PROSPECTUS
MAY 1, 1998
THE PRUDENTIAL
SERIES FUND, INC.
THIS PROSPECTUS IS FOR USE WITH THE VARIABLE UNIVERSAL LIFE INSURANCE CONTRACT,
AS IT DESCRIBES ONLY THOSE PORTFOLIOS AVAILABLE FOR INVESTMENT THROUGH THAT
CONTRACT. THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE CURRENT
PROSPECTUS FOR THE VARIABLE UNIVERSAL LIFE INSURANCE CONTRACT.
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. Ten of the Series Fund's portfolios are currently available for
investment under the Variable Universal Life Insurance contract. The portfolios
are: the Money Market Portfolio, the Diversified Bond Portfolio, 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, 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.
SHARES OF THE MONEY MARKET 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, 1998, which information is
incorporated herein by reference and is available without charge upon written
request to The Prudential Series Fund, Inc., 751 Broad Street, Newark, New
Jersey 07102-3777, or by telephoning (800) 437-4016.
----------------------------------------------------------
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.
751 Broad Street
Newark, New Jersey 07102-3777
Telephone: (800) 437-4016
PSF-VUL Ed 5-98
<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.
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 (the "S&P 500 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 S&P 500
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.
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 7. The Series
Fund may in the future establish other portfolios with different investment
objectives.
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
FINANCIAL HIGHLIGHTS.....................................................................1
PORTFOLIO RATES OF RETURN................................................................6
THE SERIES FUND..........................................................................7
THE ACCOUNTS AND THE CONTRACTS...........................................................7
INVESTMENT MANAGER.......................................................................7
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS.....................................7
FIXED INCOME PORTFOLIOS.........................................................8
Money Market Portfolio..........................................................8
Diversified Bond Portfolio......................................................8
BALANCED PORTFOLIOS.............................................................9
Conservative Balanced Portfolio.................................................9
Flexible Managed Portfolio.....................................................10
HIGH YIELD BOND PORTFOLIOS.....................................................11
High Yield Bond Portfolio......................................................11
DIVERSIFIED STOCK PORTFOLIOS...................................................13
Stock Index Portfolio..........................................................13
Equity Income Portfolio........................................................15
Equity Portfolio...............................................................15
Prudential Jennison Portfolio..................................................16
Global Portfolio...............................................................17
CONVERTIBLE SECURITIES.........................................................18
LOAN PARTICIPATIONS............................................................18
FOREIGN SECURITIES.............................................................18
OPTIONS ON EQUITY SECURITIES...................................................19
OPTIONS ON DEBT SECURITIES.....................................................20
OPTIONS ON STOCK INDICES.......................................................21
OPTIONS ON FOREIGN CURRENCIES..................................................21
FUTURES CONTRACTS..............................................................22
OPTIONS ON FUTURES CONTRACTS...................................................23
REPURCHASE AGREEMENTS..........................................................23
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS.................................23
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES....................................24
SHORT SALES....................................................................24
SHORT SALES AGAINST THE BOX....................................................24
INTEREST RATE SWAPS............................................................24
LOANS OF PORTFOLIO SECURITIES..................................................25
INVESTMENT RESTRICTIONS APPLICABLE TO THE PORTFOLIOS....................................25
INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES.........................................25
PURCHASE AND REDEMPTION OF SHARES.......................................................26
DETERMINATION OF NET ASSET VALUE........................................................26
DIVIDENDS, DISTRIBUTIONS, AND TAXES.....................................................27
OTHER INFORMATION CONCERNING THE SERIES FUND............................................28
INCORPORATION AND AUTHORIZED STOCK.............................................28
VOTING RIGHTS..................................................................29
MONITORING FOR POSSIBLE CONFLICT...............................................29
PERIODIC REPORTS...............................................................29
PORTFOLIO BROKERAGE AND RELATED PRACTICES......................................29
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT...................................30
YEAR 2000......................................................................30
ADDITIONAL INFORMATION.........................................................30
APPENDIX: SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO MAY CURRENTLY INVEST...........A1
</TABLE>
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED)
The following highlights for the two years ended December 31, 1997 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
other independent auditors, whose report thereon was also unqualified. Price
Waterhouse LLP's report is included in the Statement of Additional Information.
