity date and amortize principal over their life. In
periods of declining interest rates, there is a reasonable likelihood that ARMs
will experience increased rates of pre-payment of principal. However, the major
difference between ARMs and fixed rate mortgage securities is that the interest
rate and the rate of amortization of principal of ARMs can and do change in
accordance with movements in a particular pre-specified, published interest rate
index.
CMOs. The portfolio may also purchase collateralized mortgage obligations
("CMOs"). A CMO is a security issued by a corporation or a U.S. Government
instrumentality that is backed by a portfolio of mortgages or mortgage-backed
securities. The issuer's obligation to make interest and principal payments is
secured by the underlying portfolio of mortgages or mortgage-backed securities.
CMOs are partitioned into several classes with a ranked priority by which the
classes of obligations are redeemed. The portfolio may invest in CMOs issued by
agencies or instrumentalities of the U.S. Government or by private originators
of, or investors in mortgage loans, including depository institutions, mortgage
banks, investment banks and special purpose subsidiaries of the foregoing. With
respect to privately issued CMOs, the portfolio will only purchase such
securities rated not lower than Aa by Moody's or AA by Standard & Poor's or
similarly rated by another nationally recognized rating service, or if unrated,
of comparable quality in the opinion of the portfolio manager. Privately issued
CMOs that are collateralized by mortgage-backed securities issued by GNMA, FHLMC
or FNMA, and CMOs issued by agencies or instrumentalities of the U.S. Government
are considered to be U.S. Government Securities for purposes of meeting the
requirement that at least 65% of the portfolio's assets be invested in U.S.
Government Securities. Neither the United States Government nor any U.S.
Government agency guarantees the payment of principal or interest on these
securities.
Asset-Backed Securities. Asset-backed securities represent a participation in,
or are secured by and payable from, a stream of payments generated by particular
assets, such as automobile or credit card receivables. Asset-backed securities
present certain risks, including the risk that the underlying obligor on the
asset, such as the automobile purchaser or the credit card holder, may default
on his or her obligation. In addition, asset-backed securities often do not
provide a security interest in the related collateral. For example, credit card
receivables are generally unsecured, and for automobile receivables the security
interests in the underlying automobiles are often not transferred when the pool
is created, with the resulting possibility that the collateral could be resold.
In addition, the portfolio may: (i) purchase and sell options on debt
securities; (ii) purchase and sell interest rate futures contracts and options
thereon; (iii) purchase securities on a when-issued or delayed delivery basis;
(iv) use interest rate swaps; and (v) make short sales. These techniques are
described on pages 17 through 22, and further information about some of them is
included in the statement of additional information.
8 - Series Fund
<PAGE>
Under normal circumstances, this portfolio's turnover rate is not expected to
exceed 200%. Purchases of U.S. Government Securities are generally made from
dealers at prices which usually include a profit to the dealer. See PORTFOLIO
BROKERAGE AND RELATED PRACTICES, page 26.
Barbara Kenworthy, Managing Director, Prudential Investments, has been portfolio
manager of the Government Income Portfolio since 1995. Ms. Kenworthy is also
portfolio manager of the Prudential Diversified Bond Fund, Inc., the Prudential
Government Income Fund, Inc., and the Diversified Bond and Zero Coupon Bond
Portfolios 2000 and 2005 of the Series Fund. Prior to 1994, Ms. Kenworthy was a
portfolio manager and president of several taxable fixed-income funds for The
Dreyfus Corp.
BALANCED PORTFOLIOS
CONSERVATIVE BALANCED PORTFOLIO. The objective of this portfolio is to achieve a
favorable total investment return consistent with a portfolio having a
conservatively managed mix of money market instruments, fixed income securities,
and common stocks in proportions believed by the investment manager to be
appropriate for an investor desiring diversification of investment who prefers a
relatively lower risk of loss than that associated with the Flexible Managed
Portfolio while recognizing that this reduces the chances of greater
appreciation.
To achieve this objective, the Conservative Balanced Portfolio will follow a
policy of maintaining a more conservative asset mix among stocks, bonds and
money market instruments than the Flexible Managed Portfolio. In general, the
portfolio manager will observe the following range of target asset allocation
mixes:
Asset Type Minimum Normal Maximum
---------- ------- ------ -------
Stocks 15% 35% 50%
Bonds and Money Market 25% 65% 70%
The portfolio manager will make variations in the proportions of each investment
category in accordance with its judgment about the expected returns and risks of
the various investment categories, but will maintain at least 25% of the value
of the portfolio's assets in fixed-income senior securities.
The bond portion of this portfolio will be invested primarily in securities with
maturities of 2 to 10 years and ratings at the time of purchase within the four
highest grades determined by Moody's, S&P, or a similar nationally-recognized
rating service or if unrated, of comparable quality in the opinion of the
portfolio manager. However, the portfolio may purchase below-investment grade
debt, also known as high risk securities. A description of corporate bond
ratings is contained in the Appendix to the statement of additional information.
Because of their shorter maturities, the value of the notes and bonds in this
portfolio will be less sensitive to changes in interest rates than the
longer-term bonds likely to be held in the Flexible Managed Portfolio. Thus,
there will be less of a risk of loss of principal, but not as much of a
likelihood for greater appreciation in value. 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
stock portion of this portfolio will be invested primarily in the equity
securities of major, established corporations in sound financial condition that
appear to offer attractive prospects of a total return from dividends and
capital appreciation that is superior to broadly based stock indices. The
portfolio may also invest in preferred stock, including below investment grade
preferred stock. The money market portion of the portfolio will hold high
quality money market instruments of the kind held by the Money Market Portfolio
as described in the Appendix to this prospectus. Moreover, when conditions
dictate a temporary defensive strategy or during temporary periods of portfolio
structuring and restructuring, the Conservative Balanced Portfolio may invest,
without limit, in high quality money market instruments of the kind held by the
Money Market Portfolio.
To the extent permitted by applicable insurance law, this portfolio may invest
up to 30% of its total assets in non-United States currency denominated debt and
equity securities of foreign and U.S. issuers. The particular risks of
investments in foreign securities are described under FOREIGN SECURITIES on page
15.
In addition, the portfolio may: (i) purchase and sell options on equity
securities, debt securities, stock indices and foreign currencies; (ii) purchase
and sell stock index, interest rate and foreign currency futures contracts and
options thereon; (iii) enter into forward foreign currency exchange contracts;
(iv) purchase securities on a when-issued or delayed delivery basis; (v) use
interest rate swaps; and (vi) make short sales. These techniques are described
on pages 16 through 22, and further information about some of them is included
in the statement of additional information.
The Conservative Balanced Portfolio is managed by a team of portfolio managers.
Mark Stumpp, Senior Managing Director, Prudential Investments, has been lead
portfolio manager of the Conservative Balanced Portfolio since 1994 and is
responsible for the overall asset allocation decisions. Mr. Stumpp has
supervisory responsibility of the portfolio management team. Warren Spitz,
Managing Director, Prudential Investments, has been the portfolio manager of the
equity portion of the portfolio since 1995. It is the intention of the portfolio
to appoint Patricia Bannan, Managing Director, Prudential Investments, to manage
a portion (to be determined by Mr. Stumpp) of the
9 - Series Fund
<PAGE>
portfolio's equity holdings. Upon Ms. Bannan's appointment, Mr. Spitz will
continue to manage the other portion of the portfolio's equity holdings. Tony
Rodriguez, Vice President, Prudential Investments, has been the portfolio
manager of the fixed income portion of the portfolio since 1993. Mr. Stumpp also
supervises the team of portfolio managers for the Flexible Managed Portfolio.
Mr. Stumpp is also portfolio manager for several employee benefit trusts
including The Prudential Retirement System for U.S. Employees and Special
Agents. Prior to 1994, he was responsible for corporate pension asset management
for Prudential Diversified Investment Strategies' corporate clients. Mr. Spitz
is also portfolio manager of the Prudential Equity Income Fund and the Equity
Income and Flexible Managed Portfolios of the Series Fund. Ms. Bannan has been
portfolio manager of the equity portion of the Flexible Managed Portfolio since
1996. Prior to 1996, Ms. Bannan was President of Phoenix Investment Counsel
where she personally managed $3 billion in assets, including a $2.5 billion
balanced mutual fund. Mr. Rodriguez is also portfolio manager for the Prudential
Structured Maturity Fund, Inc. and the Flexible Managed Portfolio of the Series
Fund.
FLEXIBLE MANAGED PORTFOLIO. The objective of this portfolio is achievement of a
high total return consistent with a portfolio having an aggressively managed mix
of money market instruments, fixed income securities, and common stocks, in
proportions believed by the investment manager to be appropriate for an investor
desiring diversification of investment who is willing to accept a relatively
high level of loss in an effort to achieve greater appreciation.
To achieve this objective, the Flexible Managed Portfolio will follow a policy
of maintaining a more aggressive asset mix among stocks, bonds and money market
investments than the Conservative Balanced Portfolio. In general, the portfolio
manager will observe the following range of target asset allocation mixes:
Asset Type Minimum Normal Maximum
---------- ------- ------ -------
Stocks 25% 60% 100%
Bonds 0% 40% 75%
Money Market 0% 0% 75%
The portfolio manager may make short-run, and sometimes substantial, variations
in the asset mix based upon its judgment about the expected returns and risks of
the various investment categories. In varying the asset mix in accordance with
these judgments, Prudential will also seek to take advantage of imbalances in
fundamental values among the different markets.
The bond component of this portfolio is expected under normal circumstances to
have a weighted average maturity of greater than 10 years. The values of bonds
with long maturities are generally more sensitive to changes in interest rates
than those of shorter maturities. 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, also known as
high risk securities. 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. The money
market portion of the portfolio will hold high quality money market instruments
of the kind held by the Money Market Portfolio as described in the Appendix to
this prospectus. 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.
To the extent permitted by applicable insurance law, this portfolio may invest
up to 30% of its total assets in non-United States currency denominated debt and
equity securities of foreign and U.S. issuers. The particular risks of
investments in foreign securities are described under FOREIGN SECURITIES on page
15.
In addition, the portfolio may: (i) purchase and sell options on equity
securities, debt securities, stock indices and foreign currencies; (ii) purchase
and sell stock index, interest rate and foreign currency futures contracts and
options thereon; (iii) enter into forward foreign currency exchange contracts;
(iv) purchase securities on a when-issued or delayed delivery basis; (v) use
interest rate swaps; and (vi) make short sales. These techniques are described
on pages 16 through 22, and further information about some of them is included
in the statement of additional information.
10 - Series Fund
<PAGE>
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 it will invest in bonds with longer
maturities; 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.
The Flexible Managed Portfolio is managed by a team of portfolio managers. Mark
Stumpp, Senior Managing Director, Prudential Investments, has been lead
portfolio manager of the Flexible Managed Portfolio since 1994 and is
responsible for the overall asset allocation decisions. Mr. Stumpp has
supervisory responsibility of the portfolio management team. Patricia Bannan,
Managing Director, Prudential Investments, has been the portfolio manager of the
equity portion of the portfolio since 1996. It is the intention of the portfolio
to appoint Warren Spitz, Managing Director, Prudential Investments, to manage a
portion (to be determined by Mr. Stumpp) of the portfolio's equity holdings.
Upon Mr. Spitz's appointment, Ms. Bannan will continue to manage the other
portion of the portfolio's equity holdings. Tony Rodriguez, Vice President,
Prudential Investments, has been the portfolio manager of the fixed income
portion of the portfolio since 1993. Mr. Stumpp also supervises the team of
portfolio managers for the Conservative Balanced Portfolio. Mr. Stumpp is also
portfolio manager for several employee benefit trusts including The Prudential
Retirement System for U.S. Employees and Special Agents. Prior to 1994, he was
responsible for corporate pension asset management for Prudential Diversified
Investment Strategies' corporate clients. Prior to 1996, Ms. Bannan was
President of Phoenix Investment Counsel where she personally managed $3 billion
in assets including a $2.5 billion balanced mutual fund. Mr. Spitz has been
portfolio manager of the equity portion of the Conservative Balanced Portfolio
since 1995 and is also portfolio manager of the Prudential Equity Income Fund
and the Equity Income Portfolio of the Series Fund. Mr. Rodriguez is also
portfolio manager for the Prudential Structured Maturity Fund, Inc., and the
Flexible Managed Portfolio of the Series Fund.
DIVERSIFIED STOCK PORTFOLIOS
STOCK INDEX PORTFOLIO. The objective of this portfolio is to achieve investment
results that correspond to the price and yield performance of publicly-traded
common stocks in the aggregate.
The portfolio seeks to achieve this objective by following the policy of
attempting to duplicate the price and yield performance of the Standard & Poor's
500 Composite Stock Price Index (the "S&P 500 Index"), an index which represents
more than 70% of the total market value of all publicly-traded common stocks and
is widely viewed among investors as representative of the performance of
publicly-traded common stocks as a whole. The S&P 500 Index is composed of 500
selected common stocks, over 95% of which are listed on the New York Stock
Exchange ("NYSE"). Standard & Poor's Corporation chooses the stocks to be
included in the index on a statistical basis taking into account market values
and industry diversification. Inclusion in the index in no way implies an
opinion by Standard & Poor's Corporation as to a stock's attractiveness as an
investment. "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 Series
Fund is not sponsored, endorsed, sold or promoted by S&P and S&P makes no
representation regarding the advisability of investing in the Series Fund.
Reference is made to the statement of additional information which sets forth
certain additional disclaimers and limitations of liabilities on behalf of S&P.
The S&P 500 Index is a "weighted" index in which the weighting of each stock
depends on its relative total market value: its market price per share times the
number of shares outstanding. Because of this weighting, approximately 11% of
the S&P 500 Index's value is accounted for by the stocks of the five largest
companies by relative market value. As of December 31, 1996 those companies
were: General Electric Co., Coca-Cola Co., Exxon Corp., Intel, and Microsoft
Corp.
This portfolio will not be "managed" in the traditional sense of using economic,
financial or market analysis to determine the stocks to be purchased by the
portfolio. Rather, the portfolio manager will purchase stocks for the portfolio
in proportion to their weighting in the S&P 500 Index. Thus, adverse financial
performance by a company will not result in reduction or elimination of the
portfolio's holdings of its stock and, conversely, superior financial
performance by a company will not lead the portfolio to increase its holdings of
the company's stock. If a stock held by this portfolio is eliminated from the
S&P 500 Index, the portfolio will sell its holdings of the stock regardless of
the prospects of the company. Because the portfolio will not be "managed" in the
traditional sense, portfolio turnover is expected to be low and is generally not
expected to exceed 10%. A 10% portfolio turnover rate would occur if one-tenth
of the portfolio's securities were sold and either repurchased or replaced
within 1 year. Because of the expected low turnover, transaction costs, such as
brokerage commissions, are also expected to be relatively low.
The following table shows the performance of the S&P 500 Index for the 25 years
ending in 1996. The period covered by this table is one of generally rising
stock prices, and the performance of the S&P 500 Index in this period should not
be viewed as a representation of any future performance by that index. In
addition, the fees and costs involved in the operation of the Stock Index
Portfolio mean that the performance of a share of stock in the
11 - Series Fund
<PAGE>
portfolio may not equal the performance of the S&P 500 Stock Index even if the
assets held by the portfolio do equal that performance.
*S&P 500 WITH DIVIDENDS REINVESTED
ANNUAL PERCENTAGE CHANGE
- --------------------------------------------------------------------------------
1972 +18.90 1985 +31.57
1973 -14.77 1986 +18.56
1974 -26.39 1987 +5.10
1975 +37.16 1988 +16.61
1976 +23.57 1989 +31.69
1977 -7.42 1990 -3.10
1978 +6.38 1991 +30.47
1979 +18.20 1992 +7.61
1980 +32.27 1993 +10.08
1981 -5.01 1994 +1.32
1982 +21.44 1995 +37.58
1983 +22.38 1996 +22.96
1984 +6.10
Source: Standard & Poor's corporation. Percentage change calculated in
accordance with specifications of sec release number IA-327.
In the nine full years since this portfolio was established its total return,
compared to that of the S&P 500 Index, was as follows:
Annual Percentage Change Total Return
S&P 500 with Stock Index Portfolio
Dividends Reinvested (After Deduction of Expenses)
------------------------- -----------------------------
1988 +16.61 +15.44
1989 +31.69 +30.93
1990 -3.10 -3.63
1991 +30.47 +29.72
1992 +7.61 +7.13
1993 +10.08 +9.66
1994 +1.32 +1.01
1995 +37.58 +37.06
1996 +22.96 +22.57
Under normal circumstances, the portfolio generally intends to purchase all 500
stocks represented in the S&P 500 Index and to invest its assets as fully in
those stocks (in proportion to their weighting in the index) as is feasible in
light of cash flows into and out of the portfolio. In order to reduce
transaction costs, a weighted investment in the 500 stocks comprising the S&P
500 Index is most efficiently made in relatively large amounts. As additional
cash is received from the purchase of shares in the portfolio, it may be held
temporarily in the types of money market instruments described in the appendix
to this prospectus, until the portfolio has a sufficient amount of assets in
such investments to make an efficient weighted investment in the 500 stocks
comprising the S&P 500 Index. If net cash outflows from the portfolio are
anticipated, the portfolio may sell stocks (in proportion to their weighting in
the S&P 500 Index) in amounts in excess of those needed to satisfy the cash
outflows and hold the balance of the proceeds in short-term investments if such
a transaction appears, taking into account transaction costs, to be more
efficient than selling only the amount of stocks needed to meet the cash
requirements. The portfolio will not, however, increase its holdings of cash in
anticipation of any decline in the value of the S&P 500 Index or of the stock
markets generally. The portfolio will instead remain as fully invested in the
S&P 500 Index stocks as feasible in light of its cash flow patterns during
periods of market declines as well as advances, and investors in the portfolio
thus run the risk of remaining fully invested in common stocks during a period
of general decline in the stock markets.
Tracking accuracy is measured by the difference between total return for the S&P
Index with dividends reinvested and total return for the portfolio with
dividends reinvested before deductions of portfolio fees and expenses. Tracking
accuracy is monitored by the portfolio manager on a daily basis. All tracking
accuracy deviations are reviewed to determine the effectiveness of investment
policies and techniques.
If the portfolio does hold short-term investments as a result of the patterns of
cash flows to and from the portfolio, such holdings may cause its performance to
differ from that of the S&P 500 Index. The portfolio will attempt to minimize
any such difference in performance through transactions involving stock index
futures contracts, options
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on stock indices, and/or options on stock index future contracts. These
derivative investment instruments are described under OPTIONS ON STOCK INDICES,
FUTURES CONTRACTS, and OPTIONS ON FUTURES CONTRACTS on pages 18 through 20. The
portfolio will not use such instruments for speculative purposes or to hedge
against any decline in the value of the stocks held in the portfolio, but
instead will employ them only as a temporary substitute for investment of cash
holdings directly in the 500 stocks when the portfolio's cash holdings are too
small to make such an investment in an efficient manner.
For example, if the portfolio's cash reserves are insufficient to invest
efficiently in another unit of the basket of stocks comprising the S&P 500
Index, the portfolio may purchase S&P 500 futures contracts to hedge against a
rise in the value of the stocks the portfolio intends to acquire. In its attempt
to minimize any difference in performance between the portfolio and the S&P 500
Index, the portfolio currently intends to engage in transactions involving the
S&P 500 Index futures contracts, the NYSE Composite Index futures contracts,
options on the S&P 500 Index, the S&P 100 Index, and the NYSE Composite Index,
and options on the S&P 500 Index futures contracts and the NYSE Composite Index
futures contracts. There can be no assurance that the portfolio's attempt to
minimize such performance difference through the use of any of these instruments
will succeed. See the statement of additional information for a more detailed
discussion of the manner in which the portfolio will employ these instruments
and for a description of other risks involved in the use of such instruments.
The above described investment policies and techniques of the Stock Index
Portfolio are non-fundamental and may be changed without shareholder approval if
it is determined that alternative investment techniques would be more effective
in achieving the portfolio's objective.
EQUITY PORTFOLIO. The objective of this portfolio is to achieve capital
appreciation through investment primarily in common stocks of companies,
including major established corporations as well as smaller capitalization
companies, that appear to offer attractive prospects of price appreciation that
is superior to broadly-based stock indices.
Current income, if any, is incidental.
Although the portfolio will be invested primarily in common stocks, it may also
invest to a limited extent in short, intermediate or long-term debt, either
convertible or nonconvertible into common stock, as well as in nonconvertible
preferred stock. In addition, it may also invest up to 5% of its assets in below
investment grade debt securities, also known as high risk securities. A
description of corporate bond ratings is contained in the Appendix to the
statement of additional information. The portfolio will attempt to maintain a
flexible approach to the selection of common stocks of various types of
companies whose valuations appear to offer opportunities for above-average
appreciation. Thus, the portfolio may invest in securities of companies whose
estimated growth in earnings exceeds that projected for the market as a whole
because of factors such as expanding market share, new products or changes in
market environment. Or it may invest in "undervalued" securities which are often
characterized by a lack of investor recognition of the basic value of a
company's assets. Securities of companies with sales and earnings trends which
are currently unfavorable but which are expected to reverse may also be in the
portfolio. The effort to achieve price appreciation that is superior to broadly
based stock indices necessarily involves accepting a greater risk of declining
values. During periods when stock prices decline generally, it can be expected
that the value of the portfolio will also decline.
To the extent permitted by applicable insurance law, this portfolio may invest
up to 30% of its total assets in nonUnited States currency denominated common
stock and fixed-income securities convertible into common stock of foreign and
U.S. issuers. The particular risks of investments in foreign securities are
described under FOREIGN SECURITIES on page 15.
In addition, the portfolio may: (i) purchase and sell options on equity
securities, stock indices and foreign currencies; (ii) purchase and sell stock
index and foreign currency futures contracts and options thereon; (iii) enter
into forward foreign currency exchange contracts; and (iv) purchase securities
on a when-issued or delayed delivery basis. These techniques are described on
pages 16 through 22, and further information about some of them is included in
the statement of additional information.
A portion of the portfolio may be invested in money market instruments of the
kind held by the Money Market Portfolio as described in the Appendix to this
prospectus in order to make effective use of cash reserves pending investment in
common stocks. Moreover, when conditions dictate a temporary defensive strategy
or during temporary periods of portfolio structuring and restructuring, the
Equity Portfolio may invest, without limit, in high quality money market
instruments of the kind held by the Money Market Portfolio.
Thomas Jackson, Managing Director, Prudential Investments, has been portfolio
manager of the Equity Portfolio since 1990. Mr. Jackson is also portfolio
manager of the Prudential Equity Fund, Inc.
GLOBAL PORTFOLIO. The objective of this portfolio is long-term growth of capital
through investment primarily in common stocks and common stock equivalents (such
as convertible debt securities) of foreign and domestic issuers. Current income,
if any, is incidental.
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The portfolio is intended to provide investors with the opportunity to invest in
a portfolio of securities of companies located throughout the world. In making
the allocation of assets among the various countries and geographic regions, the
portfolio manager ordinarily considers such factors as prospects for relative
economic growth between foreign countries; expected levels of inflation and
interest rates; government policies influencing business conditions; the range
of individual investment opportunities available to international investors; and
other pertinent financial, tax, social, political and national factors--all in
relation to the prevailing prices of the securities in each country or region.
There are, generally, no geographic limitations on companies in which the
portfolio may invest. Depending upon market conditions, the portfolio may be
invested primarily in foreign securities. Investments may be made in companies
based in the Pacific Basin (for example, Japan, Australia, New Zealand,
Singapore, Malaysia, and Hong Kong) and Western Europe (for example, the United
Kingdom, Spain, Germany, Switzerland, the Netherlands, France, and Scandinavia),
as well as the United States, Canada, and such other areas and countries as the
portfolio manager may determine from time to time. The portfolio may seek to
hedge its position in foreign currencies as more fully described herein.
The portfolio is not required to maintain any particular geographic or currency
mix of its investments. The portfolio intends to maintain investments in at
least three countries (including the United States), but may, when market
conditions warrant, invest up to 35% of its assets in companies located in any
one country (other than the United States).
In analyzing companies for investment, the portfolio manager ordinarily looks
for one or more of the following characteristics: prospects for above-average
earnings growth per share; high return on invested capital; healthy balance
sheet; sound financial and accounting policies and overall financial strength;
strong competitive advantages; effective research and product development and
marketing; efficient service; pricing flexibility; strength of management; and
general operating characteristics which will enable the companies to compete
successfully in their marketplace--all in relation to the prevailing prices of
the securities of such companies.
Investing in securities of foreign companies and countries involves special
risks. The particular risks of investments in foreign securities are described
under FOREIGN SECURITIES on page 15.
When conditions dictate a temporary defensive strategy or during temporary
periods of portfolio structuring and restructuring, the Global Portfolio may
invest, without limit, in high quality money market instruments of the kind held
by the Money Market Portfolio as described in the Appendix to this prospectus.
In addition, the portfolio may: (i) purchase and sell options on equity
securities, stock indices and foreign currencies; (ii) purchase and sell stock
index, interest rate and foreign currency futures contracts and options thereon;
(iii) enter into forward foreign currency exchange contracts; and (iv) purchase
securities on a when-issued or delayed delivery basis. These techniques are
described on pages 15 through 22, and further information about some of them is
included in the statement of additional information.
The operating expense ratio of the portfolio can be expected to be significantly
higher than that of a fund investing exclusively in domestic securities since
the expenses of the portfolio, such as custodial, valuation and communication
costs, as well as the rate of the investment management fee (0.75% of the
portfolio's average daily net assets), though similar to such expenses of other
global funds, are higher than those generally incurred by funds investing solely
in the securities of U.S. issuers.
As a result of its investment policies, the portfolio's turnover rate may exceed
100% although it is not expected to exceed 200%.
Daniel Duane, Managing Director, Prudential Investments, has been the portfolio
manager of the Global Portfolio since 1990. Mr. Duane also manages several
mutual funds including the Prudential Global Fund, Inc.
CONVERTIBLE SECURITIES
The Conservative Balanced, Flexible Managed, Equity, and Global Portfolios may
invest in convertible securities and such securities may constitute a major part
of the holdings of the Global Portfolio. A convertible security is a
fixed-income security (a bond or preferred stock) which may be converted at a
stated price within a specified period of time into a certain quantity of the
common stock of the same or a different issuer. Convertible securities are
senior to common stocks in a corporation's capital structure, but are usually
subordinated to similar nonconvertible securities. While providing a fixed
income stream (generally higher in yield than the income derivable from a common
stock but lower than that afforded by a similar nonconvertible security), a
convertible security also affords an investor the opportunity, through its
conversion feature, to participate in the capital appreciation attendant upon a
market price advance in the convertible security's underlying common stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without risk,
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<PAGE>
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
LOAN PARTICIPATIONS
The Diversified Bond, Conservative Balanced and Flexible Managed Portfolios may
invest in fixed and floating rate loans ("Loans") arranged through private
negotiations between a corporate borrower and one or more financial institutions
("Lenders"). The portfolios may invest in such Loans generally in the form of
participations in Loans ("Participations"). Participations typically will result
in the Series Fund having a contractual relationship only with the Lender, not
with the borrower. The Series Fund will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In connection with purchasing Participations, the Series Fund
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the Loan, nor any rights of set-off
against the borrower, and the Series Fund may not benefit directly from any
collateral supporting the Loan in which it has purchased the Participation. As a
result, the Series Fund will assume the credit risk of both the borrower and the
Lender that is selling the Participation. In the event of the insolvency of the
Lender selling a Participation, the Series Fund may be treated as a general
creditor of the Lender and may not benefit from any set-off between the Lender
and the borrower.
FOREIGN SECURITIES
The Global Portfolio may invest up to 100% of its total assets in common stock
and convertible securities denominated in a foreign currency and issued by
foreign or domestic issuers. The Diversified Bond Portfolio may invest up to 20%
of its assets in United States currency denominated debt securities issued
outside the United States by foreign or domestic issuers. In addition, the bond
components of the Conservative Balanced and Flexible Managed Portfolios may each
invest up to 20% of their assets in such securities. To the extent permitted by
applicable law, the Conservative Balanced, and Flexible Managed Portfolios may
invest up to 30% of their total assets in debt and equity securities denominated
in a foreign currency and issued by foreign or domestic issuers. Further, to the
extent permitted by applicable insurance law, the Equity Portfolio may invest up
to 30% of its total assets in non-United States currency denominated common
stock and fixed-income securities convertible into common stock of foreign and
U.S. issuers. Securities issued outside the United States and not publicly
traded in the United States, as well as American Depository Receipts ("ADRs"),
and securities denominated in a foreign currency are referred to collectively in
this prospectus as "foreign securities."
ADRs are U.S. dollar-denominated certificates issued by a United States bank or
trust company and represent the right to receive securities of a foreign issuer
deposited in a domestic bank or foreign branch of a United States bank and
traded on a United States exchange or in an over-the-counter market. Investment
in ADRs has certain advantages over direct investment in the underlying foreign
securities because they are easily transferable, have readily available market
quotations, and the foreign issuers are usually subject to comparable auditing,
accounting, and financial reporting standards as domestic issuers.
Foreign securities involve certain risks, which should be considered carefully
by an investor. These risks include political or economic instability in the
country of the issuer, the difficulty of predicting international trade
patterns, the possibility of imposition of exchange controls and, in the case of
securities not denominated in United States currency, the risk of currency
fluctuations. Such securities may be subject to greater fluctuations in price
than domestic securities. Under certain market conditions, foreign securities
may be less liquid than domestic securities. In addition, there may be less
publicly available information about a foreign company than about a domestic
company. Foreign companies generally are not subject to uniform accounting,
auditing, and financial reporting standards comparable to those applicable to
domestic companies. There is generally less government regulation of securities
exchanges, brokers, and listed companies abroad than in the United States, and,
with respect to certain foreign countries, there is a possibility of
expropriation, confiscatory taxation or diplomatic developments which could
affect investment in those countries. Finally, in the event of a default of any
foreign debt obligations, it may be more difficult for a portfolio to obtain or
to enforce a judgment against the issuers of such securities.
If the security is denominated in foreign currency, it may be affected by
changes in currency rates and in exchange control regulations, and costs may be
incurred in connection with conversions between currencies. The portfolios that
may invest in foreign securities may, but need not, enter into forward foreign
currency exchange contracts for the purchase or sale of foreign currency for
hedging purposes, including: locking-in the U.S. dollar price equivalent of
interest or dividends to be paid on such securities which are held by the
portfolio; and protecting the U.S. dollar value of such securities which are
held by the portfolio. The portfolios will not enter into such forward contracts
or maintain a net exposure to such contracts where the consummation of the
contracts would obligate the portfolio to deliver an amount of foreign currency
in excess of the value of the portfolio's portfolio securities or other assets
denominated in that currency. See FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS in
the statement of additional information. In addition, the portfolios may, for
hedging purposes, enter into certain transactions
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<PAGE>
involving options on foreign currencies, foreign currency futures contracts and
options on foreign currency futures contracts. See OPTIONS ON FOREIGN
CURRENCIES, FUTURES CONTRACTS, and OPTIONS ON FUTURES CONTRACTS on pages 19
through 20.
RISK FACTORS RELATING TO INVESTING IN FIXED INCOME SECURITIES RATED BELOW
INVESTMENT GRADE
The Conservative Balanced, Flexible Managed and Equity Portfolios may invest in
below investment grade fixed income securities. Medium to lower rated and
comparable non-rated securities tend to offer higher yields than higher rated
securities with the same maturities because the historical financial condition
of the issuers of such securities may not have been as strong as that of other
issuers. Since medium to lower rated securities generally involve greater risks
of loss of income and principal than higher rated securities, investors should
consider carefully the relative risks associated with investments in high
yield/high risk securities which carry medium to lower ratings and in comparable
non-rated securities. Investors should understand that such securities are not
generally meant for short-term investing.
Fixed income securities are subject to the risk of an issuer's inability to meet
principal and interest payments on the obligations (credit risk) and may also be
subject to price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness of the issuer and general market
liquidity (market risk). The value of the fixed income securities in the
portfolio will be directly impacted by the market perception of the
creditworthiness of the securities' issuers and will fluctuate inversely with
changes in interest rates. Lower rated or unrated securities are more likely to
react to developments affecting market and credit risk than are more highly
rated securities, which react primarily to movements in the general level of
interest rates. For example, because investors generally perceive that there are
greater risks associated with investing in medium or lower rated securities, the
yields and prices of such securities may tend to fluctuate more than those of
higher rated securities. Moreover, in the lower quality segments of the fixed
income securities market, changes in perception of the creditworthiness of
individual issuers tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the fixed income securities
market. The yield and price of medium to lower rated securities therefore may
experience greater volatility than is the case with higher rated securities.
Prudential considers both credit risk and market risk in selecting securities
for the portfolio. By holding a diversified selection of such securities, the
portfolio seeks to reduce this volatility.
The secondary market for high yield/high risk securities, which is concentrated
in relatively few market makers, may not be as liquid as the secondary market
for more highly rated securities. Under adverse market or economic conditions,
the secondary market for high yield/high risk securities could contract further,
independent of any specific adverse changes in the condition of a particular
issuer. As a result, Prudential could find it more difficult to sell such
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such lower
rated or unrated securities therefore may be less than the prices used in
calculating the portfolio's net asset value. In the absence of readily available
market quotations, high yield/high risk securities will be valued by the Series
Fund's Board of Directors using a method that, in the good faith belief of the
Board, accurately reflects fair value. Valuing such securities in an illiquid
market is a difficult task. The Board's judgment plays a more significant role
in valuing such securities than those securities for which more objective market
data are available.
From time to time, federal laws have been enacted which have required the
divestiture by companies of their investments in high yield bonds and have
limited the deductibility of interest by certain corporate issuers of high yield
bonds. These types of laws could adversely affect the portfolio's net asset
value and investment practices, the secondary market for high yield securities,
the financial condition of issuers of these securities and the value of
outstanding high yield securities. There is currently no legislation pending
that would adversely impact the market for high yield/high risk securities.
However, there can be no assurance that such legislation will not be proposed or
enacted in the future.
OPTIONS ON EQUITY SECURITIES
The Conservative Balanced, Flexible Managed, Equity, and Global Portfolios may
purchase and write (i.e., sell) put and call options on equity securities that
are traded on securities exchanges, are listed on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"), or that result from
privately negotiated transactions with broker-dealers ("OTC options"). A call
option is a short-term contract pursuant to which the purchaser or holder, in
return for a premium paid, has the right to buy the equity security underlying
the option at a specified exercise price at any time during the term of the
option. The writer of the call option, who receives the premium, has the
obligation, upon exercise of the option, to deliver the underlying equity
security against payment of the exercise price. A put option is a similar
contract which gives the purchaser or holder, in return for a premium, the right
to sell the underlying equity security at a specified price during the term of
the option. The
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<PAGE>
writer of the put, who receives the premium, has the obligation to buy the
underlying equity security at the exercise price upon exercise by the holder of
the put.
A portfolio will write only "covered" options on stocks. A call option is
covered if: (1) the portfolio owns the security underlying the option; or (2)
the portfolio has an absolute and immediate right to acquire that security
without additional cash consideration (or for additional cash consideration held
in a segregated account by its custodian) upon conversion or exchange of other
securities it holds; or (3) the portfolio holds on a share-for-share basis a
call on the same security as the call written where the exercise price of the
call held is equal to or less than the exercise price of the call written or
greater than the exercise price of the call written if the difference is
maintained by the portfolio in cash, Treasury bills or other high grade
short-term debt obligations in a segregated account with its custodian. A put
option is covered if: (1) the portfolio deposits and maintains with its
custodian in a segregated account cash, U.S. Government securities or other
liquid unencumbered assets having a value equal to or greater than the exercise
price of the option; or (2) the portfolio holds on a share-for-share basis a put
on the same security as the put written where the exercise price of the put held
is equal to or greater than the exercise price of the put written or less than
the exercise price if the difference is maintained by the portfolio in cash,
Treasury bills or other high grade short-term debt obligations in a segregated
account with its custodian.
The Conservative Balanced, Flexible Managed, Equity, and Global Portfolios may
also purchase "protective puts" (i.e., put options acquired for the purpose of
protecting a portfolio security from a decline in market value). In exchange for
the premium paid for the put option, the portfolio acquires the right to sell
the underlying security at the exercise price of the put regardless of the
extent to which the underlying security declines in value. The loss to the
portfolio is limited to the premium paid for, and transaction costs in
connection with, the put plus the initial excess, if any, of the market price of
the underlying security over the exercise price. However, if the market price of
the security underlying the put rises, the profit the portfolio realizes on the
sale of the security will be reduced by the premium paid for the put option less
any amount (net of transaction costs) for which the put may be sold. Similar
principles apply to the purchase of puts on debt securities and stock indices,
as described under OPTIONS ON DEBT SECURITIES, below and OPTIONS ON STOCK
INDICES, page 18.
These portfolios may purchase call options for hedging and investment purposes.
No portfolio intends to invest more than 5% of its net assets at any one time in
the purchase of call options on stocks. These portfolios may also purchase
putable and callable equity securities, which are securities coupled with a put
or a call option provided by the issuer.
If the writer of an exchange-traded option wishes to terminate the obligation,
he or she may effect a "closing purchase transaction" by buying an option of the
same series as the option previously written. Similarly, the holder of an
exchange-traded option may liquidate his or her position by exercise of the
option or by effecting a "closing sale transaction" by selling an option of the
same series as the option previously purchased. A portfolio will realize a
profit from a closing transaction if the price of the transaction is less than
the premium received from writing the option or is more than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from a closing purchase transaction with respect to a call option
is likely to be offset in whole or in part by appreciation of the underlying
equity security owned by the portfolio. Unlike exchange-traded options, OTC
options generally do not have a continuous liquid market. Consequently, the
portfolio will generally be able to realize the value of an OTC option it has
purchased only by exercising it or reselling it to the dealer who issued it.
Similarly, when the portfolio writes an OTC option, it generally will be able to
close out the OTC option prior to its expiration only by entering into a closing
purchase transaction with the dealer to which the portfolio originally wrote the
OTC option. There is, in general, no guarantee that closing purchase or closing
sale transactions can be effected.
There are certain special risks associated with the portfolios' transactions in
stock options, in addition to a risk that the market value of the security will
move adversely to the portfolio's option position. These risks, which relate
primarily to liquidity, are discussed in the statement of additional
information.
OPTIONS ON DEBT SECURITIES
The Diversified Bond, Government Income, Conservative Balanced, and Flexible
Managed Portfolios may purchase and write (i.e. sell) put and call options on
debt securities (including U.S. Government debt securities) that are traded on
U.S. securities exchanges or that result from privately negotiated transactions
with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York ("OTC options"). Options on debt are similar to options
on stock, except that the option holder has the right to take or make delivery
of a debt security, rather than stock.
A portfolio will write only "covered" options. Options on debt securities are
covered in the same manner as options on stocks, discussed above, except that,
in the case of call options on U.S. Treasury Bills, the portfolio might own U.S.
Treasury Bills of a different series from those underlying the call option, but
with a principal amount and value corresponding to the option contract amount
and a maturity date no later than that of the securities deliverable
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<PAGE>
under the call option. The principal reason for a portfolio to write an option
on one or more of its securities is to realize through the receipt of the
premiums paid by the purchaser of the option a greater current return than would
be realized on the underlying security alone. Calls on debt securities will not
be written when, in the opinion of Prudential, interest rates are likely to
decline significantly, because under those circumstances the premium received by
writing the call likely would not fully offset the foregone appreciation in the
value of the underlying security.
These portfolios may also write straddles (i.e., a combination of a call and a
put written on the same security at the same strike price where the same issue
of the security is considered "cover" for both the put and the call). In such
cases, the portfolio will also segregate or deposit for the benefit of the
portfolio's broker cash or liquid high-grade debt obligations equivalent to the
amount, if any, by which the put is "in the money." It is contemplated that each
portfolio's use of straddles will be limited to 5% of the portfolio's net assets
(meaning that the securities used for cover or segregated as described above
will not exceed 5% of the portfolio's net assets at the time the straddle is
written). The writing of a call and a put on the same security at the same
strike price where the call and the put are covered by different securities is
not considered a straddle for purposes of this limit.
These portfolios may purchase "protective puts" in an effort to protect the
value of a security that it owns against a substantial decline in market value.
Protective puts are described in OPTIONS ON EQUITY SECURITIES, page 16. A
portfolio may wish to protect certain portfolio securities against a decline in
market value at a time when put options on those particular securities are not
available for purchase. A portfolio may therefore purchase a put option on
securities other than those it wishes to protect even though it does not hold
such other securities in its portfolio. While changes in the value of the put
option should generally offset changes in the value of the securities being
hedged, the correlation between the two values may not be as close in these
transactions as in transactions in which the portfolio purchases a put option on
an underlying security it owns.
These portfolios may also purchase call options on debt securities for hedging
or investment purposes. No portfolio currently intends to invest more than 5% of
its net assets at any one time in the purchase of call options on debt
securities. A portfolio may also purchase putable and callable debt securities,
which are securities coupled with a put or call option provided by the issuer.
If the writer of an exchange-traded option wishes to terminate the obligation,
he or she may effect a "closing purchase transaction" or a "closing sale
transaction" in a manner similar to that discussed above in connection with
options on equity securities.
The staff of the Securities and Exchange Commission has taken the position that
purchased OTC options and the assets used as "cover" for written OTC options are
illiquid for purposes of a portfolio's 15% limitation on investment in illiquid
securities. However, pursuant to the terms of certain no-action letters issued
by the staff, the securities used as cover for written OTC options may be
considered liquid provided that the portfolio sells OTC options only to
qualified dealers who agree that the portfolio may repurchase any OTC option it
writes for a maximum price to be calculated by a predetermined formula. In such
cases, the OTC option would be considered illiquid only to the extent that the
maximum repurchase price under the formula exceeds the intrinsic value of the
option.
There are certain risks associated with the portfolios' transactions in debt
options, in addition to a risk that the market value of the security will move
adversely to the portfolio's option position. These risks, which relate
primarily to liquidity, are discussed in the statement of additional
information.
OPTIONS ON STOCK INDICES
The Conservative Balanced, Flexible Managed, Equity, and Global Portfolios may
purchase and sell put and call options on stock indices traded on securities
exchanges, listed on NASDAQ or that result from privately negotiated
transactions with broker-dealers ("OTC options"). The Stock Index Portfolio may
utilize options on stock indices by constructing "put/call" combinations that
are economically comparable to a long stock index futures position, as described
in the statement of additional information. Options on stock indices are similar
to options on stock except that, rather than the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of the stock index upon which the option is based is greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
option. This amount of cash is equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
times a specified multiple (the "multiplier"). The writer of the option is
obligated, in return for the premium received, to make delivery of this amount.
Unlike stock options, all settlements are in cash, and gain or loss depends on
price movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements in individual stocks.
The multiplier for an index option performs a function similar to the unit of
trading for a stock option. It determines the total dollar value per Contract of
each point in the difference between the exercise price of an option and the
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current level of the underlying index. A multiplier of 100 means that a
one-point difference will yield $100. Options on different indices may have
different multipliers.
A portfolio will write only "covered" options on stock indices. The manner in
which these options are covered is discussed in the statement of additional
information.
These portfolios may purchase put and call options for hedging and investment
purposes. No portfolio intends to invest more than 5% of its net assets at any
time in the purchase of puts and calls on stock indices. A portfolio may effect
closing sale and purchase transactions involving options on stock indices, as
described above in connection with stock options.
OPTIONS ON FOREIGN CURRENCIES
The Conservative Balanced, Flexible Managed, Equity, and Global Portfolios may
purchase and write put and call options on foreign currencies traded on U.S. or
foreign securities exchanges or boards of trade for hedging purposes in a manner
similar to that in which forward foreign currency exchange contracts (discussed
under FOREIGN SECURITIES, page 15 and futures contracts on foreign currencies
(discussed under FUTURES CONTRACTS, below) will be employed. Options on foreign
currencies are similar to options on stock, except that the option holder has
the right to take or make delivery of a specified amount of foreign currency,
rather than stock.
A portfolio may purchase and write options to hedge the portfolio's securities
denominated in foreign currencies. If there is a decline in the dollar value of
a foreign currency in which the portfolio's securities are denominated, the
dollar value of such securities will decline even though the foreign currency
value remains the same. To hedge against the decline of the foreign currency, a
portfolio may purchase put options on such foreign currency. If the value of the
foreign currency declines, the gain realized on the put option would offset, in
whole or in part, the adverse effect such decline would have on the value of the
portfolio's securities. Alternatively, a portfolio may write a call option on
the foreign currency. If the foreign currency declines, the option would not be
exercised and the decline in the value of the portfolio securities denominated
in such foreign currency would be offset in part by the premium the portfolio
received for the option.
If, on the other hand, the portfolio manager anticipates purchasing a foreign
security and also anticipates a rise in such foreign currency (thereby
increasing the cost of such security), a portfolio may purchase call options on
the foreign currency. The purchase of such options could offset, at least
partially, the effects of the adverse movements of the exchange rates.
Alternatively, a portfolio could write a put option on the currency and, if the
exchange rates move as anticipated, the option would expire unexercised.
A portfolio's successful use of currency exchange options on foreign currencies
depends upon the manager's ability to predict the direction of the currency
exchange markets and political conditions, which requires different skills and
techniques than predicting changes in the securities markets generally. For
instance, if the currency being hedged has moved in a favorable direction, the
corresponding appreciation of the portfolio's securities denominated in such
currency would be partially offset by the premiums paid on the options. Further,
if the currency exchange rate does not change, the portfolio net income would be
less than if the portfolio had not hedged since there are costs associated with
options.
The use of these options is subject to various additional risks. The correlation
between movements in the price of options and the price of the currencies being
hedged is imperfect. The use of these instruments will hedge only the currency
risks associated with investments in foreign securities, not market risks. The
portfolio's ability to establish and maintain positions will depend on market
liquidity. The ability of the portfolio to close out an option depends upon a
liquid secondary market. There is no assurance that liquid secondary markets
will exist for any particular option at any particular time.
FUTURES CONTRACTS
The Conservative Balanced, Flexible Managed, Stock Index, Equity, and Global
Portfolios may, to the extent permitted by applicable regulations, attempt to
reduce the risk of investment in equity securities by hedging a portion of their
equity portfolios through the use of stock index futures contracts. A stock
index futures contract is an agreement in which the seller of the contract
agrees to deliver to the buyer an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made.
The Diversified Bond, Government Income, Conservative Balanced, Flexible
Managed, and Global Portfolios may, to the extent permitted by applicable
regulations, purchase and sell for hedging purpose futures contracts on
interest-bearing securities (such as U.S. Treasury bonds and notes) or interest
rate indices (referred to collectively as "interest rate futures contracts").
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The Conservative Balanced, Flexible Managed, Equity, and Global Portfolios may,
to the extent permitted by applicable regulations, purchase and sell futures
contracts on foreign currencies or groups of foreign currencies for hedging
purposes.
When the futures contract is entered into, each party deposits with a futures
commission merchant (or in a segregated custodial account) approximately 5% of
the contract amount, called the "initial margin." Subsequent payments to and
from the futures commission merchant, called the "variation margin," will be
made on a daily basis as the underlying security, index or rate fluctuates
making the long and short positions in the futures contracts more or less
valuable, a process known as "marking to the market." The Board of Directors
currently intends to limit futures trading for hedging purposes so that a
portfolio will not enter into futures contracts or related options if the
aggregate initial margins and premiums exceed 5% of the fair market value of its
assets, after taking into account unrealized profits and unrealized losses on
any such contracts and options.
In addition, as permitted by applicable regulations, the Conservative Balanced
and Flexible Managed Portfolios may purchase and sell stock index futures
contracts and interest rate futures contracts to adjust the portfolio's asset
mix. For example, if the investment manager expects bonds to outperform stocks,
it may purchase interest rate futures contracts rather than actually selling
stocks and buying bonds. Neither portfolio will enter into futures contracts or
related options for this purpose if the aggregate initial margins and premiums
for futures and options for this purpose exceed 5% of the fair market of that
portfolio's assets, taking into account unrealized profits and unrealized losses
on any such futures and options.
A portfolio's successful use of futures contracts depends upon the investment
manager's ability to predict the direction of the relevant market. The
correlation between movement in the price of the futures contract and the price
of the securities or currencies being hedged is imperfect. The ability of a
portfolio to close out a futures position depends on a liquid secondary market.
There is no assurance that liquid secondary markets will exist for any
particular futures contract at any particular time.
OPTIONS ON FUTURES CONTRACTS
To the extent permitted by applicable insurance law and federal regulations, the
Conservative Balanced, Flexible Managed, Stock Index, Equity, and Global
Portfolios may enter into certain transactions involving options on stock index
futures contracts; the Diversified Bond, Government Income, Conservative
Balanced, Flexible Managed, and Global Portfolios may enter into certain
transactions involving options on interest rate futures contracts; and the
Conservative Balanced, Flexible Managed, Equity, and Global Portfolios may enter
into certain transactions involving options on foreign currency futures
contracts. An option on a futures contract gives the purchaser or holder the
right, but not the obligation, to assume a position in a futures contract (a
long position if the option is a call and a short position if the option is a
put) at a specified price at any time during the option exercise period. The
writer of the option is required upon exercise to assume an offsetting futures
position (a short position if the option is a call and long position if the
option is a put). Upon exercise of the option, the assumption of offsetting
futures positions by the writer and holder of the option will be accomplished by
delivery of the accumulated balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. As an alternative to
exercise, the holder or writer of an option may terminate a position by selling
or purchasing an option of the same series. There is no guarantee that such
closing transactions can be effected. The Stock Index Portfolio intends to
utilize options on stock index futures contracts by constructing "put/call"
combinations that are economically comparable to a long stock index futures
position, as described in the statement of additional information. The other
portfolios intend to utilize options on futures contracts for the same purposes
that they use the underlying futures contracts.
REPURCHASE AGREEMENTS
The portfolios may enter into repurchase agreements, subject to each portfolio's
investment limit in short-term debt obligations, whereby the seller of a
security agrees to repurchase that security from the portfolio at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the portfolio's
money is invested in the repurchase agreement. The repurchase agreements will at
all times be fully collateralized in an amount at least equal to the resale
price. The instruments held as collateral are valued daily, and if the value of
the instruments declines, the portfolio will require additional collateral. If
the seller defaults and the value of the collateral securing the repurchase
agreement declines, the portfolio may incur a loss. All portfolios, except the
Global Portfolio, participate in a joint repurchase account pursuant to an order
of the SEC. On a daily basis, any uninvested cash balances of the portfolios may
be aggregated and invested in one or more repurchase agreements. Each portfolio
participates in the income earned or accrued in the joint account based on the
percentage of its investment.
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REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The Diversified Bond and Government Income Portfolios, as well as the fixed
income portions of the Conservative Balanced and Flexible Managed Portfolios,
may use reverse repurchase agreements and dollar rolls. The money market portion
of any portfolio may use reverse repurchase agreements. Reverse repurchase
agreements involve the sale of securities held by a portfolio with an agreement
by the portfolio to repurchase the same securities at an agreed upon price and
date. During the reverse repurchase period, the portfolio often continues to
receive principal and interest payments on the sold securities. The terms of
each agreement reflect a rate of interest for use of the funds for the period,
and thus these agreements have the characteristics of borrowing by the
portfolio. Dollar rolls involve sales by a portfolio of securities for delivery
in the current month with a simultaneous contract to repurchase substantially
similar securities (same type and coupon) from the same party at an agreed upon
price and date. During the roll period, the portfolio forgoes principal and
interest paid on the securities. A portfolio is compensated by the difference
between the current sales price and the forward price for the future purchase
(often referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. A "covered roll" is a specific type of dollar roll
for which there is an offsetting cash position or a cash equivalent security
position which matures on or before the forward settlement date of the dollar
roll transaction. A portfolio will establish a segregated account with its
custodian in which it will maintain cash, U.S. Government securities or other
liquid unencumbered assets equal in value to its obligations in respect of
reverse repurchase agreements and dollar rolls. Reverse repurchase agreements
and dollar rolls involve the risk that the market value of the securities
retained by the portfolio may decline below the price of the securities the
portfolio has sold but is obligated to repurchase under the agreement. In the
event the buyer of securities under a reverse repurchase agreement or dollar
roll files for bankruptcy or becomes insolvent, the portfolio's use of the
proceeds of the agreement may be restricted pending a determination by the other
party, or its trustee or receiver, whether to enforce the portfolio's obligation
to repurchase the securities. The Diversified Bond and Government Income
Portfolios, as well as the fixed income portions of the Conservative Balanced
and Flexible Managed Portfolios, will not obligate more than 30% of their net
assets in connection with reverse repurchase agreements and dollar rolls. No
other portfolio will obligate more than 10% of its net assets in connection with
reverse repurchase agreements.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
From time to time, in the ordinary course of business, the Diversified Bond,
Government Income, Conservative Balanced, Flexible Managed, Equity and Global
Portfolios may purchase or sell securities on a when-issued or delayed delivery
basis, that is, delivery and payment can take place a month or more after the
date of the transaction. A portfolio will make commitments for such when-issued
transactions only with the intention of actually acquiring the securities. A
portfolio's custodian will maintain, in a separate account, cash, U.S.
Government securities or other liquid unencumbered assets having a value equal
to or greater than such commitments. If a portfolio chooses to dispose of the
right to acquire a when-issued security prior to its acquisition, it could, as
with the disposition of any other portfolio security, incur a gain or loss due
to market fluctuations.
In addition, the short-term portions of any of the portfolios may purchase money
market securities on when-issued or delayed delivery basis on the terms set
forth in the Appendix to this prospectus.
SHORT SALES
The Diversified Bond, Government Income, Conservative Balanced and Flexible
Managed Portfolios may sell securities they do not own in anticipation of a
decline in the market value of those securities ("short sales"). To complete
such a transaction, the portfolio will borrow the security to make delivery to
the buyer. The portfolio is then obligated to replace the security borrowed by
purchasing it at the market price at the time of replacement. The price at such
time may be more or less than the price at which the security was sold by the
portfolio. Until the security is replaced, the portfolio is required to pay to
the lender any interest which accrues during the period of the loan. To borrow
the security the portfolio may be required to pay a fee which would increase the
cost of the security sold. The proceeds of the short sale will be retained by
the broker to the extent necessary to meet margin requirements until the short
position is closed out. Until the portfolio replaces the borrowed security, it
will (a) maintain in a segregated account cash, U.S. Government securities or
other liquid unencumbered assets at such a level that the amount deposited in
the account plus the amount deposited with the broker as collateral will equal
the current market value of the security sold short and will not be less than
the market value of the security at the time it was sold short or (b) otherwise
cover its short position.
The portfolio will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the portfolio replaces the borrowed security. The portfolio will realize a gain
if the security declines in price between those dates. This result is the
opposite of what one would expect from a cash purchase of a long position in a
security. The amount of any gain will be decreased, and the amount of any loss
will be increased, by the amount of any fee or interest paid in connection with
the short sale. No more
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than 25% of any portfolio's net assets will be, when added together: (i)
deposited as collateral for the obligation to replace securities borrowed to
effect short sales and (ii) allocated to segregated accounts in connection with
short sales.
SHORT SALES AGAINST THE BOX
All portfolios available to The Prudential Variable Contract Account-24 may make
short sales of securities or maintain a short position, provided that at all
times when a short position is open the portfolio owns an equal amount of such
securities or securities convertible into or exchangeable, with or without
payment of any further consideration, for an equal amount of the securities of
the same issuer as the securities sold short (a "short sale against the box");
provided, that if further consideration is required in connection with the
conversion or exchange, cash, U.S. Government securities or other liquid
unencumbered assets in an amount equal to such consideration must be put in a
segregated account.
INTEREST RATE SWAPS
The Diversified Bond and Government Income Portfolios and the fixed income
portions of the Conservative Balanced and Flexible Managed Portfolios may use
interest rate swaps to increase or decrease a portfolio's exposure to long- or
short-term interest rates. No portfolio currently intends to invest more than 5%
of its net assets at any one time in interest rate swaps. For more information,
see the statement of additional information.
LOANS OF PORTFOLIO SECURITIES
All of the portfolios available to The Prudential Variable Contract Account-24
may from time to time lend the securities they hold to broker-dealers, provided
that such loans are made pursuant to written agreements and are continuously
secured by collateral in the form of cash, U.S. Government securities or
irrevocable standby letters of credit in an amount equal to at least the market
value at all times of the loaned securities plus the accrued interest and
dividends. During the time securities are on loan, the portfolio will continue
to receive the interest and dividends or amounts equivalent thereto, on the
loaned securities while receiving a fee from the borrower or earning interest on
the investment of the cash collateral. The right to terminate the loan will be
given to either party subject to appropriate notice. Upon termination of the
loan, the borrower will return to the lender securities identical to the loaned
securities. The portfolio will not have the right to vote securities on loan,
but would terminate the loan and retain the right to vote if that were
considered important with respect to the investment.
The primary risk in lending securities is that the borrower may become insolvent
on a day on which the loaned security is rapidly advancing in price. In such
event, if the borrower fails to return the loaned securities, the existing
collateral might be insufficient to purchase back the full amount of the
security loaned, and the borrower would be unable to furnish additional
collateral. The borrower would be liable for any shortage; but the portfolio
would be an unsecured creditor with respect to such shortage and might not be
able to recover all or any of it. However, this risk may be minimized by a
careful selection of borrowers and securities to be lent and by monitoring
collateral.
No portfolio will lend securities to broker-dealers affiliated with Prudential,
including Prudential Securities Incorporated. This will not affect a portfolio's
ability to maximize its securities lending opportunities.
INVESTMENT RESTRICTIONS APPLICABLE
TO THE PORTFOLIOS
The Series Fund is subject to certain investment restrictions which are
fundamental to the operations of the Series Fund and may not be changed except
with the approval of a majority vote (as defined under INVESTMENT OBJECTIVES AND
POLICIES OF THE PORTFOLIOS on page 5) of the persons participating in the
affected portfolio.
The investments of the various portfolios currently available to The Prudential
Variable Contract Account-24 are generally subject to certain additional
restrictions under state laws. In the event of future amendments to the
applicable statutes, each of these portfolios will comply, without the approval
of the shareholders, with the statutory requirements as so modified.
For a detailed discussion of investment restrictions applicable to the Series
Fund, see INVESTMENT RESTRICTIONS in the statement of additional information.
22 - Series Fund
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INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES
The Series Fund has entered into an Investment Advisory Agreement with
Prudential under which Prudential will, subject to the direction of the Board of
Directors of the Series Fund, be responsible for the management of the Series
Fund, and provide investment advice and related services to each portfolio. The
directors, in addition to reviewing the actions of the Series Fund's investment
advisor, decide upon matters of general policy. The Series Fund's officers
conduct and supervise the daily business operations of the Series Fund.
Prudential, founded in 1875 under the laws of New Jersey, is subject to
regulation by the Department of Insurance of the State of New Jersey as well as
by the insurance departments of all the other states and jurisdictions in which
it does business. Prudential is registered both as a broker-dealer under the
Securities Exchange Act of 1934 and as an investment advisor under the
Investment Advisers Act of 1940. Prudential's principal business address is
Prudential Plaza, Newark, New Jersey 07102-3777.
Subject to Prudential's supervision, substantially all of the investment
advisory services provided to the Series Fund by Prudential, with respect to the
portfolios currently available to The Prudential Variable Contract Account-24,
are furnished by its wholly-owned subsidiary, PIC, pursuant to the Service
Agreement between Prudential and PIC which provides that a portion of the fee
received by Prudential for providing investment advisory services will be paid
to PIC. PIC is registered as an investment advisor under the Investment Advisers
Act of 1940.
Under the Investment Advisory Agreement, Prudential receives an investment
management fee as compensation for its services to the Series Fund. The fee is a
daily charge, payable quarterly, equal to an annual percentage of the average
daily net assets of each individual portfolio.
The investment management fee for the Stock Index Portfolio is equal to an
annual rate of 0.35% of the average daily net assets of the portfolio. The
investment management fee for the Diversified Bond and Government Income
Portfolios is equal to an annual rate of 0.4% of the average daily net assets of
each of the portfolios. For the Equity Portfolio, the fee is equal to an annual
rate of 0.45% of the average daily net assets of the portfolio. The fee for the
Conservative Balanced is equal to an annual rate of 0.55% of the average daily
net assets of the portfolio. For the Flexible Managed Portfolio, the fee is
equal to an annual rate of 0.6% of the average daily net assets of the
portfolio. The fee for the Global Portfolio is equal to an annual rate of 0.75%
of the average daily net assets of the portfolio. For further information about
the expenses of the Series Fund, see INVESTMENT MANAGEMENT ARRANGEMENTS AND
EXPENSES in the statement of additional information.
PURCHASE AND REDEMPTION OF SHARES
Shares in the Series Fund are currently offered continuously, without sales
charge, at prices equal to the respective net asset values of the portfolios,
only to the Accounts to fund benefits payable under the Contracts. The Series
Fund may at some later date also offer its shares to other separate accounts of
Prudential or other insurers. Pruco Securities Corporation ("Prusec"), an
indirect wholly-owned subsidiary of Prudential, acts as the principal
underwriter of the Series Fund. Prusec's principal business address is 213
Washington Street, Newark, New Jersey 07102-2992.
The Series Fund is required to redeem all full and fractional shares of the
Series Fund for cash within 7 days of receipt of proper notice of redemption.
The redemption price is the net asset value per share next determined after the
initial receipt of proper notice of redemption.
The right to redeem shares or to receive payment with respect to any redemption
may be suspended only for any period during which trading on the NYSE is
restricted as determined by the Securities and Exchange Commission or when such
exchange is closed (other than customary weekend and holiday closings), for any
period during which an emergency exists as defined by the Securities and
Exchange Commission as a result of which disposal of a portfolio's securities or
determination of the net asset value of each portfolio is not reasonably
practicable, and for such other periods as the Securities and Exchange
Commission may by order permit for the protection of shareholders of each
portfolio.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each portfolio available to The Prudential
Variable Contract Account-24 is determined once daily, as of 4:15 p.m. New York
City time on each day during which the NYSE is open for business. The NYSE is
open for business Monday through Friday except for the days on which the
following holidays are observed: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
In the event the New York Stock Exchange closes early on any
23 - Series Fund
<PAGE>
business day, the net asset value of each portfolio shall be determined at a
time between such closing and 4:15 p.m. New York City time. The net asset value
per share of each such portfolio is computed by adding the sum of the value of
the securities held by that portfolio plus any cash or other assets it holds,
subtracting all its liabilities, and dividing the result by the total number of
shares outstanding of that portfolio at such time. Expenses, including the
investment management fee payable to Prudential, are accrued daily.
In determining the net asset value of the Diversified Bond and Government Income
Portfolios, securities (other than debt obligations with remaining maturities of
less than 60 days, which are valued at amortized cost) 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.
The net asset value of the Stock Index, Equity, and Global Portfolios will be
determined in the following manner. Any security for which the primary market is
on an exchange is generally valued at the last sale price on such exchange as of
the close of the NYSE (which is currently 4:00 p.m. New York City 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. 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. Short-term debt instruments which
mature in less than 60 days are valued at amortized cost. For valuation
purposes, quotations of foreign securities in a foreign currency are converted
to U.S. dollar equivalents.
In determining the net asset value of each of the Balanced Portfolios, the
method of valuation of a security depends on the type of investment involved.
Intermediate or long-term fixed income securities are valued in the same way as
such securities in the Diversified Bond Portfolio, and common stocks and
convertible debt securities are valued in the same way as such securities are
valued in the Equity Portfolio. With respect to the money market portion of the
Conservative Balanced and Flexible Managed Portfolios, all short-term debt
obligations with a maturity of 12 months or less are valued on an amortized cost
basis in accordance with an order obtained from the Securities and Exchange
Commission. Each Balanced Portfolio must maintain a dollar-weighted average
maturity for its short-term debt obligations of 120 days or less. The values
determined by the amortized cost method may deviate from market value under
certain circumstances. The Board of Directors has established procedures to
monitor whether any material deviation occurs and, if so, will promptly consider
what action, if any, should be initiated to prevent unfair results to Contract
owners. The short-term portion of these portfolios may be invested only in high
quality instruments, as described in the Appendix to this prospectus.
With respect to all the portfolios which utilize such investments, options on
stock and stock indices traded on national securities exchanges are valued at
the average of the bid and asked prices as of the close of the respective
exchange (which is currently 4:10 p.m. New York City time). Futures contracts
and options thereon are valued at the last sale price at the close of the
applicable commodities exchanges or board of trade (which is currently 4:15 p.m.
New York City time) or, if there was no sale on the applicable commodities
exchange or board of trade on such day, at the mean between the most recently
quoted bid and asked prices on such exchange or board of trade.
Securities or assets for which market quotations are not readily available will
be valued at fair value as determined by Prudential under the direction of the
Board of Directors of the Series Fund.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
The Series Fund intends to continue to qualify as a regulated investment company
under certain provisions of the Internal Revenue Code (the "Code"). Under such
provisions, the Series Fund will not be subject to federal income tax on the
part of its net ordinary income and net realized capital gains that it
distributes to the Accounts. The Series Fund intends to meet the requirements
for treatment as a regulated investment company both on a portfolio-by-portfolio
basis and for the Series Fund as a whole. The Series Fund's compliance with
those requirements may prevent a portfolio from utilizing options and futures
contracts as much as the portfolio manager might otherwise believe to be
desirable.
The Series Fund intends to distribute as dividends substantially all the net
investment income, if any, of each portfolio. For dividend purposes, net
investment income of each portfolio available to The Prudential Variable
Contract Account-24 will consist of all payments of dividends (other than stock
dividends) or interest received by such portfolio less the estimated expenses of
such portfolio (including fees payable to the Investment Manager). Dividends
from investment income of the portfolios will normally be declared and
reinvested in additional full and fractional shares quarter-annually.
24 - Series Fund
<PAGE>
The Series Fund will also declare and distribute annually all net realized
capital gains of the portfolios available to The Prudential Variable Contract
Account-24.
The Code generally imposes a 4% excise tax on a portion of the undistributed
income of a regulated investment company if that company fails to distribute
required percentages of its ordinary income and capital gain net income. The
Series Fund intends to employ practices that will eliminate or minimize the
imposition of this excise tax.
In addition, Section 817(h) of the Code requires that assets underlying variable
life insurance and variable annuity contracts must meet certain diversification
requirements if the contracts are to qualify as life insurance and annuity
contracts. The diversification requirements ordinarily must be met within 1 year
after Contract owner funds are first allocated to the particular portfolio, and
within 30 days after the end of each calendar quarter thereafter. In order to
meet the diversification requirements set forth in Treasury Regulations issued
pursuant to Section 817(h), each portfolio must meet one of two alternative
tests. Under the first test, no more than 55% of the portfolio's assets can be
invested in any one investment; no more than 70% of the assets can be invested
in any two investments; no more than 80% of the assets can be invested in any
three investments; and no more than 90% can be invested in any four investments.
Under the second test, the portfolio must meet the tax law diversification
requirements for a regulated investment company and no more than 55% of the
value of the portfolio's assets can be invested in cash, cash items, Government
securities, and securities of other regulated investment companies.
For purposes of determining whether a variable account is adequately
diversified, each United States Government agency or instrumentality is treated
as a separate issuer for purposes of determining whether a variable account is
adequately diversified. The Series Fund's compliance with the diversification
requirements will generally limit the amount of assets that may be invested in
federally insured certificates of deposit and all types of securities issued or
guaranteed by each United States Government agency or instrumentality.
The Global Portfolio may be required to pay withholding or other taxes to
foreign governments. If so, the taxes will reduce the portfolio's dividends.
Foreign tax withholding from dividends and interest (if any) is typically set at
a rate between 10% and 15%. While Contract owners will thus bear the cost of
foreign tax withholding, they will not be able to claim a foreign tax credit or
deduction for foreign taxes paid by the portfolio.
The foregoing is a general and abbreviated summary of the applicable provisions
of the Code and Treasury Regulations currently in effect. For the complete
provisions, reference should be made to the pertinent Code sections and the
Treasury Regulations promulgated thereunder. The Code and these Regulations are
subject to change by legislative or administrative actions.
OTHER INFORMATION CONCERNING THE SERIES FUND
INCORPORATION AND AUTHORIZED STOCK
The Series Fund was incorporated under Maryland law on November 15, 1982. The
authorized Capital Stock of the Series Fund consists of 2 billion shares, par
value $0.01 per share. As of the date of this prospectus, the shares of Capital
Stock are divided into fifteen classes: Money Market Portfolio Capital Stock
(225 million shares), Diversified Bond Portfolio Capital Stock (200 million
shares), Government Income Portfolio Capital Stock (100 million shares), Zero
Coupon Bond Portfolio 2000 Capital Stock (25 million shares), Zero Coupon Bond
Portfolio 2005 Capital Stock (50 million shares), Conservative Balanced
Portfolio Capital Stock (300 million shares), Flexible Managed Portfolio Capital
Stock (300 million shares), High Yield Bond Portfolio Capital Stock (100 million
shares), Stock Index Portfolio Capital Stock (100 million shares), Equity Income
Portfolio Capital Stock (100 million shares), Equity Portfolio Capital Stock
(200 million shares), Prudential Jennison Portfolio Capital Stock (50 million
shares), Small Capitalization Stock Portfolio Capital Stock (50 million shares),
Global Portfolio Capital Stock (100 million shares), Natural Resources Portfolio
Capital Stock (100 million shares). The shares of each portfolio, when issued,
will be fully paid and non-assessable, will have no conversion, exchange or
similar rights, and will be freely transferable.
Each share of stock will have a pro rata interest in the assets of the portfolio
to which the stock of that class relates and will have no interest in the assets
of any other portfolio. Holders of shares of any portfolio are entitled to
redeem their shares as set forth under PURCHASE AND REDEMPTION OF SHARES, page
23.
VOTING RIGHTS
The voting rights of Contract owners or Participants, and limitations on those
rights, are explained in the accompanying prospectus for the Contracts.
Prudential and certain other insurers with separate accounts which invest in the
Series Fund, as the owners of the assets in the Accounts, vote all of the shares
of the Series Fund, but they will generally do so in accordance with the
instructions of Contract owners or Participants pursuant to the current SEC
requirements and staff interpretations regarding pass-through voting. Under
certain circumstances, however, the Companies may disregard voting instructions
received from Contract owners or Participants. The
25 - Series Fund
<PAGE>
Series Fund does not hold annual shareholders meetings in any year in which it
is not required to do so either under Maryland law or the Investment Company Act
of 1940. For additional information describing how the Companies will vote the
shares of the Series Fund, see VOTING RIGHTS in the accompanying prospectus for
the Contracts.
MONITORING FOR POSSIBLE CONFLICT
As stated above, Series Fund shares will be sold to separate accounts of
Prudential and certain other insurers to fund both variable life insurance and
variable annuity contracts. The Board of Directors of the Series Fund intends to
monitor events for the existence of any material conflict between the interests
of variable life insurance and variable annuity contract owners. The Companies
have agreed to be responsible for reporting any potential or existing conflicts
to the Board of Directors. Moreover, the Companies have agreed to be
responsible, at their cost, to remedy any material irreconcilable conflict up to
and including establishing a new registered management investment company and
segregating the assets underlying the variable life insurance and variable
annuity contracts.
PERIODIC REPORTS
The Series Fund will send each shareholder, at least annually, statements
showing as of a specified date the number of shares in each portfolio credited
to the shareholder. The Series Fund will also send Contract owners and
Participants semi-annual reports showing the financial condition of the
portfolios in which they may invest and the investments held in each. If a
single individual or company invests in the Series Fund through more than one
variable insurance contract, then the individual or company will receive only
one copy of each annual or semi-annual report issued by the Series Fund.
However, if such individual or company wishes to receive multiple copies of any
such report, a request may be made by calling the toll-free telephone number
listed on the cover page of this prospectus. The annual report may take the form
of an updated copy of this prospectus and its accompanying statement of
additional information.
PORTFOLIO BROKERAGE AND RELATED PRACTICES
Prudential is responsible for decisions to buy and sell securities for the
portfolios, the selection of brokers and dealers to effect the transactions and
the negotiation of brokerage commissions, if any. Transactions on a stock
exchange in equity securities will be executed primarily through brokers that
will receive a commission paid by the portfolio. The Diversified Bond and
Government Income Portfolios, on the other hand, will not normally incur any
brokerage commissions. Fixed income securities, as well as equity securities
traded in the over-the-counter market, are generally traded on a "net" basis
with dealers acting as principals for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
that includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. Certain of these securities may
also be purchased directly from an issuer, in which case neither commissions nor
discounts are paid.
An affiliated broker may be employed to execute brokerage transactions on behalf
of the portfolios, as long as the commissions are reasonable and fair compared
to the commissions received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. The Series Fund may not
engage in any transactions in which Prudential or its affiliates, including
Prudential Securities Incorporated, acts as principal, including
over-the-counter purchases and negotiated trades in which such a party acts as a
principal. Additional information about portfolio brokerage and related
transactions is included in the statement of additional information.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Prudential is the transfer agent and dividend disbursing agent for the Series
Fund. Prudential as transfer agent issues and redeems shares of the Series Fund
and maintains records of ownership for the shareholders. Prudential's principal
business address is Prudential Plaza, Newark, New Jersey 07102-3777.
ADDITIONAL INFORMATION
This prospectus and the statement of additional information referred to on the
cover page do not contain all the information set forth in the registration
statement, certain portions of which have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The omitted information
may be obtained from the Commission's principal office in Washington, D.C., upon
payment of the fees prescribed by the Commission.
For further information, shareholders may also contact the Series Fund's office,
the address and phone number of which are set forth on the cover of this
prospectus.
26 - Series Fund
<PAGE>
APPENDIX
SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO
MAY CURRENTLY INVEST*
The Money Market Portfolio, and the other portfolios to the extent their
investment policies so provide, may invest in the following liquid, short-term,
debt securities regularly bought and sold by financial institutions:
1. U.S. Treasury Bills and other obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. These are debt securities
(including bills, certificates of indebtedness, notes, and bonds) issued or
guaranteed by the U.S. Treasury or by an agency or instrumentality of the U.S.
Government that is established under the authority of an act of Congress.
Although all obligations of agencies and instrumentalities are not direct
obligations of the U.S. Treasury, payment of the interest and principal on them
is generally backed directly or indirectly by the U.S. Government. This support
can range from the backing of the full faith and credit of the United States, to
U.S. Treasury guarantees or to the backing solely of the issuing instrumentality
itself. Securities which are not backed by the full faith and credit of the
United States include but are not limited to obligations of the Tennessee Valley
Authority, the Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation, and the United States Postal Service, each of which has
the right to borrow from the U.S. Treasury to meet its obligations, and
obligations of the Federal Farm Credit System and the Federal Home Loan Banks,
the obligations of which may only be satisfied by the individual credit of the
issuing agency. Obligations of the Government National Mortgage Association, the
Farmers Home Administration, and the Export-Import Bank are examples of
securities that are backed by the full faith and credit of the United States.
2. Obligations (including certificates of deposit, bankers' acceptances, and
time deposits) of domestic banks, foreign branches of U.S. banks, U.S. branches
of foreign banks, and foreign offices of foreign banks provided that such bank
has, at the time of the portfolio's investment, total assets of at least $1
billion or the equivalent. Obligations of any savings and loan association or
savings bank organized under the laws of the United States or any state thereof,
provided that such association or savings bank has, at the time of the
portfolio's investment, total assets of at least $1 billion. The term
"certificates of deposit" includes both Eurodollar certificates of deposit,
which are traded in the over-the-counter market, and Eurodollar time deposits,
for which there is generally not a market. "Eurodollars" are dollars deposited
in banks outside the United States. An investment in Eurodollar instruments
involves risks that are different in some respects from an investment in debt
obligations of domestic issuers, including future political and economic
developments such as possible expropriation or confiscatory taxation that might
adversely affect the payment of principal and interest on the Eurodollar
instruments.
"Certificates of deposit" are certificates evidencing the indebtedness of a
commercial bank to repay funds deposited with it for a definite period of time
(usually from 14 days to 1 year). "Bankers' acceptances" are credit instruments
evidencing the obligation of a bank to pay a draft which has been drawn on it by
a customer. These instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity. "Time deposits"
are non-negotiable deposits in a bank for a fixed period of time.
3. Commercial paper, variable amount demand master notes, bills, notes, and
other obligations issued by a U.S. company, a foreign company or a foreign
government, its agencies, instrumentalities or political subdivisions,
denominated in U.S. dollars, and, at the date of investment, rated at least A or
A-2 by Standard & Poor's Rating Service ("S&P"), A or Prime-2 by Moody's
Investors Service ("Moody's") or, if not rated, issued by an entity having an
outstanding unsecured debt issue rated at least A or A-2 by S&P or A or Prime-2
by Moody's. A description of corporate bond ratings is contained in the Appendix
to the statement of additional information. If such obligations are guaranteed
or supported by a letter of credit issued by a bank, such bank (including a
foreign bank) must meet the requirements set forth in paragraph 2 above. If such
obligations are guaranteed or insured by an insurance company or other non-bank
entity, such insurance company or other non-bank entity must represent a credit
of high quality, as determined by the Series Fund's investment advisor under the
supervision of the Series Fund's Board of Directors.
As stated above in paragraphs 2 and 3, the Money Market Portfolio and short-term
portions of the other portfolios may contain obligations of foreign branches of
domestic banks and domestic branches of foreign banks, as well as commercial
paper, bills, notes, and other obligations issued in the United States by
foreign issuers, including foreign governments, their agencies, and
instrumentalities. This involves certain additional risks. These risks include
future political and economic developments in the country of the issuer, the
possible imposition of withholding taxes on interest income payable on such
obligations held by the Series Fund, the possible seizure or nationalization of
foreign deposits, and the possible establishment of exchange controls or other
foreign
*Although the Money Market Portfolio is not available to The Prudential Variable
Contract Account-24, any short-term portion of the various portfolios available
through subaccounts of that Account may be invested in the types of securities
described in this Appendix.
A1 - Series Fund
<PAGE>
governmental laws or restrictions which might affect adversely the payment of
principal and interest on such obligations held by the Series Fund. In addition,
there may be less publicly available information about a foreign issuer than
about a domestic one, and foreign issuers may not be subject to the same
accounting, auditing and financial recordkeeping standards, and requirements as
domestic issuers. Securities issued by foreign issuers may be subject to greater
fluctuations in price than securities issued by U.S. entities. Finally, in the
event of a default with respect to any such foreign debt obligations, it may be
more difficult for the Series Fund to obtain or to enforce a judgment against
the issuers of such securities.
4. Repurchase Agreements. When the Money Market Portfolio purchases money market
securities of the types described above, it may on occasion enter into a
repurchase agreement with the seller wherein the seller and the buyer agree at
the time of sale to a repurchase of the security at a mutually agreed upon time
and price. The period of maturity is usually quite short, possibly overnight or
a few days, although it may extend over a number of months. The resale price is
in excess of the purchase price, reflecting an agreed-upon market rate effective
for the period of time the portfolio's money is invested in the security, and is
not related to the coupon rate of the purchased security. Repurchase agreements
may be considered loans of money to the seller of the underlying security, which
are collateralized by the securities underlying the repurchase agreement. The
Series Fund will not enter into repurchase agreements unless the agreement is
"fully collateralized" (i.e., the value of the securities is, and during the
entire term of the agreement remains, at least equal to the amount of the "loan"
including accrued interest). The Series Fund will take possession of the
securities underlying the agreement and will value them daily to assure that
this condition is met. The Series Fund has adopted standards for the parties
with whom it will enter into repurchase agreements which it believes are
reasonably designed to assure that such a party presents no serious risk of
becoming involved in bankruptcy proceedings within the time frame contemplated
by the repurchase agreement. In the event that a seller defaults on a repurchase
agreement, the Series Fund may incur a loss in the market value of the
collateral, as well as disposition costs; and, if a party with whom the Series
Fund had entered into a repurchase agreement becomes involved in bankruptcy
proceedings, the Series Fund'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 bankruptcy proceedings.
The Series Fund will not enter into repurchase agreements with Prudential or its
affiliates, including Prudential Securities Incorporated. This will not affect
the Series Fund's ability to maximize its opportunities to engage in repurchase
agreements.
5. Reverse Repurchase Agreements. The Money Market Portfolio may use reverse
repurchase agreements, which are described on page 21 of the prospectus. No
portfolio may obligate more than 10% of its net assets in connection with
reverse repurchase agreements, except that the Diversified Bond and Government
Income Portfolios, as well as the fixed income portions of the Conservative
Balanced and Flexible Managed Portfolios, may obligate up to 30% of their net
assets in connection with reverse repurchase agreements and dollar rolls.
6. When-Issued and Delayed Delivery Securities. From time to time, in the
ordinary course of business, the Money Market Portfolio may purchase securities
on a when-issued or delayed delivery basis (i.e., delivery and payment can take
place a month or more after the date of the transaction). The purchase price and
the interest rate payable on the securities are fixed on the transaction date.
The securities so purchased are subject to market fluctuation, and no interest
accrues to the portfolio until delivery and payment take place. At the time the
portfolio makes the commitment to purchase securities on a when-issued or
delayed delivery basis, it will record the transaction and thereafter reflect
the value, each day, of such securities in determining its net asset value. The
portfolio will make commitments for when-issued transactions only with the
intention of actually acquiring the securities and, to facilitate such
acquisitions, the Series Fund's custodian bank will maintain in a separate
account securities of the portfolio having a value equal to or greater than such
commitments. On delivery dates for such transactions, the portfolio will meet
its obligations from maturities or sales of the securities held in the separate
account and/or from then available cash flow. If the portfolio chooses to
dispose of the right to acquire a when issued security prior to its acquisition,
it could, as with the disposition of any other obligation, incur a gain or loss
due to market fluctuation. No when-issued commitments will be made if, as a
result, more than 15% of the portfolio's net assets would be so committed.
*Although the Money Market Portfolio is not available to The Prudential Variable
Contract Account-24, any short-term portion of the various portfolios available
through subaccounts of that Account may be invested in the types of securities
described in this Appendix.
A2 - Series Fund
<PAGE>
PRUvider Variable
Appreciable Life(R)
Insurance
May 1, 1997
PROSPECTUS
THE PRUCO LIFE PRUVIDER VARIABLE APPRECIABLE ACCOUNT AND
THE PRUDENTIAL SERIES FUND, INC.
PRUCO LIFE INSURANCE COMPANY
SVAL-1 ED 5/97
CATALOG NO. 6469898
<PAGE>
PROSPECTUS
MAY 1, 1997
PRUCO LIFE INSURANCE COMPANY
PRUVIDER VARIABLE APPRECIABLE ACCOUNT
PRUVIDER(SM)
VARIABLE APPRECIABLE LIFE(R)
INSURANCE CONTRACT
This prospectus describes a variable life insurance contract issued by Pruco
Life Insurance Company ("Pruco Life"), a stock life insurance company that is a
wholly-owned subsidiary of The Prudential Insurance Company of America
("Prudential"). Pruco Life calls this contract its PRUVIDER(SM) Variable
APPRECIABLE LIFE(R) Insurance Contract* (the "Contract"). The Contract provides
whole-life insurance protection. The death benefit varies daily with investment
experience but will never be less than a guaranteed minimum amount (the face
amount specified in the Contract). The Contract also generally provides a cash
surrender value which does not have a guaranteed minimum amount.
The assets held for the purpose of paying benefits under these and other similar
contracts are segregated from the other assets of Pruco Life and are invested in
one or both of the current subaccounts of the Pruco Life PRUVIDER Variable
Appreciable Account (from now on, the "Account"). In this case, the assets will
be invested in the corresponding portfolio of The Prudential Series Fund, Inc.
(from now on, the "Series Fund"). The two portfolios of the Series Fund
currently available to Contract owners are the CONSERVATIVE BALANCED PORTFOLIO
and the FLEXIBLE MANAGED PORTFOLIO. The contract owner may also choose to have
the assets invested in a FIXED-RATE OPTION. This prospectus describes the
Contract generally, the Pruco Life PRUVIDER Variable Appreciable Account and the
securities issued by the Series Fund.
Although it is advantageous to the purchaser to pay a Scheduled Premium amount
on the dates due, which are at least once a year but may be more often,
purchasers have flexibility as to when and in what amounts they pay premiums.
Before you sign an application to purchase this life insurance contract, you
should read this prospectus with care and have any questions you may have
answered by your Pruco Life representative. If you do purchase the Contract, you
should retain this prospectus for future reference, together with the Contract
itself that you will receive.
Additional information about the contract and the Series Fund is set forth in a
separate Statement of Additional Information which is incorporated by reference
into this prospectus. It is available without charge upon request to the Pruco
Life Insurance Company at the address shown below.
THE REPLACEMENT OF LIFE INSURANCE IS GENERALLY NOT IN THE INTEREST OF THE
CUSTOMER. IN MOST CASES, WHEN A CUSTOMER REQUIRES ADDITIONAL COVERAGE, A NEW
POLICY SUPPLEMENTING THE EXISTING POLICY SHOULD BE REQUESTED, THEREBY PROTECTING
THE BENEFITS OF THE ORIGINAL POLICY. IF YOU ARE CONSIDERING REPLACING A POLICY,
YOU SHOULD COMPARE THE BENEFITS AND COSTS OF SUPPLEMENTING YOUR EXISTING POLICY
WITH THE BENEFITS AND COSTS OF PURCHASING THE CONTRACT DESCRIBED IN THIS
PROSPECTUS AND YOU SHOULD CONSULT WITH A QUALIFIED TAX ADVISOR.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PRUCO LIFE INSURANCE COMPANY
213 Washington Street
Newark, New Jersey 07102-2992
Telephone: (800) 437-4016, Ext. 46
*PRUVIDER is a service mark of Prudential.
APPRECIABLE LIFE is a registered mark of Prudential.
SVAL-1 Ed. 5-97
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C>
INTRODUCTION AND SUMMARY................................................................................1
BRIEF DESCRIPTION OF THE CONTRACT...............................................................1
BALANCED PORTFOLIOS.............................................................................3
CONSERVATIVE BALANCED PORTFOLIO..........................................................3
FLEXIBLE MANAGED PORTFOLIO...............................................................3
FIXED-RATE OPTION...............................................................................3
TRANSFERS BETWEEN INVESTMENT OPTIONS............................................................3
THE SCHEDULED PREMIUM...........................................................................3
PAYMENT OF HIGHER PREMIUMS......................................................................3
CONTRACT LOANS..................................................................................3
PRUVIDER VARIABLE APPRECIABLE LIFE INSURANCE CONTRACTS..........................................3
FINANCIAL HIGHLIGHTS OF THE PORTFOLIOS OF THE SERIES FUND...............................................4
PORTFOLIO RATES OF RETURN...............................................................................6
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS AND ACCUMULATED PREMIUMS.........................7
GENERAL INFORMATION ABOUT PRUCO LIFE PRUVIDER VARIABLE APPRECIABLE ACCOUNT
AND THE FIXED RATE OPTION...........................................................................8
PRUCO LIFE PRUVIDER VARIABLE APPRECIABLE ACCOUNT................................................8
THE FIXED-RATE OPTION...........................................................................8
DETAILED INFORMATION FOR PROSPECTIVE CONTRACT OWNERS....................................................9
REQUIREMENTS FOR ISSUANCE OF A CONTRACT.........................................................9
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK"....................................................9
CONTRACT FEES AND CHARGES.......................................................................9
Deductions from Premiums.................................................................9
Deductions from Portfolios...............................................................9
Monthly Deductions from Contract Fund...................................................10
Daily Deduction from the Contract Fund..................................................11
Surrender or Withdrawal Charges.........................................................11
Transaction Charges.....................................................................12
CONTRACT DATE..................................................................................12
PREMIUMS.......................................................................................12
ALLOCATION OF PREMIUMS.........................................................................13
TRANSFERS......................................................................................13
HOW THE CONTRACT FUND CHANGES WITH INVESTMENT EXPERIENCE.......................................14
HOW A CONTRACT'S DEATH BENEFIT WILL VARY.......................................................14
CONTRACT LOANS.................................................................................15
SURRENDER OF A CONTRACT........................................................................15
LAPSE AND REINSTATEMENT........................................................................15
Fixed Extended Term Insurance...........................................................16
Fixed Reduced Paid-Up Insurance.........................................................16
Variable Reduced Paid-Up Insurance......................................................16
What Happens If No Request Is Made?.....................................................16
PAID-UP INSURANCE OPTION.......................................................................16
WHEN PROCEEDS ARE PAID.........................................................................17
LIVING NEEDS BENEFIT...........................................................................17
Terminal Illness Option.................................................................17
Nursing Home Option.....................................................................17
VOTING RIGHTS..................................................................................18
REPORTS TO CONTRACT OWNERS.....................................................................18
TAX TREATMENT OF CONTRACT BENEFITS.............................................................19
Treatment as Life Insurance.............................................................19
Pre-Death Distributions.................................................................19
Other Tax Consequences..................................................................19
OTHER CONTRACT PROVISIONS......................................................................20
FURTHER INFORMATION ABOUT THE SERIES FUND..............................................................20
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS...................................................20
BALANCED PORTFOLIOS............................................................................20
Conservative Balanced Portfolio.........................................................20
Flexible Managed Portfolio..............................................................21
FOREIGN SECURITIES.............................................................................23
RISK FACTORS RELATING TO INVESTING IN FIXED INCOME SECURITIES RATED BELOW INVESTMENT GRADE.....23
OPTIONS, FUTURES CONTRACTS AND SWAPS...........................................................24
SHORT SALES....................................................................................24
REPURCHASE AGREEMENTS..........................................................................24
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS.................................................25
LOANS OF PORTFOLIO SECURITIES..................................................................25
INVESTMENT RESTRICTIONS APPLICABLE TO THE PORTFOLIOS...................................................25
INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES........................................................25
PORTFOLIO BROKERAGE AND RELATED PRACTICES......................................................26
STATE REGULATION.......................................................................................26
EXPERTS ...............................................................................................26
LITIGATION.............................................................................................27
EXPANDED TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION......................................27
ADDITIONAL INFORMATION.................................................................................28
FINANCIAL STATEMENTS...................................................................................28
FINANCIAL STATEMENTS OF THE PRUCO LIFE PRUvider VARIABLE APPRECIABLE ACCOUNT...........................A1
CONSOLIDATED FINANCIAL STATEMENTS OF PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES.....................B1
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FOR
THE SERIES FUND.
<PAGE>
INTRODUCTION AND SUMMARY
This section provides only an overview of the more significant provisions of the
Contract. It omits details which are provided in the rest of this prospectus, as
well as in a Statement of Additional Information which is available to you upon
request without charge. A description of the contents of that Statement of
Additional Information is on page 27.
As you read this prospectus you should keep in mind that you are considering the
purchase of a life insurance contract. Because it is VARIABLE LIFE INSURANCE -
and variable life insurance has significant investment aspects and requires you
to make investment decisions - it is also a "security." That is why you have
been given this prospectus. Securities which are offered to the public must be
registered with the Securities and Exchange Commission, and the prospectus that
is a part of the registration statement must be given to all prospective buyers.
But because a substantial part of your premium pays for life insurance that will
pay to your beneficiary, in the event of your death, an amount far exceeding
your total premium payments, you should not buy this contract unless a major
reason for the purchase is to provide life insurance protection. Because the
contract provides whole-life or permanent insurance, it also serves a second
important objective. It can be expected to provide an increasing cash surrender
value that can be used during your lifetime.
BRIEF DESCRIPTION OF THE CONTRACT
The PRUVIDER Variable APPRECIABLE LIFE Contract (referred to from now on as the
"Contract") is issued and sold by the Pruco Life Insurance Company ("Pruco
Life"), a stock life insurance company, organized in 1971 under the laws of the
State of Arizona. It is licensed to sell life insurance and annuities in the
District of Columbia, Guam, and in all states except New York. These Contracts
are not offered in any state in which the necessary approvals have not yet been
obtained.
Pruco Life is a wholly-owned subsidiary of Prudential, a mutual insurance
company founded in 1875 under the laws of the State of New Jersey. As of
December 31, 1996, Prudential has invested over $442 million in Pruco Life in
connection with Pruco Life's organization and operation. Prudential intends from
time to time to make additional capital contributions to Pruco Life as needed to
enable it to meet its reserve requirements and expenses in connection with its
business. Prudential is under no obligation to make such contributions and its
assets do not back the benefits payable under the Contract. Pruco Life's
consolidated financial statements begin on page B1 and should be considered only
as bearing upon Pruco Life's ability to meet its obligations under the
Contracts.
The Contract is a form of flexible premium variable life insurance. It is built
around a Contract Fund, the amount of which changes every business day. That
amount represents the value of your Contract on that day although you will have
to pay a surrender charge if you decide to surrender the Contract during the
first ten Contract years.
A broad objective of the Contract is to provide benefits that will increase in
value if favorable investment results are achieved. Pruco Life has established a
separate account, like a separate division within the Company, called the Pruco
Life PRUVIDER Variable Appreciable Account. Whenever you pay a premium, Pruco
Life first deducts certain charges (described below) and, unless you decide
otherwise puts the remainder - often called the "net premium" - into the
Account, where it is combined with the net premiums from all other contracts
like this one. The money in the Account, including your Contract Fund, is then
invested in the following way. The Account is divided into 2 subaccounts and you
must decide which one[s] will hold the assets of your Contract Fund. The money
allocated to each subaccount is immediately invested in a corresponding
portfolio of The Prudential Series Fund, Inc. Those two portfolios -- called the
CONSERVATIVE BALANCED PORTFOLIO and the FLEXIBLE MANAGED PORTFOLIO -- differ in
the amount of risk associated with them and are described in more detail below.
Because the assets that relate to the Contract may be invested in these variable
investment options, the Contract offers an opportunity for your cash surrender
value to appreciate more rapidly than it would under comparable fixed-benefit
whole-life insurance. You, however, must accept the risk that if investment
performance is unfavorable the cash surrender value may not appreciate as
rapidly and, indeed, may decrease in value. If you prefer to avoid this risk you
may elect to allocate part or all of the net premiums in a fixed-rate option
under which a stated interest rate is credited to the amount of your Contract
Fund allocated to that option. See THE FIXED-RATE OPTION, page 8.
Pruco Life deducts certain charges from each premium payment and from the
amounts held in the designated investment options. In addition, Pruco Life makes
certain additional charges if a Contract lapses or is surrendered during the
first 10 Contract years. All these charges, which are largely designed to cover
insurance costs and risks as well as sales and administrative expenses, are
fully described under CONTRACT FEES AND CHARGES on page 9. In brief, and subject
to that fuller description, the following diagram outlines the charges which may
be made:
1
<PAGE>
PREMIUM PAYMENT
o less charge for taxes
attributable to premiums
o less $2 processing fee
INVESTED PREMIUM AMOUNT
o To be invested in one or a combination of:
o The Conservative Balanced Portfolio
o The Flexible Managed Portfolio
o The Fixed-Rate Option
DAILY CHARGES
o A daily charge equivalent to an annual rate of up to 0.9% is deducted
from the assets of the subaccounts for mortality and expense risks.
o Management fees and expenses are deducted from the assets of the Series
Fund. See DEDUCTIONS FROM PORTFOLIOS, page 9.
MONTHLY CHARGES
o A sales charge is deducted from the Contract Fund in the amount of 1/2
of 1% of the primary annual premium.
o The Contract Fund is reduced by a guaranteed minimum death benefit risk
charge of not more than $0.01 per $1,000 of the face amount of
insurance.
o The Contract Fund is reduced by an administrative charge of up to $6 per
Contract and up to $0.19 per $1,000 of face amount of insurance
(currently, on a non-guaranteed basis, the $0.19 charge is decreased to
$0.09 per $1,000); if the face amount of the Contract is less than
$10,000, there is an additional charge of $0.30 per $1,000 of face
amount.
o A charge for anticipated mortality is deducted, with the maximum charge
based on the non-smoker/smoker 1980 CSO Tables.
o If the Contract includes riders, a deduction from the Contract Fund will
be made for charges applicable to those riders; a deduction will also be
made if the rating class of the insured results in an extra charge.
POSSIBLE ADDITIONAL CHARGES
o If the Contract lapses or is surrendered during the first 10 years, a
contingent deferred sales charge is assessed; the maximum contingent
deferred sales charge during the first 5 years is 50% of the first
year's primary annual premium but this charge is both subject to other
important limitations and reduced for Contracts that have been in force
for more than 5 years.
o If the Contract lapses or is surrendered during the first 10 years, a
contingent deferred administrative charge is assessed; during the first
5 years, this charge equals $5 per $1,000 of face amount and it begins
to decline uniformly after the fifth Contract year so that it disappears
on the tenth Contract anniversary.
o An administrative processing charge of $15 will be made in connection
with each withdrawal of excess cash surrender value.
Because of the charges listed above, and in particular because of the
significant charges deducted upon early surrender or lapse, you should purchase
a Contract only if you intend and have the financial capability to keep it in
force for a substantial period.
When you first buy the Contract you give instructions to Pruco Life as to what
combination of the three investment options you wish your Contract Fund
invested. Thereafter you may make changes in these allocations either in writing
or by telephone. The investment objectives of the portfolios, described more
fully starting on page 20 of this prospectus, and of the fixed-rate option are
as follows:
2
<PAGE>
BALANCED PORTFOLIOS
CONSERVATIVE BALANCED PORTFOLIO. Achievement of a favorable total investment
return consistent with a portfolio having a conservatively managed mix of money
market instruments, fixed income securities, and common stocks, in proportions
believed by the investment manager to be appropriate for an investor who desires
diversification of investment who prefers a relatively lower risk of loss than
that associated with the Flexible Managed Portfolio while recognizing that this
reduces the chances of greater appreciation.
FLEXIBLE MANAGED PORTFOLIO. Achievement of a high total investment return
consistent with a portfolio having an aggressively managed mix of money market
instruments, fixed income securities, and common stocks, in proportions believed
by the investment manager to be appropriate for an investor desiring
diversification of investment who is willing to accept a relatively high level
of loss in an effort to achieve greater appreciation.
FIXED-RATE OPTION
Guarantee against loss of principal plus income at a rate which may change at
yearly intervals, but will never be lower than an effective annual rate of 4%.
TRANSFERS BETWEEN INVESTMENT OPTIONS
You may at any time change the instructions for the allocation of your premiums
to the various investment options. You may also transfer amounts held in one
option to another. There are restrictions upon transfers out of the fixed-rate
option which under certain circumstances Pruco Life may waive.
THE SCHEDULED PREMIUM
Your Contract sets forth an annual Scheduled Premium, or one that is payable
more frequently, such as monthly. Pruco Life guarantees that, if the Scheduled
Premiums are paid when due (or if missed premiums are paid later, with
interest), the death benefit will be paid upon the death of the insured. The
Contract will not lapse even if investment experience is unexpectedly so
unfavorable that the Contract Fund value drops to below zero.
The amount of the scheduled premium depends on the Contract's face amount, the
insured's sex (except where unisex rates apply) and age at issue, the insured's
risk classification, the rate for taxes attributable to premiums, and the
frequency of premium payments selected. Under certain low face amount Contracts
issued on younger insureds, the payment of the Scheduled Premium may cause the
Contract to be classified as a Modified Endowment Contract. See TAX TREATMENT OF
CONTRACT BENEFITS, page 19. The scheduled premium will not be increased (except
to reflect changes in the rate for taxes attributable to premiums). See
PREMIUMS, page 12.
PAYMENT OF HIGHER PREMIUMS
The payment of premiums in excess of Scheduled Premiums may cause the Contract
to be classified as a Modified Endowment Contract. See PREMIUMS, page 12 and TAX
TREATMENT OF CONTRACT BENEFITS, page 19.
CONTRACT LOANS
The Contract permits the owner to borrow up to 90% of the amount of the cash
surrender value (100% of the portion allocated to the fixed-rate option) on
favorable terms. See CONTRACT LOANS, page 15. When a loan is made, the amount
held under the investment options described above is reduced, proportionately,
by the amount of the loan.
PRUVIDER VARIABLE APPRECIABLE LIFE INSURANCE CONTRACTS
Pruco Life's PRUVIDER Variable APPRECIABLE LIFE Insurance Contract is a form of
life insurance that provides much of the flexibility of variable universal life.
However, it differs in two important ways. First, Pruco Life guarantees that if
the Scheduled Premiums are paid when due or within the grace period (or missed
premiums are paid later with interest), the Contract will not lapse and the face
amount of insurance will be paid upon the death of the insured even if, because
of unfavorable investment experience, the Contract Fund value should drop to
below zero. Second, if all premiums are not paid when due (or made up), the
Contract will not lapse as long as the Contract Fund is higher than a stated
amount set forth in a table in the Contract - an amount that increases each year
and in later years becomes quite high; it is called the "Tabular Contract Fund."
The Contract lapses when the Contract Fund falls to below this stated amount,
rather than when it drops to zero. Thus, when a PRUVIDER Variable APPRECIABLE
LIFE Contract lapses, it may still have considerable value and you will,
therefore, have a substantial incentive to reinstate it, as well as an
opportunity to make a considered decision whether to do so or to take, in one
form or another, the cash surrender value. In effect, Pruco Life provides an
early and timely warning against the imprudent use of the flexibility provided
by the Contract.
3
<PAGE>
In the following pages of this prospectus we describe in much greater detail all
of the provisions of the Contract. That description is preceded by two sets of
tables. The first set provides, in condensed form, financial information about
the portfolios of the Series Fund, beginning on the date each of them was first
established. The second set shows what the cash surrender values and death
benefits would be under a Contract issued on a hypothetical person, making
certain assumptions. These tables show generally how the values under the
Contract would vary, with different investment performances.
FINANCIAL HIGHLIGHTS OF THE PORTFOLIOS OF
THE SERIES FUND
The tables that follow provide information about the annual investment income,
capital appreciation and expenses of the 2 available portfolios of the Series
Fund for each year, beginning with the year after the Series Fund was
established. They are prepared on a per share basis and therefore provide useful
information about the investment performance of each portfolio.
NOTE, HOWEVER, THAT THESE TABLES DO NOT TELL YOU HOW YOUR CONTRACT FUND WOULD
HAVE CHANGED DURING THIS PERIOD BECAUSE THEY DO NOT REFLECT THE DEDUCTIONS FROM
THE CONTRACT FUND OTHER THAN THE PORTFOLIO DEDUCTIONS.
4
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the periods indicated)
The following highlights for the year ended December 31, 1996 have been audited
by Price Waterhouse LLP, independent accountants, whose report thereon was
unqualified. In addition, the financial highlights for each of the years prior
to and including the period ended December 31, 1995 have been audited by
Deloitte & Touche LLP, independent auditors, whose report thereon was also
unqualified. Their reports are included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
CONSERVATIVE BALANCED
-------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A) 1991(A) 1990(A) 1989(A) 1988(A) 1987(A)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of year...... $ 15.31 $ 14.10 $ 14.91 $ 14.24 $ 14.32 $ 13.06 $ 13.36 $ 12.30 $ 11.89 $ 12.57
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.66 0.63 0.53 0.49 0.56 0.69 0.82 0.89 0.77 0.66
Net realized and
unrealized gains
(losses) on
investments............ 1.24 1.78 (0.68) 1.23 0.41 1.74 (0.14) 1.15 0.43 (0.40)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total from investment
operations........... 1.90 2.41 (0.15) 1.72 0.97 2.43 0.68 2.04 1.20 0.26
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.66) (0.64) (0.51) (0.47) (0.54) (0.67) (0.81) (0.89) (0.79) (0.71)
Distributions from net
realized gains......... (1.03) (0.56) (0.15) (0.58) (0.51) (0.50) (0.17) (0.09) -- (0.23)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total
distributions........ (1.69) (1.20) (0.66) (1.05) (1.05) (1.17) (0.98) (0.98) (0.79) (0.94)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Net Asset Value, end of
year................... $ 15.52 $ 15.31 $ 14.10 $ 14.91 $ 14.24 $ 14.32 $ 13.06 $ 13.36 $ 12.30 $ 11.89
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
TOTAL INVESTMENT
RETURN:(B)............. 12.63% 17.27% (0.97%) 12.20% 6.95% 19.07% 5.27% 16.99% 10.19% 1.54%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in millions).......... $4,478.8 $3,940.8 $3,501.1 $3,103.2 $2,114.0 $1,500.0 $1,100.2 $976.0 $815.6 $803.9
Ratios to average net
assets:
Expenses............... 0.59% 0.58% 0.61% 0.60% 0.62% 0.63% 0.65% 0.64% 0.65% 0.66%
Net investment
income................. 4.13% 4.19% 3.61% 3.22% 3.88% 4.89% 6.21% 6.81% 6.22% 5.05%
Portfolio turnover
rate................... 295% 201% 125% 79% 62% 115% 44% 154% 111% 141%
Average commission rate
paid per share......... $0.0554 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
FLEXIBLE MANAGED
-------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A) 1991(A) 1990(A) 1989(A) 1988(A) 1987(A)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of year...... $ 17.86 $ 15.50 $ 16.96 $ 16.01 $ 16.29 $ 14.00 $ 14.45 $ 13.12 $ 12.33 $ 13.56
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.57 0.56 0.47 0.57 0.58 0.65 0.72 0.82 0.72 0.57
Net realized and
unrealized gains
(losses) on
investments............ 1.79 3.15 (1.02) 1.88 0.61 2.81 (0.47) 1.99 0.84 (0.75)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total from investment
operations........... 2.36 3.71 (0.55) 2.45 1.19 3.46 0.25 2.81 1.56 (0.18)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.58) (0.56) (0.45) (0.57) (0.56) (0.66) (0.70) (0.81) (0.77) (0.67)
Distributions from net
realized gains......... (1.85) (0.79) (0.46) (0.93) (0.91) (0.51) -- (0.67) -- (0.38)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total
distributions........ (2.43) (1.35) (0.91) (1.50) (1.47) (1.17) (0.70) (1.48) (0.77) (1.05)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Net Asset Value, end of
year................... $ 17.79 $ 17.86 $ 15.50 $ 16.96 $ 16.01 $ 16.29 $ 14.00 $ 14.45 $ 13.12 $ 12.33
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
TOTAL INVESTMENT
RETURN:(B)............. 13.64% 24.13% (3.16%) 15.58% 7.61% 25.43% 1.91% 21.77% 12.83% (1.83%)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in millions).......... $4,896.9 $4,261.2 $3,481.5 $3,292.2 $2,435.6 $1,990.7 $1,507.8 $1,386.5 $1,103.9 $1,062.4
Ratios to average net
assets:
Expenses............... 0.64% 0.63% 0.66% 0.66% 0.67% 0.67% 0.69% 0.69% 0.70% 0.71%
Net investment
income................. 3.07% 3.30% 2.90% 3.30% 3.63% 4.23% 5.13% 5.66% 5.52% 4.09%
Portfolio turnover
rate................... 233% 173% 124% 63% 59% 93% 52% 141% 128% 124%
Average commission rate
paid per share......... $0.0563 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns.
This information should be read in conjunction with the financial statements of
The Prudential Series Fund, Inc. and notes thereto, which appear in the
Statement of Additional Information.
Further information about performance of the portfolios is contained in the
Annual Report to Contract Owners which may be obtained without charge.
5
<PAGE>
PORTFOLIO RATES OF RETURN
The following table, based upon the immediately preceding financial highlights
for the Series Fund, shows first the average annual compounded net rates of
return for each Portfolio for the year ended December 31, 1996, for the 5 year
and 10 year periods ending on that date, and from the inception date of each
Portfolio to December 31, 1996. These rates of return should not be regarded as
an estimate or prediction of future performance. They may be useful in assessing
the competence and performance of the Series Fund's investment advisor and in
helping you to decide which portfolios to choose. THIS INFORMATION RELATES ONLY
TO THE SERIES FUND AND DOES NOT REFLECT THE VARIOUS OTHER CHARGES MADE UNDER THE
CONTRACTS.
<TABLE>
<CAPTION>
5 YEARS 10 YEARS INCEPTION
INCEPTION YEAR ENDED ENDED ENDED DATE TO
PORTFOLIO DATE 12/31/96 12/31/96 12/31/96 12/31/96
<S> <C> <C> <C> <C> <C>
- -------------------------- ------------- ----------- ----------- ----------- -------------
CONSERVATIVE BALANCED 5/83 12.63% 9.43% 9.92% 10.60%
FLEXIBLE MANAGED 5/83 13.64% 11.18% 11.35% 11.77%
</TABLE>
6
<PAGE>
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS
AND ACCUMULATED PREMIUMS
The following tables have been prepared to help show how values under the
Contract change with investment performance of the Account. The tables assume
that no portion of the Contract Fund is allocated to the fixed-rate option. The
tables illustrate how cash surrender values (reflecting the deduction of
deferred sales load and administrative charges, if any) and death benefits of
Contracts issued on an insured of a given age would vary over time if the gross
investment return on the assets held in the selected Series Fund portfolios were
a uniform, after tax, annual rate of 0%, 4%, 8%, and 12% and minimum scheduled
premiums were paid. The death benefits and cash surrender values would be
different from those shown if the returns averaged 0%, 4%, 8%, and 12% but
fluctuated over and under those averages throughout the years.
The death benefits and cash surrender values shown in the first two tables on
pages T1 and T2 reflect Pruco Life's current charges. The values shown in these
tables are calculated upon the assumption that Pruco Life will continue to use
the administrative charges and mortality rates that it is currently using, even
though it is permitted under the Contract to use higher administrative charges
and the higher mortality charges specified in the 1980 CSO Table. While Pruco
Life does not currently intend to withdraw or modify these reductions in
charges, it reserves the right to do so.
The death benefits and cash surrender values shown in the next two tables on
pages T3 and T4 are calculated upon the assumption that the maximum
administrative charges allowable under the Contract and the maximum mortality
charges specified by the 1980 CSO Table are made throughout the life of the
Contract; they do not reflect Pruco Life's current practice of reducing the
administrative and mortality charges.
The amounts shown for the death benefit and cash surrender value as of each
Contract year reflect the fact that the net investment return on the assets held
in the subaccounts is lower than the gross, after-tax return of the Series
Fund's portfolios. This is because these tables assume an investment management
fee and other estimated Series Fund expenses totaling 0.62% and also reflect the
daily charge to the Account for assuming mortality and expense risks, which is
equivalent to an effective annual rate of 0.9%. The 0.62% figure is based on an
average of the current management fees of the two available portfolios and an
analysis of historical operating expenses other than management fees, taking
into account any applicable expense offsets. Actual fees and expenses of the
portfolios associated with a Contract may be more or less than 0.62%, will vary
from year to year, and will depend on how the Contract Fund is allocated. Based
on the above assumptions, gross annual rates of return of 0%, 4%, 8%, and 12%
correspond in the tables to approximate net annual rates of return of -1.52%,
2.48%, 6.48%, and 10.48%, respectively. The tables reflect the fact that no
charges for federal or state income taxes are currently made against the Account
(other than "taxes attributable to premiums"). If such a charge is made in the
future, it will take higher gross rates of return to produce the same net
after-tax returns. The tables assume that the insured is in the preferred rating
class, and the charge for federal, state and local taxes attributable to
premiums is 3.25%.
Upon request, Pruco Life will furnish a comparable hypothetical illustration
based on the proposed insured's age and sex (except where unisex rates apply)
and on the face amount or premium amount requested. The illustrations can be
prepared upon the assumptions that the insured is in the preferred or standard
rating class or in a different risk classification, and can assume that annual,
semi-annual, quarterly or monthly premiums are paid.
7
<PAGE>
ILLUSTRATIONS
-------------
THE PRUVIDER VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT
MALE SELECT PREFERRED ISSUE AGE 35
$5,000 GUARANTEED DEATH BENEFIT
$173.70 ANNUAL PREMIUM (1)
USING CURRENT CONTRACTUAL CHARGES
<TABLE>
Death Benefit (2) Cash Surrender Value (2)
------------------------------------------------- ----------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated --------------------------------------------------- ----------------------------------------------------
Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (-1.52% Net) (2.48% Net) (6.48% Net) (10.48% Net) (-1.52% Net) (2.48% Net) (6.48% Net) (10.48% Net)
------ -------------- ------------ ----------- ----------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 181 $5,003 $5,007 $ 5,011 $ 5,016 $ 0 $ 0 $ 2 $ 6
2 $ 369 $5,002 $5,013 $ 5,024 $ 5,036 $ 48 $ 59 $ 70 $ 82
3 $ 564 $5,000 $5,019 $ 5,040 $ 5,063 $101 $ 121 $ 142 $ 165
4 $ 767 $5,000 $5,024 $ 5,058 $ 5,096 $153 $ 185 $ 219 $ 256
5 $ 978 $5,000 $5,028 $ 5,079 $ 5,136 $204 $ 249 $ 300 $ 357
6 $ 1,198 $5,000 $5,033 $ 5,104 $ 5,186 $268 $ 329 $ 400 $ 482
7 $ 1,427 $5,000 $5,038 $ 5,133 $ 5,247 $330 $ 410 $ 506 $ 619
8 $ 1,665 $5,000 $5,042 $ 5,166 $ 5,318 $392 $ 493 $ 617 $ 769
9 $ 1,912 $5,000 $5,046 $ 5,204 $ 5,403 $452 $ 577 $ 735 $ 934
10 $ 2,169 $5,000 $5,049 $ 5,246 $ 5,501 $510 $ 662 $ 859 $ 1,114
15 $ 3,617 $5,000 $5,055 $ 5,539 $ 6,264 $718 $1,044 $ 1,528 $ 2,253
20 $ 5,379 $5,000 $5,042 $ 6,017 $ 9,081 $879 $1,452 $ 2,427 $ 4,105
25 $ 7,523 $5,000 $5,007 $ 6,949 $13,482 $965 $1,873 $ 3,625 $ 7,034
30 (Age 65) $10,132 $5,000 $5,000 $ 8,696 $19,488 $934 $2,290 $ 5,171 $11,589
35 $13,305 $5,000 $5,000 $10,646 $27,770 $691 $2,674 $ 7,108 $18,540
40 $17,166 $5,000 $5,000 $12,868 $39,313 $ 41 $2,983 $ 9,482 $28,970
45 $21,864 $5,000 $5,000 $15,463 $55,611 $ 0 $3,125 $12,331 $44,348
</TABLE>
- -----------
(1) If premiums are paid more frequently than annually, the payments would be
$89.46 semi-annually, $46.15 quarterly or $16.90 monthly. The death benefits
and cash surrender values would be slightly different for a Contract with
more frequent premium payments.
(2) Assumes no Contract loan has been made.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN
THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A
REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING
INTEREST RATES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER
VALUE FOR A CONTRACT WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES
OF RETURN AVERAGED 0%, 4%, 8%, AND 12% OVER A PERIOD OF YEARS BUT ALSO
FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO
REPRESENTATIONS CAN BE MADE BY PRUCO LIFE OR THE SERIES FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED
OVER ANY PERIOD OF TIME.
T1
<PAGE>
THE PRUVIDER VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT
MALE SELECT PREFERRED ISSUE AGE 35
$20,000 GUARANTEED DEATH BENEFIT
$390.90 ANNUAL PREMIUM (1)
USING CURRENT CONTRACTUAL CHARGES
<TABLE>
Death Benefit (2) Cash Surrender Value (2)
---------------------------------------------------- ----------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated ---------------------------------------------------- ----------------------------------------------------
Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (-1.52% Net) (2.48% Net) (6.48% Net) (10.48% Net) (-1.52% Net) (2.48% Net) (6.48% Net) (10.48% Net)
------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 407 $20,012 $20,024 $20,036 $ 20,048 $ 38 $ 50 $ 62 $ 74
2 $ 829 $20,013 $20,046 $20,080 $ 20,115 $ 243 $ 276 $ 310 $ 345
3 $ 1,269 $20,001 $20,065 $20,132 $ 20,204 $ 441 $ 505 $ 572 $ 644
4 $ 1,726 $20,000 $20,081 $20,194 $ 20,316 $ 635 $ 739 $ 851 $ 973
5 $ 2,202 $20,000 $20,094 $20,265 $ 20,455 $ 832 $ 985 $ 1,155 $ 1,346
6 $ 2,697 $20,000 $20,111 $20,355 $ 20,634 $1,082 $ 1,294 $ 1,538 $ 1,818
7 $ 3,211 $20,000 $20,125 $20,458 $ 20,850 $1,333 $ 1,615 $ 1,947 $ 2,339
8 $ 3,746 $20,000 $20,138 $20,576 $ 21,106 $1,580 $ 1,941 $ 2,379 $ 2,909
9 $ 4,302 $20,000 $20,148 $20,710 $ 21,410 $1,821 $ 2,272 $ 2,834 $ 3,534
10 $ 4,881 $20,000 $20,156 $20,861 $ 21,765 $2,056 $ 2,608 $ 3,313 $ 4,217
15 $ 8,140 $20,000 $20,153 $21,933 $ 24,565 $2,893 $ 4,108 $ 5,887 $ 8,520
20 $12,106 $20,000 $20,071 $23,703 $ 34,368 $3,536 $ 5,709 $ 9,341 $ 15,537
25 $16,931 $20,000 $20,000 $26,728 $ 51,066 $3,882 $ 7,357 $13,944 $ 26,641
30 (Age 65) $22,801 $20,000 $20,000 $33,481 $ 73,847 $3,750 $ 8,976 $19,911 $ 43,915
35 $29,942 $20,000 $20,000 $41,021 $105,266 $2,769 $10,425 $27,387 $ 70,280
40 $38,631 $20,000 $20,000 $49,613 $149,051 $ 140 $11,484 $36,561 $109,838
45 $49,203 $20,000 $20,000 $59,648 $210,877 $ 0 $11,674 $47,568 $168,168
</TABLE>
- ----------
(1) If premiums are paid more frequently than annually, the payments would be
$202.79 semi-annually, $103.98 quarterly or $36.59 monthly. The death
benefits and cash surrender values would be slightly different for a
Contract with more frequent premium payments.
(2) Assumes no Contract loan has been made.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%, 8%,
AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY PRUCO LIFE OR
THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T2
<PAGE>
THE PRUVIDER VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT
MALE SELECT PREFERRED ISSUE AGE 35
$5,000 GUARANTEED DEATH BENEFIT
$173.70 ANNUAL PREMIUM (1)
USING MAXIMUM CONTRACTUAL CHARGES
<TABLE>
Death Benefit (2) Cash Surrender Value (2)
-------------------------------------------------- ---------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated -------------------------------------------------- ---------------------------------------------------
Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (-1.52% Net) (2.48% Net) (6.48% Net) (10.48% Net) (-1.52% Net) (2.48% Net) (6.48% Net) (10.48% Net)
------ -------------- ------------ ----------- ----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 181 $5,000 $5,000 $ 5,004 $ 5,009 $ 0 $ 0 $ 0 $ 0
2 $ 369 $5,000 $5,000 $ 5,010 $ 5,022 $ 35 $ 45 $ 56 $ 67
3 $ 564 $5,000 $5,000 $ 5,018 $ 5,039 $ 82 $ 100 $ 120 $ 142
4 $ 767 $5,000 $5,000 $ 5,028 $ 5,063 $128 $ 157 $ 189 $ 224
5 $ 978 $5,000 $5,000 $ 5,039 $ 5,092 $172 $ 214 $ 261 $ 314
6 $ 1,198 $5,000 $5,000 $ 5,053 $ 5,129 $228 $ 284 $ 349 $ 425
7 $ 1,427 $5,000 $5,000 $ 5,070 $ 5,173 $283 $ 355 $ 442 $ 546
8 $ 1,665 $5,000 $5,000 $ 5,089 $ 5,227 $336 $ 427 $ 540 $ 677
9 $ 1,912 $5,000 $5,000 $ 5,111 $ 5,290 $388 $ 500 $ 642 $ 821
10 $ 2,169 $5,000 $5,000 $ 5,136 $ 5,364 $438 $ 573 $ 749 $ 977
15 $ 3,617 $5,000 $5,000 $ 5,316 $ 5,948 $601 $ 885 $1,305 $ 1,936
20 $ 5,379 $5,000 $5,000 $ 5,619 $ 7,671 $711 $1,200 $2,029 $ 3,468
25 $ 7,523 $5,000 $5,000 $ 6,094 $11,185 $738 $1,495 $2,960 $ 5,835
30 (Age 65) $10,132 $5,000 $5,000 $ 6,978 $15,837 $630 $1,732 $4,150 $ 9,418
35 $13,305 $5,000 $5,000 $ 8,391 $22,060 $278 $1,834 $5,602 $14,728
40 $17,166 $5,000 $5,000 $ 9,931 $30,451 $ 0 $1,641 $7,318 $22,439
45 $21,864 $5,000 $5,000 $11,640 $41,854 $ 0 $ 713 $9,283 $33,377
</TABLE>
- ----------
(1) If premiums are paid more frequently than annually, the payments would be
$89.46 semi-annually, $46.15 quarterly or $16.90 monthly. The death
benefits and cash surrender values would be slightly different for a
Contract with more frequent premium payments.
(2) Assumes no Contract loan has been made.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%, 8%,
AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY PRUCO LIFE OR
THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T3
<PAGE>
THE PRUVIDER VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT
MALE SELECT PREFERRED ISSUE AGE 35
$20,000 GUARANTEED DEATH BENEFIT
$390.90 ANNUAL PREMIUM (1)
USING MAXIMUM CONTRACTUAL CHARGES
<TABLE>
Death Benefit (2) Cash Surrender Value (2)
---------------------------------------------------- ---------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated ---------------------------------------------------- ---------------------------------------------------
Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (-1.52% Net) (2.48% Net) (6.48% Net) (10.48% Net) (-1.52% Net) (2.48% Net) (6.48% Net) (10.48% Net)
------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 407 $20,000 $20,000 $20,009 $ 20,020 $ 12 $ 24 $ 35 $ 46
2 $ 829 $20,000 $20,000 $20,024 $ 20,056 $ 190 $ 221 $ 253 $ 286
3 $ 1,269 $20,000 $20,000 $20,045 $ 20,110 $ 364 $ 422 $ 485 $ 551
4 $ 1,726 $20,000 $20,000 $20,073 $ 20,185 $ 532 $ 627 $ 730 $ 842
5 $ 2,202 $20,000 $20,000 $20,108 $ 20,282 $ 704 $ 843 $ 999 $ 1,173
6 $ 2,697 $20,000 $20,000 $20,152 $ 20,406 $ 923 $1,115 $ 1,336 $ 1,589
7 $ 3,211 $20,000 $20,000 $20,205 $ 20,558 $1,143 $1,396 $ 1,695 $ 2,047
8 $ 3,746 $20,000 $20,000 $20,268 $ 20,742 $1,358 $1,680 $ 2,071 $ 2,545
9 $ 4,302 $20,000 $20,000 $20,341 $ 20,963 $1,566 $1,967 $ 2,465 $ 3,087
10 $ 4,881 $20,000 $20,000 $20,426 $ 21,225 $1,768 $2,255 $ 2,878 $ 3,677
15 $ 8,140 $20,000 $20,000 $21,056 $ 23,325 $2,427 $3,477 $ 5,010 $ 7,280
20 $12,106 $20,000 $20,000 $22,139 $ 28,833 $2,870 $4,707 $ 7,777 $ 13,035
25 $16,931 $20,000 $20,000 $23,868 $ 42,092 $2,979 $5,844 $11,330 $ 21,959
30 (Age 65) $22,801 $20,000 $20,000 $26,688 $ 59,647 $2,546 $6,726 $15,871 $ 35,471
35 $29,942 $20,000 $20,000 $32,133 $ 83,129 $1,129 $7,031 $21,453 $ 55,500
40 $38,631 $20,000 $20,000 $38,071 $114,786 $ 0 $6,070 $28,055 $ 84,587
45 $49,203 $20,000 $20,000 $44,659 $157,809 $ 0 $1,945 $35,614 $125,848
</TABLE>
- -------------
1) If premiums are paid more frequently than annually, the payments would be
$202.79 semi-annually, $103.98 quarterly or $36.59 monthly. The death
benefits and cash surrender values would be slightly different for a
Contract with more frequent premium payments.
2) Assumes no Contract loan has been made.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%, 8%,
AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY PRUCO LIFE OR
THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T4
<PAGE>
GENERAL INFORMATION ABOUT
PRUCO LIFE PRUVIDER VARIABLE APPRECIABLE ACCOUNT
AND THE FIXED RATE OPTION
PRUCO LIFE PRUVIDER VARIABLE APPRECIABLE ACCOUNT
Pruco Life PRUVIDER Variable Appreciable Account was established on July 10,
1992 under Arizona law as a separate investment account. The Account meets the
definition of a "separate account" under the federal securities laws. The
Account holds assets that are segregated from all of Pruco Life's other assets.
The obligations to Contract owners and beneficiaries arising under the Contract
are general corporate obligations of Pruco Life. Pruco Life is also the legal
owner of the assets in the Account. Pruco Life will maintain assets in the
Account with a total market value at least equal to the reserve and other
liabilities relating to the variable benefits attributable to the Account. These
assets may not be charged with liabilities which arise from any other business
Pruco Life conducts. In addition to these assets, the Account's assets may
include funds contributed by Pruco Life to commence operation of the Account and
may include accumulations of the charges Pruco Life makes against the Account.
From time to time these additional assets will be transferred to Pruco Life's
general account. Before making any such transfer, Pruco Life will consider any
possible adverse impact the transfer might have on the Account.
The Account is registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940 ("1940 Act") as a unit investment
trust, which is a type of investment company. This does not involve any
supervision by the SEC of the management or investment policies or practices of
the Account. For state law purposes, the Account is treated as a part or
division of Pruco Life. There are currently two subaccounts within the Account,
one of which invests in the Conservative Balanced Portfolio and the other of
which invests in the Flexible Managed Portfolio of the Series Fund. Additional
subaccounts may be added in the future. The Account's financial statements begin
on page A1.
THE FIXED-RATE OPTION
Because of exemptive and exclusionary provisions, interests in the fixed-rate
option under the Contract have not been registered under the Securities Act of
1933 and the general account has not been registered as an investment company
under the Investment Company Act of 1940. Accordingly, interests in the
fixed-rate option are not subject to the provisions of these Acts, and Pruco
Life has been advised that the staff of the Securities and Exchange Commission
has not reviewed the disclosure in this Prospectus relating to the fixed-rate
option. Any inaccurate or misleading disclosure regarding the fixed-rate option
may, however, subject Pruco Life and its directors to civil liability if that
results in any damage.
As explained earlier, you may elect to allocate, either initially or by
transfer, all or part of the amount credited under the Contract to the
fixed-rate option, and the amount so allocated or transferred becomes part of
The Pruco Life's general assets. Sometimes this is referred to as Pruco Life's
general account, which consists of all assets owned by Pruco Life other than
those in the Account and in other separate accounts that have been or may be
established by Pruco Life. Subject to applicable law, Pruco Life has sole
discretion over the investment of the assets of the general account, and
Contract owners do not share in the investment experience of those assets.
Instead, Pruco Life guarantees that the part of the Contract Fund allocated to
the fixed-rate option will accrue interest daily at an effective annual rate
that Pruco Life declares periodically. This rate may not be less than an
effective annual rate of 4%. Currently, declared interest rates remain in effect
from the date money is allocated to the fixed-rate option until the Monthly date
in the same month in the following year. See CONTRACT DATE, page 12. Thereafter,
a new crediting rate will be declared each year and will remain in effect for
the calendar year. Pruco Life reserves the right to change this practice. Pruco
Life is not obligated to credit interest at a higher rate than 4%, although in
its sole discretion it may do so. Different crediting rates may be declared for
different portions of the Contract Fund allocated to the fixed-rate option. At
least annually and on request, a Contract owner will be advised of the interest
rates that currently apply to his or her Contract.
Transfers from the fixed-rate option are subject to strict limits. (See
TRANSFERS, page 13). The payment of any cash surrender value attributable to the
fixed-rate option may be delayed up to 6 months (see WHEN PROCEEDS ARE PAID,
page 17).
8
<PAGE>
DETAILED INFORMATION FOR PROSPECTIVE
CONTRACT OWNERS
REQUIREMENTS FOR ISSUANCE OF A CONTRACT
Generally, the minimum initial guaranteed death benefit that can be applied for
is $5,000 and the maximum that can be applied for is $25,000. For proposed
insureds 21 years of age or younger, the minimum initial guaranteed death
benefit that can be applied for is $10,000. The Contract may generally be issued
on insureds below the age of 76. Before issuing any Contract, Pruco Life
requires evidence of insurability which may include a medical examination.
Non-smokers who meet preferred underwriting requirements are offered the most
favorable premium rate. A higher premium is charged if an extra mortality risk
is involved. These are the current underwriting requirements. The Company
reserves the right to change these requirements on a non-discriminatory basis.
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK"
Generally, you may return the Contract for a refund within 10 days after you
receive it, within 45 days after Part I of the application for insurance is
signed, or within 10 days after Pruco Life mails or delivers a Notice of
Withdrawal Right, whichever is latest. Some states allow a longer period of time
during which a Contract may be returned for a refund. A refund can be requested
by mailing or delivering the Contract to the representative who sold it or to
the Home Office specified in the Contract. A Contract returned according to this
provision shall be deemed void from the beginning. You will then receive a
refund of all premium payments made, plus or minus any change due to investment
experience. However, if applicable law so requires, if you exercise your
short-term cancellation right, you will receive a refund of all premium payments
made, with no adjustment for investment experience.
CONTRACT FEES AND CHARGES
This section provides a detailed description of each charge that is described
briefly in the chart on page 2, and an explanation of the purpose of the charge.
In several instances we will use the terms "maximum charge" and "current
charge." The "maximum charge," in each instance, will be the highest charge that
Pruco Life is entitled to make under the Contract. The "current charge" is the
lower amount that Pruco Life is now charging. However, if circumstances change,
Pruco Life reserves the right to increase each current charge, up to but to no
more than the maximum charge, without giving any advance notice.
A Contract owner may add several "riders" to the Contract which provide
additional benefits, which are charged for separately. The statement and
description of charges that follows assumes there are no riders to the Contract.
Deductions from Premiums
(a) A charge for taxes attributable to premiums is deducted from each premium.
That charge is currently made up of two parts. The first part is in an amount
equal to the state or local premium tax. It varies from jurisdiction to
jurisdiction and generally ranges from 0.75% to 5% (but in some instances it may
exceed 5%) of the premium received by Pruco Life. The second part is for federal
income taxes measured by premiums and it is equal to 1.25% of the premium. Pruco
Life believes that this charge is a reasonable estimate of an increase in its
federal income taxes resulting from a 1990 change in the Internal Revenue Code.
It is intended to recover this increased tax. During 1996, 1995 and 1994, Pruco
Life received a total of approximately $2,187,535, $2,003,387 and $2,412,598,
respectively, in taxes attributable to premiums.
(b) A charge of $2 is deducted from each premium payment to cover the cost of
collecting and processing premiums. Thus, if you pay premiums annually, this
charge will be $2 per year. If you pay premiums monthly, the charge will be $24
per year. If you pay premiums more frequently, for example under a payroll
deduction plan with your employer, the charge may be more than $24 per year.
During 1996, 1995 and 1994, Pruco Life received a total of approximately
$1,155,021, $965,634 and $753,128, respectively, in processing charges.
Deductions from Portfolios
(a) An investment advisory fee is deducted daily from each portfolio at an
annual rate of 0.55% for the Conservative Balanced Portfolio and 0.6% for the
Flexible Managed Portfolio.
(b) The expenses incurred in conducting the investment operations of the
portfolios (such as investment advisory fees, custodian fees and preparation and
distribution of annual reports) are paid out of the portfolio's income. These
expenses also vary from portfolio to portfolio. The total expenses of each
portfolio for the year 1996 expressed as a percentage of the average assets
during the year are shown as follows:
9
<PAGE>
- --------------------------------------------------------------------------------
ADVISORY OTHER TOTAL
PORTFOLIO FEE EXPENSES EXPENSES
- --------------------------------------------------------------------------------
Conservative Balanced 0.55% 0.04% 0.59%
Flexible Managed 0.60% 0.04% 0.64%
- --------------------------------------------------------------------------------
For the years 1996, 1995 and 1994, Prudential received a total of $94,962,866,
$77,610,207 and $66,413,206, respectively, in investment management fees for all
of the Series Fund's portfolios.
Monthly Deductions from Contract Fund
The following monthly charges are deducted proportionately from the dollar
amounts held in each of the chosen investment option[s].
(a) A sales charge, often called a sales load, is deducted to pay part of the
costs Pruco Life incurs in selling the Contracts, including commissions,
advertising and the printing and distribution of prospectuses and sales
literature. The charge is equal to 0.5% of the "primary annual premium" which is
equal to the Scheduled Premium that would be payable if premiums were being paid
annually, less the two deductions from premiums (taxes attributable to premiums
and the $2 processing charge), and less the $6 part of the monthly deduction
described in (c) below, the $0.30 per $1,000 of face amount for Contracts with a
face amount of less than $10,000, and any extra premiums for riders or
substandard risks. The deduction is made whether the Contract owner is paying
premiums annually or more frequently. It is lower on Contracts issued on
insureds over 60 years of age. To summarize, this charge is somewhat less than
(significantly less for Contracts with small face amounts) 6% of the annual
Scheduled Premium.
There is a second sales load, which will be charged only if a Contract lapses or
is surrendered before the end of the 10th Contract year. It is often described
as a contingent deferred sales load ("CDSL") and is described later under
SURRENDER OR WITHDRAWAL CHARGES. During 1996, 1995 and 1994, Pruco Life received
a total of approximately $3,685,080, $3,035,533 and $1,785,222, respectively, in
sales load charges.
(b) A charge of not more than $0.01 per $1000 of face amount of insurance is
made to compensate Pruco Life for the risk it assumes by guaranteeing that, no
matter how unfavorable investment experience may be, the death benefit will
never be less than the guaranteed minimum death benefit so long as Scheduled
Premiums are paid on or before the due date or during the grace period. This
charge will not be made if the Contract has been continued in force pursuant to
an option on lapse. During 1996, 1995 and 1994, Pruco Life received a total of
approximately $147,942, $120,813 and $92,140, respectively, for this risk
charge.
(c) An administrative charge of $6 plus up to $0.19 per $1,000 per month of face
amount of insurance is deducted each month. Currently, on a non-guaranteed
basis, this charge is reduced from $0.19 to $0.09 per $1,000. The charge is
intended to pay for processing claims, keeping records, and communicating with
Contract owners. If premiums are paid by automatic transfer under the Pru-Matic
Plan, as described on page 12, the current charge is further reduced to $0.07
per $1,000 of face amount. There is an additional charge of $0.30 per $1,000 of
face amount if the face amount of the Contract is less than $10,000. This
monthly administrative charge will not be made if the Contract has been
continued in force pursuant to an option on lapse. During 1996, 1995 and 1994,
Pruco Life received a total of approximately $8,169,343, $6,876,677 and
$5,161,744, respectively, in monthly administrative charges.
(d) A mortality charge is deducted that is intended to be used to pay death
benefits. When an insured dies, the amount payable to the beneficiary is larger
than the Contract Fund and significantly larger if the insured dies in the early
years of a Contract. The mortality charges collected from all Contract owners
enables Pruco Life to pay the death benefit for the few insureds who die. The
maximum mortality charge is determined by multiplying the "net amount at risk"
under a Contract (the amount by which the Contract's death benefit, computed as
if there were neither riders nor Contract debt, exceeds the Contract Fund) by a
rate based upon the insured's current attained age and sex (except where unisex
rates apply) and the anticipated mortality for that class of persons. The
anticipated mortality is based upon mortality tables published by The National
Association of Insurance Commissioners called the Non-Smoker/Smoker 1980 CSO
Tables. Pruco Life may determine that a lesser amount than that called for by
these mortality tables will be adequate for insureds of particular ages and may
thus make a lower mortality charge for such persons. Any lower current mortality
charges are not applicable to Contracts in force pursuant to an option on lapse.
See LAPSE AND REINSTATEMENT, page 15.
(e) If the Contract includes riders, Pruco Life deducts any charges applicable
to those riders from the Contract Fund on each Monthly date. In addition, Pruco
Life will deduct on each Monthly date any extra charge incurred because of the
rating class of the insured.
10
<PAGE>
(f) A charge may be deducted to cover federal, state or local taxes (other than
"taxes attributable to premiums" described above) that are imposed upon the
operations of the Account. At present no such taxes are imposed and no charge is
made. Pruco Life will review the question of a charge to the Account for company
federal income taxes periodically. Such a charge may be made in future years for
any company federal income taxes that would be attributable to the Account.
Under current law, Pruco Life may incur state and local taxes (in addition to
premium taxes) in several states. At present, these taxes are not significant
and they are not charged against the Account. If there is a material change in
the applicable state or local tax laws, the imposition of any such taxes upon
Pruco Life that are attributable to the Account may result in a corresponding
charge against the Account.
Daily Deduction from the Contract Fund
Each day a charge is deducted from the assets of each of the subaccounts in an
amount equivalent to an effective annual rate of up to 0.9%. This charge is
intended to compensate Pruco Life for assuming mortality and expense risks under
the Contract. The mortality risk assumed is that insureds may live for shorter
periods of time than Pruco Life estimated when it determined what mortality
charge to make. The expense risk assumed is that expenses incurred in issuing
and administering the Contract will be greater than Pruco Life estimated in
fixing its administrative charges. This charge is not assessed against amounts
allocated to the fixed-rate option. During 1996, 1995 and 1994, Pruco Life
received a total of approximately $1,391,951, $976,867 and $576,113,
respectively, in mortality and expense risk charges.
Surrender or Withdrawal Charges
(a) An additional sales load (the CDSL) is charged if a Contract is surrendered
for its cash surrender value or lapses during the first 10 Contract years. It is
not deducted from the death benefit if the insured should die during this
period. This maximum contingent deferred charge is equal to 50% of the first
year's primary annual premium upon Contracts that lapse during the first 5
Contract years. That percentage is reduced uniformly on a daily basis starting
from the Contract's fifth anniversary until it disappears on the tenth
anniversary. Other important limitations apply. They are described more fully in
the Statement of Additional Information. The amount of this charge can be more
easily understood by reference to the following table which shows the sales
loads that would be paid by a 35 year old man with $20,000 face amount of
insurance, both through the monthly deductions from the Contract Fund described
above and upon the surrender of the Contract.
<TABLE>
- -----------------------------------------------------------------------------------------------------
CUMULATIVE
TOTAL SALES
CUMULATIVE LOAD AS
SALES LOAD PER-
SURRENDER, CUMULATIVE DEDUCTED CONTINGENT CENTAGE OF
LAST DAY SCHEDULED FROM DEFERRED TOTAL SCHEDULED
OF PREMIUMS CONTRACT SALES SALES PREMIUMS
YEAR NO. PAID FUND LOAD LOAD PAID
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 $ 390.90 $ 18.24 $ 87.22 $105.46 26.98%
2 781.80 36.48 104.16 140.64 17.99%
3 1,172.70 54.72 121.10 175.82 14.99%
4 1,563.60 72.96 138.04 211.00 13.49%
5 1,954.50 91.20 146.55 237.75 12.16%
6 2,345.40 109.44 121.80 231.24 9.86%
7 2,736.30 127.68 91.40 219.08 8.01%
8 3,127.20 145.92 60.80 206.72 6.61%
9 3,518.10 164.16 30.40 194.56 5.53%
10 3,909.00 182.40 0.00 182.40 4.67%
- -----------------------------------------------------------------------------------------------------
</TABLE>
The percentages shown in the last column will not be appreciably different for
insureds of different ages.
(b) An administrative charge of $5 per $1,000 of face amount of insurance is
deducted upon lapse or surrender to cover the cost of processing applications,
conducting medical examinations, determining insurability and the insured's
rating class, and establishing records. However, this charge is reduced
beginning on the Contract's fifth anniversary and declines daily at a constant
rate until it disappears entirely on the tenth Contract anniversary. We are
currently allowing partial surrenders of the Contract, but we reserve the right
to cancel this administrative practice. If the Contract is partially surrendered
during the first 10 years, a proportionate amount of the charge will be deducted
from the Contract Fund. During 1996, 1995 and 1994, Pruco Life received a total
of
11
<PAGE>
approximately $269,611, $219,895 and $94,251, respectively, for surrendered or
lapsed Contracts. Surrender of all or part of a Contract may have tax
consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 19.
Transaction Charges
An administrative processing charge of $15 will be made in connection with each
withdrawal of excess cash surrender value of a Contract. This charge is
described in more detail in the Statement of Additional Information.
CONTRACT DATE
When the first premium payment is paid with the application for a Contract, the
Contract date will ordinarily be the later of the date of the application or the
date of any medical examination. In most cases no medical examination will be
necessary. If the first premium is not paid with the application, the Contract
date will ordinarily be the date the first premium was paid and the Contract was
delivered. Under certain circumstances, Pruco Life will permit a Contract to be
back-dated but only to a date not earlier than 6 months prior to the date of the
application. It may be advantageous for a Contract owner to have an earlier
Contract date since that will result in the use by Pruco Life of a lower issue
age in determining the amount of the scheduled premium. Pruco Life will require
the payment of all premiums that would have been due had the application date
coincided with the back-dated Contract date. The death benefit and cash
surrender value under the Contract will be equal to what they would have been
had the Contract been issued on the Contract date, all scheduled premiums been
received on their due dates, and all Contract charges been made.
PREMIUMS
The Contract provides for a Scheduled Premium which, if paid when due or within
a 61 day grace period, ensures that the Contract will not lapse. If you pay
premiums other than on a monthly basis, you will receive a notice that a premium
is due about 3 weeks before each due date. If you pay premiums monthly, you will
receive a book each year with 12 coupons that will serve as a reminder. With
Pruco Life's consent, you may change the frequency of premium payments.
You may elect to have monthly premiums paid automatically under the "Pru-Matic
Premium Plan" by pre-authorized transfers from a bank checking account. If you
select the Pru-Matic Premium Plan, one of the current monthly charges will be
reduced. See MONTHLY DEDUCTIONS FROM CONTRACT FUND, page 10. Some Contract
owners may also be eligible to have monthly premiums paid by pre-authorized
deductions from an employer's payroll.
The following table shows, for two face amounts, representative preferred and
standard annual premium amounts under Contracts issued on insureds who are not
substandard risks. These premiums do not reflect any additional riders or
supplementary benefits.
- --------------------------------------------------------------------------------
$10,000 FACE AMOUNT $20,000 FACE AMOUNT
------------------- -------------------
PREFERRED STANDARD PREFERRED STANDARD
- --------------------------------------------------------------------------------
Male, age 35 $233.70 $274.01 $390.90 $ 471.52
at issue
- --------------------------------------------------------------------------------
Female, age 45 $278.04 $308.53 $479.59 $ 540.57
at issue
- --------------------------------------------------------------------------------
Male, age 55 $450.96 $562.17 $825.43 $1047.86
at issue
- --------------------------------------------------------------------------------
The following table compares annual and monthly premiums for insureds who are in
the preferred rating class. Note that in these examples the sum of 12 monthly
premiums for a particular Contract is approximately 110% to 116% of the annual
scheduled premium for that Contract.
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- --------------------------------------------------------------------------------
$10,000 FACE AMOUNT $20,000 FACE AMOUNT
------------------------ -------------------------
MONTHLY ANNUAL MONTHLY ANNUAL
- --------------------------------------------------------------------------------
Male, age 35 $22.43 $233.70 $36.59 $390.90
at issue
- --------------------------------------------------------------------------------
Female, age 45 $26.46 $278.04 $44.65 $479.59
at issue
- --------------------------------------------------------------------------------
Male, age 55 $41.96 $450.96 $75.66 $825.43
at issue
- --------------------------------------------------------------------------------
A significant feature of this Contract is that it permits you to pay greater
than Scheduled Premiums. This may be done by making occasional unscheduled
premium payments or on a periodic basis. If you wish, you may select a higher
contemplated premium than the Scheduled Premium. Pruco Life will then bill you
for the chosen premium. In general, the regular payment of higher premiums will
result in higher cash surrender values and higher death benefits. Conversely,
payment of a Scheduled Premium need not be made if the Contract Fund is
sufficiently large to enable the charges due under the Contract to be made
without causing the Contract to lapse. See LAPSE AND REINSTATEMENT, page 15. The
payment of premiums in excess of Scheduled Premiums may cause the Contract to
become a Modified Endowment Contract. If this happens, loans and other
distributions which would otherwise not be taxable events will be subject to
federal income taxation. See TAX TREATMENT OF CONTRACT BENEFITS, page 19.
Pruco Life will generally accept any premium payment if the payment is at least
$25. Pruco Life does reserve the right, however, to limit unscheduled premiums
to a total of $5,000 in any Contract year, and to refuse to accept premiums that
would immediately result in more than a dollar-for-dollar increase in the death
benefit. See HOW A CONTRACT'S DEATH BENEFIT WILL VARY, page 14. The privilege of
making large or additional premium payments offers a way of investing amounts
which accumulate without current income taxation, but again, there are tax
consequences if the Contract becomes a Modified Endowment Contract. See TAX
TREATMENT OF CONTRACT BENEFITS, page 19.
ALLOCATION OF PREMIUMS
On the Contract date, a $2 processing charge and the charge for taxes
attributable to premiums are deducted from the initial premium. The remainder is
allocated on the Contract date among the subaccount[s] or the fixed-rate option
according to the desired allocation specified in the application form. From this
invested portion of the initial premium, the first monthly deductions are made.
See CONTRACT FEES AND CHARGES, page 9. The invested portion of any part of the
initial premium in excess of the Scheduled Premium is placed in the selected
investment option[s] on the date of receipt at a Home Office, but not earlier
than the Contract date. Thus, to the extent that the receipt of the first
premium precedes the Contract date, there will be a period during which the
Contract owner's initial premium will not be invested. All subsequent premium
payments, after the deduction from premiums, will be invested as of the end of
the valuation period in which it is received at a Home Office in accordance with
the allocation previously designated. Provided the Contract is not in default,
you may change the way in which subsequent premiums are allocated by giving
written notice to a Home Office. You may also change the way in which subsequent
premiums are allocated by telephoning the Home Office, provided you are enrolled
to use the Telephone Transfer system. There is no charge for reallocating future
premiums. If any part of the invested portion of a premium is allocated to a
particular investment option, that portion must be at least 10% on the date the
allocation takes effect. All percentage allocations must be in whole numbers.
For example, 33% can be selected but 33-1/3% cannot. Of course, the total
allocation of all selected investment options must equal 100%.
TRANSFERS
If the Contract is not in default, or if the Contract is in force as variable
reduced paid-up insurance (see LAPSE AND REINSTATEMENT, page 15), you may, up to
four times in each Contract year, transfer amounts from one subaccount to the
other subaccount or to the fixed-rate option. Currently you may make additional
transfers with Pruco Life's consent. There is no charge. All or a portion of the
amount credited to a subaccount may be transferred.
In addition, the total amount credited to a Contract held in the subaccounts may
be transferred to the fixed-rate option at any time during the first two
Contract years. If you wish to convert your variable Contract to a fixed-benefit
Contract in this manner, you must request a complete transfer of funds to the
fixed-rate option and should also change your allocation instructions regarding
any future premiums.
Transfers between subaccounts will take effect as of the end of the valuation
period (usually the business day) in which a proper transfer request is received
at a Home Office. The valuation period is defined as the period of
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<PAGE>
time from one determination of the value of the amount invested in a subaccount
to the next. Such determinations are made when the net asset values of the
portfolios are calculated, which is generally at 4:15 p.m. New York City time on
each day during which the New York Stock Exchange is open. The request may be in
terms of dollars, such as a request to transfer $1,000 from one subaccount to
the other, or may be in terms of a percentage reallocation between subaccounts.
In the latter case, as with premium reallocations, the percentages must be in
whole numbers. You may transfer amounts by proper written notice to a Home
Office or by telephone, provided you are enrolled to use the Telephone Transfer
System. You will automatically be enrolled to use the Telephone Transfer System
unless the Contract is jointly owned or you elect not to have this privilege.
Telephone transfers may not be available on policies that are assigned,
depending on the terms of the assignment. Pruco Life has adopted procedures
designed to ensure that requests by telephone are genuine and will require
appropriate identification for that purpose. Pruco Life will not be held liable
for following telephone instructions that we reasonably believe to be genuine.
Pruco Life cannot guarantee that you will be able to get through to complete a
telephone transfer during peak periods such as periods of drastic economic or
market change.
Transfers from the fixed-rate option are subject to restrictions and may only be
made with Pruco Life's consent. Transfers from the fixed-rate option to the
subaccounts are currently permitted once each Contract year and only during the
30-day period beginning on the Contract anniversary. The maximum amount which
may be transferred out of the fixed-rate option each year is currently the
greater of: (a) 25% of the amount in the fixed-rate option, or (b) $2,000. Such
transfer requests received prior to the Contract anniversary will be effected on
the Contract anniversary. Transfer requests received within the 30-day period
beginning on the Contract anniversary will be effected as of the end of the
valuation period in which a proper transfer request is received at a Home
Office.
These limits are subject to change in the future.
HOW THE CONTRACT FUND CHANGES WITH INVESTMENT EXPERIENCE
As previously stated, after the tenth Contract year, there will no longer be a
surrender charge and, if there is no Contract loan, the cash surrender value
will be equal to the Contract Fund. This section, therefore, also describes how
the cash surrender value of the Contract will change with investment experience.
On the Contract Date, the Contract Fund value is the initial premium less the
deductions from premiums and the first monthly deductions. See CONTRACT FEES AND
CHARGES, page 9. This amount is placed in the investment options designated by
the owner. Thereafter the Contract Fund value changes daily, reflecting
increases or decreases in the value of the securities in which the assets of the
subaccount have been invested, and interest credited on any amounts allocated to
the fixed-rate option. It is also reduced by the daily asset charge for
mortality and expense risks assessed against the variable investment options.
The Contract Fund value also increases to reflect the receipt of additional
premium payments and is decreased by the monthly deductions.
A Contract's cash surrender value on any date will be the Contract Fund value
reduced by the withdrawal charges, if any, and by any Contract debt. Upon
request, Pruco Life will tell a Contract owner the cash surrender value of his
or her Contract. It is possible, although highly unlikely, that the cash
surrender value of a Contract could decline to zero because of unfavorable
investment performance, even if a Contract owner continues to pay Scheduled
Premiums when due.
The tables on pages T1 through T4 of this prospectus illustrate what the death
benefit and cash surrender values would be for a representative Contract,
assuming uniform hypothetical investment results in the selected portfolio[s],
and also provide information about the aggregate premiums payable under the
Contract.
HOW A CONTRACT'S DEATH BENEFIT WILL VARY
The death benefit will change from the outset with investment experience. The
precise way in which that will occur is complicated and is described in the
Statement of Additional Information. In general, and assuming the optional
paid-up benefit is not in effect, see PAID-UP INSURANCE OPTION, on page 16, if
the net investment performance is 4% per year or higher, the death benefit will
increase; if it is below 4%, it will decrease. Pruco Life guarantees, however,
that it will not decrease below the face amount of insurance. If unfavorable
experience of that kind should occur, it must be offset by favorable experience
before the death benefit begins to increase again.
If the Contract is kept in force for several years and if investment performance
is relatively favorable, the Contract Fund value may grow to the point where, to
meet certain provisions of the Internal Revenue Code which require that the
death benefit always be greater than the Contract Fund value, the death benefit
must be increased. The required difference between the death benefit and
Contract Fund value is higher at younger ages than at older ages. A precise
description is in the Statement of Additional Information.
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CONTRACT LOANS
The owner may borrow from Pruco Life up to the "loan value" of the Contract,
using the Contract as the only security for the loan. The loan value is equal to
(1) 90% of an amount equal to the portion of the Contract Fund value
attributable to the variable investment options and to any prior loan[s]
supported by the variable investment options, minus the portion of any charges
attributable to variable investment options that would be payable upon an
immediate surrender; plus (2) 100% of an amount equal to the portion of the
Contract Fund value attributable to the fixed-rate option and to any prior
loan[s] supported by the fixed-rate option, minus the portion of any charges
attributable to the fixed-rate option that would be payable upon an immediate
surrender. The minimum amount that may be borrowed at any one time is $200
unless the proceeds are used to pay premiums on the Contract.
Interest charged on a loan accrues daily at a fixed effective annual rate of
5.5%. Interest payments on any loan are due at the end of each Contract year. If
interest is not paid when due, it is added to the principal amount of the loan.
The term "Contract debt" means the amount of all outstanding loans plus any
interest accrued but not yet due. If at any time the Contract debt exceeds what
the cash surrender value would be if there were no Contract debt, Pruco Life
will notify you of its intent to terminate the Contract in 61 days, within which
time you may repay all or enough of the loan to obtain a positive cash surrender
value and thus keep the Contract in force for a limited time. If you fail to
keep the Contract in force, the amount of unpaid Contract debt will be treated
as a distribution which may be taxable. See TAX TREATMENT OF CONTRACT BENEFITS,
page 19, and LAPSE AND REINSTATEMENT, page 15.
When a loan is made, an amount equal to the loan proceeds will be transferred
out of the variable investment options and/or the fixed-rate option, as
applicable. The reduction will normally be made in the same proportions as the
value in each subaccount and the fixed-rate option bears to the total value of
the Contract. While a loan is outstanding, the amount that was so transferred
will continue to be treated as part of the Contract Fund but it will be credited
with the assumed rate of return of 4% rather than with the actual rate of return
of the subaccount[s] or fixed-rate option.
A loan will not affect the amount of the premiums due. Should the death benefit
become payable while a loan is outstanding, or should the Contract be
surrendered, any Contract debt will be deducted from the death benefit or the
cash surrender value.
A loan will have an effect on a Contract's cash surrender value and may have an
effect on the death benefit, even if the loan is fully repaid, because the
investment results of the selected investment options will apply only to the
amount remaining invested under those options. The longer the loan is
outstanding, the greater the effect is likely to be. The effect could be
favorable or unfavorable. If investment results are greater than the rate being
credited upon the amount of the loan while the loan is outstanding, values under
the Contract will not increase as rapidly as they would have if no loan had been
made. If investment results are below that rate, Contract values will be higher
than they would have been had no loan been made. A loan that is repaid will not
have any effect upon the guaranteed minimum death benefit.
Consider the Contract issued on a 35 year old male insured illustrated in the
table on page T2 with an 8% gross investment return. Assume a $1,500 loan was
made under this Contract at the end of Contract year 8 and repaid at the end of
Contract year 10 and loan interest was paid when due. Upon repayment, the cash
surrender value would be $3,237.44. This amount is lower than the cash surrender
value shown on that page for the end of Contract year 10 because the loan amount
was credited with the 4% assumed rate of return rather than the 6.48% net return
for the designated subaccount[s] resulting from the 8% gross return in the
underlying Series Fund. Loans from Modified Endowment Contracts may be treated
for tax purposes as distributions of income. See TAX TREATMENT OF CONTRACT
BENEFITS, page 19.
SURRENDER OF A CONTRACT
You may surrender a Contract for its cash surrender value while the insured is
living. To surrender a Contract, you must deliver or mail it, together with a
written request in a form that meets our needs, to a Home Office. The cash
surrender value of a surrendered Contract (taking into account the deferred
sales and administrative charges, if any) will be determined as of the end of
the valuation period in which such a request is received in the Home Office. We
are currently allowing partial surrenders of Contracts, but we reserve the right
to cancel this administrative practice. Surrender of a Contract may have tax
consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 19.
LAPSE AND REINSTATEMENT
If Scheduled Premiums are paid on or before each due date, or within the grace
period after each due date, and there are no withdrawals, a Contract will remain
in force even if the investment results of that Contract's variable investment
option[s] have been so unfavorable that the Contract Fund has decreased to zero
or less.
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<PAGE>
In addition, even if a Scheduled Premium is not paid, the Contract will remain
in force as long as the Contract Fund on any Monthly Date is equal to or greater
than the Tabular Contract Fund value on the following Monthly Date. (A Table of
Tabular Contract Fund Values is included in the Contract; the values increase
with each year the Contract remains in force.) This could occur because of such
factors as favorable investment experience, deduction of current rather than
maximum charges, or the previous payment of greater than Scheduled Premiums.
However, if a Scheduled Premium is not paid, and the Contract Fund is
insufficient to keep the Contract in force, the Contract will go into default.
Should this happen, Pruco Life will send you a notice of default setting forth
the payment necessary to keep the Contract in force on a premium paying basis.
This payment must be received at a Home Office within the 61 day grace period
after the notice of default is mailed or the Contract will lapse. A Contract
that lapses with an outstanding Contract loan may have tax consequences. See TAX
TREATMENT OF CONTRACT BENEFITS, page 19.
A Contract that has lapsed may be reinstated within 5 years after the date of
default unless the Contract has been surrendered for its cash surrender value.
To reinstate a lapsed Contract, Pruco Life requires renewed evidence of
insurability, and submission of certain payments due under the Contract.
If your Contract does lapse, it will still provide some benefits. You can
receive the cash surrender value by making a request of Pruco Life prior to the
end of the 61 day grace period. You may also choose one of the three forms of
insurance described below for which no further premiums are payable.
Fixed Extended Term Insurance. The amount of insurance that would have been paid
on the date of default will continue for a stated period of time. You will be
told in writing how long that will be. The insurance amount will not change.
There will be a diminishing cash surrender value but no loan value. Extended
term insurance is not available to insureds in high risk classifications or
under Contracts issued in connection with tax-qualified pension plans.
Fixed Reduced Paid-Up Insurance. This insurance continues for the lifetime of
the insured but at an insurance amount that is generally lower than that
provided by fixed extended term insurance. It will decrease only if a Contract
loan is taken. You will be told, if you ask, what the amount of the insurance
will be. Fixed paid-up insurance has a cash surrender value and a loan value. It
is possible for this Contract to be classified as a Modified Endowment Contract
if this option is exercised during the first 7 Contract years. See TAX TREATMENT
OF CONTRACT BENEFITS, page 19.
Variable Reduced Paid-Up Insurance. This is similar to fixed paid-up insurance
and will initially be in the same amount. The Contract Fund will continue to
vary to reflect the experience of the selected investment options. There will be
a new guaranteed minimum death benefit. Variable reduced paid-up insurance has
cash surrender and loan values.
Variable reduced paid-up insurance is the automatic option provided upon lapse,
if the amount of variable reduced paid-up insurance is at least as great as the
amount of fixed extended term insurance which would have been provided upon
lapse. Variable reduced paid-up insurance will be available only if the insured
is not in one of the high risk rating classes for which Pruco Life does not
offer fixed extended term insurance. It is possible for this Contract to be
classified as a Modified Endowment Contract if this option is exercised during
the first 7 Contract years. See TAX TREATMENT OF CONTRACT BENEFITS, page 19.
What Happens If No Request Is Made? Except in the two situations described
below, if no request is made the "automatic option" will be fixed extended term
insurance. If that is not available to the insured, then fixed reduced paid-up
insurance will be provided. However, if variable reduced paid-up insurance is
available and the amount is at least as great as the amount of fixed extended
term insurance, then the automatic option will be variable reduced paid-up
insurance. This could occur when there is a Contract debt outstanding when the
Contract lapses.
PAID-UP INSURANCE OPTION
In certain circumstances you may elect to stop paying premiums and to have
guaranteed insurance coverage for the lifetime of the insured. This benefit is
available only if the following conditions are met: (1) the Contract is not in
default; (2) Pruco Life is not paying premiums in accordance with any payment of
premium benefit that may be included in the Contract; and (3) the Contract Fund
is sufficiently large so that the calculated guaranteed paid-up insurance amount
is at least equal to the face amount of insurance plus the excess, if any, of
the Contract Fund over the tabular Contract Fund. The amount of guaranteed
paid-up insurance coverage may be greater. It will be equal to the difference
between the Contract Fund and the present value of future monthly charges from
the Contract Fund (other than charges for anticipated mortality costs and for
payment of premium riders) multiplied by the attained age factor. This option
will generally be available only when the Contract has been in force for many
years and the Contract Fund has grown because of favorable investment experience
or the payment of unscheduled premiums or both. Once the paid-up insurance
option is exercised, the actual death benefit is equal to the greater of the
guaranteed paid-up insurance amount and the Contract Fund multiplied by the
attained age
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factor. Upon request, Pruco Life will quote the amount needed to pay up the
Contract and to guarantee the paid-up insurance amount as long as a payment
equal to or greater than the quoted amount is received within two weeks of the
quote. There is no guarantee if the remittance is received within the two week
period and is less than the quoted amount or if the remittance is received
outside the two week period. In this case, Pruco Life will add the remittance to
the Contract Fund and recalculate the guaranteed paid-up insurance amount. If
the guaranteed paid-up insurance amount is equal to or greater than the face
amount, the paid-up request will be processed. If the guaranteed paid-up
insurance amount is calculated below the face amount, the insured will be
notified that the amount is insufficient to process the request. In some cases,
the quoted amount, if paid, would increase the death benefit by more than it
increases the Contract Fund. In these situations, underwriting might be required
to accept the premium payment and to process the paid-up request. Pruco Life
reserves the right to change this procedure in the future. After the first
Contract year, you must make a proper written request for the Contract to become
fully paid-up and send the Contract to a Home Office to be endorsed. If this
option is exercised during the first 7 Contract years, the Contract may be
classified as a "Modified Endowment Contract," see TAX TREATMENT OF CONTRACT
BENEFITS, page 19. A Contract in effect under a paid-up insurance option will
have cash surrender and loan values.
WHEN PROCEEDS ARE PAID
Pruco Life will generally pay any death benefit, cash surrender value, loan
proceeds or withdrawal within 7 days after receipt at a Home Office of all the
documents required for such a payment. Other than the death benefit, which is
determined as of the date of death, the amount will be determined as of the end
of the valuation period in which the necessary documents are received at a Home
Office. However, Pruco Life may delay payment of proceeds from the subaccount[s]
and the variable portion of the death benefit due under the Contract if the sale
or valuation of the Account's assets is not reasonably practicable because the
New York Stock Exchange is closed for other than a regular holiday or weekend,
trading is restricted by the SEC or the SEC declares that an emergency exists.
With respect to the amount of any cash surrender value allocated to the
fixed-rate option, and with respect to a Contract in force as fixed reduced
paid-up insurance or as extended term insurance, Pruco Life expects to pay the
cash surrender value promptly upon request. However, Pruco Life has the right to
delay payment of such cash surrender value for up to 6 months (or a shorter
period if required by applicable law). Pruco Life will pay interest of at least
3% a year if it delays such a payment for more than 30 days (or a shorter period
if required by applicable law).
LIVING NEEDS BENEFIT
Contract applicants may elect to add the LIVING NEEDS BENEFIT(SM) to their
Contracts at issue. The benefit may vary state-by-state. It can generally be
added only when the aggregate face amounts of the insured's eligible contracts
equal $50,000 or more. There is no charge for adding the benefit to the
Contract. However, an administrative charge (not to exceed $150) will be made at
the time the LIVING NEEDS BENEFIT is paid.
Subject to state regulatory approval, the LIVING NEEDS BENEFIT allows the
Contract owner to elect to receive an accelerated payment of all or part of the
Contract's death benefit, adjusted to reflect current value, at a time when
certain special needs exist. The adjusted death benefit will always be less than
the death benefit, but will generally be greater than the Contract's cash
surrender value. One or both of the following options may be available. A Pruco
Life representative should be consulted as to whether additional options may be
available.
Terminal Illness Option. This option is available if the insured is diagnosed as
terminally ill with a life expectancy of 6 months or less. When satisfactory
evidence is provided, Pruco Life will provide an accelerated payment of the
portion of the death benefit selected by the Contract owner as a LIVING NEEDS
BENEFIT. You may (1) elect to receive the benefit in a single sum or (2) receive
equal monthly payments for 6 months. If the insured dies before all the payments
have been made, the present value of the remaining payments will be paid to the
beneficiary designated in the LIVING NEEDS BENEFIT claim form in a single sum.
Nursing Home Option. This option is available after the insured has been
confined to an eligible nursing home for 6 months or more. When satisfactory
evidence is provided, including certification by a licensed physician, that the
insured is expected to remain in the nursing home until death, Pruco Life will
provide an accelerated payment of the portion of the death benefit selected by
the Contract owner as a LIVING NEEDS BENEFIT. You may (1) elect to receive the
benefit in a single sum or (2) receive equal monthly payments for a specified
number of years (not more than 10 nor less than 2), depending upon the age of
the insured. If the insured dies before all of the payments have been made, the
present value of the remaining payments will be paid to the beneficiary
designated in the LIVING NEEDS BENEFIT claim form in a single sum.
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All or part of the Contract's death benefit may be accelerated under the LIVING
NEEDS BENEFIT. If the benefit is only partially accelerated, a death benefit of
at least $25,000 must remain under the Contract. Pruco Life reserves the right
to determine the minimum amount that may be accelerated.
No benefit will be payable if the Contract owner is required to elect it in
order to meet the claims of creditors or to obtain a government benefit. Pruco
Life can furnish details about the amount of LIVING NEEDS BENEFIT that is
available to an eligible Contract owner under a particular Contract, and the
adjusted premium payments that would be in effect if less than the entire death
benefit is accelerated.
The Contract owner should consider whether adding this settlement option is
appropriate in his or her given situation. Adding the LIVING NEEDS BENEFIT to
the Contract has no adverse consequences; however, electing to use it could.
With the exception of certain business-related policies, the recently enacted
Health Insurance Portability and Accountability Act of 1996 excludes from income
the Living Needs Benefit if the insured is terminally ill or chronically ill as
defined by the tax law (although the exclusion in the latter case may be
limited). Contract owners should consult a qualified tax advisor before electing
to receive this benefit. Receipt of a LIVING NEEDS BENEFIT payment may also
affect a Contract owner's eligibility for certain government benefits or
entitlements.
VOTING RIGHTS
As stated above, all of the assets held in the subaccounts of the Account will
be invested in shares of the corresponding portfolios of the Series Fund. Pruco
Life is the legal owner of those shares and as such has the right to vote on any
matter voted on at Series Fund shareholders meetings. However, Pruco Life will,
as required by law, vote the shares of the Series Fund at any regular and
special shareholders meetings it is required to hold in accordance with voting
instructions received from Contract owners. The Series Fund will not hold annual
shareholders meetings when not required to do so under Maryland law or the
Investment Company Act of 1940. Series Fund shares for which no timely
instructions from Contract owners are received, and any shares attributable to
general account investments of Pruco Life will be voted in the same proportion
as shares in the respective portfolios for which instructions are received.
Matters on which Contract owners may give voting instructions including the
following: (1) election of the Board of Directors of the Series Fund; (2)
ratification of the independent accountant of the Series Fund; (3) approval of
the investment advisory agreement for a portfolio of the Series Fund
corresponding to the Contract owner's selected subaccount[s]; (4) any change in
the fundamental investment policy of a portfolio corresponding to the Contract
owner's selected subaccount[s]; and (5) any other matter requiring a vote of the
shareholders of the Series Fund. With respect to approval of the investment
advisory agreement or any change in a portfolio's fundamental investment policy,
Contract owners participating in such portfolios will vote separately on the
matter.
The number of shares in a portfolio for which you may give instructions is
determined by dividing the portion of your Contract Fund attributable to the
portfolio, by the value of one share of the portfolio. The number of votes for
which each Contract owner may give Pruco Life instructions will be determined as
of the record date chosen by the Board of Directors of the Series Fund. Pruco
Life will furnish Contract owners with proper forms and proxies to enable them
to give these instructions. Pruco Life reserves the right to modify the manner
in which the weight to be given voting instructions is calculated where such a
change is necessary to comply with current federal regulations or
interpretations of those regulations.
Pruco Life may, if required by state insurance regulations, disregard voting
instructions if such instructions would require shares to be voted so as to
cause a change in the sub-classification or investment objectives of one or more
of the Series Fund's portfolios, or to approve or disapprove an investment
advisory contract for the Series Fund. In addition, Pruco Life itself may
disregard voting instructions that would require changes in the investment
policy or investment advisor of one or more of the Series Fund's portfolios,
provided that Pruco Life reasonably disapproves such changes in accordance with
applicable federal regulations. If Pruco Life does disregard voting
instructions, it will advise Contract owners of that action and its reasons for
such action in the next annual or semi-annual report to Contract owners.
REPORTS TO CONTRACT OWNERS
Once each Contract year (except where the Contract is in force as fixed extended
term insurance or fixed reduced paid-up insurance), you will be sent a statement
that provides certain information pertinent to your own Contract. These
statements show all transactions during the year that affected the value of your
Contract Fund, including monthly changes attributable to investment experience.
That statement will also show the current death benefit, cash surrender value,
and loan values of your Contract. On request, you will be sent a current
statement in a form similar to that of the annual statement described above, but
Pruco Life may limit the number of such requests or impose a reasonable charge
if such requests are made too frequently.
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You will also be sent annual and semi-annual reports of the Series Fund showing
the financial condition of the portfolios and the investments held in both. If a
single individual or company invests in the Series Fund through more than one
variable insurance contract, then the individual or company will receive only
one copy of each annual or semi-annual report issued by the Series Fund.
However, if such individual or company wishes to receive multiple copies of any
such report, a request may be made by calling the toll-free telephone number
listed on the inside front cover page of this prospectus.
TAX TREATMENT OF CONTRACT BENEFITS
The tax treatment of life insurance is complex and may change. Each prospective
purchaser is urged to consult a qualified tax advisor. The following discussion
is not intended as tax advice, and it is not a complete statement of what the
effect of federal income taxes will be under all circumstances. Rather, it
provides information about how Pruco Life believes the tax laws apply in the
most commonly occurring circumstances. A more technical discussion of what
follows is contained in the Statement of Additional Information.
Treatment as Life Insurance. Pruco Life believes that the Contract should
qualify as "life insurance" under the Internal Revenue Code. This means that:
(1) except as noted below, the Contract owner should not be taxed on any part of
the Contract Fund, including additions attributable to interest, dividends or
appreciation until amounts are distributed under the Contract; and (2) the death
benefit should be excludable from the gross income of the beneficiary under
section 101(a) of the Code.
Although Pruco Life believes the Contract should qualify as "life insurance" for
federal tax purposes, there are uncertainties, particularly because the
Secretary of the Treasury has not yet issued permanent regulations that bear on
this question. Accordingly, we have reserved the right to make changes -- which
will be applied uniformly to all Contract owners after advance written notice --
that we deem necessary to insure that the Contract will continue to qualify as
life insurance.
Pre-Death Distributions. The tax treatment of any distribution received by an
owner prior to an insured's death will depend upon whether the Contract is
classified as a Modified Endowment Contract.
If the Contract is not classified as a Modified Endowment Contract, proceeds
received in the event of a lapse, surrender of the Contract, or withdrawal of
part of the cash surrender value will generally not be taxable unless the total
amount received exceeds the gross premiums paid less the untaxed portion of any
prior withdrawals. In certain limited circumstances, all or a portion of a
withdrawal during the first 15 contract years may be taxable even if total
withdrawals do not exceed total premiums paid to date. The proceeds of any loan
will be treated as indebtedness of the owner and will not be treated as taxable
income.
If the Contract is classified as a Modified Endowment Contract, pre-death
distributions, including loans and withdrawals (even those made during the 2
year period before the Contract became a Modified Endowment Contract), will be
taxed first as investment income to the extent of gain in the Contract, and then
as a return of the Contract owner's investment in the Contract. In addition,
pre-death distributions (including full surrenders) will be subject to a penalty
of 10% of the amount includible in income unless the amount is distributed on or
after the owner reaches age 59 1/2, on account of the owner's disability, or as
a life annuity.
A Contract may be classified as a Modified Endowment Contract under various
circumstances. For example, low face amount Contracts issued on younger insureds
may be classified as a Modified Endowment Contract even though the Contract
owner pays only the Scheduled Premiums or even less than the Scheduled Premiums.
Before purchasing such a Contract, you should understand the tax treatment of
pre-death distributions and consider the purpose for which the Contract is being
purchased. More generally, a Contract may be classified as a Modified Endowment
Contract if premiums in excess of Scheduled Premiums are paid or the face amount
of insurance is decreased during the first seven Contract years, or if the face
amount of insurance is increased or if a rider is added or removed from the
Contract. You should consult with your tax advisor before making any of these
policy changes.
Other Tax Consequences. There may be federal estate taxes and state and local
estate and inheritance taxes payable if either the owner or the insured dies.
The transfer or assignment of the Contract to a new owner may also have tax
consequences. The individual situation of each Contract owner or beneficiary
will be significant.
Withholding. The taxable portion of any amounts received under the Contract will
be subject to withholding to meet federal income tax obligations if the Contract
owner fails to elect that no taxes will be withheld or in certain other
circumstances.
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OTHER CONTRACT PROVISIONS
There are several other Contract provisions that are of less significance to you
than those already described in detail either because they relate to options
that you may choose under the Contract but are not likely to exercise for
several years after you first purchase it or because they are of a routine
nature not likely to influence your decision to buy the Contract. These
provisions are summarized in the Expanded Table of Contents of the Statement of
Additional Information, page 27 and described in greater detail in the Statement
of Additional Information.
FURTHER INFORMATION ABOUT THE SERIES FUND
The Prudential Series Fund, Inc. (the "Series Fund") is a Maryland corporation
organized on November 15, 1982. It is registered under the Investment Company
Act of 1940 (the "1940 Act") as an open-end, diversified, management investment
company. This registration does not imply any supervision by the Securities and
Exchange Commission over the Series Fund's management or its investment policies
or practices.
The Series Fund is currently made up of fifteen separate portfolios, two of
which, the Conservative Balanced and Flexible Managed Portfolios are available
to Contract owners. Each portfolio is, for many purposes, in effect a separate
investment fund, and a separate class of capital stock is issued for each
portfolio. Each share of capital stock issued with respect to a portfolio has a
pro-rata interest in the assets of that portfolio and has no interest in the
assets of any other portfolio. Each portfolio bears its own liabilities and also
its proportionate share of the general liabilities of the Series Fund. In other
respects the Series Fund is treated as one entity. For example, the Series Fund
has only one Board of Directors and owners of the shares of each portfolio are
entitled to vote for members of the Board.
Shares in the Series Fund are currently sold and redeemed at the close of each
business day, at their net asset value, determined in the manner described in
the Statement of Additional Information, only to separate accounts of Prudential
and its subsidiaries. They may, in the future, be sold to other insurers to fund
benefits under variable life insurance and variable annuity contracts issued by
those companies.
Prudential is the investment advisor of the Series Fund. Prudential has entered
into a Service Agreement with its wholly-owned subsidiary The Prudential
Investment Corporation ("PIC"), which provides that PIC will furnish to
Prudential such services as Prudential may require in connection with the
performance of its obligations under an Investment Advisory Agreement with the
Series Fund. One of PIC's business groups is Prudential Investments. See
INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES, page 25.
INVESTMENT OBJECTIVES AND POLICIES
OF THE PORTFOLIOS
Each portfolio of the Series Fund has a different objective which it pursues
through separate investment policies as described below. Since each portfolio
has a different investment objective, each can be expected to have different
investment results and incur different market and financial risks. Those risks,
as explained above, are borne by the Contract owner. The Series Fund may in the
future establish other portfolios with different investment objectives.
The investment objectives of each portfolio are fundamental and may not be
changed without the approval of the holders of a majority of the outstanding
shares of the portfolio affected (which for this purpose and under the 1940 Act
means the lesser of: (i) 67% of the shares represented at a meeting at which
more than 50% of the outstanding shares are represented; or (ii) more than 50%
of the outstanding shares). The policies by which a portfolio seeks to achieve
its investment objectives, however, are not fundamental. They may be changed by
the Board of Directors of the Series Fund without the approval of the
shareholders.
The investment objectives of both portfolios available to PRUVIDER Contract
owners are set forth on page 3. For the sake of convenience, they are repeated
here, followed in each case by a brief description of the policies of both
portfolios. In some cases a fuller description of those policies is in the
Statement of Additional Information. There is no guarantee that any of these
objectives will be met.
BALANCED PORTFOLIOS
CONSERVATIVE BALANCED PORTFOLIO. The objective of this portfolio is to achieve a
favorable total investment return consistent with a portfolio having a
conservatively managed mix of money market instruments, fixed income securities,
and common stocks in proportions believed by the investment manager to be
appropriate for an investor desiring diversification of investment who prefers a
relatively lower risk of loss than that associated with the Flexible Managed
Portfolio while recognizing that this reduces the chances of greater
appreciation.
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To achieve this objective, the Conservative Balanced Portfolio will follow a
policy of maintaining a more conservative asset mix among stocks, bonds and
money market instruments than the Flexible Managed Portfolio. In general, the
portfolio manager will observe the following range of target asset allocation
mixes:
Asset Type Minimum Normal Maximum
---------- ------- ------ -------
Stocks 15% 35% 50%
Bonds and Money Market 25% 65% 70%
The portfolio manager will make variations in the proportions of each investment
category in accordance with its judgment about the expected returns and risks of
the various investment categories, but will maintain at least 25% of the value
of the portfolio's assets in fixed-income senior securities.
The bond portion of this portfolio will be invested primarily in securities with
maturities of 2 to 10 years and ratings at the time of purchase within the four
highest grades determined by Moody's, S&P, or a similar nationally-recognized
rating service or if unrated, of comparable quality in the opinion of the
portfolio manager. However, the portfolio may purchase below-investment grade
debt. A description of corporate bond ratings is contained in the Statement of
Additional Information. Because of their shorter maturities, the value of the
notes and bonds in this portfolio will be less sensitive to changes in interest
rates than the longer-term bonds likely to be held in the Flexible Managed
Portfolio. Thus, there will be less of a risk of loss of principal, but not as
much of a likelihood for greater appreciation in value. 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 stock portion of this portfolio will be invested primarily in the equity
securities of major, established corporations in sound financial condition that
appear to offer attractive prospects of a total return from dividends and
capital appreciation that is superior to broadly based stock indices. The
portfolio may also invest in preferred stock, including below investment grade
preferred stock. 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 Conservative
Balanced Portfolio may invest, without limit, in high quality money market
instruments of the kind held by the Money Market Portfolio. See SECURITIES IN
WHICH THE MONEY MARKET PORTFOLIO MAY CURRENTLY INVEST in the Statement of
Additional Information.
To the extent permitted by applicable insurance law, this portfolio may invest
up to 30% of its total assets in non-United States currency denominated debt and
equity securities of foreign and U.S. issuers. The particular risks of
investments in foreign securities are described under FOREIGN SECURITIES on page
23.
In addition, the portfolio may: (i) purchase and sell options on equity
securities, debt securities, stock indices and foreign currencies; (ii) purchase
and sell stock index, interest rate and foreign currency futures contracts and
options thereon; (iii) enter into forward foreign currency exchange contracts;
(iv) purchase securities on a when-issued or delayed delivery basis; (v) use
interest rate swaps; and (vi) make short sales. These techniques are described
briefly under OPTIONS, FUTURES CONTRACTS AND SWAPS and SHORT SALES, beginning on
page 24, and in detail in the Statement of Additional Information.
The Conservative Balanced Portfolio is managed by a team of portfolio managers.
Mark Stumpp, Senior Managing Director, Prudential Investments, has been lead
portfolio manager of the Conservative Balanced Portfolio since 1994 and is
responsible for the overall asset allocation decisions. Mr. Stumpp has
supervisory responsibility of the portfolio management team. Warren Spitz,
Managing Director, Prudential Investments, has been the portfolio manager of the
equity portion of the portfolio since 1995. It is the intention of the portfolio
to appoint Patricia Bannan, Managing Director, Prudential Investments, to manage
a portion (to be determined by Mr. Stumpp) of the portfolio's equity holdings.
Upon Ms. Bannan's appointment, Mr. Spitz will continue to manage the other
portion of the portfolio's equity holdings. Tony Rodriguez, Vice President,
Prudential Investments, has been the portfolio manager of the fixed income
portion of the portfolio since 1993. Mr. Stumpp also supervises the team of
portfolio managers for the Flexible Managed Portfolio. Mr. Stumpp is also
portfolio manager for several employee benefit trusts including The Prudential
Retirement System for U.S. Employees and Special Agents. Prior to 1994, he was
responsible for corporate pension asset management for Prudential Diversified
Investment Strategies' corporate clients. Mr. Spitz is also portfolio manager of
the Prudential Equity Income Fund and the Equity Income and Flexible Managed
Portfolios of the Series Fund. Ms. Bannan has been portfolio manager of the
equity portion of the Flexible Managed Portfolio since 1996. Prior to 1996, Ms.
Bannan was President of Phoenix Investment Counsel where she personally managed
$3 billion in assets, including a $2.5 billion balanced mutual fund. Mr.
Rodriguez is also portfolio manager for the Prudential Structured Maturity Fund,
Inc. and the Flexible Managed Portfolio of the Series Fund.
FLEXIBLE MANAGED PORTFOLIO. The objective of this portfolio is achievement of a
high total return consistent with a portfolio having an aggressively managed mix
of money market instruments, fixed income securities, and common stocks, in
proportions believed by the investment manager to be appropriate for an investor
desiring diversification of investment who is willing to accept a relatively
high level of loss in an effort to achieve greater appreciation.
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To achieve this objective, the Flexible Managed Portfolio will follow a policy
of maintaining a more aggressive asset mix among stocks, bonds and money market
investments than the Conservative Balanced Portfolio. In general, the portfolio
manager will observe the following range of target asset allocation mixes:
ASSET TYPE MINIMUM NORMAL MAXIMUM
---------- ------- ------ -------
Stocks 25% 60% 100%
Bonds 0% 40% 75%
Money Market 0% 0% 75%
The portfolio manager may make short-run, and sometimes substantial, variations
in the asset mix based upon its judgment about the expected returns and risks of
the various investment categories. In varying the asset mix in accordance with
these judgments, Prudential will also seek to take advantage of imbalances in
fundamental values among the different markets.
The bond component of this portfolio is expected under normal circumstances to
have a weighted average maturity of greater than 10 years. The values of bonds
with longer maturities are generally more sensitive to changes in interest rates
than those of shorter maturities. 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 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, also known as high risk
securities. 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 Conservative
Balanced Portfolio. The portfolio may also invest in preferred stock, including
below investment grade preferred stock. 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.
See SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO MAY CURRENTLY INVEST in the
Statement of Additional Information.
To the extent permitted by applicable insurance law, this portfolio may invest
up to 30% of its total assets in non-United States currency denominated debt and
equity securities of foreign and U.S. issuers. The particular risks of
investments in foreign securities are described under FOREIGN SECURITIES, below.
In addition, the portfolio may: (i) purchase and sell options on equity
securities, debt securities, stock indices and foreign currencies; (ii) purchase
and sell stock index, interest rate and foreign currency futures contracts and
options thereon; (iii) enter into forward foreign currency exchange contracts;
(iv) purchase securities on a whenissued or delayed delivery basis; (v) use
interest rate swaps; and (vi) make short sales. These techniques are described
briefly under OPTIONS, FUTURES CONTRACTS AND SWAPS and SHORT SALES, below, and
in detail in the Statement of Additional Information.
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 it will invest in bonds with longer
maturities; 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.
The Flexible Managed Portfolio is managed by a team of portfolio managers. Mark
Stumpp, Senior Managing Director, Prudential Investments, has been lead
portfolio manager of the Flexible Managed Portfolio since 1994 and is
responsible for the overall asset allocation decisions. Mr. Stumpp has
supervisory responsibility of the portfolio management team. Patricia Bannan,
Managing Director, Prudential Investments, has been the portfolio manager of the
equity portion of the portfolio since 1996. It is the intention of the portfolio
to appoint Warren Spitz, Managing Director, Prudential Investments, to manage a
portion (to be determined by Mr. Stumpp) of the portfolio's equity holdings.
Upon Mr. Spitz's appointment, Ms. Bannan will continue to manage the other
portion of the portfolio's equity holdings. Tony Rodriguez, Vice President,
Prudential Investments, has been the portfolio manager of the fixed income
portion of the portfolio since 1993. Mr. Stumpp also supervises the team of
portfolio managers for the Conservative Balanced Portfolio. Mr. Stumpp is also
portfolio manager for several employee benefit trusts including The Prudential
Retirement System for U.S. Employees and Special Agents. Prior to 1994,
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he was responsible for corporate pension asset management for Prudential
Diversified Investment Strategies' corporate clients. Prior to 1996, Ms. Bannan
was President of Phoenix Investment Counsel where she personally managed $3
billion in assets including a $2.5 billion balanced mutual fund. Mr. Spitz has
been portfolio manager of the equity portion of the Conservative Balanced
Portfolio since 1995 and is also portfolio manager of the Prudential Equity
Income Fund and the Equity Income Portfolio of the Series Fund. Mr. Rodriguez is
also portfolio manager for the Prudential Structured Maturity Fund, Inc., and
the Flexible Managed Portfolio of the Series Fund.
FOREIGN SECURITIES
The bond components of the Conservative Balanced and Flexible Managed Portfolios
may each invest up to 20% of their assets in United States currency denominated
debt securities issued outside the United States by foreign or domestic issuers.
To the extent permitted by applicable insurance law, the Conservative Balanced
and Flexible Managed Portfolios may invest up to 30% of their total assets in
debt and equity securities denominated in a foreign currency and issued by
foreign or domestic issuers. Securities issued outside the United States and not
publicly traded in the United States, as well as American Depository Receipts
("ADRs") and securities denominated in a foreign currency are referred to
collectively in this prospectus as "foreign securities."
ADRs are U.S. dollar-denominated certificates issued by a United States bank or
trust company and represent the right to receive securities of a foreign issuer
deposited in a domestic bank or foreign branch of a United States bank and
traded on a United States exchange or in an over-the-counter market. Investment
in ADRs has certain advantages over direct investment in the underlying foreign
securities because they are easily transferable, have readily available market
quotations, and the foreign issuers are usually subject to comparable auditing,
accounting, and financial reporting standards as domestic issuers.
Foreign securities involve risks of political and economic instability in the
country of the issuer, the difficulty of predicting international trade
patterns, the possibility of imposition of exchange controls and, in the case of
securities not denominated in United States currency, the risk of currency
fluctuations. Such securities may be subject to greater fluctuations in price
than domestic securities. Under certain market conditions, foreign securities
may be less liquid than domestic securities. In addition, there may be less
publicly available information about a foreign company than about a domestic
company. Foreign companies generally are subject to uniform accounting,
auditing, and financial reporting standards comparable to those applicable to
domestic companies. There is generally less government regulation of securities
exchanges, brokers, and listed companies abroad than in the United States, and,
with respect to certain foreign countries, there is a possibility of
expropriation, confiscatory taxation or diplomatic developments which could
affect investment in those countries. If the security is denominated in foreign
currency, it may be affected by changes in currency rates and in exchange
control regulations, and costs may be incurred in connection with conversions
between currencies. Finally, in the event of a default of any foreign debt
obligations, it may be more difficult for a portfolio to obtain or to enforce a
judgment against the issuers of such securities. See FORWARD FOREIGN CURRENCY
EXCHANGE CONTRACTS in the Statement of Additional Information.
RISK FACTORS RELATING TO INVESTING IN FIXED INCOME SECURITIES RATED BELOW
INVESTMENT GRADE
The Conservative Balanced and Flexible Managed Portfolios may invest in below
investment grade fixed income securities. Medium to lower rated and comparable
non-rated securities tend to offer higher yields than higher rated securities
with the same maturities because the historical financial condition of the
issuers of such securities may not have been as strong as that of other issuers.
Since medium to lower rated securities generally involve greater risks of loss
of income and principal than higher rated securities, investors should consider
carefully the relative risks associated with investments in high yield/high risk
securities which carry medium to lower ratings and in comparable non-rated
securities. Investors should understand that such securities are not generally
meant for short-term investing.
Fixed income securities are subject to the risk of an issuer's inability to meet
principal and interest payments on the obligations (credit risk) and may also be
subject to price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness of the issuer and general market
liquidity (market risk). The value of the fixed income securities in the
portfolio will be directly impacted by the market perception of the
creditworthiness of the securities' issuers and will fluctuate inversely with
changes in interest rates. Lower rated or unrated securities are more likely to
react to developments affecting market and credit risk than are more highly
rated securities, which react primarily to movements in the general level of
interest rates. For example, because investors generally perceive that there are
greater risks associated with investing in medium or lower rated securities, the
yields and prices of such securities may tend to fluctuate more than those of
higher rated securities. Moreover, in the lower quality segments of the fixed
income securities market, changes in perception of the creditworthiness of
individual issuers tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the fixed income securities
market. The yield and price of medium to lower rated securities therefore may
experience greater volatility than is the case with higher rated securities.
Prudential
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considers both credit risk and market risk in selecting securities
for the portfolio. By holding a diversified selection of such securities, the
portfolio seeks to reduce this volatility.
The secondary market for high yield/high risk securities, which is concentrated
in relatively few market makers, may not be as liquid as the secondary market
for more highly rated securities. Under adverse market or economic conditions,
the secondary market for high yield/high risk securities could contract further,
independent of any specific adverse changes in the condition of a particular
issuer. As a result, Prudential could find it more difficult to sell such
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such lower
rated or unrated securities therefore may be less than the prices used in
calculating the portfolio's net asset value. In the absence of readily available
market quotations, high yield/high risk securities will be valued by the Series
Fund's Board of Directors using a method that, in the good faith belief of the
Board, accurately reflects fair value. Valuing such securities in an illiquid
market is a difficult task. The Board's judgment plays a more significant role
in valuing such securities than those securities for which more objective market
data are available.
From time to time, federal laws have been enacted which have required the
divestiture by companies of their investments in high yield bonds and have
limited the deductibility of interest by certain corporate issuers of high yield
bonds. These types of laws could adversely affect the portfolio's net asset
value and investment practices, the secondary market for high yield securities,
the financial condition of issuers of these securities and the value of
outstanding high yield securities. There is currently no legislation pending
that would adversely impact the market for high yield/high risk securities.
However, there can be no assurance that such legislation will not be proposed or
enacted in the future.
OPTIONS, FUTURES CONTRACTS AND SWAPS
The description of the portfolios' investment policies also state whether they
will invest in what are sometimes called derivative securities. These include
options (which may be to buy or sell equity securities, debt securities, stock
indices, foreign currencies and stock index futures contracts); futures
contracts on interest bearing securities, stock and interest rate indices, and
foreign currencies; and interest rate swaps. These investments have not in the
past represented more than a very minor part of the investments of any portfolio
but may increase in the future.
A call option gives the owner the right to buy and a put option the right to
sell a designated security or index at a predetermined price for a given period
of time. They will be used primarily to hedge or minimize fluctuations in the
principal value of a portfolio or to generate additional income. They involve
risks which differ, depending upon the particular option. But they often offer
an attractive alternative to the purchase or sale of the related security.
Futures contracts represent a contractual obligation to buy or sell a designated
security or index within a stated period. They can be used as a hedge against or
to minimize fluctuations of a portfolio or as an efficient way of establishing
certain positions more quickly than direct purchase of the securities. They can
also be used to speculate, but this will not be done by any of the portfolios.
They involve risks of various kinds, all of which could result in losses rather
than in achieving the intended objective of any particular purchase.
Because options, futures and swaps are now used to such a limited extent, a full
description of these investments and the risks associated with them is in the
Statement of Additional Information.
SHORT SALES
The Conservative Balanced and Flexible Managed Portfolios may sell securities
they do not own in anticipation of a decline in the market value of those
securities ("short sales"). The portfolio will incur a loss as a result of the
short sale if the price of the security increases between the date of the short
sale and the date on which the portfolio replaces the borrowed security. The
portfolio will realize a gain if the security declines in price between those
dates. This result is the opposite of what one would expect from a cash purchase
of a long position in a security. The amount of any gain will be decreased, and
the amount of any loss will be increased, by the amount of any fee or interest
paid in connection with the short sale.
REPURCHASE AGREEMENTS
The portfolios may enter into repurchase agreements, subject to each portfolio's
investment limit in short-term debt obligations, whereby the seller of a
security agrees to repurchase that security from the portfolio at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the portfolio's
money is invested in the repurchase agreement. The repurchase agreements will at
all times be fully collateralized in an amount at least equal to the
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<PAGE>
resale price. The instruments held as collateral are valued daily, and if the
value of the instruments declines, the portfolio will require additional
collateral. If the seller defaults and the value of the collateral securing the
repurchase agreement declines, the portfolio may incur a loss. Both portfolios
participate in a joint repurchase account pursuant to an order of the SEC. On a
daily basis, any uninvested cash balances of the portfolios may be aggregated
and invested in one or more repurchase agreements. Each portfolio participates
in the income earned or accrued in the joint account based on the percentage of
its investment.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The fixed income portions of the Conservative Balanced and Flexible Managed
Portfolios may use reverse repurchase agreements and dollar rolls. The money
market portion of these portfolios may use reverse repurchase agreements.
Reverse repurchase agreements involve the sale of securities held by a portfolio
with an agreement by the portfolio to repurchase the same securities at an
agreed upon price and date. During the reverse repurchase period, the portfolio
often continues to receive principal and interest payments on the sold
securities. The terms of each agreement reflect a rate of interest for use of
the funds for the period, and thus these agreements have the characteristics of
borrowing by the portfolio. Dollar rolls involve sales by a portfolio of
securities for delivery in the current month with a simultaneous contract to
repurchase substantially similar securities (same type and coupon) from the same
party at an agreed upon price and date. During the roll period, the portfolio
forgoes principal and interest paid on the securities. A portfolio is
compensated by the difference between the current sales price and the forward
price for the future purchase (often referred to as the "drop") as well as by
the interest earned on the cash proceeds of the initial sale. A "covered roll"
is a specific type of dollar roll for which there is an offsetting cash position
or a cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction. A portfolio will establish a
segregated account with its custodian in which it will maintain cash, U.S.
Government securities or other liquid unencumbered assets equal in value to its
obligations in respect of reverse repurchase agreements and dollar rolls.
Reverse repurchase agreements and dollar rolls involve the risk that the market
value of the securities retained by the portfolio may decline below the price of
the securities the portfolio has sold but is obligated to repurchase under the
agreement. In the event the buyer of securities under a reverse repurchase
agreement or dollar roll files for bankruptcy or becomes insolvent, the
portfolio's use of the proceeds of the agreement may be restricted pending a
determination by the other party, or its trustee or receiver, whether to enforce
the portfolio's obligation to repurchase the securities. No portfolio will
obligate more than 30% of its net assets in connection with reverse repurchase
agreements and dollar rolls.
LOANS OF PORTFOLIO SECURITIES
Both of the portfolios may from time to time lend the securities they hold to
broker-dealers, provided that such loans are made pursuant to written agreements
and are continuously secured by collateral in the form of cash, U.S. Government
Securities or irrevocable standby letters of credit in an amount equal to at
least the market value at all times of the loaned securities plus the accrued
interest and dividends. During the time securities are on loan, the portfolio
will continue to receive the interest and dividends, or amounts equivalent
thereto, on the loaned securities, while receiving a fee from the borrower or
earning interest on the investment of the cash collateral.
There is a slight risk that the borrower may become insolvent, which might delay
carrying out a decision to sell the loaned security. This risk can be minimized
by careful selection of borrowers and requiring and monitoring the adequacy of
capital. No loans will be made to any broker affiliated with Prudential.
INVESTMENT RESTRICTIONS APPLICABLE TO
THE PORTFOLIOS
The Series Fund is subject to certain investment restrictions which are
fundamental to the operations of the Series Fund and may not be changed except
with the approval of a majority vote of the persons participating in the
affected portfolio.
The investments of the various portfolios are generally subject to certain
additional restrictions under state laws. In the event of future amendments to
the applicable New Jersey statutes, each portfolio will comply, without the
approval of the shareholders, with the statutory requirements as so modified.
A detailed discussion of investment restrictions applicable to the Series Fund
is in the Statement of Additional Information.
INVESTMENT MANAGEMENT ARRANGEMENTS AND
EXPENSES
The Series Fund has entered into an Investment Advisory Agreement with
Prudential under which Prudential will, subject to the direction of the Board of
Directors of the Series Fund, be responsible for the management of the
25
<PAGE>
Series Fund, and provide investment advice and related services to each
portfolio. Prudential manages the assets that it owns as well as those of
various separate accounts established by Prudential and those held by other
investment companies for which it acts as investment advisor.
Subject to Prudential's supervision, substantially all of the investment
advisory services provided to the Series Fund by Prudential with respect to the
Conservative Balanced and Flexible Managed Portfolios, are furnished by its
wholly-owned subsidiary, PIC, pursuant to the Service Agreement between
Prudential and PIC which provides that a portion of the fee received by
Prudential for providing investment advisory services will be paid to PIC. PIC
is registered as an investment advisor under the Investment Advisers Act of
1940.
Under the Investment Advisory Agreement, Prudential receives an investment
management fee as compensation for its services to the Series Fund. The fee is a
daily charge, payable quarterly, equal to an annual percentage of the average
daily net assets of each individual portfolio. It is set forth on page 9.
Further information about the investment management arrangements and the
expenses of the Series Fund is in the Statement of Additional Information.
PORTFOLIO BROKERAGE AND RELATED PRACTICES
Prudential is responsible for decisions to buy and sell securities for the
portfolios, the selection of brokers and dealers to effect the transactions, and
the negotiation of brokerage commissions, if any. Fixed income securities, as
well as equity securities traded in the over-the-counter market, are generally
traded on a "net" basis with dealers acting as principals for their own accounts
without a stated commission, although the price of the security usually includes
a profit to the dealer.
An affiliated broker may be employed to execute brokerage transactions on behalf
of the portfolios, as long as the commissions are reasonable and fair compared
to the commissions received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. The Series Fund may not
engage in any transactions in which Prudential or its affiliates, including
Prudential Securities Incorporated, acts as principal, including
over-the-counter purchases and negotiated trades in which such a party acts as a
principal. Additional information about portfolio brokerage and related
transactions is in the Statement of Additional Information.
STATE REGULATION
Pruco Life is subject to regulation and supervision by the Department of
Insurance of the State of Arizona, which periodically examines its operations
and financial condition. It is also subject to the insurance laws and
regulations of all jurisdictions in which it is authorized to do business.
Pruco Life is required to submit annual statements of its operations, including
financial statements, to the insurance departments of the various jurisdictions
in which it does business to determine solvency and compliance with local
insurance laws and regulations.
In addition to the annual statements referred to above, Pruco Life is required
to file with Arizona and other jurisdictions a separate statement with respect
to the operations of all its variable contract accounts, in a form promulgated
by the National Association of Insurance Commissioners.
EXPERTS
The financial statements included in this prospectus for the year ended December
31, 1996 have been audited by Price Waterhouse LLP, independent accountants, as
stated in their reports appearing herein, and are included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing. Price Waterhouse LLP's principal business address is 1177 Avenue of
the Americas, New York, New York 10036.
The financial statements included in this prospectus for the years prior to 1996
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein, and are included in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.
Deloitte & Touche LLP's principal business address is Two Hilton Court,
Parsippany, New Jersey 07054-0319.
On March 12, 1996, Deloitte & Touche LLP was dismissed as the independent
accountants of Pruco Life. There have been no disagreements with Deloitte &
Touche LLP on any matter of accounting principles or practices, financial
statements disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of the accountant, would have caused them to make a reference
to the matter in their reports.
26
<PAGE>
Actuarial matters included in this prospectus have been examined by Nancy D.
Davis, FSA, MAAA, Vice President and Actuary of Prudential whose opinion is
filed as an exhibit to the registration statement.
LITIGATION
Several actions have been brought against Pruco Life alleging that Pruco Life
and its agents engaged in improper life insurance sales practices. Prudential
has agreed to indemnify Pruco Life for losses, if any, resulting from such
litigation. No other significant litigation is being brought against Pruco Life
that would have a material effect on its financial position.
EXPANDED TABLE OF CONTENTS OF STATEMENT OF
ADDITIONAL INFORMATION
Included in the registration statements for the Contracts and the Series Fund is
a Statement of Additional Information which is available without charge by
writing to Pruco Life at 213 Washington Street, Newark, New Jersey 07102-2992.
The following table of contents of that Statement provides a brief summary of
what is included in each section.
I. MORE DETAILED INFORMATION ABOUT THE CONTRACT.
SALES LOAD UPON SURRENDER. A description is given of exactly how Pruco
Life determines the amount of the part of the sales load that is imposed
only upon surrenders or withdrawals during the first 10 Contract years.
REDUCTION OF CHARGES FOR CONCURRENT SALES TO SEVERAL INDIVIDUALS. Where
the Contract is sold at the same time to several individuals who are
members of an associated class and Pruco Life's expenses will be reduced,
some of the charges under those Contracts may be reduced.
PAYING PREMIUMS BY PAYROLL DEDUCTION. Your employer may pay monthly
premiums for you with deductions from your salary.
UNISEX PREMIUMS AND BENEFITS. In some states and under certain
circumstances, premiums and benefits will not vary with the sex of the
insured.
HOW THE DEATH BENEFIT WILL VARY. A description is given of exactly how
the death benefit may increase to satisfy Internal Revenue Code
requirements.
WITHDRAWAL OF EXCESS CASH SURRENDER VALUE. If the Contract Fund value is
high enough you may be able to withdraw part of the cash surrender value
while keeping the Contract in effect. There will be a transaction charge.
The death benefit will change. There may be tax consequences. You should
consult your Pruco Life representative to discuss whether a withdrawal or
a loan is preferable.
TAX TREATMENT OF CONTRACT BENEFITS. A fuller account is provided of how
Contract owners may be affected by federal income taxes.
SALE OF THE CONTRACT AND SALES COMMISSIONS. The Contract is sold
primarily by agents of Prudential who are also registered representatives
of one of its subsidiaries, Pruco Securities Corporation, a broker and
dealer registered under the Securities and Exchange Act of 1934.
Generally, selling agents receive a commission of 50% of the Scheduled
Premium in the first year, no more than 6% of the Scheduled Premiums for
the second through tenth years and smaller commissions thereafter.
RIDERS. Various extra fixed-benefits may be obtained for an extra
premium. They are described in what are known as "riders" to the
Contract.
OTHER STANDARD CONTRACT PROVISIONS. The Contract contains several
provisions commonly included in all life insurance policies. They include
provisions relating to beneficiaries, misstatement of age or sex,
suicide, assignment, incontestability, and settlement options.
II. INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS.
General
Convertible Securities
Loan Participations
Warrants
Options and Futures
When-Issued and Delayed Delivery Securities
Short Sales
Short Sales Against the Box
27
<PAGE>
Interest Rate Swaps
Loans of Portfolio Securities
Illiquid Securities
Forward Foreign Currency Exchange Contracts
A more detailed description is given of these investments and the
policies of these portfolios.
III. INVESTMENT RESTRICTIONS.
There are many restrictions upon the investments the portfolios may make
and the practices in which they may engage; these are fundamental,
meaning they may not be changed without Contract owner approval.
IV. INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES.
A fuller description than that in the prospectus is given.
V. PORTFOLIO TRANSACTIONS AND BROKERAGE.
A description is given of how securities transactions are effected and
how Prudential selects the brokers.
VI. DETERMINATION OF NET ASSET VALUE.
A full description is given of how the daily net asset value of each
portfolio is determined.
VII. SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO MAY CURRENTLY INVEST.
A full description is given.
VIII. DEBT RATINGS.
A description is given of how Moody's Investors Services, Inc. and
Standard & Poor's Corporation describe the creditworthiness of debt
securities.
IX. POSSIBLE REPLACEMENT OF THE SERIES FUND.
Although it is most unlikely, it is conceivable that Pruco Life might
wish to replace the Series Fund portfolios with other investment options.
SEC approval will be needed.
X. OTHER INFORMATION CONCERNING THE SERIES FUND.
Incorporation and Authorized Stock
Dividends, Distributions and Taxes
Custodian and Transfer Agent
Experts
License
More detail is provided about these matters.
XI. DIRECTORS AND OFFICERS OF PRUCO LIFE AND MANAGEMENT OF THE SERIES FUND.
The names and recent affiliations of Pruco Life's directors and executive
officers are given. The same information is given for the Series Fund.
XII. FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC.
XIII. THE PRUDENTIAL SERIES FUND, INC. SCHEDULE OF INVESTMENTS.
ADDITIONAL INFORMATION
A registration statement has been filed with the SEC under the Securities Act of
1933, relating to the offering described in this prospectus. This prospectus and
the Statement of Additional Information do not include all of the information
set forth in the registration statement. Certain portions have been omitted
pursuant to the rules and regulations of the SEC. The omitted information may,
however, be obtained from the SEC's principal office in Washington, D.C., upon
payment of a prescribed fee.
Further information may also be obtained from Pruco Life. Its address and
telephone number are on the inside front cover of this prospectus.
FINANCIAL STATEMENTS
The financial statements of the Account should be distinguished from the
consolidated financial statements of Pruco Life which should be considered only
as bearing upon the ability of Pruco Life to meet its obligations under the
Contracts. The financial statements of the Series Fund are in the Statement of
Additional Information.
28
<PAGE>
FINANCIAL STATEMENTS OF
PRUCO LIFE PRUvider VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 1996
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
-------------- --------------
<S> <C> <C>
ASSETS
Investment in shares of The Prudential Series
Fund, Inc.
Portfolios at net asset value [Note 3]........ $ 87,335,747 $ 92,307,986
-------------- --------------
NET ASSETS, representing:
Equity of Contract owners....................... $ 87,026,102 $ 91,993,875
Equity of Pruco Life Insurance Company.......... 309,645 314,111
-------------- --------------
$ 87,335,747 $ 92,307,986
-------------- --------------
-------------- --------------
Number of Contract owner units outstanding...... 33,924,601.712 41,638,622.847
-------------- --------------
-------------- --------------
Unit Value...................................... $ 2.56528 $ 2.20934
-------------- --------------
-------------- --------------
</TABLE>
STATEMENTS OF OPERATIONS
For the year ended December 31, 1996
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
-------------- --------------
<S> <C> <C>
INVESTMENT INCOME
Dividend distributions received................. $ 2,436,249 $ 3,515,191
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 4A]..... 662,587 729,364
-------------- --------------
NET INVESTMENT INCOME............................. 1,773,662 2,785,827
-------------- --------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Capital gains distributions received............ 8,045,666 5,586,889
Realized gain on shares redeemed
[average cost basis].......................... 0 3,248
Net unrealized (loss) gain on investments....... (782,631) 771,969
-------------- --------------
NET GAIN ON INVESTMENTS........................... 7,263,035 6,362,106
-------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ 9,036,697 $ 9,147,933
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A3 AND A4.
A1
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
---------------------------------------------- ----------------------------------------------
1996 1995 1994 1996 1995 1994
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income............. $ 1,773,662 $ 1,286,436 $ 690,992 $ 2,785,827 $ 2,140,247 $ 1,178,335
Capital gains distributions
received........................ 8,045,666 2,529,393 951,248 5,586,889 2,376,572 488,108
Realized gain (loss) on shares
redeemed
[average cost basis]............ 0 0 (1,569) 3,248 0 (508)
Net unrealized gain (loss) on
investments..................... (782,631) 6,464,304 (2,528,354) 771,969 4,408,774 (2,217,215)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS........................ 9,036,697 10,280,133 (887,683) 9,147,933 8,925,593 (551,280)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
[NOTE 6].......................... 16,291,683 13,702,273 21,856,622 12,500,355 13,523,927 27,067,880
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM EQUITY
TRANSFERS [NOTE 7]................ 302,045 (910,613) 327,110 285,561 (963,325) 311,412
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL INCREASE IN NET ASSETS........ 25,630,425 23,071,793 21,296,049 21,933,849 21,486,195 26,828,012
NET ASSETS:
Beginning of year................. 61,705,322 38,633,529 17,337,480 70,374,137 48,887,942 22,059,930
-------------- -------------- -------------- -------------- -------------- --------------
End of year....................... $ 87,335,747 $ 61,705,322 $ 38,633,529 $ 92,307,986 $ 70,374,137 $ 48,887,942
-------------- -------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- -------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A3 AND A4.
A2
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF
PRUCO LIFE PRUVIDER VARIABLE APPRECIABLE ACCOUNT
FOR THE YEAR ENDED DECEMBER 31, 1996
NOTE 1: GENERAL
Pruco Life PRUvider Variable Appreciable Account (the "Account") was established
on July 10, 1992 under Arizona law as a separate investment account of Pruco
Life Insurance Company ("Pruco Life") which is a wholly-owned subsidiary of The
Prudential Insurance Company of America ("Prudential"). The assets of the
Account are segregated from Pruco Life's other assets.
The Account is registered under the Investment Company Act of 1940, as amended,
as a unit investment trust. There are two subaccounts within the Account, each
of which invests only in a corresponding portfolio of The Prudential Series
Fund, Inc. (the "Series Fund"). The Series Fund is a diversified open-end
management investment company, and is managed by Prudential.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements are prepared in conformity with generally
accepted accounting principles (GAAP). The preparation of the financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts and disclosures. Actual results
could differ from those estimates.
Investments--The investments in shares of the Series Fund are stated at the net
asset value of the respective portfolio.
Security Transactions--Realized gains and losses on security transactions are
reported on an average cost basis. Purchase and sale transactions are recorded
as of the trade date of the security being purchased or sold.
Distributions Received--Dividend and capital gain distributions received are
reinvested in additional shares of the Series Fund and are recorded on
ex-dividend date.
Equity of Pruco Life Insurance Company--Pruco Life maintains a position in the
Account for the purpose of administering activity in the Account. The activity
includes unit transactions, fund share transactions, and expense processing.
Pruco Life monitors the balance daily and transfers funds based upon anticipated
activity. At times, Pruco Life may owe an amount to the Account, which is
reflected in Pruco Life's equity as a negative balance. The position does not
have an effect on the Contract owner's account or the related unit value.
NOTE 3: INVESTMENT INFORMATION FOR THE PRUDENTIAL SERIES FUND, INC. PORTFOLIOS
The net asset value per share for each portfolio of the Series Fund, the number
of shares of each portfolio held by the subaccounts of the Account and the
aggregate cost of investments in such shares at December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
PORTFOLIOS
------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
-------------- --------------
<S> <C> <C>
Number of shares: 4,909,915 5,948,806
Net asset value per share: $ 17.78763 $ 15.51706
Cost: $84,538,137 $89,765,498
</TABLE>
NOTE 4: CHARGES AND EXPENSES
A. Mortality Risk and Expense Risk Charges
The mortality risk and expense risk charges at an effective annual rate of
0.90% are applied daily against the net assets representing equity of
Contract owners held in each subaccount. Mortality risk is that contract
holders may not live as long as estimated and expense risk is that the cost
of issuing and administering the policies may exceed the estimated
expenses. For 1996, the amount of these charges paid to Pruco Life was
$1,391,951.
