AS FILED WITH THE SEC ON ________________. REGISTRATION NO. 2-80896
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |_|
PRE-EFFECTIVE AMENDMENT NO. |_|
POST-EFFECTIVE AMENDMENT NO. 36 |X|
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |_|
AMENDMENT NO. 39 |X|
(Check appropriate box or boxes)
----------------
THE PRUDENTIAL SERIES FUND, INC.
(Exact Name of Registrant)
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(800) 778-2255
(Address and telephone number of principal executive offices)
----------------
CAREN A. CUNNINGHAM
SECRETARY
THE PRUDENTIAL SERIES FUND, INC.
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(Name and address of agent for service)
Copy to:
CHRISTOPHER E. PALMER
SHEA & GARDNER
1800 MASSACHUSETTS AVENUE, N.W.
WASHINGTON, D.C. 20036
----------------
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of the Registration Statement.
It is proposed that this filing will become effective (check appropriate box):
|_| immediately upon filing pursuant to paragraph (b)
|X| on April 30, 1999 pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(1)
|_| on (date) pursuant to paragraph (a)(1)
|_| 75 days after filing pursuant to paragraph (a)(2)
|_| on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
PART A
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
CONSERVATIVE BALANCED PORTFOLIO
DIVERSIFIED BOND PORTFOLIO
DIVERSIFIED CONSERVATIVE GROWTH PORTFOLIO
EQUITY PORTFOLIO
EQUITY INCOME PORTFOLIO
FLEXIBLE MANAGED PORTFOLIO
GLOBAL PORTFOLIO
GOVERNMENT INCOME PORTFOLIO
HIGH YIELD BOND PORTFOLIO
MONEY MARKET PORTFOLIO
NATURAL RESOURCES PORTFOLIO
PRUDENTIAL JENNISON PORTFOLIO
SMALL CAPITALIZATION STOCK PORTFOLIO
STOCK INDEX PORTFOLIO
20/20 FOCUS PORTFOLIO
ZERO COUPON BOND PORTFOLIO 2000
ZERO COUPON BOND PORTFOLIO 2005
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.
[LOGO] PRUDENTIAL
INVESTMENTS
<PAGE>
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
1 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
Diversified Conservative Growth Portfolio
-----------------------------------------
4 Investment Objective and Principal Strategies
4 Principal Risks
4 Evaluating Performance
Equity Portfolio
----------------
4 Investment Objective and Principal Strategies
5 Principal Risks
5 Evaluating Performance
Equity Income Portfolio
-----------------------
6 Investment Objective and Principal Strategies
6 Principal Risks
6 Evaluating Performance
Flexible Managed Portfolio
--------------------------
7 Investment Objective and Principal Strategies
7 Principal Risks
8 Evaluating Performance
Global Portfolio
----------------
9 Investment Objective and Principal Strategies
9 Principal Risks
9 Evaluating Performance
Government Income Portfolio
---------------------------
10 Investment Objective and Principal Strategies
10 Principal Risks
10 Evaluating Performance
<PAGE>
High Yield Bond Portfolio
-------------------------
11 Investment Objective and Principal Strategies
11 Principal Risks
12 Evaluating Performance
Money Market Portfolio
----------------------
12 Investment Objective and Principal Strategies
13 Principal Risks
13 Evaluating Performance
Natural Resources Portfolio
---------------------------
14 Investment Objective and Principal Strategies
14 Principal Risks
14 Evaluating Performance
Prudential Jennison Portfolio
-----------------------------
15 Investment Objective and Principal Strategies
15 Principal Risks
16 Evaluating Performance
Small Capitalization Stock Portfolio
------------------------------------
16 Investment Objective and Principal Strategies
17 Principal Risks
17 Evaluating Performance
Stock Index Portfolio
---------------------
18 Investment Objective and Principal Strategies
18 Principal Risks
18 Evaluating Performance
20/20 Focus Portfolio
---------------------
19 Investment Objective and Principal Strategies
19 Principal Risks
20 Evaluating Performance
Zero Coupon Bond Portfolios - 2000 and 2005
-------------------------------------------
20 Investment Objective and Principal Strategies
20 Principal Risks
20 Evaluating Performance
22 HOW THE PORTFOLIOS INVEST
22 Conservative Balanced Portfolio
24 Diversified Bond Portfolio
26 Diversified Conservative Growth Portfolio
29 Equity Portfolio
30 Equity Income Portfolio
32 Flexible Managed Portfolio
34 Global Portfolio
35 Government Income Portfolio
37 High Yield Bond Portfolio
38 Money Market Portfolio
40 Natural Resources Portfolio
41 Prudential Jennison Portfolio
<PAGE>
42 Small Capitalization Stock Portfolio
44 Stock Index Portfolio
45 20/20 Focus Portfolio
46 Zero Coupon Bond Portfolios 2000 and 2005
48 INVESTMENT RISKS
55 HOW THE PORTFOLIOS ARE MANAGED
55 Investment Adviser
55 Investment Sub-Advisers
56 Portfolio Managers
58 HOW TO BUY AND SELL SHARES OF THE FUND
59 How to Buy and Sell Shares
59 Net Asset Value
60 Distributor
60 OTHER INFORMATION
60 Federal Income Taxes
60 Year 2000
60 Monitoring for Possible Conflicts
FINANCIAL HIGHLIGHTS
For More Information (Back Cover)
<PAGE>
RISK/RETURN SUMMARY
This prospectus provides information about the Prudential Series Fund, Inc. (the
Fund), which consists of seventeen separate portfolios (each a Portfolio).
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 The Prudential Insurance
Company of America (Prudential) as investment options under variable life
insurance and variable annuity contracts (the Contracts). (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. NOT EVERY
PORTFOLIO IS AVAILABLE UNDER EACH CONTRACT. The prospectus for each Contract
lists the Portfolios currently available through that Contract.
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.
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."
<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
- ------ ----- ------ ----- ------ ------ ------ ------ ------ ------
16.99% 5.27% 19.07% 6.95% 12.20% -0.97% 17.27% 12.63% 13.45% 11.74%
- -------------------------------------------------------------------------------
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%
- -------------------------------------------------------------------------------
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
3
<PAGE>
CALENDAR MONTH-END RETURN (4/30/83). SOURCE: LIPPER, INC.
- -------------------------------------------------------------------------------
DIVERSIFIED CONSERVATIVE GROWTH PORTFOLIO
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is to provide CURRENT INCOME AND A REASONABLE LEVEL OF
CAPITAL APPRECIATION. To achieve our objective, we will invest in a diversified
portfolio of debt and equity securities. Up to 35% of the Portfolio's total
assets may be invested in high-yield/high-risk debt securities which have
speculative characteristics and generally are riskier than higher-rated
securities. The Portfolio may also invest in foreign securities including debt
obligations of issuers in emerging markets. 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. Since a majority
of the Portfolio's assets are usually invested 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.
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 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. Investing in markets of developing countries involves
exposure to economies that are generally less diverse and mature, and to
political systems that can be expected to have less stability than those of
developed countries.
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
The Portfolio commenced operations in 1999, so there is no performance history
to report.
- -------------------------------------------------------------------------------
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.
4
<PAGE>
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%
- -------------------------------------------------------------------------------
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.
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
5
<PAGE>
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."
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.
6
<PAGE>
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%
- -------------------------------------------------------------------------------
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.
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
7
<PAGE>
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%
- -------------------------------------------------------------------------------
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.
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.
8
<PAGE>
- -------------------------------------------------------------------------------
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.
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%
- --------------------------------------------------------------------------------
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.
9
<PAGE>
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.
- -------------------------------------------------------------------------------
GOVERNMENT INCOME PORTFOLIO
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is A HIGH LEVEL OF INCOME OVER THE LONG TERM CONSISTENT
WITH THE PRESERVATION OF CAPITAL. To achieve our objective, we invest primarily
in U.S. government securities, including intermediate and long term U.S.
Treasury securities and debt obligations issued by agencies or instrumentalities
established by the U.S. government. The Portfolio may also invest in
mortgage-related securities, collateralized mortgage obligations and corporate
debt securities. While we make every effort to achieve our objective, we can't
guarantee success.
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
PRINCIPAL RISKS
The Portfolio invests primarily in U.S. government securities which are
considered among the most creditworthy of debt securities. Nevertheless, all
investments involve risk. All debt securities have 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.
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 9 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.
10
<PAGE>
Annual Returns* (Class I shares)
- -------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ----- ---- ----- ---- ----- ---- ---- ----
6.34% 16.11% 5.85% 12.56% -5.16% 19.48% 2.22% 9.67% 9.09%
- -------------------------------------------------------------------------------
Best Quarter: 6.95% (3rd quarter of 1991) Worst Quarter: (3.93)% (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 (5/1/89)
------ ------- --------
Class I shares 9.09% 6.74% 8.87%
Lehman Govt. Index** 9.85% 7.18% 9.14%
Lipper Average*** 8.14% 6.36% 8.66%
- -----------------------------------------------------------------------------
*THE PORTFOLIO'S RETURNS ARE AFTER DEDUCTION OF EXPENSES AND DO NOT INCLUDE
CONTRACT CHARGES.
**THE LEHMAN GOVERNMENT INDEX IS A WEIGHTED INDEX COMPRISED OF SECURITIES ISSUED
OR BACKED BY THE U.S. GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES WITH A
REMAINING MATURITY OF ONE TO 30 YEARS. THE "SINCE INCEPTION" RETURN REFLECTS THE
CLOSEST CALENDAR MONTH-END RETURN (4/30/89). SOURCE: LIPPER, INC.
***THE LIPPER VARIABLE INSURANCE PRODUCTS (VIP) GENERAL U.S. GOVERNMENT 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
(4/30/89). 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.
11
<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%
- -------------------------------------------------------------------------------
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.
12
<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 THE 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 and 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% 3.78% 2.95% 4.05% 5.80% 5.22% 5.41% 5.39%
- -------------------------------------------------------------------------------
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.
13
<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.
- -------------------------------------------------------------------------------
NATURAL RESOURCES PORTFOLIO
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is LONG-TERM GROWTH OF CAPITAL. To achieve this goal,
we invest primarily in common stocks and convertible securities of natural
resource companies and securities that are related to the market value of some
natural resource. Up to 30% of the Portfolio's total assets may be invested 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 invests primarily in a single sector of the economy, its
performance may vary significantly from broad based market indexes.
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.
14
<PAGE>
Annual Returns* (Class I shares)
- ------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ----- ---- ----- ---- ----- ---- ----- ----- ----- -----
35.64% -5.76% 10.30% 7.30% 25.15% -4.30% 26.92% 30.88% -11.59% -17.10%
- ------------------------------------------------------------------------------
Best Quarter: 15.21% (1st quarter of 1996) Worst Quarter: (21.60)% (4th quarter
of 1997)
*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 (5/1/88)
------ ------- -------- --------
Class I shares (17.10)% 3.11% 8.24% 8.23%
S&P 500** 28.60% 24.05% 19.19% 17.29%
Lipper Average*** (20.65)% (2.04)% 2.01% n/a
- ------------------------------------------------------------------------------
*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 (4/30/88). SOURCE: LIPPER, INC.
***THE LIPPER VARIABLE INSURANCE PRODUCTS (VIP) NATURAL RESOURCES 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
(4/30/88). 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
15
<PAGE>
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.
Annual Returns* (Class I shares)
- -------------------------------------------------------
1996 1997 1998
----- ----- -----
14.41% 31.71% 37.46%
- -------------------------------------------------------
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.
- -------------------------------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is to achieve LONG-TERM GROWTH OF CAPITAL. To achieve
this objective, we invest primarily in equity securities of publicly-traded
companies with small market capitalization. WE ATTEMPT TO DUPLICATE THE PRICE
AND YIELD PERFORMANCE OF THE STANDARD & POOR'S SMALL CAPITALIZATION STOCK INDEX
(THE S&P SMALLCAP INDEX). The market capitalization of the companies that make
up the S&P SmallCap Index may change from time to time - as of February 28,
1999, the S&P SmallCap stocks had market capitalizations of between $18 million
and $3.4 billion.
16
<PAGE>
The Portfolio is not "managed" in the traditional sense of using market and
economic analyses to select stocks. Rather, the portfolio manager purchases
stocks to duplicate the stocks and their weighting in the S&P SmallCap 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
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.
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.
Annual Returns* (Class I shares)
- ----------------------------------------------------
1996 1997 1998
19.77% 25.17% -0.76%
- ----------------------------------------------------
Best Quarter: 18.08% (4th quarter of 1998) Worst Quarter: (20.61)% (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 (0.76)% 17.04%
S&P SmallCap 600 Index** (1.31)% 17.83%
Lipper Average*** 1.48% 16.61%
- -------------------------------------------------------------------------------
*THE PORTFOLIO'S RETURNS ARE AFTER DEDUCTION OF EXPENSES AND DO NOT INCLUDE
CONTRACT CHARGES.
**THE S&P SMALLCAP 600 INDEX IS A CAPITAL-WEIGHTED INDEX REPRESENTING THE
AGGREGATE MARKET VALUE OF THE COMMON EQUITY OF 600 SMALL COMPANY STOCKS. THE S&P
SMALLCAP 600 INDEX IS AN UNMANAGED INDEX THAT INCLUDES THE REINVESTMENT OF ALL
DIVIDENDS BUT DOES NOT REFLECT THE PAYMENT OF TRANSACTION COSTS AND ADVISORY
FEES ASSOCIATED WITH
17
<PAGE>
AN INVESTMENT IN THE PORTFOLIO. THE "SINCE INCEPTION" RETURN REFLECTS THE
CLOSEST MONTH-END RETURN (4/30/95). SOURCE: LIPPER, INC.
***THE LIPPER VARIABLE INSURANCE PRODUCTS (VIP) SMALL CAP 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 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
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.
18
<PAGE>
Annual Return* (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%
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
20/20 FOCUS PORTFOLIO
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is LONG-TERM GROWTH OF CAPITAL. We seek to achieve this
goal by investing primarily in up to 40 equity securities of U.S. companies that
are selected by the Portfolio's two portfolio managers (up to 20 by each) as
having strong capital appreciation potential. One manager will use a "value"
approach which means he will attempt to identify strong companies selling at a
discount from their perceived true value. The other manager will use a "growth"
approach, which means he seeks companies that exhibit higher-than-average
earnings growth. Up to 20% of the Portfolio's total assets may be invested 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.
19
<PAGE>
Because our strategy for the Portfolio involves investing primarily in 40 or
fewer securities, there is the risk that a loss resulting from the decline in
value of one security may represent a greater portion of the total assets of the
Portfolio than a portfolio that invests in a greater number of securities. In
addition, the Portfolio's investments may not be as widely spread across sectors
of the economy as a portfolio with a greater number of securities. Thus, the
Portfolio's performance may be more sensitive to developments in a single sector
of the economy than other portfolios.
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
The Portfolio commenced operations in 1999, so there is no performance history
to report.
- -------------------------------------------------------------------------------
ZERO COUPON BOND PORTFOLIOS - 2000 AND 2005
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
The investment objectives of these two Portfolios are THE HIGHEST PREDICTABLE
COMPOUND INVESTMENT FOR A SPECIFIC PERIOD OF TIME, CONSISTENT WITH THE SAFETY OF
INVESTED CAPITAL. We seek to achieve this objective by investing primarily in
debt obligations of the United States Treasury and corporations that have been
issued without interest coupons or have been stripped of their interest coupons,
or have interest coupons that have been stripped from the debt obligation. The
two Portfolios differ only in their liquidation dates which are November 15,
2000 for the Zero Coupon Bond Portfolio 2000 and November 15, 2005 for the Zero
Coupon Bond Portfolio 2005. On each Portfolio's liquidation date, the Portfolio
will redeem all investments. Please refer to your variable contract prospectus
for information on your reallocation options and the Portfolio to which your
investment will be transferred if you do not provide other instructions. 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. Since the
Portfolios 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.
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, investments in the Portfolios 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 Portfolios perform. The
following bar charts and tables show the Portfolios' performance for each full
calendar year of operation for the last 10 years. They demonstrate the risk of
investing in the Portfolios and how returns can change from year to year. Past
performance does not mean that the Portfolios will achieve similar results in
the future.
20
<PAGE>
Zero Coupon Bond Portfolio 2000* Annual Returns (Class I shares)
- ------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
----- ---- ----- ---- ----- ---- ----- ---- ---- ----
20.38% 5.11% 20.71% 8.59% 16.15% -7.18% 21.56% 1.53% 7.17% 7.57%
- ------------------------------------------------------------------------------
Best Quarter: 14.29% (2nd quarter of 1989) Worst Quarter: (5.24)% (1st 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.
Zero Coupon Bond Portfolio 2005* Annual Returns (Class I shares)
- -------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ----- ---- ----- ---- ----- ---- ----- -----
2.56% 21.16% 9.66% 21.94% -9.61% 31.85 -1.01% 11.18% 12.35%
- -------------------------------------------------------------------------------
Best Quarter: 12.43% (4th quarter of 1990) Worst Quarter: (7.80)% (1st 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.
Zero Coupon Bond Portfolio 2000 - Average Annual Returns* (as of 12/31/98)
- -------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS 10 YEARS (2/12/86)
------ ------- -------- ---------
Class I shares 7.57% 5.72% 9.79% 10.09%
Lehman Govt. Index** 9.85% 7.18% 9.17% 8.92%
Lipper Average*** 10.43% 6.87% 9.79% n/a
- -------------------------------------------------------------------------------
*THE PORTFOLIO'S RETURNS ARE AFTER DEDUCTION OF EXPENSES AND DO NOT INCLUDE
CONTRACT CHARGES.
** THE LEHMAN GOVERNMENT INDEX (LGI) IS A WEIGHTED INDEX MADE UP OF SECURITIES
ISSUED OR BACKED BY THE U.S. GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES WITH
A REMAINING MATURITY OF ONE TO 30 YEARS. THE LGI IS AN UNMANAGED INDEX AND
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 (1/31/86). SOURCE: LIPPER, INC.
***THE LIPPER VARIABLE INSURANCE PRODUCTS (VIP) TARGET MATURITY 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
(1/31/86). SOURCE: LIPPER, INC.
21
<PAGE>
Zero Coupon Bond Portfolio 2005 - Average Annual Returns* (as of 12/31/98)
- -------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (5/1/89)
------ ------- --------
Class I shares 12.35% 8.07% 10.97%
Lehman Govt. Index** 9.85% 7.18% 9.14%
Lipper Average*** 10.43% 6.87% 10.50%
- -------------------------------------------------------------------------------
*THE PORTFOLIO'S RETURNS ARE AFTER DEDUCTION OF EXPENSES AND DO NOT INCLUDE
CONTRACT CHARGES.
**THE LEHMAN GOVERNMENT INDEX (LGI) IS A WEIGHTED INDEX MADE UP OF SECURITIES
ISSUED OR BACKED BY THE U.S. GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES WITH
A REMAINING MATURITY OF ONE TO 30 YEARS. THE LGI IS AN UNMANAGED INDEX AND
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 (4/30/89). SOURCE: LIPPER, INC. ***THE LIPPER VARIABLE INSURANCE PRODUCTS
(VIP) TARGET MATURITY 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 (4/30/89). SOURCE: LIPPER, INC.
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.
<TABLE>
<CAPTION>
- -------------------------------------------------------
<S> <C>
BALANCED PORTFOLIO To achieve our objective, we invest in a mix of equity and
We invest in all three types of securities - equity, equity-related securities, debt obligations and money
debt and money market - in order to achieve market instruments. We adjust the percentage of Portfolio
diversification in a single portfolio. We seek to assets in each category depending on our expectations
maintain a conservative blend of investments that regarding the different markets. While we make every
will have strong performance in a down market and effort to achieve our objective, we can't guarantee
solid, but not necessarily outstanding, performance success.
in up markets. This Portfolio may be appropriate for
an investor looking for diversification with less We will vary how much of the Portfolio's assets are
risk than that of the Flexible Managed Portfolio, invested in a particular type of security depending how we
while recognizing that this reduces the chances of think the different markets will perform. Under normal
greater appreciation. conditions, we intend to keep at least 25% of the
Portfolio's total assets invested in debt securities.
- -------------------------------------------------------
</TABLE>
In general, we will invest within the ranges shown below:
ASSET TYPE MINIMUM NORMAL MAXIMUM
---------- ------- ------ -------
Stocks 15% 35% 75%
Debt obligations and money market 25% 65% 85%
securities
22
<PAGE>
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.)
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
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. No more than 25% of the
Portfolio's net assets may be used as collateral or segregated
23
<PAGE>
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.
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.
24
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
<S> <C>
OUR STRATEGY Debt obligations, in general, are basically written
In general, the value of debt obligations moves in the opposite promises to repay a debt. The terms of repayment
direction as interest rates - if a bond is purchased and then vary among the different types of debt obligations,
interest rates go up, newer bonds will be worth more because they as do the commitments of other parties to honor the
will have a higher rate of interest. We will adjust the mix of the obligations of the issuer of the security. The
Portfolio's short-term, intermediate and long term debt types of debt obligations in which we can invest
obligations in an attempt to benefit from price appreciation when include U.S. government securities,
interest rates go down and to incur smaller declines when rates go mortgage-related securities and corporate bonds.
up.
- --------------------------------------------------------------------
</TABLE>
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 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
25
<PAGE>
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.
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.
- -------------------------------------------------------------------------------
DIVERSIFIED CONSERVATIVE GROWTH PORTFOLIO
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
Our investment objective is to provide CURRENT INCOME AND A REASONABLE LEVEL OF
CAPITAL APPRECIATION. We seek to achieve this objective by investing in a
diversified portfolio of debt and equity securities. While we make every effort
to achieve our objective, we can't guarantee success.
26
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
<S> <C>
Asset Allocation Under normal market conditions, we invest
This Portfolio is designed for investors who want investment approximately 60% of the Portfolio's total assets
professionals to make their asset allocation decisions for them and in debt securities of varying maturities with a
are seeking current income and low to moderate capital dollar-weighted average portfolio maturity of
appreciation. We have contracted with four highly regarded between 4 and 15 years. (The maturity of a bond is
sub-advisers who each will manage a portion of the Portfolio's the number of years until the principal is due and
assets. In this way, the Portfolio offers diversification not only payable. Weighted average maturity is calculated by
of asset type, but also of investment style. Investors in this adding the maturities of all of the bonds in the
Portfolio should have both sufficient time and tolerance for risk to Portfolio and dividing by the number of bonds on a
accept periodic declines in the value of their investment. dollar-weighted basis.)
- ----------------------------------------------------------------------
</TABLE>
The types of debt securities in which we can invest include U.S. government
securities, corporate debt obligations, asset-backed securities,
inflation-indexed bonds of governments and corporations and commercial paper.
These debt securities will generally be investment grade. We may also invest up
to 35% of the Portfolio's total assets in lower rated securities that are
riskier and considered speculative. At the time these high-yield or "junk bonds"
are purchased they will have a minimum rating of B by Moody's, S&P or another
major rating service. 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 25% of the Portfolio's total assets may be invested in debt obligations
issued or guaranteed by foreign governments, their agencies and
instrumentalities, supranational organizations, and foreign corporations or
financial institutions. Up to 10% of the Portfolio's total assets may be
invested in debt obligations of issuers in emerging markets.
The Portfolio will normally invest approximately 40% of its total assets in
equity and equity-related securities issued by U.S. and foreign companies. Up
to 15% of the Portfolio's total assets may be invested in FOREIGN EQUITY
SECURITIES, including those of companies in emerging markets. For these
purposes, we do not consider American Depository 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.)
Generally, the Portfolio's assets will be allocated as shown in the table below.
However, we may rebalance the Portfolio's assets at any time or add or eliminate
portfolio segments, in accordance with the Portfolio's investment objective and
policies.
<TABLE>
<CAPTION>
PERCENT OF
PORTFOLIO ASSET
ASSETS CLASS SUB-ADVISER INVESTMENT STYLE
- --------- ----- ----------- ----------------
<S> <C> <C> <C>
40% Fixed income Pacific Investment Management Company Mostly high-quality debt instruments
20% Fixed income The Prudential Investment Corporation High-yield debt, including junk bonds and
emerging market debt
15% Equities Jennison Associates LLC Growth-oriented, focusing on large-cap stocks
15% Equities The Prudential Investment Corporation Value-oriented, focusing on large-cap stocks
5% Equities The Dreyfus Corporation Value-oriented, focusing on small-cap and mid-cap
stocks
5% Equities Franklin Advisers, Inc. Growth-oriented, focusing on small-cap and
mid-cap stocks.
</TABLE>
We may also invest in MORTGAGE-RELATED SECURITIES. These securities are usually
pass-through instruments that pay investors a share of all interest and
principal payments from an underlying pool of fixed or adjustable rate
mortgages.
27
<PAGE>
We may invest in mortgage-related securities issued and guaranteed by
the U.S. government or its agencies like the Federal National Mortgage
Association (Fannie Maes) and the Government National Mortgage Association
(Ginnie Maes) and debt securities issued (but not guaranteed) by the Federal
Home Loan Mortgage Company (Freddie Macs). Private mortgage-related securities
that are not guaranteed by U.S. governmental entities generally have one or more
types of credit enhancement to ensure timely receipt of payments and to protect
against default.
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.
We may also invest in debt securities of the U.S. Treasury and corporations that
have been issued without interest coupons or that have been stripped of their
interest coupons, or have interest coupons that have been stripped from the debt
obligation (stripped securities).
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 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, debt securities,
financial indexes, and U.S. government securities; engage in FOREIGN CURRENCY
EXCHANGE CONTRACTS and related options; purchase and write PUT AND CALL OPTIONS
ON FOREIGN CURRENCIES; trade CURRENCIES FUTURE CONTRACTS and options on those
contracts; purchase and sell FUTURES on debt securities, U.S. government
securities, financial indexes and interest rates and related options; and invest
in DELAYED DELIVERY and WHEN-ISSUED securities.
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 5% 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 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 an agreed price and
28
<PAGE>
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."
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.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
<S> <C>
VALUE APPROACH To achieve our investment objective, we invest
We use a value approach to investing which means primarily ink common stocks of major established
we look for companies whose stock is selling below corporations as well as smaller companies.
major established companies whose stock is selling below
the price that we believe reflects its true worth based
on earnings, book value and other financial measures. A portion of the Portfolio's assets may be invested
in short, intermediate or long term DEBT OBLIGATIONS,
To achieve our value investment strategy, we usually buy including convertible and nonconvertible PREFERRED
securities that are out of favor and that many other STOCK and OTHER EQUITY-RELATED SECURITIES. Up to 5% of
investors are selling. We attempt to invest in companies and these holdings may be rated below investment grade.
industries before other investors recognize their true These securities are considered speculative and are
value. sometimes referred to as "junk bonds."
- ---------------------------------------------------------------
</TABLE>
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.
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
29
<PAGE>
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 the various Portfolios are added together and invested in one or
more repurchase agreements. Each Portfolio 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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
<S> <C>
CONTRARIAN APPROACH We will normally invest at least 65% of the Portfolio's
To achieve our value investment strategy, we generally total assets in EQUITY and EQUITY-RELATED SECURITIES. We
take a strong contrarian approach to investing. In buy common stock of companies of every size - small, medium
other words, we usually buy securities that are out of and large capitalization. When deciding which stocks to
favor and that many other investors are selling, and we buy, we look at a company's earnings, balance sheet and cash
attempt to invest in companies and industries before flow and then at how these factors impact the stock's price
other investors recognize their true value. Using these and return. We also buy EQUITY-RELATED SECURITIES - like
guidelines, we focus on long-term performance, not bonds, corporate notes and preferred stock - that can be
short-term gain. converted into a company's common stock or other equity
security.
- ----------------------------------------------------------
</TABLE>
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
30
<PAGE>
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.
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.
31
<PAGE>
- -------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
<S> <C>
BALANCED PORTFOLIO To achieve our objective, we invest in a mix of
We invest in all three types of securities - equity, debt and money equity and equity-related securities, debt
market - in order to achieve diversification in a single portfolio. obligations and money market instruments. We
We seek to maintain a more aggressive mix of investments than the adjust the percentage of Portfolio assets in each
Conservative Balanced Portfolio. This Portfolio may be appropriate category depending on our expectations regarding
for an investor looking for diversification who is willing to accept the different markets. While we make every
a relatively high level of loss in an effort to achieve greater effort to achieve our objective, we can't
appreciation. guarantee success.
- ----------------------------------------------------------------------
</TABLE>
Generally, we will invest within the ranges shown below:
ASSET TYPE MINIMUM NORMAL MAXIMUM
---------- ------- ------ -------
Stocks 25% 60% 100%
Fixed income securities 0% 40% 75%
Money market securities 0% 0% 75%
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.
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.
32
<PAGE>
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.
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
33
<PAGE>
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
<S> <C>
GLOBAL INVESTING When selecting stocks, we use a growth approach which
This Portfolio is intended to provide investors with the means we look for companies that have above-average
opportunity to invest in companies located throughout the world. growth prospects. In making our stock picks, we look
for companies that have had growth in earnings and
Although we are not required to invest in a minimum number of sales, high returns on equity and assets or other
countries, we intend generally to invest in at least three strong financial characteristics. Often, the companies
countries, including the U.S. However, in response to market we chose have superior management, a unique market
conditions, we can invest up to 35% of the Portfolio's total niche or a strong new product.
assets in any one country other than the U.S.
- -----------------------------------------------------------------
</TABLE>
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, 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 the various Portfolios are added together and invested in one or
more repurchase agreements. Each Portfolio receives a portion of the income
earned in the joint account based on the percentage of its investment.
34
<PAGE>
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.
- ------------------------------------------------------------------------------
GOVERNMENT INCOME PORTFOLIO
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of this Portfolio is A HIGH LEVEL OF INCOME OVER THE
LONGER TERM CONSISTENT WITH THE PRESERVATION OF capital. In pursuing our
objective, we invest primarily in intermediate and long-term U.S. Treasury
securities and debt obligations issued by agencies or instrumentalities
established, sponsored or guaranteed by the U.S. government. While we make every
effort to achieve this objective, we can't guarantee success.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
<S> <C>
U.S. GOVERNMENT SECURITIES Normally, we will invest at least 65% of the
U.S. government securities are considered among the most Portfolio's total assets in U.S. GOVERNMENT
creditworthy of debt securities. Because they are generally SECURITIES, which include TREASURY SECURITIES,
considered less risky, their yields tend to be lower than OBLIGATIONS ISSUED OR GUARANTEED BY U.S. GOVERNMENT
the yields from corporate debt. Like all debt securities, AGENCIES AND INSTRUMENTALITIES and MORTGAGE-RELATED
the values of U.S. government securities, the values of U.S. SECURITIES issued by U.S. government
government securities will change as interest rates change. instrumentalities or non-governmental corporations.
- --------------------------------------------------------------
</TABLE>
MORTGAGE-RELATED SECURITIES are usually pass-through instruments that pay
investors a share of all interest and principal payments from an underlying pool
of fixed or adjustable rate mortgages. We may invest in mortgage-related
securities issued and guaranteed by the U.S. government or its agencies like the
Federal National Mortgage Association (Fannie Maes) and the Government National
Mortgage Association (Ginnie Maes) and debt securities issued (but not
guaranteed) by the Federal Home Loan Mortgage Company (Freddie Macs). Private
mortgage-related securities that are not guaranteed by U.S. governmental
entities generally have one or more types of credit enhancement to ensure timely
receipt of payments and to protect against default.
Mortgage-related securities include COLLATERALIZED MORTGAGE OBLIGATIONS,
MULTI-CLASS PASS THROUGH SECURITIES and STRIPPED MORTGAGE-BACKED SECURITIES. A
collateralized mortgage backed obligation (CMO) is a security backed by an
underlying portfolio of mortgages or mortgage-backed securities that may be
issued or guaranteed by entities such as banks, U.S. governmental entities or
broker-dealers. A multi-class pass-through security is an equity interest in a
trust composed of underlying mortgage assets. Payments of principal and interest
on the mortgage assets and any reinvestment income provide the money to pay debt
service on the CMO or to make scheduled distributions on the multi-class
pass-through security. A stripped mortgage-backed security (MBS strip) may be
issued by U.S. governmental entities or by private institutions. MBS strips take
the pieces of a debt security (principal and interest) and break them apart. The
resulting securities may be sold separately and may perform differently. MBS
strips are highly sensitive to changes in prepayment and interest rates.
The Portfolio may invest up to 35% of its total assets in MONEY MARKET
INSTRUMENTS, FOREIGN GOVERNMENT SECURITIES (including those issued by
supranational organizations) denominated in U.S. dollars, ASSET-BACKED
SECURITIES rated in one of the top two ratings categories by Moody's or S&P (or
if unrated, of comparable quality in our judgment) and SECURITIES OF ISSUERS
(INCLUDING FOREIGN GOVERNMENTS) OTHER THAN THE U.S. GOVERNMENT AND RELATED
ENTITIES, where the principal and interest are substantially guaranteed by U.S.
government agencies whose guarantee is backed by the full faith and credit of
the U.S. and where an assurance of payment on the unguaranteed portion is
provided for in a comparable way.
35
<PAGE>
The Portfolio may invest up to 100% of its assets in MONEY MARKET INSTRUMENTS in
response to adverse market conditions or when restructuring the Portfolio.
Investing heavily in these securities limits our ability to achieve capital
appreciation, 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 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. 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 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.
36
<PAGE>
- ------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
<S> <C>
HIGH YIELD/HIGH RISK Normally, we will invest at least 80% of the Portfolio's
Lower rated and comparable unrated securities tend to offer total assets in medium to lower rated debt securities.
better yields than higher rated securities with the same These high-yield or "junk bonds" are riskier than higher
maturities because the issuer's past financial condition may rated bonds and are considered speculative.
not have been as strong as that of higher rated issuers.
Changes in the perception of the creditworthiness of the The Portfolio may also invest up to 20% of its total
issuers of lower rated securities tend to occur more frequently assets in U.S. dollar denominated DEBT SECURITIES issued
and in a more pronounced manner than for issuers of higher outside the U.S. by foreign and U.S. issuers.
rated securities.
- -----------------------------------------------------------------
</TABLE>
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.
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.
37
<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.
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."
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
<S> <C>
STEADY NET ASSET VALUE We invest in a diversified portfolio of short-term debt
The net asset value for the Portfolio will ordinarily obligations issued by the U.S. government, its agencies and
remain at $10 per share because dividends are declared instrumentalities, as well as commercial paper, asset
and reinvested daily. The price of each share remains backed securities, funding agreements, certificates of
the same, but you will have more shares when dividends deposit, floating and variable rate demand notes, notes and
are declared. other obligations issued by banks, corporations and other
companies (including trust structures), and obligations
issued by foreign banks, companies or foreign governments.
- -----------------------------------------------------------
</TABLE>
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.
38
<PAGE>
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.
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
39
<PAGE>
restrictions that are fundamental policies, which means they cannot be changed
without shareholder approval. For more information about these restrictions, see
the SAI.
- -------------------------------------------------------------------------------
NATURAL RESOURCES PORTFOLIO
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of this Portfolio is 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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
<S> <C>
NATURAL RESOURCE COMPANIES In pursuing our objective, we normally invest 65% of the
are companies that primarily own, explore, mine, process or Portfolio's total assets in common stocks and convertible
otherwise develop natural resources, or supply goods and securities of natural resource companies and in securities
services to such companies. Natural resources generally which are related to the market value of some natural
include PRECIOUS METALS, such as gold, silver and platinum, resource (asset-indexed securities).
FERROUS AND NONFERROUS METALS, such as iron, aluminum and
copper, STRATEGIC METALS such as uranium and titanium, We seek securities that are attractively priced as compared
HYDROCARBONS such as coal and oil, TIMBERLAND, undeveloped to the intrinsic value of the underlying natural resource
REAL PROPERTY and AGRICULTURAL COMMODITIES. or securities of companies in a position to benefit from
current or expected economic conditions.
- -------------------------------------------------------------
</TABLE>
Depending on prevailing trends, we may shift the Portfolio's focus from one
natural resource to another, however, we will not invest more than 25% of the
Portfolio's total assets in a single natural resource industry.
When acquiring ASSET-INDEXED SECURITIES, we usually will invest in obligations
rated at least BBB by Moody's or Baa by S&P (or, if unrated, of comparable
quality in our judgment). However, we may invest in asset-indexed securities
rated as low as CC by Moody's or Ca by S&P or in unrated securities of
comparable quality. These high-risk or "junk bonds" are considered speculative.
The Portfolio may also acquire asset-indexed securities issued in the form of
COMMERCIAL PAPER provided they are rated at least A-2 by S&P or P-2 by Moody's
(or, if unrated, of comparable quality in our judgment).
The Portfolio may invest up to 35% of its total assets in securities that are
not asset-indexed or natural resource related. These holdings may include common
stocks, convertible stock, debt securities and money market instruments. When
acquiring debt securities, we usually will invest in obligations rated A or
better by S&P or Moody's (or, if unrated, of comparable quality in our
judgment). However, we may invest in debt securities rated as low as CC by
Moody's or Ca by S&P or in unrated securities of comparable quality.
Under normal circumstances, the Portfolio may invest up to 35% of its total
assets in MONEY MARKET INSTRUMENTS. 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.
Up to 30% of the Portfolio's total 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.)
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
40
<PAGE>
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.
- -------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
<S> <C>
INVESTMENT STRATEGY In pursuing our objective, we normally invest 65% of
We seek to invest in equity securities of established the Portfolio's total assets in common stocks and
companies with above-average growth prospects. We select preferred stocks of companies with capitalization in
stocks on a company-by-company basis using fundamental excess of $1 billion.
analysis. In making our stock picks, we look for
companies that have had growth in earnings and sales, For the balance of the Portfolio, we may invest in
high returns on equity and assets or other strong COMMON STOCKS, PREFERRED STOCKS and OTHER
financial characteristics. Often, the companies we EQUITY-RELATED SECURITIES of companies that are
choose have superior management, a unique market niche undergoing changes in management, product and/or
or a strong new product. marketing dynamics which we believe have not yet been
reflected in reported earnings or recognized by
investors.
- -----------------------------------------------------------
</TABLE>
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
41
<PAGE>
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 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.
- -------------------------------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of this Portfolio is 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.
42
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
<S> <C>
S&P SMALLCAP INDEX To achieve this objective, we attempt to duplicate
We attempt to duplicate the performance of the Standard & Poor's Small the performance of the S&P SmallCap Index.
Capitalization Stock Index, a market-weighted index which consists of Normally we do this by investing in all or a
600 smaller capitalization U.S. stocks. The market capitalization of representative sample of the STOCKS in the S&P
the companies that make up the S&P SmallCap Index may change from time Small Cap Index. Thus, the Portfolio is not
to time - as of February 28, 1999, the S&P SmallCap stocks had market "managed" in the traditional sense of using market
capitalizations of between $18 million and $3.4 billion. They are and economic analyses to select stocks.
selected for market size, liquidity and industry group. The S&P
SmallCap Index has above-average risk and may fluctuate more than the The Portfolio may also hold CASH or CASH EQUIVALENTS,
S&P 500 Index. in which case its performance will differ from
the Index's.
- ------------------------------------------------------------------------
</TABLE>
We attempt to minimize these differences 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 equity securities and stock indexes;
purchase and sell stock index FUTURES CONTRACTS and options on those futures
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. 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.
43
<PAGE>
- -------------------------------------------------------------------------------
A STOCK'S INCLUSION IN THE S&P SMALLCAP 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 SMALL CAPITALIZATION STOCK INDEX" AND "STANDARD & POOR'S
SMALLCAP 600" ARE TRADEMARKS OF MCGRAW HILL.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
<S> <C>
S&P 500 INDEX Under normal conditions, we attempt to invest in all 500
We attempt to duplicate the performance of the S&P 500 stocks represented in the S&P 500 Index in proportion to
Index, a market-weighted index which represents more than their weighting in the Index. We will attempt to remain
70% of the market value of all publicly-traded common as fully invested in the S&P 500 stocks as possible in
stocks. light of cash flow into and out of the Portfolio.
- ------------------------------------------------------------
</TABLE>
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.
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."
44
<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.
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
20/20 FOCUS PORTFOLIO
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of this Portfolio is 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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
<S> <C>
VALUE & GROWTH APPROACHES To achieve this objective, the Portfolio will invest
Our strategy is to combine the efforts of two outstanding primarily in up to 40 equity securities of U.S.
portfolio managers, each with a different investment style, companies that are selected by the Portfolio's two
and to invest in only the favorite stock picks of each portfolio managers as having strong capital
manager. One manager will invest using a VALUE approach, appreciation potential. Each portfolio manager will
which means he will attempt to identify strong companies manage his own portion of the Portfolio's assets, which
selling at a discount from their perceived true value. The will usually include a maximum of 20 securities.
other manager will use a GROWTH approach, which means he Because the Portfolio will be investing in 40 or fewer
seeks companies that exhibit higher-than-average earnings securities, an investment in this Portfolio may be
growth. riskier than an investment in a more widely diversified
fund. We intend to be fully invested, holding less than 5%
in cash, under normal market conditions.
- --------------------------------------------------------------
</TABLE>
Normally, the Portfolio will invest at least 80% of its total assets in common
stocks and equity-related securities such as PREFERRED STOCKS, CONVERTIBLE
STOCKS, and equity interests in PARTNERSHIPS, JOINT VENTURES and OTHER
NONCORPORATE ENTITIES. We may also invest in WARRANTS and similar rights that
can be exercised for equity securities, but will not invest more than 5% of the
Portfolio's total assets in unattached warrants or rights. The Portfolio may
invest up to 20% of its total assets in CASH, OBLIGATIONS ISSUED OR GUARANTEED
BY THE U.S. GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES and DERIVATIVES. Up
to 20% of the Portfolio's total assets may be invested in FOREIGN 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.)
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.
We may invest in high quality MONEY MARKET INSTRUMENTS. 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.
45
<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 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 financial indexes that are traded on U.S or
foreign securities exchanges or in the over-the-counter market; purchase and
sell FUTURES CONTRACTS on stock indexes and foreign currencies and options on
those contracts; and purchase or sell 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
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. 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. We may also use up to 25% of the Portfolio's
net assets for SHORT SALES AGAINST-THE-BOX which means the Portfolio owns
securities identical to those sold short.
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.
- -------------------------------------------------------------------------------
ZERO COUPON BOND PORTFOLIOS - 2000 AND 2005
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of these two Portfolios is THE HIGHEST PREDICTABLE
COMPOUND INVESTMENT FOR A SPECIFIC PERIOD OF TIME, CONSISTENT WITH THE SAFETY OF
INVESTED CAPITAL. We seek to achieve this objective by investing primarily in
debt securities of the U.S. Treasury and corporations that have been issued
without interest coupons or that have been stripped of their interest coupons,
or have interest coupons that have been stripped from the debt obligation
(stripped securities). The two Portfolios differ only in their liquidation dates
which are November 15, 2000 for the Zero Coupon Bond Portfolio 2000 and November
15, 2005 for the Zero Coupon Bond Portfolio 2005. On the liquidation date of a
Portfolio, all of the securities held by the Portfolio will be sold and all
outstanding shares of the Portfolio will be redeemed. While we will try to
achieve our objective, we can't guarantee success.
46
<PAGE>
- -------------------------------------
ACTIVE MANAGEMENT
Each Portfolio seeks a higher yield In pursuing their objective, each
than would be realized by just Portfolio invests only in debt
holding the Portfolio's initial securities that do not involve
investments. We actively manage the substantial risk of loss of capital
Portfolios to take advantage of through default and that can be
trading opportunities that may arise readily sold. Although these
from supply and demand dynamics or securities are not high-risk, their
perceived differences in the quality value does vary because of changes in
or liquidity of securities. interest rates.
Of course, by pursuing this strategy, In order to lessen the impact of
the Portfolios have the risk that interest rate changes, we will keep
they will not realize the yield of the duration of each Portfolio within
their initial investments. one year of the Portfolio's
liquidation date. (Duration is a
measure of a "length" of a bond, or
in this case, a portfolio of bonds.
It is a mathematical calculation that
takes into account the maturities of
the bonds, coupon rates and
prevailing interest rates.)
- -------------------------------------
Generally, we try to invest at least 70% of each Portfolio's total assets in
STRIPPED SECURITIES that are obligations of the U.S. government and which mature
within two years of the Portfolio's liquidation date. Up to 30% of the
Portfolio's total assets may be invested in either stripped securities of
corporations or interest bearing corporate debt securities rated no lower than
Baa by a major rating service (or, if unrated, of comparable quality in our
judgment).
Under normal conditions, no more than 20% of a Portfolio's total assets may be
invested in interest-bearing securities. However, as the liquidation date of a
Portfolio draws near, we may invest more than 20% in interest bearing securities
as a defensive measure.
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.
Under normal circumstances, each Portfolio may invest in MONEY MARKET
INSTRUMENTS for cash management purposes. As a Portfolio's liquidation date
nears, we may increase our investment in money market instruments. In addition,
in response to adverse market conditions, 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.
ADDITIONAL STRATEGIES
Each Portfolio also follows certain policies when it BORROWS MONEY (each
Portfolio may borrow up to 5% of the value of its total assets); LENDS ITS
SECURITIES; and holds ILLIQUID SECURITIES (each 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 Portfolios
are 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.
47
<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 outperformed other investments
SECURITIES GOVERNMENT INCOME, MONEY o The equity markets could go down, over the long term
MARKET, ZERO COUPON 2000 & resulting in a decline in value of a
2005 Portfolio's investments o Generally, economic growth
means higher corporate profits,
(% VARIES) o Companies that pay dividends may which leads to an increase in
not do so if they don't have profits stock prices, known as capital
or adequate cash flow appreciation
Equity-related securities:
CONSERVATIVE BALANCED, o Changes in economic or political o May be a source of dividend
DIVERSIFIED BOND, conditions, both U.S. and income
DIVERSIFIED CONSERVATIVE international, may result in a decline
GROWTH, EQUITY, EQUITY in the value of a Portfolio's o Highly successful small-cap
INCOME, FLEXIBLE MANAGED, investments companies can outperform larger
GLOBAL, HIGH YIELD BOND, ones
NATURAL RESOURCES, o Small-cap companies are more
PRUDENTIAL JENNISON, SMALL likely to reinvest earnings and not
CAPITALIZATION STOCK pay dividends
(% varies) o Changes in interest rates may
affect the securities of small- and
medium-sized companies more than the
securities of larger companies
- ------------------- ------------------------------ -------------------------------------------- ------------------------------------
</TABLE>
48
<PAGE>
<TABLE>
- ------------------- ------------------------------ -------------------------------------------- ------------------------------------
<S> <C> <C> <C>
INVESTMENT GRADE ALL PORTFOLIOS EXCEPT SMALL o The Portfolio's holdings, share o Bonds have generally
DEBT SECURITIES CAPITALIZATION STOCK, STOCK price, yield, and total return may outperformed money market
INDEX, 20/20 FOCUS fluctuate in response to bond market instruments over the long term
movements with less risk than stocks
(% VARIES)
o Credit risk - the default of an o Most bonds will rise in value
issuer would leave a Portfolio with when interest rates fall
unpaid interest or principal. The
lower a bond's quality, the higher its o Regular interest income
potential volatility
o Investment grade bonds have a
o Market risk - the risk that the lower risk of default
market value of an investment may move
up or down, sometimes rapidly or o Generally more secure than
unpredictably. Market risk may affect stocks since companies must pay
an industry, 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, income than higher quality debt
(JUNK BONDS) DIVERSIFIED CONSERVATIVE o Higher credit risk securities
GROWTH, EQUITY, EQUITY
INCOME, FLEXIBLE MANAGED, o May be more illiquid (harder to
HIGH YIELD BOND, NATURAL value and sell), in which case
RESOURCES valuation would depend more on the
investment adviser's judgment than is
(% VARIES) generally the case with higher rated
securities
- ------------------- ------------------------------ -------------------------------------------- ------------------------------------
FOREIGN CONSERVATIVE BALANCED, o Foreign markets, economies and o Investors can participate in
SECURITIES DIVERSIFIED BOND, political systems may not be as stable the growth of foreign markets
DIVERSIFIED CONSERVATIVE as in the U.S. and companies operating in those
GROWTH, EQUITY, EQUITY markets
INCOME, FLEXIBLE MANAGED, o Currency risk - changing values of
GLOBAL, GOVERNMENT INCOME, foreign currencies o Changing value of foreign
HIGH YIELD BOND, MONEY currencies
MARKET, NATURAL RESOURCES, o May be less liquid than U.S.
PRUDENTIAL JENNISON, 20/20 stocks and bonds o Opportunities for
FOCUS diversification
- ------------------- ------------------------------ -------------------------------------------- ------------------------------------
</TABLE>
49
<PAGE>
<TABLE>
- ------------------- ------------------------------ -------------------------------------------- ------------------------------------
<S> <C> <C> <C>
(% VARIES) o Differences in foreign laws,
accounting standards, public
Options on Foreign information, custody and settlement
Currencies: practices
CONSERVATIVE BALANCED,
DIVERSIFIED CONSERVATIVE o Year 2000 conversion may be more
GROWTH, EQUITY, EQUITY of a problem for some foreign issuers
INCOME, FLEXIBLE MANAGED,
GLOBAL, NATURAL RESOURCES,
PRUDENTIAL JENNISON
(% VARIES)
Futures on Foreign
Currencies:
CONSERVATIVE BALANCED,
DIVERSIFIED CONSERVATIVE
GROWTH, EQUITY, EQUITY
INCOME, FLEXIBLE MANAGED,
GLOBAL, PRUDENTIAL JENNISON,
NATURAL RESOURCES, 20/20
FOCUS
(% VARIES)
- ------------------- ------------------------------ ------------------------------------------ ------------------------------------
DERIVATIVES Options on Equity o Derivatives, such as futures, o A Portfolio could make money and
SECURITIES: CONSERVATIVE options and foreign currency forward protect against losses if the
BALANCED, DIVERSIFIED contracts, may not fully offset the investment analysis proves correct
CONSERVATIVE GROWTH, EQUITY, underlying positions and this could
EQUITY INCOME, FLEXIBLE result in losses to a Portfolio that o Derivatives that involve
MANAGED, GLOBAL, NATURAL would not have otherwise occurred leverage could generate
RESOURCES, PRUDENTIAL substantial gains at low cost
JENNISON, SMALL o Derivatives used for risk
CAPITALIZATION STOCK, STOCK management may not have the intended o One way to manage a
INDEX effects and may result in losses or Portfolio's risk/return balance
missed opportunities is to lock in the value of an
(% VARIES) investment ahead of time
o The other party to a derivatives
Options on Debt Securities: contract could default
CONSERVATIVE BALANCED,
DIVERSIFIED BOND, o Derivatives that involve leverage
DIVERSIFIED CONSERVATIVE could magnify losses
GROWTH, FLEXIBLE MANAGED,
GOVERNMENT INCOME, HIGH o Certain types of derivatives
YIELD BOND involve costs to a Portfolio that can
reduce returns
(% VARIES)
- ------------------- ------------------------------ -------------------------------------------- ------------------------------------
</TABLE>
50
<PAGE>
<TABLE>
- ------------------- ------------------------------ -------------------------------------------- ------------------------------------
<S> <C> <C> <C>
Options on Stock Indexes:
CONSERVATIVE BALANCED,
DIVERSIFIED CONSERVATIVE
GROWTH, EQUITY, EQUITY
INCOME, FLEXIBLE MANAGED
GLOBAL,
NATURAL RESOURCES,
PRUDENTIAL JENNISON, SMALL
CAPITALIZATION STOCK, STOCK
INDEX, 20/20 FOCUS
(% VARIES)
Futures Contracts on stock
indexes:
CONSERVATIVE BALANCED,
DIVERSIFIED CONSERVATIVE
GROWTH, EQUITY, EQUITY
INCOME, FLEXIBLE MANAGED,
GLOBAL, NATURAL RESOURCES,
PRUDENTIAL JENNISON, SMALL
CAPITALIZATION STOCK, STOCK
INDEX, 20/20 FOCUS
(% VARIES)
Futures on debt securities
and interest rate indexes:
CONSERVATIVE BALANCED,
DIVERSIFIED BOND,
DIVERSIFIED CONSERVATIVE
GROWTH, FLEXIBLE MANAGED,
GLOBAL, GOVERNMENT INCOME,
HIGH YIELD BOND
(% VARIES)
Interest Rate Swaps:
CONSERVATIVE BALANCED,
DIVERSIFIED BOND,
DIVERSIFIED CONSERVATIVE
GROWTH, FLEXIBLE MANAGED,
GOVERNMENT INCOME, HIGH
YIELD BOND
- ------------------- ------------------------------ -------------------------------------------- ------------------------------------
</TABLE>
51
<PAGE>
<TABLE>
- ------------------- ------------------------------ -------------------------------------------- ------------------------------------
<S> <C> <C> <C>
(% VARIES)
- ------------------- ------------------------------ -------------------------------------------- ------------------------------------
MORTGAGE BACKED & DIVERSIFIED CONSERVATIVE o Prepayment risk - the risk that o Regular interest income
ASSET-BACKED GROWTH, GOVERNMENT INCOME, the underlying mortgage or other debt
SECURITIES MONEY MARKET, PRUDENTIAL may be prepaid partially or o Pass-through instruments
JENNISON completely, generally during periods provide greater diversification
of falling interest rates, which could than direct ownership of loans
(% VARIES) 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 the collateral
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
- ------------------- ------------------------------ -------------------------------------------- -----------------------------------
ZERO COUPON BONDS DIVERSIFIED CONSERVATIVE o Typically subject to greater o Value rises faster when
GROWTH, ZERO COUPON volatility and less liquidity in interest rates fall
PORTFOLIOS 2000 & 2005 adverse markets than other debt
securities
(% VARIES)
o Credit 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, 20/20 FOCUS 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
time or price desired
MONEY MARKET PORTFOLIO (10%
of its net assets)
- ------------------- ------------------------------ -------------------------------------------- -----------------------------------
</TABLE>
52
<PAGE>
<TABLE>
- ------------------- ------------------------------ -------------------------------------------- ------------------------------------
<S> <C> <C> <C>
LOAN CONSERVATIVE BALANCED, o Credit risk o May offer right to receive
PARTICIPATIONS DIVERSIFIED BOND, principal, interest and fees
DIVERSIFIED CONSERVATIVE o Market risk without as much risk as lender
GROWTH, FLEXIBLE 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 o Use of such instruments and o Use of instruments may
DELAYED DELIVERY delayed delivery securities: strategies may magnify underlying magnify underlying investment
SECURITIES, CONSERVATIVE BALANCED, investment losses gains
REVERSE DIVERSIFIED CONSERVATIVE
REPURCHASE GROWTH, DIVERSIFIED BOND, o Investment costs may exceed
AGREEMENTS, EQUITY, EQUITY INCOME, potential underlying investment gains
DOLLAR ROLLS AND FLEXIBLE MANAGED, GLOBAL,
SHORT SALES GOVERNMENT INCOME, HIGH
YIELD BOND, MONEY MARKET,
NATURAL RESOURCES,
PRUDENTIAL JENNISON, SMALL
CAPITALIZATION STOCK
(% VARIES)
Reverse Repurchase
Agreements:
CONSERVATIVE BALANCED,
DIVERSIFIED BOND,
DIVERSIFIED CONSERVATIVE
GROWTH, FLEXIBLE MANAGED,
GOVERNMENT INCOME, HIGH
YIELD BOND, MONEY MARKET AND
THE MONEY MARKET PORTION OF
ANY PORTFOLIO
(% VARIES)
Dollar Rolls:
CONSERVATIVE BALANCED,
DIVERSIFIED BOND,
DIVERSIFIED CONSERVATIVE
GROWTH, FLEXIBLE MANAGED,
GOVERNMENT INCOME, HIGH
YIELD BOND
- ------------------- ------------------------------ -------------------------------------------- ------------------------------------
</TABLE>
53
<PAGE>
<TABLE>
- ------------------- ------------------------------ -------------------------------------------- ------------------------------------
<S> <C> <C> <C>
(% VARIES)
Short Sales:
CONSERVATIVE BALANCED,
DIVERSIFIED BOND,
DIVERSIFIED CONSERVATIVE
GROWTH, FLEXIBLE MANAGED,
GOVERNMENT INCOME, HIGH
YIELD BOND, 20/20 FOCUS
(% VARIES)
Short Sales Against the Box:
ALL PORTFOLIOS EXCEPT THE
MONEY MARKET AND ZERO COUPON
BOND PORTFOLIOS
(% VARIES)
- ------------------- ------------------------------ -------------------------------------------- ------------------------------------
</TABLE>
54
<PAGE>
HOW THE PORTFOLIOS ARE MANAGED
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Prudential 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. For the two new Portfolios,
the following chart describes the fee arrangement.
- --------------------------------------------------------------------------------
TOTAL ADVISORY FEES AS % OF
PORTFOLIO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Conservative Balanced 0.55
Diversified Bond 0.40
Diversified Conservative Growth 0.75
Equity 0.45
Equity Income 0.40
Flexible Managed 0.60
Global 0.75
Government Income 0.40
High Yield Bond 0.55
Money Market 0.40
Natural Resources 0.45
Prudential Jennison 0.60
Small Capitalization Stock 0.40
Stock Index 0.35
20/20 Focus 0.75
Zero Coupon Bond 2000 0.40
Zero Coupon Bond 2005 0.40
- --------------------------------------------------------------------------------
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-advisers 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 and the growth equity portion of the assets for
the 20/20 Focus 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.
55
<PAGE>
For the Diversified Conservative Growth Portfolio, Prudential serves as overall
investment manager and is responsible for selecting sub-advisers to handle the
day-to-day investment management and monitoring their performance. With Board
approval, Prudential is permitted to change or add sub-advisers or enter into a
new agreement with a current sub-adviser without shareholder approval. The Fund
will notify shareholders of any new sub-adviser. Listed below are the current
sub-advisers for the Diversified Conservative Growth Portfolio:
JENNISON. (See above.)
PRUDENTIAL INVESTMENT CORPORATION. (See above.)
FRANKLIN ADVISERS, INC. (Franklin) is located at 777 Mariners Island
Blvd., San Mateo, California 94404 and is a wholly owned subsidiary of
Franklin Resources, Inc. As of December 31, 1998, Franklin and its
affiliates managed over $220 billion in assets.
THE DREYFUS CORPORATION (Dreyfus) is located at 200 Park Avenue, New
York, New York, 10266 and is a subsidiary of Mellon Bank corporation.
As of December 31, 1998, Dreyfus managed over $111 billion in assets.
PACIFIC INVESTMENT MANAGEMENT COMPANY (PIMCO) is located at 840 Newport
Center Drive, Newport Beach, California 92660 and is a subsidiary of
PIMCO Advisors L.P. As of December 31, 1998, PIMCO managed over $157
million in assets.
- --------------------------------------------------------------------------------
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, GOVERNMENT INCOME PORTFOLIO AND
ZERO COUPON BOND PORTFOLIOS 2000 & 2005
These Portfolios are managed by Ms. Barbara Kenworthy who has been the manager
of each 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.
56
<PAGE>
DIVERSIFIED CONSERVATIVE GROWTH PORTFOLIO
The equity portion of the Portfolio advised by Jennison is managed by Spiros
"Sig" Segalas, James N. Kannry, CFA, and Kathleen A. McCarragher. 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. Segalas is one of the
co-managers of the Prudential Jennison Portfolio and the 20/20 Focus Portfolio.
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. Mr. Kannry is also one of
the co-managers of the Prudential Jennison Portfolio.
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. Ms. McCarragher is also one of the
co-managers of the Prudential Jennison Portfolio.
Thomas R. Jackson manages the equity portion of the Portfolio assigned to PIC.
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.
George Edwards, CFA, manages the fixed income portion of the Portfolio assigned
to PIC. 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).
Edward B. Jamieson, Michael McCarthy and Aidan O'Connell manage the portion of
the Portfolio assigned to Franklin. Mr. Jamieson is an Executive Vice President
of Franklin and Managing Director of Franklin's equity and high yield groups. He
has been with Franklin since 1987. Mr. McCarthy joined Franklin in 1992 and is a
vice president and portfolio manager specializing in research analysis of
several technology groups. Mr. O'Connell joined Franklin in 1998 and is a
research analyst specializing in research analysis of the semiconductor and
semiconductor capital equipment industries. Prior to joining Franklin, Mr.
O'Connell was a research associate and corporate finance associate with
Hambrecht & Quist.
William R. Rydell, CFA and Mark W. Sikorski, CFA, manage the portion of the
Portfolio assigned to Dreyfus. Mr. Rydell is a portfolio manager of Dreyfus and
is the President and Chief Executive Officer of Mellon Equity Associates LLP.
Mr. Rydell has been in the Mellon organization since 1973. Mr. Sikorski is a
portfolio manager of Dreyfus and a Vice President of Mellon Equity Associates
LLP. Mr. Sikorski has been in the Mellon organization since 1996. Prior to
joining Mellon, he managed various corporation treasury projects for Northeast
Utilities, including bond refinancing and investment evaluations.
John Hague manages the portion of the Portfolio assigned to PIMCO. Mr. Hague is
a Managing Director of PIMCO and has managed fixed income assets for PIMCO and
its predecessor since 1989.
EQUITY PORTFOLIO
Thomas Jackson, Managing Director of Prudential Investments, has managed this
Portfolio since 1990. (See description under "Diversified Conservative Growth
Portfolio," above.)
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.)
57
<PAGE>
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.
HIGH YIELD BOND PORTFOLIO
George Edwards, CFA, Managing Director of Prudential Investments, has managed
this Portfolio since 1997. (See description under "Diversified Conservative
Growth Portfolio," above).
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.
NATURAL RESOURCES PORTFOLIO
Leigh Goehring, Vice President of Prudential Investments, has managed this
Portfolio since 1992. Prior to that time, Mr. Goehring was portfolio manager for
The Prudential-Bache Option Growth Fund.
PRUDENTIAL JENNISON PORTFOLIO
This Portfolio is managed by by Messrs. Segalas and Kannry and Ms. McCarragher
of Jennison since 1999. (See description under "Diversified Conservative Growth
Portfolio," above.)
SMALL CAPITALIZATION STOCK PORTFOLIO
Wai Chiang, Vice President of Prudential Investments, has managed this Portfolio
since its inception in 1995. Mr. Chiang has been employed by Prudential as a
portfolio manager since 1986.
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.)
20/20 FOCUS PORTFOLIO
Thomas R. Jackson, Managing Director of Prudential Investments, manages
approximately 50% of the Portfolio's assets. (See description under "Diversified
Conservative Growth Portfolio," above.)
Spiros Segalas, Director, President and Chief Investment Officer of Jennison,
manages approximately 50% of the Portfolio's assets. (See description under
"Diversified Conservative Growth 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 certain Contracts. Class II is offered only to separate accounts
of non-Prudential insurance companies as investment options under certain of
their Contracts. Please refer to the accompanying Contract prospectus to see
which Portfolios are available through your Contract.
58
<PAGE>
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.
Both Class I and Class II shares of a Portfolio are sold without any sales
charge at the net asset value of the Portfolio. Class II shares, however, are
subject to an annual distribution or "12b-1" fee of 0.25% and an administration
fee of 0.15% of the average daily net assets of Class II. 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.
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.
59
<PAGE>
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.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. The Fund has adopted a
distribution plan under Rule 12b-1 of the Investment Company Act of 1940
covering Class II shares. Under that plan, Class II of each Portfolio pays to
PIMS a distribution or "12b-1" fee at the annual rate of 0.25% of the average
daily net assets of Class II. This fee pays for distribution services for Class
II shares. Because these fees are paid out of the Portfolio's assets on an
on-going basis, over time these fees will increase the cost of your investment
in Class II shares and may cost you more than paying other types of sales
charges. These 12b-1 fees do not apply to Class I.
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.
60
<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.
61
<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.
62
<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.
63
<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.
64
<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.
65
<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.
66
<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.
67
<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>
GOVERNMENT INCOME
-----------------------------------------------------
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 11.52 $ 11.22 $ 11.72 $ 10.46 $ 11.78
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................. 0.67 0.75 0.75 0.74 0.70
Net realized and unrealized gains
(losses) on investments.............. 0.36 0.30 (0.51) 1.28 (1.31)
--------- --------- --------- --------- ---------
Total from investment operations... 1.03 1.05 0.24 2.02 (0.61)
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.68) (0.75) (0.74) (0.76) (0.71)
Dividends in excess of net investment
income............................... --(c) -- -- -- --
--------- --------- --------- --------- ---------
Total distributions................ (0.68) (0.75) (0.74) (0.76) (0.71)
--------- --------- --------- --------- ---------
Net Asset Value, end of year........... $ 11.87 $ 11.52 $ 11.22 $ 11.72 $ 10.46
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:(b)............ 9.09% 9.67% 2.22% 19.48% (5.16)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $443.2 $429.6 $482.0 $501.8 $487.6
Ratios to average net assets:
Expenses............................. 0.43% 0.44% 0.46% 0.45% 0.45%
Net investment income................ 5.71% 6.40% 6.38% 6.55% 6.30%
Portfolio turnover rate................ 109% 88% 95% 195% 34%
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
(c) Less than $.005 per share.
68
<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.
69
<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.
70
<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>
NATURAL RESOURCES
-------------------------------------------------------
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........................ $ 15.24 $ 19.77 $ 17.27 $ 14.44 $ 15.56
-------- -------- -------- -------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income......... 0.09 0.12 0.15 0.21 0.18
Net realized and unrealized
gains (losses) on
investments................. (2.48) (2.43) 5.11 3.66 (0.85)
-------- -------- -------- -------- -------
Total from investment
operations.............. (2.39) (2.31) 5.26 3.87 (0.67)
-------- -------- -------- -------- -------
LESS DISTRIBUTIONS:
Dividends from net investment
income...................... (0.11) (0.10) (0.14) (0.21) (0.15)
Distributions from net
realized gains.............. (0.75) (2.12) (2.62) (0.83) (0.30)
Tax return of capital
distributions............... (0.01) -- -- -- --
-------- -------- -------- -------- -------
Total distributions....... (0.87) (2.22) (2.76) (1.04) (0.45)
-------- -------- -------- -------- -------
Net Asset Value, end of
year........................ $ 11.98 $ 15.24 $ 19.77 $ 17.27 $ 14.44
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
TOTAL INVESTMENT RETURN:(b)... (17.10)% (11.59)% 30.88% 26.92% (4.30)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)................... $236.9 $358.0 $438.4 $293.2 $227.3
Ratios to average net assets:
Expenses.................... 0.49% 0.54% 0.52% 0.50% 0.61%
Net investment income....... 0.63% 0.60% 0.75% 1.25% 1.09%
Portfolio turnover rate....... 12% 32% 36% 46% 18%
</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.
71
<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.
72
<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>
SMALL CAPITALIZATION STOCK
-----------------------------------------------------------
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... $ 15.93 $ 13.79 $ 11.83 $ 10.00
------------- ----------- ----------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................. 0.09 0.10 0.09 0.08
Net realized and unrealized gains
(losses) on investments.............. (0.25) 3.32 2.23 1.91
------------- ----------- ----------- -------
Total from investment operations... (0.16) 3.42 2.32 1.99
------------- ----------- ----------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.09) (0.10) (0.09) (0.04)
Distributions from net realized
gains................................ (0.97) (1.18) (0.27) (0.12)
------------- ----------- ----------- -------
Total distributions................ (1.06) (1.28) (0.36) (0.16)
------------- ----------- ----------- -------
Net Asset Value, end of period......... $ 14.71 $ 15.93 $ 13.79 $ 11.83
------------- ----------- ----------- -------
------------- ----------- ----------- -------
TOTAL INVESTMENT RETURN:(b)............ (0.76)% 25.17% 19.77% 19.74%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
millions)............................ $360.4 $290.3 $147.9 $47.5
Ratios to average net assets:
Expenses............................. 0.47% 0.50% 0.56% 0.60%(c)
Net investment income................ 0.57% 0.69% 0.87% 0.68%(c)
Portfolio turnover rate................ 26% 31% 13% 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 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.
73
<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.
74
<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>
ZERO COUPON BOND 2000
------------------------------------------------
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..... $ 12.61 $ 12.92 $ 13.27 $ 11.86 $ 13.72
------- ------- ------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................. 0.63 0.67 0.55 0.59 0.92
Net realized and unrealized gains
(losses) on investments.............. 0.31 0.22 (0.36) 1.95 (1.91)
------- ------- ------- --------- ---------
Total from investment operations... 0.94 0.89 0.19 2.54 (0.99)
------- ------- ------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.64) (0.67) (0.54) (0.60) (0.85)
Distributions from net realized
gains................................ (0.17) (0.53) -- (0.53) (0.02)
------- ------- ------- --------- ---------
Total distributions................ (0.81) (1.20) (0.54) (1.13) (0.87)
------- ------- ------- --------- ---------
Net Asset Value, end of year........... $ 12.74 $ 12.61 $ 12.92 $ 13.27 $ 11.86
------- ------- ------- --------- ---------
------- ------- ------- --------- ---------
TOTAL INVESTMENT RETURN:(b)............ 7.57% 7.17% 1.53% 21.56% (7.18)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $40.2 $41.3 $44.7 $25.3 $20.6
Ratios to average net assets:
Expenses............................. 0.62% 0.66% 0.52% 0.48% 0.51%
Net investment income................ 4.85% 4.78% 4.88% 4.53% 6.69%
Portfolio turnover rate................ 16% 32% 13% 71% 9%
(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.
75
<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.
ZERO COUPON BOND 2005
---------------------------------------------------
YEAR ENDED
DECEMBER 31,
---------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of
year........................ $ 12.60 $ 12.25 $ 13.19 $ 10.74 $ 12.68
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income......... 0.66 0.68 0.66 0.66 0.75
Net realized and unrealized
gains (losses) on
investments................. 0.87 0.66 (0.82) 2.73 (1.97)
------- ------- ------- ------- -------
Total from investment
operations.............. 1.53 1.34 (0.16) 3.39 (1.22)
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment
income...................... (0.67) (0.71) (0.64) (0.65) (0.72)
Distributions from net
realized gains.............. (0.02) (0.28) (0.14) (0.29) --
------- ------- ------- ------- -------
Total distributions....... (0.69) (0.99) (0.78) (0.94) (0.72)
------- ------- ------- ------- -------
Net Asset Value, end of
year........................ $ 13.44 $ 12.60 $ 12.25 $ 13.19 $ 10.74
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN:(b)... 12.35% 11.18% (1.01)% 31.85% (9.61)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)................... $45.5 $30.8 $25.8 $23.6 $16.5
Ratios to average net assets:
Expenses.................... 0.61% 0.74% 0.53% 0.49% 0.60%
Net investment income....... 5.35% 5.71% 5.42% 5.32% 6.53%
Portfolio turnover rate....... -- 35% 10% 69% 6%
</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.
76
<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
<PAGE>
PRUVIDER VARIABLE(SM)
APPRECIABLE LIFE(R) INSURANCE
PROSPECTUS
THE PRUCO LIFE PRUVIDER VARIABLE
APPRECIABLE ACCOUNT AND
THE PRUDENTIAL SERIES FUND, INC.
MAY 1, 1999
PRUCO LIFE INSURANCE COMPANY
<PAGE>
PROSPECTUS
MAY 1, 1999
PRUCO LIFE INSURANCE COMPANY
PRUVIDER VARIABLE APPRECIABLE ACCOUNT
PRUVIDER(SM)
VARIABLE APPRECIABLE LIFE(R)
INSURANCE CONTRACT
This prospectus describes a variable life insurance contract (the "Contract")
offered by Pruco Life Insurance Company ("Pruco Life", "us", or "we") under the
name PRUVIDER(SM) Variable APPRECIABLE LIFE(R) Insurance. Pruco Life, a stock
life insurance company, is a wholly-owned subsidiary of The Prudential Insurance
Company of America ("Prudential"). The death benefit varies daily with
investment experience but will never be less than a guaranteed minimum amount
(the face amount specified in the Contract). There is no guaranteed minimum cash
surrender value.
AS OF MAY 1, 1999, PRUCO LIFE NO LONGER OFFERED THESE CONTRACTS FOR SALE.
You, the Contract owner, may choose to invest your Contract's premiums and their
earnings in one or more of the following ways:
o Invest in either one or both of two available subaccounts of the Pruco Life
PRUVIDER Variable Appreciable Account, each of which invests in a
corresponding portfolio of The Prudential Series Fund, Inc. (the "Fund"):
the CONSERVATIVE BALANCED PORTFOLIO and the FLEXIBLE MANAGED PORTFOLIO.
Pruco Life may add additional subaccounts in the future.
o Invest in the FIXED-RATE OPTION, which pays a guaranteed interest rate.
Pruco Life will credit interest daily on any portion of the premium payment
that you have allocated to the fixed-rate option at rates periodically
declared by Pruco Life, in its sole discretion. Any such interest rate will
never be less than an effective annual rate of 4%.
You have considerable flexibility as to when and in what amounts you pay
premiums. On the other hand, it may be to your advantage to pay a Scheduled
Premium amount on the dates due, which are at least once a year but may be more
often.
This prospectus describes the Contract generally and the Pruco Life PRUVIDER
Variable Appreciable Account. The prospectus and its statement of additional
information also describe the investment objectives and the risks of investing
in the Fund portfolios. The statement of additional information is available
without charge by telephoning (800) 778-2255.
Before you sign an application to purchase this life insurance contract, you
should carefully read this prospectus. If you do purchase the Contract, you
should retain this prospectus, together with the Contract, for future reference.
The Securities and Exchange Commission ("SEC") maintains a Web site
(http://www.sec.gov) that contains material incorporated by reference and other
information regarding registrants that file electronically with the SEC.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PRUCO LIFE INSURANCE COMPANY
213 Washington Street
Newark, New Jersey 07102-2992
Telephone: (800) 778-2255
PRUVIDER is a service mark of Prudential.
APPRECIABLE LIFE is a registered mark of Prudential.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INTRODUCTION AND SUMMARY.......................................................................................................1
BRIEF DESCRIPTION OF THE CONTRACT...........................................................................................1
INVESTMENT OPTIONS..........................................................................................................1
CHARGES.....................................................................................................................2
PREMIUM PAYMENTS............................................................................................................3
LAPSE AND GUARANTEE AGAINST LAPSE...........................................................................................4
REFUND......................................................................................................................4
FINANCIAL HIGHLIGHTS OF THE PORTFOLIOS OF THE FUND.............................................................................5
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS AND ACCUMULATED PREMIUMS................................................8
GENERAL INFORMATION ABOUT PRUCO LIFE INSURANCE COMPANY, PRUCO LIFE PRUVIDER VARIABLE APPRECIABLE ACCOUNT AND THE FIXED RATE
OPTION.........................................................................................................................9
PRUCO LIFE INSURANCE COMPANY................................................................................................9
THE PRUCO LIFE PRUVIDER VARIABLE APPRECIABLE ACCOUNT........................................................................9
THE FIXED-RATE OPTION......................................................................................................10
DETAILED INFORMATION FOR CONTRACT OWNERS......................................................................................10
REQUIREMENTS FOR ISSUANCE OF A CONTRACT....................................................................................10
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK"...............................................................................10
CONTRACT FEES AND CHARGES..................................................................................................11
DEDUCTIONS FROM PREMIUMS.................................................................................................11
DEDUCTIONS FROM PORTFOLIOS...............................................................................................11
MONTHLY DEDUCTIONS FROM CONTRACT FUND....................................................................................11
DAILY DEDUCTION FROM THE CONTRACT FUND...................................................................................12
SURRENDER OR WITHDRAWAL CHARGES..........................................................................................13
TRANSACTION CHARGES......................................................................................................13
CONTRACT DATE..............................................................................................................13
PREMIUMS...................................................................................................................14
ALLOCATION OF PREMIUMS.....................................................................................................15
TRANSFERS..................................................................................................................15
HOW THE CONTRACT FUND CHANGES WITH INVESTMENT EXPERIENCE...................................................................16
HOW A CONTRACT'S DEATH BENEFIT WILL VARY...................................................................................16
CONTRACT LOANS.............................................................................................................16
SURRENDER OF A CONTRACT....................................................................................................17
LAPSE AND REINSTATEMENT....................................................................................................17
FIXED EXTENDED TERM INSURANCE............................................................................................18
FIXED REDUCED PAID-UP INSURANCE..........................................................................................18
VARIABLE REDUCED PAID-UP INSURANCE.......................................................................................18
WHAT HAPPENS IF NO REQUEST IS MADE?......................................................................................18
PAID-UP INSURANCE OPTION...................................................................................................18
REDUCED PAID-UP INSURANCE OPTION...........................................................................................19
WHEN PROCEEDS ARE PAID.....................................................................................................19
LIVING NEEDS BENEFIT.......................................................................................................19
TERMINAL ILLNESS OPTION..................................................................................................19
NURSING HOME OPTION......................................................................................................20
VOTING RIGHTS..............................................................................................................20
REPORTS TO CONTRACT OWNERS.................................................................................................21
TAX TREATMENT OF CONTRACT BENEFITS.........................................................................................21
TREATMENT AS LIFE INSURANCE..............................................................................................21
PRE-DEATH DISTRIBUTIONS..................................................................................................21
WITHHOLDING..............................................................................................................22
OTHER TAX CONSEQUENCES...................................................................................................22
OTHER CONTRACT PROVISIONS..................................................................................................22
FURTHER INFORMATION ABOUT THE FUND............................................................................................22
RISK/RETURN SUMMARIES......................................................................................................22
CONSERVATIVE BALANCED PORTFOLIO............................................................................................22
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES............................................................................22
</TABLE>
<PAGE>
<TABLE>
<S> <C>
PRINCIPAL RISKS..........................................................................................................22
EVALUATING PERFORMANCE...................................................................................................23
FLEXIBLE MANAGED PORTFOLIO.................................................................................................24
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES............................................................................24
PRINCIPAL RISKS..........................................................................................................24
EVALUATING PERFORMANCE...................................................................................................24
HOW THE PORTFOLIOS INVEST.....................................................................................................25
CONSERVATIVE BALANCED PORTFOLIO............................................................................................25
INVESTMENT OBJECTIVE AND POLICIES........................................................................................25
DERIVATIVES AND OTHER STRATEGIES.........................................................................................26
ADDITIONAL STRATEGIES....................................................................................................27
FLEXIBLE MANAGED PORTFOLIO.................................................................................................27
INVESTMENT OBJECTIVE AND POLICIES........................................................................................27
DERIVATIVES AND OTHER STRATEGIES.........................................................................................28
ADDITIONAL STRATEGIES....................................................................................................29
INVESTMENT RISKS..............................................................................................................31
HOW THE PORTFOLIOS ARE MANAGED................................................................................................35
PURCHASE AND SALE OF FUND SHARES...........................................................................................35
OTHER FUND INFORMATION........................................................................................................36
DISTRIBUTOR................................................................................................................36
MONITORING FOR POSSIBLE CONFLICTS..........................................................................................36
STATE REGULATION..............................................................................................................36
EXPERTS.......................................................................................................................36
LITIGATION....................................................................................................................36
YEAR 2000 COMPLIANCE..........................................................................................................37
EXPANDED TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION.............................................................38
ADDITIONAL INFORMATION........................................................................................................40
FINANCIAL STATEMENTS..........................................................................................................40
FINANCIAL STATEMENTS OF THE PRUCO LIFE PRUVIDER VARIABLE APPRECIABLE ACCOUNT..................................................A1
CONSOLIDATED FINANCIAL STATEMENTS OF PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES............................................B1
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
INTRODUCTION AND SUMMARY
THIS SUMMARY PROVIDES ONLY AN OVERVIEW OF THE MORE SIGNIFICANT PROVISIONS OF THE
CONTRACT. WE PROVIDE FURTHER DETAIL IN THE SUBSEQUENT SECTIONS OF THIS
PROSPECTUS, AS WELL AS IN A STATEMENT OF ADDITIONAL INFORMATION WHICH IS
AVAILABLE TO YOU UPON REQUEST WITHOUT CHARGE. A DESCRIPTION OF THE CONTENTS OF
THE STATEMENT OF ADDITIONAL INFORMATION IS ON PAGE 37.
AS OF MAY 1, 1999, PRUCO LIFE NO LONGER OFFERED THESE CONTRACTS FOR SALE.
As you read this prospectus, you should keep in mind that this is a variable
life insurance contract. Variable life insurance has significant investment
aspects and requires you to make investment decisions, and therefore it is also
a "security." Securities that are offered to the public must be registered with
the Securities and Exchange Commission. The prospectus that is a part of the
registration statement must be given to all prospective purchasers. A
substantial part of the premium pays for life insurance that will pay a benefit
to the beneficiary, in the event of the insured's death. This death benefit
generally far exceeds total premium payments. You should not purchase this
Contract, therefore, unless the major reason for the purchase is to provide life
insurance protection. Because the Contract provides whole life insurance, it
also serves a second important objective. It can be expected to provide a cash
surrender value that can be used during your lifetime.
BRIEF DESCRIPTION OF THE CONTRACT
The Pruco Life PRUVIDER Variable APPRECIABLE LIFE Insurance Contract (the
"Contract") is issued and sold by Pruco Life Insurance Company ("Pruco Life",
"us", or "we"). The Contract is a form of flexible premium variable life
insurance. It is based on a Contract Fund, the value of which changes every
business day. The Contract Fund amount represents the value of your Contract on
that day. There is a surrender charge if you decide to surrender the Contract
during the first 10 Contract years.
A broad objective of the Contract is to provide benefits that will increase in
value if favorable investment results are achieved. Pruco Life has established
the Pruco Life PRUVIDER Variable Appreciable Account (the "Account") under
Arizona law as a separate investment account whose assets are segregated from
all other assets of Pruco Life. The Account is divided into two subaccounts, and
you decide which one[s] will hold the assets of your Contract Fund. Whenever you
pay a premium, Pruco Life first deducts certain charges and, except for amounts
allocated to the fixed-rate option, puts the remainder - the "net premium" -
into the Account. The money allocated to each subaccount is immediately invested
in a corresponding portfolio of The Prudential Series Fund, Inc. (the "Fund"), a
series mutual fund for which Prudential is the investment adviser. The two Fund
portfolios -- the CONSERVATIVE BALANCED PORTFOLIO and the FLEXIBLE MANAGED
PORTFOLIO -- differ in the amount of risk associated with them and are described
in more detail below.
The Fund is an investment company registered under the Investment Company Act of
1940.
INVESTMENT OPTIONS
When you first buy the Contract you give instructions to Pruco Life as to what
combination of the three investment options you wish your Contract Fund
invested. Thereafter you may make changes in these allocations either in writing
or by telephone. The investment objectives of the portfolios, described more
fully starting on page 22 of this prospectus, are as follows:
1
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
VARIABLE INVESTMENT OPTIONS
o CONSERVATIVE BALANCED PORTFOLIO. The investment objective is a total
investment return consistent with a conservatively managed diversified
portfolio. The Portfolio invests in a mix of equity securities, debt
obligations, and money market instruments. This Portfolio is appropriate
for an investor desiring diversification with a relatively lower risk of
loss than that associated with the Flexible Managed Portfolio.
o FLEXIBLE MANAGED PORTFOLIO. The investment objective is a total investment
return consistent with an aggressively managed diversified portfolio. The
Portfolio invests in a mix of equity securities, debt obligations, and
money market instruments. This Portfolio is appropriate for an investor
desiring diversification, who is willing to accept a relatively high level
of loss, in an effort to achieve greater appreciation.
FIXED-RATE OPTION
The fixed-rate option provides a guarantee against loss of principal plus income
at a rate which may change at yearly intervals, for new premium deposits, it
changes monthly, but will never be lower than an effective annual rate of 4%.
CHARGES
Pruco Life deducts certain charges from each premium payment and from the
amounts held in the designated subaccounts and the fixed rate option. In
addition, Pruco Life makes certain additional charges if a Contract lapses or is
surrendered during the first 10 Contract years. All these charges, which are
largely designed to cover insurance costs and risks as well as sales and
administrative expenses, are fully described under Contract Fees and Charges on
page 11. In brief, Pruco Life may make the following charges:
- --------------------------------------------------------------------------------
PREMIUM PAYMENT
- --------------------------------------------------------------------------------
-----------------------------------
o less charge for taxes
attributable to premiums
o less $2 processing fee
-----------------------------------
- --------------------------------------------------------------------------------
INVESTED PREMIUM AMOUNT
o To be invested in one or a combination of:
o The Conservative Balanced Portfolio
o The Flexible Managed Portfolio
o The fixed-rate option
- --------------------------------------------------------------------------------
2
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DAILY CHARGES
o We deduct management fees and expenses from the Fund assets. The total
expenses of each portfolio for the year 1998, expressed as a percentage of
the average assets during the year, are as follows:
PORTFOLIOS CONSERVATIVE BALANCED FLEXIBLE MANAGED
---------- --------------------- ----------------
Advisory Fee 0.55% 0.60%
Other Expenses 0.02% 0.01%
Total Expenses 0.57% 0.61%
o We deduct a daily mortality and expense risk charge equivalent to an annual
rate of up to 0.9% from the assets of the subaccounts.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MONTHLY CHARGES
o We deduct a sales charge from the Contract Fund in the amount of 1/2 of 1%
of the primary annual premium.
o We reduce the Contract Fund by a guaranteed minimum death benefit risk
charge of not more than $0.01 per $1,000 of the face amount of insurance.
o We reduce the Contract Fund by an administrative charge of up to $6 per
Contract and up to $0.19 per $1,000 of face amount of insurance (currently,
on a non-guaranteed basis, the $0.19 charge is decreased to $0.09 per
$1,000); if the face amount of the Contract is less than $10,000, there is
an additional charge of $0.30 per $1,000 of face amount.
o We deduct a charge for anticipated mortality. The maximum charge is based
on the non-smoker/smoker 1980 CSO Tables.
o If the Contract includes riders, we deduct rider charges from the Contract
Fund.
o If the rating class of the insured results in an extra charge, we will
deduct that charge from the Contract Fund.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
POSSIBLE ADDITIONAL CHARGES
o During the first 10 years, we will assess a contingent deferred sales
charge if the Contract lapses or is surrendered. During the first five
years, the maximum contingent deferred sales charge is 50% of the first
year's primary annual premium. This charge is both subject to other
important limitations and reduced for Contracts that have been inforce for
more than five years.
o During the first 10 years, we will assess a contingent deferred
administrative charge if the Contract lapses or is surrendered. During the
first five years, this charge equals $5 per $1,000 of face amount. It
begins to decline uniformly after the fifth Contract year so that it
disappears on the 10th Contract anniversary.
o We assess an administrative processing charge of up to $15 for each
withdrawal of excess cash surrender value.
- --------------------------------------------------------------------------------
Because of the charges listed above, and in particular because of the
significant charges deducted upon early surrender or lapse, you should purchase
a Contract only if you intend to, and have the financial capability to, keep it
for a substantial period.
PREMIUM PAYMENTS
Your Contract sets forth an annual Scheduled Premium, or one that is payable
more frequently, such as monthly. Pruco Life guarantees that, if the Scheduled
Premiums are paid when due (or if
3
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
missed premiums are paid later, with interest), the death benefit will be paid
upon the death of the insured. Your Contract will not lapse even if investment
experience is so unfavorable that the Contract Fund value drops to zero.
The amount of the Scheduled Premium depends on the Contract's face amount, the
insured's sex (except where unisex rates apply) and age at issue, the insured's
risk classification, the rate for taxes attributable to premiums, and the
frequency of premium payments selected. Under certain low face amount Contracts
issued on younger insureds, the payment of the Scheduled Premium may cause the
Contract to be classified as a Modified Endowment Contract. See Tax Treatment of
Contract Benefits, page 21.
LAPSE AND GUARANTEE AGAINST LAPSE
Pruco Life's PRUVIDER Variable APPRECIABLE LIFE Insurance Contract is a form of
life insurance that provides much of the flexibility of variable universal life,
with two important distinctions:
o Pruco Life guarantees that if the Scheduled Premiums are paid when due, or
within the grace period (or missed premiums are paid later with interest),
the Contract will not lapse and, at least, the face amount of insurance
will be paid upon the death of the insured. This is true even if, because
of unfavorable investment experience, the Contract Fund value should drop
to zero.
o If all premiums are not paid when due (or not made up later), the Contract
will still not lapse as long as the Contract Fund is higher than a stated
amount set forth in a table in the Contract. This amount is called the
"Tabular Contract Fund", and it increases each year. In later years it
becomes quite high. The Contract lapses when the Contract Fund falls below
this stated amount, rather than when it drops to zero. This means that,
when a PRUvider Variable Appreciable Life Contract lapses, it may still
have considerable value, and you may have a substantial incentive to
reinstate it. If you choose not to reinstate, on the other hand, you may
take the cash surrender value under several options.
REFUND
For a limited time, a Contract may be returned for a refund in accordance with
the terms of its "free look" provision. See SHORT-TERM CANCELLATION RIGHT OR
"FREE LOOK", page 10.
----------
THE REPLACEMENT OF LIFE INSURANCE IS GENERALLY NOT IN YOUR BEST INTEREST. IN
MOST CASES, IF YOU REQUIRE ADDITIONAL COVERAGE, THE BENEFITS OF YOUR EXISTING
CONTRACT CAN BE PROTECTED BY PURCHASING ADDITIONAL INSURANCE OR A SUPPLEMENTAL
CONTRACT. IF YOU ARE CONSIDERING REPLACING A CONTRACT, YOU SHOULD COMPARE THE
BENEFITS AND COSTS OF SUPPLEMENTING YOUR EXISTING CONTRACT WITH THE BENEFITS AND
COSTS OF PURCHASING THE CONTRACT DESCRIBED IN THIS PROSPECTUS AND YOU SHOULD
CONSULT A QUALIFIED TAX ADVISER.
THIS PROSPECTUS MAY ONLY BE OFFERED IN JURISDICTIONS IN WHICH THE OFFERING IS
LAWFUL. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH
THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND ITS STATEMENT OF
ADDITIONAL INFORMATION.
In the following pages of this prospectus we describe in much greater detail all
of the provisions of the Contract. The description is preceded by two sets of
tables. The first set provides, in condensed form, financial information about
the portfolios of the Fund, beginning on the date each of them was first
established. The second set shows what the cash surrender values and death
benefits would be under a Contract issued on a hypothetical person, making
certain assumptions. These tables show generally how the values under the
Contract would vary, with different investment performances.
4
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS OF THE PORTFOLIOS OF
THE FUND
The tables that follow provide information about the annual investment income,
capital appreciation and expenses of the two available portfolios of the Fund
for each year, beginning with the year after the Fund was established. They are
prepared on a per share basis and therefore provide useful information about the
investment performance of each portfolio.
NOTE, HOWEVER, THAT THESE TABLES DO NOT TELL YOU HOW YOUR CONTRACT FUND WOULD
HAVE CHANGED DURING THIS PERIOD BECAUSE THEY DO NOT REFLECT THE DEDUCTIONS FROM
THE CONTRACT FUND OTHER THAN THE PORTFOLIO DEDUCTIONS.
5
- --------------------------------------------------------------------------------
<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 investment ...................... 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.
6
<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 investment ...................... 1.14 2.52 1.79 3.15 (1.02)
-------- -------- -------- -------- --------
Total from investment operations 1.72 3.11 2.36 3.71 (0.55)
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income .......... (0.59) (0.58) (0.58) (0.56) (0.45)
Distributions from net realized gains ......... (1.85) (3.04) (1.85) (0.79) (0.46)
-------- -------- -------- -------- --------
Total Distributions ...................... (2.44) (3.62) (2.43) (1.35) (0.91)
-------- -------- -------- -------- --------
Net Asset Value, end of year .................. $ 16.56 $ 17.28 $ 17.79 $ 17.86 $ 15.50
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:(b) ................... 10.24% 17.96% 13.64% 24.13% (3.16%)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in millions) ......... $5,410.0 $5,490.1 $4,896.9 $4,261.2 $3,481.5
Ratios to average net assets:
Expenses .................................... 0.61% 0.62% 0.64% 0.63% 0.66%
Net investment income ....................... 3.21% 3.02% 3.07% 3.30% 2.90%
Portfolio turnover rate ....................... 138% 227% 233% 173% 124%
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions. Total investment returns for
less than a full year are not annualized.
7
<PAGE>
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS
AND ACCUMULATED PREMIUMS
The following four tables show how a Contract's death benefit and cash surrender
values change with the investment performance of the Account. They are
"hypothetical" because they are based, in part, upon several assumptions which
are described below. All four tables assume the following:
o a Contract of a given face amount bought by a 35 year old male, non-smoker,
with no extra risks or substandard ratings, and no extra benefit riders
added to the Contract.
o the Scheduled Premium is paid on each Contract anniversary, the deduction
for taxes attributable to premiums is 3.25% and no loans are taken.
o the Contract fund has been invested in equal amounts in each of the two
available portfolios of the Fund and no portion of the Contract Fund has
been allocated to the fixed-rate option.
The first table (page T1) assumes a Contract with a $5,000 face amount has been
purchased and the second table (page T2) assumes a Contract with a $20,000 face
amount has been purchased. Both assume the current charges will continue for the
indefinite future. The third and fourth tables (pages T3 and T4) are based upon
the same assumptions except it is assumed the maximum contractual charges have
been made from the beginning.
Finally, there are four assumptions, shown separately, about the average
investment performance of the portfolios. The first is that there will be a
uniform 0% gross rate of return with the average value of the Contract Fund
uniformly adversely affected by very unfavorable investment performance. The
other three assumptions are that investment performance will be at a uniform
gross annual rate of 4%, 8% and 12%. Actual returns will fluctuate from year to
year. In addition, death benefits and cash surrender values would be different
from those shown if investment returns averaged 0%, 4%, 8% and 12% but
fluctuated from those averages throughout the years. Nevertheless, these
assumptions help show how the Contract values change with investment experience.
The first column in the following four tables (pages T1 through T4) shows the
Contract year. The second column, to provide context, shows what the aggregate
amount would be if the Scheduled Premiums had been invested to earn interest,
after taxes, at 4% compounded annually. The next four columns show the death
benefit payable at the end of each of the years shown for the four different
assumed investment returns. The last four columns show the cash surrender value
payable at the end of each of the years shown for the four different assumed
investment returns. The cash surrender values in the first 10 years reflect the
surrender charges that would be deducted if the Contract were surrendered in
those years.
A gross return (as well as the net return) is shown at the top of each column.
The gross return represents the combined effect of investment income and capital
gains and losses, realized or unrealized, of the portfolios before any reduction
is made for investment advisory fees or other Fund expenses. The net return
reflects average total annual expenses of the two portfolios of 0.59%, and the
daily deduction from the Contract Fund of 0.9% per year. Thus, based on the
above assumptions, gross investment returns of 0%, 4%, 8% and 12% are the
equivalent of net investment returns of -1.49%, 2.51%, 6.51%, and 10.51%,
respectively. The actual fees and expenses of the portfolios associated with a
particular Contract may be more or less than 0.59% and will depend on which
subaccounts are selected. The death benefits and cash surrender values shown
reflect the deduction of all expenses and charges, including monthly charges,
both from the Fund and under the Contract.
If you are considering the purchase of a variable life insurance contract from
another insurance company, you should not rely upon these tables for comparison
purposes. A comparison between two tables, each showing values for a 35 year old
man, may be useful for a 35 year old man but would be inaccurate if made for
insureds of other ages or sex. Your Pruco Life representative can provide you
with a hypothetical illustration for a person of your own age, sex, and rating
class.
8
<PAGE>
ILLUSTRATIONS
-------------
THE PRUVIDER VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT
MALE PREFERRED ISSUE AGE 35
$5,000 GUARANTEED DEATH BENEFIT
$173.70 ANNUAL PREMIUM (1)
USING CURRENT CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT (2) CASH SURRENDER VALUE (2)
---------------------------------------------------- ----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED ---------------------------------------------------- ----------------------------------------------------
POLICY AT 4% INTEREST 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR PER YEAR (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET) (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET)
------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 181 $5,003 $5,007 $ 5,011 $ 5,016 $ 0 $ 0 $ 2 $ 6
2 $ 369 $5,002 $5,013 $ 5,025 $ 5,036 $ 48 $ 59 $ 70 $ 82
3 $ 564 $5,000 $5,019 $ 5,040 $ 5,063 $101 $ 121 $ 142 $ 165
4 $ 767 $5,000 $5,024 $ 5,058 $ 5,096 $154 $ 185 $ 219 $ 257
5 $ 978 $5,000 $5,028 $ 5,079 $ 5,136 $205 $ 249 $ 300 $ 357
6 $ 1,198 $5,000 $5,034 $ 5,105 $ 5,187 $268 $ 330 $ 401 $ 483
7 $ 1,427 $5,000 $5,039 $ 5,134 $ 5,248 $331 $ 411 $ 507 $ 620
8 $ 1,665 $5,000 $5,043 $ 5,167 $ 5,320 $392 $ 494 $ 618 $ 771
9 $ 1,912 $5,000 $5,047 $ 5,205 $ 5,404 $452 $ 578 $ 736 $ 935
10 $ 2,169 $5,000 $5,050 $ 5,248 $ 5,503 $511 $ 663 $ 861 $ 1,116
15 $ 3,617 $5,000 $5,058 $ 5,544 $ 6,271 $721 $1,047 $ 1,532 $ 2,259
20 $ 5,379 $5,000 $5,048 $ 6,027 $ 9,117 $882 $1,457 $ 2,436 $ 4,122
25 $ 7,523 $5,000 $5,016 $ 6,983 $13,550 $970 $1,882 $ 3,643 $ 7,069
30 (Age 65) $10,132 $5,000 $5,000 $ 8,747 $19,608 $940 $2,304 $ 5,202 $11,661
35 $13,305 $5,000 $5,000 $10,721 $27,975 $700 $2,696 $ 7,157 $18,678
40 $17,166 $5,000 $5,000 $12,973 $39,652 $ 52 $3,019 $ 9,560 $29,220
45 $21,864 $5,000 $5,000 $15,607 $56,163 $ 0 $3,189 $12,446 $44,788
</TABLE>
(1) If premiums are paid more frequently than annually, the payments would be
$89.46 semi-annually, $46.15 quarterly or $16.90 monthly. The death
benefits and cash surrender values would be slightly different for a
Contract with more frequent premium payments.
(2) Assumes no Contract loan has been made.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rates of
inflation. The death benefit and cash surrender value for a contract would be
different from those shown if the actual rates of return averaged 0%, 4%, 8%,
and 12% over a period of years but also fluctuated above or below those averages
for individual contract years. No representations can be made by Pruco Life or
the Series Fund that these hypothetical rates of return can be achieved for any
one year or sustained over any period of time.
T1
<PAGE>
THE PRUVIDER VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT
MALE PREFERRED ISSUE AGE 35
$20,000 GUARANTEED DEATH BENEFIT
$390.90 ANNUAL PREMIUM (1)
USING CURRENT CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT (2) CASH SURRENDER VALUE (2)
---------------------------------------------------- ----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED ---------------------------------------------------- ----------------------------------------------------
POLICY AT 4% INTEREST 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR PER YEAR (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET) (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET)
------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 407 $20,012 $20,024 $20,036 $ 20,048 $ 39 $ 50 $ 62 $ 74
2 $ 829 $20,013 $20,046 $20,080 $ 20,115 $ 243 $ 276 $ 310 $ 345
3 $ 1,269 $20,002 $20,065 $20,133 $ 20,204 $ 442 $ 506 $ 573 $ 644
4 $ 1,726 $20,000 $20,082 $20,195 $ 20,317 $ 636 $ 739 $ 852 $ 974
5 $ 2,202 $20,000 $20,095 $20,266 $ 20,457 $ 833 $ 986 $ 1,157 $ 1,347
6 $ 2,697 $20,000 $20,112 $20,357 $ 20,636 $1,084 $ 1,296 $ 1,540 $ 1,820
7 $ 3,211 $20,000 $20,128 $20,461 $ 20,853 $1,335 $ 1,617 $ 1,950 $ 2,342
8 $ 3,746 $20,000 $20,141 $20,579 $ 21,111 $1,582 $ 1,944 $ 2,383 $ 2,914
9 $ 4,302 $20,000 $20,152 $20,715 $ 21,416 $1,824 $ 2,276 $ 2,839 $ 3,539
10 $ 4,881 $20,000 $20,160 $20,867 $ 21,773 $2,060 $ 2,612 $ 3,319 $ 4,225
15 $ 8,140 $20,000 $20,164 $21,949 $ 24,589 $2,900 $ 4,119 $ 5,903 $ 8,544
20 $12,106 $20,000 $20,092 $23,738 $ 34,499 $3,549 $ 5,730 $ 9,376 $ 15,597
25 $16,931 $20,000 $20,000 $26,860 $ 51,316 $3,900 $ 7,391 $14,013 $ 26,771
30 (Age 65) $22,801 $20,000 $20,000 $33,679 $ 74,293 $3,775 $ 9,031 $20,028 $ 44,181
35 $29,942 $20,000 $20,000 $41,307 $106,029 $2,801 $10,514 $27,578 $ 70,789
40 $38,631 $20,000 $20,000 $50,014 $150,318 $ 181 $11,630 $36,856 $110,771
45 $49,203 $20,000 $20,000 $60,199 $212,938 $ 0 $11,934 $48,007 $169,812
</TABLE>
(1) If premiums are paid more frequently than annually, the payments would be
$202.79 semi-annually, $103.98 quarterly or $36.59 monthly. The death
benefits and cash surrender values would be slightly different for a
Contract with more frequent premium payments.
(2) Assumes no Contract loan has been made.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rates of
inflation. The death benefit and cash surrender value for a contract would be
different from those shown if the actual rates of return averaged 0%, 4%, 8%,
and 12% over a period of years but also fluctuated above or below those averages
for individual contract years. No representations can be made by Pruco Life or
the Series Fund that these hypothetical rates of return can be achieved for any
one year or sustained over any period of time.
T2
<PAGE>
THE PRUVIDER VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT
MALE PREFERRED ISSUE AGE 35
$5,000 GUARANTEED DEATH BENEFIT
$173.70 ANNUAL PREMIUM (1)
USING MAXIMUM CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT (2) CASH SURRENDER VALUE (2)
---------------------------------------------------- ---------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED ---------------------------------------------------- ---------------------------------------------------
POLICY AT 4% INTEREST 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR PER YEAR (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET) -1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET)
------ -------------- ------------ ----------- ----------- ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 181 $5,000 $5,000 $ 5,004 $ 5,009 $ 0 $ 0 $ 0 $ 0
2 $ 369 $5,000 $5,000 $ 5,010 $ 5,022 $ 35 $ 45 $ 56 $ 67
3 $ 564 $5,000 $5,000 $ 5,018 $ 5,040 $ 82 $ 101 $ 120 $ 142
4 $ 767 $5,000 $5,000 $ 5,028 $ 5,063 $128 $ 157 $ 189 $ 224
5 $ 978 $5,000 $5,000 $ 5,040 $ 5,093 $172 $ 214 $ 261 $ 314
6 $ 1,198 $5,000 $5,000 $ 5,054 $ 5,130 $228 $ 285 $ 350 $ 426
7 $ 1,427 $5,000 $5,000 $ 5,071 $ 5,174 $283 $ 356 $ 443 $ 547
8 $ 1,665 $5,000 $5,000 $ 5,090 $ 5,228 $336 $ 428 $ 541 $ 679
9 $ 1,912 $5,000 $5,000 $ 5,112 $ 5,291 $388 $ 501 $ 643 $ 822
10 $ 2,169 $5,000 $5,000 $ 5,137 $ 5,366 $439 $ 574 $ 750 $ 979
15 $ 3,617 $5,000 $5,000 $ 5,320 $ 5,954 $603 $ 887 $1,309 $ 1,942
20 $ 5,379 $5,000 $5,000 $ 5,627 $ 7,702 $713 $1,205 $2,037 $ 3,482
25 $ 7,523 $5,000 $5,000 $ 6,110 $11,242 $742 $1,503 $2,975 $ 5,865
30 (Age 65) $10,132 $5,000 $5,000 $ 7,022 $15,936 $635 $1,744 $4,176 $ 9,477
35 $13,305 $5,000 $5,000 $ 8,452 $22,224 $284 $1,853 $5,643 $14,837
40 $17,166 $5,000 $5,000 $10,014 $30,713 $ 0 $1,672 $7,379 $22,633
45 $21,864 $5,000 $5,000 $11,750 $42,268 $ 0 $ 767 $9,370 $33,708
</TABLE>
(1) If premiums are paid more frequently than annually, the payments would be
$89.46 semi-annually, $46.15 quarterly or $16.90 monthly. The death
benefits and cash surrender values would be slightly different for a
Contract with more frequent premium payments.
(2) Assumes no Contract loan has been made.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rates of
inflation. The death benefit and cash surrender value for a contract would be
different from those shown if the actual rates of return averaged 0%, 4%, 8%,
and 12% over a period of years but also fluctuated above or below those averages
for individual contract years. No representations can be made by Pruco Life or
the Series Fund that these hypothetical rates of return can be achieved for any
one year or sustained over any period of time.
T3
<PAGE>
THE PRUVIDER VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT
MALE PREFERRED ISSUE AGE 35
$20,000 GUARANTEED DEATH BENEFIT
$390.90 ANNUAL PREMIUM (1)
USING MAXIMUM CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT (2) CASH SURRENDER VALUE (2)
---------------------------------------------------- ----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED ---------------------------------------------------- ----------------------------------------------------
POLICY AT 4% INTEREST 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR PER YEAR (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET) (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET)
------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 407 $20,000 $20,000 $20,009 $ 20,020 $ 12 $ 24 $ 35 $ 46
2 $ 829 $20,000 $20,000 $20,024 $ 20,057 $ 191 $ 222 $ 253 $ 286
3 $ 1,269 $20,000 $20,000 $20,045 $ 20,111 $ 364 $ 423 $ 485 $ 551
4 $ 1,726 $20,000 $20,000 $20,074 $ 20,186 $ 533 $ 628 $ 731 $ 843
5 $ 2,202 $20,000 $20,000 $20,110 $ 20,284 $ 705 $ 844 $ 1,000 $ 1,174
6 $ 2,697 $20,000 $20,000 $20,154 $ 20,408 $ 925 $1,117 $ 1,338 $ 1,591
7 $ 3,211 $20,000 $20,000 $20,208 $ 20,561 $1,145 $1,398 $ 1,697 $ 2,050
8 $ 3,746 $20,000 $20,000 $20,271 $ 20,746 $1,360 $1,683 $ 2,074 $ 2,549
9 $ 4,302 $20,000 $20,000 $20,345 $ 20,968 $1,569 $1,970 $ 2,469 $ 3,092
10 $ 4,881 $20,000 $20,000 $20,431 $ 21,232 $1,772 $2,260 $ 2,883 $ 3,683
15 $ 8,140 $20,000 $20,000 $21,070 $ 23,346 $2,433 $3,487 $ 5,024 $ 7,300
20 $12,106 $20,000 $20,000 $22,169 $ 28,945 $2,881 $4,725 $ 7,807 $ 13,086
25 $16,931 $20,000 $20,000 $23,925 $ 42,300 $2,994 $5,874 $11,387 $ 22,068
30 (Age 65) $22,801 $20,000 $20,000 $26,854 $ 60,009 $2,566 $6,774 $15,970 $ 35,686
35 $29,942 $20,000 $20,000 $32,365 $ 83,731 $1,153 $7,105 $21,608 $ 55,902
40 $38,631 $20,000 $20,000 $38,386 $115,758 $ 0 $6,187 $28,287 $ 85,303
45 $49,203 $20,000 $20,000 $45,078 $159,345 $ 0 $2,146 $35,948 $127,073
</TABLE>
(1) If premiums are paid more frequently than annually, the payments would be
$202.79 semi-annually, $103.98 quarterly or $36.59 monthly. The death
benefits and cash surrender values would be slightly different for a
Contract with more frequent premium payments.
(2) Assumes no Contract loan has been made.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rates of
inflation. The death benefit and cash surrender value for a contract would be
different from those shown if the actual rates of return averaged 0%, 4%, 8%,
and 12% over a period of years but also fluctuated above or below those averages
for individual contract years. No representations can be made by Pruco Life or
the Series Fund that these hypothetical rates of return can be achieved for any
one year or sustained over any period of time.
T4
<PAGE>
GENERAL INFORMATION ABOUT PRUCO LIFE INSURANCE COMPANY, PRUCO LIFE PRUVIDER
VARIABLE APPRECIABLE ACCOUNT AND THE
FIXED RATE OPTION
PRUCO LIFE INSURANCE COMPANY
Pruco Life Insurance Company ("Pruco Life", "us", or "we") is a stock life
insurance company, organized in 1971 under the laws of the State of Arizona. It
is licensed to sell life insurance and annuities in the District of Columbia,
Guam, and in all states except New York. Pruco Life is a wholly-owned subsidiary
of Prudential, a mutual insurance company founded in 1875 under the laws of the
State of New Jersey. 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 plan of reorganization, which hasn't been developed and approved, would
provide the criteria for determining eligibility and the methodology for
allocating shares or other consideration to those who would be eligible.
Generally, the amount of shares or other consideration eligible customers would
receive would be based on a number of factors, including the types, amounts and
issue years of their policies. As a general rule, owners of Prudential-issued
insurance policies and annuity contracts would be eligible, while mutual fund
customers and customers of the Company's subsidiaries, such as the Pruco Life
insurance companies, would not be. It has not yet been determined whether any
exceptions to that general rule will be made with respect to policyholders and
contract owners of Prudential's subsidiaries.
As of December 31, 1998, Prudential has invested over $442 million in Pruco Life
in connection with Pruco Life's organization and operation. Prudential may make
additional capital contributions to Pruco Life as needed to enable it to meet
its reserve requirements and expenses. Prudential is under no obligation to make
such contributions and its assets do not back the benefits payable under the
Contract. Pruco Life's consolidated financial statements begin on page B1 and
should be considered only as bearing upon Pruco Life's ability to meet its
obligations under the Contracts.
PRUCO LIFE PRUVIDER VARIABLE APPRECIABLE ACCOUNT
Pruco Life PRUvider Variable Appreciable Account was established on July 10,
1992 under Arizona law as a separate investment account. The Account meets the
definition of a "separate account" under the federal securities laws. The
Account holds assets that are segregated from all of Pruco Life's other assets.
The obligations to Contract owners and beneficiaries arising under the Contract
are general corporate obligations of Pruco Life. Pruco Life is also the legal
owner of the assets in the Account. Pruco Life will maintain assets in the
Account with a total market value at least equal to the reserve and other
liabilities relating to the variable benefits attributable to the Account. These
assets may not be charged with liabilities which arise from any other business
Pruco Life conducts. In addition to these assets, the Account's assets may
include funds contributed by Pruco Life to commence operation of the Account and
may include accumulations of the charges Pruco Life makes against the Account.
From time to time these additional assets will be transferred to Pruco Life's
general account. Before making any such transfer, Pruco Life will consider any
possible adverse impact the transfer might have on the Account.
The Account is a unit investment trust, which is a type of investment company.
It is registered with the Securities and Exchange Commission ("SEC") under the
Investment Company Act of 1940 ("1940 Act"). This does not involve any
supervision by the SEC of the management, investment policies, or practices of
the Account. For state law purposes, the Account is treated as a part or
division of Pruco Life.
9
<PAGE>
There are currently two subaccounts within the Account, one of which invests in
the Conservative Balanced Portfolio and the other of which invests in the
Flexible Managed Portfolio of the Fund. We may add additional subaccounts in the
future. The Account's financial statements begin on page A1.
THE FIXED-RATE OPTION
BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN THE FIXED-RATE
OPTION UNDER THE CONTRACT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 AND THE GENERAL ACCOUNT HAS NOT BEEN REGISTERED AS AN INVESTMENT COMPANY
UNDER THE INVESTMENT COMPANY ACT OF 1940. ACCORDINGLY, INTERESTS IN THE
FIXED-RATE OPTION ARE NOT SUBJECT TO THE PROVISIONS OF THESE ACTS, AND PRUCO
LIFE HAS BEEN ADVISED THAT THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION
HAS NOT REVIEWED THE DISCLOSURE IN THIS PROSPECTUS RELATING TO THE FIXED-RATE
OPTION. ANY INACCURATE OR MISLEADING DISCLOSURE REGARDING THE FIXED-RATE OPTION
MAY, HOWEVER, BE SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF FEDERAL
SECURITIES LAWS.
You may choose to allocate, either initially or by transfer, all or part of your
Contract Fund to the fixed-rate option. This amount becomes part of Pruco Life's
general account. Pruco Life's general account consists of all assets owned by
Pruco Life other than those in the Account and in other separate accounts that
have been or may be established by Pruco Life. Subject to applicable law, Pruco
Life has sole discretion over the investment of the general account assets.
Contract owners do not share in the investment experience of those assets.
Instead, Pruco Life guarantees that the part of the Contract Fund allocated to
the fixed-rate option will accrue interest daily at an effective annual rate
that Pruco Life declares periodically. This rate may not be less than an
effective annual rate of 4%.
Currently, the following steps are taken for crediting interest rates: (1)
declared interest rates remain in effect from the date money is allocated to the
fixed-rate option until the Monthly date in the same month in the following year
(see CONTRACT DATE on page 13); thereafter, a new crediting rate will be
declared each year and will remain in effect for the calendar year. Pruco Life
reserves the right to change this practice. Pruco Life is not obligated to
credit interest at a higher rate than 4%, although we may do so. Different
crediting rates may be declared for different portions of the Contract Fund
allocated to the fixed-rate option. At least annually and on request, you will
be advised of the interest rates that currently apply to your Contract. The term
Monthly Date means the day of each month that is the same as the Contract Date.
Transfers from the fixed-rate option are subject to strict limits. See
Transfers, page 15. The payment of any cash surrender value attributable to the
fixed-rate option may be delayed up to six months. See When Proceeds Are Paid,
page 19.
DETAILED INFORMATION FOR CONTRACT OWNERS
REQUIREMENTS FOR ISSUANCE OF A CONTRACT
Generally, the Contract may be issued on insureds below the age of 76. You may
apply for a minimum initial guaranteed death benefit of $5,000; the maximum you
may apply for is $25,000. Proposed insureds, 21 years of age or less, may apply
for a minimum initial guaranteed death benefit of $10,000. Before issuing any
Contract, Pruco Life requires evidence of insurability, which may include a
medical examination. Non-smokers who meet preferred underwriting requirements
are offered the most favorable premium rate. Pruco Life charges a higher premium
if an extra mortality risk is involved. These are the current underwriting
requirements. We reserve the right to change these requirements on a
non-discriminatory basis.
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK"
Generally, you may return the Contract for a refund within 10 days after you
receive it. Some states allow a longer period of time during which a Contract
may be returned for a refund. You can request a refund by mailing or delivering
the Contract to the representative who sold it or to the Home Office specified
in the Contract. A Contract returned according to this provision shall be deemed
void from the beginning. You will then receive a refund of all premium payments
made, plus or minus any change due to investment experience. However, if
applicable law so requires and if you exercise your short-term cancellation
right, you will receive a refund of all premium payments made, with no
adjustment for investment experience.
10
<PAGE>
CONTRACT FEES AND CHARGES
This section provides a more detailed description of each charge that is
described briefly in the chart on page 2.
In several instances we use the terms "maximum charge" and "current charge." The
"maximum charge," in each instance, is the highest charge that Pruco Life is
entitled to make under the Contract. The "current charge" is the lower amount
that we are now charging. If circumstances change, we reserve the right to
increase each current charge, up to the maximum charge, without giving any
advance notice.
A Contract owner may add several "riders" to the Contract which provide
additional benefits and are charged for separately. The statement and
description of charges that follows assumes there are no riders to the Contract.
DEDUCTIONS FROM PREMIUMS
(a) Pruco Life deducts a charge for taxes attributable to premiums from each
premium payment. That charge is currently made up of two parts. The first part
is a charge for state and local premium-based taxes. The tax rate varies from
state to state, generally ranging from 0.75% to 5% (but in some instances may
exceed 5%) of the premium received by Pruco Life. The amount charged may be more
than Pruco Life actually pays. The second part is a charge for federal income
taxes measured by premiums, equal to 1.25% of the premium. We believe that this
charge is a reasonable estimate of an increase in its federal income taxes
resulting from a 1990 change in the Internal Revenue Code. It is intended to
recover this increased tax. During 1998, 1997, and 1996, we received a total of
approximately $1,571,427, $1,668,969, and $2,187,535, respectively, in charges
for taxes attributable to premiums.
(b) Pruco Life deducts a charge of $2 from each premium payment to cover the
cost of collecting and processing premiums. Thus, if you pay premiums annually,
this charge will be $2 per year. If you pay premiums monthly, the charge will be
$24 per year. If you pay premiums more frequently, for example under a payroll
deduction plan with your employer, the charge may be more than $24 per year.
During 1998, 1997, and 1996, we received a total of approximately $1,244,849,
$1,239,689, and $1,155,021, respectively, in processing charges.
Deductions from Portfolios
Pruco Life deducts an investment advisory fee daily from each portfolio at a
rate, on an annualized basis, of 0.55% for the Conservative Balanced Portfolio
and 0.60% for the Flexible Managed Portfolio.
We pay expenses incurred in conducting the investment operations of the
portfolios (such as investment advisory fees, custodian fees and preparation and
distribution of annual reports) out of the portfolio's income. These expenses
also vary by portfolio. The total expenses of each portfolio for the year 1998,
expressed as a percentage of the average assets during the year, are as follows:
- --------------------------------------------------------------------------------
ADVISORY OTHER TOTAL
PORTFOLIO FEE EXPENSES EXPENSES
- --------------------------------------------------------------------------------
Conservative Balanced 0.55% 0.02% 0.57%
Flexible Managed 0.60% 0.01% 0.61%
- --------------------------------------------------------------------------------
MONTHLY DEDUCTIONS FROM CONTRACT FUND
Pruco Life deducts the following monthly charges proportionately from the dollar
amounts held in each of the chosen investment option[s].
(a) Pruco Life deducts a sales charge, often called a "sales load", to pay part
of the costs of selling the Contracts, including commissions, advertising, and
the printing and distribution of prospectuses and sales literature. The charge
is equal to 0.5% of the "primary annual premium." The primary annual premium is
equal to the Scheduled Premium that would be payable if premiums were being paid
annually, less the two deductions from premiums (taxes attributable to premiums
and the $2 processing charge), and less the $6 part of the monthly deduction
described in (c) below, the $0.30 per $1,000 of face amount for Contracts with a
face amount of less than $10,000, and any extra premiums for riders or
substandard risks. The sales load is charged whether the Contract owner is
paying premiums
11
<PAGE>
annually or more frequently. It is lower on Contracts issued on insureds over 60
years of age. To summarize, for most Contracts, this charge is somewhat less
than 6% of the annual Scheduled Premium.
There is a second sales load, which will be charged only if a Contract lapses or
is surrendered before the end of the 10th Contract year. It is often described
as a contingent deferred sales load ("CDSL") and is described later under
SURRENDER OR WITHDRAWAL CHARGES, page 13. During 1998, 1997, and 1996, we
received a total of approximately $3,192,589, $3,998,082, and $3,685,080,
respectively, in sales load charges.
(b) Pruco Life deducts a charge of not more than $0.01 per $1000 of face amount
of insurance to compensate for the risk we assume in guaranteeing that, no
matter how unfavorable investment experience may be, the death benefit will
never be less than the guaranteed minimum death benefit, so long as Scheduled
Premiums are paid on or before the due date or during the grace period. This
charge will not be made if the Contract has been continued inforce pursuant to
an option on lapse. During 1998, 1997, and 1996, we received a total of
approximately $153,083, $158,412, and $147,942, respectively, for this risk
charge.
(c) Pruco Life deducts an administrative charge of $6 plus up to $0.19 per
$1,000 of face amount of insurance. Currently, on a non-guaranteed basis, this
charge is reduced from $0.19 to $0.09 per $1,000. The charge is intended to pay
for processing claims, keeping records, and communicating with Contract owners.
If premiums are paid by automatic transfer under the Pru-Matic Plan, as
described on page 14, the current charge is further reduced to $0.07 per $1,000
of face amount. There is an additional charge of $0.30 per $1,000 of face amount
if the face amount of the Contract is less than $10,000. This monthly
administrative charge will not be made if the Contract has been continued
inforce pursuant to an option on lapse. During 1998, 1997, and 1996, we received
a total of approximately $8,434,299, $8,726,448, and $8,169,343, respectively,
in monthly administrative charges.
(d) Pruco Life deducts a mortality charge that is intended to be used to pay
death benefits. When an insured dies, the amount payable to the beneficiary is
larger than the Contract Fund and significantly larger if the insured dies in
the early years of a Contract. The mortality charges collected from all Contract
owners enable us to pay the death benefit for the few insureds who die. We
determine the maximum mortality charge by multiplying the "net amount at risk"
under a Contract (the amount by which the Contract's death benefit, computed as
if there were neither riders nor Contract debt, exceeds the Contract Fund) by a
rate based upon the insured's current attained age and sex (except where unisex
rates apply) and the anticipated mortality for that class of persons. The
anticipated mortality is based upon mortality tables published by The National
Association of Insurance Commissioners called the Non-Smoker/Smoker 1980 CSO
Tables. We may determine that a lesser amount than that called for by these
mortality tables will be adequate for insureds of particular ages and may thus
make a lower mortality charge for such persons. Any lower current mortality
charges are not applicable to Contracts inforce pursuant to an option on lapse.
See LAPSE AND REINSTATEMENT, page 17.
(e) If a rider is added to the basic Contract, or if an insured is in a
substandard risk classification (for example, a person in a hazardous
occupation), we increase the Scheduled Premium and deduct additional charges
monthly.
(f) Pruco Life may deduct a charge to cover federal, state or local taxes (other
than "taxes attributable to premiums" described above) that are imposed upon the
operations of the Account. At present no such taxes are imposed and no charge is
made. We will review the question of a charge to the Account for company federal
income taxes periodically. We may make such a charge in future years for any
federal income taxes that would be attributable to the Account.
Under current law, Pruco Life may incur state and local taxes (in addition to
premium taxes) in several states. At present, these taxes are not significant
and they are not charged against the Account. If there is a material change in
the applicable state or local tax laws, the imposition of any such taxes upon
Pruco Life that are attributable to the Account may result in a corresponding
charge against the Account.
DAILY DEDUCTION FROM THE CONTRACT FUND
Each day Pruco Life deducts a charge from the assets of each of the subaccounts
in an amount equivalent to an effective annual rate of up to 0.9%. This charge
is intended to compensate us for assuming mortality and expense risks under the
Contract. The mortality risk assumed is that insureds may live for shorter
periods of time than we estimated when we determined what mortality charge to
make. The expense risk assumed is that expenses incurred in issuing and
administering the Contract will be greater than we estimated in fixing our
administrative charges. This charge is not assessed against amounts allocated to
the fixed-rate option. During 1998, 1997, and 1996, we received a total of
approximately $2,044,132, $1,776,910, and $1,391,951, respectively, in mortality
and expense risk charges.
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<PAGE>
SURRENDER OR WITHDRAWAL CHARGES
(a) Pruco Life charges an additional contingent deferred sales load (the CDSL)
if a Contract lapses or is surrendered during the first 10 Contract years. No
such charge is applicable to the death benefit, no matter when it may become
payable. The maximum contingent deferred charge is equal to 50% of the first
year's primary annual premium upon Contracts that lapse or are surrendered
during the first five Contract years. That percentage is reduced uniformly on a
daily basis starting from the Contract's fifth anniversary until it disappears
on the 10th anniversary. Other important limitations apply. They are described
more fully in the statement of additional information. The amount of this charge
can be more easily understood by reference to the following table which shows
the sales loads that would be paid by a 35 year old man with $20,000 face amount
of insurance, both through the monthly deductions from the Contract Fund
described above and upon the surrender of the Contract.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
CUMULATIVE
SURRENDER, CUMULATIVE CUMULATIVE CONTINGENT TOTAL SALES TOTAL SALES LOAD AS
LAST DAY OF SCHEDULED PREMIUMS SALES LOAD DEDUCTED DEFERRED SALES LOAD PER-
YEAR NO. PAID FROM CONTRACT FUND LOAD* CENTAGE OF SCHEDULED
PREMIUMS PAID**
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 $ 390.90 $ 18.24 $ 87.22 $105.46 26.98%
2 781.80 36.48 104.16 140.64 17.99%
3 1,172.70 54.72 121.10 175.82 14.99%
4 1,563.60 72.96 138.04 211.00 13.49%
5 1,954.50 91.20 146.55 237.75 12.16%
6 2,345.40 109.44 121.80 231.24 9.86%
7 2,736.30 127.68 91.40 219.08 8.01%
8 3,127.20 145.92 60.80 206.72 6.61%
9 3,518.10 164.16 30.40 194.56 5.53%
10 3,909.00 182.40 0.00 182.40 4.67%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
* The maximum CDSL is $152.20 for years one through five; $121.80 for year
six; $91.40 for year seven; $60.80 for year eight; $30.40 for year nine;
and zero for year 10.
** The percentages shown in the last column will not be appreciably different
for insureds of different ages.
(b) Pruco Life deducts an administrative charge of $5 per $1,000 of face amount
of insurance upon lapse or surrender to cover the cost of processing
applications, conducting medical examinations, determining insurability and the
insured's rating class, and establishing records. However, this charge is
reduced beginning on the Contract's fifth anniversary and declines daily at a
constant rate until it disappears entirely on the 10th Contract anniversary. We
are currently allowing partial surrenders of the Contract, but we reserve the
right to cancel this administrative practice. If the Contract is partially
surrendered during the first 10 years, we deduct a proportionate amount of the
charge from the Contract Fund. During 1998, 1997, and 1996, we received a total
of approximately $222,698, $295,205, and $269,611, respectively, for surrendered
or lapsed Contracts. Surrender of all or part of a Contract may have tax
consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 21.
TRANSACTION CHARGES
Pruco Life will make an administrative processing charge equal to the lesser of
$15 or 2% of the amount withdrawn in connection with each withdrawal of excess
cash surrender value of a Contract. This charge is described in more detail in
the statement of additional information.
CONTRACT DATE
When the first premium payment is paid with the application for a Contract, the
Contract Date will ordinarily be the later of the date of the application date
and the medical examination date. In most cases no medical examination will be
necessary. If the first premium is not paid with the application, the Contract
Date will ordinarily be the date the first premium is paid and the Contract is
delivered. It may be advantageous for a Contract owner to have an earlier
Contract Date when that will result in Pruco Life using a lower issue age in
determining the Scheduled Premium
13
<PAGE>
amount. Pruco Life will permit a Contract to be back-dated but only to a date
not earlier than six months prior to the date of the application. Pruco Life
will require the payment of all premiums that would have been due had the
application date coincided with the back-dated Contract Date. The death benefit
and cash surrender value under the Contract will be equal to what they would
have been had the Contract been issued on the Contract Date, all Scheduled
Premiums been received on their due dates, and all Contract charges been made.
PREMIUMS
The Contract provides for a Scheduled Premium which, if paid when due or within
a 61 day grace period, ensures that the Contract will not lapse. If you pay
premiums other than on a monthly basis, you will receive a notice that a premium
is due about three weeks before each due date. If you pay premiums monthly, you
will receive a book each year with 12 coupons that will serve as a reminder.
With Pruco Life's consent, you may change the frequency of premium payments.
You may elect to have monthly premiums paid automatically under the "Pru-Matic
Premium Plan" by pre-authorized transfers from a bank checking account. If you
select the Pru-Matic Premium Plan, one of the current monthly charges will be
reduced. See MONTHLY DEDUCTIONS FROM CONTRACT FUND, page 11. Some Contract
owners may also be eligible to have monthly premiums paid by pre-authorized
deductions from an employer's payroll.
The following table shows, for two face amounts, representative preferred and
standard annual premium amounts under Contracts issued on insureds who are not
substandard risks. These premiums do not reflect any additional riders or
supplementary benefits.
- --------------------------------------------------------------------------------
$10,000 FACE AMOUNT $20,000 FACE AMOUNT
-------------------------------------------------------------
PREFERRED STANDARD PREFERRED STANDARD
- --------------------------------------------------------------------------------
Male, age 35 $233.70 $274.01 $390.90 $ 471.52
at issue
- --------------------------------------------------------------------------------
Female, age 45 $278.04 $308.53 $479.59 $ 540.57
at issue
- --------------------------------------------------------------------------------
Male, age 55 $450.96 $562.17 $825.43 $1047.86
at issue
- --------------------------------------------------------------------------------
The following table compares annual and monthly premiums for insureds who are in
the preferred rating class. Note that in these examples the sum of 12 monthly
premiums for a particular Contract is approximately 110% to 116% of the annual
Scheduled Premium for that Contract.
- --------------------------------------------------------------------------------
$10,000 FACE AMOUNT $20,000 FACE AMOUNT
-------------------------------------------------------------
MONTHLY ANNUAL MONTHLY ANNUAL
- --------------------------------------------------------------------------------
Male, age 35 $22.43 $233.70 $36.59 $390.90
at issue
- --------------------------------------------------------------------------------
Female, age 45 $26.46 $278.04 $44.65 $479.59
at issue
- --------------------------------------------------------------------------------
Male, age 55 $41.96 $450.96 $75.66 $825.43
at issue
- --------------------------------------------------------------------------------
A significant feature of this Contract is that it permits you to pay greater
than Scheduled Premiums. You may make unscheduled premium payments occasionally
or on a periodic basis. If you wish, you may select a higher contemplated
premium than the Scheduled Premium. Pruco Life will then bill you for the chosen
premium. In general, the regular payment of higher premiums will result in
higher cash surrender values and higher death benefits. Conversely, a Scheduled
Premium payment does not need to be made if the Contract Fund is large enough to
enable the charges due under the Contract to be made without causing the
Contract to lapse. SEE LAPSE AND
14
<PAGE>
REINSTATEMENT, page 17. The payment of premiums in excess of Scheduled Premiums
may cause the Contract to become a Modified Endowment Contract for federal
income tax purposes. If this happens, loans and other distributions which would
otherwise not be taxable events may be subject to federal income taxation. See
TAX TREATMENT OF CONTRACT BENEFITS, page 21.
Pruco Life will generally accept any premium payment of at least $25. Pruco Life
reserves the right to limit unscheduled premiums to a total of $5,000 in any
Contract year, and to refuse to accept premiums that would immediately result in
more than a dollar-for-dollar increase in the death benefit. See How a
Contract's Death Benefit Will Vary, page 16. The privilege of making large or
additional premium payments offers a way of investing amounts which accumulate
without current income taxation, but again, there are tax consequences if the
Contract becomes a Modified Endowment Contract. See Tax Treatment of Contract
Benefits, page 21.
ALLOCATION OF PREMIUMS
On the Contract Date, Pruco Life deducts a $2 processing charge and the charge
for taxes attributable to premiums from the initial premium, and deducts the
first monthly charges. The remainder of the initial premium is allocated on the
Contract Date among the subaccount[s] or the fixed-rate option according to the
allocation you specified in the application form. The invested portion of any
part of the initial premium in excess of the Scheduled Premium is generally
placed in the selected investment option[s] on the date of receipt at a Home
Office, but not earlier than the Contract Date. If Pruco Life receives the
initial premium prior to the Contract Date, there will be a period during which
it will not be invested. Each subsequent premium payment, after the deductions
from premiums, will be invested as of the end of the valuation period when
received at a Home Office in accordance with the allocation previously
designated. A valuation period is the period of time from one determination of
the value of the amount invested in a subaccount to the next. Such
determinations are made when the net asset values of the portfolios are
calculated, which is generally 4:15 p.m. Eastern time on each day during which
the New York Stock Exchange is open. Provided the Contract is not in default,
you may change the way in which subsequent premiums are allocated by giving
written notice to a Home Office. You may also change the way in which subsequent
premiums are allocated by telephoning a Home Office, provided you are enrolled
to use the Telephone Transfer system. There is no charge for reallocating future
premiums. If any part of the invested portion of a premium is allocated to a
particular investment option, that portion must be at least 10% on the date the
allocation takes effect. All percentage allocations must be in whole numbers.
For example, 33% can be selected but 33 1/3% cannot. Of course, the total
allocation of all selected investment options must equal 100%.
TRANSFERS
If the Contract is not in default, or if the Contract is inforce as variable
reduced paid-up insurance (see LAPSE AND REINSTATEMENT, page 17), you may, up to
four times in each Contract year, transfer amounts from one subaccount to the
other subaccount or to the fixed-rate option. Currently, you may make additional
transfers with our consent without charge. All or a portion of the amount
credited to a subaccount may be transferred.
In addition, the total amount credited to a Contract held in the subaccounts may
be transferred to the fixed-rate option at any time during the first two
Contract years. If you wish to convert your variable Contract to a fixed-benefit
Contract in this manner, you must request a complete transfer of funds to the
fixed-rate option and change your allocation instructions regarding any future
premiums.
Transfers between subaccounts will take effect as of the end of the valuation
period (usually the business day) in which a proper transfer request is received
at a Home Office. The request may be in terms of dollars, such as a request to
transfer $1,000 from one subaccount to the other, or may be in terms of a
percentage reallocation between subaccounts. In the latter case, as with premium
reallocations, the percentages must be in whole numbers. You may transfer
amounts by proper written notice to a Home Office or by telephone, if you are
enrolled to use the Telephone Transfer System. You will automatically be
enrolled to use the Telephone Transfer System unless the Contract is jointly
owned or you elect not to have this privilege. Telephone transfers may not be
available on Contracts that are assigned, depending on the terms of the
assignment. We will use reasonable procedures, such as asking you for certain
personal information provided on your application for insurance, to confirm that
instructions given by telephone are genuine. Pruco Life will not be held liable
for following telephone instructions that we reasonably believe to be genuine.
Pruco Life cannot guarantee that you will be able to get through to complete a
telephone transfer during peak periods such as periods of drastic economic or
market change.
Transfers from the fixed-rate option to the subaccounts are currently permitted
once each Contract year and only during the 30-day period beginning on the
Contract anniversary. The maximum amount which may be transferred out
15
<PAGE>
of the fixed-rate option each year is currently the greater of: (a) 25% of the
amount in the fixed-rate option, or (b) $2,000. Such transfer requests received
prior to the Contract anniversary will be effective on the Contract anniversary.
Transfer requests received within the 30-day period beginning on the Contract
anniversary will be effective as of the end of the valuation period in which a
proper transfer request is received at a Home Office. Pruco Life may change
these limits in the future.
HOW THE CONTRACT FUND CHANGES WITH INVESTMENT EXPERIENCE
As explained earlier, after the 10th Contract year, there will no longer be a
surrender charge and, if there is no Contract loan, the cash surrender value
will be equal to the Contract Fund. This section, therefore, also describes how
the cash surrender value of the Contract will change with investment experience.
On the Contract Date, the Contract Fund value is the initial premium less the
deductions from premiums and the first monthly deductions. See Contract Fees and
Charges, page 11. This amount is placed in the subaccounts you choose and/or the
fixed rate option. Thereafter, the Contract Fund value changes daily, reflecting
increases or decreases in the value of the subaccount assets, and interest
credited on any amounts allocated to the fixed-rate option. It is also reduced
by the daily asset charge for mortality and expense risks assessed against the
subaccounts. The Contract Fund value also increases to reflect the receipt of
additional premium payments and is decreased by the monthly deductions.
A Contract's cash surrender value on any date will be the Contract Fund value
reduced by the withdrawal charges, if any, and by any Contract debt. Upon
request, Pruco Life will tell you the cash surrender value of your Contract. It
is possible, although highly unlikely, that the cash surrender value of a
Contract could decline to zero because of unfavorable investment performance,
even if you continue to pay Scheduled Premiums when due.
The tables on pages T1 through T4 of this prospectus (immediately following page
8) illustrate what the death benefit and cash surrender values would be for a
representative Contract, assuming uniform hypothetical investment results in the
selected portfolio[s], and also provide information about the aggregate premiums
payable under the Contract.
HOW A CONTRACT'S DEATH BENEFIT WILL VARY
The death benefit will change with investment experience. The precise way in
which that will occur is complicated and is described in the statement of
additional information. In general, and assuming the optional paid-up benefit is
not in effect (see Paid-Up Insurance Option on page 18), if the net investment
performance is 4% per year or higher and Scheduled Premiums are paid when due,
the death benefit will increase. If the net investment performance is below 4%,
the death benefit will decrease, but Pruco Life guarantees that it will not
decrease below the face amount of insurance. Any unfavorable experience must be
offset by favorable experience, however, before the death benefit begins to
increase again.
If the Contract is kept inforce for several years and if investment performance
is relatively favorable, the Contract Fund value may grow to the point where the
death benefit must be increased to comply with certain provisions of the
Internal Revenue Code, which require that the death benefit always be greater
than the Contract Fund value. The required difference between the death benefit
and Contract Fund value is higher at younger ages than at older ages. A precise
description is in the statement of additional information.
CONTRACT LOANS
You may borrow from Pruco Life up to the "loan value" of the Contract, using the
Contract as the only security for the loan. The loan value is equal to (1) 90%
of an amount equal to the portion of the Contract Fund value attributable to the
subaccounts and to any prior loan[s] supported by the subaccounts, minus the
portion of any charges attributable to the subaccounts that would be payable
upon an immediate surrender; plus (2) 100% of an amount equal to the portion of
the Contract Fund value attributable to the fixed-rate option and to any prior
loan[s] supported by the fixed-rate option, minus the portion of any charges
attributable to the fixed-rate option that would be payable upon an immediate
surrender. The minimum amount that may be borrowed at any one time is $200
unless the proceeds are used to pay premiums on the Contract.
Interest charged on a loan accrues daily at a fixed effective annual rate of
5.5%. Interest payments on any loan are due at the end of each Contract year. If
interest is not paid when due, it is added to the principal amount of the loan.
The Contract debt is the amount of all outstanding loans plus any interest
accrued but not yet due. If at any time the Contract debt exceeds what the cash
surrender value would be if there were no Contract debt, Pruco Life will notify
16
<PAGE>
you of its intent to terminate the Contract in 61 days, within which time you
may repay all or enough of the loan to obtain a positive cash surrender value
and thus keep the Contract inforce for a limited time. If you fail to keep the
Contract inforce, the amount of unpaid Contract debt will be treated as a
distribution which may be taxable. See TAX TREATMENT OF CONTRACT BENEFITS, page
21, and LAPSE AND REINSTATEMENT, page 17.
When a loan is made, an amount equal to the loan proceeds (the "loan amount") is
transferred out of the subaccounts and/or the fixed-rate option, as applicable.
The reduction will normally be made in the same proportions as the value in each
subaccount and the fixed-rate option bears to the total value of the Contract.
While a loan is outstanding, the amount that was so transferred will continue to
be treated as part of the Contract Fund but it will be credited with the assumed
rate of return of 4% rather than with the actual rate of return of the
subaccount[s] or fixed-rate option.
A loan will not affect the amount of the premiums due. Should the death benefit
become payable while a loan is outstanding, or should the Contract be
surrendered, any Contract debt will be deducted from the death benefit or the
cash surrender value.
A loan will have an effect on a Contract's cash surrender value and may have an
effect on the death benefit, even if the loan is fully repaid, because the
investment results of the selected options will apply only to the amount
remaining invested under those options. The longer the loan is outstanding, the
greater the effect is likely to be. The effect could be favorable or
unfavorable. If investment results are greater than the rate being credited upon
the amount of the loan while the loan is outstanding, values under the Contract
will not increase as rapidly as they would have if no loan had been made. If
investment results are below that rate, Contract values will be higher than they
would have been had no loan been made. A loan that is repaid will not have any
effect upon the guaranteed minimum death benefit.
Consider the Contract issued on a 35 year old male insured illustrated in the
table on page T2 with an 8% gross investment return. Assume a $1,500 loan was
made under this Contract at the end of Contract year eight and repaid at the end
of Contract year 10 and loan interest was paid when due. Upon repayment, the
cash surrender value would be $3,242.58. This amount is lower than the cash
surrender value shown on that page for the end of Contract year 10 because the
loan amount was credited with the 4% assumed rate of return rather than the
6.51% net return for the designated subaccount[s] resulting from the 8% gross
return in the underlying Fund. Loans from Modified Endowment Contracts may be
treated for tax purposes as distributions of income. See TAX TREATMENT OF
CONTRACT BENEFITS, page 21.
SURRENDER OF A CONTRACT
You may surrender a Contract, in whole or in part, for its cash surrender value
while the insured is living. To surrender a Contract, in whole or in part, you
must deliver or mail it, together with a written request in a form that meets
Pruco Life's needs, to a Home Office. The cash surrender value of a surrendered
or partially surrendered Contract (taking into account the deferred sales and
administrative charges, if any) will be determined as of the end of the
valuation period in which such a request is received in a Home Office. Surrender
of all or part of a Contract may have tax consequences. See Tax Treatment of
Contract Benefits, page 21.
LAPSE AND REINSTATEMENT
As explained earlier, if Scheduled Premiums are paid on or before each due date,
or within the grace period after each due date, and there are no withdrawals or
outstanding loans, a Contract will remain inforce even if the investment results
of that Contract's variable investment option[s] have been so unfavorable that
the Contract Fund has decreased to zero.
In addition, even if a Scheduled Premium is not paid, the Contract will remain
inforce as long as the Contract Fund on any Monthly Date is equal to or greater
than the Tabular Contract Fund Value on the following Monthly Date. (A Table of
Tabular Contract Fund Values is included in the Contract; the values increase
with each year the Contract remains inforce.) This could occur because of such
factors as favorable investment experience, deduction of current rather than
maximum charges, or the previous payment of greater than Scheduled Premiums.
However, if a Scheduled Premium is not paid, and the Contract Fund is
insufficient to keep the Contract inforce, the Contract will go into default.
Should this happen, Pruco Life will send the Contract owner a notice of default
setting forth the payment necessary to keep the Contract inforce on a premium
paying basis. This payment must be received at a Home Office within the 61 day
grace period after the notice of default is mailed or the Contract will lapse. A
Contract that lapses with an outstanding Contract loan may have tax
consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 21.
17
<PAGE>
A Contract that has lapsed may be reinstated within five years after the date of
default unless the Contract has been surrendered for its cash surrender value.
To reinstate a lapsed Contract, Pruco Life requires renewed evidence of
insurability, and submission of certain payments due under the Contract.
If your Contract does lapse, it will still provide some benefits. You can
receive the cash surrender value by making a request of Pruco Life prior to the
end of the 61 day grace period. You may also choose one of the three forms of
insurance described below for which no further premiums are payable.
FIXED EXTENDED TERM INSURANCE
The amount of insurance that would have been paid on the date of default will
continue for a stated period of time. You will be told in writing how long that
will be. The insurance amount will not change. There will be a diminishing cash
surrender value but no loan value. Extended term insurance is not available to
insureds in high risk classifications or under Contracts issued in connection
with tax-qualified pension plans.
FIXED REDUCED PAID-UP INSURANCE
This insurance continues for the lifetime of the insured but at an insurance
amount that is generally lower than that provided by fixed extended term
insurance. It will decrease only if you take a Contract loan. Upon request, we
will tell you what the amount of insurance will be. Fixed paid-up insurance has
a cash surrender value and a loan value. It is possible for this Contract to be
classified as a Modified Endowment Contract if this option is exercised. See TAX
TREATMENT OF CONTRACT BENEFITS, page 21.
VARIABLE REDUCED PAID-UP INSURANCE
This is similar to fixed paid-up insurance and will initially be in the same
amount. The Contract Fund will continue to vary to reflect the experience of the
subaccounts and/or the fixed rate option. There will be a new guaranteed minimum
death benefit. Loans will be available subject to the same rules that apply to
premium-paying Contracts.
Variable reduced paid-up insurance is the automatic option provided upon lapse
only if the amount of variable reduced paid-up insurance is at least as great as
the amount of fixed extended term insurance which would have been provided upon
lapse. In addition, variable reduced paid-up insurance will be available only if
the insured is not in one of the high risk rating classes for which Pruco Life
does not offer fixed extended term insurance. It is possible for this Contract
to be classified as a Modified Endowment Contract if this option is exercised.
See TAX TREATMENT OF CONTRACT BENEFITS, page 21.
WHAT HAPPENS IF NO REQUEST IS MADE?
Except in the two situations that follow, if no request is made the "automatic
option" will be fixed extended term insurance. If fixed extended term insurance
is not available to the insured, then fixed reduced paid-up insurance will be
provided. However, if variable reduced paid-up insurance is available and the
amount is at least as great as the amount of fixed extended term insurance, then
the automatic option will be variable reduced paid-up insurance. This could
occur if the Contract lapses and there is a Contract debt outstanding.
PAID-UP INSURANCE OPTION
In certain circumstances you may elect to stop paying premiums and to have
guaranteed insurance coverage for the lifetime of the insured. This benefit is
available only if the following conditions are met: (1) the Contract is not in
default; (2) Pruco Life is not paying premiums in accordance with any payment of
premium benefit that may be included in the Contract; and (3) the Contract Fund
is sufficiently large so that the calculated guaranteed paid-up insurance amount
is at least equal to the face amount of insurance plus the excess, if any, of
the Contract Fund over the Tabular Contract Fund. The amount of guaranteed
paid-up insurance coverage may be greater. It will be equal to the difference
between the Contract Fund and the present value of future monthly charges from
the Contract Fund (other than charges for anticipated mortality costs and for
payment of premium riders) multiplied by the attained age factor. This option
will generally be available only when the Contract has been inforce for many
years and the Contract Fund has grown because of favorable investment experience
or the payment of unscheduled premiums or both. Once the paid-up insurance
option is exercised, the actual death benefit is equal to the greater of the
guaranteed paid-up insurance amount and the Contract Fund multiplied by the
attained age factor.
18
<PAGE>
Upon request, Pruco Life will tell you the amount needed to pay up the Contract
and to guarantee the paid-up insurance amount as long as a payment equal to or
greater than this amount is received within two weeks of the date it was quoted.
There is no guarantee if the payment is received within the two week period and
is less than the quoted amount or if the payment is received outside the two
week period. In that case, Pruco Life will add the payment to the Contract Fund
and recalculate the guaranteed paid-up insurance amount. If the guaranteed
paid-up insurance amount is equal to or greater than the face amount, the
paid-up request will be processed. If the guaranteed paid-up insurance amount
calculated is below the face amount, you will be notified that the amount is
insufficient to process the request. In some cases, the quoted amount, if paid,
would increase the death benefit by more than it increases the Contract Fund. In
these situations, underwriting might be required to accept the premium payment
and to process the paid-up request. Pruco Life reserves the right to change this
procedure in the future. After the first Contract year, you must make a proper
written request for the Contract to become fully paid-up and send the Contract
to a Home Office to be endorsed. It is possible for this Contract to be
classified as a Modified Endowment Contract if this option is exercised. See TAX
TREATMENT OF CONTRACT BENEFITS, page 21. A Contract in effect under a paid-up
insurance option will have cash surrender and loan values.
REDUCED PAID-UP INSURANCE OPTION
Like the paid-up insurance option, reduced paid-up insurance provides the
insured with lifetime insurance coverage without the payment of additional
premiums. However, reduced paid-up insurance provides insurance coverage which
is generally lower than the death benefit of the Contract. Reduced paid-up
insurance is based upon a Contract's current net cash value and can be requested
at any time. This option is available only when the Contract is not in default
and Pruco Life is not paying any premiums in accordance with any payment of
premium benefit that may be included in the Contract. In order to receive
reduced paid-up insurance, a Contract owner must make a proper written request,
and Pruco Life may request that the owner send the Contract to a Home Office to
be endorsed. It is possible for this Contract to be classified as a Modified
Endowment Contract if this option is exercised. See TAX TREATMENT OF CONTRACT
BENEFITS, page 21.
WHEN PROCEEDS ARE PAID
Pruco Life will generally pay any death benefit, cash surrender value, loan
proceeds or withdrawal within seven days after all the documents required for
such payment are received at a Home Office. Other than the death benefit, which
is determined as of the date of death, the amount will be determined as of the
end of the valuation period in which the necessary documents are received at a
Home Office. Pruco Life may delay payment of proceeds from the subaccount[s] and
the variable portion of the death benefit due under the Contract if the sale or
valuation of the Account's assets is not reasonably practicable because the New
York Stock Exchange is closed for other than a regular holiday or weekend,
trading is restricted by the SEC, or the SEC declares that an emergency exists.
With respect to the amount of any cash surrender value allocated to the
fixed-rate option, and with respect to a Contract inforce as fixed reduced
paid-up insurance or as extended term insurance, Pruco Life expects to pay the
cash surrender value promptly upon request. However, Pruco Life has the right to
delay payment of such cash surrender value for up to six months (or a shorter
period if required by applicable law). Pruco Life will pay interest of at least
3% a year if it delays such a payment for more than 30 days (or a shorter period
if required by applicable law).
LIVING NEEDS BENEFIT
You may elect to add the LIVING NEEDS BENEFITSM to your Contract at issue. The
benefit may vary by state. It can generally be added only when the aggregate
face amounts of the insured's eligible contracts equal $50,000 or more. There is
no charge for adding the benefit to the Contract. However, an administrative
charge (not to exceed $150) will be made at the time the LIVING NEEDS BENEFIT is
paid.
Subject to state regulatory approval, the LIVING NEEDS BENEFIT allows you to
elect to receive an accelerated payment of all or part of the Contract's death
benefit, adjusted to reflect current value, at a time when certain special needs
exist. The adjusted death benefit will always be less than the death benefit,
but will generally be greater than the Contract's cash surrender value. One or
both of the following options may be available. A Pruco Life representative
should be consulted as to whether additional options may be available.
TERMINAL ILLNESS OPTION
This option is available if the insured is diagnosed as terminally ill with a
life expectancy of six months or less. When you provide satisfactory evidence,
Pruco Life will provide an accelerated payment of the portion of the death
benefit
19
<PAGE>
you select as a LIVING NEEDS BENEFIT. The Contract owner may (1) elect to
receive the benefit in a single sum or (2) receive equal monthly payments for
six months. If the insured dies before all the payments have been made, the
present value of the remaining payments will be paid to the beneficiary
designated in the LIVING NEEDS BENEFIT claim form in a single sum.
NURSING HOME OPTION
This option is available after the insured has been confined to an eligible
nursing home for six months or more. When you provide satisfactory evidence,
including certification by a licensed physician, that the insured is expected to
remain in the nursing home until death, Pruco Life will provide an accelerated
payment of the portion of the death benefit you select as a LIVING NEEDS
BENEFIT. The Contract owner may (1) elect to receive the benefit in a single sum
or (2) receive equal monthly payments for a specified number of years (not more
than 10 nor less than two), depending upon the age of the insured. If the
insured dies before all of the payments have been made, the present value of the
remaining payments will be paid to the beneficiary designated in the LIVING
NEEDS BENEFIT claim form in a single sum.
All or part of the Contract's death benefit may be accelerated under the LIVING
NEEDS BENEFIT. If the benefit is only partially accelerated, a death benefit of
at least $25,000 must remain under the Contract. Pruco Life reserves the right
to determine the minimum amount that may be accelerated.
No benefit will be payable if the Contract owner is required to elect it in
order to meet the claims of creditors or to obtain a government benefit. Pruco
Life can furnish details about the amount of LIVING NEEDS BENEFIT that is
available to an eligible Contract owner, and the adjusted premium payments that
would be in effect if less than the entire death benefit is accelerated.
You should consider whether adding this settlement option is appropriate in your
given situation. Adding the LIVING NEEDS BENEFIT to the Contract has no adverse
consequences; however, electing to use it could. With the exception of certain
business-related policies, the LIVING NEEDS BENEFIT is excluded from income if
the insured is terminally ill or chronically ill as defined by the tax law
(although the exclusion in the latter case may be limited). You should consult a
qualified tax adviser before electing to receive this benefit. Receipt of a
LIVING NEEDS BENEFIT payment may also affect your eligibility for certain
government benefits or entitlements.
VOTING RIGHTS
As explained earlier, all of the assets held in the subaccounts will be invested
in shares of the corresponding portfolios of the Fund. Pruco Life is the legal
owner of those shares and has the right to vote on any matter voted on at Fund
shareholders meetings. However, Pruco Life will vote the shares of the Fund in
accordance with voting instructions received from Contract owners at any regular
and special shareholders meetings. The Fund will not hold annual shareholders
meetings when not required to do so under Maryland law or the Investment Company
Act of 1940. Fund shares for which no timely instructions from Contract owners
are received, and any shares attributable to general account investments of
Pruco Life, will be voted in the same proportion as shares in the respective
portfolios for which instructions are received. If the applicable federal
securities laws or regulations, or their current interpretation, change so as to
permit Pruco Life to vote shares of the Fund in its own right, it may elect to
do so.
Matters on which Contract owners may give voting instructions including the
following: (1) election of the Board of Directors of the Fund; (2) ratification
of the independent accountant of the Fund; (3) approval of the investment
advisory agreement for a portfolio of the Fund corresponding to the Contract
owner's selected subaccount[s]; (4) any change in the fundamental investment
policy of a portfolio corresponding to the Contract owner's selected
subaccount[s]; and (5) any other matter requiring a vote of the shareholders of
the Fund. With respect to approval of the investment advisory agreement or any
change in a portfolio's fundamental investment policy, Contract owners
participating in such portfolios will vote separately on the matter.
The number of shares in a portfolio for which a Contract owner may give
instructions is determined by dividing the portion of your Contract Fund
attributable to the portfolio, by the value of one share of the portfolio. The
number of votes for which each Contract owner may give Pruco Life instructions
will be determined as of the record date chosen by the Board of Directors of the
Fund. Pruco Life will furnish Contract owners with proper forms and proxies to
enable them to give these instructions. Pruco Life reserves the right to modify
the manner in which the weight to be given voting instructions is calculated
where such a change is necessary to comply with current federal regulations.
Pruco Life may, if required by state insurance regulations, disregard voting
instructions if they would require shares to be voted so as to cause a change in
the sub-classification or investment objectives of one or more of the Fund's
20
<PAGE>
portfolios, or to approve or disapprove an investment advisory contract for the
Fund. In addition, Pruco Life itself may disregard voting instructions that
would require changes in the investment policy or investment adviser of one or
more of the Fund's portfolios, provided that Pruco Life reasonably disapproves
such changes in accordance with applicable federal regulations. If Pruco Life
does disregard voting instructions, it will advise Contract owners of that
action and its reasons for such action in the next annual or semi-annual report
to Contract owners.
REPORTS TO CONTRACT OWNERS
Once each Contract year (except where the Contract is inforce as fixed extended
term insurance or fixed reduced paid-up insurance), Pruco Life will send you a
statement that provides certain information pertinent to your own Contract. The
statement shows all transactions during the year that affected the value of your
Contract Fund, including monthly changes attributable to investment experience.
The statement will also show the current death benefit, cash surrender value,
and loan values of your Contract. On request, you will be sent a current
statement in a form similar to that of the annual statement described above, but
Pruco Life may limit the number of such requests or impose a reasonable charge
if such requests are made too frequently.
You will also receive, usually at the end of February, an annual report of the
operations of the Fund. That report will list the investments held in both
portfolios and include audited financial statements for the Fund. A semi-annual
report with similar unaudited information will be sent to you, usually at the
end of August.
TAX TREATMENT OF CONTRACT BENEFITS
We urge each prospective purchaser to consult a qualified tax adviser. The
following discussion is not intended as tax advice, and it is not a complete
statement of what the effect of federal income taxes will be under all
circumstances. Current federal income tax laws and regulations or
interpretations may change. A more detailed discussion of what follows is
contained in the statement of additional information.
TREATMENT AS LIFE INSURANCE
We believe we have taken adequate steps to ensure that the Contract qualifies as
life insurance for tax purposes. Generally speaking, this means that:
o You will not be taxed on the growth of the funds in the Contract,
unless you receive a distribution from the Contract.
o The Contract's death benefit will be tax free to your beneficiary.
Although we believe the Contract should qualify as "life insurance" for federal
tax purposes, there are uncertainties, particularly because the Secretary of the
Treasury has not yet issued permanent regulations that bear on this question.
Accordingly, we have reserved the right to make changes -- which will be
applied uniformly to all Contract owners after advance written notice --
that we deem necessary to ensure that the Contract will continue to qualify as
life insurance.