<TABLE>
<CAPTION>
MONEY MARKET
--------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
--------------------------------------------------------------------------------------------------
1997 1996 1995(a) 1994(a) 1993(a) 1992(a) 1991(a) 1990(a) 1989(a) 1988(a)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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........... 0.54 0.51 0.56 0.40 0.29 0.37 0.60 0.78 0.88 0.72
Dividends and
distributions... (0.54) (0.51) (0.56) (0.40) (0.29) (0.37) (0.60) (0.78) (0.88) (0.72)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
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
RETURN(b)....... 5.41% 5.22% 5.80% 4.05% 2.95% 3.79% 6.16% 8.16% 9.25% 7.35%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
year (in
millions)....... $657.5 $668.8 $613.3 $583.3 $474.7 $528.7 $529.6 $434.2 $236.1 $155.9
Ratios to average
net assets:
Expenses........ 0.43% 0.44% 0.44% 0.47% 0.45% 0.47% 0.46% 0.50% 0.55% 0.57%
Net investment
income........ 5.28% 5.10% 5.64% 4.02% 2.90% 3.72% 5.96% 7.80% 8.77% 7.17%
</TABLE>
<TABLE>
<CAPTION>
DIVERSIFIED BOND
----------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
----------------------------------------------------------------------------------------------------
1997 1996 1995(a) 1994(a) 1993(a) 1992(a) 1991(a) 1990(a) 1989(a) 1988(a)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value,
beginning of
year............ $ 11.07 $ 11.31 $ 10.04 $ 11.10 $ 10.83 $ 11.00 $ 10.33 $ 10.32 $ 9.94 $ 10.04
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment
income.......... 0.80 0.76 0.76 0.68 0.68 0.76 0.80 0.83 0.89 0.88
Net realized and
unrealized gains
(losses) on
investments..... 0.11 (0.27) 1.29 (1.04) 0.40 0.01 0.84 (0.01) 0.42 (0.07)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from
investment
operations... 0.91 0.49 2.05 (0.36) 1.08 0.77 1.64 0.82 1.31 0.81
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net
investment
income.......... (0.83) (0.73) (0.75) (0.68) (0.66) (0.72) (0.78) (0.81) (0.85) (0.91)
Distributions from
net realized
gains........... (0.13) -- (0.03) (0.02) (0.15) (0.22) (0.19) -- (0.08) --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total
distributions... (0.96) (0.73) (0.78) (0.70) (0.81) (0.94) (0.97) (0.81) (0.93) (0.91)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value,
end of year..... $ 11.02 $ 11.07 $ 11.31 $ 10.04 $ 11.10 $ 10.83 $ 11.00 $ 10.33 $ 10.32 $ 9.94
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL INVESTMENT
RETURN(b)....... 8.57% 4.40% 20.73% (3.23)% 10.13% 7.19% 16.44% 8.32% 13.49% 8.19%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
year (in
millions)....... $816.7 $720.2 $655.8 $541.6 $576.2 $428.8 $318.7 $227.7 $191.1 $148.8
Ratios to average
net assets:
Expenses........ 0.43% 0.45% 0.44% 0.45% 0.46% 0.47% 0.49% 0.47% 0.53% 0.53%
Net investment
income........ 7.18% 6.89% 7.00% 6.41% 6.05% 6.89% 7.43% 8.06% 8.56% 8.52%
Portfolio turnover
rate............ 224% 210% 199% 32% 41% 61% 131% 42% 273% 222%
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
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 two years ended December 31, 1997 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
other independent auditors, whose report thereon was also unqualified. Price
Waterhouse LLP's report is included in the Statement of Additional Information.
<TABLE>
<CAPTION>
CONSERVATIVE BALANCED
-----------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------------------------------------------------------------
1997 1996 1995(a) 1994(a) 1993(a) 1992(a) 1991(a) 1990(a) 1989(a) 1988(a)
--------- --------- --------- -------- --------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value,
beginning of
year............ $ 15.52 $ 15.31 $ 14.10 $ 14.91 $ 14.24 $ 14.32 $ 13.06 $ 13.36 $ 12.30 $ 11.89
--------- --------- --------- -------- --------- --------- --------- --------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment
income.......... 0.76 0.66 0.63 0.53 0.49 0.56 0.69 0.82 0.89 0.77
Net realized and
unrealized gains
(losses) on
investments..... 1.26 1.24 1.78 (0.68) 1.23 0.41 1.74 (0.14) 1.15 0.43
--------- --------- --------- -------- --------- --------- --------- --------- -------- --------
Total from
investment
operations... 2.02 1.90 2.41 (0.15) 1.72 0.97 2.43 0.68 2.04 1.20
--------- --------- --------- -------- --------- --------- --------- --------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net
investment
income.......... (0.76) (0.66) (0.64) (0.51) (0.47) (0.54) (0.67) (0.81) (0.89) (0.79)
Distributions from
net realized
gains........... (1.81) (1.03) (0.56) (0.15) (0.58) (0.51) (0.50) (0.17) (0.09) --
--------- --------- --------- -------- --------- --------- --------- --------- -------- --------
Total
distributions... (2.57) (1.69) (1.20) (0.66) (1.05) (1.05) (1.17) (0.98) (0.98) (0.79)
--------- --------- --------- -------- --------- --------- --------- --------- -------- --------
Net Asset Value,
end of year..... $ 14.97 $ 15.52 $ 15.31 $ 14.10 $ 14.91 $ 14.24 $ 14.32 $ 13.06 $ 13.36 $ 12.30
--------- --------- --------- -------- --------- --------- --------- --------- -------- --------
--------- --------- --------- -------- --------- --------- --------- --------- -------- --------
TOTAL INVESTMENT
RETURN(b)....... 13.45% 12.63% 17.27% (0.97)% 12.20% 6.95% 19.07% 5.27% 16.99% 10.19%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
year (in
millions)....... $4,744.2 $4,478.8 $3,940.8 $3,501.1 $3,103.2 $2,114.0 $1,500.0 $1,100.2 $976.0 $815.6
Ratios to average
net assets:
Expenses........ 0.56% 0.59% 0.58% 0.61% 0.60% 0.62% 0.63% 0.65% 0.64% 0.65%
