<PAGE>
The
Prudential
Series Fund, Inc.
[PHOTO]
Annual Report
to Contract Owners
Pruco Life's PRUvider(SM)
Pruco Life of New Jersey's PRUvider(SM)
December 31, 1997
[LOGO] Prudential
The Prudential Insurance Company of America
751 Broad Street
Newark, NJ 07102-3777
<PAGE>
[LOGO]==========================================================================
This report may be used with the public only when preceded or accompanied by
current prospectuses for The Prudential Series Fund, Inc., the applicable
variable life or variable annuity product and the current Performance Data
Update for the applicable product. The Performance Data Update shows historical
investment performance after the deduction of investment management fees,
investment-related expenses and the product's Mortality and Expense Risk Charge.
For the variable life insurance products, additional contract charges include
the cost of insurance, administrative, sales and any applicable withdrawal or
surrender charges. These charges will reduce the rates of return shown on the
Performance Data Update. For the variable annuity products, the Performance Data
Update provides returns that are net of all contract charges, including
applicable surrender or withdrawal charges. The prospectuses contain complete
information concerning charges and expenses, including hypothetical performance
illustrations that show the effects of performance on various assumptions, and
should be read carefully before you invest or send money.
Variable life and variable annuity products are offered by Pruco Securities
Corp., a subsidiary of The Prudential Insurance Company of America. Both are
located at 751 Broad Street, Newark, NJ 07102-3777.
<PAGE>
================================================================================
Table of Contents
I. Letter to Contract Owners 2
1. Market Review 4
2. Investment Advisor's Outlook 8
3. Individual Portfolios
Conservative Balanced Portfolio 10
Flexible Managed Portfolio 12
II. The Prudential Series Fund, Inc.
1. Financial Statements A1
2. Schedule of Investments B1
3. Notes to Financial Statements C1
4. Financial Highlights D1
5. Report of Independent Accountants E1
<PAGE>
Year End December 31, 1997
Letter
To Contract Owners
[PHOTO]
E. Michael Caulfield
President
================================================================================
"We're quite pleased with the return on stocks in the last three years, but we
don't think this divergence from historical norms can continue indefinitely."
Dear Contract Owner:
We are pleased to provide our Annual Report to you on the investment
performance of the two portfolios of The Prudential Series Fund, Inc., which are
available to you in your PRUvider(SM) variable life insurance contract.
It has been another exceptional year. For the third year in a row (and the first
time in history), stock prices have risen by more than 20%, driven by
unexpectedly high corporate profits and surprisingly low inflation. Bonds also
performed quite well, with total returns averaging just below 10%.
We live in remarkable times. The U.S. economy grew by almost 4.0% in 1997, yet
inflation fell to 1.7%, the lowest since oil prices collapsed 11 years ago.
Unemployment dipped below 5% for the first time since the 1970s. And consumer
confidence was the highest in 28 years. Yet, we live in a global economy. The
economic turmoil, stock market and currency declines in Asia impacted global
markets in the fourth quarter and the economic effects on the world's growth are
not yet clear.
How Did the Portfolios Perform?
You'll be pleased to know that The Prudential Series Fund Conservative Balanced
and Flexible Managed Portfolios delivered returns consistent with the strategies
around which they were designed. Both the Conservative Balanced and the Flexible
Managed Portfolios hold a combination of stocks, bonds and money market
securities.
The Conservative Balanced Portfolio holds less in stocks, which generally makes
it less volatile, and may also reduce returns when stock prices are rising. The
Flexible Managed Portfolio hold more in stocks, which makes it more volatile,
but raises the possibility of higher returns when stocks are rising in price.
It's Long-Term Performance That Counts.
Although in this Report we're focusing primarily on one-year performance,
remember that it's long-term performance that counts. Review your Portfolio's
1997 performance, but also be sure to examine its longer-term record as well.
You'll note that over the past 5 and 10 years, the Portfolios have delivered
excellent performance, both on an absolute basis and in comparison with funds
having similar objectives as reported by Lipper Analytical Services.
2
<PAGE>
Our goal is to achieve this kind of above-average investment performance over
time. Such consistency is important because most people purchase variable life
and variable annuity products to finance long-term goals. We encourage you to
consider future returns rather than focusing on past performance. As always,
remember that past performance is no guarantee of future results.
What Goes Up Can Also Go Down.
While discussing the long-term, we think it's crucial to remind Contract Owners
that stocks have offered a 10.7% average annual return over the last 70
years--about half of what they have given us over the last three years. And
since 1980, corporate revenues have risen 4% a year, while earnings have risen
almost twice as fast and stock prices four times as much.
Can this continue? We're quite pleased with the return on stocks in the last
three years, but we don't think this divergence from historical norms can
continue indefinitely. It's simply the law of averages. We must remember that
with return comes risk--that stocks can and do go down as well as up. If you
have benefited more than you expected in recent years, then at some point you
will surely benefit less. The only question is: When? Given the very serious
economic crisis in Asia, it could be sooner rather than later.
With this in mind, your Prudential Representative/Pruco Securities Registered
Representative stands ready to discuss these issues and to assist you in any way
he or she can. We believe that your personal financial representative--one who
understands you and your long-term investment needs--is a valuable resource
given today's often volatile market.
All of us at Prudential thank you for your business and look forward to helping
you plan for your future financial security.
/s/ E. Michael Caulfield /s/ Mendel A. Melzer, CFA
E. Michael Caulfield Mendel A. Melzer, CFA
President Chairman
January 30, 1998
[PHOTO]
Mendel A. Melzer, CFA
Chairman
================================================================================
Important Note
The rates of return quoted on the following pages reflect the deduction of
investment management fees and investment-related expenses, but not product
charges. They reflect the reinvestment of dividend and capital gains
distributions. They are not an estimate or a guarantee of future performance.
Contract unit values increase or decrease based on the performance of the
Portfolio and, when redeemed, may be worth more or less than their original
cost. Changes in contract values depend not only on the investment performance
of the Portfolio but also on the insurance and administrative charges,
applicable sales charges, and the mortality and expense risk charge applicable
under the contract. These contract charges effectively reduce the dollar amount
of any net gains and increase the dollar amount of any net losses.
Your Prudential Representative/Pruco Securities Registered Representative can
provide you with actual rates of return for your type of variable life insurance
or annuity contract and show you a personalized illustration of how insurance
charges affect the returns you experience.
- --------------------------------------------------------------------------------
3
<PAGE>
1997
Market Review
================================================================================
How the Markets Compared.(1)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Average Retun Over
Past 20 Years
1997 (Annualized)
---- ------------
<S> <C> <C>
Money Markets 4.9% 7.7%
Bonds 9.8% 9.7%
Foreign Stocks 16.2% 15.0%
U.S. Stocks 33.4% 16.7%
</TABLE>
- --------------------------------------------------------------------------------
This chart compares the 12-month return as of 12/31/97 for various categories
of investments with the average annual total return over 20 years for the same
investment. As you can see, stock and bond market returns can vary considerably
from year to year. Unlike stocks, bonds generally offer a fixed rate of return
and principal if held to maturity. An investment's past performance should
never be used to predict future results. There are different risks associated
with each investment sector, which should be carefully considered before
investing.
(1) Source: Prudential. For purposes of comparison only. U.S. money markets as
measured by Lipper Money Market Average. Bonds as measured by the Lehman
Brothers Gov't. Corp. Index. Foreign stocks as measured by the Morgan
Stanley Capital International World Index. U.S. stocks as measured by the
S&P 500 Index.
U.S. Stocks
Nothing Short of Spectacular.
U.S. stocks rose more than 20% for the third straight year for the first time in
history--measured by either the Dow Jones Industrial Average (the "Dow Jones")
or the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500").
Unexpectedly high corporate profits and exceptionally low inflation, plus strong
economic growth and the lowest unemployment rate and highest consumer confidence
in 28 years, all combined to drive emotions in the stock market to euphoric
levels.
The numbers were impressive, considering that stocks have gained only 10.7% on
average over the last 70 years. In 1997, the S&P 500 gained 33%, after rising
23% in 1996 and 37% in 1995.
Only in October did a reality check set in, when the market fell briefly by 10%
in what market professionals called a correction. But stock prices quickly
rebounded, and many major indexes moved on to new highs.
Still, the momentum of the market had clearly slowed by year-end as investors
became increasingly concerned about the economic crisis in Asia and how severely
it might affect corporate earnings in 1998.
Large, Value Stocks Dominated.
Large company stocks continued to lead the market higher in 1997. For example,
the small company-oriented Russell 2000 Index rose 22.4% during calendar year
1997, nearly 12 percentage points behind the S&P 500.
Financial stocks rose 49% in 1997 as consolidation continued to sweep the
industry and long-term interest rates fell to their lowest levels since 1993.
Banks and stock brokerage firms are continuing to achieve economies of scale
through acquisitions.
4
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Financial Stocks Top.
1997
-----
<S> <C>
Finance 48.7%
Consumer Growth 36.9%
Consumer Cyclical 36.7%
Utilities 35.9%
Technology 27.1%
Energy 25.6%
Industrials 21.9%
- --------------------------------------------------------------------------------
</TABLE>
Source: Prudential.
<TABLE>
<CAPTION>
================================================================================
Large Stocks Outperformed Small Stocks.
20-Year
1997 Average
---- -------
<S> <C> <C>
S&P 500* 33.4% 16.7%
NASDAQ* 21.6% 14.5%
Russell 2000* 22.4% 15.9%
- --------------------------------------------------------------------------------
</TABLE>
*The Standard & Poor's 500, NASDAQ and Russell 2000 are unmanaged indexes that
are considered to be generally representative of U.S. stock markets. Investors
cannot invest directly in indexes or market averages. Past performance is no
guarantee of future results.
Consumer growth stocks finished second, narrowly nosing out
consumer cyclical stocks for the year. Media, drugs and leisure led
the consumer growth stocks, with Tele-Communications, Inc. (TCI) doubling,
Comcast rising 78% and Gannett up 68%. Among the pharmaceuticals,
Schering-Plough and Lilly nearly doubled, while Pfizer rose 82% during the same
period. Retailers led the consumer cyclical stocks, with Gap, Costco, Tandy and
Home Depot each up about 77% for the year.
================================================================================
The Dow in the Past Twelve Months
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
1997 Dow
- ---- --------
<S> <C> <C>
Jan 6806.16
Feb 6877.74
Mar 6583.48
In March and April,
fears of higher interest
rates shook the market.
Apr 7008.99
May 7331.04
Jun 7962.31
Jul 8222.61
July 16 The Dow passes
the 8,000-point mark for
the first time
Aug 7622.42
Sep 7945.26
Oct 7442.08
Oct 28 The Dow surged
337 points, its largest
point gain ever, rising 4.71%
Nov 7823.13
Dec 7908.25
- --------------------------------------------------------------------------------
</TABLE>
Daily close of the Dow Jones Industrial Average for the past twelve months.
Technology stocks fared well for much of the year but tumbled in the fourth
quarter on worries about Asia, losing 12%, bringing their return for the year to
27%. Utilities stocks led all other market sectors in the quarter, rising 19% in
the last three months of 1997 as long- term interest rates fell sharply and
investors sought companies with safe earnings streams. Interestingly, for the
year, utilities beat the S&P 500.
5
<PAGE>
1997
Market Review
continued
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
================================================================================
30-Year U.S. Treasury Yields.
1997 Yield
- ---- -----
<S> <C>
Jan 6.73
Feb 6.7
Mar 6.81
Apr 7.12
May 6.87
Jun 6.77
Jul 6.63
Aug 6.45
Sep 6.64
Oct 6.29
Nov 6.16
Dec 6.08
- --------------------------------------------------------------------------------
</TABLE>
Monthly closing yields for the past twelve months. Source: Bloomberg, as of
12/31/97.
High Yield Bonds Performed Best.
<TABLE>
<CAPTION>
1997
-----
<S> <C>
High Yield Bonds 12.8%
Corporate Bonds 10.2%
Aggregate Index 9.7%
Government Bonds 9.6%
Mortgage Bonds 9.5%
- -------------------------------------------------------------------------------
</TABLE>
Source: Lehman Brothers, as of 12/31/97.
Bonds
Inflation Fell Sharply, Pushing Prices Higher.
Nineteen ninety-seven was a very good year for bonds, as inflation fell below 2%
for the first time in 11 years and long-term interest rates dipped to their
lowest level since 1993.
Bonds returned a healthy 9.65% for the year as measured by the Lehman Brothers
Aggregate Index, led by high yield bonds in the United States, which returned
12.76%.
A financial crisis in Asia late in the year set off a major rally in the U.S.
Treasury market, where the 30-year bond returned more than 15% in 1997 as the
yield fell by nearly three-quarters of a percentage point to 5.92% at year-end.
Worldwide, investors bought Treasurys after Southeast Asian currencies collapsed
under the weight of excesses in the financial sector and overinvestment in real
estate and infrastructure.
Fundamentally, economic conditions were nearly ideal for bond investors, as
inflation seemed to be slowly fading away. Prices at the wholesale level
actually fell by 1.7% as measured by the government's Producer Price Index, but
at the retail level prices continued to rise, even if only by 1.7%, as measured
by the Consumer Price Index. Still, that was the lowest increase in 11 years,
and nearly half of 1996's rate.
As interest rates fell, home mortgage refinancings rose, with 30-year rates
falling below 7%. Others, including noted investor Warren Buffett, were reported
to be investing in bonds, and cash flows into bond mutual funds quadrupled in
1997.
High yield corporate bonds led all other sectors of the U.S. bond market in 1997
as corporate profits climbed unexpectedly higher while economic growth surged.
The lowest-rated bonds performed the best. Nineteen ninety-seven was another
record-breaking year for newly issued high yield bonds. These bonds were in such
demand in 1997 that the interest rate premium they commanded over U.S. Treasurys
reached all-time lows in October.
6
<PAGE>
Foreign Stocks
A Plunge in the Pacific.
Asian stock markets plunged in 1997 as Southeast Asian currencies collapsed
under the weight of excesses in the financial sector and overinvestment in real
estate and infrastructure. Currencies in some countries fell by nearly 50%
against the U.S. dollar. Credit and cash became scarce and economies slowed. The
financial crisis eventually reached Japan, helping to halt a nascent economic
recovery.
The Morgan Stanley Capital International Pacific Index fell 25% during the year
as stocks in Thailand dropped 77%, Indonesia 74% and Malaysia 68%, all in U.S.
dollar terms. Even older, larger, more developed Pacific Basin countries did not
escape unscathed. Economic malaise continued to linger in Japan, where stocks
dropped almost 24% in U.S. dollars for the year.
European Stocks Performed Well.
In Europe, stocks performed quite well during the year, rising over 24% for
U.S.-based investors despite a strong dollar. Developing countries were strong,
such as Portugal, up 48%, and older, more established stock exchanges also
posted excellent returns, with Switzerland rising 45%, Italy up 36% and Germany
ahead 25%, all measured by Morgan Stanley in U.S. dollars. European stocks
benefited as the movement toward a European economic union fostered less
government borrowing and thus lower interest rates, which stimulated the
sluggish economies of Germany and France and led to rapid growth in smaller
countries on the periphery, such as Ireland.
In addition, corporate restructuring continued to improve
productivity, driving double-digit earnings gains. Europe has also
been the region least affected by economic turmoil in Asia, its stock prices are
less expensive than those in the United States, and Europe is earlier in its
economic growth cycle than the United States, which is now in its seventh year
of economic recovery.
<TABLE>
<CAPTION>
================================================================================
Foreign Markets.
1997
----
<S> <C>
MSCI Europe Index 24.2%
MSCI World Index 16.2%
MSCI EAFE Index 2.1%
MSCI Japan Index (23.6)%
MSCI Pacific Index (25.3)%
S&P 500 Index 33.4%
- --------------------------------------------------------------------------------
</TABLE>
Source: Morgan Stanley Capital International.
The Morgan Stanley Capital International (MSCI) World Index is a weighted,
unmanaged index of the performance of 1,472 securities listed on the stock
exchanges of the U.S., Europe, Canada, Australia, New Zealand and the Far East.
Investors cannot invest directly in an index.
Morgan Stanley country indexes [Europe, Asia, Far East (EAFE), Pacific and
Japan] are unmanaged indexes that include stocks making up the largest
two-thirds of each country's total stock market capitalization. This chart is
for illustrative purposes only and is not indicative of the past, present or
future performance of any specific investment. Investors cannot invest directly
in stock indexes.
The Standard & Poor's 500 is a weighted, unmanaged index comprised of 500
stocks, which provides a broad indicator of stock price movements.
7
<PAGE>
1998
Investment Advisor's Outlook
The Economy
Expect Slower Growth.
Our economists at Prudential forecast slower economic growth plus a slight
increase in inflation and unemployment in 1998. They are looking for the U.S.
economy to grow slower than 2%, less than half as fast as it grew in 1997. We
believe inflation will remain acceptable, but that the Consumer Price Index may
rise as much as 2.2%, somewhat faster than 1997's 1.7%. As demand for U.S.
exports slows in Asia, unemployment should rise toward 5.5%, up from December's
4.7%.
Prudential's economists expect short-term interest rates to fall by half a
percentage point in 1998, and long-term rates to end the year close to where
they began--at around 6%. Our economists forecast that the Federal Reserve Bank
will lower interest rates by a quarter of a percentage point in the spring and
another quarter point in the summer, bringing the federal funds rate (or
overnight bank lending rate) down to 5%. As of this writing in early January,
interest rates on government bonds maturing in 10 years or less were priced to
yield below 5.50%, the official overnight lending rate.
U.S. Stocks
We're Looking for an Average Year.
We said it last year. And the year before. Each year we've said that surely the
U.S. stock market would not rise by 20% again in the following year. But the
market has done just that now for three years in a row--for the first time in
history. Can this remarkable performance continue? Over the last 70 years, the
historical average return for stocks is only about 10.7%. This year, more than
ever, we expect that stocks will turn in a performance much closer to average.
We're cautious, conservative investors, so we build our portfolios
one stock at a time. This year, with continued economic growth and modest
inflation expected, we believe that earnings will be the key force driving stock
market performance. We'll be looking even more closely than usual at a company's
ability to meet its corporate earnings expectations, because investors have
become very unforgiving of even the slightest shortfall in earnings.
