THE PRUDENTIAL SERIES FUND, INC.
CONSERVATIVE BALANCED PORTFOLIO
DIVERSIFIED BOND PORTFOLIO
EQUITY PORTFOLIO
EQUITY INCOME PORTFOLIO
FLEXIBLE MANAGED PORTFOLIO
GLOBAL PORTFOLIO
HIGH YIELD BOND PORTFOLIO
MONEY MARKET PORTFOLIO
PRUDENTIAL JENNISON PORTFOLIO
STOCK INDEX PORTFOLIO
PROSPECTUS: May 1, 1999
As with all mutual funds, filing this prospectus with the SEC does not mean
that the SEC has judged this Fund a good investment, nor has the SEC
determined that this prospectus is complete or accurate. It is a criminal
offense to state otherwise.
[PRUDENTIAL INVESTMENTS LOGO]
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
RISK/RETURN SUMMARY
Conservative Balanced Portfolio
-------------------------------
1 Investment Objective and Principal Strategies
1 Principal Risks
2 Evaluating Performance
Diversified Bond Portfolio
--------------------------
2 Investment Objective and Principal Strategies
3 Principal Risks
3 Evaluating Performance
Equity Portfolio
----------------
4 Investment Objective and Principal Strategies
4 Principal Risks
4 Evaluating Performance
Equity Income Portfolio
-----------------------
5 Investment Objective and Principal Strategies
5 Principal Risks
6 Evaluating Performance
Flexible Managed Portfolio
--------------------------
6 Investment Objective and Principal Strategies
7 Principal Risks
7 Evaluating Performance
Global Portfolio
----------------
8 Investment Objective and Principal Strategies
8 Principal Risks
8 Evaluating Performance
High Yield Bond Portfolio
-------------------------
9 Investment Objective and Principal Strategies
9 Principal Risks
10 Evaluating Performance
Money Market Portfolio
----------------------
10 Investment Objective and Principal Strategies
11 Principal Risks
11 Evaluating Performance
Prudential Jennison Portfolio
-----------------------------
12 Investment Objective and Principal Strategies
12 Principal Risks
12 Evaluating Performance
Stock Index Portfolio
---------------------
13 Investment Objective and Principal Strategies
13 Principal Risks
14 Evaluating Performance
<PAGE>
15 HOW THE PORTFOLIOS INVEST
15 Conservative Balanced Portfolio
17 Diversified Bond Portfolio
19 Equity Portfolio
20 Equity Income Portfolio
22 Flexible Managed Portfolio
24 Global Portfolio
25 High Yield Bond Portfolio
27 Money Market Portfolio
28 Prudential Jennison Portfolio
30 Stock Index Portfolio
32 INVESTMENT RISKS
37 HOW THE PORTFOLIOS ARE MANAGED
37 Investment Adviser
37 Investment Sub-Advisers
38 Portfolio Managers
39 HOW TO BUY AND SELL SHARES OF THE FUND
39 How to Buy and Sell Shares
40 Net Asset Value
41 Distributor
41 OTHER INFORMATION
41 Federal Income Taxes
41 Year 2000
41 Monitoring for Possible Conflicts
FINANCIAL HIGHLIGHTS
For More Information (Back Cover)
<PAGE>
RISK/RETURN SUMMARY
This prospectus is for use with the Variable Universal Life Insurance Contract
and describes only those portfolios of The Prudential Series Fund, Inc. (the
Fund) that are available for investment through that Contract. This prospectus
should be read together with the current prospectus for the Variable Universal
Life Insurance Contract.
The Fund is a diversified, open-end investment management company - commonly
known as a mutual fund. Ten of the Fund's seventeen portfolios (the Portfolios)
are available under the Variable Universal Life Insurance Contract:
CONSERVATIVE BALANCED PORTFOLIO GLOBAL PORTFOLIO
DIVERSIFIED BOND PORTFOLIO HIGH YIELD PORTFOLIO
EQUITY MONEY MARKET PORTFOLIO
EQUITY INCOME PORTFOLIO PRUDENTIAL JENNISON PORTFOLIO
FLEXIBLE MANAGED PORTFOLIO STOCK INDEX PORTFOLIO
The following section highlights key information about each Portfolio.
Additional information follows this summary and is provided in the Fund's
Statement of Additional Information (SAI).
- --------------------------------------------------------------------------------
CONSERVATIVE BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is A TOTAL INVESTMENT RETURN CONSISTENT WITH A
CONSERVATIVELY MANAGED DIVERSIFIED PORTFOLIO. This Portfolio may be appropriate
for an investor who wants diversification with a relatively lower risk of loss
than that associated with the Flexible Managed Portfolio (see below). To achieve
our objective, we invest in a mix of equity securities, debt obligations and
money market instruments. Up to 30% of the Portfolio's total assets may be
invested in foreign securities. In addition, we may invest a portion of the
Portfolio's assets in high yield/high risk debt securities. While we make every
effort to achieve our objective, we can't guarantee success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Equity
securities - such as common stocks - are subject to COMPANY RISK. The price of
the stock of a particular company can vary based on a variety of factors, such
as the company's financial performance, changes in management and product
trends, and the potential for takeover and acquisition. Common stocks are also
subject to MARKET RISK stemming from factors independent of any particular
security. Investment markets fluctuate. All markets go through cycles and market
risk involves being on the wrong side of a cycle. Factors affecting market risk
include political events, broad economic and social changes, and the mood of the
investing public. You can see market risk in action during large drops in the
stock market. If investor sentiment turns gloomy, the price of all stocks may
decline. It may not matter that a particular company has great profits and its
stock is selling at a relatively low price. If the overall market is dropping,
the values of all stocks are likely to drop.
Since the Portfolio also invests in debt obligations, there is the risk that the
value of a particular obligation could decrease. Debt obligations may involve
CREDIT RISK - the risk that the borrower will not repay an obligation, and
MARKET RISK - the risk that interest rates may change and affect the value of
the obligation. High-yield debt securities - also known as "junk bonds" - have a
higher risk of default and tend to be less liquid.
The Portfolio's investment in foreign securities involves additional risks. For
example, foreign banks and companies generally are not subject to the same types
of regulatory requirements that U.S. banks and companies are. Foreign political
developments and changes in currency rates may adversely affect the value of
foreign securities.
<PAGE>
There is also risk involved in the investment strategies we may use. Some of our
strategies require us to try to predict whether the price or value of an
underlying investment will go up or down over a certain period of time. There is
always the risk that investments will not perform as we thought they would. Like
any mutual fund, an investment in the Portfolio could lose value, and you could
lose money. For more information about risk, see "Investment Risks."
EVALUATING PERFORMANCE
A number of factors - including risk - affect how the Portfolio performs. The
following bar chart and table show the Portfolio's performance for each full
calendar year of operation for the last 10 years. They demonstrate the risk of
investing in the Portfolio and how returns can change from year to year. Past
performance does not mean that the Portfolio will achieve similar results in the
future.
Annual Returns* (Class I shares)
================================================================================
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
16.99% 5.27% 19.07% 6.95% 12.20% -0.97% 17.27% 12.63% 13.45% 11.74%
[GRAPHICAL REPRESENTATION OF CHART]
================================================================================
Best Quarter: 7.62% (2nd quarter of 1997)
Worst Quarter: (3.17)% (3rd quarter of 1998)
* THESE ANNUAL RETURNS DO NOT INCLUDE CONTRACT CHARGES. IF CONTRACT CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN. SEE THE
ACCOMPANYING CONTRACT PROSPECTUS.
Average Annual Returns* (as of 12/31/98)
================================================================================
SINCE
INCEPTION
1 YEAR 5 YEARS 10 YEARS (5/13/83)
------ ------- -------- ---------
Class I shares 11.74% 10.65% 11.31% 10.86%
S&P 500** 28.60% 24.05% 19.19% 17.29%
Lipper Average*** 14.79% 13.73% 12.21% 8.94%
================================================================================
* THE PORTFOLIO'S RETURNS ARE AFTER DEDUCTION OF EXPENSES AND DO NOT INCLUDE
CONTRACT CHARGES.
** THE STANDARD & POOR'S 500 STOCK INDEX (S&P 500 ) - AN UNMANAGED INDEX OF 500
STOCKS OF LARGE U.S. COMPANIES - GIVES A BROAD LOOK AT HOW STOCK PRICES HAVE
PERFORMED. THESE RETURNS DO NOT INCLUDE THE EFFECT OF ANY INVESTMENT MANAGEMENT
EXPENSES. THESE RETURNS WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF THESE
EXPENSES. THE "SINCE INCEPTION" RETURN REFLECTS THE CLOSEST CALENDAR MONTH-END
RETURN (4/30/83). SOURCE: LIPPER, INC.
*** 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. THE RETURNS
ARE NET OF INVESTMENT FEES AND FUND EXPENSES BUT NOT PRODUCT CHARGES. THE "SINCE
INCEPTION" RETURN REFLECTS THE CLOSEST CALENDAR MONTH-END RETURN (4/30/83).
SOURCE: LIPPER, INC.
- --------------------------------------------------------------------------------
DIVERSIFIED BOND PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is A HIGH LEVEL OF INCOME OVER A LONGER TERM WHILE
PROVIDING REASONABLE SAFETY OF CAPITAL. This means we look for investments that
we think will provide a high level of current income, but which are not expected
to involve a substantial risk of loss of capital through default. To achieve our
objective, we invest primarily in higher-grade debt obligations and high-quality
money market investments. We may also purchase U.S. dollar denominated
securities that are issued outside the U.S. by foreign or U.S. issuers. In
addition, we may invest a portion of the Portfolio's assets in high yield/high
risk debt securities. While we make every effort to achieve our objective, we
can't guarantee success.
2
<PAGE>
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Since the
Portfolio invests primarily in debt obligations, there is the risk that the
value of a particular obligation could go down. Debt obligations may involve
CREDIT RISK - the risk that the borrower will not repay an obligation, and
MARKET RISK - the risk that interest rates may change and affect the value of
the obligation. High-yield debt securities - also known as "junk bonds" - have a
higher risk of default and tend to be less liquid.
The Portfolio's investment in U.S. dollar denominated foreign securities
involves additional risks. For example, foreign banks and companies generally
are not subject to the same types of regulatory requirements that U.S. banks and
companies are. Foreign political developments may adversely affect the value of
foreign securities. The Portfolio's foreign securities may also be affected by
changes in currency rates, though to a lesser extent than if the Portfolio
invested in securities denominated in a foreign currency.
There is also risk involved in the investment strategies we may use. Some of our
strategies require us to try to predict whether the price or value of an
underlying investment will go up or down over a certain period of time. There is
always the risk that investments will not perform as we thought they would. Like
any mutual fund, an investment in the Portfolio could lose value, and you could
lose money. For more information about risk, see "Investment Risks."
EVALUATING PERFORMANCE
A number of factors - including risk - affect how the Portfolio performs. The
following bar chart and table show the Portfolio's performance for each full
calendar year of operation for the last 10 years. They demonstrate the risk of
investing in the Portfolio and how returns can change from year to year. Past
performance does not mean that the Portfolio will achieve similar results in the
future.
Annual Returns* (Class I shares)
================================================================================
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
13.49% 8.32% 16.44% 7.19% 10.13% -3.23% 20.73% 4.40% 8.57% 7.15%
[GRAPHICAL REPRESENTATION OF CHART]
================================================================================
Best Quarter: 7.94% (2nd quarter of 1989)
Worst Quarter: (2.83)% (1st quarter of 1994)
* THESE ANNUAL RETURNS DO NOT INCLUDE CONTRACT CHARGES. IF CONTRACT CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN. SEE THE
ACCOMPANYING CONTRACT PROSPECTUS.
Average Annual Returns* (as of 12/31/98)
================================================================================
SINCE
INCEPTION
1 YEAR 5 YEARS 10 YEARS (5/13/83)
------ ------- -------- ---------
Class I shares 7.15% 7.25% 9.14% 9.25%
Lehman Aggregate Index** 8.69% 7.27% 9.26% 9.99%
Lipper Average*** 7.44% 7.13% 8.97% 8.94%
================================================================================
* THE PORTFOLIO'S RETURNS ARE AFTER DEDUCTION OF EXPENSES AND DO NOT INCLUDE
CONTRACT CHARGES.
** THE LEHMAN AGGREGATE INDEX (LAI) IS COMPRISED OF MORE THAN 5,000 GOVERNMENT
AND CORPORATE BONDS. THESE RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES
CHARGES. THESE RETURNS WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF SALES
CHARGES. THE "SINCE INCEPTION" RETURN REFLECTS THE CLOSEST CALENDAR MONTH-END
RETURN (4/30/83). SOURCE: LIPPER, INC.
*** THE LIPPER VARIABLE INSURANCE PRODUCTS (VIP) CORPORATE DEBT AVERAGE IS
CALCULATED BY LIPPER ANALYTICAL SERVICES, INC. AND REFLECTS THE INVESTMENT
RETURN OF CERTAIN PORTFOLIOS UNDERLYING VARIABLE LIFE AND ANNUITY PRODUCTS. THE
RETURNS ARE NET OF INVESTMENT FEES AND FUND EXPENSES BUT NOT PRODUCT CHARGES.
THE "SINCE INCEPTION" RETURN REFLECTS THE CLOSEST CALENDAR MONTH-END RETURN
(4/30/83). SOURCE: LIPPER, INC.
3
<PAGE>
- --------------------------------------------------------------------------------
EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is CAPITAL APPRECIATION. To achieve our objective, we
invest primarily in common stocks of major established corporations as well as
smaller companies that we believe offer attractive prospects of appreciation. In
addition, the Portfolio may invest up to 30% of its total assets in foreign
securities. While we make every effort to achieve our objective, we can't
guarantee success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Equity
securities - such as common stocks - are subject to COMPANY RISK. The price of
the stock of a particular company can vary based on a variety of factors, such
as the company's financial performance, changes in management and product
trends, and the potential for takeover and acquisition. Common stocks are also
subject to MARKET RISK stemming from factors independent of any particular
security. Investment markets fluctuate. All markets go through cycles and market
risk involves being on the wrong side of a cycle. Factors affecting market risk
include political events, broad economic and social changes, and the mood of the
investing public. You can see market risk in action during large drops in the
stock market. If investor sentiments turn gloomy, the price of all stocks may
decline. It may not matter that a particular company has great profits and its
stock is selling at a relatively low price. If the overall market is dropping,
the values of all stocks are likely to drop. Generally, the stock prices of
small-sized companies vary more than the prices of large company stocks and may
present above average risks.
The Portfolio's investment in foreign securities involves additional risks. For
example, foreign banks and companies generally are not subject to the same types
of regulatory requirements that U.S. banks and companies are. Foreign political
developments and changes in currency rates may adversely affect the value of
foreign securities.
There is also risk involved in the investment strategies we may use. Some of our
strategies require us to try to predict whether the price or value of an
underlying investment will go up or down over a certain period of time. There is
always the risk that investments will not perform as we thought they would. Like
any mutual fund, an investment in the Portfolio could lose value, and you could
lose money. For more information about risk, see "Investment Risks."
EVALUATING PERFORMANCE
A number of factors - including risk - affect how the Portfolio performs. The
following bar chart and table show the Portfolio's performance for each full
calendar year of operation for the last 10 years. They demonstrate the risk of
investing in the Portfolio and how returns can change from year to year. Past
performance does not mean that the Portfolio will achieve similar results in the
future.
Annual Returns* (Class I shares)
================================================================================
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
29.73% -5.21% 26.01% 14.17% 21.87% 2.78% 31.29% 18.52% 24.66% 9.34%
[GRAPHICAL REPRESENTATION OF CHART]
================================================================================
Best Quarter: 19.13% (1st quarter of 1991)
Worst Quarter: (15.59)% (3rd quarter of 1990)
* THESE ANNUAL RETURNS DO NOT INCLUDE CONTRACT CHARGES. IF CONTRACT CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN. SEE THE
ACCOMPANYING CONTRACT PROSPECTUS.
4
<PAGE>
Average Annual Returns* (as of 12/31/98)
- ------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS 10 YEARS (5/13/83)
------ ------- -------- ---------
Class I shares 9.34% 16.88% 16.74% 15.14%
S&P 500** 28.60% 24.05% 19.19% 17.29%
Lipper Average*** 24.94% 20.25% 17.83% 16.01%
- ------------------------------------------------------------------------------
*THE PORTFOLIO'S RETURNS ARE AFTER DEDUCTION OF EXPENSES AND DO NOT INCLUDE
CONTRACT CHARGES.
**THE STANDARD & POOR'S 500 STOCK INDEX (S&P 500) - AN UNMANAGED INDEX OF 500
STOCKS OF LARGE U.S. COMPANIES - GIVES A BROAD LOOK AT HOW STOCK PRICES HAVE
PERFORMED. THESE RETURNS DO NOT INCLUDE THE EFFECT OF ANY INVESTMENT MANAGEMENT
EXPENSES. THESE RETURNS WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF THESE
EXPENSES. THE "SINCE INCEPTION" RETURN REFLECTS THE CLOSEST CALENDAR MONTH-END
RETURN (4/30/83). SOURCE: LIPPER, INC.
***THE LIPPER VARIABLE INSURANCE PRODUCTS (VIP) GROWTH FUND AVERAGE IS
CALCULATED BY LIPPER ANALYTICAL SERVICES, INC. AND REFLECTS THE INVESTMENT
RETURN OF CERTAIN PORTFOLIOS UNDERLYING VARIABLE LIFE AND ANNUITY PRODUCTS. THE
RETURNS ARE NET OF INVESTMENT FEES AND FUND EXPENSES BUT NOT PRODUCT CHARGES.
THESE RETURNS WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF THESE EXPENSES. THE
"SINCE INCEPTION" RETURN REFLECTS THE CLOSEST CALENDAR MONTH-END RETURN
(4/30/83). SOURCE: LIPPER, INC.
- --------------------------------------------------------------------------------
EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is BOTH CURRENT INCOME AND CAPITAL APPRECIATION. To
achieve our objective, we invest primarily in common stocks and convertible
securities that we believe provide good prospects for returns above those of the
Standard & Poor's 500 Stock Index (S&P 500 Index) or the NYSE Composite Index.
In addition, the Portfolio may invest up to 30% of its total assets in foreign
securities. While we make every effort to achieve our objective, we can't
guarantee success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Equity
securities - such as common stocks - are subject to COMPANY RISK. The price of
the stock of a particular company can vary based on a variety of factors, such
as the company's financial performance, changes in management and product
trends, and the potential for takeover and acquisition. Common stocks are also
subject to MARKET RISK stemming from factors independent of any particular
security. Investment markets fluctuate. All markets go through cycles and market
risk involves being on the wrong side of a cycle. Factors affecting market risk
include political events, broad economic and social changes, and the mood of the
investing public. You can see market risk in action during large drops in the
stock market. If investor sentiments turn gloomy, the price of all stocks may
decline. It may not matter that a particular company has great profits and its
stock is selling at a relatively low price. If the overall market is dropping,
the values of all stocks are likely to drop.