A3
<PAGE>
B. Deferred Sales Charge
Subsequent to a Contract owner redemption, a deferred sales charge is
imposed upon surrenders of certain variable life insurance contracts to
compensate Pruco Life for sales and other marketing expenses. The amount of
any sales charge will depend on the number of years that have elapsed since
the Contract was issued. No sales charge will be imposed after the tenth
year of the Contract. No sales charge will be imposed on death benefits.
For 1996, the amount of these charges paid to Pruco Life was $269,611.
C. Cost of Insurance Charges
Contract holder contributions are applied to the Account net of the
following charges: transaction costs, premium taxes, sales loads,
administrative charges, and death benefit risk charges. During 1996, Pruco
Life received a total of $1,155,021, $2,187,535, $3,685,080, $8,169,343 and
$147,942, respectively for these charges.
NOTE 5: TAXES
Pruco Life is taxed as a "life insurance company" under the Internal Revenue
Code and the operations of the Account form a part of and are taxed with those
of Pruco Life. Under current federal law, no federal income taxes are payable by
the Account. As such, no provision for tax liability has been recorded.
NOTE 6: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
Contract owner activity in the subaccounts of the Account, for the year ended
December 31, 1996, was as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
-------------- --------------
<S> <C> <C>
Contract Owner Contributions, net: $ 33,219,329 $ 28,765,171
Contract Owner Redemptions: $(17,425,707) $(15,930,323)
Net Transfers from(to) other subaccounts or fixed rate option: $ 498,061 $ (334,493)
</TABLE>
NOTE 7: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS
The increase (decrease) in net assets resulting from equity transfers represents
the net contributions (withdrawals) of Pruco Life to (from) the Account.
NOTE 8: UNIT ACTIVITY
Transactions in units (including transfers among subaccounts), for the year
ended December 31, 1996, were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------
PORTFOLIO FLEXIBLE CONSERVATIVE
INFORMATION MANAGED BALANCED
- ----------------------------------- ----------------- -----------------
<S> <C> <C>
Contract Owner Contributions: 14,116,349.476 13,901,186.920
Contract Owner Redemptions: (7,281,504.623) (7,840,673.413)
</TABLE>
NOTE 9: PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments in the
Series Fund, Inc. were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
-----------------------------
PORTFOLIO FLEXIBLE CONSERVATIVE
INFORMATION MANAGED BALANCED
- --------------------------------------------- ------------- --------------
<S> <C> <C>
For the year ended December 31, 1996
Purchases.................................... $15,321,000 $11,473,000
Sales........................................ $ 0 $ (59,000)
</TABLE>
A4
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of
Pruco Life PRUvider Variable Appreciable Account
and the Board of Directors of
Pruco Life Insurance Company
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of Flexible Managed Subaccount and
Conservative Balanced Subaccount of Pruco Life PRUvider Variable Appreciable
Account at December 31, 1996, and the results of each of their operations and
the changes in each of their net assets for the year then ended, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of Pruco Life Insurance Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of shares owned in The
Prudential Series Fund, Inc. at December 31, 1996, provide a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
New York, New York
March 31, 1997
A5
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Contract Owners of
Pruco Life PRUvider Variable Appreciable
Account and the Board of Directors
of Pruco Life Insurance Company
Newark, New Jersey
We have audited the accompanying statements of changes in net assets of Pruco
Life PRUvider Variable Appreciable Account of Pruco Life Insurance Company
(comprising, respectively, the Flexible Managed and Conservative Balanced
subaccounts) for the periods presented for each of the two years ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the changes in net assets of each of the respective subaccounts
constituting the Pruco Life PRUvider Variable Appreciable Account for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Parsippany, New Jersey
February 15, 1996
A6
<PAGE>
<TABLE>
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<CAPTION>
DECEMBER 31,
1996 1995
----------- ------------
(000'S)
ASSETS
<S> <C> <C>
Fixed maturities
Held to maturity $ 405,731 $ 437,727
Available for sale 2,236,817 2,144,854
Equity securities 3,748 4,036
Mortgage loans 46,915 64,464
Investment real estate - 4,059
Policy loans 639,782 569,273
Other long term investments 4,528 4,159
Short term investments 169,830 228,016
----------- ------------
Total invested assets 3,507,351 3,456,588
----------- ------------
Cash 73,766 41,435
Deferred policy acquisition costs 633,159 566,976
Premiums due 9,084 6,367
Accrued investment income 62,110 59,862
Receivable from affiliates 1,901 8,275
Federal income tax receivable 7,191 6,375
Reinsurance recoverable on unpaid losses 27,014 27,914
Other assets 20,000 12,578
Separate Account assets 5,336,851 4,285,268
----------- ------------
TOTAL ASSETS $9,678,427 $8,471,638
=========== ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Future policy benefits and other policyholders'
liabilities $ 557,351 $ 501,200
Policyholders' account balances 2,188,862 2,218,330
Deferred federal income tax payable 148,960 141,048
Payable to affiliate 51,729 41,584
Other liabilities 55,090 37,387
Separate Account liabilities 5,277,454 4,263,896
----------- ------------
Total Liabilities 8,279,446 7,203,445
----------- ------------
Contingencies - Note 9
Stockholder's Equity
Common Stock, $10 par value;
1,000,000 shares, authorized;
250,000 shares, issued and outstanding at
December 31, 1996 and 1995 2,500 2,500
Paid-in-capital 439,582 439,582
Net unrealized investment gains (less deferred
income tax) 12,402 30,836
Retained earnings 944,497 795,275
----------- ------------
Total Stockholder's Equity 1,398,981 1,268,193
----------- ------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $9,678,427 $8,471,638
=========== ============
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
B-1
<PAGE>
<TABLE>
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996 1995 1994
-----------------------------------
(000'S)
REVENUES
<S> <C> <C> <C>
Premiums $ 51,525 $ 42,089 $ 22,689
Policy charges and fee income 324,976 319,012 308,753
Net investment income 247,328 246,618 241,132
Realized investment gains (losses) 10,835 13,200 (41,074)
Other income 20,818 26,986 13,259
-----------------------------------
Total Revenues 655,482 647,905 544,759
-----------------------------------
BENEFITS AND EXPENSES
Policyholders' benefits 186,873 153,987 121,949
Interest credited to policyholders' account
balances 118,246 126,926 113,711
Other operating costs and expenses 122,006 134,790 179,173
-----------------------------------
Total Benefits and Expenses 427,125 415,703 414,833
-----------------------------------
Income before income tax provision 228,357 232,202 129,926
-----------------------------------
Income tax provision 79,135 79,558 48,031
-----------------------------------
NET INCOME $ 149,222 $ 152,644 $ 81,895
===================================
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
B-2
<PAGE>
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996 1995 1994
-----------------------------------
(000'S)
Common Stock
<S> <C> <C> <C>
Balance, beginning of year $ 2,500 $ 2,500 $ 2,500
Issued during year - - -
-----------------------------------
Balance, end of year 2,500 2,500 2,500
-----------------------------------
Paid in Capital
Balance, beginning of year 439,582 439,582 439,582
Paid in during year - - -
-----------------------------------
Balance, end of year 439,582 439,582 439,582
-----------------------------------
Net Unrealized Investment Gains (Losses)
(Less Deferred Income Tax)
Balance, beginning of year 30,836 (1,349) -
Adoption of SFAS 115 - (39,762) -
Net change in unrealized investment
gains (losses) (18,434) 71,947 (1,349)
-----------------------------------
Balance, end of year 12,402 30,836 (1,349)
-----------------------------------
RETAINED EARNINGS
Balance, beginning of year 795,275 642,631 560,736
Net income 149,222 152,644 81,895
-----------------------------------
Balance, end of year 944,497 795,275 642,631
-----------------------------------
TOTAL STOCKHOLDER'S EQUITY $1,398,981 $1,268,193 $1,083,364
===================================
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
B-3
<PAGE>
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996 1995 1994
------------------------------------------
(000'S)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 149,222 $ 152,644 $ 81,895
Adjustments to reconcile net income to net cash from
operating activities:
Increase in future policy benefits and other policyholders'
liabilities 56,151 22,877 31,932
General account policy fee income (50,286) (56,637) (48,401)
Interest credited to policyholders' account balances 118,246 126,926 113,711
Net decrease (increase) in Separate Accounts (38,025) (3,520) (4,121)
Net realized investment (gains) losses (10,835) (13,200) 41,074
Amortization and other non-cash items 26,709 (8,106) 6,228
Change in:
Accrued investment income (2,248) (480) (2,597)
Premiums due (2,717) (1,957) (1,374)
Receivable from affiliates 6,374 (758) (637)
Note receivable from affiliate -- -- 50,000
Deferred policy acquisition costs (66,183) 31,318 34,124
Federal income tax receivable (816) 12,031 (28,908)
Other assets (6,522) (12,689) (11,121)
Payable to affiliate 10,145 11,327 (24,029)
Deferred federal income tax payable 7,912 30,779 --
Other liabilities 17,703 (61,306) (5,293)
-----------------------------------------
Cash Flows From Operating Activities 214,830 229,249 232,483
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Held to maturity 138,127 144,898 2,710,423
Available for sale 3,886,254 1,886,687 --
Equity securities 7,527 5,557 1,910
Mortgage loans 19,226 7,395 10,821
Other long term investments 288 1,559 607
Investment real estate 4,488 2,926 8,677
Payments for the purchase of:
Fixed maturities:
Held to maturity (114,494) (135,092) (2,561,082)
Available for sale (4,008,810) (1,741,139) --
Equity securities (4,697) (4,279) (2,436)
Mortgage loans -- -- (35,276)
Other long term investments (657) (1,674) (1,584)
Policy loans (70,509) (75,411) (73,591)
Net proceeds (payments) of short term investments 58,186 (36,482) 9,845
-----------------------------------------
Cash Flows From Investing Activities (85,071) 54,945 68,314
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 536,370 95,039 114,105
Withdrawals (net of transfers to/from separate accounts) (633,798) (365,578) (387,793)
-----------------------------------------
Cash Flows From Financing Activities (97,428) (270,539) (273,688)
-----------------------------------------
Net increase in Cash 32,331 13,655 27,109
Cash, beginning of year 41,435 27,780 671
-----------------------------------------
CASH, END OF YEAR $ 73,766 $ 41,435 $ 27,780
=========================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid $ 61,760 $ 53,107 $ 56,089
=========================================
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
B-4
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRINCIPLES
A. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Pruco Life Insurance Company (Pruco Life), a stock life insurance company,
and its subsidiaries (collectively, the Company). Pruco Life is a
wholly-owned subsidiary of The Prudential Insurance Company of America
(Prudential), a mutual life insurance company. The Company markets
individual life insurance and deferred annuities primarily through
Prudential's sales force in the United States, and in Taiwan. All
significant intercompany balances and transactions have been eliminated in
consolidation.
B. Basis of Presentation
The Financial Accounting Standards Board (FASB) issued Interpretation No. 40
"Applicability of Generally Accepted Accounting Principles to Mutual Life
Insurance and Other Enterprises", as amended by Statement of Financial
Accounting Standards (SFAS) No. 120 "Accounting and Reporting by Mutual Life
Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration
Participating Contracts", effective for fiscal years beginning after
December 15, 1995. Financial statements of mutual life insurance companies,
and their wholly owned stock life insurance subsidiaries, for periods
beginning after December 15, 1995 which are prepared on the basis of
statutory accounting practices will no longer be characterized as in
conformity with generally accepted accounting principles (GAAP). As a
result, the Company has prepared its 1996 consolidated financial statements
in accordance with all applicable GAAP pronouncements. The 1995 and 1994
consolidated financial statements, which were previously prepared on the
statutory basis of accounting, have been restated in accordance with GAAP.
The cumulative effect of adopting GAAP as of January 1, 1994 was an increase
in retained earnings of $378.3 million. See Note 7 for a reconciliation of
the Company's surplus and net income determined in accordance with statutory
accounting practices with equity and net income determined on a GAAP basis.
On January 1, 1995, the Company adopted SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities," which expanded the use of fair
value accounting for those securities that a company does not have positive
intent and ability to hold to maturity. Implementation of this statement
decreased stockholder's equity by $39.8 million net of deferred income tax
benefit of $21.4 million. In 1994 prior to the adoption of SFAS 115, all
fixed maturities were carried at amortized cost.
C. Investments
Fixed Maturities - Securities held to maturity are those that the Company
has the positive intent and ability to hold to maturity and are principally
reported at amortized cost. Amortized cost is adjusted to estimated fair
value for impairments which are deemed to be other than temporary.
Where the Company may not have the positive intent to hold fixed maturities
until maturity, the securities are classified as "Available for Sale." These
securities are reported at market value based principally on their quoted
market prices. The associated unrealized gains and losses, net of income
taxes and deferred policy acquisition costs, are included as a component of
equity or if deemed to be other than temporary, are included as a realized
loss.
Equity Securities consist primarily of common and preferred stocks.
Marketable equity securities are reported at market value based principally
on their quoted market prices. Cost basis of the equity securities is $3.9
million and $5.3 million as of December 31, 1996 and 1995, respectively. The
associated unrealized gains and losses are included as a component of
equity.
Mortgage Loans and Policy Loans are stated primarily at unpaid principal
balances, net of unamortized discounts. Interest income is recognized as net
investment income earned.
B-5
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
Investment Real Estate acquired through foreclosure during 1994 was sold in
1996 for $4.5 million.
Other Long Term Investments, which consist of limited partnerships, are
valued at the aggregate net equity in the partnerships. Certain investments
in this category were non-income producing at December 31, 1995. These
investments were $.3 million at December 31, 1995. There were no non-income
producing investments at December 31, 1996 and 1994.
Partnership and joint venture interests in which the Company does not have
control and a majority economic interest are reported on the equity basis of
accounting. Non real estate related interests of $4.5 million and $4.1
million are included in other long term investments, at December 31, 1996
and 1995, respectively. The Company's share of net income from such entities
was $1.4 million, $.3 million, and $1.9 million for the years ended December
31, 1996, 1995, and 1994, respectively, and is reported in net investment
income.
Realized investment gains and losses are reported based on specific
identification of the investments sold.
Short-term investments are fixed maturities that mature within one year, and
are reported at estimated fair value.
D. Revenue Recognition and Related Expenses
Universal life contracts are long duration life insurance contracts that
involve significant mortality and morbidity risk with both fixed and
guaranteed terms. Investment contracts are long duration contracts that do
not subject the insurance enterprise to risks arising from policyholder
mortality or morbidity. Amounts received as payments for these contracts are
reported as deposits to policyholders' account balances. Revenues from these
contracts consist primarily of amounts assessed during the period against
policyholders' account balances for mortality charges, policy administration
fees and surrender charges. Policy benefits and claims that are charged to
expenses include benefit claims incurred in the period in excess of related
policyholders' account balances.
Premiums, policy benefits and claims from traditional life and annuity
policies, generally are recognized in operations when due.
E. Deferred Policy Acquisition Costs
Acquisition costs consist of commissions and other costs which vary with and
are primarily related to the production or acquisition of new business.
Acquisition costs related to universal life products and investment-type
contracts are deferred and amortized in proportion to total estimated gross
profits arising principally from investment results, mortality, expense
margins and surrender charges based on historical and anticipated future
experience. Amortization of deferred policy acquisition costs was $9.3
million, $54.4 million, and $76.0 million for the years ended December 31,
1996, 1995, and 1994, respectively. Deferred policy acquisition costs are
analyzed to determine if they are recoverable from future income, including
investment income. If such costs are determined to be unrecoverable, they
are expensed at the time of determination. The effect on the deferred policy
acquisition asset that would result from realization of unrealized
investment gains (losses) is recognized with an offset to unrealized
investment gains (losses) in consolidated stockholder's equity.
B-6
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
F. Future Policy Benefits and Policyholders' Account Balances
Benefit reserve liabilities for payout annuities such as matured deferred
annuities and supplementary contracts represent the present values of
estimated future benefits payments and related expenses. Present values for
these contracts are computed using interest rates ranging from 6.5% to 11%.
The mortality assumption for these contracts is the 83 IAM tables. Reserves
for supplementary benefits are stated at interest rates that vary from 4% to
6.5% using mortality and morbidity assumptions either from company
experience or various actuarial tables.
When liabilities for future policy benefits plus the present value of
expected future gross deposits are insufficient to provide expected future
policy benefits and expenses, unrecoverable deferred policy acquisition
costs are written off and thereafter, if required, a premium deficiency
reserve is established as a charge to income.
Policyholders' account balances for universal life and investment-type
contracts are equal to the policy account values. The policy account values
represent an accumulation of gross deposits plus interest credited less
expense and mortality charges and withdrawals.
Interest crediting rates on life insurance products range from 3.35% to 7%.
G. Separate Accounts
Separate Accounts represent funds for which investment income and investment
gains and losses accrue directly to, and investment risk is borne by, the
policyholders, with the exception of the Pruco Life Modified Guaranteed
Annuity Account. The Pruco Life Modified Guaranteed Annuity Account is a
non-unitized separate account, which funds the Modified Guaranteed Annuity
Contract and the Market Value Adjustment Annuity Contract. Owners of the
Pruco Life Modified Guaranteed Annuity and the Market Value Adjustment
Annuity Contracts do not participate in the investment gain or loss from
assets relating to such accounts. Such gain or loss is borne, in total, by
the Company.
All Separate Account assets are carried at market value. Deposits to all
Separate Accounts are reported as increases in Separate Account liabilities,
which equal the Separate Account policy account fund values. Charges
assessed against Policyholders' account balances for mortality, policy
administration and surrender charges are included in policy charges and fee
income. Mortality and expense risk charges are applied against the
Policyholders' account balance. The Separate Account assets are legally
segregated and are not subject to claims that arise out of any other
business of the Company.
H. Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
B-7
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
2. FIXED MATURITIES
Gross unrealized gains and losses for securities classified as Held to Maturity
and Available for Sale, by major security type, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(000's) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ - $ - $ - $ -
Foreign government bonds - - - -
Corporate securities 405,731 10,947 576 416,102
Mortgage-backed securities - - - -
Other fixed maturities - - - -
- ---------------------------------------------------------------------------------------------------
Total $ 405,731 $ 10,947 $ 576 $ 416,102
- ---------------------------------------------------------------------------------------------------
<CAPTION>
DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(000's) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available For Sale
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 32,055 $ 30 $ 174 $ 31,911
Foreign government bonds 90,447 857 205 91,099
Corporate securities 2,087,250 30,365 4,206 2,113,409
Mortgage-backed securities 398 - - 398
Other fixed maturities - - - -
- ---------------------------------------------------------------------------------------------------
Total $ 2,210,150 $ 31,252 $ 4,585 $ 2,236,817
- ---------------------------------------------------------------------------------------------------
</TABLE>
B-8
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(000's) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ - $ - $ - $ -
Foreign government bonds - - - -
Corporate securities 437,727 18,629 1,805 454,551
Mortgage-backed securities - - - -
Other fixed maturities - - - -
- ---------------------------------------------------------------------------------------------------
Total $ 437,727 $ 18,629 $ 1,805 $ 454,551
- ---------------------------------------------------------------------------------------------------
<CAPTION>
DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(000's) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available For Sale
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 324,854 $ 6,830 $ 61 $ 331,623
Foreign government bonds 73,042 3,055 - 76,097
Corporate securities 1,507,248 54,545 2,168 1,559,625
Mortgage-backed securities 169,190 8,717 398 177,509
Other fixed maturities - - - -
- ---------------------------------------------------------------------------------------------------
Total $ 2,074,334 $ 73,147 $ 2,627 $ 2,144,854
- ---------------------------------------------------------------------------------------------------
</TABLE>
B-9
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
The amortized cost and estimated fair value of fixed maturities at December 31,
1996, categorized by contractual maturity, are shown below. Actual maturities
will differ from contractual maturities because borrowers may prepay obligations
with or without call or prepayment penalties.
DECEMBER 31, 1996
- ------------------------------------------------------------------------------
Estimated
Amortized Fair
(000's) Cost Value
- ------------------------------------------------------------------------------
Held to Maturity
Due in one year or less $ 28,653 $ 28,762
Due after one year through five years 156,013 158,183
Due after five years through ten years 194,765 202,766
Due after ten years 26,300 26,391
Mortgage-backed securities -- --
- ------------------------------------------------------------------------------
Total $ 405,731 $ 416,102
- ------------------------------------------------------------------------------
DECEMBER 31, 1996
- ------------------------------------------------------------------------------
Estimated
Amortized Fair
(000's) Cost Value
- ------------------------------------------------------------------------------
Available For Sale
Due in one year or less $ 130,400 $ 131,301
Due after one year through five years 1,561,854 1,578,979
Due after five years through ten years 398,090 404,920
Due after ten years 119,408 121,219
Mortgage-backed securities 398 398
- ------------------------------------------------------------------------------
Total $2,210,150 $2,236,817
- ------------------------------------------------------------------------------
Proceeds from the sale of fixed maturities during 1996, 1995, and 1994 were $3.8
billion, $1.8 billion, and $2.6 billion, respectively. Gross gains of $28.7
million, $28.8 million, and $16.8 million and gross losses of $19.7 million,
$17.5 million, and $49.8 million were realized on those sales during 1996, 1995,
and 1994, respectively.
B-10
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
3. Net Investment Income YEAR ENDED
DECEMBER 31,
1996 1995 1994
-------------------------------------------
(000'S)
<S> <C> <C> <C>
Net investment income consists of:
Gross investment income
Fixed maturities
Held to maturity $ 33,419 $ 33,458 $ 196,909
Available for sale 152,445 160,740 --
Equity securities 44 104 14
Mortgage loans 5,669 7,757 4,041
Investment real estate 613 647 2,146
Policy loans 33,449 29,775 25,692
Short term investments 16,780 15,092 12,676
Other 9,438 3,949 5,075
-------------------------------------------
251,857 251,522 246,553
Investment expenses (4,529) (4,904) (5,421)
===========================================
Net investment income $ 247,328 $ 246,618 $ 241,132
===========================================
4. Investment Gains (Losses)
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996 1995 1994
-------------------------------------------
(000'S)
<S> <C> <C> <C>
Realized investment gains (losses)
Fixed maturities - Available for sale $ 9,036 $ 11,359 $ (38,180)
Equity securities 781 2,020 503
Mortgage loans 1,677 (90) (4,581)
Investment real estate 487 (99) 1,184
Other (1,146) 10 --
-------------------------------------------
Realized investment gains (losses) $ 10,835 $ 13,200 $ (41,074)
===========================================
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996 1995 1994
-------------------------------------------
(000'S)
<S> <C> <C> <C>
Net unrealized investment gains
(losses), beginning of period $ 30,836 $ (1,349) $ --
Net unrealized investment gains (losses)
Fixed maturities - Available for sale (43,853) 131,712 --
Equity securities 1,403 827 (2,108)
-------------------------------------------
(42,450) 132,539 (2,108)
Deferred income tax benefit (provision) 15,398 (47,714) 759
Deferred policy acquisition costs
(net of deferred income taxes) 8,618 (12,878) --
-------------------------------------------
Net change in unrealized
investment gains (losses) (18,434) 71,947 (1,349)
Adoption of SFAS 115 -- (39,762) --
-------------------------------------------
Net unrealized investment gains
(losses), end of period $ 12,402 $ 30,836 (1,349)
===========================================
</TABLE>
B-11
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
5. Fair Value Information
The fair value amounts have been determined by the Company using available
information and reasonable valuation methodologies. Considerable judgment is
applied, as necessary, in interpreting data to develop the estimates of fair
value. Accordingly, the estimates presented may not be realized in a current
market exchange. The use of different market assumptions and/or estimation
methodologies could have a material effect on the estimated fair values.
The following methods and assumptions were used in calculating the fair values.
Fixed Maturities - Fair values for fixed maturities, other than private
placement securities, are based on quoted market prices or estimates from
independent pricing services. Fair values for private placement securities are
estimated using a discounted cash flow model which considers the current market
spreads between the U.S. Treasury yield curve and corporate bond yield curve
adjusted for the type of issue, its current quality and its remaining average
life.
Equity Securities - Fair value is based on quoted market prices.
Mortgage Loans - The fair value of the mortgage loan portfolio is primarily
based upon the present value of the scheduled cash flows discounted at the
appropriate U.S. Treasury rate, adjusted for the current market spread for a
similar quality mortgage.
Policy Loans - The estimated fair value is calculated using a discounted cash
flow model based upon current U.S. Treasury rates and historical loan
repayments.
Policyholders' Account Balances - Fair values for policyholders' account
balances are equal to the policy account values.
Short-term Investments - Fair values for short-term investments are based on
quoted market prices or estimates from independent pricing services.
The following table discloses the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------
(000'S)
<S> <C> <C> <C> <C>
Financial Assets:
Fixed maturities:
Held to maturity $ 405,731 $ 416,102 $ 437,727 $ 454,551
Available for sale 2,236,817 2,236,817 2,144,854 2,144,854
Mortgage loans 46,915 46,692 64,464 63,635
Policy loans 639,782 623,218 569,273 577,975
Equity securities 3,748 3,748 4,036 4,036
Short-term investments 169,830 169,830 228,016 228,016
Financial Liabilities:
Policyholders'
account balances $ 2,188,862 $ 2,188,862 $ 2,218,330 $ 2,218,330
</TABLE>
B-12
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
6. Income Taxes
The Company is a member of a group of affiliated companies which join in filing
a consolidated federal income tax return in addition to separate company state
and local tax returns. The Internal Revenue Code limits the amount of nonlife
insurance losses that may offset life insurance company taxable income.
Companies operating outside the United States are taxed under applicable foreign
statutes.
Pursuant to the tax allocation arrangement, total federal income tax expense is
determined on a separate company basis. Members with losses record tax benefits
to the extent such losses are recognized in the consolidated federal tax
provision. The Company has a net receivable from Prudential of $7.2 million and
$6.4 million as of December 31, 1996 and 1995, respectively.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes.
The components of income taxes are as follows:
YEAR ENDED
DECEMBER 31,
1996 1995 1994
-------------------------------------
(000'S)
Current income tax provision:
Federal income tax $ 59,489 $ 65,131 $ 59,641
State and local income tax 703 1,876 3,036
Foreign income tax 4 7 7
-------------------------------------
Total current income tax 60,196 67,014 62,684
Deferred income tax provision
(benefit):
Federal income tax 18,413 12,196 (14,246)
State and local income tax 526 348 (407)
-------------------------------------
Total deferred income tax 18,939 12,544 (14,653)
-------------------------------------
Total income tax provision $ 79,135 $ 79,558 $ 48,031
=====================================
The income tax provision is different from the amount computed using the
expected federal income tax rate of 35% for the following reasons:
YEAR ENDED
DECEMBER 31,
1996 1995 1994
-------------------------------------
(000'S)
Expected federal income tax expense $ 79,926 $ 81,271 $ 45,474
State income taxes 1,229 2,224 2,629
Other (2,020) (3,937) (72)
=====================================
Total income tax provision $ 79,135 $ 79,558 $ 48,031
=====================================
B-13
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
The components of net deferred income taxes payable are as follows:
YEAR ENDED
DECEMBER 31,
1996 1995
------------------------------
(000'S)
Deferred Income Tax Assets
Insurance liabilities $ 38,532 $ 40,732
Other -- --
------------------------------
Total deferred income tax assets $ 38,532 $ 40,732
==============================
Deferred Income Tax Liabilities
Deferred acquisition costs $ 173,785 $ 153,526
Net investment gains 12,502 28,157
Other 1,205 97
------------------------------
Total deferred income tax liabilities 187,492 181,780
------------------------------
Deferred federal income tax payable $ 148,960 $ 141,048
==============================
The Internal Revenue Service (the "Service") has completed examinations of the
consolidated federal income tax returns through 1989. The Service is examining
the years 1990 through 1992. Discussions are being held with the Service with
respect to proposed adjustments. However, management believes there are adequate
defenses against, or sufficient reserves to provide for, such adjustments.
B-14
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
7. Stockholder's Equity Reconciliation
The reconciliation of statutory net income to GAAP net income, and statutory
surplus to GAAP equity as of December 31, 1996, 1995, and 1994 are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------
(000'S)
<S> <C> <C> <C>
Statutory net income $ 73,847 $ 157,751 $ 52,955
Deferred acquisition costs 48,862 (6,103) (34,124)
Deferred premium 1,295 (743) 1,122
Insurance liabilities 10,211 22,890 31,780
Income taxes (7,780) (27,669) 42,755
Interest maintenance reserve 365 5,480 (24,704)
Separate accounts and other 22,422 1,038 12,111
---------------------------------------------------------
GAAP net income $ 149,222 $ 152,644 $ 81,895
=========================================================
Statutory surplus $ 901,645 $ 829,022 $ 676,087
Investment valuation 26,678 70,776 -
Deferred acquisition costs 633,159 566,976 598,294
Deferred premium (11,859) (13,154) (12,412)
Insurance liabilities (124,781) (153,995) (71,076)
Income taxes (124,823) (128,070) (82,167)
Asset valuation reserve and interest
maintenance reserve 68,733 64,551 23,690
Other 30,229 32,087 (49,052)
---------------------------------------------------------
GAAP stockholder's equity $ 1,398,981 $ 1,268,193 $ 1,083,364
=========================================================
</TABLE>
The New York State Insurance Department ("Department") recognizes only
statutory accounting for determining and reporting the financial condition
and results of operations of an insurance company, for determining its
solvency under the New York Insurance Law, and for determining whether its
financial condition warrants the payment of a dividend to its stockholders.
No consideration is given by the Department to financial statements prepared
in accordance with generally accepted accounting principles in making such
determinations.
B-15
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
8. Related Party Transactions
A. Service Agreements
The Company, Prudential, and Pruco Securities Corporation, an indirect
wholly-owned subsidiary of Prudential, operate under service and lease
agreements whereby services of officers and employees, supplies, use of
equipment and office space are provided. The net cost of these services
allocated to the Company were $102 million, $98 million and $78 million for
the years ended December 31, 1996, 1995, and 1994, respectively.
B. Pension Plans
The Company is a wholly-owned subsidiary of Prudential which sponsors
several defined benefit pension plans that cover substantially all of its
employees. Benefits are generally based on career average earnings and
credited length of service. Prudential's funding policy is to contribute
annually the amount necessary to satisfy the Internal Revenue Service
contribution guidelines.
No pension expense for contributions to the plan was allocated to the
Company in 1996, 1995, or 1994 because the plan was subject to the full
funding limitation under the Internal Revenue Code.
C. Postretirement Life and Health Benefits
Prudential also sponsors certain life insurance and health care benefits for
its retired employees. Substantially all employees may become eligible to
receive a benefit if they retire after age 55 with at least 10 years of
service. Prudential elected to amortize its obligation over twenty years. A
provision for contributions to the postretirement fund is included in the
net cost of services allocated to the Company discussed above for the years
ended December 31, 1996, 1995, and 1994.
D. Reinsurance
The Company currently has three reinsurance agreements in place with
Prudential (the reinsurer). Specifically: reinsurance Group Annuity
Contract, whereby the reinsurer, in consideration for a single premium
payment by the Company, provides reinsurance equal to 100% of all payments
due under the contract, and two yearly renewable term agreements in which
the Company may offer and the reinsurer may accept reinsurance on any life
in excess of the Company's maximum limit of retention. The Company is not
relieved of its primary obligation to the policyholder as a result of these
reinsurance transactions. These agreements had no material effect on net
income for the years ended December 31, 1996, 1995, and 1994.
9. Contingencies
Several actions have been brought against the Company on behalf of those
persons who purchased life insurance policies based on complaints about
sales practices engaged in by Prudential, the Company and agents appointed
by Prudential and the Company. Prudential has agreed to indemnify the
Company for any and all losses resulting from such litigation.
10. Dividends
The Company is subject to Arizona law which limits the amount of dividends
that insurance companies can pay to stockholders. The maximum dividend which
may be paid in any twelve month period without notification or approval is
limited to the lesser of 10% of surplus as of December 31 of the preceding
year or the net gain from operations of the preceding calendar year. Cash
dividends may only be paid out of surplus derived from realized net profits.
Based on these limitations and the Company's surplus position at December
31, 1996, the Company would be permitted a maximum of $48 million in
dividend distribution in 1997, all of which could be paid in cash, without
approval from The State of Arizona Department of Insurance.
B-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Pruco Life Insurance Company
In our opinion, the accompanying consolidated statement of financial position
and the related consolidated statements of operations, of stockholder's equity
and of cash flows present fairly, in all material respects, the financial
position of Pruco Life Insurance Company and its subsidiaries at December 31,
1996, and the results of their operations and their cash flows for the year in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
- --------------------------
PRICE WATERHOUSE LLP
New York, New York
March 21, 1997
B-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors of
Pruco Life Insurance Company
Newark, New Jersey
We have audited the accompanying consolidated statement of financial position of
Pruco Life Insurance Company and subsidiaries as of December 31, 1995, and the
related consolidated statements of operations, stockholder's equity and cash
flows for the years ended December 31, 1995 and 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the accompanying financial statements presents fairly, in all
material respects, the consolidated financial position of Pruco Life Insurance
Company and subsidiaries as of December 31, 1995, and the consolidated results
of operations and cash flows for the years ended December 31, 1995 and 1994 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company has
retroactively adopted all applicable generally accepted accounting principles
relating to stock life insurance subsidiaries of mutual life insurance companies
and has changed, as of January 1, 1995, the method of accounting for fixed
maturity investments.
/s/ DELOITTE & TOUCHE LLP
Parsippany, N.J.
December 19, 1996
B-18
<PAGE>
PRUVIDER(SM)
VARIABLE APPRECIABLE LIFE(R)
INSURANCE CONTRACT
PRUDENTIAL
PRUCO LIFE INSURANCE COMPANY
213 Washington Street, Newark, NJ 07102-2992
Telephone 800 437-4016, Extension 46
A Subsidiary of The Prudential Insurance Company of America
<PAGE>
PRUVIDER VARIABLE
APPRECIABLE LIFE(R)
INSURANCE
MAY 1, 1997
PROSPECTUS
THE PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT AND
THE PRUDENTIAL SERIES FUND, INC.
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
SVAL-2 ED 5/97
CATALOG NO. 640189U
<PAGE>
PROSPECTUS
MAY 1, 1997
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT
PRUVIDER(SM)
VARIABLE APPRECIABLE LIFE(R)
INSURANCE CONTRACT
This prospectus describes a variable life insurance contract issued by Pruco
Life Insurance Company of New Jersey ("Pruco Life of New Jersey"), a stock life
insurance company that is an indirect wholly-owned subsidiary of The Prudential
Insurance Company of America ("Prudential"). Pruco Life of New Jersey calls this
contract its PRUVIDER(sm) Variable APPRECIABLE LIFE(R) Insurance Contract* (the
"Contract"). The Contract provides whole-life insurance protection. The death
benefit varies daily with investment experience but will never be less than a
guaranteed minimum amount (the face amount specified in the Contract). The
Contract also generally provides a cash surrender value which does not have a
guaranteed minimum amount.
The assets held for the purpose of paying benefits under these and other similar
contracts are segregated from the other assets of Pruco Life of New Jersey and
are invested in one or both of the current subaccounts of the Pruco Life of New
Jersey Variable Appreciable Account (from now on, the "Account"). In this case,
the assets will be invested in the corresponding portfolio of The Prudential
Series Fund, Inc. (from now on, the "Series Fund"). The two portfolios of the
Series Fund currently available to Contract owners are the CONSERVATIVE BALANCED
PORTFOLIO and the FLEXIBLE MANAGED PORTFOLIO. The Contract owner may also choose
to have the assets invested in a FIXED-RATE OPTION. This prospectus describes
the Contract generally, the Pruco Life of New Jersey Variable Appreciable
Account and the securities issued by the Series Fund.
Although it is advantageous to the purchaser to pay a Scheduled Premium amount
on the dates due, which are at least once a year but may be more often,
purchasers have flexibility as to when and in what amounts they pay premiums.
Before you sign an application to purchase this life insurance contract, you
should read this prospectus with care and have any questions you may have
answered by your Pruco Life of New Jersey representative. If you do purchase the
Contract, you should retain this prospectus for future reference, together with
the Contract itself that you will receive.
Additional information about the contract and the Series Fund is set forth in a
separate Statement of Additional Information which is incorporated by reference
into this prospectus. It is available without charge upon request to the Pruco
Life Insurance Company of New Jersey at the address shown below.
THE REPLACEMENT OF LIFE INSURANCE IS GENERALLY NOT IN THE INTEREST OF THE
CUSTOMER. IN MOST CASES, WHEN A CUSTOMER REQUIRES ADDITIONAL COVERAGE, A NEW
POLICY SUPPLEMENTING THE EXISTING POLICY SHOULD BE REQUESTED, THEREBY PROTECTING
THE BENEFITS OF THE ORIGINAL POLICY. IF YOU ARE CONSIDERING REPLACING A POLICY,
YOU SHOULD COMPARE THE BENEFITS AND COSTS OF SUPPLEMENTING YOUR EXISTING POLICY
WITH THE BENEFITS AND COSTS OF PURCHASING THE CONTRACT DESCRIBED IN THIS
PROSPECTUS AND YOU SHOULD CONSULT WITH A QUALIFIED TAX ADVISOR.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
213 Washington Street
Newark, New Jersey 07102-2992
Telephone: (800) 437-4016, Ext. 46
*PRUVIDER is a service mark of Prudential.
APPRECIABLE LIFE is a registered mark of Prudential.
SVAL-2 Ed. 5-97
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INTRODUCTION AND SUMMARY..............................................................1
BRIEF DESCRIPTION OF THE CONTRACT...............................................1
BALANCED PORTFOLIOS.............................................................3
CONSERVATIVE BALANCED PORTFOLIO...........................................3
FLEXIBLE MANAGED PORTFOLIO................................................3
FIXED-RATE OPTION...............................................................3
TRANSFERS BETWEEN INVESTMENT OPTIONS............................................3
THE SCHEDULED PREMIUM...........................................................3
PAYMENT OF HIGHER PREMIUMS......................................................3
CONTRACT LOANS..................................................................3
PRUVIDER VARIABLE APPRECIABLE LIFE INSURANCE CONTRACTS..........................3
FINANCIAL HIGHLIGHTS OF THE PORTFOLIOS OF THE SERIES FUND.............................4
PORTFOLIO RATES OF RETURN.............................................................6
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS AND ACCUMULATED PREMIUMS.......7
GENERAL INFORMATION ABOUT PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT
AND THE FIXED-RATE OPTION.......................................................8
PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT...........................8
THE FIXED-RATE OPTION...........................................................8
DETAILED INFORMATION FOR PROSPECTIVE CONTRACT OWNERS..................................9
REQUIREMENTS FOR ISSUANCE OF A CONTRACT.........................................9
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK"....................................9
CONTRACT FEES AND CHARGES.......................................................9
Deductions from Premiums..................................................9
Deductions from Portfolios................................................9
Monthly Deductions from Contract Fund....................................10
Daily Deduction from the Contract Fund...................................11
Surrender or Withdrawal Charges..........................................11
Transaction Charges......................................................12
CONTRACT DATE..................................................................12
PREMIUMS.......................................................................12
ALLOCATION OF PREMIUMS.........................................................13
TRANSFERS......................................................................13
HOW THE CONTRACT FUND CHANGES WITH INVESTMENT EXPERIENCE.......................14
HOW A CONTRACT'S DEATH BENEFIT WILL VARY.......................................14
CONTRACT LOANS.................................................................15
SURRENDER OF A CONTRACT........................................................15
LAPSE AND REINSTATEMENT........................................................15
Fixed Extended Term Insurance............................................16
Fixed Reduced Paid-Up Insurance..........................................16
Variable Reduced Paid-Up Insurance.......................................16
What Happens If No Request Is Made?......................................16
PAID-UP INSURANCE OPTION.......................................................16
REDUCED PAID-UP INSURANCE OPTION...............................................17
WHEN PROCEEDS ARE PAID.........................................................17
LIVING NEEDS BENEFIT...........................................................17
Terminal Illness Option..................................................18
VOTING RIGHTS..................................................................18
REPORTS TO CONTRACT OWNERS.....................................................19
TAX TREATMENT OF CONTRACT BENEFITS.............................................19
Treatment as Life Insurance..............................................19
Pre-Death Distributions..................................................19
Other Tax Consequences...................................................20
OTHER CONTRACT PROVISIONS......................................................20
FURTHER INFORMATION ABOUT THE SERIES FUND............................................20
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS.................................20
BALANCED PORTFOLIOS............................................................21
Conservative Balanced Portfolio..........................................21
Flexible Managed Portfolio...............................................22
FOREIGN SECURITIES.............................................................23
RISK FACTORS RELATING TO INVESTING IN FIXED INCOME SECURITIES RATED BELOW
INVESTMENT GRADE...............................................................23
OPTIONS, FUTURES CONTRACTS AND SWAPS...........................................24
SHORT SALES....................................................................24
REPURCHASE AGREEMENTS..........................................................25
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS.................................25
LOANS OF PORTFOLIO SECURITIES..................................................25
INVESTMENT RESTRICTIONS APPLICABLE TO THE PORTFOLIOS.................................25
INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES......................................26
PORTFOLIO BROKERAGE AND RELATED PRACTICES......................................26
STATE REGULATION.....................................................................26
EXPERTS..............................................................................26
LITIGATION...........................................................................27
EXPANDED TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION....................27
ADDITIONAL INFORMATION...............................................................28
FINANCIAL STATEMENTS.................................................................29
FINANCIAL STATEMENTS OF THE PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT....A1
FINANCIAL STATEMENTS OF PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY ..................B1
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FOR
THE SERIES FUND.
<PAGE>
INTRODUCTION AND SUMMARY
This section provides only an overview of the more significant provisions of the
Contract. It omits details which are provided in the rest of this prospectus, as
well as in a Statement of Additional Information which is available to you upon
request without charge. A description of the contents of that Statement of
Additional Information is on page 27.
As you read this prospectus you should keep in mind that you are considering the
purchase of a life insurance contract. Because it is VARIABLE LIFE INSURANCE -
and variable life insurance has significant investment aspects and requires you
to make investment decisions - it is also a "security." That is why you have
been given this prospectus. Securities which are offered to the public must be
registered with the Securities and Exchange Commission, and the prospectus that
is a part of the registration statement must be given to all prospective buyers.
But because a substantial part of your premium pays for life insurance that will
pay to your beneficiary, in the event of your death, an amount far exceeding
your total premium payments, you should not buy this contract unless a major
reason for the purchase is to provide life insurance protection. Because the
contract provides whole-life or permanent insurance, it also serves a second
important objective. It can be expected to provide an increasing cash surrender
value that can be used during your lifetime.
BRIEF DESCRIPTION OF THE CONTRACT
The PRUVIDER Variable APPRECIABLE LIFE Contract (referred to from now on as the
"Contract") is issued and sold by the Pruco Life Insurance Company of New Jersey
("Pruco Life of New Jersey"), a stock life insurance company, organized in 1982
under the laws of the State of New Jersey. It is licensed to sell life insurance
and annuities only in the States of New Jersey and New York. These Contracts are
not offered in any state in which the necessary approvals have not yet been
obtained.
Pruco Life of New Jersey is a wholly-owned subsidiary of Pruco Life Insurance
Company, which in turn is a wholly-owned subsidiary of Prudential, a mutual
insurance company founded in 1875 under the laws of the State of New Jersey. As
of December 31, 1996, Prudential has invested $127 million in Pruco Life of New
Jersey through its subsidiary Pruco Life Insurance Company in connection with
Pruco Life of New Jersey's organization and operation. Prudential intends from
time to time to make additional capital contributions to Pruco Life of New
Jersey as needed to enable it to meet its reserve requirements and expenses in
connection with its business. Prudential is under no obligation to make such
contributions and its assets do not back the benefits payable under the
Contract. Pruco Life of New Jersey's financial statements begin on page B1 and
should be considered only as bearing upon Pruco Life of New Jersey's ability to
meet its obligations under the Contracts.
The Contract is a form of flexible premium variable life insurance. It is built
around a Contract Fund, the amount of which changes every business day. That
amount represents the value of your Contract on that day although you will have
to pay a surrender charge if you decide to surrender the Contract during the
first ten Contract years.
A broad objective of the Contract is to provide benefits that will increase in
value if favorable investment results are achieved. Pruco Life of New Jersey has
established a separate account, like a separate division within the Company,
called the Pruco Life of New Jersey Variable Appreciable Account. Whenever you
pay a premium, Pruco Life of New Jersey first deducts certain charges (described
below) and, unless you decide otherwise puts the remainder - often called the
"net premium" - into the Account, where it is combined with the net premiums
from all other contracts like this one. The money in the Account, including your
Contract Fund, is then invested in the following way. The Account is divided
into 2 subaccounts and you must decide which one[s] will hold the assets of your
Contract Fund. The money allocated to each subaccount is immediately invested in
a corresponding portfolio of The Prudential Series Fund, Inc. Those two
portfolios -- called the CONSERVATIVE BALANCED PORTFOLIO and the FLEXIBLE
MANAGED PORTFOLIO -- differ in the amount of risk associated with them and are
described in more detail below.
Because the assets that relate to the Contract may be invested in these variable
investment options, the Contract offers an opportunity for your cash surrender
value to appreciate more rapidly than it would under comparable fixed-benefit
whole-life insurance. You, however, must accept the risk that if investment
performance is unfavorable the cash surrender value may not appreciate as
rapidly and, indeed, may decrease in value. If you prefer to avoid this risk you
may elect to allocate part or all of the net premiums in a fixed-rate option
under which a stated interest rate is credited to the amount of your Contract
Fund allocated to that option. See THE FIXED-RATE OPTION, page 8.
Pruco Life of New Jersey deducts certain charges from each premium payment and
from the amounts held in the designated investment options. In addition, Pruco
Life of New Jersey makes certain additional charges if a Contract lapses or is
surrendered during the first 10 Contract years. All these charges, which are
largely designed to cover insurance costs and risks as well as sales and
administrative expenses, are fully described under CONTRACT
1
<PAGE>
FEES AND CHARGES on page 9. In brief, and subject to that fuller description,
the following diagram outlines the charges which may be made:
PREMIUM PAYMENT
o less charge for taxes
attributable to premiums
o less $2 processing fee
INVESTED PREMIUM AMOUNT
o To be invested in one or a combination of:
o The Conservative Balanced Portfolio
o The Flexible Managed Portfolio
o The Fixed-Rate Option
DAILY CHARGES
o A daily charge equivalent to an annual rate of up to 0.9% is deducted from
the assets of the subaccounts for mortality and expense risks.
o Management fees and expenses are deducted from the assets of the Series
Fund. See DEDUCTIONS FROM PORTFOLIOS, page 9.
MONTHLY CHARGES
o A sales charge is deducted from the Contract Fund in the amount of 1/2 of
1% of the primary annual premium.
o The Contract Fund is reduced by a guaranteed minimum death benefit risk
charge of not more than $0.01 per $1,000 of the face amount of insurance.
o The Contract Fund is reduced by an administrative charge of up to $6 per
Contract and up to $0.19 per $1,000 of face amount of insurance
(currently, on a non-guaranteed basis, the $0.19 charge is decreased to
$0.09 per $1,000); if the face amount of the Contract is less than
$10,000, there is an additional charge of $0.30 per $1,000 of face amount.
o A charge for anticipated mortality is deducted, with the maximum charge
based on the non-smoker/smoker 1980 CSO Tables.
o If the Contract includes riders, a deduction from the Contract Fund will
be made for charges applicable to those riders; a deduction will also be
made if the rating class of the insured results in an extra charge.
POSSIBLE ADDITIONAL CHARGES
o If the Contract lapses or is surrendered during the first 10 years, a
contingent deferred sales charge is assessed; the maximum contingent
deferred sales charge during the first 5 years is 50% of the first year's
primary annual premium but this charge is both subject to other important
limitations and reduced for Contracts that have been in force for more
than 5 years.
o If the Contract lapses or is surrendered during the first 10 years, a
contingent deferred administrative charge is assessed; during the first 5
years, this charge equals $5 per $1,000 of face amount and it begins to
decline uniformly after the fifth Contract year so that it disappears on
the tenth Contract anniversary.
o An administrative processing charge of $15 will be made in connection with
each withdrawal of excess cash surrender value.
Because of the charges listed above, and in particular because of the
significant charges deducted upon early surrender or lapse, you should purchase
a Contract only if you intend and have the financial capability to keep it in
force for a substantial period.
When you first buy the Contract you give instructions to Pruco Life of New
Jersey as to what combination of the three investment options you wish your
Contract Fund invested. Thereafter you may make changes in these
2
<PAGE>
allocations either in writing or by telephone. The investment objectives of the
portfolios, described more fully starting on page 20 of this prospectus, and of
the fixed-rate option are as follows:
BALANCED PORTFOLIOS
CONSERVATIVE BALANCED PORTFOLIO. Achievement of a favorable total investment
return consistent with a portfolio having a conservatively managed mix of money
market instruments, fixed income securities, and common stocks, in proportions
believed by the investment manager to be appropriate for an investor who desires
diversification of investment who prefers a relatively lower risk of loss than
that associated with the Flexible Managed Portfolio while recognizing that this
reduces the chances of greater appreciation.
FLEXIBLE MANAGED PORTFOLIO. Achievement of a high total investment return
consistent with a portfolio having an aggressively managed mix of money market
instruments, fixed income securities, and common stocks, in proportions believed
by the investment manager to be appropriate for an investor desiring
diversification of investment who is willing to accept a relatively high level
of loss in an effort to achieve greater appreciation.
FIXED-RATE OPTION
Guarantee against loss of principal plus income at a rate which may change at
yearly intervals, but will never be lower than an effective annual rate of 4%.
TRANSFERS BETWEEN INVESTMENT OPTIONS
You may at any time change the instructions for the allocation of your premiums
to the various investment options. You may also transfer amounts held in one
option to another. There are restrictions upon transfers out of the fixed-rate
option which under certain circumstances Pruco Life of New Jersey may waive.
THE SCHEDULED PREMIUM
Your Contract sets forth an annual Scheduled Premium, or one that is payable
more frequently, such as monthly. Pruco Life of New Jersey guarantees that, if
the Scheduled Premiums are paid when due (or if missed premiums are paid later,
with interest), the death benefit will be paid upon the death of the insured.
The Contract will not lapse even if investment experience is unexpectedly so
unfavorable that the Contract Fund value drops to below zero.
The amount of the scheduled premium depends on the Contract's face amount, the
insured's sex (except where unisex rates apply) and age at issue, the insured's
risk classification, the rate for taxes attributable to premiums, and the
frequency of premium payments selected. Under certain low face amount Contracts
issued on younger insureds, the payment of the Scheduled Premium may cause the
Contract to be classified as a Modified Endowment Contract. See TAX TREATMENT OF
CONTRACT BENEFITS, page 19. The scheduled premium will not be increased (except
to reflect changes in the rate for taxes attributable to premiums). See
PREMIUMS, page 12.
PAYMENT OF HIGHER PREMIUMS
The payment of premiums in excess of Scheduled Premiums may cause the Contract
to be classified as a Modified Endowment Contract. See PREMIUMS, page 12 and TAX
TREATMENT OF CONTRACT BENEFITS, page 19.
CONTRACT LOANS
The Contract permits the owner to borrow up to 90% of the amount of the cash
surrender value (100% of the portion allocated to the fixed-rate option) on
favorable terms. See CONTRACT LOANS, page 15. When a loan is made, the amount
held under the investment options described above is reduced, proportionately,
by the amount of the loan.
PRUVIDER VARIABLE APPRECIABLE LIFE INSURANCE CONTRACTS
Pruco Life of New Jersey's PRUVIDER Variable APPRECIABLE LIFE Insurance Contract
is a form of life insurance that provides much of the flexibility of variable
universal life. However, it differs in two important ways. First, Pruco Life of
New Jersey guarantees that if the Scheduled Premiums are paid when due or within
the grace period (or missed premiums are paid later with interest), the Contract
will not lapse and the face amount of insurance will be paid upon the death of
the insured even if, because of unfavorable investment experience, the Contract
Fund value should drop to below zero. Second, if all premiums are not paid when
due (or made up), the Contract will not lapse as long as the Contract Fund is
higher than a stated amount set forth in a table in the Contract - an amount
that increases each year and in later years becomes quite high; it is called the
"Tabular Contract Fund." The Contract lapses when the Contract Fund falls to
below this stated amount, rather than when it drops to zero. Thus, when a
PRUVIDER Variable APPRECIABLE LIFE Contract lapses, it may still have
considerable value and you will,
3
<PAGE>
therefore, have a substantial incentive to reinstate it, as well as an
opportunity to make a considered decision whether to do so or to take, in one
form or another, the cash surrender value. In effect, Pruco Life of New Jersey
provides an early and timely warning against the imprudent use of the
flexibility provided by the Contract.
In the following pages of this prospectus we describe in much greater detail all
of the provisions of the Contract. That description is preceded by two sets of
tables. The first set provides, in condensed form, financial information about
the portfolios of the Series Fund, beginning on the date each of them was first
established. The second set shows what the cash surrender values and death
benefits would be under a Contract issued on a hypothetical person, making
certain assumptions. These tables show generally how the values under the
Contract would vary, with different investment performances.
FINANCIAL HIGHLIGHTS OF THE PORTFOLIOS
OF THE SERIES FUND
The tables that follow provide information about the annual investment income,
capital appreciation and expenses of the 2 available portfolios of the Series
Fund for each year, beginning with the year after the Series Fund was
established. They are prepared on a per share basis and therefore provide useful
information about the investment performance of each portfolio.
NOTE, HOWEVER, THAT THESE TABLES DO NOT TELL YOU HOW YOUR CONTRACT FUND WOULD
HAVE CHANGED DURING THIS PERIOD BECAUSE THEY DO NOT REFLECT THE DEDUCTIONS FROM
THE CONTRACT FUND OTHER THAN THE PORTFOLIO DEDUCTIONS.
4
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the periods indicated)
The following highlights for the year ended December 31, 1996 have been audited
by Price Waterhouse LLP, independent accountants, whose report thereon was
unqualified. In addition, the financial highlights for each of the years prior
to and including the period ended December 31, 1995 have been audited by
Deloitte & Touche LLP, independent auditors, whose report thereon was also
unqualified. Their reports are included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
CONSERVATIVE BALANCED
-------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A) 1991(A) 1990(A) 1989(A) 1988(A) 1987(A)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of year...... $ 15.31 $ 14.10 $ 14.91 $ 14.24 $ 14.32 $ 13.06 $ 13.36 $ 12.30 $ 11.89 $ 12.57
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.66 0.63 0.53 0.49 0.56 0.69 0.82 0.89 0.77 0.66
Net realized and
unrealized gains
(losses) on
investments............ 1.24 1.78 (0.68) 1.23 0.41 1.74 (0.14) 1.15 0.43 (0.40)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total from investment
operations........... 1.90 2.41 (0.15) 1.72 0.97 2.43 0.68 2.04 1.20 0.26
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.66) (0.64) (0.51) (0.47) (0.54) (0.67) (0.81) (0.89) (0.79) (0.71)
Distributions from net
realized gains......... (1.03) (0.56) (0.15) (0.58) (0.51) (0.50) (0.17) (0.09) -- (0.23)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total
distributions........ (1.69) (1.20) (0.66) (1.05) (1.05) (1.17) (0.98) (0.98) (0.79) (0.94)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Net Asset Value, end of
year................... $ 15.52 $ 15.31 $ 14.10 $ 14.91 $ 14.24 $ 14.32 $ 13.06 $ 13.36 $ 12.30 $ 11.89
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
TOTAL INVESTMENT
RETURN:(B)............. 12.63% 17.27% (0.97%) 12.20% 6.95% 19.07% 5.27% 16.99% 10.19% 1.54%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in millions).......... $4,478.8 $3,940.8 $3,501.1 $3,103.2 $2,114.0 $1,500.0 $1,100.2 $976.0 $815.6 $803.9
Ratios to average net
assets:
Expenses............... 0.59% 0.58% 0.61% 0.60% 0.62% 0.63% 0.65% 0.64% 0.65% 0.66%
Net investment
income................. 4.13% 4.19% 3.61% 3.22% 3.88% 4.89% 6.21% 6.81% 6.22% 5.05%
Portfolio turnover
rate................... 295% 201% 125% 79% 62% 115% 44% 154% 111% 141%
Average commission rate
paid per share......... $0.0554 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
FLEXIBLE MANAGED
-------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A) 1991(A) 1990(A) 1989(A) 1988(A) 1987(A)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of year...... $ 17.86 $ 15.50 $ 16.96 $ 16.01 $ 16.29 $ 14.00 $ 14.45 $ 13.12 $ 12.33 $ 13.56
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.57 0.56 0.47 0.57 0.58 0.65 0.72 0.82 0.72 0.57
Net realized and
unrealized gains
(losses) on
investments............ 1.79 3.15 (1.02) 1.88 0.61 2.81 (0.47) 1.99 0.84 (0.75)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total from investment
operations........... 2.36 3.71 (0.55) 2.45 1.19 3.46 0.25 2.81 1.56 (0.18)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.58) (0.56) (0.45) (0.57) (0.56) (0.66) (0.70) (0.81) (0.77) (0.67)
Distributions from net
realized gains......... (1.85) (0.79) (0.46) (0.93) (0.91) (0.51) -- (0.67) -- (0.38)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Total
distributions........ (2.43) (1.35) (0.91) (1.50) (1.47) (1.17) (0.70) (1.48) (0.77) (1.05)
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Net Asset Value, end of
year................... $ 17.79 $ 17.86 $ 15.50 $ 16.96 $ 16.01 $ 16.29 $ 14.00 $ 14.45 $ 13.12 $ 12.33
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
TOTAL INVESTMENT
RETURN:(B)............. 13.64% 24.13% (3.16%) 15.58% 7.61% 25.43% 1.91% 21.77% 12.83% (1.83%)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in millions).......... $4,896.9 $4,261.2 $3,481.5 $3,292.2 $2,435.6 $1,990.7 $1,507.8 $1,386.5 $1,103.9 $1,062.4
Ratios to average net
assets:
Expenses............... 0.64% 0.63% 0.66% 0.66% 0.67% 0.67% 0.69% 0.69% 0.70% 0.71%
Net investment
income................. 3.07% 3.30% 2.90% 3.30% 3.63% 4.23% 5.13% 5.66% 5.52% 4.09%
Portfolio turnover
rate................... 233% 173% 124% 63% 59% 93% 52% 141% 128% 124%
Average commission rate
paid per share......... $0.0563 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns.
This information should be read in conjunction with the financial statements of
The Prudential Series Fund, Inc. and notes thereto, which appear in the
Statement of Additional Information.
Further information about performance of the portfolios is contained in the
Annual Report to Contract Owners which may be obtained without charge.
5
<PAGE>
PORTFOLIO RATES OF RETURN
The following table, based upon the immediately preceding financial highlights
for the Series Fund, shows first the average annual compounded net rates of
return for each Portfolio for the year ended December 31, 1996, for the 5 year
and 10 year periods ending on that date, and from the inception date of each
Portfolio to December 31, 1996. These rates of return should not be regarded as
an estimate or prediction of future performance. They may be useful in assessing
the competence and performance of the Series Fund's investment advisor and in
helping you to decide which portfolios to choose. THIS INFORMATION RELATES ONLY
TO THE SERIES FUND AND DOES NOT REFLECT THE VARIOUS OTHER CHARGES MADE UNDER THE
CONTRACTS.
<TABLE>
<CAPTION>
5 YEARS 10 YEARS INCEPTION
INCEPTION YEAR ENDED ENDED ENDED DATE TO
PORTFOLIO DATE 12/31/96 12/31/96 12/31/96 12/31/96
<S> <C> <C> <C> <C> <C>
- -------------------------- ------------- ----------- ----------- ----------- -------------
CONSERVATIVE BALANCED 5/83 12.63% 9.43% 9.92% 10.60%
FLEXIBLE MANAGED 5/83 13.64% 11.18% 11.35% 11.77%
</TABLE>
6
<PAGE>
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS
AND ACCUMULATED PREMIUMS
The following tables have been prepared to help show how values under the
Contract change with investment performance of the Account. The tables assume
that no portion of the Contract Fund is allocated to the fixed-rate option. The
tables illustrate how cash surrender values (reflecting the deduction of
deferred sales load and administrative charges, if any) and death benefits of
Contracts issued on an insured of a given age would vary over time if the gross
investment return on the assets held in the selected Series Fund portfolios were
a uniform, after tax, annual rate of 0%, 4%, 8%, and 12% and minimum scheduled
premiums were paid. The death benefits and cash surrender values would be
different from those shown if the returns averaged 0%, 4%, 8%, and 12% but
fluctuated over and under those averages throughout the years.
The death benefits and cash surrender values shown in the first two tables on
pages T1 and T2 reflect Pruco Life of New Jersey's current charges. The values
shown in these tables are calculated upon the assumption that Pruco Life of New
Jersey will continue to use the administrative charges and mortality rates that
it is currently using, even though it is permitted under the Contract to use
higher administrative charges and the higher mortality charges specified in the
1980 CSO Table. While Pruco Life of New Jersey does not currently intend to
withdraw or modify these reductions in charges, it reserves the right to do so.
The death benefits and cash surrender values shown in the next two tables on
pages T3 and T4 are calculated upon the assumption that the maximum
administrative charges allowable under the Contract and the maximum mortality
charges specified by the 1980 CSO Table are made throughout the life of the
Contract; they do not reflect Pruco Life of New Jersey's current practice of
reducing the administrative and mortality charges.
The amounts shown for the death benefit and cash surrender value as of each
Contract year reflect the fact that the net investment return on the assets held
in the subaccounts is lower than the gross, after-tax return of the Series
Fund's portfolios. This is because these tables assume an investment management
fee and other estimated Series Fund expenses totaling 0.62% and also reflect the
daily charge to the Account for assuming mortality and expense risks, which is
equivalent to an effective annual rate of 0.9%. The 0.62% figure is based on an
average of the current management fees of the two available portfolios and an
analysis of historical operating expenses other than management fees, taking
into account any applicable expense offsets. Actual fees and expenses of the
portfolios associated with a Contract may be more or less than 0.62%, will vary
from year to year, and will depend on how the Contract Fund is allocated. Based
on the above assumptions, gross annual rates of return of 0%, 4%, 8%, and 12%
correspond in the tables to approximate net annual rates of return of -1.52%,
2.48%, 6.48%, and 10.48%, respectively. The tables reflect the fact that no
charges for federal or state income taxes are currently made against the Account
(other than "taxes attributable to premiums"). If such a charge is made in the
future, it will take higher gross rates of return to produce the same net
after-tax returns. The tables assume that the insured is in the preferred rating
class, and the charge for federal, state and local taxes attributable to
premiums is 3.25%.
Upon request, Pruco Life of New Jersey will furnish a comparable hypothetical
illustration based on the proposed insured's age and sex (except where unisex
rates apply) and on the face amount or premium amount requested. The
illustrations can be prepared upon the assumptions that the insured is in the
preferred or standard rating class or in a different risk classification, and
can assume that annual, semi-annual, quarterly or monthly premiums are paid.
7
<PAGE>
ILLUSTRATIONS
-------------
THE PRUVIDER VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT
MALE SELECT PREFERRED ISSUE AGE 35
$5,000 GUARANTEED DEATH BENEFIT
$173.70 ANNUAL PREMIUM (1)
USING CURRENT CONTRACTUAL CHARGES
<TABLE>
Death Benefit (2) Cash Surrender Value (2)
------------------------------------------------- ----------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated --------------------------------------------------- ----------------------------------------------------
Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (-1.52% Net) (2.48% Net) (6.48% Net) (10.48% Net) (-1.52% Net) (2.48% Net) (6.48% Net) (10.48% Net)
------ -------------- ------------ ----------- ----------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 181 $5,003 $5,007 $ 5,011 $ 5,016 $ 0 $ 0 $ 2 $ 6
2 $ 369 $5,002 $5,013 $ 5,024 $ 5,036 $ 48 $ 59 $ 70 $ 82
3 $ 564 $5,000 $5,019 $ 5,040 $ 5,063 $101 $ 121 $ 142 $ 165
4 $ 767 $5,000 $5,024 $ 5,058 $ 5,096 $153 $ 185 $ 219 $ 256
5 $ 978 $5,000 $5,028 $ 5,079 $ 5,136 $204 $ 249 $ 300 $ 357
6 $ 1,198 $5,000 $5,033 $ 5,104 $ 5,186 $268 $ 329 $ 400 $ 482
7 $ 1,427 $5,000 $5,038 $ 5,133 $ 5,247 $330 $ 410 $ 506 $ 619
8 $ 1,665 $5,000 $5,042 $ 5,166 $ 5,318 $392 $ 493 $ 617 $ 769
9 $ 1,912 $5,000 $5,046 $ 5,204 $ 5,403 $452 $ 577 $ 735 $ 934
10 $ 2,169 $5,000 $5,049 $ 5,246 $ 5,501 $510 $ 662 $ 859 $ 1,114
15 $ 3,617 $5,000 $5,055 $ 5,539 $ 6,264 $718 $1,044 $ 1,528 $ 2,253
20 $ 5,379 $5,000 $5,042 $ 6,017 $ 9,081 $879 $1,452 $ 2,427 $ 4,105
25 $ 7,523 $5,000 $5,007 $ 6,949 $13,482 $965 $1,873 $ 3,625 $ 7,034
30 (Age 65) $10,132 $5,000 $5,000 $ 8,696 $19,488 $934 $2,290 $ 5,171 $11,589
35 $13,305 $5,000 $5,000 $10,646 $27,770 $691 $2,674 $ 7,108 $18,540
40 $17,166 $5,000 $5,000 $12,868 $39,313 $ 41 $2,983 $ 9,482 $28,970
45 $21,864 $5,000 $5,000 $15,463 $55,611 $ 0 $3,125 $12,331 $44,348
</TABLE>
- -----------
(1) If premiums are paid more frequently than annually, the payments would be
$89.46 semi-annually, $46.15 quarterly or $16.90 monthly. The death benefits
and cash surrender values would be slightly different for a Contract with
more frequent premium payments.
(2) Assumes no Contract loan has been made.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN
THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A
REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING
INTEREST RATES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER
VALUE FOR A CONTRACT WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES
OF RETURN AVERAGED 0%, 4%, 8%, AND 12% OVER A PERIOD OF YEARS BUT ALSO
FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO
REPRESENTATIONS CAN BE MADE BY PRUCO LIFE OF NEW JERSEY OR THE SERIES FUND
THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
T1
<PAGE>
THE PRUVIDER VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT
MALE SELECT PREFERRED ISSUE AGE 35
$20,000 GUARANTEED DEATH BENEFIT
$390.90 ANNUAL PREMIUM (1)
USING CURRENT CONTRACTUAL CHARGES
<TABLE>
Death Benefit (2) Cash Surrender Value (2)
---------------------------------------------------- ----------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated ---------------------------------------------------- ----------------------------------------------------
Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (-1.52% Net) (2.48% Net) (6.48% Net) (10.48% Net) (-1.52% Net) (2.48% Net) (6.48% Net) (10.48% Net)
------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 407 $20,012 $20,024 $20,036 $ 20,048 $ 38 $ 50 $ 62 $ 74
2 $ 829 $20,013 $20,046 $20,080 $ 20,115 $ 243 $ 276 $ 310 $ 345
3 $ 1,269 $20,001 $20,065 $20,132 $ 20,204 $ 441 $ 505 $ 572 $ 644
4 $ 1,726 $20,000 $20,081 $20,194 $ 20,316 $ 635 $ 739 $ 851 $ 973
5 $ 2,202 $20,000 $20,094 $20,265 $ 20,455 $ 832 $ 985 $ 1,155 $ 1,346
6 $ 2,697 $20,000 $20,111 $20,355 $ 20,634 $1,082 $ 1,294 $ 1,538 $ 1,818
7 $ 3,211 $20,000 $20,125 $20,458 $ 20,850 $1,333 $ 1,615 $ 1,947 $ 2,339
8 $ 3,746 $20,000 $20,138 $20,576 $ 21,106 $1,580 $ 1,941 $ 2,379 $ 2,909
9 $ 4,302 $20,000 $20,148 $20,710 $ 21,410 $1,821 $ 2,272 $ 2,834 $ 3,534
10 $ 4,881 $20,000 $20,156 $20,861 $ 21,765 $2,056 $ 2,608 $ 3,313 $ 4,217
15 $ 8,140 $20,000 $20,153 $21,933 $ 24,565 $2,893 $ 4,108 $ 5,887 $ 8,520
20 $12,106 $20,000 $20,071 $23,703 $ 34,368 $3,536 $ 5,709 $ 9,341 $ 15,537
25 $16,931 $20,000 $20,000 $26,728 $ 51,066 $3,882 $ 7,357 $13,944 $ 26,641
30 (Age 65) $22,801 $20,000 $20,000 $33,481 $ 73,847 $3,750 $ 8,976 $19,911 $ 43,915
35 $29,942 $20,000 $20,000 $41,021 $105,266 $2,769 $10,425 $27,387 $ 70,280
40 $38,631 $20,000 $20,000 $49,613 $149,051 $ 140 $11,484 $36,561 $109,838
45 $49,203 $20,000 $20,000 $59,648 $210,877 $ 0 $11,674 $47,568 $168,168
</TABLE>
- ----------
(1) If premiums are paid more frequently than annually, the payments would be
$202.79 semi-annually, $103.98 quarterly or $36.59 monthly. The death
benefits and cash surrender values would be slightly different for a
Contract with more frequent premium payments.
(2) Assumes no Contract loan has been made.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%, 8%,
AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY PRUCO LIFE OF
NEW JERSEY OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T2
<PAGE>
THE PRUVIDER VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT
MALE SELECT PREFERRED ISSUE AGE 35
$5,000 GUARANTEED DEATH BENEFIT
$173.70 ANNUAL PREMIUM (1)
USING MAXIMUM CONTRACTUAL CHARGES
<TABLE>
Death Benefit (2) Cash Surrender Value (2)
-------------------------------------------------- ---------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated -------------------------------------------------- ---------------------------------------------------
Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (-1.52% Net) (2.48% Net) (6.48% Net) (10.48% Net) (-1.52% Net) (2.48% Net) (6.48% Net) (10.48% Net)
------ -------------- ------------ ----------- ----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 181 $5,000 $5,000 $ 5,004 $ 5,009 $ 0 $ 0 $ 0 $ 0
2 $ 369 $5,000 $5,000 $ 5,010 $ 5,022 $ 35 $ 45 $ 56 $ 67
3 $ 564 $5,000 $5,000 $ 5,018 $ 5,039 $ 82 $ 100 $ 120 $ 142
4 $ 767 $5,000 $5,000 $ 5,028 $ 5,063 $128 $ 157 $ 189 $ 224
5 $ 978 $5,000 $5,000 $ 5,039 $ 5,092 $172 $ 214 $ 261 $ 314
6 $ 1,198 $5,000 $5,000 $ 5,053 $ 5,129 $228 $ 284 $ 349 $ 425
7 $ 1,427 $5,000 $5,000 $ 5,070 $ 5,173 $283 $ 355 $ 442 $ 546
8 $ 1,665 $5,000 $5,000 $ 5,089 $ 5,227 $336 $ 427 $ 540 $ 677
9 $ 1,912 $5,000 $5,000 $ 5,111 $ 5,290 $388 $ 500 $ 642 $ 821
10 $ 2,169 $5,000 $5,000 $ 5,136 $ 5,364 $438 $ 573 $ 749 $ 977
15 $ 3,617 $5,000 $5,000 $ 5,316 $ 5,948 $601 $ 885 $1,305 $ 1,936
20 $ 5,379 $5,000 $5,000 $ 5,619 $ 7,671 $711 $1,200 $2,029 $ 3,468
25 $ 7,523 $5,000 $5,000 $ 6,094 $11,185 $738 $1,495 $2,960 $ 5,835
30 (Age 65) $10,132 $5,000 $5,000 $ 6,978 $15,837 $630 $1,732 $4,150 $ 9,418
35 $13,305 $5,000 $5,000 $ 8,391 $22,060 $278 $1,834 $5,602 $14,728
40 $17,166 $5,000 $5,000 $ 9,931 $30,451 $ 0 $1,641 $7,318 $22,439
45 $21,864 $5,000 $5,000 $11,640 $41,854 $ 0 $ 713 $9,283 $33,377
</TABLE>
- ----------
(1) If premiums are paid more frequently than annually, the payments would be
$89.46 semi-annually, $46.15 quarterly or $16.90 monthly. The death
benefits and cash surrender values would be slightly different for a
Contract with more frequent premium payments.
(2) Assumes no Contract loan has been made.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN
THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A
REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING
INTEREST RATES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER
VALUE FOR A CONTRACT WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES
OF RETURN AVERAGED 0%, 4%, 8%, AND 12% OVER A PERIOD OF YEARS BUT ALSO
FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO
REPRESENTATIONS CAN BE MADE BY PRUCO LIFE OF NEW JERSEY OR THE SERIES FUND
THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
T3
<PAGE>
THE PRUVIDER VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT
MALE SELECT PREFERRED ISSUE AGE 35
$20,000 GUARANTEED DEATH BENEFIT
$390.90 ANNUAL PREMIUM (1)
USING MAXIMUM CONTRACTUAL CHARGES
<TABLE>
Death Benefit (2) Cash Surrender Value (2)
---------------------------------------------------- ---------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated ---------------------------------------------------- ---------------------------------------------------
Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (-1.52% Net) (2.48% Net) (6.48% Net) (10.48% Net) (-1.52% Net) (2.48% Net) (6.48% Net) (10.48% Net)
------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 407 $20,000 $20,000 $20,009 $ 20,020 $ 12 $ 24 $ 35 $ 46
2 $ 829 $20,000 $20,000 $20,024 $ 20,056 $ 190 $ 221 $ 253 $ 286
3 $ 1,269 $20,000 $20,000 $20,045 $ 20,110 $ 364 $ 422 $ 485 $ 551
4 $ 1,726 $20,000 $20,000 $20,073 $ 20,185 $ 532 $ 627 $ 730 $ 842
5 $ 2,202 $20,000 $20,000 $20,108 $ 20,282 $ 704 $ 843 $ 999 $ 1,173
6 $ 2,697 $20,000 $20,000 $20,152 $ 20,406 $ 923 $1,115 $ 1,336 $ 1,589
7 $ 3,211 $20,000 $20,000 $20,205 $ 20,558 $1,143 $1,396 $ 1,695 $ 2,047
8 $ 3,746 $20,000 $20,000 $20,268 $ 20,742 $1,358 $1,680 $ 2,071 $ 2,545
9 $ 4,302 $20,000 $20,000 $20,341 $ 20,963 $1,566 $1,967 $ 2,465 $ 3,087
10 $ 4,881 $20,000 $20,000 $20,426 $ 21,225 $1,768 $2,255 $ 2,878 $ 3,677
15 $ 8,140 $20,000 $20,000 $21,056 $ 23,325 $2,427 $3,477 $ 5,010 $ 7,280
20 $12,106 $20,000 $20,000 $22,139 $ 28,833 $2,870 $4,707 $ 7,777 $ 13,035
25 $16,931 $20,000 $20,000 $23,868 $ 42,092 $2,979 $5,844 $11,330 $ 21,959
30 (Age 65) $22,801 $20,000 $20,000 $26,688 $ 59,647 $2,546 $6,726 $15,871 $ 35,471
35 $29,942 $20,000 $20,000 $32,133 $ 83,129 $1,129 $7,031 $21,453 $ 55,500
40 $38,631 $20,000 $20,000 $38,071 $114,786 $ 0 $6,070 $28,055 $ 84,587
45 $49,203 $20,000 $20,000 $44,659 $157,809 $ 0 $1,945 $35,614 $125,848
</TABLE>
- -------------
1) If premiums are paid more frequently than annually, the payments would be
$202.79 semi-annually, $103.98 quarterly or $36.59 monthly. The death
benefits and cash surrender values would be slightly different for a
Contract with more frequent premium payments.
2) Assumes no Contract loan has been made.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN
THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A
REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING
INTEREST RATES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER
VALUE FOR A CONTRACT WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES
OF RETURN AVERAGED 0%, 4%, 8%, AND 12% OVER A PERIOD OF YEARS BUT ALSO
FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO
REPRESENTATIONS CAN BE MADE BY PRUCO LIFE OF NEW JERSEY OR THE SERIES FUND
THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
T4
<PAGE>
GENERAL INFORMATION ABOUT
PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE
ACCOUNT AND THE FIXED RATE OPTION
PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT
The Pruco Life of New Jersey Variable Appreciable Account was established on
January 13, 1984 under New Jersey law as a separate investment account. The
Account meets the definition of a "separate account" under the federal
securities laws. The Account holds assets that are segregated from all of Pruco
Life of New Jersey's other assets.
The obligations to Contract owners and beneficiaries arising under the Contract
are general corporate obligations of Pruco Life of New Jersey. Pruco Life of New
Jersey is also the legal owner of the assets in the Account. Pruco Life of New
Jersey will maintain assets in the Account with a total market value at least
equal to the reserve and other liabilities relating to the variable benefits
attributable to the Account. These assets may not be charged with liabilities
which arise from any other business Pruco Life of New Jersey conducts. In
addition to these assets, the Account's assets may include funds contributed by
Pruco Life of New Jersey to commence operation of the Account and may include
accumulations of the charges Pruco Life of New Jersey makes against the Account.
From time to time these additional assets will be transferred to Pruco Life of
New Jersey's general account. Before making any such transfer, Pruco Life of New
Jersey will consider any possible adverse impact the transfer might have on the
Account.
The Account is registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940 ("1940 Act") as a unit investment
trust, which is a type of investment company. This does not involve any
supervision by the SEC of the management or investment policies or practices of
the Account. For state law purposes, the Account is treated as a part or
division of Pruco Life of New Jersey. There are currently two subaccounts within
the Account, one of which invests in the Conservative Balanced Portfolio and the
other of which invests in the Flexible Managed Portfolio of the Series Fund.
Additional subaccounts may be added in the future. The Account's financial
statements begin on page A1.
THE FIXED-RATE OPTION
Because of exemptive and exclusionary provisions, interests in the fixed-rate
option under the Contract have not been registered under the Securities Act of
1933 and the general account has not been registered as an investment company
under the Investment Company Act of 1940. Accordingly, interests in the
fixed-rate option are not subject to the provisions of these Acts, and Pruco
Life of New Jersey has been advised that the staff of the Securities and
Exchange Commission has not reviewed the disclosure in this Prospectus relating
to the fixed-rate option. Any inaccurate or misleading disclosure regarding the
fixed-rate option may, however, subject Pruco Life of New Jersey and its
directors to civil liability if that results in any damage.
As explained earlier, you may elect to allocate, either initially or by
transfer, all or part of the amount credited under the Contract to the
fixed-rate option, and the amount so allocated or transferred becomes part of
Pruco Life of New Jersey's general assets. Sometimes this is referred to as
Pruco Life of New Jersey's general account, which consists of all assets owned
by Pruco Life of New Jersey other than those in the Account and in other
separate accounts that have been or may be established by Pruco Life of New
Jersey. Subject to applicable law, Pruco Life of New Jersey has sole discretion
over the investment of the assets of the general account, and Contract owners do
not share in the investment experience of those assets. Instead, Pruco Life of
New Jersey guarantees that the part of the Contract Fund allocated to the
fixed-rate option will accrue interest daily at an effective annual rate that
Pruco Life of New Jersey declares periodically. This rate may not be less than
an effective annual rate of 4%. Currently, declared interest rates remain in
effect from the date money is allocated to the fixed-rate option until the
Monthly date in the same month in the following year. See CONTRACT DATE, page
12. Thereafter, a new crediting rate will be declared each year and will remain
in effect for the calendar year. Pruco Life of New Jersey reserves the right to
change this practice. Pruco Life of New Jersey is not obligated to credit
interest at a higher rate than 4%, although in its sole discretion it may do so.
Different crediting rates may be declared for different portions of the Contract
Fund allocated to the fixed-rate option. At least annually and on request, a
Contract owner will be advised of the interest rates that currently apply to his
or her Contract.
Transfers from the fixed-rate option are subject to strict limits. (See
TRANSFERS, page 13). The payment of any cash surrender value attributable to the
fixed-rate option may be delayed up to 6 months (see WHEN PROCEEDS ARE PAID,
page 17).
8
<PAGE>
DETAILED INFORMATION FOR PROSPECTIVE
CONTRACT OWNERS
REQUIREMENTS FOR ISSUANCE OF A CONTRACT
The Contract may generally be issued on insureds below the age of 76. Generally,
the minimum initial guaranteed death benefit that can be applied for is $5,000
and the maximum that can be applied for is $25,000. For proposed insureds 21
years of age or younger, the minimum initial guaranteed death benefit that can
be applied for is $10,000. Before issuing any Contract, Pruco Life of New Jersey
requires evidence of insurability which may include a medical examination.
Non-smokers who meet preferred underwriting requirements are offered the most
favorable premium rate. A higher premium is charged if an extra mortality risk
is involved. These are the current underwriting requirements. The Company
reserves the right to change these requirements on a non-discriminatory basis.
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK"
Generally, you may return the Contract for a refund within 10 days after you
receive it, within 45 days after Part I of the application for insurance is
signed, or within 10 days after Pruco Life of New Jersey mails or delivers a
Notice of Withdrawal Right, whichever is latest. Some states allow a longer
period of time during which a Contract may be returned for a refund. A refund
can be requested by mailing or delivering the Contract to the representative who
sold it or to the Home Office specified in the Contract. A Contract returned
according to this provision shall be deemed void from the beginning. You will
then receive a refund of all premium payments made, plus or minus any change due
to investment experience. However, if applicable law so requires, if you
exercise your short-term cancellation right, you will receive a refund of all
premium payments made, with no adjustment for investment experience.
CONTRACT FEES AND CHARGES
This section provides a detailed description of each charge that is described
briefly in the chart on page 2, and an explanation of the purpose of the charge.
In several instances we will use the terms "maximum charge" and "current
charge." The "maximum charge," in each instance, will be the highest charge that
Pruco Life of New Jersey is entitled to make under the Contract. The "current
charge" is the lower amount that Pruco Life of New Jersey is now charging.
However, if circumstances change, Pruco Life of New Jersey reserves the right to
increase each current charge, up to but to no more than the maximum charge,
without giving any advance notice.
A Contract owner may add several "riders" to the Contract which provide
additional benefits, which are charged for separately. The statement and
description of charges that follows assumes there are no riders to the Contract.
Deductions from Premiums
(a) A charge for taxes attributable to premiums is deducted from each premium.
That charge is currently made up of two parts. The first part is in an amount
equal to the state or local premium tax. It varies from jurisdiction to
jurisdiction and generally ranges from 0.75% to 5% (but in some instances it may
exceed 5%) of the premium received by Pruco Life of New Jersey. The second part
is for federal income taxes measured by premiums and it is equal to 1.25% of the
premium. Pruco Life of New Jersey believes that this charge is a reasonable
estimate of an increase in its federal income taxes resulting from a 1990 change
in the Internal Revenue Code. It is intended to recover this increased tax.
During 1996, 1995 and 1994, Pruco Life of New Jersey received a total of
approximately $168,923, $153,339 and $149,988, respectively, in charges for
payment of taxes attributable to premiums.
(b) A charge of $2 is deducted from each premium payment to cover the cost of
collecting and processing premiums. Thus, if you pay premiums annually, this
charge will be $2 per year. If you pay premiums monthly, the charge will be $24
per year. If you pay premiums more frequently, for example under a payroll
deduction plan with your employer, the charge may be more than $24 per year.
During 1996, 1995 and 1994, Pruco Life of New Jersey received a total of
approximately $205,362, $169,672 and $116,312, respectively, in processing
charges.
Deductions from Portfolios
(a) An investment advisory fee is deducted daily from each portfolio at an
annual rate of 0.55% for the Conservative Balanced Portfolio and 0.6% for the
Flexible Managed Portfolio.
(b) The expenses incurred in conducting the investment operations of the
portfolios (such as investment advisory fees, custodian fees and preparation and
distribution of annual reports) are paid out of the portfolio's income.
9
<PAGE>
These expenses also vary from portfolio to portfolio. The total expenses of each
portfolio for the year 1996 expressed as a percentage of the average assets
during the year are shown below:
ADVISORY OTHER TOTAL
PORTFOLIO FEE EXPENSES EXPENSES
--------- --- -------- --------
Conservative Balanced 0.55% 0.04% 0.59%
Flexible Managed 0.60% 0.04% 0.64%
For the years 1996, 1995 and 1994, Prudential received a total of $94,962,866,
$77,610,207, and $66,413,206, respectively, in investment management fees for
all of the Series Fund's portfolios.
Monthly Deductions from Contract Fund
The following monthly charges are deducted proportionately from the dollar
amounts held in each of the chosen investment option[s].
(a) A sales charge, often called a sales load, is deducted to pay part of the
costs Pruco Life of New Jersey incurs in selling the Contracts, including
commissions, advertising and the printing and distribution of prospectuses and
sales literature. The charge is equal to 0.5% of the "primary annual premium"
which is equal to the Scheduled Premium that would be payable if premiums were
being paid annually, less the two deductions from premiums (taxes attributable
to premiums and the $2 processing charge), and less the $6 part of the monthly
deduction described in (c) below, the $0.30 per $1,000 of face amount for
Contracts with a face amount of less than $10,000, and any extra premiums for
riders or substandard risks. The deduction is made whether the Contract owner is
paying premiums annually or more frequently. It is lower on Contracts issued on
insureds over 60 years of age. To summarize, this charge is somewhat less than
(significantly less for Contracts with small face amounts) 6% of the annual
Scheduled Premium.
There is a second sales load, which will be charged only if a Contract lapses or
is surrendered before the end of the 10th Contract year. It is often described
as a contingent deferred sales load ("CDSL") and is described later under
SURRENDER OR WITHDRAWAL CHARGES, page 11. During 1996, 1995 and 1994, Pruco Life
of New Jersey received a total of approximately $468,823, $351,003 and $203,885,
respectively, in sales load charges.
(b) A charge of not more than $0.01 per $1000 of face amount of insurance is
made to compensate Pruco Life of New Jersey for the risk it assumes by
guaranteeing that, no matter how unfavorable investment experience may be, the
death benefit will never be less than the guaranteed minimum death benefit so
long as Scheduled Premiums are paid on or before the due date or during the
grace period. This charge will not be made if the Contract has been continued in
force pursuant to an option on lapse. During 1996, 1995 and 1994, Pruco Life of
New Jersey received a total of approximately $24,222, $19,558 and $12,917,
respectively, for this risk charge.
(c) An administrative charge of $6 plus up to $0.19 per $1,000 per month of face
amount of insurance is deducted each month. Currently, on a non-guaranteed
basis, this charge is reduced from $0.19 to $0.09 per $1,000. The charge is
intended to pay for processing claims, keeping records, and communicating with
Contract owners. If premiums are paid by automatic transfer under the Pru-Matic
Plan, as described on page 12, the current charge is further reduced to $0.07
per $1,000 of face amount. There is an additional charge of $0.30 per $1,000 of
face amount if the face amount of the Contract is less than $10,000. This
monthly administrative charge will not be made if the Contract has been
continued in force pursuant to an option on lapse. During 1996, 1995 and 1994,
Pruco Life of New Jersey received a total of approximately $1,263,734,
$1,028,516 and $680,579, respectively, in monthly administrative charges.
(d) A mortality charge is deducted that is intended to be used to pay death
benefits. When an insured dies, the amount payable to the beneficiary is larger
than the Contract Fund and significantly larger if the insured dies in the early
years of a Contract. The mortality charges collected from all Contract owners
enables Pruco Life of New Jersey to pay the death benefit for the few insureds
who die. The maximum mortality charge is determined by multiplying the "net
amount at risk" under a Contract (the amount by which the Contract's death
benefit, computed as if there were neither riders nor Contract debt, exceeds the
Contract Fund) by a rate based upon the insured's current attained age and sex
(except where unisex rates apply) and the anticipated mortality for that class
of persons. The anticipated mortality is based upon mortality tables published
by The National Association of Insurance Commissioners called the
Non-Smoker/Smoker 1980 CSO Tables. Pruco Life of New Jersey may determine that a
lesser amount than that called for by these mortality tables will be adequate
for insureds of particular ages and may thus make a lower mortality charge for
such persons. Any lower current mortality charges are not applicable to
Contracts in force pursuant to an option on lapse. See LAPSE AND REINSTATEMENT,
page 15.
10
<PAGE>
(e) If the Contract includes riders, Pruco Life of New Jersey deducts any
charges applicable to those riders from the Contract Fund on each Monthly date.
In addition, Pruco Life of New Jersey will deduct on each Monthly date any extra
charge incurred because of the rating class of the insured.
(f) A charge may be deducted to cover federal, state or local taxes (other than
"taxes attributable to premiums" described above) that are imposed upon the
operations of the Account. At present no such taxes are imposed and no charge is
made. Pruco Life of New Jersey will review the question of a charge to the
Account for company federal income taxes periodically. Such a charge may be made
in future years for any company federal income taxes that would be attributable
to the Account.
Under current law, Pruco Life of New Jersey may incur state and local taxes (in
addition to premium taxes) in several states. At present, these taxes are not
significant and they are not charged against the Account. If there is a material
change in the applicable state or local tax laws, the imposition of any such
taxes upon Pruco Life of New Jersey that are attributable to the Account may
result in a corresponding charge against the Account.
Daily Deduction from the Contract Fund
Each day a charge is deducted from the assets of each of the subaccounts in an
amount equivalent to an effective annual rate of up to 0.9%. This charge is
intended to compensate Pruco Life of New Jersey for assuming mortality and
expense risks under the Contract. The mortality risk assumed is that insureds
may live for shorter periods of time than Pruco Life of New Jersey estimated
when it determined what mortality charge to make. The expense risk assumed is
that expenses incurred in issuing and administering the Contract will be greater
than Pruco Life of New Jersey estimated in fixing its administrative charges.
This charge is not assessed against amounts allocated to the fixed-rate option.
During 1996, 1995 and 1994, Pruco Life of New Jersey received a total of
approximately $113,587, $71,857 and $31,792, respectively, in mortality and
expense risk charges.
Surrender or Withdrawal Charges
(a) An additional sales load (the CDSL) is charged if a Contract is surrendered
for its cash surrender value or lapses during the first 10 Contract years. It is
not deducted from the death benefit if the insured should die during this
period. This maximum contingent deferred charge is equal to 50% of the first
year's primary annual premium upon Contracts that lapse during the first 5
Contract years. That percentage is reduced uniformly on a daily basis starting
from the Contract's fifth anniversary until it disappears on the tenth
anniversary. Other important limitations apply. They are described more fully in
the Statement of Additional Information. The amount of this charge can be more
easily understood by reference to the following table which shows the sales
loads that would be paid by a 35 year old man with $20,000 face amount of
insurance, both through the monthly deductions from the Contract Fund described
above and upon the surrender of the Contract.
<TABLE>
<CAPTION>
CUMULATIVE
CUMULATIVE TOTAL SALES
SALES LOAD LOAD AS PER-
CUMULATIVE DEDUCTED CENTAGE OF
SURRENDER, SCHEDULED FROM CONTINGENT TOTAL SCHEDULED
LAST DAY OF PREMIUMS CONTRACT DEFERRED SALES PREMIUMS
YEAR NO. PAID FUND SALES LOAD LOAD PAID
-------- ---- ---- ---------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
1 $ 390.90 $ 18.24 $ 87.22 $105.46 26.98%
2 781.80 36.48 104.16 140.64 17.99%
3 1,172.70 54.72 121.10 175.82 14.99%
4 1,563.60 72.96 138.04 211.00 13.49%
5 1,954.50 91.20 146.55 237.75 12.16%
6 2,345.40 109.44 121.80 231.24 9.86%
7 2,736.30 127.68 91.40 219.08 8.01%
8 3,127.20 145.92 60.80 206.72 6.61%
9 3,518.10 164.16 30.40 194.56 5.53%
10 3,909.00 182.40 0.00 182.40 4.67%
</TABLE>
The percentages shown in the last column will not be appreciably different for
insureds of different ages.
(b) An administrative charge of $5 per $1,000 of face amount of insurance is
deducted upon lapse or surrender to cover the cost of processing applications,
conducting medical examinations, determining insurability and the insured's
rating class, and establishing records. However, this charge is reduced
beginning on the Contract's fifth anniversary and declines daily at a constant
rate until it disappears entirely on the tenth Contract anniversary. We are
currently allowing partial surrenders of the Contract, but we reserve the right
to cancel this administrative practice. If the Contract is partially surrendered
during the first 10 years, a proportionate amount of the charge
11
<PAGE>
will be deducted from the Contract Fund. During 1996, 1995 and 1994, Pruco Life
of New Jersey received a total of approximately $33,452, $22,963 and $10,806,
respectively, for surrendered or lapsed Contracts. Surrender of all or part of a
Contract may have tax consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page
19.
Transaction Charges
An administrative processing charge of $15 will be made in connection with each
withdrawal of excess cash surrender value of a Contract. This charge is
described in more detail in the Statement of Additional Information.
CONTRACT DATE
When the first premium payment is paid with the application for a Contract, the
Contract date will ordinarily be the later of the date of the application or the
date of any medical examination. In most cases no medical examination will be
necessary. If the first premium is not paid with the application, the Contract
date will ordinarily be the date the first premium was paid and the Contract was
delivered. Under certain circumstances, Pruco Life of New Jersey will permit a
Contract to be back-dated but only to a date not earlier than 6 months prior to
the date of the application. It may be advantageous for a Contract owner to have
an earlier Contract date since that will result in the use by Pruco Life of New
Jersey of a lower issue age in determining the amount of the scheduled premium.
Pruco Life of New Jersey will require the payment of all premiums that would
have been due had the application date coincided with the back-dated Contract
date. The death benefit and cash surrender value under the Contract will be
equal to what they would have been had the Contract been issued on the Contract
date, all scheduled premiums been received on their due dates, and all Contract
charges been made.
PREMIUMS
As already explained, the Contract provides for a Scheduled Premium which, if
paid when due or within a 61 day grace period, ensures that the Contract will
not lapse. If you pay premiums other than on a monthly basis, you will receive a
notice that a premium is due about 3 weeks before each due date. If you pay
premiums monthly, you will receive a book each year with 12 coupons that will
serve as a reminder. With Pruco Life of New Jersey's consent, you may change the
frequency of premium payments.
You may elect to have monthly premiums paid automatically under the "Pru-Matic
Premium Plan" by pre-authorized transfers from a bank checking account. If you
select the Pru-Matic Premium Plan, one of the current monthly charges will be
reduced. See MONTHLY DEDUCTIONS FROM CONTRACT FUND, page 10. Some Contract
owners may also be eligible to have monthly premiums paid by pre-authorized
deductions from an employer's payroll.
The following table shows, for two face amounts, representative preferred and
standard annual premium amounts under Contracts issued on insureds who are not
substandard risks. These premiums do not reflect any additional riders or
supplementary benefits.
$10,000 FACE AMOUNT $20,000 FACE AMOUNT
----------------------- -----------------------
PREFERRED STANDARD PREFERRED STANDARD
--------- -------- --------- --------
Male, age 35 $233.70 $274.01 $390.90 $ 471.52
at issue
Female, age 45 $278.04 $308.53 $479.59 $ 540.57
at issue
Male, age 55 $450.96 $562.17 $825.43 $1047.86
at issue
The following table compares annual and monthly premiums for insureds who are in
the preferred rating class. Note that in these examples the sum of 12 monthly
premiums for a particular Contract is approximately 110% to 116% of the annual
scheduled premium for that Contract.
12
<PAGE>
$10,000 FACE AMOUNT $20,000 FACE AMOUNT
--------------------- ---------------------
MONTHLY ANNUAL MONTHLY ANNUAL
------- ------ ------- ------
Male, age 35 $22.43 $233.70 $36.59 $390.90
at issue
Female, age 45 $26.46 $278.04 $44.65 $479.59
at issue
Male, age 55 $41.96 $450.96 $75.66 $825.43
at issue
A significant feature of this Contract is that it permits you to pay greater
than Scheduled Premiums. This may be done by making occasional unscheduled
premium payments or on a periodic basis. If you wish, you may select a higher
contemplated premium than the Scheduled Premium. Pruco Life of New Jersey will
then bill you for the chosen premium. In general, the regular payment of higher
premiums will result in higher cash surrender values and higher death benefits.
Conversely, payment of a Scheduled Premium need not be made if the Contract Fund
is sufficiently large to enable the charges due under the Contract to be made
without causing the Contract to lapse. See LAPSE AND REINSTATEMENT, page 15. The
payment of premiums in excess of Scheduled Premiums may cause the Contract to
become a Modified Endowment Contract. If this happens, loans and other
distributions which would otherwise not be taxable events will be subject to
federal income taxation. See TAX TREATMENT OF CONTRACT BENEFITS, page 19.
Pruco Life of New Jersey will generally accept any premium payment if the
payment is at least $25. Pruco Life of New Jersey does reserve the right,
however, to limit unscheduled premiums to a total of $5,000 in any Contract
year, and to refuse to accept premiums that would immediately result in more
than a dollar-for-dollar increase in the death benefit. See HOW A CONTRACT'S
DEATH BENEFIT WILL VARY, page 14. The privilege of making large or additional
premium payments offers a way of investing amounts which accumulate without
current income taxation, but again, there are tax consequences if the Contract
becomes a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS,
page 19.
ALLOCATION OF PREMIUMS
On the Contract date, a $2 processing charge and the charge for taxes
attributable to premiums are deducted from the initial premium. The remainder is
allocated on the Contract date among the subaccount[s] or the fixed-rate option
according to the desired allocation specified in the application form. From this
invested portion of the initial premium, the first monthly deductions are made.
See CONTRACT FEES AND CHARGES, page 9. The invested portion of any part of the
initial premium in excess of the Scheduled Premium is placed in the selected
investment option[s] on the date of receipt at a Home Office, but not earlier
than the Contract date. Thus, to the extent that the receipt of the first
premium precedes the Contract date, there will be a period during which the
Contract owner's initial premium will not be invested. All subsequent premium
payments, after the deduction from premiums, will be invested as of the end of
the valuation period in which it is received at a Home Office in accordance with
the allocation previously designated. Provided the Contract is not in default,
you may change the way in which subsequent premiums are allocated by giving
written notice to a Home Office. You may also change the way in which subsequent
premiums are allocated by telephoning the Home Office, provided you are enrolled
to use the Telephone Transfer system. There is no charge for reallocating future
premiums. If any part of the invested portion of a premium is allocated to a
particular investment option, that portion must be at least 10% on the date the
allocation takes effect. All percentage allocations must be in whole numbers.
For example, 33% can be selected but 331/3% cannot. Of course, the total
allocation of all selected investment options must equal 100%.
TRANSFERS
If the Contract is not in default, or if the Contract is in force as variable
reduced paid-up insurance (see LAPSE AND REINSTATEMENT , page 15), you may, up
to four times in each Contract year, transfer amounts from one subaccount to the
other subaccount or to the fixed-rate option. Currently, you may make additional
transfers with Pruco Life of New Jersey's consent. There is no charge. All or a
portion of the amount credited to a subaccount may be transferred.
In addition, the total amount credited to a Contract held in the subaccounts may
be transferred to the fixed-rate option at any time during the first two
Contract years. If you wish to convert your variable Contract to a fixed-benefit
Contract in this manner, you must request a complete transfer of funds to the
fixed-rate option and should also change your allocation instructions regarding
any future premiums.
13
<PAGE>
Transfers between subaccounts will take effect as of the end of the valuation
period (usually the business day) in which a proper transfer request is received
at a Home Office. The valuation period is defined as the period of time from one
determination of the value of the amount invested in a subaccount to the next.
Such determinations are made when the net asset values of the portfolios are
calculated, which is generally at 4:15 p.m. New York City time on each day
during which the New York Stock Exchange is open. The request may be in terms of
dollars, such as a request to transfer $1,000 from one subaccount to the other,
or may be in terms of a percentage reallocation between subaccounts. In the
latter case, as with premium reallocations, the percentages must be in whole
numbers. You may transfer amounts by proper written notice to a Home Office or
by telephone, provided you are enrolled to use the Telephone Transfer System.
You will automatically be enrolled to use the Telephone Transfer System unless
the Contract is jointly owned or you elect not to have this privilege. Telephone
transfers may not be available on policies that are assigned, depending on the
terms of the assignment. Pruco Life of New Jersey has adopted procedures
designed to ensure that requests by telephone are genuine and will require
appropriate identification for that purpose. Pruco Life of New Jersey will not
be held liable for following telephone instructions that we reasonably believe
to be genuine. Pruco Life of New Jersey cannot guarantee that you will be able
to get through to complete a telephone transfer during peak periods such as
periods of drastic economic or market change.
Transfers from the fixed-rate option are subject to restrictions and may only be
made with Pruco Life of New Jersey's consent. Transfers from the fixed-rate
option to the subaccounts are currently permitted once each Contract year and
only during the 30-day period beginning on the Contract anniversary. The maximum
amount which may be transferred out of the fixed-rate option each year is
currently the greater of: (a) 25% of the amount in the fixed-rate option, or (b)
$2,000. Such transfer requests received prior to the Contract anniversary will
be effected on the Contract anniversary. Transfer requests received within the
30-day period beginning on the Contract anniversary will be effected as of the
end of the valuation period in which a proper transfer request is received at a
Home Office. These limits are subject to change in the future.
HOW THE CONTRACT FUND CHANGES WITH INVESTMENT EXPERIENCE
As explained above, after the tenth Contract year, there will no longer be a
surrender charge and, if there is no Contract loan, the cash surrender value
will be equal to the Contract Fund. This section, therefore, also describes how
the cash surrender value of the Contract will change with investment experience.
On the Contract Date, the Contract Fund value is the initial premium less the
deductions from premiums and the first monthly deductions. See CONTRACT FEES AND
CHARGES, page 9. This amount is placed in the investment options designated by
the owner. Thereafter the Contract Fund value changes daily, reflecting
increases or decreases in the value of the securities in which the assets of the
subaccount have been invested, and interest credited on any amounts allocated to
the fixed-rate option. It is also reduced by the daily asset charge for
mortality and expense risks assessed against the variable investment options.
The Contract Fund value also increases to reflect the receipt of additional
premium payments and is decreased by the monthly deductions.
A Contract's cash surrender value on any date will be the Contract Fund value
reduced by the withdrawal charges, if any, and by any Contract debt. Upon
request, Pruco Life of New Jersey will tell a Contract owner the cash surrender
value of his or her Contract. It is possible, although highly unlikely, that the
cash surrender value of a Contract could decline to zero because of unfavorable
investment performance, even if a Contract owner continues to pay Scheduled
Premiums when due.
The tables on pages T1 through T4 of this prospectus illustrate what the death
benefit and cash surrender values would be for a representative Contract,
assuming uniform hypothetical investment results in the selected portfolio[s],
and also provide information about the aggregate premiums payable under the
Contract.
HOW A CONTRACT'S DEATH BENEFIT WILL VARY
The death benefit will change from the outset with investment experience. The
precise way in which that will occur is complicated and is described in the
Statement of Additional Information. In general, and assuming the optional
paid-up benefit is not in effect, see PAID-UP INSURANCE OPTION, page 16, if the
net investment performance is 4% per year or higher, the death benefit will
increase; if it is below 4%, it will decrease. Pruco Life of New Jersey
guarantees, however, that it will not decrease below the face amount of
insurance. If unfavorable experience of that kind should occur, it must be
offset by favorable experience before the death benefit begins to increase
again.
If the Contract is kept in force for several years and if investment performance
is relatively favorable, the Contract Fund value may grow to the point where, to
meet certain provisions of the Internal Revenue Code which require that the
death benefit always be greater than the Contract Fund value, the death benefit
must be increased. The required difference between the death benefit and
Contract Fund value is higher at younger ages than at older ages. A precise
description is in the Statement of Additional Information.
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CONTRACT LOANS
The owner may borrow from Pruco Life of New Jersey up to the "loan value" of the
Contract, using the Contract as the only security for the loan. The loan value
is equal to (1) 90% of an amount equal to the portion of the Contract Fund value
attributable to the variable investment options and to any prior loan[s]
supported by the variable investment options, minus the portion of any charges
attributable to variable investment options that would be payable upon an
immediate surrender; plus (2) 100% of an amount equal to the portion of the
Contract Fund value attributable to the fixed-rate option and to any prior
loan[s] supported by the fixed-rate option, minus the portion of any charges
attributable to the fixed-rate option that would be payable upon an immediate
surrender. The minimum amount that may be borrowed at any one time is $200
unless the proceeds are used to pay premiums on the Contract.
Interest charged on a loan accrues daily at a fixed effective annual rate of
5.5%. Interest payments on any loan are due at the end of each Contract year. If
interest is not paid when due, it is added to the principal amount of the loan.
The term "Contract debt" means the amount of all outstanding loans plus any
interest accrued but not yet due. If at any time the Contract debt exceeds what
the cash surrender value would be if there were no Contract debt, Pruco Life of
New Jersey will notify you of its intent to terminate the Contract in 61 days,
within which time you may repay all or enough of the loan to obtain a positive
cash surrender value and thus keep the Contract in force for a limited time. If
you fail to keep the Contract in force, the amount of unpaid Contract debt will
be treated as a distribution which may be taxable. See TAX TREATMENT OF CONTRACT
BENEFITS, page 19, and LAPSE AND REINSTATEMENT, page 15.
When a loan is made, an amount equal to the loan proceeds will be transferred
out of the variable investment options and/or the fixed-rate option, as
applicable. The reduction will normally be made in the same proportions as the
value in each subaccount and the fixed-rate option bears to the total value of
the Contract. While a loan is outstanding, the amount that was so transferred
will continue to be treated as part of the Contract Fund but it will be credited
with the assumed rate of return of 4% rather than with the actual rate of return
of the subaccount[s] or fixed-rate option.
A loan will not affect the amount of the premiums due. Should the death benefit
become payable while a loan is outstanding, or should the Contract be
surrendered, any Contract debt will be deducted from the death benefit or the
cash surrender value.
A loan will have an effect on a Contract's cash surrender value and may have an
effect on the death benefit, even if the loan is fully repaid, because the
investment results of the selected investment options will apply only to the
amount remaining invested under those options. The longer the loan is
outstanding, the greater the effect is likely to be. The effect could be
favorable or unfavorable. If investment results are greater than the rate being
credited upon the amount of the loan while the loan is outstanding, values under
the Contract will not increase as rapidly as they would have if no loan had been
made. If investment results are below that rate, Contract values will be higher
than they would have been had no loan been made. A loan that is repaid will not
have any effect upon the guaranteed minimum death benefit.
Consider the Contract issued on a 35 year old male insured illustrated in the
table on page T2 with an 8% gross investment return. Assume a $1,500 loan was
made under this Contract at the end of Contract year 8 and repaid at the end of
Contract year 10 and loan interest was paid when due. Upon repayment, the cash
surrender value would be $3,237.44. This amount is lower than the cash surrender
value shown on that page for the end of Contract year 10 because the loan amount
was credited with the 4% assumed rate of return rather than the 6.48% net return
for the designated subaccount[s] resulting from the 8% gross return in the
underlying Series Fund. Loans from Modified Endowment Contracts may be treated
for tax purposes as distributions of income. See TAX TREATMENT OF CONTRACT
BENEFITS, page 19.
SURRENDER OF A CONTRACT
You may surrender a Contract for its cash surrender value while the insured is
living. To surrender a Contract, you must deliver or mail it, together with a
written request in a form that meets our needs, to a Home Office. The cash
surrender value of a surrendered Contract (taking into account the deferred
sales and administrative charges, if any) will be determined as of the end of
the valuation period in which such a request is received in the Home Office. We
are currently allowing partial surrenders of Contracts, but we reserve the right
to cancel this administrative practice. Surrender of a Contract may have tax
consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 19.
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LAPSE AND REINSTATEMENT
As has already been explained, if Scheduled Premiums are paid on or before each
due date, or within the grace period after each due date, and there are no
withdrawals, a Contract will remain in force even if the investment results of
that Contract's variable investment option[s] have been so unfavorable that the
Contract Fund has decreased to zero or less.
In addition, even if a Scheduled Premium is not paid, the Contract will remain
in force as long as the Contract Fund on any Monthly Date is equal to or greater
than the Tabular Contract Fund value on the following Monthly Date. (A Table of
Tabular Contract Fund Values is included in the Contract; the values increase
with each year the Contract remains in force.) This could occur because of such
factors as favorable investment experience, deduction of current rather than
maximum charges, or the previous payment of greater than Scheduled Premiums.
However, if a Scheduled Premium is not paid, and the Contract Fund is
insufficient to keep the Contract in force, the Contract will go into default.
Should this happen, Pruco Life of New Jersey will send you a notice of default
setting forth the payment necessary to keep the Contract in force on a premium
paying basis. This payment must be received at a Home Office within the 61 day
grace period after the notice of default is mailed or the Contract will lapse. A
Contract that lapses with an outstanding Contract loan may have tax
consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 19.
A Contract that has lapsed may be reinstated within 5 years after the date of
default unless the Contract has been surrendered for its cash surrender value.
To reinstate a lapsed Contract, Pruco Life of New Jersey requires renewed
evidence of insurability, and submission of certain payments due under the
Contract.
If your Contract does lapse, it will still provide some benefits. You can
receive the cash surrender value by making a request of Pruco Life of New Jersey
prior to the end of the 61 day grace period. You may also choose one of the
three forms of insurance described below for which no further premiums are
payable.
Fixed Extended Term Insurance. The amount of insurance that would have been paid
on the date of default will continue for a stated period of time. You will be
told in writing how long that will be. The insurance amount will not change.
There will be a diminishing cash surrender value but no loan value. Extended
term insurance is not available to insureds in high risk classifications or
under Contracts issued in connection with tax-qualified pension plans.
Fixed Reduced Paid-Up Insurance. This insurance continues for the lifetime of
the insured but at an insurance amount that is generally lower than that
provided by fixed extended term insurance. It will decrease only if a Contract
loan is taken. You will be told, if you ask, what the amount of the insurance
will be. Fixed paid-up insurance has a cash surrender value and a loan value. It
is possible for this Contract to be classified as a Modified Endowment Contract
if this option is exercised during the first 7 Contract years. See TAX TREATMENT
OF CONTRACT BENEFITS, page 19.
Variable Reduced Paid-Up Insurance. This is similar to fixed paid-up insurance
and will initially be in the same amount. The Contract Fund will continue to
vary to reflect the experience of the selected investment options. There will be
a new guaranteed minimum death benefit. Variable reduced paid-up insurance has
cash surrender and loan values.
Variable reduced paid-up insurance is the automatic option provided upon lapse,
if the amount of variable reduced paid-up insurance is at least as great as the
amount of fixed extended term insurance which would have been provided upon
lapse. Variable reduced paid-up insurance will be available only if the insured
is not in one of the high risk rating classes for which Pruco Life of New Jersey
does not offer fixed extended term insurance. It is possible for this Contract
to be classified as a Modified Endowment Contract if this option is exercised
during the first 7 Contract years. See TAX TREATMENT OF CONTRACT BENEFITS, page
19.
What Happens If No Request Is Made? Except in the two situations described
below, if no request is made the "automatic option" will be fixed extended term
insurance. If that is not available to the insured, then fixed reduced paid-up
insurance will be provided. However, if variable reduced paid-up insurance is
available and the amount is at least as great as the amount of fixed extended
term insurance, then the automatic option will be variable reduced paid-up
insurance. This could occur when there is a Contract debt outstanding when the
Contract lapses.
PAID-UP INSURANCE OPTION
In certain circumstances you may elect to stop paying premiums and to have
guaranteed insurance coverage for the lifetime of the insured. This benefit is
available only if the following conditions are met: (1) the Contract is not in
default; (2) Pruco Life of New Jersey is not paying premiums in accordance with
any payment of premium benefit that may be included in the Contract; and (3) the
Contract Fund is sufficiently large so that the calculated guaranteed paid-up
insurance amount is at least equal to the face amount of insurance plus the
excess, if any, of the Contract Fund over the tabular Contract Fund. The amount
of guaranteed paid-up insurance coverage may
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be greater. It will be equal to the difference between the Contract Fund and the
present value of future monthly charges from the Contract Fund (other than
charges for anticipated mortality costs and for payment of premium riders)
multiplied by the attained age factor. This option will generally be available
only when the Contract has been in force for many years and the Contract Fund
has grown because of favorable investment experience or the payment of
unscheduled premiums or both. Once the paid-up insurance option is exercised,
the actual death benefit is equal to the greater of the guaranteed paid-up
insurance amount and the Contract Fund multiplied by the attained age factor.
Upon request, Pruco Life of New Jersey will quote the amount needed to pay up
the Contract and to guarantee the paid-up insurance amount as long as a payment
equal to or greater than the quoted amount is received within two weeks of the
quote. There is no guarantee if the remittance is received within the two week
period and is less than the quoted amount or if the remittance is received
outside the two week period. In this case, Pruco Life of New Jersey will add the
remittance to the Contract Fund and recalculate the guaranteed paid-up insurance
amount. If the guaranteed paid-up insurance amount is equal to or greater than
the face amount, the paid-up request will be processed. If the guaranteed
paid-up insurance amount is calculated below the face amount, the insured will
be notified that the amount is insufficient to process the request. In some
cases, the quoted amount, if paid, would increase the death benefit by more than
it increases the Contract Fund. In these situations, underwriting might be
required to accept the premium payment and to process the paid-up request. Pruco
Life of New Jersey reserves the right to change this procedure in the future.
After the first Contract year, you must make a proper written request for the
Contract to become fully paid-up and send the Contract to a Home Office to be
endorsed. If this option is exercised during the first 7 Contract years, the
Contract may be classified as a "Modified Endowment Contract," see TAX TREATMENT
OF CONTRACT BENEFITS, page 19. A Contract in effect under a paid-up insurance
option will have cash surrender and loan values.
REDUCED PAID-UP INSURANCE OPTION
Like the paid-up insurance option, reduced paid-up insurance provides the
insured with lifetime insurance coverage without the payment of additional
premiums. However, reduced paid-up insurance provides insurance coverage which
is generally lower than the death benefit of the Contract. Reduced paid-up
insurance is based upon a Contract's current net cash value and can be requested
at any time. This option is available only when the Contract is not in default
and Pruco Life of New Jersey is not paying any premiums in accordance with any
payment of premium benefit that may be included in the Contract. In order to
receive reduced paid-up insurance, a Contract owner must make a proper written
request, and Pruco Life of New Jersey may request that the owner send the
Contract to a Home Office to be endorsed. Acquisition of reduced paid-up
insurance within the first 7 Contract years may result in the Contract becoming
a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS, page 19.
WHEN PROCEEDS ARE PAID
Pruco Life of New Jersey will generally pay any death benefit, cash surrender
value, loan proceeds or withdrawal within 7 days after receipt at a Home Office
of all the documents required for such a payment. Other than the death benefit,
which is determined as of the date of death, the amount will be determined as of
the end of the valuation period in which the necessary documents are received at
a Home Office. However, Pruco Life of New Jersey may delay payment of proceeds
from the subaccount[s] and the variable portion of the death benefit due under
the Contract if the sale or valuation of the Account's assets is not reasonably
practicable because the New York Stock Exchange is closed for other than a
regular holiday or weekend, trading is restricted by the SEC or the SEC declares
that an emergency exists.
With respect to the amount of any cash surrender value allocated to the
fixed-rate option, and with respect to a Contract in force as fixed reduced
paid-up insurance or as extended term insurance, Pruco Life of New Jersey
expects to pay the cash surrender value promptly upon request. However, Pruco
Life of New Jersey has the right to delay payment of such cash surrender value
for up to 6 months (or a shorter period if required by applicable law). Pruco
Life of New Jersey will pay interest of at least 3% a year if it delays such a
payment for more than 30 days (or a shorter period if required by applicable
law).
LIVING NEEDS BENEFIT
Contract applicants may elect to add the LIVING NEEDS BENEFIT(SM) to their
Contracts at issue. The benefit may vary state-by-state. It can generally be
added only when the aggregate face amounts of the insured's eligible contracts
equal $50,000 or more. There is no charge for adding the benefit to the
Contract. However, an administrative charge (not to exceed $150) will be made at
the time the LIVING NEEDS BENEFIT is paid.
Subject to state regulatory approval, the LIVING NEEDS BENEFIT allows the
Contract owner to elect to receive an accelerated payment of all or part of the
Contract's death benefit, adjusted to reflect current value, at a time when
certain special needs exist. The adjusted death benefit will always be less than
the death benefit, but will generally
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be greater than the Contract's cash surrender value. The following option may be
available. A Pruco Life of New Jersey representative should be consulted as to
whether additional options may be available.
Terminal Illness Option. This option is available if the insured is diagnosed as
terminally ill with a life expectancy of 6 months or less. When satisfactory
evidence is provided, Pruco Life of New Jersey will provide an accelerated
payment of the portion of the death benefit selected by the Contract owner as a
LIVING NEEDS BENEFIT. You may (1) elect to receive the benefit in a single sum
or (2) receive equal monthly payments for 6 months. If the insured dies before
all the payments have been made, the present value of the remaining payments
will be paid to the beneficiary designated in the LIVING NEEDS BENEFIT claim
form in a single sum.
All or part of the Contract's death benefit may be accelerated under the LIVING
NEEDS BENEFIT. If the benefit is only partially accelerated, a death benefit of
at least $25,000 must remain under the Contract. Pruco Life of New Jersey
reserves the right to determine the minimum amount that may be accelerated.
No benefit will be payable if the Contract owner is required to elect it in
order to meet the claims of creditors or to obtain a government benefit. Pruco
Life of New Jersey can furnish details about the amount of LIVING NEEDS BENEFIT
that is available to an eligible Contract owner under a particular Contract, and
the adjusted premium payments that would be in effect if less than the entire
death benefit is accelerated.
The Contract owner should consider whether adding this settlement option is
appropriate in his or her given situation. Adding the LIVING NEEDS BENEFIT to
the Contract has no adverse consequences; however, electing to use it could.
With the exception of certain business-related policies, the recently enacted
Health Insurance Portability and Accountability Act of 1996 excludes from income
the LIVING NEEDS BENEFIT if the insured is terminally ill or chronically ill as
defined by the tax law (although the exclusion in the latter case may be
limited). Contract owners should consult a qualified tax advisor before electing
to receive this benefit. Receipt of a LIVING NEEDS BENEFIT payment may also
affect a Contract owner's eligibility for certain government benefits or
entitlements.
VOTING RIGHTS
As stated above, all of the assets held in the subaccounts of the Account will
be invested in shares of the corresponding portfolios of the Series Fund. Pruco
Life of New Jersey is the legal owner of those shares and as such has the right
to vote on any matter voted on at Series Fund shareholders meetings. However,
Pruco Life of New Jersey will, as required by law, vote the shares of the Series
Fund at any regular and special shareholders meetings it is required to hold in
accordance with voting instructions received from Contract owners. The Series
Fund will not hold annual shareholders meetings when not required to do so under
Maryland law or the Investment Company Act of 1940. Series Fund shares for which
no timely instructions from Contract owners are received, and any shares
attributable to general account investments of Pruco Life of New Jersey will be
voted in the same proportion as shares in the respective portfolios for which
instructions are received.
Matters on which Contract owners may give voting instructions including the
following: (1) election of the Board of Directors of the Series Fund; (2)
ratification of the independent accountant of the Series Fund; (3) approval of
the investment advisory agreement for a portfolio of the Series Fund
corresponding to the Contract owner's selected subaccount[s]; (4) any change in
the fundamental investment policy of a portfolio corresponding to the Contract
owner's selected subaccount[s]; and (5) any other matter requiring a vote of the
shareholders of the Series Fund. With respect to approval of the investment
advisory agreement or any change in a portfolio's fundamental investment policy,
Contract owners participating in such portfolios will vote separately on the
matter.
The number of shares in a portfolio for which you may give instructions is
determined by dividing the portion of your Contract Fund attributable to the
portfolio, by the value of one share of the portfolio. The number of votes for
which each Contract owner may give Pruco Life of New Jersey instructions will be
determined as of the record date chosen by the Board of Directors of the Series
Fund. Pruco Life of New Jersey will furnish Contract owners with proper forms
and proxies to enable them to give these instructions. Pruco Life of New Jersey
reserves the right to modify the manner in which the weight to be given voting
instructions is calculated where such a change is necessary to comply with
current federal regulations or interpretations of those regulations.
Pruco Life of New Jersey may, if required by state insurance regulations,
disregard voting instructions if such instructions would require shares to be
voted so as to cause a change in the sub-classification or investment objectives
of one or more of the Series Fund's portfolios, or to approve or disapprove an
investment advisory contract for the Series Fund. In addition, Pruco Life of New
Jersey itself may disregard voting instructions that would require changes in
the investment policy or investment advisor of one or more of the Series Fund's
portfolios, provided that Pruco Life of New Jersey reasonably disapproves such
changes in accordance with applicable federal regulations. If Pruco Life of New
Jersey does disregard voting instructions, it will advise Contract owners of
that action and its reasons for such action in the next annual or semi-annual
report to Contract owners.
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REPORTS TO CONTRACT OWNERS
Once each Contract year (except where the Contract is in force as fixed extended
term insurance or fixed reduced paid-up insurance), you will be sent a statement
that provides certain information pertinent to your own Contract. These
statements show all transactions during the year that affected the value of your
Contract Fund, including monthly changes attributable to investment experience.
That statement will also show the current death benefit, cash surrender value,
and loan values of your Contract. On request, you will be sent a current
statement in a form similar to that of the annual statement described above, but
Pruco Life of New Jersey may limit the number of such requests or impose a
reasonable charge if such requests are made too frequently.
You will also be sent annual and semi-annual reports of the Series Fund showing
the financial condition of the portfolios and the investments held in both. If a
single individual or company invests in the Series Fund through more than one
variable insurance contract, then the individual or company will receive only
one copy of each annual or semi-annual report issued by the Series Fund.
However, if such individual or company wishes to receive multiple copies of any
such report, a request may be made by calling the toll-free telephone number
listed on the inside front cover page of this prospectus.
TAX TREATMENT OF CONTRACT BENEFITS
The tax treatment of life insurance is complex and may change. Each prospective
purchaser is urged to consult a qualified tax advisor. The following discussion
is not intended as tax advice, and it is not a complete statement of what the
effect of federal income taxes will be under all circumstances. Rather, it
provides information about how Pruco Life of New Jersey believes the tax laws
apply in the most commonly occurring circumstances. A more technical discussion
of what follows is contained in the Statement of Additional Information.
Treatment as Life Insurance. Pruco Life of New Jersey believes that the Contract
should qualify as "life insurance" under the Internal Revenue Code. This means
that: (1) except as noted below, the Contract owner should not be taxed on any
part of the Contract Fund, including additions attributable to interest,
dividends or appreciation until amounts are distributed under the Contract; and
(2) the death benefit should be excludible from the gross income of the
beneficiary under section 101(a) of the Code.
Although Pruco Life of New Jersey believes the Contract should qualify as "life
insurance" for federal tax purposes, there are uncertainties, particularly
because the Secretary of the Treasury has not yet issued permanent regulations
that bear on this question. Accordingly, we have reserved the right to make
changes -- which will be applied uniformly to all Contract owners after advance
written notice -- that we deem necessary to insure that the Contract will
continue to qualify as life insurance.
Pre-Death Distributions. The tax treatment of any distribution received by an
owner prior to an insured's death will depend upon whether the Contract is
classified as a Modified Endowment Contract.
If the Contract is not classified as a Modified Endowment Contract, proceeds
received in the event of a lapse, surrender of the Contract, or withdrawal of
part of the cash surrender value will generally not be taxable unless the total
amount received exceeds the gross premiums paid less the untaxed portion of any
prior withdrawals. In certain limited circumstances, all or a portion of a
withdrawal during the first 15 contract years may be taxable even if total
withdrawals do not exceed total premiums paid to date. The proceeds of any loan
will be treated as indebtedness of the owner and will not be treated as taxable
income.
If the Contract is classified as a Modified Endowment Contract, pre-death
distributions, including loans and withdrawals (even those made during the 2
year period before the Contract became a Modified Endowment Contract), will be
taxed first as investment income to the extent of gain in the Contract, and then
as a return of the Contract owner's investment in the Contract. In addition,
pre-death distributions (including full surrenders) will be subject to a penalty
of 10% of the amount includible in income unless the amount is distributed on or
after the owner reaches age 59 1/2, on account of the owner's disability, or as
a life annuity.
A Contract may be classified as a Modified Endowment Contract under various
circumstances. For example, low face amount Contracts issued on younger insureds
may be classified as a Modified Endowment Contract even though the Contract
owner pays only the Scheduled Premiums or even less than the Scheduled Premiums.
Before purchasing such a Contract, you should understand the tax treatment of
pre-death distributions and consider the purpose for which the Contract is being
purchased. More generally, a Contract may be classified as a Modified Endowment
Contract if premiums in excess of Scheduled Premiums are paid or the face amount
of insurance is decreased during the first seven Contract years, or if the face
amount of insurance is increased or if a rider is added or removed from the
Contract. You should consult with your tax advisor before making any of these
policy changes.
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Other Tax Consequences. There may be federal estate taxes and state and local
estate and inheritance taxes payable if either the owner or the insured dies.
The transfer or assignment of the Contract to a new owner may also have tax
consequences. The individual situation of each Contract owner or beneficiary
will be significant.
Withholding. The taxable portion of any amounts received under the Contract will
be subject to withholding to meet federal income tax obligations if the Contract
owner fails to elect that no taxes will be withheld or in certain other
circumstances.
OTHER CONTRACT PROVISIONS
There are several other Contract provisions that are of less significance to you
than those already described in detail either because they relate to options
that you may choose under the Contract but are not likely to exercise for
several years after you first purchase it or because they are of a routine
nature not likely to influence your decision to buy the Contract. These
provisions are summarized in the EXPANDED TABLE OF CONTENTS OF THE STATEMENT OF
ADDITIONAL INFORMATION, page 27 and described in greater detail in the Statement
of Additional Information.
FURTHER INFORMATION ABOUT THE SERIES FUND
The Prudential Series Fund, Inc. (the "Series Fund") is a Maryland corporation
organized on November 15, 1982. It is registered under the Investment Company
Act of 1940 (the "1940 Act") as an open-end, diversified, management investment
company. This registration does not imply any supervision by the Securities and
Exchange Commission over the Series Fund's management or its investment policies
or practices.
The Series Fund is currently made up of fifteen separate portfolios, two of
which, the Conservative Balanced and Flexible Managed Portfolios are available
to Contract owners. Each portfolio is, for many purposes, in effect a separate
investment fund, and a separate class of capital stock is issued for each
portfolio. Each share of capital stock issued with respect to a portfolio has a
pro-rata interest in the assets of that portfolio and has no interest in the
assets of any other portfolio. Each portfolio bears its own liabilities and also
its proportionate share of the general liabilities of the Series Fund. In other
respects the Series Fund is treated as one entity. For example, the Series Fund
has only one Board of Directors and owners of the shares of each portfolio are
entitled to vote for members of the Board.
Shares in the Series Fund are currently sold and redeemed at the close of each
business day, at their net asset value, determined in the manner described in
the Statement of Additional Information, only to separate accounts of Prudential
and its subsidiaries. They may, in the future, be sold to other insurers to fund
benefits under variable life insurance and variable annuity contracts issued by
those companies.
Prudential is the investment advisor of the Series Fund. Prudential has entered
into a Service Agreement with its wholly-owned subsidiary The Prudential
Investment Corporation ("PIC"), which provides that PIC will furnish to
Prudential such services as Prudential may require in connection with the
performance of its obligations under an Investment Advisory Agreement with the
Series Fund. One of PIC's business groups is Prudential Investments.
See INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES, page 26.
INVESTMENT OBJECTIVES AND POLICIES
OF THE PORTFOLIOS
Each portfolio of the Series Fund has a different objective which it pursues
through separate investment policies as described below. Since each portfolio
has a different investment objective, each can be expected to have different
investment results and incur different market and financial risks. Those risks,
as explained above, are borne by the Contract owner. The Series Fund may in the
future establish other portfolios with different investment objectives.
The investment objectives of each portfolio are fundamental and may not be
changed without the approval of the holders of a majority of the outstanding
shares of the portfolio affected (which for this purpose and under the 1940 Act
means the lesser of: (i) 67% of the shares represented at a meeting at which
more than 50% of the outstanding shares are represented; or (ii) more than 50%
of the outstanding shares). The policies by which a portfolio seeks to achieve
its investment objectives, however, are not fundamental. They may be changed by
the Board of Directors of the Series Fund without the approval of the
shareholders.
The investment objectives of both portfolios available to PRUVIDER Contract
owners are set forth on page 3. For the sake of convenience, they are repeated
here, followed in each case by a brief description of the policies of both
portfolios. In some cases a fuller description of those policies is in the
Statement of Additional Information. There is no guarantee that any of these
objectives will be met.
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BALANCED PORTFOLIOS
CONSERVATIVE BALANCED PORTFOLIO. The objective of this portfolio is to achieve a
favorable total investment return consistent with a portfolio having a
conservatively managed mix of money market instruments, fixed income securities,
and common stocks in proportions believed by the investment manager to be
appropriate for an investor desiring diversification of investment who prefers a
relatively lower risk of loss than that associated with the Flexible Managed
Portfolio while recognizing that this reduces the chances of greater
appreciation.
To achieve this objective, the Conservative Balanced Portfolio will follow a
policy of maintaining a more conservative asset mix among stocks, bonds and
money market instruments than the Flexible Managed Portfolio. In general, the
portfolio manager will observe the following range of target asset allocation
mixes:
Asset Type Minimum Normal Maximum
---------- ------- ------ -------
Stocks 15% 35% 50%
Bonds and Money Market 25% 65% 70%
The portfolio manager will make variations in the proportions of each investment
category in accordance with its judgment about the expected returns and risks of
the various investment categories, but will maintain at least 25% of the value
of the portfolio's assets in fixed-income senior securities.
The bond portion of this portfolio will be invested primarily in securities with
maturities of 2 to 10 years and ratings at the time of purchase within the four
highest grades determined by Moody's, S&P, or a similar nationally-recognized
rating service or if unrated, of comparable quality in the opinion of the
portfolio manager. However, the portfolio may purchase below-investment grade
debt. A description of corporate bond ratings is contained in the Statement of
Additional Information. Because of their shorter maturities, the value of the
notes and bonds in this portfolio will be less sensitive to changes in interest
rates than the longer-term bonds likely to be held in the Flexible Managed
Portfolio. Thus, there will be less of a risk of loss of principal, but not as
much of a likelihood for greater appreciation in value. 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 stock portion of this portfolio will be invested primarily in the equity
securities of major, established corporations in sound financial condition that
appear to offer attractive prospects of a total return from dividends and
capital appreciation that is superior to broadly based stock indices. The
portfolio may also invest in preferred stock, including below investment grade
preferred stock. 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 Conservative
Balanced Portfolio may invest, without limit, in high quality money market
instruments of the kind held by the Money Market Portfolio. See SECURITIES IN
WHICH THE MONEY MARKET PORTFOLIO MAY CURRENTLY INVEST in the Statement of
Additional Information.
To the extent permitted by applicable insurance law, this portfolio may invest
up to 30% of its total assets in nonUnited States currency denominated debt and
equity securities of foreign and U.S. issuers. The particular risks of
investments in foreign securities are described under FOREIGN SECURITIES on page
23.
In addition, the portfolio may: (i) purchase and sell options on equity
securities, debt securities, stock indices and foreign currencies; (ii) purchase
and sell stock index, interest rate and foreign currency futures contracts and
options thereon; (iii) enter into forward foreign currency exchange contracts;
(iv) purchase securities on a whenissued or delayed delivery basis; (v) use
interest rate swaps; and (vi) make short sales. These techniques are described
briefly under OPTIONS, FUTURES CONTRACTS AND SWAPS and SHORT SALES, beginning on
page 24, and in detail in the Statement of Additional Information.
The Conservative Balanced Portfolio is managed by a team of portfolio managers.
Mark Stumpp, Senior Managing Director, Prudential Investments, has been lead
portfolio manager of the Conservative Balanced Portfolio since 1994 and is
responsible for the overall asset allocation decisions. Mr. Stumpp has
supervisory responsibility of the portfolio management team. Warren Spitz,
Managing Director, Prudential Investments, has been the portfolio manager of the
equity portion of the portfolio since 1995. It is the intention of the portfolio
to appoint Patricia Bannan, Managing Director, Prudential Investments, to manage
a portion (to be determined by Mr. Stumpp) of the portfolio's equity holdings.
Upon Ms. Bannan's appointment, Mr. Spitz will continue to manage the other
portion of the portfolio's equity holdings. Tony Rodriguez, Vice President,
Prudential Investments, has been the portfolio manager of the fixed income
portion of the portfolio since 1993. Mr. Stumpp also supervises the team of
portfolio managers for the Flexible Managed Portfolio. Mr. Stumpp is also
portfolio manager for several employee benefit trusts including The Prudential
Retirement System for U.S. Employees and Special Agents. Prior to 1994, he was
responsible for corporate pension asset management for Prudential Diversified
Investment Strategies' corporate clients. Mr. Spitz is also portfolio manager of
the Prudential Equity Income Fund and the Equity Income and Flexible Managed
Portfolios of the Series Fund. Ms. Bannan has been portfolio manager of the
equity portion of the Flexible Managed Portfolio since 1996. Prior to 1996, Ms.
Bannan was President of Phoenix Investment
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Counsel where she personally managed $3 billion in assets, including a $2.5
billion balanced mutual fund. Mr. Rodriguez is also portfolio manager for the
Prudential Structured Maturity Fund, Inc. and the Flexible Managed Portfolio of
the Series Fund.
FLEXIBLE MANAGED PORTFOLIO. The objective of this portfolio is achievement of a
high total return consistent with a portfolio having an aggressively managed mix
of money market instruments, fixed income securities, and common stocks, in
proportions believed by the investment manager to be appropriate for an investor
desiring diversification of investment who is willing to accept a relatively
high level of loss in an effort to achieve greater appreciation.
To achieve this objective, the Flexible Managed Portfolio will follow a policy
of maintaining a more aggressive asset mix among stocks, bonds and money market
investments than the Conservative Balanced Portfolio. In general, the portfolio
manager will observe the following range of target asset allocation mixes:
Asset Type Minimum Normal Maximum
---------- ------- ------ -------
Stocks 25% 60% 100%
Bonds 0% 40% 75%
Money Market 0% 0% 75%
The portfolio manager may make short-run, and sometimes substantial, variations
in the asset mix based upon its judgment about the expected returns and risks of
the various investment categories. In varying the asset mix in accordance with
these judgments, Prudential will also seek to take advantage of imbalances in
fundamental values among the different markets.
The bond component of this portfolio is expected under normal circumstances to
have a weighted average maturity of greater than 10 years. The values of bonds
with longer maturities are generally more sensitive to changes in interest rates
than those of shorter maturities. 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 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, also known as high risk
securities. 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 Conservative
Balanced Portfolio. The portfolio may also invest in preferred stock, including
below investment grade preferred stock. 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.
See SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO MAY CURRENTLY INVEST in the
Statement of Additional Information.
To the extent permitted by applicable insurance law, this portfolio may invest
up to 30% of its total assets in non-United States currency denominated debt and
equity securities of foreign and U.S. issuers. The particular risks of
investments in foreign securities are described under FOREIGN SECURITIES, below.
In addition, the portfolio may: (i) purchase and sell options on equity
securities, debt securities, stock indices and foreign currencies; (ii) purchase
and sell stock index, interest rate and foreign currency futures contracts and
options thereon; (iii) enter into forward foreign currency exchange contracts;
(iv) purchase securities on a whenissued or delayed delivery basis; (v) use
interest rate swaps; and (vi) make short sales. These techniques are described
briefly under OPTIONS, FUTURES CONTRACTS AND SWAPS and SHORT SALES, beginning on
page 24, and in detail in the Statement of Additional Information.
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 it will invest in bonds with longer
maturities; 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.
The Flexible Managed Portfolio is managed by a team of portfolio managers. Mark
Stumpp, Senior Managing Director, Prudential Investments, has been lead
portfolio manager of the Flexible Managed Portfolio since 1994 and is
responsible for the overall asset allocation decisions. Mr. Stumpp has
supervisory responsibility of the portfolio
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management team. Patricia Bannan, Managing Director, Prudential Investments, has
been the portfolio manager of the equity portion of the portfolio since 1996. It
is the intention of the portfolio to appoint Warren Spitz, Managing Director,
Prudential Investments, to manage a portion (to be determined by Mr. Stumpp) of
the portfolio's equity holdings. Upon Mr. Spitz's appointment, Ms. Bannan will
continue to manage the other portion of the portfolio's equity holdings. Tony
Rodriguez, Vice President, Prudential Investments, has been the portfolio
manager of the fixed income portion of the portfolio since 1993. Mr. Stumpp also
supervises the team of portfolio managers for the Conservative Balanced
Portfolio. Mr. Stumpp is also portfolio manager for several employee benefit
trusts including The Prudential Retirement System for U.S. Employees and Special
Agents. Prior to 1994, he was responsible for corporate pension asset management
for Prudential Diversified Investment Strategies' corporate clients. Prior to
1996, Ms. Bannan was President of Phoenix Investment Counsel where she
personally managed $3 billion in assets including a $2.5 billion balanced mutual
fund. Mr. Spitz has been portfolio manager of the equity portion of the
Conservative Balanced Portfolio since 1995 and is also portfolio manager of the
Prudential Equity Income Fund and the Equity Income Portfolio of the Series
Fund. Mr. Rodriguez is also portfolio manager for the Prudential Structured
Maturity Fund, Inc., and the Flexible Managed Portfolio of the Series Fund.
FOREIGN SECURITIES
The bond components of the Conservative Balanced and Flexible Managed Portfolios
may each invest up to 20% of their assets in United States currency denominated
debt securities issued outside the United States by foreign or domestic issuers.
To the extent permitted by applicable insurance law, the Conservative Balanced
and Flexible Managed Portfolios may invest up to 30% of their total assets in
debt and equity securities denominated in a foreign currency and issued by
foreign or domestic issuers. Securities issued outside the United States and not
publicly traded in the United States, as well as American Depository Receipts
("ADRs") and securities denominated in a foreign currency are referred to
collectively in this prospectus as "foreign securities."
ADRs are U.S. dollar-denominated certificates issued by a United States bank or
trust company and represent the right to receive securities of a foreign issuer
deposited in a domestic bank or foreign branch of a United States bank and
traded on a United States exchange or in an over-the-counter market. Investment
in ADRs has certain advantages over direct investment in the underlying foreign
securities because they are easily transferable, have readily available market
quotations, and the foreign issuers are usually subject to comparable auditing,
accounting, and financial reporting standards as domestic issuers.
Foreign securities involve risks of political and economic instability in the
country of the issuer, the difficulty of predicting international trade
patterns, the possibility of imposition of exchange controls and, in the case of
securities not denominated in United States currency, the risk of currency
fluctuations. Such securities may be subject to greater fluctuations in price
than domestic securities. Under certain market conditions, foreign securities
may be less liquid than domestic securities. In addition, there may be less
publicly available information about a foreign company than about a domestic
company. Foreign companies generally are subject to uniform accounting,
auditing, and financial reporting standards comparable to those applicable to
domestic companies. There is generally less government regulation of securities
exchanges, brokers, and listed companies abroad than in the United States, and,
with respect to certain foreign countries, there is a possibility of
expropriation, confiscatory taxation or diplomatic developments which could
affect investment in those countries. If the security is denominated in foreign
currency, it may be affected by changes in currency rates and in exchange
control regulations, and costs may be incurred in connection with conversions
between currencies. Finally, in the event of a default of any foreign debt
obligations, it may be more difficult for a portfolio to obtain or to enforce a
judgment against the issuers of such securities. See FORWARD FOREIGN CURRENCY
EXCHANGE CONTRACTS in the Statement of Additional Information.
RISK FACTORS RELATING TO INVESTING IN FIXED INCOME SECURITIES RATED BELOW
INVESTMENT GRADE
The Conservative Balanced and Flexible Managed Portfolios may invest in below
investment grade fixed income securities. Medium to lower rated and comparable
non-rated securities tend to offer higher yields than higher rated securities
with the same maturities because the historical financial condition of the
issuers of such securities may not have been as strong as that of other issuers.
Since medium to lower rated securities generally involve greater risks of loss
of income and principal than higher rated securities, investors should consider
carefully the relative risks associated with investments in high yield/high risk
securities which carry medium to lower ratings and in comparable non-rated
securities. Investors should understand that such securities are not generally
meant for short-term investing.
Fixed income securities are subject to the risk of an issuer's inability to meet
principal and interest payments on the obligations (credit risk) and may also be
subject to price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness of the issuer and general market
liquidity (market risk). The value of the fixed income securities in the
portfolio will be directly impacted by the market perception of the
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creditworthiness of the securities' issuers and will fluctuate inversely with
changes in interest rates. Lower rated or unrated securities are more likely to
react to developments affecting market and credit risk than are more highly
rated securities, which react primarily to movements in the general level of
interest rates. For example, because investors generally perceive that there are
greater risks associated with investing in medium or lower rated securities, the
yields and prices of such securities may tend to fluctuate more than those of
higher rated securities. Moreover, in the lower quality segments of the fixed
income securities market, changes in perception of the creditworthiness of
individual issuers tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the fixed income securities
market. The yield and price of medium to lower rated securities therefore may
experience greater volatility than is the case with higher rated securities.
Prudential considers both credit risk and market risk in selecting securities
for the portfolio. By holding a diversified selection of such securities, the
portfolio seeks to reduce this volatility.
The secondary market for high yield/high risk securities, which is concentrated
in relatively few market makers, may not be as liquid as the secondary market
for more highly rated securities. Under adverse market or economic conditions,
the secondary market for high yield/high risk securities could contract further,
independent of any specific adverse changes in the condition of a particular
issuer. As a result, Prudential could find it more difficult to sell such
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such lower
rated or unrated securities therefore may be less than the prices used in
calculating the portfolio's net asset value. In the absence of readily available
market quotations, high yield/high risk securities will be valued by the Series
Fund's Board of Directors using a method that, in the good faith belief of the
Board, accurately reflects fair value. Valuing such securities in an illiquid
market is a difficult task. The Board's judgment plays a more significant role
in valuing such securities than those securities for which more objective market
data are available.
From time to time, federal laws have been enacted which have required the
divestiture by companies of their investments in high yield bonds and have
limited the deductibility of interest by certain corporate issuers of high yield
bonds. These types of laws could adversely affect the portfolio's net asset
value and investment practices, the secondary market for high yield securities,
the financial condition of issuers of these securities and the value of
outstanding high yield securities. There is currently no legislation pending
that would adversely impact the market for high yield/high risk securities.
However, there can be no assurance that such legislation will not be proposed or
enacted in the future.
OPTIONS, FUTURES CONTRACTS AND SWAPS
The description of the portfolios' investment policies also state whether they
will invest in what are sometimes called derivative securities. These include
options (which may be to buy or sell equity securities, debt securities, stock
indices, foreign currencies and stock index futures contracts); futures
contracts on interest bearing securities, stock and interest rate indices, and
foreign currencies; and interest rate swaps. These investments have not in the
past represented more than a very minor part of the investments of any portfolio
but may increase in the future.
A call option gives the owner the right to buy and a put option the right to
sell a designated security or index at a predetermined price for a given period
of time. They will be used primarily to hedge or minimize fluctuations in the
principal value of a portfolio or to generate additional income. They involve
risks which differ, depending upon the particular option. But they often offer
an attractive alternative to the purchase or sale of the related security.
Futures contracts represent a contractual obligation to buy or sell a designated
security or index within a stated period. They can be used as a hedge against or
to minimize fluctuations of a portfolio or as an efficient way of establishing
certain positions more quickly than direct purchase of the securities. They can
also be used to speculate, but this will not be done by any of the portfolios.
They involve risks of various kinds, all of which could result in losses rather
than in achieving the intended objective of any particular purchase.
Because options, futures and swaps are now used to such a limited extent, a full
description of these investments and the risks associated with them is in the
Statement of Additional Information.
SHORT SALES
The Conservative Balanced and Flexible Managed Portfolios may sell securities
they do not own in anticipation of a decline in the market value of those
securities ("short sales"). The portfolio will incur a loss as a result of the
short sale if the price of the security increases between the date of the short
sale and the date on which the portfolio replaces the borrowed security. The
portfolio will realize a gain if the security declines in price between those
dates. This result is the opposite of what one would expect from a cash purchase
of a long position in a security. The amount of any gain will be decreased, and
the amount of any loss will be increased, by the amount of any fee or interest
paid in connection with the short sale.
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REPURCHASE AGREEMENTS
The portfolios may enter into repurchase agreements, subject to each portfolio's
investment limit in short-term debt obligations, whereby the seller of a
security agrees to repurchase that security from the portfolio at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the portfolio's
money is invested in the repurchase agreement. The repurchase agreements will at
all times be fully collateralized in an amount at least equal to the resale
price. The instruments held as collateral are valued daily, and if the value of
the instruments declines, the portfolio will require additional collateral. If
the seller defaults and the value of the collateral securing the repurchase
agreement declines, the portfolio may incur a loss. Both portfolios participate
in a joint repurchase account pursuant to an order of the SEC. On a daily basis,
any uninvested cash balances of the portfolios may be aggregated and invested in
one or more repurchase agreements. Each portfolio participates in the income
earned or accrued in the joint account based on the percentage of its
investment.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The fixed income portions of the Conservative Balanced and Flexible Managed
Portfolios may use reverse repurchase agreements and dollar rolls. The money
market portion of these portfolios may use reverse repurchase agreements.
Reverse repurchase agreements involve the sale of securities held by a portfolio
with an agreement by the portfolio to repurchase the same securities at an
agreed upon price and date. During the reverse repurchase period, the portfolio
often continues to receive principal and interest payments on the sold
securities. The terms of each agreement reflect a rate of interest for use of
the funds for the period, and thus these agreements have the characteristics of
borrowing by the portfolio. Dollar rolls involve sales by a portfolio of
securities for delivery in the current month with a simultaneous contract to
repurchase substantially similar securities (same type and coupon) from the same
party at an agreed upon price and date. During the roll period, the portfolio
forgoes principal and interest paid on the securities. A portfolio is
compensated by the difference between the current sales price and the forward
price for the future purchase (often referred to as the "drop") as well as by
the interest earned on the cash proceeds of the initial sale. A "covered roll"
is a specific type of dollar roll for which there is an offsetting cash position
or a cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction. A portfolio will establish a
segregated account with its custodian in which it will maintain cash, U.S.
Government securities or other liquid unencumbered assets equal in value to its
obligations in respect of reverse repurchase agreements and dollar rolls.
Reverse repurchase agreements and dollar rolls involve the risk that the market
value of the securities retained by the portfolio may decline below the price of
the securities the portfolio has sold but is obligated to repurchase under the
agreement. In the event the buyer of securities under a reverse repurchase
agreement or dollar roll files for bankruptcy or becomes insolvent, the
portfolio's use of the proceeds of the agreement may be restricted pending a
determination by the other party, or its trustee or receiver, whether to enforce
the portfolio's obligation to repurchase the securities. No portfolio will
obligate more than 30% of its net assets in connection with reverse repurchase
agreements and dollar rolls.
LOANS OF PORTFOLIO SECURITIES
Both of the portfolios may from time to time lend the securities they hold to
broker-dealers, provided that such loans are made pursuant to written agreements
and are continuously secured by collateral in the form of cash, U.S. Government
Securities or irrevocable standby letters of credit in an amount equal to at
least the market value at all times of the loaned securities plus the accrued
interest and dividends. During the time securities are on loan, the portfolio
will continue to receive the interest and dividends, or amounts equivalent
thereto, on the loaned securities, while receiving a fee from the borrower or
earning interest on the investment of the cash collateral.
There is a slight risk that the borrower may become insolvent, which might delay
carrying out a decision to sell the loaned security. This risk can be minimized
by careful selection of borrowers and requiring and monitoring the adequacy of
capital. No loans will be made to any broker affiliated with Prudential.
INVESTMENT RESTRICTIONS APPLICABLE TO THE
PORTFOLIOS
The Series Fund is subject to certain investment restrictions which are
fundamental to the operations of the Series Fund and may not be changed except
with the approval of a majority vote of the persons participating in the
affected portfolio.
The investments of the various portfolios are generally subject to certain
additional restrictions under state laws. In the event of future amendments to
the applicable New Jersey statutes, each portfolio will comply, without the
approval of the shareholders, with the statutory requirements as so modified.
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A detailed discussion of investment restrictions applicable to the Series Fund
is in the Statement of Additional Information.
INVESTMENT MANAGEMENT ARRANGEMENTS AND
EXPENSES
The Series Fund has entered into an Investment Advisory Agreement with
Prudential under which Prudential will, subject to the direction of the Board of
Directors of the Series Fund, be responsible for the management of the Series
Fund, and provide investment advice and related services to each portfolio.
Prudential manages the assets that it owns as well as those of various separate
accounts established by Prudential and those held by other investment companies
for which it acts as investment advisor.
Subject to Prudential's supervision, substantially all of the investment
advisory services provided to the Series Fund by Prudential, with respect to the
Conservative Balanced and Flexible Managed Portfolios, are furnished by its
wholly-owned subsidiary PIC, pursuant to the Service Agreement between
Prudential and PIC which provides that a portion of the fee received by
Prudential for providing investment advisory services will be paid to PIC. PIC
is registered as an investment advisor under the Investment Advisers Act of
1940.
Under the Investment Advisory Agreement, Prudential receives an investment
management fee as compensation for its services to the Series Fund. The fee is a
daily charge, payable quarterly, equal to an annual percentage of the average
daily net assets of each individual portfolio. It is set forth on page 9.
Further information about the investment management arrangements and the
expenses of the Series Fund is in the Statement of Additional Information.
PORTFOLIO BROKERAGE AND RELATED PRACTICES
Prudential is responsible for decisions to buy and sell securities for the
portfolios, the selection of brokers and dealers to effect the transactions, and
the negotiation of brokerage commissions, if any. Fixed income securities, as
well as equity securities traded in the over-the-counter market, are generally
traded on a "net" basis with dealers acting as principals for their own accounts
without a stated commission, although the price of the security usually includes
a profit to the dealer.
An affiliated broker may be employed to execute brokerage transactions on behalf
of the portfolios, as long as the commissions are reasonable and fair compared
to the commissions received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. The Series Fund may not
engage in any transactions in which Prudential or its affiliates, including
Prudential Securities Incorporated, acts as principal, including
over-the-counter purchases and negotiated trades in which such a party acts as a
principal. Additional information about portfolio brokerage and related
transactions is in the Statement of Additional Information.
STATE REGULATION
Pruco Life of New Jersey is subject to regulation and supervision by the
Department of Insurance of the State of New Jersey, which periodically examines
its operations and financial condition. It is also subject to the insurance laws
and regulations of all jurisdictions in which it is authorized to do business.
Pruco Life of New Jersey is required to submit annual statements of its
operations, including financial statements, to the insurance departments of the
various jurisdictions in which it does business to determine solvency and
compliance with local insurance laws and regulations.
In addition to the annual statements referred to above, Pruco Life of New Jersey
is required to file with New Jersey and other jurisdictions a separate statement
with respect to the operations of all its variable contract accounts, in a form
promulgated by the National Association of Insurance Commissioners.
EXPERTS
The financial statements included in this prospectus for the year ended December
31, 1996 have been audited by Price Waterhouse LLP, independent accountants, as
stated in their reports appearing herein, and are included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing. Price Waterhouse LLP's principal business address is 1177 Avenue of
the Americas, New York, New York 10036.
The financial statements included in this prospectus for the years prior to 1996
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein, and are included in reliance upon the
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reports of such firm given upon their authority as experts in accounting and
auditing. Deloitte & Touche LLP's principal business address is Two Hilton
Court, Parsippany, New Jersey 07054-0319.
On March 12, 1996, Deloitte & Touche LLP was dismissed as the independent
accountants of Pruco Life of New Jersey. There have been no disagreements with
Deloitte & Touche LLP on any matter of accounting principles or practices,
financial statements disclosure or auditing scope or procedure which, if not
resolved to the satisfaction of the accountant, would have caused them to make a
reference to the matter in their reports.
Actuarial matters included in this prospectus have been examined by Nancy D.
Davis, FSA, MAAA, Vice President and Actuary of Prudential whose opinion is
filed as an exhibit to the registration statement.
LITIGATION
Several actions have been brought against Pruco Life of New Jersey alleging that
Pruco Life of New Jersey and its agents engaged in improper life insurance sales
practices. Prudential has agreed to indemnify Pruco Life of New Jersey for
losses, if any, resulting from such litigation. No other significant litigation
is being brought against Pruco Life of New Jersey that would have a material
effect on its financial position.
EXPANDED TABLE OF CONTENTS OF STATEMENT OF
ADDITIONAL INFORMATION
Included in the registration statements for the Contracts and the Series Fund is
a Statement of Additional Information which is available without charge by
writing to Pruco Life of New Jersey at 213 Washington Street, Newark, New Jersey
07102-2992. The following table of contents of that Statement provides a brief
summary of what is included in each section.
I. MORE DETAILED INFORMATION ABOUT THE CONTRACT.
SALES LOAD UPON SURRENDER. A description is given of exactly how Pruco
Life of New Jersey determines the amount of the part of the sales load
that is imposed only upon surrenders or withdrawals during the first 10
Contract years.
REDUCTION OF CHARGES FOR CONCURRENT SALES TO SEVERAL INDIVIDUALS. Where
the Contract is sold at the same time to several individuals who are
members of an associated class and Pruco Life of New Jersey's expenses
will be reduced, some of the charges under those Contracts may be reduced.
PAYING PREMIUMS BY PAYROLL DEDUCTION. Your employer may pay monthly
premiums for you with deductions from your salary.
UNISEX PREMIUMS AND BENEFITS. In some states and under certain
circumstances, premiums and benefits will not vary with the sex of the
insured.
HOW THE DEATH BENEFIT WILL VARY. A description is given of exactly how the
death benefit may increase to satisfy Internal Revenue Code requirements.
WITHDRAWAL OF EXCESS CASH SURRENDER VALUE. If the Contract Fund value is
high enough you may be able to withdraw part of the cash surrender value
while keeping the Contract in effect. There will be a transaction charge.
The death benefit will change. There may be tax consequences. You should
consult your Pruco Life of New Jersey representative to discuss whether a
withdrawal or a loan is preferable.
TAX TREATMENT OF CONTRACT BENEFITS. A fuller account is provided of how
Contract owners may be affected by federal income taxes.
SALE OF THE CONTRACT AND SALES COMMISSIONS. The Contract is sold primarily
by agents of Prudential who are also registered representatives of one of
its subsidiaries, Pruco Securities Corporation, a broker and dealer
registered under the Securities and Exchange Act of 1934. Generally,
selling agents receive a commission of 50% of the Scheduled Premium in the
first year, no more than 6% of the scheduled premiums for the second
through tenth years and smaller commissions thereafter.
RIDERS. Various extra fixed-benefits may be obtained for an extra premium.
They are described in what are known as "riders" to the Contract.
OTHER STANDARD CONTRACT PROVISIONS. The Contract contains several
provisions commonly included in all life insurance policies. They include
provisions relating to beneficiaries, misstatement of age or sex, suicide,
assignment, incontestability, and settlement options.
27
<PAGE>
II. INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS.
General
Convertible Securities
Loan Participations
Warrants
Options and Futures
When-Issued and Delayed Delivery Securities
Short Sales
Short Sales Against the Box
Interest Rate Swaps
Loans of Portfolio Securities
Illiquid Securities
Forward Foreign Currency Exchange Contracts
A more detailed description is given of these investments and the policies
of these portfolios.
III. INVESTMENT RESTRICTIONS.
There are many restrictions upon the investments the portfolios may make
and the practices in which they may engage; these are fundamental, meaning
they may not be changed without Contract owner approval.
IV. INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES.
A fuller description than that in the prospectus is given.
V. PORTFOLIO TRANSACTIONS AND BROKERAGE.
A description is given of how securities transactions are effected and how
Prudential selects the brokers.
VI. DETERMINATION OF NET ASSET VALUE.
A full description is given of how the daily net asset value of each
portfolio is determined.
VII. SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO MAY CURRENTLY INVEST.
A full description is given.
VIII. DEBT RATINGS.
A description is given of how Moody's Investors Services, Inc. and
Standard & Poor's Corporation describe the creditworthiness of debt
securities.
IX. POSSIBLE REPLACEMENT OF THE SERIES FUND.
Although it is most unlikely, it is conceivable that Pruco Life of New
Jersey might wish to replace the Series Fund portfolios with other
investment options. SEC approval will be needed.
X. OTHER INFORMATION CONCERNING THE SERIES FUND.
Incorporation and Authorized Stock
Dividends, Distributions and Taxes
Custodian and Transfer Agent
Experts
License
More detail is provided about these matters.
XI. DIRECTORS AND OFFICERS OF PRUCO LIFE NEW JERSEY AND MANAGEMENT OF THE
SERIES FUND.
The names and recent affiliations of Pruco Life of New Jersey's directors
and executive officers are given. The same information is given for the
Series Fund.
XII. FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC.
XIII. THE PRUDENTIAL SERIES FUND, INC. SCHEDULE OF INVESTMENTS.
ADDITIONAL INFORMATION
A registration statement has been filed with the SEC under the Securities Act of
1933, relating to the offering described in this prospectus. This prospectus and
the Statement of Additional Information do not include all of the information
set forth in the registration statement. Certain portions have been omitted
pursuant to the rules and regulations of the SEC. The omitted information may,
however, be obtained from the SEC's principal office in Washington, D.C., upon
payment of a prescribed fee.
28
<PAGE>
Further information may also be obtained from Pruco Life of New Jersey. Its
address and telephone number are on the inside front cover of this prospectus.
FINANCIAL STATEMENTS
The financial statements of the Account should be distinguished from the
financial statements of Pruco Life of New Jersey which should be considered only
as bearing upon the ability of Pruco Life of New Jersey to meet its obligations
under the Contracts. The financial statements of the Series Fund are in the
Statement of Additional Information.
29
<PAGE>
FINANCIAL STATEMENTS OF THE
PRUVIDER VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 1996
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
-------------- --------------
<S> <C> <C>
ASSETS
Investment in shares of The Prudential Series
Fund, Inc. Portfolios at net asset value [Note
3]............................................ $ 332,374,136 $ 103,313,807
-------------- --------------
NET ASSETS, representing:
Equity of Contract owners....................... $ 332,222,571 $ 102,839,654
Equity of Pruco Life Insurance Company of New
Jersey........................................ 151,565 474,153
-------------- --------------
$ 332,374,136 $ 103,313,807
-------------- --------------
-------------- --------------
</TABLE>
STATEMENTS OF OPERATIONS
For the year ended December 31, 1996
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
-------------- --------------
<S> <C> <C>
INVESTMENT INCOME
Dividend distributions received................. $ 9,673,291 $ 4,036,315
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 5A]..... 1,886,931 603,268
Reimbursement for excess expenses [Note 5D]..... (768,611) (184,407)
-------------- --------------
NET EXPENSES...................................... 1,118,320 418,861
-------------- --------------
NET INVESTMENT INCOME............................. 8,554,971 3,617,454
-------------- --------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Capital gains distributions received............ 31,237,057 6,285,583
Realized gain on shares redeemed
[average cost basis].......................... 1,665,484 631,625
Net unrealized gain (loss) on investments....... (2,307,005) 818,813
-------------- --------------
NET GAIN ON INVESTMENTS........................... 30,595,536 7,736,021
-------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ 39,150,507 $ 11,353,475
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A3 THROUGH A5.
A1
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
---------------------------------------------- ----------------------------------------------
1996 1995 1994 1996 1995 1994
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income............ $ 8,554,971 $ 7,690,078 $ 5,619,063 $ 3,617,454 $ 3,339,301 $ 2,486,229
Capital gains distributions
received....................... 31,237,057 12,349,890 6,536,164 6,285,583 3,199,302 863,296
Realized gain on shares redeemed
[average cost basis]........... 1,665,484 862,723 469,942 631,625 395,934 84,451
Net unrealized gain (loss) on
investments.................... (2,307,005) 35,084,463 (20,633,412) 818,813 6,759,491 (4,531,190)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 39,150,507 55,987,154 (8,008,243) 11,353,475 13,694,028 (1,097,214)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
[NOTE 7]......................... (4,012,445) 7,645,276 10,588,266 (2,779,707) (668,617) 1,744,736
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 8]......................... (30,235) (84,390) 28,940 307,568 (183,597) 139,892
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL INCREASE IN NET ASSETS....... 35,107,827 63,548,040 2,608,963 8,881,336 12,841,814 787,414
NET ASSETS:
Beginning of year................ 297,266,309 233,718,269 231,109,306 94,432,471 81,590,657 80,803,243
-------------- -------------- -------------- -------------- -------------- --------------
End of year...................... $ 332,374,136 $ 297,266,309 233,718,269 $ 103,313,807 $ 94,432,471 81,590,657
-------------- -------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- -------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A3 THROUGH A5.
A2
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF THE
PRUVIDER VARIABLE APPRECIABLE LIFE
SUBACCOUNTS OF PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT
FOR THE YEAR ENDED DECEMBER 31, 1996
NOTE 1: GENERAL
Pruco Life of New Jersey Variable Appreciable Account (the "Account") was
established on January 13, 1984 under New Jersey law as a separate investment
account of Pruco Life Insurance Company of New Jersey ("Pruco Life of New
Jersey") which is a wholly-owned subsidiary of Pruco Life Insurance Company (an
Arizona domiciled company) and is indirectly wholly-owned by The Prudential
Insurance Company of America ("Prudential"). The assets of the Account are
segregated from Pruco Life of New Jersey's other assets. The two products that
invest in the Account are Pruco Life of New Jersey Variable Appreciable Life
("VAL") and Pruco Life of New Jersey PRUvider Variable Appreciable Life
("PRUvider").
The Account is registered under the Investment Company Act of 1940, as amended,
as a unit investment trust. There are two subaccounts within the Account
available to Contract owners of PRUvider. Each of the subaccounts invests only
in a corresponding portfolio of The Prudential Series Fund, Inc. (the "Series
Fund"). The Series Fund is a diversified open-end management investment company,
and is managed by Prudential.
New sales of the VAL product, which invests in the Account, were discontinued as
of May 1, 1992. However, premium payments made by current Contract owners will
continue to be received by the Account.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements are prepared in conformity with generally
accepted accounting principles (GAAP). The preparation of the financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts and disclosures. Actual results
could differ from those estimates.
Investments--The investments in shares of the Series Fund are stated at the net
asset value of the respective portfolio.
Security Transactions--Realized gains and losses on security transactions are
reported on an average cost basis. Purchase and sale transactions are recorded
as of the trade date of the security being purchased or sold.
Distributions Received--Dividend and the capital gain distributions received are
reinvested in additional shares of the Series Fund and are recorded on the
ex-dividend date.
Equity of Pruco Life Insurance Company of New Jersey--Pruco Life of New Jersey
maintains a position in the Account for the purpose of administering activity in
the Account. The activity includes unit transactions, fund share transactions,
and expense processing. Pruco Life of New Jersey monitors the balance daily and
transfers funds based upon anticipated activity. At times, Pruco Life of New
Jersey may owe an amount to the Account, which is reflected in Pruco Life of New
Jersey's equity as a negative balance. The position does not have an effect on
the Contract owner's account or the related unit value.
NOTE 3: INVESTMENT INFORMATION FOR THE PRUDENTIAL SERIES FUND, INC. PORTFOLIOS
The net asset value per share for each portfolio of the Series Fund, the number
of shares of each portfolio held by the subaccounts of the Account and the
aggregate cost of investments in such shares at December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
PORTFOLIOS
------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
-------------- --------------
<S> <C> <C>
Number of shares: 18,685,690 6,658,079
Net asset value per share: $ 17.78763 $ 15.51706
Cost: $ 290,510,240 $ 91,751,530
</TABLE>
A3
<PAGE>
NOTE 4: CONTRACT OWNER UNIT INFORMATION
Outstanding Contract owner units, unit values and total value of Contract owner
equity for the year ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
----------------- -----------------
<S> <C> <C>
Contract Owner Units Outstanding (VAL):......... 87,958,937.501 30,989,074.232
Unit value (VAL):............................... $ 3.68167 $ 3.09975
----------------- -----------------
Contract Owner Equity (VAL):.................... $ 323,835,781 $ 96,058,382
----------------- -----------------
Contract Owner Units Outstanding (PRUvider):.... 3,269,346.631 3,069,365.344
Unit value (PRUvider):.......................... $ 2.56528 $ 2.20934
----------------- -----------------
Contract Owner Equity (PRUvider):............... $ 8,386,790 $ 6,781,272
----------------- -----------------
TOTAL CONTRACT OWNER EQUITY:.................... $ 332,222,571 $ 102,839,654
----------------- -----------------
----------------- -----------------
</TABLE>
NOTE 5: CHARGES AND EXPENSES
A. Mortality Risk and Expense Risk Charges
The mortality risk and expense risk charges at an effective annual rate of
0.60% and 0.90% are applied daily against the net assets representing equity
of VAL and PRUvider Contract owners held in each subaccount, respectively.
Mortality risk is that contract holders may not live as long as estimated
and expense risk is that the cost of issuing and administering the policies
may exceed the estimated expenses. For 1996, the amount of these charges
paid to Pruco Life of New Jersey was $3,627,280 for VAL and $113,587 for
PRUvider.
B. Deferred Sales Charge
Subsequent to a Contract owner redemption, a deferred sales charge is
imposed upon surrenders of certain variable life insurance contracts to
compensate Pruco Life of New Jersey for sales and other marketing expenses.
The amount of any sales charge will depend on the number of years that have
elapsed since the Contract was issued. No sales charge will be imposed after
the tenth year of the Contract. No sales charge will be imposed on death
benefits. For 1996, the amount of these charges paid to Pruco Life of New
Jersey was $33,452.
C. Partial Withdrawal Charge
A charge is imposed by Pruco Life of New Jersey on partial withdrawals of
the cash surrender value. For 1996, the amount of these charges paid to
Pruco Life of New Jersey was $17,194.
D. Expense Reimbursement
Pursuant to a prior merger agreement, the Account is reimbursed by Pruco
Life of New Jersey for expenses in excess of 0.40% of the VAL product's
average daily net assets incurred by the Flexible Managed and Conservative
Balanced Portfolios of the Series Fund. PRUvider contracts do not provide
for reimbursement by Pruco Life of New Jersey. For 1996, the amount of those
reimbursements totaled $953,018.
E. Cost of Insurance Charges
Contract holder contributions are applied to the Account net of the
following charges: transaction costs, premium taxes, sales loads, monthly
administration charges, and death benefit risk charges. During 1996, Pruco
Life Insurance Company of New Jersey, received a total of $205,362,
$168,923, $468,823, $1,263,734, and $24,222, respectively, for these
charges.
NOTE 6: TAXES
Pruco Life of New jersey is taxed as a "life insurance company" under the
Internal Revenue Code and the operations of the Account form a part of and are
taxed with those of Pruco Life of New Jersey. Under current federal law, no
federal income taxes are payable by the Account. As such, no provision for tax
liability has been recorded.
A4
<PAGE>
NOTE 7: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
Contract owner activity in the subaccounts of the Account for the year ended
December 31, 1996, was as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
-------------- --------------
<S> <C> <C>
Contract Owner Contributions, net: $ 32,612,223 $ 15,200,979
Contract Owner Redemptions: $ (35,135,228) $ (16,449,929)
Net Transfers from(to) other subaccounts or fixed rate option: $ (1,489,440) $ (1,530,757)
</TABLE>
NOTE 8: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS
The increase (decrease) in net assets resulting from equity transfers represents
the net contributions (withdrawals) of Pruco Life of New Jersey to (from) the
Account.
NOTE 9: UNIT ACTIVITY
Transactions in units (including transfers among subaccounts) for the year ended
December 31, 1996, were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
----------------- -----------------
<S> <C> <C>
Contract Owner Contributions: 10,117,095.280 5,634,628.443
Contract Owner Redemptions: (10,999,911.624) (6,423,986.641)
</TABLE>
NOTE 10: PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments in the
Series Fund, Inc. were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
-----------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
------------- --------------
<S> <C> <C>
For the year ended December 31, 1996
Purchases.................................... $ 3,974,000 $ 1,320,000
Sales........................................ $ (9,135,000) $ (4,211,000)
</TABLE>
NOTE 11: RELATED PARTY TRANSACTIONS
Prudential has purchased multiple individual VAL contracts of the Account
insuring the lives of certain employees. Prudential is the owner and beneficiary
of the contracts. Net premium payments of approximately $2.9 million for the
year ended December 31, 1996 were directed to the Flexible Managed subaccount.
Equity of Contract owners in that subaccount at December 31, 1996 includes
approximately $119.4 million owned by Prudential.
A5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of
PRUvider Variable Appreciable Life Subaccounts of
Pruco Life of New Jersey Variable Appreciable Account
and the Board of Directors of
Pruco Life Insurance Company of New Jersey
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of Flexible Managed Subaccount and
Conservative Balanced Subaccount of Pruco Life of New Jersey Variable
Appreciable Account at December 31, 1996, and the results of each of their
operations and the changes in each of their net assets for the year then ended,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of Pruco Life Insurance Company of New
Jersey's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of shares owned in The Prudential Series Fund, Inc. at December 31,
1996, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
New York, New York
March 31, 1997
A6
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Contract Owners of
Pruco Life of New Jersey Variable Appreciable
Account and the Board of Directors
of Pruco Life Insurance Company of New Jersey
Newark, New Jersey
We have audited the accompanying statements of changes in net assets of the
Flexible Managed and Conservative Balanced subaccounts of the Pruco Life of New
Jersey Variable Appreciable Account of Pruco Life Insurance Company of New
Jersey for the periods presented for each of the two years ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the changes in net assets of the Flexible Managed and Conservative
Balanced subaccounts of the Pruco Life of New Jersey Variable Appreciable
Account for the respective stated periods in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
February 15, 1996
A7
<PAGE>
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
STATEMENTS OF FINANCIAL POSITION
DECEMBER 31,
1996 1995
---------- ----------
(000'S)
ASSETS
Fixed maturities - Available for sale $ 555,898 $ 513,433
Policy loans 113,918 98,194
Short term investments 17,002 45,308
---------- ----------
Total invested assets 686,818 656,935
---------- ----------
Cash 3,928 --
Deferred policy acquisition costs 106,965 96,031
Premiums due 401 344
Accrued investment income 12,908 11,579
Receivable from affiliates -- 3,616
Federal income tax receivable -- 69
Other assets 1,335 281
Separate Account assets 883,261 789,427
---------- ----------
TOTAL ASSETS $1,695,616 $1,558,282
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Future policy benefits and other policyholders' $ 100,663 $ 92,045
liabilities
Policyholders' account balances 375,448 375,193
Federal income tax payable 1,970 --
Deferred federal income tax payable 24,175 23,809
Payable to affiliate 6,059 5,375
Other liabilities 11,990 6,279
Separate Account liabilities 880,065 787,566
---------- ----------
TOTAL LIABILITIES 1,400,370 1,290,267
---------- ----------
CONTINGENCIES - NOTE 9
STOCKHOLDER'S EQUITY
Common Stock, $5 par value;
400,000 shares,
authorized; issued and
outstanding at December 31, 1996 and 1995 2,000 2,000
Paid-in-capital 125,000 125,000
Net unrealized investment gains (less deferred income 2,032 6,588
tax)
Retained earnings 166,214 134,427
---------- ----------
TOTAL STOCKHOLDER'S EQUITY 295,246 268,015
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $1,695,616 $1,558,282
========== ==========
SEE NOTES TO THE FINANCIAL STATEMENTS
B-1
<PAGE>
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
STATEMENTS OF OPERATIONS
YEAR ENDED
DECEMBER 31,
1996 1995 1994
----------------------------
(000'S)
REVENUES
Premiums $ 1,345 $ 1,042 $ 1,869
Policy charges and fee income 58,571 59,515 55,021
Net investment income 43,784 43,530 42,357
Realized investment gains(losses) 1,221 3,592 (8,310)
Other income 4,047 3,900 3,201
----------------------------
TOTAL REVENUES 108,968 111,579 94,138
----------------------------
BENEFITS AND EXPENSES
Policyholders' benefits 28,653 26,331 22,788
Interest credited to policyholders' account 20,069 21,364 22,151
balances
Other operating costs and expenses 12,848 21,881 23,716
----------------------------
TOTAL BENEFITS AND EXPENSES 61,570 69,576 68,655
----------------------------
Income before income tax provision 47,398 42,003 25,483
Income tax provision 15,611 15,002 9,483
----------------------------
NET INCOME $ 31,787 $ 27,001 $ 16,000
============================
SEE NOTES TO THE FINANCIAL STATEMENTS
B-2
<PAGE>
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996 1995 1994
--------------------------------
(000'S)
<S> <C> <C> <C>
COMMON STOCK
Balance, beginning of year $ 2,000 $ 2,000 $ 2,000
Issued during year -- -- --
--------------------------------
Balance, end of year 2,000 2,000 2,000
--------------------------------
PAID IN CAPITAL
Balance, beginning of year 125,000 125,000 125,000
Paid in during year -- -- --
--------------------------------
Balance, end of year 125,000 125,000 125,000
--------------------------------
NET UNREALIZED INVESTMENT GAINS (LESS DEFERRED
INCOME TAX)
Balance, beginning of year 6,588 -- --
Adoption of SFAS 115 -- (11,189) --
Net change in unrealized investment gains(losses) (4,556) 17,777 --
--------------------------------
Balance, end of year 2,032 6,588 --
--------------------------------
RETAINED EARNINGS
Balance, beginning of year 134,427 107,426 91,426
Net income 31,787 27,001 16,000
--------------------------------
Balance, end of year 166,214 134,427 107,426
--------------------------------
TOTAL STOCKHOLDER'S EQUITY $ 295,246 $ 268,015 $234,426
================================
</TABLE>
SEE NOTES TO THE FINANCIAL STATEMENTS
B-3
<PAGE>
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996 1995 1994
---------------------------------
(000'S)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,787 $ 27,001 $ 16,000
Adjustments to reconcile net income to net cash from
operating activities:
Increase in future policy benefits and other policyholders' 8,618 900 3,936
liabilities
General account policy fee income (9,963) (11,931) (7,744)
Interest credited to policyholders' account balances 20,069 21,364 22,151
Net decrease (increase) in Separate Accounts (1,335) 260 (310)
Net realized investment (gains)losses (1,221) (3,592) 8,310
Amortization and other non-cash items 8,908 (6,839) 3,778
Change in:
Accrued investment income (1,329) (317) (679)
Premiums due (57) 41 26
Receivable from affiliates 3,616 (1,789) (132)
Deferred policy acquisition costs (10,934) 9,074 4,727
Other assets (985) 1,287 2,759
Payable to affiliate 684 807 (3,798)
Federal income tax payable 1,970 8,328 (7,869)
Deferred federal income tax payable 366 3,460 (1,183)
Other liabilities 5,711 (304) 2,988
---------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 55,905 47,750 42,960
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Held to maturity -- -- 705,888
Available for sale 901,775 553,681 --
Payments for the purchase of:
Fixed maturities:
Held to maturity -- -- (658,008)
Available for sale (956,483) (522,757) --
Policy loans (15,724) (12,917) (15,511)
Net proceeds (payments) of short term investments 28,306 (3,613) (12,095)
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES (42,126) 14,394 20,274
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 16,754 18,348 22,336
Withdrawals (net of transfers to/from separate accounts) (26,605) (80,509) (85,590)
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES (9,851) (62,161) (63,254)
---------------------------------
Net increase(decrease) in Cash 3,928 (17) (20)
Cash, beginning of year -- 17 37
---------------------------------
CASH , END OF YEAR $ 3,928 $ 0 $ 17
=================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid $ 11,673 $ 7,900 $ 17,679
=================================
</TABLE>
SEE NOTES TO THE FINANCIAL STATEMENTS
B-4
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
DECEMBER 31, 1996, 1995, AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRINCIPLES
A. GENERAL
Pruco Life Insurance Company of New Jersey (the Company), a stock life insurance
company domiciled in New Jersey, is an indirect subsidiary of The Prudential
Insurance Company of America (Prudential), a mutual life insurance company, and
a direct subsidiary of Pruco Life Insurance Company (Pruco Life), a stock life
insurance company domiciled in the state of Arizona. The Company markets
individual life insurance and annuities through Prudential's sales force.
B. BASIS OF PRESENTATION
The Financial Accounting Standards Board (FASB) issued Interpretation No. 40,
"Applicability of Generally Accepted Accounting Principles to Mutual Life
Insurance and Other Enterprises", as amended by Statement of Financial
Accounting Standards (SFAS) No. 120, "Accounting and Reporting by Mutual Life
Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration
Participating Contracts", effective for fiscal years beginning after December
15, 1995. Financial statements of mutual life insurance companies, and their
wholly owned stock life insurance subsidiaries, for periods beginning after
December 15, 1995 which are prepared on the basis of statutory accounting
practices will no longer be characterized as in conformity with generally
accepted accounting principles (GAAP). As a result, the Company has prepared its
1996 financial statements in accordance with all applicable GAAP pronouncements.
The 1995 and 1994 financial statements, which were previously prepared on the
statutory basis of accounting, have been restated in accordance with GAAP. The
cumulative effect of adopting GAAP as of January 1, 1994 was an increase in
retained earnings of $63.6 million. See Note 7 for a reconciliation of the
Company's surplus and net income determined in accordance with statutory
accounting practices with equity and net income determined on a GAAP basis.
On January 1, 1995, the Company adopted SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which expanded the use of fair value
accounting for those securities that a company does not have positive intent and
ability to hold to maturity. Implementation of this statement decreased
stockholder's equity by $11.2 million net of deferred income tax benefit of $6.3
million. In 1994 prior to the adoption of SFAS 115, all fixed maturities were
carried at amortized cost.
C. INVESTMENTS
Fixed Maturities - Where the Company may not have the positive intent to hold
fixed maturities until maturity, the securities are classified as "Available for
Sale." These securities are reported at market value based principally on their
quoted market prices. The associated unrealized gains and losses, net of income
taxes and deferred policy acquisition costs, are included as a component of
equity or if deemed to be other than temporary, are included as a realized loss.
Policy Loans are stated primarily at unpaid principal balances.
Realized Investment Gains and Losses are reported based on specific
identification of the investments sold.
Short-term investments are fixed maturities that mature within one year, and are
reported at estimated fair value.
D. REVENUE RECOGNITION AND RELATED EXPENSES
Universal life contracts are long duration life insurance contracts that involve
significant mortality and morbidity risk with both fixed and guaranteed terms.
Investment contracts, such as deferred annuities, are long duration contracts
that do not subject the insurance enterprise to risks arising from policyholder
mortality or morbidity. Amounts received as payments for these contracts are
reported as deposits to policyholders' account balances. Revenues from these
contracts consist primarily of amounts assessed during the period against
policyholders' account balances for mortality charges, policy administration
fees and surrender charges. Policy benefits and claims that are charged to
expenses include benefit claims incurred in the period in excess of related
policyholders' account balances.
Premiums, policy benefits and claims from individual life policies and payout
annuities, generally are recognized in operations when due.
B-5
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
DECEMBER 31, 1996, 1995, AND 1994
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions and other costs which vary with and are
primarily related to the production or acquisition of new business. Acquisition
costs related to universal life products and investment-type contracts are
deferred and amortized in proportion to total estimated gross profits arising
principally from investment results, mortality, expense margins and surrender
charges based on historical and anticipated future experience. As required,
amortization expense also includes the impact of revised estimates to expected
gross profits, which is the basis for amortizing deferred policy acquisition
costs. Amortization of deferred policy acquisition costs, including the impact
of revised estimates of gross profits, was $(2.2) million, $8.9 million, and
$11.0 million for the years ended December 31, 1996, 1995, and 1994,
respectively. Deferred policy acquisition costs are analyzed to determine if
they are recoverable from future income, including investment income. If such
costs are determined to be unrecoverable, they are expensed at the time of
determination. The effect on the deferred policy acquisition asset that would
result from realization of unrealized investment gains(losses) is recognized
with an offset to unrealized investment gains(losses) in stockholder's equity.
F. FUTURE POLICY BENEFITS AND POLICYHOLDERS' ACCOUNT BALANCES
Benefit reserve liabilities for payout annuities such as matured deferred
annuities and supplementary contracts represent the present values of estimated
future benefits payments and related expenses. Present values for matured
deferred annuity contracts are computed using interest rates ranging from 6.5%
to 8.75%. The mortality assumption for these contracts is the 83 IAM tables.
Reserves for supplementary contracts are stated at interest rates that vary from
7.25% to 8.25% using mortality and morbidity assumptions either from company
experience or various actuarial tables.
When liabilities for future policy benefits plus the present value of expected
future gross deposits are insufficient to provide expected future policy
benefits and expenses, unrecoverable deferred policy acquisition costs are
written off and thereafter, if required, a premium deficiency reserve is
established as a charge to income.
Policyholders' account balances for universal life and investment-type contracts
are equal to the policy account values. The policy account values represent an
accumulation of gross deposits plus interest credited less expense and mortality
charges and withdrawals.
Interest crediting rates on life insurance products range from 3.4% to 6.6%.
G. SEPARATE ACCOUNTS
Separate Accounts represent funds for which investment income and investment
gains and losses accrue directly to, and investment risk is borne by, the
policyholders. All Separate Account assets are carried at market value. Deposits
to all Separate Accounts are reported as increases in Separate Account
liabilities, which equal the Separate Account policy account fund values.
Charges assessed against policyholders' account balances for mortality, policy
administration and surrender charges are included in policy charges and fee
income. Mortality and expense risk charges are applied against the
policyholders' account balance. The Separate Account assets are legally
segregated and are not subject to claims that arise out of any other business of
the Company.
H. ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
B-6
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
DECEMBER 31, 1996, 1995, AND 1994
2. FIXED MATURITIES
Gross unrealized gains and losses for securities, by major security type, are as
follows:
<TABLE>
<CAPTION>
DECEMBER, 31, 1996
- ------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(000's) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury securities and obligations
of U.S. government corporations and $ 29,386 $ 1 $ 174 $ 29,213
agencies
Foreign government bonds 38,853 420 52 39,221
Corporate securities 483,439 5,108 1,133 487,414
Mortgage-backed securities 50 -- -- 50
- ------------------------------------------------------------------------------------------------------
Total $551,728 $ 5,529 $1,359 $555,898
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
- ------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(000's) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury securities and obligations
of U.S. government corporations and $ 81,806 $ 1,287 $ -- $ 83,093
agencies
Foreign government bonds 25,849 1,128 -- 26,977
Corporate securities 353,514 11,130 340 364,304
Mortgage-backed securities 36,872 2,192 5 39,059
- ------------------------------------------------------------------------------------------------------
Total $498,041 $15,737 $ 345 $513,433
- ------------------------------------------------------------------------------------------------------
</TABLE>
B-7
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
DECEMBER 31, 1996, 1995, AND 1994
The amortized cost and estimated fair value of fixed maturities at December 31,
1996, categorized by contractual maturity, are shown below. Actual maturities
will differ from contractual maturities because borrowers may prepay obligations
with or without call or prepayment penalties.
DECEMBER 31, 1996
- ---------------------------------------------------------------------------
Estimated
Amortized Fair
(000's) Cost Value
- ---------------------------------------------------------------------------
AVAILABLE FOR SALE
Due in one year or less $ 43,723 $ 43,951
Due after one year through five years 444,883 448,048
Due after five years through ten years 57,989 58,586
Due after ten years 5,083 5,263
Mortgage-backed securities 50 50
- ---------------------------------------------------------------------------
Total $551,728 $555,898
- ---------------------------------------------------------------------------
Proceeds from the sale of fixed maturities during 1996, 1995, and 1994 were
$869.6 million, $535.3 million, and $672.8 million, respectively. Gross gains of
$5.2 million, $6.8 million, and $3.3 million and gross losses of $4.0 million,
$3.2 million, and $11.6 million were realized on those sales during 1996, 1995,
and 1994, respectively.
B-8
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
3. NET INVESTMENT INCOME
YEAR ENDED
DECEMBER 31,
Net investment income consists of: 1996 1995 1994
----------------------------------
Gross investment income (000'S)
<S> <C> <C> <C>
Fixed maturities $ 36,193 $ 36,861 $ 36,565
Policy loans 5,761 5,029 4,290
Short term investments 2,504 2,290 2,364
Other 28 51 44
----------------------------------
44,486 44,231 43,263
Investment expenses (702) (701) (906)
----------------------------------
Net investment income $ 43,784 $ 43,530 $ 42,357
==================================
4. INVESTMENT GAINS(LOSSES)
YEAR ENDED
DECEMBER 31,
1996 1995 1994
----------------------------------
(000'S)
Fixed maturities:
Realized investment gains $ 5,232 $ 6,785 $ 3,327
Realized investment losses (4,011) (3,193) (11,637)
----------------------------------
Realized investment gains(losses) $ 1,221 $ 3,592 ($ 8,310)
==================================
YEAR ENDED
DECEMBER 31,
1996 1995 1994
----------------------------------
(000'S)
<S> <C> <C> <C>
Net unrealized investment gains, beginning of period $ 6,588 $ -- $ --
Net unrealized investment gains(losses) on fixed maturities (11,222) 32,875 --
Deferred income tax benefit(provision) 4,040 (11,835) --
Deferred policy acquisition costs (net of deferred income 2,626 (3,263) --
taxes)
----------------------------------
Net change in unrealized investment gains(losses) (4,556) 17,777 --
Adoption of SFAS 115 -- (11,189) --
----------------------------------
Net unrealized investment gains, end of period $ 2,032 $ 6,588 $ --
==================================
</TABLE>
B-9
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
DECEMBER 31, 1996, 1995, AND 1994
5. FAIR VALUE INFORMATION
The fair value amounts have been determined by the Company using available
information and reasonable valuation methodologies. Considerable judgment is
applied, as necessary, in interpreting data to develop the estimates of fair
value. Accordingly, the estimates presented may not be realized in a current
market exchange. The use of different market assumptions and/or estimation
methodologies could have a material effect on the estimated fair values.
The following methods and assumptions were used in calculating the fair values.
Fixed Maturities - Fair values for fixed maturities are based on quoted market
prices or estimates from independent pricing services.
Policy Loans - The estimated fair value is calculated using a discounted cash
flow model based upon current U.S. Treasury rates and historical loan repayment.
Policyholders' Account Balances - Fair values for policyholders' account
balances are equal to the policy account values.
Short-term Investments - Fair values for short-term investments are based on
quoted market prices or estimates from independent pricing services.
The following table discloses the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------
(000'S)
<S> <C> <C> <C> <C>
Financial Assets:
Fixed maturities -- Available
for sale $555,898 $555,898 $513,433 $513,433
Policy loans 113,918 110,262 98,194 99,057
Short-term investments 17,002 17,002 45,308 45,308
Financial Liabilities:
Policyholders'
account balances $375,448 $375,448 $375,193 $375,193
</TABLE>
B-10
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
DECEMBER 31, 1996, 1995, AND 1994
6. INCOME TAXES
The Company is a member of a group of affiliated companies which join in filing
a consolidated federal income tax return in addition to separate company state
and local tax returns. The Internal Revenue Code limits the amount of nonlife
insurance losses that may offset life insurance company taxable income.
Companies operating outside the United States are taxed under applicable foreign
statutes.
Pursuant to the tax allocation arrangement, total federal income tax expense is
determined on a separate company basis. Members with losses record tax benefits
to the extent such losses are recognized in the consolidated federal tax
provision.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes.
The components of income taxes are as follows:
YEAR ENDED
DECEMBER 31,
1996 1995 1994
------------------------------
(000'S)
Current income tax provision:
Federal income tax $ 13,589 $ 13,868 $ 9,431
State and local income tax (907) 1,380 1,235
------------------------------
Total current income tax 12,682 15,248 10,666
Deferred income tax provision (benefit):
Federal income tax 2,848 (239) (1,150)
State and local income tax 81 (7) (33)
------------------------------
Total deferred income tax 2,929 (246) (1,183)
------------------------------
Total income tax provision $ 15,611 $ 15,002 $ 9,483
==============================
The income tax provision is different from the amount computed using the
expected federal income tax rate of 35% for the following reasons:
YEAR ENDED
DECEMBER 31,
1996 1995 1994
---------------------------------
(000'S)
Expected federal income tax expense $ 16,589 $ 14,702 $ 8,919
State income taxes (826) 1,373 1,202
Other (152) (1,073) (638)
---------------------------------
Total income tax provision $ 15,611 $ 15,002 $ 9,483
=================================
B-11
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
DECEMBER 31, 1996, 1995, AND 1994
The components of net deferred income taxes payable are as follows:
YEAR ENDED
DECEMBER 31,
1996 1995
------- -------
DEFERRED INCOME TAX ASSETS (000'S)
Insurance liabilities $ 6,189 $ 6,966
Other -- 276
------- -------
Total deferred income tax assets $ 6,189 $ 7,242
------- -------
DEFERRED INCOME TAX LIABILITIES
Deferred acquisition costs $28,424 $25,322
Net investment gains 1,940 5,729
------- -------
Total deferred income tax liabilities 30,364 31,051
------- -------
Deferred federal income tax payable $24,175 $23,809
======= =======
The Internal Revenue Service (the "Service") has completed examinations of the
consolidated federal income tax returns through 1989. The Service is examining
the years 1990 through 1992. Discussions are being held with the Service with
respect to proposed adjustments. However, management believes there are adequate
defenses against, or sufficient reserves to provide for, such adjustments.
B-12
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
DECEMBER 31, 1996, 1995, AND 1994
7. STOCKHOLDER'S EQUITY RECONCILIATION
The reconciliation of statutory net income to GAAP net income, and statutory
surplus to GAAP equity as of December 31, 1996, 1995, and 1994 are as follows:
1996 1995 1994
---------------------------------
(000'S)
Statutory net income $ 24,774 $ 25,567 $ 16,309
Deferred acquisition costs 5,656 (2,589) (4,727)
Deferred premium 221 (58) 241
Insurance liabilities 1,154 4,366 4,614
Income taxes (2,883) 510 8,518
Interest maintenance reserve (765) 1,285 (10,327)
Separate accounts and other 3,630 (2,080) 1,372
---------------------------------
GAAP net income $ 31,787 $ 27,001 $ 16,000
=================================
Statutory surplus $ 216,019 $ 191,607 $ 163,066
Investment valuation 4,170 15,392 --
Deferred acquisition costs 106,965 96,031 105,105
Deferred premium (2,205) (2,426) (2,368)
Insurance liabilities (21,501) (25,062) (23,882)
Income taxes (21,829) (21,510) (13,015)
Asset valuation reserve and interest
maintenance reserve 13,598 13,966 5,512
Other 29 17 8
---------------------------------
GAAP stockholder's equity $ 295,246 $ 268,015 $ 234,426
=================================
The New York State Insurance Department ("Department") recognizes only statutory
accounting for determining and reporting the financial condition and results of
operations of an insurance company, for determining its solvency under the New
York Insurance Law, and for determining whether its financial condition warrants
the payment of a dividend to its stockholders. No consideration is given by the
Department to financial statements prepared in accordance with generally
accepted accounting principles in making such determinations.
B-13
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
DECEMBER 31, 1996, 1995, AND 1994
8. RELATED PARTY TRANSACTIONS
A. SERVICE AGREEMENTS
The Company, Prudential, Pruco Life, and Pruco Securities Corporation, an
indirect wholly-owned subsidiary of Prudential, operate under service and lease
agreements whereby services of officers and employees, supplies, use of
equipment and office space are provided. The net cost of these services
allocated to the Company were $12 million, $16 million, and $15 million for the
years ended December 31, 1996, 1995, and 1994, respectively.
B. PENSION PLANS
The Company is an indirect wholly-owned subsidiary of Prudential which sponsors
several defined benefit pension plans that cover substantially all of its
employees. Benefits are generally based on career average earnings and credited
length of service. Prudential's funding policy is to contribute annually the
amount necessary to satisfy the Internal Revenue Service contribution
guidelines.
No pension expense for contributions to the plan was allocated to the Company in
1996, 1995, or 1994 because the plan was subject to the full funding limitation
under the Internal Revenue Code.
C. POSTRETIREMENT LIFE AND HEALTH BENEFITS
Prudential also sponsors certain life insurance and health care benefits for its
retired employees. Substantially all employees may become eligible to receive a
benefit if they retire after age 55 with at least 10 years of service.
Prudential elected to amortize its obligation over twenty years. A provision for
contributions to the postretirement fund is included in the net cost of services
allocated to the Company discussed above for the years ended December 31, 1996,
1995, and 1994.
D. REINSURANCE
The Company currently has one reinsurance agreement in place with Prudential
(the reinsurer). This contract is a yearly renewable term agreement in which the
Company may offer and the reinsurer may accept reinsurance on any life in excess
of the Company's maximum limit of retention of $2.5 million. The Company is not
relieved of its primary obligation to the policyholder as a result of this
reinsurance transaction. This agreement had no material effect on net income for
the years ended December 31, 1996, 1995, and 1994.
9. CONTINGENCIES
Several actions have been brought against the Company on behalf of those persons
who purchased life insurance policies based on complaints about sales practices
engaged in by Prudential, the Company and agents appointed by Prudential and the
Company. Prudential has agreed to indemnify the Company for any and all losses
resulting from such litigation.
10. DIVIDENDS
The Company is subject to New Jersey law which limits the amount of dividends
that insurance companies may pay to stockholders. The maximum dividend which may
be paid in any twelve month period without prior approval of the New Jersey
Commissioner of Insurance is limited to the greater of 10% of surplus as of
December 31 of the preceding year or the net gain from operations of the
preceding calendar year. Cash dividends may only be paid out of surplus derived
from realized net profits. Based on these limitations and the Company's surplus
position at December 31, 1996, the Company would be permitted a maximum of $25
million in dividend distributions in 1997, all of which could be paid in cash,
without approval from The State of New Jersey Department of Insurance.
B-14
<PAGE>
Report of Independent Accountants
To the Board of Directors of
Pruco Life Insurance Company of New Jersey
In our opinion, the accompanying statement of financial position and the related
statements of operations, of stockholder's equity and of cash flows present
fairly, in all material respects, the financial position of Pruco Life Insurance
Company of New Jersey at December 31, 1996, and the results of its operations
and its cash flows for the year in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/
PRICE WATERHOUSE LLP
New York, New York
April 11, 1997
B-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors of
Pruco Life Insurance Company of New Jersey
Newark, New Jersey
We have audited the accompanying statement of financial position of Pruco Life
Insurance Company of New Jersey as of December 31, 1995, and the related
statements of operations, stockholder's equity and cash flows for the years
ended December 31, 1995 and 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the accompanying financial statements presents fairly, in all
material respects, the financial position of Pruco Life Insurance Company of New
Jersey as of December 31, 1995, and the results of operations and cash flows for
the years ended December 31, 1995 and 1994 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, the Company has
retroactively adopted all applicable generally accepted accounting principles
relating to stock life insurance subsidiaries of mutual life insurance companies
and has changed, as of January 1, 1995, the method of accounting for fixed
maturity investments.
/s/
Deloitte & Touche LLP
Parsippany, NJ
December 19, 1996
B-16
<PAGE>
PRUVIDER(SM)
VARIABLE APPRECIABLE LIFE(R)
INSURANCE CONTRACT
PRUDENTIAL
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
213 Washington Street, Newark, NJ 07102-2992
Telephone 800 437-4016, Extension 46
A Subsidiary of The Prudential Insurance Company of America
<PAGE>
PART B
INFORMATION REQUIRED IN STATEMENT
OF ADDITIONAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
THE PRUDENTIAL -------------------
SERIES FUND, INC.
The Prudential Series Fund, Inc. (the "Series Fund") is a diversified, open-end
management investment company (commonly known as a "mutual fund") that is
intended to provide a range of investment alternatives through its fifteen
separate portfolios, each of which is, for investment purposes, in effect a
separate fund. A separate class of capital stock is issued for each portfolio.
Shares of the Series Fund are currently sold only to separate accounts (the
"Accounts") of The Prudential Insurance Company of America ("Prudential") and
certain other insurers to fund the benefits under variable life insurance and
variable annuity contracts (the "Contracts") issued by those 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.
NOT EVERY PORTFOLIO IS AVAILABLE UNDER ALL OF THE VARIABLE CONTRACTS. THE
PROSPECTUS FOR EACH CONTRACT LISTS THE PORTFOLIOS CURRENTLY AVAILABLE UNDER THAT
PARTICULAR CONTRACT.
This statement of additional information is not a prospectus and should be read
in conjunction with the Series Fund's prospectus dated May 1, 1997, which is
available without charge upon written request to The Prudential Series Fund,
Inc., Prudential Plaza, Newark, New Jersey 07102-3777 or by telephoning (800)
445-4571.
CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE TO
PAGE PAGE IN PROSPECTUS
---- ------------------
<S> <C> <C>
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
GENERAL.................................................... 1 10
WARRANTS................................................... 1
OPTIONS ON STOCK, OPTIONS ON DEBT SECURITIES, OPTIONS ON
STOCK INDICES, OPTIONS ON FOREIGN CURRENCIES, FUTURES
CONTRACTS, AND OPTIONS ON FUTURES CONTRACTS.............. 1 31
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS................ 4 27
INTEREST RATE SWAPS........................................ 6
ILLIQUID SECURITIES........................................ 6
INVESTMENT RESTRICTIONS...................................... 7 34
INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES.............. 10 34
FURTHER INFORMATION ABOUT THE ZERO COUPON BOND PORTFOLIOS.... 11 14
OTHER INFORMATION CONCERNING THE SERIES FUND
PORTFOLIO TRANSACTIONS AND BROKERAGE....................... 12 38
CUSTODIANS................................................. 13
EXPERTS.................................................... 14
LICENSES................................................... 14
MANAGEMENT OF THE SERIES FUND................................ 15 10
FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC...... A1
THE PRUDENTIAL SERIES FUND, INC. SCHEDULE OF INVESTMENTS..... B1
APPENDIX: DEBT RATINGS....................................... C1
</TABLE>
THE PRUDENTIAL SERIES FUND, INC.
Prudential Plaza
Newark, New Jersey 07102-3777
Telephone: (800) 445-4571
PSF-2 Ed 5-97 Catalog No. 646674P
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
OF THE PORTFOLIOS
GENERAL
The Prudential Series Fund, Inc. (the "Series Fund") is made up of fifteen
separate portfolios: the Money Market Portfolio, the Diversified Bond Portfolio,
the Government Income Portfolio, the Zero Coupon Bond Portfolios 2000 and 2005,
the Conservative Balanced Portfolio, the Flexible Managed Portfolio, the High
Yield Bond Portfolio, the Stock Index Portfolio, the Equity Income Portfolio,
the Equity Portfolio, the Prudential Jennison Portfolio, the Small
Capitalization Stock Portfolio, the Global Portfolio, and the Natural Resources
Portfolio. Not every portfolio is available under all of the variable contracts.
The prospectus for each Contract lists the portfolios currently available under
that particular Contract. The portfolios are managed by The Prudential Insurance
Company of America ("Prudential") as discussed in INVESTMENT MANAGEMENT
ARRANGEMENTS AND EXPENSES, page 10.
Each of the fifteen portfolios seeks to achieve a different investment
objective. Accordingly, each portfolio can be expected to have different
investment results and to be subject to different financial and market risks.
Financial risk refers to the ability of an issuer of a debt security to pay
principal and interest and to the earnings stability and overall financial
soundness of an issuer of an equity security. Market risk refers to the degree
to which the price of a security will react to changes in conditions in
securities markets in general, and with particular reference to debt securities,
to changes in the overall level of interest rates.
The investment objectives of the Series Fund's portfolios can be found in
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS in the prospectus. The
policies employed to manage the Zero Coupon Bond Portfolios are discussed in
greater detail in a separate section below.
WARRANTS
The Conservative Balanced, Flexible Managed, Equity Income, Equity, Prudential
Jennison, Small Capitalization Stock, Global, and Natural Resources Portfolios
may invest in warrants on common stocks. Warrants are options to buy a number of
shares of stock at a predetermined price during a specified period. The risk
associated with the purchase of a warrant is that the purchase price will be
lost if the market price of the stock does not reach a level that justifies the
exercise or sale of the warrant before it expires. From time to time, the
Diversified Bond and the High Yield Bond Portfolios may invest in debt
securities that are offered together with warrants but only when the debt
security meets the portfolio's investment criteria and the value of the warrant
is relatively very small. If the warrant later becomes valuable, it may be sold
or exercised.
OPTIONS ON STOCK, OPTIONS ON DEBT SECURITIES, OPTIONS ON STOCK INDICES,
OPTIONS ON FOREIGN CURRENCIES, FUTURES CONTRACTS, AND OPTIONS ON FUTURES
CONTRACTS
A. ADDITIONAL INFORMATION REGARDING THE USE OF FUTURES AND OPTIONS BY THE
DIVERSIFIED BOND, GOVERNMENT INCOME, CONSERVATIVE BALANCED, FLEXIBLE MANAGED,
HIGH YIELD BOND, EQUITY INCOME, EQUITY, PRUDENTIAL JENNISON, SMALL
CAPITALIZATION STOCK, GLOBAL, AND NATURAL RESOURCES PORTFOLIOS.
A portfolio will write only "covered" options on stock indices. A call option is
covered if the portfolio holds a portfolio of stocks at least equal to the value
of the index times the multiplier times the number of contracts. When a
portfolio writes a call option on a broadly based stock market index, the
portfolio will segregate or put into escrow with its custodian or pledge to a
broker as collateral for the option, cash, cash equivalents or "qualified
securities" (defined below) with a market value at the time the option is
written of not less than 100% of the current index value times the multiplier
times the number of contracts. If a portfolio has written an option on an
industry or market segment index, it will segregate or put into escrow with its
custodian or pledge to a broker as collateral for the option, at least five
"qualified securities", all of which are stocks of issuers in such industry or
market segment, with a market value at the time the option is written of not
less than 100% of the current index value times the multiplier times the number
of contracts. Such stocks will include stocks which represent at least 50% of
the weighting of the industry or market segment index and will represent at
least 50% of the portfolio's holdings in that industry or market segment. No
individual security will represent more than 15% of the amount so segregated,
pledged or escrowed in the case of broadly based stock market index options or
25% of such amount in the case of industry or market segment index options. If
at the close of business on any day the market value of such qualified
securities so segregated, escrowed or pledged falls below 100% of the current
index value times the multiplier times the number of contracts, the portfolio
will so segregate, escrow or pledge an amount in cash, Treasury bills or other
high-grade short-term obligations equal in value to the difference. In addition,
when a portfolio writes a call on an index which is in-the-money at the time the
call is written, the portfolio will segregate with its custodian or pledge to
the broker as collateral, cash or U.S. Government or other liquid unencumbered
assets equal in value to the amount by which the call is in-the-money times the
multiplier times the number of
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contracts. Any amount segregated pursuant to the foregoing sentence may be
applied to the portfolio's obligation to segregate additional amounts in the
event that the market value of the qualified securities falls below 100% of the
current index value times the multiplier times the number of contracts. A
"qualified security" is an equity security which is listed on a securities
exchange or listed on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") against which the portfolio has not written a stock
call option and which has not been hedged by the portfolio by the sale of stock
index futures. However, if the portfolio holds a call on the same index as the
call written where the exercise price of the call held is equal to or less than
the exercise price of the call written or greater than the exercise price of the
call written if the difference is maintained by the portfolio in cash, Treasury
bills or other high-grade short-term obligations in a segregated account with
its custodian, it will not be subject to the requirement described in this
paragraph.
A put option is covered if: (1) the portfolio holds in a segregated account
cash, Treasury bills or other high-grade short-term debt obligations of a value
equal to the strike price times the multiplier times the number of contracts; or
(2) the portfolio holds a put on the same index as the put written where the
strike price of the put held is equal to or greater than the strike price of the
put written or less than the strike price of the put written if the difference
is maintained by the portfolio in cash, Treasury bills or other liquid
unencumbered assets in a segregated account with its custodian. In instances
involving the purchase of futures contracts by a portfolio, an amount of cash
and cash equivalents, equal to the market value of the futures contracts, will
be deposited in a segregated account with the portfolio's custodian and/or in a
margin account with a broker to collateralize the position and thereby ensure
that the use of such futures is unleveraged.
B. ADDITIONAL INFORMATION REGARDING THE USE OF FUTURES AND OPTIONS BY THE STOCK
INDEX AND SMALL CAPITALIZATION STOCK PORTFOLIOS.
As explained in the prospectus, the Stock Index Portfolio seeks to duplicate the
performance of the S&P 500 Index and the Small Capitalization Stock Portfolio
seeks to duplicate the performance of the S&P SmallCap 600 Index. The portfolios
will be as fully invested in the S&P Indices stocks as is feasible in light of
cash flow patterns and the cash requirements for efficiently investing in a unit
of the basket of stocks comprising the S&P 500 and S&P SmallCap 600 Indices,
respectively. When the portfolios do have short-term investments, they may
purchase stock index futures contracts in an effort to have the portfolio better
mimic the performance of a fully invested portfolio. When a portfolio purchases
stock index futures contracts, an amount of cash and cash equivalents, equal to
the market value of the futures contracts, will be deposited in a segregated
account with the portfolio's custodian and/or in a margin account with a broker
to collateralize the position and thereby ensure that the use of futures is
unleveraged. As with the other portfolios, the Board of Directors currently
intends to limit futures trading so that the Stock Index and Small
Capitalization Stock Portfolios will not enter into futures contracts or related
options if the aggregate initial margins and premiums exceed 5% of the fair
market value of its assets, after taking into account unrealized profits and
unrealized losses on any such contracts and options.
As an alternative to the purchase of a stock index futures contract, the
portfolio may construct synthetic positions involving options on stock indices
and options on stock index futures that are equivalent to such a long futures
position. In particular, the portfolio may utilize "put/call combinations" as
synthetic long stock index futures positions. A put/call combination is the
simultaneous purchase of a call and the sale of a put with the same strike price
and maturity. It is equivalent to a forward position and, if settled every day,
is equivalent to a long futures position. When constructing put/call
combinations, the portfolio will segregate cash or cash equivalents in a
segregated account equal to the market value of the portfolio's forward position
to collateralize the position and ensure that it is unleveraged.
C. RISKS OF TRANSACTIONS IN OPTIONS ON EQUITY AND DEBT SECURITIES.
A portfolio's use of options on equity or debt securities is subject to certain
special risks, in addition to the risk that the market value of the security
will move adversely to the portfolio's option position. An exchange-traded
option position may be closed out only on an exchange, board of trade or other
trading facility which provides a secondary market for an option of the same
series. Although these portfolios will generally purchase or write only those
exchange-traded options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange will
exist for any particular option, or at any particular time, and for some options
no secondary market on an exchange or otherwise may exist. In such event it
might not be possible to effect closing transactions in particular options, with
the result that the portfolio would have to exercise its options in order to
realize any profit and would incur brokerage commissions upon the exercise of
such options and upon the subsequent disposition of underlying securities
acquired through the exercise of call options or upon the purchase of underlying
securities for the exercise of put options. If a portfolio as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise.
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Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading volume;
or (vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in the class or series of options) would cease to exist,
although outstanding options on that exchange that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms. There is no assurance that higher
than anticipated trading activity or other unforeseen events might not, at
times, render certain of the facilities of any of the clearing corporations
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.
The purchase and sale of options that result from privately negotiated
transactions with broker-dealers ("OTC options") will also be subject to certain
risks. Unlike exchange-traded options, OTC options generally do not have a
continuous liquid market. Consequently, a portfolio will generally be able to
realize the value of an OTC option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when a portfolio writes an
OTC option, it generally will be able to close out the OTC option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to which the portfolio originally wrote the OTC option. While the portfolios
will seek to enter into OTC options only with dealers who agree to and which are
expected to be able to be capable of entering into closing transactions with the
portfolio, there can be no assurance that the portfolio will be able to
liquidate an OTC option at a favorable price at any time prior to expiration. In
the event of insolvency of the other party, the portfolio may be unable to
liquidate an OTC option. Prudential monitors the creditworthiness of dealers
with whom the Series Fund enters into OTC option transactions under the Board of
Directors' general supervision.
D. RISKS OF TRANSACTIONS IN OPTIONS ON STOCK INDICES.
A portfolio's purchase and sale of options on stock indices will be subject to
the same risks as stock options, described in the previous section. In addition,
the distinctive characteristics of options on indices create certain risks that
are not present with stock options. Index prices may be distorted if trading of
certain stocks included in the index is interrupted. Trading in the index
options also may be interrupted in certain circumstances, such as if trading
were halted in a substantial number of stocks included in the index. If this
occurred, a portfolio would not be able to close out options which it had
purchased or written and, if restrictions on exercise were imposed, may be
unable to exercise an option it holds, which could result in substantial losses
to the portfolio. It is the policy of the portfolios to purchase or write
options only on stock indices which include a number of stocks sufficient to
minimize the likelihood of a trading halt in options on the index.
The ability to establish and close out positions on such options will be subject
to the development and maintenance of a liquid secondary market. A portfolio
will not purchase or sell any index option contract unless and until, in its
manager's opinion, the market for such options has developed sufficiently that
the risk in connection with such transactions is no greater than the risk in
connection with options on stocks.
There are certain special risks associated with writing calls on stock indices.
Because exercises of index options are settled in cash, a call writer such as a
portfolio cannot determine the amount of its settlement obligations in advance
and, unlike call writing on specific stocks, cannot precisely provide in advance
for, or cover, its potential settlement obligations by acquiring and holding the
underlying securities. However, the portfolios will follow the "cover"
procedures described in item A above.