8
<PAGE>
In the United States, we are particularly interested in smaller company stocks,
because we believe they are very attractively priced, considering their earnings
expectations. These stocks have trailed large company stocks for several years
now, but small company stocks have historically fared better than larger company
stocks.
U.S. Bonds
Off to a Great Start.
The U.S. bond market performed well in the early days of 1998 as the interest
rates on the 30-year U.S. Treasury fell to their lowest level since the
government first started to sell them regularly in 1977.
Despite the rally, interest rates remain quite favorable when adjusted for
inflation. So if we experience slower economic growth and continued low
inflation, bond holders may yet enjoy more price appreciation in addition to
their coupon income.
We are firm believers in corporate bonds, which we expect will continue to
perform well as the economy grows and the effects of the Asian economic crisis
are more fully understood in the months ahead. Similarly, we expect certain
emerging markets bonds that have been badly beaten down by this crisis to return
to more realistic price levels.
Foreign Stocks
Watching Closely.
Overseas, we are watching the Asian situation closely, but believe it may be too
early to make a substantial commitment there. We are being selective, choosing
stocks rather than countries. In Europe, we expect strong economies and stock
markets in 1998 as companies there continue to restructure.
================================================================================
A Reality Check.
Stock prices in general have nearly doubled in the last three years. We're quite
pleased with the unusually high returns that stocks have provided for our
Contract Owners over the past few years and we are certain that you are, too.
Those types of returns bring you closer to your goals of financial security
faster than you might have expected.
Since 1927, the U.S. stock market's average return has been 10.7%, as measured
by the S&P 500. Yet, in recent years returns have been much higher, as the chart
below shows.
<TABLE>
<CAPTION>
================================================================================
Returns of the U.S. Stock Market.
Average
Annual
Return
------
<S> <C>
Last 70 Years
1927-1997 10.7%
Source: Ibbotson Associates.
Last Three Years
1995 37.4%
1996 23.0%
1997 33.4%
</TABLE>
Source: Lipper Analytical Services, Inc.
As much as we would like this tremendous performance to continue year after
year, we know it cannot. It's simply the law of averages.
9
<PAGE>
Prudential
Conservative Balanced Portfolio
Performance Summary.
It was the third consecutive extraordinary year for both stocks and bonds. Your
Portfolio--which invests in a conservative mix of bonds, stocks and money market
securities--gained 13.45%. It trailed the 18.95% return of the Lipper (VIP)
Balanced Fund Average, because the Portfolio's conservative mandate requires a
smaller proportion of equities in the asset allocation than typical balanced
portfolios. In addition, a financial crisis in Asia led U.S. investors to turn
to stocks of the most familiar, and larger, companies and to U.S. Treasury
bonds. This move produced a sharp reversal in the fourth quarter of the relative
strength of the smaller and mid-sized stocks that had provided an extra lift to
our earnings earlier in the year. It also severely limited the gains on our bond
holdings.
The Portfolio may invest in foreign securities. Foreign investments are subject
to the risk of currency fluctuation and the impact of social, political and
economic change.
<TABLE>
<CAPTION>
================================================================================
Average Annual Returns Through December 31, 1997
One Three Five Ten
Year Years Years Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Conservative Balanced(1) 13.45% 14.43% 10.74% 11.15%
- --------------------------------------------------------------------------------
Lipper (VIP) Balanced Avg.(2) 18.95% 18.16% 12.34% 12.31%
- --------------------------------------------------------------------------------
S&P 500(3) 33.35% 31.13% 20.25% 18.02%
- --------------------------------------------------------------------------------
Lehman Gov't./Corp. Bond Index(4) 9.76% 10.43% 7.61% 9.14%
- --------------------------------------------------------------------------------
</TABLE>
Conservative Balanced Portfolio inception date: 5/13/83.
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
[PLOT POINTS TO COME]
<TABLE>
<CAPTION>
================================================================================
$10,000 Invested Over Ten Years
$52,448 $31,981 $28,771 $23,988
S&P Lipper (VIP) Conservative Lehman Gov't/.
500(3) Balanced Average(2) Balanced Portfolio(1) Corp Bond Index(4)
------ ------------------- --------------------- ------------------
<S> <C> <C> <C> <C>
1987 $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00
1988 11,031.90 11,282.40 10,758.00 11,656.20
1989 13,236.40 13,738.20 12,289.30 15,343.30
1990 13,424.90 14,000.80 13,307.40 14,866.30
1991 16,839.70 17,561.80 15,453.30 19,385.60
1992 18,028.70 18,897.90 16,624.90 20,860.50
1993 20,288.90 21,841.90 18,458.80 22,958.40
1994 19,871.20 21,150.80 17,811.20 23,260.00
1995 24,758.30 26,254.80 21,238.50 31,990.30
1996 28,364.90 29,834.90 21,855.00 39,330.50
1997 33,796.00 35,194.30 23,987.50 52,447.60
- --------------------------------------------------------------------------------
</TABLE>
(1) Past performance is not predictive of future performance. Portfolio
performance is net of investment fees and fund expenses but not product
charges.
(2) The Lipper Variable Insurance Products (VIP) Balanced Average is calculated
by Lipper Analytical Services, Inc., and reflects the investment return of
certain portfolios underlying variable life and annuity products. These
returns are net of investment fees and fund expenses but not product
charges.
(3) The S&P 500 is a capital-weighted index representing the aggregate market
value of the common equity of 500 stocks primarily traded on the New York
Stock Exchange. The S&P 500 is an unmanaged index that includes the
reinvestment of all dividends but does not reflect the payment of
transaction costs and advisory fees associated with an investment in the
Portfolio. The securities that comprise the S&P 500 may differ
substantially from the securities in the Portfolio. The S&P 500 is not the
only index that may be used to characterize performance of this Portfolio,
and other indexes may portray different comparative performance.
(4) The Lehman Government/Corporate Bond Index is comprised of government and
corporate bonds. The Index is an unmanaged index that includes the
reinvestment of all interest but does not reflect the payment of
transaction costs and advisory fees associated with an investment in the
Portfolio. The securities that comprise the Index may differ substantially
from the securities in the Portfolio. The Lehman Gov't./Corp. Bond Index is
not the only index that may be used to characterize performance of income
funds, and other indexes may portray different comparative performance.
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
================================================================================
<TABLE>
<S> <C>
Low Risk Fixed Income
BALANCED
High Yield Bond
Diversified Stock
High Risk Specialized
- --------------------------------------------------------------------------------
</TABLE>
Investment Goal
Favorable total return consistent with a more conservatively managed diversified
portfolio.
Types of Investments
Money market instruments, bonds and common stocks of both established and
smaller companies.
Investment Style
The Portfolio management team holds a baseline allocation of 35% stocks, 35%
bonds and 30% money market instruments.
Performance Review.
We Thought 1997 Would Be a Good Year for Bonds. So we reallocated about 25% of
our assets from lower yielding money market instrument to intermediate bonds.
They performed well in 1997 and provided a return approaching that of our
long-term bonds. Our bonds included some southeastern Asian debt, which reduced
our returns in the fourth quarter.
In our stock portfolio, we increased diversification at mid-year to reduce
volatility. To our value stocks (stocks trading at low prices compared to their
underlying business strength), we added growth stocks (stocks with particularly
strong earnings prospects). However, we held more smaller and mid-sized
companies than the S&P 500, and this year's disappointing returns for stocks of
smaller companies caused our stock portfolio to lag the broader market.
10
<PAGE>
Strategy Session.
The Impact of the Asian Crisis. Economic and financial market conditions in Asia
had a large impact on global security markets in the latter part of 1997 and we
are making decisions to protect your Portfolio in 1998. We believe the turmoil
in Southeast Asia will have a detrimental impact on the profits of U.S.
companies. However, we believe this Portfolio's conservative guidelines do not
require lower exposure to stocks except in severe bear markets, which we do not
expect in 1998. Unless we see a prospect of rising interest rates, we will
continue our present allocation of intermediate bonds.
On Stocks. In our stock portion of the Portfolio, our growth stock purchases are
focusing on industries that are relatively protected from a slowing economy,
such as health care and food and drug retailers. We also believe investors
overreacted to the impact of the Asian economic crisis on technology stocks, so
we took advantage of lower prices in the fourth quarter of 1997 to add to our
holdings. One of the focuses of our value stocks was industrials. The earnings
of industrial companies tend to vary with the rate of economic growth, so their
stock prices suffered in the last quarter of 1997. However, these companies have
improved their profitability since the beginning of this economic cycle and we
believe they are better positioned to withstand a downturn than previously. They
were inexpensive when we bought them and now are the best-priced sector of the
market. We think their earnings will beat expectations and stock prices will
rise.
And on Bonds. Although we expect emerging markets bonds to recover somewhat, we
do not expect enough bounce to warrant an increased exposure. We are reducing
our holdings as we see a return to fair value. We also expect to reduce our
holdings of corporate bonds, as they no longer provide enough return advantage
over Treasurys to warrant a significant over-weighting.
Outlook
PORTFOLIO MANAGER
Mark Stumpp
Value and Growth.
"Nineteen ninety-seven marked the third consecutive year of outstanding stock
market returns. Investors tend to extrapolate the recent past into the future:
many market participants are convinced that the rally can proceed indefinitely.
For example, analysts currently project that corporate earnings will grow at an
annual rate of nearly 14% over the next five years. When adjusted for today's
low rate of inflation, that's the highest rate of growth on record. (Earnings
grew only 7.8% a year between 1982 and 1996, and have averaged 7.6% a year over
the past 75 years.) With the expanding recessions in Asia, and most of the gains
from corporate cost-cutting already achieved, we believe that earnings will tend
to disappoint in 1998. We do not foresee a bear market but do expect continued
volatility and performance more consistent with the historical norm."
PORTFOLIO MANAGERS
[PHOTO]
Mark Stumpp
[PHOTO] [PHOTO]
Warren E. Spitz Patricia A. Bannan
[PHOTO]
Tony Rodriguez
<TABLE>
<CAPTION>
================================================================================
Portfolio Composition
as of 12/31/97
--------------
<S> <C>
Bonds 59%
Stocks 34%
Money Market 7%
</TABLE>
<TABLE>
<CAPTION>
================================================================================
Top Sectors - Stocks
as of 12/31/97
--------------
Consumer Growth 32.8%
Technology 16.4%
Industrials 15.8%
Finance 12.4%
Consumer Cyclical 11.7%
Energy 8.4%
Utilities 2.5%
<CAPTION>
Top Sectors - Bonds
as of 12/31/97
--------------
<S> <C>
Industrials 44.5%
Foreign (US$) 21.1%
Financial 20.8%
Other 8.6%
U.S. Treasurys 5.0%
- --------------------------------------------------------------------------------
</TABLE>
Source: Prudential. Holdings are subject to change.
11
<PAGE>
Prudential
Flexible Managed Portfolio
Performance Summary.
It was the third consecutive extraordinary year for both stocks and bonds. Your
Portfolio--which invests in a mix of stocks, bonds and money market
securities--gained 17.96%, an excellent return for a balanced portfolio.
However, it slightly trailed the 18.92% return of the Lipper (VIP) Flexible
Average, because a financial crisis in Asia led U.S. investors to turn to stocks
of the most familiar, and larger, companies and to U.S. Treasury bonds. This
move produced a sharp reversal in the fourth quarter of the relative strength of
the smaller and mid-sized stocks that had provided an extra lift to our earnings
earlier in the year. It also severely limited the gains on our bond holdings.
The Portfolio may invest in foreign securities. Foreign investments are subject
to the risk of currency fluctuation and the impact of social, political and
economic change.
<TABLE>
<CAPTION>
================================================================================
Average Annual Returns Through December 31, 1997
One Three Five Ten
Year Years Years Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Flexible Managed(1) 17.96% 18.49% 13.25% 13.41%
- --------------------------------------------------------------------------------
Lipper (VIP) Flexible Avg.(2) 18.92% 18.75% 13.00% 12.87%
- --------------------------------------------------------------------------------
S&P 500(3) 33.35% 31.13% 20.25% 18.02%
- --------------------------------------------------------------------------------
Lehman Gov't./Corp. Bond Index(4) 9.76% 10.43% 7.61% 9.14%
- --------------------------------------------------------------------------------
</TABLE>
Flexible Managed Portfolio inception date: 5/13/83.
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
[PLOT POINTS TO COME]
<TABLE>
<CAPTION>
================================================================================
$10,000 Invested Over Ten Years
$52,448 $35,194 $28,771 $23,988
S&P Flexible Lipper (VIP) Lehman Gov't/.
500(3) Managed Portfolio(1) Flexible Avg.(2) Corp Bond Index(4)
------ -------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
- --------------------------------------------------------------------------------
</TABLE>
(1) Past performance is not predictive of future performance. Portfolio
performance is net of investment fees and fund expenses but not product
charges.
(2) The Lipper Variable Insurance Products (VIP) Flexible Average is calculated
by Lipper Analytical Services, Inc., and reflects the investment return of
certain portfolios underlying variable life and annuity products. These
returns are net of investment fees and fund expenses but not product
charges.
(3) The S&P 500 is a capital-weighted index representing the aggregate market
value of the common equity of 500 stocks primarily traded on the New York
Stock Exchange. The S&P 500 is an unmanaged index that includes the
reinvestment of all dividends but does not reflect the payment of
transaction costs and advisory fees associated with an investment in the
Portfolio. The securities that comprise the S&P 500 may differ
substantially from the securities in the Portfolio. The S&P 500 is not the
only index that may be used to characterize performance of this Portfolio,
and other indexes may portray different comparative performance.
(4) The Lehman Government/Corporate Bond Index is comprised of government and
corporate bonds. The Index is an unmanaged index that includes the
reinvestment of all interest but does not reflect the payment of
transaction costs and advisory fees associated with an investment in the
Portfolio. The securities that comprise the Index may differ substantially
from the securities in the Portfolio. The Lehman Gov't./Corp. Bond Index is
not the only index that may be used to characterize performance of income
funds, and other indexes may portray different comparative performance.
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
================================================================================
<TABLE>
<S> <C>
Low Risk Fixed Income
BALANCED
High Yield Bond
Diversified Stock
High Risk Specialized
- --------------------------------------------------------------------------------
</TABLE>
Investment Goal
High total return consistent with a more aggressively managed diversified
portfolio.
Types of Investments
Money market instruments, bonds and common stocks of both established and
smaller companies.
Investment Style
The Portfolio management team holds a baseline allocation of 60% stocks and 40%
bonds.
Performance Review.
We Stuck with Stocks. Despite the pessimistic outlook our decision proved to be
right. In the bond portfolio we favored higher-yielding corporate securities
over lower-yielding Treasury bonds.
There were some disappointments, however. Although our bond portfolio outpaced
the Lehman Aggregate Bond Index, exposure to southeastern Asian debt erased some
of our early gains. In mid-year, we diversified our stock portfolio to reduce
overall volatility. To our growth stocks (stocks with particularly strong
earnings prospects), we added value stocks (stocks trading at low prices
compared to their underlying business strength). However, we held more smaller
and mid-sized companies than the S&P 500, and this year's disappointing returns
for stocks of smaller companies caused our stock portfolio to lag.
12
<PAGE>
Strategy Session.
The Impact of the Asian Crisis. Economic and financial market conditions in Asia
had a large impact on global security markets in the latter part of 1997 and we
are making decisions to protect your Portfolio in 1998. We believe the turmoil
in southeast Asia will have a detrimental impact on the profits of U.S.
companies. With stock prices high even on the assumption that profits will
continue to grow rapidly, we have slightly reduced our allocation to stocks and
shifted some assets into bonds. We will become more defensive if earnings trail
expectations over the course of the year.
On stocks. In our stock portion of the Portfolio, one focus of our value stocks
was industrials. The earnings of industrial companies tend to vary with the rate
of economic growth, so their stock prices suffered in the last quarter of 1997.
However, these companies have improved their profitability since the beginning
of this economic cycle and we believe they are better positioned to withstand a
downturn than previously. They already were inexpensive when we bought them and
they now are the best-priced sector of the market. We think their earnings will
beat expectations and stock prices will rise. Our growth stock purchases are
focusing on industries that are relatively protected from a slowing economy,
such as health care and food and drug retailers.
And on Bonds. Although we expect emerging markets bonds to recover somewhat, we
do not expect enough bounce to warrant an increased exposure. We are reducing
our holdings as we see a return to fair value. We also expect to reduce our
holdings of corporate bonds, as they no longer provide enough return over
Treasurys to warrant a significant over-weighting.
Outlook
PORTFOLIO MANAGER
Mark Stumpp
Value and Growth.
"Nineteen ninety-seven marked the third consecutive year of outstanding stock
market returns. Investors tend to extrapolate the recent past into the future:
many market participants are convinced that the rally can proceed indefinitely.
For example, analysts currently project that corporate earnings will grow at an
annual rate of nearly 14% over the next five years. When adjusted for today's
low rate of inflation, that's the highest rate of growth on record. (Earnings
grew only 7.8% a year between 1982 and 1996, and have averaged 7.6% a year over
the past 75 years.) With the expanding recessions in Asia, and most of the gains
from corporate cost-cutting already achieved, we believe that earnings will tend
to disappoint in 1998. We do not foresee a bear market but do expect continued
volatility and performance more consistent with the historical norm."
PORTFOLIO MANAGERS
[PHOTO]
Mark Stumpp
[PHOTO] [PHOTO]
Patricia A. Bannan Warren E. Spitz
[PHOTO]
Tony Rodriguez
<TABLE>
<CAPTION>
================================================================================
Portfolio Composition
as of 12/31/97
--------------
<S> <C>
Stocks 58%
Bonds 36%
Money Market 6%
</TABLE>
<TABLE>
<CAPTION>
================================================================================
Top Sectors - Stocks
as of 12/31/97
--------------
<S> <C>
Consumer Growth 25.8%
Industrials 21.2%
Finance 14.3%
Consumer Cyclical 14.1%
Technology 12.6%
Energy 10.0%
Utilities 2.0%
<CAPTION>
Top Sectors - Bonds
as of 12/31/97
--------------
<S> <C>
Industrials 45.7%
Foreign (US$) 26.5%
Financial 19.2%
Other 7.1%
Utilities 1.5%
- --------------------------------------------------------------------------------
</TABLE>
Source: Prudential. Holdings are subject to change.