PRE-DEATH DISTRIBUTIONS
The tax treatment of any distribution you receive before the insured's death
depends on whether the Contract is classified as a Modified Endowment Contract.
If the Contract is not classified as a Modified Endowment Contract, you
generally will not be taxed on proceeds received in the event of a lapse,
surrender of the Contract, or withdrawal of part of the cash surrender value
unless the total amount received exceeds the gross premiums paid less the
untaxed portion of any prior withdrawals. In certain limited circumstances, you
may be taxed on all or a portion of a withdrawal during the first 15 contract
years even if total withdrawals do not exceed total premiums paid to date. The
proceeds of any loan will be treated as indebtedness of the owner and will not
be treated as taxable income.
If the Contract is classified as a Modified Endowment Contract, amounts you
receive under the Contract before the insured's death, including loans and
withdrawals (even those made during the two year period before the Contract
became a Modified Endowment Contract), are included in income to the extent of
gain in the Contract. In addition, any taxable income on pre-death distributions
is subject to a penalty of 10% of the amount includible in income unless the
amount is received on or after age 591/2, on account of your becoming
disabled, or as a life annuity.
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<PAGE>
A Contract will be classified as a Modified Endowment Contract if the premium
payments are in excess of the "7 Pay Limit." The 7 Pay Limit is generally the
amount that would be required to pay for the insurance policy in seven equal
annual installments. The 7 Pay Limit is actuarially determined based on IRS
guidelines, which consider the death benefit, supplemental benefits such as
dependent coverage and waiver of premium, riders and the age of the insured.
For example, if the 7 Pay Limit is determined to be $1,000 per year, cumulative
premiums paid may not exceed $1,000 in year one, $2,000 in year two, $3,000 in
year three, $4,000 in year four, $5,000 in year five, $6,000 in year six, and
$7,000 in year seven. If cumulative premiums paid exceed the 7 Pay Limit then
pre-death distributions are subject to the less favorable income tax treatment
previously described.
A Contract may be classified as a Modified Endowment Contract under various
circumstances. For example, low face amount Contracts issued on younger insureds
may be classified as a Modified Endowment Contract even though the Contract
owner pays only the Scheduled Premiums or even less than the Scheduled Premiums.
Before purchasing such a Contract, you should understand the tax treatment of
pre-death distributions and consider the purpose for which the Contract is being
purchased. Generally, a Contract may be classified as a Modified Endowment
Contract if premiums in excess of Scheduled Premiums are paid or the face amount
of insurance is decreased, or if the face amount of insurance is increased, or
if a rider is added or removed from the Contract. You should consult your tax
adviser before making any of these policy changes.
Prudential tests premium payments and reductions in coverage to determine
whether a policy is a MEC. If a premium payment or reduction causes MEC status,
Prudential will notify you and advise you as to any available options to avoid
MEC status. For example, subject to IRS time limits, a premium payment in excess
of the 7 Pay Limit may be returned to you to restore non-MEC status.
WITHHOLDING
The taxable portion of any amounts received under the Contract will be subject
to withholding to meet federal income tax obligations if you fail to elect that
no taxes will be withheld or in certain other circumstances.
OTHER TAX CONSEQUENCES
There may be federal estate taxes and state and local estate and inheritance
taxes payable if either the owner or the insured dies. The transfer or
assignment of the Contract to a new owner may also have tax consequences. The
individual situation of each Contract owner or beneficiary will be significant.
OTHER CONTRACT PROVISIONS
There are several other Contract provisions that are of less significance to you
than those already described in detail, either because they relate to options
that you may choose under the Contract but are not likely to exercise for
several years after you first purchase it, or because they are of a routine
nature not likely to influence your decision to buy the Contract. These
provisions are summarized in the Expanded Table of Contents of the Statement of
Additional Information on page 37, and described in greater detail in the
statement of additional information.
FURTHER INFORMATION ABOUT THE FUND
RISK/RETURN SUMMARIES
This section provides information about the Conservative Balanced and Flexible
Managed Portfolios, including a summary of the principal investment risks
associated with each.
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
22
<PAGE>
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.
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)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
1989 16.99%
1990 5.27%
1991 19.07%
1992 6.95%
1993 12.20%
1994 -0.97%
1995 17.27%
1996 12.63%
1997 13.45%
1998 11.74%
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.
23
<PAGE>
Average Annual Returns* (as of 12/31/98)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SINCE INCEPTION
1 YEAR 5 YEARS 10 YEARS (5/13/83)
------ ------- -------- ---------
<S> <C> <C> <C> <C>
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%
</TABLE>
*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.
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.
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."
24
<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)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
1989 21.77%
1990 1.91%
1991 25.43%
1992 7.61%
1993 15.58%
1994 -3.16%
1995 24.13%
1996 13.64%
1997 17.96%
1998 10.24%
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.
Average Annual Returns* (as of 12/31/98)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SINCE INCEPTION
1 YEAR 5 YEARS 10 YEARS (5/13/83)
------ ------- -------- ---------
<S> <C> <C> <C> <C>
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%
</TABLE>
*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.
HOW THE PORTFOLIOS INVEST
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.
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- -------------------------------------------------
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.
In general, we will invest within the ranges shown below:
ASSET TYPE MINIMUM NORMAL MAXIMUM
---------- ------- ------ -------
Stocks 15% 35% 75%
Debt obligations and money 25% 65% 85%
market securities
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.)
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 capital appreciation, 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
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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 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.
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, "Description of the Portfolios, Their Investments and
Risks - Risk Management and Return Enhancement Strategies."
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
27
<PAGE>
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.
- -----------------------------------------------------
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:
ASSET TYPE MINIMUM NORMAL MAXIMUM
---------- ------- ------ -------
Stocks 25% 60% 100%
Fixed income securities 0% 40% 75%
Money market securities 0% 0% 75%
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.
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 capital appreciation, but can help to
preserve the Portfolio's assets when the markets are unstable.
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<PAGE>
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 DELAY-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.
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, "Description of the Portfolios, their Investments and
Risks - Risk Management and Return Enhancement Strategies."
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.
30
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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 RISKS POTENTIAL REWARDS
- ------------------------------------------ ----------------------------------------- -------------------------------------
<S> <C> <C>
HIGH-QUALITY MONEY MARKET o Credit risk - the risk that o Regular interest income
OBLIGATIONS OF ALL TYPES the borrower can't pay back
the money borrowed
o Generally more secure than
stocks and since
o Market risk - the risk that
the companies must pay 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 RELATED SECURITIES o Individual stocks could lose o Historically, stocks have
value outperformed other investments
over the long term
o The equity markets could go
down, resulting in a decline o Generally, economic growth
in value of a Portfolio's means higher corporate
investments profits, which leads to an
increase in stock prices,
o Companies that pay dividends known as capital appreciation
may not do so if they don't
have profits or adequate cash o May be a source of dividend
flow income
o Changes in economic or
political conditions, both
U.S. and international, may
result in a decline in the
value of a Portfolio's
investments o Highly successful small-cap
companies can outperform
o Small-cap companies are more larger ones
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>
31
<PAGE>
<TABLE>
- ------------------------------------------ ----------------------------------------- -------------------------------------
<S> <C> <C>
o The Portfolio's holdings, o Bonds have generally
INVESTMENT GRADE DEBT SECURITIES share price, yield, and total outperformed money market
return may fluctuate in instruments over the long term
response to bond market with less risk than stocks
movements
o Most bonds will rise in value
o Credit risk - the default of when interest rates fall
an issuer would leave a
Portfolio with unpaid interest o Regular interest income
or principal. The lower a
bond's quality, the higher its o Investment grade bonds have a
potential volatility lower risk of default
o Market risk - the risk that o Generally more secure than
the market value of an stocks since companies must
investment may move up or pay their debts before they
down, sometimes rapidly or pay dividends
unpredictably. Market risk may
affect an industry, sector, or
the market as a whole
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
- ------------------------------------------ ----------------------------------------- -------------------------------------
o Higher market risk o May offer higher interest income
HIGH-YIELD DEBT SECURITIES than higher quality debt
(JUNK BONDS) o Higher credit risk securities
o May be more illiquid (harder
to 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
- ------------------------------------------ ----------------------------------------- -------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
- ------------------------------------------ ----------------------------------------- -------------------------------------
<S> <C> <C>
o Foreign markets, economies and o Investors can participate in
FOREIGN political systems may not be the growth of foreign markets
SECURITIES; as stable as in the U.S. and companies operating in
OPTIONS AND FUTURES ON those markets
FOREIGN CURRENCIES o Currency risk - changing
values of foreign currencies o Changing value of foreign
currencies
o May be less liquid than U.S.
stocks and bonds o Opportunities for
diversification
o Differences in foreign laws,
accounting standards, public
information, custody and
settlement practices
o Year 2000 conversion may be
more of a problem for some
foreign issuers
- ------------------------------------------ ----------------------------------------- -------------------------------------
o Derivatives , such as futures, o A Portfolio could make money
DERIVATIVES-- options and foreign currency and
forward protect against losses
if the investment contracts, o Derivatives that involves
may not fully offset the leverage could generate
analysis proves correct. substantial gains at low cost
underlying positions and this
could result in losses to a o One way to managed a
Portfolio that would not have Portfolio's risk/return
otherwise occurred balance is to lock in the
value of an investment ahead
OPTIONS ON EQUITY SECURITIES, o Derivatives used for risk of time.
DEBT SECURITIES, STOCK INDEXES; management may not have the
FUTURES CONTRACTS ON STOCK intended effects and may
INDEXES, DEBT SECURITIES AND result in losses or missed
INTEREST RATE INDEXES, opportunities
INTEREST RATE SWAPS
o The other party to a
derivatives contract could
default
o Derivatives that involve
leverage could magnify losses
o Certain types of derivatives
involve costs to a Portfolio
that can reduce returns
- ------------------------------------------ ----------------------------------------- -------------------------------------
REAL ESTATE INVESTMENT TRUSTS (REITS) o Performance depends on the o Real estate holdings can
strength of real estate generate good returns from
markets, REIT management and rents, rising market values,
property management which can etc.
be affected by many factors,
including national and o Greater diversification than
regional economic conditions direct ownership
- ------------------------------------------ ----------------------------------------- -------------------------------------
</TABLE>
33
<PAGE>
<TABLE>
- ------------------------------------------ ----------------------------------------- -------------------------------------
<S> <C> <C>
o May be difficult to value o May offer a more attractive
precisely yield than more widely traded
ILLIQUID SECURITIES securities
(UP TO 15% OF NET ASSETS) o May be difficult to sell at
the time or price desired
- ------------------------------------------ ----------------------------------------- -------------------------------------
LOAN PARTICIPATIONS o Credit risk o May offer right to receive
principal, interest and fees
o Market risk without as much risk as lender
o A Portfolio has no rights against
the borrower in the event the
borrower does not repay the loan
- ------------------------------------------ ----------------------------------------- -------------------------------------
o Use of such instruments and o Use of instruments may magnify
WHEN-ISSUED AND strategies may magnify underlying investment gains
DELAYED DELIVERY underlying investment losses
SECURITIES, REVERSE
REPURCHASE o Investment costs may exceed
AGREEMENTS, SHORT SALES AND SHORT potential underlying
SALES AGAINST THE BOX investment gains
- ------------------------------------------ ----------------------------------------- -------------------------------------
</TABLE>
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<PAGE>
HOW THE PORTFOLIOS ARE MANAGED
Prudential is the investment manager of the Fund. Prudential has entered into a
Service Agreement with its wholly-owned subsidiary, The Prudential Investment
Corporation ("PIC"), which provides that PIC will furnish to Prudential such
services as Prudential may require in connection with the performance of its
obligations under an Investment Advisory Agreement with the Fund. One of PIC's
business groups is Prudential Investments.
The investment advisory fee paid in 1998 for the Conservative Balanced Portfolio
was 55% of the average net assets of the Portfolio. For the Flexible Managed
Portfolio, the fee paid in 1998 was 60% of the average net assets of the
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.
PURCHASE AND SALE OF FUND SHARES
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 and its
affiliates as investment options under certain contracts, including the Contract
offered by this prospectus. Class II is offered only to separate accounts of
non-Prudential insurance companies as investment options under certain of their
contracts.
When the Account purchases or sells shares of a Portfolio, the price it 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 NAV of each share class of each 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 each of the Portfolios 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.
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.
SHORT- TERM DEBT SECURITIES with remaining maturities of 12 months or less held
by the Conservative Balanced and Flexible Managed Portfolios 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 costs basis -
are valued using an independent pricing service.
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<PAGE>
OPTIONS ON STOCK AND STOCK INDEXES that are traded on an 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.
OTHER FUND INFORMATION
DISTRIBUTOR
Prudential Investment Management Services LLC ("PIMS") distributes the Fund's
shares under a Distribution Agreement with 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.
STATE REGULATION
Pruco Life is subject to regulation and supervision by the Department of
Insurance of the State of Arizona, which periodically examines its operations
and financial condition. It is also subject to the insurance laws and
regulations of all jurisdictions in which it is authorized to do business.
Pruco Life is required to submit annual statements of its operations, including
financial statements, to the insurance departments of the various jurisdictions
in which it does business to determine solvency and compliance with local
insurance laws and regulations.
In addition to the annual statements referred to above, Pruco Life is required
to file with Arizona and other jurisdictions a separate statement with respect
to the operations of all its variable contract accounts, in a form promulgated
by the National Association of Insurance Commissioners.
EXPERTS
The financial statements of Pruco Life as of December 31, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998 and the financial
statements of the Account as of December 31, 1998 and for each of the three
years in the period then ended included in this prospectus have been so included
in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting. PricewaterhouseCoopers LLP's principal business address is 1177
Avenue of the Americas, New York, New York 10036.
Actuarial matters included in this prospectus have been examined by Nancy D.
Davis, FSA, MAAA, Vice President and Actuary of Prudential whose opinion is
filed as an exhibit to the registration statement.
LITIGATION
Several actions have been brought against Pruco Life alleging that Pruco Life
and its agents engaged in improper life insurance sales practices. Prudential
has agreed to indemnify Pruco Life for losses, if any, resulting from such
litigation. No other significant litigation is being brought against Pruco Life
that would have a material effect on its financial position.
36
<PAGE>
YEAR 2000 COMPLIANCE
The services provided to you as a purchaser of a PRUvider Variable Appreciable
Life Insurance Contract depend on the smooth functioning of numerous computer
systems. Many computer systems in use today are programmed to recognize only the
last two digits of a date as the year. As a result, any systems using this kind
of programming can not distinguish a date using "00" and may treat it as "1900"
instead of "2000." This problem may impact computer systems that store business
information, but it could also affect other equipment used in our business like
telephone, fax machines and elevators. If this problem is not corrected, the
"Year 2000" issue could affect the accuracy and integrity of business records.
Prudential's regular business operations could be interrupted as well as those
of other companies that deal with us.
In addition, the operations of the mutual funds associated with the PRUvider
Variable Appreciable Life Insurance Contract could experience problems resulting
from the Year 2000 issue. Please refer to the respective mutual fund's
prospectus for information regarding their approach to Year 2000 concerns. The
following describes Prudential's effort to address Year 2000 concerns.
To address this potential problem Prudential, as the parent company of Pruco
Life, organized its Year 2000 efforts around the following three areas:
o BUSINESS SYSTEMS - Computer programs directly used to support our business;
o INFRASTRUCTURE - Computers and other business equipment like telephones and
fax machines; and
o BUSINESS PARTNERS - Year 2000 readiness of essential business partners.
BUSINESS SYSTEMS. The business systems component includes a wide range of
computer programs that directly support Prudential's business operations
including systems for: insurance product processing, securities trading,
personnel record keeping and general accounting systems. All business systems
were analyzed to determine whether each computer program with a Year 2000
problem should be retired, replaced or renovated. The majority of this work has
been completed. A few remaining programs are currently being tested and
completion of this process is expected by June 1999.
INFRASTRUCTURE. As with business applications, we established a specific
methodology and process for addressing infrastructure issues. The infrastructure
effort includes mainframe computer system hardware and operating system
software, mid-range systems and servers, telecommunications equipment and
systems, buildings and facilities systems, personal computers, and vendor
hardware and software. Other than desktop systems, substantially all other
infrastructure systems have been tested. Presently a small number of midrange
computers, and building and facility systems are still in the testing phase. We
expect to have the infrastructure implementation process completed by June 1999.
BUSINESS PARTNERS. Prudential recognizes the importance of determining the Year
2000 readiness of external business relationships especially those that involve
electronic data transfer products and services, and products that impact our
essential business processes. Prudential first classified each business partner
as "highly critical" or "less critical" to our business and then began to
develop risk assessment and contingency plans to address the potential that a
business partner could experience a Year 2000 failure. All highly critical
business partner relationships have been assessed and contingency planning is
completed. Risk assessment and contingency planning continues for less critical
business partners, and the target completion date for these relationships is
June 1999.
Prudential believes that the Business Systems, Infrastructure and Business
Partners components of the Year 2000 project are substantially on schedule. A
small number of the projects may not meet their targeted completion date.
However, Prudential expects that these projects will be completed by September,
1999. If there are any delays, they should not have a significant impact on the
timing of the project as a whole.
THE COST OF YEAR 2000 READINESS
Prudential is funding the Year 2000 program from internal operating budgets, and
estimates that its total costs to address the Year 2000 issue will total
approximately $220 million. Because these expenses were part of the operating
budget, they did not impact the management of PRUvider Variable Appreciable Life
Insurance Contracts. During the course of the Year 2000 program, some optional
computer projects have been delayed, but these delays have not had any material
effect on PRUvider Variable Appreciable Life Insurance Contracts.
YEAR 2000 RISKS AND CONTINGENCY PLANNING
Prudential believes that it is well positioned to lessen the impact of the Year
2000 problem. However, given the nature of this issue, we can not be 100%
certain that we are completely prepared, particularly because we can not be
certain
37
<PAGE>
of Year 2000 readiness of third parties. As a result, we are unable to determine
at this time whether the consequences of Year 2000 failures may have a material
adverse effect on the results of Prudential's operations, liquidity or financial
condition. In the worst case, it is possible that a Year 2000 technology
failure, whether internal or external, could have a material impact on
Prudential's results of operations, liquidity, or financial position. If
Prudential is unable to address the Year 2000 problem, we may have difficulty in
responding to your incoming phone calls, calculating your unit values or
processing withdrawals and purchase payments. It is also possible that the
mutual funds associated with the PRUvider Variable Appreciable Life Insurance
Contract will be unable to value their securities, in turn creating difficulties
in purchasing or selling shares of the respective mutual fund and calculating
corresponding unit asset values. The objective of Prudential's Year 2000 program
has been to reduce these risks as much as possible.
Most of the operations of the PRUvider Variable Appreciable Life Insurance
Contract involve such a large number of individual transactions that they can
only be handled with the help of computers. As a result, our current contingency
plans include responses to the failure of specific business programs or
infrastructure components. However, our contingency responses are now being
reviewed and we expect to finalize them by June, 1999 to ensure that they are
workable under the special conditions of a Year 2000 failure. Prudential
believes that with the completion of its Year 2000 program as scheduled, the
possibility of significant interruptions of normal operations will be reduced.
EXPANDED TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
Included in the registration statements for the Contracts and the Fund is a
statement of additional information which is available without charge by writing
to Pruco Life at 213 Washington Street, Newark, New Jersey 07102-2992. The
following table of contents of that Statement provides a brief summary of what
is included in each section.
I. MORE DETAILED INFORMATION ABOUT THE CONTRACT.
SALES LOAD UPON SURRENDER. A description is given of exactly how Pruco Life
determines the amount of the part of the sales load that is imposed only
upon surrenders or withdrawals during the first 10 Contract years.
REDUCTION OF CHARGES FOR CONCURRENT SALES TO SEVERAL INDIVIDUALS. Where the
Contract is sold at the same time to several individuals who are members of
an associated class and Pruco Life's expenses will be reduced, some of the
charges under those Contracts may be reduced.
PAYING PREMIUMS BY PAYROLL DEDUCTION. Your employer may pay monthly
premiums for you with deductions from your salary.
UNISEX PREMIUMS AND BENEFITS. In some states and under certain
circumstances, premiums and benefits will not vary with the sex of the
insured.
HOW THE DEATH BENEFIT WILL VARY. A description is given of exactly how the
death benefit may increase to satisfy Internal Revenue Code requirements.
WITHDRAWAL OF EXCESS CASH SURRENDER VALUE. If the Contract Fund value is
high enough you may be able to withdraw part of the cash surrender value
while keeping the Contract in effect. There will be a transaction charge.
The death benefit will change. There may be tax consequences. You should
consult your Pruco Life representative to discuss whether a withdrawal or a
loan is preferable.
TAX TREATMENT OF CONTRACT BENEFITS. A fuller account is provided of how
Contract owners may be affected by federal income taxes.
SALE OF THE CONTRACT AND SALES COMMISSIONS. The Contract is sold primarily
by agents of Prudential who are also registered representatives of one of
its subsidiaries, Pruco Securities Corporation, a broker and dealer
registered under the Securities and Exchange Act of 1934. Generally,
selling agents receive a commission of 50% of the Scheduled Premium in the
first year, no more than 6% of the Scheduled Premiums for the second
through tenth years and smaller commissions thereafter.
RIDERS. Various extra fixed-benefits may be obtained for an extra premium.
They are described in what are known as "riders" to the Contract.
OTHER STANDARD CONTRACT PROVISIONS. The Contract contains several
provisions commonly included in all life insurance policies. They include
provisions relating to beneficiaries, misstatement of age or sex, suicide,
assignment, incontestability, and settlement options.
38
<PAGE>
II. INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS.
General
Convertible Securities
Warrants
Foreign Securities
Options on Stock and Debt Securities
Options on Stock Indexes
Options on Foreign Currencies
Futures Contracts and Options on Futures Contracts
Forward Foreign Currency Exchange Contracts
Interest Rate Swaps
Loan Participations
Reverse Repurchase Agreements and Dollar Rolls
When-Issued and Delayed Delivery Securities
Short Sales Loans of Portfolio Securities
Illiquid Securities
A more detailed description is given of these investments and the policies
of these portfolios.
III. INVESTMENT RESTRICTIONS.
There are many restrictions upon the investments the portfolios may make
and the practices in which they may engage; these are fundamental, meaning
they may not be changed without Contract owner approval.
IV. INVESTMENT MANAGEMENT AND DISTRIBUTION ARRANGEMENTS.
A fuller description than that in the prospectus is given.
V. OTHER INFORMATION CONCERNING THE FUND.
Incorporation and Authorized Shares
Portfolio Transactions and Brokerage
Taxation of the Fund
Custodians
Experts
Licenses
VI. DIRECTORS AND OFFICERS OF PRUCO LIFE AND MANAGEMENT OF THE FUND.
The names and recent affiliations of Pruco Life's directors and executive
officers are given. The same information is given for the Fund.
VII. FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC.
VIII. THE PRUDENTIAL SERIES FUND, INC. SCHEDULE OF INVESTMENTS.
IX. DEBT RATINGS.
A description is given of how Moody's Investors Services, Inc. and Standard
& Poor's Ratings Services describe the creditworthiness of debt securities.
39
<PAGE>
ADDITIONAL INFORMATION
Pruco Life has filed a registration statement with the SEC under the Securities
Act of 1933, relating to the offering described in this prospectus. This
prospectus and the statement of additional information do not include all of the
information set forth in the registration statement. Certain portions have been
omitted pursuant to the rules and regulations of the SEC. The omitted
information may, however, be obtained from the SEC's Public Reference Section at
450 Fifth Street, N.W. Washington, D.C. 20549, or by telephoning (800) SEC-0330,
upon payment of a prescribed fee.
Further information may also be obtained from Pruco Life. Its address and
telephone number are on the inside front cover of this prospectus.
FINANCIAL STATEMENTS
The financial statements of the Account should be distinguished from the
consolidated financial statements of Pruco Life and subsidiaries, which should
be considered only as bearing upon the ability of Pruco Life to meet its
obligations under the Contracts. The financial statements of the Fund are in the
statement of additional information.
40
<PAGE>
FINANCIAL STATEMENTS OF
PRUCO LIFE PRUVIDER VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
PORTFOLIO PORTFOLIO
---------------- ----------------
<S> <C> <C>
ASSETS
Investment in The Prudential Series Fund, Inc.
Portfolios, at net asset value [Note 3] ............. $ 124,635,035 $ 115,186,914
---------------- ----------------
Net Assets ............................................. $ 124,635,035 $ 115,186,914
================ ================
NET ASSETS, representing:
Equity of contract owners .............................. $ 124,635,035 $ 115,186,914
================ ================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A4 THROUGH A6
A1
<PAGE>
<TABLE>
FINANCIAL STATEMENTS OF
PRUCO LIFE PRUVIDER VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF OPERATIONS
For the years ended December 31, 1998, 1997 and 1996
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
PORTFOLIO PORTFOLIO
------------------------------------ ------------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend income ...................................... $ 3,885,455 $ 3,045,029 $2,436,249 $ 4,692,358 $ 4,605,400 $3,515,191
----------- ----------- ---------- ----------- ----------- ----------
EXPENSES
Charges to contract owners for assuming
mortality risk and expense risk [Note 5A] ......... 1,056,568 890,696 662,587 987,564 886,214 729,364
----------- ----------- ---------- ----------- ----------- ----------
NET INVESTMENT INCOME ................................... 2,828,887 2,154,333 1,773,662 3,704,794 3,719,186 2,785,827
----------- ----------- ---------- ----------- ----------- ----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received ................. 12,475,065 16,205,801 8,045,666 6,729,009 11,137,278 5,586,889
Realized gain on shares redeemed ..................... 27,544 130,940 0 64,871 212,244 3,248
Net change in unrealized gain (loss) on investments .. (5,044,498) (3,235,860) (782,631) 658,618 (3,623,420) 771,969
----------- ----------- ---------- ----------- ----------- ----------
NET GAIN ON INVESTMENTS ................................. 7,458,111 13,100,881 7,263,035 7,452,498 7,726,102 6,362,106
----------- ----------- ---------- ----------- ----------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ........................... $10,286,998 $15,255,214 $9,036,697 $11,157,292 $11,445,288 $9,147,933
=========== =========== ========== =========== =========== ==========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A4 THROUGH A6
A2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF
PRUCO LIFE PRUVIDER VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1998, 1997 and 1996
SUBACCOUNTS
---------------------------------------------------------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
PORTFOLIO PORTFOLIO
--------------------------------------- -----------------------------------------
1998 1997 1996 1998 1997 1996
------------ ------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income......................... $ 2,828,887 $ 2,154,333 $ 1,773,662 $ 3,704,794 $ 3,719,186 $ 2,785,827
Capital gains distributions received.......... 12,475,065 16,205,801 8,045,666 6,729,009 11,137,278 5,586,889
Realized gain on shares redeemed.............. 27,544 130,940 0 64,871 212,244 3,248
Net change in unrealized gain (loss) on
investments................................. (5,044,498) (3,235,860) (782,631) 658,618 (3,623,420) 771,969
------------ ------------ ----------- ------------ ------------ -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS..................... 10,286,998 15,255,214 9,036,697 11,157,292 11,445,288 9,147,933
------------ ------------ ----------- ------------ ------------ -----------
NET INCREASE IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
[Note 7]...................................... 5,477,105 6,605,926 16,291,683 166,881 427,926 12,500,355
------------ ------------ ----------- ------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS
RETAINED IN THE ACCOUNT
[Note 8]...................................... 2,274 (328,229) 302,045 4,262 (322,721) 285,561
------------ ------------ ----------- ------------ ------------ -----------
TOTAL INCREASE IN NET ASSETS..................... 15,766,377 21,532,911 25,630,425 11,328,435 11,550,493 21,933,849
NET ASSETS
Beginning of year............................. 108,868,658 87,335,747 61,705,322 103,858,479 92,307,986 70,374,137
------------ ------------ ----------- ------------ ------------ -----------
End of year.................................. $124,635,035 $108,868,658 $87,335,747 $115,186,914 $103,858,479 $92,307,986
============ ============ =========== ============ ============ ===========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A4 THROUGH A6
A3
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF
PRUCO LIFE PRUVIDER VARIABLE APPRECIABLE ACCOUNT
DECEMBER 31, 1998
NOTE 1: GENERAL
Pruco Life PruVider Variable Appreciable Account (the "Account") was
established on July 10, 1992 under Arizona law as a separate investment
account of Pruco Life Insurance Company ("Pruco Life") which is a
wholly-owned subsidiary of The Prudential Insurance Company of America
("Prudential"). The assets of the Account are segregated from Pruco
Life's other assets.
The Account is registered under the Investment Company Act of 1940, as
amended, as a unit investment trust. There are two subaccounts within
the Account, each of which invests only in a corresponding portfolio of
The Prudential Series Fund, Inc. (the "Series Fund"). The Series Fund is
a diversified open-end management investment company, and is managed by
Prudential.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements are prepared in conformity with
generally accepted accounting principles ("GAAP"). The preparation of
the financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures. Actual results could differ from those estimates.
Investments--The investments in shares of the Series Fund are stated at
the net asset value of the respective portfolio.
Security Transactions--Realized gains and losses on security
transactions are reported on an average cost basis. Purchase and sale
transactions are recorded as of the trade date of the security being
purchased or sold.
Distributions Received--Dividend and capital gain distributions received
are reinvested in additional shares of the Series Fund and are recorded
on the ex-dividend date.
NOTE 3: INVESTMENT INFORMATION FOR THE PRUDENTIAL SERIES FUND, INC. PORTFOLIOS
The net asset value per share (rounded) for each portfolio of the Series
Fund, the number of shares of each portfolio held by the PruVider
Variable Appreciable Life subaccounts of the Account and the aggregate
cost of investments in such shares at December 31, 1998 were as follows:
PORTFOLIOS
--------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
-------------- --------------
Number of shares: 7,525,925 7,638,106
Net asset value per share (rounded): $ 16.56 $ 15.08
Cost: $ 130,117,783 $ 115,609,228
NOTE 4: CONTRACT OWNER UNIT INFORMATION
Outstanding contract owner units, unit values and total value of
contract owner equity at December 31, 1998 were as follows:
SUBACCOUNTS
----------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
PORTFOLIO PORTFOLIO
--------------- ---------------
Contract Owner Units Outstanding 38,041,166 41,876,253
Unit Value $ 3.27632 $ 2.75065
--------------- ---------------
TOTAL CONTRACT OWNER EQUITY $ 124,635,035 $ 115,186,914
=============== ===============
A4
<PAGE>
NOTE 5: CHARGES AND EXPENSES
A. Mortality Risk and Expense Risk Charges
The mortality risk and expense risk charges at an effective annual
rate of 0.90% are applied daily against the net assets representing
equity of contract owners held in each subaccount. Mortality risk is
that contract owners may not live as long as estimated and expense
risk is that the cost of issuing and administering the policies may
exceed related charges by Pruco Life.
B. Deferred Sales Charge
Subsequent to a contract owner redemption, a deferred sales charge is
imposed upon surrenders of certain variable life insurance contracts
to compensate Pruco Life for sales and other marketing expenses. The
amount of any sales charge will depend on the number of years that
have elapsed since the contract was issued. No sales charge will be
imposed after the tenth year of the contract. No sales charge will be
imposed on death benefits.
C. Partial Withdrawal Charge
A charge is imposed by Pruco Life on partial withdrawals of the cash
surrender value. A charge equal to the lesser of $15 or 2% will be
made in connection with each partial withdrawal of the cash surrender
value of a contract.
D. Cost of Insurance Charges
Contract owner contributions are subject to certain deductions prior
to being invested in the Account. The deductions are for (1)
transaction costs which are deducted from each premium payment to
cover premium collection and processing costs; (2) state premium
taxes; (3) sales charges which are deducted in order to compensate
Pruco Life for the cost of selling the contract. Contracts are also
subject to monthly charges for the costs of administering the
contract and to compensate Pruco Life for the guaranteed minimum
death benefit risk.
NOTE 6: TAXES
Pruco Life is taxed as a "life insurance company" as defined by the
Internal Revenue Code and the results of operations of the Account form
a part of Prudential's consolidated federal tax return. Under current
federal law, no federal income taxes are payable by the Account. As
such, no provision for tax liability has been recorded in these
financial statements.
NOTE 7: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
The following amounts represent contract owner activity components for
the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
PORTFOLIO PORTFOLIO
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Contract Owner Contributions: .......... $ 25,870,745 $ 26,737,492 $ 17,110,194 $ 19,001,987
Policy Loans ........................... (1,252,962) (912,970) (799,965) (704,562)
Policy Loan Repayment and
Interest ............................. 542,622 390,085 440,486 350,979
Surrenders, Withdrawals and
Death Benefits ....................... (6,436,168) (6,402,537) (5,513,621) (6,555,299)
Net Transfers From (To) Other
Subaccounts or Fixed Rate Options .... 489,890 567,479 (443,976)
Administrative and Other Charges ....... (13,737,022) (13,773,623) (10,626,237) (11,188,850)
------------ ------------ ------------ ------------
Net Increase in Net Assets
Resulting From Premium Payments
and Other Operating Transfers ........ $ 5,477,105 $ 6,605,926 $ 166,881 $ 427,926
============ ============ ============ ============
</TABLE>
A5
<PAGE>
NOTE 8: NET INCREASE (DECREASE) IN NET ASSETS RETAINED IN THE ACCOUNT
The increase (decrease) in net assets retained in the account represents
the net contributions (withdrawals) of Pruco Life to (from) the Account.
Effective October 13, 1998 Pruco Life no longer maintains a position in
the account. Previously, Pruco Life maintained a position in the Account
for liquidity purposes including unit purchases and redemptions, fund
share transactions and expense processing.
NOTE 9: UNIT ACTIVITY
Transactions in units (including transfers among subaccounts) for the
years ended December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
PORTFOLIO PORTFOLIO
------------------------------------------ -----------------------------------------
1998 1997 1996 1998 1997 1996
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner
Contributions: 8,645,893 9,998,784 14,116,349 6,780,289 8,324,436 13,901,187
Contact Owner
Redemptions: (6,905,049) (7,621,395) (7,281,505) (6,713,503) (8,122,804) (7,840,673)
</TABLE>
NOTE 10: PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments
in the Series Fund for the year ended December 31, 1998 were as follows:
PORTFOLIOS
------------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
----------- ------------
Purchases ....................... $ 6,416,642 $ 2,311,063
Sales ........................... $(1,926,831) $(3,056,492)
A6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of the
Pruco Life PRUvider Variable Appreciable Account
and the Board of Directors of
Pruco Life Insurance Company
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of the subaccounts (Flexible Managed
Portfolio and Conservative Balanced Portfolio) of the Pruco Life PRUvider
Variable Appreciable Account at December 31, 1998, the results of each of their
operations and the changes in each of their net assets for each of the three
years in the period then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of Pruco Life
Insurance Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of fund shares owned at December 31, 1998, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 19, 1999
A7
<PAGE>
<TABLE>
Pruco Life Insurance Company and Subsidiaries
Consolidated Statements of Financial Position
December 31, 1998 and 1997 (In Thousands)
- --------------------------------------------------------------------------------
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Fixed maturities
Available for sale, at fair value (amortized cost, 1998: $2,738,654;
1997: $2,526,554) $ 2,763,926 $ 2,563,852
Held to maturity, at amortized cost (fair value, 1998: $421,845; 1997:
$350,056) 410,558 338,848
Equity securities - available for sale, at fair value (cost, 1998: $2,951; 2,847 1,982
1997: $1,289)
Mortgage loans on real estate 17,354 22,787
Policy loans 766,917 703,955
Short-term investments 240,727 316,355
Other long-term investments 1,047 1,317
------------ ------------
Total investments 4,203,376 3,949,096
Cash 89,679 71,358
Deferred policy acquisition costs 861,713 655,242
Accrued investment income 61,114 67,000
Other assets 65,145 86,692
Separate Account assets 11,531,754 8,022,079
------------ ------------
TOTAL ASSETS $ 16,812,781 $ 12,851,467
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' account balances $ 2,696,191 $ 2,380,460
Future policy benefits and other policyholder liabilities 534,599 472,460
Cash collateral for loaned securities 73,336 143,421
Securities sold under agreement to repurchase 49,708 --
Income taxes payable 44,524 71,703
Net deferred income tax liability 148,834 138,483
Payable to affiliate 66,568 70,375
Other liabilities 55,038 120,260
Separate Account liabilities 11,490,751 7,948,788
------------ ------------
Total liabilities 15,159,549 11,345,950
------------ ------------
Contingencies (See Note 11)
Stockholder's Equity
Common stock, $10 par value;
1,000,000 shares, authorized;
250,000 shares, issued and outstanding at
December 31, 1998 and 1997 2,500 2,500
Paid-in-capital 439,582 439,582
Retained earnings 1,202,833 1,050,871
Accumulated other comprehensive income
Net unrealized investment gains 9,902 17,129
Foreign currency translation adjustments (1,585) (4,565)
------------ ------------
Accumulated other comprehensive income 8,317 12,564
------------ ------------
Total stockholder's equity 1,653,232 1,505,517
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 16,812,781 $ 12,851,467
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
B-1
<PAGE>
<TABLE>
Pruco Life Insurance Company and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 1998, 1997 and 1996 (In Thousands)
- --------------------------------------------------------------------------------
<CAPTION>
1998 1997 1996
--------- --------- ---------
REVENUES
<S> <C> <C> <C>
Premiums $ 57,467 $ 49,496 $ 51,525
Policy charges and fee income 364,719 330,292 324,976
Net investment income 261,430 259,634 247,328
Realized investment gains, net 44,841 10,974 10,835
Other income 41,267 33,801 20,818
--------- --------- ---------
Total revenues 769,724 684,197 655,482
--------- --------- ---------
BENEFITS AND EXPENSES
Policyholders' benefits 186,527 179,419 186,873
Interest credited to policyholders' account balances 118,935 110,815 118,246
General, administrative and other expenses 228,067 225,721 122,006
--------- --------- ---------
Total benefits and expenses 533,529 515,955 427,125
--------- --------- ---------
Income from operations before income taxes 236,195 168,242 228,357
--------- --------- ---------
Income taxes
Current 69,768 73,326 60,196
Deferred 14,465 (11,458) 18,939
--------- --------- ---------
Total income taxes 84,233 61,868 79,135
--------- --------- ---------
NET INCOME 151,962 106,374 149,222
--------- --------- ---------
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (7,227) 3,025 (17,952)
Foreign currency translation adjustments 2,980 (2,863) (482)
--------- --------- ---------
Other comprehensive income (4,247) 162 (18,434)
--------- --------- ---------
TOTAL COMPREHENSIVE INCOME $ 147,715 $ 106,536 $ 130,788
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
B-2
<PAGE>
<TABLE>
Pruco Life Insurance Company and Subsidiaries
Consolidated Statements of Changes in Stockholder's Equity
Years Ended December 31, 1998, 1997, and 1996 (In Thousands)
- --------------------------------------------------------------------------------
<CAPTION>
Accumulated
other Total
Common Paid-in- Retained comprehensive stockholder's
stock capital earnings income equity
----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 2,500 $ 439,582 $ 795,275 $ 30,836 $ 1,268,193
Net income -- -- 149,222 -- 149,222
Change in foreign currency
translation adjustments -- -- -- (482) (482)
Change in net unrealized
investment gains, net of
reclassification adjustment -- -- -- (17,952) (17,952)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 2,500 439,582 944,497 12,402 1,398,981
Net income -- -- 106,374 -- 106,374
Change in foreign currency
translation adjustments -- -- -- (2,863) (2,863)
Change in net unrealized
investment gains, net of
reclassification adjustment -- -- -- 3,025 3,025
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 2,500 439,582 1,050,871 12,564 1,505,517
Net income -- -- 151,962 -- 151,962
Change in foreign currency
translation adjustments -- -- -- 2,980 2,980
Change in net unrealized
investment gains, net of
reclassification adjustment -- -- -- (7,227) (7,227)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 $ 2,500 $ 439,582 $ 1,202,833 $ 8,317 $ 1,653,232
=========== =========== =========== =========== ============
</TABLE>
See Notes to Consolidated Financial Statements
B-3
<PAGE>
<TABLE>
Pruco Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997, and 1996 (In Thousands)
- --------------------------------------------------------------------------------
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 151,962 $ 106,374 $ 149,222
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Policy charges and fee income (47,230) (40,783) (50,286)
Interest credited to policyholders' account balances 118,935 110,815 118,246
Realized investment gains, net (44,841) (10,974) (10,835)
Amortization and other non-cash items 18,611 (31,181) 29,334
Change in:
Future policy benefits and other policyholders' liabilities 62,139 39,683 54,176
Accrued investment income 5,886 (4,890) (2,248)
Separate Accounts 32,288 (13,894) (38,025)
Payable to affiliate (3,807) 20,547 16,519
Policy loans (62,962) (64,173) (70,509)
Deferred policy acquisition costs (206,471) (22,083) (66,183)
Income taxes payable (27,179) 78,894 (816)
Deferred income tax liability 10,351 (10,477) 7,912
Other, net (43,675) 34,577 7,814
----------- ----------- -----------
Cash Flows (Used In) From Operating Activities (35,993) 192,435 144,321
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Available for sale 5,429,396 2,828,665 3,886,254
Held to maturity 74,767 138,626 138,127
Equity securities 4,101 6,939 7,527
Mortgage loans on real estate 5,433 24,925 19,226
Other long-term investments 1,140 3,276 288
Investment real estate -- -- 4,488
Payments for the purchase of:
Fixed maturities:
Available for sale (5,617,208) (3,141,785) (4,008,810)
Held to maturity (145,919) (70,532) (114,494)
Equity securities (2,274) (4,594) (4,697)
Other long-term investments (409) (51) (657)
Cash collateral for loaned securities, net (70,085) 143,421 -
Securities sold under agreement to repurchase, net 49,708 - -
Short-term investments, net 75,771 (147,030) 58,186
----------- ----------- -----------
Cash Flows Used In Investing Activities (195,579) (218,140) (14,562)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 3,098,721 2,099,600 536,370
Withdrawals (2,848,828) (2,076,303) (633,798)
----------- ----------- -----------
Cash Flows From (Used in) Financing Activities 249,893 23,297 (97,428)
----------- ----------- -----------
Net increase (decrease) in Cash 18,321 (2,408) 32,331
Cash, beginning of year 71,358 73,766 41,435
----------- ----------- -----------
CASH, END OF PERIOD $ 89,679 $ 71,358 $ 73,766
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid (received) $ 99,810 $ (7,904) $ 61,760
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
B-4
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. BUSINESS
Pruco Life Insurance Company (the Company) is a stock life insurance company,
organized in 1971 under the laws of the state of Arizona. The Company markets
individual life insurance, variable life insurance, variable annuities, fixed
annuities, and a group annuity program (the Contracts) in all states and
territories except the District of Columbia and Guam. In addition, the Company
markets individual life insurance through its branch office in Taiwan. The
Company has two wholly owned subsidiaries, Pruco Life Insurance Company of New
Jersey (PLNJ) and The Prudential Life Insurance Company of Arizona (PLICA). PLNJ
is a stock life insurance company organized in 1982 under the laws of the state
of New Jersey. It is licensed to sell individual life insurance, variable life
insurance, fixed annuities, and variable annuities only in the states of New
Jersey and New York. PLICA is a stock life insurance company organized in 1988
under the laws of the state of Arizona. PLICA had no new business sales in 1997
or 1998 and at this time will not be issuing new business.
The Company is a wholly owned subsidiary of The Prudential Insurance Company of
America (Prudential), a mutual insurance company founded in 1875 under the laws
of the state of New Jersey. Prudential intends to make additional capital
contributions to the Company, as needed, to enable it to comply with its reserve
requirements and fund expenses in connection with its business. Generally,
Prudential is under no obligation to make such contributions and its assets do
not back the benefits payable under the Contracts.
The Company is engaged in a business that is highly competitive because of the
large number of stock and mutual life insurance companies and other entities
engaged in marketing insurance products, and individual and group annuities.
There are approximately 1,620 stock, mutual and other types of insurers in the
life insurance business in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP"). All significant intercompany
balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the period. Actual results could differ from those estimates.
Investments
Fixed maturities classified as "available for sale" are carried at estimated
fair value. Fixed maturities that the Company has both the intent and ability to
hold to maturity are stated at amortized cost and classified as "held to
maturity". The amortized cost of fixed maturities is written down to estimated
fair value if a decline in value is considered to be other than temporary.
Unrealized gains and losses on fixed maturities "available for sale", including
the effect on deferred policy acquisition costs and participating annuity
contracts that would result from the realization of unrealized gains and losses,
net of income taxes, are included in a separate component of equity,
"Accumulated other comprehensive income."
Equity securities, available for sale, comprised of common and non-redeemable
preferred stock, are carried at estimated fair value. The associated unrealized
gains and losses, net of income tax, the effects on deferred policy acquisition
costs and on participating annuity contracts that would result from the
realization of unrealized gains and losses, are included in a separate component
of equity, "Accumulated other comprehensive income."
Mortgage loans on real estate are stated primarily at unpaid principal balances,
net of unamortized discounts and allowance for losses. The allowance for losses
is based upon a loan specific review and management's consideration of past
results, current trends, the estimated value of the underlying collateral,
composition of the loan portfolio, current economic conditions and other
relevant factors. Impaired loans are identified by management as loans in which
a probability exists that all amounts due according to the contractual terms of
the loan agreement will not be collected.
B-5
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Impaired loans are measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, or the fair value of the
collateral if the loan is collateral dependent.
Interest received on impaired loans, including loans that were previously
modified in a troubled debt restructuring, is either applied against the
principal or reported as revenue, according to management's judgment as to the
collectibility of principal. Management discontinues the accrual of interest on
impaired loans after the loans are 90 days delinquent as to principal or
interest, or earlier when management has serious doubts about collectibility.
When a loan is recognized as impaired, any accrued but unpaid interest
previously recorded on such loan is reversed against interest income of the
current period. Generally, a loan is restored to accrual status only after all
delinquent interest and principal are brought current and, in the case of loans
where interest has been interrupted for a substantial period, a regular payment
performance has been established.
Policy loans are carried at unpaid principal balances.
Short-term investments, consists primarily of highly liquid debt instruments
purchased with an original maturity of twelve months or less and are carried at
amortized cost, which approximates fair value.
Other long-term investments primarily represent the Company's investments in
joint ventures and partnerships in which the Company does not have control.
These investments are recorded using the equity method of accounting, reduced
for other than temporary declines in value.
Realized investment gains, net are computed using the specific identification
method. Costs of fixed maturity and equity securities are adjusted for
impairments considered to be other than temporary.
Cash
Cash includes cash on hand, amounts due from banks, and money market
instruments.
Deferred Policy Acquisition Costs
The costs which vary with and that are related primarily to the production of
new insurance business are deferred to the extent that they are deemed
recoverable from future profits. Such costs include certain commissions, costs
of policy issuance and underwriting, and certain variable field office expenses.
Deferred policy acquisition costs are subject to recoverability testing at the
time of policy issue and loss recognition testing at the end of each accounting
period. Deferred policy acquisition costs are adjusted for the impact of
unrealized gains or losses on investments as if these gains or losses had been
realized, with corresponding credits or charges included in "Accumulated other
comprehensive income."
Acquisition costs related to interest-sensitive life products and
investment-type contracts are deferred and amortized in proportion to total
estimated gross profits arising principally from investment results, mortality
and expense margins and surrender charges based on historical and anticipated
future experience. Amortization periods range from 15 to 30 years. For
participating life insurance, deferred policy acquisition costs are amortized
over the expected life of the contracts in proportion to estimated gross margins
based on historical and anticipated future experience, which is updated
periodically. Deferred policy acquisition costs are analyzed to determine if
they are recoverable from future income, including investment income. If such
costs are determined to be unrecoverable, they are expensed at the time of
determination. The effect of revisions to estimated gross profits on unamortized
deferred acquisition costs is reflected in earnings in the period such estimated
gross profits are revised.
Securities loaned
Securities loaned are treated as financing arrangements and are recorded at the
amount of cash received as collateral. The Company obtains collateral in an
amount equal to 102% of the fair value of the securities. The Company monitors
the market value of securities loaned on a daily basis with additional
collateral obtained as necessary. Non-cash collateral received is not reflected
in the consolidated statements of financial position. Substantially all of the
Company's securities loaned are with large brokerage firms.
B-6
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are treated as financing
arrangements and are carried at the amounts at which the securities will be
subsequently reacquired, including accrued interest, as specified in the
respective agreements. The Company's policy is to take possession of securities
purchased under agreements to resell. The market value of securities to be
repurchased is monitored and additional collateral is requested, where
appropriate, to protect against credit exposure.
Securities lending and securities repurchase agreements are used to generate net
investment income and facilitate trading activity. These instruments are
short-term in nature (usually 30 days or less). Securities loaned are
collateralized principally by U.S. Government and mortgage-backed securities.
Securities sold under repurchase agreements are collateralized principally by
cash. The carrying amounts of these instruments approximate fair value because
of the relatively short period of time between the origination of the
instruments and their expected realization.
Separate Account Assets and Liabilities
Separate Account assets and liabilities are reported at estimated fair value and
represent segregated funds which are invested for certain policyholders and
other customers. Separate Account assets include common stocks, fixed
maturities, real estate related securities, and short-term investments. The
assets of each account are legally segregated and are not subject to claims that
arise out of any other business of the Company. Investment risks associated with
market value changes are borne by the customers, except to the extent of minimum
guarantees made by the Company with respect to certain accounts. The investment
income and gains or losses for Separate Accounts generally accrue to the
policyholders and are not included in the Consolidated Statement of Operations.
Mortality, policy administration and surrender charges on the accounts are
included in "Policy charges and fee income."
Separate Accounts represent funds for which investment income and investment
gains and losses accrue directly to, and investment risk is borne by, the
policyholders, with the exception of the Pruco Life Modified Guaranteed Annuity
Account. The Pruco Life Modified Guaranteed Annuity Account is a non-unitized
separate account, which funds the Modified Guaranteed Annuity Contract and the
Market Value Adjustment Annuity Contract. Owners of the Pruco Life Modified
Guaranteed Annuity and the Market Value Adjustment Annuity Contracts do not
participate in the investment gain or loss from assets relating to such
accounts. Such gain or loss is borne, in total, by the Company.
Insurance Revenue and Expense Recognition
Premiums from insurance policies are generally recognized when due. Benefits are
recorded as an expense when they are incurred. For traditional life insurance
contracts, a liability for future policy benefits is recorded using the net
level premium method. For individual annuities in payout status, a liability for
future policy benefits is recorded for the present value of expected future
payments based on historical experience.
Premiums from non-participating group annuities with life contingencies are
generally recognized when due. For single premium immediate annuities, premiums
are recognized when due with any excess profit deferred and recognized in a
constant relationship to insurance in-force or, for annuities, the amount of
expected future benefit payments.
Amounts received as payment for interest-sensitive life, individual annuities,
and guaranteed investment contracts are reported as deposits to "Policyholders'
account balances." Revenues from these contracts reflected as "Policy charges
and fee income" consist primarily of fees assessed during the period against the
policyholders' account balances for mortality charges, policy administration
charges and surrender charges. In addition, interest earned from the investment
of these account balances is reflected in "Net investment income." Benefits and
expenses for these products include claims in excess of related account
balances, expenses of contract administration, interest credited and
amortization of deferred policy acquisition costs.
Foreign Currency Translation Adjustments
Assets and liabilities of the Taiwan branch are translated to U.S. dollars at
the exchange rate in effect at the end of the period. Revenues, benefits and
other expenses are translated at the average rate prevailing during the period.
Cumulative translation adjustments arising from the use of differing exchange
rates from period to period are charged or credited directly to "Other
comprehensive income." The cumulative effect of changes in foreign exchange
rates are included in "Accumulated other comprehensive income."
B-7
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Other Income
Other income consists primarily of asset management fees which are received by
the Company from Prudential for services Prudential provides to the Prudential
Series Fund, an underlying investment option of the Separate Accounts.
Derivative Financial Instruments
Derivatives are financial instruments whose values are derived from interest
rates, foreign exchange rates, various financial indices, or the value of
securities or commodities. Derivative financial instruments used by the Company
include futures, currency swaps, and options contracts and can be
exchange-traded or contracted in the over-the-counter market. The Company uses
derivative financial instruments to hedge market risk from changes in interest
rates or foreign currency exchange rates, and to alter interest rate or currency
exposures arising from mismatches between assets and liabilities. All
derivatives used by the Company are for other than trading purposes.
To qualify as a hedge, derivatives must be designated as hedges for existing
assets, liabilities, firm commitments, or anticipated transactions which are
identified and probable to occur, and effective in reducing the market risk to
which the Company is exposed. The effectiveness of the derivatives must be
evaluated at the inception of the hedge and throughout the hedge period.
When derivatives qualify as hedges, the changes in the fair value or cash flows
of the derivatives and the hedged items are recognized in earnings in the same
period. If the Company's use of other than trading derivatives does not meet the
criteria to apply hedge accounting, the derivatives are recorded at fair value
in "Other liabilities" in the Consolidated Statements of Financial Position, and
changes in their fair value are recognized in earnings in "Realized investment
gains, net" without considering changes in the hedged assets or liabilities.
Cash flows from other than trading derivative assets and liabilities are
reported in the operating activities section in the Consolidated Statements of
Cash Flows.
Income Taxes
The Company and its subsidiaries are members of the consolidated federal income
tax return of Prudential and files separate company state and local tax returns.
Pursuant to the tax allocation arrangement with Prudential, total federal income
tax expense is determined on a separate company basis. Members with losses
record tax benefits to the extent such losses are recognized in the consolidated
federal tax provision. Deferred income taxes are generally recognized, based on
enacted rates, when assets and liabilities have different values for financial
statement and tax reporting purposes. A valuation allowance is recorded to
reduce a deferred tax asset to that portion that is expected to be realized.
New Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 125"). The statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
and provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. SFAS 125
became effective January 1, 1997 and is to be applied prospectively. Subsequent
to June 1996, FASB issued SFAS No. 127 "Deferral of the Effective Date of
Certain Provisions of SFAS 125" ("SFAS 127"). SFAS 127 delays the implementation
of SFAS 125 for one year for certain transactions, including repurchase
agreements, dollar rolls, securities lending and similar transactions. Adoption
of SFAS 125 did not have a material impact on the Company's results of
operations, financial position and liquidity.
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
which was issued by the FASB in June 1997. This statement defines comprehensive
income and establishes standards for reporting and displaying comprehensive
income and its components in financial statements. The statement requires that
the Company classify items of other comprehensive income by their nature and
display the accumulated balance of other comprehensive income separately from
retained earnings in the equity section of the Statement of Financial Position.
Application of this statement did not change recognition or measurement of net
income and, therefore, did not affect the Company's financial position or
results of operations.
B-8
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
On January 1, 1999, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SOP 97-3").
This statement provides guidance for determining when an insurance company or
other enterprise should recognize a liability for guaranty-fund assessments as
well as guidance for measuring the liability. The adoption of SOP 97-3 is not
expected to have a material effect on the Company's financial position or
results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires that companies recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 provides, if certain conditions
are met, that a derivative may be specifically designated as (1) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment (fair value hedge), (2) a hedge of the exposure to
variable cash flows of a forecasted transaction (cash flow hedge), or (3) a
hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction (foreign currency hedge).
SFAS No. 133 does not apply to most traditional insurance contracts. However,
certain hybrid contracts that contain features which can affect settlement
amounts similarly to derivatives may require separate accounting for the "host
contract" and the underlying "embedded derivative" provisions. The latter
provisions would be accounted for as derivatives as specified by the statement.
Under SFAS No. 133, the accounting for changes in fair value of a derivative
depends on its intended use and designation. For a fair value hedge, the gain or
loss is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item. For a cash flow hedge, the effective
portion of the derivative's gain or loss is initially reported as a component of
other comprehensive income and subsequently reclassified into earnings when the
forecasted transaction affects earnings. For a foreign currency hedge, the gain
or loss is reported in other comprehensive income as part of the foreign
currency translation adjustment. For all other derivatives not designated as
hedging instruments, the gain or loss is recognized in earnings in the period of
change. The Company is required to adopt this Statement no later than January 1,
2000 and is currently assessing the effect of the new standard.
In October, 1998, the AICPA issued Statement of Position 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk," ("SOP 98-7"). This statement provides guidance on how
to account for insurance and reinsurance contracts that do not transfer
insurance risk. SOP 98-7 is effective for fiscal years beginning after June 15,
1999. The adoption of this statement is not expected to have a material effect
on the Company's financial position or results of operations.
Reclassifications
Certain amounts in the prior years have been reclassified to conform to current
year presentation.
B-9
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS
Fixed Maturities and Equity Securities:
The following tables provide additional information relating to fixed maturities
and equity securities as of December 31,:
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Fixed maturities available for sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies 110,294 864 318 110,840
Foreign government bonds 87,112 2,003 696 88,419
Corporate securities 2,540,498 30,160 6,897 2,563,761
Mortgage-backed securities 750 156 -- 906
---------- ---------- ---------- ----------
Total fixed maturities available for sale $2,738,654 $ 33,183 $ 7,911 $2,763,926
========== ========== ========== ==========
Equity securities available for sale $ 2,951 $ 168 $ 272 $ 2,847
========== ========== ========== ==========
Fixed maturities held to maturity
Corporate securities $ 410,558 $ 11,287 $ -- $ 421,845
---------- ---------- ---------- ----------
Total fixed maturities held to maturity $ 410,558 $ 11,287 $ -- $ 421,845
========== ========== ========== ==========
1997
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
(In Thousands)
Fixed maturities available for sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 177,691 $ 1,231 $ 20 $ 178,902
Foreign government bonds 83,889 1,118 19 84,988
Corporate securities 2,263,898 36,857 2,017 2,298,738
Mortgage-backed securities 1,076 180 32 1,224
---------- ---------- ---------- ----------
Total fixed maturities available for sale $2,526,554 $ 39,386 $ 2,088 $2,563,852
========== ========== ========== ==========
Equity securities available for sale $ 1,289 $ 802 $ 109 $ 1,982
========== ========== ========== ==========
Fixed maturities held to maturity
Corporate securities $ 338,848 $ 11,427 $ 219 $ 350,056
---------- ---------- ---------- ----------
Total fixed maturities held to maturity $ 338,848 $ 11,427 $ 219 $ 350,056
========== ========== ========== ==========
</TABLE>
B-10
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS (continued)
The amortized cost and estimated fair value of fixed maturities, categorized by
contractual maturities at December 31, 1998 are shown below:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
-------------------------------- ---------------------------------
Amortized Estimated Fair Amortized Estimated Fair
Cost Value Cost Value
--------- -------------- ---------- --------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 72,931 $ 73,254 $ 3,036 $ 3,064
Due after one year through five years 1,050,981 1,059,389 193,749 201,136
Due after five years through ten years 1,142,507 1,156,664 155,568 158,801
Due after ten years 471,485 473,713 58,205 58,844
Mortgage-backed securities 750 906 -- --
---------- ---------- ---------- ----------
Total $2,738,654 $2,763,926 $ 410,558 $ 421,845
========== ========== ========== ==========
</TABLE>
Actual maturities will differ from contractual maturities because, in certain
circumstances, issuers have the right to call or prepay obligations.
Proceeds from the sale of fixed maturities available for sale during 1998, 1997,
and 1996 were $5,327.3 million, $2,796.3 million, and $3,667.1 million,
respectively. Gross gains of $46.3 million, $18.6 million, and $22.1 million and
gross losses of $14.1 million, $7.9 million, and $17.6 million were realized on
those sales during 1998, 1997, and 1996, respectively.
Proceeds from the maturity of fixed maturities available for sale during 1998,
1997, and 1996 were $102.1 million, $32.4 million, and $219.2 million,
respectively. During the years ended December 31, 1998, 1997, and 1996, there
were no securities classified as held to maturity that were sold.
Writedowns for impairments of fixed maturities which were deemed to be other
than temporary were $2.8 million, $.1 million and $.1 million for the years
1998, 1997 and 1996, respectively.
B-11
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS (continued)
The following table describes the credit quality of the fixed maturity
portfolio, based on ratings assigned by the National Association of Insurance
Commissioners ("NAIC") or Standard & Poor's Corporation, an independent rating
agency as of December 31, 1998:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------------------ -------------------------------------
Amortized Estimated Fair Amortized Estimated Fair
Cost Value Cost Value
---------- -------------- ---------- --------------
(In Thousands) (In Thousands)
NAIC Standard & Poor's
<S> <C> <C> <C> <C>
1 AAA to AA- $1,195,301 $1,211,995 $ 180,070 $ 186,683
2 BBB+ to BBB- 1,254,522 1,263,656 182,298 185,417
3 BB+ to BB- 201,033 204,278 39,346 40,654
4 B+ to B- 59,799 57,695 8,821 9,068
5 CCC or lower 27,552 26,061 -- --
6 In or near default 447 241 23 23
---------- ---------- ---------- ----------
Total $2,738,654 $2,763,926 $ 410,558 $ 421,845
========== ========== ========== ==========
</TABLE>
The fixed maturity portfolio consists largely of investment grade assets (rated
"1" or "2" by the NAIC), with such investments accounting for 89% and 94% of the
portfolio at December 31, 1998 and 1997, respectively, based on fair value. As
of both of those dates, less than 1% of the fixed maturities portfolio was rated
"6" by the NAIC, defined as public and private placement securities which are
currently non-performing or believed subject to default in the near-term.
The Company continually reviews fixed maturities and identifies potential
problem assets which require additional monitoring. The Company defines
"problem" fixed maturities as those for which principal and/or interest payments
are in default. The Company defines "potential problem" fixed maturities as
assets which are believed to present default risk associated with future debt
service obligations and therefore require more active management. At December
31, 1998 management identified $264.0 thousand of fixed maturity investments as
problem or potential problem. An immaterial amount of problem or potential
problem fixed maturities were identified in 1997.
Mortgage Loans on Real Estate
The Company's mortgage loans were collateralized by the following property types
at December 31, 1998 and 1997.
1998 1997
------------------ -------------------
(In Thousands)
Office buildings $ -- -- $ 4,607 20%
Retail stores 7,356 42% 8,090 35%
Apartment complexes 5,988 35% 6,080 27%
Industrial buildings 4,010 23% 4,010 18%
------------------ ------------------
Net carrying value $17,354 100% $22,787 100%
================== ==================
B-12
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS (continued)
The largest concentration of mortgage loans are in the states of Pennsylvania
(35%), Washington (34%), and New Jersey (23%).
Special Deposits
Fixed maturities of $8.6 million and $8.3 million at December 31, 1998 and 1997,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws.
Other Long-Term Investments
The Company's "Other long-term investments" of $1.0 million and $1.3 million as
of December 31, 1998 and 1997, respectively, are comprised of joint ventures and
limited parterships. The Company's share of net income from these entities was
$.1 million, $2.2 million and $1.4 million for the years ended December 31,
1998, 1997 and 1996, respectively, and is reported in "Net investment income."
Investment Income and Investment Gains and Losses
Net investment income arose from the following sources for the years ended
December 31:
1998 1997 1996
--------- --------- ---------
(In Thousands)
Fixed maturities - available for sale $ 179,184 $ 161,140 $ 152,445
Fixed maturities - held to maturity 26,128 26,936 33,419
Equity securities 14 76 44
Mortgage loans on real estate 1,818 2,585 5,669
Policy loans 40,928 37,398 33,449
Short-term investments 23,110 22,011 16,780
Other 6,886 14,920 10,051
--------- --------- ---------
Gross investment income 278,068 265,066 251,857
Less: investment expenses (16,638) (5,432) (4,529)
--------- --------- ---------
Net investment income $ 261,430 $ 259,634 $ 247,328
========= ========= =========
Realized investment gains ,net including charges for other than temporary
reductions in value, for the years ended December 31, were from the following
sources:
1998 1997 1996
--------- --------- ---------
(In Thousands)
Fixed maturities - available for sale $ 29,330 $ 9,039 $ 9,036
Fixed maturities - held to maturity 487 821 --
Equity securities 3,489 8 781
Mortgage loans on real estate -- 797 1,677
Derivative instruments 12,414 -- --
Other (879) 309 (659)
--------- --------- ---------
Realized investment gains, net $ 44,841 $ 10,974 $ 10,835
========= ========= =========
B-13
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS (continued)
Net Unrealized Investment Gains
Net unrealized investment gains on securities available for sale are included in
the Consolidated Statement of Financial Position as a component of "Accumulated
other comprehensive income." Changes in these amounts include reclassification
adjustments to avoid double-counting in "Comprehensive income," items that are
included as part of "Net income" for a period that also have been part of "Other
comprehensive income" in earlier periods. The amounts for the years ended
December 31, net of tax, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Net unrealized investment gains, beginning of year $ 17,129 $ 14,104 $ 32,056
Changes in net unrealized investment gains attributable to:
Investments:
Net unrealized gains on investments arising during the period 14,593 13,880 (20,405)
Reclassification adjustment for gains included in net income 22,799 6,680 6,165
-------- -------- --------
Change in net unrealized gains on investments, net of adjustments (8,206) 7,200 (26,570)
Impact of net unrealized investment gains on:
Policyholder's account balances (1,063) 1,293 (2,467)
Deferred policy acquisition costs 2,042 (5,468) 11,085
-------- -------- --------
Change in net unrealized investment gains (7,227) 3,025 (17,952)
-------- -------- --------
Net unrealized investment gains, end of year $ 9,902 $ 17,129 $ 14,104
======== ======== ========
</TABLE>
Unrealized gains (losses) on investments arising during the periods reported in
the above table are net of income tax (benefit) expense of $(8.2) million,
$(7.6) million and $12.1 million for the years ended December 31, 1998, 1997 and
1996, respectively.
Reclassification adjustments reported in the above table for the years ended
December 31, 1998, 1997 and 1996 are net of income tax expense of $12.8 million,
$3.6 million and $3.8 million, respectively.
Policyholder's account balances reported in the above table are net of income
tax (benefit) expense of $(.2) million, $.0 million and $1.4 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
Deferred policy acquisition costs in the above tables for the years ended
December 31, 1998, 1997 and 1996 are net of income tax (benefit) expense of
$(1.1) million, $2.9 million and $(6.2) million, respectively.
4. POLICYHOLDERS' LIABILITIES
Future policy benefits and other policyholder liabilities at December 31 are as
follows:
1998 1997
-------- --------
(In Thousands)
Life insurance $506,249 $444,737
Annuities 28,350 27,723
-------- --------
$534,599 $472,460
======== ========
B-14
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. POLICYHOLDERS' LIABILITIES (continued)
Life insurance liabilities include reserves for death benefits. Annuity
liabilities include reserves for immediate annuities.
The following table highlights the key assumptions generally utilized in
calculating these reserves:
<TABLE>
<CAPTION>
Product Mortality Interest Rate Estimation Method
- ------------------------------ ------------------------- ------------- -----------------------
<S> <C> <C> <C>
Life insurance - Domestic Generally rates 2.5% to 7.5% Net level premium based
guaranteed in on non-forfeiture
calculating cash interest rate
surrender values
Life insurance - International Generally rates 6.25% to 6.5% Net level premium based
guaranteed in on the expected
calculating cash investment return
surrender values
Individual immediate annuities 1983 Individual Annuity 6.25% to 11.0% Present value of
Mortality Table with expected future payment
certain modifications based on historical
experience
</TABLE>
Policyholders' account balances at December 31, are as follows:
1998 1997
---------- ----------
(In Thousands)
Interest-sensitive life contracts $1,386,829 $1,345,089
Individual annuities 1,077,996 1,035,371
Guaranteed investment contracts 231,366 --
---------- ----------
$2,696,191 $2,380,460
========== ==========
Policyholders' account balances for interest-sensitive life, individual
annuities, and guaranteed investment contracts are equal to policy account
values plus unearned premiums. The policy account values represent an
accumulation of gross premium payments plus credited interest less withdrawals,
expenses, mortality charges.
Certain contract provisions that determine the policyholder account balances are
as follows:
<TABLE>
<CAPTION>
Product Interest Rate Withdrawal / Surrender Charges
- --------------------------------- -------------- ----------------------------------
<S> <C> <C>
Interest sensitive life contracts 4.0% to 6.5% Various up to 10 years
Individual annuities 3.0% to 5.6% 0% to 8% for up to 8 years
Guaranteed investment contracts 5.02% to 6.23% Subject to market value withdrawal
provisions for any funds withdrawn
other than for benefit responsive
and contractual payments
</TABLE>
B-15
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. REINSURANCE
The Company participates in reinsurance, with Prudential and other companies, in
order to provide greater diversification of business, provide additional
capacity for future growth and limit the maximum net loss potential arising from
large risks. Reinsurance ceded arrangements do not discharge the Company or the
insurance subsidiaries as the primary insurer, except for cases involving a
novation. Ceded balances would represent a liability to the Company in the event
the reinsurers were unable to meet their obligations to the Company under the
terms of the reinsurance agreements. The likelihood of a material reinsurance
liability reassumed by the Company is considered to be remote.
Reinsurance amounts included in the Consolidated Statement of Operations for the
year ended December 31 are below.
1998 1997 1996
-------- -------- --------
(In Thousands)
Direct Premiums $ 65,423 $ 51,851 $ 53.776
Reinsurance assumed 1,395 1,369 1,128
Reinsurance ceded - affiliated (6,532) (686) (254)
Reinsurance ceded - unaffiliated (2,819) (3,038) (3,125)
-------- -------- --------
Premiums $ 57,467 $ 49,496 $ 51,525
======== ======== ========
Policyholders' benefits ceded $ 27,991 $ 25,704 $ 26,796
======== ======== ========
Reinsurance recoverables, included in "Other assets" in the Company's
Consolidated Statements of Financial Position, at December 31 include amounts
recoverable on unpaid and paid losses and were as follows:
1998 1997
------- -------
(In Thousands)
Life insurance - affiliated $ 6,481 $ 2,618
Other reinsurance - affiliated 21,650 23,243
------- -------
$28,131 $25,861
======= =======
B-16
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. EMPLOYEE BENEFIT PLANS
Pension and Other Postretirement Plans
The Company has a non-contributory defined benefit pension plan which covers
substantially all of its Taiwanese employees. This plan was established as of
September 30, 1997 and the projected benefit obligation and related expenses at
September 30, 1998 was not material to the Consolidated Statements of Financial
Position or results of operations for the years presented. All other employee
benefit costs are allocated to the Company from Prudential in accordance with
the service agreement described in Note 13.
7. INCOME TAXES
The components of income taxes for the years ended December 31, are as follows:
1998 1997 1996
-------- -------- --------
(In Thousands)
Current tax expense (benefit):
U.S $ 67,272 $ 71,989 $ 59,489
State and local 2,496 1,337 703
Foreign -- -- 4
-------- -------- --------
Total 69,768 73,326 60,196
-------- -------- --------
Deferred tax expense (benefit):
U.S 14,059 (11,458) 18,413
State and local 406 -- 526
-------- -------- --------
Total 14,465 (11,458) 18,939
-------- -------- --------
Total income tax expense $ 84,233 $ 61,868 $ 79,135
======== ======== ========
The income tax expense for the years ended December 31, differs from the amount
computed by applying the expected federal income tax rate of 35% to income from
operations before income taxes for the following reasons:
1998 1997 1996
-------- -------- --------
(In Thousands)
Expected federal income tax expense $ 82,668 $ 58,885 $ 79,925
State and local income taxes 1,886 869 799
Other (321) 2,114 (1,589)
-------- -------- --------
Total income tax expense $ 84,233 $ 61,868 $ 79,135
======== ======== ========
B-17
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. INCOME TAXES (continued)
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
1998 1997
-------- --------
(In Thousands)
Deferred tax assets
Insurance reserves $ 93,564 $ 52,144
-------- --------
Deferred tax assets 93,564 52,144
-------- --------
Deferred tax liabilities
Deferred acquisition costs 224,179 167,128
Net investment gains 12,241 16,068
Other 5,978 7,431
-------- --------
Deferred tax liabilities 242,398 190,627
-------- --------
Net deferred tax liability $148,834 $138,483
======== ========
Management believes that based on its historical pattern of taxable income, the
Company and its subsidiaries will produce sufficient income in the future to
realize its deferred tax assets after valuation allowance. Adjustments to the
valuation allowance will be made if there is a change in management's assessment
of the amount of the deferred tax asset that is realizable. At December 31, 1998
and 1997, respectively, the Company and its subsidiaries had no federal or state
operating loss carryforwards for tax purposes.
The Internal Revenue Service (the "Service") has completed examinations of all
consolidated federal income tax returns through 1989. The Service has examined
the years 1990 through 1992. Discussions are being held with the Service with
respect to proposed adjustments. However, management believes there are adequate
defenses against, or sufficient reserves to provide for, such adjustments. The
Service has begun their examination of the years 1993 through 1995.
B-18
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. EQUITY
Reconciliation of Statutory Surplus and Net Income
Accounting practices used to prepare statutory financial statements for
regulatory purposes differ in certain instances from GAAP. The following table
reconciles the Company's statutory net income and surplus as of and for the
years ended December 31, determined in accordance with accounting practices
prescribed or permitted by the Arizona and New Jersey Departments of Banking and
Insurance with net income and equity determined using GAAP.
1998 1997 1996
--------- --------- ---------
(In Thousands)
Statutory net income $ (33,097) $ 12,778 $ 48,846
Adjustments to reconcile to net
income on a GAAP basis:
Statutory income of subsidiaries 18,953 18,553 25,001
Deferred acquisition costs 202,375 38,003 48,862
Deferred premium 2,625 1,144 1,295
Insurance liabilities (24,942) 26,517 28,662
Deferred taxes (14,465) 11,458 (18,939)
Valuation of investments 20,077 506 365
Other, net (19,564) (2,585) 15,130
--------- --------- ---------
GAAP net income $ 151,962 $ 106,374 $ 149,222
========= ========= =========
1998 1997
----------- -----------
(In Thousands)
Statutory surplus $ 931,164 $ 853,130
Adjustments to reconcile to equity
on a GAAP basis:
Valuation of investments 117,254 97,787
Deferred acquisition costs 861,713 655,242
Deferred premium (15,625) (14,817)
Insurance liabilities (133,811) (107,525)
Deferred taxes (148,834) (138,483)
Other, net 41,371 160,183
----------- -----------
GAAP stockholder's equity $ 1,653,232 $ 1,505,517
=========== ===========
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values presented below have been determined using available
information and valuation methodologies. Considerable judgment is applied in
interpreting data to develop the estimates of fair value. Accordingly, such
estimates presented may not be realized in a current market exchange. The use of
different market assumptions and/or estimation methodologies could have a
material effect on the estimated fair values. The following methods and
assumptions were used in calculating the estimated fair values (for all other
financial instruments presented in the table, the carrying value approximates
estimated fair value).
B-19
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Fixed maturities and Equity securities
Estimated fair values for fixed maturities and equity securities, other than
private placement securities, are based on quoted market prices or estimates
from independent pricing services. Fair values for private placement securities
are estimated using a discounted cash flow model which considers the current
market spreads between the U.S. Treasury yield curve and corporate bond yield
curve, adjusted for the type of issue, its current credit quality and its
remaining average life. The estimated fair value of certain non-performing
private placement securities is based on amounts estimated by management.
Mortgage loans on real estate
The estimated fair value of the mortgage loan portfolio is primarily based upon
the present value of the scheduled future cash flows discounted at the
appropriate U.S. Treasury rate, adjusted for the current market spread for a
similar quality mortgage.
Policy loans
The estimated fair value of policy loans is calculated using a discounted cash
flow model based upon current U.S. Treasury rates and historical loan
repayments.
Policyholders' account balances
Estimated fair values of policyholders' account balances are derived by using
discounted projected cash flows, based on interest rates being offered for
similar contracts, with maturities consistent with those remaining for the
contracts being valued.
Derivative financial instruments
The fair value of futures is estimated based on market quotes for a transactions
with similar terms.
The following table discloses the carrying amounts and estimated fair values of
the Company's financial instruments at December 31,:
<TABLE>
<CAPTION>
1998 1997
------------------------------- ---------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----------- ----------- ------------- -----------
(In Thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Fixed maturities:
Available for sale $ 2,763,926 $ 2,763,926 $ 2,563,852 $ 2,563,852
Held to maturity 410,558 421,845 338,848 350,056
Equity securities 2,847 2,847 1,982 1,982
Mortgage loans 17,354 19,465 22,787 24,994
Policy loans 766,917 806,099 703,955 703,605
Short-term investments 240,727 240,727 316,355 316,355
Cash 89,679 89,679 71,358 71,358
Separate Account assets 11,531,754 11,531,754 8,022,079 8,022,079
Financial Liabilities:
Policyholders'
account balances $ 2,696,191 $ 2,703,725 $ 2,380,460 $ 2,374,040
Cash collateral for loaned
securities 123,044 123,044 143,421 143,421
Separate Account liabilities 11,490,751 11,490,751 7,948,788 7,948,788
Derivatives 1,723 2,374 653 653
</TABLE>
B-20
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
Futures & Options
The Company uses exchange-traded Treasury futures and options to reduce market
risks from changes in interest rates, to alter mismatches between the duration
of assets in a portfolio and the duration of liabilities supported by those
assets, and to hedge against changes in the value of securities it owns or
anticipates acquiring. The Company enters into exchange-traded futures and
options with regulated futures commissions merchants who are members of a
trading exchange. The fair value of futures and options is estimated based on
market quotes for a transaction with similar terms.
Under exchange-traded futures, the Company agrees to purchase a specified number
of contracts with other parties and to post variation margin on a daily basis in
an amount equal to the difference in the daily market values of those contracts.
Futures are typically used to hedge duration mismatches between assets and
liabilities by replicating Treasury performance. Treasury futures move
substantially in value as interest rates change and can be used to either
generate new or hedge existing interest rate risk. This strategy protects
against the risk that cash flow requirements may necessitate liquidation of
investments at unfavorable prices resulting from increases in interest rates.
This strategy can be a more cost effective way of temporarily reducing the
Company's exposure to a market decline than selling fixed income securities and
purchasing a similar portfolio when such a decline is believed to be over.
For futures that meet hedge accounting criteria, changes in their fair value are
deferred and recognized as an adjustment to the carrying value of the hedged
item. Deferred gains or losses from the hedges for interest-bearing financial
instruments are amortized as a yield adjustment over the remaining lives of the
hedged item. Futures that do not qualify as hedges are carried at fair value
with changes in value reported in current period earnings. The notional value of
futures contracts was $40.8 million and $115.7 million at December 31, 1998 and
1997, respectively. The fair value of futures contracts was immaterial at
December 31, 1998 and 1997.
When the Company anticipates a significant decline in the stock market which
will correspondingly affect its diversified portfolio, it may purchase put index
options where the basket of securities in the index is appropriate to provide a
hedge against a decrease in the value of the equity portfolio or a portion
thereof. This strategy effects an orderly sale of hedged securities. When the
Company has large cash flows which it has allocated for investment in equity
securities, it may purchase call index options as a temporary hedge against an
increase in the price of the securities it intends to purchase. This hedge
permits such investment transactions to be executed with the least possible
adverse market impact.
Option premium paid or received is reported as an asset or liability and
amortized into income over the life of the option. If options meet the criteria
for hedge accounting, changes in their fair value are deferred and recognized as
an adjustment to the hedged item. Deferred gains or losses from the hedges for
interest-bearing financial instruments are recognized as an adjustment to
interest income or expense of the hedged item. If the options do not meet the
criteria for hedge accounting, they are fair valued, with changes in fair value
reported in current period earnings. The fair value of options was immaterial at
December 31, 1998, and there were no options in 1997.
Currency Derivatives
The Company uses currency swaps to reduce market risks from changes in currency
values of investments denominated in foreign currencies that the Company either
holds or intends to acquire and to alter the currency exposures arising from
mismatches between such foreign currencies and the US Dollar.
Under currency swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between one currency and another at a
forward exchange rate and calculated by reference to an agreed principal amount.
Generally, the principal amount of each currency is exchanged at the beginning
and termination of the currency swap by each party. These transactions are
entered into pursuant to master agreements that provide for a single net payment
to be made by one counterparty for payments made in the same currency at each
due date.
If currency derivatives are effective as hedges of foreign currency translation
and transaction exposures, gains or losses are recorded in "Foreign currency
translation adjustments". If currency derivatives do not meet hedge accounting
criteria, gains or losses from those derivatives are recognized in current
period earnings.
As of December 31, 1998, the notional value of the swaps was $40.5 million with
a fair value of ($2.3) million. There were no currency swaps at year end 1997.
B-21
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)
Credit Risk
The current credit exposure of the Company's derivative contracts is limited to
the fair value at the reporting date. Credit risk is managed by entering into
transactions with creditworthy counterparties and obtaining collateral where
appropriate and customary. The Company also attempts to minimize its exposure to
credit risk through the use of various credit monitoring techniques. As of
December 31, 1998, 47% of notional consisted of interest rate derivatives, 47%
of notional consisted of foreign currency derivatives, and 6% of notional
consisted of equity derivatives.
11. CONTINGENCIES
Several actions have been brought against the Company on behalf of those persons
who purchased life insurance policies based on complaints about sales practices
engaged in by Prudential, the Company and agents appointed by Prudential and the
Company. Prudential has agreed to indemnify the Company for any and all losses
resulting from such litigation.
In the normal course of business, the Company is subject to various claims and
assessments. Management believes the settlement of these matters would not have
a material effect on the financial position or results of operations of the
Company.
12. DIVIDENDS
The Company is subject to Arizona law which limits the amount of dividends that
insurance companies can pay to stockholders. The maximum dividend which may be
paid in any twelve month period without notification or approval is limited to
the lesser of 10% of statutory surplus as of December 31 of the preceding year
or the net gain from operations of the preceding calendar year. Cash dividends
may only be paid out of surplus derived from realized net profits. Based on
these limitations and the Company's surplus position at December 31, 1998, the
Company would not be permitted a dividend distribution in 1998.
13. RELATED PARTY TRANSACTIONS
Service Agreements
Prudential and Pruco Life operate under service and lease agreements whereby
services of officers and employees (except for those agents employed by the
Company in Taiwan), supplies, use of equipment and office space are provided by
Prudential. The net cost of these services allocated to the Company were $269.9
million, $139.5 million and $101.7 million for the years ended December 31,
1998, 1997, and 1996, respectively. These costs are treated in a manner
consistent with the Company's policy on deferred acquisition costs.
Prudential and Pruco Life have an agreement with respect to administrative
services for the Prudential Series Fund. The Company invests in the various
portfolios of the Series Fund through the Separate Accounts. Under this
agreement, Prudential pays compensation to Pruco Life in the amount equal to a
portion of the gross investment advisory fees paid by the Prudential Series
Fund. The Company received from Prudential its allocable share of such
compensation in the amount of $40.1 million, $29.4 million and $19.1 million
during 1998, 1997 and 1996, respectively, recorded in other income.
Reinsurance
The Company currently has three reinsurance agreements in place with Prudential
(the reinsurer). Specifically a reinsurance Group Annuity Contract, whereby the
reinsurer, in consideration for a single premium payment by the Company,
provides reinsurance equal to 100% of all payments due under the contract, and
two yearly renewable term agreements in which the Company may offer and the
reinsurer may accept reinsurance on any life in excess of the Company's maximum
limit of retention. The Company is not relieved of its primary obligation to the
policyholder as a result of these reinsurance transactions. These agreements had
no material effect on net income for the years ended December 31, 1998, 1997,
and 1996.
B-22
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
13. RELATED PARTY TRANSACTIONS (continued)
Debt Agreements
In July 1998, the Company established a revolving line of credit facility of up
to $300 million with Prudential Funding Corporation, a wholly owned subsidiary
of Prudential. There is no outstanding debt relating to this credit facility as
of December 31, 1998.
B-23
<PAGE>
Report of Independent Accountants
---------------------------------
To the Board of Directors of
Pruco Life Insurance Company
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of operations, of changes in
stockholder's equity and of cash flows present fairly, in all material respects,
the financial position of Pruco Life Insurance Company and its subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
February 26, 1999
B-24
<PAGE>
PRUVIDER(SM)
VARIABLE APPRECIABLE LIFE(R)
INSURANCE
PRUvider(SM) Variable APPRECIABLE LIFE(R) was issued by Pruco Life Insurance
Company, 213 Washington Street, Newark, NJ 07102-2992 and offered through Pruco
Securities Corporation, 751 Broad Street, Newark, NJ 07102-3777, both
subsidiaries of The Prudential Insurance Company of America, 751 Broad Street,
Newark, NJ 07102-3777. PRUvider is a service mark of Prudential. APPRECIABLE
LIFE is a registered mark of Prudential.
[LOGO] PRUDENTIAL
Pruco Life Insurance Company
213 Washington Street, Newark, NJ 07102-2992
Telephone 800 778-2255
SVAL-1 Ed. 5/99 CAT#6469898
<PAGE>
PRUvider(SM) Variable
Appreciable Life(R) Insurance
PROSPECTUS
The Pruco Life of New Jersey Variable
Appreciable Account and
The Prudential Series Fund, Inc.
MAY 1, 1999
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
<PAGE>
PROSPECTUS
MAY 1, 1999
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT
PRUvider(SM)
VARIABLE APPRECIABLE LIFE(R)
INSURANCE CONTRACT
This prospectus describes a variable life insurance contract (the "Contract")
offered by Pruco Life Insurance Company of New Jersey ("Pruco Life of New
Jersey", "us", or "we") under the name PRUvider(SM) VARIABLE APPRECIABLE LIFE(R)
Insurance. Pruco Life of New Jersey, a stock life insurance company, is an
indirect, wholly-owned subsidiary of The Prudential Insurance Company of America
("Prudential"). The death benefit varies daily with investment experience but
will never be less than a guaranteed minimum amount (the face amount specified
in the Contract). There is no guaranteed minimum cash surrender value.
AS OF MAY 1, 1999, PRUCO LIFE OF NEW JERSEY NO LONGER OFFERED THESE CONTRACTS
FOR SALE.
You, the Contract owner, may choose to invest your Contract's premiums and their
earnings in one or more of the following ways:
o Invest in either one or both of two available subaccounts of the Pruco Life
of New Jersey Variable Appreciable Account, each of which invests in a
corresponding portfolio of The Prudential Series Fund, Inc. (the "Fund"):
the CONSERVATIVE BALANCED PORTFOLIO and the FLEXIBLE MANAGED PORTFOLIO.
Pruco Life of New Jersey may add additional subaccounts in the future.
o Invest in the FIXED-RATE OPTION, which pays a guaranteed interest rate.
Pruco Life of New Jersey will credit interest daily on any portion of the
premium payment that you have allocated to the fixed-rate option at rates
periodically declared by Pruco Life of New Jersey, in its sole discretion.
Any such interest rate will never be less than an effective annual rate of
4%.
You have considerable flexibility as to when and in what amounts you pay
premiums. On the other hand, it may be to your advantage to pay a Scheduled
Premium amount on the dates due, which are at least once a year but may be more
often.
This prospectus describes the Contract generally and the Pruco Life of New
Jersey PRUvider(SM) Variable Appreciable Account. The prospectus and its
statement of additional information also describe the investment objectives and
the risks of investing in the Fund portfolios. The statement of additional
information is available without charge by telephoning (800) 778-2255.
Before you sign an application to purchase this life insurance contract, you
should carefully read this prospectus. If you do purchase the Contract, you
should retain this prospectus, together with the Contract, for future reference.
The Securities and Exchange Commission ("SEC") maintains a Web site
(http://www.sec.gov) that contains material incorporated by reference and other
information regarding registrants that file electronically with the SEC.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
213 Washington Street
Newark, New Jersey 07102-2992
Telephone: (800) 778-2255
PRUvider is a service mark of Prudential.
APPRECIABLE LIFE is a registered mark of Prudential.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
INTRODUCTION AND SUMMARY .......................................................... 1
BRIEF DESCRIPTION OF THE CONTRACT ............................................. 1
INVESTMENT OPTIONS ............................................................ 1
CHARGES ....................................................................... 2
PREMIUM PAYMENTS .............................................................. 3
LAPSE AND GUARANTEE AGAINST LAPSE ............................................. 4
REFUND ........................................................................ 4
FINANCIAL HIGHLIGHTS OF THE PORTFOLIOS OF THE FUND ................................ 5
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS AND ACCUMULATED PREMIUMS ... 8
GENERAL INFORMATION ABOUT PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY, PRUCO LIFE OF
NEW JERSEY VARIABLE APPRECIABLE ACCOUNTAND THE FIXED RATE OPTION ................. 9
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY .................................... 9
PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT ......................... 9
THE FIXED-RATE OPTION ......................................................... 10
DETAILED INFORMATION FOR CONTRACT OWNERS .......................................... 10
REQUIREMENTS FOR ISSUANCE OF A CONTRACT ....................................... 10
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK" .................................. 10
CONTRACT FEES AND CHARGES ..................................................... 11
DEDUCTIONS FROM PREMIUMS .................................................. 11
DEDUCTIONS FROM PORTFOLIOS ................................................ 11
MONTHLY DEDUCTIONS FROM CONTRACT FUND ..................................... 11
DAILY DEDUCTION FROM THE CONTRACT FUND .................................... 13
SURRENDER OR WITHDRAWAL CHARGES ........................................... 13
TRANSACTION CHARGES ....................................................... 14
CONTRACT DATE ................................................................. 14
PREMIUMS ...................................................................... 14
ALLOCATION OF PREMIUMS ........................................................ 15
TRANSFERS ..................................................................... 16
HOW THE CONTRACT FUND CHANGES WITH INVESTMENT EXPERIENCE ...................... 16
HOW A CONTRACT'S DEATH BENEFIT WILL VARY ...................................... 17
CONTRACT LOANS ................................................................ 17
SURRENDER OF A CONTRACT ....................................................... 18
LAPSE AND REINSTATEMENT ....................................................... 18
FIXED EXTENDED TERM INSURANCE ............................................. 18
FIXED REDUCED PAID-UP INSURANCE ........................................... 18
VARIABLE REDUCED PAID-UP INSURANCE ........................................ 19
WHAT HAPPENS IF NO REQUEST IS MADE? ....................................... 19
PAID-UP INSURANCE OPTION ...................................................... 19
REDUCED PAID-UP INSURANCE OPTION .............................................. 19
WHEN PROCEEDS ARE PAID ........................................................ 20
LIVING NEEDS BENEFIT .......................................................... 20
TERMINAL ILLNESS OPTION ................................................... 20
VOTING RIGHTS ................................................................. 21
REPORTS TO CONTRACT OWNERS .................................................... 21
TAX TREATMENT OF CONTRACT BENEFITS ............................................ 22
TREATMENT AS LIFE INSURANCE ............................................... 22
PRE-DEATH DISTRIBUTIONS ................................................... 22
WITHHOLDING ............................................................... 22
OTHER TAX CONSEQUENCES .................................................... 23
OTHER CONTRACT PROVISIONS ..................................................... 23
FURTHER INFORMATION ABOUT THE FUND ................................................ 23
RISK/RETURN SUMMARIES ......................................................... 23
CONSERVATIVE BALANCED PORTFOLIO ............................................... 23
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES ............................. 23
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
PRINCIPAL RISKS ........................................................... 23
EVALUATING PERFORMANCE .................................................... 24
FLEXIBLE MANAGED PORTFOLIO .................................................... 24
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES ............................. 24
PRINCIPAL RISKS ........................................................... 25
EVALUATING PERFORMANCE .................................................... 25
HOW THE PORTFOLIOS INVEST ......................................................... 26
CONSERVATIVE BALANCED PORTFOLIO ............................................... 26
INVESTMENT OBJECTIVE AND POLICIES ......................................... 26
DERIVATIVES AND OTHER STRATEGIES .......................................... 27
ADDITIONAL STRATEGIES ..................................................... 28
FLEXIBLE MANAGED PORTFOLIO .................................................... 28
INVESTMENT OBJECTIVE AND POLICIES ......................................... 28
DERIVATIVES AND OTHER STRATEGIES .......................................... 29
ADDITIONAL STRATEGIES ..................................................... 30
INVESTMENT RISKS .................................................................. 31
HOW THE PORTFOLIOS ARE MANAGED .................................................... 35
PURCHASE AND SALE OF FUND SHARES .............................................. 35
OTHER FUND INFORMATION ............................................................ 36
DISTRIBUTOR ................................................................... 36
MONITORING FOR POSSIBLE CONFLICTS ............................................. 36
STATE REGULATION .................................................................. 36
EXPERTS ........................................................................... 36
LITIGATION ........................................................................ 36
YEAR 2000 COMPLIANCE............................................................... 37
EXPANDED TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION.................. 38
ADDITIONAL INFORMATION............................................................. 40
FINANCIAL STATEMENTS............................................................... 40
FINANCIAL STATEMENTS OF THE PRUVIDER VARIABLE APPRECIABLE LIFE SUBACCOUNTS OF
PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT.............................. A1
FINANCIAL STATEMENTS OF PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY ................ B1
</TABLE>
<PAGE>
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INTRODUCTION AND SUMMARY
THIS SUMMARY PROVIDES ONLY AN OVERVIEW OF THE MORE SIGNIFICANT PROVISIONS OF THE
CONTRACT. WE PROVIDE FURTHER DETAIL IN THE SUBSEQUENT SECTIONS OF THIS
PROSPECTUS, AS WELL AS IN A STATEMENT OF ADDITIONAL INFORMATION WHICH IS
AVAILABLE TO YOU UPON REQUEST WITHOUT CHARGE. A DESCRIPTION OF THE CONTENTS OF
THE STATEMENT OF ADDITIONAL INFORMATION IS ON PAGE 38.
AS OF MAY 1, 1999, PRUCO LIFE OF NEW JERSEY NO LONGER OFFERED THESE CONTRACTS
FOR SALE.
As you read this prospectus, you should keep in mind that this is a variable
life insurance contract. VARIABLE LIFE INSURANCE has significant investment
aspects and requires you to make investment decisions, and therefore it is also
a "security." Securities that are offered to the public must be registered with
the Securities and Exchange Commission. The prospectus that is a part of the
registration statement must be given to all prospective purchasers. A
substantial part of the premium pays for life insurance that will pay a benefit
to the beneficiary, in the event of the insured's death. This death benefit
generally far exceeds total premium payments. You should not purchase this
Contract, therefore, unless the major reason for the purchase is to provide life
insurance protection. Because the Contract provides whole life insurance, it
also serves a second important objective. It can be expected to provide a cash
surrender value that can be used during your lifetime.
BRIEF DESCRIPTION OF THE CONTRACT
The Pruco Life of New Jersey PRUvider VARIABLE APPRECIABLE LIFE Insurance
Contract (the "Contract") is issued and sold by Pruco Life Insurance Company of
New Jersey ("Pruco Life of New Jersey", "us", or "we"). The Contract is a form
of flexible premium variable life insurance. It is based on a Contract Fund, the
value of which changes every business day. The Contract Fund amount represents
the value of your Contract on that day. There is a surrender charge if you
decide to surrender the Contract during the first 10 Contract years.
A broad objective of the Contract is to provide benefits that will increase in
value if favorable investment results are achieved. Pruco Life of New Jersey has
established the Pruco Life of New Jersey Variable Appreciable Account (the
"Account") under New Jersey law as a separate investment account whose assets
are segregated from all other assets of Pruco Life of New Jersey. The Account is
divided into two subaccounts, and you decide which one[s] will hold the assets
of your Contract Fund. Whenever you pay a premium, Pruco Life of New Jersey
first deducts certain charges and, except for amounts allocated to the
fixed-rate option, puts the remainder - the "net premium" - into the Account.
The money allocated to each subaccount is immediately invested in a
corresponding portfolio of The Prudential Series Fund, Inc. (the "Fund"), a
series mutual fund for which Prudential is the investment adviser. The two Fund
portfolios -- the CONSERVATIVE BALANCED PORTFOLIO and the FLEXIBLE MANAGED
PORTFOLIO -- differ in the amount of risk associated with them and are described
in more detail below.
The Fund is an investment company registered under the Investment Company Act of
1940.
INVESTMENT OPTIONS
When you first buy the Contract you give instructions to Pruco Life of New
Jersey as to what combination of the three investment options you wish your
Contract Fund invested. Thereafter you may make changes in these allocations
either in writing or by telephone. The investment objectives of the portfolios,
described more fully starting on page 23 of this prospectus, are as follows:
1
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VARIABLE INVESTMENT OPTIONS
O CONSERVATIVE BALANCED PORTFOLIO. The investment objective is a total
investment return consistent with a conservatively managed diversified
portfolio. The Portfolio invests in a mix of equity securities, debt
obligations, and money market instruments. This Portfolio is appropriate
for an investor desiring diversification with a relatively lower risk of
loss than that associated with the Flexible Managed Portfolio.
o FLEXIBLE MANAGED PORTFOLIO. The investment objective is a total investment
return consistent with an aggressively managed diversified portfolio. The
Portfolio invests in a mix of money equity securities, debt obligations,
and money market instruments. This Portfolio is appropriate for an investor
desiring diversification, who is willing to accept a relatively high level
of loss, in an effort to achieve greater appreciation.
FIXED-RATE OPTION
The fixed-rate option provides a guarantee against loss of principal plus income
at a rate which may change at yearly intervals, for new premium deposits, it
changes monthly, but will never be lower than an effective annual rate of 4%.
CHARGES
Pruco Life of New Jersey deducts certain charges from each premium payment and
from the amounts held in the designated subaccounts and the fixed rate option.
In addition, Pruco Life of New Jersey makes certain additional charges if a
Contract lapses or is surrendered during the first 10 Contract years. All these
charges, which are largely designed to cover insurance costs and risks as well
as sales and administrative expenses, are fully described under CONTRACT FEES
AND CHARGES on page 11. In brief, Pruco Life of New Jersey may make the
following charges:
------------------------------------------------------------------------
PREMIUM PAYMENT
------------------------------------------------------------------------
-----------------------------------------
o less charge for taxes attributable
to premiums
o less $2 processing fee
-----------------------------------------
------------------------------------------------------------------------
INVESTED PREMIUM AMOUNT
o To be invested in one or a combination of:
o The Conservative Balanced Portfolio
o The Flexible Managed Portfolio
o The fixed-rate option
------------------------------------------------------------------------
2
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------------------------------------------------------------------------
DAILY CHARGES
o We deduct management fees and expenses from the Fund assets. The
total expenses of each portfolio for the year 1998, expressed as a
percentage of the average assets during the year, are as follows:
Portfolios Conservative Balanced Flexible Managed
Advisory Fee 0.55% 0.60%
Other Expenses 0.02% 0.01%
Total Expenses 0.57% 0.61%
o We deduct a daily mortality and expense risk charge equivalent to an
annual rate of up to 0.9% from the subaccount assets.
------------------------------------------------------------------------
------------------------------------------------------------------------
MONTHLY CHARGES
o We deduct a sales charge from the Contract Fund in the amount of 1/2
of 1% of the primary annual premium.
o We reduce the Contract Fund by a guaranteed minimum death benefit risk
charge of not more than $0.01 per $1,000 of the face amount of
insurance.
o We reduce the Contract Fund by an administrative charge of up to $6
per Contract and up to $0.19 per $1,000 of face amount of insurance
(currently, on a non-guaranteed basis, the $0.19 charge is decreased
to $0.09 per $1,000); if the face amount of the Contract is less than
$10,000, there is an additional charge of $0.30 per $1,000 of face
amount.
o We deduct a charge for anticipated mortality. The maximum charge is
based on the non-smoker/smoker 1980 CSO Tables.
o If the Contract includes riders, we deduct rider charges from the
Contract Fund.
o If the rating class of the insured results in an extra charge, we will
deduct that charge from the Contract Fund.
------------------------------------------------------------------------
------------------------------------------------------------------------
POSSIBLE ADDITIONAL CHARGES
o During the first 10 years, we will assess a contingent deferred sales
charge if the Contract lapses or is surrendered. During the first five
years, the maximum contingent deferred sales charge is 50% of the
first year's primary annual premium. This charge is both subject to
other important limitations and reduced for Contracts that have been
inforce for more than five years.
o During the first 10 years, we will assess a contingent deferred
administrative charge if the Contract lapses or is surrendered. During
the first five years, this charge equals $5 per $1,000 of face amount.
It begins to decline uniformly after the fifth Contract year so that
it disappears on the 10th Contract anniversary.
o We assess an administrative processing charge of up to $15 for each
withdrawal of excess cash surrender value.
------------------------------------------------------------------------
Because of the charges listed above, and in particular because of the
significant charges deducted upon early surrender or lapse, you should purchase
a Contract only if you intend to, and have the financial capability to, keep it
for a substantial period.
3
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PREMIUM PAYMENTS
Your Contract sets forth an annual Scheduled Premium, or one that is payable
more frequently, such as monthly. Pruco Life of New Jersey guarantees that, if
the Scheduled Premiums are paid when due (or if missed premiums are paid later,
with interest), the death benefit will be paid upon the death of the insured.
Your Contract will not lapse even if investment experience is so unfavorable
that the Contract Fund value drops to zero.
The amount of the Scheduled Premium depends on the Contract's face amount, the
insured's sex and age at issue, the insured's risk classification, the rate for
taxes attributable to premiums, and the frequency of premium payments selected.
Under certain low face amount Contracts issued on younger insureds, the payment
of the Scheduled Premium may cause the Contract to be classified as a Modified
Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS, page 22.
LAPSE AND GUARANTEE AGAINST LAPSE
Pruco Life of New Jersey's PRUVIDER Variable APPRECIABLE LIFE Insurance Contract
is a form of life insurance that provides much of the flexibility of variable
universal life, with two important distinctions:
o Pruco Life of New Jersey guarantees that if the Scheduled Premiums are paid
when due, or within the grace period (or missed premiums are paid later
with interest), the Contract will not lapse and, at least, the face amount
of insurance will be paid upon the death of the insured. This is true even
if, because of unfavorable investment experience, the Contract Fund value
should drop to zero.
o If all premiums are not paid when due (or not made up later), the Contract
will still not lapse as long as the Contract Fund is higher than a stated
amount set forth in a table in the Contract. This amount is called the
"Tabular Contract Fund", and it increases each year. In later years it
becomes quite high. The Contract lapses when the Contract Fund falls below
this stated amount, rather than when it drops to zero. This means that,
when a PRUVIDER Variable APPRECIABLE LIFE Contract lapses, it may still
have considerable value, and you may have a substantial incentive to
reinstate it. If you choose not to reinstate, on the other hand, you may
take the cash surrender value under several options.
REFUND
For a limited time, a Contract may be returned for a refund in accordance with
the terms of its "free look" provision. See SHORT-TERM CANCELLATION RIGHT OR
"FREE LOOK", page 10.
----------
THE REPLACEMENT OF LIFE INSURANCE IS GENERALLY NOT IN YOUR BEST INTEREST. IN
MOST CASES, IF YOU REQUIRE ADDITIONAL COVERAGE, THE BENEFITS OF YOUR EXISTING
CONTRACT CAN BE PROTECTED BY PURCHASING ADDITIONAL INSURANCE OR A SUPPLEMENTAL
CONTRACT. IF YOU ARE CONSIDERING REPLACING A CONTRACT, YOU SHOULD COMPARE THE
BENEFITS AND COSTS OF SUPPLEMENTING YOUR EXISTING CONTRACT WITH THE BENEFITS AND
COSTS OF PURCHASING THE CONTRACT DESCRIBED IN THIS PROSPECTUS AND YOU SHOULD
CONSULT A QUALIFIED TAX ADVISER.
THIS PROSPECTUS MAY ONLY BE OFFERED IN JURISDICTIONS IN WHICH THE OFFERING IS
LAWFUL. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH
THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND ITS STATEMENT OF
ADDITIONAL INFORMATION.
4
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In the following pages of this prospectus we describe in much greater detail all
of the provisions of the Contract. The description is preceded by two sets of
tables. The first set provides, in condensed form, financial information about
the portfolios of the Fund, beginning on the date each of them was first
established. The second set shows what the cash surrender values and death
benefits would be under a Contract issued on a hypothetical person, making
certain assumptions. These tables show generally how the values under the
Contract would vary, with different investment performances.
FINANCIAL HIGHLIGHTS OF THE PORTFOLIOS OF THE FUND
The tables that follow provide information about the annual investment income,
capital appreciation and expenses of the two available portfolios of the Fund
for each year, beginning with the year after the Fund was established. They are
prepared on a per share basis and therefore provide useful information about the
investment performance of each portfolio.
NOTE, HOWEVER, THAT THESE TABLES DO NOT TELL YOU HOW YOUR CONTRACT FUND WOULD
HAVE CHANGED DURING THIS PERIOD BECAUSE THEY DO NOT REFLECT THE DEDUCTIONS FROM
THE CONTRACT FUND OTHER THAN THE PORTFOLIO DEDUCTIONS.
5
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<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.
6
<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.
7
<PAGE>
ILLUSTRATIONS OF CASH SURRENDER VALUES,
DEATH BENEFITS AND ACCUMULATED PREMIUMS
The following four tables show how a Contract's death benefit and cash surrender
values change with the investment performance of the Account. They are
"hypothetical" because they are based, in part, upon several assumptions which
are described below. All four tables assume the following:
o a Contract of a given face amount bought by a 35 year old male, non-smoker,
with no extra risks or substandard ratings, and no extra benefit riders
added to the Contract.
o the Scheduled Premium is paid on each Contract anniversary, the deduction
for taxes attributable to premiums is 3.25% and no loans are taken.
o the Contract fund has been invested in equal amounts in each of the two
available portfolios of the Fund and no portion of the Contract Fund has
been allocated to the fixed-rate option.
The first table (page T1) assumes a Contract with a $5,000 face amount has been
purchased and the second table (page T2) assumes a Contract with a $20,000 face
amount has been purchased. Both assume the current charges will continue for the
indefinite future. The third and fourth tables (pages T3 and T4) are based upon
the same assumptions except it is assumed the maximum contractual charges have
been made from the beginning.
Finally, there are four assumptions, shown separately, about the average
investment performance of the portfolios. The first is that there will be a
uniform 0% gross rate of return with the average value of the Contract Fund
uniformly adversely affected by very unfavorable investment performance. The
other three assumptions are that investment performance will be at a uniform
gross annual rate of 4%, 8% and 12%. Actual returns will fluctuate from year to
year. In addition, death benefits and cash surrender values would be different
from those shown if investment returns averaged 0%, 4%, 8% and 12% but
fluctuated from those averages throughout the years. Nevertheless, these
assumptions help show how the Contract values change with investment experience.
The first column in the following four tables (pages T1 through T4) shows the
Contract year. The second column, to provide context, shows what the aggregate
amount would be if the Scheduled Premiums had been invested to earn interest,
after taxes, at 4% compounded annually. The next four columns show the death
benefit payable at the end of each of the years shown for the four different
assumed investment returns. The last four columns show the cash surrender value
payable at the end of each of the years shown for the four different assumed
investment returns. The cash surrender values in the first 10 years reflect the
surrender charges that would be deducted if the Contract were surrendered in
those years.
A gross return (as well as the net return) is shown at the top of each column.
The gross return represents the combined effect of investment income and capital
gains and losses, realized or unrealized, of the portfolios before any reduction
is made for investment advisory fees or other Fund expenses. The net return
reflects average total annual expenses of the two portfolios of 0.59%, and the
daily deduction from the Contract Fund of 0.9% per year. Thus, based on the
above assumptions, gross investment returns of 0%, 4%, 8% and 12% are the
equivalent of net investment returns of -1.49%, 2.51%, 6.51%, and 10.51%,
respectively. The actual fees and expenses of the portfolios associated with a
particular Contract may be more or less than 0.59% and will depend on which
subaccounts are selected. The death benefits and cash surrender values shown
reflect the deduction of all expenses and charges, including monthly charges,
both from the Fund and under the Contract.
If you are considering the purchase of a variable life insurance contract from
another insurance company, you should not rely upon these tables for comparison
purposes. A comparison between two tables, each showing values for a 35 year old
man, may be useful for a 35 year old man but would be inaccurate if made for
insureds of other ages or sex. Your Pruco Life of New Jersey representative can
provide you with a hypothetical illustration for a person of your own age, sex,
and rating class.
8
<PAGE>
ILLUSTRATION
------------
THE PRUVIDER VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT
MALE PREFERRED ISSUE AGE 35
$5,000 GUARANTEED DEATH BENEFIT
$173.70 ANNUAL PREMIUM (1)
USING CURRENT CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
Death Benefit (2) Cash Surrender Value (2)
---------------------------------------------------- ----------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated ---------------------------------------------------- ----------------------------------------------------
Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (-1.49% Net) (2.51% Net) (6.51% Net) (10.51% Net) (-1.49% Net) (2.51% Net) (6.51% Net) (10.51% Net)
------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 181 $5,003 $5,007 $ 5,011 $ 5,016 $ 0 $ 0 $ 2 $ 6
2 $ 369 $5,002 $5,013 $ 5,025 $ 5,036 $ 48 $ 59 $ 70 $ 82
3 $ 564 $5,000 $5,019 $ 5,040 $ 5,063 $101 $ 121 $ 142 $ 165
4 $ 767 $5,000 $5,024 $ 5,058 $ 5,096 $154 $ 185 $ 219 $ 257
5 $ 978 $5,000 $5,028 $ 5,079 $ 5,136 $205 $ 249 $ 300 $ 357
6 $ 1,198 $5,000 $5,034 $ 5,105 $ 5,187 $268 $ 330 $ 401 $ 483
7 $ 1,427 $5,000 $5,039 $ 5,134 $ 5,248 $331 $ 411 $ 507 $ 620
8 $ 1,665 $5,000 $5,043 $ 5,167 $ 5,320 $392 $ 494 $ 618 $ 771
9 $ 1,912 $5,000 $5,047 $ 5,205 $ 5,404 $452 $ 578 $ 736 $ 935
10 $ 2,169 $5,000 $5,050 $ 5,248 $ 5,503 $511 $ 663 $ 861 $ 1,116
15 $ 3,617 $5,000 $5,058 $ 5,544 $ 6,271 $721 $1,047 $ 1,532 $ 2,259
20 $ 5,379 $5,000 $5,048 $ 6,027 $ 9,117 $882 $1,457 $ 2,436 $ 4,122
25 $ 7,523 $5,000 $5,016 $ 6,983 $13,550 $970 $1,882 $ 3,643 $ 7,069
30 (Age 65) $10,132 $5,000 $5,000 $ 8,747 $19,608 $940 $2,304 $ 5,202 $11,661
35 $13,305 $5,000 $5,000 $10,721 $27,975 $700 $2,696 $ 7,157 $18,678
40 $17,166 $5,000 $5,000 $12,973 $39,652 $ 52 $3,019 $ 9,560 $29,220
45 $21,864 $5,000 $5,000 $15,607 $56,163 $ 0 $3,189 $12,446 $44,788
</TABLE>
(1) If premiums are paid more frequently than annually, the payments would be
$89.46 semi-annually, $46.15 quarterly or $16.90 monthly. The death
benefits and cash surrender values would be slightly different for a
Contract with more frequent premium payments.
(2) Assumes no Contract loan has been made.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rates of
inflation. The death benefit and cash surrender value for a contract would be
different from those shown if the actual rates of return averaged 0%, 4%, 8%,
and 12% over a period of years but also fluctuated above or below those averages
for individual contract years. No representations can be made by Pruco Life of
New Jersey or the Series Fund that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time.
T1
<PAGE>
THE PRUVIDER VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT
MALE PREFERRED ISSUE AGE 35
$20,000 GUARANTEED DEATH BENEFIT
$390.90 ANNUAL PREMIUM (1)
USING CURRENT CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
Death Benefit (2) Cash Surrender Value (2)
---------------------------------------------------- ----------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated ---------------------------------------------------- ----------------------------------------------------
Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (-1.49% Net) (2.51% Net) (6.51% Net) (10.51% Net) (-1.49% Net) (2.51% Net) (6.51% Net) (10.51% Net)
------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 407 $20,012 $20,024 $20,036 $ 20,048 $ 39 $ 50 $ 62 $ 74
2 $ 829 $20,013 $20,046 $20,080 $ 20,115 $ 243 $ 276 $ 310 $ 345
3 $ 1,269 $20,002 $20,065 $20,133 $ 20,204 $ 442 $ 506 $ 573 $ 644
4 $ 1,726 $20,000 $20,082 $20,195 $ 20,317 $ 636 $ 739 $ 852 $ 974
5 $ 2,202 $20,000 $20,095 $20,266 $ 20,457 $ 833 $ 986 $ 1,157 $ 1,347
6 $ 2,697 $20,000 $20,112 $20,357 $ 20,636 $1,084 $ 1,296 $ 1,540 $ 1,820
7 $ 3,211 $20,000 $20,128 $20,461 $ 20,853 $1,335 $ 1,617 $ 1,950 $ 2,342
8 $ 3,746 $20,000 $20,141 $20,579 $ 21,111 $1,582 $ 1,944 $ 2,383 $ 2,914
9 $ 4,302 $20,000 $20,152 $20,715 $ 21,416 $1,824 $ 2,276 $ 2,839 $ 3,539
10 $ 4,881 $20,000 $20,160 $20,867 $ 21,773 $2,060 $ 2,612 $ 3,319 $ 4,225
15 $ 8,140 $20,000 $20,164 $21,949 $ 24,589 $2,900 $ 4,119 $ 5,903 $ 8,544
20 $12,106 $20,000 $20,092 $23,738 $ 34,499 $3,549 $ 5,730 $ 9,376 $ 15,597
25 $16,931 $20,000 $20,000 $26,860 $ 51,316 $3,900 $ 7,391 $14,013 $ 26,771
30 (Age 65) $22,801 $20,000 $20,000 $33,679 $ 74,293 $3,775 $ 9,031 $20,028 $ 44,181
35 $29,942 $20,000 $20,000 $41,307 $106,029 $2,801 $10,514 $27,578 $ 70,789
40 $38,631 $20,000 $20,000 $50,014 $150,318 $ 181 $11,630 $36,856 $110,771
45 $49,203 $20,000 $20,000 $60,199 $212,938 $ 0 $11,934 $48,007 $169,812
</TABLE>
(1) If premiums are paid more frequently than annually, the payments would be
$202.79 semi-annually, $103.98 quarterly or $36.59 monthly. The death
benefits and cash surrender values would be slightly different for a
Contract with more frequent premium payments.
(2) Assumes no Contract loan has been made.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rates of
inflation. The death benefit and cash surrender value for a contract would be
different from those shown if the actual rates of return averaged 0%, 4%, 8%,
and 12% over a period of years but also fluctuated above or below those averages
for individual contract years. No representations can be made by Pruco Life of
New Jersey or the Series Fund that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time.
T2
<PAGE>
THE PRUVIDER VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT
MALE PREFERRED ISSUE AGE 35
$5,000 GUARANTEED DEATH BENEFIT
$173.70 ANNUAL PREMIUM (1)
USING MAXIMUM CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
Death Benefit (2) Cash Surrender Value (2)
---------------------------------------------------- ----------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated ---------------------------------------------------- ----------------------------------------------------
Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (-1.49% Net) (2.51% Net) (6.51% Net) (10.51% Net) (-1.49% Net) (2.51% Net) (6.51% Net) (10.51% Net)
------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 181 $5,000 $5,000 $ 5,004 $ 5,009 $ 0 $ 0 $ 0 $ 0
2 $ 369 $5,000 $5,000 $ 5,010 $ 5,022 $ 35 $ 45 $ 56 $ 67
3 $ 564 $5,000 $5,000 $ 5,018 $ 5,040 $ 82 $ 101 $ 120 $ 142
4 $ 767 $5,000 $5,000 $ 5,028 $ 5,063 $128 $ 157 $ 189 $ 224
5 $ 978 $5,000 $5,000 $ 5,040 $ 5,093 $172 $ 214 $ 261 $ 314
6 $ 1,198 $5,000 $5,000 $ 5,054 $ 5,130 $228 $ 285 $ 350 $ 426
7 $ 1,427 $5,000 $5,000 $ 5,071 $ 5,174 $283 $ 356 $ 443 $ 547
8 $ 1,665 $5,000 $5,000 $ 5,090 $ 5,228 $336 $ 428 $ 541 $ 679
9 $ 1,912 $5,000 $5,000 $ 5,112 $ 5,291 $388 $ 501 $ 643 $ 822
10 $ 2,169 $5,000 $5,000 $ 5,137 $ 5,366 $439 $ 574 $ 750 $ 979
15 $ 3,617 $5,000 $5,000 $ 5,320 $ 5,954 $603 $ 887 $1,309 $ 1,942
20 $ 5,379 $5,000 $5,000 $ 5,627 $ 7,702 $713 $1,205 $2,037 $ 3,482
25 $ 7,523 $5,000 $5,000 $ 6,110 $11,242 $742 $1,503 $2,975 $ 5,865
30 (Age 65) $10,132 $5,000 $5,000 $ 7,022 $15,936 $635 $1,744 $4,176 $ 9,477
35 $13,305 $5,000 $5,000 $ 8,452 $22,224 $284 $1,853 $5,643 $14,837
40 $17,166 $5,000 $5,000 $10,014 $30,713 $ 0 $1,672 $7,379 $22,633
45 $21,864 $5,000 $5,000 $11,750 $42,268 $ 0 $ 767 $9,370 $33,708
</TABLE>
(1) If premiums are paid more frequently than annually, the payments would be
$89.46 semi-annually, $46.15 quarterly or $16.90 monthly. The death
benefits and cash surrender values would be slightly different for a
Contract with more frequent premium payments.
(2) Assumes no Contract loan has been made.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rates of
inflation. The death benefit and cash surrender value for a contract would be
different from those shown if the actual rates of return averaged 0%, 4%, 8%,
and 12% over a period of years but also fluctuated above or below those averages
for individual contract years. No representations can be made by Pruco Life of
New Jersey or the Series Fund that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time.
T3
<PAGE>
THE PRUVIDER VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT
MALE PREFERRED ISSUE AGE 35
$20,000 GUARANTEED DEATH BENEFIT
$390.90 ANNUAL PREMIUM (1)
USING MAXIMUM CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
Death Benefit (2) Cash Surrender Value (2)
---------------------------------------------------- ----------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated ---------------------------------------------------- ----------------------------------------------------
Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (-1.49% Net) (2.51% Net) (6.51% Net) (10.51% Net) (-1.49% Net) (2.51% Net) (6.51% Net) (10.51% Net)
------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 407 $20,000 $20,000 $20,009 $ 20,020 $ 12 $ 24 $ 35 $ 46
2 $ 829 $20,000 $20,000 $20,024 $ 20,057 $ 191 $ 222 $ 253 $ 286
3 $ 1,269 $20,000 $20,000 $20,045 $ 20,111 $ 364 $ 423 $ 485 $ 551
4 $ 1,726 $20,000 $20,000 $20,074 $ 20,186 $ 533 $ 628 $ 731 $ 843
5 $ 2,202 $20,000 $20,000 $20,110 $ 20,284 $ 705 $ 844 $ 1,000 $ 1,174
6 $ 2,697 $20,000 $20,000 $20,154 $ 20,408 $ 925 $1,117 $ 1,338 $ 1,591
7 $ 3,211 $20,000 $20,000 $20,208 $ 20,561 $1,145 $1,398 $ 1,697 $ 2,050
8 $ 3,746 $20,000 $20,000 $20,271 $ 20,746 $1,360 $1,683 $ 2,074 $ 2,549
9 $ 4,302 $20,000 $20,000 $20,345 $ 20,968 $1,569 $1,970 $ 2,469 $ 3,092
10 $ 4,881 $20,000 $20,000 $20,431 $ 21,232 $1,772 $2,260 $ 2,883 $ 3,683
15 $ 8,140 $20,000 $20,000 $21,070 $ 23,346 $2,433 $3,487 $ 5,024 $ 7,300
20 $12,106 $20,000 $20,000 $22,169 $ 28,945 $2,881 $4,725 $ 7,807 $ 13,086
25 $16,931 $20,000 $20,000 $23,925 $ 42,300 $2,994 $5,874 $11,387 $ 22,068
30 (Age 65) $22,801 $20,000 $20,000 $26,854 $ 60,009 $2,566 $6,774 $15,970 $ 35,686
35 $29,942 $20,000 $20,000 $32,365 $ 83,731 $1,153 $7,105 $21,608 $ 55,902
40 $38,631 $20,000 $20,000 $38,386 $115,758 $ 0 $6,187 $28,287 $ 85,303
45 $49,203 $20,000 $20,000 $45,078 $159,345 $ 0 $2,146 $35,948 $127,073
</TABLE>
(1) If premiums are paid more frequently than annually, the payments would be
$202.79 semi-annually, $103.98 quarterly or $36.59 monthly. The death
benefits and cash surrender values would be slightly different for a
Contract with more frequent premium payments.
(2) Assumes no Contract loan has been made.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rates of
inflation. The death benefit and cash surrender value for a contract would be
different from those shown if the actual rates of return averaged 0%, 4%, 8%,
and 12% over a period of years but also fluctuated above or below those averages
for individual contract years. No representations can be made by Pruco Life of
New Jersey or the Series Fund that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time.
T4
<PAGE>
GENERAL INFORMATION ABOUT PRUCO LIFE
INSURANCE COMPANY OF NEW JERSEY, PRUCO LIFE OF
NEW JERSEY VARIABLE APPRECIABLE ACCOUNT AND
THE FIXED RATE OPTION
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
Pruco Life Insurance Company of New Jersey ("Pruco Life of New Jersey", "us", or
"we") is a stock life insurance company, organized in 1982 under the laws of the
State of New Jersey. It is licensed to sell life insurance and annuities only in
the States of New Jersey and New York. Pruco Life of New Jersey is a
wholly-owned subsidiary of Pruco Life Insurance Company, which in turn is a
wholly-owned subsidiary of Prudential, a mutual insurance company founded in
1875 under the laws of the State of New Jersey. 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 plan of reorganization, which hasn't been developed and approved, would
provide the criteria for determining eligibility and the methodology for
allocating shares or other consideration to those who would be eligible.
Generally, the amount of shares or other consideration eligible customers would
receive would be based on a number of factors, including the types, amounts and
issue years of their policies. As a general rule, owners of Prudential-issued
insurance policies and annuity contracts would be eligible, while mutual fund
customers and customers of the Company's subsidiaries, such as the Pruco Life
insurance companies, would not be. It has not yet been determined whether any
exceptions to that general rule will be made with respect to policyholders and
contract owners of Prudential's subsidiaries.
As of December 31, 1998, Prudential has invested over $127 million in Pruco Life
of New Jersey in connection with Pruco Life of New Jersey's organization and
operation. Prudential may make additional capital contributions to Pruco Life of
New Jersey as needed to enable it to meet its reserve requirements and expenses.
Prudential is under no obligation to make such contributions and its assets do
not back the benefits payable under the Contract. Pruco Life of New Jersey's
financial statements begin on page B1 and should be considered only as bearing
upon Pruco Life of New Jersey's ability to meet its obligations under the
Contracts.
PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT
Pruco Life of New Jersey Variable Appreciable Account was established on January
13, 1984 under New Jersey law as a separate investment account. The Account
meets the definition of a "separate account" under the federal securities laws.
The Account holds assets that are segregated from all of Pruco Life of New
Jersey's other assets.
The obligations to Contract owners and beneficiaries arising under the Contract
are general corporate obligations of Pruco Life of New Jersey . Pruco Life of
New Jersey is also the legal owner of the assets in the Account. Pruco Life of
New Jersey will maintain assets in the Account with a total market value at
least equal to the reserve and other liabilities relating to the variable
benefits attributable to the Account. These assets may not be charged with
liabilities which arise from any other business Pruco Life of New Jersey
conducts. In addition to these assets, the Account's assets may include funds
contributed by Pruco Life of New Jersey to commence operation of the Account and
may include accumulations of the charges Pruco Life of New Jersey makes against
the Account. From time to time these additional assets will be transferred to
Pruco Life of New Jersey's general account. Before making any such transfer,
Pruco Life of New Jersey will consider any possible adverse impact the transfer
might have on the Account.
The Account is a unit investment trust, which is a type of investment company.
It is registered with the Securities and Exchange Commission ("SEC") under the
Investment Company Act of 1940 ("1940 Act"). This does not involve any
9
<PAGE>
supervision by the SEC of the management, investment policies, or practices of
the Account. For state law purposes, the Account is treated as a part or
division of Pruco Life of New Jersey.
There are currently two subaccounts within the Account, one of which invests in
the Conservative Balanced Portfolio and the other of which invests in the
Flexible Managed Portfolio of the Fund. We may add additional subaccounts in the
future. The Account's financial statements begin on page A1.
THE FIXED-RATE OPTION
BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN THE FIXED-RATE
OPTION UNDER THE CONTRACT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 AND THE GENERAL ACCOUNT HAS NOT BEEN REGISTERED AS AN INVESTMENT COMPANY
UNDER THE INVESTMENT COMPANY ACT OF 1940. ACCORDINGLY, INTERESTS IN THE
FIXED-RATE OPTION ARE NOT SUBJECT TO THE PROVISIONS OF THESE ACTS, AND PRUCO
LIFE OF NEW JERSEY HAS BEEN ADVISED THAT THE STAFF OF THE SECURITIES AND
EXCHANGE COMMISSION HAS NOT REVIEWED THE DISCLOSURE IN THIS PROSPECTUS RELATING
TO THE FIXED-RATE OPTION. ANY INACCURATE OR MISLEADING DISCLOSURE REGARDING THE
FIXED-RATE OPTION MAY, HOWEVER, BE SUBJECT TO CERTAIN GENERALLY APPLICABLE
PROVISIONS OF FEDERAL SECURITIES LAWS.
You may choose to allocate, either initially or by transfer, all or part of your
Contract Fund to the fixed-rate option. This amount becomes part of Pruco Life
of New Jersey=s general account. Pruco Life of New Jersey=s general account
consists of all assets owned by Pruco Life of New Jersey other than those in the
Account and in other separate accounts that have been or may be established by
Pruco Life of New Jersey. Subject to applicable law, Pruco Life of New Jersey
has sole discretion over the investment of the general account assets. Contract
owners do not share in the investment experience of those assets. Instead, Pruco
Life of New Jersey guarantees that the part of the Contract Fund allocated to
the fixed-rate option will accrue interest daily at an effective annual rate
that Pruco Life of New Jersey declares periodically. This rate may not be less
than an effective annual rate of 4%.
Currently, the following steps are taken for crediting interest rates: (1)
declared interest rates remain in effect from the date money is allocated to the
fixed-rate option until the Monthly date in the same month in the following year
(see CONTRACT DATE on page 14); thereafter, a new crediting rate will be
declared each year and will remain in effect for the calendar year. Pruco Life
of New Jersey reserves the right to change this practice. Pruco Life of New
Jersey is not obligated to credit interest at a higher rate than 4%, although we
may do so. Different crediting rates may be declared for different portions of
the Contract Fund allocated to the fixed-rate option. At least annually and on
request, you will be advised of the interest rates that currently apply to your
Contract. The term Monthly Date means the day of each month that is the same as
the Contract Date.
Transfers from the fixed-rate option are subject to strict limits. See
TRANSFERS, page 16. The payment of any cash surrender value attributable to the
fixed-rate option may be delayed up to six months. See WHEN PROCEEDS ARE PAID,
page 20.
DETAILED INFORMATION FOR CONTRACT OWNERS
REQUIREMENTS FOR ISSUANCE OF A CONTRACT
Generally, the Contract may be issued on insureds below the age of 76. You may
apply for a minimum initial guaranteed death benefit of $5,000; the maximum you
may apply for is $25,000. Proposed insureds, 21 years of age or less, may apply
for a minimum initial guaranteed death benefit of $10,000. Before issuing any
Contract, Pruco Life of New Jersey requires evidence of insurability, which may
include a medical examination. Non-smokers who meet preferred underwriting
requirements are offered the most favorable premium rate. Pruco Life of New
Jersey charges a higher premium if an extra mortality risk is involved. These
are the current underwriting requirements. We reserve the right to change these
requirements on a non-discriminatory basis.
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK"
Generally, you may return the Contract for a refund within 10 days after you
receive it. Some states allow a longer period of time during which a Contract
may be returned for a refund. You can request a refund by mailing or delivering
the Contract to the representative who sold it or to the Home Office specified
in the Contract. A Contract returned according to this provision shall be deemed
void from the beginning. You will then receive a refund of all premium
10
<PAGE>
payments made, plus or minus any change due to investment experience. However,
if applicable law so requires and if you exercise your short-term cancellation
right, you will receive a refund of all premium payments made, with no
adjustment for investment experience.
CONTRACT FEES AND CHARGES
This section provides a more detailed description of each charge that is
described briefly in the chart on page 2.
In several instances we use the terms "maximum charge" and "current charge." The
"maximum charge," in each instance, is the highest charge that Pruco Life of New
Jersey is entitled to make under the Contract. The "current charge" is the lower
amount that we are now charging. If circumstances change, we reserve the right
to increase each current charge, up to the maximum charge, without giving any
advance notice.
A Contract owner may add several "riders" to the Contract which provide
additional benefits and are charged for separately. The statement and
description of charges that follows assumes there are no riders to the Contract.
DEDUCTIONS FROM PREMIUMS
(a) Pruco Life of New Jersey deducts a charge for taxes attributable to premiums
from each premium payment. That charge is currently made up of two parts. The
first part is a charge for state and local premium-based taxes. The tax rate
varies from state to state, generally ranging from 0.75% to 5% (but in some
instances may exceed 5%) of the premium received by Pruco Life of New Jersey.
The amount charged may be more than Pruco Life of New Jersey actually pays. The
second part is a charge for federal income taxes measured by premiums, equal to
1.25% of the premium. We believe that this charge is a reasonable estimate of an
increase in its federal income taxes resulting from a 1990 change in the
Internal Revenue Code. It is intended to recover this increased tax. During
1998, 1997, and 1996, we received a total of approximately $124,201, $130,658,
and $168,923, respectively, in charges for taxes attributable to premiums.
(b) Pruco Life of New Jersey deducts a charge of $2 from each premium payment to
cover the cost of collecting and processing premiums. Thus, if you pay premiums
annually, this charge will be $2 per year. If you pay premiums monthly, the
charge will be $24 per year. If you pay premiums more frequently, for example
under a payroll deduction plan with your employer, the charge may be more than
$24 per year. During 1998, 1997, and 1996, we received a total of approximately
$217,724, $219,537, and $205,362, respectively, in processing charges.
DEDUCTIONS FROM PORTFOLIOS
Pruco Life of New Jersey deducts an investment advisory fee daily from each
portfolio at a rate, on an annualized basis, of 0.55% for the Conservative
Balanced Portfolio and 0.60% for the Flexible Managed Portfolio.
We pay expenses incurred in conducting the investment operations of the
portfolios (such as investment advisory fees, custodian fees and preparation and
distribution of annual reports) out of the portfolio's income. These expenses
also vary by portfolio. The total expenses of each portfolio for the year 1998,
expressed as a percentage of the average assets during the year, are as follows:
------------------------------------------------------------------------------
ADVISORY OTHER TOTAL
PORTFOLIO FEE EXPENSES EXPENSES
------------------------------------------------------------------------------
Conservative Balanced 0.55% 0.02% 0.57%
Flexible Managed 0.60% 0.01% 0.61%
------------------------------------------------------------------------------
MONTHLY DEDUCTIONS FROM CONTRACT FUND
Pruco Life of New Jersey deducts the following monthly charges proportionately
from the dollar amounts held in each of the chosen investment option[s].
11
<PAGE>
(a) Pruco Life of New Jersey deducts a sales charge, often called a "sales
load", to pay part of the costs of selling the Contracts, including commissions,
advertising, and the printing and distribution of prospectuses and sales
literature. The charge is equal to 0.5% of the "primary annual premium." The
primary annual premium is equal to the Scheduled Premium that would be payable
if premiums were being paid annually, less the two deductions from premiums
(taxes attributable to premiums and the $2 processing charge), and less the $6
part of the monthly deduction described in (c) below, the $0.30 per $1,000 of
face amount for Contracts with a face amount of less than $10,000, and any extra
premiums for riders or substandard risks. The sales load is charged whether the
Contract owner is paying premiums annually or more frequently. It is lower on
Contracts issued on insureds over 60 years of age. To summarize, for most
Contracts, this charge is somewhat less than 6% of the annual Scheduled Premium.
There is a second sales load, which will be charged only if a Contract lapses or
is surrendered before the end of the 10th Contract year. It is often described
as a contingent deferred sales load ("CDSL") and is described later under
SURRENDER OR WITHDRAWAL CHARGES, page 13. During 1998, 1997, and 1996, we
received a total of approximately $513,309, $568,524, and $468,823,
respectively, in sales load charges.
(b) Pruco Life of New Jersey deducts a charge of not more than $0.01 per $1000
of face amount of insurance to compensate for the risk we assume in guaranteeing
that, no matter how unfavorable investment experience may be, the death benefit
will never be less than the guaranteed minimum death benefit, so long as
Scheduled Premiums are paid on or before the due date or during the grace
period. This charge will not be made if the Contract has been continued inforce
pursuant to an option on lapse. During 1998, 1997, and 1996, we received a total
of approximately $25,605, $26,181, and $24,222, respectively, for this risk
charge.
(c) Pruco Life of New Jersey deducts an administrative charge of $6 plus up to
$0.19 per $1,000 of face amount of insurance. Currently, on a non-guaranteed
basis, this charge is reduced from $0.19 to $0.09 per $1,000. The charge is
intended to pay for processing claims, keeping records, and communicating with
Contract owners. If premiums are paid by automatic transfer under the Pru-Matic
Plan, as described on page 14, the current charge is further reduced to $0.07
per $1,000 of face amount. There is an additional charge of $0.30 per $1,000 of
face amount if the face amount of the Contract is less than $10,000. This
monthly administrative charge will not be made if the Contract has been
continued inforce pursuant to an option on lapse. During 1998, 1997, and 1996,
we received a total of approximately $1,268,693, $1,352,185, and $1,263,734,
respectively, in monthly administrative charges.
(d) Pruco Life of New Jersey deducts a mortality charge that is intended to be
used to pay death benefits. When an insured dies, the amount payable to the
beneficiary is larger than the Contract Fund and significantly larger if the
insured dies in the early years of a Contract. The mortality charges collected
from all Contract owners enable us to pay the death benefit for the few insureds
who die. We determine the maximum mortality charge by multiplying the "net
amount at risk" under a Contract (the amount by which the Contract's death
benefit, computed as if there were neither riders nor Contract debt, exceeds the
Contract Fund) by a rate based upon the insured's current attained age, sex and
the anticipated mortality for that class of persons. The anticipated mortality
is based upon mortality tables published by The National Association of
Insurance Commissioners called the Non-Smoker/Smoker 1980 CSO Tables. We may
determine that a lesser amount than that called for by these mortality tables
will be adequate for insureds of particular ages and may thus make a lower
mortality charge for such persons. Any lower current mortality charges are not
applicable to Contracts inforce pursuant to an option on lapse. See LAPSE AND
REINSTATEMENT, page 18.
(e) If a rider is added to the basic Contract, or if an insured is in a
substandard risk classification (for example, a person in a hazardous
occupation), we increase the Scheduled Premium and deduct additional charges
monthly.
(f) Pruco Life of New Jersey may deduct a charge to cover federal, state or
local taxes (other than "taxes attributable to premiums" described above) that
are imposed upon the operations of the Account. At present no such taxes are
imposed and no charge is made. We will review the question of a charge to the
Account for company federal income taxes periodically. We may make such a charge
in future years for any federal income taxes that would be attributable to the
Account.
Under current law, Pruco Life of New Jersey may incur state and local taxes (in
addition to premium taxes) in several states. At present, these taxes are not
significant and they are not charged against the Account. If there is a material
12
<PAGE>
change in the applicable state or local tax laws, the imposition of any such
taxes upon Pruco Life of New Jersey that are attributable to the Account may
result in a corresponding charge against the Account.
DAILY DEDUCTION FROM THE CONTRACT FUND
Each day Pruco Life of New Jersey deducts a charge from the assets of each of
the subaccounts in an amount equivalent to an effective annual rate of up to
0.9%. This charge is intended to compensate us for assuming mortality and
expense risks under the Contract. The mortality risk assumed is that insureds
may live for shorter periods of time than we estimated when we determined what
mortality charge to make. The expense risk assumed is that expenses incurred in
issuing and administering the Contract will be greater than we estimated in
fixing our administrative charges. This charge is not assessed against amounts
allocated to the fixed-rate option. During 1998, 1997, and 1996, we received a
total of approximately $182,115, $154,038, and $113,587, respectively, in
mortality and expense risk charges.
SURRENDER OR WITHDRAWAL CHARGES
(a) Pruco Life of New Jersey charges an additional contingent deferred sales
load (the CDSL) if a Contract lapses or is surrendered during the first 10
Contract years. No such charge is applicable to the death benefit, no matter
when it may become payable. The maximum contingent deferred charge is equal to
50% of the first year's primary annual premium upon Contracts that lapse or are
surrendered during the first five Contract years. That percentage is reduced
uniformly on a daily basis starting from the Contract's fifth anniversary until
it disappears on the 10th anniversary. Other important limitations apply. They
are described more fully in the statement of additional information. The amount
of this charge can be more easily understood by reference to the following table
which shows the sales loads that would be paid by a 35 year old man with $20,000
face amount of insurance, both through the monthly deductions from the Contract
Fund described above and upon the surrender of the Contract. The primary annual
premium is $304.20.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
CUMULATIVE CUMULATIVE
SURRENDER, CUMULATIVE SALES LOAD CONTINGENT TOTAL TOTAL SALES LOAD AS PER-
LAST DAY OF SCHEDULED PREMIUMS DEDUCTED FROM DEFERRED SALES CENTAGE OF SCHEDULED
YEAR NO. PAID CONTRACT FUND SALES LOAD* LOAD PREMIUMS PAID**
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 $ 390.90 $ 18.24 $ 87.22 $ 105.46 26.98%
2 781.80 36.48 104.16 140.64 17.99%
3 1,172.70 54.72 121.10 175.82 14.99%
4 1,563.60 72.96 138.04 211.00 13.49%
5 1,954.50 91.20 146.55 237.75 12.16%
6 2,345.40 109.44 121.80 231.24 9.86%
7 2,736.30 127.68 91.40 219.08 8.01%
8 3,127.20 145.92 60.80 206.72 6.61%
9 3,518.10 164.16 30.40 194.56 5.53%
10 3,909.00 182.40 0.00 182.40 4.67%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* The maximum CDSL is $152.20 for years one through five; $121.80 for year
six; $91.40 for year seven; $60.80 for year eight; $30.40 for year nine;
and zero for year 10.
** The percentages shown in the last column will not be appreciably different
for insureds of different ages.
(b) Pruco Life of New Jersey deducts an administrative charge of $5 per $1,000
of face amount of insurance upon lapse or surrender to cover the cost of
processing applications, conducting medical examinations, determining
insurability and the insured's rating class, and establishing records. However,
this charge is reduced beginning on the Contract's fifth anniversary and
declines daily at a constant rate until it disappears entirely on the 10th
Contract
13
<PAGE>
anniversary. We are currently allowing partial surrenders of the Contract, but
we reserve the right to cancel this administrative practice. If the Contract is
partially surrendered during the first 10 years, we deduct a proportionate
amount of the charge from the Contract Fund. During 1998, 1997, and 1996, we
received a total of approximately $38,805, $53,157, and $33,452, respectively,
for surrendered or lapsed Contracts. Surrender of all or part of a Contract may
have tax consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 22.
TRANSACTION CHARGES
Pruco Life of New Jersey will make an administrative processing charge equal to
the lesser of $15 or 2% of the amount withdrawn in connection with each
withdrawal of excess cash surrender value of a Contract. This charge is
described in more detail in the statement of additional information.
CONTRACT DATE
When the first premium payment is paid with the application for a Contract, the
Contract Date will ordinarily be the later of the date of the application date
and the medical examination date. In most cases no medical examination will be
necessary. If the first premium is not paid with the application, the Contract
Date will ordinarily be the date the first premium is paid and the Contract is
delivered. It may be advantageous for a Contract owner to have an earlier
Contract Date when that will result in Pruco Life of New Jersey using a lower
issue age in determining the Scheduled Premium amount. Pruco Life of New Jersey
will permit a Contract to be back-dated but only to a date not earlier than six
months prior to the date of the application. Pruco Life of New Jersey will
require the payment of all premiums that would have been due had the application
date coincided with the back-dated Contract Date. The death benefit and cash
surrender value under the Contract will be equal to what they would have been
had the Contract been issued on the Contract Date, all Scheduled Premiums been
received on their due dates, and all Contract charges been made.
PREMIUMS
The Contract provides for a Scheduled Premium which, if paid when due or within
a 61 day grace period, ensures that the Contract will not lapse. If you pay
premiums other than on a monthly basis, you will receive a notice that a premium
is due about three weeks before each due date. If you pay premiums monthly, you
will receive a book each year with 12 coupons that will serve as a reminder.
With Pruco Life of New Jersey's consent, you may change the frequency of premium
payments.
You may elect to have monthly premiums paid automatically under the "Pru-Matic
Premium Plan" by pre-authorized transfers from a bank checking account. If you
select the Pru-Matic Premium Plan, one of the current monthly charges will be
reduced. See MONTHLY DEDUCTIONS FROM CONTRACT FUND, page 11. Some Contract
owners may also be eligible to have monthly premiums paid by pre-authorized
deductions from an employer's payroll.
The following table shows, for two face amounts, representative preferred and
standard annual premium amounts under Contracts issued on insureds who are not
substandard risks. These premiums do not reflect any additional riders or
supplementary benefits.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
$10,000 FACE AMOUNT $20,000 FACE AMOUNT
------------------------------- -------------------------------
PREFERRED STANDARD PREFERRED STANDARD
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Male, age 35 $233.70 $274.01 $390.90 $ 471.52
at issue
- ------------------------------------------------------------------------------------------------
Female, age 45
at issue $278.04 $308.53 $479.59 $ 540.57
- ------------------------------------------------------------------------------------------------
Male, age 55 $450.96 $562.17 $825.43 $1047.86
at issue
- ------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
The following table compares annual and monthly premiums for insureds who are in
the preferred rating class. Note that in these examples the sum of 12 monthly
premiums for a particular Contract is approximately 110% to 116% of the annual
Scheduled Premium for that Contract.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
$10,000 FACE AMOUNT $20,000 FACE AMOUNT
------------------------------- -------------------------------
MONTHLY ANNUAL MONTHLY ANNUAL
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Male, age 35 $22.43 $233.70 $36.59 $390.90
at issue
- ------------------------------------------------------------------------------------------------
Female, age 45
at issue $26.46 $278.04 $44.65 $479.59
- ------------------------------------------------------------------------------------------------
Male, age 55 $41.96 $450.96 $75.66 $825.43
at issue
- ------------------------------------------------------------------------------------------------
</TABLE>
A significant feature of this Contract is that it permits you to pay greater
than Scheduled Premiums. You may make unscheduled premium payments occasionally
or on a periodic basis. If you wish, you may select a higher contemplated
premium than the Scheduled Premium. Pruco Life of New Jersey will then bill you
for the chosen premium. In general, the regular payment of higher premiums will
result in higher cash surrender values and higher death benefits. Conversely, a
Scheduled Premium payment does not need to be made if the Contract Fund is large
enough to enable the charges due under the Contract to be made without causing
the Contract to lapse. See LAPSE AND REINSTATEMENT, page 18. The payment of
premiums in excess of Scheduled Premiums may cause the Contract to become a
Modified Endowment Contract for federal income tax purposes. If this happens,
loans and other distributions which would otherwise not be taxable events may be
subject to federal income taxation. See TAX TREATMENT OF CONTRACT BENEFITS, page
22.
Pruco Life of New Jersey will generally accept any premium payment of at least
$25. Pruco Life of New Jersey reserves the right to limit unscheduled premiums
to a total of $5,000 in any Contract year, and to refuse to accept premiums that
would immediately result in more than a dollar-for-dollar increase in the death
benefit. See HOW A CONTRACT'S DEATH BENEFIT WILL VARY, page 17. The privilege of
making large or additional premium payments offers a way of investing amounts
which accumulate without current income taxation, but again, there are tax
consequences if the Contract becomes a Modified Endowment Contract. See TAX
TREATMENT OF CONTRACT BENEFITS, page 22.
ALLOCATION OF PREMIUMS
On the Contract Date, Pruco Life of New Jersey deducts a $2 processing charge
and the charge for taxes attributable to premiums from the initial premium, and
deducts the first monthly charges. The remainder of the initial premium is
allocated on the Contract Date among the subaccount[s] or the fixed-rate option
according to the allocation you specified in the application form. The invested
portion of any part of the initial premium in excess of the Scheduled Premium is
generally placed in the selected investment option[s] on the date of receipt at
a Home Office, but not earlier than the Contract Date. If Pruco Life of New
Jersey receives the initial premium prior to the Contract Date, there will be a
period during which it will not be invested. Each subsequent premium payment,
after the deductions from premiums, will be invested as of the end of the
valuation period when received at a Home Office in accordance with the
allocation previously designated. A valuation period is the period of time from
one determination of the value of the amount invested in a subaccount to the
next. Such determinations are made when the net asset values of the portfolios
are calculated, which is generally 4:15 p.m. Eastern time on each day during
which the New York Stock Exchange is open. Provided the Contract is not in
default, you may change the way in which subsequent premiums are allocated by
giving written notice to a Home Office. You may also change the way in which
subsequent premiums are allocated by telephoning a Home Office, provided you are
enrolled to use the Telephone Transfer system. There is no charge for
reallocating future premiums. If any part of the invested portion of a premium
is allocated to a particular investment option, that portion must be at least
10% on the date the allocation takes effect. All percentage allocations must be
in whole numbers. For example, 33% can be selected but 33 1/3% cannot. Of
course, the total allocation of all selected investment options must equal 100%.
15
<PAGE>
TRANSFERS
If the Contract is not in default, or if the Contract is inforce as variable
reduced paid-up insurance (see LAPSE AND REINSTATEMENT , page 18), you may, up
to four times in each Contract year, transfer amounts from one subaccount to the
other subaccount or to the fixed-rate option. Currently, you may make additional
transfers with our consent without charge. All or a portion of the amount
credited to a subaccount may be transferred.
In addition, the total amount credited to a Contract held in the subaccounts may
be transferred to the fixed-rate option at any time during the first two
Contract years. If you wish to convert your variable Contract to a fixed-benefit
Contract in this manner, you must request a complete transfer of funds to the
fixed-rate option and change your allocation instructions regarding any future
premiums.
Transfers between subaccounts will take effect as of the end of the valuation
period (usually the business day) in which a proper transfer request is received
at a Home Office. The request may be in terms of dollars, such as a request to
transfer $1,000 from one subaccount to the other, or may be in terms of a
percentage reallocation between subaccounts. In the latter case, as with premium
reallocations, the percentages must be in whole numbers. You may transfer
amounts by proper written notice to a Home Office or by telephone, if you are
enrolled to use the Telephone Transfer System. You will automatically be
enrolled to use the Telephone Transfer System unless the Contract is jointly
owned or you elect not to have this privilege. Telephone transfers may not be
available on Contracts that are assigned, depending on the terms of the
assignment. We will use reasonable procedures, such as asking you for certain
personal information provided on your application for insurance, to confirm that
instructions given by telephone are genuine. Pruco Life of New Jersey will not
be held liable for following telephone instructions that we reasonably believe
to be genuine. Pruco Life of New Jersey cannot guarantee that you will be able
to get through to complete a telephone transfer during peak periods such as
periods of drastic economic or market change.
Transfers from the fixed-rate option to the subaccounts are currently permitted
once each Contract year and only during the 30-day period beginning on the
Contract anniversary. The maximum amount which may be transferred out of the
fixed-rate option each year is currently the greater of: (a) 25% of the amount
in the fixed-rate option, or (b) $2,000. Such transfer requests received prior
to the Contract anniversary will be effective on the Contract anniversary.
Transfer requests received within the 30-day period beginning on the Contract
anniversary will be effective as of the end of the valuation period in which a
proper transfer request is received at a Home Office. Pruco Life of New Jersey
may change these limits in the future.
HOW THE CONTRACT FUND CHANGES WITH INVESTMENT EXPERIENCE
As explained earlier, after the 10th Contract year, there will no longer be a
surrender charge and, if there is no Contract loan, the cash surrender value
will be equal to the Contract Fund. This section, therefore, also describes how
the cash surrender value of the Contract will change with investment experience.
On the Contract Date, the Contract Fund value is the initial premium less the
deductions from premiums and the first monthly deductions. See CONTRACT FEES AND
CHARGES, page 11. This amount is placed in the subaccounts you choose and/or the
fixed rate option. Thereafter, the Contract Fund value changes daily, reflecting
increases or decreases in the value of the subaccount assets, and interest
credited on any amounts allocated to the fixed-rate option. It is also reduced
by the daily asset charge for mortality and expense risks assessed against the
subaccounts. The Contract Fund value also increases to reflect the receipt of
additional premium payments and is decreased by the monthly deductions.
A Contract's cash surrender value on any date will be the Contract Fund value
reduced by the withdrawal charges, if any, and by any Contract debt. Upon
request, Pruco Life of New Jersey will tell you the cash surrender value of your
Contract. It is possible, although highly unlikely, that the cash surrender
value of a Contract could decline to zero because of unfavorable investment
performance, even if you continue to pay Scheduled Premiums when due.
The tables on pages T1 through T4 of this prospectus (immediately following page
8) illustrate what the death benefit and cash surrender values would be for a
representative Contract, assuming uniform hypothetical investment results in the
selected portfolio[s], and also provide information about the aggregate premiums
payable under the Contract.
16
<PAGE>
HOW A CONTRACT'S DEATH BENEFIT WILL VARY
The death benefit will change with investment experience. The precise way in
which that will occur is complicated and is described in the statement of
additional information. In general, and assuming the optional paid-up benefit is
not in effect (see PAID-UP INSURANCE OPTION on page 19), if the net investment
performance is 4% per year or higher and Scheduled Premiums are paid when due,
the death benefit will increase. If the net investment performance is below 4%,
the death benefit will decrease, but Pruco Life of New Jersey guarantees that it
will not decrease below the face amount of insurance. Any unfavorable experience
must be offset by favorable experience, however, before the death benefit begins
to increase again.
If the Contract is kept inforce for several years and if investment performance
is relatively favorable, the Contract Fund value may grow to the point where the
death benefit must be increased to comply with certain provisions of the
Internal Revenue Code, which require that the death benefit always be greater
than the Contract Fund value. The required difference between the death benefit
and Contract Fund value is higher at younger ages than at older ages. A precise
description is in the statement of additional information.
CONTRACT LOANS
You may borrow from Pruco Life of New Jersey up to the "loan value" of the
Contract, using the Contract as the only security for the loan. The loan value
is equal to (1) 90% of an amount equal to the portion of the Contract Fund value
attributable to the subaccounts and to any prior loan[s] supported by the
subaccounts, minus the portion of any charges attributable to the subaccounts
that would be payable upon an immediate surrender; plus (2) 100% of an amount
equal to the portion of the Contract Fund value attributable to the fixed-rate
option and to any prior loan[s] supported by the fixed-rate option, minus the
portion of any charges attributable to the fixed-rate option that would be
payable upon an immediate surrender. The minimum amount that may be borrowed at
any one time is $200 unless the proceeds are used to pay premiums on the
Contract.
Interest charged on a loan accrues daily at a fixed effective annual rate of
5.5%. Interest payments on any loan are due at the end of each Contract year. If
interest is not paid when due, it is added to the principal amount of the loan.
The Contract debt is the amount of all outstanding loans plus any interest
accrued but not yet due. If at any time the Contract debt exceeds what the cash
surrender value would be if there were no Contract debt, Pruco Life of New
Jersey will notify you of its intent to terminate the Contract in 61 days,
within which time you may repay all or enough of the loan to obtain a positive
cash surrender value and thus keep the Contract inforce for a limited time. If
you fail to keep the Contract inforce, the amount of unpaid Contract debt will
be treated as a distribution which may be taxable. See TAX TREATMENT OF CONTRACT
BENEFITS, page 22, and LAPSE AND REINSTATEMENT, page 18.
When a loan is made, an amount equal to the loan proceeds (the "loan amount") is
transferred out of the subaccounts and/or the fixed-rate option, as applicable.
The reduction will normally be made in the same proportions as the value in each
subaccount and the fixed-rate option bears to the total value of the Contract.
While a loan is outstanding, the amount that was so transferred will continue to
be treated as part of the Contract Fund but it will be credited with the assumed
rate of return of 4% rather than with the actual rate of return of the
subaccount[s] or fixed-rate option.
A loan will not affect the amount of the premiums due. Should the death benefit
become payable while a loan is outstanding, or should the Contract be
surrendered, any Contract debt will be deducted from the death benefit or the
cash surrender value.
A loan will have an effect on a Contract's cash surrender value and may have an
effect on the death benefit, even if the loan is fully repaid, because the
investment results of the selected options will apply only to the amount
remaining invested under those options. The longer the loan is outstanding, the
greater the effect is likely to be. The effect could be favorable or
unfavorable. If investment results are greater than the rate being credited upon
the amount of the loan while the loan is outstanding, values under the Contract
will not increase as rapidly as they would have if no loan had been made. If
investment results are below that rate, Contract values will be higher than they
would have been had no loan been made. A loan that is repaid will not have any
effect upon the guaranteed minimum death benefit.
Consider the Contract issued on a 35 year old male insured illustrated in the
table on page T2 with an 8% gross investment return. Assume a $1,500 loan was
made under this Contract at the end of Contract year eight and repaid at the end
of Contract year 10 and loan interest was paid when due. Upon repayment, the
cash surrender value would
17
<PAGE>
be $3,242.58. This amount is lower than the cash surrender value shown on that
page for the end of Contract year 10 because the loan amount was credited with
the 4% assumed rate of return rather than the 6.51% net return for the
designated subaccount[s] resulting from the 8% gross return in the underlying
Fund. Loans from Modified Endowment Contracts may be treated for tax purposes as
distributions of income. See TAX TREATMENT OF CONTRACT BENEFITS, page 22.
SURRENDER OF A CONTRACT
You may surrender a Contract, in whole or in part, for its cash surrender value
while the insured is living. To surrender a Contract, in whole or in part, you
must deliver or mail it, together with a written request in a form that meets
Pruco Life of New Jersey's needs, to a Home Office. The cash surrender value of
a surrendered or partially surrendered Contract (taking into account the
deferred sales and administrative charges, if any) will be determined as of the
end of the valuation period in which such a request is received in a Home
Office. Surrender of all or a part of a Contract may have tax consequences. See
TAX TREATMENT OF CONTRACT BENEFITS, page 22.
LAPSE AND REINSTATEMENT
As explained earlier, if Scheduled Premiums are paid on or before each due date,
or within the grace period after each due date, and there are no withdrawals or
outstanding loans, a Contract will remain inforce even if the investment results
of that Contract's variable investment option[s] have been so unfavorable that
the Contract Fund has decreased to zero.
In addition, even if a Scheduled Premium is not paid, the Contract will remain
inforce as long as the Contract Fund on any Monthly Date is equal to or greater
than the Tabular Contract Fund Value on the following Monthly Date. (A Table of
Tabular Contract Fund Values is included in the Contract; the values increase
with each year the Contract remains inforce.) This could occur because of such
factors as favorable investment experience, deduction of current rather than
maximum charges, or the previous payment of greater than Scheduled Premiums.
However, if a Scheduled Premium is not paid, and the Contract Fund is
insufficient to keep the Contract inforce, the Contract will go into default.
Should this happen, Pruco Life of New Jersey will send the Contract owner a
notice of default setting forth the payment necessary to keep the Contract
inforce on a premium paying basis. This payment must be received at a Home
Office within the 61 day grace period after the notice of default is mailed or
the Contract will lapse. A Contract that lapses with an outstanding Contract
loan may have tax consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 22.
A Contract that has lapsed may be reinstated within five years after the date of
default unless the Contract has been surrendered for its cash surrender value.
To reinstate a lapsed Contract, Pruco Life of New Jersey requires renewed
evidence of insurability, and submission of certain payments due under the
Contract.