Since the Portfolio may also invest in debt obligations, there is the risk that
the value of a particular obligation could decrease. Debt obligations may
involve CREDIT RISK - the risk that the borrower will not repay an obligation,
and MARKET RISK - the risk that interest rates may change and affect the value
of the obligation.
The Portfolio's investment in foreign securities involves additional risks. For
example, foreign banks and companies generally are not subject to the same types
of regulatory requirements that U.S. banks and companies are. Foreign political
developments and changes in currency rates may adversely affect the value of
foreign securities.
There is also risk involved in the investment strategies we may use. Some of our
strategies require us to try to predict whether the price or value of an
underlying investment will go up or down over a certain period of time. There is
always the risk that investments will not perform as we thought they would. Like
any mutual fund, an investment in the Portfolio could lose value, and you could
lose money. For more information about risk, see "Investment Risks."
5
<PAGE>
EVALUATING PERFORMANCE
A number of factors - including risk - affect how the Portfolio performs. The
following bar chart and table show the Portfolio's performance for each full
calendar year of operation for the last 10 years. They demonstrate the risk of
investing in the Portfolio and how returns can change from year to year. Past
performance does not mean that the Portfolio will achieve similar results in the
future.
Annual Returns* (Class I shares)
================================================================================
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
22.67% -3.73% 27.50% 10.14% 22.28% 1.44% 21.70% 21.74% 36.61% -2.38%
[GRAPHICAL REPRESENTATION OF CHART]
================================================================================
Best Quarter: 16.54% (2nd quarter of 1997)
Worst Quarter: (18.14)% (3rd quarter of 1998)
*THESE ANNUAL RETURNS DO NOT INCLUDE CONTRACT CHARGES. IF CONTRACT CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN. SEE THE
ACCOMPANYING CONTRACT PROSPECTUS.
Average Annual Returns* (as of 12/31/98)
- --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS 10 YEARS (2/19/88)
------ ------- -------- ---------
Class I shares (2.38)% 14.93% 15.06% 14.91%
S&P 500** 28.60% 24.05% 19.19% 18.31%
Lipper Average*** 16.21% 18.50% 15.23% 15.05%
- --------------------------------------------------------------------------------
*THE PORTFOLIO'S RETURNS ARE AFTER DEDUCTION OF EXPENSES AND DO NOT INCLUDE
CONTRACT CHARGES.
** THE STANDARD & POOR'S 500 STOCK INDEX (S&P 500) - AN UNMANAGED INDEX OF 500
STOCKS OF LARGE U.S. COMPANIES - GIVES A BROAD LOOK AT HOW STOCK PRICES HAVE
PERFORMED. THESE RETURNS DO NOT INCLUDE THE EFFECT OF INVESTMENT MANAGEMENT
EXPENSES. THESE RETURNS WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF THESE
EXPENSES. THE "SINCE INCEPTION" RETURN REFLECTS THE CLOSEST CALENDAR MONTH-END
RETURN (2/29/88). SOURCE: LIPPER, INC.
*** THE LIPPER VARIABLE INSURANCE PRODUCTS (VIP) EQUITY INCOME AVERAGE IS
CALCULATED BY LIPPER ANALYTICAL SERVICES, INC. AND REFLECTS THE INVESTMENT
RETURN OF CERTAIN PORTFOLIOS UNDERLYING VARIABLE LIFE AND ANNUITY PRODUCTS. THE
RETURNS ARE NET OF INVESTMENT FEES AND FUND EXPENSES BUT NOT PRODUCT CHARGES.
THE "SINCE INCEPTION" RETURN REFLECTS THE CLOSEST CALENDAR MONTH-END RETURN
(2/29/88). SOURCE: LIPPER, INC.
- --------------------------------------------------------------------------------
FLEXIBLE MANAGED PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is A HIGH TOTAL RETURN CONSISTENT WITH AN AGGRESSIVELY
MANAGED DIVERSIFIED PORTFOLIO. This Portfolio may be appropriate for an investor
who wants diversification and is willing to accept a relatively high level of
loss in an effort to achieve greater appreciation. To achieve our objective, we
invest in a mix of equity securities, debt obligations and money market
instruments. The Portfolio may also invest in foreign securities. A portion of
the debt portion of the Portfolio may be invested in high-yield/high-risk debt
securities which have speculative characteristics and generally are riskier than
higher-rated securities. While we make every effort to achieve our objective, we
can't guarantee success.
6
<PAGE>
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Since the
Portfolio invests in debt obligations, there is the risk that the value of a
particular obligation could decrease. Debt obligations may involve CREDIT RISK -
the risk that the borrower will not repay an obligation, and MARKET RISK - the
risk that interest rates may change and affect the value of the obligation.
A substantial portion of the Portfolio's assets may also be invested in equity
securities. Equity securities such as common stocks - are subject to COMPANY
RISK. The price of the stock of a particular company can vary based on a variety
of factors, such as the company's financial performance, changes in management
and product trends, and the potential for takeover and acquisition. Common
stocks are also subject to MARKET RISK stemming from factors independent of any
particular security. Investment markets fluctuate. All markets go through cycles
and market risk involves being on the wrong side of a cycle. Factors affecting
market risk include political events, broad economic and social changes and the
mood of the investing public. If investor sentiments turn gloomy, the price of
all stocks may decline. It may not matter that a particular company has great
profits and its stock is selling at a relatively low price. If the overall
market is dropping, the value of all stocks are likely to drop.
The Portfolio's investment in foreign securities involves additional risks. For
example, foreign banks and companies generally are not subject to the same types
of regulatory requirements that U.S. banks and companies are. Foreign political
developments and changes in currency rates may adversely affect the value of
foreign securities.
There is also risk involved in the investment strategies we may use. Some of our
strategies require us to try to predict whether the price or value of an
underlying investment will go up or down over a certain period of time. There is
always the risk that investments will not perform as we thought they would. Like
any mutual fund, an investment in the Portfolio could lose value, and you could
lose money. For more information about risk, see "Investment Risks."
EVALUATING PERFORMANCE
A number of factors - including risk - affect how the Portfolio performs. The
following bar chart and table show the Portfolio's performance for each full
calendar year of operation for the last 10 years. They demonstrate the risk of
investing in the Portfolio and how returns can change from year to year. Past
performance does not mean that the Portfolio will achieve similar results in the
future.
Annual Returns* (Class I shares)
================================================================================
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
21.77% 1.91% 25.43% 7.61% 15.58% -3.16% 24.13% 13.64% 17.96% 10.24%
[GRAPHICAL REPRESENTATION OF CHART]
================================================================================
Best Quarter: 10.89% (2nd quarter of 1997)
Worst Quarter: (8.50)% (3rd quarter of 1998)
* THESE ANNUAL RETURNS DO NOT INCLUDE CONTRACT CHARGES. IF CONTRACT CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN. SEE THE
ACCOMPANYING CONTRACT PROSPECTUS.
7
<PAGE>
Average Annual Returns* (as of 12/31/98)
- --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS 10 YEARS (5/13/83)
------ ------- -------- ---------
Class I shares 10.24% 12.19% 13.15% 12.06%
S&P 500** 28.60% 24.05% 19.19% 17.29%
Lipper Average*** 13.50% 13.64% 14.00% 12.84%
- --------------------------------------------------------------------------------
*THE PORTFOLIO'S RETURNS ARE AFTER DEDUCTION OF EXPENSES AND DO NOT INCLUDE
CONTRACT CHARGES.
** THE STANDARD & POOR'S 500 STOCK INDEX (S&P 500) - AN UNMANAGED INDEX OF 500
STOCKS OF LARGE U.S. COMPANIES - GIVES A BROAD LOOK AT HOW STOCK PRICES HAVE
PERFORMED. THESE RETURNS DO NOT INCLUDE THE EFFECT OF ANY INVESTMENT MANAGEMENT
EXPENSES. THESE RETURNS WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF THESE
EXPENSES. THE "SINCE INCEPTION" RETURN REFLECTS THE CLOSEST CALENDAR MONTH-END
RETURN (4/30/83). SOURCE: LIPPER, INC.
***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. THE RETURNS
ARE NET OF INVESTMENT FEES AND FUND EXPENSES BUT NOT PRODUCT CHARGES. THE "SINCE
INCEPTION" RETURN REFLECTS THE CLOSEST CALENDAR MONTH-END RETURN (4/30/83).
SOURCE: LIPPER, INC.
- --------------------------------------------------------------------------------
GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is LONG-TERM GROWTH OF CAPITAL. To achieve this
objective, we invest primarily in common stocks (and their equivalents) of
foreign and U.S. companies. Generally, we invest in at least three countries,
including the U.S., but we may invest up to 35% of the Portfolio's assets in
companies located in any one country other than the U.S. While we make every
effort to achieve our objective, we can't guarantee success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Equity
securities - such as common stocks - are subject to COMPANY RISK. The price of
the stock of a particular company can vary based on a variety of factors, such
as the company's financial performance, changes in management and product
trends, and the potential for takeover and acquisition. Common stocks are also
subject to MARKET RISK stemming from factors independent of any particular
security. Investment markets fluctuate. All markets go through cycles and market
risk involves being on the wrong side of a cycle. Factors affecting market risk
include political events, broad economic and social changes, and the mood of the
investing public. You can see market risk in action during large drops in the
stock market. If investor sentiments turn gloomy, the price of all stocks may
decline. It may not matter that a particular company has great profits and its
stock is selling at a relatively low price. If the overall market is dropping,
the values of all stocks are likely to drop.
Depending on market conditions, the Portfolio may be invested primarily in
foreign securities, which involve additional risks. For example, foreign banks
and companies generally are not subject to the same types of regulatory
requirements that U.S. banks and companies are. Foreign political developments
and changes in currency rates may adversely affect the value of foreign
securities.
There is also risk involved in the investment strategies we may use. Some of our
strategies require us to try to predict whether the price or value of an
underlying investment will go up or down over a certain period of time. There is
always the risk that investments will not perform as we thought they would. Like
any mutual fund, an investment in the Portfolio could lose value, and you could
lose money. For more information about risk, see "Investment Risks."
EVALUATING PERFORMANCE
A number of factors - including risk - affect how the Portfolio performs. The
following bar chart and table show the Portfolio's performance for each full
calendar year of operation for the last 10 years. They demonstrate the risk of
investing in the Portfolio and how returns can change from year to year. Past
performance does not mean that the Portfolio will achieve similar results in the
future.
8
<PAGE>
Annual Returns* (Class I shares)
================================================================================
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
18.82% -12.91% 11.39% -3.42% 43.14% -4.89% 15.88% 19.97% 6.98% 25.08%
[GRAPHICAL REPRESENTATION OF CHART]
================================================================================
Best Quarter: 22.17% (4th quarter of 1998)
Worst Quarter: (14.21)% (3rd quarter of 1998)
*THESE ANNUAL RETURNS DO NOT INCLUDE CONTRACT CHARGES. IF CONTRACT CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN. SEE THE
ACCOMPANYING CONTRACT PROSPECTUS.
Average Annual Returns* (as of 12/31/98)
- --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS 10 YEARS (9/19/88)
------ ------- -------- ---------
Class I shares 25.08% 12.04% 10.90% 11.47%
Morgan Stanley World Index** 24.80% 16.19% 11.21% 12.10%
Lipper Average*** 16.19% 12.31% 11.04% 11.10%
- --------------------------------------------------------------------------------
* THE PORTFOLIO'S RETURNS ARE AFTER DEDUCTION OF EXPENSES AND DO NOT INCLUDE
CONTRACT CHARGES.
**THE MORGAN STANLEY WORLD INDEX (MSWI) IS A WEIGHTED INDEX COMPRISED OF
APPROXIMATELY 1,500 COMPANIES LISTED ON THE STOCK EXCHANGES OF THE U.S.A.,
EUROPE, CANADA, AUSTRALIA, NEW ZEALAND AND THE FAR EAST. THE "SINCE INCEPTION"
RETURN REFLECTS THE CLOSEST CALENDAR MONTH-END RETURN (9/30/88). SOURCE: LIPPER,
INC.
***THE LIPPER VARIABLE INSURANCE PRODUCTS (VIP) GLOBAL AVERAGE IS CALCULATED BY
LIPPER ANALYTICAL SERVICES, INC. AND REFLECTS THE INVESTMENT RETURN OF CERTAIN
PORTFOLIOS UNDERLYING VARIABLE LIFE AND ANNUITY PRODUCTS. THE RETURNS ARE NET OF
INVESTMENT FEES AND FUND EXPENSES BUT NOT PRODUCT CHARGES. THE "SINCE INCEPTION"
RETURN REFLECTS THE CLOSEST CALENDAR MONTH-END RETURN (9/30/88). SOURCE: LIPPER,
INC..
- --------------------------------------------------------------------------------
HIGH YIELD BOND PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is A HIGH TOTAL RETURN. In pursuing our objective, we
invest in high-yield/high-risk debt securities. Such securities have speculative
characteristics and generally are riskier than higher-rated securities. In
addition, the Portfolio may invest up to 20% of its total assets in foreign debt
obligations. While we make every effort to achieve our objective, we can't
guarantee success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. The Portfolio
invests in debt obligations which have CREDIT, MARKET and INTEREST RATE RISKS.
Credit risk is the possibility that an issuer of debt securities fails to pay
the Portfolio interest or principal. Market risk, which may affect an industry,
a sector or the entire market, is the possibility that the market value of an
investment may move up or down and that its movement may occur quickly or
unpredictably. Interest rate risk refers to the fact that the value of most
bonds will fall when interest rates rise. The longer the maturity and the lower
the credit quality of a bond, the more likely its value will decline. High-yield
debt securities - also known as "junk bonds" - have a higher risk of default and
tend to be less liquid.
The Portfolio's investment in foreign securities involves additional risks. For
example, foreign banks and companies generally are not subject to the same types
of regulatory requirements that U.S. banks and companies are. In addition,
political developments and changes in currency rates may adversely affect the
value of foreign securities.
9
<PAGE>
There is also risk involved in the investment strategies we may use. Some of our
strategies require us to try to predict whether the price or value of an
underlying investment will go up or down over a certain period of time. There is
always the risk that investments will not perform as we thought they would. Like
any mutual fund, an investment in the Portfolio could lose value, and you could
lose money. For more information about risk, see "Investment Risks."
EVALUATING PERFORMANCE
A number of factors - including risk - affect how the Portfolio performs. The
following bar chart and table show the Portfolio's performance for each full
calendar year of operation for the last 10 years. They demonstrate the risk of
investing in the Portfolio and how returns can change from year to year. Past
performance does not mean that the Portfolio will achieve similar results in the
future.
Annual Returns* (Class I shares)
================================================================================
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
- -2.05% -11.84% 38.99% 17.53% 19.27% -2.72% 17.56% 11.39% 13.78% -2.36%
[GRAPHICAL REPRESENTATION OF CHART]
================================================================================
Best Quarter: 15.89% (1st quarter of 1991)
Worst Quarter: (9.68)% (3rd quarter of 1990)
*THESE ANNUAL RETURNS DO NOT INCLUDE CONTRACT CHARGES. IF CONTRACT CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN. SEE THE
ACCOMPANYING CONTRACT PROSPECTUS.
Average Annual Returns* (as of 12/31/98)
- --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS 10 YEARS (2/23/87)
------ ------- -------- ---------
Class I shares (2.36)% 7.20% 9.07% 8.26%
Lehman High Yield Index** 1.60% 8.52% 10.52% 9.81%
Lipper Average*** 0.10% 7.87% 9.92% 9.35%
- --------------------------------------------------------------------------------
*THE PORTFOLIO'S RETURNS ARE AFTER DEDUCTION OF EXPENSES AND DO NOT INCLUDE
CONTRACT CHARGES.
** THE LEHMAN HIGH YIELD INDEX IS MADE UP OF OVER 700 NONINVESTMENT GRADE 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 "SINCE INCEPTION" RETURN
REFLECTS THE CLOSEST CALENDAR MONTH-END RETURN (2/28/87). SOURCE: LIPPER, INC.
*** THE LIPPER VARIABLE INSURANCE PRODUCTS (VIP) HIGH CURRENT YIELD AVERAGE IS
CALCULATED BY LIPPER ANALYTICAL SERVICES, INC. AND REFLECTS THE INVESTMENT
RETURN OF CERTAIN PORTFOLIOS UNDERLYING VARIABLE LIFE AND ANNUITY PRODUCTS. THE
RETURNS ARE NET OF INVESTMENT FEES AND FUND EXPENSES BUT NOT PRODUCT CHARGES.
THE "SINCE INCEPTION" RETURN REFLECTS THE CLOSEST CALENDAR MONTH-END RETURN
(2/28/87). SOURCE: LIPPER, INC.
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is MAXIMUM CURRENT INCOME CONSISTENT WITH THE STABILITY
OF CAPITAL AND THE MAINTENANCE OF LIQUIDITY. To achieve our objective, we invest
in high-quality short-term money market instruments issued by the U.S.
government or its agencies, as well as by corporations and banks, both domestic
and foreign. The Portfolio will invest only in instruments that mature in
thirteen months or less, and which are denominated in U.S. dollars. While we
make every effort to achieve our objective, we can't guarantee success.
10
<PAGE>
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Since the
Portfolio invests only in money market instruments, there is not likely to be an
opportunity for capital appreciation. Debt obligations, including money market
instruments, also involve CREDIT RISK - the risk that the borrower will not
repay an obligation, and MARKET RISK - the risk that interest rates may change
and affect the value of the obligation.
The Portfolio's investment in foreign securities involves additional risks. For
example, foreign banks and companies generally are not subject to the same types
of regulatory requirements that U.S. banks and companies are. Political
developments and changes in currency rates may adversely affect the value of
foreign securities, even though denominated in U.S. dollars.
There is also risk involved in the investment strategies we may use. Some of our
strategies require us to try to predict whether the price or value of an
underlying investment will go up or down over a certain period of time. There is
always the risk that investments will not perform as we thought they would. For
more information about risk, see "Investment Risks."
- --------------------------------------------------------------------------------
AN INVESTMENT IN THE PORTFOLIO IS NOT A BANK DEPOSIT AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY. ALTHOUGH THE PORTFOLIO SEEKS TO MAINTAIN A NET ASSET VALUE OF $10 PER
SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE PORTFOLIO.
- --------------------------------------------------------------------------------
EVALUATING PERFORMANCE
A number of factors - including risk - can affect how the Portfolio performs.
The following bar chart and table show the Portfolio's performance over the past
10 years. They demonstrates how returns can change from year to year. Past
performance does not assure that the Portfolio will achieve similar results in
the future.
Annual Returns* (Class I shares)
================================================================================
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
9.25% 8.16% 6.16% 3.79% 2.95% 4.05% 5.80% 5.22% 5.41% 5.39%
[GRAPHICAL REPRESENTATION OF CHART]
================================================================================
Best Quarter: 2.37% (2nd quarter of 1989)
Worst Quarter: 0.71% (2nd quarter of 1993)
*THESE ANNUAL RETURNS DO NOT INCLUDE CONTRACT CHARGES. IF CONTRACT CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN. SEE THE
ACCOMPANYING CONTRACT PROSPECTUS.