Price movements in a portfolio's equity security portfolio probably will not
correlate precisely with movements in the level of the index and, therefore, in
writing a call on a stock index a portfolio bears the risk that the price of the
securities held by the portfolio may not increase as much as the index. In such
event, the portfolio would bear a loss on the call which is not completely
offset by movement in the price of the portfolio's equity securities. It is also
possible that the index may rise when the portfolio's securities do not rise in
value. If this occurred, the portfolio would experience a loss on the call which
is not offset by an increase in the value of its securities portfolio and might
also experience a loss in its securities portfolio. However, because the value
of a diversified securities portfolio will, over time, tend to move in the same
direction as the market, movements in the value of a portfolio's securities in
the opposite direction as the market would be likely to occur for only a short
period or to a small degree.
When a portfolio has written a call, there is also a risk that the market may
decline between the time the portfolio has a call exercised against it, at a
price which is fixed as of the closing level of the index on the date of
exercise, and the time the portfolio is able to sell stocks in its portfolio. As
with stock options, a portfolio will not learn that an index option has been
exercised until the day following the exercise date but, unlike a call on stock
where the
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portfolio would be able to deliver the underlying securities in settlement, the
portfolio may have to sell part of its stock portfolio in order to make
settlement in cash, and the price of such stocks might decline before they can
be sold. This timing risk makes certain strategies involving more than one
option substantially more risky with options in stock indices than with stock
options. For example, even if an index call which a portfolio has written is
"covered" by an index call held by the portfolio with the same strike price, the
portfolio will bear the risk that the level of the index may decline between the
close of trading on the date the exercise notice is filed with the clearing
corporation and the close of trading on the date the portfolio exercises the
call it holds or the time the portfolio sells the call which in either case
would occur no earlier than the day following the day the exercise notice was
filed.
There are also certain special risks involved in purchasing put and call options
on stock indices. If a portfolio holds an index option and exercises it before
final determination of the closing index value for that day, it runs the risk
that the level of the underlying index may change before closing. If such a
change causes the exercised option to fall out-of-the-money, the portfolio will
be required to pay the difference between the closing index value and the
exercise price of the option (times the applicable multiplier) to the assigned
writer. Although the portfolio may be able to minimize the risk by withholding
exercise instructions until just before the daily cutoff time or by selling
rather than exercising an option when the index level is close to the exercise
price, it may not be possible to eliminate this risk entirely because the cutoff
times for index options may be earlier than those fixed for other types of
options and may occur before definitive closing index values are announced.
E. RISKS OF TRANSACTIONS IN OPTIONS ON FOREIGN CURRENCY.
Because there are two currencies involved, developments in either or both
countries can affect the values of options on foreign currencies. Risks include
those described in the prospectus under FOREIGN SECURITIES and OPTIONS ON
FOREIGN CURRENCIES. In addition, the quantities of currency underlying option
contracts represent odd lots in a market dominated by transactions between
banks; this can mean extra transaction costs upon exercise. Option markets may
be closed while round-the-clock interbank currency markets are open, and this
can create price and rate discrepancies.
F. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS.
There are several risks associated with a portfolio's use of futures contracts
for hedging purposes. One such risk arises because of imperfect correlation
between movements in the price of the futures contract and the price of the
securities or currency that are the subject of the hedge. In the case of futures
contracts on stock or interest rate indices, the correlation between the price
of the futures contract and movements in the index might not be perfect. To
compensate for differences in historical volatility, a portfolio could purchase
or sell futures contracts with a greater or lesser value than the securities or
currency it wished to hedge or purchase. In addition, temporary price
distortions in the futures market could be caused by a variety of factors.
Further, the ability of a portfolio to close out a futures position depends on a
liquid secondary market. There is no assurance that a liquid secondary market on
an exchange will exist for any particular futures contract at any particular
time. Further, each portfolio's successful use of futures contracts is to some
extent dependent on the ability of the portfolio manager to predict correctly
movements in the direction of the market, interest rates and/or currency
exchange rates.
The hours of trading of futures contracts may not conform to the hours during
which the portfolio may trade the underlying securities and/or currency. To the
extent that the futures markets close before the securities or currency markets,
significant price and rate movements can take place in the securities and/or
currency markets that cannot be reflected in the futures markets.
G. RISKS OF TRANSACTIONS IN OPTIONS ON FUTURES CONTRACTS.
Options on futures contracts are subject to risks similar to those described
above with respect to options on securities, options on stock indices, and
futures contracts. These risks include the risk that the portfolio manager may
not correctly predict changes in the market, the risk of imperfect correlation
between the option and the securities being hedged, and the risk that there
might not be a liquid secondary market for the option. There is also the risk of
imperfect correlation between the option and the underlying futures contract. If
there were no liquid secondary market for a particular option on a futures
contract, the portfolio might have to exercise an option it held in order to
realize any profit and might continue to be obligated under an option it had
written until the option expired or was exercised. If the portfolio were unable
to close out an option it had written on a futures contract, it would continue
to be required to maintain initial margin and make variation margin payments
with respect to the option position until the option expired or was exercised
against the portfolio.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
As explained in the prospectus, the Conservative Balanced, Flexible Managed,
Equity Income, Equity, Prudential Jennison, Global, and Natural Resources
Portfolios may purchase debt and equity securities denominated in foreign
currencies. To address the currency fluctuation risk that such investments
entail, these portfolios may enter into
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forward foreign currency exchange contracts in several circumstances. When a
portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, or when a portfolio anticipates the receipt
in a foreign currency of dividends or interest payments on a security which it
holds, the portfolio may desire to "lock-in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment, as
the case may be. By entering into a forward contract for a fixed amount of
dollars, for the purchase or sale of the amount of foreign currency involved in
the underlying transactions, the portfolio will be able to protect itself
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Additionally, when a portfolio's manager believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the portfolio may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of the portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of those securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. The portfolios will not enter into such
forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate a portfolio to deliver an amount of
foreign currency in excess of the value of the securities or other assets
denominated in that currency held by the portfolio. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the long-term investment decisions made with regard to overall diversification
strategies. However, the portfolios believe that it is important to have the
flexibility to enter into such forward contracts when it is determined that the
best interests of the portfolios will thereby be served.
The portfolios generally will not enter into a forward contract with a term of
greater than 1 year. At the maturity of a forward contract, a portfolio may
either sell the portfolio security and make delivery of the foreign currency or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly, it
may be necessary for a portfolio to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency that the portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.
If a portfolio retains the portfolio security and engages in an offsetting
transaction, the portfolio will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. Should
forward prices decline during the period between the portfolio's entering into a
forward contract for the sale of a foreign currency and the date it enters into
an offsetting contract for the purchase of the foreign currency, the portfolio
will realize a gain to the extent that the price of the currency it has agreed
to sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the portfolio will suffer a loss to the extent that the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The portfolios' dealing in forward foreign currency exchange contracts will be
limited to the transactions described above. Of course, the portfolios are not
required to enter into such transactions with regard to their foreign
currency-denominated securities. It also should be realized that this method of
protecting the value of the portfolio securities against a decline in the value
of a currency does not eliminate fluctuations in the underlying prices of the
securities which are unrelated to exchange rates. Additionally, although such
contracts tend to minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time they tend to limit any potential gain which
might result should the value of such currency increase.
Although the portfolios value their assets daily in terms of U.S. dollars, they
do not intend physically to convert their holdings of foreign currencies into
U.S. dollars on a daily basis. They will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to a portfolio at one rate, while offering a lesser rate of exchange should the
portfolio desire to resell that currency to the dealer.
The High Yield Bond Portfolio may also invest up to 10% of its total assets in
foreign currency denominated debt securities of foreign or domestic issuers;
however, the portfolio will not engage in such investment activity unless
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it has been first authorized to do so by the Series Fund's Board of Directors.
If the portfolio does engage in such investment activity, it may also enter into
forward foreign currency exchange contracts.
INTEREST RATE SWAPS
The Diversified Bond, Government Income, and High Yield Bond Portfolios and the
fixed income portions of the Conservative Balanced and Flexible Managed
Portfolios may use interest rate swaps subject to the limitations set forth in
the prospectus.
Interest rate swaps, in their most basic form, involve the exchange by a
portfolio with another party of their respective commitments to pay or receive
interest. For example, a portfolio might exchange its right to receive certain
floating rate payments in exchange for another party's right to receive fixed
rate payments. Interest rate swaps can take a variety of other forms, such as
agreements to pay the net differences between two different indices or rates,
even if the parties do not own the underlying instruments. Despite their
differences in form, the function of interest rate swaps is generally the same -
to increase or decrease a portfolio's exposure to long- or short-term interest
rates. For example, a portfolio may enter into a swap transaction to preserve a
return or spread on a particular investment or a portion of its portfolio or to
protect against any increase in the price of securities the portfolio
anticipates purchasing at a later date.
The use of swap agreements is subject to certain risks. As with options and
futures, if the investment manager's prediction of interest rate movements is
incorrect, the portfolio's total return will be less than if the portfolio had
not used swaps. In addition, if the counterparty's creditworthiness declines,
the value of the swap would likely decline. Moreover, there is no guarantee that
a portfolio could eliminate its exposure under an outstanding swap agreement by
entering into an offsetting swap agreement with the same or another party.
A portfolio will maintain appropriate liquid assets in a segregated custodial
account to cover its current obligations under swap agreements. If a portfolio
enters into a swap agreement on a net basis, it will segregate assets with a
daily value at least equal to the excess, if any, of the portfolio's accrued
obligations under the swap agreement over the accrued amount the portfolio is
entitled to receive under the agreement. If a portfolio enters into a swap
agreement on other than a net basis, it will segregate assets with a value equal
to the full amount of the portfolio's accrued obligations under the agreement.
ILLIQUID SECURITIES
Each portfolio, other than the Money Market Portfolio, may hold up to 15% of its
net assets in illiquid securities. The Money Market Portfolio may hold up to 10%
of its net assets in illiquid securities. Illiquid securities are those which
may not be sold in the ordinary course of business within seven days at
approximately the value at which the portfolio has valued them. Repurchase
agreements with a maturity of greater than seven days are considered illiquid.
The portfolios may purchase securities which are not registered under the
Securities Act of 1933 but which can be sold to qualified institutional buyers
in accordance with Rule 144A under that Act. Any such security will not be
considered illiquid so long as it is determined by the adviser, acting under
guidelines approved and monitored by the Board of Directors, that an adequate
trading market exists for that security. In making that determination, the
adviser will consider, among other relevant factors: (1) the frequency of trades
and quotes for the security; (2) the number of dealers willing to purchase or
sell the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades. A portfolio's treatment of
Rule 144A securities as liquid could have the effect of increasing the level of
portfolio illiquidity to the extent that qualified institutional buyers become,
for a time, uninterested in purchasing these securities. In addition, the
adviser, acting under guidelines approved and monitored by the Board of
Directors, may conditionally determine, for purposes of the 15% test, that
certain commercial paper issued in reliance on the exemption from registration
in Section 4(2) of the Securities Act of 1933 will not be considered illiquid,
whether or not it may be resold under Rule 144A. To make that determination, the
following conditions must be met: (1) the security must not be traded flat or in
default as to principal or interest; (2) the security must be rated in one of
the two highest rating categories by at least two nationally recognized
statistical rating organizations ("NRSROs"), or if only one NRSRO rates the
security, by that NRSRO; if the security is unrated, the adviser must determine
that the security is of equivalent quality; and (3) the adviser must consider
the trading market for the specific security, taking into account all relevant
factors. The adviser will continue to monitor the liquidity of any Rule 144A
security or any Section 4(2) commercial paper which has been determined to be
liquid and, if a security is no longer liquid because of changed conditions, the
holdings of illiquid securities will be reviewed to determine if any steps are
required to assure that the 15% test continues to be satisfied.
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INVESTMENT RESTRICTIONS
Set forth below are certain investment restrictions applicable to the
portfolios. Restrictions 1, 3, 5, and 8-11 are fundamental and may not be
changed without shareholder approval as required by the 1940 Act. Restrictions
2, 4, 6, 7, and 12 are not fundamental and may be changed by the Board of
Directors without shareholder approval.
None of the portfolios will:
1. Buy or sell real estate and mortgages, although the portfolios may buy and
sell securities that are secured by real estate and securities of real
estate investment trusts and of other issuers that engage in real estate
operation. Buy or sell commodities or commodities contracts, except that
the Diversified Stock, Balanced, and Specialized Portfolios may purchase
and sell stock index futures contracts and related options; the Fixed
Income Portfolios (other than the Money Market and Zero Coupon Bond
Portfolios), the Global Portfolio, and the Balanced Portfolios may purchase
and sell interest rate futures contracts and related options; and all
portfolios (other than the Money Market, Government Income, Zero Coupon
Bond, and Small Capitalization Stock Portfolios) may purchase and sell
foreign currency futures contracts and related options and forward foreign
currency exchange contracts.
2. Except as part of a merger, consolidation, acquisition or reorganization,
invest more than 5% of the value of its total assets in the securities of
any one investment company or more than 10% of the value of its total
assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting
securities of any one investment company.
3. Acquire securities for the purpose of exercising control or management of
any company except in connection with a merger, consolidation, acquisition
or reorganization.
4. Make short sales of securities or maintain a short position, except that
the Diversified Bond, High Yield Bond, Government Income, Conservative
Balanced and Flexible Managed Portfolios may sell securities short up to
25% of their net assets and except that the portfolios (other than the
Money Market and Zero Coupon Bond Portfolios) may make short sales against
the box. Collateral arrangements entered into with respect to options,
futures contracts and forward contracts are not deemed to be short sales.
Collateral arrangements entered into with respect to interest rate swap
agreements are not deemed to be short sales.
5. Purchase securities on margin or otherwise borrow money or issue senior
securities except that the Diversified Bond, High Yield Bond and Government
Income Portfolios, as well as the fixed income portions of the Balanced
Portfolios, may enter into reverse repurchase agreements, dollar rolls and
may purchase securities on a when-issued and delayed delivery basis; except
that the Money Market Portfolio and the money market portion of any
portfolio may enter into reverse repurchase agreements and may purchase
securities on a when-issued and delayed delivery basis; and except that the
Equity, Prudential Jennison, Small Capitalization Stock, Equity Income,
Natural Resources, Global, Flexible Managed and Conservative Balanced
Portfolios may purchase securities on a when-issued or a delayed delivery
basis. The Series Fund may also obtain such short-term credit as it needs
for the clearance of securities transactions and may borrow from a bank for
the account of any portfolio as a temporary measure to facilitate
redemptions (but not for leveraging or investment) or to exercise an
option, an amount that does not exceed 5% of the value of the portfolio's
total assets (including the amount owed as a result of the borrowing) at
the time the borrowing is made. Interest paid on borrowings will not be
available for investment. Collateral arrangements with respect to futures
contracts and options thereon and forward foreign currency exchange
contracts (as permitted by restriction no. 1) are not deemed to be the
issuance of a senior security or the purchase of a security on margin.
Collateral arrangements with respect to the writing of the following
options by the following portfolios are not deemed to be the issuance of a
senior security or the purchase of a security on margin: Diversified Stock
and Specialized Portfolios other than the Stock Index Portfolio (options on
equity securities, stock indices, foreign currencies) and the Small
Capitalization Stock Portfolio (options on equity securities, stock
indices); Balanced Portfolios (options on debt securities, equity
securities, stock indices, foreign currencies); Diversified Bond and High
Yield Bond Portfolios (options on debt securities, foreign currencies);
Government Income Portfolio (options on debt securities). Collateral
arrangements entered into by the Fixed Income Portfolios (other than the
Money Market and Zero Coupon Bond Portfolios) and the Balanced Portfolios
with respect to interest rate swap agreements are not deemed to be the
issuance of a senior security or the purchase of a security on margin.
6. Enter into reverse repurchase agreements if, as a result, the portfolio's
obligations with respect to reverse repurchase agreements would exceed 10%
of the portfolio's net assets (defined to mean total assets at market value
less liabilities other than reverse repurchase agreements); except that the
Diversified Bond, High Yield Bond, and Government Income Portfolios, as
well as the fixed income portions of the Conservative Balanced and Flexible
Managed Portfolios, may enter into reverse repurchase agreements and dollar
rolls
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provided that the portfolio's obligations with respect to those instruments
do not exceed 30% of the portfolio's net assets (defined to mean total
assets at market value less liabilities other than reverse repurchase
agreements and dollar rolls).
7. Pledge or mortgage assets, except that no more than 10% of the value of any
portfolio may be pledged (taken at the time the pledge is made) to secure
authorized borrowing and except that a portfolio may enter into reverse
repurchase agreements. Collateral arrangements entered into with respect to
futures and forward contracts and the writing of options are not deemed to
be the pledge of assets. Collateral arrangements entered into with respect
to interest rate swap agreements are not deemed to be the pledge of assets.
8. Lend money, except that loans of up to 10% of the value of each portfolio
may be made through the purchase of privately placed bonds, debentures,
notes, and other evidences of indebtedness of a character customarily
acquired by institutional investors that may or may not be convertible into
stock or accompanied by warrants or rights to acquire stock. Repurchase
agreements and the purchase of publicly traded debt obligations are not
considered to be "loans" for this purpose and may be entered into or
purchased by a portfolio in accordance with its investment objectives and
policies.
9. Underwrite the securities of other issuers, except where the Series Fund
may be deemed to be an underwriter for purposes of certain federal
securities laws in connection with the disposition of portfolio securities
and with loans that a portfolio may make pursuant to item 8 above.
10. Make an investment unless, when considering all its other investments, 75%
of the value of a portfolio's assets would consist of cash, cash items,
obligations of the United States Government, its agencies or
instrumentalities, and other securities. For purposes of this restriction,
"other securities" are limited for each issuer to not more than 5% of the
value of a portfolio's assets and to not more than 10% of the issuer's
outstanding voting securities held by the Series Fund as a whole. Some
uncertainty exists as to whether certain of the types of bank obligations
in which a portfolio may invest, such as certificates of deposit and
bankers' acceptances, should be classified as "cash items" rather than
"other securities" for purposes of this restriction, which is a
diversification requirement under the 1940 Act. Interpreting most bank
obligations as "other securities" limits the amount a portfolio may invest
in the obligations of any one bank to 5% of its total assets. If there is
an authoritative decision that any of these obligations are not
"securities" for purposes of this diversification test, this limitation
would not apply to the purchase of such obligations.
11. Purchase securities of a company in any industry if, as a result of the
purchase, a portfolio's holdings of securities issued by companies in that
industry would exceed 25% of the value of the portfolio, except that this
restriction does not apply to purchases of obligations issued or guaranteed
by the U.S. Government, its agencies and instrumentalities or issued by
domestic banks. For purposes of this restriction, neither finance companies
as a group nor utility companies as a group are considered to be a single
industry and will be grouped instead according to their services; for
example, gas, electric, and telephone utilities will each be considered a
separate industry. For purposes of this exception, domestic banks shall
include all banks which are organized under the laws of the United States
or a state (as defined in the 1940 Act), U.S. branches of foreign banks
that are subject to the same regulations as U.S. banks and foreign branches
of domestic banks (as permitted by the SEC).
12. Invest more than 15% of its net assets in illiquid securities. (The Money
Market Portfolio will not invest more than 10% of its net assets in
illiquid securities.) For purposes of this restriction, illiquid securities
are those deemed illiquid pursuant to SEC regulations and guidelines, as
they may be revised from time to time.
The Natural Resources Portfolio will generally invest a substantial majority of
its total assets in securities of natural resource companies. With respect to
item 11 above, as it relates to the Natural Resources Portfolio, the following
categories will be considered separate and distinct industries: integrated
oil/domestic, integrated oil/international, crude oil production, natural gas
production, gas pipeline, oil service, coal, forest products, paper, foods
(including corn and wheat), tobacco, fertilizers, aluminum, copper, iron and
steel, all other basic metals (e.g., nickel, lead), gold, silver, platinum,
mining finance, plantations (e.g., edible oils), mineral sands, and diversified
resources. A company will be deemed to be in a particular industry if the
majority of its revenues is derived from or the majority of its assets is
dedicated to one of the categories described in the preceding sentence. The
Board of Directors of the Series Fund will review these industry classifications
from time to time to determine whether they are reasonable under the
circumstances and may change such classifications, without shareholder approval,
to the extent necessary.
Certain additional non-fundamental investment policies are applicable only to
the Money Market Portfolio. That portfolio will not:
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1. Invest in oil and gas interests, common stock, preferred stock, warrants or
other equity securities.
2. Write or purchase any put or call option or combination of them, except
that it may purchase putable or callable securities.
3. Invest in any security with a remaining maturity in excess of 397 days,
except that securities held pursuant to repurchase agreements may have a
remaining maturity of more than 397 days.
Certain additional non-fundamental investment policies are applicable only to
the High Yield Bond Portfolio. That portfolio will not:
1. Invest in any non-fixed income equity securities, including warrants,
except when attached to or included in a unit with fixed income securities,
but not including preferred stock.
2. Invest more than 20% of the market or other fair value of its total assets
in United States currency denominated issues of foreign governments and
other foreign issuers; or invest more than 10% of the market or other fair
value of its total assets in securities which are payable in currencies
other than United States dollars. The portfolio will not engage in
investment activity in non-U.S. dollar denominated issues without first
obtaining authorization to do so from the Series Fund's Board of Directors.
See INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS, page 1.
The investments of the various portfolios are generally subject to certain
additional restrictions under the laws of the State of New Jersey. In the event
of future amendments to the applicable New Jersey statutes, each portfolio will
comply, without the approval of the shareholders, with the statutory
requirements as so modified. The pertinent provisions of New Jersey law as they
stand are, in summary form, as follows:
1. An Account may not purchase any evidence of indebtedness issued, assumed or
guaranteed by any institution created or existing under the laws of the
U.S., any U.S. state or territory, District of Columbia, Puerto Rico,
Canada or any Canadian province, if such evidence of indebtedness is in
default as to interest. "Institution" includes any corporation, joint stock
association, business trust, business joint venture, business partnership,
savings and loan association, credit union or other mutual savings
institution.
2. The stock of a corporation may not be purchased unless: (i) the corporation
has paid a cash dividend on the class of stock during each of the past 5
years preceding the time of purchase; or (ii) during the 5-year period the
corporation had aggregate earnings available for dividends on such class of
stock sufficient to pay average dividends of 4% per annum computed upon the
par value of such stock or upon stated value if the stock has no par value.
This limitation does not apply to any class of stock which is preferred as
to dividends over a class of stock whose purchase is not prohibited.
3. Any common stock purchased must be: (i) listed or admitted to trading on a
securities exchange in the United States or Canada; or (ii) included in the
National Association of Securities Dealers' national price listings of
"over-the-counter" securities; or (iii) determined by the Commissioner of
Insurance of New Jersey to be publicly held and traded and have market
quotations available.
4. Any security of a corporation may not be purchased if after the purchase
more than 10% of the market value of the assets of a portfolio would be
invested in the securities of such corporation.
As a result of these currently applicable requirements of New Jersey law, which
impose substantial limitations on the ability of the Series Fund to invest in
the stock of companies whose securities are not publicly traded or who have not
recorded a 5-year history of dividend payments or earnings sufficient to support
such payments, the portfolios will not generally hold the stock of newly
organized corporations. Nonetheless, an investment not otherwise eligible under
items 1 or 2 above may be made if, after giving effect to the investment, the
total cost of all such non-eligible investments does not exceed 5% of the
aggregate market value of the assets of the portfolio.
Investment limitations also arise under the insurance laws and regulations of
Arizona and may arise under the laws and regulations of other states. Although
compliance with the requirements of New Jersey law set forth above will
ordinarily result in compliance with any applicable laws of other states, under
some circumstances the laws of other states could impose additional restrictions
on the portfolios. For example, the Series Fund will generally invest no more
than 10% of its assets in the obligations of banks of the foreign countries
enumerated in item 2 of the Appendix to the prospectus. In addition, the Series
Fund adheres to additional restrictions relating to such practices as the
lending of securities, borrowing, and the purchase of put and call options,
futures contracts, and derivative instruments on securities to comply with
investment guidelines issued by the California Department of Insurance.
Current federal income tax laws require that the assets of each portfolio be
adequately diversified so that Prudential and other insurers with separate
accounts which invest in the Series Fund, as applicable, and not the Contract
owners, are considered the owners of assets held in the Accounts for federal
income tax purposes. See
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<PAGE>
DIVIDENDS, DISTRIBUTIONS, AND TAXES in the prospectus. Prudential intends to
maintain the assets of each portfolio pursuant to those diversification
requirements.
INVESTMENT MANAGEMENT ARRANGEMENTS
AND EXPENSES
Prudential is the investment advisor of the Series Fund. It is the largest
insurance company in the United States. The Series Fund has entered into an
Investment Advisory Agreement with Prudential under which Prudential will,
subject to the direction of the Board of Directors of the Series Fund, be
responsible for the management of the Series Fund, and provide investment advice
and related services to each portfolio. Prudential has entered into a Service
Agreement with its wholly-owned subsidiary The Prudential Investment Corporation
("PIC"), which provides that PIC will furnish to Prudential such services as
Prudential may require in connection with Prudential's performance of its
obligations under advisory agreements with clients which are registered
investment companies. In addition, Prudential has entered into a Subadvisory
Agreement with its wholly-owned subsidiary Jennison Associates Capital Corp.
("Jennison") under which Jennison furnishes investment advisory services in
connection with the management of the Prudential Jennison Portfolio. More
detailed information about Prudential and its role as investment advisor can be
found in INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES in the prospectus.
Under the Investment Advisory Agreement, Prudential receives an investment
management fee as compensation for its services to the Series Fund. The fee is a
daily charge, payable quarterly, equal to an annual percentage of the average
daily net assets of each individual portfolio.
The investment management fee for the Stock Index Portfolio is equal to an
annual rate of 0.35% of the average daily net assets of the portfolio. For the
Money Market, Diversified Bond, Government Income, Zero Coupon Bond, Equity
Income, and Small Capitalization Stock Portfolios that fee is equal to an annual
rate of 0.4% of the average daily net assets of each of the portfolios. For the
Equity and Natural Resources Portfolios, the fee is equal to an annual rate of
0.45% of the average daily net assets of each of the portfolios. The fee for the
Conservative Balanced and High Yield Bond Portfolios is equal to an annual rate
of 0.55% of the average daily net assets of each of the portfolios. For the
Flexible Managed and Prudential Jennison Portfolios, the fee is equal to an
annual rate of 0.6% of the average daily net assets of the portfolio. The fee
for the Global Portfolio is equal to an annual rate of 0.75% of the average
daily net assets of the portfolio. Under the Service Agreement, Prudential pays
PIC a portion of the fee it receives for providing investment advisory services.
Prudential pays Jennison a portion of the fee it receives for providing
investment advisory services to the Prudential Jennison Portfolio.
For the years 1996, 1995, and 1994, Prudential received a total of $94,962,866,
$77,610,207, and $66,413,206, respectively, in investment management fees for
all of the Series Fund's portfolios.
The Investment Advisory Agreement requires Prudential to pay for maintaining any
Prudential staff and personnel who perform clerical, accounting, administrative,
and similar services for the Series Fund, other than investor services and any
daily Series Fund accounting services. It also requires Prudential to pay for
the equipment, office space and related facilities necessary to perform these
services and the fees or salaries of all officers and directors of the Series
Fund who are affiliated persons of Prudential or of any subsidiary of
Prudential.
Each portfolio pays all other expenses incurred in its individual operation and
also pays a portion of the Series Fund's general administrative expenses
allocated on the basis of the asset size of the respective portfolios. Expenses
that will be borne directly by the portfolios include redemption expenses,
expenses of portfolio transactions, shareholder servicing costs, interest,
certain taxes, charges of the Custodian and Transfer Agent, and other expenses
attributable to a particular portfolio. Expenses that will be allocated among
all portfolios include legal expenses, state franchise taxes, auditing services,
costs of printing proxies, costs of stock certificates, Securities and Exchange
Commission fees, accounting costs, the fees and expenses of directors of the
Series Fund who are not affiliated persons of Prudential or any subsidiary of
Prudential, and other expenses properly payable by the entire Series Fund. If
the Series Fund is sued, litigation costs may be directly applicable to one or
more portfolio or allocated on the basis of the size of the respective
portfolios, depending upon the nature of the lawsuit. The Series Fund's Board of
Directors has determined that this is an appropriate method of allocating
expenses.
Under the Investment Advisory Agreement, Prudential has agreed to refund to a
portfolio (except the Global Portfolio) the portion of the investment management
fee for that portfolio equal to the amount that the aggregate annual ordinary
operating expenses of that portfolio (excluding interest, taxes, and brokerage
fees and commissions but including investment management fees) exceeds 0.75% of
the portfolio's average daily net assets. There is no expense limitation or
reimbursement provision for the Global Portfolio.
The Investment Advisory Agreement with Prudential was most recently approved by
the Series Fund's Board of Directors, including a majority of the Directors who
are not interested persons of Prudential, on February 12, 1997
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with respect to all portfolios. The Investment Advisory Agreement was most
recently approved by the shareholders in accordance with instructions from
Contract owners at their 1989 annual meeting with respect to all portfolios
except the Prudential Jennison and Small Capitalization Stock Portfolios. A
Supplemental Advisory Agreement regarding the Prudential Jennison and Small
Capitalization Stock Portfolios was approved by the Series Fund Board of
Directors on December 20, 1994 and by the sole shareholder of the Prudential
Jennison and Small Capitalization Stock Portfolios on April 5, 1995. The
Investment Advisory and Supplemental Investment Advisory Agreements will
continue in effect if approved annually by: (1) a majority of the non-interested
persons of the Series Fund's Board of Directors; and (2) by a majority of the
entire Board of Directors or by a majority vote of the shareholders of each
portfolio. The required shareholder approval of the Agreements shall be
effective with respect to any portfolio if a majority of the voting shares of
that portfolio vote to approve the Agreements, even if the Agreements are not
approved by a majority of the voting shares of any other portfolio or by a
majority of the voting shares of the entire Series Fund. The Agreements provide
that they may not be assigned by Prudential and that they may be terminated upon
60 days' notice by the Series Fund's Board of Directors or by a majority vote of
its shareholders. Prudential may terminate the Agreements upon 90 days' notice.
The Service Agreement between Prudential and PIC was most recently ratified by
shareholders of the Series Fund at their 1989 annual meeting with respect to all
portfolios except for the Prudential Jennison and Small Capitalization Stock
Portfolios, which had not yet been established. The Service Agreement with
respect to those portfolios and the Investment Subadvisory Agreement with
Jennison were ratified by the sole shareholder of those portfolios, April 5,
1995. The Service Agreement between Prudential and PIC will continue in effect
as to the Series Fund for a period of more than 2 years from its execution, only
so long as such continuance is specifically approved at least annually in the
same manner as the Investment Advisory Agreement between Prudential and the
Series Fund. The Service Agreement may be terminated by either party upon not
less than 30 days prior written notice to the other party, will terminate
automatically in the event of its assignment, and will terminate automatically
as to the Series Fund in the event of the assignment or termination of the
Investment Advisory Agreement between Prudential and the Series Fund. Prudential
is not relieved of its responsibility for all investment advisory services under
the Investment Advisory Agreement.
Prudential also serves as the investment advisor to several other investment
companies. When investment opportunities arise that may be appropriate for more
than one entity for which Prudential serves as investment advisor, Prudential
will not favor one over another and may allocate investments among them in an
impartial manner believed to be equitable to each entity involved. The
allocations will be based on each entity's investment objectives and its current
cash and investment positions. Because the various entities for which Prudential
acts as investment advisor have different investment objectives and positions,
Prudential may from time to time buy a particular security for one or more such
entities while at the same time it sells such securities for another.
FURTHER INFORMATION ABOUT THE
ZERO COUPON BOND PORTFOLIOS
As stated in the prospectus, the objective of Zero Coupon Bond Portfolios 2000
and 2005 is to achieve the highest predictable compounded investment return for
a specified period of time, consistent with the safety of invested capital. This
discussion provides a more detailed explanation of the investment policies that
will be employed to manage these portfolios.
If each Zero Coupon Bond Portfolio held only stripped securities that were
obligations of the United States Government, maturing on the liquidation date,
the compounded yield of the portfolio from the date of initial investment until
the liquidation date could be calculated arithmetically to a high degree of
accuracy. By: (i) including stripped corporate obligations and interest bearing
debt securities; (ii) including securities with maturity dates within 2 years of
the liquidation date; and (iii) more actively managing the portfolio, the
accuracy of the predicted yield is reduced somewhat with the objective of
achieving an increased yield. The reduction in accuracy is kept to an acceptably
small amount, however, by an investment technique known as "immunization." By
purchasing securities with maturity dates or with interest payment dates prior
to the liquidation date, a risk is incurred that the payments received will not
be able to be reinvested at interest rates as high as or higher than the yield
initially predicted. This is known as "reinvestment risk." By including
securities with maturity dates after the liquidation date, a risk is incurred
that, because interest rates have increased, the market value of such securities
will be lower than had been anticipated. This is known as "market risk." It is
also possible, conversely, that payments received prior to the liquidation date
can be reinvested at higher rates than the predicted yield and that the value of
unmatured securities on the liquidation date will be greater than anticipated.
Reinvestment risk and market risk are thus reciprocal in that any change in the
general level of interest rates has an opposite effect on the two classes of
securities described above.
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The portfolios' investment advisor seeks to balance these risks by making use of
the concept of "duration." A bond's duration is the average weighted period of
time until receipt of all scheduled cash payments under the bond (whether
principal or interest), where the weights are the present value of the amounts
to be received on each payment date. Unlike the concept of a bond's "term to
maturity," therefore, duration takes into account both the amount and timing of
a bond's interest payments, in addition to its maturity date and yield to
maturity. The duration of a zero coupon bond is the product of the face amount
of the bond and the time until maturity. As applied to a portfolio of bonds, a
portfolio's "duration" is the average weighted period of time until receipt of
all scheduled payments, whether principal or interest, from all bonds in the
portfolio.
When a portfolio's duration is equal to the length of time remaining until its
liquidation date, fluctuations in the amount of income accumulated by the
portfolio through reinvestment of coupon or principal payments received prior to
the liquidation date (i.e., fluctuations caused by reinvestment risk) will, over
the period ending on the liquidation date, be approximately equal in magnitude
to, but opposite in direction from, fluctuations in the market value on the
liquidation date of the portfolio's unmatured bonds (i.e., fluctuations caused
by market risk). By maintaining each portfolio's duration within 1 year of the
length of time remaining until its liquidation date, Prudential believes that
each portfolio's value on its liquidation date, and hence an investor's
compounded investment return to that date, will largely be immunized against
changes in the general level of interest rates. The success of this technique
could be affected, however, by such factors as changes in the relationship
between long-term and short-term interest rates and changes in the difference
between the yield on corporate and Treasury securities.
Prudential will also calculate a projected yield for each Zero Coupon Bond
Portfolio. At the beginning of each week, after the net asset value of each Zero
Coupon Bond Portfolio has been determined, Prudential will calculate the
compounded annual yield that will result if all securities in the portfolio are
held until the liquidation date or, if earlier, until their maturity dates (with
the proceeds reinvested until the liquidation date). This is the predicted yield
for that date. It can also be expressed as the amount to which a premium of
$10,000 is predicted to grow by the portfolio's liquidation date. Both of these
numbers will be furnished upon request. Unless there is a significant change in
the general level of interest rates--in which case a recalculation will be
made--the predicted yield is not likely to vary materially over the course of
each week.
As stated in the prospectus, as much as 30% of each portfolio's assets may be
invested in zero coupon debt securities issued by United States corporations or
in high grade interest bearing debt securities, provided that no more than 20%
of the assets of the portfolio may be invested in interest bearing securities.
The extent to which the portfolio invests in interest bearing securities may
rise above 20% as the portfolio moves closer to its liquidation date since both
reinvestment risk and market risk become smaller as the period to the
liquidation date decreases.
OTHER INFORMATION CONCERNING THE SERIES FUND
PORTFOLIO TRANSACTIONS AND BROKERAGE
Prudential is responsible for decisions to buy and sell securities, options on
securities and indices, and futures and related options for the Series Fund.
Prudential is also responsible for the selection of brokers, dealers, and
futures commission merchants to effect the transactions and the negotiation of
brokerage commissions, if any. Broker-dealers may receive brokerage commissions
on Series Fund portfolio transactions, including options and the purchase and
sale of underlying securities upon the exercise of options. Orders may be
directed to any broker or futures commission merchant including, to the extent
and in the manner permitted by applicable law, Prudential Securities
Incorporated, an indirect wholly-owned subsidiary of Prudential.
Equity securities traded in the over-the-counter market and bonds, including
convertible bonds, are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments and U.S.
Government agency securities may be purchased directly from the issuer, in which
case no commissions or discounts are paid. The Series Fund will not deal with
Prudential Securities Incorporated in any transaction in which Prudential
Securities Incorporated acts as principal. Thus, it will not deal with
Prudential Securities Incorporated if execution involves Prudential Securities
Incorporated's acting as principal with respect to any part of the Series Fund's
order.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities Incorporated, during the existence of
the syndicate, is a principal underwriter (as defined in the 1940 Act) except in
accordance with rules of the Securities and Exchange Commission. This
limitation, in the opinion of the Series Fund, will not significantly affect the
portfolios' current ability to pursue their respective investment objectives.
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<PAGE>
However, in the future it is possible that the Series Fund may under other
circumstances be at a disadvantage because of this limitation in comparison to
other funds not subject to such a limitation.
In placing orders for portfolio securities of the Series Fund, Prudential is
required to give primary consideration to obtaining the most favorable price and
efficient execution. Within the framework of this policy, Prudential will
consider the research and investment services provided by brokers, dealers or
futures commission merchants who effect or are parties to portfolio transactions
of the Series Fund, Prudential or Prudential's other clients. Such research and
investment services are those which brokerage houses customarily provide to
institutional investors and include statistical and economic data and research
reports on particular companies and industries. Such services are used by
Prudential in connection with all of its investment activities, and some of such
services obtained in connection with the execution of transactions for the
Series Fund may be used in managing other investment accounts. Conversely,
brokers, dealers or futures commission merchants furnishing such services may be
selected for the execution of transactions for such other accounts, and the
services furnished by such brokers, dealers or futures commission merchants may
be used by Prudential in providing investment management for the Series Fund.
Commission rates are established pursuant to negotiations with the broker,
dealer or futures commission merchant based on the quality and quantity of
execution services provided by the broker in the light of generally prevailing
rates. Prudential's policy is to pay higher commissions to brokers, other than
Prudential Securities Incorporated, for particular transactions than might be
charged if a different broker had been selected on occasions when, in
Prudential's opinion, this policy furthers the objective of obtaining best price
and execution. Prudential's present policy is not to permit higher commissions
to be paid on Series Fund transactions in order to secure research, statistical,
and investment services from brokers. Prudential might in the future authorize
the payment of such higher commissions but only with the prior concurrence of
the Board of Directors of the Series Fund, if it is determined that the higher
commissions are necessary in order to secure desired research and are reasonable
in relation to all the services that the broker provides.
Subject to the above considerations, Prudential Securities Incorporated may act
as a securities broker or futures commission merchant for the Series Fund. In
order for Prudential Securities Incorporated to effect any portfolio
transactions for the Series Fund, the commissions received by Prudential
Securities Incorporated must be reasonable and fair compared to the commissions
received by other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time. This standard would allow Prudential Securities
Incorporated to receive no more than the remuneration that would be expected to
be received by an unaffiliated broker or futures commission merchant in a
commensurate arm's-length transaction. Furthermore, the Board of Directors of
the Series Fund, including a majority of the directors who are not "interested"
persons, has adopted procedures which are reasonably designed to provide that
any commissions, fees or other remuneration paid to Prudential Securities
Incorporated are consistent with the foregoing standard. In accordance with Rule
11a2-2(T) under the Securities Exchange Act of 1934, Prudential Securities
Incorporated may not retain compensation for effecting transactions on a
national securities exchange for the Series Fund unless the Series Fund has
expressly authorized the retention of such compensation in a written contract
executed by the Series Fund and Prudential Securities Incorporated. Rule
11a2-2(T) provides that Prudential Securities Incorporated must furnish to the
Series Fund at least annually a statement setting forth the total amount of all
compensation retained by Prudential Securities Incorporated from transactions
effected for the Series Fund during the applicable period. Brokerage and futures
transactions with Prudential Securities Incorporated are also subject to such
fiduciary standards as may be imposed by applicable law.
For the years 1996, 1995, and 1994, the Series Fund paid a total of $12,197,982,
$11,607,197, and $11,579,886, respectively, in brokerage commissions. Of those
amounts, $961,524, $899,739, and $560,155, for 1996, 1995, and 1994,
respectively, was paid out to Prudential Securities Incorporated. For 1996, the
commissions paid to this affiliated broker constituted 7.9% of the total
commissions paid by the Series Fund for that year. Transactions through this
affiliated broker accounted for 7.9% of the aggregate dollar amount of
transactions for the Series Fund involving the payment of commissions.
CUSTODIANS
Chase Manhattan Bank, Chase Metro Tech Center, Brooklyn, NY 11245, is currently
the custodian of the assets held by all the portfolios, except the Global
Portfolio. On or about May 31, 1997, Investors Fiduciary Trust Company ("IFTC"),
127 West 10th Street, Kansas City, MO 64105-1716, will become the custodian of
the assets held by all the portfolios except the Global Portfolio. IFTC will
also be the custodian of the assets held in connection with repurchase
agreements entered into by the portfolios, and is authorized to use the
facilities of the Depository Trust Company and the facilities of the book-entry
system of the Federal Reserve Bank with respect to securities held by these
portfolios. Brown Brothers Harriman & Co. ("Brown Brothers"), 40 Water Street,
Boston, MA 02109, is the custodian of the assets of the Global Portfolio. Each
of the Series Fund's custodians employs subcustodians, who were approved by the
directors of the Series Fund in accordance with regulations of
13
<PAGE>
the Securities and Exchange Commission, for the purpose of providing custodial
service for the Series Fund's foreign assets held outside the United States. The
directors of the Series Fund monitor the activities of the custodians and the
subcustodians.
EXPERTS
The financial statements included in this statement of additional information
and the FINANCIAL HIGHLIGHTS included in the Series Fund's prospectus for the
year ended December 31, 1996 have been audited by Price Waterhouse LLP,
independent accountants, as stated in their report appearing herein and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing. Price Waterhouse LLP's principal business
address is 1177 Avenue of the Americas, New York, NY 10036.
The financial statements included in this statement of additional information
and the FINANCIAL HIGHLIGHTS included in the Series Fund's prospectus for the
years ended prior to 1996 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing. Deloitte & Touche LLP's principal business
address is Two Hilton Court, Parsippany, NJ 07054-0319.
LICENSES
As part of the Investment Advisory Agreement, Prudential has granted the Series
Fund a royalty-free, non-exclusive license to use the words "The Prudential" and
"Prudential" and its registered service mark of a rock representing the Rock of
Gibraltar. However, Prudential may terminate this license if Prudential or a
company controlled by it ceases to be the Series Fund's investment advisor.
Prudential may also terminate the license for any other reason upon 60 days
written notice; but, in this event, the Investment Advisory Agreement shall also
terminate 120 days following receipt by the Series Fund of such notice, unless a
majority of the outstanding voting securities of the Series Fund vote to
continue the Agreement notwithstanding termination of the license.
The Series Fund is not sponsored, endorsed, sold or promoted by Standard &
Poor's ("S&P"). S&P makes no representation or warranty, express or implied, to
Contract owners or any member of the public regarding the advisability of
investing in securities generally or in the Series Fund particularly or the
ability of the S&P 500 Index or the S&P SmallCap 600 Index to track general
stock market performance. S&P's only relationship to the Series Fund is the
licensing of certain trademarks and trade names of S&P and the S&P 500 Index.
The S&P 500 Index and the S&P SmallCap 600 Index are determined, composed and
calculated by S&P without regard to the Series Fund, the Stock Index Portfolio
or the Small Capitalization Stock Portfolio. S&P has no obligation to take the
needs of the Series Fund or the Contract owners into consideration in
determining, composing or calculating the S&P 500 Index or the S&P SmallCap 600
Index. S&P is not responsible for and has not participated in the determination
of the prices and amount of the Series Fund shares or the timing of the issuance
or sale of those shares or in the determination or calculation of the equation
by which the shares are to be converted into cash. S&P has no obligation or
liability in connection with the administration, marketing or trading of the
Series Fund Shares.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX, THE S&P SMALLCAP 600 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL
HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES
NO WARRANTY, EXPRESS OR IMPLIED AS TO RESULTS TO BE OBTAINED BY THE SERIES FUND,
CONTRACT OWNERS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500
INDEX, THE S&P SMALLCAP 600 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO
EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
S&P 500 INDEX, THE S&P SMALLCAP 600 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY
SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS),
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
14
<PAGE>
MANAGEMENT OF THE SERIES FUND
The names of all directors and major officers of the Series Fund and the
principal occupation of each during the last 5 years are shown below. Unless
otherwise stated, the address of each director and officer is Prudential Plaza,
Newark, New Jersey 07102-3777.
DIRECTORS OF THE SERIES FUND
MENDEL A. MELZER*, Chairman of the Board--Chief Investment Officer of Prudential
Investments since 1996; 1995 to 1996: Chief Financial Officer of the Money
Management Group of Prudential; 1993 to 1995: Senior Vice President and Chief
Financial Officer of Prudential Preferred Financial Services; Prior to 1993:
Managing Director, The Prudential Investment Corporation.
E. MICHAEL CAULFIELD*, President and Director--Chief Executive Officer of
Prudential Investments since 1995; 1995: Chief Executive Officer, Prudential
Preferred Financial Services; 1993 to 1995: President, Prudential Preferred
Financial Services; 1992 to 1993: President, Prudential Property and Casualty
Insurance Company; Prior to 1992: President of Investment Services of
Prudential.
SAUL K. FENSTER, Director--President of New Jersey Institute of Technology.
Address: 323 Martin Luther King Boulevard, Newark, New Jersey 07102.
W. SCOTT MCDONALD, JR., Director--Principal, Kaludis Consulting Group since
1997; 1995 to 1996: Principal, Scott McDonald & Associates; Prior to 1995:
Executive Vice President of Fairleigh Dickinson University. Address:
9 Zamrok Way, Morristown, New Jersey 07960.
JOSEPH WEBER, Director--Vice President, Interclass (international corporate
learning). Address: 37 Beachmont Terrace, North Caldwell, New Jersey 07006.
OFFICERS WHO ARE NOT DIRECTORS
SUSAN COTE, Vice President--Vice President Prudential Investments since 1996;
1995 to 1996: Chief Operating Officer and Managing Director, Prudential Mutual
Fund Investment Management; Prior to 1995: Senior Vice
President and Treasurer of Prudential Mutual Funds.
THOMAS EARLY, Secretary--General Counsel, Mutual Funds and Annuities, Prudential
Investments since 1996; 1994 to 1996: General Counsel, Prudential Retirement
Services, Prudential Investments; Prior to 1994: Associate General Counsel and
Chief Financial Services Counsel, Frank Russell Company.
I. EDWARD PRICE, Vice President--Senior Vice President and Actuary, Prudential
Individual Insurance Group since 1995; 1994 to 1995: Chief Executive Officer,
Prudential International Insurance; 1993 to 1994: President, Prudential
International Insurance; Prior to 1993: Senior Vice President and Company
Actuary of Prudential.
EUGENE STARK, Comptroller, Principal Financial Officer and Treasurer--Vice
President, Prudential Investments.
No director or officer of the Series Fund who is also an officer, director or
employee of Prudential or its affiliates is entitled to any remuneration from
the Series Fund for services as one of its directors or officers. Each director
of the Series Fund who is not an interested person of the Series Fund will
receive a fee of $2,000 per year plus $200 per portfolio for each meeting of the
Board attended and will be reimbursed for all expenses incurred in connection
with attendance at meetings.
*These members of the Board are interested persons of Prudential, its affiliates
or the Series Fund as defined in the 1940 Act. Certain actions of the Board,
including the annual continuance of the Investment Advisory Agreement between
the Series Fund and Prudential, must be approved by a majority of the members of
the Board who are not interested persons of Prudential, its affiliates or the
Series Fund. Mr. Melzer and Mr. Caulfield, two of the five members of the Board,
are interested persons of Prudential and the Series Fund, as that term is
defined in the 1940 Act, because they are officers and/or affiliated persons of
Prudential, the investment advisor to the Series Fund. Messrs. Fenster,
McDonald, and Weber are not interested persons of Prudential, its affiliates or
the Series Fund. However, Mr. Fenster is President of the New Jersey Institute
of Technology. Prudential has issued a group annuity contract to the Institute
and provides group life and group health insurance to its employees.
15
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments (amortized cost:
$663,894,267)............................ $ 663,894,267
Cash....................................... 864
Interest receivable........................ 5,663,807
--------------
Total Assets............................. 669,558,938
--------------
LIABILITIES
Payable to investment adviser.............. 653,175
Accrued expenses........................... 137,642
--------------
Total Liabilities........................ 790,817
--------------
NET ASSETS................................... $ 668,768,121
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 668,768
Paid-in capital in excess of par......... 668,099,353
--------------
Net assets, December 31, 1996.............. $ 668,768,121
--------------
--------------
Net asset value and redemption price per
share of 66,876,812 outstanding shares of
common stock (authorized 200,000,000
shares).................................. $ 10.00
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C>
INVESTMENT INCOME
Interest................................... $ 34,610,969
---------------
EXPENSES
Investment advisory fee.................... 2,495,613
Shareholders' reports...................... 140,000
Accounting fees............................ 87,000
Custodian expense.......................... 32,000
Audit fees................................. 10,700
Directors' fees............................ 2,000
Legal fees................................. 400
Miscellaneous expenses..................... 21
---------------
2,767,734
---------------
NET INVESTMENT INCOME........................ 31,843,235
---------------
NET REALIZED GAIN ON INVESTMENTS
Net realized gain on investments........... 1,246
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 31,844,481
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 31,843,235 $ 33,920,243
Net realized gain on investments....................................................... 1,246 --
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 31,844,481 33,920,243
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (31,843,235) (33,920,243)
Distributions from net realized capital gains.......................................... (1,246) --
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (31,844,481) (33,920,243)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [18,464,400 and 13,987,392 shares, respectively].................... 184,644,000 139,873,920
Capital stock issued in reinvestment of dividends and distributions [3,184,448 and
3,392,024 shares, respectively]....................................................... 31,844,481 33,920,243
Capital stock repurchased [(16,104,000) and (14,375,600) shares, respectively]......... (161,040,000) (143,756,000)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 55,448,481 30,038,163
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 55,448,481 30,038,163
NET ASSETS:
Beginning of year...................................................................... 613,319,640 583,281,477
------------------ -------------------
End of year............................................................................ $ 668,768,121 $ 613,319,640
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
A1
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
DIVERSIFIED BOND PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$729,261,513)............................ $ 743,439,495
Cash....................................... 457
Interest and dividends receivable.......... 11,451,464
Receivable for investments sold short (Note
2)....................................... 26,546,678
--------------
Total Assets............................. 781,438,094
--------------
LIABILITIES
Payable for investments purchased.......... 33,940,503
Investments sold short at value (proceeds
$26,546,678 including accrued interest)
(Note 2)................................. 26,310,748
Payable to investment adviser.............. 721,625
Accrued expenses........................... 150,054
Payable for capital stock repurchased...... 98,583
--------------
Total Liabilities........................ 61,221,513
--------------
NET ASSETS................................... $ 720,216,581
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 650,871
Paid-in capital, in excess of par........ 699,963,944
--------------
700,614,815
Undistributed net investment income........ 2,057,193
Accumulated net realized gains on
investments.............................. 3,130,661
Net unrealized appreciation on
investments.............................. 14,413,912
--------------
Net assets, December 31, 1996.............. $ 720,216,581
--------------
--------------
Net asset value and redemption price per
share of 65,087,090 outstanding shares of
common stock (authorized 200,000,000
shares).................................. $ 11.07
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C>
INVESTMENT INCOME
Interest................................... $ 49,692,559
Dividends.................................. 89,819
---------------
49,782,378
---------------
EXPENSES
Investment advisory fee.................... 2,713,429
Shareholders' reports...................... 205,000
Accounting fees............................ 85,000
Custodian expense.......................... 43,000
Audit fees................................. 11,600
Directors' fees............................ 2,000
Legal fees................................. 500
Miscellaneous expenses..................... 332
---------------
Total expenses........................... 3,060,861
Less: custodian fee credit................. (5,308)
---------------
Net expenses............................. 3,055,553
---------------
NET INVESTMENT INCOME........................ 46,726,825
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain on investments........... 3,227,785
Net change in unrealized appreciation on:
Investments.............................. (19,084,958)
Short sales.............................. 235,930
---------------
(18,849,028)
---------------
NET LOSS ON INVESTMENTS...................... (15,621,243)
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 31,105,582
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 46,726,825 $ 41,106,435
Net realized gain on investments....................................................... 3,227,785 3,945,376
Net change in unrealized appreciation on investments and short sales................... (18,849,028) 65,195,088
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 31,105,582 110,246,899
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (44,766,756) (40,773,047)
Distributions from net realized capital gains.......................................... -- (1,426,845)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (44,766,756) (42,199,892)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [7,068,417 and 3,596,587 shares, respectively]...................... 78,594,183 39,971,262
Capital stock issued in reinvestment of dividends and distributions [4,117,675 and
3,793,654 shares, respectively]....................................................... 44,766,756 42,199,892
Capital stock repurchased [(4,070,327) and (3,376,822) shares, respectively]........... (45,319,610) (36,030,334)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 78,041,329 46,140,820
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 64,380,155 114,187,827
NET ASSETS:
Beginning of year...................................................................... 655,836,426 541,648,599
------------------ -------------------
End of year............................................................................ $ 720,216,581 $ 655,836,426
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
A2
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
GOVERNMENT INCOME PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$474,449,592)............................ $ 476,801,502
Cash....................................... 228
Interest receivable........................ 5,874,562
--------------
Total Assets............................. 482,676,292
--------------
LIABILITIES
Payable to investment adviser.............. 494,508
Accrued expenses........................... 122,431
Payable for capital stock repurchased...... 23,913
--------------
Total Liabilities........................ 640,852
--------------
NET ASSETS................................... $ 482,035,440
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 429,580
Paid-in capital in excess of par......... 487,138,074
--------------
487,567,654
Undistributed net investment income........ 33,167
Accumulated net realized losses on
investments.............................. (7,917,291)
Net unrealized appreciation on
investments.............................. 2,351,910
--------------
Net assets, December 31, 1996.............. $ 482,035,440
--------------
--------------
Net asset value and redemption price per
share of 42,957,973 outstanding shares of
common stock (authorized 100,000,000
shares).................................. $ 11.22
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C>
INVESTMENT INCOME
Interest................................... $ 33,508,051
---------------
EXPENSES
Investment advisory fee.................... 1,957,623
Shareholders' reports...................... 175,000
Accounting fees............................ 95,000
Custodian expense.......................... 42,000
Audit fees................................. 8,100
Directors' fees............................ 2,000
Legal fees................................. 300
Miscellaneous expenses..................... 37
---------------
Total expenses........................... 2,280,060
Less: custodian fee credit................. (14,020)
---------------
Net expenses............................. 2,266,040
---------------
NET INVESTMENT INCOME........................ 31,242,011
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain on investments........... 14,328,542
Net change in unrealized appreciation on
investments.............................. (35,068,717)
---------------
NET LOSS ON INVESTMENTS...................... (20,740,175)
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 10,501,836
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 31,242,011 $ 31,463,453
Net realized gain (loss) on investments................................................ 14,328,542 (12,819,604)
Net change in unrealized appreciation on investments................................... (35,068,717) 66,364,196
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 10,501,836 85,008,045
------------------ -------------------
DIVIDENDS:
Dividends from net investment income................................................... (30,988,878) (31,133,859)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [778,426 and 863,496 shares, respectively].......................... 8,926,475 9,888,081
Capital stock issued in reinvestment of dividends [2,790,002 and 2,693,392 shares,
respectively]......................................................................... 30,988,878 31,133,859
Capital stock repurchased [(3,428,037) and (7,346,525) shares, respectively]........... (39,168,176) (80,695,126)
------------------ -------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS.............. 747,177 (39,673,186)
------------------ -------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS.................................................. (19,739,865) 14,201,000
NET ASSETS:
Beginning of year...................................................................... 501,775,305 487,574,305
------------------ -------------------
End of year............................................................................ $ 482,035,440 $ 501,775,305
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
A3
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
ZERO COUPON BOND 2000 PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$42,593,668)............................. $ 44,802,353
Interest receivable........................ 109
--------------
Total Assets............................. 44,802,462
--------------
LIABILITIES
Payable to investment adviser.............. 45,050
Accrued expenses........................... 18,242
--------------
Total Liabilities........................ 63,292
--------------
NET ASSETS................................... $ 44,739,170
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 34,636
Paid-in capital in excess of par......... 42,136,569
--------------
42,171,205
Undistributed net investment income........ 8,384
Accumulated net realized gains on
investments.............................. 350,896
Net unrealized appreciation on
investments.............................. 2,208,685
--------------
Net assets, December 31, 1996.............. $ 44,739,170
--------------
--------------
Net asset value and redemption price per
share of 3,463,608 outstanding shares of
common stock (authorized 25,000,000
shares).................................. $ 12.92
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C>
INVESTMENT INCOME
Interest................................... $ 1,613,482
---------------
EXPENSES
Investment advisory fee.................... 119,545
Custodian expense.......................... 13,000
Shareholders' reports...................... 11,000
Accounting fees............................ 10,000
Directors' fees............................ 2,000
Audit fees................................. 400
Legal fees................................. 100
---------------
156,045
---------------
NET INVESTMENT INCOME........................ 1,457,437
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain on investments........... 350,896
Net change in unrealized appreciation on
investments.............................. (913,982)
---------------
NET LOSS ON INVESTMENTS...................... (563,086)
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 894,351
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 1,457,437 $ 1,045,991
Net realized gain on investments....................................................... 350,896 945,638
Net change in unrealized appreciation on investments................................... (913,982) 2,457,617
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 894,351 4,449,246
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (1,464,562) (1,046,055)
Distributions from net realized capital gains.......................................... -- (945,910)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (1,464,562) (1,991,965)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [1,886,245 and 111,200 shares, respectively]........................ 24,377,000 1,481,434
Capital stock issued in reinvestment of dividends and distributions [114,738 and
151,186 shares, respectively]......................................................... 1,464,562 1,991,965
Capital stock repurchased [(440,396) and (89,987) shares, respectively]................ (5,791,000) (1,195,434)
Initial capitalization repurchased by The Prudential [-0- and (8,965) shares,
respectively]......................................................................... -- (111,423)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 20,050,562 2,166,542
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 19,480,351 4,623,823
NET ASSETS:
Beginning of year...................................................................... 25,258,819 20,634,996
------------------ -------------------
End of year............................................................................ $ 44,739,170 $ 25,258,819
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
A4
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
ZERO COUPON BOND 2005 PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$23,876,529)............................. $ 25,784,167
Cash....................................... 69,821
--------------
Total Assets............................. 25,853,988
--------------
LIABILITIES
Payable to investment adviser.............. 26,141
Accrued expenses........................... 13,117
--------------
Total Liabilities........................ 39,258
--------------
NET ASSETS................................... $ 25,814,730
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 21,066
Paid-in capital in excess of par......... 23,825,693
--------------
23,846,759
Undistributed net investment income........ 60,333
Net unrealized appreciation on
investments.............................. 1,907,638
--------------
Net assets, December 31, 1996.............. $ 25,814,730
--------------
--------------
Net asset value and redemption price per
share of 2,106,585 outstanding shares of
common stock (authorized 50,000,000
shares).................................. $ 12.25
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C>
INVESTMENT INCOME
Interest................................... $ 1,442,897
---------------
EXPENSES
Investment advisory fee.................... 97,040
Custodian expense.......................... 10,613
Accounting fees............................ 10,000
Shareholders' reports...................... 9,000
Directors' fees............................ 2,000
Audit fees................................. 400
Legal fees................................. 100
---------------
Total expenses........................... 129,153
Less: custodian fee credit................. (613)
---------------
Net expenses............................. 128,540
---------------
NET INVESTMENT INCOME........................ 1,314,357
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain on investments........... 278,534
Net change in unrealized appreciation on
investments.............................. (1,746,280)
---------------
NET LOSS ON INVESTMENTS...................... (1,467,746)
---------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... ($ 153,389)
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 1,314,357 $ 1,027,273
Net realized gain on investments....................................................... 278,534 471,329
Net change in unrealized appreciation on investments................................... (1,746,280) 3,840,819
------------------ -------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS........................ (153,389) 5,339,421
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (1,273,302) (1,031,193)
Distributions from net realized capital gains.......................................... (278,534) (471,329)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (1,551,836) (1,502,522)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [205,219 and 292,895 shares, respectively].......................... 2,571,000 3,700,000
Capital stock issued in reinvestment of dividends and distributions [128,813 and
116,304 shares, respectively]......................................................... 1,551,836 1,502,522
Capital stock repurchased [20,262 and (152,641) shares, respectively].................. (250,000) (1,898,000)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 3,872,836 3,304,522
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 2,167,611 7,141,421
NET ASSETS:
Beginning of year...................................................................... 23,647,119 16,505,698
------------------ -------------------
End of year............................................................................ $ 25,814,730 $ 23,647,119
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
A5
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
CONSERVATIVE BALANCED PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$4,188,354,768).......................... $4,538,468,628
Receivable for investments sold short (Note
2)....................................... 111,621,197
Interest and dividends receivable.......... 44,683,414
Receivable for investments sold............ 1,376,096
--------------
Total Assets............................. 4,696,149,335
--------------
LIABILITIES
Investments sold short at value (proceeds
$111,621,197 including accrued interest)
(Note 2)................................. 110,481,637
Payable for investments purchased.......... 99,447,868
Payable to investment adviser.............. 6,126,182
Accrued expenses........................... 768,878
Bank overdraft............................. 453,239
Payable for capital stock repurchased...... 62,998
--------------
Total Liabilities........................ 217,340,802
--------------
NET ASSETS................................... $4,478,808,533
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 2,886,377
Paid-in capital in excess of par......... 4,094,460,572
--------------
4,097,346,949
Accumulated net realized gains on
investments.............................. 30,208,164
Net unrealized appreciation on
investments.............................. 351,253,420
--------------
Net assets, December 31, 1996.............. $4,478,808,533
--------------
--------------
Net asset value and redemption price per
share of 288,637,703 outstanding shares
of common stock (authorized 300,000,000
shares).................................. $ 15.52
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C>
INVESTMENT INCOME
Interest................................... $ 174,514,843
Dividends (net of $488,736 foreign
withholding tax)......................... 23,515,755
---------------
198,030,598
---------------
EXPENSES
Investment advisory fee.................... 23,052,572
Shareholders' reports...................... 1,367,000
Custodian expense.......................... 228,000
Accounting fees............................ 127,000
Audit fees................................. 70,400
Legal fees................................. 2,900
Directors' fees............................ 2,000
Miscellaneous expenses..................... 736
---------------
Total expenses........................... 24,850,608
Less: custodian fee credit................. (103,584)
---------------
Net expenses............................. 24,747,024
---------------
NET INVESTMENT INCOME........................ 173,283,574
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Investments.............................. 270,207,375
Short sales.............................. (100,129)
---------------
270,107,246
---------------
Net change in unrealized appreciation on:
Investments.............................. 60,263,761
Short sales.............................. 1,139,560
---------------
61,403,321
---------------
NET GAIN ON INVESTMENTS...................... 331,510,567
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 504,794,141
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 173,283,574 $ 155,293,990
Net realized gain on investments and short sales....................................... 270,107,246 167,342,297
Net change in unrealized appreciation on investments and short sales................... 61,403,321 264,773,974
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 504,794,141 587,410,261
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (174,034,704) (154,987,434)
Dividends in excess of net investment income........................................... (41,632) --
Distributions from net realized capital gains.......................................... (273,551,593) (133,660,168)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (447,627,929) (288,647,602)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [10,561,256 and 5,345,143 shares, respectively]..................... 167,668,924 81,026,772
Capital stock issued in reinvestment of dividends and distributions [29,086,855 and
19,023,739 shares, respectively]...................................................... 447,627,929 288,647,602
Capital stock repurchased [(8,429,995) and (15,343,313) shares, respectively].......... (134,428,797) (228,767,054)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 480,868,056 140,907,320
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 538,034,268 439,669,979
NET ASSETS:
Beginning of year...................................................................... 3,940,774,265 3,501,104,286
------------------ -------------------
End of year............................................................................ $ 4,478,808,533 $ 3,940,774,265
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
A6
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
FLEXIBLE MANAGED PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$4,400,135,497).......................... $4,981,429,094
Cash....................................... 52,238
Receivable for securities sold short (Note
2)....................................... 113,630,151
Interest and dividends receivable.......... 33,277,907
Receivable for investments sold............ 31,241,005
--------------
Total Assets............................. 5,159,630,395
--------------
LIABILITIES
Payable for investments purchased.......... 141,168,642
Investments sold short, at value (proceeds
$113,630,151 including accrued interest)
(Note 2)................................. 112,461,581
Payable to investment adviser.............. 7,374,729
Accrued expenses........................... 1,390,075
Payable for capital stock repurchased...... 312,681
--------------
Total Liabilities........................ 262,707,708
--------------
NET ASSETS................................... $4,896,922,687
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 2,751,892
Paid-in capital in excess of par......... 4,273,689,804
--------------
4,276,441,696
Distributions in excess of net investment
income................................... (576,929)
Accumulated net realized gains on
investments.............................. 38,595,752
Net unrealized appreciation on
investments.............................. 582,462,168
--------------
Net assets, December 31, 1996.............. $4,896,922,687
--------------
--------------
Net asset value and redemption price per
share, 275,189,159 shares of common stock
outstanding (300,000,000 shares
authorized).............................. $ 17.79
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C>
INVESTMENT INCOME
Interest................................... $ 127,494,108
Dividends (net of $553,612 foreign
withholding tax)......................... 40,857,296
---------------
168,351,404
---------------
EXPENSES
Investment advisory fee.................... 27,247,674
Shareholders' reports...................... 1,423,000
Custodian expense.......................... 397,050
Accounting fees............................ 122,000
Audit fees................................. 75,600
Legal fees................................. 3,100
Directors' fees............................ 2,000
Miscellaneous expenses..................... 165
---------------
Total expenses........................... 29,270,589
Less: custodian fee credit................. (131,050)
---------------
Net expenses............................. 29,139,539
---------------
NET INVESTMENT INCOME........................ 139,211,865
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain (loss) on:
Investments.............................. 408,037,782
Foreign currencies....................... (69,542)
Short sales.............................. 77,891
---------------
408,046,131
---------------
Net change in unrealized appreciation on:
Investments.............................. 40,562,155
Foreign currencies....................... (1,902)
Short sales.............................. 1,168,570
---------------
41,728,823
---------------
NET GAIN ON INVESTMENTS...................... 449,774,954
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 588,986,819
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 139,211,865 $ 126,640,661
Net realized gain on investments, foreign currencies and short sales................... 408,046,131 292,267,835
Net change in unrealized appreciation on investments, foreign currencies and short
sales................................................................................. 41,728,823 410,041,102
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 588,986,819 828,949,598
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (142,089,785) (124,621,227)
Distributions from net realized capital gains.......................................... (458,909,559) (176,844,671)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (600,999,344) (301,465,898)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [8,998,637 and 8,486,525 shares, respectively]...................... 166,455,957 146,641,074
Capital stock issued in reinvestment of dividends and distributions [34,012,173 and
17,050,711 shares, respectively]...................................................... 600,999,344 301,465,898
Capital stock repurchased [(6,420,074) and (11,612,102) shares, respectively].......... (119,724,926) (195,926,134)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 647,730,375 252,180,838
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 635,717,850 779,664,538
NET ASSETS:
Beginning of year...................................................................... 4,261,204,837 3,481,540,299
------------------ -------------------
End of year............................................................................ $ 4,896,922,687 $ 4,261,204,837
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
A7
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
HIGH YIELD BOND PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$415,325,778)............................ $ 426,625,805
Interest and dividends receivable.......... 7,497,949
Receivable for investments sold............ 1,000,000
--------------
Total Assets............................. 435,123,754
--------------
LIABILITIES
Payable for investments purchased.......... 1,250,766
Payable to investment adviser.............. 584,614
Accrued expenses and other liabilities..... 421,499
--------------
Total Liabilities........................ 2,256,879
--------------
NET ASSETS................................... $ 432,866,875
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 550,197
Paid-in capital in excess of par......... 442,651,885
--------------
443,202,082
Accumulated net realized losses on
investments.............................. (21,635,234)
Net unrealized appreciation on
investments.............................. 11,300,027
--------------
Net assets, December 31, 1996.............. $ 432,866,875
--------------
--------------
Net asset value and redemption price per
share of 55,019,693 outstanding shares of
common stock (authorized 100,000,000
shares).................................. $ 7.87
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C>
INVESTMENT INCOME
Interest................................... $ 41,382,142
Dividends.................................. 574,685
---------------
41,956,827
---------------
EXPENSES
Investment advisory fee.................... 2,192,765
Accounting fees............................ 166,000
Shareholders' reports...................... 141,000
Custodian expense.......................... 61,200
Audit fees................................. 6,800
Directors' fees............................ 2,000
Legal fees................................. 300
Miscellaneous expenses..................... 53
---------------
Total expenses........................... 2,570,118
Less: custodian fee credit................. (38,238)
---------------
Net expenses............................. 2,531,880
---------------
NET INVESTMENT INCOME........................ 39,424,947
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized loss on investments........... (1,288,395)
Net change in unrealized appreciation on
investments.............................. 4,580,936
---------------
NET GAIN ON INVESTMENTS...................... 3,292,541
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 42,717,488
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 39,424,947 $ 34,801,907
Net realized loss on investments....................................................... (1,288,395) (14,399,977)
Net change in unrealized appreciation on investments................................... 4,580,936 33,692,744
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 42,717,488 54,094,674
------------------ -------------------
DIVIDENDS:
Dividends from net investment income................................................... (39,126,995) (36,032,307)
Dividends in excess of net investment income........................................... (495,859) --
------------------ -------------------
TOTAL DIVIDENDS........................................................................ (39,622,854) (36,032,307)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [5,685,336 and 4,596,182 shares, respectively]...................... 45,754,000 36,443,000
Capital stock issued in reinvestment of dividends [5,088,084 and 4,650,470 shares,
respectively]......................................................................... 39,622,854 36,032,307
Capital stock repurchased [(2,919,156) and (3,656,896) shares, respectively]........... (23,514,000) (28,853,000)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 61,862,854 43,622,307
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 64,957,488 61,684,674
NET ASSETS:
Beginning of year...................................................................... 367,909,387 306,224,713
------------------ -------------------
End of year............................................................................ $ 432,866,875 $ 367,909,387
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
A8
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
STOCK INDEX PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$1,054,471,251).......................... $1,587,648,210
Cash....................................... 1,473
Interest and dividends receivable.......... 2,655,364
Receivable for investments sold............ 1,824,157
--------------
Total Assets............................. 1,592,129,204
--------------
LIABILITIES
Payable for investments purchased.......... 8,163,338
Payable to investment adviser.............. 1,337,596
Due to broker -- variation margin.......... 937,100
Accrued expenses........................... 259,878
Payable for capital stock repurchased...... 50,985
--------------
Total Liabilities........................ 10,748,897
--------------
NET ASSETS................................... $1,581,380,307
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 665,994
Paid-in capital in excess of par......... 1,047,578,597
--------------
1,048,244,591
Distributions in excess of net realized
gains on investments..................... (757,443)
Net unrealized appreciation on
investments.............................. 533,893,159
--------------
Net assets, December 31, 1996.............. $1,581,380,307
--------------
--------------
Net asset value and redemption price per
share of 66,599,412 outstanding shares of
common stock (authorized 100,000,000
shares).................................. $ 23.74
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C>
INVESTMENT INCOME
Dividends (net of $136,635 foreign
withholding tax)......................... $ 27,163,285
Interest................................... 2,879,860
---------------
30,043,145
---------------
EXPENSES
Investment advisory fee.................... 4,488,042
Shareholders' reports...................... 445,000
Accounting fees............................ 73,000
Custodian expense.......................... 43,000
Audit fees................................. 21,700
Directors' fees............................ 2,000
Legal fees................................. 900
Miscellaneous expenses..................... 48
---------------
5,073,690
---------------
NET INVESTMENT INCOME........................ 24,969,455
---------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on:
Investments.............................. 6,152,350
Futures.................................. 6,312,835
---------------
12,465,185
---------------
Net change in unrealized appreciation on:
Investments.............................. 225,458,987
Futures.................................. 1,063,850
---------------
226,522,837
---------------
NET GAIN ON INVESTMENTS...................... 238,988,022
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 263,957,477
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 24,969,455 $ 18,865,378
Net realized gain on investments....................................................... 12,465,185 12,159,728
Net change in unrealized gain on investments........................................... 226,522,837 225,882,882
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 263,957,477 256,907,988
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (25,100,782) (18,734,051)
Distributions from net realized capital gains.......................................... (17,273,757) (7,293,493)
Distributions in excess of net realized capital gains.................................. (196,333) --
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (42,570,872) (26,027,544)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [14,156,009 and 7,147,197 shares, respectively]..................... 310,087,550 130,752,103
Capital stock issued in reinvestment of dividends and distributions [1,875,670 and
1,331,092 shares, respectively]....................................................... 42,570,872 26,027,544
Capital stock repurchased [(1,109,676) and (1,230,332) shares, respectively]........... (23,942,788) (20,916,230)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 328,715,634 135,863,417
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 550,102,239 366,743,861
NET ASSETS:
Beginning of year...................................................................... 1,031,278,068 664,534,207
------------------ -------------------
End of year............................................................................ $ 1,581,380,307 $ 1,031,278,068
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
A9
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
EQUITY INCOME PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$1,104,105,583).......................... $1,352,232,781
Receivable for investments sold............ 7,458,659
Interest and dividends receivable.......... 6,009,058
Other assets............................... 6,336
--------------
Total Assets............................. 1,365,706,834
--------------
LIABILITIES
Payable to investment adviser.............. 1,320,276
Bank overdraft............................. 591,012
Accrued expenses........................... 233,969
Payable for investments purchased.......... 86,962
--------------
Total Liabilities........................ 2,232,219
--------------
NET ASSETS................................... $1,363,474,615
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 736,622
Paid-in capital in excess of par......... 1,108,759,148
--------------
1,109,495,770
Undistributed net investment income........ 135,860
Accumulated net realized gains on
investments.............................. 5,715,787
Net unrealized appreciation on
investments.............................. 248,127,198
--------------
Net assets, December 31, 1996.............. $1,363,474,615
--------------
--------------
Net asset value and redemption price per
share of 73,662,222 outstanding shares of
common stock (authorized 100,000,000
shares).................................. $ 18.51
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C>
INVESTMENT INCOME
Dividends (net of $421,846 foreign
withholding tax)......................... $ 41,128,940
Interest................................... 5,218,900
---------------
46,347,840
---------------
EXPENSES
Investment advisory fee.................... 4,863,078
Shareholders' reports...................... 472,000
Accounting fees............................ 92,000
Audit fees................................. 20,000
Custodian expense.......................... 10,000
Directors' fees............................ 2,000
Legal fees................................. 800
Miscellaneous expenses..................... 356
---------------
Total expenses........................... 5,460,234
Less: custodian fee credit................. (1,112)
---------------
Net expenses............................. 5,459,122
---------------
NET INVESTMENT INCOME........................ 40,888,718
---------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on investments........... 35,305,154
Net change in unrealized appreciation on
investments.............................. 167,448,548
---------------
NET GAIN ON INVESTMENTS...................... 202,753,702
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 243,642,420
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 40,888,718 $ 39,916,318
Net realized gain on investments....................................................... 35,305,154 61,266,793
Net change in unrealized appreciation on investments................................... 167,448,548 90,522,832
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 243,642,420 191,705,943
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (49,702,706) (38,782,405)
Distributions from net realized capital gains.......................................... (35,958,853) (46,564,566)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (85,661,559) (85,346,971)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [3,768,657 and 4,803,598 shares, respectively]...................... 65,526,000 76,990,000
Capital stock issued in reinvestment of dividends and distributions [4,848,028 and
5,213,794 shares, respectively]....................................................... 85,661,559 85,346,971
Capital stock repurchased [(3,172,167) and (1,152,259) shares, respectively]........... (55,657,000) (18,404,000)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 95,530,559 143,932,971
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 253,511,420 250,291,943
NET ASSETS:
Beginning of year...................................................................... 1,109,963,195 859,671,252
------------------ -------------------
End of year............................................................................ $ 1,363,474,615 $ 1,109,963,195
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
A10
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
EQUITY PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$3,719,947,601).......................... $4,801,952,766
Cash....................................... 12,981
Interest and dividends receivable.......... 12,084,765
Receivable for investments sold............ 6,185,603
--------------
Total Assets............................. 4,820,236,115
--------------
LIABILITIES
Payable to investment adviser.............. 5,284,247
Accrued expenses........................... 815,009
Payable for capital stock repurchased...... 167,783
--------------
Total Liabilities........................ 6,267,039
--------------
NET ASSETS................................... $4,813,969,076
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 1,785,273
Paid-in capital in excess of par......... 3,694,408,950
--------------
3,696,194,223
Undistributed net investment income........ 3,240,354
Accumulated net realized gains on
investments.............................. 32,529,334
Net unrealized appreciation on
investments.............................. 1,082,005,165
--------------
Net assets, December 31, 1996.............. $4,813,969,076
--------------
--------------
Net asset value and redemption price per
share of 178,527,300 outstanding shares
of common stock (authorized 200,000,000
shares).................................. $ 26.96
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C>
INVESTMENT INCOME
Dividends (net of $912,241 foreign
withholding tax)......................... $ 71,930,568
Interest................................... 57,390,582
---------------
129,321,150
---------------
EXPENSES
Investment advisory fee.................... 19,216,733
Shareholders' reports...................... 1,485,000
Custodian expense.......................... 136,400
Accounting fees............................ 93,000
Audit fees................................. 71,800
Legal fees................................. 2,900
Directors' fees............................ 2,000
Miscellaneous expenses..................... 173
---------------
Total expenses........................... 21,008,006
Less: custodian fee credit................. (65,416)
---------------
Net expenses............................. 20,942,590
---------------
NET INVESTMENT INCOME........................ 108,378,560
---------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCIES
Net realized gain (loss) on:
Investments.............................. 344,166,641
Foreign currencies....................... (16,774)
---------------
344,149,867
---------------
Net change in unrealized appreciation on:
Investments.............................. 282,404,303
Foreign currencies....................... 6,569
---------------
282,410,872
---------------
NET GAIN ON INVESTMENTS...................... 626,560,739
---------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.................... $ 734,939,299
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 108,378,560 $ 73,682,361
Net realized gain on investments and foreign currencies................................ 344,149,867 234,571,951
Net change in unrealized appreciation on investments and foreign currencies............ 282,410,872 553,122,748
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 734,939,299 861,377,060
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (107,745,221) (71,456,482)
Distributions from net realized capital gains.......................................... (422,203,368) (132,219,093)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (529,948,589) (203,675,575)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [13,547,538 and 15,687,254 shares, respectively].................... 368,210,773 374,478,697
Capital stock issued in reinvestment of dividends and distributions [20,011,095 and
8,038,373 shares, respectively]....................................................... 529,948,589 203,675,575
Capital stock repurchased [(3,776,507) and (1,673,110) shares, respectively]........... (102,985,123) (39,823,647)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 795,174,239 538,330,625
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 1,000,164,949 1,196,032,110
NET ASSETS:
Beginning of year...................................................................... 3,813,804,127 2,617,772,017
------------------ -------------------
End of year............................................................................ $ 4,813,969,076 $ 3,813,804,127
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
A11
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
PRUDENTIAL JENNISON
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$204,769,558)............................ $ 230,427,402
Cash....................................... 397,490
Receivable for investments sold............ 646,413
Interest and dividends receivable.......... 189,641
--------------
Total Assets............................. 231,660,946
--------------
LIABILITIES
Payable for investments purchased.......... 4,759,087
Payable to investment adviser.............. 311,027
Accrued expenses........................... 47,684
--------------
Total Liabilities........................ 5,117,798
--------------
NET ASSETS................................... $ 226,543,148
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 158,165
Paid-in capital in excess of par......... 203,756,863
--------------
203,915,028
Undistributed net investment income........ 62,787
Accumulated net realized losses on
investments.............................. (3,092,511)
Net unrealized appreciation on
investments.............................. 25,657,844
--------------
Net assets, December 31, 1996.............. $ 226,543,148
--------------
--------------
Net asset value and redemption price per
share of 15,816,529 outstanding shares of
common stock (authorized 50,000,000
shares).................................. $ 14.32
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C>
INVESTMENT INCOME
Dividends (net of $22,553 foreign
withholding tax)......................... $ 922,433
Interest................................... 252,927
---------------
1,175,360
---------------
EXPENSES
Investment advisory fee.................... 821,423
Shareholders' reports...................... 40,000
Accounting fees............................ 28,000
Custodian expense.......................... 14,000
Audit fees................................. 2,700
Directors' fees............................ 2,000
Miscellaneous expenses..................... 1,143
Legal fees................................. 100
---------------
Total expenses........................... 909,366
Less: custodian fee credit................. (4,670)
---------------
Net expenses............................. 904,696
---------------
NET INVESTMENT INCOME........................ 270,664
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized loss on investments........... (3,092,511)
Net change in unrealized appreciation on
investments.............................. 21,613,425
---------------
NET GAIN ON INVESTMENTS...................... 18,520,914
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 18,791,578
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
APRIL 25, 1995
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 270,664 $ 42,553
Net realized gain (loss) on investments................................................ (3,092,511) 130,598
Net change in unrealized appreciation on investments................................... 21,613,425 4,044,419
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 18,791,578 4,217,570
------------------ -------------------
DIVIDENDS:
Dividends from net investment income................................................... (373,490) (7,538)
------------------ -------------------
CAPITAL TRANSACTIONS:
Initial capitalization issued to The Prudential [-0- and 990,000 shares,
respectively]......................................................................... -- 9,900,000
Capital stock sold [11,292,685 and 4,215,890 shares, respectively]..................... 151,529,000 51,219,000
Capital stock issued in reinvestment of dividends [27,287 and 667 shares,
respectively]......................................................................... 373,490 7,538
Capital stock repurchased [(531,868) and (188,132) shares, respectively]............... (6,868,000) (2,346,000)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 145,034,490 58,780,538
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 163,452,578 62,990,570
NET ASSETS:
Beginning of period.................................................................... 63,090,570 100,000*
------------------ -------------------
End of period.......................................................................... $ 226,543,148 $ 63,090,570
------------------ -------------------
------------------ -------------------
<CAPTION>
*Prior to April 25, 1995 (commencement of operations), the Portfolio issued 10,000 shares to The Prudential for $100,000.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
A12
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
SMALL CAPITALIZATION STOCK
<TABLE>
<CAPTION>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$136,007,075)............................ $ 151,296,795
Receivable from broker -- variation
margin................................... 215,925
Interest and dividends receivable.......... 87,031
--------------
Total Assets............................. 151,599,751
--------------
LIABILITIES
Payable for investments purchased.......... 3,231,906
Bank overdraft............................. 276,946
Payable to investment adviser.............. 129,958
Accrued expenses........................... 62,618
--------------
Total Liabilities........................ 3,701,428
--------------
NET ASSETS................................... $ 147,898,323
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 107,236
Paid-in capital in excess of par......... 131,907,629
--------------
132,014,865
Accumulated net realized gains on
investments.............................. 636,788
Net unrealized appreciation on
investments.............................. 15,246,670
--------------
Net assets, December 31, 1996.............. $ 147,898,323
--------------
--------------
Net asset value and redemption price per
share of 10,723,586 outstanding shares of
common stock (authorized 50,000,000
shares).................................. $ 13.79
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C>
INVESTMENT INCOME
Dividends (net of $350 foreign withholding
tax)..................................... $ 867,358
Interest................................... 426,763
---------------
1,294,121
---------------
EXPENSES
Investment advisory fee.................... 362,830
Custodian expense.......................... 70,866
Accounting fees............................ 35,000
Shareholders' reports...................... 33,000
Directors' fees............................ 2,000
Audit fees................................. 1,700
Miscellaneous expenses..................... 945
Legal fees................................. 100
---------------
Total expenses........................... 506,441
Less: custodian fee credit................. (866)
---------------
Net expenses............................. 505,575
---------------
NET INVESTMENT INCOME........................ 788,546
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain on:
Investments.............................. 2,466,425
Futures.................................. 377,916
---------------
2,844,341
---------------
Net change in unrealized appreciation on:
Investments.............................. 12,692,785
Futures.................................. (54,275)
---------------
12,638,510
---------------
NET GAIN ON INVESTMENTS...................... 15,482,851
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 16,271,397
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
APRIL 25, 1995
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 788,546 $ 175.519
Net realized gain on investments....................................................... 2,844,340 801,247
Net change in unrealized gain on investments........................................... 12,638,511 2,608,160
------------------ -------------------
NET INCREASE IN NET ASSETS OPERATIONS.................................................. 16,271,397 3,584,926
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (821,179) (142,886)
Distributions from net realized capital gains.......................................... (2,604,153) (404,647)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (3,425,332) (547,533)
------------------ -------------------
CAPITAL TRANSACTIONS:
Initial capitalization issued to The Prudential [-0- and 990,000 shares,
respectively]......................................................................... -- 9,900,000
Capital stock sold [7,144,721 and 3,181,402 shares, respectively]...................... 92,968,000 36,389,000
Capital stock issued in reinvestment of dividends and distributions [259,822 and 46,817
shares, respectively]................................................................. 3,425,332 547,533
Capital stock repurchased [(692,228) and (216,949) shares, respectively]............... (8,808,000) (2,507,000)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 87,585,332 44,329,533
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 100,431,397 47,366,926
NET ASSETS:
Beginning of period.................................................................... 47,466,926 100,000*
------------------ -------------------
End of period.......................................................................... $ 147,898,323 $ 47,466,926
------------------ -------------------
------------------ -------------------
<CAPTION>
*Prior to April 25, 1995 (commencement of operations), the Portfolio issued 10,000 shares to The Prudential for $100,000.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
A13
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
GLOBAL PORTFOLIO
<TABLE>
<CAPTION>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$460,602,835)............................ $ 571,212,501
Foreign currency, at value (cost:
$14,787,117)............................. 14,798,221
Receivable for investments sold............ 4,069,896
Forward currency contracts -- amount
receivable from counterparties........... 692,778
Dividends and interest receivable.......... 483,593
Other assets............................... 320,523
--------------
Total Assets............................. 591,577,512
--------------
LIABILITIES
Payable for investments purchased.......... 9,399,505
Payable to investment adviser.............. 1,044,630
Accrued expenses and other liabilities..... 411,684
Payable for capital stock repurchased...... 91,654
--------------
Total Liabilities........................ 10,947,473
--------------
NET ASSETS................................... $ 580,630,039
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 325,197
Paid-in capital in excess of par......... 467,274,634
--------------
467,599,831
Undistributed net investment income........ 1,317,330
Accumulated net realized gains on
investments.............................. 489,279
Net unrealized appreciation on investments
and foreign currencies................... 111,223,599
--------------
Net assets, December 31, 1996.............. $ 580,630,039
--------------
--------------
Net asset value and redemption price per
share of 32,519,654 outstanding shares of
common stock (authorized 100,000,000
shares).................................. $ 17.85
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C>
INVESTMENT INCOME
Dividends (net of $555,343 foreign
withholding tax)......................... $ 6,536,733
Interest................................... 1,063,491
---------------
7,600,224
---------------
EXPENSES
Investment advisory fee.................... 3,671,568
Custodian expense.......................... 400,000
Shareholders' reports...................... 190,000
Accounting fees............................ 177,000
Audit fees................................. 41,000
Directors' fees............................ 2,000
Legal fees................................. 200
Miscellaneous expenses..................... 8,534
---------------
4,490,302
---------------
NET INVESTMENT INCOME........................ 3,109,922
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain on:
Investments.............................. 15,872,383
Foreign currencies....................... 3,900,113
---------------
19,772,496
---------------
Net change in unrealized appreciation on:
Investments.............................. 67,917,996
Foreign currencies....................... (2,616,550)
---------------
65,301,446
---------------
NET GAIN ON INVESTMENTS AND FOREIGN
CURRENCIES................................... 85,073,942
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 88,183,864
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 3,109,922 $ 1,620,950
Net realized gain on investments and foreign currencies................................ 19,772,496 13,763,168
Net change in unrealized appreciation on investments and foreign currencies............ 65,301,446 39,034,318
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 88,183,864 54,418,436
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (3,109,922) (5,982,859)
Distributions from net realized capital gains.......................................... (19,019,488) (7,583,630)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (22,129,410) (13,566,489)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [7,307,979 and 2,817,622 shares, respectively]...................... 123,508,873 42,294,857
Capital stock issued in reinvestment of dividends and distributions [1,310,966 and
872,571 shares, respectively]......................................................... 22,129,410 13,566,489
Capital stock repurchased [1,820,909 and (2,794,423) shares, respectively]............. (30,587,232) (41,558,737)
Initial capitalization repurchased by The Prudential [(36,088) and (48,679) shares,
respectively]......................................................................... (575,000) (789,000)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 114,476,051 13,513,609
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 180,530,505 54,365,556
NET ASSETS:
Beginning of year...................................................................... 400,099,534 345,733,978
------------------ -------------------
End of year............................................................................ $ 580,630,039 $ 400,099,534
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
A14
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
NATURAL RESOURCES PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$359,799,612)............................ $ 437,988,179
Cash....................................... 8,706
Interest and dividends receivable.......... 692,813
Receivable for investments sold............ 471,770
--------------
Total Assets............................. 439,161,468
--------------
LIABILITIES
Payable to investment adviser.............. 479,571
Payable for investments purchased.......... 200,315
Accrued expenses and other liabilities..... 96,344
--------------
Total Liabilities........................ 776,230
--------------
NET ASSETS................................... $ 438,385,238
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 221,794
Paid-in capital in excess of par......... 348,190,815
--------------
348,412,609
Undistributed net investment income........ 48,572
Accumulated net realized gain on
investments and foreign currencies....... 11,735,510
Net unrealized appreciation on investments
and foreign currencies................... 78,188,547
--------------
Net assets, December 31, 1996.............. $ 438,385,238
--------------
--------------
Net asset value and redemption price per
share (22,179,414 shares of common stock
outstanding 100,000,000 shares
authorized).............................. $ 19.77
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C>
INVESTMENT INCOME
Dividends (net of $326,414 foreign
withholding tax)......................... $ 3,873,474
Interest................................... 830,445
---------------
4,703,919
---------------
EXPENSES
Investment advisory fee.................... 1,662,931
Shareholders' reports...................... 140,000
Accounting fees............................ 84,000
Custodian expense.......................... 28,900
Audit fees................................. 6,400
Directors' fees............................ 2,000
Legal fees................................. 300
Miscellaneous expenses..................... 168
---------------
Total expenses........................... 1,924,699
Less: custodian fee credit................. (5,847)
---------------
Net expenses............................. 1,918,852
---------------
NET INVESTMENT INCOME........................ 2,785,067
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain (loss) on:
Investments.............................. 55,014,870
Options written.......................... 189,896
Foreign currencies....................... (91,558)
---------------
55,113,208
---------------
Net change in unrealized appreciation on:
Investments.............................. 36,084,029
Options written.......................... (31,675)
Foreign currencies....................... (20)
---------------
36,052,334
---------------
NET GAIN ON INVESTMENTS AND FOREIGN
CURRENCIES................................... 91,165,542
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 93,950,609
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 2,785,067 $ 3,291,987
Net realized gain on investments and foreign currencies................................ 55,113,208 19,734,447
Net change in unrealized appreciation on investments and foreign currencies............ 36,052,334 39,062,266
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 93,950,609 62,088,700
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (2,609,058) (3,370,234)
Distributions from net realized capital gains.......................................... (50,936,196) (13,348,694)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (53,545,254) (16,718,928)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [2,914,136 and 1,205,152 shares, respectively]...................... 60,203,000 19,186,000
Capital stock issued in reinvestment of dividends and distributions [2,739,322 and
981,450 shares, respectively]......................................................... 53,545,254 16,718,928
Capital stock repurchased [448,045 and (948,328) shares, respectively]................. (8,940,000) (15,377,000)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 104,808,254 20,527,928
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 145,213,609 65,897,700
NET ASSETS:
Beginning of year...................................................................... 293,171,629 227,273,929
------------------ -------------------
End of year............................................................................ $ 438,385,238 $ 293,171,629
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
A15
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
SCHEDULE OF INVESTMENTS
MONEY MARKET PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) (NOTE 2)
------------- --------------
<S> <C> <C>
COMMERCIAL PAPER -- 52.9%
ABN-Amro Bank North America,
5.300%, 02/28/97.............................. $ 2,000 $ 1,983,217
American Brands, Inc.,
5.320%, 01/14/97.............................. 3,900 3,893,084
5.340%, 02/11/97-03/12/97..................... 2,000 1,983,832
6.000%, 01/22/97.............................. 1,000 996,667
American Express Credit Corp.,
5.300%, 02/28/97.............................. 14,482 14,360,472
Aristar, Inc.,
5.410%, 03/14/97.............................. 2,000 1,978,661
5.590%, 02/28/97.............................. 4,500 4,460,171
Avco Financial Services Inc,
5.600%, 03/06/97.............................. 5,000 4,951,000
Avco Financial Services Inc.,
5.440%, 02/28/97.............................. 6,000 5,948,320
Barton Capital Corp.,
5.360%, 01/15/97.............................. 1,300 1,297,484
5.370%, 01/10/97.............................. 13,000 12,984,487
5.400%, 02/21/97.............................. 2,000 1,985,000
5.600%, 02/28/97.............................. 1,000 991,133
BHF Finance, Inc.,
5.310%, 01/30/97.............................. 7,000 6,971,090
Bradford & Bingley Building Society,
5.350%, 01/15/97.............................. 5,000 4,990,340
Caterpillar Financial Services Corp.,
5.350%, 05/16/97-06/16/97..................... 5,000 4,886,610
Ciba-Geigy Corp.,
5.750%, 02/06/97.............................. 1,000 994,410
CIT Group Holdings, Inc.,
5.350%, 03/31/97.............................. 4,000 3,947,689
Coca Cola Enterprises, Inc.,
5.340%, 02/03/97.............................. 4,000 3,981,013
Colonial Pipeline Co.,
5.750%, 01/27/97.............................. 6,100 6,075,642
Countrywide Home Loan,
6.050%, 01/21/97.............................. 2,000 1,993,614
6.200%, 01/15/97.............................. 13,000 12,970,894
6.350%, 01/15/97-01/21/97..................... 18,000 17,956,603
CXC, Inc.,
7.000%, 01/02/97.............................. 21,862 21,862,000
Engelhard Corp.,
5.580%, 02/24/97.............................. 4,000 3,967,140
Enterprise Funding Corp.,
5.340%, 03/18/97.............................. 5,000 4,944,375
Falcon Asset Securitization Corp.,
5.450%, 01/22/97.............................. 2,975 2,965,992
First Data Corp.,
5.400%, 03/18/97-03/25/97..................... 3,000 2,965,200
5.460%, 03/25/97.............................. 10,000 9,875,633
Ford Motor Credit Co.,
5.350%, 03/03/97.............................. 3,000 2,973,250
General Electric Capital Corp.,
5.440%, 02/25/97.............................. 30,000 29,755,200
General Motors Acceptance Corp.,
5.390%, 03/31/97.............................. 1,000 986,824
General Signal Corp.,
5.800%, 02/06/97.............................. 6,300 6,264,475
5.900%, 02/05/97.............................. 3,500 3,480,497
GTE Corp.,
5.500%, 01/14/97.............................. 1,000 998,167
Heller Financial, Inc.,
5.570%, 01/13/97-01/14/97..................... 2,000 1,996,441
5.800%, 01/21/97.............................. 5,000 4,984,694
Indosuez N. A., Inc.,
5.500%, 02/14/97.............................. 5,000 4,967,153
ITT Hartford Group, Inc.,
5.320%, 02/18/97.............................. 2,000 1,986,109
5.500%, 01/21/97.............................. 2,000 1,994,194
Johnson Controls, Inc.,
5.390%, 01/24/97.............................. 5,000 4,983,531
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) (NOTE 2)
------------- --------------
<S> <C> <C>
Kredietbank NA Financial Corp.,
5.320%, 01/16/97.............................. $ 3,000 $ 2,993,793
Lehman Brothers Holding, Inc.,
6.700%, 01/07/97.............................. 33,000 32,969,292
Merrill Lynch & Co., Inc.,
5.310%, 02/27/97.............................. 8,000 7,933,920
5.330%, 01/24/97.............................. 7,000 6,977,199
5.350%, 01/29/97.............................. 9,000 8,963,887
5.450%, 01/22/97.............................. 1,000 996,972
Mitsubishi International Corp.,
5.450%, 01/15/97.............................. 4,000 3,992,128
5.750%, 02/10/97.............................. 900 894,394
Morgan Stanley Group, Inc.,
5.320%, 01/21/97-01/29/97..................... 12,000 11,956,849
Nationwide Building Society,
5.310%, 02/19/97.............................. 4,000 3,971,680
5.375%, 02/26/97.............................. 1,000 991,788
5.550%, 02/26/97.............................. 5,000 4,957,604
NYNEX Corp.,
5.410%, 02/13/97.............................. 2,000 1,987,377
6.800%, 01/06/97.............................. 4,760 4,756,404
PNC Funding Corp.,
5.360%, 01/22/97.............................. 1,000 997,022
Preferred Receivables Funding Corp.,
5.320%, 02/06/97.............................. 3,000 2,984,483
5.370%, 03/20/97.............................. 1,000 988,514
5.450%, 01/14/97.............................. 1,000 998,183
5.600%, 02/25/97.............................. 5,000 4,958,000
Sears Roebuck Acceptance Corp.,
5.470%, 02/26/97.............................. 5,000 4,958,215
Triple-A One Funding Corp.,
5.400%, 02/14/97.............................. 2,000 1,987,100
5.500%, 01/24/97.............................. 1,208 1,203,940
Union Pacific Resources,
6.000%, 01/27/97.............................. 1,855 1,847,271
WCP Funding, Inc.,
5.400%, 02/20/97.............................. 4,000 3,970,600
--------------
353,768,923
--------------
OTHER CORPORATE OBLIGATIONS -- 22.5%
Abbey National Treasury Services, PLC,
5.500%, 11/26/97.............................. 10,000 9,990,924
Associates Corp. of North America,
9.700%, 05/01/97.............................. 3,450 3,491,185
Beneficial Corp.,
5.57%, 08/05/97 (a)........................... 9,000 9,003,377
7.250%, 06/09/97.............................. 750 753,620
9.050%, 03/14/97.............................. 1,100 1,106,958
Capital Equipment Receivable Trust,
5.600%, 10/15/97.............................. 9,268 9,268,366
Ford Motor Credit Co.,
5.625%, 03/03/97.............................. 1,000 999,287
6.300%, 04/23/97.............................. 1,000 1,000,733
6.450%, 07/21/97.............................. 500 500,812
General Electric Capital Corp.,
8.300%, 06/02/97.............................. 2,005 2,023,440
General Motors Acceptance Corp.,
5.520%, 02/02/97 (a).......................... 11,000 10,999,035
5.520%, 02/21/97 (a).......................... 1,000 999,963
5.650%, 06/02/97 (a).......................... 11,000 11,005,887
5.750%, 06/09/97.............................. 1,000 1,000,599
6.750%, 07/10/97.............................. 5,000 5,028,923
7.875%, 02/27/97-02/28/97..................... 2,250 2,259,052
Goldman Sachs Group, L.P.,
5.805%, 12/15/97 (a).......................... 30,000 30,000,000
International Lease Finance Corp.,
5.938%, 10/15/97 (a).......................... 3,000 3,009,300
</TABLE>
B1
<PAGE>
MONEY MARKET PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) (NOTE 2)
------------- --------------
<S> <C> <C>
John Deere Capital Corp.,
7.200%, 05/15/97.............................. $ 250 $ 250,977
Merrill Lynch & Co., Inc.,
5.533%, 10/01/97 (a).......................... 5,000 4,998,912
Morgan Stanley Group, Inc.,
5.625%, 12/15/97 (a).......................... 4,000 4,000,000
5.688%, 01/15/98 (a).......................... 5,000 5,000,000
6.070%, 01/15/97 (a).......................... 2,000 2,000,000
Nationsbank Auto Owner,
5.776%, 08/15/97.............................. 1,681 1,680,604
Short Term Repack Asset,
6.000%, 12/15/97 (a).......................... 9,000 8,998,169
SMM Trust 1995-Q,
5.605%, 01/08/97 (a).......................... 19,000 18,999,971
Transamerica Financial Corp.,
6.750%, 08/15/97.............................. 1,750 1,756,207
--------------
150,126,301
--------------
CERTIFICATES OF DEPOSIT-DOMESTIC -- 2.4%
Chase Manhattan Bank (USA),
5.750%, 03/24/97.............................. 15,000 15,000,000
Mellon Bank, N.A.,
5.550%, 02/18/97.............................. 1,000 1,000,080
--------------
16,000,080
--------------
CERTIFICATES OF DEPOSIT-EURODOLLAR -- 5.2%
Abbey National Treasury Services, PLC,
5.410%, 01/30/97.............................. 5,000 5,000,093
Banco Bilbao Vizcaya S.A.,
5.410%, 03/05/97.............................. 1,000 1,000,017
Bank of Nova Scotia,
6.050%, 06/25/97.............................. 2,000 2,004,196
Bank of Scotland,
5.430%, 06/05/97.............................. 15,000 14,999,802
Bayerische Hypotheken,
5.740%, 05/27/97.............................. 11,000 11,004,501
Creditanstalt Bankverein,
5.430%, 04/07/97.............................. 1,000 1,000,017
--------------
35,008,626
--------------
CERTIFICATES OF DEPOSIT-YANKEE -- 10.6%
Abbey National, PLC,
5.420%, 05/27/97.............................. 10,000 9,998,273
Bank of Montreal,
5.450%, 01/07/97.............................. 5,000 5,000,000
Banque Nationale De Paris,
5.440%, 03/17/97.............................. 2,000 1,999,959
5.580%, 04/02/97.............................. 30,000 29,991,911
Landesbank Hessen-Thuringen,
6.050%, 06/13/97.............................. 3,000 3,006,041
Midland Bank, PLC,
5.500%, 04/10/97.............................. 1,000 999,920
National Bank of Canada,
5.438%, 03/10/97.............................. 5,000 5,000,000
Societe Generale Bank,
5.600%, 04/03/97.............................. 15,000 15,003,658
--------------
70,999,762
--------------
BANK NOTES -- 3.7%
American Express Centurian Bank,
5.532%, 10/09/97 (a).......................... 1,000 999,923
5.575%, 01/14/97 (a).......................... 2,000 1,999,932
5.575%, 04/15/97 (a).......................... 2,000 1,999,887
5.595%, 03/19/97 (a).......................... 3,000 2,999,879
5.595%, 12/22/97 (a).......................... 1,000 999,904
FCC National Bank,
5.770%, 04/15/97.............................. 4,000 3,999,351
First Bank N.A., Minneapolis,
5.518%, 10/24/97 (a).......................... 2,000 1,998,881
First National Bank of Seattle,
5.800%, 05/09/97.............................. 5,000 4,999,001
Morgan Guaranty Trust Co.,
5.375%, 11/14/97 (a).......................... 4,000 3,997,475
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) (NOTE 2)
------------- --------------
<S> <C> <C>
PNC Bank N.A.,
5.564%, 02/20/97 (a).......................... $ 1,000 $ 999,897
--------------
24,994,130
--------------
U. S. GOVERNMENT & AGENCY OBLIGATIONS -- 2.0%
Student Loan Marketing Association,
5.870%, 06/30/97.............................. 13,000 12,996,445
--------------
TOTAL INVESTMENTS -- 99.3%
(amortized cost: $663,894,267 (b))............................. 663,894,267
OTHER ASSETS IN EXCESS OF
LIABILITIES -- 0.7%............................................ 4,873,854
--------------
TOTAL NET ASSETS -- 100%......................................... $ 668,768,121
--------------
--------------
<FN>
The following abbreviations are used in portfolio descriptions:
PLC Public Limited Company (British Corporation)
S.A. Sociedad Anonima (Spanish Corporation) or Societe Anonyme
(French Corporation)
(a) Indicates a variable rate security. The maturity date presented for
these instruments 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.
(b) The cost of securities for federal income tax purposes is
substantially the same as for financial reporting purposes.
</FN>
</TABLE>
<TABLE>
<S> <C>
The industry classification of portfolio holdings and other
assets in excess of liabilities shown as a percentage of net
assets as of December 31, 1996 was as follows:
Commercial Banks.................................... 31.2%
Security Brokers & Dealers.......................... 17.5
Asset Backed Securities............................. 12.7
Short-Term Business Credit.......................... 11.2
Mortgage Banks...................................... 4.9
Finance Lessors..................................... 4.8
Personal Credit Institutions........................ 4.7
Computer Rental & Leasing........................... 1.9
Federal Credit Agencies............................. 1.9
Electric Industry Apparatus......................... 1.5
Telephone & Communications.......................... 1.2
Tobacco............................................. 1.0
Gas Pipelines....................................... 0.9
Commodity Trading................................... 0.7
Regulating Controls................................. 0.7
Beverages........................................... 0.6
Fire & Marine Casualty Insurance.................... 0.6
Specialty Chemical.................................. 0.6
Equipment & Rental & Leasing........................ 0.4
Crude Petroleum & Natural Gas....................... 0.3
---------
99.3
Other assets in excess of liabilities............... 0.7
---------
100.0%
---------
---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B2
<PAGE>
DIVERSIFIED BOND PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 99.0%
<S> <C> <C> <C>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) VALUE
LONG-TERM BONDS -- 98.7% (NOTE 2)
<CAPTION>
------------ --------- --------------
<S> <C> <C> <C>
DOMESTIC CORPORATE BONDS -- 62.8%
AGRICULTURAL EQUIPMENT -- 0.7%
Agco Corp.,
8.50%, 03/15/06............................... Ba3 $ 5,000 $ 5,059,000
--------------
AIRLINES -- 5.2%
Boeing Co.,
8.75%, 08/15/21............................... A1 6,250 7,356,125
Delta Air Lines, Inc.,
7.79%, 12/01/98............................... Baa3 1,000 1,020,710
8.38%, 06/12/98............................... Baa3 2,000 2,054,340
9.875%, 05/15/00.............................. Baa3 6,000 6,499,320
United Air Lines, Inc.,
9.75%, 08/15/21............................... Baa3 4,500 5,333,580
10.67%, 05/01/04.............................. Baa3 7,000 8,278,830
11.21%, 05/01/14.............................. Baa3 5,000 6,555,850
--------------
37,098,755
--------------
CABLE & PAY TELEVISION SYSTEMS -- 1.5%
Continental Cablevision, Inc.,
8.30%, 05/15/06............................... Baa2 3,500 3,728,445
Tele-Communications, Inc.,
10.125%, 04/15/22............................. Ba1 6,300 6,917,526
--------------
10,645,971
--------------
COMPUTERS -- 0.5%
Digital Equipment Corp.,
7.125%, 10/15/02.............................. Ba1 4,000 3,817,000
--------------
ENTERTAINMENT -- 0.7%
Royal Caribbean Cruises Ltd.,
11.375%, 05/15/02............................. Ba2 5,000 5,325,000
--------------
FINANCIAL SERVICES -- 27.7%
Advanta Mortgage Loan Trust, Series 1994-3
8.49%, 01/25/26............................... Aaa 8,500 8,802,812
Aristar, Inc.,
5.75%, 07/15/98............................... A3 2,000 1,987,160
7.50%, 07/01/99............................... Baa1 2,000 2,050,740
Associates Corp. of North America,
8.375%, 01/15/98.............................. Aa3 500 511,570
Bank of New York,
7.97%, 12/31/26............................... A1 5,000 5,049,700
BankAmerica Corp.,
6.031%, 05/17/99.............................. A 10,000 10,075,000
Chase Manhattan Corp.,
8.00%, 06/15/99............................... A2 2,000 2,071,620
Chemical Bank,
6.625%, 08/15/05.............................. A1 2,000 1,942,880
Chrysler Financial Corp.,
9.50%, 12/15/99............................... A3 5,000 5,406,550
Conseco, Inc.,
8.70%, 11/15/26............................... BBB 10,500 10,590,510
CoreStates Financial Corp.,
8.00%, 12/15/26............................... A1 10,000 10,000,600
Enterprise Rent-A-Car USA Finance Co.,
7.00%, 06/15/00............................... Baa3 9,000 9,108,900
7.875%, 03/15/98.............................. Baa2 5,000 5,111,250
8.75%, 12/15/99............................... Baa2 3,000 3,177,300
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
First Tennessee National Corp., B.A.,
8.07%, 01/06/27............................... A3 $ 4,500 $ 4,474,800
First Union Corp.,
7.85%, 01/01/27............................... A1 10,000 9,908,750
Ford Motor Credit Co.,
5.75%, 01/25/01............................... A1 4,000 3,872,240
6.25%, 02/26/98............................... A1 3,000 3,007,470
General Motors Acceptance Corp.,
8.40%, 10/15/99............................... A3 3,700 3,887,627
Lehman Brothers Holdings, Inc.,
6.84%, 09/25/98............................... Baa1 5,000 5,037,850
Liberty Mutual Insurance Co.,
8.20%, 05/04/07............................... A2 8,250 8,761,005
Mellon Bank Corp.,
7.995%, 01/15/27.............................. A2 10,000 9,875,000
Nationwide CSN Trust,
9.875%, 02/15/25.............................. A1 5,000 5,559,500
Principal Mutual Life Insurance,
7.875%, 03/01/24.............................. Aa3 5,000 4,901,550
Reliastar Financial Corp.,
6.625%, 09/15/03.............................. A3 5,000 4,912,500
Republic Bank of New York Corp.,
7.53%, 12/04/26............................... A1 5,000 4,900,615
Salomon, Inc.,
5.98%, 02/02/98............................... Baa1 10,000 9,995,100
7.00%, 05/15/99............................... Baa1 10,000 10,079,000
7.25%, 05/01/01............................... Baa1 2,250 2,271,285
State Street Capital Corp.,
7.94%, 12/30/26............................... A1 12,000 11,952,000
SunAmerica, Inc.,
6.20%, 10/31/99............................... Baa1 5,000 4,975,000
Union Planters Corp.,
8.20%, 12/15/26............................... BB+ 5,000 4,950,000
Wells Fargo & Co.,
7.96%, 12/15/26............................... A1 10,000 10,100,000
--------------
199,307,884
--------------
FOREST PRODUCTS -- 1.0%
Boise Cascade Corp.,
9.875%, 02/15/01.............................. Baa3 1,000 1,058,790
Westvaco Corp.,
9.75%, 06/15/20............................... A1 5,000 6,269,800
--------------
7,328,590
--------------
HEALTH CARE -- 2.9%
Columbia/HCA Healthcare Corp.,
7.69%, 06/15/25............................... A2 12,000 12,355,680
Tenet Healthcare Corp.,
8.625%, 12/01/03.............................. Ba1 6,500 6,857,500
9.625%, 09/01/02.............................. Ba1 1,500 1,642,500
--------------
20,855,680
--------------
MACHINERY & EQUIPMENT -- 0.4%
Crane Co.,
7.25%, 06/15/99............................... Baa2 3,000 3,028,560
--------------
</TABLE>
B3
<PAGE>
DIVERSIFIED BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
MEDIA -- 7.8%
News America Holdings, Inc.,
7.50%, 03/01/00............................... Baa3 $ 6,000 $ 6,137,160
7.75%, 12/01/45............................... Baa3 7,000 6,518,330
Paramount Communications, Inc.,
7.50%, 01/15/02............................... Ba2 5,000 4,995,850
Time Warner, Inc.,
7.75%, 06/15/05............................... Ba1 9,800 9,858,114
8.18%, 08/15/07............................... Ba1 4,000 4,104,280
8.375%, 07/15/33.............................. Baa3 6,000 6,021,540
Turner Broadcasting System, Inc.,
7.40%, 02/01/04............................... Ba1 13,500 13,374,855
Viacom, Inc.,
7.75%, 06/01/05............................... Ba2 5,000 4,923,350
--------------
55,933,479
--------------
MISCELLANEOUS-CONSUMER GROWTH -- 0.4%
Whitman Corp.,
7.50%, 08/15/01............................... Baa2 3,000 3,075,540
--------------
OIL & GAS -- 2.3%
Occidental Petroleum Corp.,
10.125%, 11/15/01............................. Baa2 5,000 5,695,150
11.125%, 08/01/10............................. Baa2 5,000 6,535,300
Parker & Parsley Petroleum Co.,
8.25%, 08/15/07............................... Baa3 4,000 4,300,600
--------------
16,531,050
--------------
OIL & GAS EQUIPMENT & SERVICES -- 1.1%
B.J. Services Co.,
7.00%, 02/01/06............................... Ba1 5,000 4,859,550
Noble Drilling Corp.,
9.125%, 07/01/06.............................. Ba2 3,000 3,225,000
--------------
8,084,550
--------------
RESTAURANTS -- 1.3%
Darden Restaurants, Inc.,
7.125%, 02/01/16.............................. Baa1 10,000 9,021,700
--------------
RETAIL -- 3.7%
Federated Department Stores, Inc.,
8.125%, 10/15/02.............................. Ba1 9,000 9,225,000
8.50%, 06/15/03............................... Ba1 11,000 11,440,000
Kmart Corp.,
9.80%, 06/15/98............................... Ba3 2,000 2,035,000
Rite Aid Corp.,
6.70%, 12/15/01............................... A3 4,000 3,986,000
--------------
26,686,000
--------------
TELECOMMUNICATIONS -- 2.6%
Impsat Corp.,
12.125%, 07/15/03............................. B2 3,000 3,180,000
MFS Communications Co., Inc., Sr. Disc. Notes,
Zero Coupon (until 01/15/99)
9.375%, 01/15/04.............................. B1 9,000 6,547,500
TCI Communications, Inc.,
6.875%, 02/15/06.............................. Ba1 10,000 9,087,400
--------------
18,814,900
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
UTILITIES -- 3.0%
Arkla, Inc.,
9.32%, 12/18/00............................... Ba3 $ 2,000 $ 2,136,280
El Paso Electric Company,
9.40%, 05/01/11............................... Ba3 4,000 4,240,000
Pennsylvania Power & Light Co.,
9.375%, 07/01/21.............................. A3 1,150 1,288,840
Texas Utilities Electric Co.,
5.875%, 04/01/98.............................. Baa2 4,000 3,991,560
Transco Energy Co.,
9.125%, 05/01/98.............................. Baa2 3,000 3,113,820
9.375%, 08/15/01.............................. Baa2 6,000 6,613,920
--------------
21,384,420
--------------
FOREIGN CORPORATE BONDS -- 8.1%
Australia & New Zealand Banking Group, Ltd.,
(Australia)
6.25%, 02/01/04............................... A1 3,000 2,889,780
Banco de Commercio Exterior de Colombia, SA,
(Colombia)
8.625%, 06/02/00.............................. Baa3 2,000 2,077,500
Banco Ganadero, SA, (Colombia)
9.75%, 08/26/99............................... Baa3 4,100 4,315,250
Canadian Pacific Forest Products Ltd., (Canada)
10.25%, 01/15/03.............................. Baa1 4,000 4,360,000
Compania Sud Americana de Vapores, SA, (Chile)
7.375%, 12/08/03.............................. BBB 3,000 2,955,000
Deutsche Bank, (Germany)
6.70%, 12/13/06............................... Aa1 4,350 4,280,248
Kansallis-Osake Pankki, N.Y., (Finland)
8.65%, 01/01/49............................... A3 5,000 5,220,750
10.00%, 05/01/02.............................. A3 5,000 5,674,500
National Australia Bank, Ltd., (Australia)
9.70%, 10/15/98............................... A1 1,700 1,801,609
National Power Corp., (Philipines)
8.40%, 12/15/16............................... Ba2 4,900 4,875,500
Ontario, Province of Canada, (Canada)
15.75%, 03/15/12.............................. Aa3 3,475 3,756,127
Polysindo Int'l Finance Co., (Netherlands)
11.375%, 06/15/06............................. Ba3 5,000 5,462,500
PT Alatief Freeport Financial Co., (Netherlands)
9.75%, 04/15/01............................... Ba1 5,750 6,286,187
Rogers Cablesystems, Inc., (Canada)
10.00%, 03/15/05.............................. Ba3 4,000 4,260,000
--------------
58,214,951
--------------
</TABLE>
B4
<PAGE>
DIVERSIFIED BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 14.0%
Federal Farm Credit Bank,
8.65%, 10/01/99............................... $ 150 $ 159,258
International Bank for Reconstruction and
Development,
12.375%, 10/15/02............................. 750 956,708
Resolution Funding Corp.,
Zero Coupon, 10/15/15......................... 17,100 4,670,694
8.125%, 10/15/19.............................. 700 791,434
8.625%, 01/15/21.............................. 200 237,562
United States Treasury Bonds,
6.75%, 8/15/26 (b)............................ 940 947,050
11.25%, 02/15/15.............................. 4,000 5,906,880
12.00%, 08/15/13.............................. 20,000 28,609,400
United States Treasury Notes,
5.75%, 08/15/03............................... 10,450 10,136,500
5.875%, 11/30/01.............................. 3,600 3,547,692
6.50%, 10/15/06............................... 13,100 13,171,657
6.625%, 06/30/01.............................. 14,430 14,662,179
7.25%, 02/15/98............................... 5,000 5,082,050
7.75%, 12/31/99............................... 5,750 6,014,155
7.875%, 11/15/04.............................. 3,600 3,928,500
12.50%, 08/15/14.............................. 1,500 2,241,795
--------------
101,063,514
--------------
U.S. GOVERNMENT AGENCY MORTGAGE BACKED SECURITIES -- 4.6%
Federal National Mortgage Association,
Zero Coupon, 07/24/06......................... 9,000 4,748,940
9.00%, 10/01/16-09/01/21...................... 623 663,006
Government National Mortgage Association,
7.50%, 05/20/02-02/15/26...................... 27,222 27,613,035
--------------
33,024,981
--------------
FOREIGN GOVERNMENT BONDS -- 9.2%
Republic of Argentina, (Argentina)
6.625%, 03/31/05.............................. B1 4,900 4,293,625
Republic of Colombia, (Colombia)
8.00%, 06/14/01............................... Baa3 1,600 1,624,000
8.75%, 10/06/99............................... Baa3 3,500 3,657,500
Republic of Philippines, (The Philippines)
8.75%, 10/07/16............................... B1 4,675 4,819,925
Republic of Poland, (Poland)
4.00%, (until 10/27/98)
5.00%, (until 10/27/99)
6.00%, (until 10/27/02)
7.00%, 10/27/14............................... Baa3 16,000 13,540,000
Republic of Venezuela, (Venezuela)
6.50%, 12/18/07 (a)........................... Ba2 3,000 2,640,000
Rio de Janeiro, (Brazil)
10.375%, 07/12/99............................. B1 5,000 5,137,500
United Mexican States, (Mexico)
7.562%, 08/06/01 (a).......................... Baa3 25,000 25,058,750
11.50%, 05/15/26.............................. Ba2 5,000 5,287,500
--------------
66,058,800
--------------
TOTAL LONG-TERM BONDS
(cost $696,315,713)...................................................... 710,360,325
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S
RATING VALUE
PREFERRED STOCK -- 0.3% (UNAUDITED) SHARES (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
GAS PIPELINES -- 0.3%
TransCanada Pipelines, Ltd.
(cost $2,000,000 )............................ 80,000 $ 2,080,000
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $698,315,713)...................................................... 712,440,325
--------------
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS -- 4.3% (000)
---------
CERTIFICATES OF DEPOSIT -- DOMESTIC -- 0.7%
Advanta National Bank, C.D.,
6.26%, 09/01/97............................... Baa $ 5,000 5,005,000
--------------
OTHER CORPORATE OBLIGATIONS -- 1.4%
Citicorp,
8.50%, 02/24/97............................... A1 3,000 3,010,410
General Motors Acceptance Corp.,
7.50%, 11/04/97............................... A3 2,000 2,027,180
Mellon Bank Corp.,
6.50%, 12/01/97............................... A2 2,000 2,007,580
Potomac Capital Investment Corp.,
6.19%, 04/28/97............................... A3 3,500 3,535,000
--------------
10,580,170
--------------
REPURCHASE AGREEMENT -- 2.2%
Joint Repurchase Agreement Account,
6.613%, 01/02/97 (Note 5)..................... 15,414 15,414,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $30,945,800)....................................................... 30,999,170
--------------
TOTAL INVESTMENTS BEFORE SHORT SALE -- 103.3%
(cost $729,261,513; Note 6).............................................. 743,439,495
--------------
INVESTMENT SOLD SHORT -- (3.6%)
United States Treasury Bond,
6.75%, 8/15/26
(proceeds $26,546,678; Note 2)................ 25,450 (26,310,748)
--------------
TOTAL INVESTMENTS, NET OF SHORT SALES -- 99.7%...................
717,128,747
OTHER ASSETS IN EXCESS OF
LIABILITIES -- 0.3%............................................ 3,087,834
--------------
TOTAL NET ASSETS -- 100.0%....................................... $ 720,216,581
--------------
--------------
<FN>
The following abbreviations are used in portfolio descriptions:
B.A. Bankers'
Acceptances
C.D. Certificates of Deposit
SA Sociedad Anonima (Spanish Corporation) or Societe
Anonyme (French Corporation)
(a) Indicates
a
variable
rate
security.
(b) Deposited with the custodian to cover an open short sale
transaction.
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B5
<PAGE>
GOVERNMENT INCOME PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
LONG-TERM INVESTMENTS -- 97.6%
PRINCIPAL
AMOUNT VALUE
(000) (NOTE 2)
LONG-TERM BONDS
<CAPTION>
------------- --------------
<S> <C> <C>
ASSET BACKED SECURITIES -- 3.2%
Chase Manhattan Credit Card Trust,
5.735%, 08/15/01, Series 1995-2 (a)........... $ 12,500 $ 12,507,750
Equicon Home Equity Loan Trust,
7.850%, 03/18/14, Series 1994-2............... 2,693 2,751,498
--------------
15,259,248
--------------
COLLATERALIZED MORTGAGE OBLIGATION -- 2.1%
Main Place Funding,
5.877%, 07/17/98 (a).......................... 10,000 10,018,750
--------------
FOREIGN -- 4.6%
United Mexican States,
7.563%, 08/06/01.............................. 22,000 22,051,700
--------------
MORTGAGE PASS-THROUGHS -- 26.3%
Federal Home Loan Mortgage Corp.,
7.387%, 06/01/25 (a).......................... 11,981 12,310,286
Federal National Mortgage Association,
8.000%, 03/01/22-05/01/26..................... 25,403 25,909,961
8.500%, 05/01/24-04/01/25..................... 30,853 32,075,358
9.000%, 02/01/25-04/01/25..................... 13,122 13,859,399
Government National Mortgage Association,
7.500%, 12/15/25-02/15/26..................... 19,696 19,729,369
8.000%, 09/15/23-10/15/25..................... 22,291 22,794,555
--------------
126,678,928
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 61.4%
Israel AID,
Zero Coupon, 03/15/06-08/15/09................ 38,272 18,501,606
Resolution Funding Corp.,
Zero Coupon, 07/15/16......................... 30,000 7,764,600
8.125%, 10/15/19.............................. 4,200 4,748,604
Small Business Administration Participation
Certificate,
7.200%, 10/01/16.............................. 20,000 20,097,600
Student Loan Marketing Association,
5.880%, 02/06/01.............................. 19,290 18,861,955
United States Treasury Bonds,
8.125%, 08/15/19.............................. 35,000 40,485,200
12.000%, 08/15/13............................. 24,100 34,474,327
United States Treasury Notes,
6.250%, 04/30/01.............................. 15,000 15,032,850
6.250%, 10/31/01.............................. 14,600 14,613,724
6.500%, 05/31/01.............................. 5,000 5,054,700
6.500%, 08/31/01.............................. 25,000 25,273,500
6.500%, 11/15/26.............................. 5,000 4,907,050
6.875%, 03/31/00.............................. 20,000 20,450,000
7.750%, 12/31/99.............................. 55,000 57,526,700
10.625%, 08/15/15............................. 6,000 8,483,460
--------------
296,275,876
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $467,932,592)............................................ 470,284,502
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENT -- 1.3% (000) (NOTE 2)
------------- --------------
<S> <C> <C>
REPURCHASE AGREEMENT
Joint Repurchase Agreement Account,
6.613%, 01/02/97 (cost $6,517,000) (Note 5)... $ 6,517 $ 6,517,000
--------------
TOTAL INVESTMENTS -- 98.9%
(cost $474,449,592; Note 6).................................... 476,801,502
OTHER ASSETS IN EXCESS OF
LIABILITIES -- 1.1%............................................ 5,233,938
--------------
TOTAL NET ASSETS -- 100.0%....................................... $ 482,035,440
--------------
--------------
(a) The interest rate shown reflects the current rate of
variable rate instruments.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B6
<PAGE>
ZERO COUPON BOND 2000 PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 99.5%
PRINCIPAL
<S> <C> <C>
AMOUNT VALUE
(000) (NOTE 2)
LONG-TERM BONDS
<CAPTION>
------------- --------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS
Federal National Mortgage Association,
Zero Coupon, 01/24/02......................... $ 7,777 $ 5,661,423
Zero Coupon, 07/24/02......................... 5,527 3,887,028
United States Treasury Bonds,
Zero Coupon, 02/15/00......................... 5,000 4,145,350
Zero Coupon, 11/15/00......................... 21,630 17,106,302
Zero Coupon, 02/15/02......................... 18,750 13,706,250
--------------
44,506,353
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $42,297,668)............................................. 44,506,353
--------------
SHORT-TERM INVESTMENT -- 0.6%
REPURCHASE AGREEMENT
Joint Repurchase Agreement Account,
6.613%, 01/02/97 (cost $296,000) (Note 5)..... 296 296,000
--------------
TOTAL INVESTMENTS -- 100.1%
(cost $42,593,668; Note 6)..................................... 44,802,353
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (0.1%)............................................... (63,183)
--------------
TOTAL NET ASSETS -- 100.0%....................................... $ 44,739,170
--------------
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B7
<PAGE>
ZERO COUPON BOND 2005 PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
LONG-TERM INVESTMENTS -- 99.9%
PRINCIPAL
AMOUNT VALUE
(000) (NOTE 2)
LONG-TERM BONDS
<CAPTION>
------------- --------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 99.9%
Federal National Mortgage Association,
Zero Coupon, 07/24/05......................... $ 5,100 $ 2,906,184
Financing Corp.,
Zero Coupon, 03/07/04......................... 3,350 2,102,393
Resolution Funding Corp.,
Zero Coupon, 07/15/07......................... 5,000 2,497,100
United States Treasury Bonds,
Zero Coupon, 11/15/04......................... 11,000 6,662,920
Zero Coupon, 11/15/05......................... 3,000 1,699,860
Zero Coupon, 02/15/06......................... 7,000 3,895,850
Zero Coupon, 05/15/06......................... 11,000 6,019,860
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $23,876,529; Note 6)..................................... 25,784,167
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.1%....................
30,563
--------------
TOTAL NET ASSETS -- 100.0%....................................... $ 25,814,730
--------------
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B8
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 91.2%
VALUE
COMMON STOCKS -- 36.7% SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AEROSPACE/DEFENSE -- 0.6%
GenCorp, Inc.................................... 629,100 $ 11,402,438
Litton Industries, Inc. (a)..................... 241,400 11,496,675
UNC, Inc. (a)................................... 278,800 3,345,600
--------------
26,244,713
--------------
AIRLINES -- 1.2%
AMR Corp. (a)................................... 378,700 33,372,937
USAir Group, Inc. (a)........................... 776,100 18,141,337
--------------
51,514,274
--------------
AUTOS - CARS & TRUCKS -- 0.5%
A.O. Smith Corp................................. 450,000 13,443,750
Ford Motor Co................................... 295,900 9,431,812
--------------
22,875,562
--------------
AUTOMOBILES & TRUCKS -- 1.8%
Chrysler Corp................................... 929,500 30,673,500
General Motors Corp............................. 464,700 25,907,025
Goodyear Tire & Rubber Co....................... 250,800 12,884,850
Mascotech, Inc.................................. 604,200 9,893,775
--------------
79,359,150
--------------
CHEMICALS -- 0.1%
Millenium Chemicals, Inc. (a)................... 188,227 3,341,029
--------------
CHEMICALS - SPECIALTY -- 1.0%
Ferro Corp...................................... 609,100 17,283,212
M.A. Hanna Co................................... 689,950 15,092,656
OM Group, Inc................................... 435,400 11,755,800
--------------
44,131,668
--------------
COMMERCIAL SERVICES -- 0.3%
BW/IP, Inc. (Class 'A' Stock)................... 365,600 6,032,400
IMO Industries, Inc. (a)........................ 575,600 1,798,750
Parker-Hannifin Corp............................ 197,450 7,651,187
--------------
15,482,337
--------------
COMPUTER HARDWARE -- 1.4%
Amdahl Corp. (a)................................ 836,600 10,143,775
Digital Equipment Corp. (a)..................... 293,500 10,676,063
International Business Machines Corp............ 278,900 42,113,900
--------------
62,933,738
--------------
CONSTRUCTION -- 0.2%
McDermott International, Inc.................... 481,900 10,601,800
--------------
CONSUMER SERVICES -- 0.4%
ADT Ltd. (a).................................... 576,300 13,182,863
SPS Transaction Services, Inc. (a).............. 185,900 2,834,975
--------------
16,017,838
--------------
CONTAINERS & PACKAGING -- 0.2%
Sealed Air Corp. (a)............................ 183,600 7,642,350
--------------
DIVERSIFIED CONSUMER PRODUCTS -- 1.0%
RJR Nabisco Holdings Corp....................... 791,400 26,907,600
Whitman Corp.................................... 849,000 19,420,875
--------------
46,328,475
--------------
DRUGS AND MEDICAL SUPPLIES -- 0.3%
United States Surgical Corp..................... 339,700 13,375,688
--------------
ELECTRICAL EQUIPMENT -- 1.0%
Belden, Inc..................................... 457,600 16,931,200
Westinghouse Electric Corp...................... 1,487,300 29,560,087
--------------
46,491,287
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
ELECTRONICS -- 1.3%
National Semiconductor Corp. (a)................ 964,000 $ 23,497,500
Texas Instruments, Inc.......................... 557,700 35,553,375
--------------
59,050,875
--------------
ENGINEERING & CONSTRUCTION -- 0.2%
Giant Cement Holdings, Inc. (a)................. 400,400 6,456,450
--------------
FINANCIAL SERVICES -- 2.9%
Alex Brown, Inc................................. 278,100 20,162,250
Lehman Brothers Holdings, Inc................... 1,597,400 50,118,425
Merrill Lynch & Co., Inc........................ 185,900 15,150,850
Morgan Stanley Group, Inc....................... 209,200 11,950,550
Salomon, Inc.................................... 650,700 30,664,237
--------------
128,046,312
--------------
FOREST PRODUCTS -- 1.7%
Champion International Corp..................... 650,700 28,142,775
Louisiana-Pacific Corp.......................... 650,700 13,746,037
Mead Corp....................................... 326,100 18,954,562
Willamette Industries, Inc...................... 238,100 16,577,712
--------------
77,421,086
--------------
GAS PIPELINES -- 0.3%
Western Gas Resources, Inc...................... 659,000 12,685,750
--------------
HOUSEHOLD PRODUCTS -- 0.3%
Jan Bell Marketing, Inc. (a).................... 964,200 1,988,663
Leggett & Platt, Inc............................ 366,600 12,693,525
--------------
14,682,188
--------------
HOUSING RELATED -- 1.1%
Hanson, PLC, ADR, (United Kingdom).............. 2,540,300 17,147,025
Owens Corning................................... 620,800 26,461,600
--------------
43,608,625
--------------
INSURANCE -- 3.0%
Allstate Corp................................... 124,999 7,234,317
Equitable of Iowa Companies..................... 346,500 15,895,687
Financial Security Assurance Holdings, Ltd...... 218,100 7,170,037
PennCorp Financial Group, Inc................... 513,500 18,486,000
Provident Companies, Inc........................ 170,900 8,267,287
Reinsurance Group of America, Inc............... 487,800 22,987,575
TIG Holdings, Inc............................... 546,900 18,526,237
Trenwick Group, Inc............................. 273,300 12,640,125
W.R. Berkley Corp............................... 180,100 9,140,075
Western National Corp........................... 836,600 16,104,550
--------------
136,451,890
--------------
INTEGRATED PRODUCERS -- 0.2%
Murphy Oil Corp................................. 177,400 9,867,875
--------------
MACHINERY -- 1.4%
Case Corp....................................... 597,500 32,563,750
DT Industries, Inc.............................. 226,100 7,913,500
Paxar Corp...................................... 1,232,660 21,263,385
--------------
61,740,635
--------------
MEDIA -- 1.6%
Central Newspapers, Inc. (Class 'A' Stock)...... 319,800 14,071,200
Gannett Co., Inc................................ 185,900 13,919,262
Hollinger International, Inc.................... 155,600 1,789,400
Houghton Mifflin Co............................. 185,900 10,526,587
Knight-Ridder, Inc.............................. 371,800 14,221,350
Lee Enterprises, Inc............................ 325,300 7,563,225
</TABLE>
B9
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
MEDIA -- CONT'D
McGraw-Hill, Inc................................ 185,500 $ 8,556,187
Media General, Inc. (Class 'A' Stock)........... 59,000 1,784,750
--------------
72,431,961
--------------
METALS-NON FERROUS -- 1.1%
Aluminum Company of America..................... 750,500 47,844,375
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 2.0%
Danaher Corp.................................... 435,800 20,319,175
Donaldson, Inc.................................. 372,200 12,468,700
IDEX Corp....................................... 275,300 10,977,587
Mark IV Industries, Inc......................... 558,793 12,642,692
Trinity Industries, Inc......................... 358,300 13,436,250
Wolverine Tube, Inc. (a)........................ 259,800 9,157,950
York International Corp......................... 185,000 10,336,875
--------------
89,339,229
--------------
MISCELLANEOUS - INDUSTRIAL -- 0.8%
Coltec Industries, Inc. (a)..................... 299,900 5,660,613
Global Industrial Technologies, Inc. (a)........ 390,700 8,644,238
Material Sciences Corp. (a)..................... 649,600 11,692,800
Titan Wheel International, Inc.................. 695,550 8,868,263
--------------
34,865,914
--------------
OIL - EXPLORATION & PRODUCTION -- 1.9%
Basin Exploration, Inc. (a)..................... 142,700 891,875
Cabot Oil & Gas Corp. (Class 'A' Stock)......... 552,500 9,461,563
Enron Oil & Gas Co.............................. 309,300 7,809,825
Mesa, Inc. (a).................................. 2,711,400 14,234,850
Noble Affiliates, Inc........................... 325,300 15,573,738
Oryx Energy Co. (a)............................. 789,500 19,540,125
Parker & Parsley Petroleum Co................... 248,600 9,136,050
Seagull Energy Corp. (a)........................ 373,400 8,214,800
--------------
84,862,826
--------------
OIL & GAS -- 1.2%
Societe Nationale Elf Aquitaine, ADR,
(France)...................................... 1,199,200 54,263,800
--------------
OIL SERVICES -- 0.6%
Coflexip, ADR, (France)......................... 650,700 17,080,875
Weatherford Enterra, Inc. (a)................... 298,653 8,959,590
--------------
26,040,465
--------------
PETROLEUM SERVICES -- 0.1%
ICO, Inc........................................ 492,100 3,014,112
--------------
RAILROADS -- 0.2%
Burlington Northern, Inc........................ 117,900 10,183,612
--------------
REAL ESTATE DEVELOPMENT -- 0.4%
Crescent Real Estate Equities, Inc.............. 339,400 17,903,350
--------------
RETAIL -- 1.6%
Bombay Company, Inc. (a)........................ 890,300 4,117,638
Charming Shoppes, Inc. (a)...................... 2,788,600 14,117,288
Dillard Department Stores, Inc. (a)............. 202,900 6,264,538
K mart Corp. (a)................................ 1,913,600 19,853,600
Toys 'R' Us, Inc. (a)........................... 557,700 16,731,000
Woolworth Corp. (a)............................. 557,700 12,199,688
--------------
73,283,752
--------------
STEEL -- 0.9%
Bethlehem Steel Corp. (a)....................... 929,500 8,365,500
LTV Corp........................................ 1,408,200 16,722,375
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
National Steel Corp. (Class 'B' Stock) (a)...... 289,300 $ 2,676,025
USX-U.S. Steel Group............................ 418,300 13,124,163
--------------
40,888,063
--------------
TELECOMMUNICATIONS -- 0.1%
Deutsche Telekom, ADR, (Germany) (a)............ 309,500 6,306,063
--------------
TEXTILES -- 1.3%
Farah, Inc. (a)................................. 249,300 1,932,075
Fieldcrest Cannon, Inc. (a)..................... 427,500 6,840,000
Fruit of the Loom, Inc. (Class 'A' Stock) (a)... 464,700 17,600,513
Owens-Illinois, Inc. (a)........................ 513,700 11,686,675
Phillips-Van Heusen Corp........................ 578,500 8,315,938
Tultex Corp. (a)................................ 558,300 3,908,100
V.F. Corp....................................... 143,700 9,699,750
--------------
59,983,051
--------------
TOBACCO -- 0.4%
Philip Morris Companies, Inc.................... 87,300 9,832,163
UST, Inc........................................ 250,400 8,106,700
--------------
17,938,863
--------------
TRUCKING/SHIPPING -- 0.1%
Yellow Corp..................................... 482,100 6,930,188
--------------
TOTAL COMMON STOCKS
(cost $1,310,419,852).......................................... 1,642,431,219
--------------
PREFERRED STOCKS -- 1.0%
FINANCIAL SERVICES -- 0.8%
Central Hispano Corp............................ 225,900 5,986,350
Central Hispano Financial Services.............. 1,000,000 25,200,000
--------------
31,186,350
--------------
GAS PIPELINES -- 0.1%
TransCanada Pipelines, Ltd...................... 140,000 3,640,000
--------------
MEDIA -- 0.0%
Times Mirror Co. (Cum. Conv.), Series B......... 1 28
--------------
PETROLEUM -- 0.1%
Mesa, Inc. (Conv. Pfd.)......................... 914,929 5,832,671
--------------
TOTAL PREFERRED STOCKS
(cost $36,848,291)............................................. 40,659,049
--------------
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS -- 53.5% (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
DOMESTIC CORPORATE BONDS -- 36.6%
AEROSPACE -- 0.2%
Northrop Grumman Corp.,
7.875%, 03/01/26.............................. Baa3 $ 7,500 7,517,475
--------------
AGRICULTURAL EQUIPMENT -- 0.1%
Agco Corp.,
8.50%, 03/15/06............................... Ba3 6,500 6,576,700
--------------
AIRLINES -- 2.9%
Delta Air Lines, Inc.,
10.125%, 05/15/10............................. Baa3 20,000 24,145,800
10.375%, 02/01/11............................. Ba1 28,405 34,799,534
</TABLE>
B10
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
United Air Lines, Inc.,
9.75%, 08/15/21............................... Baa2 $ 10,125 $ 12,000,555
10.67%, 05/01/04.............................. Baa3 29,665 35,084,499
11.21%, 05/01/14.............................. Baa3 18,433 24,168,797
--------------
130,199,185
--------------
ASSET-BACKED SECURITIES -- 0.2%
Banc One Credit Card Master Trust,
7.75%, 12/15/99............................... A2 5,100 5,178,081
Standard Credit Card Master Trust,
5.95%, 10/07/04............................... Aaa 4,650 4,469,813
--------------
9,647,894
--------------
CABLE & PAY TELEVISION SYSTEMS -- 1.9%
Continental Cablevision, Inc.,
8.30%, 05/15/06............................... Ba2 11,200 11,931,024
8.625%, 08/15/03.............................. Ba2 27,050 29,271,076
Tele-Communications, Inc.,
7.875%, 08/01/13.............................. Baa3 2,500 2,301,450
9.25%, 04/15/02............................... Baa3 21,425 22,694,860
9.80%, 02/01/12............................... B2 7,000 7,575,400
9.875%, 06/15/22.............................. Baa3 7,900 8,507,668
10.125%, 04/15/22............................. Baa3 2,000 2,196,040
--------------
84,477,518
--------------
COMPUTERS -- 0.2%
Digital Equipment Corp.,
7.125%, 10/15/02.............................. Ba1 10,000 9,542,500
--------------
FINANCIAL SERVICES -- 19.1%
Associates Corp. of North America,
6.625%, 05/15/01.............................. Aa3 34,500 34,485,510
6.68%, 09/17/99............................... Aa3 34,050 34,299,927
8.375%, 01/15/98.............................. A1 1,100 1,125,454
Bank of New York,
7.97%, 12/31/26............................... A1 26,000 26,258,440
Barnett Banks,
8.06%, 12/01/26............................... A2 3,500 3,540,775
Bayerische Landes,
6.20%, 09/30/99............................... Aaa 30,000 29,970,000
Capital One Bank,
6.66%, 08/17/98............................... Baa3 10,050 10,085,677
6.73%, 06/04/98............................... Baa2 16,000 16,094,400
6.90%, 04/15/99............................... Baa3 11,000 11,073,590
7.20%, 07/19/99............................... Baa3 11,250 11,376,112
CIT Group Holdings, M.T.N.,
5.85%, 03/16/98............................... Aa3 25,000 25,009,750
5.875%, 11/09/98.............................. Aa3 33,900 33,795,588
Conseco, Inc.,
8.70%, 11/15/26............................... NR 18,200 18,356,884
CoreStates Financial Corp.,
8.00%, 12/15/26............................... A1 24,250 24,251,455
Enterprise Rent-A-Car USA Finance Co., M.T.N.,
6.35%, 01/15/01............................... Baa3 11,500 11,195,250
7.00%, 06/15/00............................... Baa3 30,000 30,363,000
7.50%, 06/15/03............................... Baa3 5,000 5,139,300
7.875%, 03/15/98.............................. Baa3 9,925 10,145,831
8.75%, 12/15/99............................... Baa3 5,000 5,295,500
First Tennessee National Corp., B.A.,
8.07%, 01/06/27............................... NR 11,150 11,087,560
First Union Corp.,
7.85%, 01/01/27............................... A1 43,500 43,103,062
9.45%, 06/15/99............................... Baa2 4,000 4,274,280
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
First USA Bank,
8.20%, 02/15/98............................... Baa3 $ 14,575 $ 14,878,306
Ford Motor Credit,
7.00%, 09/25/01............................... A1 37,000 37,551,670
General Motors Acceptance Corp., M.T.N.,
5.395%, 02/02/99.............................. P1 2,000 1,999,825
7.375%, 07/20/98.............................. Baa1 4,650 4,742,209
Lehman Brothers Holdings, Inc.,
6.71%, 10/12/99............................... Baa1 6,000 6,008,100
6.84%, 09/25/98............................... Baa1 30,000 30,227,100
6.89%, 10/10/00............................... Baa1 10,545 10,581,380
Liberty Mutual Insurance Co.,
7.875%, 10/15/26.............................. A2 2,500 2,526,985
8.20%, 05/04/07............................... A2 51,005 54,164,250
Lumbermens Mutual Casualty Co.,
9.15%, 07/01/26............................... Baa1 28,750 31,265,625
Mellon Bank Corp.,
7.72%, 12/01/26............................... A2 15,635 15,151,097
7.995%, 01/15/27.............................. A2 38,500 38,018,750
Republic Bank of New York Corp.,
7.53%, 12/04/26............................... NR 21,000 20,582,583
Salomon, Inc., M.T.N.,
5.98%, 02/02/98............................... Baa1 35,000 34,982,850
7.00%, 05/15/99............................... Baa1 42,000 42,331,800
7.25%, 05/01/01............................... Baa1 8,625 8,706,592
State Street Capital Corp.,
7.94%, 12/30/26............................... NR 10,000 9,960,000
SunAmerica, Inc.,
6.20%, 10/31/99............................... Baa1 9,000 8,955,000
Travelers Capital, Inc.,
7.75%, 12/01/36............................... A1 20,000 19,350,000
Union Planters Corp.,
8.20%, 12/15/26............................... Baa1 20,750 20,542,500
USAA Capital Corp.,
6.34%, 09/18/98............................... Aa1 10,000 10,040,000
Wells Fargo & Co.,
7.96%, 12/15/26............................... A1 32,500 31,974,429
--------------
854,868,396
--------------
FOOD & BEVERAGE -- 0.1%
RJR Nabisco, Inc.,
8.75%, 08/15/05............................... Baa3 4,000 4,018,000
--------------
HEALTH CARE -- 0.0%
Tenet Healthcare Corp.,
8.625%, 12/01/03.............................. Ba2 2,000 2,110,000
--------------
HOSPITAL MANAGEMENT -- 0.0%
Service Corp. International,
7.00%, 06/01/15............................... A3 2,500 2,530,950
--------------
MEDIA -- 5.8%
News America Holdings, Inc.,
7.375%, 10/17/08.............................. Baa3 28,000 27,784,960
7.75%, 12/01/45............................... Baa3 61,000 56,802,590
9.25%, 02/01/13............................... Baa3 24,050 26,942,975
Paramount Communications, Inc.,
7.50%, 01/15/02............................... Ba2 6,425 6,419,667
Time Warner, Inc.,
7.75%, 06/15/05............................... Ba1 15,000 15,088,950
8.11%, 08/15/06............................... Ba1 13,250 13,583,503
8.18%, 08/15/07............................... Ba1 24,500 25,138,715
</TABLE>
B11
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Time Warner, Inc., (Con't)
8.375%, 07/15/33.............................. Baa3 $ 37,450 $ 37,584,446
9.125%, 01/15/13.............................. Ba1 14,270 15,578,559
Turner Broadcasting Co.,
8.375%, 07/01/13.............................. Ba1 5,325 5,435,813
Viacom, Inc.,
6.75%, 01/15/03............................... Ba2 8,545 8,178,931
7.75%, 06/01/05............................... Ba2 22,275 21,933,524
--------------
260,472,633
--------------
OIL & GAS -- 0.1%
Parker & Parsley Petroleum Co.,
8.25%, 08/15/07............................... Ba2 3,000 3,225,450
--------------
OIL & GAS EQUIPMENT & SERVICES -- 0.2%
B.J. Services Co.,
7.00%, 02/01/06............................... Ba1 4,000 3,887,640
Noble Drilling Corp.,
9.125%, 07/01/06.............................. Ba2 3,500 3,762,500
--------------
7,650,140
--------------
RETAIL -- 3.1%
Federated Department Stores, Inc.,
8.125%, 10/15/02.............................. Ba1 18,075 18,526,875
8.50%, 06/15/03............................... Ba1 36,750 38,220,000
10.00%, 02/15/01.............................. Ba1 4,500 4,905,000
Rite Aid Corp.,
6.70%, 12/15/01............................... A3 5,000 4,982,500
Sears Roebuck Acceptance Corp., M.T.N.,
6.38%, 02/16/99............................... A2 70,000 70,177,100
--------------
136,811,475
--------------
TECHNOLOGY -- 1.8%
Comdisco, Inc., M.T.N.,
5.54%, 01/26/98............................... Baa1 12,500 12,456,750
6.09%, 11/09/98............................... Baa1 34,000 34,034,000
6.29%, 10/22/98............................... Baa1 5,000 5,007,450
6.375%, 11/30/01.............................. Baa1 21,500 21,153,850
6.689%, 05/22/98.............................. Baa1 9,000 9,075,240
--------------
81,727,290
--------------
TELECOMMUNICATIONS -- 0.7%
TCI Communications, Inc.,
8.65%, 09/15/04............................... Baa3 28,470 28,609,788
8.75%, 08/01/15............................... Baa3 5,450 5,383,946
--------------
33,993,734
--------------
TRUCKING/SHIPPING -- 0.1%
Federal Express Corp., M.T.N.,
10.00%, 06/01/98.............................. Baa3 3,000 3,157,440
10.05%, 06/15/99.............................. Baa3 500 539,080
--------------
3,696,520
--------------
UTILITIES -- 0.1%
Arkla, Inc., M.T.N.,
9.25%, 12/18/97............................... Ba2 3,000 3,077,790
--------------
FOREIGN CORPORATE BONDS -- 6.3%
Banco de Commercio Exterior de Colombia, SA,
M.T.N., (Colombia)
8.625%, 06/02/00.............................. NR 5,500 5,713,125
Banco Ganadero, SA, M.T.N., (Colombia)
9.75%, 08/26/99............................... Baa3 7,300 7,683,250
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Bangkok Bank, (Thailand)
7.25%, 09/15/05............................... A3 $ 10,000 $ 9,777,400
8.25%, 03/15/16............................... A3 15,000 15,258,750
Central Hispano Financial Services, (Cayman
Islands)
6.031%, 04/28/05.............................. A3 10,000 10,005,000
Compania Sud Americana de Vapores, SA, (Chile)
7.375%, 12/08/03.............................. NR 7,600 7,486,000
Deutsche Bank, (Germany)
6.70%, 12/13/06............................... Aa1 12,500 12,299,562
Domtar, Inc., (Canada)
9.50%, 08/01/16............................... Ba1 9,000 9,843,750
Empresa Colombia de Petroleos, (Colombia)
7.25%, 07/08/98............................... NR 8,250 8,311,875
Kansallis-Osake Pankki, N.Y., (Finland)
6.125%, 05/15/98.............................. A3 6,160 6,163,758
8.650%, 12/29/49 (b).......................... Baa2 10,000 10,441,500
9.75%, 12/15/98............................... Baa1 16,950 17,990,730
Okobank, (Finland)
7.25%, 09/27/49............................... A3 18,750 19,125,000
7.325%, 10/29/49.............................. NR 9,000 9,220,500
7.70%, 10/29/49............................... NR 3,500 3,585,750
Petroliam Nasional, (Malaysia)
6.625%, 10/18/01.............................. NR 22,000 22,014,520
7.125%, 10/18/06.............................. A1 66,400 66,830,936
PT Alatief Freeport Financial Co., (Netherlands)
9.75%, 04/15/01............................... Ba2 8,950 9,784,588
Royal Bank of Canada, (Canada)
6.75%, 10/24/11............................... Aa3 17,400 17,034,600
Siam Commercila, (Thailand)
7.50%, 03/15/06............................... A3 14,500 14,282,500
--------------
282,853,094
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 5.4%
Federal National Mortgage Association,
9.05%, 04/10/00............................... 14,000 15,148,420
United States Treasury Bonds,
5.875%, 11/15/99.............................. 5,000 4,980,450
United States Treasury Notes,
5.00%, 02/15/99............................... 17,000 16,691,790
5.625%, 11/30/98-11/30/00..................... 86,500 85,271,755
5.875%, 11/30/01-02/15/04..................... 45,400 44,645,298
6.00%, 08/15/99............................... 10,000 9,998,400
6.125%, 07/31/00-09/30/00..................... 19,300 19,298,110
6.25%, 04/30/01-02/15/03...................... 20,150 20,142,013
6.375%, 09/30/01.............................. 7,000 7,041,580
6.50%, 08/31/01-10/15/06...................... 16,500 16,625,810
6.75%, 04/30/00............................... 3,000 3,056,730
--------------
242,900,356
--------------
</TABLE>
B12
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
FOREIGN GOVERNMENT BONDS -- 5.2%
Republic of Argentina, (Argentina)
6.625%, 03/31/05.............................. B1 $ 4,900 $ 4,293,625
Republic of Colombia, (Colombia)
7.125%, 05/11/98.............................. Ba1 2,775 2,788,875
8.00%, 06/14/01............................... Baa3 2,250 2,283,750
8.75%, 10/06/99............................... Ba1 12,325 12,879,625
Republic of Poland, (Poland)
4.00%, (until 10/27/98),
5.00%, (until 10/27/99),
6.00%, (until 10/27/02),
7.00%, 10/27/14............................... Baa3 129,500 109,589,375
Republic of Venezuela, (Venezuela)
6.50%, 12/18/07............................... Ba2 9,750 8,580,000
United Mexican States, (Mexico)
7.563%, 08/06/01.............................. Baa3 73,500 73,672,725
9.75%, 02/06/01............................... Ba2 4,000 4,130,000
11.375%, 09/15/16............................. Ba2 13,000 13,536,250
--------------
231,754,225
--------------
TOTAL LONG-TERM BONDS
(cost $2,376,901,639).................................................... 2,399,651,325
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $3,724,169,782).................................................... 4,082,741,593
--------------
SHORT-TERM INVESTMENTS -- 10.1%
BANK NOTES -- 0.2%
First Bank N.A., Minneapolis,
5.275%, 10/24/97.............................. P3 2,000 1,998,881
PNC Bank N.A.,
5.20%, 04/01/97............................... NR 5,000 4,999,364
--------------
6,998,245
--------------
CERTIFICATES OF DEPOSIT-DOMESTIC -- 1.5%
Advanta National Bank,
5.80%, 03/19/97............................... NR 25,000 25,350,000
5.84%, 03/14/97............................... NR 21,500 21,457,000
6.26%, 09/01/97............................... NR 10,500 10,510,500
8.18%, 02/09/97............................... Baa3 10,000 10,100,000
--------------
67,417,500
--------------
CERTIFICATES OF DEPOSIT-EURODOLLAR -- 0.1%
Abbey National Treasury Services, PLC,
5.41%, 01/30/97............................... P1 5,000 5,000,093
--------------
CERTIFICATES OF DEPOSIT-YANKEE -- 1.0%
Bank of Montreal (Canada),
5.39%, 01/22/97............................... P1 18,000 18,000,000
Bank of Nova Scotia (Canada),
5.39%, 03/04/97............................... P3 4,000 4,000,000
Banque Nationale De Paris (France),
5.42%, 01/15/97............................... NR 10,000 9,999,961
5.58%, 04/02/97............................... NR 3,000 2,999,191
Commerzbank (Germany),
5.42%, 06/10/97............................... P1 1,000 999,631
Deutsche Bank (Germany),
5.69%, 10/28/97............................... P3 3,000 2,999,261
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
National Bank of Canada (Canada),
5.438%, 03/10/97.............................. P3 $ 2,000 $ 2,000,000
Norddeutsche Landesbank (Germany),
5.75%, 04/11/97............................... NR 5,000 5,001,784
Societe Generale (France),
5.78%, 08/20/97............................... P1 2,000 2,001,590
--------------
48,001,418
--------------
COMMERCIAL PAPER -- 3.8%
Aetna Services, Inc.,
5.42%, 03/14/97............................... NR 5,000 4,946,553
American Brands, Inc.,
5.45%, 02/06/97............................... P3 1,000 994,701
6.00%, 01/22/97............................... P3 2,000 1,993,333
American Express Credit Corp.,
5.30%, 02/28/97............................... P1 5,000 4,958,042
Aristar, Inc.,
5.40%, 01/28/97............................... P2 2,000 1,992,200
5.47%, 03/17/97............................... P2 3,000 2,966,268
Bank Austria,
5.35%, 01/15/97............................... NR 8,000 7,984,544
Barton Capital Corp.,
5.35%, 02/27/97............................... NR 2,000 1,983,356
5.40%, 02/21/97............................... NR 8,000 7,940,000
BHF Finance, Inc.,
5.31%, 01/30/97............................... NR 1,000 995,870
Bradford & Bingley Building Society,
5.35%, 01/10/97-01/15/97...................... NR 28,000 27,960,767
Caterpillar Financial Services Corp.,
5.35%, 05/16/97-06/16/97...................... NR 2,000 1,955,565
5.38%, 04/28/97............................... P1 5,000 4,913,322
5.50%, 02/27/97............................... P1 1,380 1,368,193
Cheltenham & Gloucester Building Society,
5.325%, 02/24/97.............................. NR 7,000 6,945,123
Coca Cola Enterprises, Inc.,
5.34%, 02/03/97............................... NR 2,000 1,990,507
Colonial Pipeline Co.,
5.75%, 01/27/97............................... P3 2,000 1,992,014
Commonwealth Bank of Austria,
5.40%, 02/10/97............................... NR 5,000 4,970,750
Corporate Receivables Corp.,
5.40%, 02/20/97............................... NR 2,000 1,985,300
Countrywide Home Loan, Inc.,
6.05%, 01/21/97............................... NR 1,000 996,807
6.20%, 01/15/97............................... NR 7,000 6,984,328
6.35%, 01/15/97............................... NR 6,000 5,986,242
CXC, Inc.,
7.00%, 01/02/97............................... NR 3,662 3,662,000
Dupont (EI) De Nemours,
5.50%, 03/04/97............................... P3 1,000 990,681
Engelhard Corp.,
5.58%, 02/24/97............................... P2 2,000 1,983,570
First Data Corp.,
5.40%, 03/18/97-03/25/97...................... NR 8,617 8,512,061
5.46%, 03/25/97............................... NR 5,000 4,937,817
Fleet Funding Corp,
5.80%, 02/04/97............................... NR 3,729 3,709,174
ITT Hartford Group, Inc.,
5.45%, 01/23/97............................... P1+ 1,000 996,821
</TABLE>
B13
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Kredietbank Na Finance Corp.,
5.32%, 01/16/97............................... NR $ 2,000 $ 1,995,862
Lehman Brothers Holdings, Inc.,
6.70%, 01/07/97............................... NR 5,000 4,995,347
Merrill Lynch & Co., Inc.,
5.35%, 01/29/97............................... P1 12,000 11,951,850
5.37%, 01/31/97............................... P1 7,000 6,969,719
NYNEX Corp.,
6.80%, 01/06/97............................... P3 3,000 2,997,733
Preferred Receivables Funding Corp.,
5.60%, 02/25/97............................... P1 4,000 3,966,400
Rank Xerox Capital PLC.,
6.25%, 01/09/97............................... NR 2,583 2,579,861
Societe Generale,
5.77%, 05/15/97............................... P1 2,000 2,000,259
Transamerica Financial Corp.,
5.38%, 02/06/97............................... P1 3,750 3,730,385
WCP Funding, Inc.,
5.40%, 02/20/97............................... NR 2,000 1,985,300
--------------
172,768,625
--------------
OTHER CORPORATE OBLIGATIONS -- 3.0%
American General Financial Corp.,
7.75%, 01/15/97............................... P1 3,700 3,702,664
9.50%, 08/01/97............................... P1 1,500 1,530,273
Associates Corp. of North America,
9.70%, 05/01/97............................... P1 2,000 2,023,837
Beneficial Corp.,
9.35%, 02/03/97............................... P1 3,500 3,510,736
Capital Equipment Receivable Trust,
5.60%, 10/15/97............................... NR 3,862 3,862,223
Capital One Bank,
8.625%, 01/15/97.............................. Baa3 32,425 32,443,158
Coca-Cola Enterprises, Inc.,
6.50%, 11/15/97............................... A3 3,750 3,765,600
General Motors Acceptance Corp.,
5.47%, 02/12/97............................... P1 12,000 11,925,243
6.30%, 09/10/97............................... Aaa 5,000 5,017,600
6.70%, 04/30/97............................... A3 11,000 11,035,420
7.60%, 02/10/97............................... P1 2,000 2,004,629
7.85%, 03/05/97............................... Baa1 3,300 3,312,078
7.85%, 03/05/97............................... P1 10,050 10,080,742
Kimberly Clark Corp.,
9.125%, 06/01/97.............................. NR 1,000 1,013,822
Mellon Bank Corp.,
6.50%, 12/01/97............................... Baa1 1,650 1,656,253
Norwest Corp.,
7.875%, 01/30/97.............................. P1 2,000 2,003,190
Salomon, Inc.,
5.89%, 11/10/97............................... Baa1 30,000 29,962,500
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Short Term Repack Asset,
6.00%, 12/15/97............................... NR $ 4,000 $ 3,999,186
--------------
132,849,154
--------------
REPURCHASE AGREEMENT -- 0.5%
Joint Repurchase Agreement Account
6.613%, 01/02/97 (Note 5)..................... 22,692 22,692,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $464,184,986)...................................................... 455,727,035
--------------
TOTAL INVESTMENTS BEFORE SHORT
SALE -- 101.3%
(cost $4,188,354,768; Note 6)............................................ 4,538,468,628
--------------
INVESTMENT SOLD SHORT -- (2.4%)
United States Treasury Bond,
6.75%, 8/15/26
(proceeds $111,621,197; Note 2).............................. (106,860) (110,481,637)
--------------
TOTAL INVESTMENTS, NET OF SHORT SALES -- 98.9%
4,427,986,991
--------------
OTHER ASSETS IN EXCESS OF OTHER
LIABILITIES -- 1.1%...................................................... 50,821,542
--------------
TOTAL NET ASSETS -- 100.0%................................................. $4,478,808,533
--------------
--------------
<FN>
The following abbreviations are used in portfolio descriptions:
ADR American
Depository
Receipt
B.A. Bankers' Acceptances
C.D. Certificates of Deposit
M.T.N. Medium Term Note
PLC Public Limited Company
SA Sociedad Anonima (Spanish Corporation) or Societe
Anonyme (French Corporation)
NR Not Rated
(a) Non-income
producing
security.
(b) Indicates a variable rate security.
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B14
<PAGE>
FLEXIBLE MANAGED PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
LONG-TERM INVESTMENTS -- 97.6%
VALUE
COMMON STOCKS -- 61.3% SHARES (NOTE 2)
<CAPTION>
------------- --------------
<S> <C> <C>
AEROSPACE -- 4.1%
AlliedSignal, Inc............................... 600,000 $ 40,200,000
Boeing Co....................................... 530,500 56,431,937
Lockheed Martin Corp............................ 500,000 45,750,000
Rockwell International Corp. (a)................ 400,000 24,350,000
United Technologies Corp........................ 550,000 36,300,000
--------------
203,031,937
--------------
BANKS AND SAVINGS & LOANS -- 4.2%
Banc One Corp................................... 775,000 33,325,000
BankAmerica Corp................................ 300,000 29,925,000
Chase Manhattan Corp............................ 550,000 49,087,500
Citicorp........................................ 310,000 31,930,000
PNC Bank Corp................................... 750,000 28,218,750
State Street Boston Corp........................ 500,000 32,250,000
--------------
204,736,250
--------------
BEVERAGES -- 0.9%
Anheuser-Busch Companies, Inc................... 1,150,000 46,000,000
--------------
CHEMICALS -- 0.6%
E.I. du Pont de Nemours & Co.................... 300,000 28,312,500
--------------
CHEMICALS - SPECIALTY -- 1.8%
IMC Global, Inc................................. 600,000 23,475,000
Morton International, Inc....................... 600,000 24,450,000
Praxair, Inc.................................... 825,000 38,053,125
--------------
85,978,125
--------------
COMMERCIAL SERVICES -- 0.3%
CUC International, Inc. (a)..................... 600,000 14,250,000
--------------
COMPUTER SERVICES -- 6.4%
3Com Corp. (a).................................. 600,000 44,025,000
Cadence Design Systems, Inc. (a)................ 675,000 26,831,250
Cascade Communications.......................... 325,000 17,915,625
Cisco Systems, Inc. (a)......................... 750,000 47,718,750
Computer Associates International, Inc.......... 975,000 48,506,250
Computer Sciences Corp. (a)..................... 500,000 41,062,500
First Data Corp................................. 500,000 18,250,000
Gateway 2000, Inc. (a).......................... 275,000 14,729,687
Microsoft Corp. (a)............................. 250,000 20,656,250
Oracle Corp. (a)................................ 775,000 32,356,250
--------------
312,051,562
--------------
CONSTRUCTION -- 0.7%
Fluor Corp...................................... 550,000 34,512,500
--------------
COSMETICS & SOAPS -- 0.7%
Procter & Gamble Co............................. 300,000 32,250,000
--------------
DIVERSIFIED GAS -- 0.3%
Cross Timbers Oil Co............................ 530,000 13,316,250
--------------
DIVERSIFIED OFFICE EQUIPMENT -- 1.8%
Alco Standard Corp.............................. 300,000 15,487,500
Hewlett-Packard Co.............................. 325,000 16,331,250
Honeywell, Inc.................................. 650,000 42,737,500
Xerox Corp...................................... 300,000 15,787,500
--------------
90,343,750
--------------
DRUGS AND MEDICAL SUPPLIES -- 6.0%
American Home Products Corp..................... 885,000 51,883,125
Baxter International, Inc....................... 650,000 26,650,000
Becton, Dickinson & Co.......................... 800,000 34,700,000
Boston Scientific Corp. (a)..................... 700,000 42,000,000
Medtronic, Inc.................................. 400,000 27,200,000
Novartis Corp., AG ADR (Switzerland)............ 933,328 53,491,332
Pfizer, Inc..................................... 700,000 58,012,500
--------------
293,936,957
--------------
ELECTRICAL EQUIPMENT -- 1.9%
Applied Materials, Inc. (a)..................... 450,000 16,171,875
Baldor Electric Co.............................. 1 25
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Belden, Inc..................................... 425,000 $ 15,725,000
FORE Systems, Inc. (a).......................... 725,000 23,834,375
Westinghouse Electric Corp...................... 1,900,000 37,762,500
--------------
93,493,775
--------------
ELECTRONICS -- 2.2%
ADT Ltd. (a).................................... 750,000 17,156,250
Intel Corp...................................... 475,000 62,195,313
Maxim Integrated Products, Inc. (a)............. 700,000 30,275,000
--------------
109,626,563
--------------
FINANCIAL SERVICES -- 0.9%
MBNA Corp....................................... 1,075,000 44,612,500
--------------
FOODS -- 0.4%
Nabisco Holdings Corp.
(Class 'A' Stock)............................. 500,000 19,437,500
--------------
FOREST PRODUCTS -- 1.2%
Kimberly-Clark Corp............................. 350,000 33,337,500
Willamette Industries, Inc...................... 399,000 27,780,375
--------------
61,117,875
--------------
GAS PIPELINES -- 0.7%
Enron Corp...................................... 850,000 36,656,250
--------------
HEALTH CARE -- 0.2%
Tenet Healthcare Corp. (a)...................... 400,000 8,750,000
--------------
HOSPITAL MANAGEMENT -- 1.1%
Columbia/HCA Healthcare Corp.................... 900,000 36,675,000
Guidant Corp.................................... 300,000 17,100,000
--------------
53,775,000
--------------
INSURANCE -- 5.0%
Aetna Inc....................................... 650,000 52,000,000
Allstate Corp................................... 875,000 50,640,625
American International Group, Inc............... 250,000 27,062,500
Chubb Corp...................................... 400,000 21,500,000
CIGNA Corp...................................... 250,000 34,156,250
Travelers Group, Inc............................ 1,266,666 57,474,970
--------------
242,834,345
--------------
LEISURE -- 0.6%
Carnival Corp. (Class 'A' Stock)................ 900,000 29,700,000
--------------
LODGING -- 0.2%
Hilton Hotels Corp.............................. 400,000 10,450,000
--------------
MACHINERY -- 0.8%
Case Corp....................................... 700,000 38,150,000
--------------
MEDIA -- 0.4%
Comcast Corp. (Class 'A' Stock)................. 1,000,000 17,625,000
--------------
MINERAL RESOURCES -- 0.5%
Potash Corp. of Saskatchewan, Inc............... 270,000 22,950,000
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 4.5%
Cognizant Corp.................................. 735,700 24,278,100
General Electric Co............................. 700,000 69,212,500
Illinois Tool Works, Inc........................ 400,000 31,950,000
Tyco International, Ltd......................... 1,225,000 64,771,875
York International Corp......................... 500,000 27,937,500
--------------
218,149,975
--------------
MISCELLANEOUS - CONSUMER GROWTH/STABLE -- 1.1%
Unilever N.V., ADR (United Kingdom)............. 300,000 52,575,000
--------------
PETROLEUM -- 3.2%
British Petroleum, PLC, ADR (United Kingdom).... 325,000 45,946,875
Mobil Corp...................................... 400,000 48,900,000
Royal Dutch Petroleum Co., ADR (Netherlands).... 200,000 34,150,000
Total SA, ADR (France).......................... 700,000 28,175,000
--------------
157,171,875
--------------
</TABLE>
B15
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
PETROLEUM SERVICES -- 1.3%
Baker Hughes, Inc............................... 581,700 $ 20,068,650
Halliburton Co.................................. 700,000 42,175,000
--------------
62,243,650
--------------
RETAIL -- 6.5%
American Stores Co.............................. 800,000 32,700,000
Federated Department Stores, Inc. (a)........... 1,120,000 38,220,000
The Gap, Inc.................................... 500,000 15,062,500
Home Depot, Inc................................. 750,000 37,593,750
Koninklijke Ahold, ADR (Netherlands)............ 250,000 15,437,500
Nike, Inc. (Class 'B' Stock).................... 600,000 35,850,000
Nine West Group................................. 775,000 35,940,625
Price/Costco, Inc. (a).......................... 1,500,000 37,687,500
Safeway, Inc. (a)............................... 1,000,000 42,750,000
Staples, Inc. (a)............................... 1,601,500 28,927,094
--------------
320,168,969
--------------
TELECOMMUNICATIONS -- 0.8%
AT&T Corp....................................... 550,000 23,925,000
Newbridge Networks Corp. (a).................... 500,000 14,125,000
--------------
38,050,000
--------------
TOTAL COMMON STOCKS
(cost $2,434,484,264).......................................... 2,996,258,108
--------------
PREFERRED STOCKS -- 1.5%
FINANCIAL SERVICES -- 0.5%
Central Hispano Financial Services.............. 1,000,000 25,200,000
--------------
GAS PIPELINES -- 0.1%
TransCanada Pipelines, Ltd...................... 140,000 3,640,000
--------------
LEISURE -- 0.3%
Hilton Hotels (Conv.)........................... 600,000 14,775,000
--------------
TELECOMMUNICATIONS -- 0.6%
Airtouch Communications (Conv.)................. 700,000 31,675,000
--------------
TOTAL PREFERRED STOCKS
(cost $75,571,505)............................................. 75,290,000
--------------
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
CONVERTIBLE BONDS -- 0.6% (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
RETAIL -- 0.6%
Federated Department Stores, Inc.,
5.00%, 10/01/03............................... Ba3 $ 8,000 9,180,000
Home Depot, Inc.,
3.25%, 10/01/01............................... A1 19,000 18,715,000
--------------
TOTAL CONVERTIBLE BONDS
(cost $27,850,057)....................................................... 27,895,000
--------------
LONG-TERM BONDS -- 34.2%
DOMESTIC CORPORATE BONDS -- 22.3%
AEROSPACE -- 0.2%
Northrop Grumman Corp.,
7.875%, 03/01/26.............................. NR 7,500 7,517,475
--------------
AGRICULTURAL EQUIPMENT -- 0.1%
Agco Corp.,
8.50%, 03/15/06............................... Ba3 6,500 6,576,700
--------------
AIRLINES -- 2.3%
Delta Air Lines, Inc.,
10.125%, 05/15/10............................. Baa3 19,335 23,342,952
10.375%, 02/01/11............................. Ba1 25,750 31,546,840
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
United Air Lines, Inc.,
9.75%, 08/15/21............................... Baa2 $ 10,125 $ 12,000,555
10.67%, 05/01/04.............................. Baa3 19,500 23,062,455
11.21%, 05/01/14.............................. Baa3 17,500 22,945,475
--------------
112,898,277
--------------
ASSET BACKED -- 0.1%
Standard Credit Card Master Trust
5.95%, 10/07/04............................... AAA 4,500 4,325,625
--------------
CABLE & PAY TELEVISION SYSTEMS -- 1.3%
Continental Cablevision, Inc.,
8.30%, 05/15/06............................... Ba2 10,800 11,504,916
8.625%, 08/15/03.............................. Ba2 7,500 8,115,825
TCI Communications, Inc.,
8.65%, 09/15/04............................... Baa3 6,000 6,029,460
8.75%, 08/01/15............................... Baa3 5,950 5,877,886
Tele-Communications, Inc.,
7.875%, 08/01/13.............................. Baa3 17,500 16,110,150
9.80%, 02/01/12............................... B2 7,000 7,575,400
9.875%, 06/15/22.............................. Baa3 7,878 8,483,976
10.125%, 04/15/22............................. Baa3 2,000 2,196,040
--------------
65,893,653
--------------
COMPUTERS -- 0.3%
Digital Equipment Corp.,
7.125%, 10/15/02.............................. Ba1 14,800 14,122,900
--------------
FINANCIAL SERVICES -- 10.7%
Bank of New York,
7.97%, 12/31/26............................... A1 26,000 26,258,440
Barnett Banks,
8.06%, 12/01/26............................... NR 3,500 3,540,775
Capital One Bank,
6.66%, 08/17/98............................... Baa3 11,175 11,214,671
6.73%, 06/04/98............................... Baa2 26,000 26,153,400
6.90%, 04/15/99............................... Baa3 11,000 11,073,590
7.20%, 07/19/99............................... Baa3 11,250 11,376,112
Conseco, Inc.,
8.70%, 11/15/26............................... NR 18,200 18,356,884
CoreStates Financial Corp.,
8.00%, 12/15/26............................... NR 24,250 24,251,455
Enterprise Rent-A-Car USA Finance Co., M.T.N.,
6.35%, 01/15/01............................... Baa3 3,500 3,407,250
7.00%, 06/15/00............................... Baa3 13,500 13,663,350
First Tennessee National Corp., B.A.,
8.07%, 01/06/27............................... NR 11,150 11,087,560
First Union Corp.,
7.85%, 01/01/27............................... A1 43,500 43,103,062
First USA Bank,
8.20%, 02/15/98............................... Baa3 13,000 13,270,530
Ford Motor Credit,
7.00%, 09/25/01............................... NR 13,000 13,193,830
General Motors Acceptance Corp., M.T.N.,
7.375%, 07/20/98.............................. Baa1 4,500 4,589,235
7.875%, 03/15/00.............................. NR 5,000 5,202,100
Lehman Brothers Holdings, Inc.,
6.71%, 10/12/99............................... Baa1 24,000 24,032,400
6.84%, 09/25/98............................... Baa1 5,000 5,037,850
Liberty Mutual Insurance Co.,
7.875%, 10/15/26.............................. A2 2,500 2,526,985
8.20%, 05/04/07............................... NR 5,000 5,309,700
Lumbermens Mutual Casualty Co.,
9.15%, 07/01/26............................... NR 12,600 13,702,500
</TABLE>
B16
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Mellon Bank Corp.,
7.72%, 12/01/26............................... A2 $ 15,500 $ 15,020,275
7.995%, 01/15/27.............................. A2 38,500 38,018,750
Republic Bank of New York Corp.,
7.53%, 12/04/26............................... NR 21,000 20,582,583
Salomon, Inc., M.T.N.,
5.98%, 02/02/98............................... Baa 23,500 23,488,485
7.00%, 05/15/99............................... Baa 34,600 34,873,340
7.25%, 05/01/01............................... Baa 8,625 8,706,593
State Street Capital Corp.,
7.94%, 12/30/26............................... NR 7,500 7,470,000
Travelers Capital, Inc.,
7.75%, 12/01/36............................... A1 20,000 19,350,000
Union Planters Corp.,
8.20%, 12/15/26............................... NR 20,750 20,542,500
USAA Capital Corp.,
6.34%, 09/18/98............................... Aa1 20,000 20,080,000
Wells Fargo & Co.,
7.96%, 12/15/26............................... A1 26,300 26,563,000
--------------
525,047,205
--------------
FOOD & BEVERAGE -- 0.1%
RJR Nabisco, Inc.,
8.75%, 08/15/05............................... Baa3 3,000 3,013,500
--------------
HEALTH CARE -- 0.9%
Tenet Healthcare Corp.,
8.625%, 12/01/03.............................. Ba2 15,315 16,157,325
9.625%, 09/01/02.............................. Ba1 23,750 26,006,250
--------------
42,163,575
--------------
INDUSTRIAL -- 0.1%
Service Corp. International,
7.00%, 06/01/15............................... A3 2,500 2,530,950
--------------
MEDIA -- 3.9%
News America Holdings, Inc.,
7.375%, 10/17/08.............................. Baa3 2,000 1,984,640
7.75%, 12/01/45............................... Baa3 39,000 36,316,410
9.25%, 02/01/13............................... Baa3 36,200 40,554,498
Paramount Communications, Inc.,
7.50%, 01/15/02............................... Ba2 9,100 9,092,447
Time Warner, Inc.,
8.11%, 08/15/06............................... Ba1 13,250 13,583,503
8.18%, 08/15/07............................... Ba1 13,000 13,338,910
8.375%, 07/15/33.............................. Baa3 32,800 32,917,752
9.125%, 01/15/13.............................. Ba1 12,040 13,144,068
Turner Broadcasting Co.,
8.375%, 07/01/13.............................. Ba 5,300 5,410,293
Viacom, Inc.,
6.75%, 01/15/03............................... Ba2 7,350 7,035,126
7.75%, 06/01/05............................... Ba2 19,675 19,373,382
--------------
192,751,029
--------------
OIL & GAS -- 0.4%
Parker & Parsley Petroleum Co.,
8.25%, 08/15/07............................... Ba2 3,000 3,225,450
Transco Energy Co.,
9.125%, 05/01/98.............................. Ba3 14,000 14,531,160
--------------
17,756,610
--------------
OIL & GAS EQUIPMENT & SERVICES -- 0.1%
B.J. Services Co.,
7.00%, 02/01/06............................... Ba1 4,000 3,887,640
Noble Drilling Corp.,
9.125%, 07/01/06.............................. Ba2 3,500 3,762,500
--------------
7,650,140
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
RETAIL -- 1.6%
Federated Department Stores, Inc.,
8.125%, 10/15/02.............................. Ba1 $ 6,600 $ 6,765,000
8.50%, 06/15/03............................... Ba1 66,000 68,640,000
10.00%, 02/15/01.............................. Ba1 2,500 2,725,000
--------------
78,130,000
--------------
TECHNOLOGY -- 0.2%
Comdisco, Inc., M.T.N.,
6.375%, 11/30/01.............................. Baa1 2,700 2,656,530
7.25%, 04/15/98............................... Baa2 10,000 10,135,700
--------------
12,792,230
--------------
FOREIGN CORPORATE BONDS -- 7.0%
Banco de Commercio Exterior de Colombia, SA,
M.T.N.,(Colombia)
8.625%, 06/02/00.............................. NR 5,500 5,713,125
Banco Ganadero, SA, M.T.N., (Colombia)
9.75%, 08/26/99............................... Baa 7,300 7,683,250
Bancomer, SA, (Mexico)
8.00%, 07/07/98............................... Ba 8,000 7,980,000
Bangkok Bank, (Thailand)
7.25%, 09/15/05............................... A3 10,000 9,777,400
Central Hispano Financial Services, (Cayman
Islands)
6.031%, 04/28/05.............................. A3 5,000 5,002,500
Compania Sud Americana de Vapores, SA, (Chile)
7.375%, 12/08/03.............................. NR 5,650 5,565,250
Controladora Commercial Mexicana, SA, (Mexico)
8.75%, 04/21/98............................... NR 15,100 15,175,500
Deutsche Bank, (Germany)
6.70%, 12/13/06............................... Aa 17,500 17,219,388
Dotmar, Inc., (Canada)
9.50%, 08/01/16............................... Ba 24,750 27,070,313
Empresa Colombia de Petroleos, (Colombia)
7.25%, 07/08/98............................... NR 8,250 8,311,875
Kansallis-Osake Pankki, N.Y., (Finland)
8.65%, 01/01/49 (b)........................... Baa1 9,000 9,397,350
9.75%, 12/15/98............................... Baa1 16,760 17,789,064
Nacional Financie, (Cayman Islands)
9.00%, 01/25/99............................... Ba2 15,000 15,300,000
National Power Co., (United Kingdom)
7.875%, 12/15/06.............................. Ba2 22,500 22,612,500
8.40%, 12/15/16............................... Ba2 27,500 27,362,500
Okobank, (Finalnd)
7.70%, 10/29/49 (b)........................... NR 3,500 3,585,750
7.25%, 09/27/49............................... A3 18,750 19,125,000
7.325%, 10/29/49 (b).......................... NR 9,000 9,220,500
Petroliam Nasional, (Malaysia)
7.125%, 10/18/06.............................. NR 63,100 63,509,519
PT Alatief Freeport Financial Co., (Netherlands)
9.75%, 04/15/01............................... Ba2 7,600 8,308,700
Rio de Janeiro, (Brazil)
10.375%, 07/12/99............................. NR 7,000 7,192,500
Rogers Cablesystems, Inc., Sr. Sec'd Notes,
(Canada)
10.00%, 03/15/05.............................. Ba3 2,000 2,130,000
</TABLE>
B17
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Royal Bank of Canada, (Canada)
6.75%, 10/24/11............................... Aa3 $ 15,000 $ 14,685,000
Siam Commercila, (Thailand)
7.50%, 03/15/06............................... Aa3 14,500 14,282,500
--------------
343,999,484
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 0.2%
Federal National Mortgage Association,
Zero Coupon, 10/09/19......................... Aaa 11,800 2,391,388
United States Treasury Notes,
6.375%, 08/15/02.............................. Aaa 10,000 10,065,600
--------------
12,456,988
--------------
FOREIGN GOVERNMENT BONDS -- 4.7%
Republic of Argentina, (Argentina)
6.625%, 03/31/05.............................. B1 32,340 28,337,925
Republic of Colombia, (Colombia)
7.125%, 05/11/98.............................. Ba1 2,700 2,713,500
8.00%, 06/14/01............................... NR 2,150 2,182,250
8.75%, 10/06/99............................... Ba1 12,300 12,853,500
Republic of Poland, (Poland)
4.00%, (until 10/27/98)....................... Baa3 100,500 85,048,125
5.00%, (until 10/27/99)
6.00%, (until 10/27/02)
7.00%, 10/27/14
Republic of Venezuela, (Venezuela)
6.50%, 12/18/07............................... Ba2 60,250 53,020,000
United Mexican States, (Mexico)
9.75%, 02/06/01............................... NR 25,000 25,812,500
11.375%, 09/15/16............................. NR 21,000 21,866,250
--------------
231,834,050
--------------
TOTAL LONG-TERM BONDS
(cost $1,657,819,992).................................................... 1,681,460,391
--------------
TOTAL LONG TERM INVESTMENTS
(cost $4,195,725,818).................................................... 4,780,903,499
--------------
SHORT-TERM INVESTMENTS -- 4.1%
BANK NOTES -- 0.1%
American Express Centurian Bank,
5.625%, 01/14/97.............................. NR 1,000 1,000,001
Comerica Bank of Detroit,
6.585%, 02/14/97.............................. NR 569 568,948
NBD Bank, N.A.,
6.55%, 06/02/97............................... NR 2,000 2,008,199
--------------
3,577,148
--------------
CERTIFICATES OF DEPOSIT-DOMESTIC -- 0.5%
Advanta National Bank,
6.14%, 02/28/97............................... Baa2 17,000 17,000,000
Chase Manhattan Bank,
5.43%, 05/06/97............................... P3 6,000 6,000,000
--------------
23,000,000
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
CERTIFICATES OF DEPOSIT-EURODOLLAR -- 0.1%
Abbey National Treasury Services, PLC, (United
Kingdom)
5.41%, 01/30/97............................... P1 $ 2,000 $ 2,000,037
Bayerische Hypotheken, (Germany)
5.74%, 05/27/97............................... NR 1,000 1,000,409
--------------
3,000,446
--------------
CERTIFICATES OF DEPOSIT-YANKEE -- 0.5%
Bank of Montreal, (Canada)
5.39%, 01/22/97............................... P1 2,000 2,000,000
Banque Nationale de Paris, (France)
5.41%, 01/15/97............................... NR 3,000 2,999,989
5.58%, 04/02/97............................... NR 2,000 1,999,461
Barclays Bank, PLC, (United Kingdom)
5.37%, 02/03/97-02/05/97...................... NR 6,000 6,000,000
Deutsche Bank, (Germany)
5.69%, 10/28/97............................... P3 1,000 999,754
Empresas La Moderna, SA, (Mexico)
10.25%, 11/12/97.............................. Baa1 2,000 2,051,250
Grupo Televisa, SA, (Mexico)
10.00%, 11/09/97.............................. Ba2 4,000 4,100,000
National Bank of Canada, (Canada)
5.438%, 03/10/97.............................. P3 1,000 1,000,000
Societe Generale, (France)
5.77%, 05/15/97............................... P1 1,000 1,000,130
--------------
22,150,584
--------------
COMMERCIAL PAPER -- 1.3%
Aetna Services, Inc.,
5.42%, 03/14/97............................... NR 2,000 1,978,621
American Brands Inc,
5.33%, 01/31/97............................... P3 1,000 995,706
6.00%, 01/22/97............................... P3 1,000 996,667
American Express Credit Corp.,
5.30%, 02/28/97............................... P1 3,000 2,974,825
Aristar, Inc.,
5.59%, 02/28/97............................... P2 1,000 991,149
Bank Austria,
5.35%, 01/15/97............................... NR 2,000 1,996,136
Barton Capital Corp.,
5.35%, 02/27/97............................... NR 1,000 991,678
Bradford & Bingley Building Society,
5.35%, 01/10/97-01/15/97...................... A1 5,550 5,542,659
Caterpillar Financial Services Corp.,
5.35%, 06/16/97............................... P1 1,000 975,479
Cheltenham & Gloucester Building Society,
5.325%, 02/24/97.............................. NR 1,000 992,160
5.35%, 01/15/97............................... NR 1,000 998,068
Coca Cola Enterprises, Inc.,
5.34%, 02/03/97............................... NR 1,000 995,253
Colonial Pipeline Co.,
5.75%, 01/27/97............................... P3 1,000 996,007
Commonwealth Bank of Australia,
5.32%, 01/22/97............................... NR 7,000 6,979,311
Corporate Receivables Corp.,
5.33%, 01/24/97............................... NR 2,000 1,993,486
</TABLE>
B18
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Countrywide Home Loan, Inc.,
6.20%, 01/15/97............................... NR $ 3,000 $ 2,993,283
CXC, Inc.,
5.60%, 01/16/97............................... NR 1,005 1,002,811
7.00%, 01/02/97............................... NR 670 670,000
Dakota Cert. Prog. of Stand. Cred.,
5.34%, 01/23/97............................... NR 2,000 1,993,770
Engelhard Corp.,
5.58%, 02/24/97............................... P2 1,000 991,785
Enterprise Funding Corp.,
5.47%, 01/16/97............................... NR 1,000 997,873
5.50%, 01/15/97............................... NR 2,000 1,996,028
Fleet Funding Corp.,
5.80%, 02/04/97............................... NR 1,000 994,683
General Motors Acceptance Corp.,
5.47%, 02/12/97............................... P1 3,000 2,981,311
5.50%, 04/07/97............................... P1 1,912 1,884,249
Kredietbank Na Finance Corp.,
5.32%, 01/16/97............................... NR 1,000 997,931
Merrill Lynch & Co., Inc.,
5.31%, 02/27/97............................... P1 1,000 991,740
5.32%, 01/21/97............................... P1 1,000 997,192
5.33%, 01/24/97............................... P1 2,000 1,993,486
5.35%, 01/29/97............................... P1 3,000 2,987,963
Morgan Stanley Group, Inc.,
5.32%, 01/29/97............................... P1 5,000 4,980,050
Nationwide Building Society,
5.375%, 02/26/97.............................. NR 1,000 991,788
Preferred Receivables Funding Corp.,
5.45%, 01/15/97............................... P1 1,000 998,032
5.60%, 02/25/97............................... P1 1,000 991,600
Short Term Repack Asset Trust,
6.006%, 12/15/97.............................. NR 1,000 999,797
Societe Generale,
5.57%, 04/04/97............................... P1 1,000 999,676
Transamerica Financial Corp.,
5.34%, 02/03/97............................... P1 1,000 995,253
--------------
65,827,506
--------------
OTHER CORPORATE OBLIGATIONS -- 0.2%
Associates Corp. of North America,
6.625%, 11/15/97.............................. P1 600 604,890
Beneficial Corp.,
5.54%, 08/05/97............................... P1 1,000 1,000,375
9.70%, 05/30/97............................... P1 2,000 2,031,498
Capital Equipment Receivable Trust,
5.60%, 10/15/97............................... NR 1,545 1,544,889
Dean Witter, Discover &,
5.747%, 03/06/97.............................. P2 1,250 1,250,281
Ford Motor Credit Corp.,
5.625%, 03/03/97.............................. P1 500 499,927
7.95%, 03/27/97............................... P1 465 467,315
General Electric Capital Corp.,
8.00%, 02/01/97............................... P1 1,500 1,503,055
General Motors Acceptance Corp.,
7.75%, 02/20/97-04/15/97...................... P1 825 828,464
7.85%, 03/05/97............................... P1 1,150 1,154,153
7.90%, 03/13/97............................... P1 500 501,804
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Household Finance Corp.,
5.67%, 08/11/97............................... P2 $ 475 $ 475,495
Norwest Corp.,
7.70%, 11/15/97............................... P1 500 508,485
Pfizer, Inc.,
6.50%, 02/01/97............................... P3 500 500,280
--------------
12,870,911
--------------
REPURCHASE AGREEMENT -- 1.4%
Joint Repurchase Agreement Account,
6.613%, 01/02/97 (Note 5)..................... 70,099 70,099,000
--------------
TOTAL SHORT-TERM INVESTMENTS -- 4.1%
(cost $204,409,679)...................................................... 200,525,595
--------------
TOTAL INVESTMENTS BEFORE SHORT SALE -- 101.7%
(cost $4,400,135,497; Note 6)............................................ 4,981,429,094
--------------
INVESTMENT SOLD SHORT -- (2.2%)
United States Treasury Bond,
6.75% 8/15/26
(proceeds $113,630,151; Note 2)............................. 108,775 (112,461,581)
--------------
TOTAL INVESTMENTS, NET OF SHORT SALES -- 99.5%.............................
4,868,967,513
OTHER ASSETS IN EXCESS OF OTHER
LIABILITIES -- 0.5%.................................................... 27,955,174
--------------
TOTAL NET ASSETS -- 100.0%................................................. $4,896,922,687
--------------
--------------
<FN>
The following abbreviations are used in portfolio descriptions:
ADR American
Depository
Receipt
AG Aktiengesellschaft (West German Stock Company)
B.A. Bankers' Acceptances
C.D. Certificates of Deposit
M.T.N. Medium Term Note
NR Not Rated
PLC Public Limited Company (British Corporation)
SA Sociedad Anonima (Spanish Corporation) or Societe
Anonyme (French Corporation)
(a) Non-income
producing
security.
(b) Indicates a variable rate security.
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B19
<PAGE>
HIGH YIELD BOND PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 90.8%
<S> <C> <C> <C>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) VALUE
CORPORATE BONDS -- 87.8% (NOTE 2)
<CAPTION>
------------ --------- --------------
<S> <C> <C> <C>
AEROSPACE -- 1.1%
K & F Industries, Inc.,
Sr. Notes,
11.875%, 12/01/03............................. B1 $ 1,500 $ 1,616,250
Talley Manufacturing & Technology, Inc.,
Sr. Notes,
10.75%, 10/15/03.............................. B2 3,000 3,097,500
--------------
4,713,750
--------------
AUTOMOTIVE PARTS -- 2.1%
Foamex, L.P.,
Sr. Sub. Deb.,
11.875%, 10/01/04............................. B3 1,500 1,597,500
Sr. Notes,
11.25%, 10/01/02.............................. B1 1,500 1,590,000
11.125%, 06/15/01............................. B2 4,000 4,290,000
Foamex-JPS Automotive L.P.,
Sr. Disc. Notes,
Zero Coupon (until 07/1/99), 14.0%,
07/01/04.................................... NR 2,000 1,660,000
--------------
9,137,500
--------------
BROADCASTING & OTHER MEDIA -- 3.3%
Benedek Broadcasting Corp., Sr. Notes,
11.875%, 03/01/05............................. Ba3 2,910 3,171,900
Globo Communicacoes E Particip., Sr. Notes,
10.50%, 12/20/06.............................. NR 1,040 1,049,100
Outdoor Systems, Inc.,
Sr. Sub. Notes,
9.375%, 10/15/06.............................. B1 3,500 3,605,000
Paxson Communications Corp., Sr. Sub. Notes,
11.625%, 10/01/02............................. B3 4,500 4,691,250
Universal Outdoor, Inc.,
Sr. Sub. Notes,
9.75%, 10/15/06............................... B1 1,750 1,806,875
--------------
14,324,125
--------------
BUILDING & RELATED INDUSTRIES -- 1.9%
Building Materials Corp. of America, Sr. Notes,
Zero Coupon (until 07/1/99), 11.75%,
07/01/04.................................... Ba3 5,000 4,325,000
Nortek, Inc., Sr. Sub. Notes,
9.875%, 03/01/04.............................. B3 3,750 3,787,500
--------------
8,112,500
--------------
CABLE -- 18.6%
Adelphia Communications Corp., Sr. Notes, PIK,
9.50%, 02/15/04............................... B2 1,707 1,476,923
12.50%, 05/15/02.............................. B2 750 768,750
American Telecasting, Inc., Sr. Disc. Notes,
Zero Coupon, (until 08/15/00), 14.56%,
08/15/05.................................... Caa 6,500 2,470,000
Zero Coupon, (until 06/15/99), 14.5%,
06/15/04.................................... Caa 3,000 1,230,000
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
CORPORATE BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
CAI Wireless Systems, Inc., Sr. Notes,
12.25%, 09/15/02.............................. Caa $ 5,550 $ 2,553,000
Cablevision Systems Corp., Sr. Sub. Deb.,
9.25%, 11/01/05............................... B3 4,825 4,776,750
Sr. Sub. Notes,
9.875%, 02/15/13.............................. B2 3,300 3,250,500
Century Communications Corp., Sr. Notes,
9.50%, 03/01/05............................... Ba3 3,500 3,587,500
Comcast Corp.,
Sr. Sub. Deb.,
9.375%, 05/15/05.............................. B1 5,000 5,187,500
Sr. Sub. Notes,
9.125%, 10/15/06.............................. B1 1,000 1,025,000
Continental Cablevision, Inc.,
Sr. Deb.,
9.50%, 08/01/13............................... Ba2 5,000 5,707,550
Diamond Cable Co.,
Sr. Disc. Notes,
Zero Coupon, (until 12/15/00), 11.75%,
12/15/05.................................... B3 1,250 900,000
Zero Coupon, (until 09/30/99), 13.25%,
09/30/04.................................... B3 2,000 1,640,000
Echostar Communications Corp., Sr. Disc. Notes,
Zero Coupon, (until 06/1/99), 12.875%,
06/01/04.................................... B2 5,000 4,125,000
Echostar Satellite,
Sr. Disc. Notes,
Zero Coupon, (until 03/15/00), 13.125%,
03/15/04.................................... Caa 3,000 2,265,000
Falcon Holdings Group, L.P., Series B, Sr. Sub.
Notes, PIK,
11.00%, 09/15/03.............................. NR 3,810 3,410,209
Intermedia Capital Partners, Sr. Notes,
11.25%, 08/01/06.............................. B 3,380 3,506,750
International Cabletel, Inc.,
Zero Coupon (until 10/15/98), 10.875%,
10/15/03.................................... B3 1,500 1,260,000
Zero Coupon (until 04/15/00), 12.75%,
04/15/05.................................... B3 4,350 3,262,500
Kabelmedia Holdings,
Sr. Disc. Notes,
Zero Coupon (until 08/1/01), 13.625%,
08/01/06.................................... B3 2,000 1,120,000
Lenfest Communications, Inc.,
Sr. Notes,
8.375%, 11/01/05.............................. Ba3 4,550 4,396,437
</TABLE>
B20
<PAGE>
HIGH YIELD BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
CORPORATE BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Marcus Cable Operating Co., L.P.,
Sr. Sub. Disc. Notes,
Zero Coupon (until 08/1/99), 13.5%,
08/01/04.................................... Ba3 $ 5,750 $ 4,715,000
People's Choice TV Corp., Sr. Disc. Notes,
Zero Coupon (until 06/1/00), 13.125%,
06/01/04.................................... Caa 3,500 1,505,000
Rogers Cablesystems, Inc., Sr. Sec'd 2nd Deb.,
10.00%, 12/01/07.............................. Ba3 1,000 1,055,000
10.00%, 03/15/05.............................. Ba3 4,250 4,526,250
Tevecap S.A., Sr. Notes,
12.625%, 11/26/04............................. B2 1,500 1,533,750
United International Holdings, Inc.,
Sr. Disc. Notes,
Zero Coupon, 11/15/99......................... B3 4,800 3,417,000
Videotron Holdings, PLC,
Sr. Disc. Notes,
Zero Coupon (until 07/1/99), 11.125%,
07/01/04.................................... B3 4,175 3,632,250
Zero Coupon (until 08/15/00), 11.00%,
08/15/05.................................... B3 3,200 2,576,000
--------------
80,879,619
--------------
CASINOS -- 3.8%
Boomtown, Inc.,
First Mtge. Bonds,
11.50%, 11/01/03.............................. B1 1,500 1,578,750
Casino Magic Finance Corp., First Mtge. Bonds,
11.50%, 10/15/01.............................. B1 1,300 1,176,500
Colorado Gaming & Entertainment,
Sr. Notes, PIK,
12.00%, 06/01/03.............................. NR 2,645 2,539,200
Empress River Casino,
Sr. Notes,
10.75%, 04/01/02.............................. Ba3 4,500 4,882,500
Lady Luck Gaming,
First Mtge. Notes,
11.875%, 03/01/01............................. B2 2,000 1,940,000
Trump Atlantic City Assoc., First Mtge. Notes,
11.25%, 05/01/06.............................. B1 4,300 4,257,000
--------------
16,373,950
--------------
CHEMICALS -- 1.3%
ISP Holdings, Inc.,
Sr. Notes,
9.00%, 10/15/03............................... Ba3 2,000 2,030,000
9.75%, 02/15/02............................... Ba3 2,319 2,376,975
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
CORPORATE BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Sterling Chemical Holdings, Inc., Sr. Disc.
Notes,
Zero Coupon (until 08/15/01), 13.5%,
08/15/08.................................... Caa $ 560 $ 327,600
Sr. Sub. Notes,
11.75%, 08/15/06.............................. B3 1,000 1,060,000
--------------
5,794,575
--------------
COMPUTER SERVICES -- 0.5%
Unisys Corp., Sr. Notes,
11.75%, 10/15/04.............................. B1 2,000 2,135,000
--------------
CONSUMER PRODUCTS -- 1.5%
Radnor Holdings Corp.,
Sr. Notes,
10.00%, 12/01/03.............................. B2 840 856,800
Revlon Worldwide Corp.,
Sr. Disc. Notes,
Zero Coupon, 03/15/98......................... NR 2,000 1,720,000
Sealy Corp., Sr. Sub. Notes,
9.50%, 05/01/03............................... B1 750 757,500
Twin Labs, Inc., Gtd. Notes,
10.25%, 05/15/06.............................. B3 3,000 3,090,000
--------------
6,424,300
--------------
DIVERSIFIED INDUSTRIES -- 0.4%
Newflo Corp., Sub. Notes,
13.25%, 11/15/02.............................. B3 1,500 1,655,625
--------------
DRUGS & HEALTHCARE -- 4.4%
Fresenius Med Care Capital Trust,
9.00%, 12/01/06............................... Ba3 1,600 1,628,000
Imed Corp., Sr. Sub. Notes,
9.75%, 12/01/06............................... B3 1,960 1,994,300
Owens & Minor, Inc.,
Sr. Sub. Notes,
10.875%, 06/01/06............................. B1 3,450 3,700,125
Paracelsus Health,
Sr. Sub. Notes,
10.00%, 08/15/06.............................. B1 2,250 2,115,000
Tenet Healthcare Corp.,
Sr. Sub. Notes,
10.125%, 03/01/05............................. Ba3 8,500 9,413,750
--------------
18,851,175
--------------
ENERGY -- 8.8%
Calenergy, Inc., Sr. Notes,
9.50%, 09/15/06............................... Ba2 1,500 1,552,500
California Energy Co., Inc., Disc. Notes,
Zero Coupon (until 01/15/97), 10.25%,
01/15/04.................................... Ba3 2,250 2,370,938
Falcon Drilling Co., Inc., L.P., Series B,
Sr. Notes,
9.75%, 01/15/01............................... B2 500 525,000
Sr. Sub. Notes,
12.50%, 03/15/05............................ NR 2,500 2,775,000
Gulf Canada Resources,
Ltd.,
9.625%, 07/01/05.............................. Ba3 3,600 3,897,000
KCS Energy, Inc., Sr. Notes,
11.00%, 01/15/03.............................. B1 5,000 5,400,000
</TABLE>
B21
<PAGE>
HIGH YIELD BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
CORPORATE BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Long Island Lighting Co.,
Deb.,
7.05%, 03/15/03............................... B3 $ 1,500 $ 1,465,365
9.00%, 11/01/22............................... Ba3 4,000 4,210,000
Maxus Energy Corp.,
Sr. Notes,
9.375%, 11/01/03.............................. B1 1,250 1,268,750
M.T.N.,
10.83%, 09/01/04.............................. B1 3,600 3,816,000
McDermott J. Ray,
Sr. Sub. Notes,
9.375%, 07/15/06.............................. Ba3 2,750 2,887,500
Parker Drilling Co.,
Gtd. Notes,
9.75%, 11/15/06............................... B1 1,360 1,434,800
Petroleum Heat & Power, Inc.,
Sub. Deb.,
9.375%, 02/01/06.............................. B2 2,000 1,900,000
12.25%, 02/01/05.............................. B2 813 902,430
Transtexas Gas Corp.,
Sr. Sec'd Notes,
11.50%, 06/15/02.............................. B2 3,525 3,807,000
--------------
38,212,283
--------------
FINANCIAL SERVICES -- 0.5%
First Nationwide Holdings, Inc.,
Sr. Notes,
12.50%, 04/15/03.............................. Ba 450 504,000
Sr. Sub. Notes,
10.625%, 10/01/03............................. Ba3 1,600 1,728,000
--------------
2,232,000
--------------
FOOD & BEVERAGE -- 2.9%
Del Monte Corp.,
Sub. Notes, PIK,
12.25%, 09/01/02 (cost $2,041,800; purchased
09/10/96) (b)............................... B3 2,041 2,081,820
Fresh Del Monte Produce, N.V., Sr. Notes,
10.00%, 05/01/03.............................. Caa 5,500 5,307,500
PM Holdings Corp.,
Zero Coupon (until 09/01/00), 11.50%,
09/01/05.................................... B3 2,981 1,922,745
PSF Hldgs., LLC, PIK,
Sr. Sec'd Notes,
11.00%, 09/17/03 (cost $242,548; purchased
11/21/96) (b)............................... NR 243 251,037
Specialty Foods Corp.,
Sr. Notes,
11.125%, 10/01/02............................. B3 3,000 2,850,000
--------------
12,413,102
--------------
INDUSTRIAL -- 0.2%
Clark Material Handling Corp., Sr. Notes,
10.75%, 11/15/06.............................. B1 800 832,000
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
CORPORATE BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
LEISURE & TOURISM -- 4.1%
HMC Acquisition, Sr. Notes,
9.00%, 12/15/07............................... Ba3 $ 3,000 $ 3,045,000
HMH Properties, Inc.,
Sr. Notes,
9.50%, 05/15/05............................... Ba3 5,550 5,772,000
Host Marriott Travel Plaza, Sr. Notes,
9.50%, 05/15/05............................... B1 4,600 4,801,250
Plitt Theaters, Inc.,
Sr. Sub. Notes,
10.875%, 06/15/04............................. B3 4,000 4,030,000
--------------
17,648,250
--------------
MEDIA -- 1.6%
NewCity Communications, Inc., Sr. Sub. Notes,
11.375%, 11/01/03............................. B3 3,250 3,599,375
Tele-Communications, Inc., Deb.,
9.80%, 02/01/12............................... B2 3,000 3,246,600
--------------
6,845,975
--------------
MISCELLANEOUS SERVICES -- 1.7%
Coinstar, Inc.,
Sr. Sub. Notes,
Zero Coupon (until 10/1/99), 13.0%, 10/01/06
(cost $621,351; purchased 10/17/96) (b)..... NR 900 639,000
Interact Systems Inc.,
Sr. Disc. Notes,
Zero Coupon (until 08/1/99), 14.0%,
08/01/03.................................... NR 4,400 2,200,000
United Stationer Supply Co., Sr. Sub. Notes,
12.75%, 05/01/05.............................. B3 4,000 4,420,000
--------------
7,259,000
--------------
PAPER & FOREST -- 2.8%
Gaylord Container Corp.,
Sr. Sub. Disc. Notes,
12.75%, 05/15/05.............................. Caa 4,365 4,823,325
Ivex Packaging Corp.,
Sr. Sub Notes,
12.50%, 12/15/02.............................. B3 740 801,050
Pacific Lumber Co.,
Sr. Notes,
10.50%, 03/01/03.............................. B3 2,750 2,791,250
Stone Consolidated, Inc.,
Sr. Notes,
10.25%, 12/15/00.............................. Ba1 3,500 3,727,500
--------------
12,143,125
--------------
PLASTIC PRODUCTS -- 0.4%
Applied Extrusion Technology, Inc.,
Sr. Notes,
11.50%, 04/01/02.............................. B2 1,700 1,785,000
--------------
</TABLE>
B22
<PAGE>
HIGH YIELD BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
CORPORATE BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
PUBLISHING -- 0.5%
Petersen Publishing,
Sr. Sub. Notes,
11.125%, 11/15/06 (cost $2,064,063; purchased
11/20/96 & 12/05/96) (b).................... B3 $ 2,050 $ 2,137,125
--------------
RETAIL -- 2.4%
Cole National Group, Inc., Sr. Sub Notes,
9.875%, 12/31/06 (cost $1,916,100; purchased
11/13/96 & 11/22/96) (b).................... B2 1,920 1,977,600
Kmart Corp., Deb.,
8.25%, 01/01/22............................... Ba3 3,250 2,730,000
8.375%, 07/01/22.............................. Ba3 2,500 2,100,000
Phar-Mor, Inc., Sr. Notes,
11.72%, 09/11/02.............................. Ba3 3,400 3,570,000
--------------
10,377,600
--------------
STEEL & METAL -- 1.0%
Maxxam Group Holdings, Inc.,
Sr. Notes,
12.00%, 08/01/03.............................. B3 800 816,000
United States Can Corp.,
Sr. Sub. Notes,
10.125%, 10/15/06............................. B2 800 841,000
WCI Steel, Inc., Sr. Notes,
10.00%, 12/01/04.............................. B2 2,500 2,531,250
--------------
4,188,250
--------------
SUPERMARKETS -- 2.4%
Food 4 Less Holdings, Inc., Sr. Disc. Deb.,
Zero Coupon, (until 06/15/00), 13.625%,
07/15/05.................................... Caa 1,900 1,197,000
Jitney-Jungle Stores America, Inc.,
12.00%, 03/01/06.............................. B2 4,000 4,230,000
Pathmark Stores, Inc.,
Sub. Notes,
11.625%, 06/15/02............................. Caa 2,690 2,730,350
Smiths Food & Drug,
Sr. Sub. Notes,
11.25%, 05/15/07.............................. B3 2,250 2,486,250
--------------
10,643,600
--------------
TELECOMMUNICATIONS -- 16.4%
Brooks Fiber Properties, Inc., Sr. Disc. Notes,
Zero Coupon (until 11/01/01), 11.875%,
11/01/06.................................... NR 4,000 2,565,000
Zero Coupon (until 03/01/01), 10.875%,
03/01/06.................................... NR 2,250 1,440,000
CellNet Data Systems, Inc., Sr. Disc. Notes,
Zero Coupon (until 06/15/00), 13.00%, 06/15/05
(cost $2,286,598; purchased 06/06/95 &
11/17/95) (b)............................... NR 4,250 3,336,250
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
CORPORATE BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Centennial Cellular Corp., Sr. Notes,
10.125%, 05/15/05............................. B1 $ 4,500 $ 4,533,750
Clearnet Communications, Inc., Sr. Disc. Notes,
Zero Coupon (until 12/15/00), 14.75%,
12/15/05.................................... B3 7,940 4,922,800
GST Telecommunications, Inc., Sr. Disc. Notes,
Zero Coupon (until 12/15/00), 13.875%,
12/15/05.................................... NR 7,200 4,410,000
Geotek Communications, Inc., Sr. Disc. Notes,
Zero Coupon (until 07/15/00), 15.00%,
07/15/05.................................... Caa 5,000 3,175,000
ICG Holdings, Inc.,
Sr. Sub. Notes,
Zero Coupon (until 09/15/00), 13.50%,
09/15/05.................................... NR 6,300 4,441,500
Impsat Corp., Sr. Notes,
12.125%, 07/15/03............................. B2 2,500 2,650,000
Intermedia Communications of Florida, Inc.,
Sr. Disc. Notes,
Zero Coupon (until 05/15/01), 12.50%,
05/15/06.................................... B3 2,000 1,360,000
Sr. Notes,
13.50%, 06/01/05.............................. B3 3,000 3,435,000
International Wireless Commerce,
Sr. Disc. Notes,
Zero Coupon, 08/15/01......................... NR 2,600 1,404,000
Ionica PLC, Sr. Notes,
13.50%, 08/15/06.............................. NR 4,000 4,080,000
MFS Communications Co., Inc., Sr. Disc. Notes,
Zero Coupon (until 01/15/99), 9.375%,
01/15/04.................................... B1 6,500 5,638,750
Metrocall, Inc.,
Sr. Sub. Notes,
10.375%, 10/01/07............................. B3 5,500 4,730,000
Omnipoint Corp., Sr. Notes,
11.625%, 08/15/06............................. B2 2,000 2,075,000
Pagemart, Inc.,
Zero Coupon (until 11/01/98), 12.25%,
11/01/03.................................... NR 2,000 1,600,000
Sr. Disc. Notes,
Zero Coupon (until 02/01/00), 15.00%,
02/01/05.................................... NR 6,500 4,468,750
Paging Network, Inc.,
Sr. Sub. Notes,
10.125%, 08/01/07............................. B2 5,250 5,355,000
</TABLE>
B23
<PAGE>
HIGH YIELD BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
CORPORATE BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Rogers Cantel, Deb.,
9.375%, 06/01/08.............................. Ba3 $ 1,500 $ 1,575,000
Winstar Communications, Inc., Sr. Disc. Notes,
Zero Coupon (until 10/15/00), 14.00%,
10/15/05.................................... NR 5,850 3,583,125
--------------
70,778,925
--------------
TEXTILES -- 1.2%
Dominion Textile (USA), Inc., Notes,
9.25%, 04/01/06............................... Ba2 3,500 3,556,875
Polysindo Int'l Finance Co., Notes,
11.375%, 06/15/06............................. Ba3 1,500 1,638,750
--------------
5,195,625
--------------
TRANSPORTATION/AIRLINES -- 0.9%
US Air, Inc., Series 89-A2,
9.82%, 01/01/13............................... B1 4,000 3,900,000
--------------
TRANSPORTATION/TRUCKING/SHIPPING -- 0.4%
Ameritruck Distribution Corp., Sr. Sub. Notes,
12.25%, 11/15/05.............................. B-(c) 1,740 1,744,350
--------------
WASTE MANAGEMENT -- 0.7%
Allied Waste North America, Inc., Sr. Sub.