If your Contract does lapse, it will still provide some benefits. You can
receive the cash surrender value by making a request of Pruco Life of New Jersey
prior to the end of the 61 day grace period. You may also choose one of the
three forms of insurance described below for which no further premiums are
payable.
FIXED EXTENDED TERM INSURANCE
The amount of insurance that would have been paid on the date of default will
continue for a stated period of time. You will be told in writing how long that
will be. The insurance amount will not change. There will be a diminishing cash
surrender value but no loan value. Extended term insurance is not available to
insureds in high risk classifications or under Contracts issued in connection
with tax-qualified pension plans.
FIXED REDUCED PAID-UP INSURANCE
This insurance continues for the lifetime of the insured but at an insurance
amount that is generally lower than that provided by fixed extended term
insurance. It will decrease only if you take a Contract loan. Upon request, we
will tell you what the amount of insurance will be. Fixed paid-up insurance has
a cash surrender value and a loan value. It is possible for this Contract to be
classified as a Modified Endowment Contract if this option is exercised. See TAX
TREATMENT OF CONTRACT BENEFITS, page 22.
18
<PAGE>
VARIABLE REDUCED PAID-UP INSURANCE
This is similar to fixed paid-up insurance and will initially be in the same
amount. The Contract Fund will continue to vary to reflect the experience of the
subaccounts and/or the fixed rate option. There will be a new guaranteed minimum
death benefit. Loans will be available subject to the same rules that apply to
premium-paying Contracts.
Variable reduced paid-up insurance is the automatic option provided upon lapse
only if the amount of variable reduced paid-up insurance is at least as great as
the amount of fixed extended term insurance which would have been provided upon
lapse. In addition, variable reduced paid-up insurance will be available only if
the insured is not in one of the high risk rating classes for which Pruco Life
of New Jersey does not offer fixed extended term insurance. It is possible for
this Contract to be classified as a Modified Endowment Contract if this option
is exercised. See TAX TREATMENT OF CONTRACT BENEFITS, page 22.
WHAT HAPPENS IF NO REQUEST IS MADE?
Except in the two situations that follow, if no request is made the "automatic
option" will be fixed extended term insurance. If fixed extended term insurance
is not available to the insured, then fixed reduced paid-up insurance will be
provided. However, if variable reduced paid-up insurance is available and the
amount is at least as great as the amount of fixed extended term insurance, then
the automatic option will be variable reduced paid-up insurance. This could
occur if the Contract lapses and there is a Contract debt outstanding.
PAID-UP INSURANCE OPTION
In certain circumstances you may elect to stop paying premiums and to have
guaranteed insurance coverage for the lifetime of the insured. This benefit is
available only if the following conditions are met: (1) the Contract is not in
default; (2) Pruco Life of New Jersey is not paying premiums in accordance with
any payment of premium benefit that may be included in the Contract; and (3) the
Contract Fund is sufficiently large so that the calculated guaranteed paid-up
insurance amount is at least equal to the face amount of insurance plus the
excess, if any, of the Contract Fund over the Tabular Contract Fund. The amount
of guaranteed paid-up insurance coverage may be greater. It will be equal to the
difference between the Contract Fund and the present value of future monthly
charges from the Contract Fund (other than charges for anticipated mortality
costs and for payment of premium riders) multiplied by the attained age factor.
This option will generally be available only when the Contract has been inforce
for many years and the Contract Fund has grown because of favorable investment
experience or the payment of unscheduled premiums or both. Once the paid-up
insurance option is exercised, the actual death benefit is equal to the greater
of the guaranteed paid-up insurance amount and the Contract Fund multiplied by
the attained age factor.
Upon request, Pruco Life of New Jersey will tell you the amount needed to pay up
the Contract and to guarantee the paid-up insurance amount as long as a payment
equal to or greater than this amount is received within two weeks of the date it
was quoted. There is no guarantee if the payment is received within the two week
period and is less than the quoted amount or if the payment is received outside
the two week period. In that case, Pruco Life of New Jersey will add the payment
to the Contract Fund and recalculate the guaranteed paid-up insurance amount. If
the guaranteed paid-up insurance amount is equal to or greater than the face
amount, the paid-up request will be processed. If the guaranteed paid-up
insurance amount calculated is below the face amount, you will be notified that
the amount is insufficient to process the request. In some cases, the quoted
amount, if paid, would increase the death benefit by more than it increases the
Contract Fund. In these situations, underwriting might be required to accept the
premium payment and to process the paid-up request. Pruco Life of New Jersey
reserves the right to change this procedure in the future. After the first
Contract year, you must make a proper written request for the Contract to become
fully paid-up and send the Contract to a Home Office to be endorsed. It is
possible for this Contract to be classified as a Modified Endowment Contract if
this option is exercised. See TAX TREATMENT OF CONTRACT BENEFITS, page 22. A
Contract in effect under a paid-up insurance option will have cash surrender and
loan values.
REDUCED PAID-UP INSURANCE OPTION
Like the paid-up insurance option, reduced paid-up insurance provides the
insured with lifetime insurance coverage without the payment of additional
premiums. However, reduced paid-up insurance provides insurance coverage which
is generally lower than the death benefit of the Contract. Reduced paid-up
insurance is based upon a Contract's
19
<PAGE>
current net cash value and can be requested at any time. This option is
available only when the Contract is not in default and Pruco Life of New Jersey
is not paying any premiums in accordance with any payment of premium benefit
that may be included in the Contract. In order to receive reduced paid-up
insurance, a Contract owner must make a proper written request, and Pruco Life
of New Jersey may request that the owner send the Contract to a Home Office to
be endorsed. It is possible for this Contract to be classified as a Modified
Endowment Contract if this option is exercised. See TAX TREATMENT OF CONTRACT
BENEFITS, page 22.
WHEN PROCEEDS ARE PAID
Pruco Life of New Jersey will generally pay any death benefit, cash surrender
value, loan proceeds or withdrawal within seven days after all the documents
required for such payment are received at a Home Office. Other than the death
benefit, which is determined as of the date of death, the amount will be
determined as of the end of the valuation period in which the necessary
documents are received at a Home Office. Pruco Life of New Jersey may delay
payment of proceeds from the subaccount[s] and the variable portion of the death
benefit due under the Contract if the sale or valuation of the Account's assets
is not reasonably practicable because the New York Stock Exchange is closed for
other than a regular holiday or weekend, trading is restricted by the SEC, or
the SEC declares that an emergency exists.
With respect to the amount of any cash surrender value allocated to the
fixed-rate option, and with respect to a Contract inforce as fixed reduced
paid-up insurance or as extended term insurance, Pruco Life of New Jersey
expects to pay the cash surrender value promptly upon request. However, Pruco
Life of New Jersey has the right to delay payment of such cash surrender value
for up to six months (or a shorter period if required by applicable law). Pruco
Life of New Jersey will pay interest of at least 3% a year if it delays such a
payment for more than 30 days (or a shorter period if required by applicable
law).
LIVING NEEDS BENEFIT
You may elect to add the LIVING NEEDS BENEFIT(SM) to your Contract at issue. The
benefit may vary by state. It can generally be added only when the aggregate
face amounts of the insured's eligible contracts equal $50,000 or more. There is
no charge for adding the benefit to the Contract. However, an administrative
charge (not to exceed $150) will be made at the time the LIVING NEEDS BENEFIT is
paid.
Subject to state regulatory approval, the LIVING NEEDS BENEFIT allows you to
elect to receive an accelerated payment of all or part of the Contract's death
benefit, adjusted to reflect current value, at a time when certain special needs
exist. The adjusted death benefit will always be less than the death benefit,
but will generally be greater than the Contract's cash surrender value. The
following option may be available. A Pruco Life of New Jersey representative
should be consulted as to whether additional options may be available.
TERMINAL ILLNESS OPTION
This option is available if the insured is diagnosed as terminally ill with a
life expectancy of six months or less. When you provide satisfactory evidence,
Pruco Life of New Jersey will provide an accelerated payment of the portion of
the death benefit you select as a LIVING NEEDS BENEFIT. The Contract owner may
(1) elect to receive the benefit in a single sum or (2) receive equal monthly
payments for six months. If the insured dies before all the payments have been
made, the present value of the remaining payments will be paid to the
beneficiary designated in the LIVING NEEDS BENEFIT claim form in a single sum.
All or part of the Contract's death benefit may be accelerated under the LIVING
NEEDS BENEFIT. If the benefit is only partially accelerated, a death benefit of
at least $25,000 must remain under the Contract. Pruco Life of New Jersey
reserves the right to determine the minimum amount that may be accelerated.
No benefit will be payable if the Contract owner is required to elect it in
order to meet the claims of creditors or to obtain a government benefit. Pruco
Life of New Jersey can furnish details about the amount of LIVING NEEDS BENEFIT
that is available to an eligible Contract owner, and the adjusted premium
payments that would be in effect if less than the entire death benefit is
accelerated.
20
<PAGE>
You should consider whether adding this settlement option is appropriate in your
given situation. Adding the LIVING NEEDS BENEFIT to the Contract has no adverse
consequences; however, electing to use it could. With the exception of certain
business-related policies, the LIVING NEEDS BENEFIT is excluded from income if
the insured is terminally ill or chronically ill as defined by the tax law
(although the exclusion in the latter case may be limited). You should consult a
qualified tax adviser before electing to receive this benefit. Receipt of a
LIVING NEEDS BENEFIT payment may also affect your eligibility for certain
government benefits or entitlements.
VOTING RIGHTS
As explained earlier, all of the assets held in the subaccounts will be invested
in shares of the corresponding portfolios of the Fund. Pruco Life of New Jersey
is the legal owner of those shares and has the right to vote on any matter voted
on at Fund shareholders meetings. However, Pruco Life of New Jersey will, as
required by law, vote the shares of the Fund in accordance with voting
instructions received from Contract owners at any regular and special
shareholders meetings. The Fund will not hold annual shareholders meetings when
not required to do so under Maryland law or the Investment Company Act of 1940.
Fund shares for which no timely instructions from Contract owners are received,
and any shares attributable to general account investments of Pruco Life of New
Jersey, will be voted in the same proportion as shares in the respective
portfolios for which instructions are received. If the applicable federal
securities laws or regulations, or their current interpretation, change so as to
permit Pruco Life of New Jersey to vote shares of the Fund in its own right, it
may elect to do so.
Matters on which Contract owners may give voting instructions including the
following: (1) election of the Board of Directors of the Fund; (2) ratification
of the independent accountant of the Fund; (3) approval of the investment
advisory agreement for a portfolio of the Fund corresponding to the Contract
owner's selected subaccount[s]; (4) any change in the fundamental investment
policy of a portfolio corresponding to the Contract owner's selected
subaccount[s]; and (5) any other matter requiring a vote of the shareholders of
the Fund. With respect to approval of the investment advisory agreement or any
change in a portfolio's fundamental investment policy, Contract owners
participating in such portfolios will vote separately on the matter.
The number of shares in a portfolio for which a Contract owner may give
instructions is determined by dividing the portion of your Contract Fund
attributable to the portfolio, by the value of one share of the portfolio. The
number of votes for which each Contract owner may give Pruco Life of New Jersey
instructions will be determined as of the record date chosen by the Board of
Directors of the Fund. Pruco Life of New Jersey will furnish Contract owners
with proper forms and proxies to enable them to give these instructions. Pruco
Life of New Jersey reserves the right to modify the manner in which the weight
to be given voting instructions is calculated where such a change is necessary
to comply with current federal regulations.
Pruco Life of New Jersey may, if required by state insurance regulations,
disregard voting instructions if they would require shares to be voted so as to
cause a change in the sub-classification or investment objectives of one or more
of the Fund's portfolios, or to approve or disapprove an investment advisory
contract for the Fund. In addition, Pruco Life of New Jersey itself may
disregard voting instructions that would require changes in the investment
policy or investment adviser of one or more of the Fund's portfolios, provided
that Pruco Life of New Jersey reasonably disapproves such changes in accordance
with applicable federal regulations. If Pruco Life of New Jersey does disregard
voting instructions, it will advise Contract owners of that action and its
reasons for such action in the next annual or semi-annual report to Contract
owners.
REPORTS TO CONTRACT OWNERS
Once each Contract year (except where the Contract is inforce as fixed extended
term insurance or fixed reduced paid-up insurance), Pruco Life of New Jersey
will send you a statement that provides certain information pertinent to your
own Contract. The statement shows all transactions during the year that affected
the value of your Contract Fund, including monthly changes attributable to
investment experience. The statement will also show the current death benefit,
cash surrender value, and loan values of your Contract. On request, you will be
sent a current statement in a form similar to that of the annual statement
described above, but Pruco Life of New Jersey may limit the number of such
requests or impose a reasonable charge if such requests are made too frequently.
21
<PAGE>
You will also receive, usually at the end of February, an annual report of the
operations of the Fund. That report will list the investments held in both
portfolios and include audited financial statements for the Fund. A semi-annual
report with similar unaudited information will be sent to you, usually at the
end of August.
TAX TREATMENT OF CONTRACT BENEFITS
We urge each prospective purchaser to consult a qualified tax adviser. The
following discussion is not intended as tax advice, and it is not a complete
statement of what the effect of federal income taxes will be under all
circumstances. Current federal income tax laws and regulations or
interpretations may change. A more detailed discussion of what follows is
contained in the statement of additional information.
TREATMENT AS LIFE INSURANCE
We believe we have taken adequate steps to ensure that the Contract qualifies as
life insurance for tax purposes. Generally speaking, this means that:
o You will not be taxed on the growth of the funds in the Contract,
unless you receive a distribution from the Contract.
o The Contract's death benefit will be tax free to your beneficiary.
Although we believe the Contract should qualify as "life insurance" for federal
tax purposes, there are uncertainties, particularly because the Secretary of the
Treasury has not yet issued permanent regulations that bear on this question.
Accordingly, we have reserved the right to make changes -- which will be applied
uniformly to all Contract owners after advance written notice -- that we deem
necessary to ensure that the Contract will continue to qualify as life
insurance.
PRE-DEATH DISTRIBUTIONS
The tax treatment of any distribution you receive before the insured's death
depends on whether the Contract is classified as a Modified Endowment Contract.
If the Contract is not classified as a Modified Endowment Contract, you
generally will not be taxed on proceeds received in the event of a lapse,
surrender of the Contract, or withdrawal of part of the cash surrender value
unless the total amount received exceeds the gross premiums paid less the
untaxed portion of any prior withdrawals. In certain limited circumstances, you
may be taxed on all or a portion of a withdrawal during the first 15 contract
years even if total withdrawals do not exceed total premiums paid to date. The
proceeds of any loan will be treated as indebtedness of the owner and will not
be treated as taxable income.
If the Contract is classified as a Modified Endowment Contract, amounts you
receive under the Contract before the insured's death, including loans and
withdrawals (even those made during the two year period before the Contract
became a Modified Endowment Contract), are included in income to the extent of
gain in the Contract. In addition, any taxable income on pre-death distributions
is subject to a penalty of 10% of the amount includible in income unless the
amount is received on or after age 59 1/2, on account of your becoming disabled,
or as a life annuity.
A Contract may be classified as a Modified Endowment Contract if the premium
payments are in excess of the "7 Pay Limit." The 7 Pay Limit is generally the
amount that would be required to pay for the insurance policy in seven equal
annual installments. The 7 Pay Limit is actuarially determined based on IRS
guidelines, which consider the death benefit, supplemental benefits such as
dependent coverage and waiver of premium, riders and the age of the insured.
For example, if the 7 Pay Limit is determined to be $1,000 per year, cumulative
premiums paid may not exceed $1,000 in year one, $2,000 in year two, $3,000 in
year three, $4,000 in year four, $5,000 ink year five, $6,000 in year six, and
$7,000 in year seven. If cumulative premiums paid exceed the 7 Pay Limit then
pre-death distributions are subject to the less favorable income tax treatment
previously described.
A Contract may be classified as a Modified Endowment Contract under various
circumstances. For example, low face amount Contracts issued on younger insureds
may be classified as a Modified Endowment Contract even though the Contract
owner pays only the Scheduled Premiums or even less than the Scheduled Premiums.
Before purchasing
22
<PAGE>
such a Contract, you should understand the tax treatment of pre-death
distributions and consider the purpose for which the Contract is being
purchased. Generally, a Contract may be classified as a Modified Endowment
Contract if premiums in excess of Scheduled Premiums are paid or the face amount
of insurance is decreased, or if the face amount of insurance is increased, or
if a rider is added or removed from the Contract. You should consult your tax
adviser before making any of these policy changes.
Prudential tests premium payments and reductions in coverage to determine
whether a policy is a MEC. If a premium payment or reduction causes MEC status,
Prudential will notify you and advise you as to any available options to avoid
MEC status. For example, subject to IRS time limits, a premium payment in excess
of the 7 Pay Limit may be returned to you to restore non-MEC status.
WITHHOLDING
The taxable portion of any amounts received under the Contract will be subject
to withholding to meet federal income tax obligations if you fail to elect that
no taxes will be withheld or in certain other circumstances.
OTHER TAX CONSEQUENCES
There may be federal estate taxes and state and local estate and inheritance
taxes payable if either the owner or the insured dies. The transfer or
assignment of the Contract to a new owner may also have tax consequences. The
individual situation of each Contract owner or beneficiary will be significant.
OTHER CONTRACT PROVISIONS
There are several other Contract provisions that are of less significance to you
than those already described in detail, either because they relate to options
that you may choose under the Contract but are not likely to exercise for
several years after you first purchase it, or because they are of a routine
nature not likely to influence your decision to buy the Contract. These
provisions are summarized in the EXPANDED TABLE OF CONTENTS OF THE STATEMENT OF
ADDITIONAL INFORMATION on page 38, and described in greater detail in the
statement of additional information.
FURTHER INFORMATION ABOUT THE FUND
RISK/RETURN SUMMARIES
This section provides information about the Conservative Balanced and Flexible
Managed Portfolios, including a summary of the principal investment risks
associated with each.
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
23
<PAGE>
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.
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)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
1989 16.99%
1990 5.27%
1991 19.07%
1992 6.95%
1993 12.20%
1994 -0.97%
1995 17.27%
1996 12.63%
1997 13.45%
1998 11.74%
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)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SINCE INCEPTION
1 YEAR 5 YEARS 10 YEARS (5/13/83)
------ ------- -------- ---------
<S> <C> <C> <C> <C>
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%
</TABLE>
*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.
24
<PAGE>
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.
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)
- --------------------------------------------------------------------------------
Annual
Year Returns
1989 21.77%
1990 1.91%
1991 25.43%
1992 7.61%
1993 15.58%
1994 -3.16%
1995 24.13%
1996 13.64%
1997 17.96%
1998 10.24%
- --------------------------------------------------------------------------------
25
<PAGE>
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.
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.
HOW THE PORTFOLIOS INVEST
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
In general, we will invest within the ranges shown below:
ASSET TYPE MINIMUM NORMAL MAXIMUM
---------- ------- ------ -------
Stocks 15% 35% 75%
Debt obligations and 25% 65% 85%
money market securities
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
26
<PAGE>
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.)
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 capital appreciation, 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 secrity 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.
27
<PAGE>
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.
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, "Description of the Portfolios, Their Investments and
Risks - Risk Management and Return Enhancement Strategies."
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
28
<PAGE>
Generally, we will invest within the ranges shown below:
ASSET TYPE MINIMUM NORMAL MAXIMUM
---------- ------- ------ -------
Stocks 25% 60% 100%
Fixed income securities 0% 40% 75%
Money market securities 0% 0% 75%
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.
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 capital appreciation, 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 DELAY-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
29
<PAGE>
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.
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, "Description of the Portfolios, their Investments and
Risks - Risk Management and Return Enhancement Strategies."
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.
30
<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 RISKS POTENTIAL REWARDS
- ------------------------------------------ ----------------------------------------- -------------------------------------
<S> <C> <C>
HIGH-QUALITY MONEY MARKET o Credit risk - the risk that o Regular interest income
OBLIGATIONS OF ALL TYPES the borrower can't pay back
the money borrowed
o Generally more secure than
stocks and since
o Market risk - the risk that
the companies must pay 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 RELATED SECURITIES o Individual stocks could lose o Historically, stocks have
value outperformed other investments
over the long term
o The equity markets could go
down, resulting in a decline o Generally, economic growth
in value of a Portfolio's means higher corporate
investments profits, which leads to an
increase in stock prices,
o Companies that pay dividends known as capital appreciation
may not do so if they don't
have profits or adequate cash o May be a source of dividend
flow income
o Changes in economic or
political conditions, both
U.S. and international, may
result in a decline in the
value of a Portfolio's
investments o Highly successful small-cap
companies can outperform
o Small-cap companies are more larger ones
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>
31
<PAGE>
<TABLE>
- ------------------------------------------ ----------------------------------------- -------------------------------------
<S> <C> <C>
o The Portfolio's holdings, o Bonds have generally
INVESTMENT GRADE DEBT SECURITIES share price, yield, and total outperformed money market
return may fluctuate in instruments over the long term
response to bond market with less risk than stocks
movements
o Most bonds will rise in value
o Credit risk - the default of when interest rates fall
an issuer would leave a
Portfolio with unpaid interest o Regular interest income
or principal. The lower a
bond's quality, the higher its o Investment grade bonds have a
potential volatility lower risk of default
o Market risk - the risk that o Generally more secure than
the market value of an stocks since companies must
investment may move up or pay their debts before they
down, sometimes rapidly or pay dividends
unpredictably. Market risk may
affect an industry, sector, or
the market as a whole
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
- ------------------------------------------ ----------------------------------------- -------------------------------------
o Higher market risk o May offer higher interest income
HIGH-YIELD DEBT SECURITIES than higher quality debt
(JUNK BONDS) o Higher credit risk securities
o May be more illiquid (harder
to 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
- ------------------------------------------ ----------------------------------------- -------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
- ------------------------------------------ ----------------------------------------- -------------------------------------
<S> <C> <C>
o Foreign markets, economies and o Investors can participate in
FOREIGN political systems may not be the growth of foreign markets
SECURITIES; as stable as in the U.S. and companies operating in
OPTIONS AND FUTURES ON those markets
FOREIGN CURRENCIES o Currency risk - changing
values of foreign currencies o Changing value of foreign
currencies
o May be less liquid than U.S.
stocks and bonds o Opportunities for
diversification
o Differences in foreign laws,
accounting standards, public
information, custody and
settlement practices
o Year 2000 conversion may be
more of a problem for some
foreign issuers
- ------------------------------------------ ----------------------------------------- -------------------------------------
o Derivatives , such as futures, o A Portfolio could make money
DERIVATIVES-- options and foreign currency and
forward protect against losses
if the investment contracts, o Derivatives that involves
may not fully offset the leverage could generate
analysis proves correct. substantial gains at low cost
underlying positions and this
could result in losses to a o One way to managed a
Portfolio that would not have Portfolio's risk/return
otherwise occurred balance is to lock in the
value of an investment ahead
OPTIONS ON EQUITY SECURITIES, o Derivatives used for risk of time.
DEBT SECURITIES, STOCK INDEXES; management may not have the
FUTURES CONTRACTS ON STOCK intended effects and may
INDEXES, DEBT SECURITIES AND result in losses or missed
INTEREST RATE INDEXES, opportunities
INTEREST RATE SWAPS
o The other party to a
derivatives contract could
default
o Derivatives that involve
leverage could magnify losses
o Certain types of derivatives
involve costs to a Portfolio
that can reduce returns
- ------------------------------------------ ----------------------------------------- -------------------------------------
</TABLE>
33
<PAGE>
<TABLE>
- ------------------------------------------ ----------------------------------------- -------------------------------------
<S> <C> <C>
REAL ESTATE INVESTMENT TRUSTS (REITS) o Performance depends on the o Real estate holdings can
strength of real estate generate good returns from
markets, REIT management and rents, rising market values,
property management which can etc.
be affected by many factors,
including national and o Greater diversification than
regional economic conditions direct ownership
o May be difficult to value o May offer a more attractive
precisely yield than more widely traded
ILLIQUID SECURITIES securities
(UP TO 15% OF NET ASSETS) o May be difficult to sell at
the time or price desired
- ------------------------------------------ ----------------------------------------- -------------------------------------
LOAN PARTICIPATIONS o Credit risk o May offer right to receive
principal, interest and fees
o Market risk without as much risk as lender
o A Portfolio has no rights against
the borrower in the event the
borrower does not repay the loan
- ------------------------------------------ ----------------------------------------- -------------------------------------
o Use of such instruments and o Use of instruments may magnify
WHEN-ISSUED AND strategies may magnify underlying investment gains
DELAYED DELIVERY underlying investment losses
SECURITIES, REVERSE
REPURCHASE o Investment costs may exceed
AGREEMENTS, SHORT SALES AND SHORT potential underlying investment
SALES AGAINST THE BOX gains
- ------------------------------------------ ----------------------------------------- -------------------------------------
</TABLE>
34
<PAGE>
HOW THE PORTFOLIOS ARE MANAGED
Prudential is the investment manager of the Fund. Prudential has entered into a
Service Agreement with its wholly-owned subsidiary, The Prudential Investment
Corporation ("PIC"), which provides that PIC will furnish to Prudential such
services as Prudential may require in connection with the performance of its
obligations under an Investment Advisory Agreement with the Fund. One of PIC's
business groups is Prudential Investments.
The investment advisory fee paid in 1998 for the Conservative Balanced Portfolio
was 55% of the average net assets of the Portfolio. For the Flexible Managed
Portfolio, the fee paid in 1998 was 60% of the average net assets of the
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.
PURCHASE AND SALE OF FUND SHARES
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 and its
affiliates as investment options under certain contracts, including the Contract
offered by this prospectus. Class II is offered only to separate accounts of
non-Prudential insurance companies as investment options under certain of their
contracts.
When the Account purchases or sells shares of a Portfolio, the price it 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 NAV of each share class of each 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 each of the Portfolios 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.
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.
SHORT- TERM DEBT SECURITIES with remaining maturities of 12 months or less held
by the Conservative Balanced and Flexible Managed Portfolios 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.
35
<PAGE>
OTHER DEBT SECURITIES - those that are not valued on an amortized costs basis -
are valued using an independent pricing service.
OPTIONS ON STOCK AND STOCK INDEXES that are traded on an 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.
OTHER FUND INFORMATION
DISTRIBUTOR
Prudential Investment Management Services LLC ("PIMS") distributes the Fund's
shares under a Distribution Agreement with 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.
STATE REGULATION
Pruco Life of New Jersey is subject to regulation and supervision by the
Department of Insurance of the State of New Jersey, which periodically examines
its operations and financial condition. It is also subject to the insurance laws
and regulations of all jurisdictions in which it is authorized to do business.
Pruco Life of New Jersey is required to submit annual statements of its
operations, including financial statements, to the insurance departments of the
various jurisdictions in which it does business to determine solvency and
compliance with local insurance laws and regulations.
In addition to the annual statements referred to above, Pruco Life of New Jersey
is required to file with New Jersey and other jurisdictions a separate statement
with respect to the operations of all its variable contract accounts, in a form
promulgated by the National Association of Insurance Commissioners.
EXPERTS
The financial statements of Pruco Life of New Jersey as of December 31, 1998 and
1997 and for each of the three years in the period ended December 31, 1998 and
the financial statements of the Account as of December 31, 1998 and for each of
the three years in the period then ended included in this prospectus have been
so included in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting. PricewaterhouseCoopers LLP's principal business address
is 1177 Avenue of the Americas, New York, New York 10036.
Actuarial matters included in this prospectus have been examined by Nancy D.
Davis, FSA, MAAA, Vice President and Actuary of Prudential whose opinion is
filed as an exhibit to the registration statement.
LITIGATION
Several actions have been brought against Pruco Life of New Jersey alleging that
Pruco Life of New Jersey and its agents engaged in improper life insurance sales
practices. Prudential has agreed to indemnify Pruco Life of New Jersey for
losses, if any, resulting from such litigation. No other significant litigation
is being brought against Pruco Life of New Jersey that would have a material
effect on its financial position.
36
<PAGE>
YEAR 2000 COMPLIANCE
The services provided to you as a purchaser of a PRUvider Variable Appreciable
Life Insurance Contract depend on the smooth functioning of numerous computer
systems. Many computer systems in use today are programmed to recognize only the
last two digits of a date as the year. As a result, any systems using this kind
of programming can not distinguish a date using "00" and may treat it as "1900"
instead of "2000." This problem may impact computer systems that store business
information, but it could also affect other equipment used in our business like
telephone, fax machines and elevators. If this problem is not corrected, the
"Year 2000" issue could affect the accuracy and integrity of business records.
Prudential's regular business operations could be interrupted as well as those
of other companies that deal with us.
In addition, the operations of the mutual funds associated with the PRUvider
Variable Appreciable Life Insurance Contract could experience problems resulting
from the Year 2000 issue. Please refer to the respective mutual fund's
prospectus for information regarding their approach to Year 2000 concerns. The
following describes Prudential's effort to address Year 2000 concerns.
To address this potential problem Prudential, as the ultimate parent company of
Pruco Life of New Jersey, organized its Year 2000 efforts around the following
three areas:
o BUSINESS SYSTEMS - Computer programs directly used to support our
business;
o INFRASTRUCTURE - Computers and other business equipment like
telephones and fax machines; and
o BUSINESS PARTNERS - Year 2000 readiness of essential business
partners.
BUSINESS SYSTEMS. The business systems component includes a wide range of
computer programs that directly support Prudential's business operations
including systems for: insurance product processing, securities trading,
personnel record keeping and general accounting systems. All business systems
were analyzed to determine whether each computer program with a Year 2000
problem should be retired, replaced or renovated. The majority of this work has
been completed. A few remaining programs are currently being tested and
completion of this process is expected by June 1999.
INFRASTRUCTURE. As with business applications, we established a specific
methodology and process for addressing infrastructure issues. The infrastructure
effort includes mainframe computer system hardware and operating system
software, mid-range systems and servers, telecommunications equipment and
systems, buildings and facilities systems, personal computers, and vendor
hardware and software. Other than desktop systems, substantially all other
infrastructure systems have been tested. Presently a small number of midrange
computers, and building and facility systems are still in the testing phase. We
expect to have the infrastructure implementation process completed by June 1999.
BUSINESS PARTNERS. Prudential recognizes the importance of determining the Year
2000 readiness of external business relationships especially those that involve
electronic data transfer products and services, and products that impact our
essential business processes. Prudential first classified each business partner
as "highly critical" or "less critical" to our business and then began to
develop risk assessment and contingency plans to address the potential that a
business partner could experience a Year 2000 failure. All highly critical
business partner relationships have been assessed and contingency planning is
completed. Risk assessment and contingency planning continues for less critical
business partners, and the target completion date for these relationships is
June 1999.
Prudential believes that the Business Systems, Infrastructure and Business
Partners components of the Year 2000 project are substantially on schedule. A
small number of the projects may not meet their targeted completion date.
However, Prudential expects that these projects will be completed by September,
1999. If there are any delays, they should not have a significant impact on the
timing of the project as a whole.
THE COST OF YEAR 2000 READINESS
Prudential is funding the Year 2000 program from internal operating budgets, and
estimates that its total costs to address the Year 2000 issue will total
approximately $220 million. Because these expenses were part of the operating
budget, they did not impact the management of PRUvider Variable Appreciable Life
Insurance Contracts. During the course of the Year 2000 program, some optional
computer projects have been delayed, but these delays have not had any material
effect on PRUvider Variable Appreciable Life Insurance Contracts.
37
<PAGE>
YEAR 2000 RISKS AND CONTINGENCY PLANNING
Prudential believes that it is well positioned to lessen the impact of the Year
2000 problem. However, given the nature of this issue, we can not be 100%
certain that we are completely prepared, particularly because we can not be
certain of Year 2000 readiness of third parties. As a result, we are unable to
determine at this time whether the consequences of Year 2000 failures may have a
material adverse effect on the results of Prudential's operations, liquidity or
financial condition. In the worst case, it is possible that a Year 2000
technology failure, whether internal or external, could have a material impact
on Prudential's results of operations, liquidity, or financial position. If
Prudential is unable to address the Year 2000 problem, we may have difficulty in
responding to your incoming phone calls, calculating your unit values or
processing withdrawals and purchase payments. It is also possible that the
mutual funds associated with the PRUvider Variable Appreciable Life Insurance
Contract will be unable to value their securities, in turn creating difficulties
in purchasing or selling shares of the respective mutual fund and calculating
corresponding unit asset values. The objective of Prudential's Year 2000 program
has been to reduce these risks as much as possible.
Most of the operations of the PRUvider Variable Appreciable Life Insurance
Contract involve such a large number of individual transactions that they can
only be handled with the help of computers. As a result, our current contingency
plans include responses to the failure of specific business programs or
infrastructure components. However, our contingency responses are now being
reviewed and we expect to finalize them by June, 1999 to ensure that they are
workable under the special conditions of a Year 2000 failure. Prudential
believes that with the completion of its Year 2000 program as scheduled, the
possibility of significant interruptions of normal operations will be reduced.
EXPANDED TABLE OF CONTENTS OF STATEMENT OF
ADDITIONAL INFORMATION
Included in the registration statements for the Contracts and the Fund is a
statement of additional information which is available without charge by writing
to Pruco Life of New Jersey at 213 Washington Street, Newark, New Jersey
07102-2992. The following table of contents of that Statement provides a brief
summary of what is included in each section.
I. MORE DETAILED INFORMATION ABOUT THE CONTRACT.
SALES LOAD UPON SURRENDER. A description is given of exactly how Pruco Life
of New Jersey determines the amount of the part of the sales load that is
imposed only upon surrenders or withdrawals during the first 10 Contract
years.
REDUCTION OF CHARGES FOR CONCURRENT SALES TO SEVERAL INDIVIDUALS. Where the
Contract is sold at the same time to several individuals who are members of
an associated class and Pruco Life of New Jersey's expenses will be
reduced, some of the charges under those Contracts may be reduced.
PAYING PREMIUMS BY PAYROLL DEDUCTION. Your employer may pay monthly
premiums for you with deductions from your salary.
UNISEX PREMIUMS AND BENEFITS. In some states and under certain
circumstances, premiums and benefits will not vary with the sex of the
insured.
HOW THE DEATH BENEFIT WILL VARY. A description is given of exactly how the
death benefit may increase to satisfy Internal Revenue Code requirements.
WITHDRAWAL OF EXCESS CASH SURRENDER VALUE. If the Contract Fund value is
high enough you may be able to withdraw part of the cash surrender value
while keeping the Contract in effect. There will be a transaction charge.
The death benefit will change. There may be tax consequences. You should
consult your Pruco Life of New Jersey representative to discuss whether a
withdrawal or a loan is preferable.
TAX TREATMENT OF CONTRACT BENEFITS. A fuller account is provided of how
Contract owners may be affected by federal income taxes.
SALE OF THE CONTRACT AND SALES COMMISSIONS. The Contract is sold primarily
by agents of Prudential who are also registered representatives of one of
its subsidiaries, Pruco Securities Corporation, a broker and dealer
registered under the Securities and Exchange Act of 1934. Generally,
selling agents receive a commission of 50% of the Scheduled Premium in the
first year, no more than 6% of the Scheduled Premiums for the second
through tenth years and smaller commissions thereafter.
38
<PAGE>
RIDERS. Various extra fixed-benefits may be obtained for an extra premium.
They are described in what are known as "riders" to the Contract.
OTHER STANDARD CONTRACT PROVISIONS. The Contract contains several
provisions commonly included in all life insurance policies. They include
provisions relating to beneficiaries, misstatement of age or sex, suicide,
assignment, incontestability, and settlement options.
II. INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS.
General
Convertible Securities
Warrants
Foreign Securities
Options on Stock and Debt Securities
Options on Stock Indexes
Options on Foreign Currencies
Futures Contracts and Options on Futures Contracts
Forward Foreign Currency Exchange Contracts Interest
Rate Swaps Loan Participations Reverse Repurchase
Agreements and Dollar Rolls When-Issued and Delayed
Delivery Securities Short Sales Loans of Portfolio
Securities Illiquid Securities
A more detailed description is given of these investments and the policies
of these portfolios.
III. INVESTMENT RESTRICTIONS.
There are many restrictions upon the investments the portfolios may make
and the practices in which they may engage; these are fundamental, meaning
they may not be changed without Contract owner approval.
IV. INVESTMENT MANAGEMENT AND DISTRIBUTION ARRANGEMENTS.
A fuller description than that in the prospectus is given.
V. OTHER INFORMATION CONCERNING THE FUND.
Incorporation and Authorized Shares
Portfolio Transactions and Brokerage
Taxation of the Fund
Custodians
Experts
Licenses
VI. DIRECTORS AND OFFICERS OF PRUCO LIFE OF NEW JERSEY AND MANAGEMENT OF THE
FUND.
The names and recent affiliations of Pruco Life of New Jersey's directors
and executive officers are given. The same information is given for the
Fund.
VII. FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC.
VIII. THE PRUDENTIAL SERIES FUND, INC. SCHEDULE OF INVESTMENTS.
IX. DEBT RATINGS.
A description is given of how Moody's Investors Services, Inc. and Standard
& Poor's Ratings Services describe the creditworthiness of debt securities.
39
<PAGE>
ADDITIONAL INFORMATION
Pruco Life of New Jersey has filed a registration statement with the SEC under
the Securities Act of 1933, relating to the offering described in this
prospectus. This prospectus and the statement of additional information do not
include all of the information set forth in the registration statement. Certain
portions have been omitted pursuant to the rules and regulations of the SEC. The
omitted information may, however, be obtained from the SEC's Public Reference
Section at 450 Fifth Street, N.W., Washington, D.C. 20549, or by telephoning
(800) SEC-0330, upon payment of a prescribed fee.
Further information may also be obtained from Pruco Life of New Jersey. Its
address and telephone number are on the inside front cover of this prospectus.
FINANCIAL STATEMENTS
The financial statements of the Account should be distinguished from the
financial statements of Pruco Life of New Jersey which should be considered only
as bearing upon the ability of Pruco Life of New Jersey to meet its obligations
under the Contracts. The financial statements of the Fund are in the statement
of additional information.
40
<PAGE>
(This page intentionally left blank.)
<PAGE>
FINANCIAL STATEMENTS OF THE
PRUVIDER VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
PORTFOLIO PORTFOLIO
----------- --------------
<S> <C> <C>
ASSETS
Investment in The Prudential Series Fund, Inc.
Portfolios at net asset value [Note 3]..................................... $248,985,487 $118,167,929
------------ ------------
Net Assets................................................................... $248,985,487 $118,167,929
============ ============
NET ASSETS, representing:
Equity of contract owners.................................................... $248,985,487 $118,167,929
------------ ------------
$248,985,487 $118,167,929
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A4 THROUGH A7
A1
<PAGE>
FINANCIAL STATEMENTS OF THE
PRUVIDER VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF OPERATIONS
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
PORTFOLIO PORTFOLIO
-------------------------------------- -----------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend income................................. $10,349,173 $10,897,673 $ 9,673,291 $ 4,872,397 $ 4,982,357 $ 4,036,315
----------- ----------- ----------- ----------- ----------- -----------
EXPENSES
Charges to contract owners for assuming
mortality risk and expense risk [Note 5A]..... 2,116,233 2,184,985 1,886,931 713,776 665,939 603,268
Reimbursement for excess expenses [Note 5D]..... (767,447) (793,096) (768,611) (183,772) (163,989) (184,407)
----------- ----------- ----------- ----------- ----------- -----------
NET EXPENSES ...................................... 1,348,786 1,391,889 1,118,320 530,004 501,950 418,861
----------- ----------- ----------- ----------- ----------- -----------
NET INVESTMENT INCOME ............................. 9,000,387 9,505,784 8,554,971 4,342,393 4,480,407 3,617,454
----------- ----------- ----------- ----------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............ 27,434,444 56,731,648 31,237,057 6,925,741 11,925,141 6,285,583
Realized gain on shares redeemed................ 8,721,978 2,974,960 1,665,484 594,578 961,056 631,625
Net change in unrealized gain (loss) on
investments ................................... (22,408,120) (11,688,757) (2,307,005) 329,870 (4,407,263) 818,813
----------- ----------- ----------- ----------- ----------- -----------
NET GAIN ON INVESTMENTS ........................... 13,748,302 48,017,851 30,595,536 7,850,189 8,478,934 7,736,021
----------- ----------- ----------- ----------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....................... $22,748,689 $57,523,635 $39,150,507 $12,192,582 $12,959,341 $11,353,475
=========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A4 THROUGH A7
A2
<PAGE>
FINANCIAL STATEMENTS OF THE
PRUVIDER VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
PORTFOLIO PORTFOLIO
------------------------------------------ -----------------------------------------
1998 1997 1996 1998 1997 1996
------------- ------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income...................... $ 9,000,387 $ 9,505,784 $ 8,554,971 $ 4,342,393 $ 4,480,407 $ 3,617,454
Capital gains distributions received....... 27,434,444 56,731,648 31,237,057 6,925,741 11,925,141 6,285,583
Realized gain on shares redeemed........... 8,721,978 2,974,960 1,665,484 594,578 961,056 631,625
Net change in unrealized gain (loss) on
investments............................... (22,408,120) (11,688,757) (2,307,005) 329,870 (4,407,263) 818,813
------------ ------------ ------------ ------------ ------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.................. 22,748,689 57,523,635 39,150,507 12,192,582 12,959,341 11,353,475
------------ ------------ ------------ ------------ ------------ ------------
NET DECREASE IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
[Note 7]................................... (152,934,681) (10,329,244) (4,012,445) (4,809,866) (4,971,703) (2,779,707)
------------ ------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RETAINED IN THE ACCOUNT
[Note 8]................................... (177,182) (219,866) (30,235) (8,012) (508,220) 307,568
------------ ------------ ------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS....... (130,363,174) 46,974,525 35,107,827 7,374,704 7,479,418 8,881,336
NET ASSETS
Beginning of year.......................... 379,348,661 332,374,136 297,266,309 110,793,225 103,313,807 94,432,471
------------ ------------ ------------ ------------ ------------ ------------
End of year................................ $248,985,487 $379,348,661 $332,374,136 $118,167,929 $110,793,225 $103,313,807
============ ============ ============ ============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A4 THROUGH A7
A3
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF THE
PRUVIDER VARIABLE APPRECIABLE LIFE SUBACCOUNTS OF
PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT
DECEMBER 31, 1998
NOTE 1: GENERAL
Pruco Life of New Jersey Variable Appreciable Account ("the Account")
was established on January 13, 1984 under New Jersey law as a
separate investment account of Pruco Life Insurance Company of New
Jersey ("Pruco Life of New Jersey") which is a wholly-owned
subsidiary of Pruco Life Insurance Company (an Arizona domiciled
company) and is indirectly wholly-owned by The Prudential Insurance
Company of America ("Prudential"). The assets of the Account are
segregated from Pruco Life of New Jersey's other assets. Proceeds
from the purchases of Pruco Life of New Jersey Variable Appreciable
Life ("VAL") and Pruco Life of New Jersey PRUvider Variable
Appreciable Life ("PRUvider") contracts are invested in the Account.
The Account is registered under the Investment Company Act of 1940,
as amended, as a unit investment trust. There are thirteen
subaccounts within the Account. PRUvider contracts offer the option
to invest in two of the subaccounts within the Account, each of which
invests only in a corresponding portfolio of The Prudential Series
Fund, Inc. (the "Series Fund"). The Series Fund is a diversified
open-end management investment company, and is managed by Prudential.
New sales of the VAL product, which invests in the Account, were
discontinued as of May 1, 1992. However, premium payments made by
current contract owners will continue to be received by the Account.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements are prepared in conformity with
generally accepted accounting principles ("GAAP"). The preparation of
the financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts
and disclosures. Actual results could differ from those estimates.
Investments--The investments in shares of the Series Fund are stated
at the net asset value of the respective portfolio.
Security Transactions--Realized gains and losses on security
transactions are reported on an average cost basis. Purchase and sale
transactions are recorded as of the trade date of the security being
purchased or sold.
Distributions Received--Dividend and capital gain distributions
received are reinvested in additional shares of the Series Fund and
are recorded on the ex-dividend date.
A4
<PAGE>
NOTE 3: INVESTMENT INFORMATION FOR THE PRUDENTIAL SERIES FUND, INC.
PORTFOLIOS
The net asset value per share (rounded) for each portfolio of the
Series Fund, the number of shares of each portfolio held by the
subaccounts and the aggregate cost of investments in such shares at
December 31, 1998 were as follows:
PORTFOLIOS
------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
-------------- --------------
Number of shares: 15,034,666 7,835,779
Net asset value per share (rounded): $ 16.56 $ 15.08
Cost: $ 241,218,468 $ 110,683,045
NOTE 4: CONTRACT OWNER UNIT INFORMATION
Outstanding contract owner units, unit values and total value of
contract owner equity at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
PORTFOLIO PORTFOLIO
----------------- -----------------
<S> <C> <C>
Contract Owner Units Outstanding (VAL) .......... 49,738,054 28,020,793
Unit Value (VAL) ................................ $ 4.75185 $ 3.89530
---------------- ----------------
Contract Owner Equity (VAL) ..................... $ 236,347,771 $ 109,149,395
---------------- ----------------
Contract Owner Units Outstanding (PRUvider) ..... 3,857,290 3,278,692
Unit value (PRUvider) ........................... $ 3.27632 $ 2.75065
---------------- ----------------
Contract Owner Equity (PRUvider) ................ $ 12,637,716 $ 9,018,534
---------------- ----------------
TOTAL CONTRACT OWNER EQUITY .................... $ 248,985,487 $ 118,167,929
================ ================
</TABLE>
A5
<PAGE>
NOTE 5: CHARGES AND EXPENSES
A. Mortality Risk and Expense Risk Charges
The mortality risk and expense risk charges, at an effective annual rate
of 0.60% and 0.90%, are applied daily against the net assets
representing equity of VAL and PRUvider contract owners held in each
subaccount, respectively. Mortality risk is that contract owners may not
live as long as estimated and expense risk is that the cost of issuing
and administering the policies may exceed related charges by Pruco Life
of New Jersey.
B. Deferred Sales Charge
A deferred sales charge is imposed upon surrenders of certain variable
life insurance contracts to compensate Pruco Life of New Jersey for
sales and other marketing expenses. The amount of any sales charge will
depend on the number of years that have elapsed since the contract was
issued. No sales charge will be imposed after the tenth year of the
contract. No sales charge will be imposed on death benefits.
C. Partial Withdrawal Charge
A charge is imposed by Pruco Life of New Jersey on partial withdrawals
of the cash surrender value. A charge equal to the lesser of $15 or 2%
will be made in connection with each partial withdrawal of the cash
surrender value of a contract.
D. Expense Reimbursement
The Account is reimbursed by Pruco Life of New Jersey for expenses in
excess of 0.40% of the VAL product's average daily net assets incurred
by the Money Market, Diversified Bond, Equity, Flexible Managed and
Conservative Balanced Portfolios of the Series Fund. PRUvider contracts
do not provide for reimbursement by Pruco Life of New Jersey.
E. Cost of Insurance Charges
Contract owner contributions are subject to certain deductions prior to
being invested in the Account. The deductions are for (1) transaction
costs which are deducted from each premium payment to cover premium
collection and processing costs; (2) state premium taxes; (3) sales
charges which are deducted in order to compensate Pruco Life of New
Jersey for the cost of selling the contract . Contracts are also subject
to monthly charges for the costs of administering the contract and to
compensate Pruco Life of New Jersey for the guaranteed minimum death
benefit risk.
NOTE 6: TAXES
Pruco Life of New Jersey is taxed as a "life insurance company" as
defined by the Internal Revenue Code and the results of operations of
the Account form a part of Prudential's consolidated federal tax return.
Under current federal law, no federal income taxes are payable by the
Account. As such, no provision for tax liability has been recorded in
these financial statements.
A6
<PAGE>
NOTE 7: NET DECREASE IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER
OPERATING TRANSFERS
The following amounts represent components of contract owner activity
for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
PORTFOLIO PORTFOLIO
--------------------------- -------------------------
1998 1997 1998 1997
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Contract Owner Net Payments............................... $ 19,460,603 $ 22,730,003 $ 8,965,691 $10,313,839
Policy Loans.............................................. (7,974,049) (7,849,567) (3,015,778) (3,213,273)
Policy Loan Repayments and Interest....................... 5,598,233 5,129,697 1,976,521 2,156,195
Surrenders, Withdrawals and Death Benefits................ (13,996,390) (15,259,724) (6,131,547) (6,793,526)
Net Transfers (To) Other Subaccounts or Fixed Rate
Options.................................................. (144,967,979) (2,359,588) (1,292,182) (1,375,131)
Administrative and Other Charges.......................... (11,055,099) (12,720,065) (5,312,571) (6,059,807)
-------------- ------------ ------------ ------------
Net Decrease in Net Assets Resulting From
Premium Payments and Other Operating Transfers.......... $(152,934,681) $(10,329,244) $(4,809,866) $(4,971,703)
============= ============ =========== ===========
</TABLE>
NOTE 8: NET INCREASE (DECREASE) IN NET ASSETS RETAINED IN THE ACCOUNT
The increase (decrease) in net assets retained in the Account represents
the net contributions (withdrawals) of Pruco Life of New Jersey to
(from) the Account. Effective October 13, 1998, Pruco Life of New Jersey
no longer maintains a position in the Account. Previously, Pruco Life of
New Jersey maintained a position in the Account for liquidity purposes
including unit purchases and redemptions, fund share transactions and
expense processing.
NOTE 9: UNIT ACTIVITY
Transactions in units (including transfers among subaccounts) for the
years ended December 31, 1998, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
PORTFOLIO PORTFOLIO
------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 16,398,289 7,728,571 10,117,095 3,568,780 4,308,577 5,634,628
Contract Owner Redemptions: (51,572,419) (10,193,317) (10,999,912) (4,841,158) (5,775,601) (6,423,987)
</TABLE>
NOTE 10: PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments
in the Series Fund for the year ended December 31, 1998 were as
follows:
PORTFOLIOS
-----------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
-----------------------------
Purchases......................... $ 1,384,533 $ 770,632
Sales............................. $(155,845,181) $ (6,102,387)
A7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of the
PRUvider Variable Appreciable Life Subaccounts of
Pruco Life of New Jersey Variable Appreciable Account
and the Board of Directors of
Pruco Life Insurance Company of New Jersey
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of the Flexible Managed Portfolio and
Conservative Balanced Portfolio of the PRUvider Variable Appreciable Life
Subaccounts of Pruco Life of New Jersey Variable Appreciable Account at December
31, 1998, the results of each of their operations and the changes in each of
their net assets for each of the three years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of Pruco Life Insurance Company of New
Jersey's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of fund shares owned at December 31, 1998, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 19, 1999
A8
<PAGE>
<TABLE>
Pruco Life Insurance Company of New Jersey
Statements of Financial Position
December 31, 1998 and 1997 (In Thousands)
- --------------------------------------------------------------------------------
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Fixed maturities
Available for sale, at fair value (amortized cost, 1998: $617,758; and
1997: $585,109) $ 622,990 $ 592,361
Policy loans 139,443 127,306
Short-term investments 53,761 52,464
---------- ----------
Total investments 816,194 772,131
Cash 45 3
Deferred policy acquisition costs 113,923 101,625
Accrued investment income 12,209 14,075
Other assets 15,379 4,037
Separate Account assets 1,453,407 1,110,561
---------- ----------
TOTAL ASSETS $2,411,157 $2,002,432
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' account balances $ 413,848 $ 402,601
Future policy benefits and other policyholder liabilities 90,530 85,220
Cash collateral for loaned securities 34,424 33,663
Securities sold under agreements to repurchase 27,210 --
Income taxes payable 1,610 12,963
Net deferred income tax liability 23,715 22,188
Payable to affiliate 3,492 4,307
Other liabilities 19,489 17,103
Separate Account liabilities 1,450,986 1,108,994
---------- ----------
Total liabilities 2,065,304 1,687,039
Contingencies - (See Note 10) ---------- ----------
Stockholder's Equity
Common stock, $5 par value;
400,000 shares, authorized;
issued and outstanding at
December 31, 1998 and 1997 2,000 2,000
Paid-in-capital 125,000 125,000
Retained earnings 217,260 185,437
Accumulated other comprehensive income 1,593 2,956
---------- ----------
Total stockholder's equity 345,853 315,393
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $2,411,157 $2,002,432
========== ==========
</TABLE>
See Notes to Financial Statements
B-1
<PAGE>
<TABLE>
Pruco Life Insurance Company of New Jersey
Statements of Operations
Years Ended December 31, 1998, 1997, and 1996 (In Thousands)
- --------------------------------------------------------------------------------
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Premiums $ 1,345 $ 1,105 $ 1,345
Policy charges and fee income 56,247 56,382 58,571
Net investment income 47,032 46,324 43,784
Realized investment gains, net 8,446 1,707 1,221
Other income 5,755 5,286 4,047
--------- --------- ---------
Total revenues 118,825 110,804 108,968
--------- --------- ---------
BENEFITS AND EXPENSES
Policyholders' benefits 28,342 33,999 28,653
Interest credited to policyholders' account balances 18,985 19,372 20,069
General, administrative and other expenses 22,105 27,236 12,848
--------- --------- ---------
Total benefits and expenses 69,432 80,607 61,570
--------- --------- ---------
Income from operations before income taxes 49,393 30,197 47,398
--------- --------- ---------
Income taxes
Current 15,309 13,279 12,682
Deferred 2,261 (2,305) 2,929
--------- --------- ---------
Total income taxes 17,570 10,974 15,611
--------- --------- ---------
NET INCOME $ 31,823 $ 19,223 $ 31,787
========= ========= =========
Net unrealized investment gains (losses) on securities,
net of reclassification adjustment (1,363) 924 (4,556)
--------- --------- ---------
TOTAL COMPREHENSIVE INCOME $ 30,460 $ 20,147 $ 27,231
========= ========= =========
</TABLE>
See Notes to Financial Statements
B-2
<PAGE>
<TABLE>
Pruco Life Insurance Company of New Jersey
Statements of Changes in Stockholder's Equity
Years Ended December 31, 1998, 1997, and 1996 (In Thousands)
- --------------------------------------------------------------------------------
<CAPTION>
Accumulated
other Total
Common Paid-in- Retained comprehensive stockholder's
stock capital earnings income equity
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 2,000 $ 125,000 $ 134,427 $ 6,588 $ 268,015
Net income -- -- 31,787 -- 31,787
Change in net unrealized
investment gains, net of
reclassification adjustment -- -- -- (4,556) (4,556)
--------- --------- --------- --------- ---------
Balance, December 31, 1996 2,000 125,000 166,214 2,032 295,246
Net income -- -- 19,223 -- 19,223
Change in net unrealized
investment gains, net of
reclassification adjustment -- -- -- 924 924
--------- --------- --------- --------- ---------
Balance, December 31, 1997 2,000 125,000 185,437 2,956 315,393
Net income -- -- 31,823 -- 31,823
Change in net unrealized
investment gains, net of
reclassification adjustment -- -- -- (1,363) (1,363)
--------- --------- --------- --------- ---------
Balance, December 31, 1998 $ 2,000 $ 125,000 $ 217,260 $ 1,593 $ 345,853
========= ========= ========= ========= =========
</TABLE>
See Notes to Financial Statements
B-3
<PAGE>
<TABLE>
Pruco Life Insurance Company of New Jersey
Statements of Cash Flows
Years Ended December 31, 1998, 1997, and 1996 (In Thousands)
- --------------------------------------------------------------------------------
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,823 $ 19,223 $ 31,787
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Policy charges and fee income (10,871) (7,841) (9,963)
Interest credited to policyholders' account balances 18,985 19,372 20,069
Realized investment gains, net (8,446) (1,707) (1,221)
Amortization and other non-cash items 2,491 (1,046) 10,065
Change in:
Future policy benefits and other policyholders' liabilities 5,310 8,981 7,461
Accrued investment income 1,866 (1,167) (1,329)
Policy loans (12,137) (13,388) (15,724)
Separate Accounts (854) 1,629 (1,335)
Payable to affiliates (815) (1,752) 4,300
Deferred policy acquisition costs (12,298) 5,340 (10,934)
Income taxes payable (11,353) 10,993 1,970
Deferred income tax liability 1,527 (1,987) 366
Other, net (8,955) 2,812 4,669
----------- ----------- -----------
Cash Flows (Used in) From Operating Activities (3,727) 39,462 40,181
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Available for sale 1,001,096 645,355 901,775
Payments for the purchase of:
Fixed maturities:
Available for sale (1,029,988) (679,709) (956,483)
Cash collateral for loaned securities, net 761 33,663 --
Securities sold under agreements to repurchase, net 27,210 -- --
Short term investments, net (1,297) (35,461) 28,306
----------- ----------- -----------
Cash Flows Used in Investing Activities (2,218) (36,152) (26,402)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 300,536 134,020 16,754
Withdrawals (294,549) (141,255) (26,605)
----------- ----------- -----------
Cash Flows From (Used in) Financing Activities 5,987 (7,235) (9,851)
----------- ----------- -----------
Net increase (decrease) in Cash 42 (3,925) 3,928
Cash, beginning of year 3 3,928 --
----------- ----------- -----------
CASH, END OF PERIOD $ 45 $ 3 $ 3,928
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid $ 27,083 $ 1,896 $ 11,673
=========== =========== ===========
</TABLE>
See Notes to Financial Statements
B-4
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. BUSINESS
Pruco Life Insurance Company of New Jersey (the Company) is a stock life
insurance company organized in 1982 under the laws of the state of New Jersey.
It is licensed to sell individual life insurance, variable life insurance,
variable annuities, and fixed annuities (the Contracts) only in the states of
New Jersey and New York.
The Company is a wholly owned subsidiary of Pruco Life Insurance Company (Pruco
Life), a stock life insurance company organized in 1971 under the laws of the
state of Arizona. Pruco Life, in turn, is a wholly owned subsidiary of The
Prudential Insurance Company of America (Prudential), a mutual insurance company
founded in 1875 under the laws of the state of New Jersey. Pruco Life intends to
make additional capital contributions to the Company, as needed, to enable it to
comply with its reserve requirements and fund expenses in connection with its
business. Generally, Pruco Life is under no obligation to make such
contributions and its assets do not back the benefits payable under the
Contracts.
The Company is engaged in a business that is highly competitive because of the
large number of stock and mutual life insurance companies and other entities
engaged in marketing insurance products, and individual annuities. There are
approximately 1,620 stock, mutual and other types of insurers in the life
insurance business in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements include the accounts of the Company, a stock life
insurance company. The financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP").
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the period. Actual results could differ from those estimates.
Investments
Fixed maturities classified as "available for sale" are carried at estimated
fair value. The amortized cost of fixed maturities is written down to estimated
fair value if a decline in value is considered to be other than temporary.
Unrealized gains and losses on fixed maturities "available for sale" including
the effect on deferred policy acquisition costs and participating annuity
contracts that would result from the realization of unrealized gains and losses,
net of income taxes, are included in a separate component of equity,
"Accumulated other comprehensive income."
Policy loans are carried at unpaid principal balances.
Short-term investments, consists primarily of highly liquid debt instruments
purchased with an original maturity of twelve months or less and are carried at
amortized cost, which approximates fair value.
Realized investment gains, net, are computed using the specific identification
method. Costs of fixed maturity are adjusted for impairments considered to be
other than temporary.
Cash
Cash includes cash on hand, amounts due from banks, and money market
instruments.
Deferred Policy Acquisition Costs
The costs which vary with and that are related primarily to the production of
new insurance business are deferred to the extent that they are deemed
recoverable from future profits. Such costs include certain commissions, costs
of policy issuance and underwriting, and certain variable field office expenses.
Deferred policy acquisition costs are subject to recoverability testing at the
time of policy issue and loss recognition testing at the end of each accounting
period. Deferred policy acquisition costs are adjusted for the impact of
unrealized gains or losses on investments as if these gains or losses had been
realized, with corresponding credits or charges included in equity.
B-5
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Acquisition costs related to interest-sensitive life products and
investment-type contracts are deferred and amortized in proportion to total
estimated gross profits arising principally from investment results, mortality
and expense margins and surrender charges based on historical and anticipated
future experience. Amortization periods range from 15 to 30 years. Deferred
policy acquisition costs are analyzed to determine if they are recoverable from
future income, including investment income. If such costs are determined to be
unrecoverable, they are expensed at the time of determination. The effect of
revisions to estimated gross profits on unamortized deferred acquisition costs
is reflected in earnings in the period such estimated gross profits are revised.
Securities loaned
Securities loaned are treated as financing arrangements and are recorded at the
amount of cash received as collateral. The Company obtains collateral in an
amount equal to 102% of the fair value of the securities. The Company monitors
the market value of securities loaned on a daily basis with additional
collateral obtained as necessary. Non-cash collateral received is not reflected
in the statements of financial position. Substantially all of the Company's
securities loaned are with large brokerage firms.
Securities sold under agreements to repurchase
Securities sold under agreements to repurchase are treated as financing
arrangements and are carried at the amounts at which the securities will be
subsequently reacquired, including accrued interest, as specified in the
respective agreements. The Company's policy is to take possession of securities
purchased under agreements to resell. The market value of securities to be
repurchased is monitored and additional collateral is requested, where
appropriate, to protect against credit exposure.
Securities lending and securities repurchase agreements are used to generate net
investment income and facilitate trading activity. These instruments are
short-term in nature (usually 30 days or less). Securities loaned are
collateralized principally by U.S. Government and mortgage-backed securities.
Securities sold under repurchase agreements are collateralized principally by
cash. The carrying amounts of these instruments approximate fair value because
of the relatively short period of time between the origination of the
instruments and their expected realization.
Separate Account Assets and Liabilities
Separate Account assets and liabilities are reported at estimated fair value and
represent segregated funds which are invested for certain policyholders and
other customers. Separate Account assets include common stocks, fixed
maturities, real estate related securities, and short-term investments. The
assets of each account are legally segregated and are not subject to claims that
arise out of any other business of the Company. Investment risks associated with
market value changes are borne by the customers, except to the extent of minimum
guarantees made by the Company with respect to certain accounts. The investment
income and gains or losses for Separate Accounts generally accrue to the
policyholders and are not included in the Statement of Operations. Mortality,
policy administration and surrender charges on the accounts are included in
"Policy charges and fee income."
Separate Accounts represent funds for which investment income and investment
gains and losses accrue directly to, and investment risk is borne by, the
policyholders, with the exception of the Pruco Life of New Jersey Modified
Guaranteed Annuity Account. The Pruco Life of New Jersey Modified Guaranteed
Annuity Account is a non-unitized Separate Account, which funds the Modified
Guaranteed Annuity Contract and the Market Value Adjustment Annuity Contract.
Owners of the Pruco Life of New Jersey Modified Guaranteed Annuity and the
Market Value Adjustment Annuity Contracts do not participate in the investment
gain or loss from assets relating to such accounts. Such gain or loss is borne,
in total, by the Company.
Insurance Revenue and Expense Recognition
Premiums from insurance policies are generally recognized when due. Benefits are
recorded as an expense when they are incurred. For traditional life insurance
contracts, a liability for future policy benefits is recorded using the net
level premium method. For individual annuities in payout status, a liability for
future policy benefits is recorded for the present value of expected future
payments based on historical experience.
B-6
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Amounts received as payment for interest sensitive life, investment contracts
and variable annuities are reported as deposits to "Policyholders' account
balances." Revenues from these contracts are reflected as "Policy charges and
fee income" and consist primarily of fees assessed during the period against the
policyholders' account balances for mortality charges, policy administration
charges, and surrender charges. In addition, interest earned from the investment
of these account balances is reflected in "Net investment income." Benefits and
expenses for these products include claims in excess of related account
balances, expenses of contract administration, interest credited and
amortization of deferred policy acquisition costs.
Other Income
Other income consists primarily of asset management fees which are received by
the Company from Prudential for services Prudential provides to the Prudential
Series Fund, an underlying investment option of the Separate Accounts.
Derivative Financial Instruments
Derivatives are financial instruments whose values are derived from interest
rates, foreign exchange rates, various financial indices, or the value of
securities or commodities. Derivative financial instruments used by the Company
are futures and can be exchange-traded or contracted in the over-the-counter
market. The Company uses derivative financial instruments to hedge market risk
from changes in interest rates and to alter interest rate or currency exposures
arising from mismatches between assets and liabilities. All derivatives used by
the Company are for other than trading purposes.
To qualify as a hedge, derivatives must be designated as hedges for existing
assets, liabilities, firm commitments, or anticipated transactions which are
identified and probable to occur, and effective in reducing the market risk to
which the Company is exposed. The effectiveness of the derivatives must be
evaluated at the inception of the hedge and throughout the hedge period.
When derivatives qualify as hedges, the changes in the fair value or cash flows
of the derivatives and the hedged items are recognized in earnings in the same
period. If the Company's use of other than trading derivatives does not meet the
criteria to apply hedge accounting, the derivatives are recorded at fair value
in "Other liabilities" in the Statements of Financial Position, and changes in
their fair value are recognized in earnings in "Realized investment gains, net"
without considering changes in the hedged assets or liabilities. Cash flows from
other than trading derivative assets and liabilities are reported in the
operating activities section in the Statements of Cash Flows.
Income Taxes
The Company is a member of the consolidated federal income tax return of
Prudential and files separate company state and local tax returns. Pursuant to
the tax allocation arrangement, total federal income tax expense is determined
on a separate company basis. Members with losses record tax benefits to the
extent such losses are recognized in the consolidated federal tax provision.
Deferred income taxes are generally recognized, based on enacted rates, when
assets and liabilities have different values for financial statement and tax
reporting purposes. A valuation allowance is recorded to reduce a deferred tax
asset to that portion that is expected to be realized.
New Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 125"). The statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
and provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. SFAS 125
became effective January 1, 1997 and was applied prospectively. Subsequent to
June 1996, FASB issued SFAS No. 127 "Deferral of the Effective Date of Certain
Provisions of SFAS 125" ("SFAS 127"). SFAS 127 delays the implementation of SFAS
125 for one year for certain transactions, including repurchase agreements,
dollar rolls, securities lending and similar transactions. Adoption of SFAS 125
did not have a material impact on the Company's results of operations, financial
position and liquidity.
On January 1, 1999, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SOP 97-3").
This statement provides guidance for determining when an insurance company or
other enterprise should recognize a liability for guaranty-fund assessments as
well as guidance for measuring the liability. The adoption of SOP 97-3 is not
expected to have a material effect on the Company's financial position or
results of operations.
B-7
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires that companies recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 provides, if certain conditions
are met, that a derivative may be specifically designated as (1) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment (fair value hedge), (2) a hedge of the exposure to
variable cash flows of a forecasted transaction (cash flow hedge), or (3) a
hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction (foreign currency hedge).
SFAS No. 133 does not apply to most traditional insurance contracts. However,
certain hybrid contracts that contain features which can affect settlement
amounts similarly to derivatives may require separate accounting for the "host
contract" and the underlying "embedded derivative" provisions. The latter
provisions would be accounted for as derivatives as specified by the statement.
Under SFAS No. 133, the accounting for changes in fair value of a derivative
depends on its intended use and designation. For a fair value hedge, the gain or
loss is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item. For a cash flow hedge, the effective
portion of the derivative's gain or loss is initially reported as a component of
other comprehensive income and subsequently reclassified into earnings when the
forecasted transaction affects earnings. For a foreign currency hedge, the gain
or loss is reported in other comprehensive income as part of the foreign
currency translation adjustment. For all other items not designated as hedging
instruments, the gain or loss is recognized in earnings in the period of change.
The Company is required to adopt this statement by the first quarter of 2000 and
is currently assessing the effect of the new standard.
In October, 1998, the AICPA issued Statement of Position 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk," ("SOP 98-7"). This statement provides guidance on how
to account for insurance and reinsurance contracts that do not transfer
insurance risk. SOP 98-7 is effective for fiscal years beginning after June 15,
1999. The adoption of this statement is not expected to have a material effect
on the Company's financial position or results of operations.
Reclassifications
Certain amounts in the prior years have been reclassified to conform to current
year presentations.
B-8
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS
Fixed Maturities
The following tables provide additional information relating to fixed maturities
as of December 31:
<TABLE>
<CAPTION>
1998
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Fixed maturities available for sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 51,663 $ 260 $ 318 $ 51,605
Foreign government bonds 34,744 887 236 35,395
Corporate Securities 531,351 7,273 2,634 535,990
-------- -------- -------- --------
Total fixed maturities available for sale $617,758 $ 8,420 $ 3,188 $622,990
======== ======== ======== ========
<CAPTION>
1997
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Fixed maturities available for sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 42,885 $ 340 $ 3 $ 43,222
Foreign government bonds 38,332 551 -- 38,883
Corporate securities 503,892 6,545 181 510,256
-------- -------- -------- --------
Total fixed maturities available for sale $585,109 $ 7,436 $ 184 $592,361
======== ======== ======== ========
</TABLE>
B-9
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS (continued)
The amortized cost and estimated fair value of fixed maturities, categorized by
contractual maturities at December 31, 1998, are shown below:
Available for Sale
---------------------------
Amortized Estimated
Cost Fair Value
-------- ----------
(In Thousands)
Due in one year or less $ 13,645 $ 13,767
Due after one year through five years 269,252 271,525
Due after five years through ten years 255,280 257,992
Due after ten years 79,581 79,706
-------- --------
Total $617,758 $622,990
======== ========
Actual maturities will differ from contractual maturities because, in certain
circumstances, issuers have the right to call or prepay obligations.
Proceeds from the sale of fixed maturities available for sale during 1998, 1997,
and 1996 were $990.7 million, $635.4 million and $854.8 million, respectively.
Gross gains of $8.8 million, $2.9 million, and $3.9 million and gross losses of
$1.8 million, $1.2 million, and $3.8 million were realized on those sales during
1998, 1997, and 1996, respectively. Proceeds from maturities of fixed maturities
available for sale during 1998, 1997, and 1996 were $10.4 million, $10.0
million, and $47.0 million, respectively.
Writedowns for impairments of fixed maturities which were deemed to be other
than temporary were $.6 million for 1998. There were no impairments of fixed
maturities for the years 1997 and 1996.
The following table describes the credit quality of the fixed maturity
portfolio, based on ratings assigned by the National Association of Insurance
Commissioners ("NAIC") or Standard & Poor's Corporation, an independent rating
agency as of December 31, 1998:
Available for Sale
-------------------------------
Amortized Estimated
Cost Fair Value
--------- ----------
NAIC Standard & Poor's (In Thousands)
1 AAA to AA- $ 303,209 $ 306,693
2 BBB+ to BBB- 286,640 287,888
3 BB+ to BB- 27,134 27,692
4 B+ to B- 704 638
5 CCC or lower 71 79
6 In or near default -- --
--------- ---------
Total $ 617,758 $ 622,990
========= =========
B-10
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS (continued)
The fixed maturity portfolio consists largely of investment grade assets (rated
"1" or "2" by the NAIC), with such investments accounting for 95% and 96% of the
portfolio at December 31, 1998 and 1997, respectively, based on fair value. As
of both of those dates, no fixed maturities in the portfolio were rated "6" by
the NAIC, defined as public and private placement securities which are currently
non-performing or believed subject to default in the near-term.
The Company continually reviews fixed maturities and identifies potential
problem assets which require additional monitoring. The Company defines
"problem" fixed maturities as those for which principal and/or interest payments
are in default. The Company defines "potential problem" fixed maturities as
assets which are believed to present default risk associated with future debt
service obligations and therefore require more active management. No problem or
potential problem fixed maturities were identified in 1998 or 1997.
Special Deposits
Fixed maturities of $.5 million at both December 31, 1998 and 1997,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws.
Investment Income and Investment Gains and Losses
Net investment income arose from the following sources for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Fixed maturities - available for sale $ 39,478 $ 37,563 $ 36,193
Policy loans 7,350 6,596 5,761
Short-term investments 3,502 3,023 2,504
Other (842) 333 28
-------- -------- --------
Gross investment income 49,488 47,515 44,486
Less investment expenses (2,456) (1,191) (702)
-------- -------- --------
Net investment income $ 47,032 $ 46,324 $ 43,784
======== ======== ========
</TABLE>
Realized investment gains, net, including charges for other than temporary
reductions in value, for the years ended December 31, were as follows:
1998 1997 1996
-------- -------- --------
(In Thousands)
Realized investment gains $ 17,957 $ 2,898 $ 5,232
Realized investment losses (9,511) (1,191) (4,011)
-------- -------- --------
Realized investment gains, net $ 8,446 $ 1,707 $ 1,221
======== ======== ========
B-11
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS (continued)
Net Unrealized Investment Gains
Net unrealized investment gains on fixed maturities available for sale are
included in the Statements of Financial Position as a component of accumulated
other comprehensive income. Changes in these amounts include adjustments to
avoid double-counting in comprehensive income, items that are included as part
of net income for a period that also have been part of other comprehensive
income in earlier periods. The amounts for the years ended December 31, net of
tax, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Net unrealized investment gains, beginning of year $ 2,956 $ 2,032 $ 6,588
Changes in net unrealized investment gains attributable to:
Investments:
Net unrealized investment gains on investments arising during the period 3,227 3,228 (6,403)
Reclassification adjustment for gains included in net income 4,539 1,109 860
------- ------- -------
Change in net unrealized investment gains, net of adjustments (1,312) 2,119 (7,263)
Impact of net unrealized investment gains on:
Future policy benefits 57 216 (776)
Deferred policy acquisition costs (108) (1,411) 3,483
------- ------- -------
Change in net unrealized investment gains (1,363) 924 (4,556)
------- ------- -------
Net unrealized investment gains, end of year $ 1,593 $ 2,956 $ 2,032
======= ======= =======
</TABLE>
Unrealized gains (losses) on investments arising during the periods reported in
the above table are net of income tax expense (benefit) of $1.7 million, $1.7
million and $(3.6) million for the years ended December 31, 1998, 1997, and
1996, respectively.
Reclassification adjustments reported in the above table for the years ended
December 31, 1998, 1997, and 1996 are net of income tax expense of $(2.4)
million, $(.6) million and $(.5) million, respectively.
The future policy benefits reported in the above table are net of income tax
expense (benefit) of $.03 million, $0, and $(.4) million for the years ended
December 31, 1998, 1997 and 1996, respectively.
Deferred policy acquisition costs in the above tables for the years ended
December 31, 1998, 1997 and 1996 are net of income tax expense (benefit) of
$(.06) million, $(.8) million and $2.0 million, respectively.
4. POLICYHOLDERS' LIABILITIES
Future policy benefits and other policyholder liabilities at December 31 are as
follows:
1998 1997
------- -------
(In Thousands)
Life insurance $85,523 $80,464
Annuities 5,007 4,756
------- -------
$90,530 $85,220
======= =======
Life insurance liabilities include reserves for death and endowment policy
benefits. Annuity liabilities include reserves for immediate annuities.
B-12
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
4. POLICYHOLDERS' LIABILITIES (continued)
The following table highlights the key assumptions generally utilized in
calculating these reserves:
<TABLE>
<CAPTION>
Product Mortality Interest Rate Estimation Method
- ---------------------- ----------------------- ---------------------- ---------------------------
<S> <C> <C> <C>
Life insurance Generally rates 2.5% to 7.5% Net level premium based
guaranteed in on non-forfeiture
calculating interest rate
cash surrender values
Individual immediate 1983 Individual Annuity 6.25% to 8.75% Present value of
annuities Mortality Table with expected future payment
certain modifications based on historical experience
</TABLE>
Policyholders' account balances at December 31, are as follows:
1998 1997
-------- --------
(In Thousands)
Individual annuities $148,327 $145,120
Interest-sensitive life contracts 265,521 257,481
-------- --------
$413,848 $402,601
======== ========
Policyholders' account balances for interest-sensitive life, individual
annuities, and guaranteed investment contracts are equal to policy account
values plus unearned premiums. The policy account values represent an
accumulation of gross premium payments plus credited interest less withdrawals,
expenses, mortality charges.
Certain contract provisions that determine the policyholder account balances are
as follows:
<TABLE>
<CAPTION>
Product Interest Rate Withdrawal / Surrender Charges
------- ------------- ------------------------------
<S> <C> <C>
Interest sensitive life contracts 4.0% to 5.4% Various up to 10 years
Individual annuities 3.0% to 5.6% 0% to 8% for up to 8 years
</TABLE>
B-13
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
5. REINSURANCE
The Company participates in reinsurance, with Prudential and other companies, in
order to provide greater diversification of business, provide additional
capacity for future growth and limit the maximum net loss potential arising from
large risks. Reinsurance ceded arrangements do not discharge the Company or the
insurance subsidiaries as the primary insurer, except for cases involving a
novation. Ceded balances would represent a liability to the Company in the event
the reinsurers were unable to meet their obligations to the Company under the
terms of the reinsurance agreements. The likelihood of a material reinsurance
liability reassumed by the Company is considered to be remote.
Reinsurance amounts included in the Statement of Operations for the year ended
December 31 are below.
1998 1997 1996
------- ------- -------
(In Thousands)
Direct Premiums $ 1,373 $ 1,117 $ 1,345
Reinsurance ceded-affiliated (28) (12) --
------- ------- -------
Premiums $ 1,345 $ 1,105 $ 1,345
======= ======= =======
Policyholders' benefits ceded $ 15 $ 14 $ 13
======= ======= =======
Reinsurance recoverables, included in "Other assets" in the Company's Statements
of Financial Position, at December 31 include amounts recoverable on unpaid and
paid losses and were as follows:
1998 1997
---- ----
(In Thousands)
Life insurance - affiliated $31 $30
--- ---
$31 $30
=== ===
B-14
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
6. INCOME TAXES
The components of income taxes for the years ended December 31, are as follows:
1998 1997 1996
-------- -------- --------
(In Thousands)
Current tax expense (benefit):
U.S. $ 14,786 $ 12,880 $ 13,589
State and local 523 399 (907)
-------- -------- --------
Total 15,309 13,279 12,682
-------- -------- --------
Deferred tax expense (benefit):
U.S. 2,198 (2,305) 2,848
State and local 63 -- 81
-------- -------- --------
Total 2,261 (2,305) 2,929
-------- -------- --------
Total income tax expense $ 17,570 $ 10,974 $ 15,611
======== ======== ========
The Company's income tax expense for the years ended December 31, differs from
the amount computed by applying the expected federal income tax rate of 35% to
income from operations before income taxes for the following reasons:
1998 1997 1996
-------- -------- --------
(In Thousands)
Expected federal income tax expense $ 17,288 $ 10,569 $ 16,589
State and local income taxes 381 259 (537)
Other (99) 146 (441)
-------- -------- --------
Total income tax expense $ 17,570 $ 10,974 $ 15,611
======== ======== ========
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
1998 1997
------- -------
(In Thousands)
Deferred income tax assets:
Insurance reserves $10,016 $ 6,907
Other -- --
------- -------
Deferred tax assets $10,016 $ 6,907
------- -------
Deferred income tax liabilities:
Deferred acquisition costs 28,509 24,725
Net investment gains 2,847 4,284
Other 2,375 86
------- -------
Deferred tax liabilities 33,731 29,095
------- -------
Net deferred federal tax liability $23,715 $22,188
======= =======
B-15
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
6. INCOME TAXES (continued)
Management believes that based on its historical pattern of taxable income, the
Company will produce sufficient income in the future to realize its deferred tax
assets after valuation allowance. Adjustments to the valuation allowance will be
made if there is a change in management's assessment of the amount of the
deferred tax asset that is realizable. At December 31, 1998 and 1997,
respectively, the Company had no federal or state operating loss carryforwards
for tax purposes.
The Internal Revenue Service (the "Service") has completed examinations of the
consolidated federal income tax returns through 1989. The Service has examined
the years 1990 through 1992. Discussions are being held with the Service with
respect to proposed adjustments. Management, however, believes there are
adequate defenses against, or sufficient reserves to provide for, such
adjustments. The Service has begun their examination of the years 1993 through
1995.
B-16
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
7. EQUITY
Reconciliation of Statutory Surplus and Net Income
Accounting practices used to prepare statutory financial statements for
regulatory purposes differ in certain instances from GAAP. The following table
reconciles the Company's statutory net income and surplus as of and for the
years ended December 31, determined in accordance with accounting practices
prescribed or permitted by the New Jersey Department of Banking and Insurance
with net income and equity determined using GAAP.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Statutory net income $ 18,704 $ 18,306 $ 24,774
Adjustments to reconcile to net income on a GAAP basis:
Deferred acquisition costs 12,464 (3,170) 5,656
Deferred premium 534 198 221
Insurance liabilities (808) 2,324 4,784
Deferred taxes (2,261) 2,305 (2,929)
Valuation of investments 3,794 (143) (765)
Other, net (604) (597) 46
-------- -------- --------
GAAP net income $ 31,823 $ 19,223 $ 31,787
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(In Thousands)
<S> <C> <C>
Statutory surplus $ 252,530 $ 235,958
Adjustments to reconcile to equity on a GAAP basis:
Valuation of investments 20,799 18,540
Deferred acquisition costs 113,923 101,625
Deferred premium (1,473) (2,007)
Insurance liabilities (18,141) (19,120)
Deferred taxes (23,715) (22,188)
Other, net 1,930 2,585
--------- ---------
GAAP stockholder's equity $ 345,853 $ 315,393
========= =========
</TABLE>
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values presented below have been determined using available
information and valuation methodologies. Considerable judgment is applied in
interpreting data to develop the estimates of fair value. Accordingly, such
estimates presented may not be realized in a current market exchange. The use of
different market assumptions and/or estimation methodologies could have a
material effect on the estimated fair values. The following methods and
assumptions were used in calculating the fair values (for all other financial
instruments presented in the table, the carrying value approximates estimated
fair value).
Fixed maturities
Estimated fair values for fixed maturities are based on quoted market prices or
estimates from independent pricing services.
Policy loans
Estimated fair value of policy loans is calculated using a discounted cash flow
model based upon current U.S. Treasury rates and historical loan repayments.
B-17
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
8. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Policyholders' account balances
Estimated fair values of policyholders' account balances are derived by using
discounted projected cash flows, based on interest rates being offered for
similar contracts, with maturities consistent with those remaining for the
contracts being valued.
Derivative financial instruments
The fair value of futures is estimated based on market quotes for transactions
with similar terms. The following table discloses the carrying amounts and
estimated fair values of the Company's financial instruments at December 31,:
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Fixed maturities available for sale $ 622,990 $ 622,990 $ 592,361 $ 592,361
Policy loans 139,443 146,504 127,306 126,262
Short-term investments 53,761 53,761 52,464 52,464
Cash 45 45 3 3
Separate Accounts assets 1,453,407 1,453,407 1,110,561 1,110,561
Financial Liabilities:
Policyholders'
account balances $ 413,848 $ 414,602 $ 402,601 $ 401,267
Cash collateral for loaned
securities 61,634 61,634 33,663 33,663
Separate Accounts liabilities 1,450,986 1,450,986 1,108,994 1,108,994
Derivatives -- -- 83 83
</TABLE>
9. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
Futures
The Company uses exchange-traded Treasury futures to reduce market risks from
changes in interest rates, to alter mismatches between the duration of assets in
a portfolio and the duration of liabilities supported by those assets, and to
hedge against changes in the value of securities it owns or anticipates
acquiring. The Company enters into exchange-traded futures with regulated
futures commissions merchants who are members of a trading exchange. The fair
value of futures is estimated based on market quotes for a transaction with
similar terms.
Under exchange-traded futures, the Company agrees to purchase a specified number
of contracts with other parties and to post variation margin on a daily basis in
an amount equal to the difference in the daily market values of those contracts.
Futures are typically used to hedge duration mismatches between assets and
liabilities by replicating Treasury performance. Treasury futures move
substantially in value as interest rates change and can be used to either
generate new or hedge existing interest rate risk. This strategy protects
against the risk that cash flow requirements may necessitate liquidation of
investments at unfavorable prices resulting from increases in interest rates.
This strategy can be a more cost effective way of temporarily reducing the
Company's exposure to a market decline than selling fixed income securities and
purchasing a similar portfolio when such a decline is believed to be over.
B-18
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
9. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)
For futures that meet hedge accounting criteria, changes in their fair value are
deferred and recognized as an adjustment to the carrying value of the hedged
item. Deferred gains or losses from the hedges for interest-bearing financial
instruments are amortized as a yield adjustment over the remaining lives of the
hedged item. Futures that do not qualify as hedges are carried at fair value
with changes in value reported in current period earnings. The fair value of
futures contracts was immaterial at December 31, 1998 and 1997.
Credit Risk
The current credit exposure of the Company's derivative contracts is limited to
the fair value at the reporting date. Credit risk is managed by entering into
transactions with creditworthy counterparties and obtaining collateral where
appropriate and customary. The Company also attempts to minimize its exposure to
credit risk through the use of various credit monitoring techniques. All of the
net credit exposure for the Company from derivative contracts is with
investment-grade counterparties.
10. CONTINGENCIES
Several actions have been brought against the Company on behalf of those persons
who purchased life insurance policies based on complaints about sales practices
engaged in by Prudential, the Company and agents appointed by Prudential and the
Company. Prudential has agreed to indemnify the Company for any and all losses
resulting from such litigation.
In the normal course of business, the Company is subject to various claims and
assessments. Management believes the settlement of these matters would not have
a material effect on the financial position or results of operations of the
Company.
11. DIVIDENDS
The Company is subject to New Jersey law which requires any shareholder dividend
or distribution must be filed with the New Jersey Commissioner of Insurance.
Cash dividends may only be paid out of surplus derived from realized net
profits.
12. RELATED PARTY TRANSACTIONS
Service Agreements
Prudential and Pruco Life of New Jersey operate under service and lease
agreements whereby services of officers and employees, supplies, use of
equipment and office space are provided by Prudential. The net cost of these
services allocated to the Company were $23.5 million, $16.2 million, and $12.2
million for the years ended December 31, 1998, 1997, and 1996, respectively.
These costs are treated in a manner consistent with the Company's policy on
deferred acquisition costs.
Prudential and Pruco Life of New Jersey have an agreement with respect to
administrative services for the Prudential Series Fund. The Company invests in
the various portfolios of the Series Fund through the Separate Accounts. Under
this agreement, Prudential pays compensation to Pruco Life of New Jersey in the
amount equal to a portion of the gross investment advisory fees paid by the
Prudential Series Fund. The Company received from Prudential its allocable
shares of such compensation in the amount of $5.6 million, $5.0 million, and
$3.5 million during 1998, 1997, and 1996 respectively, recorded in "Other
income."
B-19
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
12. RELATED PARTY TRANSACTIONS (continued)
Reinsurance
The Company currently has a reinsurance agreement in place with Prudential (the
reinsurer). The reinsurance agreement is a yearly renewable term agreement in
which the Company may offer and the reinsurer may accept reinsurance on any life
in excess of the Company's maximum limit of retention. The Company is not
relieved of its primary obligation to the policyholder as a result of these
reinsurance transactions. These agreements had no material effect on net income
for the years ended December 31, 1998, 1997, and 1996.
Debt Agreements
In July 1998, the Company established a revolving line of credit facility with
Prudential Funding Corporation, a wholly-owned subsidiary of Prudential. There
is no outstanding debt relating to this credit facility as of December 31, 1998.
B-20
<PAGE>
Report of Independent Accountants
---------------------------------
To the Board of Directors of
Pruco Life Insurance Company of New Jersey
In our opinion, the accompanying statements of financial position and the
related statements of operations, of changes in stockholder's equity and of cash
flows present fairly, in all material respects, the financial position of Pruco
Life Insurance Company of New Jersey at December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
February 26, 1999
B-21
<PAGE>
PRUvider(SM)
Variable Appreciable Life(R)
Insurance
PRUvider(SM) Variable Appreciable Life(R) was issued by Pruco Life
Insurance Company of New Jersey, 213 Washington Street, Newark,
NJ 07102-2992 and offered through Pruco Securities Corporation,
751 Broad Street, Newark, NJ 07102-3777, both subsidiaries of The
Prudential Insurance Company of America, 751 Broad Street,
Newark, NJ 07102-3777. PRUvider is a service mark of Prudential.
Appreciable Life is a registered mark of Prudential.
[GRAPHIC OMITTED]
Pruco Life Insurance Company of New Jersey
213 Washington Street, Newark, NJ 07102-2992
Telephone 800 778-2255
SVAL-2 Ed. 5/99 CAT# 640189U
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
THE PRUDENTIAL
SERIES FUND, INC.
The Prudential Series Fund, Inc. (the Fund) is a diversified, open-end
management investment company (commonly known as a mutual fund) that is intended
to provide a range of investment alternatives through its seventeen separate
Portfolios, each of which is, for investment purposes, in effect a separate fund
(the Portfolios).
The Fund offers two classes of shares of each Portfolio: Class I and Class II.
Class I shares are sold only to separate accounts of The Prudential Insurance
Company of America (Prudential) as investment options under variable life
insurance and variable annuity contracts. Class II shares are offered only to
separate accounts of non-Prudential insurance companies for the same types of
contracts (collectively with the Prudential contracts, the Contracts). These
separate accounts invest in shares of the Fund through subaccounts that
correspond to the Portfolios. The separate accounts will redeem shares of the
Fund to the extent necessary to provide benefits under the Contracts or for such
other purposes as may be consistent with the Contracts.
NOT EVERY PORTFOLIO IS AVAILABLE UNDER EACH CONTRACT. THE PROSPECTUS FOR EACH
CONTRACT LISTS THE PORTFOLIOS CURRENTLY AVAILABLE UNDER THAT PARTICULAR
CONTRACT.
In order to sell shares to both Prudential and non-Prudential insurance
companies, the Fund has obtained an Order from the SEC. The Fund and its
Portfolios are managed in compliance with the terms and conditions of that
Order.This statement of additional information is not a prospectus and should be
read in conjunction with the Fund's prospectus dated May 1, 1999, which is
available without charge upon written request to The Prudential Series Fund,
Inc., 751 Broad Street, Newark, New Jersey 07102-3777 or by telephoning (800)
778-2255.
THE PRUDENTIAL SERIES FUND, INC.
751 Broad Street
Newark, New Jersey 07102-3777
Telephone: (800) 778-2255
PSF-2 Ed 5-99 Catalog No. 646674P
<PAGE>
CONTENTS
PAGE
----
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS..................... 1
I. GENERAL............................................................ 1
II. CONVERTIBLE SECURITIES............................................. 1
V. WARRANTS........................................................... 1
IV. FOREIGN SECURITIES................................................. 1
V. OPTIONS ON STOCK AND DEBT SECURITIES............................... 2
VI. OPTIONS ON STOCK INDEXES........................................... 4
VII. OPTIONS ON FOREIGN CURRENCIES...................................... 6
VIII. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS................. 7
IX. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS........................ 10
XIX. INTEREST RATE SWAPS................................................ 10
XI. LOAN PARTICIPATIONS................................................ 10
XII. REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS..................... 11
XIII. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES........................ 11
XIV. SHORT SALES........................................................ 11
XV. LOANS OF PORTFOLIO SECURITIES...................................... 12
XVI. ILLIQUID SECURITIES................................................ 12
XVII. FURTHER INFORMATION ABOUT THE ZERO COUPON BOND PORTFOLIOS.......... 13
INVESTMENT RESTRICTIONS.................................................. 14
INVESTMENT MANAGEMENT AND
DISTRIBUTION ARRANGEMENTS................................................ 17
I. INVESTMENT MANAGEMENT ARRANGEMENTS ................................ 17
II. DISTRIBUTION ARRANGEMENTS.......................................... 20
OTHER INFORMATION CONCERNING THE FUND................................... 21
I. INCORPORATION AND AUTHORIZED STOCK................................ 21
II. PORTFOLIO TRANSACTIONS AND BROKERAGE.............................. 21
III. TAXATION OF THE FUND.............................................. 24
IV. CUSTODIANS........................................................ 25
V. EXPERTS........................................................... 25
VI. LICENSES.......................................................... 25
MANAGEMENT OF THE FUND................................................... 26
FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC.
THE PRUDENTIAL SERIES FUND, INC. SCHEDULE OF INVESTMENTS
APPENDIX: DEBT RATINGS
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
I. GENERAL
This Statement of Additional Information provides information about the Fund,
which consists of seventeen separate portfolios -- the Conservative Balanced
Portfolio, Diversified Bond Portfolio, Diversified Conservative Growth
Portfolio, Equity Portfolio, Equity Income Portfolio, Flexible Managed
Portfolio, Global Portfolio, Government Income Portfolio, High Yield Bond
Portfolio, Money Market Portfolio, Natural Resources Portfolio, Prudential
Jennison Portfolio, Small Capitalization Stock Portfolio, Stock Index Portfolio,
20/20 Focus Portfolio, Zero Coupon Bond Portfolio 2000 and Zero Coupon Bond
Portfolio 2005. Not every Portfolio is available under every Contract. The
prospectus for each Contract lists the Portfolios currently available under that
particular Contract. The Portfolios are managed by Prudential as discussed under
MANAGEMENT OF THE FUND.
Each of the seventeen Portfolios has a different investment objective. For this
reason, each Portfolio will have different investment results and be subject to
different financial and market risks. FINANCIAL RISK refers to the ability of an
issuer of a debt security to pay principal and interest and to the earnings
stability and overall financial soundness of an issuer of an equity security.
MARKET RISK refers to the degree to which the price of a security will react to
changes in conditions in securities markets in general, and with particular
reference to debt securities, to changes in the overall level of interest rates.
The investment objectives of the Portfolios can be found under RISK/RETURN
SUMMARY and HOW THE PORTFOLIOS INVEST in the prospectus.
II. CONVERTIBLE SECURITIES
The Conservative Balanced, Diversified Conservative Growth, Flexible Managed,
Equity, Prudential Jennison, Small Capitalization Stock and 20/20 Focus
Portfolios may invest in convertible securities and a significant portion of the
assets of the Equity Income, Global and Natural Resources Portfolios may be
invested in these types of securities.
A convertible security is a debt security - for example, a bond or preferred
stock - that may be converted into common stock of the same or different issuer.
The convertible security sets the price, quantity of shares and time period in
which it may be so converted. Convertible stock are senior to a company's common
stock but are usually subordinated to debt obligations of the company.
Convertible securities provide a steady stream of income which is generally at a
higher rate than the income on the issuer's common stock but lower than the rate
on the issuer's debt obligations. At the same time, they offer - through their
conversion mechanism - the chance to participate in the capital appreciation of
the underlying common stock. The price of a convertible security tends to
increase and decrease with the market value of the underlying common stock.
III. WARRANTS
The Conservative Balanced, Equity, Equity Income, Flexible Managed, Global,
Natural Resources, Prudential Jennison and Small Capitalization Stock Portfolios
may invest in warrants on common stocks. The 20/20 Focus Portfolio may invest up
to 5% of its total assets in warrants. A warrant is a right to buy a number of
shares of stock at a specified price during a specified period of time. The risk
associated with warrants is that the market price of the underlying stock will
stay below the exercise price of the warrant during the exercise period. If this
occurs, the warrant becomes worthless and the investor loses the money he or she
paid for the warrant.
From time to time, the Diversified Bond and the High Yield Bond Portfolios may
invest in debt securities that are offered together with warrants but only when
the debt security meets the Portfolio's investment criteria and the value of the
warrant is relatively very small. If the warrant later becomes valuable, it may
be sold or exercised.
IV. FOREIGN SECURITIES
2. The Global Portfolio may invest up to 100% of its total assets in common
stock and convertible securities denominated in a foreign currency and issued by
foreign or domestic issuers. The Diversified Bond and High Yield Bond Portfolios
may each invest up to 20% of their assets in U.S. currency denominated debt
securities issued outside the U.S. by
1
<PAGE>
foreign or U.S. issuers. In addition, the fixed income portions of the
Conservative Balanced and Flexible Managed Portfolios may each invest up to 20%
in such securities. The Conservative Balanced, Equity Income and Flexible
Managed Portfolios may invest up to 30% of their total assets in debt and equity
securities denominated in a foreign currency and issued by foreign or U.S.
issuers. The Equity, Natural Resources and Prudential Jennison Portfolios may
invest up to 30% of their total assets in non-U.S. currency denominated common
stock and fixed income securities convertible into common stock of foreign and
U.S. issuers. The Diversified Conservative Growth Portfolio may invest up to 15%
of its total assets in foreign equity securities and up to 25% of its total
assets in foreign debt obligations (of which, 10% of the Portfolio's total
assets may be invested in debt obligations of issuers in emerging countries).
The 20/20 Focus Portfolio may invest up to 20% of its total assets in securities
of foreign issuers.
American Depositary Receipts (ADRs) are not considered "foreign securities" for
purposes of the percentage limitations set forth in the preceding paragraph.
ADRs are U.S. dollar-denominated certificates issued by a U.S. bank or trust
company. ADRs represent the right to receive securities of a foreign issuer
deposited in a domestic bank or foreign branch of a U.S. bank and traded on a
U.S. exchange or in the over-the-counter (OTC) market. Investment in ADRs has
certain advantages over direct investments in the underlying foreign securities
because they are easily transferable, have readily available market quotations,
and the foreign issuers are usually subject to comparable auditing, accounting
and financial reporting standards as U.S. issuers.
Foreign securities (including ADRs) involve certain risks, which should be
considered carefully by an investor. These risks include political or economic
instability in the country of an issuer, the difficulty of predicting
international trade patterns, the possibility of imposition of exchange controls
and, in the case of securities not denominated in U.S. currency, the risk of
currency fluctuations. Foreign securities may be subject to greater movement in
price than U.S. securities and under certain market conditions, may be less
liquid than U.S securities. In addition, there may be less publicly available
information about a foreign company than a U.S company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to U.S. companies. There is
generally less government regulation of securities exchanges, brokers and listed
companies abroad than in the U.S., and, with respect to certain foreign
countries, there is a possibility of expropriations, confiscatory taxation or
diplomatic developments which could affect investment in those countries.
Finally, in the event of a default of any foreign debt obligations, it may be
more difficult for a Portfolio to obtain or enforce a judgment against the
issuers of such securities.
If a security is denominated in a foreign currency, it may be affected by
changes in currency rates and in exchange control regulations, and costs may be
incurred in connection with conversions between currencies. The Portfolios that
may invest in foreign securities may enter into forward foreign currency
exchange contracts for the purchase or sale of foreign currency for hedging
purposes, including: locking in the U.S. dollar price equivalent of interest or
dividends to be paid on such securities which are held by a Portfolio; and
protecting the U.S. dollar value of such securities which are held by the
Portfolio. A Portfolio will not enter into such forward contracts or maintain a
net exposure to such contracts where the consummation of the contracts would
obligate the Portfolio to deliver an amount of foreign currency in excess of the
value of the Portfolio's securities or other assets denominated in that
currency. In addition, the Portfolios may, for hedging purposes, enter into
certain transactions involving options on foreign currencies, foreign currency
futures contracts and options on foreign currency futures contracts.
V. OPTIONS ON STOCK AND DEBT SECURITIES
A. OPTIONS ON STOCK
The Conservative Balanced, Diversified Conservative Growth, Equity Income,
Equity, Flexible Managed, Global, Natural Resources, Prudential Jennison and
Small Capitalization Stock Portfolios may purchase and "write" (that is, sell)
put and call options on equity securities that are traded on securities
exchanges, listed on the National Association of Securities Dealers Automated
Quotations System (NASDAQ), or privately negotiated with broker-dealers (OTC
equity options).
A call option is a short-term contract that gives the option purchaser or
"holder" the right to acquire a particular equity security for a specified price
at any time during a specified period. For this right, the option purchaser pays
the option seller a certain amount of money or "premium" which is set before the
option contract is entered into. The seller or "writer" of the option is
obligated to deliver the particular security if the option purchaser exercises
the option.
2
<PAGE>
A put option is a similar contract. In a put option, the option purchaser has
the right to sell a particular security to the option seller for a specified
price at any time during a specified period. In exchange for this right, the
option purchaser pays the option seller a premium.
The Portfolios will write only "covered" options on stocks. A call option is
covered if:
(1) the Portfolio owns the security underlying the option;
(2) the Portfolio has an absolute right to acquire the security immediately;
(3) the Portfolio has a call on the same security that underlies the option
which has an exercise price equal to or less than the exercise price of the
covered option (or, if the exercise price is greater, the Portfolio sets
aside in a segregated account liquid assets that are equal to the
difference).
A put option is covered if:
(1) the Portfolio sets aside in a segregated account liquid assets that are
equal to or greater than the exercise price of the option;
(2) the Portfolio holds a put on the same security that underlies the option
which has an exercise price equal to or greater than the exercise price of
the covered option (or, if the exercise price is less, the Portfolio sets
aside in a segregated account liquid assets that are equal to the
difference).
The Conservative Balanced, Diversified Conservative Growth, Equity Income,
Equity, Flexible Managed, Global, Natural Resources, Prudential Jennison and
Small Capitalization Stock Portfolios, can also purchase "protective puts" on
equity securities. These are acquired to protect a Portfolio's security from a
decline in market value. In a protective put, a Portfolio has the right to sell
the underlying security at the exercise price, regardless of how much the
underlying security may decline in value. In exchange for this right, the
Portfolio pays the put seller a premium.
The Portfolios may use options for both hedging and investment purposes. None of
the Portfolios intend to use more than 5% of its net assets to acquire call
options on stocks. The Portfolios may purchase equity securities that have a put
or call option provided by the issuer.
B. OPTIONS ON DEBT SECURITIES
The Conservative Balanced, Diversified Bond, Diversified Conservative Growth,
Flexible Managed, Government Income and High Yield Bond Portfolios may purchase
and sell put and call options on debt securities, including U.S. government debt
securities, that are traded on a U.S. securities exchange or privately
negotiated with primary U.S. government securities dealers that are recognized
by the Federal Reserve Bank of New York (OTC debt options). None of the
Portfolios currently intend to invest more than 5% of its net assets at any one
time in call options on debt securities.
Options on debt securities are similar to stock options (see above) except that
the option holder has the right to acquire or sell a debt security rather than
an equity security.
The Portfolios will write only covered options. Options on debt securities are
covered in much the same way as options on equity securities. One exception is
in the case of call options on U.S. Treasury Bills. With these options, a
Portfolio might own U.S. Treasury Bills of a different series from those
underlying the call option, but with a principal amount and value that matches
the option contract amount and a maturity date that is no later than the
maturity date of the securities underlying the option.
The above Portfolios may also write straddles - which are simply combinations of
a call and a put written on the same security at the same strike price and
maturity date. When a Portfolio writes a straddle, the same security is used to
"cover" both the put and the call. If the price of the underlying security is
below the strike price of the put, the Portfolio will set aside liquid assets as
additional cover equal to the difference. A Portfolio will not use more than 5%
of its net assets as cover for straddles.
The above Portfolios may also purchase protective puts to try to protect the
value of one of the securities it owns against a decline in market value, as
well as putable and callable debt securities.
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C. RISKS OF TRANSACTIONS IN OPTIONS ON EQUITY AND DEBT SECURITIES.
A Portfolio's use of options on equity or debt securities is subject to certain
special risks, in addition to the risk that the market value of the security
will move opposite to the Portfolio's option position. An exchange-traded option
position may be closed out only on an exchange, board of trade or other trading
facility which provides a secondary market for an option of the same series.
Although the Portfolios will generally purchase or write only those
exchange-traded options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange will
exist for any particular option, or at any particular time, and for some options
no secondary market on an exchange or otherwise may exist. In such event it
might not be possible to effect closing transactions in particular options, with
the result that the Portfolio would have to exercise its options in order to
realize any profit and would incur brokerage commissions upon the exercise of
such options and upon the subsequent disposition of underlying securities
acquired through the exercise of call options or upon the purchase of underlying
securities for the exercise of put options. If a Portfolio, as a covered call
option writer, is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or a clearing
corporation may not be adequate at all times to handle the trading volume; or
(vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange would cease to exist, although outstanding options on that
exchange that had been issued by a clearing corporation as a result of trades on
that exchange would continue to be exercisable in accordance with their terms.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of any
of the clearing corporations inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders.
The purchase and sale of OTC options will also be subject to certain risks.
Unlike exchange-traded options, OTC options generally do not have a continuous
liquid market. Consequently, a Portfolio will generally be able to realize the
value of an OTC option it has purchased only by exercising it or reselling it to
the dealer who issued it. Similarly, when a Portfolio writes an OTC option, it
generally will be able to close out the OTC option prior to its expiration only
by entering into a closing purchase transaction with the dealer to which the
Portfolio originally wrote the OTC option. While the Portfolios will seek to
enter into OTC options only with dealers who agree to enter into closing
transactions with the Portfolio, there can be no assurance that a Portfolio will
be able to liquidate an OTC option at a favorable price at any time prior to
expiration. In the event of insolvency of the other party, a Portfolio may be
unable to liquidate an OTC option. Prudential monitors the creditworthiness of
dealers with whom the Portfolios enter into OTC option transactions under the
Board of Directors' general supervision.
VI. OPTIONS ON STOCK INDEXES
A. STOCK INDEX OPTIONS
The Conservative Balanced, Diversified Conservative Growth, Equity, Equity
Income, Flexible Managed, Global, Natural Resources, Prudential Jennison, Small
Capitalization Stock, Stock Index, and 20/20 Focus Portfolios may purchase and
sell put and call options on stock indexes that are traded on securities
exchanges, listed on NASDAQ or that are privately-negotiated with broker-dealers
(OTC options). Options on stock indexes are similar to options on stocks, except
that instead of giving the option holder the right to receive or sell a stock,
it gives the holder the right to receive an amount of cash if the closing level
of the stock index is greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash the holder
will receive is determined by multiplying the difference between the index's
closing price and the option's exercise price, expressed in dollars, by a
specified "multiplier". Unlike stock options, stock index options are always
settled in cash and gain or loss depends on price movements in the stock market
generally (or a particular market segment, depending on the index) rather than
the price movement of an individual stock.
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A Portfolio will only sell or "write" covered options on stock indexes. A call
option is covered if the Portfolio holds stocks at least equal to the value of
the index times the multiplier times the number of contracts (the Option Value).
When a Portfolio writes a call option on a broadly based stock market index, the
Portfolio will set aside cash, cash equivalents or "qualified securities"
(defined below). The value of the assets to be segregated cannot be less than
100% of the Option Value as of the time the option is written.
If a Portfolio has written an option on an industry or market segment index, it
must set aside at least five "qualified securities," all of which are stocks of
issuers in that market segment, with a market value at the time the option is
written of not less than 100% of the Option Value. The qualified securities will
include stocks which represent at least 50% of the weighting of the industry or
market segment index and will represent at least 50% of the Portfolio's holdings
in that industry or market segment. No individual security will represent more
than 15% of the amount so set aside in the case of broadly based stock market
index options or 25% of such amount in the case of options on a market segment
index. If at the close of business on any day the market value of the qualified
securities falls below 100% of the Option Value as of that date, the Portfolio
will set aside an amount in liquid unencumbered assets equal in value to the
difference. In addition, when a Portfolio writes a call on an index which is
"in-the-money" at the time the option is written - that is, the index's value is
above the strike price - the Portfolio will set aside liquid unencumbered assets
equal to the amount by which the call is in-the-money times the multiplier times
the number of contracts. Any amount so set aside may be applied to the
Portfolio's obligation to segregate additional amounts in the event that the
market value of the qualified securities falls below 100% of the current Option
Value. A "qualified security" is an equity security which is listed on a
securities exchange or listed on NASDAQ against which the Portfolio has not
written a stock call option and which has not been hedged by the Portfolio by
the sale of stock index futures. However, the Portfolio will not be subject to
the requirement described in this paragraph if it holds a call on the same index
as the call written and the exercise price of the call held is equal to or less
than the exercise price of the call written or greater than the exercise price
of the call written if the difference is maintained by the Portfolio in liquid
unencumbered assets in a segregated account with its custodian.
A put index option is covered if: (1) the Portfolio sets aside in a segregated
account liquid unencumbered assets of a value equal to the strike price times
the multiplier times the number of contracts; or (2) the Portfolio holds a put
on the same index as the put written where the strike price of the put held is
equal to or greater than the strike price of the put written or less than the
strike price of the put written if the difference is maintained by the Portfolio
in liquid unencumbered assets in a segregated account.
B. RISKS OF TRANSACTIONS IN OPTIONS ON STOCK INDEXES
A Portfolio's purchase and sale of options on stock indexes has the same risks
as stock options described in the previous section. In addition, the distinctive
characteristics of options on indexes create special risks. Index prices may be
distorted if trading of certain stocks included in the index is interrupted.
Trading in index options also may be interrupted in certain circumstances, such
as if trading were halted in a substantial number of stocks included in the
index. If this occurred, a Portfolio would not be able to close out options
which it had purchased or written and, if restrictions on exercise were imposed,
may be unable to exercise an option it holds, which could result in substantial
losses to the Portfolio. It is the policy of the Portfolios to purchase or write
options only on stock indexes which include a number of stocks sufficient to
minimize the likelihood of a trading halt in options on the index.
The ability to establish and close out positions on stock index options are
subject to the existence of a liquid secondary market. A Portfolio will not
purchase or sell any index option contract unless and until, in the portfolio
manager's opinion, the market for such options has developed sufficiently that
the risk in connection with such transactions is no greater than the risk in
connection with options on stocks.
There are certain additional risks associated with writing calls on stock
indexes. Because exercises of index options are settled in cash, a call writer
such as a Portfolio cannot determine the amount of its settlement obligations in
advance and, unlike call writing on specific stocks, cannot precisely provide in
advance for, or cover, its potential settlement obligations by acquiring and
holding the underlying securities. However, the Portfolios will follow the
"cover" procedures described above.
Price movements of a Portfolio's equity securities probably will not correlate
precisely with movements in the level of the index. Therefore, in writing a call
on a stock index a Portfolio bears the risk that the price of the securities
held by the Portfolio may not increase as much as the index. In that case, the
Portfolio would bear a loss on the call which may not be completely offset by
movement in the price of the Portfolio's equity securities. It is also possible
that the
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index may rise when the Portfolio's securities do not rise in value. If this
occurred, the Portfolio would experience a loss on the call which is not offset
by an increase in the value of its securities and might also experience a loss
in its securities. However, because the value of a diversified securities
portfolio will, over time, tend to move in the same direction as the market,
movements in the value of a Portfolio's securities in the opposite direction as
the market would be likely to occur for only a short period or to a small
degree.
When a Portfolio has written a stock index call, there is also a risk that the
market may decline between the time the Portfolio has a call exercised against
it, at a price which is fixed as of the closing level of the index on the date
of exercise, and the time the Portfolio is able to sell stocks in its portfolio.
As with stock options, a Portfolio will not learn that an index option has been
exercised until the day following the exercise date but, unlike a call on stock
where the Portfolio would be able to deliver the underlying securities in
settlement, the Portfolio may have to sell part of its stock portfolio in order
to make settlement in cash, and the price of such stocks might decline before
they can be sold. This timing risk makes certain strategies involving more than
one option substantially more risky with options in stock indexes than with
stock options. For example, even if an index call which a Portfolio has written
is "covered" by an index call held by the Portfolio with the same strike price,
the Portfolio will bear the risk that the level of the index may decline between
the close of trading on the date the exercise notice is filed with the clearing
corporation and the close of trading on the date the Portfolio exercises the
call it holds or the time the Portfolio sells the call which in either case
would occur no earlier than the day following the day the exercise notice was
filed.
There are also certain special risks involved in purchasing put and call options
on stock indexes. If a Portfolio holds an index option and exercises it before
final determination of the closing index value for that day, it runs the risk
that the level of the underlying index may change before closing. If such a
change causes the exercised option to fall out-of-the-money, the Portfolio will
be required to pay the difference between the closing index value and the
exercise price of the option (times the applicable multiplier) to the assigned
writer. Although the Portfolio may be able to minimize this risk by withholding
exercise instructions until just before the daily cutoff time or by selling
rather than exercising an option when the index level is close to the exercise
price, it may not be possible to eliminate this risk entirely because the cutoff
times for index options may be earlier than those fixed for other types of
options and may occur before definitive closing index values are announced.
VII. OPTIONS ON FOREIGN CURRENCIES
A. OPTIONS ON FOREIGN CURRENCY
The Conservative Balanced, Diversified Conservative Growth, Equity Income,
Equity, Flexible Managed, Global, Natural Resources and Prudential Jennison
Portfolios may purchase and write put and call options on foreign currencies
traded on U.S. or foreign securities exchanges or boards of trade for hedging
purposes in a manner similar to that in which forward foreign currency exchange
contracts and futures contracts on foreign currencies are employed (see below).
Options on foreign currencies are similar to options on stocks, except that the
option holder has the right to take or make delivery of a specified amount of
foreign currency rather than stock.
A Portfolio may purchase and write options to hedge its securities denominated
in foreign currencies. If the U.S. dollar increases in value relative to a
foreign currency in which the Portfolio's securities are denominated, the value
of those securities will decline as well. To hedge against a decline of a
foreign currency a Portfolio may purchase put options on that foreign currency.
If the value of the foreign currency declines, the gain realized on the put
option would offset, at least in part, the decline in the value of the
Portfolio's holdings denominated in that foreign currency. Alternatively, a
Portfolio may write a call option on a foreign currency. If the foreign currency
declines, the option would not be exercised and the decline in the value of the
Portfolio's securities denominated in that foreign currency would be offset in
part by the premium the Portfolio received for the option.
If on the other hand, the portfolio manager anticipates purchasing a foreign
security and also anticipates a rise in the foreign currency in which it is
denominated, the Portfolio may purchase call options on the foreign currency.
The purchase of such options could offset, at least partially, the effects of
adverse movements of the exchange rates. Alternatively, the Portfolio could
write a put option on the currency and, if the exchange rates move as
anticipated, the option would expire unexercised.
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B. RISKS OF TRANSACTIONS IN OPTIONS ON FOREIGN CURRENCY
A Portfolio's successful use of currency exchange options on foreign currencies
depends upon the portfolio manager's ability to predict the direction of the
currency exchange markets and political conditions, which requires different
skills and techniques than predicting changes in the securities markets
generally. For instance, if the currency being hedged has moved in a favorable
direction, the corresponding appreciation of the Portfolio's securities
denominated in such currency would be partially offset by the premiums paid on
the options. If the currency exchange rate does not change, the Portfolio's net
income would be less than if the Portfolio had not hedged since there are costs
associated with options.
The use of these options is subject to various additional risks. The correlation
between the movements in the price of options and the price of the currencies
being hedged is imperfect. The use of these instruments will hedge only the
currency risks associated with investments in foreign securities, not market
risk. A Portfolio's ability to establish and maintain positions will depend on
market liquidity. The ability of the Portfolio to close out an option depends on
a liquid secondary market. There is no assurance that liquid secondary markets
will exist for any particular option at any particular time.
Because there are two currencies involved, developments in either or both
countries can affect the values of options on foreign currencies. In addition,
the quantities of currency underlying option contracts represent odd lots in a
market dominated by transactions between banks; this can mean extra transaction
costs upon exercise. Option markets may be closed while round-the-clock
interbank currency markets are open, and this can create price and rate
discrepancies.
VIII. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
A. FUTURES AND OPTIONS ON FUTURES
The Conservative Balanced, Diversified Conservative Growth, Equity, Equity
Income, Flexible Managed, Global, Natural Resources, Prudential Jennison, Small
Capitalization Stock, Stock Index, and 20/20 Focus Portfolios may purchase and
sell stock index futures contracts. A stock index futures contract is an
agreement between the buyer and the seller of the contract to transfer an amount
of cash equal to the daily variation margin of the contract. No physical
delivery of the underlying stocks in the index is made.
The Conservative Balanced, Diversified Bond, Flexible Managed, Global,
Government Income and High Yield Bond Portfolios may, to the extent permitted by
applicable regulations, purchase and sell futures contracts on interest-bearing
securities or interest rate indexes. The Diversified Conservative Growth
Portfolio may, to the extent permitted by applicable regulations, purchase and
sell futures contracts as debt securities, aggregates of debt securities, and
U.S. government securities.
The Conservative Balanced, Diversified Conservative Growth, Flexible Managed,
Equity Income, Equity, Prudential Jennison, Global, Natural Resources and 20/20
Focus Portfolios may purchase and sell futures contracts on foreign currencies.
When a futures contract is entered into, each party deposits with a futures
commission merchant (or in a segregated account) approximately 5% of the
contract amount. This is known as the "initial margin." Every day during the
futures contract, either the buyer or the futures commission merchant will make
payments of "variation margin." In other words, if the value of the underlying
security, index or interest rate increases, then the buyer will have to add to
the margin account so that the account balance equals approximately 5% of the
value of the contract on that day. The next day, the value of the underlying
security, index or interest rate may decrease, in which case the borrower would
receive money from the account equal to the amount by which the account balance
exceeds 5% of the value of the contract on that day.
The above Portfolios may purchase or sell futures contracts without limit for
hedging purposes. This would be the case, for example, if a portfolio manager is
using a futures contract to reduce the risk of a particular position on a
security. The above Portfolios can also purchase or sell futures contract for
non-hedging purposes provided the initial margins and premiums associated with
the contracts do not exceed 5% of the fair market value of the Portfolio's
assets, taking into account unrealized profits or unrealized losses on any such
futures. This would be the case if a portfolio manager uses futures for
investment purposes, to increase income or to adjust the Portfolio's asset mix.
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B. ADDITIONAL INFORMATION REGARDING THE USE OF FUTURES AND OPTIONS BY THE
STOCK INDEX AND SMALL CAPITALIZATION STOCK PORTFOLIOS
As explained in the prospectus, the Stock Index Portfolio seeks to duplicate the
performance of the Standard & Poor's 500 Composite Stock Price Index (S&P 500
Index) and the Small Capitalization Stock Portfolio seeks to duplicate the
performance of the Standard & Poor's Small Capitalization Stock Index (S&P
SmallCap Index). The Portfolios will be as fully invested in the S&P Indexes'
stocks as is feasible in light of cash flow patterns and the cash requirements
for efficiently investing in a unit of the basket of stocks comprising the S&P
500 and S&P SmallCap Indexes, respectively. When the Portfolios do have
short-term investments, they may purchase stock index futures contracts in an
effort to have the Portfolio better follow the performance of a fully invested
portfolio. When a Portfolio purchases stock index futures contracts, an amount
of cash and cash equivalents, equal to the market value of the futures
contracts, will be deposited in a segregated account with the Portfolio's
custodian and/or in a margin account with a broker to collateralize the position
and thereby ensure that the use of futures is unleveraged.
As an alternative to the purchase of a stock index futures contract, a Portfolio
may construct synthetic positions involving options on stock indexes and options
on stock index futures that are equivalent to such a long futures position. In
particular, a Portfolio may utilize "put/call combinations" as synthetic long
stock index futures positions. A put/call combination is the purchase of a call
and the sale of a put at the same time with the same strike price and maturity.
It is equivalent to a forward position and, if settled every day, is equivalent
to a long futures position. When constructing put/call combinations, the
Portfolio will set aside cash or cash equivalents in a segregated account equal
to the market value of the Portfolio's forward position to collateralize the
position and ensure that it is unleveraged.
C. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks associated with a Portfolio's use of futures contracts.
When used for investment purposes (that is, non-hedging purposes), successful
use of futures contracts, like successful investment in securities, depends on
the ability of the portfolio manager to predict correctly movements in the
relevant markets, interest rates and/or currency exchange rates. When used for
hedging purposes, there is a risk of imperfect correlation between movements in
the price of the futures contract and the price of the securities or currency
that are the subject of the hedge. In the case of futures contracts on stock or
interest rate indexes, the correlation between the price of the futures contract
and movements in the index might not be perfect. To compensate for differences
in volatility, a Portfolio could purchase or sell futures contracts with a
greater or lesser value than the securities or currency it wished to hedge or
purchase. Other risks apply to use for both hedging and investment purposes.
Temporary price distortions in the futures market could be caused by a variety
of factors. Further, the ability of a Portfolio to close out a futures position
depends on a liquid secondary market. There is no assurance that a liquid
secondary market on an exchange will exist for any particular futures contract
at any particular time.
The hours of trading of futures contracts may not conform to the hours during
which a Portfolio may trade the underlying securities and/or currency. To the
extent that the futures markets close before the securities or currency markets,
significant price and rate movements can take place in the securities and/or
currency markets that cannot be reflected in the futures markets.
D. RISKS OF TRANSACTIONS IN OPTIONS ON FUTURES CONTRACTS
Options on futures contracts are subject to risks similar to those described
above with respect to options on securities, options on stock indexes, and
futures contracts. These risks include the risk that the portfolio manager may
not correctly predict changes in the market, the risk of imperfect correlation
between the option and the securities being hedged, and the risk that there
might not be a liquid secondary market for the option. There is also the risk of
imperfect correlation between the option and the underlying futures contract. If
there were no liquid secondary market for a particular option on a futures
contract, a Portfolio might have to exercise an option it held in order to
realize any profit and might continue to be obligated under an option it had
written until the option expired or was exercised. If the Portfolio were unable
to close out an option it had written on a futures contract, it would continue
to be required to maintain initial margin and make variation margin payments
with respect to the option position until the option expired or was exercised
against the Portfolio.
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IX. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Conservative Balanced, Diversified Conservative Growth, Flexible Managed,
Equity Income, Equity, Prudential Jennison, Global, and Natural Resources
Portfolios may enter into foreign currency exchange contracts to protect the
value of their foreign holdings against future changes in the level of currency
exchange rates. When a Portfolio enters into a contract for the purchase or sale
of a security denominated in a foreign currency, or when a Portfolio anticipates
the receipt in a foreign currency of dividends or interest payments on a
security which it holds, the Portfolio may desire to "lock-in" the U.S. dollar
price of the security or the U.S. dollar equivalent of such dividend or interest
payment, as the case may be. By entering into a forward contract for a fixed
amount of dollars, for the purchase or sale of the amount of foreign currency
involved in the underlying transactions, the Portfolio will be able to protect
itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Additionally, when a portfolio manager believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Portfolio may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of the portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of those securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. The above Portfolios will not enter into
such forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate a Portfolio to deliver an amount of
foreign currency in excess of the value of the securities or other assets
denominated in that currency held by the Portfolio. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the long-term investment decisions made with regard to overall diversification
strategies. However, the Portfolios believe that it is important to have the
flexibility to enter into such forward contracts when it is determined that the
best interests of the Portfolios will thereby be served.
The Portfolios generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, a Portfolio may
either sell the security and make delivery of the foreign currency or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract with the same currency
trader obligating it to purchase, on the same maturity date, the same amount of
the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular security at the expiration of the contract. Accordingly, it may be
necessary for a Portfolio to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency that the Portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.
If a Portfolio retains the security and engages in an offsetting transaction,
the Portfolio will incur a gain or a loss (as described below) to the extent
that there has been movement in forward contract prices. If forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent that the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. If forward
prices increase, the Portfolio will suffer a loss to the extent that the price
of the currency it has agreed to purchase exceeds the price of the currency it
has agreed to sell.
The above Portfolios' dealing in forward foreign currency exchange contracts
will be limited to the transactions described above. Of course, the Portfolios
are not required to enter into such transactions with regard to their foreign
currency-denominated securities. It also should be realized that this method of
protecting the value of a Portfolio's securities against a decline in the value
of a currency does not eliminate fluctuations in the underlying prices of the
securities which are unrelated to exchange rates. Additionally, although such
contracts tend to minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time they tend to limit any potential gain which
might result should the value of such currency increase.
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Although the Portfolios value their assets daily in terms of U.S. dollars, they
do not intend physically to convert their holdings of foreign currencies into
U.S. dollars on a daily basis. They will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to a Portfolio at one rate, while offering a lesser rate of exchange should the
Portfolio desire to resell that currency to the dealer.
The High Yield Bond Portfolio may also invest up to 10% of its total assets in
foreign currency denominated debt securities of foreign or U.S. issuers;
however, the Portfolio will not engage in such investment activity unless it has
been first authorized to do so by the Fund's Board of Directors. If the
Portfolio does engage in such investment activity, it may also enter into
forward foreign currency exchange contracts.
X. INTEREST RATE SWAPS
The Diversified Bond, Diversified Conservative Growth, Government Income, and
High Yield Bond Portfolios and the fixed income portions of the Conservative
Balanced and Flexible Managed Portfolios may use interest rate swaps subject to
the limitations set forth in the prospectus.
Interest rate swaps, in their most basic form, involve the exchange by a
Portfolio with another party of their respective commitments to pay or receive
interest. For example, a Portfolio might exchange its right to receive certain
floating rate payments in exchange for another party's right to receive fixed
rate payments. Interest rate swaps can take a variety of other forms, such as
agreements to pay the net differences between two different indexes or rates,
even if the parties do not own the underlying instruments. Despite their
differences in form, the function of interest rate swaps is generally the same -
to increase or decrease a Portfolio's exposure to long or short-term interest
rates. For example, a Portfolio may enter into a swap transaction to preserve a
return or spread on a particular investment or a portion of its portfolio or to
protect against any increase in the price of securities the Portfolio
anticipates purchasing at a later date.
The use of swap agreements is subject to certain risks. As with options and
futures, if the portfolio manager's prediction of interest rate movements is
incorrect, the Portfolio's total return will be less than if the Portfolio had
not used swaps. In addition, if the counterparty's creditworthiness declines,
the value of the swap would likely decline. Moreover, there is no guarantee that
a Portfolio could eliminate its exposure under an outstanding swap agreement by
entering into an offsetting swap agreement with the same or another party.
Each of the above Portfolios will set aside liquid assets in a segregated
custodial account to cover its current obligations under swap agreements. If a
Portfolio enters into a swap agreement on a net basis, it will segregate assets
with a daily value at least equal to the excess, if any, of the Portfolio's
accrued obligations under the swap agreement over the accrued amount the
Portfolio is entitled to receive under the agreement. If a Portfolio enters into
a swap agreement on other than a net basis, it will segregate assets with a
value equal to the full amount of the Portfolio's accrued obligations under the
agreement.
XI. LOAN PARTICIPATIONS
The Conservative Balanced, Diversified Bond, Diversified Conservative Growth,
Flexible Managed, High Yield Bond and Money Market Portfolios may invest in
fixed and floating rate loans that are privately negotiated between a corporate
borrower and one or more financial institutions. The above Portfolios will
generally invest in loans in the form of "loan participations." In the typical
loan participation, the Portfolio will have a contractual relationship with the
lender but not the borrower. This means that the Portfolio will not have any
right to enforce the borrower's compliance with the terms of the loan and may
not benefit directly from any collateral supporting the loan. As a result, the
Portfolio will assume the credit risk of both the borrower and the lender. In
the event of the lender's insolvency, the Portfolio may be treated as a general
creditor of the lender and may not benefit from any set-off between the lender
and the borrower.
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XII. REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
A. DESCRIPTION OF REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The Diversified Bond, Diversified Conservative Growth, Government Income and
High Yield Bond Portfolios, and the fixed income portions of the Conservative
Balanced and Flexible Managed Portfolios, may use up to 30% of their net assets
for reverse repurchase agreements and dollar rolls. The Money Market Portfolio
and the money market portion of any Portfolio may use up to 10% of its net
assets for reverse repurchase agreements.
In a reverse repurchase transaction, a Portfolio sells one of its securities and
agrees to repurchase the same security at a set price on a specified date.
During the time the security is held by the other party, the Portfolio will
often continue to receive principal and interest payments on the security. The
terms of the reverse repurchase agreement reflect a rate of interest for use of
the money received by the Portfolio and thus, is similar to borrowing.
Dollar rolls involve the sale by the Portfolio of one of its securities for
delivery in the current month and a contract to repurchase substantially similar
securities (for example, with the same coupon) from the other party on a
specified date in the future at a specified amount. During the roll period, a
Portfolio does not receive any principal or interest earned on the security. The
Portfolio realizes a profit to the extent the current sale price is more than
the price specified for the future purchase, plus any interest earned on the
cash paid to the Portfolio on the initial sale.
A "covered roll" is a specific type of dollar roll where there is an offsetting
cash position or a cash equivalent security position which matures on or before
the forward settlement date of the dollar roll transaction.
A Portfolio participating in reverse repurchase or dollar roll transactions will
set aside liquid assets in a segregated account which equal in value the
Portfolio's obligations under the reverse repurchase agreement or dollar roll,
respectively.
B. RISKS OF REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
Reverse repurchase agreements and dollar rolls involve the risk that the market
value of the securities retained by a Portfolio may decline below the price of
the securities it has sold but is obligated to repurchase under the agreement.
If the other party in a reverse purchase or dollar roll transaction becomes
insolvent, a Portfolio's use of the proceeds of the agreement may be restricted
pending a determination by a third party of whether to enforce the Portfolio's
obligation to repurchase.
XIII. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Conservative Balanced, Diversified Bond, Diversified Conservative Growth,
Equity, Equity Income, Flexible Managed, Global, Government Income, High Yield
Bond, Natural Resources, Prudential Jennison, Small Capitalization Stock and
20/20 Focus Portfolios may purchase or sell securities on a when-issued or
delayed delivery basis. This means that the delivery and payment can take place
a month or more after the date of the transaction. A Portfolio will make
commitments for when-issued transactions only with the intention of actually
acquiring the securities. A Portfolio's custodian will maintain in a segregated
account, liquid assets having a value equal to or greater to such commitments.
If the Portfolio chooses to dispose of the right to acquire a when-issued
security prior to its acquisition, it could, as with the disposition of any
other security, incur a gain or loss.
The Money Market Portfolio and the short-term portion of the other Portfolios
may purchase money market securities on a when-issued or delayed-delivery basis.
XIV. SHORT SALES
The Conservative Balanced, Diversified Bond, Diversified Conservative Growth,
Flexible Managed, Government Income, High Yield Bond and 20/20 Focus Portfolios
may enter into short sales. In a short sale, a Portfolio sells a security it
does not own in anticipation of a decline in the market value of those
securities. To complete the transaction, the Portfolio will borrow the security
to make delivery to the buyer. The Portfolio is then obligated to replace the
security it borrowed by purchasing it at the market price at the time of
replacement. The price at that time may be more or less than the price at which
the Portfolio sold it. Until the security is replaced, the Portfolio is required
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to pay to the lender any interest which accrues during the period of the loan.
To borrow the security, the Portfolio may be required to pay a fee which would
increase the cost of the security sold.
Until a Portfolio replaces a borrowed security used in a short sale, it will set
aside liquid assets in a segregated account equal to the current market value of
the security sold short or otherwise cover the short position. No more than 25%
of any Portfolio's net assets will be, when added together: (1) deposited as
collateral for the obligation to replace securities borrowed in connection with
short sales and (2) segregated in accounts in connection with short sales.
A Portfolio incurs a loss in a short sale if the price of the security increases
between the date of the short sale and the date the Portfolio replaces the
borrowed security. On the other hand, a Portfolio will realize gain if the
security's price decreases between the date of the short sale and the date the
security is replaced.
XV. LOANS OF PORTFOLIO SECURITIES
A. DESCRIPTION OF SECURITIES LOANS
All of the Portfolios except the Money Market Portfolio may lend the securities
they hold to broker-dealers, qualified banks and certain institutional
investors. All securities loans will be made pursuant to a written agreement and
continuously secured by collateral in the form of cash, U.S. Government
securities or irrevocable standby letters of credit in an amount equal or
greater than the market value of the loaned securities plus the accrued interest
and dividends. While a security is loaned, the Portfolio will continue to
receive the interest and dividends on the loaned security while also receiving a
fee from the borrower or earning interest on the investment of the cash
collateral. Upon termination of the loan, the borrower will return to the
Portfolio a security identical to the loaned security. The Portfolio will not
have the right to vote a security that is on loan, but would be able to
terminate the loan and retain the right to vote if that were considered
important with respect to the investment.
B. RISKS ASSOCIATED WITH LENDING SECURITIES
The primary risk in lending securities is that the borrower may become insolvent
on a day on which the loaned security is rapidly advancing in price. In this
event, if the borrower fails to return the loaned security, the existing
collateral might be insufficient to purchase back the full amount of the
security loaned, and the borrower would be unable to furnish additional
collateral. The borrower would be liable for any shortage but the Portfolio
would be an unsecured creditor with respect to any shortfall and might not be
able to recover all or any of it. However, this risk can be decreased by the
careful selection of borrowers and securities to be lent.
None of the Portfolios will lend securities to entities affiliated with
Prudential.
XVI. ILLIQUID SECURITIES
Each Portfolio, other than the Money Market Portfolio, may hold up to 15% of its
net assets in illiquid securities. The Money Market Portfolio may hold up to 10%
of its net assets in illiquid securities. Securities are "illiquid" if they
cannot be sold in the ordinary course of business within seven days at
approximately the value at which the Portfolio has them valued. Repurchase
agreements with a maturity of greater than seven days are considered illiquid.
The Portfolios may purchase securities which are not registered under the
Securities Act of 1933 but which can be sold to qualified institutional buyers
in accordance with Rule 144A under that Act. These securities will not be
considered illiquid so long as it is determined by the investment adviser,
acting under guidelines approved and monitored by the Board of Directors, that
an adequate trading market exists for that security. In making that
determination, the investment adviser will consider, among other relevant
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers willing to purchase or sell the security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security;
and (4) the nature of the security and the nature of the marketplace trades. A
Portfolio's treatment of Rule 144A securities as liquid could have the effect of
increasing the level of portfolio illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities. In addition, the investment adviser, acting under guidelines
approved and monitored by the Board of Directors, may conditionally determine,
for purposes of the 15% test, that certain commercial paper issued in reliance
on the exemption from registration in Section 4(2) of the Securities Act of 1933
will not be considered illiquid, whether or not it may be resold under Rule
144A. To make that determination, the following conditions must be met: (1) the
security must not be traded flat or in default as to principal or interest; (2)
the security must be rated in
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one of the two highest rating categories by at least two nationally recognized
statistical rating organizations ("NRSROs"), or if only one NRSRO rates the
security, by that NRSRO (if the security is unrated, the investment adviser must
determine that the security is of equivalent quality); and (3) the investment
adviser must consider the trading market for the specific security, taking into
account all relevant factors. The investment adviser will continue to monitor
the liquidity of any Rule 144A security or any Section 4(2) commercial paper
which has been determined to be liquid and, if a security is no longer liquid
because of changed conditions, the holdings of illiquid securities will be
reviewed to determine if any steps are required to assure that the 15% test
continues to be satisfied.
XVII. FURTHER INFORMATION ABOUT THE ZERO COUPON BOND PORTFOLIOS
As stated in the prospectus, the objective of Zero Coupon Bond Portfolios 2000
and 2005 is to achieve the highest predictable compounded investment return for
a specified period of time, consistent with the safety of invested capital. This
discussion provides a more detailed explanation of the investment policies that
will be employed to manage these Portfolios.
If each Zero Coupon Bond Portfolio held only stripped securities that were
obligations of the United States Government, maturing on the liquidation date,
the compounded yield of the Portfolio from the date of initial investment until
the liquidation date could be calculated arithmetically to a high degree of
accuracy. By: (i) including stripped corporate obligations and interest bearing
debt securities; (ii) including securities with maturity dates within 2 years of
the liquidation date; and (iii) more actively managing the Portfolio, the
accuracy of the predicted yield is reduced somewhat with the objective of
achieving an increased yield. The reduction in accuracy is kept to an acceptably
small amount, however, by an investment technique known as "immunization." By
purchasing securities with maturity dates or with interest payment dates prior
to the liquidation date, a risk is incurred that the payments received will not
be able to be reinvested at interest rates as high as or higher than the yield
initially predicted. This is known as "reinvestment risk." By including
securities with maturity dates after the liquidation date, a risk is incurred
that, because interest rates have increased, the market value of such securities
will be lower than had been anticipated. This is known as "market risk." It is
also possible, conversely, that payments received prior to the liquidation date
can be reinvested at higher rates than the predicted yield and that the value of
unmatured securities on the liquidation date will be greater than anticipated.
Reinvestment risk and market risk are thus reciprocal in that any change in the
general level of interest rates has an opposite effect on the two classes of
securities described above.
The Portfolios' investment adviser seeks to balance these risks by making use of
the concept of "duration." A bond's duration is the average weighted period of
time until receipt of all scheduled cash payments under the bond (whether
principal or interest), where the weights are the present value of the amounts
to be received on each payment date. Unlike the concept of a bond's "term to
maturity," therefore, duration takes into account both the amount and timing of
a bond's interest payments, in addition to its maturity date and yield to
maturity. The duration of a zero coupon bond is the product of the face amount
of the bond and the time until maturity. As applied to a portfolio of bonds, a
portfolio's "duration" is the average weighted period of time until receipt of
all scheduled payments, whether principal or interest, from all bonds in the
portfolio.
When a Portfolio's duration is equal to the length of time remaining until its
liquidation date, fluctuations in the amount of income accumulated by the
Portfolio through reinvestment of coupon or principal payments received prior to
the liquidation date (that is, fluctuations caused by reinvestment risk) will,
over the period ending on the liquidation date, be approximately equal in
magnitude to, but opposite in direction from, fluctuations in the market value
on the liquidation date of the Portfolio's unmatured bonds (that is,
fluctuations caused by market risk). By maintaining each Portfolio's duration
within one year of the length of time remaining until its liquidation date, the
investment adviser believes that each Portfolio's value on its liquidation date,
and hence an investor's compounded investment return to that date, will largely
be immunized against changes in the general level of interest rates. The success
of this technique could be affected, however, by such factors as changes in the
relationship between long-term and short-term interest rates and changes in the
difference between the yield on corporate and Treasury securities.
The investment adviser will also calculate a projected yield for each Zero
Coupon Bond Portfolio. At the beginning of each week, after the net asset value
of each Zero Coupon Bond Portfolio has been determined, the investment adviser
will calculate the compounded annual yield that will result if all securities in
the Portfolio are held until the liquidation date or, if earlier, until their
maturity dates (with the proceeds reinvested until the liquidation date). This
is the predicted yield for that date. It can also be expressed as the amount to
which a premium of $10,000 is predicted to grow by the Portfolio's liquidation
date. Both of these numbers will be furnished upon request. Unless there is a
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significant change in the general level of interest rates--in which case a
recalculation will be made--the predicted yield is not likely to vary materially
over the course of each week.
As stated in the prospectus, as much as 30% of each Portfolio's assets may be
invested in zero coupon debt securities issued by United States corporations or
in high grade interest-bearing debt securities, provided that no more than 20%
of the assets of the Portfolio may be invested in interest-bearing securities.
The extent to which the Portfolio invests in interest-bearing securities may
rise above 20% as the Portfolio moves closer to its liquidation date since both
reinvestment risk and market risk become smaller as the period to the
liquidation date decreases.
INVESTMENT RESTRICTIONS
Set forth below are certain investment restrictions applicable to the
Portfolios. Restrictions 1, 3, 5, and 8 through 11 are fundamental and may not
be changed without shareholder approval as required by the 1940 Act.
Restrictions 2, 4, 6, 7, and 12 are not fundamental and may be changed by the
Board of Directors without shareholder approval.
None of the Portfolios will:
1. Buy or sell real estate and mortgages, although the Portfolios may buy
and sell securities that are secured by real estate and securities of
real estate investment trusts and of other issuers that engage in real
estate operation. Buy or sell commodities or commodities contracts,
except that the Diversified Stock, Balanced, and Specialized Portfolios
may purchase and sell stock index futures contracts and related
options; the Fixed Income Portfolios (other than the Money Market and
Zero Coupon Bond Portfolios), the Global Portfolio, and the Balanced
Portfolios may purchase and sell interest rate futures contracts and
related options; and all Portfolios (other than the Money Market,
Government Income, Zero Coupon Bond, and Small Capitalization Stock
Portfolios) may purchase and sell foreign currency futures contracts
and related options and forward foreign currency exchange contracts.
2. Except as part of a merger, consolidation, acquisition or
reorganization, invest more than 5% of the value of its total assets in
the securities of any one investment company or more than 10% of the
value of its total assets, in the aggregate, in the securities of two
or more investment companies, or acquire more than 3% of the total
outstanding voting securities of any one investment company.
3. Acquire securities for the purpose of exercising control or management
of any company except in connection with a merger, consolidation,
acquisition or reorganization.
4. Make short sales of securities or maintain a short position, except
that the Diversified Bond, Diversified Conservative Growth, 20/20
Focus, High Yield Bond, Government Income, Conservative Balanced and
Flexible Managed Portfolios may sell securities short up to 25% of
their net assets and except that the Portfolios (other than the Money
Market and Zero Coupon Bond Portfolios) may make short sales against
the box. Collateral arrangements entered into with respect to options,
futures contracts and forward contracts are not deemed to be short
sales. Collateral arrangements entered into with respect to interest
rate swap agreements are not deemed to be short sales.
5. Purchase securities on margin or otherwise borrow money or issue senior
securities except that the Diversified Bond, Diversified Conservative
Growth, High Yield Bond and Government Income Portfolios, as well as
the fixed income portions of the Balanced Portfolios, may enter into
reverse repurchase agreements, dollar rolls and may purchase securities
on a when-issued and delayed delivery basis; except that the Money
Market Portfolio and the money market portion of any Portfolio may
enter into reverse repurchase agreements and may purchase securities on
a when-issued and delayed delivery basis; and except that the Equity,
Prudential Jennison, 20/20 Focus, Small Capitalization Stock, Equity
Income, Natural Resources and Global Portfolios may purchase securities
on a when-issued or a delayed delivery basis. The Fund may also obtain
such short-term credit as it needs for the clearance of securities
transactions and may borrow from a bank for the account of any
Portfolio as a temporary measure to facilitate redemptions (but not for
leveraging or investment) or to exercise an option, an amount that does
not exceed 5% of the value of the Portfolio's total assets (including
the amount owed as a result of the borrowing) at the time the borrowing
is made. Interest paid on borrowings will not be available for
investment. Collateral arrangements with respect to futures contracts
and options thereon and forward foreign currency exchange contracts (as
permitted by restriction no. 1) are not deemed to be the issuance of a
senior security or the purchase of a security on margin. Collateral
arrangements with respect to the writing of the
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following options by the following Portfolios are not deemed to be the
issuance of a senior security or the purchase of a security on margin:
Diversified Stock and Specialized Portfolios other than the Stock Index
Portfolio (options on equity securities, stock indexes, foreign
currencies) and the Small Capitalization Stock Portfolio (options on
equity securities, stock indexes); the Diversified Conservative Growth
and the Balanced Portfolios (options on debt securities, equity
securities, stock indexes, foreign currencies); Diversified Bond and
High Yield Bond Portfolios (options on debt securities, foreign
currencies); Government Income Portfolio (options on debt securities);
20/20 Focus Portfolio (options on stock indexes). Collateral
arrangements entered into by the Fixed Income Portfolios (other than
the Money Market and Zero Coupon Bond Portfolios), Diversified
Conservative Growth Portfolio and the Balanced Portfolios with respect
to interest rate swap agreements are not deemed to be the issuance of a
senior security or the purchase of a security on margin.
6. Enter into reverse repurchase agreements if, as a result, the
Portfolio's obligations with respect to reverse repurchase agreements
would exceed 10% of the Portfolio's net assets (defined to mean total
assets at market value less liabilities other than reverse repurchase
agreements); except that the Diversified Bond, Diversified Conservative
Growth, High Yield Bond, and Government Income Portfolios, as well as
the fixed income portions of the Conservative Balanced and Flexible
Managed Portfolios, may enter into reverse repurchase agreements and
dollar rolls provided that the Portfolio's obligations with respect to
those instruments do not exceed 30% of the Portfolio's net assets
(defined to mean total assets at market value less liabilities other
than reverse repurchase agreements and dollar rolls).
7. Pledge or mortgage assets, except that no more than 10% of the value of
any Portfolio may be pledged (taken at the time the pledge is made) to
secure authorized borrowing and except that a Portfolio may enter into
reverse repurchase agreements. Collateral arrangements entered into
with respect to futures and forward contracts and the writing of
options are not deemed to be the pledge of assets. Collateral
arrangements entered into with respect to interest rate swap agreements
are not deemed to be the pledge of assets.
8. Lend money, except that loans of up to 10% of the value of each
Portfolio may be made through the purchase of privately placed bonds,
debentures, notes, and other evidences of indebtedness of a character
customarily acquired by institutional investors that may or may not be
convertible into stock or accompanied by warrants or rights to acquire
stock. Repurchase agreements and the purchase of publicly traded debt
obligations are not considered to be "loans" for this purpose and may
be entered into or purchased by a Portfolio in accordance with its
investment objectives and policies.
9. Underwrite the securities of other issuers, except where the Fund may
be deemed to be an underwriter for purposes of certain federal
securities laws in connection with the disposition of Portfolio
securities and with loans that a Portfolio may make pursuant to item 8
above.
10. Make an investment unless, when considering all its other investments,
75% of the value of a Portfolio's assets would consist of cash, cash
items, obligations of the United States Government, its agencies or
instrumentalities, and other securities. For purposes of this
restriction, "other securities" are limited for each issuer to not more
than 5% of the value of a Portfolio's assets and to not more than 10%
of the issuer's outstanding voting securities held by the Fund as a
whole. Some uncertainty exists as to whether certain of the types of
bank obligations in which a Portfolio may invest, such as certificates
of deposit and bankers' acceptances, should be classified as "cash
items" rather than "other securities" for purposes of this restriction,
which is a diversification requirement under the 1940 Act. Interpreting
most bank obligations as "other securities" limits the amount a
Portfolio may invest in the obligations of any one bank to 5% of its
total assets. If there is an authoritative decision that any of these
obligations are not "securities" for purposes of this diversification
test, this limitation would not apply to the purchase of such
obligations.
11. Purchase securities of a company in any industry if, as a result of the
purchase, a Portfolio's holdings of securities issued by companies in
that industry would exceed 25% of the value of the Portfolio, except
that this restriction does not apply to purchases of obligations issued
or guaranteed by the U.S. Government, its agencies and
instrumentalities or issued by domestic banks. For purposes of this
restriction, neither finance companies as a group nor utility companies
as a group are considered to be a single industry and will be grouped
instead according to their services; for example, gas, electric, and
telephone utilities will each be considered a separate industry. For
purposes of this exception, domestic banks shall include all banks
which are organized under the laws of the United States or a state (as
defined in the 1940 Act), U.S. branches of foreign banks that are
subject
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to the same regulations as U.S. banks and foreign branches of domestic
banks (as permitted by the Securities and Exchange Commission ("SEC").
12. Invest more than 15% of its net assets in illiquid securities. (The
Money Market Portfolio will not invest more than 10% of its net assets
in illiquid securities.) For purposes of this restriction, illiquid
securities are those deemed illiquid pursuant to SEC regulations and
guidelines, as they may be revised from time to time.
Consistent with item 5 above, the Fund has entered into a joint $1 billion
revolving credit facility with other Prudential mutual funds to facilitate
redemptions if necessary. This credit facility, which was entered into on March
13, 1999, is a syndicated arrangement with 12 different major banks.
The Natural Resources Portfolio will generally invest a substantial majority of
its total assets in securities of natural resource companies. With respect to
item 11 above, as it relates to the Natural Resources Portfolio, the following
categories will be considered separate and distinct industries: integrated
oil/domestic, integrated oil/international, crude oil production, natural gas
production, gas pipeline, oil service, coal, forest products, paper, foods
(including corn and wheat), tobacco, fertilizers, aluminum, copper, iron and
steel, all other basic metals (for example, nickel, lead), gold, silver,
platinum, mining finance, plantations (for example, edible oils), mineral sands,
and diversified resources. A company will be deemed to be in a particular
industry if the majority of its revenues is derived from or the majority of its
assets is dedicated to one of the categories described in the preceding
sentence. The Board of Directors of the Fund will review these industry
classifications from time to time to determine whether they are reasonable under
the circumstances and may change such classifications, without shareholder
approval, to the extent necessary.
Certain additional non-fundamental investment policies are applicable only to
the Money Market Portfolio. That Portfolio will not:
1. Invest in oil and gas interests, common stock, preferred stock,
warrants or other equity securities.
2. Write or purchase any put or call option or combination of them, except
that it may purchase putable or callable securities.
3. Invest in any security with a remaining maturity in excess of 397 days,
except that securities held pursuant to repurchase agreements may have
a remaining maturity of more than 397 days.
Certain additional non-fundamental investment policies are applicable only to
the High Yield Bond Portfolio. That Portfolio will not:
1. Invest in any non-fixed income equity securities, including warrants,
except when attached to or included in a unit with fixed income
securities, but not including preferred stock.
2. Invest more than 20% of the market or other fair value of its total
assets in United States currency denominated issues of foreign
governments and other foreign issuers; or invest more than 10% of the
market or other fair value of its total assets in securities which are
payable in currencies other than United States dollars. The Portfolio
will not engage in investment activity in non-U.S. dollar denominated
issues without first obtaining authorization to do so from the Fund's
Board of Directors. See INVESTMENT OBJECTIVES AND POLICIES OF THE
PORTFOLIOS.
The investments of the various Portfolios are generally subject to certain
additional restrictions under the laws of the State of New Jersey. In the event
of future amendments to the applicable New Jersey statutes, each Portfolio will
comply, without the approval of the shareholders, with the statutory
requirements as so modified. The pertinent provisions of New Jersey law as they
stand are, in summary form, as follows:
1. An Account may not purchase any evidence of indebtedness issued,
assumed or guaranteed by any institution created or existing under the
laws of the U.S., any U.S. state or territory, District of Columbia,
Puerto Rico, Canada or any Canadian province, if such evidence of
indebtedness is in default as to interest. "Institution" includes any
corporation, joint stock association, business trust, business joint
venture, business partnership, savings and loan association, credit
union or other mutual savings institution.
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2. The stock of a corporation may not be purchased unless: (i) the
corporation has paid a cash dividend on the class of stock during each
of the past 5 years preceding the time of purchase; or (ii) during the
5-year period the corporation had aggregate earnings available for
dividends on such class of stock sufficient to pay average dividends of
4% per annum computed upon the par value of such stock or upon stated
value if the stock has no par value. This limitation does not apply to
any class of stock which is preferred as to dividends over a class of
stock whose purchase is not prohibited.
3. Any common stock purchased must be: (i) listed or admitted to trading
on a securities exchange in the United States or Canada; or (ii)
included in the National Association of Securities Dealers' national
price listings of "over-the-counter" securities; or (iii) determined by
the Commissioner of Insurance of New Jersey to be publicly held and
traded and have market quotations available.
4. Any security of a corporation may not be purchased if after the
purchase more than 10% of the market value of the assets of a Portfolio
would be invested in the securities of such corporation.
As a result of these currently applicable requirements of New Jersey law, which
impose substantial limitations on the ability of the Fund to invest in the stock
of companies whose securities are not publicly traded or who have not recorded a
5-year history of dividend payments or earnings sufficient to support such
payments, the Portfolios will not generally hold the stock of newly organized
corporations. Nonetheless, an investment not otherwise eligible under items 1 or
2 above may be made if, after giving effect to the investment, the total cost of
all such non-eligible investments does not exceed 5% of the aggregate market
value of the assets of the Portfolio.
Investment limitations also arise under the insurance laws and regulations of
Arizona and may arise under the laws and regulations of other states. Although
compliance with the requirements of New Jersey law set forth above will
ordinarily result in compliance with any applicable laws of other states, under
some circumstances the laws of other states could impose additional restrictions
on the Portfolios.
Current federal income tax laws require that the assets of each Portfolio be
adequately diversified so that Prudential and other insurers with separate
accounts which invest in the Fund, as applicable, and not the Contract owners,
are considered the owners of assets held in the Accounts for federal income tax
purposes. See OTHER INFORMATION - FEDERAL INCOME TAXES in the prospectus.
Prudential intends to maintain the assets of each Portfolio pursuant to those
diversification requirements.
INVESTMENT MANAGEMENT AND DISTRIBUTION ARRANGEMENTS
I. INVESTMENT MANAGEMENT ARRANGEMENTS
Prudential is the investment adviser of the Fund. It is the largest insurance
company in the United States. The Fund has entered into an Investment Advisory
Agreement with Prudential under which Prudential will, subject to the direction
of the Board of Directors of the Fund, be responsible for the management of the
Fund, and provide investment advice and related services to each Portfolio.
Prudential has entered into a Service Agreement with its wholly-owned
subsidiary, The Prudential Investment Corporation ("PIC"), which provides that
PIC will furnish to Prudential such services as Prudential may require in
connection with Prudential's performance of its obligations under advisory
agreements with clients which are registered investment companies. In addition,
Prudential has entered into Subadvisory Agreements with Franklin Advisers, Inc.
("Franklin"), The Dreyfus Corporation ("Dreyfus"), Pacific Investment Management
Company ("PIMCO") and Jennison Associates LLC ("Jennison") under which these
companies provide investment advisory services to the Diversified Conservative
Growth Portfolio. Prudential has also entered into Subadvisory Agreements with
Jennison under which Jennison furnishes investment advisory services in
connection with the management of the Prudential Jennison and 20/20 Focus
Portfolios. More detailed information about Prudential and its role as
investment adviser can be found in HOW THE PORTFOLIOS ARE MANAGED in the
prospectus.
Under the Investment Advisory Agreement, Prudential receives an investment
management fee as compensation for its services to the Fund. The fee is a daily
charge, payable quarterly, equal to an annual percentage of the average daily
net assets of each individual Portfolio.
The investment management fee for the Stock Index Portfolio is equal to an
annual rate of 0.35% of the average daily net assets of the Portfolio. For the
Money Market, Diversified Bond, Government Income, Zero Coupon Bond, Equity
17
<PAGE>
Income, and Small Capitalization Stock Portfolios that fee is equal to an annual
rate of 0.40% of the average daily net assets of each of the Portfolios. For the
Equity and Natural Resources Portfolios, the fee is equal to an annual rate of
0.45% of the average daily net assets of each of the Portfolios. The fee for the
Conservative Balanced and High Yield Bond Portfolios is equal to an annual rate
of 0.55% of the average daily net assets of each of the Portfolios. For the
Flexible Managed and Prudential Jennison Portfolios, the fee is equal to an
annual rate of 0.60% of the average daily net assets of the Portfolio. The fee
for the Global, 20/20 Focus and Diversified Conservative Growth Portfolios is
equal to an annual rate of 0.75% of the average daily net assets of the
Portfolio. Under the Service Agreement, Prudential pays PIC a portion of the fee
it receives for providing investment management services. Prudential pays
Jennison a portion of the fee it receives for providing investment management
services to the Prudential Jennison, 20/20 Focus and Diversified Conservative
Growth Portfolios.
For the years ended December 31, 1998, 1997 and 1996, Prudential was paid the
following fees for providing investment management services to the Portfolios:
INVESTMENT MANAGEMENT FEES
--------------------------
YEAR ENDED DECEMBER 31
--------------------------
<TABLE>
<CAPTION>
PORTFOLIO 1998 1997 1996
- --------- ---- ---- ----
<S> <C> <C> <C>
Conservative Balanced Portfolio $26,224,569 $25,757,735 $23,052,572
Diversified Bond Portfolio 3,782,116 2,981,884 2,713,429
Diversified Conservative Growth Portfolio n/a n/a n/a
Equity Income Portfolio 8,830,161 6,601,602 4,863,078
Equity Portfolio 28,389,539 24,840,379 19,216,733
Flexible Managed Portfolio 33,049,940 31,740,440 27,247,674
Global Portfolio 5,342,945 4,836,302 3,671,568
Government Income Portfolio 1,735,370 $1,758,870 1,957,623
High Yield Bond Portfolio 3,782,134 2,679,304 2,192,765
Money Market Portfolio 3,246,494 2,667,947 2,495,613
Natural Resources Portfolio 1,349,743 1,975,906 1,662,931
Prudential Jennison Portfolio 4,662,187 2,063,572 821,423
Small Capitalization Stock Portfolio 1,243,051 867,687 362,830
Stock Index Portfolio 10,279,903 7,121,699 4,488,042
20/20 Focus Portfolio(1) n/a n/a n/a
Zero Coupon Bond 2000 Portfolio 159,341 161,101 119,545
Zero Coupon Bond 2005 Portfolio 149,980 123,525 97,040
------------ ------------ -----------
Total $132,227,473 $116,177,953 $94,962,866
</TABLE>
- ------------------------------------------------
Portfolio commenced operations in April of 1999.