Average Annual Returns* (as of 12/31/98)
- --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS 10 YEARS (5/13/83)
------ ------- -------- ---------
Class I shares 5.39% 5.18% 5.61% 6.39%
Lipper Average** 5.10% 4.92% 5.32% 6.02%
- --------------------------------------------------------------------------------
*THE PORTFOLIO'S RETURNS ARE AFTER DEDUCTION OF EXPENSES AND DO NOT INCLUDE
CONTRACT CHARGES
** THE LIPPER VARIABLE INSURANCE PRODUCTS (VIP) MONEY MARKET 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.
11
<PAGE>
7-Day Yield* (as of 12/31/98)
- --------------------------------------------------------------------------------
Money Market Portfolio 4.96%
Average Money Market Fund** 4.53%
- --------------------------------------------------------------------------------
* THE PORTFOLIO'S YIELD IS AFTER DEDUCTION OF EXPENSES AND DOES NOT INCLUDE
CONTRACT CHARGES.
**SOURCE: IBC FINANCIAL DATA, INC. AS OF 12/29/98, BASED ON 303 FUNDS IN THE IBC
TAXABLE GENERAL PURPOSE, FIRST AND SECOND TIER MONEY MARKET FUND. THE "SINCE
INCEPTION" RETURN REFLECTS THE CLOSEST CALENDAR MONTH-END RETURN (4/30/83).
SOURCE: LIPPER, INC.
- --------------------------------------------------------------------------------
PRUDENTIAL JENNISON PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is to achieve LONG-TERM GROWTH OF CAPITAL. To achieve
our objective, we invest primarily in equity securities of major established
corporations that we believe offer above-average growth prospects. In addition,
the Portfolio may invest up to 30% of its total assets in foreign securities.
While we make every effort to achieve our objective, we can't guarantee success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Equity
securities - such as common stocks - are subject to COMPANY RISK. The price of
the stock of a particular company can vary based on a variety of factors, such
as the company's financial performance, changes in management and product
trends, and the potential for takeover and acquisition. Common stocks are also
subject to MARKET RISK stemming from factors independent of any particular
security. Investment markets fluctuate. All markets go through cycles and market
risk involves being on the wrong side of a cycle. Factors affecting market risk
include political events, broad economic and social changes, and the mood of the
investing public. You can see market risk in action during large drops in the
stock market. If investor sentiments turn gloomy, the price of all stocks may
decline. It may not matter that a particular company has great profits and its
stock is selling at a relatively low price. If the overall market is dropping,
the values of all stocks are likely to drop.
The Portfolio's investment in foreign securities involves additional risks. For
example, foreign banks and companies generally are not subject to the same types
of regulatory requirements that U.S. banks and companies are. Foreign political
developments and changes in currency rates may adversely affect the value of
foreign securities.
There is also risk involved in the investment strategies we may use. Some of our
strategies require us to try to predict whether the price or value of an
underlying investment will go up or down over a certain period of time. There is
always the risk that investments will not perform as we thought they would. Like
any mutual fund, an investment in the Portfolio could lose value, and you could
lose money. For more information about risk, see "Investment Risks."
EVALUATING PERFORMANCE
A number of factors - including risk - affect how the Portfolio performs. The
following bar chart and table show the Portfolio's performance for each full
calendar year of operation for the last 3 years. They demonstrate the risk of
investing in the Portfolio and how returns can change from year to year. Past
performance does not mean that the Portfolio will achieve similar results in the
future.
12
<PAGE>
Annual Returns* (Class I shares)
================================================================================
1996 1997 1998
------ ------ ------
14.41% 31.71% 37.46%
[GRAPHICAL REPRESENTATION OF CHART]
================================================================================
Best Quarter: 29.46% (4th quarter of 1998)
Worst Quarter: (12.07)% (3rd quarter of 1998)
*THESE ANNUAL RETURNS DO NOT INCLUDE CONTRACT CHARGES. IF CONTRACT CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN. SEE THE
ACCOMPANYING CONTRACT PROSPECTUS.
Average Annual Returns* (as of 12/31/98)
- --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR (4/25/95)
------ ---------
Class I shares 37.46% 29.60%
S&P 500** 28.60% 29.32%
Lipper Average*** 24.94% 25.38%
- --------------------------------------------------------------------------------
*THE PORTFOLIO'S RETURNS ARE AFTER DEDUCTION OF EXPENSES AND DO NOT INCLUDE
CONTRACT CHARGES.
** THE STANDARD & POOR'S 500 STOCK INDEX (S&P 500) - AN UNMANAGED INDEX OF 500
STOCKS OF LARGE U.S. COMPANIES - GIVES A BROAD LOOK AT HOW STOCK PRICES HAVE
PERFORMED. THESE RETURNS DO NOT INCLUDE THE EFFECT OF ANY INVESTMENT MANAGEMENT
EXPENSES. THESE RETURNS WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF THESE
EXPENSES. THE "SINCE INCEPTION" RETURN REFLECTS THE CLOSEST CALENDAR MONTH-END
RETURN (4/30/95). SOURCE: LIPPER, INC.
***THE LIPPER VARIABLE INSURANCE PRODUCTS (VIP) GROWTH AVERAGE IS CALCULATED BY
LIPPER ANALYTICAL SERVICES, INC. AND REFLECTS THE INVESTMENT RETURN OF CERTAIN
PORTFOLIOS UNDERLYING VARIABLE LIFE AND ANNUITY PRODUCTS. THE RETURNS ARE NET OF
INVESTMENT FEES AND FUND EXPENSES BUT NOT PRODUCT CHARGES. THE "SINCE INCEPTION"
RETURN REFLECTS THE CLOSEST CALENDAR MONTH-END RETURN (4/30/95). SOURCE: LIPPER,
INC.
- --------------------------------------------------------------------------------
STOCK INDEX PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is INVESTMENT RESULTS THAT GENERALLY CORRESPOND TO THE
PERFORMANCE OF PUBLICLY-TRADED COMMON STOCKS. To achieve our objective, we
attempt to duplicate the price and yield of the Standard & Poor's 500 Stock
Index (S&P 500 Index). The S&P 500 Index represents more than 70% of the total
market value of all publicly-traded common stocks and is widely viewed as
representative of publicly-traded common stocks as a whole.
The Portfolio is not "managed" in the traditional sense of using market and
economic analyses to select stocks. Rather, the portfolio manager purchases
stocks in proportion to their weighting in the S&P 500 Index. While we make
every effort to achieve our objective, we can't guarantee success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Equity
securities - such as common stocks - are subject to COMPANY RISK. The price of
the stock of a particular company can vary based on a variety of factors, such
as the company's financial performance, changes in management and product
trends, and the potential for takeover and acquisition. Common stocks are also
subject to MARKET RISK stemming from factors independent of any particular
security. Investment markets fluctuate. All markets go through cycles and market
risk involves being on the wrong side of a cycle. Factors affecting market risk
include political events, broad economic and social changes, and the mood of the
investing public. You can see market risk in action during large drops in the
13
<PAGE>
stock market. If investor sentiments turn gloomy, the price of all stocks may
decline. It may not matter that a particular company has great profits and its
stock is selling at a relatively low price. If the overall market is dropping,
the values of all stocks are likely to drop.
Like any mutual fund, an investment in the Portfolio could lose value, and you
could lose money. For more information about risk, see "Investment Risks."
EVALUATING PERFORMANCE
A number of factors - including risk - affect how the Portfolio performs. The
following bar chart and table show the Portfolio's performance for each full
calendar year of operation for the last 10 years. They demonstrate the risk of
investing in the Portfolio and how returns can change. Past performance does not
mean that the Portfolio will achieve similar results in the future.
Annual Returns* (Class I shares)
================================================================================
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
30.93% -3.63% 29.72% 7.13% 9.66% 1.01% 37.06% 22.57% 32.83% 28.42%
[GRAPHICAL REPRESENTATION OF CHART]
================================================================================
Best Quarter: 21.44% (4th quarter of 1998)
Worst Quarter: (13.72)% (3rd quarter of 1990)
*THESE ANNUAL RETURNS DO NOT INCLUDE CONTRACT CHARGES. IF CONTRACT CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN. SEE THE
ACCOMPANYING CONTRACT PROSPECTUS.
Average Annual Returns* (as of 12/31/98)
- --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS 10 YEARS (10/19/87)
------ ------- -------- ----------
Class I shares 28.42% 23.70% 18.74% 18.82%
S&P 500** 28.60% 24.05% 19.19% 18.50%
Lipper Average*** 28.25% 23.58% 18.62% 18.04%
- --------------------------------------------------------------------------------
*THE PORTFOLIO'S RETURNS ARE AFTER DEDUCTION OF EXPENSES AND DO NOT INCLUDE
CONTRACT CHARGES.
**THE STANDARD & POOR'S 500 STOCK INDEX (S&P 500) - AN UNMANAGED INDEX OF 500
STOCKS OF LARGE U.S. COMPANIES - GIVES A BROAD LOOK AT HOW STOCK PRICES HAVE
PERFORMED. THESE RETURNS DO NOT INCLUDE THE EFFECT OF ANY INVESTMENT MANAGEMENT
EXPENSES. THESE RETURNS WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF THESE
EXPENSES. THE "SINCE INCEPTION" RETURN REFLECTS THE CLOSEST CALENDAR MONTH-END
RETURN (10/31/87). SOURCE: LIPPER, INC.
***THE LIPPER VARIABLE INSURANCE PRODUCTS (VIP) S&P 500 INDEX AVERAGE IS
CALCULATED BY LIPPER ANALYTICAL SERVICES, INC. AND REFLECTS THE INVESTMENT
RETURN OF CERTAIN PORTFOLIOS UNDERLYING VARIABLE LIFE AND ANNUITY PRODUCTS. THE
RETURNS ARE NET OF INVESTMENT FEES AND FUND EXPENSES BUT NOT PRODUCT CHARGES.
THE "SINCE INCEPTION" RETURN REFLECTS THE CLOSEST CALENDAR MONTH-END RETURN
(10/31/87). SOURCE: LIPPER, INC.
14
<PAGE>
HOW THE PORTFOLIOS INVEST
While the Portfolios have some common attributes, each one has its own portfolio
managers, investment objective and policies, performance information, and risks.
Therefore, some sections of this prospectus deal with each Portfolio separately,
while other sections address two or more Portfolios at the same time. In
sections that concern one particular Portfolio as identified in the section
heading, "the Portfolio" refers to that particular Portfolio.
- --------------------------------------------------------------------------------
CONSERVATIVE BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of this Portfolio is to seek A TOTAL INVESTMENT RETURN
CONSISTENT WITH A CONSERVATIVELY MANAGED DIVERSIFIED PORTFOLIO.
SIDE BAR----------------------------------------------
BALANCED PORTFOLIO
We invest in all three types of securities - equity,
debt and money market - in order to achieve
diversification in a single portfolio. We seek to
maintain a conservative blend of investments that
will have strong performance in a down market and
solid, but not necessarily outstanding, performance
in up markets. This Portfolio may be appropriate
for an investor looking for diversification with
less risk than that of the Flexible Managed
Portfolio, while recognizing that this reduces the
chances of greater appreciation.
- ------------------------------------------------------
To achieve our objective, we invest in a mix of equity and equity-related
securities, debt obligations and money market instruments. We adjust the
percentage of Portfolio assets in each category depending on our expectations
regarding the different markets. While we make every effort to achieve our
objective, we can't guarantee success.
We will vary how much of the Portfolio's assets are invested in a particular
type of security depending how we think the different markets will perform.
Under normal conditions, we intend to keep at least 25% of the Portfolio's total
assets invested in debt securities.
<TABLE>
<CAPTION>
In general, we will invest within the ranges shown below:
ASSET TYPE MINIMUM NORMAL MAXIMUM
---------- ------- ------ -------
<S> <C> <C> <C>
Stocks 15% 35% 75%
Debt obligations and money market 25% 65% 85%
securities
</TABLE>
DEBT SECURITIES in general are basically written promises to repay a debt. There
are numerous types of debt securities which vary as to the terms of repayment
and the commitment of other parties to honor the obligations of the issuer. Most
of the securities in the debt portion of this Portfolio will be rated
"investment grade." This means major rating services, like Standard & Poor's
Ratings Group (S&P) or Moody's Investors Service, Inc. (Moody's), have rated the
securities within one of their four highest rating categories.
The Portfolio may also invest in lower-rated securities, which are riskier and
are considered speculative. These securities are sometimes referred to as "junk
bonds." We may also invest in instruments that are not rated, but which we
believe are of comparable quality to the instruments described above.
The Portfolio may also invest up to 30% of its total assets in FOREIGN EQUITY
and DEBT SECURITIES that are not denominated in the U.S. dollar. In addition, up
to 20% of the Portfolio's total assets may be invested in debt securities that
are issued outside the U.S. by foreign or U.S. issuers, provided the securities
are denominated in U.S. dollars. For these purposes, we do not consider American
Depositary Receipts (ADRs) as foreign securities. (ADRs are certificates
representing the right to receive foreign securities that have been deposited
with a U.S. bank or a foreign branch of a U.S. bank.)
15
<PAGE>
The stock portion of the Portfolio will be invested mainly in EQUITY and
EQUITY-RELATED securities of major, established corporations which we believe
are in sound financial condition and offer better total returns than broad based
market indexes.
The money market portion of the Portfolio will be invested in high-quality money
market instruments. We manage this portion of the Portfolio to comply with
specific rules designed for money market mutual funds. We will not acquire any
security with a remaining maturity exceeding thirteen months, and we will
maintain a dollar-weighted average portfolio of 90 days or less. (Weighted
average maturity is calculated by adding the maturities of all the bonds in a
portfolio and dividing by the number of bonds on a weighted basis.)
In response to adverse market conditions or when restructuring the Portfolio, we
may temporarily invest up to 100% of the Portfolio's total assets in money
market instruments. Investing heavily in these securities limits our ability to
achieve our investment objective, but can help to preserve the value of the
Portfolio's assets when the markets are unstable.
We may also invest in loans arranged through private negotiations between a
corporation which is the borrower and one or more financial institutions that
are the lenders. Generally, these types of investments are in the form of LOAN
PARTICIPATIONS. In loan participations, the Portfolio will have a contractual
relationship with the lender but not with the borrower. This means the Portfolio
will only have rights to principal and interest received by the lender. It will
not be able to enforce compliance by the borrower with the terms of the loan and
may not have a right to any collateral securing the loan. If the lender becomes
insolvent, the Portfolio may be treated as a general creditor and not benefit
from any set-off between the lender and the borrower.
DERIVATIVES AND OTHER STRATEGIES
We may also use alternative investment strategies - including DERIVATIVES - to
try to improve the Portfolio's returns, protect its assets or for short-term
cash management. There is no guarantee that these strategies will work, that the
instruments necessary to implement these strategies will be available or that
the Portfolio will not lose money. With derivatives, we try to predict whether
the underlying investment - a security, market index, currency, interest rate or
some other benchmark - will go up or down at some future date. We may use
derivatives to try to reduce risk or to increase return consistent with the
Portfolio's overall investment objective.
We may: purchase and sell OPTIONS on equity securities, debt securities, stock
indexes and foreign currencies; purchase and sell stock index, interest rate and
foreign currency FUTURES CONTRACTS and options on those contracts; enter into
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS; and purchase securities on a
WHEN-ISSUED or DELAYED DELIVERY basis.
The Portfolio may also enter into SHORT SALES. In a short sale we sell a
security we do not own to take advantage of an anticipated decline in the
security's price. The Portfolio borrows the security for delivery and if it can
buy the security later at a lower price, a profit results. No more than 25% of
the Portfolio's net assets may be used as collateral or segregated for purposes
of securing a short sale obligation. The Portfolio may also enter into SHORT
SALES AGAINST-THE-BOX which means it owns securities identical to those sold
short.
We may also use INTEREST RATE SWAPS in the management of the fixed-income
portion of the Portfolio. In an interest rate swap the Portfolio and another
party agree to exchange interest payments. For example, the Portfolio may wish
to exchange a floating rate of interest for a fixed rate. We would enter into
this type of a swap if we think interest rates are going down.
The Portfolio may also enter into REPURCHASE AGREEMENTS. In a repurchase
transaction, the Portfolio agrees to purchase certain securities and the seller
agrees to repurchase the same securities at an agreed upon price on a specified
date. This creates a fixed return for the Portfolio. The Portfolio may
participate with certain other Portfolios of the Fund in a JOINT REPURCHASE
ACCOUNT under an order obtained from the SEC. In a joint repurchase transaction,
uninvested cash balances of various Portfolios are added together and invested
in one or more repurchase agreements. Each of the participating Portfolios
receives a portion of the income earned in the joint account based on the
percentage of its investment.
16
<PAGE>
We may also invest in REVERSE REPURCHASE AGREEMENTS and DOLLAR ROLLS in the
management of the fixed-income portion of the Portfolio. In a reverse repurchase
transaction, the Portfolio sells a security it owns and agrees to buy it back at
set price and date. During the period the security is held by the other party,
the Portfolio may continue to receive principal and interest payments on the
security. Dollar rolls involve the sale by the Portfolio of a security for
delivery in the current month with a promise to repurchase from the buyer a
substantially similar - but not necessarily the same - security at a set price
and date in the future. During the "roll period," the Portfolio does not receive
any principal or interest on the security. Instead it is compensated by the
difference between the current sales price and the price of the future purchase,
as well as any interest earned on the cash proceeds from the original sale. The
Portfolio will not use more than 30% of its net assets in connection with
reverse repurchase transactions and dollar rolls.
We will consider other factors (such as cost) in deciding whether to employ any
particular strategy or use any particular instrument. Any derivatives we use may
not match the Portfolio's underlying holdings. For more information about these
strategies, see the SAI, "Investment Objectives and Policies of the Portfolios."
ADDITIONAL STRATEGIES
The Portfolio also follows certain policies when it BORROWS MONEY (the Portfolio
may borrow up to 5% of the value of its total assets); LENDS ITS SECURITIES; and
holds ILLIQUID SECURITIES (the Portfolio may hold up to 15% of its net assets in
illiquid securities, including securities with legal or contractual restrictions
on resale, those without a readily available market and repurchase agreements
with maturities longer than seven days). The Portfolio is subject to certain
investment restrictions that are fundamental policies, which means they cannot
be changed without shareholder approval. For more information about these
restrictions, see the SAI.
- --------------------------------------------------------------------------------
DIVERSIFIED BOND PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
Our investment objective is A HIGH LEVEL OF INCOME OVER A LONGER TERM WHILE
PROVIDING REASONABLE SAFETY OF CAPITAL. This means we look for investments that
we think will provide a high level of current income, but which are not expected
to involve a substantial risk of loss of capital through default. To achieve our
objective, we invest primarily in intermediate and long term debt obligations
that are rated investment grade and high-quality money market investments. While
we make every effort to achieve our objective, we can't guarantee success.
SIDEBAR-------------------------------------------------------------
OUR STRATEGY
In general, the value of debt obligations moves in the opposite
direction as interest rates - if a bond is purchased and then
interest rates go up, newer bonds will be worth more because they
will have a higher rate of interest. We will adjust the mix of the
Portfolio's short-term, intermediate and long term debt
obligations in an attempt to benefit from price appreciation when
interest rates go down and to incur smaller declines when rates go
up.