Notes,
10.25%, 12/01/06.............................. B3 3,000 3,155,625
--------------
TOTAL CORPORATE BONDS
(cost $370,615,827)...................................................... 379,893,954
--------------
CONVERTIBLE BONDS -- 0.9%
TELECOMMUNICATIONS -- 0.9%
Geotek Communications, Inc.,
12.00%, 02/15/01
(cost $2,000,000; purchased 03/05/96) (b)... Caa 2,000 2,030,000
GST Communications, Inc.,
Sr. Disc. Notes
Zero Coupon (until 12/15/00), 13.875%,
12/15/05.................................... NR 650 513,500
Winstar Communications, Inc.,
Sr. Disc. Notes,
Zero Coupon (until 10/15/00), 14.00%,
10/15/05.................................... NR 2,025 1,458,000
--------------
TOTAL CONVERTIBLE BONDS
(cost $3,413,622)........................................................ 4,001,500
--------------
PREFERRED STOCKS -- 1.6% SHARES
-------------
Cablevision Systems Corp., Series H, PIK........ 11,579 1,082,678
Series L, PIK................................. 299 2,683,166
Silgan Holdings, Inc., PIK...................... 28,870 3,089,090
--------------
TOTAL PREFERRED STOCKS
(cost $7,100,626).............................................. 6,854,934
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
VALUE
COMMON STOCKS (A) -- 0.1% SHARES (NOTE 2)
<CAPTION>
------------- --------------
<S> <C> <C>
Dr. Pepper Bottling Holdings, Inc., (Class 'B'
Stock)........................................ 5,807 $ 58,070
Loehmann's Holdings, Inc........................ 4,403 101,269
PM Holdings Corp................................ 1,103 386,050
Pagemart Nationwide, Inc........................ 13,125 91,875
--------------
TOTAL COMMON STOCKS
(cost $5,226).................................................. 637,264
--------------
COMMON TRUST UNITS -- 0.1% UNITS
-------------
PSF Hldgs., LLC, (cost $757,452; purchased
11/21/96) (b)................................. 22,025 594,675
--------------
WARRANTS (A) -- 0.3%
American Telecasting, Inc., expiring 08/10/00... 6,500 39,000
CellNet Data System, Inc., expiring 06/15/05
(cost $0; purchased 06/06/95 &
11/17/95) (b)................................. 17,000 170
Cellular Communications Int'l, Inc., expiring
08/15/03...................................... 4,375 0
Clearnet Communications, Inc., expiring
09/15/05...................................... 26,202 189,964
Coinstar, Inc., expiring 10/1/06 (cost $0;
purchased 10/17/96) (b)....................... 900 9
Foamex - JPS Automotive, expiring 07/1/99....... 2,000 50,000
ICG Communications, expiring 09/15/05........... 20,790 270,270
Interact Systems, Inc., expiring 08/1/03........ 4,400 0
Intercel, Inc., expiring 02/1/06................ 6,720 47,040
Intermedia Communications of Florida, Inc.,
expiring 06/1/00 (cost $0; purchased
05/25/95) (b)................................. 3,000 105,000
International Wireless Commerce, expiring
08/15/01...................................... 2,600 26
Ionica PLC, expiring 08/15/06................... 4,000 440,000
Nextel Comm,
expiring 12/15/98............................. 1,543 15
expiring 04/25/99............................. 2,250 23
Pagemart, Inc., expiring 11/1/03................ 9,200 46,000
People's Choice TV Corp., expiring 06/1/00...... 3,500 3,500
President Riverboat Casinos, expiring
09/30/99...................................... 22,075 221
Sterling Chemical Holdings, Inc., expiring
08/15/08...................................... 560 19,600
--------------
TOTAL WARRANTS................................................... 1,210,838
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $381,892,753)............................................ 393,193,165
--------------
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS -- 7.8% (000)
-------------
REPURCHASE AGREEMENT -- 7.3%
Joint Repurchase Agreement Account,
6.613%, 01/02/97 (Note 5)..................... $ 31,450 31,450,000
--------------
</TABLE>
B24
<PAGE>
HIGH YIELD BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED) (000) (NOTE 2)
------------- --------------
<S> <C> <C>
U. S. GOVERNMENT & AGENCY OBLIGATIONS -- 0.5%
U.S. Treasury Bills,
4.85%, 03/06/97............................... $ 2,000 $ 1,982,640
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $33,433,025)............................................. 33,432,640
--------------
TOTAL INVESTMENTS -- 98.6%
(cost $415,325,778; Note 6).................................... 426,625,805
OTHER ASSETS IN EXCESS OF LIABILITIES -- 1.4%....................
6,241,070
--------------
TOTAL NET ASSETS -- 100.0%....................................... $ 432,866,875
--------------
--------------
<FN>
The following abbreviations are used in portfolio descriptions:
LLC Limited
Liability
Company
L.P. Limited Partnership
M.T.N. Medium Term Note
NR Not Rated by Moody's or Standard & Poor's
PIK Payment in Kind securities
(a) PLC Non-income Public Limited Company (British Corporation)
producing
security.
(b) Indicates a restricted security; the aggregate cost of such
securities is $11,929,912. The aggregate value is
$13,152,686 and is approximately 3.0% of net assets.
(c) Standard & Poor's Rating.
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B25
<PAGE>
STOCK INDEX PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 96.8%
VALUE
COMMON STOCKS SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AEROSPACE -- 2.4%
AlliedSignal, Inc............................... 77,300 $ 5,179,100
Boeing Co....................................... 98,028 10,427,728
General Dynamics Corp........................... 17,400 1,226,700
Lockheed Martin Corp............................ 54,149 4,954,633
McDonnell Douglas Corp.......................... 57,300 3,667,200
Northrop Grumman Corp........................... 15,300 1,266,075
Raytheon Co..................................... 62,800 3,022,250
Rockwell International Corp. (a)................ 59,000 3,591,625
United Technologies Corp........................ 65,800 4,342,800
--------------
37,678,111
--------------
AIRLINES -- 0.3%
AMR Corp. (a)................................... 25,000 2,203,125
Delta Air Lines, Inc............................ 20,900 1,481,287
Southwest Airlines Co........................... 39,600 876,150
USAir Group, Inc. (a)........................... 16,100 376,337
--------------
4,936,899
--------------
ALUMINUM -- 0.4%
Alcan Aluminum, Ltd............................. 62,050 2,086,431
Aluminum Co. of America......................... 46,500 2,964,375
Reynolds Metals Co.............................. 17,200 969,650
--------------
6,020,456
--------------
AUTOS - CARS & TRUCKS -- 2.1%
Chrysler Corp................................... 197,400 6,514,200
Cummins Engine Co., Inc......................... 11,200 515,200
Dana Corp....................................... 26,900 877,612
Echlin, Inc..................................... 16,600 524,975
Ford Motor Co................................... 322,100 10,266,937
General Motors Corp............................. 204,900 11,423,175
Genuine Parts Co................................ 33,150 1,475,175
Johnson Controls, Inc........................... 11,100 919,912
Navistar International Corp. (a)................ 20,500 187,062
Safety Kleen Corp............................... 17,450 285,744
--------------
32,989,992
--------------
BANKS AND SAVINGS & LOANS -- 7.3%
Banc One Corp................................... 117,694 5,060,842
Bank of Boston Corp............................. 40,600 2,608,550
Bank of New York Company, Inc................... 105,800 3,570,750
BankAmerica Corp................................ 97,448 9,720,438
Bankers Trust NY Corp........................... 22,000 1,897,500
Barnett Banks, Inc.............................. 52,900 2,175,512
Boatmen's Bancshares, Inc....................... 41,800 2,696,100
Chase Manhattan Corp............................ 119,147 10,633,870
Citicorp........................................ 129,500 13,338,500
Comerica, Inc................................... 30,700 1,607,912
CoreStates Financial Corp....................... 60,100 3,117,687
First Bank System, Inc.......................... 37,600 2,566,200
First Chicago NBD Corp.......................... 88,315 4,746,931
First Union Corp................................ 76,525 5,662,850
Fleet Financial Group, Inc...................... 71,100 3,546,112
Golden West Financial Corp...................... 15,000 946,875
Great Western Financial Corp.................... 37,100 1,075,900
H.F. Ahmanson & Co.............................. 29,400 955,500
J.P. Morgan & Co., Inc.......................... 50,250 4,905,656
KeyCorp......................................... 62,600 3,161,300
Mellon Bank Corp................................ 34,550 2,453,050
NationsBank Corp................................ 78,139 7,638,087
Norwest Corp.................................... 99,100 4,310,850
PNC Bank Corp................................... 90,800 3,416,350
Suntrust Banks, Inc............................. 59,500 2,930,375
U.S. Bancorp.................................... 42,100 1,891,869
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Wachovia Corp................................... 44,900 $ 2,536,850
Wells Fargo & Co................................ 25,266 6,815,503
--------------
115,987,919
--------------
BEVERAGES -- 3.7%
Adolph Coors Co. (Class 'B' Stock).............. 9,500 180,500
Anheuser-Busch Companies, Inc................... 135,800 5,432,000
Brown-Forman Corp. (Class 'B' Stock)............ 19,500 892,125
Coca-Cola Co.................................... 676,000 35,574,500
PepsiCo, Inc.................................... 423,200 12,378,600
Seagram Co., Ltd................................ 101,100 3,917,625
--------------
58,375,350
--------------
CHEMICALS -- 2.2%
Air Products & Chemicals, Inc................... 30,000 2,073,750
Dow Chemical Co................................. 65,700 5,149,237
E.I. du Pont de Nemours & Co.................... 152,600 14,401,625
Eastman Chemical Co............................. 20,600 1,138,150
FMC Corp. (a)................................... 10,600 743,325
Hercules, Inc................................... 28,400 1,228,300
Monsanto Co..................................... 160,500 6,239,437
Nalco Chemical Co............................... 17,500 632,187
Rohm & Haas Co.................................. 17,900 1,461,087
Sigma-Aldrich Corp.............................. 13,600 849,150
Union Carbide Corp.............................. 34,500 1,410,187
--------------
35,326,435
--------------
CHEMICALS - SPECIALTY -- 0.5%
Engelhard Corp.................................. 39,075 747,309
Great Lakes Chemical Corp....................... 17,400 813,450
Morton International, Inc....................... 39,500 1,609,625
Praxair, Inc.................................... 42,000 1,937,250
Raychem Corp.................................... 11,900 953,487
W.R. Grace & Co................................. 25,000 1,293,750
--------------
7,354,871
--------------
COMMERCIAL SERVICES -- 0.3%
CUC International, Inc. (a)..................... 108,925 2,586,969
Deluxe Corp..................................... 21,100 691,025
Dun & Bradstreet Corp........................... 47,460 1,127,175
John H. Harland Co.............................. 8,200 270,600
Moore Corp., Ltd................................ 26,800 546,050
--------------
5,221,819
--------------
COMPUTER SERVICES -- 5.2%
3Com Corp. (a).................................. 46,800 3,433,950
Amdahl Corp. (a)................................ 33,100 401,337
Autodesk, Inc................................... 13,900 389,200
Automatic Data Processing, Inc.................. 79,000 3,387,125
Bay Networks, Inc. (a).......................... 51,300 1,070,887
Cabletron Systems, Inc. (a)..................... 42,600 1,416,450
Ceridian Corp. (a).............................. 19,800 801,900
Cisco Systems, Inc. (a)......................... 176,200 11,210,725
COMPAQ Computer Corp. (a)....................... 73,400 5,449,950
Computer Associates International, Inc.......... 98,962 4,923,359
Computer Sciences Corp. (a)..................... 20,500 1,683,562
EMC Corp. (a)................................... 64,400 2,133,250
First Data Corp................................. 122,300 4,463,950
Intergraph Corp. (a)............................ 11,300 115,825
Microsoft Corp. (a)............................. 324,900 26,844,862
Novell, Inc. (a)................................ 92,500 875,859
Oracle Corp. (a)................................ 179,025 7,474,294
Seagate Technology, Inc. (a).................... 68,100 2,689,950
</TABLE>
B26
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Silicon Graphics, Inc. (a)...................... 47,600 $ 1,213,800
Sun Microsystems, Inc. (a)...................... 98,800 2,537,925
Tandem Computers, Inc. (a)...................... 32,900 452,375
--------------
82,970,535
--------------
CONSTRUCTION -- 0.2%
Fluor Corp...................................... 23,000 1,443,250
Foster Wheeler Corp............................. 10,400 386,100
Kaufman & Broad Home Corp....................... 8,366 107,712
Owens Corning................................... 13,200 562,650
Pulte Corp...................................... 5,900 181,425
--------------
2,681,137
--------------
CONTAINERS -- 0.2%
Ball Corp....................................... 8,100 210,600
Bemis Co., Inc.................................. 14,200 523,625
Crown Cork & Seal Co., Inc...................... 34,400 1,870,500
--------------
2,604,725
--------------
COSMETICS & SOAPS -- 2.4%
Alberto Culver Co. (Class 'B' Stock)............ 7,000 336,000
Avon Products, Inc.............................. 36,100 2,062,212
Clorox Co....................................... 13,900 1,395,212
Colgate Palmolive Co............................ 41,600 3,837,600
Gillette Co..................................... 121,000 9,407,750
International Flavors & Fragrances, Inc......... 30,300 1,363,500
Procter & Gamble Co............................. 185,252 19,914,590
--------------
38,316,864
--------------
DIVERSIFIED GAS -- 0.2%
Ashland, Inc.................................... 18,000 789,750
Coastal Corp.................................... 28,000 1,368,500
Eastern Enterprises............................. 5,100 180,412
ENSERCH Corp.................................... 19,000 437,000
NICOR, Inc...................................... 14,100 504,075
ONEOK, Inc...................................... 6,400 192,000
--------------
3,471,737
--------------
DIVERSIFIED OFFICE EQUIPMENT -- 3.2%
Alco Standard Corp.............................. 36,176 1,867,586
Avery Dennison Corp............................. 29,200 1,032,950
Dell Computer Corp. (a)......................... 48,600 2,581,875
Hewlett-Packard Co.............................. 276,200 13,879,050
Honeywell, Inc.................................. 35,900 2,360,425
International Business Machines Corp............ 141,100 21,306,100
Pitney Bowes, Inc............................... 40,700 2,218,150
Unisys Corp. (a)................................ 46,100 311,175
Xerox Corp...................................... 88,246 4,643,946
--------------
50,201,257
--------------
DRUGS AND HOSPITAL SUPPLIES -- 9.1%
Abbott Laboratories............................. 210,700 10,693,025
Allergan, Inc................................... 18,600 662,625
ALZA Corp. (a).................................. 23,500 608,062
American Home Products Corp..................... 173,400 10,165,575
Amgen, Inc. (a)................................. 72,000 3,915,000
Bausch & Lomb, Inc.............................. 15,600 546,000
Baxter International, Inc....................... 74,200 3,042,200
Becton, Dickinson & Co.......................... 33,300 1,444,387
Biomet, Inc..................................... 29,900 452,237
Boston Scientific Corp. (a)..................... 48,700 2,922,000
Bristol-Myers Squibb Co......................... 135,840 14,772,600
C.R. Bard, Inc.................................. 14,400 403,200
Eli Lilly & Co.................................. 149,800 10,935,400
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Johnson & Johnson............................... 364,000 $ 18,109,000
Mallinckrodt, Inc............................... 20,600 908,975
Medtronic, Inc.................................. 65,100 4,426,800
Merck & Co., Inc................................ 327,750 25,974,187
Pfizer, Inc..................................... 176,800 14,652,300
Pharmacia & Upjohn, Inc......................... 138,225 5,477,166
Schering-Plough Corp............................ 100,300 6,494,425
St. Jude Medical, Inc. (a)...................... 22,600 963,325
United States Surgical Corp..................... 17,500 689,062
Warner-Lambert Co............................... 73,800 5,535,000
--------------
143,792,551
--------------
ELECTRICAL EQUIPMENT -- 0.3%
Applied Materials, Inc. (a)..................... 52,100 1,872,344
W.W. Grainger, Inc.............................. 14,600 1,171,650
Westinghouse Electric Corp...................... 113,200 2,249,850
--------------
5,293,844
--------------
ELECTRONICS -- 3.8%
Advanced Micro Devices, Inc. (a)................ 37,300 960,475
AMP, Inc........................................ 59,144 2,269,651
Apple Computer, Inc............................. 32,900 686,787
Data General Corp. (a).......................... 9,000 130,500
Digital Equipment Corp. (a)..................... 41,800 1,520,475
EG&G, Inc....................................... 11,800 237,475
Emerson Electric Co............................. 61,000 5,901,750
Harris Corp..................................... 10,900 748,012
Intel Corp...................................... 223,000 29,199,062
LSI Logic Corp. (a)............................. 35,600 952,300
Micron Technology, Inc.......................... 56,000 1,631,000
Motorola, Inc................................... 161,300 9,899,787
National Semiconductor Corp. (a)................ 37,100 904,312
Perkin-Elmer Corp............................... 11,400 671,175
Tandy Corp...................................... 16,665 733,260
Tektronix, Inc.................................. 8,600 440,750
Texas Instruments, Inc.......................... 51,300 3,270,375
Thomas & Betts Corp............................. 14,400 639,000
--------------
60,796,146
--------------
ENVIRONMENTAL SERVICES -- 0.1%
Laidlaw, Inc. (Class 'B' Stock)................. 84,400 970,600
--------------
FINANCIAL SERVICES -- 3.2%
American Express Co............................. 128,900 7,282,850
Beneficial Corp................................. 14,400 912,600
Dean Witter Discover & Co....................... 43,545 2,884,856
Federal Home Loan Mortgage Corp................. 48,750 5,368,594
Federal National Mortgage Association........... 296,000 11,026,000
Fifth Third Bancorp............................. 28,400 1,783,875
Green Tree Financial Corp....................... 36,800 1,421,400
H & R Block, Inc................................ 28,400 823,600
Household International , Inc................... 25,900 2,389,275
MBIA, Inc....................................... 11,700 1,184,625
MBNA Corp....................................... 60,250 2,500,375
Merrill Lynch & Co., Inc........................ 45,400 3,700,100
Morgan Stanley Group, Inc....................... 41,100 2,347,837
National City Corp.............................. 59,800 2,683,525
Republic New York Corp.......................... 15,000 1,224,375
Salomon, Inc.................................... 29,800 1,404,325
Transamerica Corp............................... 17,800 1,406,200
--------------
50,344,412
--------------
FOODS -- 4.1%
Archer-Daniels-Midland Co....................... 146,698 3,227,356
Campbell Soup Co................................ 60,500 4,855,125
</TABLE>
B27
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
ConAgra, Inc.................................... 65,200 $ 3,243,700
CPC International, Inc.......................... 39,200 3,038,000
Fleming Companies, Inc.......................... 9,400 162,150
General Mills, Inc.............................. 42,100 2,668,087
Giant Food, Inc. (Class 'A' Stock).............. 15,500 534,750
H.J. Heinz & Co................................. 99,550 3,558,912
Hershey Foods Corp.............................. 42,600 1,863,750
Kellogg Co...................................... 56,800 3,727,500
Philip Morris Companies, Inc.................... 220,800 24,867,600
Pioneer Hi-Bred International, Inc.............. 22,500 1,575,000
Quaker Oats Co.................................. 37,000 1,410,625
Ralston Purina Company.......................... 29,340 2,152,822
Sara Lee Corp................................... 132,200 4,924,450
Sysco Corp...................................... 47,900 1,562,737
W. M. Wrigley, Jr. Co........................... 31,100 1,749,375
--------------
65,121,939
--------------
FOREST PRODUCTS -- 1.5%
Boise Cascade Corp.............................. 12,986 412,305
Champion International Corp..................... 26,600 1,150,450
Georgia-Pacific Corp............................ 24,600 1,771,200
International Paper Co.......................... 81,534 3,291,935
James River Corp. of Virginia................... 23,000 761,875
Kimberly-Clark Corp............................. 76,594 7,295,578
Louisiana-Pacific Corp.......................... 29,800 629,525
Mead Corp....................................... 13,700 796,312
Potlatch Corp................................... 8,700 374,100
Stone Container Corp............................ 28,566 424,919
Temple Inland, Inc.............................. 14,400 779,400
Union Camp Corp................................. 18,900 902,475
Westvaco Corp................................... 27,300 784,875
Weyerhaeuser Co................................. 54,000 2,558,250
Willamette Industries, Inc...................... 15,000 1,044,375
--------------
22,977,574
--------------
GAS PIPELINES -- 0.5%
Columbia Gas System, Inc........................ 15,300 973,462
Consolidated Natural Gas Co..................... 25,900 1,430,975
El Paso Natural Gas Co.......................... 4,259 215,100
Enron Corp...................................... 68,900 2,971,312
NorAm Energy Corp............................... 35,700 548,887
Peoples Energy Corp............................. 9,700 328,587
Williams Companies, Inc......................... 42,300 1,586,250
--------------
8,054,573
--------------
HOSPITAL MANAGEMENT -- 0.8%
Beverly Enterprises, Inc. (a)................... 24,200 308,550
Columbia/HCA Healthcare Corp.................... 182,698 7,444,943
Guidant Corp.................................... 13,000 741,000
Humana, Inc. (a)................................ 43,500 831,937
Manor Care, Inc................................. 15,850 427,950
Service Corp. International..................... 64,400 1,803,200
Shared Medical Systems Corp..................... 7,100 349,675
Tenet Healthcare Corp. (a)...................... 57,600 1,260,000
--------------
13,167,255
--------------
HOUSING RELATED -- 0.5%
Armstrong World Industries, Inc................. 10,900 757,550
Centex Corp..................................... 9,200 346,150
Fleetwood Enterprises, Inc...................... 9,500 261,250
Lowe's Companies, Inc........................... 47,700 1,693,350
Masco Corp...................................... 44,000 1,584,000
Maytag Corp..................................... 28,300 558,925
Stanley Works................................... 25,600 691,200
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Tupperware Corporation.......................... 16,300 $ 874,087
Whirlpool Corp.................................. 20,300 946,487
--------------
7,712,999
--------------
INSURANCE -- 4.0%
Aetna Inc....................................... 41,512 3,320,960
Alexander & Alexander Services, Inc............. 10,400 180,700
Allstate Corp................................... 120,994 7,002,528
American General Corp........................... 55,300 2,260,387
American International Group, Inc............... 127,337 13,784,230
Aon Corp........................................ 28,700 1,782,987
Chubb Corp...................................... 49,400 2,655,250
CIGNA Corp...................................... 20,500 2,800,812
General Re Corp................................. 22,250 3,509,937
ITT Hartford Group, Inc. (a).................... 32,300 2,180,250
Jefferson-Pilot Corp............................ 18,575 1,051,809
Lincoln National Corp........................... 27,600 1,449,000
Marsh & McLennan Companies, Inc................. 19,500 2,028,000
MGIC Investment Corp............................ 17,400 1,322,400
Providian Corp.................................. 25,800 1,325,475
SAFECO Corp..................................... 33,400 1,317,213
St. Paul Companies, Inc......................... 23,400 1,371,825
Torchmark Corp.................................. 18,700 944,350
Travelers Group, Inc............................ 174,594 7,922,203
United Healthcare Corp.......................... 50,600 2,277,000
UNUM Corp....................................... 20,000 1,445,000
USF&G Corp...................................... 32,400 676,350
USLIFE Corp..................................... 8,500 282,625
--------------
62,891,291
--------------
LEISURE -- 1.1%
Brunswick Corp.................................. 28,100 674,400
Harrah's Entertainment, Inc. (a)................ 26,650 529,669
Hasbro, Inc..................................... 23,600 917,450
King World Productions, Inc. (a)................ 10,550 389,031
Mattel, Inc..................................... 74,581 2,069,623
Walt Disney Co.................................. 184,267 12,829,590
--------------
17,409,763
--------------
LODGING -- 0.6%
HFS, Inc........................................ 35,900 2,145,025
Hilton Hotels Corp.............................. 74,700 1,951,538
Loews Corp...................................... 31,500 2,968,875
Marriott International, Inc..................... 35,300 1,950,325
--------------
9,015,763
--------------
MACHINERY -- 1.1%
Briggs & Stratton Corp.......................... 7,700 338,800
Case Corp....................................... 20,000 1,090,000
Caterpillar, Inc................................ 51,600 3,882,900
Cincinnati Milacron, Inc........................ 11,000 240,625
Cooper Industries, Inc.......................... 28,600 1,204,775
Deere & Co...................................... 69,500 2,823,438
Dover Corp...................................... 31,000 1,557,750
Eaton Corp...................................... 21,400 1,492,650
Giddings & Lewis, Inc........................... 6,900 88,838
Harnischfeger Industries, Inc................... 12,800 616,000
Ingersoll-Rand Co............................... 29,900 1,330,550
PACCAR, Inc..................................... 10,830 736,440
Parker-Hannifin Corp............................ 21,050 815,688
Snap-On, Inc.................................... 17,500 623,438
Timken Co....................................... 8,300 380,763
--------------
17,222,655
--------------
</TABLE>
B28
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
MEDIA -- 1.8%
Comcast Corp. (Special Class 'A' Stock)......... 85,900 $ 1,530,094
Dow Jones & Co., Inc............................ 26,500 897,688
Gannett Co., Inc................................ 38,200 2,860,225
Interpublic Group of Companies, Inc............. 21,200 1,007,000
Knight-Ridder, Inc.............................. 25,800 986,850
McGraw-Hill, Inc................................ 27,200 1,254,600
Meredith Corp................................... 7,000 369,250
New York Times Co. (Class 'A' Stock)............ 26,800 1,018,400
R. R. Donnelley & Sons Co....................... 41,300 1,295,788
Tele-Communications, Inc. (Series 'A'
Stock) (a).................................... 176,800 2,309,450
Time Warner, Inc................................ 154,440 5,791,500
Times Mirror Co. (Class 'A' Stock).............. 28,200 1,402,950
Tribune Co...................................... 16,100 1,269,888
US West Media Group (a)......................... 169,300 3,132,050
Viacom, Inc. (Class 'B' Stock) (a).............. 95,967 3,346,849
--------------
28,472,582
--------------
MINERAL RESOURCES -- 0.9%
ASARCO, Inc..................................... 12,200 303,475
Barrick Gold Corporation........................ 96,400 2,771,500
Battle Mountain Gold Co......................... 59,000 405,625
Burlington Resources, Inc....................... 34,300 1,727,863
Cyprus Amax Minerals Co......................... 25,400 593,725
Echo Bay Mines, Ltd............................. 37,200 246,450
Freeport-McMoRan Copper & Gold, Inc. (Class 'B'
Stock)........................................ 51,700 1,544,538
Homestake Mining Co............................. 42,000 598,500
Inco, Ltd....................................... 46,100 1,469,438
Newmont Mining Corp............................. 27,300 1,221,675
Phelps Dodge Corp............................... 17,800 1,201,500
Placer Dome, Inc................................ 65,200 1,418,100
Sante Fe Pacific Gold Corp...................... 34,916 536,834
--------------
14,039,223
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 4.5%
Browning-Ferris Industries, Inc................. 58,800 1,543,500
Cognizant Corp.................................. 46,460 1,533,180
Crane Co........................................ 11,850 343,650
Ecolab, Inc..................................... 17,100 643,388
General Electric Co............................. 449,200 44,414,650
General Instrument Corp. (a).................... 36,900 797,963
General Signal Corp............................. 13,962 596,876
Illinois Tool Works, Inc........................ 33,800 2,699,775
ITT Corp. (a)................................... 31,200 1,353,300
ITT Industries, Inc............................. 31,900 781,550
Millipore Corp.................................. 11,000 455,125
NACCO Industries, Inc. (Class 'A' Stock)........ 2,500 133,750
Newport News Shipbuilding, Inc. (a)............. 9,160 137,400
Pall Corp....................................... 32,500 828,750
PPG Industries Inc.............................. 50,100 2,811,863
Textron, Inc.................................... 22,300 2,101,775
Thermo Electron Corp. (a)....................... 23,000 948,750
Trinova Corp.................................... 7,200 261,900
TRW, Inc........................................ 34,800 1,722,600
Tyco International, Ltd......................... 42,200 2,231,325
WMX Technologies, Inc........................... 132,300 4,316,288
--------------
70,657,358
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
MISCELLANEOUS - CONSUMER GROWTH/STABLE -- 2.0%
American Greetings Corp. (Class 'A' Stock)...... 20,600 $ 584,525
Black & Decker Corp............................. 23,500 707,938
Corning, Inc.................................... 62,800 2,904,500
Eastman Kodak Co................................ 91,000 7,302,750
Jostens, Inc.................................... 9,900 209,138
Minnesota Mining & Manufacturing Co............. 113,300 9,389,738
Polaroid Corp................................... 11,800 513,300
Rubbermaid, Inc................................. 40,900 930,475
Unilever N.V., ADR (United Kingdom)............. 44,300 7,763,575
Whitman Corp.................................... 28,300 647,363
--------------
30,953,302
--------------
PETROLEUM -- 8.0%
Amerada Hess Corp............................... 25,200 1,458,450
Amoco Corp...................................... 135,030 10,869,915
Atlantic Richfield Co........................... 43,785 5,801,513
Chevron Corp.................................... 178,000 11,570,000
Exxon Corp...................................... 337,400 33,065,200
Kerr-McGee Corp................................. 13,200 950,400
Louisiana Land & Exploration Co................. 9,300 498,713
Mobil Corp...................................... 106,900 13,068,525
Occidental Petroleum Corp....................... 89,000 2,080,375
PanEnergy Corp.................................. 40,290 1,813,050
Pennzoil Co..................................... 12,500 706,250
Phillips Petroleum Co........................... 71,900 3,181,575
Royal Dutch Petroleum Co., ADR (Netherlands).... 145,800 24,895,350
Santa Fe Energy Resources, Inc. (a)............. 22,970 318,709
Sun Co., Inc.................................... 19,000 463,125
Tenneco, Inc.................................... 45,800 2,066,725
Texaco, Inc..................................... 71,700 7,035,563
Union Pacific Resources Group, Inc.............. 67,756 1,981,863
Unocal Corp..................................... 67,500 2,742,188
USX-Marathon Group.............................. 78,100 1,864,638
--------------
126,432,127
--------------
PETROLEUM SERVICES -- 1.0%
Baker Hughes, Inc............................... 39,700 1,369,650
Dresser Industries, Inc......................... 47,700 1,478,700
Halliburton Co.................................. 34,200 2,060,550
Helmerich & Payne, Inc.......................... 6,600 344,025
McDermott International, Inc.................... 13,700 227,763
Oryx Energy Co. (a)............................. 29,100 720,225
Rowan Companies, Inc. (a)....................... 25,400 574,675
Schlumberger, Ltd............................... 67,200 6,711,600
Sonat, Inc...................................... 24,000 1,236,000
Western Atlas, Inc. (a)......................... 14,200 1,006,425
--------------
15,729,613
--------------
RAILROADS -- 0.9%
Burlington Northern, Inc........................ 42,142 3,640,015
Conrail Inc..................................... 16,534 1,647,200
CSX Corp........................................ 59,212 2,501,707
Norfolk Southern Corp........................... 33,800 2,957,500
Union Pacific Corp.............................. 66,300 3,986,288
--------------
14,732,710
--------------
</TABLE>
B29
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
RESTAURANTS -- 0.6%
Darden Restaurants, Inc......................... 44,000 $ 385,000
McDonald's Corp................................. 189,100 8,556,775
Wendy's International, Inc...................... 33,700 690,850
--------------
9,632,625
--------------
RETAIL -- 4.7%
Albertson's, Inc................................ 68,700 2,447,438
American Stores Co.............................. 40,100 1,639,088
AutoZone, Inc. (a).............................. 23,000 632,500
Charming Shoppes, Inc........................... 23,300 117,956
Circuit City Stores, Inc........................ 26,800 807,350
CVS Corp........................................ 28,700 1,187,463
Dayton-Hudson Corp.............................. 58,242 2,285,999
Dillard Department Stores, Inc. (Class 'A'
Stock)........................................ 31,050 958,669
Federated Department Stores, Inc. (a)........... 56,400 1,924,650
Great Atlantic & Pacific Tea Co., Inc........... 10,100 321,938
Harcourt General, Inc........................... 20,506 945,839
Home Depot, Inc................................. 130,749 6,553,794
J.C. Penney Co., Inc............................ 62,200 3,032,250
K mart Corp..................................... 128,900 1,337,338
Kroger Co. (a).................................. 34,000 1,581,000
Liz Claiborne, Inc.............................. 19,300 745,463
Longs Drug Stores, Inc.......................... 6,200 304,575
May Department Stores Co........................ 68,300 3,193,025
Mercantile Stores Co., Inc...................... 10,200 503,625
Newell Co....................................... 42,400 1,335,600
Nike, Inc. (Class 'B' Stock).................... 78,000 4,660,500
Nordstrom, Inc.................................. 21,200 751,275
Pep Boys-Manny, Moe & Jack...................... 16,600 510,450
Price/Costco, Inc. (a).......................... 53,666 1,348,358
Reebok International, Ltd....................... 14,600 613,200
Rite Aid Corp................................... 33,200 1,319,700
Sears, Roebuck & Co............................. 107,100 4,939,988
Sherwin-Williams Co............................. 23,400 1,310,400
Stride Rite Corp................................ 12,400 124,000
Supervalu, Inc.................................. 17,800 505,075
The Gap, Inc.................................... 76,700 2,310,588
The Limited, Inc................................ 72,448 1,331,232
TJX Companies, Inc.............................. 21,800 1,032,775
Toys 'R' Us, Inc. (a)........................... 74,550 2,236,500
Wal-Mart Stores, Inc............................ 622,400 14,237,400
Walgreen Co..................................... 67,600 2,704,000
Winn Dixie Stores, Inc.......................... 41,000 1,296,625
Woolworth Corp.................................. 34,900 763,438
--------------
73,851,064
--------------
RUBBER -- 0.2%
B.F. Goodrich Co................................ 13,800 558,900
Cooper Tire & Rubber Co......................... 23,200 458,200
Goodyear Tire & Rubber Co....................... 43,000 2,209,125
--------------
3,226,225
--------------
STEEL -- 0.3%
Allegheny Teledyne, Inc......................... 48,380 1,112,740
Armco, Inc. (a)................................. 26,700 110,138
Bethlehem Steel Corp. (a)....................... 31,600 284,400
Inland Steel Industries, Inc.................... 12,000 240,000
Nucor Corp...................................... 23,900 1,218,900
USX-U.S. Steel Group............................ 23,740 744,843
Worthington Industries, Inc..................... 23,600 427,750
--------------
4,138,771
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
TELECOMMUNICATIONS -- 4.5%
Airtouch Communications, Inc. (a)............... 137,000 $ 3,459,250
Alltel Corp..................................... 51,400 1,612,675
Ameritech Corp.................................. 148,900 9,027,063
Andrew Corp. (a)................................ 15,975 847,673
AT&T Corp....................................... 439,573 19,121,426
DSC Communications Corp. (a).................... 32,000 572,000
Frontier Corp................................... 23,000 520,375
Lucent Technologies, Inc........................ 173,760 8,036,400
MCI Communications Corp......................... 187,000 6,112,563
Northern Telecom, Ltd........................... 70,300 4,349,813
SBC Communications, Inc......................... 163,600 8,466,300
Scientific-Atlanta, Inc......................... 19,500 292,500
Sprint Corp..................................... 117,200 4,673,350
Tci Satellite Entertainment, Inc. (Class 'A'
Stock) (a).................................... 17,080 168,665
Tellabs, Inc. (a)............................... 48,400 1,821,050
Worldcom Inc.................................... 111,600 2,908,575
--------------
71,989,678
--------------
TEXTILES -- 0.2%
Fruit of the Loom, Inc. (Class 'A' Stock) (a)... 20,200 765,075
National Service Industries, Inc................ 12,500 467,188
Russell Corp.................................... 10,600 315,350
Springs Industries, Inc......................... 6,400 275,200
V.F. Corp....................................... 17,918 1,209,465
--------------
3,032,278
--------------
TOBACCO -- 0.2%
American Brands, Inc............................ 46,700 2,317,488
UST, Inc........................................ 50,800 1,644,650
--------------
3,962,138
--------------
TRUCKING/SHIPPING -- 0.1%
Caliber System Inc.............................. 11,600 223,300
Consolidated Freightways, Inc. (a).............. 5,700 50,588
Federal Express Corp. (a)....................... 30,800 1,370,600
Ryder System, Inc............................... 21,700 610,313
--------------
2,254,801
--------------
UTILITY - COMMUNICATIONS -- 2.8%
Bell Atlantic Corp.............................. 119,100 7,711,725
BellSouth Corp.................................. 270,200 10,909,325
GTE Corp........................................ 260,520 11,853,660
NYNEX Corp...................................... 120,200 5,784,625
Pacific Telesis Group........................... 116,200 4,270,350
U S West Communications, Inc.................... 130,900 4,221,525
--------------
44,751,210
--------------
UTILITY - ELECTRIC -- 2.8%
American Electric Power Co., Inc................ 51,100 2,101,488
Baltimore Gas & Electric Co..................... 39,250 1,049,938
Carolina Power & Light Co....................... 41,400 1,511,100
Central & South West Corp....................... 58,300 1,493,938
CINergy Corp.................................... 43,739 1,459,789
Consolidated Edison Co. of NY, Inc.............. 64,100 1,874,925
Dominion Resources, Inc......................... 49,250 1,896,125
DTE Energy Company.............................. 38,500 1,246,438
Duke Power Co................................... 55,100 2,548,375
Edison International............................ 117,200 2,329,350
Entergy Corp.................................... 63,900 1,773,225
FPL Group, Inc.................................. 49,300 2,267,800
GPU, Inc........................................ 31,600 1,062,550
Houston Industries, Inc......................... 71,500 1,617,688
</TABLE>
B30
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Niagara Mohawk Power Corp....................... 35,700 $ 352,538
Northern States Power Co........................ 18,200 834,925
Ohio Edison Co.................................. 42,200 960,050
P P & L Resources, Inc.......................... 43,800 1,007,400
Pacific Enterprises............................. 23,800 722,925
Pacific Gas & Electric Co....................... 111,400 2,339,400
PacifiCorp...................................... 79,500 1,629,750
PECO Energy Co.................................. 60,800 1,535,200
Public Service Enterprise Group, Inc............ 66,000 1,798,500
Southern Co..................................... 181,600 4,108,700
Texas Utilities Co.............................. 60,129 2,450,257
Unicom Corp..................................... 57,600 1,562,400
Union Electric Company.......................... 27,600 1,062,600
--------------
44,597,374
--------------
TOTAL COMMON STOCKS
(cost $998,185,758)............................................ 1,531,362,551
--------------
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS -- 3.6% (000)
-------------
U.S. GOVERNMENT OBLIGATION -- 0.2%
US Treasury Bills,
4.860%, 03/20/97 (b).......................... $ 2,550 2,523,659
REPURCHASE AGREEMENT -- 3.4%
Joint Repurchase Agreement Account,
6.613%, 01/02/97 (Note 5)..................... 53,762 53,762,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $56,285,493)............................................. 56,285,659
TOTAL INVESTMENTS -- 100.4%
(cost $1,054,471,251; Note 6).................................. 1,587,648,210
VARIATION MARGIN ON OPEN FUTURES CONTRACTS -- (0.1%) (C).........
(937,100)
OTHER LIABILITIES IN EXCESS OF
OTHER ASSETS -- (0.3%)......................................... (5,330,803)
--------------
TOTAL NET ASSETS -- 100.0%....................................... $1,581,380,307
--------------
--------------
<FN>
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, 1996 are as
follows:
NUMBER OF EXPIRATION VALUE AT VALUE AT
CONTRACTS TYPE DATE TRADE DATE DECEMBER 31, 1996 APPRECIATION
129 S&P 500 Index Mar 97 $47,304,050 $48,020,250 $716,200
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B31
<PAGE>
EQUITY INCOME PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
LONG-TERM INVESTMENTS -- 96.7%
VALUE
COMMON STOCKS -- 84.8% SHARES (NOTE 2)
<CAPTION>
------------- --------------
<S> <C> <C>
AEROSPACE/DEFENSE -- 3.9%
Newport News Shipbuilding, Inc. (a)............. 50,260 $ 753,900
Northrop Grumman Corp........................... 388,600 32,156,650
Thiokol Corp.................................... 462,000 20,674,500
United Industrial Corp.......................... 31,700 186,238
--------------
53,771,288
AIRLINES -- 2.4%
AMR Corp. (a)................................... 364,200 32,095,125
--------------
ALUMINUM -- 0.3%
Reynolds Metals Co.............................. 71,586 4,035,661
--------------
AUTOS - CARS & TRUCKS -- 3.3%
Chrysler Corp................................... 1,248,034 41,185,122
Ford Motor Co................................... 130,000 4,143,750
--------------
45,328,872
--------------
CHEMICALS -- 2.4%
Dow Chemical Co................................. 378,800 29,688,450
Millenium Chemicals, Inc. (a)................... 144,998 2,573,714
--------------
32,262,164
--------------
COMMERCIAL SERVICES -- 0.2%
IMO Industries, Inc. (a)........................ 434,600 1,358,125
John H. Harland Co.............................. 32,400 1,069,200
--------------
2,427,325
--------------
COMPUTER HARDWARE -- 7.1%
Amdahl Corp. (a)................................ 800,000 9,700,000
Digital Equipment Corp. (a)..................... 319,100 11,607,263
Intergraph Corp. (a)............................ 607,700 6,228,925
International Business Machines Corp............ 459,100 69,324,100
--------------
96,860,288
--------------
CONSUMER SERVICES -- 0.0%
Petroleum Heat and Power, Inc. (Class 'A'
Stock)........................................ 47,300 301,538
--------------
CONTAINERS -- 0.5%
Stone Container Corp............................ 435,400 6,476,575
--------------
ELECTRICAL EQUIPMENT -- 1.0%
Kuhlman Corp.................................... 560,000 10,850,000
Pacific Scientific Co........................... 185,700 2,089,125
--------------
12,939,125
--------------
ELECTRONICS -- 4.3%
Esterline Technologies Corp. (a)................ 275,700 7,202,662
Micron Technology, Inc.......................... 451,000 13,135,375
National Semiconductor Corp. (a)................ 320,000 7,800,000
Newport Corp.................................... 297,700 2,642,087
Texas Instruments, Inc.......................... 429,000 27,348,750
--------------
58,128,874
--------------
FINANCIAL SERVICES -- 10.2%
A.G. Edwards, Inc............................... 211,000 7,094,875
Bear Stearns Companies, Inc..................... 884,049 24,642,866
Lehman Brothers Holdings, Inc................... 1,759,100 55,191,762
Painewebber Group, Inc.......................... 904,000 25,425,000
Salomon, Inc.................................... 560,000 26,390,000
--------------
138,744,503
--------------
FOREST PRODUCTS -- 0.9%
Fletcher Challenge, Ltd., ADR (Canada).......... 62,400 1,037,400
Louisiana-Pacific Corp.......................... 71,700 1,514,662
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Potlatch Corp................................... 81,500 $ 3,504,500
Rayonier, Inc................................... 149,900 5,752,412
--------------
11,808,974
--------------
GAS DISTRIBUTION -- 0.8%
KN Energy, Inc.................................. 261,900 10,279,575
Yankee Energy System, Inc....................... 30,400 649,800
--------------
10,929,375
--------------
GAS PIPELINES -- 1.9%
El Paso Natural Gas Co.......................... 23,371 1,180,230
PanEnergy Corp.................................. 299,600 13,482,000
Sonat, Inc...................................... 206,300 10,624,450
--------------
25,286,680
--------------
HOUSEHOLD PRODUCTS -- 1.1%
Gibson Greetings, Inc. (a)...................... 778,600 15,280,025
--------------
HOUSING RELATED -- 1.0%
Hanson, PLC, ADR (United Kingdom)............... 2,030,000 13,702,500
--------------
INSURANCE -- 5.3%
Alexander & Alexander Services, Inc............. 812,000 14,108,500
Marsh & McLennan Companies, Inc................. 243,800 25,355,200
Ohio Casualty Corp.............................. 339,900 12,066,450
SAFECO Corp..................................... 350,200 13,811,012
Selective Insurance Group, Inc.................. 198,800 7,554,400
--------------
72,895,562
--------------
INTEGRATED PRODUCERS -- 4.0%
Elf Aquitaine, ADR (France)..................... 1,200,000 54,300,000
Mobil Corp...................................... 600 73,350
--------------
54,373,350
--------------
LODGING -- 0.1%
Homestead Village, Inc.......................... 66,245 1,192,410
--------------
MEDIA -- 3.4%
Dun & Bradstreet Corp........................... 195,600 4,645,500
Gannett Co., Inc................................ 120,000 8,985,000
Westinghouse Electric Corp...................... 1,669,500 33,181,312
--------------
46,811,812
--------------
MINERAL RESOURCES -- 0.4%
Coeur D'Alene Mines Corp........................ 194,678 2,944,505
Echo Bay Mines, Ltd............................. 298,499 1,977,556
--------------
4,922,061
--------------
MISCELLANEOUS - INDUSTRIAL -- 0.8%
Tenneco, Inc.................................... 251,300 11,339,913
--------------
OIL SERVICES -- 1.9%
McDermott International, Inc.................... 1,571,400 26,124,525
--------------
PETROLEUM -- 0.4%
USX-Marathon Group.............................. 230,600 5,505,575
--------------
PETROLEUM SERVICES -- 0.3%
Crestar Energy, Inc. (a)........................ 200,000 4,304,998
--------------
REAL ESTATE DEVELOPMENT -- 17.1%
Alexander Haagen Properties, Inc................ 420,000 6,195,000
Amli Residential Properties Trust............... 208,300 4,869,012
Avalon Properties, Inc.......................... 265,000 7,618,750
Beacon Properties Corp.......................... 184,800 6,768,300
Bradley Real Estate, Inc........................ 240,000 4,320,000
CarrAmerica Realty Corp......................... 26,500 775,125
Crescent Real Estate Equities, Inc.............. 717,000 37,821,750
Crown American Realty Trust..................... 675,100 5,063,250
Equity Residential Properties Trust............. 1,188,800 49,038,000
</TABLE>
B32
<PAGE>
EQUITY INCOME PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Gables Residential Trust........................ 435,800 $ 12,638,200
Glimcher Realty Trust........................... 565,000 12,430,000
Irvine Apartment Communities, Inc............... 392,000 9,800,000
JDN Realty Corp................................. 293,200 8,099,650
JP Realty, Inc.................................. 84,000 2,173,500
Kimco Realty Corp............................... 56,250 1,961,719
Malan Realty Investors, Inc..................... 140,000 2,275,000
Manufactured Home Communities, Inc.............. 581,500 13,519,875
Patriot American Hospitality, Inc............... 181,900 7,844,437
Pennsylvania Real Estate Investment Trust....... 50,100 1,221,188
Security Capital Pacific Trust.................. 527,034 12,055,903
Simon Debartolo Group, Inc...................... 214,300 6,643,300
Sunstone Hotel Investors, Inc................... 240,000 3,150,000
Vornado Realty Trust............................ 278,800 14,637,000
Walden Residential Properties, Inc.............. 5,000 124,375
Weingarten Realty Investors..................... 62,500 2,539,063
--------------
233,582,397
--------------
RETAIL -- 2.2%
J.C. Penney Co., Inc............................ 549,800 26,802,750
K mart Corp. (a)................................ 299,200 3,104,200
--------------
29,906,950
--------------
STEEL -- 2.7%
LTV Corp........................................ 90,000 1,068,750
USX-U.S. Steel Group............................ 1,159,400 36,376,175
--------------
37,444,925
--------------
TELECOMMUNICATIONS -- 0.5%
Telefonos de Mexico SA (Class 'L' Stock), ADR
(Mexico)...................................... 198,000 6,534,000
--------------
TEXTILES -- 0.8%
Garan, Inc...................................... 2,900 56,188
Kellwood Co..................................... 518,900 10,378,000
Oxford Industries, Inc.......................... 34,500 828,000
--------------
11,262,188
--------------
TOBACCO -- 1.6%
RJR Nabisco Holdings Corp....................... 421,100 14,317,400
UST, Inc........................................ 218,600 7,077,175
--------------
21,394,575
--------------
TRUCKING/SHIPPING -- 0.8%
Alexander & Baldwin, Inc........................ 287,750 7,193,750
Yellow Corp..................................... 259,700 3,733,188
--------------
10,926,938
--------------
UTILITIES - ELECTRICAL & GAS -- 0.8%
British Gas, PLC, ADR (United Kingdom).......... 110,600 4,216,625
TransCanada Pipelines, Ltd...................... 389,600 6,818,000
--------------
11,034,625
--------------
UTILITY - ELECTRIC -- 0.4%
Centerior Energy Corp........................... 46,600 500,950
Central Louisiana Electric Co................... 6,100 168,513
Pacific Gas & Electric Co....................... 240,000 5,040,000
--------------
5,709,463
--------------
TOTAL COMMON STOCKS
(cost $912,402,158)............................................ 1,155,645,159
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
PREFERRED STOCKS -- 8.3% SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
ALUMINUM -- 0.3%
Kaiser Aluminum Corp. (Cum. Conv.).............. 319,900 $ 3,598,875
--------------
DRUGS & HOSPITAL SUPPLIES -- 0.6%
U.S. Surgical Corp. (Cum. Conv.)................ 208,300 7,967,475
--------------
EXPLORATION & PRODUCTION -- 0.6%
Parker & Parsley Capital, LLC (Cum. Conv.)...... 118,800 7,796,250
--------------
INSURANCE -- 0.4%
Alexander & Alexander Services, Inc. (Cum.
Conv.), Series A.............................. 100,000 5,212,500
USF&G Corp. (Conv. Ex.), Series A............... 10,900 555,900
--------------
5,768,400
--------------
INTEGRATED OIL & GAS PRODUCERS -- 0.1%
Unocal Corp. (Conv.) Series 6.25%............... 34,372 1,972,094
--------------
MEDIA -- 1.9%
Westinghouse Electric Corp. (Cum. Conv.), Series
C............................................. 1,457,000 26,226,000
--------------
NON-FERROUS METALS -- 0.2%
Hecla Mining Co. (Cum. Conv.), Series B......... 60,000 2,640,000
--------------
REAL ESTATE DEVELOPMENT -- 0.1%
Security Capital Pacific Trust (Cum. Conv.),
Series A...................................... 54,500 1,669,062
--------------
RETAIL -- 0.9%
Kmart Corp. (Cum. Conv.)........................ 247,300 12,055,875
--------------
STEEL & METALS -- 1.1%
Bethlehem Steel Corp. (Cum. Conv.).............. 264,000 10,098,000
USX Corp. (Cum. Conv.).......................... 114,600 5,085,375
--------------
15,183,375
--------------
TEXTILES/APPAREL -- 0.3%
Fieldcrest Cannon, Inc. (Cum. Conv.), Series
A............................................. 85,000 3,336,250
--------------
TOBACCO -- 1.5%
RJR Nabisco Holdings Corp. (Conv.), Ser. C...... 3,107,000 20,972,250
--------------
OIL SERVICES -- 0.3%
McDermott International, Inc. (Cum. Conv.),
Series C...................................... 88,000 3,388,000
--------------
TOTAL PREFERRED STOCKS
(cost $109,734,121)............................................ 112,573,906
--------------
WARRANTS
LODGING
Homestead Village, Inc.
(cost $191,545)................................. 44,442 361,091
--------------
PRINCIPAL
AMOUNT
CONVERTIBLE BONDS -- 1.4% (000)
-------------
EXPLORATION & PRODUCTION -- 0.2%
Cross Timbers Oil Co.,
5.250%, 11/01/03.............................. $ 1,174 1,276,725
Oryx Energy Co.,
7.500%, 05/15/14.............................. 1,760 1,707,200
--------------
2,983,925
--------------
</TABLE>
B33
<PAGE>
EQUITY INCOME PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE BONDS (CONTINUED) (000) (NOTE 2)
------------- --------------
<S> <C> <C>
OIL SERVICES -- 0.3%
Baker Hughes, Inc.,
Zero Coupon, 05/05/08......................... $ 5,940 $ 4,484,700
--------------
REAL ESTATE DEVELOPMENT -- 0.3%
Alexander Haagen Properties, Inc., Series A,
7.500%, 01/15/01.............................. 1,600 1,483,000
Malan Realty Investors, Inc.,
9.500%, 07/15/04.............................. 3,000 2,970,000
--------------
4,453,000
--------------
RETAIL -- 0.6%
Charming Shoppes, Inc.,
7.500%, 07/15/06.............................. 8,000 7,760,000
--------------
TOTAL CONVERTIBLE BONDS
(cost $19,020,457)............................................. 19,681,625
--------------
LONG-TERM BOND -- 2.2%
U.S. GOVERNMENT & AGENCY OBLIGATION
US Treasury Note,
6.750%, 08/15/26
(cost $29,011,302).............................. 30,000 30,225,000
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $1,070,359,583).......................................... 1,318,486,781
--------------
SHORT-TERM INVESTMENT -- 2.5%
REPURCHASE AGREEMENT
Joint Repurchase Agreement Account,
6.613%, 01/02/97
(cost $33,746,000) (Note 5)................. 33,746 33,746,000
--------------
TOTAL INVESTMENTS -- 99.2%
(cost $1,104,105,583; Note 6).................................. 1,352,232,781
--------------
OTHER ASSETS IN EXCESS OF
LIABILITIES -- 0.8%............................................ 11,241,834
--------------
TOTAL NET ASSETS -- 100%......................................... $1,363,474,615
--------------
--------------
<FN>
The following abbreviations are used in portfolio descriptions:
ADR American
Depository
Receipt
LLC Limited Liability Company
PLC Public Limited Company (British Corporation)
(a) Non-income
producing
security.
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B34
<PAGE>
EQUITY PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
LONG-TERM INVESTMENTS -- 75.9%
VALUE
COMMON STOCKS -- 75.3% SHARES (NOTE 2)
<CAPTION>
------------- --------------
<S> <C> <C>
AUTOMOBILES & TRUCKS -- 3.8%
Chrysler Corp................................... 3,927,820 $ 129,618,060
General Motors Corp............................. 700,000 39,025,000
Navistar International Corp. (a)................ 395,200 3,606,200
PACCAR Inc...................................... 139,700 9,499,600
--------------
181,748,860
--------------
BANKS & FINANCIAL SERVICES -- 13.6%
American Express Co............................. 2,200,000 124,300,000
Associates First Capital Corp. (a).............. 139,300 6,146,613
Bank of New York Co., Inc....................... 1,800,000 60,750,000
BankAmerica Corp................................ 550,000 54,862,500
Chase Manhattan Corp............................ 624,000 55,692,000
Dean Witter Discover & Co....................... 1,600,000 106,000,000
First America Bank Corp......................... 187,000 11,243,375
Great Western Financial Corp.................... 1,000,000 29,000,000
Lehman Brothers Holdings, Inc................... 900,000 28,237,500
Mellon Bank Corp................................ 276,398 19,624,258
Mercantile Bankshares Corp...................... 279,600 8,947,200
Morgan (J.P.) & Co., Inc........................ 395,400 38,600,925
NationsBank Corp................................ 600,000 58,650,000
Republic New York Corp.......................... 225,000 18,365,625
Salomon, Inc.................................... 700,000 32,987,500
--------------
653,407,496
--------------
CHEMICALS -- 1.0%
Eastman Chemical Co............................. 466,550 25,776,887
Wellman, Inc.................................... 798,200 13,669,175
Witco Corp...................................... 268,800 8,198,400
--------------
47,644,462
--------------
COMMERCIAL SERVICES -- 1.9%
AAR Corp........................................ 650,000 19,662,500
American Standard Co., Inc. (a)................. 1,050,000 40,162,500
TRW Inc......................................... 694,400 34,372,800
--------------
94,197,800
--------------
COMPUTER HARDWARE -- 5.1%
Amdahl Corp. (a)................................ 4,000,000 48,500,000
Comdisco, Inc................................... 1,297,207 41,186,322
Digital Equipment Corp. (a)..................... 2,900,000 105,487,500
Gerber Scientific, Inc.......................... 419,800 6,244,525
International Business Machines Corp............ 300,000 45,300,000
--------------
246,718,347
--------------
CONSTRUCTION & HOUSING -- 0.5%
Centex Corp..................................... 600,000 22,575,000
--------------
DIVERSIFIED CONSUMER PRODUCTS -- 5.1%
Gibson Greetings Inc. (a)....................... 750,000 14,718,750
Loews Corp...................................... 1,600,000 150,800,000
RJR Nabisco Holdings Corp....................... 2,300,000 78,200,000
--------------
243,718,750
--------------
ELECTRICAL EQUIPMENT
Rexel, Inc. (a)................................. 107,199 1,701,784
--------------
ELECTRICAL POWER -- 1.2%
American Electric Power
Company Inc................................... 180,000 7,402,500
GPU, Inc........................................ 500,000 16,812,500
Long Island Lighting Co......................... 1,541,400 34,103,475
--------------
58,318,475
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
ELECTRONICS -- 1.1%
Harris Corp..................................... 300,000 $ 20,587,500
Texas Instruments, Inc.......................... 500,000 31,875,000
--------------
52,462,500
--------------
ENERGY EQUIPMENT & SERVICES -- 0.4%
NorAm Energy Corp............................... 1,300,000 19,987,500
--------------
FOREST PRODUCTS -- 8.9%
Georgia-Pacific Corp............................ 900,000 64,800,000
International Paper Co.......................... 1,350,000 54,506,250
James River Corp. of Virginia................... 560,000 18,550,000
Kimberly-Clark Corp............................. 343,100 32,680,275
Mead Corp....................................... 900,000 52,312,500
Rayonier Inc.................................... 125,000 4,796,875
Temple-Inland Inc............................... 850,000 46,006,250
Weyerhaeuser Co................................. 1,421,400 67,338,825
Willamette Industries, Inc...................... 1,250,000 87,031,250
--------------
428,022,225
--------------
HOSPITALS -- 3.0%
Foundation Health Corp. (a)..................... 1,430,700 45,424,725
Tenet Healthcare Corp. (a)...................... 3,237,832 70,827,575
Wellpoint Health Networks Inc................... 799,700 27,489,688
--------------
143,741,988
--------------
INSURANCE -- 11.3%
Alexander & Alexander Services, Inc............. 1,050,000 18,243,750
American Financial Group Inc.................... 303,700 11,464,675
American General Corp........................... 1,000,000 40,875,000
Chubb Corp...................................... 2,206,400 118,594,000
Citizens Corp................................... 700,000 15,750,000
Old Republic International Corp................. 1,950,885 52,186,174
Providian Corp.................................. 340,500 17,493,187
SAFECO Corp..................................... 1,600,000 63,100,000
St. Paul Companies, Inc......................... 826,900 48,477,013
The Equitable Companies, Inc.................... 1,800,000 44,325,000
Travelers Corp.................................. 1,800,000 81,675,000
Western National Corp........................... 1,624,300 31,267,775
--------------
543,451,574
--------------
METALS-NON FERROUS -- 1.6%
Aluminum Company of America..................... 600,000 38,250,000
Amax Gold Inc. (a).............................. 131,342 837,305
Cyprus Amax Minerals Co......................... 1,533,200 35,838,550
Nord Resources Corp. (a)........................ 130,500 570,938
--------------
75,496,793
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 0.1%
American Water Works Co., Inc................... 270,000 5,568,750
Worldtex, Inc. (a).............................. 107,199 951,391
--------------
6,520,141
--------------
OIL & GAS EXPLORATION/PRODUCTION -- 6.0%
Amerada Hess Corp............................... 325,000 18,809,375
Atlantic Richfield Co........................... 400,000 53,000,000
Elf Aquitaine, ADR (France)..................... 2,424,433 109,705,593
Occidental Petroleum Corp....................... 1,100,000 25,712,500
Oryx Energy Co. (a)............................. 1,600,000 39,600,000
Total S.A., ADR (France)........................ 738,365 29,719,191
Union Texas Petroleum
Holdings, Inc................................. 504,500 11,288,188
--------------
287,834,847
--------------
</TABLE>
B35
<PAGE>
EQUITY PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
RESTAURANTS -- 0.4%
Darden Restaurants Inc.......................... 2,500,000 $ 21,875,000
--------------
RETAIL -- 5.9%
Dayton-Hudson Corp.............................. 358,800 14,082,900
Dillard Department Stores, Inc. (a)............. 2,550,000 78,731,250
K-Mart Corp. (a)................................ 6,500,000 67,437,500
Petrie Stores Corp.............................. 540,000 1,451,250
Tandy Corp...................................... 1,382,900 60,847,600
Toys 'R' Us Inc. (a)............................ 854,000 25,620,000
Waban, Inc. (a)................................. 1,300,000 33,800,000
--------------
281,970,500
--------------
STEEL -- 0.7%
Bethlehem Steel Corp. (a)....................... 500,000 4,500,000
Birmingham Steel Corp........................... 1,468,400 27,899,600
Carpenter Technology Corp....................... 100,000 3,662,500
--------------
36,062,100
--------------
TELECOMMUNICATIONS -- 3.3%
360 Communication Co............................ 96,066 2,221,526
AT&T Corp....................................... 1,600,000 69,600,000
Loral Corp...................................... 1,800,000 33,075,000
Telefonica de Espana, SA, ADR (Spain)........... 800,000 55,400,000
--------------
160,296,526
--------------
TRANSPORTATION -- 0.4%
OMI Corp. (a)................................... 1,000,000 8,750,000
Overseas Shipholding Group, Inc................. 600,000 10,200,000
--------------
18,950,000
--------------
TOTAL COMMON STOCKS
(cost $2,545,705,536).......................................... 3,626,702,668
--------------
PREFERRED STOCK -- 0.6%
DIVERSIFIED CONSUMER PRODUCTS -- 0.6%
RJR Nabisco Holdings Corp., Conv. Pfd. Stock
(cost $25,999,610)............................ 4,000,000 27,000,000
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $2,571,705,146).......................................... 3,653,702,668
--------------
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS -- 23.8% (000)
-------------
CERTIFICATES OF DEPOSIT-YANKEE -- 2.7%
Bank of Montreal
5.45%, 01/07/97............................... $ 47,000 47,000,000
Canadian Imperial Bank of Commerce
5.41%, 01/31/97............................... 35,000 35,000,000
Deutsche Bank
5.37%, 01/21/97............................... 46,000 46,000,000
--------------
128,000,000
--------------
COMMERCIAL PAPER -- 4.5%
Aristar, Inc.,
5.59%, 02/21/97............................... 6,615 6,563,642
Ciba-Geigy Corp.,
5.75%, 02/06/97............................... 2,000 1,988,820
Countrywide Home Loan, Inc.,
6.20%, 01/15/97............................... 11,000 10,975,372
6.35%, 01/15/97............................... 18,000 17,958,725
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED) (000) (NOTE 2)
------------- --------------
<S> <C> <C>
Countrywide Home Loan, Inc.,
5.58%, 01/21/97............................... $ 12,636 $ 12,598,787
5.35%, 01/21/97............................... 6,000 5,983,058
Creditanstalt Finance Inc.,
5.40%, 02/11/97............................... 20,000 19,880,000
Engelhard Corp.,
5.34%, 01/17/97............................... 5,000 4,988,875
5.58%, 02/24/97............................... 1,000 991,785
Finova Capital Corp.,
5.55%, 01/13/97............................... 1,000 998,304
General Motors Accept Corp.,
5.72%, 01/31/97............................... 8,499 8,459,839
GTE Corp.,
5.50%, 01/14/97............................... 2,000 1,996,333
Heller Financial, Inc.,
5.57%, 01/13/97............................... 2,000 1,996,596
5.57%, 01/14/97............................... 4,000 3,992,574
5.75%, 01/16/97............................... 7,000 6,984,347
Lehman Brothers Holdings, Inc.,
6.70%, 01/07/97............................... 48,000 47,955,333
Mitsubishi International Corp.,
5.45%, 01/15/97............................... 3,000 2,994,096
5.35%, 01/24/97............................... 2,000 1,993,461
NYNEX Corp.,
6.80%, 01/06/97............................... 5,000 4,996,222
5.71%, 01/13/97............................... 5,000 4,991,276
Preferred Receivables Funding Corp.,
5.50%, 01/13/97............................... 2,990 2,984,975
5.45%, 01/14/97............................... 1,000 998,183
5.33%, 01/21/97............................... 2,639 2,631,576
5.55%, 01/22/97............................... 2,613 2,604,943
5.32%, 01/23/97............................... 7,800 7,775,794
Rank Xerox Capital (Europe) PLC,
5.65%, 01/16/97............................... 3,018 3,011,369
5.50%, 01/17/97............................... 15,161 15,126,256
5.35%, 01/21/97............................... 1,000 997,176
5.65%, 01/21/97............................... 6,043 6,024,980
Sonoco Products,
5.45%, 01/14/97............................... 6,564 6,552,076
--------------
217,994,773
--------------
REPURCHASE AGREEMENT -- 12.4%
Joint Repurchase Agreement Account,
6.613%, 01/02/97 (Note 5)..................... 599,921 599,921,000
--------------
U. S. GOVERNMENT & AGENCY OBLIGATIONS -- 4.2%
Federal Home Loan Mortgage Corp.,
5.24%, 02/14/97............................... 20,800 20,669,815
5.225%, 02/28/97.............................. 15,000 14,875,906
5.27%, 03/17/97............................... 13,000 12,859,174
5.26%, 06/20/97............................... 3,640 3,550,118
Federal National Mortgage Assoc.,
5.23%, 01/28/97............................... 14,040 13,986,968
5.22%, 02/18/97............................... 20,800 20,658,248
5.21%, 03/03/97............................... 21,205 21,020,870
5.30%, 03/27/97............................... 8,000 7,900,720
5.37%, 03/27/97............................... 8,320 8,215,751
5.50%, 03/27/97............................... 10,600 10,468,455
5.25%, 04/10/97............................... 22,000 21,685,583
5.30%, 04/04/97............................... 20,800 20,520,448
5.40%, 12/05/97............................... 10,000 9,986,992
</TABLE>
B36
<PAGE>
EQUITY PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED) (000) (NOTE 2)
------------- --------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS (CON'T)
United States Treasury Notes,
6.875%, 02/28/97.............................. $ 3,900 $ 3,909,750
5.75%, 09/30/97............................... 12,000 12,025,527
--------------
202,334,325
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $1,148,242,455).......................................... 1,148,250,098
--------------
TOTAL INVESTMENTS -- 99.7%
(cost $3,719,947,601: Note 6).................................. 4,801,952,766
OTHER ASSETS IN EXCESS OF
LIABILITIES -- 0.3%............................................ 12,016,310
--------------
TOTAL NET ASSETS -- 100%......................................... $4,813,969,076
--------------
--------------
<FN>
The following abbreviation is used in portfolio descriptions:
ADR American
Depository
Receipt
(a) Non-income
producing
security.
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B37
<PAGE>
PRUDENTIAL JENNISON
DECEMBER 31, 1996
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 97.0%
VALUE
COMMON STOCKS SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AEROSPACE -- 3.2%
Boeing Co....................................... 68,600 $ 7,297,325
--------------
AIRLINES -- 2.2%
AMR Corp. (a)................................... 37,600 3,313,500
Continental Airlines, Inc. (a).................. 60,300 1,703,475
--------------
5,016,975
--------------
BANKS AND SAVINGS & LOANS -- 2.0%
Chase Manhattan Corp............................ 51,300 4,578,525
--------------
BUSINESS SERVICES -- 4.8%
Eagle River Interactive, Inc. (a)............... 84,600 666,225
Manpower, Inc................................... 53,700 1,745,250
Omnicom Group, Inc.............................. 76,200 3,486,150
Reuters Holdings PLC, ADR (United Kingdom)...... 64,400 4,926,600
--------------
10,824,225
--------------
COMMERCIAL SERVICES -- 1.7%
CUC International, Inc. (a)..................... 160,100 3,802,375
--------------
COMPUTER SERVICES -- 14.8%
3Com Corp. (a).................................. 74,100 5,437,087
America Online, Inc. (a)........................ 79,900 2,656,675
Cisco Systems, Inc. (a)......................... 86,200 5,484,475
Computer Associates International, Inc.......... 71,350 3,549,662
Electronic Data Systems Corp.................... 72,700 3,144,275
First Data Corp................................. 62,746 2,290,229
Microsoft Corp. (a)............................. 68,500 5,659,812
SAP AG, ADR (Germany)........................... 41,800 1,901,900
Seagate Technology, Inc. (a).................... 86,800 3,428,600
--------------
33,552,715
--------------
COMPUTER SYSTEMS -- 5.3%
Dell Computer Corp. (a)......................... 60,100 3,192,813
Hewlett-Packard Co.............................. 110,600 5,557,650
International Business Machines Corp............ 22,100 3,337,100
--------------
12,087,563
--------------
DRUGS AND HOSPITAL SUPPLIES -- 11.1%
Astra AB, ADR................................... 53,300 2,611,700
Bristol-Myers Squibb Co......................... 30,700 3,338,625
Chiron Corporation (a).......................... 29,800 555,025
Eli Lilly & Co.................................. 49,600 3,620,800
Johnson & Johnson............................... 64,500 3,208,875
Merck & Co., Inc................................ 48,100 3,811,925
Pfizer, Inc..................................... 53,700 4,450,387
Smithkline Beecham PLC, UTS, ADR (United
Kingdom)...................................... 51,500 3,502,000
--------------
25,099,337
--------------
ELECTRONICS -- 8.9%
Intel Corp...................................... 56,600 7,411,062
International Rectifier Corp. (a)............... 184,700 2,816,675
KLA Instruments Corp. (a)....................... 49,600 1,760,800
LSI Logic Corp. (a)............................. 106,800 2,856,900
Picturetel Corp. (a)............................ 43,600 1,133,600
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Symbol Technologies, Inc. (a)................... 68,800 $ 3,044,400
Texas Instruments, Inc.......................... 19,700 1,255,875
--------------
20,279,312
--------------
FINANCIAL SERVICES -- 1.7%
Federal National Mortgage Association........... 57,600 2,145,600
MBNA Corp....................................... 19,500 809,250
Schwab (Charles) Corp........................... 31,800 1,017,600
--------------
3,972,450
--------------
FOOD & BEVERAGES -- 1.0%
PepsiCo, Inc.................................... 80,800 2,363,400
--------------
FOREST PRODUCTS -- 1.7%
Kimberly-Clark Corp............................. 40,000 3,810,000
--------------
HOSPITAL MANAGEMENT -- 2.7%
Healthsouth Rehablilitation (a)................. 86,900 3,356,512
PhyCor, Inc. (a)................................ 99,900 2,834,662
--------------
6,191,174
--------------
HOUSEHOLD PRODUCTS & PERSONAL CARE -- 2.4%
Gillette Co..................................... 68,900 5,356,975
--------------
INSURANCE -- 6.4%
CIGNA Corp...................................... 24,100 3,292,662
MGIC Investment Corp............................ 61,400 4,666,400
Mutual Risk Management, Ltd..................... 77,966 2,884,742
UNUM Corp....................................... 49,900 3,605,275
--------------
14,449,079
--------------
LEISURE -- 2.7%
Walt Disney Co.................................. 86,600 6,029,525
--------------
LODGING -- 1.6%
Hilton Hotels Corp.............................. 135,200 3,532,100
--------------
MACHINERY -- 1.2%
Harnischfeger Industries, Inc................... 57,100 2,747,938
--------------
MEDIA -- 2.5%
Clear Channel Communications, Inc. (a).......... 84,600 3,056,175
Scholastic Corp. (a)............................ 37,600 2,528,600
--------------
5,584,775
--------------
PETROLEUM -- 0.9%
Union Pacific Resources Group, Inc.............. 73,300 2,144,025
--------------
PETROLEUM SERVICES -- 1.7%
Schlumberger, Ltd............................... 37,900 3,785,263
--------------
RETAIL -- 7.9%
AutoZone, Inc. (a).............................. 87,100 2,395,250
Corporate Express, Inc. (a)..................... 78,100 2,299,069
Home Depot, Inc................................. 74,800 3,749,350
Kohl's Corp. (a)................................ 78,800 3,092,900
Nike, Inc. (Class 'B' Stock).................... 40,700 2,431,825
Saks Holdings, Inc. (a)......................... 64,300 1,736,100
The Gap, Inc.................................... 71,300 2,147,913
--------------
17,852,407
--------------
</TABLE>
B38
<PAGE>
PRUDENTIAL JENNISON (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
SOFTWARE -- 2.0%
Intuit, Inc. (a)................................ 93,600 $ 2,948,400
Macromedia Inc. (a)............................. 82,600 1,486,800
--------------
4,435,200
--------------
TELECOMMUNICATIONS -- 6.6%
Ascend Communications, Inc. (a)................. 39,100 2,429,088
L.M. Ericsson Telephone Co. (Class 'B' Stock),
ADR (Sweden).................................. 104,000 3,139,500
Nokia AB Corp., ADR (Japan)..................... 67,200 3,872,400
Tellabs, Inc. (a)............................... 87,500 3,292,188
Vodafone Group PLC, ADR (United Kingdom)........ 53,500 2,213,563
--------------
14,946,739
--------------
TOTAL COMMON STOCKS
(cost $194,081,558)............................................ 219,739,402
--------------
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENT -- 4.7% (000)
-------------
REPURCHASE AGREEMENT
Joint Repurchase Agreement Account,
6.613%, 01/02/97
(cost $10,688,000) (Note 5)................... $ 10,688 10,688,000
--------------
TOTAL INVESTMENTS -- 101.7%
(cost $204,769,558; Note 6).................................... 230,427,402
LIABILITIES IN EXCESS OF OTHER ASSETS -- (1.7%)..................
(3,884,254)
--------------
TOTAL NET ASSETS -- 100.0%....................................... $ 226,543,148
--------------
--------------
<FN>
The following abbreviations are used in portfolio descriptions:
ADR American
Depository
Receipt
PLC Public Limited Company (British Corporation)
UTS Unit Trust Shares
(a) Non-income
producing
security.
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B39
<PAGE>
SMALL CAPITALIZATION STOCK
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
LONG-TERM INVESTMENTS -- 91.5%
VALUE
COMMON STOCKS SHARES (NOTE 2)
<CAPTION>
------------- --------------
<S> <C> <C>
AEROSPACE -- 0.8%
AAR Corp........................................ 7,400 $ 223,850
BE Aerospace, Inc. (a).......................... 9,800 265,825
Kaman Corp. (Class 'A' Stock)................... 8,300 107,900
Orbital Sciences Corp. (a)...................... 14,100 243,225
Trimble Navigation, Ltd. (a).................... 10,300 118,450
UNC, Inc. (a)................................... 8,600 103,200
Watkins-Johnson Co.............................. 3,900 95,550
--------------
1,158,000
--------------
AIRLINES -- 0.4%
Comair Holdings, Inc............................ 20,725 497,400
Mesa Air Group, Inc. (a)........................ 13,200 89,100
SkyWest, Inc.................................... 4,600 63,825
--------------
650,325
--------------
ALUMINUM -- 0.1%
Commonwealth Aluminum Corp...................... 5,000 76,875
IMCO Recycling, Inc. (a)........................ 5,500 80,437
--------------
157,312
--------------
AUTOS - CARS & TRUCKS -AUTOMOBILES -- 1.2%
A.O. Smith Corp................................. 9,800 292,775
Breed Technologies, Inc......................... 14,800 384,800
Custom Chrome, Inc. (a)......................... 2,200 44,275
Myers Industries, Inc........................... 7,820 131,962
Simpson Industries, Inc......................... 8,300 90,392
Spartan Motors, Inc............................. 5,700 38,475
Standard Motor Products, Inc.................... 6,200 86,025
Standard Products Co............................ 7,900 201,450
TBC Corp. (a)................................... 10,900 81,750
Titan Wheel International, Inc.................. 10,300 131,325
Wabash National Corp............................ 8,900 163,537
Wynn's International, Inc....................... 4,200 132,825
--------------
1,779,591
--------------
BANKS AND SAVINGS & LOANS -- 7.8%
Astoria Financial Corp. (a)..................... 10,100 372,437
CCB Financial Corp.............................. 7,000 477,750
Centura Banks, Inc.............................. 11,300 504,262
Coast Savings Financial, Inc. (a)............... 8,700 318,637
Collective Bancorp, Inc......................... 9,600 337,200
Commercial Federal Corp. (a).................... 6,800 326,400
Cullen/Frost Bankers, Inc....................... 10,500 349,125
Deposit Guaranty Corp........................... 18,700 579,700
Downey Financial Corp........................... 11,795 231,477
First Commercial Corp........................... 14,136 524,799
First Financial Corp............................ 16,625 407,312
First Michigan Bank Corp........................ 11,588 343,311
FirstBank Puerto Rico (a)....................... 7,000 182,000
Firstmerit Corp................................. 14,500 514,750
JSB Financial, Inc.............................. 4,900 186,200
Keystone Financial, Inc......................... 17,800 445,000
Liberty Bancorp, Inc............................ 4,300 213,925
Magna Group, Inc................................ 12,000 354,000
Mark Twain Bancshares, Inc...................... 7,100 346,125
North American Mortgage Co...................... 6,500 128,375
ONBANcorp, Inc.................................. 5,700 211,612
Provident Bancorp, Inc.......................... 18,225 619,650
RCSB Financial, Inc............................. 7,200 208,800
Riggs National Corp. (a)........................ 14,200 244,950
Roosevelt Financial Group, Inc.................. 19,800 415,800
Sovereign Bancorp, Inc.......................... 23,055 302,597
St. Paul Bancorp, Inc........................... 8,400 246,750
Union Planters Corp............................. 29,700 1,158,300
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Whitney Holding Corp............................ 8,000 $ 283,000
Zions Bancorp, Inc.............................. 7,000 728,000
--------------
11,562,244
--------------
FOOD & BEVERAGES -- 0.0%
Coca Cola Bottling Co........................... 600 29,250
--------------
CHEMICALS -- 1.8%
Chemed Corp..................................... 4,600 167,900
Chemfirst Inc. (a).............................. 9,200 212,750
Cytec Industries, Inc. (a)...................... 21,800 885,625
Hauser Chemical Research, Inc. (a).............. 4,800 28,200
Lilly Industries, Inc. (Class 'A' Stock)........ 10,600 193,450
McWhorter Technologies, Inc. (a)................ 4,900 112,087
Mississippi Chemical Corp. (a).................. 12,673 304,148
Mycogen Corp. (a)............................... 15,200 326,800
Puretec Corp. (a)............................... 13,700 23,547
Quaker Chemical Corp............................ 4,000 65,500
Scotts Co. (Class 'A' Stock) (a)................ 8,700 172,912
WD-40 Co........................................ 3,400 173,453
--------------
2,666,372
--------------
CHEMICALS - SPECIALTY -- 0.2%
Cambrex Corp.................................... 5,500 180,125
Penwest, Ltd.................................... 3,500 61,250
--------------
241,375
--------------
COMMERCIAL SERVICES -- 2.7%
ABM Industries, Inc............................. 9,100 168,350
ADVO, Inc....................................... 11,300 158,200
Bowne & Company, Inc............................ 8,300 204,387
CDI Corp. (a)................................... 9,300 263,887
Corrections Corp. of America (a)................ 35,100 1,074,937
Franklin Quest Co. (a).......................... 9,600 201,600
Insurance Auto Auction, Inc. (a)................ 5,600 53,200
Interim Services, Inc. (a)...................... 9,100 323,050
KinderCare Learning Centers (a)................. 8,800 165,000
LSB Industries, Inc............................. 5,900 26,550
Merrill Corp.................................... 3,500 80,500
NFO Research, Inc. (a).......................... 4,650 102,300
Norrell Corp.................................... 11,000 299,750
Pharmaceutical Marketing Services, Inc. (a)..... 6,200 64,325
Plenum Publishing Corp.......................... 1,800 63,000
Primark Corp. (a)............................... 12,700 314,325
Thomas Nelson, Inc.............................. 7,900 117,512
True North Communications, Inc.................. 11,100 242,812
--------------
3,923,685
--------------
COMPUTER SERVICES -- 7.7%
Acxiom Corp. (a)................................ 24,000 576,000
American Management Systems, Inc. (a)........... 19,150 469,175
Amtech Corp..................................... 6,800 44,944
Auspex Systems, Inc. (a)........................ 11,500 133,687
BancTec, Inc. (a)............................... 9,700 200,062
Banyan Systems, Inc. (a)........................ 7,900 35,550
BBN Corp. (a)................................... 9,800 220,500
BISYS Group, Inc. (a)........................... 11,600 429,925
Broderbund Software, Inc. (a)................... 9,800 291,550
Cerner Corp. (a)................................ 15,500 240,250
Chips & Technologies, Inc. (a).................. 9,700 177,025
Comverse Technology, Inc. (a)................... 10,100 381,906
Control Data Systems, Inc. (a).................. 6,400 140,800
Fair Issac & Company, Inc....................... 5,800 226,925
FileNet Corp. (a)............................... 7,200 230,400
</TABLE>
B40
<PAGE>
SMALL CAPITALIZATION STOCK (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Gerber Scientific, Inc.......................... 10,900 $ 162,137
Henry (Jack) & Associates, Inc.................. 5,600 200,200
Hyperion Software Corp. (a)..................... 8,000 170,000
Keane, Inc. (a)................................. 15,800 501,650
Komag, Inc. (a)................................. 24,000 651,000
Microcom Inc. (a)............................... 7,500 92,812
National Computer Systems, Inc.................. 7,200 183,600
National Data Corp.............................. 12,200 530,700
Network General Corp. (a)....................... 20,300 614,075
Norand Corp. (a)................................ 3,600 62,100
Paxar Corp...................................... 13,112 226,182
Platinum Software Corp. (a)..................... 8,600 102,125
PLATINUM Technology, Inc. (a)................... 26,200 356,975
Progress Software Corp. (a)..................... 5,900 118,000
Read-Rite Corp. (a)............................. 21,800 550,450
Standard Microsystems Corp. (a)................. 6,500 61,750
Sterling Software, Inc. (a)..................... 17,500 553,437
SunGard Data Systems, Inc. (a).................. 19,700 778,150
System Software Associates, Inc................. 19,900 211,437
Tech Data Corp. (a)............................. 20,100 550,237
Telxon Corp..................................... 7,600 93,100
Viewlogic Systems, Inc. (a)..................... 8,100 92,137
Wall Data, Inc. (a)............................. 4,300 65,037
Xircom, Inc. (a)................................ 9,200 200,100
Zebra Technologies Corp. (Class 'A'
Stock) (a).................................... 11,400 266,475
Zilog, Inc. (a)................................. 9,400 245,575
--------------
11,438,140
--------------
CONSTRUCTION -- 0.7%
BMC West Corp. (a).............................. 5,700 69,825
Insituform Technologies, Inc. (Class 'A'
Stock) (a).................................... 13,000 95,875
Lone Star Industries, Inc....................... 4,700 173,312
M.D.C. Holdings, Inc............................ 8,400 72,450
Morrison Knudsen Corp. (a)...................... 25,000 225,000
Ply-Gem Industries, Inc......................... 6,500 80,437
Republic Group, Inc............................. 5,000 78,125
Southern Energy Homes, Inc. (a)................. 6,912 79,488
Stone & Webster, Inc............................ 6,000 189,000
--------------
1,063,512
--------------
CONTAINERS -- 0.3%
Aptargroup Inc.................................. 8,400 296,100
Shorewood Packaging Corp. (a)................... 8,200 159,900
--------------
456,000
--------------
COSMETICS & SOAPS -- 0.3%
Nature's Sunshine Products, Inc................. 8,700 156,600
USA Detergent, Inc. (a)......................... 6,300 262,237
--------------
418,837
--------------
DIVERSIFIED GAS -- 4.9%
Atmos Energy Corp............................... 7,400 176,675
Barrett Resources Corp. (a)..................... 14,610 622,751
Benton Oil & Gas Co. (a)........................ 13,000 294,125
Box Energy Corp. (Class 'B' Stock) (a).......... 9,900 90,337
Cascade Natural Gas Corp........................ 4,922 83,674
Connecticut Energy Corp......................... 4,200 89,250
Cross Timbers Oil Co............................ 7,500 188,437
Daniel Industries............................... 7,900 116,525
Devon Energy Corp............................... 10,400 361,400
Energen Corp.................................... 5,200 157,300
HS Resources, Inc. (a).......................... 8,100 133,650
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
KCS Energy, Inc................................. 5,500 $ 196,625
New Jersey Resources Corp....................... 8,600 251,550
Northwest Natural Gas Co........................ 9,900 237,600
Oceaneering International, Inc. (a)............. 11,200 177,800
Pennsylvania Enterprises, Inc................... 2,200 96,525
Plains Resources, Inc. (a)...................... 7,800 121,875
Pogo Producing Co............................... 15,500 732,375
Public Service Company of North Carolina,
Inc........................................... 9,000 164,250
Snyder Oil Corp................................. 14,600 253,675
Southwest Gas Corp.............................. 12,500 240,625
Southwestern Energy Co.......................... 11,500 173,937
St. Mary Land & Exploration Co.................. 4,100 101,987
Tuboscope Vetco International, Inc. (a)......... 19,400 300,700
United Cities Gas Co............................ 5,400 121,500
United Meridian Corp. (a)....................... 16,000 828,000
Vintage Petroleum, Inc.......................... 11,200 386,400
Washington Energy Co............................ 5,700 117,562
WICOR, Inc...................................... 8,600 308,525
Wiser Oil Co.................................... 4,200 82,950
--------------
7,208,585
--------------
DIVERSIFIED OFFICE EQUIPMENT -- 0.1%
Nashua Corp..................................... 3,100 37,200
New England Business Service, Inc............... 6,100 131,150
--------------
168,350
--------------
DRUGS AND HOSPITAL SUPPLIES -- 7.1%
ADAC Laboratories............................... 8,300 198,162
Advanced Tissue Sciences, Inc. (a).............. 17,600 168,300
Alliance Pharmaceutical Corp.................... 14,100 192,112
Alpharma Inc. (Class 'A' Stock)................. 10,200 145,350
American Medical Response, Inc. (a)............. 11,500 373,750
Ballard Medical Products........................ 12,900 240,262
Calgene, Inc. (a)............................... 31,300 156,500
CellPro, Inc. (a)............................... 6,700 83,750
Cephalon, Inc. (a).............................. 11,500 235,750
Circon Corp. (a)................................ 4,400 67,100
Coherent Inc. (a)............................... 5,100 215,475
Collagen Corp................................... 4,100 74,825
COR Therapeutics, Inc. (a)...................... 9,200 90,850
Cygnus, Inc. (a)................................ 8,700 126,150
Enzo Biochem, Inc. (a).......................... 10,313 186,923
IDEXX Laboratories, Inc. (a).................... 17,600 633,600
ImmuLogic Pharmaceutical Corp. (a).............. 9,300 59,287
Invacare Corp................................... 13,800 379,500
Liposome Company, Inc. (a)...................... 17,200 328,950
Medimmune, Inc. (a)............................. 9,700 164,900
Mentor Corp/Minn................................ 11,700 345,150
Molecular Biosystems, Inc. (a).................. 8,200 53,300
NBTY, Inc. (a).................................. 8,700 165,300
North American Vaccine, Inc. (a)................ 14,600 354,050
Noven Pharmaceuticals, Inc. (a)................. 9,300 130,200
Omnicare, Inc................................... 35,700 1,146,862
Owens & Minor, Inc.............................. 14,900 152,725
Patterson Dental Co. (a)........................ 9,200 259,900
Perseptive Biosystems, Inc. (a)................. 10,000 69,375
Pharmaceutical Resources, Inc. (a).............. 8,700 30,450
Protein Design Labs, Inc. (a)................... 7,600 277,400
Regeneron Pharmaceuticals, Inc. (a)............. 12,000 193,500
Resound Corp. (a)............................... 8,900 63,412
Respironics, Inc. (a)........................... 8,600 149,425
Roberts Pharmaceutical Corp. (a)................ 9,000 101,250
</TABLE>
B41
<PAGE>
SMALL CAPITALIZATION STOCK (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Safeskin Corp. (a).............................. 7,700 $ 375,375
SciClone Pharmaceuticals, Inc. (a).............. 8,300 66,400
Sequus Pharmaceuticals, Inc. (a)................ 13,700 219,200
SpaceLabs Medical, Inc. (a)..................... 4,500 92,250
STERIS Corp. (a)................................ 16,032 697,392
Summit Technology, Inc. (a)..................... 14,500 79,750
Sunrise Medical, Inc. (a)....................... 8,800 139,700
Syncor International Corp. (a).................. 4,100 54,837
TECNOL Medical Products, Inc. (a)............... 9,100 137,637
The Immune Response Corp. (a)................... 9,100 75,075
TheraTech, Inc. (a)............................. 9,850 130,512
US Bioscience, Inc. (a)......................... 10,650 134,456
Vertex Pharmaceuticals, Inc. (a)................ 9,800 394,450
VISX, Inc. (a).................................. 7,300 161,512
Vital Signs, Inc................................ 6,100 158,600
Zoll Medical Corp. (a).......................... 2,800 30,100
--------------
10,561,041
--------------
ELECTRICAL EQUIPMENT -- 1.8%
Baldor Electric Co.............................. 12,250 301,656
Fluke Corp...................................... 4,000 178,500
KEMET Corp. (a)................................. 18,600 432,450
Kent Electronics Corp. (a)...................... 11,300 290,975
Kuhlman Corp.................................... 6,500 125,937
Microchip Technology, Inc. (a).................. 15,900 808,912
Rexel, Inc. (a)................................. 12,000 190,500
Valence Technology, Inc. (a).................... 10,200 45,262
Vicor Corp. (a)................................. 19,800 330,412
--------------
2,704,604
--------------
ELECTRONICS -- 5.0%
Allen Group, Inc................................ 12,500 278,125
Bell Industries, Inc............................ 3,421 73,124
Benchmark Electronics, Inc. (a)................. 2,600 78,325
BMC Industries, Inc............................. 12,800 403,200
C-COR Electronics, Inc. (a)..................... 4,500 59,625
Core Industries, Inc............................ 5,000 82,500
Cyrix Corp. (a)................................. 9,100 161,525
Dallas Semiconductor Corp....................... 12,500 287,500
Dionex Corp. (a)................................ 5,600 196,000
Dynatech Corp. (a).............................. 8,000 354,000
IMO Industries, Inc. (a)........................ 7,600 23,750
Integrated Circuit Systems, Inc. (a)............ 5,500 74,937
Intermagnetics General Corp. (a)................ 5,700 68,400
International Rectifier Corp. (a)............... 23,900 364,475
Itron, Inc. (a)................................. 6,200 110,050
Lattice Semiconductor Corp. (a)................. 10,400 478,400
Logicon, Inc.................................... 6,600 240,900
Marshall Industries (a)......................... 8,000 245,000
Oak Industries, Inc. (a)........................ 8,600 197,800
Pacific Scientific Co........................... 5,900 66,375
Park Electrochemical Corp....................... 5,300 120,575
Photronics, Inc. (a)............................ 5,500 149,875
Pioneer Standard Electronics, Inc............... 10,300 135,187
Plexus Corp. (a)................................ 3,000 50,250
S3, Inc. (a).................................... 22,300 362,375
Sanmina Corp. (a)............................... 7,900 446,350
SCI Systems, Inc. (a)........................... 13,900 620,287
Tencor Instruments (a).......................... 14,500 382,437
Thomas & Betts Corp............................. 5,656 250,985
Three-Five Systems, Inc. (a).................... 3,700 47,637
Tseng Laboratories, Inc......................... 8,900 27,812
VLSI Technology, Inc. (a)....................... 21,500 513,312
Wyle Electronics................................ 5,900 233,050
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
X-Rite, Inc..................................... 9,800 $ 161,700
Zero Corp....................................... 5,700 114,000
--------------
7,459,843
--------------
ENVIRONMENTAL SERVICES -- 1.4%
Allwaste, Inc................................... 18,600 95,325
Dames & Moore, Inc.............................. 10,400 152,100
Ionics, Inc. (a)................................ 7,300 350,400
OHM Corp. (a)................................... 12,600 107,100
Omega Environmental, Inc. (a)................... 20,500 26,266
Republic Industries, Inc (a).................... 6,120 190,868
TETRA Technologies, Inc. (a).................... 6,000 151,500
United States Filter Corp. (a).................. 32,150 1,020,763
--------------
2,094,322
--------------
FINANCIAL SERVICES -- 3.9%
Alex Brown, Inc................................. 7,600 551,000
AMRESCO, Inc. (a)............................... 13,600 363,800
Cal Fed Bancorp, Inc. (a)....................... 23,600 578,200
Charter One Financial, Inc...................... 21,817 916,314
Eaton Vance Corp................................ 4,400 209,550
Envoy Corporation (a)........................... 7,000 262,500
Inter-Regional Financial Group, Inc............. 5,700 200,925
Investors Financial Services Corp. (a).......... 69 1,915
Legg Mason, Inc................................. 8,500 327,250
Pioneer Group, Inc.............................. 11,100 263,625
Piper Jaffray Companies, Inc.................... 8,500 132,813
Quick & Reilly Group, Inc....................... 11,725 350,284
Raymond James Financial, Inc.................... 9,800 295,225
SEI Corp........................................ 8,500 189,125
TCF Financial Corp.............................. 16,300 709,050
United States Trust Corp........................ 4,500 355,500
--------------
5,707,076
--------------
FOODS -- 2.3%
Chiquita Brands International, Inc.............. 26,100 332,775
Dekalb Genetics Corp. (Class 'B' Stock)......... 7,800 397,800
Earthgrains Co.................................. 4,700 245,575
GoodMark Foods, Inc............................. 3,400 56,100
Interstate Bakeries Corp........................ 17,500 859,688
J & J Snack Foods Corp. (a)..................... 3,900 52,650
Nash-Finch Co................................... 4,600 97,750
National Auto Credit, Inc....................... 13,390 160,680
Richfood Holdings, Inc.......................... 19,600 475,300
Rykoff-Sexton, Inc.............................. 13,000 206,375
Smith's Food & Drugs Centers, Inc............... 7,392 229,152
Smithfield Foods, Inc. (a)...................... 8,400 319,200
--------------
3,433,045
--------------
FOREST PRODUCTS -- 0.5%
Caraustar Industries, Inc....................... 11,600 385,700
Mosinee Paper Corp.............................. 4,566 162,093
Pope & Talbot, Inc.............................. 6,300 100,013
Universal Forest Products, Inc.................. 8,000 106,000
--------------
753,806
--------------
FURNITURE -- 0.6%
Ethan Allen Interiors, Inc. (a)................. 6,800 261,800
Interface, Inc. (Class 'A' Stock)............... 10,000 201,250
Juno Lighting, Inc.............................. 8,200 131,200
La-Z-Boy Chair Co............................... 8,500 250,750
Thomas Industries, Inc.......................... 4,900 102,288
--------------
947,288
--------------
</TABLE>
B42
<PAGE>
SMALL CAPITALIZATION STOCK (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
HEALTH CARE -- 0.9%
Coventry Corp. (a).............................. 15,400 $ 142,691
Sola International, Inc. (a).................... 11,400 433,200
Sybron International Corp. (a).................. 22,000 726,000
--------------
1,301,891
--------------
HOSPITAL MANAGEMENT -- 2.8%
Express Scripts, Inc. (Class 'A' Stock) (a)..... 7,600 272,650
Genesis Health Ventures, Inc. (a)............... 15,000 466,875
GranCare, Inc. (a).............................. 11,100 198,413
Integrated Health Services, Inc................. 10,800 263,250
Lincare Holdings, Inc. (a)...................... 13,200 541,200
Living Centers of America, Inc. (a)............. 9,500 263,625
Magellan Health Services, Inc. (a).............. 14,700 328,913
Mariner Health Group, Inc. (a).................. 13,600 113,900
PhyCor, Inc. (a)................................ 25,675 728,528
Universal Health Services, Inc. (Class 'B'
Stock) (a).................................... 15,000 429,375
Vivra, Inc. (a)................................. 18,700 516,588
--------------
4,123,317
--------------
HOUSING RELATED -- 1.0%
Champion Enterprises, Inc. (a).................. 22,300 434,850
Continental Homes Holding Corp.................. 3,300 70,125
Fedders Corp.................................... 17,700 110,625
Oakwood Homes Corp.............................. 21,200 484,950
Ryland Group, Inc............................... 7,100 97,625
Skyline Corp.................................... 4,800 118,800
Standard-Pacific Corp........................... 14,400 82,800
U.S. Home Corp. (a)............................. 5,300 137,800
--------------
1,537,575
--------------
INSURANCE -- 4.2%
Allied Group, Inc............................... 9,350 305,044
American Bankers Insurance Group, Inc........... 9,600 490,800
Arthur J. Gallagher and Co...................... 7,900 244,900
Capital Re Corp................................. 7,500 349,688
Capitol American Financial Corp................. 7,200 261,900
CMAC Investment Corp............................ 10,500 385,875
Compdent Corp. (a).............................. 4,700 165,675
Enhance Financial Services Group, Inc........... 8,100 295,650
Fidelity National Financial, Inc................ 6,479 97,995
First American Financial Corp................... 5,200 213,850
Fremont General Corp............................ 12,870 398,970
Frontier Insurance Group, Inc................... 6,860 262,395
Hilb, Rogal and Hamilton Co..................... 6,300 83,475
Integon Corp.................................... 7,300 129,575
Life Re Corp.................................... 6,300 243,338
Mutual Risk Management, Ltd..................... 8,500 314,500
Orion Capital Corp.............................. 6,400 391,200
Protective Life Corp............................ 14,400 574,200
Selective Insurance Group, Inc.................. 6,700 254,600
Sierra Health Services, Inc. (a)................ 8,300 204,388
Trenwick Group, Inc............................. 3,100 143,375
Washington National Corp........................ 5,800 159,500
Zenith National Insurance Corp.................. 8,300 227,213
--------------
6,198,106
--------------
LEISURE -- 1.9%
Aztar Corp. (a)................................. 21,100 147,700
Bell Sports Corp. (a)........................... 6,400 38,400
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Carmike Cinemas, Inc. (Class 'A' Stock) (a)..... 5,200 $ 131,950
Casino Magic Corp. (a).......................... 16,700 41,228
Cineplex Odeon Corp. (a)........................ 76,700 105,463
GC Companies, Inc. (a).......................... 3,700 128,113
Grand Casinos, Inc. (a)......................... 19,650 265,275
Hollywood Park, Inc. (a)........................ 8,400 126,000
Huffy Corp...................................... 6,200 89,125
K2, Inc. (a).................................... 7,800 214,500
Outboard Marine Corp............................ 9,400 155,100
Players International, Inc. (a)................. 13,400 72,025
Regal Cinemas, Inc. (a)......................... 14,925 458,944
Roadmaster Industries, Inc. (a)................. 21,700 27,125
Showboat, Inc................................... 7,500 129,375
Sturm Ruger & Company, Inc...................... 12,600 244,125
Thor Industries, Inc............................ 3,700 93,425
Winnebago Industries, Inc....................... 11,800 85,550
WMS Industries, Inc. (a)........................ 11,400 228,000
--------------
2,781,423
--------------
LODGING -- 0.3%
Marcus Corp..................................... 9,250 196,563
Prime Hospitality Corp. (a)..................... 18,600 299,925
--------------
496,488
--------------
MACHINERY -- 2.2%
AGCO Corp....................................... 26,800 767,150
Astec Industries, Inc. (a)...................... 4,400 41,800
Cognex Corp. (a)................................ 19,200 355,200
Global Industrial Technologies, Inc. (a)........ 10,600 234,525
Kysor Industrial Corp........................... 2,700 88,088
Lindsay Manufacturing Co. (a)................... 3,050 142,588
Manitowoc Company, Inc.......................... 5,350 216,675
Novellus Systems, Inc. (a)...................... 7,600 411,825
Regal Beloit Corp............................... 9,600 188,400
Roper Industries, Inc........................... 6,200 242,575
Royal Appliance Manufacturing Co. (a)........... 11,200 77,000
SPX Corp........................................ 6,600 255,750
Toro Co......................................... 5,600 204,400
--------------
3,225,976
--------------
MEDIA -- 0.6%
Catalina Marketing Corp. (a).................... 9,200 507,150
International Family Entertainment, Inc. (Class
'B' Stock) (a)................................ 21,000 325,500
NTN Communications, Inc. (a).................... 10,500 40,031
--------------
872,681
--------------
METALS - DIVERSIFIED -- 0.6%
Amcast Industrial Corp.......................... 3,900 96,525
AMCOL International Corp........................ 8,800 138,600
Castle (A.M.) & Co.............................. 6,600 127,050
Glamis Gold, Ltd................................ 14,400 100,800
Handy & Harman.................................. 5,400 94,500
Hecla Mining Co. (a)............................ 23,900 134,438
Stillwater Mining Co. (a)....................... 9,000 163,125
--------------
855,038
--------------
MINERAL RESOURCES -- 0.6%
Coeur D'Alene Mines Corp........................ 10,300 155,788
Dravo Corp...................................... 7,000 98,875
Getchell Gold Co. (a)........................... 12,100 464,338
</TABLE>
B43
<PAGE>
SMALL CAPITALIZATION STOCK (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Kronos, Inc. (a)................................ 3,800 $ 121,600
Sunshine Mining and Refining Co. (a)............ 108,000 101,250
--------------
941,851
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 5.5%
Air & Water Technologies Corp. (Class 'A'
Stock) (a).................................... 15,000 86,250
Air Express International Corp.................. 10,900 351,525
Alliant Techsystems, Inc........................ 6,100 335,500
Apogee Enterprises, Inc......................... 6,400 254,400
Aquarion Co..................................... 3,300 91,988
Bassett Furniture Industries, Inc............... 6,000 147,000
Butler Manufacturing Co......................... 3,100 125,550
BW/IP, Inc. (Class 'A' Stock)................... 11,300 186,450
Clarcor, Inc.................................... 6,900 152,663
Consumers Water Co.............................. 4,500 81,000
Cyrk International, Inc. (a).................... 4,900 63,700
Expeditors International of Washington, Inc..... 11,100 255,300
Fibreboard Corp. (a)............................ 4,000 135,000
Figgie International, Inc. (Class 'A'
Stock) (a).................................... 7,700 92,400
Fisher Scientific International, Inc............ 9,400 442,975
Flow International Corp. (a).................... 7,000 63,875
Gentex Corp. (a)................................ 16,200 326,025
Geon Co. (a).................................... 11,200 219,800
Greenfield Industries, Inc...................... 7,400 226,625
Griffon Corp. (a)............................... 13,500 165,375
Harmon Industries, Inc.......................... 2,800 52,150
Insteel Industries, Inc......................... 3,900 34,613
Intermet Corp. (a).............................. 11,200 180,600
Jan Bell Marketing, Inc. (a).................... 11,300 23,306
Justin Industries, Inc.......................... 12,100 139,150
K-Swiss, Inc. (Class 'A' Stock)................. 2,600 25,675
L.A. Gear, Inc. (a)............................. 10,000 18,750
Lydall, Inc. (a)................................ 7,900 177,750
Medusa Corp..................................... 7,600 261,250
Mohawk Industries, Inc. (a)..................... 16,100 354,200
Mueller Industries, Inc. (a).................... 8,200 315,700
O'Sullivan Corp................................. 7,600 83,600
Paragon Trade Brands, Inc. (a).................. 5,700 171,000
Rollins Environmental Services, Inc............. 28,400 49,700
SPS Technologies, Inc. (a)...................... 2,800 179,900
Standex International Corp...................... 6,200 191,425
Texas Industries, Inc........................... 5,200 263,250
The Rival Co.................................... 4,200 104,475
Timberland Co. (Class 'A' Stock) (a)............ 5,200 197,600
TJ International, Inc........................... 8,200 190,650
Tredegar Industries, Inc........................ 5,650 226,706
Valmont Industries, Inc......................... 6,400 264,000
Walbro Corp..................................... 4,100 74,825
Whittaker Corp. (a)............................. 5,200 65,650
Wolverine Tube, Inc. (a)........................ 6,500 229,125
Wolverine World Wide, Inc....................... 13,025 377,725
--------------
8,056,176
--------------
MISCELLANEOUS - CONSUMER GROWTH/STABLE -- 1.4%
DeVRY, Inc. (a)................................. 15,600 366,600
Hughes Supply, Inc.............................. 4,600 198,375
Mail Boxes, Etc. (a)............................ 5,100 114,750
Merisel, Inc. (a)............................... 13,800 22,856
Philadelphia Suburban Corp...................... 8,950 177,881
Premark International, Inc...................... 29,200 649,700
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Southern California Water Co.................... 3,700 $ 80,475
Valassis Communications, Inc. (a)............... 19,700 416,163
--------------
2,026,800
--------------
PETROLEUM -- 0.5%
Cabot Oil & Gas Corp. (Class 'A' Stock)......... 10,700 183,238
KN Energy, Inc.................................. 14,200 557,350
--------------
740,588
--------------
PETROLEUM SERVICES -- 2.7%
Camco International, Inc........................ 11,300 521,213
Input/Output, Inc. (a).......................... 20,200 373,700
Mesa, Inc. (a).................................. 30,100 158,025
Newfield Exploration Co. (a).................... 16,400 426,400
Noble Drilling Corp. (a)........................ 57,200 1,136,850
Offshore Logistics, Inc. (a).................... 9,100 176,313
Piedmont Natural Gas Company, Inc............... 13,800 322,575
Pool Energy Services Co. (a).................... 8,800 135,300
Pride Petroleum Services, Inc. (a).............. 13,400 311,550
Production Operators Corp....................... 4,700 218,550
Seitel, Inc. (a)................................ 4,722 188,880
--------------
3,969,356
--------------
RAILROADS -- 0.1%
RailTex, Inc. (a)............................... 4,100 103,525
--------------
REAL ESTATE DEVELOPMENT -- 0.2%
Toll Brothers, Inc. (a)......................... 15,800 308,100
--------------
RESTAURANTS -- 1.3%
Applebee's International, Inc................... 14,700 404,250
Au Bon Pain, Inc. (Class 'A' Stock) (a)......... 5,500 35,750
Bertucci's, Inc. (a)............................ 4,200 22,575
Cheesecake Factory (a).......................... 5,100 92,438
CKE Restaurants, Inc............................ 10,300 370,800
Flagstar Companies, Inc. (a).................... 20,200 18,306
Foodmaker, Inc. (a)............................. 18,200 161,525
IHOP Corp. (a).................................. 4,300 101,588
Ruby Tuesday Inc................................ 8,300 153,550
Showbiz Pizza Time, Inc. (a).................... 8,450 153,156
Sonic Corp. (a)................................. 5,950 151,725
Taco Cabana (Class 'A' Stock) (a)............... 800 5,900
TCBY Enterprises, Inc........................... 11,200 44,800
Triarc Companies, Inc. (Class 'A' Stock) (a).... 14,000 161,000
--------------
1,877,363
--------------
RETAIL -- 5.0%
Arbor Drugs, Inc................................ 17,625 306,234
Arctic Cat, Inc................................. 13,800 136,275
Bombay Company, Inc. (a)........................ 17,600 81,400
Books-A-Million, Inc. (a)....................... 8,000 55,000
Brown Group, Inc................................ 8,400 154,350
Carson Pirie Scott & Co. (a).................... 7,500 189,375
Casey's General Stores, Inc..................... 12,200 228,750
Cash America International, Inc................. 8,643 73,466
Cato Corp. (Class 'A' Stock).................... 12,200 61,000
CompUSA, Inc. (a)............................... 42,500 876,563
Damark International, Inc. (a).................. 3,900 37,050
Designs, Inc. (a)............................... 7,400 41,625
Discount Auto Parts, Inc. (a)................... 7,800 182,325
Dress Barn, Inc. (a)............................ 10,700 160,500
Eagle Hardware & Garden, Inc. (a)............... 13,100 271,825
</TABLE>
B44
<PAGE>
SMALL CAPITALIZATION STOCK (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Fabri-Centers of America (Class 'A' Stock)...... 8,200 $ 132,225
Filene's Basement Corp. (a)..................... 9,600 39,600
Galoob Toys, Inc. (a)........................... 8,100 113,400
Gottschalks, Inc. (a)........................... 5,000 26,250
Hechinger Co. (Class 'A' Stock)................. 19,700 40,631
J. Baker, Inc................................... 6,600 35,063
Lechters, Inc. (a).............................. 900 4,556
Levitz Furniture, Inc. (a)...................... 13,900 43,438
Lillian Vernon Corp............................. 4,600 56,350
Michaels Stores, Inc. (a)....................... 11,300 135,600
MicroAge, Inc. (a).............................. 6,900 138,000
O'Reilly Automotive, Inc. (a)................... 4,800 153,600
Oshkosh B' Gosh, Inc. (Class 'A' Stock)......... 5,700 86,925
Payless Cashways, Inc. (a)...................... 18,300 36,600
Pier 1 Imports, Inc............................. 21,100 371,888
Proffitt's, Inc. (a)............................ 11,000 405,625
Regis Corp...................................... 10,500 170,625
Ross Stores, Inc................................ 11,800 590,000
Russ Berrie & Company, Inc...................... 10,200 183,600
Shopko Stores, Inc.............................. 15,000 225,000
Sports & Recreation, Inc. (a)................... 9,400 72,850
Sports Authority, Inc........................... 14,650 318,638
Stein Mart, Inc. (a)............................ 11,200 226,800
Strawbridge & Clothier (Class 'A' Stock)........ 3,700 58,738
Swiss Army Brand (a)............................ 3,800 50,350
Tyco Toys, Inc. (a)............................. 16,400 192,700
Venture Stores, Inc............................. 8,400 25,200
Whole Foods Market, Inc. (a).................... 9,100 204,750
Williams-Sonoma, Inc. (a)....................... 12,000 436,500
--------------
7,431,240
--------------
STEEL -- 0.8%
Acme Metals, Inc. (a)........................... 5,400 104,625
Birmingham Steel Corp........................... 13,400 254,600
Commercial Metals Co............................ 7,000 210,875
Material Sciences Corp. (a)..................... 7,300 131,400
Northwestern Steel and Wire Co. (a)............. 11,900 58,013
Quanex Corp..................................... 6,300 172,463
Steel Technologies, Inc......................... 5,600 74,200
WHX Corp. (a)................................... 12,100 107,388
--------------
1,113,564
--------------
TELECOMMUNICATIONS -- 2.0%
Aspect Telecommunications Corp. (a)............. 11,300 717,550
BroadBand Technologies, Inc. (a)................ 6,200 91,450
California Microwave, Inc. (a).................. 7,500 111,563
Centigram Communications Corp. (a).............. 3,300 42,075
CommNet Cellular, Inc. (a)...................... 6,500 181,188
Compression Labs, Inc. (a)...................... 7,000 26,688
Digi International, Inc. (a).................... 6,200 58,900
Digital Microwave Corp. (a)..................... 7,500 209,063
Geotek Communications, Inc...................... 28,200 200,925
InterVoice, Inc. (a)............................ 7,600 93,100
Network Equipment Technologies, Inc. (a)........ 9,800 161,700
Picturetel Corp. (a)............................ 15,700 408,200
Symmetricom, Inc. (a)........................... 7,300 145,088
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
TCSI Corp. (a).................................. 9,900 $ 61,875
Vitesse Semiconductor Corp. (a)................. 10,500 477,750
--------------
2,987,115
--------------
TEXTILES -- 1.9%
Angelica Corp................................... 4,300 82,238
Ashworth, Inc. (a).............................. 5,700 32,775
Authentic Fitness Corp.......................... 10,500 126,000
Cone Mills Corp. (a)............................ 12,800 100,800
Delta Woodside Industries, Inc.................. 11,400 72,675
Dixie Yarns, Inc................................ 5,200 40,300
Fieldcrest Cannon, Inc. (a)..................... 4,300 68,800
G & K Services, Inc. (Class 'A' Stock).......... 9,500 358,625
Galey & Lord, Inc. (a).......................... 5,500 81,813
Guilford Mills, Inc............................. 6,700 178,388
Haggar Corp..................................... 3,900 61,913
Hartmarx Corp. (a).............................. 15,600 87,750
Johnston Industries, Inc........................ 4,400 31,900
Kellwood Co..................................... 9,900 198,000
Nautica Enterprises, Inc. (a)................... 18,700 472,175
Oxford Industries, Inc.......................... 4,100 98,400
Phillips-Van Heusen Corp........................ 12,600 181,125
Pillowtex Corp. (a)............................. 5,000 90,000
St. John Knits, Inc............................. 7,800 339,300
Tultex Corp. (a)................................ 13,700 95,900
--------------
2,798,877
--------------
TOBACCO -- 0.3%
Dimon, Inc...................................... 19,900 460,188
--------------
TRUCKING/SHIPPING -- 1.5%
American Freightways, Inc....................... 14,700 163,538
Arkansas Best Corp.............................. 8,700 38,063
Fritz Companies Inc. (a)........................ 800 10,200
Frozen Food Express Industries, Inc............. 7,600 68,400
Heartland Express, Inc. (a)..................... 14,949 364,382
Kirby Corp. (a)................................. 11,500 227,125
Landstar Systems, Inc. (a)...................... 6,000 139,500
M.S. Carriers, Inc. (a)......................... 5,500 88,000
Rollins Truck Leasing Corp...................... 20,700 261,338
US freightways Co............................... 10,500 288,094
Werner Enterprises, Inc......................... 17,750 321,719
Yellow Corp..................................... 13,100 188,313
--------------
2,158,672
--------------
UTILITY - ELECTRIC -- 1.5%
Bangor Hydro-Electric Co........................ 3,200 29,600
Central Hudson Gas & Electric Corp.............. 8,000 251,000
Central Vermont Public Service Corp............. 5,400 64,800
Cilcorp Inc..................................... 6,300 230,738
Commonwealth Energy System...................... 10,100 237,350
Eastern Utilities Associates.................... 9,500 165,063
Green Mountain Power Corp....................... 2,400 57,300
Interstate Power Co............................. 4,500 130,500
Orange & Rockland Utilities, Inc................ 6,400 229,600
Sierra Pacific Resources........................ 14,400 414,000
TNP Enterprises, Inc............................ 6,000 164,250
United Illuminating Co.......................... 6,700 210,213
--------------
2,184,414
--------------
</TABLE>
B45
<PAGE>
SMALL CAPITALIZATION STOCK (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
TRANSPORTATION -- 0.1%
Pittston Burling................................ 9,300 $ 186,000
--------------
TOTAL COMMON STOCKS
(cost $120,029,233)............................................ 135,318,927
--------------
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS -- 10.8% (000)
-------------
REPURCHASE AGREEMENT -- 10.5%
Joint Repurchase Agreement Account,
6.613%, 01/02/97 (Note 5)..................... $ 15,582,000 15,582,000
--------------
U. S. GOVERNMENT & AGENCY OBLIGATION -- 0.3%
United States Treasury Bill,
5.860%, 03/20/97 (b)......................... 400,000 395,868
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $15,977,842)............................................. 15,977,868
--------------
TOTAL INVESTMENTS -- 102.3%
(cost $136,007,075; Note 6).................................... 151,296,795
VARIATION MARGIN ON OPEN FUTURES CONTRACTS (C)...................
215,925
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (2.3%)............................................... (3,614,397)
--------------
TOTAL NET ASSETS -- 100.0%....................................... $ 147,898,323
--------------
--------------
(a) Non-income producing security.
(b) Security segregated as collateral for futures contracts.
(c) Open futures contracts as of December 31, 1996 are as
follows:
NUMBER OF EXPIRATION VALUE AT VALUE AT
CONTRACTS TYPE DATE TRADE DATE DECEMBER 31, 1996 DEPRECIATION
89 MIDCAP 400 Index Mar 97 $11,461,000 $11,418,700 ($42,300)
1 S&P 500 Index Mar 97 $ 373,000 $ 372,250 ($ 750)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B46
<PAGE>
GLOBAL PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
LONG-TERM INVESTMENTS -- 93.9%
VALUE
COMMON STOCKS -- 93.8% SHARES (NOTE 2)
<CAPTION>
------------- --------------
<S> <C> <C>
ARGENTINA -- 0.7%
Banco Frances Del Rio De La Plata
(Banks and Savings & Loans)................... 453,195 $ 4,238,157
--------------
AUSTRALIA -- 3.9%
Brambles Industries, Ltd.
(Miscellaneous - Basic Industry).............. 552,500 10,783,281
Broken Hill Proprietary Co., Ltd.
(Metals - Diversified)........................ 472,231 6,727,592
Coca-Cola Amatil, Ltd.
(Foods)....................................... 371,832 3,975,907
Publishing and Broadcasting, Ltd.
(Media)....................................... 213,900 1,040,709
--------------
22,527,489
--------------
BELGIUM -- 0.3%
Bekaert, SA
(Miscellaneous - Basic Industry).............. 3,150 2,000,627
--------------
BRAZIL -- 0.7%
Basil De Distrub., ADR
(Retail) (a).................................. 219,400 3,839,500
--------------
FEDERAL REPUBLIC OF GERMANY -- 3.6%
Hoechst, AG
(Chemicals)................................... 177,900 8,398,266
Linde, AG
(Machinery)................................... 11,240 6,860,779
SAP, AG
(Computer Services) (a)....................... 40,400 5,495,974
--------------
20,755,019
--------------
FINLAND -- 1.6%
Nokia Corp. (Class 'A' Stock)
(Telecommunications).......................... 157,700 9,151,964
--------------
FRANCE -- 6.4%
Carrefour Supermarche, SA
(Retail)...................................... 18,000 11,708,671
Imetal
(Steel)....................................... 25,236 3,724,620
Legrand, SA
(Electrical Equipment)........................ 37,800 6,438,381
SGS Thomson Microelectronics, N.V., ADR
(Electronics) (a)............................. 101,600 7,112,000
SGS Thomson Microelectronics, N.V.,
(Electronics) (a)............................. 5,000 353,565
Valeo, SA
Autos - Cars & Trucks......................... 128,585 7,928,170
--------------
37,265,407
--------------
HONG KONG -- 7.3%
CDL Hotels International, Ltd.
(Real Estate Development)..................... 6,948,145 3,975,117
Citic Pacific, Ltd.
(Multi-industry) (c).......................... 1,652,000 9,590,122
Guoco Group, Ltd.
(Financial Services).......................... 1,944,000 10,883,082
Hung Hing Printing Group, Ltd.
(Miscellaneous - Basic Industry).............. 3,452,000 1,249,674
Hutchison Whampoa, Ltd.
(Multi-industry).............................. 749,000 5,882,959
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
New World Development Co., Ltd.
(Real Estate Development)..................... 1,597,000 $ 10,736,828
--------------
42,317,782
--------------
ITALY -- 2.7%
Gucci Group, ADR
(Textiles).................................... 94,100 6,010,637
Telecom Italia Mobile Spa
(Telecommunications).......................... 3,790,500 9,570,445
--------------
15,581,082
--------------
JAPAN -- 13.6%
Daibiru Corp.
(Real Estate Development)..................... 198,000 1,825,121
Eisai Co., Ltd.
(Drugs and Hospital Supplies)................. 288,000 5,656,788
Honda Motor Co.
(Autos - Cars & Trucks)....................... 368,000 10,493,453
Jgc Corp.
(Construction) (a)............................ 438,000 3,278,963
Keyence Corp.
(Electrical Equipment)........................ 37,800 4,656,616
Kokusai Denshin Denwa
(Telecommunications).......................... 49,000 3,368,539
Mitsui Fudosan
(Real Estate Development)..................... 673,000 6,725,362
Namco, Ltd.
(Leisure)..................................... 145,500 4,449,733
Nippon Television Network
(Media)....................................... 21,700 6,542,901
Nissan Chemicals Inds.
(Chemicals)................................... 663,000 3,141,368
Onward Kashiyama Co., Ltd.
(Textiles).................................... 528,000 7,414,197
Sony Corp.
(Electronics)................................. 169,000 11,050,224
Toyota Motor Corp.
(Autos - Cars & Trucks)....................... 352,000 10,097,864
--------------
78,701,129
--------------
MALAYSIA -- 2.6%
I.J.M. Corp. Berhad
(Construction)................................ 3,180,000 7,493,465
Renong Berhad
(Real Estate Development)..................... 1,637,000 2,904,459
Resorts World Berhad
(Leisure)..................................... 1,065,000 4,850,495
--------------
15,248,419
--------------
MEXICO -- 2.4%
Apasco, SA de CV
(Steel)....................................... 659,200 4,508,778
Cifra, SA de CV (Class 'B' Stock)
(Retail) (a).................................. 1,948,900 2,379,657
Fomento Economico Mexicano, SA de CV (Class 'B'
Stock)
(Beverage).................................... 935,400 3,198,961
Kimberly Clark (Series A)
(Paper Products).............................. 205,000 4,037,682
--------------
14,125,078
--------------
</TABLE>
B47
<PAGE>
GLOBAL PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
NETHERLANDS -- 2.9%
Heineken, N.V.
(Food & Beverages)............................ 21,625 $ 3,825,996
Nutricia Verenigde Bedrijven
(Healthcare).................................. 37,300 5,664,859
Royal Dutch Petroleum
(Petroleum)................................... 41,400 7,255,220
--------------
16,746,075
--------------
NEW ZEALAND -- 0.1%
Fletcher Challenge Forestry Division
(Forest Products)............................. 293,204 490,803
--------------
SINGAPORE -- 3.1%
Overseas Chinese Banking Corp., Ltd.
(Banks and Savings & Loans)................... 462,000 5,744,872
Overseas Union Bank, Ltd.
(Banks and Savings & Loans)................... 793,000 6,120,489
Sembawang Maritime, Ltd.
(Trucking/Shipping)........................... 883,500 2,525,548
Wing Tai Holdings, Ltd.
(Real Estate Development)..................... 1,239,250 3,542,486
--------------
17,933,395
--------------
SPAIN -- 2.8%
Banco Popular Espanol, SA
(Banks and Savings & Loans)................... 31,700 6,227,711
Centros Commerciales Pryca, SA
(Retail)...................................... 197,462 4,183,552
Telefonica De Espana
(Telecommunications) (a)...................... 253,700 5,893,004
--------------
16,304,267
--------------
SWEDEN -- 5.3%
Astra, AB (Series 'B' Free)
(Drugs and Hospital Supplies)................. 161,880 7,782,931
Hennes & Mauritz (Series 'B' Free)
(Retail)...................................... 86,000 11,863,820
Mo Och Domsjo, Ab (Series'B' Free)
(Forest Products)............................. 156,900 4,402,286
Skandinaviska Enskilda Bank (Series A)
(Banks & Savings & Loans)..................... 655,100 6,701,310
--------------
30,750,347
--------------
UNITED KINGDOM -- 13.3%
Bank Of Ireland
(Banks and Savings & Loans)................... 982,700 8,969,717
British Sky Broadcasting Group, PLC
(Media)....................................... 987,800 8,830,191
Dixons Group, PLC
(Retail)...................................... 795,800 7,400,045
Guest Kean & Nettlefolds, PLC
(Autos - Cars & Trucks)....................... 677,340 11,611,047
Hays, PLC
(Commercial Services)......................... 519,700 5,001,723
Reed International, PLC
(Miscellaneous - Basic Industry).............. 298,000 5,603,368
Siebe, PLC
(Machinery) (c)............................... 690,340 12,815,127
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Standard Chartered, PLC
(Banks & Savings & Loans)..................... 580,000 $ 7,121,602
Vodafone Group, PLC
(Telecommunications).......................... 2,394,200 10,127,167
--------------
77,479,987
--------------
UNITED STATES -- 20.5%
Baker Hughes, Inc.
(Petroleum Services).......................... 163,800 5,651,100
Case Corp.
(Machinery)................................... 105,000 5,722,500
Cisco Systems, Inc.
(Computer Services) (a)....................... 154,800 9,849,150
Mattel, Inc.
(Leisure)..................................... 338,758 9,400,535
MCI Communications Corp.
(Telecommunications) (c)...................... 321,400 10,505,763
Microsoft Corp.
(Computer Services) (a), (c).................. 170,700 14,104,088
Mirage Resorts, Inc.
(Leisure) (a)................................. 211,500 4,573,688
Mobil Corp.
(Petroleum)................................... 81,300 9,938,925
Motorola, Inc.
(Electronics)................................. 67,400 4,136,675
Oracle Corp.
(Computer Services) (a)....................... 252,600 10,546,050
Texas Instruments, Inc.
(Electronics)................................. 106,900 6,814,875
Tiffany & Co.
(Retail)...................................... 133,800 4,900,425
Time Warner, Inc.
(Media)....................................... 173,400 6,502,500
Transocean Offshore, Inc.
(Petroleum Services).......................... 79,800 4,997,475
Viacom, Inc. (Class 'A' Stock)
(Media) (a)................................... 146,600 5,057,700
Walt Disney Co.
(Leisure)..................................... 92,500 6,440,313
--------------
119,141,762
--------------
TOTAL COMMON STOCKS
(cost $433,976,824)............................................ 544,598,289
--------------
WARRANTS (A) -- 0.1%
MALAYSIA
Renong Berhad, Expire 11/21/00,
(Miscellaneous - Basic Industry).............. 185,625 91,158
--------------
SINGAPORE
United Overseas Bank Ltd., Expire 6/17/97,
(Banks and Savings & Loans)................... 57,800 204,054
--------------
TOTAL WARRANTS
(cost $307,011)................................................ 295,212
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $434,283,835)............................................ 544,893,501
--------------
</TABLE>
B48
<PAGE>
GLOBAL PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENT -- 4.5% (000) (NOTE 2)
------------- --------------
<S> <C> <C>
UNITED STATES
Bear, Stearns & Co., Repurchase Agreement,
6.750%, 01/02/97 (cost $26,319,000) (b)....... $ 26,319 $ 26,319,000
--------------
TOTAL INVESTMENTS -- 98.4%
(cost $460,602,835; Note 6).................................... 571,212,501
FORWARD CURRENCY CONTRACTS --
AMOUNT RECEIVABLE FROM
COUNTERPARTIES (D) -- 0.1%..................................... 692,778
OTHER ASSETS IN EXCESS
OF LIABILITIES -- 1.5%......................................... 8,724,760
--------------
TOTAL NET ASSETS -- 100.0%....................................... $ 580,630,039
--------------
--------------
<FN>
The following abbreviations are used in portfolio descriptions:
AB Akiteboiag
(Swedish
Stock
Company)
ADR American Depository Receipt
AG Aktiengesellschaft (West 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., repurchase price $26,328,870 due
1/02/97. The value of the collateral was $27,180,328.
(c) Securities with an aggregate market value of $13,568,943
have been segregated as collateral for forward currency
contracts.
(d) Outstanding forward currency contract to sell foreign
currency at December 31, 1996 is as follows:
VALUE AT
FOREIGN CURRENCY SETTLEMENT DATE CURRENCY
SALE CONTRACTS RECEIVABLE VALUE APPRECIATION
Japanese Yen, $42,507,276 $41,814,498 $692,778
expiring
1/6/97-1/14/97
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B49
<PAGE>
NATURAL RESOURCES PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 98.0%
VALUE
COMMON STOCKS -- 93.2% SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
ALUMINUM -- 2.9%
Aluminum Company of America..................... 198,000 $ 12,622,500
--------------
CANADIAN OIL & GAS -- 8.1%
Barrington Petroleum Ltd. (a)................... 623,400 2,547,275
Beau Canada Exploration Ltd. (Class 'A'
Stock) (a).................................... 1,010,900 1,770,274
Blue Range Resource Corp........................ 501,000 2,979,314
Crestar Energy, Inc. (a)........................ 570,000 12,269,245
Elan Energy, Inc................................ 550,000 4,815,761
HCO Energy Ltd.................................. 927,392 1,048,855
Northstar Energy Corp. (a)...................... 668,400 7,778,897
Rio Alto Exploration Ltd. (a)................... 343,200 2,491,675
--------------
35,701,296
--------------
CHEMICALS -- 1.1%
Agrium, Inc..................................... 338,033 4,612,337
--------------
EXPLORATION & PRODUCTION -- 19.1%
Abacan Resource Corp. (a)....................... 676,500 5,877,094
Alberta Energy Company Ltd...................... 280,000 6,708,795
Arakis Energy Corp.............................. 740,000 2,451,250
Cairn Energy USA, Inc. (a)...................... 252,500 2,525,000
Cross Timbers Oil Co............................ 220,200 5,532,525
Enron Oil & Gas Co.............................. 98,900 2,497,225
Fx Energy, Inc.................................. 240,000 2,220,000
Harcor Energy, Inc.............................. 428,500 2,088,937
Mesa, Inc. (a).................................. 1,374,900 7,218,225
Newfield Exploration Co. (a).................... 328,400 8,538,400
Noble Affiliates, Inc........................... 374,900 17,948,384
Parker & Parsley Petroleum Co................... 137,800 5,064,150
PetroCorp, Inc. (a)............................. 206,600 1,911,050
Rigel Energy Corp. (a).......................... 318,600 3,166,087
Seagull Energy Corp. (a)........................ 161,900 3,561,800
Tom Brown, Inc. (a)............................. 300,000 6,262,500
--------------
83,571,422
--------------
FOREST PRODUCTS -- 12.2%
Asia Pacific Resource International Holdings
Ltd. (a)...................................... 441,700 2,484,562
Champion International Corp..................... 300,000 12,975,000
Fletcher Challenge Ltd., ADR (New Zealand)...... 431,200 7,168,700
Louisiana-Pacific Corp.......................... 270,000 5,703,750
Macmillan Bloedel Ltd........................... 600,000 7,858,446
Pacific Forest Products Ltd. (a)................ 500,000 6,566,946
Rayonier, Inc................................... 188,200 7,222,175
Timberwest Forest Ltd........................... 244,700 3,312,065
--------------
53,291,644
--------------
GAS PIPELINES -- 6.9%
NGC Corp........................................ 553,045 12,858,296
USX-Delhi Group................................. 139,200 2,209,800
Western Gas Resources, Inc...................... 787,300 15,155,525
--------------
30,223,621
--------------
GOLD -- 20.5%
Agnico-Eagle Mines Ltd.......................... 464,500 6,503,000
Barrick Gold Corp............................... 329,953 9,486,149
Battle Mountain Gold Co......................... 154,200 1,060,125
Bema Gold Corp.................................. 700,000 4,156,250
Cambior, Inc.................................... 732,500 10,714,469
Coeur D'Alene Mines Corp........................ 90,525 1,369,191
Durban Roodeport Deep, ADR (South Africa)....... 150,000 1,106,250
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Freeport-McMoRan Copper & Gold, Inc. (Class 'A'
Stock)........................................ 147,200 $ 4,140,000
Getchell Gold Co. (a)........................... 177,211 6,800,472
Golden Star Resources........................... 250,000 3,250,000
Greenstone Resources Ltd........................ 260,000 3,025,903
Harmony Gold Mining, ADR (South Africa)......... 468,000 3,685,500
International Pursuit Corp...................... 343,100 1,289,285
Kloof Gold Mining Co., Ltd. ADR (South
Africa)....................................... 257,900 2,014,844
Meridian Gold, Inc.............................. 737,000 3,011,456
Newmont Mining Corp............................. 120,007 5,370,313
Pegasus Gold, Inc. (a).......................... 163,400 1,235,713
Placer Dome, Inc................................ 189,700 4,125,975
Samax Gold, Inc................................. 336,900 1,290,569
Sante Fe Pacific Gold Corp...................... 443,300 6,815,738
TVX Gold, Inc. (a).............................. 570,000 4,417,500
Vaal Reefs Exploration & Mining Co., Ltd., ADR
(South Africa)................................ 350,000 2,165,625
Western Deep Levels Ltd., ADR (South Africa).... 90,000 2,700,000
--------------
89,734,327
--------------
HOUSING RELATED -- 0.1%
TJ International, Inc........................... 19,900 462,675
--------------
MINERAL RESOURCES -- 1.0%
CRA Ltd., ADR (Australia)....................... 70,627 4,431,562
--------------
NON-FERROUS METALS -- 8.5%
Cameco Corp..................................... 166,300 6,661,707
Comalco Ltd., ADR (Australia)................... 134,900 3,525,058
Inco Ltd........................................ 134,000 4,271,250
Potash Corp. of Saskatchewan, Inc. (Canada)..... 160,000 13,600,000
Westaim Corp.................................... 705,576 2,085,066
Westmin Resources Ltd........................... 600,000 2,911,346
WMC Ltd. ADR, (South Africa) (a)................ 178,100 4,474,762
--------------
37,529,189
--------------
OIL SERVICES -- 9.6%
3-D Geophysical, Inc. (a)....................... 240,000 2,160,000
Bouyges Offshore SA, ADR (France) (a)........... 119,900 1,543,713
Coflexip, ADR (France).......................... 289,499 7,599,349
CS Resources Ltd................................ 514,000 4,875,593
Dawson Production Services, Inc. (a)............ 273,700 4,242,350
J. Ray McDermott International, SA (a).......... 184,200 4,052,400
Precision Drilling Corp. (a).................... 78,700 2,734,825
Stolt Comex Seaway, SA (a)...................... 209,000 3,579,125
Tesco Corp. (a)................................. 293,800 3,880,175
Weatherford Enterra, Inc. (a)................... 253,174 7,595,220
--------------
42,262,750
--------------
PLATINUM -- 3.2%
Stillwater Mining Co. (a)....................... 780,800 14,152,000
--------------
TOTAL COMMON STOCKS
(cost $335,622,627)............................................ 408,595,323
--------------
PREFERRED STOCKS -- 3.9%
EXPLORATION & PRODUCTION -- 2.3%
Mesa, Inc....................................... 1,606,087 10,238,803
--------------
</TABLE>
B50
<PAGE>
NATURAL RESOURCES PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
PREFERRED STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
GOLD -- 0.8%
Amax Gold, Inc. (Conv.), Series B............... 47,500 $ 2,499,688
Freeport - McMoRan Copper & Gold, Inc........... 57,000 969,000
--------------
3,468,688
--------------
NON-FERROUS METALS -- 0.8%
Hecla Mining Co. (Cum. Conv.), Series B......... 82,700 3,638,800
--------------
TOTAL PREFERRED STOCKS
(cost $12,022,998)............................................. 17,346,291
--------------
PRINCIPAL
AMOUNT
CONVERTIBLE BONDS -- 0.9% (000)
-------------
GOLD
Coeur d'Alene Mines Corp.,
6.375%, 01/31/04
(cost $3,939,987)............................. $ 4,099 3,832,565
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $351,585,612)............................................ 429,774,179
--------------
SHORT-TERM INVESTMENT -- 1.9%
REPURCHASE AGREEMENT
Joint Repurchase Agreement Account,
6.613%, 01/02/97
(cost $8,214,000) (Note 5).................... 8,214 8,214,000
--------------
TOTAL INVESTMENTS -- 99.9%
(cost $359,799,612; Note 6).................................... 437,988,179
OTHER ASSETS IN EXCESS OF
LIABILITIES -- 0.1%............................................ 397,059
--------------
TOTAL NET ASSETS -- 100.0%....................................... $ 438,385,238
--------------
--------------
<FN>
The following abbreviations are used in portfolio descriptions:
ADR American
Depository
Receipt
SA Sociedad Anonima (Spanish Corporation) or Societe
Anonyme (French Corporation)
(a) Non-income
producing
security.
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B51
<PAGE>
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: Money Market Portfolio,
Diversified Bond Portfolio, Government Income Portfolio, Zero Coupon Bond 2000
Portfolio, Zero Coupon Bond 2005 Portfolio, Conservative Balanced Portfolio,
Flexible Managed Portfolio, High Yield Bond Portfolio, Stock Index Portfolio,
Equity Income Portfolio, Equity Portfolio, Prudential Jennison Portfolio, Small
Capitalization Stock Portfolio, Global Portfolio and Natural Resources
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. These
policies are in conformity with generally accepted accounting principles.
SECURITIES VALUATION: Securities traded on an exchange (whether domestic or
foreign) are valued at the last reported sales price on the primary exchange on
which they are traded. Securities traded in the over-the-counter market
(including securities listed on exchanges for which a last sales price is not
available) are valued at the average of the last reported bid and asked prices.
Convertible debt securities are valued at the mean between the most recently
quoted bid and asked prices provided by principal market makers. High yield
bonds are valued either by quotes received from principal market makers or by an
independent pricing service which determine prices by analysis of quality,
coupon, maturity and other factors. Any security for which a reliable market
quotation is unavailable is valued at fair value as determined in good faith by
or under the direction of the Series Fund's Board of Directors.
The Money Market, 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
be 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 investment 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
B52
<PAGE>
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 foreign currency gains (losses) are included in the
reported net realized gains (losses) on investment transactions.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains or losses from holdings of foreign currencies, currency
gains or losses realized between the trade and settlement dates on security
transactions, and the difference between the amounts of dividends, interest and
foreign taxes recorded on the Series Fund's books and the U.S. dollar equivalent
amounts actually received or paid. Net unrealized currency gains or losses from
valuing foreign currency denominated assets and liabilities (other than
investments) at fiscal year end exchange rates are reflected as a component of
net unrealized appreciation (depreciation) on investments and foreign
currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
SHORT SALES: Certain portfolios of the Series Fund may sell a security it does
not own in anticipation of a decline in the market value of that security (short
sale). When the Portfolio makes a short sale, it must borrow the security sold
short and deliver it to the 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 sale 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.
B53
<PAGE>
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; interest income, which is comprised of three elements: stated
coupon, original issue discount and market discount, 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.
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 Statements 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.
The Money Market Portfolio will declare and reinvest dividends from net
investment income and net realized capital gain (loss) daily. Each other
Portfolio will declare and distribute dividends from net investment income and
distributions from net realized gains, if any, twice a year. Dividends and
distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Series Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gains, and
Return of Capital Distributions by Investment Companies. As a result of this
statement, the Series Fund changed the classification of distributions to
shareholders to disclose the amounts of undistributed net investment income and
accumulated net realized gain (loss) on investments available for distributions
determined in accordance with income tax regulations. For the fiscal year ended
December 31, 1996, the application of this statement increased (decreased)
paid-in capital in excess of par (PC), undistributed net investment income
("UNI") and accumulated net realized gains (losses) on investments ("G/L") by
the following amounts:
<TABLE>
<CAPTION>
PC UNI G/L
----------- ----------- -----------
<S> <C> <C> <C>
Diversified Bond Portfolio.................. $(7,574,364) $ (617,274) $ 8,191,638
Government Income Portfolio................. (16,529) (1,481,055) 1,497,584
Zero Coupon Bond 2000 Portfolio............. (49,536) 49,665 (129)
Conservative Balanced Portfolio............. (15,661,578) 3,079,619 12,581,959
Flexible Managed Portfolio.................. (31,413,181) 8,052,179 23,361,002
High Yield Portfolio........................ (3,589,971) 2,838,653 751,318
Stock Index Portfolio....................... (937,091) 448,481 488,610
Equity Income Portfolio..................... (3,889,621) 11,442,266 (7,552,645)
Equity Portfolio............................ (10,995,498) 6,099,985 4,895,513
Prudential Jennison Portfolio............... -- 130,598 (130,598)
Global Portfolio............................ (373,014) 5,985,915 (5,612,901)
Natural Resources Portfolio................. (39,838) (86,067) 125,905
</TABLE>
Net investment income, net realized gains and net assets were not affected by
these reclassifications.
B54
<PAGE>
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. In addition, The Prudential has entered into a subadvisory
agreement with Jennison Capital Corp. ("Jennison"), under which Jennison
furnishes investment advisory services in connection with the management of the
Prudential Jennison Portfolio. The Prudential compensates Jennison for its
services as follows: 0.75% on the first $10 million of that Portfolio's average
daily net assets, 0.50% on the next $30 million, 0.35% on the next $25 million,
0.25% on the next $335 million, 0.22% on the next $600 million and 0.20%
thereafter. 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.
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
Portfolios' average daily net assets:
<TABLE>
<CAPTION>
Fund Investment Advisory Fee
<S> <C>
Money Market Portfolio.............................. 0.40%
Diversified Bond Portfolio.......................... 0.40
Government Income Portfolio......................... 0.40
Zero Coupon Bond 2000 Portfolio..................... 0.40
Zero Coupon Bond 2005 Portfolio..................... 0.40
Conservative Balanced Portfolio..................... 0.55
Flexible Managed Portfolio.......................... 0.60
High Yield Bond Portfolio........................... 0.55
Stock Index Portfolio............................... 0.35
Equity Income Portfolio............................. 0.40
Equity Portfolio.................................... 0.45
Prudential Jennison Portfolio....................... 0.60
Small Capitalization Stock Portfolio................ 0.40
Global Portfolio.................................... 0.75
Natural Resources Portfolio......................... 0.45
</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, 1996.
PIC and Jennison are indirect, wholly-owned subsidiaries of The Prudential.
B55
<PAGE>
NOTE 4: OTHER TRANSACTIONS WITH AFFILIATES
For the fiscal year ended December 31, 1996, Prudential Securities Incorporated,
an indirect, wholly owned subsidiary of The Prudential, earned $961,524 in
brokerage commissions from transactions executed on behalf of the Series Fund as
follows:
<TABLE>
<CAPTION>
Fund Commission
<S> <C>
Conservative Balanced Portfolio................................ $ 120,976
Flexible Managed Portfolio..................................... 582,317
Equity Income Portfolio........................................ 66,311
Equity Portfolio............................................... 165,924
Global Portfolio............................................... 19,388
Natural Resources Portfolio.................................... 6,608
------------
$ 961,524
</TABLE>
As of December 31, 1996, The Prudential had investments of $14,361,824 in the
Prudential Jennison Portfolio and $14,367,378 in the Small Capitalization Stock
Portfolio.
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
$868,381,000 as of December 31, 1996. The Portfolios of the Series Fund with
cash invested in the joint account had the following principal amounts and
percentage participation in the account:
<TABLE>
<CAPTION>
Principal Percentage
Amount Interest
------------- ------------
<S> <C> <C>
Diversified Bond Portfolio........................... $ 15,414,000 1.78%
Government Income Portfolio.......................... 6,517,000 0.75
Zero Coupon Bond 2000 Portfolio...................... 296,000 0.03
Conservative Balanced Portfolio...................... 22,692,000 2.61
Flexible Managed Portfolio........................... 70,099,000 8.07
High Yield Bond Portfolio............................ 31,450,000 3.62
Stock Index Portfolio................................ 53,762,000 6.19
Equity Income Portfolio.............................. 33,746,000 3.89
Equity Portfolio..................................... 599,921,000 69.09
Prudential Jennison Portfolio........................ 10,688,000 1.23
Small Capitalization Stock Portfolio................. 15,582,000 1.79
Natural Resources Portfolio.......................... 8,214,000 0.95
------------- ------------
$ 868,381,000 100.00%
</TABLE>
As of such date, each repurchase agreement in the joint account and the
collateral therefor were as follows:
Bear, Stearns & Co., Inc., 6.75%, in the principal amount of $265,000,000,
repurchase price $265,099,375, due 1/2/97. The value of the collateral including
accrued interest was $270,501,866.
Goldman, Sachs & Co., Inc., 5.85%, in the principal amount of $73,381,000,
repurchase price $73,404,849, due 1/2/97. The value of the collateral including
accrued interest was $75,883,443.
Smith Barney, Inc., 6.65%, in the principal amount of $265,000,000, repurchase
price $265,097,902, due 1/2/97. The value of the collateral including accrued
interest was $270,820,275.
UBS Securities Corp., 6.65%, in the principal amount of $265,000,000, repurchase
price $265,097,902, due 1/2/97. The value of the collateral including accrued
interest was $270,302,336.
The weighted average interest rate of these repurchase agreements was 6.613%.
B56
<PAGE>
NOTE 6: PORTFOLIO SECURITIES
The aggregate cost of purchase and the proceeds from the sales of securities
(excluding short-term issues) for the fiscal year ended December 31, 1996 were
as follows:
Cost of Purchases:
<TABLE>
<CAPTION>
ZERO ZERO HIGH
DIVERSIFIED GOVERNMENT COUPON COUPON CONSERVATIVE FLEXIBLE YIELD
BOND INCOME 2000 2005 BALANCED MANAGED BOND
------------ ------------ ----------- ----------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Debt Securities... $1,474,912,068 $473,601,266 $22,217,643 $ 5,528,123 $10,348,623,701 $7,818,989,849 $343,629,174
Equity
Securities...... 0 0 0 0 $ 524,839,665 $2,661,774,273 $ 10,633,778
</TABLE>
<TABLE>
<CAPTION>
SMALL
STOCK EQUITY PRUDENTIAL CAPITALIZATION NATURAL
INDEX INCOME EQUITY JENNISON STOCK GLOBAL RESOURCES
------------ ------------ ----------- ----------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Debt Securities... 0 $ 37,152,915 0 0 0 0 0
Equity
Securities...... $322,878,792 $282,895,367 $644,784,097 $203,871,305 $ 87,947,226 $ 271,345,027 $179,453,886
</TABLE>
Proceeds From Sales:
<TABLE>
<CAPTION>
ZERO ZERO HIGH
DIVERSIFIED GOVERNMENT COUPON COUPON CONSERVATIVE FLEXIBLE YIELD
BOND INCOME 2000 2005 BALANCED MANAGED BOND
------------ ------------ ----------- ----------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Debt Securities... $1,351,233,287 $433,921,140 $ 3,706,830 $ 2,335,050 $9,086,693,898 $7,188,296,334 $319,599,876
Equity
Securities...... 0 0 0 0 $ 797,513,299 $2,656,626,154 $ 8,018,168
</TABLE>
<TABLE>
<CAPTION>
SMALL
STOCK EQUITY PRUDENTIAL CAPITALIZATION NATURAL
INDEX INCOME EQUITY JENNISON STOCK GLOBAL RESOURCES
------------ ------------ ----------- ----------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Debt Securities... 0 $ 44,135,081 0 0 0 0 0
Equity
Securities...... $ 13,326,025 $197,334,087 $653,768,417 $61,951,658 $ 10,754,845 $ 187,932,378 $130,313,128
</TABLE>
Transactions in options written during the fiscal year ended December 31, 1996
were as follows:
<TABLE>
<CAPTION>
NATURAL RESOURCES
------------------------
CALL OPTIONS WRITTEN
------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
----------- -----------
<S> <C> <C>
Options outstanding at
December 31, 1995....... 440 $ 163,675
Options written........... 134 43,147
Options terminated in
closing purchase
transactions............ (574) (206,822)
----------- -----------
Options outstanding at
December 31, 1996....... 0 0
----------- -----------
----------- -----------
</TABLE>
The federal income tax basis and unrealized appreciation/depreciation of the
Fund's investments as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
ZERO ZERO
DIVERSIFIED GOVERNMENT COUPON COUPON CONSERVATIVE FLEXIBLE
BOND INCOME 2000 2005 BALANCED MANAGED
------------- ------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Gross Unrealized Appreciation... $16,153,798 $ 6,581,659 $ 2,208,685 $ 1,997,518 $413,912,093 $610,666,412
Gross Unrealized Depreciation... 1,997,928 4,229,749 -- 89,880 67,562,846 36,056,964
Total Net Unrealized............ 14,155,870 2,351,910 2,208,685 1,907,638 346,349,247 574,609,448
Tax Basis....................... 729,283,625 474,449,592 42,593,668 23,876,529 4,192,119,381 4,406,819,646
<CAPTION>
SMALL
STOCK EQUITY PRUDENTIAL CAPITALIZATION
INDEX INCOME EQUITY JENNISON STOCK GLOBAL
------------- ------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Gross Unrealized Appreciation... $546,264,662 $297,676,452 1$,153,620,111 $31,401,080 $ 22,262,161 $127,364,695
Gross Unrealized Depreciation... 13,128,946 53,301,876 71,614,946 6,675,173 6,974,999 16,756,986
Total Net Unrealized............ 533,135,716 244,374,576 1,082,005,165 24,725,907 15,287,162 110,607,709
Tax Basis....................... 1,054,512,494 1,107,858,205 3,719,947,601 205,701,495 136,009,633 460,604,792
<CAPTION>
HIGH
YIELD
BOND
--------------
<S> <C>
Gross Unrealized Appreciation... $ 20,260,380
Gross Unrealized Depreciation... 8,960,353
Total Net Unrealized............ 11,300,027
Tax Basis....................... 415,325,778
NATURAL
RESOURCES
--------------
<S> <C>
Gross Unrealized Appreciation... $ 90,880,549
Gross Unrealized Depreciation... 12,691,982
Total Net Unrealized............ 78,188,567
Tax Basis....................... 359,799,612
</TABLE>
For federal income tax purposes, the following Porfolios had post-October
deferred losses during 1996 and capital loss carryforwards utilized during 1996
and available to offset future realized capital gains:
<TABLE>
<CAPTION>
CAPITAL
POST OCTOBER CAPITAL LOSSES LOSSES
LOSSES CARRYFORWARDS CARRYFORWARDS EXPIRATION
DEFERRED UTILIZED IN 1996 AVAILABLE DATE
-------------- ----------------- ------------ -------------
<S> <C> <C> <C> <C>
Government Income
Portfolio............... -- $14,658,101 $7,917,291 12/31/2003
High Yield Bond
Portfolio............... $ 2,303,758 818,030 972,998 12/31/1999
3,273,984 12/31/2002
15,084,494 12/31/2003
------------
19,331,476
Prudential Jennison
Portfolio............... -- -- 2,160,575 12/31/2004
Natural Resources
Portfolio............... 31,622 -- -- --
</TABLE>
B57
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MONEY MARKET
-------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A)
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of
year............................. $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
-------- -------- -------- -------- --------
Income From Investment Operations:
Net investment income and net
realized gains................... 0.51 0.56 0.40 0.29 0.37
Dividends and distributions........ (0.51) (0.56) (0.40) (0.29) (0.37)
-------- -------- -------- -------- --------
Net Asset Value, end of year....... $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RATE OF
RETURN:(B)....................... 5.22% 5.80% 4.05% 2.95% 3.79%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)........................ $668.8 $613.3 $583.3 $474.7 $528.7
Ratios to average net assets:
Expenses......................... 0.44% 0.44% 0.47% 0.45% 0.47%
Net investment income............ 5.10% 5.64% 4.02% 2.90% 3.72%
</TABLE>
<TABLE>
<CAPTION>
DIVERSIFIED BOND
-------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A)
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of
year............................. $ 11.31 $ 10.04 $ 11.10 $ 10.83 $ 11.00
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............. 0.76 0.76 0.68 0.68 0.76
Net realized and unrealized gains
(losses) on investments.......... (0.27) 1.29 (1.04) 0.40 0.01
-------- -------- -------- -------- --------
Total from investment
operations..................... 0.49 2.05 (0.36) 1.08 0.77
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment
income........................... (0.73) (0.75) (0.68) (0.66) (0.72)
Distributions from net realized
gains............................ -- (0.03) (0.02) (0.15) (0.22)
-------- -------- -------- -------- --------
Total distributions............ (0.73) (0.78) (0.70) (0.81) (0.94)
-------- -------- -------- -------- --------
Net Asset Value, end of year....... $ 11.07 $ 11.31 $ 10.04 $ 11.10 $ 10.83
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(B)........ 4.40% 20.73% (3.23%) 10.13% 7.19%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)........................ $720.2 $655.8 $541.6 $576.2 $428.8
Ratios to average net assets:
Expenses......................... 0.45% 0.44% 0.45% 0.46% 0.47%
Net investment income............ 6.89% 7.00% 6.41% 6.05% 6.89%
Portfolio turnover rate............ 210% 199% 32% 41% 61%
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns.
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B58
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
GOVERNMENT INCOME
--------------------------------------------------
YEAR ENDED
DECEMBER 31,
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A)
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of
year............................. $ 11.72 $ 10.46 $ 11.78 $ 11.09 $ 11.13
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............. 0.75 0.74 0.70 0.70 0.73
Net realized and unrealized gains
(losses) on investments.......... (0.51) 1.28 (1.31) 0.68 (0.09)
-------- -------- -------- -------- --------
Total from investment
operations..................... 0.26 2.02 (0.61) 1.38 0.64
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment
income........................... (0.74) (0.76) (0.71) (0.64) (0.59)
Distributions from net realized
gains............................ -- -- -- (0.05) (0.09)
-------- -------- -------- -------- --------
Total distributions............ (0.74) (0.76) (0.71) (0.69) (0.68)
-------- -------- -------- -------- --------
Net Asset Value, end of year....... $ 11.22 $ 11.72 $ 10.46 $ 11.78 $ 11.09
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(B)........ 2.22% 19.48% (5.16%) 12.56% 5.85%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)........................ $482.0 $501.8 $487.6 $540.1 $315.5
Ratios to average net assets:
Expenses......................... 0.46% 0.45% 0.45% 0.46% 0.53%
Net investment income............ 6.38% 6.55% 6.30% 5.91% 6.58%
Portfolio turnover rate............ 95% 195% 34% 19% 81%
</TABLE>
<TABLE>
<CAPTION>
ZERO COUPON BOND 2000
--------------------------------------------------
YEAR ENDED
DECEMBER 31,
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A)
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of
year............................. $ 13.27 $ 11.86 $ 13.72 $ 12.55 $ 12.40
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............. 0.55 0.59 0.92 0.85 0.89
Net realized and unrealized gains
(losses) on investments.......... (0.36) 1.95 (1.91) 1.16 0.14
-------- -------- -------- -------- --------
Total from investment
operations..................... 0.19 2.54 (0.99) 2.01 1.03
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment
income........................... (0.54) (0.60) (0.85) (0.84) (0.88)
Distributions from net realized
gains............................ -- (0.53) (0.02) (0.01) --
-------- -------- -------- -------- --------
Total distributions............ (0.54) (1.13) (0.87) (0.84) (0.88)
-------- -------- -------- -------- --------
Net Asset Value, end of year....... $ 12.92 $ 13.27 $ 11.86 $ 13.72 $ 12.55
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(B)........ 1.53% 21.56% (7.18%) 16.15% 8.59%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)........................ $44.7 $25.3 $20.6 $22.2 $16.7
Ratios to average net assets:
Expenses......................... 0.52% 0.48% 0.51% 0.62% 0.66%
Net investment income............ 4.88% 4.53% 6.69% 6.21% 7.24%
Portfolio turnover rate............ 13% 71% 9% 1% --
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns.
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B59
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
ZERO COUPON BOND 2005
--------------------------------------------------
YEAR ENDED
DECEMBER 31,
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A)
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of
year............................. $ 13.19 $ 10.74 $ 12.68 $ 11.03 $ 10.87
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............. 0.66 0.66 0.75 0.77 0.80
Net realized and unrealized gains
(losses) on investments.......... (0.82) 2.73 (1.97) 1.62 0.21
-------- -------- -------- -------- --------
Total from investment
operations..................... (0.16) 3.39 (1.22) 2.39 1.01
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income........................... (0.64) (0.65) (0.72) (0.74) (0.79)
Distributions from net realized
gains............................ (0.14) (0.29) -- -- (0.06)
-------- -------- -------- -------- --------
Total distributions............ (0.78) (0.94) (0.72) (0.74) (0.85)
-------- -------- -------- -------- --------
Net Asset Value, end of year....... $ 12.25 $ 13.19 $ 10.74 $ 12.68 $ 11.03
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(B)........ (1.01%) 31.85% (9.61%) 21.94% 9.66%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)........................ $25.8 $23.6 $16.5 $14.5 $9.8
Ratios to average net assets:
Expenses......................... 0.53% 0.49% 0.60% 0.66% 0.75%
Net investment income............ 5.42% 5.32% 6.53% 6.17% 7.46%
Portfolio turnover rate............ 10% 69% 6% 4% 11%
</TABLE>
<TABLE>
<CAPTION>
CONSERVATIVE BALANCED
-------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A)
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of
year............................. $ 15.31 $ 14.10 $ 14.91 $ 14.24 $ 14.32
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............. 0.66 0.63 0.53 0.49 0.56
Net realized and unrealized gains
(losses) on investments.......... 1.24 1.78 (0.68) 1.23 0.41
-------- -------- -------- -------- --------
Total from investment
operations..................... 1.90 2.41 (0.15) 1.72 0.97
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income........................... (0.66) (0.64) (0.51) (0.47) (0.54)
Distributions from net realized
gains............................ (1.03) (0.56) (0.15) (0.58) (0.51)
-------- -------- -------- -------- --------
Total distributions............ (1.69) (1.20) (0.66) (1.05) (1.05)
-------- -------- -------- -------- --------
Net Asset Value, end of year....... $ 15.52 $ 15.31 $ 14.10 $ 14.91 $ 14.24
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(B)........ 12.63% 17.27% (0.97%) 12.20% 6.95%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)........................ $4,478.8 $3,940.8 $3,501.1 $3,103.2 $2,114.0
Ratios to average net assets:
Expenses......................... 0.59% 0.58% 0.61% 0.60% 0.62%
Net investment income............ 4.13% 4.19% 3.61% 3.22% 3.88%
Portfolio turnover rate............ 295% 201% 125% 79% 62%
Average commission rate paid per
share............................ $0.0554 N/A N/A N/A N/A
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns.
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B60
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FLEXIBLE MANAGED
-------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A)
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of
year............................. $ 17.86 $ 15.50 $ 16.96 $ 16.01 $ 16.29
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............. 0.57 0.56 0.47 0.57 0.58
Net realized and unrealized gains
(losses) on investments.......... 1.79 3.15 (1.02) 1.88 0.61
-------- -------- -------- -------- --------
Total from investment
operations..................... 2.36 3.71 (0.55) 2.45 1.19
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income........................... (0.58) (0.56) (0.45) (0.57) (0.56)
Distributions from net realized
gains............................ (1.85) (0.79) (0.46) (0.93) (0.91)
-------- -------- -------- -------- --------
Total distributions............ (2.43) (1.35) (0.91) (1.50) (1.47)
-------- -------- -------- -------- --------
Net Asset Value, end of year....... $ 17.79 $ 17.86 $ 15.50 $ 16.96 $ 16.01
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(B)........ 13.64% 24.13% (3.16%) 15.58% 7.61%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)........................ $4,896.9 $4,261.2 $3,481.5 $3,292.2 $2,435.6
Ratios to average net assets:
Expenses......................... 0.64% 0.63% 0.66% 0.66% 0.67%
Net investment income............ 3.07% 3.30% 2.90% 3.30% 3.63%
Portfolio turnover rate............ 233% 173% 124% 63% 59%
Average commission rate paid per
share............................ $0.0563 N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD BOND
-------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A)
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of
year............................. $ 7.80 $ 7.37 $ 8.41 $ 7.72 $ 7.21
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............. 0.80 0.81 0.87 0.82 0.82
Net realized and unrealized gains
(losses) on investments.......... 0.06 0.46 (1.10) 0.63 0.42
-------- -------- -------- -------- --------
Total from investment
operations..................... 0.86 1.27 (0.23) 1.45 1.24
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income........................... (0.78) (0.84) (0.81) (0.76) (0.73)
Dividends in excess of net
investment income................ (0.01) -- -- -- --
-------- -------- -------- -------- --------
Total distributions............ (0.79) (0.84) (0.81) (0.76) (0.73)
-------- -------- -------- -------- --------
Net Asset Value, end of year....... $ 7.87 $ 7.80 $ 7.37 $ 8.41 $ 7.72
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(B)........ 11.39% 17.56% (2.72%) 19.27% 17.54%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)........................ $432.9 $367.9 $306.2 $282.9 $153.7
Ratios to average net assets:
Expenses......................... 0.63% 0.61% 0.65% 0.65% 0.70%
Net investment income............ 9.89% 10.34% 9.88% 9.91% 10.67%
Portfolio turnover rate............ 88% 139% 69% 96% 75%
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns.
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B61
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
STOCK INDEX
-------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A)
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of
year............................. $ 19.96 $ 14.96 $ 15.20 $ 14.22 $ 13.61
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............. 0.40 0.40 0.38 0.36 0.35
Net realized and unrealized gains
(losses) on investments.......... 4.06 5.13 (0.23) 1.00 0.60
-------- -------- -------- -------- --------
Total from investment
operations..................... 4.46 5.53 0.15 1.36 0.95
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income........................... (0.40) (0.38) (0.37) (0.35) (0.33)
Distributions from net realized
gains............................ (0.28) (0.15) (0.02) (0.03) (0.01)
-------- -------- -------- -------- --------
Total distributions............ (0.68) (0.53) (0.39) (0.38) (0.34)
-------- -------- -------- -------- --------
Net Asset Value, end of year....... $ 23.74 $ 19.96 $ 14.96 $ 15.20 $ 14.22
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(B)........ 22.57% 37.06% 1.01% 9.66% 7.13%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)........................ $1,581.4 $1,031.3 $664.5 $615.1 $433.5
Ratios to average net assets:
Expenses......................... 0.40% 0.38% 0.42% 0.42% 0.46%
Net investment income............ 1.95% 2.27% 2.50% 2.43% 2.56%
Portfolio turnover rate............ 1% 1% 2% 1% 1%
Average commission rate paid per
share............................ $0.0250 N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
EQUITY INCOME
-------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A)
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year $ 16.27 $ 14.48 $ 15.66 $ 13.67 $ 13.21
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............. 0.58 0.64 0.67 0.55 0.58
Net realized and unrealized gains
(losses) on investments.......... 2.88 2.50 (0.45) 2.46 0.72
-------- -------- -------- -------- --------
Total from investment
operations..................... 3.46 3.14 0.22 3.01 1.30
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income........................... (0.71) (0.62) (0.56) (0.50) (0.52)
Distributions from net realized
gains............................ (0.51) (0.73) (0.82) (0.52) (0.32)
-------- -------- -------- -------- --------
Total distributions............ (1.22) (1.35) (1.38) (1.02) (0.84)
-------- -------- -------- -------- --------
Net Asset Value, end of year....... $ 18.51 $ 16.27 $ 14.48 $ 15.66 $ 13.67
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(B)........ 21.74% 21.70% 1.44% 22.28% 10.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)........................ $1,363.5 $1,110.0 $859.7 $602.8 $234.4
Ratios to average net assets:
Expenses......................... 0.45% 0.43% 0.52% 0.54% 0.57%
Net investment income............ 3.36% 4.00% 3.92% 3.56% 4.32%
Portfolio turnover rate............ 21% 64% 63% 41% 40%
Average commission rate paid per
share............................ $0.0553 N/A N/A N/A N/A
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns.
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B62
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
EQUITY
-------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A)
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of
year............................. $ 25.64 $ 20.66 $ 21.49 $ 18.90 $ 17.91
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............. 0.71 0.55 0.51 0.42 0.44
Net realized and unrealized gains
(losses) on investments.......... 3.88 5.89 0.05 3.67 2.05
-------- -------- -------- -------- --------
Total from investment
operations..................... 4.59 6.44 0.56 4.09 2.49
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income........................... (0.67) (0.52) (0.49) (0.40) (0.44)
Distributions from net realized
gains............................ (2.60) (0.94) (0.90) (1.10) (1.06)
-------- -------- -------- -------- --------
Total distributions............ (3.27) (1.46) (1.39) (1.50) (1.50)
-------- -------- -------- -------- --------
Net Asset Value, end of year....... $ 26.96 $ 25.64 $ 20.66 $ 21.49 $ 18.90
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(B)........ 18.52% 31.29% 2.78% 21.87% 14.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)........................ $4,814.0 $3,813.8 $2,617.8 $2,186.5 $1,416.6
Ratios to average net assets:
Expenses......................... 0.50% 0.48% 0.55% 0.53% 0.53%
Net investment income............ 2.54% 2.28% 2.39% 1.99% 2.33%
Portfolio turnover rate............ 20% 18% 7% 13% 16%
Average commission rate paid per
share............................ $0.0524 N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
PRUDENTIAL JENNISON
-------------------
<S> <C> <C>
APRIL
25,
YEAR 1995(D)
ENDED TO
DECEMBER DECEMBER
31, 1996 31, 1995
-------- --------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of
period $12.55 $10.00
-------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............. 0.02 0.02
Net realized and unrealized gains
(losses) on investments.......... 1.78 2.54
-------- --------
Total from investment
operations..................... 1.80 2.56
-------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income........................... (0.03) (0.01)
Distributions from net realized
gains............................ -- --
-------- --------
Total distributions............ (0.03) (0.01)
-------- --------
Net Asset Value, end of period..... $14.32 $12.55
-------- --------
-------- --------
TOTAL INVESTMENT RETURN:(B)........ 14.41% 24.2%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
millions)........................ $226.5 $63.1
Ratios to average net assets:
Expenses......................... 0.66% 0.79%(c)
Net investment income............ 0.20% 0.15%(c)
Portfolio turnover rate............ 46% 37%
Average commission rate paid per
share............................ $0.0603 N/A
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns. Total return for periods of
less than one year are not annualized.
(c) Annualized.
(d) Commencement of operations.
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B63
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SMALL
CAPITALIZATION
STOCK
-------------------
<S> <C> <C>
APRIL
25,
YEAR 1995(D)
ENDED TO
DECEMBER DECEMBER
31, 1996 31, 1995
-------- --------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of
period........................... $11.83 $10.00
-------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............. 0.09 0.08
Net realized and unrealized gains
(losses) on investments.......... 2.23 1.91
-------- --------
Total from investment
operations..................... 2.32 1.99
-------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income........................... (0.09) (0.04)
Distributions from net realized
gains............................ (0.27) (0.12)
-------- --------
Total distributions............ (0.36) (0.16)
-------- --------
Net Asset Value, end of period..... $13.79 $11.83
-------- --------
-------- --------
TOTAL INVESTMENT RETURN:(B)........ 19.77 % 19.74 %
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
millions)........................ $147.9 $47.5
Ratios to average net assets:
Expenses......................... 0.56 % 0.60 %(c)
Net investment income............ 0.87 % 0.68 %(c)
Portfolio turnover rate............ 13 % 32 %
Average commission rate paid per
share............................ $0.0307 N/A
</TABLE>
<TABLE>
<CAPTION>
GLOBAL
-------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A)
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year $ 15.53 $ 13.88 $ 14.64 $ 10.37 $ 10.79
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............. 0.11 0.06 0.02 0.02 0.05
Net realized and unrealized gains
(losses) on investments.......... 2.94 2.14 (0.74) 4.44 (0.42)
-------- -------- -------- -------- --------
Total from investment
operations..................... 3.05 2.20 (0.72) 4.46 (0.37)
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income........................... (0.11) (0.24) (0.02) (0.08) (0.05)
Distributions from net realized
gains............................ (0.62) (0.31) (0.02) (0.11) --
-------- -------- -------- -------- --------
Total distributions............ (0.73) (0.55) (0.04) (0.19) (0.05)
-------- -------- -------- -------- --------
Net Asset Value, end of year....... $ 17.85 $ 15.53 $ 13.88 $ 14.64 $ 10.37
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(B)........ 19.97% 15.88% (4.89%) 43.14% (3.42%)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)........................ $580.6 $400.1 $345.7 $129.1 $34.0
Ratios to average net assets:
Expenses......................... 0.92% 1.06% 1.23% 1.44% 1.87%
Net investment income............ 0.64% 0.44% 0.20% 0.18% 0.49%
Portfolio turnover rate............ 41% 59% 37% 55% 78%
Average commission rate paid per
share............................ $0.0358 N/A N/A N/A N/A
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns. Total investment return for
periods of less than a full year are not annualized.
(c) Annualized.
(d) Commencement of operations.
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B64
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
NATURAL RESOURCES
-------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A)
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of
year............................. $ 17.27 $ 14.44 $ 15.56 $ 12.95 $ 12.45
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............. 0.15 0.21 0.18 0.23 0.32
Net realized and unrealized gains
(losses) on investments.......... 5.11 3.66 (0.85) 3.00 0.59
-------- -------- -------- -------- --------
Total from investment
operations..................... 5.26 3.87 (0.67) 3.23 0.91
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income........................... (0.14) (0.21) (0.15) (0.21) (0.31)
Distributions from net realized
gains............................ (2.62) (0.83) (0.30) (0.41) (1.00)
-------- -------- -------- -------- --------
Total distributions............ (2.76) (1.04) (0.45) (0.62) (0.41)
-------- -------- -------- -------- --------
Net Asset Value, end of year....... $ 19.77 $ 17.27 $ 14.44 $ 15.56 $ 12.95
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(B)........ 30.88% 26.92% (4.30%) 25.15% 7.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)........................ $438.4 $293.2 $227.3 $158.8 $77.5
Ratios to average net assets:
Expenses......................... 0.52% 0.50% 0.61% 0.60% 0.72%
Net investment income............ 0.75% 1.25% 1.09% 1.50% 2.44%
Portfolio turnover rate............ 36% 46% 18% 20% 29%
Average commission rate paid per
share............................ $0.0454 N/A N/A N/A N/A
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns.
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B52 THROUGH B57.
B65
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF THE PRUDENTIAL SERIES FUND, INC.:
In our opinion, the accompanying Statements of Assets and Liabilities, including
the Schedules of Investments, and the related Statements of Operations and of
Changes in Net Assets and the Financial Highlights present fairly, in all
material respects, the financial position of each of the fifteen portfolios,
Money Market, Diversified Bond, Government Income, Zero Coupon Bond 2000, Zero
Coupon Bond 2005, Conservative Balanced, Flexible Managed, High Yield Bond,
Stock Index, Equity Income, Equity, Prudential Jennison, Small Capitalization
Stock, Global and Natural Resources, that comprise The Prudential Series Fund,
Inc. (collectively the "Portfolios") at December 31, 1996, the results of each
of their operations, the changes in each of their net assets, and each of their
financial highlights for the year ended December 31, 1996, 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, 1996 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, NY 10036
February 14, 1997
B66
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE SHAREHOLDERS AND BOARD OF DIRECTORS OF THE PRUDENTIAL SERIES FUND, INC.:
We have audited the accompanying statements of changes in net assets of the
Money Market, Diversified Bond, Equity, Flexible Managed, Conservative Balanced,
Zero Coupon Bond 2000, Zero Coupon Bond 2005, High Yield Bond, Stock Index,
Equity Income, Natural Resources, Government Income and Global Portfolios of The
Prudential Series Fund, Inc. for the year ended December 31, 1995, and the
financial highlights contained in the prospectus for each of the periods
presented in the nine years ended December 31, 1995. We also have audited the
accompanying statement of changes in net assets and the financial highlights, of
Small Capitalization Stock and Prudential Jennison Portfolios of The Prudential
Series Fund, Inc. for the period April 25, 1995 (commencement of business) to
December 31, 1995. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the changes in net assets and the financial
highlights of each of the respective portfolios of The Prudential Series Fund,
Inc. for the respective stated periods in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 15, 1996
B67
<PAGE>
BOARD OF
DIRECTORS THE PRUDENTIAL SERIES FUND, INC.
MENDEL A. MELZER W. SCOTT McDONALD, JR., E. MICHAEL CAULFIELD,
CHAIRMAN, PhD. CEO,
THE PRUDENTIAL SERIES EXECUTIVE VICE PRUDENTIAL INVESTMENTS
FUND, INC. PRESIDENT, PRESIDENT, THE
FAIRLEIGH DICKINSON PRUDENTIAL SERIES FUND,
UNIVERSITY INC.
SAUL K. FENSTER, PhD. JOSEPH WEBER, PhD.
PRESIDENT, NEW JERSEY VICE PRESIDENT,
INSTITUTE OF TECHNOLOGY INTERCLASS
(INTERNATIONAL
CORPORATE LEARNING)
TAX INFORMATION
Although we understand that the vast majority, if not all, of the
shareholders/contract holders of the Series Fund currently maintain a tax
deferred status, we are nevertheless required by the Internal Revenue Code to
advise you within 60 days of the Series Fund's fiscal year end (December 31,
1996) as to the federal tax status of dividends paid by the Fund during such
fiscal year. Accordingly, we are advising you that in 1996, the Fund paid
dividends as follows:
Ordinary Dividends
Short-Term Long-Term Total
Income Capital Gains Capital Gains Dividends
Money Market Portfolio $ 0.510 $ 0.510
Diversified Bond Portfolio 0.727 0.727
Government Income Portfolio 0.740 0.740
Zero Coupon Bond 2000 Portfolio 0.540 0.540
Zero Coupon Bond 2005 Portfolio 0.639 $ 0.138 0.777
Conservative Balanced Portfolio 0.661 $ 0.047 0.980 1.688
Flexible Managed Portfolio 0.577 0.218 1.631 2.426
High Yield Bond Portfolio 0.793 0.793
Stock Index Portfolio 0.404 0.066 0.207 0.677
Equity Income Portfolio 0.711 0.121 0.384 1.216
Equity Portfolio 0.671 0.319 2.282 3.272
Prudential Jennison Portfolio 0.030 0.030
Small Capitalization Stock
Portfolio 0.094 0.229 0.039 0.362
Global Portfolio 0.107 0.082 0.546 0.735
Natural Resources Portfolio 0.138 0.226 2.392 2.756
B68
<PAGE>
APPENDIX
DEBT RATINGS
Moody's Investors Services, Inc. describes its categories of corporate debt
securities and its "Prime-1" and "Prime-2" commercial paper as follows:
Bonds:
Aaa -- Bonds which are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are
generally known as high-grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long
term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa -- Bonds which are rated "Baa" are considered as medium grade
obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba -- Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate,
and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class.
B -- Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa -- Bonds which are rated "Caa" are of poor standing. Such issues may
be in default or there may be present elements of danger with respect
to principal or interest.
Ca -- Bonds which are rated "Ca" represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C -- Bonds which are rated "C" are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Commercial paper:
o Issuers rated Prime-1 (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics:
- --Leading market positions in well-established industries.
- --High rates of return of funds employed.
- --Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
- --Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- --Well established access to a range of financial markets and assured sources of
alternate liquidity.
o Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term debt obligations. This will normally be evidenced by
many of the characteristics cited above but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
C1
<PAGE>
Standard & Poor's Rating Group describes its grades of corporate debt securities
and its "A" commercial paper as follows:
Bonds:
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
BBB Debt rated "BBB" is regarded as having adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in
higher-rated categories.
BB-B-CCC-CC-C
Debt rated "BB", "B", "CCC", "CC", and "C" is regarded as having
predominantly speculative characteristics with respect to capacity to
pay interest and repay principal. BB indicates the least degree of
speculation and C the highest. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major exposures to adverse conditions.
Commercial paper:
Commercial paper rated A by Standard & Poor's Rating Group has the
following characteristics: Liquidity ratios are better than the
industry average. Long term senior debt rating is "A" or better. In
some cases BBB credits may be acceptable. The issuer has access to at
least two additional channels of borrowing. Basic earnings and cash
flow have an upward trend with allowances made for unusual
circumstances. Typically, the issuer's industry is well established,
the issuer has a strong position within its industry and the
reliability and quality of management is unquestioned. Issuers rated A
are further referred to by use of numbers 1, 2 and 3 to denote
relative strength within this classification.
C2
<PAGE>
THE PRUDENTIAL
SERIES FUND, INC.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Prudential Plaza
Newark, New Jersey 07102-3777
Telephone: (800) 445-4571
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
THE PRUDENTIAL --------------------
SERIES FUND, INC.
THIS STATEMENT OF ADDITIONAL INFORMATION IS FOR USE ONLY WITH THE PRUDENTIAL
VARIABLE CONTRACT ACCOUNT-24.
The Prudential Series Fund, Inc. (the "Series Fund") is a diversified, open-end
management investment company (commonly known as a "mutual fund") that is
intended to provide a range of investment alternatives through its fifteen
separate portfolios, each of which is, for investment purposes, in effect a
separate fund. A separate class of capital stock is issued for each portfolio.
Shares of the Series Fund are currently sold only to separate accounts (the
"Accounts") of The Prudential Insurance Company of America ("Prudential") and
certain other insurers to fund the benefits under variable life insurance and
variable annuity contracts (the "Contracts") issued by those 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.
Unless otherwise indicated, this statement of additional information provides
information only with respect to the seven portfolios of the Series Fund
currently available to The Prudential Variable Contract Account-24.
------------------------------------
This statement of additional information is not a prospectus and should be read
in conjunction with the Series Fund's prospectus dated May 1, 1997 that is for
use with The Prudential Variable Contract Account-24, which is available without
charge upon written request to The Prudential Insurance Company of America, c/o
Prudential Defined Contribution Services, 30 Scranton Office Park, Moosic,
Pennsylvania 18507-1789, or by telephoning 1 (800) 458-6333.
------------------------------------
CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE TO
PAGE PAGE IN PROSPECTUS
---- ------------------
<S> <C> <C>
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
GENERAL............................................................................... 1 5
WARRANTS.............................................................................. 1
OPTIONS ON STOCK, OPTIONS ON DEBT SECURITIES, OPTIONS ON STOCK INDICES,
OPTIONS ON FOREIGN CURRENCIES, FUTURES CONTRACTS, AND OPTIONS ON
FUTURES CONTRACTS.................................................................. 1 17
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS........................................... 4 15
INTEREST RATE SWAPS................................................................... 5
ILLIQUID SECURITIES................................................................... 6
INVESTMENT RESTRICTIONS.................................................................. 6 22
INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES.......................................... 9 22
OTHER INFORMATION CONCERNING THE SERIES FUND
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. 10 26
CUSTODIANS............................................................................ 11
EXPERTS............................................................................... 11
LICENSES.............................................................................. 12
MANAGEMENT OF THE SERIES FUND............................................................ 13 5
FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC.................................. A1
THE PRUDENTIAL SERIES FUND, INC. SCHEDULE OF INVESTMENTS................................. B1
APPENDIX: DEBT RATINGS................................................................... C1
</TABLE>
THE PRUDENTIAL SERIES FUND, INC.
Prudential Plaza
Newark, New Jersey 07102-3777
Telephone: (800) 445-4571
PSF-2A Ed 5-97
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
OF THE PORTFOLIOS
GENERAL
The Prudential Variable Contract Account-24 may currently invest in seven
portfolios of The Prudential Series Fund, Inc. (the "Series Fund"): the
Diversified Bond Portfolio, the Government Income Portfolio, the Conservative
Balanced Portfolio, the Flexible Managed Portfolio, the Stock Index Portfolio,
the Equity Portfolio, and the Global Portfolio. The portfolios are managed by
The Prudential Insurance Company of America ("Prudential") as discussed in
INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES, page 9.
Each of the portfolios seeks to achieve a different investment objective.
Accordingly, each portfolio can be expected to have different investment results
and to be subject to different financial and market risks. Financial risk refers
to the ability of an issuer of a debt security to pay principal and interest and
to the earnings stability and overall financial soundness of an issuer of an
equity security. Market risk refers to the degree to which the price of a
security will react to changes in conditions in securities markets in general,
and with particular reference to debt securities, to changes in the overall
level of interest rates.
The investment objective of each of the Series Fund's seven portfolios currently
available to The Prudential Variable Contract Account-24 can be found in
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS in the prospectus.
WARRANTS
The Conservative Balanced, Flexible Managed, Equity, and Global Portfolios may
invest in warrants on common stocks. Warrants are options to buy a number of
shares of stock at a predetermined price during a specified period. The risk
associated with the purchase of a warrant is that the purchase price will be
lost if the market price of the stock does not reach a level that justifies the
exercise or sale of the warrant before it expires. From time to time, the
Diversified Bond Portfolio may invest in debt securities that are offered
together with warrants but only when the debt security meets the portfolio's
investment criteria and the value of the warrant is relatively very small. If
the warrant later becomes valuable, it may be sold or exercised.
OPTIONS ON STOCK, OPTIONS ON DEBT SECURITIES, OPTIONS ON STOCK INDICES,
OPTIONS ON FOREIGN CURRENCIES, FUTURES CONTRACTS, AND OPTIONS ON FUTURES
CONTRACTS
A. ADDITIONAL INFORMATION REGARDING THE USE OF FUTURES AND OPTIONS BY THE
DIVERSIFIED BOND, GOVERNMENT INCOME, CONSERVATIVE BALANCED, FLEXIBLE MANAGED,
EQUITY, AND GLOBAL PORTFOLIOS.
A portfolio will write only "covered" options on stock indices. A call option is
covered if the portfolio holds a portfolio of stocks at least equal to the value
of the index times the multiplier times the number of contracts. When a
portfolio writes a call option on a broadly based stock market index, the
portfolio will segregate or put into escrow with its custodian or pledge to a
broker as collateral for the option, cash, cash equivalents or "qualified
securities" (defined below) with a market value at the time the option is
written of not less than 100% of the current index value times the multiplier
times the number of contracts. If a portfolio has written an option on an
industry or market segment index, it will segregate or put into escrow with its
custodian or pledge to a broker as collateral for the option, at least five
"qualified securities", all of which are stocks of issuers in such industry or
market segment, with a market value at the time the option is written of not
less than 100% of the current index value times the multiplier times the number
of contracts. Such stocks will include stocks which represent at least 50% of
the weighting of the industry or market segment index and will represent at
least 50% of the portfolio's holdings in that industry or market segment. No
individual security will represent more than 15% of the amount so segregated,
pledged or escrowed in the case of broadly based stock market index options or
25% of such amount in the case of industry or market segment index options. If
at the close of business on any day the market value of such qualified
securities so segregated, escrowed or pledged falls below 100% of the current
index value times the multiplier times the number of contracts, the portfolio
will so segregate, escrow or pledge an amount in cash, Treasury bills or other
high-grade short-term obligations equal in value to the difference. In addition,
when a portfolio writes a call on an index which is in-the-money at the time the
call is written, the portfolio will segregate with its custodian or pledge to
the broker as collateral, cash or U.S. Government or other liquid unencumbered
assets equal in value to the amount by which the call is in-the-money times the
multiplier times the number of contracts. Any amount segregated pursuant to the
foregoing sentence may be applied to the portfolio's obligation to segregate
additional amounts in the event that the market value of the qualified
securities falls below 100% of the current index value times the multiplier
times the number of contracts. A "qualified security" is an equity security
which is listed on a securities exchange or listed on the National Association
of Securities Dealers Automated Quotation System ("NASDAQ") against which the
portfolio has not written a stock call option and which has not been hedged by
the portfolio by the sale of stock index futures. However, if the portfolio
holds a
1
<PAGE>
call on the same index as the call written where the exercise price of the call
held is equal to or less than the exercise price of the call written or greater
than the exercise price of the call written if the difference is maintained by
the portfolio in cash, Treasury bills or other high-grade short-term obligations
in a segregated account with its custodian, it will not be subject to the
requirement described in this paragraph.
A put option is covered if: (1) the portfolio holds in a segregated account
cash, Treasury bills or other high-grade short-term debt obligations of a value
equal to the strike price times the multiplier times the number of contracts; or
(2) the portfolio holds a put on the same index as the put written where the
strike price of the put held is equal to or greater than the strike price of the
put written or less than the strike price of the put written if the difference
is maintained by the portfolio in cash, Treasury bills or other liquid
unencumbered assets in a segregated account with its custodian. In instances
involving the purchase of futures contracts by a portfolio, an amount of cash
and cash equivalents, equal to the market value of the futures contracts, will
be deposited in a segregated account with the portfolio's custodian and/or in a
margin account with a broker to collateralize the position and thereby ensure
that the use of such futures is unleveraged.
B. ADDITIONAL INFORMATION REGARDING THE USE OF FUTURES AND OPTIONS BY THE STOCK
INDEX PORTFOLIO.
As explained in the prospectus, the Stock Index Portfolio seeks to duplicate the
performance of the S&P 500 Index. The portfolio will be as fully invested in the
S&P 500 Index stocks as is feasible in light of cash flow patterns and the cash
requirements for efficiently investing in a unit of the basket of stocks
comprising the S&P 500 Index. When the portfolio does have short-term
investments, it may purchase stock index futures contracts in an effort to have
the portfolio better mimic the performance of a fully invested portfolio. When
the portfolio purchases stock index futures contracts, an amount of cash and
cash equivalents, equal to the market value of the futures contracts, will be
deposited in a segregated account with the portfolio's custodian and/or in a
margin account with a broker to collateralize the position and thereby ensure
that the use of futures is unleveraged. As with the other portfolios, the Board
of Directors currently intends to limit futures trading so that the Stock Index
Portfolio will not enter into futures contracts or related options if the
aggregate initial margins and premiums exceed 5% of the fair market value of its
assets, after taking into account unrealized profits and unrealized losses on
any such contracts and options.
As an alternative to the purchase of a stock index futures contract, the
portfolio may construct synthetic positions involving options on stock indices
and options on stock index futures that are equivalent to such a long futures
position. In particular, the portfolio may utilize "put/call combinations" as
synthetic long stock index futures positions. A put/call combination is the
simultaneous purchase of a call and the sale of a put with the same strike price
and maturity. It is equivalent to a forward position and, if settled every day,
is equivalent to a long futures position. When constructing put/call
combinations, the portfolio will segregate cash or cash equivalents in a
segregated account equal to the market value of the portfolio's forward position
to collateralize the position and ensure that it is unleveraged.
C. RISKS OF TRANSACTIONS IN OPTIONS ON EQUITY AND DEBT SECURITIES.
A portfolio's use of options on equity or debt securities is subject to certain
special risks, in addition to the risk that the market value of the security
will move adversely to the portfolio's option position. An exchange-traded
option position may be closed out only on an exchange, board of trade or other
trading facility which provides a secondary market for an option of the same
series. Although these portfolios will generally purchase or write only those
exchange-traded options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange will
exist for any particular option, or at any particular time, and for some options
no secondary market on an exchange or otherwise may exist. In such event it
might not be possible to effect closing transactions in particular options, with
the result that the portfolio would have to exercise its options in order to
realize any profit and would incur brokerage commissions upon the exercise of
such options and upon the subsequent disposition of underlying securities
acquired through the exercise of call options or upon the purchase of underlying
securities for the exercise of put options. If a portfolio as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading volume;
or (vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in the class or series of options) would cease to exist,
although outstanding options on that exchange that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
2
<PAGE>
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of any
of the clearing corporations inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders.
The purchase and sale of options that result from privately negotiated
transactions with broker-dealers ("OTC options") will also be subject to certain
risks. Unlike exchange-traded options, OTC options generally do not have a
continuous liquid market. Consequently, a portfolio will generally be able to
realize the value of an OTC option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when a portfolio writes an
OTC option, it generally will be able to close out the OTC option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to which the portfolio originally wrote the OTC option. While the portfolios
will seek to enter into OTC options only with dealers who agree to and which are
expected to be able to be capable of entering into closing transactions with the
portfolio, there can be no assurance that the portfolio will be able to
liquidate an OTC option at a favorable price at any time prior to expiration. In
the event of insolvency of the other party, the portfolio may be unable to
liquidate an OTC option. Prudential monitors the creditworthiness of dealers
with whom the Series Fund enters into OTC option transactions under the Board of
Directors' general supervision.
D. RISKS OF TRANSACTIONS IN OPTIONS ON STOCK INDICES.
A portfolio's purchase and sale of options on stock indices will be subject to
the same risks as stock options, described in the previous section. In addition,
the distinctive characteristics of options on indices create certain risks that
are not present with stock options. Index prices may be distorted if trading of
certain stocks included in the index is interrupted. Trading in the index
options also may be interrupted in certain circumstances, such as if trading
were halted in a substantial number of stocks included in the index. If this
occurred, a portfolio would not be able to close out options which it had
purchased or written and, if restrictions on exercise were imposed, may be
unable to exercise an option it holds, which could result in substantial losses
to the portfolio. It is the policy of the portfolios to purchase or write
options only on stock indices which include a number of stocks sufficient to
minimize the likelihood of a trading halt in options on the index.
The ability to establish and close out positions on such options will be subject
to the development and maintenance of a liquid secondary market. A portfolio
will not purchase or sell any index option contract unless and until, in its
manager's opinion, the market for such options has developed sufficiently that
the risk in connection with such transactions is no greater than the risk in
connection with options on stocks.
There are certain special risks associated with writing calls on stock indices.
Because exercises of index options are settled in cash, a call writer such as a
portfolio cannot determine the amount of its settlement obligations in advance
and, unlike call writing on specific stocks, cannot precisely provide in advance
for, or cover, its potential settlement obligations by acquiring and holding the
underlying securities. However, the portfolios will follow the "cover"
procedures described in item A above.
Price movements in a portfolio's equity security portfolio probably will not
correlate precisely with movements in the level of the index and, therefore, in
writing a call on a stock index a portfolio bears the risk that the price of the
securities held by the portfolio may not increase as much as the index. In such
event, the portfolio would bear a loss on the call which is not completely
offset by movement in the price of the portfolio's equity securities. It is also
possible that the index may rise when the portfolio's securities do not rise in
value. If this occurred, the portfolio would experience a loss on the call which
is not offset by an increase in the value of its securities portfolio and might
also experience a loss in its securities portfolio. However, because the value
of a diversified securities portfolio will, over time, tend to move in the same
direction as the market, movements in the value of a portfolio's securities in
the opposite direction as the market would be likely to occur for only a short
period or to a small degree.
When a portfolio has written a call, there is also a risk that the market may
decline between the time the portfolio has a call exercised against it, at a
price which is fixed as of the closing level of the index on the date of
exercise, and the time the portfolio is able to sell stocks in its portfolio. As
with stock options, a portfolio will not learn that an index option has been
exercised until the day following the exercise date but, unlike a call on stock
where the portfolio would be able to deliver the underlying securities in
settlement, the portfolio may have to sell part of its stock portfolio in order
to make settlement in cash, and the price of such stocks might decline before
they can be sold. This timing risk makes certain strategies involving more than
one option substantially more risky with options in stock indices than with
stock options. For example, even if an index call which a portfolio has written
is "covered" by an index call held by the portfolio with the same strike price,
the portfolio will bear the risk that the level of the index may decline between
the close of trading on the date the exercise notice is filed with the clearing
corporation and the close of trading on the date the portfolio exercises the
call it holds or the time the portfolio sells the call which in either case
would occur no earlier than the day following the day the exercise notice was
filed.
3
<PAGE>
There are also certain special risks involved in purchasing put and call options
on stock indices. If a portfolio holds an index option and exercises it before
final determination of the closing index value for that day, it runs the risk
that the level of the underlying index may change before closing. If such a
change causes the exercised option to fall out-of-the-money, the portfolio will
be required to pay the difference between the closing index value and the
exercise price of the option (times the applicable multiplier) to the assigned
writer. Although the portfolio may be able to minimize the risk by withholding
exercise instructions until just before the daily cutoff time or by selling
rather than exercising an option when the index level is close to the exercise
price, it may not be possible to eliminate this risk entirely because the cutoff
times for index options may be earlier than those fixed for other types of
options and may occur before definitive closing index values are announced.
E. RISKS OF TRANSACTIONS IN OPTIONS ON FOREIGN CURRENCY.
Because there are two currencies involved, developments in either or both
countries can affect the values of options on foreign currencies. Risks include
those described in the prospectus under FOREIGN SECURITIES and OPTIONS ON
FOREIGN CURRENCIES. In addition, the quantities of currency underlying option
contracts represent odd lots in a market dominated by transactions between
banks; this can mean extra transaction costs upon exercise. Option markets may
be closed while round-the-clock interbank currency markets are open, and this
can create price and rate discrepancies.
F. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS.
There are several risks associated with a portfolio's use of futures contracts
for hedging purposes. One such risk arises because of imperfect correlation
between movements in the price of the futures contract and the price of the
securities or currency that are the subject of the hedge. In the case of futures
contracts on stock or interest rate indices, the correlation between the price
of the futures contract and movements in the index might not be perfect. To
compensate for differences in historical volatility, a portfolio could purchase
or sell futures contracts with a greater or lesser value than the securities or
currency it wished to hedge or purchase. In addition, temporary price
distortions in the futures market could be caused by a variety of factors.
Further, the ability of a portfolio to close out a futures position depends on a
liquid secondary market. There is no assurance that a liquid secondary market on
an exchange will exist for any particular futures contract at any particular
time. Further, each portfolio's successful use of futures contracts is to some
extent dependent on the ability of the portfolio manager to predict correctly
movements in the direction of the market, interest rates and/or currency
exchange rates.
The hours of trading of futures contracts may not conform to the hours during
which the portfolio may trade the underlying securities and/or currency. To the
extent that the futures markets close before the securities or currency markets,
significant price and rate movements can take place in the securities and/or
currency markets that cannot be reflected in the futures markets.
G. RISKS OF TRANSACTIONS IN OPTIONS ON FUTURES CONTRACTS.
Options on futures contracts are subject to risks similar to those described
above with respect to options on securities, options on stock indices, and
futures contracts. These risks include the risk that the portfolio manager may
not correctly predict changes in the market, the risk of imperfect correlation
between the option and the securities being hedged, and the risk that there
might not be a liquid secondary market for the option. There is also the risk of
imperfect correlation between the option and the underlying futures contract. If
there were no liquid secondary market for a particular option on a futures
contract, the portfolio might have to exercise an option it held in order to
realize any profit and might continue to be obligated under an option it had
written until the option expired or was exercised. If the portfolio were unable
to close out an option it had written on a futures contract, it would continue
to be required to maintain initial margin and make variation margin payments
with respect to the option position until the option expired or was exercised
against the portfolio.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
As explained in the prospectus, the Conservative Balanced, Flexible Managed,
Equity, and Global Portfolios may purchase debt and equity securities
denominated in foreign currencies. To address the currency fluctuation risk that
such investments entail, these portfolios may enter into forward foreign
currency exchange contracts in several circumstances. When a portfolio enters
into a contract for the purchase or sale of a security denominated in a foreign
currency, or when a portfolio anticipates the receipt in a foreign currency of
dividends or interest payments on a security which it holds, the portfolio may
desire to "lock-in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such dividend or interest payment, as the case may be. By entering
into a forward contract for a fixed amount of dollars, for the purchase or sale
of the amount of foreign currency involved in the underlying transactions, the
portfolio will be able to protect itself against a possible loss resulting from
an adverse change in the relationship between the U.S. dollar and the subject
foreign currency during the period between the date on which the security is
purchased or sold, or on which the dividend or interest payment is declared, and
the date on which such payments are made or received.
4
<PAGE>
Additionally, when a portfolio's manager believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the portfolio may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of the portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of those securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. The portfolios will not enter into such
forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate a portfolio to deliver an amount of
foreign currency in excess of the value of the securities or other assets
denominated in that currency held by the portfolio. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the long-term investment decisions made with regard to overall diversification
strategies. However, the portfolios believe that it is important to have the
flexibility to enter into such forward contracts when it is determined that the
best interests of the portfolios will thereby be served.
The portfolios generally will not enter into a forward contract with a term of
greater than 1 year. At the maturity of a forward contract, a portfolio may
either sell the portfolio security and make delivery of the foreign currency or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly, it
may be necessary for a portfolio to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency that the portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.
If a portfolio retains the portfolio security and engages in an offsetting
transaction, the portfolio will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. Should
forward prices decline during the period between the portfolio's entering into a
forward contract for the sale of a foreign currency and the date it enters into
an offsetting contract for the purchase of the foreign currency, the portfolio
will realize a gain to the extent that the price of the currency it has agreed
to sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the portfolio will suffer a loss to the extent that the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The portfolios' dealing in forward foreign currency exchange contracts will be
limited to the transactions described above. Of course, the portfolios are not
required to enter into such transactions with regard to their foreign
currency-denominated securities. It also should be realized that this method of
protecting the value of the portfolio securities against a decline in the value
of a currency does not eliminate fluctuations in the underlying prices of the
securities which are unrelated to exchange rates. Additionally, although such
contracts tend to minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time they tend to limit any potential gain which
might result should the value of such currency increase.
Although the portfolios value their assets daily in terms of U.S. dollars, they
do not intend physically to convert their holdings of foreign currencies into
U.S. dollars on a daily basis. They will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to a portfolio at one rate, while offering a lesser rate of exchange should the
portfolio desire to resell that currency to the dealer.
INTEREST RATE SWAPS
The Diversified Bond and Government Income Portfolios and the fixed income
portions of the Conservative Balanced and Flexible Managed Portfolios may use
interest rate swaps subject to the limitations set forth in the prospectus.
Interest rate swaps, in their most basic form, involve the exchange by a
portfolio with another party of their respective commitments to pay or receive
interest. For example, a portfolio might exchange its right to receive certain
floating rate payments in exchange for another party's right to receive fixed
rate payments. Interest rate swaps can take a variety of other forms, such as
agreements to pay the net differences between two different indices or rates,
even if the parties do not own the underlying instruments. Despite their
differences in form, the function of interest rate swaps is generally the same -
to increase or decrease a portfolio's exposure to long- or short-term interest
rates. For example, a portfolio may enter into a swap transaction to preserve a
return or spread on a particular investment or a portion of its portfolio or to
protect against any increase in the price of securities the portfolio
anticipates purchasing at a later date.
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The use of swap agreements is subject to certain risks. As with options and
futures, if the investment manager's prediction of interest rate movements is
incorrect, the portfolio's total return will be less than if the portfolio had
not used swaps. In addition, if the counterparty's creditworthiness declines,
the value of the swap would likely decline. Moreover, there is no guarantee that
a portfolio could eliminate its exposure under an outstanding swap agreement by
entering into an offsetting swap agreement with the same or another party.
A portfolio will maintain appropriate liquid assets in a segregated custodial
account to cover its current obligations under swap agreements. If a portfolio
enters into a swap agreement on a net basis, it will segregate assets with a
daily value at least equal to the excess, if any, of the portfolio's accrued
obligations under the swap agreement over the accrued amount the portfolio is
entitled to receive under the agreement. If a portfolio enters into a swap
agreement on other than a net basis, it will segregate assets with a value equal
to the full amount of the portfolio's accrued obligations under the agreement.
ILLIQUID SECURITIES
Each portfolio available to The Prudential Variable Contract Account-24 may hold
up to 15% of its net assets in illiquid securities. Illiquid securities are
those which may not be sold in the ordinary course of business within seven days
at approximately the value at which the portfolio has valued them. Repurchase
agreements with a maturity of greater than seven days are considered illiquid.
The portfolios may purchase securities which are not registered under the
Securities Act of 1933 but which can be sold to qualified institutional buyers
in accordance with Rule 144A under that Act. Any such security will not be
considered illiquid so long as it is determined by the adviser, acting under
guidelines approved and monitored by the Board of Directors, that an adequate
trading market exists for that security. In making that determination, the
adviser will consider, among other relevant factors: (1) the frequency of trades
and quotes for the security; (2) the number of dealers willing to purchase or
sell the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades. A portfolio's treatment of
Rule 144A securities as liquid could have the effect of increasing the level of
portfolio illiquidity to the extent that qualified institutional buyers become,
for a time, uninterested in purchasing these securities. In addition, the
adviser, acting under guidelines approved and monitored by the Board of
Directors, may conditionally determine, for purposes of the 15% test, that
certain commercial paper issued in reliance on the exemption from registration
in Section 4(2) of the Securities Act of 1933 will not be considered illiquid,
whether or not it may be resold under Rule 144A. To make that determination, the
following conditions must be met: (1) the security must not be traded flat or in
default as to principal or interest; (2) the security must be rated in one of
the two highest rating categories by at least two nationally recognized
statistical rating organizations ("NRSROs"), or if only one NRSRO rates the
security, by that NRSRO; if the security is unrated, the adviser must determine
that the security is of equivalent quality; and (3) the adviser must consider
the trading market for the specific security, taking into account all relevant
factors. The adviser will continue to monitor the liquidity of any Rule 144A
security or any Section 4(2) commercial paper which has been determined to be
liquid and, if a security is no longer liquid because of changed conditions, the
holdings of illiquid securities will be reviewed to determine if any steps are
required to assure that the 15% test continues to be satisfied.
INVESTMENT RESTRICTIONS
Set forth below are certain investment restrictions applicable to the
portfolios. Restrictions 1, 3, 5, and 8-11 are fundamental and may not be
changed without shareholder approval as required by the 1940 Act. Restrictions
2, 4, 6, 7, and 12 are not fundamental and may be changed by the Board of
Directors without shareholder approval.
None of the portfolios available to The Prudential Variable Contract Account-24
will:
1. Buy or sell real estate and mortgages, although the portfolios may buy and
sell securities that are secured by real estate and securities of real
estate investment trusts and of other issuers that engage in real estate
operation. Buy or sell commodities or commodities contracts, except that
the Diversified Stock and Balanced Portfolios may purchase and sell stock
index futures contracts and related options; the Fixed Income Portfolios,
the Global Portfolio, and the Balanced Portfolios may purchase and sell
interest rate futures contracts and related options; and all portfolios
(other than the Government Income Portfolio) may purchase and sell foreign
currency futures contracts and related options and forward foreign currency
exchange contracts.
2. Except as part of a merger, consolidation, acquisition or reorganization,
invest more than 5% of the value of its total assets in the securities of
any one investment company or more than 10% of the value of its total
assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting
securities of any one investment company.
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3. Acquire securities for the purpose of exercising control or management of
any company except in connection with a merger, consolidation, acquisition
or reorganization.
4. Make short sales of securities or maintain a short position, except that
the Diversified Bond, Government Income, Conservative Balanced and Flexible
Managed Portfolios may sell securities short up to 25% of their net assets
and except that the portfolios make short sales against the box. Collateral
arrangements entered into with respect to options, futures contracts and
forward contracts are not deemed to be short sales. Collateral arrangements
entered into with respect to interest rate swap agreements are not deemed
to be short sales.
5. Purchase securities on margin or otherwise borrow money or issue senior
securities except that the Diversified Bond and Government Income
Portfolios, as well as the fixed income portions of the Balanced
Portfolios, may enter into reverse repurchase agreements, dollar rolls and
may purchase securities on a when-issued and delayed delivery basis; except
that the money market portion of any portfolio may enter into reverse
repurchase agreements and may purchase securities on a when-issued and
delayed delivery basis; and except that the Equity, Global, Flexible
Managed and Conservative Balanced Portfolios may purchase securities on a
when-issued or a delayed delivery basis. The Series Fund may also obtain
such short-term credit as it needs for the clearance of securities
transactions and may borrow from a bank for the account of any portfolio as
a temporary measure to facilitate redemptions (but not for leveraging or
investment) or to exercise an option, an amount that does not exceed 5% of
the value of the portfolio's total assets (including the amount owed as a
result of the borrowing) at the time the borrowing is made. Interest paid
on borrowings will not be available for investment. Collateral arrangements
with respect to futures contracts and options thereon and forward foreign
currency exchange contracts (as permitted by restriction no. 1) are not
deemed to be the issuance of a senior security or the purchase of a
security on margin. Collateral arrangements with respect to the writing of
the following options by the following portfolios are not deemed to be the
issuance of a senior security or the purchase of a security on margin:
Diversified Stock Portfolios other than the Stock Index Portfolio (options
on equity securities, stock indices, foreign currencies); Stock Index
Portfolio (options on stock indices); Balanced Portfolios (options on debt
securities, equity securities, stock indices, foreign currencies);
Diversified Bond Portfolio (options on debt securities, foreign
currencies); Government Income Portfolio (options on debt securities).
Collateral arrangements entered into by the Fixed Income Portfolios and the
Balanced Portfolios with respect to interest rate swap agreements are not
deemed to be the issuance of a senior security or the purchase of a
security on margin.
6. Enter into reverse repurchase agreements if, as a result, the portfolio's
obligations with respect to reverse repurchase agreements would exceed 10%
of the portfolio's net assets (defined to mean total assets at market value
less liabilities other than reverse repurchase agreements); except that the
Diversified Bond and Government Income Portfolios, as well as the fixed
income portions of the Conservative Balanced and Flexible Managed
Portfolios, may enter into reverse repurchase agreements and dollar rolls
provided that the portfolio's obligations with respect to those instruments
do not exceed 30% of the portfolio's net assets (defined to mean total
assets at market value less liabilities other than reverse repurchase
agreements and dollar rolls).
7. Pledge or mortgage assets, except that no more than 10% of the value of any
portfolio may be pledged (taken at the time the pledge is made) to secure
authorized borrowing and except that a portfolio may enter into reverse
repurchase agreements. Collateral arrangements entered into with respect to
futures and forward contracts and the writing of options are not deemed to
be the pledge of assets. Collateral arrangements entered into with respect
to interest rate swap agreements are not deemed to be the pledge of assets.
8. Lend money, except that loans of up to 10% of the value of each portfolio
may be made through the purchase of privately placed bonds, debentures,
notes, and other evidences of indebtedness of a character customarily
acquired by institutional investors that may or may not be convertible into
stock or accompanied by warrants or rights to acquire stock. Repurchase
agreements and the purchase of publicly traded debt obligations are not
considered to be "loans" for this purpose and may be entered into or
purchased by a portfolio in accordance with its investment objectives and
policies.
9. Underwrite the securities of other issuers, except where the Series Fund
may be deemed to be an underwriter for purposes of certain federal
securities laws in connection with the disposition of portfolio securities
and with loans that a portfolio may make pursuant to item 8 above.
10. Make an investment unless, when considering all its other investments, 75%
of the value of a portfolio's assets would consist of cash, cash items,
obligations of the United States Government, its agencies or
instrumentalities, and other securities. For purposes of this restriction,
"other securities" are limited for each issuer to not more than 5% of the
value of a portfolio's assets and to not more than 10% of the issuer's
outstanding voting securities held by the Series Fund as a whole. Some
uncertainty exists as to whether
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certain of the types of bank obligations in which a portfolio may invest,
such as certificates of deposit and bankers' acceptances, should be
classified as "cash items" rather than "other securities" for purposes of
this restriction, which is a diversification requirement under the 1940
Act. Interpreting most bank obligations as "other securities" limits the
amount a portfolio may invest in the obligations of any one bank to 5% of
its total assets. If there is an authoritative decision that any of these
obligations are not "securities" for purposes of this diversification test,
this limitation would not apply to the purchase of such obligations.
11. Purchase securities of a company in any industry if, as a result of the
purchase, a portfolio's holdings of securities issued by companies in that
industry would exceed 25% of the value of the portfolio, except that this
restriction does not apply to purchases of obligations issued or guaranteed
by the U.S. Government, its agencies and instrumentalities or issued by
domestic banks. For purposes of this restriction, neither finance companies
as a group nor utility companies as a group are considered to be a single
industry and will be grouped instead according to their services; for
example, gas, electric, and telephone utilities will each be considered a
separate industry. For purposes of this exception, domestic banks shall
include all banks which are organized under the laws of the United States
or a state (as defined in the 1940 Act), U.S. branches of foreign banks
that are subject to the same regulations as U.S. banks and foreign branches
of domestic banks (as permitted by the SEC).
12. Invest more than 15% of its net assets in illiquid securities. For purposes
of this restriction, illiquid securities are those deemed illiquid pursuant
to SEC regulations and guidelines, as they may be revised from time to
time.
The investments of the various portfolios currently available to The Prudential
Variable Contract Account-24 are generally subject to certain additional
restrictions under the laws of the State of New Jersey. In the event of future
amendments to the applicable New Jersey statutes, each of these portfolios will
comply, without the approval of the shareholders, with the statutory
requirements as so modified. The pertinent provisions of New Jersey law as they
stand are, in summary form, as follows:
1. An Account may not purchase any evidence of indebtedness issued, assumed or
guaranteed by any institution created or existing under the laws of the
U.S., any U.S. state or territory, District of Columbia, Puerto Rico,
Canada or any Canadian province, if such evidence of indebtedness is in
default as to interest. "Institution" includes any corporation, joint stock
association, business trust, business joint venture, business partnership,
savings and loan association, credit union or other mutual savings
institution.
2. The stock of a corporation may not be purchased unless: (i) the corporation
has paid a cash dividend on the class of stock during each of the past 5
years preceding the time of purchase; or (ii) during the 5-year period the
corporation had aggregate earnings available for dividends on such class of
stock sufficient to pay average dividends of 4% per annum computed upon the
par value of such stock or upon stated value if the stock has no par value.
This limitation does not apply to any class of stock which is preferred as
to dividends over a class of stock whose purchase is not prohibited.
3. Any common stock purchased must be: (i) listed or admitted to trading on a
securities exchange in the United States or Canada; or (ii) included in the
National Association of Securities Dealers' national price listings of
"over-the-counter" securities; or (iii) determined by the Commissioner of
Insurance of New Jersey to be publicly held and traded and have market
quotations available.
4. Any security of a corporation may not be purchased if after the purchase
more than 10% of the market value of the assets of a portfolio would be
invested in the securities of such corporation.
As a result of these currently applicable requirements of New Jersey law, which
impose substantial limitations on the ability of the Series Fund to invest in
the stock of companies whose securities are not publicly traded or who have not
recorded a 5-year history of dividend payments or earnings sufficient to support
such payments, the portfolios will not generally hold the stock of newly
organized corporations. Nonetheless, an investment not otherwise eligible under
items 1 or 2 above may be made if, after giving effect to the investment, the
total cost of all such non-eligible investments does not exceed 5% of the
aggregate market value of the assets of the portfolio.