13
<PAGE>
================================================================================
The toll-free numbers shown below can be used to make transfers and
reallocations, review how your premiums are being allocated and receive current
investment option values in your contract. Unit values for each investment
option are available to all Contract Owners from the toll-free numbers. The
phone lines are open each business day during the hours shown. Please be sure to
have your contract number available when you call.
1-800-356-4050
8 a.m. - 4 p.m. Eastern Time
[MAP OF UNITED STATES]
1-800-635-9587
8 a.m. - 4 p.m. Eastern Time
================================================================================
In the past, Contract Owners who held several variable contracts at the same
address received multiple copies of Annual Reports and Semiannual Reports. In an
effort to lessen waste and reduce your fund's expenses of postage and printing,
we will attempt to mail only one copy of this report, based on our current
records for Contract Owners with the same last name and same address. No action
on your part is necessary. Upon request, we will furnish you with additional
reports. The above toll-free numbers should be used to request any additional
copies. Proxy material and tax information will continue to be sent to each
account of record.
<PAGE>
[LOGO]==========================================================================
Whether providing insurance protection for home, family and business or
arranging to cover future education and retirement expenses, Prudential people
have always been able to deliver something more: personal service, quality,
attention to detail and the financial strength of The Rock(R). Since 1875,
Prudential has been helping individuals and families meet their financial needs.
P.O. Box 197
Minneapolis, MN 55440-0197
Address Service Requested
-------------
Bulk Rate
U.S. Postage
PAID
Prudential
-------------
[LOGO]
PRUvider AR 12/97 Printed in the U.S.A. PI-MV-0298-2377
CAT#42M316N on recycled paper. MRA-1997-A022963
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
CONSERVATIVE BALANCED PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<S> <C>
ASSETS
Investments, at value (cost:
$4,491,825,742).......................... $4,696,024,117
Cash....................................... 2,749
Interest and dividends receivable.......... 60,006,370
--------------
Total Assets............................. 4,756,033,236
--------------
LIABILITIES
Payable to investment adviser.............. 6,725,610
Payable for investments purchased.......... 3,573,515
Due to broker -- variation margin.......... 653,438
Accrued expenses........................... 546,540
Payable for capital stock repurchased...... 302,094
--------------
Total Liabilities........................ 11,801,197
--------------
NET ASSETS................................... $4,744,232,039
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 3,169,112
Paid-in capital, in excess of par........ 4,500,747,938
--------------
4,503,917,050
Undistributed net investment income........ 949,046
Accumulated net realized gain on
investments.............................. 36,942,793
Net unrealized appreciation on
investments.............................. 202,423,150
--------------
Net assets, December 31, 1997.............. $4,744,232,039
--------------
--------------
Net asset value and redemption price per
share, 316,911,160 outstanding shares of
common stock (authorized 350,000,000
shares).................................. $ 14.97
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1997
<S> <C> <C>
INVESTMENT INCOME
Dividends (net of $187,480 foreign
withholding tax)......................... $ 19,377,627
Interest................................... 216,743,419
---------------
236,121,046
---------------
EXPENSES
Investment advisory fee.................... 25,757,735
Custodian expense.......................... 281,000
Shareholders' reports...................... 169,000
Accounting fees............................ 101,000
Audit fees................................. 67,000
Legal fees................................. 3,000
Directors' fees............................ 3,000
Miscellaneous expenses..................... 923
---------------
Total Expenses........................... 26,382,658
Less: Custodian fee credit................. (166,162)
---------------
Net Expenses............................. 26,216,496
---------------
NET INVESTMENT INCOME........................ 209,904,550
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Investments.............................. 546,046,706
Futures contracts........................ (20,841,176)
Short sales.............................. (30,344)
---------------
525,175,186
---------------
Net change in unrealized appreciation on:
Investments.............................. (145,915,485)
Futures contracts........................ (1,775,225)
Short sales.............................. (1,139,560)
---------------
(148,830,270)
---------------
NET GAIN ON INVESTMENTS...................... 376,344,916
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 586,249,466
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 209,904,550 $ 173,283,574
Net realized gain on investments....................................................... 525,175,186 270,107,246
Net change in unrealized appreciation on investments................................... (148,830,270) 61,403,321
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 586,249,466 504,794,141
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income................................................... (209,004,256) (174,034,704)
Dividends in excess of net investment income........................................... -- (41,632)
Distributions from net realized capital gains.......................................... (518,358,296) (273,551,593)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (727,362,552) (447,627,929)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [4,585,160 and 10,561,256 shares, respectively]..................... 74,015,405 167,668,924
Capital stock issued in reinvestment of dividends and distributions [47,801,252 and
29,086,855 shares, respectively]...................................................... 727,362,552 447,627,929
Capital stock repurchased [(24,112,955) and (8,429,995) shares, respectively].......... (394,841,365) (134,428,797)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 406,536,592 480,868,056
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 265,423,506 538,034,268
NET ASSETS:
Beginning of year...................................................................... 4,478,808,533 3,940,774,265
------------------ -------------------
End of year............................................................................ $ 4,744,232,039 $ 4,478,808,533
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A1
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
FLEXIBLE MANAGED PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<S> <C>
ASSETS
Investments, at value (cost:
$5,050,966,053).......................... $5,471,387,547
Cash....................................... 15,631
Interest and dividends receivable.......... 40,850,547
Receivable for investments sold............ 294
--------------
Total Assets............................. 5,512,254,019
--------------
LIABILITIES
Payable for investments purchased.......... 12,760,562
Payable to investment adviser.............. 8,471,572
Accrued expenses........................... 654,878
Due to broker -- variation margin.......... 203,828
Payable for capital stock repurchased...... 21,085
--------------
Total Liabilities........................ 22,111,925
--------------
NET ASSETS................................... $5,490,142,094
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 3,177,111
Paid-in capital, in excess of par........ 4,984,889,353
--------------
4,988,066,464
Undistributed net investment income........ 768,864
Accumulated net realized gain on
investments.............................. 82,447,694
Net unrealized appreciation on
investments.............................. 418,859,072
--------------
Net assets, December 31, 1997.............. $5,490,142,094
--------------
--------------
Net asset value and redemption price per
share, 317,711,061 outstanding shares of
common stock (authorized 350,000,000
shares).................................. $ 17.28
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1997
<S> <C> <C>
INVESTMENT INCOME
Dividends (net of $810,090 foreign
withholding tax)......................... $ 35,833,891
Interest................................... 156,549,837
---------------
192,383,728
---------------
EXPENSES
Investment advisory fee.................... 31,740,440
Custodian expense.......................... 477,000
Shareholders' reports...................... 212,000
Accounting fees............................ 94,000
Audit fees................................. 72,000
Legal fees................................. 4,000
Directors' fees............................ 3,000
Miscellaneous expenses..................... 1,971
---------------
Total Expenses........................... 32,604,411
Less: Custodian fee credit................. (284,638)
---------------
Net Expenses............................. 32,319,773
---------------
NET INVESTMENT INCOME........................ 160,063,955
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Investments.............................. 867,141,418
Futures contracts........................ (499,159)
Short sales.............................. 1,049,655
---------------
867,691,914
---------------
Net change in unrealized appreciation on:
Investments.............................. (160,872,103)
Futures contracts........................ (1,562,422)
Short sales.............................. (1,168,571)
---------------
(163,603,096)
---------------
NET GAIN ON INVESTMENTS...................... 704,088,818
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 864,152,773
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 160,063,955 $ 139,211,865
Net realized gain on investments....................................................... 867,691,914 408,046,131
Net change in unrealized appreciation on investments................................... (163,603,096) 41,728,823
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 864,152,773 588,986,819
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (159,343,911) (142,089,785)
Distributions from net realized capital gains.......................................... (823,214,223) (458,909,559)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (982,558,134) (600,999,344)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [4,859,580 and 8,998,637 shares, respectively]...................... 92,765,042 166,455,957
Capital stock issued in reinvestment of dividends and distributions [56,453,647 and
34,012,173 shares, respectively]...................................................... 982,558,134 600,999,344
Capital stock repurchased [(18,791,325) and (6,420,074) shares, respectively].......... (363,698,408) (119,724,926)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 711,624,768 647,730,375
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 593,219,407 635,717,850
NET ASSETS:
Beginning of year...................................................................... 4,896,922,687 4,261,204,837
------------------ -------------------
End of year............................................................................ $ 5,490,142,094 $ 4,896,922,687
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A2
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO
DECEMBER 31, 1997
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 91.8%
<S> <C> <C> <C>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) VALUE
LONG-TERM BONDS -- 58.6% (NOTE 2)
<CAPTION>
------------ --------- --------------
<S> <C> <C> <C>
AGRICULTURAL PRODUCTS & SERVICES -- 0.1%
Agco Corp.,
8.50%, 03/15/06............................... Ba1 $ 2,875 $ 3,054,687
--------------
AIRLINES -- 4.2%
Delta Airlines, Inc.,
10.125%, 05/15/10............................. Baa3 20,000 25,218,200
10.375%, 02/01/11 (a)......................... Ba1 56,905 73,306,108
United Airlines, Inc.,
6.126%, 03/02/04.............................. Aa2 8,000 7,988,000
9.75%, 08/15/21............................... Baa3 10,125 12,956,659
10.67%, 05/01/04.............................. Baa3 46,665 55,931,736
11.21%, 05/01/14.............................. Baa3 18,433 25,848,780
--------------
201,249,483
--------------
ASSET-BACKED SECURITIES -- 1.6%
California Infrastructure,
6.14%, 03/25/02............................... Aaa 5,500 5,511,000
6.17%, 03/25/03............................... Aaa 6,000 6,018,600
6.28%, 09/25/05............................... Aaa 7,000 7,042,000
6.38%, 09/25/08............................... Aaa 21,000 21,172,200
6.42%, 12/26/09............................... Aaa 10,000 10,110,000
6.48%, 11/26/09............................... Aaa 10,000 10,115,625
Standard Credit Card Master Trust,
5.95%, 10/07/04 (a)........................... Aaa 4,650 4,602,012
Team Financing Corp,
7.35%, 05/15/03............................... Aa2 11,000 11,405,570
--------------
75,977,007
--------------
BANKS AND SAVINGS & LOANS -- 5.9%
Banco Ganadero, M.T.N. SA (Colombia),
9.75%, 08/26/99............................... Baa3 7,300 7,500,750
Bangkok Bank, (Thailand),
7.25%, 09/15/05............................... Ba1 10,000 7,452,800
8.25%, 03/15/16............................... Ba1 7,500 5,250,000
8.375%, 01/15/27 Sr. Note..................... Ba1 40,000 23,440,400
Bank Nova Scotia,
6.50%, 07/15/07............................... A1 7,200 7,218,000
Bank of Boston N.A.,
5.973%, 01/25/99.............................. A2 2,500 2,507,600
Bankers Trust New York Corp.,
5.813%, 08/06/00.............................. A2 7,500 7,485,000
Banque Cent De Tunisie, (Tunisia),
7.50%, 09/19/07............................... Baa3 17,950 16,783,250
Capital One Bank,
6.97%, 02/04/02............................... Baa3 25,000 25,362,750
7.08%, 10/30/01............................... Baa3 35,100 35,915,022
7.35%, 06/20/00............................... Baa3 8,100 8,293,266
8.125%, 03/01/00.............................. Baa3 13,150 13,630,501
Chase, Inc.
6.075%, 02/28/00.............................. Aa3 4,000 4,006,160
Kansallis-Osake Pankki, (Finland),
8.65%, 12/29/49............................... A3 10,000 10,200,000
National Australia Bank, (Australia),
6.40%, 12/10/07............................... A1 14,000 14,000,000
Nationsbank Corp.,
6.076%, 06/19/02.............................. A1 5,000 5,005,850
North Fork Bancorporation, Inc.,
8.00%, 12/15/27............................... Baa3 4,000 4,068,800
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Okobank, (Finland),
7.20%, 10/29/49............................... A3 $ 9,000 $ 9,101,250
7.20%, 10/29/49............................... A3 3,500 3,539,375
7.312%, 09/27/49.............................. A3 18,750 19,031,250
Royal Bank of Canada, (Canada),
6.75%, 10/24/11 (a)........................... Aa3 17,400 17,513,448
Siam Commercila, (Thailand),
7.50%, 03/15/06............................... A3 14,500 9,425,000
Svenska Handelsbank, (Sweden),
7.125%, 03/29/49.............................. A1 10,000 10,075,000
Thai Farmers Bank, (Thailand),
8.25%, 08/21/16 (a)........................... Ba1 20,000 12,000,000
--------------
278,805,472
--------------
CABLE & PAY TELEVISION SYSTEMS -- 2.0%
Continental Cablevision, Inc.,
8.50%, 09/15/01............................... Baa3 5,545 5,889,455
Tele-Communications, Inc.,
6.875%, 02/15/06.............................. Ba1 10,000 10,036,800
7.375%, 02/15/00.............................. Ba1 27,000 27,521,100
7.875%, 08/01/13.............................. Ba1 19,350 20,812,279
8.25%, 01/15/03............................... Ba1 2,000 2,135,780
9.25%, 04/15/02............................... Ba1 9,500 10,427,865
9.875%, 06/15/22.............................. Ba1 12,900 16,811,667
--------------
93,634,946
--------------
CONSULTING -- 0.7%
Comdisco, Inc., M.T.N.,
6.11%, 08/04/99............................... Baa1 12,500 12,513,250
6.375%, 11/30/01.............................. Baa1 21,500 21,500,000
--------------
34,013,250
--------------
CONSUMER SERVICES -- 0.1%
Service Corp. International,
7.00%, 06/01/15............................... Baa1 2,500 2,557,875
--------------
ENERGY -- 0.1%
Baltimore Gas & Electric,
5.886%, 03/15/99.............................. A2 3,500 3,503,570
--------------
FINANCIAL SERVICES -- 15.4%
Advanta Corp.,
6.99%, 10/18/99............................... Ba3 15,000 14,400,000
7.25%, 08/16/99............................... Ba3 3,000 2,957,910
7.50%, 08/28/00............................... Ba3 35,000 34,053,250
American General Finance, Inc.,
7.57%, 12/01/45............................... A2 5,000 5,178,500
Arkwright Corp.,
9.625%, 08/15/26.............................. Baa3 8,000 9,471,600
Avco Financial Services,
5.915%, 11/17/99.............................. NR 3,500 3,498,950
Bear Stearns & Co.,
6.50%, 07/05/00............................... A2 20,000 20,120,800