Net investment
income........ 4.48% 4.13% 4.19% 3.61% 3.22% 3.88% 4.89% 6.21% 6.81% 6.22%
Portfolio turnover
rate............ 295% 295% 201% 125% 79% 62% 115% 44% 154% 111%
Average commission
rate paid per
share........... $0.0563 $0.0554 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,
------------------------------------------------------------------------------------------------------------
1997 1996 1995(a) 1994(a) 1993(a) 1992(a) 1991(a) 1990(a) 1989(a) 1988(a)
--------- --------- --------- -------- -------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value,
beginning of
year............ $ 17.79 $ 17.86 $ 15.50 $ 16.96 $ 16.01 $ 16.29 $ 14.00 $ 14.45 $ 13.12 $ 12.33
--------- --------- --------- -------- -------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment
income.......... 0.59 0.57 0.56 0.47 0.57 0.58 0.65 0.72 0.82 0.72
Net realized and
unrealized gains
(losses) on
investments..... 2.52 1.79 3.15 (1.02) 1.88 0.61 2.81 (0.47) 1.99 0.84
--------- --------- --------- -------- -------- --------- --------- --------- --------- ---------
Total from
investment
operations... 3.11 2.36 3.71 (0.55) 2.45 1.19 3.46 0.25 2.81 1.56
--------- --------- --------- -------- -------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net
investment
income.......... (0.58) (0.58) (0.56) (0.45) (0.57) (0.56) (0.66) (0.70) (0.81) (0.77)
Distributions from
net realized
gains........... (3.04) (1.85) (0.79) (0.46) (0.93) (0.91) (0.51) -- (0.67) --
--------- --------- --------- -------- -------- --------- --------- --------- --------- ---------
Total
distributions... (3.62) (2.43) (1.35) (0.91) (1.50) (1.47) (1.17) (0.70) (1.48) (0.77)
--------- --------- --------- -------- -------- --------- --------- --------- --------- ---------
Net Asset Value,
end of year..... $ 17.28 $ 17.79 $ 17.86 $ 15.50 $ 16.96 $ 16.01 $ 16.29 $ 14.00 $ 14.45 $ 13.12
--------- --------- --------- -------- -------- --------- --------- --------- --------- ---------
--------- --------- --------- -------- -------- --------- --------- --------- --------- ---------
TOTAL INVESTMENT
RETURN(b)....... 17.96% 13.64% 24.13% (3.16)% 15.58% 7.61% 25.43% 1.91% 21.77% 12.83%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
year (in
millions)....... $5,490.1 $4,896.9 $4,261.2 $3,481.5 $3,292.2 $2,435.6 $1,990.7 $1,507.8 $1,386.5 $1,103.9
Ratios to average
net assets:
Expenses........ 0.62% 0.64% 0.63% 0.66% 0.66% 0.67% 0.67% 0.69% 0.69% 0.70%
Net investment
income........ 3.02% 3.07% 3.30% 2.90% 3.30% 3.63% 4.23% 5.13% 5.66% 5.52%
Portfolio turnover
rate............ 227% 233% 173% 124% 63% 59% 93% 52% 141% 128%
Average commission
rate paid per
share........... $0.0569 $0.0563 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.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for less than a
full year are not annualized.
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 two years ended December 31, 1997 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
other independent auditors, whose report thereon was also unqualified. Price
Waterhouse LLP's report is included in the Statement of Additional Information.
<TABLE>
<CAPTION>
HIGH YIELD BOND
------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
------------------------------------------------------------------------------------------------------
1997 1996 1995(a) 1994(a) 1993(a) 1992(a) 1991(a) 1990(a) 1989(a) 1988(a)
-------- -------- -------- -------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value,
beginning of
year............ $ 7.87 $ 7.80 $ 7.37 $ 8.41 $ 7.72 $ 7.21 $ 5.84 $ 7.67 $ 8.90 $ 8.74
-------- -------- -------- -------- ------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment
income.......... 0.78 0.80 0.81 0.87 0.82 0.82 0.83 0.94 1.07 1.07
Net realized and
unrealized gains
(losses) on
investments..... 0.26 0.06 0.46 (1.10) 0.63 0.42 1.40 (1.79) (1.22) 0.06
-------- -------- -------- -------- ------- -------- -------- -------- -------- --------
Total from
investment
operations... 1.04 0.86 1.27 (0.23) 1.45 1.24 2.23 (0.85) (0.15) 1.13
-------- -------- -------- -------- ------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net
investment
income.......... (0.77) (0.78) (0.84) (0.81) (0.76) (0.73) (0.86) (0.98) (1.08) (0.97)
Dividends in
excess of net
investment
income.......... -- (0.01) -- -- -- -- -- -- -- --
-------- -------- -------- -------- ------- -------- -------- -------- -------- --------
Total
distributions... (0.77) (0.79) (0.84) (0.81) (0.76) (0.73) (0.86) (0.98) (1.08) (0.97)
-------- -------- -------- -------- ------- -------- -------- -------- -------- --------
Net Asset Value,
end of year..... $ 8.14 $ 7.87 $ 7.80 $ 7.37 $ 8.41 $ 7.72 $ 7.21 $ 5.84 $ 7.67 $ 8.90
-------- -------- -------- -------- ------- -------- -------- -------- -------- --------
-------- -------- -------- -------- ------- -------- -------- -------- -------- --------
TOTAL INVESTMENT
RETURN(b)....... 13.78% 11.39% 17.56% (2.72)% 19.27% 17.54% 39.71% (11.84)% (2.05)% 13.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
year (in
millions)....... $568.7 $432.9 $367.9 $306.2 $282.9 $153.7 $78.7 $49.8 $60.0 $65.8
Ratios to average
net assets:
Expenses........ 0.57% 0.63% 0.61% 0.65% 0.65% 0.70% 0.75% 0.75% 0.71% 0.75%
Net investment
income........ 9.78% 9.89% 10.34% 9.88% 9.91% 10.67% 12.05% 13.42% 12.29% 11.60%
Portfolio turnover
rate............ 106% 88% 139% 69% 96% 75% 57% 35% 61% 71%
</TABLE>
<TABLE>
<CAPTION>
STOCK INDEX
-------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1997 1996 1995(a) 1994(a) 1993(a) 1992(a) 1991(a) 1990(a) 1989(a) 1988(a)