- --------------------------------------------------------------------
Debt obligations, in general, are basically written promises to repay a debt.
The terms of repayment vary among the different types of debt obligations, as do
the commitments of other parties to honor the obligations of the issuer of the
security. The types of debt obligations in which we can invest include U.S.
government securities, mortgage-related securities and corporate bonds.
Usually at least 80% of the Portfolio's total assets will be invested in debt
securities that are investment grade. The Portfolio may continue to hold a debt
obligation if it is downgraded below investment grade after it is purchased or
if it is no longer rated by a major rating service. We may also invest in lower
rated securities which are riskier and considered speculative. These securities
are sometimes referred to as "junk bonds." We may also invest in instruments
that are not rated, but which we believe are of comparable quality to the
instruments described above.
The Portfolio may invest without limit in DEBT OBLIGATIONS ISSUED OR GUARANTEED
BY THE U.S. GOVERNMENT AND GOVERNMENT-RELATED ENTITIES. An example of a debt
security that is backed by the full faith and credit of the U.S. government is
an obligation of the Government National Mortgage Association (Ginnie Mae). In
addition, we may invest in U.S. government securities issued by other government
entities, like the Federal National Mortgage Association (Fannie Mae) and the
Student Loan Marketing Association (Sallie Mae) which are not backed by the full
faith and credit of the U.S. government. Instead, these issuers have the right
to borrow from
17
<PAGE>
the U.S. Treasury to meet their obligations. The Portfolio may
also invest in the debt securities of other government-related entities, like
the Farm Credit System, which depend entirely upon their own resources to repay
their debt.
We may also invest up to 20% of Portfolio's total assets in debt securities
issued outside the U.S. by U.S. or foreign issuers provided the securities are
denominated in U.S. dollars.
The Portfolio may also invest in CONVERTIBLE DEBT SECURITIES and CONVERTIBLE AND
NON-CONVERTIBLE PREFERRED STOCKS of any rating. The Portfolio will not acquire
any common stock except by converting a convertible debt security or exercising
a warrant. No more than 10% of the Portfolio's total assets will be held in
common stocks, and those will usually be sold as soon as a favorable opportunity
arises.
We may also invest in loans arranged through private negotiations between a
corporation which is the borrower and one or more financial institutions that
are the lenders. Generally, these types of investments are in the form of LOAN
PARTICIPATIONS. In loan participations, the Portfolio will have a contractual
relationship with the lender but not with the borrower. This means the Portfolio
will only have rights to principal and interest received by the lender. It will
not be able to enforce compliance by the borrower with the terms of the loan and
may not have a right to any collateral securing the loan. If the lender becomes
insolvent, the Portfolio may be treated as a general creditor and will not
benefit from any set-off between the lender and the borrower.
Under normal conditions, the Portfolio may invest a portion of its assets in
high-quality MONEY MARKET INSTRUMENTS. In response to adverse market conditions
or when restructuring the Portfolio, we may temporarily invest up to 100% of the
Portfolio's assets in money market instruments. Investing heavily in these
securities limits our ability to achieve our investment objective, but can help
to preserve the value of the Portfolio's assets when the markets are unstable.
DERIVATIVES AND OTHER STRATEGIES
We may also use alternative investment strategies - including DERIVATIVES - to
try to improve the Portfolio's returns, protect its assets or for short-term
cash management. There is no guarantee that these strategies will work, that the
instruments necessary to implement these strategies will be available or that
the Portfolio will not lose money. With derivatives, we try to predict whether
the underlying investment - a security, market index, currency, interest rate or
some other benchmark - will go up or down at some future date. We may use
derivatives to try to reduce risk or to increase return consistent with the
Portfolio's overall investment objective.
We may: purchase and sell OPTIONS on debt securities; purchase and sell interest
rate FUTURES CONTRACTS and options on those contracts; and purchase securities
on a WHEN-ISSUED or DELAYED DELIVERY basis.
The Portfolio may also enter into SHORT SALES. In a short sale we sell a
security we do not own to take advantage of an anticipated decline in the
security's price. The Portfolio borrows the security for delivery and if it can
buy the security later at a lower price, a profit results. No more than 25% of
the Portfolio's net assets may be used as collateral or segregated for purposes
of securing a short sale obligation. The Portfolio may also enter into SHORT
SALES AGAINST-THE-BOX which means it owns securities identical to those sold
short.
We may also use INTEREST RATE SWAPS in the management of the Portfolio. In an
interest rate swap the Portfolio and another party agree to exchange interest
payments. For example, the Portfolio may wish to exchange a floating rate of
interest for a fixed rate. We would enter into this type of a swap if we think
interest rates are going down.
The Portfolio may also enter into REPURCHASE AGREEMENTS. In a repurchase
transaction, the Portfolio agrees to purchase certain securities and the seller
agrees to repurchase the same securities at an agreed upon price on a specified
date. This creates a fixed return for the Portfolio. The Portfolio may
participate with certain other Portfolios of the Fund in a JOINT REPURCHASE
ACCOUNT under an order obtained from the SEC. In a joint repurchase transaction,
uninvested cash balances of various Portfolios are added together and invested
in one or more repurchase agreements. Each of the participating Portfolios
receives a portion of the income earned in the joint account based on the
percentage of its investment.
18
<PAGE>
The Portfolio may also invest up to 30% of its net assets in REVERSE REPURCHASE
AGREEMENTS and DOLLAR ROLLS. In a reverse repurchase transaction, the Portfolio
sells a security it owns and agrees to buy it back at a set price and date.
During the period the security is held by the other party, the Portfolio may
continue to receive principal and interest payments on the security. Dollar
rolls involve the sale by the Portfolio of a security for delivery in the
current month with a promise to repurchase from the buyer a substantially
similar - but not necessarily the same - security at a set price and date in the
future. During the "roll period," the Portfolio does not receive any principal
or interest on the security. Instead it is compensated by the difference between
the current sales price and the price of the future purchase, as well as any
interest earned on the cash proceeds from the original sale. The Portfolio will
not use more than 30% of its net assets in connection with reverse repurchase
transactions and dollar rolls.
We will consider other factors (such as cost) in deciding whether to employ any
particular strategy or use any particular instrument. Any derivatives we use may
not match the Portfolio's underlying holdings. For more information about these
strategies, see the SAI, "Investment Objectives and Policies of the Portfolios."
ADDITIONAL STRATEGIES
The Portfolio also follows certain policies when it BORROWS MONEY (the Portfolio
may borrow up to 5% of the value of its total assets); LENDS ITS SECURITIES; and
holds ILLIQUID SECURITIES (the Portfolio may hold up to 15% of its net assets in
illiquid securities, including securities with legal or contractual restrictions
on resale, those without a readily available market and repurchase agreements
with maturities longer than seven days). The Portfolio is subject to certain
investment restrictions that are fundamental policies, which means they cannot
be changed without shareholder approval. For more information about these
restrictions, see the SAI.
- --------------------------------------------------------------------------------
EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of this Portfolio is CAPITAL APPRECIATION. This means
we seek investments that we believe will provide investment returns above
broadly based market indexes. While we make every effort to achieve this
objective, we can't guarantee success.
SIDEBAR--------------------------------------------------------------
VALUE APPROACH
We use a value approach to investing which means we look for
companies whose stock is selling below the price that we
believe reflects its true worth based on earnings, book
value and other financial measures.
To achieve our value investment strategy, we usually buy
securities that are out of favor and that many other
investors are selling. We attempt to invest in companies and
industries before other investors recognize their true
value.
- --------------------------------------------------------------
To achieve our investment objective, we invest primarily in common stocks of
major established corporations as well as smaller companies.
A portion of the Portfolio's assets may be invested in short, intermediate or
long term DEBT OBLIGATIONS, including convertible and nonconvertible PREFERRED
STOCK and OTHER EQUITY-RELATED SECURITIES. Up to 5% of these holdings may be
rated below investment grade. These securities are considered speculative and
are sometimes referred to as "junk bonds."
Up to 30% of the Portfolio's total assets may be invested in FOREIGN SECURITIES,
including money market instruments, equity securities and debt obligations. For
these purposes, we do not consider American Depositary Receipts (ADRs) as
foreign securities. (ADRs are certificates representing the right to receive
foreign securities that have been deposited with a U.S. bank or a foreign branch
of a U.S. bank.)
Under normal circumstances, the Portfolio may invest a portion of its assets in
MONEY MARKET INSTRUMENTS. In addition, we may temporarily invest up to 100% of
the Portfolio's assets in money market instruments in response to adverse market
conditions or when we are restructuring the portfolio. Investing heavily in
these securities limits our ability to achieve our investment objective, but can
help to preserve the Portfolio's assets when the markets are unstable.
19
<PAGE>
DERIVATIVES AND OTHER STRATEGIES
We may also use alternative investment strategies - including DERIVATIVES - to
try to improve the Portfolio's returns, protect its assets or for short-term
cash management. There is no guarantee that these strategies will work, that the
instruments necessary to implement these strategies will be available or that
the Portfolio will not lose money. With derivatives, we try to predict whether
the underlying investment - a security, market index, currency or some other
benchmark - will go up or down at some future date. We may use derivatives to
try to reduce risk or to increase return consistent with the Portfolio's overall
investment objective.
We may: purchase and sell OPTIONS on equity securities, stock indexes and
foreign currencies; purchase and sell stock index and foreign currency FUTURES
CONTRACTS and options on these futures contracts; enter into FORWARD FOREIGN
CURRENCY EXCHANGE CONTRACTS; and purchase securities on a WHEN-ISSUED or DELAYED
DELIVERY basis.
The Portfolio may also enter into SHORT SALES AGAINST-THE-BOX. In a short sale
we sell a security we do not own to take advantage of an anticipated decline in
the stock's price. The Portfolio borrows the stock for delivery and if it can
buy the stock later at a lower price, a profit results. A short sale is
"against-the-box" when the Portfolio owns an equal amount of the securities sold
short or owns securities that can be converted into the securities sold.
The Portfolio may also enter into REPURCHASE AGREEMENTS. In a repurchase
transaction, the Portfolio agrees to purchase certain securities and the seller
agrees to repurchase the same securities at a set price on a specified date.
This creates a fixed return for the Portfolio. The Portfolio may participate
with certain other Portfolios of the Fund in a JOINT REPURCHASE ACCOUNT under an
order obtained from the SEC. In a joint repurchase transaction, uninvested cash
balances of various Portfolios are added together and invested in one or more
repurchase agreements. Each of the participating Portfolios receives a portion
of the income earned in the joint account based on the percentage of its
investment.
We will consider factors such as cost and volatility in deciding whether to
employ any particular strategy or use any particular instrument. Any derivatives
we use may not match the Portfolio's underlying holdings. For more information
about these strategies, see the SAI, "Investment Objectives and Policies of the
Portfolios."
ADDITIONAL STRATEGIES
The Portfolio also follows certain policies when it BORROWS MONEY (the Portfolio
may borrow up to 5% of the value of its total assets); LENDS ITS SECURITIES; and
holds ILLIQUID SECURITIES (the Portfolio may hold up to 15% of its net assets in
illiquid securities, including securities with legal or contractual restrictions
on resale, those without a readily available market and repurchase agreements
with maturities longer than seven days). The Portfolio is subject to certain
investment restrictions that are fundamental policies, which means they cannot
be changed without shareholder approval. For more information about these
restrictions, see the SAI.
- --------------------------------------------------------------------------------
EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of this Portfolio is to seek BOTH CURRENT INCOME AND
CAPITAL APPRECIATION. This means we seek investments whose price will increase
as well as pay dividends and other income. To achieve this objective, we look
for securities we believe will provide investment returns above those of the
Standard & Poor's 500 Stock Index (S&P 500 Index) or the NYSE Composite Index.
While we make every effort to achieve this objective, we can't guarantee
success.
20
<PAGE>
SIDEBAR-------------------------------------------------
CONTRARIAN APPROACH
To achieve our value investment strategy, we generally
take a strong contrarian approach to investing. In
other words, we usually buy securities that are out of
favor and that many other investors are selling, and
we attempt to invest in companies and industries
before other investors recognize their true value.
Using these guidelines, we focus on long-term
performance, not short-term gain.
- --------------------------------------------------------
We will normally invest at least 65% of the Portfolio's total assets in EQUITY
and EQUITY-RELATED SECURITIES. We buy common stock of companies of every size -
small, medium and large capitalization. When deciding which stocks to buy, we
look at a company's earnings, balance sheet and cash flow and then at how these
factors impact the stock's price and return. We also buy EQUITY-RELATED
SECURITIES - like bonds, corporate notes and preferred stock - that can be
converted into a company's common stock or other equity security.
Up to 35% of the Portfolio's total assets may be invested in other DEBT
OBLIGATIONS including non-convertible preferred stock. When acquiring these
types of securities, we usually invest in obligations rated A or better by
Moody's or S&P. We may also invest in obligations rated as low as CC by Moody's
or Ca by S&P. These securities are considered speculative and are sometimes
referred to as "junk bonds." We may also invest in instruments that are not
rated, but which we believe are of comparable quality to the instruments
described above.
Up to 30% of the Portfolio's total assets may be invested in FOREIGN SECURITIES,
including money market instruments, equity securities and debt obligations. For
these purposes, we do not consider American Depositary Receipts (ADRs) as
foreign securities. (ADRs are certificates representing the right to receive
foreign securities that have been deposited with a U.S. bank or a foreign branch
of a U.S. bank.)
Under normal circumstances, the Portfolio may invest up to 35% of its total
assets in high-quality MONEY MARKET INSTRUMENTS. In response to adverse market
conditions or when we are restructuring the Portfolio, we may temporarily invest
up to 100% of the Portfolio's assets in MONEY MARKET INSTRUMENTS. Investing
heavily in these securities limits our ability to achieve our investment
objective, but can help to preserve the Portfolio's assets when the markets are
unstable.
The Portfolio may also invest in REAL ESTATE INVESTMENT TRUSTS (REITs). A REIT
is a company that manages a portfolio of real estate to earn profits for its
shareholders. Some REITs acquire equity interests in real estate and then
receive income from rents and capital gains when the buildings are sold. Other
REITs lend money to real estate developers and receive interest income from the
mortgages. Some REITs invest in both types of interests.
DERIVATIVES AND OTHER STRATEGIES
We may also use alternative investment strategies - including DERIVATIVES - to
try to improve the Portfolio's returns, protect its assets or for short-term
cash management. There is no guarantee that these strategies will work, that the
instruments necessary to implement these strategies will be available or that
the Portfolio will not lose money. With derivatives, we try to predict whether
the underlying investment - a security, market index, currency or some other
benchmark - will go up or down at some future date. We may use derivatives to
try to reduce risk or to increase return consistent with the Portfolio's overall
investment objective.
We may: purchase and sell OPTIONS on equity securities, stock indexes and
foreign currencies; purchase and sell stock index and foreign currency FUTURES
CONTRACTS and options on these futures contracts; enter into FORWARD FOREIGN
CURRENCY EXCHANGE CONTRACTS; and purchase securities on a WHEN-ISSUED or DELAYED
DELIVERY basis.
The Portfolio may also enter into SHORT SALES AGAINST-THE-BOX. In a short sale
we sell a security we do not own to take advantage of an anticipated decline in
the security's price. The Portfolio borrows the security for delivery and if it
can buy the security later at a lower price, a profit results. A short sale is
"against-the-box" when the Portfolio owns an equal amount of the securities sold
short or owns securities that can be converted into the securities sold.
21
<PAGE>
The Portfolio may also enter into REPURCHASE AGREEMENTS. In a repurchase
transaction, the Portfolio agrees to purchase certain securities and the seller
agrees to repurchase the same securities at a set price on a specified date.
This creates a fixed return for the Portfolio. The Portfolio may participate
with certain other Portfolios of the Fund in a JOINT REPURCHASE ACCOUNT under an
order obtained from the SEC. In a joint repurchase transaction, uninvested cash
balances of various Portfolios are added together and invested in one or more
repurchase agreements. Each of the participating Portfolios receives a portion
of the income earned in the joint account based on the percentage of its
investment.
We will consider factors such as cost and volatility in deciding whether to
employ any particular strategy or use any particular instrument. Any derivatives
we use may not match the Portfolio's underlying holdings. For more information
about these strategies, see the SAI, "Investment Objectives and Policies of the
Portfolios."
ADDITIONAL STRATEGIES
The Portfolio also follows certain policies when it BORROWS MONEY (the Portfolio
may borrow up to 5% of the value of its total assets); LENDS ITS SECURITIES; and
holds ILLIQUID SECURITIES (the Portfolio may hold up to 15% of its net assets in
illiquid securities, including securities with legal or contractual restrictions
on resale, those without a readily available market and repurchase agreements
with maturities longer than seven days). The Portfolio is subject to certain
investment restrictions that are fundamental policies, which means they cannot
be changed without shareholder approval. For more information about these
restrictions, see the SAI.
- --------------------------------------------------------------------------------
FLEXIBLE MANAGED PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of this Portfolio is to seek A HIGH TOTAL RETURN
CONSISTENT WITH AN AGGRESSIVELY MANAGED DIVERSIFIED PORTFOLIO.
SIDEBAR-------------------------------------------------------------
BALANCED PORTFOLIO
We invest in all three types of securities - equity, debt and
money market - in order to achieve diversification in a single
portfolio. We seek to maintain a more aggressive mix of
investments than the Conservative Balanced Portfolio. This
Portfolio may be appropriate for an investor looking for
diversification who is willing to accept a relatively high level
of loss in an effort to achieve greater appreciation.
- --------------------------------------------------------------------
To achieve our objective, we invest in a mix of equity and equity-related
securities, debt obligations and money market instruments. We adjust the
percentage of Portfolio assets in each category depending on our expectations
regarding the different markets. While we make every effort to achieve our
objective, we can't guarantee success.
Generally, we will invest within the ranges shown below:
<TABLE>
<CAPTION>
ASSET TYPE MINIMUM NORMAL MAXIMUM
---------- ------- ------ -------
<S> <C> <C> <C>
Stocks 25% 60% 100%
Fixed income securities 0% 40% 75%
Money market securities 0% 0% 75%
</TABLE>
The stock portion of the Portfolio will be invested in a broadly diversified
portfolio of stocks generally consisting of large and mid-size companies,
although it may also hold stocks of smaller companies. We will invest in
companies and industries that, in our judgment, will provide either attractive
long-term returns, or are desirable to hold in the Portfolio to manage risk.
Most of the securities in the fixed income portion of this Portfolio will be
investment grade, however, we may also invest up to 25% of this portion of the
Portfolio in debt securities rated as low as BB, Ba or lower by a major rating
service at the time they are purchased. These high-yield or "junk bonds" are
riskier and considered speculative. We may also invest in instruments that are
not rated, but which we believe are of comparable quality to the instruments
described above.
22
<PAGE>
The fixed income portion of the Portfolio may also include LOAN PARTICIPATIONS.