Central Hispano Financial Services, (Portugal),
6.25%, 04/28/05............................... A3 10,000 10,000,000
Conseco, Inc.,
8.70%, 11/15/26 (a)........................... Ba2 32,313 36,126,991
8.796%, 04/01/27 (a).......................... Ba2 23,900 26,676,463
Donaldson Lufkin, & Jenrette Inc.,
5.625%, 02/15/16.............................. Baa1 5,480 5,395,827
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B1
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Enterprise Rent-A-Car USA Finance Co., M.T.N.,
6.35%, 01/15/01............................... Baa2 $ 11,500 $ 11,554,050
6.95%, 03/01/04............................... Baa2 27,500 28,050,000
7.00%, 06/15/00............................... Baa2 30,000 30,598,800
7.50%, 06/15/03............................... Baa2 5,000 5,261,900
8.75%, 12/15/99............................... Baa2 5,000 5,245,000
First Chicago NBD Corp.,
5.819%, 09/23/02.............................. A1 8,000 7,976,000
First Union Corp.,
9.45%, 06/15/99............................... A2 4,000 4,177,920
Great Western Financial,
8.206%, 02/01/27 (a).......................... A3 19,300 20,469,966
Industrial Finance Corp.,
7.75%, 08/04/07............................... Ba1 5,000 4,750,000
7.875%, 08/04/02.............................. Ba1 6,000 5,700,000
Lehman Brothers Holdings, Inc.,
6.206%, 09/03/02.............................. Baa1 8,000 7,950,000
6.33%, 08/01/00............................... Baa1 30,000 30,039,600
6.40%, 08/30/00............................... Baa1 79,000 78,901,250
6.71%, 10/12/99............................... Baa1 6,000 6,056,640
6.89%, 10/10/00............................... Baa1 10,545 10,701,804
7.125%, 07/15/02.............................. Baa1 16,000 16,359,680
Lumbermens Mutual Casualty Co.,
8.30%, 12/01/37............................... Baa1 21,750 23,055,000
9.15%, 07/01/26............................... Baa1 7,500 8,728,125
Merita Bank, Ltd.,
7.50%, 12/29/49............................... A3 15,000 15,390,000
Merrill Lynch Pierce, Fenner & Smith,
5.935%, 11/14/00.............................. Aa3 10,000 9,966,250
Paine Webber Group, Inc.,
7.625%, 10/15/08 Sr. Note..................... Baa1 5,000 5,352,700
PT Alatief Freeport Financial Co., Sr. Notes,
(Netherlands),
9.75%, 04/15/01............................... Ba1 8,950 9,039,500
Salomon, Inc.,
6.25%, 10/01/99............................... A2 32,800 32,838,048
6.50%, 03/01/00 (a)........................... A2 38,500 38,701,740
6.59%, 02/21/01 (a)........................... A2 30,750 31,005,840
6.75%, 02/15/03............................... A2 5,000 5,057,850
7.25%, 05/01/01............................... A2 8,625 8,852,010
Sears Roebuck Acceptance Corp., M.T.N.,
6.38%, 02/16/99............................... A2 25,000 25,125,000
SunAmerica, Inc.,
6.20%, 10/31/99............................... Baa1 9,000 9,008,100
Textron Financial Corp.,
6.05%, 03/16/09............................... Aaa 46,440 46,354,771
Union Planters Corp., Gtd. Notes,
8.20%, 12/15/26............................... Baa1 20,750 21,793,932
--------------
731,941,767
--------------
FOOD & BEVERAGE -- 0.5%
Archer-Daniels-Midland Co.,
6.75%, 12/15/27............................... Aa3 5,000 5,008,650
6.95%, 12/15/2097............................. Aa3 18,800 19,045,152
--------------
24,053,802
--------------
INDUSTRIAL -- 0.8%
Compania Sud Americana de Vapores, SA (Chile),
7.375%, 12/08/03.............................. NR 7,600 7,505,000
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Reliance Industries Ltd.,
8.125%, 09/27/05.............................. Baa3 $ 15,000 $ 14,025,000
8.25%, 01/15/27............................... Baa3 19,000 17,005,000
--------------
38,535,000
--------------
LEISURE & TOURISM -- 0.1%
Royal Carribean Cruises Ltd.,
7.50%, 10/15/27............................... Baa3 5,750 5,855,455
--------------
MEDIA -- 5.7%
Paramount Communications, Inc., Sr. Notes,
7.50%, 01/15/02............................... Ba2 6,425 6,582,541
Time Warner, Inc.,
6.10%, 12/30/01............................... Ba1 27,650 27,016,815
8.11%, 08/15/06............................... Ba1 7,250 7,848,850
8.18%, 08/15/07............................... Ba1 24,915 27,118,981
9.125%, 01/15/13.............................. Ba1 41,270 49,143,078
Turner Broadcasting Co.,
8.375%, 07/01/13.............................. Ba1 17,325 19,438,997
Viacom, Inc.,
6.75%, 01/15/03............................... Ba2 71,325 70,082,518
7.75%, 06/01/05............................... Ba2 60,025 61,050,827
--------------
268,282,607
--------------
OIL & GAS -- 1.6%
Apache Corp.,
7.95%, 04/15/26............................... Baa1 2,900 3,250,030
B.J. Services Co.,
7.00%, 02/01/06............................... Baa2 4,000 4,095,000
Gulf Canada Resources, Ltd., (Canada),
8.25%, 03/15/17............................... Ba1 4,500 5,006,295
Parker & Parsley Petroleum Co.,
8.25%, 08/15/07............................... Baa3 3,000 3,304,320
Petroliam Nasional, (Malaysia),
6.625%, 10/18/01.............................. A2 12,000 11,662,680
Seagull Energy Corp.,
7.50%, 09/15/27............................... Ba1 17,000 17,606,730
Talisman Energy Inc.,
7.25%, 10/15/27............................... Baa1 30,000 30,829,800
--------------
75,754,855
--------------
PAPER & FOREST -- 0.5%
UPM-Kymmene Oyj,
7.45%, 11/26/27............................... Baa1 22,800 23,398,500
--------------
RAILROADS -- 0.5%
Norfolk Southern Corp.,
7.05%, 05/01/37............................... Baa1 25,000 26,218,750
--------------
REAL ESTATE INVESTMENT TRUST -- 0.2%
Falcor Suite Hotels, Inc.,
7.625%, 10/1/07............................... Ba1 8,000 8,006,400
--------------
RETAIL -- 2.8%
Federated Department Stores, Inc.,
8.125%, 10/15/02 Sr. Note (a)................. Baa2 41,030 43,861,070
8.50%, 06/15/03 (a)........................... Baa2 32,400 35,345,160
10.00%, 02/15/01 (a).......................... Baa2 46,115 50,791,061
Rite Aid Corp.,
6.70%, 12/15/01............................... Baa1 5,000 5,081,250
--------------
135,078,541
--------------
TELECOMMUNICATIONS -- 3.6%
McLeod USA Inc., Sr. Notes,
9.25%, 07/15/07............................... B3 3,000 3,150,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B2
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Total Access Communications Public Company Ltd.,
(Thailand),
8.375%, 11/04/06.............................. Ba2 $ 33,000 $ 15,840,000
WorldCom, Inc.,
7.55%, 04/01/04............................... Ba1 80,000 83,775,200
7.75%, 04/01/07............................... Ba1 25,000 26,847,250
7.75%, 04/01/27............................... Ba1 4,500 4,944,420
8.875%, 01/15/06.............................. Ba1 32,000 34,429,440
--------------
168,986,310
--------------
TOBACCO -- 3.0%
Philip Morris Co. Inc.,
6.375%, 02/01/06.............................. A2 17,675 17,359,501
7.20%, 02/01/07............................... A2 31,915 32,932,769
RJR Nabisco, Inc.,
7.625%, 09/15/03.............................. Baa3 10,500 10,732,260
8.25%, 07/01/04............................... Baa3 8,000 8,410,000
8.50%, 07/01/07............................... Baa3 11,000 11,726,550
8.75%, 04/15/04............................... Baa3 23,090 24,719,000
8.75%, 08/15/05............................... Baa3 19,000 20,499,670
9.25%, 08/15/13............................... Baa3 13,571 15,227,341
--------------
141,607,091
--------------
TRANSPORTATION/TRUCKING/SHIPPING -- 0.0%
Federal Express Corp., M.T.N.,
10.05%, 06/15/99.............................. Baa2 500 527,645
--------------
UTILITIES -- 1.9%
Commonwealth Edison Co.,
7.375%, 01/15/04.............................. Baa3 14,000 14,523,880
7.625%, 01/15/07.............................. Baa3 21,000 22,162,980
Hyder PLC, (United Kingdom),
6.75%, 12/15/04............................... Baa1 25,000 25,093,750
6.875%, 12/15/17.............................. Baa1 25,000 25,438,750
Hydro-Quebec, (Canada),
5.938%, 09/29/49.............................. A+ 5,000 4,415,625
--------------
91,634,985
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 3.1%
United States Treasury Bond,
6.125%, 08/15/07.............................. 7,500 7,707,450
United States Treasury Notes,
5.875%, 01/31/99 (a).......................... 20,000 20,046,800
5.875%, 09/30/02.............................. 28,550 28,706,169
5.875%, 02/15/04.............................. 16,750 16,896,563
6.25%, 10/31/01............................... 9,500 9,661,785
6.375%, 03/31/01 (a).......................... 4,600 4,686,250
6.375%, 08/15/27.............................. 57,325 60,460,104
--------------
148,165,121
--------------
FOREIGN GOVERNMENT BONDS -- 4.2%
Abbey National Treasury, (United Kingdom),
5.875%, 03/08/99.............................. Aa2 5,500 5,492,850
Banco de Commercio Exterior de Colombia, S.A.,
M.T.N. (Colombia),
8.625%, 06/02/00.............................. Baa3 5,500 5,623,750
City of Moscow, (Russia),
9.50%, 05/31/00............................... Ba2 16,500 15,592,500
City of St. Petersburg, (Russia),
9.50%, 06/18/02............................... NR 25,000 22,500,000
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Province of Quebec, (Canada),
6.238%, 06/15/99.............................. A2 $ 3,000 $ 3,007,969
Republic of Colombia, (Colombia),
7.625%, 02/15/07 (a).......................... Baa3 85,000 79,370,450
8.00%, 06/14/01............................... Baa3 2,250 2,257,875
8.75%, 10/06/99............................... Baa3 12,325 12,692,532
Republic of South Africa, (South Africa),
8.50%, 06/23/17............................... Baa3 37,950 36,242,250
Russian Ministry of Finance, (Russia),
10.00%, 06/26/07.............................. Ba2 7,800 7,226,700
United Mexican States, (Mexico),
11.50%, 05/15/26.............................. Ba2 6,900 8,176,500
--------------
198,183,376
--------------
TOTAL LONG-TERM BONDS
(cost $2,787,932,280).................................................... 2,779,026,495
--------------
COMMON STOCKS -- 32.5% SHARES
-------------
AEROSPACE -- 0.8%
AlliedSignal, Inc............................... 196,400 7,647,325
GenCorp, Inc.................................... 100,000 2,500,000
Litton Industries, Inc. (b)..................... 78,900 4,536,750
Lockheed Martin Corp............................ 193,000 19,010,500
Parker-Hannifin Corp. (b)....................... 43,925 2,015,059
Raytheon Co. (Class "A" Stock) (b).............. 7,295 359,749
--------------
36,069,383
--------------
AIRLINES -- 0.4%
AMR Corp. (b)................................... 84,700 10,883,950
US Airways Group, Inc. (b)...................... 114,900 7,181,250
--------------
18,065,200
--------------
APPAREL -- 0.0%
Phillips-Van Heusen Corp........................ 96,300 1,372,275
--------------
AUTOS - CARS & TRUCKS -- 0.4%
Chrysler Corp................................... 147,800 5,200,712
Ford Motor Co................................... 95,600 4,654,525
General Motors Corp............................. 111,000 6,729,375
Mascotech, Inc.................................. 96,000 1,764,000
Titan International, Inc........................ 102,950 2,065,434
--------------
20,414,046
--------------
BANKS AND SAVINGS & LOANS -- 1.4%
BankAmerica Corp................................ 172,000 12,556,000
Barnett Banks, Inc.............................. 179,600 12,908,750
Chase Manhattan Corp............................ 213,800 23,411,100
Citicorp........................................ 56,800 7,181,650
Fleet Financial Group, Inc...................... 166,100 12,447,119
--------------
68,504,619
--------------
CHEMICALS -- 0.2%
Ferro Corp...................................... 137,100 3,333,244
Millennium Chemicals, Inc....................... 148,927 3,509,092
OM Group, Inc................................... 64,400 2,358,650
--------------
9,200,986
--------------
COMMERCIAL SERVICES -- 0.3%
Cendant Corp. (b)............................... 373,700 12,845,937
--------------
COMPUTER SERVICES -- 1.5%
Autodesk, Inc................................... 671,600 24,849,200
BMC Software, Inc. (b).......................... 296,400 19,451,250
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B3
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Cadence Design Systems, Inc. (b)................ 693,800 $ 16,998,100
Microsoft Corp. (a)............................. 67,900 8,776,075
--------------
70,074,625
--------------
COMPUTERS -- 2.1%
3Com Corp. (b).................................. 519,600 18,153,525
Cisco Systems, Inc. (b)......................... 436,050 24,309,787
Compaq Computer Corp............................ 245,300 13,844,119
Digital Equipment Corp. (b)..................... 99,200 3,670,400
International Business Machines Corp............ 179,800 18,800,337
Sun Microsystems, Inc. (b)...................... 552,900 22,046,887
--------------
100,825,055
--------------
CONSTRUCTION -- 0.2%
Oakwood Homes Corp.............................. 141,600 4,699,350
Standard Pacific Corp........................... 156,600 2,466,450
Webb Corp....................................... 142,600 3,707,600
--------------
10,873,400
--------------
CONSUMER-APPLIANCES -- 0.3%
Sunbeam Corp.,.................................. 293,000 12,342,625
--------------
CONTAINERS -- 0.0%
Owens-Illinois, Inc. (b)........................ 58,300 2,211,756
--------------
COSMETICS & SOAPS -- 0.5%
Avon Products, Inc.............................. 425,600 26,121,200
--------------
DIVERSIFIED OPERATIONS -- 1.0%
Cognizant Corp.................................. 289,800 12,914,212
General Electric Co............................. 408,600 29,981,025
Whitman Corp.................................... 135,000 3,518,437
--------------
46,413,674
--------------
DRUGS AND MEDICAL SUPPLIES -- 3.8%
American Home Products Corp.,................... 315,500 24,135,750
Biogen, Inc. (b)................................ 532,500 19,369,687
Bristol-Myers Squibb Co......................... 308,700 29,210,737
Cardinal Health, Inc............................ 300,300 22,560,037
Guidant Corp.................................... 202,400 12,599,400
Medtronic, Inc.................................. 398,500 20,846,531
Novartis Corp., AG, ADR (Switzerland)........... 84,100 6,833,125
Pfizer, Inc..................................... 253,800 18,923,962
Warner-Lambert Co............................... 190,400 23,609,600
--------------
178,088,829
--------------
ELECTRICAL EQUIPMENT -- 0.0%
Belden, Inc..................................... 68,200 2,404,050
--------------
ELECTRONICS -- 0.5%
Intel Corp...................................... 79,600 5,591,900
National Semiconductor Corp. (b)................ 738,400 19,152,250
--------------
24,744,150
--------------
ENGINEERING & CONSTRUCTION -- 0.0%
Giant Cement Holdings, Inc. (b)................. 59,100 1,366,687
--------------
ENVIRONMENTAL SERVICES -- 0.5%
U.S.A. Waste Services, Inc. (b)................. 651,100 25,555,675
--------------
EXPLORATION & PRODUCTION -- 0.0%
Apex Silver Mines Ltd. (b)...................... 83,600 1,065,900
--------------
FINANCIAL SERVICES -- 1.6%
Fannie Mae...................................... 24,900 1,420,856
Lehman Brothers Holdings, Inc................... 254,000 12,954,000
Merrill Lynch & Co., Inc........................ 59,200 4,317,900
Morgan Stanley, Dean Witter, Discover & Co.,.... 334,090 19,753,071
Schwab (Charles) Corp........................... 417,600 17,513,100
Travelers Group, Inc............................ 357,967 19,285,472
--------------
75,244,399
--------------
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
FOOD & BEVERAGES -- 1.3%
PepsiCo, Inc.................................... 740,500 $ 26,981,969
Quaker Oats Co.................................. 317,300 16,737,575
Ralston-Ralston Purina Group.................... 205,600 19,107,950
--------------
62,827,494
--------------
FOREST PRODUCTS -- 0.3%
Boise Cascade Corp.,............................ 145,600 4,404,400
Champion International Corp..................... 96,200 4,359,062
Louisiana-Pacific Corp.......................... 100,400 1,907,600
Mead Corp....................................... 96,500 2,702,000
Willamette Industries, Inc...................... 70,300 2,262,781
--------------
15,635,843
--------------
HEALTHCARE -- 0.1%
A.O. Smith Corp................................. 71,500 3,020,875
--------------
HOSPITALS/ HOSPITAL MANAGEMENT -- 0.6%
Columbia/HCA Healthcare Corp.,.................. 203,800 6,037,575
Healthsouth Corp. (b)........................... 779,300 21,625,575
--------------
27,663,150
--------------
HOUSEHOLD PRODUCTS -- 0.0%
Leggett & Platt, Inc............................ 58,300 2,441,312
--------------
HOUSING RELATED -- 0.2%
Hanson, PLC, ADR (United Kingdom)............... 260,962 6,018,436
Owens Corning................................... 100,100 3,415,912
--------------
9,434,348
--------------
INSURANCE -- 1.2%
Allstate Corp................................... 150,000 13,631,250
Berkley (WR) Corp............................... 43,100 1,891,012
Financial Security Assurance Holdings Ltd.,..... 34,600 1,669,450
Loews Corp...................................... 29,500 3,130,687
PennCorp Financial Group, Inc................... 81,600 2,912,100