Investment limitations also arise under the insurance laws and regulations of
Arizona and may arise under the laws and regulations of other states. Although
compliance with the requirements of New Jersey law set forth above will
ordinarily result in compliance with any applicable laws of other states, under
some circumstances the laws of other states could impose additional restrictions
on the portfolios. For example, the Series Fund will generally invest no more
than 10% of its assets in the obligations of banks of the foreign countries
enumerated in item 2 of the Appendix to the prospectus. In addition, the Series
Fund adheres to additional restrictions relating to such practices as the
lending of securities, borrowing, and the purchase of put and call options,
futures contracts, and derivative instruments on securities to comply with
investment guidelines issued by the California Department of Insurance.
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Current federal income tax laws require that the assets of each portfolio be
adequately diversified so that Prudential and other insurers with separate
accounts which invest in the Series Fund, as applicable, and not the Contract
owners, are considered the owners of assets held in the Accounts for federal
income tax purposes. See DIVIDENDS, DISTRIBUTIONS, AND TAXES in the prospectus.
Prudential intends to maintain the assets of each portfolio pursuant to those
diversification requirements.
INVESTMENT MANAGEMENT ARRANGEMENTS
AND EXPENSES
Prudential is the investment advisor of the Series Fund. It is the largest
insurance company in the United States. The Series Fund has entered into an
Investment Advisory Agreement with Prudential under which Prudential will,
subject to the direction of the Board of Directors of the Series Fund, be
responsible for the management of the Series Fund, and provide investment advice
and related services to each portfolio. Prudential has entered into a Service
Agreement with its wholly-owned subsidiary The Prudential Investment Corporation
("PIC"), which provides that PIC will furnish to Prudential such services as
Prudential may require in connection with Prudential's performance of its
obligations under advisory agreements with clients which are registered
investment companies. More detailed information about Prudential and its role as
investment advisor can be found in INVESTMENT MANAGEMENT ARRANGEMENTS AND
EXPENSES in the prospectus.
Under the Investment Advisory Agreement, Prudential receives an investment
management fee as compensation for its services to the Series Fund. The fee is a
daily charge, payable quarterly, equal to an annual percentage of the average
daily net assets of each individual portfolio.
The investment management fee for the Stock Index Portfolio is equal to an
annual rate of 0.35% of the average daily net assets of the portfolio. For the
Diversified Bond and Government Income Portfolios that fee is equal to an annual
rate of 0.4% of the average daily net assets of each of the portfolios. For the
Equity Portfolio, the fee is equal to an annual rate of 0.45% of the average
daily net assets of the portfolio. The fee for the Conservative Balanced
Portfolio is equal to an annual rate of 0.55% of the average daily net assets of
the portfolio. For the Flexible Managed Portfolio, the fee is equal to an annual
rate of 0.6% of the average daily net assets of the portfolio. The fee for the
Global Portfolio is equal to an annual rate of 0.75% of the average daily net
assets of the portfolio. Under the Service Agreement, Prudential pays PIC a
portion of the fee it receives for providing investment advisory services.
For the years 1996, 1995, and 1994, Prudential received a total of $94,962,866,
$77,610,207, and $66,413,206, respectively, in investment management fees for
all of the Series Fund's portfolios.
The Investment Advisory Agreement requires Prudential to pay for maintaining any
Prudential staff and personnel who perform clerical, accounting, administrative,
and similar services for the Series Fund, other than investor services and any
daily Series Fund accounting services. It also requires Prudential to pay for
the equipment, office space and related facilities necessary to perform these
services and the fees or salaries of all officers and directors of the Series
Fund who are affiliated persons of Prudential or of any subsidiary of
Prudential.
Each portfolio pays all other expenses incurred in its individual operation and
also pays a portion of the Series Fund's general administrative expenses
allocated on the basis of the asset size of the respective portfolios. Expenses
that will be borne directly by the portfolios include redemption expenses,
expenses of portfolio transactions, shareholder servicing costs, interest,
certain taxes, charges of the Custodian and Transfer Agent, and other expenses
attributable to a particular portfolio. Expenses that will be allocated among
all portfolios include legal expenses, state franchise taxes, auditing services,
costs of printing proxies, costs of stock certificates, Securities and Exchange
Commission fees, accounting costs, the fees and expenses of directors of the
Series Fund who are not affiliated persons of Prudential or any subsidiary of
Prudential, and other expenses properly payable by the entire Series Fund. If
the Series Fund is sued, litigation costs may be directly applicable to one or
more portfolio or allocated on the basis of the size of the respective
portfolios, depending upon the nature of the lawsuit. The Series Fund's Board of
Directors has determined that this is an appropriate method of allocating
expenses.
Under the Investment Advisory Agreement, Prudential has agreed to refund to a
portfolio (except the Global Portfolio) the portion of the investment management
fee for that portfolio equal to the amount that the aggregate annual ordinary
operating expenses of that portfolio (excluding interest, taxes, and brokerage
fees and commissions but including investment management fees) exceeds 0.75% of
the portfolio's average daily net assets. There is no expense limitation or
reimbursement provision for the Global Portfolio.
The Investment Advisory Agreement with Prudential was most recently approved by
the Series Fund's Board of Directors, including a majority of the Directors who
are not interested persons of Prudential, on February 12, 1997 with respect to
all portfolios available to The Prudential Variable Contract Account-24. The
Investment Advisory Agreement was most recently approved by the shareholders in
accordance with instructions from Contract owners and Participants at their 1989
annual meeting with respect to all portfolios available to The Prudential
Variable
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Contract Account-24. The Agreement will continue in effect if approved annually
by: (1) a majority of the non-interested persons of the Series Fund's Board of
Directors; and (2) by a majority of the entire Board of Directors or by a
majority vote of the shareholders of each portfolio. The required shareholder
approval of the Agreement shall be effective with respect to any portfolio if a
majority of the voting shares of that portfolio vote to approve the Agreement,
even if the Agreement is not approved by a majority of the voting shares of any
other portfolio or by a majority of the voting shares of the entire Series Fund.
The Agreement provides that it may not be assigned by Prudential and that it may
be terminated upon 60 days' notice by the Series Fund's Board of Directors or by
a majority vote of its shareholders. Prudential may terminate the Agreement upon
90 days' notice.
The Service Agreement between Prudential and PIC was most recently ratified by
shareholders of the Series Fund at their 1989 annual meeting with respect to all
portfolios available to The Prudential Variable Contract Account-24. The Service
Agreement between Prudential and PIC will continue in effect as to the Series
Fund for a period of more than 2 years from its execution, only so long as such
continuance is specifically approved at least annually in the same manner as the
Investment Advisory Agreement between Prudential and the Series Fund. The
Service Agreement may be terminated by either party upon not less than 30 days
prior written notice to the other party, will terminate automatically in the
event of its assignment, and will terminate automatically as to the Series Fund
in the event of the assignment or termination of the Investment Advisory
Agreement between Prudential and the Series Fund. Prudential is not relieved of
its responsibility for all investment advisory services under the Investment
Advisory Agreement.
Prudential also serves as the investment advisor to several other investment
companies. When investment opportunities arise that may be appropriate for more
than one entity for which Prudential serves as investment advisor, Prudential
will not favor one over another and may allocate investments among them in an
impartial manner believed to be equitable to each entity involved. The
allocations will be based on each entity's investment objectives and its current
cash and investment positions. Because the various entities for which Prudential
acts as investment advisor have different investment objectives and positions,
Prudential may from time to time buy a particular security for one or more such
entities while at the same time it sells such securities for another.
OTHER INFORMATION CONCERNING THE SERIES FUND
PORTFOLIO TRANSACTIONS AND BROKERAGE
Prudential is responsible for decisions to buy and sell securities, options on
securities and indices, and futures and related options for the Series Fund.
Prudential is also responsible for the selection of brokers, dealers, and
futures commission merchants to effect the transactions and the negotiation of
brokerage commissions, if any. Broker-dealers may receive brokerage commissions
on Series Fund portfolio transactions, including options and the purchase and
sale of underlying securities upon the exercise of options. Orders may be
directed to any broker or futures commission merchant including, to the extent
and in the manner permitted by applicable law, Prudential Securities
Incorporated, an indirect wholly-owned subsidiary of Prudential.
Equity securities traded in the over-the-counter market and bonds, including
convertible bonds, are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments and U.S.
Government agency securities may be purchased directly from the issuer, in which
case no commissions or discounts are paid. The Series Fund will not deal with
Prudential Securities Incorporated in any transaction in which Prudential
Securities Incorporated acts as principal. Thus, it will not deal with
Prudential Securities Incorporated if execution involves Prudential Securities
Incorporated's acting as principal with respect to any part of the Series Fund's
order.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities Incorporated, during the existence of
the syndicate, is a principal underwriter (as defined in the 1940 Act) except in
accordance with rules of the Securities and Exchange Commission. This
limitation, in the opinion of the Series Fund, will not significantly affect the
portfolios' current ability to pursue their respective investment objectives.
However, in the future it is possible that the Series Fund may under other
circumstances be at a disadvantage because of this limitation in comparison to
other funds not subject to such a limitation.
In placing orders for portfolio securities of the Series Fund, Prudential is
required to give primary consideration to obtaining the most favorable price and
efficient execution. Within the framework of this policy, Prudential will
consider the research and investment services provided by brokers, dealers or
futures commission merchants who effect or are parties to portfolio transactions
of the Series Fund, Prudential or Prudential's other clients. Such research and
investment services are those which brokerage houses customarily provide to
institutional investors and include statistical and economic data and research
reports on particular companies and industries. Such services are used by
Prudential in connection with all of its investment activities, and some of such
services
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obtained in connection with the execution of transactions for the Series Fund
may be used in managing other investment accounts. Conversely, brokers, dealers
or futures commission merchants furnishing such services may be selected for the
execution of transactions for such other accounts, and the services furnished by
such brokers, dealers or futures commission merchants may be used by Prudential
in providing investment management for the Series Fund. Commission rates are
established pursuant to negotiations with the broker, dealer or futures
commission merchant based on the quality and quantity of execution services
provided by the broker in the light of generally prevailing rates. Prudential's
policy is to pay higher commissions to brokers, other than Prudential Securities
Incorporated, for particular transactions than might be charged if a different
broker had been selected on occasions when, in Prudential's opinion, this policy
furthers the objective of obtaining best price and execution. Prudential's
present policy is not to permit higher commissions to be paid on Series Fund
transactions in order to secure research, statistical, and investment services
from brokers. Prudential might in the future authorize the payment of such
higher commissions but only with the prior concurrence of the Board of Directors
of the Series Fund, if it is determined that the higher commissions are
necessary in order to secure desired research and are reasonable in relation to
all the services that the broker provides.
Subject to the above considerations, Prudential Securities Incorporated may act
as a securities broker or futures commission merchant for the Series Fund. In
order for Prudential Securities Incorporated to effect any portfolio
transactions for the Series Fund, the commissions received by Prudential
Securities Incorporated must be reasonable and fair compared to the commissions
received by other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time. This standard would allow Prudential Securities
Incorporated to receive no more than the remuneration that would be expected to
be received by an unaffiliated broker or futures commission merchant in a
commensurate arm's-length transaction. Furthermore, the Board of Directors of
the Series Fund, including a majority of the directors who are not "interested"
persons, has adopted procedures which are reasonably designed to provide that
any commissions, fees or other remuneration paid to Prudential Securities
Incorporated are consistent with the foregoing standard. In accordance with Rule
11a2-2(T) under the Securities Exchange Act of 1934, Prudential Securities
Incorporated may not retain compensation for effecting transactions on a
national securities exchange for the Series Fund unless the Series Fund has
expressly authorized the retention of such compensation in a written contract
executed by the Series Fund and Prudential Securities Incorporated. Rule
11a2-2(T) provides that Prudential Securities Incorporated must furnish to the
Series Fund at least annually a statement setting forth the total amount of all
compensation retained by Prudential Securities Incorporated from transactions
effected for the Series Fund during the applicable period. Brokerage and futures
transactions with Prudential Securities Incorporated are also subject to such
fiduciary standards as may be imposed by applicable law.
For the years 1996, 1995, and 1994, the Series Fund paid a total of $12,197,982,
$11,607,197, and $11,579,886, respectively, in brokerage commissions. Of those
amounts, $961,524, $899,739, and $560,155, for 1996, 1995, and 1994,
respectively, was paid out to Prudential Securities Incorporated. For 1996, the
commissions paid to this affiliated broker constituted 7.9% of the total
commissions paid by the Series Fund for that year. Transactions through this
affiliated broker accounted for 7.9% of the aggregate dollar amount of
transactions for the Series Fund involving the payment of commissions. These
figures do include all of the Series Fund's portfolios, including portfolios not
available to The Prudential Variable Contract Account-24.
CUSTODIANS
Chase Manhattan Bank, Chase Metro Tech Center, Brooklyn, NY 11245, is currently
the custodian of the assets held by all the portfolios, except the Global
Portfolio. On or about May 31, 1997, Investors Fiduciary Trust Company ("IFTC"),
127 West 10th Street, Kansas City, MO 64105-1716, will become the custodian of
the assets held by all the portfolios except the Global Portfolio. IFTC will
also be the custodian of the assets held in connection with repurchase
agreements entered into by the portfolios, and is authorized to use the
facilities of the Depository Trust Company and the facilities of the book-entry
system of the Federal Reserve Bank with respect to securities held by these
portfolios. Brown Brothers Harriman & Co. ("Brown Brothers"), 40 Water Street,
Boston, MA 02109, is the custodian of the assets of the Global Portfolio. Each
of the Series Fund's custodians employs subcustodians, who were approved by the
directors of the Series Fund in accordance with regulations of the Securities
and Exchange Commission, for the purpose of providing custodial service for the
Series Fund's foreign assets held outside the United States. The directors of
the Series Fund monitor the activities of the custodians and the subcustodians.
EXPERTS
The financial statements included in this statement of additional information
and the FINANCIAL HIGHLIGHTS included in the Series Fund's prospectus for the
year ended December 31, 1996 have been audited by Price Waterhouse LLP,
independent accountants, as stated in their report appearing herein and are
included in reliance
11
<PAGE>
upon the report of such firm given upon their authority as experts in accounting
and auditing. Price Waterhouse LLP's principal business address is 1177 Avenue
of the Americas, New York, NY 10036.
The financial statements included in this statement of additional information
and the FINANCIAL HIGHLIGHTS included in the Series Fund's prospectus for the
years ended prior to 1996 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing. Deloitte & Touche LLP's principal business
address is Two Hilton Court, Parsippany, NJ 07054-0319.
LICENSES
As part of the Investment Advisory Agreement, Prudential has granted the Series
Fund a royalty-free, non-exclusive license to use the words "The Prudential" and
"Prudential" and its registered service mark of a rock representing the Rock of
Gibraltar. However, Prudential may terminate this license if Prudential or a
company controlled by it ceases to be the Series Fund's investment advisor.
Prudential may also terminate the license for any other reason upon 60 days
written notice; but, in this event, the Investment Advisory Agreement shall also
terminate 120 days following receipt by the Series Fund of such notice, unless a
majority of the outstanding voting securities of the Series Fund vote to
continue the Agreement notwithstanding termination of the license.
The Series Fund is not sponsored, endorsed, sold or promoted by Standard &
Poor's ("S&P"). S&P makes no representation or warranty, express or implied, to
Contract owners or any member of the public regarding the advisability of
investing in securities generally or in the Series Fund particularly or the
ability of the S&P 500 Index to track general stock market performance. S&P's
only relationship to the Series Fund is the licensing of certain trademarks and
trade names of S&P and of the S&P 500 Index which is determined, composed and
calculated by S&P without regard to the Series Fund or the Stock Index
Portfolio. S&P has no obligation to take the needs of the Series Fund or the
Contract owners into consideration in determining, composing or calculating the
S&P 500 Index. S&P is not responsible for and has not participated in the
determination of the prices and amount of the Series Fund shares or the timing
of the issuance or sale of those shares or in the determination or calculation
of the equation by which the shares are to be converted into cash. S&P has no
obligation or liability in connection with the administration, marketing or
trading of the Series Fund Shares.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX
OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED
AS TO RESULTS TO BE OBTAINED BY THE SERIES FUND, CONTRACT OWNERS, OR ANY OTHER
PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN.
S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY
OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
12
<PAGE>
MANAGEMENT OF THE SERIES FUND
The names of all directors and major officers of the Series Fund and the
principal occupation of each during the last 5 years are shown below. Unless
otherwise stated, the address of each director and officer is Prudential Plaza,
Newark, New Jersey 07102-3777.
DIRECTORS OF THE SERIES FUND
MENDEL A. MELZER*, Chairman of the Board--Chief Investment Officer of Prudential
Investments since 1996; 1995 to 1996: Chief Financial Officer of the Money
Management Group of Prudential; 1993 to 1995: Senior Vice President and Chief
Financial Officer of Prudential Preferred Financial Services; Prior to 1993:
Managing Director, The Prudential Investment Corporation.
E. MICHAEL CAULFIELD*, President and Director--Chief Executive Officer of
Prudential Investments since 1995; 1995: Chief Executive Officer, Prudential
Preferred Financial Services; 1993 to 1995: President, Prudential Preferred
Financial Services; 1992 to 1993: President, Prudential Property and Casualty
Insurance Company; Prior to 1992: President of Investment Services of
Prudential.
SAUL K. FENSTER, Director--President of New Jersey Institute of Technology.
Address: 323 Martin Luther King Boulevard, Newark, New Jersey 07102.
W. SCOTT MCDONALD, JR., Director--Principal, Kaludis Consulting Group since
1997; 1995 to 1996: Principal, Scott McDonald & Associates; Prior to 1995:
Executive Vice President of Fairleigh Dickinson University. Address: 9 Zamrok
Way, Morristown, New Jersey 07960.
JOSEPH WEBER, Director--Vice President, Interclass (international corporate
learning). Address: 37 Beachmont Terrace, North Caldwell, New Jersey 07006.
OFFICERS WHO ARE NOT DIRECTORS
SUSAN COTE, Vice President--Vice President Prudential Investments since 1996;
1995 to 1996: Chief Operating Officer and Managing Director, Prudential Mutual
Fund Investment Management; Prior to 1995: Senior Vice President and Treasurer
of Prudential Mutual Funds.
THOMAS EARLY, Secretary--General Counsel, Mutual Funds and Annuities, Prudential
Investments since 1996; 1994 to 1996: General Counsel, Prudential Retirement
Services, Prudential Investments; Prior to 1994: Associate General Counsel and
Chief Financial Services Counsel, Frank Russell Company.
I. EDWARD PRICE, Vice President--Senior Vice President and Actuary, Prudential
Individual Insurance Group since 1995; 1994 to 1995: Chief Executive Officer,
Prudential International Insurance; 1993 to 1994: President, Prudential
International Insurance; Prior to 1993: Senior Vice President and Company
Actuary of Prudential.
EUGENE STARK, Comptroller, Principal Financial Officer and Treasurer--Vice
President, Prudential Investments.
No director or officer of the Series Fund who is also an officer, director or
employee of Prudential or its affiliates is entitled to any remuneration from
the Series Fund for services as one of its directors or officers. Each director
of the Series Fund who is not an interested person of the Series Fund will
receive a fee of $2,000 per year plus $200 per portfolio for each meeting of the
Board attended and will be reimbursed for all expenses incurred in connection
with attendance at meetings.
*These members of the Board are interested persons of Prudential, its affiliates
or the Series Fund as defined in the 1940 Act. Certain actions of the Board,
including the annual continuance of the Investment Advisory Agreement between
the Series Fund and Prudential, must be approved by a majority of the members of
the Board who are not interested persons of Prudential, its affiliates or the
Series Fund. Mr. Melzer and Mr. Caulfield, two of the five members of the Board,
are interested persons of Prudential and the Series Fund, as that term is
defined in the 1940 Act, because they are officers and/or affiliated persons of
Prudential, the investment advisor to the Series Fund. Messrs. Fenster,
McDonald, and Weber are not interested persons of Prudential, its affiliates or
the Series Fund. However, Mr. Fenster is President of the New Jersey Institute
of Technology. Prudential has issued a group annuity contract to the Institute
and provides group life and group health insurance to its employees.
13
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
DIVERSIFIED BOND PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$729,261,513)............................ $ 743,439,495
Cash....................................... 457
Interest and dividends receivable.......... 11,451,464
Receivable for investments sold short (Note
2)....................................... 26,546,678
--------------
Total Assets............................. 781,438,094
--------------
LIABILITIES
Payable for investments purchased.......... 33,940,503
Investments sold short at value (proceeds
$26,546,678 including accrued interest)
(Note 2)................................. 26,310,748
Payable to investment adviser.............. 721,625
Accrued expenses........................... 150,054
Payable for capital stock repurchased...... 98,583
--------------
Total Liabilities........................ 61,221,513
--------------
NET ASSETS................................... $ 720,216,581
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 650,871
Paid-in capital, in excess of par........ 699,963,944
--------------
700,614,815
Undistributed net investment income........ 2,057,193
Accumulated net realized gains on
investments.............................. 3,130,661
Net unrealized appreciation on
investments.............................. 14,413,912
--------------
Net assets, December 31, 1996.............. $ 720,216,581
--------------
--------------
Net asset value and redemption price per
share of 65,087,090 outstanding shares of
common stock (authorized 200,000,000
shares).................................. $ 11.07
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C>
INVESTMENT INCOME
Interest................................... $ 49,692,559
Dividends.................................. 89,819
---------------
49,782,378
---------------
EXPENSES
Investment advisory fee.................... 2,713,429
Shareholders' reports...................... 205,000
Accounting fees............................ 85,000
Custodian expense.......................... 43,000
Audit fees................................. 11,600
Directors' fees............................ 2,000
Legal fees................................. 500
Miscellaneous expenses..................... 332
---------------
Total expenses........................... 3,060,861
Less: custodian fee credit................. (5,308)
---------------
Net expenses............................. 3,055,553
---------------
NET INVESTMENT INCOME........................ 46,726,825
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain on investments........... 3,227,785
Net change in unrealized appreciation on:
Investments.............................. (19,084,958)
Short sales.............................. 235,930
---------------
(18,849,028)
---------------
NET LOSS ON INVESTMENTS...................... (15,621,243)
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 31,105,582
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 46,726,825 $ 41,106,435
Net realized gain on investments....................................................... 3,227,785 3,945,376
Net change in unrealized appreciation on investments and short sales................... (18,849,028) 65,195,088
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 31,105,582 110,246,899
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (44,766,756) (40,773,047)
Distributions from net realized capital gains.......................................... -- (1,426,845)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (44,766,756) (42,199,892)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [7,068,417 and 3,596,587 shares, respectively]...................... 78,594,183 39,971,262
Capital stock issued in reinvestment of dividends and distributions [4,117,675 and
3,793,654 shares, respectively]....................................................... 44,766,756 42,199,892
Capital stock repurchased [(4,070,327) and (3,376,822) shares, respectively]........... (45,319,610) (36,030,334)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 78,041,329 46,140,820
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 64,380,155 114,187,827
NET ASSETS:
Beginning of year...................................................................... 655,836,426 541,648,599
------------------ -------------------
End of year............................................................................ $ 720,216,581 $ 655,836,426
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B28 THROUGH B32.
A1
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
GOVERNMENT INCOME PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$474,449,592)............................ $ 476,801,502
Cash....................................... 228
Interest receivable........................ 5,874,562
--------------
Total Assets............................. 482,676,292
--------------
LIABILITIES
Payable to investment adviser.............. 494,508
Accrued expenses........................... 122,431
Payable for capital stock repurchased...... 23,913
--------------
Total Liabilities........................ 640,852
--------------
NET ASSETS................................... $ 482,035,440
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 429,580
Paid-in capital in excess of par......... 487,138,074
--------------
487,567,654
Undistributed net investment income........ 33,167
Accumulated net realized losses on
investments.............................. (7,917,291)
Net unrealized appreciation on
investments.............................. 2,351,910
--------------
Net assets, December 31, 1996.............. $ 482,035,440
--------------
--------------
Net asset value and redemption price per
share of 42,957,973 outstanding shares of
common stock (authorized 100,000,000
shares).................................. $ 11.22
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C>
INVESTMENT INCOME
Interest................................... $ 33,508,051
---------------
EXPENSES
Investment advisory fee.................... 1,957,623
Shareholders' reports...................... 175,000
Accounting fees............................ 95,000
Custodian expense.......................... 42,000
Audit fees................................. 8,100
Directors' fees............................ 2,000
Legal fees................................. 300
Miscellaneous expenses..................... 37
---------------
Total expenses........................... 2,280,060
Less: custodian fee credit................. (14,020)
---------------
Net expenses............................. 2,266,040
---------------
NET INVESTMENT INCOME........................ 31,242,011
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain on investments........... 14,328,542
Net change in unrealized appreciation on
investments.............................. (35,068,717)
---------------
NET LOSS ON INVESTMENTS...................... (20,740,175)
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 10,501,836
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 31,242,011 $ 31,463,453
Net realized gain (loss) on investments................................................ 14,328,542 (12,819,604)
Net change in unrealized appreciation on investments................................... (35,068,717) 66,364,196
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 10,501,836 85,008,045
------------------ -------------------
DIVIDENDS:
Dividends from net investment income................................................... (30,988,878) (31,133,859)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [778,426 and 863,496 shares, respectively].......................... 8,926,475 9,888,081
Capital stock issued in reinvestment of dividends [2,790,002 and 2,693,392 shares,
respectively]......................................................................... 30,988,878 31,133,859
Capital stock repurchased [(3,428,037) and (7,346,525) shares, respectively]........... (39,168,176) (80,695,126)
------------------ -------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS.............. 747,177 (39,673,186)
------------------ -------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS.................................................. (19,739,865) 14,201,000
NET ASSETS:
Beginning of year...................................................................... 501,775,305 487,574,305
------------------ -------------------
End of year............................................................................ $ 482,035,440 $ 501,775,305
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B28 THROUGH B32.
A2
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
CONSERVATIVE BALANCED PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$4,188,354,768).......................... $4,538,468,628
Receivable for investments sold short (Note
2)....................................... 111,621,197
Interest and dividends receivable.......... 44,683,414
Receivable for investments sold............ 1,376,096
--------------
Total Assets............................. 4,696,149,335
--------------
LIABILITIES
Investments sold short at value (proceeds
$111,621,197 including accrued interest)
(Note 2)................................. 110,481,637
Payable for investments purchased.......... 99,447,868
Payable to investment adviser.............. 6,126,182
Accrued expenses........................... 768,878
Bank overdraft............................. 453,239
Payable for capital stock repurchased...... 62,998
--------------
Total Liabilities........................ 217,340,802
--------------
NET ASSETS................................... $4,478,808,533
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 2,886,377
Paid-in capital in excess of par......... 4,094,460,572
--------------
4,097,346,949
Accumulated net realized gains on
investments.............................. 30,208,164
Net unrealized appreciation on
investments.............................. 351,253,420
--------------
Net assets, December 31, 1996.............. $4,478,808,533
--------------
--------------
Net asset value and redemption price per
share of 288,637,703 outstanding shares
of common stock (authorized 300,000,000
shares).................................. $ 15.52
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C>
INVESTMENT INCOME
Interest................................... $ 174,514,843
Dividends (net of $488,736 foreign
withholding tax)......................... 23,515,755
---------------
198,030,598
---------------
EXPENSES
Investment advisory fee.................... 23,052,572
Shareholders' reports...................... 1,367,000
Custodian expense.......................... 228,000
Accounting fees............................ 127,000
Audit fees................................. 70,400
Legal fees................................. 2,900
Directors' fees............................ 2,000
Miscellaneous expenses..................... 736
---------------
Total expenses........................... 24,850,608
Less: custodian fee credit................. (103,584)
---------------
Net expenses............................. 24,747,024
---------------
NET INVESTMENT INCOME........................ 173,283,574
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Investments.............................. 270,207,375
Short sales.............................. (100,129)
---------------
270,107,246
---------------
Net change in unrealized appreciation on:
Investments.............................. 60,263,761
Short sales.............................. 1,139,560
---------------
61,403,321
---------------
NET GAIN ON INVESTMENTS...................... 331,510,567
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 504,794,141
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 173,283,574 $ 155,293,990
Net realized gain on investments and short sales....................................... 270,107,246 167,342,297
Net change in unrealized appreciation on investments and short sales................... 61,403,321 264,773,974
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 504,794,141 587,410,261
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (174,034,704) (154,987,434)
Dividends in excess of net investment income........................................... (41,632) --
Distributions from net realized capital gains.......................................... (273,551,593) (133,660,168)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (447,627,929) (288,647,602)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [10,561,256 and 5,345,143 shares, respectively]..................... 167,668,924 81,026,772
Capital stock issued in reinvestment of dividends and distributions [29,086,855 and
19,023,739 shares, respectively]...................................................... 447,627,929 288,647,602
Capital stock repurchased [(8,429,995) and (15,343,313) shares, respectively].......... (134,428,797) (228,767,054)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 480,868,056 140,907,320
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 538,034,268 439,669,979
NET ASSETS:
Beginning of year...................................................................... 3,940,774,265 3,501,104,286
------------------ -------------------
End of year............................................................................ $ 4,478,808,533 $ 3,940,774,265
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B28 THROUGH B32.
A3
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
FLEXIBLE MANAGED PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$4,400,135,497).......................... $4,981,429,094
Cash....................................... 52,238
Receivable for securities sold short (Note
2)....................................... 113,630,151
Interest and dividends receivable.......... 33,277,907
Receivable for investments sold............ 31,241,005
--------------
Total Assets............................. 5,159,630,395
--------------
LIABILITIES
Payable for investments purchased.......... 141,168,642
Investments sold short, at value (proceeds
$113,630,151 including accrued interest)
(Note 2)................................. 112,461,581
Payable to investment adviser.............. 7,374,729
Accrued expenses........................... 1,390,075
Payable for capital stock repurchased...... 312,681
--------------
Total Liabilities........................ 262,707,708
--------------
NET ASSETS................................... $4,896,922,687
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 2,751,892
Paid-in capital in excess of par......... 4,273,689,804
--------------
4,276,441,696
Distributions in excess of net investment
income................................... (576,929)
Accumulated net realized gains on
investments.............................. 38,595,752
Net unrealized appreciation on
investments.............................. 582,462,168
--------------
Net assets, December 31, 1996.............. $4,896,922,687
--------------
--------------
Net asset value and redemption price per
share, 275,189,159 shares of common stock
outstanding (300,000,000 shares
authorized).............................. $ 17.79
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C>
INVESTMENT INCOME
Interest................................... $ 127,494,108
Dividends (net of $553,612 foreign
withholding tax)......................... 40,857,296
---------------
168,351,404
---------------
EXPENSES
Investment advisory fee.................... 27,247,674
Shareholders' reports...................... 1,423,000
Custodian expense.......................... 397,050
Accounting fees............................ 122,000
Audit fees................................. 75,600
Legal fees................................. 3,100
Directors' fees............................ 2,000
Miscellaneous expenses..................... 165
---------------
Total expenses........................... 29,270,589
Less: custodian fee credit................. (131,050)
---------------
Net expenses............................. 29,139,539
---------------
NET INVESTMENT INCOME........................ 139,211,865
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain (loss) on:
Investments.............................. 408,037,782
Foreign currencies....................... (69,542)
Short sales.............................. 77,891
---------------
408,046,131
---------------
Net change in unrealized appreciation on:
Investments.............................. 40,562,155
Foreign currencies....................... (1,902)
Short sales.............................. 1,168,570
---------------
41,728,823
---------------
NET GAIN ON INVESTMENTS...................... 449,774,954
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 588,986,819
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 139,211,865 $ 126,640,661
Net realized gain on investments, foreign currencies and short sales................... 408,046,131 292,267,835
Net change in unrealized appreciation on investments, foreign currencies and short
sales................................................................................. 41,728,823 410,041,102
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 588,986,819 828,949,598
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (142,089,785) (124,621,227)
Distributions from net realized capital gains.......................................... (458,909,559) (176,844,671)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (600,999,344) (301,465,898)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [8,998,637 and 8,486,525 shares, respectively]...................... 166,455,957 146,641,074
Capital stock issued in reinvestment of dividends and distributions [34,012,173 and
17,050,711 shares, respectively]...................................................... 600,999,344 301,465,898
Capital stock repurchased [(6,420,074) and (11,612,102) shares, respectively].......... (119,724,926) (195,926,134)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 647,730,375 252,180,838
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 635,717,850 779,664,538
NET ASSETS:
Beginning of year...................................................................... 4,261,204,837 3,481,540,299
------------------ -------------------
End of year............................................................................ $ 4,896,922,687 $ 4,261,204,837
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B28 THROUGH B32.
A4
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
STOCK INDEX PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$1,054,471,251).......................... $1,587,648,210
Cash....................................... 1,473
Interest and dividends receivable.......... 2,655,364
Receivable for investments sold............ 1,824,157
--------------
Total Assets............................. 1,592,129,204
--------------
LIABILITIES
Payable for investments purchased.......... 8,163,338
Payable to investment adviser.............. 1,337,596
Due to broker -- variation margin.......... 937,100
Accrued expenses........................... 259,878
Payable for capital stock repurchased...... 50,985
--------------
Total Liabilities........................ 10,748,897
--------------
NET ASSETS................................... $1,581,380,307
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 665,994
Paid-in capital in excess of par......... 1,047,578,597
--------------
1,048,244,591
Distributions in excess of net realized
gains on investments..................... (757,443)
Net unrealized appreciation on
investments.............................. 533,893,159
--------------
Net assets, December 31, 1996.............. $1,581,380,307
--------------
--------------
Net asset value and redemption price per
share of 66,599,412 outstanding shares of
common stock (authorized 100,000,000
shares).................................. $ 23.74
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C>
INVESTMENT INCOME
Dividends (net of $136,635 foreign
withholding tax)......................... $ 27,163,285
Interest................................... 2,879,860
---------------
30,043,145
---------------
EXPENSES
Investment advisory fee.................... 4,488,042
Shareholders' reports...................... 445,000
Accounting fees............................ 73,000
Custodian expense.......................... 43,000
Audit fees................................. 21,700
Directors' fees............................ 2,000
Legal fees................................. 900
Miscellaneous expenses..................... 48
---------------
5,073,690
---------------
NET INVESTMENT INCOME........................ 24,969,455
---------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on:
Investments.............................. 6,152,350
Futures.................................. 6,312,835
---------------
12,465,185
---------------
Net change in unrealized appreciation on:
Investments.............................. 225,458,987
Futures.................................. 1,063,850
---------------
226,522,837
---------------
NET GAIN ON INVESTMENTS...................... 238,988,022
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 263,957,477
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 24,969,455 $ 18,865,378
Net realized gain on investments....................................................... 12,465,185 12,159,728
Net change in unrealized gain on investments........................................... 226,522,837 225,882,882
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 263,957,477 256,907,988
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (25,100,782) (18,734,051)
Distributions from net realized capital gains.......................................... (17,273,757) (7,293,493)
Distributions in excess of net realized capital gains.................................. (196,333) --
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (42,570,872) (26,027,544)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [14,156,009 and 7,147,197 shares, respectively]..................... 310,087,550 130,752,103
Capital stock issued in reinvestment of dividends and distributions [1,875,670 and
1,331,092 shares, respectively]....................................................... 42,570,872 26,027,544
Capital stock repurchased [(1,109,676) and (1,230,332) shares, respectively]........... (23,942,788) (20,916,230)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 328,715,634 135,863,417
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 550,102,239 366,743,861
NET ASSETS:
Beginning of year...................................................................... 1,031,278,068 664,534,207
------------------ -------------------
End of year............................................................................ $ 1,581,380,307 $ 1,031,278,068
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B28 THROUGH B32.
A5
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
EQUITY PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$3,719,947,601).......................... $4,801,952,766
Cash....................................... 12,981
Interest and dividends receivable.......... 12,084,765
Receivable for investments sold............ 6,185,603
--------------
Total Assets............................. 4,820,236,115
--------------
LIABILITIES
Payable to investment adviser.............. 5,284,247
Accrued expenses........................... 815,009
Payable for capital stock repurchased...... 167,783
--------------
Total Liabilities........................ 6,267,039
--------------
NET ASSETS................................... $4,813,969,076
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 1,785,273
Paid-in capital in excess of par......... 3,694,408,950
--------------
3,696,194,223
Undistributed net investment income........ 3,240,354
Accumulated net realized gains on
investments.............................. 32,529,334
Net unrealized appreciation on
investments.............................. 1,082,005,165
--------------
Net assets, December 31, 1996.............. $4,813,969,076
--------------
--------------
Net asset value and redemption price per
share of 178,527,300 outstanding shares
of common stock (authorized 200,000,000
shares).................................. $ 26.96
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C>
INVESTMENT INCOME
Dividends (net of $912,241 foreign
withholding tax)......................... $ 71,930,568
Interest................................... 57,390,582
---------------
129,321,150
---------------
EXPENSES
Investment advisory fee.................... 19,216,733
Shareholders' reports...................... 1,485,000
Custodian expense.......................... 136,400
Accounting fees............................ 93,000
Audit fees................................. 71,800
Legal fees................................. 2,900
Directors' fees............................ 2,000
Miscellaneous expenses..................... 173
---------------
Total expenses........................... 21,008,006
Less: custodian fee credit................. (65,416)
---------------
Net expenses............................. 20,942,590
---------------
NET INVESTMENT INCOME........................ 108,378,560
---------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCIES
Net realized gain (loss) on:
Investments.............................. 344,166,641
Foreign currencies....................... (16,774)
---------------
344,149,867
---------------
Net change in unrealized appreciation on:
Investments.............................. 282,404,303
Foreign currencies....................... 6,569
---------------
282,410,872
---------------
NET GAIN ON INVESTMENTS...................... 626,560,739
---------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.................... $ 734,939,299
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 108,378,560 $ 73,682,361
Net realized gain on investments and foreign currencies................................ 344,149,867 234,571,951
Net change in unrealized appreciation on investments and foreign currencies............ 282,410,872 553,122,748
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 734,939,299 861,377,060
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (107,745,221) (71,456,482)
Distributions from net realized capital gains.......................................... (422,203,368) (132,219,093)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (529,948,589) (203,675,575)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [13,547,538 and 15,687,254 shares, respectively].................... 368,210,773 374,478,697
Capital stock issued in reinvestment of dividends and distributions [20,011,095 and
8,038,373 shares, respectively]....................................................... 529,948,589 203,675,575
Capital stock repurchased [(3,776,507) and (1,673,110) shares, respectively]........... (102,985,123) (39,823,647)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 795,174,239 538,330,625
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 1,000,164,949 1,196,032,110
NET ASSETS:
Beginning of year...................................................................... 3,813,804,127 2,617,772,017
------------------ -------------------
End of year............................................................................ $ 4,813,969,076 $ 3,813,804,127
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B28 THROUGH B32.
A6
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
GLOBAL PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$460,602,835)............................ $ 571,212,501
Foreign currency, at value (cost:
$14,787,117)............................. 14,798,221
Receivable for investments sold............ 4,069,896
Forward currency contracts -- amount
receivable from counterparties........... 692,778
Dividends and interest receivable.......... 483,593
Other assets............................... 320,523
--------------
Total Assets............................. 591,577,512
--------------
LIABILITIES
Payable for investments purchased.......... 9,399,505
Payable to investment adviser.............. 1,044,630
Accrued expenses and other liabilities..... 411,684
Payable for capital stock repurchased...... 91,654
--------------
Total Liabilities........................ 10,947,473
--------------
NET ASSETS................................... $ 580,630,039
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 325,197
Paid-in capital in excess of par......... 467,274,634
--------------
467,599,831
Undistributed net investment income........ 1,317,330
Accumulated net realized gains on
investments.............................. 489,279
Net unrealized appreciation on investments
and foreign currencies................... 111,223,599
--------------
Net assets, December 31, 1996.............. $ 580,630,039
--------------
--------------
Net asset value and redemption price per
share of 32,519,654 outstanding shares of
common stock (authorized 100,000,000
shares).................................. $ 17.85
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C>
INVESTMENT INCOME
Dividends (net of $555,343 foreign
withholding tax)......................... $ 6,536,733
Interest................................... 1,063,491
---------------
7,600,224
---------------
EXPENSES
Investment advisory fee.................... 3,671,568
Custodian expense.......................... 400,000
Shareholders' reports...................... 190,000
Accounting fees............................ 177,000
Audit fees................................. 41,000
Directors' fees............................ 2,000
Legal fees................................. 200
Miscellaneous expenses..................... 8,534
---------------
4,490,302
---------------
NET INVESTMENT INCOME........................ 3,109,922
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain on:
Investments.............................. 15,872,383
Foreign currencies....................... 3,900,113
---------------
19,772,496
---------------
Net change in unrealized appreciation on:
Investments.............................. 67,917,996
Foreign currencies....................... (2,616,550)
---------------
65,301,446
---------------
NET GAIN ON INVESTMENTS AND FOREIGN
CURRENCIES................................... 85,073,942
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 88,183,864
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 3,109,922 $ 1,620,950
Net realized gain on investments and foreign currencies................................ 19,772,496 13,763,168
Net change in unrealized appreciation on investments and foreign currencies............ 65,301,446 39,034,318
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 88,183,864 54,418,436
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (3,109,922) (5,982,859)
Distributions from net realized capital gains.......................................... (19,019,488) (7,583,630)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (22,129,410) (13,566,489)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [7,307,979 and 2,817,622 shares, respectively]...................... 123,508,873 42,294,857
Capital stock issued in reinvestment of dividends and distributions [1,310,966 and
872,571 shares, respectively]......................................................... 22,129,410 13,566,489
Capital stock repurchased [1,820,909 and (2,794,423) shares, respectively]............. (30,587,232) (41,558,737)
Initial capitalization repurchased by The Prudential [(36,088) and (48,679) shares,
respectively]......................................................................... (575,000) (789,000)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 114,476,051 13,513,609
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 180,530,505 54,365,556
NET ASSETS:
Beginning of year...................................................................... 400,099,534 345,733,978
------------------ -------------------
End of year............................................................................ $ 580,630,039 $ 400,099,534
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B28 THROUGH B32.
A7
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
SCHEDULE OF INVESTMENTS
DIVERSIFIED BOND PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 99.0%
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS -- 98.7% (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
DOMESTIC CORPORATE BONDS -- 62.8%
AGRICULTURAL EQUIPMENT -- 0.7%
Agco Corp.,
8.50%, 03/15/06............................... Ba3 $ 5,000 $ 5,059,000
--------------
AIRLINES -- 5.2%
Boeing Co.,
8.75%, 08/15/21............................... A1 6,250 7,356,125
Delta Air Lines, Inc.,
7.79%, 12/01/98............................... Baa3 1,000 1,020,710
8.38%, 06/12/98............................... Baa3 2,000 2,054,340
9.875%, 05/15/00.............................. Baa3 6,000 6,499,320
United Air Lines, Inc.,
9.75%, 08/15/21............................... Baa3 4,500 5,333,580
10.67%, 05/01/04.............................. Baa3 7,000 8,278,830
11.21%, 05/01/14.............................. Baa3 5,000 6,555,850
--------------
37,098,755
--------------
CABLE & PAY TELEVISION SYSTEMS -- 1.5%
Continental Cablevision, Inc.,
8.30%, 05/15/06............................... Baa2 3,500 3,728,445
Tele-Communications, Inc.,
10.125%, 04/15/22............................. Ba1 6,300 6,917,526
--------------
10,645,971
--------------
COMPUTERS -- 0.5%
Digital Equipment Corp.,
7.125%, 10/15/02.............................. Ba1 4,000 3,817,000
--------------
ENTERTAINMENT -- 0.7%
Royal Caribbean Cruises Ltd.,
11.375%, 05/15/02............................. Ba2 5,000 5,325,000
--------------
FINANCIAL SERVICES -- 27.7%
Advanta Mortgage Loan Trust, Series 1994-3
8.49%, 01/25/26............................... Aaa 8,500 8,802,812
Aristar, Inc.,
5.75%, 07/15/98............................... A3 2,000 1,987,160
7.50%, 07/01/99............................... Baa1 2,000 2,050,740
Associates Corp. of North America,
8.375%, 01/15/98.............................. Aa3 500 511,570
Bank of New York,
7.97%, 12/31/26............................... A1 5,000 5,049,700
BankAmerica Corp.,
6.031%, 05/17/99.............................. A 10,000 10,075,000
Chase Manhattan Corp.,
8.00%, 06/15/99............................... A2 2,000 2,071,620
Chemical Bank,
6.625%, 08/15/05.............................. A1 2,000 1,942,880
Chrysler Financial Corp.,
9.50%, 12/15/99............................... A3 5,000 5,406,550
Conseco, Inc.,
8.70%, 11/15/26............................... BBB 10,500 10,590,510
CoreStates Financial Corp.,
8.00%, 12/15/26............................... A1 10,000 10,000,600
Enterprise Rent-A-Car USA Finance Co.,
7.00%, 06/15/00............................... Baa3 9,000 9,108,900
7.875%, 03/15/98.............................. Baa2 5,000 5,111,250
8.75%, 12/15/99............................... Baa2 3,000 3,177,300
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
First Tennessee National Corp., B.A.,
8.07%, 01/06/27............................... A3 $ 4,500 $ 4,474,800
First Union Corp.,
7.85%, 01/01/27............................... A1 10,000 9,908,750
Ford Motor Credit Co.,
5.75%, 01/25/01............................... A1 4,000 3,872,240
6.25%, 02/26/98............................... A1 3,000 3,007,470
General Motors Acceptance Corp.,
8.40%, 10/15/99............................... A3 3,700 3,887,627
Lehman Brothers Holdings, Inc.,
6.84%, 09/25/98............................... Baa1 5,000 5,037,850
Liberty Mutual Insurance Co.,
8.20%, 05/04/07............................... A2 8,250 8,761,005
Mellon Bank Corp.,
7.995%, 01/15/27.............................. A2 10,000 9,875,000
Nationwide CSN Trust,
9.875%, 02/15/25.............................. A1 5,000 5,559,500
Principal Mutual Life Insurance,
7.875%, 03/01/24.............................. Aa3 5,000 4,901,550
Reliastar Financial Corp.,
6.625%, 09/15/03.............................. A3 5,000 4,912,500
Republic Bank of New York Corp.,
7.53%, 12/04/26............................... A1 5,000 4,900,615
Salomon, Inc.,
5.98%, 02/02/98............................... Baa1 10,000 9,995,100
7.00%, 05/15/99............................... Baa1 10,000 10,079,000
7.25%, 05/01/01............................... Baa1 2,250 2,271,285
State Street Capital Corp.,
7.94%, 12/30/26............................... A1 12,000 11,952,000
SunAmerica, Inc.,
6.20%, 10/31/99............................... Baa1 5,000 4,975,000
Union Planters Corp.,
8.20%, 12/15/26............................... BB+ 5,000 4,950,000
Wells Fargo & Co.,
7.96%, 12/15/26............................... A1 10,000 10,100,000
--------------
199,307,884
--------------
FOREST PRODUCTS -- 1.0%
Boise Cascade Corp.,
9.875%, 02/15/01.............................. Baa3 1,000 1,058,790
Westvaco Corp.,
9.75%, 06/15/20............................... A1 5,000 6,269,800
--------------
7,328,590
--------------
HEALTH CARE -- 2.9%
Columbia/HCA Healthcare Corp.,
7.69%, 06/15/25............................... A2 12,000 12,355,680
Tenet Healthcare Corp.,
8.625%, 12/01/03.............................. Ba1 6,500 6,857,500
9.625%, 09/01/02.............................. Ba1 1,500 1,642,500
--------------
20,855,680
--------------
MACHINERY & EQUIPMENT -- 0.4%
Crane Co.,
7.25%, 06/15/99............................... Baa2 3,000 3,028,560
--------------
</TABLE>
B1
<PAGE>
DIVERSIFIED BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
MEDIA -- 7.8%
News America Holdings, Inc.,
7.50%, 03/01/00............................... Baa3 $ 6,000 $ 6,137,160
7.75%, 12/01/45............................... Baa3 7,000 6,518,330
Paramount Communications, Inc.,
7.50%, 01/15/02............................... Ba2 5,000 4,995,850
Time Warner, Inc.,
7.75%, 06/15/05............................... Ba1 9,800 9,858,114
8.18%, 08/15/07............................... Ba1 4,000 4,104,280
8.375%, 07/15/33.............................. Baa3 6,000 6,021,540
Turner Broadcasting System, Inc.,
7.40%, 02/01/04............................... Ba1 13,500 13,374,855
Viacom, Inc.,
7.75%, 06/01/05............................... Ba2 5,000 4,923,350
--------------
55,933,479
--------------
MISCELLANEOUS-CONSUMER GROWTH -- 0.4%
Whitman Corp.,
7.50%, 08/15/01............................... Baa2 3,000 3,075,540
--------------
OIL & GAS -- 2.3%
Occidental Petroleum Corp.,
10.125%, 11/15/01............................. Baa2 5,000 5,695,150
11.125%, 08/01/10............................. Baa2 5,000 6,535,300
Parker & Parsley Petroleum Co.,
8.25%, 08/15/07............................... Baa3 4,000 4,300,600
--------------
16,531,050
--------------
OIL & GAS EQUIPMENT & SERVICES -- 1.1%
B.J. Services Co.,
7.00%, 02/01/06............................... Ba1 5,000 4,859,550
Noble Drilling Corp.,
9.125%, 07/01/06.............................. Ba2 3,000 3,225,000
--------------
8,084,550
--------------
RESTAURANTS -- 1.3%
Darden Restaurants, Inc.,
7.125%, 02/01/16.............................. Baa1 10,000 9,021,700
--------------
RETAIL -- 3.7%
Federated Department Stores, Inc.,
8.125%, 10/15/02.............................. Ba1 9,000 9,225,000
8.50%, 06/15/03............................... Ba1 11,000 11,440,000
Kmart Corp.,
9.80%, 06/15/98............................... Ba3 2,000 2,035,000
Rite Aid Corp.,
6.70%, 12/15/01............................... A3 4,000 3,986,000
--------------
26,686,000
--------------
TELECOMMUNICATIONS -- 2.6%
Impsat Corp.,
12.125%, 07/15/03............................. B2 3,000 3,180,000
MFS Communications Co., Inc., Sr. Disc. Notes,
Zero Coupon (until 01/15/99)
9.375%, 01/15/04.............................. B1 9,000 6,547,500
TCI Communications, Inc.,
6.875%, 02/15/06.............................. Ba1 10,000 9,087,400
--------------
18,814,900
--------------
UTILITIES -- 3.0%
Arkla, Inc.,
9.32%, 12/18/00............................... Ba3 2,000 2,136,280
El Paso Electric Company,
9.40%, 05/01/11............................... Ba3 4,000 4,240,000
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Pennsylvania Power & Light Co.,
9.375%, 07/01/21.............................. A3 $ 1,150 $ 1,288,840
Texas Utilities Electric Co.,
5.875%, 04/01/98.............................. Baa2 4,000 3,991,560
Transco Energy Co.,
9.125%, 05/01/98.............................. Baa2 3,000 3,113,820
9.375%, 08/15/01.............................. Baa2 6,000 6,613,920
--------------
21,384,420
--------------
FOREIGN CORPORATE BONDS -- 8.1%
Australia & New Zealand Banking Group, Ltd.,
(Australia)
6.25%, 02/01/04............................... A1 3,000 2,889,780
Banco de Commercio Exterior de Colombia, SA,
(Colombia)
8.625%, 06/02/00.............................. Baa3 2,000 2,077,500
Banco Ganadero, SA, (Colombia)
9.75%, 08/26/99............................... Baa3 4,100 4,315,250
Canadian Pacific Forest Products Ltd., (Canada)
10.25%, 01/15/03.............................. Baa1 4,000 4,360,000
Compania Sud Americana de Vapores, SA, (Chile)
7.375%, 12/08/03.............................. BBB 3,000 2,955,000
Deutsche Bank, (Germany)
6.70%, 12/13/06............................... Aa1 4,350 4,280,248
Kansallis-Osake Pankki, N.Y., (Finland)
8.65%, 01/01/49............................... A3 5,000 5,220,750
10.00%, 05/01/02.............................. A3 5,000 5,674,500
National Australia Bank, Ltd., (Australia)
9.70%, 10/15/98............................... A1 1,700 1,801,609
National Power Corp., (Philipines)
8.40%, 12/15/16............................... Ba2 4,900 4,875,500
Ontario, Province of Canada, (Canada)
15.75%, 03/15/12.............................. Aa3 3,475 3,756,127
Polysindo Int'l Finance Co., (Netherlands)
11.375%, 06/15/06............................. Ba3 5,000 5,462,500
PT Alatief Freeport Financial Co., (Netherlands)
9.75%, 04/15/01............................... Ba1 5,750 6,286,187
Rogers Cablesystems, Inc., (Canada)
10.00%, 03/15/05.............................. Ba3 4,000 4,260,000
--------------
58,214,951
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 14.0%
Federal Farm Credit Bank,
8.65%, 10/01/99............................... 150 159,258
International Bank for Reconstruction and
Development,
12.375%, 10/15/02............................. 750 956,708
Resolution Funding Corp.,
Zero Coupon, 10/15/15......................... 17,100 4,670,694
8.125%, 10/15/19.............................. 700 791,434
8.625%, 01/15/21.............................. 200 237,562
</TABLE>
B2
<PAGE>
DIVERSIFIED BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
United States Treasury Bonds,
6.75%, 8/15/26 (b)............................ 940 947,050
11.25%, 02/15/15.............................. 4,000 5,906,880
12.00%, 08/15/13.............................. 20,000 28,609,400
United States Treasury Notes,
5.75%, 08/15/03............................... 10,450 10,136,500
5.875%, 11/30/01.............................. 3,600 3,547,692
6.50%, 10/15/06............................... 13,100 13,171,657
6.625%, 06/30/01.............................. 14,430 14,662,179
7.25%, 02/15/98............................... 5,000 5,082,050
7.75%, 12/31/99............................... 5,750 6,014,155
7.875%, 11/15/04.............................. 3,600 3,928,500
12.50%, 08/15/14.............................. 1,500 2,241,795
--------------
101,063,514
--------------
U.S. GOVERNMENT AGENCY MORTGAGE BACKED SECURITIES -- 4.6%
Federal National Mortgage Association,
Zero Coupon, 07/24/06......................... 9,000 4,748,940
9.00%, 10/01/16-09/01/21...................... 623 663,006
Government National Mortgage Association,
7.50%, 05/20/02-02/15/26...................... 27,222 27,613,035
--------------
33,024,981
--------------
FOREIGN GOVERNMENT BONDS -- 9.2%
Republic of Argentina, (Argentina)
6.625%, 03/31/05.............................. B1 4,900 4,293,625
Republic of Colombia, (Colombia)
8.00%, 06/14/01............................... Baa3 1,600 1,624,000
8.75%, 10/06/99............................... Baa3 3,500 3,657,500
Republic of Philippines, (The Philippines)
8.75%, 10/07/16............................... B1 4,675 4,819,925
Republic of Poland, (Poland)
4.00%, (until 10/27/98)
5.00%, (until 10/27/99)
6.00%, (until 10/27/02)
7.00%, 10/27/14............................... Baa3 16,000 13,540,000
Republic of Venezuela, (Venezuela)
6.50%, 12/18/07 (a)........................... Ba2 3,000 2,640,000
Rio de Janeiro, (Brazil)
10.375%, 07/12/99............................. B1 5,000 5,137,500
United Mexican States, (Mexico)
7.562%, 08/06/01 (a).......................... Baa3 25,000 25,058,750
11.50%, 05/15/26.............................. Ba2 5,000 5,287,500
--------------
66,058,800
--------------
TOTAL LONG-TERM BONDS
(cost $696,315,713)...................................................... 710,360,325
--------------
PREFERRED STOCK -- 0.3% SHARES
---------
GAS PIPELINES -- 0.3%
TransCanada Pipelines, Ltd.
(cost $2,000,000 )............................ 80,000 2,080,000
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $698,315,713)...................................................... 712,440,325
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS -- 4.3% (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
CERTIFICATES OF DEPOSIT -- DOMESTIC -- 0.7%
Advanta National Bank, C.D.,
6.26%, 09/01/97............................... Baa $ 5,000 $ 5,005,000
--------------
OTHER CORPORATE OBLIGATIONS -- 1.4%
Citicorp,
8.50%, 02/24/97............................... A1 3,000 3,010,410
General Motors Acceptance Corp.,
7.50%, 11/04/97............................... A3 2,000 2,027,180
Mellon Bank Corp.,
6.50%, 12/01/97............................... A2 2,000 2,007,580
Potomac Capital Investment Corp.,
6.19%, 04/28/97............................... A3 3,500 3,535,000
--------------
10,580,170
--------------
REPURCHASE AGREEMENT -- 2.2%
Joint Repurchase Agreement Account,
6.613%, 01/02/97 (Note 5)..................... 15,414 15,414,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $30,945,800)....................................................... 30,999,170
--------------
TOTAL INVESTMENTS BEFORE SHORT SALE -- 103.3%
(cost $729,261,513; Note 6).............................................. 743,439,495
--------------
INVESTMENT SOLD SHORT -- (3.6%)
United States Treasury Bond,
6.75%, 8/15/26
(proceeds $26,546,678; Note 2)................ 25,450 (26,310,748)
--------------
TOTAL INVESTMENTS, NET OF SHORT SALES -- 99.7%................... 717,128,747
OTHER ASSETS IN EXCESS OF
LIABILITIES -- 0.3%............................................ 3,087,834
--------------
TOTAL NET ASSETS -- 100.0%....................................... $ 720,216,581
--------------
--------------
<FN>
The following abbreviations are used in portfolio descriptions:
B.A. Bankers' Acceptances
C.D. Certificates of Deposit
SA Sociedad Anonima (Spanish Corporation) or Societe
Anonyme (French Corporation)
(a) Indicates a variable rate security.
(b) Deposited with the custodian to cover an open short sale
transaction.
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B28 THROUGH B32.
B3
<PAGE>
GOVERNMENT INCOME PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 97.6%
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (000) (NOTE 2)
------------- --------------
<S> <C> <C>
ASSET BACKED SECURITIES -- 3.2%
Chase Manhattan Credit Card Trust,
5.735%, 08/15/01, Series 1995-2 (a)........... $ 12,500 $ 12,507,750
Equicon Home Equity Loan Trust,
7.850%, 03/18/14, Series 1994-2............... 2,693 2,751,498
--------------
15,259,248
--------------
COLLATERALIZED MORTGAGE OBLIGATION -- 2.1%
Main Place Funding,
5.877%, 07/17/98 (a).......................... 10,000 10,018,750
--------------
FOREIGN -- 4.6%
United Mexican States,
7.563%, 08/06/01.............................. 22,000 22,051,700
--------------
MORTGAGE PASS-THROUGHS -- 26.3%
Federal Home Loan Mortgage Corp.,
7.387%, 06/01/25 (a).......................... 11,981 12,310,286
Federal National Mortgage Association,
8.000%, 03/01/22-05/01/26..................... 25,403 25,909,961
8.500%, 05/01/24-04/01/25..................... 30,853 32,075,358
9.000%, 02/01/25-04/01/25..................... 13,122 13,859,399
Government National Mortgage Association,
7.500%, 12/15/25-02/15/26..................... 19,696 19,729,369
8.000%, 09/15/23-10/15/25..................... 22,291 22,794,555
--------------
126,678,928
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 61.4%
Israel AID,
Zero Coupon, 03/15/06-08/15/09................ 38,272 18,501,606
Resolution Funding Corp.,
Zero Coupon, 07/15/16......................... 30,000 7,764,600
8.125%, 10/15/19.............................. 4,200 4,748,604
Small Business Administration Participation
Certificate,
7.200%, 10/01/16.............................. 20,000 20,097,600
Student Loan Marketing Association,
5.880%, 02/06/01.............................. 19,290 18,861,955
United States Treasury Bonds,
8.125%, 08/15/19.............................. 35,000 40,485,200
12.000%, 08/15/13............................. 24,100 34,474,327
United States Treasury Notes,
6.250%, 04/30/01.............................. 15,000 15,032,850
6.250%, 10/31/01.............................. 14,600 14,613,724
6.500%, 05/31/01.............................. 5,000 5,054,700
6.500%, 08/31/01.............................. 25,000 25,273,500
6.500%, 11/15/26.............................. 5,000 4,907,050
6.875%, 03/31/00.............................. 20,000 20,450,000
7.750%, 12/31/99.............................. 55,000 57,526,700
10.625%, 08/15/15............................. 6,000 8,483,460
--------------
296,275,876
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $467,932,592)............................................ 470,284,502
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENT -- 1.3% (000) (NOTE 2)
------------- --------------
<S> <C> <C>
REPURCHASE AGREEMENT
Joint Repurchase Agreement Account,
6.613%, 01/02/97 (cost $6,517,000) (Note 5)... $ 6,517 $ 6,517,000
--------------
TOTAL INVESTMENTS -- 98.9%
(cost $474,449,592; Note 6).................................... 476,801,502
OTHER ASSETS IN EXCESS OF
LIABILITIES -- 1.1%............................................ 5,233,938
--------------
TOTAL NET ASSETS -- 100.0%....................................... $ 482,035,440
--------------
--------------
(a) The interest rate shown reflects the current rate of
variable rate instruments.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B28 THROUGH B32.
B4
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 91.2%
VALUE
COMMON STOCKS -- 36.7% SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AEROSPACE/DEFENSE -- 0.6%
GenCorp, Inc.................................... 629,100 $ 11,402,438
Litton Industries, Inc. (a)..................... 241,400 11,496,675
UNC, Inc. (a)................................... 278,800 3,345,600
--------------
26,244,713
--------------
AIRLINES -- 1.2%
AMR Corp. (a)................................... 378,700 33,372,937
USAir Group, Inc. (a)........................... 776,100 18,141,337
--------------
51,514,274
--------------
AUTOS - CARS & TRUCKS -- 0.5%
A.O. Smith Corp................................. 450,000 13,443,750
Ford Motor Co................................... 295,900 9,431,812
--------------
22,875,562
--------------
AUTOMOBILES & TRUCKS -- 1.8%
Chrysler Corp................................... 929,500 30,673,500
General Motors Corp............................. 464,700 25,907,025
Goodyear Tire & Rubber Co....................... 250,800 12,884,850
Mascotech, Inc.................................. 604,200 9,893,775
--------------
79,359,150
--------------
CHEMICALS -- 0.1%
Millenium Chemicals, Inc. (a)................... 188,227 3,341,029
--------------
CHEMICALS - SPECIALTY -- 1.0%
Ferro Corp...................................... 609,100 17,283,212
M.A. Hanna Co................................... 689,950 15,092,656
OM Group, Inc................................... 435,400 11,755,800
--------------
44,131,668
--------------
COMMERCIAL SERVICES -- 0.3%
BW/IP, Inc. (Class 'A' Stock)................... 365,600 6,032,400
IMO Industries, Inc. (a)........................ 575,600 1,798,750
Parker-Hannifin Corp............................ 197,450 7,651,187
--------------
15,482,337
--------------
COMPUTER HARDWARE -- 1.4%
Amdahl Corp. (a)................................ 836,600 10,143,775
Digital Equipment Corp. (a)..................... 293,500 10,676,063
International Business Machines Corp............ 278,900 42,113,900
--------------
62,933,738
--------------
CONSTRUCTION -- 0.2%
McDermott International, Inc.................... 481,900 10,601,800
--------------
CONSUMER SERVICES -- 0.4%
ADT Ltd. (a).................................... 576,300 13,182,863
SPS Transaction Services, Inc. (a).............. 185,900 2,834,975
--------------
16,017,838
--------------
CONTAINERS & PACKAGING -- 0.2%
Sealed Air Corp. (a)............................ 183,600 7,642,350
--------------
DIVERSIFIED CONSUMER PRODUCTS -- 1.0%
RJR Nabisco Holdings Corp....................... 791,400 26,907,600
Whitman Corp.................................... 849,000 19,420,875
--------------
46,328,475
--------------
DRUGS AND MEDICAL SUPPLIES -- 0.3%
United States Surgical Corp..................... 339,700 13,375,688
--------------
ELECTRICAL EQUIPMENT -- 1.0%
Belden, Inc..................................... 457,600 16,931,200
Westinghouse Electric Corp...................... 1,487,300 29,560,087
--------------
46,491,287
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
ELECTRONICS -- 1.3%
National Semiconductor Corp. (a)................ 964,000 $ 23,497,500
Texas Instruments, Inc.......................... 557,700 35,553,375
--------------
59,050,875
--------------
ENGINEERING & CONSTRUCTION -- 0.2%
Giant Cement Holdings, Inc. (a)................. 400,400 6,456,450
--------------
FINANCIAL SERVICES -- 2.9%
Alex Brown, Inc................................. 278,100 20,162,250
Lehman Brothers Holdings, Inc................... 1,597,400 50,118,425
Merrill Lynch & Co., Inc........................ 185,900 15,150,850
Morgan Stanley Group, Inc....................... 209,200 11,950,550
Salomon, Inc.................................... 650,700 30,664,237
--------------
128,046,312
--------------
FOREST PRODUCTS -- 1.7%
Champion International Corp..................... 650,700 28,142,775
Louisiana-Pacific Corp.......................... 650,700 13,746,037
Mead Corp....................................... 326,100 18,954,562
Willamette Industries, Inc...................... 238,100 16,577,712
--------------
77,421,086
--------------
GAS PIPELINES -- 0.3%
Western Gas Resources, Inc...................... 659,000 12,685,750
--------------
HOUSEHOLD PRODUCTS -- 0.3%
Jan Bell Marketing, Inc. (a).................... 964,200 1,988,663
Leggett & Platt, Inc............................ 366,600 12,693,525
--------------
14,682,188
--------------
HOUSING RELATED -- 1.1%
Hanson, PLC, ADR, (United Kingdom).............. 2,540,300 17,147,025
Owens Corning................................... 620,800 26,461,600
--------------
43,608,625
--------------
INSURANCE -- 3.0%
Allstate Corp................................... 124,999 7,234,317
Equitable of Iowa Companies..................... 346,500 15,895,687
Financial Security Assurance Holdings, Ltd...... 218,100 7,170,037
PennCorp Financial Group, Inc................... 513,500 18,486,000
Provident Companies, Inc........................ 170,900 8,267,287
Reinsurance Group of America, Inc............... 487,800 22,987,575
TIG Holdings, Inc............................... 546,900 18,526,237
Trenwick Group, Inc............................. 273,300 12,640,125
W.R. Berkley Corp............................... 180,100 9,140,075
Western National Corp........................... 836,600 16,104,550
--------------
136,451,890
--------------
INTEGRATED PRODUCERS -- 0.2%
Murphy Oil Corp................................. 177,400 9,867,875
--------------
MACHINERY -- 1.4%
Case Corp....................................... 597,500 32,563,750
DT Industries, Inc.............................. 226,100 7,913,500
Paxar Corp...................................... 1,232,660 21,263,385
--------------
61,740,635
--------------
MEDIA -- 1.6%
Central Newspapers, Inc. (Class 'A' Stock)...... 319,800 14,071,200
Gannett Co., Inc................................ 185,900 13,919,262
Hollinger International, Inc.................... 155,600 1,789,400
Houghton Mifflin Co............................. 185,900 10,526,587
Knight-Ridder, Inc.............................. 371,800 14,221,350
Lee Enterprises, Inc............................ 325,300 7,563,225
</TABLE>
B5
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
MEDIA -- CONT'D
McGraw-Hill, Inc................................ 185,500 $ 8,556,187
Media General, Inc. (Class 'A' Stock)........... 59,000 1,784,750
--------------
72,431,961
--------------
METALS-NON FERROUS -- 1.1%
Aluminum Company of America..................... 750,500 47,844,375
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 2.0%
Danaher Corp.................................... 435,800 20,319,175
Donaldson, Inc.................................. 372,200 12,468,700
IDEX Corp....................................... 275,300 10,977,587
Mark IV Industries, Inc......................... 558,793 12,642,692
Trinity Industries, Inc......................... 358,300 13,436,250
Wolverine Tube, Inc. (a)........................ 259,800 9,157,950
York International Corp......................... 185,000 10,336,875
--------------
89,339,229
--------------
MISCELLANEOUS - INDUSTRIAL -- 0.8%
Coltec Industries, Inc. (a)..................... 299,900 5,660,613
Global Industrial Technologies, Inc. (a)........ 390,700 8,644,238
Material Sciences Corp. (a)..................... 649,600 11,692,800
Titan Wheel International, Inc.................. 695,550 8,868,263
--------------
34,865,914
--------------
OIL - EXPLORATION & PRODUCTION -- 1.9%
Basin Exploration, Inc. (a)..................... 142,700 891,875
Cabot Oil & Gas Corp. (Class 'A' Stock)......... 552,500 9,461,563
Enron Oil & Gas Co.............................. 309,300 7,809,825
Mesa, Inc. (a).................................. 2,711,400 14,234,850
Noble Affiliates, Inc........................... 325,300 15,573,738
Oryx Energy Co. (a)............................. 789,500 19,540,125
Parker & Parsley Petroleum Co................... 248,600 9,136,050
Seagull Energy Corp. (a)........................ 373,400 8,214,800
--------------
84,862,826
--------------
OIL & GAS -- 1.2%
Societe Nationale Elf Aquitaine, ADR,
(France)...................................... 1,199,200 54,263,800
--------------
OIL SERVICES -- 0.6%
Coflexip, ADR, (France)......................... 650,700 17,080,875
Weatherford Enterra, Inc. (a)................... 298,653 8,959,590
--------------
26,040,465
--------------
PETROLEUM SERVICES -- 0.1%
ICO, Inc........................................ 492,100 3,014,112
--------------
RAILROADS -- 0.2%
Burlington Northern, Inc........................ 117,900 10,183,612
--------------
REAL ESTATE DEVELOPMENT -- 0.4%
Crescent Real Estate Equities, Inc.............. 339,400 17,903,350
--------------
RETAIL -- 1.6%
Bombay Company, Inc. (a)........................ 890,300 4,117,638
Charming Shoppes, Inc. (a)...................... 2,788,600 14,117,288
Dillard Department Stores, Inc. (a)............. 202,900 6,264,538
K mart Corp. (a)................................ 1,913,600 19,853,600
Toys 'R' Us, Inc. (a)........................... 557,700 16,731,000
Woolworth Corp. (a)............................. 557,700 12,199,688
--------------
73,283,752
--------------
STEEL -- 0.9%
Bethlehem Steel Corp. (a)....................... 929,500 8,365,500
LTV Corp........................................ 1,408,200 16,722,375
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
National Steel Corp. (Class 'B' Stock) (a)...... 289,300 $ 2,676,025
USX-U.S. Steel Group............................ 418,300 13,124,163
--------------
40,888,063
--------------
TELECOMMUNICATIONS -- 0.1%
Deutsche Telekom, ADR, (Germany) (a)............ 309,500 6,306,063
--------------
TEXTILES -- 1.3%
Farah, Inc. (a)................................. 249,300 1,932,075
Fieldcrest Cannon, Inc. (a)..................... 427,500 6,840,000
Fruit of the Loom, Inc. (Class 'A' Stock) (a)... 464,700 17,600,513
Owens-Illinois, Inc. (a)........................ 513,700 11,686,675
Phillips-Van Heusen Corp........................ 578,500 8,315,938
Tultex Corp. (a)................................ 558,300 3,908,100
V.F. Corp....................................... 143,700 9,699,750
--------------
59,983,051
--------------
TOBACCO -- 0.4%
Philip Morris Companies, Inc.................... 87,300 9,832,163
UST, Inc........................................ 250,400 8,106,700
--------------
17,938,863
--------------
TRUCKING/SHIPPING -- 0.1%
Yellow Corp..................................... 482,100 6,930,188
--------------
TOTAL COMMON STOCKS
(cost $1,310,419,852).......................................... 1,642,431,219
--------------
PREFERRED STOCKS -- 1.0%
FINANCIAL SERVICES -- 0.8%
Central Hispano Corp............................ 225,900 5,986,350
Central Hispano Financial Services.............. 1,000,000 25,200,000
--------------
31,186,350
--------------
GAS PIPELINES -- 0.1%
TransCanada Pipelines, Ltd...................... 140,000 3,640,000
--------------
MEDIA -- 0.0%
Times Mirror Co. (Cum. Conv.), Series B......... 1 28
--------------
PETROLEUM -- 0.1%
Mesa, Inc. (Conv. Pfd.)......................... 914,929 5,832,671
--------------
TOTAL PREFERRED STOCKS
(cost $36,848,291)............................................. 40,659,049
--------------
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS -- 53.5% (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
DOMESTIC CORPORATE BONDS -- 36.6%
AEROSPACE -- 0.2%
Northrop Grumman Corp.,
7.875%, 03/01/26.............................. Baa3 $ 7,500 7,517,475
--------------
AGRICULTURAL EQUIPMENT -- 0.1%
Agco Corp.,
8.50%, 03/15/06............................... Ba3 6,500 6,576,700
--------------
AIRLINES -- 2.9%
Delta Air Lines, Inc.,
10.125%, 05/15/10............................. Baa3 20,000 24,145,800
10.375%, 02/01/11............................. Ba1 28,405 34,799,534
</TABLE>
B6
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
United Air Lines, Inc.,
9.75%, 08/15/21............................... Baa2 $ 10,125 $ 12,000,555
10.67%, 05/01/04.............................. Baa3 29,665 35,084,499
11.21%, 05/01/14.............................. Baa3 18,433 24,168,797
--------------
130,199,185
--------------
ASSET-BACKED SECURITIES -- 0.2%
Banc One Credit Card Master Trust,
7.75%, 12/15/99............................... A2 5,100 5,178,081
Standard Credit Card Master Trust,
5.95%, 10/07/04............................... Aaa 4,650 4,469,813
--------------
9,647,894
--------------
CABLE & PAY TELEVISION SYSTEMS -- 1.9%
Continental Cablevision, Inc.,
8.30%, 05/15/06............................... Ba2 11,200 11,931,024
8.625%, 08/15/03.............................. Ba2 27,050 29,271,076
Tele-Communications, Inc.,
7.875%, 08/01/13.............................. Baa3 2,500 2,301,450
9.25%, 04/15/02............................... Baa3 21,425 22,694,860
9.80%, 02/01/12............................... B2 7,000 7,575,400
9.875%, 06/15/22.............................. Baa3 7,900 8,507,668
10.125%, 04/15/22............................. Baa3 2,000 2,196,040
--------------
84,477,518
--------------
COMPUTERS -- 0.2%
Digital Equipment Corp.,
7.125%, 10/15/02.............................. Ba1 10,000 9,542,500
--------------
FINANCIAL SERVICES -- 19.1%
Associates Corp. of North America,
6.625%, 05/15/01.............................. Aa3 34,500 34,485,510
6.68%, 09/17/99............................... Aa3 34,050 34,299,927
8.375%, 01/15/98.............................. A1 1,100 1,125,454
Bank of New York,
7.97%, 12/31/26............................... A1 26,000 26,258,440
Barnett Banks,
8.06%, 12/01/26............................... A2 3,500 3,540,775
Bayerische Landes,
6.20%, 09/30/99............................... Aaa 30,000 29,970,000
Capital One Bank,
6.66%, 08/17/98............................... Baa3 10,050 10,085,677
6.73%, 06/04/98............................... Baa2 16,000 16,094,400
6.90%, 04/15/99............................... Baa3 11,000 11,073,590
7.20%, 07/19/99............................... Baa3 11,250 11,376,112
CIT Group Holdings, M.T.N.,
5.85%, 03/16/98............................... Aa3 25,000 25,009,750
5.875%, 11/09/98.............................. Aa3 33,900 33,795,588
Conseco, Inc.,
8.70%, 11/15/26............................... NR 18,200 18,356,884
CoreStates Financial Corp.,
8.00%, 12/15/26............................... A1 24,250 24,251,455
Enterprise Rent-A-Car USA Finance Co., M.T.N.,
6.35%, 01/15/01............................... Baa3 11,500 11,195,250
7.00%, 06/15/00............................... Baa3 30,000 30,363,000
7.50%, 06/15/03............................... Baa3 5,000 5,139,300
7.875%, 03/15/98.............................. Baa3 9,925 10,145,831
8.75%, 12/15/99............................... Baa3 5,000 5,295,500
First Tennessee National Corp., B.A.,
8.07%, 01/06/27............................... NR 11,150 11,087,560
First Union Corp.,
7.85%, 01/01/27............................... A1 43,500 43,103,062
9.45%, 06/15/99............................... Baa2 4,000 4,274,280
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
First USA Bank,
8.20%, 02/15/98............................... Baa3 $ 14,575 $ 14,878,306
Ford Motor Credit,
7.00%, 09/25/01............................... A1 37,000 37,551,670
General Motors Acceptance Corp., M.T.N.,
5.395%, 02/02/99.............................. P1 2,000 1,999,825
7.375%, 07/20/98.............................. Baa1 4,650 4,742,209
Lehman Brothers Holdings, Inc.,
6.71%, 10/12/99............................... Baa1 6,000 6,008,100
6.84%, 09/25/98............................... Baa1 30,000 30,227,100
6.89%, 10/10/00............................... Baa1 10,545 10,581,380
Liberty Mutual Insurance Co.,
7.875%, 10/15/26.............................. A2 2,500 2,526,985
8.20%, 05/04/07............................... A2 51,005 54,164,250
Lumbermens Mutual Casualty Co.,
9.15%, 07/01/26............................... Baa1 28,750 31,265,625
Mellon Bank Corp.,
7.72%, 12/01/26............................... A2 15,635 15,151,097
7.995%, 01/15/27.............................. A2 38,500 38,018,750
Republic Bank of New York Corp.,
7.53%, 12/04/26............................... NR 21,000 20,582,583
Salomon, Inc., M.T.N.,
5.98%, 02/02/98............................... Baa1 35,000 34,982,850
7.00%, 05/15/99............................... Baa1 42,000 42,331,800
7.25%, 05/01/01............................... Baa1 8,625 8,706,592
State Street Capital Corp.,
7.94%, 12/30/26............................... NR 10,000 9,960,000
SunAmerica, Inc.,
6.20%, 10/31/99............................... Baa1 9,000 8,955,000
Travelers Capital, Inc.,
7.75%, 12/01/36............................... A1 20,000 19,350,000
Union Planters Corp.,
8.20%, 12/15/26............................... Baa1 20,750 20,542,500
USAA Capital Corp.,
6.34%, 09/18/98............................... Aa1 10,000 10,040,000
Wells Fargo & Co.,
7.96%, 12/15/26............................... A1 32,500 31,974,429
--------------
854,868,396
--------------
FOOD & BEVERAGE -- 0.1%
RJR Nabisco, Inc.,
8.75%, 08/15/05............................... Baa3 4,000 4,018,000
--------------
HEALTH CARE -- 0.0%
Tenet Healthcare Corp.,
8.625%, 12/01/03.............................. Ba2 2,000 2,110,000
--------------
HOSPITAL MANAGEMENT -- 0.0%
Service Corp. International,
7.00%, 06/01/15............................... A3 2,500 2,530,950
--------------
MEDIA -- 5.8%
News America Holdings, Inc.,
7.375%, 10/17/08.............................. Baa3 28,000 27,784,960
7.75%, 12/01/45............................... Baa3 61,000 56,802,590
9.25%, 02/01/13............................... Baa3 24,050 26,942,975
Paramount Communications, Inc.,
7.50%, 01/15/02............................... Ba2 6,425 6,419,667
Time Warner, Inc.,
7.75%, 06/15/05............................... Ba1 15,000 15,088,950
8.11%, 08/15/06............................... Ba1 13,250 13,583,503
8.18%, 08/15/07............................... Ba1 24,500 25,138,715
</TABLE>
B7
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Time Warner, Inc., (Con't)
8.375%, 07/15/33.............................. Baa3 $ 37,450 $ 37,584,446
9.125%, 01/15/13.............................. Ba1 14,270 15,578,559
Turner Broadcasting Co.,
8.375%, 07/01/13.............................. Ba1 5,325 5,435,813
Viacom, Inc.,
6.75%, 01/15/03............................... Ba2 8,545 8,178,931
7.75%, 06/01/05............................... Ba2 22,275 21,933,524
--------------
260,472,633
--------------
OIL & GAS -- 0.1%
Parker & Parsley Petroleum Co.,
8.25%, 08/15/07............................... Ba2 3,000 3,225,450
--------------
OIL & GAS EQUIPMENT & SERVICES -- 0.2%
B.J. Services Co.,
7.00%, 02/01/06............................... Ba1 4,000 3,887,640
Noble Drilling Corp.,
9.125%, 07/01/06.............................. Ba2 3,500 3,762,500
--------------
7,650,140
--------------
RETAIL -- 3.1%
Federated Department Stores, Inc.,
8.125%, 10/15/02.............................. Ba1 18,075 18,526,875
8.50%, 06/15/03............................... Ba1 36,750 38,220,000
10.00%, 02/15/01.............................. Ba1 4,500 4,905,000
Rite Aid Corp.,
6.70%, 12/15/01............................... A3 5,000 4,982,500
Sears Roebuck Acceptance Corp., M.T.N.,
6.38%, 02/16/99............................... A2 70,000 70,177,100
--------------
136,811,475
--------------
TECHNOLOGY -- 1.8%
Comdisco, Inc., M.T.N.,
5.54%, 01/26/98............................... Baa1 12,500 12,456,750
6.09%, 11/09/98............................... Baa1 34,000 34,034,000
6.29%, 10/22/98............................... Baa1 5,000 5,007,450
6.375%, 11/30/01.............................. Baa1 21,500 21,153,850
6.689%, 05/22/98.............................. Baa1 9,000 9,075,240
--------------
81,727,290
--------------
TELECOMMUNICATIONS -- 0.7%
TCI Communications, Inc.,
8.65%, 09/15/04............................... Baa3 28,470 28,609,788
8.75%, 08/01/15............................... Baa3 5,450 5,383,946
--------------
33,993,734
--------------
TRUCKING/SHIPPING -- 0.1%
Federal Express Corp., M.T.N.,
10.00%, 06/01/98.............................. Baa3 3,000 3,157,440
10.05%, 06/15/99.............................. Baa3 500 539,080
--------------
3,696,520
--------------
UTILITIES -- 0.1%
Arkla, Inc., M.T.N.,
9.25%, 12/18/97............................... Ba2 3,000 3,077,790
--------------
FOREIGN CORPORATE BONDS -- 6.3%
Banco de Commercio Exterior de Colombia, SA,
M.T.N., (Colombia)
8.625%, 06/02/00.............................. NR 5,500 5,713,125
Banco Ganadero, SA, M.T.N., (Colombia)
9.75%, 08/26/99............................... Baa3 7,300 7,683,250
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Bangkok Bank, (Thailand)
7.25%, 09/15/05............................... A3 $ 10,000 $ 9,777,400
8.25%, 03/15/16............................... A3 15,000 15,258,750
Central Hispano Financial Services, (Cayman
Islands)
6.031%, 04/28/05.............................. A3 10,000 10,005,000
Compania Sud Americana de Vapores, SA, (Chile)
7.375%, 12/08/03.............................. NR 7,600 7,486,000
Deutsche Bank, (Germany)
6.70%, 12/13/06............................... Aa1 12,500 12,299,562
Domtar, Inc., (Canada)
9.50%, 08/01/16............................... Ba1 9,000 9,843,750
Empresa Colombia de Petroleos, (Colombia)
7.25%, 07/08/98............................... NR 8,250 8,311,875
Kansallis-Osake Pankki, N.Y., (Finland)
6.125%, 05/15/98.............................. A3 6,160 6,163,758
8.650%, 12/29/49 (b).......................... Baa2 10,000 10,441,500
9.75%, 12/15/98............................... Baa1 16,950 17,990,730
Okobank, (Finland)
7.25%, 09/27/49............................... A3 18,750 19,125,000
7.325%, 10/29/49.............................. NR 9,000 9,220,500
7.70%, 10/29/49............................... NR 3,500 3,585,750
Petroliam Nasional, (Malaysia)
6.625%, 10/18/01.............................. NR 22,000 22,014,520
7.125%, 10/18/06.............................. A1 66,400 66,830,936
PT Alatief Freeport Financial Co., (Netherlands)
9.75%, 04/15/01............................... Ba2 8,950 9,784,588
Royal Bank of Canada, (Canada)
6.75%, 10/24/11............................... Aa3 17,400 17,034,600
Siam Commercila, (Thailand)
7.50%, 03/15/06............................... A3 14,500 14,282,500
--------------
282,853,094
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 5.4%
Federal National Mortgage Association,
9.05%, 04/10/00............................... 14,000 15,148,420
United States Treasury Bonds,
5.875%, 11/15/99.............................. 5,000 4,980,450
United States Treasury Notes,
5.00%, 02/15/99............................... 17,000 16,691,790
5.625%, 11/30/98-11/30/00..................... 86,500 85,271,755
5.875%, 11/30/01-02/15/04..................... 45,400 44,645,298
6.00%, 08/15/99............................... 10,000 9,998,400
6.125%, 07/31/00-09/30/00..................... 19,300 19,298,110
6.25%, 04/30/01-02/15/03...................... 20,150 20,142,013
6.375%, 09/30/01.............................. 7,000 7,041,580
6.50%, 08/31/01-10/15/06...................... 16,500 16,625,810
6.75%, 04/30/00............................... 3,000 3,056,730
--------------
242,900,356
--------------
</TABLE>
B8
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
FOREIGN GOVERNMENT BONDS -- 5.2%
Republic of Argentina, (Argentina)
6.625%, 03/31/05.............................. B1 $ 4,900 $ 4,293,625
Republic of Colombia, (Colombia)
7.125%, 05/11/98.............................. Ba1 2,775 2,788,875
8.00%, 06/14/01............................... Baa3 2,250 2,283,750
8.75%, 10/06/99............................... Ba1 12,325 12,879,625
Republic of Poland, (Poland)
4.00%, (until 10/27/98),
5.00%, (until 10/27/99),
6.00%, (until 10/27/02),
7.00%, 10/27/14............................... Baa3 129,500 109,589,375
Republic of Venezuela, (Venezuela)
6.50%, 12/18/07............................... Ba2 9,750 8,580,000
United Mexican States, (Mexico)
7.563%, 08/06/01.............................. Baa3 73,500 73,672,725
9.75%, 02/06/01............................... Ba2 4,000 4,130,000
11.375%, 09/15/16............................. Ba2 13,000 13,536,250
--------------
231,754,225
--------------
TOTAL LONG-TERM BONDS
(cost $2,376,901,639).................................................... 2,399,651,325
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $3,724,169,782).................................................... 4,082,741,593
--------------
SHORT-TERM INVESTMENTS -- 10.1%
BANK NOTES -- 0.2%
First Bank N.A., Minneapolis,
5.275%, 10/24/97.............................. P3 2,000 1,998,881
PNC Bank N.A.,
5.20%, 04/01/97............................... NR 5,000 4,999,364
--------------
6,998,245
--------------
CERTIFICATES OF DEPOSIT-DOMESTIC -- 1.5%
Advanta National Bank,
5.80%, 03/19/97............................... NR 25,000 25,350,000
5.84%, 03/14/97............................... NR 21,500 21,457,000
6.26%, 09/01/97............................... NR 10,500 10,510,500
8.18%, 02/09/97............................... Baa3 10,000 10,100,000
--------------
67,417,500
--------------
CERTIFICATES OF DEPOSIT-EURODOLLAR -- 0.1%
Abbey National Treasury Services, PLC,
5.41%, 01/30/97............................... P1 5,000 5,000,093
--------------
CERTIFICATES OF DEPOSIT-YANKEE -- 1.0%
Bank of Montreal (Canada),
5.39%, 01/22/97............................... P1 18,000 18,000,000
Bank of Nova Scotia (Canada),
5.39%, 03/04/97............................... P3 4,000 4,000,000
Banque Nationale De Paris (France),
5.42%, 01/15/97............................... NR 10,000 9,999,961
5.58%, 04/02/97............................... NR 3,000 2,999,191
Commerzbank (Germany),
5.42%, 06/10/97............................... P1 1,000 999,631
Deutsche Bank (Germany),
5.69%, 10/28/97............................... P3 3,000 2,999,261
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
National Bank of Canada (Canada),
5.438%, 03/10/97.............................. P3 $ 2,000 $ 2,000,000
Norddeutsche Landesbank (Germany),
5.75%, 04/11/97............................... NR 5,000 5,001,784
Societe Generale (France),
5.78%, 08/20/97............................... P1 2,000 2,001,590
--------------
48,001,418
--------------
COMMERCIAL PAPER -- 3.8%
Aetna Services, Inc.,
5.42%, 03/14/97............................... NR 5,000 4,946,553
American Brands, Inc.,
5.45%, 02/06/97............................... P3 1,000 994,701
6.00%, 01/22/97............................... P3 2,000 1,993,333
American Express Credit Corp.,
5.30%, 02/28/97............................... P1 5,000 4,958,042
Aristar, Inc.,
5.40%, 01/28/97............................... P2 2,000 1,992,200
5.47%, 03/17/97............................... P2 3,000 2,966,268
Bank Austria,
5.35%, 01/15/97............................... NR 8,000 7,984,544
Barton Capital Corp.,
5.35%, 02/27/97............................... NR 2,000 1,983,356
5.40%, 02/21/97............................... NR 8,000 7,940,000
BHF Finance, Inc.,
5.31%, 01/30/97............................... NR 1,000 995,870
Bradford & Bingley Building Society,
5.35%, 01/10/97-01/15/97...................... NR 28,000 27,960,767
Caterpillar Financial Services Corp.,
5.35%, 05/16/97-06/16/97...................... NR 2,000 1,955,565
5.38%, 04/28/97............................... P1 5,000 4,913,322
5.50%, 02/27/97............................... P1 1,380 1,368,193
Cheltenham & Gloucester Building Society,
5.325%, 02/24/97.............................. NR 7,000 6,945,123
Coca Cola Enterprises, Inc.,
5.34%, 02/03/97............................... NR 2,000 1,990,507
Colonial Pipeline Co.,
5.75%, 01/27/97............................... P3 2,000 1,992,014
Commonwealth Bank of Austria,
5.40%, 02/10/97............................... NR 5,000 4,970,750
Corporate Receivables Corp.,
5.40%, 02/20/97............................... NR 2,000 1,985,300
Countrywide Home Loan, Inc.,
6.05%, 01/21/97............................... NR 1,000 996,807
6.20%, 01/15/97............................... NR 7,000 6,984,328
6.35%, 01/15/97............................... NR 6,000 5,986,242
CXC, Inc.,
7.00%, 01/02/97............................... NR 3,662 3,662,000
Dupont (EI) De Nemours,
5.50%, 03/04/97............................... P3 1,000 990,681
Engelhard Corp.,
5.58%, 02/24/97............................... P2 2,000 1,983,570
First Data Corp.,
5.40%, 03/18/97-03/25/97...................... NR 8,617 8,512,061
5.46%, 03/25/97............................... NR 5,000 4,937,817
Fleet Funding Corp,
5.80%, 02/04/97............................... NR 3,729 3,709,174
ITT Hartford Group, Inc.,
5.45%, 01/23/97............................... P1+ 1,000 996,821
</TABLE>
B9
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Kredietbank Na Finance Corp.,
5.32%, 01/16/97............................... NR $ 2,000 $ 1,995,862
Lehman Brothers Holdings, Inc.,
6.70%, 01/07/97............................... NR 5,000 4,995,347
Merrill Lynch & Co., Inc.,
5.35%, 01/29/97............................... P1 12,000 11,951,850
5.37%, 01/31/97............................... P1 7,000 6,969,719
NYNEX Corp.,
6.80%, 01/06/97............................... P3 3,000 2,997,733
Preferred Receivables Funding Corp.,
5.60%, 02/25/97............................... P1 4,000 3,966,400
Rank Xerox Capital PLC.,
6.25%, 01/09/97............................... NR 2,583 2,579,861
Societe Generale,
5.77%, 05/15/97............................... P1 2,000 2,000,259
Transamerica Financial Corp.,
5.38%, 02/06/97............................... P1 3,750 3,730,385
WCP Funding, Inc.,
5.40%, 02/20/97............................... NR 2,000 1,985,300
--------------
172,768,625
--------------
OTHER CORPORATE OBLIGATIONS -- 3.0%
American General Financial Corp.,
7.75%, 01/15/97............................... P1 3,700 3,702,664
9.50%, 08/01/97............................... P1 1,500 1,530,273
Associates Corp. of North America,
9.70%, 05/01/97............................... P1 2,000 2,023,837
Beneficial Corp.,
9.35%, 02/03/97............................... P1 3,500 3,510,736
Capital Equipment Receivable Trust,
5.60%, 10/15/97............................... NR 3,862 3,862,223
Capital One Bank,
8.625%, 01/15/97.............................. Baa3 32,425 32,443,158
Coca-Cola Enterprises, Inc.,
6.50%, 11/15/97............................... A3 3,750 3,765,600
General Motors Acceptance Corp.,
5.47%, 02/12/97............................... P1 12,000 11,925,243
6.30%, 09/10/97............................... Aaa 5,000 5,017,600
6.70%, 04/30/97............................... A3 11,000 11,035,420
7.60%, 02/10/97............................... P1 2,000 2,004,629
7.85%, 03/05/97............................... Baa1 3,300 3,312,078
7.85%, 03/05/97............................... P1 10,050 10,080,742
Kimberly Clark Corp.,
9.125%, 06/01/97.............................. NR 1,000 1,013,822
Mellon Bank Corp.,
6.50%, 12/01/97............................... Baa1 1,650 1,656,253
Norwest Corp.,
7.875%, 01/30/97.............................. P1 2,000 2,003,190
Salomon, Inc.,
5.89%, 11/10/97............................... Baa1 30,000 29,962,500
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Short Term Repack Asset,
6.00%, 12/15/97............................... NR $ 4,000 $ 3,999,186
--------------
132,849,154
--------------
REPURCHASE AGREEMENT -- 0.5%
Joint Repurchase Agreement Account
6.613%, 01/02/97 (Note 5)..................... 22,692 22,692,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $464,184,986)...................................................... 455,727,035
--------------
TOTAL INVESTMENTS BEFORE SHORT
SALE -- 101.3%
(cost $4,188,354,768; Note 6)............................................ 4,538,468,628
--------------
INVESTMENT SOLD SHORT -- (2.4%)
United States Treasury Bond,
6.75%, 8/15/26
(proceeds $111,621,197; Note 2).............................. (106,860) (110,481,637)
--------------
TOTAL INVESTMENTS, NET OF SHORT SALES -- 98.9%
4,427,986,991
--------------
OTHER ASSETS IN EXCESS OF OTHER
LIABILITIES -- 1.1%...................................................... 50,821,542
--------------
TOTAL NET ASSETS -- 100.0%................................................. $4,478,808,533
--------------
--------------
<FN>
The following abbreviations are used in portfolio descriptions:
ADR American Depository Receipt
B.A. Bankers' Acceptances
C.D. Certificates of Deposit
M.T.N. Medium Term Note
PLC Public Limited Company
SA Sociedad Anonima (Spanish Corporation) or Societe
Anonyme (French Corporation)
NR Not Rated
(a) Non-income producing security.
(b) Indicates a variable rate security.
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B28 THROUGH B32.
B10
<PAGE>
FLEXIBLE MANAGED PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 97.6%
VALUE
COMMON STOCKS -- 61.3% SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AEROSPACE -- 4.1%
AlliedSignal, Inc............................... 600,000 $ 40,200,000
Boeing Co....................................... 530,500 56,431,937
Lockheed Martin Corp............................ 500,000 45,750,000
Rockwell International Corp. (a)................ 400,000 24,350,000
United Technologies Corp........................ 550,000 36,300,000
--------------
203,031,937
--------------
BANKS AND SAVINGS & LOANS -- 4.2%
Banc One Corp................................... 775,000 33,325,000
BankAmerica Corp................................ 300,000 29,925,000
Chase Manhattan Corp............................ 550,000 49,087,500
Citicorp........................................ 310,000 31,930,000
PNC Bank Corp................................... 750,000 28,218,750
State Street Boston Corp........................ 500,000 32,250,000
--------------
204,736,250
--------------
BEVERAGES -- 0.9%
Anheuser-Busch Companies, Inc................... 1,150,000 46,000,000
--------------
CHEMICALS -- 0.6%
E.I. du Pont de Nemours & Co.................... 300,000 28,312,500
--------------
CHEMICALS - SPECIALTY -- 1.8%
IMC Global, Inc................................. 600,000 23,475,000
Morton International, Inc....................... 600,000 24,450,000
Praxair, Inc.................................... 825,000 38,053,125
--------------
85,978,125
--------------
COMMERCIAL SERVICES -- 0.3%
CUC International, Inc. (a)..................... 600,000 14,250,000
--------------
COMPUTER SERVICES -- 6.4%
3Com Corp. (a).................................. 600,000 44,025,000
Cadence Design Systems, Inc. (a)................ 675,000 26,831,250
Cascade Communications.......................... 325,000 17,915,625
Cisco Systems, Inc. (a)......................... 750,000 47,718,750
Computer Associates International, Inc.......... 975,000 48,506,250
Computer Sciences Corp. (a)..................... 500,000 41,062,500
First Data Corp................................. 500,000 18,250,000
Gateway 2000, Inc. (a).......................... 275,000 14,729,687
Microsoft Corp. (a)............................. 250,000 20,656,250
Oracle Corp. (a)................................ 775,000 32,356,250
--------------
312,051,562
--------------
CONSTRUCTION -- 0.7%
Fluor Corp...................................... 550,000 34,512,500
--------------
COSMETICS & SOAPS -- 0.7%
Procter & Gamble Co............................. 300,000 32,250,000
--------------
DIVERSIFIED GAS -- 0.3%
Cross Timbers Oil Co............................ 530,000 13,316,250
--------------
DIVERSIFIED OFFICE EQUIPMENT -- 1.8%
Alco Standard Corp.............................. 300,000 15,487,500
Hewlett-Packard Co.............................. 325,000 16,331,250
Honeywell, Inc.................................. 650,000 42,737,500
Xerox Corp...................................... 300,000 15,787,500
--------------
90,343,750
--------------
DRUGS AND MEDICAL SUPPLIES -- 6.0%
American Home Products Corp..................... 885,000 51,883,125
Baxter International, Inc....................... 650,000 26,650,000
Becton, Dickinson & Co.......................... 800,000 34,700,000
Boston Scientific Corp. (a)..................... 700,000 42,000,000
Medtronic, Inc.................................. 400,000 27,200,000
Novartis Corp., AG ADR (Switzerland)............ 933,328 53,491,332
Pfizer, Inc..................................... 700,000 58,012,500
--------------
293,936,957
--------------
ELECTRICAL EQUIPMENT -- 1.9%
Applied Materials, Inc. (a)..................... 450,000 16,171,875
Baldor Electric Co.............................. 1 25
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Belden, Inc..................................... 425,000 $ 15,725,000
FORE Systems, Inc. (a).......................... 725,000 23,834,375
Westinghouse Electric Corp...................... 1,900,000 37,762,500
--------------
93,493,775
--------------
ELECTRONICS -- 2.2%
ADT Ltd. (a).................................... 750,000 17,156,250
Intel Corp...................................... 475,000 62,195,313
Maxim Integrated Products, Inc. (a)............. 700,000 30,275,000
--------------
109,626,563
--------------
FINANCIAL SERVICES -- 0.9%
MBNA Corp....................................... 1,075,000 44,612,500
--------------
FOODS -- 0.4%
Nabisco Holdings Corp.
(Class 'A' Stock)............................. 500,000 19,437,500
--------------
FOREST PRODUCTS -- 1.2%
Kimberly-Clark Corp............................. 350,000 33,337,500
Willamette Industries, Inc...................... 399,000 27,780,375
--------------
61,117,875
--------------
GAS PIPELINES -- 0.7%
Enron Corp...................................... 850,000 36,656,250
--------------
HEALTH CARE -- 0.2%
Tenet Healthcare Corp. (a)...................... 400,000 8,750,000
--------------
HOSPITAL MANAGEMENT -- 1.1%
Columbia/HCA Healthcare Corp.................... 900,000 36,675,000
Guidant Corp.................................... 300,000 17,100,000
--------------
53,775,000
--------------
INSURANCE -- 5.0%
Aetna Inc....................................... 650,000 52,000,000
Allstate Corp................................... 875,000 50,640,625
American International Group, Inc............... 250,000 27,062,500
Chubb Corp...................................... 400,000 21,500,000
CIGNA Corp...................................... 250,000 34,156,250
Travelers Group, Inc............................ 1,266,666 57,474,970
--------------
242,834,345
--------------
LEISURE -- 0.6%
Carnival Corp. (Class 'A' Stock)................ 900,000 29,700,000
--------------
LODGING -- 0.2%
Hilton Hotels Corp.............................. 400,000 10,450,000
--------------
MACHINERY -- 0.8%
Case Corp....................................... 700,000 38,150,000
--------------
MEDIA -- 0.4%
Comcast Corp. (Class 'A' Stock)................. 1,000,000 17,625,000
--------------
MINERAL RESOURCES -- 0.5%
Potash Corp. of Saskatchewan, Inc............... 270,000 22,950,000
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 4.5%
Cognizant Corp.................................. 735,700 24,278,100
General Electric Co............................. 700,000 69,212,500
Illinois Tool Works, Inc........................ 400,000 31,950,000
Tyco International, Ltd......................... 1,225,000 64,771,875
York International Corp......................... 500,000 27,937,500
--------------
218,149,975
--------------
MISCELLANEOUS - CONSUMER GROWTH/STABLE -- 1.1%
Unilever N.V., ADR (United Kingdom)............. 300,000 52,575,000
--------------
PETROLEUM -- 3.2%
British Petroleum, PLC, ADR (United Kingdom).... 325,000 45,946,875
Mobil Corp...................................... 400,000 48,900,000
Royal Dutch Petroleum Co., ADR (Netherlands).... 200,000 34,150,000
Total SA, ADR (France).......................... 700,000 28,175,000
--------------
157,171,875
--------------
</TABLE>
B11
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
PETROLEUM SERVICES -- 1.3%
Baker Hughes, Inc............................... 581,700 $ 20,068,650
Halliburton Co.................................. 700,000 42,175,000
--------------
62,243,650
--------------
RETAIL -- 6.5%
American Stores Co.............................. 800,000 32,700,000
Federated Department Stores, Inc. (a)........... 1,120,000 38,220,000
The Gap, Inc.................................... 500,000 15,062,500
Home Depot, Inc................................. 750,000 37,593,750
Koninklijke Ahold, ADR (Netherlands)............ 250,000 15,437,500
Nike, Inc. (Class 'B' Stock).................... 600,000 35,850,000
Nine West Group................................. 775,000 35,940,625
Price/Costco, Inc. (a).......................... 1,500,000 37,687,500
Safeway, Inc. (a)............................... 1,000,000 42,750,000
Staples, Inc. (a)............................... 1,601,500 28,927,094
--------------
320,168,969
--------------
TELECOMMUNICATIONS -- 0.8%
AT&T Corp....................................... 550,000 23,925,000
Newbridge Networks Corp. (a).................... 500,000 14,125,000
--------------
38,050,000
--------------
TOTAL COMMON STOCKS
(cost $2,434,484,264).......................................... 2,996,258,108
--------------
PREFERRED STOCKS -- 1.5%
FINANCIAL SERVICES -- 0.5%
Central Hispano Financial Services.............. 1,000,000 25,200,000
--------------
GAS PIPELINES -- 0.1%
TransCanada Pipelines, Ltd...................... 140,000 3,640,000
--------------
LEISURE -- 0.3%
Hilton Hotels (Conv.)........................... 600,000 14,775,000
--------------
TELECOMMUNICATIONS -- 0.6%
Airtouch Communications (Conv.)................. 700,000 31,675,000
--------------
TOTAL PREFERRED STOCKS
(cost $75,571,505)............................................. 75,290,000
--------------
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
CONVERTIBLE BONDS -- 0.6% (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
RETAIL -- 0.6%
Federated Department Stores, Inc.,
5.00%, 10/01/03............................... Ba3 $ 8,000 9,180,000
Home Depot, Inc.,
3.25%, 10/01/01............................... A1 19,000 18,715,000
--------------
TOTAL CONVERTIBLE BONDS
(cost $27,850,057)....................................................... 27,895,000
--------------
LONG-TERM BONDS -- 34.2%
DOMESTIC CORPORATE BONDS -- 22.3%
AEROSPACE -- 0.2%
Northrop Grumman Corp.,
7.875%, 03/01/26.............................. NR 7,500 7,517,475
--------------
AGRICULTURAL EQUIPMENT -- 0.1%
Agco Corp.,
8.50%, 03/15/06............................... Ba3 6,500 6,576,700
--------------
AIRLINES -- 2.3%
Delta Air Lines, Inc.,
10.125%, 05/15/10............................. Baa3 19,335 23,342,952
10.375%, 02/01/11............................. Ba1 25,750 31,546,840
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
United Air Lines, Inc.,
9.75%, 08/15/21............................... Baa2 $ 10,125 $ 12,000,555
10.67%, 05/01/04.............................. Baa3 19,500 23,062,455
11.21%, 05/01/14.............................. Baa3 17,500 22,945,475
--------------
112,898,277
--------------
ASSET BACKED -- 0.1%
Standard Credit Card Master Trust
5.95%, 10/07/04............................... AAA 4,500 4,325,625
--------------
CABLE & PAY TELEVISION SYSTEMS -- 1.3%
Continental Cablevision, Inc.,
8.30%, 05/15/06............................... Ba2 10,800 11,504,916
8.625%, 08/15/03.............................. Ba2 7,500 8,115,825
TCI Communications, Inc.,
8.65%, 09/15/04............................... Baa3 6,000 6,029,460
8.75%, 08/01/15............................... Baa3 5,950 5,877,886
Tele-Communications, Inc.,
7.875%, 08/01/13.............................. Baa3 17,500 16,110,150
9.80%, 02/01/12............................... B2 7,000 7,575,400
9.875%, 06/15/22.............................. Baa3 7,878 8,483,976
10.125%, 04/15/22............................. Baa3 2,000 2,196,040
--------------
65,893,653
--------------
COMPUTERS -- 0.3%
Digital Equipment Corp.,
7.125%, 10/15/02.............................. Ba1 14,800 14,122,900
--------------
FINANCIAL SERVICES -- 10.7%
Bank of New York,
7.97%, 12/31/26............................... A1 26,000 26,258,440
Barnett Banks,
8.06%, 12/01/26............................... NR 3,500 3,540,775
Capital One Bank,
6.66%, 08/17/98............................... Baa3 11,175 11,214,671
6.73%, 06/04/98............................... Baa2 26,000 26,153,400
6.90%, 04/15/99............................... Baa3 11,000 11,073,590
7.20%, 07/19/99............................... Baa3 11,250 11,376,112
Conseco, Inc.,
8.70%, 11/15/26............................... NR 18,200 18,356,884
CoreStates Financial Corp.,
8.00%, 12/15/26............................... NR 24,250 24,251,455
Enterprise Rent-A-Car USA Finance Co., M.T.N.,
6.35%, 01/15/01............................... Baa3 3,500 3,407,250
7.00%, 06/15/00............................... Baa3 13,500 13,663,350
First Tennessee National Corp., B.A.,
8.07%, 01/06/27............................... NR 11,150 11,087,560
First Union Corp.,
7.85%, 01/01/27............................... A1 43,500 43,103,062
First USA Bank,
8.20%, 02/15/98............................... Baa3 13,000 13,270,530
Ford Motor Credit,
7.00%, 09/25/01............................... NR 13,000 13,193,830
General Motors Acceptance Corp., M.T.N.,
7.375%, 07/20/98.............................. Baa1 4,500 4,589,235
7.875%, 03/15/00.............................. NR 5,000 5,202,100
Lehman Brothers Holdings, Inc.,
6.71%, 10/12/99............................... Baa1 24,000 24,032,400
6.84%, 09/25/98............................... Baa1 5,000 5,037,850
Liberty Mutual Insurance Co.,
7.875%, 10/15/26.............................. A2 2,500 2,526,985
8.20%, 05/04/07............................... NR 5,000 5,309,700
Lumbermens Mutual Casualty Co.,
9.15%, 07/01/26............................... NR 12,600 13,702,500
</TABLE>
B12
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Mellon Bank Corp.,
7.72%, 12/01/26............................... A2 $ 15,500 $ 15,020,275
7.995%, 01/15/27.............................. A2 38,500 38,018,750
Republic Bank of New York Corp.,
7.53%, 12/04/26............................... NR 21,000 20,582,583
Salomon, Inc., M.T.N.,
5.98%, 02/02/98............................... Baa 23,500 23,488,485
7.00%, 05/15/99............................... Baa 34,600 34,873,340
7.25%, 05/01/01............................... Baa 8,625 8,706,593
State Street Capital Corp.,
7.94%, 12/30/26............................... NR 7,500 7,470,000
Travelers Capital, Inc.,
7.75%, 12/01/36............................... A1 20,000 19,350,000
Union Planters Corp.,
8.20%, 12/15/26............................... NR 20,750 20,542,500
USAA Capital Corp.,
6.34%, 09/18/98............................... Aa1 20,000 20,080,000
Wells Fargo & Co.,
7.96%, 12/15/26............................... A1 26,300 26,563,000
--------------
525,047,205
--------------
FOOD & BEVERAGE -- 0.1%
RJR Nabisco, Inc.,
8.75%, 08/15/05............................... Baa3 3,000 3,013,500
--------------
HEALTH CARE -- 0.9%
Tenet Healthcare Corp.,
8.625%, 12/01/03.............................. Ba2 15,315 16,157,325
9.625%, 09/01/02.............................. Ba1 23,750 26,006,250
--------------
42,163,575
--------------
INDUSTRIAL -- 0.1%
Service Corp. International,
7.00%, 06/01/15............................... A3 2,500 2,530,950
--------------
MEDIA -- 3.9%
News America Holdings, Inc.,
7.375%, 10/17/08.............................. Baa3 2,000 1,984,640
7.75%, 12/01/45............................... Baa3 39,000 36,316,410
9.25%, 02/01/13............................... Baa3 36,200 40,554,498
Paramount Communications, Inc.,
7.50%, 01/15/02............................... Ba2 9,100 9,092,447
Time Warner, Inc.,
8.11%, 08/15/06............................... Ba1 13,250 13,583,503
8.18%, 08/15/07............................... Ba1 13,000 13,338,910
8.375%, 07/15/33.............................. Baa3 32,800 32,917,752
9.125%, 01/15/13.............................. Ba1 12,040 13,144,068
Turner Broadcasting Co.,
8.375%, 07/01/13.............................. Ba 5,300 5,410,293
Viacom, Inc.,
6.75%, 01/15/03............................... Ba2 7,350 7,035,126
7.75%, 06/01/05............................... Ba2 19,675 19,373,382
--------------
192,751,029
--------------
OIL & GAS -- 0.4%
Parker & Parsley Petroleum Co.,
8.25%, 08/15/07............................... Ba2 3,000 3,225,450
Transco Energy Co.,
9.125%, 05/01/98.............................. Ba3 14,000 14,531,160
--------------
17,756,610
--------------
OIL & GAS EQUIPMENT & SERVICES -- 0.1%
B.J. Services Co.,
7.00%, 02/01/06............................... Ba1 4,000 3,887,640
Noble Drilling Corp.,
9.125%, 07/01/06.............................. Ba2 3,500 3,762,500
--------------
7,650,140
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
RETAIL -- 1.6%
Federated Department Stores, Inc.,
8.125%, 10/15/02.............................. Ba1 $ 6,600 $ 6,765,000
8.50%, 06/15/03............................... Ba1 66,000 68,640,000
10.00%, 02/15/01.............................. Ba1 2,500 2,725,000
--------------
78,130,000
--------------
TECHNOLOGY -- 0.2%
Comdisco, Inc., M.T.N.,
6.375%, 11/30/01.............................. Baa1 2,700 2,656,530
7.25%, 04/15/98............................... Baa2 10,000 10,135,700
--------------
12,792,230
--------------
FOREIGN CORPORATE BONDS -- 7.0%
Banco de Commercio Exterior de Colombia, SA,
M.T.N.,(Colombia)
8.625%, 06/02/00.............................. NR 5,500 5,713,125
Banco Ganadero, SA, M.T.N., (Colombia)
9.75%, 08/26/99............................... Baa 7,300 7,683,250
Bancomer, SA, (Mexico)
8.00%, 07/07/98............................... Ba 8,000 7,980,000
Bangkok Bank, (Thailand)
7.25%, 09/15/05............................... A3 10,000 9,777,400
Central Hispano Financial Services, (Cayman
Islands)
6.031%, 04/28/05.............................. A3 5,000 5,002,500
Compania Sud Americana de Vapores, SA, (Chile)
7.375%, 12/08/03.............................. NR 5,650 5,565,250
Controladora Commercial Mexicana, SA, (Mexico)
8.75%, 04/21/98............................... NR 15,100 15,175,500
Deutsche Bank, (Germany)
6.70%, 12/13/06............................... Aa 17,500 17,219,388
Dotmar, Inc., (Canada)
9.50%, 08/01/16............................... Ba 24,750 27,070,313
Empresa Colombia de Petroleos, (Colombia)
7.25%, 07/08/98............................... NR 8,250 8,311,875
Kansallis-Osake Pankki, N.Y., (Finland)
8.65%, 01/01/49 (b)........................... Baa1 9,000 9,397,350
9.75%, 12/15/98............................... Baa1 16,760 17,789,064
Nacional Financie, (Cayman Islands)
9.00%, 01/25/99............................... Ba2 15,000 15,300,000
National Power Co., (United Kingdom)
7.875%, 12/15/06.............................. Ba2 22,500 22,612,500
8.40%, 12/15/16............................... Ba2 27,500 27,362,500
Okobank, (Finalnd)
7.70%, 10/29/49 (b)........................... NR 3,500 3,585,750
7.25%, 09/27/49............................... A3 18,750 19,125,000
7.325%, 10/29/49 (b).......................... NR 9,000 9,220,500
Petroliam Nasional, (Malaysia)
7.125%, 10/18/06.............................. NR 63,100 63,509,519
PT Alatief Freeport Financial Co., (Netherlands)
9.75%, 04/15/01............................... Ba2 7,600 8,308,700
Rio de Janeiro, (Brazil)
10.375%, 07/12/99............................. NR 7,000 7,192,500
Rogers Cablesystems, Inc., Sr. Sec'd Notes,
(Canada)
10.00%, 03/15/05.............................. Ba3 2,000 2,130,000
</TABLE>
B13
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Royal Bank of Canada, (Canada)
6.75%, 10/24/11............................... Aa3 $ 15,000 $ 14,685,000
Siam Commercila, (Thailand)
7.50%, 03/15/06............................... Aa3 14,500 14,282,500
--------------
343,999,484
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 0.2%
Federal National Mortgage Association,
Zero Coupon, 10/09/19......................... Aaa 11,800 2,391,388
United States Treasury Notes,
6.375%, 08/15/02.............................. Aaa 10,000 10,065,600
--------------
12,456,988
--------------
FOREIGN GOVERNMENT BONDS -- 4.7%
Republic of Argentina, (Argentina)
6.625%, 03/31/05.............................. B1 32,340 28,337,925
Republic of Colombia, (Colombia)
7.125%, 05/11/98.............................. Ba1 2,700 2,713,500
8.00%, 06/14/01............................... NR 2,150 2,182,250
8.75%, 10/06/99............................... Ba1 12,300 12,853,500
Republic of Poland, (Poland)
4.00%, (until 10/27/98)....................... Baa3 100,500 85,048,125
5.00%, (until 10/27/99)
6.00%, (until 10/27/02)
7.00%, 10/27/14
Republic of Venezuela, (Venezuela)
6.50%, 12/18/07............................... Ba2 60,250 53,020,000
United Mexican States, (Mexico)
9.75%, 02/06/01............................... NR 25,000 25,812,500
11.375%, 09/15/16............................. NR 21,000 21,866,250
--------------
231,834,050
--------------
TOTAL LONG-TERM BONDS
(cost $1,657,819,992).................................................... 1,681,460,391
--------------
TOTAL LONG TERM INVESTMENTS
(cost $4,195,725,818).................................................... 4,780,903,499
--------------
SHORT-TERM INVESTMENTS -- 4.1%
BANK NOTES -- 0.1%
American Express Centurian Bank,
5.625%, 01/14/97.............................. NR 1,000 1,000,001
Comerica Bank of Detroit,
6.585%, 02/14/97.............................. NR 569 568,948
NBD Bank, N.A.,
6.55%, 06/02/97............................... NR 2,000 2,008,199
--------------
3,577,148
--------------
CERTIFICATES OF DEPOSIT-DOMESTIC -- 0.5%
Advanta National Bank,
6.14%, 02/28/97............................... Baa2 17,000 17,000,000
Chase Manhattan Bank,
5.43%, 05/06/97............................... P3 6,000 6,000,000
--------------
23,000,000
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
CERTIFICATES OF DEPOSIT-EURODOLLAR -- 0.1%
Abbey National Treasury Services, PLC, (United
Kingdom)
5.41%, 01/30/97............................... P1 $ 2,000 $ 2,000,037
Bayerische Hypotheken, (Germany)
5.74%, 05/27/97............................... NR 1,000 1,000,409
--------------
3,000,446
--------------
CERTIFICATES OF DEPOSIT-YANKEE -- 0.5%
Bank of Montreal, (Canada)
5.39%, 01/22/97............................... P1 2,000 2,000,000
Banque Nationale de Paris, (France)
5.41%, 01/15/97............................... NR 3,000 2,999,989
5.58%, 04/02/97............................... NR 2,000 1,999,461
Barclays Bank, PLC, (United Kingdom)
5.37%, 02/03/97-02/05/97...................... NR 6,000 6,000,000
Deutsche Bank, (Germany)
5.69%, 10/28/97............................... P3 1,000 999,754
Empresas La Moderna, SA, (Mexico)
10.25%, 11/12/97.............................. Baa1 2,000 2,051,250
Grupo Televisa, SA, (Mexico)
10.00%, 11/09/97.............................. Ba2 4,000 4,100,000
National Bank of Canada, (Canada)
5.438%, 03/10/97.............................. P3 1,000 1,000,000
Societe Generale, (France)
5.77%, 05/15/97............................... P1 1,000 1,000,130
--------------
22,150,584
--------------
COMMERCIAL PAPER -- 1.3%
Aetna Services, Inc.,
5.42%, 03/14/97............................... NR 2,000 1,978,621
American Brands Inc,
5.33%, 01/31/97............................... P3 1,000 995,706
6.00%, 01/22/97............................... P3 1,000 996,667
American Express Credit Corp.,
5.30%, 02/28/97............................... P1 3,000 2,974,825
Aristar, Inc.,
5.59%, 02/28/97............................... P2 1,000 991,149
Bank Austria,
5.35%, 01/15/97............................... NR 2,000 1,996,136
Barton Capital Corp.,
5.35%, 02/27/97............................... NR 1,000 991,678
Bradford & Bingley Building Society,
5.35%, 01/10/97-01/15/97...................... A1 5,550 5,542,659
Caterpillar Financial Services Corp.,
5.35%, 06/16/97............................... P1 1,000 975,479
Cheltenham & Gloucester Building Society,
5.325%, 02/24/97.............................. NR 1,000 992,160
5.35%, 01/15/97............................... NR 1,000 998,068
Coca Cola Enterprises, Inc.,
5.34%, 02/03/97............................... NR 1,000 995,253
Colonial Pipeline Co.,
5.75%, 01/27/97............................... P3 1,000 996,007
Commonwealth Bank of Australia,
5.32%, 01/22/97............................... NR 7,000 6,979,311
Corporate Receivables Corp.,
5.33%, 01/24/97............................... NR 2,000 1,993,486
</TABLE>
B14
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Countrywide Home Loan, Inc.,
6.20%, 01/15/97............................... NR $ 3,000 $ 2,993,283
CXC, Inc.,
5.60%, 01/16/97............................... NR 1,005 1,002,811
7.00%, 01/02/97............................... NR 670 670,000
Dakota Cert. Prog. of Stand. Cred.,
5.34%, 01/23/97............................... NR 2,000 1,993,770
Engelhard Corp.,
5.58%, 02/24/97............................... P2 1,000 991,785
Enterprise Funding Corp.,
5.47%, 01/16/97............................... NR 1,000 997,873
5.50%, 01/15/97............................... NR 2,000 1,996,028
Fleet Funding Corp.,
5.80%, 02/04/97............................... NR 1,000 994,683
General Motors Acceptance Corp.,
5.47%, 02/12/97............................... P1 3,000 2,981,311
5.50%, 04/07/97............................... P1 1,912 1,884,249
Kredietbank Na Finance Corp.,
5.32%, 01/16/97............................... NR 1,000 997,931
Merrill Lynch & Co., Inc.,
5.31%, 02/27/97............................... P1 1,000 991,740
5.32%, 01/21/97............................... P1 1,000 997,192
5.33%, 01/24/97............................... P1 2,000 1,993,486
5.35%, 01/29/97............................... P1 3,000 2,987,963
Morgan Stanley Group, Inc.,
5.32%, 01/29/97............................... P1 5,000 4,980,050
Nationwide Building Society,
5.375%, 02/26/97.............................. NR 1,000 991,788
Preferred Receivables Funding Corp.,
5.45%, 01/15/97............................... P1 1,000 998,032
5.60%, 02/25/97............................... P1 1,000 991,600
Short Term Repack Asset Trust,
6.006%, 12/15/97.............................. NR 1,000 999,797
Societe Generale,
5.57%, 04/04/97............................... P1 1,000 999,676
Transamerica Financial Corp.,
5.34%, 02/03/97............................... P1 1,000 995,253
--------------
65,827,506
--------------
OTHER CORPORATE OBLIGATIONS -- 0.2%
Associates Corp. of North America,
6.625%, 11/15/97.............................. P1 600 604,890
Beneficial Corp.,
5.54%, 08/05/97............................... P1 1,000 1,000,375
9.70%, 05/30/97............................... P1 2,000 2,031,498
Capital Equipment Receivable Trust,
5.60%, 10/15/97............................... NR 1,545 1,544,889
Dean Witter, Discover &,
5.747%, 03/06/97.............................. P2 1,250 1,250,281
Ford Motor Credit Corp.,
5.625%, 03/03/97.............................. P1 500 499,927
7.95%, 03/27/97............................... P1 465 467,315
General Electric Capital Corp.,
8.00%, 02/01/97............................... P1 1,500 1,503,055
General Motors Acceptance Corp.,
7.75%, 02/20/97-04/15/97...................... P1 825 828,464
7.85%, 03/05/97............................... P1 1,150 1,154,153
7.90%, 03/13/97............................... P1 500 501,804
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Household Finance Corp.,
5.67%, 08/11/97............................... P2 $ 475 $ 475,495
Norwest Corp.,
7.70%, 11/15/97............................... P1 500 508,485
Pfizer, Inc.,
6.50%, 02/01/97............................... P3 500 500,280
--------------
12,870,911
--------------
REPURCHASE AGREEMENT -- 1.4%
Joint Repurchase Agreement Account,
6.613%, 01/02/97 (Note 5)..................... 70,099 70,099,000
--------------
TOTAL SHORT-TERM INVESTMENTS -- 4.1%
(cost $204,409,679)...................................................... 200,525,595
--------------
TOTAL INVESTMENTS BEFORE SHORT SALE -- 101.7%
(cost $4,400,135,497; Note 6)............................................ 4,981,429,094
--------------
INVESTMENT SOLD SHORT -- (2.2%)
United States Treasury Bond,
6.75% 8/15/26
(proceeds $113,630,151; Note 2)............................. 108,775 (112,461,581)
--------------
TOTAL INVESTMENTS, NET OF SHORT SALES -- 99.5%.............................
4,868,967,513
OTHER ASSETS IN EXCESS OF OTHER
LIABILITIES -- 0.5%.................................................... 27,955,174
--------------
TOTAL NET ASSETS -- 100.0%................................................. $4,896,922,687
--------------
--------------
<FN>
The following abbreviations are used in portfolio descriptions:
ADR American Depository Receipt
AG Aktiengesellschaft (West German Stock Company)
B.A. Bankers' Acceptances
C.D. Certificates of Deposit
M.T.N. Medium Term Note
NR Not Rated
PLC Public Limited Company (British Corporation)
SA Sociedad Anonima (Spanish Corporation) or Societe
Anonyme (French Corporation)
(a) Non-income producing security.
(b) Indicates a variable rate security.
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B28 THROUGH B32.
B15
<PAGE>
STOCK INDEX PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 96.8%
VALUE
COMMON STOCKS SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AEROSPACE -- 2.4%
AlliedSignal, Inc............................... 77,300 $ 5,179,100
Boeing Co....................................... 98,028 10,427,728
General Dynamics Corp........................... 17,400 1,226,700
Lockheed Martin Corp............................ 54,149 4,954,633
McDonnell Douglas Corp.......................... 57,300 3,667,200
Northrop Grumman Corp........................... 15,300 1,266,075
Raytheon Co..................................... 62,800 3,022,250
Rockwell International Corp. (a)................ 59,000 3,591,625
United Technologies Corp........................ 65,800 4,342,800
--------------
37,678,111
--------------
AIRLINES -- 0.3%
AMR Corp. (a)................................... 25,000 2,203,125
Delta Air Lines, Inc............................ 20,900 1,481,287
Southwest Airlines Co........................... 39,600 876,150
USAir Group, Inc. (a)........................... 16,100 376,337
--------------
4,936,899
--------------
ALUMINUM -- 0.4%
Alcan Aluminum, Ltd............................. 62,050 2,086,431
Aluminum Co. of America......................... 46,500 2,964,375
Reynolds Metals Co.............................. 17,200 969,650
--------------
6,020,456
--------------
AUTOS - CARS & TRUCKS -- 2.1%
Chrysler Corp................................... 197,400 6,514,200
Cummins Engine Co., Inc......................... 11,200 515,200
Dana Corp....................................... 26,900 877,612
Echlin, Inc..................................... 16,600 524,975
Ford Motor Co................................... 322,100 10,266,937
General Motors Corp............................. 204,900 11,423,175
Genuine Parts Co................................ 33,150 1,475,175
Johnson Controls, Inc........................... 11,100 919,912
Navistar International Corp. (a)................ 20,500 187,062
Safety Kleen Corp............................... 17,450 285,744
--------------
32,989,992
--------------
BANKS AND SAVINGS & LOANS -- 7.3%
Banc One Corp................................... 117,694 5,060,842
Bank of Boston Corp............................. 40,600 2,608,550
Bank of New York Company, Inc................... 105,800 3,570,750
BankAmerica Corp................................ 97,448 9,720,438
Bankers Trust NY Corp........................... 22,000 1,897,500
Barnett Banks, Inc.............................. 52,900 2,175,512
Boatmen's Bancshares, Inc....................... 41,800 2,696,100
Chase Manhattan Corp............................ 119,147 10,633,870
Citicorp........................................ 129,500 13,338,500
Comerica, Inc................................... 30,700 1,607,912
CoreStates Financial Corp....................... 60,100 3,117,687
First Bank System, Inc.......................... 37,600 2,566,200
First Chicago NBD Corp.......................... 88,315 4,746,931
First Union Corp................................ 76,525 5,662,850
Fleet Financial Group, Inc...................... 71,100 3,546,112
Golden West Financial Corp...................... 15,000 946,875
Great Western Financial Corp.................... 37,100 1,075,900
H.F. Ahmanson & Co.............................. 29,400 955,500
J.P. Morgan & Co., Inc.......................... 50,250 4,905,656
KeyCorp......................................... 62,600 3,161,300
Mellon Bank Corp................................ 34,550 2,453,050
NationsBank Corp................................ 78,139 7,638,087
Norwest Corp.................................... 99,100 4,310,850
PNC Bank Corp................................... 90,800 3,416,350
Suntrust Banks, Inc............................. 59,500 2,930,375
U.S. Bancorp.................................... 42,100 1,891,869
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Wachovia Corp................................... 44,900 $ 2,536,850
Wells Fargo & Co................................ 25,266 6,815,503
--------------
115,987,919
--------------
BEVERAGES -- 3.7%
Adolph Coors Co. (Class 'B' Stock).............. 9,500 180,500
Anheuser-Busch Companies, Inc................... 135,800 5,432,000
Brown-Forman Corp. (Class 'B' Stock)............ 19,500 892,125
Coca-Cola Co.................................... 676,000 35,574,500
PepsiCo, Inc.................................... 423,200 12,378,600
Seagram Co., Ltd................................ 101,100 3,917,625
--------------
58,375,350
--------------
CHEMICALS -- 2.2%
Air Products & Chemicals, Inc................... 30,000 2,073,750
Dow Chemical Co................................. 65,700 5,149,237
E.I. du Pont de Nemours & Co.................... 152,600 14,401,625
Eastman Chemical Co............................. 20,600 1,138,150
FMC Corp. (a)................................... 10,600 743,325
Hercules, Inc................................... 28,400 1,228,300
Monsanto Co..................................... 160,500 6,239,437
Nalco Chemical Co............................... 17,500 632,187
Rohm & Haas Co.................................. 17,900 1,461,087
Sigma-Aldrich Corp.............................. 13,600 849,150
Union Carbide Corp.............................. 34,500 1,410,187
--------------
35,326,435
--------------
CHEMICALS - SPECIALTY -- 0.5%
Engelhard Corp.................................. 39,075 747,309
Great Lakes Chemical Corp....................... 17,400 813,450
Morton International, Inc....................... 39,500 1,609,625
Praxair, Inc.................................... 42,000 1,937,250
Raychem Corp.................................... 11,900 953,487
W.R. Grace & Co................................. 25,000 1,293,750
--------------
7,354,871
--------------
COMMERCIAL SERVICES -- 0.3%
CUC International, Inc. (a)..................... 108,925 2,586,969
Deluxe Corp..................................... 21,100 691,025
Dun & Bradstreet Corp........................... 47,460 1,127,175
John H. Harland Co.............................. 8,200 270,600
Moore Corp., Ltd................................ 26,800 546,050
--------------
5,221,819
--------------
COMPUTER SERVICES -- 5.2%
3Com Corp. (a).................................. 46,800 3,433,950
Amdahl Corp. (a)................................ 33,100 401,337
Autodesk, Inc................................... 13,900 389,200
Automatic Data Processing, Inc.................. 79,000 3,387,125
Bay Networks, Inc. (a).......................... 51,300 1,070,887
Cabletron Systems, Inc. (a)..................... 42,600 1,416,450
Ceridian Corp. (a).............................. 19,800 801,900
Cisco Systems, Inc. (a)......................... 176,200 11,210,725
COMPAQ Computer Corp. (a)....................... 73,400 5,449,950
Computer Associates International, Inc.......... 98,962 4,923,359
Computer Sciences Corp. (a)..................... 20,500 1,683,562
EMC Corp. (a)................................... 64,400 2,133,250
First Data Corp................................. 122,300 4,463,950
Intergraph Corp. (a)............................ 11,300 115,825
Microsoft Corp. (a)............................. 324,900 26,844,862
Novell, Inc. (a)................................ 92,500 875,859
Oracle Corp. (a)................................ 179,025 7,474,294
Seagate Technology, Inc. (a).................... 68,100 2,689,950
</TABLE>
B16
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Silicon Graphics, Inc. (a)...................... 47,600 $ 1,213,800
Sun Microsystems, Inc. (a)...................... 98,800 2,537,925
Tandem Computers, Inc. (a)...................... 32,900 452,375
--------------
82,970,535
--------------
CONSTRUCTION -- 0.2%
Fluor Corp...................................... 23,000 1,443,250
Foster Wheeler Corp............................. 10,400 386,100
Kaufman & Broad Home Corp....................... 8,366 107,712
Owens Corning................................... 13,200 562,650
Pulte Corp...................................... 5,900 181,425
--------------
2,681,137
--------------
CONTAINERS -- 0.2%
Ball Corp....................................... 8,100 210,600
Bemis Co., Inc.................................. 14,200 523,625
Crown Cork & Seal Co., Inc...................... 34,400 1,870,500
--------------
2,604,725
--------------
COSMETICS & SOAPS -- 2.4%
Alberto Culver Co. (Class 'B' Stock)............ 7,000 336,000
Avon Products, Inc.............................. 36,100 2,062,212
Clorox Co....................................... 13,900 1,395,212
Colgate Palmolive Co............................ 41,600 3,837,600
Gillette Co..................................... 121,000 9,407,750
International Flavors & Fragrances, Inc......... 30,300 1,363,500
Procter & Gamble Co............................. 185,252 19,914,590
--------------
38,316,864
--------------
DIVERSIFIED GAS -- 0.2%
Ashland, Inc.................................... 18,000 789,750
Coastal Corp.................................... 28,000 1,368,500
Eastern Enterprises............................. 5,100 180,412
ENSERCH Corp.................................... 19,000 437,000
NICOR, Inc...................................... 14,100 504,075
ONEOK, Inc...................................... 6,400 192,000
--------------
3,471,737
--------------
DIVERSIFIED OFFICE EQUIPMENT -- 3.2%
Alco Standard Corp.............................. 36,176 1,867,586
Avery Dennison Corp............................. 29,200 1,032,950
Dell Computer Corp. (a)......................... 48,600 2,581,875
Hewlett-Packard Co.............................. 276,200 13,879,050
Honeywell, Inc.................................. 35,900 2,360,425
International Business Machines Corp............ 141,100 21,306,100
Pitney Bowes, Inc............................... 40,700 2,218,150
Unisys Corp. (a)................................ 46,100 311,175
Xerox Corp...................................... 88,246 4,643,946
--------------
50,201,257
--------------
DRUGS AND HOSPITAL SUPPLIES -- 9.1%
Abbott Laboratories............................. 210,700 10,693,025
Allergan, Inc................................... 18,600 662,625
ALZA Corp. (a).................................. 23,500 608,062
American Home Products Corp..................... 173,400 10,165,575
Amgen, Inc. (a)................................. 72,000 3,915,000
Bausch & Lomb, Inc.............................. 15,600 546,000
Baxter International, Inc....................... 74,200 3,042,200
Becton, Dickinson & Co.......................... 33,300 1,444,387
Biomet, Inc..................................... 29,900 452,237
Boston Scientific Corp. (a)..................... 48,700 2,922,000
Bristol-Myers Squibb Co......................... 135,840 14,772,600
C.R. Bard, Inc.................................. 14,400 403,200
Eli Lilly & Co.................................. 149,800 10,935,400
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Johnson & Johnson............................... 364,000 $ 18,109,000
Mallinckrodt, Inc............................... 20,600 908,975
Medtronic, Inc.................................. 65,100 4,426,800
Merck & Co., Inc................................ 327,750 25,974,187
Pfizer, Inc..................................... 176,800 14,652,300
Pharmacia & Upjohn, Inc......................... 138,225 5,477,166
Schering-Plough Corp............................ 100,300 6,494,425
St. Jude Medical, Inc. (a)...................... 22,600 963,325
United States Surgical Corp..................... 17,500 689,062
Warner-Lambert Co............................... 73,800 5,535,000
--------------
143,792,551
--------------
ELECTRICAL EQUIPMENT -- 0.3%
Applied Materials, Inc. (a)..................... 52,100 1,872,344
W.W. Grainger, Inc.............................. 14,600 1,171,650
Westinghouse Electric Corp...................... 113,200 2,249,850
--------------
5,293,844
--------------
ELECTRONICS -- 3.8%
Advanced Micro Devices, Inc. (a)................ 37,300 960,475
AMP, Inc........................................ 59,144 2,269,651
Apple Computer, Inc............................. 32,900 686,787
Data General Corp. (a).......................... 9,000 130,500
Digital Equipment Corp. (a)..................... 41,800 1,520,475
EG&G, Inc....................................... 11,800 237,475
Emerson Electric Co............................. 61,000 5,901,750
Harris Corp..................................... 10,900 748,012
Intel Corp...................................... 223,000 29,199,062
LSI Logic Corp. (a)............................. 35,600 952,300
Micron Technology, Inc.......................... 56,000 1,631,000
Motorola, Inc................................... 161,300 9,899,787
National Semiconductor Corp. (a)................ 37,100 904,312
Perkin-Elmer Corp............................... 11,400 671,175
Tandy Corp...................................... 16,665 733,260
Tektronix, Inc.................................. 8,600 440,750
Texas Instruments, Inc.......................... 51,300 3,270,375
Thomas & Betts Corp............................. 14,400 639,000
--------------
60,796,146
--------------
ENVIRONMENTAL SERVICES -- 0.1%
Laidlaw, Inc. (Class 'B' Stock)................. 84,400 970,600
--------------
FINANCIAL SERVICES -- 3.2%
American Express Co............................. 128,900 7,282,850
Beneficial Corp................................. 14,400 912,600
Dean Witter Discover & Co....................... 43,545 2,884,856
Federal Home Loan Mortgage Corp................. 48,750 5,368,594
Federal National Mortgage Association........... 296,000 11,026,000
Fifth Third Bancorp............................. 28,400 1,783,875
Green Tree Financial Corp....................... 36,800 1,421,400
H & R Block, Inc................................ 28,400 823,600
Household International , Inc................... 25,900 2,389,275
MBIA, Inc....................................... 11,700 1,184,625
MBNA Corp....................................... 60,250 2,500,375
Merrill Lynch & Co., Inc........................ 45,400 3,700,100
Morgan Stanley Group, Inc....................... 41,100 2,347,837
National City Corp.............................. 59,800 2,683,525
Republic New York Corp.......................... 15,000 1,224,375
Salomon, Inc.................................... 29,800 1,404,325
Transamerica Corp............................... 17,800 1,406,200
--------------
50,344,412
--------------
FOODS -- 4.1%
Archer-Daniels-Midland Co....................... 146,698 3,227,356
Campbell Soup Co................................ 60,500 4,855,125
</TABLE>
B17
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
ConAgra, Inc.................................... 65,200 $ 3,243,700
CPC International, Inc.......................... 39,200 3,038,000
Fleming Companies, Inc.......................... 9,400 162,150
General Mills, Inc.............................. 42,100 2,668,087
Giant Food, Inc. (Class 'A' Stock).............. 15,500 534,750
H.J. Heinz & Co................................. 99,550 3,558,912
Hershey Foods Corp.............................. 42,600 1,863,750
Kellogg Co...................................... 56,800 3,727,500
Philip Morris Companies, Inc.................... 220,800 24,867,600
Pioneer Hi-Bred International, Inc.............. 22,500 1,575,000
Quaker Oats Co.................................. 37,000 1,410,625
Ralston Purina Company.......................... 29,340 2,152,822
Sara Lee Corp................................... 132,200 4,924,450
Sysco Corp...................................... 47,900 1,562,737
W. M. Wrigley, Jr. Co........................... 31,100 1,749,375
--------------
65,121,939
--------------
FOREST PRODUCTS -- 1.5%
Boise Cascade Corp.............................. 12,986 412,305
Champion International Corp..................... 26,600 1,150,450
Georgia-Pacific Corp............................ 24,600 1,771,200
International Paper Co.......................... 81,534 3,291,935
James River Corp. of Virginia................... 23,000 761,875
Kimberly-Clark Corp............................. 76,594 7,295,578
Louisiana-Pacific Corp.......................... 29,800 629,525
Mead Corp....................................... 13,700 796,312
Potlatch Corp................................... 8,700 374,100
Stone Container Corp............................ 28,566 424,919
Temple Inland, Inc.............................. 14,400 779,400
Union Camp Corp................................. 18,900 902,475
Westvaco Corp................................... 27,300 784,875
Weyerhaeuser Co................................. 54,000 2,558,250
Willamette Industries, Inc...................... 15,000 1,044,375
--------------
22,977,574
--------------
GAS PIPELINES -- 0.5%
Columbia Gas System, Inc........................ 15,300 973,462
Consolidated Natural Gas Co..................... 25,900 1,430,975
El Paso Natural Gas Co.......................... 4,259 215,100
Enron Corp...................................... 68,900 2,971,312
NorAm Energy Corp............................... 35,700 548,887
Peoples Energy Corp............................. 9,700 328,587
Williams Companies, Inc......................... 42,300 1,586,250
--------------
8,054,573
--------------
HOSPITAL MANAGEMENT -- 0.8%
Beverly Enterprises, Inc. (a)................... 24,200 308,550
Columbia/HCA Healthcare Corp.................... 182,698 7,444,943
Guidant Corp.................................... 13,000 741,000
Humana, Inc. (a)................................ 43,500 831,937
Manor Care, Inc................................. 15,850 427,950
Service Corp. International..................... 64,400 1,803,200
Shared Medical Systems Corp..................... 7,100 349,675
Tenet Healthcare Corp. (a)...................... 57,600 1,260,000
--------------
13,167,255
--------------
HOUSING RELATED -- 0.5%
Armstrong World Industries, Inc................. 10,900 757,550
Centex Corp..................................... 9,200 346,150
Fleetwood Enterprises, Inc...................... 9,500 261,250
Lowe's Companies, Inc........................... 47,700 1,693,350
Masco Corp...................................... 44,000 1,584,000
Maytag Corp..................................... 28,300 558,925
Stanley Works................................... 25,600 691,200
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Tupperware Corporation.......................... 16,300 $ 874,087
Whirlpool Corp.................................. 20,300 946,487
--------------
7,712,999
--------------
INSURANCE -- 4.0%
Aetna Inc....................................... 41,512 3,320,960
Alexander & Alexander Services, Inc............. 10,400 180,700
Allstate Corp................................... 120,994 7,002,528
American General Corp........................... 55,300 2,260,387
American International Group, Inc............... 127,337 13,784,230
Aon Corp........................................ 28,700 1,782,987
Chubb Corp...................................... 49,400 2,655,250
CIGNA Corp...................................... 20,500 2,800,812
General Re Corp................................. 22,250 3,509,937
ITT Hartford Group, Inc. (a).................... 32,300 2,180,250
Jefferson-Pilot Corp............................ 18,575 1,051,809
Lincoln National Corp........................... 27,600 1,449,000
Marsh & McLennan Companies, Inc................. 19,500 2,028,000
MGIC Investment Corp............................ 17,400 1,322,400
Providian Corp.................................. 25,800 1,325,475
SAFECO Corp..................................... 33,400 1,317,213
St. Paul Companies, Inc......................... 23,400 1,371,825
Torchmark Corp.................................. 18,700 944,350
Travelers Group, Inc............................ 174,594 7,922,203
United Healthcare Corp.......................... 50,600 2,277,000
UNUM Corp....................................... 20,000 1,445,000
USF&G Corp...................................... 32,400 676,350
USLIFE Corp..................................... 8,500 282,625
--------------
62,891,291
--------------
LEISURE -- 1.1%
Brunswick Corp.................................. 28,100 674,400
Harrah's Entertainment, Inc. (a)................ 26,650 529,669
Hasbro, Inc..................................... 23,600 917,450
King World Productions, Inc. (a)................ 10,550 389,031
Mattel, Inc..................................... 74,581 2,069,623
Walt Disney Co.................................. 184,267 12,829,590
--------------
17,409,763
--------------
LODGING -- 0.6%
HFS, Inc........................................ 35,900 2,145,025
Hilton Hotels Corp.............................. 74,700 1,951,538
Loews Corp...................................... 31,500 2,968,875
Marriott International, Inc..................... 35,300 1,950,325
--------------
9,015,763
--------------
MACHINERY -- 1.1%
Briggs & Stratton Corp.......................... 7,700 338,800
Case Corp....................................... 20,000 1,090,000
Caterpillar, Inc................................ 51,600 3,882,900
Cincinnati Milacron, Inc........................ 11,000 240,625
Cooper Industries, Inc.......................... 28,600 1,204,775
Deere & Co...................................... 69,500 2,823,438
Dover Corp...................................... 31,000 1,557,750
Eaton Corp...................................... 21,400 1,492,650
Giddings & Lewis, Inc........................... 6,900 88,838
Harnischfeger Industries, Inc................... 12,800 616,000
Ingersoll-Rand Co............................... 29,900 1,330,550
PACCAR, Inc..................................... 10,830 736,440
Parker-Hannifin Corp............................ 21,050 815,688
Snap-On, Inc.................................... 17,500 623,438
Timken Co....................................... 8,300 380,763
--------------
17,222,655
--------------
</TABLE>
B18
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
MEDIA -- 1.8%
Comcast Corp. (Special Class 'A' Stock)......... 85,900 $ 1,530,094
Dow Jones & Co., Inc............................ 26,500 897,688
Gannett Co., Inc................................ 38,200 2,860,225
Interpublic Group of Companies, Inc............. 21,200 1,007,000
Knight-Ridder, Inc.............................. 25,800 986,850
McGraw-Hill, Inc................................ 27,200 1,254,600
Meredith Corp................................... 7,000 369,250
New York Times Co. (Class 'A' Stock)............ 26,800 1,018,400
R. R. Donnelley & Sons Co....................... 41,300 1,295,788
Tele-Communications, Inc. (Series 'A'
Stock) (a).................................... 176,800 2,309,450
Time Warner, Inc................................ 154,440 5,791,500
Times Mirror Co. (Class 'A' Stock).............. 28,200 1,402,950
Tribune Co...................................... 16,100 1,269,888
US West Media Group (a)......................... 169,300 3,132,050
Viacom, Inc. (Class 'B' Stock) (a).............. 95,967 3,346,849
--------------
28,472,582
--------------
MINERAL RESOURCES -- 0.9%
ASARCO, Inc..................................... 12,200 303,475
Barrick Gold Corporation........................ 96,400 2,771,500
Battle Mountain Gold Co......................... 59,000 405,625
Burlington Resources, Inc....................... 34,300 1,727,863
Cyprus Amax Minerals Co......................... 25,400 593,725
Echo Bay Mines, Ltd............................. 37,200 246,450
Freeport-McMoRan Copper & Gold, Inc. (Class 'B'
Stock)........................................ 51,700 1,544,538
Homestake Mining Co............................. 42,000 598,500
Inco, Ltd....................................... 46,100 1,469,438
Newmont Mining Corp............................. 27,300 1,221,675
Phelps Dodge Corp............................... 17,800 1,201,500
Placer Dome, Inc................................ 65,200 1,418,100
Sante Fe Pacific Gold Corp...................... 34,916 536,834
--------------
14,039,223
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 4.5%
Browning-Ferris Industries, Inc................. 58,800 1,543,500
Cognizant Corp.................................. 46,460 1,533,180
Crane Co........................................ 11,850 343,650
Ecolab, Inc..................................... 17,100 643,388
General Electric Co............................. 449,200 44,414,650
General Instrument Corp. (a).................... 36,900 797,963
General Signal Corp............................. 13,962 596,876
Illinois Tool Works, Inc........................ 33,800 2,699,775
ITT Corp. (a)................................... 31,200 1,353,300
ITT Industries, Inc............................. 31,900 781,550
Millipore Corp.................................. 11,000 455,125
NACCO Industries, Inc. (Class 'A' Stock)........ 2,500 133,750
Newport News Shipbuilding, Inc. (a)............. 9,160 137,400
Pall Corp....................................... 32,500 828,750
PPG Industries Inc.............................. 50,100 2,811,863
Textron, Inc.................................... 22,300 2,101,775
Thermo Electron Corp. (a)....................... 23,000 948,750
Trinova Corp.................................... 7,200 261,900
TRW, Inc........................................ 34,800 1,722,600
Tyco International, Ltd......................... 42,200 2,231,325
WMX Technologies, Inc........................... 132,300 4,316,288
--------------
70,657,358
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
MISCELLANEOUS - CONSUMER GROWTH/STABLE -- 2.0%
American Greetings Corp. (Class 'A' Stock)...... 20,600 $ 584,525
Black & Decker Corp............................. 23,500 707,938
Corning, Inc.................................... 62,800 2,904,500
Eastman Kodak Co................................ 91,000 7,302,750
Jostens, Inc.................................... 9,900 209,138
Minnesota Mining & Manufacturing Co............. 113,300 9,389,738
Polaroid Corp................................... 11,800 513,300
Rubbermaid, Inc................................. 40,900 930,475
Unilever N.V., ADR (United Kingdom)............. 44,300 7,763,575
Whitman Corp.................................... 28,300 647,363
--------------
30,953,302
--------------
PETROLEUM -- 8.0%
Amerada Hess Corp............................... 25,200 1,458,450
Amoco Corp...................................... 135,030 10,869,915
Atlantic Richfield Co........................... 43,785 5,801,513
Chevron Corp.................................... 178,000 11,570,000
Exxon Corp...................................... 337,400 33,065,200
Kerr-McGee Corp................................. 13,200 950,400
Louisiana Land & Exploration Co................. 9,300 498,713
Mobil Corp...................................... 106,900 13,068,525
Occidental Petroleum Corp....................... 89,000 2,080,375
PanEnergy Corp.................................. 40,290 1,813,050
Pennzoil Co..................................... 12,500 706,250
Phillips Petroleum Co........................... 71,900 3,181,575
Royal Dutch Petroleum Co., ADR (Netherlands).... 145,800 24,895,350
Santa Fe Energy Resources, Inc. (a)............. 22,970 318,709
Sun Co., Inc.................................... 19,000 463,125
Tenneco, Inc.................................... 45,800 2,066,725
Texaco, Inc..................................... 71,700 7,035,563
Union Pacific Resources Group, Inc.............. 67,756 1,981,863
Unocal Corp..................................... 67,500 2,742,188
USX-Marathon Group.............................. 78,100 1,864,638
--------------
126,432,127
--------------
PETROLEUM SERVICES -- 1.0%
Baker Hughes, Inc............................... 39,700 1,369,650
Dresser Industries, Inc......................... 47,700 1,478,700
Halliburton Co.................................. 34,200 2,060,550
Helmerich & Payne, Inc.......................... 6,600 344,025
McDermott International, Inc.................... 13,700 227,763
Oryx Energy Co. (a)............................. 29,100 720,225
Rowan Companies, Inc. (a)....................... 25,400 574,675
Schlumberger, Ltd............................... 67,200 6,711,600
Sonat, Inc...................................... 24,000 1,236,000
Western Atlas, Inc. (a)......................... 14,200 1,006,425
--------------
15,729,613
--------------
RAILROADS -- 0.9%
Burlington Northern, Inc........................ 42,142 3,640,015
Conrail Inc..................................... 16,534 1,647,200
CSX Corp........................................ 59,212 2,501,707
Norfolk Southern Corp........................... 33,800 2,957,500
Union Pacific Corp.............................. 66,300 3,986,288
--------------
14,732,710
--------------
</TABLE>
B19
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
RESTAURANTS -- 0.6%
Darden Restaurants, Inc......................... 44,000 $ 385,000
McDonald's Corp................................. 189,100 8,556,775
Wendy's International, Inc...................... 33,700 690,850
--------------
9,632,625
--------------
RETAIL -- 4.7%
Albertson's, Inc................................ 68,700 2,447,438
American Stores Co.............................. 40,100 1,639,088
AutoZone, Inc. (a).............................. 23,000 632,500
Charming Shoppes, Inc........................... 23,300 117,956
Circuit City Stores, Inc........................ 26,800 807,350
CVS Corp........................................ 28,700 1,187,463
Dayton-Hudson Corp.............................. 58,242 2,285,999
Dillard Department Stores, Inc. (Class 'A'
Stock)........................................ 31,050 958,669
Federated Department Stores, Inc. (a)........... 56,400 1,924,650
Great Atlantic & Pacific Tea Co., Inc........... 10,100 321,938
Harcourt General, Inc........................... 20,506 945,839
Home Depot, Inc................................. 130,749 6,553,794
J.C. Penney Co., Inc............................ 62,200 3,032,250
K mart Corp..................................... 128,900 1,337,338
Kroger Co. (a).................................. 34,000 1,581,000
Liz Claiborne, Inc.............................. 19,300 745,463
Longs Drug Stores, Inc.......................... 6,200 304,575
May Department Stores Co........................ 68,300 3,193,025
Mercantile Stores Co., Inc...................... 10,200 503,625
Newell Co....................................... 42,400 1,335,600
Nike, Inc. (Class 'B' Stock).................... 78,000 4,660,500
Nordstrom, Inc.................................. 21,200 751,275
Pep Boys-Manny, Moe & Jack...................... 16,600 510,450
Price/Costco, Inc. (a).......................... 53,666 1,348,358
Reebok International, Ltd....................... 14,600 613,200
Rite Aid Corp................................... 33,200 1,319,700
Sears, Roebuck & Co............................. 107,100 4,939,988
Sherwin-Williams Co............................. 23,400 1,310,400
Stride Rite Corp................................ 12,400 124,000
Supervalu, Inc.................................. 17,800 505,075
The Gap, Inc.................................... 76,700 2,310,588
The Limited, Inc................................ 72,448 1,331,232
TJX Companies, Inc.............................. 21,800 1,032,775
Toys 'R' Us, Inc. (a)........................... 74,550 2,236,500
Wal-Mart Stores, Inc............................ 622,400 14,237,400
Walgreen Co..................................... 67,600 2,704,000
Winn Dixie Stores, Inc.......................... 41,000 1,296,625
Woolworth Corp.................................. 34,900 763,438
--------------
73,851,064
--------------
RUBBER -- 0.2%
B.F. Goodrich Co................................ 13,800 558,900
Cooper Tire & Rubber Co......................... 23,200 458,200
Goodyear Tire & Rubber Co....................... 43,000 2,209,125
--------------
3,226,225
--------------
STEEL -- 0.3%
Allegheny Teledyne, Inc......................... 48,380 1,112,740
Armco, Inc. (a)................................. 26,700 110,138
Bethlehem Steel Corp. (a)....................... 31,600 284,400
Inland Steel Industries, Inc.................... 12,000 240,000
Nucor Corp...................................... 23,900 1,218,900
USX-U.S. Steel Group............................ 23,740 744,843
Worthington Industries, Inc..................... 23,600 427,750
--------------
4,138,771
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
TELECOMMUNICATIONS -- 4.5%
Airtouch Communications, Inc. (a)............... 137,000 $ 3,459,250
Alltel Corp..................................... 51,400 1,612,675
Ameritech Corp.................................. 148,900 9,027,063
Andrew Corp. (a)................................ 15,975 847,673
AT&T Corp....................................... 439,573 19,121,426
DSC Communications Corp. (a).................... 32,000 572,000
Frontier Corp................................... 23,000 520,375
Lucent Technologies, Inc........................ 173,760 8,036,400
MCI Communications Corp......................... 187,000 6,112,563
Northern Telecom, Ltd........................... 70,300 4,349,813
SBC Communications, Inc......................... 163,600 8,466,300
Scientific-Atlanta, Inc......................... 19,500 292,500
Sprint Corp..................................... 117,200 4,673,350
Tci Satellite Entertainment, Inc. (Class 'A'
Stock) (a).................................... 17,080 168,665
Tellabs, Inc. (a)............................... 48,400 1,821,050
Worldcom Inc.................................... 111,600 2,908,575
--------------
71,989,678
--------------
TEXTILES -- 0.2%
Fruit of the Loom, Inc. (Class 'A' Stock) (a)... 20,200 765,075
National Service Industries, Inc................ 12,500 467,188
Russell Corp.................................... 10,600 315,350
Springs Industries, Inc......................... 6,400 275,200
V.F. Corp....................................... 17,918 1,209,465
--------------
3,032,278
--------------
TOBACCO -- 0.2%
American Brands, Inc............................ 46,700 2,317,488
UST, Inc........................................ 50,800 1,644,650
--------------
3,962,138
--------------
TRUCKING/SHIPPING -- 0.1%
Caliber System Inc.............................. 11,600 223,300
Consolidated Freightways, Inc. (a).............. 5,700 50,588
Federal Express Corp. (a)....................... 30,800 1,370,600
Ryder System, Inc............................... 21,700 610,313
--------------
2,254,801
--------------
UTILITY - COMMUNICATIONS -- 2.8%
Bell Atlantic Corp.............................. 119,100 7,711,725
BellSouth Corp.................................. 270,200 10,909,325
GTE Corp........................................ 260,520 11,853,660
NYNEX Corp...................................... 120,200 5,784,625
Pacific Telesis Group........................... 116,200 4,270,350
U S West Communications, Inc.................... 130,900 4,221,525
--------------
44,751,210
--------------
UTILITY - ELECTRIC -- 2.8%
American Electric Power Co., Inc................ 51,100 2,101,488
Baltimore Gas & Electric Co..................... 39,250 1,049,938
Carolina Power & Light Co....................... 41,400 1,511,100
Central & South West Corp....................... 58,300 1,493,938
CINergy Corp.................................... 43,739 1,459,789
Consolidated Edison Co. of NY, Inc.............. 64,100 1,874,925
Dominion Resources, Inc......................... 49,250 1,896,125
DTE Energy Company.............................. 38,500 1,246,438
Duke Power Co................................... 55,100 2,548,375
Edison International............................ 117,200 2,329,350
Entergy Corp.................................... 63,900 1,773,225
FPL Group, Inc.................................. 49,300 2,267,800
GPU, Inc........................................ 31,600 1,062,550
Houston Industries, Inc......................... 71,500 1,617,688
</TABLE>
B20
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Niagara Mohawk Power Corp....................... 35,700 $ 352,538
Northern States Power Co........................ 18,200 834,925
Ohio Edison Co.................................. 42,200 960,050
P P & L Resources, Inc.......................... 43,800 1,007,400
Pacific Enterprises............................. 23,800 722,925
Pacific Gas & Electric Co....................... 111,400 2,339,400
PacifiCorp...................................... 79,500 1,629,750
PECO Energy Co.................................. 60,800 1,535,200
Public Service Enterprise Group, Inc............ 66,000 1,798,500
Southern Co..................................... 181,600 4,108,700
Texas Utilities Co.............................. 60,129 2,450,257
Unicom Corp..................................... 57,600 1,562,400
Union Electric Company.......................... 27,600 1,062,600
--------------
44,597,374
--------------
TOTAL COMMON STOCKS
(cost $998,185,758)............................................ 1,531,362,551
--------------
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS -- 3.6% (000)
-------------
U.S. GOVERNMENT OBLIGATION -- 0.2%
US Treasury Bills,
4.860%, 03/20/97 (b).......................... $ 2,550 2,523,659
REPURCHASE AGREEMENT -- 3.4%
Joint Repurchase Agreement Account,
6.613%, 01/02/97 (Note 5)..................... 53,762 53,762,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $56,285,493)............................................. 56,285,659
TOTAL INVESTMENTS -- 100.4%
(cost $1,054,471,251; Note 6).................................. 1,587,648,210
VARIATION MARGIN ON OPEN FUTURES CONTRACTS -- (0.1%) (C).........
(937,100)
OTHER LIABILITIES IN EXCESS OF
OTHER ASSETS -- (0.3%)......................................... (5,330,803)
--------------
TOTAL NET ASSETS -- 100.0%....................................... $1,581,380,307
--------------
--------------
<FN>
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, 1996 are as follows:
NUMBER OF EXPIRATION VALUE AT VALUE AT
CONTRACTS TYPE DATE TRADE DATE DECEMBER 31, 1996 APPRECIATION
129 S&P 500 Index Mar 97 $47,304,050 $48,020,250 $716,200
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B28 THROUGH B32.
B21
<PAGE>
EQUITY PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 75.9%
VALUE
COMMON STOCKS -- 75.3% SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AUTOMOBILES & TRUCKS -- 3.8%
Chrysler Corp................................... 3,927,820 $ 129,618,060
General Motors Corp............................. 700,000 39,025,000
Navistar International Corp. (a)................ 395,200 3,606,200
PACCAR Inc...................................... 139,700 9,499,600
--------------
181,748,860
--------------
BANKS & FINANCIAL SERVICES -- 13.6%
American Express Co............................. 2,200,000 124,300,000
Associates First Capital Corp. (a).............. 139,300 6,146,613
Bank of New York Co., Inc....................... 1,800,000 60,750,000
BankAmerica Corp................................ 550,000 54,862,500
Chase Manhattan Corp............................ 624,000 55,692,000
Dean Witter Discover & Co....................... 1,600,000 106,000,000
First America Bank Corp......................... 187,000 11,243,375
Great Western Financial Corp.................... 1,000,000 29,000,000
Lehman Brothers Holdings, Inc................... 900,000 28,237,500
Mellon Bank Corp................................ 276,398 19,624,258
Mercantile Bankshares Corp...................... 279,600 8,947,200
Morgan (J.P.) & Co., Inc........................ 395,400 38,600,925
NationsBank Corp................................ 600,000 58,650,000
Republic New York Corp.......................... 225,000 18,365,625
Salomon, Inc.................................... 700,000 32,987,500
--------------
653,407,496
--------------
CHEMICALS -- 1.0%
Eastman Chemical Co............................. 466,550 25,776,887
Wellman, Inc.................................... 798,200 13,669,175
Witco Corp...................................... 268,800 8,198,400
--------------
47,644,462
--------------
COMMERCIAL SERVICES -- 1.9%
AAR Corp........................................ 650,000 19,662,500
American Standard Co., Inc. (a)................. 1,050,000 40,162,500
TRW Inc......................................... 694,400 34,372,800
--------------
94,197,800
--------------
COMPUTER HARDWARE -- 5.1%
Amdahl Corp. (a)................................ 4,000,000 48,500,000
Comdisco, Inc................................... 1,297,207 41,186,322
Digital Equipment Corp. (a)..................... 2,900,000 105,487,500
Gerber Scientific, Inc.......................... 419,800 6,244,525
International Business Machines Corp............ 300,000 45,300,000
--------------
246,718,347
--------------
CONSTRUCTION & HOUSING -- 0.5%
Centex Corp..................................... 600,000 22,575,000
--------------
DIVERSIFIED CONSUMER PRODUCTS -- 5.1%
Gibson Greetings Inc. (a)....................... 750,000 14,718,750
Loews Corp...................................... 1,600,000 150,800,000
RJR Nabisco Holdings Corp....................... 2,300,000 78,200,000
--------------
243,718,750
--------------
ELECTRICAL EQUIPMENT
Rexel, Inc. (a)................................. 107,199 1,701,784
--------------
ELECTRICAL POWER -- 1.2%
American Electric Power
Company Inc................................... 180,000 7,402,500
GPU, Inc........................................ 500,000 16,812,500
Long Island Lighting Co......................... 1,541,400 34,103,475
--------------
58,318,475
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
ELECTRONICS -- 1.1%
Harris Corp..................................... 300,000 $ 20,587,500
Texas Instruments, Inc.......................... 500,000 31,875,000
--------------
52,462,500
--------------
ENERGY EQUIPMENT & SERVICES -- 0.4%
NorAm Energy Corp............................... 1,300,000 19,987,500
--------------
FOREST PRODUCTS -- 8.9%
Georgia-Pacific Corp............................ 900,000 64,800,000
International Paper Co.......................... 1,350,000 54,506,250
James River Corp. of Virginia................... 560,000 18,550,000
Kimberly-Clark Corp............................. 343,100 32,680,275
Mead Corp....................................... 900,000 52,312,500
Rayonier Inc.................................... 125,000 4,796,875
Temple-Inland Inc............................... 850,000 46,006,250
Weyerhaeuser Co................................. 1,421,400 67,338,825
Willamette Industries, Inc...................... 1,250,000 87,031,250
--------------
428,022,225
--------------
HOSPITALS -- 3.0%
Foundation Health Corp. (a)..................... 1,430,700 45,424,725
Tenet Healthcare Corp. (a)...................... 3,237,832 70,827,575
Wellpoint Health Networks Inc................... 799,700 27,489,688
--------------
143,741,988
--------------
INSURANCE -- 11.3%
Alexander & Alexander Services, Inc............. 1,050,000 18,243,750
American Financial Group Inc.................... 303,700 11,464,675
American General Corp........................... 1,000,000 40,875,000
Chubb Corp...................................... 2,206,400 118,594,000
Citizens Corp................................... 700,000 15,750,000
Old Republic International Corp................. 1,950,885 52,186,174
Providian Corp.................................. 340,500 17,493,187
SAFECO Corp..................................... 1,600,000 63,100,000
St. Paul Companies, Inc......................... 826,900 48,477,013
The Equitable Companies, Inc.................... 1,800,000 44,325,000
Travelers Corp.................................. 1,800,000 81,675,000
Western National Corp........................... 1,624,300 31,267,775
--------------
543,451,574
--------------
METALS-NON FERROUS -- 1.6%
Aluminum Company of America..................... 600,000 38,250,000
Amax Gold Inc. (a).............................. 131,342 837,305
Cyprus Amax Minerals Co......................... 1,533,200 35,838,550
Nord Resources Corp. (a)........................ 130,500 570,938
--------------
75,496,793
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 0.1%
American Water Works Co., Inc................... 270,000 5,568,750
Worldtex, Inc. (a).............................. 107,199 951,391
--------------
6,520,141
--------------
OIL & GAS EXPLORATION/PRODUCTION -- 6.0%
Amerada Hess Corp............................... 325,000 18,809,375
Atlantic Richfield Co........................... 400,000 53,000,000
Elf Aquitaine, ADR (France)..................... 2,424,433 109,705,593
Occidental Petroleum Corp....................... 1,100,000 25,712,500
Oryx Energy Co. (a)............................. 1,600,000 39,600,000
Total S.A., ADR (France)........................ 738,365 29,719,191
Union Texas Petroleum
Holdings, Inc................................. 504,500 11,288,188
--------------
287,834,847
--------------
</TABLE>
B22
<PAGE>
EQUITY PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
RESTAURANTS -- 0.4%
Darden Restaurants Inc.......................... 2,500,000 $ 21,875,000
--------------
RETAIL -- 5.9%
Dayton-Hudson Corp.............................. 358,800 14,082,900
Dillard Department Stores, Inc. (a)............. 2,550,000 78,731,250
K-Mart Corp. (a)................................ 6,500,000 67,437,500
Petrie Stores Corp.............................. 540,000 1,451,250
Tandy Corp...................................... 1,382,900 60,847,600
Toys 'R' Us Inc. (a)............................ 854,000 25,620,000
Waban, Inc. (a)................................. 1,300,000 33,800,000
--------------
281,970,500
--------------
STEEL -- 0.7%
Bethlehem Steel Corp. (a)....................... 500,000 4,500,000
Birmingham Steel Corp........................... 1,468,400 27,899,600
Carpenter Technology Corp....................... 100,000 3,662,500
--------------
36,062,100
--------------
TELECOMMUNICATIONS -- 3.3%
360 Communication Co............................ 96,066 2,221,526
AT&T Corp....................................... 1,600,000 69,600,000
Loral Corp...................................... 1,800,000 33,075,000
Telefonica de Espana, SA, ADR (Spain)........... 800,000 55,400,000
--------------
160,296,526
--------------
TRANSPORTATION -- 0.4%
OMI Corp. (a)................................... 1,000,000 8,750,000
Overseas Shipholding Group, Inc................. 600,000 10,200,000
--------------
18,950,000
--------------
TOTAL COMMON STOCKS
(cost $2,545,705,536).......................................... 3,626,702,668
--------------
PREFERRED STOCK -- 0.6%
DIVERSIFIED CONSUMER PRODUCTS -- 0.6%
RJR Nabisco Holdings Corp., Conv. Pfd. Stock
(cost $25,999,610)............................ 4,000,000 27,000,000
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $2,571,705,146).......................................... 3,653,702,668
--------------
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS -- 23.8% (000)
-------------
CERTIFICATES OF DEPOSIT-YANKEE -- 2.7%
Bank of Montreal
5.45%, 01/07/97............................... $ 47,000 47,000,000
Canadian Imperial Bank of Commerce
5.41%, 01/31/97............................... 35,000 35,000,000
Deutsche Bank
5.37%, 01/21/97............................... 46,000 46,000,000
--------------
128,000,000
--------------
COMMERCIAL PAPER -- 4.5%
Aristar, Inc.,
5.59%, 02/21/97............................... 6,615 6,563,642
Ciba-Geigy Corp.,
5.75%, 02/06/97............................... 2,000 1,988,820
Countrywide Home Loan, Inc.,
6.20%, 01/15/97............................... 11,000 10,975,372
6.35%, 01/15/97............................... 18,000 17,958,725
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED) (000) (NOTE 2)
------------- --------------
<S> <C> <C>
Countrywide Home Loan, Inc.,
5.58%, 01/21/97............................... $ 12,636 $ 12,598,787
5.35%, 01/21/97............................... 6,000 5,983,058
Creditanstalt Finance Inc.,
5.40%, 02/11/97............................... 20,000 19,880,000
Engelhard Corp.,
5.34%, 01/17/97............................... 5,000 4,988,875
5.58%, 02/24/97............................... 1,000 991,785
Finova Capital Corp.,
5.55%, 01/13/97............................... 1,000 998,304
General Motors Accept Corp.,
5.72%, 01/31/97............................... 8,499 8,459,839
GTE Corp.,
5.50%, 01/14/97............................... 2,000 1,996,333
Heller Financial, Inc.,
5.57%, 01/13/97............................... 2,000 1,996,596
5.57%, 01/14/97............................... 4,000 3,992,574
5.75%, 01/16/97............................... 7,000 6,984,347
Lehman Brothers Holdings, Inc.,
6.70%, 01/07/97............................... 48,000 47,955,333
Mitsubishi International Corp.,
5.45%, 01/15/97............................... 3,000 2,994,096
5.35%, 01/24/97............................... 2,000 1,993,461
NYNEX Corp.,
6.80%, 01/06/97............................... 5,000 4,996,222
5.71%, 01/13/97............................... 5,000 4,991,276
Preferred Receivables Funding Corp.,
5.50%, 01/13/97............................... 2,990 2,984,975
5.45%, 01/14/97............................... 1,000 998,183
5.33%, 01/21/97............................... 2,639 2,631,576
5.55%, 01/22/97............................... 2,613 2,604,943
5.32%, 01/23/97............................... 7,800 7,775,794
Rank Xerox Capital (Europe) PLC,
5.65%, 01/16/97............................... 3,018 3,011,369
5.50%, 01/17/97............................... 15,161 15,126,256
5.35%, 01/21/97............................... 1,000 997,176
5.65%, 01/21/97............................... 6,043 6,024,980
Sonoco Products,
5.45%, 01/14/97............................... 6,564 6,552,076
--------------
217,994,773
--------------
REPURCHASE AGREEMENT -- 12.4%
Joint Repurchase Agreement Account,
6.613%, 01/02/97 (Note 5)..................... 599,921 599,921,000
--------------
U. S. GOVERNMENT & AGENCY OBLIGATIONS -- 4.2%
Federal Home Loan Mortgage Corp.,
5.24%, 02/14/97............................... 20,800 20,669,815
5.225%, 02/28/97.............................. 15,000 14,875,906
5.27%, 03/17/97............................... 13,000 12,859,174
5.26%, 06/20/97............................... 3,640 3,550,118
Federal National Mortgage Assoc.,
5.23%, 01/28/97............................... 14,040 13,986,968
5.22%, 02/18/97............................... 20,800 20,658,248
5.21%, 03/03/97............................... 21,205 21,020,870
5.30%, 03/27/97............................... 8,000 7,900,720
5.37%, 03/27/97............................... 8,320 8,215,751
5.50%, 03/27/97............................... 10,600 10,468,455
5.25%, 04/10/97............................... 22,000 21,685,583
5.30%, 04/04/97............................... 20,800 20,520,448
5.40%, 12/05/97............................... 10,000 9,986,992
</TABLE>
B23
<PAGE>
EQUITY PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED) (000) (NOTE 2)
------------- --------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS (CON'T)
United States Treasury Notes,
6.875%, 02/28/97.............................. $ 3,900 $ 3,909,750
5.75%, 09/30/97............................... 12,000 12,025,527
--------------
202,334,325
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $1,148,242,455).......................................... 1,148,250,098
--------------
TOTAL INVESTMENTS -- 99.7%
(cost $3,719,947,601: Note 6).................................. 4,801,952,766
OTHER ASSETS IN EXCESS OF
LIABILITIES -- 0.3%............................................ 12,016,310
--------------
TOTAL NET ASSETS -- 100%......................................... $4,813,969,076
--------------
--------------
<FN>
The following abbreviation is used in portfolio descriptions:
ADR American Depository Receipt
(a) Non-income producing security.
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B28 THROUGH B32.
B24
<PAGE>
GLOBAL PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 93.9%
VALUE
COMMON STOCKS -- 93.8% SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
ARGENTINA -- 0.7%
Banco Frances Del Rio De La Plata
(Banks and Savings & Loans)................... 453,195 $ 4,238,157
--------------
AUSTRALIA -- 3.9%
Brambles Industries, Ltd.
(Miscellaneous - Basic Industry).............. 552,500 10,783,281
Broken Hill Proprietary Co., Ltd.
(Metals - Diversified)........................ 472,231 6,727,592
Coca-Cola Amatil, Ltd.
(Foods)....................................... 371,832 3,975,907
Publishing and Broadcasting, Ltd.
(Media)....................................... 213,900 1,040,709
--------------
22,527,489
--------------
BELGIUM -- 0.3%
Bekaert, SA
(Miscellaneous - Basic Industry).............. 3,150 2,000,627
--------------
BRAZIL -- 0.7%
Basil De Distrub., ADR
(Retail) (a).................................. 219,400 3,839,500
--------------
FEDERAL REPUBLIC OF GERMANY -- 3.6%
Hoechst, AG
(Chemicals)................................... 177,900 8,398,266
Linde, AG
(Machinery)................................... 11,240 6,860,779
SAP, AG
(Computer Services) (a)....................... 40,400 5,495,974
--------------
20,755,019
--------------
FINLAND -- 1.6%
Nokia Corp. (Class 'A' Stock)
(Telecommunications).......................... 157,700 9,151,964
--------------
FRANCE -- 6.4%
Carrefour Supermarche, SA
(Retail)...................................... 18,000 11,708,671
Imetal
(Steel)....................................... 25,236 3,724,620
Legrand, SA
(Electrical Equipment)........................ 37,800 6,438,381
SGS Thomson Microelectronics, N.V., ADR
(Electronics) (a)............................. 101,600 7,112,000
SGS Thomson Microelectronics, N.V.,
(Electronics) (a)............................. 5,000 353,565
Valeo, SA
Autos - Cars & Trucks......................... 128,585 7,928,170
--------------
37,265,407
--------------
HONG KONG -- 7.3%
CDL Hotels International, Ltd.
(Real Estate Development)..................... 6,948,145 3,975,117
Citic Pacific, Ltd.
(Multi-industry) (c).......................... 1,652,000 9,590,122
Guoco Group, Ltd.
(Financial Services).......................... 1,944,000 10,883,082
Hung Hing Printing Group, Ltd.
(Miscellaneous - Basic Industry).............. 3,452,000 1,249,674
Hutchison Whampoa, Ltd.
(Multi-industry).............................. 749,000 5,882,959
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
New World Development Co., Ltd.
(Real Estate Development)..................... 1,597,000 $ 10,736,828
--------------
42,317,782
--------------
ITALY -- 2.7%
Gucci Group, ADR
(Textiles).................................... 94,100 6,010,637
Telecom Italia Mobile Spa
(Telecommunications).......................... 3,790,500 9,570,445
--------------
15,581,082
--------------
JAPAN -- 13.6%
Daibiru Corp.
(Real Estate Development)..................... 198,000 1,825,121
Eisai Co., Ltd.
(Drugs and Hospital Supplies)................. 288,000 5,656,788
Honda Motor Co.
(Autos - Cars & Trucks)....................... 368,000 10,493,453
Jgc Corp.
(Construction) (a)............................ 438,000 3,278,963
Keyence Corp.
(Electrical Equipment)........................ 37,800 4,656,616
Kokusai Denshin Denwa
(Telecommunications).......................... 49,000 3,368,539
Mitsui Fudosan
(Real Estate Development)..................... 673,000 6,725,362
Namco, Ltd.
(Leisure)..................................... 145,500 4,449,733
Nippon Television Network
(Media)....................................... 21,700 6,542,901
Nissan Chemicals Inds.
(Chemicals)................................... 663,000 3,141,368
Onward Kashiyama Co., Ltd.
(Textiles).................................... 528,000 7,414,197
Sony Corp.
(Electronics)................................. 169,000 11,050,224
Toyota Motor Corp.
(Autos - Cars & Trucks)....................... 352,000 10,097,864
--------------
78,701,129
--------------
MALAYSIA -- 2.6%
I.J.M. Corp. Berhad
(Construction)................................ 3,180,000 7,493,465
Renong Berhad
(Real Estate Development)..................... 1,637,000 2,904,459
Resorts World Berhad
(Leisure)..................................... 1,065,000 4,850,495
--------------
15,248,419
--------------
MEXICO -- 2.4%
Apasco, SA de CV
(Steel)....................................... 659,200 4,508,778
Cifra, SA de CV (Class 'B' Stock)
(Retail) (a).................................. 1,948,900 2,379,657
Fomento Economico Mexicano, SA de CV (Class 'B'
Stock)
(Beverage).................................... 935,400 3,198,961
Kimberly Clark (Series A)
(Paper Products).............................. 205,000 4,037,682
--------------
14,125,078
--------------
</TABLE>
B25
<PAGE>
GLOBAL PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
NETHERLANDS -- 2.9%
Heineken, N.V.
(Food & Beverages)............................ 21,625 $ 3,825,996
Nutricia Verenigde Bedrijven
(Healthcare).................................. 37,300 5,664,859
Royal Dutch Petroleum
(Petroleum)................................... 41,400 7,255,220
--------------
16,746,075
--------------
NEW ZEALAND -- 0.1%
Fletcher Challenge Forestry Division
(Forest Products)............................. 293,204 490,803
--------------
SINGAPORE -- 3.1%
Overseas Chinese Banking Corp., Ltd.
(Banks and Savings & Loans)................... 462,000 5,744,872
Overseas Union Bank, Ltd.
(Banks and Savings & Loans)................... 793,000 6,120,489
Sembawang Maritime, Ltd.
(Trucking/Shipping)........................... 883,500 2,525,548
Wing Tai Holdings, Ltd.
(Real Estate Development)..................... 1,239,250 3,542,486
--------------
17,933,395
--------------
SPAIN -- 2.8%
Banco Popular Espanol, SA
(Banks and Savings & Loans)................... 31,700 6,227,711
Centros Commerciales Pryca, SA
(Retail)...................................... 197,462 4,183,552
Telefonica De Espana
(Telecommunications) (a)...................... 253,700 5,893,004
--------------
16,304,267
--------------
SWEDEN -- 5.3%
Astra, AB (Series 'B' Free)
(Drugs and Hospital Supplies)................. 161,880 7,782,931
Hennes & Mauritz (Series 'B' Free)
(Retail)...................................... 86,000 11,863,820
Mo Och Domsjo, Ab (Series'B' Free)
(Forest Products)............................. 156,900 4,402,286
Skandinaviska Enskilda Bank (Series A)
(Banks & Savings & Loans)..................... 655,100 6,701,310
--------------
30,750,347
--------------
UNITED KINGDOM -- 13.3%
Bank Of Ireland
(Banks and Savings & Loans)................... 982,700 8,969,717
British Sky Broadcasting Group, PLC
(Media)....................................... 987,800 8,830,191
Dixons Group, PLC
(Retail)...................................... 795,800 7,400,045
Guest Kean & Nettlefolds, PLC
(Autos - Cars & Trucks)....................... 677,340 11,611,047
Hays, PLC
(Commercial Services)......................... 519,700 5,001,723
Reed International, PLC
(Miscellaneous - Basic Industry).............. 298,000 5,603,368
Siebe, PLC
(Machinery) (c)............................... 690,340 12,815,127
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Standard Chartered, PLC
(Banks & Savings & Loans)..................... 580,000 $ 7,121,602
Vodafone Group, PLC
(Telecommunications).......................... 2,394,200 10,127,167
--------------
77,479,987
--------------
UNITED STATES -- 20.5%
Baker Hughes, Inc.
(Petroleum Services).......................... 163,800 5,651,100
Case Corp.
(Machinery)................................... 105,000 5,722,500
Cisco Systems, Inc.
(Computer Services) (a)....................... 154,800 9,849,150
Mattel, Inc.
(Leisure)..................................... 338,758 9,400,535
MCI Communications Corp.
(Telecommunications) (c)...................... 321,400 10,505,763
Microsoft Corp.
(Computer Services) (a), (c).................. 170,700 14,104,088
Mirage Resorts, Inc.
(Leisure) (a)................................. 211,500 4,573,688
Mobil Corp.
(Petroleum)................................... 81,300 9,938,925
Motorola, Inc.
(Electronics)................................. 67,400 4,136,675
Oracle Corp.
(Computer Services) (a)....................... 252,600 10,546,050
Texas Instruments, Inc.
(Electronics)................................. 106,900 6,814,875
Tiffany & Co.
(Retail)...................................... 133,800 4,900,425
Time Warner, Inc.
(Media)....................................... 173,400 6,502,500
Transocean Offshore, Inc.
(Petroleum Services).......................... 79,800 4,997,475
Viacom, Inc. (Class 'A' Stock)
(Media) (a)................................... 146,600 5,057,700
Walt Disney Co.
(Leisure)..................................... 92,500 6,440,313
--------------
119,141,762
--------------
TOTAL COMMON STOCKS
(cost $433,976,824)............................................ 544,598,289
--------------
WARRANTS (A) -- 0.1%
MALAYSIA
Renong Berhad, Expire 11/21/00,
(Miscellaneous - Basic Industry).............. 185,625 91,158
--------------
SINGAPORE
United Overseas Bank Ltd., Expire 6/17/97,
(Banks and Savings & Loans)................... 57,800 204,054
--------------
TOTAL WARRANTS
(cost $307,011)................................................ 295,212
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $434,283,835)............................................ 544,893,501
--------------
</TABLE>
B26
<PAGE>
GLOBAL PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENT -- 4.5% (000) (NOTE 2)
------------- --------------
<S> <C> <C>
UNITED STATES
Bear, Stearns & Co., Repurchase Agreement,
6.750%, 01/02/97 (cost $26,319,000) (b)....... $ 26,319 $ 26,319,000
--------------
TOTAL INVESTMENTS -- 98.4%
(cost $460,602,835; Note 6).................................... 571,212,501
FORWARD CURRENCY CONTRACTS --
AMOUNT RECEIVABLE FROM
COUNTERPARTIES (D) -- 0.1%..................................... 692,778
OTHER ASSETS IN EXCESS
OF LIABILITIES -- 1.5%......................................... 8,724,760
--------------
TOTAL NET ASSETS -- 100.0%....................................... $ 580,630,039
--------------
--------------
<FN>
The following abbreviations are used in portfolio descriptions:
AB Akiteboiag (Swedish Stock Company)
ADR American Depository Receipt
AG Aktiengesellschaft (West 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., repurchase price $26,328,870 due 1/02/97. The value of
the collateral was $27,180,328.
(c) Securities with an aggregate market value of $13,568,943 have been
segregated as collateral for forward currency contracts.
(d) Outstanding forward currency contract to sell foreign currency at December
31, 1996 is as follows:
VALUE AT
FOREIGN CURRENCY SETTLEMENT DATE CURRENCY
SALE CONTRACTS RECEIVABLE VALUE APPRECIATION
Japanese Yen, $42,507,276 $41,814,498 $692,778
expiring
1/6/97-1/14/97
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B28 THROUGH B32.
B27
<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. These
policies are in conformity with generally accepted accounting principles.
SECURITIES VALUATION: Securities traded on an exchange (whether domestic or
foreign) are valued at the last reported sales price on the primary exchange on
which they are traded. Securities traded in the over-the-counter market
(including securities listed on exchanges for which a last sales price is not
available) are valued at the average of the last reported bid and asked prices.
Convertible debt securities are valued at the mean between the most recently
quoted bid and asked prices provided by principal market makers. High yield
bonds are valued either by quotes received from principal market makers or by an
independent pricing service which determine prices by analysis of quality,
coupon, maturity and other factors. Any security for which a reliable market
quotation is unavailable is valued at fair value as determined in good faith by
or under the direction of the Series Fund's Board of Directors.
Conservative Balanced and Flexible Managed Portfolios use amortized cost to
value short-term securities. Short-term securities that are held in the other
Portfolios which mature in more than 60 days are valued at current market
quotations and those short-term securities which mature in 60 days or less are
valued at amortized cost.
REPURCHASE AGREEMENTS: In connection with transactions in repurchase agreements
with U.S. financial institutions, it is the Series Fund's policy that its
custodian or designated subcustodians, as the case may be under triparty
repurchase agreements, take possession of the underlying collateral securities,
the value of which exceeds the principal amount of the repurchase transaction
including accrued interest. If the seller defaults and the value of the
collateral declines or if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Series Fund may
be 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 investment 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
B28
<PAGE>
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 foreign currency gains (losses) are included in the
reported net realized gains (losses) on investment transactions.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains or losses from holdings of foreign currencies, currency
gains or losses realized between the trade and settlement dates on security
transactions, and the difference between the amounts of dividends, interest and
foreign taxes recorded on the Series Fund's books and the U.S. dollar equivalent
amounts actually received or paid. Net unrealized currency gains or losses from
valuing foreign currency denominated assets and liabilities (other than
investments) at fiscal year end exchange rates are reflected as a component of
net unrealized appreciation (depreciation) on investments and foreign
currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
SHORT SALES: Certain portfolios of the Series Fund may sell a security it does
not own in anticipation of a decline in the market value of that security (short
sale). When the Portfolio makes a short sale, it must borrow the security sold
short and deliver it to the 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 sale 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.
B29
<PAGE>
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; interest income, which is comprised of three elements: stated
coupon, original issue discount and market discount, 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.
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 Statements 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
and distributions from net realized gains, if any, twice a year. Dividends and
distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Series Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gains, and
Return of Capital Distributions by Investment Companies. As a result of this
statement, the Series Fund changed the classification of distributions to
shareholders to disclose the amounts of undistributed net investment income and
accumulated net realized gain (loss) on investments available for distributions
determined in accordance with income tax regulations. For the fiscal year ended
December 31, 1996, the application of this statement increased (decreased)
paid-in capital in excess of par (PC), undistributed net investment income
("UNI") and accumulated net realized gains (losses) on investments ("G/L") by
the following amounts:
<TABLE>
<CAPTION>
PC UNI G/L
----------- ----------- -----------
<S> <C> <C> <C>
Diversified Bond Portfolio.................. $(7,574,364) $ (617,274) $ 8,191,638
Government Income Portfolio................. (16,529) (1,481,055) 1,497,584
Conservative Balanced Portfolio............. (15,661,578) 3,079,619 12,581,959
Flexible Managed Portfolio.................. (31,413,181) 8,052,179 23,361,002
Stock Index Portfolio....................... (937,091) 448,481 488,610
Equity Portfolio............................ (10,995,498) 6,099,985 4,895,513
Global Portfolio............................ (373,014) 5,985,915 (5,612,901)
</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
B30
<PAGE>
Fund, occupancy and certain clerical and administrative expenses of the Series
Fund. The Series Fund bears all other costs and expenses.
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
Portfolios' 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, 1996.
PIC is an indirect, wholly-owned subsidiary of The Prudential.
NOTE 4: OTHER TRANSACTIONS WITH AFFILIATES
For the fiscal year ended December 31, 1996, Prudential Securities Incorporated,
an indirect, wholly owned subsidiary of The Prudential, earned $888,605 in
brokerage commissions from transactions executed on behalf of the following
Portfolios:
<TABLE>
<CAPTION>
Fund Commission
<S> <C>
Conservative Balanced Portfolio................................ $ 120,976
Flexible Managed Portfolio..................................... 582,317
Equity Portfolio............................................... 165,924
Global Portfolio............................................... 19,388
------------
$ 888,605
</TABLE>
NOTE 5: JOINT REPURCHASE AGREEMENT ACCOUNT
The portfolios of the Series Fund (exclusive of the 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
$868,381,000 as of December 31, 1996. The Portfolios of the Series Fund with
cash invested in the joint account had the following principal amounts and
percentage participation in the account:
<TABLE>
<CAPTION>
Principal Percentage
Amount Interest
------------- ------------
<S> <C> <C>
Diversified Bond Portfolio........................... $ 15,414,000 1.78%
Government Income Portfolio.......................... 6,517,000 0.75
Conservative Balanced Portfolio...................... 22,692,000 2.61
Flexible Managed Portfolio........................... 70,099,000 8.07
Stock Index Portfolio................................ 53,762,000 6.19
Equity Portfolio..................................... 599,921,000 69.09
All other portfolios (currently not available to
VCA-24)............................................. 99,976,000 11.51
------------- ------------
$ 868,381,000 100.00%
</TABLE>
As of such date, each repurchase agreement in the joint account and the
collateral was as follows:
B31
<PAGE>
Bear, Stearns & Co., Inc., 6.75%, in the principal amount of $265,000,000,
repurchase price $265,099,375, due 1/2/97. The value of the collateral including
accrued interest was $270,501,866.
Goldman, Sachs & Co., Inc., 5.85%, in the principal amount of $73,381,000,
repurchase price $73,404,849, due 1/2/97. The value of the collateral including
accrued interest was $75,883,443.
Smith Barney, Inc., 6.65%, in the principal amount of $265,000,000, repurchase
price $265,097,902, due 1/2/97. The value of the collateral including accrued
interest was $270,820,275.
UBS Securities Corp., 6.65%, in the principal amount of $265,000,000, repurchase
price $265,097,902, due 1/2/97. The value of the collateral including accrued
interest was $270,302,336.
The weighted average interest rate of these repurchase agreements was 6.613%.
NOTE 6: PORTFOLIO SECURITIES
The aggregate cost of purchase and the proceeds from the sales of securities
(excluding short-term issues) for the fiscal year ended December 31, 1996 were
as follows:
Cost of Purchases:
<TABLE>
<CAPTION>
DIVERSIFIED GOVERNMENT CONSERVATIVE FLEXIBLE STOCK
BOND INCOME BALANCED MANAGED INDEX EQUITY GLOBAL
------------ ------------ ------------ ----------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Debt Securities... $1,474,912,068 $473,601,266 $10,348,623,701 $7,818,989,849 0 0 0
Equity
Securities...... 0 0 $524,839,665 $2,661,774,273 $ 322,878,792 $ 644,784,097 $271,345,027
</TABLE>
Proceeds From Sales:
<TABLE>
<CAPTION>
DIVERSIFIED GOVERNMENT CONSERVATIVE FLEXIBLE STOCK
BOND INCOME BALANCED MANAGED INDEX EQUITY GLOBAL
------------ ------------ ----------- ----------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Debt Securities... $1,351,233,287 $433,921,140 $9,086,693,898 $7,188,296,334 0 0 0
Equity
Securities...... 0 0 $797,513,299 $2,656,626,154 $ 13,326,025 $ 653,768,417 $187,932,378
</TABLE>
The federal income tax basis and unrealized appreciation/depreciation of the
Fund's investments as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
DIVERSIFIED GOVERNMENT CONSERVATIVE FLEXIBLE STOCK
BOND INCOME BALANCED MANAGED INDEX EQUITY
------------- ------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Gross Unrealized Appreciation... $16,153,798 $ 6,581,659 $413,912,093 $610,666,412 $546,264,662 1$,153,620,111
Gross Unrealized Depreciation... 1,997,928 4,229,749 67,562,846 36,056,964 13,128,946 71,614,946
Total Net Unrealized............ 14,155,870 2,351,910 346,349,247 574,609,448 533,135,716 1,082,005,165
Tax Basis....................... 729,283,625 474,449,592 4,192,119,381 4,406,819,646 1,054,512,494 3,719,947,601
<CAPTION>
GLOBAL
--------------
<S> <C>
Gross Unrealized Appreciation... $127,364,695
Gross Unrealized Depreciation... 16,756,986
Total Net Unrealized............ 110,607,709
Tax Basis....................... 460,604,792
</TABLE>
For federal income tax purposes, the Government Income Portfolio had the
following capital loss carryforward utilized during 1996 and available to offset
future realized capital gains:
<TABLE>
<CAPTION>
CAPITAL
CAPITAL LOSSES LOSSES
CARRYFORWARDS CARRYFORWARDS EXPIRATION
UTILIZED IN 1996 AVAILABLE DATE
----------------- ------------ -------------
<S> <C> <C> <C>
Government Income
Portfolio............... $14,658,101 $7,917,291 12/31/2003
</TABLE>
B32
<PAGE>
FINANCIAL HIGHLIGHTS
DIVERSIFIED BOND
-------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
1996 1995(a) 1994(a) 1993(a) 1992(a)
-------- -------- -------- -------- --------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of year...... $ 11.31 $ 10.04 $ 11.10 $ 10.83 $ 11.00
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.76 0.76 0.68 0.68 0.76
Net realized and
unrealized gains
(losses) on
investments............ (0.27) 1.29 (1.04) 0.40 0.01
-------- -------- -------- -------- --------
Total from investment
operations........... 0.49 2.05 (0.36) 1.08 0.77
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net
investment income...... (0.73) (0.75) (0.68) (0.66) (0.72)
Distributions from net
realized gains......... -- (0.03) (0.02) (0.15) (0.22)
-------- -------- -------- -------- --------
Total
distributions........ (0.73) (0.78) (0.70) (0.81) (0.94)
-------- -------- -------- -------- --------
Net Asset Value, end of
year................... $ 11.07 $ 11.31 $ 10.04 $ 11.10 $ 10.83
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT
RETURN:(b)............. 4.40% 20.73% (3.23%) 10.13% 7.19%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in millions).......... $720.2 $655.8 $541.6 $576.2 $428.8
Ratios to average net
assets:
Expenses............... 0.45% 0.44% 0.45% 0.46% 0.47%
Net investment
income................. 6.89% 7.00% 6.41% 6.05% 6.89%
Portfolio turnover
rate................... 210% 199% 32% 41% 61%
GOVERNMENT INCOME
--------------------------------------------------
YEAR ENDED
DECEMBER 31,
--------------------------------------------------
1996 1995(a) 1994(a) 1993(a) 1992(a)
-------- -------- -------- -------- --------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of period.... $ 11.72 $ 10.46 $ 11.78 $ 11.09 $ 11.13
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.75 0.74 0.70 0.70 0.73
Net realized and
unrealized gains
(losses) on
investments............ (0.51) 1.28 (1.31) 0.68 (0.09)
-------- -------- -------- -------- --------
Total from investment
operations........... 0.24 2.02 (0.61) 1.38 0.64
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net
investment income...... (0.74) (0.76) (0.71) (0.64) (0.59)
Distributions from net
realized gains......... -- -- -- (0.05) (0.09)
-------- -------- -------- -------- --------
Total
distributions........ (0.74) (0.76) (0.71) (0.69) (0.68)
-------- -------- -------- -------- --------
Net Asset Value, end of
period................. $ 11.22 $ 11.72 $ 10.46 $ 11.78 $ 11.09
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT
RETURN:(b)............. 2.22% 19.48% (5.16%) 12.56% 5.85%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in millions).......... $482.0 $501.8 $487.6 $540.1 $315.5
Ratios to average net
assets:
Expenses............... 0.46% 0.45% 0.45% 0.46% 0.53%
Net investment
income................. 6.38% 6.55% 6.30% 5.91% 6.58%
Portfolio turnover
rate................... 95% 195% 34% 19% 81%
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns.
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B28 THROUGH B32.
B33
<PAGE>
FINANCIAL HIGHLIGHTS
CONSERVATIVE BALANCED
-------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
1996 1995(a) 1994(a) 1993(a) 1992(a)
-------- -------- -------- -------- --------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of year...... $ 15.31 $ 14.10 $ 14.91 $ 14.24 $ 14.32
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.66 0.63 0.53 0.49 0.56
Net realized and
unrealized gains
(losses) on
investments............ 1.24 1.78 (0.68) 1.23 0.41
-------- -------- -------- -------- --------
Total from investment
operations........... 1.90 2.41 (0.15) 1.72 0.97
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.66) (0.64) (0.51) (0.47) (0.54)
Distributions from net
realized gains......... (1.03) (0.56) (0.15) (0.58) (0.51)
-------- -------- -------- -------- --------
Total
distributions........ (1.69) (1.20) (0.66) (1.05) (1.05)
-------- -------- -------- -------- --------
Net Asset Value, end of
year................... $ 15.52 $ 15.31 $ 14.10 $ 14.91 $ 14.24
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT
RETURN:(b)............. 12.63% 17.27% (0.97%) 12.20% 6.95%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in millions).......... $4,478.8 $3,940.8 $3,501.1 $3,103.2 $2,114.0
Ratios to average net
assets:
Expenses............... 0.59% 0.58% 0.61% 0.60% 0.62%
Net investment
income................. 4.13% 4.19% 3.61% 3.22% 3.88%
Portfolio turnover
rate................... 295% 201% 125% 79% 62%
Average commission rate
paid per share......... $0.0554 N/A N/A N/A N/A
FLEXIBLE MANAGED
----------------------------------------------------
YEAR ENDED
DECEMBER 31,
----------------------------------------------------
1996 1995(a) 1994(a) 1993(a) 1992(a)
-------- -------- -------- -------- --------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of year...... $ 17.86 $ 15.50 $ 16.96 $ 16.01 $ 16.29
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.57 0.56 0.47 0.57 0.58
Net realized and
unrealized gains
(losses) on
investments............ 1.79 3.15 (1.02) 1.88 0.61
-------- -------- -------- -------- --------
Total from investment
operations........... 2.36 3.71 (0.55) 2.45 1.19
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.58) (0.56) (0.45) (0.57) (0.56)
Distributions from net
realized gains......... (1.85) (0.79) (0.46) (0.93) (0.91)
-------- -------- -------- -------- --------
Total
distributions........ (2.43) (1.35) (0.91) (1.50) (1.47)
-------- -------- -------- -------- --------
Net Asset Value, end of
year................... $ 17.79 $ 17.86 $ 15.50 $ 16.96 $ 16.01
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT
RETURN:(b)............. 13.64% 24.13% (3.16%) 15.58% 7.61%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in millions).......... $4,896.9 $4,261.2 $3,481.5 $3,292.2 $2,435.6
Ratios to average net
assets:
Expenses............... 0.64% 0.63% 0.66% 0.66% 0.67%
Net investment
income................. 3.07% 3.30% 2.90% 3.30% 3.63%
Portfolio turnover
rate................... 233% 173% 124% 63% 59%
Average commission rate
paid per share......... $0.0563 N/A N/A N/A N/A
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns.
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B28 THROUGH B32.
B34
<PAGE>
FINANCIAL HIGHLIGHTS
STOCK INDEX
-------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
1996 1995(a) 1994(a) 1993(a) 1992(a)
-------- -------- -------- -------- --------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of period.... $ 19.96 $ 14.96 $ 15.20 $ 14.22 $ 13.61
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.40 0.40 0.38 0.36 0.35
Net realized and
unrealized gains
(losses) on
investments............ 4.06 5.13 (0.23) 1.00 0.60
-------- -------- -------- -------- --------
Total from investment
operations........... 4.46 5.53 0.15 1.36 0.95
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.40) (0.38) (0.37) (0.35) (0.33)
Distributions from net
realized gains......... (0.28) (0.15) (0.02) (0.03) (0.01)
-------- -------- -------- -------- --------
Total
distributions........ (0.68) (0.53) (0.39) (0.38) (0.34)
-------- -------- -------- -------- --------
Net Asset Value, end of
period................. $ 23.74 $ 19.96 $ 14.96 $ 15.20 $ 14.22
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT
RETURN:(b)............. 22.57% 37.06% 1.01% 9.66% 7.13%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in millions).......... $1,581.4 $1,031.3 $664.5 $615.1 $433.5
Ratios to average net
assets:
Expenses............... 0.40% 0.38% 0.42% 0.42% 0.46%
Net investment
income................. 1.95% 2.27% 2.50% 2.43% 2.56%
Portfolio turnover
rate................... 1% 1% 2% 1% 1%
Average commission rate
paid per share......... $0.0250 N/A N/A N/A N/A
EQUITY
---------------------------------------------------
YEAR ENDED
DECEMBER 31,
---------------------------------------------------
1996 1995(a) 1994(a) 1993(a) 1992(a)
-------- -------- -------- -------- --------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of year...... $ 25.64 $ 20.66 $ 21.49 $ 18.90 $ 17.91
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.71 0.55 0.51 0.42 0.44
Net realized and
unrealized gains
(losses) on
investments............ 3.88 5.89 0.05 3.67 2.05
-------- -------- -------- -------- --------
Total from investment
operations........... 4.59 6.44 0.56 4.09 2.49
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.67) (0.52) (0.49) (0.40) (0.44)
Distributions from net
realized gains......... (2.60) (0.94) (0.90) (1.10) (1.06)
-------- -------- -------- -------- --------
Total
distributions........ (3.27) (1.46) (1.39) (1.50) (1.50)
-------- -------- -------- -------- --------
Net Asset Value, end of
year................... $ 26.96 $ 25.64 $ 20.66 $ 21.49 $ 18.90
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT
RETURN:(b)............. 18.52% 31.29% 2.78% 21.87% 14.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in millions).......... $4,814.0 $3,813.8 $2,617.8 $2,186.5 $1,416.6
Ratios to average net
assets:
Expenses............... 0.50% 0.48% 0.55% 0.53% 0.53%
Net investment
income................. 2.54% 2.28% 2.39% 1.99% 2.33%
Portfolio turnover
rate................... 20% 18% 7% 13% 16%
Average commission rate
paid per share......... $0.0524 N/A N/A N/A N/A
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns.
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B28 THROUGH B32.
B35
<PAGE>
GLOBAL
-------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
1996 1995(a) 1994(a) 1993(a) 1992(a)
-------- -------- -------- -------- --------
PER SHARE OPERATING
PERFORMANCE:
Net Asset Value,
beginning of period.... $ 15.53 $ 13.88 $ 14.64 $ 10.37 $ 10.79
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.11 0.06 0.02 0.02 0.05
Net realized and
unrealized gains
(losses) on
investments............ 2.94 2.14 (0.74) 4.44 (0.42)
-------- -------- -------- -------- --------
Total from investment
operations........... 3.05 2.20 (0.72) 4.46 (0.37)
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.11) (0.24) (0.02) (0.08) (0.05)
Distributions from net
realized gains......... (0.62) (0.31) (0.02) (0.11) --
-------- -------- -------- -------- --------
Total
distributions........ (0.73) (0.55) (0.04) (0.19) (0.05)
-------- -------- -------- -------- --------
Net Asset Value, end of
period................. $ 17.85 $ 15.53 $ 13.88 $ 14.64 $ 10.37
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT
RETURN:(b)............. 19.97% 15.88% (4.89%) 43.14% (3.42%)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in millions).......... $580.6 $400.1 $345.7 $129.1 $34.0
Ratios to average net
assets:
Expenses............... 0.92% 1.06% 1.23% 1.44% 1.87%
Net investment
income................. 0.64% 0.44% 0.20% 0.18% 0.49%
Portfolio turnover
rate................... 41% 59% 37% 55% 78%
Average commission rate
paid per share......... $0.0358 N/A N/A N/A N/A
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns.
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B28 THROUGH B32.
B36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF THE PRUDENTIAL SERIES FUND, INC.:
In our opinion, the accompanying Statements of Assets and Liabilities, including
the Schedules of Investments, and the related Statements of Operations and of
Changes in Net Assets and the Financial Highlights present fairly, in all
material respects, the financial position of Diversified Bond, Government
Income, Conservative Balanced, Flexible Managed, Stock Index, Equity and Global
(collectively the "Portfolios"), seven of the fifteen portfolios that comprise
The Prudential Series Fund, Inc. at December 31, 1996, the results of each of
their operations, the changes in each of their net assets, and each of their
financial highlights for the year ended December 31, 1996, 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, 1996 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, NY 10036
February 14, 1997
B37
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE SHAREHOLDERS AND BOARD OF DIRECTORS OF THE PRUDENTIAL SERIES FUND, INC.:
We have audited the accompanying statements of changes in net assets of the
Diversified Bond, Equity, Flexible Managed, Conservative Balanced, Stock Index,
Government Income and Global Portfolios (seven of the portfolios comprising The
Prudential Series Fund, Inc.) for the year ended December 31, 1995, and the
financial highlights contained in the prospectus for each of the periods
presented in the nine years ended December 31, 1995. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the changes in net assets and the financial
highlights of each of the respective portfolios of The Prudential Series Fund,
Inc. for the respective stated periods in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 15, 1996
B38
<PAGE>
BOARD OF
DIRECTORS THE PRUDENTIAL SERIES FUND, INC.
MENDEL A. MELZER W. SCOTT McDONALD, JR., E. MICHAEL CAULFIELD,
CHAIRMAN, PhD. CEO,
THE PRUDENTIAL SERIES EXECUTIVE VICE PRUDENTIAL INVESTMENTS
FUND, INC. PRESIDENT, PRESIDENT, THE
FAIRLEIGH DICKINSON PRUDENTIAL SERIES FUND,
UNIVERSITY INC.
SAUL K. FENSTER, PhD. JOSEPH WEBER, PhD.
PRESIDENT, NEW JERSEY VICE PRESIDENT,
INSTITUTE OF TECHNOLOGY INTERCLASS
(INTERNATIONAL
CORPORATE LEARNING)
TAX INFORMATION
Although we understand that the vast majority, if not all, of the
shareholders/contract holders of the Series Fund currently maintain a tax
deferred status, we are nevertheless required by the Internal Revenue Code to
advise you within 60 days of the Series Fund's fiscal year end (December 31,
1996) as to the federal tax status of dividends paid by the Fund during such
fiscal year. Accordingly, we are advising you that in 1996, the Fund paid
dividends as follows:
Ordinary Dividends
Short-Term Long-Term Total
Income Capital Gains Capital Gains Dividends
------ ------------- ------------- ---------
Diversified Bond Portfolio $0.727 $ 0.727
Government Income Portfolio 0.740 0.740
Conservative Balanced Portfolio 0.661 $0.047 $0.980 1.688
Flexible Managed Portfolio 0.577 0.218 1.631 2.426
Stock Index Portfolio 0.404 0.066 0.207 0.677
Equity Portfolio 0.671 0.319 2.282 3.272
Global Portfolio 0.107 0.082 0.546 0.735
B39
<PAGE>
APPENDIX
DEBT RATINGS
Moody's Investors Services, Inc. describes its categories of corporate debt
securities and its "Prime-1" and "Prime-2" commercial paper as follows:
Bonds:
Aaa -- Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are
generally known as high-grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long
term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa -- Bonds which are rated "Baa" are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba -- Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate,
and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class.
B -- Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa -- Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which are rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds which are rated "C" are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Commercial paper:
o Issuers rated Prime-1 (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics:
- --Leading market positions in well-established industries.
- --High rates of return of funds employed.
- --Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
- --Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- --Well established access to a range of financial markets and assured sources of
alternate liquidity.
o Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term debt obligations. This will normally be evidenced by
many of the characteristics cited above but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
C1
<PAGE>
Standard & Poor's Rating Group describes its grades of corporate debt securities
and its "A" commercial paper as follows:
Bonds:
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB Debt rated "BBB" is regarded as having adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
BB-B-CCC-CC-C
Debt rated "BB", "B", "CCC", "CC", and "C" is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of
speculation and C the highest. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major exposures to adverse conditions.
Commercial paper:
Commercial paper rated A by Standard & Poor's Rating Group has the
following characteristics: Liquidity ratios are better than the industry
average. Long term senior debt rating is "A" or better. In some cases BBB
credits may be acceptable. The issuer has access to at least two
additional channels of borrowing. Basic earnings and cash flow have an
upward trend with allowances made for unusual circumstances. Typically,
the issuer's industry is well established, the issuer has a strong
position within its industry and the reliability and quality of
management is unquestioned. Issuers rated A are further referred to by
use of numbers 1, 2 and 3 to denote relative strength within this
classification.
C2
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
PRUCO LIFE INSURANCE COMPANY
PRUVIDER VARIABLE APPRECIABLE ACCOUNT
PRUVIDER
VARIABLE
APPRECIABLE
LIFE(R)
INSURANCE CONTRACTS
PROVIDING FOR THE INVESTMENT
OF ASSETS IN THE
INVESTMENT PORTFOLIOS OF
THE PRUDENTIAL SERIES
FUND, INC.
The Pruco Life Insurance Company, a stock life insurance company that is a
wholly-owned subsidiary of The Prudential Insurance Company of America, offers a
variable life insurance contract called the PRUVIDER Variable APPRECIABLE
LIFE(R) Insurance Contract*. The Contract provides whole-life insurance
protection. The death benefit varies daily with investment experience but will
never be less than the "face amount" of insurance specified in the Contract. The
Contract also generally provides a cash surrender value which also varies with
investment experience. There is no guaranteed minimum cash surrender value.
The assets held for the purpose of paying benefits under these contracts can be
invested in one or both of the two current subaccounts of the Pruco Life
PRUVIDER Variable Appreciable Account. The assets invested in each subaccount
are in turn invested in a corresponding portfolio of The Prudential Series Fund,
Inc., a diversified, open-end management investment company (commonly known as a
mutual fund) that is intended to provide a range of investment alternatives to
variable contract owners. Each portfolio is, for investment purposes, in effect
a separate fund. The two available Series Fund portfolios are the CONSERVATIVE
BALANCED PORTFOLIO and the FLEXIBLE MANAGED PORTFOLIO. A separate class of
capital stock is issued for each portfolio. Shares of the Series Fund are
currently sold only to separate accounts of Pruco Life and certain other
insurers to fund the benefits under variable life insurance and variable annuity
contracts issued by those companies.
The PRUVIDER Variable APPRECIABLE LIFE(R) Insurance Contract owner may also
choose to invest in a FIXED-RATE OPTION which is described in the prospectus of
The Pruco Life PRUVIDER Variable Appreciable Account.
------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS OF THE PRUCO LIFE PRUVIDER VARIABLE
APPRECIABLE ACCOUNT DATED MAY 1, 1997, WHICH IS AVAILABLE WITHOUT CHARGE UPON
WRITTEN REQUEST TO THE PRUCO LIFE INSURANCE COMPANY, 213 WASHINGTON STREET,
NEWARK, NEW JERSEY 07102-2992 OR BY TELEPHONING (800) 437-4016, EXT. 46.