The Investment Advisory Agreement requires Prudential to pay for maintaining any
Prudential staff and personnel who perform clerical, accounting, administrative,
and similar services for the Fund, other than investor services and any daily
Fund accounting services. It also requires Prudential to pay for the equipment,
office space and related facilities necessary to perform these services and the
fees or salaries of all officers and directors of the Fund who are affiliated
persons of Prudential or of any subsidiary of Prudential.
Each Portfolio pays all other expenses incurred in its individual operation and
also pays a portion of the Fund's general administrative expenses allocated on
the basis of the asset size of the respective Portfolios. Expenses that will be
borne directly by the Portfolios include redemption expenses, expenses of
portfolio transactions, shareholder servicing costs, interest, certain taxes,
charges of the custodian and transfer agent, and other expenses attributable to
a particular Portfolio. Expenses that will be allocated among all Portfolios
include legal expenses, state franchise taxes, auditing services, costs of
printing proxies, prospectuses and statements of additional information, costs
of stock certificates, SEC fees, accounting costs, the fees and expenses of
directors of the Fund who are not affiliated persons of Prudential or any
subsidiary of Prudential, and other expenses properly payable by the entire
Fund. If the Fund is sued, litigation costs may be directly applicable to one or
more Portfolio or allocated on the basis of the size of the respective
Portfolios, depending upon the nature of the lawsuit. The Fund's Board of
Directors has determined that this is an appropriate method of allocating
expenses.
18
<PAGE>
Under the Investment Advisory Agreement, Prudential has agreed to refund to a
Portfolio (except the Diversified Conservative Growth, Global and 20/20 Focus
Portfolios) the portion of the investment management fee for that Portfolio
equal to the amount that the aggregate annual ordinary operating expenses of
that Portfolio (excluding interest, taxes, and brokerage fees and commissions
but including investment management fees) exceeds 0.75% of the Portfolio's
average daily net assets. There is no expense limitation or reimbursement
provision for the Diversified Conservative Growth, Global or 20/20 Focus
Portfolios.
The Investment Advisory Agreement with Prudential was most recently approved by
the Fund's Board of Directors, including a majority of the Directors who are not
interested persons of Prudential, on May 28, 1998 with respect to all Portfolios
except the Diversified Conservative Growth and 20/20 Focus Portfolios and was
most recently approved by the shareholders in accordance with instructions from
Contract owners at their 1989 annual meeting with respect to all Portfolios
except the Prudential Jennison, Small Capitalization Stock, Diversified
Conservative Growth and 20/20 Focus Portfolios. A Supplemental Advisory
Agreement regarding the Prudential Jennison and Small Capitalization Stock
Portfolios was approved by the Fund Board of Directors on December 20, 1994 and
by the sole shareholder of the Prudential Jennison and Small Capitalization
Stock Portfolios on April 5, 1995. A Supplemental Advisory Agreement with the
20/20 Focus Portfolio and the Diversified Conservative Growth Portfolio was
approved by the Fund's Board of Directors on February 25, 1999 and by the sole
shareholder of those Portfolios on April 5, 1999.
The Investment Advisory and Supplemental Investment Advisory Agreements will
continue in effect if approved annually by: (1) a majority of the non-interested
persons of the Fund's Board of Directors; and (2) by a majority of the entire
Board of Directors or by a majority vote of the shareholders of each Portfolio.
The required shareholder approval of the Agreements shall be effective with
respect to any Portfolio if a majority of the voting shares of that Portfolio
vote to approve the Agreements, even if the Agreements are not approved by a
majority of the voting shares of any other Portfolio or by a majority of the
voting shares of the entire Fund. The Agreements provide that they may not be
assigned by Prudential and that they may be terminated upon 60 days' notice by
the Fund's Board of Directors or by a majority vote of its shareholders.
Prudential may terminate the Agreements upon 90 days' notice.
The Service Agreement between Prudential and PIC was most recently ratified by
shareholders of the Fund at their 1989 annual meeting with respect to all
Portfolios except for the Prudential Jennison, Small Capitalization Stock, 20/20
Focus and Diversified Conservative Growth Portfolios, which had not yet been
established. The Service Agreement with respect to the Prudential Jennison and
Small Capitalization Stock Portfolios and the Investment Subadvisory Agreement
with Jennison for the Prudential Jennison Portfolio were ratified by the sole
shareholder of those Portfolios on April 5, 1995. The Service Agreement with
respect to the 20/20 Focus and Diversified Conservative Growth Portfolios were
ratified by the sole shareholder of those Portfolios on April 5, 1999. The
Service Agreement between Prudential and PIC will continue in effect as to the
Fund for a period of more than 2 years from its execution, only so long as such
continuance is specifically approved at least annually in the same manner as the
Investment Advisory Agreement between Prudential and the Fund. The Service
Agreement may be terminated by either party upon not less than 30 days prior
written notice to the other party, will terminate automatically in the event of
its assignment, and will terminate automatically as to the Fund in the event of
the assignment or termination of the Investment Advisory Agreement between
Prudential and the Fund. Prudential is not relieved of its responsibility for
all investment advisory services under the Investment Advisory Agreement.
The Fund has entered in a Sub-Advisory Agreement with Jennison in respect of its
20/20 Focus Portfolio. This Sub-Advisory Agreement was ratified by the sole
shareholder of the Portfolio on April 5, 1999. The Fund has also entered into
Sub-Advisory Agreements in respect of its Diversified Conservative Growth
Portfolio with Jennison, PIC, Franklin, Dreyfus and PIMCO. These Sub-Advisory
Agreements were ratified by the sole shareholder of the Portfolio on April 5,
1999. Under each Sub-Advisory Agreement, Prudential has agreed to pay the named
sub-adviser a portion of the fee it receives for providing investment management
services to the Diversified, Conservative Growth Portfolio.
Franklin Advisers, Inc.
Franklin is a California corporation located at 777 Mariners Island Blvd., San
Mateo, Ca 94404. Franklin is a wholly-owned subsidiary of Franklin Resources
Inc., a publicly-owned company engaged in the financial services industry
through its subsidiaries. Franklin advises 97 domestic equity and fixed income
mutual funds in the Franklin Templeton Group of funds. As of December 31, 1998,
Franklin and its affiliates managed over $220 billion in assets.
19
<PAGE>
The Dreyfus Corporation
Dreyfus has its headquarters at 200 Park Avenue, New York, NY 10166. Dreyfus is
a subsidiary of Mellon Bank corporation, a broad-based financial services
company with a bank at its core, and over $300 billion under management or
administration. As of December 31, 1998, Dreyfus managed over $11 billion in
assets.
Pacific Investment Management Company
PIMCO is a Delaware general partnership located at 840 Newport Center Drive,
Newport Beach, CA 92660. PIMCO is a subsidiary of PIMCO Advisors L.P. ("PIMCO
Advisors"). The general partners of PIMCO Advisors are PIMCO Partners, G.P. and
PIMCO Advisors Holdings L.P. ("PAH"). PIMCO Partners, G.P. is a general
partnership between PIMCO Holding LLC, a Delaware limited liability company and
indirect wholly-owned subsidiary of Pacific Life Insurance company, and Pimco
Partners LLC, a California limited liability company controlled by the PIMCO
Managing Directors. PimCO Partners, G.P. is the sole general partner of PAH.
PIMCO is registered as an investment advisor with the Commission and as a
commodity trading advisor with the CFTC. As of December 31, 1998, PIMCO had
approximately $157 million in assets.
Prudential also serves as the investment adviser to several other investment
companies. When investment opportunities arise that may be appropriate for more
than one entity for which Prudential serves as investment adviser, Prudential
will not favor one over another and may allocate investments among them in an
impartial manner believed to be equitable to each entity involved. The
allocations will be based on each entity's investment objectives and its current
cash and investment positions. Because the various entities for which Prudential
acts as investment adviser have different investment objectives and positions,
Prudential may from time to time buy a particular security for one or more such
entities while at the same time it sells such securities for another.
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 the 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.
II. DISTRIBUTION ARRANGEMENTS
Prudential Investment Management Services LLC ("PIMS"), an indirect wholly-owned
subsidiary of Prudential, acts as the principal underwriter of the Fund. PIMS is
a limited liability corporation organized under Delaware law in 1996. PIMS is a
registered broker-dealer under the Securities Exchange Act of 1934 and is a
member of the National Association of Securities Dealers, Inc. PIMS' principal
business address is 751 Broad Street, Newark, New Jersey 07102-3777.
The Fund has adopted a Distribution and Service Plan pursuant to Rule 12b-1 of
the Investment Company Act of 1940 (the Plan) in respect of Class II of each
Portfolio. The expenses incurred under the Plan include commissions and account
servicing fees paid to, or on account of, insurers or their agents who sell
Class II shares, advertising expenses, indirect and overhead costs of the Fund's
underwriter associated with the sale of Class II shares. Under the Plan, the
Fund pays the Fund's underwriter 0.25 of 1% of the average net assets of the
Class II shares.
The Class II Plan will continue in effect from year to year, upon annual
approval by a vote of the Fund's Board of Directors, including a majority vote
of the Directors who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the Plan or in any
agreement related to the Plan (the "12b-1 Directors"). The Plan may be
terminated at any time, without penalty, by the vote of a majority of the Rule
12b-1 Directors or by the vote of the holders of a majority of the outstanding
shares of Class II. The Plan may not be amended to materially increase the
amounts payable thereunder without shareholder approval.
20
<PAGE>
OTHER INFORMATION CONCERNING THE FUND
I. INCORPORATION AND AUTHORIZED STOCK
The Fund was incorporated under Maryland law on November 15, 1982. As of the
date of this SAI, the shares of capital stock are divided into thirty-four
classes: Conservative Balanced Portfolio Capital Stock - Class I, Conservative
Balanced Portfolio Capital Stock - Class II, Diversified Bond Portfolio Capital
Stock - Class I, Diversified Bond Portfolio Capital Stock - Class II,
Diversified Conservative Growth Portfolio Capital Stock - Class I, Diversified
Conservative Growth Portfolio Capital Stock - Class II, Equity Portfolio Capital
Stock - Class I, Equity Portfolio Capital Stock - Class II, Equity Income
Portfolio Capital Stock - Class I, Equity Income Portfolio Capital Stock - Class
II, Flexible Managed Portfolio Capital Stock - Class I, Flexible Managed
Portfolio Capital Stock - Class II, Global Portfolio Capital Stock - Class I,
Global Portfolio Capital Stock - Class II, Government Income Portfolio Capital
Stock - Class I, Government Income Portfolio Capital Stock Class II, High Yield
Bond Portfolio Capital Stock - Class I, High Yield Bond Portfolio Capital Stock
- - Class II, Money Market Portfolio Capital Stock - Class I, Money Market
Portfolio Capital Stock - Class II, Natural Resources Portfolio Capital Stock -
Class I, Natural Resources Portfolio Capital Stock - Class II, Prudential
Jennison Portfolio Capital Stock - Class I, Prudential Jennison Portfolio
Capital Stock - Class II, Small Capitalization Stock Portfolio Capital Stock -
Class I, Small Capitalization Stock Portfolio Capital Stock - Class II, Stock
Index Portfolio Capital Stock - Class I, Stock Index Portfolio Capital Stock -
Class II, 20/20 Focus Portfolio Capital Stock - Class I, 20/20 Focus Portfolio
Capital Stock - Class II, Zero Coupon Bond 2000 Portfolio Capital Stock - Class
I, Zero Coupon Bond 2000 Portfolio Capital Stock - Class II, Zero Coupon Bond
2005 Portfolio Capital Stock - Class I and Zero Coupon Bond 2005 Portfolio
Capital Stock - Class II.
Each class of shares of each Portfolio represents an interest in the same assets
of the Portfolio and is identical in all respects except that: (1) Class II
shares are subject to distribution and administration fees whereas Class I
shares are not; (2) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interest of one class differ from the interests of any class; and (3) each class
is offered to a limited group of investors.
The shares of each class, when issued, will be fully paid and non-assessable,
will have no conversion or similar rights, and will be freely transferable. Each
share of each class is equal as to earnings, assets and voting privileges. Class
II bears the expenses related to the distribution of its shares. In the event of
liquidation, each share of a Portfolio is entitled to its portion of all of the
Portfolio's assets after all debts and expenses of the Portfolio have been paid.
Since Class II shares bear distribution and administration expenses, the
liquidation proceeds to Class II shareholders are likely to be lower than to
Class I shareholders, whose shares are not subject to any distribution or
administration fees.
From time to time, Prudential has purchased shares of the Fund to provide
initial capital and to enable the Portfolios to avoid unrealistically poor
investment performance that might otherwise result because the amounts available
for investment are too small. Prudential will not redeem any of its shares until
a Portfolio is large enough so that redemption will not have an adverse effect
upon investment performance. Prudential will vote its shares in the same manner
and in the same proportion as the shares held by the separate accounts that
invest in the Fund, which in turn, are generally voted in accordance with
instructions from Contract owners.
II. PORTFOLIO TRANSACTIONS AND BROKERAGE
Prudential, as the Portfolio's investment adviser, is responsible for decisions
to buy and sell securities, options on securities and indexes, and futures and
related options for the Fund. Prudential is also responsible for the selection
of brokers, dealers, and futures commission merchants to effect the transactions
and the negotiation of brokerage commissions, if any. Broker-dealers may receive
brokerage commissions on Portfolio transactions, including options and the
purchase and sale of underlying securities upon the exercise of options. Orders
may be directed to any broker or futures commission merchant including, to the
extent and in the manner permitted by applicable law, Prudential Securities
Incorporated, an indirect wholly-owned subsidiary of Prudential (PSI).
Equity securities traded in the over-the-counter market and bonds, including
convertible bonds, are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments and U.S.
Government agency securities may be purchased directly from the issuer, in which
case no commissions or discounts are paid. The Fund will not deal with PSI in
any
21
<PAGE>
transaction in which PSI acts as principal. Thus, it will not deal with PSI
if execution involves PSI's acting as principal with respect to any part of the
Fund's order.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which PSI, during the existence of the syndicate, is a principal
underwriter (as defined in the 1940 Act) except in accordance with rules of the
SEC. This limitation, in the opinion of the Fund, will not significantly affect
the Portfolios' current ability to pursue their respective investment
objectives. However, in the future it is possible that the Fund may under other
circumstances be at a disadvantage because of this limitation in comparison to
other funds not subject to such a limitation.
In placing orders for portfolio securities of the Fund, Prudential's overriding
objective is to obtain the best possible combination of price and execution.
Prudential seeks to effect each transaction at a price and commission that
provides the most favorable total cost or proceeds reasonably attainable in the
circumstances. The factors that Prudential may consider in selecting a
particular broker, dealer or futures commission merchant firms are: Prudential's
knowledge of negotiated commission rates currently available and other
transaction costs; the nature of the portfolio transaction; the size of the
transaction; the desired timing of the trade; the activity existing and expected
in the market for the particular transaction; confidentiality; the execution,
clearance and settlement capabilities of the firms; the availability of research
and research related services provided through such firms; Prudential's
knowledge of the financial stability of the firms; Prudential's knowledge of
actual or apparent operational problems of firms; and the amount of capital, if
any, that would be contributed by firms executing the transaction. Given these
factors, the Fund may pay transaction costs in excess of that which another firm
might have charged for effecting the same transaction.
When Prudential selects a firm that executes orders or is a party to portfolio
transactions, relevant factors taken into consideration are whether that firm
has furnished research and research related products and/or services, such as
research reports, research compilations, statistical and economic data, computer
data bases, quotation equipment and services, research oriented
computer-software, hardware and services, reports concerning the performance of
accounts, valuations of securities, investment related periodicals, investment
seminars and other economic services and consultants. Such services are used in
connection with some or all of Prudential's investment activities; some of such
services, obtained in connection with the execution of transactions for one
investment account may be used in managing other accounts, and not all of these
services may be used in connection with the Fund.
PSI may act as a securities broker or futures commission merchant for the Fund.
In order for PSI to effect any transactions for the Portfolios, the commissions
received by PSI must be reasonable and fair compared to the commissions received
by other brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a comparable
period of time. This standard would allow PSI to receive no more than the
remuneration that would be expected to be received by an unaffiliated broker or
futures commission merchant in a commensurate arm's-length transaction.
Furthermore, the Board of Directors of the Fund, including a majority of the
directors who are not "interested" persons, has adopted procedures which are
reasonably designed to provide that any commissions, fees or other remuneration
paid to PSI are consistent with the foregoing standard. In accordance with Rule
11a2-2(T) under the Securities Exchange Act of 1934, PSI may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation in a written contract executed by the Fund and PSI. Rule 11a2-2(T)
provides that PSI must furnish to the Fund at least annually a statement setting
forth the total amount of all compensation retained by PSI from transactions
effected for the Fund during the applicable period. Brokerage and futures
transactions with PSI are also subject to such fiduciary standards as may be
imposed by applicable law.
22
<PAGE>
For the years ended December 31, 1998, 1997, and 1996, the Portfolios paid the
following amounts in brokerage commissions:
COMMISSIONS PAID BY THE PORTFOLIOS
----------------------------------
YEAR ENDED DECEMBER 31, 1998
----------------------------
<TABLE>
<CAPTION>
% OF
AGGREGATE COMMISSIONS PAID COMMISSIONS
PORTFOLIO COMMISSIONS TO PSI PAID TO PSI
- --------- ----------- ---------------- -----------
<S> <C> <C> <C>
Conservative Balanced $ 1,320,049 $ 32,490 2.46%
Equity 3,861,374 294641 7.63%
Equity Income 1,808,503 160,840 8.89%
Flexible Managed 2,176,922 103,021 4.73%
Global 1,891,928 14,247 0.75%
High Yield 6,770 0 0.00%
Natural Resources 331,482 1,800 0.54%
Prudential Jennison 936,449 56,980 6.08%
Small Cap Stock 249,010 0 0.00%
Stock Index 180,781 0 0.00%
----------- --------
Total $12,763,268 $664,019
</TABLE>
COMMISSIONS PAID BY THE PORTFOLIOS
----------------------------------
YEAR ENDED DECEMBER 31, 1997
----------------------------
<TABLE>
<CAPTION>
% OF
AGGREGATE COMMISSIONS PAID COMMISSIONS
PORTFOLIO COMMISSIONS TO PSI PAID TO PSI
- --------- ----------- ---------------- -----------
<S> <C> <C> <C>
Diversified Bond $ 54,863 $ 0 0%
Government Income 4,971 0 0%
Conservative Balanced 3,338,897 256,752 7.69%
Flexible Managed 6,544,428 428,008 6.54%
High Yield Bond 47,273 0 0%
Stock Index 200,865 0 0%
Equity Income 2,241,887 198,726 8.86%
Equity 1,823,705 189,498 10.39%
Prudential Jennison 484,086 0 0%
Small Capitalization Stock 227,781 0 0%
Global 2,055,319 7,621 0.37%
Natural Resources 569,768 132 0.02%
----------- ----------
Total $17,593,843 $1,080,737
</TABLE>
23
<PAGE>
COMMISSIONS PAID BY THE PORTFOLIOS
----------------------------------
YEAR ENDED DECEMBER 31, 1996
----------------------------
% OF
AGGREGATE COMMISSIONS PAID
PORTFOLIO COMMISSIONS TO PSI
- --------- ----------- ----------------
Conservative Balanced $ 2,192,303 $120,976
Flexible Managed 5,760,972 582,317
High Yield Bond 300 0
Stock Index 190,060 0
Equity Income 925,727 66,311
Equity 1,498,313 165,924
Prudential Jennison 217,853 0
Small Capitalization 146,850 0
Global 1,231,548 19,388
Natural Resources 627,390 6,608
----------- --------
Total $12,791,316 $961,524
For 1998, the percentage of the aggregate dollar amount of transactions effected
through PSI on a Portfolio basis was:
PERCENTAGE OF AGGREGATE DOLLAR AMOUNT
PORTFOLIO OF TRANSACTIONS EFFECTED THROUGH PSI
--------- -------------------------------------
Conservative Balanced 0.79%
Equity 10.47%
Equity Income 8.45%
Flexible Managed 1.53%
Natural Resources 0.49%
Prudential Jennison 6.27%
III. TAXATION OF THE FUND
The Fund intends to qualify as regulated investment company under Subchapter M
of the Internal Code of 1986, as amended (the "Code"). The Fund generally will
not be subject to federal income tax to the extent it distributes to
shareholders its net investment income and net capital gains in the manner
required by the Code. There is a 4% excise tax on the undistributed income of a
regulated investment company if that company fails to distribute the required
percentage of its net investment income and net capital gains. The Fund intends
to employ practices that will eliminate or minimize this excise tax.
Federal tax law requires that the assets underlying variable contracts,
including the Fund, meet certain diversification requirements. Each Portfolio is
required to diversify its investments each quarter so that no more than 55% of
the value of its assets is represented by any one investment, no more than 70%
is represented by any two investments, no more than 80% is represented by any
three investments, and no more than 90% is represented by any four investments.
Generally, securities of a single issuer are treated as one investment and
obligations of each U.S. Government agency and instrumentality (such as the
Government National Mortgage Association) are treated as issued by separate
issuers. In addition, any security issued, guaranteed or insured (to the extent
so guaranteed or insured) by the United States or an instrumentality of the U.S.
will be treated as a security issued by the U.S. Government or its
instrumentality, whichever is applicable.
Some foreign securities purchased by the Portfolios may be subject to foreign
taxes which could reduce the return on those securities.
This is a general and brief summary of the tax laws and regulations applicable
to the Fund. The law and regulations may change. You should consult a tax
adviser for complete information and advice.
24
<PAGE>
IV. CUSTODIANS
Investors Fiduciary Trust Company (IFTC), 127 West 10th Street, Kansas City, MO
64105-1716, is the custodian of the assets held by all the Portfolios except the
Global Portfolio. Pending Board approval, IFTC will become the custodian of the
assets of the Global Portfolio in the second quarter of 1999. IFTC is also the
custodian of the assets held in connection with repurchase agreements entered
into by the Portfolios, and is authorized to use the facilities of the
Depository Trust Company and the facilities of the book-entry system of the
Federal Reserve Bank with respect to securities held by these Portfolios. Brown
Brothers Harriman & Co., 40 Water Street, Boston, MA 02109, is currently the
custodian of the assets of the Global Portfolio. Each of the Fund's custodians
employs subcustodians, who were approved in accordance with regulations of the
SEC, for the purpose of providing custodial service for the Fund's foreign
assets held outside the United States.
V. EXPERTS
The financial statements included in this statement of additional information
and the FINANCIAL HIGHLIGHTS included in the Fund's prospectus for each of the
three years ended December 31, 1998 have been audited by PricewaterhouseCoopers
LLP, independent accountants, as stated in their report appearing herein. The
Fund is relying on PricewaterhouseCoopers' report which is given on their
authority as accounting and auditing experts. PricewaterhouseCoopers LLP's
principal business address is 1177 Avenue of the Americas, New York, NY 10036.
VI. LICENSES
As part of the Investment Advisory Agreement, Prudential has granted the Fund a
royalty-free, non-exclusive license to use the words "The Prudential" and
"Prudential" and its registered service mark of a rock representing the Rock of
Gibraltar. However, Prudential may terminate this license if Prudential or a
company controlled by it ceases to be the Fund's investment adviser. Prudential
may also terminate the license for any other reason upon 60 days' written
notice; but, in this event, the Investment Advisory Agreement shall also
terminate 120 days following receipt by the Fund of such notice, unless a
majority of the outstanding voting securities of the Fund vote to continue the
Agreement notwithstanding termination of the license.
The Fund is not sponsored, endorsed, sold or promoted by Standard & Poors
("S&P"). S&P makes no representation or warranty, express or implied, to
Contract owners or any member of the public regarding the advisability of
investing in securities generally or in the Fund particularly or the ability of
the S&P 500 Index or the S&P SmallCap 600 Index to track general stock market
performance. S&P's only relationship to the Fund is the licensing of certain
trademarks and trade names of S&P and the S&P 500 Index. The S&P 500 Index and
the S&P SmallCap 600 Index are determined, composed and calculated by S&P
without regard to the Fund, the Stock Index Portfolio or the Small
Capitalization Stock Portfolio. S&P has no obligation to take the needs of the
Fund or the Contract owners into consideration in determining, composing or
calculating the S&P 500 Index or the S&P SmallCap 600 Index. S&P is not
responsible for and has not participated in the determination of the prices and
amount of the Fund shares or the timing of the issuance or sale of those shares
or in the determination or calculation of the equation by which the shares are
to be converted into cash. S&P has no obligation or liability in connection with
the administration, marketing or trading of the Fund shares.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX, THE S&P SMALLCAP 600 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL
HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES
NO WARRANTY, EXPRESS OR IMPLIED AS TO RESULTS TO BE OBTAINED BY THE FUND,
CONTRACT OWNERS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500
INDEX, THE S&P SMALLCAP 600 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO
EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
S&P 500 INDEX, THE S&P SMALLCAP 600 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY
SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS),
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
25
<PAGE>
MANAGEMENT OF THE FUND
The names of all directors and major officers of the Fund and the principal
occupation of each during the last 5 years are shown below. Unless otherwise
stated, the address of each director and officer is 751 Broad Street, Newark,
New Jersey 07102-3777.
DIRECTORS OF THE FUND
E. MICHAEL CAULFIELD*, 52, DIRECTOR AND PRESIDENT -- Executive Vice President,
Prudential Financial Management since 1998; 1995 to 1998: Chief Executive
Officer of Prudential Investments; 1995: Chief Executive Officer, Prudential
Preferred Financial Services; prior to 1995: President, Prudential Preferred
Financial Services.
SAUL K. FENSTER, 66, DIRECTOR--President of New Jersey Institute of Technology.
Address: 323 Martin Luther King, Jr. Boulevard, Newark, New Jersey 07102.
W. SCOTT MCDONALD, JR., 62, DIRECTOR--Vice President, Kaludis Consulting Group
since 1997; 1995 to 1996: Principal, Scott McDonald & Associates; Prior to 1995:
Executive Vice President of Fairleigh Dickinson University. Address: 9 Zamrok
Way, Morristown, New Jersey 07960.
JOSEPH WEBER, 75, DIRECTOR--Vice President, Interclass (international corporate
learning). Address: 37 Beachmont Terrace, North Caldwell, New Jersey 07006.
OFFICERS WHO ARE NOT DIRECTORS
CAREN A. CUNNINGHAM, SECRETARY--Assistant General Counsel of Prudential
Investments Fund Management, LLC ("PIFM") Inc. since 1997; prior to 1997: Vice
President and Associate General Counsel of Smith Barney Mutual Fund Management
Inc.
GRACE C. TORRES, TREASURER AND PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER--First
Vice President of PIFM since 1996; prior to 1996: First Vice President of
Prudential Securities Inc.
STEPHEN M. UNGERMAN, ASSISTANT TREASURER--Vice President and Tax Director of
Prudential Investments since 1996; prior to 1996: First Vice President of
Prudential Mutual Fund Management, Inc.
* This member of the Board is an interested person of Prudential, its affiliates
or the Fund as defined in the 1940 Act. Certain actions of the Board, including
the annual continuance of the Investment Advisory Agreement between the Fund and
Prudential, must be approved by a majority of the members of the Board who are
not interested persons of Prudential, its affiliates or the Fund. Mr. Caulfield,
one of the four members of the Board, is an interested person of Prudential and
the Fund, as that term is defined in the 1940 Act, because he is an officer
and/or affiliated person of Prudential, the investment advisor to the Fund.
Messrs. Fenster, McDonald, and Weber are not interested persons of Prudential,
its affiliates or the Fund. However, Mr. Fenster is President of the New Jersey
Institute of Technology. Prudential has issued a group annuity contract to the
Institute and provides group life and group health insurance to its employees.
No director or officer of the Fund who is also an officer, director or employee
of Prudential or its affiliates is entitled to any remuneration from the Fund
for services as one of its directors or officers. A single annual retainer fee
of $35,000 is paid to each of the directors who is not an interested person of
the Fund for services rendered to five different Prudential mutual funds,
including this Fund. (The amount paid in respect of each fund is determined on
the basis of the funds' relative average net assets.) The directors who are not
interested persons of the Fund are also reimbursed for all expenses incurred in
connection with attendance at meetings.
26
<PAGE>
The following table sets forth the aggregate compensation paid by the Fund to
the Directors who are not affiliated with Prudential for the fiscal year ended
December 31, 1998 and the aggregate compensation paid to such Directors for
service on the Fund's Board and the Boards of any other investment companies
managed by Prudential for the calendar year ended December 31, 1998. Below are
listed all Directors who have served the Fund during its most recent fiscal
year.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR ESTIMATED TOTAL COMPENSATION
RETIREMENT BENEFITS ANNUAL RELATED TO FUNDS
AGGREGATE COMPENSATION ACCRUED AS PART OF BENEFITS UPON MANAGED BY
NAME AND POSITION FROM FUND FUND EXPENSES RETIREMENT PRUDENTIAL (**)
- ----------------- ---------------------- -------------------- -------------- -------------------
<S> <C> <C> <C> <C>
E. Michael Caulfield* -- --
Saul K. Fenster $14,400 None N/A $27,200 (5/19)
W. Scott McDonald $14,400 None N/A $27,200 (5/19))
Joseph Weber $14,400 None N/A $27,200 (5/19)
</TABLE>
- -----------
* Directors who are "interested" do not receive compensation from Prudential
(including the Fund).
** Indicates number of funds and portfolios (including the Fund) to which
aggregate compensation relates.
As of April 1, 1999, the Directors and officers of the Fund, as a group,
beneficially owned less than one percent of the outstanding shares of the Fund
capital stock.
27
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<S> <C>
ASSETS
Investments (amortized cost
$900,703,505)............................ $ 900,703,505
Cash....................................... 9,189
Receivable for capital stock sold.......... 13,716,886
Interest receivable........................ 7,056,910
--------------
Total Assets............................. 921,486,490
--------------
LIABILITIES
Payable to investment adviser.............. 912,487
Payable for capital stock repurchased...... 305,381
Accrued expenses........................... 76,634
--------------
Total Liabilities........................ 1,294,502
--------------
NET ASSETS................................... $ 920,191,988
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 920,192
Paid-in capital, in excess of par........ 919,271,796
--------------
Net assets, December 31, 1998.............. $ 920,191,988
--------------
--------------
Net asset value and redemption price per
share, 92,019,199 outstanding shares of
common stock (authorized 150,000,000
shares).................................. $ 10.00
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Interest................................... $ 45,708,673
---------------
EXPENSES
Investment advisory fee.................... 3,246,494
Accounting fees............................ 55,000
Shareholders' reports...................... 50,000
Audit fees and expenses.................... 8,500
Custodian expense.......................... 4,000
Directors' fees............................ 3,000
Legal fees................................. 800
Miscellaneous expenses..................... 4,800
---------------
Total expenses........................... 3,372,594
Less: custodian fee credit................. (7,309)
---------------
Net expenses............................. 3,365,285
---------------
NET INVESTMENT INCOME...................... 42,343,388
NET REALIZED GAIN ON INVESTMENTS............. 16,489
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 42,359,877
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 42,343,388 $ 35,214,538
Net realized gain on investments....................................................... 16,489 13,511
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 42,359,877 35,228,049
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (42,343,388) (35,214,538)
Distributions from net realized capital gains.......................................... (16,489) (13,511)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (42,359,877) (35,228,049)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [76,618,642 and 22,888,771 shares, respectively].................... 766,186,419 228,887,710
Capital stock issued in reinvestment of dividends and distributions [4,235,988 and
3,522,805 shares, respectively]....................................................... 42,359,877 35,228,049
Capital stock repurchased [(54,581,645) and (27,542,174) shares, respectively]......... (545,816,448) (275,421,740)
------------------ -------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS.............. 262,729,848 (11,305,981)
------------------ -------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS.................................................. 262,729,848 (11,305,981)
NET ASSETS:
Beginning of year...................................................................... 657,462,140 668,768,121
------------------ -------------------
End of year............................................................................ $ 920,191,988 $ 657,462,140
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A1
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
DIVERSIFIED BOND PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$1,093,359,976).......................... $1,107,781,086
Cash....................................... 384
Interest receivable........................ 15,816,923
Receivable for capital stock sold.......... 556,662
--------------
Total Assets............................. 1,124,155,055
--------------
LIABILITIES
Payable to investment adviser.............. 1,074,849
Payable for capital stock sold............. 398,036
Accrued expenses........................... 108,467
--------------
Total Liabilities........................ 1,581,352
--------------
NET ASSETS................................... $1,122,573,703
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 1,015,413
Paid-in capital, in excess of par........ 1,105,810,493
--------------
1,106,825,906
Accumulated net realized gains on
investments.............................. 1,326,687
Net unrealized appreciation on
investments.............................. 14,421,110
--------------
Net assets, December 31, 1998.............. $1,122,573,703
--------------
--------------
Net asset value and redemption price per
share, 101,541,324 outstanding shares of
common stock (authorized 150,000,000
shares).................................. $ 11.06
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Interest................................... $ 64,715,464
---------------
EXPENSES
Investment advisory fee.................... 3,782,116
Accounting fees............................ 86,000
Shareholders' reports...................... 85,000
Custodian expense.......................... 38,000
Audit fees................................. 12,000
Legal fees and expenses.................... 4,000
Directors' fees............................ 3,000
Miscellaneous expenses..................... 5,700
---------------
Total expenses........................... 4,015,816
Less custodian fee credit.................. (11,022)
---------------
Net expenses............................. 4,004,794
---------------
NET INVESTMENT INCOME........................ 60,710,670
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Investments.............................. 2,828,534
Futures.................................. (1,344,416)
---------------
1,484,118
---------------
Net change in unrealized appreciation on:
Investments.............................. 1,774,509
Futures contracts........................ 463,469
---------------
2,237,978
---------------
NET GAIN ON INVESTMENTS...................... 3,722,096
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 64,432,766
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 60,710,670 $ 53,531,495
Net realized gain on investments....................................................... 1,484,118 9,194,921
Net change in unrealized appreciation (depreciation) on investments.................... 2,237,978 (2,230,780)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 64,432,766 60,495,636
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (60,939,829) (55,359,529)
Distributions from net realized capital gains.......................................... (3,466,261) (9,016,752)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (64,406,090) (64,376,281)
------------------ -------------------
CAPITAL STOCK TRANSACTIONS:
Capital stock sold [29,994,210 and 11,468,488 shares, respectively].................... 334,707,738 127,691,138
Capital stock issued in investment of dividends and distributions [5,809,428 and
5,812,573 shares, respectively]....................................................... 64,406,090 64,376,281
Capital stock repurchased [(8,361,173) and (8,269,292) shares, respectively]........... (93,273,532) (91,696,624)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL STOCK TRANSACTIONS..................... 305,840,296 100,370,795
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 305,866,972 96,490,150
NET ASSETS:
Beginning of year...................................................................... 816,706,731 720,216,581
------------------ -------------------
End of year(a)......................................................................... $ 1,122,573,703 $ 816,706,731
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ -- $ 229,159
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A2
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
GOVERNMENT INCOME PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$418,498,213)............................ $ 437,087,379
Cash....................................... 189
Interest receivable........................ 6,848,403
Receivable for capital stock sold.......... 45,399
--------------
Total Assets............................. 443,981,370
--------------
LIABILITIES
Payable to investment adviser.............. 454,208
Payable for capital stock repurchased...... 255,294
Accrued expenses........................... 59,914
--------------
Total Liabilities........................ 769,416
--------------
NET ASSETS................................... $ 443,211,954
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 373,542
Paid-in capital, in excess of par........ 424,306,767
--------------
424,680,309
Accumulated net realized loss on
investments.............................. (57,521)
Net unrealized appreciation on
investments.............................. 18,589,166
--------------
Net assets, December 31, 1998.............. $ 443,211,954
--------------
--------------
Net asset value and redemption price per
share, 37,354,161 outstanding shares of
common stock (authorized 70,000,000
shares).................................. $ 11.87
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Interest................................... $ 26,712,834
---------------
EXPENSES
Investment advisory fee.................... 1,735,370
Accounting fees............................ 88,000
Shareholders' reports...................... 17,000
Custodian expense.......................... 10,000
Audit fees and expenses.................... 4,000
Directors' fees............................ 3,000
Legal fees................................. 1,000
Miscellaneous expenses..................... 5,101
---------------
Total expenses........................... 1,863,471
Less: custodian fee credit................. (1,207)
---------------
Net expenses............................. 1,862,264
---------------
NET INVESTMENT INCOME........................ 24,850,570
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Investments.............................. 7,423,525
Futures contracts........................ (296,471)
Short sales.............................. 9,938
---------------
7,136,992
---------------
Net change in unrealized appreciation
(depreciation) on:
Investments.............................. 5,320,808
Futures contracts........................ 73,032
---------------
5,393,840
---------------
NET GAIN ON INVESTMENTS...................... 12,530,832
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 37,381,402
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 24,850,570 $ 28,142,312
Net realized gain on investments....................................................... 7,136,992 722,778
Net change in unrealized appreciation on investments................................... 5,393,840 10,843,416
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 37,381,402 39,708,506
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (24,927,823) (28,098,226)
Distributions in excess of net investment income....................................... (64,303) --
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (24,992,126) (28,098,226)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [3,555,442 and 550,602 shares, respectively]........................ 42,216,640 6,261,175
Capital stock issued in reinvestment of dividends and distributions [2,122,659 and
2,484,757 shares, respectively]....................................................... 24,992,126 28,098,226
Capital stock repurchased [(5,610,053) and (8,707,219) shares, respectively]........... (66,029,147) (98,362,062)
------------------ -------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS.............. 1,179,619 (64,002,661)
------------------ -------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS.................................................. 13,568,895 (52,392,381)
NET ASSETS:
Beginning of year...................................................................... 429,643,059 482,035,440
------------------ -------------------
End of year(a)......................................................................... $ 443,211,954 $ 429,643,059
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ -- $ 77,253
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A3
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
ZERO COUPON BOND 2000 PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$38,323,550)............................. $ 40,251,420
Cash....................................... 976
Interest receivable........................ 16
Receivable for capital stock sold.......... 3,227
--------------
Total Assets............................. 40,255,639
--------------
LIABILITIES
Payable to investment adviser.............. 40,719
Accrued expenses........................... 33,412
Payable for capital stock repurchased...... 1,865
--------------
Total Liabilities........................ 75,996
--------------
NET ASSETS................................... $ 40,179,643
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 31,545
Paid-in capital, in excess of par........ 38,145,343
--------------
38,176,888
Accumulated net realized gains on
investments.............................. 74,885
Net unrealized appreciation on
investments.............................. 1,927,870
--------------
Net assets, December 31, 1998.............. $ 40,179,643
--------------
--------------
Net asset value and redemption price per
share, 3,154,487 outstanding shares of
common stock (authorized 15,000,000
shares).................................. $ 12.74
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Interest................................... $ 2,185,384
---------------
EXPENSES
Investment advisory fee.................... 159,341
Accounting fees............................ 72,000
Shareholders' reports...................... 3,000
Directors' fees............................ 3,000
Audit fees and expenses.................... 1,000
Legal fees................................. 1,000
Miscellaneous expenses..................... 7,650
---------------
Total expenses........................... 246,991
Less: custodian fee credit................. (56)
---------------
Net expenses............................. 246,935
---------------
NET INVESTMENT INCOME........................ 1,938,449
---------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on investments........... 613,189
Net change in unrealized appreciation on
investments.............................. 344,539
---------------
NET GAIN ON INVESTMENTS...................... 957,728
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 2,896,177
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 1,938,449 $ 1,923,763
Net realized gain on investments....................................................... 613,189 1,279,141
Net change in unrealized appreciation (depreciation) on investments.................... 344,539 (625,354)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 2,896,177 2,577,550
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (1,944,693) (1,925,903)
Distributions from net realized capital gains.......................................... (538,304) (1,630,037)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (2,482,997) (3,555,940)
------------------ -------------------
CAPITAL STOCK TRANSACTIONS:
Capital stock sold [585,974 and 1,163,699 shares, respectively]........................ 7,538,056 14,959,000
Capital stock issued in reinvestment of dividends and distributions [193,959 and
280,836 shares, respectively]......................................................... 2,482,997 3,555,940
Capital stock repurchased [(898,800) and (1,634,789) shares, respectively]............. (11,521,310) (21,009,000)
------------------ -------------------
NET DECREASE IN NET ASSETS RESULTING FROM CAPITAL STOCK TRANSACTIONS................... (1,500,257) (2,494,060)
------------------ -------------------
TOTAL DECREASE IN NET ASSETS............................................................. (1,087,077) (3,472,450)
NET ASSETS:
Beginning of year...................................................................... 41,266,720 44,739,170
------------------ -------------------
End of year(a)......................................................................... $ 40,179,643 $ 41,266,720
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ -- $ 6,244
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A4
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
ZERO COUPON BOND 2005 PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$40,070,501)............................. $ 45,584,111
Cash....................................... 892
Interest receivable........................ 9
Receivable for capital stock sold.......... 2,241
--------------
Total Assets............................. 45,587,253
--------------
LIABILITIES
Payable to investment adviser.............. 45,720
Accrued expenses........................... 27,638
Payable for capital stock repurchased...... 10,461
--------------
Total Liabilities........................ 83,819
--------------
NET ASSETS................................... $ 45,503,434
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 33,854
Paid-in capital, in excess of par........ 39,955,970
--------------
39,989,824
Net unrealized appreciation on
investments.............................. 5,513,610
--------------
Net assets, December 31, 1998.............. $ 45,503,434
--------------
--------------
Net asset value and redemption price per
share, 3,385,363 outstanding shares of
common stock (authorized 15,000,000
shares).................................. $ 13.44
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Interest................................... $ 2,244,812
---------------
EXPENSES
Investment advisory fee.................... 149,980
Accounting fees............................ 72,000
Shareholders' reports...................... 3,000
Directors' fees............................ 3,000
Custodian expense.......................... 1,000
Audit fees and expenses.................... 500
Miscellaneous expenses..................... 1,000
---------------
Total expenses........................... 230,480
Less: custodian fee credit................. (74)
---------------
Net expenses............................. 230,406
---------------
NET INVESTMENT INCOME........................ 2,014,406
---------------
NET CHANGE IN UNREALIZED APPRECIATION ON
INVESTMENTS.................................. 2,497,521
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 4,511,927
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 2,014,406 $ 1,763,656
Net realized gain on investments....................................................... -- 685,044
Net change in unrealized appreciation on investments................................... 2,497,521 1,108,451
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 4,511,927 3,557,151
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (2,019,716) (1,819,286)
Distributions from net realized capital gains.......................................... (38,745) (646,299)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (2,058,461) (2,465,585)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [960,834 and 1,232,187 shares, respectively]........................ 12,526,521 14,912,002
Capital stock issued in reinvestment of dividends and distributions [156,052 and
198,605 shares, respectively]......................................................... 2,058,461 2,465,585
Capital stock repurchased [(177,614) and (1,091,286) shares, respectively]............. (2,345,896) (13,473,001)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 12,239,086 3,904,586
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 14,692,552 4,996,152
NET ASSETS:
Beginning of year...................................................................... 30,810,882 25,814,730
------------------ -------------------
End of year (a)........................................................................ $ 45,503,434 $ 30,810,882
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ -- $ 4,703
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A5
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
CONSERVATIVE BALANCED PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$4,496,058,447).......................... $4,762,474,785
Cash....................................... 845,314
Interest and dividends receivable.......... 42,070,945
Receivable for investments sold............ 324,115
Due from broker -- variation margin........ 85,990
Receivable for capital stock sold.......... 263,037
--------------
Total Assets............................. 4,806,064,186
--------------
LIABILITIES
Payable to investment adviser.............. 6,472,779
Payable for capital stock repurchased...... 1,730,453
Payable for investments purchased.......... 1,518,060
Accrued expenses........................... 383,124
--------------
Total Liabilities........................ 10,104,416
--------------
NET ASSETS................................... $4,795,959,770
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 3,181,043
Paid-in capital, in excess of par........ 4,507,920,747
--------------
4,511,101,790
Accumulated net realized gains on
investments.............................. 15,961,929
Net unrealized appreciation on
investments.............................. 268,896,051
--------------
Net assets, December 31, 1998.............. $4,795,959,770
--------------
--------------
Net asset value and redemption price per
share, 318,104,322 outstanding shares of
common stock (authorized 350,000,000
shares).................................. $ 15.08
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Dividends (net of $227,089 foreign
withholding tax)......................... $ 24,862,659
Interest................................... 202,415,229
---------------
227,277,888
---------------
EXPENSES
Investment advisory fee.................... 26,224,569
Shareholders' reports...................... 335,000
Accounting fees............................ 270,000
Custodian expense.......................... 210,000
Audit fees................................. 45,000
Legal fees................................. 4,000
Directors' fees............................ 3,000
Miscellaneous expenses..................... 22,800
---------------
Total expenses........................... 27,114,369
Less: Custodian fee credit................. (37,735)
---------------
Net expenses............................. 27,076,634
---------------
NET INVESTMENT INCOME........................ 200,201,254
---------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on:
Investments.............................. 252,074,816
Futures contracts........................ 11,004,301
---------------
263,079,117
---------------
Net change in unrealized appreciation on:
Investments.............................. 62,217,963
Futures contracts........................ 4,254,938
---------------
66,472,901
---------------
NET GAIN ON INVESTMENTS...................... 329,552,018
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 529,753,272
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 200,201,254 $ 209,904,550
Net realized gain on investments....................................................... 263,079,117 525,175,186
Net change in unrealized appreciation (depreciation) on investments.................... 66,472,901 (148,830,270)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 529,753,272 586,249,466
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (201,150,300) (209,004,256)
Distributions from net realized capital gains.......................................... (284,059,981) (518,358,296)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (485,210,281) (727,362,552)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [4,155,780 and 4,585,160 shares, respectively]...................... 64,306,807 74,015,405
Capital stock issued in reinvestment of dividends and distributions [32,017,520 and
47,801,252 shares, respectively]...................................................... 485,210,281 727,362,552
Capital stock repurchased [(34,980,138) and (24,112,955) shares, respectively]......... (542,332,348) (394,841,365)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 7,184,740 406,536,592
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 51,727,731 265,423,506
NET ASSETS:
Beginning of year...................................................................... 4,744,232,039 4,478,808,533
------------------ -------------------
End of year (a)........................................................................ $ 4,795,959,770 $ 4,744,232,039
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ -- $ 949,046
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A6
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
FLEXIBLE MANAGED PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$5,149,958,034).......................... $5,386,550,009
Cash....................................... 1,341
Interest and dividends receivable.......... 33,290,998
Due from broker -- variation margin........ 809,059
Receivable for investments sold............ 619,824
Receivable for capital stock sold.......... 232,095
--------------
Total Assets............................. 5,421,503,326
--------------
LIABILITIES
Payable to investment adviser.............. 7,882,895
Payable for capital stock repurchased...... 1,607,590
Payable for investments purchased.......... 1,595,867
Accrued expenses........................... 435,586
--------------
Total Liabilities........................ 11,521,938
--------------
NET ASSETS................................... $5,409,981,388
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 3,267,182
Paid-in capital, in excess of par........ 5,110,844,004
--------------
5,114,111,186
Undistributed net investment income........ 170,556
Accumulated net realized gains on
investments.............................. 43,985,733
Net unrealized appreciation on
investments.............................. 251,713,913
--------------
Net assets, December 31, 1998.............. $5,409,981,388
--------------
--------------
Net asset value and redemption price per
share, 326,718,180 outstanding shares of
common stock (authorized 350,000,000
shares).................................. $ 16.56
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Dividends (net of $614,599 foreign
withholding tax)......................... $ 41,517,034
Interest................................... 170,024,349
---------------
211,541,383
---------------
EXPENSES
Investment advisory fee.................... 33,049,940
Shareholders' reports...................... 415,000
Accounting fees............................ 242,000
Custodian expense.......................... 234,000
Audit fees and expenses.................... 57,000
Directors' fees............................ 3,000
Miscellaneous expenses..................... 26,800
---------------
Total expenses........................... 34,027,740
Less: custodian fee credit................. (74,445)
---------------
Net expenses............................. 33,953,295
---------------
NET INVESTMENT INCOME........................ 177,588,088
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain on:
Investments.............................. 471,749,472
Futures contracts........................ 42,134,442
---------------
513,883,914
---------------
Net change in unrealized appreciation on:
Investments.............................. (183,829,519)
Futures contracts........................ 16,684,360
---------------
(167,145,159)
---------------
NET GAIN ON INVESTMENTS...................... 346,738,755
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 524,326,843
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 177,588,088 $ 160,063,955
Net realized gain on investments....................................................... 513,883,914 867,691,914
Net change in unrealized appreciation on investments................................... (167,145,159) (163,603,096)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 524,326,843 864,152,773
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (178,186,396) (159,343,911)
Distributions from net realized capital gains.......................................... (552,345,875) (823,214,223)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (730,532,271) (982,558,134)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [4,188,120 and 4,859,580 shares, respectively]...................... 74,668,669 92,765,042
Capital stock issued in reinvestment of dividends and distributions [43,615,212 and
56,453,647 shares, respectively]...................................................... 730,532,271 982,558,134
Capital stock repurchased [(38,796,213) and (18,791,325) shares, respectively]......... (679,156,218) (363,698,408)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 126,044,722 711,624,768
------------------ -------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS.................................................. (80,160,706) 593,219,407
NET ASSETS:
Beginning of year...................................................................... 5,490,142,094 4,896,922,687
------------------ -------------------
End of year (a)........................................................................ $ 5,409,981,388 $ 5,490,142,094
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ 170,556 $ 768,864
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A7
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
HIGH YIELD BOND PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$854,146,463)............................ $ 774,702,884
Cash....................................... 584
Interest and dividends receivable.......... 16,618,373
Receivable for investments sold............ 227,009
--------------
Total Assets............................. 791,548,850
--------------
LIABILITIES
Payable to investment adviser.............. 1,042,407
Payable for investments purchased.......... 814,187
Payable for capital stock repurchased...... 293,998
Accrued expenses........................... 77,287
--------------
Total Liabilities........................ 2,227,879
--------------
NET ASSETS................................... $ 789,320,971
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 1,095,439
Paid-in capital, in excess of par........ 873,911,034
--------------
875,006,473
Undistributed net investment income........ 2,179,668
Accumulated net realized loss on
investments.............................. (8,421,591)
Net unrealized depreciation on
investments.............................. (79,443,579)
--------------
Net assets, December 31, 1998.............. $ 789,320,971
--------------
--------------
Net asset value and redemption price per
share, 109,543,936 outstanding shares of
common stock (authorized 125,000,000
shares).................................. $ 7.21
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Interest................................... $ 69,885,220
Dividends.................................. 5,241,487
---------------
75,126,707
---------------
EXPENSES
Investment advisory fee.................... 3,782,134
Accounting fees............................ 145,000
Shareholders' reports...................... 70,000
Custodian expense.......................... 12,000
Audit fees................................. 9,000
Directors' fees............................ 3,000
Legal fees................................. 1,000
Miscellaneous expenses..................... 5,200
---------------
Total expenses........................... 4,027,334
Less: custodian fee credit................. (60,989)
---------------
Net expenses............................. 3,966,345
---------------
NET INVESTMENT INCOME........................ 71,160,362
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized loss on investments........... (2,031,112)
Net change in unrealized depreciation on
investments.............................. (90,371,730)
---------------
NET LOSS ON INVESTMENTS...................... (92,402,842)
---------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ (21,242,480)
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 71,160,362 $ 47,675,767
Net realized gain (loss) on investments................................................ (2,031,112) 15,354,840
Net change in unrealized depreciation on investments................................... (90,371,730) (144,633)
------------------ -------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS........................ (21,242,480) 62,885,974
------------------ -------------------
DIVIDENDS
Dividends from net investment income................................................... (69,715,948) (47,277,841)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [42,524,544 and 18,324,520 shares, respectively].................... 336,104,252 149,154,244
Capital stock issued in reinvestment of dividends and distributions [9,210,712 and
5,847,594 shares, respectively]....................................................... 69,715,948 47,277,841
Capital stock repurchased [(12,010,426) and (9,372,701) shares, respectively].......... (94,215,879) (76,232,015)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 311,604,321 120,200,070
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 220,645,893 135,808,203
NET ASSETS:
Beginning of year...................................................................... 568,675,078 432,866,875
------------------ -------------------
End of year (a)........................................................................ $ 789,320,971 $ 568,675,078
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ 2,179,668 $ 735,254
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A8
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
STOCK INDEX PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$1,918,971,738).......................... $3,544,514,168
Cash....................................... 509
Receivable for capital stock sold.......... 6,715,386
Interest and dividends receivable.......... 3,677,152
Receivable for investments sold............ 551,105
Due from broker -- variation margin........ 246,890
--------------
Total Assets............................. 3,555,705,210
--------------
LIABILITIES
Payable for investments purchased.......... 3,914,541
Payable to investment adviser.............. 2,807,611
Payable for capital stock repurchased...... 630,555
Accrued expenses........................... 263,513
--------------
Total Liabilities........................ 7,616,220
--------------
NET ASSETS................................... $3,548,088,990
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 940,173
Paid-in capital, in excess of par........ 1,907,227,882
--------------
1,908,168,055
Accumulated net realized gain on
investments.............................. 9,773,130
Net unrealized appreciation on
investments.............................. 1,630,147,805
--------------
Net assets, December 31, 1998.............. $3,548,088,990
--------------
--------------
Net asset value and redemption price per
share, 94,017,271 outstanding shares of
common stock (authorized 125,000,000
shares).................................. $ 37.74
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Dividends (net of $250,942 foreign
withholding tax)......................... $ 42,313,155
Interest................................... 5,376,488
---------------
47,689,643
---------------
EXPENSES
Investment advisory fee.................... 10,279,903
Shareholders' reports...................... 335,000
Custodian expense.......................... 142,000
Accounting fees............................ 107,000
Audit fees and expenses.................... 40,000
Directors' fees............................ 3,000
Miscellaneous expenses..................... 14,000
---------------
Total expenses........................... 10,920,903
Less: custodian fee credit................. (2,914)
---------------
Net expenses............................. 10,917,989
---------------
NET INVESTMENT INCOME........................ 36,771,654
---------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on:
Investments.............................. 52,786,455
Futures contracts........................ 4,678,758
---------------
57,465,213
---------------
Net change in unrealized appreciation on:
Investments.............................. 640,594,646
Futures contracts........................ 4,097,025
---------------
644,691,671
---------------
NET GAIN ON INVESTMENTS...................... 702,156,884
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 738,928,538
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 36,771,654 $ 31,459,576
Net realized gain on investments....................................................... 57,465,213 74,021,385
Net change in unrealized appreciation on investments................................... 644,691,671 451,562,975
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 738,928,538 557,043,936
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (37,075,916) (31,155,314)
Distributions from net realized capital gains.......................................... (53,566,202) (67,389,823)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (90,642,118) (98,545,137)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [21,945,962 and 17,248,797 shares, respectively].................... 739,810,425 484,303,403
Capital stock issued in reinvestment of dividends and distributions [2,541,175 and
3,309,920 shares, respectively]....................................................... 90,642,118 98,545,137
Capital stock repurchased [(11,483,263) and (6,144,732) shares, respectively].......... (378,841,199) (174,536,420)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 451,611,344 408,312,120
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 1,099,897,764 866,810,919
NET ASSETS:
Beginning of year...................................................................... 2,448,191,226 1,581,380,307
------------------ -------------------
End of year (a)........................................................................ $ 3,548,088,990 $ 2,448,191,226
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ -- $ 304,262
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A9
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
EQUITY INCOME PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$1,945,300,102).......................... $2,185,867,351
Cash....................................... 5,397
Interest and dividends receivable.......... 6,371,174
Receivable for investments sold............ 3,349,741
Receivable for capital stock sold.......... 162,523
Receivable for securities lending, net..... 5,590
--------------
Total Assets............................. 2,195,761,776
--------------
LIABILITIES
Collateral for securities on loan.......... 49,079,500
Payable to investment adviser.............. 2,120,498
Payable for capital stock repurchased...... 2,050,465
Accrued expenses........................... 190,498
--------------
Total Liabilities........................ 53,440,961
--------------
NET ASSETS................................... $2,142,320,815
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 1,069,398
Paid-in capital, in excess of par........ 1,863,673,204
--------------
1,864,742,602
Undistributed net investment income........ 1,987,561
Accumulated net realized gains on
investments.............................. 35,023,403
Net unrealized appreciation on
investments.............................. 240,567,249
--------------
Net assets, December 31, 1998.............. $2,142,320,815
--------------
--------------
Net asset value and redemption price per
share, 106,939,774 outstanding shares of
common stock (authorized 150,000,000
shares).................................. $ 20.03
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Dividends (net of $907,584 foreign
withholding tax)......................... $ 60,602,958
Interest................................... 4,893,474
Income from securities loaned, net......... 14,493
---------------
65,510,925
---------------
EXPENSES
Investment advisory fee.................... 8,830,161
Shareholders' reports...................... 222,000
Custodian expense.......................... 110,000
Accounting fees............................ 100,000
Audit fees................................. 26,300
Directors' fees............................ 3,000
Legal fees................................. 100
Miscellaneous expenses..................... 11,800
---------------
Total expenses........................... 9,303,361
Less: custodian fee credit................. (4,923)
---------------
Net expenses............................. 9,298,438
---------------
NET INVESTMENT INCOME........................ 56,212,487
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain on investments........... 129,490,381
Net change in unrealized appreciation on
investments.............................. (258,928,963)
---------------
NET LOSS ON INVESTMENTS...................... (129,438,582)
---------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ (73,226,095)
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 56,212,487 $ 47,850,376
Net realized gain on investments....................................................... 129,490,381 209,283,667
Net change in unrealized appreciation on investments................................... (258,928,963) 251,369,014
------------------ -------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS........................ (73,226,095) 508,503,057
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (58,670,537) (43,537,704)
Distributions from net realized capital gains.......................................... (129,895,659) (179,961,221)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (188,566,196) (223,498,925)
------------------ -------------------
CAPITAL STOCK TRANSACTIONS:
Capital stock sold [17,968,538 and 11,266,195 shares, respectively].................... 414,994,376 253,831,217
Capital stock issued in reinvestment of dividends and distributions [8,899,832 and
10,153,692 shares, respectively]...................................................... 188,566,196 223,498,925
Capital stock repurchased [(10,593,789) and (4,416,916) shares, respectively].......... (229,203,355) (96,053,000)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL STOCK TRANSACTIONS................... 374,357,217 381,277,142
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 112,564,926 666,281,274
NET ASSETS:
Beginning of year...................................................................... 2,029,755,889 1,363,474,615
------------------ -------------------
End of year (a)........................................................................ $ 2,142,320,815 $ 2,029,755,889
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ 1,987,561 $ 4,445,611
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A10
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
EQUITY PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$4,767,976,521).......................... $6,250,695,797
Interest and dividends receivable.......... 12,414,416
Receivable for capital stock sold.......... 128,574
--------------
Total Assets............................. 6,263,238,787
--------------
LIABILITIES
Bank overdraft............................. 319
Payable for capital stock repurchased...... 8,881,940
Payable to investment adviser.............. 6,806,202
Accrued expenses........................... 503,692
--------------
Total Liabilities........................ 16,192,153
--------------
NET ASSETS................................... $6,247,046,634
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 2,107,865
Paid-in capital, in excess of par........ 4,649,464,292
--------------
4,651,572,157
Undistributed net investment income........ 109,952
Accumulated net realized gains on
investments.............................. 112,645,380
Net unrealized appreciation on investments
and foreign currencies................... 1,482,719,145
--------------
Net assets, December 31, 1998.............. $6,247,046,634
--------------
--------------
Net asset value and redemption price per
share, 210,786,528 outstanding shares of
common stock (authorized 250,000,000
shares).................................. $ 29.64
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Dividends (net of $1,413,190 foreign
withholding tax)......................... $ 92,432,542
Interest................................... 51,526,104
---------------
143,958,646
---------------
EXPENSES
Investment advisory fee.................... 28,389,539
Shareholders' reports...................... 492,000
Custodian expense.......................... 380,000
Accounting fees............................ 122,000
Audit fees and expenses.................... 85,000
Directors' fees............................ 3,000
Miscellaneous expenses..................... 30,800
---------------
Total expenses........................... 29,502,339
Less: custodian fee credit................. (23,575)
---------------
Net expenses............................. 29,478,764
---------------
NET INVESTMENT INCOME........................ 114,479,882
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain on:
Investments.............................. 766,376,440
Foreign currencies....................... 105,151
---------------
766,481,591
---------------
Net change in unrealized appreciation
(depreciation) on:
Investments.............................. (344,088,795)
Foreign currencies....................... 13,886
---------------
(344,074,909)
---------------
NET GAIN ON INVESTMENTS AND FOREIGN
CURRENCIES................................... 422,406,682
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 536,886,564
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 114,479,882 $ 125,326,195
Net realized gain on investments and foreign currencies................................ 766,481,591 320,958,795
Net change in unrealized appreciation (depreciation) on investments and foreign
currencies............................................................................ (344,074,909) 744,788,889
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 536,886,564 1,191,073,879
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (115,394,083) (127,895,464)
Distributions from net realized capital gains.......................................... (684,800,016) (322,171,256)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (800,194,099) (450,066,720)
------------------ -------------------
CAPITAL STOCK TRANSACTIONS:
Capital stock sold [12,676,785 and 12,471,611 shares, respectively].................... 418,548,498 381,942,219
Capital stock issued in reinvestment of dividends and distributions [27,106,415 and
14,665,432 shares, respectively]...................................................... 800,194,099 450,066,720
Capital stock repurchased [(22,886,073) and (11,771,942) shares, respectively]......... (732,368,459) (363,005,143)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL STOCK TRANSACTIONS................... 486,374,138 469,003,796
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 223,066,603 1,210,010,955
NET ASSETS:
Beginning of year...................................................................... 6,023,980,031 4,813,969,076
------------------ -------------------
End of year (a)........................................................................ $ 6,247,046,634 $ 6,023,980,031
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ 109,952 $ 919,002
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A11
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
PRUDENTIAL JENNISON PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$886,742,260)............................ $1,204,377,523
Receivable for capital stock sold.......... 2,113,426
Receivable for investments sold............ 1,677,844
Interest and dividends receivable.......... 517,449
--------------
Total Assets............................. 1,208,686,242
--------------
LIABILITIES
Payable for investments purchased.......... 1,812,726
Payable to investment adviser.............. 1,459,546
Accrued expenses........................... 96,554
Payable for capital stock repurchased...... 6,588,081
--------------
Total Liabilities........................ 9,956,907
--------------
NET ASSETS................................... $1,198,729,335
--------------
--------------
Net assets were comprised of:
Common stock, at $.01 par value.......... $ 501,398
Paid-in capital, in excess of par........ 870,373,753
--------------
870,875,151
Accumulated net realized gains on
investments.............................. 10,218,921
Net unrealized appreciation on
investments.............................. 317,635,263
--------------
Net assets, December 31, 1998.............. $1,198,729,335
--------------
--------------
Net asset value and redemption price per
share, 50,139,795 outstanding shares of
common stock (authorized 75,000,000
shares).................................. $ 23.91
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Dividends (net of $38,690 foreign
withholding tax)......................... $ 5,032,093
Interest................................... 1,399,831
---------------
6,431,924
---------------
EXPENSES
Investment advisory fee.................... 4,662,187
Shareholders' reports...................... 125,000
Accounting fees............................ 81,000
Custodian expense.......................... 20,000
Audit fees and expenses.................... 14,000
Directors' fees............................ 3,000
Legal fees................................. 1,000
Miscellaneous expenses..................... 5,200
---------------
Total expenses........................... 4,911,387
Less: custodian fee credit................. (7,533)
---------------
Net expenses............................. 4,903,854
---------------
NET INVESTMENT INCOME........................ 1,528,070
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain on investments........... 24,429,896
Net change in unrealized appreciation on
investments.............................. 237,742,766
---------------
NET GAIN ON INVESTMENTS...................... 262,172,662
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 263,700,732
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 1,528,070 $ 871,876
Net realized gain on investments....................................................... 24,429,896 33,000,406
Net change in unrealized appreciation on investments................................... 237,742,766 54,234,653
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 263,700,732 88,106,935
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (1,629,850) (832,883)
Distributions from net realized capital gains.......................................... (17,069,906) (27,048,964)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (18,699,756) (27,881,847)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [30,113,536 and 12,593,772 shares, respectively].................... 619,908,140 218,245,522
Capital stock issued in reinvestment of dividends and distributions [849,914 and
1,607,079 shares, respectively]....................................................... 18,699,756 27,881,847
Capital stock repurchased [(8,792,029) and (1,044,246) shares, respectively]........... (180,816,656) (17,547,320)
Initial capitalization repurchased [-0- and (1,004,760) shares, respectively].......... -- (19,411,166)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 457,791,240 209,168,883
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 702,792,216 269,393,971
NET ASSETS:
Beginning of year...................................................................... 495,937,119 226,543,148
------------------ -------------------
End of year(a)......................................................................... $ 1,198,729,335 $ 495,937,119
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ -- $ 101,780
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A12
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
SMALL CAPITALIZATION STOCK PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$345,829,551)............................ $ 359,367,407
Cash....................................... 4,712
Receivable for capital stock sold.......... 685,591
Due from broker -- variation margin........ 613,350
Interest and dividends receivable.......... 203,638
--------------
Total Assets............................. 360,874,698
--------------
LIABILITIES
Payable to investment adviser.............. 310,730
Accrued expenses........................... 162,126
Payable for capital stock repurchased...... 12,131
Payable for investments purchased.......... 4,073
--------------
Total Liabilities........................ 489,060
--------------
NET ASSETS................................... $ 360,385,638
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 244,980
Paid-in capital, in excess of par........ 340,517,863
--------------
340,762,843
Accumulated net realized gains on
investments.............................. 4,054,989
Net unrealized appreciation on
investments.............................. 15,567,806
--------------
Net assets, December 31, 1998.............. $ 360,385,638
--------------
--------------
Net asset value and redemption price per
share, 24,498,003 outstanding shares of
common stock (authorized 50,000,000
shares).................................. $ 14.71
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Dividends (net of $719 foreign withholding
tax)..................................... $ 2,484,688
Interest................................... 750,247
---------------
3,234,935
---------------
EXPENSES
Investment advisory fee.................... 1,243,051
Accounting fees............................ 140,000
Shareholders' reports...................... 44,000
Custodian expense.......................... 10,000
Audit fees................................. 4,000
Directors' fees............................ 3,000
Legal fees................................. 1,000
Miscellaneous expenses..................... 30,401
---------------
Total expenses........................... 1,475,452
Less: custodian fee credit................. (4,956)
---------------
Net expenses............................. 1,470,496
---------------
NET INVESTMENT INCOME........................ 1,764,439
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain on:
Investments.............................. 21,360,757
Futures contracts........................ 1,513,163
---------------
22,873,920
---------------
Net change in unrealized appreciation
(depreciation) on:
Investments.............................. (26,519,869)
Futures contracts........................ 1,702,000
---------------
(24,817,869)
---------------
NET LOSS ON INVESTMENTS...................... (1,943,949)
---------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ (179,510)
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 1,764,439 $ 1,507,646
Net realized gain on investments....................................................... 22,873,920 21,586,971
Net change in unrealized appreciation (depreciation) on investments.................... (24,817,869) 25,139,005
------------------ -------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS........................ (179,510) 48,233,622
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (1,831,259) (1,440,826)
Distributions from net realized capital gains.......................................... (21,572,922) (19,469,768)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (23,404,181) (20,910,594)
------------------ -------------------
CAPITAL STOCK TRANSACTIONS:
Capital stock sold [7,528,693 and 8,135,914 shares, respectively]...................... 113,481,559 128,260,999
Capital stock issued in reinvestment of dividends and distributions [1,637,984 and
1,354,381 shares, respectively]....................................................... 23,404,181 20,910,594
Capital stock repurchased [(2,891,548) and (941,823) shares, respectively]............. (43,226,325) (15,480,999)
Initial capitalization repurchased [-0- and (1,049,184) shares, respectively].......... -- (18,602,031)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 93,659,415 115,088,563
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 70,075,724 142,411,591
NET ASSETS:
Beginning of year...................................................................... 290,309,914 147,898,323
------------------ -------------------
End of year (a)........................................................................ $ 360,385,638 $ 290,309,914
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ -- $ 66,820
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A13
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
GLOBAL PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$589,592,454)............................ $ 831,023,491
Foreign currency, at value (cost:
$17,499,873)............................. 17,371,833
Receivable for investments sold............ 4,254,046
Dividends and interest receivable.......... 552,684
Receivable for capital stock sold.......... 40,732
--------------
Total Assets............................. 853,242,786
--------------
LIABILITIES
Forward currency contracts -- amount
payable to counterparties................ 3,828,254
Payable for investments purchased.......... 2,897,332
Payable to investment adviser.............. 1,418,703
Payable for capital stock repurchased...... 327,774
Accrued expenses and other liabilities..... 226,668
Bank overdraft............................. 2,096
--------------
Total Liabilities........................ 8,700,827
--------------
NET ASSETS................................... $ 844,541,959
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 399,149
Paid-in capital, in excess of par........ 610,100,715
--------------
610,499,864
Distributions in excess of net investment
income................................... (8,644,128)
Accumulated net realized gains on
investments.............................. 5,209,641
Net unrealized appreciation on investments
and foreign currencies................... 237,476,582
--------------
Net assets, December 31, 1998.............. $ 844,541,959
--------------
--------------
Net asset value and redemption price per
share of 39,914,867 outstanding shares of
common stock (authorized 75,000,000
shares).................................. $ 21.16
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
December 31, 1998
<S> <C>
INVESTMENT INCOME
Dividends (net of $541,282 foreign
withholding tax)......................... $ 6,673,826
Interest................................... 1,452,097
---------------
8,125,923
---------------
EXPENSES
Investment advisory fee.................... 5,342,945
Custodian expense.......................... 446,000
Accounting fees............................ 244,000
Shareholders' reports...................... 37,000
Audit fees and expenses.................... 6,000
Directors' fees............................ 3,000
Miscellaneous expenses..................... 3,761
---------------
Total expenses........................... 6,082,706
---------------
NET INVESTMENT INCOME........................ 2,043,217
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain on:......................
Investments.............................. 40,877,802
Foreign currencies....................... 219,287
---------------
41,097,089
---------------
Net change in unrealized appreciation
(depreciation) on:
Investments.............................. 125,305,318
Foreign currencies....................... (4,159,978)
---------------
121,145,340
---------------
NET GAIN ON INVESTMENTS AND FOREIGN
CURRENCIES................................... 162,242,429
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 164,285,646
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 2,043,217 $ 3,060,617
Net realized gain on investments and foreign currencies................................ 41,097,089 31,027,057
Net change in unrealized appreciation on investments and foreign currencies............ 121,145,340 5,107,643
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 164,285,646 39,195,317
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (5,559,015) (4,377,947)
Distributions in excess of net investment income....................................... (4,481,373) (3,434,778)
Distributions from net realized capital gains.......................................... (35,181,433) (30,337,530)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (45,221,821) (38,150,255)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [9,626,530 and 5,853,862 shares, respectively]...................... 191,039,953 111,692,563
Capital stock issued in reinvestment of dividends and distributions [2,231,010 and
2,115,902 shares, respectively]....................................................... 45,221,821 38,150,255
Capital stock repurchased [(7,562,638) and (4,869,453) shares, respectively]........... (149,184,992) (93,116,567)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 87,076,782 56,726,251
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 206,140,607 57,771,313
NET ASSETS:
Beginning of year...................................................................... 638,401,352 580,630,039
------------------ -------------------
End of year (a)........................................................................ $ 844,541,959 $ 638,401,352
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ -- $ 3,515,798
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A14
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
NATURAL RESOURCES PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$306,169,860)............................ $ 237,086,009
Cash....................................... 863
Receivable for investments sold............ 237,530
Interest and dividends receivable.......... 225,221
Receivable for capital stock sold.......... 258
--------------
Total Assets............................. 237,549,881
--------------
LIABILITIES
Payable for capital stock repurchased...... 311,628
Payable to investment adviser.............. 284,388
Accrued expenses........................... 55,227
--------------
Total Liabilities........................ 651,243
--------------
NET ASSETS................................... $ 236,898,638
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 197,680
Paid-in capital, in excess of par........ 312,662,614
--------------
312,860,294
Distributions in excess of net investment
income................................... (47,890)
Accumulated net realized loss on
investments.............................. (6,830,155)
Net unrealized depreciation on investments
and foreign currencies................... (69,083,611)
--------------
Net assets, December 31, 1998.............. $ 236,898,638
--------------
--------------
Net asset value and redemption price per
share, 19,767,981 outstanding shares of
common stock (authorized 50,000,000
shares).................................. $ 11.98
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Dividends (net of $167,262 foreign
withholding tax)......................... $ 3,161,846
Interest................................... 222,375
---------------
3,384,221
---------------
EXPENSES
Investment advisory fee.................... 1,349,743
Accounting fees............................ 82,000
Custodian expense.......................... 45,000
Shareholders' reports...................... 5,000
Directors' fees............................ 3,000
Audit fees and expenses.................... 1,000
Miscellaneous expenses..................... 3,200
---------------
Total expenses........................... 1,488,943
Less: custodian fee credit................. (798)
---------------
Net expenses............................. 1,488,145
---------------
NET INVESTMENT INCOME........................ 1,896,076
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain (loss) on:
Investments.............................. (7,027,034)
Written options.......................... 222,682
Foreign currencies....................... (107,816)
---------------
(6,912,168)
---------------
Net change in unrealized appreciation
(depreciation) on:
Investments.............................. (47,046,023)
Foreign currencies....................... 1,611
---------------
(47,044,412)
---------------
NET LOSS ON INVESTMENTS AND FOREIGN
CURRENCIES................................... (53,956,580)
---------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ (52,060,504)
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 1,896,076 $ 2,648,464
Net realized gain (loss) on investments, written options and foreign currencies........ (6,912,168) 50,655,442
Net change in unrealized depreciation on investments and foreign currencies............ (47,044,412) (100,227,746)
------------------ -------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... (52,060,504) (46,923,840)
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (2,234,825) (2,203,301)
Distributions from net realized capital gains.......................................... (16,376,612) (46,135,203)
Tax return of capital distributions.................................................... (222,068) --
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (18,833,505) (48,338,504)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [332,632 and 1,537,840 shares, respectively]........................ 4,416,142 30,041,015
Capital stock issued in reinvestment of dividends and distributions [1,190,078 and
3,086,491 shares, respectively]....................................................... 18,833,505 48,338,504
Capital stock repurchased [(5,235,801) and (3,322,673) shares, respectively]........... (73,408,413) (63,551,000)
------------------ -------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS.............. (50,158,766) 14,828,519
------------------ -------------------
TOTAL DECREASE IN NET ASSETS............................................................. (121,052,775) (80,433,825)
NET ASSETS:
Beginning of year...................................................................... 357,951,413 438,385,238
------------------ -------------------
End of year (a)........................................................................ $ 236,898,638 $ 357,951,413
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ -- $ 633,307
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A15
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
SCHEDULE OF INVESTMENTS
MONEY MARKET PORTFOLIO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
INTEREST MATURITY AMOUNT VALUE
RATE DATE (000) (NOTE 2)
------ -------- --------- --------------
<S> <C> <C> <C> <C>
BANK NOTES -- 6.0%
FCC National Bank (a)........................... 5.19% 01/15/99 $ 5,000 $ 5,000,000
Key Bank, N.A. (a).............................. 5.33% 01/13/99 1,000 1,000,018
Key Bank, N.A. (a).............................. 4.67% 01/29/99 3,000 2,999,878
Key Bank, N.A. (a).............................. 4.65% 03/18/99 9,000 8,998,914
Nationsbank Corp. (a)........................... 5.05% 02/16/99 29,000 29,000,000
Nationsbank Corp. (a)........................... 5.27% 07/01/99 8,000 7,997,416
--------------
54,996,226
--------------
CERTIFICATE OF DEPOSIT-DOMESTIC -- 3.3%
Chase Manhattan Bank (U.S.A.) Delaware.......... 5.25% 02/08/99 30,000 30,000,000
--------------
30,000,000
--------------
CERTIFICATES OF DEPOSIT-YANKEE -- 21.0%
Abbey National Treasury Services, PLC........... 5.25% 01/20/99 25,000 25,000,000
Barclays Bank PLC............................... 5.56% 02/25/99 5,000 4,999,566
Barclays Bank PLC (a)........................... 5.49% 06/02/99 21,000 20,993,088
Bayerische Hypo Und Wechsel Bank................ 5.68% 03/03/99 3,000 2,999,784
Bayerische Landesbank Girozentrale (a).......... 5.09% 03/23/99 20,000 19,996,337
Bayerische Landesbank Girozentrale (a).......... 5.49% 06/30/99 20,000 19,992,110
Canadian Imperial Bank of Commerce.............. 5.55% 2/10/99 15,000 14,999,211
Canadian Imperial Bank of Commerce.............. 5.69% 3/10/99 7,000 6,999,066
Canadian Imperial Bank of Commerce.............. 5.71% 3/30/99 4,000 3,999,123
Commerzbank, AG................................. 5.67% 03/05/99 4,000 4,001,966
Credit Agricole Indosuez........................ 5.74% 04/26/99 3,000 2,999,457
Deutsche Bank................................... 5.55% 02/25/99 10,000 9,999,278
Deutsche Bank................................... 5.66% 03/03/99 5,000 4,999,600
Deutsche Bank................................... 5.64% 03/22/99 5,000 4,999,370
Rabobank Nederland.............................. 5.50% 02/09/99 13,000 12,998,934
Royal Bank of Canada (a)........................ 5.47% 08/06/99 14,000 13,994,339
Swiss Bank Corp................................. 5.74% 06/11/99 20,000 19,994,931
--------------
193,966,161
--------------
COMMERCIAL PAPER -- 45.5%
Aetna Services, Inc............................. 5.50% 01/15/99 4,000 3,991,444
American General Finance Corp................... 5.22% 02/17/99 6,000 5,959,110
American Honda Finance Corp..................... 5.25% 02/10/99 2,852 2,835,363
American Honda Finance Corp..................... 5.27% 02/11/99 27,366 27,201,751
Aon Corp........................................ 5.30% 02/23/99 3,000 2,976,592
Aon Corp........................................ 5.28% 02/26/99 16,000 15,868,587
Aristar, Inc.................................... 5.25% 02/05/99 7,194 7,157,281
Association Corp. of North America.............. 5.03% 02/02/99 24,020 23,912,604
Association Corp. of North America.............. 5.05% 02/10/99 12,955 12,882,308
Association Corp. of North America.............. 5.11% 03/09/99 5,000 4,952,449
Bank of Montreal................................ 5.12% 2/18/99 10,000 9,931,707
Bank of New York Co., Inc....................... 5.10% 01/14/99 3,000 2,994,475
BBL North America............................... 5.33% 01/29/99 15,000 14,937,817
Bradford & Bingley Building Society............. 5.20% 02/02/99 23,257 23,149,501
Centric Capital Corp............................ 5.35% 01/27/99 2,100 2,091,886
Centric Capital Corp............................ 5.20% 03/02/99 3,398 3,368,551
Chrysler Financial Corp......................... 5.09% 01/29/99 32,000 31,873,316
Cregem North America............................ 4.90% 03/29/99 15,000 14,822,375
Falcon Asset Securitization Corp................ 5.43% 02/17/99 4,000 3,971,643
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B1
<PAGE>
MONEY MARKET PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
INTEREST MATURITY AMOUNT VALUE
RATE DATE (000) (NOTE 2)
------ -------- --------- --------------
<S> <C> <C> <C> <C>
Ford Motor Credit Corp.......................... 5.40% 01/14/99 $ 10,000 $ 10,000,000
Ford Motor Credit Corp.......................... 5.20% 02/19/99 2,000 1,985,844
General Electric Capital Corp................... 5.10% 02/19/99 15,000 14,895,875
General Motors Acceptance Corp.................. 5.19% 01/26/99 5,000 4,981,979
General Motors Acceptance Corp.................. 5.06% 01/29/99 20,000 19,921,289
General Motors Acceptance Corp.................. 5.12% 03/19/99 9,000 8,901,440
Monte Rosa Capital Corp......................... 5.40% 01/29/99 2,531 2,520,370
Monte Rosa Capital Corp......................... 5.46% 02/19/99 19,000 18,858,798
Monte Rosa Capital Corp......................... 5.30% 02/22/99 6,530 6,480,009
Nationwide Building Society..................... 5.06% 03/01/99 3,000 2,975,122
Nationwide Building Society..................... 5.11% 03/09/99 2,000 1,980,979
Norwest Financial, Inc.......................... 5.23% 03/04/99 5,000 4,954,964
Old Line Funding Corp........................... 5.40% 01/14/99 10,000 9,980,500
Old Line Funding Corp........................... 5.37% 01/29/99 4,000 3,983,293
Old Line Funding Corp........................... 5.40% 02/25/99 6,000 5,950,500
Petrofina Delaware, Inc......................... 5.05% 01/29/99 8,220 8,187,714
PNC Funding Corp................................ 5.20% 02/22/99 1,000 992,489
Preferred Receivables Funding Corp.............. 5.40% 02/16/99 2,000 1,986,200
Salomon Smith Barney Holdings, Inc.............. 5.31% 02/16/99 17,048 16,932,329
Toronto Dominion Holdings....................... 4.90% 06/08/99 10,000 9,784,944
UBS Finance (Delaware).......................... 5.22% 01/15/99 10,000 9,979,704
UBS Finance (Delaware).......................... 5.07% 01/28/99 13,840 13,787,342
Unifunding, Inc................................. 5.23% 02/05/99 4,000 3,979,661
Windmill Funding Corp........................... 5.40% 01/28/99 10,000 9,959,500
Windmill Funding Corp........................... 5.75% 01/29/99 9,930 9,885,591
--------------
418,725,196
--------------
DISCOUNT NOTE -- 1.6%
Federal Home Loan Mortgage Association.......... 4.93% 03/26/99 15,152 14,977,701
--------------
14,977,701
--------------
LOAN PARTICIPATIONS -- 1.5%
Baker Hughes, Inc............................... 5.70% 01/29/99 8,000 8,000,000
Marsh & Mclennan Co............................. 5.38% 02/24/99 5,716 5,716,000
--------------
13,716,000
--------------
OTHER CORPORATE OBLIGATIONS -- 19.0%
Abbey National Treasury Services, PLC........... 5.50% 02/05/99 3,000 2,999,776
Abbey National Treasury Services, PLC........... 5.72% 06/11/99 14,000 13,995,269
Bishops Gate Residential Mortgage (a)........... 5.75% 11/22/99 6,000 6,000,000
Chrysler Financial Corp. (a).................... 5.53% 03/11/99 15,000 15,000,409
General Electric Capital Corp. (a).............. 5.50% 06/04/99 15,000 14,992,456
General Motors Acceptance Corp. (a)............. 5.20% 02/02/99 10,000 9,999,745
Goldman Sachs Group L.P. (a).................... 5.07% 06/04/01 30,000 30,000,000
Liquid Asset Backed Security Trust 1998-1 (a)... 5.63% 02/26/99 4,335 4,334,658
Morgan (J.P.) & Co., Inc. (a)................... 5.21% 04/05/99 1,000 999,908
Restructured Asset Securities Enhanced Return
(a)........................................... 5.63% 03/31/99 2,000 2,000,000
Restructured Asset Securities Enhanced Return
(a)........................................... 5.61% 09/02/99 19,000 19,000,000
Restructured Asset Securities Enhanced Return
(a)........................................... 5.68% 01/21/00 16,000 16,000,000
SMM Trust Notes 1995-Q (a)...................... 5.32% 12/15/99 27,000 27,000,000
Short Term Restructured Assets.................. 5.55% 08/18/99 12,000 12,000,000
--------------
174,322,221
--------------
TOTAL INVESTMENTS -- 97.9%
(amortized cost $900,703,505; (b))............................................ 900,703,505
--------------
OTHER ASSETS IN EXCESS OF LIABILITIES -- 2.1%................................... 19,488,483
--------------
TOTAL NET ASSETS -- 100.0%...................................................... $ 920,191,988
--------------
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B2
<PAGE>
MONEY MARKET PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
The following abbreviations are used in portfolio descriptions:
AG Aktiengesellschaft (German Stock Company)
PLC Public Limited Company (British Corporation)
(a) Indicates a variable rate security. The maturity date presented for these
instruments is the later of the next date on which the security can be
redeemed at par or the next date on which the rate of interest is adjusted.
The interest rate shown reflects the rate in effect at December 31, 1998.
(b) The cost of securities for federal income tax purposes is substantially the
same as for financial reporting purposes.
The industry classification of portfolio holdings and other
assets in excess of liabilities shown as a percentage of net
assets as of December 31, 1998 was as follows:
Commercial Banks 48.0%
Motor Vehicle Parts 14.3%
Asset Backed Securities 10.5%
Personal Credit 6.4%
Security Brokers & Dealers 5.0%
Short-Term Business Credit 4.9%
Accidental/Health Insurance 2.5%
Bank Holding Company U.S. 2.0%
Federal Credit Agencies 1.5%
Crude Petroleum & Natural Gas 0.8%
Construction 0.9%
Insurance 0.6%
Surety Insurance 0.5%
---------
97.9%
Other assets in excess of liabilities 2.1%
---------
100.0%
---------
---------
SEE NOTES TO FINANCIAL STATEMENTS.
B3
<PAGE>
DIVERSIFIED BOND PORTFOLIO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 95.9% MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
LONG-TERM BONDS -- 95.0% (UNAUDITED) RATE DATE (000) (NOTE 2)
------------ ------ ----------------- --------- --------------
<S> <C> <C> <C> <C> <C>
AEROSPACE -- 2.5%
Boeing Co.,..................................... Aa3 8.75% 08/15/21 $ 6,250 $ 7,910,250
Raytheon Co.,................................... Baa1 5.95% 03/15/01 6,500 6,557,070
Raytheon Co.,................................... Baa1 6.40% 12/15/18 9,500 9,428,750
Raytheon Co.,................................... Baa1 7.00% 11/01/28 3,550 3,737,511
--------------
27,633,581
--------------
AIRLINES -- 2.6%
Continental Airlines, Inc.,..................... Ba2 8.00% 12/15/05 8,000 7,904,800
Delta Air Lines, Inc.,.......................... Ba1 9.875% 05/15/00 6,000 6,298,320
United Airlines, Inc.,.......................... Baa3 10.67% 05/01/04 7,000 8,282,400
United Airlines, Inc.,.......................... Baa3 11.21% 05/01/14 5,000 6,566,000
--------------
29,051,520
--------------
ASSET-BACKED SECURITIES -- 1.7%
Advanta Mortgage Loan Trust, Series 1994-3,..... Aaa 8.49% 01/25/26 8,500 8,728,091
Airplanes Pass Through Trust,................... Ba2 10.875% 03/15/19 6,000 6,300,000
California Infrastructure PG&E, Series
1997-1,....................................... NR 6.32% 09/25/05 4,000 4,117,500
--------------
19,145,591
--------------
AUTO-CARS & TRUCKS -- 0.7%
Navistar International Corp.,................... Ba1 7.00% 02/01/03 3,500 3,500,547
Navistar International Corp.,................... Ba3 8.00% 02/01/08 4,500 4,578,750
--------------
8,079,297
--------------
BANKS AND SAVINGS & LOANS -- 4.5%
Banco de Commercio Exterior de Columbia, SA,
M.T.N., (Colombia)............................ NR 8.625% 06/02/00 2,000 1,960,000
Banco Ganadero, SA, M.T.N., (Colombia).......... NR 9.75% 08/26/99 4,100 4,079,500
Bayerische Landesbank Girozentrale, (Germany)... Aaa 5.875% 12/01/08 10,000 10,224,000
Capital One Bank,............................... Baa3 7.08% 10/30/01 5,000 5,027,850
Chase Manhattan Corp.,.......................... A2 8.00% 06/15/99 2,000 2,023,940
Chase Manhattan Corp............................ A2 6.625% 08/15/05 2,000 2,083,040
Compass Trust Bank,............................. A3 8.23% 01/15/27 4,500 4,820,625
International Bank for Reconstruction and
Development, (Supranational).................. Aaa 12.375% 10/15/02 750 938,527
Kansallis-Osake Pankki, (Finland)............... Baa1 8.65% 01/01/49 5,000 5,073,600
Kansallis-Osake Pankki, (Finland)............... Baa1 10.00% 05/01/02 5,000 5,621,000
National Australia Bank, (Australia)............ A1 6.40% 12/10/07 3,700 3,774,000
Skandinaviska Enskilda Bank, (Sweden)........... Baa1 7.50% 03/29/49 5,000 4,941,400
--------------
50,567,482
--------------
CABLE & PAY TELEVISION SYSTEMS -- 2.4%
Cable & Wire Communications PLC (United
Kingdom)...................................... Baa1 6.75% 12/01/08 6,400 6,524,160
Rogers Cablesystems, Inc., (Canada)............. Ba3 10.00% 03/15/05 4,000 4,480,000
Tele-Communications, Inc.,...................... Ba1 6.34% 02/01/02 3,500 3,584,875
Tele-Communications, Inc.,...................... Ba1 6.375% 09/15/99 2,750 2,769,332
Tele-Communications, Inc.,...................... Baa3 10.125% 04/15/22 6,300 9,114,021
--------------
26,472,388
--------------
COMPUTER SOFTWARE & SERVICES -- 0.5%
Computer Associates International, Inc.,........ Baa1 6.375% 04/15/05 5,300 5,245,092
--------------
DIVERSIFIED CONSUMER PRODUCT -- 1.3%
Owens-Illinois, Inc.,........................... Ba1 7.50% 05/15/10 5,000 5,095,100
Philip Morris Cos., Inc.,....................... A2 6.15% 03/15/10 10,000 10,083,000
--------------
15,178,100
--------------
DRUGS & MEDICAL SUPPLIES -- 0.3%
Mallinckrodt, Inc............................... Baa2 6.30% 03/15/11 3,500 3,445,969
--------------
FINANCIAL SERVICES -- 14.3%
Advanta Corp., M.T.N............................ Ba2 7.25% 08/16/99 10,000 9,920,500
Aristar, Inc.,.................................. Baa1 7.50% 07/01/99 2,000 2,021,040
Arkwright Corp.,................................ Baa3 9.625% 08/15/26 5,000 5,980,500
Associates Corp.,............................... Aa3 6.95% 11/01/18 8,000 8,524,640
AT&T Capital Corp,.............................. Baa3 7.50% 11/15/00 10,000 10,122,400
Calair Capital Corp.,........................... Ba2 8.125% 04/01/08 3,000 2,933,850
Chrysler Financial Corp.,....................... A3 9.50% 12/15/99 5,000 5,196,100
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B4
<PAGE>
DIVERSIFIED BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) RATE DATE (000) (NOTE 2)
------------ ------ ----------------- --------- --------------
<S> <C> <C> <C> <C> <C>
FINANCIAL SERVICES (CONT'D.)
Comdisco Inc.,.................................. Baa1 6.32% 11/27/00 $ 10,000 $ 10,046,600
Conseco Inc.,................................... Baa2 6.40% 06/15/01 10,000 9,589,000
Conseco, Inc.,.................................. Ba2 8.70% 11/15/26 1,600 1,461,808
Conseco, Inc.,.................................. Ba2 8.796% 04/01/27 8,350 7,634,405
ContiFinancial Corp.,........................... Ba1 7.50% 03/15/02 12,900 9,030,000
ContiFinancial Corp.,........................... Ba1 8.125% 04/01/08 1,800 1,224,000
Enterprise Rent-A-Car USA Finance Co., M.T.N.... Baa3 7.00% 06/15/00 9,000 9,038,430
Enterprise Rent-A-Car USA Finance Co., M.T.N.... Baa3 8.75% 12/15/99 3,000 3,072,210
Ford Motor Credit Co.,.......................... A1 5.75% 01/25/01 4,000 4,034,640
General Motors Acceptance Corp.,................ A2 5.75% 11/10/03 10,000 10,077,600
General Motors Acceptance Corp.,................ Baa1 8.40% 10/15/99 3,700 3,790,613
Household Finance,.............................. A2 6.50% 11/15/08 23,000 23,805,000
Interpool Capital Trust,........................ Ba2 9.875% 02/15/27 7,000 5,740,000
Nationwide CSN Trust,........................... Aa3 9.875% 02/15/25 5,000 6,267,200
PT Alatief Freeport Financial Co.,
(Netherlands)................................. Ba2 9.75% 04/15/01 5,750 4,140,000
Reliastar Financial Corp.,...................... A3 6.625% 09/15/03 5,000 5,031,000
Tokai Pfd Capital,.............................. Baa3 9.98% 12/29/49 2,300 1,932,000
--------------
160,613,536
--------------
FOOD & BEVERAGE -- 0.3%
Whitman Corp.,.................................. Baa2 7.50% 08/15/01 3,000 3,133,320
--------------
FOREST PRODUCTS -- 2.4%
Fort James Corp.,............................... Baa3 6.234% 03/15/01 5,000 5,047,050
Scotia Pacific Co.,............................. NR 7.11% 01/20/14 4,100 3,902,216
Scotia Pacific Co.,............................. NR 7.71% 01/20/14 12,200 10,929,736
Westvaco Corp.,................................. A1 9.75% 06/15/20 5,000 6,703,950
--------------
26,582,952
--------------
HOUSING RELATED -- 0.6%
American Standard Cos. Inc.,.................... Ba3 7.375% 04/15/05 2,100 2,069,319
Owens Corning,.................................. Baa3 7.50% 05/01/05 5,000 5,111,050
--------------
7,180,369
--------------
INDUSTRIAL -- 1.6%
Cendant Corp.,.................................. Baa1 7.75% 12/01/03 15,000 15,160,050
Compania Sud Americana de Vapores, SA,
(Chile)....................................... NR 7.375% 12/08/03 3,000 2,692,500
--------------
17,852,550
--------------
INVESTMENT BANKERS -- 5.3%
Lehman Brothers Holdings, Inc.,................. Baa1 6.40% 08/30/00 6,450 6,451,612
Merrill Lynch, Pierce, Fenner & Smith, Inc.,.... NR 5.40% 06/24/03 15,000 14,850,000
Merrill Lynch, Pierce, Fenner & Smith, Inc.,.... Aa3 6.875% 11/15/18 9,800 10,159,170
Morgan Stanley, Dean Witter Discover & Co.,
M.T.N......................................... A1 6.09% 03/09/11 6,500 6,586,775
Salomon, Inc.,.................................. Baa1 6.25% 10/01/99 8,000 8,054,320
Salomon, Inc.,.................................. NR 6.65% 07/15/01 7,000 7,166,320
Salomon, Inc., M.T.N............................ Baa1 6.59% 02/21/01 3,500 3,567,200
Salomon, Inc.,.................................. Baa1 7.25% 05/01/01 2,250 2,330,460
--------------
59,165,857
--------------
LEISURE & TOURISM -- 1.2%
Royal Caribbean Cruises Ltd.,................... Baa3 7.00% 10/15/07 8,000 8,011,120
Royal Caribbean Cruises Ltd.,................... Baa3 7.25% 08/15/06 5,000 5,081,900
--------------
13,093,020
--------------
LODGING -- 1.2%
ITT Corp.,...................................... Baa2 6.25% 11/15/00 7,000 6,753,180
ITT Corp.,...................................... Baa2 6.75% 11/15/03 7,000 6,445,810
--------------
13,198,990
--------------
MEDIA -- 7.7%
News America Holdings, Inc.,.................... Baa3 6.703% 05/21/04 36,000 36,697,320
Paramount Communications, Inc.,................. Ba2 7.50% 01/15/02 5,000 5,217,650
Time Warner, Inc.,.............................. Baa3 6.625% 05/15/29 19,000 19,331,740
Time Warner, Inc.,.............................. Ba1 8.11% 08/15/06 7,800 8,892,390
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B5
<PAGE>
DIVERSIFIED BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) RATE DATE (000) (NOTE 2)
------------ ------ ----------------- --------- --------------
<S> <C> <C> <C> <C> <C>
MEDIA (CONT'D.)
Turner Broadcasting System, Inc.,............... Ba1 7.40% 02/01/04 $ 13,500 $ 14,477,130
Viacom, Inc.,................................... Ba2 7.75% 06/01/05 1,450 1,573,004
--------------
86,189,234
--------------
OIL & GAS -- 1.5%
B.J. Services Co.,.............................. Ba1 7.00% 02/01/06 5,000 5,174,850
Occidental Petroleum Corp.,..................... Baa3 10.125% 11/15/01 5,000 5,466,800
Occidental Petroleum Corp.,..................... Baa3 11.125% 08/01/10 5,000 6,526,550
--------------
17,168,200
--------------
OIL & GAS SERVICES -- 3.0%
K N Energy, Inc.,............................... Baa2 6.30% 03/01/21 15,000 15,042,150
R&B Falcon Corp.,............................... Ba1 6.50% 04/15/03 8,600 7,811,552
R&B Falcon Corp.,............................... Ba1 6.75% 04/15/05 7,300 6,278,000
R&B Falcon Corp.,............................... Ba1 7.375% 04/15/18 5,750 4,435,493
--------------
33,567,195
--------------
REAL ESTATE INVESTMENT TRUST -- 3.1%
Camden Property Trust,.......................... Baa2 7.23% 10/30/00 5,000 5,012,000
Colonial Realty,................................ Baa3 7.00% 07/14/07 1,350 1,294,529
Equity Residentia,.............................. A3 6.15% 09/15/00 15,000 14,901,000
ERP Operating, L.P.,............................ A3 6.63% 04/13/05 6,500 6,413,940
Felcor Suite Hotels, Inc.,...................... Ba1 7.625% 10/01/07 7,900 7,524,750
--------------
35,146,219
--------------
RESTAURANTS -- 0.8%
Darden Restaurants, Inc.,....................... A3 7.125% 02/01/16 10,000 9,465,300
--------------
RETAIL -- 7.2%
Federated Department Stores, Inc.,.............. Ba1 8.125% 10/15/02 5,250 5,659,133
Federated Department Stores, Inc.,.............. Ba1 8.50% 06/15/03 10,200 11,250,396
Kmart Corp.,.................................... Ba2 9.35% 01/02/20 2,000 2,080,000
Kmart Corp.,.................................... Ba2 9.78% 01/05/20 3,850 4,210,476
Kroger Co., (The)............................... Baa3 6.375% 03/01/08 6,600 6,710,220
Meyer, (Fred) Inc.,............................. Ba2 7.15% 03/01/03 550 572,209
Meyer, (Fred) Inc.,............................. Ba2 7.375% 03/01/05 5,000 5,289,200
Rite Aid Corp.,................................. A3 6.70% 12/15/01 4,000 4,102,400
Saks Inc.,...................................... Baa3 7.25% 12/01/04 11,600 11,641,180
Saks Inc.,...................................... Baa3 7.50% 12/01/10 8,000 7,999,440
Saks Inc.,...................................... Baa3 8.25% 11/15/08 11,200 11,872,000
Sears Roebuk & Co.,............................. A2 6.50% 12/01/28 10,000 9,815,300
--------------
81,201,954
--------------
TELECOMMUNICATIONS -- 4.5%
LCI International, Inc.,........................ Ba1 7.25% 06/15/07 10,125 10,251,765
Qwest Communications International Inc.,........ Ba1 7.50% 11/01/08 5,000 5,200,000
Sprint Corp.,................................... Baa1 5.70% 11/15/03 17,000 17,060,690
Sprint Corp.,................................... Baa1 6.875% 11/15/28 14,000 14,550,200
Worldcom Inc,................................... Baa2 6.125% 08/15/01 3,300 3,352,734
--------------
50,415,389
--------------
UTILITIES -- 8.1%
Arkla, Inc., M.T.N.,............................ Ba2 9.32% 12/18/00 2,000 2,136,000
Calenergy Co., Inc.,............................ Ba1 6.96% 09/15/03 8,000 8,142,640
Calenergy Co., Inc.,............................ BA1 7.23% 09/15/05 5,000 5,151,300
Calenergy Co., Inc.,............................ Ba1 8.48% 09/15/28 10,000 11,055,300
Cogentrix Energy, Inc.,......................... Ba1 8.75% 10/15/08 10,000 10,625,000
Commonwealth Edison Co.,........................ Baa3 7.625% 01/15/07 7,525 8,313,846
Connecticut Light & Power Company,.............. Ba2 7.75% 06/01/02 5,685 5,897,164
El Paso Electric Company,....................... Ba2 7.75% 05/01/01 5,850 6,070,487
El Paso Electric Company,....................... Ba3 9.40% 05/01/11 4,000 4,588,240
Niagara Mohawk Power,........................... Ba3 6.875% 04/01/03 4,000 4,138,800
Niagara Mohawk Power,........................... Ba2 7.375% 08/01/03 8,000 8,455,280
Niagara Mohawk Power,........................... Baa2 8.00% 06/01/04 5,000 5,459,300
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B6
<PAGE>
DIVERSIFIED BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) RATE DATE (000) (NOTE 2)
------------ ------ ----------------- --------- --------------
<S> <C> <C> <C> <C> <C>
UTILITIES (CONT'D.)
Pennsylvania Power & Light Co.,................. A2 9.375% 07/01/21 $ 1,150 $ 1,286,781
Texas Utilities,................................ Baa3 5.94% 10/15/01 10,000 10,058,300
--------------
91,378,438
--------------
WASTE MANAGEMENT -- 0.2%
USA Waste Service,.............................. Baa3 6.125% 07/15/01 2,000 2,012,400
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 14.1%
Federal Farm Credit Bank,....................... 8.65% 10/01/99 150 154,008
Resolution Funding Corp.,....................... Zero 10/15/15 17,100 6,621,120
Resolution Funding Corp.,....................... 8.125% 10/15/19 700 914,263
Resolution Funding Corp.,....................... 8.625% 01/15/21 200 275,718
Small Business Administration Participation
Certicates,................................... 6.00% 09/01/18 15,000 15,305,550
United States Treasury Bond,.................... 5.375% 07/31/00 5,200 5,256,888
United States Treasury Note,.................... 4.75% 11/15/08 1,500 1,511,715
United States Treasury Note,.................... 5.375% 02/15/01 3,200 3,248,992
United States Treasury Note,.................... 5.50% 08/15/28 2,000 2,093,440
United States Treasury Note,.................... 5.75% 08/15/03 4,000 4,176,880
United States Treasury Note,.................... 5.875% 11/15/05 5,400 5,760,288
United States Treasury Note,.................... 6.00% 08/15/00 6,600 6,736,092
United States Treasury Note,.................... 6.50% 05/15/05 3,600 3,945,384
United States Treasury Note,.................... 6.50% 11/15/26 80,000 93,024,800
United States Treasury Note,.................... 6.625% 07/31/01 4,200 4,400,802
United States Treasury Note,.................... 7.125% 09/30/99 3,500 3,562,335
United States Treasury Note,.................... 7.50% 02/15/05 1,300 1,488,500
--------------
158,476,775
--------------
U.S. GOVERNMENT MORTGAGE- BACKED SECURITIES -- 0.7%
Federal National Mortgage Association,.......... 9.00% 10/01/16-09/01/21 388 410,024
Government National Mortgage Association,....... 7.50% 05/20/02-02/15/26 7,091 7,308,344
--------------
7,718,368
--------------
FOREIGN GOVERNMENT BONDS -- 0.7%
Republic of Panama, (Panama).................... NR 7.875% 02/13/02 8,000 7,720,000
--------------
TOTAL LONG-TERM BONDS (COST $1,052,032,111)............................................................ 1,066,099,086
--------------
<CAPTION>
SHARES
---------
<S> <C> <C> <C> <C> <C>
PREFERRED STOCK -- 0.9%
Centaur Funding (cost $10,022,865)........................................................ 75,000 10,377,000
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $1,062,054,976)................................................................................ 1,076,476,086
--------------
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS -- 2.8% (000)
---------
REPURCHASE AGREEMENT
Joint Repurchase Agreement Account
(cost $31,305,000; Note 5).................... 4.693% 01/04/99 31,305 31,305,000
--------------
TOTAL INVESTMENTS -- 98.7%
(cost $1,093,359,976; Note 6)........................................................................ 1,107,781,086
OTHER ASSETS IN EXCESS OF LIABILITIES -- 1.3%.......................................................... 14,792,617
--------------
NET ASSETS -- 100.0%................................................................................... $1,122,573,703
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
L.P. Limited Partnership
M.T.N. Medium Term Note
PLC Public Limited Company (British Corporation)
SA Sociedad Anonima (Spanish Coporation) or Societe Anonyme (French
Corporation)
NR Not Rated by Moody's or Standard & Poors
SEE NOTES TO FINANCIAL STATEMENTS.
B7
<PAGE>
GOVERNMENT INCOME PORTFOLIO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 92.7% PRINCIPAL
INTEREST MATURITY AMOUNT VALUE
LONG-TERM BONDS RATE DATE (000) (NOTE 2)
----------- -------------------- --------- --------------
<S> <C> <C> <C> <C>
ASSET-BACKED SECURITIES -- 2.3%
Team Fleet Financing Corp....................... 7.350% 05/15/03 $ 10,000 $ 10,276,563
--------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 1.4%
Westpac Securitisation Trust, Ser. 1998-1G
(Australia)................................... 5.483% 07/19/29 6,280(a) 6,229,427
--------------
CORPORATE -- 1.9%
Merck & Co., Inc................................ 5.760% 05/03/37 8,000 8,340,000
--------------
MORTGAGE PASS-THROUGHS -- 11.1%
Federal Home Loan Mortgage Corp., ARM........... 7.629% 06/01/25 3,468 3,489,476
Federal National Mortgage Association........... 7.500% 02/01/02 - 05/01/10 15,810 16,249,210
Federal National Mortgage Association........... 8.000% 03/01/22 - 05/01/26 1,110 1,150,114
Federal National Mortgage Association........... 9.000% 02/01/25 - 04/01/25 5,877 6,219,881
Government National Mortgage Association........ 7.500% 12/15/25 - 02/15/26 14,756 15,213,981
Government National Mortgage Association........ 8.000% 09/15/23 - 12/15/24 6,633 6,899,974
--------------
49,222,636
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 76.0%
Federal Farm Credit Bank........................ 5.900% 01/10/05 5,000 5,147,650
Federal Home Loan Bank.......................... 5.750% 10/15/07 15,000 15,810,000
Federal Home Loan Mortgage Corp.,............... 7.360% 06/05/07 15,000 15,796,800
Federal National Mortgage Association........... Zero 10/08/24 - 10/08/27 45,779 9,640,633
Federal National Mortgage Association........... 5.860% 08/20/03 12,374 12,534,491
Federal National Mortgage Association........... 6.060% 05/21/03 30,000 30,515,700
Israel AID...................................... Zero 03/15/06 18,272 12,803,190
Israel AID...................................... Zero 08/15/09 20,000 11,530,800
Resolution Funding Corp......................... 8.125% 10/15/19 4,200 5,485,578
Small Business Administration Participation
Certificates.................................. 6.000% 09/01/18 8,000 8,162,960
Small Business Administration Participation
Certificates.................................. 7.200% 10/01/16 18,387 19,673,778
Small Business Administration Participation
Certificates.................................. 6.850% 07/01/17 4,784 5,035,297
Small Business Administration Participation
Certificates.................................. 7.150% 01/01/17 18,034 19,309,360
United States Treasury Bonds.................... 8.125% 08/15/19 61,100 81,597,217
United States Treasury Bonds.................... 8.125% 08/15/21 4,000 5,405,000
United States Treasury Bonds.................... 11.750% 02/15/10 37,000 50,273,750
United States Treasury Notes.................... 4.250% 11/15/03 17,200 16,979,668
United States Treasury Notes.................... 4.750% 11/15/08 3,000 3,023,430
United States Treasury Notes.................... 5.250% 08/15/03 4,300 4,409,521
United States Treasury Notes.................... 7.875% 11/15/04 3,000 3,475,770
--------------
336,610,593
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $392,763,629)............................................................................ 410,679,219
--------------
SHORT-TERM INVESTMENTS -- 5.9%
REPURCHASE AGREEMENT -- 0.4%
Joint Repurchase Agreement Account (Note 5)..... 4.693% 01/04/99 1,692 1,692,000
--------------
U. S. GOVERNMENT & AGENCY OBLIGATIONS -- 5.5%
United States Treasury Notes.................... 7.750% 12/31/99 24,000 24,716,160
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $25,734,584)............................................................................. 26,408,160
--------------
TOTAL INVESTMENTS -- 98.6%
(cost $418,498,213; Note 6).................................................................... 437,087,379
OTHER ASSETS IN EXCESS OF LIABILITIES -- 1.4%.................................................... 6,124,575
--------------
NET ASSETS -- 100.0%............................................................................. $ 443,211,954
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
AID Agency for International Development
ARM Adjustable Rate Mortgage
(a) US$ Denominated Foreign Bonds
SEE NOTES TO FINANCIAL STATEMENTS.
B8
<PAGE>
ZERO COUPON BOND 2000 PORTFOLIO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 99.9% PRINCIPAL
INTEREST MATURITY AMOUNT VALUE
LONG-TERM BONDS RATE DATE (000) (NOTE 2)
------ -------- --------- --------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS
Federal National Mortgage Association........... Zero 01/24/02 $ 7,777 $ 6,679,743
Federal National Mortgage Association........... Zero 07/24/02 4,527 3,777,193
United States Treasury Bonds.................... Zero 11/15/00 28,575 26,254,996
United States Treasury Bonds.................... Zero 02/15/02 3,950 3,418,488
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $38,202,550)............................................................ 40,130,420
--------------
SHORT-TERM INVESTMENT -- 0.3%
REPURCHASE AGREEMENT
Joint Repurchase Agreement Account.............. 4.693% 01/04/99 121 121,000
--------------
(cost $121,000; Note 5)
TOTAL INVESTMENTS -- 100.2%
(cost $38,323,550; Note 6).................................................... 40,251,420
LIABILITIES IN EXCESS OF OTHER ASSETS -- (0.2%)................................. (71,777)
--------------
NET ASSETS -- 100.0%............................................................ $ 40,179,643
--------------
--------------
ZERO COUPON BOND 2005 PORTFOLIO
DECEMBER 31, 1998
LONG-TERM INVESTMENTS -- 100.0%
LONG-TERM BONDS
U.S. GOVERNMENT & AGENCY OBLIGATIONS
Federal National Mortage Association............ Zero 01/24/05 $ 1,400 $ 1,030,092
Federal National Mortgage Association........... Zero 01/24/06 2,320 1,620,381
Financing Corp.................................. Zero 03/07/04 3,350 2,598,494
Financing Corp.................................. Zero 11/11/05 425 301,346
Financing Corp.................................. Zero 08/08/07 2,070 1,313,291
Resolution Funding Corp......................... Zero 07/15/07 4,350 2,842,725
United States Treasury Bond..................... Zero 11/15/04 7,600 5,756,848
United States Treasury Bond..................... Zero 05/15/05 17,640 13,053,071
United States Treasury Bond..................... Zero 08/15/05 8,700 6,361,353
United States Treasury Bond..................... Zero 11/15/05 2,000 1,442,920
United States Treasury Bond..................... Zero 02/15/06 7,000 4,981,270
United States Treasury Bond..................... Zero 05/15/06 6,000 4,216,320
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $40,004,501)............................................................ 45,518,111
--------------
SHORT-TERM INVESTMENT -- 0.2%
REPURCHASE AGREEMENT
Joint Repurchase Agreement Account (cost
$66,000; Note 5).............................. 4.693% 01/04/99 66 66,000
--------------
TOTAL INVESTMENTS -- 100.2%
(cost $40,070,501; Note 6).................................................... 45,584,111
LIABILITIES IN EXCESS OF OTHER ASSETS -- (0.2%)................................. (80,677)
--------------
TOTAL NET ASSETS -- 100.0%...................................................... $ 45,503,434
--------------
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B9
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO
December 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 94.3%
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS -- 54.9% (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
AEROSPACE -- 1.3%
Raytheon Co.,
5.95%, 03/15/01............................... Baa1 $ 16,400 $ 16,543,992
6.00%, 12/15/10............................... Baa1 20,000 20,000,000
6.40%, 12/15/18............................... Baa1 25,000 24,812,500
--------------
61,356,492
--------------
AIRLINES -- 3.3%
Continental Airlines, Inc.,
8.00%, 12/15/05............................... Ba2 5,000 4,940,500
Delta Airlines, Inc.,
10.125%, 05/15/10............................. Baa3 20,000 25,019,000
10.375%, 02/01/11............................. Ba1 37,905 48,392,555
United Airlines, Inc.,
10.67%, 05/01/04.............................. Baa3 46,865 55,450,668
11.21%, 05/01/14.............................. Baa3 18,433 24,206,216
--------------
158,008,939
--------------
ASSET-BACKED SECURITIES -- 0.7%
California Infrastructure,
6.14%, 03/25/02............................... Aaa 5,500 5,517,930
6.17%, 03/25/03............................... Aaa 6,000 6,073,560
6.28%, 09/25/05............................... Aaa 7,000 7,167,160
Standard Credit Card Master Trust,
5.95%, 10/07/04............................... Aaa 4,650 4,718,262
Team Financing Corp.,
7.35%, 05/15/03............................... Aa2 11,000 11,304,219
--------------
34,781,131
--------------
BANKS AND SAVINGS & LOANS -- 3.3%
Bank of Nova Scotia,
6.50%, 07/15/07............................... A1 7,200 7,250,256
Bayerische Landesbank Girozentrale,
5.875%, 12/01/08.............................. Aaa 22,000 22,492,800
Capital One Bank,
6.97%, 02/04/02............................... Baa3 25,000 25,007,250
7.08%, 10/30/01............................... Baa3 35,100 35,295,507
7.35%, 06/20/00............................... Baa3 8,100 8,162,208
8.125%, 03/01/00.............................. Baa3 13,150 13,341,069
Citigroup,
6.375%, 11/15/08.............................. A1 17,500 18,094,475
Kansallis-Osake-Pankki, (Finland),
8.65%, 01/01/49............................... Baa1 10,000 10,147,200
National Australia Bank, (Australia),
6.40%, 12/10/07............................... A1 14,000 14,280,000
Okobank, (Finland),
6.75%, 09/27/49............................... A3 6,250 6,243,750
--------------
160,314,515
--------------
CABLE & PAY TELEVISION SYSTEMS -- 2.3%
Cable & Wire Communications, Inc.,
6.75%, 12/01/08............................... Baa1 17,000 17,329,800
Continental Cablevision, Inc.,
8.50%, 09/15/01............................... Ba2 5,545 5,881,914
<CAPTION>
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
<CAPTION>
CABLE & PAY TELEVISION SYSTEMS (CONT'D.)
<S> <C> <C> <C>
Tele-Communications, Inc.,
6.34%, 02/01/02............................... Ba1 $ 12,000 $ 12,291,000
7.375%, 02/15/00.............................. Ba1 40,700 41,585,225
8.25%, 01/15/03............................... Baa3 2,000 2,194,800
9.25%, 04/15/02............................... Baa3 9,500 10,563,525
9.875%, 06/15/22.............................. Baa3 12,900 18,288,975
--------------
108,135,239
--------------
COMMERCIAL SERVICES -- 0.8%
Cendant Corp.,
7.75%, 12/01/03............................... Baa1 39,000 39,416,130
--------------
COMPUTERS SOFTWARE & SERVICES -- 0.6%
Computer Associates International, Inc.,
6.375%, 04/15/05.............................. Baa1 14,300 14,151,852
Qwest Comm,
7.25%, 11/01/08............................... Ba1 8,000 8,180,000
Worldcom Inc,
6.125%, 08/15/01.............................. Baa2 6,700 6,807,066
--------------
29,138,918
--------------
CONSULTING -- 2.6%
Comdisco Inc., M.T.N.,
5.94%, 04/13/00............................... Baa1 12,500 12,468,750
6.32%, 11/27/00............................... Baa1 37,750 37,925,915
6.375%, 11/30/01.............................. Baa1 21,500 21,593,095
6.65%, 11/13/01............................... Baa1 50,000 50,385,000
--------------
122,372,760
--------------
CONSUMER SERVICES -- 0.3%
Loewen Group, Inc.,
7.20%, 06/01/03............................... Ba3 10,000 8,400,000
7.60%, 06/01/08............................... Ba3 3,400 2,686,000
Service Corp. International,
7.00%, 06/01/15............................... Baa1 2,500 2,588,375
--------------
13,674,375
--------------
CONTAINERS -- 0.6%
Owens-Illinois, Inc.,
7.15%, 05/15/05............................... Ba1 30,000 30,066,300
7.50%, 05/15/10............................... Ba1 800 815,216
--------------
30,881,516
--------------
DRUGS & MEDICAL SUPPLIES -- 0.5%
Mallinckrodt, Inc.,
6.30%, 03/15/11(a)............................ Baa2 16,780 16,520,958
Merck & Co Inc.,
5.95%, 12/01/28............................... Aaa 10,000 9,982,500
--------------
26,503,458
--------------
ELECTRICAL -- 0.3%
Enersis Sa,
6.90%, 12/01/06............................... Baa1 10,000 9,182,000
7.40%, 12/01/16............................... Baa1 6,400 5,267,200
--------------
14,449,200
--------------
FINANCIAL SERVICES -- 13.2%
Advanta Corp., M.T.N.,
7.50%, 08/28/00............................... Ba2 35,000 32,866,400
Arkwright Corp.,
9.625%, 08/15/26.............................. Baa3 8,000 9,568,800
Associates Corp.,
6.25%, 11/01/08............................... Aa3 21,000 21,745,920
6.95%, 11/01/18............................... Aa3 24,000 25,573,920
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B10
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
FINANCIAL SERVICES (CONT'D.)
<S> <C> <C> <C>
AT&T Capital Corp, M.T.N.,
6.25%, 05/15/01............................... Baa3 $ 35,500 $ 35,016,845
7.50%, 11/15/00............................... Baa3 47,000 47,575,280
BCH Financial Services
5.72%, 04/28/05............................... A3 10,000 9,933,200
Bear Stearns & Co,
6.50%, 07/05/00............................... A2 20,000 20,203,400
Conseco Inc.,
6.80%, 06/15/05............................... Baa3 13,000 11,801,400
8.70%, 11/15/26............................... Ba2 29,813 27,237,594
8.796%, 04/01/27.............................. Ba2 7,500 6,857,250
ContiFinancial Corp.,
7.50%, 03/15/02............................... Ba1 31,300 21,910,000
8.375%, 08/15/03.............................. Ba1 16,085 11,259,500
Donaldson Lufkin, & Jenrette Inc.,
5.625%, 02/15/16.............................. Baa1 5,480 5,415,117
Enterprise Rent-A-Car USA Finance Co., M.T.N.,
6.35%, 01/15/01............................... Baa3 11,200 11,226,992
6.95%, 03/01/04............................... Baa2 17,500 17,663,100
7.00%, 06/15/00............................... Baa3 23,000 23,098,210
7.50%, 06/15/03............................... Baa3 5,000 5,158,900
First Industrial, L.P.,
6.50%, 04/05/11............................... Baa2 9,000 8,864,730
General Motors Acceptance Corp., M.T.N.,
5.95%, 04/20/01............................... A2 30,300 30,542,400
Household Finance Corp.,
6.50%, 11/15/08............................... A2 72,000 74,520,000
Lehman Brothers Holdings, Inc.,
6.33%, 08/01/00............................... Baa1 17,200 17,317,476
6.40%, 08/30/00............................... Baa1 21,700 21,705,425
MCN Investment Corp.,
6.30%, 04/02/11............................... Baa2 8,250 8,194,725
Merrill Lynch, Pierce, Fenner & Smith, Inc.,
6.875%, 11/15/18.............................. Aa3 16,900 17,519,385
Morgan Stanley Dean Witter & Co., M.T.N.,
5.89%, 03/20/00............................... A1 20,000 20,140,800
6.09%, 03/09/11............................... A1 21,000 21,280,350
PaineWebber Group, Inc.,
7.015%, 02/10/04.............................. Baa1 6,000 6,288,840
7.625%, 10/15/08.............................. Baa1 5,000 5,387,250
PT Alatief Freeport Financial Co., Sr. Notes,
(Netherlands),
9.75%, 04/15/01 (b)/(c)....................... Ba2 8,950 6,444,000
Salomon, Inc.,
6.59%, 02/21/01............................... Baa1 9,750 9,937,200
6.75%, 02/15/03............................... Baa1 5,000 5,137,450
7.25%, 05/01/01............................... Baa1 8,625 8,933,430
Textron Financial Corp.,
6.05%, 03/16/09............................... Aaa 26,319 26,369,655
--------------
632,694,944
--------------
<CAPTION>
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
FOREST PRODUCTS -- 0.4%
Fort James Corp.,
6.234%, 03/15/11.............................. Baa3 $ 17,500 $ 17,664,675
--------------
INDUSTRIAL -- 2.5%
Compania Sud Americana de Vapores, S.A.,
(Chile),
7.375%, 12/08/03.............................. Baa 7,600 6,821,000
Scotia Pacific Co.,
7.11%, 01/20/14............................... A3 7,900 7,518,904
7.71%, 01/20/14............................... Baa2 23,800 21,321,944
Security Capital Group,
6.95%, 06/15/05............................... Baa1 4,500 4,297,500
U.S. Filter Corp.,
6.375%, 05/15/01.............................. Ba1 60,090 59,445,835
6.50%, 05/15/03............................... Ba1 20,000 19,481,800
--------------
118,886,983
--------------
LODGING -- 0.9%
ITT Corp.,
6.25%, 11/15/00............................... Ba1 23,703 22,867,232
6.75%, 11/15/03............................... Baa2 21,500 19,797,845
--------------
42,665,077
--------------
MEDIA -- 1.1%
Paramount Communications, Inc.,
7.50%, 01/15/02............................... Ba2 6,425 6,704,680
Time Warner, Inc.,
6.10%, 12/30/01............................... Ba1 27,650 27,926,500
8.11%, 08/15/06............................... Ba1 1,500 1,710,075
Viacom, Inc.,
7.75%, 06/01/05............................... Ba2 13,775 14,943,533
--------------
51,284,788
--------------
MISCELLANEOUS -- 0.1%
Tokai Pfd Capital,
9.98%, 12/29/49............................... A3 4,700 3,948,000
--------------
OIL & GAS -- 0.3%
B.J. Services Co.,
7.00%, 02/01/06............................... Ba1 4,000 4,139,880
Petro Canada,
7.00%, 11/15/28............................... A3 10,000 9,861,200
--------------
14,001,080
--------------
OIL & GAS SERVICES -- 3.7%
KN Energy, Inc.,
6.30%, 03/01/21............................... Baa2 27,550 27,627,416
6.45%, 11/30/01............................... Baa2 18,000 18,009,000
R&B Falcon Corp.
6.50%, 04/15/03............................... Ba1 44,350 40,283,992
6.75%, 04/15/05............................... Ba1 28,750 24,725,000
Seagull Energy Co.,
7.50%, 09/15/27............................... Ba1 8,000 7,165,360
Williams Companies, Inc.,
5.95%, 02/15/10............................... Baa2 59,000 59,064,900
--------------
176,875,668
--------------
REAL ESTATE INVESTMENT TRUST -- 3.5%
Camden Prop Trst,
7.23%, 10/30/00............................... Baa2 22,000 22,052,800
Colonial Realty,
7.00%, 07/14/07............................... Baa3 4,250 4,075,368
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B11
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
REAL ESTATE INVESTMENT TRUST (CONT'D.)
<S> <C> <C> <C>
EOP Operating, L.P.,
6.50%, 06/15/04............................... Baa1 $ 6,000 $ 5,900,400
6.625%, 02/15/05.............................. Baa 17,938 17,583,366
Equity Residential,
6.15%, 09/15/00............................... A3 45,000 44,703,000
ERP Operating, L.P.,
6.63%, 04/13/15............................... A3 22,400 22,103,424
Felcor Suite Hotels, Inc.,
7.625%, 10/01/07.............................. Ba1 8,000 7,620,000
Gables Realty Trust,
6.80%, 03/15/05............................... Baa2 7,500 7,157,175
Simon Debartolo Group, Inc.,
6.75%, 06/15/05............................... Baa1 17,500 16,969,750
6.75%, 07/15/04............................... Baa1 8,000 7,897,520
6.875%, 10/27/05.............................. Baa1 14,858 14,539,296
--------------
170,602,099
--------------
RETAIL -- 4.3%
Federated Department Stores, Inc.,
8.125%, 10/15/02.............................. Ba1 41,030 44,227,468
8.50%, 06/15/03............................... Ba1 32,400 35,736,552
Fred Meyer, Inc.,
7.15%, 03/01/03............................... Ba2 12,400 12,900,712
Rite Aid Corp.,
6.70%, 12/15/01............................... A3 5,000 5,128,000
Safeway Stores Inc.,
5.75%, 11/15/00............................... Baa2 6,000 6,012,000
6.05%, 11/15/03............................... Baa2 12,000 12,082,320
Saks Inc.,
7.25%, 12/01/04............................... Baa3 20,900 20,974,195
7.50%, 12/01/10............................... Baa3 22,500 22,498,425
8.25%, 11/15/08............................... Baa3 30,900 32,754,000
Sears Roebuk & Co.,
6.50%, 12/01/28............................... A2 16,000 15,704,480
--------------
208,018,152
--------------
TECHNOLOGY -- 0.7%
Time Warner Inc,
6.625%, 05/15/29.............................. Baa3 33,000 33,576,180
--------------
TELECOMMUNICATIONS -- 2.0%
360 Communication Co.,
7.125%, 03/01/03.............................. Ba2 22,550 23,863,538
7.60%, 04/01/09............................... Ba1 7,000 7,932,750
Sprint Cap Corp.,
5.70%, 11/15/03............................... Baa1 11,000 11,039,270
6.125%, 11/15/08.............................. Baa1 25,000 25,545,750
6.875%, 11/15/28.............................. Baa1 24,500 25,462,850
--------------
93,844,158
--------------
TOBACCO -- 1.3%
Philip Morris Cos., Inc.,
6.15%, 03/15/10............................... A2 40,000 40,332,000
RJR Nabisco, Inc.,
8.75%, 08/15/05............................... Baa3 6,900 6,962,584
9.25%, 08/15/13............................... Baa3 13,571 13,953,159
--------------
61,247,743
--------------
<CAPTION>
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
UTILITIES -- 0.5%
Commonwealth Edison Co.,
7.375%, 01/15/04.............................. Baa3 $ 14,000 $ 14,930,300
Niagara Mohawk Power,
7.375%, 08/01/03.............................. Ba2 10,000 10,569,100
--------------
25,499,400
--------------
WASTE MANAGEMENT -- 0.2%
USA Waste Service,
6.125%, 07/15/01.............................. Baa3 10,000 10,062,000
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 3.6%
United States Treasury Bond,
8.00%, 11/15/21............................... 55,300 73,937,759
United States Treasury Notes,
4.75%, 11/15/08............................... 8,600 8,667,166
5.50%, 08/15/28............................... 36,075 37,760,424
5.75%, 08/15/03............................... 3,900 4,072,458
5.875%, 11/15/05.............................. 2,200 2,346,784
6.375%, 08/15/27.............................. 27,000 31,032,990
7.50%, 02/15/05............................... 900 1,030,500
7.875%, 11/15/04.............................. 3,000 3,475,770
United States Treasury Strip,
6.50%, 05/15/05............................... 10,150 11,123,791
--------------
173,447,642
--------------
TOTAL LONG-TERM BONDS
(cost $2,694,909,653).................................................... 2,633,351,262
--------------
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCKS -- 38.7% SHARES
-------------
<S> <C> <C>
AEROSPACE -- 0.6%
Aeroquip-Vickers, Inc..................................... 4,400 131,725
AlliedSignal, Inc......................................... 88,300 3,912,794
Boeing Co................................................. 156,500 5,105,812
GenCorp, Inc.............................................. 98,400 2,453,850
General Dynamics Corp..................................... 19,700 1,154,912
Goodrich (B.F.) Co........................................ 11,300 405,387
Litton Industries, Inc.(b)................................ 77,600 5,063,400
Lockheed Martin Corp...................................... 30,400 2,576,400
Northrop Grumman Corp..................................... 10,500 767,812
Parker-Hannifin Corp...................................... 60,625 1,985,469
Raytheon Co. (Class "B" Stock)............................ 52,900 2,816,925
United Technologies Corp.................................. 36,500 3,969,375
----------------
30,343,861
----------------
AIRLINES -- 0.4%
AMR Corp.(b).............................................. 183,600 10,901,250
Delta Air Lines, Inc...................................... 23,400 1,216,800
Southwest Airlines Co..................................... 51,900 1,164,506
US Airways Group, Inc.(b)................................. 128,200 6,666,400
----------------
19,948,956
----------------
APPAREL -- 0.1%
Fruit of the Loom, Inc. (Class "A" Stock)(b).............. 84,100 1,161,631
Nike, Inc. (Class "B" Stock).............................. 45,500 1,845,594
Phillips-Van Heusen Corp.................................. 94,700 680,656
Reebok International Ltd.................................. 8,800 130,900
----------------
3,818,781
----------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B12
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- ----------------
<S> <C> <C>
AUTOS - CARS & TRUCKS -- 1.0%
Cummins Engine Co., Inc................................... 6,000 $ 213,000
DaimlerChrysler AG........................................ 80,071 7,691,820
Dana Corp................................................. 25,600 1,046,400
Ford Motor Co............................................. 281,900 16,544,006
General Motors Corp....................................... 213,000 15,242,813
Genuine Parts Co.......................................... 28,000 936,250
Johnson Controls, Inc..................................... 13,200 778,800
MascoTech, Inc............................................ 94,400 1,616,600
Midas, Inc................................................ 22,100 687,862
Navistar International Corp.(b)........................... 11,300 322,050
PACCAR, Inc............................................... 12,200 501,725
Titan International, Inc.................................. 101,250 961,875
TRW, Inc.................................................. 19,300 1,084,419
----------------
47,627,620
----------------
BANKS AND SAVINGS & LOANS -- 2.2%
Banc One Corp............................................. 183,772 9,383,858
Bank of New York Co., Inc................................. 118,000 4,749,500
BankAmerica Corp.......................................... 271,761 16,339,630
BankBoston Corp........................................... 45,600 1,775,550
Bankers Trust Corp........................................ 15,300 1,307,194
BB&T Corp................................................. 44,600 1,797,937
Chase Manhattan Corp...................................... 133,600 9,093,150
Comerica, Inc............................................. 24,700 1,684,231
First Union Corp.......................................... 151,500 9,213,094
Fleet Financial Group, Inc................................ 87,000 3,887,812
Golden West Financial Corp................................ 8,900 816,019
Huntington Bancshares, Inc................................ 33,000 992,062
KeyCorp................................................... 68,800 2,201,600
Mellon Bank Corp.......................................... 39,900 2,743,125
Mercantile Bancorporation, Inc............................ 22,700 1,047,037
Morgan (J.P.) & Co., Inc.................................. 27,800 2,920,737
National City Corp........................................ 51,400 3,726,500
Northern Trust Corp....................................... 17,500 1,527,969
PNC Bank Corp............................................. 47,800 2,587,175
Providian Financial Corp.................................. 22,350 1,676,250
Regions Financial Corp.................................... 30,000 1,209,375
Republic New York Corp.................................... 17,100 779,119
Summit Bancorp............................................ 27,600 1,205,775
Suntrust Banks, Inc....................................... 33,000 2,524,500
Synovus Financial Corp.................................... 41,150 1,003,031
U.S. Bancorp.............................................. 115,300 4,093,150
Union Planters Corp....................................... 17,000 770,312
Wachovia Corp............................................. 32,300 2,824,231
Wells Fargo & Co.......................................... 251,300 10,036,294
----------------
103,916,217
----------------
BUSINESS SERVICES -- 0.1%
Equifax, Inc.............................................. 23,500 803,406
Omnicom Group, Inc........................................ 25,400 1,473,200
----------------
2,276,606
----------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- ----------------
<S> <C> <C>
CHEMICALS -- 0.7%
Air Products & Chemicals, Inc............................. 36,900 $ 1,476,000
Dow Chemical Co........................................... 35,500 3,228,281
Du Pont (E.I.) de Nemours & Co............................ 177,200 9,402,675
Eastman Chemical Co....................................... 12,300 550,425
Engelhard Corp............................................ 22,600 440,700
Ferro Corp................................................ 134,900 3,507,400
FMC Corp.(b).............................................. 5,400 302,400
Grace (W.R.) & Co......................................... 11,600 181,975
Great Lakes Chemical Corp................................. 9,400 376,000
Hercules, Inc............................................. 15,100 413,362
Millennium Chemicals, Inc.(b)............................. 146,527 2,912,224
Monsanto Co............................................... 92,900 4,412,750
Morton International, Inc................................. 20,400 499,800
Nalco Chemical Co......................................... 10,400 322,400
OM Group, Inc............................................. 63,300 2,310,450
Praxair, Inc.............................................. 24,700 870,675
Raychem Corp.............................................. 13,300 429,756
Rohm & Haas Co............................................ 28,800 867,600
Sigma-Aldrich Corp........................................ 15,700 461,187
Union Carbide Corp........................................ 19,300 820,250
----------------
33,786,310
----------------
COMMERCIAL SERVICES -- 0.1%
Cendant Corp.(b).......................................... 129,900 2,476,219
Deluxe Corp............................................... 12,700 464,344
Moore Corp. Ltd........................................... 13,900 152,900
----------------
3,093,463
----------------
COMPUTER SERVICES -- 2.4%
3Com Corp.(b)............................................. 55,500 2,487,094
Adobe Systems, Inc........................................ 10,800 504,900
America Online, Inc.(b)................................... 10,500 1,680,000
Autodesk, Inc............................................. 7,300 311,619
Automatic Data Processing, Inc............................ 46,800 3,752,775
BMC Software, Inc.(b)..................................... 31,000 1,381,437
Cabletron Systems, Inc.(b)................................ 24,800 207,700
Ceridian Corp.(b)......................................... 11,300 788,881
Cisco Systems, Inc.(b).................................... 241,100 22,377,094
Computer Associates International, Inc.................... 85,500 3,644,437
Computer Sciences Corp.(b)................................ 24,400 1,572,275
Electronic Data Systems Corp.............................. 76,000 3,819,000
EMC Corp.(b).............................................. 77,700 6,604,500
First Data Corp........................................... 67,000 2,123,062
Microsoft Corp.(b)........................................ 383,300 53,158,919
Novell, Inc.(b)........................................... 55,000 996,875
Oracle Corp.(b)........................................... 154,100 6,645,562
Parametric Technology Corp.(b)............................ 40,200 658,275
Peoplesoft, Inc........................................... 30,000 568,125
Silicon Graphics, Inc.(b)................................. 29,400 378,525
Unisys Corp............................................... 39,100 1,346,506
----------------
115,007,561
----------------
COMPUTERS -- 1.5%
Apple Computer, Inc.(b)................................... 20,800 851,500
Compaq Computer Corp...................................... 258,789 10,852,964
Data General Corp.(b)..................................... 7,600 124,925
Dell Computer Corp.(b).................................... 196,300 14,366,706
Gateway 2000, Inc.(b)..................................... 24,300 1,243,856
Hewlett-Packard Co........................................ 162,900 11,128,106
International Business Machines Corp...................... 144,700 26,733,325
Seagate Technology, Inc.(b)............................... 37,900 1,146,475
Sun Microsystems, Inc.(b)................................. 59,100 5,060,437
----------------
71,508,294
----------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B13
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- ----------------
<S> <C> <C>
CONSTRUCTION -- 0.2%
Centex Corp............................................... 9,300 $ 419,081
Fluor Corp................................................ 13,100 557,569
Foster Wheeler Corp....................................... 6,400 84,400
Oakwood Homes Corp........................................ 139,300 2,115,619
Pulte Corp................................................ 6,600 183,562
Standard Pacific Corp..................................... 154,000 2,175,250
Webb (Del E.) Corp........................................ 140,300 3,867,019
----------------
9,402,500
----------------
CONTAINERS -- 0.1%
Ball Corp................................................. 4,700 215,025
Bemis Co., Inc............................................ 8,300 314,881
Crown Cork & Seal Co., Inc................................ 20,100 619,331
Owens-Illinois, Inc.(b)................................... 81,500 2,495,937
Sealed Air Corp........................................... 12,900 658,706
----------------
4,303,880
----------------
COSMETICS & SOAPS -- 0.7%
Alberto Culver Co. (Class "B" Stock)...................... 8,900 237,519
Avon Products, Inc........................................ 41,400 1,831,950
Colgate-Palmolive Co...................................... 46,300 4,300,112
Gillette Co............................................... 175,400 8,474,012
International Flavors & Fragrances, Inc................... 17,100 755,606
Procter & Gamble Co....................................... 210,200 19,193,887
----------------
34,793,086
----------------
DIVERSIFIED CONSUMER PRODUCTS -- 0.1%
Eastman Kodak Co.......................................... 86,800 6,249,600
----------------
DIVERSIFIED OFFICE EQUIPMENT -- 0.2%
Avery Dennison Corp....................................... 17,300 779,581
Pitney Bowes, Inc......................................... 42,800 2,827,475
Xerox Corp................................................ 51,000 6,018,000
----------------
9,625,056
----------------
DIVERSIFIED OPERATIONS -- 1.1%
Fortune Brands, Inc....................................... 26,900 850,712
General Electric Capital Corp............................. 504,700 51,510,944
----------------
52,361,656
----------------
DRUGS AND MEDICAL SUPPLIES -- 3.8%
Abbott Laboratories....................................... 239,600 11,740,400
Allergan, Inc............................................. 10,200 660,450
ALZA Corp.(b)............................................. 13,400 700,150
American Home Products Corp............................... 203,500 11,459,594
Amgen, Inc.(b)............................................ 41,200 4,307,975
Bard (C.R.), Inc.......................................... 8,900 440,550
Bausch & Lomb, Inc........................................ 8,700 522,000
Baxter International, Inc................................. 43,900 2,823,319
Becton, Dickinson & Co.................................... 38,200 1,630,662
Biomet, Inc............................................... 17,500 704,375
Boston Scientific Corp.(b)................................ 61,000 1,635,562
Bristol-Myers Squibb Co................................... 154,300 20,647,269
Cardinal Health, Inc...................................... 29,700 2,253,487
Guidant Corp.............................................. 23,600 2,601,900
Johnson & Johnson......................................... 210,600 17,664,075
Lilly (Eli) & Co.......................................... 171,700 15,259,837
Mallinckrodt, Inc......................................... 11,400 351,262
Medtronic, Inc............................................ 73,400 5,449,950
Merck & Co., Inc.......................................... 184,800 27,292,650
Pfizer, Inc.,............................................. 204,200 25,614,337
Pharmacia & Upjohn, Inc................................... 79,500 4,501,687
Schering-Plough Corp...................................... 229,400 12,674,350
St. Jude Medical, Inc.(b)................................. 14,400 398,700
Warner-Lambert Co......................................... 127,900 9,616,481
----------------
180,951,022
----------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- ----------------
<S> <C> <C>
ELECTRONICS -- 1.3%
Advanced Micro Devices, Inc.(b)........................... 22,200 $ 642,412
AMP Inc................................................... 34,500 1,796,156
Applied Materials, Inc.(b)................................ 57,300 2,445,994
Belden, Inc............................................... 67,100 1,421,681
EG&G, Inc................................................. 7,100 197,469
Emerson Electric Co....................................... 69,400 4,341,837
Grainger (W.W.), Inc...................................... 15,600 649,350
Harris Corp............................................... 12,500 457,812
Honeywell, Inc............................................ 19,900 1,498,719
Intel Corp................................................ 260,600 30,897,387
KLA-Tencor Corp.(b)....................................... 13,200 572,550
LSI Logic Corp.(b)........................................ 22,200 357,975
Micron Technology, Inc.................................... 33,100 1,673,619
Motorola, Inc............................................. 93,500 5,709,344
Perkin-Elmer Corp......................................... 7,600 741,475
Rockwell International Corp............................... 31,500 1,529,719
Solectron Corp............................................ 5,000 464,687
Tektronix, Inc............................................ 7,900 237,494
Texas Instruments, Inc.................................... 61,100 5,227,869
Thomas & Betts Corp....................................... 8,600 372,487
----------------
61,236,036
----------------
ENGINEERING & CONSTRUCTION
Giant Cement Holdings, Inc.(b)............................ 58,100 1,437,975
----------------
ENVIRONMENTAL SERVICES
Browning-Ferris Industries, Inc........................... 28,800 819,000
----------------
EXPLORATION & PRODUCTION
Apex Silver Mines Ltd..................................... 82,200 678,150
----------------
FINANCIAL SERVICES -- 2.2%
American Express Co....................................... 70,800 7,239,300
Associates First Capital Corp............................. 108,544 4,599,552
Bear Stearns Companies, Inc............................... 16,500 616,687
Block (H.R.), Inc......................................... 16,400 738,000
Capital One Financial Corp................................ 9,600 1,104,000
Citigroup, Inc............................................ 407,500 20,171,250
Countrywide Credit Industries, Inc........................ 17,000 853,187
Dun & Bradstreet Corp..................................... 26,700 842,719
Federal Home Loan Mortgage Corp........................... 105,700 6,811,044
Federal National Mortgage Assoc........................... 161,900 11,980,600
Fifth Third Bancorp....................................... 39,500 2,816,844
Franklin Resource, Inc.................................... 39,600 1,267,200
Household International, Inc.............................. 75,752 3,001,673
Lehman Brothers Holdings, Inc............................. 189,600 8,354,250
MBNA Corp................................................. 117,750 2,936,391
Merrill Lynch & Co., Inc.................................. 112,300 7,496,025
Morgan Stanley Dean Witter & Co........................... 146,790 10,422,090
Paychex, Inc.............................................. 23,000 1,183,062
Schwab (Charles) Corp.(b)................................. 62,400 3,506,100
SLM Holding Corp.......................................... 25,000 1,200,000
State Street Corp......................................... 25,200 1,752,975
Sunamerica, Inc........................................... 30,600 2,482,425
Transamerica Corp......................................... 9,800 1,131,900
Washington Mutual, Inc.................................... 89,178 3,405,485
----------------
105,912,759
----------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B14
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- ----------------
<S> <C> <C>
FOOD & BEVERAGES -- 1.7%
Anheuser-Busch Companies, Inc............................. 76,700 $ 5,033,437
Archer-Daniels-Midland Co................................. 93,975 1,615,195
Bestfoods................................................. 45,100 2,401,575
Brown-Forman Corp. (Class "B" Stock)...................... 10,800 817,425
Campbell Soup Co.......................................... 71,500 3,932,500
Coca Cola Enterprises, Inc................................ 60,000 2,145,000
Coca-Cola Co.............................................. 383,500 25,646,562
ConAgra, Inc.............................................. 74,500 2,346,750
Coors (Adolph) Co. (Class "B" Stock)...................... 5,800 327,337
General Mills, Inc........................................ 24,800 1,928,200
Heinz (H.J.) & Co......................................... 57,200 3,238,950
Hershey Foods Corp........................................ 22,400 1,393,000
Kellogg Co................................................ 64,400 2,197,650
PepsiCo, Inc.............................................. 235,600 9,644,875
Pioneer Hi-Bred International, Inc........................ 38,300 1,034,100
Quaker Oats Co............................................ 21,700 1,291,150
Ralston-Ralston Purina Group.............................. 50,400 1,631,700
Sara Lee Corp............................................. 148,200 4,177,388
Seagram Co., Ltd.......................................... 55,800 2,120,400
Sysco Corp................................................ 53,300 1,462,419
Whitman Corp.............................................. 132,800 3,369,800
Wrigley (William) Jr. Co.................................. 18,200 1,630,037
----------------
79,385,450
----------------
FOREST PRODUCTS -- 0.6%
Boise Cascade Corp........................................ 152,000 4,712,000
Champion International Corp............................... 109,700 4,442,850
Fort James Corp........................................... 32,700 1,308,000
Georgia-Pacific Corp...................................... 14,500 849,156
International Paper Co.................................... 47,300 2,119,631
Louisiana-Pacific Corp.................................... 189,700 3,473,881
Mead Corp................................................. 111,300 3,262,481
Potlatch Corp............................................. 4,500 165,937
Temple-Inland, Inc........................................ 8,900 527,881
Union Camp Corp........................................... 10,900 735,750
Westvaco Corp............................................. 16,000 429,000
Weyerhaeuser Co........................................... 31,300 1,590,431
Willamette Industries, Inc................................ 86,500 2,897,750
----------------
26,514,748
----------------
GAS PIPELINES -- 0.1%
Columbia Energy Group..................................... 13,000 750,750
Consolidated Natural Gas Co............................... 15,000 810,000
Peoples Energy Corp....................................... 5,500 219,312
Sempra Energy............................................. 33,699 855,112
Sonat, Inc................................................ 17,200 465,475
Williams Companies, Inc................................... 64,400 2,008,475
----------------
5,109,124
----------------
HOSPITALS/ HEALTHCARE -- 0.3%
Columbia/HCA Healthcare Corp.............................. 301,900 7,472,025
HBO & Co.................................................. 69,000 1,979,437
Healthsouth Corp.(b)...................................... 63,600 981,825
Humana, Inc.(b)........................................... 25,700 457,781
IMS Health, Inc........................................... 25,400 1,916,112
Manor Care, Inc........................................... 12,000 352,500
Service Corp. International............................... 39,400 1,499,662
Shared Medical Systems Corp............................... 4,100 204,487
Tenet Healthcare Corp.(b)................................. 48,000 1,260,000
----------------
16,123,829
----------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- ----------------
<S> <C> <C>
HOUSEHOLD PRODUCTS & PERSONAL CARE -- 0.2%
Clorox Co................................................. 16,200 $ 1,892,362
Kimberly-Clark Corp....................................... 87,000 4,741,500
Leggett & Platt, Inc...................................... 114,700 2,523,400
----------------
9,157,262
----------------
HOUSING RELATED -- 0.5%
Armstrong World Industries, Inc........................... 6,400 386,000
Fleetwood Enterprises, Inc................................ 5,700 198,075
Hanson, PLC, ADR, (United Kingdom)........................ 309,562 12,072,918
Kaufman & Broad Home Corp................................. 6,100 175,375
Lowe's Companies, Inc..................................... 54,800 2,805,075
Masco Corp................................................ 51,800 1,489,250
Maytag Corp............................................... 14,900 927,525
Owens Corning............................................. 106,900 3,788,269
Stanley Works............................................. 14,000 388,500
Tupperware Corp........................................... 9,600 157,800
Whirlpool Corp............................................ 11,700 647,887
----------------
23,036,674
----------------
INSURANCE -- 1.5%
Aetna, Inc................................................ 23,300 1,831,962
Allstate Corp............................................. 131,300 5,071,462
American General Corp..................................... 39,700 3,096,600
American International Group, Inc......................... 163,500 15,798,187
Aon Corp.................................................. 26,300 1,456,362
Berkley (W.R.) Corp....................................... 42,400 1,444,250
Berkshire Hathaway, Inc. (Class "B" Stock)................ 452 1,061,025
Chubb Corp................................................ 26,700 1,732,162
CIGNA Corp................................................ 34,800 2,690,475
Cincinnati Financial Corp................................. 25,800 944,925
Conseco, Inc.............................................. 49,021 1,498,204
Financial Security Assurance Holdings Ltd................. 34,000 1,844,500
Hartford Financial Services Group, Inc.................... 37,000 2,030,375
Jefferson-Pilot Corp...................................... 16,600 1,245,000
Lincoln National Corp..................................... 16,000 1,309,000
Loews Corp................................................ 47,000 4,617,750
Marsh & McLennan Companies, Inc........................... 39,900 2,331,656
MBIA, Inc................................................. 15,300 1,003,106
MGIC Investment Corp...................................... 17,900 712,644
Progressive Corp.......................................... 11,300 1,913,938
Provident Companies, Inc.................................. 70,400 2,921,600
Reinsurance Group of America, Inc......................... 115,550 8,088,500
SAFECO Corp............................................... 22,100 948,919
St. Paul Companies, Inc................................... 36,200 1,257,950
TIG Holdings, Inc......................................... 85,500 1,330,594
Torchmark Corp............................................ 21,900 773,329
Trenwick Group, Inc....................................... 64,850 2,115,731
United Healthcare Corp.................................... 29,500 1,270,344
UNUM Corp................................................. 21,700 1,266,737
----------------
73,607,287
----------------
INTRUMENTS-CONTROLS
Flowserve Corp............................................ 39,486 653,987
----------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B15
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- ----------------
<S> <C> <C>
LEISURE -- 0.3%
Brunswick Corp............................................ 15,600 $ 386,100
Carnival Corp. (Class "A" Stock).......................... 78,500 3,768,000
Disney (Walt) Co.......................................... 317,100 9,513,000
Harrah's Entertainment, Inc.(b)........................... 15,800 247,862
Hilton Hotels Corp........................................ 39,200 749,700
King World Productions, Inc............................... 11,500 338,531
Marriott International, Inc. (Class "A" Stock)............ 40,000 1,160,000
Mirage Resorts, Inc.(b)................................... 28,100 419,744
----------------
16,582,937
----------------
MACHINERY -- 0.3%
Briggs & Stratton Corp.................................... 3,900 194,513
Case Corp................................................. 98,800 2,155,075
Caterpillar, Inc.......................................... 58,300 2,681,800
Cooper Industries, Inc.................................... 19,000 906,063
Deere & Co................................................ 39,100 1,295,188
Dover Corp................................................ 34,800 1,274,550
DT Industries, Inc........................................ 35,800 563,850
Eaton Corp................................................ 11,200 791,700
Global Industrial Technologies, Inc.(b)................... 61,400 656,213
Harnischfeger Industries, Inc............................. 7,500 76,406
Ingersoll-Rand Co......................................... 25,900 1,215,681
Milacron, Inc............................................. 6,300 121,275
Paxar Corp................................................ 229,925 2,054,955
Snap-On, Inc.............................................. 9,500 330,719
Timken Co................................................. 9,900 186,863
----------------
14,504,851
----------------
MANUFACTURING -- 0.3%
Hussmann International, Inc............................... 66,400 1,286,500
Illinois Tool Works, Inc.................................. 39,100 2,267,800
Smith (A.O.) Corp.,....................................... 105,450 2,590,116
Tyco International Ltd.................................... 98,651 7,441,985
----------------
13,586,401
----------------
MEDIA -- 1.3%
CBS Corp.(b).............................................. 304,000 9,956,000
Central Newspapers, Inc.(Class "A" Stock)................. 50,000 3,571,875
Clear Channel Communications, Inc.(b)..................... 38,600 2,103,700
Comcast Corp. (Special Class "A" Stock)................... 56,700 3,327,581
Donnelley (R.R.) & Sons Co................................ 22,800 998,925
Dow Jones & Co., Inc...................................... 15,100 726,688
Gannett Co., Inc.......................................... 44,400 2,938,725
Houghton Mifflin Co....................................... 58,700 2,773,576
Interpublic Group of Companies, Inc....................... 19,700 1,571,075
Knight-Ridder, Inc........................................ 70,600 3,609,425
Lee Enterprises, Inc...................................... 50,900 1,603,350
McGraw-Hill, Inc.......................................... 15,500 1,579,063
Mediaone Group, Inc....................................... 95,100 4,469,700
Meredith Corp............................................. 8,300 314,363
New York Times Co. (Class "A" Stock)...................... 30,000 1,040,625
Tele-Communications, Inc. (Series "A" Stock)(b)........... 79,400 4,391,813
Time Warner, Inc.......................................... 183,000 11,357,438
Times Mirror Co. (Class "A" Stock)........................ 13,900 778,400
Tribune Co................................................ 19,300 1,273,800
Viacom, Inc. (Class "B" Stock)(b)......................... 55,300 4,092,200
----------------
62,478,322
----------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- ----------------
<S> <C> <C>
METALS-FERROUS -- 0.3%
AK Steel Holding Corp..................................... 213,400 $ 5,014,900
Allegheny Teledyne, Inc................................... 30,700 627,431
Bethlehem Steel Corp.(b).................................. 241,500 2,022,563
LTV Corp.................................................. 204,900 1,190,981
Material Sciences Corp.(b)................................ 96,900 823,650
National Steel Corp. (Class "B" Stock)(b)................. 42,200 300,675
Nucor Corp................................................ 13,800 596,850
USX-U.S. Steel Group, Inc................................. 80,900 1,860,700
Worthington Industries, Inc............................... 15,200 190,000
----------------
12,627,750
----------------
METALS-NON FERROUS -- 0.3%
Alcan Aluminum Ltd........................................ 35,600 963,425
Aluminum Company of America............................... 184,300 13,741,869
Cyprus Amax Minerals Co................................... 14,600 146,000
Inco Ltd.................................................. 26,200 276,738
Reynolds Metals Co........................................ 11,600 611,175
----------------
15,739,207
----------------
MINERAL RESOURCES
ASARCO, Inc............................................... 6,300 94,894
Burlington Resources, Inc................................. 27,600 988,425
Homestake Mining Co....................................... 33,100 304,106
Phelps Dodge Corp......................................... 9,200 468,050
----------------
1,855,475
----------------
MISCELLANEOUS - BASIC INDUSTRY -- 0.4%
AES Corp.................................................. 24,000 1,137,000
Coltec Industries, Inc.................................... 43,700 852,150
Crane Co.................................................. 10,800 326,025
Danaher Corp.............................................. 14,000 760,375
Donaldson Co., Inc........................................ 109,200 2,265,900
Ecolab, Inc............................................... 20,200 730,988
IDEX Corp................................................. 60,100 1,472,450
ITT Industries, Inc....................................... 18,500 735,375
Laidlaw, Inc.............................................. 51,500 518,219
Mark IV Industries, Inc................................... 86,542 1,125,046
Millipore Corp............................................ 6,800 193,375
NACCO Industries, Inc. (Class "A" Stock).................. 1,300 119,600
Pall Corp................................................. 19,500 493,594
PPG Industries, Inc....................................... 27,900 1,625,175
Textron, Inc.............................................. 25,700 1,951,594
Thermo Electron Corp.(b).................................. 24,900 421,744
Trinity Industries, Inc................................... 52,200 2,009,700
York International Corp................................... 27,000 1,101,938
----------------
17,840,248
----------------
MISCELLANEOUS - CONSUMER GROWTH/STAPLE -- 0.4%
American Greetings Corp. (Class "A" Stock)................ 11,400 468,113
Black & Decker Corp....................................... 14,900 835,331
Corning, Inc.............................................. 36,200 1,629,000
Jostens, Inc.............................................. 6,100 159,744
Minnesota Mining & Manufacturing Co....................... 64,000 4,552,000
Polaroid Corp............................................. 7,000 130,813
Rubbermaid, Inc........................................... 23,500 738,781
Unilever N.V., ADR, (United Kingdom)...................... 100,300 8,318,631
----------------
16,832,413
----------------
MISCELLANEOUS - INDUSTRIAL
Tenneco, Inc.............................................. 26,700 909,469
----------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B16
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- ----------------
<S> <C> <C>
OIL & GAS -- 2.0%
Amerada Hess Corp......................................... 14,400 $ 716,400
Amoco Corp................................................ 149,000 8,995,875
Anadarko Petroleum Corp................................... 18,800 580,450
Ashland, Inc.............................................. 11,800 570,825
Atlantic Richfield Co..................................... 50,200 3,275,550
Basin Exploration, Inc.(b)................................ 17,400 218,588
Cabot Oil & Gas Corp. (Class "A" Stock)................... 88,600 1,329,000
Chevron Corp.............................................. 102,900 8,534,269
Coastal Corp.............................................. 33,200 1,159,925
Eastern Enterprises....................................... 3,200 140,000
Enron Oil & Gas Co........................................ 48,400 834,900
Exxon Corp................................................ 380,300 27,809,438
Kerr-McGee Corp........................................... 7,500 286,875
Mobil Corp................................................ 122,800 10,698,950
Murphy Oil Corp........................................... 27,600 1,138,500
NICOR, Inc................................................ 7,600 321,100
Noble Affiliates, Inc..................................... 50,900 1,253,413
Phillips Petroleum Co..................................... 41,200 1,756,150
Pioneer Natural Resources Co.............................. 334,644 2,928,135
Royal Dutch Petroleum Co.................................. 335,800 16,076,426
Seagull Energy Corp.(b)................................... 63,700 402,106
Sunoco, Inc............................................... 14,800 533,725
Texaco, Inc............................................... 85,800 4,536,675
Union Pacific Resources Group, Inc........................ 39,800 360,688
Unocal Corp............................................... 38,600 1,126,638
USX-Marathon Group........................................ 45,200 1,361,650
Western Gas Resources, Inc................................ 103,000 592,250
----------------
97,538,501
----------------
OIL & GAS EXPLORATION/PRODUCTION -- 0.2%
Elf Aquitaine SA, ADR, (France)........................... 124,800 7,066,800
Occidental Petroleum Corp................................. 53,100 896,063
Oryx Energy Co.(b)........................................ 140,000 1,881,250
----------------
9,844,113
----------------
OIL & GAS SERVICES -- 0.5%
Apache Corp............................................... 15,000 379,688
Baker Hughes, Inc......................................... 49,450 874,647
Enron Corp................................................ 51,400 2,933,013
Halliburton Co............................................ 68,500 2,029,313
Helmerich & Payne, Inc.................................... 7,900 153,063
J. Ray McDermott, SA...................................... 163,800 4,002,864
McDermott International, Inc.............................. 431,600 10,655,125
ONEOK, Inc................................................ 4,900 177,013
Rowan Companies, Inc.(b).................................. 13,600 136,000
Schlumberger Ltd.......................................... 83,000 3,828,375
Wolverine Tube, Inc.(b)................................... 37,000 777,000
----------------
25,946,101
----------------
PRECIOUS METALS -- 0.1%
Barrick Gold Corp......................................... 58,500 1,140,750
Battle Mountain Gold Co................................... 36,000 148,500
Freeport-McMoRan Copper & Gold, Inc. (Class "B").......... 30,300 316,256
Newmont Mining Corp....................................... 24,500 442,531
Placer Dome, Inc.......................................... 38,700 445,050
----------------
2,493,087
----------------
RAILROADS -- 0.2%
Burlington Northern Santa Fe Corp......................... 73,500 2,480,625
CSX Corp.................................................. 34,200 1,419,300
Norfolk Southern Corp..................................... 59,100 1,872,731
Union Pacific Corp........................................ 38,700 1,743,919
----------------
7,516,575
----------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- ----------------
<S> <C> <C>
REAL ESTATE DEVELOPMENT -- 0.3%
Crescent Operating, Inc................................... 17,060 $ 81,035
Crescent Real Estate Equities Co.......................... 336,700 7,744,100
Equity Residential Properties Trust....................... 14,400 582,300
Vornado Operating, Inc.(b)................................ 4,920 39,668
Vornado Realty Trust(b)................................... 185,200 6,250,500
----------------
14,697,603
----------------
RESTAURANTS -- 0.2%
Darden Restaurants, Inc................................... 18,200 327,600
McDonald's Corp........................................... 107,900 8,267,838
Tricon Global Restaurants, Inc.(b)........................ 23,800 1,192,975
Wendy's International, Inc................................ 20,700 451,519
----------------
10,239,932
----------------
RETAIL -- 2.6%
Albertson's, Inc.......................................... 38,500 2,451,969
American Stores Co........................................ 42,800 1,580,925
AutoZone, Inc.(b)......................................... 23,800 783,913
Bombay Company, Inc.(b)................................... 139,200 774,300
Charming Shoppes, Inc.(b)................................. 811,300 3,498,731
Circuit City Stores, Inc.................................. 15,500 774,031
Consolidated Stores Corp.................................. 16,900 341,169
Costco Companies, Inc.(b)................................. 33,600 2,425,500
CVS Corp.................................................. 59,800 3,289,000
Dayton-Hudson Corp........................................ 68,500 3,716,125
Designs, Inc.(b).......................................... 51,900 100,556
Dillard's, Inc............................................ 49,100 1,393,213
Dollar General Corporation................................ 22,500 531,563
Federated Department Stores, Inc.(b)...................... 32,900 1,433,206
Fred Meyer, Inc........................................... 21,000 1,265,250
Great Atlantic & Pacific Tea Co., Inc..................... 6,000 177,750
Harcourt General, Inc..................................... 11,100 590,381
Home Depot, Inc........................................... 229,100 14,018,056
IKON Office Solutions, Inc................................ 21,100 180,669
J.C. Penney Co., Inc...................................... 39,100 1,832,813
Jan Bell Marketing, Inc.(b)............................... 73,200 471,225
Kmart Corp.(b)............................................ 685,800 10,501,313
Kohl's Corp.(b)........................................... 22,600 1,388,488
Kroger Co.(b)............................................. 39,923 2,415,342
Liz Claiborne, Inc........................................ 10,500 331,406
Longs Drug Stores, Inc.................................... 6,100 228,750
May Department Stores Co.................................. 36,200 2,185,575
Newell Co................................................. 24,900 1,027,125
Nordstrom, Inc............................................ 28,200 978,188
Pep Boys - Manny, Moe & Jack.............................. 9,900 155,306
Rite Aid Corp............................................. 40,400 2,002,325
Safeway, Inc.,(b)......................................... 71,000 4,326,563
Sears, Roebuck & Co....................................... 61,400 2,609,500
Sherwin-Williams Co....................................... 27,100 796,063
Staples, Inc.(b).......................................... 43,000 1,878,563
Supervalu, Inc............................................ 18,800 526,400
Tandy Corp................................................ 16,200 667,238
The Gap, Inc.............................................. 93,000 5,231,250
The Limited, Inc.......................................... 247,100 7,196,788
TJX Companies, Inc........................................ 50,600 1,467,400
Toys 'R' Us, Inc.(b)...................................... 131,700 2,222,439
Wal-Mart Stores, Inc...................................... 347,700 28,315,819
Walgreen Co............................................... 77,600 4,544,450
Winn-Dixie Stores, Inc.................................... 23,300 1,045,588
----------------
123,672,224
----------------
RUBBER -- 0.1%
Cooper Tire & Rubber Co................................... 12,300 251,381
Goodyear Tire & Rubber Co................................. 63,600 3,207,825
----------------
3,459,206
----------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B17
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- ----------------
<S> <C> <C>
SEMICONDUCTORS
National Semiconductor Corp.(b)........................... 25,700 $ 346,950
----------------
TELECOMMUNICATIONS -- 3.5%
Airtouch Communications, Inc.(b).......................... 88,400 6,375,850
Alcatel Alsthom, ADR, (France)............................ 124,900 3,052,244
Alltel Corp............................................... 42,800 2,559,975
Ameritech Corp............................................ 171,400 10,862,476
Andrew Corp.(b)........................................... 13,900 229,350
Ascend Communications, Inc.(b)............................ 30,200 1,985,650
AT&T Corp................................................. 280,600 21,115,150
Bell Atlantic Corp........................................ 243,200 13,816,800
BellSouth Corp............................................ 305,200 15,221,850
Deutsche Telekom AG, ADR, (Germany)....................... 45,000 1,473,750
Frontier Corp............................................. 25,700 873,800
General Instrument Corp................................... 23,200 787,350
GTE Corp.................................................. 150,000 10,115,625
Lucent Technologies, Inc.................................. 205,400 22,594,000
MCI Worldcom, Inc......................................... 280,414 20,119,705
Nextel Communications, Inc. (Class "A" Stock)(b).......... 41,100 970,988
Northern Telecom Ltd...................................... 102,140 5,119,768
SBC Communications, Inc................................... 302,100 16,200,113
Scientific-Atlanta, Inc................................... 12,400 282,875
Sprint Corp............................................... 112,950 6,717,269
Tellabs, Inc.(b).......................................... 28,400 1,947,175
US West, Inc.............................................. 77,860 5,031,703
----------------
167,453,466
----------------
TEXTILES
National Service Industries, Inc.......................... 6,700 254,600
Pillowtex Corp.(b)........................................ 18,530 495,678
Russell Corp.............................................. 5,700 115,781
Springs Industries, Inc................................... 3,200 132,600
Tultex Corp.(b)........................................... 88,300 77,263
VF Corp................................................... 19,100 895,313
----------------
1,971,235
----------------
TOBACCO -- 0.7%
Philip Morris Co., Inc.................................... 479,600 25,658,600
RJR Nabisco Holdings Corp................................. 303,500 9,010,157
UST, Inc.................................................. 28,900 1,007,888
----------------
35,676,645
----------------
TOYS
Hasbro, Inc............................................... 20,800 751,400
Mattel, Inc............................................... 45,551 1,039,132
----------------
1,790,532
----------------
TRUCKING/SHIPPING -- 0.1%
Federal Express Corp...................................... 23,000 2,047,000
Ryder System, Inc......................................... 12,000 312,000
Yellow Corp.(b)........................................... 43,600 833,850
----------------
3,192,850
----------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- ----------------
<S> <C> <C>
UTILITY - ELECTRIC -- 0.8%
Ameren Corp............................................... 21,500 $ 917,781
American Electric Power Co., Inc.......................... 29,700 1,397,757
Baltimore Gas & Electric Co............................... 23,100 713,213
Carolina Power & Light Co................................. 23,500 1,105,969
Central & South West Corp................................. 33,200 910,925
CINergy Corp.............................................. 24,700 849,063
Consolidated Edison, Inc.................................. 36,800 1,945,800
Dominion Resources, Inc................................... 30,300 1,416,525
DTE Energy Co............................................. 22,700 973,263
Duke Energy Corp.......................................... 56,400 3,613,125
Edison International...................................... 56,700 1,580,513
Entergy Corp.............................................. 38,200 1,188,975
FirstEnergy Corp.(b)...................................... 36,100 1,175,506
FPL Group, Inc............................................ 28,500 1,756,313
GPU, Inc.................................................. 19,900 879,331
Houston Industries, Inc................................... 44,300 1,423,138
New Century Energies, Inc................................. 15,000 731,250
Niagara Mohawk Power Corp.(b)............................. 22,600 364,425
Northern States Power Co.................................. 23,300 646,575
Pacific Gas & Electric Co................................. 59,700 1,880,550
PacifiCorp................................................ 46,400 977,300
PECO Energy Co............................................ 34,900 1,452,713
PP&L Resources, Inc....................................... 26,000 724,750
Public Service Enterprise Group, Inc...................... 36,300 1,452,000
Southern Co............................................... 108,100 3,141,656
Texas Utilities Co........................................ 41,600 1,942,200
Unicom Corp............................................... 33,900 1,307,269
----------------
36,467,885
----------------
WASTE MANAGEMENT -- 0.1%
Waste Management, Inc..................................... 127,902 5,963,431
----------------
TOTAL COMMON STOCKS
(cost $1,566,786,221).................................................... 1,853,914,159
----------------
</TABLE>
<TABLE>
<CAPTION>
PREFERRED STOCKS -- 0.7%
<S> <C> <C>
FINANCIAL SERVICES -- 0.6%
Central Hispano Capital Corp.............................. 1,225,900 31,289,903
--------------
TELECOMMUNICATIONS -- 0.1%
Telecomunicacoes Brasileiras S.A., ADR.................... 55,900 4,063,231
--------------
TOTAL PREFERRED STOCKS
(cost $36,876,618)....................................................... 35,353,134
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $4,298,572,492).................................................... 4,522,618,555
--------------
</TABLE>
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
SHORT-TERM RATING AMOUNT
INVESTMENTS -- 5.0% (UNAUDITED) (000)
------------ ---------
<S> <C> <C> <C>
CERTIFICATES OF DEPOSIT-YANKEE
Alltel Corp.,
5.75%, 01/04/99............................... NR $ 1,200 1,200,000
Avery Dennison,
5.00%, 01/04/99............................... NR 1,174 1,174,000
--------------
2,374,000
--------------
COMMERCIAL PAPER -- 0.3%
Barton Capital Corp,
5.35%, 01/04/99............................... P1 1,200 1,199,465
Campbell Soup Company,
4.80%, 01/04/99............................... P1 1,270 1,269,492
Countrywide Home Loan,
5.40%, 01/04/99............................... P1 1,200 1,199,460
CXC Inc.,
5.30%, 01/04/99............................... P1 1,200 1,199,470
Dover,
5.30%, 01/04/99............................... P1 1,200 1,199,470
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B18
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHORT-TERM MOODY'S PRINCIPAL
INVESTMENTS RATING AMOUNT VALUE
(CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
COMMERCIAL PAPER (CONT'D.)