--------- --------- --------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value,
beginning of
year............ $ 23.74 $ 19.96 $ 14.96 $ 15.20 $ 14.22 $ 13.61 $ 10.76 $ 11.73 $ 9.45 $ 8.53
--------- --------- --------- -------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment
income.......... 0.43 0.40 0.40 0.38 0.36 0.35 0.35 0.36 0.33 0.36
Net realized and
unrealized gains
(losses) on
investments..... 7.34 4.06 5.13 (0.23) 1.00 0.60 2.82 (0.79) 2.57 0.95
--------- --------- --------- -------- -------- -------- -------- -------- -------- --------
Total from
investment
operations... 7.77 4.46 5.53 0.15 1.36 0.95 3.17 (0.43) 2.90 1.31
--------- --------- --------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net
investment
income.......... (0.42) (0.40) (0.38) (0.37) (0.35) (0.33) (0.31) (0.31) (0.35) (0.39)
Distributions from
net realized
gains........... (0.87) (0.28) (0.15) (0.02) (0.03) (0.01) (0.01) (0.23) (0.27) --
--------- --------- --------- -------- -------- -------- -------- -------- -------- --------
Total
distributions... (1.29) (0.68) (0.53) (0.39) (0.38) (0.34) (0.32) (0.54) (0.62) (0.39)
--------- --------- --------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value,
end of year..... $ 30.22 $ 23.74 $ 19.96 $ 14.96 $ 15.20 $ 14.22 $ 13.61 $ 10.76 $ 11.73 $ 9.45
--------- --------- --------- -------- -------- -------- -------- -------- -------- --------
--------- --------- --------- -------- -------- -------- -------- -------- -------- --------
TOTAL INVESTMENT
RETURN(b)....... 32.83% 22.57% 37.06% 1.01% 9.66% 7.13% 29.72% (3.63)% 30.93% 15.44%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
year (in
millions)....... $2,448.2 $1,581.4 $1,031.3 $664.5 $615.1 $433.5 $236.9 $104.5 $53.8 $36.0
Ratios to average
net assets:
Expenses........ 0.37% 0.40% 0.38% 0.42% 0.42% 0.46% 0.47% 0.60% 0.69% 0.78%
Net investment
income........ 1.55% 1.95% 2.27% 2.50% 2.43% 2.56% 2.82% 3.23% 2.95% 3.87%
Portfolio turnover
rate............ 5% 1% 1% 2% 1% 1% 1% 18% 15% 16%
Average commission
rate paid per
share........... $0.0235 $0.0250 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.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
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 two years ended December 31, 1997 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
other independent auditors, whose report thereon was also unqualified. Price
Waterhouse LLP's report is included in the Statement of Additional Information.
<TABLE>
<CAPTION>
EQUITY INCOME
-------------------------------------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 19,
DECEMBER 31, 1988(d) TO
---------------------------------------------------------------------------------------------- DECEMBER 31,
1997 1996 1995(a) 1994(a) 1993(a) 1992(a) 1991(a) 1990(a) 1989(a) 1988(a)
--------- --------- --------- -------- -------- -------- -------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value,
beginning of
period.......... $ 18.51 $ 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.......... 0.61 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..... 6.06 2.88 2.50 (0.45) 2.46 0.72 2.43 (0.98) 1.84 0.69
--------- --------- --------- -------- -------- -------- -------- --------- -------- -------------
Total from
investment
operations... 6.67 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.......... (0.57) (0.71) (0.62) (0.56) (0.50) (0.52) (0.54) (0.46) (0.46) (0.42)
Distributions from
net realized
gains........... (2.22) (0.51) (0.73) (0.82) (0.52) (0.32) (0.50) (0.08) (0.29) (0.23)
--------- --------- --------- -------- -------- -------- -------- --------- -------- -------------
Total
distributions... (2.79) (1.22) (1.35) (1.38) (1.02) (0.84) (1.04) (0.54) (0.75) (0.65)
--------- --------- --------- -------- -------- -------- -------- --------- -------- -------------
Net Asset Value,
end of period... $ 22.39 $ 18.51 $ 16.27 $ 14.50 $ 15.66 $ 13.67 $ 13.21 $ 11.24 $ 12.25 $ 10.62
--------- --------- --------- -------- -------- -------- -------- --------- -------- -------------
--------- --------- --------- -------- -------- -------- -------- --------- -------- -------------
TOTAL INVESTMENT
RETURN(b)....... 36.61% 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)....... $2,029.8 $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........ 0.41% 0.45% 0.43% 0.52% 0.54% 0.57% 0.57% 0.60% 0.74% 0.64%(c)
Net investment
income........ 2.90% 3.36% 4.00% 3.92% 3.56% 4.32% 4.53% 4.53% 4.48% 4.08%(c)
Portfolio turnover
rate............ 38% 21% 64% 63% 41% 40% 60% 55% 57% 61%
Average commission
rate paid per
share........... $0.0566 $0.0553 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
EQUITY
------------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
------------------------------------------------------------------------------------------------------------
1997 1996 1995(a) 1994(a) 1993(a) 1992(a) 1991(a) 1990(a) 1989(a) 1988(a)
--------- --------- --------- --------- --------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value,
beginning of
year............ $ 26.96 $ 25.64 $ 20.66 $ 21.49 $ 18.90 $ 17.91 $ 15.45 $ 18.54 $ 15.46 $ 13.62
--------- --------- --------- --------- --------- --------- --------- --------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment
income.......... 0.69 0.71 0.55 0.51 0.42 0.44 0.48 0.58 0.47 0.40
Net realized and
unrealized gains
(losses) on
investments..... 5.88 3.88 5.89 0.05 3.67 2.05 3.42 (1.58) 4.07 1.91
--------- --------- --------- --------- --------- --------- --------- --------- -------- --------
Total from
investment
operations... 6.57 4.59 6.44 0.56 4.09 2.49 3.90 (1.00) 4.54 2.31