In loan participations, the Portfolio will have a contractual relationship with
the lender but not with the borrower. This means the Portfolio will only have
rights to principal and interest received by the lender. It will not be able to
enforce compliance by the borrower with the terms of the loan and may not have a
right to any collateral securing the loan. If the lender becomes insolvent, the
Portfolio may be treated as a general creditor and will not benefit from any
set-off between the lender and the borrower.
The Portfolio may also invest up to 30% of its total assets in FOREIGN EQUITY
AND DEBT SECURITIES that are not denominated in the U.S. dollar. In addition, up
to 20% of the Portfolio's total assets may be invested in debt securities that
are issued outside of the U.S. by foreign or U.S. issuers provided the
securities are denominated in U.S. dollars. For these purposes, we do not
consider American Depositary Receipts (ADRs) as foreign securities. (ADRs are
certificates representing the right to receive foreign securities that have been
deposited with a U.S. bank or a foreign branch of a U.S. bank.)
The money market portion of the Portfolio will be invested in high-quality money
market instruments. In response to adverse market conditions or when we are
restructuring the Portfolio, we may temporarily invest up to 100% of the
Portfolio's assets in money market instruments. Investing heavily in these
securities limits our ability to achieve our investment objective, but can help
to preserve the Portfolio's assets when the markets are unstable.
The Portfolio may also invest in REAL ESTATE INVESTMENT TRUSTS (REITs). A REIT
is a company that manages a portfolio of real estate to earn profits for its
shareholders. Some REITs acquire equity interests in real estate and then
receive income from rents and capital gains when the buildings are sold. Other
REITs lend money to real estate developers and receive interest income from the
mortgages. Some REITs invest in both types of interests.
DERIVATIVES AND OTHER STRATEGIES
We may also use alternative investment strategies - including DERIVATIVES - to
try to improve the Portfolio's returns, protect its assets or for short-term
cash management. There is no guarantee that these strategies will work, that the
instruments necessary to implement these strategies will be available or that
the Portfolio will not lose money. With derivatives, we try to predict whether
the underlying investment - a security, market index, currency, interest rate or
some other benchmark - will go up or down at some future date. We may use
derivatives to try to reduce risk or to increase return consistent with the
Portfolio's overall investment objective.
We may: purchase and sell OPTIONS on equity securities, debt securities, stock
indexes, and foreign currencies; purchase and sell stock index, interest rate
and foreign currency FUTURES CONTRACTS and options on those contracts; enter
into FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS; and purchase securities on a
WHEN-ISSUED or DELAYED DELIVERY basis.
The Portfolio may also enter into SHORT SALES. In a short sale we sell a
security we do not own to take advantage of an anticipated decline in the
security's price. The Portfolio borrows the security for delivery and if it can
buy the security later at a lower price, a profit results. No more than 25% of
the Portfolio's net assets may be used as collateral or segregated for purposes
of securing a short sale obligation. The Portfolio may also enter into SHORT
SALES AGAINST-THE-BOX which means it owns securities identical to those sold
short.
We may also use INTEREST RATE SWAPS in the management of the fixed income
portion of the Portfolio. In an interest rate swap the Portfolio and another
party agree to exchange interest payments. For example, the Portfolio may wish
to exchange a floating rate of interest for a fixed rate. We would enter into
this type of a swap if we think interest rates are going down.
The Portfolio may also enter into REPURCHASE AGREEMENTS. In a repurchase
transaction, the Portfolio agrees to purchase certain securities and the seller
agrees to repurchase the same securities at a set price on a specified date.
This creates a fixed return for the Portfolio. The Portfolio may participate
with certain other Portfolios of the Fund in a JOINT REPURCHASE ACCOUNT under an
order obtained from the SEC. In a joint repurchase transaction, uninvested cash
balances of various Portfolios are added together and invested in one or more
repurchase agreements. Each of the participating Portfolios receives a portion
of the income earned in the joint account based on the percentage of its
investment.
23
<PAGE>
We may also invest in REVERSE REPURCHASE AGREEMENTS and DOLLAR ROLLS in the
management of the fixed-income portion of the Portfolio. In a reverse repurchase
transaction, the Portfolio sells a security it owns and agrees to buy it back at
set price and date. During the period the security is held by the other party,
the Portfolio may continue to receive principal and interest payments on the
security. Dollar rolls involve the sale by the Portfolio of a security for
delivery in the current month with a promise to repurchase from the buyer a
substantially similar - but not necessarily
the same - security at a set price and date in the future. During the "roll
period," the Portfolio does not receive any principal or interest on the
security. Instead it is compensated by the difference between the current sales
price and the price of the future purchase, as well as any interest earned on
the cash proceeds from the original sale. The Portfolio will not use more than
30% of its net assets in connection with reverse repurchase transactions and
dollar rolls.
We will consider other factors (such as cost) in deciding whether to employ any
particular strategy or use any particular instrument. Any derivatives we use may
not match the Portfolio's underlying holdings. For more information about these
strategies, see the SAI, "Investment Objectives and Policies of the Portfolios."
ADDITIONAL STRATEGIES
The Portfolio also follows certain policies when it BORROWS MONEY (the Portfolio
may borrow up to 5% of the value of its total assets); LENDS ITS SECURITIES; and
holds ILLIQUID SECURITIES (the Portfolio may hold up to 15% of its net assets in
illiquid securities, including securities with legal or contractual restrictions
on resale, those without a readily available market and repurchase agreements
with maturities longer than seven days). The Portfolio is subject to certain
investment restrictions that are fundamental policies, which means they cannot
be changed without shareholder approval. For more information about these
restrictions, see the SAI.
- --------------------------------------------------------------------------------
GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of this Portfolio is LONG TERM GROWTH OF CAPITAL. To
achieve this objective, we invest primarily in equity and equity-related
securities of foreign and U.S. companies. While we make every effort to achieve
this objective, we can't guarantee success.
- -----------------------------------------------------------------
GLOBAL INVESTING
This Portfolio is intended to provide investors with the
opportunity to invest in companies located throughout the world.
Although we are not required to invest in a minimum number of
countries, we intend generally to invest in at least three
countries, including the U.S. However, in response to market
conditions, we can invest up to 35% of the Portfolio's total
assets in any one country other than the U.S.
- -----------------------------------------------------------------
When selecting stocks, we use a growth approach which means we look for
companies that have above-average growth prospects. In making our stock picks,
we look for companies that have had growth in earnings and sales, high returns
on equity and assets or other strong financial characteristics. Often, the
companies we choose have superior management, a unique market niche or a strong
new product.
The Portfolio may invest up to 100% of its assets in MONEY MARKET INSTRUMENTS in
response to adverse market conditions or when we are restructuring the
Portfolio. Investing heavily in these securities limits our ability to achieve
our investment objective, but can help to preserve the Portfolio's assets when
the markets are unstable.
DERIVATIVES AND OTHER STRATEGIES
We may also use alternative investment strategies - including DERIVATIVES - to
try to improve the Portfolio's returns, protect its assets or for short-term
cash management. There is no guarantee that these strategies will work, that the
instruments necessary to implement these strategies will be available or that
the Portfolio will not lose money. With derivatives, we try to predict whether
the underlying investment - a security, market index,
24
<PAGE>
currency, interest rate or some other benchmark - will go up or down at some
future date. We may use derivatives to try to reduce risk or to increase return
consistent with the Portfolio's overall investment objective.
We may: purchase and sell OPTIONS on equity securities, stock indexes and
foreign currencies; purchase and sell FUTURES contracts on stock indexes, debt
securities, interest rate indexes and foreign currencies and options on these
futures contracts; enter into FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS; and
purchase securities on a WHEN-ISSUED or DELAYED DELIVERY basis.
The Portfolio may also enter into SHORT SALES AGAINST-THE-BOX. In a short sale
we sell a security we do not own to take advantage of an anticipated decline in
the stock's price. The Portfolio borrows the stock for delivery and if it can
buy the stock later at a lower price, a profit results. A short sale is
"against-the-box" when the Portfolio owns an equal amount of the securities sold
short or owns securities that can be converted into the securities sold.
The Portfolio may also enter into REPURCHASE AGREEMENTS. In a repurchase
transaction, the Portfolio agrees to purchase certain securities and the seller
agrees to repurchase the same securities at a set price on a specified date.
This creates a fixed return for the Portfolio. The Portfolio may participate
with certain other Portfolios of the Fund in a JOINT REPURCHASE ACCOUNT under an
order obtained from the SEC. In a joint repurchase transaction, uninvested cash
balances of various Portfolios are added together and invested in one or more
repurchase agreements. Each of the participating Portfolios receives a portion
of the income earned in the joint account based on the percentage of its
investment.
We will consider factors such as cost and volatility in deciding whether to
employ any particular strategy or use any particular instrument. Any derivatives
we use may not match the Portfolio's underlying holdings. For more information
about these strategies, see the SAI, "Investment Objectives and Policies of the
Portfolios."
ADDITIONAL STRATEGIES
The Portfolio also follows certain policies when it BORROWS MONEY (the Portfolio
may borrow up to 5% of the value of its total assets); LENDS ITS SECURITIES; and
holds ILLIQUID SECURITIES (the Portfolio may hold up to 15% of its net assets in
illiquid securities, including securities with legal or contractual restrictions
on resale, those without a readily available market and repurchase agreements
with maturities longer than seven days). The Portfolio is subject to certain
investment restrictions that are fundamental policies, which means they cannot
be changed without shareholder approval. For more information about these
restrictions, see the SAI.
- --------------------------------------------------------------------------------
HIGH YIELD BOND PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of this Portfolio is A HIGH TOTAL RETURN. In pursuing
our objective, we invest in high yield/high risk debt securities. While we make
every effort to achieve this objective, we can't guarantee success.
- ----------------------------------------------------------------
HIGH YIELD/HIGH RISK
Lower rated and comparable unrated securities tend to offer
better yields than higher rated securities with the same
maturities because the issuer's past financial condition may
not have been as strong as that of higher rated issuers.
Changes in the perception of the creditworthiness of the
issuers of lower rated securities tend to occur more
frequently and in a more pronounced manner than for issuers
of higher rated securities.
- ----------------------------------------------------------------
Normally, we will invest at least 80% of the Portfolio's total assets in medium
to lower rated debt securities. These high-yield or "junk bonds" are riskier
than higher rated bonds and are considered speculative.
The Portfolio may also invest up to 20% of its total assets in U.S. dollar
denominated DEBT SECURITIES issued outside the U.S. by foreign and U.S. issuers.
The Portfolio may also acquire CONVERTIBLE AND NONCONVERTIBLE DEBT SECURITIES
and PREFERRED STOCK. The Portfolio will not invest in common stocks, except when
they are included as part of a debt security.
25
<PAGE>
We may also invest in loans arranged through private negotiations between a
corporation which is the borrower and one or more financial institutions that
are the lenders. Generally, these types of investments are in the form of LOAN
PARTICIPATIONS. In loan participations, the Portfolio will have a contractual
relationship with the lender but not with the borrower. This means the Portfolio
will only have rights to principal and interest received by the lender. It will
not be able to enforce compliance by the borrower with the terms of the loan and
may not have a right to any collateral securing the loan. If the lender becomes
insolvent, the Portfolio may be treated as a general creditor and will not
benefit from any set-off between the lender and the borrower.
Under normal circumstances, the Portfolio may invest in MONEY MARKET INSTRUMENTS
and COMMERCIAL PAPER of domestic corporations. In response to adverse market
conditions or when we are restructuring the Portfolio, we may temporarily invest
up to 100% of the Portfolio's assets in money market instruments. Investing
heavily in these securities limits our ability to achieve our investment
objective, but can help to preserve the Portfolio's assets when the markets are
unstable.
DERIVATIVES AND OTHER STRATEGIES
We may also use alternative investment strategies - including DERIVATIVES - to
try to improve the Portfolio's returns, protect its assets or for short-term
cash management. There is no guarantee that these strategies will work, that the
instruments necessary to implement these strategies will be available or that
the Portfolio will not lose money. With derivatives, we try to predict whether
the underlying investment - a security, interest rate or some other benchmark -
will go up or down at some future date. We may use derivatives to try to reduce
risk or to increase return consistent with the Portfolio's overall investment
objective.
We may: purchase and sell OPTIONS on debt securities; purchase and sell interest
rate FUTURES CONTRACTS and options on these futures contracts; and purchase
securities on a WHEN-ISSUED or DELAYED DELIVERY basis.
The Portfolio may also enter into SHORT SALES. In a short sale we sell a
security we do not own to take advantage of an anticipated decline in the
security's price. The Portfolio borrows the security for delivery and if it can
buy the security later at a lower price, a profit results. No more than 25% of
the Portfolio's net assets may be used as collateral or segregated for purposes
of securing a short sale obligation. The Portfolio may also enter into SHORT
SALES AGAINST-THE-BOX which means it owns securities identical to those sold
short.
We may also use INTEREST RATE SWAPS in the management of the Portfolio. In an
interest rate swap the Portfolio and another party agree to exchange interest
payments. For example, the Portfolio may wish to exchange a floating rate of
interest for a fixed rate. We would enter into this type of a swap if we think
interest rates are going down.
The Portfolio may also enter into REPURCHASE AGREEMENTS. In a repurchase
transaction, the Portfolio agrees to purchase certain securities and the seller
agrees to repurchase the same securities at a set price on a specified date.
This creates a fixed return for the Portfolio. The Portfolio may participate
with certain other Portfolios of the Fund in a JOINT REPURCHASE ACCOUNT under an
order obtained from the SEC. In a joint repurchase transaction, uninvested cash
balances of various Portfolios are added together and invested in one or more
repurchase agreements. Each of the participating Portfolios receives a portion
of the income earned in the joint account based on the percentage of its
investment.
The Portfolio may use up to 30% of its net assets in connection with REVERSE
REPURCHASE AGREEMENTS and DOLLAR ROLLS. In a reverse repurchase transaction, the
Portfolio sells a security it owns and agrees to buy it back at a set price and
date. During the period the security is held by the other party, the Portfolio
may continue to receive principal and interest payments on the security. Dollar
rolls involve the sale by the Portfolio of a security for delivery in the
current month with a promise to repurchase from the buyer a substantially
similar but not necessarily the same - security at a set price and date in the
future. During the "roll period," the Portfolio does not receive any principal
or interest on the security. Instead it is compensated by the difference between
the current sales price and the price of the future purchase, as well as any
interest earned on the cash proceeds from the original sale.
We will consider other factors (such as cost) in deciding whether to employ any
particular strategy or use any particular instrument. Any derivatives we use may
not match the Portfolio's underlying holdings. For more information about these
strategies, see the SAI, "Investment Objectives and Policies of the Portfolios."
26
<PAGE>
ADDITIONAL STRATEGIES
The Portfolio also follows certain policies when it BORROWS MONEY (the Portfolio
may borrow up to 5% of the value of its total assets); LENDS ITS SECURITIES; and
holds ILLIQUID SECURITIES (the Portfolio may hold up to 15% of its net assets in
illiquid securities, including securities with legal or contractual restrictions
on resale, those without a readily available market and repurchase agreements
with maturities longer than seven days). The Portfolio is subject to certain
investment restrictions that are fundamental policies, which means they cannot
be changed without shareholder approval. For more information about these
restrictions, see the SAI.
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
The investment objective of this Portfolio is to SEEK THE MAXIMUM CURRENT INCOME
THAT IS CONSISTENT WITH STABILITY OF CAPITAL AND MAINTENANCE OF LIQUIDITY. This
means we seek investments that we think will provide a high level of current
income. While we make every effort to achieve our objective, we can't guarantee
success.
SIDEBAR---------------------------------------------------------
STEADY NET ASSET VALUE
The net asset value for the Portfolio will ordinarily remain
at $10 per share because dividends are declared and
reinvested daily. The price of each share remains the same,
but you will have more shares when dividends are declared.
- ----------------------------------------------------------------
We invest in a diversified portfolio of short-term debt obligations issued by
the U.S. government, its agencies and instrumentalities, as well as
commercial paper, asset backed securities, funding agreements, certificates of
deposit, floating and variable rate demand notes, notes and other obligations
issued by banks, corporations and other companies (including trust structures),
and obligations issued by foreign banks, companies or foreign governments.
We make investments that meet the requirements of specific rules designed for
money market mutual funds, such as the Investment Company Act Rule 2a-7. As
such, we will not acquire any security with a remaining maturity exceeding
thirteen months, and we will maintain a dollar-weighted average portfolio of 90
days or less. In addition, we will comply with the diversification, quality and
other requirements of Rule 2a-7. This means, generally, that the instruments
that we purchase present "minimal credit risk" and are of "eligible quality."
"Eligible quality" for this purpose means a security is: (i) rated in one of the
two highest short-term rating categories by at least two major rating services
(or if only one major rating service has rated the security, as rated by that
service); or (ii) if unrated, of comparable quality in our judgment. All
securities that we purchase will be denominated in U.S. dollars.
COMMERCIAL PAPER is short-term debt obligations of banks, corporations and other
borrowers. The obligations are usually issued by financially strong businesses
and often include a line of credit to protect purchasers of the obligations. An
ASSET-BACKED SECURITY is a loan or note that pays interest based upon the cash
flow of a pool of assets, such as mortgages, loans and credit card receivables.
FUNDING AGREEMENTS are contracts issued by insurance companies that guarantee a
return of principal, plus some amount of interest. When purchased by money
market funds, funding agreements will typically be short-term and will provide
an adjustable rate of interest. CERTIFICATES OF DEPOSIT, TIME DEPOSITS and
BANKERS' ACCEPTANCES are obligations issued by or through a bank. These
instruments depend upon the strength of the bank involved in the borrowing to
give investors comfort that the borrowing will be repaid when promised.
We may purchase DEBT SECURITIES that include DEMAND FEATURES, which allow us to
demand repayment of a debt obligation before the obligation is due or "matures."
This means that longer term securities can be purchased because of our
expectation that we can demand repayment of the obligation at a set price within
a relatively short period of time, in compliance with the rules applicable to
money market mutual funds.
27
<PAGE>
The Portfolio may also purchase FLOATING RATE and VARIABLE RATE securities.
These securities pay interest at rates that change periodically to reflect
changes in market interest rates. Because these securities adjust the interest
they pay, they may be beneficial when interest rates are rising because of the
additional return the Portfolio will receive, and they may be detrimental when
interest rates are falling because of the reduction in interest payments to the
Portfolio.
The securities that we may purchase may change over time as new types of money
market instruments are developed. We will purchase these new instruments,
however, only if their characteristics and features follow the rules governing
money market mutual funds.
================================================================================
AN INVESTMENT IN THE PORTFOLIO IS NOT A BANK DEPOSIT AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY. ALTHOUGH THE PORTFOLIO SEEKS TO PRESERVE THE VALUE OF AN INVESTMENT AT
$10 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE PORTFOLIO.
================================================================================
OTHER STRATEGIES
We may also use alternative investment strategies to try to improve the
Portfolio's returns, protect its assets or for short-term cash management. There
is no guarantee that these strategies will work, that the instruments necessary
to implement these strategies will be available or that the Portfolio will not
lose money.