<S> <C> <C> <C>
Duke Capital Corp,
5.05%, 01/04/99............................... P1 $ 1,200 $ 1,199,495
John Hancock Cap. Corp.,
5.25%, 01/07/99............................... P1 1,200 1,198,950
Novartis Finance Corp.,
5.25%, 01/04/99............................... P1 912 911,601
Pitney Bowes Credit Corp,
5.10%, 01/04/99............................... P1 1,206 1,205,488
Reed Elsevier, Inc.,
5.05%, 01/04/99............................... P1 1,200 1,199,495
SBC Communications,
5.00%, 01/04/99............................... P1 1,200 1,199,500
Sonoco Products,
5.35%, 01/04/99............................... P1 1,000 999,554
Triple-A One Plus Funding,,
5.30%, 01/04/99............................... P1 728 727,678
Xerox Capital Corp,
5.30%, 01/04/99............................... P1 1,200 1,199,470
--------------
15,908,588
--------------
OTHER CORPORATE OBLIGATIONS -- 2.3%
Advanta Corp., M.T.N.,
6.99%, 10/18/99............................... Ba3 15,000 14,448,000
7.25%, 08/16/99............................... Ba2 3,000 2,976,150
AT&T Capital Corp., M.T.N.,
6.65%, 04/30/99............................... Baa3 32,000 32,104,319
Comdisco, Inc.,
6.11%, 08/04/99............................... Baa1 12,500 12,541,375
Enterprise Rent-A-Car USA Finance Co., M.T.N.,
8.75%, 12/15/99............................... Baa3 5,000 5,120,350
Federal Express Corp.,
10.05%, 06/15/99.............................. Baa3 500 510,090
First Union Corp.,
9.45%, 06/15/99............................... A3 4,000 4,071,961
Lehman Brothers Holdings, Inc.,
6.71%, 10/12/99............................... Baa1 6,000 6,049,020
Okobank, (Finland),
6.793%, 1/14/99 .............................. A3 12,500 12,500,000
SunAmerica, Inc.,
6.20%, 10/31/99............................... Baa1 9,000 9,068,850
Tele-Communications, Inc.,
6.375%, 09/15/99.............................. Ba1 8,000 8,056,240
--------------
107,446,355
--------------
<CAPTION>
SHORT-TERM MOODY'S PRINCIPAL
INVESTMENTS RATING AMOUNT VALUE
(CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
REPURCHASE AGREEMENT -- 2.3%
Joint Repurchase Agreement Account,
4.693%, 01/04/99 (Note 5)..................... $ 109,421 $ 109,421,000
--------------
U. S. GOVERNMENT OBLIGATION -- 0.1%
United States Treasury Bills,
4.32%, 03/18/99 (a)........................... 100 99,088
4.36%, 03/18/99 (a)........................... 4,650 4,607,199
--------------
4,706,287
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $197,485,955)...................................................... 239,856,230
--------------
TOTAL INVESTMENTS -- 99.3%
(cost $4,496,058,447; Note 6)............................................
4,762,474,785
VARIATION MARGIN ON OPEN FUTURES CONTRACTS (D).............................
85,990
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.7%..............................
33,398,995
--------------
TOTAL NET ASSETS -- 100.0%.................................................
$4,795,959,770
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
AG Aktiengesellschaft (German Stock Company)
ADR American Depository Receipt
L.P. Limited Partnership
M.T.N. Medium Term Note
SA Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French
Corporation)
(a) Security segregated as collateral for futures contracts.
(b) Non-income producing security.
(c) Issue in default.
(d) Open futures contracts as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
VALUE AT
NUMBER OF EXPIRATION VALUE AT DECEMBER 31, APPRECIATION/
CONTRACTS TYPE DATE TRADE DATE 1998 DEPRECIATION
<C> <S> <C> <C> <C> <C>
Long Position:
307 U.S. T-Bond Mar 99 $39,190,000 $39,228,844 $ 38,844
148 S&P 500 Index Mar 99 $43,681,225 $46,083,500 $2,402,275
110 U.S. Treasury 5yr Mar 99 $12,429,218 $12,467,812 $ 38,594
-------------
$2,479,713
-------------
-------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B19
<PAGE>
FLEXIBLE MANAGED PORTFOLIO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 88.7%
VALUE
COMMON STOCKS -- 52.8% SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AEROSPACE -- 1.0%
Aeroquip-Vickers, Inc........................... 4,500 $ 134,719
AlliedSignal, Inc............................... 91,400 4,050,162
Boeing Co....................................... 162,100 5,288,512
GenCorp, Inc.................................... 403,900 10,072,256
General Dynamics Corp........................... 20,400 1,195,950
Goodrich (B.F.) Co.............................. 11,600 416,150
Litton Industries, Inc. (a)..................... 306,000 19,966,500
Lockheed Martin Corp............................ 31,500 2,669,625
Northrop Grumman Corp........................... 10,800 789,750
Raytheon Co. (Class "B" Stock).................. 55,000 2,928,750
United Technologies Corp........................ 37,700 4,099,875
--------------
51,612,249
--------------
AIRLINES -- 1.2%
AMR Corp. (a)................................... 646,300 38,374,062
Delta Air Lines, Inc............................ 24,200 1,258,400
Southwest Airlines Co........................... 53,700 1,204,894
US Airways Group, Inc. (a)...................... 479,200 24,918,400
--------------
65,755,756
--------------
APPAREL -- 0.1%
Fruit of the Loom, Inc. (Class "A" Stock) (a)... 310,300 4,286,018
Nike, Inc. (Class "B" Stock).................... 47,200 1,914,550
Reebok International Ltd........................ 9,100 135,362
--------------
6,335,930
--------------
AUTOS - CARS & TRUCKS -- 2.2%
Cummins Engine Co., Inc......................... 6,200 220,100
DaimlerChrysler AG.............................. 327,975 31,506,098
Dana Corp....................................... 26,550 1,085,231
Ford Motor Co................................... 478,700 28,093,707
General Motors Corp............................. 553,900 39,638,469
Genuine Parts Co................................ 29,000 969,687
Johnson Controls, Inc........................... 13,700 808,300
MascoTech, Inc.................................. 388,000 6,644,500
Midas, Inc...................................... 90,866 2,828,204
Navistar International Corp. (a)................ 11,700 333,450
PACCAR, Inc..................................... 12,600 518,175
Titan International, Inc........................ 415,700 3,949,150
TRW, Inc........................................ 19,900 1,118,131
--------------
117,713,202
--------------
BANKS AND SAVINGS & LOANS -- 2.0%
Banc One Corp................................... 190,264 9,715,355
Bank of New York Co., Inc....................... 122,000 4,910,500
BankAmerica Corp................................ 281,141 16,903,603
BankBoston Corp................................. 47,200 1,837,850
Bankers Trust Corp.............................. 15,900 1,358,456
BB&T Corp....................................... 46,200 1,862,437
Chase Manhattan Corp............................ 136,700 9,304,144
Comerica, Inc................................... 25,500 1,738,781
First Union Corp................................ 156,800 9,535,400
Fleet Financial Group, Inc...................... 90,000 4,021,875
Golden West Financial Corp...................... 9,200 843,525
Huntington Bancshares, Inc...................... 34,120 1,025,732
KeyCorp......................................... 71,200 2,278,400
Mellon Bank Corp................................ 41,300 2,839,375
Mercantile Bancorporation, Inc.................. 23,800 1,097,775
Morgan (J.P.) & Co., Inc........................ 28,800 3,025,800
National City Corp.............................. 53,200 3,857,000
Northern Trust Corp............................. 18,100 1,580,356
PNC Bank Corp................................... 49,500 2,679,187
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
BANKS AND SAVINGS & LOANS (CONT'D.)
Providian Financial Corp........................ 23,100 $ 1,732,500
Regions Financial Corp.......................... 32,000 1,290,000
Republic New York Corp.......................... 17,700 806,456
Summit Bancorp.................................. 28,500 1,245,094
Suntrust Banks, Inc............................. 34,200 2,616,300
Synovus Financial Corp.......................... 42,500 1,035,937
U.S. Bancorp.................................... 119,400 4,238,700
Union Planters Corp............................. 18,000 815,625
Wachovia Corp................................... 33,400 2,920,412
Wells Fargo & Co................................ 259,400 10,359,787
--------------
107,476,362
--------------
BUSINESS SERVICES
Equifax, Inc.................................... 24,400 834,175
Omnicom Group, Inc.............................. 27,300 1,583,400
--------------
2,417,575
--------------
CHEMICALS -- 1.1%
Air Products & Chemicals, Inc................... 38,100 1,524,000
Dow Chemical Co................................. 36,800 3,346,500
Du Pont (E.I.) de Nemours & Co.................. 183,500 9,736,969
Eastman Chemical Co............................. 12,700 568,325
Engelhard Corp.................................. 23,400 456,300
Ferro Corp...................................... 553,650 14,394,900
FMC Corp. (a)................................... 5,600 313,600
Grace (W.R.) & Co............................... 12,000 188,250
Great Lakes Chemical Corp....................... 9,700 388,000
Hercules, Inc................................... 15,700 429,787
Millennium Chemicals, Inc. (a).................. 601,600 11,956,800
Monsanto Co..................................... 96,200 4,569,500
Morton International, Inc....................... 21,200 519,400
Nalco Chemical Co............................... 10,800 334,800
OM Group, Inc................................... 260,300 9,500,950
Praxair, Inc.................................... 25,600 902,400
Raychem Corp.................................... 13,800 445,912
Rohm & Haas Co.................................. 29,700 894,712
Sigma-Aldrich Corp.............................. 16,300 478,812
Union Carbide Corp.............................. 20,800 884,000
--------------
61,833,917
--------------
COMMERCIAL SERVICES -- 0.1%
Cendant Corp. (a)............................... 136,500 2,602,031
Deluxe Corp..................................... 13,200 482,625
Moore Corp. Ltd................................. 14,300 157,300
--------------
3,241,956
--------------
COMPUTER SERVICES -- 2.2%
3Com Corp. (a).................................. 57,500 2,576,719
Adobe Systems, Inc.............................. 11,200 523,600
America Online, Inc. (a)........................ 10,900 1,744,000
Autodesk, Inc................................... 7,600 324,425
Automatic Data Processing, Inc.................. 48,500 3,889,094
BMC Software, Inc. (a).......................... 32,600 1,452,737
Cabletron Systems, Inc. (a)..................... 25,600 214,400
Ceridian Corp. (a).............................. 11,700 816,806
Cisco Systems, Inc. (a)......................... 248,500 23,063,906
Computer Associates International, Inc.......... 88,600 3,776,575
Computer Sciences Corp. (a)..................... 25,300 1,630,269
Electronic Data Systems Corp.................... 78,000 3,919,500
EMC Corp. (a)................................... 80,400 6,834,000
First Data Corp................................. 69,400 2,199,112
Microsoft Corp. (a)............................. 396,700 55,017,331
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B20
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
COMPUTER SERVICES (CONT'D.)
Novell, Inc. (a)................................ 56,900 $ 1,031,312
Oracle Corp. (a)................................ 159,500 6,878,437
Parametric Technology Corp. (a)................. 43,200 707,400
Peoplesoft, Inc................................. 30,000 568,125
Silicon Graphics, Inc. (a)...................... 30,400 391,400
Unisys Corp..................................... 40,400 1,391,275
--------------
118,950,423
--------------
COMPUTERS -- 1.4%
Apple Computer, Inc. (a)........................ 21,600 884,250
Compaq Computer Corp............................ 267,961 11,237,614
Data General Corp. (a).......................... 7,900 129,856
Dell Computer Corp. (a)......................... 203,200 14,871,700
Gateway 2000, Inc. (a).......................... 25,100 1,284,806
Hewlett-Packard Co.............................. 168,600 11,517,487
International Business Machines Corp............ 149,800 27,675,550
Seagate Technology, Inc. (a).................... 39,300 1,188,825
Sun Microsystems, Inc. (a)...................... 61,200 5,240,250
--------------
74,030,338
--------------
CONSTRUCTION -- 0.6%
Centex Corp..................................... 9,600 432,600
Fluor Corp...................................... 13,600 578,850
Foster Wheeler Corp............................. 6,600 87,037
Oakwood Homes Corp.............................. 572,000 8,687,250
Pulte Corp...................................... 6,900 191,906
Standard Pacific Corp........................... 632,400 8,932,650
Webb (Del E.) Corp.............................. 576,500 15,889,781
--------------
34,800,074
--------------
CONTAINERS -- 0.2%
Ball Corp....................................... 4,900 224,175
Bemis Co., Inc.................................. 8,600 326,262
Crown Cork & Seal Co., Inc...................... 20,800 640,900
Owens-Illinois, Inc. (a)........................ 260,800 7,987,000
Sealed Air Corp................................. 13,400 684,237
--------------
9,862,574
--------------
COSMETICS & SOAPS -- 0.7%
Alberto Culver Co. (Class "B" Stock)............ 9,200 245,525
Avon Products, Inc.............................. 42,800 1,893,900
Colgate-Palmolive Co............................ 47,900 4,448,712
Gillette Co..................................... 181,600 8,773,550
International Flavors & Fragrances, Inc......... 17,700 782,119
Procter & Gamble Co............................. 216,700 19,787,419
--------------
35,931,225
--------------
DIVERSIFIED OFFICE EQUIPMENT -- 0.2%
Avery Dennison Corp............................. 17,300 779,581
Pitney Bowes, Inc............................... 44,400 2,933,175
Xerox Corp...................................... 52,800 6,230,400
--------------
9,943,156
--------------
DIVERSIFIED OPERATIONS -- 1.3%
Fortune Brands, Inc............................. 27,800 879,175
General Electric Corp........................... 522,400 53,317,450
Loews Corp...................................... 183,800 18,058,350
--------------
72,254,975
--------------
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
DRUGS AND MEDICAL SUPPLIES -- 3.5%
Abbott Laboratories............................. 248,000 $ 12,152,000
Allergan, Inc................................... 10,600 686,350
ALZA Corp. (a).................................. 13,900 726,275
American Home Products Corp..................... 210,700 11,865,044
Amgen, Inc. (a)................................. 41,700 4,360,256
Bard (C.R.), Inc................................ 9,200 455,400
Bausch & Lomb, Inc.............................. 9,000 540,000
Baxter International, Inc....................... 45,400 2,919,787
Becton, Dickinson & Co.......................... 39,700 1,694,694
Biomet, Inc..................................... 18,100 728,525
Boston Scientific Corp. (a)..................... 63,200 1,694,550
Bristol-Myers Squibb Co......................... 159,700 21,369,856
Cardinal Health, Inc............................ 32,250 2,446,969
Guidant Corp.................................... 24,400 2,690,100
Johnson & Johnson............................... 217,200 18,217,650
Lilly (Eli) & Co................................ 176,900 15,721,987
Mallinckrodt, Inc............................... 11,800 363,587
Medtronic, Inc.................................. 75,900 5,635,575
Merck & Co., Inc................................ 191,200 28,237,850
Pfizer, Inc..................................... 210,500 26,404,594
Pharmacia & Upjohn, Inc......................... 82,300 4,660,237
Schering-Plough Corp............................ 237,400 13,116,350
St. Jude Medical, Inc. (a)...................... 14,900 412,544
Warner-Lambert Co............................... 132,400 9,954,825
--------------
187,055,005
--------------
ELECTRONICS -- 1.3%
Advanced Micro Devices, Inc. (a)................ 23,000 665,562
AMP Inc......................................... 35,700 1,858,631
Applied Materials, Inc. (a)..................... 59,400 2,535,637
Belden, Inc..................................... 275,600 5,839,275
EG&G, Inc....................................... 7,300 203,031
Emerson Electric Co............................. 71,900 4,498,244
Grainger (W.W.), Inc............................ 16,100 670,162
Harris Corp..................................... 13,000 476,125
Honeywell, Inc.................................. 20,600 1,551,437
Intel Corp...................................... 269,700 31,976,306
KLA-Tencor Corp. (a)............................ 13,700 594,237
LSI Logic Corp. (a)............................. 23,000 370,875
Micron Technology, Inc.......................... 34,300 1,734,294
Motorola, Inc................................... 96,800 5,910,850
National Semiconductor Corp. (a)................ 26,700 360,450
Perkin-Elmer Corp............................... 7,900 770,744
Rockwell International Corp..................... 32,500 1,578,281
Solectron Corp.................................. 5,200 483,275
Tektronix, Inc.................................. 8,200 246,512
Texas Instruments, Inc.......................... 63,200 5,407,550
Thomas & Betts Corp............................. 9,000 389,812
--------------
68,121,290
--------------
ENGINEERING & CONSTRUCTION -- 0.1%
Giant Cement Holding, Inc. (a).................. 244,900 6,061,275
--------------
ENVIRONMENTAL SERVICES -- 0.2%
Browning-Ferris Industries, Inc................. 29,800 847,437
Waste Management, Inc........................... 256,562 11,962,203
--------------
12,809,640
--------------
FINANCIAL SERVICES -- 3.0%
American Express Co............................. 73,300 7,494,925
Associates First Capital Corp................... 112,390 4,762,526
Bear Stearns Companies, Inc..................... 17,500 654,062
Block (H.R.), Inc............................... 17,000 765,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B21
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
FINANCIAL SERVICES (CONT'D.)
Capital One Financial Corp...................... 10,200 $ 1,173,000
Citigroup, Inc.................................. 584,451 28,930,324
Countrywide Credit Industries, Inc.............. 17,600 883,300
Dun & Bradstreet Corp........................... 27,600 871,125
Federal Home Loan Mortgage Corp................. 109,600 7,062,350
Federal National Mortgage Association........... 167,500 12,395,000
Fifth Third Bancorp............................. 41,100 2,930,944
Franklin Resources, Inc......................... 41,000 1,312,000
Household International, Inc.................... 78,392 3,106,283
Lehman Brothers Holdings, Inc................... 724,900 31,940,906
MBNA Corp....................................... 121,800 3,037,387
Merrill Lynch & Co., Inc........................ 294,000 19,624,500
Morgan Stanley Dean Witter & Co................. 317,795 22,563,445
Paychex, Inc.................................... 23,000 1,183,062
Schwab (Charles) Corp. (a)...................... 64,500 3,624,094
SLM Holding Corp................................ 26,000 1,248,000
State Street Corp............................... 26,100 1,815,581
SunAmerica, Inc................................. 31,700 2,571,662
Transamerica Corp............................... 10,200 1,178,100
Washington Mutual, Inc.......................... 92,336 3,526,081
--------------
164,653,657
--------------
FOOD & BEVERAGES -- 2.3%
Anheuser-Busch Companies, Inc................... 79,400 5,210,625
Archer-Daniels-Midland Co....................... 101,115 1,737,914
Bestfoods....................................... 46,700 2,486,775
Brown-Forman Corp. (Class "B" Stock)............ 11,200 847,700
Campbell Soup Co................................ 74,000 4,070,000
Coca-Cola Co.................................... 395,900 26,475,812
Coca-Cola Enterprises, Inc...................... 62,000 2,216,500
ConAgra, Inc.................................... 77,100 2,428,650
Coors (Adolph) Co. (Class "B" Stock)............ 6,000 338,625
General Mills, Inc.............................. 25,700 1,998,175
Heinz (H.J.) & Co............................... 59,300 3,357,862
Hershey Foods Corp.............................. 23,200 1,442,750
Kellogg Co...................................... 66,600 2,272,725
PepsiCo, Inc.................................... 240,300 9,837,281
Pioneer Hi-Bred International, Inc.............. 39,600 1,069,200
Quaker Oats Co.................................. 22,400 1,332,800
Ralston-Ralston Purina Group.................... 52,000 1,683,500
RJR Nabisco Holdings Corp....................... 1,124,200 33,374,688
Sara Lee Corp................................... 149,600 4,216,850
Seagram Co., Ltd................................ 57,800 2,196,400
Sysco Corp...................................... 55,200 1,514,550
Whitman Corp.................................... 545,200 13,834,450
Wrigley (William) Jr. Co........................ 18,800 1,683,775
--------------
125,627,607
--------------
FOREST PRODUCTS -- 1.5%
Boise Cascade Corp.............................. 669,400 20,751,400
Champion International Corp..................... 404,400 16,378,200
Fort James Corp................................. 35,200 1,408,000
Georgia-Pacific Corp............................ 15,000 878,437
International Paper Co.......................... 49,000 2,195,812
Louisiana-Pacific Corp.......................... 706,600 12,939,612
Mead Corp....................................... 406,800 11,924,325
Potlatch Corp................................... 4,700 173,312
Temple-Inland, Inc.............................. 9,100 539,744
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
FOREST PRODUCTS (CONT'D.)
Union Camp Corp................................. 11,300 $ 762,750
Westvaco Corp................................... 16,600 445,087
Weyerhaeuser Co................................. 32,300 1,641,244
Willamette Industries, Inc...................... 302,500 10,133,750
--------------
80,171,673
--------------
GAS PIPELINES -- 0.1%
Columbia Energy Group........................... 13,500 779,625
Consolidated Natural Gas Co..................... 15,500 837,000
Peoples Energy Corp............................. 5,700 227,287
Sempra Energy................................... 37,053 940,220
Sonat, Inc...................................... 17,800 481,712
Williams Companies, Inc......................... 66,600 2,077,087
--------------
5,342,931
--------------
HOSPITALS/HOSPITAL MANAGEMENT -- 0.6%
Columbia/HCA Healthcare Corp.................... 911,500 22,559,625
HBO & Co........................................ 71,300 2,045,419
Healthsouth Corp. (a)........................... 65,700 1,014,244
Humana, Inc. (a)................................ 26,600 473,812
IMS Health, Inc................................. 26,300 1,984,006
Manor Care, Inc................................. 13,300 390,687
Service Corp. International..................... 40,800 1,552,950
Shared Medical Systems Corp..................... 4,200 209,475
Tenet Healthcare Corp. (a)...................... 49,700 1,304,625
--------------
31,534,843
--------------
HOUSEHOLD PRODUCTS & PERSONAL CARE -- 0.3%
Clorox Co....................................... 16,700 1,950,769
Kimberly-Clark Corp............................. 90,100 4,910,450
Leggett & Platt, Inc............................ 470,800 10,357,600
--------------
17,218,819
--------------
HOUSING RELATED -- 1.3%
Armstrong World Industries, Inc................. 6,500 392,031
Fleetwood Enterprises, Inc...................... 6,100 211,975
Hanson, PLC, ADR, (United Kingdom).............. 1,221,100 47,622,900
Kaufman & Broad Home Corp....................... 6,400 184,000
Lowe's Companies, Inc........................... 56,800 2,907,450
Masco Corp...................................... 53,500 1,538,125
Maytag Corp..................................... 15,400 958,650
Owens Corning................................... 413,400 14,649,862
Stanley Works................................... 14,400 399,600
Tupperware Corp................................. 9,900 162,731
Whirlpool Corp.................................. 12,100 670,037
--------------
69,697,361
--------------
INSURANCE -- 2.3%
Aetna, Inc...................................... 24,100 1,894,862
Allstate Corp................................... 135,800 5,245,275
American General Corp........................... 41,100 3,205,800
American International Group, Inc............... 169,200 16,348,950
Aon Corp........................................ 27,100 1,500,662
Berkley (W.R.) Corp............................. 175,850 5,989,891
Berkshire Hathaway, Inc. (Class "B" Stock)...... 494 1,159,725
Chubb Corp...................................... 27,600 1,790,550
CIGNA Corp...................................... 36,000 2,783,250
Cincinnati Financial Corp....................... 26,700 977,887
Conseco, Inc.................................... 50,687 1,549,121
Financial Security Assurance Holdings Ltd....... 140,100 7,600,425
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B22
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
INSURANCE (CONT'D.)
Hartford Financial Services Group, Inc.......... 38,300 $ 2,101,712
Jefferson-Pilot Corp............................ 17,200 1,290,000
Lincoln National Corp........................... 16,600 1,358,087
Marsh & McLennan Companies, Inc................. 41,300 2,413,469
MBIA, Inc....................................... 15,900 1,042,444
Magic Investment Corp........................... 18,500 736,531
Progressive Corp................................ 11,700 1,981,687
Provident Companies, Inc........................ 238,400 9,893,600
Reinsurance Group of America, Inc............... 474,600 33,222,000
SAFECO Corp..................................... 22,900 983,269
St. Paul Companies, Inc......................... 37,400 1,299,650
TIG Holdings, Inc............................... 351,200 5,465,550
Torchmark Corp.................................. 22,700 801,594
Trenwick Group, Inc............................. 273,300 8,916,413
United Healthcare Corp.......................... 30,500 1,313,406
UNUM Corp....................................... 22,500 1,313,438
--------------
124,179,248
--------------
INTRUMENTS - CONTROLS -- 0.1%
Parker-Hannifin Corp............................ 194,900 6,382,975
--------------
LEISURE -- 0.3%
Brunswick Corp.................................. 16,200 400,950
Carnival Corp. (Class "A" Stock)................ 78,500 3,768,000
Disney (Walt) Co................................ 328,300 9,849,000
Harrah's Entertainment, Inc. (a)................ 16,400 257,275
Hilton Hotels Corp.............................. 40,600 776,475
King World Productions, Inc..................... 11,900 350,306
Marriott International, Inc. (Class "A"
Stock)........................................ 41,400 1,200,600
Mirage Resorts, Inc. (a)........................ 29,100 434,681
--------------
17,037,287
--------------
MACHINERY -- 0.6%
Briggs & Stratton Corp.......................... 4,000 199,500
Case Corp....................................... 369,200 8,053,175
Caterpillar, Inc................................ 60,400 2,778,400
Cooper Industries, Inc.......................... 19,600 934,675
Deere & Co...................................... 40,500 1,341,563
Dover Corp...................................... 36,100 1,322,163
DT Industries, Inc.............................. 146,800 2,312,100
Eaton Corp...................................... 11,600 819,975
Global Industrial Technologies, Inc. (a)........ 258,100 2,758,444
Harnischfeger Industries, Inc................... 7,800 79,463
Ingersoll-Rand Co............................... 26,900 1,262,619
Milacron, Inc................................... 6,400 123,200
Paxar Corp...................................... 954,575 8,531,514
Snap-On, Inc.................................... 9,900 344,644
Timken Co....................................... 10,200 192,525
--------------
31,053,960
--------------
MANUFACTURING -- 0.5%
Flowserve Corp.................................. 161,991 2,682,976
Hussmann International, Inc..................... 272,600 5,281,625
Illinois Tool Works, Inc........................ 40,400 2,343,200
Smith (A.O.) Corp............................... 433,350 10,644,159
Tyco International Ltd.......................... 102,157 7,706,469
--------------
28,658,429
--------------
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
MEDIA -- 2.2%
CBS Corp. (a)................................... 910,000 $ 29,802,500
Central Newspapers, Inc.(Class "A" Stock)....... 205,300 14,666,119
Clear Channel Communications, Inc. (a).......... 40,000 2,180,000
Comcast Corp. (Special Class "A" Stock)......... 57,600 3,380,400
Donnelley (R.R.) & Sons Co...................... 23,700 1,038,356
Dow Jones & Co., Inc............................ 15,600 750,750
Gannett Co., Inc................................ 46,000 3,044,625
Houghton Mifflin Co............................. 240,700 11,373,075
Interpublic Group of Companies, Inc............. 21,200 1,690,700
Knight-Ridder, Inc.............................. 251,600 12,863,051
Lee Enterprises, Inc............................ 208,900 6,580,350
McGraw-Hill, Inc................................ 16,100 1,640,188
Mediaone Group, Inc............................. 98,500 4,629,500
Meredith Corp................................... 8,600 325,725
New York Times Co. (Class "A" Stock)............ 31,200 1,082,250
Tele-Communications, Inc. (Class "A"
Stock) (a).................................... 82,268 4,550,449
Time Warner, Inc................................ 189,400 11,754,638
Times Mirror Co. (Class "A" Stock).............. 14,300 800,800
Tribune Co...................................... 19,900 1,313,400
Viacom, Inc. (Class "B" Stock) (a).............. 57,300 4,240,200
--------------
117,707,076
--------------
METALS-FERROUS -- 0.8%
AK Steel Holding Corp........................... 880,000 20,680,000
Allegheny Teledyne, Inc......................... 31,800 649,913
Bethlehem Steel Corp. (a)....................... 924,400 7,741,851
LTV Corp........................................ 841,400 4,890,638
Material Sciences Corp. (a)..................... 397,900 3,382,150
National Steel Corp. (Class "B" Stock) (a)...... 172,800 1,231,200
Nucor Corp...................................... 14,200 614,150
USX-U.S. Steel Group, Inc....................... 291,100 6,695,300
Worthington Industries, Inc..................... 15,700 196,250
--------------
46,081,452
--------------
METALS-NON FERROUS -- 1.0%
Alcan Aluminum Ltd.............................. 36,900 998,606
Aluminum Company of America..................... 678,200 50,568,287
Cyprus Amax Minerals Co......................... 15,100 151,000
Inco Ltd........................................ 27,000 285,188
Reynolds Metals Co.............................. 11,900 626,981
--------------
52,630,062
--------------
MINERAL RESOURCES
ASARCO, Inc..................................... 6,500 97,906
Burlington Resources, Inc....................... 28,600 1,024,237
Homestake Mining Co............................. 34,300 315,131
Phelps Dodge Corp............................... 9,500 483,313
--------------
1,920,587
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 0.9%
AES Corp........................................ 25,000 1,184,375
Coltec Industries, Inc.......................... 179,200 3,494,400
Crane Co........................................ 11,100 335,081
Danaher Corp.................................... 14,000 760,375
Donaldson Co., Inc.............................. 448,600 9,308,450
Ecolab, Inc..................................... 20,900 756,319
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B23
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
MISCELLANEOUS - BASIC INDUSTRY (CONT'D.)
IDEX Corp....................................... 246,700 $ 6,044,150
ITT Industries, Inc............................. 19,300 767,175
Laidlaw, Inc.................................... 53,300 536,331
Mark IV Industries, Inc......................... 355,500 4,621,500
Millipore Corp.................................. 7,000 199,063
NACCO Industries, Inc. (Class "A" Stock)........ 1,300 119,600
Pall Corp....................................... 20,200 511,313
PPG Industries, Inc............................. 28,900 1,683,425
Textron, Inc.................................... 26,700 2,027,531
Thermo Electron Corp. (a)....................... 25,800 436,988
Trinity Industries, Inc......................... 214,100 8,242,850
Wolverine Tube, Inc. (a)........................ 155,300 3,261,300
York International Corp......................... 110,600 4,513,863
--------------
48,804,089
--------------
MISCELLANEOUS - CONSUMER GROWTH/STAPLE -- 0.6%
American Greetings Corp. (Class "A" Stock)...... 11,800 484,538
Black & Decker Corp............................. 15,400 863,362
Corning, Inc.................................... 37,400 1,683,000
Eastman Kodak Co................................ 195,400 14,068,800
Jostens, Inc.................................... 6,300 164,981
Minnesota Mining & Manufacturing Co............. 66,200 4,708,475
Polaroid Corp................................... 7,300 136,419
Rubbermaid, Inc................................. 24,300 763,931
Unilever N.V., ADR, (United Kingdom)............ 103,800 8,608,913
--------------
31,482,419
--------------
MISCELLANEOUS - INDUSTRIAL
Tenneco, Inc.................................... 27,600 940,125
--------------
OIL & GAS -- 2.4%
Amerada Hess Corp............................... 14,800 736,300
Amoco Corp...................................... 154,200 9,309,825
Anadarko Petroleum Corp......................... 19,400 598,975
Ashland, Inc.................................... 12,200 590,175
Atlantic Richfield Co........................... 52,000 3,393,000
Basin Exploration, Inc. (a)..................... 71,400 896,963
Cabot Oil & Gas Corp. (Class "A" Stock)......... 363,800 5,457,000
Chevron Corp.................................... 106,500 8,832,844
Coastal Corp.................................... 34,500 1,205,344
Eastern Enterprises............................. 3,300 144,375
Enron Oil & Gas Co.............................. 198,700 3,427,575
Exxon Corp...................................... 393,100 28,745,438
Kerr-McGee Corp................................. 7,700 294,525
Mobil Corp...................................... 125,500 10,934,188
Murphy Oil Corp................................. 114,000 4,702,500
NICOR, Inc...................................... 7,800 329,550
Noble Affiliates, Inc........................... 208,900 5,144,163
Phillips Petroleum Co........................... 42,600 1,815,825
Pioneer Natural Resources Co.................... 1,488,431 13,023,771
Royal Dutch Petroleum Co........................ 345,700 16,550,388
Seagull Energy Corp. (a)........................ 245,500 1,549,719
Sunoco, Inc..................................... 15,300 551,756
Texaco, Inc..................................... 87,700 4,637,138
Union Pacific Resources Group, Inc.............. 41,200 373,375
Unocal Corp..................................... 39,900 1,164,581
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
OIL & GAS (CONT'D.)
USX-Marathon Group.............................. 46,800 $ 1,409,850
Western Gas Resources, Inc...................... 423,100 2,432,825
--------------
128,251,968
--------------
OIL & GAS EXPLORATION/PRODUCTION -- 0.7%
Elf Aquitaine SA, ADR, (France)................. 513,400 29,071,275
Occidental Petroleum Corp....................... 57,100 963,563
Oryx Energy Co. (a)............................. 524,100 7,042,594
--------------
37,077,432
--------------
OIL & GAS SERVICES -- 1.3%
Apache Corp..................................... 15,500 392,344
Baker Hughes, Inc............................... 51,340 908,076
Enron Corp...................................... 53,200 3,035,725
Halliburton Co.................................. 70,900 2,100,413
Helmerich & Payne, Inc.......................... 8,200 158,875
J. Ray McDermott, SA............................ 672,900 16,443,994
McDermott International, Inc.................... 1,745,600 43,094,501
ONEOK, Inc...................................... 5,000 180,625
Rowan Companies, Inc. (a)....................... 14,100 141,000
Schlumberger Ltd................................ 85,800 3,957,525
--------------
70,413,078
--------------
PRECIOUS METALS -- 0.1%
Apex Silver Mines Ltd........................... 340,400 2,808,300
Barrick Gold Corp............................... 60,400 1,177,800
Battle Mountain Gold Co......................... 37,200 153,450
Freeport-McMoRan Copper & Gold, Inc. (Class "B"
Stock)........................................ 31,400 327,738
Newmont Mining Corp............................. 25,400 458,788
Placer Dome, Inc................................ 40,000 460,000
--------------
5,386,076
--------------
RAILROADS -- 0.1%
Burlington Northern Santa Fe Corp............... 75,900 2,561,625
CSX Corp........................................ 35,400 1,469,100
Norfolk Southern Corp........................... 61,100 1,936,106
Union Pacific Corp.............................. 40,000 1,802,500
--------------
7,769,331
--------------
REAL ESTATE DEVELOPMENT -- 1.2%
Crescent Operating, Inc......................... 67,240 319,390
Crescent Real Estate Equities Co................ 1,377,600 31,684,800
Equity Residential Properties Trust............. 150,900 6,102,019
Vornado Operating, Inc. (a)..................... 20,000 161,250
Vornado Realty Trust (a)........................ 745,100 25,147,125
--------------
63,414,584
--------------
RESTAURANTS -- 0.2%
Darden Restaurants, Inc......................... 19,000 342,000
McDonald's Corp................................. 111,700 8,559,013
Tricon Global Restaurants, Inc. (a)............. 24,600 1,233,075
Wendy's International, Inc...................... 21,500 468,969
--------------
10,603,057
--------------
RETAIL -- 3.7%
Albertson's, Inc................................ 39,800 2,534,763
American Stores Co.............................. 44,300 1,636,331
AutoZone, Inc. (a).............................. 24,600 810,263
Bombay Co., Inc. (a)............................ 571,600 3,179,525
Charming Shoppes, Inc. (a)...................... 3,332,400 14,370,975
Circuit City Stores, Inc........................ 16,000 799,000
Consolidated Stores Corp........................ 17,400 351,263
Costco Companies, Inc. (a)...................... 34,700 2,504,906
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B24
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
RETAIL (CONT'D.)
CVS Corp........................................ 62,000 $ 3,410,000
Dayton-Hudson Corp.............................. 70,800 3,840,900
Designs, Inc. (a)............................... 203,900 395,056
Dillard's, Inc.................................. 148,300 4,208,013
Dollar General Corp............................. 27,500 649,688
Federated Department Stores, Inc. (a)........... 34,000 1,481,125
Fred Meyer, Inc................................. 23,000 1,385,750
Great Atlantic & Pacific Tea Co., Inc........... 6,200 183,675
Harcourt General, Inc........................... 11,500 611,656
Home Depot, Inc................................. 237,200 14,513,675
IKON Office Solutions, Inc...................... 21,800 186,663
J.C. Penney Co., Inc............................ 40,500 1,898,438
Jan Bell Marketing, Inc. (a).................... 295,700 1,903,569
Kmart Corp. (a)................................. 2,576,000 39,445,000
Kohl's Corp. (a)................................ 25,200 1,548,225
Kroger Co. (a).................................. 41,300 2,498,650
Liz Claiborne, Inc.............................. 10,900 344,031
Longs Drug Stores, Inc.......................... 6,300 236,250
May Department Stores Co........................ 37,500 2,264,063
Newell Co....................................... 25,800 1,064,250
Nordstrom, Inc.................................. 28,900 1,002,469
Pep Boys - Manny, Moe & Jack.................... 10,300 161,581
Phillips-Van Heusen Corp........................ 389,200 2,797,375
Rite Aid Corp................................... 41,800 2,071,713
Safeway, Inc. (a)............................... 72,000 4,387,500
Sears, Roebuck & Co............................. 63,500 2,698,750
Sherwin-Williams Co............................. 28,000 822,500
Staples, Inc. (a)............................... 43,000 1,878,563
Supervalu, Inc.................................. 19,400 543,200
Tandy Corp...................................... 16,700 687,831
The Gap, Inc.................................... 96,300 5,416,875
The Limited, Inc................................ 826,500 24,071,813
TJX Companies, Inc.............................. 52,400 1,519,600
Toys 'R' Us, Inc. (a)........................... 404,100 6,819,188
Wal-Mart Stores, Inc............................ 360,200 29,333,788
Walgreen Co..................................... 80,300 4,702,569
Winn-Dixie Stores, Inc.......................... 24,100 1,081,488
--------------
198,252,506
--------------
RUBBER -- 0.2%
Cooper Tire & Rubber Co......................... 12,800 261,600
Goodyear Tire & Rubber Co....................... 186,400 9,401,550
--------------
9,663,150
--------------
TELECOMMUNICATIONS -- 3.4%
Airtouch Communications, Inc. (a)............... 91,400 6,592,225
Alcatel Alsthom, ADR, (France).................. 513,000 12,536,438
Alltel Corp..................................... 43,000 2,571,938
Ameritech Corp.................................. 177,500 11,249,063
Andrew Corp. (a)................................ 14,300 235,950
Ascend Communications, Inc. (a)................. 31,300 2,057,975
AT&T Corp....................................... 290,800 21,882,700
Bell Atlantic Corp.............................. 251,800 14,305,388
BellSouth Corp.................................. 316,000 15,760,500
Deutsche Telekom AG, ADR, (Germany)............. 185,000 6,058,750
Frontier Corp................................... 26,700 907,800
General Instrument Corp......................... 24,000 814,500
GTE Corp........................................ 155,300 10,473,044
Lucent Technologies, Inc........................ 211,000 23,210,000
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
TELECOMMUNICATIONS (CONT'D.)
MCI WorldCom, Inc............................... 287,270 $ 20,611,623
Nextel Communications, Inc. (Class "A"
Stock) (a).................................... 42,500 1,004,063
Northern Telecom Ltd............................ 105,800 5,303,225
SBC Communications, Inc......................... 313,200 16,795,350
Scientific-Atlanta, Inc......................... 12,800 292,000
Sprint Corp..................................... 69,700 5,863,513
Sprint Corp. (PCS Group)........................ 46,850 1,083,406
Tellabs, Inc. (a)............................... 30,600 2,098,013
US West, Inc.................................... 80,441 5,198,500
--------------
186,905,964
--------------
TEXTILES -- 0.1%
National Service Industries, Inc................ 6,900 262,200
Pillowtex Corp. (a)............................. 73,932 1,977,681
Russell Corp.................................... 5,900 119,844
Springs Industries, Inc......................... 3,300 136,744
Tultex Corp. (a)................................ 362,600 317,275
VF Corp......................................... 19,800 928,125
--------------
3,741,869
--------------
TOBACCO -- 0.8%
Philip Morris Co., Inc.......................... 801,400 42,874,900
UST, Inc........................................ 29,800 1,039,275
--------------
43,914,175
--------------
TOYS
Hasbro, Inc..................................... 21,600 780,300
Mattel, Inc..................................... 47,200 1,076,750
--------------
1,857,050
--------------
TRUCKING/SHIPPING -- 0.1%
Federal Express Corp. (a)....................... 23,800 2,118,200
Ryder System, Inc............................... 12,400 322,400
Yellow Corp. (a)................................ 178,700 3,417,638
--------------
5,858,238
--------------
UTILITY - ELECTRIC -- 0.7%
Ameren Corp..................................... 22,200 947,663
American Electric Power Co., Inc................ 30,700 1,444,819
Baltimore Gas & Electric Co..................... 24,000 741,000
Carolina Power & Light Co....................... 24,400 1,148,325
Central & South West Corp....................... 34,400 943,850
CINergy Corp.................................... 25,600 880,000
Consolidated Edison, Inc........................ 38,100 2,014,538
Dominion Resources, Inc......................... 31,400 1,467,950
DTE Energy Co................................... 23,500 1,007,563
Duke Energy Corp................................ 58,300 3,734,844
Edison International............................ 58,900 1,641,838
Entergy Corp.................................... 39,600 1,232,550
FirstEnergy Corp. (a)........................... 37,300 1,214,581
FPL Group, Inc.................................. 29,500 1,817,938
GPU, Inc........................................ 20,600 910,263
Houston Industries, Inc......................... 47,600 1,529,150
New Century Energies, Inc....................... 15,000 731,250
Niagara Mohawk Power Corp. (a).................. 24,300 391,838
Northern States Power Co........................ 24,200 671,550
Pacific Gas & Electric Co....................... 61,800 1,946,700
PacifiCorp...................................... 48,100 1,013,106
PECO Energy Co.................................. 36,100 1,502,663
PP&L Resources, Inc............................. 26,900 749,838
Public Service Enterprise Group, Inc............ 37,600 1,504,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B25
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
UTILITY - ELECTRIC (CONT'D.)
Southern Co..................................... 111,800 $ 3,249,188
Texas Utilities Co.............................. 44,500 2,077,594
Unicom Corp..................................... 35,100 1,353,544
--------------
37,868,143
--------------
TOTAL COMMON STOCKS
(cost $2,611,554,092).......................................... 2,858,308,143
--------------
PREFERRED STOCKS -- 0.8%
FINANCIAL SERVICES -- 0.5%
Central Hispano Capital Corp. (Portugal)........ 1,000,000 25,000,000
--------------
TELECOMMUNICATIONS -- 0.3%
Telecomunicacoes Brasileiras S.A., ADR
(Brazil)...................................... 223,400 16,238,388
--------------
TOTAL PREFERRED STOCKS
(cost $47,988,630)............................................. 41,238,388
--------------
MOODY'S PRINCIPAL
RATING AMOUNT
LONG-TERM BONDS -- 35.1% (UNAUDITED) (000)
------------ ---------
AEROSPACE -- 0.7%
Raytheon Co.,
5.95%, 03/15/01............................... Baa1 $ 14,000 14,122,920
6.40%, 12/15/18............................... Baa1 25,000 24,812,500
--------------
38,935,420
--------------
AIRLINES -- 2.3%
Continental Airlines, Inc.,
8.00%, 12/15/05............................... Ba2 15,000 14,821,500
Delta Airlines, Inc.,
10.125%, 05/15/10............................. Baa3 19,335 24,187,118
10.375%, 02/01/11............................. Ba1 31,250 39,896,250
United Airlines, Inc.,
10.67%, 05/01/04.............................. Baa3 19,500 23,072,400
11.21%, 05/01/14.............................. Baa3 17,500 22,981,000
--------------
124,958,268
--------------
ASSET-BACKED SECURITIES -- 0.2%
California Infrastructure,
1997-1 6.17%, 03/25/03........................ A3 4,000 4,049,040
Standard Credit Card Master Trust, 1993-2A
5.95%, 10/07/04............................... Aaa 4,500 4,566,060
--------------
8,615,100
--------------
AUTO - CARS & TRUCKS -- 0.2%
Navistar International Corp.,
7.00%, 02/01/03............................... Ba1 11,500 11,501,797
--------------
BANKS AND SAVINGS & LOANS -- 1.9%
Banco de Commercio Exterior de Columbia, SA,
M.T.N. (Colombia),
8.625%, 06/02/00.............................. NR 5,500 5,390,000
Bank of Nova Scotia (Canada),
6.50%, 07/15/07............................... A1 5,400 5,437,692
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
BANKS AND SAVINGS & LOANS (CONT'D.)
Bayerische Landesbank Girozentrale (Germany),
5.875%, 12/01/08.............................. Aaa $ 12,500 $ 12,780,000
Capital One Bank,
6.844%, 06/13/00.............................. Baa3 23,900 24,081,401
Central Hispano Financial Services (Portugal),
6.188%, 04/28/05.............................. A3 5,000 4,966,600
Citicorp, M.T.N.,
6.375%, 11/15/08.............................. A1 12,500 12,924,625
Kansallis-Osake-Pankki (Finland),
8.65%, 01/01/49............................... Baa1 9,000 9,132,480
National Australia Bank (Australia),
6.40%, 12/10/07............................... A1 8,700 8,874,000
6.60%, 12/10/07............................... A1 5,000 5,182,500
Okobank (Finland),
6.75%, 09/27/49............................... A3 16,250 16,233,750
--------------
105,003,048
--------------
CABLE & PAY TELEVISION SYSTEMS -- 1.0%
Cable & Wire Communications PLC (United
Kingdom),
6.75%, 12/01/08............................... Baa1 12,100 12,334,740
Continental Cablevision, Inc.,
8.50%, 09/15/01............................... Ba2 5,100 5,409,876
Rogers Cablesystems, Inc. (Canada),
10.00%, 03/15/05.............................. Ba3 2,000 2,240,000
Tele-Communications, Inc.,
6.34%, 02/01/02............................... Ba1 8,500 8,706,125
7.375%, 02/15/00.............................. Ba1 6,000 6,130,500
9.875%, 06/15/22.............................. Baa3 12,878 18,257,784
--------------
53,079,025
--------------
COMPUTERS SOFTWARE & SERVICES -- 0.3%
Computer Associates International, Inc.,
6.375%, 04/15/05.............................. Baa1 13,750 13,607,550
--------------
CONSULTING -- 0.6%
Comdisco, Inc.,
5.94%, 04/13/00............................... Baa1 12,500 12,468,750
6.32%, 11/27/00............................... Baa1 19,000 19,088,540
6.375%, 11/30/01.............................. Baa1 2,700 2,711,691
--------------
34,268,981
--------------
CONSUMER SERVICES -- 0.6%
Loewen Group, Inc.,
7.20%, 06/01/03............................... Ba3 20,000 16,800,000
7.60%, 06/01/08............................... Ba3 16,200 12,798,000
Service Corp. International,
7.00%, 06/01/15............................... A3 2,500 2,588,375
--------------
32,186,375
--------------
CONTAINERS -- 0.7%
Owens-Illinois, Inc.,
7.15%, 05/15/05............................... Ba1 40,000 40,088,400
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B26
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
DRUGS & MEDICAL SUPPLIES -- 0.1%
Mallinckrodt, Inc.,
6.30%, 03/15/11 (b)........................... Baa2 $ 8,000 $ 7,876,500
--------------
FINANCIAL SERVICES -- 7.7%
Advanta Corp., M.T.N.,
6.99%, 10/18/99............................... Ba3 10,000 9,632,000
Associates Corp.,
6.95%, 11/01/18............................... Aa3 29,000 30,901,820
AT&T Capital Corp,
7.50%, 11/15/00............................... Baa3 40,000 40,489,600
AT&T Capital Corp., M.T.N.,
6.25%, 05/15/01............................... Baa3 16,500 16,275,435
Calair Capital Corp.,
8.125%, 04/01/08.............................. Ba2 6,000 5,867,700
Conseco, Inc.,
6.40%, 06/15/11............................... Baa2 25,000 23,972,500
6.80%, 06/15/05............................... Baa3 2,000 1,815,600
8.70%, 11/15/26............................... Ba2 30,038 27,443,161
8.796%, 04/01/27.............................. Ba2 10,200 9,325,860
ContiFinancial Corp.,
7.50%, 03/15/02............................... Ba1 7,740 5,418,000
8.125%, 04/01/08.............................. Ba1 10,700 7,276,000
8.375%, 08/15/03.............................. Ba1 8,000 5,600,000
Enterprise Rent-A-Car USA Finance Co.,
6.35%, 01/15/01............................... Baa3 21,000 21,050,610
6.95%, 03/01/04............................... Baa2 7,500 7,569,900
7.00%, 06/15/00............................... Baa3 13,500 13,557,645
General Motors Acceptance Corp., M.T.N.,
5.95%, 04/20/01............................... A3 14,700 14,817,600
International Lease Finance Corp.,
6.00%, 05/15/02............................... A1 43,100 43,502,123
Lehman Brothers Holdings, Inc.,
6.40%, 08/30/00............................... Baa1 25,650 25,656,413
MCN Investment Corp.,
6.30%, 04/02/11............................... Baa2 8,250 8,194,725
Merrill Lynch, Pierce, Fenner & Smith, Inc.,
6.875%, 11/15/18.............................. Aa3 18,500 19,178,025
Morgan Stanley Dean Witter & Co., M.T.N.,
5.89%, 03/20/00............................... A1 15,000 15,105,600
6.09%, 03/09/11............................... A1 15,000 15,200,250
PT Alatief Freeport Co. (Netherlands),
9.75%, 04/15/01(a)/(c)........................ Ba2 7,600 5,472,000
Salomon, Inc., M.T.N.,
6.59%, 02/21/01............................... Baa1 8,250 8,408,400
6.75%, 08/15/03............................... Baa1 5,000 5,162,200
7.25%, 05/01/01............................... Baa1 8,625 8,933,430
Textron Financial Corp.,
6.05%, 03/16/09 1997-A........................ Aaa 17,639 17,672,740
--------------
413,499,337
--------------
FOREST PRODUCTS -- 0.2%
Fort James Corp.,
6.234%, 03/15/11 1997-A....................... Baa3 11,000 11,103,510
--------------
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
INDUSTRIAL -- 2.0%
Compania Sud Americana de Vapores, S.A. (Chile),
7.375%, 12/08/03.............................. NR $ 5,650 $ 5,070,875
Scotia Pacific Co.,
7.71%, 01/20/14............................... NR 9,800 9,327,248
7.71%, 01/20/14............................... NR 29,500 26,428,460
Security Capital Group,
6.95%, 06/15/05............................... Baa1 4,500 4,297,500
U.S. Filter Corp.,
6.375%, 05/15/01.............................. Ba1 20,000 19,785,600
6.50%, 05/15/03............................... Ba1 42,000 40,911,780
--------------
105,821,463
--------------
LODGING -- 1.0%
ITT Corp.,
6.25%, 11/15/00............................... Baa2 41,983 40,502,679
6.75%, 11/15/03............................... Baa2 14,000 12,891,620
--------------
53,394,299
--------------
MEDIA -- 1.2%
Paramount Communications, Inc.,
7.50%, 01/15/02............................... Ba2 9,100 9,496,123
Time Warner Inc.,
6.625%, 05/15/29.............................. Baa3 36,000 36,628,560
Viacom, Inc.,
7.75%, 06/01/05............................... Ba2 16,850 18,279,386
--------------
64,404,069
--------------
MISCELLANEOUS -- 0.1%
Tokai Preferred Capital,
9.98%, 12/29/49............................... A3 6,000 5,040,000
--------------
OIL & GAS -- 0.1%
B.J. Services Co.,
7.00%, 02/01/06............................... Ba1 4,000 4,139,880
--------------
OIL & GAS SERVICES -- 2.0%
KN Energy, Inc.,
6.30%, 03/01/21............................... Baa2 20,000 20,056,200
R&B Falcon Corp.,
6.50%, 04/15/03............................... Ba1 15,375 13,965,420
6.75%, 04/15/05............................... Ba1 30,000 25,800,000
Seagull Energy Co.,
7.50%, 09/15/27............................... Ba1 8,225 7,366,886
Williams Companies, Inc.,
5.95%, 02/15/10............................... Baa2 41,000 41,045,100
--------------
108,233,606
--------------
REAL ESTATE INVESTMENT TRUST -- 2.1%
Colonial Realty,
7.00%, 07/14/07............................... Baa3 3,350 3,212,349
EOP Operating, L.P.,
6.50%, 06/15/04............................... Baa1 6,000 5,900,400
6.625%, 02/15/05.............................. Bbb 18,187 17,827,443
Equity Residential Properties Trust,
6.15%, 09/15/00............................... A3 25,000 24,835,000
6.63%, 04/13/15............................... A3 15,300 15,097,428
Felcor Suites, L.P.,
7.375%, 10/01/04.............................. Ba1 25,000 23,812,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B27
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
REAL ESTATE INVESTMENT TRUST (CONT'D.)
Gables Realty Trust,
6.80%, 03/15/05............................... Baa2 $ 7,500 $ 7,157,175
Simon DeBartolo Group, Inc.,
6.75%, 06/15/05............................... Baa1 17,500 16,969,750
--------------
114,812,045
--------------
RETAIL -- 2.8%
Dayton Hudson,
5.95%, 06/15/00............................... A3 9,000 9,072,270
Federated Department Stores, Inc.,
8.125%, 10/15/02.............................. Ba1 3,600 3,880,548
8.50%, 06/15/03............................... Ba1 54,890 60,542,572
Meyer (Fred), Inc.,
7.15%, 03/01/03............................... Ba2 12,445 12,947,529
Saks, Inc.,
7.50%, 12/01/10............................... Baa3 29,000 28,997,970
8.25%, 11/15/08............................... Baa3 19,700 20,882,000
Sears Roebuck & Co.,
6.50%, 12/01/28............................... A2 17,000 16,686,010
--------------
153,008,899
--------------
TELECOMMUNICATIONS -- 2.1%
360 Communication Co.,
7.125%, 03/01/03.............................. Ba2 23,776 25,160,952
7.60%, 04/01/09............................... Ba1 12,885 14,601,926
Qwest Communications International Inc.,
7.50%, 11/01/08............................... Ba1 39,000 40,560,000
Sprint Corp.,
6.875%, 11/15/28.............................. Baa1 26,000 27,021,800
Worldcom Inc,
6.125%, 08/15/01.............................. Baa2 7,600 7,721,448
--------------
115,066,126
--------------
TOBACCO -- 0.6%
Philip Morris Companies, Inc.,
6.15%, 03/15/10............................... A2 20,000 20,166,000
RJR Nabisco, Inc.,
8.75%, 08/15/05............................... Baa3 4,600 4,641,722
9.25%, 08/15/13............................... Baa3 7,000 7,197,120
--------------
32,004,842
--------------
TRANSPORTATION/TRUCKING/SHIPPING -- 0.2%
Ryder System, Inc.,
7.51%, 03/24/00............................... Baa1 3,000 3,076,080
8.34%, 01/26/00............................... Baa1 5,000 5,152,750
--------------
8,228,830
--------------
UTILITIES -- 1.3%
Calenergy Co., Inc.,
6.96%, 09/15/03............................... Ba1 15,000 15,267,450
8.48%, 09/15/28............................... Ba1 23,000 25,427,190
Enersis SA, (Chile)
7.40%, 12/01/16............................... Baa1 6,400 5,267,200
Niagara Mohawk Power,
7.00%, 10/01/00............................... Ba3 25,000 25,250,000
--------------
71,211,840
--------------
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 3.1%
Federal National Mortgage Association,
Zero Coupon, 10/09/19......................... $ 11,800 $ 3,521,592
U.S. Treasury Bond,
6.25%, 08/15/23............................... 10,000 11,176,600
U.S. Treasury Note,
4.75%, 11/15/08 (b)........................... 3,700 3,728,897
5.50%, 08/15/28............................... 2,475 2,590,632
6.50%, 05/15/05............................... 9,600 10,521,024
7.50%, 02/15/05............................... 3,100 3,549,500
6.75%, 08/15/26............................... 109,900 131,656,903
--------------
166,745,148
--------------
TOTAL LONG-TERM BONDS
(cost $1,900,228,227).................................................... 1,896,834,358
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $4,559,770,949).................................................... 4,796,380,889
--------------
SHORT-TERM INVESTMENTS -- 10.9%
COMMERCIAL PAPER -- 0.4%
Barton Capital Corp,
5.35%, 01/04/99............................... P1 1,700 1,699,242
Campbell Soup Co.
4.80%, 01/04/99............................... P1 1,198 1,197,521
Countrywide Home Loan,
5.40%, 01/04/99............................... P2 1,700 1,699,235
CXC Inc.,
5.30%, 01/04/99............................... P1 1,700 1,699,249
Dover,
5.30%, 01/04/99............................... NR 1,700 1,699,249
Hershey,
5.00%, 01/04/99............................... P1 1,427 1,426,405
John Hancock Capital Corp.,
5.25%, 01/07/99............................... P1 1,700 1,698,513
Novartis Finance Corp.,
5.25%, 01/04/99............................... P1 1,500 1,499,344
Reed Elsevier, Inc.,
5.05%, 01/04/99............................... P1 1,700 1,699,285
SBC Communications,
5.00%, 01/04/99............................... P1 1,700 1,699,291
Sonoco Products,
5.35%, 01/04/99............................... P1 1,000 999,554
Triple-A One Plus Funding,
5.30%, 01/04/99............................... P1 1,500 1,499,338
Xerox Capital Corp,
5.30%, 01/04/99............................... P1 1,700 1,699,249
--------------
20,215,475
--------------
LOAN PARTICIPATIONS
Alltel Corp.,
5.75%, 01/04/99............................... P1 1,700 1,700,000
--------------
OTHER CORPORATE OBLIGATIONS -- 1.2%
AT&T Capital Corp., M.T.N.,
6.65%, 04/30/99............................... Baa3 24,500 24,579,870
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B28
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
OTHER CORPORATE OBLIGATIONS (CONT'D.)
Banco Ganadero, SA, M.T.N., (Colombia),
9.75%, 08/26/99............................... NR $ 7,300 $ 7,263,500
Comdisco, Inc.,
6.11%, 08/04/99............................... Baa1 12,500 12,541,375
Okobank (Finland)
6.793%, 1/14/99 (d)........................... NR 12,500 12,500,000
Tele-Communications, Inc.
6.375%, 09/15/99.............................. Ba1 6,400 6,444,992
--------------
63,329,737
--------------
U. S. GOVERNMENT OBLIGATION -- 0.4%
U.S. Treasury Bill,
4.32%, 03/18/99 (b)......................................... 100 99,088
4.36%, 03/18/99 (b)......................................... 22,400 22,193,820
--------------
22,292,908
--------------
REPURCHASE AGREEMENT -- 8.9%
Joint Repurchase Agreement Account
4.693%, 01/04/99 (Note 5)................................... 482,631 482,631,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $590,187,085)...................................................... 590,169,120
--------------
TOTAL INVESTMENTS -- 99.6%................................................. 5,386,550,009
(cost $5,149,958,034; Note 6)
VARIATION MARGIN ON OPEN FUTURES CONTRACTS (e).............................
809,059
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.4%..............................
22,622,320
--------------
TOTAL NET ASSETS -- 100.0%................................................. $5,409,981,388
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
ADR American Depository Receipt
AG Aktiengesellschaft (German Stock Company)
L.P. Limited Partnership
M.T.N. Medium Term Note
PLC Public Limited Company (British Corporation)
SA Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French
Corporation)
(a) Non-income producing security.
(b) Security segregated as collateral for futures contracts.
(c) Issue in default.
(d) Indicates a variable rate security. The maturity date presented for this
instrument is the later of the next date on which the security can be
redeemed at par or the next date on which the rate of interest is adjusted.
The interest rate shown reflects the rate in effect at December 31, 1998.
(e) Open futures contracts as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION VALUE AT VALUE AT APPRECIATION/
CONTRACTS TYPE DATE TRADE DATE DECEMBER 31, 1998 DEPRECIATION
<S> <C> <C> <C> <C> <C>
Long positions:
U.S. Treasury
1,241 Bond Mar 99 $159,480,156 $ 158,576,531 $ (903,625)
1,134 S&P 500 Index Mar 99 337,073,687 353,099,250 16,025,563
------------
$15,121,938
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B29
<PAGE>
HIGH YIELD BOND PORTFOLIO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 93.9% MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
CORPORATE BONDS -- 86.1% (UNAUDITED) RATE DATE (000) (NOTE 2)
------------ ------ -------- --------- --------------
<S> <C> <C> <C> <C> <C>
AEROSPACE -- 0.8%
BE Aerospace, Sr. Sub. Notes.................... B1 9.50% 11/01/08 $ 1,000 $ 1,055,000
Compass Aerospace Corp., Sr. Sub. Notes......... Caa1 10.125% 04/15/05 1,500 1,447,500
Sequa Corp., Sr. Sub. Notes..................... B3 9.375% 12/15/03 2,000 2,070,000
Stellex Industries, Inc., Sr. Sub. Notes........ B3 9.50% 11/01/07 1,000 870,000
Transdigm, Inc., Sr. Sub. Notes................. B3 10.375% 12/01/08 1,000 1,002,500
--------------
6,445,000
--------------
AUTOMOTIVE PARTS -- 2.0%
AM General Corp., Sr. Notes..................... B3 12.875% 05/01/02 3,700 2,960,000
Hayes Wheels Int'l., Inc., Sr. Sub. Notes....... B2 9.125% 07/15/07 1,000 1,044,062
JPS Automotive Products Corp., L.P., Sr.
Notes......................................... B2 11.125% 06/15/01 4,000 4,200,000
Paragon Corp Holdings, Sr. Notes................ B3 9.625% 04/01/08 2,000 1,680,000
Stanadyne Automotive, Sr. Sub. Notes............ Caa 10.25% 12/15/07 3,000 3,000,000
Venture Holdings Trust, Sr. Notes............... NR 9.50% 07/01/05 2,700 2,686,500
--------------
15,570,562
--------------
BROADCASTING & OTHER MEDIA -- 5.6%
Ackerley Group, Sr. Sub. Notes.................. B2 9.00% 01/15/09 3,000 3,056,250
American Lawyer Media Holdings, Inc., Sr. Disc.
Notes, Zero Coupon
(until 12/15/02).............................. B3 12.25% 12/15/08 5,000 3,100,000
CD Radio, Inc., Sr. Disc. Notes, Zero Coupon
(until 12/01/02).............................. Caa 15.00% 12/01/07 4,245 2,589,450
Chancellor Media Corp., Sr. Sub. Notes.......... Ba3 9.00% 10/01/08 3,500 3,696,875
Globo Communicacoes E Particip., Sr. Notes
(Brazil)...................................... NR 10.50% 12/20/06 1,300 832,000
Grupo Televisa, Sr. Notes (Mexico).............. Ba2 13.25% 05/15/08 3,000 2,227,500
Liberty Group Publishing, Sr. Disc. Notes, Zero
Coupon (until 2/01/03)........................ Caa1 11.625% 02/01/09 550 302,500
Lin Holdings Corp., Sr. Disc. Notes, Zero Coupon
(until 3/01/03)............................... B3 10.00% 03/01/08 500 351,250
Mail-Well Corp, Sr. Sub. Notes.................. B1 8.75% 12/15/08 4,750 4,797,500
NTL, Inc., Sr. Notes, Zero Coupon (until
10/01/03)..................................... B3 12.375% 10/01/08 2,500 1,562,500
NTL, Inc., Sr. Notes, Zero Coupon (until
4/01/03)...................................... B3 9.75% 04/01/08 2,000 1,235,000
Paxson Communications Corp., Sr. Sub. Notes..... B3 11.625% 10/01/02 2,500 2,537,500
Radio Unica, Sr. Disc. Note, Zero Coupon (until
8/01/02)...................................... NR 11.75% 08/01/06 4,750 2,565,000
SFX Entertainment, Sr. Sub. Notes............... B3 9.125% 12/01/08 4,000 3,980,000
Shop At Home, Inc., Sr. Sec'd. Notes............ B1 11.00% 04/01/05 1,250 1,275,000
Transwestern Publishing, Sr. Disc. Notes, Zero
Coupon (until 11/15/02)....................... B3 11.875% 11/15/08 3,650 2,418,125
TV Azteca SA de CV, Sr. Notes (Mexico).......... NR 10.50% 02/15/07 2,850 2,322,750
TVN Enterainment Corp., Sr. Notes............... NR 14.00% 08/01/08 3,750 3,187,500
Von Hoffman, Sub. Debs.......................... NR 13.50% 05/15/09 609 626,897
World Color Press, Sr. Sub. Notes............... B1 8.375% 11/15/08 1,750 1,758,750
--------------
44,422,347
--------------
BUILDING & RELATED INDUSTRIES -- 2.7%
Ainsworth Lumber Co., Ltd., Bonds............... B3 12.50% 07/15/07 5,125 5,073,750
Engle Homes, Inc., Sr. Notes.................... B1 9.25% 02/01/08 4,400 4,400,000
Falcon Building Products, Inc., Sr. Sub. Disc.
Notes, Zero Coupon
(until 6/15/02)............................... NR 10.50% 06/15/07 1,900 1,092,500
New Millenium Homes, Sr. Notes, Zero Coupon
(until 6/01/99)............................... NR 13.00% 09/03/04 3,000 2,910,000
Presley Co., Sr. Sub. Notes..................... B2 12.50% 07/01/01 6,157 5,202,665
Webb (Del E.), Sr. Sub. Deb..................... B2 9.375% 05/01/09 1,000 960,000
Wickes Lumber Co., Sr. Notes.................... B3 11.625% 12/15/03 2,000 1,690,000
--------------
21,328,915
--------------
CABLE -- 4.5%
Adelphia Communications Corp., Sr. Notes........ B2 10.50% 07/15/04 500 547,500
Adelphia Communications Co., PIK, Sr. Notes..... B3 9.50% 02/15/04 250 265,625
Avalon Cable Holding, Sr. Disc. Notes........... Caa 11.875% 12/01/08 6,000 3,360,000
Avalon Cable Holding, Sr. Sub. Notes............ B3 9.375% 12/01/08 2,000 2,040,000
Diamond Cable Communications, Sr. Disc. Notes,
Zero Coupon (until 2/15/02) (United
Kingdom)...................................... NR 12.75% 02/15/07 4,000 2,840,000
Diva Systems Corp., Sr. Disc. Notes, Zero Coupon
(until 3/01/03)............................... NR 12.625% 03/01/08 1,000 372,000
Echostar Satellite, Sr. Disc. Notes, Zero Coupon
(until 3/15/00)............................... B3 13.125% 03/15/04 1,500 1,496,250
Falcon Holding Group, Sr. Disc. Deb., Zero
Coupon (until 4/15/03)........................ B2 9.285% 04/15/10 2,000 1,350,000
Intermedia Capital Partners, Sr. Notes.......... B2 11.25% 08/01/06 3,380 3,802,500
International Cabletel, Inc., Sr. Disc. Notes,
Zero Coupon (until 4/15/00)................... B3 12.75% 04/15/05 6,100 5,551,000
Renaissance Media, Sr. Disc. Notes, Zero Coupon
(until 4/15/03)............................... B3 10.00% 04/15/08 1,000 675,000
Rogers Cablesystems, Inc., Sr. Sec'd. Deb.,
(Canada)...................................... Ba3 10.00% 12/01/07 1,000 1,125,000
Rogers Cablesystems, Inc., Sr. Sec'd Notes,
(Canada)...................................... Ba3 10.00% 03/15/05 1,175 1,960,000
Scott Cable Communications, Jr. Sub. PIK........ NR 16.00% 07/18/02 108 21,600
Scott Cable Communications, Dep. Rec., PIK...... NR 15.00% 03/18/02 908 1,016,750
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B30
<PAGE>
HIGH YIELD BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
CORPORATE BONDS (CONTINUED) (UNAUDITED) RATE DATE (000) (NOTE 2)
------------ ------ -------- --------- --------------
<S> <C> <C> <C> <C> <C>
Star Choice Communications, Inc., Sr. Notes,
(Canada)...................................... NR 13.00% 12/15/05 $ 3,000 $ 3,015,000
Telewest Communications PLC, Sr. Disc. Deb.,
Zero Coupon (until 10/01/00) (United
Kingdom)...................................... B1 11.00% 10/01/07 1,000 832,500
United International Holdings, Sr. Disc. Notes,
Zero Coupon (until 2/15/03)................... B3 10.75% 02/15/08 9,750 5,216,250
--------------
35,486,975
--------------
CHEMICALS -- 0.8%
GNI Group, Inc., Sr. Notes...................... B2 10.875% 07/15/05 4,000 3,520,000
Sterling Chemical Holdings, Inc., Sr. Disc.
Notes, Zero Coupon (until 8/15/01)............ Caa 13.50% 08/15/08 4,060 1,542,800
Sterling Chemical Holdings, Inc., Sr. Sub.
Notes......................................... B3 11.75% 08/15/06 1,000 850,000
--------------
5,912,800
--------------
CONSUMER PRODUCTS -- 3.7%
CB Richard Ellis Services, Inc., Bonds.......... Ba3 8.875% 06/01/06 2,000 1,960,000
Coinstar Inc., Sr. Disc. Notes, Zero Coupon
(until 10/01/99).............................. NR 13.00% 10/01/06 5,025 4,271,250
Corning Consumer Products, Sr. Sub. Notes....... B3 9.625% 05/01/08 3,250 2,275,000
Edison Brothers Corp., Sr. Notes................ NR 11.00% 09/26/07 3,680 1,104,000
Electronic Retailing Systems, Sr. Disc. Notes,
Zero Coupon (until 2/01/00)................... NR 13.25% 02/01/04 2,000 700,000
Hedstrom Corp., Sr. Sub. Notes.................. B3 10.00% 06/01/07 900 765,000
Hedstrom Holding, Inc., Sr. Disc. Notes, Zero
Coupon (until 6/01/02)........................ Caa 12.00% 06/01/09 400 180,000
Icon Health & Fitness, Sr. Sub. Notes........... Caa 13.00% 07/15/02 3,000 1,800,000
IHF Holdings, Inc., Sr. Disc. Notes, Zero Coupon
(until 11/15/99).............................. NR 15.00% 11/15/04 2,250 247,500
Interact Systems, Inc., Sr. Disc. Notes, Zero
Coupon (until 8/1/99)(b) (cost $4,070,320;
purchased 7/30/96)............................ NR 14.00% 08/01/03 4,400 1,760,000
La Petite Holding, Sr. Notes.................... B3 10.00% 05/15/08 750 742,500
Loewen Group, Inc., Sr. Gtd. Notes.............. Ba1 8.25% 10/15/03 3,000 2,542,500
Packaging Resources Group, Sr. Notes, PIK....... NR 13.00% 06/30/03 2,114 1,775,685
Revlon Consumer Prod. Corp., Sr. Notes, PIK..... B2 9.00% 11/01/06 2,250 2,227,500
Sealy Mattress Co., Sr. Sub. Disc. Notes, Zero
Coupon (until 12/15/02)....................... B3 10.875% 12/15/07 2,500 1,500,000
Syratech Corp., Sr. Notes....................... B1 11.00% 04/15/07 2,500 2,025,000
Waste System International, Sr. Sub. Notes...... Caa1 7.00% 05/13/05 2,000 1,930,000
Windmere-Durable Holdings, Inc., Sr. Notes...... B3 10.00% 07/31/08 2,000 1,870,000
--------------
29,675,935
--------------
CONTAINERS -- 0.7%
Ball Corp., Sr. Sub. Notes...................... B1 8.25% 08/01/08 250 261,250
Consumers Intl, Inc., Sr. Sec'd. Notes.......... Ba3 10.25% 04/01/05 3,850 4,042,500
Radnor Holdings, Sr. Notes...................... B2 10.00% 12/01/03 1,500 1,507,500
--------------
5,811,250
--------------
DRUGS & HEALTHCARE -- 4.7%
Abbey Healthcare Group, Inc., Bonds............. B1 9.50% 11/01/02 500 485,000
Dade International, Inc., Sr. Sub. Notes........ B3 11.125% 05/01/06 6,250 6,875,000
Fresenius Medical Co., Gtd. Notes............... Ba3 7.875% 02/01/08 2,100 2,079,000
Fresenius Med. Core Capital Trust, Gtd. Notes... Ba3 9.00% 12/01/06 1,500 1,569,375
Graham-Field Health Products, Inc., Sr. Sub.
Notes......................................... B3 9.75% 08/15/07 5,000 3,300,000
Harborside Healthcare, Zero Coupon (until
08/01/03)..................................... B3 11.00% 08/01/08 2,500 1,200,000
ICN Pharmaceuticals, Inc., Sr. Notes............ Ba3 8.75% 11/15/08 4,750 4,773,750
Integrated Health Services, Inc., Sr. Sub.
Notes......................................... B2 9.25% 01/15/08 3,250 3,055,000
Magellan Health Services, Bonds................. B3 9.00% 02/15/08 7,000 6,160,000
Mariner Post Acute Network, Inc., Sr. Sub. Disc.
Notes, Zero Coupon (until 11/ 01/02).......... B3 10.50% 11/01/07 3,000 1,455,000
Medaphis Corp., Sr. Notes....................... B2 9.50% 02/15/05 350 269,500
Mediq, Inc., Sr. Sub. Notes..................... B3 11.00% 06/01/08 1,000 960,000
Sun Healthcare, Sr. Notes....................... B2 9.50% 07/01/07 3,750 3,000,000
Vencor Inc., Sr. Sub. Notes..................... B3 9.875% 05/01/05 2,500 2,050,000
--------------
37,231,625
--------------
ENERGY -- 5.0%
Anker Coal Group Inc., Sr. Notes................ B3 9.75% 10/01/07 3,000 1,590,000
Bayard Drilling Technologies, Inc., Sr. Notes... B2 11.00% 06/30/05 1,500 1,650,000
Chesapeake Energy Corp., Sr. Notes.............. B1 9.625% 05/01/05 2,500 1,875,000
Chiles Offshore, Sr. Notes...................... B3 10.00% 05/01/08 1,000 800,000
Clark USA, Inc., Sr. Notes...................... B3 10.875% 12/01/05 1,250 1,162,500
Gothic Production Corp., Sr. Notes.............. B3 11.125% 05/01/05 1,250 975,000
Grant Geophysical, Inc., Sr. Notes.............. B3 9.75% 02/15/08 4,000 2,720,000
Great Lakes Carbon Corp., Sr. Sub. Notes........ B3 10.25% 05/15/08 2,000 2,015,000
Grey Wolf, Sr. Notes............................ B1 8.875% 07/01/07 2,000 1,450,000
Ocean Rig Norway Co., Gtd. Notes................ B3 10.25% 06/01/08 2,000 1,600,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B31
<PAGE>
HIGH YIELD BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
CORPORATE BONDS (CONTINUED) (UNAUDITED) RATE DATE (000) (NOTE 2)
------------ ------ -------- --------- --------------
<S> <C> <C> <C> <C> <C>
P & L Coal Holding, Sr. Notes................... NR 8.875% 05/15/08 $ 2,000 $ 2,040,000
P & L Coal Holding, Sr. Sub. Notes.............. NR 9.625% 05/15/08 3,750 3,815,625
Parker Drilling Corp., Sr. Notes................ B1 9.75% 11/15/06 850 760,750
Petroleum Mexicanos, Gtd. Notes (Mexico)........ Ba2 9.375% 12/02/08 1,500 1,477,500
Petroleum Heat & Power, Inc., Sub. Deb.(b) (cost
$2,779,064; purchased on various dates:
1/27/94 through 1/31/97)...................... B2 9.375% 02/01/06 3,000 2,730,000
Petroleum Heat & Power, Inc., Sub. Deb.(b) (cost
$832,534; purchased
3/16/95)...................................... B2 12.25% 02/01/05 813 796,740
R & B Falcon Corp., Sr. Notes................... Ba1 9.50% 12/15/08 3,000 3,000,000
Seven Seas Petroleum, Inc., Sr. Notes........... Caa1 12.50% 05/15/05 1,500 1,012,500
Tesoro Petroleum Corp., Sr. Sub. Notes.......... B1 9.00% 07/01/08 3,000 2,910,000
Transamerican Energy Corp., Sr. Disc. Notes..... NR 11.50% 06/15/02 900 261,000
Universal Compression Holdings, Sr. Disc. Notes,
Zero Coupon (until 2/15/03)................... B2 9.875% 02/15/08 1,750 1,050,000
Universal Compression Holdings, Sr. Disc. Notes,
Zero Coupon (until 2/15/03)................... B3 11.375% 02/15/09 700 399,000
York Power Funding, Sr. Sec'd. Notes (Cayman
Islands)...................................... Ba3 12.00% 10/30/07 3,000 2,940,000
--------------
39,030,615
--------------
FINANCIAL SERVICES -- 2.1%
AmeriCredit Corp., Sr. Notes.................... B1 9.25% 02/01/04 1,350 1,299,375
Amresco, Inc., Sr. Sub. Notes(b) (cost
$4,310,000; purchased 2/24/98 and
11/25/98)..................................... B2 9.875% 03/15/05 4,600 3,220,000
BF Saul Corp., Sr. Notes........................ B3 9.75% 04/01/08 1,750 1,610,000
Delta Financial Corp., Sr. Notes................ B1 9.50% 08/01/04 1,075 903,000
Fuji LLC, Bonds, Zero Coupon (until 06/30/08)... Baa2 9.87% 12/31/49 2,000 1,430,000
Korea Development Bank, Bonds (Korea)........... Ba1 7.90% 02/01/02 3,000 2,851,800
SB Treasury Co., Bonds, Zero Coupon (until
06/30/08)..................................... A2 9.40% 12/29/49 5,000 4,650,000
Nationwide Credit, Sr. Notes.................... B3 10.25% 01/15/08 850 688,500
--------------
16,652,675
--------------
FOOD & BEVERAGE -- 2.9%
Advantica Restaurant Group, Sr. Notes........... NR 11.25% 01/15/08 5,762 5,834,501
Carrols Corp., Sr. Sub. Notes................... B2 9.50% 12/01/08 2,500 2,518,750
Favorite Brands, Sr. Notes...................... B3 10.75% 05/15/06 550 451,000
Fresh Foods, Inc., Bonds........................ B3 10.75% 06/01/06 2,500 2,300,000
FRI-MRD Corp., Sr. Disc. Notes, Zero Coupon
(until 8/01/99)............................... NR 15.00% 01/24/02 3,000 2,711,250
Grupo Azucarero, Sr. Notes (Mexico)............. B3 11.50% 01/15/05 4,000 1,400,000
Packaged Ice, Inc., Sr. Notes................... B3 9.75% 02/01/05 4,000 4,000,000
Premium Standard Farms, Sr. Sec'd. Notes, PIK
(b) (cost $255,739; purchased 9/17/96 and
3/03/97)...................................... NR 11.00% 09/17/03 256 268,526
Specialty Foods Acquisition Corp., Sr. Notes,
PIK........................................... B2 10.25% 08/15/01 2,765 2,543,800
Specialty Foods Corp., Sr. Sub. Notes........... Caa 11.25% 08/15/03 1,850 795,500
--------------
22,823,327
--------------
GAMING -- 4.8%
Alliance Gaming Corp., Gtd. Notes............... B3 10.00% 08/01/07 1,000 915,000
Aztar Corp., Sr. Sub. Notes..................... B2 13.75% 10/01/04 1,500 1,665,000
Blue Chip Casino, Sr. Sub. Notes................ NR 9.50% 09/15/02 6,749 5,567,925
Casino America, Sr. Notes....................... B1 12.50% 08/01/03 2,000 2,210,000
Casino Magic Finance Corp., First Mtge. Bonds... B3 13.00% 08/15/03 3,750 4,237,500
Colorado Gaming & Entertainment, Sr. Notes,
PIK........................................... NR 12.00% 06/01/03 3,590 3,841,264
Fitzgeralds Gaming, Sr. Notes................... B3 12.25% 12/15/04 2,375 1,282,500
Grand Casinos, Inc., Sr. Notes.................. B2 9.00% 10/15/04 1,000 1,125,000
Isle of Capri Black Hawk, LLC, First Mtg.
Notes......................................... B3 13.00% 08/31/04 4,000 4,400,000
Lady Luck Gaming, First Mtge. Notes............. B3 11.875% 03/01/01 2,500 2,525,000
Louisiana Casino Cruises, Inc., Sr. Notes, Zero
Coupon (until 03/01/99)....................... NR 12.25% 12/01/01 4,000 4,000,000
Majestic Star Casino, Sr. Notes................. B2 12.75% 05/15/03 1,150 1,207,500
Santa Fe Hotel, Inc., Sr. Notes................. B2 11.00% 12/15/00 2,750 2,612,500
Trump Atlantic City Assoc., First Mtge. Notes... B1 11.25% 05/01/06 1,500 1,320,000
Trump Atlantic City Assoc., First Mtge. Notes... Caa 11.75% 11/15/03 2,100 1,680,000
--------------
38,589,189
--------------
INDUSTRIAL -- 6.2%
Allied Waste Industries, Inc. Sr. Disc. Notes... Ba2 7.625% 01/01/06 3,250 3,290,625
Allied Waste Industries, Inc. Sr. Disc. Notes... Ba2 7.875% 01/01/09 10,000 10,125,000
Clean Harbors, Inc., Sr. Notes.................. B2 12.50% 05/15/01 1,500 1,275,000
Continental Global Group, Sr. Notes............. B2 11.00% 04/01/07 4,120 3,522,600
Eagle-Picher Industries, Sr. Sub. Notes......... B3 9.375% 03/01/08 1,250 1,181,250
ICF Kaiser International, Inc., Sr. Sub.
Notes......................................... B3 13.00% 12/31/03 4,450 2,225,000
Interlake Corp., Sr. Sub. Notes................. B3 12.125% 03/01/02 1,500 1,515,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B32
<PAGE>
HIGH YIELD BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
CORPORATE BONDS (CONTINUED) (UNAUDITED) RATE DATE (000) (NOTE 2)
------------ ------ -------- --------- --------------
<S> <C> <C> <C> <C> <C>
International Wireless Group, Sr. Sub. Notes.... NR 11.75% 06/01/05 $ 3,000 $ 3,157,500
Kaiser Aluminum & Chemical Corp., Sr. Sub.
Notes......................................... B2 12.75% 02/01/03 4,000 3,920,000
Moll Industries, Sr. Sub. Notes................. B3 10.50% 07/01/08 1,000 970,000
Motors & Gears, Inc., Sr. Notes................. B3 10.75% 11/15/06 3,500 3,570,000
Neenah Corp., Sr. Sub. Notes.................... B3 11.125% 05/01/07 750 770,625
RBX Corp., Sr. Notes............................ B2 12.00% 01/15/03 3,650 2,956,500
Thermadyne Holdings, Deb., Zero Coupon (until
6/01/03)...................................... Caa1 12.50% 06/01/08 2,375 1,045,000
Thermadyne Manufacturing, Sr. Sub. Notes........ B3 9.875% 06/01/08 2,500 2,275,000
UCAR Global Enterprises, Sr. Sub. Notes......... B1 12.00% 01/15/05 3,000 3,150,000
Viasystems, Inc., Sr. Sub. Notes................ B3 9.75% 06/01/07 4,000 3,980,000
--------------
48,929,100
--------------
LEISURE & TOURISM -- 1.1%
Bally Health & Tennis Corp., Sr. Sub. Notes..... B3 9.875% 10/15/07 5,000 4,900,000
Loews Cineplex, Sr. Notes....................... B3 8.875% 08/01/08 500 516,250
Premier Cruises Ltd., Sr. Notes, PIK............ B3 11.00% 03/15/08 1,000 500,000
Outboard Marine Corp., Sr. Notes................ B3 10.75% 06/01/08 2,500 2,437,500
--------------
8,353,750
--------------
LODGING -- 1.0%
Hilton Hotels, Sr. Notes........................ Baa1 7.50% 12/15/17 1,000 956,250
HMH Properties, Inc., Sr. Notes................. Ba2 8.45% 12/01/08 4,250 4,250,000
--------------
5,206,250
--------------
OIL & GAS -- 0.8%
Empire Gas Corp., Sr. Notes, Zero Coupon (until
07/15/99)..................................... Caa 7.00% 07/15/04 5,300 4,147,250
Gulf Canada Resources, Ltd., Sr. Sub. Notes..... B2 9.25% 01/15/04 1,000 1,024,680
Gulf Canada Resources, Ltd., Sub. Deb........... Ba3 9.625% 07/01/05 1,000 1,045,000
--------------
6,216,930
--------------
PAPER/PACKAGING -- 5.1%
AMM Holdings, Inc., Sr. Disc. Notes, Zero Coupon
(until 7/01/03)............................... Caa 13.50% 07/01/09 6,000 2,640,000
APP International Finance, Sr. Sec'd. Notes..... Ba3 11.75% 10/01/05 2,600 1,716,000
Envirodyne Industries, Inc., Sr. Disc. Notes.... B1 12.00% 06/15/00 721 722,802
Envirodyne Industries, Inc., Sr. Notes.......... B3 10.25% 12/01/01 2,325 1,860,000
Gaylord Container Corp., Sr. Notes.............. B 9.75% 06/15/07 2,100 1,806,000
Gaylord Container Corp., Sr. Sub. Notes......... Caa1 9.875% 02/15/08 1,300 949,000
Graham Packaging, Sr. Disc. Notes, Zero Coupon
(until 1/15/03)............................... Caa1 10.75% 01/15/09 1,100 759,000
Maxxam Group Holdings, Inc., Sr. Notes.......... NR 12.00% 08/01/03 7,550 7,757,625
Millar Western Forest, Sr. Notes................ B3 9.875% 05/15/08 2,250 1,687,500
Repap New Brunswick, Inc., Sr. Sec'd. Notes..... B3 10.625% 04/15/05 3,000 2,010,000
SD Warren Co., Sr. Sub. Notes................... B1 12.00% 12/15/04 3,000 3,255,000
Silgan Holdings, Inc., Sub. Debs................ NR 13.25% 07/15/06 3,149 3,463,900
Stone Container Corp., Sr. Sub. Deb............. B2 12.58% 08/01/16 250 264,375
Stone Container Corp., Sr. Sub. Notes........... B3 12.25% 04/01/02 6,150 6,150,000
Tekni-Plex Inc., Sr. Sub. Notes................. B3 11.25% 04/01/07 750 832,500
U.S. Timberlands Klamath Fall, LLC, Sr. Notes... B1 9.625% 11/15/07 2,250 2,261,250
United Stationer Supply Co., Sr. Sub. Notes..... B3 12.75% 05/01/05 2,200 2,453,000
--------------
40,587,952
--------------
PUBLISHING -- 0.6%
Sullivan Graphics, Inc., Sr. Sub. Notes......... Caa 12.75% 08/01/05 4,500 4,567,500
--------------
RETAIL -- 5.6%
County Seat Stores, Inc., Sr. Notes............. NR 12.75% 11/01/04 3,750 1,875,000
Duane Reade, Inc., Sr. Sub. Notes............... B3 9.25% 02/15/08 400 412,000
Frank's Nursery & Crafts, Sr. Sub. Notes........ B3 10.25% 03/01/08 2,100 2,079,000
French Fragrances, Inc.......................... B2 10.375% 05/15/07 470 462,950
Hechinger Co., Sr. Notes........................ B2 6.95% 10/15/03 5,025 3,115,500
Merisel Inc., Sr. Notes......................... Ca 12.50% 12/31/04 5,250 5,407,500
Musicland Stores, Sr. Sub. Notes................ B1 9.00% 06/15/03 4,600 4,393,000
New Sassco, Inc., Sr. Notes..................... NR 12.75% 03/31/04 7,171 7,099,290
Pamida, Inc., Sr. Notes......................... B3 11.75% 03/15/03 5,374 5,159,040
Phar-Mor, Inc., Sr. Notes....................... B3 11.72% 09/11/02 4,564 4,769,380
Phillips Van-Heusen, Corp., Sr. Notes........... B1 9.50% 05/01/08 1,250 1,250,000
Saks, Inc., Gtd. Sr. Sub. Notes................. Baa3 8.25% 11/15/08 2,500 2,650,000
Speedy Muffler King, Inc., Bonds................ B1 10.875% 10/01/06 4,500 4,635,000
US Office Products, Sr. Sub. Notes.............. B3 9.75% 06/15/08 1,250 787,500
--------------
44,095,160
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B33
<PAGE>
HIGH YIELD BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
CORPORATE BONDS (CONTINUED) (UNAUDITED) RATE DATE (000) (NOTE 2)
------------ ------ -------- --------- --------------
<S> <C> <C> <C> <C> <C>
STEEL & METAL -- 2.5%
AK Steel Corp., Sr. Notes....................... Ba2 9.125% 12/15/06 $ 500 $ 523,750
Doe Run Resources Corp., Sr. Notes.............. B3 11.25% 03/15/05 2,000 1,600,000
Northwestern Steel & Wire, Sr. Notes............ B3 9.50% 06/15/01 1,000 600,000
Pohang Iron & Steel, Notes...................... Ba1 7.125% 07/15/04 5,000 4,311,000
Pohang Iron & Steel, Sr. Notes.................. Ba1 6.625% 07/01/03 2,000 1,767,000
Renco Steel Holdings, Sr. Notes................. NR 10.875% 02/01/05 500 430,000
Sheffield Steel Corp., First Mtg. Notes......... NR 11.50% 12/01/05 3,500 2,975,000
WCI Steel, Inc., Sr. Notes...................... B2 10.00% 12/01/04 2,000 1,985,000
Wheeling-Pittsburgh Corp., Sr. Notes............ B2 9.25% 11/15/07 3,325 3,125,500
WHX Corp., Sr. Notes............................ B3 10.50% 04/15/05 2,350 2,138,500
--------------
19,455,750
--------------
SUPERMARKETS -- 1.5%
Homeland Stores, Inc., Notes.................... NR 10.00% 08/01/03 5,760 5,011,200
Pantry, Inc., Sr. Sub. Notes.................... B3 10.25% 10/15/07 3,500 3,657,500
Pathmark Stores, Sr. Sub. Notes................. B2 9.625% 05/01/03 3,500 3,430,000
--------------
12,098,700
--------------
TECHNOLOGY -- 2.2%
Ampex, Sr. Notes................................ NR 12.00% 03/15/03 5,000 5,200,000
Anacomp, Inc., Sr. Sub. Notes................... B3 10.875% 04/01/04 4,000 4,120,000
Decisionone Corp., Sr. Sub. Notes............... B3 9.75% 08/01/07 4,000 1,840,000
Details Holdings Corp., Sr. Disc. Notes, Zero
Coupon (until 11/15/02)....................... NR 12.50% 11/15/07 1,300 715,000
Details, Inc., Sr. Sub. Notes................... B3 10.00% 11/15/05 1,000 950,000
DII Group, Sr. Sub. Notes....................... B1 8.50% 09/15/07 2,000 1,980,000
Jordan Telecommunication Products, Inc., Sr.
Notes......................................... NR 9.875% 08/01/07 2,900 2,900,000
--------------
17,705,000
--------------
TELECOMMUNICATIONS -- 15.8%
21st Century Telecom Group, Inc., Sr. Disc.
Notes, Zero Coupon (until 2/15/03)............ NR 12.25% 02/15/08 1,500 630,000
Allegiance Telecommunications, Inc., Sr. Disc.
Notes, Zero Coupon
(until 2/15/03)............................... NR 11.75% 02/15/08 3,800 1,748,000
Allegiance Telecommunications, Inc., Sr.
Notes......................................... NR 12.875% 05/15/08 1,750 1,706,250
American Communication Lines, Bonds............. B1 10.25% 06/30/08 3,000 3,060,000
AMSC Acquisition Co., Inc., Sr. Notes........... NR 12.25% 04/01/08 2,100 1,302,000
Arch Communications, Inc., Sr. Notes............ Caa 12.75% 07/01/07 500 492,500
Bestel, SA, Sr. Disc. Notes, Zero Coupon (until
5/15/01)...................................... NR 12.75% 05/15/05 2,500 1,450,000
Birch Telecommunications, Inc., Sr. Notes....... NR 14.00% 06/15/08 2,500 2,300,000
Caprock Communications Sr. Notes................ Caa 12.00% 07/15/08 2,500 2,400,000
CCPR Services, Inc., Gtd. Notes................. B2 10.00% 02/01/07 1,500 1,485,000
Cellnet Data Systems, Inc., Sr. Disc. Notes,
Zero Coupon (until 10/01/02)(b) (cost
$177,691; purchased 6/9/98)................... NR 14.00% 10/01/07 6,000 1,320,000
Classic Communications, Inc. Sr. Disc. Notes,
Zero Coupon (until 08/01/03).................. Caa 13.250% 08/01/09 2,000 1,230,000
Coaxial Communications, Inc., Sr. Disc. Notes... B3 10.00% 08/15/06 1,250 1,287,500
Crown Castle International, Sr. Disc. Notes,
Zero Coupon (until 11/15/02).................. B3 10.625% 11/15/07 500 345,000
DTI Holdings, Inc., Sr. Disc. Notes, Zero Coupon
(until 3/01/03)............................... NR 12.50% 03/01/08 1,000 255,000
E. Spire Communication, Sr. Disc. Notes, Zero
Coupon (until 07/01/03)....................... NR 10.625% 07/01/08 2,850 1,140,000
Echostar Communication Sr. Disc. Notes, Zero
Coupon (until 06/01/99)....................... Caa 12.875% 06/01/04 1,000 1,025,000
Econophone, Inc., Sr. Disc. Notes, Zero Coupon
(until 2/15/03)............................... NR 11.00% 02/15/08 3,500 1,662,500
First World Communications, Inc., Sr. Disc.
Notes, Zero Coupon (until 4/15/03)............ NR 13.00% 04/15/08 3,000 915,000
Focal Communications Corp., Zero Coupon (until
2/15/03)...................................... NR 12.125% 02/15/08 2,850 1,510,500
Geotek Communication, Inc., Sr. Disc. Notes,
Zero Coupon (until 7/15/00)(d)................ Caa 15.00% 07/15/05 4,512 1,534,080
Global Telesystems, Sr. Notes................... Caa2 9.875% 02/15/05 1,200 1,140,000
Globix Corp., Sr. Notes......................... NR 13.00% 05/01/05 1,250 1,025,000
GST Telecommunications, Inc., Sr. Disc. Notes,
Zero Coupon
(until 12/15/00).............................. NR 13.875% 12/15/05 650 533,000
GST Telecommunications, Inc., Sr. Notes, Zero
Coupon (until 12/15/00)....................... NR 13.875% 12/15/05 5,950 4,254,250
GST Telecommunications, Inc., Sr. Disc. Notes,
Zero Coupon (until 5/01/03)................... NR 10.50% 05/01/08 1,250 575,000
Hyperion Telecommunications, Inc., Sr. Disc.
Notes, Zero Coupon
(until 04/15/01)(b) (cost $2,226,875;
purchased on various dates: 2/23/98 through
6/26/98)...................................... NR 13.00% 04/15/03 1,350 972,000
ICG Holdings Inc., Sr. Sub. Notes, Zero Coupon
(until 9/15/00)............................... NR 13.50% 09/15/05 2,000 1,660,000
ICG Services, Inc., Sr. Disc. Notes, Zero Coupon
(until 5/01/03)............................... NR 9.875% 05/01/08 2,000 1,030,000
ICO Global Communications Sr. Sub. Notes........ B3 15.00% 08/01/05 2,950 2,212,500
Impsat Corp., Sr. Notes......................... B2 12.375% 06/15/08 2,000 1,620,000
Impsat Corp., Gtd. Sr. Notes.................... B2 12.125% 07/15/03 3,150 2,772,000
IPC Information Systems, Inc., Sr. Disc. Notes,
Zero Coupon (until 5/01/01)................... B3 10.85% 05/01/08 2,250 1,406,250
Iridium, LLC, Gtd. Notes........................ B3 10.875% 07/15/05 1,000 855,000
Iridium, LLC, Gtd. Notes........................ B3 14.00% 07/15/05 2,500 2,375,000
Level 3 Communications, Sr. Disc. Notes, Zero
Coupon (until 12/01/03)....................... B3 10.50% 12/01/08 5,750 3,342,187
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B34
<PAGE>
HIGH YIELD BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
CORPORATE BONDS (CONTINUED) (UNAUDITED) RATE DATE (000) (NOTE 2)
------------ ------ -------- --------- --------------
<S> <C> <C> <C> <C> <C>
Level 3 Communications, Sr. Notes............... B3 9.125% 05/01/08 $ 1,250 $ 1,239,063
Long Distance International, Inc., Sr. Notes.... NR 12.25% 04/15/08 2,000 1,600,000
Mastec, Inc., Sr. Notes......................... Ba3 7.75% 02/01/08 1,000 965,000
McCaw Int'l. Ltd., Sr. Disc. Notes, Zero Coupon
(until 4/15/02)............................... NR 13.00% 04/15/07 2,000 1,090,000
Metronet Communications Corp., Zero Coupon
(until 6/15/03)............................... B3 9.95% 06/15/08 4,000 2,450,000
Netia Holdings, Sr. Disc. Notes, Zero Coupon
(until 11/01/01).............................. B3 11.25% 11/01/07 3,000 1,695,000
Netia Holdings, Sr. Notes....................... B 10.25% 11/01/07 850 726,750
Nextel Communications, Inc., Sr. Disc. Notes,
Zero Coupon (until 09/15/02).................. B2 10.65% 09/15/07 600 385,500
Nextel Communications, Inc., Sr. Disc. Notes,
Zero Coupon (until 2/15/03)................... B2 9.95% 02/15/08 5,900 3,540,000
Nextel Communications, Inc., Sr. Disc. Notes,
Zero Coupon (until 8/15/99)................... B2 9.75% 08/15/04 2,500 2,425,000
Nextel Communications, Inc., Sr. Disc. Notes,
Zero Coupon (until 10/31/02).................. B3 9.75% 10/31/07 1,000 610,000
Northeast Optic, Sr. Notes...................... NR 12.75% 08/15/08 2,000 1,940,000
Omnipoint Corp., Sr. Notes, Series A............ B3 11.625% 08/15/06 5,875 4,112,500
Pagemart Nationwide, Inc., Sr. Disc. Notes,
Series H, Zero Coupon
(until 2/01/00)............................... NR 15.00% 02/01/05 7,500 6,600,000
Pagemart Wireless, Inc., Sr. Disc. Notes, Zero
Coupon (until 2/01/03)........................ NR 11.25% 02/01/08 2,500 1,150,000
Price Communications Wireless, Inc., Sr. Sub.
Notes......................................... NR 11.75% 07/15/07 5,000 5,275,000
PTC International Finance Corp., Gtd. Notes,
Zero Coupon (until 7/01/02)................... NR 10.75% 07/01/07 1,750 1,207,500
RCN Corp., Sr. Disc. Notes, Zero Coupon (until
10/15/02)..................................... B3 11.125% 10/15/07 1,250 725,000
Rogers Cantel, Inc., Sr. Sub. Notes, Zero Coupon
(until 11/30/02).............................. B2 8.80% 10/01/07 3,400 3,425,500
RSL Communications PLC, Sr. Sec'd Notes......... B3 12.00% 11/01/08 1,500 1,552,500
Splitrock Service, Inc., Sr. Notes.............. NR 11.75% 07/15/08 1,750 1,522,500
Telegroup, Inc., Sr. Disc. Notes, Zero Coupon
(until 11/01/01).............................. NR 10.50% 11/01/04 4,000 2,040,000
Time Warner Telecom LLC., Sr. Notes............. B2 9.75% 07/15/08 2,750 2,873,750
Unisite, Inc., Sr. Disc. Notes.................. NR 13.00% 12/15/04 4,000 4,562,800
US Xchange, LLC, Sr. Notes...................... NR 15.00% 07/01/08 2,250 2,295,000
USA Mobile Communications, Sr. Notes............ B2 9.50% 02/01/04 5,000 4,500,000
Versatel Telecommunications, Sr. Notes.......... NR 13.25% 05/15/08 2,000 1,980,000
Viatel, Inc., Sr. Disc. Notes, Zero Coupon
(until 4/15/03)............................... NR 12.50% 04/15/08 1,100 627,000
Viatel, Inc., Sr. Notes......................... Caa1 11.25% 04/15/08 1,500 1,507,500
WamNet, Inc., Sr. Disc. Notes, Zero Coupon
(until 3/01/02)............................... NR 13.25% 03/01/05 1,000 550,000
Winstar Communications, Sr. Notes............... Caa1 14.00% 10/15/05 1,500 1,085,625
Worldwide Fiber, Inc., Sr. Notes................ B3 12.50% 12/15/05 4,000 4,000,000
--------------
124,829,005
--------------
TEXTILES -- 1.2%
Cluett American Corp., Sr. Sub. Notes........... NR 10.125% 05/15/08 3,560 3,364,200
Foamex, L.P., Sr. Sub. Notes.................... B3 9.875% 06/15/07 2,950 3,186,000
Steel Heddle Manufacturing, Sr. Sub. Notes...... B3 10.625% 06/01/08 2,000 1,400,000
Worldtex, Inc., Gtd. Notes...................... B1 9.625% 12/15/07 2,000 1,780,000
--------------
9,730,200
--------------
TRANSPORTATION -- 2.2%
Aircraft Funding, Sr. Sub. Notes, PIK........... NR 12.00% 07/15/99 1,051 1,008,970
Airplanes Pass-through Trust, Sr. Notes......... Ba2 10.875% 3/15/19 1,000 1,050,000
Airtran Airlines, Inc., Gtd. Notes.............. NR 10.50% 04/15/01 3,000 2,580,000
Canadian Airlines, Sr. Notes.................... NR 12.25% 08/01/06 750 525,000
Continental Airlines, Inc., Sr. Notes........... Ba2 8.00% 12/15/05 3,000 2,964,300
Holt Group, Sr. Notes........................... Caa1 9.75% 01/15/06 800 552,000
Kitty Hawk, Inc., Sr. Notes..................... B1 9.95% 11/15/04 2,000 1,970,000
Stena Line AB, Sr. Notes........................ B1 10.625% 06/01/08 2,000 1,800,000
Trans World Airlines, Sr. Notes................. NR 11.50% 12/15/04 1,750 1,487,500
Trism, Inc., Bonds.............................. B2 10.75% 12/15/00 3,750 2,118,750
Valuejet, Inc., Sr. Notes....................... B3 10.25% 04/15/01 2,500 1,412,500
--------------
17,469,020
--------------
UTILITIES -- 0.1%
Korea Electric Power, Notes..................... Ba1 7.00% 10/01/02 1,185 1,066,382
--------------
TOTAL CORPORATE BONDS
(cost $749,262,856)......................................................................... 679,291,914
--------------
CONVERTIBLE BONDS -- 0.2%
OIL & GAS SERVICES -- 0.2%
Key Energy Group, Inc., Sub. Notes.............. NR 5.00% 09/15/04 4,000 1,800,000
--------------
TELECOMMUNICATIONS
Geotek Communications, Inc., Sr. Conv. Notes.... NR 12.00% 02/15/01 2,000 10,000
--------------
TOTAL CONVERTIBLE BONDS
(cost $4,969,713)........................................................................... 1,810,000
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B35
<PAGE>
HIGH YIELD BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
VALUE
COMMON STOCKS (a) -- 0.5% SHARES (NOTE 2)
<CAPTION>
------------- --------------
<S> <C> <C>
Cellnet Data Systems, Inc. (b) (cost $170; purchased 6/23/97)................ 34,000 $ 170,000
Coinstar, Inc................................................................ 6,300 67,725
Dr. Pepper Bottling Holdings, Inc., (Class 'B' Stock)........................ 5,807 185,824
Hedstrom Holding Co.......................................................... 24,261 24,261
Intermedia Communications, PIK............................................... 8,514 146,867
Loehmann's Holdings, Inc.(b) (cost $0; purchased 9/28/98).................... 4,403 8,393
Pagemart Nationwide, Inc..................................................... 13,125 73,828
Premium Standard Farms(b)(c) (cost $870,000; purchased 1/8/98)............... 22,025 356,149
Samuels Jewelers, Inc........................................................ 37,500 318,750
Scott Cable Communications, (Class 'C' Stock)................................ 875 0
Waste Systems International.................................................. 513,351 2,823,431
--------------
TOTAL COMMON STOCKS
(cost $2,885,749)........................................................................... 4,175,228
--------------
PREFERRED STOCKS -- 6.8%
21st Century Telecommunications Group, Inc., PIK............................. 443 287,919
Adelphia Communications, Inc., PIK........................................... 65,250 7,601,625
AmeriKing, Inc............................................................... 22,716 579,258
California Federal Bancorp, Inc.............................................. 100,000 2,531,250
Cendant Corp................................................................. 91,100 3,040,462
Century Maintenance Supplies................................................. 42,547 4,403,610
Chesapeake Energy Corp.(a)................................................... 20,000 213,750
Clark USA, Inc., PIK......................................................... 531 424,693
Cluett American Corp......................................................... 37,805 3,542,623
Concentric Network Corp...................................................... 1,278 1,092,690
CSC Holdings, Inc., PIK...................................................... 327 3,644,545
Eagle-Picher Holdings, Inc. (a).............................................. 170 858,500
EchoStar Communications, Inc., PIK........................................... 4,002 4,627,335
Fitzgerald Gaming, Inc. (a).................................................. 50,000 500,000
Geneva Steel, Inc............................................................ 22,000 66,000
GPA Group PLC................................................................ 1,550,000 775,000
Harborside Healthcare Corp................................................... 1,034 904,750
ICG Communications, Inc., PIK................................................ 1,273 1,247,059
Intermedia Communications, Inc., Series 144.................................. 90,000 1,338,750
Intermedia Communications, Inc., Series D.................................... 90,000 2,103,750
Intermedia Communications, Inc., PIK......................................... 3,151 3,175,053
International Utility Structures, Inc........................................ 16 14,240
Kelley Oil & Gas Corp........................................................ 38,400 345,600
Nextel Communications, Inc................................................... 922 839,020
NEXTLINK Communications, Inc................................................. 39,500 1,659,000
Paxson Communications, Inc................................................... 5,511 5,015,181
Petroleum Heat & Power, Inc., Conv. Pfd. (a)(b) (cost $49,022, purchased
9/9/98).................................................................... 19,609 39,218
Petroleum Heat & Power, Inc., Series C (b) (cost $2,000,000, purchased
2/12/97)................................................................... 80,000 1,600,000
Rural Cellular Corp., PIK.................................................... 529 486,328
Viasystems, Inc. (a)......................................................... 43,297 649,459
Viatel Inc., Sr. Notes....................................................... 1,363 149,944
--------------
TOTAL PREFERRED STOCKS
(cost $62,519,868).......................................................................... 53,756,612
--------------
EXPIRATION
WARRANTS (a) -- 0.2% DATE UNITS
------------- -------------
21st Century Telecom Group, Inc............................... 02/15/10..... 400 12,000
Allegiance Telecommunications, Inc............................ 02/03/08..... 3,800 30,400
American Banknote Corp........................................ 12/01/02..... 2,500 312
American Mobile Satelite Corp................................. 04/01/08..... 2,100 8,148
Ampex Corp.................................................... 03/15/03..... 170,000 127,500
Bell Technology Group Ltd..................................... 01/23/01..... 1,250 12
Bestel SA..................................................... 01/01/04..... 2,500 5,000
Birch Telecomm, Inc........................................... 06/15/00..... 2,500 0
Cellnet Data Systems, Inc..................................... 01/01/49..... 7,010 42,060
Classic Communicatons, Inc.................................... 08/01/09..... 6,000 0
Clearnet Communications, Inc.................................. 09/15/05..... 26,202 131,010
Diva Systems Corp............................................. 01/01/05..... 3,000 48,000
DTI Holdings, Inc............................................. 01/01/04..... 5,000 250
Electronic Retailing Systems.................................. 01/01/49..... 2,000 10,000
Ermis Maritime Holdings, Inc.................................. 01/01/07..... 2,000 2,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B36
<PAGE>
HIGH YIELD BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
EXPIRATION VALUE
WARRANTS (a) (CONTINUED) DATE UNITS (NOTE 2)
------------- ------------- --------------
<S> <C> <C> <C>
First World Communications.................................... 01/01/04..... 3,000 $ 0
Foamex - JPS Automotive LLC................................... 07/01/99..... 2,000 42,000
Globalstar Capital Co......................................... 02/15/04..... 1,200 72,000
Hyperion Telecommunications Corp.............................. 04/15/01..... 4,250 318,623
ICG Communications, Inc....................................... 09/15/05..... 20,790 270,270
ICO Global Communications..................................... 08/01/05..... 2,950 0
Interact Systems, Inc......................................... 08/01/03..... 4,400 550
Intermedia Communications of Florida, Inc..................... 06/01/00..... 3,000 128,220
Long Distance Int'l., Inc..................................... 05/01/05..... 2,000 20
McCaw Int'l. Ltd.............................................. 01/01/49..... 1,650 8,250
MGC Communications, Inc....................................... 01/01/49..... 1,950 60,138
Nextel Communications, Inc.................................... 01/01/49..... 2,250 0
Pagemart, Inc................................................. 11/01/03..... 9,200 27,600
Powertel, Inc................................................. 02/01/06..... 6,720 13,440
President Riverboat Casinos, Inc.............................. 09/30/99..... 22,075 0
Price Communications Cellular Holdings........................ 08/01/07..... 6,880 301,860
Primus Telecommunications Group............................... 08/01/07..... 1,500 18,750
Splitrock Service, Inc........................................ 07/15/08..... 1,750 19,250
Star Choice Communications, Inc............................... 12/15/05..... 69,480 26,805
Sterling Chemical Holdings, Inc............................... 08/15/08..... 560 8,400
TVN Entertainment Corp........................................ 08/01/08..... 3,750 38
Unisite, Inc.................................................. 12/15/04..... 1,943 0
USN Communications, Inc....................................... 01/01/49..... 10,590 2,224
Versatel Telecommunications................................... 05/15/08..... 2,000 20,000
Wam!net, Inc.................................................. 01/01/08..... 3,000 24,000
--------------
TOTAL WARRANTS
(cost $618,277)............................................................................. 1,779,130
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $820,256,463)......................................................................... 740,812,884
--------------
PRINCIPAL
INTEREST MATURITY AMOUNT
SHORT-TERM INVESTMENT -- 4.3% RATE DATE (000)
------------ -------- ---------
REPURCHASE AGREEMENT
Joint Repurchase Agreement Account....................... 4.693% 01/04/99 $33,890 33,890,000
--------------
(cost $33,890,000 Note 5)
TOTAL INVESTMENTS -- 98.2%
(cost $854,146,463; Note 6)................................................................. 774,702,884
OTHER ASSETS IN EXCESS OF LIABILITIES -- 1.8%................................................. 14,618,087
--------------
TOTAL NET ASSETS -- 100.0%.................................................................... $ 789,320,971
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
LLC Limited Liability Company
LP Limited Partnership
NR Not Rated by Moody's or Standard & Poors
PIK Payment in Kind Securities
PLC Public Limited Company
(a) Non-income producing security.
(b) Indicates a restricted security; the aggregate cost of the restricted
securities is $13,501,095. The aggregate value, $13,241,026 is
approximately 1.7% of net assets.
(c) Indiciates a fair valued security.
(d) Represents issuer in default on interest payments, non-income producing
security.
SEE NOTES TO FINANCIAL STATEMENTS.
B37
<PAGE>
STOCK INDEX PORTFOLIO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 97.3%
VALUE
COMMON STOCKS SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AEROSPACE -- 1.3%
Aeroquip-Vickers, Inc........................... 9,700 $ 290,394
AlliedSignal, Inc............................... 195,400 8,658,662
Boeing Co....................................... 343,536 11,207,862
General Dynamics Corp........................... 44,400 2,602,950
Goodrich (B.F.) Co.............................. 25,600 918,400
Lockheed Martin Corp............................ 68,049 5,767,153
Northrop Grumman Corp........................... 24,200 1,769,625
Parker-Hannifin Corp............................ 38,225 1,251,869
Raytheon Co. (Class "B" Stock).................. 118,018 6,284,458
United Technologies Corp........................ 79,700 8,667,375
--------------
47,418,748
--------------
AIRLINES -- 0.3%
AMR Corp. (a)................................... 63,900 3,794,062
Delta Air Lines, Inc............................ 53,200 2,766,400
Southwest Airlines Co........................... 117,150 2,628,553
US Airways Group, Inc. (a)...................... 34,900 1,814,800
--------------
11,003,815
--------------
APPAREL -- 0.1%
Fruit of the Loom, Inc. (Class "A" Stock) (a)... 25,200 348,075
Nike, Inc. (Class "B" Stock).................... 101,100 4,100,869
Reebok International Ltd........................ 19,000 282,625
--------------
4,731,569
--------------
AUTOS - CARS & TRUCKS -- 1.4%
Cummins Engine Co., Inc......................... 12,400 440,200
Dana Corp....................................... 57,094 2,333,717
Ford Motor Co................................... 420,500 24,678,094
General Motors Corp............................. 224,400 16,058,625
Genuine Parts Co................................ 61,925 2,070,617
Johnson Controls, Inc........................... 29,300 1,728,700
Navistar International Corp. (a)................ 23,900 681,150
PACCAR, Inc..................................... 27,160 1,116,955
TRW, Inc........................................ 42,000 2,359,875
--------------
51,467,933
--------------
BANKS AND SAVINGS & LOANS -- 6.5%
Banc One Corp................................... 404,445 20,651,973
Bank of New York Co., Inc....................... 261,100 10,509,275
BankAmerica Corp................................ 600,844 36,125,745
BankBoston Corp................................. 102,600 3,994,987
Bankers Trust Corp.............................. 34,200 2,921,962
BB&T Corp....................................... 98,700 3,978,844
Chase Manhattan Corp............................ 295,094 20,084,835
Comerica, Inc................................... 54,150 3,692,353
First Union Corp................................ 334,578 20,346,525
Fleet Financial Group, Inc...................... 198,400 8,866,000
Golden West Financial Corp...................... 20,100 1,842,919
Huntington Bancshares, Inc...................... 73,500 2,209,594
KeyCorp......................................... 152,900 4,892,800
Mellon Bank Corp................................ 91,200 6,270,000
Mercantile Bancorporation, Inc.................. 53,400 2,463,075
Morgan (J.P.) & Co., Inc........................ 61,950 6,508,622
National City Corp.............................. 114,700 8,315,750
Northern Trust Corp............................. 38,300 3,344,069
PNC Bank Corp................................... 104,600 5,661,475
Providian Financial Corp........................ 48,750 3,656,250
Regions Financial Corp.......................... 75,100 3,027,469
Republic New York Corp.......................... 37,100 1,690,369
Summit Bancorp.................................. 60,900 2,660,569
Suntrust Banks, Inc............................. 72,800 5,569,200
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
BANKS AND SAVINGS & LOANS (CONT'D.)
Synovus Financial Corp.......................... 91,500 $ 2,230,312
U.S. Bancorp.................................... 259,426 9,209,623
Union Planters Corp............................. 43,800 1,984,687
Wachovia Corp................................... 71,900 6,286,756
Wells Fargo & Co................................ 565,260 22,575,071
--------------
231,571,109
--------------
BUSINESS SERVICES -- 0.1%
Equifax, Inc.................................... 52,300 1,788,006
Omnicom Group, Inc.............................. 58,400 3,387,200
--------------
5,175,206
--------------
CHEMICALS -- 1.6%
Air Products & Chemicals, Inc................... 81,100 3,244,000
Dow Chemical Co................................. 77,900 7,084,031
Du Pont (E.I.) de Nemours & Co.................. 394,400 20,927,850
Eastman Chemical Co............................. 27,600 1,235,100
Engelhard Corp.................................. 49,875 972,562
FMC Corp. (a)................................... 12,300 688,800
Grace (W.R.) & Co............................... 24,400 382,775
Great Lakes Chemical Corp....................... 20,600 824,000
Hercules, Inc................................... 32,400 886,950
Monsanto Co..................................... 209,300 9,941,750
Morton International, Inc....................... 46,100 1,129,450
Nalco Chemical Co............................... 23,100 716,100
Praxair, Inc.................................... 55,600 1,959,900
Raychem Corp.................................... 30,200 975,837
Rohm & Haas Co.................................. 61,800 1,861,725
Sigma-Aldrich Corp.............................. 34,000 998,750
Union Carbide Corp.............................. 47,000 1,997,500
--------------
55,827,080
--------------
COMMERCIAL SERVICES -- 0.2%
Cendant Corp. (a)............................... 299,618 5,711,468
Deluxe Corp..................................... 27,000 987,187
Moore Corp. Ltd................................. 28,500 313,500
--------------
7,012,155
--------------
COMPUTER SERVICES -- 7.2%
3Com Corp. (a).................................. 124,000 5,556,750
Adobe Systems, Inc.............................. 23,600 1,103,300
America Online, Inc. (a)........................ 24,000 3,840,000
Autodesk, Inc................................... 15,800 674,462
Automatic Data Processing, Inc.................. 104,700 8,395,631
BMC Software, Inc. (a).......................... 71,100 3,168,394
Cabletron Systems, Inc. (a)..................... 53,500 448,062
Ceridian Corp. (a).............................. 24,600 1,717,387
Cisco Systems, Inc. (a)......................... 537,450 49,882,078
Computer Associates International, Inc.......... 195,143 8,317,970
Computer Sciences Corp. (a)..................... 55,200 3,556,950
Electronic Data Systems Corp.................... 170,100 8,547,525
EMC Corp. (a)................................... 173,300 14,730,500
First Data Corp................................. 154,300 4,889,381
Microsoft Corp. (a)............................. 858,300 119,035,481
Novell, Inc. (a)................................ 120,100 2,176,812
Oracle Corp. (a)................................ 336,687 14,519,627
Parametric Technology Corp. (a)................. 93,000 1,522,875
Peoplesoft, Inc................................. 70,000 1,325,625
Silicon Graphics, Inc. (a)...................... 61,800 795,675
Unisys Corp..................................... 85,900 2,958,181
--------------
257,162,666
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B38
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
COMPUTERS -- 4.5%
Apple Computer, Inc. (a)........................ 45,700 $ 1,870,844
Compaq Computer Corp............................ 580,769 24,356,000
Data General Corp. (a).......................... 15,800 259,712
Dell Computer Corp. (a)......................... 440,200 32,217,137
Gateway 2000, Inc. (a).......................... 54,200 2,774,362
Hewlett-Packard Co.............................. 361,400 24,688,137
International Business Machines Corp............ 323,800 59,822,050
Seagate Technology, Inc. (a).................... 83,100 2,513,775
Sun Microsystems, Inc. (a)...................... 131,000 11,216,875
--------------
159,718,892
--------------
CONSTRUCTION -- 0.1%
Centex Corp..................................... 21,600 973,350
Fluor Corp...................................... 28,300 1,204,519
Foster Wheeler Corp............................. 13,300 175,394
Pulte Corp...................................... 14,500 403,281
--------------
2,756,544
--------------
CONTAINERS -- 0.2%
Ball Corp....................................... 10,900 498,675
Bemis Co., Inc.................................. 18,100 686,669
Crown Cork & Seal Co., Inc...................... 44,200 1,361,912
Owens-Illinois, Inc. (a)........................ 54,700 1,675,187
Sealed Air Corp................................. 29,510 1,506,854
--------------
5,729,297
--------------
COSMETICS & SOAPS -- 2.2%
Alberto Culver Co. (Class "B" Stock)............ 19,100 509,731
Avon Products, Inc.............................. 92,000 4,071,000
Colgate-Palmolive Co............................ 102,700 9,538,262
Gillette Co..................................... 391,700 18,924,006
International Flavors & Fragrances, Inc......... 36,400 1,608,425
Procter & Gamble Co............................. 463,504 42,323,709
--------------
76,975,133
--------------
DIVERSIFIED OFFICE EQUIPMENT -- 0.6%
Avery Dennison Corp............................. 40,800 1,838,550
Pitney Bowes, Inc............................... 98,100 6,480,731
Xerox Corp...................................... 113,446 13,386,628
--------------
21,705,909
--------------
DIVERSIFIED OPERATIONS -- 3.3%
Fortune Brands, Inc............................. 61,300 1,938,612
General Electric Co............................. 1,124,600 114,779,487
--------------
116,718,099
--------------
DRUGS AND MEDICAL SUPPLIES -- 11.3%
Abbott Laboratories............................. 534,900 26,210,100
Allergan, Inc................................... 23,300 1,508,675
ALZA Corp. (a).................................. 30,600 1,598,850
American Home Products Corp..................... 457,400 25,757,337
Amgen, Inc. (a)................................. 88,700 9,274,694
Bard (C.R.), Inc................................ 19,000 940,500
Bausch & Lomb, Inc.............................. 20,100 1,206,000
Baxter International, Inc....................... 99,900 6,424,819
Becton, Dickinson & Co.......................... 86,600 3,696,737
Biomet, Inc..................................... 39,100 1,573,775
Boston Scientific Corp. (a)..................... 136,600 3,662,587
Bristol-Myers Squibb Co......................... 343,780 46,002,061
Cardinal Health, Inc............................ 69,450 5,269,519
Guidant Corp.................................... 52,900 5,832,225
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
DRUGS AND MEDICAL SUPPLIES (CONT'D.)
Johnson & Johnson............................... 464,800 $ 38,985,100
Lilly (Eli) & Co................................ 381,400 33,896,925
Mallinckrodt, Inc............................... 23,800 733,337
Medtronic, Inc.................................. 163,500 12,139,875
Merck & Co., Inc................................ 411,650 60,795,559
Pfizer, Inc..................................... 453,600 56,898,450
Pharmacia & Upjohn, Inc......................... 177,425 10,046,691
Schering-Plough Corp............................ 509,400 28,144,350
St. Jude Medical, Inc. (a)...................... 30,300 838,931
Warner-Lambert Co............................... 281,500 21,165,281
--------------
402,602,378
--------------
ELECTRONICS -- 3.8%
Advanced Micro Devices, Inc. (a)................ 48,100 1,391,894
AMP Inc......................................... 76,044 3,959,041
Applied Materials, Inc. (a)..................... 127,600 5,446,925
EG&G, Inc....................................... 15,000 417,187
Emerson Electric Co............................. 154,100 9,640,881
Grainger (W.W.), Inc............................ 33,400 1,390,275
Harris Corp..................................... 27,100 992,537
Honeywell, Inc.................................. 44,000 3,313,750
Intel Corp...................................... 582,500 69,062,656
KLA-Tencor Corp. (a)............................ 29,700 1,288,237
LSI Logic Corp. (a)............................. 47,500 765,937
Micron Technology, Inc.......................... 74,900 3,787,131
Motorola, Inc................................... 207,100 12,646,044
National Semiconductor Corp. (a)................ 58,000 783,000
Perkin-Elmer Corp............................... 17,200 1,678,075
Rockwell International Corp..................... 68,500 3,326,531
Solectron Corp.................................. 11,600 1,078,075
Tektronix, Inc.................................. 17,500 526,094
Texas Instruments, Inc.......................... 136,000 11,636,500
Thomas & Betts Corp............................. 19,800 857,587
--------------
133,988,357
--------------
ENVIRONMENTAL SERVICES -- 0.1%
Browning-Ferris Industries, Inc................. 66,200 1,882,562
--------------
FINANCIAL SERVICES -- 5.6%
American Express Co............................. 159,900 16,349,775
Associates First Capital Corp................... 240,066 10,172,797
Bear Stearns Companies, Inc..................... 40,100 1,498,737
Block (H.R.), Inc............................... 36,700 1,651,500
Capital One Financial Corp...................... 22,800 2,622,000
Citigroup, Inc.................................. 791,209 39,164,845
Countrywide Credit Industries, Inc.............. 38,800 1,947,275
Dun & Bradstreet Corp........................... 58,360 1,841,987
Federal Home Loan Mortgage Corp................. 233,000 15,013,937
Federal National Mortgage Association........... 360,100 26,647,400
Fifth Third Bancorp............................. 93,800 6,689,112
Franklin Resources, Inc......................... 88,400 2,828,800
Household International, Inc.................... 171,258 6,786,098
Lehman Brothers Holdings, Inc................... 40,200 1,771,312
MBNA Corp....................................... 258,768 6,453,027
Merrill Lynch & Co., Inc........................ 120,400 8,036,700
Morgan Stanley Dean Witter & Co................. 200,905 14,264,255
Paychex, Inc.................................... 52,000 2,674,750
Schwab (Charles) Corp........................... 139,200 7,821,300
SLM Holding Corp................................ 59,600 2,860,800
State Street Corp............................... 55,800 3,881,587
SunAmerica, Inc................................. 71,700 5,816,662
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B39
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
FINANCIAL SERVICES (CONT'D.)
Transamerica Corp............................... 21,600 $ 2,494,800
Washington Mutual, Inc.......................... 206,248 7,876,095
--------------
197,165,551
--------------
FOOD & BEVERAGES -- 4.7%
Anheuser-Busch Companies, Inc................... 168,500 11,057,812
Archer-Daniels-Midland Co....................... 206,173 3,543,598
Bestfoods....................................... 100,700 5,362,275
Brown-Forman Corp. (Class "B" Stock)............ 24,500 1,854,344
Campbell Soup Co................................ 152,400 8,382,000
Coca-Cola Co.................................... 852,900 57,037,687
Coca-Cola Enterprises, Inc...................... 139,000 4,969,250
ConAgra, Inc.................................... 169,100 5,326,650
Coors (Adolph) Co. (Class "B" Stock)............ 12,800 722,400
General Mills, Inc.............................. 54,400 4,229,600
Heinz (H.J.) & Co............................... 127,850 7,239,506
Hershey Foods Corp.............................. 49,800 3,096,937
Kellogg Co...................................... 141,700 4,835,512
PepsiCo, Inc.................................... 510,000 20,878,125
Pioneer Hi-Bred International, Inc.............. 84,900 2,292,300
Quaker Oats Co.................................. 48,200 2,867,900
Ralston-Ralston Purina Group.................... 109,220 3,535,997
Sara Lee Corp................................... 323,400 9,115,837
Seagram Co., Ltd................................ 130,200 4,947,600
Sysco Corp...................................... 117,500 3,223,906
Wrigley (William) Jr. Co........................ 39,900 3,573,544
--------------
168,092,780
--------------
FOREST PRODUCTS -- 0.6%
Boise Cascade Corp.............................. 18,886 585,466
Champion International Corp..................... 33,000 1,336,500
Fort James Corp................................. 76,000 3,040,000
Georgia-Pacific Corp............................ 31,400 1,838,862
International Paper Co.......................... 107,434 4,814,386
Louisiana-Pacific Corp.......................... 38,900 712,356
Mead Corp....................................... 35,400 1,037,662
Potlatch Corp................................... 10,000 368,750
Temple-Inland, Inc.............................. 19,000 1,126,937
Union Camp Corp................................. 25,100 1,694,250
Westvaco Corp................................... 35,700 957,206
Weyerhaeuser Co................................. 68,900 3,500,981
Willamette Industries, Inc...................... 40,100 1,343,350
--------------
22,356,706
--------------
GAS PIPELINES -- 0.3%
Columbia Energy Group........................... 28,250 1,631,437
Consolidated Natural Gas Co..................... 33,700 1,819,800
Peoples Energy Corp............................. 11,400 454,575
Sempra Energy................................... 84,104 2,134,139
Sonat, Inc...................................... 36,900 998,606
Williams Companies, Inc......................... 146,300 4,562,731
--------------
11,601,288
--------------
HOSPITALS/ HOSPITAL MANAGEMENT -- 0.7%
Columbia/HCA Healthcare Corp.................... 226,298 5,600,875
HBO & Co........................................ 151,100 4,334,681
Healthsouth Corp. (a)........................... 146,500 2,261,594
Humana, Inc. (a)................................ 58,100 1,034,906
IMS Health, Inc................................. 57,560 4,342,183
Manor Care, Inc................................. 30,850 906,219
Service Corp. International..................... 89,500 3,406,594
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Shared Medical Systems Corp..................... 9,000 $ 448,875
Tenet Healthcare Corp. (a)...................... 107,100 2,811,375
--------------
25,147,302
--------------
HOUSEHOLD PRODUCTS & PERSONAL CARE -- 0.4%
Clorox Co....................................... 36,600 4,275,338
Kimberly-Clark Corp............................. 186,988 10,190,846
--------------
14,466,184
--------------
HOUSING RELATED -- 0.5%
Armstrong World Industries, Inc................. 13,700 826,281
Fleetwood Enterprises, Inc...................... 12,600 437,850
Kaufman & Broad Home Corp....................... 13,166 378,523
Lowe's Companies, Inc........................... 122,900 6,290,944
Masco Corp...................................... 118,200 3,398,250
Maytag Corp..................................... 32,700 2,035,575
Owens Corning................................... 19,100 676,856
Stanley Works................................... 32,300 896,325
Tupperware Corp................................. 22,300 366,556
Whirlpool Corp.................................. 27,300 1,511,738
--------------
16,818,898
--------------
INSURANCE -- 3.4%
Aetna, Inc...................................... 50,912 4,002,956
Allstate Corp................................... 283,988 10,969,037
American General Corp........................... 88,686 6,917,508
American International Group, Inc............... 363,532 35,126,280
Aon Corp........................................ 58,150 3,220,056
Berkshire Hathaway, Inc. (Class "B" Stock)...... 982 2,307,113
Chubb Corp...................................... 58,400 3,788,700
CIGNA Corp...................................... 71,100 5,496,919
Cincinnati Financial Corp....................... 58,500 2,142,563
Conseco, Inc.................................... 108,259 3,308,666
Hartford Financial Services Group, Inc.......... 81,300 4,461,338
Jefferson-Pilot Corp............................ 37,012 2,775,900
Lincoln National Corp........................... 35,100 2,871,619
Loews Corp...................................... 39,700 3,900,525
Marsh & McLennan Companies, Inc................. 88,400 5,165,875
MBIA, Inc....................................... 34,300 2,248,794
MGIC Investment Corp............................ 40,200 1,600,463
Progressive Corp................................ 25,100 4,251,313
Provident Companies, Inc........................ 47,200 1,958,800
SAFECO Corp..................................... 48,300 2,073,881
St. Paul Companies, Inc......................... 82,410 2,863,748
Torchmark Corp.................................. 48,000 1,695,000
United Healthcare Corp.......................... 67,500 2,906,719
UNUM Corp....................................... 48,500 2,831,188
--------------
118,884,961
--------------
LEISURE -- 1.1%
Brunswick Corp.................................. 33,400 826,650
Carnival Corp. (Class "A" Stock)................ 181,000 8,688,000
Disney (Walt) Co................................ 712,601 21,378,030
Harrah's Entertainment, Inc. (a)................ 35,350 554,553
Hilton Hotels Corp.............................. 87,800 1,679,175
King World Productions, Inc..................... 25,600 753,600
Marriott International, Inc. (Class "A"
Stock)........................................ 90,200 2,615,800
Mirage Resorts, Inc. (a)........................ 61,900 924,631
--------------
37,420,439
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B40
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
MACHINERY -- 0.6%
Briggs & Stratton Corp.......................... 7,800 $ 389,025
Case Corp....................................... 25,400 554,038
Caterpillar, Inc................................ 127,700 5,874,200
Cooper Industries, Inc.......................... 42,600 2,031,488
Deere & Co...................................... 85,200 2,822,250
Dover Corp...................................... 78,100 2,860,413
Eaton Corp...................................... 25,500 1,802,531
Harnischfeger Industries, Inc................... 16,100 164,019
Ingersoll-Rand Co............................... 57,550 2,701,253
Milacron, Inc................................... 12,600 242,550
Snap-On, Inc.................................... 20,800 724,100
Timken Co....................................... 21,500 405,813
--------------
20,571,680
--------------
MANUFACTURING -- 0.6%
Illinois Tool Works, Inc........................ 87,200 5,057,600
Tyco International Ltd.......................... 224,608 16,943,866
--------------
22,001,466
--------------
MEDIA -- 2.9%
CBS Corp........................................ 248,100 8,125,275
Clear Channel Communications, Inc. (a).......... 86,200 4,697,900
Comcast Corp. (Special Class "A" Stock)......... 128,200 7,523,738
Donnelley (R.R.) & Sons Co...................... 49,500 2,168,719
Dow Jones & Co., Inc............................ 32,200 1,549,625
Gannett Co., Inc................................ 99,400 6,579,038
Interpublic Group of Companies, Inc............. 47,900 3,820,025
Knight-Ridder, Inc.............................. 27,600 1,411,050
McGraw-Hill, Inc................................ 34,700 3,535,063
Mediaone Group, Inc............................. 212,200 9,973,400
Meredith Corp................................... 17,800 674,175
New York Times Co. (Class "A" Stock)............ 65,200 2,261,625
Tele-Communications, Inc. (Series "A"
Stock) (a).................................... 182,800 10,111,125
Time Warner, Inc................................ 411,080 25,512,653
Times Mirror Co. (Class "A" Stock).............. 30,600 1,713,600
Tribune Co...................................... 42,600 2,811,600
Viacom, Inc. (Class "B" Stock) (a).............. 125,367 9,277,158
--------------
101,745,769
--------------
METALS-FERROUS -- 0.1%
Allegheny Teledyne, Inc......................... 69,880 1,428,173
Bethlehem Steel Corp. (a)....................... 47,300 396,138
Nucor Corp...................................... 30,800 1,332,100
USX-U.S. Steel Group, Inc....................... 31,540 725,420
Worthington Industries, Inc..................... 34,000 425,000
--------------
4,306,831
--------------
METALS-NON FERROUS -- 0.3%
Alcan Aluminum Ltd.............................. 79,350 2,147,409
Aluminum Company of America..................... 65,500 4,883,844
Cyprus Amax Minerals Co......................... 32,700 327,000
Inco Ltd........................................ 56,200 593,613
Reynolds Metals Co.............................. 25,600 1,348,800
--------------
9,300,666
--------------
MINERAL RESOURCES -- 0.1%
ASARCO, Inc..................................... 14,500 218,406
Burlington Resources, Inc....................... 60,917 2,181,590
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Homestake Mining Co............................. 72,700 $ 667,931
Phelps Dodge Corp............................... 20,300 1,032,763
--------------
4,100,690
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 0.6%
AES Corp........................................ 63,300 2,998,838
Crane Co........................................ 23,625 713,180
Danaher Corp.................................... 43,100 2,340,869
Ecolab, Inc..................................... 46,000 1,664,625
ITT Industries, Inc............................. 41,900 1,665,525
Laidlaw, Inc.................................... 112,400 1,131,025
Millipore Corp.................................. 14,200 403,813
NACCO Industries, Inc. (Class "A" Stock)........ 2,800 257,600
Pall Corp....................................... 42,000 1,063,125
PPG Industries, Inc............................. 62,200 3,623,150
Textron, Inc.................................... 57,200 4,343,625
Thermo Electron Corp. (a)....................... 57,000 965,438
--------------
21,170,813
--------------
MISCELLANEOUS - CONSUMER GROWTH/STAPLE -- 1.2%
American Greetings Corp. (Class "A" Stock)...... 24,800 1,018,350
Black & Decker Corp............................. 32,900 1,844,456
Corning, Inc.................................... 80,600 3,627,000
Eastman Kodak Co................................ 113,100 8,143,200
Jostens, Inc.................................... 12,400 324,725
Minnesota Mining & Manufacturing Co............. 137,300 9,765,463
Polaroid Corp................................... 15,400 287,788
Rubbermaid, Inc................................. 52,200 1,641,038
Unilever N.V., ADR, (United Kingdom)............ 221,700 18,387,244
--------------
45,039,264
--------------
MISCELLANEOUS - INDUSTRIAL -- 0.1%
Tenneco, Inc.................................... 58,900 2,006,281
--------------
OIL & GAS -- 5.5%
Amerada Hess Corp............................... 32,500 1,616,875
Amoco Corp...................................... 327,260 19,758,323
Anadarko Petroleum Corp......................... 41,600 1,284,400
Ashland, Inc.................................... 26,600 1,286,775
Atlantic Richfield Co........................... 112,270 7,325,618
Chevron Corp.................................... 227,700 18,884,869
Coastal Corp.................................... 72,700 2,539,956
Eastern Enterprises............................. 6,500 284,375
Exxon Corp...................................... 843,600 61,688,250
Kerr-McGee Corp................................. 16,200 619,650
Mobil Corp...................................... 272,000 23,698,000
NICOR, Inc...................................... 16,200 684,450
Phillips Petroleum Co........................... 90,300 3,849,038
Royal Dutch Petroleum Co........................ 745,300 35,681,238
Sunoco, Inc..................................... 33,200 1,197,275
Texaco, Inc..................................... 183,782 9,717,473
Union Pacific Resources Group, Inc.............. 86,056 779,883
Unocal Corp..................................... 84,600 2,469,263
USX-Marathon Group.............................. 100,000 3,012,500
--------------
196,378,211
--------------
OIL & GAS EXPLORATION/PRODUCTION -- 0.1%
Occidental Petroleum Corp....................... 128,000 2,160,000
Oryx Energy Co. (a)............................. 37,200 499,875
--------------
2,659,875
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B41
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
OIL & GAS SERVICES -- 0.7%
Apache Corp..................................... 34,100 $ 863,156
Baker Hughes, Inc............................... 112,130 1,983,299
Enron Corp...................................... 114,200 6,516,538
Halliburton Co.................................. 152,700 4,523,738
Helmerich & Payne, Inc.......................... 18,100 350,688
McDermott International, Inc.................... 20,700 511,031
ONEOK, Inc...................................... 10,000 361,250
Rowan Companies, Inc. (a)....................... 28,700 287,000
Schlumberger Ltd................................ 189,100 8,722,238
--------------
24,118,938
--------------
PRECIOUS METALS -- 0.2%
Barrick Gold Corp............................... 129,300 2,521,350
Battle Mountain Gold Co......................... 81,000 334,125
Freeport-McMoRan Copper & Gold, Inc. (Class "B"
Stock)........................................ 66,200 690,963
Newmont Mining Corp............................. 54,503 984,460
Placer Dome, Inc................................ 86,000 989,000
--------------
5,519,898
--------------
RAILROADS -- 0.5%
Burlington Northern Santa Fe Corp............... 163,626 5,522,378
CSX Corp........................................ 76,612 3,179,398
Norfolk Southern Corp........................... 132,300 4,192,256
Union Pacific Corp.............................. 86,800 3,911,425
--------------
16,805,457
--------------
RESTAURANTS -- 0.6%
Darden Restaurants, Inc......................... 50,300 905,400
McDonald's Corp................................. 238,800 18,298,050
Tricon Global Restaurants, Inc. (a)............. 53,850 2,699,231
Wendy's International, Inc...................... 44,800 977,200
--------------
22,879,881
--------------
RETAIL -- 6.4%
Albertson's, Inc................................ 85,800 5,464,388
American Stores Co.............................. 95,800 3,538,613
AutoZone, Inc. (a).............................. 51,900 1,709,456
Circuit City Stores, Inc........................ 33,800 1,687,888
Consolidated Stores Corp........................ 37,200 750,975
Costco Companies, Inc. (a)...................... 75,466 5,447,702
CVS Corp........................................ 134,800 7,414,000
Dayton-Hudson Corp.............................. 152,284 8,261,407
Dillard's, Inc.................................. 37,750 1,071,156
Dollar General Corporation...................... 63,875 1,509,047
Federated Department Stores, Inc. (a)........... 73,500 3,201,844
Fred Meyer, Inc................................. 54,100 3,259,525
Great Atlantic & Pacific Tea Co., Inc........... 12,400 367,350
Harcourt General, Inc........................... 25,006 1,330,007
Home Depot, Inc................................. 519,446 31,783,602
IKON Office Solutions, Inc...................... 46,476 397,951
J.C. Penney Co., Inc............................ 88,800 4,162,500
Kmart Corp. (a)................................. 168,400 2,578,625
Kohl's Corp. (a)................................ 55,600 3,415,925
Kroger Co. (a).................................. 88,700 5,366,350
Liz Claiborne, Inc.............................. 23,400 738,563
Longs Drug Stores, Inc.......................... 13,700 513,750
May Department Stores Co........................ 80,600 4,866,225
Newell Co....................................... 55,000 2,268,750
Nordstrom, Inc.................................. 52,300 1,814,156
Pep Boys-Manny, Moe & Jack...................... 21,700 340,419
Rite Aid Corp................................... 90,600 4,490,363
Safeway, Inc. (a)............................... 166,100 10,121,719
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
RETAIL (CONT'D.)