------------------
PRUCO LIFE INSURANCE COMPANY
213 Washington Street
Newark, New Jersey 07102-2992
Telephone: (800) 437-4016, Ext. 46
*PRUVIDER is a service mark of Prudential.
APPRECIABLE LIFE is a registered mark of Prudential.
SVAL-1SAI Ed 5-97
Catalog No. 64M086G
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MORE DETAILED INFORMATION ABOUT THE CONTRACT............................................................1
SALES LOAD UPON SURRENDER.......................................................................1
REDUCTION OF CHARGES FOR CONCURRENT SALES TO SEVERAL INDIVIDUALS................................1
PAYING PREMIUMS BY PAYROLL DEDUCTION............................................................1
UNISEX PREMIUMS AND BENEFITS....................................................................1
HOW THE DEATH BENEFIT WILL VARY.................................................................2
WITHDRAWAL OF EXCESS CASH SURRENDER VALUE.......................................................2
TAX TREATMENT OF CONTRACT BENEFITS..............................................................3
TREATMENT AS LIFE INSURANCE..............................................................3
PRE-DEATH DISTRIBUTIONS..................................................................3
WITHHOLDING..............................................................................4
OTHER TAX CONSIDERATIONS.................................................................4
SALE OF THE CONTRACT AND SALES COMMISSIONS......................................................5
RIDERS .........................................................................................5
OTHER STANDARD CONTRACT PROVISIONS..............................................................5
BENEFICIARY..............................................................................5
INCONTESTABILITY.........................................................................5
MISSTATEMENT OF AGE OR SEX...............................................................5
SUICIDE EXCLUSION........................................................................5
ASSIGNMENT...............................................................................5
SETTLEMENT OPTIONS.......................................................................5
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS....................................................6
GENERAL.........................................................................................6
CONVERTIBLE SECURITIES..........................................................................6
LOAN PARTICIPATIONS.............................................................................6
WARRANTS........................................................................................6
OPTIONS AND FUTURES.............................................................................6
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES....................................................13
SHORT SALES....................................................................................13
SHORT SALES AGAINST THE BOX....................................................................13
INTEREST RATE SWAPS............................................................................13
LOANS OF PORTFOLIO SECURITIES..................................................................14
ILLIQUID SECURITIES............................................................................14
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS....................................................15
INVESTMENT RESTRICTIONS................................................................................16
INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES........................................................18
PORTFOLIO TRANSACTIONS AND BROKERAGE...................................................................19
DETERMINATION OF NET ASSET VALUE.......................................................................20
SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO MAY CURRENTLY INVEST....................................21
DEBT RATINGS...........................................................................................24
POSSIBLE REPLACEMENT OF THE SERIES FUND................................................................25
OTHER INFORMATION CONCERNING THE SERIES FUND...........................................................26
INCORPORATION AND AUTHORIZED STOCK.............................................................26
DIVIDENDS, DISTRIBUTIONS AND TAXES.............................................................26
CUSTODIANS, TRANSFER AGENT, AND DIVIDEND DISBURSING AGENT......................................26
EXPERTS........................................................................................26
LICENSE........................................................................................26
DIRECTORS AND OFFICERS OF PRUCO LIFE AND MANAGEMENT OF THE SERIES FUND.................................28
FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC............................................... A1
THE PRUDENTIAL SERIES FUND, INC. SCHEDULE OF INVESTMENTS.............................................. B1
</TABLE>
<PAGE>
MORE DETAILED INFORMATION ABOUT THE CONTRACT
SALES LOAD UPON SURRENDER
A contingent deferred sales load is assessed if the Contract lapses or is
surrendered during the first 10 Contract years. No such charge is applicable to
the death benefit, no matter when that may become payable. Subject to the
additional limitations described below, for Contracts that lapse or are
surrendered during the first 5 Contract years the charge will be equal to 50% of
the first year's primary annual premium. In the next 5 Contract years that
percentage is reduced uniformly on a daily basis until it reaches zero on the
tenth Contract anniversary. Thus, for Contracts surrendered at the end of the
sixth year, the maximum deferred sales charge will be 40% of the first year's
primary annual premium, for Contracts surrendered at the end of year 7, the
maximum deferred sales charge will be 30% of the first year's primary annual
premium, and so forth. We are currently allowing partial surrenders of the
Contract, but we reserve the right to cancel this administrative practice. If
the Contract is partially surrendered during the first 10 years, a proportionate
amount of the charge will be deducted from the Contract Fund. Surrender of all
or part of a Contract may have tax consequences. See TAX TREATMENT OF CONTRACT
BENEFITS, page 3.
The contingent deferred sales load is also subject to a further limit at older
issue ages (approximately above age 61) in order to comply with certain
requirements of state law. Specifically, the contingent deferred sales load for
such insureds is no more than $32.50 per $1,000 of face amount.
The sales load is subject to a further important limitation that may,
particularly for Contracts that lapse or are surrendered within the first 5 or 6
years, result in a lower contingent deferred sales load than that described
above. (This limitation might also, under unusual circumstances, apply to reduce
the monthly sales load deductions described in the prospectus in item (a) under
MONTHLY DEDUCTIONS FROM CONTRACT FUND.)
The limitation is based on a Guideline Annual Premium ("GAP") that is associated
with every Contract. The GAP is an amount determined actuarially in accordance
with a definition set forth in a regulation of the Securities and Exchange
Commission ("SEC"). The maximum aggregate sales load that Pruco Life will charge
(that is, the sum of the monthly sales load deduction and the contingent
deferred sales charge) will not be more than 30% of the premiums actually paid
until those premiums total one GAP plus no more than 9% of the next premiums
paid until total premiums are equal to 5 GAPS, plus no more than 6% of all
subsequent premiums. If the sales charges described above would at any time
exceed this maximum amount then the charge, to the extent of any excess, will
not be made.
REDUCTION OF CHARGES FOR CONCURRENT SALES TO SEVERAL INDIVIDUALS
Pruco Life may reduce the sales charges and/or other charges on individual
Contracts sold to members of a class of associated individuals, or to a trustee,
employer or other entity representing such a class, where it is expected that
such multiple sales will result in savings of sales or administrative expenses.
Pruco Life determines both the eligibility for such reduced charges, as well as
the amount of such reductions, by considering the following factors: (1) the
number of individuals; (2) the total amount of premium payments expected to be
received from these Contracts; (3) the nature of the association between these
individuals, and the expected persistency of the individual Contracts; (4) the
purpose for which the individual Contracts are purchased and whether that
purpose makes it likely that expenses will be reduced; and (5) any other
circumstances which Pruco Life believes to be relevant in determining whether
reduced sales or administrative expenses may be expected. Some of the reductions
in charges for these sales may be contractually guaranteed; other reductions may
be withdrawn or modified by Pruco Life on a uniform basis. Pruco Life's
reductions in charges for these sales will not be unfairly discriminatory to the
interests of any individual Contract owners.
PAYING PREMIUMS BY PAYROLL DEDUCTION
In addition to the annual, semi-annual, quarterly and monthly premium payment
modes, a payroll budget method of paying premiums may also be available under
certain Contracts. The employer generally deducts the necessary amounts from
employee paychecks and sends premium payments to Pruco Life monthly. Any Pruco
Life representative authorized to sell this Contract can provide further details
concerning the payroll budget method of paying premiums.
UNISEX PREMIUMS AND BENEFITS
The Contract generally employs mortality tables that distinguish between males
and females. Thus, premiums and benefits under Contracts issued on males and
females of the same age will generally differ. However, in those states that
have adopted regulations prohibiting sex-distinct insurance rates, premiums and
cost of insurance charges will be based on a blended unisex rate whether the
insured is male or female. In addition, employers and
1
<PAGE>
employee organizations considering purchase of a Contract should consult their
legal advisors to determine whether purchase of a Contract based on sex-distinct
actuarial tables is consistent with Title VII of the Civil Rights Act of 1964 or
other applicable law. Pruco Life may offer the Contract with unisex mortality
rates to such prospective purchasers.
HOW THE DEATH BENEFIT WILL VARY
The death benefit will vary with investment experience. Assuming no withdrawals,
the death benefit will be equal to the face amount of insurance plus the amount
(if any) by which the Contract Fund value exceeds the applicable "Tabular
Contract Fund value" for the Contract (subject to an exception described below
under which the death benefit is higher). Each Contract contains a table that
sets forth the Tabular Contract Fund value as of the end of each of the first 20
years of the Contract. Tabular Contract Fund values between Contract
anniversaries are determined by interpolation. The "Tabular Contract Fund value"
for each Contract year is an amount that is slightly less than the Contract Fund
value that would result as of the end of such year if only scheduled premiums
were paid, they were paid when due, the selected investment options earned a net
return at a uniform rate of 4% per year, full mortality charges based upon the
1980 CSO Table were deducted, maximum sales load and expense charges were
deducted, and there was no Contract debt.
Thus, for a Contract with no withdrawals, the death benefit will equal the face
amount if the Contract Fund equals the Tabular Contract Fund value. If, due to
investment results greater than a net return of 4%, or to payment of greater
than scheduled premiums, or to smaller than maximum charges, the Contract Fund
value is a given amount greater than the Tabular Contract Fund value, the death
benefit will be the face amount plus that excess amount. If, due to investment
results less favorable than a net return of 4%, the Contract Fund value is less
than the tabular Contract Fund value, the death benefit will not fall below the
initial face amount stated in the Contract; however, this unfavorable investment
experience must first be offset by favorable performance or additional payments
that bring the Contract Fund up to the tabular level before favorable investment
results or additional payments will increase the death benefit. Again, the death
benefit will reflect a deduction for the amount of any Contract debt.
See CONTRACT LOANS in the prospectus.
The Contract Fund could grow to the point where it is necessary to increase the
death benefit by a greater amount in order to ensure that the Contract will
satisfy the Internal Revenue Code's definition of life insurance. Thus, the
death benefit will always be the greatest of (1) the face amount plus the
Contract Fund minus the tabular Contract Fund value; (2) the guaranteed minimum
death benefit; and (3) the Contract Fund times the attained age factor that
applies.
WITHDRAWAL OF EXCESS CASH SURRENDER VALUE
Under certain circumstances, a Contract owner may withdraw a portion of the
Contract's cash surrender value without surrendering the Contract in whole or in
part. The amount that a Contract owner may withdraw is limited by the
requirement that the Contract Fund after withdrawal must not be less than the
Tabular Contract Fund value. (A Table of Tabular Contract Fund Values is
included in the Contract; the values increase with each year the Contract
remains in force.) But because the Contract Fund may be made up in part by an
outstanding Contract loan, there is a further limitation that the amount
withdrawn may not be larger than an amount sufficient to reduce the cash
surrender value to zero. The amount withdrawn must be at least $200. An owner
may make no more than four such withdrawals in each Contract year, and there is
a $15 administrative processing fee for each withdrawal. An amount withdrawn may
not be repaid except as a scheduled or unscheduled premium subject to the
applicable charges. Upon request, Pruco Life will tell a Contract owner how much
he or she may withdraw. Withdrawal of part of the cash surrender value may have
tax consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 3. A temporary
need for funds may also be met by making a loan and you should consult your
Pruco Life representative about how best to meet your needs.
When a withdrawal is made, the cash surrender value and Contract Fund value are
reduced by the amount of the withdrawal, and the death benefit is accordingly
reduced. Neither the face amount of insurance nor the amount of scheduled
premiums will be changed due to a withdrawal of excess cash surrender value. No
surrender charges will be assessed upon a withdrawal.
Withdrawal of part of the cash surrender value increases the risk that the
Contract Fund may be insufficient to provide for benefits under the Contract. If
such a withdrawal is followed by unfavorable investment experience, the Contract
may lapse even if scheduled premiums continue to be paid when due. This is
because, for purposes of determining whether a lapse has occurred, Pruco Life
treats withdrawals as a return of premium.
2
<PAGE>
TAX TREATMENT OF CONTRACT BENEFITS
Each prospective purchaser is urged to consult a qualified tax advisor. The
following discussion is not intended as tax advice, and it is not a complete
statement of what the effect of federal income taxes will be under all
circumstances. Rather, it provides information about how Pruco Life believes the
tax laws apply in the most commonly occurring circumstances. There is no
guarantee, however, that the current federal income tax laws and regulations or
interpretations will not change.
TREATMENT AS LIFE INSURANCE. The Contract will be treated as "life insurance" as
long as it satisfies certain definitional tests set forth in Section 7702 of the
Internal Revenue Code (the "Code") and as long as the underlying investments for
the Contract satisfy diversification requirements set forth in Treasury
Regulations issued pursuant to Section 817(h) of the Code.
These diversification requirements must ordinarily be met within 1 year after
Contract owner funds are first allocated to the particular portfolio of the
Series Fund, and within 30 days after the end of each calendar quarter
thereafter. Each portfolio must meet one of two alternative tests. Under the
first test, no more than 55% of the portfolio's assets can be invested in any
one investment; no more than 70% of the assets can be invested in any two
investments; no more than 80% can be invested in any three investments; and no
more than 90% can be invested in any four investments. Under the second test,
the portfolio must meet the tax law diversification requirements for a regulated
investment company and no more than 55% of the value of the portfolio's assets
can be invested in cash, cash items, Government securities, and securities of
other regulated investment companies.
For purposes of determining whether a variable account is adequately
diversified, each United States Government agency or instrumentality is treated
as a separate issuer. Compliance with diversification requirements will
generally limit the amount of assets that may be invested in federally insured
certificates of deposit and all types of securities issued or guaranteed by each
United States Government agency or instrumentality.
Pruco Life believes that it has taken adequate steps to cause the Contract to be
treated as life insurance for tax purposes. This means that: (1) except as noted
below, the Contract owner should not be taxed on any part of the Contract Fund,
including additions attributable to interest, dividends or appreciation until
amounts are distributed under the Contract; and (2) the death benefit should be
excludible from the gross income of the beneficiary under section 101(a) of the
Code.
However, Section 7702 of the Code, which defines life insurance for tax
purposes, gives the Secretary of the Treasury authority to prescribe regulations
to carry out the purposes of the Section. In this regard, proposed regulations
governing mortality charges were issued in 1991 and proposed regulations
relating to the definition of life insurance were issued in 1992. None of these
proposed regulations has yet been finalized. Additional regulations under
Section 7702 may also be promulgated in the future. Moreover, in connection with
the issuance of temporary regulations under Section 817(h), the Treasury
Department announced that such regulations do not provide guidance concerning
the extent to which Contract owners may direct their investments to particular
divisions of a separate account. Such guidance will be included in regulations
or rulings under Section 817(d) relating to the definition of a variable
contract.
Pruco Life intends to comply with final regulations issued under sections 7702
and 817. Therefore, it reserves the right to make such changes as it deems
necessary to assure that the Contract continues to qualify as life insurance for
tax purposes. Any such changes will apply uniformly to affected Contract owners
and will be made only after advance written notice to affected Contract owners.
PRE-DEATH DISTRIBUTIONS. The taxation of pre-death distributions depends on
whether the Contract is classified as a Modified Endowment Contract. The
following discussion first deals with distributions under Contracts not so
classified, and then with Modified Endowment Contracts.
1. A surrender or lapse of the Contract may have tax consequences. Upon
surrender, the owner will not be taxed on the cash surrender value
except for the amount, if any, that exceeds the gross premiums paid less
the untaxed portion of any prior withdrawals. The amount of any unpaid
Contract debt will, upon surrender or lapse, be added to the cash
surrender value and treated, for this purpose, as if it had been
received. Any loss incurred upon surrender is generally not deductible.
The tax consequences of a surrender may differ if the proceeds are
received under any income payment settlement option.
A withdrawal generally is not taxable unless it exceeds total premiums
paid to the date of withdrawal less the untaxed portion of any prior
withdrawals. However, under certain limited circumstances, in the first
15 Contract years all or a portion of a withdrawal may be taxable if the
Contract Fund exceeds the total premiums paid less the untaxed portion
of any prior withdrawals, even if total withdrawals do not exceed total
premiums paid to date.
3
<PAGE>
Extra premiums for optional benefits and riders generally do not count
in computing gross premiums paid, which in turn determines the extent to
which a withdrawal might be taxed.
Loans received under the Contract will ordinarily be treated as
indebtedness of the owner and will not be considered to be distributions
subject to tax.
2. Some of the above rules are changed if the Contract is classified as a
Modified Endowment Contract under section 7702A of the Code. A Contract
may be classified as a Modified Endowment Contract under various
circumstances. For example, low face amount Contracts issued on younger
insureds may be classified as a Modified Endowment Contract even though
the Contract owner pays only the Scheduled Premiums or even less than
the Scheduled Premiums. Before purchasing such a Contract, you should
understand the tax treatment of pre-death distributions and consider the
purpose for which the Contract is being purchased. More generally, a
Contract may be classified as a Modified Endowment Contract if premiums
in excess of Scheduled Premiums are paid or a decrease in the face
amount of insurance is made (or a rider removed) during the first 7
Contract years. Moreover, the addition of a rider after the Contract
date may have an impact on the Contract's status as a Modified Endowment
Contract. Contract owners contemplating any of these steps should first
consult a qualified tax advisor and their Pruco Life representative.
If the Contract is classified as a Modified Endowment Contract, then
pre-death distributions, including loans and withdrawals, are includible
in income to the extent that the Contract fund prior to surrender
charges exceeds the gross premiums paid for the Contract increased by
the amount of any loans previously includible in income and reduced by
any untaxed amounts previously received other than the amount of any
loans excludible from income. These rules may also apply to pre-death
distributions, including loans, made during the 2 year period prior to
the Contract becoming a Modified Endowment Contract.
In addition, pre-death distributions from such Contracts (including full
surrenders) will be subject to a penalty of 10 percent of the amount
includible in income unless the amount is distributed on or after age
59-1/2, on account of the taxpayer's disability, or as a life annuity.
It is presently unclear how the penalty tax provisions apply to
Contracts owned by nonnatural persons such as corporations.
Under certain circumstances, Modified Endowment Contracts issued during
any calendar year will be treated as a single contract for purposes of
applying the above rules.
WITHHOLDING. The taxable portions of any amounts received under the Contract
will be subject to withholding to meet federal income tax obligations if the
Contract owner fails to elect that no taxes be withheld or in certain other
circumstances. Contract owners who do not provide a social security number or
other taxpayer identification number will not be permitted to elect out of
withholding. All recipients of such amounts may be subject to penalties under
the estimated tax rules if withholding and estimated tax payments are not
sufficient.
OTHER TAX CONSIDERATIONS. Transfer of the Contract to a new owner or assignment
of the Contract may have tax consequences depending on the circumstances. In the
case of a transfer of the Contract for a valuable consideration, the death
benefit may be subject to federal income taxes under section 101(a)(2) of the
Code. In addition, a transfer of the Contract to or the designation of a
beneficiary who is either 37 1/2 years younger than the Contract owner or a
grandchild of the Contract owner may have Generation Skipping Transfer tax
consequences under Section 2601 of the Code.
In certain circumstances, deductions for interest paid or accrued on Contract
debt or on other loans that are incurred or continued to purchase or carry the
Contract may be denied under section 163 of the Code as personal interest or
under section 264 of the Code. Contract owners should consult a tax advisor
regarding the application of these provisions to their circumstances.
Business-owned life insurance is subject to additional rules. Section 264(a)(1)
of the Code generally precludes business Contract owners from deducting premium
payments. The recently enacted Health Insurance Portability and Accountability
Act of 1996 generally disallows tax deductions for interest on Contract debt on
a businessowned insurance policy effective (with certain transitional rules) for
interest paid or accrued after October 13, 1995. An exception permits the
deduction of interest on policy loans on Contracts for up to 20 key persons. The
interest deduction for Contract debt on such loans is limited to a prescribed
interest rate and a maximum aggregate loan amount of $50,000 per key insured
person. The Code also imposes an indirect tax upon additions to the Contract
fund or the receipt of death benefits under business-owned life insurance
policies under certain circumstances by way of the corporate alternative minimum
tax.
The individual situation of each Contract owner or beneficiary will determine
the federal estate taxes and the state and local estate, inheritance and other
taxes due if the owner or insured dies.
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SALE OF THE CONTRACT AND SALES COMMISSIONS
Pruco Securities Corporation ("Prusec"), an indirect wholly-owned subsidiary of
Prudential, acts as the principal underwriter of the Contract. Prusec, organized
in 1971 under New Jersey law, is registered as a broker and dealer under the
Securities Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. Prusec's principal business address is 213 Washington
Street, Newark, New Jersey 07102-2992. The Contract is sold by registered
representatives of Prusec who are also authorized by state insurance departments
to do so. The Contract may also be sold through other broker-dealers authorized
by Prusec and applicable law to do so. Registered representatives of such other
broker-dealers may be paid on a different basis than described below. Where the
insured is less than 60 years of age, the representative will generally receive
a commission of no more than 50% of the scheduled premiums for the first year,
no more than 6% of the scheduled premiums for the second through tenth years,
and no more than 2% of the scheduled premiums thereafter. For insureds over 59
years of age, the commission will be lower. The representative may be required
to return all or part of the first year commission if the Contract is not
continued through the second year. Representatives with less than 3 years of
service may be paid on a different basis.
Sales expenses in any year are not equal to the deduction for sales load in that
year. Pruco Life expects to recover its total sales expenses over the periods
the Contracts are in effect. To the extent that the sales charges are
insufficient to cover total sales expenses, the sales expenses will be recovered
from Pruco Life's surplus, which may include amounts derived from the mortality
and expense risk charge and the guaranteed minimum death benefit risk charge
described in the prospectus under DAILY DEDUCTION FROM THE CONTRACT FUND and
item (d) under MONTHLY DEDUCTIONS FROM CONTRACT FUND.
RIDERS
The Contract owner may be able to obtain extra fixed benefits which may require
an additional premium. These optional insurance benefits will be described in
what is known as a "rider" to the Contract. Charges for the riders will be
deducted from the Contract Fund on each Monthly date. One rider pays an
additional amount if the insured dies in an accident. Another waives certain
premiums if the insured is disabled within the meaning of the provision (or, in
the case of a Contract issued on an insured under the age of 15, if the
applicant dies or becomes disabled within the meaning of the provision). Others
pay an additional amount if the insured dies within a stated number of years
after issue; similar benefits may be available if the insured's child should
die. The amounts of these benefits are fully guaranteed at issue; they do not
depend on the performance of the Account. Certain restrictions may apply; they
are clearly described in the applicable rider.
Any Pruco Life representative authorized to sell the Contract can explain these
extra benefits further. Samples of the provisions are available from Pruco Life
upon written request.
OTHER STANDARD CONTRACT PROVISIONS.
BENEFICIARY. The beneficiary is designated and named in the application by the
Contract owner. Thereafter, the owner may change the beneficiary, provided it is
in accordance with the terms of the Contract. Should the insured die with no
surviving beneficiary, the insured's estate will become the beneficiary.
INCONTESTABILITY. After the Contract has been in force during the insured's
lifetime for 2 years from the Contract date or, with respect to any change in
the Contract that requires Pruco Life's approval and could increase its
liability, after the change has been in effect during the insured's lifetime for
2 years from the effective date of the change, Pruco Life will not contest its
liability under the Contract in accordance with its terms.
MISSTATEMENT OF AGE OR SEX. If the insured's stated age or sex (except where
unisex rates apply) or both are incorrect in the Contract, Pruco Life will
adjust the death benefits payable, as required by law, to reflect the correct
age and sex. Any death benefit will be based on what the most recent charge for
mortality would have provided at the correct age and sex.
SUICIDE EXCLUSION. Generally, if the insured, whether sane or insane, dies by
suicide within 2 years from the Contract date, Pruco Life will pay no more under
the Contract than the sum of the premiums paid.
ASSIGNMENT. This Contract may not be assigned if such assignment would violate
any federal, state, or local law or regulation. Generally, the Contract may not
be assigned to an employee benefit plan or program without Pruco Life's consent.
Pruco Life assumes no responsibility for the validity or sufficiency of any
assignment, and it will not be obligated to comply with any assignment unless it
has received a copy at one of its Home Offices.
SETTLEMENT OPTIONS. The Contract grants to most owners, or to the beneficiary, a
variety of optional ways of receiving Contract proceeds, other than in a lump
sum. Any Pruco Life representative authorized to sell this Contract can explain
these options upon request.
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INVESTMENT OBJECTIVES AND POLICIES OF THE
PORTFOLIOS
GENERAL
The Prudential Series Fund, Inc. (the "Series Fund") has fifteen separate
portfolios, two of which, the Conservative Balanced Portfolio and the Flexible
Managed Portfolio, are available to PRUVIDER Contract owners. The portfolios are
managed by The Prudential Insurance Company of America ("Prudential"), see
INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES, page 18.
Each of the portfolios seeks to achieve a different investment objective.
Accordingly, each portfolio can be expected to have different investment results
and to be subject to different financial and market risks. Financial risk refers
to the ability of an issuer of a debt security to pay principal and interest and
to the earnings stability and overall financial soundness of an issuer of an
equity security. Market risk refers to the degree to which the price of a
security will react to changes in conditions in securities markets in general,
and with particular reference to debt securities, to changes in the overall
level of interest rates.
The investment objectives of the Series Fund's portfolios that are available to
PRUVIDER Contract owners can be found under INVESTMENT OBJECTIVES AND POLICIES
OF THE PORTFOLIOS in the prospectus.
CONVERTIBLE SECURITIES
The Conservative Balanced and Flexible Managed Portfolios may invest in
convertible securities. A convertible security is a fixed-income security (a
bond or preferred stock) which may be converted at a stated price within a
specified period of time into a certain quantity of the common stock of the same
or a different issuer. Convertible securities are senior to common stocks in a
corporation's capital structure, but are usually subordinated to similar
nonconvertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from a common stock but lower than
that afforded by a similar nonconvertible security), a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in capital appreciation attendant upon a market price advance in the
convertible security's underlying common stock. The price of a convertible
security tends to increase as the market value of the underlying stock rises,
whereas it tends to decrease as the market value of the underlying stock
declines. While no securities investment is without risk, investments in
convertible securities generally entail less risk than investments in the common
stock of the same issuer.
LOAN PARTICIPATIONS
The Conservative Balanced and Flexible Managed Portfolios may invest in fixed
and floating rate loans ("Loans") arranged through private negotiations between
a corporate borrower and one or more financial institutions ("Lenders"). The
portfolios may invest in such Loans generally in the form of participations in
Loans ("Participations"). Participations typically will result in the Series
Fund having a contractual relationship only with the Lender, not with the
borrower. The Series Fund will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the Lender selling the
Participation and only upon receipt by the Lender of the payments from the
borrower. In connection with purchasing Participations, the Series Fund
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the Loan, nor any rights of set-off
against the borrower, and the Series Fund may not benefit directly from any
collateral supporting the Loan in which it has purchased the Participation. As a
result, the Series Fund will assume the credit risk of both the borrower and the
Lender that is selling the Participation. In the event of the insolvency of the
Lender selling a Participation, the Series Fund may be treated as a general
creditor of the Lender and may not benefit from any set-off between the Lender
and the borrower.
WARRANTS
The Conservative Balanced and Flexible Managed Portfolios may invest in warrants
on common stocks. Warrants are options to buy a number of shares of stock at a
predetermined price during a specified period. The risk associated with the
purchase of a warrant is that the purchase price will be lost if the market
price of the stock does not reach a level that justifies the exercise or sale of
the warrant before it expires.
OPTIONS AND FUTURES
OPTIONS ON EQUITY SECURITIES. The Conservative Balanced and Flexible Managed
Portfolios may purchase and write (i.e., sell) put and call options on equity
securities that are traded on securities exchanges or that are listed on the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
or that result from privately negotiated transactions with broker-dealers ("OTC
options"). A call option is a short-term contract pursuant to
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which the purchaser or holder, in return for a premium paid, has the right to
buy the equity security underlying the option at a specified exercise price at
any time during the term of the option. The writer of the call option, who
receives the premium, has the obligation, upon exercise of the option, to
deliver the underlying equity security against payment of the exercise price. A
put option is a similar contract which gives the purchaser or holder, in return
for a premium, the right to sell the underlying equity security at a specified
price during the term of the option. The writer of the put, who receives the
premium, has the obligation to buy the underlying security at the exercise price
upon exercise by the holder of the put.
A portfolio will write only "covered" options on stocks. A call option is
covered if: (1) the portfolio owns the security underlying the option; or (2)
the portfolio has an absolute and immediate right to acquire that security
without additional cash consideration (or for additional cash consideration held
in a segregated account by its custodian) upon conversion or exchange of other
securities it holds; or (3) the portfolio holds on a share-for-share basis a
call on the same security as the call written where the exercise price of the
call held is equal to or less than the exercise price of the call written or
greater than the exercise price of the call written if the difference is
maintained by the portfolio in cash, Treasury bills or other high grade
short-term debt obligations in a segregated account with its custodian. A put
option is covered if: (1) the portfolio deposits and maintains with its
custodian in a segregated account cash, U.S. Government securities or other
liquid unencumbered assets having a value equal to or greater than the exercise
price of the option; or (2) the portfolio holds on a share-for-share basis a put
on the same security as the put written where the exercise price of the put held
is equal to or greater than the exercise price of the put written or less than
the exercise price if the difference is maintained by the portfolio in cash,
Treasury bills or other high grade short-term debt obligations in a segregated
account with its custodian.
The Conservative Balanced and Flexible Managed Portfolios may also purchase
"protective puts" (i.e., put options acquired for the purpose of protecting a
portfolio security from a decline in market value). In exchange for the premium
paid for the put option, the portfolio acquires the right to sell the underlying
security at the exercise price of the put regardless of the extent to which the
underlying security declines in value. The loss to the portfolio is limited to
the premium paid for, and transaction costs in connection with, the put plus the
initial excess, if any, of the market price of the underlying security over the
exercise price. However, if the market price of the security underlying the put
rises, the profit the portfolio realizes on the sale of the security will be
reduced by the premium paid for the put option less any amount (net of
transaction costs) for which the put may be sold. Similar principles apply to
the purchase of puts on debt securities and stock indices, as described below
under OPTIONS ON DEBT SECURITIES, page 8 and OPTIONS ON STOCK INDICES, page 9.
The portfolios may purchase call options for hedging and investment purposes. No
portfolio intends to invest more than 5% of its net assets at any one time in
the purchase of call options on stocks. These portfolios may also purchase
putable and callable equity securities, which are securities coupled with a put
or a call option provided by the issuer.
If the writer of an exchange-traded option wishes to terminate the obligation,
he or she may effect a "closing purchase transaction" by buying an option of the
same series as the option previously written. Similarly, the holder of an
exchange-traded option may liquidate his or her position by exercise of the
option or by effecting a "closing sale transaction" by selling an option of the
same series as the option previously purchased. A portfolio will realize a
profit from a closing transaction if the price of the transaction is less than
the premium received from writing the option or is more than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from a closing purchase transaction with respect to a call option
is likely to be offset in whole or in part by appreciation of the underlying
equity security owned by the portfolio. Unlike exchange-traded options, OTC
options generally do not have a continuous liquid market. Consequently, the
portfolio will generally be able to realize the value of an OTC option it has
purchased only by exercising it or reselling it to the dealer who issued it.
Similarly, when the portfolio writes an OTC option, it generally will be able to
close out the OTC option prior to its expiration only by entering into a closing
purchase transaction with the dealer to which the portfolio originally wrote the
OTC option. There is, in general, no guarantee that closing purchase or closing
sale transactions can be effected.
A portfolio's use of options on equity securities is subject to certain special
risks, in addition to the risk that the market value of the security will move
adversely to the portfolio's option position. An option position may be closed
out only on an exchange, board of trade or other trading facility which provides
a secondary market for an option of the same series. Although a portfolio will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option, or at any particular time, and
for some options no secondary market on an exchange or otherwise may exist. In
such event it might not be possible to effect closing transactions in particular
options, with the result that the portfolio would have to exercise its options
in order to realize any profit and would incur brokerage commissions upon the
exercise of such options and upon the subsequent disposition of underlying
securities acquired through the exercise of call options or upon the purchase of
underlying securities for the
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exercise of put options. If a portfolio as a covered call option writer is
unable to effect a closing purchase transaction in a secondary market, it will
not be able to sell the underlying security until the option expires or it
delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, which might cause an exchange to institute special
procedures that might interfere with the timely execution of customers' orders.
The purchase and sale of OTC options will also be subject to certain risks.
Unlike exchange-traded options, OTC options generally do not have a continuous
liquid market. Consequently, a portfolio will generally be able to realize the
value of an OTC option it has purchased only by exercising it or reselling it to
the dealer who issued it. Similarly, when a portfolio writes an OTC option, it
generally will be able to close out the OTC option prior to its expiration only
by entering into a closing purchase transaction with the dealer to which the
portfolio originally wrote the OTC option. While the portfolios will seek to
enter into OTC options only with dealers who agree to and which are expected to
be able to be capable of entering into closing transactions with the portfolio,
there can be no assurance that the portfolio will be able to liquidate an OTC
option at a favorable price at any time prior to expiration. In the event of
insolvency of the other party, the portfolio may be unable to liquidate an OTC
option. Prudential monitors the creditworthiness of dealers with whom the Series
Fund enters into OTC option transactions under the general supervision of the
Series Fund's Board of Directors.
OPTIONS ON DEBT SECURITIES. The Conservative Balanced and Flexible Managed
Portfolios may purchase and write (i.e., sell) put and call options on debt
securities (including U.S. Government debt securities) that are traded on U.S.
securities exchanges or that result from privately negotiated transactions with
primary U.S. Government securities dealers recognized by the Federal Reserve
Bank of New York ("over-the-counter" or "OTC" options). Options on debt are
similar to options on stock, except that the option holder has the right to take
or make delivery of a debt security, rather than stock.
A portfolio will write only "covered" options. Options on debt securities are
covered in the same manner as options on stocks, discussed above, except that,
in the case of call options on U.S. Treasury Bills, the portfolio might own U.S.
Treasury Bills of a different series from those underlying the call option, but
with a principal amount and value corresponding to the option contract amount
and a maturity date no later than that of the securities deliverable under the
call option. The principal reason for a portfolio to write an option on one or
more of its securities is to realize through the receipt of the premiums paid by
the purchaser of the option a greater current return than would be realized on
the underlying security alone. Calls on debt securities will not be written
when, in the opinion of Prudential, interest rates are likely to decline
significantly, because under those circumstances the premium received by writing
the call likely would not fully offset the foregone appreciation in the value of
the underlying security.
The portfolios may also write straddles (i.e., a combination of a call and a put
written on the same security at the same strike price where the same issue of
the security is considered "cover" for both the put and the call). In such
cases, the portfolio will also segregate or deposit for the benefit of the
portfolio's broker cash or liquid high-grade debt obligations equivalent to the
amount, if any, by which the put is "in the money." It is contemplated that each
portfolio's use of straddles will be limited to 5% of the portfolio's net assets
(meaning that the securities used for cover or segregated as described above
will not exceed 5% of the portfolio's net assets at the time the straddle is
written). The writing of a call and a put on the same security at the same
strike price where the call and the put are covered by different securities is
not considered a straddle for purposes of this limit.
The portfolios may purchase "protective puts" in an effort to protect the value
of a security that it owns against a substantial decline in market value.
Protective puts are described above in OPTIONS ON EQUITY SECURITIES, page 6. A
portfolio may wish to protect certain portfolio securities against a decline in
market value at a time when put options on those particular securities are not
available for purchase. A portfolio may therefore purchase a put option on
securities other than those it wishes to protect even though it does not hold
such other securities in its portfolio. While changes in the value of the put
option should generally offset changes in the value of the
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securities being hedged, the correlation between the two values may not be as
close in these transactions as in transactions in which the portfolio purchases
a put option on an underlying security it owns.
The portfolios may also purchase call options on debt securities for hedging or
investment purposes. No portfolio currently intends to invest more than 5% of
its net assets at any one time in the purchase of call options on debt
securities. A portfolio may also purchase putable and callable debt securities,
which are securities coupled with a put or call option provided by the issuer.
If the writer of an exchange-traded option wishes to terminate the obligation,
he or she may effect a "closing purchase transaction" or a "closing sale
transaction" in a manner similar to that discussed above in connection with
options on equity securities.
The staff of the Securities and Exchange Commission has taken the position that
purchased OTC options and the assets used as "cover" for written OTC options are
illiquid for purposes of a portfolio's 15% limitation on investment in illiquid
securities. However, pursuant to the terms of certain no-action letters issued
by the staff, the securities used as cover for written OTC options may be
considered liquid provided that the portfolio sells OTC options only to
qualified dealers who agree that the portfolio may repurchase any OTC option it
writes for a maximum price to be calculated by a predetermined formula. In such
cases, the OTC option would be considered illiquid only to the extent that the
maximum repurchase price under the formula exceeds the intrinsic value of the
option.
The use of debt options is subject to the same risks described above in
connection with stock options.
OPTIONS ON STOCK INDICES. The Conservative Balanced and Flexible Managed
Portfolios may purchase and sell put and call options on stock indices traded on
securities exchanges or listed on NASDAQ or that result from privately
negotiated transactions with broker-dealers ("OTC options"). Options on stock
indices are similar to options on stock except that rather than the right to
take or make delivery of stock at a specified price, an option on a stock index
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the stock index upon which the option is based is
greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. This amount of cash is equal to such difference
between the closing price of the index and the exercise price of the option
expressed in dollars times a specified multiple (the "multiplier"). The writer
of the option is obligated, in return for the premium received, to make delivery
of this amount. Unlike stock options, all settlements are in cash, and gain or
loss depends on price movements in the stock market generally (or in a
particular industry or segment of the market) rather than price movements in
individual stocks.
The multiplier for an index option performs a function similar to the unit of
trading for a stock option. It determines the total dollar value per Contract of
each point in the difference between the exercise price of an option and the
current level of the underlying index. A multiplier of 100 means that a
one-point difference will yield $100. Options on different indices may have
different multipliers.
The portfolios may purchase put and call options for hedging and investment
purposes. No portfolio intends to invest more than 5% of its net assets at any
one time in the purchase of puts and calls on stock indices. A portfolio may
effect closing sale and purchase transactions involving options on stock
indices, as described above in connection with stock options.
A portfolio will write only "covered" options on stock indices. A call option is
covered if the portfolio holds a portfolio of stocks at least equal to the value
of the index times the multiplier times the number of contracts. When a
portfolio writes a call option on a broadly based stock market index, the
portfolio will segregate or put into escrow with its custodian or pledge to a
broker as collateral for the option, cash, cash equivalents or "qualified
securities" (defined below) with a market value at the time the option is
written of not less than 100% of the current index value times the multiplier
times the number of contracts. If a portfolio has written an option on an
industry or market segment index, it will segregate or put into escrow with its
custodian or pledge to a broker as collateral for the option at least five
"qualified securities," all of which are stocks of issuers in such industry or
market segment, with a market value at the time the option is written of not
less than 100% of the current index value times the multiplier times the number
of contracts. Such stocks will include stocks which represent at least 50% of
the weighting of the industry or market segment index and will represent at
least 50% of the portfolio's holdings in that industry or market segment. No
individual security will represent more than 15% of the amount so segregated,
pledged or escrowed in the case of broadly based stock market index options or
25% of such amount in the case of industry or market segment index options. If
at the close of business on any day the market value of such qualified
securities so segregated, escrowed or pledged falls below 100% of the current
index value times the multiplier times the number of contracts, the portfolio
will so segregate, escrow or pledge an amount in cash, Treasury bills or other
high-grade short-term obligations equal in value to the difference. In addition,
when a portfolio writes a call on an index which is in-the-money at the time the
call is written, the portfolio will segregate with its custodian or pledge to
the broker as collateral, cash or U.S. Government or other liquid unencumbered
assets equal in value to the amount by which the call is in-the-money times the
multiplier times the number of
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contracts. Any amount segregated pursuant to the foregoing sentence may be
applied to the portfolio's obligation to segregate additional amounts in the
event that the market value of the qualified securities falls below 100% of the
current index value times the multiplier times the number of contracts. A
"qualified security" is an equity security which is listed on a securities
exchange or NASDAQ against which the portfolio has not written a stock call
option and which has not been hedged by the portfolio by the sale of stock index
futures. However, if the portfolio holds a call on the same index as the call
written where the exercise price of the call held is equal to or less than the
exercise price of the call written or greater than the exercise price of the
call written if the difference is maintained by the portfolio in cash, Treasury
bills or other high-grade short-term obligations in a segregated account with
its custodian, it will not be subject to the requirement described in this
paragraph.
A put option is covered if: (1) the portfolio holds in a segregated account
cash, Treasury bills or other high-grade short-term debt obligations of a value
equal to the strike price times the multiplier times the number of contracts; or
(2) the portfolio holds a put on the same index as the put written where the
strike price of the put held is equal to or greater than the strike price of the
put written or less than the strike price of the put written if the difference
is maintained by the portfolio in cash, Treasury bills or other liquid
unencumbered assets in a segregated account with its custodian. In instances
involving the purchase of futures contracts by a portfolio, an amount of cash
and cash equivalents, equal to the market value of the futures contracts, will
be deposited in a segregated account with the portfolio's custodian and/or in a
margin account with a broker to collateralize the position and thereby ensure
that the use of such futures is unleveraged.
The purchase and sale of options on stock indices will be subject to the risks
described under OPTIONS ON EQUITY SECURITIES, page 6. In addition, the
distinctive characteristics of options on indices create certain risks that are
not present with stock options. Index prices may be distorted if trading of
certain stocks included in the index is interrupted. Trading in the index
options also may be interrupted in certain circumstances, such as if trading
were halted in a substantial number of stocks included in the index. If this
occurred, a portfolio would not be able to close out options which it had
purchased or written and, if restrictions on exercise were imposed, might be
unable to exercise an option it holds, which could result in substantial losses
to the portfolio. It is the policy of the portfolios to purchase or write
options only on stock indices which include a number of stocks sufficient to
minimize the likelihood of a trading halt in options on the index.
The ability to establish and close out positions on such options will be subject
to the development and maintenance of a liquid secondary market. A portfolio
will not purchase or sell any index option contract unless and until, in its
manager's opinion, the market for such options has developed sufficiently that
the risk in connection with such transactions is no greater than the risk in
connection with options on stocks.
There are certain special risks associated with writing calls on stock indices.
Because exercises of index options are settled in cash, a call writer such as a
portfolio cannot determine the amount of its settlement obligations in advance
and, unlike call writing on specific stocks, cannot precisely provide in advance
for, or cover, its potential settlement obligations by acquiring and holding the
underlying securities. The portfolios, however, will follow the "cover"
procedures described above.
Price movements in a portfolio's equity security portfolio probably will not
correlate precisely with movements in the level of the index and, therefore, in
writing a call on a stock index a portfolio bears the risk that the price of the
securities held by the portfolio may not increase as much as the index. In such
event, the portfolio would bear a loss on the call which is not completely
offset by movement in the price of the portfolio's equity securities. It is also
possible that the index may rise when the portfolio's securities do not rise in
value. If this occurred, the portfolio would experience a loss on the call which
is not offset by an increase in the value of its securities portfolio and might
also experience a loss in its securities portfolio. However, because the value
of a diversified securities portfolio will, over time, tend to move in the same
direction as the market, movements in the value of a portfolio's securities in
the opposite direction as the market would be likely to occur for only a short
period or to a small degree.
When a portfolio has written a call, there is also a risk that the market may
decline between the time the portfolio has a call exercised against it, at a
price which is fixed as of the closing level of the index on the date of the
exercise, and the time the portfolio is able to sell stocks in its portfolio. As
with stock options, a portfolio will not learn that an index option has been
exercised until the day following the exercise date but, unlike a call on stock
where the portfolio would be able to deliver the underlying securities in
settlement, the portfolio may have to sell part of its stock portfolio in order
to make settlement in cash, and the price of such stocks might decline before
they can be sold. This timing risk makes certain strategies involving more than
one option substantially more risky with options in stock indices than with
stock options. For example, even if an index call which a portfolio has written
is "covered" by an index call held by the portfolio with the same strike price,
the portfolio will bear the risk that the level of the index may decline between
the close of trading on the date the exercise notice is filed with the clearing
corporation and the close of trading on the date the portfolio exercises the
call it holds or the time the
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portfolio sells the call, which in either case would occur no earlier than the
day following the day the exercise notice was filed.
There are also certain special risks involved in purchasing put and call options
on stock indices. If a portfolio holds an index option and exercises it before
final determination of the closing index value for that day, it runs the risk
that the level of the underlying index may change before closing. If such a
change causes the exercised option to fall out-of-the-money, the portfolio will
be required to pay the difference between the closing index value and the
exercise price of the option (times the applicable multiplier) to the assigned
writer. Although the portfolio may be able to minimize the risk by withholding
exercise instructions until just before the daily cutoff time or by selling
rather than exercising an option when the index level is close to the exercise
price, it may not be possible to eliminate this risk entirely because the cutoff
times for index options may be earlier than those fixed for other types of
options and may occur before definitive closing index values are announced.
OPTIONS ON FOREIGN CURRENCIES. The Conservative Balanced and Flexible Managed
Portfolios may purchase and write put and call options on foreign currencies
traded on U.S. or foreign securities exchanges or boards of trade for hedging
purposes in a manner similar to that in which forward foreign currency exchange
contracts (see FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS, page 15) and futures
contracts on foreign currencies (discussed under FUTURES CONTRACTS, below) will
be employed. Options on foreign currencies are similar to options on stock,
except that the option holder has the right to take or make delivery of a
specified amount of foreign currency, rather than stock.
A portfolio may purchase and write options to hedge the portfolio's securities
denominated in foreign currencies. If there is a decline in the dollar value of
a foreign currency in which the portfolio's securities are denominated, the
dollar value of such securities will decline even though the foreign currency
value remains the same. To hedge against the decline of the foreign currency, a
portfolio may purchase put options on such foreign currency. If the value of the
foreign currency declines, the gain realized on the put option would offset, in
whole or in part, the adverse effect such decline would have on the value of the
portfolio's securities. Alternatively, a portfolio may write a call option on
the foreign currency. If the foreign currency declines, the option would not be
exercised and the decline in the value of the portfolio securities denominated
in such foreign currency would be offset in part by the premium the portfolio
received for the option.
If, on the other hand, the portfolio manager anticipates purchasing a foreign
security and also anticipates a rise in such foreign currency (thereby
increasing the cost of such security), the portfolio may purchase call options
on the foreign currency. The purchase of such options could offset, at least
partially, the effects of the adverse movements of the exchange rates.
Alternatively, a portfolio could write a put option on the currency and, if the
exchange rates move as anticipated, the option would expire unexercised.
A portfolio's successful use of currency exchange options on foreign currencies
depends upon the manager's ability to predict the direction of the currency
exchange markets and political conditions, which requires different skills and
techniques than predicting changes in the securities markets generally. For
instance, if the currency being hedged has moved in a favorable direction, the
corresponding appreciation of the portfolio's securities denominated in such
currency would be partially offset by the premiums paid on the options. Further,
if the currency exchange rate does not change, the portfolio net income would be
less than if the portfolio had not hedged since there are costs associated with
options.
The use of these options is subject to various additional risks. The correlation
between movements in the price of options and the price of the currencies being
hedged is imperfect. The use of these instruments will hedge only the currency
risks associated with investments in foreign securities, not market risks. The
portfolio's ability to establish and maintain positions will depend on market
liquidity. The ability of the portfolio to close out an option depends upon a
liquid secondary market. There is no assurance that liquid secondary markets
will exist for any particular option at any particular time.
Because there are two currencies involved, developments in either or both
countries can affect the values of options on foreign currencies. In addition,
the quantities of currency underlying option contracts represent odd lots in a
market dominated by transactions between banks; this can mean extra transaction
costs upon exercise. Option markets may be closed while round-the-clock
interbank currency markets are open, and this can create price and rate
discrepancies.
FUTURES CONTRACTS. The Conservative Balanced and Flexible Managed Portfolios
may, to the extent permitted by applicable regulations, attempt to reduce the
risk of investment in equity securities by hedging a portion of their equity
portfolios through the use of stock index futures contracts. A stock index
futures contract is an agreement in which the seller of the contract agrees to
deliver to the buyer an amount of cash equal to a specific dollar amount times
the difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement is made.
No physical delivery of the underlying stocks in the index is made.
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The Conservative Balanced and Flexible Managed Portfolios may, to the extent
permitted by applicable regulations, purchase and sell for hedging purpose
futures contracts on interest-bearing securities (such as U.S. Treasury bonds
and notes) or interest rate indices (referred to collectively as "interest rate
futures contracts").
The Conservative Balanced and Flexible Managed Portfolios may, to the extent
permitted by applicable regulations, purchase and sell futures contracts on
foreign currencies or groups of foreign currencies for hedging purposes.
When the futures contract is entered into, each party deposits with a futures
commission merchant (or in a segregated custodial account) approximately 5% of
the contract amount, called the "initial margin." Subsequent payments to and
from the futures commission merchant, called the "variation margin," will be
made on a daily basis as the underlying security, index or rate fluctuates
making the long and short positions in the futures contracts more or less
valuable, a process known as "marking to the market." The Board of Directors
currently intends to limit futures trading for hedging purposes so that a
portfolio will not enter into futures contracts or related options if the
aggregate initial margins and premiums exceed 5% of the fair market value of its
assets, after taking into account unrealized profits and unrealized losses on
any such contracts and options.
In addition, as permitted by applicable regulations, the Conservative Balanced
and Flexible Managed Portfolios may purchase and sell stock index futures
contracts and interest rate futures contracts to adjust the portfolio's asset
mix. For example, if the investment manager expects bonds to outperform stocks,
it may purchase interest rate futures contracts rather than actually selling
stocks and buying bonds. Neither portfolio will enter into futures contracts or
related options for this purpose if the aggregate initial margins and premiums
for futures and options for this purpose exceed 5% of the fair market of that
portfolio's assets, taking into account unrealized profits and unrealized losses
on any such futures and options.
A portfolio's successful use of futures contracts depends upon the investment
manager's ability to predict the direction of the relevant market. The
correlation between movement in the price of the futures contract and the price
of the securities or currencies being hedged is imperfect. The ability of a
portfolio to close out a futures position depends on a liquid secondary market.
There is no assurance that liquid secondary markets will exist for any
particular futures contract at any particular time.
There are several additional risks associated with a portfolio's use of futures
contracts for hedging purposes. One such risk arises because of imperfect
correlation between movements in the price of the futures contract and the price
of the securities or currency that are the subject of the hedge. In the case of
futures contracts on stock or interest rate indices, the correlation between the
price of the futures contract and movements in the index might not be perfect.
To compensate for differences in historical volatility, a portfolio could
purchase or sell future contracts with a greater or lesser value than the
securities or currency it wished to hedge or purchase. In addition, temporary
price distortions in the futures market could be caused by a variety of factors.
Further, the ability of a portfolio to close out a futures position depends on a
liquid secondary market. There is no assurance that a liquid secondary market on
an exchange will exist for any particular futures contract at any particular
time. Further, each portfolio's successful use of futures contracts is to some
extent dependent on the ability of the portfolio manager to predict correctly
movements in the direction of the market, interest rates and/or currency
exchange rates.
In addition, the hours of trading of futures contracts may not conform to the
hours during which the portfolio may trade the underlying securities and/or
currency. To the extent that the futures markets close before the securities or
currency markets, significant price and rate movements can take place in the
securities and/or currency markets that cannot be reflected in the futures
markets.
OPTIONS ON FUTURES CONTRACTS. To the extent permitted by applicable insurance
law and federal regulations, the Conservative Balanced and Flexible Managed
Portfolios may enter into certain transactions involving options on stock index
futures contracts, options on interest rate futures contracts, and options on
foreign currency futures contracts. An option on a futures contract gives the
purchaser or holder the right, but not the obligation, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put) at a specified price at any time during the option
exercise period. The writer of the option is required upon exercise to assume an
offsetting futures position (a short position if the option is a call and a long
position if the option is a put). Upon exercise of the option, the assumption of
offsetting futures positions by the writer and holder of the option will be
accomplished by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the futures contract.
As an alternative to exercise, the holder or writer of an option may terminate a
position by selling or purchasing an option of the same series. There is no
guarantee that such closing transactions can be effected. The portfolios intend
to utilize options on futures contracts for the same purposes that they use the
underlying futures contracts.
Options on futures contracts are subject to risks similar to those described
above with respect to option on securities, options on stock indices, and
futures contracts. These risks include the risk that the portfolio manager may
not correctly predict changes in the market, the risk of imperfect correlation
between the option and the
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securities being hedged, and the risk that there might not be a liquid secondary
market for the option. There is also the risk of imperfect correlation between
the option and the underlying futures contract. If there were no liquid
secondary market for a particular option on a futures contract, the portfolio
might have to exercise an option it held in order to realize any profit and
might continue to be obligated under an option it had written until the option
expired or was exercised. If the portfolio were unable to close out an option it
had written on a futures contract, it would continue to be required to maintain
initial margin and make variation margin payments with respect to the option
position until the option expired or was exercised against the portfolio.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
From time to time, in the ordinary course of business, the Conservative Balanced
and Flexible Managed Portfolios may purchase or sell securities on a when-issued
or delayed delivery basis, that is, delivery and payment can take place a month
or more after the date of the transaction. The portfolios will limit such
purchases to those in which the date for delivery and payment falls within 120
days of the date of the commitment. A portfolio will make commitments for such
when-issued transactions only with the intention of actually acquiring the
securities. A portfolio's custodian will maintain, in a separate account, cash,
U.S. Government securities or other liquid unencumbered assets having a value
equal to or greater than such commitments. If a portfolio chooses to dispose of
the right to acquire a when-issued security prior to its acquisition, it could,
as with the disposition of any other portfolio security, incur a gain or loss
due to market fluctuations.
In addition, the short-term portions of the portfolios may purchase money market
securities on a when-issued or delayed delivery basis on the terms set forth
under item 6 in SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO MAY CURRENTLY
INVEST, page 21.
SHORT SALES
The Conservative Balanced and Flexible Managed Portfolios may sell securities
they do not own in anticipation of a decline in the market value of those
securities ("short sales"). To complete such a transaction, the portfolio will
borrow the security to make delivery to the buyer. The portfolio is then
obligated to replace the security borrowed by purchasing it at the market price
at the time of replacement. The price at such time may be more or less than the
price at which the security was sold by the portfolio. Until the security is
replaced, the portfolio is required to pay to the lender any interest which
accrues during the period of the loan. To borrow the security the portfolio may
be required to pay a fee which would increase the cost of the security sold. The
proceeds of the short sale will be retained by the broker to the extent
necessary to meet margin requirements until the short position is closed out.
Until the portfolio replaces the borrowed security, it will (a) maintain in a
segregated account cash, U.S. Government securities or other liquid unencumbered
assets at such a level that the amount deposited in the account plus the amount
deposited with the broker as collateral will equal the current market value of
the security sold short and will not be less than the market value of the
security at the time it was sold short or (b) otherwise cover its short
position.
The portfolio will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the portfolio replaces the borrowed security. The portfolio will realize a gain
if the security declines in price between those dates. This result is the
opposite of what one would expect from a cash purchase of a long position in a
security. The amount of any gain will be decreased, and the amount of any loss
will be increased, by the amount of any fee or interest paid in connection with
the short sale. No more than 25% of any portfolio's net assets will be, when
added together: (i) deposited as collateral for the obligation to replace
securities borrowed to effect short sales and (ii) allocated to segregated
accounts in connection with short sales.
SHORT SALES AGAINST THE BOX
The portfolios may make short sales of securities or maintain a short position,
provided that at all times when a short position is open the portfolio owns an
equal amount of such securities or securities convertible into or exchangeable,
with or without payment of any further consideration, for an equal amount of the
securities of the same issuer as the securities sold short (a "short sale
against the box"); provided, that if further consideration is required in
connection with the conversion or exchange, cash, U.S. Government securities or
other liquid unencumbered assets in an amount equal to such consideration must
be put in a segregated account.
INTEREST RATE SWAPS
The fixed income portions of the Conservative Balanced and Flexible Managed
Portfolios may use interest rate swaps to increase or decrease a portfolio's
exposure to long- or short-term interest rates. No portfolio currently intends
to invest more than 5% of its net assets at any one time in interest rate swaps.
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Interest rate swaps, in their most basic form, involve the exchange by a
portfolio with another party of their respective commitments to pay or receive
interest. For example, a portfolio might exchange its right to receive certain
floating rate payments in exchange for another party's right to receive fixed
rate payments. Interest rate swaps can take a variety of other forms, such as
agreements to pay the net differences between two different indices or rates,
even if the parties do not own the underlying instruments. Despite their
differences in form, the function of interest rate swaps is generally the same--
to increase or decrease a portfolio's exposure to long- or short-term interest
rates. For example, a portfolio may enter into a swap transaction to preserve a
return or spread on a particular investment or a portion of its portfolio or to
protect against any increase in the price of securities the portfolio
anticipates purchasing at a later date.
The use of swap agreements is subject to certain risks. As with options and
futures, if the investment manager's prediction of interest rate movements is
incorrect, the portfolio's total return will be less than if the portfolio had
not used swaps. In addition, if the counterparty's creditworthiness declines,
the value of the swap would likely decline. Moreover, there is no guarantee that
a portfolio could eliminate its exposure under an outstanding swap agreement by
entering into an offsetting swap agreement with the same or another party.
A portfolio will maintain appropriate liquid assets in a segregated custodial
account to cover its current obligations under swap agreements. If a portfolio
enters into a swap agreement on a net basis, it will segregate assets with a
daily value at least equal to the excess, if any, of the portfolio's accrued
obligations under the swap agreement over the accrued amount the portfolio is
entitled to receive under the agreement. If a portfolio enters into a swap
agreement on other than a net basis, it will segregate assets with a value equal
to the full amount of the portfolio's accrued obligations under the agreement.
LOANS OF PORTFOLIO SECURITIES
The portfolios may from time to time lend the securities they hold to
broker-dealers, provided that such loans are made pursuant to written agreements
and are continuously secured by collateral in the form of cash, U.S. Government
securities or irrevocable standby letters of credit in an amount equal to at
least the market value at all times of the loaned securities plus the accrued
interest and dividends. During the time securities are on loan, the portfolio
will continue to receive the interest and dividends or amounts equivalent
thereto on the loaned securities while receiving a fee from the borrower or
earning interest on the investment of the cash collateral. The right to
terminate the loan will be given to either party subject to appropriate notice.
Upon termination of the loan, the borrower will return to the lender securities
identical to the loaned securities. The portfolio will not have the right to
vote securities on loan, but would terminate the loan and retain the right to
vote if that were considered important with respect to the investment.
The primary risk in lending securities is that the borrower may become insolvent
on a day on which the loaned security is rapidly advancing in price. In such
event, if the borrower fails to return the loaned securities, the existing
collateral might be insufficient to purchase back the full amount of the
security loaned, and the borrower would be unable to furnish additional
collateral. The borrower would be liable for any shortage; but the portfolio
would be an unsecured creditor with respect to such shortage and might not be
able to recover all or any of it. However, this risk may be minimized by a
careful selection of borrowers and securities to be lent and by monitoring
collateral.
No portfolio will lend securities to broker-dealers affiliated with Prudential,
including Prudential Securities Incorporated. This will not affect a portfolio's
ability to maximize its securities lending opportunities.
ILLIQUID SECURITIES
The portfolios may hold up to 15% of its net assets in illiquid securities.
Illiquid securities are those which may not be sold in the ordinary course of
business within seven days at approximately the value at which the portfolio has
valued them. Variable and floating rate instruments that cannot be disposed of
within seven days and repurchase agreements with a maturity of greater than
seven days are considered illiquid.
The portfolios may purchase securities which are not registered under the
Securities Act of 1933 but which can be sold to qualified institutional buyers
in accordance with Rule 144A under that Act. Any such security will not be
considered illiquid so long as it is determined by the adviser, acting under
guidelines approved and monitored by the Board of Directors, that an adequate
trading market exists for that security. In making that determination, the
adviser will consider, among other relevant factors: (1) the frequency of trades
and quotes for the security; (2) the number of dealers willing to purchase or
sell the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades. A portfolio's treatment of
Rule 144A securities as liquid could have the effect of increasing the level of
portfolio illiquidity to the extent that qualified institutional buyers become,
for a time, uninterested in purchasing these securities. In addition, the
adviser, acting under guidelines approved and monitored by the Board of
Directors, may conditionally determine, for purposed of the 15% test, that
certain commercial paper issued in
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reliance on the exemption from registration in Section 4(2) of the Securities
Act of 1933 will not be considered illiquid, whether or not it may be resold
under Rule 144A. To make that determination, the following conditions must be
met: (1) the security must not be traded flat or in default as to principal or
interest; (2) the security must be rated in one of the two highest rating
categories by at least two nationally recognized statistical rating
organizations ("NRSROs"), or if only one NRSRO rates the security, by that
NRSRO; if the security is unrated, the adviser must determine that the security
is of equivalent quality; and (3) the adviser must consider the trading market
for the specific security, taking into account all relevant factors. The adviser
will continue to monitor the liquidity of any Rule 144A security or any Section
4(2) commercial paper which has been determined to be liquid and, if a security
is no longer liquid because of changed conditions, the holdings of illiquid
securities will be reviewed to determine if any steps are required to assure
that the 15% test continues to be satisfied.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
To the extent permitted by applicable insurance law, the Conservative Balanced
and Flexible Managed Portfolios may purchase securities denominated in foreign
currencies. To address the currency fluctuation risk that such investments
entail, these portfolios may enter into forward foreign currency exchange
contracts in several circumstances. When a portfolio enters into a contract for
the purchase or sale of a security denominated in a foreign currency, or when a
portfolio anticipates the receipt in a foreign currency of dividends or interest
payments on a security which it holds, the portfolio may desire to "lock-in" the
U.S. dollar price of the security or the U.S. dollar equivalent of such dividend
or interest payment, as the case may be. By entering into a forward contract for
a fixed amount of dollars, for the purchase or sale of the amount of foreign
currency involved in the underlying transactions, the portfolio will be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date on which the security is purchased or sold, or on which
the dividend or interest payment is declared, and the date on which such
payments are made or received.
Additionally, when a portfolio's manager believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the portfolio may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of the portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of those securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. The portfolios will not enter into such
forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate a portfolio to deliver an amount of
foreign currency in excess of the value of the securities or other assets
denominated in that currency held by the portfolio. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the long-term investment decisions made with regard to overall diversification
strategies. However, the portfolios believe that it is important to have the
flexibility to enter into such forward contracts when it is determined that the
best interests of the portfolios will thereby be served.
The portfolios generally will not enter into a forward contract with a term of
greater than 1 year. At the maturity of a forward contract, a portfolio may
either sell the portfolio security and make delivery of the foreign currency or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly, it
may be necessary for a portfolio to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency that the portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.
If a portfolio retains the portfolio security and engages in an offsetting
transaction, the portfolio will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. Should
forward prices decline during the period between the portfolio's entering into a
forward contract for the sale of a foreign currency and the date it enters into
an offsetting contract for the purchase of the foreign currency, the portfolio
will realize a gain to the extent that the price of the currency it has agreed
to sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the portfolio will suffer a loss to the extent that the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The portfolios' dealing in forward foreign currency exchange contracts will be
limited to the transactions described above. Of course, the portfolios are not
required to enter into such transactions with regard to their foreign
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currency-denominated securities. It also should be realized that this method of
protecting the value of the portfolio securities against a decline in the value
of a currency does not eliminate fluctuations in the underlying prices of the
securities which are unrelated to exchange rates. Additionally, although such
contracts tend to minimize the risk of loss due to a decline in the value of the
hedge currency, at the same time they tend to limit any potential gain which
might result should the value of such currency increase.
Although the portfolios value their assets daily in terms of U.S. dollars, they
do not intend physically to convert their holdings of foreign currencies into
U.S. dollars on a daily basis. They will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to a portfolio at one rate, while offering a lesser rate of exchange should the
portfolio desire to resell that currency to the dealer.
INVESTMENT RESTRICTIONS
Set forth below are certain investment restrictions applicable to the
portfolios. Restrictions 1, 3, 5, and 8-11 are fundamental and may not be
changed without shareholder approval as required by the 1940 Act. Restrictions
2, 4, 6, 7, and 12 are not fundamental and may be changed by the Board of
Directors without shareholder approval.
Neither of the portfolios available to PRUVIDER Contract owners will:
1. Buy or sell real estate and mortgages, although the portfolios may buy and
sell securities that are secured by real estate and securities of real
estate investment trusts and of other issuers that engage in real estate
operation. Buy or sell commodities or commodities contracts, except that
the Conservative Balanced and Flexible Managed Portfolios may purchase and
sell stock index futures contracts and related options, purchase and sell
interest rate futures contracts and related options, and purchase and sell
foreign currency futures contracts and related options and forward foreign
currency exchange contracts.
2. Except as part of a merger, consolidation, acquisition or reorganization,
invest more than 5% of the value of its total assets in the securities of
any one investment company or more than 10% of the value of its total
assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting
securities of any one investment company.
3. Acquire securities for the purpose of exercising control or management of
any company except in connection with a merger, consolidation, acquisition
or reorganization.
4. Make short sales of securities or maintain a short position, except that
the Conservative Balanced and Flexible Managed Portfolios may sell
securities short up to 25% of their net assets and may make short sales
against the box. Collateral arrangements entered into with respect to
options, futures contracts and forward contracts are not deemed to be short
sales. Collateral arrangements entered into with respect to interest rate
swap agreements are not deemed to be short sales.
5. Purchase securities on margin or otherwise borrow money or issue senior
securities except that the fixed income portions of the Conservative
Balanced and Flexible Managed Portfolios may enter into reverse repurchase
agreements, dollar rolls and may purchase securities on a when-issued and
delayed delivery basis; except that the money market portion of any
portfolio may enter into reverse repurchase agreements and may purchase
securities on a when-issued and delayed delivery basis; and except that the
Conservative Balanced and Flexible Managed Portfolios may purchase
securities on a when-issued or a delayed delivery basis. The Series Fund
may also obtain such short-term credit as it needs for the clearance of
securities transactions and may borrow from a bank for the account of any
portfolio as a temporary measure to facilitate redemptions (but not for
leveraging or investment) or to exercise an option, an amount that does not
exceed 5% of the value of the portfolio's total assets (including the
amount owed as a result of the borrowing) at the time the borrowing is
made. Interest paid on borrowings will not be available for investment.
Collateral arrangements with respect to futures contracts and options
thereon and forward foreign currency exchange contracts (as permitted by
restriction no.1) are not deemed to be the issuance of a senior security or
the purchase of a security on margin. Collateral arrangements with respect
to the writing of options on debt securities, equity securities, stock
indices and foreign currencies by the Conservative Balanced and Flexible
Managed Portfolios are not deemed to be the issuance of a senior security
or the purchase of a security on margin. Collateral arrangements entered
into by the Conservative Balanced and Flexible Managed Portfolios with
respect to interest rate swap agreements are not deemed to be the issuance
of a senior security or the purchase of a security on margin.
6. Enter into reverse repurchase agreements if, as a result, the portfolio's
obligations with respect to reverse repurchase agreements would exceed 10%
of the portfolio's net assets (defined to mean total assets at market value
less liabilities other than reverse repurchase agreements); except that the
fixed income portions
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of the Conservative Balanced and Flexible Managed Portfolios may enter into
reverse repurchase agreements and dollar rolls provided that the portfolio's
obligations with respect to those instruments do not exceed 30% of the
portfolio's net assets (defined to mean total assets at market value less
liabilities other than reverse repurchase agreements and dollar rolls).
7. Pledge or mortgage assets, except that no more than 10% of the value of any
portfolio may be pledged (taken at the time the pledge is made) to secure
authorized borrowing and except that a portfolio may enter into reverse
repurchase agreements. Collateral arrangements entered into with respect to
futures and forward contracts and the writing of options are not deemed to
be the pledge of assets. Collateral arrangements entered into with respect
to interest rate swap agreements are not deemed to be the pledge of assets.
8. Lend money, except that loans of up to 10% of the value of each portfolio
may be made through the purchase of privately placed bonds, debentures,
notes, and other evidences of indebtedness of a character customarily
acquired by institutional investors that may or may not be convertible into
stock or accompanied by warrants or rights to acquire stock. Repurchase
agreements and the purchase of publicly traded debt obligations are not
considered to be "loans" for this purpose and may be entered into or
purchased by a portfolio in accordance with its investment objectives and
policies.
9. Underwrite the securities of other issuers, except where the Series Fund may
be deemed to be an underwriter for purposes of certain federal securities
laws in connection with the disposition of portfolio securities and with
loans that a portfolio may make pursuant to item 8 above.
10. Make an investment unless, when considering all its other investments, 75%
of the value of a portfolio's assets would consist of cash, cash items,
obligations of the United States Government, its agencies or
instrumentalities, and other securities. For purposes of this restriction,
"other securities" are limited for each issuer to not more than 5% of the
value of a portfolio's assets and to not more than 10% of the issuer's
outstanding voting securities held by the Series Fund as a whole. Some
uncertainty exists as to whether certain of the types of bank obligations in
which a portfolio may invest, such as certificates of deposit and bankers'
acceptances, should be classified as "cash items" rather than "other
securities" for purposes of this restriction, which is a diversification
requirement under the 1940 Act. Interpreting most bank obligations as "other
securities" limits the amount a portfolio may invest in the obligations of
any one bank to 5% of its total assets. If there is an authoritative
decision that any of these obligations are not "securities" for purposes of
this diversification test, this limitation would not apply to the purchase
of such obligations.
11. Purchase securities of a company in any industry if, as a result of the
purchase, a portfolio's holdings of securities issued by companies in that
industry would exceed 25% of the value of the portfolio, except that this
restriction does not apply to purchases of obligations issued or guaranteed
by the U.S. Government, its agencies and instrumentalities or issued by
domestic banks. For purposes of this restriction, neither finance companies
as a group nor utility companies as a group are considered to be a single
industry and will be grouped instead according to their services; for
example, gas, electric, and telephone utilities will each be considered a
separate industry. For purposes of this exception, domestic banks shall
include all banks which are organized under the laws of the United States or
a state (as defined in the 1940 Act), U.S. branches of foreign banks that
are subject to the same regulations as U.S. banks and foreign branches of
domestic banks (as permitted by the SEC).
12. Invest more than 15% of its net assets in illiquid securities. For purposes
of this restriction, illiquid securities are those deemed illiquid pursuant
to SEC regulations and guidelines, as they may be revised from time to time.
The investments of the various portfolios are generally subject to certain
additional restrictions under the laws of the State of New Jersey. In the event
of future amendments to the applicable New Jersey statutes, each portfolio will
comply, without the approval of the shareholders, with the statutory
requirements as so modified. The pertinent provisions of New Jersey law as they
stand are, in summary form, as follows:
1. An Account may not purchase any evidence of indebtedness issued, assumed or
guaranteed by any institution created or existing under the laws of the
U.S., any U.S. state or territory, District of Columbia, Puerto Rico, Canada
or any Canadian province, if such evidence of indebtedness is in default as
to interest. "Institution" includes any corporation, joint stock
association, business trust, business joint venture, business partnership,
savings and loan association, credit union or other mutual savings
institution.
2. The stock of a corporation may not be purchased unless: (i) the corporation
has paid a cash dividend on the class of stock during each of the past 5
years preceding the time of purchase; or (ii) during the 5-year period the
corporation had aggregate earnings available for dividends on such class of
stock sufficient to pay average dividends of 4% per annum computed upon the
par value of such stock or upon stated value if the stock has
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no par value. This limitation does not apply to any class of stock which is
preferred as to dividends over a class of stock whose purchase is not
prohibited.
3. Any common stock purchased must be: (i) listed or admitted to trading on a
securities exchange in the United States or Canada; or (ii) included in the
National Association of Securities Dealers' national price listings of
"over-the-counter" securities; or (iii) determined by the Commissioner of
Insurance of New Jersey to be publicly held and traded and have market
quotations available.
4. Any security of a corporation may not be purchased if after the purchase
more than 10% of the market value of the assets of a portfolio would be
invested in the securities of such corporation.
As a result of these currently applicable requirements of New Jersey law, which
impose substantial limitations on the ability of the Series Fund to invest in
the stock of companies whose securities are not publicly traded or who have not
recorded a 5-year history of dividend payments or earnings sufficient to support
such payments, the portfolios will not generally hold the stock of newly
organized corporations. Nonetheless, an investment not otherwise eligible under
items 1 or 2 above may be made if, after giving effect to the investment, the
total cost of all such non-eligible investments does not exceed 5% of the
aggregate market value of the assets of the portfolio.
Investment limitations also arise under the insurance laws and regulations of
Arizona and may arise under the laws and regulations of other states. Although
compliance with the requirements of New Jersey law set forth above will
ordinarily result in compliance with any applicable laws of other states, under
some circumstances the laws of other states could impose additional restrictions
on the portfolios. For example, the Series Fund will generally invest no more
than 10% of its assets in the obligations of banks of the foreign countries
described in item 2 of SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO MAY
CURRENTLY INVEST, page 21. In addition, the Series Fund adheres to additional
restrictions relating to such practices as the lending of securities, borrowing,
and the purchase of put and call options, futures contracts, and derivative
instruments on securities to comply with investment guidelines issued by the
California Department of Insurance.
Current federal income tax laws require that the assets of each portfolio be
adequately diversified so that Prudential and other insurers with separate
accounts which invest in the Series Fund and not the Contract owners, are
considered the owners of assets held in the Account for federal income tax
purposes. See TAX TREATMENT OF CONTRACT BENEFITS, page 3. Prudential intends to
maintain the assets of each portfolio pursuant to those diversification
requirements.
INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES
The Series Fund and Prudential have entered into an Investment Advisory
Agreement under which Prudential will, subject to the direction of the Board of
Directors of the Series Fund, be responsible for the management of the Series
Fund, and provide investment advice and related services to each portfolio. As
noted in the prospectus, Prudential has also entered into a Service Agreement
with its wholly-owned subsidiary, The Prudential Investment Corporation ("PIC"),
which provides that PIC will furnish to Prudential such services as Prudential
may require in connection with Prudential's performance of its obligations under
the Investment Advisory Agreement.
Under the Investment Advisory Agreement, Prudential receives an investment
management fee as compensation for its services to the Series Fund. The fee is a
daily charge, payable quarterly, equal to an annual percentage of the average
daily net assets of each individual portfolio.
The investment management fee for the Conservative Balanced Portfolio is equal
to an annual rate of 0.55% of the average daily net assets of each of the
portfolios. For the Flexible Managed Portfolio, the fee is equal to an annual
rate of 0.6% of the average daily net assets of the portfolio.
The Investment Advisory Agreement requires Prudential to pay for maintaining any
Prudential staff and personnel who perform clerical, accounting, administrative,
and similar services for the Series Fund, other than investor services and any
daily Series Fund accounting services. It also requires Prudential to pay for
the equipment, office space and related facilities necessary to perform these
services and the fees or salaries of all officers and directors of the Series
Fund who are affiliated persons of Prudential or any subsidiary of Prudential.
Each portfolio pays all other expenses incurred in its individual operation and
also pays a portion of the Series Fund's general administrative expenses
allocated on the basis of the asset size of the respective portfolios. Expenses
that will be borne directly by the portfolios include redemption expenses,
expenses of portfolio transactions, shareholder servicing costs, interest,
certain taxes, charges of the Custodian and Transfer Agent, and other expenses
attributable to a particular portfolio. Expenses that will be allocated among
all portfolios include legal expenses, state franchise taxes, auditing services,
costs of printing proxies, costs of stock certificates, Securities and Exchange
Commission fees, accounting costs, the fees and expenses of directors of the
Series Fund
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who are not affiliated persons of Prudential or any subsidiary of Prudential,
and other expenses properly payable by the entire Series Fund. If the Series
Fund is sued, litigation costs may be directly applicable to one or more
portfolios or allocated on the basis of the size of the respective portfolios,
depending upon the nature of the lawsuit. The Series Fund's Board of Directors
has determined that this is an appropriate method of allocating expenses.
Under the Investment Advisory Agreement, Prudential has agreed to refund to the
Conservative Balanced and Flexible Managed Portfolios the portion of the
investment management fee for that portfolio equal to the amount that the
aggregate annual ordinary operating expenses of that portfolio (excluding
interest, taxes, and brokerage fees and commissions but including investment
management fees) exceeds 0.75% of the portfolio's average daily net assets.
The Investment Advisory Agreement with Prudential was most recently approved by
the Series Fund's Board of Directors, including a majority of the Directors who
are not interested persons of Prudential, on February 12, 1997 with respect to
the Balanced Portfolios. The Investment Advisory Agreement was most recently
approved by shareholders in accordance with instructions from Contract owners at
their 1989 annual meeting with respect to the Balanced Portfolios. The Agreement
will continue in effect if approved annually by: (1) a majority of the
noninterested persons of the Series Fund's Board of Directors; and (2) by a
majority of the entire Board of Directors or by a majority vote of the
shareholders of each portfolio. The required shareholder approval of the
Agreement shall be effective with respect to any portfolio if a majority of the
voting shares of that portfolio vote to approve the Agreement, even if the
Agreement is not approved by a majority of the voting shares of any other
portfolio or by a majority of the voting shares of the entire Series Fund. The
Agreement provides that it may not be assigned by Prudential and that it may be
terminated upon 60 days' notice by the Series Fund's Board of Directors or by a
majority vote of its shareholders. Prudential may terminate the Agreement upon
90 days' notice.
The Service Agreement between Prudential and PIC was most recently ratified by
shareholders of the Series Fund at their 1989 annual meeting with respect to the
Balanced Portfolios. The Service Agreement between Prudential and PIC will
continue in effect as to the Series Fund for a period of more than 2 years from
its execution, only so long as such continuance is specifically approved at
least annually in the same manner as the Investment Advisory Agreement between
Prudential and the Series Fund. The Service Agreement may be terminated by
either party upon not less than 30 days' prior written notice to the other
party, will terminate automatically in the event of its assignment, and will
terminate automatically as to the Series Fund in the event of the assignment or
termination of the Investment Advisory Agreement between Prudential and the
Series Fund. Prudential is not relieved of its responsibility for all investment
advisory services under the Investment Advisory Agreement. Under the Service
Agreement, Prudential pays PIC a portion of the fee it receives for providing
investment advisory services.
Prudential also serves as the investment advisor to several other investment
companies. When investment opportunities arise that may be appropriate for more
than one entity for which Prudential serves as investment advisor, Prudential
will not favor one over another and may allocate investments among them in an
impartial manner believed to be equitable to each entity involved. The
allocations will be based on each entity's investment objectives and its current
cash and investment positions. Because the various entities for which Prudential
acts as investor advisor have different investment objectives and positions,
Prudential may from time to time buy a particular security for one or more such
entities while at the same time it sells such securities for another.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Prudential is responsible for decisions to buy and sell securities, options on
securities and indices, and futures and related options for the Series Fund.
Prudential is also responsible for the selection of brokers, dealers, and
futures commission merchants to effect the transactions and the negotiation of
brokerage commissions, if any. Brokerdealers may receive brokerage commissions
on Series Fund portfolio transactions, including options and the purchase and
sale of underlying securities upon the exercise of options. Orders may be
directed to any broker or futures commission merchant including, to the extent
and in the manner permitted by applicable law, Prudential Securities
Incorporated, an indirect wholly-owned subsidiary of Prudential.
Bonds, including convertible bonds, and equity securities traded in the
over-the-counter market are generally traded on a "net" basis with dealers
acting as principal for their own accounts without a stated commission, although
the price of the security usually includes a profit to the dealer. In
underwritten offerings, securities are purchased at a fixed price which includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount. On occasion, certain money market
instruments and U.S. Government agency securities may be purchased directly from
the issuer, in which case no commissions or discounts are paid. The Series Fund
will not deal with Prudential Securities Incorporated in any transaction in
which Prudential Securities Incorporated acts as principal. Thus, it will not
deal with Prudential Securities Incorporated if execution involves Prudential
Securities Incorporated's acting as principal with respect to any part of the
Series Fund's order.
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Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities Incorporated, during the existence of
the syndicate, is a principal underwriter (as defined in the 1940 Act) except in
accordance with rules of the Securities and Exchange Commission. This
limitation, in the opinion of the Series Fund, will not significantly affect the
portfolios' current ability to pursue their respective investment objectives.
However, in the future it is possible that the Series Fund may under other
circumstances be at a disadvantage because of this limitation in comparison to
other funds not subject to such a limitation.
In placing orders for portfolio securities of the Series Fund, Prudential is
required to give primary consideration to obtaining the most favorable price and
efficient execution. Within the framework of this policy, Prudential will
consider the research and investment services provided by brokers, dealers or
futures commission merchants who effect or are parties to portfolio transactions
of the Series Fund, Prudential or Prudential's other clients. Such research and
investment services are those which brokerage houses customarily provide to
institutional investors and include statistical and economic data and research
reports on particular companies and industries. Such services are used by
Prudential in connection with all of its investment activities, and some of such
services obtained in connection with the execution of transactions for the
Series Fund may be used in managing other investment accounts. Conversely,
brokers, dealers or futures commission merchants furnishing such services may be
selected for the execution of transactions for such other accounts, and the
services furnished by such brokers, dealers or futures commission merchants may
be used by Prudential in providing investment management for the Series Fund.
Commission rates are established pursuant to negotiations with the broker,
dealer or futures commission merchant based on the quality and quantity of
execution services provided by the broker in the light of generally prevailing
rates. Prudential's policy is to pay higher commissions to brokers, other than
Prudential Securities Incorporated, for particular transactions than might be
charged if a different broker had been selected on occasions when, in
Prudential's opinion, this policy furthers the objective of obtaining best price
and execution. Prudential's present policy is not to permit higher commissions
to be paid on Series Fund transactions in order to secure research, statistical,
and investment services from brokers. Prudential might in the future authorize
the payment of such higher commissions but only with the prior concurrence of
the Board of Directors of the Series Fund, if it is determined that the higher
commissions are necessary in order to secure desired research and are reasonable
in relation to all the services that the broker provides.
Subject to the above considerations, Prudential Securities Incorporated may act
as a securities broker or futures commission merchant for the Series Fund. In
order for Prudential Securities Incorporated to effect any portfolio
transactions for the Series Fund, the commissions received by Prudential
Securities Incorporated must be reasonable and fair compared to the commissions
received by other brokers in connection with comparable transac tions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time. This standard would allow Prudential Securities
Incorporated to receive no more than the remuneration that would be expected to
be received by an unaffiliated broker or futures commission merchant in a
commensurate arm's-length transaction. Furthermore, the Board of Directors of
the Series Fund, including a majority of the noninterested directors, has
adopted procedures which are reasonably designed to provide that any
commissions, fees or other remuneration paid to Prudential Securities
Incorporated are consistent with the foregoing standard. In accordance with Rule
11a2-2(T) under the Securities Exchange Act of 1934, Prudential Securities
Incorporated may not retain compensation for effecting transactions on a
securities exchange for the Series Fund unless the Series Fund has expressly
authorized the retention of such compensation in a written contract executed by
the Series Fund and Prudential Securities Incorporated. Rule 11a2-2(T) provides
that Prudential Securities Incorporated must furnish to the Series Fund at least
annually a statement setting forth the total amount of all compensation retained
by Prudential Securities Incorporated from transactions effected for the Series
Fund during the applicable period. Brokerage and futures transactions with
Prudential Securities Incorporated are also subject to such fiduciary standards
as may be imposed by applicable law.
For the years 1996, 1995, and 1994, the Series Fund paid a total of $12,197,982,
$11,607,197, and $11,579,886, respectively, in brokerage commissions for all
portfolios. Of those amounts, $961,524, $899,739, and $560,155, for 1996, 1995,
and 1994, respectively, was paid out to Prudential Securities Incorporated. For
1996, the commissions paid to this affiliated broker constituted 7.9% of the
total commissions paid by the Series Fund for that year. Transactions through
this affiliated broker accounted for 7.9% of the aggregate dollar amount of
transactions for all of the portfolios of the Series Fund involving the payment
of commissions.
DETERMINATION OF NET ASSET VALUE
Shares in the Series Fund are currently offered continuously, without sales
charge, at prices equal to the respective net asset values of the portfolios,
only to separate accounts to fund benefits payable under the Contracts described
in the variable life insurance and variable annuity prospectuses. The Series
Fund may at some later date also offer its shares to other separate accounts of
Prudential or other insurers. Prudential acts as principal underwriter to the
Series Fund. As such, Prudential receives no underwriting compensation from the
Series Fund.
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As noted in the prospectus, the net asset value of the shares of each portfolio
is determined once daily on each day the New York Stock Exchange ("NYSE") is
open for business. The NYSE is open for business Monday through Friday except
for the days on which the following holidays are observed: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. In the event the New York Stock Exchange
closes early on any business day, the net asset value of each portfolio shall be
determined at a time between such closing and 4:15 p.m. New York City time.
In determining the net asset value of any intermediate or long-term fixed income
securities of the Conservative Balanced and Flexible Managed Portfolios (other
than debt obligations with remaining maturities of 12 months or less, which are
valued at amortized cost) 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.
All short-term debt obligations in the money market portions of the Conservative
Balanced and Flexible Managed Portfolios of 12 months remaining maturity or less
are valued on an amortized cost basis in accordance with an order obtained from
the Securities and Exchange Commission. This means that each obligation will be
valued initially at its purchase price and thereafter by amortizing any discount
or premium uniformly to maturity, regardless of the impact of fluctuating
interest rates on the market value of the obligation. This highly practical
method of valuation is in widespread use and almost always results in a value
that is extremely close to the actual market value. In order to continue to
utilize the amortized cost method of valuation, the money market portions of the
Conservative Balanced and Flexible Managed Portfolios may not purchase any
security with a remaining maturity of more than 12 months and must maintain a
dollar-weighted average portfolio maturity of 120 days or less. In the event of
sizeable changes in interest rates, however, the value determined by this method
may be higher or lower than the price that would be received if the obligation
were sold. The Series Fund's Board of Directors has established procedures to
monitor whether any material deviation occurs and, if so, will promptly consider
what action, if any, should be initiated to prevent unfair results to Contract
owners. The short-term portion of these portfolios may be invested only in high
quality instruments, as described in SECURITIES IN WHICH THE MONEY MARKET
PORTFOLIO MAY CURRENTLY INVEST, page 21.
The net asset value of the common stocks and convertible debt securities of the
portfolios will be determined in the following manner. Any security for which
the primary market is on an exchange is generally valued at the last sale price
on such exchange as of the close of the NYSE (which is currently 4:00 p.m. New
York City 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. 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. Corporate bonds
(other than convertible debt securities) are valued on the same basis as
intermediate or long-term fixed income securities, as described above.
Short-term debt instruments which mature in less than 60 days are valued at
amortized cost. For valuation purposes, quotations of foreign securities in a
foreign currency are converted to U.S. dollar equivalents.
With respect to all the portfolios which utilize such investments, options on
stock and stock indices traded on national securities exchanges are valued at
the average of the bid and asked prices as of the close of the respective
exchange (which is currently 4:10 p.m. New York City time). Futures contracts
and options thereon are valued at the last sale price at the close of the
applicable commodities exchanges or board of trade (which is currently 4:15 p.m.
New York City time) or, if there was no sale on the applicable commodities
exchange or board of trade on such day, at the mean between the most recently
quoted bid and asked prices on such exchange or board of trade.
Securities or assets for which market quotations are not readily available will
be valued at fair value as determined by Prudential under the direction of the
Board of Directors of the Series Fund.
SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO
MAY CURRENTLY INVEST*
The Money Market Portfolio, and the other portfolios to the extent their
investment policies so provide, may invest in the following liquid, short-term,
debt securities regularly bought and sold by financial institutions:
* Although the Money Market Portfolio is not available to PRUVIDER Contract
owners, any short-term portion of the Conservative Balanced and Flexible Managed
Portfolios may be invested in the types of securities described in this section.
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1. U.S. Treasury Bills and other obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. These are debt securities
(including bills, certificates of indebtedness, notes, and bonds) issued or
guaranteed by the U.S. Treasury or by an agency or instrumentality of the U.S.
Government that is established under the authority of an act of Congress.
Although all obligations of agencies and instrumentalities are not direct
obligations of the U.S. Treasury, payment of the interest and principal on them
is generally backed directly or indirectly by the U.S. Government. This support
can range from the backing of the full faith and credit of the United States, to
U.S. Treasury guarantees or to the backing solely of the issuing instrumentality
itself. Securities which are not backed by the full faith and credit of the
United States include but are not limited to obligations of the Tennessee Valley
Authority, the Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation, and the United States Postal Service, each of which has
the right to borrow from the U.S. Treasury to meet its obligations, and
obligations of the Federal Farm Credit System and the Federal Home Loan Banks,
the obligations of which may only be satisfied by the individual credit of the
issuing agency. Obligations of the Government National Mortgage Association, the
Farmers Home Administration, and the Export-Import Bank are examples of
securities that are backed by the full faith and credit of the United States.
2. Obligations (including certificates of deposit, bankers' acceptances, and
time deposits) of domestic banks, foreign branches of U.S. banks, U.S. branches
of foreign banks, and foreign offices of foreign banks provided that such bank
has, at the time of the portfolio's investment, total assets of at least $1
billion or the equivalent. Obligations of any savings and loan association or
savings bank organized under the laws of the United States or any state thereof,
provided that such association or savings bank has, at the time of the
portfolio's investment, total assets of at least $1 billion. The term
"certificates of deposit" includes both Eurodollar certificates of deposit,
which are traded in the over-the-counter market, and Eurodollar time deposits,
for which there is generally not a market. "Eurodollars" are dollars deposited
in banks outside the United States. An investment in Eurodollar instruments
involves risks that are different in some respects from an investment in debt
obligations of domestic issuers, including future political and economic
developments such as possible expropriation or confiscatory taxation that might
adversely affect the payment of principal and interest on the Eurodollar
instruments.
"Certificates of deposit" are certificates evidencing the indebtedness of a
commercial bank to repay funds deposited with it for a definite period of time
(usually from 14 days to 1 year). "Bankers' acceptances" are credit instruments
evidencing the obligation of a bank to pay a draft which has been drawn on it by
a customer. These instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity. "Time deposits"
are non-negotiable deposits in a bank for a fixed period of time.
3. Commercial paper, variable amount demand master notes, bills, notes and other
obligations issued by a U.S. company, a foreign company or a foreign government,
its agencies, instrumentalities or political subdivisions, denominated in U.S.
dollars, and, at the date of investment, rated at least A or A-2 by Standard &
Poor's Rating Group ("S&P"), A or Prime-2 by Moody's Investors Service
("Moody's") or, if not rated, issued by an entity having an outstanding
unsecured debt issue rated at least A or A-2 by S&P or A or Prime-2 by Moody's.
For a description of corporate bond ratings, see DEBT RATINGS, page 24. If such
obligations are guaranteed or supported by a letter of credit issued by a bank,
such bank (including a foreign bank) must meet the requirements set forth in
paragraph 2 above. If such obligations are guaranteed or insured by an insurance
company or other non-bank entity, such insurance company or other non-bank
entity must represent a credit of high quality, as determined by the Series
Fund's investment adviser (which as noted above is currently Prudential) under
the supervision of the Series Fund's Board of Directors.
As stated above in paragraphs 2 and 3, the Money Market Portfolio and short-term
portions of the other portfolios may contain obligations of foreign branches of
domestic banks and domestic branches of foreign banks, as well as commercial
paper, bills, notes, and other obligations issued in the United States by
foreign issuers, including foreign governments, their agencies, and
instrumentalities. This involves certain additional risks. These risks include
future political and economic developments in the country of the issuer, the
possible imposition of withholding taxes on interest income payable on such
obligations held by the Series Fund, the possible seizure or nationalization of
foreign deposits, and the possible establishment of exchange controls or other
foreign governmental laws or restrictions which might affect adversely the
payment of principal and interest on such obligations held by the Series Fund.
In addition, there may be less publicly available information about a foreign
issuer than about a domestic one, and foreign issuers may not be subject to the
same accounting, auditing and financial recordkeeping standards and requirements
as domestics issuers. Securities issued by foreign issuers may be subject to
greater fluctuations in price than securities issued by U.S. entities. Finally,
in the event of default with respect to any such foreign debt obligations, it
may be more difficult for the Series Fund to obtain or to enforce a judgment
against the issuers of such securities.
4. Repurchase Agreements. When the Money Market Portfolio purchases money market
securities of the types described above, it may on occasion enter into a
repurchase agreement with the seller wherein the seller and the buyer agree at
the time of sale to repurchase of the security at a mutually agreed upon time
and price. The period
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of maturity is usually quite short, possibly overnight or a few days, although
it may extend over a number of months. The resale price is in excess of the
purchase price, reflecting an agreed-upon market rate effective for the period
of time the portfolio's money is invested in the security, and is not related to
the coupon rate of the purchased security. Repurchase agreements may be
considered loans of money to the seller of the underlying security, which are
collateralized by the securities underlying the repurchase agreement. The Series
Fund will not enter into repurchase agreements unless the agreement is "fully
collateralized" (i.e., the value of the securities is, and during the entire
term of the agreement remains, at least equal to the amount of the 'loan'
including accrued interest). The Series Fund will take possession of the
securities underlying the agreement and will value them daily to assure that
this condition is met. The Series Fund has adopted standards for the parties
with whom it will enter into repurchase agreements which it believes are
reasonably designed to assure that such a party presents no serious risk of
becoming involved in bankruptcy proceedings within the time frame contemplated
by the repurchase agreement. In the event that a seller defaults on a repurchase
agreement, the Series Fund may incur a loss in the market value of the
collateral, as well as disposition costs; and, if a party with whom the Series
Fund had entered into a repurchase agreement becomes involved in bankruptcy
proceedings, the Series Fund'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 bankruptcy proceedings.
The Series Fund will not enter into repurchase agreements with Prudential or its
affiliates, including Prudential Securities Incorporated. This will not affect
the Series Fund's ability to maximize its opportunities to engage in repurchase
agreements.
5. Reverse Repurchase Agreements. The Money Market Portfolio may use reverse
repurchase agreements, which are described under REVERSE REPURCHASE AGREEMENTS
AND DOLLAR ROLLS in the prospectus. No portfolio may obligate more than 10% of
its net assets in connection with reverse repurchase agreements, except that the
fixed income portions of the Conservative Balanced and Flexible Managed
Portfolios may obligate up to 30% of their net assets in connection with reverse
repurchase agreements and dollar rolls.
6. When-Issued and Delayed Delivery Securities. From time to time, in the
ordinary course of business, the Money Market Portfolio may purchase securities
on a when-issued or delayed delivery basis (i.e., delivery and payment can take
place a month or more after the date of the transaction). The purchase price and
the interest rate payable on the securities are fixed on the transaction date.
The securities so purchased are subject to market fluctuation, and no interest
accrues to the portfolio until delivery and payment take place. At the time the
portfolio makes the commitment to purchase securities on a when-issued or
delayed delivery basis, it will record the transaction and thereafter reflect
the value, each day, of such securities in determining its net asset value. The
portfolio will make commitments for when-issued transactions only with the
intention of actually acquiring the securities and, to facilitate such
acquisitions, the Series Fund's custodian bank will maintain in a separate
account securities of the portfolio having a value equal to or greater than such
commitments. On delivery dates for such transactions, the portfolio will meet
its obligations from maturities or sales of the securities held in the separate
account and/or from then available cash flow. If the portfolio chooses to
dispose of the right to acquire a when-issued security prior to its acquisition,
it could, as with the disposition of any other obligation, incur a gain or loss
due to market fluctuation. No when-issued commitments will be made if, as a
result, more than 15% of the portfolio's net assets would be so committed.
The Board of Directors of the Series Fund has adopted policies for the Money
Market Portfolio to conform to amendments of an SEC rule applicable to money
market funds, like the portfolio. These policies do not apply to any other
portfolio. The policies are as follows: (1) The portfolio will not invest more
than 5% of its assets in the securities of any one issuer (except U.S.
Government securities); however, the portfolio may exceed the 5% limit with
respect to a single security rated in the highest rating category for up to
three business days after the purchase thereof; (2) To be eligible for
investment, a security must be a United States dollar-denominated instrument
that the Series Fund's Board has determined to present minimal credit risks and
must be rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations ("NRSROs") assigning a
rating to the security or issue, or if only one NRSRO has assigned a rating,
that NRSRO. An unrated security must be deemed to be of comparable quality as
determined by the Series Fund's Board. In other words, the portfolio will invest
in only first tier or second tier securities. First tier securities are
securities which are rated by at least two NRSROs, or by the only NRSRO that has
rated the security, in the highest short-term rating category, or unrated
securities of comparable quality as determined by the Series Fund's Board.
Second tier securities are eligible securities that are not first tier
securities; (3) The portfolio will not invest more than 5% of its total assets
in second tier securities; (4) The portfolio may not invest more than 1% of its
assets in second tier securities of any one issuer; (5) In the event a first
tier security held by the portfolio is downgraded and becomes a second tier
security, or in the case of an unrated security the Series Fund's Board
determines it is no longer of comparable quality to a first tier security, or in
the event Prudential becomes aware that an NRSRO has rated a second tier
security or an unrated portfolio security below its second highest rating, the
Board will reassess promptly whether the security presents minimal credit risks
and shall cause the portfolio to take such
23
<PAGE>
action as the Board determines is in the best interests of the portfolio and its
shareholders; (6) In the event of a default or if because of a rating downgrade
a security held in the portfolio is no longer an eligible investment, the
portfolio will sell the security as soon as practicable unless the Series Fund's
Board makes a specific finding that such action would not be in the best
interest of the portfolio; and (7) The portfolio's dollar-weighted average
maturity will be no more than 90 days. The Series Fund's Board of Directors has
adopted written procedures delegating to the investment advisor under certain
guidelines the responsibility to make several of the above-described
determinations, including certain credit quality determinations.
DEBT RATINGS
Moody's Investors Services, Inc. describes its categories of corporate debt
securities and its "Prime-1" and "Prime-2" commercial paper as follows:
Bonds:
Aaa -- Bonds which are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa -- Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are
generally known as high-grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long
term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa -- Bonds which are rated "Baa" are considered as medium grade
obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba -- Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection
of interest and principal payments may be very moderate, and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B -- Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa -- Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which are rated "Ca" represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C -- Bonds which are rated "C" are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Commercial paper:
o Issuers rated Prime-1 (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics:
- --Leading market positions in well-established industries.
- --High rates of return of funds employed.
- --Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
- --Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- --Well established access to a range of financial markets and assured sources of
alternate liquidity.
24
<PAGE>
o Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term debt obligations. This will normally be evidenced by
many of the characteristics cited above but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Standard & Poor's Rating Group describes its grades of corporate debt securities
and its "A" commercial paper as follows:
Bonds:
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in
small degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
BBB Debt rated "BBB" is regarded as having adequate capacity to pay
interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher-rated categories.
BB-B-CCC-CC-C
Debt rated "BB", "B", "CCC", "CC", and "C" is regarded as having
predominantly speculative characteristics with respect to
capacity to pay interest and repay principal. BB indicates the
least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to
adverse conditions.
Commercial paper:
Commercial paper rated A by Standard & Poor's Rating Group has
the following characteristics: Liquidity ratios are better than
the industry average. Long term senior debt rating is "A" or
better. In some cases BBB credits may be acceptable. The issuer
has access to at least two additional channels of borrowing.
Basic earnings and cash flow have an upward trend with allowances
made for unusual circumstances. Typically, the issuer's industry
is well established, the issuer has a strong position within its
industry and the reliability and quality of management is
unquestioned. Issuers rated A are further referred to by use of
numbers 1, 2 and 3 to denote relative strength within this
classification.
POSSIBLE REPLACEMENT OF THE SERIES FUND
Although Prudential believes it to be unlikely, it is possible that in the
judgment of its management, one or more of the portfolios of the Series Fund may
become unsuitable for investment by Contract owners because of investment policy
changes, tax law changes, or the unavailability of shares for investment. In
that event, Prudential may seek to substitute the shares of another portfolio or
of an entirely different mutual fund. Before this can be done, the approval of
the SEC, and possibly one or more state insurance departments, will be required.
Contract owners will be notified of such substitution.
In addition, although it is highly unlikely, it is conceivable that in the
future it may become disadvantageous for both variable life insurance and
variable annuity contract separate accounts to invest in the same underlying
mutual fund. Although neither the companies which invest in the Series Fund nor
the Series Fund currently foresees any such disadvantage, the Series Fund's
Board of Directors intends to monitor events in order to identify any material
conflict between variable life insurance and variable annuity contract owners
and to determine what action, if any, should be taken in response thereto.
Material conflicts could result from such things as: (1) changes in state
insurance law; (2) changes in federal income tax law; (3) changes in the
investment management of any portfolio of the Series Fund; or (4) difference
between voting instructions given by variable life insurance and variable
annuity contract owners. Prudential will bear the expense, if it does become
necessary, of remedying any material conflict including establishing a new
underlying investment company and segregating the assets held under variable
life insurance and variable annuity contracts.
25
<PAGE>
OTHER INFORMATION CONCERNING THE SERIES FUND
INCORPORATION AND AUTHORIZED STOCK
The Series Fund was incorporated under Maryland law on November 15, 1982. The
authorized Capital Stock of the Series Fund consists of 2 billion shares, par
value $0.01 per share. As of the date of this prospectus, the shares of Capital
Stock are divided into fifteen classes: MONEY MARKET PORTFOLIO Capital Stock
(225 million shares), DIVERSIFIED BOND PORTFOLIO Capital Stock (200 million
shares), HIGH YIELD BOND PORTFOLIO Capital Stock (100 million shares),
GOVERNMENT INCOME PORTFOLIO Capital Stock (100 million shares), EQUITY PORTFOLIO
Capital Stock (200 million shares), STOCK INDEX PORTFOLIO Capital Stock (100
million shares), EQUITY INCOME PORTFOLIO Capital Stock (100 million shares),
NATURAL RESOURCES PORTFOLIO Capital Stock (100 million shares), GLOBAL PORTFOLIO
Capital Stock (100 million shares), CONSERVATIVE BALANCED PORTFOLIO Capital
Stock (300 million shares), FLEXIBLE MANAGED PORTFOLIO Capital Stock (300
million shares), ZERO COUPON BOND PORTFOLIO 2000 Capital Stock (25 million
shares), ZERO COUPON BOND PORTFOLIO 2005 Capital Stock (50 million shares),
PRUDENTIAL JENNISON PORTFOLIO Capital Stock (50 million shares), SMALL
CAPITALIZATION STOCK PORTFOLIO Capital Stock (50 million shares). The shares of
each portfolio, when issued, will be fully paid and non-assessable, will have no
conversion, exchange or similar rights, and will be freely transferable. Each
share of stock will have a pro rata interest in the assets of the portfolio to
which the stock of that class relates and will have no interest in the assets of
any other portfolio.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Series Fund is qualified as a regulated investment company under Section 851
of the Internal Revenue Code and distributes substantially all of each
portfolio's net investment income and realized gains from securities
transactions to the respective subaccounts, which immediately reinvest it. For
each taxable year in which it and each of its portfolios so qualify, the Series
Fund will not be subject to tax on net investment income and realized gains from
securities transactions distributed to shareholders.
CUSTODIANS, TRANSFER AGENT, AND DIVIDEND DISBURSING AGENT
Chase Manhattan Bank, Chase Metro Tech Center, Brooklyn, NY 11245, is currently
the custodian of the assets held by all the portfolios, except the Global
Portfolio. On or about May 31, 1997, Investors Fiduciary Trust Company ("IFTC"),
127 West 10th Street, Kansas City, MO 64105-1716, will become the custodian of
the assets held by all the portfolios except the Global Portfolio. IFTC will
also be the custodian of the assets held in connection with repurchase
agreements entered into by the portfolios, and is authorized to use the
facilities of the Depository Trust Company and the facilities of the book-entry
system of the Federal Reserve Bank with respect to securities held by these
portfolios. Brown Brothers Harriman & Co. ("Brown Brothers"), 40 Water Street,
Boston, MA 02109, is the custodian of the assets of the Global Portfolio. Each
of the Series Fund's custodians employs subcustodians, who were approved by the
directors of the Series Fund in accordance with regulations of the Securities
and Exchange Commission, for the purpose of providing custodial service for the
Series Fund's foreign assets held outside the United States. The directors of
the Series Fund monitor the activities of the custodians and the subcustodians.
Prudential is the transfer agent and dividend disbursing agent for the Series
Fund. Prudential as transfer agent issues and redeems shares of the Series Fund
and maintains records of ownership for the shareholders. Prudential's principal
business address is Prudential Plaza, Newark, New Jersey 07102-3777.
EXPERTS
The financial statements of the Series Fund included in this statement of
additional information and the FINANCIAL HIGHLIGHTS included in the prospectus
for the year ended December 31, 1996 have been audited by Price Waterhouse LLP,
independent accountants, as stated in their report appearing herein and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing. Price Waterhouse LLP's principal business
address is 1177 Avenue of the Americas, New York, New York 10036.
The financial statements of the Series Fund included in this statement of
additional information and the FINANCIAL HIGHLIGHTS included in the prospectus
for the years prior to 1996 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing. Deloitte & Touche LLP's principal business
address is Two Hilton Court, Parsippany, NJ 07054-0319.
LICENSE
As part of the Investment Advisory Agreement, Prudential has granted the Series
Fund a royalty-free, non-exclusive license to use the words "The Prudential" and
"Prudential" and its registered service mark of a rock representing the Rock of
Gibraltar. However, Prudential may terminate this license if Prudential or a
company controlled by it ceases to be the Series Fund's investment advisor.
Prudential may also terminate the license for any other reason
26
<PAGE>
upon 60 days written notice; but, in this event, the Investment Advisory
Agreement shall also terminate 120 days following receipt by the Series Fund of
such notice, unless a majority of the outstanding voting securities of the
Series Fund vote to continue the Agreement notwithstanding termination of the
license.
27
<PAGE>
DIRECTORS AND OFFICERS OF PRUCO LIFE AND
MANAGEMENT OF THE SERIES FUND
DIRECTORS AND OFFICERS
The directors and major officers of Pruco Life, listed with their principal
occupations during the past 5 years, are shown below.
DIRECTORS OF PRUCO LIFE
WILLIAM M. BETHKE, Director. -- President, Prudential Capital Markets Group
since 1992.
IRA J. KLEINMAN, Director. -- Executive Vice President, Prudential International
Insurance Group since 1997; 1995 to 1997: Chief Marketing and Product
Development Officer, Prudential Individual Insurance Group; 1993 to 1995:
President, Prudential Select; Prior to 1993: Senior Vice President of
Prudential.
MENDEL A. MELZER, Director. -- Chief Investment Officer, Mutual Funds and
Annuities, Prudential Investments since 1996; 1995 to 1996: Chief Financial
Officer of the Money Management Group of Prudential; 1993 to 1995: Senior Vice
President and Chief Financial Officer of Prudential Preferred Financial
Services; Prior to 1993: Managing Director, Prudential Investment Corporation.
ESTHER H. MILNES, President and Director. -- Vice President and Actuary,
Prudential Individual Insurance Group since 1996; 1993 to 1996: Senior Vice
President and Chief Actuary, Prudential Insurance and Financial Services; Prior
to 1993: Vice President and Associate Actuary of Prudential.
I. EDWARD PRICE, Vice Chairman and Director. -- Senior Vice President and
Actuary, Prudential Individual Insurance Group since 1995; 1994 to 1995: Chief
Executive Officer, Prudential International Insurance; 1993 to 1994: President,
Prudential International Insurance; Prior to 1993: Senior Vice President and
Company Actuary of Prudential.
KIYOFUMI SAKAGUCHI, Director. -- President, Prudential International Insurance
Group since 1995; 1994 to 1995: Chairman and Chief Executive Officer, The
Prudential Life Insurance Co., Ltd.; Prior to 1994: President and Chief
Executive Officer, Asia Pacific Region-Prudential International Insurance, and
President, The Prudential Life Insurance Co., Ltd.
WILLIAM F. YELVERTON, Chairman and Director. -- Chief Executive Officer,
Prudential Individual Insurance Group since 1995; Prior to 1995: Chief Executive
Officer, New York Life Worldwide.
OFFICERS WHO ARE NOT DIRECTORS
SUSAN L. BLOUNT, Secretary. -- Vice President and Secretary of Prudential since
1995; Prior to 1995: Assistant General Counsel for Prudential Residential
Services Company.
C. EDWARD CHAPLIN, Treasurer. -- Vice President and Treasurer of Prudential
since 1995; 1993 to 1995: Managing Director and Assistant Treasurer of
Prudential; 1992 to 1993: Vice President and Assistant Treasurer, Banking and
Cash Management for Prudential.
LINDA S. DOUGHERTY, Vice President, Comptroller and Chief Accounting Officer. --
Vice President and Comptroller, Prudential Individual Insurance Group since
1997; Prior to 1997: Vice President, Accounting, Prudential.
JAMES C. DROZANOWSKI, Senior Vice President. -- Vice President and Operations
Executive, Prudential Individual Insurance Group since 1996; 1995 to 1996:
President and Chief Executive Officer of Chase Manhattan Bank; 1993 to 1995:
Vice President, North America Customer Services, Chase Manhattan Bank; Prior to
1993: Operations Executive, Global Securities Services, Chase Manhattan Bank.
CLIFFORD E. KIRSCH, Chief Legal Officer. -- Chief Counsel, Variable Products,
Law Department of Prudential since 1995; 1994 to 1995: Associate General Counsel
with Paine Webber; Prior to 1994: Assistant Director in the Division of
Investment Management with the Securities and Exchange Commission.
FRANK P. MARINO, Senior Vice President. -- Vice President, Policyowner Relations
Department, Prudential Individual Insurance Group since 1996; Prior to 1996:
Senior Vice President, Prudential Mutual Fund Services.
MARIO A. MOSSE, Senior Vice President. -- Vice President, Annuity Services,
Prudential Investments since 1996; Prior to 1996: Vice President, Chase
Manhattan Bank.
SHIRLEY H. SHAO, Senior Vice President and Chief Actuary. -- Vice President and
Associate Actuary, Prudential.
KAREN L. SHAPIRO, Senior Vice President. -- Vice President, Prudential
Individual Insurance Group since 1996; Vice President and Associate General
Counsel, Prudential Securities Incorporated 1993 to 1996; Prior to 1993: Senior
Associate with Shaw, Pittman, Potts and Trowbridge.
The business address of all directors and officers of Pruco Life is 213
Washington Street, Newark, New Jersey 07102-2992.
* SUBSIDIARY OF PRUDENTIAL
28
<PAGE>
MANAGEMENT OF THE SERIES FUND
The names of all directors and major officers of the Series Fund and the
principal occupation of each during the last 5 years are shown below. Unless
otherwise stated, the address of each director and officer is Prudential Plaza,
Newark, New Jersey 07102-3777.
DIRECTORS OF THE SERIES FUND
MENDEL A. MELZER*, Chairman of the Board--Chief Investment Officer of Prudential
Investments since 1996; 1995 to 1996: Chief Financial Officer of the Money
Management Group of Prudential; 1993 to 1995: Senior Vice President and Chief
Financial Officer of Prudential Preferred Financial Services; Prior to 1993:
Managing Director, The Prudential Investment Corporation.
E. MICHAEL CAULFIELD*, President and Director--Chief Executive Officer of
Prudential Investments since 1995; 1995: Chief Executive Officer, Prudential
Preferred Financial Services; 1993 to 1995: President, Prudential Preferred
Financial Services; 1992 to 1993: President, Prudential Property and Casualty
Insurance Company; Prior to 1992: President of Investment Services of
Prudential.
SAUL K. FENSTER, Director--President of New Jersey Institute of Technology.
Address: 323 Martin Luther King Boulevard, Newark, New Jersey 07102.
W. SCOTT MCDONALD, JR., Director--Principal, Kaludis Consulting Group since
1997; 1995 to 1996: Principal, Scott McDonald & Associates; Prior to 1995:
Executive Vice President of Fairleigh Dickinson University. Address: 9 Zamrok
Way, Morristown, New Jersey 07960.
JOSEPH WEBER, Director--Vice President, Interclass (international corporate
learning). Address: 37 Beachmont Terrace, North Caldwell, New Jersey 07006.
OFFICERS WHO ARE NOT DIRECTORS
SUSAN COTE, Vice President--Vice President Prudential Investments since 1996;
1995 to 1996: Chief Operating Officer and Managing Director, Prudential Mutual
Fund Investment Management; Prior to 1995: Senior Vice President and Treasurer
of Prudential Mutual Funds.
THOMAS EARLY, Secretary--General Counsel, Mutual Funds and Annuities, Prudential
Investments since 1996; 1994 to 1996: General Counsel, Prudential Retirement
Services, Prudential Investments; Prior to 1994: Associate General Counsel and
Chief Financial Services Counsel, Frank Russell Company.
I. EDWARD PRICE, Vice President--Senior Vice President and Actuary, Prudential
Individual Insurance Group since 1995; 1994 to 1995: Chief Executive Officer,
Prudential International Insurance; 1993 to 1994: President, Prudential
International Insurance; Prior to 1993: Senior Vice President and Company
Actuary of Prudential.
EUGENE STARK, Comptroller, Principal Financial Officer and Treasurer--Vice
President, Prudential Investments.
No director or officer of the Series Fund who is also an officer, director or
employee of Prudential or its affiliates is entitled to any remuneration from
the Series Fund for services as one of its directors or officers. Each director
of the Series Fund who is not an interested person of the Series Fund will
receive a fee of $2,000 per year plus $200 per portfolio for each meeting of the
Board attended and will be reimbursed for all expenses incurred in connection
with attendance at meetings.
*These members of the Board are interested persons of Prudential, its affiliates
or the Series Fund as defined in the 1940 Act. Certain actions of the Board,
including the annual continuance of the Investment Advisory Agreement between
the Series Fund and Prudential, must be approved by a majority of the members of
the Board who are not interested persons of Prudential, its affiliates or the
Series Fund. Mr. Melzer and Mr. Caulfield, two of the five members of the Board,
are interested persons of Prudential and the Series Fund, as that term is
defined in the 1940 Act, because they are officers and/or affiliated persons of
Prudential, the investment advisor to the Series Fund. Messrs. Fenster,
McDonald, and Weber are not interested persons of Prudential, its affiliates or
the Series Fund. However, Mr. Fenster is President of the New Jersey Institute
of Technology. Prudential has issued a group annuity contract to the Institute
and provides group life and group health insurance to its employees.
29
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
CONSERVATIVE BALANCED PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$4,188,354,768).......................... $4,538,468,628
Receivable for investments sold short (Note
2)....................................... 111,621,197
Interest and dividends receivable.......... 44,683,414
Receivable for investments sold............ 1,376,096
--------------
Total Assets............................. 4,696,149,335
--------------
LIABILITIES
Investments sold short at value (proceeds
$111,621,197 including accrued interest)
(Note 2)................................. 110,481,637
Payable for investments purchased.......... 99,447,868
Payable to investment adviser.............. 6,126,182
Accrued expenses........................... 768,878
Bank overdraft............................. 453,239
Payable for capital stock repurchased...... 62,998
--------------
Total Liabilities........................ 217,340,802
--------------
NET ASSETS................................... $4,478,808,533
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 2,886,377
Paid-in capital in excess of par......... 4,094,460,572
--------------
4,097,346,949
Accumulated net realized gains on
investments.............................. 30,208,164
Net unrealized appreciation on
investments.............................. 351,253,420
--------------
Net assets, December 31, 1996.............. $4,478,808,533
--------------
--------------
Net asset value and redemption price per
share of 288,637,703 outstanding shares
of common stock (authorized 300,000,000
shares).................................. $ 15.52
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C> <C>
INVESTMENT INCOME
Interest................................... $ 174,514,843
Dividends (net of $488,736 foreign
withholding tax)......................... 23,515,755
---------------
198,030,598
---------------
EXPENSES
Investment advisory fee.................... 23,052,572
Shareholders' reports...................... 1,367,000
Custodian expense.......................... 228,000
Accounting fees............................ 127,000
Audit fees................................. 70,400
Legal fees................................. 2,900
Directors' fees............................ 2,000
Miscellaneous expenses..................... 736
---------------
Total expenses........................... 24,850,608
Less: custodian fee credit................. (103,584)
---------------
Net expenses............................. 24,747,024
---------------
NET INVESTMENT INCOME........................ 173,283,574
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Investments.............................. 270,207,375
Short sales.............................. (100,129)
---------------
270,107,246
---------------
Net change in unrealized appreciation on:
Investments.............................. 60,263,761
Short sales.............................. 1,139,560
---------------
61,403,321
---------------
NET GAIN ON INVESTMENTS...................... 331,510,567
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 504,794,141
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 173,283,574 $ 155,293,990
Net realized gain on investments and short sales....................................... 270,107,246 167,342,297
Net change in unrealized appreciation on investments and short sales................... 61,403,321 264,773,974
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 504,794,141 587,410,261
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (174,034,704) (154,987,434)
Dividends in excess of net investment income........................................... (41,632) --
Distributions from net realized capital gains.......................................... (273,551,593) (133,660,168)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (447,627,929) (288,647,602)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [10,561,256 and 5,345,143 shares, respectively]..................... 167,668,924 81,026,772
Capital stock issued in reinvestment of dividends and distributions [29,086,855 and
19,023,739 shares, respectively]...................................................... 447,627,929 288,647,602
Capital stock repurchased [(8,429,995) and (15,343,313) shares, respectively].......... (134,428,797) (228,767,054)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 480,868,056 140,907,320
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 538,034,268 439,669,979
NET ASSETS:
Beginning of year...................................................................... 3,940,774,265 3,501,104,286
------------------ -------------------
End of year............................................................................ $ 4,478,808,533 $ 3,940,774,265
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B12 THROUGH B16.
A1
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
FLEXIBLE MANAGED PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$4,400,135,497).......................... $4,981,429,094
Cash....................................... 52,238
Receivable for securities sold short (Note
2)....................................... 113,630,151
Interest and dividends receivable.......... 33,277,907
Receivable for investments sold............ 31,241,005
--------------
Total Assets............................. 5,159,630,395
--------------
LIABILITIES
Payable for investments purchased.......... 141,168,642
Investments sold short, at value (proceeds
$113,630,151 including accrued interest)
(Note 2)................................. 112,461,581
Payable to investment adviser.............. 7,374,729
Accrued expenses........................... 1,390,075
Payable for capital stock repurchased...... 312,681
--------------
Total Liabilities........................ 262,707,708
--------------
NET ASSETS................................... $4,896,922,687
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 2,751,892
Paid-in capital in excess of par......... 4,273,689,804
--------------
4,276,441,696
Distributions in excess of net investment
income................................... (576,929)
Accumulated net realized gains on
investments.............................. 38,595,752
Net unrealized appreciation on
investments.............................. 582,462,168
--------------
Net assets, December 31, 1996.............. $4,896,922,687
--------------
--------------
Net asset value and redemption price per
share, 275,189,159 shares of common stock
outstanding (300,000,000 shares
authorized).............................. $ 17.79
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C> <C>
INVESTMENT INCOME
Interest................................... $ 127,494,108
Dividends (net of $553,612 foreign
withholding tax)......................... 40,857,296
---------------
168,351,404
---------------
EXPENSES
Investment advisory fee.................... 27,247,674
Shareholders' reports...................... 1,423,000
Custodian expense.......................... 397,050
Accounting fees............................ 122,000
Audit fees................................. 75,600
Legal fees................................. 3,100
Directors' fees............................ 2,000
Miscellaneous expenses..................... 165
---------------
Total expenses........................... 29,270,589
Less: custodian fee credit................. (131,050)
---------------
Net expenses............................. 29,139,539
---------------
NET INVESTMENT INCOME........................ 139,211,865
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain (loss) on:
Investments.............................. 408,037,782
Foreign currencies....................... (69,542)
Short sales.............................. 77,891
---------------
408,046,131
---------------
Net change in unrealized appreciation on:
Investments.............................. 40,562,155
Foreign currencies....................... (1,902)
Short sales.............................. 1,168,570
---------------
41,728,823
---------------
NET GAIN ON INVESTMENTS...................... 449,774,954
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 588,986,819
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 139,211,865 $ 126,640,661
Net realized gain on investments, foreign currencies and short sales................... 408,046,131 292,267,835
Net change in unrealized appreciation on investments, foreign currencies and short
sales................................................................................. 41,728,823 410,041,102
-------------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 588,986,819 828,949,598
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (142,089,785) (124,621,227)
Distributions from net realized capital gains.......................................... (458,909,559) (176,844,671)
-------------- --------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (600,999,344) (301,465,898)
-------------- --------------
CAPITAL TRANSACTIONS:
Capital stock sold [8,998,637 and 8,486,525 shares, respectively]...................... 166,455,957 146,641,074
Capital stock issued in reinvestment of dividends and distributions [34,012,173 and
17,050,711 shares, respectively]...................................................... 600,999,344 301,465,898
Capital stock repurchased [(6,420,074) and (11,612,102) shares, respectively].......... (119,724,926) (195,926,134)
-------------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 647,730,375 252,180,838
-------------- --------------
TOTAL INCREASE IN NET ASSETS............................................................. 635,717,850 779,664,538
NET ASSETS:
Beginning of year...................................................................... 4,261,204,837 3,481,540,299
-------------- --------------
End of year............................................................................ $4,896,922,687 $4,261,204,837
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B12 THROUGH B16.
A2
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
SCHEDULE OF INVESTMENTS
CONSERVATIVE BALANCED PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 91.2%
VALUE
COMMON STOCKS -- 36.7% SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AEROSPACE/DEFENSE -- 0.6%
GenCorp, Inc.................................... 629,100 $ 11,402,438
Litton Industries, Inc. (a)..................... 241,400 11,496,675
UNC, Inc. (a)................................... 278,800 3,345,600
--------------
26,244,713
--------------
AIRLINES -- 1.2%
AMR Corp. (a)................................... 378,700 33,372,937
USAir Group, Inc. (a)........................... 776,100 18,141,337
--------------
51,514,274
--------------
AUTOS - CARS & TRUCKS -- 0.5%
A.O. Smith Corp................................. 450,000 13,443,750
Ford Motor Co................................... 295,900 9,431,812
--------------
22,875,562
--------------
AUTOMOBILES & TRUCKS -- 1.8%
Chrysler Corp................................... 929,500 30,673,500
General Motors Corp............................. 464,700 25,907,025
Goodyear Tire & Rubber Co....................... 250,800 12,884,850
Mascotech, Inc.................................. 604,200 9,893,775
--------------
79,359,150
--------------
CHEMICALS -- 0.1%
Millenium Chemicals, Inc. (a)................... 188,227 3,341,029
--------------
CHEMICALS - SPECIALTY -- 1.0%
Ferro Corp...................................... 609,100 17,283,212
M.A. Hanna Co................................... 689,950 15,092,656
OM Group, Inc................................... 435,400 11,755,800
--------------
44,131,668
--------------
COMMERCIAL SERVICES -- 0.3%
BW/IP, Inc. (Class 'A' Stock)................... 365,600 6,032,400
IMO Industries, Inc. (a)........................ 575,600 1,798,750
Parker-Hannifin Corp............................ 197,450 7,651,187
--------------
15,482,337
--------------
COMPUTER HARDWARE -- 1.4%
Amdahl Corp. (a)................................ 836,600 10,143,775
Digital Equipment Corp. (a)..................... 293,500 10,676,063
International Business Machines Corp............ 278,900 42,113,900
--------------
62,933,738
--------------
CONSTRUCTION -- 0.2%
McDermott International, Inc.................... 481,900 10,601,800
--------------
CONSUMER SERVICES -- 0.4%
ADT Ltd. (a).................................... 576,300 13,182,863
SPS Transaction Services, Inc. (a).............. 185,900 2,834,975
--------------
16,017,838
--------------
CONTAINERS & PACKAGING -- 0.2%
Sealed Air Corp. (a)............................ 183,600 7,642,350
--------------
DIVERSIFIED CONSUMER PRODUCTS -- 1.0%
RJR Nabisco Holdings Corp....................... 791,400 26,907,600
Whitman Corp.................................... 849,000 19,420,875
--------------
46,328,475
--------------
DRUGS AND MEDICAL SUPPLIES -- 0.3%
United States Surgical Corp..................... 339,700 13,375,688
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
ELECTRICAL EQUIPMENT -- 1.0%
Belden, Inc..................................... 457,600 $ 16,931,200
Westinghouse Electric Corp...................... 1,487,300 29,560,087
--------------
46,491,287
--------------
ELECTRONICS -- 1.3%
National Semiconductor Corp. (a)................ 964,000 23,497,500
Texas Instruments, Inc.......................... 557,700 35,553,375
--------------
59,050,875
--------------
ENGINEERING & CONSTRUCTION -- 0.2%
Giant Cement Holdings, Inc. (a)................. 400,400 6,456,450
--------------
FINANCIAL SERVICES -- 2.9%
Alex Brown, Inc................................. 278,100 20,162,250
Lehman Brothers Holdings, Inc................... 1,597,400 50,118,425
Merrill Lynch & Co., Inc........................ 185,900 15,150,850
Morgan Stanley Group, Inc....................... 209,200 11,950,550
Salomon, Inc.................................... 650,700 30,664,237
--------------
128,046,312
--------------
FOREST PRODUCTS -- 1.7%
Champion International Corp..................... 650,700 28,142,775
Louisiana-Pacific Corp.......................... 650,700 13,746,037
Mead Corp....................................... 326,100 18,954,562
Willamette Industries, Inc...................... 238,100 16,577,712
--------------
77,421,086
--------------
GAS PIPELINES -- 0.3%
Western Gas Resources, Inc...................... 659,000 12,685,750
--------------
HOUSEHOLD PRODUCTS -- 0.3%
Jan Bell Marketing, Inc. (a).................... 964,200 1,988,663
Leggett & Platt, Inc............................ 366,600 12,693,525
--------------
14,682,188
--------------
HOUSING RELATED -- 1.1%
Hanson, PLC, ADR, (United Kingdom).............. 2,540,300 17,147,025
Owens Corning................................... 620,800 26,461,600
--------------
43,608,625
--------------
INSURANCE -- 3.0%
Allstate Corp................................... 124,999 7,234,317
Equitable of Iowa Companies..................... 346,500 15,895,687
Financial Security Assurance Holdings, Ltd...... 218,100 7,170,037
PennCorp Financial Group, Inc................... 513,500 18,486,000
Provident Companies, Inc........................ 170,900 8,267,287
Reinsurance Group of America, Inc............... 487,800 22,987,575
TIG Holdings, Inc............................... 546,900 18,526,237
Trenwick Group, Inc............................. 273,300 12,640,125
W.R. Berkley Corp............................... 180,100 9,140,075
Western National Corp........................... 836,600 16,104,550
--------------
136,451,890
--------------
INTEGRATED PRODUCERS -- 0.2%
Murphy Oil Corp................................. 177,400 9,867,875
--------------
</TABLE>
B1
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
MACHINERY -- 1.4%
Case Corp....................................... 597,500 $ 32,563,750
DT Industries, Inc.............................. 226,100 7,913,500
Paxar Corp...................................... 1,232,660 21,263,385
--------------
61,740,635
--------------
MEDIA -- 1.6%
Central Newspapers, Inc. (Class 'A' Stock)...... 319,800 14,071,200
Gannett Co., Inc................................ 185,900 13,919,262
Hollinger International, Inc.................... 155,600 1,789,400
Houghton Mifflin Co............................. 185,900 10,526,587
Knight-Ridder, Inc.............................. 371,800 14,221,350
Lee Enterprises, Inc............................ 325,300 7,563,225
McGraw-Hill, Inc................................ 185,500 8,556,187
Media General, Inc. (Class 'A' Stock)........... 59,000 1,784,750
--------------
72,431,961
--------------
METALS-NON FERROUS -- 1.1%
Aluminum Company of America..................... 750,500 47,844,375
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 2.0%
Danaher Corp.................................... 435,800 20,319,175
Donaldson, Inc.................................. 372,200 12,468,700
IDEX Corp....................................... 275,300 10,977,587
Mark IV Industries, Inc......................... 558,793 12,642,692
Trinity Industries, Inc......................... 358,300 13,436,250
Wolverine Tube, Inc. (a)........................ 259,800 9,157,950
York International Corp......................... 185,000 10,336,875
--------------
89,339,229
--------------
MISCELLANEOUS - INDUSTRIAL -- 0.8%
Coltec Industries, Inc. (a)..................... 299,900 5,660,613
Global Industrial Technologies, Inc. (a)........ 390,700 8,644,238
Material Sciences Corp. (a)..................... 649,600 11,692,800
Titan Wheel International, Inc.................. 695,550 8,868,263
--------------
34,865,914
--------------
OIL - EXPLORATION & PRODUCTION -- 1.9%
Basin Exploration, Inc. (a)..................... 142,700 891,875
Cabot Oil & Gas Corp. (Class 'A' Stock)......... 552,500 9,461,563
Enron Oil & Gas Co.............................. 309,300 7,809,825
Mesa, Inc. (a).................................. 2,711,400 14,234,850
Noble Affiliates, Inc........................... 325,300 15,573,738
Oryx Energy Co. (a)............................. 789,500 19,540,125
Parker & Parsley Petroleum Co................... 248,600 9,136,050
Seagull Energy Corp. (a)........................ 373,400 8,214,800
--------------
84,862,826
--------------
OIL & GAS -- 1.2%
Societe Nationale Elf Aquitaine, ADR,
(France)...................................... 1,199,200 54,263,800
--------------
OIL SERVICES -- 0.6%
Coflexip, ADR, (France)......................... 650,700 17,080,875
Weatherford Enterra, Inc. (a)................... 298,653 8,959,590
--------------
26,040,465
--------------
PETROLEUM SERVICES -- 0.1%
ICO, Inc........................................ 492,100 3,014,112
--------------
RAILROADS -- 0.2%
Burlington Northern, Inc........................ 117,900 10,183,612
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
REAL ESTATE DEVELOPMENT -- 0.4%
Crescent Real Estate Equities, Inc.............. 339,400 $ 17,903,350
--------------
RETAIL -- 1.6%
Bombay Company, Inc. (a)........................ 890,300 4,117,638
Charming Shoppes, Inc. (a)...................... 2,788,600 14,117,288
Dillard Department Stores, Inc. (a)............. 202,900 6,264,538
K mart Corp. (a)................................ 1,913,600 19,853,600
Toys 'R' Us, Inc. (a)........................... 557,700 16,731,000
Woolworth Corp. (a)............................. 557,700 12,199,688
--------------
73,283,752
--------------
STEEL -- 0.9%
Bethlehem Steel Corp. (a)....................... 929,500 8,365,500
LTV Corp........................................ 1,408,200 16,722,375
National Steel Corp. (Class 'B' Stock) (a)...... 289,300 2,676,025
USX-U.S. Steel Group............................ 418,300 13,124,163
--------------
40,888,063
--------------
TELECOMMUNICATIONS -- 0.1%
Deutsche Telekom, ADR, (Germany) (a)............ 309,500 6,306,063
--------------
TEXTILES -- 1.3%
Farah, Inc. (a)................................. 249,300 1,932,075
Fieldcrest Cannon, Inc. (a)..................... 427,500 6,840,000
Fruit of the Loom, Inc. (Class 'A' Stock) (a)... 464,700 17,600,513
Owens-Illinois, Inc. (a)........................ 513,700 11,686,675
Phillips-Van Heusen Corp........................ 578,500 8,315,938
Tultex Corp. (a)................................ 558,300 3,908,100
V.F. Corp....................................... 143,700 9,699,750
--------------
59,983,051
--------------
TOBACCO -- 0.4%
Philip Morris Companies, Inc.................... 87,300 9,832,163
UST, Inc........................................ 250,400 8,106,700
--------------
17,938,863
--------------
TRUCKING/SHIPPING -- 0.1%
Yellow Corp..................................... 482,100 6,930,188
--------------
TOTAL COMMON STOCKS
(cost $1,310,419,852).......................................... 1,642,431,219
--------------
PREFERRED STOCKS -- 1.0%
FINANCIAL SERVICES -- 0.8%
Central Hispano Corp............................ 225,900 5,986,350
Central Hispano Financial Services.............. 1,000,000 25,200,000
--------------
31,186,350
--------------
GAS PIPELINES -- 0.1%
TransCanada Pipelines, Ltd...................... 140,000 3,640,000
--------------
MEDIA -- 0.0%
Times Mirror Co. (Cum. Conv.), Series B......... 1 28
--------------
PETROLEUM -- 0.1%
Mesa, Inc. (Conv. Pfd.)......................... 914,929 5,832,671
--------------
TOTAL PREFERRED STOCKS
(cost $36,848,291)............................................. 40,659,049
--------------
</TABLE>
B2
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS -- 53.5% (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
DOMESTIC CORPORATE BONDS -- 36.6%
AEROSPACE -- 0.2%
Northrop Grumman Corp.,
7.875%, 03/01/26.............................. Baa3 $ 7,500 $ 7,517,475
--------------
AGRICULTURAL EQUIPMENT -- 0.1%
Agco Corp.,
8.50%, 03/15/06............................... Ba3 6,500 6,576,700
--------------
AIRLINES -- 2.9%
Delta Air Lines, Inc.,
10.125%, 05/15/10............................. Baa3 20,000 24,145,800
10.375%, 02/01/11............................. Ba1 28,405 34,799,534
United Air Lines, Inc.,
9.75%, 08/15/21............................... Baa2 10,125 12,000,555
10.67%, 05/01/04.............................. Baa3 29,665 35,084,499
11.21%, 05/01/14.............................. Baa3 18,433 24,168,797
--------------
130,199,185
--------------
ASSET-BACKED SECURITIES -- 0.2%
Banc One Credit Card Master Trust,
7.75%, 12/15/99............................... A2 5,100 5,178,081
Standard Credit Card Master Trust,
5.95%, 10/07/04............................... Aaa 4,650 4,469,813
--------------
9,647,894
--------------
CABLE & PAY TELEVISION SYSTEMS -- 1.9%
Continental Cablevision, Inc.,
8.30%, 05/15/06............................... Ba2 11,200 11,931,024
8.625%, 08/15/03.............................. Ba2 27,050 29,271,076
Tele-Communications, Inc.,
7.875%, 08/01/13.............................. Baa3 2,500 2,301,450
9.25%, 04/15/02............................... Baa3 21,425 22,694,860
9.80%, 02/01/12............................... B2 7,000 7,575,400
9.875%, 06/15/22.............................. Baa3 7,900 8,507,668
10.125%, 04/15/22............................. Baa3 2,000 2,196,040
--------------
84,477,518
--------------
COMPUTERS -- 0.2%
Digital Equipment Corp.,
7.125%, 10/15/02.............................. Ba1 10,000 9,542,500
--------------
FINANCIAL SERVICES -- 19.1%
Associates Corp. of North America,
6.625%, 05/15/01.............................. Aa3 34,500 34,485,510
6.68%, 09/17/99............................... Aa3 34,050 34,299,927
8.375%, 01/15/98.............................. A1 1,100 1,125,454
Bank of New York,
7.97%, 12/31/26............................... A1 26,000 26,258,440
Barnett Banks,
8.06%, 12/01/26............................... A2 3,500 3,540,775
Bayerische Landes,
6.20%, 09/30/99............................... Aaa 30,000 29,970,000
Capital One Bank,
6.66%, 08/17/98............................... Baa3 10,050 10,085,677
6.73%, 06/04/98............................... Baa2 16,000 16,094,400
6.90%, 04/15/99............................... Baa3 11,000 11,073,590
7.20%, 07/19/99............................... Baa3 11,250 11,376,112
CIT Group Holdings, M.T.N.,
5.85%, 03/16/98............................... Aa3 25,000 25,009,750
5.875%, 11/09/98.............................. Aa3 33,900 33,795,588
Conseco, Inc.,
8.70%, 11/15/26............................... NR 18,200 18,356,884
CoreStates Financial Corp.,
8.00%, 12/15/26............................... A1 24,250 24,251,455
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Enterprise Rent-A-Car USA Finance Co., M.T.N.,
6.35%, 01/15/01............................... Baa3 $ 11,500 $ 11,195,250
7.00%, 06/15/00............................... Baa3 30,000 30,363,000
7.50%, 06/15/03............................... Baa3 5,000 5,139,300
7.875%, 03/15/98.............................. Baa3 9,925 10,145,831
8.75%, 12/15/99............................... Baa3 5,000 5,295,500
First Tennessee National Corp., B.A.,
8.07%, 01/06/27............................... NR 11,150 11,087,560
First Union Corp.,
7.85%, 01/01/27............................... A1 43,500 43,103,062
9.45%, 06/15/99............................... Baa2 4,000 4,274,280
First USA Bank,
8.20%, 02/15/98............................... Baa3 14,575 14,878,306
Ford Motor Credit,
7.00%, 09/25/01............................... A1 37,000 37,551,670
General Motors Acceptance Corp., M.T.N.,
5.395%, 02/02/99.............................. P1 2,000 1,999,825
7.375%, 07/20/98.............................. Baa1 4,650 4,742,209
Lehman Brothers Holdings, Inc.,
6.71%, 10/12/99............................... Baa1 6,000 6,008,100
6.84%, 09/25/98............................... Baa1 30,000 30,227,100
6.89%, 10/10/00............................... Baa1 10,545 10,581,380
Liberty Mutual Insurance Co.,
7.875%, 10/15/26.............................. A2 2,500 2,526,985
8.20%, 05/04/07............................... A2 51,005 54,164,250
Lumbermens Mutual Casualty Co.,
9.15%, 07/01/26............................... Baa1 28,750 31,265,625
Mellon Bank Corp.,
7.72%, 12/01/26............................... A2 15,635 15,151,097
7.995%, 01/15/27.............................. A2 38,500 38,018,750
Republic Bank of New York Corp.,
7.53%, 12/04/26............................... NR 21,000 20,582,583
Salomon, Inc., M.T.N.,
5.98%, 02/02/98............................... Baa1 35,000 34,982,850
7.00%, 05/15/99............................... Baa1 42,000 42,331,800
7.25%, 05/01/01............................... Baa1 8,625 8,706,592
State Street Capital Corp.,
7.94%, 12/30/26............................... NR 10,000 9,960,000
SunAmerica, Inc.,
6.20%, 10/31/99............................... Baa1 9,000 8,955,000
Travelers Capital, Inc.,
7.75%, 12/01/36............................... A1 20,000 19,350,000
Union Planters Corp.,
8.20%, 12/15/26............................... Baa1 20,750 20,542,500
USAA Capital Corp.,
6.34%, 09/18/98............................... Aa1 10,000 10,040,000
Wells Fargo & Co.,
7.96%, 12/15/26............................... A1 32,500 31,974,429
--------------
854,868,396
--------------
FOOD & BEVERAGE -- 0.1%
RJR Nabisco, Inc.,
8.75%, 08/15/05............................... Baa3 4,000 4,018,000
--------------
HEALTH CARE -- 0.0%
Tenet Healthcare Corp.,
8.625%, 12/01/03.............................. Ba2 2,000 2,110,000
--------------
HOSPITAL MANAGEMENT -- 0.0%
Service Corp. International,
7.00%, 06/01/15............................... A3 2,500 2,530,950
--------------
</TABLE>
B3
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
MEDIA -- 5.8%
News America Holdings, Inc.,
7.375%, 10/17/08.............................. Baa3 $ 28,000 $ 27,784,960
7.75%, 12/01/45............................... Baa3 61,000 56,802,590
9.25%, 02/01/13............................... Baa3 24,050 26,942,975
Paramount Communications, Inc.,
7.50%, 01/15/02............................... Ba2 6,425 6,419,667
Time Warner, Inc.,
7.75%, 06/15/05............................... Ba1 15,000 15,088,950
8.11%, 08/15/06............................... Ba1 13,250 13,583,503
8.18%, 08/15/07............................... Ba1 24,500 25,138,715
Time Warner, Inc., (Con't)
8.375%, 07/15/33.............................. Baa3 37,450 37,584,446
9.125%, 01/15/13.............................. Ba1 14,270 15,578,559
Turner Broadcasting Co.,
8.375%, 07/01/13.............................. Ba1 5,325 5,435,813
Viacom, Inc.,
6.75%, 01/15/03............................... Ba2 8,545 8,178,931
7.75%, 06/01/05............................... Ba2 22,275 21,933,524
--------------
260,472,633
--------------
OIL & GAS -- 0.1%
Parker & Parsley Petroleum Co.,
8.25%, 08/15/07............................... Ba2 3,000 3,225,450
--------------
OIL & GAS EQUIPMENT & SERVICES -- 0.2%
B.J. Services Co.,
7.00%, 02/01/06............................... Ba1 4,000 3,887,640
Noble Drilling Corp.,
9.125%, 07/01/06.............................. Ba2 3,500 3,762,500
--------------
7,650,140
--------------
RETAIL -- 3.1%
Federated Department Stores, Inc.,
8.125%, 10/15/02.............................. Ba1 18,075 18,526,875
8.50%, 06/15/03............................... Ba1 36,750 38,220,000
10.00%, 02/15/01.............................. Ba1 4,500 4,905,000
Rite Aid Corp.,
6.70%, 12/15/01............................... A3 5,000 4,982,500
Sears Roebuck Acceptance Corp., M.T.N.,
6.38%, 02/16/99............................... A2 70,000 70,177,100
--------------
136,811,475
--------------
TECHNOLOGY -- 1.8%
Comdisco, Inc., M.T.N.,
5.54%, 01/26/98............................... Baa1 12,500 12,456,750
6.09%, 11/09/98............................... Baa1 34,000 34,034,000
6.29%, 10/22/98............................... Baa1 5,000 5,007,450
6.375%, 11/30/01.............................. Baa1 21,500 21,153,850
6.689%, 05/22/98.............................. Baa1 9,000 9,075,240
--------------
81,727,290
--------------
TELECOMMUNICATIONS -- 0.7%
TCI Communications, Inc.,
8.65%, 09/15/04............................... Baa3 28,470 28,609,788
8.75%, 08/01/15............................... Baa3 5,450 5,383,946
--------------
33,993,734
--------------
TRUCKING/SHIPPING -- 0.1%
Federal Express Corp., M.T.N.,
10.00%, 06/01/98.............................. Baa3 3,000 3,157,440
10.05%, 06/15/99.............................. Baa3 500 539,080
--------------
3,696,520
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
UTILITIES -- 0.1%
Arkla, Inc., M.T.N.,
9.25%, 12/18/97............................... Ba2 $ 3,000 $ 3,077,790
--------------
FOREIGN CORPORATE BONDS -- 6.3%
Banco de Commercio Exterior de Colombia, SA,
M.T.N., (Colombia)
8.625%, 06/02/00.............................. NR 5,500 5,713,125
Banco Ganadero, SA, M.T.N., (Colombia)
9.75%, 08/26/99............................... Baa3 7,300 7,683,250
Bangkok Bank, (Thailand)
7.25%, 09/15/05............................... A3 10,000 9,777,400
8.25%, 03/15/16............................... A3 15,000 15,258,750
Central Hispano Financial Services, (Cayman
Islands)
6.031%, 04/28/05.............................. A3 10,000 10,005,000
Compania Sud Americana de Vapores, SA, (Chile)
7.375%, 12/08/03.............................. NR 7,600 7,486,000
Deutsche Bank, (Germany)
6.70%, 12/13/06............................... Aa1 12,500 12,299,562
Domtar, Inc., (Canada)
9.50%, 08/01/16............................... Ba1 9,000 9,843,750
Empresa Colombia de Petroleos, (Colombia)
7.25%, 07/08/98............................... NR 8,250 8,311,875
Kansallis-Osake Pankki, N.Y., (Finland)
6.125%, 05/15/98.............................. A3 6,160 6,163,758
8.650%, 12/29/49 (b).......................... Baa2 10,000 10,441,500
9.75%, 12/15/98............................... Baa1 16,950 17,990,730
Okobank, (Finland)
7.25%, 09/27/49............................... A3 18,750 19,125,000
7.325%, 10/29/49.............................. NR 9,000 9,220,500
7.70%, 10/29/49............................... NR 3,500 3,585,750
Petroliam Nasional, (Malaysia)
6.625%, 10/18/01.............................. NR 22,000 22,014,520
7.125%, 10/18/06.............................. A1 66,400 66,830,936
PT Alatief Freeport Financial Co., (Netherlands)
9.75%, 04/15/01............................... Ba2 8,950 9,784,588
Royal Bank of Canada, (Canada)
6.75%, 10/24/11............................... Aa3 17,400 17,034,600
Siam Commercila, (Thailand)
7.50%, 03/15/06............................... A3 14,500 14,282,500
--------------
282,853,094
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 5.4%
Federal National Mortgage Association,
9.05%, 04/10/00............................... 14,000 15,148,420
United States Treasury Bonds,
5.875%, 11/15/99.............................. 5,000 4,980,450
United States Treasury Notes,
5.00%, 02/15/99............................... 17,000 16,691,790
5.625%, 11/30/98-11/30/00..................... 86,500 85,271,755
5.875%, 11/30/01-02/15/04..................... 45,400 44,645,298
</TABLE>
B4
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
6.00%, 08/15/99............................... $ 10,000 $ 9,998,400
6.125%, 07/31/00-09/30/00..................... 19,300 19,298,110
6.25%, 04/30/01-02/15/03...................... 20,150 20,142,013
6.375%, 09/30/01.............................. 7,000 7,041,580
6.50%, 08/31/01-10/15/06...................... 16,500 16,625,810
6.75%, 04/30/00............................... 3,000 3,056,730
--------------
242,900,356
--------------
FOREIGN GOVERNMENT BONDS -- 5.2%
Republic of Argentina, (Argentina)
6.625%, 03/31/05.............................. B1 4,900 4,293,625
Republic of Colombia, (Colombia)
7.125%, 05/11/98.............................. Ba1 2,775 2,788,875
8.00%, 06/14/01............................... Baa3 2,250 2,283,750
8.75%, 10/06/99............................... Ba1 12,325 12,879,625
Republic of Poland, (Poland)
4.00%, (until 10/27/98),
5.00%, (until 10/27/99),
6.00%, (until 10/27/02),
7.00%, 10/27/14............................... Baa3 129,500 109,589,375
Republic of Venezuela, (Venezuela)
6.50%, 12/18/07............................... Ba2 9,750 8,580,000
United Mexican States, (Mexico)
7.563%, 08/06/01.............................. Baa3 73,500 73,672,725
9.75%, 02/06/01............................... Ba2 4,000 4,130,000
11.375%, 09/15/16............................. Ba2 13,000 13,536,250
--------------
231,754,225
--------------
TOTAL LONG-TERM BONDS
(cost $2,376,901,639).................................................... 2,399,651,325
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $3,724,169,782).................................................... 4,082,741,593
--------------
SHORT-TERM INVESTMENTS -- 10.1%
BANK NOTES -- 0.2%
First Bank N.A., Minneapolis,
5.275%, 10/24/97.............................. P3 2,000 1,998,881
PNC Bank N.A.,
5.20%, 04/01/97............................... NR 5,000 4,999,364
--------------
6,998,245
--------------
CERTIFICATES OF DEPOSIT-DOMESTIC -- 1.5%
Advanta National Bank,
5.80%, 03/19/97............................... NR 25,000 25,350,000
5.84%, 03/14/97............................... NR 21,500 21,457,000
6.26%, 09/01/97............................... NR 10,500 10,510,500
8.18%, 02/09/97............................... Baa3 10,000 10,100,000
--------------
67,417,500
--------------
CERTIFICATES OF DEPOSIT-EURODOLLAR -- 0.1%
Abbey National Treasury Services, PLC,
5.41%, 01/30/97............................... P1 5,000 5,000,093
--------------
CERTIFICATES OF DEPOSIT-YANKEE -- 1.0%
Bank of Montreal (Canada),
5.39%, 01/22/97............................... P1 18,000 18,000,000
Bank of Nova Scotia (Canada),
5.39%, 03/04/97............................... P3 4,000 4,000,000
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Banque Nationale De Paris (France),
5.42%, 01/15/97............................... NR $ 10,000 $ 9,999,961
5.58%, 04/02/97............................... NR 3,000 2,999,191
Commerzbank (Germany),
5.42%, 06/10/97............................... P1 1,000 999,631
Deutsche Bank (Germany),
5.69%, 10/28/97............................... P3 3,000 2,999,261
National Bank of Canada (Canada),
5.438%, 03/10/97.............................. P3 2,000 2,000,000
Norddeutsche Landesbank (Germany),
5.75%, 04/11/97............................... NR 5,000 5,001,784
Societe Generale (France),
5.78%, 08/20/97............................... P1 2,000 2,001,590
--------------
48,001,418
--------------
COMMERCIAL PAPER -- 3.8%
Aetna Services, Inc.,
5.42%, 03/14/97............................... NR 5,000 4,946,553
American Brands, Inc.,
5.45%, 02/06/97............................... P3 1,000 994,701
6.00%, 01/22/97............................... P3 2,000 1,993,333
American Express Credit Corp.,
5.30%, 02/28/97............................... P1 5,000 4,958,042
Aristar, Inc.,
5.40%, 01/28/97............................... P2 2,000 1,992,200
5.47%, 03/17/97............................... P2 3,000 2,966,268
Bank Austria,
5.35%, 01/15/97............................... NR 8,000 7,984,544
Barton Capital Corp.,
5.35%, 02/27/97............................... NR 2,000 1,983,356
5.40%, 02/21/97............................... NR 8,000 7,940,000
BHF Finance, Inc.,
5.31%, 01/30/97............................... NR 1,000 995,870
Bradford & Bingley Building Society,
5.35%, 01/10/97-01/15/97...................... NR 28,000 27,960,767
Caterpillar Financial Services Corp.,
5.35%, 05/16/97-06/16/97...................... NR 2,000 1,955,565
5.38%, 04/28/97............................... P1 5,000 4,913,322
5.50%, 02/27/97............................... P1 1,380 1,368,193
Cheltenham & Gloucester Building Society,
5.325%, 02/24/97.............................. NR 7,000 6,945,123
Coca Cola Enterprises, Inc.,
5.34%, 02/03/97............................... NR 2,000 1,990,507
Colonial Pipeline Co.,
5.75%, 01/27/97............................... P3 2,000 1,992,014
Commonwealth Bank of Austria,
5.40%, 02/10/97............................... NR 5,000 4,970,750
Corporate Receivables Corp.,
5.40%, 02/20/97............................... NR 2,000 1,985,300
Countrywide Home Loan, Inc.,
6.05%, 01/21/97............................... NR 1,000 996,807
6.20%, 01/15/97............................... NR 7,000 6,984,328
6.35%, 01/15/97............................... NR 6,000 5,986,242
CXC, Inc.,
7.00%, 01/02/97............................... NR 3,662 3,662,000
Dupont (EI) De Nemours,
5.50%, 03/04/97............................... P3 1,000 990,681
</TABLE>
B5
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Engelhard Corp.,
5.58%, 02/24/97............................... P2 $ 2,000 $ 1,983,570
First Data Corp.,
5.40%, 03/18/97-03/25/97...................... NR 8,617 8,512,061
5.46%, 03/25/97............................... NR 5,000 4,937,817
Fleet Funding Corp,
5.80%, 02/04/97............................... NR 3,729 3,709,174
ITT Hartford Group, Inc.,
5.45%, 01/23/97............................... P1+ 1,000 996,821
Kredietbank Na Finance Corp.,
5.32%, 01/16/97............................... NR 2,000 1,995,862
Lehman Brothers Holdings, Inc.,
6.70%, 01/07/97............................... NR 5,000 4,995,347
Merrill Lynch & Co., Inc.,
5.35%, 01/29/97............................... P1 12,000 11,951,850
5.37%, 01/31/97............................... P1 7,000 6,969,719
NYNEX Corp.,
6.80%, 01/06/97............................... P3 3,000 2,997,733
Preferred Receivables Funding Corp.,
5.60%, 02/25/97............................... P1 4,000 3,966,400
Rank Xerox Capital PLC.,
6.25%, 01/09/97............................... NR 2,583 2,579,861
Societe Generale,
5.77%, 05/15/97............................... P1 2,000 2,000,259
Transamerica Financial Corp.,
5.38%, 02/06/97............................... P1 3,750 3,730,385
WCP Funding, Inc.,
5.40%, 02/20/97............................... NR 2,000 1,985,300
--------------
172,768,625
--------------
OTHER CORPORATE OBLIGATIONS -- 3.0%
American General Financial Corp.,
7.75%, 01/15/97............................... P1 3,700 3,702,664
9.50%, 08/01/97............................... P1 1,500 1,530,273
Associates Corp. of North America,
9.70%, 05/01/97............................... P1 2,000 2,023,837
Beneficial Corp.,
9.35%, 02/03/97............................... P1 3,500 3,510,736
Capital Equipment Receivable Trust,
5.60%, 10/15/97............................... NR 3,862 3,862,223
Capital One Bank,
8.625%, 01/15/97.............................. Baa3 32,425 32,443,158
Coca-Cola Enterprises, Inc.,
6.50%, 11/15/97............................... A3 3,750 3,765,600
General Motors Acceptance Corp.,
5.47%, 02/12/97............................... P1 12,000 11,925,243
6.30%, 09/10/97............................... Aaa 5,000 5,017,600
6.70%, 04/30/97............................... A3 11,000 11,035,420
7.60%, 02/10/97............................... P1 2,000 2,004,629
7.85%, 03/05/97............................... Baa1 3,300 3,312,078
7.85%, 03/05/97............................... P1 10,050 10,080,742
Kimberly Clark Corp.,
9.125%, 06/01/97.............................. NR 1,000 1,013,822
Mellon Bank Corp.,
6.50%, 12/01/97............................... Baa1 1,650 1,656,253
Norwest Corp.,
7.875%, 01/30/97.............................. P1 2,000 2,003,190
Salomon, Inc.,
5.89%, 11/10/97............................... Baa1 30,000 29,962,500
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Short Term Repack Asset,
6.00%, 12/15/97............................... NR $ 4,000 $ 3,999,186
--------------
132,849,154
--------------
REPURCHASE AGREEMENT -- 0.5%
Joint Repurchase Agreement Account
6.613%, 01/02/97 (Note 5)..................... 22,692 22,692,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $464,184,986)...................................................... 455,727,035
--------------
TOTAL INVESTMENTS BEFORE SHORT
SALE -- 101.3%
(cost $4,188,354,768; Note 6)............................................ 4,538,468,628
--------------
INVESTMENT SOLD SHORT -- (2.4%)
United States Treasury Bond,
6.75%, 8/15/26
(proceeds $111,621,197; Note 2).............................. (106,860) (110,481,637)
--------------
TOTAL INVESTMENTS, NET OF SHORT SALES -- 98.9%
4,427,986,991
--------------
OTHER ASSETS IN EXCESS OF OTHER
LIABILITIES -- 1.1%...................................................... 50,821,542
--------------
TOTAL NET ASSETS -- 100.0%................................................. $4,478,808,533
--------------
--------------
<FN>
The following abbreviations are used in portfolio descriptions:
ADR American
Depository
Receipt
B.A. Bankers' Acceptances
C.D. Certificates of Deposit
M.T.N. Medium Term Note
PLC Public Limited Company
SA Sociedad Anonima (Spanish Corporation) or Societe
Anonyme (French Corporation)
NR Not Rated
(a) Non-income producing security.
(b) Indicates a variable rate security.
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B12 THROUGH B16.
B6
<PAGE>
FLEXIBLE MANAGED PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
LONG-TERM INVESTMENTS -- 97.6%
VALUE
COMMON STOCKS -- 61.3% SHARES (NOTE 2)
------------- --------------
<CAPTION>
<S> <C> <C>
AEROSPACE -- 4.1%
AlliedSignal, Inc............................... 600,000 $ 40,200,000
Boeing Co....................................... 530,500 56,431,937
Lockheed Martin Corp............................ 500,000 45,750,000
Rockwell International Corp. (a)................ 400,000 24,350,000
United Technologies Corp........................ 550,000 36,300,000
--------------
203,031,937
--------------
BANKS AND SAVINGS & LOANS -- 4.2%
Banc One Corp................................... 775,000 33,325,000
BankAmerica Corp................................ 300,000 29,925,000
Chase Manhattan Corp............................ 550,000 49,087,500
Citicorp........................................ 310,000 31,930,000
PNC Bank Corp................................... 750,000 28,218,750
State Street Boston Corp........................ 500,000 32,250,000
--------------
204,736,250
--------------
BEVERAGES -- 0.9%
Anheuser-Busch Companies, Inc................... 1,150,000 46,000,000
--------------
CHEMICALS -- 0.6%
E.I. du Pont de Nemours & Co.................... 300,000 28,312,500
--------------
CHEMICALS - SPECIALTY -- 1.8%
IMC Global, Inc................................. 600,000 23,475,000
Morton International, Inc....................... 600,000 24,450,000
Praxair, Inc.................................... 825,000 38,053,125
--------------
85,978,125
--------------
COMMERCIAL SERVICES -- 0.3%
CUC International, Inc. (a)..................... 600,000 14,250,000
--------------
COMPUTER SERVICES -- 6.4%
3Com Corp. (a).................................. 600,000 44,025,000
Cadence Design Systems, Inc. (a)................ 675,000 26,831,250
Cascade Communications.......................... 325,000 17,915,625
Cisco Systems, Inc. (a)......................... 750,000 47,718,750
Computer Associates International, Inc.......... 975,000 48,506,250
Computer Sciences Corp. (a)..................... 500,000 41,062,500
First Data Corp................................. 500,000 18,250,000
Gateway 2000, Inc. (a).......................... 275,000 14,729,687
Microsoft Corp. (a)............................. 250,000 20,656,250
Oracle Corp. (a)................................ 775,000 32,356,250
--------------
312,051,562
--------------
CONSTRUCTION -- 0.7%
Fluor Corp...................................... 550,000 34,512,500
--------------
COSMETICS & SOAPS -- 0.7%
Procter & Gamble Co............................. 300,000 32,250,000
--------------
DIVERSIFIED GAS -- 0.3%
Cross Timbers Oil Co............................ 530,000 13,316,250
--------------
DIVERSIFIED OFFICE EQUIPMENT -- 1.8%
Alco Standard Corp.............................. 300,000 15,487,500
Hewlett-Packard Co.............................. 325,000 16,331,250
Honeywell, Inc.................................. 650,000 42,737,500
Xerox Corp...................................... 300,000 15,787,500
--------------
90,343,750
--------------
DRUGS AND MEDICAL SUPPLIES -- 6.0%
American Home Products Corp..................... 885,000 51,883,125
Baxter International, Inc....................... 650,000 26,650,000
Becton, Dickinson & Co.......................... 800,000 34,700,000
Boston Scientific Corp. (a)..................... 700,000 42,000,000
Medtronic, Inc.................................. 400,000 27,200,000
Novartis Corp., AG ADR (Switzerland)............ 933,328 53,491,332
Pfizer, Inc..................................... 700,000 58,012,500
--------------
293,936,957
--------------
ELECTRICAL EQUIPMENT -- 1.9%
Applied Materials, Inc. (a)..................... 450,000 16,171,875
Baldor Electric Co.............................. 1 25
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Belden, Inc..................................... 425,000 $ 15,725,000
FORE Systems, Inc. (a).......................... 725,000 23,834,375
Westinghouse Electric Corp...................... 1,900,000 37,762,500
--------------
93,493,775
--------------
ELECTRONICS -- 2.2%
ADT Ltd. (a).................................... 750,000 17,156,250
Intel Corp...................................... 475,000 62,195,313
Maxim Integrated Products, Inc. (a)............. 700,000 30,275,000
--------------
109,626,563
--------------
FINANCIAL SERVICES -- 0.9%
MBNA Corp....................................... 1,075,000 44,612,500
--------------
FOODS -- 0.4%
Nabisco Holdings Corp.
(Class 'A' Stock)............................. 500,000 19,437,500
--------------
FOREST PRODUCTS -- 1.2%
Kimberly-Clark Corp............................. 350,000 33,337,500
Willamette Industries, Inc...................... 399,000 27,780,375
--------------
61,117,875
--------------
GAS PIPELINES -- 0.7%
Enron Corp...................................... 850,000 36,656,250
--------------
HEALTH CARE -- 0.2%
Tenet Healthcare Corp. (a)...................... 400,000 8,750,000
--------------
HOSPITAL MANAGEMENT -- 1.1%
Columbia/HCA Healthcare Corp.................... 900,000 36,675,000
Guidant Corp.................................... 300,000 17,100,000
--------------
53,775,000
--------------
INSURANCE -- 5.0%
Aetna Inc....................................... 650,000 52,000,000
Allstate Corp................................... 875,000 50,640,625
American International Group, Inc............... 250,000 27,062,500
Chubb Corp...................................... 400,000 21,500,000
CIGNA Corp...................................... 250,000 34,156,250
Travelers Group, Inc............................ 1,266,666 57,474,970
--------------
242,834,345
--------------
LEISURE -- 0.6%
Carnival Corp. (Class 'A' Stock)................ 900,000 29,700,000
--------------
LODGING -- 0.2%
Hilton Hotels Corp.............................. 400,000 10,450,000
--------------
MACHINERY -- 0.8%
Case Corp....................................... 700,000 38,150,000
--------------
MEDIA -- 0.4%
Comcast Corp. (Class 'A' Stock)................. 1,000,000 17,625,000
--------------
MINERAL RESOURCES -- 0.5%
Potash Corp. of Saskatchewan, Inc............... 270,000 22,950,000
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 4.5%
Cognizant Corp.................................. 735,700 24,278,100
General Electric Co............................. 700,000 69,212,500
Illinois Tool Works, Inc........................ 400,000 31,950,000
Tyco International, Ltd......................... 1,225,000 64,771,875
York International Corp......................... 500,000 27,937,500
--------------
218,149,975
--------------
MISCELLANEOUS - CONSUMER GROWTH/STABLE -- 1.1%
Unilever N.V., ADR (United Kingdom)............. 300,000 52,575,000
--------------
PETROLEUM -- 3.2%
British Petroleum, PLC, ADR (United Kingdom).... 325,000 45,946,875
Mobil Corp...................................... 400,000 48,900,000
Royal Dutch Petroleum Co., ADR (Netherlands).... 200,000 34,150,000
Total SA, ADR (France).......................... 700,000 28,175,000
--------------
157,171,875
--------------
</TABLE>
B7
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
PETROLEUM SERVICES -- 1.3%
Baker Hughes, Inc............................... 581,700 $ 20,068,650
Halliburton Co.................................. 700,000 42,175,000
--------------
62,243,650
--------------
RETAIL -- 6.5%
American Stores Co.............................. 800,000 32,700,000
Federated Department Stores, Inc. (a)........... 1,120,000 38,220,000
The Gap, Inc.................................... 500,000 15,062,500
Home Depot, Inc................................. 750,000 37,593,750
Koninklijke Ahold, ADR (Netherlands)............ 250,000 15,437,500
Nike, Inc. (Class 'B' Stock).................... 600,000 35,850,000
Nine West Group................................. 775,000 35,940,625
Price/Costco, Inc. (a).......................... 1,500,000 37,687,500
Safeway, Inc. (a)............................... 1,000,000 42,750,000
Staples, Inc. (a)............................... 1,601,500 28,927,094
--------------
320,168,969
--------------
TELECOMMUNICATIONS -- 0.8%
AT&T Corp....................................... 550,000 23,925,000
Newbridge Networks Corp. (a).................... 500,000 14,125,000
--------------
38,050,000
--------------
TOTAL COMMON STOCKS
(cost $2,434,484,264).......................................... 2,996,258,108
--------------
PREFERRED STOCKS -- 1.5%
FINANCIAL SERVICES -- 0.5%
Central Hispano Financial Services.............. 1,000,000 25,200,000
--------------
GAS PIPELINES -- 0.1%
TransCanada Pipelines, Ltd...................... 140,000 3,640,000
--------------
LEISURE -- 0.3%
Hilton Hotels (Conv.)........................... 600,000 14,775,000
--------------
TELECOMMUNICATIONS -- 0.6%
Airtouch Communications (Conv.)................. 700,000 31,675,000
--------------
TOTAL PREFERRED STOCKS
(cost $75,571,505)............................................. 75,290,000
--------------
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
CONVERTIBLE BONDS -- 0.6% (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
RETAIL -- 0.6%
Federated Department Stores, Inc.,
5.00%, 10/01/03............................... Ba3 $ 8,000 $ 9,180,000
Home Depot, Inc.,
3.25%, 10/01/01............................... A1 19,000 18,715,000
--------------
TOTAL CONVERTIBLE BONDS
(cost $27,850,057)....................................................... 27,895,000
--------------
LONG-TERM BONDS -- 34.2%
DOMESTIC CORPORATE BONDS -- 22.3%
AEROSPACE -- 0.2%
Northrop Grumman Corp.,
7.875%, 03/01/26.............................. NR 7,500 7,517,475
--------------
AGRICULTURAL EQUIPMENT -- 0.1%
Agco Corp.,
8.50%, 03/15/06............................... Ba3 6,500 6,576,700
--------------
AIRLINES -- 2.3%
Delta Air Lines, Inc.,
10.125%, 05/15/10............................. Baa3 19,335 23,342,952
10.375%, 02/01/11............................. Ba1 25,750 31,546,840
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
United Air Lines, Inc.,
9.75%, 08/15/21............................... Baa2 $ 10,125 $ 12,000,555
10.67%, 05/01/04.............................. Baa3 19,500 23,062,455
11.21%, 05/01/14.............................. Baa3 17,500 22,945,475
--------------
112,898,277
--------------
ASSET BACKED -- 0.1%
Standard Credit Card Master Trust
5.95%, 10/07/04............................... AAA 4,500 4,325,625
--------------
CABLE & PAY TELEVISION SYSTEMS -- 1.3%
Continental Cablevision, Inc.,
8.30%, 05/15/06............................... Ba2 10,800 11,504,916
8.625%, 08/15/03.............................. Ba2 7,500 8,115,825
TCI Communications, Inc.,
8.65%, 09/15/04............................... Baa3 6,000 6,029,460
8.75%, 08/01/15............................... Baa3 5,950 5,877,886
Tele-Communications, Inc.,
7.875%, 08/01/13.............................. Baa3 17,500 16,110,150
9.80%, 02/01/12............................... B2 7,000 7,575,400
9.875%, 06/15/22.............................. Baa3 7,878 8,483,976
10.125%, 04/15/22............................. Baa3 2,000 2,196,040
--------------
65,893,653
--------------
COMPUTERS -- 0.3%
Digital Equipment Corp.,
7.125%, 10/15/02.............................. Ba1 14,800 14,122,900
--------------
FINANCIAL SERVICES -- 10.7%
Bank of New York,
7.97%, 12/31/26............................... A1 26,000 26,258,440
Barnett Banks,
8.06%, 12/01/26............................... NR 3,500 3,540,775
Capital One Bank,
6.66%, 08/17/98............................... Baa3 11,175 11,214,671
6.73%, 06/04/98............................... Baa2 26,000 26,153,400
6.90%, 04/15/99............................... Baa3 11,000 11,073,590
7.20%, 07/19/99............................... Baa3 11,250 11,376,112
Conseco, Inc.,
8.70%, 11/15/26............................... NR 18,200 18,356,884
CoreStates Financial Corp.,
8.00%, 12/15/26............................... NR 24,250 24,251,455
Enterprise Rent-A-Car USA Finance Co., M.T.N.,
6.35%, 01/15/01............................... Baa3 3,500 3,407,250
7.00%, 06/15/00............................... Baa3 13,500 13,663,350
First Tennessee National Corp., B.A.,
8.07%, 01/06/27............................... NR 11,150 11,087,560
First Union Corp.,
7.85%, 01/01/27............................... A1 43,500 43,103,062
First USA Bank,
8.20%, 02/15/98............................... Baa3 13,000 13,270,530
Ford Motor Credit,
7.00%, 09/25/01............................... NR 13,000 13,193,830
General Motors Acceptance Corp., M.T.N.,
7.375%, 07/20/98.............................. Baa1 4,500 4,589,235
7.875%, 03/15/00.............................. NR 5,000 5,202,100
Lehman Brothers Holdings, Inc.,
6.71%, 10/12/99............................... Baa1 24,000 24,032,400
6.84%, 09/25/98............................... Baa1 5,000 5,037,850
Liberty Mutual Insurance Co.,
7.875%, 10/15/26.............................. A2 2,500 2,526,985
8.20%, 05/04/07............................... NR 5,000 5,309,700
Lumbermens Mutual Casualty Co.,
9.15%, 07/01/26............................... NR 12,600 13,702,500
</TABLE>
B8
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Mellon Bank Corp.,
7.72%, 12/01/26............................... A2 $ 15,500 $ 15,020,275
7.995%, 01/15/27.............................. A2 38,500 38,018,750
Republic Bank of New York Corp.,
7.53%, 12/04/26............................... NR 21,000 20,582,583
Salomon, Inc., M.T.N.,
5.98%, 02/02/98............................... Baa 23,500 23,488,485
7.00%, 05/15/99............................... Baa 34,600 34,873,340
7.25%, 05/01/01............................... Baa 8,625 8,706,593
State Street Capital Corp.,
7.94%, 12/30/26............................... NR 7,500 7,470,000
Travelers Capital, Inc.,
7.75%, 12/01/36............................... A1 20,000 19,350,000
Union Planters Corp.,
8.20%, 12/15/26............................... NR 20,750 20,542,500
USAA Capital Corp.,
6.34%, 09/18/98............................... Aa1 20,000 20,080,000
Wells Fargo & Co.,
7.96%, 12/15/26............................... A1 26,300 26,563,000
--------------
525,047,205
--------------
FOOD & BEVERAGE -- 0.1%
RJR Nabisco, Inc.,
8.75%, 08/15/05............................... Baa3 3,000 3,013,500
--------------
HEALTH CARE -- 0.9%
Tenet Healthcare Corp.,
8.625%, 12/01/03.............................. Ba2 15,315 16,157,325
9.625%, 09/01/02.............................. Ba1 23,750 26,006,250
--------------
42,163,575
--------------
INDUSTRIAL -- 0.1%
Service Corp. International,
7.00%, 06/01/15............................... A3 2,500 2,530,950
--------------
MEDIA -- 3.9%
News America Holdings, Inc.,
7.375%, 10/17/08.............................. Baa3 2,000 1,984,640
7.75%, 12/01/45............................... Baa3 39,000 36,316,410
9.25%, 02/01/13............................... Baa3 36,200 40,554,498
Paramount Communications, Inc.,
7.50%, 01/15/02............................... Ba2 9,100 9,092,447
Time Warner, Inc.,
8.11%, 08/15/06............................... Ba1 13,250 13,583,503
8.18%, 08/15/07............................... Ba1 13,000 13,338,910
8.375%, 07/15/33.............................. Baa3 32,800 32,917,752
9.125%, 01/15/13.............................. Ba1 12,040 13,144,068
Turner Broadcasting Co.,
8.375%, 07/01/13.............................. Ba 5,300 5,410,293
Viacom, Inc.,
6.75%, 01/15/03............................... Ba2 7,350 7,035,126
7.75%, 06/01/05............................... Ba2 19,675 19,373,382
--------------
192,751,029
--------------
OIL & GAS -- 0.4%
Parker & Parsley Petroleum Co.,
8.25%, 08/15/07............................... Ba2 3,000 3,225,450
Transco Energy Co.,
9.125%, 05/01/98.............................. Ba3 14,000 14,531,160
--------------
17,756,610
--------------
OIL & GAS EQUIPMENT & SERVICES -- 0.1%
B.J. Services Co.,
7.00%, 02/01/06............................... Ba1 4,000 3,887,640
Noble Drilling Corp.,
9.125%, 07/01/06.............................. Ba2 3,500 3,762,500
--------------
7,650,140
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
RETAIL -- 1.6%
Federated Department Stores, Inc.,
8.125%, 10/15/02.............................. Ba1 $ 6,600 $ 6,765,000
8.50%, 06/15/03............................... Ba1 66,000 68,640,000
10.00%, 02/15/01.............................. Ba1 2,500 2,725,000
--------------
78,130,000
--------------
TECHNOLOGY -- 0.2%
Comdisco, Inc., M.T.N.,
6.375%, 11/30/01.............................. Baa1 2,700 2,656,530
7.25%, 04/15/98............................... Baa2 10,000 10,135,700
--------------
12,792,230
--------------
FOREIGN CORPORATE BONDS -- 7.0%
Banco de Commercio Exterior de Colombia, SA,
M.T.N.,(Colombia)
8.625%, 06/02/00.............................. NR 5,500 5,713,125
Banco Ganadero, SA, M.T.N., (Colombia)
9.75%, 08/26/99............................... Baa 7,300 7,683,250
Bancomer, SA, (Mexico)
8.00%, 07/07/98............................... Ba 8,000 7,980,000
Bangkok Bank, (Thailand)
7.25%, 09/15/05............................... A3 10,000 9,777,400
Central Hispano Financial Services, (Cayman
Islands)
6.031%, 04/28/05.............................. A3 5,000 5,002,500
Compania Sud Americana de Vapores, SA, (Chile)
7.375%, 12/08/03.............................. NR 5,650 5,565,250
Controladora Commercial Mexicana, SA, (Mexico)
8.75%, 04/21/98............................... NR 15,100 15,175,500
Deutsche Bank, (Germany)
6.70%, 12/13/06............................... Aa 17,500 17,219,388
Dotmar, Inc., (Canada)
9.50%, 08/01/16............................... Ba 24,750 27,070,313
Empresa Colombia de Petroleos, (Colombia)
7.25%, 07/08/98............................... NR 8,250 8,311,875
Kansallis-Osake Pankki, N.Y., (Finland)
8.65%, 01/01/49 (b)........................... Baa1 9,000 9,397,350
9.75%, 12/15/98............................... Baa1 16,760 17,789,064
Nacional Financie, (Cayman Islands)
9.00%, 01/25/99............................... Ba2 15,000 15,300,000
National Power Co., (United Kingdom)
7.875%, 12/15/06.............................. Ba2 22,500 22,612,500
8.40%, 12/15/16............................... Ba2 27,500 27,362,500
Okobank, (Finalnd)
7.70%, 10/29/49 (b)........................... NR 3,500 3,585,750
7.25%, 09/27/49............................... A3 18,750 19,125,000
7.325%, 10/29/49 (b).......................... NR 9,000 9,220,500
Petroliam Nasional, (Malaysia)
7.125%, 10/18/06.............................. NR 63,100 63,509,519
PT Alatief Freeport Financial Co., (Netherlands)
9.75%, 04/15/01............................... Ba2 7,600 8,308,700
Rio de Janeiro, (Brazil)
10.375%, 07/12/99............................. NR 7,000 7,192,500
Rogers Cablesystems, Inc., Sr. Sec'd Notes,
(Canada)
10.00%, 03/15/05.............................. Ba3 2,000 2,130,000
</TABLE>
B9
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Royal Bank of Canada, (Canada)
6.75%, 10/24/11............................... Aa3 $ 15,000 $ 14,685,000
Siam Commercila, (Thailand)
7.50%, 03/15/06............................... Aa3 14,500 14,282,500
--------------
343,999,484
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 0.2%
Federal National Mortgage Association,
Zero Coupon, 10/09/19......................... Aaa 11,800 2,391,388
United States Treasury Notes,
6.375%, 08/15/02.............................. Aaa 10,000 10,065,600
--------------
12,456,988
--------------
FOREIGN GOVERNMENT BONDS -- 4.7%
Republic of Argentina, (Argentina)
6.625%, 03/31/05.............................. B1 32,340 28,337,925
Republic of Colombia, (Colombia)
7.125%, 05/11/98.............................. Ba1 2,700 2,713,500
8.00%, 06/14/01............................... NR 2,150 2,182,250
8.75%, 10/06/99............................... Ba1 12,300 12,853,500
Republic of Poland, (Poland)
4.00%, (until 10/27/98)....................... Baa3 100,500 85,048,125
5.00%, (until 10/27/99)
6.00%, (until 10/27/02)
7.00%, 10/27/14
Republic of Venezuela, (Venezuela)
6.50%, 12/18/07............................... Ba2 60,250 53,020,000
United Mexican States, (Mexico)
9.75%, 02/06/01............................... NR 25,000 25,812,500
11.375%, 09/15/16............................. NR 21,000 21,866,250
--------------
231,834,050
--------------
TOTAL LONG-TERM BONDS
(cost $1,657,819,992).................................................... 1,681,460,391
--------------
TOTAL LONG TERM INVESTMENTS
(cost $4,195,725,818).................................................... 4,780,903,499
--------------
SHORT-TERM INVESTMENTS -- 4.1%
BANK NOTES -- 0.1%
American Express Centurian Bank,
5.625%, 01/14/97.............................. NR 1,000 1,000,001
Comerica Bank of Detroit,
6.585%, 02/14/97.............................. NR 569 568,948
NBD Bank, N.A.,
6.55%, 06/02/97............................... NR 2,000 2,008,199
--------------
3,577,148
--------------
CERTIFICATES OF DEPOSIT-DOMESTIC -- 0.5%
Advanta National Bank,
6.14%, 02/28/97............................... Baa2 17,000 17,000,000
Chase Manhattan Bank,
5.43%, 05/06/97............................... P3 6,000 6,000,000
--------------
23,000,000
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
CERTIFICATES OF DEPOSIT-EURODOLLAR -- 0.1%
Abbey National Treasury Services, PLC, (United
Kingdom)
5.41%, 01/30/97............................... P1 $ 2,000 $ 2,000,037
Bayerische Hypotheken, (Germany)
5.74%, 05/27/97............................... NR 1,000 1,000,409
--------------
3,000,446
--------------
CERTIFICATES OF DEPOSIT-YANKEE -- 0.5%
Bank of Montreal, (Canada)
5.39%, 01/22/97............................... P1 2,000 2,000,000
Banque Nationale de Paris, (France)
5.41%, 01/15/97............................... NR 3,000 2,999,989
5.58%, 04/02/97............................... NR 2,000 1,999,461
Barclays Bank, PLC, (United Kingdom)
5.37%, 02/03/97-02/05/97...................... NR 6,000 6,000,000
Deutsche Bank, (Germany)
5.69%, 10/28/97............................... P3 1,000 999,754
Empresas La Moderna, SA, (Mexico)
10.25%, 11/12/97.............................. Baa1 2,000 2,051,250
Grupo Televisa, SA, (Mexico)
10.00%, 11/09/97.............................. Ba2 4,000 4,100,000
National Bank of Canada, (Canada)
5.438%, 03/10/97.............................. P3 1,000 1,000,000
Societe Generale, (France)
5.77%, 05/15/97............................... P1 1,000 1,000,130
--------------
22,150,584
--------------
COMMERCIAL PAPER -- 1.3%
Aetna Services, Inc.,
5.42%, 03/14/97............................... NR 2,000 1,978,621
American Brands Inc,
5.33%, 01/31/97............................... P3 1,000 995,706
6.00%, 01/22/97............................... P3 1,000 996,667
American Express Credit Corp.,
5.30%, 02/28/97............................... P1 3,000 2,974,825
Aristar, Inc.,
5.59%, 02/28/97............................... P2 1,000 991,149
Bank Austria,
5.35%, 01/15/97............................... NR 2,000 1,996,136
Barton Capital Corp.,
5.35%, 02/27/97............................... NR 1,000 991,678
Bradford & Bingley Building Society,
5.35%, 01/10/97-01/15/97...................... A1 5,550 5,542,659
Caterpillar Financial Services Corp.,
5.35%, 06/16/97............................... P1 1,000 975,479
Cheltenham & Gloucester Building Society,
5.325%, 02/24/97.............................. NR 1,000 992,160
5.35%, 01/15/97............................... NR 1,000 998,068
Coca Cola Enterprises, Inc.,
5.34%, 02/03/97............................... NR 1,000 995,253
Colonial Pipeline Co.,
5.75%, 01/27/97............................... P3 1,000 996,007
Commonwealth Bank of Australia,
5.32%, 01/22/97............................... NR 7,000 6,979,311
Corporate Receivables Corp.,
5.33%, 01/24/97............................... NR 2,000 1,993,486
</TABLE>
B10
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Countrywide Home Loan, Inc.,
6.20%, 01/15/97............................... NR $ 3,000 $ 2,993,283
CXC, Inc.,
5.60%, 01/16/97............................... NR 1,005 1,002,811
7.00%, 01/02/97............................... NR 670 670,000
Dakota Cert. Prog. of Stand. Cred.,
5.34%, 01/23/97............................... NR 2,000 1,993,770
Engelhard Corp.,
5.58%, 02/24/97............................... P2 1,000 991,785
Enterprise Funding Corp.,
5.47%, 01/16/97............................... NR 1,000 997,873
5.50%, 01/15/97............................... NR 2,000 1,996,028
Fleet Funding Corp.,
5.80%, 02/04/97............................... NR 1,000 994,683
General Motors Acceptance Corp.,
5.47%, 02/12/97............................... P1 3,000 2,981,311
5.50%, 04/07/97............................... P1 1,912 1,884,249
Kredietbank Na Finance Corp.,
5.32%, 01/16/97............................... NR 1,000 997,931
Merrill Lynch & Co., Inc.,
5.31%, 02/27/97............................... P1 1,000 991,740
5.32%, 01/21/97............................... P1 1,000 997,192
5.33%, 01/24/97............................... P1 2,000 1,993,486
5.35%, 01/29/97............................... P1 3,000 2,987,963
Morgan Stanley Group, Inc.,
5.32%, 01/29/97............................... P1 5,000 4,980,050
Nationwide Building Society,
5.375%, 02/26/97.............................. NR 1,000 991,788
Preferred Receivables Funding Corp.,
5.45%, 01/15/97............................... P1 1,000 998,032
5.60%, 02/25/97............................... P1 1,000 991,600
Short Term Repack Asset Trust,
6.006%, 12/15/97.............................. NR 1,000 999,797
Societe Generale,
5.57%, 04/04/97............................... P1 1,000 999,676
Transamerica Financial Corp.,
5.34%, 02/03/97............................... P1 1,000 995,253
--------------
65,827,506
--------------
OTHER CORPORATE OBLIGATIONS -- 0.2%
Associates Corp. of North America,
6.625%, 11/15/97.............................. P1 600 604,890
Beneficial Corp.,
5.54%, 08/05/97............................... P1 1,000 1,000,375
9.70%, 05/30/97............................... P1 2,000 2,031,498
Capital Equipment Receivable Trust,
5.60%, 10/15/97............................... NR 1,545 1,544,889
Dean Witter, Discover &,
5.747%, 03/06/97.............................. P2 1,250 1,250,281
Ford Motor Credit Corp.,
5.625%, 03/03/97.............................. P1 500 499,927
7.95%, 03/27/97............................... P1 465 467,315
General Electric Capital Corp.,
8.00%, 02/01/97............................... P1 1,500 1,503,055
General Motors Acceptance Corp.,
7.75%, 02/20/97-04/15/97...................... P1 825 828,464
7.85%, 03/05/97............................... P1 1,150 1,154,153
7.90%, 03/13/97............................... P1 500 501,804
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Household Finance Corp.,
5.67%, 08/11/97............................... P2 $ 475 $ 475,495
Norwest Corp.,
7.70%, 11/15/97............................... P1 500 508,485
Pfizer, Inc.,
6.50%, 02/01/97............................... P3 500 500,280
--------------
12,870,911
--------------
REPURCHASE AGREEMENT -- 1.4%
Joint Repurchase Agreement Account,
6.613%, 01/02/97 (Note 5)..................... 70,099 70,099,000
--------------
TOTAL SHORT-TERM INVESTMENTS -- 4.1%
(cost $204,409,679)...................................................... 200,525,595
--------------
TOTAL INVESTMENTS BEFORE SHORT SALE -- 101.7%
(cost $4,400,135,497; Note 6)............................................ 4,981,429,094
--------------
INVESTMENT SOLD SHORT -- (2.2%)
United States Treasury Bond,
6.75% 8/15/26
(proceeds $113,630,151; Note 2)............................. 108,775 (112,461,581)
--------------
TOTAL INVESTMENTS, NET OF SHORT SALES -- 99.5%............................. 4,868,967,513
OTHER ASSETS IN EXCESS OF OTHER
LIABILITIES -- 0.5%.................................................... 27,955,174
--------------
TOTAL NET ASSETS -- 100.0%................................................. $4,896,922,687
--------------
--------------
<FN>
The following abbreviations are used in portfolio descriptions:
ADR American Depository Receipt
AG Aktiengesellschaft (West German Stock Company)
B.A. Bankers' Acceptances
C.D. Certificates of Deposit
M.T.N. Medium Term Note
NR Not Rated
PLC Public Limited Company (British Corporation)
SA Sociedad Anonima (Spanish Corporation) or Societe
Anonyme (French Corporation)
(a) Non-income producing security.
(b) Indicates a variable rate security.
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B12 THROUGH B16.
B11
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS OF
THE CONSERVATIVE BALANCED PORTFOLIO AND
FLEXIBLE MANAGED PORTFOLIO 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 two Portfolios: Conservative Balanced
Portfolio and Flexible Managed 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. These
policies are in conformity with generally accepted accounting principles.
SECURITIES VALUATION: Securities traded on an exchange (whether domestic or
foreign) are valued at the last reported sales price on the primary exchange on
which they are traded. Securities traded in the over-the-counter market
(including securities listed on exchanges for which a last sales price is not
available) are valued at the average of the last reported bid and asked prices.
Convertible debt securities are valued at the mean between the most recently
quoted bid and asked prices provided by principal market makers. High yield
bonds are valued either by quotes received from principal market makers or by an
independent pricing service which determine prices by analysis of quality,
coupon, maturity and other factors. Any security for which a reliable market
quotation is unavailable is valued at fair value as determined in good faith by
or under the direction of the Series Fund's Board of Directors. Short-term
securities 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
be 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 investment 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 foreign currency gains (losses) are included in the reported net
realized gains (losses) on investment transactions.
B12
<PAGE>
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains or losses from holdings of foreign currencies, currency
gains or losses realized between the trade and settlement dates on security
transactions, and the difference between the amounts of dividends, interest and
foreign taxes recorded on the Series Fund's books and the U.S. dollar equivalent
amounts actually received or paid. Net unrealized currency gains or losses from
valuing foreign currency denominated assets and liabilities (other than
investments) at fiscal year end exchange rates are reflected as a component of
net unrealized appreciation (depreciation) on investments and foreign
currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
SHORT SALES: Conservative Balanced Portfolio and Flexible Managed Portfolio 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 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 sale 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 recorded on the
ex-dividend date; interest income, which is comprised of three elements: stated
coupon, original issue discount and market discount, is recorded on the accrual
basis. Certain Portfolios own shares of
B13
<PAGE>
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.
CUSTODY FEE CREDITS: The Series Fund 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 Statements 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
and distributions from net realized gains, if any, twice a year. Dividends and
distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Series Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gains, and
Return of Capital Distributions by Investment Companies. As a result of this
statement, the Series Fund changed the classification of distributions to
shareholders to disclose the amounts of undistributed net investment income and
accumulated net realized gain (loss) on investments available for distributions
determined in accordance with income tax regulations. For the fiscal year ended
December 31, 1996, the application of this statement increased (decreased)
paid-in capital in excess of par (PC), undistributed net investment income
("UNI") and accumulated net realized gains (losses) on investments ("G/L") by
the following amounts:
<TABLE>
<CAPTION>
PC UNI G/L
------------- ----------- -----------
<S> <C> <C> <C>
Conservative Balanced Portfolio............ $(15,661,578) $3,079,619 $12,581,959
Flexible Managed Portfolio................. (31,413,181) 8,052,179 23,361,002
</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.
B14
<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
Portfolios' average daily net assets:
<TABLE>
<CAPTION>
FUND INVESTMENT ADVISORY FEE
---- -----------------------
<S> <C>
Conservative Balanced Portfolio..................... 0.55%
Flexible Managed Portfolio.......................... 0.60
</TABLE>
The Prudential has agreed to refund to a 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, 1996.
PIC is an indirect, wholly-owned subsidiary of The Prudential.
NOTE 4: OTHER TRANSACTIONS WITH AFFILIATES
For the fiscal year ended December 31, 1996, Prudential Securities Incorporated,
an indirect, wholly owned subsidiary of The Prudential, earned $703,293 in
brokerage commissions from transactions executed on behalf of the Conservative
Balanced Portfolio and the Flexible Managed Portfolio as follows:
<TABLE>
<CAPTION>
FUND COMMISSION
---- ----------
<S> <C>
Conservative Balanced Portfolio................................ $ 120,976
Flexible Managed Portfolio..................................... 582,317
---------
$ 703,293
</TABLE>
NOTE 5: JOINT REPURCHASE AGREEMENT ACCOUNT
The portfolios of the Series Fund 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 $868,381,000 as of December 31, 1996.
The Portfolios of the Series Fund with cash invested in the joint account had
the following principal amounts and percentage participation in the account:
<TABLE>
<CAPTION>
PRINCIPAL PERCENTAGE
AMOUNT INTEREST
------------- -----------
<S> <C> <C>
Conservative Balanced Portfolio.................... $ 22,692,000 2.61%
Flexible Managed Portfolio......................... 70,099,000 8.07
All other portfolios (currently not available to
PRUvider)......................................... 775,590,000 89.32
------------- -------
$ 868,381,000 100.00%
</TABLE>
As of such date, each repurchase agreement in the joint account and the
collateral therefor were as follows:
Bear, Stearns & Co., Inc., 6.75%, in the principal amount of $265,000,000,
repurchase price $265,099,375, due 1/2/97. The value of the collateral including
accrued interest was $270,501,866.
Goldman, Sachs & Co., Inc., 5.85%, in the principal amount of $73,381,000,
repurchase price $73,404,849, due 1/2/97. The value of the collateral including
accrued interest was $75,883,443.
Smith Barney, Inc., 6.65%, in the principal amount of $265,000,000, repurchase
price $265,097,902, due 1/2/97. The value of the collateral including accrued
interest was $270,820,275.
UBS Securities Corp., 6.65%, in the principal amount of $265,000,000, repurchase
price $265,097,902, due 1/2/97. The value of the collateral including accrued
interest was $270,302,336.
The weighted average interest rate of these repurchase agreements was 6.613%.
B15
<PAGE>
NOTE 6: PORTFOLIO SECURITIES
The aggregate cost of purchase and the proceeds from the sales of securities
(excluding short-term issues) for the fiscal year ended December 31, 1996 were
as follows:
Cost of Purchases:
<TABLE>
<CAPTION>
CONSERVATIVE FLEXIBLE
BALANCED MANAGED
-------------- --------------
<S> <C> <C>
Debt Securities................. $10,348,623,701 $7,818,989,849
Equity Securities............... $ 524,839,665 $2,661,774,273
</TABLE>
Proceeds From Sales:
<TABLE>
<CAPTION>
CONSERVATIVE FLEXIBLE
BALANCED MANAGED
-------------- --------------
<S> <C> <C>
Debt Securities................. $9,086,693,898 $7,188,296,334
Equity Securities............... $ 797,513,299 $2,656,626,154
</TABLE>
The federal income tax basis and unrealized appreciation/depreciation of the
Fund's investments as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
CONSERVATIVE FLEXIBLE
BALANCED MANAGED
-------------- --------------
<S> <C> <C>
Gross Unrealized Appreciation... $ 413,912,093 $ 610,666,412
Gross Unrealized Depreciation... 67,562,846 36,056,964
Total Net Unrealized............ 346,349,247 574,609,448
Tax Basis....................... 4,192,119,381 4,406,819,646
</TABLE>
B16
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CONSERVATIVE BALANCED
-------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A)
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of
year............................. $ 15.31 $ 14.10 $ 14.91 $ 14.24 $ 14.32
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............. 0.66 0.63 0.53 0.49 0.56
Net realized and unrealized gains
(losses) on investments.......... 1.24 1.78 (0.68) 1.23 0.41
-------- -------- -------- -------- --------
Total from investment
operations..................... 1.90 2.41 (0.15) 1.72 0.97
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income........................... (0.66) (0.64) (0.51) (0.47) (0.54)
Distributions from net realized
gains............................ (1.03) (0.56) (0.15) (0.58) (0.51)
-------- -------- -------- -------- --------
Total distributions............ (1.69) (1.20) (0.66) (1.05) (1.05)
-------- -------- -------- -------- --------
Net Asset Value, end of year....... $ 15.52 $ 15.31 $ 14.10 $ 14.91 $ 14.24
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(B)........ 12.63% 17.27% (0.97%) 12.20% 6.95%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)........................ $4,478.8 $3,940.8 $3,501.1 $3,103.2 $2,114.0
Ratios to average net assets:
Expenses......................... 0.59% 0.58% 0.61% 0.60% 0.62%
Net investment income............ 4.13% 4.19% 3.61% 3.22% 3.88%
Portfolio turnover rate............ 295% 201% 125% 79% 62%
Average commission rate paid per
share............................ $0.0554 N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
FLEXIBLE MANAGED
-------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A)
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of
year............................. $ 17.86 $ 15.50 $ 16.96 $ 16.01 $ 16.29
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............. 0.57 0.56 0.47 0.57 0.58
Net realized and unrealized gains
(losses) on investments.......... 1.79 3.15 (1.02) 1.88 0.61
-------- -------- -------- -------- --------
Total from investment
operations..................... 2.36 3.71 (0.55) 2.45 1.19
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income........................... (0.58) (0.56) (0.45) (0.57) (0.56)
Distributions from net realized
gains............................ (1.85) (0.79) (0.46) (0.93) (0.91)
-------- -------- -------- -------- --------
Total distributions............ (2.43) (1.35) (0.91) (1.50) (1.47)
-------- -------- -------- -------- --------
Net Asset Value, end of year....... $ 17.79 $ 17.86 $ 15.50 $ 16.96 $ 16.01
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(B)........ 13.64% 24.13% (3.16%) 15.58% 7.61%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)........................ $4,896.9 $4,261.2 $3,481.5 $3,292.2 $2,435.6
Ratios to average net assets:
Expenses......................... 0.64% 0.63% 0.66% 0.66% 0.67%
Net investment income............ 3.07% 3.30% 2.90% 3.30% 3.63%
Portfolio turnover rate............ 233% 173% 124% 63% 59%
Average commission rate paid per
share............................ $0.0563 N/A N/A N/A N/A
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns.
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B12 THROUGH B16.
B17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF THE PRUDENTIAL SERIES FUND, INC.:
In our opinion, the accompanying Statements of Assets and Liabilities, including
the Schedules of Investments, and the related Statements of Operations and of
Changes in Net Assets and the Financial Highlights present fairly, in all
material respects, the financial position of each of the Conservative Balanced
and Flexible Managed Portfolios (collectively the "Portfolios"), two of the
fifteen portfolios that comprise The Prudential Series Fund, Inc. at December
31, 1996, the results of each of their operations, the changes in each of their
net assets, and each of their financial highlights for the year ended December
31, 1996, 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, 1996 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, NY 10036
February 14, 1997
B18
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE SHAREHOLDERS AND BOARD OF DIRECTORS OF THE PRUDENTIAL SERIES FUND, INC.:
We have audited the accompanying statements of changes in net assets of the
Flexible Managed and Conservative Balanced Portfolios (two of the portfolios
comprising The Prudential Series Fund, Inc.) for the year ended December 31,
1995, and the financial highlights contained in the prospectus for each of the
years in the nine-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the changes in net assets and the financial
highlights of each of the respective portfolios of The Prudential Series Fund,
Inc. for the respective stated periods in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 15, 1996
B19
<PAGE>
BOARD OF
DIRECTORS THE PRUDENTIAL SERIES FUND, INC.
MENDEL A. MELZER W. SCOTT McDONALD, JR., E. MICHAEL CAULFIELD,
CHAIRMAN, PhD. CEO,
THE PRUDENTIAL SERIES EXECUTIVE VICE PRUDENTIAL INVESTMENTS
FUND, INC. PRESIDENT, PRESIDENT, THE
FAIRLEIGH DICKINSON PRUDENTIAL SERIES FUND,
UNIVERSITY INC.
SAUL K. FENSTER, PhD. JOSEPH WEBER, PhD.
PRESIDENT, NEW JERSEY VICE PRESIDENT,
INSTITUTE OF TECHNOLOGY INTERCLASS
(INTERNATIONAL
CORPORATE LEARNING)
TAX INFORMATION
Although we understand that the vast majority, if not all, of the
shareholders/contract holders of the Series Fund currently maintain a tax
deferred status, we are nevertheless required by the Internal Revenue Code to
advise you within 60 days of the Series Fund's fiscal year end (December 31,
1996) as to the federal tax status of dividends paid by the Fund during such
fiscal year. Accordingly, we are advising you that in 1996, the Fund paid
dividends as follows:
ORDINARY DIVIDENDS
SHORT-TERM LONG-TERM TOTAL
INCOME CAPITAL GAINS CAPITAL GAINS DIVIDENDS
------ ------------- ------------- ---------
Conservative Balanced Portfolio $0.661 $0.047 $0.980 $1.688
Flexible Managed Portfolio 0.577 0.218 1.631 2.426
B20
<PAGE>
PRUVIDER(SM)
VARIABLE APPRECIABLE LIFE(R)
INSURANCE CONTRACT
PRUDENTIAL
PRUCO LIFE INSURANCE COMPANY
213 Washington Street, Newark, NJ 07102-2992
Telephone 800 437-4016, Extension 46
A Subsidiary of The Prudential Insurance Company of America
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT
PRUVIDER
VARIABLE
APPRECIABLE
LIFE(R)___________________
INSURANCE CONTRACTS
PROVIDING FOR THE INVESTMENT
OF ASSETS IN THE
INVESTMENT PORTFOLIOS OF
THE PRUDENTIAL SERIES
FUND, INC.
The Pruco Life Insurance Company of New Jersey, a stock life insurance company
that is an indirect wholly-owned subsidiary of the Prudential Insurance Company
of America, offers a variable life insurance contract called the PRUVIDER
Variable APPRECIABLE LIFE(R) Insurance Contract*. The Contract provides
whole-life insurance protection. The death benefit varies daily with investment
experience but will never be less than the "face amount" of insurance specified
in the Contract. The Contract also generally provides a cash surrender value
which also varies with investment experience. There is no guaranteed minimum
cash surrender value.
The assets held for the purpose of paying benefits under these contracts can be
invested in one or both of the two available subaccounts of the Pruco Life of
New Jersey Variable Appreciable Account. The assets invested in each subaccount
are in turn invested in a corresponding portfolio of The Prudential Series Fund,
Inc., a diversified, open-end management investment company (commonly known as a
mutual fund) that is intended to provide a range of investment alternatives to
variable contract owners. Each portfolio is, for investment purposes, in effect
a separate fund. The two available Series Fund portfolios are the CONSERVATIVE
BALANCED PORTFOLIO and the FLEXIBLE MANAGED PORTFOLIO. A separate class of
capital stock is issued for each portfolio. Shares of the Series Fund are
currently sold only to separate accounts of Pruco Life of New Jersey and certain
other insurers to fund the benefits under variable life insurance and variable
annuity contracts issued by those companies.
The PRUVIDER Variable APPRECIABLE LIFE(R) Insurance Contract owner may also
choose to invest in a fixed-rate option which is described in the prospectus of
The Pruco Life of New Jersey Variable Appreciable Account.
------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS OF THE PRUCO LIFE OF NEW JERSEY VARIABLE
APPRECIABLE ACCOUNT DATED MAY 1, 1997, WHICH IS AVAILABLE WITHOUT CHARGE UPON
WRITTEN REQUEST TO THE PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY, 213
WASHINGTON STREET, NEWARK, NEW JERSEY 07102-2992 OR BY TELEPHONING (800)
437-4016, EXT. 46.
------------------------------------
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
213 Washington Street
Newark, New Jersey 07102-2992
Telephone: (800) 437-4016, Ext. 46
*PRUVIDER is a service mark of Prudential.
APPRECIABLE LIFE is a registered mark of Prudential.
SVAL-2SAI Ed 5-97
Catalog No. 64M087E
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
MORE DETAILED INFORMATION ABOUT THE CONTRACT..........................................1
SALES LOAD UPON SURRENDER.......................................................1
REDUCTION OF CHARGES FOR CONCURRENT SALES TO SEVERAL INDIVIDUALS................1
PAYING PREMIUMS BY PAYROLL DEDUCTION............................................1
UNISEX PREMIUMS AND BENEFITS....................................................2
HOW THE DEATH BENEFIT WILL VARY.................................................2
WITHDRAWAL OF EXCESS CASH SURRENDER VALUE.......................................2
TAX TREATMENT OF CONTRACT BENEFITS..............................................3
TREATMENT AS LIFE INSURANCE...............................................3
PRE-DEATH DISTRIBUTIONS...................................................3
WITHHOLDING...............................................................4
OTHER TAX CONSIDERATIONS..................................................4
SALE OF THE CONTRACT AND SALES COMMISSIONS......................................5
RIDERS..........................................................................5
OTHER STANDARD CONTRACT PROVISIONS..............................................5
BENEFICIARY...............................................................5
INCONTESTABILITY..........................................................5
MISSTATEMENT OF AGE OR SEX................................................5
SUICIDE EXCLUSION.........................................................5
ASSIGNMENT................................................................5
SETTLEMENT OPTIONS........................................................6
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS..................................6
GENERAL.........................................................................6
CONVERTIBLE SECURITIES..........................................................6
LOAN PARTICIPATIONS.............................................................6
WARRANTS........................................................................6
OPTIONS AND FUTURES.............................................................7
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES....................................13
SHORT SALES....................................................................13
SHORT SALES AGAINST THE BOX....................................................13
INTEREST RATE SWAPS............................................................14
LOANS OF PORTFOLIO SECURITIES..................................................14
ILLIQUID SECURITIES............................................................14
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS....................................15
INVESTMENT RESTRICTIONS..............................................................16
INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES......................................18
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................19
DETERMINATION OF NET ASSET VALUE.....................................................21
SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO MAY CURRENTLY INVEST..................22
DEBT RATINGS.........................................................................24
POSSIBLE REPLACEMENT OF THE SERIES FUND..............................................25
OTHER INFORMATION CONCERNING THE SERIES FUND.........................................26
INCORPORATION AND AUTHORIZED STOCK.............................................26
DIVIDENDS, DISTRIBUTIONS AND TAXES.............................................26
CUSTODIANS, TRANSFER AGENT, AND DIVIDEND DISBURSING AGENT......................26
EXPERTS........................................................................26
LICENSE........................................................................27
DIRECTORS AND OFFICERS OF PRUCO LIFE OF NEW JERSEY AND MANAGEMENT OF THE SERIES FUND.28
FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC. ........................... A1
THE PRUDENTIAL SERIES FUND, INC. SCHEDULE OF INVESTMENTS........................... B1
</TABLE>
<PAGE>
MORE DETAILED INFORMATION ABOUT THE CONTRACT
SALES LOAD UPON SURRENDER
A contingent deferred sales load is assessed if the Contract lapses or is
surrendered during the first 10 Contract years. No such charge is applicable to
the death benefit, no matter when that may become payable. Subject to the
additional limitations described below, for Contracts that lapse or are
surrendered during the first 5 Contract years the charge will be equal to 50% of
the first year's primary annual premium. In the next 5 Contract years that
percentage is reduced uniformly on a daily basis until it reaches zero on the
tenth Contract anniversary. Thus, for Contracts surrendered at the end of the
sixth year, the maximum deferred sales charge will be 40% of the first year's
primary annual premium, for Contracts surrendered at the end of year 7, the
maximum deferred sales charge will be 30% of the first year's primary annual
premium, and so forth. We are currently allowing partial surrenders of the
Contract, but we reserve the right to cancel this administrative practice. If
the Contract is partially surrendered during the first 10 years, a proportionate
amount of the charge will be deducted from the Contract Fund. Surrender of all
or part of the Contract may have tax consequences. See TAX TREATMENT OF CONTRACT
BENEFITS, page 3.
The contingent deferred sales load is also subject to a further limit at older
issue ages (approximately above age 61) in order to comply with certain
requirements of state law. Specifically, the contingent deferred sales load for
such insureds is no more than $32.50 per $1,000 of face amount.
The sales load is subject to a further important limitation that may,
particularly for Contracts that lapse or are surrendered within the first 5 or 6
years, result in a lower contingent deferred sales load than that described
above. (This limitation might also, under unusual circumstances, apply to reduce
the monthly sales load deductions described in the prospectus in item (a) under
MONTHLY DEDUCTIONS FROM CONTRACT FUND.)
The limitation is based on a Guideline Annual Premium ("GAP") that is associated
with every Contract. The GAP is an amount determined actuarially in accordance
with a definition set forth in a regulation of the Securities and Exchange
Commission ("SEC"). The maximum aggregate sales load that Pruco Life of New
Jersey will charge (that is, the sum of the monthly sales load deduction and the
contingent deferred sales charge) will not be more than 30% of the premiums
actually paid until those premiums total one GAP plus no more than 9% of the
next premiums paid until total premiums are equal to 5 GAPS, plus no more than
6% of all subsequent premiums. If the sales charges described above would at any
time exceed this maximum amount then the charge, to the extent of any excess,
will not be made.
REDUCTION OF CHARGES FOR CONCURRENT SALES TO SEVERAL INDIVIDUALS
Pruco Life of New Jersey may reduce the sales charges and/or other charges on
individual Contracts sold to members of a class of associated individuals, or to
a trustee, employer or other entity representing such a class, where it is
expected that such multiple sales will result in savings of sales or
administrative expenses. Pruco Life of New Jersey determines both the
eligibility for such reduced charges, as well as the amount of such reductions,
by considering the following factors: (1) the number of individuals; (2) the
total amount of premium payments expected to be received from these Contracts;
(3) the nature of the association between these individuals, and the expected
persistency of the individual Contracts; (4) the purpose for which the
individual Contracts are purchased and whether that purpose makes it likely that
expenses will be reduced; and (5) any other circumstances which Pruco Life of
New Jersey believes to be relevant in determining whether reduced sales or
administrative expenses may be expected. Some of the reductions in charges for
these sales may be contractually guaranteed; other reductions may be withdrawn
or modified by Pruco Life of New Jersey on a uniform basis. Pruco Life of New
Jersey's reductions in charges for these sales will not be unfairly
discriminatory to the interests of any individual Contract owners.
PAYING PREMIUMS BY PAYROLL DEDUCTION
In addition to the annual, semi-annual, quarterly and monthly premium payment
modes, a payroll budget method of paying premiums may also be available under
certain Contracts. The employer generally deducts the necessary amounts from
employee paychecks and sends premium payments to Pruco Life of New Jersey
monthly. Any Pruco Life of New Jersey representative authorized to sell this
Contract can provide further details concerning the payroll budget method of
paying premiums.
UNISEX PREMIUMS AND BENEFITS
The Contract generally employs mortality tables that distinguish between males
and females. Thus, premiums and benefits under Contracts issued on males and
females of the same age will generally differ. However, in those states that
have adopted regulations prohibiting sex-distinct insurance rates, premiums and
cost of insurance
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<PAGE>
charges will be based on a blended unisex rate whether the insured is male or
female. In addition, employers and employee organizations considering purchase
of a Contract should consult their legal advisors to determine whether purchase
of a Contract based on sex-distinct actuarial tables is consistent with Title
VII of the Civil Rights Act of 1964 or other applicable law. Pruco Life of New
Jersey may offer the Contract with unisex mortality rates to such prospective
purchasers.
HOW THE DEATH BENEFIT WILL VARY
The death benefit will vary with investment experience. Assuming no withdrawals,
the death benefit will be equal to the face amount of insurance plus the amount
(if any) by which the Contract Fund value exceeds the applicable "Tabular
Contract Fund value" for the Contract (subject to an exception described below
under which the death benefit is higher). Each Contract contains a table that
sets forth the Tabular Contract Fund value as of the end of each of the first 20
years of the Contract. Tabular Contract Fund values between Contract
anniversaries are determined by interpolation. The "Tabular Contract Fund value"
for each Contract year is an amount that is slightly less than the Contract Fund
value that would result as of the end of such year if only scheduled premiums
were paid, they were paid when due, the selected investment options earned a net
return at a uniform rate of 4% per year, full mortality charges based upon the
1980 CSO Table were deducted, maximum sales load and expense charges were
deducted, and there was no Contract debt.
Thus, for a Contract with no withdrawals, the death benefit will equal the face
amount if the Contract Fund equals the Tabular Contract Fund value. If, due to
investment results greater than a net return of 4%, or to payment of greater
than scheduled premiums, or to smaller than maximum charges, the Contract Fund
value is a given amount greater than the Tabular Contract Fund value, the death
benefit will be the face amount plus that excess amount. If, due to investment
results less favorable than a net return of 4%, the Contract Fund value is less
than the tabular Contract Fund value, the death benefit will not fall below the
initial face amount stated in the Contract; however, this unfavorable investment
experience must first be offset by favorable performance or additional payments
that bring the Contract Fund up to the tabular level before favorable investment
results or additional payments will increase the death benefit. Again, the death
benefit will reflect a deduction for the amount of any Contract debt. See
CONTRACT LOANS in the prospectus.
The Contract Fund could grow to the point where it is necessary to increase the
death benefit by a greater amount in order to ensure that the Contract will
satisfy the Internal Revenue Code's definition of life insurance. Thus, the
death benefit will always be the greatest of (1) the face amount plus the
Contract Fund minus the tabular Contract Fund value; (2) the guaranteed minimum
death benefit; and (3) the Contract Fund times the attained age factor that
applies.
WITHDRAWAL OF EXCESS CASH SURRENDER VALUE
Under certain circumstances, a Contract owner may withdraw a portion of the
Contract's cash surrender value without surrendering the Contract in whole or in
part. The amount that a Contract owner may withdraw is limited by the
requirement that the Contract Fund after withdrawal must not be less than the
Tabular Contract Fund value. (A Table of Tabular Contract Fund Values is
included in the Contract; the values increase with each year the Contract
remains in force.) But because the Contract Fund may be made up in part by an
outstanding Contract loan, there is a further limitation that the amount
withdrawn may not be larger than an amount sufficient to reduce the cash
surrender value to zero. The amount withdrawn must be at least $200. An owner
may make no more than four such withdrawals in each Contract year, and there is
a $15 administrative processing fee for each withdrawal. An amount withdrawn may
not be repaid except as a scheduled or unscheduled premium subject to the
applicable charges. Upon request, Pruco Life of New Jersey will tell a Contract
owner how much he or she may withdraw. Withdrawal of part of the cash surrender
value may have tax consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 3.