--------- --------- --------- --------- --------- --------- --------- --------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net
investment
income.......... (0.70) (0.67) (0.52) (0.49) (0.40) (0.44) (0.48) (0.56) (0.50) (0.47)
Distributions from
net realized
gains........... (1.76) (2.60) (0.94) (0.90) (1.10) (1.06) (0.96) (1.53) (0.96) --
--------- --------- --------- --------- --------- --------- --------- --------- -------- --------
Total
distributions... (2.46) (3.27) (1.46) (1.39) (1.50) (1.50) (1.44) (2.09) (1.46) (0.47)
--------- --------- --------- --------- --------- --------- --------- --------- -------- --------
Net Asset Value,
end of year..... $ 31.07 $ 26.96 $ 25.64 $ 20.66 $ 21.49 $ 18.90 $ 17.91 $ 15.45 $ 18.54 $ 15.46
--------- --------- --------- --------- --------- --------- --------- --------- -------- --------
--------- --------- --------- --------- --------- --------- --------- --------- -------- --------
TOTAL INVESTMENT
RETURN(b)....... 24.66% 18.52% 31.29% 2.78% 21.87% 14.17% 26.01% (5.21)% 29.73% 17.05%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
year (in
millions)....... $6,024.0 $4,814.0 $3,813.8 $2,617.8 $2,186.5 $1,416.6 $1,032.8 $700.5 $675.5 $500.1
Ratios to average
net assets:
Expenses........ 0.46% 0.50% 0.48% 0.55% 0.53% 0.53% 0.51% 0.56% 0.56% 0.57%
Net investment
income........ 2.27% 2.54% 2.28% 2.39% 1.99% 2.33% 2.66% 3.37% 2.66% 2.67%
Portfolio turnover
rate............ 13% 20% 18% 7% 13% 16% 21% 85% 74% 62%
Average commission
rate paid per
share........... $0.0336 $0.0524 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.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for periods less
than a 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 two years ended December 31, 1997 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
other independent auditors, whose report thereon was also unqualified. Price
Waterhouse LLP's report is included in the Statement of Additional Information.
<TABLE>
<CAPTION>
PRUDENTIAL JENNISON
-----------------------------------------
YEAR ENDED
DECEMBER 31, APRIL 25, 1995(d)
------------------ TO
1997 1996 DECEMBER 31, 1995(a)
-------- -------- ---------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of period... $ 14.32 $ 12.55 $ 10.00
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. 0.04 0.02 0.02
Net realized and unrealized gains on
investments.......................... 4.48 1.78 2.54
-------- -------- --------
Total from investment operations... 4.52 1.80 2.56
-------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.04) (0.03) (0.01)
Distributions from net realized
gains................................ (1.07) -- --
-------- -------- --------
Total distributions................ (1.11) (0.03) (0.01)
-------- -------- --------
Net Asset Value, end of period......... $ 17.73 $ 14.32 $ 12.55
-------- -------- --------
-------- -------- --------
TOTAL INVESTMENT RETURN(b)............. 31.71% 14.41% 24.20%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
millions)............................ $495.9 $226.5 $63.1
Ratios to average net assets:
Expenses............................. 0.64% 0.66% 0.79%(c)
Net investment income................ 0.25% 0.20% 0.15%(c)
Portfolio turnover rate................ 60% 46% 37%
Average commission rate paid per
share................................ $0.0590 $0.0603 N/A
</TABLE>
<TABLE>
<CAPTION>
GLOBAL
-------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 19,
DECEMBER 31, 1988(d) TO
---------------------------------------------------------------------------------------------- DECEMBER 31,
1997 1996 1995(a) 1994(a) 1993(a) 1992(a) 1991(a) 1990(a) 1989(a) 1988(a)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value,
beginning of
year............ $ 17.85 $ 15.53 $ 13.88 $ 14.64 $ 10.37 $ 10.79 $ 9.87 $ 11.55 $ 10.51 $ 9.82
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net investment
income.......... 0.09 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..... 1.11 2.94 2.14 (0.74) 4.44 (0.42) 1.02 (1.80) 1.81 0.79
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------------
Total from
investment
operations... 1.20 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.......... (0.13) (0.11) (0.24) (0.02) (0.08) (0.05) (0.10) (0.07) (0.07) (0.15)
Dividends in
excess of net
investment
income.......... (0.10) -- -- -- -- -- -- -- -- --
Distributions from
net realized
gains........... (0.90) (0.62) (0.31) (0.02) (0.11) -- (0.09) (0.01) (0.78) --
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------------
Total
distributions... (1.13) (0.73) (0.55) (0.04) (0.19) (0.05) (0.19) (0.08) (0.85) (0.15)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------------
Net Asset Value,
end of year..... $ 17.92 $ 17.85 $ 15.53 $ 13.88 $ 14.64 $ 10.37 $ 10.79 $ 9.87 $ 11.55 $ 10.51
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------------
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------------
TOTAL INVESTMENT
RETURN(b)....... 6.98% 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
year (in
millions)....... $638.4 $580.6 $400.1 $345.7 $129.1 $34.0 $34.3 $26.2 $29.4 $26.9
Ratios to average
net assets:
Expenses........ 0.85% 0.92% 1.06% 1.23% 1.44% 1.87% 1.62% 1.67% 1.47% 0.42%(c)
Net investment
income........ 0.47% 0.64% 0.44% 0.20% 0.18% 0.49% 0.92% 1.92% 0.70% 0.51%(c)
Portfolio turnover
rate............ 70% 41% 59% 37% 55% 78% 136% 43% 48% 6%
Average commission
rate paid per
share........... $0.0247 $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.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total investment returns for
less than a full 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.