Sears, Roebuck & Co............................. 130,400 $ 5,542,000
Sherwin-Williams Co............................. 59,700 1,753,688
Staples, Inc. (a)............................... 105,200 4,595,925
Supervalu, Inc.................................. 40,800 1,142,400
Tandy Corp...................................... 34,530 1,422,204
The Gap, Inc.................................... 201,525 11,335,781
The Limited, Inc................................ 82,048 2,389,648
TJX Companies, Inc.............................. 109,400 3,172,600
Toys 'R' Us, Inc. (a)........................... 98,450 1,661,344
Wal-Mart Stores, Inc............................ 774,000 63,032,625
Walgreen Co..................................... 172,900 10,125,456
Winn-Dixie Stores, Inc.......................... 51,900 2,329,013
--------------
226,374,940
--------------
RUBBER -- 0.1%
Cooper Tire & Rubber Co......................... 28,800 588,600
Goodyear Tire & Rubber Co....................... 54,300 2,738,756
--------------
3,327,356
--------------
TELECOMMUNICATIONS -- 10.3%
Airtouch Communications, Inc. (a)............... 198,900 14,345,663
Alltel Corp..................................... 94,700 5,664,244
Ameritech Corp.................................. 383,400 24,297,975
Andrew Corp. (a)................................ 29,112 480,348
Ascend Communications, Inc. (a)................. 74,800 4,918,100
AT&T Corp....................................... 624,473 46,991,593
Bell Atlantic Corp.............................. 538,390 30,587,282
BellSouth Corp.................................. 682,000 34,014,750
Frontier Corp................................... 60,400 2,053,600
General Instrument Corp......................... 51,300 1,740,994
GTE Corp........................................ 330,320 22,275,955
Lucent Technologies, Inc........................ 454,620 50,008,200
MCI WorldCom, Inc............................... 620,572 44,526,041
Nextel Communications, Inc. (Class "A"
Stock) (a).................................... 99,800 2,357,775
Northern Telecom Ltd............................ 226,720 11,364,340
SBC Communications, Inc......................... 675,286 36,212,212
Scientific-Atlanta, Inc......................... 27,200 620,500
Sprint Corp..................................... 149,700 12,593,513
Sprint Corp. (PCS Group)........................ 123,850 2,864,031
Tellabs, Inc. (a)............................... 67,600 4,634,825
US West, Inc.................................... 179,622 11,608,072
--------------
364,160,013
--------------
TEXTILES -- 0.1%
National Service Industries, Inc................ 14,700 558,600
Russell Corp.................................... 12,700 257,969
Springs Industries, Inc......................... 6,700 277,631
VF Corp......................................... 42,836 2,007,938
--------------
3,102,138
--------------
TOBACCO -- 1.4%
Philip Morris Co., Inc.......................... 843,000 45,100,500
RJR Nabisco Holdings Corp....................... 111,900 3,322,031
UST, Inc........................................ 66,100 2,305,238
--------------
50,727,769
--------------
TOYS -- 0.1%
Hasbro, Inc..................................... 45,700 1,650,913
Mattel, Inc..................................... 102,381 2,335,567
--------------
3,986,480
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B42
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCKS VALUE
(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
TRUCKING/SHIPPING -- 0.1%
Federal Express Corp. (a)....................... 50,620 $ 4,505,180
Ryder System, Inc............................... 25,800 670,800
--------------
5,175,980
--------------
UTILITY - ELECTRIC -- 2.3%
Ameren Corp..................................... 47,200 2,014,850
American Electric Power Co., Inc................ 66,500 3,129,656
Baltimore Gas & Electric Co..................... 50,550 1,560,731
Carolina Power & Light Co....................... 52,000 2,447,250
Central & South West Corp....................... 73,400 2,013,913
CINergy Corp.................................... 55,739 1,916,028
Consolidated Edison, Inc........................ 81,800 4,325,175
Dominion Resources, Inc......................... 67,950 3,176,663
DTE Energy Co................................... 50,600 2,169,475
Duke Energy Corp................................ 125,131 8,016,205
Edison International............................ 120,800 3,367,300
Entergy Corp.................................... 86,300 2,686,088
FirstEnergy Corp. (a)........................... 82,200 2,676,638
FPL Group, Inc.................................. 63,100 3,888,538
GPU, Inc........................................ 44,200 1,953,088
Houston Industries, Inc......................... 103,410 3,322,046
New Century Energies, Inc....................... 40,900 1,993,875
Niagara Mohawk Power Corp. (a).................. 64,600 1,041,675
Northern States Power Co........................ 50,900 1,412,475
Pacific Gas & Electric Co....................... 131,000 4,126,500
PacifiCorp...................................... 102,300 2,154,694
PECO Energy Co.................................. 77,500 3,225,938
PP&L Resources, Inc............................. 49,000 1,365,875
Public Service Enterprise Group, Inc............ 80,400 3,216,000
Southern Co..................................... 240,800 6,998,250
Texas Utilities Co.............................. 97,506 4,552,311
Unicom Corp..................................... 75,100 2,896,044
--------------
81,647,281
--------------
WASTE MANAGEMENT -- 0.3%
Waste Management, Inc........................... 199,530 9,303,086
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $1,826,272,044).......................................... 3,451,812,324
--------------
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS -- 2.6% (000) (NOTE 2)
------------- --------------
REPURCHASE AGREEMENT -- 2.4%
Joint Repurchase Agreement Account,
4.693%, 01/04/99 (Note 5)..................... $ 86,854 $ 86,854,000
--------------
U. S. GOVERNMENT OBLIGATION -- 0.2%
United States Treasury Bill,
4.36%, 03/18/99 (b)........................... 5,900 5,847,844
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $92,699,694)............................................. 92,701,844
--------------
TOTAL INVESTMENTS -- 99.9%
(cost $1,918,971,738; Note 6) 3,544,514,168
VARIATION MARGIN ON
OPEN FUTURES CONTRACTS(c)...................................... 246,890
OTHER ASSETS IN EXCESS
OF LIABILITIES -- 0.1%......................................... 3,327,932
--------------
TOTAL NET ASSETS -- 100.0%....................................... $3,548,088,990
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
ADR American Depository Receipt
(a) Non-income producing security
(b) Security segregated as collateral for futures contracts.
(c) Open futures contracts as of December 31, 1998 are as follows:
<TABLE>
<C> <S> <C> <C> <C> <C>
VALUE AT
NUMBER OF EXPIRATION VALUE AT DECEMBER 31,
CONTRACTS TYPE DATE TRADE DATE 1998 APPRECIATION
Long Position:
S&P 500
288 Index Mar 99 $85,070,625 $89,676,000 $4,605,375
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B43
<PAGE>
EQUITY INCOME PORTFOLIO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 96.9%
VALUE
COMMON STOCKS -- 91.4% SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AEROSPACE
United Industrial Corp.................................... 32,300 $ 316,944
--------------
AIRLINES -- 3.1%
AMR Corp. (a)............................................. 947,000 56,228,125
Trans World Airlines, Inc................................. 1,224,700(b) 5,893,869
US Airways Group, Inc..................................... 63,600 3,307,200
--------------
65,429,194
--------------
AUTOS - CARS & TRUCKS -- 7.5%
DaimlerChrysler AG........................................ 673,986 64,744,780
Ford Motor Co............................................. 762,600 44,755,087
General Motors Corp....................................... 724,000 51,811,250
--------------
161,311,117
--------------
CHEMICALS -- 5.1%
Dow Chemical Co........................................... 1,029,600 93,629,250
Millennium Chemicals, Inc................................. 841,498 16,724,773
--------------
110,354,023
--------------
CONSUMER SERVICES
Petroleum Heat and Power, Inc. (Class "A" Stock).......... 48,200 36,150
--------------
DIVERSIFIED CONSUMER PRODUCTS -- 1.1%
Eastman Kodak Co.......................................... 222,300 16,005,600
Gibson Greetings, Inc. (a)................................ 724,000 8,597,500
--------------
24,603,100
--------------
ELECTRICAL EQUIPMENT -- 1.0%
Kuhlman Corp.............................................. 559,600 21,194,850
--------------
ELECTRONICS -- 0.9%
Esterline Technologies Corp. (a).......................... 562,400 12,232,200
Instron Corp.............................................. 157,900 2,723,775
Newport Corp.............................................. 313,000 5,281,875
--------------
20,237,850
--------------
FINANCIAL SERVICES -- 7.8%
A.G. Edwards, Inc......................................... 322,800 12,024,300
Bear Stearns Companies, Inc............................... 946,851 35,388,556
Lehman Brothers Holdings, Inc............................. 1,596,100 70,328,156
PaineWebber Group, Inc.................................... 1,294,700 50,007,787
--------------
167,748,799
--------------
FOREST PRODUCTS -- 4.6%
Fletcher Challenge Ltd., ADR, (Canada).................... 63,600 198,750
Georgia-Pacific Corp...................................... 392,500 22,985,781
Longview Fibre Co......................................... 1,345,700 15,559,656
Louisiana-Pacific Corp.................................... 1,311,900 24,024,169
Potlatch Corp............................................. 209,300 7,717,937
Rayonier, Inc............................................. 404,600 18,586,312
Weyerhaeuser Co........................................... 200,000 10,162,500
--------------
99,235,105
--------------
GAS DISTRIBUTION -- 0.7%
TransCanada Pipelines, Ltd................................ 970,944(b) 14,321,424
--------------
GAS PIPELINES -- 0.3%
Sonat, Inc................................................ 210,400 5,693,950
--------------
HOSPITALS/ HOSPITAL MANAGEMENT -- 1.6%
Columbia/HCA Healthcare Corp.............................. 800,000 19,800,000
PhyCor, Inc. (a).......................................... 2,000,000 13,625,000
--------------
33,425,000
--------------
HOUSING RELATED -- 5.7%
Hanson, PLC, ADR, (United Kingdom)........................ 2,089,150 81,476,850
Kaufman & Broad Home Corp................................. 701,500 20,168,125
Ryland Group, Inc......................................... 732,300 21,145,162
--------------
122,790,137
--------------
INSURANCE -- 3.4%
Marsh & McLennan Companies, Inc........................... 822,600 48,070,687
Ohio Casualty Corp........................................ 387,500(b) 15,935,937
Selective Insurance Group, Inc............................ 405,600 8,162,700
--------------
72,169,324
--------------
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
LEISURE -- 1.9%
Hilton Hotels Corp........................................ 1,045,600 $ 19,997,100
Prime Hospitality Corp. (a)............................... 354,900 3,748,631
Starwood Hotels & Resorts (a)............................. 747,200 16,952,100
--------------
40,697,831
--------------
MEDIA -- 2.4%
CBS Corp.................................................. 1,548,845 50,724,674
--------------
METALS-FERROUS -- 3.7%
AK Steel Holding Corp..................................... 1,395,000 32,782,500
USX-U.S. Steel Group...................................... 2,048,000 47,104,000
--------------
79,886,500
--------------
METALS-NON FERROUS -- 7.0%
Aluminum Company of America............................... 1,217,300 90,764,931
Kaiser Aluminum Corp. (a)................................. 271,872 1,325,376
Reynolds Metals Co........................................ 1,084,186 57,123,050
--------------
149,213,357
--------------
MISCELLANEOUS - INDUSTRIAL -- 0.4%
Tenneco, Inc.............................................. 232,300 7,912,719
--------------
OIL & GAS -- 3.8%
Crestar Energy, Inc., ADR, (Canada) (a)................... 204,000 1,732,428
Elf Aquitaine SA, ADR, (France)........................... 693,600 39,275,100
Occidental Petroleum Corp................................. 1,020,000 17,212,500
Pioneer Natural Resources Co.............................. 1,866,717 16,333,774
USX-Marathon Group........................................ 235,200 7,085,400
--------------
81,639,202
--------------
OIL & GAS SERVICES -- 3.9%
McDermott International, Inc.............................. 2,661,200 65,698,375
Pennzoil-Quaker State Co.................................. 1,247,008 18,471,306
--------------
84,169,681
--------------
PRECIOUS METALS -- 0.4%
Ashanti Goldfields Co., Ltd............................... 715,131 6,704,353
Coeur d'Alene Mines Corp.................................. 198,578(b) 918,423
Echo Bay Mines, Ltd....................................... 304,499 532,873
--------------
8,155,649
--------------
REAL ESTATE DEVELOPMENT -- 12.4%
Amli Residential Properties Trust......................... 212,500 4,728,125
Archstone Communities Trust............................... 32,200 652,050
Bradley Real Estate, Inc.................................. 109,800 2,250,900
Capital Automotive........................................ 590,000 8,776,250
CCA Prison Realty Trust................................... 637,900(b) 13,076,950
Centertrust Retail Properties, Inc........................ 428,400 5,247,900
Crescent Operating, Inc. (a).............................. 155,150 736,963
Crescent Real Estate Equities Co.......................... 2,300,200 52,904,600
Crown American Realty Trust............................... 1,129,000 8,749,750
Equity Inns, Inc.......................................... 22,300 214,638
Equity Office Properties Trust............................ 555,278 13,326,672
Equity Residential Properties Trust....................... 1,604,200 64,869,838
Gables Residential Trust.................................. 425,900 9,875,556
Glimcher Realty Trust..................................... 522,700 8,199,856
JP Realty, Inc............................................ 85,700 1,681,863
Kimco Realty Corp......................................... 57,350 2,276,078
Malan Realty Investors, Inc............................... 136,200 2,162,175
Manufactured Home Communities, Inc........................ 417,800 10,471,113
Pennsylvania Real Estate Investment Trust................. 51,100 993,256
Sunstone Hotel Investors, Inc............................. 162,300 1,531,706
TriNet Corporate Realty Trust, Inc........................ 170,000 4,547,500
Vornado Operating, Inc.................................... 40,400 325,725
Vornado Realty Trust...................................... 1,260,100 42,528,375
Walden Residential Properties, Inc........................ 362,100 7,400,419
--------------
267,528,258
--------------
RETAIL -- 3.9%
Heilig-Meyers Co.......................................... 1,396,300 9,337,756
J.C. Penney Co., Inc...................................... 608,100 28,504,688
The Limited, Inc.......................................... 1,534,700 44,698,138
--------------
82,540,582
--------------
TELECOMMUNICATIONS -- 1.1%
Telefonos de Mexico SA, (Class "L" Stock), ADR,
(Mexico)................................................ 469,700(b) 22,868,519
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B44
<PAGE>
EQUITY INCOME PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
TEXTILES -- 0.6%
Garan, Inc................................................ 3,000 $ 84,375
Kellwood Co............................................... 529,300 13,232,500
--------------
13,316,875
--------------
TOBACCO -- 5.5%
Philip Morris Co., Inc.................................... 850,000 45,475,000
RJR Nabisco Holdings Corp................................. 2,452,880 72,819,875
--------------
118,294,875
--------------
TRUCKING/SHIPPING -- 0.5%
Yellow Corp. (a).......................................... 561,000 10,729,125
--------------
UTILITY - ELECTRIC -- 0.4%
Cleco Corp................................................ 6,200 212,738
First Energy Corp. (a).................................... 24,965 812,923
Pacific Gas & Electric, Co................................ 244,800 7,711,200
--------------
8,736,861
--------------
WASTE MANAGEMENT -- 0.7%
Waste Management, Inc..................................... 320,442 14,940,608
--------------
TOTAL COMMON STOCKS
(cost $1,702,255,422).................................................... 1,960,222,283
--------------
PREFERRED STOCKS -- 4.7%
INTEGRATED PRODUCERS -- 0.1%
Unocal Corp. (Conv.) Series 6.25%......................... 35,072 1,709,760
--------------
METALS-FERROUS -- 0.8%
Bethlehem Steel Corp. (Cum. Conv.), $3.50................. 264,000 10,197,000
Rouge Steel, 7.25%........................................ 267,700 2,476,225
USX Capital Trust (Cum. Conv.), 6.75%..................... 116,900 4,902,494
--------------
17,575,719
--------------
METALS-NON FERROUS -- 0.1%
Hecla Mining Co. (Cum. Conv.), 7.00%, Series B............ 61,200 2,325,600
--------------
REAL ESTATE DEVELOPMENT -- 0.6%
Archstone Communities Trust, $1.75........................ 55,600 1,487,300
Union Pacific Capital Trust, 6.25%........................ 243,900 11,219,400
--------------
12,706,700
--------------
RETAIL -- 1.9%
Kmart Corp. (Cum. Conv.), 7.75%........................... 685,300 39,704,569
--------------
TELECOMMUNICATIONS -- 1.2%
Telecomunicacoes Brasileiras S.A., ADR, Series B,
(Brazil)................................................ 358,300 26,043,931
--------------
TOTAL PREFERRED STOCKS
(cost $116,629,674)...................................................... 100,066,279
--------------
WARRANT(a) UNITS
-------------
CONSTRUCTION
Morrison Knudsen Corp.,
expiring 03/11/03....................................... 5,689 17,778
--------------
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
CONVERTIBLE BONDS -- 0.8% (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
EXPLORATION & PRODUCTION -- 0.1%
Oryx Energy Co.,
7.50%, 05/15/14............................... B2 $ 1,800 $ 1,795,500
--------------
OIL & GAS SERVICES -- 0.2%
Baker Hughes, Inc.,
Zero Coupon, 05/05/08......................... A2 6,060 3,976,875
--------------
REAL ESTATE DEVELOPMENT -- 0.2%
Centertrust Retail Properties Inc.,
7.50%, 01/15/01............................... NR 1,020 963,900
7.50%, 01/15/01............................... B2 610 576,450
Malan Realty Investors, Inc.,
9.50%, 07/15/04............................... NR 3,000 2,895,000
--------------
4,435,350
--------------
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
CONVERTIBLE BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
RETAIL -- 0.3%
Charming Shoppes, Inc.,
7.50%, 07/15/06............................... B2 $ 8,160 $ 7,550,530
--------------
TOTAL CONVERTIBLE BONDS
(cost $18,612,250)....................................................... 17,758,255
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $1,837,497,346).................................................... 2,078,064,595
--------------
SHORT-TERM INVESTMENTS -- 5.0%
LOAN PARTICIPATION NOTE -- 1.6%
Alltel Corp.,
5.75%, 01/04/99............................... P1 35,000(c) 35,000,000
--------------
COMMERCIAL PAPER -- 0.7%
Countrywide Home Loan, Inc.,
6.75%, 01/04/99............................... P1 8,000(c) 7,995,500
5.40%, 01/04/99............................... P1 6,098(c) 6,095,256
--------------
14,090,756
--------------
REPURCHASE AGREEMENT -- 2.7%
Joint Repurchase Agreement Account,
4.693%, 01/04/99
(Note 5).................................... 58,712 58,712,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $107,802,756)...................................................... 107,802,756
--------------
TOTAL INVESTMENTS -- 101.9%
(cost $1,945,300,102; Note 6)............................................ 2,185,867,351
LIABILITIES IN EXCESS OF OTHER ASSETS -- (1.9%)............................
(43,546,536)
--------------
NET ASSETS -- 100.0%....................................................... $2,142,320,815
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
ADR American Depository Receipt
NR Not Rated by Moody's or Standard & Poor's
AG Aktiengesellschaft (German Stock Company)
SA Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French
Corporation)
(a) Non-income producing security.
(b) Portion of securities on loan with an aggregate market value of
$46,303,663; cash collateral of $49,079,500 was received with which the
portfolio purchased securities.
(c) Represents security purchased with cash collateral received for securities
on loan.
SEE NOTES TO FINANCIAL STATEMENTS.
B45
<PAGE>
EQUITY PORTFOLIO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 92.0%
VALUE
COMMON STOCKS SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AEROSPACE
Raytheon Co............................................... 44,639 $ 2,307,278
--------------
AUTOS - CARS & TRUCKS -- 2.8%
General Motors Corp....................................... 700,000 50,093,750
LucasVarity PLC (United Kingdom).......................... 29,951,922 99,787,075
Navistar International Corp. (a).......................... 395,200 11,263,200
PACCAR, Inc............................................... 279,400 11,490,325
--------------
172,634,350
--------------
BANKS AND SAVINGS & LOANS -- 6.1%
Bank of New York Co., Inc................................. 2,400,000 96,600,000
BankAmerica Corp.......................................... 1,789,856 107,615,092
Chase Manhattan Corp...................................... 1,216,800 82,818,450
Mellon Bank Corp.......................................... 270,100 18,569,375
Mercantile Bankshares Corp................................ 419,400 16,146,900
Morgan (J.P.) & Co., Inc.................................. 327,900 34,449,994
National City Corp........................................ 61,560 4,463,100
Republic New York Corp.................................... 450,000 20,503,125
--------------
381,166,036
--------------
CHEMICALS -- 2.4%
BOC Group, PLC ADR (United Kingdom)....................... 800,000 21,800,000
Dow Chemical Co........................................... 556,300 50,588,531
Eastman Chemical Co....................................... 941,550 42,134,362
Potash Corp. of Saskatchewan Inc., (Canada)............... 380,000 24,272,500
Wellman, Inc.............................................. 798,200 8,131,662
Witco Corp................................................ 268,800 4,284,000
--------------
151,211,055
--------------
COMPUTERS -- 5.3%
Compaq Computer Corp...................................... 3,669,250 153,879,172
Gerber Scientific, Inc.................................... 419,800 9,996,487
Hewlett-Packard Co........................................ 1,100,000 75,143,750
NCR Corp.................................................. 100,000 4,175,000
Seagate Technology, Inc. (a).............................. 2,975,800 90,017,950
--------------
333,212,359
--------------
CONSTRUCTION & HOUSING -- 1.5%
American Standard Co., Inc. (a)........................... 1,050,000 37,734,375
Centex Corp............................................... 1,200,000 54,075,000
--------------
91,809,375
--------------
DIVERSIFIED CONSUMER PRODUCTS -- 1.2%
Eastman Kodak Co.......................................... 889,800 64,065,600
Gibson Greeting, Inc. (a)................................. 750,000 8,906,250
--------------
72,971,850
--------------
ELECTRONICS -- 5.3%
AMP Inc................................................... 1,644,191 85,600,694
Arrow Electronics, Inc. (a)............................... 2,145,500 57,258,031
Avnet, Inc................................................ 887,600 53,699,800
Harris Corp............................................... 2,884,000 105,626,500
Hitachi Ltd. ADR.......................................... 515,000 31,125,312
--------------
333,310,337
--------------
FINANCIAL SERVICES -- 5.4%
American Express Co....................................... 350,000 35,787,500
Citigroup, Inc............................................ 1,941,601 96,109,249
Lehman Brothers Holdings, Inc............................. 849,800 37,444,312
Morgan Stanley Dean Witter & Co........................... 2,335,000 165,785,000
--------------
335,126,061
--------------
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
FOREST PRODUCTS -- 9.2%
Fort James Corp........................................... 664,000 $ 26,560,000
Georgia-Pacific Corp...................................... 1,724,000 100,961,750
Georgia-Pacific Timber Group.............................. 1,158,000 27,574,875
International Paper Co.................................... 1,820,000 81,558,750
Mead Corp................................................. 2,306,000 67,594,625
Rayonier Inc.............................................. 830,400 38,146,500
Temple-Inland, Inc........................................ 1,240,500 73,577,156
Weyerhaeuser Co........................................... 1,522,500 77,362,031
Willamette Industries, Inc................................ 2,500,000 83,750,000
--------------
577,085,687
--------------
HOSPITALS/ HOSPITAL MANAGEMENT -- 9.4%
Columbia/HCA Healthcare Corp.............................. 5,790,100 143,304,975
Foundation Health Systems, Inc. (a)....................... 4,724,610 56,400,032
PacifiCare Health Systems, Inc. (a)....................... 838,800 66,684,600
Tenet Healthcare Corp. (a)................................ 5,122,832 134,474,340
Wellpoint Health Networks Inc............................. 2,120,300 184,466,100
--------------
585,330,047
--------------
INSURANCE -- 13.1%
American Financial Group, Inc............................. 552,700 24,249,712
American General Corp..................................... 879,704 68,616,912
Chubb Corp................................................ 2,206,400 143,140,200
Equitable Companies, Inc.................................. 1,466,900 84,896,837
Loews Corp................................................ 1,775,000 174,393,750
Old Republic International Corp........................... 2,926,327 65,842,358
SAFECO Corp............................................... 2,855,800 122,620,913
St. Paul Companies, Inc................................... 1,653,800 57,469,550
Tokio Marine & Fire Insurance Co. Ltd., ADR (Japan)....... 656,400 39,876,300
United Healthcare Corp.................................... 928,000 39,962,000
--------------
821,068,532
--------------
LEISURE -- 1.1%
Hilton Hotels Corp........................................ 3,470,600 66,375,225
--------------
METALS-FERROUS -- 0.2%
Birmingham Steel Corp..................................... 1,492,400 6,249,425
Carpenter Technology Corp................................. 100,000 3,393,750
--------------
9,643,175
--------------
METALS-NON FERROUS -- 1.4%
Aluminum Company of America............................... 941,000 70,163,313
Cyprus Amax Minerals Co................................... 1,490,400 14,904,000
Nord Resources Corp. (a).................................. 130,500 130,500
--------------
85,197,813
--------------
OIL & GAS -- 2.7%
Amerada Hess Corp......................................... 325,000 16,168,750
Atlantic Richfield Co..................................... 1,100,000 71,775,000
Keyspan Energy Co......................................... 1,356,432 42,049,392
Total SA, ADR, (France)................................... 738,365 36,733,659
--------------
166,726,801
--------------
OIL & GAS EXPLORATION/PRODUCTION -- 2.8%
Elf Aquitaine SA, ADR, (France)........................... 2,424,433 137,283,519
Occidental Petroleum Corp................................. 1,100,000 18,562,500
Oryx Energy Co. (a)....................................... 1,600,000 21,500,000
--------------
177,346,019
--------------
PRECIOUS METALS -- 1.5%
Freeport-McMoRan Copper & Gold, Inc. (Class "A").......... 3,853,300 37,328,844
Freeport-McMoRan Copper & Gold, Inc. (Class "B").......... 319,600 3,335,825
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B46
<PAGE>
EQUITY PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
PRECIOUS METALS (CONT'D.)
Kinross Gold Corp. (a).................................... 105,126 $ 243,104
Newmont Mining Corp....................................... 3,057,000 55,217,063
--------------
96,124,836
--------------
RESTAURANTS -- 2.3%
Darden Restaurants, Inc................................... 7,922,700 142,608,600
--------------
RETAIL -- 7.9%
Dillards, Inc............................................. 3,649,000 103,540,375
HomeBase, Inc. (a)........................................ 1,300,000 8,287,500
IKON Office Solutions, Inc................................ 5,193,000 44,465,063
Kmart Corp. (a)........................................... 6,500,000 99,531,250
Nine West Group Inc. (a).................................. 1,430,800 22,266,825
Pep Boys - Manny, Moe & Jack.............................. 2,025,000 31,767,188
Sears, Roebuck and Co..................................... 690,000 29,325,000
Tandy Corp................................................ 2,784,900 114,703,069
Toys 'R' Us, Inc. (a)..................................... 2,350,000 39,656,250
--------------
493,542,520
--------------
SEMICONDUCTORS -- 0.4%
National Semiconductor Corp. (a).......................... 1,905,600 25,725,600
--------------
TELECOMMUNICATIONS -- 3.6%
Alltel Corp............................................... 1,255,088 75,069,951
AT&T Corp................................................. 1,100,000 82,775,000
Loral Corp................................................ 2,600,000 46,312,500
Portugal Telecom SA, ADR, (Portugal)...................... 409,900 18,291,788
--------------
222,449,239
--------------
TEXTILES
Worldtex, Inc. (a)........................................ 107,199 388,596
--------------
TOBACCO -- 3.5%
Philip Morris Co., Inc.................................... 2,025,000 108,337,500
RJR Nabisco Holdings Corp................................. 3,710,000 110,140,625
--------------
218,478,125
--------------
TRANSPORTATION -- 0.2%
Marine Transport Corp. (a)................................ 100,000 225,000
OMI Corp. (a)............................................. 1,000,000 3,250,000
Overseas Shipholding Group, Inc........................... 600,000 9,637,500
--------------
13,112,500
--------------
UTILITY - ELECTRIC -- 1.7%
American Electric Power, Inc.............................. 180,000 8,471,250
GPU, Inc.................................................. 500,000 22,093,750
Houston Industries, Inc................................... 974,519 31,306,423
Unicom Corp............................................... 1,112,900 42,916,206
--------------
104,787,629
--------------
UTILITY - WATER -- 0.1%
American Water Works Co., Inc............................. 270,000 9,112,500
--------------
WASTE MANAGEMENT -- 0.9%
Waste Management, Inc..................................... 1,176,892 54,872,590
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $4,261,005,459).................................................... 5,743,724,735
--------------
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS -- 8.1% (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
COMMERCIAL PAPER -- 7.0%
Barton Capital Corp.,
5.60%, 01/14/99............................... P1 $ 60,000 $ 59,878,667
Clipper Receivables Corp.,
5.42%, 01/22/99............................... P1 38,000 37,879,857
Countrywide Home Loan,
5.10%, 01/04/99............................... P1 33,850 33,835,614
Falcon Asset Securitization Corp.,
5.68%, 01/21/99............................... P1 21,332 21,264,686
Four Winds Funding Corp.,
5.70%, 01/29/99............................... P1 50,000 49,778,333
Old Line Funding Corp.,
5.40%, 01/27/99............................... P1 42,000 41,836,200
Thunder Bay Funding Inc.,
5.60%, 01/15/99............................... P1 27,447 27,387,226
5.70%, 01/20/99............................... P1 30,000 29,909,750
Triple-A One Funding Corp.,
5.55%, 01/19/99............................... P1 30,000 29,916,750
Wells Fargo & Co.,
5.70%, 01/22/99............................... P1 50,000 49,833,750
Windmill Funding Corp.,
5.57%, 01/22/99............................... P1 23,000 22,925,269
5.57%, 01/25/99............................... P1 37,000 36,862,606
--------------
441,308,708
--------------
REPURCHASE AGREEMENT -- 1.0%
Joint Repurchase Agreement Account,
4.693%, 01/04/99 (Note 5)..................... 60,667 60,667,000
--------------
U. S. GOVERNMENT & AGENCY OBLIGATIONS -- 0.1%
Federal National Mortgage Association,
4.94%, 02/23/99............................... 5,000 4,995,354
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $506,971,062)...................................................... 506,971,062
--------------
TOTAL INVESTMENTS -- 100.1%
(cost $4,767,976,521; Note 6)............................................ 6,250,695,797
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (0.1%)................................................... (3,649,163)
--------------
NET ASSETS -- 100.0%....................................................... $6,247,046,634
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
ADR American Depository Receipt.
PLC Public Limited Company (British Corporation).
SA Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French
Corporation).
(a) Non-income producing security.
SEE NOTES TO FINANCIAL STATEMENTS.
B47
<PAGE>
PRUDENTIAL JENNISON PORTFOLIO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 96.9%
VALUE
COMMON STOCKS SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AEROSPACE -- 1.2%
Raytheon Co. (Class "A" Stock).................. 118,400 $ 6,119,800
Raytheon Co. (Class "B" Stock).................. 156,100 8,312,325
--------------
14,432,125
--------------
BANKS AND SAVINGS & LOANS -- 2.7%
Chase Manhattan Corp............................ 477,500 32,499,844
--------------
BROADCASTING SERVICES -- 1.1%
Infinity Broadcasting Corp. (a)................. 462,300 12,655,462
--------------
BUSINESS SERVICES -- 1.4%
Omnicom Group, Inc.............................. 288,700 16,744,600
--------------
COMPUTER SERVICES -- 13.0%
3Com Corp. (a).................................. 275,700 12,354,806
Cadence Design Systems, Inc. (a)................ 529,400 15,749,650
Cisco Systems, Inc. (a)......................... 349,875 32,472,773
HBO & Co........................................ 551,500 15,821,156
Microsoft Corp. (a)............................. 281,500 39,040,531
Oracle Corp. (a)................................ 661,500 28,527,187
PLATINUM Technology, Inc. (a)................... 659,708 12,616,915
--------------
156,583,018
--------------
COMPUTERS -- 6.8%
Compaq Computer Corp............................ 495,600 20,784,225
Dell Computer Corp. (a)......................... 258,100 18,889,694
Hewlett-Packard Co.............................. 292,000 19,947,250
International Business Machines Corp............ 115,500 21,338,625
--------------
80,959,794
--------------
DIVERSIFIED OFFICE EQUIPMENT -- 1.5%
Xerox Corp...................................... 153,100 18,065,800
--------------
DIVERSIFIED OPERATIONS -- 2.8%
General Electric Co............................. 330,900 33,772,481
--------------
DRUGS AND MEDICAL SUPPLIES -- 12.1%
American Home Products Corp..................... 431,700 24,310,106
Eli Lilly & Co.................................. 169,200 15,037,650
Merck & Co., Inc................................ 154,400 22,802,950
Pfizer, Inc..................................... 181,300 22,741,819
Pharmacia & Upjohn, Inc......................... 213,000 12,061,125
Schering-Plough Corp............................ 517,800 28,608,450
Warner-Lambert Co............................... 257,000 19,323,188
--------------
144,885,288
--------------
ELECTRONICS -- 8.4%
Applied Materials, Inc. (a)..................... 320,500 13,681,344
Intel Corp...................................... 206,100 24,435,731
KLA-Tencor Corp. (a)............................ 350,600 15,207,275
Symbol Technologies, Inc........................ 368,125 23,536,992
Texas Instruments, Inc.......................... 281,500 24,085,844
--------------
100,947,186
--------------
FINANCIAL SERVICES -- 11.0%
Associates First Capital Corp................... 506,000 21,441,750
Citigroup, Inc.................................. 617,700 30,576,150
MBNA Corp....................................... 929,037 23,167,860
Morgan Stanley Dean Witter & Co................. 384,020 27,265,420
Schwab (Charles) Corp. (a)...................... 308,250 17,319,797
Washington Mutual, Inc.......................... 322,100 12,300,194
--------------
132,071,171
--------------
INSURANCE -- 6.1%
Ace Ltd......................................... 456,500 15,720,719
American International Group, Inc............... 216,800 20,948,300
Mutual Risk Management, Ltd..................... 383,332 14,997,865
Provident Companies, Inc........................ 252,400 10,474,600
UNUM Corp....................................... 178,200 10,402,425
--------------
72,543,909
--------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
LEISURE -- 0.9%
Promus Hotel Corp. (a).......................... 334,700 $ 10,835,913
--------------
MEDIA -- 4.1%
CBS Corp. (a)................................... 901,600 29,527,400
Clear Channel Communications, Inc. (a).......... 362,100 19,734,450
--------------
49,261,850
--------------
RETAIL - RESTAURANTS -- 1.9%
McDonald's Corp................................. 299,900 22,979,838
--------------
RETAIL -- 10.3%
Home Depot, Inc................................. 585,300 35,813,044
Kohl's Corp. (a)................................ 371,500 22,824,031
Rite Aid Corp................................... 283,100 14,031,144
Staples, Inc. (a)............................... 483,900 21,140,381
The Gap, Inc.................................... 359,700 20,233,125
Wal-Mart Stores, Inc............................ 110,300 8,982,556
--------------
123,024,281
--------------
SOFTWARE -- 1.2%
Intuit, Inc. (a)................................ 203,000 14,717,500
--------------
TELECOMMUNICATIONS -- 10.4%
Airtouch Communications, Inc. (a)............... 307,200 22,156,800
Ascend Communications, Inc. (a)................. 202,000 13,281,500
MCI Wordcom, Inc. (a)........................... 778,200 55,835,850
Nokia AB Corp., (Japan), ADR.................... 147,000 17,704,313
Qwest Communications International (a).......... 302,700 15,135,000
--------------
124,113,463
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $843,458,260)............................................ 1,161,093,523
--------------
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENT -- 3.6% (000)
-------------
REPURCHASE AGREEMENT
Joint Repurchase Agreement Account,
4.693%, 01/04/99
(cost $43,284,000; Note 5).................. $ 43,284 43,284,000
--------------
TOTAL INVESTMENTS -- 100.5%
(cost $886,742,260; Note 5).................................... 1,204,377,523
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (0.5%)......................................... (5,648,188)
--------------
TOTAL NET ASSETS -- 100.0%....................................... $1,198,729,335
--------------
--------------
</TABLE>
The following abbreviation is used in portfolio descriptions:
ADR American Depository Receipt
(a) Non-income producing security.
SEE NOTES TO FINANCIAL STATEMENTS.
B48
<PAGE>
SMALL CAPITALIZATION STOCK PORTFOLIO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 93.1%
VALUE
COMMON STOCKS SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
ADVERTISING -- 0.3%
HA-LO Industries, Inc........................... 27,600 $ 1,038,450
--------------
AEROSPACE -- 0.8%
BE Aerospace, Inc. (a).......................... 23,100 485,100
Kaman Corp. (Class "A" Stock)................... 23,500 377,469
Orbital Sciences Corp. (a)...................... 35,800 1,584,150
Trimble Navigation, Ltd. (a).................... 22,600 163,850
Watkins-Johnson Co.............................. 8,200 167,075
--------------
2,777,644
--------------
AGRICULTURAL PRODUCTS & SERVICES -- 0.4%
Delta & Pine Land Co............................ 38,100 1,409,700
--------------
AIRLINES -- 0.9%
Comair Holdings, Inc............................ 66,037 2,228,749
Mesa Air Group, Inc. (a)........................ 28,100 219,531
SkyWest, Inc.................................... 24,000 784,500
--------------
3,232,780
--------------
APPAREL -- 0.1%
Phillips-Van Heusen Corp........................ 27,000 194,062
--------------
AUTOS - CARS & TRUCKS -- 0.8%
Breed Technologies, Inc......................... 35,275 288,814
Myers Industries, Inc........................... 17,822 510,155
Simpson Industries, Inc......................... 18,200 176,312
Spartan Motors, Inc............................. 11,900 68,425
Standard Motor Products, Inc.................... 13,000 315,250
Standard Products Co............................ 16,700 340,262
TBC Corp. (a)................................... 21,000 149,625
Titan International, Inc........................ 21,600 205,200
Wabash National Corp............................ 21,300 432,656
Wynn's International, Inc....................... 18,625 412,078
--------------
2,898,777
--------------
BANKS AND SAVINGS & LOANS -- 6.2%
Anchor Bancorp Wisconsin, Inc................... 17,700 424,800
Astoria Financial Corp. (a)..................... 54,100 2,475,075
Banknorth Group, Inc............................ 15,200 571,900
Carolina First Corp............................. 17,600 445,500
Centura Banks, Inc.............................. 25,200 1,874,250
Commercial Federal Corp. (a).................... 55,525 1,287,486
Cullen/Frost Bankers, Inc....................... 21,600 1,185,300
Downey Financial Corp........................... 26,444 672,669
First Bancorp/Puerto Rico (a)................... 28,300 854,306
First Merit Corp................................ 71,800 1,929,625
First Midwest Bancorp, Inc...................... 29,600 1,126,650
HUBCO, Inc...................................... 42,983 1,294,863
JSB Financial, Inc.............................. 9,400 511,125
Premier Bancshares, Inc......................... 16,900 442,569
Queens County Bancorp, Inc...................... 22,050 655,987
Riggs National Corp............................. 30,500 621,437
Silicon Valley Bancshares....................... 20,500 349,141
St. Paul Bancorp, Inc........................... 40,300 1,096,916
Susquehanna Bancshares, Inc..................... 32,500 665,234
TrustCo Bank Corp............................... 26,710 801,300
United Bankshares, Inc.......................... 42,500 1,126,250
UST Corp........................................ 41,000 966,062
Whitney Holding Corp............................ 22,500 843,750
--------------
22,222,195
--------------
BROADCASTING SERVICES -- 0.6%
Harman International............................ 18,500 705,312
Metro Networks, Inc............................. 15,800 673,475
Westwood One, Inc............................... 29,900 911,950
--------------
2,290,737
--------------
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
BUSINESS SERVICES -- 0.1%
Franklin Covey Co............................... 21,700 $ 363,475
--------------
CHEMICALS -- 1.6%
Cambrex Corp.................................... 24,100 578,400
Chemed Corp..................................... 9,900 331,650
Chemfirst, Inc. (a)............................. 18,400 363,400
Hauser Chemical Research, Inc. (a).............. 10,100 44,819
Lilly Industries, Inc. (Class "A" Stock)........ 22,000 438,625
MacDermid, Inc.................................. 26,100 1,021,162
McWhorter Technologies, Inc. (a)................ 10,300 235,612
Mississippi Chemical Corp. (a).................. 26,072 365,008
OM Group, Inc................................... 23,700 865,050
Penford Corp.................................... 7,300 116,800
Quaker Chemical Corp............................ 8,200 147,600
Scotts Co. (Class "A" Stock) (a)................ 17,700 680,344
WD-40 Co........................................ 15,600 446,550
--------------
5,635,020
--------------
COMMERCIAL SERVICES -- 3.5%
AAR Corp........................................ 27,550 657,756
ABM Industries, Inc............................. 20,100 695,962
ADVO, Inc....................................... 21,200 559,150
Billing Information Concepts Corp............... 33,600 369,600
Bowne & Co...................................... 35,500 634,562
CDI Corp. (a)................................... 19,400 391,637
Central Parking Corp............................ 27,950 906,628
Consolidated Graphics, Inc...................... 12,900 871,556
Hadco Corp...................................... 13,200 462,000
Insurance Auto Auction, Inc. (a)................ 11,200 133,000
Interim Services, Inc. (a)...................... 46,700 1,091,612
John H. Harland Co.............................. 30,800 487,025
LSB Industries, Inc............................. 11,500 38,094
Merrill Corp.................................... 16,300 314,794
NFO Worldwide, Inc.............................. 20,075 230,862
Norrell Corp.................................... 27,200 401,200
Pharmaceutical Marketing Services, Inc. (a)..... 12,200 175,375
Primark Corp. (a)............................... 21,420 581,017
Superior Services, Inc.......................... 28,800 577,800
Thomas Nelson, Inc.............................. 14,850 200,475
True North Communications, Inc.................. 44,400 1,193,250
Vantive Corp.................................... 25,900 207,200
Volt Information Sciences, Inc.................. 14,300 322,644
World Color Press, Inc.......................... 38,300 1,165,756
--------------
12,668,955
--------------
COMPUTER SERVICES -- 6.8%
Acxiom Corp. (a)................................ 73,000 2,263,000
American Management Systems, Inc. (a)........... 42,250 1,690,000
Analysts International Corp..................... 22,100 425,425
Auspex Systems, Inc. (a)........................ 25,300 109,502
Avid Technology................................. 24,800 579,700
BancTec, Inc. (a)............................... 20,200 253,762
BISYS Group, Inc. (a)........................... 26,500 1,368,062
Boole & Babbage, Inc............................ 28,100 827,194
Cerner Corp. (a)................................ 32,600 872,050
Ciber, Inc...................................... 53,300 1,489,069
Computer Task Group, Inc........................ 20,200 547,925
Fair Issac & Co., Inc........................... 13,200 609,675
FileNet Corp. (a)............................... 31,300 358,972
Harbinger Corp.................................. 41,900 335,200
Henry (Jack) & Associates, Inc.................. 18,850 937,787
Hutchinson Technology, Inc. (a)................. 19,700 701,812
Insight Enterprises Inc. (a).................... 14,700 747,862
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B49
<PAGE>
SMALL CAPITALIZATION STOCK PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
COMPUTER SERVICES (CONT'D.)
Inter-Tel, Inc.................................. 27,000 $ 631,125
Komag, Inc. (a)................................. 53,100 550,912
Midway Games, Inc............................... 36,430 400,730
National Computer Systems, Inc.................. 31,000 1,147,000
National Data Corp.............................. 33,625 1,637,117
Platinum Software Corp. (a)..................... 25,200 322,875
Progress Software Corp. (a)..................... 17,250 582,187
Read-Rite Corp. (a)............................. 48,400 715,412
Standard Microsystems Corp. (a)................. 15,800 123,437
System Software Associates, Inc................. 47,200 331,875
Technology Solutions Co......................... 39,400 422,319
Telxon Corp..................................... 16,000 222,000
Wall Data, Inc. (a)............................. 9,400 225,600
Whittman-Hart, Inc.............................. 50,900 1,406,112
Xircom, Inc. (a)................................ 22,900 778,600
Zebra Technologies Corp. (Class "A"
Stock) (a).................................... 31,100 894,125
--------------
24,508,423
--------------
COMPUTERS -- 0.5%
Applied Magnetics Corp.......................... 23,900 147,881
Exabyte Corp.................................... 22,400 123,200
Gerber Scientific, Inc.......................... 22,500 535,781
MICROS Systems, Inc............................. 15,200 499,700
Vanstar Corp.................................... 43,000 397,750
--------------
1,704,312
--------------
CONSTRUCTION -- 1.2%
Florida Rock Industries, Inc.................... 17,200 533,200
Halter Marine Group............................. 28,600 139,425
Insituform Technologies, Inc. (Class "A"
Stock) (a).................................... 25,600 371,200
Lone Star Industries, Inc....................... 19,200 706,800
M.D.C. Holdings, Inc............................ 18,100 386,887
Morrison Knudsen Corp. (a)...................... 53,700 523,575
Oakwood Homes Corp.............................. 46,300 703,181
Republic Group, Inc............................. 11,070 222,092
Southern Energy Homes, Inc. (a)................. 13,312 81,536
Standard Pacific Corp........................... 29,550 417,394
Stone & Webster, Inc............................ 12,400 412,300
--------------
4,497,590
--------------
CONSUMER SERVICES -- 0.2%
Pre-Paid Legal Services, Inc.................... 22,300 735,900
--------------
CONTAINERS -- 0.4%
Aptar Group, Inc................................ 35,800 1,004,637
Shorewood Packaging Corp. (a)................... 25,650 525,825
--------------
1,530,462
--------------
COSMETICS & SOAPS -- 0.1%
Nature's Sunshine Products, Inc................. 17,400 265,350
USA Detergent, Inc. (a)......................... 13,700 99,325
--------------
364,675
--------------
DIVERSIFIED CONSUMER PRODUCTS -- 0.1%
Gibson Greetings, Inc. (a)...................... 16,300 193,562
--------------
DIVERSIFIED OFFICE EQUIPMENT -- 0.2%
Nashua Corp..................................... 6,700 89,194
New England Business Service, Inc............... 13,100 512,537
--------------
601,731
--------------
DRUGS AND MEDICAL SUPPLIES -- 6.8%
ADAC Laboratories............................... 19,900 397,378
Advanced Tissue Sciences, Inc. (a).............. 39,000 101,156
Alliance Pharmaceutical Corp.................... 31,800 104,344
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
DRUGS AND MEDICAL SUPPLIES (CONT'D.)
Alpharma, Inc. (Class "A" Stock)................ 25,300 $ 893,406
Ballard Medical Products........................ 30,300 736,669
Barr Laboratories, Inc.......................... 21,300 1,022,400
Bindley Western Industries, Inc................. 21,900 1,078,575
Cephalon, Inc. (a).............................. 28,400 255,600
Circon Corp. (a)................................ 13,300 199,500
Coherent, Inc. (a).............................. 22,400 278,600
COR Therapeutics, Inc. (a)...................... 23,900 316,675
Cygnus, Inc. (a)................................ 20,100 97,987
Diagnostic Products............................. 13,200 410,850
Enzo Biochem, Inc. (a).......................... 24,318 250,779
IDEXX Laboratories, Inc. (a).................... 38,400 1,033,200
The Immune Response Corp. (a)................... 23,000 250,125
Incyte Pharmacueticals, Inc..................... 26,500 990,437
Invacare Corp................................... 29,800 715,200
Jones Medical Industries, Inc................... 28,600 1,043,900
Liposome Co., Inc. (a).......................... 37,500 578,906
Medimmune, Inc. (a)............................. 26,400 2,625,150
Mentor Corp..................................... 24,600 576,562
Molecular Biosystems, Inc. (a).................. 18,450 54,197
NBTY, Inc. (a).................................. 67,300 479,512
North American Vaccine, Inc. (a)................ 31,000 275,125
Noven Pharmaceuticals, Inc. (a)................. 20,300 110,381
Organogenesis Inc (a)........................... 16,900 190,125
Owens & Minor, Inc.............................. 32,300 508,725
Patterson Dental Co. (a)........................ 32,100 1,396,350
Protein Design Labs, Inc. (a)................... 18,400 427,800
Regeneron Pharmaceuticals, Inc. (a)............. 30,800 227,150
Resound Corp. (a)............................... 20,400 76,500
Respironics, Inc. (a)........................... 32,300 647,009
Roberts Pharmaceutical Corp. (a)................ 29,600 643,800
Safeskin Corp. (a).............................. 54,100 1,305,162
Sequus Pharmaceuticals, Inc. (a)................ 31,400 635,850
SpaceLabs Medical, Inc. (a)..................... 8,900 204,700
Summit Technology, Inc. (a)..................... 31,100 136,062
Sunrise Medical, Inc. (a)....................... 22,000 273,625
Syncor International Corp. (a).................. 10,400 283,400
TheraTech, Inc. (a)............................. 21,050 342,062
US Bioscience, Inc. (a)......................... 24,150 173,578
Vertex Pharmaceuticals, Inc. (a)................ 25,200 749,700
VISX, Inc. (a).................................. 15,200 1,329,050
Vital Signs, Inc................................ 12,100 211,750
--------------
24,639,012
--------------
ELECTRICAL EQUIPMENT -- 1.4%
Anixter International, Inc. (a)................. 44,300 899,844
Baldor Electric Co.............................. 36,166 732,361
C-Cube Microsystems, Inc........................ 37,200 1,009,050
KEMET Corp. (a)................................. 38,900 437,625
Kent Electronics Corp. (a)...................... 27,100 345,525
Kuhlman Corp.................................... 16,000 606,000
Kulicke & Soffa Industries, Inc................. 23,100 410,025
Valence Technology, Inc. (a).................... 25,200 182,700
Vicor Corp. (a)................................. 41,800 376,200
--------------
4,999,330
--------------
ELECTRONICS -- 5.5%
Analogic Corp................................... 12,600 474,075
Belden, Inc..................................... 25,700 544,519
Bell Industries, Inc............................ 8,525 96,972
Benchmark Electronics, Inc. (a)................. 11,200 410,200
BMC Industries, Inc............................. 26,700 166,875
Burr-Brown Corp. (a)............................ 36,500 855,469
C-COR Electronics, Inc. (a)..................... 9,100 125,125
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B50
<PAGE>
SMALL CAPITALIZATION STOCK PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
ELECTRONICS (CONT'D.)
Cable Design Technologies....................... 29,900 $ 553,150
Checkpoint Systems, Inc. (a).................... 31,000 383,625
CTS Corp........................................ 13,600 591,600
Dallas Semiconductor Corp....................... 27,100 1,104,325
Dionex Corp. (a)................................ 20,700 758,137
Electro Scientific Industries, Inc.............. 11,300 512,031
Electroglas, Inc................................ 19,600 230,300
Etec Sysytems, Inc.............................. 22,000 880,000
General Semiconductor, Inc...................... 35,900 293,931
Helix Technology Corp........................... 22,000 286,000
Innovex, Inc.................................... 14,700 201,666
Integrated Circuit Systems, Inc. (a)............ 11,700 206,212
Intermagnetics General Corp. (a)................ 12,683 77,685
International Rectifier Corp. (a)............... 51,000 497,250
Itron, Inc. (a)................................. 14,500 104,219
Lattice Semiconductor Corp. (a)................. 23,400 1,074,206
Marshall Industries (a)......................... 16,500 404,250
Methode Electronics, Inc. (Class "A" Stock)..... 35,300 551,562
Oak Industries, Inc. (a)........................ 18,000 630,000
Park Electrochemical Corp....................... 10,300 294,837
Photronics, Inc. (a)............................ 24,300 582,441
Picturetel Corp. (a)............................ 38,100 252,412
Pioneer Standard Electronics, Inc............... 26,100 244,687
Plexus Corp. (a)................................ 14,700 497,962
S3, Inc. (a).................................... 50,800 373,856
Sanmina Corp. (a)............................... 48,900 3,056,250
SpeedFam International, Inc..................... 15,800 270,575
Technitrol, Inc................................. 15,600 497,250
Three-Five Systems, Inc. (a).................... 7,875 107,789
Ultratech Stepper, Inc. (a)..................... 20,900 334,400
Unitrode Corp................................... 30,400 532,000
VLSI Technology, Inc. (a)....................... 46,200 505,312
X-Rite, Inc..................................... 20,000 155,000
--------------
19,718,155
--------------
ENVIRONMENTAL SERVICES -- 0.2%
Dames & Moore, Inc.............................. 17,400 224,025
Ionics, Inc. (a)................................ 15,500 464,031
TETRA Technologies, Inc. (a).................... 13,500 147,656
--------------
835,712
--------------
EXPLORATION & PRODUCTION -- 0.2%
Newfield Exploration Co. (a).................... 34,350 717,056
--------------
FINANCIAL SERVICES -- 3.9%
AmeriCredit Corp................................ 60,700 838,419
AMRESCO, Inc. (a)............................... 44,000 385,000
Commerce Bancorp, Inc........................... 21,175 1,111,687
Dain Rauscher Corp.............................. 11,800 348,100
E*TRADE Group, Inc. (a)......................... 54,600 2,554,256
Eaton Vance Corp................................ 35,700 745,237
Envoy Corp. (a)................................. 21,100 1,229,075
Legg Mason, Inc................................. 53,132 1,676,979
MAF Bancorp, Inc................................ 21,400 567,100
Pioneer Group, Inc.............................. 25,000 493,750
Raymond James Financial, Inc.................... 48,118 1,016,493
SEI Corp........................................ 17,700 1,758,937
U.S. Trust Corp................................. 18,800 1,428,800
--------------
14,153,833
--------------
FOOD & BEVERAGES -- 2.3%
Canandaigua Wine Co............................. 17,800 1,029,062
Chiquita Brands International, Inc.............. 64,775 619,411
Coca-Cola Bottling Co........................... 8,300 477,250
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
FOOD & BEVERAGES (CONT'D.)
Corn Products International, Inc................ 35,400 $ 1,075,275
Earthgrains Co.................................. 42,700 1,321,031
Fleming Companies, Inc.......................... 38,100 395,287
J & J Snack Foods Corp. (a)..................... 9,000 201,375
Nash-Finch Co................................... 11,200 159,600
Ralcorp Holdings, Inc........................... 32,300 589,475
Richfood Holdings, Inc.......................... 46,200 958,650
Smithfield Foods, Inc. (a)...................... 37,300 1,263,537
--------------
8,089,953
--------------
FOREST PRODUCTS -- 0.3%
Caraustar Industries, Inc....................... 24,100 688,356
Pope & Talbot, Inc.............................. 13,325 111,597
Universal Forest Products, Inc.................. 18,900 379,181
--------------
1,179,134
--------------
FURNITURE -- 0.9%
Ethan Allen Interiors, Inc. (a)................. 28,600 1,172,600
Interface, Inc. (Class "A" Stock)............... 52,100 483,553
Juno Lighting, Inc.............................. 18,500 432,437
La-Z-Boy Chair Co............................... 52,900 942,281
Thomas Industries, Inc.......................... 15,550 305,169
--------------
3,336,040
--------------
HEALTHCARE -- 2.1%
American Oncology Resources, Inc................ 32,400 471,825
Bio-Technology General Corp..................... 47,900 332,306
Biomatrix, Inc.................................. 10,800 629,100
Coventry Corp................................... 58,100 512,006
The Cooper Companies, Inc....................... 14,800 306,175
Datascope Corp.................................. 15,500 356,500
MedQuist, Inc................................... 22,900 904,550
NCS Healthcare, Inc. (Class "A" Stock).......... 18,800 446,500
Pharmaceutical Product Development, Inc......... 23,100 694,444
Renal Care Group, Inc........................... 39,650 1,142,416
Sierra Health Services, Inc. (a)................ 27,525 579,745
Smith (A.O.) Corp............................... 23,500 577,219
Sola International, Inc. (a).................... 24,600 424,350
--------------
7,377,136
--------------
HOSPITALS/HOSPITAL MANAGEMENT -- 2.6%
Curative Health Services, Inc................... 12,700 425,450
Express Scripts, Inc. (Class "A" Stock) (a)..... 33,400 2,241,975
Genesis Health Ventures, Inc. (a)............... 35,000 306,250
HBO & Co........................................ 34,075 977,527
Integrated Health Services, Inc................. 53,660 757,947
Magellan Health Services, Inc. (a).............. 31,400 262,975
Mariner Post-Acute Network, Inc................. 70,605 322,135
Orthodontic Centers of America, Inc............. 46,700 907,731
Pediatrix Medical Group, Inc.................... 15,200 911,050
PhyCor, Inc. (a)................................ 77,775 529,842
Universal Health Services, Inc. (Class "B"
Stock) (a).................................... 32,575 1,689,828
--------------
9,332,710
--------------
HOUSING RELATED -- 1.3%
Champion Enterprises, Inc. (a).................. 47,700 1,305,787
D.R. Horton, Inc................................ 55,325 1,272,475
Fedders Corp.................................... 37,700 219,131
National Presto Industries, Inc................. 7,000 298,375
Ryland Group, Inc............................... 14,625 422,297
Skyline Corp.................................... 9,400 305,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B51
<PAGE>
SMALL CAPITALIZATION STOCK PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
HOUSING RELATED (CONT'D.)
TJ International, Inc........................... 16,000 $ 411,000
U.S. Home Corp. (a)............................. 13,600 452,200
--------------
4,686,765
--------------
INSURANCE -- 4.7%
American Bankers Insurance Group, Inc........... 42,400 2,051,100
Arthur J. Gallagher & Co........................ 17,200 758,950
Capital Re Corp................................. 31,700 635,981
CMAC Investment Corp............................ 22,600 1,038,187
Compdent Corp. (a).............................. 9,500 98,562
Delphi Financial Group, Inc..................... 19,280 1,010,995
Enhance Financial Services Group, Inc........... 37,200 1,116,000
Executive Risk, Inc............................. 10,900 598,819
Fidelity National Financial, Inc................ 27,361 834,523
First American Financial Corp................... 57,000 1,831,125
Fremont General Corp............................ 67,740 1,676,565
Frontier Insurance Group, Inc................... 37,252 479,619
Hilb, Rogal and Hamilton Co..................... 12,100 240,487
Mutual Risk Management, Ltd..................... 38,100 1,490,662
NAC Re Corp..................................... 17,500 821,406
Orion Capital Corp.............................. 27,400 1,090,862
Selective Insurance Group, Inc.................. 28,900 581,612
Trenwick Group, Inc............................. 10,050 327,881
Zenith National Insurance Corp.................. 16,900 390,812
--------------
17,074,148
--------------
LEISURE -- 1.7%
Anchor Gaming................................... 12,400 699,050
Aztar Corp. (a)................................. 44,900 227,306
Carmike Cinemas, Inc. (Class "A" Stock) (a)..... 11,000 223,438
Family Golf Centers, Inc........................ 25,400 501,650
GC Companies, Inc. (a).......................... 7,300 303,863
Grand Casinos, Inc. (a)......................... 41,650 335,803
Hollywood Park, Inc. (a)........................ 26,100 216,956
Huffy Corp...................................... 12,100 199,650
K2, Inc. (a).................................... 16,400 169,125
Marcus Corp..................................... 28,625 465,156
Players International, Inc. (a)................. 31,700 196,144
Polaris Industries, Inc......................... 25,800 1,011,038
Primadonna Resorts, Inc......................... 28,400 250,275
Prime Hospitality Corp. (a)..................... 52,000 549,250
Sturm Ruger & Co., Inc.......................... 25,700 306,794
Thor Industries, Inc............................ 11,600 295,800
Winnebago Industries, Inc....................... 21,800 329,725
--------------
6,281,023
--------------
MACHINERY -- 2.7%
Applied Industrial Technologies, Inc............ 21,900 303,863
Applied Power, Inc. (Class "A" Stock)........... 38,295 1,445,636
Astec Industries, Inc. (a)...................... 9,400 522,875
Cognex Corp. (a)................................ 40,600 812,000
Gardner Denver Machinery, Inc. (a).............. 15,900 234,525
Global Industrial Technologies, Inc. (a)........ 21,900 234,056
Graco, Inc...................................... 19,300 569,350
JLG Industries, Inc............................. 43,800 684,375
Lindsay Manufacturing Co. (a)................... 13,612 201,628
Manitowoc Co., Inc.............................. 17,175 762,141
Novellus Systems, Inc. (a)...................... 33,900 1,678,050
Paxar Corp...................................... 48,352 432,146
Regal Beloit Corp............................... 20,800 478,400
Robbins & Myers, Inc............................ 11,000 243,375
Roper Industries, Inc........................... 31,100 633,663
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
MACHINERY (CONT'D.)
Royal Appliance Manufacturing Co. (a)........... 20,400 $ 75,225
Toro Co......................................... 12,700 361,950
--------------
9,673,258
--------------
MEDIA -- 0.3%
Catalina Marketing Corp. (a).................... 17,800 1,217,075
--------------
METALS-FERROUS -- 0.3%
Birmingham Steel Corp........................... 24,600 103,013
Commercial Metals Co............................ 14,200 394,050
Material Sciences Corp. (a)..................... 15,225 129,413
Northwestern Steel and Wire Co. (a)............. 24,300 15,188
Quanex Corp..................................... 14,025 316,439
Steel Technologies, Inc......................... 11,800 79,650
WHX Corp. (a)................................... 18,300 184,144
--------------
1,221,897
--------------
METALS-NON FERROUS -- 0.5%
Amcast Industrial Corp.......................... 9,100 174,038
AMCOL International Corp........................ 26,050 257,244
Brush Wellman, Inc.............................. 16,000 279,000
Castle (A.M.) & Co.............................. 13,800 207,000
Commonwealth Industries, Inc.................... 15,800 148,125
Hecla Mining Co. (a)............................ 54,700 198,288
IMCO Recycling, Inc. (a)........................ 16,600 256,263
RTI International Metals, Inc................... 20,400 285,600
--------------
1,805,558
--------------
MINERAL RESOURCES -- 0.1%
Kronos, Inc. (a)................................ 7,900 350,069
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 6.5%
Air Express International Corp.................. 34,400 748,200
Alliant Techsystems, Inc........................ 9,300 766,669
Apogee Enterprises, Inc......................... 26,900 302,625
Aquarion Co..................................... 7,450 305,450
Barnes Group, Inc............................... 18,400 540,500
Bassett Furniture Industries, Inc............... 13,000 313,625
Blout International, Inc........................ 37,300 930,169
Brightpoint, Inc................................ 51,700 710,875
Butler Manufacturing Co......................... 7,600 170,050
Clarcor, Inc.................................... 24,300 486,000
Consumers Water Co.............................. 8,600 270,363
CPI Corp........................................ 9,900 262,350
Cross (A.T.) Co. (Class "A" Stock).............. 16,400 88,150
Cyrk, Inc. (a).................................. 14,900 111,750
Expeditors International of Washington, Inc..... 24,500 1,029,000
Flow International Corp. (a).................... 14,000 135,625
Gentex Corp. (a)................................ 71,400 1,428,000
Geon Co. (a).................................... 23,100 531,300
Griffon Corp. (a)............................... 29,300 311,313
Harmon Industries, Inc.......................... 10,000 230,625
Hologic, Inc.................................... 13,200 160,050
Insteel Industries, Inc......................... 8,300 40,463
Intermet Corp. (a).............................. 24,700 322,644
Justin Industries, Inc.......................... 26,200 343,875
K-Swiss, Inc. (Class "A" Stock)................. 5,200 139,750
Lawson Products, Inc............................ 10,600 243,800
Libbey, Inc..................................... 17,500 506,406
Lydall, Inc. (a)................................ 15,600 185,250
Mohawk Industries, Inc. (a)..................... 57,000 2,397,563
Mueller Industries, Inc. (a).................... 35,400 719,063
O'Sullivan Corp................................. 15,200 150,100
PAREXEL International Corp...................... 24,400 610,000
Reliance Steel & Aluminum Co.................... 18,400 508,300
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B52
<PAGE>
SMALL CAPITALIZATION STOCK PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
MISCELLANEOUS - BASIC INDUSTRY (CONT'D.)
Scott Technologies.............................. 17,000 $ 281,031
Service Experts, Inc............................ 16,500 482,625
SPS Technologies, Inc. (a)...................... 12,600 713,475
Standex International Corp...................... 13,000 341,250
Tera Tech Inc. (a).............................. 28,400 768,575
Texas Industries, Inc........................... 21,000 565,688
The Rival Co.................................... 9,300 124,969
Timberland Co. (Class "A" Stock) (a)............ 11,400 519,413
Tredegar Industries, Inc........................ 35,850 806,625
Valmont Industries, Inc......................... 25,400 352,425
Walbro Corp..................................... 8,600 54,825
Watsco, Inc..................................... 24,400 408,700
Whittaker Corp. (a)............................. 11,100 187,313
Wolverine Tube, Inc. (a)........................ 14,000 294,000
Wolverine World Wide, Inc....................... 43,512 576,534
Xylan Corp...................................... 43,200 758,700
--------------
23,236,051
--------------
MISCELLANEOUS - CONSUMER GROWTH/STAPLE -- 1.5%
DeVRY, Inc. (a)................................. 67,750 2,074,844
Hughes Supply, Inc.............................. 22,950 671,288
Philadelphia Suburban Corp...................... 27,400 810,013
Valassis Communications, Inc. (a)............... 36,700 1,894,638
--------------
5,450,783
--------------
OIL & GAS -- 1.5%
Benton Oil & Gas Co. (a)........................ 29,400 88,200
Cabot Oil & Gas Corp. (Class "A" Stock)......... 24,700 370,500
Cascade Natural Gas Corp........................ 10,422 188,899
Cross Timbers Oil Co............................ 44,575 334,313
Northwest Natural Gas Co........................ 23,500 608,063
Piedmont Natural Gas Co., Inc................... 30,300 1,094,588
Remington Oil & Gas Corp. (a)................... 19,300 61,519
Santa Fe Energy Resources, Inc. (a)............. 102,000 752,250
Snyder Oil Corp................................. 33,300 443,306
Southwest Gas Corp.............................. 30,000 806,250
Vintage Petroleum, Inc.......................... 51,300 442,463
Wiser Oil Co.................................... 8,800 17,600
--------------
5,207,951
--------------
OIL & GAS SERVICES -- 2.6%
Atmos Energy Corp............................... 28,600 922,350
Barrett Resources Corp. (a)..................... 31,510 756,240
Connecticut Energy Corp......................... 10,200 311,100
Customtracks Corp............................... 14,800 158,175
Daniel Industries............................... 16,900 204,913
Devon Energy Corp............................... 32,100 985,069
Energen Corp.................................... 27,900 544,050
HS Resources, Inc. (a).......................... 18,800 142,175
Input/Output, Inc. (a).......................... 50,000 365,625
KCS Energy, Inc................................. 28,500 87,281
New Jersey Resources Corp....................... 17,400 687,300
Oceaneering International, Inc. (a)............. 22,800 342,000
Offshore Logistics, Inc. (a).................... 21,700 257,688
Pennsylvania Enterprises, Inc................... 9,500 242,250
Plains Resources, Inc. (a)...................... 16,000 230,000
Pogo Producing Co............................... 39,800 517,400
Pool Energy Services Co. (a).................... 20,900 225,981
Pride Petroleum Services, Inc................... 49,700 351,006
Public Service Company of North Carolina,
Inc........................................... 18,775 488,150
Seitel, Inc. (a)................................ 21,894 272,307
Southwestern Energy Co.......................... 24,700 185,250
St. Mary Land & Exploration Co.................. 10,900 201,650
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
OIL & GAS SERVICES (CONT'D.)
Tuboscope Vetco International, Inc. (a)......... 45,100 $ 366,438
WICOR, Inc...................................... 35,500 774,344
--------------
9,618,742
--------------
PAPER AND RELATED PRODUCTS -- 0.4%
Buckeye Technologies, Inc....................... 36,600 546,713
Schweitzer-Mauduit International, Inc........... 16,000 247,000
W.H. Brady Co................................... 22,400 603,400
--------------
1,397,113
--------------
PRECIOUS METALS -- 0.5%
Coeur d'Alene Mines Corp. (a)................... 21,700 100,363
Getchell Gold Co. (a)........................... 30,600 833,850
Glamis Gold, Ltd................................ 37,700 70,688
Stillwater Mining Co. (a)....................... 22,400 918,400
--------------
1,923,301
--------------
RAILROADS
RailTex, Inc. (a)............................... 9,100 102,944
--------------
REAL ESTATE DEVELOPMENT -- 0.2%
Toll Brothers, Inc. (a)......................... 36,800 830,300
--------------
RESTAURANTS -- 2.1%
Applebee's International, Inc................... 30,100 620,813
Au Bon Pain, Inc. (Class "A" Stock) (a)......... 11,800 79,650
CEC Entertainment, Inc.......................... 18,150 503,663
Cheesecake Factory (a).......................... 19,950 591,642
CKE Restaurants, Inc............................ 51,013 1,501,680
Foodmaker, Inc. (a)............................. 37,100 818,519
IHOP Corp. (a).................................. 9,800 391,388
Landry's Seafood Restaurants, Inc............... 30,100 225,750
Luby's Cafeterias, Inc.......................... 22,300 344,256
Ruby Tuesday, Inc............................... 31,200 663,000
Ryan's Family Steak Houses, Inc. (a)............ 41,400 512,325
Shoney's, Inc. (a).............................. 48,200 63,263
Sonic Corp. (a)................................. 18,025 448,372
Taco Cabana (Class "A" Stock) (a)............... 14,100 109,275
TCBY Enterprises, Inc........................... 22,900 160,300
Triarc Companies, Inc. (Class "A" Stock) (a).... 30,400 486,400
--------------
7,520,296
--------------
RETAIL -- 6.1%
AnnTaylor Stores Corp........................... 25,500 1,005,656
Arctic Cat, Inc................................. 27,700 282,194
Bombay Co., Inc. (a)............................ 37,600 209,150
Books-A-Million, Inc. (a)....................... 17,300 224,900
Brown Group, Inc................................ 17,550 308,222
Building Materials Holding Corp................. 11,700 141,863
Casey's General Stores, Inc..................... 52,300 681,534
Cash America International, Inc................. 24,843 377,303
Cato Corp. (Class "A" Stock).................... 27,400 269,719
Consolidated Products, Inc...................... 26,094 538,184
Damark International, Inc. (a).................. 7,200 58,500
Discount Auto Parts, Inc. (a)................... 16,300 357,581
Dress Barn, Inc. (a)............................ 23,000 349,313
Eagle Hardware & Garden, Inc. (a)............... 28,900 939,250
Filene's Basement Corp. (a)..................... 20,800 49,400
Footstar, Inc................................... 24,400 610,000
Goody's Family Clothing (a)..................... 33,100 332,034
Gottschalks, Inc. (a)........................... 12,500 95,313
Gymboree Corp................................... 24,000 153,000
J. Baker, Inc................................... 13,800 79,350
Jan Bell Marketing, Inc. (a).................... 28,500 183,469
Jo-Ann Stores, Inc.(Class "A" Stock)............ 18,000 290,250
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B53
<PAGE>
SMALL CAPITALIZATION STOCK PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
RETAIL (CONT'D.)
Just For Feet, Inc.............................. 30,000 $ 521,250
Lechters, Inc. (a).............................. 17,000 41,969
Lillian Vernon Corp............................. 9,200 151,800
Linens 'n Things, Inc........................... 38,000 1,505,750
The Men's Wearhouse, Inc........................ 33,050 1,049,338
Michaels Stores, Inc. (a)....................... 29,400 531,956
MicroAge, Inc. (a).............................. 19,500 299,813
O'Reilly Automotive, Inc. (a)................... 21,100 996,975
Oshkosh B' Gosh, Inc. (Class "A" Stock)......... 18,000 363,375
Pacific Sunwear of California, Inc.............. 20,900 342,237
Pier 1 Imports, Inc............................. 97,950 948,891
Regis Corp...................................... 22,600 904,000
Russ Berrie & Co., Inc.......................... 22,200 521,700
Shopko Stores, Inc.............................. 25,200 837,900
Sports Authority, Inc........................... 31,550 165,638
Stein Mart, Inc. (a)............................ 45,400 316,381
Stride Rite Corp................................ 46,200 404,250
Swiss Army Brands, Inc. (a)..................... 7,700 74,113
Whole Foods Market, Inc. (a).................... 26,200 1,267,425
Williams-Sonoma, Inc. (a)....................... 51,700 2,084,156
Zale Corp....................................... 35,000 1,128,750
--------------
21,993,852
--------------
SAFETY
Rural/Metro Corp................................ 14,000 153,125
--------------
SOFTWARE -- 1.4%
HNC Software, Inc............................... 25,500 1,031,156
Hyperion Solutions Corp......................... 29,370 528,660
Macromedia Inc. (a)............................. 39,400 1,327,288
Mercury Interactive Corp........................ 17,200 1,087,900
National Instruments Corp....................... 32,300 1,102,238
--------------
5,077,242
--------------
TELECOMMUNICATIONS -- 2.4%
Allen Telecom, Inc.............................. 27,200 181,900
Aspect Telecommunications Corp. (a)............. 50,100 864,225
California Microwave, Inc. (a).................. 16,100 150,938
Centigram Communications Corp. (a).............. 6,800 67,150
CommScope, Inc.................................. 48,900 822,131
Dialogic Corp................................... 15,900 312,534
Digi International, Inc. (a).................... 13,800 153,525
Digital Microwave Corp. (a)..................... 61,000 417,469
General Communication, Inc...................... 49,100 199,469
InterVoice, Inc. (a)............................ 13,800 476,100
Network Equipment Technologies, Inc. (a)........ 20,500 211,406
P-COM, Inc...................................... 43,200 172,125
Symmetricom, Inc. (a)........................... 15,700 104,994
TCSI Corp. (a).................................. 22,100 46,272
Tel-Save Holdings, Inc.......................... 64,100 1,073,675
Vitesse Semicondutor Corp. (a).................. 72,800 3,321,500
--------------
8,575,413
--------------
TEXTILES -- 1.5%
Angelica Corp................................... 8,800 163,900
Ashworth, Inc. (a).............................. 14,600 80,756
Authentic Fitness Corp.......................... 22,400 408,800
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Cone Mills Corp. (a)............................ 26,000 $ 146,250
Delta Woodside Industries, Inc.................. 24,400 146,400
Dixie Group, Inc................................ 10,700 86,938
G & K Services, Inc. (Class "A" Stock).......... 20,400 1,086,300
Galey & Lord, Inc. (a).......................... 11,300 97,463
Guilford Mills, Inc............................. 24,337 406,124
Haggar Corp..................................... 7,800 89,213
Hancock Fabrics................................. 20,800 174,200
Hartmarx Corp. (a).............................. 33,100 186,188
Johnston Industries, Inc........................ 10,600 33,125
Kellwood Co..................................... 21,375 534,375
Nautica Enterprises, Inc. (a)................... 37,000 555,000
Oxford Industries, Inc.......................... 8,800 248,600
Pillowtex Corp. (a)............................. 14,009 374,741
St. John Knits, Inc............................. 16,650 432,900
Tultex Corp. (a)................................ 28,300 24,763
--------------
5,276,036
--------------
TOBACCO -- 0.1%
DIMON, Inc...................................... 44,175 328,552
--------------
TRUCKING/SHIPPING -- 1.6%
American Freightways, Inc....................... 31,400 362,081
Arkansas Best Corp.............................. 18,500 108,109
Fritz Companies, Inc. (a)....................... 33,900 366,544
Frozen Food Express Industries, Inc............. 16,000 126,000
Heartland Express, Inc. (a)..................... 29,749 520,608
Kirby Corp. (a)................................. 20,000 398,750
Landstar Systems, Inc. (a)...................... 10,300 419,725
M.S. Carriers, Inc. (a)......................... 12,200 401,838
Pittston Burlington Group....................... 19,975 222,222
Rollins Truck Leasing Corp...................... 54,100 797,975
USFreightways Corp.............................. 26,100 760,163
Werner Enterprises, Inc......................... 47,512 840,369
Yellow Corp. (a)................................ 25,900 495,338
--------------
5,819,722
--------------
UTILITY - ELECTRIC -- 1.8%
Bangor Hydro-Electric Co........................ 6,975 89,367
Central Hudson Gas & Electric................... 16,900 756,275
Central Vermont Public Service.................. 11,300 117,238
CILCORP, Inc.................................... 13,400 819,913
Commonwealth Energy System...................... 21,475 869,738
Eastern Utilities Associates.................... 19,400 548,050
Green Mountain Power Corp....................... 5,200 54,600
Orange & Rockland Utilities, Inc................ 13,500 769,500
Sierra Pacific Resources........................ 30,400 1,155,200
TNP Enterprises, Inc............................ 12,600 478,013
United Illuminating Co.......................... 13,625 701,688
--------------
6,359,582
--------------
UTILITY - WATER -- 0.3%
American States Water Co........................ 8,200 223,450
United Water Resources, Inc..................... 37,000 885,688
--------------
1,109,138
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $321,999,044)............................................ 335,536,457
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B54
<PAGE>
SMALL CAPITALIZATION STOCK PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS -- 6.6% (000) (NOTE 2)
------------- --------------
<S> <C> <C>
REPURCHASE AGREEMENT -- 6.3%
Joint Repurchase Agreement
Account, 4.693%, 01/04/99 (Note 5)............ $ 22,592 $ 22,592,000
--------------
U. S. GOVERNMENT OBLIGATIONS -- 0.3%
United States Treasury Bills,
4.30%, 03/18/99 (b)........................... 150 148,674
4.36%, 03/18/99 (b)........................... 1,100 1,090,276
--------------
1,238,950
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $23,830,507)............................................. 23,830,950
--------------
TOTAL INVESTMENTS -- 99.7%
(cost $345,829,551; Note 6).................................... 359,367,407
VARIATION MARGIN ON
OPEN FUTURES CONTRACTS (c) -- 0.2%............................. 613,350
OTHER ASSETS IN EXCESS
OF LIABILITIES -- 0.1%......................................... 404,881
--------------
TOTAL NET ASSETS -- 100.0%....................................... $ 360,385,638
--------------
--------------
</TABLE>
(a) Non-income producing security.
(b) Security segregated as collateral for futures contracts.
(c) Open futures contracts as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION VALUE AT VALUE AT UNREALIZED
CONTRACTS TYPE DATE TRADE DATE DECEMBER 31, 1998 APPRECIATION
<S> <C> <C> <C> <C> <C>
Long Position:
120 MidCap 400 Index Mar 99 $ 21,475,050 $ 23,505,000 $ 2,029,950
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B55
<PAGE>
GLOBAL PORTFOLIO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 93.2%
VALUE
COMMON STOCKS -- 92.4% SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AUSTRALIA -- 1.4%
AMP Limited..................................... 326,000 $ 4,120,529
Brambles Industries, Ltd........................ 298,600 7,256,327
FXF Trust....................................... 224,600 41,193
--------------
11,418,049
--------------
FEDERAL REPUBLIC OF GERMANY -- 1.8%
Mannesmann, AG.................................. 106,659 12,229,114
SAP, AG......................................... 6,580 2,843,954
--------------
15,073,068
--------------
FINLAND -- 3.4%
Nokia Corp. (Class "A" Stock)................... 236,662 28,974,152
--------------
FRANCE -- 9.7%
Casino Guichard Perrachon, SA................... 90,463 9,421,543
Elf Aquitaine, SA............................... 109,633 12,673,655
Legrand, SA..................................... 55,861 14,804,434
Pinault Printemps Redoute, SA................... 33,785 6,456,888
Suez Lyonnaise Des Eaux......................... 62,868 12,915,154
Thomson CSF..................................... 328,820 14,122,043
Valeo, SA....................................... 149,290 11,765,383
--------------
82,159,100
--------------
IRELAND -- 2.4%
Bank of Ireland................................. 917,988 20,058,961
--------------
ITALY -- 5.0%
Unicredito Italiano SpA......................... 4,786,492 28,426,851
Telecom Italia SpA.............................. 1,574,398 13,459,862
--------------
41,886,713
--------------
JAPAN -- 5.2%
Honda Motor Co.................................. 157,000 5,135,288
Nippon Telephone and Telegraph Corp............. 1,086 8,349,059
NTT Mobile Communication Network, Inc........... 216 8,855,191
Olympus Optical Co., Ltd........................ 1,070,000 12,254,177
Takefuji Corp................................... 131,700 9,579,237
--------------
44,172,952
--------------
NETHERLANDS -- 3.3%
ING Groep, N.V.................................. 242,234 14,776,328
Koninklijke Numico, N.V......................... 273,036 13,018,738
--------------
27,795,066
--------------
SPAIN -- 4.0%
Banco Central Hispanoamericano, SA.............. 1,155,224 13,735,794
Telefonica De Espana............................ 453,545 20,194,700
--------------
33,930,494
--------------
SWEDEN -- 4.3%
Drott, AB (Class "B" Shares).................... 182,794 1,681,558
Hennes & Mauritz, AB............................ 190,023 15,533,093
Nordbanken Holdings, AB......................... 2,193,279 14,082,865
Skanska, AB (Class "B" Shares).................. 195,773 5,439,126
--------------
36,736,642
--------------
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
SWITZERLAND -- 2.5%
Novartis, AG.................................... 7,831 15,388,428
UBS, AG......................................... 18,858 5,791,904
--------------
21,180,332
--------------
UNITED KINGDOM -- 10.4%
Bank of Scotland................................ 1,037,063 $ 12,388,630
Glaxo Wellcome PLC.............................. 351,881 12,114,335
Guest, Kean & Nettlefolds, PLC.................. 881,861 11,705,117
Hays, PLC....................................... 1,555,994 13,682,625
Siebe, PLC...................................... 2,275,337 8,928,172
Vodafone Group, PLC............................. 1,806,063 29,306,058
--------------
88,124,937
--------------
UNITED STATES -- 39.0%
Belo (A.H.) Corp. (Class "A" Stock)............. 514,900 10,265,819
Cisco Systems, Inc. (a)......................... 169,000 15,685,312
Citigroup, Inc.................................. 203,100 10,053,450
Computer Sciences Corp.......................... 199,000 12,823,062
Disney (Walt) Co................................ 300,600 9,018,000
Electronic Arts, Inc............................ 295,400 16,579,325
Fox Entertainment Group, Inc. (Class "A"
Stock)........................................ 418,600 10,543,487
Healthsouth Corp. (a)........................... 506,500 7,819,094
MCI WorldCom, Inc............................... 251,400 18,037,950
Microsoft Corp. (a)............................. 134,600 18,667,337
Office Depot, Inc............................... 304,700 11,254,856
Pfizer, Inc..................................... 48,100 6,033,544
PMC-Sierra, Inc................................. 289,900 18,299,938
Safeway, Inc. (a)............................... 468,800 28,567,500
SCI Systems, Inc. (a)........................... 189,200 10,926,300
Solectron Corp.................................. 129,200 12,007,525
Tenet Healthcare Corp. (a)...................... 341,800 8,972,250
Texas Instruments, Inc.......................... 218,400 18,686,850
The Limited, Inc................................ 175,800 5,120,175
Time Warner, Inc................................ 428,600 26,599,988
Transocean Offshore, Inc........................ 226,800 6,081,075
USA Networks, Inc............................... 404,300 13,392,438
Warner-Lambert Co............................... 66,800 5,022,525
Waste Management, Inc........................... 301,100 14,038,788
Wells Fargo & Co................................ 374,800 14,968,575
--------------
329,465,163
--------------
TOTAL COMMON STOCKS
(cost $539,856,453)............................................ 780,975,629
--------------
PREFERRED STOCKS -- 0.7%
FEDERAL REPUBLIC OF GERMANY
Wella, AG, 1.57%................................ 6,609 5,514,608
--------------
(cost $5,349,125)
RIGHTS(a) -- 0.1%
SPAIN
Telefonica, SA.................................. 453,545 403,254
--------------
(cost $256,876)
TOTAL LONG-TERM INVESTMENTS
(cost $545,462,454)............................................ 786,893,491
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B56
<PAGE>
GLOBAL PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENT -- 5.2% (000) (NOTE 2)
------------- --------------
<S> <C> <C>
REPURCHASE AGREEMENT
UNITED STATES
Bear, Stearns & Co. Inc., 4.73%,
01/04/99 (cost $44,130,000)(b)................ $ 44,130 $ 44,130,000
--------------
TOTAL INVESTMENTS -- 98.4%
(cost $589,592,454; Note 6).................................... 831,023,491
--------------
FORWARD CURRENCY CONTRACTS -- AMOUNT PAYABLE TO COUNTERPARTIES
(c) -- (0.5%).................................................. (3,828,254)
OTHER ASSETS IN EXCESS OF OTHER
LIABILITIES -- 2.1%............................................ 17,346,722
--------------
TOTAL NET ASSETS -- 100.0%....................................... $ 844,541,959
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
AB Aktiebolag (Swedish Stock Company)
AG Aktiengesellschaft (German Stock Company)
N.V. Naamloze Vennootschap (Dutch Corporation)
PLC Public Limited Company (British Corporation)
SA Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French
Corporation)
(a) Non-income producing security.
(b) Bear, Stearns & Co. Inc., repurchase price $44,153,193, due
1/4/99. The value of the collateral was $45,098,734
(c) Outstanding forward currency contracts at December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
VALUE AT
FOREIGN CURRENCY SETTLEMENT CURRENT
CONTRACTS DATE VALUE DEPRECIATION
- -------------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
Sale:
Japanese Yen,
expiring 2/16/99 $ 2,200,000 $ 2,774,219 $ (574,219)
expiring 2/17/99 $ 2,450,000 $ 3,083,306 $ (633,306)
expiring 3/17/99 $ 1,775,000 $ 2,053,545 $ (278,545)
expiring 3/17/99 $ 5,925,000 $ 6,851,612 $ (926,612)
expiring 4/17/99 $ 6,259,542 $ 7,345,432 $(1,085,890)
expiring 6/24/99 $ 5,479,224 $ 5,632,213 $ (152,989)
expiring 6/28/99 $ 5,458,538 $ 5,635,231 $ (176,693)
-------------
$(3,828,254)
-------------
-------------
</TABLE>
The industry classification of portfolio holdings and other assets in excess of
liabilities shown as a percentage of net assets as of December 31, 1998 were as
follows:
<TABLE>
<S> <C>
Commercial Banks 17.1%
Telecommunications 15.2%
Electronics 10.2%
Retail 9.0%
Computer Services 7.9%
Media 7.2%
Drugs & Medical Supplies 4.6%
Automobiles 3.4%
Machinery 2.5%
Construction 2.1%
Hospitals 2.0%
Electrical Equipment 1.7%
Environmental Services 1.7%
Commercial Services 1.6%
Chemicals 1.5%
Foods & Beverages 1.5%
Leisure 1.1%
Diversified Operations 0.9%
Oil & Gas Services 0.7%
Cosmetics & Soaps 0.6%
Insurance 0.5%
Real Estate Investment Trust 0.2%
Repurchase Agreement 5.2%
---------
98.4%
Forward currency contracts (0.5)%
Other assets in excess of liabilities 2.1%
---------
100.0%
---------
---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B57
<PAGE>
NATURAL RESOURCES PORTFOLIO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 99.5%
VALUE
COMMON STOCKS -- 98.1% SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
ALUMINUM -- 1.1%
Comalco Ltd., ADR (Australia)................... 134,900 $ 2,585,696
--------------
CHEMICALS
Agrium, Inc..................................... 503 4,436
--------------
EXPLORATION & PRODUCTION -- 11.9%
Apex Silver Mines, Ltd. (a)..................... 197,600 1,630,200
Atna Resources, Ltd. (a)........................ 295,100 129,159
Brigham Exploration Company (a)................. 109,500 602,250
Fx Energy, Inc.................................. 131,800 1,334,475
Miller Exploration, Co.......................... 120,200 540,900
Newfield Exploration Co. (a).................... 439,100 9,166,212
Nuevo Energy Co. (a)............................ 223,600 2,571,400
Pioneer Natural Resources Co.................... 458,460 4,011,525
Ranger Oil, Ltd................................. 753,946 3,349,120
Sutton Resources, Ltd. (a)...................... 184,900 797,191
Talisman Energy, Inc. (a)....................... 91,190 1,595,825
Tom Brown, Inc. (a)............................. 248,900 2,496,778
--------------
28,225,035
--------------
FOREST PRODUCTS -- 14.1%
Boise Cascade Corp.............................. 288,700 8,949,700
Champion International Corp..................... 260,500 10,550,250
Fletcher Challenge, Ltd., ADR (New Zealand)..... 372,700 1,164,687
Macmillan Bloedel, Ltd. (Canada)................ 725,100 7,247,211
Rayonier, Inc................................... 121,300 5,572,219
--------------
33,484,067
--------------
GOLD -- 21.0%
Agnico-Eagle Mines, Ltd......................... 401,500 1,656,187
Anglogold Ltd., ADR (Canada).................... 198,076 3,874,862
Ashanti Goldfields Co., Ltd..................... 204,900 1,920,937
Avgold, Ltd., (a), ADR (South Africa)........... 163,000 896,500
Barrick Gold Corp............................... 274,653 5,355,733
Battle Mountain Gold Corp....................... 137,400 566,775
Bema Gold Corp.................................. 605,000 491,562
Cambior, Inc.................................... 581,600 2,863,969
Coeur d'Alene Mines Corp........................ 80,525 372,428
Durban Roodeport Deep, ADR (South Africa)....... 150,000 412,500
Francisco Gold Corp............................. 93,500 537,497
Getchell Gold Co. (a)........................... 328,311 8,946,475
Gold Fields (South Africa)...................... 113,999 626,994
Golden Knight Resources, Inc. (a)............... 254,400 74,784
Golden Star Resources........................... 292,300 310,569
Greenstone Resources, Ltd....................... 409,300 366,306
Harmony Gold Mining, ADR (South Africa)......... 612,900 2,911,275
Iamgold International Mining (South Africa)..... 356,500 931,539
International Pursuit Corp...................... 305,600 41,923
Meridian Gold, Inc.............................. 627,200 3,687,484
Newmont Mining Corp............................. 474,507 8,570,783
Placer Dome, Inc................................ 249,100 2,864,650
TVX Gold, Inc. (a).............................. 492,600 892,837
Western Areas Gold Mining Co., Ltd., ADR (South
Africa) (a)................................... 178,700 571,840
--------------
49,746,409
--------------
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
METALS-NON FERROUS -- 7.5%
Cameco Corp..................................... 277,500 $ 4,976,075
Freeport-McMoRan Copper & Gold, Inc. (Class "A"
Stock)........................................ 385,700 3,736,469
Potash Corp. of Saskatchewan, Inc. (Canada)..... 143,100 9,140,512
Rio Tinto Ltd., ADR (Australia) (a)............. 1 47
--------------
17,853,103
--------------
OIL & GAS -- 14.6%
Alberta Energy Co. Ltd. (Canada)................ 407,800 8,779,619
Beau Canada Exploration Ltd. (Class "A" Stock)
(Canada) (a).................................. 873,800 1,101,669
Blue Range Resource Corp. (Canada) (a).......... 566,700 1,277,185
Crester Energy, Inc., ADR (Canada) (a).......... 480,900 4,083,943
Cross Timbers Oil Co............................ 355,200 2,664,000
Dynegy, Inc..................................... 433,345 4,739,711
Noble Affiliates, Inc........................... 134,200 3,304,675
Rigel Energy Corp. (Canada) (a)................. 275,300 1,798,406
Rio Alto Exploration, Ltd. (Canada) (a)......... 292,000 2,861,249
Western Gas Resources, Inc...................... 678,800 3,903,100
--------------
34,513,557
--------------
OIL & GAS SERVICES -- 5.2%
Bouyges Offshore, SA, ADR (France) (a).......... 188,900 2,007,063
J. Ray McDermott, SA (a)........................ 205,100 5,012,131
Poco Petroleums, Ltd............................ 368,700 3,082,937
Smith International, Inc. (a)................... 85,000 2,140,938
--------------
12,243,069
--------------
OIL SERVICES -- 0.4%
Tesco Corp. (a)................................. 243,800 1,011,321
--------------
PLATINUM -- 22.3%
Anglo American Platinum, Ltd., ADR (South
Africa)....................................... 682,369 9,297,278
Impala Platinum Holdings, Ltd................... 922,200 12,507,338
Stillwater Mining Co. (a)....................... 753,500 30,893,500
--------------
52,698,116
--------------
TOTAL COMMON STOCKS
(cost $300,598,622)............................................ 232,364,809
--------------
PREFERRED STOCKS -- 1.4%
GOLD
Hecla Mining Co. (Cum. Conv.) 7.0% Series B..... 60,700 2,306,600
Kinam Gold, Inc. (Cum. Conv.) $3.75 Series B.... 26,100 939,600
--------------
TOTAL PREFERRED STOCKS
(cost $4,096,238).............................................. 3,246,200
--------------
TOTAL LONG-TERM INVESTMENT
(cost $304,694,860)............................................ 235,611,009
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B58
<PAGE>
NATURAL RESOURCES PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENT -- 0.6% (000) (NOTE 2)
------------- --------------
<S> <C> <C>
REPURCHASE AGREEMENT
Joint Repurchase Agreement Account 4.693%,
01/04/99 (cost $1,475,000; Note 5)............ $ 1,475 $ 1,475,000
--------------
TOTAL INVESTMENTS -- 100.1%
(cost $306,169,860; Note 6).................................... 237,086,009
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (0.1%)............................................... (187,371)
--------------
TOTAL NET ASSETS -- 100.0%....................................... $ 236,898,638
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
ADR American Depository Receipt
SA Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French
Corporation)
(a) Non-income producing security.
SEE NOTES TO FINANCIAL STATEMENTS.
B59
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
NOTE 1: GENERAL
The Prudential Series Fund, Inc. ("Series Fund"), a Maryland corporation,
organized on November 15, 1982, is a diversified open-end management investment
company registered under the Investment Company Act of 1940, as amended. The
Series Fund is composed of fifteen Portfolios ("Portfolio" or "Portfolios"),
each with a separate series of capital stock: Money Market Portfolio,
Diversified Bond Portfolio, Government Income Portfolio, Zero Coupon Bond 2000
Portfolio, Zero Coupon Bond 2005 Portfolio, Conservative Balanced Portfolio,
Flexible Managed Portfolio, High Yield Bond Portfolio, Stock Index Portfolio,
Equity Income Portfolio, Equity Portfolio, Prudential Jennison Portfolio, Small
Capitalization Stock Portfolio, Global Portfolio and Natural Resources
Portfolio. Shares in the Series Fund are currently sold only to certain separate
accounts of The Prudential Insurance Company of America ("The Prudential"),
Pruco Life Insurance Company and Pruco Life Insurance Company of New Jersey
(together referred to as the "Companies") to fund benefits under certain
variable life insurance and variable annuity contracts ("contracts") issued by
the Companies. The accounts invest in shares of the Series Fund through
subaccounts that correspond to the portfolios. The accounts will redeem shares
of the Series Fund to the extent necessary to provide benefits under the
contracts or for such other purposes as may be consistent with the contracts.
The ability of the issuers of the securities held by the Money Market Portfolio
to meet their obligations may be affected by economic developments in a specific
industry or region.
NOTE 2: ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Series Fund in preparation of its financial statements.
SECURITIES VALUATION: Securities traded on an exchange (whether domestic or
foreign) are valued at the last reported sales price on the primary exchange on
which they are traded. Securities traded in the over-the-counter market
(including securities listed on exchanges for which a last sales price is not
available) are valued at the average of the last reported bid and asked prices
or at the bid price on such day in the absence of an asked price. Convertible
debt securities are valued at the mean between the most recently quoted bid and
asked prices provided by principal market makers. High yield bonds are valued
either by quotes received from principal market makers or by an independent
pricing service which determine prices by analysis of quality, coupon, maturity
and other factors. Any security for which a reliable market quotation is
unavailable is valued at fair value as determined in good faith by or under the
direction of the Series Fund's Board of Directors.
The Money Market, Conservative Balanced and Flexible Managed Portfolios use
amortized cost to value short-term securities. Short-term securities that are
held in the other Portfolios which mature in more than 60 days are valued at
current market quotations and those short-term securities which mature in 60
days or less are valued at amortized cost.
The High Yield Bond Portfolio may hold up to 15% of its net assets in illiquid
securities, including those which are restricted as to disposition under
securities law ("restricted securities"). Certain issues of restricted
securities held by the High Yield Bond Portfolio at December 31, 1998 include
registration rights, none of which are currently under contract to be
registered. Restricted securities, sometimes referred to as private placements,
are valued pursuant to the valuation procedures noted above.
REPURCHASE AGREEMENTS: In connection with transactions in repurchase agreements
with U.S. financial institutions, it is the Series Fund's policy that its
custodian or designated subcustodians, as the case may be under triparty
repurchase agreements, take possession of the underlying collateral securities,
the value of which exceeds the principal amount of the repurchase transaction
including accrued interest. If the seller defaults and the value of the
collateral declines or if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Series Fund may
by delayed or limited. (See Note 5).
FOREIGN CURRENCY TRANSLATION: The books and records of the Series Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) market value of investments securities, other assets and liabilities - at
the current rates of exchange.
(ii) purchases and sales of investment securities, income and expenses - at the
rate of exchange prevailing on the respective dates of such transactions.
C1
<PAGE>
Although the net assets of the Series Fund are presented at the foreign exchange
rates and market values at the close of the fiscal year, the Series Fund does
not isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from changes
in the market prices of securities held at the end of the fiscal year.
Similarly, the Series Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market prices
of long-term portfolio securities sold during the fiscal year. Accordingly,
these realized and unrealized foreign currency gains (losses) are included in
the reported net realized gains (losses) on investment transactions.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains or losses from holdings of foreign currencies, currency
gains or losses realized between the trade and settlement dates on security
transactions, and the difference between the amounts of dividends, interest and
foreign taxes recorded on the Series Fund's books and the U.S. dollar equivalent
amounts actually received or paid. Net unrealized currency gains or losses from
valuing foreign currency denominated assets and liabilities (other than
investments) at fiscal year end exchange rates are reflected as a component of
net unrealized appreciation (depreciation) on investments and foreign
currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
FORWARD CURRENCY CONTRACTS: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. Certain portfolios of the Series Fund enter into forward currency
contracts in order to hedge their exposure to changes in foreign currency
exchange rates on their foreign portfolio holdings or on specific receivables
and payables denominated in a foreign currency. The contracts are valued daily
at current exchange rates and any unrealized gain or loss is included in net
unrealized appreciation or depreciation on investments. Gain or loss is realized
on the settlement date of the contract equal to the difference between the
settlement value of the original and renegotiated forward contracts. This gain
or loss, if any, is included in net realized gain (loss) on foreign currencies.
Risks may arise upon entering into these contracts from the potential inability
of the counterparties to meet the terms of their contracts.
SHORT SALES: Certain portfolios of the Series Fund may sell a security it does
not own in anticipation of a decline in the market value of that security (short
sale). When the Portfolio makes a short sale, it must borrow the security sold
short and deliver it to the buyer. The proceeds of the short sale will be
retained by the broker-dealer through which it made the short sale as collateral
for its obligation to deliver the security upon conclusion of the sale. The
Portfolio may have to pay a fee to borrow the particular security and may be
obligated to remit any interest or dividends received on such borrowed
securities. A gain, limited to the price at which the Portfolio sold the
security short, or a loss, unlimited in magnitude, will be recognized upon the
termination of a short sale if the market price at termination is less than or
greater than, respectively, the proceeds originally received.
OPTIONS: The Series Fund may either purchase or write options in order to hedge
against adverse market movements or fluctuations in value with respect to
securities which the Series Fund currently owns or intends to purchase. The
Series Fund's principal reason for writing options is to realize, through
receipts of premiums, a greater current return than would be realized on the
underlying security alone. When the Series Fund purchases an option, it pays a
premium and an amount equal to that premium is recorded as an investment. When
the Series Fund writes an option, it receives a premium and an amount equal to
that premium is recorded as a liability. The investment or liability is adjusted
daily to reflect the current market value of the option. If an option expires
unexercised, the Series Fund realizes a gain or loss to the extent of the
premium received or paid. If an option is exercised, the premium received or
paid is an adjustment to the proceeds from the sales or the cost of the purchase
in determining whether the Series Fund has realized a gain or loss. The
difference between the premium and the amount received or paid on effecting a
closing purchase or sale transaction is also treated as a realized gain or loss.
Gain or loss on purchased options is included in net realized gain (loss) on
investment transactions. Gain or loss on written options is presented separately
as net realized gain (loss) on written option transactions.
The Series Fund, as writer of an option, may have no control over whether the
underlying securities may be sold (called) or purchased (put). As a result, the
Series Fund bears the market risk of an unfavorable change in the price of the
security underlying the written option. The Series Fund, as purchaser of an
option, bears the risk of the potential inability of the counterparties to meet
the terms of their contracts.
FINANCIAL FUTURES CONTRACTS: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series Fund is required to pledge to the broker an amount of cash and/or
other assets equal to a
C2
<PAGE>
certain percentage of the contract amount. This amount is known as the "initial
margin". Subsequent payments, known as "variation margin", are made or received
by the Series Fund each day, depending on the daily fluctuations in the value of
the underlying security. Such variation margin is recorded for financial
statement purposes on a daily basis as unrealized gain or loss. When the
contract expires or is closed, the gain or loss is realized and is presented in
the statement of operations as net realized gain (loss) on financial futures
contracts.
The Series Fund invests in financial futures contracts in order to hedge its
existing portfolio securities or securities the Series Fund intends to purchase,
against fluctuations in value. Under a variety of circumstances, the Series Fund
may not achieve the anticipated benefits of the financial futures contracts and
may realize a loss. The use of futures transactions involves the risk of
imperfect correlation in movements in the price of futures contracts and the
underlying assets.
SECURITIES LENDING: The Series Fund (excluding the Money Market Portfolio) many
lend its portfolio securities to broker-dealers, qualified banks and certain
institutional investors. The loans are secured by collateral in an amount equal
to at least the market value at all times of the loaned securities plus any
accrued interest and dividends. During the time the securities are on loan, the
Series Fund will continue to receive interest and dividends or amounts
equivalent thereto, on the loaned securities while receiving a fee from the
borrower or earning interest on the investment of the cash collateral. Loans are
subject to termination at the option of the borrower or the Series Fund. Upon
termination of the loan, the borrower will return to the Series Fund securities
identical to the loaned securities. The Series Fund may pay reasonable finders',
administrative and custodial fees in connection with a loan of its securities
and may share the interest earned on the collateral with the borrower. The
Series Fund bears the risk of delay in recovery of, or even loss of rights in
the securities loaned should the borrower of the securities fail financially.
Prudential Securities Incorporated ("PSI") is the securities lending agent for
the Fund. PSI is an indirect, wholly owned subsidiary of Prudential. For the
fiscal year ended December 31, 1998, PSI has been compensated approximately
$4,800.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; interest income, which is comprised of four elements: stated
coupon, original issue discount, market discount and market premium is recorded
on the accrual basis. Certain portfolios own shares of real estate investment
trusts ("REITs") which report information on the source of their distributions
annually. A portion of distributions received from REITs during the year is
estimated to be a return of capital and is recorded as a reduction of their
costs. Expenses are recorded on the accrual basis which may require the use of
certain estimates by management. The Series Fund expenses are allocated to the
respective Portfolios on the basis of relative net assets except for expenses
that are charged directly at a Portfolio level.
CUSTODY FEE CREDITS: The Series Fund, exclusive of the Global Portfolio, has an
arrangement with its custodian bank, whereby uninvested monies earn credits
which reduce the fees charged by the custodian. Such custody fee credits are
presented as a reduction of gross expenses in the accompanying Statements of
Operations.
TAXES: For federal income tax purposes, each portfolio in the Series Fund is
treated as a separate taxpaying entity. It is the intent of the Series Fund to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends, interest and capital gains have been
provided for in accordance with the Series Fund's understanding of the
applicable country's tax rules and regulations.
DIVIDENDS AND DISTRIBUTIONS: Dividends and distributions of each Portfolio are
declared in cash and automatically reinvested in additional shares of the Fund.
The Money Market Portfolio will declare and reinvest dividends from net
investment income and net realized capital gain (loss) daily. Each other
Portfolio will normally declare and distribute dividends from net investment
income, if any, quarterly and net capital gains, if any, at least annually.
Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Series Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gains, and
Return of Capital Distributions by Investment Companies. As a result of this
statement, the Series Fund changed the classification of distributions to
shareholders to disclose the amounts of undistributed net investment income and
C3
<PAGE>
accumulated net realized gain (loss) on investments available for distributions
determined in accordance with income tax regulations. For the year ended
December 31, 1998, the application of this statement increased (decreased)
paid-in capital in excess of par ("PC"), undistributed net investment income
("UNI") and accumulated net realized gains (losses) on investments ("GL") by the
following amounts:
<TABLE>
<CAPTION>
PC UNI G/L
--------- ------------ -----------
<S> <C> <C> <C>
Government Income...................... $ (64,303) $ 64,303 --
Zero Coupon Bond 2005 Portfolio........ (607) 607 --
Equity Portfolio....................... -- 105,151 $ (105,151)
Global Portfolio....................... -- (4,162,755) 4,162,755
Natural Resources Portfolio............ (222,068) (120,380) 342,448
</TABLE>
Net investment income, net realized gains and net assets were not affected by
these reclassifications.
NOTE 3: AGREEMENTS
The Series Fund has an investment advisory agreement with The Prudential.
Pursuant to this agreement The Prudential has responsibility for all investment
advisory services and supervises the subadvisers' performance of such services.
The Prudential has entered into a service agreement with The Prudential
Investment Corporation ("PIC"), which provides that PIC will furnish to The
Prudential such services as The Prudential may require in connection with the
performance of its obligations under the investment advisory agreement with the
Series Fund. In addition, The Prudential has entered into a subadvisory
agreement with Jennison Associates LLC ("Jennison"), under which Jennison
furnishes investment advisory services in connection with the management of the
Prudential Jennison Portfolio. The Prudential compensates Jennison for its
services as follows: 0.75% on the first $10 million of that Portfolio's average
daily net assets, 0.50% on the next $30 million, 0.35% on the next $25 million,
0.25% on the next $335 million, 0.22% on the next $600 million and 0.20%
thereafter. The Prudential pays for the cost of PIC's services, compensation of
officers of the Series Fund, occupancy and certain clerical and administrative
expenses of the Series Fund. The Series Fund bears all other costs and expenses.
The investment advisory fee paid to The Prudential is computed daily and payable
quarterly, at the annual rates specified below, of the value of each of the
Portfolio's average daily net assets.
<TABLE>
<CAPTION>
Fund Investment Advisory Fee
- --------------------------------------- ------------------------
<S> <C>
Money Market Porfolio.................. 0.40%
Diversified Bond Portfolio............. 0.40
Government Income Portfolio............ 0.40
Zero Coupon Bond 2000 Portfolio........ 0.40
Zero Coupon Bond 2005 Portfolio........ 0.40
Conservative Balanced Portfolio........ 0.55
Flexible Managed Portfolio............. 0.60
High Yield Bond Portfolio.............. 0.55
Stock Index Portfolio.................. 0.35
Equity Income Portfolio................ 0.40
Equity Portfolio....................... 0.45
Prudential Jennison Portfolio.......... 0.60
Small Capitalization Stock Portfolio... 0.40
Global Portfolio....................... 0.75
Natural Resources Portfolio............ 0.45
</TABLE>
The Prudential has agreed to refund to a Portfolio (other than the Global
Portfolio), the portion of the investment advisory fee for that Portfolio equal
to the amount that the aggregate annual ordinary operating expenses (excluding
interest, taxes and brokerage commissions) exceeds 0.75% of the Portfolio's
average daily net assets. No refund was required for the year ended December 31,
1998.
PIC and Jennison are indirect, wholly-owned subsidiaries of The Prudential.
The Series Fund has a credit agreement (the "Agreement") with an unaffiliated
lender. The maximum commitment under the Agreement is $250,000,000. The
Agreement expired on December 18, 1998 and has been extended through February
28, 1999 under the same terms. Interest on any such borrowings outstanding will
be at market rates. The purpose of the Agreement is to serve as an alternative
source of funding for capital share redemptions. The Series Fund did not borrow
any amounts pursuant to the
C4
<PAGE>
Agreement during the year ended December 31, 1998. The Series Fund pays a
commitment fee at an annual rate of .055 of 1% on the unused portion of the
credit facility. The commitment fee is accrued and paid quarterly by the Series
Fund.
NOTE 4: OTHER TRANSACTIONS WITH AFFILIATES
For the year ended December 31, 1998, Prudential Securities Incorporated, an
indirect, wholly-owned subsidiary of The Prudential, earned $664,019 in
brokerage commissions from transactions executed on behalf of the Series Fund as
follows:
<TABLE>
<CAPTION>
Fund Commission
- --------------------------------------- -----------
<S> <C>
Conservative Balanced Portfolio........ $ 32,490
Flexible Managed Portfolio............. 103,021
Equity Income Portfolio................ 160,840
Equity Portfolio....................... 294,641
Global Portfolio....................... 14,247
Prudential Jennison Portfolio.......... 56,980
Natural Resources Portfolio............ 1,800
-----------
$ 664,019
</TABLE>
NOTE 5: JOINT REPURCHASE AGREEMENT ACCOUNT
The Portfolios of the Series Fund (excluding Global Portfolio) may transfer
uninvested cash balances into a single joint repurchase agreement account, the
daily aggregate balance of which is invested in one or more repurchase
agreements collateralized by U.S. Government obligations. The Series Fund's
undivided interest in the joint repurchase agreement account represented
$932,710,000 as of December 31, 1998. The Portfolios of the Series Fund with
cash invested in the joint accounts had the following principal amounts and
percentage participation in the account:
<TABLE>
<CAPTION>
Principal Percentage
Amount Interest
------------- ----------
<S> <C> <C>
Diversified Bond Portfolio............. $ 31,305,000 3.36%
Government Income Portfolio............ 1,692,000 0.18
Zero Coupon Bond 2000 Portfolio........ 121,000 0.01
Zero Coupon Bond 2005 Portfolio........ 66,000 0.01
Conservative Balanced Portfolio........ 109,421,000 11.73
Flexible Managed Portfolio............. 482,631,000 51.75
High Yield Bond Portfolio.............. 33,890,000 3.63
Stock Index Portfolio.................. 86,854,000 9.31
Equity Income Portfolio................ 58,712,000 6.30
Equity Portfolio....................... 60,667,000 6.50
Prudential Jennison Portfolio.......... 43,284,000 4.64
Small Capitalization Stock Portfolio... 22,592,000 2.42
Natural Resources Portfolio............ 1,475,000 0.16
------------- ----------
$ 932,710,000 100.00%
</TABLE>
As of such date, each repurchase agreement in the joint account and the
collateral therefor were as follows:
Bear, Stearns & Co., Inc., 4.75%, in the principal amount of $255,000,000,
repurchase price $255,134,583, due 1/4/99. The value of the collateral including
accrued interest was $260,454,041.
Credit Suisse First Boston Corp., 4.88%, in the principal amount of $50,000,000,
repurchase price $50,027,111, due 1/4/99. The value of the collateral including
accrued interest was $52,533,163.
CIBC Oppenheimer, 4.75%, in the principal amount of $255,000,000, repurchase
price $255,134,583, due . The value of the collateral including accrued interest
was $260,553,672.
SBC Warburg Dillon Reed Inc., 4.70%, in the principal amount of $255,000,000,
repurchase price $255,133,167, due 1/4/99. The value of the collateral including
accrued interest was $261,037,802.
Morgan (J.P.) Securities, Inc., 4.35%, in the principal amount of $117,710,000,
repurchase price $117,766,893, due 1/4/99. The value of the collateral including
accrued interest was $120,272,486.
C5
<PAGE>
NOTE 6: PORTFOLIO SECURITIES
The aggregate cost of purchases and the proceeds from the sales of securities
(excluding short-term issues) for the year ended December 31, 1998 were as
follows:
Cost of Purchases:
<TABLE>
<CAPTION>
ZERO ZERO
DIVERSIFIED GOVERNMENT COUPON COUPON CONSERVATIVE FLEXIBLE
BOND INCOME 2000 2005 BALANCED MANAGED
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Government Securities......... $1,084,548,820 $ 495,987,249 $ 6,556,420 $ 10,371,040 $2,907,392,972 $2,497,336,303
Non-Government Securities..... $1,014,377,393 0 0 0 $4,664,947,720 $4,533,514,880
<CAPTION>
HIGH
YIELD
BOND
-------------
<S> <C>
Government Securities......... 0
Non-Government Securities..... $ 678,466,256
</TABLE>
<TABLE>
<CAPTION>
SMALL
STOCK EQUITY PRUDENTIAL CAPITALIZATION
INDEX INCOME EQUITY JENNISON STOCK GLOBAL
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Government Securities......... 0 0 0 0 0 0
Non-Government Securities..... $ 506,725,666 $ 701,633,702 $1,642,979,141 $ 819,680,050 $ 146,819,579 $ 515,000,344
<CAPTION>
NATURAL
RESOURCES
-------------
<S> <C>
Government Securities......... 0
Non-Government Securities..... $ 37,720,353
</TABLE>
Proceeds from Sales:
<TABLE>
<CAPTION>
ZERO ZERO
DIVERSIFIED GOVERNMENT COUPON COUPON CONSERVATIVE FLEXIBLE
BOND INCOME 2000 2005 BALANCED MANAGED
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Government Securities......... $ 981,769,931 $ 452,147,570 $ 10,656,367 0 $2,956,094,381 $2,461,697,036
Non-Government Securities..... $ 800,302,342 0 0 0 $4,778,976,239 $5,139,626,859
<CAPTION>
HIGH
YIELD
BOND
-------------
<S> <C>
Government Securities......... 0
Non-Government Securities..... $ 413,571,009
</TABLE>
<TABLE>
<CAPTION>
SMALL
STOCK EQUITY PRUDENTIAL CAPITALIZATION
INDEX INCOME EQUITY JENNISON STOCK GLOBAL
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Government Securities......... 0 0 0 0 0 0
Non-Government Securities..... $ 98,694,085 $ 424,595,936 $1,341,760,073 $ 399,687,941 $ 78,305,913 $ 488,859,228
<CAPTION>
NATURAL
RESOURCES
-------------
<S> <C>
Government Securities......... 0
Non-Government Securities..... $ 93,954,998
</TABLE>
Transactions in options written during the year ended December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
NATURAL RESOURCES PORTFOLIO
----------------------------
CONTRACTS PREMIUM
------------- -------------
<S> <C> <C>
Options outstanding at
December 31, 1997........... 0 $ 0
Options written............... 1,146 232,822
Options terminated in closing
purchase transactions....... (1,146 ) (232,822)
------ -------------
Options outstanding at
December 31, 1998........... 0 $ 0
------ -------------
------ -------------
</TABLE>
The federal income tax basis and unrealized appreciation/depreciation of the
Series Fund's investments as of December 31, 1998 were as follows:
<TABLE>
<CAPTION>
ZERO ZERO
DIVERSIFIED GOVERNMENT COUPON COUPON CONSERVATIVE FLEXIBLE
BOND INCOME 2000 2005 BALANCED MANAGED
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gross Unrealized
Appreciation................ $ 29,099,718 $ 19,061,880 $ 1,927,870 $ 5,513,610 $ 429,047,409 $ 555,358,703
Gross Unrealized
Depreciation................ 16,654,189 472,714 -- -- 164,278,673 320,658,740
Total Net Unrealized.......... 12,445,529 18,589,166 1,927,870 5,513,610 264,768,736 234,699,963
Tax Basis..................... 1,095,335,557 418,498,213 38,323,550 40,070,501 4,497,706,049 5,151,850,046
<CAPTION>
HIGH
YIELD
BOND
-------------
<S> <C>
Gross Unrealized
Appreciation................ $ 14,026,170
Gross Unrealized
Depreciation................ 93,507,623
Total Net Unrealized.......... (79,481,453)
Tax Basis..................... 854,184,337
</TABLE>
<TABLE>
<CAPTION>
SMALL
STOCK EQUITY PRUDENTIAL CAPITALIZATION
INDEX INCOME EQUITY JENNISON STOCK GLOBAL
--------------- ------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gross Unrealized
Appreciation................ $ 1,665,560,555 $ 416,426,863 $ 1,763,010,854 $ 327,887,751 $ 63,376,056 $ 239,116,983
Gross Unrealized
Depreciation................ 40,647,788 175,859,614 280,291,578 10,960,715 50,650,473 12,753,049
Total Net Unrealized.......... 1,624,912,767 240,567,249 1,482,719,276 316,927,036 12,725,583 226,363,934
Tax Basis..................... 1,919,601,401 1,945,300,102 4,767,976,521 887,450,487 346,641,824 604,659,557
<CAPTION>
NATURAL
RESOURCES
-------------
<S> <C>
Gross Unrealized
Appreciation................ $ 32,816,849
Gross Unrealized
Depreciation................ 102,159,768
Total Net Unrealized.......... (69,342,919)
Tax Basis..................... 306,428,928
</TABLE>
For federal income tax purposes, the following Portfolios had post October
losses deferred and capital loss carryforwards as of December 31, 1998.
Accordingly no capital gain distributions are expected to be paid to
shareholders until net gains have been realized in excess of such amounts:
<TABLE>
<CAPTION>
POST OCTOBER POST OCTOBER CAPITAL LOSS
CURRENCY CAPITAL CARRYFORWARDS CAPITAL LOSS
LOSSES LOSSES UTILIZED IN CARRYFORWARDS EXPIRATION
DEFERRED DEFERRED 1998 AVAILABLE YEAR
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Government Income Portfolio... -- -- $ 7,210,024 $ 57,521 2003
High Yield Bond............... -- $ 5,542,044 3,548,806 2,841,673 2003
Natural Resources Portfolio... $ 4,530 2,497,324 -- 4,117,123 2006
</TABLE>
C6
<PAGE>
FINANCIAL HIGHLIGHTS
<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>
<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.
SEE NOTES TO FINANCIAL STATEMENTS.
D1
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
GOVERNMENT INCOME
------------------------------------------------
YEAR ENDED
DECEMBER 31,
------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 11.52 $ 11.22 $ 11.72 $ 10.46 $ 11.78
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. 0.67 0.75 0.75 0.74 0.70
Net realized and unrealized gains
(losses) on investments.............. 0.36 0.30 (0.51) 1.28 (1.31)
-------- -------- -------- -------- --------
Total from investment operations... 1.03 1.05 0.24 2.02 (0.61)
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.68) (0.75) (0.74) (0.76) (0.71)
Dividends in excess of net investment
income............................... --(c) -- -- -- --
-------- -------- -------- -------- --------
Total distributions................ (0.68) (0.75) (0.74) (0.76) (0.71)
-------- -------- -------- -------- --------
Net Asset Value, end of year........... $ 11.87 $ 11.52 $ 11.22 $ 11.72 $ 10.46
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(b)............ 9.09% 9.67% 2.22% 19.48% (5.16)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $443.2 $429.6 $482.0 $501.8 $487.6
Ratios to average net assets:
Expenses............................. 0.43% 0.44% 0.46% 0.45% 0.45%
Net investment income................ 5.71% 6.40% 6.38% 6.55% 6.30%
Portfolio turnover rate................ 109% 88% 95% 195% 34%
</TABLE>
<TABLE>
<CAPTION>
ZERO COUPON BOND 2000
------------------------------------------------
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..... $ 12.61 $ 12.92 $ 13.27 $ 11.86 $ 13.72
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. 0.63 0.67 0.55 0.59 0.92
Net realized and unrealized gains
(losses) on investments.............. 0.31 0.22 (0.36) 1.95 (1.91)
-------- -------- -------- -------- --------
Total from investment operations... 0.94 0.89 0.19 2.54 (0.99)
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.64) (0.67) (0.54) (0.60) (0.85)
Distributions from net realized
gains................................ (0.17) (0.53) -- (0.53) (0.02)
-------- -------- -------- -------- --------
Total distributions................ (0.81) (1.20) (0.54) (1.13) (0.87)
-------- -------- -------- -------- --------
Net Asset Value, end of year........... $ 12.74 $ 12.61 $ 12.92 $ 13.27 $ 11.86
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(b)............ 7.57% 7.17% 1.53% 21.56% (7.18)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $40.2 $41.3 $44.7 $25.3 $20.6
Ratios to average net assets:
Expenses............................. 0.62% 0.66% 0.52% 0.48% 0.51%
Net investment income................ 4.85% 4.78% 4.88% 4.53% 6.69%
Portfolio turnover rate................ 16% 32% 13% 71% 9%
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
(c) Less than $.005 per share.
SEE NOTES TO FINANCIAL STATEMENTS.
D2
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
ZERO COUPON BOND 2005
-------------------------------------------------
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........................ $ 12.60 $ 12.25 $ 13.19 $ 10.74 $ 12.68
------- ------- -------- ------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income......... 0.66 0.68 0.66 0.66 0.75
Net realized and unrealized
gains (losses) on
investments................. 0.87 0.66 (0.82) 2.73 (1.97)
------- ------- -------- ------- --------
Total from investment
operations.............. 1.53 1.34 (0.16) 3.39 (1.22)
------- ------- -------- ------- --------
LESS DISTRIBUTIONS:
Dividends from net investment
income...................... (0.67) (0.71) (0.64) (0.65) (0.72)
Distributions from net
realized gains.............. (0.02) (0.28) (0.14) (0.29) --
------- ------- -------- ------- --------
Total distributions....... (0.69) (0.99) (0.78) (0.94) (0.72)
------- ------- -------- ------- --------
Net Asset Value, end of
year........................ $ 13.44 $ 12.60 $ 12.25 $ 13.19 $ 10.74
------- ------- -------- ------- --------
------- ------- -------- ------- --------
TOTAL INVESTMENT RETURN:(b)... 12.35% 11.18% (1.01)% 31.85% (9.61)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)................... $45.5 $30.8 $25.8 $23.6 $16.5
Ratios to average net assets:
Expenses.................... 0.61% 0.74% 0.53% 0.49% 0.60%
Net investment income....... 5.35% 5.71% 5.42% 5.32% 6.53%
Portfolio turnover rate....... -- 35% 10% 69% %6
</TABLE>
<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.
SEE NOTES TO FINANCIAL STATEMENTS.
D3
<PAGE>
FINANCIAL HIGHLIGHTS
<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>
<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.
SEE NOTES TO FINANCIAL STATEMENTS.
D4
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
STOCK INDEX
----------------------------------------------------
YEAR ENDED
DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 30.22 $ 23.74 $ 19.96 $ 14.96 $ 15.20
--------- --------- --------- --------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. 0.42 0.43 0.40 0.40 0.38
Net realized and unrealized gains
(losses) on investments.............. 8.11 7.34 4.06 5.13 (0.23)
--------- --------- --------- --------- --------
Total from investment operations... 8.53 7.77 4.46 5.53 0.15
--------- --------- --------- --------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.42) (0.42) (0.40) (0.38) (0.37)
Distributions from net realized
gains................................ (0.59) (0.87) (0.28) (0.15) (0.02)
--------- --------- --------- --------- --------
Total distributions................ (1.01) (1.29) (0.68) (0.53) (0.39)
--------- --------- --------- --------- --------
Net Asset Value, end of year........... $ 37.74 $ 30.22 $ 23.74 $ 19.96 $ 14.96
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
TOTAL INVESTMENT RETURN:(b)............ 28.42% 32.83% 22.57% 37.06% 1.01%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $3,548.1 $2,448.2 $1,581.4 $1,031.3 $664.5
Ratios to average net assets:
Expenses............................. 0.37% 0.37% 0.40% 0.38% 0.42%
Net investment income................ 1.25% 1.55% 1.95% 2.27% 2.50%
Portfolio turnover rate................ 3% 5% 1% 1% 2%
</TABLE>
<TABLE>
<CAPTION>
EQUITY 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 year reported and includes
reinvestment of dividends and distributions.
SEE NOTES TO FINANCIAL STATEMENTS.
D5
<PAGE>
FINANCIAL HIGHLIGHTS
<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>
<TABLE>
<CAPTION>
PRUDENTIAL JENNISON
-----------------------------------------------------------
YEAR ENDED APRIL 25,
DECEMBER 31, 1995(d)(a)
---------------------------------------- TO
1998 1997 1996 DECEMBER 31, 1995
------------- ----------- ----------- -----------------
<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.
SEE NOTES TO FINANCIAL STATEMENTS.
D6
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SMALL CAPITALIZATION STOCK
-----------------------------------------
APRIL 25,
1995(d)
YEAR ENDED TO
DECEMBER 31, DECEMBER
---------------------------- 31,
1998 1997 1996 1995(a)
-------- ------- ------- ----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of period... $ 15.93 $ 13.79 $ 11.83 $10.00
-------- ------- ------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. 0.09 0.10 0.09 0.08
Net realized and unrealized gains
(losses) on investments.............. (0.25) 3.32 2.23 1.91
-------- ------- ------- ----------
Total from investment operations... (0.16) 3.42 2.32 1.99
-------- ------- ------- ----------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.09) (0.10) (0.09) (0.04)
Distributions from net realized
gains................................ (0.97) (1.18) (0.27) (0.12)
-------- ------- ------- ----------
Total distributions................ (1.06) (1.28) (0.36) (0.16)
-------- ------- ------- ----------
Net Asset Value, end of period......... $ 14.71 $ 15.93 $ 13.79 $11.83
-------- ------- ------- ----------
-------- ------- ------- ----------
TOTAL INVESTMENT RETURN:(b)............ (0.76)% 25.17% 19.77% 19.74%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
millions)............................ $360.4 $290.3 $147.9 $47.5
Ratios to average net assets:
Expenses............................. 0.47% 0.50% 0.56% 0.60%(c)
Net investment income................ 0.57% 0.69% 0.87% 0.68%(c)
Portfolio turnover rate................ 26% 31% 13% 32%
</TABLE>
<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.
(c) Annualized.
(d) Commencement of operations.
SEE NOTES TO FINANCIAL STATEMENTS.
D7
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
NATURAL RESOURCES
--------------------------------------------------
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........................ $ 15.24 $ 19.77 $ 17.27 $ 14.44 $ 15.56
-------- -------- ------- ------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income......... 0.09 0.12 0.15 0.21 0.18
Net realized and unrealized
gains (losses) on
investments................. (2.48) (2.43) 5.11 3.66 (0.85)
-------- -------- ------- ------- --------
Total from investment
operations.............. (2.39) (2.31) 5.26 3.87 (0.67)
-------- -------- ------- ------- --------
LESS DISTRIBUTIONS:
Dividends from net investment
income...................... (0.11) (0.10) (0.14) (0.21) (0.15)
Distributions from net
realized gains.............. (0.75) (2.12) (2.62) (0.83) (0.30)
Tax return of capital
distributions............... (0.01) -- -- -- --
-------- -------- ------- ------- --------
Total distributions....... (0.87) (2.22) (2.76) (1.04) (0.45)
-------- -------- ------- ------- --------
Net Asset Value, end of
year........................ $ 11.98 $ 15.24 $ 19.77 $ 17.27 $ 14.44
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
TOTAL INVESTMENT RETURN:(b)... (17.10)% (11.59)% 30.88% 26.92% (4.30)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)................... $236.9 $358.0 $438.4 $293.2 $227.3
Ratios to average net assets:
Expenses.................... 0.49% 0.54% 0.52% 0.50% 0.61%
Net investment income....... 0.63% 0.60% 0.75% 1.25% 1.09%
Portfolio turnover rate....... 12% 32% 36% 46% 18%
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
SEE NOTES TO FINANCIAL STATEMENTS.
D8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF THE PRUDENTIAL SERIES FUND, INC.:
In our opinion, the accompanying statements of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of each of the Money Market,
Diversified Bond, Government Income, Zero Coupon Bond 2000, Zero Coupon Bond
2005, Conservative Balanced, Flexible Managed, High Yield Bond, Stock Index,
Equity Income, Equity, Prudential Jennison, Small Capitalization Stock, Global
and Natural Resources Portfolios (constituting The Prudential Series Fund, Inc.,
hereafter referred to as the "Portfolios") at December 31, 1998, the results of
each of their operations for the year then ended, the changes in each of their
net assets for each of the two years in the period then ended and the financial
highlights for each of the three years in the period then ended, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Portfolios' management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above. The accompanying financial highlights of the
Prudential Jennison Portfolio and Small Capitalization Stock Portfolio for the
period April 25, 1995 through December 31, 1995 and the financial highlights for
each of the two years in the period ended December 31, 1995 for each of the
other thirteen portfolios were audited by other independent accountants, whose
opinion dated February 15, 1996 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
February 12, 1999
TAX INFORMATION (UNAUDITED)
Although we understand that the vast majority, if not all, of the
shareholders/contract holders of the Series Fund currently maintain a tax
deferred status, we are nevertheless required by the Internal Revenue Code to
advise you within 60 days of the Series Fund's fiscal year end (December 31,
1998) as to the federal tax status of dividends paid by the Series Fund during
such fiscal year. Accordingly, we are advising you that in 1998, the Series Fund
paid dividends as follows:
<TABLE>
<CAPTION>
ORDINARY DIVIDENDS
- ------------------------------------------------------------------------------------------------
SHORT-TERM LONG-TERM TAX RETURN TOTAL
INCOME CAPITAL GAINS CAPITAL GAINS OF CAPITAL DIVIDENDS
----------- --------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Money Market Porfolio $ 0.460 -- -- -- $ 0.460
Diversified Bond Portfolio 0.692 $ 0.041 -- -- 0.733
Government Income Portfolio 0.679 -- -- -- 0.679
Zero Coupon Bond 2000 Portfolio 0.636 0.014 $ 0.160 -- 0.810
Zero Coupon Bond 2005 Portfolio 0.666 -- 0.016 -- 0.682
Conservative Balanced Portfolio 0.664 0.898 0.044 -- 1.606
Flexible Managed Portfolio 0.586 0.949 0.901 -- 2.436
High Yield Bond Portfolio 0.761 -- -- -- 0.761
Stock Index Portfolio 0.420 0.029 0.559 -- 1.008
Equity Income Portfolio 0.586 0.125 1.173 -- 1.884
Equity Portfolio 0.606 0.094 3.544 -- 4.244
Prudential Jennison Portfolio 0.044 -- 0.380 -- 0.424
Small Capitalization Stock Portfolio 0.091 0.199 0.771 -- 1.061
Global Portfolio 0.277 -- 0.928 -- 1.205
Natural Resources Portfolio 0.105 0.181 0.571 0.010 0.867
</TABLE>
E1
<PAGE>
BOARD OF
DIRECTORS THE PRUDENTIAL SERIES FUND, INC.
<TABLE>
<S> <C> <C>
MENDEL A. MELZER, CFA W. SCOTT McDONALD, JR., Ph.D. E. MICHAEL CAULFIELD
CHAIRMAN, VICE PRESIDENT, EXECUTIVE VICE PRESIDENT,
THE PRUDENTIAL SERIES FUND, INC. KALUDIS CONSULTING GROUP PRUDENTIAL FINANCIAL MANAGEMENT
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
</TABLE>
<TABLE>
<S> <C>
SAUL K. FENSTER, Ph.D. JOSEPH WEBER, Ph.D.
PRESIDENT, VICE PRESIDENT,
NEW JERSEY INSTITUTE OF TECHNOLOGY INTERCLASS (INTERNATIONAL CORPORATE LEARNING)
</TABLE>
<PAGE>
APPENDIX
DEBT RATINGS
Moody's Investors Services, Inc. describes its categories of corporate debt
securities and its "Prime-1" and "Prime-2" commercial paper as follows:
BONDS:
Aaa -- Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated "Baa" are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated "Ca" represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated "C" are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
COMMERCIAL PAPER:
Issuers rated Prime-1 (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics:
- --Leading market positions in well-established industries.
- --High rates of return of funds employed.
- --Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
- --Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- --Well established access to a range of financial markets and assured sources of
alternate liquidity.
F1
<PAGE>
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term debt obligations. This will normally be evidenced by
many of the characteristics cited above but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Standard & Poor's Ratings Services describes its grades of corporate debt
securities and its "A" commercial paper as follows:
BONDS:
AAA -- Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA -- Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A -- Debt rated "A" has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB -- Debt rated "BBB" is regarded as having adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB-B-CCC-CC-C
Debt rated "BB", "B", "CCC", "CC", and "C" is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
COMMERCIAL PAPER:
Commercial paper rated A by Standard & Poor's Ratings Services has the following
characteristics: Liquidity ratios are better than the industry average. Long
term senior debt rating is "A" or better. In some cases BBB credits may be
acceptable. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowances
made for unusual circumstances. Typically, the issuer's industry is well
established, the issuer has a strong position within its industry and the
reliability and quality of management is unquestioned. Issuers rated A are
further referred to by use of numbers 1, 2 and 3 to denote relative strength
within this classification.
F2
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
PRUCO LIFE INSURANCE COMPANY
PRUVIDER VARIABLE APPRECIABLE ACCOUNT
PRUVIDER(SM)
VARIABLE
APPRECIABLE
LIFE(R)___________________
INSURANCE CONTRACTS
PROVIDING FOR THE INVESTMENT
OF ASSETS IN THE
INVESTMENT PORTFOLIOS OF
THE PRUDENTIAL SERIES
FUND, INC.
This statement of additional information describes a variable life insurance
contract (the "Contract") offered by Pruco Life Insurance Company ("Pruco Life",
"us", or "we") under the name PRUVIDER(SM) Variable APPRECIABLE LIFE(R)
Insurance. Pruco Life, a stock life insurance company, is a wholly-owned
subsidiary of The Prudential Insurance Company of America ("Prudential"). The
death benefit varies daily with investment experience but will never be less
than the "face amount" of insurance specified in the Contract. There is no
guaranteed minimum cash surrender value.
The assets under these contracts can be invested in one or both of the two
available subaccounts of the Pruco Life PRUVIDER Variable Appreciable Account.
The assets invested in each subaccount are in turn invested in a corresponding
portfolio of The Prudential Series Fund, Inc., a diversified, open-end
management investment company (commonly known as a mutual fund) that is intended
to provide a range of investment alternatives to variable contract owners. Each
portfolio is, for investment purposes, in effect a separate fund. The two
available Series Fund portfolios are the CONSERVATIVE BALANCED PORTFOLIO and the
FLEXIBLE MANAGED PORTFOLIO. A separate class of capital stock is issued for each
portfolio. Shares of the Series Fund are currently sold only to separate
accounts of Pruco Life and certain other insurers to fund the benefits under
variable life insurance and variable annuity contracts issued by those
companies.
The PRUVIDER(SM) Variable APPRECIABLE LIFE(R) Insurance Contract owner may also
choose to invest in a FIXED-RATE OPTION which is described in the prospectus of
the Pruco Life PRUVIDER Variable Appreciable Account.
------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ
WITH THE PROSPECTUS OF THE PRUCO LIFE PRUVIDER VARIABLE APPRECIABLE ACCOUNT
DATED MAY 1, 1999. THE PROSPECTUS IS AVAILABLE WITHOUT CHARGE UPON WRITTEN
REQUEST TO THE PRUCO LIFE INSURANCE COMPANY, 213 WASHINGTON STREET, NEWARK, NEW
JERSEY 07102-2992 OR BY TELEPHONING (800) 437-4016.
------------------------------------
PRUCO LIFE INSURANCE COMPANY
213 Washington Street
Newark, New Jersey 07102-2992
Telephone: (800) 778-2255
PRUVIDER is a service mark of Prudential.
APPRECIABLE LIFE is a registered mark of Prudential.
SVAL-1SAI Ed 5-99
Catalog No. 64M086G
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
CONTENTS
PAGE
MORE DETAILED INFORMATION ABOUT THE CONTRACT...................................1
SALES LOAD UPON SURRENDER..................................................1
REDUCTION OF CHARGES FOR CONCURRENT SALES TO SEVERAL INDIVIDUALS...........1
PAYING PREMIUMS BY PAYROLL DEDUCTION.......................................1
UNISEX PREMIUMS AND BENEFITS...............................................1
HOW THE DEATH BENEFIT WILL VARY............................................2
WITHDRAWAL OF EXCESS CASH SURRENDER VALUE..................................2
TAX TREATMENT OF CONTRACT BENEFITS.........................................3
TREATMENT AS LIFE INSURANCE............................................3
PRE-DEATH DISTRIBUTIONS................................................3
WITHHOLDING............................................................4
OTHER TAX CONSIDERATIONS...............................................4
BUSINESS-OWNED LIFE INSURANCE..........................................4
SALE OF THE CONTRACT AND SALES COMMISSIONS.................................4
RIDERS.....................................................................5
OTHER STANDARD CONTRACT PROVISIONS.........................................5
ASSIGNMENT.............................................................5
BENEFICIARY............................................................5
INCONTESTABILITY.......................................................5
MISSTATEMENT OF AGE OR SEX.............................................5
SETTLEMENT OPTIONS.....................................................5
SUICIDE EXCLUSION......................................................5
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS...........................6
GENERAL....................................................................6
CONVERTIBLE SECURITIES.....................................................6
WARRANTS...................................................................6
FOREIGN SECURITIES.........................................................6
OPTIONS ON STOCK AND DEBT SECURITIES.......................................7
OPTIONS ON STOCK.......................................................7
OPTIONS ON DEBT SECURITIES.............................................8
RISKS OF TRANSACTIONS IN OPTIONS ON EQUITY AND DEBT SECURITIES.........8
OPTIONS ON STOCK INDEXES...................................................9
STOCK INDEX OPTIONS....................................................9
RISKS OF TRANSACTIONS IN OPTIONS ON STOCK INDEXES......................9
OPTIONS ON FOREIGN CURRENCIES.............................................10
OPTIONS ON FOREIGN CURRENCY...........................................10
RISKS OF TRANSACTIONS IN OPTIONS ON FOREIGN CURRENCY..................11
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS........................11
FUTURES AND OPTIONS ON FUTURES........................................11
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS............................12
RISKS OF TRANSACTIONS IN OPTIONS ON FUTURES CONTRACTS.................12
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS...............................12
INTEREST RATE SWAPS.......................................................13
LOAN PARTICIPATIONS.......................................................14
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS............................14
DESCRIPTION OF REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS.........14
RISKS OF REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS...............14
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES...............................14
SHORT SALES...............................................................14
LOANS OF PORTFOLIO SECURITIES.............................................15
DESCRIPTION OF SECURITIES LOANS.......................................15
RISKS ASSOCIATED WITH LENDING SECURITIES..............................15
ILLIQUID SECURITIES.......................................................15
INVESTMENT RESTRICTIONS.......................................................16
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INVESTMENT MANAGEMENT AND DISTRIBUTION ARRANGEMENTS...........................18
INVESTMENT MANAGEMENT ARRANGEMENTS........................................18
DISTRIBUTION ARRANGEMENTS.................................................19
OTHER INFORMATION CONCERNING THE FUND.........................................19
INCORPORATION AND AUTHORIZED STOCK........................................19
PORTFOLIO TRANSACTIONS AND BROKERAGE......................................20
TAXATION OF THE FUND......................................................21
CUSTODIANS................................................................22
EXPERTS...................................................................22
LICENSES..................................................................22
DEBT RATINGS..................................................................23
DIRECTORS AND OFFICERS OF PRUCO LIFE AND MANAGEMENT OF THE FUND...............25
FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC.......................A1
THE PRUDENTIAL SERIES FUND, INC. SCHEDULE OF INVESTMENTS......................B1
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MORE DETAILED INFORMATION ABOUT THE CONTRACT
SALES LOAD UPON SURRENDER
Pruco Life assesses a contingent deferred sales load if the Contract lapses or
is surrendered during the first 10 Contract years. No such charge is applicable
to the death benefit, no matter when that may become payable. Subject to the
additional limitations described below, for Contracts that lapse or are
surrendered during the first five Contract years, the charge will be equal to
50% of the first year's primary annual premium. In the next five Contract years,
we reduce that percentage uniformly on a daily basis until it reaches zero on
the 10th Contract anniversary. Thus, for Contracts surrendered at the end of the
sixth year, the maximum deferred sales charge will be 40% of the first year's
primary annual premium, for Contracts surrendered at the end of year seven, the
maximum deferred sales charge will be 30% of the first year's primary annual
premium, and so forth. We are currently allowing partial surrenders of the
Contract, but we reserve the right to cancel this administrative practice. If
the Contract is partially surrendered during the first 10 years, we deduct a
proportionate amount of the charge from the Contract Fund. Surrender of all or
part of the Contract may have tax consequences. See TAX TREATMENT OF CONTRACT
BENEFITS, page 3.
The contingent deferred sales load is also further limited at older issue ages
(approximately above age 61) in order to comply with certain requirements of
state law. Specifically, the contingent deferred sales load for such insureds is
no more than $32.50 per $1,000 of face amount.
The sales load is subject to a further important limitation that may,
particularly for Contracts that lapse or are surrendered within the first five
or six years, result in a lower contingent deferred sales load than that
described above. (This limitation might also, under unusual circumstances, apply
to reduce the monthly sales load deductions described in the prospectus in item
(a) under MONTHLY DEDUCTIONS FROM CONTRACT FUND.)
The limitation is based on a Guideline Annual Premium ("GAP") that is associated
with every Contract. The GAP is a defined amount determined actuarially in
accordance with a regulation of the Securities and Exchange Commission ("SEC").
Pruco Life will charge a maximum aggregate sales load (that is, the sum of the
monthly sales load deduction and the contingent deferred sales charge) that will
not be more than 30% of the premiums actually paid until those premiums total
one GAP plus no more than 9% of the next premiums paid until total premiums are
equal to five GAPS, plus no more than 6% of all subsequent premiums. If the
sales charges described above would at any time exceed this maximum amount then,
to the extent of any excess, we will not make the charge.
REDUCTION OF CHARGES FOR CONCURRENT SALES TO SEVERAL INDIVIDUALS
Pruco Life may reduce the sales charges and/or other charges on individual
Contracts sold to members of a class of associated individuals, or to a trustee,
employer or other entity representing such a class, where it is expected that
such multiple sales will result in savings of sales or administrative expenses.
Pruco Life determines both the eligibility for such reduced charges, as well as
the amount of such reductions, by considering the following factors: (1) the
number of individuals; (2) the total amount of premium payments expected to be
received from these Contracts; (3) the nature of the association between these
individuals, and the expected persistency of the individual Contracts; (4) the
purpose for which the individual Contracts are purchased and whether that
purpose makes it likely that expenses will be reduced; and (5) any other
circumstances which Pruco Life believes to be relevant in determining whether
reduced sales or administrative expenses may be expected. Some of the reductions
in charges for these sales may be contractually guaranteed; other reductions may
be withdrawn or modified by Pruco Life on a uniform basis. Pruco Life's
reductions in charges for these sales will not be unfairly discriminatory to the
interests of any individual Contract owners.
PAYING PREMIUMS BY PAYROLL DEDUCTION
In addition to the annual, semi-annual, quarterly and monthly premium payment
modes, a payroll budget method of paying premiums may also be available under
certain Contracts. The employer generally deducts the necessary amounts from
employee paychecks and sends premium payments to Pruco Life monthly. Any Pruco
Life representative authorized to sell this Contract can provide further details
concerning the payroll budget method of paying premiums.
UNISEX PREMIUMS AND BENEFITS
The Contract generally uses mortality tables that distinguish between males and
females. Thus, premiums and benefits differ under Contracts issued on males and
females of the same age. However, in those states that have adopted regulations
prohibiting sex-distinct insurance rates, premiums and cost of insurance charges
will be based on a blended unisex rate, whether the insured is male or female.
In addition, employers and employee organizations
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considering purchase of a Contract should consult their legal advisers to
determine whether purchase of a Contract based on sex-distinct actuarial tables
is consistent with Title VII of the Civil Rights Act of 1964 or other applicable
law. Pruco Life may offer the Contract with unisex mortality rates to employers
and employee organizations.
HOW THE DEATH BENEFIT WILL VARY
The death benefit will vary with investment experience. The death benefit will
be equal to the face amount of insurance plus the amount, if any, by which the
Contract Fund value exceeds the applicable "Tabular Contract Fund Value" for the
Contract (subject to an exception described below under which the death benefit
is higher). Each Contract contains a table that sets forth the Tabular Contract
Fund Value as of the end of each of the first 20 years of the Contract. Tabular
Contract Fund Values between Contract anniversaries are determined by
interpolation. The "Tabular Contract Fund Value" for each Contract year is an
amount that is slightly less than the Contract Fund value that would result as
of the end of such year if: (1) you paid only Scheduled Premiums; (2) you paid
the Scheduled Premiums when due; (3) your selected investment options earned a
net return at a uniform rate of 4% per year; (4) we deducted full mortality
charges based upon the 1980 CSO Table; (5) we deducted the maximum sales load
and expense charges; and (6) there was no Contract debt.
The death benefit will equal the face amount if the Contract Fund equals the
Tabular Contract Fund Value. If, due to investment results greater than a net
return of 4%, or to payment of greater than Scheduled Premiums, or to smaller
than maximum charges, the Contract Fund value is a given amount greater than the
Tabular Contract Fund Value, the death benefit will be the face amount plus that
excess amount. If, due to investment results less favorable than a net return of
4%, the Contract Fund value is less than the Tabular Contract Fund Value, the
death benefit will not fall below the initial face amount stated in the
Contract. Again, the death benefit will reflect a deduction for the amount of
any Contract debt. See Contract Loans in the prospectus. Any unfavorable
investment experience must first be offset by favorable performance or
additional payments that bring the Contract Fund up to the Tabular level before
favorable investment results or additional payments will increase the death
benefit.
The Contract Fund could grow to the point where it is necessary to increase the
death benefit by a greater amount in order to ensure that the Contract will
satisfy the Internal Revenue Code's definition of life insurance. Thus, the
death benefit will always be the greatest of (1) the face amount plus the
Contract Fund minus the Tabular Contract Fund Value; (2) the guaranteed minimum
death benefit; and (3) the Contract Fund times the attained age factor that
applies.
WITHDRAWAL OF EXCESS CASH SURRENDER VALUE
Under certain circumstances, you may withdraw a portion of the Contract's cash
surrender value without surrendering the Contract. The withdrawal amount is
limited by the requirement that the Contract Fund after withdrawal must not be
less than the Tabular Contract Fund Value. (A Table of Tabular Contract Fund
Values is included in the Contract; the Values increase with each year the
Contract remains inforce.) But because the Contract Fund may be made up in part
by an outstanding Contract loan, there is a further limitation that the amount
withdrawn may not be larger than an amount sufficient to reduce the cash
surrender value to zero. The amount withdrawn must be at least $200. You may
make no more than four such withdrawals in each Contract year, and there is an
administrative processing fee for each withdrawal equal to the lesser of $15 and
2% of the amount withdrawn. An amount withdrawn may not be repaid except as a
scheduled or unscheduled premium subject to the applicable charges. Upon
request, Pruco Life will tell you how much you may withdraw. Withdrawal of part
of the cash surrender value may have tax consequences. See TAX TREATMENT OF
CONTRACT BENEFITS, page 3. A temporary need for funds may also be met by making
a loan and you should consult your Pruco Life representative about how best to
meet your needs.
When a withdrawal is made, the cash surrender value and Contract Fund value are
reduced by the amount of the withdrawal, and the death benefit is reduced
accordingly. Neither the face amount of insurance nor the amount of Scheduled
Premiums will be changed due to a withdrawal of excess cash surrender value. No
surrender charges will be assessed for a withdrawal.
Withdrawal of part of the cash surrender value increases the risk that the
Contract Fund may be insufficient to provide Contract benefits. If such a
withdrawal is followed by unfavorable investment experience, the Contract may
lapse even if Scheduled Premiums continue to be paid when due. This is because,
for purposes of determining whether a lapse has occurred, Pruco Life treats
withdrawals as a return of premium.
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TAX TREATMENT OF CONTRACT BENEFITS
This summary provides general information on the federal income tax treatment of
the Contract. It is not a complete statement of what the federal income taxes
will be in all circumstances. It is based on current law and interpretations,
which may change. It does not cover state taxes or other taxes. It is not
intended as tax advice. You should consult your own qualified tax adviser for
complete information and advice.
TREATMENT AS LIFE INSURANCE
The Contract must meet certain requirements to qualify as life insurance for tax
purposes. These requirements include certain definitional tests and rules for
diversification of the Contract's investments.
We believe we have taken adequate steps to ensure that the Contract qualifies as
life insurance for tax purposes. Generally speaking, this means that:
o you will not be taxed on the growth of the funds in the Contract,
unless you receive a distribution from the Contract,
o the Contract's death benefit will be tax free to your beneficiary.
Although we believe that the Contract should qualify as life insurance for tax
purposes, there are some uncertainties, particularly because the Secretary of
Treasury has not yet issued permanent regulations that bear on this question.
Accordingly, we reserve the right to make changes -- which will be applied
uniformly to all Contract owners after advance written notice -- that we deem
necessary to ensure that the Contract will qualify as life insurance.
PRE-DEATH DISTRIBUTIONS
The tax treatment of any distribution you receive before the insured's death
depends on whether the Contract is classified as a Modified Endowment Contract.
CONTRACTS NOT CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS.
o If you surrender the Contract or allow it to lapse, you will be taxed
on the amount you receive in excess of the premiums you paid less the
untaxed portion of any prior withdrawals. For this purpose, you will
be treated as receiving any portion of the cash surrender value used
to repay Contract debt. The tax consequences of a surrender may differ
if you take the proceeds under an income payment settlement option.
o Generally, you will be taxed on a withdrawal to the extent the amount
you receive exceeds the premiums you paid for the Contract less the
untaxed portion of any prior withdrawals. However, under some limited
circumstances, in the first 15 Contract years, all or a portion of a
withdrawal may be taxed if the Contract Fund exceeds the total
premiums paid less the untaxed portions of any prior withdrawals, even
if total withdrawals do not exceed total premiums paid.
o Extra premiums for optional benefits and riders generally do not count
in computing the premiums paid for the Contract for the purposes of
determining whether a withdrawal is taxable.
o Loans you take against the Contract are ordinarily treated as debt and
are not considered distributions subject to tax.
MODIFIED ENDOWMENT CONTRACTS.
o The rules change if the Contract is classified as a Modified Endowment
Contract. The Contract could be classified as a Modified Endowment
Contract if premiums substantially in excess of Scheduled Premiums are
paid or a decrease in the face amount of insurance is made (or a rider
removed). The addition of a rider or an increase in the face amount of
insurance may also cause the Contract to be classified as a Modified
Endowment Contract even though the Contract owner pays only Scheduled
Premiums or even less than the Scheduled Premiums. You should first
consult a qualified tax adviser and your Pruco Life representative if
you are contemplating any of these steps.
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o If the Contract is classified as a Modified Endowment Contract, then
amounts you receive under the Contract before the insured's death,
including loans and withdrawals, are included in income to the extent
that the Contract Fund before surrender charges exceeds the premiums
paid for the Contract increased by the amount of any loans previously
included in income and reduced by any untaxed amounts previously
received other than the amount of any loans excludible from income. An
assignment of a Modified Endowment Contract is taxable in the same
way. These rules also apply to pre-death distributions, including
loans, made during the two-year period before the time that the
Contract became a Modified Endowment Contract.
o Any taxable income on pre-death distributions (including full
surrenders) is subject to a penalty of 10 percent unless the amount is
received on or after age 592, on account of your becoming disabled or
as a life annuity. It is presently unclear how the penalty tax
provisions apply to Contracts owned by businesses.
o All Modified Endowment Contracts issued by us to you during the same
calendar year are treated as a single Contract for purposes of
applying these rules.
WITHHOLDING
You must affirmatively elect that no taxes be withheld from a pre-death
distribution. Otherwise, the taxable portion of any amounts you receive will be
subject to withholding. You are not permitted to elect out of withholding if you
do not provide a social security number or other taxpayer identification number.
You may be subject to penalties under the estimated tax payment rules if your
withholding and estimated tax payments are insufficient to cover the tax due.
OTHER TAX CONSIDERATIONS
If you transfer or assign the Contract to someone else, there may be gift,
estate and/or income tax consequences. If you transfer the Contract to a person
two or more generations younger than you (or designate such a younger person as
a beneficiary), there may be Generation Skipping Transfer tax consequences.
Deductions for interest paid or accrued on Contract debt or on other loans that
are incurred or continued to purchase or carry the Contract may be denied. Your
individual situation or that of your beneficiary will determine the federal
estate taxes and the state and local estate, inheritance and other taxes due if
you or the insured dies.
BUSINESS-OWNED LIFE INSURANCE
If a business, rather than an individual, is the owner of the Contract, there
are some additional rules. Business Contract owners generally cannot deduct
premium payments. Business Contract owners generally cannot take tax deductions
for interest on Contract debt paid or accrued after October 13, 1995. An
exception permits the deduction of interest on policy loans on Contracts for up
to 20 key persons. The interest deduction for Contract debt on these loans is
limited to a prescribed interest rate and a maximum aggregate loan amount of
$50,000 per key insured person. The corporate alternative minimum tax also
applies to business-owned life insurance. This is an indirect tax on additions
to the Contract Fund or death benefits received under business-owned life
insurance policies.
SALE OF THE CONTRACT AND SALES COMMISSIONS
Pruco Securities Corporation ("Prusec"), an indirect wholly-owned subsidiary of
Prudential, acts as the principal underwriter of the Contract. Prusec, organized
in 1971 under New Jersey law, is registered as a broker and dealer under the
Securities Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. Prusec's principal business address is 751 Broad
Street, Newark, New Jersey 07102-3777. The Contract is sold by registered
representatives of Prusec who are also authorized by state insurance departments
to do so. The Contract may also be sold through other broker-dealers authorized
by Prusec and applicable law to do so. Registered representatives of such other
broker-dealers may be paid on a different basis than described below. Where the
insured is less than 60 years of age, the representative will generally receive
a commission of: (1) no more than 50% of the Scheduled Premiums for the first
year: (2) no more than 6% of the Scheduled Premiums for the second through 10th
years; and (3) no more than 2% of the Scheduled Premiums thereafter. For
insureds over 59 years of age, the commission will be lower. The representative
may be required to return all or part of the first year commission if the
Contract is not continued through the second year. Representatives with less
than three years of service may be paid on a different basis.
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Sales expenses in any year are not equal to the deduction for sales load in that
year. Pruco Life expects to recover its total sales expenses over the periods
the Contracts are in effect. To the extent that the sales charges are
insufficient to cover total sales expenses, the sales expenses will be recovered
from Pruco Life's surplus, which may include amounts derived from the mortality
and expense risk charge and the guaranteed minimum death benefit risk charge
described in the prospectus under DAILY DEDUCTION FROM THE CONTRACT FUND and
item (d) under MONTHLY DEDUCTIONS FROM CONTRACT FUND.
RIDERS
Contract owners may be able to obtain additional fixed benefits which may
increase the Scheduled Premium. If they do cause an increase in the Scheduled
Premium, they will be charged for by making monthly deductions from the Contract
Fund. These optional insurance benefits will be described in what is known as a
"rider" to the Contract. Charges for the riders will be deducted from the
Contract Fund on each Monthly date. One rider pays an additional amount if the
insured dies in an accident. Another waives certain premiums if the insured is
disabled within the meaning of the provision (or, in the case of a Contract
issued on an insured under the age of 15, if the applicant dies or becomes
disabled within the meaning of the provision). Others pay an additional amount
if the insured dies within a stated number of years after issue; similar
benefits may be available if the insured's spouse or child should die. The
amounts of these benefits are fully guaranteed at issue; they do not depend on
the performance of the Account, although they will no longer be available if the
Contract lapses. Certain restrictions may apply; they are clearly described in
the applicable rider.
Any Pruco Life representative authorized to sell the Contract can explain these
extra benefits further. Samples of the provisions are available from Pruco Life
upon written request.
OTHER STANDARD CONTRACT PROVISIONS
ASSIGNMENT
This Contract may not be assigned if the assignment would violate any federal,
state, or local law or regulation. Generally, the Contract may not be assigned
to an employee benefit plan or program without Pruco Life's consent. Pruco Life
assumes no responsibility for the validity or sufficiency of any assignment, and
it will not be obligated to comply with any assignment unless it has received a
copy at a Home Office.
BENEFICIARY
As the Contract owner, you designate and name your beneficiary in the
application. Thereafter, you may change the beneficiary, provided it is in
accordance with the terms of the Contract. Should the insured die with no
surviving beneficiary, the insured's estate will become the beneficiary.
INCONTESTABILITY
We will not contest the Contract after it has been inforce during the insured's
lifetime for two years from the issue date except when any change is made in the
Contract that requires Pruco Life's approval and would increase our liability.
We will not contest such change after it has been in effect for two years during
the lifetime of the insured.
MISSTATEMENT OF AGE OR SEX
If the insured's stated age or sex (except where unisex rates apply) or both are
incorrect in the Contract, Pruco Life will adjust the death benefits payable, as
required by law, to reflect the correct age and sex. Any death benefit will be
based on what the most recent charge for mortality would have provided at the
correct age and sex.
SETTLEMENT OPTIONS
The Contract grants to most owners, or to the beneficiary, a variety of optional
ways of receiving Contract proceeds, other than in a lump sum. Any Pruco Life
representative authorized to sell this Contract can explain these options upon
request.
SUICIDE EXCLUSION
Generally, if the insured, whether sane or insane, dies by suicide within two
years from the Contract Date, Pruco Life will pay no more under the Contract
than the sum of the premiums paid.
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INVESTMENT OBJECTIVES AND POLICIES OF THE
PORTFOLIOS
GENERAL
The Prudential Series Fund, Inc. (the "Fund") is a diversified, open-end
management investment company (commonly known as a "mutual fund") that is
intended to provide a range of investment alternatives through its seventeen
separate portfolios, each of which is for investment purposes, in effect a
separate fund. Two portfolios, the Conservative Balanced Portfolio and the
Flexible Managed Portfolio (the "Portfolios"), are available to PRUVIDER
Contract owners. The Fund Portfolios are managed by The Prudential Insurance
Company of America ("Prudential"). See INVESTMENT MANAGEMENT AND DISTRIBUTION
ARRANGEMENTS, page 18.
Each of the Portfolios seeks to achieve a different investment objective.
Accordingly, each Portfolio can be expected to have different investment results
and to be subject to different financial and market risks. Financial risk refers
to the ability of an issuer of a debt security to pay principal and interest and
to the earnings stability and overall financial soundness of an issuer of an
equity security. Market risk refers to the degree to which the price of a
security will react to changes in conditions in securities markets in general,
and with particular reference to debt securities, to changes in the overall
level of interest rates.
The investment objectives of the Fund's Portfolios that are available to
PRUVIDER Contract owners can be found under the Portfolio's RISK/RETURN SUMMARY
in the prospectus.
CONVERTIBLE SECURITIES
The Conservative Balanced and Flexible Managed Portfolios may invest in
convertible securities. A convertible security is a debt security - for example,
a bond or preferred stock - that may be converted into common stock of the same
or different issuer. The convertible security sets the price, quantity of shares
and time period in which it may be so converted. Convertible stock are senior to
a company's common stock but are usually subordinated to debt obligations of the
company. Convertible securities provide a steady stream of income which is
generally at a higher rate than the income on the issuer's common stock but
lower than the rate on the issuer's debt obligations. At the same time, they
offer - through their conversion mechanism - the chance to participate in the
capital appreciation of the underlying common stock. The price of a convertible
security tends to increase and decrease with the market value of the underlying
common stock.