We may purchase securities on a WHEN-ISSUED or DELAYED DELIVERY basis.
The Portfolio may also enter into REPURCHASE AGREEMENTS. In a repurchase
transaction, the Portfolio agrees to purchase certain securities and the seller
agrees to repurchase the same securities at a set price on a specified date.
This creates a fixed return for the Portfolio. The Portfolio may participate
with certain other Portfolios of the Fund in a JOINT REPURCHASE ACCOUNT under an
order obtained from the SEC. In a joint repurchase transaction, uninvested cash
balances of various Portfolios are added together and invested in one or more
repurchase agreements. Each of the participating Portfolios receives a portion
of the income earned in the joint account based on the percentage of its
investment.
The Portfolio may use up to 10% of its net assets in connection with REVERSE
REPURCHASE AGREEMENTS. In a reverse repurchase transaction, the Portfolio sells
a security it owns and agrees to buy it back at an agreed price and date. During
the period the security is held by the other party, the Portfolio may continue
to receive principal and interest payments on the security.
We will consider other factors (such as cost) in deciding whether to employ any
particular strategy or use any particular instrument. For more information about
these strategies, see the SAI, "Investment Objectives and Policies of the
Portfolios."
The Portfolio also follows certain policies when it BORROWS MONEY (the Portfolio
may borrow up to 5% of the value of its total assets) and holds ILLIQUID
SECURITIES (the Portfolio may hold up to 10% of its net assets in illiquid
securities, including securities with legal or contractual restrictions on
resale, those without a readily available market and repurchase agreements with
maturities longer than seven days). The Portfolio is subject to certain
investment restrictions that are fundamental policies, which means they cannot
be changed without shareholder approval. For more information about these
restrictions, see the SAI.
- --------------------------------------------------------------------------------
PRUDENTIAL JENNISON PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of this Portfolio is to achieve LONG TERM GROWTH OF
CAPITAL. This means we seek investments whose price will increase over several
years. While we make every effort to achieve this objective, we can't guarantee
success.
28
<PAGE>
- ---------------------------------------------------------
INVESTMENT STRATEGY
We seek to invest in equity securities of established
companies with above-average growth prospects. We
select stocks on a company-by-company basis using
fundamental analysis. In making our stock picks, we
look for companies that have had growth in earnings and
sales, high returns on equity and assets or other
strong financial characteristics. Often, the companies
we choose have superior management, a unique market
niche or a strong new product.
- ---------------------------------------------------------
In pursuing our objective, we normally invest 65% of the Portfolio's total
assets in common stocks and preferred stocks of companies with capitalization in
excess of $1 billion.
For the balance of the Portfolio, we may invest in COMMON STOCKS, PREFERRED
STOCKS and OTHER EQUITY-RELATED SECURITIES of companies that are undergoing
changes in management, product and/or marketing dynamics which we believe have
not yet been reflected in reported earnings or recognized by investors.
In addition, we may invest in DEBT SECURITIES and MORTGAGE-RELATED SECURITIES.
These securities may be rated as low as Baa by Moody's or BBB by S&P (or if
unrated, of comparable quality in our judgment).
The Portfolio may also invest in OBLIGATIONS ISSUED OR GUARANTEED BY THE U.S.
GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES. In addition, up to 30% of the
Portfolio's assets may be invested in FOREIGN EQUITY and EQUITY-RELATED
SECURITIES. For these purposes, we do not consider American Depositary Receipts
(ADRs) as foreign securities. (ADRs are certificates representing the right to
receive foreign securities that have been deposited with a U.S. bank or a
foreign branch of a U.S. bank.)
In response to adverse market conditions or when restructuring the Portfolio, we
may invest up to 100% of the Portfolio's assets in MONEY MARKET INSTRUMENTS.
Investing heavily in these securities limits our ability to achieve our
investment objective, but can help to preserve the Portfolio's assets when the
markets are unstable.
DERIVATIVES AND OTHER STRATEGIES
We may also use alternative investment strategies - including DERIVATIVES - to
try to improve the Portfolio's returns, protect its assets or for short-term
cash management. There is no guarantee that these strategies will work, that the
instruments necessary to implement these strategies will be available or that
the Portfolio will not lose money. With derivatives, we try to predict whether
the underlying investment - a security, market index, currency or some other
benchmark - will go up or down at some future date. We may use derivatives to
try to reduce risk or to increase return consistent with the Portfolio's overall
investment objective.
We may: purchase and sell OPTIONS on equity securities, stock indexes and
foreign currencies; purchase and sell stock index and foreign currency FUTURES
CONTRACTS and options on those futures contracts; enter into FORWARD FOREIGN
CURRENCY EXCHANGE CONTRACTS; and purchase securities on a WHEN-ISSUED or DELAYED
DELIVERY basis.
The Portfolio may also enter into SHORT SALES AGAINST-THE-BOX. In a short sale
we sell a security we do not own to take advantage of an anticipated decline in
the security's price. The Portfolio borrows the security for delivery and if it
can buy the security later at a lower price, a profit results. A short sale is
"against-the-box" when the Portfolio owns an equal amount of the securities sold
short or owns securities that can be converted into the securities sold.
The Portfolio may also enter into REPURCHASE AGREEMENTS. In a repurchase
transaction, the Portfolio agrees to purchase certain securities and the seller
agrees to repurchase the same securities at a set price on a specified date.
This creates a fixed return for the Portfolio. The Portfolio may participate
with certain other Portfolios of the Fund in a JOINT REPURCHASE ACCOUNT under an
order obtained from the SEC. In a joint repurchase transaction, uninvested cash
balances of various Portfolios are added together and invested in one or more
repurchase agreements. Each of the participating Portfolios receives a portion
of the income earned in the joint account based on the percentage of its
investment.
We will consider factors such as cost and volatility in deciding whether to
employ any particular strategy or use any particular instrument. Any derivatives
we use may not match the Portfolio's underlying holdings. For more information
about these strategies, see the SAI, "Investment Objectives and Policies of the
Portfolios."
29
<PAGE>
ADDITIONAL STRATEGIES
The Portfolio also follows certain policies when it BORROWS money (the Portfolio
may borrow up to 5% of the value of its total assets); LENDS ITS SECURITIES; and
holds ILLIQUID SECURITIES (the Portfolio may hold up to 15% of its net assets in
illiquid securities, including securities with legal or contractual restrictions
on resale, those without a readily available market and repurchase agreements
with maturities longer than seven days). The Portfolio is subject to certain
investment restrictions that are fundamental policies, which means they cannot
be changed without shareholder approval. For more information about these
restrictions, see the SAI.
- --------------------------------------------------------------------------------
STOCK INDEX PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of this Portfolio is to achieve INVESTMENT RESULTS THAT
GENERALLY CORRESPOND TO THE PERFORMANCE OF PUBLICLY-TRADED COMMON STOCKS. To
achieve this goal, we attempt to duplicate the performance of the S&P 500 Index.
While we make every effort to achieve this objective, we can't guarantee
success.
- -----------------------------------------------------------
S&P 500 INDEX
We attempt to duplicate the performance of the S&P 500
Index, a market-weighted index which represents more than
70% of the market value of all publicly-traded common
stocks.
- -----------------------------------------------------------
Under normal conditions, we attempt to invest in all 500 stocks represented in
the S&P 500 Index in proportion to their weighting in the Index. We will attempt
to remain as fully invested in the S&P 500 stocks as possible in light of cash
flow into and out of the Portfolio.
To manage investments and redemptions in the Portfolio, we may temporarily hold
cash or invest in high-quality MONEY MARKET INSTRUMENTS. To the extent we do so,
the Portfolio's performance will differ from that of the Index. We attempt to
minimize differences in the performance of the Portfolio and the Index by using
stock index FUTURES CONTRACTS, options on stock indexes and OPTIONS on stock
index futures contracts. The Portfolio will not use these derivative securities
for speculative purposes or to hedge against a decline in the value of the
Portfolio's holdings.
ALTERNATIVE STRATEGIES
We may also use alternative investment strategies to try to improve the
Portfolio's returns or for short-term cash management. There is no guarantee
that these strategies will work, that the instruments necessary to implement
these strategies will be available or that the Portfolio will not lose money.
We may: purchase and sell OPTIONS on stock indexes; purchase and sell stock
index FUTURES CONTRACTS and options on those futures contracts.
The Portfolio may also enter into SHORT SALES AGAINST-THE-BOX. In a short sale
we sell a security we do not own to take advantage of an anticipated decline in
the stock's price. The Portfolio borrows the stock for delivery and if it can
buy the stock later at a lower price, a profit results. A short sale is
"against-the-box" when the Portfolio owns an equal amount of the securities sold
short or owns securities that can be converted into the securities sold.
The Portfolio may also enter into REPURCHASE AGREEMENTS. In a repurchase
transaction, the Portfolio agrees to purchase certain securities and the seller
agrees to repurchase the same securities at a set price on a specified date.
This creates a fixed return for the Portfolio. The Portfolio may participate
with certain other Portfolios of the Fund in a JOINT REPURCHASE ACCOUNT under an
order obtained from the SEC. In a joint repurchase transaction, uninvested cash
balances of various Portfolios are added together and invested in one or more
repurchase agreements. Each of the participating Portfolios receives a portion
of the income earned in the joint account based on the percentage of its
investment.
30
<PAGE>
We will consider factors such as cost and volatility in deciding whether to
employ any particular strategy or use any particular instrument. For more
information about these strategies, see the SAI, "Investment Objectives and
Policies of the Portfolios."
ADDITIONAL STRATEGIES
The Portfolio also follows certain policies when it BORROWS MONEY (the Portfolio
may borrow up to 5% of the value of its total assets); LENDS ITS SECURITIES; and
holds ILLIQUID SECURITIES (the Portfolio may hold up to 15% of its net assets in
illiquid securities, including securities with legal or contractual restrictions
on resale, those without a readily available market and repurchase agreements
with maturities longer than seven days). The Portfolio is subject to certain
investment restrictions that are fundamental policies, which means they cannot
be changed without shareholder approval. For more information about these
restrictions, see the SAI.
================================================================================
A STOCK'S INCLUSION IN THE S&P 500 INDEX IN NO WAY IMPLIES S&P'S OPINION AS TO
THE STOCK'S ATTRACTIVENESS AS AN INVESTMENT. THE PORTFOLIO IS NOT SPONSORED,
ENDORSED, SOLD OR PROMOTED BY S&P. S&P MAKES NO REPRESENTATIONS REGARDING THE
ADVISABILITY OF INVESTING IN THE PORTFOLIO. "STANDARD & POOR'S," "STANDARD &
POOR'S 500" AND "500" ARE TRADEMARKS OF MCGRAW HILL.
================================================================================
31
<PAGE>
INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Portfolios is no
exception. This chart outlines the key risks and potential rewards of the
principal investments and certain other investments each Portfolio may make. See
also, "Investment Objectives and Policies of the Portfolios" in the SAI.
<TABLE>
<CAPTION>
INVESTMENT
TYPE PORTFOLIO & % OF ASSETS RISKS POTENTIAL REWARDS
- ------------------ ----------------------------- -------------------------------------------- --------------------------------------
<S> <C> <C> <C>
HIGH QUALITY ALL PORTFOLIOS o Credit risk - the risk that the o Regular interest income
MONEY MARKET borrower can't pay back the money
OBLIGATIONS OF (% VARIES) borrowed o Generally more secure than
ALL TYPES stocks since companies must pay
o Market risk - the risk that
the their debts before they
pay obligations may lose
value because dividends
interest rates change or
there is a lack of
confidence in the borrower
- ------------------ ----------------------------- -------------------------------------------- --------------------------------------
EQUITY AND Equity securities: o Individual stocks could lose value o Historically, stocks have
EQUITY-RELATED ALL PORTFOLIOS EXCEPT MONEY outperformed other investments
SECURITIES MARKET o The equity markets could go down, over the long term
resulting in a decline in value of a
(% VARIES) Portfolio's investments o Generally, economic growth
means higher corporate profits,
o Companies that pay dividends may which leads to an increase in
Equity-related securities: not do so if they don't have profits stock prices, known as capital
CONSERVATIVE BALANCED, or adequate cash flow appreciation
DIVERSIFIED BOND, EQUITY,
EQUITY INCOME, FLEXIBLE o Changes in economic or political o May be a source of dividend
MANAGED, GLOBAL, HIGH YIELD conditions, both U.S. and income
BOND, PRUDENTIAL JENNISON international, may result in a decline
in the value of a Portfolio's o Highly successful small-cap
(% VARIES) investments companies can outperform larger
ones
o Small-cap companies are more
likely to reinvest earnings and not
pay dividends
o Changes in interest rates
may affect the securities
of small and medium-sized
companies more than the
securities of larger
companies
- ------------------ ----------------------------- -------------------------------------------- --------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
<S> <C> <C> <C>
INVESTMENT ALL PORTFOLIOS EXCEPT STOCK o A Portfolio's holdings, share o Bonds have generally
GRADE DEBT INDEX price, yield, and total return may outperformed money market
SECURITIES fluctuate in response to bond market instruments over the long term
(% VARIES) movements with less risk than stocks
o Credit risk - the default
of an issuer would leave a o Most bonds will rise in value
Portfolio with unpaid when interest rates fall
interest or principal. The
lower a bond's quality, the
higher its potential o Regular interest income
volatility
o Investment grade bonds have a
o Market risk - the risk that lower risk of default
the market value of an
investment may move up or
down, sometimes rapidly or
unpredictably. Market risk o Generally more secure than
may affect an industry, stocks since companies must pay
sector, or the market as their debts before they pay
a whole dividends
o Interest rate risk - the
value of most bonds will
fall when interest rates
rise; the longer a bond's
maturity and the lower its
credit quality, the more
its value typically falls.
It can lead to price
volatility
- ------------------ ----------------------------- -------------------------------------------- --------------------------------------
HIGH YIELD DEBT CONSERVATIVE BALANCED, o Higher market risk o May offer higher interest
SECURITIES DIVERSIFIED BOND, EQUITY, income than higher quality debt
(JUNK BONDS) EQUITY INCOME, FLEXIBLE o Higher credit risk securities
MANAGED, HIGH YIELD BOND
o May be more illiquid (harder to
(% VARIES) value and sell), in
which case valuation would
depend more on the
investment adviser's
judgment than is generally
the case with higher rated
securities
- ------------------ ----------------------------- -------------------------------------------- --------------------------------------
FOREIGN CONSERVATIVE BALANCED, o Foreign markets, economies and o Investors can participate in
SECURITIES DIVERSIFIED BOND, EQUITY, political systems may not be as stable the growth of foreign markets and
EQUITY INCOME, FLEXIBLE as in the U.S. companies operating in those
MANAGED, GLOBAL, HIGH YIELD markets
BOND, MONEY MARKET, o Currency risk - changing values of
PRUDENTIAL JENNISON foreign currencies o Changing value of foreign
currencies
(% VARIES) o May be less liquid than U.S.
stocks and bonds o Opportunities for
Options on Foreign diversification
Currencies: o Differences in foreign laws,
CONSERVATIVE BALANCED, accounting standards, public
EQUITY, EQUITY INCOME, information, custody and settlement
FLEXIBLE MANAGED, GLOBAL, practices
PRUDENTIAL JENNISON
</TABLE>
33
<PAGE>
<TABLE>
- ------------------ ----------------------------- -------------------------------------------- --------------------------------------
<S> <C> <C> <C>
(% VARIES)
Futures on Foreign o Year 2000 conversion may be more
Currencies: of a problem for some foreign issuers
CONSERVATIVE BALANCED,
EQUITY, EQUITY INCOME,
FLEXIBLE MANAGED, GLOBAL,
PRUDENTIAL JENNISON
(% VARIES)
- ------------------ ----------------------------- -------------------------------------------- --------------------------------------
DERIVATIVES Options on Equity o Derivatives, such as futures, o A Portfolio could make money
Securities: CONSERVATIVE options and foreign currency forward and protect against losses if the
BALANCED, EQUITY, EQUITY contracts, may not fully offset the investment analysis proves correct
INCOME, FLEXIBLE MANAGED, underlying positions and this could
GLOBAL, PRUDENTIAL result in losses to a Portfolio that o Derivatives that involve
JENNISON, STOCK INDEX would not have otherwise occurred leverage could generate
substantial gains at low cost
(% VARIES) o Derivatives used for risk
management may not have the intended o One way to manage a
Options on Debt Securities: effects and may result in losses or Portfolio's risk/return balance is
CONSERVATIVE BALANCED, missed opportunities to lock in the value of an
DIVERSIFIED BOND, FLEXIBLE investment ahead of time
MANAGED, HIGH YIELD BOND o The other party to a derivatives
contract could default
(% VARIES)
o Derivatives that involve leverage
Options on Stock Indexes: could magnify losses
CONSERVATIVE BALANCED,
EQUITY, EQUITY INCOME, o Certain types of derivatives
FLEXIBLE MANAGED, GLOBAL, involve costs to a Portfolio that can
PRUDENTIAL JENNISON, STOCK reduce returns
INDEX
(% VARIES)
Futures Contracts on stock
indexes:
CONSERVATIVE BALANCED,
EQUITY, EQUITY INCOME,
FLEXIBLE MANAGED, GLOBAL,
PRUDENTIAL JENNISON, STOCK
INDEX
(% VARIES)
</TABLE>
34
<PAGE>
<TABLE>
- ------------------ ----------------------------- -------------------------------------------- --------------------------------------
<S> <C> <C> <C>
Futures on debt securities
and interest rate indexes:
CONSERVATIVE BALANCED,
DIVERSIFIED BOND, FLEXIBLE
MANAGED, GLOBAL, HIGH YIELD
BOND
(% VARIES)
Interest Rate Swaps:
CONSERVATIVE BALANCED,
DIVERSIFIED BOND, FLEXIBLE
MANAGED, HIGH YIELD BOND
(% VARIES)
- ------------------ ----------------------------- -------------------------------------------- --------------------------------------
MORTGAGE BACKED MONEY MARKET, PRUDENTIAL o Prepayment risk - the risk that o Regular interest income
& ASSET-BACKED JENNISON the underlying mortgage or other debt
SECURITIES may be prepaid partially or o Pass-through instruments
(% VARIES) completely, generally during periods provide greater diversification
of falling interest rates, which could than direct ownership of loans
adversely affect yield to maturity and
could require a Portfolio to reinvest o Certain mortgage backed
in lower-yielding securities securities may benefit from
security interest in real estate
o Credit risk - the risk that collateral
the underlying mortgages or
receivables will not be paid by
debtors or by credit insurers
or guarantors of such
instruments and thus may
involve greater risk
o Market risk
- ------------------ ----------------------------- -------------------------------------------- --------------------------------------
REAL ESTATE CONSERVATIVE BALANCED, o Performance depends on the o Real estate holdings can
INVESTMENT TRUSTS EQUITY INCOME, FLEXIBLE strength of real estate markets, REIT generate good returns from rents,
(REITS) MANAGED management and property management rising market values, etc.
which can be affected by many factors,
(% VARIES) including national and regional o Greater diversification than
economic conditions direct ownership
- ------------------ ----------------------------- -------------------------------------------- --------------------------------------
ILLIQUID ALL PORTFOLIOS EXCEPT MONEY o May be difficult to value precisely o May offer a more attractive
SECURITIES MARKET (15% of its net yield than more widely traded
assets) o May be difficult to sell at the securities
MONEY MARKET PORTFOLIO (10% time or price desired
of its net assets)
- ------------------ ----------------------------- -------------------------------------------- --------------------------------------
</TABLE>
35
<PAGE>
<TABLE>
- ------------------ ----------------------------- -------------------------------------------- --------------------------------------
<S> <C> <C> <C>
o Credit risk o May offer right to receive
LOAN CONSERVATIVE BALANCED, principal, interest and fees
PARTICIPATIONS DIVERSIFIED BOND, FLEXIBLE o Market risk without as much risk as lender
MANAGED, HIGH YIELD BOND,
MONEY MARKET o A Portfolio has no rights against
the borrower in the event the borrower
(% VARIES) does not repay the loan
- ------------------ ----------------------------- -------------------------------------------- --------------------------------------
WHEN-ISSUED AND When-issued and delayed o Use of such instruments and o Use of instruments may magnify
DELAYED DELIVERY delivery securities: strategies may magnify underlying underlying investment gains
SECURITIES, CONSERVATIVE BALANCED, investment losses
REVERSE DIVERSIFIED BOND, EQUITY,
REPURCHASE EQUITY INCOME, FLEXIBLE o Investment costs may exceed
AGREEMENTS, MANAGED, GLOBAL, HIGH YIELD potential underlying investment gains
DOLLAR ROLLS AND BOND, MONEY MARKET,
SHORT SALES PRUDENTIAL JENNISON
(% VARIES)
Reverse Repurchase
Agreements:
CONSERVATIVE BALANCED,
DIVERSIFIED BOND, FLEXIBLE
MANAGED, HIGH YIELD BOND,
MONEY MARKET AND THE MONEY
MARKET PORTION OF ANY
PORTFOLIO
(% VARIES)
Dollar Rolls:
CONSERVATIVE BALANCED,
DIVERSIFIED BOND, FLEXIBLE
MANAGED, HIGH YIELD BOND
(% VARIES)
Short Sales:
CONSERVATIVE BALANCED,
DIVERSIFIED BOND, FLEXIBLE
MANAGED, HIGH YIELD BOND
(% VARIES)
Short Sales Against the Box:
ALL PORTFOLIOS EXCEPT THE
MONEY MARKET PORTFOLIO
(% VARIES)
- ------------------ ----------------------------- -------------------------------------------- --------------------------------------
</TABLE>
36
<PAGE>
HOW THE PORTFOLIOS ARE MANAGED
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
The Prudential Insurance Company of America serves as the overall investment
adviser for the Fund. Founded in 1875, it is responsible for the management of
the Fund and provides investment advice and related services to each Portfolio.