Provident Companies, Inc........................ 54,300 2,097,337
Reinsurance Group of America, Inc............... 117,450 4,998,966
TIG Holdings, Inc............................... 86,900 2,883,994
Trenwick Group, Inc............................. 65,950 2,481,369
United Healthcare Corp.......................... 377,000 18,732,187
Western National Corp........................... 134,500 3,984,562
--------------
58,412,914
--------------
INSTRUMENTS-CONTROLS -- 0.0%
Flowserve Corp.................................. 40,186 1,122,696
--------------
LEISURE -- 0.5%
Carnival Corp. (Class "A" Stock)................ 398,800 22,083,550
--------------
MACHINERY -- 0.2%
Case Corp....................................... 88,400 5,342,675
DT Industries, Inc.............................. 36,400 1,237,600
Global Industrial
Technologies, Inc. (b)........................ 62,400 1,056,900
Paxar Corp. (b)................................. 233,725 3,462,052
--------------
11,099,227
--------------
MANUFACTURING -- 1.0%
Illinois Tool Works, Inc. (b)................... 181,300 10,900,663
Tyco International, Ltd......................... 802,800 36,176,175
--------------
47,076,838
--------------
MEDIA -- 0.2%
Central Newspapers, Inc. (Class "A" Stock)...... 50,800 3,756,025
Houghton Mifflin Co............................. 59,700 2,290,988
Knight-Ridder, Inc.............................. 59,200 3,078,400
Lee Enterprises, Inc............................ 51,700 1,528,381
--------------
10,653,794
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B4
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
MEDICAL INSTRUMENTS -- 0.3%
Arterial Vascular Engineering, Inc., (b)........ 198,200 $ 12,883,000
--------------
METALS-FERROUS -- 0.2%
Bethlehem Steel Corp. (b)....................... 225,200 1,942,350
LTV Corp........................................ 208,300 2,030,925
Material Sciences Corp. (b)..................... 98,500 1,200,469
National Steel Corp. (Class "B" Stock) (b)...... 42,900 496,031
USX-U.S. Steel Group............................ 61,800 1,931,250
--------------
7,601,025
--------------
METALS-NON FERROUS -- 0.2%
Aluminum Company of America..................... 147,600 10,387,350
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 0.3%
Coltec Industries, Inc. (b)..................... 44,400 1,029,525
Donaldson, Co................................... 55,500 2,500,969
IDEX Corp....................................... 61,100 2,130,863
Mark IV Industries, Inc......................... 87,942 1,923,731
Trinity Industries, Inc......................... 53,100 2,369,588
Wolverine Tube, Inc. (b)........................ 37,600 1,165,600
York International Corp......................... 27,400 1,084,013
--------------
12,204,289
--------------
MISCELLANEOUS - CONSUMER GROWTH/STABLE -- 0.3%
Eastman Kodak Co................................ 29,200 1,775,725
Unilever N.V., ADR (United Kingdom)............. 237,000 14,797,688
--------------
16,573,413
--------------
MISCELLANEOUS - INDUSTRIAL -- 0.2%
CBS Corp........................................ 207,400 6,105,338
Energy Group, PLC, ADR (United Kingdom)......... 49,862 2,225,092
--------------
8,330,430
--------------
OIL & GAS -- 1.3%
Basin Exploration, Inc. (b)..................... 17,700 314,175
Cabot Oil & Gas Corp. (Class "A" Stock)......... 90,100 1,751,319
Cross Timbers Oil Co............................ 296,300 7,388,981
Elf Aquitaine SA, ADR (France).................. 126,900 7,439,513
Enron Oil & Gas Co.............................. 49,200 1,042,425
Murphy Oil Corp................................. 28,100 1,522,669
Noble Affiliates, Inc.,......................... 196,700 6,933,675
Pioneer Natural Resources Co.................... 325,044 9,405,961
Seagull Energy Corp. (b)........................ 63,700 1,313,813
Total SA (Class "B" Stock) (France)............. 126,800 7,037,400
Unocal Corp..................................... 389,700 15,125,231
Western Gas Resources, Inc.,.................... 104,700 2,316,488
--------------
61,591,650
--------------
OIL & GAS SERVICES -- 1.5%
Apache Corp..................................... 498,500 17,478,656
Halliburton Co.................................. 595,200 30,913,200
J. Ray McDermott, SA (b)........................ 166,500 7,159,500
McDermott International, Inc.................... 307,700 11,269,513
Oryx Energy Co. (b)............................. 125,500 3,200,250
--------------
70,021,119
--------------
REAL ESTATE DEVELOPMENT -- 0.2%
Crescent Operating, Inc. (b).................... 17,360 425,320
Crescent Real Estate Equities, Inc.............. 166,300 6,548,063
Equity Residential Properties Trust............. 14,600 738,213
--------------
7,711,596
--------------
RETAIL -- 4.2%
Bombay Company, Inc. (b)........................ 141,500 654,438
Borders Group, Inc. (b)......................... 656,000 20,541,000
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Charming Shoppes, Inc. (b)...................... 824,800 $ 3,866,250
Consolidated Stores Corp. (b)................... 466,900 20,514,419
Costco Companies, Inc. (b)...................... 373,200 16,654,050
CVS Corp........................................ 157,900 10,115,469
Designs, Inc. (b)............................... 52,800 158,400
Dillards, Inc. (Class "A" Stock)................ 32,200 1,135,050
Federated Department Stores, Inc. (b)........... 242,700 10,451,269
Home Depot, Inc................................. 276,050 16,252,444
Jan Bell Marketing, Inc. (b).................... 153,800 384,500
Kmart Corp. (b)................................. 619,600 7,164,125
Kroger Co. (b).................................. 407,400 15,048,338
Liz Claiborne, Inc.............................. 276,600 11,565,338
Rite Aid Corp................................... 241,700 14,184,769
Safeway, Inc. (b)............................... 407,800 25,793,350
Tandy Corp...................................... 47,500 1,831,719
The Limited, Inc................................ 215,300 5,490,150
The TJX Companies, Inc.......................... 449,600 15,455,000
Toys 'R' Us, Inc. (b)........................... 88,700 2,788,506
--------------
200,048,584
--------------
RUBBER -- 0.1%
Goodyear Tire & Rubber Co....................... 39,800 2,532,275
--------------
TELECOMMUNICATIONS -- 1.2%
Alcatel Alsthom, ADR (France)................... 127,000 3,214,688
Deutsche Telekom, ADR (Germany)................. 45,800 853,025
Nextel Communications, Inc. (Class "A" Stock)
(b)........................................... 871,500 22,659,000
Tellabs, Inc. (b)............................... 299,000 15,809,625
WorldCom, Inc................................... 410,800 12,426,700
--------------
54,963,038
--------------
TEXTILES -- 0.1%
Fruit of the Loom, Inc. (Class "A" Stock) (b)... 73,800 1,891,125
Pillowtex Corp.................................. 18,830 656,696
Tultex Corp. (b)................................ 89,800 364,813
--------------
2,912,634
--------------
TOBACCO -- 0.8%
Bat Industries, PLC, ADR (United Kingdom)....... 107,100 2,008,125
Phillip Morris Co. Inc.......................... 646,700 29,303,594
RJR Nabisco Holdings Corp....................... 125,800 4,717,500
--------------
36,029,219
--------------
TOYS -- 0.4%
Mattel, Inc..................................... 475,751 17,721,725
--------------
TRUCKING/SHIPPING -- 0.0%
Yellow Corp. (b)................................ 44,300 1,113,038
--------------
WASTE MANAGEMENT -- 0.1%
Waste Management, Inc........................... 208,000 5,720,000
--------------
TOTAL COMMON STOCKS
(cost $1,331,959,806).......................................... 1,543,620,897
--------------
PREFERRED STOCKS -- 0.7%
FINANCIAL SERVICES -- 0.7%
Central Hispano Capital Corp.,.................. 225,900 6,254,606
Central Hispano Corp.,.......................... 1,000,000 26,000,000
--------------
32,254,606
--------------
TOTAL PREFERRED STOCKS
(cost $31,236,594)............................................. 32,254,606
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $4,151,360,152).......................................... 4,354,901,998
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B5
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS -- 7.2% (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
ASSET-BACKED SECURITIES -- 0.3%
Centric Capital Corp.,
5.92%, 02/23/98............................... P1 $ 1,000 $ 991,449
Corporate Asset Funding Co., Inc.,
5.78%, 02/24/98............................... P1 4,600 4,560,857
Falcon Asset Securitization Corp.,
5.90%, 01/21/98............................... P1 1,000 996,886
Restructured Asset Securities Enhanced Return,
5.95875%, 08/28/98............................ P1 4,000 4,000,000
Strategic Money Market Trust,
5.91%, 12/16/98............................... P1 2,000 2,000,000
Variable Funding Capital Corp.,
5.81%, 02/20/98............................... P1 2,000 1,984,184
Wood Street Funding Corp.,
5.83%, 02/13/98............................... P1 1,000 993,198
--------------
15,526,574
--------------
BANK NOTES -- 0.2%
American Express Centurion Bank,
5.929%, 09/22/98.............................. P1 5,000 5,000,000
NBD Bank--Michigan,
5.00%, 01/30/98............................... P1 2,000 1,998,356
US Bank, N.A.,
5.83094%, 10/21/98............................ P1 1,000 999,358
--------------
7,997,714
--------------
CERTIFICATES OF DEPOSIT-EURO -- 0.2%
Morgan Guaranty Trust Co.,
5.79%, 03/16/98............................... P1 4,000 4,000,209
Westdeutsche Landesbank Girozentral, (Germany),
5.83%, 08/03/98............................... P1 6,000 5,997,462
--------------
9,997,671
--------------
CERTIFICATES OF DEPOSIT-YANKEE -- 1.1%
Canadian Imperial Bank of Commerce, (Canada),
5.95%, 06/29/98............................... P1 900 899,706
Corestates Bank, NA,
5.7825%, 01/23/98............................. P1 1,000 1,000,000
Credit Agricole Indosuez,
5.75%, 02/10/98............................... P1 5,000 5,000,000
Dresdner Bank, AG, (Germany),
5.95%, 10/20/98............................... P1 7,000 6,998,241
Empresa Colombia de Petroleos, (Colombia),
7.25%, 07/08/98............................... BBB- 8,250 8,280,937
Kansallis-Osake Pankki, N.Y., (Finland),
6.125%, 05/15/98.............................. A3 6,160 6,160,000
9.75%, 12/15/98............................... Baa1 16,950 17,472,908
Republic of Colombia, (Colombia),
7.125%, 05/11/98.............................. Ba1 2,775 2,802,750
Royal Bank of Canada, (Canada),
5.91%, 06/17/98............................... P1 3,000 2,999,217
Swiss Bank Corp.,
5.77%, 01/30/98............................... P1 2,000 1,999,421
--------------
53,613,180
--------------
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 3.4%
Aon Corp.,
5.79%, 03/12/98............................... P2 $ 880 $ 870,234
Barton Capital Corp.,
5.95%, 02/09/98............................... P1 1,000 993,719
Bell Atlantic Financial Services, Inc.,
6.08%, 01/09/98............................... P1 6,000 5,992,907
BP America,
6.90%, 01/02/98............................... P1 6,500 6,500,000
Capital One Bank,
6.66%, 08/17/98............................... Baa3 10,050 10,088,291
Coca-Cola Enterprises,
5.65%, 03/12/98............................... P2 3,000 2,967,512
Comdisco, Inc., M.T.N.,
5.54%, 01/26/98............................... Baa1 12,500 12,498,000
6.09%, 11/09/98............................... Baa1 34,000 34,009,860
6.29%, 10/22/98............................... Baa1 5,000 5,009,900
6.689%, 05/22/98.............................. Baa1 9,000 9,024,300
Duke Capital Corp.,
5.90%, 01/23/98............................... P2 1,000 996,558
Enterprise Rent-A-Car USA Finance Co., M.T.N.,
7.875%, 03/15/98 (b).......................... Baa2 9,925 9,961,921
Federal Express Corp., M.T.N.,
10.00%, 06/01/98.............................. Baa3 3,000 3,045,750
Finova Capital Corp.,
5.75%, 02/04/98............................... P2 3,400 3,382,079
First USA Bank,
8.20%, 02/15/98............................... Baa3 11,500 11,521,275
General Electric Capital Services, Inc.,
5.70%, 01/12/98............................... P1 5,000 4,992,083
Honeywell Inc.,
6.75%, 01/02/98............................... P1 4,250 4,250,000
ING America Insurance Holdings, Inc.,
5.74%, 04/03/98............................... P1 2,000 1,970,981
5.74%, 04/28/98............................... P1 1,600 1,570,407
Mont Blanc Capital Corp.,
5.82%, 02/13/98............................... P1 2,000 1,986,420
Newell Co.,
6.80%, 01/02/98............................... P1 6,500 6,500,000
Old Line Funding Corp.,
5.90%, 01/21/98............................... A1+ 1,000 996,886
PHH Corp.,
6.75%, 01/02/98............................... P1 6,500 6,500,000
Safeco Corp.,
5.76%, 03/17/98............................... P2 2,000 1,976,320
Special Purpose Account Receivables Cooperative
Corp.,
5.80%, 03/26/98............................... P1 1,000 986,628
Textron Financial Corp.,
6.125%, 02/23/98.............................. A3 1,000 1,000,220
Xerox Capital (Europe) PLC
5.75%, 02/05/98............................... P1 3,000 2,983,708
5.79%, 02/12/98............................... P1 875 869,230
6.85%, 01/02/98............................... P1 2,610 2,610,000
--------------
156,055,189
--------------
MEDIUM TERM NOTES -- 0.2%
Ford Motor Credit Corp.,
9.00%, 03/25/98............................... P1 1,200 1,208,318
General Motors Acceptance Corp.,
5.76825%, 09/21/98............................ P1 3,000 2,997,564
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B6
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
IBM Credit Corp.,
5.65%, 02/27/98............................... P1 $ 4,000 $ 3,998,626
Morgan Stanley Group, Inc.,
6.34%, 03/09/98............................... P1 1,000 1,000,606
Suntrust Banks, Inc.,
8.875%, 02/01/98.............................. P1 805 806,820
--------------
10,011,934
--------------
OTHER CORPORATE OBLIGATIONS -- 0.1%
Association Corp. of America,
6.125%, 02/01/98.............................. P1 2,040 2,039,976
Beneficial Corp.,
9.125%, 02/15/98.............................. P1 2,700 2,709,664
--------------
4,749,640
--------------
U. S. GOVERNMENT & AGENCY OBLIGATIONS -- 0.0%
United States Treasury Bills,
5.045%, 03/19/98 (a).......................... 700 692,545
5.165%, 01/22/98 (a).......................... 300 299,139
5.29%, 03/19/98 (a)........................... 400 395,533
--------------
1,387,217
--------------
REPURCHASE AGREEMENT -- 1.7%
Joint Repurchase Agreement Account,
6.53%, 01/02/98 (Note 5)...................... 81,783 81,783,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $340,697,062)...................................................... 341,122,119
--------------
TOTAL INVESTMENTS -- 99.0%
(cost $4,491,825,742; Note 6)............................................ 4,696,024,117
--------------
VARIATION MARGIN ON OPEN FUTURES
CONTRACTS (c) -- (0.0%).................................................. (653,438)
OTHER ASSETS IN EXCESS OF LIABILITIES --
1.0%..................................................................... 48,861,360
--------------
TOTAL NET ASSETS -- 100.0%................................................. $4,744,232,039
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
ADR American Depository Receipt
AG Aktiengesellschaft (German Stock Company)
M.T.N. Medium Term Note
PLC Public Limited Company (British Corporation)
SA Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French
Corporation)
(a) Security segregated as collateral for futures contracts.
(b) Non-income producing security.
(c) Open futures contracts as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION VALUE AT VALUE AT APPRECIATION/
CONTRACTS TYPE DATE TRADE DATE DECEMBER 31, 1997 DEPRECIATION
<C> <S> <C> <C> <C> <C>
Long Position:
61 S&P 500 Index Mar 98 15,095,625 14,931,275 (164,350)
318 U.S. Treasury 5 Yr. Mar 98 34,423,500 34,542,750 119,250
166 U.S. Treasury 5 Yr. Mar 98 19,931,438 19,997,813 66,375
Short Position:
637 U.S. Treasury 5 Yr. Mar 98 75,803,000 76,738,594 (935,594)
365 U.S. Treasury 5 Yr. Mar 98 39,488,438 39,648,125 (159,687)
1181 U.S. Treasury 10 Yr. Mar 98 131,755,312 132,456,531 (701,219)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B7
<PAGE>
FLEXIBLE MANAGED PORTFOLIO
DECEMBER 31, 1997
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 93.8%
VALUE
COMMON STOCKS -- 57.6% SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AEROSPACE -- 1.3%
AlliedSignal, Inc............................... 289,300 $ 11,264,619
GenCorp, Inc.................................... 428,200 10,705,000
Litton Industries, Inc. (a)..................... 324,400 18,653,000
Lockheed Martin Corp............................ 272,900 26,880,650
Raytheon Co. (Class "A" Stock).................. 30,252 1,491,826
--------------
68,995,095
--------------
AIRLINES -- 1.4%
AMR Corp. (a)................................... 346,000 44,461,000
USAir Group, Inc. (a)........................... 491,700 30,731,250
--------------
75,192,250
--------------
AUTOS - CARS & TRUCKS -- 1.5%
Chrysler Corp................................... 632,700 22,263,131
Ford Motor Co................................... 301,300 14,669,544
General Motors Corp............................. 474,400 28,760,500
Mascotech, Inc.................................. 411,300 7,557,637