WARRANTS
The Conservative Balanced and Flexible Managed Portfolios may invest in warrants
on common stocks. A warrant is a right to buy a number of shares of stock at a
specified price during a specified period of time. The risk associated with
warrants is that the market price of the underlying stock will stay below the
exercise price of the warrant during the exercise period. If this occurs, the
warrant becomes worthless and the investor loses the money he or she paid for
the warrant.
FOREIGN SECURITIES
The bond portions of the Conservative Balanced and Flexible Managed Portfolios
may each invest up to 20% of their assets in U.S. currency denominated debt
securities issued outside the U.S. by foreign or U.S. issuers. The Portfolios
may invest up to 30% of their total assets in debt and equity securities
denominated in a foreign currency and issued by foreign or U.S. issuers.
American Depository Receipts ("ADRs") are not considered "foreign securities"
for purposes of the percentage limitations set forth in the preceding paragraph.
ADRs are U.S. dollar-denominated certificates issued by a U.S. bank or trust
company. ADRs represent the right to receive securities of a foreign issuer
deposited in a domestic bank or foreign branch of a U.S. bank and traded on a
U.S. exchange or in the over-the-counter (OTC) market. Investment in ADRs has
certain advantages over direct investments in the underlying foreign securities
because they are easily transferable, have readily available market quotations,
and the foreign issuers are usually subject to comparable auditing, accounting
and financial reporting standards as U.S. issuers.
Foreign securities (including ADRs) involve certain risks, which should be
considered carefully by an investor. These risks include political or economic
instability in the country of an issuer, the difficulty of predicting
international trade patterns, the possibility of imposition of exchange controls
and, in the case of securities not denominated in U.S. currency, the risk of
currency fluctuations. Foreign securities may be subject to greater movement in
price than U.S. securities and under certain market conditions, may be less
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liquid than U.S securities. In addition, there may be less publicly available
information about a foreign company than a U.S company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to U.S. companies. There is
generally less government regulation of securities exchanges, brokers and listed
companies abroad than in the U.S., and, with respect to certain foreign
countries, there is a possibility of expropriations, confiscatory taxation or
diplomatic developments which could affect investment in those countries.
Finally, in the event of a default of any foreign debt obligations, it may be
more difficult for a Portfolio to obtain or enforce a judgment against the
issuers of such securities.
If a security is denominated in a foreign currency, it may be affected by
changes in currency rates and in exchange control regulations, and costs may be
incurred in connection with conversions between currencies. The Portfolios that
may invest in foreign securities may enter into forward foreign currency
exchange contracts for the purchase or sale of foreign currency for hedging
purposes, including: locking in the U.S. dollar price equivalent of interest or
dividends to be paid on such securities which are held by a Portfolio; and
protecting the U.S. dollar value of such securities which are held by the
Portfolio. A Portfolio will not enter into such forward contracts or maintain a
net exposure to such contracts where the consummation of the contracts would
obligate the Portfolio to deliver an amount of foreign currency in excess of the
value of the Portfolio=s securities or other assets denominated in that
currency. In addition, the Portfolios may, for hedging purposes, enter into
certain transactions involving options on foreign currencies, foreign currency
futures contracts and options on foreign currency futures contracts.
OPTIONS ON STOCK AND DEBT SECURITIES
OPTIONS ON STOCK
The Conservative Balanced and Flexible Managed Portfolios may purchase and
"write" (that is, sell) put and call options on equity securities that are
traded on securities exchanges, listed on the National Association of Securities
Dealers Automated Quotations System (NASDAQ), or privately negotiated with
broker-dealers (OTC equity options).
A call option is a short-term contract that gives the option purchaser or
"holder" the right to acquire a particular equity security for a specified price
at any time during a specified period. For this right, the option purchaser pays
the option seller a certain amount of money or "premium" which is set before the
option contract is entered into. The seller or "writer" of the option is
obligated to deliver the particular security if the option purchaser exercises
the option.
A put option is a similar contract. In a put option, the option purchaser has
the right to sell a particular security to the option seller for a specified
price at any time during a specified period. In exchange for this right, the
option purchaser pays the option seller a premium.
The Portfolios will write only "covered" options on stocks. A call option is
covered if:
(1) the Portfolio owns the security underlying the option;
(2) the Portfolio has an absolute right to acquire the security immediately;
(3) the Portfolio has a call on the same security that underlies the option
which has an exercise price equal to or less than the exercise price of the
covered option (or, if the exercise price is greater, the Portfolio sets
aside, in a segregated account, liquid assets that are equal to the
difference).
A put option is covered if:
(1) the Portfolio sets aside, in a segregated account, liquid assets that are
equal to or greater than the exercise price of the option;
(2) the Portfolio holds a put on the same security that underlies the option
which has an exercise price equal to or greater than the exercise price of
the covered option (or, if the exercise price is less, the Portfolio sets
aside, in a segregated account, liquid assets that are equal to the
difference).
The Conservative Balanced and Flexible Managed Portfolios can also purchase
"protective puts" on equity securities. These are acquired to protect a
Portfolio's security from a decline in market value. In a protective put, a
Portfolio has the right to sell the underlying security at the exercise price,
regardless of how much the underlying security may decline in value. In exchange
for this right, the Portfolio pays the put seller a premium.
The Portfolios may use options for both hedging and investment purposes. Neither
of the Portfolios intend to use more than 5% of its net assets to acquire call
options on stocks. The Portfolios may purchase equity securities that have a put
or call option provided by the issuer.
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OPTIONS ON DEBT SECURITIES
The Conservative Balanced and Flexible Managed Portfolios may purchase and sell
put and call options on debt securities, including U.S. government debt
securities, that are traded on a U.S. securities exchange or privately
negotiated with primary U.S. government securities dealers that are recognized
by the Federal Reserve Bank of New York (OTC debt options). Neither of the
Portfolios currently intend to invest more than 5% of its net assets at any one
time in call options on debt securities.
Options on debt securities are similar to stock options (see above) except that
the option holder has the right to acquire or sell a debt security rather than
an equity security.
The Portfolios will write only covered options. Options on debt securities are
covered in much the same way as options on equity securities. One exception is
in the case of call options on U.S. Treasury Bills. With these options, a
Portfolio might own U.S. Treasury Bills of a different series from those
underlying the call option, but with a principal amount and value that matches
the option contract amount and a maturity date that is no later than the
maturity date of the securities underlying the option.
The Portfolios may also write straddles - which are simply combinations of a
call and a put written on the same security at the same strike price and
maturity date. When a Portfolio writes a straddle, the same security is used to
"cover" both the put and the call. If the price of the underlying security is
below the strike price of the put, the Portfolio will set aside liquid assets as
additional cover equal to the difference. A Portfolio will not use more than 5%
of its net assets as cover for straddles.
The Portfolios may also purchase protective puts to try to protect the value of
one of the securities it owns against a decline in market value, as well as
putable and callable debt securities.
RISKS OF TRANSACTIONS IN OPTIONS ON EQUITY AND DEBT SECURITIES
A Portfolio's use of options on equity or debt securities is subject to certain
special risks, in addition to the risk that the market value of the security
will move opposite to the Portfolio's option position. An exchange-traded option
position may be closed out only on an exchange, board of trade or other trading
facility which provides a secondary market for an option of the same series.
Although the Portfolios will generally purchase or write only those
exchange-traded options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange will
exist for any particular option, or at any particular time, and for some options
no secondary market on an exchange or otherwise may exist. In such event it
might not be possible to effect closing transactions in particular options, with
the result that the Portfolio would have to exercise its options in order to
realize any profit and would incur brokerage commissions upon the exercise of
such options and upon the subsequent disposition of underlying securities
acquired through the exercise of call options or upon the purchase of underlying
securities for the exercise of put options. If a Portfolio as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or a clearing
corporation may not be adequate at all times to handle the trading volume; or
(vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange would cease to exist, although outstanding options on that
exchange that had been issued by a clearing corporation as a result of trades on
that exchange would continue to be exercisable in accordance with their terms.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of any
of the clearing corporations inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders.
The purchase and sale of OTC options will also be subject to certain risks.
Unlike exchange-traded options, OTC options generally do not have a continuous
liquid market. Consequently, a Portfolio will generally be able to realize the
value of an OTC option it has purchased only by exercising it or reselling it to
the dealer who issued it. Similarly, when a Portfolio writes an OTC option, it
generally will be able to close out the OTC option prior to its expiration only
by entering into a closing purchase transaction with the dealer to which the
Portfolio originally wrote the OTC option. While the Portfolios will seek to
enter into OTC options only with dealers who agree to enter into closing
transactions
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with the Portfolio, there can be no assurance that a Portfolio will be able to
liquidate an OTC option at a favorable price at any time prior to expiration. In
the event of insolvency of the other party, a Portfolio may be unable to
liquidate an OTC option. Prudential monitors the creditworthiness of dealers
with whom the Portfolios enter into OTC option transactions under the Board of
Directors' general supervision.
OPTIONS ON STOCK INDEXES
STOCK INDEX OPTIONS
The Conservative Balanced and Flexible Managed Portfolios may purchase and sell
put and call options on stock indexes that are traded on securities exchanges,
listed on NASDAQ or that are privately-negotiated with broker-dealers (OTC
options). Options on stock indexes are similar to options on stocks, except that
instead of giving the option holder the right to receive or sell a stock, it
gives the holder the right to receive an amount of cash if the closing level of
the stock index is greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash the holder
will receive is determined by multiplying the difference between the index=s
closing price and the option=s exercise price, expressed in dollars, by a
specified "multiplier." Unlike stock options, stock index options are always
settled in cash and gain or loss depends on price movements in the stock market
generally (or a particular market segment, depending on the index) rather than
the price movement of an individual stock.
A Portfolio will only sell or "write" covered options on stock indexes. A call
option is covered if the Portfolio holds stocks at least equal to the value of
the index times the multiplier times the number of contracts (the Option Value).
When a Portfolio writes a call option on a broadly based stock market index, the
Portfolio will set aside cash, cash equivalents or "qualified securities"
(defined below). The value of the assets to be segregated cannot be less than
100% of the Option Value as of the time the option is written.
If a Portfolio has written an option on an industry or market segment index, it
must set aside at least five "qualified securities," all of which are stocks of
issuers in that market segment, with a market value at the time the option is
written of not less than 100% of the Option Value. The qualified securities will
include stocks which represent at least 50% of the weighting of the industry or
market segment index and will represent at least 50% of the Portfolio's holdings
in that industry or market segment. No individual security will represent more
than 15% of the amount so set aside in the case of broadly based stock market
index options or 25% of such amount in the case of options on a market segment
index. If at the close of business on any day the market value of the qualified
securities falls below 100% of the Option Value as of that date, the Portfolio
will set aside an amount in liquid unencumbered assets equal in value to the
difference. In addition, when a Portfolio writes a call on an index which is
"in-the-money" at the time the option is written - that is, the index=s value is
above the strike price the Portfolio will set aside liquid unencumbered assets
equal to the amount by which the call is in-the-money times the multiplier times
the number of contracts. Any amount so set aside may be applied to the
Portfolio's obligation to segregate additional amounts in the event that the
market value of the qualified securities falls below 100% of the current Option
Value. A "qualified security" is an equity security which is listed on a
securities exchange or listed on NASDAQ against which the Portfolio has not
written a stock call option and which has not been hedged by the Portfolio by
the sale of stock index futures. However, the Portfolio will not be subject to
the requirement described in this paragraph if it holds a call on the same index
as the call written and the exercise price of the call held is equal to or less
than the exercise price of the call written or greater than the exercise price
of the call written if the difference is maintained by the Portfolio in liquid
unencumbered assets in a segregated account with its custodian.
A put index option is covered if: (1) the Portfolio sets aside in a segregated
account liquid unencumbered assets of a value equal to the strike price times
the multiplier times the number of contracts; or (2) the Portfolio holds a put
on the same index as the put written where the strike price of the put held is
equal to or greater than the strike price of the put written or less than the
strike price of the put written if the difference is maintained by the Portfolio
in liquid unencumbered assets in a segregated account.
RISKS OF TRANSACTIONS IN OPTIONS ON STOCK INDEXES
A Portfolio's purchase and sale of options on stock indexes has the same risks
as stock options described in the previous section. In addition, the distinctive
characteristics of options on indexes create special risks. Index prices may be
distorted if trading of certain stocks included in the index is interrupted.
Trading in index options also may be interrupted in certain circumstances, such
as if trading were halted in a substantial number of stocks included in the
index. If this occurred, a Portfolio would not be able to close out options
which it had purchased or written and, if restrictions on exercise were imposed,
may be unable to exercise an option it holds, which could result in substantial
losses to the Portfolio. It is the policy of the Portfolios to purchase or write
options only on stock indexes which include a number of stocks sufficient to
minimize the likelihood of a trading halt in options on the index.
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The ability to establish and close out positions on stock index options are
subject to the existence of a liquid secondary market. A Portfolio will not
purchase or sell any index option contract unless and until, in the portfolio
manager's opinion, the market for such options has developed sufficiently that
the risk in connection with such transactions is no greater than the risk in
connection with options on stocks.
There are certain additional risks associated with writing calls on stock
indexes. Because exercises of index options are settled in cash, a call writer
such as a Portfolio cannot determine the amount of its settlement obligations in
advance and, unlike call writing on specific stocks, cannot precisely provide in
advance for, or cover, its potential settlement obligations by acquiring and
holding the underlying securities. However, the Portfolios will follow the
"cover" procedures described above.
Price movements of a Portfolio's equity securities probably will not correlate
precisely with movements in the level of the index. Therefore, in writing a call
on a stock index a Portfolio bears the risk that the price of the securities
held by the Portfolio may not increase as much as the index. In that case, the
Portfolio would bear a loss on the call which may not be completely offset by
movement in the price of the Portfolio's equity securities. It is also possible
that the index may rise when the Portfolio's securities do not rise in value. If
this occurred, the Portfolio would experience a loss on the call which is not
offset by an increase in the value of its securities and might also experience a
loss in its securities. However, because the value of a diversified securities
portfolio will, over time, tend to move in the same direction as the market,
movements in the value of a Portfolio's securities in the opposite direction as
the market would be likely to occur for only a short period or to a small
degree.
When a Portfolio has written a stock index call, there is also a risk that the
market may decline between the time the Portfolio has a call exercised against
it, at a price which is fixed as of the closing level of the index on the date
of exercise, and the time the Portfolio is able to sell stocks in its portfolio.
As with stock options, a Portfolio will not learn that an index option has been
exercised until the day following the exercise date but, unlike a call on stock
where the Portfolio would be able to deliver the underlying securities in
settlement, the Portfolio may have to sell part of its stock portfolio in order
to make settlement in cash, and the price of such stocks might decline before
they can be sold. This timing risk makes certain strategies involving more than
one option substantially more risky with options in stock indexes than with
stock options. For example, even if an index call which a Portfolio has written
is "covered" by an index call held by the Portfolio with the same strike price,
the Portfolio will bear the risk that the level of the index may decline between
the close of trading on the date the exercise notice is filed with the clearing
corporation and the close of trading on the date the Portfolio exercises the
call it holds or the time the Portfolio sells the call which in either case
would occur no earlier than the day following the day the exercise notice was
filed.
There are also certain special risks involved in purchasing put and call options
on stock indexes. If a Portfolio holds an index option and exercises it before
final determination of the closing index value for that day, it runs the risk
that the level of the underlying index may change before closing. If such a
change causes the exercised option to fall out-of-the-money, the Portfolio will
be required to pay the difference between the closing index value and the
exercise price of the option (times the applicable multiplier) to the assigned
writer. Although the Portfolio may be able to minimize this risk by withholding
exercise instructions until just before the daily cutoff time or by selling
rather than exercising an option when the index level is close to the exercise
price, it may not be possible to eliminate this risk entirely because the cutoff
times for index options may be earlier than those fixed for other types of
options and may occur before definitive closing index values are announced.
OPTIONS ON FOREIGN CURRENCIES
OPTIONS ON FOREIGN CURRENCY
The Conservative Balanced and Flexible Managed Portfolios may purchase and write
put and call options on foreign currencies traded on U.S. or foreign securities
exchanges or boards of trade for hedging purposes in a manner similar to that in
which forward foreign currency exchange contracts and futures contracts on
foreign currencies are employed (see below). Options on foreign currencies are
similar to options on stocks, except that the option holder has the right to
take or make delivery of a specified amount of foreign currency rather than
stock.
A Portfolio may purchase and write options to hedge its securities denominated
in foreign currencies. If the U.S. dollar increases in value relative to a
foreign currency in which the Portfolio's securities are denominated, the value
of those securities will decline as well. To hedge against a decline of a
foreign currency a Portfolio may purchase put options on that foreign currency.
If the value of the foreign currency declines, the gain realized on the put
option would offset, at least in part, the decline in the value of the
Portfolio's holdings denominated in that foreign currency. Alternatively, a
Portfolio may write a call option on a foreign currency. If the foreign currency
declines, the option would not be exercised and the decline in the value of the
Portfolio's securities denominated in that foreign currency would be offset in
part by the premium the Portfolio received for the option.
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If, on the other hand, the portfolio manager anticipates purchasing a foreign
security and also anticipates a rise in the foreign currency in which it is
denominated, the Portfolio may purchase call options on the foreign currency.
The purchase of such options could offset, at least partially, the effects of
adverse movements of the exchange rates. Alternatively, the Portfolio could
write a put option on the currency and, if the exchange rates move as
anticipated, the option would expire unexercised.
RISKS OF TRANSACTIONS IN OPTIONS ON FOREIGN CURRENCY
A Portfolio's successful use of currency exchange options on foreign currencies
depends upon the portfolio manager's ability to predict the direction of the
currency exchange markets and political conditions, which requires different
skills and techniques than predicting changes in the securities markets
generally. For instance, if the currency being hedged has moved in a favorable
direction, the corresponding appreciation of the Portfolio's securities
denominated in such currency would be partially offset by the premiums paid on
the options. If the currency exchange rate does not change, the Portfolio's net
income would be less than if the Portfolio had not hedged since there are costs
associated with options.
The use of these options is subject to various additional risks. The correlation
between the movements in the price of options and the price of the currencies
being hedged is imperfect. The use of these instruments will hedge only the
currency risks associated with investments in foreign securities, not market
risk. A Portfolio's ability to establish and maintain positions will depend on
market liquidity. The ability of the Portfolio to close out an option depends on
a liquid secondary market. There is no assurance that liquid secondary markets
will exist for any particular option at any particular time.
Because there are two currencies involved, developments in either or both
countries can affect the values of options on foreign currencies. In addition,
the quantities of currency underlying option contracts represent odd lots in a
market dominated by transactions between banks; this can mean extra transaction
costs upon exercise. Option markets may be closed while round-the-clock
interbank currency markets are open, and this can create price and rate
discrepancies.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES AND OPTIONS ON FUTURES
The Conservative Balanced and Flexible Managed Portfolio may purchase and sell
stock index futures contracts. A stock index futures contract is an agreement
between the buyer and the seller of the contract to transfer an amount of cash
equal to the daily variation margin of the contract. No physical delivery of the
underlying stocks in the index is made.
The Conservative Balanced and Flexible Managed Portfolios may, to the extent
permitted by applicable regulations, purchase and sell futures contracts on
interest-bearing securities or interest rate indexes, and purchase and sell
futures contracts on foreign currencies.
When a futures contract is entered into, each party deposits with a futures
commission merchant (or in a segregated account) approximately 5% of the
contract amount. This is known as the "initial margin." Every day during the
futures contract, either the buyer or the futures commission merchant will make
payments of "variation margin." In other words, if the value of the underlying
security, index or interest rate increases, then the buyer will have to add to
the margin account so that the account balance equals approximately 5% of the
value of the contract on that day. The next day, the value of the underlying
security, index or interest rate may decrease, in which case the borrower would
receive money from the account equal to the amount by which the account balance
exceeds 5% of the value of the contract on that day.
The Portfolios may purchase or sell futures contracts without limit for hedging
purposes. This would be the case, for example, if a portfolio manager is using a
futures contract to reduce the risk of a particular position on a security. The
Portfolios can also purchase or sell futures contract for non-hedging purposes
provided the initial margins and premiums associated with the contracts do not
exceed 5% of the fair market value of the Portfolio's assets, taking into
account unrealized profits or unrealized losses on any such futures. This would
be the case if a portfolio manager uses futures for investment purposes, to
increase income or to adjust the Portfolio's asset mix.
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RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks associated with a Portfolio's use of futures contracts.
When used for investment purposes (that is, non-hedging purposes), successful
use of futures contracts, like successful investment in securities, depends on
the ability of the portfolio manager to predict correctly movements in the
relevant markets, interest rates and/or currency exchange rates. When used for
hedging purposes, there is a risk of imperfect correlation between movements in
the price of the futures contract and the price of the securities or currency
that are the subject of the hedge. In the case of futures contracts on stock or
interest rate indexes, the correlation between the price of the futures contract
and movements in the index might not be perfect. To compensate for differences
in volatility, a Portfolio could purchase or sell futures contracts with a
greater or lesser value than the securities or currency it wished to hedge or
purchase. Other risks apply to use for both hedging and investment purposes.
Temporary price distortions in the futures market could be caused by a variety
of factors. Further, the ability of a Portfolio to close out a futures position
depends on a liquid secondary market. There is no assurance that a liquid
secondary market on an exchange will exist for any particular futures contract
at any particular time.
The hours of trading of futures contracts may not conform to the hours during
which a Portfolio may trade the underlying securities and/or currency. To the
extent that the futures markets close before the securities or currency markets,
significant price and rate movements can take place in the securities and/or
currency markets that cannot be reflected in the futures markets.
RISKS OF TRANSACTIONS IN OPTIONS ON FUTURES CONTRACTS
Options on futures contracts are subject to risks similar to those described
above with respect to options on securities, options on stock indexes, and
futures contracts. These risks include the risk that the portfolio manager may
not correctly predict changes in the market, the risk of imperfect correlation
between the option and the securities being hedged, and the risk that there
might not be a liquid secondary market for the option. There is also the risk of
imperfect correlation between the option and the underlying futures contract. If
there were no liquid secondary market for a particular option on a futures
contract, a Portfolio might have to exercise an option it held in order to
realize any profit and might continue to be obligated under an option it had
written until the option expired or was exercised. If the Portfolio were unable
to close out an option it had written on a futures contract, it would continue
to be required to maintain initial margin and make variation margin payments
with respect to the option position until the option expired or was exercised
against the Portfolio.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Conservative Balanced and Flexible Managed Portfolios may enter into foreign
currency exchange contracts to protect the value of their foreign holdings
against future changes in the level of currency exchange rates. When a Portfolio
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, or when a Portfolio anticipates the receipt in a foreign
currency of dividends or interest payments on a security which it holds, the
Portfolio may desire to "lock-in" the U.S. dollar price of the security or the
U.S. dollar equivalent of such dividend or interest payment, as the case may be.
By entering into a forward contract for a fixed amount of dollars, for the
purchase or sale of the amount of foreign currency involved in the underlying
transactions, the Portfolio will be able to protect itself against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar and the foreign currency during the period between the date on which the
security is purchased or sold, or on which the dividend or interest payment is
declared, and the date on which such payments are made or received.
Additionally, when a portfolio manager believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Portfolio may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of the portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of those securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. The Portfolios will not enter into such
forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate a Portfolio to deliver an amount of
foreign currency in excess of the value of the securities or other assets
denominated in that currency held by the Portfolio. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the long-term investment decisions made with regard to overall diversification
strategies. However, the Portfolios believe that it is important to have the
flexibility to enter into such forward contracts when it is determined that the
best interests of the Portfolios will thereby be served.
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The Portfolios generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, a Portfolio may
either sell the security and make delivery of the foreign currency or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract with the same currency
trader obligating it to purchase, on the same maturity date, the same amount of
the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular security at the expiration of the contract. Accordingly, it may be
necessary for a Portfolio to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency that the Portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.
If a Portfolio retains the security and engages in an offsetting transaction,
the Portfolio will incur a gain or a loss (as described below) to the extent
that there has been movement in forward contract prices. If forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent that the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. If forward
prices increase, the Portfolio will suffer a loss to the extent that the price
of the currency it has agreed to purchase exceeds the price of the currency it
has agreed to sell.
The Portfolios' dealing in forward foreign currency exchange contracts will be
limited to the transactions described above. Of course, the Portfolios are not
required to enter into such transactions with regard to their foreign
currency-denominated securities. It also should be realized that this method of
protecting the value of a Portfolio's securities against a decline in the value
of a currency does not eliminate fluctuations in the underlying prices of the
securities which are unrelated to exchange rates. Additionally, although such
contracts tend to minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time they tend to limit any potential gain which
might result should the value of such currency increase.
Although the Portfolios value their assets daily in terms of U.S. dollars, they
do not intend physically to convert their holdings of foreign currencies into
U.S. dollars on a daily basis. They will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to a Portfolio at one rate, while offering a lesser rate of exchange should the
Portfolio desire to resell that currency to the dealer.
INTEREST RATE SWAPS
The fixed income portions of the Conservative Balanced and Flexible Managed
Portfolios may use interest rate swaps subject to the limitations set forth in
the prospectus.
Interest rate swaps, in their most basic form, involve the exchange by a
Portfolio with another party of their respective commitments to pay or receive
interest. For example, a Portfolio might exchange its right to receive certain
floating rate payments in exchange for another party's right to receive fixed
rate payments. Interest rate swaps can take a variety of other forms, such as
agreements to pay the net differences between two different indexes or rates,
even if the parties do not own the underlying instruments. Despite their
differences in form, the function of interest rate swaps is generally the same B
to increase or decrease a Portfolio's exposure to long or short-term interest
rates. For example, a Portfolio may enter into a swap transaction to preserve a
return or spread on a particular investment or a portion of its portfolio or to
protect against any increase in the price of securities the Portfolio
anticipates purchasing at a later date.
The use of swap agreements is subject to certain risks. As with options and
futures, if the portfolio manager's prediction of interest rate movements is
incorrect, the Portfolio's total return will be less than if the Portfolio had
not used swaps. In addition, if the counterparty's creditworthiness declines,
the value of the swap would likely decline. Moreover, there is no guarantee that
a Portfolio could eliminate its exposure under an outstanding swap agreement by
entering into an offsetting swap agreement with the same or another party.
Each Portfolio will set aside appropriate liquid assets in a segregated
custodial account to cover its current obligations under swap agreements. If a
Portfolio enters into a swap agreement on a net basis, it will segregate assets
with a daily value at least equal to the excess, if any, of the Portfolio's
accrued obligations under the swap agreement over the accrued amount the
Portfolio is entitled to receive under the agreement. If a Portfolio enters into
a swap agreement on other than a net basis, it will segregate assets with a
value equal to the full amount of the Portfolio's accrued obligations under the
agreement.
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LOAN PARTICIPATIONS
The Conservative Balanced and Flexible Managed Portfolios may invest in fixed
and floating rate loans that are privately negotiated between a corporate
borrower and one or more financial institutions. The Portfolios will generally
invest in loans in the form of "loan participations." In the typical loan
participation, the Portfolio will have a contractual relationship with the
lender but not the borrower. This means that the Portfolio will not have any
right to enforce the borrower=s compliance with the terms of the loan and may
not benefit directly from any collateral supporting the loan. As a result, the
Portfolio will assume the credit risk of both the borrower and the lender. In
the event of the lender=s insolvency, the Portfolio may be treated as a general
creditor of the lender and may not benefit from any set-off between the lender
and the borrower.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
DESCRIPTION OF REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The fixed portions of the Conservative Balanced and Flexible Managed Portfolios
may use up to 30% of their net assets for reverse repurchase agreements.
In a reverse repurchase transaction, a Portfolio sells one of its securities and
agrees to repurchase the same security at a set price on a specified date.
During the time the security is held by the other party, the Portfolio will
often continue to receive principal and interest payments on the security. The
terms of the reverse repurchase agreement reflect a rate of interest for use of
the money received by the Portfolio and thus, is similar to borrowing.
Dollar rolls involve the sale by the Portfolio of one of its securities for
delivery in the current month and a contract to repurchase substantially similar
securities (for example, with the same coupon) from the other party on a
specified date in the future at a specified amount. During the roll period, a
Portfolio does not receive any principal or interest earned on the security. The
Portfolio realizes a profit to the extent the current sale price is more than
the price specified for the future purchase, plus any interest earned on the
cash paid to the Portfolio on the initial sale.
A "covered roll" is a specific type of dollar roll where there is an offsetting
cash position or a cash equivalent security position which matures on or before
the forward settlement date of the dollar roll transaction.
A Portfolio participating in reverse repurchase or dollar roll transactions will
set aside liquid assets in a segregated account, which equal in value the
Portfolio's obligations under the reverse repurchase agreement or dollar roll,
respectively.
RISKS OF REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
Reverse repurchase agreements and dollar rolls involve the risk that the market
value of the securities retained by a Portfolio may decline below the price of
the securities it has sold but is obligated to repurchase under the agreement.
If the other party in a reverse purchase or dollar roll transaction becomes
insolvent, a Portfolio=s use of the proceeds of the agreement may be restricted
pending a determination by a third party of whether to enforce the Portfolio=s
obligation to repurchase.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Conservative Balanced and Flexible Managed Portfolios may purchase or sell
securities on a when-issued or delayed delivery basis. This means that the
delivery and payment can take place a month or more after the date of the
transaction. A Portfolio will make commitments for when-issued transactions only
with the intention of actually acquiring the securities. A Portfolio's custodian
will maintain in a segregated account, liquid assets having a value equal to or
greater to such commitments. If the Portfolio chooses to dispose of the right to
acquire a when-issued security prior to its acquisition, it could, as with the
disposition of any other security, incur a gain or loss.
SHORT SALES
The Conservative Balanced and Flexible Managed Portfolios may enter into short
sales. In a short sale, a Portfolio sells a security it does not own in
anticipation of a decline in the market value of those securities. To complete
the transaction, the Portfolio will borrow the security to make delivery to the
buyer. The Portfolio is then obligated to replace the security it borrowed by
purchasing it at the market price at the time of replacement. The price at that
time may be more or less than the price at which the Portfolio sold it. Until
the security is replaced, the Portfolio is required to pay to the lender any
interest which accrues during the period of the loan. To borrow the security,
the Portfolio may be required to pay a fee which would increase the cost of the
security sold.
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Until a Portfolio replaces a borrowed security used in a short sale, it will set
aside liquid assets in a segregated account equal to the current market value of
the security sold short or otherwise cover the short position. No more than 25%
of any Portfolio=s net assets will be, when added together: (1) deposited as
collateral for the obligation to replace securities borrowed in connection with
short sales and (2) segregated in accounts in connection with short sales.
A Portfolio incurs a loss in a short sale if the price of the security increases
between the date of the short sale and the date the Portfolio replaces the
borrowed security. On the other hand, a Portfolio will realize gain if the
security=s price decreases between the date of the short sale and the date the
security is replaced.
LOANS OF PORTFOLIO SECURITIES
DESCRIPTION OF SECURITIES LOANS
The Portfolios may lend the securities they hold to broker-dealers, qualified
banks and certain institutional investors. All securities loans will be made
pursuant to a written agreement and continuously secured by collateral in the
form of cash, U.S. Government securities or irrevocable standby letters of
credit in an amount equal or greater than the market value of the loaned
securities plus the accrued interest and dividends. While a security is loaned,
the Portfolio will continue to receive the interest and dividends on the loaned
security while also receiving a fee from the borrower or earning interest on the
investment of the cash collateral. Upon termination of the loan, the borrower
will return to the Portfolio a security identical to the loaned security. The
Portfolio will not have the right to vote a security that is on loan, but would
be able to terminate the loan and retain the right to vote if that were
considered important with respect to the investment.
RISKS ASSOCIATED WITH LENDING SECURITIES
The primary risk in lending securities is that the borrower may become insolvent
on a day on which the loaned security is rapidly advancing in price. In this
event, if the borrower fails to return the loaned security, the existing
collateral might be insufficient to purchase back the full amount of the
security loaned, and the borrower would be unable to furnish additional
collateral. The borrower would be liable for any shortage but the Portfolio
would be an unsecured creditor with respect to any shortfall and might not be
able to recover all or any of it.
However, this risk can be decreased by the careful selection of borrowers and
securities to be lent.
Neither of the Portfolios will lend securities to entities affiliated with
Prudential.
ILLIQUID SECURITIES
Each Portfolio may hold up to 15% of its net assets in illiquid securities.
Securities are "illiquid" if they cannot be sold in the ordinary course of
business within seven days at approximately the value at which the Portfolio has
them valued. Repurchase agreements with a maturity of greater than seven days
are considered illiquid.
The Portfolios may purchase securities which are not registered under the
Securities Act of 1933 but which can be sold to qualified institutional buyers
in accordance with Rule 144A under that Act. These securities will not be
considered illiquid so long as it is determined by the investment adviser,
acting under guidelines approved and monitored by the Board of Directors, that
an adequate trading market exists for that security. In making that
determination, the investment adviser will consider, among other relevant
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers willing to purchase or sell the security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security;
and (4) the nature of the security and the nature of the marketplace trades. A
Portfolio's treatment of Rule 144A securities as liquid could have the effect of
increasing the level of portfolio illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities. In addition, the investment adviser, acting under guidelines
approved and monitored by the Board of Directors, may conditionally determine,
for purposes of the 15% test, that certain commercial paper issued in reliance
on the exemption from registration in Section 4(2) of the Securities Act of 1933
will not be considered illiquid, whether or not it may be resold under Rule
144A. To make that determination, the following conditions must be met: (1) the
security must not be traded flat or in default as to principal or interest; (2)
the security must be rated in one of the two highest rating categories by at
least two nationally recognized statistical rating organizations ("NRSROs"), or
if only one NRSRO rates the security, by that NRSRO; (if the security is
unrated, the investment adviser must determine that the security is of
equivalent quality); and (3) the investment adviser must consider the trading
market for the specific security, taking into account all relevant factors. The
investment adviser will continue to monitor the liquidity of any Rule 144A
security or any Section 4(2) commercial paper which has been determined to be
liquid and, if a security is no longer liquid because of changed conditions, the
holdings of illiquid securities will be reviewed to determine if any steps are
required to assure that the 15% test continues to be satisfied.
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INVESTMENT RESTRICTIONS
Set forth below are certain investment restrictions applicable to the
Portfolios. Restrictions 1, 3, 5, and 8 through 11 are fundamental and may not
be changed without shareholder approval as required by the 1940 Act.
Restrictions 2, 4, 6, 7, and 12 are not fundamental and may be --- changed by
the Board of Directors without shareholder approval.
Neither of the Portfolios available to PRUVIDER Contract owners will:
1. Buy or sell real estate and mortgages, although the Portfolios may buy and
sell securities that are secured by real estate and securities of real
estate investment trusts and of other issuers that engage in real estate
operation. Buy or sell commodities or commodities contracts, except that
the Portfolios may purchase and sell interest rate futures contracts and
related options; and the Portfolios may purchase and sell foreign currency
futures contracts and related options and forward foreign currency exchange
contracts.
2. Except as part of a merger, consolidation, acquisition or reorganization,
invest more than 5% of the value of its total assets in the securities of
any one investment company or more than 10% of the value of its total
assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting
securities of any one investment company.
3. Acquire securities for the purpose of exercising control or management of
any company except in connection with a merger, consolidation, acquisition
or reorganization.
4. Make short sales of securities or maintain a short position, except that
the Portfolios may sell securities short up to 25% of their net assets and
may make short sales against-the-box. Collateral arrangements entered into
with respect to options, futures contracts and forward contracts are not
deemed to be short sales. Collateral arrangements entered into with respect
to interest rate swap agreements are not deemed to be short sales.
5. Purchase securities on margin or otherwise borrow money or issue senior
securities, except that the fixed income portions of the Portfolios may
enter into reverse repurchase agreements, dollar rolls and may purchase
securities on a when-issued and delayed delivery basis; except that the
money market portion of any Portfolio may enter into reverse repurchase
agreements and may purchase securities on a when-issued and delayed
delivery basis; and except that the Portfolios may purchase securities on a
when-issued or a delayed delivery basis; and except that the Portfolios may
purchase securities on a when-issued or a delayed delivery basis. The Fund
may also obtain such short-term credit as it needs for the clearance of
securities transactions and may borrow from a bank for the account of any
Portfolio as a temporary measure to facilitate redemptions (but not for
leveraging or investment) or to exercise an option, an amount that does not
exceed 5% of the value of the Portfolio=s total assets (including the
amount owed as a results of the borrowing) at the time the borrowing is
made. Interest paid on borrowings will not be available for investment.
Collateral arrangements with respect to futures contracts and options
thereon and forward foreign currency exchange contracts (as permitted by
restriction no. 1) are not deemed to be the issuance of a senior security
or the purchase of a security on margin. Collateral arrangement with
respect to the writing of the following options by the Portfolios are not
deemed to be the issuance of a senior security or the purchase of a
security on margin: options on debt securities, equity securities, stock
indexes, foreign currencies. Collateral arrangements entered into by the
Portfolios with respect to interest rate swap agreements are not deemed to
be the issuance of a senior security or the purchase of a security on
margin.
6. Enter into reverse repurchase agreements if, as a result, the Portfolio's
obligations with respect to reverse repurchase agreements would exceed 10%
of the Portfolio's net assets (defined to mean total assets at market value
less liabilities other than reverse repurchase agreements); except that the
fixed income portions of the Portfolios may enter into reverse repurchase
agreements and dollar rolls provided that the Portfolio's obligations with
respect to those instruments do not exceed 30% of the Portfolio's net
assets (defined to mean total assets at market value less liabilities other
than reverse repurchase agreements and dollar rolls).
7. Pledge or mortgage assets, except that no more than 10% of the value of any
Portfolio may be pledged (taken at the time the pledge is made) to secure
authorized borrowing and except that a Portfolio may enter into reverse
repurchase agreements. Collateral arrangements entered into with respect to
futures and forward contracts and the writing of options are not deemed to
be the pledge of assets. Collateral arrangements entered into with respect
to interest rate swap agreements are not deemed to be the pledge of assets.
8. Lend money, except that loans of up to 10% of the value of each Portfolio
may be made through the purchase of privately placed bonds, debentures,
notes, and other evidences of indebtedness of a character customarily
acquired by institutional investors that may or may not be convertible into
stock or accompanied by warrants or
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rights to acquire stock. Repurchase agreements and the purchase of publicly
traded debt obligations are not considered to be "loans" for this purpose
and may be entered into or purchased by a Portfolio in accordance with its
investment objectives and policies.
9. Underwrite the securities of other issuers, except where the Fund may be
deemed to be an underwriter for purposes of certain federal securities laws
in connection with the disposition of Portfolio securities and with loans
that a Portfolio may make pursuant to item 8 above.
10. Make an investment unless, when considering all its other investments, 75%
of the value of a Portfolio's assets would consist of cash, cash items,
obligations of the United States Government, its agencies or
instrumentalities, and other securities. For purposes of this restriction,
"other securities" are limited for each issuer to not more than 5% of the
value of a Portfolio's assets and to not more than 10% of the issuer's
outstanding voting securities held by the Fund as a whole. Some uncertainty
exists as to whether certain of the types of bank obligations in which a
Portfolio may invest, such as certificates of deposit and bankers'
acceptances, should be classified as "cash items" rather than "other
securities" for purposes of this restriction, which is a diversification
requirement under the 1940 Act. Interpreting most bank obligations as
"other securities" limits the amount a Portfolio may invest in the
obligations of any one bank to 5% of its total assets. If there is an
authoritative decision that any of these obligations are not "securities"
for purposes of this diversification test, this limitation would not apply
to the purchase of such obligations.
11. Purchase securities of a company in any industry if, as a result of the
purchase, a Portfolio's holdings of securities issued by companies in that
industry would exceed 25% of the value of the Portfolio, except that this
restriction does not apply to purchases of obligations issued or guaranteed
by the U.S. Government, its agencies and instrumentalities or issued by
domestic banks. For purposes of this restriction, neither finance companies
as a group nor utility companies as a group are considered to be a single
industry and will be grouped instead according to their services; for
example, gas, electric, and telephone utilities will each be considered a
separate industry. For purposes of this exception, domestic banks shall
include all banks which are organized under the laws of the United States
or a state (as defined in the 1940 Act), U.S. branches of foreign banks
that are subject to the same regulations as U.S. banks and foreign branches
of domestic banks (as permitted by the SEC).
12. Invest more than 15% of its net assets in illiquid securities. For purposes
of this restriction, illiquid securities are those deemed illiquid pursuant
to SEC regulations and guidelines, as they may be revised from time to
time.
Consistent with item 5 above, the Fund has entered into a joint $1 billion
revolving credit facility with other Prudential mutual funds to facilitate
redemptions if necessary. This credit facility, which was entered into on March
13, 1999, is a syndicated arrangement with 12 different major banks.
The investments of the Portfolios are generally subject to certain additional
restrictions under the laws of the State of New Jersey. In the event of future
amendments to the applicable New Jersey statutes, each Portfolio will comply,
without the approval of the shareholders, with the statutory requirements as so
modified. The pertinent provisions of New Jersey law as they stand are, in
summary form, as follows:
1. An Account may not purchase any evidence of indebtedness issued, assumed or
guaranteed by any institution created or existing under the laws of the
U.S., any U.S. state or territory, District of Columbia, Puerto Rico,
Canada or any Canadian province, if such evidence of indebtedness is in
default as to interest. "Institution" includes any corporation, joint stock
association, business trust, business joint venture, business partnership,
savings and loan association, credit union or other mutual savings
institution.
2. The stock of a corporation may not be purchased unless: (i) the corporation
has paid a cash dividend on the class of stock during each of the past 5
years preceding the time of purchase; or (ii) during the 5-year period the
corporation had aggregate earnings available for dividends on such class of
stock sufficient to pay average dividends of 4% per annum computed upon the
par value of such stock or upon stated value if the stock has no par value.
This limitation does not apply to any class of stock which is preferred as
to dividends over a class of stock whose purchase is not prohibited.
3. Any common stock purchased must be: (i) listed or admitted to trading on a
securities exchange in the United States or Canada; or (ii) included in the
National Association of Securities Dealers' national price listings of
"over-the-counter" securities; or (iii) determined by the Commissioner of
Insurance of New Jersey to be publicly held and traded and have market
quotations available.
4. Any security of a corporation may not be purchased if after the purchase
more than 10% of the market value of the assets of a Portfolio would be
invested in the securities of such corporation.
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As a result of these currently applicable requirements of New Jersey law, which
impose substantial limitations on the ability of the Fund to invest in the stock
of companies whose securities are not publicly traded or who have not recorded a
5-year history of dividend payments or earnings sufficient to support such
payments, the Portfolios will not generally hold the stock of newly organized
corporations. Nonetheless, an investment not otherwise eligible under items 1 or
2 above may be made if, after giving effect to the investment, the total cost of
all such non-eligible investments does not exceed 5% of the aggregate market
value of the assets of the Portfolio.
Investment limitations also arise under the insurance laws and regulations of
Arizona and may arise under the laws and regulations of other states. Although
compliance with the requirements of New Jersey law set forth above will
ordinarily result in compliance with any applicable laws of other states, under
some circumstances the laws of other states could impose additional restrictions
on the Portfolios.
Current federal income tax laws require that the assets of each Portfolio be
adequately diversified so that Prudential and other insurers with separate
accounts which invest in the Fund, as applicable, and not the Contract owners,
are considered the owners of assets held in the Accounts for federal income tax
purposes. See OTHER INFORMATION - FEDERAL INCOME TAXES in the prospectus.
Prudential intends to maintain the assets of each Portfolio pursuant to those
diversification requirements.
INVESTMENT MANAGEMENT AND DISTRIBUTION ARRANGEMENTS
INVESTMENT MANAGEMENT ARRANGEMENTS
Prudential is the investment adviser of the Fund. It is the largest insurance
company in the United States. The Fund has entered into an Investment Advisory
Agreement with Prudential under which Prudential will, subject to the direction
of the Board of Directors of the Fund, be responsible for the management of the
Fund, and provide investment advice and related services to each Portfolio.
Prudential has entered into a Service Agreement with its wholly-owned
subsidiary, The Prudential Investment Corporation ("PIC"), which provides that
PIC will furnish to Prudential such services as Prudential may require in
connection with Prudential's performance of its obligations under advisory
agreements with clients which are registered investment companies. In addition,
Prudential has entered into a Subadvisory Agreement with its wholly-owned
subsidiary Jennison Associates LLC ("Jennison") under which Jennison furnishes
investment advisory services in connection with the management of the Prudential
Jennison Portfolio. More detailed information about Prudential and its role as
investment adviser can be found in HOW THE PORTFOLIOS ARE MANAGED in the
prospectus.
Under the Investment Advisory Agreement, Prudential receives an investment
management fee as compensation for its services to the Fund. The fee is a daily
charge, payable quarterly, equal to an annual percentage of the average daily
net assets of each individual Portfolio. For the Conservative Balanced
Portfolio, the rate is 0.55%. For the Flexible Managed Portfolio, the rate is
0.60%.
The Investment Advisory Agreement requires Prudential to pay for maintaining any
Prudential staff and personnel who perform clerical, accounting, administrative,
and similar services for the Fund, other than investor services and any daily
Fund accounting services. It also requires Prudential to pay for the equipment,
office space and related facilities necessary to perform these services and the
fees or salaries of all officers and directors of the Fund who are affiliated
persons of Prudential or of any subsidiary of Prudential.
For the years ended 1998, 1997 and 1996, Prudential received a total of
$26,224,569, $25,757,735, and $23,052,572, respectively, in investment
management fees for the Conservative Balanced Portfolio and $33,049,940,
$31,740,440, and $27,247,674, respectively, for the Flexible Managed Portfolio.
Each Fund Portfolio pays all other expenses incurred in its individual operation
and also pays a portion of the Fund's general administrative expenses allocated
on the basis of the asset size of the respective Portfolios. Expenses that will
be borne directly by the Portfolios include redemption expenses, expenses of
portfolio transactions, shareholder servicing costs, interest, certain taxes,
charges of the custodian and transfer agent, and other expenses attributable to
a particular Portfolio. Expenses that will be allocated among all Fund
Portfolios include legal expenses, state franchise taxes, auditing services,
costs of printing proxies, prospectuses and statements of additional
information, costs of stock certificates, SEC fees, accounting costs, the fees
and expenses of directors of the Fund who are not affiliated persons of
Prudential or any subsidiary of Prudential, and other expenses properly payable
by the entire Fund. If the Fund is sued, litigation costs may be directly
applicable to one or more Portfolio or allocated on the basis of the size of the
respective Portfolios, depending upon the nature of the lawsuit.
The Fund's Board of Directors has determined that this is an appropriate method
of allocating expenses.
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Under the Investment Advisory Agreement, Prudential has agreed to refund to a
Portfolio the portion of the investment management fee for that Portfolio equal
to the amount that the aggregate annual ordinary operating expenses of that
Portfolio (excluding interest, taxes, and brokerage fees and commissions but
including investment management fees) exceeds 0.75% of the Portfolio's average
daily net assets.
The Investment Advisory Agreement with Prudential was most recently approved by
the Fund's Board of Directors, including a majority of the Directors who are not
interested persons of Prudential, on May 28, 1998 with respect to all
Portfolios. The Investment Advisory Agreement was most recently approved by the
shareholders in accordance with instructions from Contract owners at their 1989
annual meeting with respect to the Portfolios. The Investment Advisory Agreement
will continue in effect if approved annually by: (1) a majority of the
non-interested persons of the Fund's Board of Directors; and (2) by a majority
of the entire Board of Directors or by a majority vote of the shareholders of
each Portfolio. The required shareholder approval of the Agreements shall be
effective with respect to any Portfolio if a majority of the voting shares of
that Portfolio vote to approve the Agreements, even if the Agreements are not
approved by a majority of the voting shares of any other Portfolio or by a
majority of the voting shares of the entire Fund. The Agreements provide that
they may not be assigned by Prudential and that they may be terminated upon 60
days' notice by the Fund's Board of Directors or by a majority vote of its
shareholders. Prudential may terminate the Agreements upon 90 days' notice.
The Service Agreement between Prudential and PIC was most recently ratified by
shareholders of the Fund at their 1989 annual meeting with respect to the
Portfolios. The Service Agreement between Prudential and PIC will continue in
effect as to the Fund for a period of more than 2 years from its execution, only
so long as such continuance is specifically approved at least annually in the
same manner as the Investment Advisory Agreement between Prudential and the
Fund. The Service Agreement may be terminated by either party upon not less than
30 days prior written notice to the other party, will terminate automatically in
the event of its assignment, and will terminate automatically as to the Fund in
the event of the assignment or termination of the Investment Advisory Agreement
between Prudential and the Fund. Prudential is not relieved of its
responsibility for all investment advisory services under the Investment
Advisory Agreement.
Prudential also serves as the investment adviser to several other investment
companies. When investment opportunities arise that may be appropriate for more
than one entity for which Prudential serves as investment adviser, Prudential
will not favor one over another and may allocate investments among them in an
impartial manner believed to be equitable to each entity involved. The
allocations will be based on each entity's investment objectives and its current
cash and investment positions. Because the various entities for which Prudential
acts as investment adviser have different investment objectives and positions,
Prudential may from time to time buy a particular security for one or more such
entities while at the same time it sells such securities for another.
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 the 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.
DISTRIBUTION ARRANGEMENTS
Prudential Investment Management Services LLC ("PIMS"), an indirect wholly-owned
subsidiary of Prudential, acts as the principal underwriter of the Fund. PIMS is
a limited liability corporation organized under Delaware law in 1996. PIMS is a
registered broker-dealer under the Securities Exchange Act of 1934 and is a
member of the National Association of Securities Dealers, Inc. PIMS= principal
business address is 751 Broad Street, Newark, New Jersey 07102-3777.
The Fund has two classes. Class I shares are sold to separate accounts of
Prudential and its affiliates. Class II shares are not available under the
Contract described in this SAI.
OTHER INFORMATION CONCERNING THE FUND
INCORPORATION AND AUTHORIZED STOCK
The Fund was incorporated under Maryland law on November 15, 1982. As of the
date of this SAI, the shares of capital stock are divided into thirty-four
classes: Conservative Balanced Portfolio Capital Stock - Class I, Conservative
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Balanced Portfolio Capital Stock - Class II, Diversified Bond Portfolio Capital
Stock - Class I, Diversified Bond Portfolio Capital Stock - Class II,
Diversified Conservative Growth Portfolio Capital Stock - Class I, Diversified
Conservative Growth Portfolio Capital Stock - Class II, Equity Portfolio Capital
Stock - Class I, Equity Portfolio Capital Stock - Class II, Equity Income
Portfolio Capital Stock - Class I, Equity Income Portfolio Capital Stock - Class
II, Flexible Managed Portfolio Capital Stock - Class I, Flexible Managed
Portfolio Capital Stock - Class II, Global Portfolio Capital Stock - Class I,
Global Portfolio Capital Stock - Class II, Government Income Portfolio Capital
Stock - Class I, Government Income Portfolio Capital Stock - Class II, High
Yield Bond Portfolio Capital Stock - Class I, High Yield Bond Portfolio Capital
Stock - Class II, Money Market Portfolio Capital Stock - Class I, Money Market
Portfolio Capital Stock - Class II, Natural Resources Portfolio Capital Stock -
Class I, Natural Resources Portfolio Capital Stock - Class II, Prudential
Jennison Portfolio Capital Stock - Class I, Prudential Jennison Portfolio
Capital Stock - Class II, Small Capitalization Stock Portfolio Capital Stock -
Class I, Small Capitalization Stock Portfolio Capital Stock - Class II, Stock
Index Portfolio Capital Stock - Class I, Stock Index Portfolio Capital Stock -
Class II, 20/20 Focus Portfolio Capital Stock - Class I, 20/20 Focus Portfolio
Capital Stock - Class II, Zero Coupon Bond 2000 Portfolio Capital Stock - Class
I, Zero Coupon Bond 2000 Portfolio Capital Stock - Class II, Zero Coupon Bond
2005 Portfolio Capital Stock - Class I and Zero Coupon Bond 2005 Portfolio
Capital Stock - Class II.
Each class of shares of each Portfolio represents an interest in the same assets
of the Portfolio and is identical in all respects except that: (1) Class II
shares are subject to distribution and administration fees whereas Class I
shares are not; (2) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interest of one class differ from the interests of any class; and (3) each class
is offered to a limited group of investors.
The shares of each class, when issued, will be fully paid and non-assessable,
will have no conversion, or similar rights, and will be freely transferable.
Each share of each class is equal as to earnings, assets and voting privileges.
Class II bears the expenses related to the distribution of its shares. In the
event of liquidation, each share of a Portfolio is entitled to its portion of
all of the Portfolio=s assets after all debts and expenses of the Portfolio have
been paid. Since Class II shares bear distribution and administration expenses,
the liquidation proceeds to Class II shareholders are likely to be lower than to
Class I shareholders, whose shares are not subject to any distribution or
administration fees.
From time to time, Prudential has purchased shares of the Fund to provide
initial capital and to enable the Portfolios to avoid unrealistically poor
investment performance that might otherwise result because the amounts available
for investment are too small. Prudential will not redeem any of its shares until
a Portfolio is large enough so that redemption will not have an adverse effect
upon investment performance. Prudential will vote its shares in the same manner
and in the same proportion as the shares held by the separate accounts that
invest in the Fund, which in turn, are generally voted in accordance with
instructions from Contract owners.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Prudential, as the Portfolio=s investment adviser, is responsible for decisions
to buy and sell securities, options on securities and indexes, and futures and
related options for the Fund. Prudential is also responsible for the selection
of brokers, dealers, and futures commission merchants to effect the transactions
and the negotiation of brokerage commissions, if any. Broker-dealers may receive
brokerage commissions on Portfolio transactions, including options and the
purchase and sale of underlying securities upon the exercise of options. Orders
may be directed to any broker or futures commission merchant including, to the
extent and in the manner permitted by applicable law, Prudential Securities
Incorporated, an indirect wholly-owned subsidiary of Prudential (APSI@).
Equity securities traded in the over-the-counter market and bonds, including
convertible bonds, are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments and U.S.
Government agency securities may be purchased directly from the issuer, in which
case no commissions or discounts are paid. The Fund will not deal with PSI in
any transaction in which PSI acts as principal. Thus, it will not deal with PSI
if execution involves PSI's acting as principal with respect to any part of the
Fund's order.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which PSI, during the existence of the syndicate, is a principal
underwriter (as defined in the 1940 Act) except in accordance with rules of the
SEC. This limitation, in the opinion of the Fund, will not significantly affect
the Portfolios' current ability to pursue their respective investment
objectives. However, in the future it is possible that the Fund may under other
circumstances be at a disadvantage because of this limitation in comparison to
other funds not subject to such a limitation.
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In placing orders for portfolio securities of the Fund, Prudential's overriding
objective is to obtain the best possible combination of price and execution.
Prudential seeks to effect each transaction at a price and commission that
provides the most favorable total cost or proceeds reasonably attainable in the
circumstances. The factors that Prudential may consider in selecting a
particular broker, dealer or futures commission merchant firms are: Prudential's
knowledge of negotiated commission rates currently available and other
transaction costs; the nature of the portfolio transaction; the size of the
transaction; the desired timing of the trade; the activity existing and expected
in the market for the particular transaction; confidentiality; the execution,
clearance and settlement capabilities of the firms; the availability of research
and research related services provided through such firms; Prudential's
knowledge of the financial stability of the firms; Prudential's knowledge of
actual or apparent operational problems of firms; and the amount of capital, if
any, that would be contributed by firms executing the transaction. Given these
factors, the Fund may pay transaction costs in excess of that which another firm
might have charged for effecting the same transaction.
When Prudential selects a firm that executes orders or is a party to portfolio
transactions, relevant factors taken into consideration are whether that firm
has furnished research and research related products and/or services, such as
research reports, research compilations, statistical and economic data, computer
data bases, quotation equipment and services, research oriented
computer-software, hardware and services, reports concerning the performance of
accounts, valuations of securities, investment related periodicals, investment
seminars and other economic services and consultants. Such services are used in
connection with some or all of Prudential's investment activities; some of such
services, obtained in connection with the execution of transactions for one
investment account may be used in managing other accounts, and not all of these
services may be used in connection with the Fund.
PSI may act as a securities broker or futures commission merchant for the Fund.
In order for PSI to effect any transactions for the Portfolios, the commissions
received by PSI must be reasonable and fair compared to the commissions received
by other brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a comparable
period of time. This standard would allow PSI to receive no more than the
remuneration that would be expected to be received by an unaffiliated broker or
futures commission merchant in a commensurate arm's-length transaction.
Furthermore, the Board of Directors of the Fund, including a majority of the
directors who are not "interested" persons, has adopted procedures which are
reasonably designed to provide that any commissions, fees or other remuneration
paid to PSI are consistent with the foregoing standard. In accordance with Rule
11a2-2(T) under the Securities Exchange Act of 1934, PSI may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation in a written contract executed by the Fund and PSI. Rule 11a2-2(T)
provides that PSI must furnish to the Fund at least annually a statement setting
forth the total amount of all compensation retained by PSI from transactions
effected for the Fund during the applicable period. Brokerage and futures
transactions with PSI are also subject to such fiduciary standards as may be
imposed by applicable law.
For the years 1998, 1997, and 1996, the Conservative Balanced Portfolio paid
$1,320,049, $3,338,897, and $2,192,303, respectively, in brokerage commissions
and the Flexible Managed Portfolio paid $2,176,922, $6,544,428, and $5,760,972,
respectively, in brokerage commissions. Of those amounts, for 1998, 1997, and
1996, the Conservative Balanced Portfolio paid $32,490, $256,752, and $120,976,
respectively, to Prudential Securities Incorporated, and the Flexible Managed
Portfolio paid $103,021, $428,008, and $582,317, respectively, to Prudential
Securities Incorporated. For 1998, the percentage of commissions paid to
Prudential Securities Incorporated was 2.46% for the Conservative Balanced
Portfolio and 4.73% for the Flexible Managed Portfolio. For 1998, the percentage
of the aggregate dollar amount of transactions effected through Prudential
Securities Incorporated was 0.79% for the Conservative Balanced Portfolio and
1.53% for the Flexible Managed Portfolio.
TAXATION OF THE FUND
The Fund intends to qualify as regulated investment company under Subchapter M
of the Internal Code of 1986, as amended (the "Code"). The Fund generally will
not be subject to federal income tax to the extent it distributes to
shareholders its net investment income and net capital gains in the manner
required by the Code. There is a 4% excise tax on the undistributed income of a
regulated investment company if that company fails to distribute the required
percentage of its net investment income and net capital gains. The Fund intends
to employ practices that will eliminate or minimize this excise tax.
Federal tax law requires that the assets underlying variable contracts,
including the Fund, meet certain diversification requirements. Each Portfolio is
required to diversify its investments each quarter so that no more than 55% of
the value of its assets is represented by any one investment, no more than 70%
is represented by any two investments, no more than 80% is represented by any
three investments, and no more than 90% is represented by any four investments.
Generally, securities of a single issuer are treated as one investment and
obligations of each U.S. Government agency and instrumentality (such as the
Government National Mortgage Association) are treated as issued by separate
issuers. In addition, any security issued, guaranteed or insured (to the extent
so guaranteed or
21
<PAGE>
insured) by the United States or an instrumentality of the U.S.
will be treated as a security issued by the U.S. Government or its
instrumentality, whichever is applicable.
Some foreign securities purchased by the Portfolios may be subject to foreign
taxes which could reduce the return on those securities.
This is a general and brief summary of the tax laws and regulations applicable
to the Fund. The law and regulations may change. You should consult a tax
adviser for complete information and advice.
CUSTODIANS
Investors Fiduciary Trust Company ("IFTC"), 127 West 10th Street, Kansas City,
MO 64105-1716, is the custodian of the assets held by the Portfolios. IFTC is
also the custodian of the assets held in connection with repurchase agreements
entered into by the Portfolios, and is authorized to use the facilities of the
Depository Trust Company and the facilities of the book-entry system of the
Federal Reserve Bank with respect to securities held by these Portfolios. IFTC
employs subcustodians, who were approved in accordance with regulations of the
SEC, for the purpose of providing custodial service for the Fund's foreign
assets held outside the United States.
EXPERTS
The financial statements included in this statement of additional information
and the FINANCIAL HIGHLIGHTS included in the prospectus for each of the three
years ended December 31, 1998 have been audited by PricewaterhouseCoopers LLP,
independent accountants, as stated in their report appearing herein. The Fund is
relying on PricewaterhouseCoopers' report which is given on their authority as
accounting and auditing experts. PricewaterhouseCoopers LLP's principal business
address is 1177 Avenue of the Americas, New York, NY 10036.
LICENSES
As part of the Investment Advisory Agreement, Prudential has granted the Fund a
royalty-free, non-exclusive license to use the words "The Prudential" and
"Prudential" and its registered service mark of a rock representing the Rock of
Gibraltar. However, Prudential may terminate this license if Prudential or a
company controlled by it ceases to be the Fund's investment adviser. Prudential
may also terminate the license for any other reason upon 60 days' written
notice; but, in this event, the Investment Advisory Agreement shall also
terminate 120 days following receipt by the Fund of such notice, unless a
majority of the outstanding voting securities of the Fund vote to continue the
Agreement notwithstanding termination of the license.
The Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's
("S&P"). S&P makes no representation or warranty, express or implied, to
Contract owners or any member of the public regarding the advisability of
investing in securities generally or in the Fund particularly or the ability of
the S&P 500 Index or the S&P SmallCap 600 Index to track general stock market
performance. S&P's only relationship to the Fund is the licensing of certain
trademarks and trade names of S&P and the S&P 500 Index. The S&P 500 Index and
the S&P SmallCap 600 Index are determined, composed and calculated by S&P
without regard to the Fund, the Stock Index Portfolio or the Small
Capitalization Stock Portfolio. S&P has no obligation to take the needs of the
Fund or the Contract owners into consideration in determining, composing or
calculating the S&P 500 Index or the S&P SmallCap 600 Index. S&P is not
responsible for and has not participated in the determination of the prices and
amount of the Fund shares or the timing of the issuance or sale of those shares
or in the determination or calculation of the equation by which the shares are
to be converted into cash. S&P has no obligation or liability in connection with
the administration, marketing or trading of the Fund shares.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500
Index, the S&P SmallCap 600 Index or any data included therein and S&P shall
have no liability for any errors, omissions, or interruptions therein. S&P makes
no warranty, express or implied as to the results to be obtained by the Fund,
Contract owners, or any other person or entity from the use of the S&P 500
Index, the S&P SmallCap 600 Index or any data included therein. S&P makes no
express or implied warranties, and expressly disclaims all warranties of
merchantability or fitness for a particular purpose or use with respect to the
S&P 500 Index, the S&P SmallCap 600 Index or any data included therein. Without
limiting any of the foregoing, in no event shall S&P have any liability for any
special, punitive, indirect, or consequential damages (including lost profits,
even if notifies of the possibility of such damages.
22
<PAGE>
DEBT RATINGS
Moody's Investors Services, Inc. describes its categories of corporate debt
securities and its "Prime-1" and "Prime-2" commercial paper as follows:
BONDS:
Aaa -- Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are
generally known as high-grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long
term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa -- Bonds which are rated "Baa" are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba -- Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate,
and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class.
B -- Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa -- Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which are rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds which are rated "C" are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
COMMERCIAL PAPER:
o Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
- -- Leading market positions in well-established industries.
- -- High rates of return of funds employed.
- -- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
23
<PAGE>
- -- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- -- Well established access to a range of financial markets and assured sources
of alternate liquidity.
o Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Standard & Poor's Ratings Services describes its grades of corporate debt
securities and its "A" commercial paper as follows:
BONDS:
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
BBB Debt rated "BBB" is regarded as having adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in
higher-rated categories.
BB-B-CCC-CC-C
Debt rated "BB", "B", "CCC", "CC", and "C" is regarded as having
predominantly speculative characteristics with respect to capacity to
pay interest and repay principal. BB indicates the least degree of
speculation and C the highest. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major exposures to adverse conditions.
COMMERCIAL PAPER:
Commercial paper rated A by Standard & Poor's Ratings Services has the
following characteristics: Liquidity ratios are better than the
industry average. Long term senior debt rating is "A" or better. In
some cases BBB credits may be acceptable. The issuer has access to at
least two additional channels of borrowing. Basic earnings and cash
flow have an upward trend with allowances made for unusual
circumstances. Typically, the issuer's industry is well established,
the issuer has a strong position within its industry and the
reliability and quality of management is unquestioned. Issuers rated A
are further referred to by use of numbers 1, 2 and 3 to denote
relative strength within this classification.
24
<PAGE>
DIRECTORS AND OFFICERS OF PRUCO LIFE AND
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and major officers of Pruco Life, listed with their principal
occupations during the past five years, are shown below.
DIRECTORS OF PRUCO LIFE
JAMES J. AVERY, JR., CHAIRMAN AND DIRECTOR. -- Senior Vice President and Chief
Actuary, Prudential Individual Insurance Group since 1997; 1995 to 1997:
President of Prudential Select; Prior to 1995: Chief Operating Officer of
Prudential Select.
WILLIAM M. BETHKE, DIRECTOR. -- Chief Investment Officer since 1997; Prior to
1997: President, Prudential Capital Markets Group.
IRA J. KLEINMAN, DIRECTOR. -- Executive Vice President, Prudential International
Insurance Group since 1997; 1995 to 1997: Chief Marketing and Product
Development Officer, Prudential Individual Insurance Group; Prior to 1995:
President, Prudential Select.
ESTHER H. MILNES, PRESIDENT AND DIRECTOR. -- Vice President and Actuary,
Prudential Individual Insurance Group since 1996; Prior to 1996: Senior Vice
President and Chief Actuary, Prudential Insurance and Financial Services.
I. EDWARD PRICE, VICE CHAIRMAN AND DIRECTOR. -- Senior Vice President and
Actuary, Prudential Individual Insurance Group since 1995; Prior to 1995: Chief
Executive Officer, Prudential International Insurance.
KIYOFUMI SAKAGUCHI, DIRECTOR. -- President, Prudential International Insurance
Group since 1995; Prior to 1995: Chairman and Chief Executive Officer, The
Prudential Life Insurance Co., Ltd.
OFFICERS WHO ARE NOT DIRECTORS
C. EDWARD CHAPLIN, TREASURER. -- Vice President and Treasurer of Prudential
since 1995; Prior to 1995: Managing Director and Assistant Treasurer of
Prudential.
JAMES C. DROZANOWSKI, SENIOR VICE PRESIDENT.-- Vice President and Operations
Executive, Prudential Individual Insurance Group since 1996; 1995 to 1996:
President and Chief Executive Officer of Chase Manhattan Bank; Prior to 1995:
Vice President, North America Customer Services, Chase Manhattan Bank.
CLIFFORD E. KIRSCH, CHIEF LEGAL OFFICER AND SECRETARY.-- Chief Counsel, Variable
Products, Law Department of Prudential since 1995; Prior to 1995: Associate
General Counsel with Paine Webber.
FRANK P. MARINO, SENIOR VICE PRESIDENT. -- Vice President, Policyowner Relations
Department, Prudential Individual Insurance Group since 1996; Prior to 1996:
Senior Vice President, Prudential Mutual Fund Services.
EDWARD A. MINOGUE, SENIOR VICE PRESIDENT. -- Vice President, Annuity Services,
Prudential Investments since 1997; Prior to 1997: Director, Merrill Lynch.
HIROSHI NAKAJIMA, SENIOR VICE PRESIDENT. -- President & Chief Executive Officer,
Pruco Life Insurance Company, Taiwan Branch since 1997; Prior to 1997: Senior
Managing Director, Prudential Life Insurance Co., Ltd.
IMANTS SAKSONS, SENIOR VICE PRESIDENT. -- Vice President, Compliance, Prudential
Individual Financial Services since 1998; Prior to 1998: Vice President, Market
Conduct, U.S. Operations, Manulife Financial.
SHIRLEY H. SHAO, SENIOR VICE PRESIDENT AND CHIEF ACTUARY. -- Vice President and
Associate Actuary, Prudential.
DENNIS G. SULLIVAN, VICE PRESIDENT AND CHIEF ACCOUNTING OFFICER. -- Vice
President and Deputy Controller, Prudential since 1998; 1997 to 1998, Vice
President and Controller, ContiFinancial Corporation; Prior to 1997, Director,
Saloman Brothers.
The business address of all directors and officers of Pruco Life is 213
Washington Street, Newark, New Jersey 07102-2992.
Pruco Life directors and officers are elected annually.
25
<PAGE>
MANAGEMENT OF THE FUND
The names of all directors and major officers of the Fund and the principal
occupation of each during the last five years are shown below. Unless otherwise
stated, the address of each director and officer is 751 Broad Street , Newark,
New Jersey 07102-3777.
DIRECTORS OF THE FUND
E. MICHAEL CAULFIELD*, 52, DIRECTOR AND PRESIDENT-- Executive Vice President,
Prudential Financial Management since 1998; 1995 to 1998: Chief Executive
Officer of Prudential Investments; 1995: Chief Executive Officer, Prudential
Preferred Financial Services; prior to 1995: President, Prudential Preferred
Financial Services.
SAUL K. FENSTER, 66, DIRECTOR--President of New Jersey Institute of Technology.
Address: 323 Martin Luther King, Jr. Boulevard, Newark, New Jersey 07102.
W. SCOTT McDONALD, JR., 62, DIRECTOR--Vice President, Kaludis Consulting Group
since 1997; 1995 to 1996: Principal, Scott McDonald & Associates; Prior to 1995:
Executive Vice President of Fairleigh Dickinson University. Address: 9 Zamrok
Way, Morristown, New Jersey 07960.
JOSEPH WEBER, 75, DIRECTOR--Vice President, Interclass (international corporate
learning). Address: 37 Beachmont Terrace, North Caldwell, New Jersey 07006.
OFFICERS WHO ARE NOT DIRECTORS
CAREN A. CUNNINGHAM, Secretary--Assistant General Counsel of Prudential
Investments Fund Management, LLC ("PIFM") Inc. since 1997; prior to 1997: Vice
President and Associate General Counsel of Smith Barney Mutual Fund Management
Inc.
GRACE C. TORRES, TREASURER AND PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER--First
Vice President of PIFM since 1996; prior to 1996: First Vice President of
Prudential Securities Inc.
STEPHEN M. UNGERMAN, ASSISTANT TREASURER--Vice President and Tax Director of
Prudential Investments since 1996; prior to 1996: First Vice President of
Prudential Mutual Fund Management, Inc.
- --------
* This member of the Board is an interested person of Prudential, its affiliates
or the Fund as defined in the 1940 Act. Certain actions of the Board, including
the annual continuance of the Investment Advisory Agreement between the Fund and
Prudential, must be approved by a majority of the members of the Board who are
not interested persons of Prudential, its affiliates or the Fund. Mr. Caulfield,
one of the four members of the Board, is an interested person of Prudential and
the Fund, as that term is defined in the 1940 Act, because he is an officer
and/or affiliated person of Prudential, the investment advisor to the Fund.
Messrs. Fenster, McDonald, and Weber are not interested persons of Prudential,
its affiliates or the Fund. However, Mr. Fenster is President of the New Jersey
Institute of Technology. Prudential has issued a group annuity contract to the
Institute and provides group life and group health insurance to its employees.
No director or officer of the Fund who is also an officer, director or employee
of Prudential or its affiliates is entitled to any remuneration from the Fund
for services as one of its directors or officers. A single annual retainer fee
of $35,000 is paid to each of the directors who is not an interested person of
the Fund for services rendered to five different Prudential mutual funds,
including this Fund. (The amount paid in respect of each fund is determined on
the basis of the funds' relative average net assets.) The directors who are not
interested persons of the Fund are also reimbursed for all expenses incurred in
connection with attendance at meetings.
26
<PAGE>
The following table sets forth the aggregate compensation paid by the Fund to
the Directors who are not affiliated with Prudential for the fiscal year ended
December 31, 1998 and the aggregate compensation paid to such Directors for
service on the Fund's Board and the Boards of any other investment companies
managed by Prudential for the calendar year ended December 31, 1998. Below are
listed all Directors who have served the Fund during its most recent fiscal
year.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
AGGREGATE RETIREMENT BENEFITS ESTIMATED ANNUAL TOTAL COMPENSATION
COMPENSATION FROM ACCRUED AS PART OF BENEFITS UPON RELATED TO FUNDS MANAGED
NAME AND POSITION FUND FUND EXPENSES RETIREMENT BY PRUDENTIAL (**)
- ----------------- ----------------- ------------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
E. Michael Caulfield* -- --
Saul K. Fenster $14,000 None N/A $27,200 (5/19)
W. Scott McDonald $14,400 None N/A $27,200 (5/19)
Joseph Weber $14,400 None N/A $27,200 (5/19)
</TABLE>
* Directors who are "interested" do not receive compensation from Prudential
(including the Fund).
** Indicates number of funds and portfolios(including the Fund) to which
aggregate compensation relates.
As of April 1, 1999, the Directors and officers of the Fund, as a group,
beneficially owned less than one percent of the outstanding shares of the Fund
capital stock.
27
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
CONSERVATIVE BALANCED PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$4,496,058,447).......................... $4,762,474,785
Cash....................................... 845,314
Interest and dividends receivable.......... 42,070,945
Receivable for investments sold............ 324,115
Due from broker -- variation margin........ 85,990
Receivable for capital stock sold.......... 263,037
--------------
Total Assets............................. 4,806,064,186
--------------
LIABILITIES
Payable to investment adviser.............. 6,472,779
Payable for capital stock repurchased...... 1,730,453
Payable for investments purchased.......... 1,518,060
Accrued expenses........................... 383,124
--------------
Total Liabilities........................ 10,104,416
--------------
NET ASSETS................................... $4,795,959,770
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 3,181,043
Paid-in capital, in excess of par........ 4,507,920,747
--------------
4,511,101,790
Accumulated net realized gains on
investments.............................. 15,961,929
Net unrealized appreciation on
investments.............................. 268,896,051
--------------
Net assets, December 31, 1998.............. $4,795,959,770
--------------
--------------
Net asset value and redemption price per
share, 318,104,322 outstanding shares of
common stock (authorized 350,000,000
shares).................................. $ 15.08
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Dividends (net of $227,089 foreign
withholding tax)......................... $ 24,862,659
Interest................................... 202,415,229
---------------
227,277,888
---------------
EXPENSES
Investment advisory fee.................... 26,224,569
Shareholders' reports...................... 335,000
Accounting fees............................ 270,000
Custodian expense.......................... 210,000
Audit fees................................. 45,000
Legal fees................................. 4,000
Directors' fees............................ 3,000
Miscellaneous expenses..................... 22,800
---------------
Total expenses........................... 27,114,369
Less: Custodian fee credit................. (37,735)
---------------
Net expenses............................. 27,076,634
---------------
NET INVESTMENT INCOME........................ 200,201,254
---------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on:
Investments.............................. 252,074,816
Futures contracts........................ 11,004,301
---------------
263,079,117
---------------
Net change in unrealized appreciation on:
Investments.............................. 62,217,963
Futures contracts........................ 4,254,938
---------------
66,472,901
---------------
NET GAIN ON INVESTMENTS...................... 329,552,018
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 529,753,272
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 200,201,254 $ 209,904,550
Net realized gain on investments....................................................... 263,079,117 525,175,186
Net change in unrealized appreciation (depreciation) on investments.................... 66,472,901 (148,830,270)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 529,753,272 586,249,466
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (201,150,300) (209,004,256)
Distributions from net realized capital gains.......................................... (284,059,981) (518,358,296)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (485,210,281) (727,362,552)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [4,155,780 and 4,585,160 shares, respectively]...................... 64,306,807 74,015,405
Capital stock issued in reinvestment of dividends and distributions [32,017,520 and
47,801,252 shares, respectively]...................................................... 485,210,281 727,362,552
Capital stock repurchased [(34,980,138) and (24,112,955) shares, respectively]......... (542,332,348) (394,841,365)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 7,184,740 406,536,592
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 51,727,731 265,423,506
NET ASSETS:
Beginning of year...................................................................... 4,744,232,039 4,478,808,533
------------------ -------------------
End of year (a)........................................................................ $ 4,795,959,770 $ 4,744,232,039
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ -- $ 949,046
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A1
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
FLEXIBLE MANAGED PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$5,149,958,034).......................... $5,386,550,009
Cash....................................... 1,341
Interest and dividends receivable.......... 33,290,998
Due from broker -- variation margin........ 809,059
Receivable for investments sold............ 619,824
Receivable for capital stock sold.......... 232,095
--------------
Total Assets............................. 5,421,503,326
--------------
LIABILITIES
Payable to investment adviser.............. 7,882,895
Payable for capital stock repurchased...... 1,607,590
Payable for investments purchased.......... 1,595,867
Accrued expenses........................... 435,586
--------------
Total Liabilities........................ 11,521,938
--------------
NET ASSETS................................... $5,409,981,388
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 3,267,182
Paid-in capital, in excess of par........ 5,110,844,004
--------------
5,114,111,186
Undistributed net investment income........ 170,556
Accumulated net realized gains on
investments.............................. 43,985,733
Net unrealized appreciation on
investments.............................. 251,713,913
--------------
Net assets, December 31, 1998.............. $5,409,981,388
--------------
--------------
Net asset value and redemption price per
share, 326,718,180 outstanding shares of
common stock (authorized 350,000,000
shares).................................. $ 16.56
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Dividends (net of $614,599 foreign
withholding tax)......................... $ 41,517,034
Interest................................... 170,024,349
---------------
211,541,383
---------------
EXPENSES
Investment advisory fee.................... 33,049,940
Shareholders' reports...................... 415,000
Accounting fees............................ 242,000
Custodian expense.......................... 234,000
Audit fees and expenses.................... 57,000
Directors' fees............................ 3,000
Miscellaneous expenses..................... 26,800
---------------
Total expenses........................... 34,027,740
Less: custodian fee credit................. (74,445)
---------------
Net expenses............................. 33,953,295
---------------
NET INVESTMENT INCOME........................ 177,588,088
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain on:
Investments.............................. 471,749,472
Futures contracts........................ 42,134,442
---------------
513,883,914
---------------
Net change in unrealized appreciation on:
Investments.............................. (183,829,519)
Futures contracts........................ 16,684,360
---------------
(167,145,159)
---------------
NET GAIN ON INVESTMENTS...................... 346,738,755
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 524,326,843
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 177,588,088 $ 160,063,955
Net realized gain on investments....................................................... 513,883,914 867,691,914
Net change in unrealized appreciation on investments................................... (167,145,159) (163,603,096)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 524,326,843 864,152,773
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (178,186,396) (159,343,911)
Distributions from net realized capital gains.......................................... (552,345,875) (823,214,223)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (730,532,271) (982,558,134)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [4,188,120 and 4,859,580 shares, respectively]...................... 74,668,669 92,765,042
Capital stock issued in reinvestment of dividends and distributions [43,615,212 and
56,453,647 shares, respectively]...................................................... 730,532,271 982,558,134
Capital stock repurchased [(38,796,213) and (18,791,325) shares, respectively]......... (679,156,218) (363,698,408)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 126,044,722 711,624,768
------------------ -------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS.................................................. (80,160,706) 593,219,407
NET ASSETS:
Beginning of year...................................................................... 5,490,142,094 4,896,922,687
------------------ -------------------
End of year (a)........................................................................ $ 5,409,981,388 $ 5,490,142,094
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ 170,556 $ 768,864
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A2
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO
December 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 94.3%
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS -- 54.9% (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
AEROSPACE -- 1.3%
Raytheon Co.,
5.95%, 03/15/01............................... Baa1 $ 16,400 $ 16,543,992
6.00%, 12/15/10............................... Baa1 20,000 20,000,000
6.40%, 12/15/18............................... Baa1 25,000 24,812,500
--------------
61,356,492
--------------
AIRLINES -- 3.3%
Continental Airlines, Inc.,
8.00%, 12/15/05............................... Ba2 5,000 4,940,500
Delta Airlines, Inc.,
10.125%, 05/15/10............................. Baa3 20,000 25,019,000
10.375%, 02/01/11............................. Ba1 37,905 48,392,555
United Airlines, Inc.,
10.67%, 05/01/04.............................. Baa3 46,865 55,450,668
11.21%, 05/01/14.............................. Baa3 18,433 24,206,216
--------------
158,008,939
--------------
ASSET-BACKED SECURITIES -- 0.7%
California Infrastructure,
6.14%, 03/25/02............................... Aaa 5,500 5,517,930
6.17%, 03/25/03............................... Aaa 6,000 6,073,560
6.28%, 09/25/05............................... Aaa 7,000 7,167,160
Standard Credit Card Master Trust,
5.95%, 10/07/04............................... Aaa 4,650 4,718,262
Team Financing Corp.,
7.35%, 05/15/03............................... Aa2 11,000 11,304,219
--------------
34,781,131
--------------
BANKS AND SAVINGS & LOANS -- 3.3%
Bank of Nova Scotia,
6.50%, 07/15/07............................... A1 7,200 7,250,256
Bayerische Landesbank Girozentrale,
5.875%, 12/01/08.............................. Aaa 22,000 22,492,800
Capital One Bank,
6.97%, 02/04/02............................... Baa3 25,000 25,007,250
7.08%, 10/30/01............................... Baa3 35,100 35,295,507
7.35%, 06/20/00............................... Baa3 8,100 8,162,208
8.125%, 03/01/00.............................. Baa3 13,150 13,341,069
Citigroup,
6.375%, 11/15/08.............................. A1 17,500 18,094,475
Kansallis-Osake-Pankki, (Finland),
8.65%, 01/01/49............................... Baa1 10,000 10,147,200
National Australia Bank, (Australia),
6.40%, 12/10/07............................... A1 14,000 14,280,000
Okobank, (Finland),
6.75%, 09/27/49............................... A3 6,250 6,243,750
--------------
160,314,515
--------------
CABLE & PAY TELEVISION SYSTEMS -- 2.3%
Cable & Wire Communications, Inc.,
6.75%, 12/01/08............................... Baa1 17,000 17,329,800
Continental Cablevision, Inc.,
8.50%, 09/15/01............................... Ba2 5,545 5,881,914
<CAPTION>
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
CABLE & PAY TELEVISION SYSTEMS (CONT'D.)
<S> <C> <C> <C>
Tele-Communications, Inc.,
6.34%, 02/01/02............................... Ba1 $ 12,000 $ 12,291,000
7.375%, 02/15/00.............................. Ba1 40,700 41,585,225
8.25%, 01/15/03............................... Baa3 2,000 2,194,800
9.25%, 04/15/02............................... Baa3 9,500 10,563,525
9.875%, 06/15/22.............................. Baa3 12,900 18,288,975
--------------
108,135,239
--------------
COMMERCIAL SERVICES -- 0.8%
Cendant Corp.,
7.75%, 12/01/03............................... Baa1 39,000 39,416,130
--------------
COMPUTERS SOFTWARE & SERVICES -- 0.6%
Computer Associates International, Inc.,
6.375%, 04/15/05.............................. Baa1 14,300 14,151,852
Qwest Comm,
7.25%, 11/01/08............................... Ba1 8,000 8,180,000
Worldcom Inc,
6.125%, 08/15/01.............................. Baa2 6,700 6,807,066
--------------
29,138,918
--------------
CONSULTING -- 2.6%
Comdisco Inc., M.T.N.,
5.94%, 04/13/00............................... Baa1 12,500 12,468,750
6.32%, 11/27/00............................... Baa1 37,750 37,925,915
6.375%, 11/30/01.............................. Baa1 21,500 21,593,095
6.65%, 11/13/01............................... Baa1 50,000 50,385,000
--------------
122,372,760
--------------
CONSUMER SERVICES -- 0.3%
Loewen Group, Inc.,
7.20%, 06/01/03............................... Ba3 10,000 8,400,000
7.60%, 06/01/08............................... Ba3 3,400 2,686,000
Service Corp. International,
7.00%, 06/01/15............................... Baa1 2,500 2,588,375
--------------
13,674,375
--------------
CONTAINERS -- 0.6%
Owens-Illinois, Inc.,
7.15%, 05/15/05............................... Ba1 30,000 30,066,300
7.50%, 05/15/10............................... Ba1 800 815,216
--------------
30,881,516
--------------
DRUGS & MEDICAL SUPPLIES -- 0.5%
Mallinckrodt, Inc.,
6.30%, 03/15/11(a)............................ Baa2 16,780 16,520,958
Merck & Co Inc.,
5.95%, 12/01/28............................... Aaa 10,000 9,982,500
--------------
26,503,458
--------------
ELECTRICAL -- 0.3%
Enersis Sa,
6.90%, 12/01/06............................... Baa1 10,000 9,182,000
7.40%, 12/01/16............................... Baa1 6,400 5,267,200
--------------
14,449,200
--------------
FINANCIAL SERVICES -- 13.2%
Advanta Corp., M.T.N.,
7.50%, 08/28/00............................... Ba2 35,000 32,866,400
Arkwright Corp.,
9.625%, 08/15/26.............................. Baa3 8,000 9,568,800
Associates Corp.,
6.25%, 11/01/08............................... Aa3 21,000 21,745,920
6.95%, 11/01/18............................... Aa3 24,000 25,573,920
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B1
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
FINANCIAL SERVICES (CONT'D.)
<S> <C> <C> <C>
AT&T Capital Corp, M.T.N.,
6.25%, 05/15/01............................... Baa3 $ 35,500 $ 35,016,845
7.50%, 11/15/00............................... Baa3 47,000 47,575,280
BCH Financial Services
5.72%, 04/28/05............................... A3 10,000 9,933,200
Bear Stearns & Co,
6.50%, 07/05/00............................... A2 20,000 20,203,400
Conseco Inc.,
6.80%, 06/15/05............................... Baa3 13,000 11,801,400
8.70%, 11/15/26............................... Ba2 29,813 27,237,594
8.796%, 04/01/27.............................. Ba2 7,500 6,857,250
ContiFinancial Corp.,
7.50%, 03/15/02............................... Ba1 31,300 21,910,000
8.375%, 08/15/03.............................. Ba1 16,085 11,259,500
Donaldson Lufkin, & Jenrette Inc.,
5.625%, 02/15/16.............................. Baa1 5,480 5,415,117
Enterprise Rent-A-Car USA Finance Co., M.T.N.,
6.35%, 01/15/01............................... Baa3 11,200 11,226,992
6.95%, 03/01/04............................... Baa2 17,500 17,663,100
7.00%, 06/15/00............................... Baa3 23,000 23,098,210
7.50%, 06/15/03............................... Baa3 5,000 5,158,900
First Industrial, L.P.,
6.50%, 04/05/11............................... Baa2 9,000 8,864,730
General Motors Acceptance Corp., M.T.N.,
5.95%, 04/20/01............................... A2 30,300 30,542,400
Household Finance Corp.,
6.50%, 11/15/08............................... A2 72,000 74,520,000
Lehman Brothers Holdings, Inc.,
6.33%, 08/01/00............................... Baa1 17,200 17,317,476
6.40%, 08/30/00............................... Baa1 21,700 21,705,425
MCN Investment Corp.,
6.30%, 04/02/11............................... Baa2 8,250 8,194,725
Merrill Lynch, Pierce, Fenner & Smith, Inc.,
6.875%, 11/15/18.............................. Aa3 16,900 17,519,385
Morgan Stanley Dean Witter & Co., M.T.N.,
5.89%, 03/20/00............................... A1 20,000 20,140,800
6.09%, 03/09/11............................... A1 21,000 21,280,350
PaineWebber Group, Inc.,
7.015%, 02/10/04.............................. Baa1 6,000 6,288,840
7.625%, 10/15/08.............................. Baa1 5,000 5,387,250
PT Alatief Freeport Financial Co., Sr. Notes,
(Netherlands),
9.75%, 04/15/01 (b)/(c)....................... Ba2 8,950 6,444,000
Salomon, Inc.,
6.59%, 02/21/01............................... Baa1 9,750 9,937,200
6.75%, 02/15/03............................... Baa1 5,000 5,137,450
7.25%, 05/01/01............................... Baa1 8,625 8,933,430
Textron Financial Corp.,
6.05%, 03/16/09............................... Aaa 26,319 26,369,655
--------------
632,694,944
--------------
<CAPTION>
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
FOREST PRODUCTS -- 0.4%
Fort James Corp.,
6.234%, 03/15/11.............................. Baa3 $ 17,500 $ 17,664,675
--------------
INDUSTRIAL -- 2.5%
Compania Sud Americana de Vapores, S.A.,
(Chile),
7.375%, 12/08/03.............................. Baa 7,600 6,821,000
Scotia Pacific Co.,
7.11%, 01/20/14............................... A3 7,900 7,518,904
7.71%, 01/20/14............................... Baa2 23,800 21,321,944
Security Capital Group,
6.95%, 06/15/05............................... Baa1 4,500 4,297,500
U.S. Filter Corp.,
6.375%, 05/15/01.............................. Ba1 60,090 59,445,835
6.50%, 05/15/03............................... Ba1 20,000 19,481,800
--------------
118,886,983
--------------
LODGING -- 0.9%
ITT Corp.,
6.25%, 11/15/00............................... Ba1 23,703 22,867,232
6.75%, 11/15/03............................... Baa2 21,500 19,797,845
--------------
42,665,077
--------------
MEDIA -- 1.1%
Paramount Communications, Inc.,
7.50%, 01/15/02............................... Ba2 6,425 6,704,680
Time Warner, Inc.,
6.10%, 12/30/01............................... Ba1 27,650 27,926,500
8.11%, 08/15/06............................... Ba1 1,500 1,710,075
Viacom, Inc.,
7.75%, 06/01/05............................... Ba2 13,775 14,943,533
--------------
51,284,788
--------------
MISCELLANEOUS -- 0.1%
Tokai Pfd Capital,
9.98%, 12/29/49............................... A3 4,700 3,948,000
--------------
OIL & GAS -- 0.3%
B.J. Services Co.,
7.00%, 02/01/06............................... Ba1 4,000 4,139,880
Petro Canada,
7.00%, 11/15/28............................... A3 10,000 9,861,200
--------------
14,001,080
--------------
OIL & GAS SERVICES -- 3.7%
KN Energy, Inc.,
6.30%, 03/01/21............................... Baa2 27,550 27,627,416
6.45%, 11/30/01............................... Baa2 18,000 18,009,000
R&B Falcon Corp.
6.50%, 04/15/03............................... Ba1 44,350 40,283,992
6.75%, 04/15/05............................... Ba1 28,750 24,725,000
Seagull Energy Co.,
7.50%, 09/15/27............................... Ba1 8,000 7,165,360
Williams Companies, Inc.,
5.95%, 02/15/10............................... Baa2 59,000 59,064,900
--------------
176,875,668
--------------
REAL ESTATE INVESTMENT TRUST -- 3.5%
Camden Prop Trst,
7.23%, 10/30/00............................... Baa2 22,000 22,052,800
Colonial Realty,
7.00%, 07/14/07............................... Baa3 4,250 4,075,368
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B2
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
REAL ESTATE INVESTMENT TRUST (CONT'D.)
<S> <C> <C> <C>
EOP Operating, L.P.,
6.50%, 06/15/04............................... Baa1 $ 6,000 $ 5,900,400
6.625%, 02/15/05.............................. Baa 17,938 17,583,366
Equity Residential,
6.15%, 09/15/00............................... A3 45,000 44,703,000
ERP Operating, L.P.,
6.63%, 04/13/15............................... A3 22,400 22,103,424
Felcor Suite Hotels, Inc.,
7.625%, 10/01/07.............................. Ba1 8,000 7,620,000
Gables Realty Trust,
6.80%, 03/15/05............................... Baa2 7,500 7,157,175
Simon Debartolo Group, Inc.,
6.75%, 06/15/05............................... Baa1 17,500 16,969,750
6.75%, 07/15/04............................... Baa1 8,000 7,897,520
6.875%, 10/27/05.............................. Baa1 14,858 14,539,296
--------------
170,602,099
--------------
RETAIL -- 4.3%
Federated Department Stores, Inc.,
8.125%, 10/15/02.............................. Ba1 41,030 44,227,468
8.50%, 06/15/03............................... Ba1 32,400 35,736,552
Fred Meyer, Inc.,
7.15%, 03/01/03............................... Ba2 12,400 12,900,712
Rite Aid Corp.,
6.70%, 12/15/01............................... A3 5,000 5,128,000
Safeway Stores Inc.,
5.75%, 11/15/00............................... Baa2 6,000 6,012,000
6.05%, 11/15/03............................... Baa2 12,000 12,082,320
Saks Inc.,
7.25%, 12/01/04............................... Baa3 20,900 20,974,195
7.50%, 12/01/10............................... Baa3 22,500 22,498,425
8.25%, 11/15/08............................... Baa3 30,900 32,754,000
Sears Roebuk & Co.,
6.50%, 12/01/28............................... A2 16,000 15,704,480
--------------
208,018,152
--------------
TECHNOLOGY -- 0.7%
Time Warner Inc,
6.625%, 05/15/29.............................. Baa3 33,000 33,576,180
--------------
TELECOMMUNICATIONS -- 2.0%
360 Communication Co.,
7.125%, 03/01/03.............................. Ba2 22,550 23,863,538
7.60%, 04/01/09............................... Ba1 7,000 7,932,750
Sprint Cap Corp.,
5.70%, 11/15/03............................... Baa1 11,000 11,039,270
6.125%, 11/15/08.............................. Baa1 25,000 25,545,750
6.875%, 11/15/28.............................. Baa1 24,500 25,462,850
--------------
93,844,158
--------------
TOBACCO -- 1.3%
Philip Morris Cos., Inc.,
6.15%, 03/15/10............................... A2 40,000 40,332,000
RJR Nabisco, Inc.,
8.75%, 08/15/05............................... Baa3 6,900 6,962,584
9.25%, 08/15/13............................... Baa3 13,571 13,953,159
--------------
61,247,743
--------------
<CAPTION>
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
UTILITIES -- 0.5%
Commonwealth Edison Co.,
7.375%, 01/15/04.............................. Baa3 $ 14,000 $ 14,930,300
Niagara Mohawk Power,
7.375%, 08/01/03.............................. Ba2 10,000 10,569,100
--------------
25,499,400
--------------
WASTE MANAGEMENT -- 0.2%
USA Waste Service,
6.125%, 07/15/01.............................. Baa3 10,000 10,062,000
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 3.6%
United States Treasury Bond,
8.00%, 11/15/21............................... 55,300 73,937,759
United States Treasury Notes,
4.75%, 11/15/08............................... 8,600 8,667,166
5.50%, 08/15/28............................... 36,075 37,760,424
5.75%, 08/15/03............................... 3,900 4,072,458
5.875%, 11/15/05.............................. 2,200 2,346,784
6.375%, 08/15/27.............................. 27,000 31,032,990
7.50%, 02/15/05............................... 900 1,030,500
7.875%, 11/15/04.............................. 3,000 3,475,770
United States Treasury Strip,
6.50%, 05/15/05............................... 10,150 11,123,791
--------------
173,447,642
--------------
TOTAL LONG-TERM BONDS
(COST $2,694,909,653).................................................... 2,633,351,262
--------------
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCKS -- 38.7% SHARES
-------------
<S> <C> <C>
AEROSPACE -- 0.6%
Aeroquip-Vickers, Inc..................................... 4,400 131,725
AlliedSignal, Inc......................................... 88,300 3,912,794
Boeing Co................................................. 156,500 5,105,812
GenCorp, Inc.............................................. 98,400 2,453,850
General Dynamics Corp..................................... 19,700 1,154,912
Goodrich (B.F.) Co........................................ 11,300 405,387
Litton Industries, Inc.(b)................................ 77,600 5,063,400
Lockheed Martin Corp...................................... 30,400 2,576,400
Northrop Grumman Corp..................................... 10,500 767,812
Parker-Hannifin Corp...................................... 60,625 1,985,469
Raytheon Co. (Class "B" Stock)............................ 52,900 2,816,925
United Technologies Corp.................................. 36,500 3,969,375
--------------
30,343,861
--------------
AIRLINES -- 0.4%
AMR Corp.(b).............................................. 183,600 10,901,250
Delta Air Lines, Inc...................................... 23,400 1,216,800
Southwest Airlines Co..................................... 51,900 1,164,506
US Airways Group, Inc.(b)................................. 128,200 6,666,400
--------------
19,948,956
--------------
APPAREL -- 0.1%
Fruit of the Loom, Inc. (Class "A" Stock)(b).............. 84,100 1,161,631
Nike, Inc. (Class "B" Stock).............................. 45,500 1,845,594
Phillips-Van Heusen Corp.................................. 94,700 680,656
Reebok International Ltd.................................. 8,800 130,900
--------------
3,818,781
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B3
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
AUTOS - CARS & TRUCKS -- 1.0%
<S> <C> <C>
Cummins Engine Co., Inc................................... 6,000 $ 213,000
DaimlerChrysler AG........................................ 80,071 7,691,820
Dana Corp................................................. 25,600 1,046,400
Ford Motor Co............................................. 281,900 16,544,006
General Motors Corp....................................... 213,000 15,242,813
Genuine Parts Co.......................................... 28,000 936,250
Johnson Controls, Inc..................................... 13,200 778,800
MascoTech, Inc............................................ 94,400 1,616,600
Midas, Inc................................................ 22,100 687,862
Navistar International Corp.(b)........................... 11,300 322,050
PACCAR, Inc............................................... 12,200 501,725
Titan International, Inc.................................. 101,250 961,875
TRW, Inc.................................................. 19,300 1,084,419
--------------
47,627,620
--------------
BANKS AND SAVINGS & LOANS -- 2.2%
Banc One Corp............................................. 183,772 9,383,858
Bank of New York Co., Inc................................. 118,000 4,749,500
BankAmerica Corp.......................................... 271,761 16,339,630
BankBoston Corp........................................... 45,600 1,775,550
Bankers Trust Corp........................................ 15,300 1,307,194
BB&T Corp................................................. 44,600 1,797,937
Chase Manhattan Corp...................................... 133,600 9,093,150
Comerica, Inc............................................. 24,700 1,684,231
First Union Corp.......................................... 151,500 9,213,094
Fleet Financial Group, Inc................................ 87,000 3,887,812
Golden West Financial Corp................................ 8,900 816,019
Huntington Bancshares, Inc................................ 33,000 992,062
KeyCorp................................................... 68,800 2,201,600
Mellon Bank Corp.......................................... 39,900 2,743,125
Mercantile Bancorporation, Inc............................ 22,700 1,047,037
Morgan (J.P.) & Co., Inc.................................. 27,800 2,920,737
National City Corp........................................ 51,400 3,726,500
Northern Trust Corp....................................... 17,500 1,527,969
PNC Bank Corp............................................. 47,800 2,587,175
Providian Financial Corp.................................. 22,350 1,676,250
Regions Financial Corp.................................... 30,000 1,209,375
Republic New York Corp.................................... 17,100 779,119
Summit Bancorp............................................ 27,600 1,205,775
Suntrust Banks, Inc....................................... 33,000 2,524,500
Synovus Financial Corp.................................... 41,150 1,003,031
U.S. Bancorp.............................................. 115,300 4,093,150
Union Planters Corp....................................... 17,000 770,312
Wachovia Corp............................................. 32,300 2,824,231
Wells Fargo & Co.......................................... 251,300 10,036,294
--------------
103,916,217
--------------
BUSINESS SERVICES -- 0.1%
Equifax, Inc.............................................. 23,500 803,406
Omnicom Group, Inc........................................ 25,400 1,473,200
--------------
2,276,606
--------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
CHEMICALS -- 0.7%
Air Products & Chemicals, Inc............................. 36,900 $ 1,476,000
Dow Chemical Co........................................... 35,500 3,228,281
Du Pont (E.I.) de Nemours & Co............................ 177,200 9,402,675
Eastman Chemical Co....................................... 12,300 550,425
Engelhard Corp............................................ 22,600 440,700
Ferro Corp................................................ 134,900 3,507,400
FMC Corp.(b).............................................. 5,400 302,400
Grace (W.R.) & Co......................................... 11,600 181,975
Great Lakes Chemical Corp................................. 9,400 376,000
Hercules, Inc............................................. 15,100 413,362
Millennium Chemicals, Inc.(b)............................. 146,527 2,912,224
Monsanto Co............................................... 92,900 4,412,750
Morton International, Inc................................. 20,400 499,800
Nalco Chemical Co......................................... 10,400 322,400
OM Group, Inc............................................. 63,300 2,310,450
Praxair, Inc.............................................. 24,700 870,675
Raychem Corp.............................................. 13,300 429,756
Rohm & Haas Co............................................ 28,800 867,600
Sigma-Aldrich Corp........................................ 15,700 461,187
Union Carbide Corp........................................ 19,300 820,250
--------------
33,786,310
--------------
COMMERCIAL SERVICES -- 0.1%
Cendant Corp.(b).......................................... 129,900 2,476,219
Deluxe Corp............................................... 12,700 464,344
Moore Corp. Ltd........................................... 13,900 152,900
--------------
3,093,463
--------------
COMPUTER SERVICES -- 2.4%
3Com Corp.(b)............................................. 55,500 2,487,094
Adobe Systems, Inc........................................ 10,800 504,900
America Online, Inc.(b)................................... 10,500 1,680,000
Autodesk, Inc............................................. 7,300 311,619
Automatic Data Processing, Inc............................ 46,800 3,752,775
BMC Software, Inc.(b)..................................... 31,000 1,381,437
Cabletron Systems, Inc.(b)................................ 24,800 207,700
Ceridian Corp.(b)......................................... 11,300 788,881
Cisco Systems, Inc.(b).................................... 241,100 22,377,094
Computer Associates International, Inc.................... 85,500 3,644,437
Computer Sciences Corp.(b)................................ 24,400 1,572,275
Electronic Data Systems Corp.............................. 76,000 3,819,000
EMC Corp.(b).............................................. 77,700 6,604,500
First Data Corp........................................... 67,000 2,123,062
Microsoft Corp.(b)........................................ 383,300 53,158,919
Novell, Inc.(b)........................................... 55,000 996,875
Oracle Corp.(b)........................................... 154,100 6,645,562
Parametric Technology Corp.(b)............................ 40,200 658,275
Peoplesoft, Inc........................................... 30,000 568,125
Silicon Graphics, Inc.(b)................................. 29,400 378,525
Unisys Corp............................................... 39,100 1,346,506
--------------
115,007,561
--------------
COMPUTERS -- 1.5%
Apple Computer, Inc.(b)................................... 20,800 851,500
Compaq Computer Corp...................................... 258,789 10,852,964
Data General Corp.(b)..................................... 7,600 124,925
Dell Computer Corp.(b).................................... 196,300 14,366,706
Gateway 2000, Inc.(b)..................................... 24,300 1,243,856
Hewlett-Packard Co........................................ 162,900 11,128,106
International Business Machines Corp...................... 144,700 26,733,325
Seagate Technology, Inc.(b)............................... 37,900 1,146,475
Sun Microsystems, Inc.(b)................................. 59,100 5,060,437
--------------
71,508,294
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B4
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
CONSTRUCTION -- 0.2%
<S> <C> <C>
Centex Corp............................................... 9,300 $ 419,081
Fluor Corp................................................ 13,100 557,569
Foster Wheeler Corp....................................... 6,400 84,400
Oakwood Homes Corp........................................ 139,300 2,115,619
Pulte Corp................................................ 6,600 183,562
Standard Pacific Corp..................................... 154,000 2,175,250
Webb (Del E.) Corp........................................ 140,300 3,867,019
--------------
9,402,500
--------------
CONTAINERS -- 0.1%
Ball Corp................................................. 4,700 215,025
Bemis Co., Inc............................................ 8,300 314,881
Crown Cork & Seal Co., Inc................................ 20,100 619,331
Owens-Illinois, Inc.(b)................................... 81,500 2,495,937
Sealed Air Corp........................................... 12,900 658,706
--------------
4,303,880
--------------
COSMETICS & SOAPS -- 0.7%
Alberto Culver Co. (Class "B" Stock)...................... 8,900 237,519
Avon Products, Inc........................................ 41,400 1,831,950
Colgate-Palmolive Co...................................... 46,300 4,300,112
Gillette Co............................................... 175,400 8,474,012
International Flavors & Fragrances, Inc................... 17,100 755,606
Procter & Gamble Co....................................... 210,200 19,193,887
--------------
34,793,086
--------------
DIVERSIFIED CONSUMER PRODUCTS -- 0.1%
Eastman Kodak Co.......................................... 86,800 6,249,600
--------------
DIVERSIFIED OFFICE EQUIPMENT -- 0.2%
Avery Dennison Corp....................................... 17,300 779,581
Pitney Bowes, Inc......................................... 42,800 2,827,475
Xerox Corp................................................ 51,000 6,018,000
--------------
9,625,056
--------------
DIVERSIFIED OPERATIONS -- 1.1%
Fortune Brands, Inc....................................... 26,900 850,712
General Electric Capital Corp............................. 504,700 51,510,944
--------------
52,361,656
--------------
DRUGS AND MEDICAL SUPPLIES -- 3.8%
Abbott Laboratories....................................... 239,600 11,740,400
Allergan, Inc............................................. 10,200 660,450
ALZA Corp.(b)............................................. 13,400 700,150
American Home Products Corp............................... 203,500 11,459,594
Amgen, Inc.(b)............................................ 41,200 4,307,975
Bard (C.R.), Inc.......................................... 8,900 440,550
Bausch & Lomb, Inc........................................ 8,700 522,000
Baxter International, Inc................................. 43,900 2,823,319
Becton, Dickinson & Co.................................... 38,200 1,630,662
Biomet, Inc............................................... 17,500 704,375
Boston Scientific Corp.(b)................................ 61,000 1,635,562
Bristol-Myers Squibb Co................................... 154,300 20,647,269
Cardinal Health, Inc...................................... 29,700 2,253,487
Guidant Corp.............................................. 23,600 2,601,900
Johnson & Johnson......................................... 210,600 17,664,075
Lilly (Eli) & Co.......................................... 171,700 15,259,837
Mallinckrodt, Inc......................................... 11,400 351,262
Medtronic, Inc............................................ 73,400 5,449,950
Merck & Co., Inc.......................................... 184,800 27,292,650
Pfizer, Inc.,............................................. 204,200 25,614,337
Pharmacia & Upjohn, Inc................................... 79,500 4,501,687
Schering-Plough Corp...................................... 229,400 12,674,350
St. Jude Medical, Inc.(b)................................. 14,400 398,700
Warner-Lambert Co......................................... 127,900 9,616,481
--------------
180,951,022
--------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
ELECTRONICS -- 1.3%
Advanced Micro Devices, Inc.(b)........................... 22,200 $ 642,412
AMP Inc................................................... 34,500 1,796,156
Applied Materials, Inc.(b)................................ 57,300 2,445,994
Belden, Inc............................................... 67,100 1,421,681
EG&G, Inc................................................. 7,100 197,469
Emerson Electric Co....................................... 69,400 4,341,837
Grainger (W.W.), Inc...................................... 15,600 649,350
Harris Corp............................................... 12,500 457,812
Honeywell, Inc............................................ 19,900 1,498,719
Intel Corp................................................ 260,600 30,897,387
KLA-Tencor Corp.(b)....................................... 13,200 572,550
LSI Logic Corp.(b)........................................ 22,200 357,975
Micron Technology, Inc.................................... 33,100 1,673,619
Motorola, Inc............................................. 93,500 5,709,344
Perkin-Elmer Corp......................................... 7,600 741,475
Rockwell International Corp............................... 31,500 1,529,719
Solectron Corp............................................ 5,000 464,687
Tektronix, Inc............................................ 7,900 237,494
Texas Instruments, Inc.................................... 61,100 5,227,869
Thomas & Betts Corp....................................... 8,600 372,487
--------------
61,236,036
--------------
ENGINEERING & CONSTRUCTION
Giant Cement Holdings, Inc.(b)............................ 58,100 1,437,975
--------------
ENVIRONMENTAL SERVICES
Browning-Ferris Industries, Inc........................... 28,800 819,000
--------------
EXPLORATION & PRODUCTION
Apex Silver Mines Ltd..................................... 82,200 678,150
--------------
FINANCIAL SERVICES -- 2.2%
American Express Co....................................... 70,800 7,239,300
Associates First Capital Corp............................. 108,544 4,599,552
Bear Stearns Companies, Inc............................... 16,500 616,687
Block (H.R.), Inc......................................... 16,400 738,000
Capital One Financial Corp................................ 9,600 1,104,000
Citigroup, Inc............................................ 407,500 20,171,250
Countrywide Credit Industries, Inc........................ 17,000 853,187
Dun & Bradstreet Corp..................................... 26,700 842,719
Federal Home Loan Mortgage Corp........................... 105,700 6,811,044
Federal National Mortgage Assoc........................... 161,900 11,980,600
Fifth Third Bancorp....................................... 39,500 2,816,844
Franklin Resource, Inc.................................... 39,600 1,267,200
Household International, Inc.............................. 75,752 3,001,673
Lehman Brothers Holdings, Inc............................. 189,600 8,354,250
MBNA Corp................................................. 117,750 2,936,391
Merrill Lynch & Co., Inc.................................. 112,300 7,496,025
Morgan Stanley Dean Witter & Co........................... 146,790 10,422,090
Paychex, Inc.............................................. 23,000 1,183,062
Schwab (Charles) Corp.(b)................................. 62,400 3,506,100
SLM Holding Corp.......................................... 25,000 1,200,000
State Street Corp......................................... 25,200 1,752,975
Sunamerica, Inc........................................... 30,600 2,482,425
Transamerica Corp......................................... 9,800 1,131,900
Washington Mutual, Inc.................................... 89,178 3,405,485
--------------
105,912,759
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B5
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
FOOD & BEVERAGES -- 1.7%
<S> <C> <C>
Anheuser-Busch Companies, Inc............................. 76,700 $ 5,033,437
Archer-Daniels-Midland Co................................. 93,975 1,615,195
Bestfoods................................................. 45,100 2,401,575
Brown-Forman Corp. (Class "B" Stock)...................... 10,800 817,425
Campbell Soup Co.......................................... 71,500 3,932,500
Coca Cola Enterprises, Inc................................ 60,000 2,145,000
Coca-Cola Co.............................................. 383,500 25,646,562
ConAgra, Inc.............................................. 74,500 2,346,750
Coors (Adolph) Co. (Class "B" Stock)...................... 5,800 327,337
General Mills, Inc........................................ 24,800 1,928,200
Heinz (H.J.) & Co......................................... 57,200 3,238,950
Hershey Foods Corp........................................ 22,400 1,393,000
Kellogg Co................................................ 64,400 2,197,650
PepsiCo, Inc.............................................. 235,600 9,644,875
Pioneer Hi-Bred International, Inc........................ 38,300 1,034,100
Quaker Oats Co............................................ 21,700 1,291,150
Ralston-Ralston Purina Group.............................. 50,400 1,631,700
Sara Lee Corp............................................. 148,200 4,177,388
Seagram Co., Ltd.......................................... 55,800 2,120,400
Sysco Corp................................................ 53,300 1,462,419
Whitman Corp.............................................. 132,800 3,369,800
Wrigley (William) Jr. Co.................................. 18,200 1,630,037
--------------
79,385,450
--------------
FOREST PRODUCTS -- 0.6%
Boise Cascade Corp........................................ 152,000 4,712,000
Champion International Corp............................... 109,700 4,442,850
Fort James Corp........................................... 32,700 1,308,000
Georgia-Pacific Corp...................................... 14,500 849,156
International Paper Co.................................... 47,300 2,119,631
Louisiana-Pacific Corp.................................... 189,700 3,473,881
Mead Corp................................................. 111,300 3,262,481
Potlatch Corp............................................. 4,500 165,937
Temple-Inland, Inc........................................ 8,900 527,881
Union Camp Corp........................................... 10,900 735,750
Westvaco Corp............................................. 16,000 429,000
Weyerhaeuser Co........................................... 31,300 1,590,431
Willamette Industries, Inc................................ 86,500 2,897,750
--------------
26,514,748
--------------
GAS PIPELINES -- 0.1%
Columbia Energy Group..................................... 13,000 750,750
Consolidated Natural Gas Co............................... 15,000 810,000
Peoples Energy Corp....................................... 5,500 219,312
Sempra Energy............................................. 33,699 855,112
Sonat, Inc................................................ 17,200 465,475
Williams Companies, Inc................................... 64,400 2,008,475
--------------
5,109,124
--------------
HOSPITALS/ HEALTHCARE -- 0.3%
Columbia/HCA Healthcare Corp.............................. 301,900 7,472,025
HBO & Co.................................................. 69,000 1,979,437
Healthsouth Corp.(b)...................................... 63,600 981,825
Humana, Inc.(b)........................................... 25,700 457,781
IMS Health, Inc........................................... 25,400 1,916,112
Manor Care, Inc........................................... 12,000 352,500
Service Corp. International............................... 39,400 1,499,662
Shared Medical Systems Corp............................... 4,100 204,487
Tenet Healthcare Corp.(b)................................. 48,000 1,260,000
--------------
16,123,829
--------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
HOUSEHOLD PRODUCTS & PERSONAL CARE -- 0.2%
Clorox Co................................................. 16,200 $ 1,892,362
Kimberly-Clark Corp....................................... 87,000 4,741,500
Leggett & Platt, Inc...................................... 114,700 2,523,400
--------------
9,157,262
--------------
HOUSING RELATED -- 0.5%
Armstrong World Industries, Inc........................... 6,400 386,000
Fleetwood Enterprises, Inc................................ 5,700 198,075
Hanson, PLC, ADR, (United Kingdom)........................ 309,562 12,072,918
Kaufman & Broad Home Corp................................. 6,100 175,375
Lowe's Companies, Inc..................................... 54,800 2,805,075
Masco Corp................................................ 51,800 1,489,250
Maytag Corp............................................... 14,900 927,525
Owens Corning............................................. 106,900 3,788,269
Stanley Works............................................. 14,000 388,500
Tupperware Corp........................................... 9,600 157,800
Whirlpool Corp............................................ 11,700 647,887
--------------
23,036,674
--------------
INSURANCE -- 1.5%
Aetna, Inc................................................ 23,300 1,831,962
Allstate Corp............................................. 131,300 5,071,462
American General Corp..................................... 39,700 3,096,600
American International Group, Inc......................... 163,500 15,798,187
Aon Corp.................................................. 26,300 1,456,362
Berkley (W.R.) Corp....................................... 42,400 1,444,250
Berkshire Hathaway, Inc. (Class "B" Stock)................ 452 1,061,025
Chubb Corp................................................ 26,700 1,732,162
CIGNA Corp................................................ 34,800 2,690,475
Cincinnati Financial Corp................................. 25,800 944,925
Conseco, Inc.............................................. 49,021 1,498,204
Financial Security Assurance Holdings Ltd................. 34,000 1,844,500
Hartford Financial Services Group, Inc.................... 37,000 2,030,375
Jefferson-Pilot Corp...................................... 16,600 1,245,000
Lincoln National Corp..................................... 16,000 1,309,000
Loews Corp................................................ 47,000 4,617,750
Marsh & McLennan Companies, Inc........................... 39,900 2,331,656
MBIA, Inc................................................. 15,300 1,003,106
MGIC Investment Corp...................................... 17,900 712,644
Progressive Corp.......................................... 11,300 1,913,938
Provident Companies, Inc.................................. 70,400 2,921,600
Reinsurance Group of America, Inc......................... 115,550 8,088,500
SAFECO Corp............................................... 22,100 948,919
St. Paul Companies, Inc................................... 36,200 1,257,950
TIG Holdings, Inc......................................... 85,500 1,330,594
Torchmark Corp............................................ 21,900 773,329
Trenwick Group, Inc....................................... 64,850 2,115,731
United Healthcare Corp.................................... 29,500 1,270,344
UNUM Corp................................................. 21,700 1,266,737
--------------
73,607,287
--------------
INTRUMENTS-CONTROLS
Flowserve Corp............................................ 39,486 653,987
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B6
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
LEISURE -- 0.3%
<S> <C> <C>
Brunswick Corp............................................ 15,600 $ 386,100
Carnival Corp. (Class "A" Stock).......................... 78,500 3,768,000
Disney (Walt) Co.......................................... 317,100 9,513,000
Harrah's Entertainment, Inc.(b)........................... 15,800 247,862
Hilton Hotels Corp........................................ 39,200 749,700
King World Productions, Inc............................... 11,500 338,531
Marriott International, Inc. (Class "A" Stock)............ 40,000 1,160,000
Mirage Resorts, Inc.(b)................................... 28,100 419,744
--------------
16,582,937
--------------
MACHINERY -- 0.3%
Briggs & Stratton Corp.................................... 3,900 194,513
Case Corp................................................. 98,800 2,155,075
Caterpillar, Inc.......................................... 58,300 2,681,800
Cooper Industries, Inc.................................... 19,000 906,063
Deere & Co................................................ 39,100 1,295,188
Dover Corp................................................ 34,800 1,274,550
DT Industries, Inc........................................ 35,800 563,850
Eaton Corp................................................ 11,200 791,700
Global Industrial Technologies, Inc.(b)................... 61,400 656,213
Harnischfeger Industries, Inc............................. 7,500 76,406
Ingersoll-Rand Co......................................... 25,900 1,215,681
Milacron, Inc............................................. 6,300 121,275
Paxar Corp................................................ 229,925 2,054,955
Snap-On, Inc.............................................. 9,500 330,719
Timken Co................................................. 9,900 186,863
--------------
14,504,851
--------------
MANUFACTURING -- 0.3%
Hussmann International, Inc............................... 66,400 1,286,500
Illinois Tool Works, Inc.................................. 39,100 2,267,800
Smith (A.O.) Corp.,....................................... 105,450 2,590,116
Tyco International Ltd.................................... 98,651 7,441,985
--------------
13,586,401
--------------
MEDIA -- 1.3%
CBS Corp.(b).............................................. 304,000 9,956,000
Central Newspapers, Inc.(Class "A" Stock)................. 50,000 3,571,875
Clear Channel Communications, Inc.(b)..................... 38,600 2,103,700
Comcast Corp. (Special Class "A" Stock)................... 56,700 3,327,581
Donnelley (R.R.) & Sons Co................................ 22,800 998,925
Dow Jones & Co., Inc...................................... 15,100 726,688
Gannett Co., Inc.......................................... 44,400 2,938,725
Houghton Mifflin Co....................................... 58,700 2,773,576
Interpublic Group of Companies, Inc....................... 19,700 1,571,075
Knight-Ridder, Inc........................................ 70,600 3,609,425
Lee Enterprises, Inc...................................... 50,900 1,603,350
McGraw-Hill, Inc.......................................... 15,500 1,579,063
Mediaone Group, Inc....................................... 95,100 4,469,700
Meredith Corp............................................. 8,300 314,363
New York Times Co. (Class "A" Stock)...................... 30,000 1,040,625
Tele-Communications, Inc. (Series "A" Stock)(b)........... 79,400 4,391,813
Time Warner, Inc.......................................... 183,000 11,357,438
Times Mirror Co. (Class "A" Stock)........................ 13,900 778,400
Tribune Co................................................ 19,300 1,273,800
Viacom, Inc. (Class "B" Stock)(b)......................... 55,300 4,092,200
--------------
62,478,322
--------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
METALS-FERROUS -- 0.3%
AK Steel Holding Corp..................................... 213,400 $ 5,014,900
Allegheny Teledyne, Inc................................... 30,700 627,431
Bethlehem Steel Corp.(b).................................. 241,500 2,022,563
LTV Corp.................................................. 204,900 1,190,981
Material Sciences Corp.(b)................................ 96,900 823,650
National Steel Corp. (Class "B" Stock)(b)................. 42,200 300,675
Nucor Corp................................................ 13,800 596,850
USX-U.S. Steel Group, Inc................................. 80,900 1,860,700
Worthington Industries, Inc............................... 15,200 190,000
--------------
12,627,750
--------------
METALS-NON FERROUS -- 0.3%
Alcan Aluminum Ltd........................................ 35,600 963,425
Aluminum Company of America............................... 184,300 13,741,869
Cyprus Amax Minerals Co................................... 14,600 146,000
Inco Ltd.................................................. 26,200 276,738
Reynolds Metals Co........................................ 11,600 611,175
--------------
15,739,207
--------------
MINERAL RESOURCES
ASARCO, Inc............................................... 6,300 94,894
Burlington Resources, Inc................................. 27,600 988,425
Homestake Mining Co....................................... 33,100 304,106
Phelps Dodge Corp......................................... 9,200 468,050
--------------
1,855,475
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 0.4%
AES Corp.................................................. 24,000 1,137,000
Coltec Industries, Inc.................................... 43,700 852,150
Crane Co.................................................. 10,800 326,025
Danaher Corp.............................................. 14,000 760,375
Donaldson Co., Inc........................................ 109,200 2,265,900
Ecolab, Inc............................................... 20,200 730,988
IDEX Corp................................................. 60,100 1,472,450
ITT Industries, Inc....................................... 18,500 735,375
Laidlaw, Inc.............................................. 51,500 518,219
Mark IV Industries, Inc................................... 86,542 1,125,046
Millipore Corp............................................ 6,800 193,375
NACCO Industries, Inc. (Class "A" Stock).................. 1,300 119,600
Pall Corp................................................. 19,500 493,594
PPG Industries, Inc....................................... 27,900 1,625,175
Textron, Inc.............................................. 25,700 1,951,594
Thermo Electron Corp.(b).................................. 24,900 421,744
Trinity Industries, Inc................................... 52,200 2,009,700
York International Corp................................... 27,000 1,101,938
--------------
17,840,248
--------------
MISCELLANEOUS - CONSUMER GROWTH/STAPLE -- 0.4%
American Greetings Corp. (Class "A" Stock)................ 11,400 468,113
Black & Decker Corp....................................... 14,900 835,331
Corning, Inc.............................................. 36,200 1,629,000
Jostens, Inc.............................................. 6,100 159,744
Minnesota Mining & Manufacturing Co....................... 64,000 4,552,000
Polaroid Corp............................................. 7,000 130,813
Rubbermaid, Inc........................................... 23,500 738,781
Unilever N.V., ADR, (United Kingdom)...................... 100,300 8,318,631
--------------
16,832,413
--------------
MISCELLANEOUS - INDUSTRIAL
Tenneco, Inc.............................................. 26,700 909,469
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B7
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
OIL & GAS -- 2.0%
<S> <C> <C>
Amerada Hess Corp......................................... 14,400 $ 716,400
Amoco Corp................................................ 149,000 8,995,875
Anadarko Petroleum Corp................................... 18,800 580,450
Ashland, Inc.............................................. 11,800 570,825
Atlantic Richfield Co..................................... 50,200 3,275,550
Basin Exploration, Inc.(b)................................ 17,400 218,588
Cabot Oil & Gas Corp. (Class "A" Stock)................... 88,600 1,329,000
Chevron Corp.............................................. 102,900 8,534,269
Coastal Corp.............................................. 33,200 1,159,925
Eastern Enterprises....................................... 3,200 140,000
Enron Oil & Gas Co........................................ 48,400 834,900
Exxon Corp................................................ 380,300 27,809,438
Kerr-McGee Corp........................................... 7,500 286,875
Mobil Corp................................................ 122,800 10,698,950
Murphy Oil Corp........................................... 27,600 1,138,500
NICOR, Inc................................................ 7,600 321,100
Noble Affiliates, Inc..................................... 50,900 1,253,413
Phillips Petroleum Co..................................... 41,200 1,756,150
Pioneer Natural Resources Co.............................. 334,644 2,928,135
Royal Dutch Petroleum Co.................................. 335,800 16,076,426
Seagull Energy Corp.(b)................................... 63,700 402,106
Sunoco, Inc............................................... 14,800 533,725
Texaco, Inc............................................... 85,800 4,536,675
Union Pacific Resources Group, Inc........................ 39,800 360,688
Unocal Corp............................................... 38,600 1,126,638
USX-Marathon Group........................................ 45,200 1,361,650
Western Gas Resources, Inc................................ 103,000 592,250
--------------
97,538,501
--------------
OIL & GAS EXPLORATION/PRODUCTION -- 0.2%
Elf Aquitaine SA, ADR, (France)........................... 124,800 7,066,800
Occidental Petroleum Corp................................. 53,100 896,063
Oryx Energy Co.(b)........................................ 140,000 1,881,250
--------------
9,844,113
--------------
OIL & GAS SERVICES -- 0.5%
Apache Corp............................................... 15,000 379,688
Baker Hughes, Inc......................................... 49,450 874,647
Enron Corp................................................ 51,400 2,933,013
Halliburton Co............................................ 68,500 2,029,313
Helmerich & Payne, Inc.................................... 7,900 153,063
J. Ray McDermott, SA...................................... 163,800 4,002,864
McDermott International, Inc.............................. 431,600 10,655,125
ONEOK, Inc................................................ 4,900 177,013
Rowan Companies, Inc.(b).................................. 13,600 136,000
Schlumberger Ltd.......................................... 83,000 3,828,375
Wolverine Tube, Inc.(b)................................... 37,000 777,000
--------------
25,946,101
--------------
PRECIOUS METALS -- 0.1%
Barrick Gold Corp......................................... 58,500 1,140,750
Battle Mountain Gold Co................................... 36,000 148,500
Freeport-McMoRan Copper & Gold, Inc. (Class "B").......... 30,300 316,256
Newmont Mining Corp....................................... 24,500 442,531
Placer Dome, Inc.......................................... 38,700 445,050
--------------
2,493,087
--------------
RAILROADS -- 0.2%
Burlington Northern Santa Fe Corp......................... 73,500 2,480,625
CSX Corp.................................................. 34,200 1,419,300
Norfolk Southern Corp..................................... 59,100 1,872,731
Union Pacific Corp........................................ 38,700 1,743,919
--------------
7,516,575
--------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
REAL ESTATE DEVELOPMENT -- 0.3%
Crescent Operating, Inc................................... 17,060 $ 81,035
Crescent Real Estate Equities Co.......................... 336,700 7,744,100
Equity Residential Properties Trust....................... 14,400 582,300
Vornado Operating, Inc.(b)................................ 4,920 39,668
Vornado Realty Trust(b)................................... 185,200 6,250,500
--------------
14,697,603
--------------
RESTAURANTS -- 0.2%
Darden Restaurants, Inc................................... 18,200 327,600
McDonald's Corp........................................... 107,900 8,267,838
Tricon Global Restaurants, Inc.(b)........................ 23,800 1,192,975
Wendy's International, Inc................................ 20,700 451,519
--------------
10,239,932
--------------
RETAIL -- 2.6%
Albertson's, Inc.......................................... 38,500 2,451,969
American Stores Co........................................ 42,800 1,580,925
AutoZone, Inc.(b)......................................... 23,800 783,913
Bombay Company, Inc.(b)................................... 139,200 774,300
Charming Shoppes, Inc.(b)................................. 811,300 3,498,731
Circuit City Stores, Inc.................................. 15,500 774,031
Consolidated Stores Corp.................................. 16,900 341,169
Costco Companies, Inc.(b)................................. 33,600 2,425,500
CVS Corp.................................................. 59,800 3,289,000
Dayton-Hudson Corp........................................ 68,500 3,716,125
Designs, Inc.(b).......................................... 51,900 100,556
Dillard's, Inc............................................ 49,100 1,393,213
Dollar General Corporation................................ 22,500 531,563
Federated Department Stores, Inc.(b)...................... 32,900 1,433,206
Fred Meyer, Inc........................................... 21,000 1,265,250
Great Atlantic & Pacific Tea Co., Inc..................... 6,000 177,750
Harcourt General, Inc..................................... 11,100 590,381
Home Depot, Inc........................................... 229,100 14,018,056
IKON Office Solutions, Inc................................ 21,100 180,669
J.C. Penney Co., Inc...................................... 39,100 1,832,813
Jan Bell Marketing, Inc.(b)............................... 73,200 471,225
Kmart Corp.(b)............................................ 685,800 10,501,313
Kohl's Corp.(b)........................................... 22,600 1,388,488
Kroger Co.(b)............................................. 39,923 2,415,342
Liz Claiborne, Inc........................................ 10,500 331,406
Longs Drug Stores, Inc.................................... 6,100 228,750
May Department Stores Co.................................. 36,200 2,185,575
Newell Co................................................. 24,900 1,027,125
Nordstrom, Inc............................................ 28,200 978,188
Pep Boys - Manny, Moe & Jack.............................. 9,900 155,306
Rite Aid Corp............................................. 40,400 2,002,325
Safeway, Inc.,(b)......................................... 71,000 4,326,563
Sears, Roebuck & Co....................................... 61,400 2,609,500
Sherwin-Williams Co....................................... 27,100 796,063
Staples, Inc.(b).......................................... 43,000 1,878,563
Supervalu, Inc............................................ 18,800 526,400
Tandy Corp................................................ 16,200 667,238
The Gap, Inc.............................................. 93,000 5,231,250
The Limited, Inc.......................................... 247,100 7,196,788
TJX Companies, Inc........................................ 50,600 1,467,400
Toys 'R' Us, Inc.(b)...................................... 131,700 2,222,439
Wal-Mart Stores, Inc...................................... 347,700 28,315,819
Walgreen Co............................................... 77,600 4,544,450
Winn-Dixie Stores, Inc.................................... 23,300 1,045,588
--------------
123,672,224
--------------
RUBBER -- 0.1%
Cooper Tire & Rubber Co................................... 12,300 251,381
Goodyear Tire & Rubber Co................................. 63,600 3,207,825
--------------
3,459,206
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B8
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
SEMICONDUCTORS
<S> <C> <C>
National Semiconductor Corp.(b)........................... 25,700 $ 346,950
--------------
TELECOMMUNICATIONS -- 3.5%
Airtouch Communications, Inc.(b).......................... 88,400 6,375,850
Alcatel Alsthom, ADR, (France)............................ 124,900 3,052,244
Alltel Corp............................................... 42,800 2,559,975
Ameritech Corp............................................ 171,400 10,862,476
Andrew Corp.(b)........................................... 13,900 229,350
Ascend Communications, Inc.(b)............................ 30,200 1,985,650
AT&T Corp................................................. 280,600 21,115,150
Bell Atlantic Corp........................................ 243,200 13,816,800
BellSouth Corp............................................ 305,200 15,221,850
Deutsche Telekom AG, ADR, (Germany)....................... 45,000 1,473,750
Frontier Corp............................................. 25,700 873,800
General Instrument Corp................................... 23,200 787,350
GTE Corp.................................................. 150,000 10,115,625
Lucent Technologies, Inc.................................. 205,400 22,594,000
MCI Worldcom, Inc......................................... 280,414 20,119,705
Nextel Communications, Inc. (Class "A" Stock)(b).......... 41,100 970,988
Northern Telecom Ltd...................................... 102,140 5,119,768
SBC Communications, Inc................................... 302,100 16,200,113
Scientific-Atlanta, Inc................................... 12,400 282,875
Sprint Corp............................................... 112,950 6,717,269
Tellabs, Inc.(b).......................................... 28,400 1,947,175
US West, Inc.............................................. 77,860 5,031,703
--------------
167,453,466
--------------
TEXTILES
National Service Industries, Inc.......................... 6,700 254,600
Pillowtex Corp.(b)........................................ 18,530 495,678
Russell Corp.............................................. 5,700 115,781
Springs Industries, Inc................................... 3,200 132,600
Tultex Corp.(b)........................................... 88,300 77,263
VF Corp................................................... 19,100 895,313
--------------
1,971,235
--------------
TOBACCO -- 0.7%
Philip Morris Co., Inc.................................... 479,600 25,658,600
RJR Nabisco Holdings Corp................................. 303,500 9,010,157
UST, Inc.................................................. 28,900 1,007,888
--------------
35,676,645
--------------
TOYS
Hasbro, Inc............................................... 20,800 751,400
Mattel, Inc............................................... 45,551 1,039,132
--------------
1,790,532
--------------
TRUCKING/SHIPPING -- 0.1%
Federal Express Corp...................................... 23,000 2,047,000
Ryder System, Inc......................................... 12,000 312,000
Yellow Corp.(b)........................................... 43,600 833,850
--------------
3,192,850
--------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
UTILITY - ELECTRIC -- 0.8%
Ameren Corp............................................... 21,500 $ 917,781
American Electric Power Co., Inc.......................... 29,700 1,397,757
Baltimore Gas & Electric Co............................... 23,100 713,213
Carolina Power & Light Co................................. 23,500 1,105,969
Central & South West Corp................................. 33,200 910,925
CINergy Corp.............................................. 24,700 849,063
Consolidated Edison, Inc.................................. 36,800 1,945,800
Dominion Resources, Inc................................... 30,300 1,416,525
DTE Energy Co............................................. 22,700 973,263
Duke Energy Corp.......................................... 56,400 3,613,125
Edison International...................................... 56,700 1,580,513
Entergy Corp.............................................. 38,200 1,188,975
FirstEnergy Corp.(b)...................................... 36,100 1,175,506
FPL Group, Inc............................................ 28,500 1,756,313
GPU, Inc.................................................. 19,900 879,331
Houston Industries, Inc................................... 44,300 1,423,138
New Century Energies, Inc................................. 15,000 731,250
Niagara Mohawk Power Corp.(b)............................. 22,600 364,425
Northern States Power Co.................................. 23,300 646,575
Pacific Gas & Electric Co................................. 59,700 1,880,550
PacifiCorp................................................ 46,400 977,300
PECO Energy Co............................................ 34,900 1,452,713
PP&L Resources, Inc....................................... 26,000 724,750
Public Service Enterprise Group, Inc...................... 36,300 1,452,000
Southern Co............................................... 108,100 3,141,656
Texas Utilities Co........................................ 41,600 1,942,200
Unicom Corp............................................... 33,900 1,307,269
--------------
36,467,885
--------------
WASTE MANAGEMENT -- 0.1%
Waste Management, Inc..................................... 127,902 5,963,431
--------------
TOTAL COMMON STOCKS
(COST $1,566,786,221).................................................... 1,853,914,159
--------------
<CAPTION>
PREFERRED STOCKS -- 0.7%
<S> <C> <C>
FINANCIAL SERVICES -- 0.6%
Central Hispano Capital Corp.............................. 1,225,900 31,289,903
--------------
TELECOMMUNICATIONS -- 0.1%
Telecomunicacoes Brasileiras S.A., ADR.................... 55,900 4,063,231
--------------
TOTAL PREFERRED STOCKS
(COST $36,876,618)....................................................... 35,353,134
--------------
TOTAL LONG-TERM INVESTMENTS
(COST $4,298,572,492).................................................... 4,522,618,555
--------------
</TABLE>
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
SHORT-TERM RATING AMOUNT
INVESTMENTS -- 5.0% (UNAUDITED) (000)
------------ ---------
<S> <C> <C> <C>
CERTIFICATES OF DEPOSIT-YANKEE
Alltel Corp.,
5.75%, 01/04/99............................... NR $ 1,200 1,200,000
Avery Dennison,
5.00%, 01/04/99............................... NR 1,174 1,174,000
--------------
2,374,000
--------------
COMMERCIAL PAPER -- 0.3%
Barton Capital Corp,
5.35%, 01/04/99............................... P1 1,200 1,199,465
Campbell Soup Company,
4.80%, 01/04/99............................... P1 1,270 1,269,492
Countrywide Home Loan,
5.40%, 01/04/99............................... P1 1,200 1,199,460
CXC Inc.,
5.30%, 01/04/99............................... P1 1,200 1,199,470
Dover,
5.30%, 01/04/99............................... P1 1,200 1,199,470
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B9
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHORT-TERM MOODY'S PRINCIPAL
INVESTMENTS RATING AMOUNT VALUE
(CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
COMMERCIAL PAPER (CONT'D.)
<S> <C> <C> <C>
Duke Capital Corp,
5.05%, 01/04/99............................... P1 $ 1,200 $ 1,199,495
John Hancock Cap. Corp.,
5.25%, 01/07/99............................... P1 1,200 1,198,950
Novartis Finance Corp.,
5.25%, 01/04/99............................... P1 912 911,601
Pitney Bowes Credit Corp,
5.10%, 01/04/99............................... P1 1,206 1,205,488
Reed Elsevier, Inc.,
5.05%, 01/04/99............................... P1 1,200 1,199,495
SBC Communications,
5.00%, 01/04/99............................... P1 1,200 1,199,500
Sonoco Products,
5.35%, 01/04/99............................... P1 1,000 999,554
Triple-A One Plus Funding,,
5.30%, 01/04/99............................... P1 728 727,678
Xerox Capital Corp,
5.30%, 01/04/99............................... P1 1,200 1,199,470
--------------
15,908,588
--------------
OTHER CORPORATE OBLIGATIONS -- 2.3%
Advanta Corp., M.T.N.,
6.99%, 10/18/99............................... Ba3 15,000 14,448,000
7.25%, 08/16/99............................... Ba2 3,000 2,976,150
AT&T Capital Corp., M.T.N.,
6.65%, 04/30/99............................... Baa3 32,000 32,104,319
Comdisco, Inc.,
6.11%, 08/04/99............................... Baa1 12,500 12,541,375
Enterprise Rent-A-Car USA Finance Co., M.T.N.,
8.75%, 12/15/99............................... Baa3 5,000 5,120,350
Federal Express Corp.,
10.05%, 06/15/99.............................. Baa3 500 510,090
First Union Corp.,
9.45%, 06/15/99............................... A3 4,000 4,071,961
Lehman Brothers Holdings, Inc.,
6.71%, 10/12/99............................... Baa1 6,000 6,049,020
Okobank, (Finland),
6.793%, 1/14/99............................... A3 12,500 12,500,000
SunAmerica, Inc.,
6.20%, 10/31/99............................... Baa1 9,000 9,068,850
Tele-Communications, Inc.,
6.375%, 09/15/99.............................. Ba1 8,000 8,056,240
--------------
107,446,355
--------------
REPURCHASE AGREEMENT -- 2.3%
Joint Repurchase Agreement Account,
4.693%, 01/04/99 (Note 5)..................... $ 109,421 $ 109,421,000
--------------
<CAPTION>
SHORT-TERM MOODY'S PRINCIPAL
INVESTMENTS RATING AMOUNT VALUE
(CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
U. S. GOVERNMENT OBLIGATION -- 0.1%
United States Treasury Bills,
4.32%, 03/18/99 (a)........................... 100 99,088
4.36%, 03/18/99 (a)........................... 4,650 4,607,199
--------------
4,706,287
--------------
TOTAL SHORT-TERM INVESTMENTS
(COST $197,485,955)...................................................... 239,856,230
--------------
TOTAL INVESTMENTS -- 99.3%
(cost $4,496,058,447; Note 6)............................................ 4,762,474,785
VARIATION MARGIN ON OPEN FUTURES
CONTRACTS (d)............................................................ 85,990
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.7%.............................. 33,398,995
--------------
TOTAL NET ASSETS -- 100.0%................................................. $4,795,959,770
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
AG Aktiengesellschaft (German Stock Company)
ADR American Depository Receipt
L.P. Limited Partnership
M.T.N. Medium Term Note
SA Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French
Corporation)
(a) Security segregated as collateral for futures contracts.
(b) Non-income producing security.
(c) Issue in default.
(d) Open futures contracts as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
VALUE AT
NUMBER OF EXPIRATION VALUE AT DECEMBER 31, APPRECIATION/
CONTRACTS TYPE DATE TRADE DATE 1998 DEPRECIATION
<C> <S> <C> <C> <C> <C>
Long Position:
307 U.S. T-Bond Mar 99 $39,190,000 $ 39,228,844 $ 38,844
148 S&P 500 Index Mar 99 $43,681,225 $ 46,083,500 $ 2,402,275
110 U.S. Treasury 5yr Mar 99 $12,429,218 $ 12,467,812 $ 38,594
-------------
$ 2,479,713
-------------
-------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B10
<PAGE>
FLEXIBLE MANAGED PORTFOLIO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 88.7%
VALUE
COMMON STOCKS -- 52.8% SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AEROSPACE -- 1.0%
Aeroquip-Vickers, Inc..................................... 4,500 $ 134,719
AlliedSignal, Inc......................................... 91,400 4,050,162
Boeing Co................................................. 162,100 5,288,512
GenCorp, Inc.............................................. 403,900 10,072,256
General Dynamics Corp..................................... 20,400 1,195,950
Goodrich (B.F.) Co........................................ 11,600 416,150
Litton Industries, Inc. (a)............................... 306,000 19,966,500
Lockheed Martin Corp...................................... 31,500 2,669,625
Northrop Grumman Corp..................................... 10,800 789,750
Raytheon Co. (Class "B" Stock)............................ 55,000 2,928,750
United Technologies Corp.................................. 37,700 4,099,875
--------------
51,612,249
--------------
AIRLINES -- 1.2%
AMR Corp. (a)............................................. 646,300 38,374,062
Delta Air Lines, Inc...................................... 24,200 1,258,400
Southwest Airlines Co..................................... 53,700 1,204,894
US Airways Group, Inc. (a)................................ 479,200 24,918,400
--------------
65,755,756
--------------
APPAREL -- 0.1%
Fruit of the Loom, Inc. (Class "A" Stock) (a)............. 310,300 4,286,018
Nike, Inc. (Class "B" Stock).............................. 47,200 1,914,550
Reebok International Ltd.................................. 9,100 135,362
--------------
6,335,930
--------------
AUTOS - CARS & TRUCKS -- 2.2%
Cummins Engine Co., Inc................................... 6,200 220,100
DaimlerChrysler AG........................................ 327,975 31,506,098
Dana Corp................................................. 26,550 1,085,231
Ford Motor Co............................................. 478,700 28,093,707
General Motors Corp....................................... 553,900 39,638,469
Genuine Parts Co.......................................... 29,000 969,687
Johnson Controls, Inc..................................... 13,700 808,300
MascoTech, Inc............................................ 388,000 6,644,500
Midas, Inc................................................ 90,866 2,828,204
Navistar International Corp. (a).......................... 11,700 333,450
PACCAR, Inc............................................... 12,600 518,175
Titan International, Inc.................................. 415,700 3,949,150
TRW, Inc.................................................. 19,900 1,118,131
--------------
117,713,202
--------------
BANKS AND SAVINGS & LOANS -- 2.0%
Banc One Corp............................................. 190,264 9,715,355
Bank of New York Co., Inc................................. 122,000 4,910,500
BankAmerica Corp.......................................... 281,141 16,903,603
BankBoston Corp........................................... 47,200 1,837,850
Bankers Trust Corp........................................ 15,900 1,358,456
BB&T Corp................................................. 46,200 1,862,437
Chase Manhattan Corp...................................... 136,700 9,304,144
Comerica, Inc............................................. 25,500 1,738,781
First Union Corp.......................................... 156,800 9,535,400
Fleet Financial Group, Inc................................ 90,000 4,021,875
Golden West Financial Corp................................ 9,200 843,525
Huntington Bancshares, Inc................................ 34,120 1,025,732
KeyCorp................................................... 71,200 2,278,400
Mellon Bank Corp.......................................... 41,300 2,839,375
Mercantile Bancorporation, Inc............................ 23,800 1,097,775
Morgan (J.P.) & Co., Inc.................................. 28,800 3,025,800
National City Corp........................................ 53,200 3,857,000
Northern Trust Corp....................................... 18,100 1,580,356
PNC Bank Corp............................................. 49,500 2,679,187
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
BANKS AND SAVINGS & LOANS (CONT'D.)
Providian Financial Corp.................................. 23,100 $ 1,732,500
Regions Financial Corp.................................... 32,000 1,290,000
Republic New York Corp.................................... 17,700 806,456
Summit Bancorp............................................ 28,500 1,245,094
Suntrust Banks, Inc....................................... 34,200 2,616,300
Synovus Financial Corp.................................... 42,500 1,035,937
U.S. Bancorp.............................................. 119,400 4,238,700
Union Planters Corp....................................... 18,000 815,625
Wachovia Corp............................................. 33,400 2,920,412
Wells Fargo & Co.......................................... 259,400 10,359,787
--------------
107,476,362
--------------
BUSINESS SERVICES
Equifax, Inc.............................................. 24,400 834,175
Omnicom Group, Inc........................................ 27,300 1,583,400
--------------
2,417,575
--------------
CHEMICALS -- 1.1%
Air Products & Chemicals, Inc............................. 38,100 1,524,000
Dow Chemical Co........................................... 36,800 3,346,500
Du Pont (E.I.) de Nemours & Co............................ 183,500 9,736,969
Eastman Chemical Co....................................... 12,700 568,325
Engelhard Corp............................................ 23,400 456,300
Ferro Corp................................................ 553,650 14,394,900
FMC Corp. (a)............................................. 5,600 313,600
Grace (W.R.) & Co......................................... 12,000 188,250
Great Lakes Chemical Corp................................. 9,700 388,000
Hercules, Inc............................................. 15,700 429,787
Millennium Chemicals, Inc. (a)............................ 601,600 11,956,800
Monsanto Co............................................... 96,200 4,569,500
Morton International, Inc................................. 21,200 519,400
Nalco Chemical Co......................................... 10,800 334,800
OM Group, Inc............................................. 260,300 9,500,950
Praxair, Inc.............................................. 25,600 902,400
Raychem Corp.............................................. 13,800 445,912
Rohm & Haas Co............................................ 29,700 894,712
Sigma-Aldrich Corp........................................ 16,300 478,812
Union Carbide Corp........................................ 20,800 884,000
--------------
61,833,917
--------------
COMMERCIAL SERVICES -- 0.1%
Cendant Corp. (a)......................................... 136,500 2,602,031
Deluxe Corp............................................... 13,200 482,625
Moore Corp. Ltd........................................... 14,300 157,300
--------------
3,241,956
--------------
COMPUTER SERVICES -- 2.2%
3Com Corp. (a)............................................ 57,500 2,576,719
Adobe Systems, Inc........................................ 11,200 523,600
America Online, Inc. (a).................................. 10,900 1,744,000
Autodesk, Inc............................................. 7,600 324,425
Automatic Data Processing, Inc............................ 48,500 3,889,094
BMC Software, Inc. (a).................................... 32,600 1,452,737
Cabletron Systems, Inc. (a)............................... 25,600 214,400
Ceridian Corp. (a)........................................ 11,700 816,806
Cisco Systems, Inc. (a)................................... 248,500 23,063,906
Computer Associates International, Inc.................... 88,600 3,776,575
Computer Sciences Corp. (a)............................... 25,300 1,630,269
Electronic Data Systems Corp.............................. 78,000 3,919,500
EMC Corp. (a)............................................. 80,400 6,834,000
First Data Corp........................................... 69,400 2,199,112
Microsoft Corp. (a)....................................... 396,700 55,017,331
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B11
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
COMPUTER SERVICES (CONT'D.)
Novell, Inc. (a).......................................... 56,900 $ 1,031,312
Oracle Corp. (a).......................................... 159,500 6,878,437
Parametric Technology Corp. (a)........................... 43,200 707,400
Peoplesoft, Inc........................................... 30,000 568,125
Silicon Graphics, Inc. (a)................................ 30,400 391,400
Unisys Corp............................................... 40,400 1,391,275
--------------
118,950,423
--------------
COMPUTERS -- 1.4%
Apple Computer, Inc. (a).................................. 21,600 884,250
Compaq Computer Corp...................................... 267,961 11,237,614
Data General Corp. (a).................................... 7,900 129,856
Dell Computer Corp. (a)................................... 203,200 14,871,700
Gateway 2000, Inc. (a).................................... 25,100 1,284,806
Hewlett-Packard Co........................................ 168,600 11,517,487
International Business Machines Corp...................... 149,800 27,675,550
Seagate Technology, Inc. (a).............................. 39,300 1,188,825
Sun Microsystems, Inc. (a)................................ 61,200 5,240,250
--------------
74,030,338
--------------
CONSTRUCTION -- 0.6%
Centex Corp............................................... 9,600 432,600
Fluor Corp................................................ 13,600 578,850
Foster Wheeler Corp....................................... 6,600 87,037
Oakwood Homes Corp........................................ 572,000 8,687,250
Pulte Corp................................................ 6,900 191,906
Standard Pacific Corp..................................... 632,400 8,932,650
Webb (Del E.) Corp........................................ 576,500 15,889,781
--------------
34,800,074
--------------
CONTAINERS -- 0.2%
Ball Corp................................................. 4,900 224,175
Bemis Co., Inc............................................ 8,600 326,262
Crown Cork & Seal Co., Inc................................ 20,800 640,900
Owens-Illinois, Inc. (a).................................. 260,800 7,987,000
Sealed Air Corp........................................... 13,400 684,237
--------------
9,862,574
--------------
COSMETICS & SOAPS -- 0.7%
Alberto Culver Co. (Class "B" Stock)...................... 9,200 245,525
Avon Products, Inc........................................ 42,800 1,893,900
Colgate-Palmolive Co...................................... 47,900 4,448,712
Gillette Co............................................... 181,600 8,773,550
International Flavors & Fragrances, Inc................... 17,700 782,119
Procter & Gamble Co....................................... 216,700 19,787,419
--------------
35,931,225
--------------
DIVERSIFIED OFFICE EQUIPMENT -- 0.2%
Avery Dennison Corp....................................... 17,300 779,581
Pitney Bowes, Inc......................................... 44,400 2,933,175
Xerox Corp................................................ 52,800 6,230,400
--------------
9,943,156
--------------
DIVERSIFIED OPERATIONS -- 1.3%
Fortune Brands, Inc....................................... 27,800 879,175
General Electric Corp..................................... 522,400 53,317,450
Loews Corp................................................ 183,800 18,058,350
--------------
72,254,975
--------------
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
DRUGS AND MEDICAL SUPPLIES -- 3.5%
Abbott Laboratories....................................... 248,000 $ 12,152,000
Allergan, Inc............................................. 10,600 686,350
ALZA Corp. (a)............................................ 13,900 726,275
American Home Products Corp............................... 210,700 11,865,044
Amgen, Inc. (a)........................................... 41,700 4,360,256
Bard (C.R.), Inc.......................................... 9,200 455,400
Bausch & Lomb, Inc........................................ 9,000 540,000
Baxter International, Inc................................. 45,400 2,919,787
Becton, Dickinson & Co.................................... 39,700 1,694,694
Biomet, Inc............................................... 18,100 728,525
Boston Scientific Corp. (a)............................... 63,200 1,694,550
Bristol-Myers Squibb Co................................... 159,700 21,369,856
Cardinal Health, Inc...................................... 32,250 2,446,969
Guidant Corp.............................................. 24,400 2,690,100
Johnson & Johnson......................................... 217,200 18,217,650
Lilly (Eli) & Co.......................................... 176,900 15,721,987
Mallinckrodt, Inc......................................... 11,800 363,587
Medtronic, Inc............................................ 75,900 5,635,575
Merck & Co., Inc.......................................... 191,200 28,237,850
Pfizer, Inc............................................... 210,500 26,404,594
Pharmacia & Upjohn, Inc................................... 82,300 4,660,237
Schering-Plough Corp...................................... 237,400 13,116,350
St. Jude Medical, Inc. (a)................................ 14,900 412,544
Warner-Lambert Co......................................... 132,400 9,954,825
--------------
187,055,005
--------------
ELECTRONICS -- 1.3%
Advanced Micro Devices, Inc. (a).......................... 23,000 665,562
AMP Inc................................................... 35,700 1,858,631
Applied Materials, Inc. (a)............................... 59,400 2,535,637
Belden, Inc............................................... 275,600 5,839,275
EG&G, Inc................................................. 7,300 203,031
Emerson Electric Co....................................... 71,900 4,498,244
Grainger (W.W.), Inc...................................... 16,100 670,162
Harris Corp............................................... 13,000 476,125
Honeywell, Inc............................................ 20,600 1,551,437
Intel Corp................................................ 269,700 31,976,306
KLA-Tencor Corp. (a)...................................... 13,700 594,237
LSI Logic Corp. (a)....................................... 23,000 370,875
Micron Technology, Inc.................................... 34,300 1,734,294
Motorola, Inc............................................. 96,800 5,910,850
National Semiconductor Corp. (a).......................... 26,700 360,450
Perkin-Elmer Corp......................................... 7,900 770,744
Rockwell International Corp............................... 32,500 1,578,281
Solectron Corp............................................ 5,200 483,275
Tektronix, Inc............................................ 8,200 246,512
Texas Instruments, Inc.................................... 63,200 5,407,550
Thomas & Betts Corp....................................... 9,000 389,812
--------------
68,121,290
--------------
ENGINEERING & CONSTRUCTION -- 0.1%
Giant Cement Holding, Inc. (a)............................ 244,900 6,061,275
--------------
ENVIRONMENTAL SERVICES -- 0.2%
Browning-Ferris Industries, Inc........................... 29,800 847,437
Waste Management, Inc..................................... 256,562 11,962,203
--------------
12,809,640
--------------
FINANCIAL SERVICES -- 3.0%
American Express Co....................................... 73,300 7,494,925
Associates First Capital Corp............................. 112,390 4,762,526
Bear Stearns Companies, Inc............................... 17,500 654,062
Block (H.R.), Inc......................................... 17,000 765,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B12
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
FINANCIAL SERVICES (CONT'D.)
Capital One Financial Corp................................ 10,200 $ 1,173,000
Citigroup, Inc............................................ 584,451 28,930,324
Countrywide Credit Industries, Inc........................ 17,600 883,300
Dun & Bradstreet Corp..................................... 27,600 871,125
Federal Home Loan Mortgage Corp........................... 109,600 7,062,350
Federal National Mortgage Association..................... 167,500 12,395,000
Fifth Third Bancorp....................................... 41,100 2,930,944
Franklin Resources, Inc................................... 41,000 1,312,000
Household International, Inc.............................. 78,392 3,106,283
Lehman Brothers Holdings, Inc............................. 724,900 31,940,906
MBNA Corp................................................. 121,800 3,037,387
Merrill Lynch & Co., Inc.................................. 294,000 19,624,500
Morgan Stanley Dean Witter & Co........................... 317,795 22,563,445
Paychex, Inc.............................................. 23,000 1,183,062
Schwab (Charles) Corp. (a)................................ 64,500 3,624,094
SLM Holding Corp.......................................... 26,000 1,248,000
State Street Corp......................................... 26,100 1,815,581
SunAmerica, Inc........................................... 31,700 2,571,662
Transamerica Corp......................................... 10,200 1,178,100
Washington Mutual, Inc.................................... 92,336 3,526,081
--------------
164,653,657
--------------
FOOD & BEVERAGES -- 2.3%
Anheuser-Busch Companies, Inc............................. 79,400 5,210,625
Archer-Daniels-Midland Co................................. 101,115 1,737,914
Bestfoods................................................. 46,700 2,486,775
Brown-Forman Corp. (Class "B" Stock)...................... 11,200 847,700
Campbell Soup Co.......................................... 74,000 4,070,000
Coca-Cola Co.............................................. 395,900 26,475,812
Coca-Cola Enterprises, Inc................................ 62,000 2,216,500
ConAgra, Inc.............................................. 77,100 2,428,650
Coors (Adolph) Co. (Class "B" Stock)...................... 6,000 338,625
General Mills, Inc........................................ 25,700 1,998,175
Heinz (H.J.) & Co......................................... 59,300 3,357,862
Hershey Foods Corp........................................ 23,200 1,442,750
Kellogg Co................................................ 66,600 2,272,725
PepsiCo, Inc.............................................. 240,300 9,837,281
Pioneer Hi-Bred International, Inc........................ 39,600 1,069,200
Quaker Oats Co............................................ 22,400 1,332,800
Ralston-Ralston Purina Group.............................. 52,000 1,683,500
RJR Nabisco Holdings Corp................................. 1,124,200 33,374,688
Sara Lee Corp............................................. 149,600 4,216,850
Seagram Co., Ltd.......................................... 57,800 2,196,400
Sysco Corp................................................ 55,200 1,514,550
Whitman Corp.............................................. 545,200 13,834,450
Wrigley (William) Jr. Co.................................. 18,800 1,683,775
--------------
125,627,607
--------------
FOREST PRODUCTS -- 1.5%
Boise Cascade Corp........................................ 669,400 20,751,400
Champion International Corp............................... 404,400 16,378,200
Fort James Corp........................................... 35,200 1,408,000
Georgia-Pacific Corp...................................... 15,000 878,437
International Paper Co.................................... 49,000 2,195,812
Louisiana-Pacific Corp.................................... 706,600 12,939,612
Mead Corp................................................. 406,800 11,924,325
Potlatch Corp............................................. 4,700 173,312
Temple-Inland, Inc........................................ 9,100 539,744
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
FOREST PRODUCTS (CONT'D.)