As of December 31, 1998, Prudential had total assets under management of
approximately $334 billion. Prudential is located at 751 Broad Street, Newark,
New Jersey 07102-3777.
Prudential is currently considering reorganizing itself into a publicly traded
stock company through a process known as "demutualization." On February 10,
1998, the Company's Board of Directors authorized management to take the
preliminary steps necessary to allow the Company to demutualize. On July 1,
1998, legislation was enacted in New Jersey that would permit this conversion to
occur and that specified the process for conversion. Demutualization is a
complex process involving development of a plan of reorganization, adoption of a
plan by the Company's Board of Directors, a public hearing, voting by qualified
policyholders and regulatory approval, all of which could take two or more years
to complete. Prudential's management and Board of Directors have not yet
determined to demutualize and it is possible that, after careful review,
Prudential could decide not to go public.
The following chart lists the total investment advisory fees paid in 1998 as a
percentage of the Portfolio's average net assets.
------------------------------------------ ------------------------------
TOTAL ADVISORY FEES AS % OF
PORTFOLIO AVERAGE NET ASSETS
------------------------------------------ ------------------------------
Conservative Balanced 0.55
Diversified Bond 0.40
Equity 0.45
Equity Income 0.40
Flexible Managed 0.60
Global 0.75
High Yield Bond 0.55
Money Market 0.40
Prudential Jennison 0.60
Stock Index 0.35
- --------------------------------------------------------------------------------
INVESTMENT SUB-ADVISERS
- --------------------------------------------------------------------------------
For each Portfolio, a sub-adviser provides day-to-day investment management.
Prudential pays the sub-adviser out of the fee Prudential receives from the
Fund.
Prudential Investment Corporation (PIC), a wholly owned subsidiary of
Prudential, provides substantially all of the investment advisory services for
the Portfolios, except the services provided by the sub-adviser listed below.
PIC's address is 751 Broad Street, Newark, New Jersey 07102.
Jennison Associates LLC (Jennison), a wholly owned subsidiary of Prudential,
provides substantially all of the investment advisory services for the
Prudential Jennison Portfolio. Jennison's address is 466 Lexington Avenue, New
York, New York 10017. As of December 31, 1998, Jennison had over $46 billion in
assets under management for institutional and mutual fund clients.
37
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
Prudential's fixed-income group is organized by teams that specialize in sector.
The Fixed Income Investment Policy Committee, which is comprised of senior
investment staff from each sector team, provides guidance to the teams regarding
duration risk, asset allocations and general risk parameters. Each of the
portfolio managers of the fixed-income Portfolios (or the fixed income portion
of a Portfolio) contributes bottom-up securities selection within those
guidelines and is responsible for the day-to-day management of the Portfolio.
CONSERVATIVE BALANCED PORTFOLIO & FLEXIBLE MANAGED PORTFOLIO
These Portfolios are managed by a team of portfolio managers. Mark Stumpp,
Ph.D., Senior Managing Director of Prudential Investments, a division of
Prudential, has been the lead portfolio manager of the Portfolios since 1994 and
is responsible for the overall asset allocation decisions.
Warren Spitz, Managing Director of Prudential Investments, has been a portfolio
manager of the Portfolios since 1995 and manages a portion of each Portfolio's
equity holdings.
Jose Rodriguez, Managing Director of Prudential Investments, has been a
portfolio manager of the Portfolios since 1993 and is responsible for the debt
portion of the Portfolios. Mr. Rodriquez has been a portfolio manager for
Prudential Investments since 1988.
John Moschberger, CFA, Vice President of Prudential Investments, manages the
portions of each Portfolio designed to duplicate the performance of the S&P 500
Index. Mr. Moschberger joined Prudential in 1980 and has been a portfolio
manager since 1986.
DIVERSIFIED BOND PORTFOLIO
This Portfolio is managed by Ms. Barbara Kenworthy who has been the manager
since 1995. Ms. Kenworthy is a Managing Director of Prudential Investments.
Before joining Prudential in 1994, she served as president and portfolio manager
for several Dreyfus fixed-income funds. Ms. Kenworthy has over 30 years of
investment experience and is a member of the Treasury Borrowing Advisory
Committee of the Public Securities Association.
EQUITY PORTFOLIO
Thomas Jackson, Managing Director of Prudential Investments, has managed this
Portfolio since 1990. Mr. Jackson, a Managing Director of PIC, joined PIC in
1990 and has over 30 years of professional equity investment management
experience. He was formerly co-chief investment officer of Red Oak Advisers and
Century Capital Associates, each a private money management firm, where he
managed pension and other accounts for institutions and individuals. Mr. Jackson
was also with The Dreyfus Corporation where he managed and served as president
of the Dreyfus Fund. Mr. Jackson began managing at Chase Manhattan Bank. He is a
member of the New York Society of Security Analysts.
EQUITY INCOME PORTFOLIO
Warren Spitz, Managing Director of Prudential Investments, has managed this
Portfolio since 1988. (See description under "Conservative Balanced Portfolio &
Flexible Managed Portfolio," above.)
GLOBAL PORTFOLIO
Daniel Duane, CFA, Managing Director of Prudential Investments, Ingrid Holm,
CFA, Vice President of Prudential Investments and Michelle Picker, CFA, Vice
President of Prudential Investments, have been co-managers of this Portfolio
since 1997. Mr. Duane has managed the Portfolio since 1990. Ms. Holm has
assisted in the management of Prudential mutual funds since 1994 and has managed
a portion of Prudential's general account. Prior to 1994, Ms. Holm headed the
high yield research group for Prudential's general account. Ms. Picker has been
an analyst in Prudential's global equity investments groups since 1992 and has
managed a portion of Prudential's general account.
38
<PAGE>
HIGH YIELD BOND PORTFOLIO
George Edwards, CFA, Managing Director of Prudential Investments, has managed
this Portfolio since 1997. Mr. Edwards is a Managing Director of Prudential
Investments. Before joining the Prudential mutual fund group, Mr. Edwards worked
in Prudential's investment grade bond unit. He was previously an analyst at
McCarthy, Crisanti & Maffei (now MCM-Duff & Phelps).
MONEY MARKET PORTFOLIO
Manolita Brasil, Investment Manager of Prudential Investments, has managed this
Portfolio since 1996. She joined Prudential in 1981 and served as an assistant
portfolio manager for six years before she was appointed manager of the P-B
International Money Fund in 1994.
PRUDENTIAL JENNISON PORTFOLIO
This Portfolio is managed by Messrs. Segalas and Kannry and Ms. McCarragher of
Jennison since 1999. Mr. Segalas is a founding member and President and Chief
Investment Officer of Jennison. He has been in the investment business for over
35 years.
Mr. Kannry, a Director and Executive Vice President of Jennison, has been part
of the Jennison team since 1972. He spent more than a dozen years as part of
Jennison's research team before assuming portfolio management responsibilities
several years ago. He holds a Chartered Financial Analyst designation and is a
member of the New York Society of Security Analysts.
Ms. McCarragher, Director and Executive Vice President of Jennison, is also
Jennison's Growth Equity Investment Strategist, having joined Jennison last year
after a 20 year investment career, including positions with Weiss, Peck & Greer
(1992-1998) and State Street Research and Management Company, where she was a
member of the Investment Committee.
STOCK INDEX PORTFOLIO
John Moschberger, CFA, Vice President of Prudential Investments, has managed
this Portfolio since 1990. (See description under "Conservative Balanced
Portfolio & Flexible Managed Portfolio," above.)
HOW TO BUY AND SELL SHARES OF THE FUND
The Fund offers two classes of shares in each Portfolio - Class I and Class II.
Class I shares are sold only to separate accounts of Prudential as investment
options under variable life insurance and variable annuity contracts including
the Variable Universal Life Insurance Contract. (A separate account is simply an
accounting device used to keep the assets invested in certain insurance
contracts separate from the general assets and liabilities of the insurance
company.) Class II shares are offered only to separate accounts of
non-Prudential insurance companies for the same types of contracts.
HOW TO BUY AND SELL SHARES
The only way to invest in the Portfolios is through certain variable life
insurance and variable annuity contracts. Together with this prospectus, you
should have received a prospectus for such a Contract. You should refer to that
prospectus for further information on investing in the Portfolios.
Class I shares of a Portfolio are sold without any sales charge at the net asset
value of the Portfolio. Class I shares do not have a distribution or
administration fee.
Shares are redeemed for cash within seven days of receipt of a proper notice of
redemption or sooner if required by law. There is no redemption charge. We may
suspend the right to redeem shares or receive payment when the New York Stock
Exchange is closed (other than weekends or holidays), when trading on the New
York Stock Exchange is restricted, or as permitted by the SEC.
39
<PAGE>
NET ASSET VALUE
When you purchase or sell shares of a Portfolio the price you will pay or
receive, as the case may be, is based on the share's value. This is known as the
net asset value or NAV. The price at which a purchase or redemption is made is
based on the next calculation of the NAV after the order is placed. The NAV of
each share class of each Portfolio (except the Money Market Portfolio) is
determined once a day - at 4:15 p.m. New York Time - on each day the New York
Stock Exchange is open for business. If the New York Stock Exchange closes early
on a day, the Portfolios' NAVs will be calculated some time between the closing
time and 4:15 p.m. on that day. The NAV for the Money Market Portfolio is
determined at 12:00 p.m. on each day the New York Stock Exchange is open for
business.
The NAV for each of the Portfolios other than the Money Market Portfolio is
determined by a simple calculation. It's the total value of a Portfolio (assets
minus liabilities) divided by the total number of shares outstanding. The NAV
for the Money Market Portfolio will ordinarily remain at $10 per share because
dividends are declared and reinvested daily. (The price of each share remains
the same but you will have more shares when dividends are declared.)
To determine a Portfolio's NAV, its holdings are valued as follows:
EQUITY SECURITIES are generally valued at the last sale price on an exchange or
NASDAQ, or if there is not sale, at the mean between the most recent bid and
asked prices on that day. If there is no asked price, the security will be
valued at the bid price. Equity securities that are not sold on an exchange or
NASDAQ are generally valued by an independent pricing agent or principal market
maker.
A Portfolio may own securities that are primarily listed on foreign exchanges
that trade on weekends or other days when the Portfolios do not price their
shares. Therefore, the value of a Portfolio's assets may change on days when
shareholders cannot purchase or redeem Portfolio shares.
All SHORT-TERM DEBT SECURITIES held by the Money Market Portfolio are valued at
amortized cost. Short-term debt securities with remaining maturities of 12 month
or less held by the Conservative Balanced and Flexible Managed Portfolios are
valued on an amortized cost basis. For the other Portfolios, debt securities
with remaining maturities of 60 days or less are valued on an amortized cost
basis. This valuation method is widely used by mutual funds. It means that the
security is valued initially at its purchase price and then decreases in value
by equal amounts each day until the security matures. It almost always results
in a value that is extremely close to the actual market value. The Fund's Board
of Directors has established procedures to monitor whether any material
deviation between valuation and market value occurs and if so, will promptly
consider what action, if any, should be taken to prevent unfair results to
Contract owners.
OTHER DEBT SECURITIES -- those that are not valued on an amortized cost basis --
are valued using an independent pricing service.
OPTIONS ON STOCK AND STOCK INDEXES that are traded on a national securities
exchange are valued at the average of the bid and asked prices as of the close
of that exchange.
FUTURES CONTRACTS and OPTIONS ON FUTURES CONTRACTS are valued at the last sale
price at the close of the commodities exchange or board of trade on which they
are traded. If there has been no sale that day, the securities will be valued at
the mean between the most recently quoted bid and asked prices on that exchange
or board of trade.
SECURITIES FOR WHICH NO MARKET QUOTATIONS ARE AVAILABLE will be valued at fair
value by Prudential under the direction of the Fund's Board of Directors.
40
<PAGE>
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. PIMS' principle business
address is 751 Broad Street, Newark, New Jersey 07102-3777.
OTHER INFORMATION
FEDERAL INCOME TAXES
If you own or are considering purchasing a variable contract, you should consult
the prospectus for the variable contract for tax information about that variable
contract. You should also consult with a qualified tax adviser for information
and advice.
The SAI provides information about certain tax laws applicable to the Fund.
YEAR 2000
The services provided to the Fund and the shareholders by the Fund's investment
adviser, sub-advisers, distributor, transfer agent and custodians depend on the
smooth functioning of their computer systems and those of outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such event could have a negative impact on handling securities
trades, payments of interest and dividends, pricing and account services.
Although, at this time, there can be no assurance that there will be no adverse
impact on the Fund, the Fund's investment adviser, sub-advisers, distributor,
transfer agent and custodians have advised the Fund that they have been actively
working on necessary changes to their computer systems to prepare for the year
2000. The Fund and its Directors receive and have received since mid-1998
satisfactory quarterly reports from the principal service providers as to their
preparations for year 2000 readiness, although there can be no assurance that
the service providers (or other securities market participants) will
successfully complete the necessary changes in a timely manner or that there
will be no adverse impact on the Fund. Moreover, the Fund at this time has not
considered retaining alternative service providers or directly undertaken
efforts to achieve year 2000 readiness, the latter of which would involve
substantial expenses without an assurance of success.
Additionally, issuers of securities generally as well as those purchased by the
Fund may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/or a specific
issuer's performance and result in a decline in the value of the securities held
by the Fund.
MONITORING FOR POSSIBLE CONFLICTS
The Fund sells its shares to fund variable life insurance contracts and variable
annuity contracts and may offer its shares to qualified retirement plans.
Because of differences in tax treatment and other considerations, it is possible
that the interest of variable life insurance contract owners, variable annuity
contract owners and participants in qualified retirement plans could conflict.
The Fund will monitor the situation and in the event that a material conflict
did develop, the Fund would determine what action, if any, to take in response.
FINANCIAL HIGHLIGHTS
The financial highlights will help you evaluate the financial performance of
each Portfolio. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in the Portfolio, assuming reinvestment of
all dividends and other distributions. The charts do not reflect charges under
any variable contract. The information is for Class I for the periods indicated.
The information for the three years ended December 31, 1998, has been audited by
PricewaterhouseCoopers LLP, whose unqualified report, along with the financial
statements, appear in the SAI, which is available upon request. The information
for the two years ended December 31, 1995, was audited by other independent
auditors whose report was also unqualified.
41
<PAGE>
Financial Highlights
The financial highlights will help you evaluate the financial performance of
each Portfolio. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Portfolio,
assuming reinvestment of all dividends and other distributions. The charts do
not reflect charges under any variable contract. The information is for Class I
for the periods indicated.
The information for the THREE YEARS ENDED DECEMBER 31, 1998 has been audited by
PRICEWATERHOUSECOOPERS LLP, whose unqualified report, along with the financial
statements, appear in the SAI, which is available upon request. THE INFORMATION
FOR THE TWO YEARS ENDED DECEMBER 31, 1995 WAS AUDITED BY OTHER INDEPENDENT
AUDITORS WHOSE REPORT WAS ALSO UNQUALIFIED.
<TABLE>
<CAPTION>
CONSERVATIVE BALANCED
------------------------------------------------
YEAR ENDED
DECEMBER 31,
------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 14.97 $ 15.52 $ 15.31 $ 14.10 $ 14.91
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................. 0.66 0.76 0.66 0.63 0.53
Net realized and unrealized gains
(losses) on investments.............. 1.05 1.26 1.24 1.78 (0.68)
-------- -------- -------- -------- --------
Total from investment operations... 1.71 2.02 1.90 2.41 (0.15)
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.66) (0.76) (0.66) (0.64) (0.51)
Distributions from net realized
gains................................ (0.94) (1.81) (1.03) (0.56) (0.15)
-------- -------- -------- -------- --------
Total distributions................ (1.60) (2.57) (1.69) (1.20) (0.66)
-------- -------- -------- -------- --------
Net Asset Value, end of year........... $ 15.08 $ 14.97 $ 15.52 $ 15.31 $ 14.10
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(b)............ 11.74% 13.45% 12.63% 17.27% (0.97)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $4,796.0 $4,744.2 $4,478.8 $3,940.8 $3,501.1
Ratios to average net assets:
Expenses............................. 0.57% 0.56% 0.59% 0.58% 0.61%
Net investment income................ 4.19% 4.48% 4.13% 4.19% 3.61%
Portfolio turnover rate................ 167% 295% 295% 201% 125%
</TABLE>
(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.