Titan International, Inc........................ 440,700 8,841,544
--------------
82,092,356
--------------
BANKS AND SAVINGS & LOANS -- 1.8%
BankAmerica Corp................................ 243,900 17,804,700
Barnett Banks, Inc.............................. 254,200 18,270,625
Chase Manhattan Corp............................ 302,100 33,079,950
Citicorp........................................ 80,500 10,178,219
Fleet Financial Group, Inc...................... 235,100 17,617,806
--------------
96,951,300
--------------
CHEMICALS -- 0.7%
Ferro Corp...................................... 586,950 14,270,222
Millennium Chemicals, Inc....................... 637,700 15,025,806
OM Group, Inc................................... 275,900 10,104,837
--------------
39,400,865
--------------
COMMERCIAL SERVICES -- 0.3%
Cendant Corp. (a)............................... 529,500 18,201,562
--------------
COMPUTERS -- 2.2%
3Com Corp. (a).................................. 737,000 25,748,937
Compaq Computer Corp............................ 346,700 19,566,881
Digital Equipment Corp. (a)..................... 424,700 15,713,900
International Business Machines Corp............ 254,400 26,600,700
Sun Microsystems, Inc. (a)...................... 781,100 31,146,362
--------------
118,776,780
--------------
COMPUTER SERVICES -- 2.4%
Autodesk, Inc................................... 951,300 35,198,100
BMC Software, Inc. (a).......................... 419,800 27,549,375
Cadence Design Systems, Inc. (a)................ 979,500 23,997,750
Cisco Systems, Inc. (a)......................... 617,100 34,403,325
Microsoft Corp.................................. 95,800 12,382,150
--------------
133,530,700
--------------
CONSTRUCTION -- 0.8%
Oakwood Homes Corp.............................. 606,400 20,124,900
Standard Pacific Corp........................... 670,400 10,558,800
Webb Corp....................................... 611,100 15,888,600
--------------
46,572,300
--------------
CONTAINERS -- 0.2%
Owens-Illinois, Inc. (a)........................ 250,000 9,484,375
--------------
COSMETICS & SOAPS -- 0.7%
Avon Products, Inc.............................. 595,600 36,554,950
--------------
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
DIVERSIFIED OPERATIONS -- 1.7%
Cognizant Corp.................................. 410,000 $ 18,270,625
General Electric Co............................. 577,200 42,352,050
Loews Corp...................................... 175,000 18,571,875
Whitman Corp.................................... 578,000 15,064,125
--------------
94,258,675
--------------
DRUGS AND MEDICAL SUPPLIES -- 4.6%
American Home Products Corp..................... 446,600 34,164,900
Biogen, Inc. (a)................................ 752,300 27,364,912
Bristol-Myers Squibb Co......................... 453,400 42,902,975
Cardinal Health, Inc............................ 425,100 31,935,637
Guidant Corp.................................... 284,900 17,735,025
Medtronic, Inc.................................. 564,000 29,504,250
Novartis Corp., AG, ADR (Switzerland)........... 114,200 9,278,750
Pfizer, Inc..................................... 359,600 26,812,675
Warner-Lambert Co............................... 269,000 33,356,000
--------------
253,055,124
--------------
ELECTRICAL EQUIPMENT -- 0.2%
Baldor Electric Co.............................. 1 29
Belden, Inc..................................... 292,200 10,300,050
--------------
10,300,079
--------------
ELECTRONICS -- 0.6%
Intel Corp...................................... 112,500 7,903,125
National Semiconductor Corp. (a)................ 1,029,600 26,705,250
--------------
34,608,375
--------------
ENERGY -- 0.2%
Energy Group, PLC, ADR (United Kingdom)......... 218,900 9,768,413
--------------
ENGINEERING & CONSTRUCTION -- 0.1%
Giant Cement Holdings, Inc. (a)................. 259,600 6,003,250
--------------
ENVIRONMENTAL SERVICES -- 1.1%
U.S.A. Waste Services, Inc. (a)................. 920,200 36,117,850
Waste Management, Inc........................... 872,300 23,988,250
--------------
60,106,100
--------------
FINANCIAL SERVICES -- 3.3%
Federal National Mortgage Association........... 35,100 2,002,894
Lehman Brothers Holdings, Inc................... 1,087,300 55,452,300
Merrill Lynch & Co., Inc........................ 253,100 18,460,481
Morgan Stanley, Dean Witter, Discover & Co...... 632,195 37,378,529
Schwab (Charles) Corp........................... 589,900 24,738,931
Travelers Group, Inc............................ 763,266 41,120,956
--------------
179,154,091
--------------
FOOD & BEVERAGES -- 2.0%
PepsiCo, Inc.................................... 1,047,900 38,182,856
Quaker Oats Co.................................. 448,500 23,658,375
Ralston-Ralston Purina Group.................... 291,000 27,044,812
RJR Nabisco Holdings Corp....................... 538,700 20,201,250
--------------
109,087,293
--------------
FOREST PRODUCTS -- 1.3%
Boise Cascade Corp.............................. 700,000 21,175,000
Champion International Corp..................... 412,200 18,677,812
Louisiana-Pacific Corp.......................... 412,200 7,831,800
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B8
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Mead Corp....................................... 413,200 $ 11,569,600
Willamette Industries, Inc...................... 301,600 9,707,750
--------------
68,961,962
--------------
HOSPITALS/ HOSPITAL MANAGEMENT -- 1.0%
Columbia/HCA Healthcare Corp.................... 855,000 25,329,375
Healthsouth Corp. (a)........................... 1,101,400 30,563,850
--------------
55,893,225
--------------
HOUSEHOLD PRODUCTS -- 0.5%
Leggett & Platt, Inc............................ 249,500 10,447,812
Sunbeam Corp.................................... 415,000 17,481,875
--------------
27,929,687
--------------
HOUSING RELATED -- 0.7%
Hanson, PLC, ADR (United Kingdom)............... 1,046,700 24,139,519
Owens Corning................................... 429,000 14,639,625
--------------
38,779,144
--------------
INSTRUMENTS-CONTROLS -- 0.2%
Parker-Hannifin Corp............................ 187,500 8,601,563
--------------
INSURANCE -- 2.6%
Allstate Corp................................... 212,000 19,265,500
Berkley (WR) Corp............................... 186,450 8,180,494
Financial Security Assurance Holdings Ltd....... 148,500 7,165,125
PennCorp Financial Group, Inc................... 349,600 12,476,350
Provident Companies, Inc........................ 232,600 8,984,175
Reinsurance Group of America, Inc............... 503,100 21,413,194
TIG Holdings, Inc............................... 372,300 12,355,706
Trenwick Group, Inc............................. 289,700 10,899,962
United Healthcare Corp.......................... 532,700 26,468,531
Western National Corp........................... 575,900 17,061,037
--------------
144,270,074
--------------
LEISURE -- 0.5%
Carnival Corp. (Class "A" Stock)................ 563,300 31,192,737
--------------
MACHINERY -- 0.9%
Case Corp....................................... 378,500 22,875,594
DT Industries, Inc.............................. 155,600 5,290,400
Global Industrial Technologies, Inc. (a)........ 273,600 4,634,100
Paxar Corp. (a)................................. 1,011,875 14,988,398
--------------
47,788,492
--------------
MANUFACTURING -- 1.6%
A.O. Smith Corp................................. 306,300 12,941,175
Flowserve Corp.................................. 171,691 4,796,617
Illinois Tool Works, Inc........................ 256,100 15,398,012
Tyco International, Ltd......................... 1,134,202 51,109,978
--------------
84,245,782
--------------
MEDIA -- 0.8%
Central Newspapers, Inc. (Class "A" Stock)...... 217,600 16,088,800
Houghton Mifflin Co............................. 255,200 9,793,300
Knight-Ridder, Inc.............................. 253,000 13,156,000
Lee Enterprises, Inc............................ 221,400 6,545,137
--------------
45,583,237
--------------
MEDICAL INSTRUMENTS -- 0.3%
Arterial Vascular Engineering, Inc. (a)......... 280,000 18,200,000
--------------
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
METALS-FERROUS -- 0.6%
Bethlehem Steel Corp. (a)....................... 958,000 $ 8,262,750
LTV Corp........................................ 892,000 8,697,000
Material Sciences Corp. (a)..................... 421,800 5,140,687
National Steel Corp. (Class "B" Stock) (a)...... 183,200 2,118,250
USX-U.S. Steel Group............................ 265,100 8,284,375
--------------
32,503,062
--------------
METALS-NON FERROUS -- 0.8%
Aluminum Company of America..................... 632,400 44,505,150
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 0.9%
Coltec Industries, Inc. (a)..................... 190,000 4,405,625
Donaldson, Co................................... 237,800 10,715,862
IDEX Corp....................................... 261,500 9,119,813
Mark IV Industries, Inc......................... 376,900 8,244,688
Trinity Industries, Inc......................... 227,000 10,129,875
Wolverine Tube, Inc. (a)........................ 164,600 5,102,600
York International Corp......................... 117,200 4,636,725
--------------
52,355,188
--------------
MISCELLANEOUS - CONSUMER GROWTH/STABLE -- 0.5%
Eastman Kodak Co................................ 120,000 7,297,500
Unilever N.V., ADR (United Kingdom)............. 334,000 20,854,125
--------------
28,151,625
--------------
MISCELLANEOUS - INDUSTRIAL -- 0.5%
CBS Corp........................................ 892,600 26,275,913
--------------
OIL & GAS -- 3.0%
Basin Exploration, Inc. (a)..................... 75,700 1,343,675
Cabot Oil & Gas Corp. (Class "A" Stock)......... 385,700 7,497,044
Cross Timbers Oil Co............................ 417,400 10,408,913
Elf Aquitaine SA, ADR (France).................. 544,200 31,903,725
Enron Oil & Gas Co.............................. 210,600 4,462,088
Murphy Oil Corp................................. 120,900 6,551,269
Noble Affiliates, Inc........................... 426,300 15,027,075
Pioneer Natural Resources Co.................... 1,426,731 41,286,028
Seagull Energy Corp. (a)........................ 260,200 5,366,625
Total SA (Class "B" Stock) (France)............. 179,200 9,945,600
Unocal Corp..................................... 550,500 21,366,281
Western Gas Resources, Inc...................... 448,500 9,923,063
--------------
165,081,386
--------------
OIL & GAS SERVICES -- 3.0%
Apache Corp..................................... 704,200 24,691,013
Halliburton Co.................................. 844,100 43,840,444
J. Ray McDermott, SA (a)........................ 713,300 30,671,900
McDermott International, Inc.................... 1,345,700 49,286,263
Oryx Energy Co. (a)............................. 537,500 13,706,250
--------------
162,195,870
--------------
PRECIOUS METALS -- 0.1%
Apex Silver Mines Ltd. (a)...................... 360,900 4,601,475
--------------
REAL ESTATE DEVELOPMENT -- 0.7%
Crescent Operating, Inc. (a).................... 71,240 1,745,380
Crescent Real Estate Equities, Inc.............. 712,400 28,050,750
Equity Residential Properties Trust............. 160,000 8,090,000
--------------
37,886,130
--------------
RETAIL -- 6.4%
Bombay Company, Inc. (a)........................ 605,900 2,802,288
Borders Group, Inc. (a)......................... 927,500 29,042,344
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B9
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Charming Shoppes, Inc. (a)...................... 3,532,600 $ 16,559,063
Consolidated Stores Corp. (a)................... 661,800 29,077,838
Costco Companies, Inc. (a)...................... 526,000 23,472,750
CVS Corp........................................ 223,000 14,285,938
Designs, Inc. (a)............................... 216,200 648,600
Dillards, Inc. (Class "A" Stock)................ 138,100 4,868,025
Federated Department Stores, Inc. (a)........... 342,800 14,761,825
Home Depot, Inc................................. 390,000 22,961,250
Jan Bell Marketing, Inc. (a).................... 658,700 1,646,750
K mart Corp. (a)................................ 2,646,900 30,604,781
Kroger Co. (a).................................. 575,200 21,246,450
Liz Claiborne, Inc.............................. 391,300 16,361,231
Phillips-Van Heusen Corp........................ 412,600 5,879,550
Rite Aid Corp................................... 341,400 20,035,913
Safeway, Inc. (a)............................... 576,300 36,450,975
Tandy Corp...................................... 203,800 7,859,038
The Limited, Inc................................ 837,400 21,353,700
The TJX Companies, Inc.......................... 637,200 21,903,750
Toys 'R' Us, Inc. (a)........................... 379,600 11,933,675
--------------
353,755,734
--------------
RUBBER -- 0.2%
Goodyear Tire & Rubber Co....................... 170,800 10,867,150
--------------
TELECOMMUNICATIONS -- 1.6%
Alcatel Alsthom, ADR (France)................... 543,800 13,764,938
Deutsche Telekom, ADR (Germany)................. 196,100 3,652,363
Nextel Communications, Inc. (Class "A"
Stock) (a).................................... 1,242,000 32,292,000
Tellabs, Inc. (a)............................... 422,500 22,339,688
WorldCom, Inc................................... 579,500 17,529,875
--------------
89,578,864
--------------
TEXTILES -- 0.2%
Fruit of the Loom, Inc. (Class "A" Stock) (a)... 316,400 8,107,750
Pillowtex Corp.................................. 78,333 2,731,856
Tultex Corp. (a)................................ 384,400 1,561,625
--------------
12,401,231
--------------
TOBACCO -- 1.0%
Bat Industries, PLC, ADR (United Kingdom)....... 458,600 8,598,750
Phillip Morris Co. Inc.......................... 1,034,900 46,893,906
--------------
55,492,656
--------------
TOYS -- 0.5%
Mattel, Inc..................................... 672,700 25,058,075
--------------
TRUCKING/SHIPPING -- 0.1%
Yellow Corp. (a)................................ 189,400 4,758,675
--------------
TOTAL COMMON STOCKS
(cost $2,741,915,742).......................................... 3,159,008,020
--------------
PREFERRED STOCKS -- 0.5%
FINANCIAL SERVICES -- 0.5%
Central Hispano Corp............................ 1,000,000 26,000,000
--------------
(cost $25,440,000)
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS -- 35.8% (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
AGRICULTURAL PRODUCTS & SERVICES -- 0.1%
Agco Corp.,
8.50%, 03/15/06............................... Ba1 $ 2,875 $ 3,054,687
--------------
AIRLINES -- 2.3%
Delta Airlines, Inc.,
10.125%, 05/15/10............................. Baa3 19,335 24,379,695
10.375%, 02/01/11 (c)......................... Ba1 25,750 33,388,737
United Airlines, Inc.,
6.126%, 03/02/04.............................. Aa2 8,000 7,988,000
9.75%, 08/15/21............................... Baa3 10,125 12,956,659
10.67%, 05/01/04.............................. Baa3 19,500 23,372,310
11.21%, 05/01/14.............................. Baa3 17,500 24,540,425
--------------
126,625,826
--------------
APPAREL MANUFACTURING -- 0.4%
Nine West Group, Inc.,
8.375%, 08/15/05.............................. Ba2 25,000 23,937,500
--------------
ASSET-BACKED SECURITIES -- 0.4%
California Infrastructure,
6.17%, 03/25/03............................... Aaa 4,000 4,012,400
MBNA Master Credit Card Trust,
5.976%, 11/15/02.............................. Aaa 1,000 1,000,312
Standard Credit Card Master Trust,
5.95%, 10/07/04 (b)........................... Aaa 4,500 4,453,560
--------------
9,466,272
--------------
BANKS AND SAVINGS & LOANS -- 5.5%
Abbey National Treasury, (United Kingdom),
5.875%, 03/08/99.............................. Aa2 5,500 5,492,850
Banc One Corp.,
5.876%, 09/30/99.............................. Aa3 5,000 5,010,400
Banco Ganadero, SA, (Colombia),
9.75%, 08/26/99............................... Baa3 7,300 7,500,750
Bangkok Bank, (Thailand),
7.25%, 09/15/05 (b)........................... Ba1 10,000 7,452,800
8.25%, 03/15/16............................... Ba1 7,500 5,250,000
8.375%, 01/15/27 (b).......................... Ba1 43,000 25,198,430
Bank of Nova Scotia,
6.50%, 07/15/07............................... A1 5,400 5,413,500
Bank of Boston N.A.,
5.973%, 01/25/99.............................. A2 2,500 2,507,600
Bankers Trust New York Corp.,
5.813%, 08/06/00.............................. A2 2,500 2,495,000
BT Securities Corp.,
6.125%, 02/24/00.............................. A3 5,000 4,955,000
Capital One Bank,
6.844%, 06/13/00.............................. Baa3 23,900 24,225,757
Central Hispano Financial Services, (Portugal),
6.25%, 04/28/05............................... A3 5,000 5,000,000
Chemical Banking,
6.075%, 02/28/00.............................. Aa3 6,000 6,009,240
Citicorp, M.T.N.,
6.045%, 05/15/00.............................. Aa3 10,000 10,031,800
First Chicago NBD Corp.,
5.986%, 06/10/02.............................. A1 10,000 9,989,600
Great Western Financial,
8.206%, 02/01/27.............................. Baa2 14,200 15,060,804
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B10
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Kansallis-Osake Pankki, (Finland),
8.65%, 12/01/49 (b)........................... A3 $ 9,000 $ 9,180,000
Key Bank N.A.