5 - 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, 1997, for the 5 year
and 10 year periods ending on that date, and from the inception date of each
Portfolio to December 31, 1997. 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 TO
INCEPTION YEAR ENDED ENDED ENDED DATE
PORTFOLIO DATE 12/31/97 12/31/97 12/31/97 12/31/97
<S> <C> <C> <C> <C> <C>
- -------------------------- ------------- ----------- ----------- ----------- -------------
MONEY MARKET 5/83 5.41% 4.68% 5.80% 6.46%
DIVERSIFIED BOND 5/83 8.57% 7.84% 9.24% 9.39%
CONSERVATIVE BALANCED 5/83 13.45% 10.74% 11.15% 10.80%
FLEXIBLE MANAGED 5/83 17.96% 13.25% 13.41% 12.18%
HIGH YIELD BOND 2/87 13.78% 11.57% 10.69% 9.30%
STOCK INDEX 10/87 32.83% 19.84% 17.47% 17.92%
EQUITY INCOME 2/88 36.61% 20.22% N/A 16.82%
EQUITY 5/83 24.66% 19.43% 17.54% 15.55%
PRUDENTIAL JENNISON 5/95 31.71% N/A N/A 26.97%
GLOBAL 9/88 6.98% 15.10% N/A 10.10%
</TABLE>
6 - 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 Variable Universal Life Contract may currently invest in 10 of the
Series Fund's portfolios: the Money Market Portfolio, the Diversified Bond
Portfolio, 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, 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 ("SEC") 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 manager of the Series Fund. Prudential's principal
business address is 751 Broad Street, 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 LLC ("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 25.
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, 1997 can be found in the FINANCIAL HIGHLIGHTS table on pages
1 through 5. The portfolio turnover rate is, generally, the
7 - Series Fund
<PAGE>
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 Ratings Services ("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.
8 - 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, page 18.
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 20 through 24, 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.
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% 85%
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, 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, and other equity related securities. The money
market portion of the portfolio will hold high quality money market instruments
of the kind held by the Money Market Portfolio. Moreover, when conditions
dictate a temporary defensive strategy or during temporary periods of portfolio
structuring and restructuring, the 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 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, page
18.
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) make
short sales; and (vi) use interest rate swaps. These techniques are described on
pages 19 through 24, 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
9 - Series Fund
<PAGE>
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
portfolio since 1995 and manages a portion of the portfolio's equity holdings.
The balance of the portfolio's equity holdings are managed to replicate the
performance of the S&P 500 Index. Tony Rodriguez, Managing Director, 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. 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. 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, and other
equity-related securities. The money market portion of the portfolio will hold
high quality money market instruments of the kind held by the Money Market
Portfolio. Moreover, when conditions dictate a temporary defensive strategy or
during temporary periods of portfolio structuring and restructuring, the
Flexible Managed Portfolio may invest, without limit, in high quality money
market instruments of the kind held by the Money Market Portfolio.
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
18.
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) make
short sales; and (vi) use interest rate swaps. These techniques are described on
pages 19 through 24, 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. Warren Spitz,
Managing Director, Prudential Investments, manages a portion of the portfolio's
equity holdings. The balance of the portfolio's equity holdings are managed to
replicate the performance of the S&P 500 Index. Tony Rodriguez, Managing
Director, 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. 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
Conservative Balanced 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 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
11 - Series Fund
<PAGE>
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, 1997, 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:
- --------------------------------------------------------------------------------
Percentage of Total
RATINGS Investments
- --------------------------------------------------------------------------------
AAA/Aaa 0%
AA/Aa 0%
A/A 0%
BBB/Baa 0.2%
BB/Ba 19.4%
B/B 49.6%
CCC/Caa or lower 10.1%
Unrated 20.7%
- --------------------------------------------------------------------------------
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, page 18.
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) make short sales; and (v) use
interest rate swaps. These techniques are described on pages 20 through 24, and
further information about some of them is included in the statement of
additional information.
12 - Series Fund
<PAGE>
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%.
George Edwards, Managing Director, Prudential Investments, has been the manager
of the High Yield Bond Portfolio since 1997. Mr. Edwards also manages the
Prudential High Yield Total Return Fund, Inc. and co-manages the Prudential
Distressed Securities Fund, Inc. Mr. Edwards has held various positions with
Prudential Investments since 1985.