A temporary need for funds may also be met by making a loan and you should
consult your Pruco Life of New Jersey representative about how best to meet your
needs.
When a withdrawal is made, the cash surrender value and Contract Fund value are
reduced by the amount of the withdrawal, and the death benefit is accordingly
reduced. Neither the face amount of insurance nor the amount of scheduled
premiums will be changed due to a withdrawal of excess cash surrender value. No
surrender charges will be assessed upon a withdrawal.
Withdrawal of part of the cash surrender value increases the risk that the
Contract Fund may be insufficient to provide for benefits under the Contract. If
such a withdrawal is followed by unfavorable investment experience, the Contract
may lapse even if scheduled premiums continue to be paid when due. This is
because, for purposes of determining whether a lapse has occurred, Pruco Life of
New Jersey treats withdrawals as a return of premium.
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<PAGE>
TAX TREATMENT OF CONTRACT BENEFITS
Each prospective purchaser is urged to consult a qualified tax advisor. The
following discussion is not intended as tax advice, and it is not a complete
statement of what the effect of federal income taxes will be under all
circumstances. Rather, it provides information about how Pruco Life of New
Jersey believes the tax laws apply in the most commonly occurring circumstances.
There is no guarantee, however, that the current federal income tax laws and
regulations or interpretations will not change.
TREATMENT AS LIFE INSURANCE. The Contract will be treated as "life insurance" as
long as it satisfies certain definitional tests set forth in Section 7702 of the
Internal Revenue Code (the "Code") and as long as the underlying investments for
the Contract satisfy diversification requirements set forth in Treasury
Regulations issued pursuant to Section 817(h) of the Code.
These diversification requirements must ordinarily be met within 1 year after
Contract owner funds are first allocated to the particular portfolio of the
Series Fund, and within 30 days after the end of each calendar quarter
thereafter. Each portfolio must meet one of two alternative tests. Under the
first test, no more than 55% of the portfolio's assets can be invested in any
one investment; no more than 70% of the assets can be invested in any two
investments; no more than 80% can be invested in any three investments; and no
more than 90% can be invested in any four investments. Under the second test,
the portfolio must meet the tax law diversification requirements for a regulated
investment company and no more than 55% of the value of the portfolio's assets
can be invested in cash, cash items, Government securities, and securities of
other regulated investment companies.
For purposes of determining whether a variable account is adequately
diversified, each United States Government agency or instrumentality is treated
as a separate issuer. Compliance with diversification requirements will
generally limit the amount of assets that may be invested in federally insured
certificates of deposit and all types of securities issued or guaranteed by each
United States Government agency or instrumentality.
Pruco Life of New Jersey believes that it has taken adequate steps to cause the
Contract to be treated as life insurance for tax purposes. This means that: (1)
except as noted below, the Contract owner should not be taxed on any part of the
Contract Fund, including additions attributable to interest, dividends or
appreciation until amounts are distributed under the Contract; and (2) the death
benefit should be excludible from the gross income of the beneficiary under
section 101(a) of the Code.
However, Section 7702 of the Code, which defines life insurance for tax
purposes, gives the Secretary of the Treasury authority to prescribe regulations
to carry out the purposes of the Section. In this regard, proposed regulations
governing mortality charges were issued in 1991 and proposed regulations
relating to the definition of life insurance were issued in 1992. None of these
proposed regulations has yet been finalized. Additional regulations under
Section 7702 may also be promulgated in the future. Moreover, in connection with
the issuance of temporary regulations under Section 817(h), the Treasury
Department announced that such regulations do not provide guidance concerning
the extent to which Contract owners may direct their investments to particular
divisions of a separate account. Such guidance will be included in regulations
or rulings under Section 817(d) relating to the definition of a variable
contract.
Pruco Life of New Jersey intends to comply with final regulations issued under
sections 7702 and 817. Therefore, it reserves the right to make such changes as
it deems necessary to assure that the Contract continues to qualify as life
insurance for tax purposes. Any such changes will apply uniformly to affected
Contract owners and will be made only after advance written notice to affected
Contract owners.
PRE-DEATH DISTRIBUTIONS. The taxation of pre-death distributions depends on
whether the Contract is classified as a Modified Endowment Contract. The
following discussion first deals with distributions under Contracts not so
classified, and then with Modified Endowment Contracts.
1. A surrender or lapse of the Contract may have tax consequences. Upon
surrender, the owner will not be taxed on the cash surrender value except
for the amount, if any, that exceeds the gross premiums paid less the
untaxed portion of any prior withdrawals. The amount of any unpaid
Contract debt will, upon surrender or lapse, be added to the cash
surrender value and treated, for this purpose, as if it had been received.
Any loss incurred upon surrender is generally not deductible. The tax
consequences of a surrender may differ if the proceeds are received under
any income payment settlement option.
A withdrawal generally is not taxable unless it exceeds total premiums
paid to the date of withdrawal less the untaxed portion of any prior
withdrawals. However, under certain limited circumstances, in the first 15
Contract years all or a portion of a withdrawal may be taxable if the
Contract Fund exceeds the total premiums paid less the untaxed portion of
any prior withdrawals, even if total withdrawals do not exceed total
premiums paid to date.
Extra premiums for optional benefits and riders generally do not count in
computing gross premiums paid, which in turn determines the extent to
which a withdrawal might be taxed.
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<PAGE>
Loans received under the Contract will ordinarily be treated as
indebtedness of the owner and will not be considered to be distributions
subject to tax.
2. Some of the above rules are changed if the Contract is classified as a
Modified Endowment Contract under section 7702A of the Code. A Contract
may be classified as a Modified Endowment Contract under various
circumstances. For example, low face amount Contracts issued on younger
insureds may be classified as a Modified Endowment Contract even though
the Contract owner pays only the Scheduled Premiums or even less than the
Scheduled Premiums. Before purchasing such a Contract, you should
understand the tax treatment of pre-death distributions and consider the
purpose for which the Contract is being purchased. More generally, a
Contract may be classified as a Modified Endowment Contract if premiums in
excess of Scheduled Premiums are paid or a decrease in the face amount of
insurance is made (or a rider removed) during the first 7 Contract years.
Moreover, the addition of a rider after the Contract date may have an
impact on the Contract's status as a Modified Endowment Contract. Contract
owners contemplating any of these steps should first consult a qualified
tax advisor and their Pruco Life of New Jersey representative.
If the Contract is classified as a Modified Endowment Contract, then
pre-death distributions, including loans and withdrawals, are includible
in income to the extent that the Contract fund prior to surrender charges
exceeds the gross premiums paid for the Contract increased by the amount
of any loans previously includible in income and reduced by any untaxed
amounts previously received other than the amount of any loans excludible
from income. These rules may also apply to pre-death distributions,
including loans, made during the 2 year period prior to the Contract
becoming a Modified Endowment Contract.
In addition, pre-death distributions from such Contracts (including full
surrenders) will be subject to a penalty of 10 percent of the amount
includible in income unless the amount is distributed on or after age 59
1/2, on account of the taxpayer's disability, or as a life annuity. It is
presently unclear how the penalty tax provisions apply to Contracts owned
by nonnatural persons such as corporations.
Under certain circumstances, Modified Endowment Contracts issued during
any calendar year will be treated as a single contract for purposes of
applying the above rules.
WITHHOLDING. The taxable portions of any amounts received under the Contract
will be subject to withholding to meet federal income tax obligations if the
Contract owner fails to elect that no taxes be withheld or in certain other
circumstances. Contract owners who do not provide a social security number or
other taxpayer identification number will not be permitted to elect out of
withholding. All recipients of such amounts may be subject to penalties under
the estimated tax rules if withholding and estimated tax payments are not
sufficient.
OTHER TAX CONSIDERATIONS. Transfer of the Contract to a new owner or assignment
of the Contract may have tax consequences depending on the circumstances. In the
case of a transfer of the Contract for a valuable consideration, the death
benefit may be subject to federal income taxes under section 101(a)(2) of the
Code. In addition, a transfer of the Contract to or the designation of a
beneficiary who is either 37 1/2 years younger than the Contract owner or a
grandchild of the Contract owner may have Generation Skipping Transfer tax
consequences under Section 2601 of the Code.
In certain circumstances, deductions for interest paid or accrued on Contract
debt or on other loans that are incurred or continued to purchase or carry the
Contract may be denied under section 163 of the Code as personal interest or
under section 264 of the Code. Contract owners should consult a tax advisor
regarding the application of these provisions to their circumstances.
Business-owned life insurance is subject to additional rules. Section 264(a)(1)
of the Code generally precludes business Contract owners from deducting premium
payments. The recently enacted Health Insurance Portability and Accountability
Act of 1996 generally disallows tax deductions for interest on Contract debt on
a business-owned insurance policy effective (with certain transitional rules)
for interest paid or accrued after October 13, 1995. An exception permits the
deduction of interest on policy loans on Contracts for up to 20 key persons. The
interest deduction for Contract debt on such loans is limited to a prescribed
interest rate and a maximum aggregate loan amount of $50,000 per key insured
person. The Code also imposes an indirect tax upon additions to the Contract
fund or the receipt of death benefits under business-owned life insurance
policies under certain circumstances by way of the corporate alternative minimum
tax.
The individual situation of each Contract owner or beneficiary will determine
the federal estate taxes and the state and local estate, inheritance and other
taxes due if the owner or insured dies.
4
<PAGE>
SALE OF THE CONTRACT AND SALES COMMISSIONS
Pruco Securities Corporation ("Prusec"), an indirect wholly-owned subsidiary of
Prudential, acts as the principal underwriter of the Contract. Prusec, organized
in 1971 under New Jersey law, is registered as a broker and dealer under the
Securities Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. Prusec's principal business address is 213 Washington
Street, Newark, New Jersey 07102-2992. The Contract is sold by registered
representatives of Prusec who are also authorized by state insurance departments
to do so. The Contract may also be sold through other broker-dealers authorized
by Prusec and applicable law to do so. Registered representatives of such other
broker-dealers may be paid on a different basis than described below. Where the
insured is less than 60 years of age, the representative will generally receive
a commission of no more than 50% of the scheduled premiums for the first year,
no more than 6% of the scheduled premiums for the second through tenth years,
and no more than 2% of the scheduled premiums thereafter. For insureds over 59
years of age, the commission will be lower. The representative may be required
to return all or part of the first year commission if the Contract is not
continued through the second year. Representatives with less than 3 years of
service may be paid on a different basis.
Sales expenses in any year are not equal to the deduction for sales load in that
year. Pruco Life of New Jersey expects to recover its total sales expenses over
the periods the Contracts are in effect. To the extent that the sales charges
are insufficient to cover total sales expenses, the sales expenses will be
recovered from Pruco Life of New Jersey's surplus, which may include amounts
derived from the mortality and expense risk charge and the guaranteed minimum
death benefit risk charge described in the prospectus under DAILY DEDUCTION FROM
THE CONTRACT FUND and item (d) under MONTHLY DEDUCTIONS FROM CONTRACT FUND.
RIDERS
The Contract owner may be able to obtain extra fixed benefits which may require
an additional premium. These optional insurance benefits will be described in
what is known as a "rider" to the Contract. Charges for the riders will be
deducted from the Contract Fund on each Monthly date. One rider pays an
additional amount if the insured dies in an accident. Another waives certain
premiums if the insured is disabled within the meaning of the provision (or, in
the case of a Contract issued on an insured under the age of 15, if the
applicant dies or becomes disabled within the meaning of the provision). Others
pay an additional amount if the insured dies within a stated number of years
after issue; similar benefits may be available if the insured's child should
die. The amounts of these benefits are fully guaranteed at issue; they do not
depend on the performance of the Account. Certain restrictions may apply; they
are clearly described in the applicable rider.
Any Pruco Life of New Jersey representative authorized to sell the Contract can
explain these extra benefits further. Samples of the provisions are available
from Pruco Life of New Jersey upon written request.
OTHER STANDARD CONTRACT PROVISIONS
BENEFICIARY. The beneficiary is designated and named in the application by the
Contract owner. Thereafter, the owner may change the beneficiary, provided it is
in accordance with the terms of the Contract. Should the insured die with no
surviving beneficiary, the insured's estate will become the beneficiary.
INCONTESTABILITY. After the Contract has been in force during the insured's
lifetime for 2 years from the Contract date or, with respect to any change in
the Contract that requires Pruco Life of New Jersey's approval and could
increase its liability, after the change has been in effect during the insured's
lifetime for 2 years from the effective date of the change, Pruco Life of New
Jersey will not contest its liability under the Contract in accordance with its
terms.
MISSTATEMENT OF AGE OR SEX. If the insured's stated age or sex (except where
unisex rates apply) or both are incorrect in the Contract, Pruco Life of New
Jersey will adjust the death benefits payable, as required by law, to reflect
the correct age and sex. Any death benefit will be based on what the most recent
charge for mortality would have provided at the correct age and sex.
SUICIDE EXCLUSION. Generally, if the insured, whether sane or insane, dies by
suicide within 2 years from the Contract date, Pruco Life of New Jersey will pay
no more under the Contract than the sum of the premiums paid.
ASSIGNMENT. This Contract may not be assigned if such assignment would violate
any federal, state, or local law or regulation. Generally, the Contract may not
be assigned to an employee benefit plan or program without Pruco Life of New
Jersey's consent. Pruco Life of New Jersey assumes no responsibility for the
validity or sufficiency of any assignment, and it will not be obligated to
comply with any assignment unless it has received a copy at one of its Home
Offices.
5
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SETTLEMENT OPTIONS. The Contract grants to most owners, or to the beneficiary, a
variety of optional ways of receiving Contract proceeds, other than in a lump
sum. Any Pruco Life of New Jersey representative authorized to sell this
Contract can explain these options upon request.
INVESTMENT OBJECTIVES AND POLICIES OF
THE PORTFOLIOS
GENERAL
The Prudential Series Fund, Inc. (the "Series Fund") has fifteen separate
portfolios, two of which, the Conservative Balanced Portfolio and the Flexible
Managed Portfolio, are available to PRUVIDER Contract owners. The portfolios are
managed by The Prudential Insurance Company of America ("Prudential"), see
INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES, page 18.
Each of the portfolios seeks to achieve a different investment objective.
Accordingly, each portfolio can be expected to have different investment results
and to be subject to different financial and market risks. Financial risk refers
to the ability of an issuer of a debt security to pay principal and interest and
to the earnings stability and overall financial soundness of an issuer of an
equity security. Market risk refers to the degree to which the price of a
security will react to changes in conditions in securities markets in general,
and with particular reference to debt securities, to changes in the overall
level of interest rates.
The investment objectives of the Series Fund's portfolios that are available to
PRUVIDER Contract owners can be found under INVESTMENT OBJECTIVES AND POLICIES
OF THE PORTFOLIOS in the prospectus.
CONVERTIBLE SECURITIES
The Conservative Balanced and Flexible Managed Portfolios may invest in
convertible securities. A convertible security is a fixed-income security (a
bond or preferred stock) which may be converted at a stated price within a
specified period of time into a certain quantity of the common stock of the same
or a different issuer. Convertible securities are senior to common stocks in a
corporation's capital structure, but are usually subordinated to similar
nonconvertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from a common stock but lower than
that afforded by a similar nonconvertible security), a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in capital appreciation attendant upon a market price advance in the
convertible security's underlying common stock. The price of a convertible
security tends to increase as the market value of the underlying stock rises,
whereas it tends to decrease as the market value of the underlying stock
declines. While no securities investment is without risk, investments in
convertible securities generally entail less risk than investments in the common
stock of the same issuer.
LOAN PARTICIPATIONS
The Conservative Balanced and Flexible Managed Portfolios may invest in fixed
and floating rate loans ("Loans") arranged through private negotiations between
a corporate borrower and one or more financial institutions ("Lenders"). The
portfolios may invest in such Loans generally in the form of participations in
Loans ("Participations"). Participations typically will result in the Series
Fund having a contractual relationship only with the Lender, not with the
borrower. The Series Fund will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the Lender selling the
Participation and only upon receipt by the Lender of the payments from the
borrower. In connection with purchasing Participations, the Series Fund
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the Loan, nor any rights of set-off
against the borrower, and the Series Fund may not benefit directly from any
collateral supporting the Loan in which it has purchased the Participation. As a
result, the Series Fund will assume the credit risk of both the borrower and the
Lender that is selling the Participation. In the event of the insolvency of the
Lender selling a Participation, the Series Fund may be treated as a general
creditor of the Lender and may not benefit from any set-off between the Lender
and the borrower.
WARRANTS
The Conservative Balanced and Flexible Managed Portfolios may invest in warrants
on common stocks. Warrants are options to buy a number of shares of stock at a
predetermined price during a specified period. The risk associated with the
purchase of a warrant is that the purchase price will be lost if the market
price of the stock does not reach a level that justifies the exercise or sale of
the warrant before it expires.
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OPTIONS AND FUTURES
OPTIONS ON EQUITY SECURITIES. The Conservative Balanced and Flexible Managed
Portfolios may purchase and write (i.e., sell) put and call options on equity
securities that are traded on securities exchanges or that are listed on the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
or that result from privately negotiated transactions with broker-dealers ("OTC
options"). A call option is a short-term contract pursuant to which the
purchaser or holder, in return for a premium paid, has the right to buy the
equity security underlying the option at a specified exercise price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation, upon exercise of the option, to deliver the
underlying equity security against payment of the exercise price. A put option
is a similar contract which gives the purchaser or holder, in return for a
premium, the right to sell the underlying equity security at a specified price
during the term of the option. The writer of the put, who receives the premium,
has the obligation to buy the underlying security at the exercise price upon
exercise by the holder of the put.
A portfolio will write only "covered" options on stocks. A call option is
covered if: (1) the portfolio owns the security underlying the option; or (2)
the portfolio has an absolute and immediate right to acquire that security
without additional cash consideration (or for additional cash consideration held
in a segregated account by its custodian) upon conversion or exchange of other
securities it holds; or (3) the portfolio holds on a share-for-share basis a
call on the same security as the call written where the exercise price of the
call held is equal to or less than the exercise price of the call written or
greater than the exercise price of the call written if the difference is
maintained by the portfolio in cash, Treasury bills or other high grade
short-term debt obligations in a segregated account with its custodian. A put
option is covered if: (1) the portfolio deposits and maintains with its
custodian in a segregated account cash, U.S. Government securities or other
liquid unencumbered assets having a value equal to or greater than the exercise
price of the option; or (2) the portfolio holds on a share-for-share basis a put
on the same security as the put written where the exercise price of the put held
is equal to or greater than the exercise price of the put written or less than
the exercise price if the difference is maintained by the portfolio in cash,
Treasury bills or other high grade short-term debt obligations in a segregated
account with its custodian.
The Conservative Balanced and Flexible Managed Portfolios may also purchase
"protective puts" (i.e., put options acquired for the purpose of protecting a
portfolio security from a decline in market value). In exchange for the premium
paid for the put option, the portfolio acquires the right to sell the underlying
security at the exercise price of the put regardless of the extent to which the
underlying security declines in value. The loss to the portfolio is limited to
the premium paid for, and transaction costs in connection with, the put plus the
initial excess, if any, of the market price of the underlying security over the
exercise price. However, if the market price of the security underlying the put
rises, the profit the portfolio realizes on the sale of the security will be
reduced by the premium paid for the put option less any amount (net of
transaction costs) for which the put may be sold. Similar principles apply to
the purchase of puts on debt securities and stock indices, as described below
under OPTIONS ON DEBT SECURITIES, page 8 and OPTIONS ON STOCK INDICES, page 9.
The portfolios may purchase call options for hedging and investment purposes. No
portfolio intends to invest more than 5% of its net assets at any one time in
the purchase of call options on stocks. These portfolios may also purchase
putable and callable equity securities, which are securities coupled with a put
or a call option provided by the issuer.
If the writer of an exchange-traded option wishes to terminate the obligation,
he or she may effect a "closing purchase transaction" by buying an option of the
same series as the option previously written. Similarly, the holder of an
exchange-traded option may liquidate his or her position by exercise of the
option or by effecting a "closing sale transaction" by selling an option of the
same series as the option previously purchased. A portfolio will realize a
profit from a closing transaction if the price of the transaction is less than
the premium received from writing the option or is more than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from a closing purchase transaction with respect to a call option
is likely to be offset in whole or in part by appreciation of the underlying
equity security owned by the portfolio. Unlike exchange-traded options, OTC
options generally do not have a continuous liquid market. Consequently, the
portfolio will generally be able to realize the value of an OTC option it has
purchased only by exercising it or reselling it to the dealer who issued it.
Similarly, when the portfolio writes an OTC option, it generally will be able to
close out the OTC option prior to its expiration only by entering into a closing
purchase transaction with the dealer to which the portfolio originally wrote the
OTC option. There is, in general, no guarantee that closing purchase or closing
sale transactions can be effected.
A portfolio's use of options on equity securities is subject to certain special
risks, in addition to the risk that the market value of the security will move
adversely to the portfolio's option position. An option position may be closed
out only on an exchange, board of trade or other trading facility which provides
a secondary market for an option of the same series. Although a portfolio will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange
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will exist for any particular option, or at any particular time, and for some
options no secondary market on an exchange or otherwise may exist. In such event
it might not be possible to effect closing transactions in particular options,
with the result that the portfolio would have to exercise its options in order
to realize any profit and would incur brokerage commissions upon the exercise of
such options and upon the subsequent disposition of underlying securities
acquired through the exercise of call options or upon the purchase of underlying
securities for the exercise of put options. If a portfolio as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, which might cause an exchange to institute special
procedures that might interfere with the timely execution of customers' orders.
The purchase and sale of OTC options will also be subject to certain risks.
Unlike exchange-traded options, OTC options generally do not have a continuous
liquid market. Consequently, a portfolio will generally be able to realize the
value of an OTC option it has purchased only by exercising it or reselling it to
the dealer who issued it. Similarly, when a portfolio writes an OTC option, it
generally will be able to close out the OTC option prior to its expiration only
by entering into a closing purchase transaction with the dealer to which the
portfolio originally wrote the OTC option. While the portfolios will seek to
enter into OTC options only with dealers who agree to and which are expected to
be able to be capable of entering into closing transactions with the portfolio,
there can be no assurance that the portfolio will be able to liquidate an OTC
option at a favorable price at any time prior to expiration. In the event of
insolvency of the other party, the portfolio may be unable to liquidate an OTC
option. Prudential monitors the creditworthiness of dealers with whom the Series
Fund enters into OTC option transactions under the general supervision of the
Series Fund's Board of Directors.
OPTIONS ON DEBT SECURITIES. The Conservative Balanced and Flexible Managed
Portfolios may purchase and write (i.e., sell) put and call options on debt
securities (including U.S. Government debt securities) that are traded on U.S.
securities exchanges or that result from privately negotiated transactions with
primary U.S. Government securities dealers recognized by the Federal Reserve
Bank of New York ("over-the-counter" or "OTC" options). Options on debt are
similar to options on stock, except that the option holder has the right to take
or make delivery of a debt security, rather than stock.
A portfolio will write only "covered" options. Options on debt securities are
covered in the same manner as options on stocks, discussed above, except that,
in the case of call options on U.S. Treasury Bills, the portfolio might own U.S.
Treasury Bills of a different series from those underlying the call option, but
with a principal amount and value corresponding to the option contract amount
and a maturity date no later than that of the securities deliverable under the
call option. The principal reason for a portfolio to write an option on one or
more of its securities is to realize through the receipt of the premiums paid by
the purchaser of the option a greater current return than would be realized on
the underlying security alone. Calls on debt securities will not be written
when, in the opinion of Prudential, interest rates are likely to decline
significantly, because under those circumstances the premium received by writing
the call likely would not fully offset the foregone appreciation in the value of
the underlying security.
The portfolios may also write straddles (i.e., a combination of a call and a put
written on the same security at the same strike price where the same issue of
the security is considered "cover" for both the put and the call). In such
cases, the portfolio will also segregate or deposit for the benefit of the
portfolio's broker cash or liquid high-grade debt obligations equivalent to the
amount, if any, by which the put is "in the money." It is contemplated that each
portfolio's use of straddles will be limited to 5% of the portfolio's net assets
(meaning that the securities used for cover or segregated as described above
will not exceed 5% of the portfolio's net assets at the time the straddle is
written). The writing of a call and a put on the same security at the same
strike price where the call and the put are covered by different securities is
not considered a straddle for purposes of this limit.
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The portfolios may purchase "protective puts" in an effort to protect the value
of a security that it owns against a substantial decline in market value.
Protective puts are described above in OPTIONS ON EQUITY SECURITIES, page 7. A
portfolio may wish to protect certain portfolio securities against a decline in
market value at a time when put options on those particular securities are not
available for purchase. A portfolio may therefore purchase a put option on
securities other than those it wishes to protect even though it does not hold
such other securities in its portfolio. While changes in the value of the put
option should generally offset changes in the value of the securities being
hedged, the correlation between the two values may not be as close in these
transactions as in transactions in which the portfolio purchases a put option on
an underlying security it owns.
The portfolios may also purchase call options on debt securities for hedging or
investment purposes. No portfolio currently intends to invest more than 5% of
its net assets at any one time in the purchase of call options on debt
securities. A portfolio may also purchase putable and callable debt securities,
which are securities coupled with a put or call option provided by the issuer.
If the writer of an exchange-traded option wishes to terminate the obligation,
he or she may effect a "closing purchase transaction" or a "closing sale
transaction" in a manner similar to that discussed above in connection with
options on equity securities.
The staff of the Securities and Exchange Commission has taken the position that
purchased OTC options and the assets used as "cover" for written OTC options are
illiquid for purposes of a portfolio's 15% limitation on investment in illiquid
securities. However, pursuant to the terms of certain no-action letters issued
by the staff, the securities used as cover for written OTC options may be
considered liquid provided that the portfolio sells OTC options only to
qualified dealers who agree that the portfolio may repurchase any OTC option it
writes for a maximum price to be calculated by a predetermined formula. In such
cases, the OTC option would be considered illiquid only to the extent that the
maximum repurchase price under the formula exceeds the intrinsic value of the
option.
The use of debt options is subject to the same risks described above in
connection with stock options.
OPTIONS ON STOCK INDICES. The Conservative Balanced and Flexible Managed
Portfolios may purchase and sell put and call options on stock indices traded on
securities exchanges or listed on NASDAQ or that result from privately
negotiated transactions with broker-dealers ("OTC options"). Options on stock
indices are similar to options on stock except that rather than the right to
take or make delivery of stock at a specified price, an option on a stock index
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the stock index upon which the option is based is
greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. This amount of cash is equal to such difference
between the closing price of the index and the exercise price of the option
expressed in dollars times a specified multiple (the "multiplier"). The writer
of the option is obligated, in return for the premium received, to make delivery
of this amount. Unlike stock options, all settlements are in cash, and gain or
loss depends on price movements in the stock market generally (or in a
particular industry or segment of the market) rather than price movements in
individual stocks.
The multiplier for an index option performs a function similar to the unit of
trading for a stock option. It determines the total dollar value per Contract of
each point in the difference between the exercise price of an option and the
current level of the underlying index. A multiplier of 100 means that a
one-point difference will yield $100. Options on different indices may have
different multipliers.
The portfolios may purchase put and call options for hedging and investment
purposes. No portfolio intends to invest more than 5% of its net assets at any
one time in the purchase of puts and calls on stock indices. A portfolio may
effect closing sale and purchase transactions involving options on stock
indices, as described above in connection with stock options.
A portfolio will write only "covered" options on stock indices. A call option is
covered if the portfolio holds a portfolio of stocks at least equal to the value
of the index times the multiplier times the number of contracts. When a
portfolio writes a call option on a broadly based stock market index, the
portfolio will segregate or put into escrow with its custodian or pledge to a
broker as collateral for the option, cash, cash equivalents or "qualified
securities" (defined below) with a market value at the time the option is
written of not less than 100% of the current index value times the multiplier
times the number of contracts. If a portfolio has written an option on an
industry or market segment index, it will segregate or put into escrow with its
custodian or pledge to a broker as collateral for the option at least five
"qualified securities," all of which are stocks of issuers in such industry or
market segment, with a market value at the time the option is written of not
less than 100% of the current index value times the multiplier times the number
of contracts. Such stocks will include stocks which represent at least 50% of
the weighting of the industry or market segment index and will represent at
least 50% of the portfolio's holdings in that industry or market segment. No
individual security will represent more than 15% of the amount so segregated,
pledged or escrowed in the case of broadly based stock market index options or
25% of such amount in the case of industry or market segment index options. If
at the close of business on any day the market
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value of such qualified securities so segregated, escrowed or pledged falls
below 100% of the current index value times the multiplier times the number of
contracts, the portfolio will so segregate, escrow or pledge an amount in cash,
Treasury bills or other high-grade short-term obligations equal in value to the
difference. In addition, when a portfolio writes a call on an index which is
in-the-money at the time the call is written, the portfolio will segregate with
its custodian or pledge to the broker as collateral, cash, U.S. Government or
other liquid unencumbered assets equal in value to the amount by which the call
is in-the-money times the multiplier times the number of contracts. Any amount
segregated pursuant to the foregoing sentence may be applied to the portfolio's
obligation to segregate additional amounts in the event that the market value of
the qualified securities falls below 100% of the current index value times the
multiplier times the number of contracts. A "qualified security" is an equity
security which is listed on a securities exchange or NASDAQ against which the
portfolio has not written a stock call option and which has not been hedged by
the portfolio by the sale of stock index futures. However, if the portfolio
holds a call on the same index as the call written where the exercise price of
the call held is equal to or less than the exercise price of the call written or
greater than the exercise price of the call written if the difference is
maintained by the portfolio in cash, Treasury bills or other high-grade
short-term obligations in a segregated account with its custodian, it will not
be subject to the requirement described in this paragraph.
A put option is covered if: (1) the portfolio holds in a segregated account
cash, Treasury bills or other high-grade short-term debt obligations of a value
equal to the strike price times the multiplier times the number of contracts; or
(2) the portfolio holds a put on the same index as the put written where the
strike price of the put held is equal to or greater than the strike price of the
put written or less than the strike price of the put written if the difference
is maintained by the portfolio in cash, Treasury bills or other liquid
unencumbered assets in a segregated account with its custodian. In instances
involving the purchase of futures contracts by a portfolio, an amount of cash
and cash equivalents, equal to the market value of the futures contracts, will
be deposited in a segregated account with the portfolio's custodian and/or in a
margin account with a broker to collateralize the position and thereby ensure
that the use of such futures is unleveraged.
The purchase and sale of options on stock indices will be subject to the risks
described above under OPTIONS ON EQUITY SECURITIES, page 7. In addition, the
distinctive characteristics of options on indices create certain risks that are
not present with stock options. Index prices may be distorted if trading of
certain stocks included in the index is interrupted. Trading in the index
options also may be interrupted in certain circumstances, such as if trading
were halted in a substantial number of stocks included in the index. If this
occurred, a portfolio would not be able to close out options which it had
purchased or written and, if restrictions on exercise were imposed, might be
unable to exercise an option it holds, which could result in substantial losses
to the portfolio. It is the policy of the portfolios to purchase or write
options only on stock indices which include a number of stocks sufficient to
minimize the likelihood of a trading halt in options on the index.
The ability to establish and close out positions on such options will be subject
to the development and maintenance of a liquid secondary market. A portfolio
will not purchase or sell any index option contract unless and until, in its
manager's opinion, the market for such options has developed sufficiently that
the risk in connection with such transactions is no greater than the risk in
connection with options on stocks.
There are certain special risks associated with writing calls on stock indices.
Because exercises of index options are settled in cash, a call writer such as a
portfolio cannot determine the amount of its settlement obligations in advance
and, unlike call writing on specific stocks, cannot precisely provide in advance
for, or cover, its potential settlement obligations by acquiring and holding the
underlying securities. The portfolios, however, will follow the "cover"
procedures described above.
Price movements in a portfolio's equity security portfolio probably will not
correlate precisely with movements in the level of the index and, therefore, in
writing a call on a stock index a portfolio bears the risk that the price of the
securities held by the portfolio may not increase as much as the index. In such
event, the portfolio would bear a loss on the call which is not completely
offset by movement in the price of the portfolio's equity securities. It is also
possible that the index may rise when the portfolio's securities do not rise in
value. If this occurred, the portfolio would experience a loss on the call which
is not offset by an increase in the value of its securities portfolio and might
also experience a loss in its securities portfolio. However, because the value
of a diversified securities portfolio will, over time, tend to move in the same
direction as the market, movements in the value of a portfolio's securities in
the opposite direction as the market would be likely to occur for only a short
period or to a small degree.
When a portfolio has written a call, there is also a risk that the market may
decline between the time the portfolio has a call exercised against it, at a
price which is fixed as of the closing level of the index on the date of the
exercise, and the time the portfolio is able to sell stocks in its portfolio. As
with stock options, a portfolio will not learn that an index option has been
exercised until the day following the exercise date but, unlike a call on stock
where the portfolio would be able to deliver the underlying securities in
settlement, the portfolio may have to sell part of its stock portfolio in order
to make settlement in cash, and the price of such stocks might decline before
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they can be sold. This timing risk makes certain strategies involving more than
one option substantially more risky with options in stock indices than with
stock options. For example, even if an index call which a portfolio has written
is "covered" by an index call held by the portfolio with the same strike price,
the portfolio will bear the risk that the level of the index may decline between
the close of trading on the date the exercise notice is filed with the clearing
corporation and the close of trading on the date the portfolio exercises the
call it holds or the time the portfolio sells the call, which in either case
would occur no earlier than the day following the day the exercise notice was
filed.
There are also certain special risks involved in purchasing put and call options
on stock indices. If a portfolio holds an index option and exercises it before
final determination of the closing index value for that day, it runs the risk
that the level of the underlying index may change before closing. If such a
change causes the exercised option to fall out-of-the-money, the portfolio will
be required to pay the difference between the closing index value and the
exercise price of the option (times the applicable multiplier) to the assigned
writer. Although the portfolio may be able to minimize the risk by withholding
exercise instructions until just before the daily cutoff time or by selling
rather than exercising an option when the index level is close to the exercise
price, it may not be possible to eliminate this risk entirely because the cutoff
times for index options may be earlier than those fixed for other types of
options and may occur before definitive closing index values are announced.
OPTIONS ON FOREIGN CURRENCIES. The Conservative Balanced and Flexible Managed
Portfolios may purchase and write put and call options on foreign currencies
traded on U.S. or foreign securities exchanges or boards of trade for hedging
purposes in a manner similar to that in which forward foreign currency exchange
contracts (see FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS, page 15) and futures
contracts on foreign currencies (discussed under FUTURES CONTRACTS, page 11)
will be employed. Options on foreign currencies are similar to options on stock,
except that the option holder has the right to take or make delivery of a
specified amount of foreign currency, rather than stock.
A portfolio may purchase and write options to hedge the portfolio's securities
denominated in foreign currencies. If there is a decline in the dollar value of
a foreign currency in which the portfolio's securities are denominated, the
dollar value of such securities will decline even though the foreign currency
value remains the same. To hedge against the decline of the foreign currency, a
portfolio may purchase put options on such foreign currency. If the value of the
foreign currency declines, the gain realized on the put option would offset, in
whole or in part, the adverse effect such decline would have on the value of the
portfolio's securities. Alternatively, a portfolio may write a call option on
the foreign currency. If the foreign currency declines, the option would not be
exercised and the decline in the value of the portfolio securities denominated
in such foreign currency would be offset in part by the premium the portfolio
received for the option.
If, on the other hand, the portfolio manager anticipates purchasing a foreign
security and also anticipates a rise in such foreign currency (thereby
increasing the cost of such security), the portfolio may purchase call options
on the foreign currency. The purchase of such options could offset, at least
partially, the effects of the adverse movements of the exchange rates.
Alternatively, a portfolio could write a put option on the currency and, if the
exchange rates move as anticipated, the option would expire unexercised.
A portfolio's successful use of currency exchange options on foreign currencies
depends upon the manager's ability to predict the direction of the currency
exchange markets and political conditions, which requires different skills and
techniques than predicting changes in the securities markets generally. For
instance, if the currency being hedged has moved in a favorable direction, the
corresponding appreciation of the portfolio's securities denominated in such
currency would be partially offset by the premiums paid on the options. Further,
if the currency exchange rate does not change, the portfolio net income would be
less than if the portfolio had not hedged since there are costs associated with
options.
The use of these options is subject to various additional risks. The correlation
between movements in the price of options and the price of the currencies being
hedged is imperfect. The use of these instruments will hedge only the currency
risks associated with investments in foreign securities, not market risks. The
portfolio's ability to establish and maintain positions will depend on market
liquidity. The ability of the portfolio to close out an option depends upon a
liquid secondary market. There is no assurance that liquid secondary markets
will exist for any particular option at any particular time.
Because there are two currencies involved, developments in either or both
countries can affect the values of options on foreign currencies. In addition,
the quantities of currency underlying option contracts represent odd lots in a
market dominated by transactions between banks; this can mean extra transaction
costs upon exercise. Option markets may be closed while round-the-clock
interbank currency markets are open, and this can create price and rate
discrepancies.
FUTURES CONTRACTS. The Conservative Balanced and Flexible Managed Portfolios
may, to the extent permitted by applicable regulations, attempt to reduce the
risk of investment in equity securities by hedging a portion of their
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equity portfolios through the use of stock index futures contracts. A stock
index futures contract is an agreement in which the seller of the contract
agrees to deliver to the buyer an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made.
The Conservative Balanced and Flexible Managed Portfolios may, to the extent
permitted by applicable regulations, purchase and sell for hedging purpose
futures contracts on interest-bearing securities (such as U.S. Treasury bonds
and notes) or interest rate indices (referred to collectively as "interest rate
futures contracts").
The Conservative Balanced and Flexible Managed Portfolios may, to the extent
permitted by applicable regulations, purchase and sell futures contracts on
foreign currencies or groups of foreign currencies for hedging purposes.
When the futures contract is entered into, each party deposits with a futures
commission merchant (or in a segregated custodial account) approximately 5% of
the contract amount, called the "initial margin." Subsequent payments to and
from the futures commission merchant, called the "variation margin," will be
made on a daily basis as the underlying security, index or rate fluctuates
making the long and short positions in the futures contracts more or less
valuable, a process known as "marking to the market." The Board of Directors
currently intends to limit futures trading for hedging purposes so that a
portfolio will not enter into futures contracts or related options if the
aggregate initial margins and premiums exceed 5% of the fair market value of its
assets, after taking into account unrealized profits and unrealized losses on
any such contracts and options.
In addition, as permitted by applicable regulations, the Conservative Balanced
and Flexible Managed Portfolios may purchase and sell stock index futures
contracts and interest rate futures contracts to adjust the portfolio's asset
mix. For example, if the investment manager expects bonds to outperform stocks,
it may purchase interest rate futures contracts rather than actually selling
stocks and buying bonds. Neither portfolio will enter into futures contracts or
related options for this purpose if the aggregate initial margins and premiums
for futures and options for this purpose exceed 5% of the fair market of that
portfolio's assets, taking into account unrealized profits and unrealized losses
on any such futures and options.
A portfolio's successful use of futures contracts depends upon the investment
manager's ability to predict the direction of the relevant market. The
correlation between movement in the price of the futures contract and the price
of the securities or currencies being hedged is imperfect. The ability of a
portfolio to close out a futures position depends on a liquid secondary market.
There is no assurance that liquid secondary markets will exist for any
particular futures contract at any particular time.
There are several additional risks associated with a portfolio's use of futures
contracts for hedging purposes. One such risk arises because of imperfect
correlation between movements in the price of the futures contract and the price
of the securities or currency that are the subject of the hedge. In the case of
futures contracts on stock or interest rate indices, the correlation between the
price of the futures contract and movements in the index might not be perfect.
To compensate for differences in historical volatility, a portfolio could
purchase or sell future contracts with a greater or lesser value than the
securities or currency it wished to hedge or purchase. In addition, temporary
price distortions in the futures market could be caused by a variety of factors.
Further, the ability of a portfolio to close out a futures position depends on a
liquid secondary market. There is no assurance that a liquid secondary market on
an exchange will exist for any particular futures contract at any particular
time. Further, each portfolio's successful use of futures contracts is to some
extent dependent on the ability of the portfolio manager to predict correctly
movements in the direction of the market, interest rates and/or currency
exchange rates.
In addition, the hours of trading of futures contracts may not conform to the
hours during which the portfolio may trade the underlying securities and/or
currency. To the extent that the futures markets close before the securities or
currency markets, significant price and rate movements can take place in the
securities and/or currency markets that cannot be reflected in the futures
markets.
OPTIONS ON FUTURES CONTRACTS. To the extent permitted by applicable insurance
law and federal regulations, the Conservative Balanced and Flexible Managed
Portfolios may enter into certain transactions involving options on stock index
futures contracts, options on interest rate futures contracts, and options on
foreign currency futures contracts. An option on a futures contract gives the
purchaser or holder the right, but not the obligation, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put) at a specified price at any time during the option
exercise period. The writer of the option is required upon exercise to assume an
offsetting futures position (a short position if the option is a call and a long
position if the option is a put). Upon exercise of the option, the assumption of
offsetting futures positions by the writer and holder of the option will be
accomplished by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the futures contract.
As an alternative to exercise, the holder or writer of an option may terminate a
position by selling or purchasing an option of the
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securities being hedged, and the risk that there might not be a liquid secondary
market for the option. There is also the risk of imperfect correlation between
the option and the underlying futures contract. If there were no liquid
secondary market for a particular option on a futures contract, the portfolio
might have to exercise an option it held in order to realize any profit and
might continue to be obligated under an option it had written until the option
expired or was exercised. If the portfolio were unable to close out an option it
had written on a futures contract, it would continue to be required to maintain
initial margin and make variation margin payments with respect to the option
position until the option expired or was exercised against the portfolio.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
From time to time, in the ordinary course of business, the Conservative Balanced
and Flexible Managed Portfolios may purchase or sell securities on a when-issued
or delayed delivery basis, that is, delivery and payment can take place a month
or more after the date of the transaction. The portfolios will limit such
purchases to those in which the date for delivery and payment falls within 120
days of the date of the commitment. A portfolio will make commitments for such
when-issued transactions only with the intention of actually acquiring the
securities. A portfolio's custodian will maintain, in a separate account, cash,
U.S. Government securities or other liquid unencumbered assets having a value
equal to or greater than such commitments. If a portfolio chooses to dispose of
the right to acquire a when-issued security prior to its acquisition, it could,
as with the disposition of any other portfolio security, incur a gain or loss
due to market fluctuations.
In addition, the short-term portions of the portfolios may purchase money market
securities on a when-issued or delayed delivery basis on the terms set forth
under item 6 in SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO MAY CURRENTLY
INVEST, page 22.
SHORT SALES
The Conservative Balanced and Flexible Managed Portfolios may sell securities
they do not own in anticipation of a decline in the market value of those
securities ("short sales"). To complete such a transaction, the portfolio will
borrow the security to make delivery to the buyer. The portfolio is then
obligated to replace the security borrowed by purchasing it at the market price
at the time of replacement. The price at such time may be more or less than the
price at which the security was sold by the portfolio. Until the security is
replaced, the portfolio is required to pay to the lender any interest which
accrues during the period of the loan. To borrow the security the portfolio may
be required to pay a fee which would increase the cost of the security sold. The
proceeds of the short sale will be retained by the broker to the extent
necessary to meet margin requirements until the short position is closed out.
Until the portfolio replaces the borrowed security, it will (a) maintain in a
segregated account cash, U.S. Government or other liquid unencumbered assets
securities at such a level that the amount deposited in the account plus the
amount deposited with the broker as collateral will equal the current market
value of the security sold short and will not be less than the market value of
the security at the time it was sold short or (b) otherwise cover its short
position.
The portfolio will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the portfolio replaces the borrowed security. The portfolio will realize a gain
if the security declines in price between those dates. This result is the
opposite of what one would expect from a cash purchase of a long position in a
security. The amount of any gain will be decreased, and the amount of any loss
will be increased, by the amount of any fee or interest paid in connection with
the short sale. No more than 25% of any portfolio's net assets will be, when
added together: (i) deposited as collateral for the obligation to replace
securities borrowed to effect short sales and (ii) allocated to segregated
accounts in connection with short sales.
SHORT SALES AGAINST THE BOX
The portfolios may make short sales of securities or maintain a short position,
provided that at all times when a short position is open the portfolio owns an
equal amount of such securities or securities convertible into or exchangeable,
with or without payment of any further consideration, for an equal amount of the
securities of the same issuer as the securities sold short (a "short sale
against the box"); provided, that if further consideration is required in
connection with the conversion or exchange, cash, U.S. Government securities or
other liquid unencumbered assets in an amount equal to such consideration must
be put in a segregated account.
INTEREST RATE SWAPS
The fixed income portions of the Conservative Balanced and Flexible Managed
Portfolios may use interest rate swaps to increase or decrease a portfolio's
exposure to long- or short-term interest rates. No portfolio currently intends
to invest more than 5% of its net assets at any one time in interest rate swaps.
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Interest rate swaps, in their most basic form, involve the exchange by a
portfolio with another party of their respective commitments to pay or receive
interest. For example, a portfolio might exchange its right to receive certain
floating rate payments in exchange for another party's right to receive fixed
rate payments. Interest rate swaps can take a variety of other forms, such as
agreements to pay the net differences between two different indices or rates,
even if the parties do not own the underlying instruments. Despite their
differences in form, the function of interest rate swaps is generally the same -
to increase or decrease a portfolio's exposure to long- or short-term interest
rates. For example, a portfolio may enter into a swap transaction to preserve a
return or spread on a particular investment or a portion of its portfolio or to
protect against any increase in the price of securities the portfolio
anticipates purchasing at a later date.
The use of swap agreements is subject to certain risks. As with options and
futures, if the investment manager's prediction of interest rate movements is
incorrect, the portfolio's total return will be less than if the portfolio had
not used swaps. In addition, if the counterparty's creditworthiness declines,
the value of the swap would likely decline. Moreover, there is no guarantee that
a portfolio could eliminate its exposure under an outstanding swap agreement by
entering into an offsetting swap agreement with the same or another party.
A portfolio will maintain appropriate liquid assets in a segregated custodial
account to cover its current obligations under swap agreements. If a portfolio
enters into a swap agreement on a net basis, it will segregate assets with a
daily value at least equal to the excess, if any, of the portfolio's accrued
obligations under the swap agreement over the accrued amount the portfolio is
entitled to receive under the agreement. If a portfolio enters into a swap
agreement on other than a net basis, it will segregate assets with a value equal
to the full amount of the portfolio's accrued obligations under the agreement.
LOANS OF PORTFOLIO SECURITIES
The portfolios may from time to time lend the securities they hold to
broker-dealers, provided that such loans are made pursuant to written agreements
and are continuously secured by collateral in the form of cash, U.S. Government
securities or irrevocable standby letters of credit in an amount equal to at
least the market value at all times of the loaned securities plus the accrued
interest and dividends. During the time securities are on loan, the portfolio
will continue to receive the interest and dividends or amounts equivalent
thereto on the loaned securities while receiving a fee from the borrower or
earning interest on the investment of the cash collateral. The right to
terminate the loan will be given to either party subject to appropriate notice.
Upon termination of the loan, the borrower will return to the lender securities
identical to the loaned securities. The portfolio will not have the right to
vote securities on loan, but would terminate the loan and retain the right to
vote if that were considered important with respect to the investment.
The primary risk in lending securities is that the borrower may become insolvent
on a day on which the loaned security is rapidly advancing in price. In such
event, if the borrower fails to return the loaned securities, the existing
collateral might be insufficient to purchase back the full amount of the
security loaned, and the borrower would be unable to furnish additional
collateral. The borrower would be liable for any shortage; but the portfolio
would be an unsecured creditor with respect to such shortage and might not be
able to recover all or any of it. However, this risk may be minimized by a
careful selection of borrowers and securities to be lent and by monitoring
collateral.
No portfolio will lend securities to broker-dealers affiliated with Prudential,
including Prudential Securities Incorporated. This will not affect a portfolio's
ability to maximize its securities lending opportunities.
ILLIQUID SECURITIES
The portfolios may hold up to 15% of its net assets in illiquid securities.
Illiquid securities are those which may not be sold in the ordinary course of
business within seven days at approximately the value at which the portfolio has
valued them. Variable and floating rate instruments that cannot be disposed of
within seven days and repurchase agreements with a maturity of greater than
seven days are considered illiquid.
The portfolios may purchase securities which are not registered under the
Securities Act of 1933 but which can be sold to qualified institutional buyers
in accordance with Rule 144A under that Act. Any such security will not be
considered illiquid so long as it is determined by the adviser, acting under
guidelines approved and monitored by the Board of Directors, that an adequate
trading market exists for that security. In making that determination, the
adviser will consider, among other relevant factors: (1) the frequency of trades
and quotes for the security; (2) the number of dealers willing to purchase or
sell the security and the number of other potential purchasers; (3)
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dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades. A portfolio's treatment of
Rule 144A securities as liquid could have the effect of increasing the level of
portfolio illiquidity to the extent that qualified institutional buyers become,
for a time, uninterested in purchasing these securities. In addition, the
adviser, acting under guidelines approved and monitored by the Board of
Directors, may conditionally determine, for purposed of the 15% test, that
certain commercial paper issued in reliance on the exemption from registration
in Section 4(2) of the Securities Act of 1933 will not be considered illiquid,
whether or not it may be resold under Rule 144A. To make that determination, the
following conditions must be met: (1) the security must not be traded flat or in
default as to principal or interest; (2) the security must be rated in one of
the two highest rating categories by at least two nationally recognized
statistical rating organizations ("NRSROs"), or if only one NRSRO rates the
security, by that NRSRO; if the security is unrated, the adviser must determine
that the security is of equivalent quality; and (3) the adviser must consider
the trading market for the specific security, taking into account all relevant
factors. The adviser will continue to monitor the liquidity of any Rule 144A
security or any Section 4(2) commercial paper which has been determined to be
liquid and, if a security is no longer liquid because of changed conditions, the
holdings of illiquid securities will be reviewed to determine if any steps are
required to assure that the 15% test continues to be satisfied.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
To the extent permitted by applicable insurance law, the Conservative Balanced
and Flexible Managed Portfolios may purchase securities denominated in foreign
currencies. To address the currency fluctuation risk that such investments
entail, these portfolios may enter into forward foreign currency exchange
contracts in several circumstances. When a portfolio enters into a contract for
the purchase or sale of a security denominated in a foreign currency, or when a
portfolio anticipates the receipt in a foreign currency of dividends or interest
payments on a security which it holds, the portfolio may desire to "lock-in" the
U.S. dollar price of the security or the U.S. dollar equivalent of such dividend
or interest payment, as the case may be. By entering into a forward contract for
a fixed amount of dollars, for the purchase or sale of the amount of foreign
currency involved in the underlying transactions, the portfolio will be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date on which the security is purchased or sold, or on which
the dividend or interest payment is declared, and the date on which such
payments are made or received.
Additionally, when a portfolio's manager believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the portfolio may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of the portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of those securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. The portfolios will not enter into such
forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate a portfolio to deliver an amount of
foreign currency in excess of the value of the securities or other assets
denominated in that currency held by the portfolio. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the long-term investment decisions made with regard to overall diversification
strategies. However, the portfolios believe that it is important to have the
flexibility to enter into such forward contracts when it is determined that the
best interests of the portfolios will thereby be served.
The portfolios generally will not enter into a forward contract with a term of
greater than 1 year. At the maturity of a forward contract, a portfolio may
either sell the portfolio security and make delivery of the foreign currency or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly, it
may be necessary for a portfolio to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency that the portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.
If a portfolio retains the portfolio security and engages in an offsetting
transaction, the portfolio will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. Should
forward prices decline during the period between the portfolio's entering into a
forward contract for the sale of a foreign currency and the date it enters into
an offsetting contract for the purchase of the foreign currency, the portfolio
will realize a gain to the extent that the price of the currency it has agreed
to sell exceeds the price of
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the currency it has agreed to purchase. Should forward prices increase, the
portfolio will suffer a loss to the extent that the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The portfolios' dealing in forward foreign currency exchange contracts will be
limited to the transactions described above. Of course, the portfolios are not
required to enter into such transactions with regard to their foreign
currency-denominated securities. It also should be realized that this method of
protecting the value of the portfolio securities against a decline in the value
of a currency does not eliminate fluctuations in the underlying prices of the
securities which are unrelated to exchange rates. Additionally, although such
contracts tend to minimize the risk of loss due to a decline in the value of the
hedge currency, at the same time they tend to limit any potential gain which
might result should the value of such currency increase.
Although the portfolios value their assets daily in terms of U.S. dollars, they
do not intend physically to convert their holdings of foreign currencies into
U.S. dollars on a daily basis. They will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to a portfolio at one rate, while offering a lesser rate of exchange should the
portfolio desire to resell that currency to the dealer.
INVESTMENT RESTRICTIONS
Set forth below are certain investment restrictions applicable to the
portfolios. Restrictions 1, 3, 5, and 8-11 are fundamental and may not be
changed without shareholder approval as required by the 1940 Act. Restrictions
2, 4, 6, 7, and 12 are not fundamental and may be changed by the Board of
Directors without shareholder approval.
Neither of the portfolios available to PRUVIDER Contract owners will:
1. Buy or sell real estate and mortgages, although the portfolios may buy and
sell securities that are secured by real estate and securities of real
estate investment trusts and of other issuers that engage in real estate
operation. Buy or sell commodities or commodities contracts, except that
the Conservative Balanced and Flexible Managed Portfolios may purchase and
sell stock index futures contracts and related options, purchase and sell
interest rate futures contracts and related options, and purchase and sell
foreign currency futures contracts and related options and forward foreign
currency exchange contracts.
2. Except as part of a merger, consolidation, acquisition or reorganization,
invest more than 5% of the value of its total assets in the securities of
any one investment company or more than 10% of the value of its total
assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting
securities of any one investment company.
3. Acquire securities for the purpose of exercising control or management of
any company except in connection with a merger, consolidation, acquisition
or reorganization.
4. Make short sales of securities or maintain a short position, except that
the Conservative Balanced and Flexible Managed Portfolios may sell
securities short up to 25% of their net assets and may make short sales
against the box. Collateral arrangements entered into with respect to
options, futures contracts and forward contracts are not deemed to be short
sales. Collateral arrangements entered into with respect to interest rate
swap agreements are not deemed to be short sales.
5. Purchase securities on margin or otherwise borrow money or issue senior
securities except that the fixed income portions of the Conservative
Balanced and Flexible Managed Portfolios may enter into reverse repurchase
agreements, dollar rolls and may purchase securities on a when-issued and
delayed delivery basis; except that the money market portion of any
portfolio may enter into reverse repurchase agreements and may purchase
securities on a when-issued and delayed delivery basis; and except that the
Conservative Balanced and Flexible Managed Portfolios may purchase
securities on a when-issued or a delayed delivery basis. The Series Fund
may also obtain such short-term credit as it needs for the clearance of
securities transactions and may borrow from a bank for the account of any
portfolio as a temporary measure to facilitate redemptions (but not for
leveraging or investment) or to exercise an option, an amount that does not
exceed 5% of the value of the portfolio's total assets (including the
amount owed as a result of the borrowing) at the time the borrowing is
made. Interest paid on borrowings will not be available for investment.
Collateral arrangements with respect to futures contracts and options
thereon and forward foreign currency exchange contracts (as permitted by
restriction no.1) are not deemed to be the issuance of a senior security or
the purchase of a security on margin. Collateral arrangements with respect
to the writing of options on debt securities, equity securities, stock
indices and foreign currencies by the Conservative Balanced and Flexible
Managed Portfolios are not deemed to be the issuance of a senior security
or the purchase of a security on margin. Collateral arrangements entered
into by the Conservative Balanced and Flexible Managed Portfolios with
respect to
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interest rate swap agreements are not deemed to be the issuance of a senior
security or the purchase of a security on margin.
6. Enter into reverse repurchase agreements if, as a result, the portfolio's
obligations with respect to reverse repurchase agreements would exceed 10%
of the portfolio's net assets (defined to mean total assets at market value
less liabilities other than reverse repurchase agreements); except that the
fixed income portions of the Conservative Balanced and Flexible Managed
Portfolios may enter into reverse repurchase agreements and dollar rolls
provided that the portfolio's obligations with respect to those instruments
do not exceed 30% of the portfolio's net assets (defined to mean total
assets at market value less liabilities other than reverse repurchase
agreements and dollar rolls).
7. Pledge or mortgage assets, except that no more than 10% of the value of any
portfolio may be pledged (taken at the time the pledge is made) to secure
authorized borrowing and except that a portfolio may enter into reverse
repurchase agreements. Collateral arrangements entered into with respect to
futures and forward contracts and the writing of options are not deemed to
be the pledge of assets. Collateral arrangements entered into with respect
to interest rate swap agreements are not deemed to be the pledge of assets.
8. Lend money, except that loans of up to 10% of the value of each portfolio
may be made through the purchase of privately placed bonds, debentures,
notes, and other evidences of indebtedness of a character customarily
acquired by institutional investors that may or may not be convertible into
stock or accompanied by warrants or rights to acquire stock. Repurchase
agreements and the purchase of publicly traded debt obligations are not
considered to be "loans" for this purpose and may be entered into or
purchased by a portfolio in accordance with its investment objectives and
policies.
9. Underwrite the securities of other issuers, except where the Series Fund
may be deemed to be an underwriter for purposes of certain federal
securities laws in connection with the disposition of portfolio securities
and with loans that a portfolio may make pursuant to item 8 above.
10. Make an investment unless, when considering all its other investments, 75%
of the value of a portfolio's assets would consist of cash, cash items,
obligations of the United States Government, its agencies or
instrumentalities, and other securities. For purposes of this restriction,
"other securities" are limited for each issuer to not more than 5% of the
value of a portfolio's assets and to not more than 10% of the issuer's
outstanding voting securities held by the Series Fund as a whole. Some
uncertainty exists as to whether certain of the types of bank obligations
in which a portfolio may invest, such as certificates of deposit and
bankers' acceptances, should be classified as "cash items" rather than
"other securities" for purposes of this restriction, which is a
diversification requirement under the 1940 Act. Interpreting most bank
obligations as "other securities" limits the amount a portfolio may invest
in the obligations of any one bank to 5% of its total assets. If there is
an authoritative decision that any of these obligations are not
"securities" for purposes of this diversification test, this limitation
would not apply to the purchase of such obligations.
11. Purchase securities of a company in any industry if, as a result of the
purchase, a portfolio's holdings of securities issued by companies in that
industry would exceed 25% of the value of the portfolio, except that this
restriction does not apply to purchases of obligations issued or guaranteed
by the U.S. Government, its agencies and instrumentalities or issued by
domestic banks. For purposes of this restriction, neither finance companies
as a group nor utility companies as a group are considered to be a single
industry and will be grouped instead according to their services; for
example, gas, electric, and telephone utilities will each be considered a
separate industry. For purposes of this exception, domestic banks shall
include all banks which are organized under the laws of the United States
or a state (as defined in the 1940 Act), U.S. branches of foreign banks
that are subject to the same regulations as U.S. banks and foreign branches
of domestic banks (as permitted by the SEC). This restriction shall not
apply to mortgage-backed securities, collateralized mortgage obligations or
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
12. Invest more than 15% of its net assets in illiquid securities. For purposes
of this restriction, illiquid securities are those deemed illiquid pursuant
to SEC regulations and guidelines, as they may be revised from time to
time.
The investments of the various portfolios are generally subject to certain
additional restrictions under the laws of the State of New Jersey. In the event
of future amendments to the applicable New Jersey statutes, each portfolio will
comply, without the approval of the shareholders, with the statutory
requirements as so modified. The pertinent provisions of New Jersey law as they
stand are, in summary form, as follows:
1. An Account may not purchase any evidence of indebtedness issued, assumed or
guaranteed by any institution created or existing under the laws of the
U.S., any U.S. state or territory, District of Columbia, Puerto Rico,
Canada or any Canadian province, if such evidence of indebtedness is in
default as to interest. "Institution"
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includes any corporation, joint stock association, business trust, business
joint venture, business partnership, savings and loan association, credit
union or other mutual savings institution.
2. The stock of a corporation may not be purchased unless: (i) the corporation
has paid a cash dividend on the class of stock during each of the past 5
years preceding the time of purchase; or (ii) during the 5-year period the
corporation had aggregate earnings available for dividends on such class of
stock sufficient to pay average dividends of 4% per annum computed upon the
par value of such stock or upon stated value if the stock has no par value.
This limitation does not apply to any class of stock which is preferred as
to dividends over a class of stock whose purchase is not prohibited.
3. Any common stock purchased must be: (i) listed or admitted to trading on a
securities exchange in the United States or Canada; or (ii) included in the
National Association of Securities Dealers' national price listings of
"over-the-counter" securities; or (iii) determined by the Commissioner of
Insurance of New Jersey to be publicly held and traded and have market
quotations available.
4. Any security of a corporation may not be purchased if after the purchase
more than 10% of the market value of the assets of a portfolio would be
invested in the securities of such corporation.
As a result of these currently applicable requirements of New Jersey law, which
impose substantial limitations on the ability of the Series Fund to invest in
the stock of companies whose securities are not publicly traded or who have not
recorded a 5-year history of dividend payments or earnings sufficient to support
such payments, the portfolios will not generally hold the stock of newly
organized corporations. Nonetheless, an investment not otherwise eligible under
items 1 or 2 above may be made if, after giving effect to the investment, the
total cost of all such non-eligible investments does not exceed 5% of the
aggregate market value of the assets of the portfolio.
Investment limitations also arise under the insurance laws and regulations of
Arizona and may arise under the laws and regulations of other states. Although
compliance with the requirements of New Jersey law set forth above will
ordinarily result in compliance with any applicable laws of other states, under
some circumstances the laws of other states could impose additional restrictions
on the portfolios. For example, the Series Fund will generally invest no more
than 10% of its assets in the obligations of banks of the foreign countries
described in item 2 of SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO MAY
CURRENTLY INVEST, page 22. In addition, the Series Fund adheres to additional
restrictions relating to such practices as the lending of securities, borrowing,
and the purchase of put and call options, futures contracts, and derivative
instruments on securities to comply with investment guidelines issued by the
California Department of Insurance.
Current federal income tax laws require that the assets of each portfolio be
adequately diversified so that Prudential and other insurers with separate
accounts which invest in the Series Fund and not the Contract owners, are
considered the owners of assets held in the Account for federal income tax
purposes. See TAX TREATMENT OF CONTRACT BENEFITS, page 3. Prudential intends to
maintain the assets of each portfolio pursuant to those diversification
requirements.
INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES
The Series Fund and Prudential have entered into an Investment Advisory
Agreement under which Prudential will, subject to the direction of the Board of
Directors of the Series Fund, be responsible for the management of the Series
Fund, and provide investment advice and related services to each portfolio. As
noted in the prospectus, Prudential has also entered into a Service Agreement
with its wholly-owned subsidiary, The Prudential Investment Corporation ("PIC"),
which provides that PIC will furnish to Prudential such services as Prudential
may require in connection with Prudential's performance of its obligations under
the Investment Advisory Agreement.
Under the Investment Advisory Agreement, Prudential receives an investment
management fee as compensation for its services to the Series Fund. The fee is a
daily charge, payable quarterly, equal to an annual percentage of the average
daily net assets of each individual portfolio.
The investment management fee for the Conservative Balanced Portfolio is equal
to an annual rate of 0.55% of the average daily net assets of each of the
portfolios. For the Flexible Managed Portfolio, the fee is equal to an annual
rate of 0.6% of the average daily net assets of the portfolio.
The Investment Advisory Agreement requires Prudential to pay for maintaining any
Prudential staff and personnel who perform clerical, accounting, administrative,
and similar services for the Series Fund, other than investor services and any
daily Series Fund accounting services. It also requires Prudential to pay for
the equipment, office space and related facilities necessary to perform these
services and the fees or salaries of all officers and directors of the Series
Fund who are affiliated persons of Prudential or any subsidiary of Prudential.
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Each portfolio pays all other expenses incurred in its individual operation and
also pays a portion of the Series Fund's general administrative expenses
allocated on the basis of the asset size of the respective portfolios. Expenses
that will be borne directly by the portfolios include redemption expenses,
expenses of portfolio transactions, shareholder servicing costs, interest,
certain taxes, charges of the Custodian and Transfer Agent, and other expenses
attributable to a particular portfolio. Expenses that will be allocated among
all portfolios include legal expenses, state franchise taxes, auditing services,
costs of printing proxies, costs of stock certificates, Securities and Exchange
Commission fees, accounting costs, the fees and expenses of directors of the
Series Fund who are not affiliated persons of Prudential or any subsidiary of
Prudential, and other expenses properly payable by the entire Series Fund. If
the Series Fund is sued, litigation costs may be directly applicable to one or
more portfolios or allocated on the basis of the size of the respective
portfolios, depending upon the nature of the lawsuit. The Series Fund's Board of
Directors has determined that this is an appropriate method of allocating
expenses.
Under the Investment Advisory Agreement, Prudential has agreed to refund to the
Conservative Balanced and Flexible Managed Portfolios the portion of the
investment management fee for that portfolio equal to the amount that the
aggregate annual ordinary operating expenses of that portfolio (excluding
interest, taxes, and brokerage fees and commissions but including investment
management fees) exceeds 0.75% of the portfolio's average daily net assets.
The Investment Advisory Agreement with Prudential was most recently approved by
the Series Fund's Board of Directors, including a majority of the Directors who
are not interested persons of Prudential, on February 12, 1997 with respect to
the Conservative Balanced and Flexible Managed Portfolios. The Investment
Advisory Agreement was most recently approved by shareholders in accordance with
instructions from Contract owners at their 1989 annual meeting with respect to
the Conservative Balanced and Flexible Managed Portfolios. The Agreement will
continue in effect if approved annually by: (1) a majority of the non-interested
persons of the Series Fund's Board of Directors; and (2) by a majority of the
entire Board of Directors or by a majority vote of the shareholders of each
portfolio. The required shareholder approval of the Agreement shall be effective
with respect to any portfolio if a majority of the voting shares of that
portfolio vote to approve the Agreement, even if the Agreement is not approved
by a majority of the voting shares of any other portfolio or by a majority of
the voting shares of the entire Series Fund. The Agreement provides that it may
not be assigned by Prudential and that it may be terminated upon 60 days' notice
by the Series Fund's Board of Directors or by a majority vote of its
shareholders. Prudential may terminate the Agreement upon 90 days' notice.
The Service Agreement between Prudential and PIC was most recently ratified by
shareholders of the Series Fund at their 1989 annual meeting with respect to the
Conservative Balanced and Flexible Managed Portfolios. The Service Agreement
between Prudential and PIC will continue in effect as to the Series Fund for a
period of more than 2 years from its execution, only so long as such continuance
is specifically approved at least annually in the same manner as the Investment
Advisory Agreement between Prudential and the Series Fund. The Service Agreement
may be terminated by either party upon not less than 30 days' prior written
notice to the other party, will terminate automatically in the event of its
assignment, and will terminate automatically as to the Series Fund in the event
of the assignment or termination of the Investment Advisory Agreement between
Prudential and the Series Fund. Prudential is not relieved of its responsibility
for all investment advisory services under the Investment Advisory Agreement.
Under the Service Agreement, Prudential pays PIC a portion of the fee it
receives for providing investment advisory services.
Prudential also serves as the investment advisor to several other investment
companies. When investment opportunities arise that may be appropriate for more
than one entity for which Prudential serves as investment advisor, Prudential
will not favor one over another and may allocate investments among them in an
impartial manner believed to be equitable to each entity involved. The
allocations will be based on each entity's investment objectives and its current
cash and investment positions. Because the various entities for which Prudential
acts as investor advisor have different investment objectives and positions,
Prudential may from time to time buy a particular security for one or more such
entities while at the same time it sells such securities for another.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Prudential is responsible for decisions to buy and sell securities, options on
securities and indices, and futures and related options for the Series Fund.
Prudential is also responsible for the selection of brokers, dealers, and
futures commission merchants to effect the transactions and the negotiation of
brokerage commissions, if any. Brokerdealers may receive brokerage commissions
on Series Fund portfolio transactions, including options and the purchase and
sale of underlying securities upon the exercise of options. Orders may be
directed to any broker or futures commission merchant including, to the extent
and in the manner permitted by applicable law, Prudential Securities
Incorporated, an indirect wholly-owned subsidiary of Prudential.
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Bonds, including convertible bonds, and equity securities traded in the
over-the-counter market are generally traded on a "net" basis with dealers
acting as principal for their own accounts without a stated commission, although
the price of the security usually includes a profit to the dealer. In
underwritten offerings, securities are purchased at a fixed price which includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount. On occasion, certain money market
instruments and U.S. Government agency securities may be purchased directly from
the issuer, in which case no commissions or discounts are paid. The Series Fund
will not deal with Prudential Securities Incorporated in any transaction in
which Prudential Securities Incorporated acts as principal. Thus, it will not
deal with Prudential Securities Incorporated if execution involves Prudential
Securities Incorporated's acting as principal with respect to any part of the
Series Fund's order. Portfolio securities may not be purchased from any
underwriting or selling syndicate of which Prudential Securities Incorporated,
during the existence of the syndicate, is a principal underwriter (as defined in
the 1940 Act) except in accordance with rules of the Securities and Exchange
Commission. This limitation, in the opinion of the Series Fund, will not
significantly affect the portfolios' current ability to pursue their respective
investment objectives. However, in the future it is possible that the Series
Fund may under other circumstances be at a disadvantage because of this
limitation in comparison to other funds not subject to such a limitation.
In placing orders for portfolio securities of the Series Fund, Prudential is
required to give primary consideration to obtaining the most favorable price and
efficient execution. Within the framework of this policy, Prudential will
consider the research and investment services provided by brokers, dealers or
futures commission merchants who effect or are parties to portfolio transactions
of the Series Fund, Prudential or Prudential's other clients. Such research and
investment services are those which brokerage houses customarily provide to
institutional investors and include statistical and economic data and research
reports on particular companies and industries. Such services are used by
Prudential in connection with all of its investment activities, and some of such
services obtained in connection with the execution of transactions for the
Series Fund may be used in managing other investment accounts. Conversely,
brokers, dealers or futures commission merchants furnishing such services may be
selected for the execution of transactions for such other accounts, and the
services furnished by such brokers, dealers or futures commission merchants may
be used by Prudential in providing investment management for the Series Fund.
Commission rates are established pursuant to negotiations with the broker,
dealer or futures commission merchant based on the quality and quantity of
execution services provided by the broker in the light of generally prevailing
rates. Prudential's policy is to pay higher commissions to brokers, other than
Prudential Securities Incorporated, for particular transactions than might be
charged if a different broker had been selected on occasions when, in
Prudential's opinion, this policy furthers the objective of obtaining best price
and execution. Prudential's present policy is not to permit higher commissions
to be paid on Series Fund transactions in order to secure research, statistical,
and investment services from brokers. Prudential might in the future authorize
the payment of such higher commissions but only with the prior concurrence of
the Board of Directors of the Series Fund, if it is determined that the higher
commissions are necessary in order to secure desired research and are reasonable
in relation to all the services that the broker provides.
Subject to the above considerations, Prudential Securities Incorporated may act
as a securities broker or futures commission merchant for the Series Fund. In
order for Prudential Securities Incorporated to effect any portfolio
transactions for the Series Fund, the commissions received by Prudential
Securities Incorporated must be reasonable and fair compared to the commissions
received by other brokers in connection with comparable transac tions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time. This standard would allow Prudential Securities
Incorporated to receive no more than the remuneration that would be expected to
be received by an unaffiliated broker or futures commission merchant in a
commensurate arm's-length transaction. Furthermore, the Board of Directors of
the Series Fund, including a majority of the noninterested directors, has
adopted procedures which are reasonably designed to provide that any
commissions, fees or other remuneration paid to Prudential Securities
Incorporated are consistent with the foregoing standard. In accordance with Rule
11a2-2(T) under the Securities Exchange Act of 1934, Prudential Securities
Incorporated may not retain compensation for effecting transactions on a
securities exchange for the Series Fund unless the Series Fund has expressly
authorized the retention of such compensation in a written contract executed by
the Series Fund and Prudential Securities Incorporated. Rule 11a2-2(T) provides
that Prudential Securities Incorporated must furnish to the Series Fund at least
annually a statement setting forth the total amount of all compensation retained
by Prudential Securities Incorporated from transactions effected for the Series
Fund during the applicable period. Brokerage and futures transactions with
Prudential Securities Incorporated are also subject to such fiduciary standards
as may be imposed by applicable law.
For the years 1996, 1995, and 1994, the Series Fund paid a total of $12,197,982,
$11,607,197, and $11,579,886, respectively, in brokerage commissions for all
portfolios. Of those amounts, $961,524, $899,739, and $560,155, for 1996, 1995,
and 1994, respectively, was paid out to Prudential Securities Incorporated. For
1996, the commissions paid to this affiliated broker constituted 7.9% of the
total commissions paid by the Series Fund for that year. Transactions through
this affiliated broker accounted for 7.9% of the aggregate dollar amount of
transactions for all of the portfolios of the Series Fund involving the payment
of commissions.
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DETERMINATION OF NET ASSET VALUE
Shares in the Series Fund are currently offered continuously, without sales
charge, at prices equal to the respective net asset values of the portfolios,
only to separate accounts to fund benefits payable under the Contracts described
in the variable life insurance and variable annuity prospectuses. The Series
Fund may at some later date also offer its shares to other separate accounts of
Prudential or other insurers. Prudential acts as principal underwriter to the
Series Fund. As such, Prudential receives no underwriting compensation from the
Series Fund.
As noted in the prospectus, the net asset value of the shares of each portfolio
is determined once daily on each day the New York Stock Exchange ("NYSE") is
open for business. The NYSE is open for business Monday through Friday except
for the days on which the following holidays are observed: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. In the event the New York Stock Exchange
closes early on any business day, the net asset value of each portfolio shall be
determined at a time between such closing and 4:15 p.m. New York City time.
In determining the net asset value of any intermediate or long-term fixed income
securities of the Conservative Balanced and Flexible Managed Portfolios (other
than debt obligations with remaining maturities 12 months or less, which are
valued at amortized cost) 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.
All short-term debt obligations in the money market portions of the Conservative
Balanced and Flexible Managed Portfolios of 12 months remaining maturity or less
are valued on an amortized cost basis in accordance with an order obtained from
the Securities and Exchange Commission. This means that each obligation will be
valued initially at its purchase price and thereafter by amortizing any discount
or premium uniformly to maturity, regardless of the impact of fluctuating
interest rates on the market value of the obligation. This highly practical
method of valuation is in widespread use and almost always results in a value
that is extremely close to the actual market value. In order to continue to
utilize the amortized cost method of valuation, the money market portions of the
Conservative Balanced and Flexible Managed Portfolios may not purchase any
security with a remaining maturity of more than 12 months and must maintain a
dollar-weighted average portfolio maturity of 120 days or less. In the event of
sizeable changes in interest rates, however, the value determined by this method
may be higher or lower than the price that would be received if the obligation
were sold. The Series Fund's Board of Directors has established procedures to
monitor whether any material deviation occurs and, if so, will promptly consider
what action, if any, should be initiated to prevent unfair results to Contract
owners. The short-term portion of these portfolios may be invested only in high
quality instruments, as described in SECURITIES IN WHICH THE MONEY MARKET
PORTFOLIO MAY CURRENTLY INVEST, page 22.
The net asset value of the common stocks and convertible debt securities of the
portfolios will be determined in the following manner. Any security for which
the primary market is on an exchange is generally valued at the last sale price
on such exchange as of the close of the NYSE (which is currently 4:00 p.m. New
York City 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. 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. Corporate bonds
(other than convertible debt securities) are valued on the same basis as
intermediate or long-term fixed income securities, as described above.
Short-term debt instruments which mature in less than 60 days are valued at
amortized cost. For valuation purposes, quotations of foreign securities in a
foreign currency are converted to U.S. dollar equivalents.
With respect to all the portfolios which utilize such investments, options on
stock and stock indices traded on national securities exchanges are valued at
the average of the bid and asked prices as of the close of the respective
exchange (which is currently 4:10 p.m. New York City time). Futures contracts
and options thereon are valued at the last sale price at the close of the
applicable commodities exchanges or board of trade (which is currently 4:15 p.m.
New York City time) or, if there was no sale on the applicable commodities
exchange or board of trade on such day, at the mean between the most recently
quoted bid and asked prices on such exchange or board of trade.
Securities or assets for which market quotations are not readily available will
be valued at fair value as determined by Prudential under the direction of the
Board of Directors of the Series Fund.
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SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO
MAY CURRENTLY INVEST*
The Money Market Portfolio, and the other portfolios to the extent their
investment policies so provide, may invest in the following liquid, short-term,
debt securities regularly bought and sold by financial institutions:
1. U.S. Treasury Bills and other obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. These are debt securities
(including bills, certificates of indebtedness, notes, and bonds) issued or
guaranteed by the U.S. Treasury or by an agency or instrumentality of the U.S.
Government that is established under the authority of an act of Congress.
Although all obligations of agencies and instrumentalities are not direct
obligations of the U.S. Treasury, payment of the interest and principal on them
is generally backed directly or indirectly by the U.S. Government. This support
can range from the backing of the full faith and credit of the United States, to
U.S. Treasury guarantees or to the backing solely of the issuing instrumentality
itself. Securities which are not backed by the full faith and credit of the
United States include but are not limited to obligations of the Tennessee Valley
Authority, the Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation, and the United States Postal Service, each of which has
the right to borrow from the U.S. Treasury to meet its obligations, and
obligations of the Federal Farm Credit System and the Federal Home Loan Banks,
the obligations of which may only be satisfied by the individual credit of the
issuing agency. Obligations of the Government National Mortgage Association, the
Farmers Home Administration, and the Export-Import Bank are examples of
securities that are backed by the full faith and credit of the United States.
2. Obligations (including certificates of deposit, bankers' acceptances, and
time deposits) of domestic banks, foreign branches of U.S. banks, U.S. branches
of foreign banks, and foreign offices of foreign banks provided that such bank
has, at the time of the portfolio's investment, total assets of at least $1
billion or the equivalent. Obligations of any savings and loan association or
savings bank organized under the laws of the United States or any state thereof,
provided that such association or savings bank has, at the time of the
portfolio's investment, total assets of at least $1 billion. The term
"certificates of deposit" includes both Eurodollar certificates of deposit,
which are traded in the over-the-counter market, and Eurodollar time deposits,
for which there is generally not a market. "Eurodollars" are dollars deposited
in banks outside the United States. An investment in Eurodollar instruments
involves risks that are different in some respects from an investment in debt
obligations of domestic issuers, including future political and economic
developments such as possible expropriation or confiscatory taxation that might
adversely affect the payment of principal and interest on the Eurodollar
instruments.
"Certificates of deposit" are certificates evidencing the indebtedness of a
commercial bank to repay funds deposited with it for a definite period of time
(usually from 14 days to 1 year). "Bankers' acceptances" are credit instruments
evidencing the obligation of a bank to pay a draft which has been drawn on it by
a customer. These instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity. "Time deposits"
are non-negotiable deposits in a bank for a fixed period of time.
3. Commercial paper, variable amount demand master notes, bills, notes and other
obligations issued by a U.S. company, a foreign company or a foreign government,
its agencies, instrumentalities or political subdivisions, denominated in U.S.
dollars, and, at the date of investment, rated at least A or A-2 by Standard &
Poor's Rating Group ("S&P"), A or Prime-2 by Moody's Investors Service
("Moody's") or, if not rated, issued by an entity having an outstanding
unsecured debt issue rated at least A or A-2 by S&P or A or Prime-2 by Moody's.
For a description of corporate bond ratings, see DEBT RATINGS page 24. If such
obligations are guaranteed or supported by a letter of credit issued by a bank,
such bank (including a foreign bank) must meet the requirements set forth in
paragraph 2 above. If such obligations are guaranteed or insured by an insurance
company or other non-bank entity, such insurance company or other non-bank
entity must represent a credit of high quality, as determined by the Series
Fund's investment adviser (which as noted above is currently Prudential) under
the supervision of the Series Fund's Board of Directors.
As stated above in paragraphs 2 and 3, the Money Market Portfolio and short-term
portions of the other portfolios may contain obligations of foreign branches of
domestic banks and domestic branches of foreign banks, as well as commercial
paper, bills, notes, and other obligations issued in the United States by
foreign issuers, including foreign governments, their agencies, and
instrumentalities. This involves certain additional risks. These risks include
future political and economic developments in the country of the issuer, the
possible imposition of withholding taxes on interest income payable on such
obligations held by the Series Fund, the possible seizure or nationalization of
foreign deposits, and the possible establishment of exchange controls or other
foreign governmental laws or restrictions which might affect adversely the
payment of principal and interest on such obligations held by the Series Fund.
In addition, there may be less publicly available information about a foreign
issuer than about a domestic one, and foreign issuers may not be subject to the
same accounting, auditing and
* Although the Money Market Portfolio is not available to PRUVIDER Contract
owners, any short-term portion of the Conservative Balanced and Flexible Managed
Portfolios may be invested in the types of securities described in this section.
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financial recordkeeping standards and requirements as domestics issuers.
Securities issued by foreign issuers may be subject to greater fluctuations in
price than securities issued by U.S. entities. Finally, in the event of default
with respect to any such foreign debt obligations, it may be more difficult for
the Series Fund to obtain or to enforce a judgment against the issuers of such
securities.
4. Repurchase Agreements. When the Money Market Portfolio purchases money market
securities of the types described above, it may on occasion enter into a
repurchase agreement with the seller wherein the seller and the buyer agree at
the time of sale to repurchase of the security at a mutually agreed upon time
and price. The period of maturity is usually quite short, possibly overnight or
a few days, although it may extend over a number of months. The resale price is
in excess of the purchase price, reflecting an agreed-upon market rate effective
for the period of time the portfolio's money is invested in the security, and is
not related to the coupon rate of the purchased security. Repurchase agreements
may be considered loans of money to the seller of the underlying security, which
are collateralized by the securities underlying the repurchase agreement. The
Series Fund will not enter into repurchase agreements unless the agreement is
"fully collateralized" (i.e., the value of the securities is, and during the
entire term of the agreement remains, at least equal to the amount of the 'loan'
including accrued interest). The Series Fund will take possession of the
securities underlying the agreement and will value them daily to assure that
this condition is met. The Series Fund has adopted standards for the parties
with whom it will enter into repurchase agreements which it believes are
reasonably designed to assure that such a party presents no serious risk of
becoming involved in bankruptcy proceedings within the time frame contemplated
by the repurchase agreement. In the event that a seller defaults on a repurchase
agreement, the Series Fund may incur a loss in the market value of the
collateral, as well as disposition costs; and, if a party with whom the Series
Fund had entered into a repurchase agreement becomes involved in bankruptcy
proceedings, the Series Fund'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 bankruptcy proceedings.
The Series Fund will not enter into repurchase agreements with Prudential or its
affiliates, including Prudential Securities Incorporated. This will not affect
the Series Fund's ability to maximize its opportunities to engage in repurchase
agreements.
5. Reverse Repurchase Agreements. The Money Market Portfolio may use reverse
repurchase agreements, which are described under REVERSE REPURCHASE AGREEMENTS
AND DOLLAR ROLLS in the prospectus. No portfolio may obligate more than 10% of
its net assets in connection with reverse repurchase agreements, except that the
fixed income portions of the Conservative Balanced and Flexible Managed
Portfolios may obligate up to 30% of their net assets in connection with reverse
repurchase agreements and dollar rolls.
6. When-Issued and Delayed Delivery Securities. From time to time, in the
ordinary course of business, the Money Market Portfolio may purchase securities
on a when-issued or delayed delivery basis (i.e., delivery and payment can take
place a month or more after the date of the transaction). The purchase price and
the interest rate payable on the securities are fixed on the transaction date.
The securities so purchased are subject to market fluctuation, and no interest
accrues to the portfolio until delivery and payment take place. At the time the
portfolio makes the commitment to purchase securities on a when-issued or
delayed delivery basis, it will record the transaction and thereafter reflect
the value, each day, of such securities in determining its net asset value. The
portfolio will make commitments for when-issued transactions only with the
intention of actually acquiring the securities and, to facilitate such
acquisitions, the Series Fund's custodian bank will maintain in a separate
account securities of the portfolio having a value equal to or greater than such
commitments. On delivery dates for such transactions, the portfolio will meet
its obligations from maturities or sales of the securities held in the separate
account and/or from then available cash flow. If the portfolio chooses to
dispose of the right to acquire a when-issued security prior to its acquisition,
it could, as with the disposition of any other obligation, incur a gain or loss
due to market fluctuation. No when-issued commitments will be made if, as a
result, more than 15% of the portfolio's net assets would be so committed.
The Board of Directors of the Series Fund has adopted policies for the Money
Market Portfolio to conform to amendments of an SEC rule applicable to money
market funds, like the portfolio. These policies do not apply to any other
portfolio. The policies are as follows: (1) The portfolio will not invest more
than 5% of its assets in the securities of any one issuer (except U.S.
Government securities); however, the portfolio may exceed the 5% limit with
respect to a single security rated in the highest rating category for up to
three business days after the purchase thereof; (2) To be eligible for
investment, a security must be a United States dollar-denominated instrument
that the Series Fund's Board has determined to present minimal credit risks and
must be rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations ("NRSROs") assigning a
rating to the security or issue, or if only one NRSRO has assigned a rating,
that NRSRO. An unrated security must be deemed to be of comparable quality as
determined by the Series Fund's Board. In other words, the portfolio will invest
in only first tier or second tier securities. First tier securities are
securities which are rated by at least two NRSROs, or by the only NRSRO that has
rated the security, in the highest short-term rating category, or unrated
securities of comparable quality as determined by the Series Fund's Board.
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Second tier securities are eligible securities that are not first tier
securities; (3) The portfolio will not invest more than 5% of its total assets
in second tier securities; (4) The portfolio may not invest more than 1% of its
assets in second tier securities of any one issuer; (5) In the event a first
tier security held by the portfolio is downgraded and becomes a second tier
security, or in the case of an unrated security the Series Fund's Board
determines it is no longer of comparable quality to a first tier security, or in
the event Prudential becomes aware that an NRSRO has rated a second tier
security or an unrated portfolio security below its second highest rating, the
Board will reassess promptly whether the security presents minimal credit risks
and shall cause the portfolio to take such action as the Board determines is in
the best interests of the portfolio and its shareholders; (6) In the event of a
default or if because of a rating downgrade a security held in the portfolio is
no longer an eligible investment, the portfolio will sell the security as soon
as practicable unless the Series Fund's Board makes a specific finding that such
action would not be in the best interest of the portfolio; and (7) The
portfolio's dollar-weighted average maturity will be no more than 90 days. The
Series Fund's Board of Directors has adopted written procedures delegating to
the investment advisor under certain guidelines the responsibility to make
several of the above-described determinations, including certain credit quality
determinations.
DEBT RATINGS
Moody's Investors Services, Inc. describes its categories of corporate debt
securities and its "Prime-1" and "Prime-2" commercial paper as follows:
Bonds:
Aaa -- Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa -- Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities.
A -- Bonds which are rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa -- Bonds which are rated "Baa" are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba -- Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection
of interest and principal payments may be very moderate, and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B -- Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa -- Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which are rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated "C" are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Commercial paper:
Issuers rated Prime-1 (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics:
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- --Leading market positions in well-established industries.
- --High rates of return of funds employed.
- --Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
- --Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- --Well established access to a range of financial markets and assured sources of
alternate liquidity.
o Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term debt obligations. This will normally be evidenced by
many of the characteristics cited above but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Standard & Poor's Rating Group describes its grades of corporate debt securities
and its "A" commercial paper as follows:
Bonds:
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
BBB Debt rated "BBB" is regarded as having adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in
higher-rated categories.
BB-B-CCC-CC-C
Debt rated "BB", "B", "CCC", "CC", and "C" is regarded as having
predominantly speculative characteristics with respect to capacity
to pay interest and repay principal. BB indicates the least degree
of speculation and C the highest. While such debt will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major exposures to adverse conditions.
Commercial paper:
Commercial paper rated A by Standard & Poor's Rating Group has the
following characteristics: Liquidity ratios are better than the
industry average. Long term senior debt rating is "A" or better. In
some cases BBB credits may be acceptable. The issuer has access to
at least two additional channels of borrowing. Basic earnings and
cash flow have an upward trend with allowances made for unusual
circumstances. Typically, the issuer's industry is well established,
the issuer has a strong position within its industry and the
reliability and quality of management is unquestioned. Issuers rated
A are further referred to by use of numbers 1, 2 and 3 to denote
relative strength within this classification.
POSSIBLE REPLACEMENT OF THE SERIES FUND
Although Prudential believes it to be unlikely, it is possible that in the
judgment of its management, one or more of the portfolios of the Series Fund may
become unsuitable for investment by Contract owners because of investment policy
changes, tax law changes, or the unavailability of shares for investment. In
that event, Prudential may seek to substitute the shares of another portfolio or
of an entirely different mutual fund. Before this can be done, the approval of
the SEC, and possibly one or more state insurance departments, will be required.
Contract owners will be notified of such substitution.
In addition, although it is highly unlikely, it is conceivable that in the
future it may become disadvantageous for both variable life insurance and
variable annuity contract separate accounts to invest in the same underlying
mutual fund. Although neither the companies which invest in the Series Fund nor
the Series Fund currently foresees any such disadvantage, the Series Fund's
Board of Directors intends to monitor events in order to identify any material
conflict between variable life insurance and variable annuity contract owners
and to determine what action, if any,
25
<PAGE>
should be taken in response thereto. Material conflicts could result from such
things as: (1) changes in state insurance law; (2) changes in federal income tax
law; (3) changes in the investment management of any portfolio of the Series
Fund; or (4) difference between voting instructions given by variable life
insurance and variable annuity contract owners. Prudential will bear the
expense, if it does become necessary, of remedying any material conflict
including establishing a new underlying investment company and segregating the
assets held under variable life insurance and variable annuity contracts.
OTHER INFORMATION CONCERNING THE SERIES FUND
INCORPORATION AND AUTHORIZED STOCK
The Series Fund was incorporated under Maryland law on November 15, 1982. The
authorized Capital Stock of the Series Fund consists of 2 billion shares, par
value $0.01 per share. As of the date of this prospectus, the shares of Capital
Stock are divided into fifteen classes: MONEY MARKET PORTFOLIO Capital Stock
(225 million shares), DIVERSIFIED BOND PORTFOLIO Capital Stock (200 million
shares), HIGH YIELD BOND PORTFOLIO Capital Stock (100 million shares),
GOVERNMENT INCOME PORTFOLIO Capital Stock (100 million shares), EQUITY PORTFOLIO
Capital Stock (200 million shares), STOCK INDEX PORTFOLIO Capital Stock (100
million shares), EQUITY INCOME PORTFOLIO Capital Stock (100 million shares),
NATURAL RESOURCES PORTFOLIO Capital Stock (100 million shares), GLOBAL PORTFOLIO
Capital Stock (100 million shares), CONSERVATIVE BALANCED PORTFOLIO Capital
Stock (300 million shares), FLEXIBLE MANAGED PORTFOLIO Capital Stock (300
million shares), ZERO COUPON BOND PORTFOLIO 2000 Capital Stock (25 million
shares), ZERO COUPON BOND PORTFOLIO 2005 Capital Stock (50 million shares),
PRUDENTIAL JENNISON PORTFOLIO Capital Stock (50 million shares), SMALL
CAPITALIZATION STOCK PORTFOLIO Capital Stock (50 million shares). The shares of
each portfolio, when issued, will be fully paid and non-assessable, will have no
conversion, exchange or similar rights, and will be freely transferable. Each
share of stock will have a pro rata interest in the assets of the portfolio to
which the stock of that class relates and will have no interest in the assets of
any other portfolio.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Series Fund is qualified as a regulated investment company under Section 851
of the Internal Revenue Code and distributes substantially all of each
portfolio's net investment income and realized gains from securities
transactions to the respective subaccounts, which immediately reinvest it. For
each taxable year in which it and each of its portfolios so qualify, the Series
Fund will not be subject to tax on net investment income and realized gains from
securities transactions distributed to shareholders.
CUSTODIANS, TRANSFER AGENT, AND DIVIDEND DISBURSING AGENT
Chase Manhattan Bank, Chase Metro Tech Center, Brooklyn, NY 11245, is currently
the custodian of the assets held by all the portfolios, except the Global
Portfolio. On or about May 31, 1997, Investors Fiduciary Trust Company ("IFTC"),
127 West 10th Street, Kansas City, MO 64105-1716, will become the custodian of
the assets held by all the portfolios except the Global Portfolio. IFTC will
also be the custodian of the assets held in connection with repurchase
agreements entered into by the portfolios, and is authorized to use the
facilities of the Depository Trust Company and the facilities of the book-entry
system of the Federal Reserve Bank with respect to securities held by these
portfolios. Brown Brothers Harriman & Co. ("Brown Brothers"), 40 Water Street,
Boston, MA 02109, is the custodian of the assets of the Global Portfolio. Each
of the Series Fund's custodians employs subcustodians, who were approved by the
directors of the Series Fund in accordance with regulations of the Securities
and Exchange Commission, for the purpose of providing custodial service for the
Series Fund's foreign assets held outside the United States. The directors of
the Series Fund monitor the activities of the custodians and the subcustodians.
Prudential is the transfer agent and dividend disbursing agent for the Series
Fund. Prudential as transfer agent issues and redeems shares of the Series Fund
and maintains records of ownership for the shareholders. Prudential's principal
business address is Prudential Plaza, Newark, New Jersey 07102-3777.
EXPERTS
The financial statements of the Series Fund included in this statement of
additional information and the FINANCIAL HIGHLIGHTS included in the prospectus
for the year ended December 31, 1996 have been audited by Price Waterhouse LLP,
independent accountants, as stated in their report appearing herein and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing. Price Waterhouse LLP's principal business
address is 1177 Avenue of the Americas, New York, New York 10036.
The financial statements of the Series Fund included in this statement of
additional information and the FINANCIAL HIGHLIGHTS included in the prospectus
for the years prior to 1996 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein and are
included in reliance upon the report of such
26
<PAGE>
firm given upon their authority as experts in accounting and auditing. Deloitte
& Touche LLP's principal business address is Two Hilton Court, Parsippany, NJ
07054-0319.
LICENSE
As part of the Investment Advisory Agreement, Prudential has granted the Series
Fund a royalty-free, non-exclusive license to use the words "The Prudential" and
"Prudential" and its registered service mark of a rock representing the Rock of
Gibraltar. However, Prudential may terminate this license if Prudential or a
company controlled by it ceases to be the Series Fund's investment advisor.
Prudential may also terminate the license for any other reason upon 60 days
written notice; but, in this event, the Investment Advisory Agreement shall also
terminate 120 days following receipt by the Series Fund of such notice, unless a
majority of the outstanding voting securities of the Series Fund vote to
continue the Agreement notwithstanding termination of the license.
27
<PAGE>
DIRECTORS AND OFFICERS OF PRUCO LIFE OF NEW JERSEY
AND MANAGEMENT OF THE SERIES FUND
DIRECTORS AND OFFICERS OF PRUCO LIFE OF NEW JERSEY
The directors and major officers of Pruco Life of New Jersey, listed with their
principal occupations during the past 5 years, are shown below.
DIRECTORS OF PRUCO LIFE OF NEW JERSEY
WILLIAM M. BETHKE, Director. -- President, Prudential Capital Markets Group
since 1992.
IRA J. KLEINMAN, Director. -- Executive Vice President, Prudential International
Insurance Group since 1997; 1995 to 1997: Chief Marketing and Product
Development Officer, Prudential Individual Insurance Group; 1993 to 1995:
President, Prudential Select; Prior to 1993: Senior Vice President of
Prudential.
MENDEL A. MELZER, Director. -- Chief Investment Officer, Mutual Funds and
Annuities, Prudential Investments since 1996; 1995 to 1996: Chief Financial
Officer of the Money Management Group of Prudential; 1993 to 1995: Senior Vice
President and Chief Financial Officer of Prudential Preferred Financial
Services; Prior to 1993: Managing Director, Prudential Investment Corporation.
ESTHER H. MILNES, President and Director. -- Vice President and Actuary,
Prudential Individual Insurance Group since 1996; 1993 to 1996: Senior Vice
President and Chief Actuary, Prudential Insurance and Financial Services; Prior
to 1993: Vice President and Associate Actuary of Prudential.
I. EDWARD PRICE, Vice Chairman and Director. -- Senior Vice President and
Actuary, Prudential Individual Insurance Group since 1995; 1994 to 1995: Chief
Executive Officer, Prudential International Insurance; 1993 to 1994: President,
Prudential International Insurance; Prior to 1993: Senior Vice President and
Company Actuary of Prudential.
WILLIAM F. YELVERTON, Chairman and Director. --Chief Executive Officer,
Prudential Individual Insurance Group since 1995; Prior to 1995: Chief Executive
Officer, New York Life Worldwide.
OFFICERS WHO ARE NOT DIRECTORS
SUSAN L. BLOUNT, Secretary.--Vice President and Secretary of Prudential since
1995; Prior to 1995: Assistant General Counsel for Prudential Residential
Services Company.
C. EDWARD CHAPLIN, Treasurer. -- Vice President and Treasurer of Prudential
since 1995; 1993 to 1995: Managing Director and Assistant Treasurer of
Prudential; 1992 to 1993: Vice President and Assistant Treasurer, Banking and
Cash Management for Prudential.
LINDA S. DOUGHERTY, Vice President, Comptroller and Chief Accounting Officer. --
Vice President and Comptroller, Prudential Individual Insurance Group since
1997; Prior to 1997: Vice President, Accounting, Prudential.
JAMES C. DROZANOWSKI, Senior Vice President. -- Vice President and Operations
Executive, Prudential Individual Insurance Group since 1996; 1995 to 1996:
President and Chief Executive Officer of Chase Manhattan Bank; 1993 to 1995:
Vice President, North America Customer Services, Chase Manhattan Bank; Prior to
1993: Operations Executive, Global Securities Services, Chase Manhattan Bank.
CLIFFORD E. KIRSCH, Chief Legal Officer. -- Chief Counsel, Variable Products,
Law Department of Prudential since 1995; 1994 to 1995: Associate General Counsel
with Paine Webber; Prior to 1994: Assistant Director in the Division of
Investment Management with the Securities and Exchange Commission.
FRANK P. MARINO, Senior Vice President. -- Vice President, Policyowner Relations
Department, Prudential Individual Insurance Group since 1996; Prior to 1996:
Senior Vice President, Prudential Mutual Fund Services.
MARIO A. MOSSE, Senior Vice President. -- Vice President, Annuity Services,
Prudential Investments since 1996; Prior to 1996: Vice President, Chase
Manhattan Bank.
SHIRLEY H. SHAO, Senior Vice President and Chief Actuary. -- Vice President and
Associate Actuary, Prudential.
KAREN L. SHAPIRO, Senior Vice President. -- Vice President, Prudential
Individual Insurance Group since 1996; Vice President and Associate General
Counsel, Prudential Securities Incorporated 1993 to 1996; Prior to 1993: Senior
Associate with Shaw, Pittman, Potts and Trowbridge.
The business address of all directors and officers of Pruco Life of New Jersey
is 213 Washington Street, Newark, New Jersey 07102-2992.
* SUBSIDIARY OF PRUDENTIAL
28
<PAGE>
MANAGEMENT OF THE SERIES FUND
The names of all directors and major officers of the Series Fund and the
principal occupation of each during the last 5 years are shown below. Unless
otherwise stated, the address of each director and officer is Prudential Plaza,
Newark, New Jersey 07102-3777.
DIRECTORS OF THE SERIES FUND
MENDEL A. MELZER*, Chairman of the Board--Chief Investment Officer of Prudential
Investments since 1996; 1995 to 1996: Chief Financial Officer of the Money
Management Group of Prudential; 1993 to 1995: Senior Vice President and Chief
Financial Officer of Prudential Preferred Financial Services; Prior to 1993:
Managing Director, The Prudential Investment Corporation.
E. MICHAEL CAULFIELD*, President and Director--Chief Executive Officer of
Prudential Investments since 1995; 1995: Chief Executive Officer, Prudential
Preferred Financial Services; 1993 to 1995: President, Prudential Preferred
Financial Services; 1992 to 1993: President, Prudential Property and Casualty
Insurance Company; Prior to 1992: President of Investment Services of
Prudential.
SAUL K. FENSTER, Director--President of New Jersey Institute of Technology.
Address: 323 Martin Luther King Boulevard, Newark, New Jersey 07102.
W. SCOTT MCDONALD, JR., Director--Principal, Kaludis Consulting Group since
1997; 1995 to 1996: Principal, Scott McDonald & Associates; Prior to 1995:
Executive Vice President of Fairleigh Dickinson University. Address:9 Zamrok
Way, Morristown, New Jersey 07960.
JOSEPH WEBER, Director--Vice President, Interclass (international corporate
learning). Address: 37 Beachmont Terrace, North Caldwell, New Jersey 07006.
OFFICERS WHO ARE NOT DIRECTORS
SUSAN COTE, Vice President--Vice President Prudential Investments since 1996;
1995 to 1996: Chief Operating Officer and Managing Director, Prudential Mutual
Fund Investment Management; Prior to 1995: Senior Vice President and Treasurer
of Prudential Mutual Funds.
THOMAS EARLY, Secretary--General Counsel, Mutual Funds and Annuities, Prudential
Investments since 1996; 1994 to 1996: General Counsel, Prudential Retirement
Services, Prudential Investments; Prior to 1994: Associate General Counsel and
Chief Financial Services Counsel, Frank Russell Company.
I. EDWARD PRICE, Vice President--Senior Vice President and Actuary, Prudential
Individual Insurance Group since 1995; 1994 to 1995: Chief Executive Officer,
Prudential International Insurance; 1993 to 1994: President, Prudential
International Insurance; Prior to 1993: Senior Vice President and Company
Actuary of Prudential.
EUGENE STARK, Comptroller, Principal Financial Officer and Treasurer--Vice
President, Prudential Investments.
No director or officer of the Series Fund who is also an officer, director or
employee of Prudential or its affiliates is entitled to any remuneration from
the Series Fund for services as one of its directors or officers. Each director
of the Series Fund who is not an interested person of the Series Fund will
receive a fee of $2,000 per year plus $200 per portfolio for each meeting of the
Board attended and will be reimbursed for all expenses incurred in connection
with attendance at meetings.
*These members of the Board are interested persons of Prudential, its affiliates
or the Series Fund as defined in the 1940 Act. Certain actions of the Board,
including the annual continuance of the Investment Advisory Agreement between
the Series Fund and Prudential, must be approved by a majority of the members of
the Board who are not interested persons of Prudential, its affiliates or the
Series Fund. Mr. Melzer and Mr. Caulfield, two of the five members of the Board,
are interested persons of Prudential and the Series Fund, as that term is
defined in the 1940 Act, because they are officers and/or affiliated persons of
Prudential, the investment advisor to the Series Fund. Messrs. Fenster,
McDonald, and Weber are not interested persons of Prudential, its affiliates or
the Series Fund. However, Mr. Fenster is President of the New Jersey Institute
of Technology. Prudential has issued a group annuity contract to the Institute
and provides group life and group health insurance to its employees.
29
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
CONSERVATIVE BALANCED PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$4,188,354,768).......................... $4,538,468,628
Receivable for investments sold short (Note
2)....................................... 111,621,197
Interest and dividends receivable.......... 44,683,414
Receivable for investments sold............ 1,376,096
--------------
Total Assets............................. 4,696,149,335
--------------
LIABILITIES
Investments sold short at value (proceeds
$111,621,197 including accrued interest)
(Note 2)................................. 110,481,637
Payable for investments purchased.......... 99,447,868
Payable to investment adviser.............. 6,126,182
Accrued expenses........................... 768,878
Bank overdraft............................. 453,239
Payable for capital stock repurchased...... 62,998
--------------
Total Liabilities........................ 217,340,802
--------------
NET ASSETS................................... $4,478,808,533
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 2,886,377
Paid-in capital in excess of par......... 4,094,460,572
--------------
4,097,346,949
Accumulated net realized gains on
investments.............................. 30,208,164
Net unrealized appreciation on
investments.............................. 351,253,420
--------------
Net assets, December 31, 1996.............. $4,478,808,533
--------------
--------------
Net asset value and redemption price per
share of 288,637,703 outstanding shares
of common stock (authorized 300,000,000
shares).................................. $ 15.52
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C> <C>
INVESTMENT INCOME
Interest................................... $ 174,514,843
Dividends (net of $488,736 foreign
withholding tax)......................... 23,515,755
---------------
198,030,598
---------------
EXPENSES
Investment advisory fee.................... 23,052,572
Shareholders' reports...................... 1,367,000
Custodian expense.......................... 228,000
Accounting fees............................ 127,000
Audit fees................................. 70,400
Legal fees................................. 2,900
Directors' fees............................ 2,000
Miscellaneous expenses..................... 736
---------------
Total expenses........................... 24,850,608
Less: custodian fee credit................. (103,584)
---------------
Net expenses............................. 24,747,024
---------------
NET INVESTMENT INCOME........................ 173,283,574
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Investments.............................. 270,207,375
Short sales.............................. (100,129)
---------------
270,107,246
---------------
Net change in unrealized appreciation on:
Investments.............................. 60,263,761
Short sales.............................. 1,139,560
---------------
61,403,321
---------------
NET GAIN ON INVESTMENTS...................... 331,510,567
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 504,794,141
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 173,283,574 $ 155,293,990
Net realized gain on investments and short sales....................................... 270,107,246 167,342,297
Net change in unrealized appreciation on investments and short sales................... 61,403,321 264,773,974
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 504,794,141 587,410,261
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (174,034,704) (154,987,434)
Dividends in excess of net investment income........................................... (41,632) --
Distributions from net realized capital gains.......................................... (273,551,593) (133,660,168)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (447,627,929) (288,647,602)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [10,561,256 and 5,345,143 shares, respectively]..................... 167,668,924 81,026,772
Capital stock issued in reinvestment of dividends and distributions [29,086,855 and
19,023,739 shares, respectively]...................................................... 447,627,929 288,647,602
Capital stock repurchased [(8,429,995) and (15,343,313) shares, respectively].......... (134,428,797) (228,767,054)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 480,868,056 140,907,320
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 538,034,268 439,669,979
NET ASSETS:
Beginning of year...................................................................... 3,940,774,265 3,501,104,286
------------------ -------------------
End of year............................................................................ $ 4,478,808,533 $ 3,940,774,265
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B12 THROUGH B16.
A1
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
FLEXIBLE MANAGED PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$4,400,135,497).......................... $4,981,429,094
Cash....................................... 52,238
Receivable for securities sold short (Note
2)....................................... 113,630,151
Interest and dividends receivable.......... 33,277,907
Receivable for investments sold............ 31,241,005
--------------
Total Assets............................. 5,159,630,395
--------------
LIABILITIES
Payable for investments purchased.......... 141,168,642
Investments sold short, at value (proceeds
$113,630,151 including accrued interest)
(Note 2)................................. 112,461,581
Payable to investment adviser.............. 7,374,729
Accrued expenses........................... 1,390,075
Payable for capital stock repurchased...... 312,681
--------------
Total Liabilities........................ 262,707,708
--------------
NET ASSETS................................... $4,896,922,687
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 2,751,892
Paid-in capital in excess of par......... 4,273,689,804
--------------
4,276,441,696
Distributions in excess of net investment
income................................... (576,929)
Accumulated net realized gains on
investments.............................. 38,595,752
Net unrealized appreciation on
investments.............................. 582,462,168
--------------
Net assets, December 31, 1996.............. $4,896,922,687
--------------
--------------
Net asset value and redemption price per
share, 275,189,159 shares of common stock
outstanding (300,000,000 shares
authorized).............................. $ 17.79
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C> <C>
INVESTMENT INCOME
Interest................................... $ 127,494,108
Dividends (net of $553,612 foreign
withholding tax)......................... 40,857,296
---------------
168,351,404
---------------
EXPENSES
Investment advisory fee.................... 27,247,674
Shareholders' reports...................... 1,423,000
Custodian expense.......................... 397,050
Accounting fees............................ 122,000
Audit fees................................. 75,600
Legal fees................................. 3,100
Directors' fees............................ 2,000
Miscellaneous expenses..................... 165
---------------
Total expenses........................... 29,270,589
Less: custodian fee credit................. (131,050)
---------------
Net expenses............................. 29,139,539
---------------
NET INVESTMENT INCOME........................ 139,211,865
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain (loss) on:
Investments.............................. 408,037,782
Foreign currencies....................... (69,542)
Short sales.............................. 77,891
---------------
408,046,131
---------------
Net change in unrealized appreciation on:
Investments.............................. 40,562,155
Foreign currencies....................... (1,902)
Short sales.............................. 1,168,570
---------------
41,728,823
---------------
NET GAIN ON INVESTMENTS...................... 449,774,954
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 588,986,819
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 139,211,865 $ 126,640,661
Net realized gain on investments, foreign currencies and short sales................... 408,046,131 292,267,835
Net change in unrealized appreciation on investments, foreign currencies and short
sales................................................................................. 41,728,823 410,041,102
-------------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 588,986,819 828,949,598
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (142,089,785) (124,621,227)
Distributions from net realized capital gains.......................................... (458,909,559) (176,844,671)
-------------- --------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (600,999,344) (301,465,898)
-------------- --------------
CAPITAL TRANSACTIONS:
Capital stock sold [8,998,637 and 8,486,525 shares, respectively]...................... 166,455,957 146,641,074
Capital stock issued in reinvestment of dividends and distributions [34,012,173 and
17,050,711 shares, respectively]...................................................... 600,999,344 301,465,898
Capital stock repurchased [(6,420,074) and (11,612,102) shares, respectively].......... (119,724,926) (195,926,134)
-------------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 647,730,375 252,180,838
-------------- --------------
TOTAL INCREASE IN NET ASSETS............................................................. 635,717,850 779,664,538
NET ASSETS:
Beginning of year...................................................................... 4,261,204,837 3,481,540,299
-------------- --------------
End of year............................................................................ $4,896,922,687 $4,261,204,837
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B12 THROUGH B16.
A2
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
SCHEDULE OF INVESTMENTS
CONSERVATIVE BALANCED PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 91.2%
VALUE
COMMON STOCKS -- 36.7% SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AEROSPACE/DEFENSE -- 0.6%
GenCorp, Inc.................................... 629,100 $ 11,402,438
Litton Industries, Inc. (a)..................... 241,400 11,496,675
UNC, Inc. (a)................................... 278,800 3,345,600
--------------
26,244,713
--------------
AIRLINES -- 1.2%
AMR Corp. (a)................................... 378,700 33,372,937
USAir Group, Inc. (a)........................... 776,100 18,141,337
--------------
51,514,274
--------------
AUTOS - CARS & TRUCKS -- 0.5%
A.O. Smith Corp................................. 450,000 13,443,750
Ford Motor Co................................... 295,900 9,431,812
--------------
22,875,562
--------------
AUTOMOBILES & TRUCKS -- 1.8%
Chrysler Corp................................... 929,500 30,673,500
General Motors Corp............................. 464,700 25,907,025
Goodyear Tire & Rubber Co....................... 250,800 12,884,850
Mascotech, Inc.................................. 604,200 9,893,775
--------------
79,359,150
--------------
CHEMICALS -- 0.1%
Millenium Chemicals, Inc. (a)................... 188,227 3,341,029
--------------
CHEMICALS - SPECIALTY -- 1.0%
Ferro Corp...................................... 609,100 17,283,212
M.A. Hanna Co................................... 689,950 15,092,656
OM Group, Inc................................... 435,400 11,755,800
--------------
44,131,668
--------------
COMMERCIAL SERVICES -- 0.3%
BW/IP, Inc. (Class 'A' Stock)................... 365,600 6,032,400
IMO Industries, Inc. (a)........................ 575,600 1,798,750
Parker-Hannifin Corp............................ 197,450 7,651,187
--------------
15,482,337
--------------
COMPUTER HARDWARE -- 1.4%
Amdahl Corp. (a)................................ 836,600 10,143,775
Digital Equipment Corp. (a)..................... 293,500 10,676,063
International Business Machines Corp............ 278,900 42,113,900
--------------
62,933,738
--------------
CONSTRUCTION -- 0.2%
McDermott International, Inc.................... 481,900 10,601,800
--------------
CONSUMER SERVICES -- 0.4%
ADT Ltd. (a).................................... 576,300 13,182,863
SPS Transaction Services, Inc. (a).............. 185,900 2,834,975
--------------
16,017,838
--------------
CONTAINERS & PACKAGING -- 0.2%
Sealed Air Corp. (a)............................ 183,600 7,642,350
--------------
DIVERSIFIED CONSUMER PRODUCTS -- 1.0%
RJR Nabisco Holdings Corp....................... 791,400 26,907,600
Whitman Corp.................................... 849,000 19,420,875
--------------
46,328,475
--------------
DRUGS AND MEDICAL SUPPLIES -- 0.3%
United States Surgical Corp..................... 339,700 13,375,688
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
ELECTRICAL EQUIPMENT -- 1.0%
Belden, Inc..................................... 457,600 $ 16,931,200
Westinghouse Electric Corp...................... 1,487,300 29,560,087
--------------
46,491,287
--------------
ELECTRONICS -- 1.3%
National Semiconductor Corp. (a)................ 964,000 23,497,500
Texas Instruments, Inc.......................... 557,700 35,553,375
--------------
59,050,875
--------------
ENGINEERING & CONSTRUCTION -- 0.2%
Giant Cement Holdings, Inc. (a)................. 400,400 6,456,450
--------------
FINANCIAL SERVICES -- 2.9%
Alex Brown, Inc................................. 278,100 20,162,250
Lehman Brothers Holdings, Inc................... 1,597,400 50,118,425
Merrill Lynch & Co., Inc........................ 185,900 15,150,850
Morgan Stanley Group, Inc....................... 209,200 11,950,550
Salomon, Inc.................................... 650,700 30,664,237
--------------
128,046,312
--------------
FOREST PRODUCTS -- 1.7%
Champion International Corp..................... 650,700 28,142,775
Louisiana-Pacific Corp.......................... 650,700 13,746,037
Mead Corp....................................... 326,100 18,954,562
Willamette Industries, Inc...................... 238,100 16,577,712
--------------
77,421,086
--------------
GAS PIPELINES -- 0.3%
Western Gas Resources, Inc...................... 659,000 12,685,750
--------------
HOUSEHOLD PRODUCTS -- 0.3%
Jan Bell Marketing, Inc. (a).................... 964,200 1,988,663
Leggett & Platt, Inc............................ 366,600 12,693,525
--------------
14,682,188
--------------
HOUSING RELATED -- 1.1%
Hanson, PLC, ADR, (United Kingdom).............. 2,540,300 17,147,025
Owens Corning................................... 620,800 26,461,600
--------------
43,608,625
--------------
INSURANCE -- 3.0%
Allstate Corp................................... 124,999 7,234,317
Equitable of Iowa Companies..................... 346,500 15,895,687
Financial Security Assurance Holdings, Ltd...... 218,100 7,170,037
PennCorp Financial Group, Inc................... 513,500 18,486,000
Provident Companies, Inc........................ 170,900 8,267,287
Reinsurance Group of America, Inc............... 487,800 22,987,575
TIG Holdings, Inc............................... 546,900 18,526,237
Trenwick Group, Inc............................. 273,300 12,640,125
W.R. Berkley Corp............................... 180,100 9,140,075
Western National Corp........................... 836,600 16,104,550
--------------
136,451,890
--------------
INTEGRATED PRODUCERS -- 0.2%
Murphy Oil Corp................................. 177,400 9,867,875
--------------
</TABLE>
B1
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
MACHINERY -- 1.4%
Case Corp....................................... 597,500 $ 32,563,750
DT Industries, Inc.............................. 226,100 7,913,500
Paxar Corp...................................... 1,232,660 21,263,385
--------------
61,740,635
--------------
MEDIA -- 1.6%
Central Newspapers, Inc. (Class 'A' Stock)...... 319,800 14,071,200
Gannett Co., Inc................................ 185,900 13,919,262
Hollinger International, Inc.................... 155,600 1,789,400
Houghton Mifflin Co............................. 185,900 10,526,587
Knight-Ridder, Inc.............................. 371,800 14,221,350
Lee Enterprises, Inc............................ 325,300 7,563,225
McGraw-Hill, Inc................................ 185,500 8,556,187
Media General, Inc. (Class 'A' Stock)........... 59,000 1,784,750
--------------
72,431,961
--------------
METALS-NON FERROUS -- 1.1%
Aluminum Company of America..................... 750,500 47,844,375
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 2.0%
Danaher Corp.................................... 435,800 20,319,175
Donaldson, Inc.................................. 372,200 12,468,700
IDEX Corp....................................... 275,300 10,977,587
Mark IV Industries, Inc......................... 558,793 12,642,692
Trinity Industries, Inc......................... 358,300 13,436,250
Wolverine Tube, Inc. (a)........................ 259,800 9,157,950
York International Corp......................... 185,000 10,336,875
--------------
89,339,229
--------------
MISCELLANEOUS - INDUSTRIAL -- 0.8%
Coltec Industries, Inc. (a)..................... 299,900 5,660,613
Global Industrial Technologies, Inc. (a)........ 390,700 8,644,238
Material Sciences Corp. (a)..................... 649,600 11,692,800
Titan Wheel International, Inc.................. 695,550 8,868,263
--------------
34,865,914
--------------
OIL - EXPLORATION & PRODUCTION -- 1.9%
Basin Exploration, Inc. (a)..................... 142,700 891,875
Cabot Oil & Gas Corp. (Class 'A' Stock)......... 552,500 9,461,563
Enron Oil & Gas Co.............................. 309,300 7,809,825
Mesa, Inc. (a).................................. 2,711,400 14,234,850
Noble Affiliates, Inc........................... 325,300 15,573,738
Oryx Energy Co. (a)............................. 789,500 19,540,125
Parker & Parsley Petroleum Co................... 248,600 9,136,050
Seagull Energy Corp. (a)........................ 373,400 8,214,800
--------------
84,862,826
--------------
OIL & GAS -- 1.2%
Societe Nationale Elf Aquitaine, ADR,
(France)...................................... 1,199,200 54,263,800
--------------
OIL SERVICES -- 0.6%
Coflexip, ADR, (France)......................... 650,700 17,080,875
Weatherford Enterra, Inc. (a)................... 298,653 8,959,590
--------------
26,040,465
--------------
PETROLEUM SERVICES -- 0.1%
ICO, Inc........................................ 492,100 3,014,112
--------------
RAILROADS -- 0.2%
Burlington Northern, Inc........................ 117,900 10,183,612
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
REAL ESTATE DEVELOPMENT -- 0.4%
Crescent Real Estate Equities, Inc.............. 339,400 $ 17,903,350
--------------
RETAIL -- 1.6%
Bombay Company, Inc. (a)........................ 890,300 4,117,638
Charming Shoppes, Inc. (a)...................... 2,788,600 14,117,288
Dillard Department Stores, Inc. (a)............. 202,900 6,264,538
K mart Corp. (a)................................ 1,913,600 19,853,600
Toys 'R' Us, Inc. (a)........................... 557,700 16,731,000
Woolworth Corp. (a)............................. 557,700 12,199,688
--------------
73,283,752
--------------
STEEL -- 0.9%
Bethlehem Steel Corp. (a)....................... 929,500 8,365,500
LTV Corp........................................ 1,408,200 16,722,375
National Steel Corp. (Class 'B' Stock) (a)...... 289,300 2,676,025
USX-U.S. Steel Group............................ 418,300 13,124,163
--------------
40,888,063
--------------
TELECOMMUNICATIONS -- 0.1%
Deutsche Telekom, ADR, (Germany) (a)............ 309,500 6,306,063
--------------
TEXTILES -- 1.3%
Farah, Inc. (a)................................. 249,300 1,932,075
Fieldcrest Cannon, Inc. (a)..................... 427,500 6,840,000
Fruit of the Loom, Inc. (Class 'A' Stock) (a)... 464,700 17,600,513
Owens-Illinois, Inc. (a)........................ 513,700 11,686,675
Phillips-Van Heusen Corp........................ 578,500 8,315,938
Tultex Corp. (a)................................ 558,300 3,908,100
V.F. Corp....................................... 143,700 9,699,750
--------------
59,983,051
--------------
TOBACCO -- 0.4%
Philip Morris Companies, Inc.................... 87,300 9,832,163
UST, Inc........................................ 250,400 8,106,700
--------------
17,938,863
--------------
TRUCKING/SHIPPING -- 0.1%
Yellow Corp..................................... 482,100 6,930,188
--------------
TOTAL COMMON STOCKS
(cost $1,310,419,852).......................................... 1,642,431,219
--------------
PREFERRED STOCKS -- 1.0%
FINANCIAL SERVICES -- 0.8%
Central Hispano Corp............................ 225,900 5,986,350
Central Hispano Financial Services.............. 1,000,000 25,200,000
--------------
31,186,350
--------------
GAS PIPELINES -- 0.1%
TransCanada Pipelines, Ltd...................... 140,000 3,640,000
--------------
MEDIA -- 0.0%
Times Mirror Co. (Cum. Conv.), Series B......... 1 28
--------------
PETROLEUM -- 0.1%
Mesa, Inc. (Conv. Pfd.)......................... 914,929 5,832,671
--------------
TOTAL PREFERRED STOCKS
(cost $36,848,291)............................................. 40,659,049
--------------
</TABLE>
B2
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS -- 53.5% (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
DOMESTIC CORPORATE BONDS -- 36.6%
AEROSPACE -- 0.2%
Northrop Grumman Corp.,
7.875%, 03/01/26.............................. Baa3 $ 7,500 $ 7,517,475
--------------
AGRICULTURAL EQUIPMENT -- 0.1%
Agco Corp.,
8.50%, 03/15/06............................... Ba3 6,500 6,576,700
--------------
AIRLINES -- 2.9%
Delta Air Lines, Inc.,
10.125%, 05/15/10............................. Baa3 20,000 24,145,800
10.375%, 02/01/11............................. Ba1 28,405 34,799,534
United Air Lines, Inc.,
9.75%, 08/15/21............................... Baa2 10,125 12,000,555
10.67%, 05/01/04.............................. Baa3 29,665 35,084,499
11.21%, 05/01/14.............................. Baa3 18,433 24,168,797
--------------
130,199,185
--------------
ASSET-BACKED SECURITIES -- 0.2%
Banc One Credit Card Master Trust,
7.75%, 12/15/99............................... A2 5,100 5,178,081
Standard Credit Card Master Trust,
5.95%, 10/07/04............................... Aaa 4,650 4,469,813
--------------
9,647,894
--------------
CABLE & PAY TELEVISION SYSTEMS -- 1.9%
Continental Cablevision, Inc.,
8.30%, 05/15/06............................... Ba2 11,200 11,931,024
8.625%, 08/15/03.............................. Ba2 27,050 29,271,076
Tele-Communications, Inc.,
7.875%, 08/01/13.............................. Baa3 2,500 2,301,450
9.25%, 04/15/02............................... Baa3 21,425 22,694,860
9.80%, 02/01/12............................... B2 7,000 7,575,400
9.875%, 06/15/22.............................. Baa3 7,900 8,507,668
10.125%, 04/15/22............................. Baa3 2,000 2,196,040
--------------
84,477,518
--------------
COMPUTERS -- 0.2%
Digital Equipment Corp.,
7.125%, 10/15/02.............................. Ba1 10,000 9,542,500
--------------
FINANCIAL SERVICES -- 19.1%
Associates Corp. of North America,
6.625%, 05/15/01.............................. Aa3 34,500 34,485,510
6.68%, 09/17/99............................... Aa3 34,050 34,299,927
8.375%, 01/15/98.............................. A1 1,100 1,125,454
Bank of New York,
7.97%, 12/31/26............................... A1 26,000 26,258,440
Barnett Banks,
8.06%, 12/01/26............................... A2 3,500 3,540,775
Bayerische Landes,
6.20%, 09/30/99............................... Aaa 30,000 29,970,000
Capital One Bank,
6.66%, 08/17/98............................... Baa3 10,050 10,085,677
6.73%, 06/04/98............................... Baa2 16,000 16,094,400
6.90%, 04/15/99............................... Baa3 11,000 11,073,590
7.20%, 07/19/99............................... Baa3 11,250 11,376,112
CIT Group Holdings, M.T.N.,
5.85%, 03/16/98............................... Aa3 25,000 25,009,750
5.875%, 11/09/98.............................. Aa3 33,900 33,795,588
Conseco, Inc.,
8.70%, 11/15/26............................... NR 18,200 18,356,884
CoreStates Financial Corp.,
8.00%, 12/15/26............................... A1 24,250 24,251,455
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Enterprise Rent-A-Car USA Finance Co., M.T.N.,
6.35%, 01/15/01............................... Baa3 $ 11,500 $ 11,195,250
7.00%, 06/15/00............................... Baa3 30,000 30,363,000
7.50%, 06/15/03............................... Baa3 5,000 5,139,300
7.875%, 03/15/98.............................. Baa3 9,925 10,145,831
8.75%, 12/15/99............................... Baa3 5,000 5,295,500
First Tennessee National Corp., B.A.,
8.07%, 01/06/27............................... NR 11,150 11,087,560
First Union Corp.,
7.85%, 01/01/27............................... A1 43,500 43,103,062
9.45%, 06/15/99............................... Baa2 4,000 4,274,280
First USA Bank,
8.20%, 02/15/98............................... Baa3 14,575 14,878,306
Ford Motor Credit,
7.00%, 09/25/01............................... A1 37,000 37,551,670
General Motors Acceptance Corp., M.T.N.,
5.395%, 02/02/99.............................. P1 2,000 1,999,825
7.375%, 07/20/98.............................. Baa1 4,650 4,742,209
Lehman Brothers Holdings, Inc.,
6.71%, 10/12/99............................... Baa1 6,000 6,008,100
6.84%, 09/25/98............................... Baa1 30,000 30,227,100
6.89%, 10/10/00............................... Baa1 10,545 10,581,380
Liberty Mutual Insurance Co.,
7.875%, 10/15/26.............................. A2 2,500 2,526,985
8.20%, 05/04/07............................... A2 51,005 54,164,250
Lumbermens Mutual Casualty Co.,
9.15%, 07/01/26............................... Baa1 28,750 31,265,625
Mellon Bank Corp.,
7.72%, 12/01/26............................... A2 15,635 15,151,097
7.995%, 01/15/27.............................. A2 38,500 38,018,750
Republic Bank of New York Corp.,
7.53%, 12/04/26............................... NR 21,000 20,582,583
Salomon, Inc., M.T.N.,
5.98%, 02/02/98............................... Baa1 35,000 34,982,850
7.00%, 05/15/99............................... Baa1 42,000 42,331,800
7.25%, 05/01/01............................... Baa1 8,625 8,706,592
State Street Capital Corp.,
7.94%, 12/30/26............................... NR 10,000 9,960,000
SunAmerica, Inc.,
6.20%, 10/31/99............................... Baa1 9,000 8,955,000
Travelers Capital, Inc.,
7.75%, 12/01/36............................... A1 20,000 19,350,000
Union Planters Corp.,
8.20%, 12/15/26............................... Baa1 20,750 20,542,500
USAA Capital Corp.,
6.34%, 09/18/98............................... Aa1 10,000 10,040,000
Wells Fargo & Co.,
7.96%, 12/15/26............................... A1 32,500 31,974,429
--------------
854,868,396
--------------
FOOD & BEVERAGE -- 0.1%
RJR Nabisco, Inc.,
8.75%, 08/15/05............................... Baa3 4,000 4,018,000
--------------
HEALTH CARE -- 0.0%
Tenet Healthcare Corp.,
8.625%, 12/01/03.............................. Ba2 2,000 2,110,000
--------------
HOSPITAL MANAGEMENT -- 0.0%
Service Corp. International,
7.00%, 06/01/15............................... A3 2,500 2,530,950
--------------
</TABLE>
B3
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
MEDIA -- 5.8%
News America Holdings, Inc.,
7.375%, 10/17/08.............................. Baa3 $ 28,000 $ 27,784,960
7.75%, 12/01/45............................... Baa3 61,000 56,802,590
9.25%, 02/01/13............................... Baa3 24,050 26,942,975
Paramount Communications, Inc.,
7.50%, 01/15/02............................... Ba2 6,425 6,419,667
Time Warner, Inc.,
7.75%, 06/15/05............................... Ba1 15,000 15,088,950
8.11%, 08/15/06............................... Ba1 13,250 13,583,503
8.18%, 08/15/07............................... Ba1 24,500 25,138,715
Time Warner, Inc., (Con't)
8.375%, 07/15/33.............................. Baa3 37,450 37,584,446
9.125%, 01/15/13.............................. Ba1 14,270 15,578,559
Turner Broadcasting Co.,
8.375%, 07/01/13.............................. Ba1 5,325 5,435,813
Viacom, Inc.,
6.75%, 01/15/03............................... Ba2 8,545 8,178,931
7.75%, 06/01/05............................... Ba2 22,275 21,933,524
--------------
260,472,633
--------------
OIL & GAS -- 0.1%
Parker & Parsley Petroleum Co.,
8.25%, 08/15/07............................... Ba2 3,000 3,225,450
--------------
OIL & GAS EQUIPMENT & SERVICES -- 0.2%
B.J. Services Co.,
7.00%, 02/01/06............................... Ba1 4,000 3,887,640
Noble Drilling Corp.,
9.125%, 07/01/06.............................. Ba2 3,500 3,762,500
--------------
7,650,140
--------------
RETAIL -- 3.1%
Federated Department Stores, Inc.,
8.125%, 10/15/02.............................. Ba1 18,075 18,526,875
8.50%, 06/15/03............................... Ba1 36,750 38,220,000
10.00%, 02/15/01.............................. Ba1 4,500 4,905,000
Rite Aid Corp.,
6.70%, 12/15/01............................... A3 5,000 4,982,500
Sears Roebuck Acceptance Corp., M.T.N.,
6.38%, 02/16/99............................... A2 70,000 70,177,100
--------------
136,811,475
--------------
TECHNOLOGY -- 1.8%
Comdisco, Inc., M.T.N.,
5.54%, 01/26/98............................... Baa1 12,500 12,456,750
6.09%, 11/09/98............................... Baa1 34,000 34,034,000
6.29%, 10/22/98............................... Baa1 5,000 5,007,450
6.375%, 11/30/01.............................. Baa1 21,500 21,153,850
6.689%, 05/22/98.............................. Baa1 9,000 9,075,240
--------------
81,727,290
--------------
TELECOMMUNICATIONS -- 0.7%
TCI Communications, Inc.,
8.65%, 09/15/04............................... Baa3 28,470 28,609,788
8.75%, 08/01/15............................... Baa3 5,450 5,383,946
--------------
33,993,734
--------------
TRUCKING/SHIPPING -- 0.1%
Federal Express Corp., M.T.N.,
10.00%, 06/01/98.............................. Baa3 3,000 3,157,440
10.05%, 06/15/99.............................. Baa3 500 539,080
--------------
3,696,520
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
UTILITIES -- 0.1%
Arkla, Inc., M.T.N.,
9.25%, 12/18/97............................... Ba2 $ 3,000 $ 3,077,790
--------------
FOREIGN CORPORATE BONDS -- 6.3%
Banco de Commercio Exterior de Colombia, SA,
M.T.N., (Colombia)
8.625%, 06/02/00.............................. NR 5,500 5,713,125
Banco Ganadero, SA, M.T.N., (Colombia)
9.75%, 08/26/99............................... Baa3 7,300 7,683,250
Bangkok Bank, (Thailand)
7.25%, 09/15/05............................... A3 10,000 9,777,400
8.25%, 03/15/16............................... A3 15,000 15,258,750
Central Hispano Financial Services, (Cayman
Islands)
6.031%, 04/28/05.............................. A3 10,000 10,005,000
Compania Sud Americana de Vapores, SA, (Chile)
7.375%, 12/08/03.............................. NR 7,600 7,486,000
Deutsche Bank, (Germany)
6.70%, 12/13/06............................... Aa1 12,500 12,299,562
Domtar, Inc., (Canada)
9.50%, 08/01/16............................... Ba1 9,000 9,843,750
Empresa Colombia de Petroleos, (Colombia)
7.25%, 07/08/98............................... NR 8,250 8,311,875
Kansallis-Osake Pankki, N.Y., (Finland)
6.125%, 05/15/98.............................. A3 6,160 6,163,758
8.650%, 12/29/49 (b).......................... Baa2 10,000 10,441,500
9.75%, 12/15/98............................... Baa1 16,950 17,990,730
Okobank, (Finland)
7.25%, 09/27/49............................... A3 18,750 19,125,000
7.325%, 10/29/49.............................. NR 9,000 9,220,500
7.70%, 10/29/49............................... NR 3,500 3,585,750
Petroliam Nasional, (Malaysia)
6.625%, 10/18/01.............................. NR 22,000 22,014,520
7.125%, 10/18/06.............................. A1 66,400 66,830,936
PT Alatief Freeport Financial Co., (Netherlands)
9.75%, 04/15/01............................... Ba2 8,950 9,784,588
Royal Bank of Canada, (Canada)
6.75%, 10/24/11............................... Aa3 17,400 17,034,600
Siam Commercila, (Thailand)
7.50%, 03/15/06............................... A3 14,500 14,282,500
--------------
282,853,094
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 5.4%
Federal National Mortgage Association,
9.05%, 04/10/00............................... 14,000 15,148,420
United States Treasury Bonds,
5.875%, 11/15/99.............................. 5,000 4,980,450
United States Treasury Notes,
5.00%, 02/15/99............................... 17,000 16,691,790
5.625%, 11/30/98-11/30/00..................... 86,500 85,271,755
5.875%, 11/30/01-02/15/04..................... 45,400 44,645,298
</TABLE>
B4
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
6.00%, 08/15/99............................... $ 10,000 $ 9,998,400
6.125%, 07/31/00-09/30/00..................... 19,300 19,298,110
6.25%, 04/30/01-02/15/03...................... 20,150 20,142,013
6.375%, 09/30/01.............................. 7,000 7,041,580
6.50%, 08/31/01-10/15/06...................... 16,500 16,625,810
6.75%, 04/30/00............................... 3,000 3,056,730
--------------
242,900,356
--------------
FOREIGN GOVERNMENT BONDS -- 5.2%
Republic of Argentina, (Argentina)
6.625%, 03/31/05.............................. B1 4,900 4,293,625
Republic of Colombia, (Colombia)
7.125%, 05/11/98.............................. Ba1 2,775 2,788,875
8.00%, 06/14/01............................... Baa3 2,250 2,283,750
8.75%, 10/06/99............................... Ba1 12,325 12,879,625
Republic of Poland, (Poland)
4.00%, (until 10/27/98),
5.00%, (until 10/27/99),
6.00%, (until 10/27/02),
7.00%, 10/27/14............................... Baa3 129,500 109,589,375
Republic of Venezuela, (Venezuela)
6.50%, 12/18/07............................... Ba2 9,750 8,580,000
United Mexican States, (Mexico)
7.563%, 08/06/01.............................. Baa3 73,500 73,672,725
9.75%, 02/06/01............................... Ba2 4,000 4,130,000
11.375%, 09/15/16............................. Ba2 13,000 13,536,250
--------------
231,754,225
--------------
TOTAL LONG-TERM BONDS
(cost $2,376,901,639).................................................... 2,399,651,325
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $3,724,169,782).................................................... 4,082,741,593
--------------
SHORT-TERM INVESTMENTS -- 10.1%
BANK NOTES -- 0.2%
First Bank N.A., Minneapolis,
5.275%, 10/24/97.............................. P3 2,000 1,998,881
PNC Bank N.A.,
5.20%, 04/01/97............................... NR 5,000 4,999,364
--------------
6,998,245
--------------
CERTIFICATES OF DEPOSIT-DOMESTIC -- 1.5%
Advanta National Bank,
5.80%, 03/19/97............................... NR 25,000 25,350,000
5.84%, 03/14/97............................... NR 21,500 21,457,000
6.26%, 09/01/97............................... NR 10,500 10,510,500
8.18%, 02/09/97............................... Baa3 10,000 10,100,000
--------------
67,417,500
--------------
CERTIFICATES OF DEPOSIT-EURODOLLAR -- 0.1%
Abbey National Treasury Services, PLC,
5.41%, 01/30/97............................... P1 5,000 5,000,093
--------------
CERTIFICATES OF DEPOSIT-YANKEE -- 1.0%
Bank of Montreal (Canada),
5.39%, 01/22/97............................... P1 18,000 18,000,000
Bank of Nova Scotia (Canada),
5.39%, 03/04/97............................... P3 4,000 4,000,000
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Banque Nationale De Paris (France),
5.42%, 01/15/97............................... NR $ 10,000 $ 9,999,961
5.58%, 04/02/97............................... NR 3,000 2,999,191
Commerzbank (Germany),
5.42%, 06/10/97............................... P1 1,000 999,631
Deutsche Bank (Germany),
5.69%, 10/28/97............................... P3 3,000 2,999,261
National Bank of Canada (Canada),
5.438%, 03/10/97.............................. P3 2,000 2,000,000
Norddeutsche Landesbank (Germany),
5.75%, 04/11/97............................... NR 5,000 5,001,784
Societe Generale (France),
5.78%, 08/20/97............................... P1 2,000 2,001,590
--------------
48,001,418
--------------
COMMERCIAL PAPER -- 3.8%
Aetna Services, Inc.,
5.42%, 03/14/97............................... NR 5,000 4,946,553
American Brands, Inc.,
5.45%, 02/06/97............................... P3 1,000 994,701
6.00%, 01/22/97............................... P3 2,000 1,993,333
American Express Credit Corp.,
5.30%, 02/28/97............................... P1 5,000 4,958,042
Aristar, Inc.,
5.40%, 01/28/97............................... P2 2,000 1,992,200
5.47%, 03/17/97............................... P2 3,000 2,966,268
Bank Austria,
5.35%, 01/15/97............................... NR 8,000 7,984,544
Barton Capital Corp.,
5.35%, 02/27/97............................... NR 2,000 1,983,356
5.40%, 02/21/97............................... NR 8,000 7,940,000
BHF Finance, Inc.,
5.31%, 01/30/97............................... NR 1,000 995,870
Bradford & Bingley Building Society,
5.35%, 01/10/97-01/15/97...................... NR 28,000 27,960,767
Caterpillar Financial Services Corp.,
5.35%, 05/16/97-06/16/97...................... NR 2,000 1,955,565
5.38%, 04/28/97............................... P1 5,000 4,913,322
5.50%, 02/27/97............................... P1 1,380 1,368,193
Cheltenham & Gloucester Building Society,
5.325%, 02/24/97.............................. NR 7,000 6,945,123
Coca Cola Enterprises, Inc.,
5.34%, 02/03/97............................... NR 2,000 1,990,507
Colonial Pipeline Co.,
5.75%, 01/27/97............................... P3 2,000 1,992,014
Commonwealth Bank of Austria,
5.40%, 02/10/97............................... NR 5,000 4,970,750
Corporate Receivables Corp.,
5.40%, 02/20/97............................... NR 2,000 1,985,300
Countrywide Home Loan, Inc.,
6.05%, 01/21/97............................... NR 1,000 996,807
6.20%, 01/15/97............................... NR 7,000 6,984,328
6.35%, 01/15/97............................... NR 6,000 5,986,242
CXC, Inc.,
7.00%, 01/02/97............................... NR 3,662 3,662,000
Dupont (EI) De Nemours,
5.50%, 03/04/97............................... P3 1,000 990,681
</TABLE>
B5
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Engelhard Corp.,
5.58%, 02/24/97............................... P2 $ 2,000 $ 1,983,570
First Data Corp.,
5.40%, 03/18/97-03/25/97...................... NR 8,617 8,512,061
5.46%, 03/25/97............................... NR 5,000 4,937,817
Fleet Funding Corp,
5.80%, 02/04/97............................... NR 3,729 3,709,174
ITT Hartford Group, Inc.,
5.45%, 01/23/97............................... P1+ 1,000 996,821
Kredietbank Na Finance Corp.,
5.32%, 01/16/97............................... NR 2,000 1,995,862
Lehman Brothers Holdings, Inc.,
6.70%, 01/07/97............................... NR 5,000 4,995,347
Merrill Lynch & Co., Inc.,
5.35%, 01/29/97............................... P1 12,000 11,951,850
5.37%, 01/31/97............................... P1 7,000 6,969,719
NYNEX Corp.,
6.80%, 01/06/97............................... P3 3,000 2,997,733
Preferred Receivables Funding Corp.,
5.60%, 02/25/97............................... P1 4,000 3,966,400
Rank Xerox Capital PLC.,
6.25%, 01/09/97............................... NR 2,583 2,579,861
Societe Generale,
5.77%, 05/15/97............................... P1 2,000 2,000,259
Transamerica Financial Corp.,
5.38%, 02/06/97............................... P1 3,750 3,730,385
WCP Funding, Inc.,
5.40%, 02/20/97............................... NR 2,000 1,985,300
--------------
172,768,625
--------------
OTHER CORPORATE OBLIGATIONS -- 3.0%
American General Financial Corp.,
7.75%, 01/15/97............................... P1 3,700 3,702,664
9.50%, 08/01/97............................... P1 1,500 1,530,273
Associates Corp. of North America,
9.70%, 05/01/97............................... P1 2,000 2,023,837
Beneficial Corp.,
9.35%, 02/03/97............................... P1 3,500 3,510,736
Capital Equipment Receivable Trust,
5.60%, 10/15/97............................... NR 3,862 3,862,223
Capital One Bank,
8.625%, 01/15/97.............................. Baa3 32,425 32,443,158
Coca-Cola Enterprises, Inc.,
6.50%, 11/15/97............................... A3 3,750 3,765,600
General Motors Acceptance Corp.,
5.47%, 02/12/97............................... P1 12,000 11,925,243
6.30%, 09/10/97............................... Aaa 5,000 5,017,600
6.70%, 04/30/97............................... A3 11,000 11,035,420
7.60%, 02/10/97............................... P1 2,000 2,004,629
7.85%, 03/05/97............................... Baa1 3,300 3,312,078
7.85%, 03/05/97............................... P1 10,050 10,080,742
Kimberly Clark Corp.,
9.125%, 06/01/97.............................. NR 1,000 1,013,822
Mellon Bank Corp.,
6.50%, 12/01/97............................... Baa1 1,650 1,656,253
Norwest Corp.,
7.875%, 01/30/97.............................. P1 2,000 2,003,190
Salomon, Inc.,
5.89%, 11/10/97............................... Baa1 30,000 29,962,500
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Short Term Repack Asset,
6.00%, 12/15/97............................... NR $ 4,000 $ 3,999,186
--------------
132,849,154
--------------
REPURCHASE AGREEMENT -- 0.5%
Joint Repurchase Agreement Account
6.613%, 01/02/97 (Note 5)..................... 22,692 22,692,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $464,184,986)...................................................... 455,727,035
--------------
TOTAL INVESTMENTS BEFORE SHORT
SALE -- 101.3%
(cost $4,188,354,768; Note 6)............................................ 4,538,468,628
--------------
INVESTMENT SOLD SHORT -- (2.4%)
United States Treasury Bond,
6.75%, 8/15/26
(proceeds $111,621,197; Note 2).............................. (106,860) (110,481,637)
--------------
TOTAL INVESTMENTS, NET OF SHORT SALES -- 98.9%
4,427,986,991
--------------
OTHER ASSETS IN EXCESS OF OTHER
LIABILITIES -- 1.1%...................................................... 50,821,542
--------------
TOTAL NET ASSETS -- 100.0%................................................. $4,478,808,533
--------------
--------------
<FN>
The following abbreviations are used in portfolio descriptions:
ADR American
Depository
Receipt
B.A. Bankers' Acceptances
C.D. Certificates of Deposit
M.T.N. Medium Term Note
PLC Public Limited Company
SA Sociedad Anonima (Spanish Corporation) or Societe
Anonyme (French Corporation)
NR Not Rated
(a) Non-income producing security.
(b) Indicates a variable rate security.
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B12 THROUGH B16.
B6
<PAGE>
FLEXIBLE MANAGED PORTFOLIO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
LONG-TERM INVESTMENTS -- 97.6%
VALUE
COMMON STOCKS -- 61.3% SHARES (NOTE 2)
------------- --------------
<CAPTION>
<S> <C> <C>
AEROSPACE -- 4.1%
AlliedSignal, Inc............................... 600,000 $ 40,200,000
Boeing Co....................................... 530,500 56,431,937
Lockheed Martin Corp............................ 500,000 45,750,000
Rockwell International Corp. (a)................ 400,000 24,350,000
United Technologies Corp........................ 550,000 36,300,000
--------------
203,031,937
--------------
BANKS AND SAVINGS & LOANS -- 4.2%
Banc One Corp................................... 775,000 33,325,000
BankAmerica Corp................................ 300,000 29,925,000
Chase Manhattan Corp............................ 550,000 49,087,500
Citicorp........................................ 310,000 31,930,000
PNC Bank Corp................................... 750,000 28,218,750
State Street Boston Corp........................ 500,000 32,250,000
--------------
204,736,250
--------------
BEVERAGES -- 0.9%
Anheuser-Busch Companies, Inc................... 1,150,000 46,000,000
--------------
CHEMICALS -- 0.6%
E.I. du Pont de Nemours & Co.................... 300,000 28,312,500
--------------
CHEMICALS - SPECIALTY -- 1.8%
IMC Global, Inc................................. 600,000 23,475,000
Morton International, Inc....................... 600,000 24,450,000
Praxair, Inc.................................... 825,000 38,053,125
--------------
85,978,125
--------------
COMMERCIAL SERVICES -- 0.3%
CUC International, Inc. (a)..................... 600,000 14,250,000
--------------
COMPUTER SERVICES -- 6.4%
3Com Corp. (a).................................. 600,000 44,025,000
Cadence Design Systems, Inc. (a)................ 675,000 26,831,250
Cascade Communications.......................... 325,000 17,915,625
Cisco Systems, Inc. (a)......................... 750,000 47,718,750
Computer Associates International, Inc.......... 975,000 48,506,250
Computer Sciences Corp. (a)..................... 500,000 41,062,500
First Data Corp................................. 500,000 18,250,000
Gateway 2000, Inc. (a).......................... 275,000 14,729,687
Microsoft Corp. (a)............................. 250,000 20,656,250
Oracle Corp. (a)................................ 775,000 32,356,250
--------------
312,051,562
--------------
CONSTRUCTION -- 0.7%
Fluor Corp...................................... 550,000 34,512,500
--------------
COSMETICS & SOAPS -- 0.7%
Procter & Gamble Co............................. 300,000 32,250,000
--------------
DIVERSIFIED GAS -- 0.3%
Cross Timbers Oil Co............................ 530,000 13,316,250
--------------
DIVERSIFIED OFFICE EQUIPMENT -- 1.8%
Alco Standard Corp.............................. 300,000 15,487,500
Hewlett-Packard Co.............................. 325,000 16,331,250
Honeywell, Inc.................................. 650,000 42,737,500
Xerox Corp...................................... 300,000 15,787,500
--------------
90,343,750
--------------
DRUGS AND MEDICAL SUPPLIES -- 6.0%
American Home Products Corp..................... 885,000 51,883,125
Baxter International, Inc....................... 650,000 26,650,000
Becton, Dickinson & Co.......................... 800,000 34,700,000
Boston Scientific Corp. (a)..................... 700,000 42,000,000
Medtronic, Inc.................................. 400,000 27,200,000
Novartis Corp., AG ADR (Switzerland)............ 933,328 53,491,332
Pfizer, Inc..................................... 700,000 58,012,500
--------------
293,936,957
--------------
ELECTRICAL EQUIPMENT -- 1.9%
Applied Materials, Inc. (a)..................... 450,000 16,171,875
Baldor Electric Co.............................. 1 25
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Belden, Inc..................................... 425,000 $ 15,725,000
FORE Systems, Inc. (a).......................... 725,000 23,834,375
Westinghouse Electric Corp...................... 1,900,000 37,762,500
--------------
93,493,775
--------------
ELECTRONICS -- 2.2%
ADT Ltd. (a).................................... 750,000 17,156,250
Intel Corp...................................... 475,000 62,195,313
Maxim Integrated Products, Inc. (a)............. 700,000 30,275,000
--------------
109,626,563
--------------
FINANCIAL SERVICES -- 0.9%
MBNA Corp....................................... 1,075,000 44,612,500
--------------
FOODS -- 0.4%
Nabisco Holdings Corp.
(Class 'A' Stock)............................. 500,000 19,437,500
--------------
FOREST PRODUCTS -- 1.2%
Kimberly-Clark Corp............................. 350,000 33,337,500
Willamette Industries, Inc...................... 399,000 27,780,375
--------------
61,117,875
--------------
GAS PIPELINES -- 0.7%
Enron Corp...................................... 850,000 36,656,250
--------------
HEALTH CARE -- 0.2%
Tenet Healthcare Corp. (a)...................... 400,000 8,750,000
--------------
HOSPITAL MANAGEMENT -- 1.1%
Columbia/HCA Healthcare Corp.................... 900,000 36,675,000
Guidant Corp.................................... 300,000 17,100,000
--------------
53,775,000
--------------
INSURANCE -- 5.0%
Aetna Inc....................................... 650,000 52,000,000
Allstate Corp................................... 875,000 50,640,625
American International Group, Inc............... 250,000 27,062,500
Chubb Corp...................................... 400,000 21,500,000
CIGNA Corp...................................... 250,000 34,156,250
Travelers Group, Inc............................ 1,266,666 57,474,970
--------------
242,834,345
--------------
LEISURE -- 0.6%
Carnival Corp. (Class 'A' Stock)................ 900,000 29,700,000
--------------
LODGING -- 0.2%
Hilton Hotels Corp.............................. 400,000 10,450,000
--------------
MACHINERY -- 0.8%
Case Corp....................................... 700,000 38,150,000
--------------
MEDIA -- 0.4%
Comcast Corp. (Class 'A' Stock)................. 1,000,000 17,625,000
--------------
MINERAL RESOURCES -- 0.5%
Potash Corp. of Saskatchewan, Inc............... 270,000 22,950,000
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 4.5%
Cognizant Corp.................................. 735,700 24,278,100
General Electric Co............................. 700,000 69,212,500
Illinois Tool Works, Inc........................ 400,000 31,950,000
Tyco International, Ltd......................... 1,225,000 64,771,875
York International Corp......................... 500,000 27,937,500
--------------
218,149,975
--------------
MISCELLANEOUS - CONSUMER GROWTH/STABLE -- 1.1%
Unilever N.V., ADR (United Kingdom)............. 300,000 52,575,000
--------------
PETROLEUM -- 3.2%
British Petroleum, PLC, ADR (United Kingdom).... 325,000 45,946,875
Mobil Corp...................................... 400,000 48,900,000
Royal Dutch Petroleum Co., ADR (Netherlands).... 200,000 34,150,000
Total SA, ADR (France).......................... 700,000 28,175,000
--------------
157,171,875
--------------
</TABLE>
B7
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
PETROLEUM SERVICES -- 1.3%
Baker Hughes, Inc............................... 581,700 $ 20,068,650
Halliburton Co.................................. 700,000 42,175,000
--------------
62,243,650
--------------
RETAIL -- 6.5%
American Stores Co.............................. 800,000 32,700,000
Federated Department Stores, Inc. (a)........... 1,120,000 38,220,000
The Gap, Inc.................................... 500,000 15,062,500
Home Depot, Inc................................. 750,000 37,593,750
Koninklijke Ahold, ADR (Netherlands)............ 250,000 15,437,500
Nike, Inc. (Class 'B' Stock).................... 600,000 35,850,000
Nine West Group................................. 775,000 35,940,625
Price/Costco, Inc. (a).......................... 1,500,000 37,687,500
Safeway, Inc. (a)............................... 1,000,000 42,750,000
Staples, Inc. (a)............................... 1,601,500 28,927,094
--------------
320,168,969
--------------
TELECOMMUNICATIONS -- 0.8%
AT&T Corp....................................... 550,000 23,925,000
Newbridge Networks Corp. (a).................... 500,000 14,125,000
--------------
38,050,000
--------------
TOTAL COMMON STOCKS
(cost $2,434,484,264).......................................... 2,996,258,108
--------------
PREFERRED STOCKS -- 1.5%
FINANCIAL SERVICES -- 0.5%
Central Hispano Financial Services.............. 1,000,000 25,200,000
--------------
GAS PIPELINES -- 0.1%
TransCanada Pipelines, Ltd...................... 140,000 3,640,000
--------------
LEISURE -- 0.3%
Hilton Hotels (Conv.)........................... 600,000 14,775,000
--------------
TELECOMMUNICATIONS -- 0.6%
Airtouch Communications (Conv.)................. 700,000 31,675,000
--------------
TOTAL PREFERRED STOCKS
(cost $75,571,505)............................................. 75,290,000
--------------
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
CONVERTIBLE BONDS -- 0.6% (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
RETAIL -- 0.6%
Federated Department Stores, Inc.,
5.00%, 10/01/03............................... Ba3 $ 8,000 $ 9,180,000
Home Depot, Inc.,
3.25%, 10/01/01............................... A1 19,000 18,715,000
--------------
TOTAL CONVERTIBLE BONDS
(cost $27,850,057)....................................................... 27,895,000
--------------
LONG-TERM BONDS -- 34.2%
DOMESTIC CORPORATE BONDS -- 22.3%
AEROSPACE -- 0.2%
Northrop Grumman Corp.,
7.875%, 03/01/26.............................. NR 7,500 7,517,475
--------------
AGRICULTURAL EQUIPMENT -- 0.1%
Agco Corp.,
8.50%, 03/15/06............................... Ba3 6,500 6,576,700
--------------
AIRLINES -- 2.3%
Delta Air Lines, Inc.,
10.125%, 05/15/10............................. Baa3 19,335 23,342,952
10.375%, 02/01/11............................. Ba1 25,750 31,546,840
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
United Air Lines, Inc.,
9.75%, 08/15/21............................... Baa2 $ 10,125 $ 12,000,555
10.67%, 05/01/04.............................. Baa3 19,500 23,062,455
11.21%, 05/01/14.............................. Baa3 17,500 22,945,475
--------------
112,898,277
--------------
ASSET BACKED -- 0.1%
Standard Credit Card Master Trust
5.95%, 10/07/04............................... AAA 4,500 4,325,625
--------------
CABLE & PAY TELEVISION SYSTEMS -- 1.3%
Continental Cablevision, Inc.,
8.30%, 05/15/06............................... Ba2 10,800 11,504,916
8.625%, 08/15/03.............................. Ba2 7,500 8,115,825
TCI Communications, Inc.,
8.65%, 09/15/04............................... Baa3 6,000 6,029,460
8.75%, 08/01/15............................... Baa3 5,950 5,877,886
Tele-Communications, Inc.,
7.875%, 08/01/13.............................. Baa3 17,500 16,110,150
9.80%, 02/01/12............................... B2 7,000 7,575,400
9.875%, 06/15/22.............................. Baa3 7,878 8,483,976
10.125%, 04/15/22............................. Baa3 2,000 2,196,040
--------------
65,893,653
--------------
COMPUTERS -- 0.3%
Digital Equipment Corp.,
7.125%, 10/15/02.............................. Ba1 14,800 14,122,900
--------------
FINANCIAL SERVICES -- 10.7%
Bank of New York,
7.97%, 12/31/26............................... A1 26,000 26,258,440
Barnett Banks,
8.06%, 12/01/26............................... NR 3,500 3,540,775
Capital One Bank,
6.66%, 08/17/98............................... Baa3 11,175 11,214,671
6.73%, 06/04/98............................... Baa2 26,000 26,153,400
6.90%, 04/15/99............................... Baa3 11,000 11,073,590
7.20%, 07/19/99............................... Baa3 11,250 11,376,112
Conseco, Inc.,
8.70%, 11/15/26............................... NR 18,200 18,356,884
CoreStates Financial Corp.,
8.00%, 12/15/26............................... NR 24,250 24,251,455
Enterprise Rent-A-Car USA Finance Co., M.T.N.,
6.35%, 01/15/01............................... Baa3 3,500 3,407,250
7.00%, 06/15/00............................... Baa3 13,500 13,663,350
First Tennessee National Corp., B.A.,
8.07%, 01/06/27............................... NR 11,150 11,087,560
First Union Corp.,
7.85%, 01/01/27............................... A1 43,500 43,103,062
First USA Bank,
8.20%, 02/15/98............................... Baa3 13,000 13,270,530
Ford Motor Credit,
7.00%, 09/25/01............................... NR 13,000 13,193,830
General Motors Acceptance Corp., M.T.N.,
7.375%, 07/20/98.............................. Baa1 4,500 4,589,235
7.875%, 03/15/00.............................. NR 5,000 5,202,100
Lehman Brothers Holdings, Inc.,
6.71%, 10/12/99............................... Baa1 24,000 24,032,400
6.84%, 09/25/98............................... Baa1 5,000 5,037,850
Liberty Mutual Insurance Co.,
7.875%, 10/15/26.............................. A2 2,500 2,526,985
8.20%, 05/04/07............................... NR 5,000 5,309,700
Lumbermens Mutual Casualty Co.,
9.15%, 07/01/26............................... NR 12,600 13,702,500
</TABLE>
B8
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Mellon Bank Corp.,
7.72%, 12/01/26............................... A2 $ 15,500 $ 15,020,275
7.995%, 01/15/27.............................. A2 38,500 38,018,750
Republic Bank of New York Corp.,
7.53%, 12/04/26............................... NR 21,000 20,582,583
Salomon, Inc., M.T.N.,
5.98%, 02/02/98............................... Baa 23,500 23,488,485
7.00%, 05/15/99............................... Baa 34,600 34,873,340
7.25%, 05/01/01............................... Baa 8,625 8,706,593
State Street Capital Corp.,
7.94%, 12/30/26............................... NR 7,500 7,470,000
Travelers Capital, Inc.,
7.75%, 12/01/36............................... A1 20,000 19,350,000
Union Planters Corp.,
8.20%, 12/15/26............................... NR 20,750 20,542,500
USAA Capital Corp.,
6.34%, 09/18/98............................... Aa1 20,000 20,080,000
Wells Fargo & Co.,
7.96%, 12/15/26............................... A1 26,300 26,563,000
--------------
525,047,205
--------------
FOOD & BEVERAGE -- 0.1%
RJR Nabisco, Inc.,
8.75%, 08/15/05............................... Baa3 3,000 3,013,500
--------------
HEALTH CARE -- 0.9%
Tenet Healthcare Corp.,
8.625%, 12/01/03.............................. Ba2 15,315 16,157,325
9.625%, 09/01/02.............................. Ba1 23,750 26,006,250
--------------
42,163,575
--------------
INDUSTRIAL -- 0.1%
Service Corp. International,
7.00%, 06/01/15............................... A3 2,500 2,530,950
--------------
MEDIA -- 3.9%
News America Holdings, Inc.,
7.375%, 10/17/08.............................. Baa3 2,000 1,984,640
7.75%, 12/01/45............................... Baa3 39,000 36,316,410
9.25%, 02/01/13............................... Baa3 36,200 40,554,498
Paramount Communications, Inc.,
7.50%, 01/15/02............................... Ba2 9,100 9,092,447
Time Warner, Inc.,
8.11%, 08/15/06............................... Ba1 13,250 13,583,503
8.18%, 08/15/07............................... Ba1 13,000 13,338,910
8.375%, 07/15/33.............................. Baa3 32,800 32,917,752
9.125%, 01/15/13.............................. Ba1 12,040 13,144,068
Turner Broadcasting Co.,
8.375%, 07/01/13.............................. Ba 5,300 5,410,293
Viacom, Inc.,
6.75%, 01/15/03............................... Ba2 7,350 7,035,126
7.75%, 06/01/05............................... Ba2 19,675 19,373,382
--------------
192,751,029
--------------
OIL & GAS -- 0.4%
Parker & Parsley Petroleum Co.,
8.25%, 08/15/07............................... Ba2 3,000 3,225,450
Transco Energy Co.,
9.125%, 05/01/98.............................. Ba3 14,000 14,531,160
--------------
17,756,610
--------------
OIL & GAS EQUIPMENT & SERVICES -- 0.1%
B.J. Services Co.,
7.00%, 02/01/06............................... Ba1 4,000 3,887,640
Noble Drilling Corp.,
9.125%, 07/01/06.............................. Ba2 3,500 3,762,500
--------------
7,650,140
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
RETAIL -- 1.6%
Federated Department Stores, Inc.,
8.125%, 10/15/02.............................. Ba1 $ 6,600 $ 6,765,000
8.50%, 06/15/03............................... Ba1 66,000 68,640,000
10.00%, 02/15/01.............................. Ba1 2,500 2,725,000
--------------
78,130,000
--------------
TECHNOLOGY -- 0.2%
Comdisco, Inc., M.T.N.,
6.375%, 11/30/01.............................. Baa1 2,700 2,656,530
7.25%, 04/15/98............................... Baa2 10,000 10,135,700
--------------
12,792,230
--------------
FOREIGN CORPORATE BONDS -- 7.0%
Banco de Commercio Exterior de Colombia, SA,
M.T.N.,(Colombia)
8.625%, 06/02/00.............................. NR 5,500 5,713,125
Banco Ganadero, SA, M.T.N., (Colombia)
9.75%, 08/26/99............................... Baa 7,300 7,683,250
Bancomer, SA, (Mexico)
8.00%, 07/07/98............................... Ba 8,000 7,980,000
Bangkok Bank, (Thailand)
7.25%, 09/15/05............................... A3 10,000 9,777,400
Central Hispano Financial Services, (Cayman
Islands)
6.031%, 04/28/05.............................. A3 5,000 5,002,500
Compania Sud Americana de Vapores, SA, (Chile)
7.375%, 12/08/03.............................. NR 5,650 5,565,250
Controladora Commercial Mexicana, SA, (Mexico)
8.75%, 04/21/98............................... NR 15,100 15,175,500
Deutsche Bank, (Germany)
6.70%, 12/13/06............................... Aa 17,500 17,219,388
Dotmar, Inc., (Canada)
9.50%, 08/01/16............................... Ba 24,750 27,070,313
Empresa Colombia de Petroleos, (Colombia)
7.25%, 07/08/98............................... NR 8,250 8,311,875
Kansallis-Osake Pankki, N.Y., (Finland)
8.65%, 01/01/49 (b)........................... Baa1 9,000 9,397,350
9.75%, 12/15/98............................... Baa1 16,760 17,789,064
Nacional Financie, (Cayman Islands)
9.00%, 01/25/99............................... Ba2 15,000 15,300,000
National Power Co., (United Kingdom)
7.875%, 12/15/06.............................. Ba2 22,500 22,612,500
8.40%, 12/15/16............................... Ba2 27,500 27,362,500
Okobank, (Finalnd)
7.70%, 10/29/49 (b)........................... NR 3,500 3,585,750
7.25%, 09/27/49............................... A3 18,750 19,125,000
7.325%, 10/29/49 (b).......................... NR 9,000 9,220,500
Petroliam Nasional, (Malaysia)
7.125%, 10/18/06.............................. NR 63,100 63,509,519
PT Alatief Freeport Financial Co., (Netherlands)
9.75%, 04/15/01............................... Ba2 7,600 8,308,700
Rio de Janeiro, (Brazil)
10.375%, 07/12/99............................. NR 7,000 7,192,500
Rogers Cablesystems, Inc., Sr. Sec'd Notes,
(Canada)
10.00%, 03/15/05.............................. Ba3 2,000 2,130,000
</TABLE>
B9
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Royal Bank of Canada, (Canada)
6.75%, 10/24/11............................... Aa3 $ 15,000 $ 14,685,000
Siam Commercila, (Thailand)
7.50%, 03/15/06............................... Aa3 14,500 14,282,500
--------------
343,999,484
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 0.2%
Federal National Mortgage Association,
Zero Coupon, 10/09/19......................... Aaa 11,800 2,391,388
United States Treasury Notes,
6.375%, 08/15/02.............................. Aaa 10,000 10,065,600
--------------
12,456,988
--------------
FOREIGN GOVERNMENT BONDS -- 4.7%
Republic of Argentina, (Argentina)
6.625%, 03/31/05.............................. B1 32,340 28,337,925
Republic of Colombia, (Colombia)
7.125%, 05/11/98.............................. Ba1 2,700 2,713,500
8.00%, 06/14/01............................... NR 2,150 2,182,250
8.75%, 10/06/99............................... Ba1 12,300 12,853,500
Republic of Poland, (Poland)
4.00%, (until 10/27/98)....................... Baa3 100,500 85,048,125
5.00%, (until 10/27/99)
6.00%, (until 10/27/02)
7.00%, 10/27/14
Republic of Venezuela, (Venezuela)
6.50%, 12/18/07............................... Ba2 60,250 53,020,000
United Mexican States, (Mexico)
9.75%, 02/06/01............................... NR 25,000 25,812,500
11.375%, 09/15/16............................. NR 21,000 21,866,250
--------------
231,834,050
--------------
TOTAL LONG-TERM BONDS
(cost $1,657,819,992).................................................... 1,681,460,391
--------------
TOTAL LONG TERM INVESTMENTS
(cost $4,195,725,818).................................................... 4,780,903,499
--------------
SHORT-TERM INVESTMENTS -- 4.1%
BANK NOTES -- 0.1%
American Express Centurian Bank,
5.625%, 01/14/97.............................. NR 1,000 1,000,001
Comerica Bank of Detroit,
6.585%, 02/14/97.............................. NR 569 568,948
NBD Bank, N.A.,
6.55%, 06/02/97............................... NR 2,000 2,008,199
--------------
3,577,148
--------------
CERTIFICATES OF DEPOSIT-DOMESTIC -- 0.5%
Advanta National Bank,
6.14%, 02/28/97............................... Baa2 17,000 17,000,000
Chase Manhattan Bank,
5.43%, 05/06/97............................... P3 6,000 6,000,000
--------------
23,000,000
--------------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
CERTIFICATES OF DEPOSIT-EURODOLLAR -- 0.1%
Abbey National Treasury Services, PLC, (United
Kingdom)
5.41%, 01/30/97............................... P1 $ 2,000 $ 2,000,037
Bayerische Hypotheken, (Germany)
5.74%, 05/27/97............................... NR 1,000 1,000,409
--------------
3,000,446
--------------
CERTIFICATES OF DEPOSIT-YANKEE -- 0.5%
Bank of Montreal, (Canada)
5.39%, 01/22/97............................... P1 2,000 2,000,000
Banque Nationale de Paris, (France)
5.41%, 01/15/97............................... NR 3,000 2,999,989
5.58%, 04/02/97............................... NR 2,000 1,999,461
Barclays Bank, PLC, (United Kingdom)
5.37%, 02/03/97-02/05/97...................... NR 6,000 6,000,000
Deutsche Bank, (Germany)
5.69%, 10/28/97............................... P3 1,000 999,754
Empresas La Moderna, SA, (Mexico)
10.25%, 11/12/97.............................. Baa1 2,000 2,051,250
Grupo Televisa, SA, (Mexico)
10.00%, 11/09/97.............................. Ba2 4,000 4,100,000
National Bank of Canada, (Canada)
5.438%, 03/10/97.............................. P3 1,000 1,000,000
Societe Generale, (France)
5.77%, 05/15/97............................... P1 1,000 1,000,130
--------------
22,150,584
--------------
COMMERCIAL PAPER -- 1.3%
Aetna Services, Inc.,
5.42%, 03/14/97............................... NR 2,000 1,978,621
American Brands Inc,
5.33%, 01/31/97............................... P3 1,000 995,706
6.00%, 01/22/97............................... P3 1,000 996,667
American Express Credit Corp.,
5.30%, 02/28/97............................... P1 3,000 2,974,825
Aristar, Inc.,
5.59%, 02/28/97............................... P2 1,000 991,149
Bank Austria,
5.35%, 01/15/97............................... NR 2,000 1,996,136
Barton Capital Corp.,
5.35%, 02/27/97............................... NR 1,000 991,678
Bradford & Bingley Building Society,
5.35%, 01/10/97-01/15/97...................... A1 5,550 5,542,659
Caterpillar Financial Services Corp.,
5.35%, 06/16/97............................... P1 1,000 975,479
Cheltenham & Gloucester Building Society,
5.325%, 02/24/97.............................. NR 1,000 992,160
5.35%, 01/15/97............................... NR 1,000 998,068
Coca Cola Enterprises, Inc.,
5.34%, 02/03/97............................... NR 1,000 995,253
Colonial Pipeline Co.,
5.75%, 01/27/97............................... P3 1,000 996,007
Commonwealth Bank of Australia,
5.32%, 01/22/97............................... NR 7,000 6,979,311
Corporate Receivables Corp.,
5.33%, 01/24/97............................... NR 2,000 1,993,486
</TABLE>
B10
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Countrywide Home Loan, Inc.,
6.20%, 01/15/97............................... NR $ 3,000 $ 2,993,283
CXC, Inc.,
5.60%, 01/16/97............................... NR 1,005 1,002,811
7.00%, 01/02/97............................... NR 670 670,000
Dakota Cert. Prog. of Stand. Cred.,
5.34%, 01/23/97............................... NR 2,000 1,993,770
Engelhard Corp.,
5.58%, 02/24/97............................... P2 1,000 991,785
Enterprise Funding Corp.,
5.47%, 01/16/97............................... NR 1,000 997,873
5.50%, 01/15/97............................... NR 2,000 1,996,028
Fleet Funding Corp.,
5.80%, 02/04/97............................... NR 1,000 994,683
General Motors Acceptance Corp.,
5.47%, 02/12/97............................... P1 3,000 2,981,311
5.50%, 04/07/97............................... P1 1,912 1,884,249
Kredietbank Na Finance Corp.,
5.32%, 01/16/97............................... NR 1,000 997,931
Merrill Lynch & Co., Inc.,
5.31%, 02/27/97............................... P1 1,000 991,740
5.32%, 01/21/97............................... P1 1,000 997,192
5.33%, 01/24/97............................... P1 2,000 1,993,486
5.35%, 01/29/97............................... P1 3,000 2,987,963
Morgan Stanley Group, Inc.,
5.32%, 01/29/97............................... P1 5,000 4,980,050
Nationwide Building Society,
5.375%, 02/26/97.............................. NR 1,000 991,788
Preferred Receivables Funding Corp.,
5.45%, 01/15/97............................... P1 1,000 998,032
5.60%, 02/25/97............................... P1 1,000 991,600
Short Term Repack Asset Trust,
6.006%, 12/15/97.............................. NR 1,000 999,797
Societe Generale,
5.57%, 04/04/97............................... P1 1,000 999,676
Transamerica Financial Corp.,
5.34%, 02/03/97............................... P1 1,000 995,253
--------------
65,827,506
--------------
OTHER CORPORATE OBLIGATIONS -- 0.2%
Associates Corp. of North America,
6.625%, 11/15/97.............................. P1 600 604,890
Beneficial Corp.,
5.54%, 08/05/97............................... P1 1,000 1,000,375
9.70%, 05/30/97............................... P1 2,000 2,031,498
Capital Equipment Receivable Trust,
5.60%, 10/15/97............................... NR 1,545 1,544,889
Dean Witter, Discover &,
5.747%, 03/06/97.............................. P2 1,250 1,250,281
Ford Motor Credit Corp.,
5.625%, 03/03/97.............................. P1 500 499,927
7.95%, 03/27/97............................... P1 465 467,315
General Electric Capital Corp.,
8.00%, 02/01/97............................... P1 1,500 1,503,055
General Motors Acceptance Corp.,
7.75%, 02/20/97-04/15/97...................... P1 825 828,464
7.85%, 03/05/97............................... P1 1,150 1,154,153
7.90%, 03/13/97............................... P1 500 501,804
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Household Finance Corp.,
5.67%, 08/11/97............................... P2 $ 475 $ 475,495
Norwest Corp.,
7.70%, 11/15/97............................... P1 500 508,485
Pfizer, Inc.,
6.50%, 02/01/97............................... P3 500 500,280
--------------
12,870,911
--------------
REPURCHASE AGREEMENT -- 1.4%
Joint Repurchase Agreement Account,
6.613%, 01/02/97 (Note 5)..................... 70,099 70,099,000
--------------
TOTAL SHORT-TERM INVESTMENTS -- 4.1%
(cost $204,409,679)...................................................... 200,525,595
--------------
TOTAL INVESTMENTS BEFORE SHORT SALE -- 101.7%
(cost $4,400,135,497; Note 6)............................................ 4,981,429,094
--------------
INVESTMENT SOLD SHORT -- (2.2%)
United States Treasury Bond,
6.75% 8/15/26
(proceeds $113,630,151; Note 2)............................. 108,775 (112,461,581)
--------------
TOTAL INVESTMENTS, NET OF SHORT SALES -- 99.5%............................. 4,868,967,513
OTHER ASSETS IN EXCESS OF OTHER
LIABILITIES -- 0.5%.................................................... 27,955,174
--------------
TOTAL NET ASSETS -- 100.0%................................................. $4,896,922,687
--------------
--------------
<FN>
The following abbreviations are used in portfolio descriptions:
ADR American Depository Receipt
AG Aktiengesellschaft (West German Stock Company)
B.A. Bankers' Acceptances
C.D. Certificates of Deposit
M.T.N. Medium Term Note
NR Not Rated
PLC Public Limited Company (British Corporation)
SA Sociedad Anonima (Spanish Corporation) or Societe
Anonyme (French Corporation)
(a) Non-income producing security.
(b) Indicates a variable rate security.
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B12 THROUGH B16.
B11
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS OF
THE CONSERVATIVE BALANCED PORTFOLIO AND
FLEXIBLE MANAGED PORTFOLIO 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 two Portfolios: Conservative Balanced
Portfolio and Flexible Managed 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. These
policies are in conformity with generally accepted accounting principles.
SECURITIES VALUATION: Securities traded on an exchange (whether domestic or
foreign) are valued at the last reported sales price on the primary exchange on
which they are traded. Securities traded in the over-the-counter market
(including securities listed on exchanges for which a last sales price is not
available) are valued at the average of the last reported bid and asked prices.
Convertible debt securities are valued at the mean between the most recently
quoted bid and asked prices provided by principal market makers. High yield
bonds are valued either by quotes received from principal market makers or by an
independent pricing service which determine prices by analysis of quality,
coupon, maturity and other factors. Any security for which a reliable market
quotation is unavailable is valued at fair value as determined in good faith by
or under the direction of the Series Fund's Board of Directors. Short-term
securities 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
be 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 investment 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 foreign currency gains (losses) are included in the reported net
realized gains (losses) on investment transactions.
B12
<PAGE>
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains or losses from holdings of foreign currencies, currency
gains or losses realized between the trade and settlement dates on security
transactions, and the difference between the amounts of dividends, interest and
foreign taxes recorded on the Series Fund's books and the U.S. dollar equivalent
amounts actually received or paid. Net unrealized currency gains or losses from
valuing foreign currency denominated assets and liabilities (other than
investments) at fiscal year end exchange rates are reflected as a component of
net unrealized appreciation (depreciation) on investments and foreign
currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
SHORT SALES: Conservative Balanced Portfolio and Flexible Managed Portfolio 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 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 sale 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 recorded on the
ex-dividend date; interest income, which is comprised of three elements: stated
coupon, original issue discount and market discount, is recorded on the accrual
basis. Certain Portfolios own shares of
B13
<PAGE>
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.
CUSTODY FEE CREDITS: The Series Fund 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 Statements 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
and distributions from net realized gains, if any, twice a year. Dividends and
distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Series Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gains, and
Return of Capital Distributions by Investment Companies. As a result of this
statement, the Series Fund changed the classification of distributions to
shareholders to disclose the amounts of undistributed net investment income and
accumulated net realized gain (loss) on investments available for distributions
determined in accordance with income tax regulations. For the fiscal year ended
December 31, 1996, the application of this statement increased (decreased)
paid-in capital in excess of par (PC), undistributed net investment income
("UNI") and accumulated net realized gains (losses) on investments ("G/L") by
the following amounts:
<TABLE>
<CAPTION>
PC UNI G/L
------------- ----------- -----------
<S> <C> <C> <C>
Conservative Balanced Portfolio............ $(15,661,578) $3,079,619 $12,581,959
Flexible Managed Portfolio................. (31,413,181) 8,052,179 23,361,002
</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.
B14
<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
Portfolios' average daily net assets:
<TABLE>
<CAPTION>
FUND INVESTMENT ADVISORY FEE
---- -----------------------
<S> <C>
Conservative Balanced Portfolio..................... 0.55%
Flexible Managed Portfolio.......................... 0.60
</TABLE>
The Prudential has agreed to refund to a 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, 1996.
PIC is an indirect, wholly-owned subsidiary of The Prudential.
NOTE 4: OTHER TRANSACTIONS WITH AFFILIATES
For the fiscal year ended December 31, 1996, Prudential Securities Incorporated,
an indirect, wholly owned subsidiary of The Prudential, earned $703,293 in
brokerage commissions from transactions executed on behalf of the Conservative
Balanced Portfolio and the Flexible Managed Portfolio as follows:
<TABLE>
<CAPTION>
FUND COMMISSION
---- ----------
<S> <C>
Conservative Balanced Portfolio................................ $ 120,976
Flexible Managed Portfolio..................................... 582,317
---------
$ 703,293
</TABLE>
NOTE 5: JOINT REPURCHASE AGREEMENT ACCOUNT
The portfolios of the Series Fund 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 $868,381,000 as of December 31, 1996.
The Portfolios of the Series Fund with cash invested in the joint account had
the following principal amounts and percentage participation in the account:
<TABLE>
<CAPTION>
PRINCIPAL PERCENTAGE
AMOUNT INTEREST
------------- -----------
<S> <C> <C>
Conservative Balanced Portfolio.................... $ 22,692,000 2.61%
Flexible Managed Portfolio......................... 70,099,000 8.07
All other portfolios (currently not available to
PRUvider)......................................... 775,590,000 89.32
------------- -------
$ 868,381,000 100.00%
</TABLE>
As of such date, each repurchase agreement in the joint account and the
collateral therefor were as follows:
Bear, Stearns & Co., Inc., 6.75%, in the principal amount of $265,000,000,
repurchase price $265,099,375, due 1/2/97. The value of the collateral including
accrued interest was $270,501,866.
Goldman, Sachs & Co., Inc., 5.85%, in the principal amount of $73,381,000,
repurchase price $73,404,849, due 1/2/97. The value of the collateral including
accrued interest was $75,883,443.
Smith Barney, Inc., 6.65%, in the principal amount of $265,000,000, repurchase
price $265,097,902, due 1/2/97. The value of the collateral including accrued
interest was $270,820,275.
UBS Securities Corp., 6.65%, in the principal amount of $265,000,000, repurchase
price $265,097,902, due 1/2/97. The value of the collateral including accrued
interest was $270,302,336.
The weighted average interest rate of these repurchase agreements was 6.613%.
B15
<PAGE>
NOTE 6: PORTFOLIO SECURITIES
The aggregate cost of purchase and the proceeds from the sales of securities
(excluding short-term issues) for the fiscal year ended December 31, 1996 were
as follows:
Cost of Purchases:
<TABLE>
<CAPTION>
CONSERVATIVE FLEXIBLE
BALANCED MANAGED
-------------- --------------
<S> <C> <C>
Debt Securities................. $10,348,623,701 $7,818,989,849
Equity Securities............... $ 524,839,665 $2,661,774,273
</TABLE>
Proceeds From Sales:
<TABLE>
<CAPTION>
CONSERVATIVE FLEXIBLE
BALANCED MANAGED
-------------- --------------
<S> <C> <C>
Debt Securities................. $9,086,693,898 $7,188,296,334
Equity Securities............... $ 797,513,299 $2,656,626,154
</TABLE>
The federal income tax basis and unrealized appreciation/depreciation of the
Fund's investments as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
CONSERVATIVE FLEXIBLE
BALANCED MANAGED
-------------- --------------
<S> <C> <C>
Gross Unrealized Appreciation... $ 413,912,093 $ 610,666,412
Gross Unrealized Depreciation... 67,562,846 36,056,964
Total Net Unrealized............ 346,349,247 574,609,448
Tax Basis....................... 4,192,119,381 4,406,819,646
</TABLE>
B16
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CONSERVATIVE BALANCED
-------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A)
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of
year............................. $ 15.31 $ 14.10 $ 14.91 $ 14.24 $ 14.32
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............. 0.66 0.63 0.53 0.49 0.56
Net realized and unrealized gains
(losses) on investments.......... 1.24 1.78 (0.68) 1.23 0.41
-------- -------- -------- -------- --------
Total from investment
operations..................... 1.90 2.41 (0.15) 1.72 0.97
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income........................... (0.66) (0.64) (0.51) (0.47) (0.54)
Distributions from net realized
gains............................ (1.03) (0.56) (0.15) (0.58) (0.51)
-------- -------- -------- -------- --------
Total distributions............ (1.69) (1.20) (0.66) (1.05) (1.05)
-------- -------- -------- -------- --------
Net Asset Value, end of year....... $ 15.52 $ 15.31 $ 14.10 $ 14.91 $ 14.24
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(B)........ 12.63% 17.27% (0.97%) 12.20% 6.95%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)........................ $4,478.8 $3,940.8 $3,501.1 $3,103.2 $2,114.0
Ratios to average net assets:
Expenses......................... 0.59% 0.58% 0.61% 0.60% 0.62%
Net investment income............ 4.13% 4.19% 3.61% 3.22% 3.88%
Portfolio turnover rate............ 295% 201% 125% 79% 62%
Average commission rate paid per
share............................ $0.0554 N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
FLEXIBLE MANAGED
-------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995(A) 1994(A) 1993(A) 1992(A)
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of
year............................. $ 17.86 $ 15.50 $ 16.96 $ 16.01 $ 16.29
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............. 0.57 0.56 0.47 0.57 0.58
Net realized and unrealized gains
(losses) on investments.......... 1.79 3.15 (1.02) 1.88 0.61
-------- -------- -------- -------- --------
Total from investment
operations..................... 2.36 3.71 (0.55) 2.45 1.19
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income........................... (0.58) (0.56) (0.45) (0.57) (0.56)
Distributions from net realized
gains............................ (1.85) (0.79) (0.46) (0.93) (0.91)
-------- -------- -------- -------- --------
Total distributions............ (2.43) (1.35) (0.91) (1.50) (1.47)
-------- -------- -------- -------- --------
Net Asset Value, end of year....... $ 17.79 $ 17.86 $ 15.50 $ 16.96 $ 16.01
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(B)........ 13.64% 24.13% (3.16%) 15.58% 7.61%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)........................ $4,896.9 $4,261.2 $3,481.5 $3,292.2 $2,435.6
Ratios to average net assets:
Expenses......................... 0.64% 0.63% 0.66% 0.66% 0.67%
Net investment income............ 3.07% 3.30% 2.90% 3.30% 3.63%
Portfolio turnover rate............ 233% 173% 124% 63% 59%
Average commission rate paid per
share............................ $0.0563 N/A N/A N/A N/A
</TABLE>
(a) Calculations are based on average month-end shares outstanding, where
applicable.
(b) Total investment returns are at the portfolio level and exclude contract
specific charges which would reduce returns.
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B12 THROUGH B16.
B17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF THE PRUDENTIAL SERIES FUND, INC.:
In our opinion, the accompanying Statements of Assets and Liabilities, including
the Schedules of Investments, and the related Statements of Operations and of
Changes in Net Assets and the Financial Highlights present fairly, in all
material respects, the financial position of each of the Conservative Balanced
and Flexible Managed Portfolios (collectively the "Portfolios"), two of the
fifteen portfolios that comprise The Prudential Series Fund, Inc. at December
31, 1996, the results of each of their operations, the changes in each of their
net assets, and each of their financial highlights for the year ended December
31, 1996, 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, 1996 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, NY 10036
February 14, 1997
B18
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE SHAREHOLDERS AND BOARD OF DIRECTORS OF THE PRUDENTIAL SERIES FUND, INC.:
We have audited the accompanying statements of changes in net assets of the
Flexible Managed and Conservative Balanced Portfolios (two of the portfolios
comprising The Prudential Series Fund, Inc.) for the year ended December 31,
1995, and the financial highlights contained in the prospectus for each of the
years in the nine-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the changes in net assets and the financial
highlights of each of the respective portfolios of The Prudential Series Fund,
Inc. for the respective stated periods in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 15, 1996
B19
<PAGE>
BOARD OF
DIRECTORS THE PRUDENTIAL SERIES FUND, INC.
MENDEL A. MELZER W. SCOTT McDONALD, JR., E. MICHAEL CAULFIELD,
CHAIRMAN, PhD. CEO,
THE PRUDENTIAL SERIES EXECUTIVE VICE PRUDENTIAL INVESTMENTS
FUND, INC. PRESIDENT, PRESIDENT, THE
FAIRLEIGH DICKINSON PRUDENTIAL SERIES FUND,
UNIVERSITY INC.
SAUL K. FENSTER, PhD. JOSEPH WEBER, PhD.
PRESIDENT, NEW JERSEY VICE PRESIDENT,
INSTITUTE OF TECHNOLOGY INTERCLASS
(INTERNATIONAL
CORPORATE LEARNING)
TAX INFORMATION
Although we understand that the vast majority, if not all, of the
shareholders/contract holders of the Series Fund currently maintain a tax
deferred status, we are nevertheless required by the Internal Revenue Code to
advise you within 60 days of the Series Fund's fiscal year end (December 31,
1996) as to the federal tax status of dividends paid by the Fund during such
fiscal year. Accordingly, we are advising you that in 1996, the Fund paid
dividends as follows:
ORDINARY DIVIDENDS
SHORT-TERM LONG-TERM TOTAL
INCOME CAPITAL GAINS CAPITAL GAINS DIVIDENDS
------ ------------- ------------- ---------
Conservative Balanced Portfolio $0.661 $0.047 $0.980 $1.688
Flexible Managed Portfolio 0.577 0.218 1.631 2.426
B20
<PAGE>
PART C
OTHER INFORMATION
<PAGE>
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
Financial statements of The Prudential Series Fund, Inc. will be filed by
Post-Effective Amendment.
(b) Exhibits
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(i) (1) Articles of Incorporation of The Prudential Filed herewith.
Series Fund, Inc.
(2) Supplemental Investment Advisory Incorporated by reference to Post-Effective
Agreement between The Prudential Amendment No. 28 to this Registration Statement,
Insurance Company of America and The filed February 1, 1995.
Prudential Series Fund, Inc.
(3) Articles Supplementary to the Articles of Filed herewith.
Incorporation of The Prudential Series
Fund, Inc.
(4) Subadvisory Agreement between The Incorporated by reference to Post-Effective
Prudential Insurance Company of America Amendment No. 28 to this Registration Statement,
and Jennison Associates Capital Corp. filed February 1, 1995.
(ii) By-laws of The Prudential Series Fund, Filed herewith.
Inc., as amended February 16, 1990.
(v) (1) Investment Advisory Agreement, as amended Filed herewith.
July 14, 1988 between The Prudential Insurance Company
of America and The Prudential Series Fund, Inc.
(2) Service Agreement between The Filed herewith.
Prudential Insurance Company of America
and The Prudential Investment Corporation.
(vi) Distribution Agreement between The
Prudential Series Fund, Inc. and Pruco Securities Corporation. Filed herewith.
(viii)(1) Custodian Agreement between Chase Filed herewith.
Manhattan Bank (formerly Chemical Bank
and Manufacturers Hanover Trust
Company) and The Prudential Series Fund, Inc.
(1)(a) Addendum #2 to Custodian Contract Incorporated by reference to Post-Effective
Between Chase Manhattan Bank and Amendment No. 32 to this Registration Statement,
The Prudential Series Fund, Inc. filed February 28, 1997.
(2) Custodian Agreement between Brown Filed herewith.
Brothers Harriman & Co. and The
Prudential Series Fund, Inc.
(ix) (1) Indemnification Agreement Filed herewith.
Regarding Reg. No. 33-49994.
(2) Indemnification Agreement Filed herewith.
Regarding Reg. No. 33-57186.
(xi) (1) Consent of Deloitte & Touche LLP Filed herewith.
independent auditors.
(2) Consent of Price Waterhouse LLP independent Filed herewith.
accountants.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
(xvii)Powers of Attorney:
<S> <C> <C>
(a) Messrs. Caulfield, Fenster, McDonald, Melzer, Weber Incorporated by reference to Post-Effective
Amendment No. 31 to this Registration Statement,
Filed April 26, 1996.
(b) Mr. Stark Incorporated by reference to Post-Effective
Amendment No. 32 to this Registration Statement,
filed February 28, 1997.
27. Financial Data Schedule Filed herewith.
</TABLE>
C-2
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
All of Registrant's outstanding securities are owned by The Prudential Insurance
Company of America ("Prudential"), a mutual life insurance company organized
under the laws of New Jersey, and the following separate accounts which are
registered as unit investment trusts under the Investment Company Act of 1940
(the "Act"): The Prudential Variable Appreciable Account, The Prudential
Individual Variable Contract Account, The Prudential Qualified Individual
Variable Contract Account, The Prudential Variable Contract Account-24 (separate
accounts of Prudential); the Pruco Life Flexible Premium Variable Annuity
Account; the Pruco Life PRUvider Variable Appreciable Account; the Pruco Life
Variable Universal Account, the Pruco Life Variable Insurance Account, the Pruco
Life Variable Appreciable Account, the Pruco Life Single Premium Variable Life
Account, the Pruco Life Single Premium Variable Annuity Account (separate
accounts of Pruco Life Insurance Company ["Pruco Life"]); the Pruco Life of New
Jersey Flexible Premium Variable Annuity Account; the Pruco Life of New Jersey
Variable Insurance Account, the Pruco Life of New Jersey Variable Appreciable
Account, the Pruco Life of New Jersey Single Premium Variable Life Account, and
the Pruco Life of New Jersey Single Premium Variable Annuity Account (separate
accounts of Pruco Life Insurance Company of New Jersey ["Pruco Life of New
Jersey"]). Pruco Life, a corporation organized under the laws of Arizona, is a
direct wholly-owned subsidiary of Prudential. Pruco Life of New Jersey, a
corporation organized under the laws of New Jersey, is a direct wholly-owned
subsidiary of Pruco Life, and an indirect wholly-owned subsidiary of Prudential.
Registrant's shares will be voted in proportion to the directions of persons
having interests in the above-referenced separate accounts. Registrant may
nonetheless be deemed to be controlled by such entities by virtue of the
presumption contained in Section 2(a)(9) of the Act, although Registrant
disclaims such control.
The subsidiaries of Prudential are set forth in Schedule D of Prudential's
Annual Statement as shown on the following pages. In addition to those
subsidiaries, Prudential holds all of the voting securities of Prudential's
Gibraltar Fund, Inc., a Maryland corporation, in three of its separate accounts.
The Gibraltar Fund is registered as an open-end, diversified, management
investment company under the Act. The separate accounts are registered as unit
investment trusts under the Act. Registrant may also be deemed to be under
common control with The Prudential Variable Contract Account-2, The Prudential
Variable Contract Account-10, The Prudential Variable Account Contract
Account-11, (separate accounts of Prudential which are registered as open-end,
diversified management investment companies) and The Prudential Variable
Contract Account-24 (separate account of Prudential which is registered as a
unit investment trust under the Act).
C-3
<PAGE>
<TABLE>
Form 1
ANNUAL STATEMENT FOR THE YEAR 1995 OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
SCHEDULE D -- PART 6 -- SECTION 1
<CAPTION>
Valuation of Shares of Subsidiary, Controlled or Affiliated Companies
<C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
| | 1 | 2 | 3 | 4 |
| | | | | Do Insurer's |
| | | NAIC | NAIC | Admitted Assets |
| CUSIP | Description | Company Code | Valuation |Include Intangible|
| Identi- | Name of Subsidiary, Controlled or | or | Method | Assets Connected |
| fication | Affiliated Company | Alien Insurer | (Sec. 5 (B) (a) | with Holding |
| | | Identification |of NAIC Purposes | of Such |
| | | Number |and Proc. Manual)| Company's Stock? |
|--------------|-------------------------------------------------------|----------------|-----------------|------------------|
| | PREFERRED STOCK - ALIEN INSURER | | | |
| 74429#120 |Prudential of America Life Ins. Co. (Canada) Class A | 68241 | 5(B)(a)(vi) | NO |
| 74429#138 |Prudential of America Life Ins. Co. (Canada) Class B | 68241 | 5(B)(a)(vi) | NO |
| 74429#146 |Prudential of America Life Ins. Co. (Canada) Class C | 68241 | 5(B)(a)(vi) | NO |
| 74429*116 |Prudential of America General Ins. Company (Canada) | AA-1560717 | 5(B)(a)(vi) | NO |
|----------------------------------------------------------------------------------------------------------------------------|
| 0499999 PREFERRED STOCK - ALIEN INSURER |
|----------------------------------------------------------------------------------------------------------------------------|
| | PREFERRED STOCK - OTHER AFFILIATES | | | |
| 74438*115 |Prudential Timber Investments, Inc. | non-insurer | 5(B)(a)(vi) | NO |
| G6993*110 |PIC Holdings, Ltd. | non-insurer | 5(B)(a)(ii) | NO |
|----------------------------------------------------------------------------------------------------------------------------|
| 0799999 PREFERRED STOCK - OTHER AFFILIATES |
|----------------------------------------------------------------------------------------------------------------------------|
| 0899999 TOTAL - PREFERRED STOCKS |
|----------------------------------------------------------------------------------------------------------------------------|
| | COMMON STOCK - U.S. PROPERTY & CASUALTY INSURER | | | |
| 37465@108 |Gibraltar Casualty Company | 35947 | 5(B)(a)(iii) | NO |
|----------------------------------------------------------------------------------------------------------------------------|
| 1099999 COMMON STOCK - U.S. PROPERTY & CASUALTY INSURER |
|----------------------------------------------------------------------------------------------------------------------------|
| | COMMON STOCK - U.S. LIFE INSURER | | | |
| 74408#109 |Pruco Life Insurance Company | 79227 | 5(B)(a)(iii) | NO |
| 74445@106 |Prudential HealthCare and Life Insurance Co. of America| 74020 | 5(B)(a)(iii) | NO |
|----------------------------------------------------------------------------------------------------------------------------|
| 1199999 COMMON STOCK - U.S. LIFE INSURER |
|----------------------------------------------------------------------------------------------------------------------------|
| | COMMON STOCK - ALIEN INSURER | | | |
| E7415#105 |PRICOA Vida, Sociedad Anonima de Seguros y Reaseguros | AA-1840004 | 5(B)(a)(vii) | NO |
| T7415#109 |PRICOA Vita, S.p.A. | AA-1360003 | 5(B)(a)(vii) | YES |
| 74429*108 |Prudential of America General Ins. Company (Canada) | AA-1560717 | 5(B)(a)(vii) | NO |
| 74429#104 |Prudential of America Life Ins. (Canada) Series 1 | 68241 | 5(B)(a)(vii) | NO |
| 74429#112 |Prudential of America Life Ins. (Canada) Series 2 | 68241 | 5(B)(a)(vii) | NO |
| Y7443@101 |The Prudential Life Insurance Company of Korea, Ltd. | AA-0130001 | 5(B)(a)(vii) | NO |
| J7443#106 |The Prudential Life Insurance Company, Ltd. | AA-1580001 | 5(B)(a)(vii) | NO |
|----------------------------------------------------------------------------------------------------------------------------|
| 1299999 COMMON STOCK - ALIEN INSURER |
|----------------------------------------------------------------------------------------------------------------------------|
| | COMMON STOCK - INVESTMENT SUBSIDIARY | | | |
| 42223@101 |Health Ventures Partner | non-insurer | 5(B)(a)(i) | NO |
| 69337*109 |PIC Realty, Canada, Limited | non-insurer | 5(B)(a)(ii) | YES |
| 74430#101 |Prudential Mortgage Asset Corporation | non-insurer | 5(B)(a)(ii) | NO |
| 74430*105 |Prudential Mortgage Asset Corporation II | non-insurer | 5(B)(a)(ii) | NO |
| 74390@101 |Prudential Realty Securities II, Inc. | non-insurer | 5(B)(a)(i) | NO |
| 74446#103 |PruLease, Inc. | non-insurer | 5(B)(a)(i) | NO |
|----------------------------------------------------------------------------------------------------------------------------|
| 1499999 COMMON STOCK - INVESTMENT SUBSIDIARY |
|----------------------------------------------------------------------------------------------------------------------------|
| | COMMON STOCK - OTHER AFFILIATES | | | |
| 45638*105 |Industrial Trust Company | non-insurer | 5(B)(a)(iv) | YES |
| 47620*101 |Jennison Associates Capital Corp. | non-insurer | 5(B)(a)(iv) | YES |
| 69332#100 |PGR Advisors I, Inc. | non-insurer | 5(B)(a)(i) | NO |
| G6933*102 |PIC Holdings, Ltd. | non-insurer | 5(B)(a)(ii) | YES |
| 74058*106 |PREMISYS Real Estate Services, Inc. | non-insurer | 5(B)(a)(i) | NO |
| 74408@101 |PRUCO, Inc. | non-insurer | 5(B)(a)(ii) | YES |
| 74445#104 |Prudential Direct Distributors, Inc. | non-insurer | 5(B)(a)(ii) | NO |
| 74433@100 |Prudential Fund Management Canada, Limited | non-insurer | 5(B)(a)(ii) | NO |
| 74446*107 |Prudential Global Funding, Inc. | non-insurer | 5(B)(a)(i) | NO |
| 74440@101 |Prudential Homes Corporation | non-insurer | 5(B)(a)(i) | NO |
| 74444*109 |Prudential Mutual Fund Management, Inc. | non-insurer | 5(B)(a)(ii) | NO |
| 74442@109 |Prudential Private Placement Investors, Inc. | non-insurer | 5(B)(a)(i) | NO |
| 74443@108 |Prudential Select Holdings, Inc. | non-insurer | 5(B)(a)(ii) | YES |
| 74441#108 |Prudential Service Bureau, Inc. | non-insurer | 5(B)(a)(i) | NO |
| 74441@100 |PruServicos Participacoes, S.A. | non-insurer | 5(B)(a)(vii) | NO |
| 76111#102 |Residential Services Corporation of America | non-insurer | 5(B)(a)(iv) | YES |
| 74437#104 |The Prudential Investment Corporation | non-insurer | 5(B)(a)(ii) | NO |
| 74390*103 |The Prudential Real Estate Affiliates, Inc. | non-insurer | 5(B)(a)(ii) | YES |
| 91204*103 |U.S. High Yield Management Company | non-insurer | 5(B)(a)(i) | NO |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|----------------------------------------------------------------------------------------------------------------------------|
| 1599999 COMMON STOCK - OTHER AFFILIATES |
|----------------------------------------------------------------------------------------------------------------------------|
| 1699999 TOTAL - COMMON STOCKS |
|----------------------------------------------------------------------------------------------------------------------------|
| 1799999 TOTAL - PREFERRED AND COMMON STOCKS |
- ------------------------------------------------------------------------------------------------------------------------------
<PAGE>
<C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
| | 1 | 5 | 6 | Stock of Such |
| | | | | Company Owned by |
| | | If Yes, | |Insurer on Statement Date|
| CUSIP | Description | Amount of | Statement | |
| Identi- | Name of Subsidiary, Controlled or | Such | Value |-------------------------|
| fication | Affiliated Company | Intangible | | 7 | 8 |
| | | Assets | | No. of | % of |
| | | | | Shares |Outstanding |
|--------------|-------------------------------------------------------|-------------|---------------|------------|------------|
| | PREFERRED STOCK - ALIEN INSURER | | | | |
| 74429#120 |Prudential of America Life Ins. Co. (Canada) Class A | N/A | 6,545,454 | 60,000 | 100 |
| 74429#138 |Prudential of America Life Ins. Co. (Canada) Class B | N/A | 9,681,818 | 88,750 | 100 |
| 74429#146 |Prudential of America Life Ins. Co. (Canada) Class C | N/A | 10,909,090 | 100,000 | 100 |
| 74429*116 |Prudential of America General Ins. Company (Canada) | N/A | 10,000,000 | 100,000 | 100 |
|------------------------------------------------------------------------------------|---------------|------------|------------|
| 0499999 PREFERRED STOCK - ALIEN INSURER 0 | 37,136,362 | X X X | X X X |
|------------------------------------------------------------------------------------|---------------|------------|------------|
| | PREFERRED STOCK - OTHER AFFILIATES | | | | |
| 74438*115 |Prudential Timber Investments, Inc. | N/A | 875,461 | 7 | 100 |
| G6993*110 |PIC Holdings, Ltd. | N/A | 11,873,000 | 7,750,000 | 100 |
|------------------------------------------------------------------------------------|---------------|------------|------------|
| 0799999 PREFERRED STOCK - OTHER AFFILIATES 0 | 12,748,461 | X X X | X X X |
|------------------------------------------------------------------------------------|---------------|------------|------------|
| 0899999 TOTAL - PREFERRED STOCKS 0 | 0 | X X X | X X X |
|------------------------------------------------------------------------------------|---------------|------------|------------|
| | COMMON STOCK - U.S. PROPERTY & CASUALTY INSURER | | | | |
| 37465@108 |Gibraltar Casualty Company | N/A | 20,947,158 | 2,000 | 100 |
|------------------------------------------------------------------------------------|---------------|------------|------------|
| 1099999 COMMON STOCK - U.S. PROPERTY & CASUALTY INSURER 0 | 20,947,158 | X X X | X X X |
|------------------------------------------------------------------------------------|---------------|------------|------------|
| | COMMON STOCK - U.S. LIFE INSURER | | | | |
| 74408#109 |Pruco Life Insurance Company | N/A | 833,277,789 | 250,000 | 100 |
| 74445@106 |Prudential HealthCare and Life Insurance Co. of America| N/A | 9,840,532 | 500,000 | 100 |
|------------------------------------------------------------------------------------|---------------|------------|------------|
| 1199999 COMMON STOCK - U.S. LIFE INSURER 0 | 843,118,321 | X X X | X X X |
|------------------------------------------------------------------------------------|---------------|------------|------------|
| | COMMON STOCK - ALIEN INSURER | | | | |
| E7415#105 |PRICOA Vida, Sociedad Anonima de Seguros y Reaseguros | N/A | 3,441,206 | 63,662 | 100 |
| T7415#109 |PRICOA Vita, S.p.A. | 700,380 | 4,308,314 | 20,000,000 | 100 |
| 74429*108 |Prudential of America General Ins. Company (Canada) | N/A | 34,499,000 | 183,436 | 100 |
| 74429#104 |Prudential of America Life Ins. (Canada) Series 1 | N/A | (5,917,508)| 25,000 | 100 |
| 74429#112 |Prudential of America Life Ins. (Canada) Series 2 | N/A | (311,448)| 12,500 | 50 |
| Y7443@101 |The Prudential Life Insurance Company of Korea, Ltd. | N/A | 21,021,792 | 2,640,000 | 100 |
| J7443#106 |The Prudential Life Insurance Company, Ltd. | N/A | 73,756,384 | 100,000 | 100 |
|------------------------------------------------------------------------------------|---------------|------------|------------|
| 1299999 COMMON STOCK - ALIEN INSURER 700,380 | 130,797,740 | X X X | X X X |
|------------------------------------------------------------------------------------|---------------|------------|------------|
| | COMMON STOCK - INVESTMENT SUBSIDIARY | | | | |
| 42223@101 |Health Ventures Partner | N/A | 23,025,205 | 1,000 | 100 |
| 69337*109 |PIC Realty, Canada, Limited | 285,715 | 33,499,753 | 16,561,003 | 100 |
| 74430#101 |Prudential Mortgage Asset Corporation | N/A | (3,426,000)| 1,000 | 100 |
| 74430*105 |Prudential Mortgage Asset Corporation II | N/A | 49,000 | 500 | 50 |
| 74390@101 |Prudential Realty Securities II, Inc. | N/A | 126,565,461 | 115 | 87 |
| 74446#103 |PruLease, Inc. | N/A | 167,451,432 | 3,100 | 100 |
|------------------------------------------------------------------------------------|---------------|------------|------------|
| 1499999 COMMON STOCK - INVESTMENT SUBSIDIARY 285,715 | 347,164,851 | X X X | X X X |
|------------------------------------------------------------------------------------|---------------|------------|------------|
| | COMMON STOCK - OTHER AFFILIATES | | | | |
| 45638*105 |Industrial Trust Company | 2,379 | 89,653 | 451 | 100 |
| 47620*101 |Jennison Associates Capital Corp. | 11,255,718 | 27,833,378 | 913,498 | 100 |
| 69332#100 |PGR Advisors I, Inc. | N/A | 967,467 | 100 | 100 |
| G6933*102 |PIC Holdings, Ltd. | 2,078,209 | 53,781,433 | 27,826,498 | 100 |
| 74058*106 |PREMISYS Real Estate Services, Inc. | N/A | (3,274,892)| 97 | 100 |
| 74408@101 |PRUCO, Inc. | 11,452,264 | 2,536,645,866 | 94 | 100 |
| 74445#104 |Prudential Direct Distributors, Inc. | N/A | 50,000 | 100 | 100 |
| 74433@100 |Prudential Fund Management Canada, Limited | N/A | 1,146,261 | 50,000 | 100 |
| 74446*107 |Prudential Global Funding, Inc. | N/A | 15,562,582 | 100 | 100 |
| 74440@101 |Prudential Homes Corporation | N/A | 5,950,735 | 1 | 100 |
| 74444*109 |Prudential Mutual Fund Management, Inc. | N/A | 17,144,146 | 150 | 15 |
| 74442@109 |Prudential Private Placement Investors, Inc. | N/A | 39,737 | 40,000 | 100 |
| 74443@108 |Prudential Select Holdings, Inc. | 1,262,549 | 20,113,528 | 44,977 | 100 |
| 74441#108 |Prudential Service Bureau, Inc. | N/A | 7,973,150 | 100 | 100 |
| 74441@100 |PruServicos Participacoes, S.A. | N/A | 7,623,745 | 422,168 | 100 |
| 76111#102 |Residential Services Corporation of America | 489,000 | 79,283,081 | 1,000 | 100 |
| 74437#104 |The Prudential Investment Corporation | N/A | 201,442,158 | 86 | 100 |
| 74390*103 |The Prudential Real Estate Affiliates, Inc. | 12,429,000 | 13,851,957 | 100 | 100 |
| 91204*103 |U.S. High Yield Management Company | N/A | 1,000 | 100 | 100 |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
|----------------------------------------------------------------------|-------------|---------------|------------|------------|
| 1599999 COMMON STOCK - OTHER AFFILIATES | 38,969,119 | 2,986,224,985 | X X X | X X X |
|----------------------------------------------------------------------|-------------|---------------|------------|------------|
| 1699999 TOTAL - COMMON STOCKS | 39,955,214 | 4,328,253,055 | X X X | X X X |
|----------------------------------------------------------------------|-------------|---------------|------------|------------|
| 1799999 TOTAL - PREFERRED AND COMMON STOCKS | 39,955,214 | 4,378,137,878 | X X X | X X X |
- --------------------------------------------------------------------------------------------------------------------------------
(a) Total of Line 1799999, col. 5 does not include intangible assets of $34,538,000 of Prudential Residential Services, L.P.
which is a partnership reported on Schedule BA.
Amount of Insurer's Capital and Surplus (Page 3, Line 38 of previous year's statement filed by the insurer with its
domiciliary insurance dept.): $7,448,951,321 .
Note: Includes only affiliates that are subsidiaries as defined by the New Jersey Statute 17B:20-4.; that is, where
a majority of the voting stock is owned or controlled, direclty or indirectly.