5.875%, 08/29/00.............................. Aa3 7,000 6,950,020
MBNA America Bank N.A.,
5.973%, 07/18/01.............................. Baa1 5,000 4,965,500
MBNA Corp.,
6.288%, 09/08/00.............................. Baa2 3,000 2,991,000
Merita Bank, Ltd.,
7.50%, 12/29/49 (b)........................... NR 12,000 12,312,000
National Australia Bank, (Australia),
6.40%, 12/10/07............................... A1 8,700 8,700,000
6.60%, 12/10/07............................... A1 5,000 5,000,000
Nationsbank Corp.,
6.076%, 06/19/02.............................. A1 5,000 5,005,850
North Fork Bancorporation, Inc.,
8.00%, 12/15/27............................... Baa3 4,000 4,068,800
Norwest Corp.,
5.863%, 11/13/01.............................. Aa3 6,450 6,446,130
Okobank, (Finland),
7.20%, 10/29/49 (c)........................... A3 12,500 12,640,625
7.312%, 09/27/49 (b).......................... A3 18,750 19,031,250
Royal Bank of Canada, (Canada),
6.75%, 10/24/11 (b)........................... Aa3 5,000 5,032,600
Siam Commercila, (Thailand),
7.50%, 03/15/06 (b)........................... Ba1 14,500 9,425,000
Suntrust Bank, Inc.,
5.889%, 04/22/02.............................. A1 10,000 9,979,000
Svenska Handelsbank, (Sweden),
7.125%, 03/29/49 (b).......................... A1 5,000 5,037,500
Thai Farmers Bank, (Thailand),
8.25%, 08/21/16 (b)........................... Ba1 20,000 12,000,000
Union Planters Corp.,
8.20%, 12/15/26............................... Baa1 20,750 21,793,932
--------------
302,152,738
--------------
CABLE & PAY TELEVISION SYSTEMS -- 1.6%
Roger Cablesystems, Inc., (Canada)
10.00%, 03/15/05.............................. Ba3 2,000 2,200,000
Tele-Communications, Inc.,
6.656%, 12/20/00.............................. Ba1 5,000 5,012,500
7.375%, 02/15/00.............................. Ba1 6,000 6,115,800
7.875%, 08/01/13.............................. Ba1 43,750 47,056,187
8.25%, 01/15/03............................... Ba1 8,000 8,543,120
9.875%, 06/15/22.............................. Ba1 12,878 16,782,996
--------------
85,710,603
--------------
CHEMICALS -- 0.2%
Reliance Industries Ltd., (India),
9.375%, 06/24/26.............................. Baa3 12,000 12,045,000
--------------
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
CONSULTING -- 0.3%
Comdisco, Inc., M.T.N.,
6.11%, 08/04/99............................... Baa1 $ 12,500 $ 12,513,250
6.375%, 11/30/01.............................. Baa1 2,700 2,700,000
--------------
15,213,250
--------------
CONSUMER SERVICES
Service Corp. International,
7.00%, 06/01/15............................... Baa1 2,500 2,557,875
--------------
ENERGY -- 0.1%
Baltimore Gas & Electric,
5.886%, 03/15/99.............................. A2 4,000 4,004,080
--------------
FINANCIAL SERVICES -- 5.3%
Advanta Corp.,
6.99%, 10/18/99............................... Ba3 10,000 9,600,000
American General Finance, Inc.,
7.57%, 12/01/45............................... A2 5,000 5,178,500
Avco Financial Services,
5.915%, 11/17/99.............................. NR 3,500 3,498,950
Caterpillar Financial Services,
5.829%, 04/10/00.............................. A2 5,000 5,011,850
Conseco, Inc.,
8.70%, 11/15/26 (c)........................... Baa3 32,538 36,378,552
8.796%, 04/01/27.............................. Ba2 29,000 32,368,930
Enterprise Rent-A-Car USA Finance Co., M.T.N.,
6.35%, 01/15/01............................... Baa3 20,700 20,797,290
6.95%, 03/01/04............................... Baa2 7,500 7,650,000
7.00%, 06/15/00............................... Baa3 13,500 13,769,460
Ford Credit Europe PLC,
6.086%, 12/20/99.............................. A1 10,000 10,010,000
General Motors Acceptance Corp., M.T.N.,
5.813%, 10/30/00.............................. A3 10,000 9,941,250
Lehman Brothers Holdings, Inc.,
6.206%, 09/03/02.............................. Baa1 10,000 9,937,500
6.40%, 08/30/00 (c)........................... Baa1 93,250 93,133,437
Lumbermens Mutual Casualty Co.,
8.30%, 12/01/37............................... Baa1 23,100 24,486,000
9.15%, 07/01/26............................... Baa1 7,500 8,728,125
--------------
290,489,844
--------------
FOOD & BEVERAGE -- 0.5%
Archer Daniels,
6.95%, 12/15/2097............................. Aa3 19,700 19,956,888
Archer-Daniels-Midland Co.,
6.75%, 12/15/27............................... Aa3 5,000 5,008,650
--------------
24,965,538
--------------
FOREST PRODUCTS -- 0.4%
UPM-Kymmene Corp.,
7.45%, 11/26/27............................... Baa1 23,400 24,014,250
--------------
INVESTMENT BANKING -- 1.9%
Merrill Lynch Pierce, Fenner & Smith, Inc.,
5.935%, 11/14/00.............................. A3 10,000 9,966,250
Morgan Stanley Group, Inc.,
5.869%, 12/19/01.............................. A1 5,000 4,987,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B11
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
PaineWebber Group, Inc.,
6.206%, 06/03/99.............................. Baa1 $ 5,000 $ 5,004,000
Salomon, Inc.,
6.25%, 10/01/99............................... Baa1 26,400 26,430,624
6.50%, 03/01/00............................... A2 19,000 19,099,560
6.59%, 02/21/01............................... A2 23,250 23,443,440
6.75%, 08/15/03............................... Baa1 5,000 5,059,400
7.25%, 05/01/01............................... A2 8,625 8,852,010
--------------
102,842,784
--------------
LEISURE & TOURISM -- 0.1%
Royal Carribean Cruises Ltd.,
7.50%, 10/15/27............................... Baa3 5,815 5,921,647
--------------
MEDIA -- 3.4%
Paramount Communications, Inc.,
7.50%, 01/15/02............................... Ba2 9,100 9,323,132
Time Warner, Inc.,
8.11%, 08/15/06............................... Ba1 9,250 10,014,050
8.18%, 08/15/07............................... Ba1 8,000 8,707,680
9.125%, 01/15/13.............................. Ba1 39,690 47,261,661
Turner Broadcasting Co.,
8.375%, 07/01/13.............................. Ba1 18,275 20,504,916
Viacom, Inc.,
6.75%, 01/15/03............................... Ba2 23,350 22,943,243
7.75%, 06/01/05............................... Ba2 68,800 69,975,792
--------------
188,730,474
--------------
METALS & MINING -- 0.1%
PT Alatief Freeport Financial Co.,
(Netherlands),
9.75%, 04/15/01............................... Ba1 7,600 7,676,000
--------------
OIL & GAS -- 1.2%
Apache Corp.,
7.95%, 04/15/26............................... Baa1 3,000 3,362,100
B.J. Services Co.,
7.00%, 02/01/06............................... Ba1 4,000 4,095,000
Gulf Canada Resources, Ltd., (Canada),
8.25%, 03/15/17............................... Ba1 20,990 23,351,585
Parker & Parsley Petroleum Co.,
8.25%, 08/15/07............................... Baa3 3,000 3,304,320
Talisman Energy Inc.,
7.25%, 10/15/27............................... Baa1 33,250 34,169,695
--------------
68,282,700
--------------
REAL ESTATE INVESTMENT TRUST -- 0.5%
Felcor Suites, L.P.,
7.375%, 10/01/04.............................. Ba1 25,000 24,937,500
--------------
RETAIL -- 1.3%
Federated Department Stores, Inc.,
8.125%, 10/15/02.............................. Ba1 3,600 3,848,400
8.50%, 06/15/03 (b)........................... Baa2 54,890 59,879,501
10.00%, 02/15/01.............................. Ba1 8,000 8,811,200
--------------
72,539,101
--------------
SHIPPING -- 0.1%
Compania Sud Americana de Vapores, SA (Chile),
7.375%, 12/08/03.............................. Baa1 5,650 5,579,375
--------------
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
TELECOMMUNICATIONS -- 1.9%
Total Access Communications Public Company Ltd.,
(Thailand),
8.375%, 11/04/06.............................. Ba2 $ 4,000 $ 1,920,000
WorldCom, Inc.,
7.55%, 04/01/04............................... Ba1 57,000 59,689,830
7.75%, 04/01/07............................... Ba1 20,000 21,477,800
7.75%, 04/01/27............................... Ba1 6,000 6,592,560
8.875%, 01/15/06.............................. Ba1 16,000 17,214,720
--------------
106,894,910
--------------
TOBACCO -- 2.4%
Philip Morris Co. Inc.,
7.20%, 02/01/07............................... A2 10,000 10,318,900
7.50%, 04/01/04............................... A2 50,000 52,363,500
RJR Nabisco, Inc.,
8.50%, 07/01/07............................... Baa3 12,750 13,592,138
8.75%, 04/15/04............................... Baa3 5,000 5,352,750
8.75%, 08/15/05............................... Baa3 12,500 13,486,625
8.75%, 07/15/07............................... Baa3 25,000 27,110,750
9.25%, 08/15/13............................... Baa3 7,000 7,854,350
--------------
130,079,013
--------------
UTILITIES -- 1.4%
Cleveland Electric Illumination,
7.88%, 11/01/17............................... Ba1 27,000 28,503,900
Consolidated Edison,
5.998%, 06/15/02.............................. A1 7,000 7,014,420
Hyder PLC, (United Kingdom),
6.75%, 12/15/17............................... Baa1 5,000 5,018,750
6.875%, 12/15/07.............................. Baa1 25,000 25,438,750
Hydro-Quebec, (Canada),
5.938%, 09/29/49.............................. A+ 6,250 5,519,531
Southern California Edison Co.,
6.38%, 09/25/08............................... Aaa 7,000 7,057,400
--------------
78,552,751
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 1.2%
Federal National Mortgage Association,
Zero Coupon, 10/09/19 (b)..................... 11,800 3,071,658
United States Treasury Bonds,
6.125%, 08/15/07.............................. 10,450 10,739,047
United States Treasury Notes,
5.875%, 09/30/02 (c).......................... 7,650 7,691,846
6.00%, 08/15/00............................... 2,750 2,769,773
6.375%, 08/15/27.............................. 37,910 39,983,298
--------------
64,255,622
--------------
FOREIGN GOVERNMENT BONDS -- 3.4%
Banco de Commercio Exterior de Colombia, S.A.,
M.T.N. (Colombia),
8.625%, 06/02/00.............................. Baa3 5,500 5,623,750
Banque Cent De Tunisie, (Tunisia),
7.50%, 09/19/07............................... Baa3 13,600 12,716,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B12
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
City of Moscow, (Russia),
9.50%, 05/31/00............................... Ba2 $ 12,500 $ 11,812,500
City of St. Petersburg, (Russia),
9.50%, 06/18/02............................... NR 35,000 31,500,000
Province of Quebec, (Canada),
6.238%, 06/15/99.............................. A2 2,000 2,005,313
Republic of Argentina, (Argentina),
6.687%, 03/31/05.............................. B1 1,949 1,744,176
Republic of Colombia, (Colombia),
7.625%, 02/15/07 (b).......................... Baa3 25,000 23,344,250
8.00%, 06/14/01............................... Baa3 2,150 2,157,525
8.75%, 10/06/99............................... Baa3 12,300 12,666,786
Republic of Philippines, (The Philippines),
8.60%, 06/15/27 (b)........................... Ba1 8,000 6,560,000
Republic of South Africa, (South Africa),
8.50%, 06/23/17............................... Baa3 25,600 24,448,000
Russian Ministry of Finance, (Russia),
9.25%, 11/27/01............................... Ba2 35,000 33,337,500
10.00%, 06/26/07.............................. Ba2 5,600 5,188,400
United Mexican States, (Mexico),
11.50%, 05/15/26.............................. Ba2 11,200 13,272,000
--------------
186,376,200
--------------
TOTAL LONG-TERM BONDS
(cost $1,964,292,103).................................................... 1,966,905,540
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $4,731,647,845).................................................... 5,151,913,560
--------------
SHORT-TERM INVESTMENTS -- 5.8%
ASSET-BACKED SECURITIES -- 0.4%
Barton Capital Corp.,
5.95%, 02/09/98............................... P1 1,100 1,093,091
Centric Capital Corp.,
5.92%, 02/23/98............................... P1 1,000 991,449
Corporate Asset Funding Co., Inc.,
5.78%, 02/24/98............................... P1 5,400 5,354,049
Mont Blanc Capital Corp.,
5.82%, 02/13/98............................... P1 2,000 1,986,420
Restructured Asset Securities Enhanced Return,
5.958%, 08/28/98.............................. P1 4,000 4,000,000
Special Purpose Account Receivables Cooperative
Corp.,
5.80%, 03/26/98............................... P1 1,000 986,628
Strategic Money Market Trust,
5.91%, 12/16/98............................... P1 5,000 5,000,000
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Variable Funding Capital Corp.,
5.81%, 02/20/98............................... P1 $ 2,135 $ 2,118,116
5.88%, 01/29/98............................... P1 1,000 995,590
5.98%, 01/21/98............................... P1 1,225 1,221,134
--------------
23,746,477
--------------
BANK ACCEPTANCE -- 0.1%
Bank of Montreal, (Canada),
5.68%, 02/17/98............................... P1 4,000 3,970,969
--------------
BANK NOTES -- 0.2%
American Express Centurion Bank,
5.929%, 09/22/98.............................. P1 5,000 5,000,000
NBD Bank Michigan,
5.00%, 01/30/98............................... P1 3,000 2,997,534
US Bank, N.A.,
5.830%, 10/21/98.............................. P1 3,000 2,998,073
--------------
10,995,607
--------------
CERTIFICATES OF DEPOSIT-DOMESTIC -- 0.1%
Taubman Realty Group,
6.519%, 07/27/98.............................. P1 5,500 5,517,710
--------------
CERTIFICATES OF DEPOSIT-EURODOLLAR -- 0.1%
Morgan Guaranty Trust Co.,
5.79%, 03/16/98............................... P1 3,000 3,000,157
Westdeutsche Landesbank Girozentral, (Germany),
5.82%, 08/03/98............................... P1 2,000 1,999,096
5.83%, 08/03/98............................... P1 3,000 2,998,731
--------------
7,997,984
--------------
CERTIFICATES OF DEPOSIT-YANKEE -- 0.4%
Canadian Imperial Bank of Commerce, (Canada),
5.80%, 03/02/98............................... P1 1,000 999,485
5.95%, 06/29/98............................... P1 3,500 3,498,858
Credit Agricole Indosuez, (France),
5.75%, 02/10/98............................... P1 5,000 5,000,000
Dresdner Bank, AG, (Germany),
5.95%, 10/20/98............................... P1 5,000 4,998,743
Royal Bank of Canada, (Canada),
5.91%, 06/17/98............................... P1 3,000 2,999,217
Societe Generale, (France),
6.19%, 05/06/98............................... P1 4,000 3,999,194
--------------
21,495,497
--------------
COMMERCIAL PAPER -- 1.4%
American General Finance Corp.,
5.72%, 03/13/98............................... P1 2,000 1,977,756
Aon Corp.,
5.79%, 03/13/98............................... P2 1,000 988,742
5.79%, 03/18/98............................... P2 1,048 1,035,358
Associates First Capital Corp.,
5.79%, 02/04/98............................... P1 1,000 994,692
Bank of New York,
5.75%, 02/06/98............................... P1 2,285 2,272,226
Barnett Bank, Inc.,
6.00%, 01/28/98............................... P1 3,000 2,987,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B13
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
BBL North America,
6.73%, 01/02/98............................... P1 $ 2,393 $ 2,393,000
Bell Atlantic Financial Services, Inc.,
6.08%, 01/09/98............................... P1 8,000 7,990,542
BP America, Inc.,
6.90%, 01/02/98............................... P1 8,000 8,000,000
Carnival Corp.,
5.83%, 01/30/98............................... P1 1,000 995,466
Duke Capital Corp.,
5.90%, 01/21/98............................... P2 1,900 1,894,084
First Chicago Financial Corp.,
5.73%, 02/26/98............................... P1 2,000 1,982,492
General Electric Capital Services, Inc.,
5.70%, 01/12/98............................... P1 5,000 4,992,083
General Motors Acceptance Corp.,
5.76%, 02/09/98............................... P1 4,000 3,975,680
ING America Insurance Holdings, Inc.,
5.74%, 04/03/98............................... P1 3,000 2,956,472
5.74%, 04/28/98............................... P1 2,000 1,963,009
Newell Co.,
6.80%, 01/02/98............................... P1 8,000 8,000,000
PHH Corp.,
6.75%, 01/02/98............................... P2 8,000 8,000,000
Safeco Corp.,
5.76%, 03/17/98............................... P2 3,000 2,964,480
Xerox Capital PLC,
5.75%, 02/05/98............................... P1 3,221 3,203,508
6.85%, 01/02/98............................... P1 3,804 3,804,000
Xerox Overseas Holdings PLC,
5.79%, 02/10/98............................... P1 996 989,753
--------------
74,360,343
--------------
FOREIGN GOVERNMENT OBLIGATIONS
Republic of Colombia, (Colombia),
7.125%, 05/11/98.............................. Ba1 2,700 2,727,000
--------------
OTHER CORPORATE OBLIGATIONS -- 0.5%
Beneficial Corp.,
9.125%, 02/15/98.............................. P1 2,715 2,724,705
Empresa Colombia de Petroleos, (Colombia),
7.25%, 07/08/98............................... BBB- 8,250 8,280,937
General Electric Capital Corp.,
13.50%, 01/20/98.............................. P1 3,000 3,010,899
General Motors Acceptance Corp.,
6.00%, 07/13/98............................... P1 1,000 1,000,400
5.786%, 09/21/98.............................. P1 3,500 3,497,158
IBM Credit Corp.,
5.65%, 02/27/98............................... P1 3,500 3,498,798
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Morgan Stanley, Dean Witter, Discover & Co.,
6.34%, 03/09/98............................... P1 $ 1,000 $ 1,000,606
Textron Financial Corp.,
6.125%, 02/23/98.............................. A3 1,000 1,000,220
--------------
24,013,723
--------------
U. S. GOVERNMENT & AGENCY OBLIGATIONS -- 0.1%
United States Treasury Bills,
4.95%, 01/15/98 (b)........................... 1,140 1,137,962
5.135%, 01/22/98 (b).......................... 3,000 2,991,442
5.19%, 01/22/98 (b)........................... 1,500 1,495,675
5.195%, 03/19/98 (c).......................... 370 365,942
5.275%, 01/22/98 (b).......................... 800 797,656
--------------
6,788,677
--------------
REPURCHASE AGREEMENT -- 2.5%
Joint Repurchase Agreement Account,
6.53%, 01/02/98
(Note 5).................................... 137,860 137,860,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $319,318,208)...................................................... 319,473,987
--------------
TOTAL INVESTMENTS -- 99.7%
(cost $5,050,966,053; Note 6)............................................ 5,471,387,547
--------------
VARIATION MARGIN ON OPEN FUTURES
CONTRACTS (d)............................................................ (203,828)
OTHER ASSETS IN EXCESS OF OTHER
LIABILITIES -- 0.3%...................................................... 18,958,375
--------------
TOTAL NET ASSETS -- 100.0%................................................. $5,490,142,094
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
ADR American Depository Receipt
AG Aktiengesellschaft (German Stock Company)
L.P. Limited Partnership
PLC Public Limited Company (British Corporation)
SA Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French
Corporation)
(a) Non-income producing security.
(b) Security segregated as collateral for futures contracts.
(c) Portion of security segregated as collateral for futures contracts.
Aggregate value of segregated securities -- $100,311,229.
(d) Open futures contracts as of December 31, 1997 are as follows:
<TABLE>
<C> <S> <C> <C> <C> <C>
NUMBER OF EXPIRATION VALUE AT VALUE AT APPRECIATION/
CONTRACTS TYPE DATE TRADE DATE DECEMBER 31, 1997 DEPRECIATION
Long positions:
627 U.S. 5 yr T-Note Mar 98 $67,867,922 $68,107,875 $239,953
865 U.S. T-Bond Mar 98 $103,945,625 $104,205,469 $259,844
Short Position:
1,779 U.S. T-Bond Mar 98 $205,927,125 $207,989,344 $(2,062,219)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B14
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS OF
THE CONSERVATIVE BALANCED PORTFOLIO AND THE FLEXIBLE MANAGED PORTFOLIO OF
THE PRUDENTIAL SERIES FUND, INC.
NOTE 1: GENERAL
The Prudential Series Fund, Inc. ("Series Fund"), a Maryland corporation,
organized on November 15, 1982, is a diversified open-end management investment
company registered under the Investment Company Act of 1940, as amended. The
Series Fund is composed of fifteen Portfolios ("Portfolio" or "Portfolios"),
each with a separate series of capital stock. The information presented in these
financial statements pertains to only two Portfolios: Conservative Balanced
Portfolio and Flexible Managed Portfolio. Shares in the Series Fund are
currently sold only to certain separate accounts of The Prudential Insurance
Company of America ("The Prudential"), Pruco Life Insurance Company and Pruco
Life Insurance Company of New Jersey (together referred to as the "Companies")
to fund benefits under certain variable life insurance and variable annuity
contracts ("contracts") issued by the Companies. The accounts invest in shares
of the Series Fund through subaccounts that correspond to the Portfolios. The
accounts will redeem shares of the Series Fund to the extent necessary to
provide benefits under the contracts or for such other purposes as may be
consistent with the contracts.
NOTE 2: ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Series Fund in preparation of its financial statements.
SECURITIES VALUATION: Securities traded on an exchange (whether domestic or
foreign) are valued at the last reported sales price on the primary exchange on
which they are traded. Securities traded in the over-the-counter market
(including securities listed on exchanges for which a last sales price is not
available) are valued at the average of the last reported bid and asked prices.
Convertible debt securities are valued at the mean between the most recently
quoted bid and asked prices provided by principal market makers. High yield
bonds are valued either by quotes received from principal market makers or by an
independent pricing service which determine prices by analysis of quality,
coupon, maturity and other factors. Any security for which a reliable market
quotation is unavailable is valued at fair value as determined in good faith by
or under the direction of the Series Fund's Board of Directors. Short-term
securities are valued at amortized cost.