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 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"). S&P 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 S&P 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, 1997 those companies
were: General Electric Co., Coca-Cola Co., Microsoft Corp., Exxon Corp. and
Merck & Co., Inc.
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 1997. 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 Index even if the assets held by the
portfolio do equal that performance.
13 - Series Fund
<PAGE>
- --------------------------------------------------------------------------------
*S&P 500 INDEX WITH DIVIDENDS REINVESTED
ANNUAL PERCENTAGE CHANGE
- --------------------------------------------------------------------------------
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 1997 +33.36
1985 +31.57
- --------------------------------------------------------------------------------
Source: Standard & Poor's Ratings Services. Percentage change calculated in
accordance with specifications of SEC release number IA-327.
- --------------------------------------------------------------------------------
In the last ten years, this portfolio's total return, compared to that of the
S&P 500 Index, was as follows:
- --------------------------------------------------------------------------------
Annual Percentage Change Total Return
S&P 500 Index 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
1997 +33.36 +32.83
- --------------------------------------------------------------------------------
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 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
500 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 21
14 - Series Fund
<PAGE>
through 23. 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 S&P
500 Index futures contracts, 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 S&P 500 Index futures contracts and 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 S&P 500 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, other equity-related securities, 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 investment manager, are of a quality comparable to rated
securities in which the portfolio may invest.
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, page
18.
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 19 through 24, 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.
15 - Series Fund
<PAGE>
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 and other equity-related securities. 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 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, page 18.
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 19 through 24, 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. and the PRICOA Worldwide Investors
Portfolio, US Equity Fund.
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 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 (i.e., rated in the fourth highest rating
category by a nationally recognized rating service (Baa by Moody's or BBB by
S&P) 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.
Moreover, when conditions dictate a temporary defensive strategy or during
temporary periods of portfolio structuring and restructuring, the Prudential
Jennison 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) lend its portfolio
securities; (iii) purchase and sell stock index and foreign currency futures
contracts
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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
19 through 24, 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 S&P 500 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 LLC
("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 and Income Fund, and the Prudential Jennison
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.
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 common stocks and other equity-related 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, page 18.
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 19 through 24, 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
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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, Ingrid Holm, Vice
President, Prudential Investments, and Michelle Picker, Vice President,
Prudential Investments, have been co-managers of the Global Portfolio since
1997. Mr. Duane has managed the Global Portfolio since 1990 and also manages
several funds including the Prudential World Fund, Inc., Global Series. Ms. Holm
has assisted in the management of several mutual funds since 1994 and manages a
portion of Prudential's general account. Prior to 1994, Ms. Holm headed the high
yield research group for Prudential's general account. Ms. Picker has been an
analyst in Prudential's global equity investments group since 1992 and has also
managed a portion of Prudential's general account.
CONVERTIBLE SECURITIES
The Conservative Balanced, Flexible Managed, Equity Income, Equity, Prudential
Jennison, and Global Portfolios may invest in convertible securities and such
securities may constitute a major part of the holdings of the Equity Income and
Global 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 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 and Prudential Jennison 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 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
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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 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 21 through 23.
OPTIONS ON EQUITY SECURITIES
The Conservative Balanced, Flexible Managed, Equity Income, Equity, Prudential
Jennison, 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 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, U.S. Government securities or other liquid
unencumbered assets 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, U.S. Government
securities or other liquid unencumbered assets in a segregated account with its
custodian.
The Conservative Balanced, Flexible Managed, Equity Income, Equity, Prudential
Jennison, 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
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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 and OPTIONS ON
STOCK INDICES, page 21.
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, 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, U.S. Government securities or other liquid unencumbered
assets 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 19. A
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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 SEC 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 Income, Equity, Prudential
Jennison, 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
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, 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 18 and
futures contracts on foreign currencies (discussed under FUTURES CONTRACTS, page
22) will be employed. Options on foreign currencies are similar to options on
stock,
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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 investment 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 Income, Equity,
Prudential Jennison, and Global Portfolios may, to the extent permitted by
applicable regulations, purchase and sell stock index futures contracts. A stock
index futures contract is an agreement between the buyer and the seller of the
contract to transfer an amount of cash equal to the daily variation margin of
the contract. No physical delivery of the underlying stocks in the index is
made.
The Diversified Bond, Conservative Balanced, Flexible Managed, High Yield Bond,
and Global Portfolios may, to the extent permitted by applicable regulations,
purchase and sell 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, and Global Portfolios may, to the extent permitted by applicable
regulations, purchase and sell futures contracts on foreign currencies or groups
of foreign currencies.
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."
A portfolio may purchase or sell futures contracts without limit for hedging
purposes and may purchase and sell such contracts for non-hedging purposes
provided the initial margins and premiums associated with the contracts do not
exceed 5% of the fair market value of the portfolio's assets, taking into
account unrealized profits and unrealized losses on any such futures. Hedging is
generally considered to be the use of futures to reduce the risk of a particular
position in a security. For example, a portfolio manager might attempt to reduce
the risk of investment in equity securities by hedging a portion of its equity
portfolio through the use of stock index futures contracts. Subject to the
limitation discussed above, futures may also be utilized by a portfolio for
non-hedging uses, such as for investment purposes, to enhance income or to
adjust its asset mix. An example of non-hedging use of futures would be if the
investment manager expects bonds to outperform stocks, it may purchase interest
rate futures contracts rather than actually selling stocks and buying bonds.