</TABLE>
C-4
<PAGE>
<TABLE>
Form 1
ANNUAL STATEMENT FOR THE YEAR 1995 OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
SCHEDULE D -- PART 6 -- SECTION 2
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
| | | |
| | | |
| | 1 | 2 |
| | | |
| CUSIP | | Name of Company Listed in |
|Identi- | Name of Lower-tier Company | Section 1 Which Controls Lower-tier |
|fication| | Company |
| | | |
|--------|--------------------------------------------------------|-----------------------------------------------------|
| | PREFERRED STOCKS | |
| | Clivwell Securities, Ltd. | PIC Holdings, Ltd. |
| | PRICOA Investment Company | PIC Holdings, Ltd. |
| | Prudential Capital and Investment Services, Inc. | PRUCO, Inc. |
| | Lapine Holding Company | PRUCO, Inc. |
| | Prudential Securities Group, Inc. | PRUCO, Inc. |
| | Prudential Asia Investments Limited | PRUCO, Inc. |
| | The Prudential Asset Management Company, Inc. | The Prudential Investment Corporation |
| | Prudential Asia Investments Limited | The Prudential Investment Corporation |
|-----------------------------------------------------------------------------------------------------------------------|
| 0199999 PREFERRED STOCKS |
|-----------------------------------------------------------------------------------------------------------------------|
| | COMMON STOCKS | |
| | Major Escrow Corp. | (a) Prudential Residential Services, L.P. |
| | ML/MSB Acquisition, Inc. | Prudential Residential Services, L.P. |
| | PRICOA Relocation Management, Ltd. | Prudential Residential Services, L.P. |
| | PRS Escrow Services, Inc. | Prudential Residential Services, L.P. |
| | Prudential Community Interaction Consulting, Inc. | Prudential Residential Services, L.P. |
| | Prudential New York Homes Corporation | Prudential Residential Services, L.P. |
| | Prudential Relocation Management Company of Canada Ltd.| Prudential Residential Services, L.P. |
| | Prudential Resources Management Asia, Limited | Prudential Residential Services, L.P. |
| | The Relocation Funding Corporation of America | Prudential Residential Services, L.P. |
| | JACC Services Corp. | Jennison Associates Capital Corp. |
| | Clivwell Securities, Ltd. | PIC Holdings, Ltd. |
| | PRICOA Capital Group, Ltd. | PIC Holdings, Ltd. |
| | PRICOA Funding, Ltd. | PIC Holdings, Ltd. |
| | PRICOA Investment Company | PIC Holdings, Ltd. |
| | PRICOA Property Investment Management Limited | PIC Holdings, Ltd. |
| | Northern Retail Properties (General Partner) Limited | PIC Holdings, Ltd. |
| | PRICOA P.I.M. (Regulated) Ltd. | PIC Holdings, Ltd. |
| | TransEuropean Properties (General Partner) Ltd. | PIC Holdings, Ltd. |
| | PRICOA Realty Group Ltd. | PIC Holdings, Ltd. |
| | PREMISYS Real Estate Services, Inc. of Colorado | PREMISYS Real Estate Services, Inc. |
| | PRICOA Invest Sociedad Anonima, S.G.C. | PRICOA Vida, Sociedad Anonima de Seguros y Reaseguro|
| | Capital Agricultural Property Services, Inc. | PRUCO, Inc. |
| | Flor-Ag Corporation | PRUCO, Inc. |
| | P.G. Realty, Inc. | PRUCO, Inc. |
| | PIC Realty Corporation | PRUCO, Inc. |
| | PRICOA Vida, Sociedad Anonima de Seguros y Reaseguros | PRUCO, Inc. |
| | Pruco Securities Corporation | PRUCO, Inc. |
| | GIB Laboratories, Inc. | PRUCO, Inc. |
| | Prudential Agricultural Credit, Inc. | PRUCO, Inc. |
| | Prudential Capital and Investment Services, Inc. | PRUCO, Inc. |
| | Lapine Holding Company | PRUCO, Inc. |
| | Lapine Technology Corporation | PRUCO, Inc. |
| | Prudential Securities Group Inc. - Series A | PRUCO, Inc. |
| | Prudential Securities Group Inc. - Series B | PRUCO, Inc. |
| | Bache Insurance Agency of Arkansas, Inc. | PRUCO, Inc. |
| | Bache Insurance Agency of Louisiana, Inc. | PRUCO, Inc. |
| | Prudential-Bache Securities (Germany) Inc. | PRUCO, Inc. |
| | BraeLoch Successor Corporation | PRUCO, Inc. |
| | BraeLoch Holdings, Inc. | PRUCO, Inc. |
| | Graham Resources, Inc. | PRUCO, Inc. |
| | Graham Depository Company II | PRUCO, Inc. |
| | Graham Energy, Ltd. | PRUCO, Inc. |
| | Graham Exploration, Ltd. | PRUCO, Inc. |
| | Graham Royalty, Ltd. | PRUCO, Inc. |
| | Graham Production Company | PRUCO, Inc. |
| | Graham Securities Corporation | PRUCO, Inc. |
| | PB Bullion Company, Inc. | PRUCO, Inc. |
| | PB Services (U.K.) | PRUCO, Inc. |
| | PGR Advisors, Inc. | PRUCO, Inc. |
| | Prudential-Bache Agriculture Inc. | PRUCO, Inc. |
| | PBML Custodian Limited | PRUCO, Inc. |
| | Prudential-Bache Capital Funding BV | PRUCO, Inc. |
| | Audley Finance BV | PRUCO, Inc. |
| | Prudential-Bache Energy Corp. | PRUCO, Inc. |
| | Prudential-Bache Energy Production Inc. | PRUCO, Inc. |
| | Prudential-Bache Holdings Inc. | PRUCO, Inc. |
| | Prudential-Bache Partners Inc. | PRUCO, Inc. |
| | Prudential-Bache International Bank S.A. | PRUCO, Inc. |
| | Prudential-Bache International (U.K.) Limited | PRUCO, Inc. |
| | Page & Gwyther Holdings Limited | PRUCO, Inc. |
| | Page & Gwyther Limited | PRUCO, Inc. |
| | Prudential-Bache Capital Funding (Equities) Ltd. | PRUCO, Inc. |
| | Circle (Nominees) Limited | PRUCO, Inc. |
| | Prudential-Bache Capital Funding (Gilts) Limited | PRUCO, Inc. |
| | Prudential-Bache Capital Funding (Money Brokers) | |
| | Limited | PRUCO, Inc. |
| | Prudential-Bache (Futures) Limited | PRUCO, Inc. |
| | Prudential-Bache Investor Services Inc. | PRUCO, Inc. |
| | Prudential-Bache Investor Services II, Inc. | PRUCO, Inc. |
| | Prudential-Bache Leasing Inc. | PRUCO, Inc. |
| | Prudential-Bache Minerals Inc. | PRUCO, Inc. |
| | Prudential-Bache Program Services Inc. | PRUCO, Inc. |
| | Prudential-Bache Properties Inc. | PRUCO, Inc. |
| | Prudential-Bache Real Estate, Inc. | PRUCO, Inc. |
| | Prudential-Bache Securities (Australia) Limited | PRUCO, Inc. |
| | Bache Nominees Ltd. | PRUCO, Inc. |
| | Corcarr Funds Management Limited | PRUCO, Inc. |
| | Corcarr Management Pty. Limited | PRUCO, Inc. |
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
| | | | Stock in Lower-tier |
| | | | Company Owned |
| | 1 | 3 | Indirectly by Insurer |
| | | | on Statement Date |
| CUSIP | | Amount of Intangible |-------------------------|
|Identi- | Name of Lower-tier Company | Assets Included in | 4 | 5 |
|fication| | Amount Shown in | No. of | % of |
| | | Column 5, Section 1 | Shares |Outstanding |
|--------|--------------------------------------------------------|------------------------|------------|------------|
| | PREFERRED STOCKS | | | |
| | Clivwell Securities, Ltd. | N/A | 7,750,000 | 100 |
| | PRICOA Investment Company | N/A | 96,238,075 | 100 |
| | Prudential Capital and Investment Services, Inc. | N/A | N/A | N/A |
| | Lapine Holding Company | N/A | 7,499,999 | 100 |
| | Prudential Securities Group, Inc. | N/A | N/A | N/A |
| | Prudential Asia Investments Limited | N/A | 12,500,000 | 50 |
| | The Prudential Asset Management Company, Inc. | N/A | N/A | N/A |
| | Prudential Asia Investments Limited | N/A | 12,500,000 | 50 |
|------------------------------------------------------------------------------------------|------------|------------|
| 0199999 PREFERRED STOCKS 0 | X X X | X X X |
|------------------------------------------------------------------------------------------|------------|------------|
| | COMMON STOCKS | | | |
| | Major Escrow Corp. | N/A | 1,000 | 100 |
| | ML/MSB Acquisition, Inc. | N/A | 1,000 | 100 |
| | PRICOA Relocation Management, Ltd. | N/A | 99 | 100 |
| | PRS Escrow Services, Inc. | N/A | 375 | 100 |
| | Prudential Community Interaction Consulting, Inc. | N/A | 1,000 | 100 |
| | Prudential New York Homes Corporation | N/A | 1,000 | 100 |
| | Prudential Relocation Management Company of Canada Ltd.| N/A | 1,000 | 100 |
| | Prudential Resources Management Asia, Limited | N/A | 10,000 | 100 |
| | The Relocation Funding Corporation of America | N/A | 1,000 | 100 |
| | JACC Services Corp. | N/A | 100,000 | 100 |
| | Clivwell Securities, Ltd. | N/A | 13,266,766 | 100 |
| | PRICOA Capital Group, Ltd. | N/A | 2,751,000 | 100 |
| | PRICOA Funding, Ltd. | N/A | 9,658,832 | 100 |
| | PRICOA Investment Company | N/A | 15,000 | 100 |
| | PRICOA Property Investment Management Limited | 2,078,209 | 2 | 100 |
| | Northern Retail Properties (General Partner) Limited | N/A | 10,000 | 100 |
| | PRICOA P.I.M. (Regulated) Ltd. | N/A | 10,000 | 100 |
| | TransEuropean Properties (General Partner) Ltd. | N/A | 40,000 | 100 |
| | PRICOA Realty Group Ltd. | N/A | 150,010 | 100 |
| | PREMISYS Real Estate Services, Inc. of Colorado | N/A | 80 | 80 |
| | PRICOA Invest Sociedad Anonima, S.G.C. | N/A | 222,050 | 100 |
| | Capital Agricultural Property Services, Inc. | 485,202 | 95 | 100 |
| | Flor-Ag Corporation | N/A | 50 | 100 |
| | P.G. Realty, Inc. | N/A | 2,500 | 100 |
| | PIC Realty Corporation | N/A | 236 | 100 |
| | PRICOA Vida, Sociedad Anonima de Seguros y Reaseguros | N/A | 26 |less than 1 |
| | Pruco Securities Corporation | N/A | 995 | 100 |
| | GIB Laboratories, Inc. | N/A | 50,000 | 100 |
| | Prudential Agricultural Credit, Inc. | N/A | 999 | 100 |
| | Prudential Capital and Investment Services, Inc. | N/A | 99 | 100 |
| | Lapine Holding Company | N/A | 12,499,999 | 71 |
| | Lapine Technology Corporation | N/A | 1 | 100 |
| | Prudential Securities Group Inc. - Series A | 6,832,173 | 100 | 100 |
| | Prudential Securities Group Inc. - Series B | N/A | 57 | 100 |
| | Bache Insurance Agency of Arkansas, Inc. | N/A | 100 | 100 |
| | Bache Insurance Agency of Louisiana, Inc. | N/A | 100 | 100 |
| | Prudential-Bache Securities (Germany) Inc. | N/A | 100 | 100 |
| | BraeLoch Successor Corporation | N/A | 330,000 | 100 |
| | BraeLoch Holdings, Inc. | N/A | 7,758,803 | 100 |
| | Graham Resources, Inc. | N/A | 7,734,234 | 100 |
| | Graham Depository Company II | N/A | 1,000 | 100 |
| | Graham Energy, Ltd. | N/A | 90 | 100 |
| | Graham Exploration, Ltd. | N/A | 130 | 100 |
| | Graham Royalty, Ltd. | N/A | 20 | 100 |
| | Graham Production Company | N/A | 50 | 100 |
| | Graham Securities Corporation | N/A | 20,000 | 100 |
| | PB Bullion Company, Inc. | N/A | 50 | 100 |
| | PB Services (U.K.) | N/A | 56,600,000 | 100 |
| | PGR Advisors, Inc. | N/A | 1,000 | 100 |
| | Prudential-Bache Agriculture Inc. | N/A | 100 | 100 |
| | PBML Custodian Limited | N/A | 5,000,000 | 100 |
| | Prudential-Bache Capital Funding BV | N/A | 40,000 | 100 |
| | Audley Finance BV | N/A | 40,000 | 100 |
| | Prudential-Bache Energy Corp. | N/A | 1 | 100 |
| | Prudential-Bache Energy Production Inc. | N/A | 100 | 100 |
| | Prudential-Bache Holdings Inc. | N/A | 50 | 100 |
| | Prudential-Bache Partners Inc. | N/A | 1 | 100 |
| | Prudential-Bache International Bank S.A. | N/A | 6,000 | 100 |
| | Prudential-Bache International (U.K.) Limited | N/A | 21,456,265 | 100 |
| | Page & Gwyther Holdings Limited | N/A | 2,000,000 | 100 |
| | Page & Gwyther Limited | N/A | 3,000,000 | 100 |
| | Prudential-Bache Capital Funding (Equities) Ltd. | N/A | 11,500,000 | 100 |
| | Circle (Nominees) Limited | N/A | 2 | 100 |
| | Prudential-Bache Capital Funding (Gilts) Limited | N/A | 25,000,000 | 100 |
| | Prudential-Bache Capital Funding (Money Brokers) | | | |
| | Limited | N/A | 10,000,000 | 100 |
| | Prudential-Bache (Futures) Limited | N/A | 7,500,000 | 100 |
| | Prudential-Bache Investor Services Inc. | N/A | 100 | 100 |
| | Prudential-Bache Investor Services II, Inc. | N/A | 100 | 100 |
| | Prudential-Bache Leasing Inc. | N/A | 500 | 100 |
| | Prudential-Bache Minerals Inc. | N/A | 100 | 100 |
| | Prudential-Bache Program Services Inc. | N/A | 100 | 100 |
| | Prudential-Bache Properties Inc. | N/A | 1 | 100 |
| | Prudential-Bache Real Estate, Inc. | N/A | 5,000 | 100 |
| | Prudential-Bache Securities (Australia) Limited | N/A | 10,000,000 | 100 |
| | Bache Nominees Ltd. | N/A | 4 | 100 |
| | Corcarr Funds Management Limited | N/A | 50,050 | 100 |
| | Corcarr Management Pty. Limited | N/A | 2 | 100 |
- ----------------------------------------------------------------------------------------------------------------------
(a) Prudential Residential Services, L.P. is a partnership which is reported on Schedule BA.
Groups of companies which are indented are owned by the company listed immediately above that
group in the percentages indicated.
</TABLE>
C-5
<PAGE>
<TABLE>
Form 1
ANNUAL STATEMENT FOR THE YEAR 1995 OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
SCHEDULE D -- PART 6 -- SECTION 2
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
| | | |
| | | |
| | 1 | 2 |
| | | |
| CUSIP | | Name of Company Listed in |
|Identi- | Name of Lower-tier Company | Section 1 Which Controls Lower-tier |
|fication| | Company |
| | | |
|--------|--------------------------------------------------------|-----------------------------------------------------|
| | Corcarr Nominees Pty. Limited | PRUCO, Inc. |
| | Corcarr Superannuation Pty. Limited | PRUCO, Inc. |
| | Divsplit Nominees Pty. Limited | PRUCO, Inc. |
| | PruBache Nominees Pty. Limited | PRUCO, Inc. |
| | Prudential-Bache Trade Services Inc. | PRUCO, Inc. |
| | PB Trade Ltd. | PRUCO, Inc. |
| | Prudential-Bache Forex (USA) Inc. | PRUCO, Inc. |
| | Prudential-Bache Forex (Hong Kong) Limited | PRUCO, Inc. |
| | Prudential-Bache Forex (U.K.) Limited | PRUCO, Inc. |
| | Prudential-Bache Transfer Agent Services, Inc. | PRUCO, Inc. |
| | Prudential Securities Incorporated | PRUCO, Inc. |
| | Bache & Co. (Lebanon) S.A.L. | PRUCO, Inc. |
| | Bache & Co. S.A. de C.V. (Mexico) | PRUCO, Inc. |
| | Bache Halsey Stuart Shields (Antilles) N.V. | PRUCO, Inc. |
| | Bache Insurance Agency Incorporated | PRUCO, Inc. |
| | Bache Insurance of Arizona Inc. | PRUCO, Inc. |
| | Bache Insurance of Kentucky, Inc. | PRUCO, Inc. |
| | Bache Shields Securities Corporation | PRUCO, Inc. |
| | Banom Corporation | PRUCO, Inc. |
| | Gelfand, Quinn & Associates, Inc. | PRUCO, Inc. |
| | P-B Holding Japan Inc. | PRUCO, Inc. |
| | Prudential Securities (Japan) Ltd. | PRUCO, Inc. |
| | Prudential-Bache Futures Asia Pacific Ltd. | PRUCO, Inc. |
| | Prudential-Bache Futures (Hong Kong) Limited | PRUCO, Inc. |
| | Prudential-Bache Nominees (Hong Kong) Limited | PRUCO, Inc. |
| | Prudential-Bache Securities Asia Pacific Ltd. | PRUCO, Inc. |
| | Prudential-Bache Securities (Belgium) Inc. | PRUCO, Inc. |
| | Prudential-Bache Securities (Espana) S.A. | PRUCO, Inc. |
| | Prudential-Bache Securities (France) S.A. | PRUCO, Inc. |
| | Prudential-Bache Securities (Holland) Inc. | PRUCO, Inc. |
| | Prudential-Bache Securities (Holland) N.V. | PRUCO, Inc. |
| | Prudential-Bache Securities (Hong Kong) Limited | PRUCO, Inc. |
| | Prudential-Bache Securities (Luxembourg) Inc. | PRUCO, Inc. |
| | Prudential-Bache Securities (Monaco) Inc. | PRUCO, Inc. |
| | Prudential-Bache Securities (Switzerland) Inc. | PRUCO, Inc. |
| | Prudential-Bache Securities (U.K.) Inc. | PRUCO, Inc. |
| | Shields Model Roland Company | PRUCO, Inc. |
| | Prudential Mutual Fund Management, Inc. | PRUCO, Inc. |
| | Prudential Mutual Fund Distributors, Inc. | PRUCO, Inc. |
| | Prudential Mutual Fund Investment | |
| | Management, Inc. | PRUCO, Inc. |
| | Prudential Mutual Fund Services, Inc. | PRUCO, Inc. |
| | Prudential Securities (Chile) Inc. | PRUCO, Inc. |
| | Prudential Securities CMO Issuer Inc. | PRUCO, Inc. |
| | Prudential Securities Futures Management Inc. | PRUCO, Inc. |
| | Prudential Securities (South America) Inc. | PRUCO, Inc. |
| | Prudential Securities (Argentina) Inc. | PRUCO, Inc. |
| | Prudential Securities (Uruguay) S.A. | PRUCO, Inc. |
| | Shields Model Roland Securities Incorporated | PRUCO, Inc. |
| | Prudential Securities Lease Holding Inc. | PRUCO, Inc. |
| | Prudential Securities Municipal Derivatives, Inc. | PRUCO, Inc. |
| | Prudential Securities Realty Funding Corporation | PRUCO, Inc. |
| | Prudential Securities Secured Financing Corporation| PRUCO, Inc. |
| | Prudential Securities Structured Assets, Inc. | PRUCO, Inc. |
| | P-B Finance Ltd. | PRUCO, Inc. |
| | R & D Funding Corp. | PRUCO, Inc. |
| | Special Situations Management Inc. | PRUCO, Inc. |
| | Seaport Futures Management, Inc. | PRUCO, Inc. |
| | Wexford Clearing Services Corporation | PRUCO, Inc. |
| | Prudential Dental Maintenance Organization, Inc. | PRUCO, Inc. |
| | Prudential Direct, Inc. | PRUCO, Inc. |
| | Prudential Equity Investors, Inc. | PRUCO, Inc. |
| | Prudential Funding Corporation | PRUCO, Inc. |
| | Prudential Health Care Plan, Inc. | PRUCO, Inc. |
| | Prudential Health Care Plan of California, Inc. | PRUCO, Inc. |
| | Prudential Health Care Plan of Connecticut, Inc. | PRUCO, Inc. |
| | Prudential Health Care Plan of Georgia, Inc. | PRUCO, Inc. |
| | Prudential Health Care Plan of New York, Inc. | PRUCO, Inc. |
| | Prudential Institutional Fund Management, Inc. | PRUCO, Inc. |
| | Prudential Holdings, Inc. | PRUCO, Inc. |
| | Prudential Property and Casualty Insurance Company | PRUCO, Inc. |
| | Prudential Commercial Insurance Company | PRUCO, Inc. |
| | Prudential General Insurance Company | PRUCO, Inc. |
| | Prudential Insurance Brokerage, Inc. | PRUCO, Inc. |
| | The Prudential Property and Casualty General | |
| | Agency, Inc. | PRUCO, Inc. |
| | The Prudential Property and Casualty Insurance Company | |
| | of New Jersey | PRUCO, Inc. |
| | Prudential Realty Partnerships, Inc. | PRUCO, Inc. |
| | Prudential Realty Securities, Inc. | PRUCO, Inc. |
| | Prudential Realty Securities II, Inc. | PRUCO, Inc. |
| | Prudential Retirement Services, Inc. | PRUCO, Inc. |
| | PruServicos Participacoes, S.A. | PRUCO, Inc. |
| | Prudential Trust Company | PRUCO, Inc. |
| | PTC Services, Inc. | PRUCO, Inc. |
| | Prudential Uniformed Services Administrators, Inc. | PRUCO, Inc. |
| | The Prudential Bank and Trust Company | PRUCO, Inc. |
| | PBT Mortgage Corporation | PRUCO, Inc. |
| | The Prudential Savings Bank, F.S.B. | PRUCO, Inc. |
| | PBT Home Equity Holdings | PRUCO, Inc. |
| | Pruco Life Insurance Company of New Jersey | Pruco Life Insurance Company |
| | The Prudential Life Insurance Company of Arizona | Pruco Life Insurance Company |
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
| | | | Stock in Lower-tier |
| | | | Company Owned |
| | 1 | 3 | Indirectly by Insurer |
| | | | on Statement Date |
| CUSIP | | Amount of Intangible |-------------------------|
|Identi- | Name of Lower-tier Company | Assets Included in | 4 | 5 |
|fication| | Amount Shown in | No. of | % of |
| | | Column 5, Section 1 | Shares |Outstanding |
|--------|--------------------------------------------------------|------------------------|------------|------------|
| | Corcarr Nominees Pty. Limited | N/A | 4 | 100 |
| | Corcarr Superannuation Pty. Limited | N/A | 4 | 100 |
| | Divsplit Nominees Pty. Limited | N/A | 4 | 100 |
| | PruBache Nominees Pty. Limited | N/A | 2 | 100 |
| | Prudential-Bache Trade Services Inc. | N/A | 1,000 | 100 |
| | PB Trade Ltd. | N/A | 100,000 | 100 |
| | Prudential-Bache Forex (USA) Inc. | N/A | 100 | 100 |
| | Prudential-Bache Forex (Hong Kong) Limited | N/A | 1,502 | 100 |
| | Prudential-Bache Forex (U.K.) Limited | N/A | 3,000,000 | 100 |
| | Prudential-Bache Transfer Agent Services, Inc. | N/A | 10,000 | 100 |
| | Prudential Securities Incorporated | N/A | 1,200 | 100 |
| | Bache & Co. (Lebanon) S.A.L. | N/A | 2,000 | 100 |
| | Bache & Co. S.A. de C.V. (Mexico) | N/A | 96 | 100 |
| | Bache Halsey Stuart Shields (Antilles) N.V. | N/A | 10 | 100 |
| | Bache Insurance Agency Incorporated | N/A | 100 | 100 |
| | Bache Insurance of Arizona Inc. | N/A | 100 | 100 |
| | Bache Insurance of Kentucky, Inc. | N/A | 100 | 100 |
| | Bache Shields Securities Corporation | N/A | 1,200 | 100 |
| | Banom Corporation | N/A | 5 | 100 |
| | Gelfand, Quinn & Associates, Inc. | N/A | 100 | 100 |
| | P-B Holding Japan Inc. | N/A | 1,000 | 100 |
| | Prudential Securities (Japan) Ltd. | N/A | 200,000 | 100 |
| | Prudential-Bache Futures Asia Pacific Ltd. | N/A | 100 | 100 |
| | Prudential-Bache Futures (Hong Kong) Limited | N/A | 1,499 | 100 |
| | Prudential-Bache Nominees (Hong Kong) Limited | N/A | 1,750 | 100 |
| | Prudential-Bache Securities Asia Pacific Ltd. | N/A | 100 | 100 |
| | Prudential-Bache Securities (Belgium) Inc. | N/A | 100 | 100 |
| | Prudential-Bache Securities (Espana) S.A. | N/A | 10,000 | 100 |
| | Prudential-Bache Securities (France) S.A. | N/A | 839 | 100 |
| | Prudential-Bache Securities (Holland) Inc. | N/A | 100 | 100 |
| | Prudential-Bache Securities (Holland) N.V. | N/A | 40,000 | 100 |
| | Prudential-Bache Securities (Hong Kong) Limited | N/A | 49,999 | 100 |
| | Prudential-Bache Securities (Luxembourg) Inc. | N/A | 100 | 100 |
| | Prudential-Bache Securities (Monaco) Inc. | N/A | 100 | 100 |
| | Prudential-Bache Securities (Switzerland) Inc. | N/A | 100 | 100 |
| | Prudential-Bache Securities (U.K.) Inc. | N/A | 200 | 100 |
| | Shields Model Roland Company | N/A | 15,000 | 100 |
| | Prudential Mutual Fund Management, Inc. | N/A | 850 | 85 |
| | Prudential Mutual Fund Distributors, Inc. | N/A | 100 | 100 |
| | Prudential Mutual Fund Investment | | | |
| | Management, Inc. | N/A | 100 | 100 |
| | Prudential Mutual Fund Services, Inc. | N/A | 100 | 100 |
| | Prudential Securities (Chile) Inc. | N/A | 100 | 100 |
| | Prudential Securities CMO Issuer Inc. | N/A | 100 | 100 |
| | Prudential Securities Futures Management Inc. | N/A | 100 | 100 |
| | Prudential Securities (South America) Inc. | N/A | 100 | 100 |
| | Prudential Securities (Argentina) Inc. | N/A | 100 | 100 |
| | Prudential Securities (Uruguay) S.A. | N/A | 100 | 100 |
| | Shields Model Roland Securities Incorporated | N/A | 10 | 100 |
| | Prudential Securities Lease Holding Inc. | N/A | 20 | 100 |
| | Prudential Securities Municipal Derivatives, Inc. | N/A | 100 | 100 |
| | Prudential Securities Realty Funding Corporation | N/A | 100 | 100 |
| | Prudential Securities Secured Financing Corporation| N/A | 100 | 100 |
| | Prudential Securities Structured Assets, Inc. | N/A | 99 | 100 |
| | P-B Finance Ltd. | N/A | 3 | 100 |
| | R & D Funding Corp. | N/A | 100 | 100 |
| | Special Situations Management Inc. | N/A | 1,000 | 100 |
| | Seaport Futures Management, Inc. | N/A | 1,000 | 100 |
| | Wexford Clearing Services Corporation | N/A | 100 | 100 |
| | Prudential Dental Maintenance Organization, Inc. | N/A | 50 | 100 |
| | Prudential Direct, Inc. | N/A | 150 | 100 |
| | Prudential Equity Investors, Inc. | N/A | 1,000 | 100 |
| | Prudential Funding Corporation | N/A | 100 | 100 |
| | Prudential Health Care Plan, Inc. | N/A | 99 | 100 |
| | Prudential Health Care Plan of California, Inc. | N/A | 1,000 | 100 |
| | Prudential Health Care Plan of Connecticut, Inc. | N/A | 1,000 | 100 |
| | Prudential Health Care Plan of Georgia, Inc. | N/A | 1,000 | 100 |
| | Prudential Health Care Plan of New York, Inc. | N/A | 200 | 100 |
| | Prudential Institutional Fund Management, Inc. | N/A | 100 | 100 |
| | Prudential Holdings, Inc. | N/A | 1,000 | 100 |
| | Prudential Property and Casualty Insurance Company | N/A | 800 | 100 |
| | Prudential Commercial Insurance Company | N/A | 2,000 | 100 |
| | Prudential General Insurance Company | N/A | 2,000 | 100 |
| | Prudential Insurance Brokerage, Inc. | N/A | 25,000 | 100 |
| | The Prudential Property and Casualty General | | | |
| | Agency, Inc. | N/A | 100 | 100 |
| | The Prudential Property and Casualty Insurance Company | | | |
| | of New Jersey | N/A | 400 | 100 |
| | Prudential Realty Partnerships, Inc. | N/A | 100 | 100 |
| | Prudential Realty Securities, Inc. | N/A | 95 | 100 |
| | Prudential Realty Securities II, Inc. | N/A | 17 | 13 |
| | Prudential Retirement Services, Inc. | N/A | 100 | 100 |
| | PruServicos Participacoes, S.A. | N/A | 1 |less than 1 |
| | Prudential Trust Company | N/A | 300,000 | 100 |
| | PTC Services, Inc. | N/A | 100 | 100 |
| | Prudential Uniformed Services Administrators, Inc. | N/A | 500,000 | 100 |
| | The Prudential Bank and Trust Company | N/A | 203,996 | 100 |
| | PBT Mortgage Corporation | N/A | 2,250 | 100 |
| | The Prudential Savings Bank, F.S.B. | 4,134,889 | 10,000 | 100 |
| | PBT Home Equity Holdings | N/A | 4,000 | 100 |
| | Pruco Life Insurance Company of New Jersey | N/A | 400,000 | 100 |
| | The Prudential Life Insurance Company of Arizona | N/A | 200,000 | 100 |
- ----------------------------------------------------------------------------------------------------------------------
(a) Prudential Residential Services, L.P. is a partnership which is reported on Schedule BA.
Groups of companies which are indented are owned by the company listed
immediately above that group in the percentages indicated.
</TABLE>
C-6
<PAGE>
<TABLE>
Form 1
ANNUAL STATEMENT FOR THE YEAR 1995 OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
SCHEDULE D -- PART 6 -- SECTION 2
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
| | | |
| | | |
| | 1 | 2 |
| | | |
| CUSIP | | Name of Company Listed in |
|Identi- | Name of Lower-tier Company | Section 1 Which Controls Lower-tier |
|fication| | Company |
| | | |
|--------|--------------------------------------------------------|-----------------------------------------------------|
| | OTIP/RAEO Insurance Company, Inc. | Prudential of America General Ins. Company (Canada) |
| | Prudential-Bache Capital Funding (Swaps) Limited | Prudential Global Funding, Inc. |
| | Prudential Texas Residential Services Corporation | Prudential Homes Corporation |
| | Prudential Select Life Insurance Company of America | Prudential Select Holdings, Inc. |
| | Lender's Service, Inc. | Residential Services Corporation of America |
| | Lender's Service Title Agency, Inc. | Residential Services Corporation of America |
| | Private Label Mortgage Services Corporation | Residential Services Corporation of America |
| | Residential Information Services, Inc. | Residential Services Corporation of America |
| | Securitized Asset Sales, Inc. | Residential Services Corporation of America |
| | Securitized Asset Services Corporation | Residential Services Corporation of America |
| | The Prudential Home Mortgage Company, Inc. | Residential Services Corporation of America |
| | The Prudential Home Mortgage Securities Company, Inc.| Residential Services Corporation of America |
| | Gateway Holdings, S.A. | The Prudential Investment Corporation |
| | Amicus Investment Company | The Prudential Investment Corporation |
| | Global Income Fund Management Company, S.A. | The Prudential Investment Corporation |
| | Global Series Fund II Management Company, S.A. | The Prudential Investment Corporation |
| | Jennison Long Bond Management Company | The Prudential Investment Corporation |
| | PAEC Management Company | The Prudential Investment Corporation |
| | Prudential Asset Sales and Syndications, Inc. | The Prudential Investment Corporation |
| | Prudential Home Building Investors, Inc. | The Prudential Investment Corporation |
| | PruSupply, Inc. | The Prudential Investment Corporation |
| | PruSupply Capital Assets, Inc. | The Prudential Investment Corporation |
| | The Prudential Asset Management Company, Inc. | The Prudential Investment Corporation |
| | Enhanced Investment Technologies, Inc. | The Prudential Investment Corporation |
| | PCM International, Inc. | The Prudential Investment Corporation |
| | Prudential Asia Investments Limited | The Prudential Investment Corporation |
| | Prudential Asia DBS Limited | The Prudential Investment Corporation |
| | Prudential Asia Fund Management Limited (BVI) | The Prudential Investment Corporation |
| | Prudential Asia Fund Management Limited | The Prudential Investment Corporation |
| | Prudential Asia Fund Managers (HK) Limited | The Prudential Investment Corporation |
| | Prudential Asset Management Asia Limited (BVI) | The Prudential Investment Corporation |
| | PAMA (Indonesia) Limited | The Prudential Investment Corporation |
| | PAMA (Singapore) Private Limited | The Prudential Investment Corporation |
| | Prudential Asset Management Asia Hong Kong Ltd. | The Prudential Investment Corporation |
| | PT PAMA Indonesia | The Prudential Investment Corporation |
| | SJ Bedding B.V. | The Prudential Investment Corporation |
| | Simmons Bedding & Furniture (HK) Limited | The Prudential Investment Corporation |
| | Simmons Asia Limited | The Prudential Investment Corporation |
| | Simmons (Southeast Asia) Private Limited | The Prudential Investment Corporation |
| | Simmons Co. Limited | The Prudential Investment Corporation |
| | Prudential Asset Management Company Securities Corp. | The Prudential Investment Corporation |
| | Prudential Timber Investments, Inc. | The Prudential Investment Corporation |
| | Texas Rio Grande Other Asset Group Company, Inc. | The Prudential Investment Corporation |
| | The Prudential Investment Advisory Company, Ltd. | The Prudential Investment Corporation |
| | The Prudential Property Company, Inc. | The Prudential Investment Corporation |
| | The Prudential Realty Advisors, Inc. | The Prudential Investment Corporation |
| | The Prudential Real Estate Financial Services of | |
| | America, Inc. | The Prudential Real Estate Affiliates, Inc. |
| | The Prudential Real Estate Financial Services of | |
| | Long Island, Inc. | The Prudential Real Estate Affiliates, Inc. |
| | The Prudential Referral Services, Inc. | The Prudential Real Estate Affiliates, Inc. |
| | | |
| | | |
| | | |
| | | |
| | | |
|-----------------------------------------------------------------------------------------------------------------------|
| 0299999 COMMON STOCKS |
|-----------------------------------------------------------------------------------------------------------------------|
| 0399999 TOTAL - PREFERRED AND COMMON STOCKS |
- -------------------------------------------------------------------------------------------------------------------------
<PAGE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
| | | | Stock in Lower-tier |
| | | | Company Owned |
| | 1 | 3 | Indirectly by Insurer |
| | | | on Statement Date |
| CUSIP | | Amount of Intangible |-------------------------|
|Identi- | Name of Lower-tier Company | Assets Included in | 4 | 5 |
|fication| | Amount Shown in | No. of | % of |
| | | Column 5, Section 1 | Shares |Outstanding |
|--------|--------------------------------------------------------|------------------------|------------|------------|
| | OTIP/RAEO Insurance Company, Inc. | N/A | 10,000 | 100 |
| | Prudential-Bache Capital Funding (Swaps) Limited | N/A | 1 | 100 |
| | Prudential Texas Residential Services Corporation | N/A | 1,000 | 100 |
| | Prudential Select Life Insurance Company of America | 1,262,549 | 2,500,000 | 100 |
| | Lender's Service, Inc. | 489,000 | 1,000 | 100 |
| | Lender's Service Title Agency, Inc. | N/A | 1,000 | 100 |
| | Private Label Mortgage Services Corporation | N/A | 1,000 | 100 |
| | Residential Information Services, Inc. | N/A | 1,000 | 100 |
| | Securitized Asset Sales, Inc. | N/A | 1,000 | 100 |
| | Securitized Asset Services Corporation | N/A | 1,000 | 100 |
| | The Prudential Home Mortgage Company, Inc. | N/A | 100 | 100 |
| | The Prudential Home Mortgage Securities Company, Inc.| N/A | 1,000 | 100 |
| | Gateway Holdings, S.A. | N/A | 20,000 | 100 |
| | Amicus Investment Company | N/A | 1,000 | 100 |
| | Global Income Fund Management Company, S.A. | N/A | 5,000 | 100 |
| | Global Series Fund II Management Company, S.A. | N/A | 1,400 | 100 |
| | Jennison Long Bond Management Company | N/A | 5,000 | 100 |
| | PAEC Management Company | N/A | 1,999 | 100 |
| | Prudential Asset Sales and Syndications, Inc. | N/A | 1,000 | 100 |
| | Prudential Home Building Investors, Inc. | N/A | 100 | 100 |
| | PruSupply, Inc. | N/A | 998 | 100 |
| | PruSupply Capital Assets, Inc. | N/A | 98 | 100 |
| | The Prudential Asset Management Company, Inc. | N/A | 86 | 100 |
| | Enhanced Investment Technologies, Inc. | N/A | 98 | 100 |
| | PCM International, Inc. | N/A | 100 | 100 |
| | Prudential Asia Investments Limited | N/A | 3,000,000 | 100 |
| | Prudential Asia DBS Limited | N/A | 475 | 25 |
| | Prudential Asia Fund Management Limited (BVI) | N/A | 200,000 | 100 |
| | Prudential Asia Fund Management Limited | N/A | 180 | 100 |
| | Prudential Asia Fund Managers (HK) Limited | N/A | 20 | 100 |
| | Prudential Asset Management Asia Limited (BVI) | N/A | 1,000,000 | 100 |
| | PAMA (Indonesia) Limited | N/A | 7,500 | 75 |
| | PAMA (Singapore) Private Limited | N/A | 1,000,000 | 100 |
| | Prudential Asset Management Asia Hong Kong Ltd. | N/A | 100 | 100 |
| | PT PAMA Indonesia | N/A | 650 | 65 |
| | SJ Bedding B.V. | N/A | 40 | 100 |
| | Simmons Bedding & Furniture (HK) Limited | N/A | 160,033 | 80 |
| | Simmons Asia Limited | N/A | 100,000 | 90 |
| | Simmons (Southeast Asia) Private Limited | N/A | 300,000 | 100 |
| | Simmons Co. Limited | N/A | 3,433,000 | 66 |
| | Prudential Asset Management Company Securities Corp. | N/A | 100 | 100 |
| | Prudential Timber Investments, Inc. | N/A | 100 | 100 |
| | Texas Rio Grande Other Asset Group Company, Inc. | N/A | 100 | 100 |
| | The Prudential Investment Advisory Company, Ltd. | N/A | 40,000 | 100 |
| | The Prudential Property Company, Inc. | N/A | 99 | 100 |
| | The Prudential Realty Advisors, Inc. | N/A | 100 | 100 |
| | The Prudential Real Estate Financial Services of | | | |
| | America, Inc. | N/A | 100 | 100 |
| | The Prudential Real Estate Financial Services of | | | |
| | Long Island, Inc. | N/A | 100 | 100 |
| | The Prudential Referral Services, Inc. | N/A | 1,000 | 100 |
| | | | | |
| | | | | |
|------------------------------------------------------------------------------------------|------------|------------|
| 0299999 COMMON STOCKS 15,282,022 | X X X | X X X |
|------------------------------------------------------------------------------------------|------------|------------|
| 0399999 TOTAL - PREFERRED AND COMMON STOCKS 15,282,022 | X X X | X X X |
- ----------------------------------------------------------------------------------------------------------------------
(a) Prudential Residential Services, L.P. is a partnership which is reported on Schedule BA.
Groups of companies which are indented are owned by the company listed
immediately above that group in the percentages indicated.
</TABLE>
C-7
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
TITLE OF CLASS NUMBER OF RECORD HOLDERS
- -------------- ------------------------
Money Market Portfolio
Capital Stock 14
Diversified Bond Portfolio
Capital Stock 15
High Yield Bond Portfolio
Capital Stock 14
Government Income Portfolio
Capital Stock 13
Equity Portfolio
Capital Stock 15
Stock Index Portfolio
Capital Stock 15
Equity Income Portfolio
Capital Stock 14
Natural Resources Portfolio
Capital Stock 13
Global Portfolio
Capital Stock 16
Conservative Balanced Portfolio
Capital Stock 15
Flexible Managed Portfolio
Capital Stock 15
Zero Coupon Bond 2000 Portfolio
Capital Stock 5
Zero Coupon Bond 2005 Portfolio
Capital Stock 5
Small Capitalization Stock Portfolio
Capital Stock 13
Prudential Jennison Portfolio 14
Capital Stock
C-8
<PAGE>
ITEM 27. INDEMNIFICATION
Article VI, paragraph (4) of Registrant's Articles of Incorporation provides
that "(e)ach director and each officer of the Corporation shall be indemnified
by the Corporation to the full extent permitted by the General Laws of the State
of Maryland and as provided in the by-laws of the Corporation." Article VIII of
the Registrant's Articles of Incorporation provides, in pertinent part, that
"(n)o provision of these Articles of Incorporation shall be effective to (a)
require a waiver of compliance with any provision of the Securities Act of 1933,
as amended, or the Investment Company Act of 1940, as amended, or of any valid
rule, regulation or order of the Securities and Exchange Commission thereunder
or (b) protect or purport to protect any director or officer of the Corporation
against any liability to the Corporation or its security holders to which he
would otherwise by subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office."
Paragraph 6 of both the Investment Advisory Agreement and the Supplemental
Investment Advisory Agreement between Registrant and Prudential provides that
"Prudential will not be liable for any error of judgment or mistake of law or
for any loss suffered by the Fund in connection with the matters to which this
Agreement relates, except for a loss resulting from willful misfeasance, bad
faith, or gross negligence in the performance of its duties on behalf of the
Fund or from reckless disregard of its obligation and duties under this
Agreement."
The Prudential Directors' and Officers' Liability and Corporation Reimbursement
Insurance program, purchased by Prudential from Aetna Casualty & Surety Company,
CNA Insurance Companies, Lloyds of London, Great American Insurance Company,
Reliance Insurance Company, Corporate Officers & Directors Assurance Ltd.,
A.C.E. Insurance Company, Ltd., XL Insurance Company, Ltd., and Zurich-American
Insurance Company, provides reimbursement for "Loss" (as defined in the
policies) which the Company pays as indemnification to its directors or officers
resulting from any claim for any actual or alleged act, error, misstatement,
misleading statement, omission, or breach of duty by persons in the discharge of
their duties in their capacities as directors or officers of Prudential, any of
its subsidiaries, or certain investment companies affiliated with Prudential.
Coverage is also provided to the individual directors or officers for such Loss,
for which they shall not be indemnified. Loss essentially is the legal liability
on claims against a director or officer, including adjudicated damages,
settlements and reasonable and necessary legal fees and expenses incurred in
defense of adjudicatory proceedings and appeals therefrom. Loss does not include
punitive or exemplary damages or the multiplied portion of any multiplied damage
award, criminal or civil fines or penalties imposed by law, taxes or wages, or
matters which are uninsurable under the law pursuant to which the policies are
construed.
There are a number of exclusions from coverage. Among the matters excluded are
Losses arising as the result of (1) claims brought about or contributed to by
the criminal, dishonest or fraudulent acts or omissions or the willful violation
of any law by a director or officer, (2) claims based on or attributable to
directors or officers gaining personal profit or advantage to which they were
not legally entitled, and (3) claims arising from actual or alleged performance
of, or failure to perform, services as, or in any capacity similar to, an
investment adviser, investment banker, underwriter, broker or dealer, as those
terms are defined in the Securities Act of 1933, the Securities Exchange Act of
1934, the Investment Advisers Act of 1940, the Investment Company Act of 1940,
any rules or regulations thereunder, or any similar federal, state or local
statute, rule or regulation.
The limit of coverage under the program for both individual and corporate
reimbursement coverage is $150,000,000. The retention for corporate
reimbursement coverage is $10,000,000 per loss.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
C-9
<PAGE>
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Prudential does not have other business of a substantial nature besides
activities relating to the assets of the registrant. Prudential is involved in
insurance, reinsurance, securities, pension services, real estate and banking.
Prudential Investment Corporation (PIC) is the investment unit of Prudential and
actively engages in the business of giving investment advice. The officers and
directors of Prudential and PIC who are engaged directly or indirectly in
activities relating to the registrant have no other business, profession,
vocation, or employment of a substantial nature, and have not had such other
connections during the past two years.
The business and other connections of Prudential's Directors are listed in the
statement of additional information in Post-Effective Amendment No. 28 to the
Registration Statement of The Prudential Variable Contract Account-10,
Registration No. 2-76580, filed on February 28, 1997, the text of which is
hereby incorporated by reference.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Pruco Securities Corporation also acts as principal underwriter of
Prudential's Gibraltar Fund.
(b) NAME AND PRINCIPAL POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITER
------------------ ----------------------
James Avery Jr. ** Director
E. Michael Caulfield * Director
Joseph Mahoney ** Director
Richard O. Painter *** Director
Richard A. Topp * Director and President
William F. Yelverton * Chairman of the Board
C. Edward Chaplin * Treasurer
Kevin Frawley ** Vice President and Chief Compliance
Officer
Clifford E. Kirsch ** Chief Legal Officer and Secretary
Lisa Ramaswamy *** Comptroller and Chief Financial
Officer
* Principal Business Address: Prudential Plaza, Newark, NJ 07102
** Principal Business Address: 213 Washington Street, Newark, NJ 7102
*** Principal Business Address: 1111 Durham Avenue, South Plainfield, NJ 07080
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books, or other documents required to be maintained by Section 31
(a) of the 1940 Act and the rules promulgated thereunder are maintained by the
Registrant, Prudential Plaza, Newark, New Jersey 07102-3777; the Registrant's
Investment Advisor, The Prudential Insurance Company of America, Prudential
Plaza, Newark, New Jersey 07102-3777, the Registrant's Accounting Agent,
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, MO 64105
or the Registrant's Custodians, Chase Manhattan Bank, Chase Metro Tech Center,
Brooklyn, NY 11245, and Brown Brothers Harriman & Co., 40 Water Street, Boston,
MA 02109.
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS
(c) The undersigned Registrant hereby undertakes to furnish each person to
whom a prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders upon request and without charge.
C-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that this Amendment is filed
solely for one or more of the purposes specified in Rule 485(b)(1) under the
Securities Act of 1933 and that no material event requiring disclosure in the
prospectus, other than one listed in Rule 485(b)(1), has occurred since the
filing date of a Post-Effective Amendment filed under Rule 485(a) which has not
become effective and has caused this Post-Effective Amendment No. 33 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Newark, State of New Jersey, on the 25th day of
April, 1997.
THE PRUDENTIAL SERIES FUND, INC.
By: /s/ Mendel A. Melzer
----------------------------------
Mendel A. Melzer
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 33 to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE AND TITLE DATE
- ------------------- ----
<S> <C> <C>
/s/ * April 25, 1997
- -----------------------------------
E. Michael Caulfield
President and Director
/s/ * April 25, 1997
- -----------------------------------
Mendel A. Melzer
Chairman of the Board of Directors and
Principal Executive Officer
/s/ * April 25, 1997
- -----------------------------------
Eugene Stark
Comptroller and Principal Financial
Officer
/s/ * April 25, 1997 *By: /s/ Thomas C. Castano
- ----------------------------------- ---------------------
Saul K. Fenster Thomas C. Castano
Director (Attorney-in-Fact)
/s/ * April 25, 1997
- -----------------------------------
W. Scott McDonald, Jr.
Director
/s/ * April 25, 1997
- -----------------------------------
Joseph Weber
Director
</TABLE>
C-11
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
<S> <C> <C>
(i)(1) Articles of Incorporation of The Prudential Series Fund, Inc. Page C-13
(i)(3) Articles Supplementary to the Articles of Incorporation of The Page C-26
Prudential Series Fund, Inc.
(ii) By-laws of The Prudential Series Fund, Inc., as amended February Page C-32
16, 1990.
(v)(1) Investment Advisory Agreement, as amended July 14, 1988 Page C-67
between The Prudential Insurance Company of America and The
Prudential Series Fund, Inc.
(v)(2) Service Agreement between The Prudential Insurance Company Page C-71
of America and The Prudential Investment Corporation.
(vi) Distribution Agreement between The Prudential Series Fund, Inc. Page C-73
and Pruco Securities Corporation.
(viii)(1) Custodian Agreement between Chase Manhattan Bank (formerly Page C-77
Chemical Bank and Manufacturers Hanover Trust Company) and
The Prudential Series Fund, Inc.
(viii)(2) Custodian Agreement between Brown Brothers Harriman & Co. Page C-108
and The Prudential Series Fund, Inc.
(ix)(1) Indemnification Agreement regarding Reg. No. 33-49994. Page C-141
(ix)(2) Indemnification Agreement regarding Reg. No. 33-57186. Page C-143
(xi)(1) Consent of Deloitte & Touche LLP independent auditors. Page C-145
(xi)(2) Consent of Price Waterhouse LLP independent accountants. Page C-146
27 Financial Data Schedule. Page C-147
</TABLE>
C-12
EXHIBIT NO. (i)(1)
ARTICLES OF INCORPORATION
OF
PRUCO LIFE SERIES FUND, INC.
ARTICLE I
THE UNDERSIGNED, Cynthia H. Levy, whose post office address is PRUDENTIAL PLAZA,
745 Broad Street, Newark, New Jersey 07101, being at least 18 years of age, does
hereby act as an incorporator, under and by virtue of the General Corporation
Laws of the State of Maryland authorizing the formation of corporations and with
the intention of forming a corporation.
ARTICLE II
NAME
The name of the corporation is PRUCO LIFE SERIES FUND, INC.
ARTICLE III
PURPOSE AND POWERS
The purpose or purposes for which the Corporation is formed and the business or
objects to be transacted, carried on and promoted by it are as follows:
(1) To conduct and carry on the business of an investment company of the
management type.
C-13
<PAGE>
-2-
(2) To hold, invest and reinvest its assets in securities, and in connection
therewith to hold part or all of its assets in cash. (3) To issue and sell
shares of its own capital stock in such amounts and on such terms and
conditions, for such purposes and for such amount or kind of consideration now
or hereafter permitted by the General Corporation Law of the State of Maryland
and by these Articles of Incorporation, as its Board of Directors may determine,
provided, however, that the value of the consideration per share to be received
by the Corporation upon the sale or other disposition of any shares of its
capital stock shall be not less than the net asset value per share of such
capital stock outstanding at the time of such event.
(4) To redeem, purchase or otherwise acquire, hold, dispose of, resell,
transfer, reissue or cancel (all without the vote or consent of the
stockholders of the Corporation) shares of its capital stock, in any manner and
to the extent now or hereafter permitted by the General Corporation Law of the
State of Maryland and by these Articles of Incorporation.
(5) To do any and all such further acts or things and to exercise any and all
such further powers or rights as may be necessary, incidental, relative,
conducive appropriate or desirable for the accomplishment, carrying out or
attainment of any of the foregoing purposes or objects.
The Corporation shall be authorized to exercise and enjoy all the powers, rights
and privileges granted to, or conferred upon, corporations by the General
Corporation law of the State of Maryland now or hereafter in force, and the
enumeration of the foregoing shall not be deemed to exclude any powers, rights
or privileges so granted or conferred.
C-14
<PAGE>
-3-
ARTICLE IV
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the principal office of the Corporation in this State
is c/o United States Corporation Company, 2 Hopkins Plaza, 1300 Mercantile Bank
and Trust Building, Baltimore, Maryland 21201. The name of the resident agent
of the Corporation in this State is United States Corporation Company, a
corporation in this State, and the post office address of the resident agent is
2 Hopkins Plaza, 1300 Mercantile Bank and Trust Building, Baltimore, Maryland
21201.
ARTICLE V
CAPITAL STOCK
The total number of shares of capital stock which the Corporation shall have
authority to issue is TWO BILLION (2,0OO,00O,OOO) shares of the par value of
One Cent ($O.O1) per share and of the aggregate par value of $20,000,000. One
billion six hundred million (1,600,000,000) shares shall be divided into the
following classes of capital stock, each class comprising the number of
shares and having the designations indicated, subject, however, to the authority
to increase and decrease the number of shares or any class hereinafter granted
to the Board of Directors:
C-15
<PAGE>
-4-
CLASS NUMBER OF SHARES
----- ----------------
Money Market Portfolio Capital Stock 600,000,000
Bond Portfolio Capital Stock 400,000,000
Common Stock Portfolio Capital Stock 600,000,000
The balance of four hundred million (400,000,000) shares of such stock may be
issued in such classes, or in any new class or classes each comprising such
number of shares and having such designations, such powers, preferences and
rights and such qualifications, limitations and restrictions as shall be fixed
and determined from time to time by resolution or resolutions providing for the
issuance of such stock adopted by the Board of Directors, to whom authority so
to fix and determine the same is hereby expressly granted. In addition, the
Board or Directors is hereby expressly granted authority to increase or decrease
the number of shares of any class, but the number of shares of any class shall
not be decreased by the Board of Directors below the number of shares thereof
then outstanding.
The holder or each share of stock of the Corporation shall be entitled to one
vote for each full share, and a fractional vote for each fractional share of
stock, irrespective of the class, then standing in his name on the books of the
Corporation. On any matter submitted to a vote of stockholders, all shares of
the Corporation then issued and outstanding and entitled to vote shall be voted
by the aggregate and not by class except that (1) when otherwise expressly
required by the Maryland General Corporation Law or the Investment Company Act
of 1940, as amended, shares shall be voted by individual class; (2) only shares
of the respective portfolios are entitled to vote on matters concerning only
that Portfolio; and (3) fundamental policies, as spe-
C-16
<PAGE>
-5-
cified in the by-laws of the Corporation, may be changed, with respect to any
Portfolio, if such change is approved by a majority (as defined under the
Investment Company Act of 1940) of the capital stock of such Portfolio.
Each class of stock of the Corporation shall have the following powers,
preferences or other special rights, and the qualifications, restrictions, and
limitations thereof shall be as follows:
(1) The shares of each class, when issued, will be fully paid and
non-assessable, have no preference, preemptive, conversion, exchange, or similar
rights, except as set forth in (2) below, and will be freely transferable.
(2) The consideration received by the Corporation for the sale or capital stock
shall become part of the assets of the Portfolio to which the capital stock of
the class relates. Each share of the capital stock of each class shall have a
pro rata interest in the assets of the Portfolio to which the capital stock of
that class relates and shall have no interest in the assets of any other
Portfolio.
(3) The Board of Directors may from time to time declare and pay dividends or
distributions, in stock or cash, on any or all classes of stock, the amount of
such dividends and distributions and the payment of them being wholly in the
discretion of the Board of Directors.
(i) Dividends or distributions on shares of any class of stock shall be paid
only out of earned surplus or other lawfully available assets belonging to such
class.
C-17
<PAGE>
-6-
(ii) Inasmuch as one goal of the Corporation is to qualify as a "regulated
investment company" under the Internal Revenue Code of 1954, as amended, or any
successor or comparable statute thereto, and Regulations promulgated thereunder,
and inasmuch as the computation of net income and gains for Federal income tax
purposes may vary from the computation thereof on the books of the Corporation,
the Board of Directors shall have the power in its discretion to distribute in
any fiscal years as dividends, including dividends designated in whole or in
part as capital gains distributions, amounts sufficient in the opinion of the
Board of Directors, to enable the Corporation to qualify as a regulated
investment company and to avoid liability for the Corporation for Federal income
tax in respect of that year. In furtherance, and not in limitation of the
foregoing, in the event that a class of shares has a net capital loss for a
fiscal year, and to the extent that a net capital loss for a fiscal year offsets
net capital gains from one or more of the other classes, the amount to be deemed
available for distribution to the class or classes with the net capital gain may
be reduced by the amount offset.
(4) The assets belonging to any class of stock shall be charged with the
liabilities in respect to such class, and shall also be charged with their share
of the general liabilities of the Corporation in proportion to the asset values
of the respective classes. The determination of the Board of Directors shall be
conclusive as to the amount of liabilities or the amount of any general assets
of the Corporation, as to whether such liabilities or assets are allocable to
one or more classes, and as to the allocation of such liabilities or assets to a
given class or among several classes.
C-18
<PAGE>
-7-
(5) With the approval of a majority of the stockholders of each of the affected
classes of capital stock, the Board of Directors may transfer the assets of any
Portfolio to any other Portfolio. Upon such a transfer, the Corporation shall
issue shares of capital stock representing interests in the Portfolio to which
the assets were transferred in exchange for all shares of capital stock
representing interests in the Portfolio from which the assets were transferred.
Such shares shall be exchanged at their respective net asset values.
C-19
<PAGE>
-8-
ARTICLE VI
PROVISIONS FOR DEFINING, LIMITING, AND REGULATING
CERTAIN POWERS OF THE CORPORATION AND OF
THE DIRECTORS AND STOCKHOLDERS
(1) The number of directors of the Corporation shall be five (5), which number
may be increased or decreased pursuant to the by-laws of the Corporation but
shall never be less than three (3). The names of the directors who shall act
until the first annual meeting or until their successors are duly elected and
qualify are:
Joseph J. Melone
John J. Marcus
A. Douglas Murch
Richard A. Yorks
Robert C. Winters
C-20
<PAGE>
-9-
(2) The Board of Directors of the Corporation is hereby empowered to authorize
the issuance from time to time of shares of capital stock, whether now or
hereafter authorized, for such consideration as the Board of Directors may deem
advisable, subject to such limitations as may be set forth in these Articles of
Incorporation or in the by-laws of the Corporation or in the General Corporation
Law of the State of Maryland or in the Investment Company Act of 1940, as
amended.
(3) No holder of stock of the Corporation shall, as such holder, have any right
to purchase or subscribe for any shares of the capital stock of the Corporation
or any other security of the Corporation which it may issue or sell (whether out
of the number of shares authorized by these Articles of Incorporation, or out of
any shares of the capital stock of the Corporation acquired by it after the
issue thereof, or otherwise) other than such right, if any, as the Board of
Directors, in its discretion, may determine.
(4) Each director and each officer of the Corporation shall be indemnified by
the Corporation to the full extent permitted by the General Laws of the State of
Maryland and as provided in the by-laws of the Corporation.
(5) The Board of Directors of the Corporation may make, alter or repeal from
time to time any of the by-laws of the Corporation except any particular by-law
which is specified as not subject to alteration or repeal by the Board of
Directors, subject to requirements of the Investment Company Act of 1940, as
amended.
C-21
<PAGE>
-10-
ARTICLE VII
REDEMPTION
Each holder of shares of capital stock of the Corporation shall be entitled to
require the Corporation to redeem all or any part of the shares of capital stock
of the Corporation standing in the name of such holder on the books of the
Corporation, and the Corporation shall redeem all shares of such capital stock
tendered to it for redemption at the redemption price of such shares as in
effect from time to time as may be determined by the Board of Directors of the
Corporation in accordance with the provisions hereof, subject to the right of
the Board of Directors of the Corporation to suspend the right of redemption of
shares of capital stock of the Corporation or postpone the date of payment of
such redemption price in accordance with provisions of applicable law. The
redemption price of shares of capital stock of the Corporation shall be the net
asset value thereof as determined by the Board of Directors of the Corporation
from time to time in accordance with the provisions of applicable law, less such
redemption fee or other charge, if any, as may be fixed by resolution of the
Board of Directors of the Corporation. Payment of the redemption price shall be
made in cash by the Corporation at such time and in such manner as may be
determined from time to time by the Board of Directors of the Corporation,
except that capital stock of any class may be redeemed in kind with the assets
of the Portfolio to which the class relates if the Board of Directors deems such
action desirable.
C-22
<PAGE>
-11-
ARTICLE VIII
DETERMINATION BINDING
Any determination made in good faith, so far as accounting matters are involved,
in accordance with accepted accounting practice by or pursuant to the direction
of the Board of Directors, as to the amount of assets, obligations or
liabilities of the Corporation, as to the amount of net income or the
Corporation from dividends and interest for any period or amounts at any time
legally available for the payment of dividends, as to the amount of any reserves
or charges set up and the propriety thereof, as to the time of or purpose for
creating reserves or as to the use, alteration or cancellation of any reserves
or charges (whether or not any obligation or liability for which such reserves
or charges shall have been created shall have been paid or discharged or shall
be then or thereafter required to be paid or discharged), as to the price of any
security owned by the Corporation or as to any other matters relating to the
issuance, sale, redemption or other acquisition or disposition of securities or
shares of capital stock of the Corporation, and any reasonable determination
made in good faith by the Board of Directors as to whether any transaction
constitutes a purchase of securities on "margin", a sale of securities "short",
or an underwriting of the sale of, or a participation in any underwriting or
selling group in connection with the public distribution of, any securities,
shall be final and conclusive, and shall be binding upon the Corporation and
all holders of its capital stock, past, present and future, and shares of the
capital stock of the Corporation are issued and sold on the condition and
understanding, evidenced by the purchase of shares of capital stock or
acceptance of share certificates, that any and all such determinations shall be
binding as aforesaid. No provision of these Ar-
C-23
<PAGE>
-12-
ticles of Incorporation shall be effective to (a) require a waiver of compliance
with any provision of the Securities Act of 1933, as amended, or the Investment
Company Act of 1940, as amended, or of any valid rule, regulation or order of
the Securities and Exchange Commission thereunder or (b) protect or
purport to protect any director or officer of the Corporation against any
liability to the Corporation or its security holders to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
ARTICLE IX
PERPETUAL EXISTENCE
The duration of the Corporation shall be perpetual.
ARTICLE X
AMENDMENT
The Corporation reserves the right from time to time to make any amendment of
its charter, now or hereafter authorized by law, including any amendment which
alters the contract rights, as expressly set forth in is charter, of any
outstanding stock.
IN WITNESS WHEREOF, the undersigned incorporator of PRUO LIFE SERIES FUND, INC.
hereby executes the foregoing Articles of Incorporation and acknowledges the
same to be her act and further acknowledges that, to the best of her knowledge,
the matters and facts set forth therein are true in all material respects under
penalties of perjury.
C-24
<PAGE>
-13-
Dated the 12th day or November, 1982.
/s/ CYNTHIA H. LEVY
------------------------
Cynthia H. Levy
State of New Jersey)
County of Essex )ss
On this __ day of November, 1982, before me personally appeared Cynthia H.
Levy, to me known and known to me to be the person mentioned and described in
and who executed the foregoing instrument and he duly acknow1edged to me that
he executed the same.
--------------------------
Notary Public
Commission Expires
-------------------------
C-25
EXHIBIT (b)(i)(3)
THE PRUDENTIAL SERIES FUND, INC.
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
THE PRUDENTIAL SERIES FUND, INC., a Maryland corporation having its
principal office in this State c/o Prentice Hall Corporate Services, 2 Hopkins
Plaza, 1300 Merchantile Bank and Trust Building, Baltimore, Maryland 21201
(hereinafter called the Corporation), hereby certifies to the State Department
of Assessments and Taxation of Maryland, that:
FIRST: The Board of Directors of the Corporation, at a meeting duly
convened and held on February 17, 1989, adopted a resolution classifying or
reclassifying two hundred million (200,000,000) unissued shares of capital stock
of the Corporation of the par value of $0.01 per share by establishing two (2)
new classes of capital stock designated as Zero Coupon Bond-2005 Portfolio
Capital Stock and Government Securities Portfolio Capital Stock and by
allocating or reallocating such two hundred million shares so that the total
number of shares of authorized capital stock of the Corporation shall be divided
among the following classes of capital stock, each class comprising the number
of shares and having the designations, preferences, rights, voting powers and
such qualifications, limitations and restrictions are hereinafter set
forth:
C-26
<PAGE>
CLASS NUMBER OF SHARES
----- ----------------
Money Market Portfolio Capital Stock 200,000,000
Bond Portfolio Capital Stock 200,000,000
Common Stock Portfolio Capital Stock 200,000,000
Aggressively Managed Flexible Portfolio Capital Stock 200,000,000
Conservatively Managed Flexible Portfolio Capital Stock 200,000,000
Zero Coupon Bond--1990 Portfolio Capital Stock 100,000,000
Zero Coupon Bond--1995 Portfolio Capital Stock 100,000,000
Zero Coupon Bond--2000 Portfolio Capital Stock 100,000,000
Zero Coupon Bond--2005 Portfolio Capital Stock 100,000,000
High Yield Bond Portfolio Capital Stock 100,000,000
Stock Index Portfolio Capital Stock 100,000,000
High Dividend Stock Portfolio Capital Stock 100,000,000
Natural Resources Portfolio Capital Stock 100,000,000
Global Equity Portfolio Capital Stock 100,000,000
Government Securities Portfolio Capital Stock 100,000,000
The holder of each share of stock of the Corporation shall be entitled to one
vote for each full share, and a fractional vote for each fractional share of
stock, irrespective of the class, then standing in his name on the books of the
Corporation. On any matter submitted to a vote of stockholders, all shares of
the Corporation then issued and outstanding and entitled to vote shall be voted
in the aggregate and not by class except that (1) when otherwise expressly
required by the Maryland General Corporation Law or the Investment Company Act
of 1940, as amended, shares shall be voted by individual class; (2) only shares
of the respective portfolios are entitled to vote on matters concerning only
that Portfolio; and (3) fundamental
C-27
<PAGE>
policies, as specified in the by-laws of the Corporation, may be changed, with
respect to any Portfolio, if such change is approved by a majority (as defined
under the Investment Company Act of 1940) of the capital stock of such
Portfolio.
Each class of stock of the Corporation shall have the following powers
preferences or other special rights, and the qualifications, restrictions, and
limitations thereof shall be as follows:
(1) The shares of each class, when issued, will be fully paid and nonassessable,
have no preference, preemptive, conversion, exchange, or similar rights, except
as set forth in (2) below, and will be freely transferable.
(2) The consideration received by the Corporation for the sale of capital stock
shall become part of the assets of the Portfolio to which the capital stock of
the class relates. Each share of the capital stock of each class shall have a
pro rata interest in the assets of the Portfolio to which the capital stock of
that class relates and shall have no interest in the assets of any other
Portfolio.
(3) The Board of Directors may from time to time declare and pay dividends or
distributions, in stock or in cash, on any or all classes of stock, the amount
of such dividends and
C-28
<PAGE>
distributions and the payment of them being wholly in the discretion of the
Board of Directors.
(i) Dividends or distributions on shares of any class of stock shall be paid
only out of earned surplus or other lawfully available assets belonging to such
class.
(ii) Inasmuch as one goal of the Corporation is to qualify as a "regulated
investment company" under the Internal Revenue Code of 1954, as amended, or any
successor or comparable statute thereto, and Regulations promulgated thereunder,
and inasmuch as the computation of net income and gains for Federal income tax
purposes may vary from the computation thereof on the books of the Corporation,
the Board of Directors shall have the power in its discretion to distribute in
any fiscal years as dividends, including dividends designated in whole or in
part as capital gains distributions, amounts sufficient in the opinion of the
Board of Directors, to enable the Corporation to qualify as a regulated
investment company and to avoid liability for the Corporation for Federal income
tax in respect of that year. In furtherance, and not in limitation of the
foregoing, in the event that a class of shares has a net capital loss for a
fiscal year, and to the extent that a net capital loss for a fiscal year offsets
net capital gains from one or more of the other classes the amount to be
C-29
<PAGE>
deemed for distribution to the class or classes with the net capital gain may be
reduced by the amount offset.
(4) The assets belonging to any class of stock shall be charged with the
liabilities in respect to such class, and shall also be charged with their share
of the general liabilities of the Corporation in proportion to the asset values
of the respective classes. The determination of the Board of Directors shall be
conclusive as to the amount of liabilities or the amount of any general assets
of the Corporation, as to whether such liabilities or assets are allocable to
one or more classes, and as to the allocation of such liabilities or assets to a
given class or among several classes.
(5) With the approval of a majority of the stockholders of each of the affected
classes of capital stock, the Board of Directors may transfer the assets of any
Portfolio to any other Portfolio. Upon such a transfer, the Corporation shall
issue shares of capital stock representing interests in the Portfolio to which
the assets were transferred in exchange for all shares of capital stock
representing interests in the Portfolio from which the assets were transferred.
Such shares shall be exchanged at their respective net asset values.
C-30
<PAGE>
SECOND: The shares aforesaid have been duly classified or reclassified by
the Board of Directors pursuant to authority and power contained in Article V of
the Articles of Incorporation of the Corporation.
IN WITNESS WHEREOF, THE PRUDENTIAL SERIES FUND, INC. has caused these
presents to be signed in its name and on its behalf by its President or one of
its Vice Presidents and its corporate seal to be hereunto affixed and attested
by its Assistant Secretary, on March 8, 1989.
THE PRUDENTIAL SERIES FUND, INC.
By: /s/ JOHN P. GUALTIERI, JR.
---------------------------
John P. Gualtieri, Jr.
Vice President
Attest:
/s/ MATTHEW K. DUFFY
- ------------------------
Matthew K. Duffy
Assistant Secretary
THE UNDERSIGNED, Vice President of THE PRUDENTIAL SERIES FUND, INC., who
executed on behalf of said Corporation the foregoing Articles Supplementary to
the Articles of Incorporation, of which this certificate is made a part, hereby
acknowledges, in the name and on behalf of said Corporation, the foregoing
Articles Supplementary to the Articles of Incorporation to be the corporate act
of said Corporation and further certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
/s/ JOHN P. GUALTIERI, JR.
-------------------------------
John P. Gualtieri, Jr.
C-31
EXHIBIT (b)(ii)
Amended Through 02/16/90
BY-LAWS
OF
THE PRUDENTIAL SERIES FUND, INC.
ARTICLE I
Section 1. PRINCIPAL OFFICES. The principal office of the Corporation shall
be in the City of Baltimore, State of Maryland.
Section 2. PRINCIPAL EXECUTIVE OFFICE. The principal executive office of
the Corporation shall be at 3003 North Central Avenue, City of Phoenix, State of
Arizona.
Section 3. OTHER OFFICES. The Corporation may have such other offices in
such places as the Board of Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. ANNUAL MEETINGS. Annual meetings of the stockholders of the
Corporation shall be held on such day in September of each year as shall be
designated by the Board of Directors; provided, however, than no annual meeting
of the stockholders shall be held in any year in which none of the following is
required to be acted on by stockholders under the Investment Company Act of
1940: (i) election of directors, (ii) approval of an investment advisory
agreement, (iii) ratification of the selection of independent public
accountants, and (iv) approval of a distribution
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agreement. Any business of the Corporation may be transacted at an annual
meeting without being specifically designated in the notice, except such
business as is specifically required by statute to be stated in the notice.
Section 2. SPECIAL MEETINGS; Special meetings of the stockholders, unless
otherwise provided by law or by the Articles of Incorporation, may be called for
any purpose or purposes by a majority of the Board of Directors, the Chairman of
the Board, the President, or on the written request of the holders of at least
25% of the outstanding capital stock of the Corporation entitled to vote at such
meeting.
Section 3. PLACE OF MEETINGS. Any annual or special meeting of the
stockholders shall be held at such place within the United States as the Board
of Directors may from time to time determine.
Section 4. NOTICE OF MEETINGS; WAIVER OF NOTICE. Notice of the place, date
and time of the holding of each annual and special meeting of the stockholders
and the purpose or purposes of each special meeting shall be given personally or
by mail, not less than ten nor more than sixty days before the date of such
meeting, to each stockholder entitled to vote at such meeting and to each other
stockholder entitled to notice of the meeting. Notice by mail shall be deemed to
be duly given when deposited in the United States mail addressed to the
stockholder at his address as it appears on the records of the Corporation, with
postage thereon prepaid.
Notice of any meeting of stockholders shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, or who shall,
either before or after the meeting, submit a signed waiver of notice
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which is filed with the records of the meeting. When a meeting is adjourned to
another time and place, unless the Board of Directors, after the adjournment,
shall fix a new record date for an adjourned meeting, or the adjournment is for
more than thirty days, notice of such adjourned meeting need not be given if the
time and place to which the meeting shall be adjourned were announced at the
meeting at which the adjournment is taken.
Section 5. QUORUM. At all meetings of the stockholders, the holders of a
majority of the shares of stock of the Corporation entitled to vote at the
meeting, present in person or by proxy, shall constitute a quorum for the
transaction of any business, except as otherwise provided by statute or by the
Articles of Incorporation or these By-Laws. In the absence of a quorum no
business may be transacted, except that the holders of a majority of the shares
of stock present in person or by proxy and entitled to vote may adjourn the
meeting from time to time, without notice other than announcement thereat,
except as otherwise required by these By-Laws, until the holders of the
requisite amount of shares of stock shall be so present. At any such adjourned
meeting at which a quorum may be present any business may be transacted which
might have been transacted at the meeting as originally called. The absence from
any meeting, in person or by proxy, of holders of the number of shares of stock
of the Corporation in excess of a majority thereof which may be required by the
laws of the State of Maryland, the Investment Company Act of 1940, as amended,
or other applicable statute, the Articles of Incorporation, or these By-Laws,
for action upon any given matter shall not prevent action at such meeting upon
any other matter or matters which may properly come before the meeting if there
shall be present
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thereat, in person or by proxy, holders of the number of shares of stock of the
Corporation required for action in respect of such other matter or matters.
Section 6. ORGANIZATION. At each meeting of the stockholders, the Chairman
of the Board (if one has been designated by the Board), or in his absence or
inability to act, the President, or in the absence or inability to act of the
Chairman of the Board and the President, a Vice President, shall act as chairman
of the meeting. The Secretary, or in his absence or inability to act any
Assistant Secretary or any person appointed by the chairman of the meeting,
shall act as secretary of the meeting and keep the minutes thereof.
Section 7. ORDER OF BUSINESS. The order of business at all meetings of the
stockholders shall be as determined by the chairman of the meeting.
Section 8. VOTING. Except as otherwise provided by statute or the Articles
of Incorporation each holder of record of shares of stock of the Corporation
having voting power shall be entitled at each meeting of the stockholders to one
vote for every share of such stock standing in his name on the record of
stockholders of the Corporation as of the record date determined pursuant to
Section 9 of this Article or if such record date shall not have been so fixed,
then at the latter of (i) the close of business on the day on which notice of
the meeting is mailed or (ii) the thirtieth day before the meeting.
Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him by a proxy signed by such
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stockholder or his attorney-in-fact. No proxy shall be valid after the
expiration of eleven months from the date thereof, unless otherwise provided in
the proxy. Every proxy shall be revocable at the pleasure of the stockholder
executing it, except in those cases where such proxy states that it is
irrevocable and where an irrevocable proxy is permitted by law. Except as
otherwise provided by statute, the Articles of Incorporation or these By-laws,
any corporate action to be taken by vote of the stockholders shall be authorized
by a majority of the total votes cast at a meeting of stockholders by the
holders of shares present in person or represented by proxy and entitled to vote
on such action.
If a vote shall be taken on any question other than the election of
directors, which shall be by written ballot, then unless required by statute or
these By-laws, or determined by the chairman of the meeting to be advisable, any
such vote need not be by ballot. On a vote by ballot, each ballot shall be
signed by the stockholder voting, or by his proxy, if there be such proxy, and
shall state the number of shares voted.
Section 9. FIXING OF RECORD DATE. The Board of Directors may fix, in
advance, a record date not more than sixty nor less than ten days before the
date then fixed for the holding of any meeting of the stockholders. All persons
who were holders of record of shares at such time, and no others, shall be
entitled to vote at such meeting and any adjournment thereof.
Section 10. INSPECTORS. The Board may, in advance of any meeting of
stockholders, appoint one or more inspectors to act at such meeting or any
adjournment thereof. If the inspectors shall not be so appointed or if any of
them shall fail to appear or act, the chairman of the meeting may, and on the
request of any stockholder entitled to vote thereat shall, appoint
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inspectors. Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath to execute faithfully the duties of inspector at
such meeting with strict impartiality and according to the best of his ability.
The inspectors shall determine the number of shares outstanding and the voting
number of each, the number of shares represented at the meeting, the existence
of a quorum, the validity and effect of proxies, and shall receive votes,
ballots or consents, hear and determine all challenges and questions arising in
connection with the right to vote, count and tabulate all votes, ballots or
consents, determine the result, and do such acts as are proper to conduct the
election or vote in fairness to all stockholders. On request of the chairman of
the meeting or any stockholder entitled to vote thereat, the inspectors shall
make a report in writing of any challenge, request or matter determined by them
and shall execute a certificate of any fact found by them. No director or
candidate for the office of director shall act as inspector of an election of
directors. Inspectors need not be stockholders.
Section 11. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Except as otherwise
provided by statute or the Articles of Incorporation, any action required to be
taken at any annual or special meeting of stockholders, or any action which may
be taken at any annual or special meeting of such stockholders, may be taken
without a meeting, without prior notice and without a vote, if the following are
filed with the records of stockholders meetings: (i) an unanimous written
consent which sets forth the action and is signed by each stockholder entitled
to vote on the matter and (ii) a written waiver of any right to dissent signed
by each stockholder entitled to notice of the meeting but not entitled to vote
thereat.
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ARTICLE III
BOARD OF DIRECTORS
Section 1. GENERAL POWERS. Except as otherwise provided in the Articles of
Incorporation, the business and affairs of the Corporation shall be managed by
the Board of Directors. The Board may exercise all the powers of the Corporation
and do all such lawful acts and things as are not by statute or the Articles of
Incorporation directed or required to be exercised or done by the stockholders.
Section 2. NUMBER OF DIRECTORS. The number of directors shall be fixed from
time to time by resolution of the Board of Directors adopted by a majority of
the Directors then in office; provided, however, that the number of directors
shall in no event be less than three nor more than fifteen. Any vacancy created
by an increase in directors may be filled in accordance with Section 6 of this
Article III. No reduction in the number of directors shall have the effect of
removing any directors from office prior to the expiration of his term unless
such director is specifically removed pursuant to Section 5 of this Article III
at the time of such decrease. Directors need not be stockholders.
Section 3. ELECTION AND TERM OF DIRECTORS. Directors shall be elected by
written ballot at each annual meeting of stockholders held pursuant to Section 1
of Article II of these By-laws or at a special meeting held for that purpose The
term of office of each director shall be from the time of his election and
qualification until the next annual meeting of stockholders, whenever it may be
held, and until his successor shall have been elected and shall have qualified,
or until his death, or until he shall
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have resigned, or have been removed as hereinafter provided in these By-laws, or
as otherwise provided by statute or the Articles of Incorporation.
Section 4. RESIGNATION. A director of the Corporation may resign at any
time by giving written notice of his resignation to the Board or the Chairman of
the Board or the President or the Secretary. Any such resignation shall take
effect at the time specified therein or, if the time when it shall become
effective shall not be specified therein, immediately upon its receipt; and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
Section 5. REMOVAL. Holders of not less than two-thirds of the outstanding
capital stock of the Corporation may remove a director through a declaration in
a writing filed with the Corporation or by vote cast in person or by proxy at a
meeting called for that purpose. The Board of Directors shall promptly call a
meeting of stockholders for the purpose of voting upon the question of removal
of any director when requested in writing to do so by the holders of not less
than 10% of the Corporation's outstanding capital stock.
Whenever ten or more stockholders who hold in the aggregate either shares
having a net asset value of at least $25,000 or at least 1% of the outstanding
shares of capital stock, whichever is less, shall advise the Board of Directors
in writing that they wish to communicate with other stockholders with a view to
a request for a meeting for the purpose of removing any director from office,
and such advice is accompanied by a form of communication and request which they
wish to transmit, the Board shall within five business days after receiving such
advice either afford such persons access to a list of the names and addresses of
persons having voting
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rights or inform them as to the approximate number of such persons and the
approximate cost of mailing the proposed form of communication and request.
If the Board elects to provide the information regarding the approximate
number of stockholders and the approximate cost of mailing to them the proposed
communication and form of request, the Board, upon the written request of those
desiring such a mailing, accompanied by a tender of the material to be mailed
and of the reasonable expenses of mailing, shall, with reasonable promptness,
mail such material to all stockholders at their addresses of record, unless
within five business days after such tender the Board shall mail to the persons
requesting the mailing and file with the U.S. Securities and Exchange
Commission, together with a copy of the material to be mailed, a written
statement signed by a least a majority of the directors to the effect that in
their opinion either such material contains untrue statements of fact or omits
to state facts necessary to make the statements contained therein not
misleading, or would be in violation of applicable law, and specifying the basis
of such opinion.
Section 6. VACANCIES. Any vacancies in the Board, whether arising from
death, resignation, removal, or increase in the number of directors or any other
cause, shall be filled by a vote of the majority of the Board of Directors then
in office even though such majority is less than a quorum, provided that no
vacancies shall be filled by action of the remaining directors, if after the
filling of said vacancy or vacancies, less than a majority of the directors then
holding office shall have been elected by the stockholders of the Corporation.
In the event that at any time there is a vacancy in any office of a director,
which vacancy may not be filled by the remaining directors, a special meeting of
the stockholders shall be held as
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promptly as possible, and in any event within sixty days, for the purpose of
filling said vacancy or vacancies, unless the United States Securities and
Exchange Commission shall by order extend such period. Any director elected or
appointed to fill a vacancy shall hold office only until the next annual meeting
of stockholders of the Corporation, whenever it may be held, and until a
successor shall have been chosen and qualified or until his earlier death,
resignation or removal.
Section 7. PLACE OF MEETINGS. Meetings of the Board may be held at such
place as the Board may from time to time determine or as shall be specified in
the notice of such meeting.
Section 8. REGULAR MEETINGS. Regular meetings of the Board may be held
without notice at such time and place as may be determined by the Board of
Directors.
Section 9. SPECIAL MEETINGS. Special meetings of the Board may be called by
two or more directors of the Corporation or by the Chairman of the Board or the
President.
Section 10. ANNUAL MEETING. The annual meeting of each newly elected Board
of Directors shall be held as soon as practicable after the meeting of
stockholders at which the directors were elected. No notice of such annual
meeting shall be necessary if held immediately after the adjournment, and at the
site, of the meeting of stockholders. If not so held, notice shall be given as
hereinafter provided for special meetings of the Board of Directors.
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Section 11. NOTICE OF SPECIAL MEETINGS. Notice of each special meeting of
the Board shall be given by the Secretary as hereinafter provided, in which
notice shall be stated the time and place of the meeting. Notice of each such
meeting shall be delivered to each director, either personally or by telephone,
telegraph, cable or wireless, at least twenty-four hours before the time at
which such meeting is to be held, or by first-class mail, postage prepaid,
addressed to him at his residence or usual place of business, at least three
days before the day on which such meeting is to be held.
Section 12. WAIVER OF NOTICE OF MEETINGS. Notice of any special meeting
need not be given to any director who shall, either before or after the meeting,
sign a written waiver of notice or who shall attend such meeting. Except as
otherwise specifically required by these By-laws, a notice or waiver of notice
of any meeting need not state the purposes of such meeting.
Section 13. QUORUM AND VOTING. One-third, but not less than two, of the
members of the entire Board shall be present in person at any meeting of the
Board in order to constitute a quorum for the transaction of business at such
meeting, and except as otherwise expressly required by statute, the Articles of
Incorporation, these By-Laws, the Investment Company Act of 1940, as amended, or
other applicable statute, the act of a majority of the directors present at any
meeting at which a quorum is present shall be the act of the Board; provided,
however, that the approval of any contract with an investment advisor or
principal underwriter, as such terms are defined in the Investment Company Act
of 1940, as amended, which the Corporation enters into or any renewal or
amendment thereof, the approval of the fidelity bond
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required by the Investment Company Act of 1940, as amended, and the selection of
the Corporation's independent public accountants shall each require the
affirmative vote of a majority of the directors who are not parties to any such
contract or interested persons of any such party. In the absence of a quorum at
any meeting of the Board, a majority of the directors present thereat may
adjourn such meeting to another time and place until a quorum shall be present
thereat. Notice of the time and place of any such adjourned meeting shall be
given to the directors who were not present at the time of the adjournment and,
unless such time and place were announced at the meeting at which the
adjournment was taken, to the other directors. At any adjourned meeting at which
a quorum is present, any business may be transacted which might have been
transacted at the meeting as originally called.
Section 14. ORGANIZATION. The Board may, by resolution adopted by a
majority of the entire Board, designate a Chairman of the Board, who shall
preside at each meeting of the Board. In the absence or inability of the
Chairman of the Board to preside at a meeting, the President, or, in his absence
or inability to act, another person chosen by a majority of the directors
present, shall act as chairman of the meeting and preside thereat. The
Secretary, or in his absence or inability to act any Assistant Secretary or any
person appointed by the chairman of the meeting, shall act as secretary of the
meeting and keep the meeting and keep the minutes thereof.
Section 15. WRITTEN CONSENT OF DIRECTORS IN LIEU OF A MEETING. Any action
required or permitted to be taken at any meeting of the Board of Directors or of
any committee thereof may be taken without a meeting if all members of the Board
or committee, as the case may be, consent thereto in
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writing, and the writing or writings are filed with the minutes of the
proceedings of the Board or committee.
Section 16. COMPENSATION. Directors may receive compensation for services
to the Corporation in their capacities as directors or otherwise in such manner
and in such amounts as may be fixed from time to time by the Board.
Section 17. INVESTMENT POLICIES. It shall be the duty of the Board of
Directors to ensure that the purchase, sale, retention and disposal of portfolio
securities and the other investment practices of the Corporation are at all
times consistent with the investment policies and restrictions with respect to
securities investments and otherwise of the Corporation, as recited in the
current Prospectus of the Corporation filed from time to time with the
Securities and Exchange Commission and as required by the Investment Company Act
of 1940, as amended. The Board, however, may delegate the duty of management of
the assets and the administration of its day to day operation to an individual
or corporate management company and/or investment adviser pursuant to a written
contract or contracts which have obtained the requisite approvals, including the
requisite approvals of renewals thereof, of the Board of Directors and/or the
stockholders of the Corporation in accordance with the provisions of the
Investment Company Act of 1940, as amended.
ARTICLE IV
COMMITTEES
Section 1. EXECUTIVE COMMITTEE. The Board may, by resolution adopted
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by a majority of the entire Board, designate an Executive Committee consisting
of two or more of the directors of the Corporation, which committee shall have
and may exercise all the powers and authority of the Board with respect to all
matters other than:
(a) the submission to stockholders of any action requiring authorization of
stockholders pursuant to statute or the Articles of Incorporation;
(b) the filling of vacancies on the Board of Directors;
(c) the fixing of compensation of the directors for serving on the Board or
on any committee of the Board, including the Executive Committee;
(d) the approval or termination of any contract with an investment adviser
or principal underwriter, as such terms are defined in the Investment Company
Act of 1940, as amended, or the taking of any other action required to be taken
by the Board of Directors by the Investment Company Act of 1940, as amended;
(e) the amendment or repeal of these By-laws or the adoption of new
By-laws;
(f) the amendment or repeal of any resolution of the Board which by its
terms may be amended or repealed only by the Board; and
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(g) the declaration of dividends and issuance of capital stock of the
Corporation.
The Executive Committee shall keep written minutes of its proceedings and shall
report such minutes to the Board. All such proceedings shall be subject to
revision or alteration by the Board; provided, however, that third parties shall
not be prejudiced by such revision or alteration.
Section 2. OTHER COMMITTEES OF THE BOARD. The Board of Directors may from
time to time, by resolution adopted by a majority of the whole Board, designate
one or more other committees of the Board, each such committee to consist of
such number of directors and to have such powers and duties as the Board of
Directors may, by resolution, prescribe.
Section 3. GENERAL. One-third, but not less than two, of the members of any
committee shall be present in person at any meeting of such committee in order
to constitute a quorum for the transaction of business at such meeting and the
act of a majority present shall be the act of such committee. The Board may
designate a chairman of any committee and such chairman or any two members of
any committee may fix the time and place of its meetings unless the Board shall
otherwise provide. In the absence or disqualification of any member of any
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. The Board shall
have the power at any time to change the membership of any committee, to fill
all vacancies, to designate alternate members to replace any absent or
disqualified member, or
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to dissolve any such committee. Nothing herein shall be deemed to prevent the
Board from appointing one or more committees consisting in whole or in part of
persons who are not directors of the Corporation; provided, however, that no
such committee shall have or may exercise any authority or power of the Board in
the management of the business or affairs of the Corporation.
ARTICLE V
OFFICERS, AGENTS AND EMPLOYEES
Section 1. NUMBER AND QUALIFICATIONS. The officers of the Corporation
shall be a Chairman of the Board and a President, each of whom shall be a
director of the Corporation, and a Secretary and a Treasurer, each of whom shall
be elected by the Board of Directors. The Board of Directors may elect or
appoint one or more Vice Presidents, a Comptroller and such other officers,
agents and employees as it may deem necessary or proper. Any two or more offices
may be held by the same person, except the offices of Chairman of the Board and
President and the offices of President and Vice President, but no officer shall
execute, acknowledge or verify any instrument in more than one capacity. Such
officers shall be elected by the Board of Directors each year at its first
meeting held after the annual meeting of stockholders, each to hold office until
the meeting of the Board following the next annual meeting of the stockholders
and until his successor shall have been duly elected and shall have qualified,
or until his death, or until he shall have resigned, or have been removed, as
hereinafter provided in these By-laws. The Board may from time to time elect, or
delegate to the Chairman of the Board or the President the power to appoint,
such officers (including one or more Assistant Vice Presidents,
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one or more Assistant Treasurers and one or more Assistant Secretaries) and such
agents, as may be necessary or desirable for the business of the Corporation.
Such other officers and agents shall have such duties and shall hold their
offices for such terms as may be prescribed by the Board or by the appointing
authority.
Section 2. RESIGNATION. Any officer of the Corporation may resign at any
time by giving written notice of his resignation to the Board, the Chairman of
the Board, the President or the Secretary. Any such resignation shall take
effect at the time specified therein or, if the time when it shall become
effective shall not be specified therein, immediately upon its receipt; and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
Section 3. REMOVAL OF OFFICER, AGENT OR EMPLOYEE. Any officer, agent or
employee of the Corporation may be removed by the Board of Directors with or
without cause at any time, and the Board may delegate such power of removal as
to agents and employees not elected or appointed by the Board of Directors. Such
removal shall be without prejudice to such person's contract rights, if any, but
the appointment of any person as an officer, agent or employee of the
Corporation shall not of itself create contract rights.
Section 4. VACANCIES. A vacancy in any office, whether arising from death,
resignation, removal or any other cause, may be filled for the unexpired portion
of the term of the office which shall be vacant, in the manner prescribed in
these By-laws for the regular election or appointment to such office.
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Section 5. COMPENSATION. The compensation of the officers of the
Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer in respect of other officers under his control.
Section 6. BONDS OR OTHER SECURITY. If required by the Board, any officer,
agent or employee of the Corporation shall give a bond or other security for the
faithful performance of his duties, in such amount and with such surety or
sureties as the Board may require. The Corporation shall also maintain a bond
issued by a reputable fidelity insurance company in accordance with Section
17(g) of the Investment Company Act of 1940, as amended, and Rule 17g-1
thereunder.
Section 7. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board
shall preside at all meetings of the Board of Directors and of the stockholders
at which he is present. He shall be chief executive officer of the Corporation.
Subject to the Board of Directors, he shall have general supervision of the
business of the Corporation and shall see that all orders and resolutions of the
Board of Directors are carried into effect. He shall have such other authority
and duties as the Board of Directors shall from time to time determine.
Section 8. THE PRESIDENT. The President shall have such power and duties as
the Board of Directors shall from time to time determine. In the absence or
disability of the Chairman of the Board, he shall perform the duties and
exercise the powers of the Chairman of the Board.
Section 9. VICE PRESIDENT. Each Vice President shall have such powers and
perform such duties as the Board of Directors or the Chairman of the Board may
from time to time prescribe.
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Section 10. COMPTROLLER. The Comptroller shall exercise all the powers and
perform all the duties usual to such office, including supervising the accounts
of the Corporation, having supervision over and responsibility for the books,
records, accounting and system of accounting and auditing in each office of the
Corporation. The Comptroller shall also have such other authority and perform
such other duties as may be provided in the By-laws, or as shall be assigned to
him by the Chairman of the Board, the President or the Board of Directors.
Section 11. TREASURER. The Treasurer shall:
(a) have charge and custody of, and be responsible for, all the funds and
securities of the Corporation, except those which the Corporation has placed in
the custody of a bank or trust company or member of a national securities
exchange (as that term is defined in the Securities Exchange Act of 1934)
pursuant to a written agreement designating such bank or trust company or member
of a national securities exchange as custodian of the property of the
Corporation;
(b) keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation;
(c) cause all moneys and other valuables to be deposited to the credit of
the Corporation;
(d) receive, and give receipts for, moneys due and payable to the
Corporation from any source whatsoever;
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(e) disburse the funds of the Corporation and supervise the investment of
its funds as ordered or authorized by the Board, taking proper vouchers
therefore; and
(f) in general, perform all the duties incident to the office of Treasurer
and such other duties as from time to time may be assigned to him by the Board
or the Chairman of the Board.
Section 12. SECRETARY. The Secretary shall:
(a) keep or cause to be kept in one or more books provided for the purpose,
the minutes of all meetings of the Board, the committees of the Board and the
stockholders;
(b) see that all notices are duly given in accordance with the provisions
of the By-laws and as required by law;
(c) be custodian of the records and the seal of the Corporation and affix
and attest the seal to all stock certificates of the Corporation (unless the
seal of the Corporation on such certificates shall be a facsimile, as
hereinafter provided) and affix and attest the seal to all other documents to be
executed on behalf of the Corporation under its seal;
(d) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are properly kept and
filed; and
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(e) in general, perform all the duties incident to the office of Secretary
and such other duties as from time to time may be assigned to him by the Board
or the Chairman of the Board.
Section 13. DELEGATION OF DUTIES. In case of the absence of any officer
of the Corporation, or for any other reason that the Board may deem sufficient,
the Board may confer for the time being the powers or duties, or any of them, of
such officer upon any other officer or upon any director.
ARTICLE VI
INDEMNIFICATION
Each officer, director, employee or agent of the Corporation shall be
indemnified by the Corporation to the full extent permitted under the General
Laws of the State of Maryland and the Investment Company Act of 1940, as
amended, except that such indemnity shall not protect any such person against
any liability to the Corporation or any stockholder thereof to which such person
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
ARTICLE VII
CAPITAL STOCK
Section 1. STOCK CERTIFICATES. Each holder of stock of the Corporation
shall be entitled upon request to have a certificate or certificates, in such
form as shall be approved by the Board, representing
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the number of shares of stock of the Corporation owned by him, provided,
however, that certificates for fractional shares will not be delivered in any
case. The certificates representing shares of stock shall be signed by or in the
name of the Corporation by the Chairman of the Board, the President or a Vice
President and by the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer and sealed with the seal of the Corporation. Any or all of
the signatures or the seal on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate shall be issued, it may be
issued by the Corporation with the same effect as if such officer, transfer
agent or registrar were still in office at the date of issue.
Section 2. BOOKS OF ACCOUNT AND RECORD OF STOCKHOLDERS. There shall be kept
at the principal executive office of the Corporation correct and complete books
and records of account of all the business and transactions of the Corporation.
There shall be made available upon request of any stockholder, in accordance
with Maryland law, a record containing the number of shares of stock issued
during a specified period not to exceed twelve months and the consideration
received by the Corporation for each such share.
Section 3. TRANSFERS OF SHARES. Transfers of shares of stock of Corporation
shall be made on the stock records of the Corporation only the registered holder
thereof, or by his attorney thereunto authorized by power-of-attorney duly
executed and filed with the Secretary or with a transfer agent or transfer
clerk, and on surrender of the certificate or
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certificates, if issued, for such shares properly endorsed or accompanied by a
duly executed stock transfer power and the payment of all taxes thereon. Except
as otherwise provided by law, the Corporation shall be entitled to recognize the
exclusive right of a person in whose name any share or shares stand on the
record of stockholders as the owner of such share or shares for all purposes,
including, without limitation, the rights to receive dividends or other
distributions, and to vote as such owner, and the Corporation shall not be bound
to recognize any equitable or legal claim to or interest in any such share or
shares on the part of any other person.
Section 4. REGULATIONS. The Board may make such additional rules and
regulations, not inconsistent with these By-laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. It may appoint, or authorize any officer or officers
to appoint, one or more transfer agents or one or more transfer clerks and one
or more registrars and may require all certificates for shares of stock to bear
the signature or signatures of any of them.
Section 5. LOST, DESTROYED OR MUTILATED CERTIFICATES. The holder of any
certificate representing shares of stock of the Corporation shall immediately
notify the Corporation of any loss, destruction or mutilation of such
certificate, and the Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it which the owner thereof shall
allege to have been lost or destroyed or which shall have been mutilated, and
the Board may, in its discretion require such owner or his legal representatives
to give to the Corporation a bond in such sum, limited or unlimited, and in such
form and with such surety or sureties, as the Board in its absolute discretion
shall determine, to
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indemnify the Corporation against any claim that may be made against it on
account of the alleged loss or destruction of any such certificate, or issuance
of a new certificate. Anything herein to the contrary notwithstanding, the
Board, in its absolute discretion, may refuse to issue any such new certificate,
except pursuant to legal proceedings under the laws of the State of Maryland.
Section 6. FIXING OF A RECORD DATE FOR DIVIDENDS AND DISTRIBUTIONS. The
Board may fix, in advance, a date not more than sixty days preceding the date
fixed for the payment of any dividend or the making of any distribution or the
allotment of rights to subscribe for securities of the Corporation, or for the
delivery of evidences of rights or evidences of interests arising out of any
change, conversion or exchange of common stock or other securities, as the
record date for the determination of the stockholders entitled to receive any
such dividend, distribution, allotment, rights or interests, and in such case
only the stockholders of record at the time so fixed shall be entitled to
receive such dividend, distribution, allotment, rights or interests.
Section 7. REGISTERED OWNER OF STOCK. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner and to hold liable for
calls and assessments a person registered on its books as the owner of shares,
and shall not be bound to recognize any equitable or other claim to or interest
in such share or shares on the part of any other person, whether or not it shall
have express or other notice thereof, except as otherwise provided by the laws
of Maryland.
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Section 8. INFORMATION TO STOCKHOLDERS AND OTHERS. Any stockholder of the
Corporation or his agent may inspect and copy during usual business hours the
Corporation's By-laws, minutes of the proceedings of its stockholders, annual
statements of its affairs, and voting trust agreements on file at its principal
executive office.
Section 9. INVOLUNTARY REDEMPTION OF SHARES. Subject to policies
established by the Board of Directors, the Corporation shall have the right to
involuntarily redeem shares of its common stock if at any time the value of a
stockholder's investment in the Corporation is less than $500.
ARTICLE VIII
SEAL
The seal of the Corporation shall be circular in form and shall bear, in
addition to any other emblem or device approved by the Board of Directors, the
name of the Corporation, the year of its incorporation and the words "Corporate
Seal" and "Maryland". Said seal may be used by causing it or a facsimile thereof
to be impressed or affixed or in any other manner reproduced.
ARTICLE IX
FISCAL YEAR
Unless otherwise determined by the Board, the fiscal year of the
Corporation shall end on the 31st day of December in each year.
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ARTICLE X
DEPOSITORIES AND CUSTODIANS
Section 1. DEPOSITORIES. The funds of the Corporation shall be deposited
with such banks or other depositories as the Board of Directors of the
Corporation may from time to time determine.
Section 2. CUSTODIANS. All securities and other investments shall be
deposited in the safekeeping of such banks or other companies as the Board of
Directors of the Corporation may from time to time determine. Every arrangement
entered into with any bank or other company for the safekeeping of the
securities and investments of the Corporation shall contain provisions complying
with the Investment Company Act of 1940, as amended, and the general rules and
regulations thereunder.
ARTICLE XI
EXECUTION OF INSTRUMENTS
Section 1. CHECKS, NOTES, DRAFTS, ETC. Checks, notes, drafts, acceptances,
bills of exchange and other orders or obligations for the payment of money shall
be signed by such officer or officers or person or persons as the Board of
Directors by resolution shall from time to time designate.
Section 2. SALE OR TRANSFER OF SECURITIES. Stock certificates, bonds or
other securities at any time owned by the Corporation may be held on behalf of
the Corporation or sold, transferred or otherwise disposed of subject to any
limits imposed by Article XIV of these By-laws and pursuant
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to authorization by the Board and, when so authorized to be held on behalf of
the Corporation or sold, transferred or otherwise disposed of, may be
transferred from the name of the Corporation by the signature of the Chairman of
the Board, the President or a Vice President or the Treasurer or the Assistant
Treasurer or the Secretary or the Assistant Secretary.
ARTICLE XII
INDEPENDENT PUBLIC ACCOUNTANTS
The firm of independent public accountants which shall sign or certify the
financial statements of the Corporation which are filed with the Securities and
Exchange Commission shall be selected annually by the Board of Directors and
ratified by the stockholders in accordance with the provisions of the Investment
Company Act of 1940, as amended.
ARTICLE XIII
ANNUAL STATEMENT
The books of account of the Corporation shall be examined by an independent
firm of public accountants at the close of each annual period of the Corporation
and at such other times as may be directed by the Board. A report to the
stockholders based upon each such examination shall be mailed to each
stockholder of the Corporation of record on such date with respect to each
report as may be determined by the Board, at his address as the same appears on
the books of the Corporation. Such annual statement shall also be available at
the annual meeting of stockholders and be placed
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on file at the Corporation's principal office in the State of Maryland. Each
such report shall show the assets and liabilities of the Corporation as of the
close of the annual or quarterly period covered by the report and the securities
in which the funds of the Corporation were then invested. Such report shall also
show the Corporation's income and expenses for the period from the end of the
Corporation's preceding fiscal year to the close of the annual or quarterly
period covered by the report and any other information required by the
Investment Company Act of 1940, as amended, and shall set forth such other
matters as the Board or such firm of independent public accounts shall
determine.
ARTICLE XIV
FUNDAMENTAL POLICIES
Section 1. POLICIES APPLICABLE TO ALL FUNDS.
(a) It is the fundamental policy of the Corporation to follow the
investment objectives for a Fund that are set forth in the Prospectus contained
in the Registration Statement of the Corporation, or Post-Effective Amendment
thereto, at the time such Registration Statement, or Post-Effective Amendment,
setting forth such objectives for such Fund initially is declared effective.
(b) It is the fundamental policy of the Corporation not to:
1. Buy or sell real estate and mortgages, although the Portfolios may buy
and sell securities that are secured by real estate and securities of real
estate investment trusts and of other issuers that engage in real
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estate operation. Buy or sell commodities or commodity contracts, except that
the Common Stock and High Dividend Stock Portfolios may purchase and sell stock
index futures contracts, that the Stock Index Portfolio may purchase and sell
stock index futures contracts and related options, that the Aggressively Managed
Flexible Portfolio may purchase and sell stock index futures contracts and
interest rate futures contracts and related options, and that the Bond and
Conservatively Managed Flexible Portfolios may purchase and sell interest rate
futures contracts and related options.
2. Buy or sell the securities of other investment companies, except by
purchases in the open market involving only customary brokerage commissions and
as a result of which not more than 5% of the Fund's total assets (taken at
current value) would be invested in such securities, or except as part of a
merger, consolidation or other acquisition.
3. Acquire securities for the purpose of exercising control or management
of any company except in connection with a merger, consolidation, acquisition or
reorganization.
4. Make short sales of securities or maintain a short position, except that
the Common Stock, High Dividend Stock, and Natural Resources Portfolios may make
short sales against the box. Collateral arrangements entered into by the Common
Stock or High Dividend Stock Portfolios with respect to futures contracts and
the writing of options on equity securities and stock
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indices are not deemed to be short sales. Collateral arrangements entered into
by the Stock Index Portfolio with respect to futures contracts and related
options and the writing of options on stock indices are not deemed to be short
sales. Collateral arrangements entered into by the Natural Resources Portfolio
with respect to the writing of options on equity securities and stock indices
are not deemed to be short sales. Collateral arrangements entered into by the
Aggressively Managed Flexible Portfolio with respect to futures contracts and
related options and the writing of options on debt securities, equity securities
and stock indices are not deemed to be short sales. Collateral arrangements
entered into by the Bond and Conservatively Managed Flexible Portfolios with
respect to futures contracts and related options and the writing of options on
debt securities are not deemed to be short sales.
5. Purchase securities on margin or otherwise borrow money or issue senior
securities except that a Portfolio, in accordance with its investment objectives
and policies, may enter into reverse repurchase agreements and purchase
securities on a when-issued and delayed delivery basis, within the limitations
set forth in the Appendix to the Prospectus; and except that the Bond, High
Yield Bond, Common Stock, High Dividend Stock, Aggressively Managed Flexible,
Conservatively Managed Flexible and Natural Resources Portfolios may purchase
securities on a when-issued or delayed delivery basis. The Fund may also obtain
such short-term credit as it needs for the clearance of securities transactions,
and may borrow from a bank, for the account of any Portfolio, as a temporary
measure to facilitate redemptions (but not for leveraging or investment) or to
exercise an option, an amount that does not exceed 5% of the value of the
Portfolio's total assets (including the amount owed as a result of the
borrowing) at the time the
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borrowing is made. Investment securities will not be purchased while borrowings
are outstanding. Interest paid on borrowings will not be available
for investment. Collateral arrangements entered into by the Common Stock or High
Dividend Stock Portfolios with respect to futures contracts and the writing of
options on equity securities and stock indices are not deemed to be the issuance
of a senior security or the purchase of a security on margin. Collateral
arrangements entered into by the Stock Index Portfolio with respect to futures
contracts and related options and the writing of options on stock indices are
not deemed to be the issuance of a senior security or the purchase of a security
on margin. Collateral agreements entered into by the Natural Resources Portfolio
with respect to the writing of options on equity securities or stock indices are
not deemed to be the issuance of a senior security or the purchase of a security
on margin. Collateral arrangements entered into by the Aggressively Managed
Flexible Portfolio with respect to futures contracts and related options and the
writing of options on debt securities, equity securities and stock indices are
not deemed to be the issuance of a senior security or the purchase of a security
on margin. Collateral arrangements entered into by the Bond or Conservatively
Managed Flexible Portfolios with respect to futures contracts and related
options and the writing of options on debt securities are not deemed to be the
issuance of a senior security or the purchase of a security on margin.
6. Enter into reverse repurchase agreements if, as a result, the
Portfolio's obligations with respect to reverse repurchase agreements would
exceed 10% of the Portfolio's net assets (defined to mean total assets at market
value less liabilities other than reverse repurchase agreements).
7. Pledge or mortgage assets, except that not more than 10% of the
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value of any Portfolio may be pledged (taken at the time the pledge is made) to
secure borrowings made in accordance with paragraph 5 above, and that a
Portfolio may enter into reverse repurchase agreements in accordance with
paragraph 6 above. Collateral arrangements entered into by the Common Stock or
High Dividend Stock Portfolios with respect to futures contracts and the writing
of options on equity securities or stock indices are not deemed to be the pledge
of assets. Collateral arrangements entered into by the Stock Index Portfolio
with respect to futures contracts and related options and the writing of options
on stock indices are not deemed to be the pledge of assets. Collateral
arrangements entered into by the Natural Resources Portfolio with respect to the
writing of options on equity securities or stock indices are not deemed to be
the pledge of assets. Collateral arrangements entered into by the Aggressively
Managed Flexible Portfolio with respect to futures contracts and related options
and the writing of options on debt securities, equity securities or stock
indices are not deemed to be the pledge of assets. Collateral arrangements
entered into by the Bond or Conservatively Managed Flexible Portfolios with
respect to futures contracts and related options and the writing of options on
debt securities are not deemed to be the pledge of assets.
8. Lend money, except that loans of up to 10% of the value of each
Portfolio may be made through the purchase of privately placed bonds,
debentures, notes and other evidences of indebtedness of a character customarily
acquired by institutional investors that may or may not be convertible in stock
or accompanied by warrants or rights to acquire stock. Repurchase agreements and
the purchase of publicly traded debt obligations are not considered to be
"loans" for this purpose and may be entered into or
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purchased by a Portfolio in accordance with its investment objectives and
policies.
9. Underwrite the securities of other issuers, except where the Fund may be
deemed to be an underwriter for the purposes of certain federal securities laws
in connection with the disposition of portfolio securities and with loans that a
Portfolio may make pursuant to paragraph 8 above.
10. Make an investment unless, when considering all its other investments,
75% of the value of a Portfolio's assets would consist of cash, cash items,
obligations of the United States Government, its agencies or instrumentalities,
and other securities. For purposes of this restriction, "other securities" are
limited for each issuer to not more than 5% of the value of a Portfolio's assets
and to not more than 10% of the issuer's outstanding voting securities held by
the Fund as a whole.
11. Purchase securities of a company in an industry if as a result of the
purchase a Portfolio's holdings of securities issued by companies in that
industry would exceed 25% of the value of the Portfolio, except that this
restriction does not apply to purchases of obligations issued or guaranteed by
the U.S. Government, its agencies and instrumentalities, or issued by domestic
banks. For purposes of this restriction, neither finance companies as a group
nor utility companies as a group are considered to be a single industry, and
will be grouped instead according to their services; for example, gas, electric,
and telephone utilities will each be considered a separate industry.
12. Invest in securities (including repurchase agreements maturing in more
than 7 days) that are subject to legal or contractual restrictions on
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resale or for which no readily available market exists, or in the securities of
issuers (other than U.S. Government agencies or instrumentalities) having a
record, together with predecessors, of less than three years' continuous
operation, if, regarding all such securities, more than 10% of the Portfolio's
total assets would be invested in them.
Section 2. POLICIES APPLICABLE TO PARTICULAR FUNDS.
The Corporation has adopted the following fundamental policies with respect
to the Money Market Portfolio: The Money Market Portfolio may not:
1. Invest in oil and gas interests, common stock, preferred stock, warrants
or other equity securities.
2. Write or purchase any put or call option or combination of them.
3. Invest in any security with a remaining maturity in excess of one year,
except that securities held pursuant to repurchase agreements may have a
remaining maturity of more than one year.
ARTICLE XV
AMENDMENTS
These By-Laws or any of them may be amended, altered or repealed at any
regular meeting of the stockholders or at any special meeting of the
stockholders at which a quorum is present or represented, provided that notice
of the proposed amendment, alteration or repeal be contained in the notice of
such special meeting. These By-laws, except Article XIV hereof, may also be
amended, altered or repealed by the affirmative vote of a
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majority of the Board of Directors at any regular or special meeting of the
Board of Directors. The By-laws, or any of them, set forth in Article XIV of
these By-laws, may be amended, altered or repealed only by the affirmative vote
of a majority of the outstanding shares (as defined below) of capital stock of
each Fund affected by such amendment, at a regular meeting or special meeting of
the stockholders, the notice of which contains the proposed amendment,
alteration or repeal. For the purpose of amending Article XIV of these By-laws,
a majority of the outstanding shares shall be the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding shares
are represented or (ii) more than 50% of the outstanding shares. A certified
copy of these By-laws, as they may be amended from time to time, shall be kept
at the principal office of the Corporation in the State of Maryland.
Notwithstanding any other provisions of this Article XV, Section 2 of Article
XIV hereof may be amended by the affirmative vote of a majority of the Board of
Directors at any regular or special meeting of the Board of Directors to set
forth a restriction applicable only to a particular Fund or particular Funds of
the Corporation provided such amendment is adopted prior to the time of a
Registration Statement of the Corporation, or Post-Effective Amendment thereto,
setting forth the investment objectives of such Fund or Funds initially is
declared effective.
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EXHIBIT (b)(v)(1)
INVESTMENT ADVISORY AGREEMENT
SIXTH AMENDMENT
This Agreement is made as of the 14th day of July, 1988, between The Prudential
Series Fund, Inc. (the "Fund"), an open-end management investment company
registered under the Investment Company Act of 1940 (the "1940 Act"), and The
Prudential Insurance Company of America ("Prudential"), and supersedes the
Investment Advisory Agreement between the Fund and Prudential made as of the
18th day of February, 1988. This Agreement deals with the performance by
Prudential of investment management services for the Fund.
The parties agree:
1. INVESTMENT MANAGEMENT SERVICES
Subject to the direction and approval of the Board of Directors of the Fund,
Prudential will manage the investments of the Fund and determine the composition
of the assets of each of the Fund's Portfolios, including the purchase,
retention, or sale of the securities and cash contained in those Portfolios.
These duties will be performed in accordance with the investment objectives and
policies of each Portfolio, as stated in the Fund's Articles of Incorporation,
By-Laws, Prospectus, Statement of Additional Information and in resolutions
adopted by the Fund's Board of Directors. Prudential will provide investment
research and conduct a continuous program of evaluation, investment, sales, and
reinvestment of the Fund's assets by determining which securities shall be
purchased, sold or exchanged for each Portfolio, when these transactions should
be executed, and what portion of the assets of each Portfolio should be held in
the various securities in which it may invest. Prudential will exercise its best
judgment in performing the services described above.
The Fund understands that Prudential now serves, and will continue to serve, as
investment manager or adviser to other investment companies and to clients that
are not investment companies, and that Prudential also performs similar
functions in managing its own assets, the assets of its separate accounts, and
the assets of certain of its subsidiaries. The Fund understands that the
employees of Prudential who assist in the performance of the services described
above will also devote time to rendering similar services to the other entities
for which Prudential also acts as investment manager or adviser.
When investment opportunities arise that may be appropriate for more than one
entity for which Prudential serves as investment manager or adviser, Prudential
will not favor one over another and may allocate investments among them in an
impartial manner believed to be equitable to each entity involved. The
allocations will be based on each entity's investment objectives and its current
cash and investment positions. Because the various entities for which Prudential
acts as investment manager or adviser have different investment objectives and
positions, Prudential may from time to time buy a particular security for one or
more such entities while at the same time its sells such securities for another.
2. EXECUTION OF TRANSACTIONS
Prudential will determine all securities to be bought or sold for each Portfolio
and will be responsible for the selection of brokers and dealers to effect all
transactions. Prudential will place all necessary orders with brokers, dealers
or issuers and will negotiate brokerage commissions, if applicable. In placing
orders for securities transactions, Prudential will attempt to obtain the best
net price and most favorable execution. Prudential will seek to effect each
transaction at a price and commission, if any, that provides the most favorable
total cost or proceeds reasonably attainable in the circumstances. Prudential
may, however, pay a higher spread or commission for a particular transaction
than otherwise would be necessary if that would further the goal of obtaining
the best available execution.
For those securities transactions that involve commission payments. Prudential
will negotiate the commission on the basis of the quality and quantity of
execution services provided by the broker, in light of generally prevailing
commission rates. Prudential's present policy is not to pay higher spreads or
commissions in order to obtain research and statistical services from brokers or
dealers, although in selecting a broker-dealer in connection with a transaction
for any Portfolio, Prudential will consider whether the broker or dealer can
furnish Prudential with such services. If Prudential determines that it is
necessary to pay higher spreads or commissions to secure desired research
services that would benefit the Fund, such higher commissions may be paid only
after Prudential has obtained the approval of the Fund's Board of Directors to
make payments of this kind, provided that the higher spread or commission is
reasonable in relation to all services that the broker or dealer provides. The
Fund agrees that Prudential may use any such research or statistical information
that it obtains from brokers in providing investment management or advice to its
other clients or accounts.
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In executing brokerage transactions, Prudential may use a broker who is an
affiliated person of Prudential, as that term is defined in the 1940 Act, only
if the commission rate obtained from the affiliated broker is as favorable as
the broker's contemporaneous charges to its most favored unaffiliated customers.
Before employing an affiliated broker, Prudential must also make the good faith
judgment that the affiliated broker is qualified to obtain the best price on the
particular transaction and that the commission is at least as favorable as that
charged by other qualified, but unaffiliated, brokers
3. REPORTS AND ADMINISTRATIVE SERVICES
Prudential shall also perform administrative services for the Fund, and shall
maintain and furnish the Fund with statistical information concerning its
investments, and with such periodic or special reports as the Fund's Board of
Directors may reasonably request, or as may be required under the 1940 Act and
rules promulgated thereunder. The administrative services shall include (i)
supervising all aspects of the Fund's operation, including coordinating matters
relating to the custodians of securities owned by the Fund, the transfer agent,
shareholder services, accountants, attorneys, and other parties performing
services for the Fund; (ii) providing to the Fund personnel to perform the
necessary administrative functions; and (iii) providing the Fund with office
space and related services necessary for the Fund's operations.
4. INVESTMENT MANAGEMENT FEE
As compensation for the services performed, the facilities furnished, and
expenses incurred by PrudentIal under this Agreement, the Fund shall pay to
Prudential an investment management fee. The fee will be a daily charge, payable
quarterly, based on an annual percentage rate of each Portfolio's average daily
net assets. For the Conservatively Managed Flexible Portfolio and the High Yield
Bond Portfolio, the annual rate of the fee is .55% of the average daily net
assets of each Portfolio. For the Aggressively Managed Flexible Portfolio, the
annual rate of the fee is .60% of the average daily net assets of the Portfolio.
For the Common Stock Portfolio and the Natural Resources Portfolio, the annual
rate of the fee is .45% of the average daily net assets of the Portfolio. For
the Stock Index Portfolio, the annual rate of the fee is .35% of the average
daily net assets of the Portfolio. For the Global Equity Portfolio the annual
rate of the fee is .75% of the average daily net assets of the Portfolio. For
all other Portfolios, the annual rate of the fee is .40% of the average daily
net assets of each Portfolio.
5. ALLOCATION OF COMPENSATION EXPENSES
Each Portfolio will bear expenses incurred in its individual operation,
including but not limited to redemption and transaction expenses, daily
accounting services (including maintaining for each Portfolio a daily trial
balance, investment ledger, and other accounts and documents, computing each
Portfolio's daily net asset value per share, and computing daily cash flow and
transaction status information), advisory fees, brokerage, shareholder servicing
costs, pricing costs, interest, taxes, and the charges of the custodians and
transfer agent. The Fund will pay all other expenses not attributable to a
specific Portfolio, but these expenses will be allocated among the Portfolios on
the basis of their respective net asset sites. These expenses include, without
limitation: insurance, legal expenses, auditing fees, state franchise and Blue
Sky qualification fees, if any, the cost of printing stock certificates,
proxies, and shareholder reports, Securities & Exchange Commission fees, the
expense of registering securities issued by the fund under applicable securities
laws, the fees and expenses of all directors of the Fund who are not affiliated
persons of The Prudential or of any Prudential subsidiary, the expense of
reimbursing Prudential for the Fund's organization costs, and litigation and
other extraordinary or non-recurring expenses.
The Prudential shall pay for maintaining any Prudential staff and personnel who
perform accounting services in connection with the preparation of financial
statements required for the Fund's semiannual reports to shareholders and
clerical, administrative and similar services for the Fund, other than investor
services and daily Fund accounting services. Prudential shall also pay for the
equipment, office space, and related facilities necessary to perform these
services and shall pay the fees or salaries of all officers and directors of the
Fund who are affiliated persons of The Prudential or of any Prudential
subsidiary. The Fund shall reimburse Prudential for the expenses of maintaining
personnel who perform investor services and daily accounting services for the
Fund. The Prudential has paid the organizational costs of the Fund and will be
reimbursed for those over a ten-year period by the Fund.
If in any fiscal year the aggregate annual ordinary operating expenses of any
Portfolio other than the Global Equity Portfolio, including the investment
management fee but excluding interest, taxes, and brokerage commissions, exceed
.75% of the Portfolio's net assets, Prudential wi1I waive that portion of the
investment management fee for the Portfolio for that fiscal year that is equal
to the excess.
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6. LIMITATION ON LIABILITY OF PRUDENTIAL
Prudential will not be liable for any error of judgment or mistake of law or for
any loss suffered by the Fund in connection with the matters to which this
Agreement relates, except for a loss resulting from willful misfeasance, bad
faith, or gross negligence in the performance of its duties on behalf of the
Fund or from reckless disregard of its obligations and duties under this
Agreement.
7. PRUDENTIAL'S SERVICE MARKS
The word "Prudential" is a registered service mark of Prudential, Registration
No. 693,628, registered February 23 1960, and the design (the "Design") of a
rock representing the Rock of Gibraltar, within a circle and without legend is
also a registered service mark of Prudential, United States Registration No.
1,121,163, registered June 26, 1979. Both the word "Prudential" and the Design
have been used in connection with Prudential's business for many years. The
words "The Prudential" and the design (also referred to as the "Design") of a
rock representing the Rock of Gibraltar within a circle and without legend, are
also covered by applications for registration Nos. 73/565085, 73/565084 and
73/565014, all filed on October 25, 1985.
Prudential hereby grants to the Fund a license to use the words "Prudential" and
"The Prudential" in the Fund's corporate name, "The Prudential Series Fund,
Inc.," and a license to use those words and the Design in connection with the
Fund's operations as an investment company. This license is granted on a
royalty-free, non-exclusive basis. Prudential retains the right to use, or
license the use of, those words and any derivative thereof, as well as the
Design, in connection with other. Investment companies, subject to the
requirements of the investment Company Act of 1940, or in connection with any
other business enterprise.
The Fund acknowledges that the words "Prudential" and "The Prudential" and the
Design represent good will of great value to Prudential and that Prudential must
be able to protect and preserve such good will by terminating the license herein
granted if Prudential, in its sole discretion, decides that it is necessary to
do so or if Prudential decides that it is no longer in a position to assure that
high quality standards will be associated with the use by the Fund of the words
"Prudential" and "The Prudential" and the Design. Accordingly, if the holders of
the outstanding voting Securities of any Portfolio of the Fund fail to approve
this Agreement, or if at any time after such approval Prudential or a company
controlled by it ceases to be investment manager of any Portfolio, Prudential
shall have the absolute right to terminate the license herein granted forthwith
upon written notice to the Fund.
Prudential shall have the absolute right to terminate the license herein granted
for any other reason upon 60 days' written notice of such termination to the
Fund, but in such event this Agreement shall terminate on the 120th day
following receipt by the Fund of such notice unless on or prior to such day the
holders of a majority of the outstanding voting securities of all of the
Portfolios of the Fund shall have voted in favor of Prudential (or a company
controlled by it) continuing to act as investment manager to each such Portfolio
in accordance with the terms hereof notwithstanding the termination of the
license herein granted.
Upon termination of the license herein granted, the Fund shall immediately
change its corporate name to one which does not include the word "Prudential" or
any derivative thereof, and will discontinue all use by it of such word, the
Design or anything resembling the Design, in connection with its business. The
terms of the license herein granted shall inure to the benefit of and be binding
upon any successors or assigns of the Fund or Prudential.
8. DURATION AND TERMINATION OF THE AGREEMENT
This Agreement will continue in effect until the date of the next meeting of
shareholders of the Fund, at which meeting it must be approved by a majority
vote of the shareholders to remain effective. The required shareholder approval
of the Agreement shall be effective, with respect to any Portfolio, if a
majority of the voting shares of that Portfolio vote to approve the Agreement,
notwithstanding that the Agreement may not yet have been approved by a majority
of the voting shares of the Fund. The Agreement will continue in effect
thereafter so long as it is approved at least annually by a (i) majority of the
non-interested members of the Fund's Board of Directors, and (ii) by a majority
of the entire Board of Directors or a majority vote of the persons participating
in each Portfolio.
If the shareholders of any Portfolio fail to approve the Agreement, Prudential
will continue to act as investment adviser with respect to such Portfolio
pending the required approval of the Agreement, of a new contract with
Prudential or a different investment adviser, or other definitive action,
including termination of this Agreement pursuant to the penultimate paragraph of
Section 7 hereof; provided that the compensation received by Prudential during
such period will be no more than its actual costs incurred in furnishing
investment management services with respect to such Portfolio or the amount it
would have received under this Agreement, whichever is less.
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The Agreement may be terminated without penalty on at least 60 days' notice by
the Fund's Board of Directors or a majority vote of its shareholders, or by
Prudential on 90 days' notice. The Agreement will terminate automatically in the
event of its assignment (as defined in the 1940 Act).
THE PRUDENTIAL SERIES FUND, INC.
By /s/
-------------------------------
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
By /s/
-------------------------------
C-70
EXHIBIT (b)(v)(2)
SERVICE AGREEMENT
This Agreement made as of the 31st day of December, 1984, by and between
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA ("prudential"), a New Jersey
corporation and THE PRUDENTIAL INVESTMENT CORPORATION (the "Company"), a New
Jersey corporation.
WITNESSETH
In consideration of the mutual promises of the parties hereto as
hereinafter set forth, the parties hereby agree as follows:
1. The Company shall furnish to Prudential such services as Prudential may
require in connection with Prudential's performance of its obligations
under its advisory or subadvisory agreements relating to its clients
which are registered investment companies ("Clients").
2. Prudential will continue to have responsibility for all investment
advisory services under its advisory or subadvisory agreements with
respect to its Clients.
3. Prudential shall reimburse the Company for costs and expenses incurred
by the Company, determined in a manner acceptable to Prudential, in
furnishing the services described in paragraph 1 above.
4. This Agreement may be terminated by either party at any time upon not
less than thirty (30) days prior written notice to the other party, but
will terminate Automatically in the event of its Assignment. No such
termination will affect the terms of the
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-2-
advisory or subadvisory agreement relating to any Client. In the event
of the assignment or termination of Prudential's advisory or subadvisory
contract with respect to a particular Client, this Agreement will
terminate automatically as to such Client.
5. This Agreement shall continue in effect as to a particular Client for a
period of more than two years from its execution only so long as such
continuance is specificially approved at least annually in accordance
with the requirements of the Investment Company Act of 1940 applicable
to continuation of advisory contracts.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
signed by their duly authorized officers and attested by their respective
secretaries or assistant secretaries under their respective seals, all as of the
date first written above.
(SEAL) (SEAL)
THE PRUDENTIAL INSURANCE THE PRUDENTIAL INVESTMENT
COMPANY OF AMERICA CORPORATION
By /s/ By /s/
----------------------- ------------------------
Attest: Attest:
/s/ /s/
- -------------------------- ---------------------------
Secretary Secretary
C-72
DISTRIBUTION AGREEMENT
AGREEMENT made this 1st day of May, 1990, by and between The Prudential
Series Fund, Inc. (the "Fund"), a Maryland corporation, and Pruco Securities
Corporation ("Distributor"), a New Jersey corporation.
WITNESSETH:
WHEREAS, the Fund is registered under the Investment Company Act of 1940 as
a diversified open-end investment company and proposes to offer its shares
continuously to the separate accounts listed on Schedule A hereto, as well as
any other separate accounts hereafter established (collectively, the "Accounts")
to fund the benefits under variable life insurance and variable annuity
contracts (the "Contracts") issued by The Prudential Insurance Company of
America, Pruco Life Insurance Company, Pruco Life Insurance Company of New
Jersey, and The Prudential Life Insurance Company of Arizona;
WHEREAS, the Fund is comprised of separate Portfolios, each of which
pursues its investment objective through separate investment policies;
WHEREAS, Distributor is registered under the Securities Exchange Act of
1934 and is a member of the National Association of Securities Dealers, Inc.;
and
WHEREAS, the Fund and the Distributor wish to enter into an agreement to
have the Distributor act as the Fund's principal underwriter for the sale of the
Fund's shares to the Accounts;
NOW, THEREFORE, the parties agree as follows:
1. APPOINTMENT OF THE DISTRIBUTOR
The Fund hereby appoints the Distributor as the principal underwriter and
distributor of the Fund to sell its shares to the Accounts and the Distributor
hereby accepts such appointment.
2. EXCLUSIVE NATURE OF DUTIES
The Distributor shall be the exclusive representative of the Fund to act as
principal underwriter and distriutor.
3. PURCHASE OF SHARES FROM THE FUND
(a) The Fund will offer, and the Distributor shall have the right to buy,
the Fund shares needed to fill unconditional orders for shares of the Fund
placed with the Distributor by the Accounts. The price which the Distributor
shall pay for the shares of each Portfolio so purchased shall be the net asset
value per share of such Portfolio, as determined on the basis set forth in
Section 3(c) of this Agreement.
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-2-
(b) The shares of each Portfolio are to be resold by the Distributor to the
Accounts at the net asset value per share of such Portfolio.
(c) On each day in which the net asset value of the shares of any Portfolio
is determined, the Fund shall provide the Distributor with the net asset value
of such shares by 5:30 p.m. New York City time or at such later time as shall be
agreed to by the parties. The net asset value of such shares shall be determined
in accordance with the method set forth in the Prospectus of the Fund.
(d) The Fund shall have the right to suspend the sales of shares of any of
its Portfolios at times when redemption of any such shares is suspended pursuant
to the conditions set forth in Section 4(b) of this Agreement. The Fund shall
also have the right to suspend the sale of shares of any or all of its
Portfolios if trading on the New York Stock Exchange shall have been suspended,
if a banking moratorium shall have been declared, or if there shall have been
some other extraordinary event that, in the judgment of the Fund, makes it
impracticable to sell any such shares.
4. REDEMPTION OF SHARES BY THE FUND
(a) Any of the outstanding shares of each Portfolio may be tendered for
redemption at any time, and the Fund agrees to redeem any such shares so
tendered in accordance with the applicable provisions of the Prospectus and
Article VII of the Fund's Articles of Incorporation. The redemption price is the
net asset value per share next determined after the initial receipt of proper
notice of redemption.
(b) The right to redeem shares or to receive payment with respect to any
redemption may be suspended only for any period during which trading on the New
York Stock Exchange is restricted as determined by the Securities and Exchange
Commission as a result of which disposal of a Portfolio's securities or
determination of the net asset value of each Portfolio is not reasonably
practicable, and for such other periods as the Securities and Exchange
Commission may by order permit for the protection of shareholders of each
Portfolio.
5. DUTIES OF THE FUND
(a) The Fund shall furnish to the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of the shares of the Fund.
(b) The Fund shall take, from time to time, subject to the necessary
approval of its shareholders, all necessary action to fix the number of its
authorized shares and to register shares under the Securities Act of 1933, in
order that there will be available for sale such number of shares as investors
may reasonably be expected to purchase.
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-3-
(c) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of shares of each of its Portfolios for
sale under the securities laws of such states as the Distributor and the Fund
may approve, if such qualification is required by such securities laws. Any such
qualification may be withheld, terminated or withdrawn by the Fund at any time
in its discretion.
6. DUTIES OF THE DISTRIBUTOR
In selling the shares of the Fund, the Distributor shall use its best
efforts to conform with the requirements of all federal and state laws and
regulations, and the regulations of the National Association of Securities
Dealers, Inc., relating to the sale of such securities. The Distributor is not
authorized by the Fund to give any information or make any representations,
other than those contained in the registration statement for the Fund and its
shares, the Prospectus, and any sales literature specifically approved by the
Fund. Nothing contained in this Agreement shall prevent the Distributor from
entering into distribution arrangements with other investment companies.
7. DURATION AND TERMINATION OF THIS AGREEMANT
This Agreement shall become effective as of the date first written above
and shall remain in force thereafter so long as it is approved at least annually
by (i) a majority of the non-interested members of the Fund's Board of
Directors; and (ii) a majority of the entire Board of Directors or a majority
vote of the persons participating in each Portfolio.
This Agreement may be terminated at any time without penalty on at least
sixty days notice by the Fund's Board of Directors or by a majority vote of its
shareholders, with respect to any Portfolio by a majority vote of the
shareholders of the capital stock of such Portfolio, or by Distributor on sixty
day's notice.
This Agreement shall terminate automatically in the event of its
assignment.
THE PRUDENTIAL SERIES FUND, INC.
By:
----------------------------
PRUCO SECURITIES CORPORATION
By:
----------------------------
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-4-
SCHEDULE A
SEPARATE ACCOUNTS CURRENTLY INVESTING
IN SHARES OF THE PRUDENTIAL SERIES FUND, INC.
I. Separate Accounts of The Prudential Insurance Company of America
1. The Prudential Individual Variable Contract Account
2. The Prudential Qualified Individual Variable Contract Account
3. The Prudential Variable Contract Account -- 24
4. The Prudential Variable Appreciable Account
II. Separate Accounts of Pruco Life Insurance Company
1. Pruco Life Variable Insurance Account
2. Pruco Life Variable Appreciable Account
3. Pruco Life Single Premium Variable Life Account
4. Pruco Life Single Premium Variable Annuity Account
5. Pruco Life Variable Universal Account
III. Separate Accounts of Pruco Life Insurance Company of New Jersey
1. Pruco Life of New Jersey Variable Insurance Account
2. Pruco Life of New Jersey Variable Appreciable Account
3. Pruco Life of New Jersey Single Premium Variable Life Account
4. Pruco Life of New Jersey Single Premium Variable Annuity Account
IV. Separate Accounts of The Prudential Life Insurance Company of Arizona
None
C-76
EXHIBIT 1.(b)(viii)(1)
CUSTODIAN CONTRACT
This Contract between The Prudential Series Fund, Inc., a corporation
organized and existing under the laws of Maryland, having its principal place of
business at 3003 North Central Avenue, Phoenix, Arizona 85012, hereinafter
called the "Fund", and Manufacturers Hanover Trust Coinpany, 40 Wall Street, New
York, New York 10015. Hereinafter called the "Custodian",
WHEREAS, the Fund is authorized to issue shares of capital stock ("Shares")
in separate classes, with each such class representing interests in a separate
portfolio of securities and other assets which are referred to herein as the
"Funds"; and
WHEREAS, the Fund offers Shares in eight classes, the Money Market
Portfolio Capital Stock, the Bond Portfolio Capital Stock, the Common Stock
Portfolio Capital Stock, the Agressively Managed Flexible Portfolio Capital
Stock, and the Conservatively Managed Flexible Portfolio Capital Stock, the Zero
Coupon Bond--1990 Portfolio Capital Stock, the Zero Coupon Bond--1995
Portfolio Capital Stock, and the Zero Coupon Bond--2000 Portfolio Capital
Stock;
WITNESSETH: That in consideration of the mutual convenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets
pursuant to the provisions of the Fund's By-Laws. The Fund agrees to deliver to
the Custodian all securities and
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cash owned by it, and all payments of income, payments of principal or capital
distributions received by it with respect to all securities owned by the Fund
from time to time, and the cash consideration received by it for such new or
treasury shares of capital stock, $0.01 par value, ("Shares") of the Fund as may
be issued or sold from time to time. The Custodian shall not be responsible for
any property of the Fund held or received by the Fund and not delivered to the
Custodian.
Upon receipt of "Instructions" (within the meaning of Section 2.14), the
Custodian shall from time to time employ one or more sub-custodians, but only in
accordance with an applicable vote by the Board of Directors of the Fund, and
provided that the Custodian shall have no more or less responsibility or
liability to the fund on account of any actions or omissions of any
sub-custodian so employed than any such sub-custodian has to the Custodian to
the extent that such sub-custodian's responsibilities and liabilities are
similar in nature and scope to those imposed by this Contract with respect to
the functions to be performed by such sub-custodian.
2. Duties of the Custodian with Respect to Property of the Fund Held by the
Custodian
2.1 Holding Securities. The Custodian shall hold and physically segregate for
the account of each of the Funds all securities held by each of the Funds,
other than securities which are maintained pursuant to Section 2.10
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<PAGE>
in a clearing agency which acts as a securities depository or in a
book-entry system authorized by the U.S. Department of the Treasury,
collectively referred to herein as "Securities System".
Pursuant to Instructions, Custodian shall accept delivery of securities
loaned by the Fund or collateral for loaned securities on behalf of the
Fund. Custodian agrees to maintain separate records for the holding of
collateral.
2.2 Delivery of Securities. The Custodian shall release and deliver securities
owned by the Fund held by the Custodian or in a Securities System account
of the Custodian only upon receipt of Instructions, which may be continuing
instructions when deemed appropriate by the parties, and only in the
following cases:
1) Upon sale of such securities for the account of the Fund and receipt
of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.11 hereof;
4) To the depository agent in connection with tender or other similar
offers for securities owned by the Fund;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or
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<PAGE>
otherwise become payable; provided that, in any such case, the cash or
other consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of the
Fund or into the name of any nominee or nominees of the Custodian or
into the name or nominee name of any agent appointed pursuant to
Section 2.10; or into the name or nominee name of any sub-custodian
appointed pursuant to Article 1; or for exchange for a different
number of bonds, certificates or other evidence representing the same
aggregate face amount or number of units; provided that in any such
case, the new securities are to be delivered to the Custodian;
7) To the broker selling the same for examination in accordance with the
"street delivery" custom;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions
for the conversion contained in such securities, or pursuant to any
deposit agreement; provided that, in any such case, the new securities
and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of
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such warrants, rights or similar securities or the surrender of
interim receipts or temporary securities for definitive securities;
provided that, any such case, the new securities and cash, if any, are
to be delivered to the Custodian;
10) For delivery in connection with any loans of securities made by the
Fund.
11) For delivery as security in connection with any borrowings by the Fund
requiring a pledge of assets by the Fund;
12) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Fund, for delivery to such Transfer Agent or to the
holders of shares in connection with distributions in kind, as may be
described from time to time in the Fund's currently effective
prospectus, in satisfaction of requests by holders of Shares for
repurchase or redemption; and
13) For any other proper corporate purpose.
2.3 Registration of Securities. Securities held by the Custodian (other than
bearer securities) shall be registered in the names of each of the Funds or
in the name of its nominee GIBCO, which shall be used only for registration
of securities owned by the Fund, or owned by or in portfolios managed by
The Prudential Insurance Company of America.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account in the name of each of the Funds,
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subject only to draft or order by the Custodian or the Fund acting pursuant
to the terms of this Contract, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or for the
account of each of the Funds, other than cash maintained by the Funds in a
bank account established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940. Funds held by the Custodian for the Fund
may be deposited by it to this credit as Custodian in the Banking
Department of the Custodian or in such other banks or trust companies as it
may in its discretion deem necessary or desireable; provided, however, that
every such bank or trust company shall be qualified to act as a custodian
under the Investment Company Act of 1940 and that each such bank or trust
company and the funds to be deposited with each such bank or trust company
shall be approved by vote of a majority of the Board of Directors of the
Fund Such funds shall be deposited by the Custodian in this capacity as
Custodian and shall be withdrawable by the Custodian only in that capacity.
2.5 Payments for Shares. The Custodian shall receive from the distributor for
the Fund's Shares or from the Transfer Agent of the Fund and deposit into
each of the Fund's account such payments as are received for the
corresponding classes of capital stock of the Fund issued or sold from time
to time by the Fund. The Custodian
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<PAGE>
will provide timely notification to the Fund and the Transfer Agent of any
receipt by it of payments for Shares of the Fund.
2.6 Collection of Income. The Custodian shall use its best efforts to collect
when due and payable all income and other payments: (a) with respect to
registered securities held hereunder to which the Fund shall be entitled
either by law or pursuant to custom in the securities business, and (b)
with respect to bearer securities if, on the date of payment by the issuer,
such securities are held by the Custodian or agent thereof and shall credit
such income, as collected, to the proper custodian account of each of the
Funds. Without limiting the generality of the foregoing, the Custodian
shall detach and present for payment all coupons and other income items
requiring presentation as when they become due and shall collect interest
when due on securities held hereunder. Proceeds from the sale of securities
and amounts due on securities which mature or are redeemed shall be
credited in like funds to the proper account of the Fund on the date the
funds are received.
2.7 Payment of Fund Moneys. Upon receipt of Instructions, which may be
continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out moneys for the Fund in the following cases only:
1) Upon the purchase of securities for the account of each of the Funds
but only (a) against the delivery
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of such securities to the Custodian (or any bank, banking firm or
trust company doing business in the United States or abroad which is
qualified under the Investment Company Act of 1940, as amended, to act
as a custodian and has been designated by the Custodian as its agent
for this purpose) registered in the name of the appropriate Fund or in
the name of a nominee of the Custodian referred to in Section 2.3
hereof or in proper form for transfer; (b) in the case of a purchase
effected through a Securities System, in accordance with the
conditions set forth in Section 2.10 hereof or (c) in the case of
repurchase agreements entered into between the Fund and the Custodian,
or another bank, or a broker or dealer, (i) against delivery of the
securities either in certificate form or through an entry crediting
the Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt evidencing purchase
by the Fund of securities owned by the Custodian along with written
evidence of the agreement by the Custodian to repurchase such
securities from the Fund;
2) In connection with conversion, exchange or surrender of securities
owned by the Fund as set forth in Section 2.2. hereof;
3) For the redemption or repurchase of Shares issued by the Fund as set
forth in Section 2.8 hereof;
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4) For the payment of any expense or liability incurred by the Fund,
including but not limited to the following payments for the account
for the Fund: interest, taxes, management, accounting, transfer agent
and legal fees, and operating expenses of the Fund whether or not such
expenses are to be in whole or part capitalized or treated as deferred
expenses;
5) For the payment of any dividends declared pursuant to the governing
documents of the Fund;
6) For any other proper purpose.
2.8 Payments for Repurchases or Redemptions of Shares of the Fund. From such
funds as may be available for the purpose but subject to the limitation of
the Articles of Incorporation and any applicable votes of the Board of
Directors of the Fund pursuant thereto, the Custodian shall, upon receipt
of instructions from the Transfer Agent, make funds available for payment
to holders of Shares who have delivered to the Transfer Agent a request for
redemption or repurchase of their Shares.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of 1940,
as amended, to act as a custodian, as its agent to carry out such of the
provisions of the Article 2 as the Custodian may from time to time direct;
provided , however, that the appointment of any agent shall not relieve the
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Custodian of its responsibilities or hereunder.
2.10 Deposit of Fund Assets in Securities Systems. The Custodian may deposit
and/or maintain securities owned by the Fund in the Depository Trust
Company, book-entry system of the Federal Reserve Bank of New York, and any
domestic securities depository registered with the Securities and Exchange
Commission under section 17A of the Securities Exchange Act of 1934, which
is approved by vote of the Board of Directors of the Fund, collectively
referred to herein as "Securities System" in accordance with applicable
Federal Reserve Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:
1) The Custodian may keep securities of the Fund in a Securities System
provided that such securities are represented in an account
("Account") of the Custodian in the Securities System which shall not
include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
2) The records of the Custodian with respect to securities for the Fund
which are maintained in a Securities System shall identify by
book-entry those securities belonging to each of the Funds;
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3) The Custodian shall pay for securities purchased for each account of
the Fund upon (i) receipt of advice from the Securities System that
such securities have been transferred to the Account, and (ii) the
making of an entry on the records of the Custodian to reflect such
payment and transfer for the proper account of the Fund. The Custodian
shall transfer securities sold for each account of the Fund upon (i)
receipt of advice from the Securities System that payment for such
securities has been transferred to the Account, and (ii) the making of
an entry on the records of the Custodian to reflect such transfer and
payment for the proper account of the Fund. Copies of all advices from
the Securities System of transfers of securities for the accounts of
the Fund shall identify the Fund, be maintained for the Fund by the
Custodian and be provided to the Fund at its request. Upon request,
the Custodian shall furnish the Fund confirmation of each transfer to
or from the proper account of the Fund in the form of a written advice
or notice and shall furnish to the Fund copies of daily transaction
sheets reflecting each day's transactions in the Securities System for
the accounts of the Funds on the next business day;
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4) Upon written request of the Fund, the Custodian shall provide the Fund
with any report obtained by the Custodian on the procedures for
safeguarding securities deposited in the Securities System;
5) Anything to the c6ntrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to the
Fund resulting from use of the Securities System by reason of any
negligence, misfeasance or willful misconduct of the Custodian or any
of its agents or of any of its or their employees. At the election of
the Fund, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claim against the Securities System or
any other person which the Custodian may have as a consequence of any
such loss or damage if and to the extent that the Fund has not been
made whole for any such loss or damage.
2.11 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to securities of the Fund held by it and in connection with
transfers of securities.
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2.12 Proxies. The Custodian shall, with respect to the securities held
hereunder, promptly deliver or cause to be executed and delivered by the
registered holder of such securities, if the securities are registered
otherwise than in the name of the Fund or a nominee of the Fund, all
proxies, without indication of the manner in which such proxies are to be
voted, and shall promptly deliver to the Fund such proxies, all proxy
soliciting materials and all notices relating to such securities. Neither
Custodian nor any nominee of Custodian shall vote any of the securities
held hereunder by or for the Fund, except in accordance with Instructions
signed by an officer of the Fund.
2.13 Communications Relating to Fund Portfolio Securities. The Custodian shall
transmit promptly to the Fund all written information (including, without
limitation, pendency of calls and maturities of securities and expirations
of the rights in connection therewith) received by the Custodian from
issuers of the securities being held for the Fund. With respect to tender
or exchange offers, the Custodian shall transmit promptly to the Fund all
written information received by the Custodian from issuers of the
securities whose tender or exchange is sought and from the party (or his
agents) making the tender or exchange offer. If the Fund desires to take
action with respect to any tender offer, exchange offer or any other
similar transaction, the Fund shall
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notify the Custodian in writing at least three business days prior to the
date on which the Custodian is to take such action. Such notification will
not be considered effective unless the securities whose tender or exchange
is sought are in position in the Fund's account on the day such
notification is received.
2.14 Instructions. Two officers of the Fund will execute and provide to the
Custodian a certificate in the form annexed hereto as Appendix A,
indicating the names and signatures authorized to give oral and written
instructions on behalf of the Fund ("Authorized Persons"), together with
any changes which may occur from time to time. In the event that any person
named in the most recent certification shall cease to be so authorized, the
Fund shall furnish the Custodian with a superseding certificate advising it
to that effect. In the absence of such a superseding certificate, the
Custodian shall be entitled to rely upon the signatures of all persons
named in the most recently dated and delivered certification.
The Custodian shall be entitled to rely upon any oral instructions and any
written instructions actually received by the Bank pursuant to this
Contract and reasonably believed to be from an Authorized Person. As used
herein "written instructions" shall include instructions transmitted to the
Custodian via the GEOPAC
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Information System, which is the direct on-line electronic link between
the Fund and the Custodian for the transmission of communications relating
to the movement and control of the securities hereunder. The Fund and the
Custodian agree that the Fund should transmit oral instructions concerning
transactions to the Custodian only in the event that the GEOPAC Information
System is not operational and only in accordance with the procedures for
transmitting such oral instructions annexed hereto as Appendix B. The Fund
agrees that, absent negligence on the part of the Custodian, the Custodian
shall incur no liability to the Fund in acting upon oral instructions or
written instructions given to the Custodian hereunder concerning
transactions, provided such instructions reasonably appear to have been
received from an Authorized Person.
2.15 Actions Permitted without Express Authority. The Custodian may in its
discretion, without express authority from the Fund:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Contract, such as postage or the payment for courier services,
provided that all such payments shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in definitive
form;
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3) endorse for collection, in the name of the Fund, checks, drafts and
other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Fund except as
otherwise directed by the Board of Directors of the Fund.
2.16 Evidence of Authority. The Custodian shall be protected in acting upon any
instructions, notice, request, consent, certificate or other instrument or
paper believed by it to be genuine and to have been properly executed by or
on behalf of the Fund. The Custodian may receive and accept a certified
copy of a vote of the Board of Directors of the Fund as conclusive evidence
(a) of the authority of any person to act in accordance with such vote or
(b) of any determination or of any action by the Board of Directors
pursuant to the Articles of Incorporation as described in such vote, and
such vote may be considered as in full force and effect until receipt by
the Custodian of written notice to the contrary.
3. Duties of Custodian with Respect to the Books of Account and Calculation of
Net Asset Values and Net Income.
The Custodian shall cooperate with and supply
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necessary information to the entity or entities appointed by the Board of
Directors of the Fund to keep the books of account of the Fund and/or compute
the net asset values per share of the outstanding shares of each class of
capital stock of the Fund.
4. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, applicable
federal and state tax laws and any other law or administrative rules or
procedures which may be applicable to the Fund. Such records shall be open to
inspection at reasonable times during the regular business hours of the
Custodian by duly authorized officers, employees or agents of the Fund and by
any representative of an appropriate regulatory body; provided, however, that
written instructions to that effect are furnished to the Custodian by the Fund
or by the Treasurer, the Comptroller, any assistant treasurer or any assistant
comptroller of The Prudential Insurance Company of America. Both the Custodian
and the Fund shall keep confidential any information obtained pursuant to this
Contract and disclose such information only if the other party has authorized
such disclosure. Not withstanding the foregoing, the Custodian shall furnish
applicable federal and state regulatory authorities with any information or
reports in connection with this contract which such authorities may request. The
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Custodian shall, at the Fund's request, supply the Fund with a tabulation of
securities owned by each of the Funds and held by the Custodian and shall, when
requested to do so by the Fund and for such compensation as shall be agreed upon
between the Fund and the Custodian, include certificate numbers in such
tabulations. In the event of termination of this Contract for any reason, the
Custodian shall provide to the Fund a complete list of assets held pursuant to
this Agreement and shall preserve the records relating to its activities and
obligations hereunder for the period or periods prescribed by applicable federal
and state law.
5. Reports to Fund
Upon written request of the Fund, the Custodian shall provide the Fund, or
the Fund's independent public accountant, at such times as they may reasonably
require, with reports on its procedures for safeguarding securities, including
securities deposited and/or maintained in a Securities System, relating to the
services provided by the Custodian under this Contract; such reports, which
shall be of sufficient scope and in sufficient detail, as may reasonably be
required by the Fund, to provide reasonable assurance that any material
inadequacies would be disclosed by such examination, and, if there are no such
inadequacies, shall so state.
6. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as
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agreed upon from time to time. Except as otherwise provided in this Contract,
the Custodian may not charge the assets of the Fund for the Custodian's
compensation or expenses, or withhold delivery of any such assets pending
payment, in part or full, of such compensation or expenses. It is understood
that payment by the Fund of such compensation and expenses shall not be
unreasonably withheld.
7. Responsibility
The Custodian will be strictly liable for all losses due to burglary,
robbery, theft, fire and mysterious disappearance, regardless of whether such a
loss occurs while the assets are on deposit with the Custodian, or any nominee
of the Custodian, or the Federal Reserve Bank of New York in connection with
book-entry procedures as provided in Treasury Department regulations in effect
from time to time, or a domestic securities depository (hereinafter
"depository") registered with the Securities and Exchange Commission (the "SEC")
under Section 17A of the Securities Exchange Act of 1934 ("1934 Act"), and any
successor thereto, or any other agent of the Custodian at the time of the loss.
Under no circumstances, however, shall the Custodian be liable for consequential
damages under this Contract nor for causes beyond its control, which causes
shall be war, insurrection, hurricane, cyclone, tornado, earthquake, volcanic
eruption, nuclear fusion, fission or radioactivity.
For losses resulting from other causes the Custodian will be liable unless
the Custodian can prove that it and any
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of its agents or nominees, the Federal Reserve Bank of New York in connection
with book-entry procedures, as provided in Treasury Department regulations in
effect from time to time, and any domestic securities depository registered with
the SEC under Section 17A of the 1934 Act, and any successor thereto, were not
negligent and did not act with willful misconduct. The Custodian may apply for
and obtain the advice and opinion of counsel to the Fund with respect to
questions of law and shall be fully protected with respect to anything done or
omitted by it in good faith in conformity with such advise or opinion. Except as
provided in the preceding paragraph, in the performance of its duties hereunder,
the Custodian shall be held to the standard of reasonable care and diligence.
In the event of loss, damage or injury to the securities while on deposit
with the Custodian, its agents or any nominee of the Custodian, including the
Federal Reserve Bank of New York in connection with book-entry procedures, or
any domestic securities depository registered with the SEC under the 1934 Act,
and any successory thereto, or any other agent of the Custodian, the Custodian
shall promptly cause such securities to be replaced by other securities of like
kind and quality, together with all rights and privileges pertaining thereto.
In the event the Custodian is unable to replace the securities, the
Custodian shall remit to the Fund cash equal to the fair market value of the
securities as of the date of discovery of the loss. The Custodian may at its
option insure
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itself against loss from any cause but shall be under no obligation to insure
for the benefit of the Fund.
The Custodian shall be under no duty or obligation to inquire into and
shall not be liable for:
(a) the validity of the issue of any securities purchased by or for the
Fund, the legality of the purchase thereof or the propriety of the
amount paid therefor;
(b) the legality of any sale of any securities by or for the Fund or the
propriety of the amount for which the same are sold;
(c) the legality of an issue or sale of any Shares or the sufficiency of
the amount to be received there for;
(d) the legality of the redemption of any Shares of the propriety of the
amount to be paid therefor; or
(e) the legality of the declaration or payment of any dividend by the
Fund.
The Custodian shall not be liable for, or considered to be the custodian of
any money, whether or not represented by any check, draft, or other instrument
for the payment of money, received by it for the Fund until the Custodian
actually receives and collects such money directly or by the final crediting of
the account representing the securities belonging to the Fund. The Custodian
shall not be liable for any securities and cash sent, delivered or transmitted
by the Fund, its brokers, dealers or similar agents and which are not
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actually received by the Custodian, its designated agents, nominees or domestic
depositories.
The Custodian shall not be under any duty or obligation to ascertain
whether any securities at any time delivered to or held for the account of the
Fund are such as may properly be held by the Fund under the provisions of its
Articles of Incorporation or By-Laws, any federal or state statutes or any rule
or regulation of any governmental agency.
With respect to any directions to receive securities in transactions not
placed through the Custodian, the Custodian shall have no duty or responsibility
to advise the Fund of non-receipt of, or to take any steps to obtain delivery
of, securities from brokers or others either against payment or free of payment.
The Custodian will provide the Fund with a daily listing of all deliveries
of securities for the account of the Fund via the GEOPAC Information System. By
reviewing the GEOPAC daily listing of securities received for the Funds, the
Fund may ascertain any instances of non-receipt of delivery of securities.
The Custodian shall be under no duty to supervise, recommend or advise the
Fund relative to the investment, purchase, sale, retention or other disposition
of any property held hereunder unless provided for by separate written
agreement.
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The extent of any loss sustained hereunder shall be determined by the
market value thereof at the date of the discovery of such loss.
8. Bankers Blanket Bond
The Custodian represents and warrants that it presently has in force, and
will maintain in force during the terms of this Agreement, Bankers Blanket Bond
insurance coverage under Form No. 24 in an amount which the Custodian deems to
be appropriate, together with a "Central Handling of Securities--Discovery
Form" Rider thereto.
9. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than sixty (60) days
after the date of such delivery or mailing. The Fund shall not amend or
terminate this Contract in contravention of any applicable federal or state
regulations, or any provision of the Articles of Incorporation. The Fund may at
any time by action of its Board of Directors (i) substitute another bank or
trust company for the Custodian by giving notice as described above to the
Custodian, or (ii) immediately terminate this Contract in the event of the
assignment of the Contract by the Custodian without the prior written approval
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of the Fund or in the event of the appointment of a conservator or receiver for
the Custodian by the Comptroller of the Currency or upon the happening of a like
event at the direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements.
10. Successor Custodian
If a successor custodian shall be appointed by the Board of Directors of
the Fund, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer, all securities then held by it hereunder and shall transfer to an
account of the successor custodian all of the Fund's securities held in a
Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of
Directors of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank
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or trust company, which is a "bank" as defined in the Investment Company Act of
1940, of is own selection, having an aggregate capital, surplus, and undivided
profits, as shown by its last published report, of not less than $25,000,000,
all securities, funds and other properties held by the Custodian and all
instruments held by the Custodian relative thereto and all other property held
by it under this Contract and to transfer to an account of such successor
custodian all of the Fund's securities held in any Securities System.
Thereafter, such bank or trust company shall be the successor of the Custodian
under this Contract.
In the event that securities, funds and other properties remain the the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of vote referred to or of the
Board of Directors to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
11. Additional Provisions
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions in addition to the
provisions of this Contract as may in their joint opinion be consistent with the
general tenor of this Contract. Any such additional provisions shall
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be in a writing signed by both parties and shall be annexed hereto, provided
that no such additional provisions shall contravene any applicable federal or
state regulations or any provision of the Articles of Incorporation of the Fund.
Additional provisions made as provided in the preceding sentence shall be deemed
to be an amendment of this Contract.
12. Additional Funds
In the event that the Fund establishes one or more classes of capital stock
in addition to the classes already authorized as described above, which will
represent interests in one or more portfolios with respect to which it desires
to have the Custodian render services as custodian under the terms hereof, it
shall so notify the Custodian in writing, and if the Custodian agrees in writing
to provide such services, such Portfolio shall become one of the Funds
hereunder.
13. New York Law to Apply
This Contract shall be governed by and the provisions thereof construed and
interpreted under and in accordance with laws of the State of New York.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 1st day of June, 1986.
SEAL
THE PRUDENTIAL SERIES FUND, INC.
ATTEST
/s/ By /s/
- ------------------------------- ------------------------------------
Assistant Secretary Comptroller
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SEAL MANUFACTURERS HANOVER TRUST COMPANY
ATTEST
/s/ By /s/
- -------------------------------- --------------------------------
Assistant Secretary
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APPENDIX A
ThE PRUDENTIAL SERIES FUND, INC.
* * * * *
CERTIFICATE OF DESIGNATION
I, Charles A. McGee, Comptroller, and I, Paul S. Felnberg, Assistant
Secretary of The Prudential Series Fund, Inc. (the "Fund"), a Maryland
corporation, do hereby certify that the individuals whose names are set forth
below have been duly authorized to act as "Authorized Persons" of the Fund, as
defined under the terms of the Custodian Contract, dated June 1, 1986, by and
between the Fund and Manufacturers Hanover Trust company, and that the
signatures set forth opposite their respective names and are their true and
correct signatures:
NAME SIGNATURES
---- ----------
SHORT TERM BOND TRADES
- ----------------------
Dawne Muller DAWNE MULLER
-------------------
Raymond Pruszkowski RAYMOND PRUSZKOWSK
-------------------
Hope Power HOPE POWER
-------------------
Lisa Feliman LISA FELIMAN
-------------------
Coleen Dempsey COLEEN DEMPSEY
-------------------
Anna Tyler ANNA TYLER
-------------------
Delores Wilkerson DELORES WILKERSON
-------------------
LONG TERM BOND TRADES
- ---------------------
Patricia Mallon PATRICIA MALLON
------------------
Mark Armellino MARK ARMELLINO
------------------
Brenda Zuckerman BRENDA ZUCKERMAN
------------------
Gale Mattina GALE MATTINA
------------------
Laurie Shannon LAURIE SHANNON
------------------
Bruce Repasy BRUCE REPASY
------------------
Leslie McQueen LESLIE McQUEEN
------------------
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NAME SIGNATURES
---- ----------
STOCK TRADES
- -------------
Carolyn Redden CAROLYN REDDEN
--------------------
Kern Fanelli KERN FANELLI
--------------------
Molses Estevez MOLSES ESTEVEZ
--------------------
Debra Kohnken DEBRA KOHNKEN
--------------------
Amy West AMY WEST
--------------------
Patricia Della Porta PATRICIA DELLA PORTA
--------------------
Dean Dubovy DEAN DUBOVY
--------------------
Daniel Williams DANIEL WILLIAMS
--------------------
James Herbst JAMES HERBST
--------------------
Darlene Pyontek DARLENE PYONTEK
--------------------
David Rodgers DAVID RODGERS
--------------------
Alice Fairchild ALICE FAIRCHILD
--------------------
Patricia Moran PATRICIA MORAN
--------------------
Sabrina Badagliacca SABRINA BADAGLIACCA
--------------------
INVESTMENT AUDITING--TRADE CONFIRMATION
- ---------------------------------------
Chuck Levy (primary contact) CHUCK LEVY
--------------------
Bill Wiegand BILL WIEGAND
--------------------
Larry Weimer LARRY WEIMER
--------------------
Carol Raskin CAROL RASKIN
--------------------
Fran Cofone FRAN COFONE
--------------------
IN WITNESS WHEREOF, we have hereunto signed our names and the Secretary of
the Fund has affixed the seal of the Fund.
Dated: May 30, 1986 CHARLES A. MCG[ILLEGIBLE] Comptroller
------------------------------------------
(Name) (Title)
PAUL [ILLEGIBLE] Assistant Secretary
------------------------------------------
(Name) (Title)
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Appendix B
PROCEDURES FOR ORAL COMMUNICATION
OF TRADES TO CUSTODIAN
The Fund will communicate all trade information to the Custodian via the
GEOPAC Information System ("GEOPAC"). The Custodian shall not be required to act
upon any written trade instructions other than those sent through GEOPAC. Except
as indicated below, Custodian shall not be required to act upon any oral trade
instructions provided by the Fund.
The following procedures for the transmission and receipt of oral
instructions shall be utilized only in the event that GEOPAC is non-operational
and trade instructions involving purchases and sales scheduled to settle on the
same day cannot therefore be electronically communicated to Custodian via
GEOPAC:
-- An Authorized Person from the Investment Auditing Division of The
Prudential Insurance Company of America previously identified by the
Fund in writing to the Custodian will telephone the Custodian at (212)
623-1868. Such individual shall identify himself by name and shall
furnish the current transaction code to the Custodian's
representative. Immediately thereafter such Authorized Person shall
arrange to have an individual from the Fund connected to the
conversation who will identify himself by name and read the trade
instructions to the Custodian. The Authorized Person shall verify the
accuracy of each trade as read and shall confirm each such transaction
to the Custodian.
-- The trade information communicated to the Custodian's representative
will be read back to the Authorized Person who will verify that it was
correctly transcribed.
-- At the time of the telephone call, the name of the Custodian's
representative and the number and nature of the trades communication
will be logged by the Authorized Person who called the Custodian.
-- Codes will be provided to the Custodian for sixty (60) day periods
with new codes provided ten (10) days in advance of the expiration
period for the prior code.
-- If the Authorized Person is unable to verify the details of any trade
or incorrectly verifies the details of any transaction, the Custodian
shall treat such trade as cancelled and shall refuse to go forward
with any such trade and shall so advise the Authorized Person,
whereupon the Custodian's
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obligations with respect to any such trade shall cease without further
notice to the Fund.
-- Incorrect or otherwise deficient authorizations will not be subject to
rehabilitation by the same Authorized Person and a new instruction
procedure must be implemented to reinstate the trade instructions.
-- Once the trade information has been verified in accordance with the
above procedures, the Custodian may act upon the instructions,
provided in the case of deliveries out of the account, that the
Securities are in position in the Fund's account at the time of
receipt of the instruction to deliver out.
-- It shall be the continuing obligation of the Fund to immediately
notify the Custodian in writing of any additions or deletions to the
listing of Authorized Persons and the Custodian shall not be required
to honor the instructions of any person not previously designated in
writing by the Fund as an Authorized Person for the above purposes.
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EXHIBIT (b)(viii)(2)
CUSTODIAN AGREEMENT
AGREEMENT made this 12th day of July, 1988, between PRUDENTIAL SERIES FUND
INC (the "Fund") and Brown Brothers Harriman & Co. (the "Custodian").
WITNESSETH: That in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. The Fund hereby employs and appoints the Custodian as a custodian for
the term and subject to the provisions of this Agreement. The Custodian shall
not be under any duty or obligation to require the Fund to deliver to it any
securities or funds owned by the Fund and shall have no responsibility or
liability for or on account of securities or funds not so delivered. The Fund
will deposit with the Custodian copies of the Articles of Incorporation and
By-Laws (or comparable documents) of the Fund and all amendments thereto, and
copies of such votes and other proceedings of the Fund as may be necessary for
or convenient to the Custodian in the performance of its duties.
2. Except for securities and funds held by subcustodians appointed pursuant
to the provisions of Section 3 hereof, the Custodian shall have and perform the
following powers and duties:
A. Safekeeping - To keep safely the securities of the Fund that have been
delivered to the Custodian and from time to time to receive delivery of
securities for safekeeping.
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B. Manner of Holding Securities - To hold securities of the Fund (1) by
physical possession of the share certificates or other instruments representing
such securities in registered or bearer form, or (2) in book-entry form by a
Securities System (as said term is defined in Section 2U).
C. Registered Name; Nominee - To hold registered securities of the Fund (1)
in the name or any nominee name of the Custodian or the Fund, or in the name or
any nominee name of any agent appointed pursuant to Section 6E, or (2) in street
certificate form, so-called, and in any case with or without any indication of
fiduciary capacity.
D. Purchases - Upon receipt of Proper Instructions, as defined in Section X
on Page 15, insofar as funds are available for the purpose, to pay for and
receive securities purchased for the account of the Fund, payment being made
only upon receipt of the securities (1) by the Custodian, or (2) by a clearing
corporation of a national securities exchange of which the Custodian is a
member, or (3) by a Securities System. However, (i) in the case of repurchase
agreements entered into by the Fund, the Custodian may release funds to a
Securities System or to a Subcustodian prior to the receipt of advice from the
Securities System or Subcustodian that the securities underlying such repurchase
agreement have been transferred by book entry into the Account (as defined in
Section 2U) of the Custodian maintained with such Securities System or
Subcustodian, so long
-2-
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as such payment instructions to Securities System or Subcustodian include a
requirement that delivery is only against payment of securities, and (ii) in the
case of time deposits, call account deposits, currency deposits, and other
deposits, contracts or options pursuant to Sections 2L, 2M and 2N, the Custodian
may make payment therefor without receiving an instrument evidencing said
deposit so long as such payment instructions detail specific securities to be
acquired.
E. Exchanges - Upon receipt of proper instructions, to exchange securities
held by it for the account of the Fund for other securities in connection with
any reorganization, recapitalization, split-up of shares, change of par value,
conversion or other event, and to deposit any such securities in accordance with
the terms of any reorganization or protective plan. Without such instructions,
the Custodian may surrender securities in temporary form for definitive
securities, may surrender securities for transfer into a name or nominee name as
permitted in Section 2C, and may surrender securities for a different number of
certificates or instruments representing the same number of shares or same
principal amount of indebtedness, provided the securities to be issued are to be
delivered to the Custodian and further provided custodian shall at the time of
surrendering securities or instruments receive a receipt or other evidence of
ownership thereof.
F. Sales of Securities - Upon receipt of proper
-3-
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instructions, to make delivery of securities which have been sold for the
account of the Fund, but only against payment therefor (1) in cash, by a
certified check, bank cashier's check, bank credit, or bank wire transfer, or
(2) by credit to the account of the Custodian with a clearing corporation of a
national securities exchange of which the Custodian is a member, or (3) by
credit to the account of the Custodian or an Agent of the Custodian with a
Securities System.
G. Depositary Receipts - Upon receipt of proper instructions, to instruct a
subcustodian appointed pursuant to Section 3 hereof (a "Subcustodian") or an
agent of the Custodian appointed pursuant to Section 6E hereof (an "Agent") to
surrender securities to the depositary used by an issuer of American Depositary
Receipts or International Depositary Receipts (hereinafter collectively referred
to as "ADRs") for such securities against a written receipt therefor adequately
describing such securities and written evidence satisfactory to the Subcustodian
or Agent that the depositary has acknowledged receipt of instructions to issue
with respect to such securities ADRS in the name of the Custodian, or a nominee
of the Custodian, for delivery to the Custodian in Boston, Massachusetts, or at
such other place as the Custodian may from time to time designate.
Upon receipt of proper instructions, to surrender ADRs to the issuer
thereof against a written receipt therefor
-4-
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adequately describing the ADRs surrendered and written evidence satisfactory to
the Custodian that the issuer of the ADRs has acknowledged receipt of
instructions to cause its depositary to deliver the securities underlying such
ADRs to a Subcustodian or an Agent.
H. Exercise of Rights; Tender Offers - Upon timely receipt of proper
instructions, to deliver to the issuer or trustee thereof, or to the agent of
either, warrants, puts, calls, rights or similar securities for the purpose of
being exercised or sold, provided that the new securities and cash, if any,
acquired by such action are to be delivered to the Custodian, and upon receipt
of proper instructions, to deposit securities upon invitations for tenders of
securities, provided that the consideration is to be paid or delivered or the
tendered securities are to be returned to the Custodian.
I. Stock Dividends, Rights, Etc. - To receive and collect all stock
dividends, rights and other items of like nature; and to deal with the same
pursuant to proper instructions relative thereto.
J. Options - Upon receipt of proper instructions, to receive and retain
confirmations or other documents evidencing the purchase of writing of an option
on a security or securities index by the Fund; to deposit and maintain in a
segregated account, either physically or by book-entry in a Securities System,
securities subject to a covered call option written by
-5-
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the Fund; and to release and/or transfer such securities or other assets only in
accordance with a notice or other communication evidencing the expiration,
termination or exercise of such covered option furnished by The Options Clearing
Corporation, the securities or options exchange on which such covered option is
traded or such other organization as may be responsible for handling such
options transactions.
K. Borrowings - Upon receipt of proper instructions, to deliver securities
of the Fund to lenders or their agents as collateral for borrowings effected by
the Fund, provided that such borrowed money is payable to or upon the
Custodian's order as Custodian for the Fund.
L. Demand Deposit Bank Accounts - To open and operate an account or
accounts in the name of the Fund on the Custodian's books subject only to draft
or order by the Custodian. All funds received by the Custodian from or for the
account of the Fund shall be deposited in said account(s). The responsibilities
of the Custodian to the Fund for deposits accepted on the Custodian's books
shall be that of a U.S. bank for a similar deposit.
If and when authorized by proper instructions, the Custodian may open
and operate an additional account(s) in such other banks or trust companies as
may be designated by the Fund in such instructions (any such bank or trust
company so designated by the Fund being referred to hereafter as a "Banking
Institution"),
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provided that such account(s) shall be in the name of the Custodian for account
of the Fund and subject only to the Custodian's draft or order. Such accounts
may be opened with Banking Institutions in the United States and in other
countries and may be denominated in either U.S. Dollars or other currencies as
the Fund may determine. All such deposits shall be deemed to be portfolio
securities of the Fund and accordingly the responsibility of the Custodian
therefore shall be the same as and no greater than the Custodian's
responsibility in respect of other portfolio securities of the Fund.
M. Interest Bearing Call or Time Deposits - To place interest bearing fixed
term and call deposits with such banks and in such amounts as the Fund may
authorize pursuant to proper instructions. Such deposits may be placed with the
Custodian or with Subcustodians or other Banking Institutions as the Fund may
determine. Deposits may be denominated in U.S. Dollars or other currencies and
need not be evidenced by the issuance or delivery of a certificate to the
Custodian, provided that the Custodian shall include in its records with respect
to the assets of the Fund, appropriate notation as to the amount and currency of
each such deposit, the accepting Banking Institution, and other appropriate
details. Such deposits, other than those placed with the Custodian, shall be
deemed portfolio securities of the Fund and the responsibilities of the
Custodian therefor shall be the same as those for demand deposit bank accounts
placed with other
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banks, as described in Section L of this agreement. The responsibility of the
Custodian for such deposits accepted on the Custodian's books shall be that of a
U.S. bank for a similar deposit.
N. Foreign Exchange Transactions and Futures Contracts - Pursuant to proper
instructions, to enter into foreign exchange contracts or options to purchase
and sell foreign currencies for spot and future delivery on behalf and for the
account of the Fund. Such transactions may be undertaken by the Custodian with
such Banking Institutions, including the Custodian and Subcustodian(s) as
principals, as approved and authorized by the Fund. Foreign exchange contracts
and options other than those executed with the Custodian, shall be deemed to be
portfolio securities of the Fund and the responsibilities of the Custodian
therefor shall be the same as those for demand deposit bank accounts placed with
other banks as described in Section 2-L of this agreement. Upon receipt of
proper instructions, to receive and retain confirmations evidencing the purchase
or sale of a futures contract or an option on a futures contract by the Fund; to
deposit and maintain in a segregated account, for the benefit of any futures
commission merchant or to pay to such futures commission merchant, assets
designated by the fund as initial, maintenance or variation "margin" deposits
intended to secure the Fund's performance of its obligations under any futures
contracts purchased or sold or any options on futures contracts written by
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the Fund, in accordance with the provisions of any agreement or agreements
among any of the Fund, the Custodian and such futures commission merchant,
designated to comply with the rules of the Commodity Futures Trading Commission
and/or any contract market, or any similar organization or organizations,
regarding such margin deposits; and to release and/or transfer assets in such
margin accounts only in accordance with any such agreements or rules.
O. Stock Loans - Upon receipt of proper instructions, to deliver securities
of the Fund, in connection with loans of securities by the Fund, to the borrower
thereof upon the receipt of the cash collateral, if any, for such borrowing. In
the event U.S. Government securities are to be used as collateral, the
Custodian will not release the securities to be loaned until it has received
confirmation that such collateral has been delivered to the Custodian. The
Custodian and Fund understand that the timing of receipt of such confirmation
will normally require that the delivery of securities to be loaned will be made
one day after receipt of the U.S. Government collateral.
P. Collections - To collect, receive and deposit in said account or
accounts all income and other payments with respect to the securities held
hereunder, and to execute ownership and other certificates and affidavits for
all federal and state tax purposes in connection with receipt of income or other
payments with respect to securities of the Fund or in connection with
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transfer of securities, and pursuant to proper instructions to take such
other actions with respect to collection or receipt of funds or transfer of
securities which involve an investment decision.
Q. Dividends, Distributions and Redemptions - Upon receipt of proper
instructions from the Fund, or upon receipt of instructions from the Fund's
shareholder servicing agent or agent with comparable duties (the "Shareholder
Servicing Agent") (given by such person or persons and in such manner on behalf
of the Shareholder Servicing Agent as the Fund shall have authorized), the
Custodian shall release funds or securities to the Shareholder Servicing Agent
or otherwise apply funds or securities, insofar as available, for the payment of
dividends or other distributions to Fund shareholders. Upon receipt of proper
instructions from the Fund, or upon receipt of instructions from the Shareholder
Servicing Agent (given by such person or persons and in such manner on behalf of
the Shareholder Servicing Agent as the Fund shall have authorized), the
Custodian shall release funds or securities, insofar as available, to the
Shareholder Servicing Agent or as such Agent shall otherwise instruct for
payment to Fund shareholders who have delivered to such Agent a request for
repurchase or redemption of their shares of capital stock of the Fund.
R. Proxies, Notices, Etc. - Promptly to deliver or mail to the Fund all
forms of proxies and all notices of meetings and any
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other notices or announcements affecting or relating to securities owned by
the Fund that are received by the Custodian, and upon receipt of proper
instructions, to execute and deliver or cause its nominee to execute and deliver
such proxies or other authorizations as may be required. Neither the Custodian
nor its nominee shall vote upon any of such securities or execute any proxy to
vote thereon or give any consent or take any other action with respect thereto
(except as otherwise herein provided) unless ordered to do so by proper
instructions.
S. Nondiscretionary Details - Without the necessity of express
authorization from the Fund, (1) to attend to all nondiscretionary details in
connection with the sale, exchange, substitution, purchase, transfer or other
dealings with securities, funds or other property of the Portfolio held by the
Custodian except as otherwise directed from time to time by the Directors of the
Fund, and (2) to make payments to itself or others for minor expenses of
handling securities or other similar items relating to the Custodian's duties
under this Agreement, provided that all such payments shall be accounted for to
the Fund.
T. Bills - Upon receipt of proper instructions, to pay or cause to be paid,
insofar as funds are available for the purpose, bills, statements, or other
obligations of the Fund.
U. Deposit of Fund Assets in Securities Systems - The Custodian may deposit
and/or maintain securities owned by the
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Fund in (i) The Depository Trust Company, (ii) any book-entry system as provided
in Subpart O of Treasury Circular No. 300, 31 CFR 306, Subpart B of 31 CFR Part
350, or the book-entry regulations of federal agencies substantially in the form
of Subpart O, or (iii) any other domestic clearing agency registered with the
Securities and Exchange Commission under Section 17A of the Securities Exchange
Act of 1934 which acts as a securities depository and whose use the Fund has
previously approved in writing (each of the foregoing being referred to in this
Agreement as a "Securities System"). Utilization of a Securities System shall be
in accordance with applicable Federal Reserve Board and Securities and Exchange
Commission rules and regulations, if any, and subject to the following
provisions:
1) The Custodian may deposit and/or maintain Fund securities, either
directly or through one or more Agents appointed by the Custodian (provided that
any such agent shall be qualified to act as a custodian of the Fund pursuant to
the Investment Company Act of 1940 and the rules and regulations thereunder), in
a Securities System provided that such securities are represented in an account
("Account") of the Custodian or such Agent in the Securities System which shall
not include any assets of the Custodian or Agent other than assets held as a
fiduciary, custodian, or otherwise for customers;
2) The records of the Custodian with respect to securities of the Fund
which are maintained in a Securities System shall identify by book-entry those
securities belonging to the Fund;
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3) The Custodian shall pay for securities purchased for the account of the
Fund upon (i) receipt of advice from the Securities System that such securities
have been transferred to the Account, and (ii) the making of an entry on the
records of the Custodian to reflect such payment and transfer for the account of
the Fund. The Custodian shall Transfer securities sold for the account of the
Fund upon (i) receipt of advice from the Securities System that payment for such
securities has been transferred to the Account, and (ii) the making of an entry
on the records of the Custodian to reflect such transfer and payment for the
account of the Fund. Copies of all advices from the Securities System of
transfers of securities for the account of the Fund shall identify the Fund, be
maintained for the Fund by the Custodian or an Agent as referred to above, and
be provided to the Fund at its request. The Custodian shall furnish the Fund
confirmation of each transfer to or from the account of the Fund in the form of
a written advice or notice and shall furnish to the Fund copies of daily
transaction sheets reflecting each day's transactions in the Securities System
for the account of the Fund on the next business day;
4) The Custodian shall provide the Fund with any report obtained by the
Custodian or any Agent as referred to above on the Securities System's
accounting system, internal accounting control and procedures for safeguarding
securities deposited in the Securities System; and the Custodian and such Agents
shall
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send to the Fund such reports on their own systems of internal accounting
control as the Fund may reasonably request from time to time.
5) At the written request of the Fund, the Custodian will terminate the
use of any such Securities System on behalf of the Fund as promptly as
practicable.
V. Other Transfers--Upon Receipt of Proper Instructions, to deliver
securities, funds and other property of the Fund to a Subcustodian or another
custodian of the Fund; and, upon receipt of proper instructions, to make such
other disposition of securities, funds or other property of the Fund in a manner
other than or for purposes other than as enumerated elsewhere in this Agreement,
provided that the instructions relating to such disposition shall include a
statement of the purpose for which the delivery is to be made, the amount of
securities to be delivered and the name of the person or persons to whom
delivery is to be made.
W. Investment Limitations--In performing its duties generally, and
more particularly in connection with the purchase, sale and exchange of
securities made by or for the Fund, the Custodian may assume unless and until
notified in writing to the contrary that proper instructions received by it are
not in conflict with or in any way contrary to any provisions of the Fund's
Articles of Incorporation or By-Laws (or comparable documents) or votes or
proceedings of the shareholders or
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Directors of the Fund. The Custodian shall in no event be liable to the Fund and
shall be indemnified by the Fund for any violation which occurs in the course of
carrying out instructions given by the Fund of any investment limitations to
which the Fund is subject or other limitations with respect to the Fund's powers
to make expenditures, encumber securities, borrow or take similar actions
affecting its portfolio.
X. Proper Instructions--Proper instructions shall mean a tested telex from
the Fund or a written request, direction, instruction or certification signed or
initialled on behalf of the Fund by one or more person or persons as the Board
of Directors of the Fund shall have from time to time authorized, provided,
however, that no such instructions directing the delivery of securities or the
payment of funds to an authorized signatory of the Fund shall be signed by such
person. Those persons authorized to give proper instructions may be identified
by the Board of Directors by name, title or position and will include at least
one officer empowered by the Board to name other individuals who are authorized
to give proper instructions on behalf of the Fund. Telephonic or other oral
instructions given by any one of the above persons will be considered proper
instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. Oral instructions will be confirmed by tested telex or in writing in
the manner set forth
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above but the lack of such confirmation shall in no way affect any action taken
by the Custodian in reliance upon such oral instructions. The Fund authorizes
the Custodian to tape record any and all telephonic or other oral instructions
given to the Custodian by or on behalf of the Fund (including any of its
officers, Directors, employees or agents) and will deliver to the Custodian a
similar authorization from any investment manager or adviser or person or entity
with similar responsibilities which is authorized to give proper instructions on
behalf of the Fund to the Custodian. Proper instructions may relate to specific
transactions or to types or classes of transactions, and may be in the form of
standing instructions.
Proper instructions may include communications effected directly between
electro-mechanical or electronic devices or systems, in addition to tested
telex, provided that the Fund and the Custodian agree to the use of such device
or system.
3. Securities, funds and other property of the Fund may be held by
subcustodians appointed pursuant to the provisions of this Section 3 (a
"Subcustodian"). The Custodian may, at any time and from time to time, appoint
any bank or trust company (meeting the requirements of a custodian or a foreign
custodian under the Investment Company Act of 1940 and the rules and regulations
thereunder) to act as a Subcustodian for the Fund, provided that the Fund shall
have approved in writing (1) any such bank or trust company and the subcustodian
agreement to be
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entered into between such bank or trust company and the Custodian, and (2) if
the subcustodian is a bank organized under the laws of a country other than the
United States, the holding of securities, cash and other property of the Fund in
the country in which it is proposed to utilize the services of such
subcustodian. Upon such approval by the Fund, the Custodian is authorized on
behalf of the Fund to notify each Subcustodian of its appointment as such. The
Custodian may, at any time in its discretion, remove any bank or trust company
that has been appointed as a Subcustodian but will promptly notify the Fund of
any such action.
Those Subcustodians, their offices or branches which the Fund has approved
to date are set forth on Appendix A hereto. Such Appendix shall be amended from
time to time as Subcustodians, branches or offices are changed, added or
deleted. The Fund shall be responsible for informing the Custodian sufficiently
in advance of a proposed investment which is to be held at a location not listed
on Appendix A, in order that there shall be sufficient time for the Fund to give
the approval required by the preceding paragraph and for the Custodian to put
the appropriate arrangements in place with such Subcustodian pursuant to such
subcustodian agreement.
Although the Fund does not intend to invest in a country before the
foregoing procedures have been completed, in the event that an investment is
made prior to approval, if practical, such
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security shall be removed to an approved location or if not practical such
security shall be held by such agent as the Custodian may appoint. In such
event, the Custodian shall be liable to the Fund for the actions of such agent
if and only to the extent the Custodian shall have recovered from such agent for
any damages caused the Fund by such agent and provided that the Custodian shall
pursue its rights against such agent.
With respect to the securities and funds held by a Subcustodian, either
directly or indirectly, including demand and interest bearing deposits,
currencies or other deposits and foreign exchange contracts as referred to in
Sections 2K, 2L or 2M, the Custodian shall be liable to the Fund if and only to
the extent that such Subcustodian is liable to the Custodian and the Custodian
recovers under the applicable subcustodian agreement. The Custodian shall
nevertheless be liable to the Fund for its own negligence in transmitting any
instructions received by it from the Fund and for its own negligence in
connection with the delivery of any securities or funds held by it to any such
Subcustodian.
In other event that any Subcustodian appointed pursuant to the provisions
of this Section 3 fails to perform any of its obligations under the terms and
conditions of the applicable subcustodian agreement, the Custodian shall use its
best efforts to cause such Subcustodian to perform such obligations. In the
event that the Custodian is unable to cause such Subcustodian to
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perform fully its obligations thereunder, the Custodian shall forthwith upon the
Fund's request terminate such Subcustodian and, if necessary or desirable,
appoint another subcustodian in accordance with the provisions of this Section
3. At the election of the Fund, it shall have the right to enforce, to the
extent permitted by the subcustodian agreement and applicable law, the
Custodian's rights against any such Subcustodian for loss or damage caused the
Fund by such Subcustodian.
At the written request of the Fund, the Custodian will terminate any
subcustodian appointed pursuant to the provisions of this Section 3 in
accordance with the termination provisions under the applicable subcustodian
agreement. The Custodian will not amend any subcustodian agreement or agree to
change or permit any changes thereunder except upon the prior written approval
of the Fund.
In the event the Custodian receives a claim from a Subcustodian under the
indemnification provisions of any subcustodian agreement, the Custodian shall
promptly give written notice to the Fund of such claim. No more than thirty
days after written notice to the Fund of the Custodian's intention to make such
payment, the Fund will reimburse the custodian the amount of such payment except
in respect of any negligence or misconduct of the Custodian.
4. The Custodian may assist generally in the preparation of reports to Fund
shareholders and others, audits of accounts, and other ministerial matters of
like nature.
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5. The Fund hereby also appoints the Custodian as its financial agent. With
respect to the appointment as financial agent, the Custodian shall have and
perform the following powers and duties:
A. Records--To create, maintain and retain such records relating to its
activities and obligations under this Agreement as are required under the
Investment Company Act of 1940 and the rules and regulations there under
(including Section 31 thereof and Rules 31a-l and 31a-2 thereunder) and under
applicable Federal and State tax laws. All such records will be the property of
the Fund and in the event of termination of this Agreement shall be delivered to
the successor custodian, and the Custodian agrees to cooperate with the Fund in
execution of documents and other action necessary or desirable in order to
substitute the successor custodian for the custodian under their agreement.
B. Accounts--To keep books of account and render statements, including
interim monthly and complete quarterly financial statements, or copies thereof,
from time to time as reasonably requested by proper instructions.
C. Access to Records--Subject to security requirements of the Custodian
applicable to its own employees having access to similar records within the
Custodian and such regulations as may be reasonably imposed by the Custodian,
the books and records maintained by the Custodian pursuant to Sections 5A and 5B
shall
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be open to inspection and audit at reasonable times by officers of,
attorneys for, and auditors employed by, the Fund and by any representative of
an appropriate regulatory body, provided that written instructions to that
effect are furnished to the Custodian by the Fund. The Custodian shall furnish
appropriate regulatory authorities with any information in connection with this
Agreement which such authorities may request.
D. Calculation of Net Asset Value--To compute and determine the net asset
value per share of capital stock of the Fund as of the close of business on the
New York Stock Exchange on each day on which such Exchange is open, unless
otherwise directed by proper instructions. Such computation and determination
shall be made in accordance with (1) the provisions of the Fund's Articles of
Incorporation or By-Laws of the Fund, as they may from time to time be amended
and delivered to the Custodian, (2) the votes of the Board of Directors of the
Fund at the time in force and applicable, as they may from time to time be
delivered to the Custodian, and (3) proper instructions from such officers of
the Fund or other persons as are from time to time authorized by the Board of
Directors of the Fund to give instructions with respect to computation and
determination of the net asset value. On each day that the Custodian shall
compute the net asset value per share of the Fund, the Custodian shall provide
the Fund with written reports which permit the Fund to verify that portfolio
transactions have been recorded in accordance with the Fund's instructions.
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In computing the net asset value, the Custodian may rely upon any
information furnished by proper instructions, including without limitation any
information (1) as to accrual of liabilities of the Fund and as to liabilities
of the Fund not appearing on the books of account kept by the custodian, (2) as
to the existence, status and proper treatment of reserves, if any, authorized by
the fund, (3) as to the sources of quotations to be used in computing the net
asset value, including those listed in Appendix B, (4) as to the fair value to
be assigned to any securities or other property for which price quotations are
not readily available, and (5) as to the sources of information with respect to
"corporate actions" affecting portfolio securities of the fund, including those
listed in Appendix B. (Information as to "corporate actions" shall include
information as to dividends, distributions, stock splits, stock dividends,
rights offerings, conversions, exchanges, recapitalizations, mergers,
redemptions, calls, maturity dates and similar transactions, including the ex-
and record dates and the amounts or other terms thereof.)
In like manner, the Custodian shall compute and determine the net asset
value as of such other times as the Board of Directors of the Fund from time to
time may reasonably request.
Notwithstanding any other provisions of this Agreement, including Section
6C, the following provisions shall apply with respect to the Custodian's
foregoing responsibilities in this
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Section SD: The Custodian shall be held to the exercise of reasonable care in
computing and determining net asset value as provided in this Section 5D, but
shall not be held accountable or liable for any losses, damages or expenses the
Fund or any shareholder or former shareholder of the Fund may suffer or incur
arising from or based upon errors or delays in the determination of such net
asset value unless such error or delay was due to the Custodian's negligence,
gross negligence or reckless or willful misconduct in determination of such net
asset value. (The parties hereto acknowledge, however, that the Custodian's
causing an error or delay in the determination of net asset value may, but does
not in and of itself, constitute negligence, gross negligence or reckless or
willful misconduct.) In no event shall the Custodian be liable or responsible to
the Fund, any present or former shareholder of the fund or any other party for
any error or delay which continued or was undetected after the date of an audit
performed by the certified public accountants employed by the Fund if, in the
exercise of reasonable care in accordance with generally accepted accounting
standards, such accountants should have become aware of such error or delay in
the course of performing such audit. The Custodian's liability for any such
negligence, gross negligence or reckless or willful misconduct which results in
an error in determination of such net asset value shall be limited to the
direct, out-of-pocket loss the Fund, shareholder or former shareholder shall
actually incur,
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measured by the difference between the actual and the erroneously computed
net asset value, and any expenses the fund shall incur in connection with
correcting the records of the Fund affected by such error (including charges
made by the Fund's registrar and transfer agent for making such corrections) or
communicating with shareholders or former shareholders of the Fund affected by
such error.
Without limiting the foregoing, the Custodian shall not be held accountable
or liable to the Fund, any shareholder or former shareholder thereof or any
other person for any delays or losses, damages or expenses any of them may
suffer or incur resulting from (1) the Custodian's failure to receive timely and
suitable notification concerning quotations or corporate actions relating to or
affecting portfolio securities of the fund or (2) any errors in the computation
of the net asset value based upon or arising out of quotations or information
as to corporate actions if received by the Custodian either (i) from a source
which the Custodian was authorized pursuant to the second paragraph of this
Section 5D to rely upon, or (ii) from a source which in the Custodian's
reasonable judgment was as reliable a source for such quotations or information
as the sources authorized pursuant to that paragraph. Nevertheless, the
Custodian will use its best judgment in determining whether to verify through
other sources any information it has received as to quotations or corporate
actions if the Custodian has reason to believe that any such information might
be incorrect.
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In the event of any error or delay in the determination of such net asset
value for which the Custodian may be liable, the Fund and the Custodian will
consult and make good faith efforts to reach agreement on what actions should be
taken in order to mitigate any loss suffered by the Fund or its present or
former shareholders, in order that the custodian's exposure to liability shall
be reduced to the extent possible after taking into account all relevant factors
and alternatives. Such actions might include the Fund or the custodian taking
reasonable steps to collect from any shareholder or former shareholder who has
received any overpayment upon redemption of shares such overpaid amount or to
collect from any shareholder who has underpaid upon a purchase of shares the
amount of such underpayment or to reduce the number of shares issued to such
shareholder. It is understood that in attempting to reach agreement on the
actions to be taken or the amount of the loss which should appropriately be
borne by the Custodian, the Fund and the Custodian will consider such relevant
factors as the amount of the loss involved, the Fund's desire to avoid loss of
shareholder good will, the fact that other persons or entitles could have been
reasonably expected to have detected the error sooner than the time it was
actually discovered, the appropriateness of limiting or eliminating the benefit
which shareholders or former shareholders might have obtained by reason of the
error, and the possibility that other parties providing services to the fund
might be induced to absorb a portion of the loss incurred.
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D. Disbursements--Upon receipt of proper instructions, to pay or cause to
be paid, insofar as funds are available for the purpose, bills, statements and
other obligations of the Fund (including but not limited to interest charges,
taxes, management fees, compensation to Fund officers and employees, and other
operating expenses of the Fund).
6. A. The Custodian shall not be liable for any action taken or omitted in
reliance upon proper instructions believed by it to be genuine or upon any other
written notice, request, direction, instruction, certificate or other instrument
believed by it to be genuine and signed by the proper party or parties.
The Secretary or Assistant Secretary of the Fund shall certify to the
Custodian the names, signatures and scope of authority of all persons authorized
to give proper instructions or any other such notice, request, direction,
instruction, certificate or instrument on behalf of the Fund, the names and
signatures of the officers of the Fund, the name and address of the Shareholder
Servicing Agent, and any resolutions, votes, instructions or directions of the
Fund's Board of Directors or shareholders. Such certificate may be accepted and
relied upon by the Custodian as conclusive evidence of the facts set forth
therein and may be considered in full force and effect until receipt of a
similar certificate to the contrary.
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the
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title, validity or genuineness of any property or evidence of title thereto
received by it or delivered by it pursuant to this Agreement.
The Custodian shall be entitled, at the expense of the Fund, to receive and
act upon advice of counsel (who may be counsel for the Fund) on all matters, and
the Custodian shall be without liability for any action reasonably taken or
omitted pursuant to such advice.
B. With respect to the portfolio securities, cash and other property of the
Fund held by a Securities System, the Custodian shall be liable to the Fund only
for any loss or damage to the Fund resulting from use of the Securities System
if caused by any negligence, misfeasance or misconduct of the Custodian or any
of its agents or of any of its or their employees or from any failure of the
Custodian or any such agent to enforce effectively such rights as it may have
against the Securities System.
C. Except as may otherwise be set forth in this Agreement with respect to
particular matters, the Custodian shall be held only to the exercise of
reasonable care and diligence in carrying out the provisions of this Agreement,
provided that the Custodian shall not thereby be required to take any action
which is in contravention of any applicable law. However, nothing herein shall
exempt the Custodian from liability due to its own negligence or willful
misconduct. The Fund agrees to indemnify and hold harmless the Custodian and its
nominees from all claims
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and liabilities (including counsel fees) incurred or assessed against it or its
nominees in connection with the performance of this Agreement, except such as
may arise from its or its nominee's breach of the relevant standard of conduct
set forth in this Agreement. Without limiting the foregoing indemnification
obligation of the Fund, the Fund agrees to indemnify the Custodian and its
nominees against any liability the Custodian or such nominee may incur by reason
of taxes assessed to the Custodian or such nominee or other costs, liability or
expense incurred by the Custodian or such nominee resulting directly or
indirectly from the fact that portfolio securities or other property of the Fund
is registered in the name of the Custodian or such nominee.
In order that the indemnification provisions contained in this
Paragraph 6-C shall apply, however, it is understood that if in any case the
Fund may be asked to indemnify or hold the Custodian harmless, the Fund shall be
fully and promptly advised of all pertinent facts concerning the situation in
question, and it is further understood that the Custodian will use all
reasonable care to identify and notify the Fund promptly concerning any
situation which presents or appears likely to present the probability of such a
claim for indemnification against the Fund. The Fund shall have the option to
defend the Custodian against any claim which may be the subject of this
indemnification, and in the event that the Fund so elects it will
-28-
C-135
<PAGE>
so notify the Custodian, and thereupon the Fund shall take over complete defense
of the claim, and the Custodian shall in such situation initiate no further
legal or other expenses for which it shall seek indemnification under this
Paragraph 6-C. The Custodian shall in no case confess any claim or make any
compromise in any case in which the Fund will be asked to indemnify the
Custodian except with the Fund's prior written consent.
It is also understood that the Custodian shall not be liable for any loss
involving any securities, currencies, deposits or other property of the Fund,
whether maintained by it, a Subcustodian, an agent of the Custodian or a
Subcustodian, a Securities System, or a Banking Institution, or a loss arising
from a foreign currency transaction or contract, resulting from a Sovereign
Risk. A "Sovereign Risk" shall mean nationalizaton, expropriation, devaluation,
revaluation, confiscation, seizure, cancellation, destruction or similar action
by any governmental authority, de facto or de jure; or enactment, promulgation,
imposition or enforcement by any such governmental authority of currency
restrictions, exchange controls, taxes, levies or other charges affecting the
Fund's property; or acts of war, terrorism, insurrection or revolution; or any
other similar act or event beyond the Custodian's control.
D. The Custodian shall be entitled to receive reimbursement from the Fund
on demand, in the manner provided in Section 7, for
-29-
C-136
<PAGE>
its cash disbursements, expenses and charges (including the fees and expenses of
any Subcustodian or any Agent) in connection with this Agreement, but excluding
salaries and usual overhead expenses.
E. The Custodian may at any time or times in its discretion appoint (and
may at any time remove) any other bank or trust company as its agent (an
"Agent") to carry out such of the provisions of this Agreement as the Custodian
may from time to time direct, provided, however, that the appointment of such
Agent (other than an Agent appointed pursuant to the third paragraph of Section
3) shall not relieve the Custodian of any of its responsibilities under this
agreement.
F. Upon request, the Fund shall deliver to the Custodian such proxies,
powers of attorney or other instruments as may be reasonable and necessary or
desirable in connection with the performance by the Custodian or any
Subcustodian of their respective obligations under this Agreement or any
applicable subcustodian agreement.
7. The Fund shall pay the Custodian a custody fee based on such fee
schedule as may from time to time be agreed upon in writing by the Custodian and
the Fund. Such fee, together with all amounts for which the Custodian is to be
reimbursed in accordance with Section 6D, shall be billed to the Fund in such a
manner as to permit payment by a direct cash payment to the Custodian.
-30-
C-137
<PAGE>
8. This Agreement shall continue in full force and effect until terminated
by either party by an instrument in writing delivered or mailed, postage
prepaid, to the other party, such termination to take effect not sooner than
seventy five (75) days after the date of such delivery or mailing. In the event
of termination the Custodian shall be entitled to receive prior to delivery of
the securities, funds and other property held by it all accrued fees and
unreimbursed expenses the payment of which is contemplated by Sections 6D and 7,
upon receipt by the Fund of a statement setting forth such fees and expenses.
In the event of the appointment of a successor custodian, it is agreed that
the funds and securities owned by the Fund and held by the Custodian or any
Subcustodian shall be delivered to the successor custodian, and the Custodian
agrees to cooperate with the Fund in execution of documents and performance of
other actions necessary or desirable in order to substitute the successor
custodian for the Custodian under this Agreement.
9. This Agreement constitutes the entire understanding and agreement of the
parties hereto with respect to the subject matter hereof. No provision of this
Agreement may be amended or terminated except by a statement in writing signed
by the party against which enforcement of the amendment or termination is
sought.
In connection with the operation of this Agreement, the Custodian and the
Fund may agree in writing from time to time on
-31-
C-138
<PAGE>
such provisions interpretative of or in addition to the provisions of this
Agreement as may in their joint opinion be consistent with the general tenor of
this Agreement. No interpretative or additional provisions made as provided in
the preceding sentence shall be deemed to be an amendment of this Agreement.
10. This instrument is executed and delivered in The Commonwealth of
Massachusetts and shall be governed by and construed according to the laws of
said Commonwealth.
11. Notices and other writings delivered or mailed postage prepaid to the
Fund addressed to the Fund at c/o Comptroller, Pruco Life Insurance Company, 213
Washington St., Newark, N.J. 07102, or to such other address as the Fund may
have designated to the Custodian in writing, or to the Custodian at 40 Water
Street, Boston, Massachusetts 02109, Attention: Manager, Securities Department,
or to such other address as the Custodian may have designated to the Fund in
writing, shall be deemed to have been properly delivered or given hereunder to
the respective addressee.
12. This Agreement shall be binding on and shall inure to the benefit of
the Fund and the Custodian and their respective successors and assigns, provided
that neither party hereto may assign this Agreement or any of its rights or
obligations hereunder without the prior written consent of the other party.
13. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original. This
-32-
C-139
<PAGE>
Agreement shall become effective when one or more counterparts have been
signed and delivered by each of the parties.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in its name and behalf on the day and year first above written.
PRUDENTIAL SERIES FUND, INC. BROWN BROTHERS HARRIMAN & CO.
By /s/ per pro /s/
---------------------------- -----------------------------
-33-
C-140
EXHIBIT (b)(ix)(1)
INDEMNIFICATION AGREEMENT
WHEREAS, the staff of the Securities and Exchange Commission has approved
the use of a combined simplified prospectus and a combined statement of
additional information that will describe both a variable life insurance
contract and its underlying fund;
WHEREAS, Pruco Life Insurance Company ("Pruco Life") and the Board of
Directors of The Prudential Series Fund ("Series Fund") agree that a combined
simplified prospectus and a combined simplified statement of additional
information for the Series Fund (Reg. No. 2-80896) and The PRUvider Variable
Appreciable Life Contract (Reg. No. 33-49994) (the "PRUvider Contract") will be
more comprehensible and will more effectively disclose to prospective purchasers
the material information relating to the PRUvider Contract and to the Series
Fund than the two separate prospectuses that are currently given to prospective
purchasers; and
WHEREAS, Pruco Life recognizes that the Series Fund and the members of its
Board of Directors should have no responsibility for the accuracy of the
statements in the combined simplified prospectus, to the extent that those
statements relate to a PRUvider Contract rather than to the Series Fund, and
that the Series Fund and the members of its Board of Directors should have no
obligation to verify the accuracy or completeness of such statements, such
obligation being solely that of Pruco Life as the issuer of the PRUvider
Contracts and as the depositor of the Pruco Life PRUvider Variable Appreciable
Account;
NOW, THEREFORE, Pruco Life hereby agrees that the Series Fund and the
members of the Board of Directors of the Series Fund shall not be liable for any
loss or damage resulting from any misstatement or misrepresentation or for any
omission of any material fact in the combined simplified prospectus that is part
of the registration statement for the Series Fund, Registration No. 2-80896, to
the extent that such misstatement, misrepresentation, or omission relates to the
PRUvider Contract or to any of its provisions or to the manner in which it is
administered.
Pruco Life further agrees that it will indemnify the Series Fund and any or
all of the members of the Board of Directors of the Series Fund and shall hold
them harmless from all cost, damage and expense that they or any of them may
incur, including the expenses of legal counsel and any other expenses incurred
defending any claim that may be brought against them, arising from the inclusion
in the combined simplified prospectus or its statement of additional
information, of any information relating to the PRUvider Contract or from the
failure of that prospectus or statement of additional information to include any
information relating to the PRUvider Contract.
C-141
<PAGE>
Indemnification under this Agreement is conditioned upon the following:
The Series Fund and the directors of the Series Fund will promptly notify
Pruco Life if any such claim is made against any of them. In addition, the
Series Fund and the directors of the Series Fund will use all reasonable
care to identify and notify Pruco Life promptly concerning any situation
which presents or appears likely to present the probability of such a
claim. Pruco Life shall have the option to defend the Series Fund and the
members of the Board of Directors of the Series Fund against any claim
which may be the subject of this Indemnification Agreement and, in the
event that Pruco Life so elects, it will so notify them. Upon such
notification, Pruco Life shall take over complete defense of the claim. In
such situation, the Series Fund and the members of the Board of Directors
of the Series Fund shall fully cooperate with Pruco Life in the defense of
such claim and they shall initiate no further legal or other expenses for
which they shall seek indemnification under this Agreement. The Series Fund
and the members of the Board of Directors of the Series Fund shall in no
case confess any claim or make any compromise in any case in which Pruco
Life will be asked to provide indemnification under this agreement except
with Pruco Life's prior written consent.
IN WITNESS WHEREOF, Pruco Life has caused this agreement to be executed by
the officer designated below as of May 1, 1994, the effective date of the
registration statement that first includes the combined simplified prospectus
and the combined statement of additional information.
PRUCO LIFE INSURANCE COMPANY
Witness:
_________________________________ By__________________________
2
C-142
EXHIBIT (b)(ix)(2)
INDEMNIFICATION AGREEMENT
WHEREAS, the staff of the Securities and Exchange Commission has approved
the use of a combined simplified prospectus and a combined statement of
additional information that will describe both a variable life insurance
contract and its underlying fund;
WHEREAS, Pruco Life of New Jersey Insurance Company ("PLNJ") and the Board
of Directors of The Prudential Series Fund ("Series Fund") agree that a
combined simplified prospectus and a combined simplified statement of additional
information for the Series Fund (Reg. No. 2-80896) and The PRUvider Variable
Appreciable Life Contract (Reg. No. 33-57186) (the "PRUvider Contract") will be
more comprehensible and will more effectively disclose to prospective purchasers
the material information relating to the PRUvider Contract and to the Series
Fund than the two separate prospectuses that are currently given to prospective
purchasers; and
WHEREAS, PLNJ recognizes that the Series Fund and the members of its Board
of Directors should have no responsibility for the accuracy of the statements in
the combined simplified prospectus, to the extent that those statements relate
to a PRUvider Contract rather than to the Series Fund, and that the Series Fund
and the members of its Board of Directors should have no obligation to verify
the accuracy or completeness of such statements, such obligation being solely
that of PLNJ as the issuer of the PRUvider Contracts and as the depositor of the
Pruco Life of New Jersey Variable Appreciable Account;
NOW, THEREFORE, PLNJ hereby agrees that the Series Fund and the members of
the Board of Directors of the Series Fund shall not be liable for any loss or
damage resulting from any misstatement or misrepresentation or for any omission
of any material fact in the combined simplified prospectus that is part of the
registration statement for the Series Fund, Registration No. 2-80896, to the
extent that such misstatement, misrepresentation, or omission relates to the
PRUvider Contract or to any of its provisions or to the manner in which it is
administered.
PLNJ further agrees that it will indemnify the Series Fund and any or all
of the members of the Board of Directors of the Series Fund and shall hold them
harmless from all cost, damage and expense that they or any of them may incur,
including the expenses of legal counsel and any other expenses incurred
defending any claim that may be brought against them, arising from the inclusion
in the combined simplified prospectus or its statement of additional
information, of any information relating to the PRUvider Contract or from the
failure of that prospectus or statement of additional information to include any
information relating to the PRUvider Contract.
C-143
<PAGE>
Indemnification under this Agreement is conditioned upon the following:
The Series Fund and the directors of the Series Fund will promptly notify
PLNJ if any such claim is made against any of them. In addition, the Series
Fund and the directors of the Series Fund will use all reasonable care to
identify and notify PLNJ promptly concerning any situation which presents
or appears likely to present the probability of such a claim. PLNJ shall
have the option to defend the Series Fund and the members of the Board of
Directors of the Series Fund against any claim which may be the subject of
this Indemnification Agreement and, in the event that PLNJ so elects, it
will so notify them. Upon such notification, PLNJ shall take over complete
defense of the claim. In such situation, the Series Fund and the members of
the Board of Directors of the Series Fund shall fully cooperate with PLNJ
in the defense of such claim and they shall initiate no further legal or
other expenses for which they shall seek indemnification under this
Agreement. The Series Fund and the members of the Board of Directors of the
Series Fund shall in no case confess any claim or make any compromise in
any case in which PLNJ will be asked to provide indemnification under this
agreement except with PLNJ's prior written consent.
IN WITNESS WHEREOF, PLNJ has caused this agreement to be executed by the
officer designated below as of May 1, 1994, the effective date of the
registration statement that first includes the combined simplified prospectus
and the combined statement of additional information.
PRUCO LIFE OF NEW JERSEY
INSURANCE COMPANY
Witness:
______________________________ By_____________________________
2
C-144
Exhibit (xi)(1)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 33 to Registration
Statement No. 2-80896 on Form N-1A of The Prudential Series Fund, Inc. of; (1)
our report dated February 15, 1996, relating to the financial statements of
Pruco Life PRUvider Variable Appreciable Account of Pruco Life Insurance
Company, and of our report dated December 19, 1996 relating to the consolidated
financial statements of Pruco Life Insurance Company and subsidiaries appearing
in the Prospectus of Pruco Life PRUvider Variable Appreciable Account, which is
part of this Registration Statement; (2) our report dated February 15, 1996,
relating to the financial statements of the PRUvider Variable Appreciable Life
Subaccounts of Pruco Life Insurance Company of New Jersey Variable Appreciable
Account, and of our report dated December 19, 1996 relating to the financial
statements of Pruco Life Insurance Company of New Jersey appearing in the
prospectus of Pruco Life of New Jersey Variable Appreciable Account, which is
part of this Registration Statement; and (3) our reports dated February 15, 1996
relating to the financial statements of: (a) The Prudential Series Fund, Inc.
appearing in Part B of this Registration Statement; (b) the Flexible Managed and
Conservative Balance portfolios (two of the portfolios comprising The Prudential
Series Fund, Inc.) appearing in Part B of this Registration Statement; and (c)
the Diversified Bond, Equity, Flexible Managed, Conservative Balanced, Stock
Index, Government Income and Global portfolios (seven of the portfolios
comprising The Prudential Series Fund, Inc.) appearing in Part B of this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Parsippany, New Jersey
April 25, 1997
C-145
Exhibit (xi)(2)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statements of Additional Information
constituting part of this Post-Effective Amendment No. 33 to the registration
statement on Form N-1A (the "Registration Statement") of our three reports dated
February 14, 1997, relating to the financial statements and financial highlights
of the portfolios of The Prudential Series Fund, Inc., which appear in such
Statements of Additional Information. We also consent to the references to us
under the headings "Financial Highlights" in the Prospectuses and "Experts" in
the Statements of Additional Information.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
April 24, 1997
C-146
<TABLE> <S> <C>
<ARTICLE> 6
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<NAME> (MONEY MARKET PORTFOLIO)
<NUMBER> 01
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<TABLE> <S> <C>
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<NAME> (DIVERSIFIED BOND)
<NUMBER> 02
<MULTIPLIER> 1000
<S> <C>
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<PERIOD-END> DEC-31-1996
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<OTHER-ITEMS-LIABILITIES> 27,281,010
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<PAID-IN-CAPITAL-COMMON> 700,614,815
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<SHARES-COMMON-PRIOR> 57,971,325
<ACCUMULATED-NII-CURRENT> 2,057,193
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,130,661
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 14,413,912
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<DIVIDEND-INCOME> 89,819
<INTEREST-INCOME> 49,692,559
<OTHER-INCOME> 0
<EXPENSES-NET> 3,055,553
<NET-INVESTMENT-INCOME> 46,726,825
<REALIZED-GAINS-CURRENT> 3,227,785
<APPREC-INCREASE-CURRENT> (18,849,028)
<NET-CHANGE-FROM-OPS> 31,105,582
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (44,766,756)
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<NUMBER-OF-SHARES-SOLD> 78,594,183
<NUMBER-OF-SHARES-REDEEMED> (45,319,610)
<SHARES-REINVESTED> 44,766,756
<NET-CHANGE-IN-ASSETS> 64,380,155
<ACCUMULATED-NII-PRIOR> 714,398
<ACCUMULATED-GAINS-PRIOR> (8,288,762)
<OVERDISTRIB-NII-PRIOR> 0
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<PER-SHARE-NII> 0.49
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</TABLE>
<TABLE> <S> <C>
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<PER-SHARE-NII> 0.75
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</TABLE>
<TABLE> <S> <C>
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<NAME> (ZERO COUPON BOND 2000)
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<PERIOD-END> DEC-31-1996
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<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 44,739,170
<TOTAL-LIABILITIES> 44,739,170
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 42,171,205
<SHARES-COMMON-STOCK> 3,463,608
<SHARES-COMMON-PRIOR> 1,903,021
<ACCUMULATED-NII-CURRENT> 8,384
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 350,896
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,208,685
<NET-ASSETS> 44,739,170
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,613,482
<OTHER-INCOME> 0
<EXPENSES-NET> 156,045
<NET-INVESTMENT-INCOME> 1,457,437
<REALIZED-GAINS-CURRENT> 350,896
<APPREC-INCREASE-CURRENT> (913,982)
<NET-CHANGE-FROM-OPS> 894,351
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,464,562)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 24,377,000
<NUMBER-OF-SHARES-REDEEMED> (5,791,000)
<SHARES-REINVESTED> 1,464,562
<NET-CHANGE-IN-ASSETS> 19,480,351
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 129
<OVERDISTRIB-NII-PRIOR> 0
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NAME> (ZERO COUPON BOND 2005)
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<S> <C>
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</TABLE>
<TABLE> <S> <C>
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<SERIES>
<NAME> (CONSERVATIVE BALANCED)
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<S> <C>
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NAME> (FLEXIBLE MANAGED )
<NUMBER> 04
<MULTIPLIER> 1000
<S> <C>
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NAME> (HIGH YIELD BOND)
<NUMBER> 09
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NAME> (STOCK INDEX)
<NUMBER> 10
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NAME> (EQUITY INCOME)
<NUMBER> 11
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NAME> (EQUITY PORTFOLIO)
<NUMBER> 03
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NAME> (JENNISON)
<NUMBER> 16
<MULTIPLIER> 1000
<S> <C>
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NAME> (SMALL CAPITALIZATION)
<NUMBER> 15
<MULTIPLIER> 1000
<S> <C>
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