REPURCHASE AGREEMENTS: In connection with transactions in repurchase agreements
with U.S. financial institutions, it is the Series Fund's policy that its
custodian or designated subcustodians, as the case may be under triparty
repurchase agreements, take possession of the underlying collateral securities,
the value of which exceeds the principal amount of the repurchase transaction
including accrued interest. If the seller defaults and the value of the
collateral declines or if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Series Fund may
by delayed or limited. (See Note 5).
FOREIGN CURRENCY TRANSLATION: The books and records of the Series Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) market value of investments securities, other assets and liabilities - at
the current rates of exchange.
(ii) purchases and sales of investment securities, income and expenses - at the
rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Series Fund are presented at the foreign exchange
rates and market values at the close of the fiscal year, the Series Fund does
not isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from changes
in the market prices of securities held at the end of the fiscal year.
Similarly, the Series Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market prices
of long-term portfolio securities sold during the fiscal year. Accordingly,
these realized and unrealized foreign currency gains (losses) are included in
the reported net realized gains (losses) on investment transactions.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains or losses from holdings of foreign currencies, currency
gains or losses realized between the trade and settlement dates
C1
<PAGE>
on security transactions, and the difference between the amounts of dividends,
interest and foreign taxes recorded on the Series Fund's books and the U.S.
dollar equivalent amounts actually received or paid. Net unrealized currency
gains or losses from valuing foreign currency denominated assets and liabilities
(other than investments) at fiscal year end exchange rates are reflected as a
component of net unrealized appreciation (depreciation) on investments and
foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
SHORT SALES: Conservative Balanced Portfolio and Flexible Managed Portfolio may
sell a security it does not own in anticipation of a decline in the market value
of that security (short sale). When a Portfolio makes a short sale, it must
borrow the security sold short and deliver it to the buyer. The proceeds of the
short sale will be retained by the broker-dealer through which it made the short
sale as collateral for its obligation to deliver the security upon conclusion of
the sale. The Portfolio may have to pay a fee to borrow the particular security
and may be obligated to remit any interest or dividends received on such
borrowed securities. A gain, limited to the price at which the Portfolio sold
the security short, or a loss, unlimited in magnitude, will be recognized upon
the termination of a short sale if the market price at termination is less than
or greater than, respectively, the proceeds originally received.
OPTIONS: The Series Fund may either purchase or write options in order to hedge
against adverse market movements or fluctuations in value with respect to
securities which the Series Fund currently owns or intends to purchase. The
Series Fund's principal reason for writing options is to realize, through
receipts of premiums, a greater current return than would be realized on the
underlying security alone. When the Series Fund purchases an option, it pays a
premium and an amount equal to that premium is recorded as an investment. When
the Series Fund writes an option, it receives a premium and an amount equal to
that premium is recorded as a liability. The investment or liability is adjusted
daily to reflect the current market value of the option. If an option expires
unexercised, the Series Fund realizes a gain or loss to the extent of the
premium received or paid. If an option is exercised, the premium received or
paid is an adjustment to the proceeds from the sales or the cost of the purchase
in determining whether the Series Fund has realized a gain or loss. The
difference between the premium and the amount received or paid on effecting a
closing purchase or sale transaction is also treated as a realized gain or loss.
Gain or loss on purchased options is included in net realized gain (loss) on
investment transactions. Gain or loss on written options is presented separately
as net realized gain (loss) on written option transactions.
The Series Fund, as writer of an option, may have no control over whether the
underlying securities may be sold (called) or purchased (put). As a result, the
Series Fund bears the market risk of an unfavorable change in the price of the
security underlying the written option. The Series Fund, as purchaser of an
option, bears the risk of the potential inability of the counterparties to meet
the terms of their contracts.
FINANCIAL FUTURES CONTRACTS: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series Fund is required to pledge to the broker an amount of cash and/or
other assets equal to a certain percentage of the contract amount. This amount
is known as the "initial margin". Subsequent payments, known as "variation
margin", are made or received by the Series Fund each day, depending on the
daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. When the contract expires or is closed, the gain or
loss is realized and is presented in the statement of operations as net realized
gain (loss) on financial futures contracts.
The Series Fund invests in financial futures contracts in order to hedge its
existing portfolio securities or securities the Series Fund intends to purchase,
against fluctuations in value. Under a variety of circumstances, the Series Fund
may not achieve the anticipated benefits of the financial futures contracts and
may realize a loss. The use of futures transactions involves the risk of
imperfect correlation in movements in the price of futures contracts and the
underlying assets.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; interest income, which is comprised of four elements: stated
coupon, original issue discount, market discount and market premium is recorded
on the accrual basis. Certain portfolios own shares of real estate investment
trusts ("REITs") which report information on the source of their
C2
<PAGE>
distributions annually. A portion of distributions received from REITs during
the period is estimated to be a return of capital and is recorded as a reduction
of their costs. During the year ended December 31, 1997, certain Portfolios
purchased securities from and sold securities to other Portfolios of the Series
Fund or other funds or accounts managed by The Prudential or its affiliates in
accordance with the provisions of Rule 17a-7 of the Investment Company Act of
1940. Expenses are recorded on the accrual basis which may require the use of
certain estimates by management. The Series Fund expenses are allocated to the
respective Portfolios on the basis of relative net assets except for expenses
that are charged directly at a Portfolio level.
CUSTODY FEE CREDITS: The Series Fund has an arrangement with its custodian
bank, whereby uninvested monies earn credits which reduce the fees charged by
the custodian. Such custody fee credits are presented as a reduction of gross
expenses in the accompanying Statement of Operations.
TAXES: For federal income tax purposes, each portfolio in the Series Fund is
treated as a separate taxpaying entity. It is the intent of the Series Fund to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends, interest and capital gains have been
provided for in accordance with the Series Fund's understanding of the
applicable country's tax rules and regulations.
DIVIDENDS AND DISTRIBUTIONS: Dividends and distributions of each Portfolio are
declared in cash and automatically reinvested in additional shares of the
Portfolio. Each Portfolio will declare and distribute dividends from net
investment income, if any, quarterly and net capital gains, if any, at least
annually. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Series Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gains, and
Return of Capital Distributions by Investment Companies. As a result of this
statement, the Series Fund changed the classification of distributions to
shareholders to disclose the amounts of undistributed net investment income and
accumulated net realized gain (loss) on investments available for distributions
determined in accordance with income tax regulations. For the fiscal year ended
December 31, 1997, the application of this statement increased (decreased)
paid-in capital in excess of par ("PC"), undistributed net investment income
("UNI") and accumulated net realized gains (losses) on investments ("GL") by the
following amounts:
<TABLE>
<CAPTION>
PC UNI G/L
-------- --------- ----------
<S> <C> <C> <C>
Conservative Balanced Portfolio........ $ 33,509 $ 48,752 $ (82,261)
Flexible Managed Portfolio............. -- 625,749 (625,749)
</TABLE>
Net investment income, net realized gains and net assets were not affected by
these reclassifications.
NOTE 3: AGREEMENTS
The Series Fund has an investment advisory agreement with The Prudential.
Pursuant to this agreement The Prudential has responsibility for all investment
advisory services and supervises the subadvisers' performance of such services.
The Prudential has entered into a service agreement with The Prudential
Investment Corporation ("PIC"), which provides that PIC will furnish to The
Prudential such services as The Prudential may require in connection with the
performance of its obligations under the investment advisory agreement with the
Series Fund. The Prudential pays for the cost of PIC's services, compensation of
officers of the Series Fund, occupancy and certain clerical and administrative
expenses of the Series Fund. The Series Fund bears all other costs and expenses.
The investment advisory fee paid The Prudential is computed daily and payable
quarterly, at the annual rates specified below of the value of each of the
Portfolio's average daily net assets.
<TABLE>
<CAPTION>
Fund Investment Advisory Fee
- --------------------------------------- ------------------------
<S> <C>
Conservative Balanced Portfolio........ 0.55%
Flexible Managed Portfolio............. 0.60
</TABLE>
C3
<PAGE>
The Prudential has agreed to refund to a Portfolio, the portion of the
investment advisory fee for that Portfolio equal to the amount that the
aggregate annual ordinary operating expenses (excluding interest, taxes and
brokerage commissions) exceeds 0.75% of the Portfolio's average daily net
assets. No refund was required for the fiscal year ended December 31, 1997.
PIC is an indirect, wholly-owned subsidiary of The Prudential.
The Series Fund entered into a credit agreement (the "Agreement") on October 28,
1997 with an unaffiliated lender. The maximum commitment under the Agreement is
$250,000,000. The Agreement expires on December 18, 1998. Interest on any such
borrowings will be at market rates. The purpose of the Agreement is to serve as
an alternative source of funding for capital share redemptions. The Series Fund
has not borrowed any amounts pursuant to the Agreement as of December 31, 1997.
The Series Fund pays a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly by the Series Fund.
NOTE 4: OTHER TRANSACTIONS WITH AFFILIATES
For the fiscal year ended December 31, 1997, Prudential Securities Incorporated,
an indirect, wholly-owned subsidiary of The Prudential, earned $684,760 in
brokerage commissions from transactions executed on behalf of the Conservative
Balanced Portfolio and the Flexible Managed Portfolio as follows:
<TABLE>
<CAPTION>
Fund Commission
- --------------------------------------- -----------
<S> <C>
Conservative Balanced Portfolio........ $ 256,752
Flexible Managed Portfolio............. 428,008
-----------
$ 684,760
</TABLE>
NOTE 5: JOINT REPURCHASE AGREEMENT ACCOUNT
The Portfolios of the Series Fund (excluding Global Portfolio) may transfer
uninvested cash balances into a single joint repurchase agreement account, the
daily aggregate balance of which is invested in one or more repurchase
agreements collateralized by U.S. Government obligations. The Series Fund's
undivided interest in the joint repurchase agreement account represented
$1,038,519,000 as of December 31, 1997. The Portfolios of the Series Fund with
cash invested in the joint accounts had the following principal amounts and
percentage participation in the account:
<TABLE>
<CAPTION>
Principal Percentage
Amount Interest
--------------- ----------
<S> <C> <C>
Conservative Balanced Portfolio........ $ 81,783,000 7.88%
Flexible Managed Portfolio............. 137,860,000 13.28
All other portfolios (currently not
available to PRUvider)............... 818,876,000 78.84
--------------- ----------
$ 1,038,519,000 100.00%
</TABLE>
As of such date, each repurchase agreement in the joint account and the
collateral therefor were as follows:
CIBC Oppenheimer, 6.10%, in the principal amount of $138,519,000, repurchase
price $138,566,045, due 1/2/98. The value of the collateral including accrued
interest was $141,862,492.
Salomon Smith Barney Inc., 6.75%, in the principal amount of $300,000,000,
repurchase price $300,112,500, due 1/2/98. The value of the collateral including
accrued interest was $306,560,575.
SBC Warburg Dillon Read Inc., 6.50%, in the principal amount of $300,000,000,
repurchase price $300,108,333, due 1/2/98. The value of the collateral including
accrued interest was $306,557,797.
UBS Securities Corp., 6.55%, in the principal amount of $300,000,000, repurchase
price $300,109,167, due 1/2/98. The value of the collateral including accrued
interest was $306,001,638.
C4
<PAGE>
NOTE 6: PORTFOLIO SECURITIES
The aggregate cost of purchases and the proceeds from the sales of securities
(excluding short-term issues) for the fiscal year ended December 31, 1997 were
as follows:
Cost of Purchases:
<TABLE>
<CAPTION>
CONSERVATIVE FLEXIBLE
BALANCED MANAGED
----------------- -----------------
<S> <C> <C>
Non-Government......................... $ 7,826,155,071 $ 8,194,217,051
Government............................. $ 5,017,442,019 $ 3,054,412,991
</TABLE>
Proceeds from Sales:
<TABLE>
<CAPTION>
CONSERVATIVE FLEXIBLE
BALANCED MANAGED
----------------- -----------------
<S> <C> <C>
Non-Government......................... $ 7,823,232,061 $ 8,576,103,609
Government............................. $ 5,106,797,609 $ 3,018,431,969
</TABLE>
The federal income tax basis and unrealized appreciation (depreciation) of the
Fund's investments as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
CONSERVATIVE FLEXIBLE
BALANCED MANAGED
----------------- -----------------
<S> <C> <C>
Gross Unrealized Appreciation.......... $ 311,261,405 $ 565,581,079
Gross Unrealized Depreciation.......... 111,299,483 149,894,627
Total Net Unrealized................... 199,961,922 415,686,452
Tax Basis.............................. 4,496,062,195 5,055,701,095
</TABLE>
C5
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CONSERVATIVE BALANCED
----------------------------------------------------
YEAR ENDED
DECEMBER 31,
----------------------------------------------------
1997 1996 1995(a) 1994(a) 1993(a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 15.52 $ 15.31 $ 14.10 $ 14.91 $ 14.24
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. 0.76 0.66 0.63 0.53 0.49
Net realized and unrealized gains
(losses) on investments.............. 1.26 1.24 1.78 (0.68) 1.23
-------- -------- -------- -------- --------
Total from investment operations... 2.02 1.90 2.41 (0.15) 1.72
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.76) (0.66) (0.64) (0.51) (0.47)
Dividends in excess of net investment
income............................... -- (1.03) (0.56) (0.15) (0.58)
Distributions from net realized
gains................................ (1.81) -- -- -- --
-------- -------- -------- -------- --------
Total distributions................ (2.57) (1.69) (1.20) (0.66) (1.05)
-------- -------- -------- -------- --------
Net Asset Value, end of year........... $ 14.97 $ 15.52 $ 15.31 $ 14.10 $ 14.91
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(b)............ 13.45% 12.63% 17.27% (0.97)% 12.20%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $4,744.2 $4,478.8 $3,940.8 $3,501.1 $3,103.2
Ratios to average net assets:
Expenses............................. 0.56% 0.59% 0.58% 0.61% 0.60%
Net investment income................ 4.48% 4.13% 4.19% 3.61% 3.22%
Portfolio turnover rate................ 295% 295% 201% 125% 79%
Average commission rate paid per
share................................ $0.0563 $0.0554 N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
FLEXIBLE MANAGED
----------------------------------------------------
YEAR ENDED
DECEMBER 31,
----------------------------------------------------
1997 1996 1995(a) 1994(a) 1993(a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 17.79 $ 17.86 $ 15.50 $ 16.96 $ 16.01
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. 0.59 0.57 0.56 0.47 0.57
Net realized and unrealized gains
(losses) on investments.............. 2.52 1.79 3.15 (1.02) 1.88
-------- -------- -------- -------- --------
Total from investment operations... 3.11 2.36 3.71 (0.55) 2.45
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.58) (0.58) (0.56) (0.45) (0.57)
Dividends in excess of net investment
income............................... -- (1.85) (0.79) (0.46) (0.93)
Distributions from net realized
gains................................ (3.04) -- -- -- --
-------- -------- -------- -------- --------
Total distributions................ (3.62) (2.43) (1.35) (0.91) (1.50)
-------- -------- -------- -------- --------
Net Asset Value, end of year........... $ 17.28 $ 17.79 $ 17.86 $ 15.50 $ 16.96
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(b)............ 17.96% 13.64% 24.13% (3.16)% 15.58%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $5,490.1 $4,896.9 $4,261.2 $3,481.5 $3,292.2
Ratios to average net assets:
Expenses............................. 0.62% 0.64% 0.63% 0.66% 0.66%
Net investment income................ 3.02% 3.07% 3.30% 2.90% 3.30%
Portfolio turnover rate................ 227% 233% 173% 124% 63%
Average commission rate paid per
share................................ $0.0569 $0.0563 N/A N/A N/A
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
SEE NOTES TO FINANCIAL STATEMENTS.
D1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF THE PRUDENTIAL SERIES FUND, INC.:
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Conservative Balanced and Flexible
Managed Portfolios (two of the fifteen portfolios that constitute The Prudential
Series Fund, Inc.; the "Portfolios") at December 31, 1997, the results of each
of their operations for the year then ended and the changes in each of their net
assets and the financial highlights for each of the two years in the period then
ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Portfolios' management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1997 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
The financial highlights for each of the three years in the period ended
December 31, 1995 for each of the Portfolios were audited by other independent
accountants whose report thereon dated February 15, 1996 expressed an
unqualified opinion on those financial highlights.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, NY 10036
February 13, 1998
E1
<PAGE>
TAX INFORMATION
Although we understand that the vast majority, if not all, of the
shareholders/contract holders of the Series Fund currently maintain a tax
deferred status, we are nevertheless required by the Internal Revenue Code to
advise you within 60 days of the Series Fund's fiscal year end (December 31,
1997) as to the federal tax status of dividends paid by the Fund during such
fiscal year. Accordingly, we are advising you that in 1997, the Fund paid
dividends as follows:
<TABLE>
<CAPTION>
ORDINARY DIVIDENDS
- ---------------------------------------------------------------------------------------
LONG-TERM CAPITAL GAINS
----------------------------
SHORT-TERM TOTAL
INCOME CAPITAL GAINS TAXED @ 28% TAXED @ 20% DIVIDENDS
----------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Conservative Balanced
Portfolio.................. $ 0.759 $ 0.585 $ 0.356 $ 0.874 $ 2.574
Flexible Managed Portfolio... 0.585 0.856 1.016 1.168 3.625
</TABLE>
E2
<PAGE>
BOARD OF
DIRECTORS THE PRUDENTIAL SERIES FUND, INC.
<TABLE>
<S> <C> <C>
MENDEL A. MELZER, CFA W. SCOTT McDONALD, JR., Ph.D. E. MICHAEL CAULFIELD
CHAIRMAN, PRINCIPAL, CEO,
THE PRUDENTIAL SERIES FUND, INC. KALUDIS CONSULTING GROUP PRUDENTIAL INVESTMENTS,
PRESIDENT, THE PRUDENTIAL SERIES
FUND, INC.
</TABLE>
SAUL K. FENSTER, Ph.D. JOSEPH WEBER, Ph.D.
PRESIDENT, NEW JERSEY VICE PRESIDENT,
INSTITUTE OF TECHNOLOGY INTERCLASS
(INTERNATIONAL
CORPORATE LEARNING)