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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, and Global Portfolios may enter into certain transactions
involving options on stock index futures contracts; the Diversified Bond,
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, 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.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The Diversified Bond 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
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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 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,
Conservative Balanced, Flexible Managed, High Yield Bond, Equity Income, Equity,
Prudential Jennison, 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 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, 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 Portfolio) 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 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.
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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, qualified banks and certain
institutional investors 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 entities 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 7) 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
manager, 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 as an investment advisor under the
Investment Advisers Act of 1940. Prudential's principal business address is 751
Broad Street, Newark, New Jersey 07102-3777.
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. Total assets under management as of
December 31, 1997 were over $370.4 billion which includes over $251.6 billion
owned by Prudential and approximately $118.8 billion of external assets under
Prudential's management.
Subject to Prudential's supervision, substantially all of the investment
advisory services provided to the Series Fund by Prudential are furnished, with
respect to nine of the Series Fund's ten 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, 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
25 - Series Fund
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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, and Equity Income Portfolios that fee is equal
to an annual rate of 0.40% 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 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 0.60% 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.
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. Currently, 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
751 Broad Street, Newark, New Jersey 07102-3777. Subject to Board approval,
during the second quarter of 1998 Prusec's responsibilities as principal
underwriter will be assigned to Prudential Investment Management Services LLC
("PIMS"). PIMS, also an indirect wholly-owned subsidiary of Prudential, is a
limited liability corporation organized under Delaware law in 1996. PIMS will
act as principal underwriter under substantially the same terms as Prusec does
currently. Both Prusec and PIMS are registered as broker-dealers under the
Securities Exchange Act of 1934 and are members of the National Association of
Securities Dealers, Inc. PIMS' principal business address is 751 Broad Street,
Newark, New Jersey 07102-3777.
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 SEC 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 SEC 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 SEC 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, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day. In the event the NYSE 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 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.
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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, below. 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 Conservative Balanced and Flexible Managed Portfolios
(collectively, the "Balanced Portfolios"), Stock Index, Equity Income, Equity,
Prudential Jennison, and Global Portfolios will be determined in the following
manner. NASDAQ National Market System equity securities and securities for which
the primary market is on an exchange are generally valued at the last sale price
on such system or exchange on that day or, in the absence of recorded sales, at
the mean between the most recently quoted bid and asked prices on that day or at
the bid price on such day in the absence of an asked price. Other
over-the-counter equity securities are valued by an independent pricing agent or
principal market maker. Convertible debt securities that are actively traded in
the over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at the mean between the
most recently quoted bid and asked prices provided by a principal market maker.
Corporate bonds (other than convertible debt securities) and Government bonds
held by the Balanced and Equity Income 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.
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, other than the Money Market Portfolio, 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 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). 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
27 - Series Fund
<PAGE>
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. 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.
Any portfolio investing in foreign securities 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. As of
the date of this prospectus, the shares of Capital Stock are divided into
fifteen classes: Money Market Portfolio Capital Stock, Diversified Bond
Portfolio Capital Stock, Government Income Portfolio Capital Stock, Zero Coupon
Bond Portfolio 2000 Capital Stock, Zero Coupon Bond Portfolio 2005 Capital
Stock, Conservative Balanced Portfolio Capital Stock, Flexible Managed Portfolio
Capital Stock, High Yield Bond Portfolio Capital Stock, Stock Index Portfolio
Capital Stock, Equity Income Portfolio Capital Stock, Equity Portfolio Capital
Stock, Prudential Jennison Portfolio Capital Stock, Small Capitalization Stock
Portfolio Capital Stock, Global Portfolio Capital Stock, Natural Resources
Portfolio Capital Stock. 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
26.
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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. 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, Prudential and/or the other insurers with separate accounts which
invest in the Series Fund 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. Prudential
and/or the other insurers with separate accounts which invest in the Series Fund
have agreed to be responsible for reporting any potential or existing conflicts
to the Board of Directors. Moreover, they 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, and High Yield 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 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.
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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 751 Broad Street, Newark, New Jersey 07102-3777.
YEAR 2000
The services provided to the Series Fund and its shareholders by Prudential,
PIC, Jennison, as well as the Series Fund's principal underwriter and its
custodians, depend on the smooth functioning of their computer systems and those
of their outside service providers. Many computer software systems in use today
cannot distinguish the year 2000 from the year 1900 because of the way dates are
encoded and calculated. Such event could have a negative impact on handling
securities trades, payments of interest and dividends, pricing and account
services. Although at this time, there can be no assurance that there will be no
adverse impact on the Series Fund, Prudential, PIC, Jennison, as well as the
Series Fund's principal underwriter and its custodians, have advised the Series
Fund that they have been actively working on necessary changes to their computer
systems to prepare for the year 2000 and expect that their systems, and those of
their outside service providers, will be adapted in time for that event.
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 SEC. The omitted information may be obtained from the SEC's
principal office in Washington, D.C., upon payment of the fees prescribed by the
SEC.
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.
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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 Ratings Services ("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. Any guarantee relied upon
by the Money Market Portfolio to comply with the credit quality, maturity or
liquidity requirements of Investment Company Act Rule 2a-7 must comply with the
rating requirements above unless excepted by the Rule.
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
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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 23 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 High Yield
Bond 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
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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
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