42
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights will help you evaluate the financial performance of
each Portfolio. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Portfolio,
assuming reinvestment of all dividends and other distributions. The charts do
not reflect charges under any variable contract. The information is for Class I
for the periods indicated.
The information for the THREE YEARS ENDED DECEMBER 31, 1998 has been audited by
PRICEWATERHOUSECOOPERS LLP, whose unqualified report, along with the financial
statements, appear in the SAI, which is available upon request. THE INFORMATION
FOR THE TWO YEARS ENDED DECEMBER 31, 1995 WAS AUDITED BY OTHER INDEPENDENT
AUDITORS WHOSE REPORT WAS ALSO UNQUALIFIED.
<TABLE>
<CAPTION>
DIVERSIFIED BOND
------------------------------------------------
YEAR ENDED
DECEMBER 31,
------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 11.02 $ 11.07 $ 11.31 $ 10.04 $ 11.10
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................. 0.69 0.80 0.76 0.76 0.68
Net realized and unrealized gains
(losses) on investments.............. 0.08 0.11 (0.27) 1.29 (1.04 )
-------- -------- -------- -------- --------
Total from investment operations... 0.77 0.91 0.49 2.05 (0.36 )
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.69) (0.83) (0.73) (0.75 ) (0.68 )
Distributions from net realized
gains................................ (0.04) (0.13) -- (0.03 ) (0.02 )
-------- -------- -------- -------- --------
Total distributions................ (0.73) (0.96) (0.73) (0.78 ) (0.70 )
-------- -------- -------- -------- --------
Net Asset Value, end of year........... $ 11.06 $ 11.02 $ 11.07 $ 11.31 $ 10.04
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(b)............ 7.15% 8.57% 4.40% 20.73% (3.23 )%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $1,122.6 $816.7 $720.2 $655.8 $541.6
Ratios to average net assets:
Expenses............................. 0.42% 0.43% 0.45% 0.44% 0.45%
Net investment income................ 6.40% 7.18% 6.89% 7.00% 6.41%
Portfolio turnover rate................ 199% 224% 210% 199% 32%
</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.
43
<PAGE>
Financial Highlights
The financial highlights will help you evaluate the financial performance of
each Portfolio. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Portfolio,
assuming reinvestment of all dividends and other distributions. The charts do
not reflect charges under any variable contract. The information is for Class I
for the periods indicated.
The information for the THREE YEARS ENDED DECEMBER 31, 1998 has been audited by
PRICEWATERHOUSECOOPERs LLP, whose unqualified report, along with the financial
statements, appear in the SAI, which is available upon request. THE INFORMATION
FOR THE TWO YEARS ENDED DECEMBER 31, 1995 WAS AUDITED BY OTHER INDEPENDENT
AUDITORS WHOSE REPORT WAS ALSO UNQUALIFIED.
<TABLE>
<CAPTION>
EQUITY
----------------------------------------------------
YEAR ENDED
DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 31.07 $ 26.96 $ 25.64 $ 20.66 $ 21.49
--------- --------- --------- --------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................. 0.60 0.69 0.71 0.55 0.51
Net realized and unrealized gains on
investments.......................... 2.21 5.88 3.88 5.89 0.05
--------- --------- --------- --------- --------
Total from investment operations... 2.81 6.57 4.59 6.44 0.56
--------- --------- --------- --------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.60) (0.70) (0.67) (0.52) (0.49)
Distributions from net realized
gains................................ (3.64) (1.76) (2.60) (0.94) (0.90)
--------- --------- --------- --------- --------
Total distributions................ (4.24) (2.46) (3.27) (1.46) (1.39)
--------- --------- --------- --------- --------
Net Asset Value, end of year........... $ 29.64 $ 31.07 $ 26.96 $ 25.64 $ 20.66
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
TOTAL INVESTMENT RETURN:(b)............ 9.34% 24.66% 18.52% 31.29% 2.78%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $6,247.0 $6,024.0 $4,814.0 $3,813.8 $2,617.8
Ratios to average net assets:
Expenses............................. 0.47% 0.46% 0.50% 0.48% 0.55%
Net investment income................ 1.81% 2.27% 2.54% 2.28% 2.39%
Portfolio turnover rate................ 25% 13% 20% 18% 7%
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total investment returns for
less than a full year are not annualized.
44
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights will help you evaluate the financial performance of
each Portfolio. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Portfolio,
assuming reinvestment of all dividends and other distributions. The charts do
not reflect charges under any variable contract. The information is for Class I
for the periods indicated.
The information for the THREE YEARS ENDED DECEMBER 31, 1998 has been audited by
PRICEWATERHOUSECOOPERS LLP, whose unqualified report, along with the financial
statements, appear in the SAI, which is available upon request. THE INFORMATION
FOR THE TWO YEARS ENDED DECEMBER 31, 1995 WAS AUDITED BY OTHER INDEPENDENT
AUDITORS WHOSE REPORT WAS ALSO UNQUALIFIED.
<TABLE>
<CAPTION>
EQUITY INCOME
------------------------------------------------
YEAR ENDED
DECEMBER 31,
------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 22.39 $ 18.51 $ 16.27 $ 14.48 $ 15.66
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................. 0.56 0.61 0.58 0.64 0.66
Net realized and unrealized gains
(losses) on investments.............. (1.03) 6.06 2.88 2.50 (0.46)
-------- -------- -------- -------- --------
Total from investment operations... (0.47) 6.67 3.46 3.14 0.20
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.59) (0.57) (0.71) (0.62) (0.56)
Distributions from net realized
gains................................ (1.30) (2.22) (0.51) (0.73) (0.82)
-------- -------- -------- -------- --------
Total distributions................ (1.89) (2.79) (1.22) (1.35) (1.38)
-------- -------- -------- -------- --------
Net Asset Value, end of year........... $ 20.03 $ 22.39 $ 18.51 $ 16.27 $ 14.48
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(b)............ (2.38)% 36.61% 21.74% 21.70% 1.44%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $2,142.3 $2,029.8 $1,363.5 $1,110.0 $859.7
Ratios to average net assets:
Expenses............................. 0.42% 0.41% 0.45% 0.43% 0.52%
Net investment income................ 2.54% 2.90% 3.36% 4.00% 3.92%
Portfolio turnover rate................ 20% 38% 21% 64% 63%
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total investment returns for
less than a full year are not annualized.
45
<PAGE>
Financial Highlights
The financial highlights will help you evaluate the financial performance of
each Portfolio. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Portfolio,
assuming reinvestment of all dividends and other distributions. The charts do
not reflect charges under any variable contract. The information is for Class I
for the periods indicated.
The information for the THREE YEARS ENDED DECEMBER 31, 1998 has been audited by
PRICEWATERHOUSECOOPERS LLP, whose unqualified report, along with the financial
statements, appear in the SAI, which is available upon request. THE INFORMATION
FOR THE TWO YEARS ENDED DECEMBER 31, 1995 WAS AUDITED BY OTHER INDEPENDENT
AUDITORS WHOSE REPORT WAS ALSO UNQUALIFIED.
<TABLE>
<CAPTION>
FLEXIBLE MANAGED
-----------------------------------------------------
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 17.28 $ 17.79 $ 17.86 $ 15.50 $ 16.96
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................. 0.58 0.59 0.57 0.56 0.47
Net realized and unrealized gains
(losses) on investments.............. 1.14 2.52 1.79 3.15 (1.02)
--------- --------- --------- --------- ---------
Total from investment operations... 1.72 3.11 2.36 3.71 (0.55)
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.59) (0.58) (0.58) (0.56) (0.45)
Distributions from net realized
gains................................ (1.85) (3.04) (1.85) (0.79) (0.46)
--------- --------- --------- --------- ---------
Total distributions................ (2.44) (3.62) (2.43) (1.35) (0.91)
--------- --------- --------- --------- ---------
Net Asset Value, end of year........... $ 16.56 $ 17.28 $ 17.79 $ 17.86 $ 15.50
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:(b)............ 10.24% 17.96% 13.64% 24.13% (3.16)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $5,410.0 $5,490.1 $4,896.9 $4,261.2 $3,481.5
Ratios to average net assets:
Expenses............................. 0.61% 0.62% 0.64% 0.63% 0.66%
Net investment income................ 3.21% 3.02% 3.07% 3.30% 2.90%
Portfolio turnover rate................ 138% 227% 233% 173% 124%
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total investment returns for
less than a full year are not annualized.
46
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights will help you evaluate the financial performance of
each Portfolio. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Portfolio,
assuming reinvestment of all dividends and other distributions. The charts do
not reflect charges under any variable contract. The information is for Class I
for the periods indicated.
The information for the THREE YEARS ENDED DECEMBER 31, 1998 has been audited by
PRICEWATERHOUSECOOPERS LLP, whose unqualified report, along with the financial
statements, appear in the SAI, which is available upon request. THE INFORMATION
FOR THE TWO YEARS ENDED DECEMBER 31, 1995 WAS AUDITED BY OTHER INDEPENDENT
AUDITORS WHOSE REPORT WAS ALSO UNQUALIFIED.
<TABLE>
<CAPTION>
GLOBAL
-----------------------------------------------------
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 17.92 $ 17.85 $ 15.53 $ 13.88 $ 14.64
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................. 0.07 0.09 0.11 0.06 0.02
Net realized and unrealized gains
(losses) on investments.............. 4.38 1.11 2.94 2.14 (0.74)
--------- --------- --------- --------- ---------
Total from investment operations... 4.45 1.20 3.05 2.20 (0.72)
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.16) (0.13) (0.11) (0.24) (0.02)
Dividends in excess of net investment
income............................... (0.12) (0.10) -- -- --
Distributions from net realized
gains................................ (0.93) (0.90) (0.62) (0.31) (0.02)
--------- --------- --------- --------- ---------
Total distributions................ (1.21) (1.13) (0.73) (0.55) (0.04)
--------- --------- --------- --------- ---------
Net Asset Value, end of year........... $ 21.16 $ 17.92 $ 17.85 $ 15.53 $ 13.88
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:(b)............ 25.08% 6.98% 19.97% 15.88% (4.89)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $844.5 $638.4 $580.6 $400.1 $345.7
Ratios to average net assets:
Expenses............................. 0.86% 0.85% 0.92% 1.06% 1.23%
Net investment income................ 0.29% 0.47% 0.64% 0.44% 0.20%
Portfolio turnover rate................ 73% 70% 41% 59% 37%
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total investment returns for
less than a full year are not annualized.
47
<PAGE>
Financial Highlights
The financial highlights will help you evaluate the financial performance of
each Portfolio. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Portfolio,
assuming reinvestment of all dividends and other distributions. The charts do
not reflect charges under any variable contract. The information is for Class I
for the periods indicated.
The information for the THREE YEARS ENDED DECEMBER 31, 1998 has been audited by
PRICEWATERHOUSECOOPERs LLP, whose unqualified report, along with the financial
statements, appear in the SAI, which is available upon request. THE INFORMATION
FOR THE TWO YEARS ENDED DECEMBER 31, 1995 WAS AUDITED BY OTHER INDEPENDENT
AUDITORS WHOSE REPORT WAS ALSO UNQUALIFIED.
<TABLE>
<CAPTION>
HIGH YIELD BOND
-----------------------------------------------------
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 8.14 $ 7.87 $ 7.80 $ 7.37 $ 8.41
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................. 0.77 0.78 0.80 0.81 0.87
Net realized and unrealized gains
(losses) on investments.............. (0.94) 0.26 0.06 0.46 (1.10)
--------- --------- --------- --------- ---------
Total from investment operations... (0.17) 1.04 0.86 1.27 (0.23)
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.76) (0.77) (0.78) (0.84) (0.81)
Dividends in excess of net investment
income............................... -- -- (0.01) -- --
--------- --------- --------- --------- ---------
Total distributions................ (0.76) (0.77) (0.79) (0.84) (0.81)
--------- --------- --------- --------- ---------
Net Asset Value, end of year........... $ 7.21 $ 8.14 $ 7.87 $ 7.80 $ 7.37
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:(b)............ (2.36)% 13.78% 11.39% 17.56% (2.72)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $789.3 $568.7 $432.9 $367.9 $306.2
Ratios to average net assets:
Expenses............................. 0.58% 0.57% 0.63% 0.61% 0.65%
Net investment income................ 10.31% 9.78% 9.89% 10.34% 9.88%
Portfolio turnover rate................ 63% 106% 88% 139% 69%
</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.
48
<PAGE>
Financial Highlights
The financial highlights will help you evaluate the financial performance of
each Portfolio. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Portfolio,
assuming reinvestment of all dividends and other distributions. The charts do
not reflect charges under any variable contract. The information is for Class I
for the periods indicated.
The information for the THREE YEARS ENDED DECEMBER 31, 1998 has been audited by
PRICEWATERHOUSECOOPERS LLP, whose unqualified report, along with the financial
statements, appear in the SAI, which is available upon request. THE INFORMATION
FOR THE TWO YEARS ENDED DECEMBER 31, 1995 WAS AUDITED BY OTHER INDEPENDENT
AUDITORS WHOSE REPORT WAS ALSO UNQUALIFIED.
<TABLE>
<CAPTION>
MONEY MARKET
----------------------------------------------------
YEAR ENDED
DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
--------- --------- --------- --------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income and realized and
unrealized gains..................... 0.52 0.54 0.51 0.56 0.40
Dividends and distributions............ (0.52) (0.54) (0.51) (0.56) (0.40)
--------- --------- --------- --------- --------
Net Asset Value, end of year........... $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
TOTAL INVESTMENT RETURN:(b)............ 5.39% 5.41% 5.22% 5.80% 4.05%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $920.2 $657.5 $668.8 $613.3 $583.3
Ratios to average net assets:
Expenses............................. 0.41% 0.43% 0.44% 0.44% 0.47%
Net investment income................ 5.20% 5.28% 5.10% 5.64% 4.02%
</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.
49
<PAGE>
Financial Highlights
The financial highlights will help you evaluate the financial performance of
each Portfolio. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Portfolio,
assuming reinvestment of all dividends and other distributions. The charts do
not reflect charges under any variable contract. The information is for Class I
for the periods indicated.
The information for the THREE YEARS ENDED DECEMBER 31, 1998 has been audited by
PRICEWATERHOUSECOOPERS LLP, whose unqualified report, along with the financial
statements, appear in the SAI, which is available upon request. THE INFORMATION
FOR THE PERIOD ENDED DECEMBER 31, 1995 WAS AUDITED BY OTHER INDEPENDENT AUDITORS
WHOSE REPORT WAS ALSO UNQUALIFIED.
<TABLE>
<CAPTION>
PRUDENTIAL JENNISON
-----------------------------------------------------------
YEAR ENDED APRIL 25, 1995(d)
DECEMBER 31, TO
---------------------------------------- DECEMBER 31,
1998 1997 1996 1995(a)
------------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of period... $ 17.73 $ 14.32 $ 12.55 $ 10.00
------------- ----------- ----------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................. 0.04 0.04 0.02 0.02
Net realized and unrealized gains on
investments.......................... 6.56 4.48 1.78 2.54
------------- ----------- ----------- -------
Total from investment operations... 6.60 4.52 1.80 2.56
------------- ----------- ----------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.04) (0.04) (0.03) (0.01)
Distributions from net realized
gains................................ (0.38) (1.07) -- --
------------- ----------- ----------- -------
Total distributions................ (0.42) (1.11) (0.03) (0.01)
------------- ----------- ----------- -------
Net Asset Value, end of period......... $ 23.91 $ 17.73 $ 14.32 $ 12.55
------------- ----------- ----------- -------
------------- ----------- ----------- -------
TOTAL INVESTMENT RETURN:(b)............ 37.46% 31.71% 14.41% 24.20%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
millions)............................ $1,198.7 $495.9 $226.5 $63.1
Ratios to average net assets:
Expenses............................. 0.63% 0.64% 0.66% 0.79%(c)
Net investment income................ 0.20% 0.25% 0.20% 0.15%(c)
Portfolio turnover rate................ 54% 60% 46% 37%
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total investment returns for
less than a full year are not annualized.
(c) Annualized.
(d) Commencement of operations.
50
<PAGE>
Financial Highlights
The financial highlights will help you evaluate the financial performance of
each Portfolio. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Portfolio,
assuming reinvestment of all dividends and other distributions. The charts do
not reflect charges under any variable contract. The information is for Class I
for the periods indicated.
The information for the THREE YEARS ENDED DECEMBER 31, 1998 has been audited by
PRICEWATERHOUSECOOPERS LLP, whose unqualified report, along with the financial
statements, appear in the SAI, which is available upon request. THE INFORMATION
FOR THE TWO YEARS ENDED DECEMBER 31, 1995 WAS AUDITED BY OTHER INDEPENDENT
AUDITORS WHOSE REPORT WAS ALSO UNQUALIFIED.
<TABLE>
<CAPTION>
STOCK INDEX
----------------------------------------------------
YEAR ENDED
DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 30.22 $ 23.74 $ 19.96 $ 14.96 $ 15.20
--------- --------- --------- --------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................. 0.42 0.43 0.40 0.40 0.38
Net realized and unrealized gains
(losses) on investments.............. 8.11 7.34 4.06 5.13 (0.23)
--------- --------- --------- --------- --------
Total from investment operations... 8.53 7.77 4.46 5.53 0.15
--------- --------- --------- --------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.42) (0.42) (0.40) (0.38) (0.37)
Distributions from net realized
gains................................ (0.59) (0.87) (0.28) (0.15) (0.02)
--------- --------- --------- --------- --------
Total distributions................ (1.01) (1.29) (0.68) (0.53) (0.39)
--------- --------- --------- --------- --------
Net Asset Value, end of year........... $ 37.74 $ 30.22 $ 23.74 $ 19.96 $ 14.96
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
TOTAL INVESTMENT RETURN:(B)............ 28.42% 32.83% 22.57% 37.06% 1.01%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $3,548.1 $2,448.2 $1,581.4 $1,031.3 $664.5
Ratios to average net assets:
Expenses............................. 0.37% 0.37% 0.40% 0.38% 0.42%
Net investment income................ 1.25% 1.55% 1.95% 2.27% 2.50%
Portfolio turnover rate................ 3% 5% 1% 1% 2%
</TABLE>
(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.
51
<PAGE>
FOR MORE INFORMATION
Additional information about the Fund and each Portfolio can be obtained upon
request without charge and can be found in the following documents:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
(incorporated by reference into this prospectus)
ANNUAL REPORT
(including a discussion of market conditions and strategies that significantly
affected the Portfolios' performance during the previous year)
SEMI-ANNUAL REPORT
To obtain these documents or to ask any questions about the Fund:
- Call toll-free (800) 778-2255
- Write to The Prudential Series Fund, Inc., 751 BROAD STREET,
NEWARK, NJ 07102-3777
You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows:
By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
(The SEC charges a fee to copy documents.)
In Person:
PUBLIC REFERENCE ROOM
IN WASHINGTON, DC
(For hours of operation, call 1(800) SEC-0330.)
Via the Internet:
http://www.sec.gov
SEC File No. 811-03623