Union Camp Corp........................................... 11,300 $ 762,750
Westvaco Corp............................................. 16,600 445,087
Weyerhaeuser Co........................................... 32,300 1,641,244
Willamette Industries, Inc................................ 302,500 10,133,750
--------------
80,171,673
--------------
GAS PIPELINES -- 0.1%
Columbia Energy Group..................................... 13,500 779,625
Consolidated Natural Gas Co............................... 15,500 837,000
Peoples Energy Corp....................................... 5,700 227,287
Sempra Energy............................................. 37,053 940,220
Sonat, Inc................................................ 17,800 481,712
Williams Companies, Inc................................... 66,600 2,077,087
--------------
5,342,931
--------------
HOSPITALS/HOSPITAL MANAGEMENT -- 0.6%
Columbia/HCA Healthcare Corp.............................. 911,500 22,559,625
HBO & Co.................................................. 71,300 2,045,419
Healthsouth Corp. (a)..................................... 65,700 1,014,244
Humana, Inc. (a).......................................... 26,600 473,812
IMS Health, Inc........................................... 26,300 1,984,006
Manor Care, Inc........................................... 13,300 390,687
Service Corp. International............................... 40,800 1,552,950
Shared Medical Systems Corp............................... 4,200 209,475
Tenet Healthcare Corp. (a)................................ 49,700 1,304,625
--------------
31,534,843
--------------
HOUSEHOLD PRODUCTS & PERSONAL CARE -- 0.3%
Clorox Co................................................. 16,700 1,950,769
Kimberly-Clark Corp....................................... 90,100 4,910,450
Leggett & Platt, Inc...................................... 470,800 10,357,600
--------------
17,218,819
--------------
HOUSING RELATED -- 1.3%
Armstrong World Industries, Inc........................... 6,500 392,031
Fleetwood Enterprises, Inc................................ 6,100 211,975
Hanson, PLC, ADR, (United Kingdom)........................ 1,221,100 47,622,900
Kaufman & Broad Home Corp................................. 6,400 184,000
Lowe's Companies, Inc..................................... 56,800 2,907,450
Masco Corp................................................ 53,500 1,538,125
Maytag Corp............................................... 15,400 958,650
Owens Corning............................................. 413,400 14,649,862
Stanley Works............................................. 14,400 399,600
Tupperware Corp........................................... 9,900 162,731
Whirlpool Corp............................................ 12,100 670,037
--------------
69,697,361
--------------
INSURANCE -- 2.3%
Aetna, Inc................................................ 24,100 1,894,862
Allstate Corp............................................. 135,800 5,245,275
American General Corp..................................... 41,100 3,205,800
American International Group, Inc......................... 169,200 16,348,950
Aon Corp.................................................. 27,100 1,500,662
Berkley (W.R.) Corp....................................... 175,850 5,989,891
Berkshire Hathaway, Inc. (Class "B" Stock)................ 494 1,159,725
Chubb Corp................................................ 27,600 1,790,550
CIGNA Corp................................................ 36,000 2,783,250
Cincinnati Financial Corp................................. 26,700 977,887
Conseco, Inc.............................................. 50,687 1,549,121
Financial Security Assurance Holdings Ltd................. 140,100 7,600,425
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B13
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
INSURANCE (CONT'D.)
Hartford Financial Services Group, Inc.................... 38,300 $ 2,101,712
Jefferson-Pilot Corp...................................... 17,200 1,290,000
Lincoln National Corp..................................... 16,600 1,358,087
Marsh & McLennan Companies, Inc........................... 41,300 2,413,469
MBIA, Inc................................................. 15,900 1,042,444
Magic Investment Corp..................................... 18,500 736,531
Progressive Corp.......................................... 11,700 1,981,687
Provident Companies, Inc.................................. 238,400 9,893,600
Reinsurance Group of America, Inc......................... 474,600 33,222,000
SAFECO Corp............................................... 22,900 983,269
St. Paul Companies, Inc................................... 37,400 1,299,650
TIG Holdings, Inc......................................... 351,200 5,465,550
Torchmark Corp............................................ 22,700 801,594
Trenwick Group, Inc....................................... 273,300 8,916,413
United Healthcare Corp.................................... 30,500 1,313,406
UNUM Corp................................................. 22,500 1,313,438
--------------
124,179,248
--------------
INTRUMENTS - CONTROLS -- 0.1%
Parker-Hannifin Corp...................................... 194,900 6,382,975
--------------
LEISURE -- 0.3%
Brunswick Corp............................................ 16,200 400,950
Carnival Corp. (Class "A" Stock).......................... 78,500 3,768,000
Disney (Walt) Co.......................................... 328,300 9,849,000
Harrah's Entertainment, Inc. (a).......................... 16,400 257,275
Hilton Hotels Corp........................................ 40,600 776,475
King World Productions, Inc............................... 11,900 350,306
Marriott International, Inc. (Class "A" Stock)............ 41,400 1,200,600
Mirage Resorts, Inc. (a).................................. 29,100 434,681
--------------
17,037,287
--------------
MACHINERY -- 0.6%
Briggs & Stratton Corp.................................... 4,000 199,500
Case Corp................................................. 369,200 8,053,175
Caterpillar, Inc.......................................... 60,400 2,778,400
Cooper Industries, Inc.................................... 19,600 934,675
Deere & Co................................................ 40,500 1,341,563
Dover Corp................................................ 36,100 1,322,163
DT Industries, Inc........................................ 146,800 2,312,100
Eaton Corp................................................ 11,600 819,975
Global Industrial Technologies, Inc. (a).................. 258,100 2,758,444
Harnischfeger Industries, Inc............................. 7,800 79,463
Ingersoll-Rand Co......................................... 26,900 1,262,619
Milacron, Inc............................................. 6,400 123,200
Paxar Corp................................................ 954,575 8,531,514
Snap-On, Inc.............................................. 9,900 344,644
Timken Co................................................. 10,200 192,525
--------------
31,053,960
--------------
MANUFACTURING -- 0.5%
Flowserve Corp............................................ 161,991 2,682,976
Hussmann International, Inc............................... 272,600 5,281,625
Illinois Tool Works, Inc.................................. 40,400 2,343,200
Smith (A.O.) Corp......................................... 433,350 10,644,159
Tyco International Ltd.................................... 102,157 7,706,469
--------------
28,658,429
--------------
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
MEDIA -- 2.2%
CBS Corp. (a)............................................. 910,000 $ 29,802,500
Central Newspapers, Inc.(Class "A" Stock)................. 205,300 14,666,119
Clear Channel Communications, Inc. (a).................... 40,000 2,180,000
Comcast Corp. (Special Class "A" Stock)................... 57,600 3,380,400
Donnelley (R.R.) & Sons Co................................ 23,700 1,038,356
Dow Jones & Co., Inc...................................... 15,600 750,750
Gannett Co., Inc.......................................... 46,000 3,044,625
Houghton Mifflin Co....................................... 240,700 11,373,075
Interpublic Group of Companies, Inc....................... 21,200 1,690,700
Knight-Ridder, Inc........................................ 251,600 12,863,051
Lee Enterprises, Inc...................................... 208,900 6,580,350
McGraw-Hill, Inc.......................................... 16,100 1,640,188
Mediaone Group, Inc....................................... 98,500 4,629,500
Meredith Corp............................................. 8,600 325,725
New York Times Co. (Class "A" Stock)...................... 31,200 1,082,250
Tele-Communications, Inc. (Class "A" Stock) (a)........... 82,268 4,550,449
Time Warner, Inc.......................................... 189,400 11,754,638
Times Mirror Co. (Class "A" Stock)........................ 14,300 800,800
Tribune Co................................................ 19,900 1,313,400
Viacom, Inc. (Class "B" Stock) (a)........................ 57,300 4,240,200
--------------
117,707,076
--------------
METALS-FERROUS -- 0.8%
AK Steel Holding Corp..................................... 880,000 20,680,000
Allegheny Teledyne, Inc................................... 31,800 649,913
Bethlehem Steel Corp. (a)................................. 924,400 7,741,851
LTV Corp.................................................. 841,400 4,890,638
Material Sciences Corp. (a)............................... 397,900 3,382,150
National Steel Corp. (Class "B" Stock) (a)................ 172,800 1,231,200
Nucor Corp................................................ 14,200 614,150
USX-U.S. Steel Group, Inc................................. 291,100 6,695,300
Worthington Industries, Inc............................... 15,700 196,250
--------------
46,081,452
--------------
METALS-NON FERROUS -- 1.0%
Alcan Aluminum Ltd........................................ 36,900 998,606
Aluminum Company of America............................... 678,200 50,568,287
Cyprus Amax Minerals Co................................... 15,100 151,000
Inco Ltd.................................................. 27,000 285,188
Reynolds Metals Co........................................ 11,900 626,981
--------------
52,630,062
--------------
MINERAL RESOURCES
ASARCO, Inc............................................... 6,500 97,906
Burlington Resources, Inc................................. 28,600 1,024,237
Homestake Mining Co....................................... 34,300 315,131
Phelps Dodge Corp......................................... 9,500 483,313
--------------
1,920,587
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 0.9%
AES Corp.................................................. 25,000 1,184,375
Coltec Industries, Inc.................................... 179,200 3,494,400
Crane Co.................................................. 11,100 335,081
Danaher Corp.............................................. 14,000 760,375
Donaldson Co., Inc........................................ 448,600 9,308,450
Ecolab, Inc............................................... 20,900 756,319
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B14
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
MISCELLANEOUS - BASIC INDUSTRY (CONT'D.)
IDEX Corp................................................. 246,700 $ 6,044,150
ITT Industries, Inc....................................... 19,300 767,175
Laidlaw, Inc.............................................. 53,300 536,331
Mark IV Industries, Inc................................... 355,500 4,621,500
Millipore Corp............................................ 7,000 199,063
NACCO Industries, Inc. (Class "A" Stock).................. 1,300 119,600
Pall Corp................................................. 20,200 511,313
PPG Industries, Inc....................................... 28,900 1,683,425
Textron, Inc.............................................. 26,700 2,027,531
Thermo Electron Corp. (a)................................. 25,800 436,988
Trinity Industries, Inc................................... 214,100 8,242,850
Wolverine Tube, Inc. (a).................................. 155,300 3,261,300
York International Corp................................... 110,600 4,513,863
--------------
48,804,089
--------------
MISCELLANEOUS - CONSUMER GROWTH/STAPLE -- 0.6%
American Greetings Corp. (Class "A" Stock)................ 11,800 484,538
Black & Decker Corp....................................... 15,400 863,362
Corning, Inc.............................................. 37,400 1,683,000
Eastman Kodak Co.......................................... 195,400 14,068,800
Jostens, Inc.............................................. 6,300 164,981
Minnesota Mining & Manufacturing Co....................... 66,200 4,708,475
Polaroid Corp............................................. 7,300 136,419
Rubbermaid, Inc........................................... 24,300 763,931
Unilever N.V., ADR, (United Kingdom)...................... 103,800 8,608,913
--------------
31,482,419
--------------
MISCELLANEOUS - INDUSTRIAL
Tenneco, Inc.............................................. 27,600 940,125
--------------
OIL & GAS -- 2.4%
Amerada Hess Corp......................................... 14,800 736,300
Amoco Corp................................................ 154,200 9,309,825
Anadarko Petroleum Corp................................... 19,400 598,975
Ashland, Inc.............................................. 12,200 590,175
Atlantic Richfield Co..................................... 52,000 3,393,000
Basin Exploration, Inc. (a)............................... 71,400 896,963
Cabot Oil & Gas Corp. (Class "A" Stock)................... 363,800 5,457,000
Chevron Corp.............................................. 106,500 8,832,844
Coastal Corp.............................................. 34,500 1,205,344
Eastern Enterprises....................................... 3,300 144,375
Enron Oil & Gas Co........................................ 198,700 3,427,575
Exxon Corp................................................ 393,100 28,745,438
Kerr-McGee Corp........................................... 7,700 294,525
Mobil Corp................................................ 125,500 10,934,188
Murphy Oil Corp........................................... 114,000 4,702,500
NICOR, Inc................................................ 7,800 329,550
Noble Affiliates, Inc..................................... 208,900 5,144,163
Phillips Petroleum Co..................................... 42,600 1,815,825
Pioneer Natural Resources Co.............................. 1,488,431 13,023,771
Royal Dutch Petroleum Co.................................. 345,700 16,550,388
Seagull Energy Corp. (a).................................. 245,500 1,549,719
Sunoco, Inc............................................... 15,300 551,756
Texaco, Inc............................................... 87,700 4,637,138
Union Pacific Resources Group, Inc........................ 41,200 373,375
Unocal Corp............................................... 39,900 1,164,581
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
OIL & GAS (CONT'D.)
USX-Marathon Group........................................ 46,800 $ 1,409,850
Western Gas Resources, Inc................................ 423,100 2,432,825
--------------
128,251,968
--------------
OIL & GAS EXPLORATION/PRODUCTION -- 0.7%
Elf Aquitaine SA, ADR, (France)........................... 513,400 29,071,275
Occidental Petroleum Corp................................. 57,100 963,563
Oryx Energy Co. (a)....................................... 524,100 7,042,594
--------------
37,077,432
--------------
OIL & GAS SERVICES -- 1.3%
Apache Corp............................................... 15,500 392,344
Baker Hughes, Inc......................................... 51,340 908,076
Enron Corp................................................ 53,200 3,035,725
Halliburton Co............................................ 70,900 2,100,413
Helmerich & Payne, Inc.................................... 8,200 158,875
J. Ray McDermott, SA...................................... 672,900 16,443,994
McDermott International, Inc.............................. 1,745,600 43,094,501
ONEOK, Inc................................................ 5,000 180,625
Rowan Companies, Inc. (a)................................. 14,100 141,000
Schlumberger Ltd.......................................... 85,800 3,957,525
--------------
70,413,078
--------------
PRECIOUS METALS -- 0.1%
Apex Silver Mines Ltd..................................... 340,400 2,808,300
Barrick Gold Corp......................................... 60,400 1,177,800
Battle Mountain Gold Co................................... 37,200 153,450
Freeport-McMoRan Copper & Gold, Inc. (Class "B" Stock).... 31,400 327,738
Newmont Mining Corp....................................... 25,400 458,788
Placer Dome, Inc.......................................... 40,000 460,000
--------------
5,386,076
--------------
RAILROADS -- 0.1%
Burlington Northern Santa Fe Corp......................... 75,900 2,561,625
CSX Corp.................................................. 35,400 1,469,100
Norfolk Southern Corp..................................... 61,100 1,936,106
Union Pacific Corp........................................ 40,000 1,802,500
--------------
7,769,331
--------------
REAL ESTATE DEVELOPMENT -- 1.2%
Crescent Operating, Inc................................... 67,240 319,390
Crescent Real Estate Equities Co.......................... 1,377,600 31,684,800
Equity Residential Properties Trust....................... 150,900 6,102,019
Vornado Operating, Inc. (a)............................... 20,000 161,250
Vornado Realty Trust (a).................................. 745,100 25,147,125
--------------
63,414,584
--------------
RESTAURANTS -- 0.2%
Darden Restaurants, Inc................................... 19,000 342,000
McDonald's Corp........................................... 111,700 8,559,013
Tricon Global Restaurants, Inc. (a)....................... 24,600 1,233,075
Wendy's International, Inc................................ 21,500 468,969
--------------
10,603,057
--------------
RETAIL -- 3.7%
Albertson's, Inc.......................................... 39,800 2,534,763
American Stores Co........................................ 44,300 1,636,331
AutoZone, Inc. (a)........................................ 24,600 810,263
Bombay Co., Inc. (a)...................................... 571,600 3,179,525
Charming Shoppes, Inc. (a)................................ 3,332,400 14,370,975
Circuit City Stores, Inc.................................. 16,000 799,000
Consolidated Stores Corp.................................. 17,400 351,263
Costco Companies, Inc. (a)................................ 34,700 2,504,906
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B15
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
RETAIL (CONT'D.)
CVS Corp.................................................. 62,000 $ 3,410,000
Dayton-Hudson Corp........................................ 70,800 3,840,900
Designs, Inc. (a)......................................... 203,900 395,056
Dillard's, Inc............................................ 148,300 4,208,013
Dollar General Corp....................................... 27,500 649,688
Federated Department Stores, Inc. (a)..................... 34,000 1,481,125
Fred Meyer, Inc........................................... 23,000 1,385,750
Great Atlantic & Pacific Tea Co., Inc..................... 6,200 183,675
Harcourt General, Inc..................................... 11,500 611,656
Home Depot, Inc........................................... 237,200 14,513,675
IKON Office Solutions, Inc................................ 21,800 186,663
J.C. Penney Co., Inc...................................... 40,500 1,898,438
Jan Bell Marketing, Inc. (a).............................. 295,700 1,903,569
Kmart Corp. (a)........................................... 2,576,000 39,445,000
Kohl's Corp. (a).......................................... 25,200 1,548,225
Kroger Co. (a)............................................ 41,300 2,498,650
Liz Claiborne, Inc........................................ 10,900 344,031
Longs Drug Stores, Inc.................................... 6,300 236,250
May Department Stores Co.................................. 37,500 2,264,063
Newell Co................................................. 25,800 1,064,250
Nordstrom, Inc............................................ 28,900 1,002,469
Pep Boys - Manny, Moe & Jack.............................. 10,300 161,581
Phillips-Van Heusen Corp.................................. 389,200 2,797,375
Rite Aid Corp............................................. 41,800 2,071,713
Safeway, Inc. (a)......................................... 72,000 4,387,500
Sears, Roebuck & Co....................................... 63,500 2,698,750
Sherwin-Williams Co....................................... 28,000 822,500
Staples, Inc. (a)......................................... 43,000 1,878,563
Supervalu, Inc............................................ 19,400 543,200
Tandy Corp................................................ 16,700 687,831
The Gap, Inc.............................................. 96,300 5,416,875
The Limited, Inc.......................................... 826,500 24,071,813
TJX Companies, Inc........................................ 52,400 1,519,600
Toys 'R' Us, Inc. (a)..................................... 404,100 6,819,188
Wal-Mart Stores, Inc...................................... 360,200 29,333,788
Walgreen Co............................................... 80,300 4,702,569
Winn-Dixie Stores, Inc.................................... 24,100 1,081,488
--------------
198,252,506
--------------
RUBBER -- 0.2%
Cooper Tire & Rubber Co................................... 12,800 261,600
Goodyear Tire & Rubber Co................................. 186,400 9,401,550
--------------
9,663,150
--------------
TELECOMMUNICATIONS -- 3.4%
Airtouch Communications, Inc. (a)......................... 91,400 6,592,225
Alcatel Alsthom, ADR, (France)............................ 513,000 12,536,438
Alltel Corp............................................... 43,000 2,571,938
Ameritech Corp............................................ 177,500 11,249,063
Andrew Corp. (a).......................................... 14,300 235,950
Ascend Communications, Inc. (a)........................... 31,300 2,057,975
AT&T Corp................................................. 290,800 21,882,700
Bell Atlantic Corp........................................ 251,800 14,305,388
BellSouth Corp............................................ 316,000 15,760,500
Deutsche Telekom AG, ADR, (Germany)....................... 185,000 6,058,750
Frontier Corp............................................. 26,700 907,800
General Instrument Corp................................... 24,000 814,500
GTE Corp.................................................. 155,300 10,473,044
Lucent Technologies, Inc.................................. 211,000 23,210,000
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
TELECOMMUNICATIONS (CONT'D.)
MCI WorldCom, Inc......................................... 287,270 $ 20,611,623
Nextel Communications, Inc. (Class "A" Stock) (a)......... 42,500 1,004,063
Northern Telecom Ltd...................................... 105,800 5,303,225
SBC Communications, Inc................................... 313,200 16,795,350
Scientific-Atlanta, Inc................................... 12,800 292,000
Sprint Corp............................................... 69,700 5,863,513
Sprint Corp. (PCS Group).................................. 46,850 1,083,406
Tellabs, Inc. (a)......................................... 30,600 2,098,013
US West, Inc.............................................. 80,441 5,198,500
--------------
186,905,964
--------------
TEXTILES -- 0.1%
National Service Industries, Inc.......................... 6,900 262,200
Pillowtex Corp. (a)....................................... 73,932 1,977,681
Russell Corp.............................................. 5,900 119,844
Springs Industries, Inc................................... 3,300 136,744
Tultex Corp. (a).......................................... 362,600 317,275
VF Corp................................................... 19,800 928,125
--------------
3,741,869
--------------
TOBACCO -- 0.8%
Philip Morris Co., Inc.................................... 801,400 42,874,900
UST, Inc.................................................. 29,800 1,039,275
--------------
43,914,175
--------------
TOYS
Hasbro, Inc............................................... 21,600 780,300
Mattel, Inc............................................... 47,200 1,076,750
--------------
1,857,050
--------------
TRUCKING/SHIPPING -- 0.1%
Federal Express Corp. (a)................................. 23,800 2,118,200
Ryder System, Inc......................................... 12,400 322,400
Yellow Corp. (a).......................................... 178,700 3,417,638
--------------
5,858,238
--------------
UTILITY - ELECTRIC -- 0.7%
Ameren Corp............................................... 22,200 947,663
American Electric Power Co., Inc.......................... 30,700 1,444,819
Baltimore Gas & Electric Co............................... 24,000 741,000
Carolina Power & Light Co................................. 24,400 1,148,325
Central & South West Corp................................. 34,400 943,850
CINergy Corp.............................................. 25,600 880,000
Consolidated Edison, Inc.................................. 38,100 2,014,538
Dominion Resources, Inc................................... 31,400 1,467,950
DTE Energy Co............................................. 23,500 1,007,563
Duke Energy Corp.......................................... 58,300 3,734,844
Edison International...................................... 58,900 1,641,838
Entergy Corp.............................................. 39,600 1,232,550
FirstEnergy Corp. (a)..................................... 37,300 1,214,581
FPL Group, Inc............................................ 29,500 1,817,938
GPU, Inc.................................................. 20,600 910,263
Houston Industries, Inc................................... 47,600 1,529,150
New Century Energies, Inc................................. 15,000 731,250
Niagara Mohawk Power Corp. (a)............................ 24,300 391,838
Northern States Power Co.................................. 24,200 671,550
Pacific Gas & Electric Co................................. 61,800 1,946,700
PacifiCorp................................................ 48,100 1,013,106
PECO Energy Co............................................ 36,100 1,502,663
PP&L Resources, Inc....................................... 26,900 749,838
Public Service Enterprise Group, Inc...................... 37,600 1,504,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B16
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
UTILITY - ELECTRIC (CONT'D.)
Southern Co............................................... 111,800 $ 3,249,188
Texas Utilities Co........................................ 44,500 2,077,594
Unicom Corp............................................... 35,100 1,353,544
--------------
37,868,143
--------------
TOTAL COMMON STOCKS
(cost $2,611,554,092).................................................... 2,858,308,143
--------------
PREFERRED STOCKS -- 0.8%
FINANCIAL SERVICES -- 0.5%
Central Hispano Capital Corp. (Portugal).................. 1,000,000 25,000,000
--------------
TELECOMMUNICATIONS -- 0.3%
Telecomunicacoes Brasileiras S.A., ADR (Brazil)........... 223,400 16,238,388
--------------
TOTAL PREFERRED STOCKS
(cost $47,988,630)....................................................... 41,238,388
--------------
MOODY'S PRINCIPAL
RATING AMOUNT
LONG-TERM BONDS -- 35.1% (UNAUDITED) (000)
------------ ---------
AEROSPACE -- 0.7%
Raytheon Co.,
5.95%, 03/15/01............................... Baa1 $ 14,000 14,122,920
6.40%, 12/15/18............................... Baa1 25,000 24,812,500
--------------
38,935,420
--------------
AIRLINES -- 2.3%
Continental Airlines, Inc.,
8.00%, 12/15/05............................... Ba2 15,000 14,821,500
Delta Airlines, Inc.,
10.125%, 05/15/10............................. Baa3 19,335 24,187,118
10.375%, 02/01/11............................. Ba1 31,250 39,896,250
United Airlines, Inc.,
10.67%, 05/01/04.............................. Baa3 19,500 23,072,400
11.21%, 05/01/14.............................. Baa3 17,500 22,981,000
--------------
124,958,268
--------------
ASSET-BACKED SECURITIES -- 0.2%
California Infrastructure,
1997-1 6.17%, 03/25/03........................ A3 4,000 4,049,040
Standard Credit Card Master Trust, 1993-2A
5.95%, 10/07/04............................... Aaa 4,500 4,566,060
--------------
8,615,100
--------------
AUTO - CARS & TRUCKS -- 0.2%
Navistar International Corp.,
7.00%, 02/01/03............................... Ba1 11,500 11,501,797
--------------
BANKS AND SAVINGS & LOANS -- 1.9%
Banco de Commercio Exterior de Columbia, SA,
M.T.N. (Colombia),
8.625%, 06/02/00.............................. NR 5,500 5,390,000
Bank of Nova Scotia (Canada),
6.50%, 07/15/07............................... A1 5,400 5,437,692
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
BANKS AND SAVINGS & LOANS (CONT'D.)
Bayerische Landesbank Girozentrale (Germany),
5.875%, 12/01/08.............................. Aaa $ 12,500 $ 12,780,000
Capital One Bank,
6.844%, 06/13/00.............................. Baa3 23,900 24,081,401
Central Hispano Financial Services (Portugal),
6.188%, 04/28/05.............................. A3 5,000 4,966,600
Citicorp, M.T.N.,
6.375%, 11/15/08.............................. A1 12,500 12,924,625
Kansallis-Osake-Pankki (Finland),
8.65%, 01/01/49............................... Baa1 9,000 9,132,480
National Australia Bank (Australia),
6.40%, 12/10/07............................... A1 8,700 8,874,000
6.60%, 12/10/07............................... A1 5,000 5,182,500
Okobank (Finland),
6.75%, 09/27/49............................... A3 16,250 16,233,750
--------------
105,003,048
--------------
CABLE & PAY TELEVISION SYSTEMS -- 1.0%
Cable & Wire Communications PLC (United
Kingdom),
6.75%, 12/01/08............................... Baa1 12,100 12,334,740
Continental Cablevision, Inc.,
8.50%, 09/15/01............................... Ba2 5,100 5,409,876
Rogers Cablesystems, Inc. (Canada),
10.00%, 03/15/05.............................. Ba3 2,000 2,240,000
Tele-Communications, Inc.,
6.34%, 02/01/02............................... Ba1 8,500 8,706,125
7.375%, 02/15/00.............................. Ba1 6,000 6,130,500
9.875%, 06/15/22.............................. Baa3 12,878 18,257,784
--------------
53,079,025
--------------
COMPUTERS SOFTWARE & SERVICES -- 0.3%
Computer Associates International, Inc.,
6.375%, 04/15/05.............................. Baa1 13,750 13,607,550
--------------
CONSULTING -- 0.6%
Comdisco, Inc.,
5.94%, 04/13/00............................... Baa1 12,500 12,468,750
6.32%, 11/27/00............................... Baa1 19,000 19,088,540
6.375%, 11/30/01.............................. Baa1 2,700 2,711,691
--------------
34,268,981
--------------
CONSUMER SERVICES -- 0.6%
Loewen Group, Inc.,
7.20%, 06/01/03............................... Ba3 20,000 16,800,000
7.60%, 06/01/08............................... Ba3 16,200 12,798,000
Service Corp. International,
7.00%, 06/01/15............................... A3 2,500 2,588,375
--------------
32,186,375
--------------
CONTAINERS -- 0.7%
Owens-Illinois, Inc.,
7.15%, 05/15/05............................... Ba1 40,000 40,088,400
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B17
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
DRUGS & MEDICAL SUPPLIES -- 0.1%
Mallinckrodt, Inc.,
6.30%, 03/15/11 (b)........................... Baa2 $ 8,000 $ 7,876,500
--------------
FINANCIAL SERVICES -- 7.7%
Advanta Corp., M.T.N.,
6.99%, 10/18/99............................... Ba3 10,000 9,632,000
Associates Corp.,
6.95%, 11/01/18............................... Aa3 29,000 30,901,820
AT&T Capital Corp,
7.50%, 11/15/00............................... Baa3 40,000 40,489,600
AT&T Capital Corp., M.T.N.,
6.25%, 05/15/01............................... Baa3 16,500 16,275,435
Calair Capital Corp.,
8.125%, 04/01/08.............................. Ba2 6,000 5,867,700
Conseco, Inc.,
6.40%, 06/15/11............................... Baa2 25,000 23,972,500
6.80%, 06/15/05............................... Baa3 2,000 1,815,600
8.70%, 11/15/26............................... Ba2 30,038 27,443,161
8.796%, 04/01/27.............................. Ba2 10,200 9,325,860
ContiFinancial Corp.,
7.50%, 03/15/02............................... Ba1 7,740 5,418,000
8.125%, 04/01/08.............................. Ba1 10,700 7,276,000
8.375%, 08/15/03.............................. Ba1 8,000 5,600,000
Enterprise Rent-A-Car USA Finance Co.,
6.35%, 01/15/01............................... Baa3 21,000 21,050,610
6.95%, 03/01/04............................... Baa2 7,500 7,569,900
7.00%, 06/15/00............................... Baa3 13,500 13,557,645
General Motors Acceptance Corp., M.T.N.,
5.95%, 04/20/01............................... A3 14,700 14,817,600
International Lease Finance Corp.,
6.00%, 05/15/02............................... A1 43,100 43,502,123
Lehman Brothers Holdings, Inc.,
6.40%, 08/30/00............................... Baa1 25,650 25,656,413
MCN Investment Corp.,
6.30%, 04/02/11............................... Baa2 8,250 8,194,725
Merrill Lynch, Pierce, Fenner & Smith, Inc.,
6.875%, 11/15/18.............................. Aa3 18,500 19,178,025
Morgan Stanley Dean Witter & Co., M.T.N.,
5.89%, 03/20/00............................... A1 15,000 15,105,600
6.09%, 03/09/11............................... A1 15,000 15,200,250
PT Alatief Freeport Co. (Netherlands),
9.75%, 04/15/01(a)/(c)........................ Ba2 7,600 5,472,000
Salomon, Inc., M.T.N.,
6.59%, 02/21/01............................... Baa1 8,250 8,408,400
6.75%, 08/15/03............................... Baa1 5,000 5,162,200
7.25%, 05/01/01............................... Baa1 8,625 8,933,430
Textron Financial Corp.,
6.05%, 03/16/09 1997-A........................ Aaa 17,639 17,672,740
--------------
413,499,337
--------------
FOREST PRODUCTS -- 0.2%
Fort James Corp.,
6.234%, 03/15/11 1997-A....................... Baa3 11,000 11,103,510
--------------
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
INDUSTRIAL -- 2.0%
Compania Sud Americana de Vapores, S.A. (Chile),
7.375%, 12/08/03.............................. NR $ 5,650 $ 5,070,875
Scotia Pacific Co.,
7.71%, 01/20/14............................... NR 9,800 9,327,248
7.71%, 01/20/14............................... NR 29,500 26,428,460
Security Capital Group,
6.95%, 06/15/05............................... Baa1 4,500 4,297,500
U.S. Filter Corp.,
6.375%, 05/15/01.............................. Ba1 20,000 19,785,600
6.50%, 05/15/03............................... Ba1 42,000 40,911,780
--------------
105,821,463
--------------
LODGING -- 1.0%
ITT Corp.,
6.25%, 11/15/00............................... Baa2 41,983 40,502,679
6.75%, 11/15/03............................... Baa2 14,000 12,891,620
--------------
53,394,299
--------------
MEDIA -- 1.2%
Paramount Communications, Inc.,
7.50%, 01/15/02............................... Ba2 9,100 9,496,123
Time Warner Inc.,
6.625%, 05/15/29.............................. Baa3 36,000 36,628,560
Viacom, Inc.,
7.75%, 06/01/05............................... Ba2 16,850 18,279,386
--------------
64,404,069
--------------
MISCELLANEOUS -- 0.1%
Tokai Preferred Capital,
9.98%, 12/29/49............................... A3 6,000 5,040,000
--------------
OIL & GAS -- 0.1%
B.J. Services Co.,
7.00%, 02/01/06............................... Ba1 4,000 4,139,880
--------------
OIL & GAS SERVICES -- 2.0%
KN Energy, Inc.,
6.30%, 03/01/21............................... Baa2 20,000 20,056,200
R&B Falcon Corp.,
6.50%, 04/15/03............................... Ba1 15,375 13,965,420
6.75%, 04/15/05............................... Ba1 30,000 25,800,000
Seagull Energy Co.,
7.50%, 09/15/27............................... Ba1 8,225 7,366,886
Williams Companies, Inc.,
5.95%, 02/15/10............................... Baa2 41,000 41,045,100
--------------
108,233,606
--------------
REAL ESTATE INVESTMENT TRUST -- 2.1%
Colonial Realty,
7.00%, 07/14/07............................... Baa3 3,350 3,212,349
EOP Operating, L.P.,
6.50%, 06/15/04............................... Baa1 6,000 5,900,400
6.625%, 02/15/05.............................. Bbb 18,187 17,827,443
Equity Residential Properties Trust,
6.15%, 09/15/00............................... A3 25,000 24,835,000
6.63%, 04/13/15............................... A3 15,300 15,097,428
Felcor Suites, L.P.,
7.375%, 10/01/04.............................. Ba1 25,000 23,812,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B18
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
REAL ESTATE INVESTMENT TRUST (CONT'D.)
Gables Realty Trust,
6.80%, 03/15/05............................... Baa2 $ 7,500 $ 7,157,175
Simon DeBartolo Group, Inc.,
6.75%, 06/15/05............................... Baa1 17,500 16,969,750
--------------
114,812,045
--------------
RETAIL -- 2.8%
Dayton Hudson,
5.95%, 06/15/00............................... A3 9,000 9,072,270
Federated Department Stores, Inc.,
8.125%, 10/15/02.............................. Ba1 3,600 3,880,548
8.50%, 06/15/03............................... Ba1 54,890 60,542,572
Meyer (Fred), Inc.,
7.15%, 03/01/03............................... Ba2 12,445 12,947,529
Saks, Inc.,
7.50%, 12/01/10............................... Baa3 29,000 28,997,970
8.25%, 11/15/08............................... Baa3 19,700 20,882,000
Sears Roebuck & Co.,
6.50%, 12/01/28............................... A2 17,000 16,686,010
--------------
153,008,899
--------------
TELECOMMUNICATIONS -- 2.1%
360 Communication Co.,
7.125%, 03/01/03.............................. Ba2 23,776 25,160,952
7.60%, 04/01/09............................... Ba1 12,885 14,601,926
Qwest Communications International Inc.,
7.50%, 11/01/08............................... Ba1 39,000 40,560,000
Sprint Corp.,
6.875%, 11/15/28.............................. Baa1 26,000 27,021,800
Worldcom Inc,
6.125%, 08/15/01.............................. Baa2 7,600 7,721,448
--------------
115,066,126
--------------
TOBACCO -- 0.6%
Philip Morris Companies, Inc.,
6.15%, 03/15/10............................... A2 20,000 20,166,000
RJR Nabisco, Inc.,
8.75%, 08/15/05............................... Baa3 4,600 4,641,722
9.25%, 08/15/13............................... Baa3 7,000 7,197,120
--------------
32,004,842
--------------
TRANSPORTATION/TRUCKING/SHIPPING -- 0.2%
Ryder System, Inc.,
7.51%, 03/24/00............................... Baa1 3,000 3,076,080
8.34%, 01/26/00............................... Baa1 5,000 5,152,750
--------------
8,228,830
--------------
UTILITIES -- 1.3%
Calenergy Co., Inc.,
6.96%, 09/15/03............................... Ba1 15,000 15,267,450
8.48%, 09/15/28............................... Ba1 23,000 25,427,190
Enersis SA, (Chile)
7.40%, 12/01/16............................... Baa1 6,400 5,267,200
Niagara Mohawk Power,
7.00%, 10/01/00............................... Ba3 25,000 25,250,000
--------------
71,211,840
--------------
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 3.1%
Federal National Mortgage Association,
Zero Coupon, 10/09/19......................... $ 11,800 $ 3,521,592
U.S. Treasury Bond,
6.25%, 08/15/23............................... 10,000 11,176,600
U.S. Treasury Note,
4.75%, 11/15/08 (b)........................... 3,700 3,728,897
5.50%, 08/15/28............................... 2,475 2,590,632
6.50%, 05/15/05............................... 9,600 10,521,024
7.50%, 02/15/05............................... 3,100 3,549,500
6.75%, 08/15/26............................... 109,900 131,656,903
--------------
166,745,148
--------------
TOTAL LONG-TERM BONDS
(cost $1,900,228,227).................................................... 1,896,834,358
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $4,559,770,949).................................................... 4,796,380,889
--------------
SHORT-TERM INVESTMENTS -- 10.9%
COMMERCIAL PAPER -- 0.4%
Barton Capital Corp,
5.35%, 01/04/99............................... P1 1,700 1,699,242
Campbell Soup Co.
4.80%, 01/04/99............................... P1 1,198 1,197,521
Countrywide Home Loan,
5.40%, 01/04/99............................... P2 1,700 1,699,235
CXC Inc.,
5.30%, 01/04/99............................... P1 1,700 1,699,249
Dover,
5.30%, 01/04/99............................... NR 1,700 1,699,249
Hershey,
5.00%, 01/04/99............................... P1 1,427 1,426,405
John Hancock Capital Corp.,
5.25%, 01/07/99............................... P1 1,700 1,698,513
Novartis Finance Corp.,
5.25%, 01/04/99............................... P1 1,500 1,499,344
Reed Elsevier, Inc.,
5.05%, 01/04/99............................... P1 1,700 1,699,285
SBC Communications,
5.00%, 01/04/99............................... P1 1,700 1,699,291
Sonoco Products,
5.35%, 01/04/99............................... P1 1,000 999,554
Triple-A One Plus Funding,
5.30%, 01/04/99............................... P1 1,500 1,499,338
Xerox Capital Corp,
5.30%, 01/04/99............................... P1 1,700 1,699,249
--------------
20,215,475
--------------
LOAN PARTICIPATIONS
Alltel Corp.,
5.75%, 01/04/99............................... P1 1,700 1,700,000
--------------
OTHER CORPORATE OBLIGATIONS -- 1.2%
AT&T Capital Corp., M.T.N.,
6.65%, 04/30/99............................... Baa3 24,500 24,579,870
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B19
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
OTHER CORPORATE OBLIGATIONS (CONT'D.)
Banco Ganadero, SA, M.T.N., (Colombia),
9.75%, 08/26/99............................... NR $ 7,300 $ 7,263,500
Comdisco, Inc.,
6.11%, 08/04/99............................... Baa1 12,500 12,541,375
Okobank (Finland)
6.793%, 1/14/99 (d)........................... NR 12,500 12,500,000
Tele-Communications, Inc.
6.375%, 09/15/99.............................. Ba1 6,400 6,444,992
--------------
63,329,737
--------------
U. S. GOVERNMENT OBLIGATION -- 0.4%
U.S. Treasury Bill,
4.32%, 03/18/99 (b)......................................... 100 99,088
4.36%, 03/18/99 (b)......................................... 22,400 22,193,820
--------------
22,292,908
--------------
REPURCHASE AGREEMENT -- 8.9%
Joint Repurchase Agreement Account
4.693%, 01/04/99 (Note 5)................................... 482,631 482,631,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $590,187,085)...................................................... 590,169,120
--------------
TOTAL INVESTMENTS -- 99.6%................................................. 5,386,550,009
(cost $5,149,958,034; Note 6)
VARIATION MARGIN ON OPEN FUTURES
CONTRACTS (e)............................................................ 809,059
OTHER ASSETS IN EXCESS OF
LIABILITIES -- 0.4%...................................................... 22,622,320
--------------
TOTAL NET ASSETS -- 100.0%................................................. $5,409,981,388
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
ADR American Depository Receipt
AG Aktiengesellschaft (German Stock Company)
L.P. Limited Partnership
M.T.N. Medium Term Note
PLC Public Limited Company (British Corporation)
SA Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French
Corporation)
(a) Non-income producing security.
(b) Security segregated as collateral for futures contracts.
(c) Issue in default.
(d) Indicates a variable rate security. The maturity date presented for this
instrument is the later of the next date on which the security can be
redeemed at par or the next date on which the rate of interest is adjusted.
The interest rate shown reflects the rate in effect at December 31, 1998.
(e) Open futures contracts as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION VALUE AT VALUE AT APPRECIATION/
CONTRACTS TYPE DATE TRADE DATE DECEMBER 31, 1998 DEPRECIATION
<S> <C> <C> <C> <C> <C>
Long positions:
1,241 U.S. Treasury Bond Mar 99 $159,480,156 $158,576,531 $ (903,625)
1,134 S&P 500 Index Mar 99 337,073,687 353,099,250 16,025,563
---------------
$15,121,938
---------------
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B20
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS OF
THE CONSERVATIVE BALANCED PORTFOLIO AND THE FLEXIBLE MANAGED PORTFOLIO OF
THE PRUDENTIAL SERIES FUND, INC.
NOTE 1: GENERAL
The Prudential Series Fund, Inc. ("Series Fund"), a Maryland corporation,
organized on November 15, 1982, is a diversified open-end management investment
company registered under the Investment Company Act of 1940, as amended. The
Series Fund is composed of fifteen Portfolios ("Portfolio" or "Portfolios"),
each with a separate series of capital stock. The information presented in these
financial statements pertains to only two Portfolios: Conservative Balanced
Portfolio and Flexible Managed Portfolio. Shares in the Series Fund are
currently sold only to certain separate accounts of The Prudential Insurance
Company of America ("The Prudential"), Pruco Life Insurance Company and Pruco
Life Insurance Company of New Jersey (together referred to as the "Companies")
to fund benefits under certain variable life insurance and variable annuity
contracts ("contracts") issued by the Companies. The accounts invest in shares
of the Series Fund through subaccounts that correspond to the Portfolios. The
accounts will redeem shares of the Series Fund to the extent necessary to
provide benefits under the contracts or for such other purposes as may be
consistent with the contracts.
NOTE 2: ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Series Fund in preparation of its financial statements.
SECURITIES VALUATION: Securities traded on an exchange (whether domestic or
foreign) are valued at the last reported sales price on the primary exchange on
which they are traded. Securities traded in the over-the-counter market
(including securities listed on exchanges for which a last sales price is not
available) are valued at the average of the last reported bid and asked prices
or at the bid price on such day in the absence of an asked price. Convertible
debt securities are valued at the mean between the most recently quoted bid and
asked prices provided by principal market makers. High yield bonds are valued
either by quotes received from principal market makers or by an independent
pricing service which determine prices by analysis of quality, coupon, maturity
and other factors. Any security for which a reliable market quotation is
unavailable is valued at fair value as determined in good faith by or under the
direction of the Series Fund's Board of Directors. Short-term securities are
valued at amortized cost.
REPURCHASE AGREEMENTS: In connection with transactions in repurchase agreements
with U.S. financial institutions, it is the Series Fund's policy that its
custodian or designated subcustodians, as the case may be under triparty
repurchase agreements, take possession of the underlying collateral securities,
the value of which exceeds the principal amount of the repurchase transaction
including accrued interest. If the seller defaults and the value of the
collateral declines or if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Series Fund may
by delayed or limited. (See Note 5).
FOREIGN CURRENCY TRANSLATION: The books and records of the Series Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) market value of investments securities, other assets and liabilities - at
the current rates of exchange.
(ii) purchases and sales of investment securities, income and expenses - at the
rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Series Fund are presented at the foreign exchange
rates and market values at the close of the fiscal year, the Series Fund does
not isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from changes
in the market prices of securities held at the end of the fiscal year.
Similarly, the Series Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market prices
of long-term portfolio securities sold during the fiscal year. Accordingly,
these realized and unrealized foreign currency gains (losses) are included in
the reported net realized gains (losses) on investment transactions.
C1
<PAGE>
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains or losses from holdings of foreign currencies, currency
gains or losses realized between the trade and settlement dates on security
transactions, and the difference between the amounts of dividends, interest and
foreign taxes recorded on the Series Fund's books and the U.S. dollar equivalent
amounts actually received or paid. Net unrealized currency gains or losses from
valuing foreign currency denominated assets and liabilities (other than
investments) at fiscal year end exchange rates are reflected as a component of
net unrealized appreciation (depreciation) on investments and foreign
currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
SHORT SALES: Conservative Balanced Portfolio and Flexible Managed Portfolio may
sell a security it does not own in anticipation of a decline in the market value
of that security (short sale). When a Portfolio makes a short sale, it must
borrow the security sold short and deliver it to the buyer. The proceeds of the
short sale will be retained by the broker-dealer through which it made the short
sale as collateral for its obligation to deliver the security upon conclusion of
the sale. The Portfolio may have to pay a fee to borrow the particular security
and may be obligated to remit any interest or dividends received on such
borrowed securities. A gain, limited to the price at which the Portfolio sold
the security short, or a loss, unlimited in magnitude, will be recognized upon
the termination of a short sale if the market price at termination is less than
or greater than, respectively, the proceeds originally received.
OPTIONS: The Series Fund may either purchase or write options in order to hedge
against adverse market movements or fluctuations in value with respect to
securities which the Series Fund currently owns or intends to purchase. The
Series Fund's principal reason for writing options is to realize, through
receipts of premiums, a greater current return than would be realized on the
underlying security alone. When the Series Fund purchases an option, it pays a
premium and an amount equal to that premium is recorded as an investment. When
the Series Fund writes an option, it receives a premium and an amount equal to
that premium is recorded as a liability. The investment or liability is adjusted
daily to reflect the current market value of the option. If an option expires
unexercised, the Series Fund realizes a gain or loss to the extent of the
premium received or paid. If an option is exercised, the premium received or
paid is an adjustment to the proceeds from the sales or the cost of the purchase
in determining whether the Series Fund has realized a gain or loss. The
difference between the premium and the amount received or paid on effecting a
closing purchase or sale transaction is also treated as a realized gain or loss.
Gain or loss on purchased options is included in net realized gain (loss) on
investment transactions. Gain or loss on written options is presented separately
as net realized gain (loss) on written option transactions.
The Series Fund, as writer of an option, may have no control over whether the
underlying securities may be sold (called) or purchased (put). As a result, the
Series Fund bears the market risk of an unfavorable change in the price of the
security underlying the written option. The Series Fund, as purchaser of an
option, bears the risk of the potential inability of the counterparties to meet
the terms of their contracts.
FINANCIAL FUTURES CONTRACTS: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series Fund is required to pledge to the broker an amount of cash and/or
other assets equal to a certain percentage of the contract amount. This amount
is known as the "initial margin." Subsequent payments, known as "variation
margin," are made or received by the Series Fund each day, depending on the
daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. When the contract expires or is closed, the gain or
loss is realized and is presented in the statement of operations as net realized
gain (loss) on financial futures contracts.
The Series Fund invests in financial futures contracts in order to hedge its
existing portfolio securities or securities the Series Fund intends to purchase,
against fluctuations in value. Under a variety of circumstances, the Series Fund
may not achieve the anticipated benefits of the financial futures contracts and
may realize a loss. The use of futures transactions involves the risk of
imperfect correlation in movements in the price of futures contracts and the
underlying assets.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; interest income, which is comprised of four elements: stated
coupon, original issue discount, market discount and market premium is recorded
on the accrual basis. Certain
C2
<PAGE>
portfolios own shares of real estate investment trusts ("REITs") which report
information on the source of their distributions annually. A portion of
distributions received from REITs during the year is estimated to be a return of
capital and is recorded as a reduction of their costs. Expenses are recorded on
the accrual basis which may require the use of certain estimates by management.
The Series Fund expenses are allocated to the respective Portfolios on the basis
of relative net assets except for expenses that are charged directly at a
Portfolio level.
CUSTODY FEE CREDITS: The Series Fund has an arrangement with its custodian
bank, whereby uninvested monies earn credits which reduce the fees charged by
the custodian. Such custody fee credits are presented as a reduction of gross
expenses in the accompanying Statement of Operations.
TAXES: For federal income tax purposes, each portfolio in the Series Fund is
treated as a separate taxpaying entity. It is the intent of the Series Fund to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends, interest and capital gains have been
provided for in accordance with the Series Fund's understanding of the
applicable country's tax rules and regulations.
DIVIDENDS AND DISTRIBUTIONS: Dividends and distributions of each Portfolio are
declared in cash and automatically reinvested in additional shares of the
Portfolio. Each Portfolio will declare and distribute dividends from net
investment income, if any, quarterly and net capital gains, if any, at least
annually. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
NOTE 3: AGREEMENTS
The Series Fund has an investment advisory agreement with The Prudential.
Pursuant to this agreement The Prudential has responsibility for all investment
advisory services and supervises the subadvisers' performance of such services.
The Prudential has entered into a service agreement with The Prudential
Investment Corporation ("PIC"), which provides that PIC will furnish to The
Prudential such services as The Prudential may require in connection with the
performance of its obligations under the investment advisory agreement with the
Series Fund. The Prudential pays for the cost of PIC's services, compensation of
officers of the Series Fund, occupancy and certain clerical and administrative
expenses of the Series Fund. The Series Fund bears all other costs and expenses.
The investment advisory fee paid The Prudential is computed daily and payable
quarterly, at the annual rates specified below of the value of each of the
Portfolio's average daily net assets.
<TABLE>
<CAPTION>
FUND INVESTMENT ADVISORY FEE
- --------------------------------------- ------------------------
<S> <C>
Conservative Balanced Portfolio........ 0.55%
Flexible Managed Portfolio............. 0.60
</TABLE>
The Prudential has agreed to refund to a Portfolio, the portion of the
investment advisory fee for that Portfolio equal to the amount that the
aggregate annual ordinary operating expenses (excluding interest, taxes and
brokerage commissions) exceeds 0.75% of the Portfolio's average daily net
assets. No refund was required for the fiscal year ended December 31, 1998.
PIC is an indirect, wholly-owned subsidiary of The Prudential.
The Series Fund has a credit agreement (the "Agreement") with an unaffiliated
lender. The maximum commitment under the Agreement is $250,000,000. The
Agreement expired on December 18, 1998 and has been extended through February
28, 1999 under the same terms. Interest on any such borrowings outstanding will
be at market rates. The purpose of the Agreement is to serve as an alternative
source of funding for capital share redemptions. The Series Fund did not borrow
any amounts pursuant to the Agreement during the year ended December 31, 1998.
The Series Fund pays a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly by the Series Fund.
C3
<PAGE>
NOTE 4: OTHER TRANSACTIONS WITH AFFILIATES
For the fiscal year ended December 31, 1998, Prudential Securities Incorporated,
an indirect, wholly-owned subsidiary of The Prudential, earned $135,511 in
brokerage commissions from transactions executed on behalf of the Conservative
Balanced Portfolio and the Flexible Managed Portfolio as follows:
<TABLE>
<CAPTION>
Fund Commission
- --------------------------------------- -----------
<S> <C>
Conservative Balanced Portfolio........ $ 32,490
Flexible Managed Portfolio............. 103,021
-----------
$ 135,511
</TABLE>
NOTE 5: JOINT REPURCHASE AGREEMENT ACCOUNT
The Portfolios of the Series Fund (excluding Global Portfolio) may transfer
uninvested cash balances into a single joint repurchase agreement account, the
daily aggregate balance of which is invested in one or more repurchase
agreements collateralized by U.S. Government obligations. The Series Fund's
undivided interest in the joint repurchase agreement account represented
$932,710,000 as of December 31, 1998. The Portfolios of the Series Fund with
cash invested in the joint accounts had the following principal amounts and
percentage participation in the account:
<TABLE>
<CAPTION>
PRINCIPAL PERCENTAGE
AMOUNT INTEREST
------------- ----------
<S> <C> <C>
Conservative Balanced Portfolio........ $ 109,421,000 11.73%
Flexible Managed Portfolio............. 482,631,000 51.75
All other portfolios (currently not
available to PRUvider)............... 340,658,000 36.52
------------- ----------
$ 932,710,000 100.00%
</TABLE>
As of such date, each repurchase agreement in the joint account and the
collateral therefor were as follows:
Bear, Stearns & Co., Inc., 4.75%, in the principal amount of $255,000,000,
repurchase price $255,134,583, due 1/4/99. The value of the collateral including
accrued interest was $260,454,041.
Credit Suisse First Boston Corp., 4.88%, in the principal amount of $50,000,000,
repurchase price $50,027,111, due 1/4/99. The value of the collateral including
accrued interest was $52,533,163.
CIBC Oppenheimer, 4.75%, in the principal amount of $255,000,000, repurchase
price $255,134,583, due 1/4/99. The value of the collateral including accrued
interest was $260,553,672.
SBC Warburg Dillon Reed Inc., 4.70%, in the principal amount of $255,000,000,
repurchase price $255,133,167, due 1/4/99. The value of the collateral including
accrued interest was $261,037,802.
Morgan (JP) Securities, Inc., 4.35%, in the principal amount of $117,710,000,
repurchase price $117,766,893, due 1/4/99. The value of the collateral including
accrued interest was $120,272,486.
NOTE 6: PORTFOLIO SECURITIES
The aggregate cost of purchases and the proceeds from the sales of securities
(excluding short-term issues) for the fiscal year ended December 31, 1998 were
as follows:
Cost of Purchases:
<TABLE>
<CAPTION>
CONSERVATIVE FLEXIBLE
BALANCED MANAGED
--------------- ---------------
<S> <C> <C>
Government Securities.................. $ 2,907,392,972 $ 2,497,336,303
Non-Government Securities.............. $ 4,664,947,720 $ 4,533,514,880
</TABLE>
Proceeds from Sales:
<TABLE>
<CAPTION>
CONSERVATIVE FLEXIBLE
BALANCED MANAGED
--------------- ---------------
<S> <C> <C>
Government Securities.................. $ 2,956,094,381 $ 2,461,697,036
Non-Government Securities.............. $ 4,778,976,239 $ 5,139,626,859
</TABLE>
C4
<PAGE>
The federal income tax basis and unrealized appreciation (depreciation) of the
Fund's investments as of December 31, 1998 were as follows:
<TABLE>
<CAPTION>
CONSERVATIVE FLEXIBLE
BALANCED MANAGED
--------------- ---------------
<S> <C> <C>
Gross Unrealized Appreciation.......... $ 429,047,409 $ 555,358,703
Gross Unrealized Depreciation.......... 164,278,673 320,658,740
Total Net Unrealized................... 264,768,736 234,699,963
Tax Basis.............................. 4,497,706,049 5,151,850,046
</TABLE>
C5
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CONSERVATIVE BALANCED
-----------------------------------------------------
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 14.97 $ 15.52 $ 15.31 $ 14.10 $ 14.91
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. 0.66 0.76 0.66 0.63 0.53
Net realized and unrealized gains
(losses) on investments.............. 1.05 1.26 1.24 1.78 (0.68)
--------- --------- --------- --------- ---------
Total from investment operations... 1.71 2.02 1.90 2.41 (0.15)
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.66) (0.76) (0.66) (0.64) (0.51)
Distributions from net realized
gains................................ (0.94) (1.81) (1.03) (0.56) (0.15)
--------- --------- --------- --------- ---------
Total distributions................ (1.60) (2.57) (1.69) (1.20) (0.66)
--------- --------- --------- --------- ---------
Net Asset Value, end of year........... $ 15.08 $ 14.97 $ 15.52 $ 15.31 $ 14.10
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:(b)............ 11.74% 13.45% 12.63% 17.27% (0.97)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $4,796.0 $4,744.2 $4,478.8 $3,940.8 $3,501.1
Ratios to average net assets:
Expenses............................. 0.57% 0.56% 0.59% 0.58% 0.61%
Net investment income................ 4.19% 4.48% 4.13% 4.19% 3.61%
Portfolio turnover rate................ 167% 295% 295% 201% 125%
FINANCIAL HIGHLIGHTS
</TABLE>
<TABLE>
<CAPTION>
FLEXIBLE MANAGED
-----------------------------------------------------
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 17.28 $ 17.79 $ 17.86 $ 15.50 $ 16.96
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. 0.58 0.59 0.57 0.56 0.47
Net realized and unrealized gains
(losses) on investments.............. 1.14 2.52 1.79 3.15 (1.02)
--------- --------- --------- --------- ---------
Total from investment operations... 1.72 3.11 2.36 3.71 (0.55)
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.59) (0.58) (0.58) (0.56) (0.45)
Distributions from net realized
gains................................ (1.85) (3.04) (1.85) (0.79) (0.46)
--------- --------- --------- --------- ---------
Total distributions................ (2.44) (3.62) (2.43) (1.35) (0.91)
--------- --------- --------- --------- ---------
Net Asset Value, end of year........... $ 16.56 $ 17.28 $ 17.79 $ 17.86 $ 15.50
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:(b)............ 10.24% 17.96% 13.64% 24.13% (3.16)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $5,410.0 $5,490.1 $4,896.9 $4,261.2 $3,481.5
Ratios to average net assets:
Expenses............................. 0.61% 0.62% 0.64% 0.63% 0.66%
Net investment income................ 3.21% 3.02% 3.07% 3.30% 2.90%
Portfolio turnover rate................ 138% 227% 233% 173% 124%
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
SEE NOTES TO FINANCIAL STATEMENTS.
D1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF THE PRUDENTIAL SERIES FUND, INC.:
In our opinion, the accompanying statements of assets and liabilities, including
the Portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Conservative Balanced and
Flexible Managed Portfolios (the "Portfolios"), two of the fifteen portfolios
that comprise The Prudential Series Fund, Inc. at December 31, 1998, the results
of each of their operations for the year then ended, the changes in each of
their net assets for each of the two years in the period then ended and the
financial highlights for each of the three years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Portfolios' management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above. The accompanying financial
highlights for each of the two years in the period ended December 31, 1995 for
each of the Portfolios were audited by other independent accountants, whose
opinion dated February 15, 1996 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
February 12, 1999
TAX INFORMATION (UNAUDITED)
Although we understand that the vast majority, if not all, of the
shareholders/contract holders of the Series Fund currently maintain a tax
deferred status, we are nevertheless required by the Internal Revenue Code to
advise you within 60 days of the Series Fund's fiscal year end (December 31,
1998) as to the federal tax status of dividends paid by the Series Fund during
such fiscal year. Accordingly, we are advising you that in 1998, the Series Fund
paid dividends as follows:
<TABLE>
<CAPTION>
ORDINARY DIVIDENDS
----------------------------
SHORT-TERM LONG-TERM TOTAL
INCOME CAPITAL GAINS CAPITAL GAINS DIVIDENDS
----------- --------------- --------------- -----------
<S> <C> <C> <C> <C>
Conservative Balanced Portfolio $ 0.664 $ 0.898 $ 0.044 $ 1.606
Flexible Managed Portfolio 0.586 0.949 0.901 2.436
</TABLE>
E1
<PAGE>
BOARD OF
DIRECTORS THE PRUDENTIAL SERIES FUND, INC.
<TABLE>
<S> <C> <C>
MENDEL A. MELZER, CFA W. SCOTT McDONALD, JR., Ph.D. E. MICHAEL CAULFIELD
CHAIRMAN, VICE PRESIDENT, EXECUTIVE VICE PRESIDENT,
THE PRUDENTIAL SERIES FUND, INC. KALUDIS CONSULTING GROUP PRUDENTIAL FINANCIAL MANAGEMENT
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
</TABLE>
<TABLE>
<S> <C>
SAUL K. FENSTER, Ph.D. JOSEPH WEBER, Ph.D.
PRESIDENT, VICE PRESIDENT,
NEW JERSEY INSTITUTE OF TECHNOLOGY INTERCLASS (INTERNATIONAL CORPORATE LEARNING)
</TABLE>
<PAGE>
PRUVIDER(SM)
VARIABLE APPRECIABLE LIFE(R)
INSURANCE
[GRAPHIC OMITTED]
[LOGO] Prudential
Pruco Life Insurance Company
213 Washington Street, Newark, NJ 07102-2992
Telephone 800 778-2255
SVAL-1SAI Ed. 5/99 CAT# 64M086G
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT
PRUvider(SM)
Variable
APPRECIABLE
LIFE(R)______________
INSURANCE CONTRACTS
PROVIDING FOR THE INVESTMENT
OF ASSETS IN THE
INVESTMENT PORTFOLIOS OF
THE PRUDENTIAL SERIES
FUND, INC.
This statement of additional information describes a variable life insurance
contract (the "Contract") offered by Pruco Life Insurance Company of New Jersey
("Pruco Life of New Jersey", "us", or "we") under the name PRUvider(SM) Variable
APPRECIABLE LIFE(R) Insurance. Pruco Life of New Jersey, a stock life insurance
company, is an indirect wholly owned subsidiary of The Prudential Insurance
Company of America ("Prudential"). The death benefit varies daily with
investment experience but will never be less than the "face amount" of insurance
specified in the Contract. There is no guaranteed minimum cash surrender value.
The assets under these contracts can be invested in one or both of the two
available subaccounts of the Pruco Life of New Jersey Variable Appreciable
Account. The assets invested in each subaccount are in turn invested in a
corresponding portfolio of The Prudential Series Fund, Inc., a diversified,
open-end management investment company (commonly known as a mutual fund) that is
intended to provide a range of investment alternatives to variable contract
owners. Each portfolio is, for investment purposes, in effect a separate fund.
The two available Series Fund portfolios are the CONSERVATIVE BALANCED PORTFOLIO
and the FLEXIBLE MANAGED PORTFOLIO. A separate class of capital stock is issued
for each portfolio. Shares of the Series Fund are currently sold only to
separate accounts of Pruco Life of New Jersey and certain other insurers to fund
the benefits under variable life insurance and variable annuity contracts issued
by those companies.
The PRUvider(SM) Variable APPRECIABLE LIFE(R) Insurance Contract owner may also
choose to invest in a fixed-rate option which is described in the prospectus of
the Pruco Life of New Jersey Variable Appreciable Account.
------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ
WITH THE PROSPECTUS OF THE PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT
DATED MAY 1, 1999. THE PROSPECTUS IS AVAILABLE WITHOUT CHARGE UPON WRITTEN
REQUEST TO THE PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY, 213 WASHINGTON
STREET, NEWARK, NEW JERSEY 07102-2992 OR BY TELEPHONING (800) 437-4016.
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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
213 Washington Street
Newark, New Jersey 07102-2992
Telephone: (800) 778-2255
PRUvider is a service mark of Prudential.
APPRECIABLE LIFE is a registered mark of Prudential.
SVAL-2SAI Ed 5-99
Catalog No. 64M087E
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STATEMENT OF ADDITIONAL INFORMATION
CONTENTS
PAGE
MORE DETAILED INFORMATION ABOUT THE CONTRACT...................................1
SALES LOAD UPON SURRENDER..................................................1
REDUCTION OF CHARGES FOR CONCURRENT SALES TO SEVERAL INDIVIDUALS...........1
PAYING PREMIUMS BY PAYROLL DEDUCTION.......................................1
UNISEX PREMIUMS AND BENEFITS...............................................2
HOW THE DEATH BENEFIT WILL VARY............................................2
WITHDRAWAL OF EXCESS CASH SURRENDER VALUE..................................2
TAX TREATMENT OF CONTRACT BENEFITS.........................................3
TREATMENT AS LIFE INSURANCE............................................3
PRE-DEATH DISTRIBUTIONS................................................3
WITHHOLDING............................................................4
OTHER TAX CONSIDERATIONS...............................................4
BUSINESS-OWNED LIFE INSURANCE..........................................4
SALE OF THE CONTRACT AND SALES COMMISSIONS.................................4
RIDERS.....................................................................5
OTHER STANDARD CONTRACT PROVISIONS.........................................5
ASSIGNMENT.............................................................5
BENEFICIARY............................................................5
INCONTESTABILITY.......................................................5
MISSTATEMENT OF AGE OR SEX.............................................5
SETTLEMENT OPTIONS.....................................................5
SUICIDE EXCLUSION......................................................5
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS...........................6
GENERAL....................................................................6
CONVERTIBLE SECURITIES.....................................................6
WARRANTS...................................................................6
FOREIGN SECURITIES.........................................................6
OPTIONS ON STOCK AND DEBT SECURITIES.......................................7
OPTIONS ON STOCK.......................................................7
OPTIONS ON DEBT SECURITIES.............................................8
RISKS OF TRANSACTIONS IN OPTIONS ON EQUITY AND DEBT SECURITIES.........8
OPTIONS ON STOCK INDEXES...................................................9
STOCK INDEX OPTIONS....................................................9
RISKS OF TRANSACTIONS IN OPTIONS ON STOCK INDEXES.....................10
OPTIONS ON FOREIGN CURRENCIES.............................................11
OPTIONS ON FOREIGN CURRENCY...........................................11
RISKS OF TRANSACTIONS IN OPTIONS ON FOREIGN CURRENCY..................11
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS........................11
FUTURES AND OPTIONS ON FUTURES........................................11
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS............................12
RISKS OF TRANSACTIONS IN OPTIONS ON FUTURES CONTRACTS.................12
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS...............................12
INTEREST RATE SWAPS.......................................................14
LOAN PARTICIPATIONS.......................................................14
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS............................14
DESCRIPTION OF REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS.........14
RISKS OF REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS...............15
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES...............................15
SHORT SALES...............................................................15
LOANS OF PORTFOLIO SECURITIES.............................................15
DESCRIPTION OF SECURITIES LOANS.......................................15
RISKS ASSOCIATED WITH LENDING SECURITIES..............................16
ILLIQUID SECURITIES.......................................................16
INVESTMENT RESTRICTIONS.......................................................16
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INVESTMENT MANAGEMENT AND DISTRIBUTION ARRANGEMENTS...........................19
INVESTMENT MANAGEMENT ARRANGEMENTS........................................19
DISTRIBUTION ARRANGEMENTS.................................................20
OTHER INFORMATION CONCERNING THE FUND.........................................20
INCORPORATION AND AUTHORIZED STOCK........................................20
PORTFOLIO TRANSACTIONS AND BROKERAGE......................................21
TAXATION OF THE FUND......................................................22
CUSTODIANS................................................................23
EXPERTS...................................................................23
LICENSES..................................................................23
DEBT RATINGS..................................................................24
DIRECTORS AND OFFICERS OF PRUCO LIFE OF NEW JERSEY AND
MANAGEMENT OF THE FUND........................................................26
FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC. .................... A1
THE PRUDENTIAL SERIES FUND, INC. SCHEDULE OF INVESTMENTS.................... B1
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MORE DETAILED INFORMATION ABOUT THE CONTRACT
SALES LOAD UPON SURRENDER
Pruco Life of New Jersey assesses a contingent deferred sales load if the
Contract lapses or is surrendered during the first 10 Contract years. No such
charge is applicable to the death benefit, no matter when that may become
payable. Subject to the additional limitations described below, for Contracts
that lapse or are surrendered during the first five Contract years, the charge
will be equal to 50% of the first year's primary annual premium. In the next
five Contract years, we reduce that percentage uniformly on a daily basis until
it reaches zero on the 10th Contract anniversary. Thus, for Contracts
surrendered at the end of the sixth year, the maximum deferred sales charge will
be 40% of the first year's primary annual premium, for Contracts surrendered at
the end of year seven, the maximum deferred sales charge will be 30% of the
first year's primary annual premium, and so forth. We are currently allowing
partial surrenders of the Contract, but we reserve the right to cancel this
administrative practice. If the Contract is partially surrendered during the
first 10 years, we deduct a proportionate amount of the charge from the Contract
Fund. Surrender of all or part of the Contract may have tax consequences. See
TAX TREATMENT OF CONTRACT BENEFITS, page 3.
The contingent deferred sales load is also further limited at older issue ages
(approximately above age 61) in order to comply with certain requirements of
state law. Specifically, the contingent deferred sales load for such insureds is
no more than $32.50 per $1,000 of face amount.
The sales load is subject to a further important limitation that may,
particularly for Contracts that lapse or are surrendered within the first five
or six years, result in a lower contingent deferred sales load than that
described above. (This limitation might also, under unusual circumstances, apply
to reduce the monthly sales load deductions described in the prospectus in item
(a) under MONTHLY DEDUCTIONS FROM CONTRACT FUND.)
The limitation is based on a Guideline Annual Premium ("GAP") that is associated
with every Contract. The GAP is a defined amount determined actuarially in
accordance with a regulation of the Securities and Exchange Commission ("SEC").
Pruco Life of New Jersey will charge a maximum aggregate sales load (that is,
the sum of the monthly sales load deduction and the contingent deferred sales
charge) that will not be more than 30% of the premiums actually paid until those
premiums total one GAP plus no more than 9% of the next premiums paid until
total premiums are equal to five GAPS, plus no more than 6% of all subsequent
premiums. If the sales charges described above would at any time exceed this
maximum amount then, to the extent of any excess, we will not make the charge.
REDUCTION OF CHARGES FOR CONCURRENT SALES TO SEVERAL INDIVIDUALS
Pruco Life of New Jersey may reduce the sales charges and/or other charges on
individual Contracts sold to members of a class of associated individuals, or to
a trustee, employer or other entity representing such a class, where it is
expected that such multiple sales will result in savings of sales or
administrative expenses. Pruco Life of New Jersey determines both the
eligibility for such reduced charges, as well as the amount of such reductions,
by considering the following factors: (1) the number of individuals; (2) the
total amount of premium payments expected to be received from these Contracts;
(3) the nature of the association between these individuals, and the expected
persistency of the individual Contracts; (4) the purpose for which the
individual Contracts are purchased and whether that purpose makes it likely that
expenses will be reduced; and (5) any other circumstances which Pruco Life of
New Jersey believes to be relevant in determining whether reduced sales or
administrative expenses may be expected. Some of the reductions in charges for
these sales may be contractually guaranteed; other reductions may be withdrawn
or modified by Pruco Life of New Jersey on a uniform basis. Pruco Life of New
Jersey's reductions in charges for these sales will not be unfairly
discriminatory to the interests of any individual Contract owners.
PAYING PREMIUMS BY PAYROLL DEDUCTION
In addition to the annual, semi-annual, quarterly and monthly premium payment
modes, a payroll budget method of paying premiums may also be available under
certain Contracts. The employer generally deducts the necessary amounts from
employee paychecks and sends premium payments to Pruco Life of New Jersey
monthly. Any Pruco Life of New Jersey representative authorized to sell this
Contract can provide further details concerning the payroll budget method of
paying premiums.
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UNISEX PREMIUMS AND BENEFITS
The Contract generally uses mortality tables that distinguish between males and
females. Thus, premiums and benefits differ under Contracts issued on males and
females of the same age. However, in those states that have adopted regulations
prohibiting sex-distinct insurance rates, premiums and cost of insurance charges
will be based on a blended unisex rate, whether the insured is male or female.
In addition, employers and employee organizations considering purchase of a
Contract should consult their legal advisers to determine whether purchase of a
Contract based on sex-distinct actuarial tables is consistent with Title VII of
the Civil Rights Act of 1964 or other applicable law.
HOW THE DEATH BENEFIT WILL VARY
The death benefit will vary with investment experience. The death benefit will
be equal to the face amount of insurance plus the amount, if any, by which the
Contract Fund value exceeds the applicable "Tabular Contract Fund Value" for the
Contract (subject to an exception described below under which the death benefit
is higher). Each Contract contains a table that sets forth the Tabular Contract
Fund Value as of the end of each of the first 20 years of the Contract. Tabular
Contract Fund Values between Contract anniversaries are determined by
interpolation. The "Tabular Contract Fund Value" for each Contract year is an
amount that is slightly less than the Contract Fund value that would result as
of the end of such year if: (1) you paid only Scheduled Premiums; (2) you paid
the Scheduled Premiums when due; (3) your selected investment options earned a
net return at a uniform rate of 4% per year; (4) we deducted full mortality
charges based upon the 1980 CSO Table; (5) we deducted the maximum sales load
and expense charges; and (6) there was no Contract debt.
The death benefit will equal the face amount if the Contract Fund equals the
Tabular Contract Fund Value. If, due to investment results greater than a net
return of 4%, or to payment of greater than Scheduled Premiums, or to smaller
than maximum charges, the Contract Fund value is a given amount greater than the
Tabular Contract Fund Value, the death benefit will be the face amount plus that
excess amount. If, due to investment results less favorable than a net return of
4%, the Contract Fund value is less than the Tabular Contract Fund Value, the
death benefit will not fall below the initial face amount stated in the
Contract. Again, the death benefit will reflect a deduction for the amount of
any Contract debt. See Contract Loans in the prospectus. Any unfavorable
investment experience must first be offset by favorable performance or
additional payments that bring the Contract Fund up to the Tabular level before
favorable investment results or additional payments will increase the death
benefit.
The Contract Fund could grow to the point where it is necessary to increase the
death benefit by a greater amount in order to ensure that the Contract will
satisfy the Internal Revenue Code's definition of life insurance. Thus, the
death benefit will always be the greatest of (1) the face amount plus the
Contract Fund minus the Tabular Contract Fund Value; (2) the guaranteed minimum
death benefit; and (3) the Contract Fund times the attained age factor that
applies.
WITHDRAWAL OF EXCESS CASH SURRENDER VALUE
Under certain circumstances, you may withdraw a portion of the Contract's cash
surrender value without surrendering the Contract. The withdrawal amount is
limited by the requirement that the Contract Fund after withdrawal must not be
less than the Tabular Contract Fund Value. (A Table of Tabular Contract Fund
Values is included in the Contract; the Values increase with each year the
Contract remains inforce.) But because the Contract Fund may be made up in part
by an outstanding Contract loan, there is a further limitation that the amount
withdrawn may not be larger than an amount sufficient to reduce the cash
surrender value to zero. The amount withdrawn must be at least $200. You may
make no more than four such withdrawals in each Contract year, and there is an
administrative processing fee for each withdrawal equal to the lesser of $15 and
2% of the amount withdrawn. An amount withdrawn may not be repaid except as a
scheduled or unscheduled premium subject to the applicable charges. Upon
request, Pruco Life of New Jersey will tell you how much you may withdraw.
Withdrawal of part of the cash surrender value may have tax consequences. See
TAX TREATMENT OF CONTRACT BENEFITS, page 3. A temporary need for funds may also
be met by making a loan and you should consult your Pruco Life of New Jersey
representative about how best to meet your needs.
When a withdrawal is made, the cash surrender value and Contract Fund value are
reduced by the amount of the withdrawal, and the death benefit is reduced
accordingly. Neither the face amount of insurance nor the amount of Scheduled
Premiums will be changed due to a withdrawal of excess cash surrender value. No
surrender charges will be assessed for a withdrawal.
Withdrawal of part of the cash surrender value increases the risk that the
Contract Fund may be insufficient to provide Contract benefits. If such a
withdrawal is followed by unfavorable investment experience, the Contract may
lapse even if Scheduled Premiums continue to be paid when due. This is because,
for purposes of determining whether a lapse has occurred, Pruco Life of New
Jersey treats withdrawals as a return of premium.
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TAX TREATMENT OF CONTRACT BENEFITS
This summary provides general information on the federal income tax treatment of
the Contract. It is not a complete statement of what the federal income taxes
will be in all circumstances. It is based on current law and interpretations,
which may change. It does not cover state taxes or other taxes. It is not
intended as tax advice. You should consult your own qualified tax adviser for
complete information and advice.
TREATMENT AS LIFE INSURANCE
The Contract must meet certain requirements to qualify as life insurance for tax
purposes. These requirements include certain definitional tests and rules for
diversification of the Contract=s investments.
We believe we have taken adequate steps to ensure that the Contract qualifies as
life insurance for tax purposes. Generally speaking, this means that:
o you will not be taxed on the growth of the funds in the Contract,
unless you receive a distribution from the Contract,
o the Contract=s death benefit will be tax free to your beneficiary.
Although we believe that the Contract should qualify as life insurance for tax
purposes, there are some uncertainties, particularly because the Secretary of
Treasury has not yet issued permanent regulations that bear on this question.
Accordingly, we reserve the right to make changes -- which will be applied
uniformly to all Contract owners after advance written notice -- that we deem
necessary to ensure that the Contract will qualify as life insurance.
PRE-DEATH DISTRIBUTIONS
The tax treatment of any distribution you receive before the insured=s death
depends on whether the Contract is classified as a Modified Endowment Contract.
CONTRACTS NOT CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS.
o If you surrender the Contract or allow it to lapse, you will be taxed
on the amount you receive in excess of the premiums you paid less the
untaxed portion of any prior withdrawals. For this purpose, you will
be treated as receiving any portion of the cash surrender value used
to repay Contract debt. The tax consequences of a surrender may differ
if you take the proceeds under an income payment settlement option.
o Generally, you will be taxed on a withdrawal to the extent the amount
you receive exceeds the premiums you paid for the Contract less the
untaxed portion of any prior withdrawals. However, under some limited
circumstances, in the first 15 Contract years, all or a portion of a
withdrawal may be taxed if the Contract Fund exceeds the total
premiums paid less the untaxed portions of any prior withdrawals, even
if total withdrawals do not exceed total premiums paid.
o Extra premiums for optional benefits and riders generally do not count
in computing the premiums paid for the Contract for the purposes of
determining whether a withdrawal is taxable.
o Loans you take against the Contract are ordinarily treated as debt and
are not considered distributions subject to tax.
MODIFIED ENDOWMENT CONTRACTS.
o The rules change if the Contract is classified as a Modified Endowment
Contract. The Contract could be classified as a Modified Endowment
Contract if premiums substantially in excess of Scheduled Premiums are
paid or a decrease in the face amount of insurance is made (or a rider
removed). The addition of a rider or an increase in the face amount of
insurance may also cause the Contract to be classified as a Modified
Endowment Contract even though the Contract owner pays only Scheduled
Premiums or even less than the Scheduled Premiums. You should first
consult a qualified tax adviser and your Pruco Life of New Jersey
representative if you are contemplating any of these steps.
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o If the Contract is classified as a Modified Endowment Contract, then
amounts you receive under the Contract before the insured=s death,
including loans and withdrawals, are included in income to the extent
that the Contract Fund before surrender charges exceeds the premiums
paid for the Contract increased by the amount of any loans previously
included in income and reduced by any untaxed amounts previously
received other than the amount of any loans excludible from income. An
assignment of a Modified Endowment Contract is taxable in the same
way. These rules also apply to pre-death distributions, including
loans, made during the two-year period before the time that the
Contract became a Modified Endowment Contract.
o Any taxable income on pre-death distributions (including full
surrenders) is subject to a penalty of 10 percent unless the amount is
received on or after age 592, on account of your becoming disabled or
as a life annuity. It is presently unclear how the penalty tax
provisions apply to Contracts owned by businesses.
o All Modified Endowment Contracts issued by us to you during the same
calendar year are treated as a single Contract for purposes of
applying these rules.
WITHHOLDING
You must affirmatively elect that no taxes be withheld from a pre-death
distribution. Otherwise, the taxable portion of any amounts you receive will be
subject to withholding. You are not permitted to elect out of withholding if you
do not provide a social security number or other taxpayer identification number.
You may be subject to penalties under the estimated tax payment rules if your
withholding and estimated tax payments are insufficient to cover the tax due.
OTHER TAX CONSIDERATIONS
If you transfer or assign the Contract to someone else, there may be gift,
estate and/or income tax consequences. If you transfer the Contract to a person
two or more generations younger than you (or designate such a younger person as
a beneficiary), there may be Generation Skipping Transfer tax consequences.
Deductions for interest paid or accrued on Contract debt or on other loans that
are incurred or continued to purchase or carry the Contract may be denied. Your
individual situation or that of your beneficiary will determine the federal
estate taxes and the state and local estate, inheritance and other taxes due if
you or the insured dies.
BUSINESS-OWNED LIFE INSURANCE
If a business, rather than an individual, is the owner of the Contract, there
are some additional rules. Business Contract owners generally cannot deduct
premium payments. Business Contract owners generally cannot take tax deductions
for interest on Contract debt paid or accrued after October 13, 1995. An
exception permits the deduction of interest on policy loans on Contracts for up
to 20 key persons. The interest deduction for Contract debt on these loans is
limited to a prescribed interest rate and a maximum aggregate loan amount of
$50,000 per key insured person. The corporate alternative minimum tax also
applies to business-owned life insurance. This is an indirect tax on additions
to the Contract Fund or death benefits received under business-owned life
insurance policies.
SALE OF THE CONTRACT AND SALES COMMISSIONS
Pruco Securities Corporation ("Prusec"), an indirect wholly-owned subsidiary of
Prudential, acts as the principal underwriter of the Contract. Prusec, organized
in 1971 under New Jersey law, is registered as a broker and dealer under the
Securities Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. Prusec's principal business address is 751 Broad
Street, Newark, New Jersey 07102-3777. The Contract is sold by registered
representatives of Prusec who are also authorized by state insurance departments
to do so. The Contract may also be sold through other broker-dealers authorized
by Prusec and applicable law to do so. Registered representatives of such other
broker-dealers may be paid on a different basis than described below. Where the
insured is less than 60 years of age, the representative will generally receive
a commission of: (1) no more than 50% of the Scheduled Premiums for the first
year; (2) no more than 6% of the Scheduled Premiums for the second through 10th
years; and (3) no more than 2% of the Scheduled Premiums thereafter. For
insureds over 59 years of age, the commission will be lower. The representative
may be required to return all or part of the first year commission if the
Contract is not continued through the second year. Representatives with less
than three years of service may be paid on a different basis.
Sales expenses in any year are not equal to the deduction for sales load in that
year. Pruco Life of New Jersey expects to recover its total sales expenses over
the periods the Contracts are in effect. To the extent that the sales
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charges are insufficient to cover total sales expenses, the sales expenses will
be recovered from Pruco Life of New Jersey's surplus, which may include amounts
derived from the mortality and expense risk charge and the guaranteed minimum
death benefit risk charge described in the prospectus under DAILY DEDUCTION FROM
THE CONTRACT FUND and item (d) under MONTHLY DEDUCTIONS FROM CONTRACT FUND.
RIDERS
Contract owners may be able to obtain additional fixed benefits which may
increase the Scheduled Premium. If they do cause an increase in the Scheduled
Premium, they will be charged for by making monthly deductions from the Contract
Fund. These optional insurance benefits will be described in what is known as a
"rider" to the Contract. Charges for the riders will be deducted from the
Contract Fund on each Monthly date. One rider pays an additional amount if the
insured dies in an accident. Another waives certain premiums if the insured is
disabled within the meaning of the provision (or, in the case of a Contract
issued on an insured under the age of 15, if the applicant dies or becomes
disabled within the meaning of the provision). Others pay an additional amount
if the insured dies within a stated number of years after issue; similar
benefits may be available if the insured's spouse or child should die. The
amounts of these benefits are fully guaranteed at issue; they do not depend on
the performance of the Account, although they will no longer be available if the
Contract lapses. Certain restrictions may apply; they are clearly described in
the applicable rider.
Any Pruco Life of New Jersey representative authorized to sell the Contract can
explain these extra benefits further. Samples of the provisions are available
from Pruco Life of New Jersey upon written request.
OTHER STANDARD CONTRACT PROVISIONS
ASSIGNMENT
This Contract may not be assigned if the assignment would violate any federal,
state, or local law or regulation. Generally, the Contract may not be assigned
to an employee benefit plan or program without Pruco Life of New Jersey's
consent. Pruco Life of New Jersey assumes no responsibility for the validity or
sufficiency of any assignment, and it will not be obligated to comply with any
assignment unless it has received a copy at a Home Office.
BENEFICIARY
As the Contract owner, you designate and name your beneficiary in the
application. Thereafter, you may change the beneficiary, provided it is in
accordance with the terms of the Contract. Should the insured die with no
surviving beneficiary, the insured's estate will become the beneficiary.
INCONTESTABILITY
We will not contest the Contract after it has been inforce during the insured's
lifetime for two years from the issue date except when any change is made in the
Contract that requires Pruco Life of New Jersey's approval and would increase
our liability. We will not contest such change after it has been in effect for
two years during the lifetime of the insured.
MISSTATEMENT OF AGE OR SEX
If the insured's stated age or sex (except where unisex rates apply) or both are
incorrect in the Contract, Pruco Life of New Jersey will adjust the death
benefits payable, as required by law, to reflect the correct age and sex. Any
death benefit will be based on what the most recent charge for mortality would
have provided at the correct age and sex.
SETTLEMENT OPTIONS
The Contract grants to most owners, or to the beneficiary, a variety of optional
ways of receiving Contract proceeds, other than in a lump sum. Any Pruco Life of
New Jersey representative authorized to sell this Contract can explain these
options upon request.
SUICIDE EXCLUSION
Generally, if the insured, whether sane or insane, dies by suicide within two
years from the Contract Date, Pruco Life of New Jersey will pay no more under
the Contract than the sum of the premiums paid.
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INVESTMENT OBJECTIVES AND POLICIES OF THE
PORTFOLIOS
GENERAL
The Prudential Series Fund, Inc. (the "Fund") is a diversified, open-end
management investment company (commonly known as a "mutual fund") that is
intended to provide a range of investment alternatives through its seventeen
separate portfolios, each of which is for investment purposes, in effect a
separate fund. Two portfolios, the Conservative Balanced Portfolio and the
Flexible Managed Portfolio (the "Portfolios"), are available to PRUvider
Contract owners. The Fund Portfolios are managed by The Prudential Insurance
Company of America ("Prudential"). See INVESTMENT MANAGEMENT AND DISTRIBUTION
ARRANGEMENTS, page 19.
Each of the Portfolios seeks to achieve a different investment objective.
Accordingly, each Portfolio can be expected to have different investment results
and to be subject to different financial and market risks. Financial risk refers
to the ability of an issuer of a debt security to pay principal and interest and
to the earnings stability and overall financial soundness of an issuer of an
equity security. Market risk refers to the degree to which the price of a
security will react to changes in conditions in securities markets in general,
and with particular reference to debt securities, to changes in the overall
level of interest rates.
The investment objectives of the Fund's Portfolios that are available to
PRUvider Contract owners can be found under the Portfolio's RISK/RETURN SUMMARY
in the prospectus.
CONVERTIBLE SECURITIES
The Conservative Balanced and Flexible Managed Portfolios may invest in
convertible securities. A convertible security is a debt security - for example,
a bond or preferred stock - that may be converted into common stock of the same
or different issuer. The convertible security sets the price, quantity of shares
and time period in which it may be so converted. Convertible stock are senior to
a company's common stock but are usually subordinated to debt obligations of the
company. Convertible securities provide a steady stream of income which is
generally at a higher rate than the income on the issuer's common stock but
lower than the rate on the issuer's debt obligations. At the same time, they
offer - through their conversion mechanism - the chance to participate in the
capital appreciation of the underlying common stock. The price of a convertible
security tends to increase and decrease with the market value of the underlying
common stock.
WARRANTS
The Conservative Balanced and Flexible Managed Portfolios may invest in warrants
on common stocks. A warrant is a right to buy a number of shares of stock at a
specified price during a specified period of time. The risk associated with
warrants is that the market price of the underlying stock will stay below the
exercise price of the warrant during the exercise period. If this occurs, the
warrant becomes worthless and the investor loses the money he or she paid for
the warrant.
FOREIGN SECURITIES
The bond portions of the Conservative Balanced and Flexible Managed Portfolios
may each invest up to 20% of their assets in U.S. currency denominated debt
securities issued outside the U.S. by foreign or U.S. issuers. The Portfolios
may invest up to 30% of their total assets in debt and equity securities
denominated in a foreign currency and issued by foreign or U.S. issuers.
American Depository Receipts ("ADRs") are not considered "foreign securities"
for purposes of the percentage limitations set forth in the preceding paragraph.
ADRs are U.S. dollar-denominated certificates issued by a U.S. bank or trust
company. ADRs represent the right to receive securities of a foreign issuer
deposited in a domestic bank or foreign branch of a U.S. bank and traded on a
U.S. exchange or in the over-the-counter (OTC) market. Investment in ADRs has
certain advantages over direct investments in the underlying foreign securities
because they are easily transferable, have readily available market quotations,
and the foreign issuers are usually subject to comparable auditing, accounting
and financial reporting standards as U.S. issuers.
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Foreign securities (including ADRs) involve certain risks, which should be
considered carefully by an investor. These risks include political or economic
instability in the country of an issuer, the difficulty of predicting
international trade patterns, the possibility of imposition of exchange controls
and, in the case of securities not denominated in U.S. currency, the risk of
currency fluctuations. Foreign securities may be subject to greater movement in
price than U.S. securities and under certain market conditions, may be less
liquid than U.S securities. In addition, there may be less publicly available
information about a foreign company than a U.S company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to U.S. companies. There is
generally less government regulation of securities exchanges, brokers and listed
companies abroad than in the U.S., and, with respect to certain foreign
countries, there is a possibility of expropriations, confiscatory taxation or
diplomatic developments which could affect investment in those countries.
Finally, in the event of a default of any foreign debt obligations, it may be
more difficult for a Portfolio to obtain or enforce a judgment against the
issuers of such securities.
If a security is denominated in a foreign currency, it may be affected by
changes in currency rates and in exchange control regulations, and costs may be
incurred in connection with conversions between currencies. The Portfolios that
may invest in foreign securities may enter into forward foreign currency
exchange contracts for the purchase or sale of foreign currency for hedging
purposes, including: locking in the U.S. dollar price equivalent of interest or
dividends to be paid on such securities which are held by a Portfolio; and
protecting the U.S. dollar value of such securities which are held by the
Portfolio. A Portfolio will not enter into such forward contracts or maintain a
net exposure to such contracts where the consummation of the contracts would
obligate the Portfolio to deliver an amount of foreign currency in excess of the
value of the Portfolio=s securities or other assets denominated in that
currency. In addition, the Portfolios may, for hedging purposes, enter into
certain transactions involving options on foreign currencies, foreign currency
futures contracts and options on foreign currency futures contracts.
OPTIONS ON STOCK AND DEBT SECURITIES
OPTIONS ON STOCK
The Conservative Balanced and Flexible Managed Portfolios may purchase and
"write" (that is, sell) put and call options on equity securities that are
traded on securities exchanges, listed on the National Association of Securities
Dealers Automated Quotations System (NASDAQ), or privately negotiated with
broker-dealers (OTC equity options).
A call option is a short-term contract that gives the option purchaser or
"holder" the right to acquire a particular equity security for a specified price
at any time during a specified period. For this right, the option purchaser pays
the option seller a certain amount of money or "premium" which is set before the
option contract is entered into. The seller or "writer" of the option is
obligated to deliver the particular security if the option purchaser exercises
the option.
A put option is a similar contract. In a put option, the option purchaser has
the right to sell a particular security to the option seller for a specified
price at any time during a specified period. In exchange for this right, the
option purchaser pays the option seller a premium.
The Portfolios will write only "covered" options on stocks. A call option is
covered if:
(1) the Portfolio owns the security underlying the option;
(2) the Portfolio has an absolute right to acquire the security immediately;
(3) the Portfolio has a call on the same security that underlies the option
which has an exercise price equal to or less than the exercise price of the
covered option (or, if the exercise price is greater, the Portfolio sets
aside, in a segregated account, liquid assets that are equal to the
difference).
A put option is covered if:
(1) the Portfolio sets aside, in a segregated account, liquid assets that are
equal to or greater than the exercise price of the option;
(2) the Portfolio holds a put on the same security that underlies the option
which has an exercise price equal to or greater than the exercise price of
the covered option (or, if the exercise price is less, the Portfolio sets
aside, in a segregated account, liquid assets that are equal to the
difference).
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The Conservative Balanced and Flexible Managed Portfolios can also purchase
"protective puts" on equity securities. These are acquired to protect a
Portfolio=s security from a decline in market value. In a protective put, a
Portfolio has the right to sell the underlying security at the exercise price,
regardless of how much the underlying security may decline in value. In exchange
for this right, the Portfolio pays the put seller a premium.
The Portfolios may use options for both hedging and investment purposes. Neither
of the Portfolios intend to use more than 5% of its net assets to acquire call
options on stocks. The Portfolios may purchase equity securities that have a put
or call option provided by the issuer.
OPTIONS ON DEBT SECURITIES
The Conservative Balanced and Flexible Managed Portfolios may purchase and sell
put and call options on debt securities, including U.S. government debt
securities, that are traded on a U.S. securities exchange or privately
negotiated with primary U.S. government securities dealers that are recognized
by the Federal Reserve Bank of New York (OTC debt options). Neither of the
Portfolios currently intend to invest more than 5% of its net assets at any one
time in call options on debt securities.
Options on debt securities are similar to stock options (see above) except that
the option holder has the right to acquire or sell a debt security rather than
an equity security.
The Portfolios will write only covered options. Options on debt securities are
covered in much the same way as options on equity securities. One exception is
in the case of call options on U.S. Treasury Bills. With these options, a
Portfolio might own U.S. Treasury Bills of a different series from those
underlying the call option, but with a principal amount and value that matches
the option contract amount and a maturity date that is no later than the
maturity date of the securities underlying the option.
The Portfolios may also write straddles - which are simply combinations of a
call and a put written on the same security at the same strike price and
maturity date. When a Portfolio writes a straddle, the same security is used to
"cover" both the put and the call. If the price of the underlying security is
below the strike price of the put, the Portfolio will set aside liquid assets as
additional cover equal to the difference. A Portfolio will not use more than 5%
of its net assets as cover for straddles.
The Portfolios may also purchase protective puts to try to protect the value of
one of the securities it owns against a decline in market value, as well as
putable and callable debt securities.
RISKS OF TRANSACTIONS IN OPTIONS ON EQUITY AND DEBT SECURITIES
A Portfolio's use of options on equity or debt securities is subject to certain
special risks, in addition to the risk that the market value of the security
will move opposite to the Portfolio's option position. An exchange-traded option
position may be closed out only on an exchange, board of trade or other trading
facility which provides a secondary market for an option of the same series.
Although the Portfolios will generally purchase or write only those
exchange-traded options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange will
exist for any particular option, or at any particular time, and for some options
no secondary market on an exchange or otherwise may exist. In such event it
might not be possible to effect closing transactions in particular options, with
the result that the Portfolio would have to exercise its options in order to
realize any profit and would incur brokerage commissions upon the exercise of
such options and upon the subsequent disposition of underlying securities
acquired through the exercise of call options or upon the purchase of underlying
securities for the exercise of put options. If a Portfolio as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or a clearing
corporation may not be adequate at all times to handle the trading volume; or
(vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange would cease to exist, although outstanding options on that
exchange that had been issued by a clearing corporation as a result of trades on
that exchange would continue to be
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exercisable in accordance with their terms. There is no assurance that higher
than anticipated trading activity or other unforeseen events might not, at
times, render certain of the facilities of any of the clearing corporations
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.
The purchase and sale of OTC options will also be subject to certain risks.
Unlike exchange-traded options, OTC options generally do not have a continuous
liquid market. Consequently, a Portfolio will generally be able to realize the
value of an OTC option it has purchased only by exercising it or reselling it to
the dealer who issued it. Similarly, when a Portfolio writes an OTC option, it
generally will be able to close out the OTC option prior to its expiration only
by entering into a closing purchase transaction with the dealer to which the
Portfolio originally wrote the OTC option. While the Portfolios will seek to
enter into OTC options only with dealers who agree to enter into closing
transactions with the Portfolio, there can be no assurance that a Portfolio will
be able to liquidate an OTC option at a favorable price at any time prior to
expiration. In the event of insolvency of the other party, a Portfolio may be
unable to liquidate an OTC option. Prudential monitors the creditworthiness of
dealers with whom the Portfolios enter into OTC option transactions under the
Board of Directors' general supervision.
OPTIONS ON STOCK INDEXES
STOCK INDEX OPTIONS
The Conservative Balanced and Flexible Managed Portfolios may purchase and sell
put and call options on stock indexes that are traded on securities exchanges,
listed on NASDAQ or that are privately-negotiated with broker-dealers (OTC
options). Options on stock indexes are similar to options on stocks, except that
instead of giving the option holder the right to receive or sell a stock, it
gives the holder the right to receive an amount of cash if the closing level of
the stock index is greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash the holder
will receive is determined by multiplying the difference between the index=s
closing price and the option=s exercise price, expressed in dollars, by a
specified "multiplier." Unlike stock options, stock index options are always
settled in cash and gain or loss depends on price movements in the stock market
generally (or a particular market segment, depending on the index) rather than
the price movement of an individual stock.
A Portfolio will only sell or "write" covered options on stock indexes. A call
option is covered if the Portfolio holds stocks at least equal to the value of
the index times the multiplier times the number of contracts (the Option Value).
When a Portfolio writes a call option on a broadly based stock market index, the
Portfolio will set aside cash, cash equivalents or "qualified securities"
(defined below). The value of the assets to be segregated cannot be less than
100% of the Option Value as of the time the option is written.
If a Portfolio has written an option on an industry or market segment index, it
must set aside at least five "qualified securities," all of which are stocks of
issuers in that market segment, with a market value at the time the option is
written of not less than 100% of the Option Value. The qualified securities will
include stocks which represent at least 50% of the weighting of the industry or
market segment index and will represent at least 50% of the Portfolio's holdings
in that industry or market segment. No individual security will represent more
than 15% of the amount so set aside in the case of broadly based stock market
index options or 25% of such amount in the case of options on a market segment
index. If at the close of business on any day the market value of the qualified
securities falls below 100% of the Option Value as of that date, the Portfolio
will set aside an amount in liquid unencumbered assets equal in value to the
difference. In addition, when a Portfolio writes a call on an index which is
"in-the-money" at the time the option is written - that is, the index=s value is
above the strike price - the Portfolio will set aside liquid unencumbered assets
equal to the amount by which the call is in-the-money times the multiplier times
the number of contracts. Any amount so set aside may be applied to the
Portfolio's obligation to segregate additional amounts in the event that the
market value of the qualified securities falls below 100% of the current Option
Value. A "qualified security" is an equity security which is listed on a
securities exchange or listed on NASDAQ against which the Portfolio has not
written a stock call option and which has not been hedged by the Portfolio by
the sale of stock index futures. However, the Portfolio will not be subject to
the requirement described in this paragraph if it holds a call on the same index
as the call written and the exercise price of the call held is equal to or less
than the exercise price of the call written or greater than the exercise price
of the call written if the difference is maintained by the Portfolio in liquid
unencumbered assets in a segregated account with its custodian.
A put index option is covered if: (1) the Portfolio sets aside in a segregated
account liquid unencumbered assets of a value equal to the strike price times
the multiplier times the number of contracts; or (2) the Portfolio holds a put
on the
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same index as the put written where the strike price of the put held is equal to
or greater than the strike price of the put written or less than the strike
price of the put written if the difference is maintained by the Portfolio in
liquid unencumbered assets in a segregated account.
RISKS OF TRANSACTIONS IN OPTIONS ON STOCK INDEXES
A Portfolio's purchase and sale of options on stock indexes has the same risks
as stock options described in the previous section. In addition, the distinctive
characteristics of options on indexes create special risks. Index prices may be
distorted if trading of certain stocks included in the index is interrupted.
Trading in index options also may be interrupted in certain circumstances, such
as if trading were halted in a substantial number of stocks included in the
index. If this occurred, a Portfolio would not be able to close out options
which it had purchased or written and, if restrictions on exercise were imposed,
may be unable to exercise an option it holds, which could result in substantial
losses to the Portfolio. It is the policy of the Portfolios to purchase or write
options only on stock indexes which include a number of stocks sufficient to
minimize the likelihood of a trading halt in options on the index.
The ability to establish and close out positions on stock index options are
subject to the existence of a liquid secondary market. A Portfolio will not
purchase or sell any index option contract unless and until, in the portfolio
manager's opinion, the market for such options has developed sufficiently that
the risk in connection with such transactions is no greater than the risk in
connection with options on stocks.
There are certain additional risks associated with writing calls on stock
indexes. Because exercises of index options are settled in cash, a call writer
such as a Portfolio cannot determine the amount of its settlement obligations in
advance and, unlike call writing on specific stocks, cannot precisely provide in
advance for, or cover, its potential settlement obligations by acquiring and
holding the underlying securities. However, the Portfolios will follow the
"cover" procedures described above.
Price movements of a Portfolio's equity securities probably will not correlate
precisely with movements in the level of the index. Therefore, in writing a call
on a stock index a Portfolio bears the risk that the price of the securities
held by the Portfolio may not increase as much as the index. In that case, the
Portfolio would bear a loss on the call which may not be completely offset by
movement in the price of the Portfolio's equity securities. It is also possible
that the index may rise when the Portfolio's securities do not rise in value. If
this occurred, the Portfolio would experience a loss on the call which is not
offset by an increase in the value of its securities and might also experience a
loss in its securities. However, because the value of a diversified securities
portfolio will, over time, tend to move in the same direction as the market,
movements in the value of a Portfolio's securities in the opposite direction as
the market would be likely to occur for only a short period or to a small
degree.
When a Portfolio has written a stock index call, there is also a risk that the
market may decline between the time the Portfolio has a call exercised against
it, at a price which is fixed as of the closing level of the index on the date
of exercise, and the time the Portfolio is able to sell stocks in its portfolio.
As with stock options, a Portfolio will not learn that an index option has been
exercised until the day following the exercise date but, unlike a call on stock
where the Portfolio would be able to deliver the underlying securities in
settlement, the Portfolio may have to sell part of its stock portfolio in order
to make settlement in cash, and the price of such stocks might decline before
they can be sold. This timing risk makes certain strategies involving more than
one option substantially more risky with options in stock indexes than with
stock options. For example, even if an index call which a Portfolio has written
is "covered" by an index call held by the Portfolio with the same strike price,
the Portfolio will bear the risk that the level of the index may decline between
the close of trading on the date the exercise notice is filed with the clearing
corporation and the close of trading on the date the Portfolio exercises the
call it holds or the time the Portfolio sells the call which in either case
would occur no earlier than the day following the day the exercise notice was
filed.
There are also certain special risks involved in purchasing put and call options
on stock indexes. If a Portfolio holds an index option and exercises it before
final determination of the closing index value for that day, it runs the risk
that the level of the underlying index may change before closing. If such a
change causes the exercised option to fall out-of-the-money, the Portfolio will
be required to pay the difference between the closing index value and the
exercise price of the option (times the applicable multiplier) to the assigned
writer. Although the Portfolio may be able to minimize this risk by withholding
exercise instructions until just before the daily cutoff time or by selling
rather than exercising an option when the index level is close to the exercise
price, it may not be possible to eliminate this risk entirely because the cutoff
times for index options may be earlier than those fixed for other types of
options and may occur before definitive closing index values are announced.
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OPTIONS ON FOREIGN CURRENCIES
OPTIONS ON FOREIGN CURRENCY
The Conservative Balanced and Flexible Managed Portfolios may purchase and write
put and call options on foreign currencies traded on U.S. or foreign securities
exchanges or boards of trade for hedging purposes in a manner similar to that in
which forward foreign currency exchange contracts and futures contracts on
foreign currencies are employed (see below). Options on foreign currencies are
similar to options on stocks, except that the option holder has the right to
take or make delivery of a specified amount of foreign currency rather than
stock.
A Portfolio may purchase and write options to hedge its securities denominated
in foreign currencies. If the U.S. dollar increases in value relative to a
foreign currency in which the Portfolio's securities are denominated, the value
of those securities will decline as well. To hedge against a decline of a
foreign currency a Portfolio may purchase put options on that foreign currency.
If the value of the foreign currency declines, the gain realized on the put
option would offset, at least in part, the decline in the value of the
Portfolio's holdings denominated in that foreign currency. Alternatively, a
Portfolio may write a call option on a foreign currency. If the foreign currency
declines, the option would not be exercised and the decline in the value of the
Portfolio's securities denominated in that foreign currency would be offset in
part by the premium the Portfolio received for the option.
If, on the other hand, the portfolio manager anticipates purchasing a foreign
security and also anticipates a rise in the foreign currency in which it is
denominated, the Portfolio may purchase call options on the foreign currency.
The purchase of such options could offset, at least partially, the effects of
adverse movements of the exchange rates. Alternatively, the Portfolio could
write a put option on the currency and, if the exchange rates move as
anticipated, the option would expire unexercised.
RISKS OF TRANSACTIONS IN OPTIONS ON FOREIGN CURRENCY
A Portfolio's successful use of currency exchange options on foreign currencies
depends upon the portfolio manager's ability to predict the direction of the
currency exchange markets and political conditions, which requires different
skills and techniques than predicting changes in the securities markets
generally. For instance, if the currency being hedged has moved in a favorable
direction, the corresponding appreciation of the Portfolio's securities
denominated in such currency would be partially offset by the premiums paid on
the options. If the currency exchange rate does not change, the Portfolio's net
income would be less than if the Portfolio had not hedged since there are costs
associated with options.
The use of these options is subject to various additional risks. The correlation
between the movements in the price of options and the price of the currencies
being hedged is imperfect. The use of these instruments will hedge only the
currency risks associated with investments in foreign securities, not market
risk. A Portfolio's ability to establish and maintain positions will depend on
market liquidity. The ability of the Portfolio to close out an option depends on
a liquid secondary market. There is no assurance that liquid secondary markets
will exist for any particular option at any particular time.
Because there are two currencies involved, developments in either or both
countries can affect the values of options on foreign currencies. In addition,
the quantities of currency underlying option contracts represent odd lots in a
market dominated by transactions between banks; this can mean extra transaction
costs upon exercise. Option markets may be closed while round-the-clock
interbank currency markets are open, and this can create price and rate
discrepancies.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES AND OPTIONS ON FUTURES
The Conservative Balanced and Flexible Managed Portfolio may purchase and sell
stock index futures contracts. A stock index futures contract is an agreement
between the buyer and the seller of the contract to transfer an amount of cash
equal to the daily variation margin of the contract. No physical delivery of the
underlying stocks in the index is made.
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The Conservative Balanced and Flexible Managed Portfolios may, to the extent
permitted by applicable regulations, purchase and sell futures contracts on
interest-bearing securities or interest rate indexes, and purchase and sell
futures contracts on foreign currencies.
When a futures contract is entered into, each party deposits with a futures
commission merchant (or in a segregated account) approximately 5% of the
contract amount. This is known as the "initial margin." Every day during the
futures contract, either the buyer or the futures commission merchant will make
payments of "variation margin." In other words, if the value of the underlying
security, index or interest rate increases, then the buyer will have to add to
the margin account so that the account balance equals approximately 5% of the
value of the contract on that day. The next day, the value of the underlying
security, index or interest rate may decrease, in which case the borrower would
receive money from the account equal to the amount by which the account balance
exceeds 5% of the value of the contract on that day.
The Portfolios may purchase or sell futures contracts without limit for hedging
purposes. This would be the case, for example, if a portfolio manager is using a
futures contract to reduce the risk of a particular position on a security. The
Portfolios can also purchase or sell futures contract for non-hedging purposes
provided the initial margins and premiums associated with the contracts do not
exceed 5% of the fair market value of the Portfolio's assets, taking into
account unrealized profits or unrealized losses on any such futures. This would
be the case if a portfolio manager uses futures for investment purposes, to
increase income or to adjust the Portfolio's asset mix.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks associated with a Portfolio's use of futures contracts.
When used for investment purposes (that is, non-hedging purposes), successful
use of futures contracts, like successful investment in securities, depends on
the ability of the portfolio manager to predict correctly movements in the
relevant markets, interest rates and/or currency exchange rates. When used for
hedging purposes, there is a risk of imperfect correlation between movements in
the price of the futures contract and the price of the securities or currency
that are the subject of the hedge. In the case of futures contracts on stock or
interest rate indexes, the correlation between the price of the futures contract
and movements in the index might not be perfect. To compensate for differences
in volatility, a Portfolio could purchase or sell futures contracts with a
greater or lesser value than the securities or currency it wished to hedge or
purchase. Other risks apply to use for both hedging and investment purposes.
Temporary price distortions in the futures market could be caused by a variety
of factors. Further, the ability of a Portfolio to close out a futures position
depends on a liquid secondary market. There is no assurance that a liquid
secondary market on an exchange will exist for any particular futures contract
at any particular time.
The hours of trading of futures contracts may not conform to the hours during
which a Portfolio may trade the underlying securities and/or currency. To the
extent that the futures markets close before the securities or currency markets,
significant price and rate movements can take place in the securities and/or
currency markets that cannot be reflected in the futures markets.
RISKS OF TRANSACTIONS IN OPTIONS ON FUTURES CONTRACTS
Options on futures contracts are subject to risks similar to those described
above with respect to options on securities, options on stock indexes, and
futures contracts. These risks include the risk that the portfolio manager may
not correctly predict changes in the market, the risk of imperfect correlation
between the option and the securities being hedged, and the risk that there
might not be a liquid secondary market for the option. There is also the risk of
imperfect correlation between the option and the underlying futures contract. If
there were no liquid secondary market for a particular option on a futures
contract, a Portfolio might have to exercise an option it held in order to
realize any profit and might continue to be obligated under an option it had
written until the option expired or was exercised. If the Portfolio were unable
to close out an option it had written on a futures contract, it would continue
to be required to maintain initial margin and make variation margin payments
with respect to the option position until the option expired or was exercised
against the Portfolio.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Conservative Balanced and Flexible Managed Portfolios may enter into foreign
currency exchange contracts to protect the value of their foreign holdings
against future changes in the level of currency exchange rates. When a Portfolio
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, or when a
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Portfolio anticipates the receipt in a foreign currency of dividends or interest
payments on a security which it holds, the Portfolio may desire to "lock-in" the
U.S. dollar price of the security or the U.S. dollar equivalent of such dividend
or interest payment, as the case may be. By entering into a forward contract for
a fixed amount of dollars, for the purchase or sale of the amount of foreign
currency involved in the underlying transactions, the Portfolio will be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Additionally, when a portfolio manager believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Portfolio may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of the portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of those securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. The Portfolios will not enter into such
forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate a Portfolio to deliver an amount of
foreign currency in excess of the value of the securities or other assets
denominated in that currency held by the Portfolio. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the long-term investment decisions made with regard to overall diversification
strategies. However, the Portfolios believe that it is important to have the
flexibility to enter into such forward contracts when it is determined that the
best interests of the Portfolios will thereby be served.
The Portfolios generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, a Portfolio may
either sell the security and make delivery of the foreign currency or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract with the same currency
trader obligating it to purchase, on the same maturity date, the same amount of
the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular security at the expiration of the contract. Accordingly, it may be
necessary for a Portfolio to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency that the Portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.
If a Portfolio retains the security and engages in an offsetting transaction,
the Portfolio will incur a gain or a loss (as described below) to the extent
that there has been movement in forward contract prices. If forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent that the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. If forward
prices increase, the Portfolio will suffer a loss to the extent that the price
of the currency it has agreed to purchase exceeds the price of the currency it
has agreed to sell.
The Portfolios' dealing in forward foreign currency exchange contracts will be
limited to the transactions described above. Of course, the Portfolios are not
required to enter into such transactions with regard to their foreign
currency-denominated securities. It also should be realized that this method of
protecting the value of a Portfolio's securities against a decline in the value
of a currency does not eliminate fluctuations in the underlying prices of the
securities which are unrelated to exchange rates. Additionally, although such
contracts tend to minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time they tend to limit any potential gain which
might result should the value of such currency increase.
Although the Portfolios value their assets daily in terms of U.S. dollars, they
do not intend physically to convert their holdings of foreign currencies into
U.S. dollars on a daily basis. They will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to a Portfolio at one rate, while offering a lesser rate of exchange should the
Portfolio desire to resell that currency to the dealer.
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INTEREST RATE SWAPS
The fixed income portions of the Conservative Balanced and Flexible Managed
Portfolios may use interest rate swaps subject to the limitations set forth in
the prospectus.
Interest rate swaps, in their most basic form, involve the exchange by a
Portfolio with another party of their respective commitments to pay or receive
interest. For example, a Portfolio might exchange its right to receive certain
floating rate payments in exchange for another party's right to receive fixed
rate payments. Interest rate swaps can take a variety of other forms, such as
agreements to pay the net differences between two different indexes or rates,
even if the parties do not own the underlying instruments. Despite their
differences in form, the function of interest rate swaps is generally the same B
to increase or decrease a Portfolio's exposure to long or short-term interest
rates. For example, a Portfolio may enter into a swap transaction to preserve a
return or spread on a particular investment or a portion of its portfolio or to
protect against any increase in the price of securities the Portfolio
anticipates purchasing at a later date.
The use of swap agreements is subject to certain risks. As with options and
futures, if the portfolio manager's prediction of interest rate movements is
incorrect, the Portfolio's total return will be less than if the Portfolio had
not used swaps. In addition, if the counterparty's creditworthiness declines,
the value of the swap would likely decline. Moreover, there is no guarantee that
a Portfolio could eliminate its exposure under an outstanding swap agreement by
entering into an offsetting swap agreement with the same or another party.
Each Portfolio will set aside appropriate liquid assets in a segregated
custodial account to cover its current obligations under swap agreements. If a
Portfolio enters into a swap agreement on a net basis, it will segregate assets
with a daily value at least equal to the excess, if any, of the Portfolio's
accrued obligations under the swap agreement over the accrued amount the
Portfolio is entitled to receive under the agreement. If a Portfolio enters into
a swap agreement on other than a net basis, it will segregate assets with a
value equal to the full amount of the Portfolio's accrued obligations under the
agreement.
LOAN PARTICIPATIONS
The Conservative Balanced and Flexible Managed Portfolios may invest in fixed
and floating rate loans that are privately negotiated between a corporate
borrower and one or more financial institutions. The Portfolios will generally
invest in loans in the form of "loan participations." In the typical loan
participation, the Portfolio will have a contractual relationship with the
lender but not the borrower. This means that the Portfolio will not have any
right to enforce the borrower=s compliance with the terms of the loan and may
not benefit directly from any collateral supporting the loan. As a result, the
Portfolio will assume the credit risk of both the borrower and the lender. In
the event of the lender=s insolvency, the Portfolio may be treated as a general
creditor of the lender and may not benefit from any set-off between the lender
and the borrower.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
DESCRIPTION OF REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The fixed portions of the Conservative Balanced and Flexible Managed Portfolios
may use up to 30% of their net assets for reverse repurchase agreements.
In a reverse repurchase transaction, a Portfolio sells one of its securities and
agrees to repurchase the same security at a set price on a specified date.
During the time the security is held by the other party, the Portfolio will
often continue to receive principal and interest payments on the security. The
terms of the reverse repurchase agreement reflect a rate of interest for use of
the money received by the Portfolio and thus, is similar to borrowing.
Dollar rolls involve the sale by the Portfolio of one of its securities for
delivery in the current month and a contract to repurchase substantially similar
securities (for example, with the same coupon) from the other party on a
specified date in the future at a specified amount. During the roll period, a
Portfolio does not receive any principal or interest earned on the security. The
Portfolio realizes a profit to the extent the current sale price is more than
the price specified for the future purchase, plus any interest earned on the
cash paid to the Portfolio on the initial sale.
A "covered roll" is a specific type of dollar roll where there is an offsetting
cash position or a cash equivalent security position which matures on or before
the forward settlement date of the dollar roll transaction.
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A Portfolio participating in reverse repurchase or dollar roll transactions will
set aside liquid assets in a segregated account, which equal in value the
Portfolio's obligations under the reverse repurchase agreement or dollar roll,
respectively.
RISKS OF REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
Reverse repurchase agreements and dollar rolls involve the risk that the market
value of the securities retained by a Portfolio may decline below the price of
the securities it has sold but is obligated to repurchase under the agreement.
If the other party in a reverse purchase or dollar roll transaction becomes
insolvent, a Portfolio=s use of the proceeds of the agreement may be restricted
pending a determination by a third party of whether to enforce the Portfolio=s
obligation to repurchase.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Conservative Balanced and Flexible Managed Portfolios may purchase or sell
securities on a when-issued or delayed delivery basis. This means that the
delivery and payment can take place a month or more after the date of the
transaction. A Portfolio will make commitments for when-issued transactions only
with the intention of actually acquiring the securities. A Portfolio=s custodian
will maintain in a segregated account, liquid assets having a value equal to or
greater to such commitments. If the Portfolio chooses to dispose of the right to
acquire a when-issued security prior to its acquisition, it could, as with the
disposition of any other security, incur a gain or loss.
SHORT SALES
The Conservative Balanced and Flexible Managed Portfolios may enter into short
sales. In a short sale, a Portfolio sells a security it does not own in
anticipation of a decline in the market value of those securities. To complete
the transaction, the Portfolio will borrow the security to make delivery to the
buyer. The Portfolio is then obligated to replace the security it borrowed by
purchasing it at the market price at the time of replacement. The price at that
time may be more or less than the price at which the Portfolio sold it. Until
the security is replaced, the Portfolio is required to pay to the lender any
interest which accrues during the period of the loan. To borrow the security,
the Portfolio may be required to pay a fee which would increase the cost of the
security sold.
Until a Portfolio replaces a borrowed security used in a short sale, it will set
aside liquid assets in a segregated account equal to the current market value of
the security sold short or otherwise cover the short position. No more than 25%
of any Portfolio=s net assets will be, when added together: (1) deposited as
collateral for the obligation to replace securities borrowed in connection with
short sales and (2) segregated in accounts in connection with short sales.
A Portfolio incurs a loss in a short sale if the price of the security increases
between the date of the short sale and the date the Portfolio replaces the
borrowed security. On the other hand, a Portfolio will realize gain if the
security=s price decreases between the date of the short sale and the date the
security is replaced.
LOANS OF PORTFOLIO SECURITIES
DESCRIPTION OF SECURITIES LOANS
The Portfolios may lend the securities they hold to broker-dealers, qualified
banks and certain institutional investors. All securities loans will be made
pursuant to a written agreement and continuously secured by collateral in the
form of cash, U.S. Government securities or irrevocable standby letters of
credit in an amount equal or greater than the market value of the loaned
securities plus the accrued interest and dividends. While a security is loaned,
the Portfolio will continue to receive the interest and dividends on the loaned
security while also receiving a fee from the borrower or earning interest on the
investment of the cash collateral. Upon termination of the loan, the borrower
will return to the Portfolio a security identical to the loaned security. The
Portfolio will not have the right to vote a security that is on loan, but would
be able to terminate the loan and retain the right to vote if that were
considered important with respect to the investment.
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RISKS ASSOCIATED WITH LENDING SECURITIES
The primary risk in lending securities is that the borrower may become insolvent
on a day on which the loaned security is rapidly advancing in price. In this
event, if the borrower fails to return the loaned security, the existing
collateral might be insufficient to purchase back the full amount of the
security loaned, and the borrower would be unable to furnish additional
collateral. The borrower would be liable for any shortage but the Portfolio
would be an unsecured creditor with respect to any shortfall and might not be
able to recover all or any of it. However, this risk can be decreased by the
careful selection of borrowers and securities to be lent.
Neither of the Portfolios will lend securities to entities affiliated with
Prudential.
ILLIQUID SECURITIES
Each Portfolio may hold up to 15% of its net assets in illiquid securities.
Securities are "illiquid" if they cannot be sold in the ordinary course of
business within seven days at approximately the value at which the Portfolio has
them valued. Repurchase agreements with a maturity of greater than seven days
are considered illiquid.
The Portfolios may purchase securities which are not registered under the
Securities Act of 1933 but which can be sold to qualified institutional buyers
in accordance with Rule 144A under that Act. These securities will not be
considered illiquid so long as it is determined by the investment adviser,
acting under guidelines approved and monitored by the Board of Directors, that
an adequate trading market exists for that security. In making that
determination, the investment adviser will consider, among other relevant
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers willing to purchase or sell the security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security;
and (4) the nature of the security and the nature of the marketplace trades. A
Portfolio's treatment of Rule 144A securities as liquid could have the effect of
increasing the level of portfolio illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities. In addition, the investment adviser, acting under guidelines
approved and monitored by the Board of Directors, may conditionally determine,
for purposes of the 15% test, that certain commercial paper issued in reliance
on the exemption from registration in Section 4(2) of the Securities Act of 1933
will not be considered illiquid, whether or not it may be resold under Rule
144A. To make that determination, the following conditions must be met: (1) the
security must not be traded flat or in default as to principal or interest; (2)
the security must be rated in one of the two highest rating categories by at
least two nationally recognized statistical rating organizations ("NRSROs"), or
if only one NRSRO rates the security, by that NRSRO; (if the security is
unrated, the investment adviser must determine that the security is of
equivalent quality); and (3) the investment adviser must consider the trading
market for the specific security, taking into account all relevant factors. The
investment adviser will continue to monitor the liquidity of any Rule 144A
security or any Section 4(2) commercial paper which has been determined to be
liquid and, if a security is no longer liquid because of changed conditions, the
holdings of illiquid securities will be reviewed to determine if any steps are
required to assure that the 15% test continues to be satisfied.
INVESTMENT RESTRICTIONS
Set forth below are certain investment restrictions applicable to the
Portfolios. Restrictions 1, 3, 5, and 8 through 11 are fundamental and may not
be changed without shareholder approval as required by the 1940 Act.
Restrictions 2, 4, 6, 7, and 12 are not fundamental and may --- be changed by
the Board of Directors without shareholder approval.
Neither of the Portfolios available to PRUvider Contract owners will:
1. Buy or sell real estate and mortgages, although the Portfolios may buy and
sell securities that are secured by real estate and securities of real
estate investment trusts and of other issuers that engage in real estate
operation. Buy or sell commodities or commodities contracts, except that
the Portfolios may purchase and sell interest rate futures contracts and
related options; and the Portfolios may purchase and sell foreign currency
futures contracts and related options and forward foreign currency exchange
contracts.
2. Except as part of a merger, consolidation, acquisition or reorganization,
invest more than 5% of the value of its total assets in the securities of
any one investment company or more than 10% of the value of its total
assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting
securities of any one investment company.
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3. Acquire securities for the purpose of exercising control or management of
any company except in connection with a merger, consolidation, acquisition
or reorganization.
4. Make short sales of securities or maintain a short position, except that
the Portfolios may sell securities short up to 25% of their net assets and
may make short sales against-the-box. Collateral arrangements entered into
with respect to options, futures contracts and forward contracts are not
deemed to be short sales. Collateral arrangements entered into with respect
to interest rate swap agreements are not deemed to be short sales.
5. Purchase securities on margin or otherwise borrow money or issue senior
securities, except that the fixed income portions of the Portfolios may
enter into reverse repurchase agreements, dollar rolls and may purchase
securities on a when-issued and delayed delivery basis; except that the
money market portion of any Portfolio may enter into reverse repurchase
agreements and may purchase securities on a when-issued and delayed
delivery basis; and except that the Portfolios may purchase securities on a
when-issued or a delayed delivery basis; and except that the Portfolios may
purchase securities on a when-issued or a delayed delivery basis. The Fund
may also obtain such short-term credit as it needs for the clearance of
securities transactions and may borrow from a bank for the account of any
Portfolio as a temporary measure to facilitate redemptions (but not for
leveraging or investment) or to exercise an option, an amount that does not
exceed 5% of the value of the Portfolio=s total assets (including the
amount owed as a results of the borrowing) at the time the borrowing is
made. Interest paid on borrowings will not be available for investment.
Collateral arrangements with respect to futures contracts and options
thereon and forward foreign currency exchange contracts (as permitted by
restriction no. 1) are not deemed to be the issuance of a senior security
or the purchase of a security on margin. Collateral arrangement with
respect to the writing of the following options by the Portfolios are not
deemed to be the issuance of a senior security or the purchase of a
security on margin: options on debt securities, equity securities, stock
indexes, foreign currencies. Collateral arrangements entered into by the
Portfolios with respect to interest rate swap agreements are not deemed to
be the issuance of a senior security or the purchase of a security on
margin.
6. Enter into reverse repurchase agreements if, as a result, the Portfolio's
obligations with respect to reverse repurchase agreements would exceed 10%
of the Portfolio's net assets (defined to mean total assets at market value
less liabilities other than reverse repurchase agreements); except that the
fixed income portions of the Portfolios may enter into reverse repurchase
agreements and dollar rolls provided that the Portfolio's obligations with
respect to those instruments do not exceed 30% of the Portfolio's net
assets (defined to mean total assets at market value less liabilities other
than reverse repurchase agreements and dollar rolls).
7. Pledge or mortgage assets, except that no more than 10% of the value of any
Portfolio may be pledged (taken at the time the pledge is made) to secure
authorized borrowing and except that a Portfolio may enter into reverse
repurchase agreements. Collateral arrangements entered into with respect to
futures and forward contracts and the writing of options are not deemed to
be the pledge of assets. Collateral arrangements entered into with respect
to interest rate swap agreements are not deemed to be the pledge of assets.
8. Lend money, except that loans of up to 10% of the value of each Portfolio
may be made through the purchase of privately placed bonds, debentures,
notes, and other evidences of indebtedness of a character customarily
acquired by institutional investors that may or may not be convertible into
stock or accompanied by warrants or rights to acquire stock. Repurchase
agreements and the purchase of publicly traded debt obligations are not
considered to be "loans" for this purpose and may be entered into or
purchased by a Portfolio in accordance with its investment objectives and
policies.
9. Underwrite the securities of other issuers, except where the Fund may be
deemed to be an underwriter for purposes of certain federal securities laws
in connection with the disposition of Portfolio securities and with loans
that a Portfolio may make pursuant to item 8 above.
10. Make an investment unless, when considering all its other investments, 75%
of the value of a Portfolio's assets would consist of cash, cash items,
obligations of the United States Government, its agencies or
instrumentalities, and other securities. For purposes of this restriction,
"other securities" are limited for each issuer to not more than 5% of the
value of a Portfolio's assets and to not more than 10% of the issuer's
outstanding voting securities held by the Fund as a whole. Some uncertainty
exists as to whether certain of the types of bank obligations in which a
Portfolio may invest, such as certificates of deposit and bankers'
acceptances, should be classified as "cash items" rather than "other
securities" for purposes of this restriction, which is a diversification
requirement under the 1940 Act. Interpreting most bank obligations as
"other securities" limits the amount a Portfolio may invest in the
obligations of any one bank to 5% of its total assets. If there is an
authoritative decision that any of these
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obligations are not "securities" for purposes of this diversification test,
this limitation would not apply to the purchase of such obligations.
11. Purchase securities of a company in any industry if, as a result of the
purchase, a Portfolio's holdings of securities issued by companies in that
industry would exceed 25% of the value of the Portfolio, except that this
restriction does not apply to purchases of obligations issued or guaranteed
by the U.S. Government, its agencies and instrumentalities or issued by
domestic banks. For purposes of this restriction, neither finance companies
as a group nor utility companies as a group are considered to be a single
industry and will be grouped instead according to their services; for
example, gas, electric, and telephone utilities will each be considered a
separate industry. For purposes of this exception, domestic banks shall
include all banks which are organized under the laws of the United States
or a state (as defined in the 1940 Act), U.S. branches of foreign banks
that are subject to the same regulations as U.S. banks and foreign branches
of domestic banks (as permitted by the SEC).
12. Invest more than 15% of its net assets in illiquid securities. For purposes
of this restriction, illiquid securities are those deemed illiquid pursuant
to SEC regulations and guidelines, as they may be revised from time to
time.
Consistent with item 5 above, the Fund has entered into a joint $1 billion
revolving credit facility with other Prudential mutual funds to facilitate
redemptions if necessary. This credit facility, which was entered into on March
13, 1999, is a syndicated arrangement with 12 different major banks.
The investments of the Portfolios are generally subject to certain additional
restrictions under the laws of the State of New Jersey. In the event of future
amendments to the applicable New Jersey statutes, each Portfolio will comply,
without the approval of the shareholders, with the statutory requirements as so
modified. The pertinent provisions of New Jersey law as they stand are, in
summary form, as follows:
1. An Account may not purchase any evidence of indebtedness issued, assumed or
guaranteed by any institution created or existing under the laws of the
U.S., any U.S. state or territory, District of Columbia, Puerto Rico,
Canada or any Canadian province, if such evidence of indebtedness is in
default as to interest. "Institution" includes any corporation, joint stock
association, business trust, business joint venture, business partnership,
savings and loan association, credit union or other mutual savings
institution.
2. The stock of a corporation may not be purchased unless: (i) the corporation
has paid a cash dividend on the class of stock during each of the past 5
years preceding the time of purchase; or (ii) during the 5-year period the
corporation had aggregate earnings available for dividends on such class of
stock sufficient to pay average dividends of 4% per annum computed upon the
par value of such stock or upon stated value if the stock has no par value.
This limitation does not apply to any class of stock which is preferred as
to dividends over a class of stock whose purchase is not prohibited.
3. Any common stock purchased must be: (i) listed or admitted to trading on a
securities exchange in the United States or Canada; or (ii) included in the
National Association of Securities Dealers' national price listings of
"over-the-counter" securities; or (iii) determined by the Commissioner of
Insurance of New Jersey to be publicly held and traded and have market
quotations available.
4. Any security of a corporation may not be purchased if after the purchase
more than 10% of the market value of the assets of a Portfolio would be
invested in the securities of such corporation.
As a result of these currently applicable requirements of New Jersey law, which
impose substantial limitations on the ability of the Fund to invest in the stock
of companies whose securities are not publicly traded or who have not recorded a
5-year history of dividend payments or earnings sufficient to support such
payments, the Portfolios will not generally hold the stock of newly organized
corporations. Nonetheless, an investment not otherwise eligible under items 1 or
2 above may be made if, after giving effect to the investment, the total cost of
all such non-eligible investments does not exceed 5% of the aggregate market
value of the assets of the Portfolio.
Investment limitations also arise under the insurance laws and regulations of
Arizona and may arise under the laws and regulations of other states. Although
compliance with the requirements of New Jersey law set forth above will
ordinarily result in compliance with any applicable laws of other states, under
some circumstances the laws of other states could impose additional restrictions
on the Portfolios.
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Current federal income tax laws require that the assets of each Portfolio be
adequately diversified so that Prudential and other insurers with separate
accounts which invest in the Fund, as applicable, and not the Contract owners,
are considered the owners of assets held in the Accounts for federal income tax
purposes. See OTHER INFORMATION - FEDERAL INCOME TAXES in the prospectus.
Prudential intends to maintain the assets of each Portfolio pursuant to those
diversification requirements.
INVESTMENT MANAGEMENT AND DISTRIBUTION ARRANGEMENTS
INVESTMENT MANAGEMENT ARRANGEMENTS
Prudential is the investment adviser of the Fund. It is the largest insurance
company in the United States. The Fund has entered into an Investment Advisory
Agreement with Prudential under which Prudential will, subject to the direction
of the Board of Directors of the Fund, be responsible for the management of the
Fund, and provide investment advice and related services to each Portfolio.
Prudential has entered into a Service Agreement with its wholly-owned
subsidiary, The Prudential Investment Corporation ("PIC"), which provides that
PIC will furnish to Prudential such services as Prudential may require in
connection with Prudential's performance of its obligations under advisory
agreements with clients which are registered investment companies. In addition,
Prudential has entered into a Subadvisory Agreement with its wholly-owned
subsidiary Jennison Associates LLC ("Jennison") under which Jennison furnishes
investment advisory services in connection with the management of the Prudential
Jennison Portfolio. More detailed information about Prudential and its role as
investment adviser can be found in HOW THE PORTFOLIOS ARE MANAGED in the
prospectus.
Under the Investment Advisory Agreement, Prudential receives an investment
management fee as compensation for its services to the Fund. The fee is a daily
charge, payable quarterly, equal to an annual percentage of the average daily
net assets of each individual Portfolio. For the Conservative Balanced
Portfolio, the rate is 0.55%. For the Flexible Managed Portfolio, the rate is
0.60%.
The Investment Advisory Agreement requires Prudential to pay for maintaining any
Prudential staff and personnel who perform clerical, accounting, administrative,
and similar services for the Fund, other than investor services and any daily
Fund accounting services. It also requires Prudential to pay for the equipment,
office space and related facilities necessary to perform these services and the
fees or salaries of all officers and directors of the Fund who are affiliated
persons of Prudential or of any subsidiary of Prudential.
For the years ended 1998, 1997 and 1996, Prudential received a total of
$26,224,569, $25,757,735, and $23,052,572, respectively, in investment
management fees for the Conservative Balanced Portfolio and $33,049,940,
$31,740,440, and $27,247,674, respectively, for the Flexible Managed Portfolio.
Each Fund Portfolio pays all other expenses incurred in its individual operation
and also pays a portion of the Fund's general administrative expenses allocated
on the basis of the asset size of the respective Portfolios. Expenses that will
be borne directly by the Portfolios include redemption expenses, expenses of
portfolio transactions, shareholder servicing costs, interest, certain taxes,
charges of the custodian and transfer agent, and other expenses attributable to
a particular Portfolio. Expenses that will be allocated among all Fund
Portfolios include legal expenses, state franchise taxes, auditing services,
costs of printing proxies, prospectuses and statements of additional
information, costs of stock certificates, SEC fees, accounting costs, the fees
and expenses of directors of the Fund who are not affiliated persons of
Prudential or any subsidiary of Prudential, and other expenses properly payable
by the entire Fund. If the Fund is sued, litigation costs may be directly
applicable to one or more Portfolio or allocated on the basis of the size of the
respective Portfolios, depending upon the nature of the lawsuit. The Fund's
Board of Directors has determined that this is an appropriate method of
allocating expenses.
Under the Investment Advisory Agreement, Prudential has agreed to refund to a
Portfolio the portion of the investment management fee for that Portfolio equal
to the amount that the aggregate annual ordinary operating expenses of that
Portfolio (excluding interest, taxes, and brokerage fees and commissions but
including investment management fees) exceeds 0.75% of the Portfolio's average
daily net assets.
The Investment Advisory Agreement with Prudential was most recently approved by
the Fund's Board of Directors, including a majority of the Directors who are not
interested persons of Prudential, on May 28, 1998 with respect to all
Portfolios. The Investment Advisory Agreement was most recently approved by the
shareholders in accordance with instructions from Contract owners at their 1989
annual meeting with respect to the Portfolios. The Investment Advisory
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Agreement will continue in effect if approved annually by: (1) a majority of the
non-interested persons of the Fund's Board of Directors; and (2) by a majority
of the entire Board of Directors or by a majority vote of the shareholders of
each Portfolio. The required shareholder approval of the Agreements shall be
effective with respect to any Portfolio if a majority of the voting shares of
that Portfolio vote to approve the Agreements, even if the Agreements are not
approved by a majority of the voting shares of any other Portfolio or by a
majority of the voting shares of the entire Fund. The Agreements provide that
they may not be assigned by Prudential and that they may be terminated upon 60
days' notice by the Fund's Board of Directors or by a majority vote of its
shareholders. Prudential may terminate the Agreements upon 90 days' notice.
The Service Agreement between Prudential and PIC was most recently ratified by
shareholders of the Fund at their 1989 annual meeting with respect to the
Portfolios. The Service Agreement between Prudential and PIC will continue in
effect as to the Fund for a period of more than 2 years from its execution, only
so long as such continuance is specifically approved at least annually in the
same manner as the Investment Advisory Agreement between Prudential and the
Fund. The Service Agreement may be terminated by either party upon not less than
30 days prior written notice to the other party, will terminate automatically in
the event of its assignment, and will terminate automatically as to the Fund in
the event of the assignment or termination of the Investment Advisory Agreement
between Prudential and the Fund. Prudential is not relieved of its
responsibility for all investment advisory services under the Investment
Advisory Agreement.
Prudential also serves as the investment adviser to several other investment
companies. When investment opportunities arise that may be appropriate for more
than one entity for which Prudential serves as investment adviser, Prudential
will not favor one over another and may allocate investments among them in an
impartial manner believed to be equitable to each entity involved. The
allocations will be based on each entity's investment objectives and its current
cash and investment positions. Because the various entities for which Prudential
acts as investment adviser have different investment objectives and positions,
Prudential may from time to time buy a particular security for one or more such
entities while at the same time it sells such securities for another.
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 the 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.
DISTRIBUTION ARRANGEMENTS
Prudential Investment Management Services LLC ("PIMS"), an indirect wholly-owned
subsidiary of Prudential, acts as the principal underwriter of the Fund. PIMS is
a limited liability corporation organized under Delaware law in 1996. PIMS is a
registered broker-dealer under the Securities Exchange Act of 1934 and is a
member of the National Association of Securities Dealers, Inc. PIMS= principal
business address is 751 Broad Street, Newark, New Jersey 07102-3777.
The Fund has two classes. Class I shares are sold to separate accounts of
Prudential and its affiliates. Class II shares are not available under the
Contract described in this SAI.
OTHER INFORMATION CONCERNING THE FUND
INCORPORATION AND AUTHORIZED STOCK
The Fund was incorporated under Maryland law on November 15, 1982. As of the
date of this SAI, the shares of capital stock are divided into thirty-four
classes: Conservative Balanced Portfolio Capital Stock - Class I, Conservative
Balanced Portfolio Capital Stock - Class II, Diversified Bond Portfolio Capital
Stock - Class I, Diversified Bond Portfolio Capital Stock - Class II,
Diversified Conservative Growth Portfolio Capital Stock - Class I, Diversified
Conservative Growth Portfolio Capital Stock - Class II, Equity Portfolio Capital
Stock - Class I, Equity Portfolio Capital Stock - Class II, Equity Income
Portfolio Capital Stock - Class I, Equity Income Portfolio Capital Stock - Class
II, Flexible Managed Portfolio Capital Stock - Class I, Flexible Managed
Portfolio Capital Stock - Class II, Global Portfolio Capital Stock - Class I,
Global Portfolio Capital Stock - Class II, Government Income Portfolio Capital
Stock - Class I, Government
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Income Portfolio Capital Stock - Class II, High Yield Bond Portfolio Capital
Stock - Class I, High Yield Bond Portfolio Capital Stock - Class II, Money
Market Portfolio Capital Stock - Class I, Money Market Portfolio Capital Stock -
Class II, Natural Resources Portfolio Capital Stock - Class I, Natural Resources
Portfolio Capital Stock - Class II, Prudential Jennison Portfolio Capital Stock
- - Class I, Prudential Jennison Portfolio Capital Stock - Class II, Small
Capitalization Stock Portfolio Capital Stock - Class I, Small Capitalization
Stock Portfolio Capital Stock - Class II, Stock Index Portfolio Capital Stock -
Class I, Stock Index Portfolio Capital Stock - Class II, 20/20 Focus Portfolio
Capital Stock - Class I, 20/20 Focus Portfolio Capital Stock - Class II, Zero
Coupon Bond 2000 Portfolio Capital Stock - Class I, Zero Coupon Bond 2000
Portfolio Capital Stock - Class II, Zero Coupon Bond 2005 Portfolio Capital
Stock - Class I and Zero Coupon Bond 2005 Portfolio Capital Stock - Class II.
Each class of shares of each Portfolio represents an interest in the same assets
of the Portfolio and is identical in all respects except that: (1) Class II
shares are subject to distribution and administration fees whereas Class I
shares are not; (2) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interest of one class differ from the interests of any class; and (3) each class
is offered to a limited group of investors.
The shares of each class, when issued, will be fully paid and non-assessable,
will have no conversion, or similar rights, and will be freely transferable.
Each share of each class is equal as to earnings, assets and voting privileges.
Class II bears the expenses related to the distribution of its shares. In the
event of liquidation, each share of a Portfolio is entitled to its portion of
all of the Portfolio=s assets after all debts and expenses of the Portfolio have
been paid. Since Class II shares bear distribution and administration expenses,
the liquidation proceeds to Class II shareholders are likely to be lower than to
Class I shareholders, whose shares are not subject to any distribution or
administration fees.
From time to time, Prudential has purchased shares of the Fund to provide
initial capital and to enable the Portfolios to avoid unrealistically poor
investment performance that might otherwise result because the amounts available
for investment are too small. Prudential will not redeem any of its shares until
a Portfolio is large enough so that redemption will not have an adverse effect
upon investment performance. Prudential will vote its shares in the same manner
and in the same proportion as the shares held by the separate accounts that
invest in the Fund, which in turn, are generally voted in accordance with
instructions from Contract owners.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Prudential, as the Portfolio=s investment adviser, is responsible for decisions
to buy and sell securities, options on securities and indexes, and futures and
related options for the Fund. Prudential is also responsible for the selection
of brokers, dealers, and futures commission merchants to effect the transactions
and the negotiation of brokerage commissions, if any. Broker-dealers may receive
brokerage commissions on Portfolio transactions, including options and the
purchase and sale of underlying securities upon the exercise of options. Orders
may be directed to any broker or futures commission merchant including, to the
extent and in the manner permitted by applicable law, Prudential Securities
Incorporated, an indirect wholly-owned subsidiary of Prudential (APSI@).
Equity securities traded in the over-the-counter market and bonds, including
convertible bonds, are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments and U.S.
Government agency securities may be purchased directly from the issuer, in which
case no commissions or discounts are paid. The Fund will not deal with PSI in
any transaction in which PSI acts as principal. Thus, it will not deal with PSI
if execution involves PSI's acting as principal with respect to any part of the
Fund's order.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which PSI, during the existence of the syndicate, is a principal
underwriter (as defined in the 1940 Act) except in accordance with rules of the
SEC. This limitation, in the opinion of the Fund, will not significantly affect
the Portfolios' current ability to pursue their respective investment
objectives. However, in the future it is possible that the Fund may under other
circumstances be at a disadvantage because of this limitation in comparison to
other funds not subject to such a limitation.
In placing orders for portfolio securities of the Fund, Prudential's overriding
objective is to obtain the best possible combination of price and execution.
Prudential seeks to effect each transaction at a price and commission that
provides the most favorable total cost or proceeds reasonably attainable in the
circumstances. The factors that Prudential may consider in selecting a
particular broker, dealer or futures commission merchant firms are: Prudential's
knowledge of negotiated commission rates currently available and other
transaction costs; the nature of the portfolio
21
<PAGE>
transaction; the size of the transaction; the desired timing of the trade; the
activity existing and expected in the market for the particular transaction;
confidentiality; the execution, clearance and settlement capabilities of the
firms; the availability of research and research related services provided
through such firms; Prudential's knowledge of the financial stability of the
firms; Prudential's knowledge of actual or apparent operational problems of
firms; and the amount of capital, if any, that would be contributed by firms
executing the transaction. Given these factors, the Fund may pay transaction
costs in excess of that which another firm might have charged for effecting the
same transaction.
When Prudential selects a firm that executes orders or is a party to portfolio
transactions, relevant factors taken into consideration are whether that firm
has furnished research and research related products and/or services, such as
research reports, research compilations, statistical and economic data, computer
data bases, quotation equipment and services, research oriented
computer-software, hardware and services, reports concerning the performance of
accounts, valuations of securities, investment related periodicals, investment
seminars and other economic services and consultants. Such services are used in
connection with some or all of Prudential's investment activities; some of such
services, obtained in connection with the execution of transactions for one
investment account may be used in managing other accounts, and not all of these
services may be used in connection with the Fund.
PSI may act as a securities broker or futures commission merchant for the Fund.
In order for PSI to effect any transactions for the Portfolios, the commissions
received by PSI must be reasonable and fair compared to the commissions received
by other brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a comparable
period of time. This standard would allow PSI to receive no more than the
remuneration that would be expected to be received by an unaffiliated broker or
futures commission merchant in a commensurate arm's-length transaction.
Furthermore, the Board of Directors of the Fund, including a majority of the
directors who are not "interested" persons, has adopted procedures which are
reasonably designed to provide that any commissions, fees or other remuneration
paid to PSI are consistent with the foregoing standard. In accordance with Rule
11a2-2(T) under the Securities Exchange Act of 1934, PSI may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation in a written contract executed by the Fund and PSI. Rule 11a2-2(T)
provides that PSI must furnish to the Fund at least annually a statement setting
forth the total amount of all compensation retained by PSI from transactions
effected for the Fund during the applicable period. Brokerage and futures
transactions with PSI are also subject to such fiduciary standards as may be
imposed by applicable law.
For the years 1998, 1997, and 1996, the Conservative Balanced Portfolio paid
$1,320,049, $3,338,897, and $2,192,303, respectively, in brokerage commissions
and the Flexible Managed Portfolio paid $2,176,922, $6,544,428, and $5,760,972,
respectively, in brokerage commissions. Of those amounts, for 1998, 1997, and
1996, the Conservative Balanced Portfolio paid $32,490, $256,752, and $120,976,
respectively, to Prudential Securities Incorporated, and the Flexible Managed
Portfolio paid $103,021, $428,008, and $582,317, respectively, to Prudential
Securities Incorporated. For 1998, the percentage of commissions paid to
Prudential Securities Incorporated was 2.46% for the Conservative Balanced
Portfolio and 4.73% for the Flexible Managed Portfolio. For 1998, the percentage
of the aggregate dollar amount of transactions effected through Prudential
Securities Incorporated was 0.79% for the Conservative Balanced Portfolio and
1.53% for the Flexible Managed Portfolio.
TAXATION OF THE FUND
The Fund intends to qualify as regulated investment company under Subchapter M
of the Internal Code of 1986, as amended (the "Code"). The Fund generally will
not be subject to federal income tax to the extent it distributes to
shareholders its net investment income and net capital gains in the manner
required by the Code. There is a 4% excise tax on the undistributed income of a
regulated investment company if that company fails to distribute the required
percentage of its net investment income and net capital gains. The Fund intends
to employ practices that will eliminate or minimize this excise tax.
Federal tax law requires that the assets underlying variable contracts,
including the Fund, meet certain diversification requirements. Each Portfolio is
required to diversify its investments each quarter so that no more than 55% of
the value of its assets is represented by any one investment, no more than 70%
is represented by any two investments, no more than 80% is represented by any
three investments, and no more than 90% is represented by any four investments.
Generally, securities of a single issuer are treated as one investment and
obligations of each U.S. Government agency and instrumentality (such as the
Government National Mortgage Association) are treated as issued by separate
issuers. In addition, any security issued, guaranteed or insured (to the extent
so guaranteed or insured) by the United States or an instrumentality of the U.S.
will be treated as a security issued by the U.S. Government or its
instrumentality, whichever is applicable.
22
<PAGE>
Some foreign securities purchased by the Portfolios may be subject to foreign
taxes which could reduce the return on those securities.
This is a general and brief summary of the tax laws and regulations applicable
to the Fund. The law and regulations may change. You should consult a tax
adviser for complete information and advice.
CUSTODIANS
Investors Fiduciary Trust Company ("IFTC"), 127 West 10th Street, Kansas City,
MO 64105-1716, is the custodian of the assets held by the Portfolios. IFTC is
also the custodian of the assets held in connection with repurchase agreements
entered into by the Portfolios, and is authorized to use the facilities of the
Depository Trust Company and the facilities of the book-entry system of the
Federal Reserve Bank with respect to securities held by these Portfolios. IFTC
employs subcustodians, who were approved in accordance with regulations of the
SEC, for the purpose of providing custodial service for the Fund's foreign
assets held outside the United States.
EXPERTS
The financial statements included in this statement of additional information
and the FINANCIAL HIGHLIGHTS included in the prospectus for each of the three
years ended December 31, 1998 have been audited by PricewaterhouseCoopers LLP,
independent accountants, as stated in their report appearing herein. The Fund is
relying on PricewaterhouseCoopers= report which is given on their authority as
accounting and auditing experts. PricewaterhouseCoopers LLP's principal business
address is 1177 Avenue of the Americas, New York, NY 10036.
LICENSES
As part of the Investment Advisory Agreement, Prudential has granted the Fund a
royalty-free, non-exclusive license to use the words "The Prudential" and
"Prudential" and its registered service mark of a rock representing the Rock of
Gibraltar. However, Prudential may terminate this license if Prudential or a
company controlled by it ceases to be the Fund's investment adviser. Prudential
may also terminate the license for any other reason upon 60 days' written
notice; but, in this event, the Investment Advisory Agreement shall also
terminate 120 days following receipt by the Fund of such notice, unless a
majority of the outstanding voting securities of the Fund vote to continue the
Agreement notwithstanding termination of the license.
The Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's
("S&P"). S&P makes no representation or warranty, express or implied, to
Contract owners or any member of the public regarding the advisability of
investing in securities generally or in the Fund particularly or the ability of
the S&P 500 Index or the S&P SmallCap 600 Index to track general stock market
performance. S&P's only relationship to the Fund is the licensing of certain
trademarks and trade names of S&P and the S&P 500 Index. The S&P 500 Index and
the S&P SmallCap 600 Index are determined, composed and calculated by S&P
without regard to the Fund, the Stock Index Portfolio or the Small
Capitalization Stock Portfolio. S&P has no obligation to take the needs of the
Fund or the Contract owners into consideration in determining, composing or
calculating the S&P 500 Index or the S&P SmallCap 600 Index. S&P is not
responsible for and has not participated in the determination of the prices and
amount of the Fund shares or the timing of the issuance or sale of those shares
or in the determination or calculation of the equation by which the shares are
to be converted into cash. S&P has no obligation or liability in connection with
the administration, marketing or trading of the Fund shares.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX, THE S&P SMALLCAP 600 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL
HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES
NO WARRANTY, EXPRESS OR IMPLIED AS TO THE RESULTS TO BE OBTAINED BY THE FUND,
CONTRACT OWNERS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500
INDEX, THE S&P SMALLCAP 600 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO
EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
S&P 500 INDEX, THE S&P SMALLCAP 600 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY
SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS,
EVEN IF NOTIFIES OF THE POSSIBILITY OF SUCH DAMAGES.
23
<PAGE>
DEBT RATINGS
Moody's Investors Services, Inc. describes its categories of corporate debt
securities and its "Prime-1" and "Prime-2" commercial paper as follows:
BONDS:
Aaa -- Bonds which are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edged." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa -- Bonds which are rated "Aa" are judged to be of high quality by
all standards. Together with the "Aaa" group they comprise what
are generally known as high-grade bonds. They are rated lower
than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger
than in Aaa securities.
A -- Bonds which are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate but elements may be present which suggest
a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated "Baa" are considered as medium grade
obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba -- Bonds which are rated "Ba" are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa -- Bonds which are rated "Caa" are of poor standing. Such issues may
be in default or there may be present elements of danger with
respect to principal or interest.
Ca -- Bonds which are rated "Ca" represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C -- Bonds which are rated "C" are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
COMMERCIAL PAPER:
o Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
- -- Leading market positions in well-established industries.
- -- High rates of return of funds employed.
24
<PAGE>
- -- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- -- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- -- Well established access to a range of financial markets and assured sources
of alternate liquidity.
o Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term debt obligations. This will normally be evidenced by
many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternate liquidity is maintained.
Standard & Poor's Ratings Services describes its grades of corporate debt
securities and its "A" commercial paper as follows:
BONDS:
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in
small degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
BBB Debt rated "BBB" is regarded as having adequate capacity to pay
interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher-rated categories.
BB-B-CCC-CC-C
Debt rated "BB", "B", "CCC", "CC", and "C" is regarded as having
predominantly speculative characteristics with respect to
capacity to pay interest and repay principal. BB indicates the
least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to
adverse conditions.
COMMERCIAL PAPER:
Commercial paper rated A by Standard & Poor's Ratings Services
has the following characteristics: Liquidity ratios are better
than the industry average. Long term senior debt rating is "A" or
better. In some cases BBB credits may be acceptable. The issuer
has access to at least two additional channels of borrowing.
Basic earnings and cash flow have an upward trend with allowances
made for unusual circumstances. Typically, the issuer's industry
is well established, the issuer has a strong position within its
industry and the reliability and quality of management is
unquestioned. Issuers rated A are further referred to by use of
numbers 1, 2 and 3 to denote relative strength within this
classification.
25
<PAGE>
DIRECTORS AND OFFICERS OF PRUCO LIFE OF NEW JERSEY
AND MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS OF PRUCO LIFE OF NEW JERSEY
The directors and major officers of Pruco Life of New Jersey, listed with their
principal occupations during the past five years, are shown below.
DIRECTORS OF PRUCO LIFE OF NEW JERSEY
JAMES J. AVERY, JR., CHAIRMAN AND DIRECTOR. -- Senior Vice President and Chief
Actuary, Prudential Individual Insurance Group since 1997; 1995 to 1997:
President of Prudential Select; Prior to 1995: Chief Operating Officer of
Prudential Select.
WILLIAM M. BETHKE, DIRECTOR. -- Chief Investment Officer since 1997; Prior to
1997: President, Prudential Capital Markets Group.
IRA J. KLEINMAN, DIRECTOR. -- Executive Vice President, Prudential International
Insurance Group since 1997; 1995 to 1997: Chief Marketing and Product
Development Officer, Prudential Individual Insurance Group; Prior to 1995:
President, Prudential Select.
ESTHER H. MILNES, PRESIDENT AND DIRECTOR. -- Vice President and Actuary,
Prudential Individual Insurance Group since 1996; Prior to 1996: Senior Vice
President and Chief Actuary, Prudential Insurance and Financial Services.
I. EDWARD PRICE, VICE CHAIRMAN AND DIRECTOR. -- Senior Vice President and
Actuary, Prudential Individual Insurance Group since 1995; Prior to 1995: Chief
Executive Officer, Prudential International Insurance.
OFFICERS WHO ARE NOT DIRECTORS
C. EDWARD CHAPLIN, TREASURER. -- Vice President and Treasurer of Prudential
since 1995; Prior to 1995: Managing Director and Assistant Treasurer of
Prudential.
JAMES C. DROZANOWSKI, SENIOR VICE PRESIDENT.-- Vice President and Operations
Executive, Prudential Individual Insurance Group since 1996; 1995 to 1996:
President and Chief Executive Officer of Chase Manhattan Bank; Prior to 1995:
Vice President, North America Customer Services, Chase Manhattan Bank.
CLIFFORD E. KIRSCH, CHIEF LEGAL OFFICER AND SECRETARY.-- Chief Counsel, Variable
Products, Law Department of Prudential since 1995; Prior to 1995: Associate
General Counsel with Paine Webber.
FRANK P. MARINO, SENIOR VICE PRESIDENT. -- Vice President, Policyowner Relations
Department, Prudential Individual Insurance Group since 1996; Prior to 1996:
Senior Vice President, Prudential Mutual Fund Services.
EDWARD A. MINOGUE, SENIOR VICE PRESIDENT. -- Vice President, Annuity Services,
Prudential Investments since 1997; Prior to 1997: Director, Merrill Lynch.
IMANTS SAKSONS, SENIOR VICE PRESIDENT. -- Vice President, Compliance, Prudential
Individual Financial Services since 1998; Prior to 1998: Vice President, Market
Conduct, U.S. Operations, Manulife Financial.
SHIRLEY H. SHAO, SENIOR VICE PRESIDENT AND CHIEF ACTUARY. -- Vice President and
Associate Actuary, Prudential.
DENNIS G. SULLIVAN, VICE PRESIDENT AND CHIEF ACCOUNTING OFFICER. -- Vice
President and Deputy Controller, Prudential since 1998; 1997 to 1998, Vice
President and Controller, ContiFinancial Corporation; Prior to 1997, Director,
Saloman Brothers.
The business address of all directors and officers of Pruco Life of New Jersey
is 213 Washington Street, Newark, New Jersey 07102-2992.
Pruco Life of New Jersey directors and officers are elected annually.
26
<PAGE>
MANAGEMENT OF THE FUND
The names of all directors and major officers of the Fund and the principal
occupation of each during the last five years are shown below. Unless otherwise
stated, the address of each director and officer is 751 Broad Street , Newark,
New Jersey 07102-3777.
DIRECTORS OF THE FUND
E. MICHAEL CAULFIELD*, 52, DIRECTOR AND PRESIDENT-- Executive Vice President,
Prudential Financial Management since 1998; 1995 to 1998: Chief Executive
Officer of Prudential Investments; 1995: Chief Executive Officer, Prudential
Preferred Financial Services; prior to 1995: President, Prudential Preferred
Financial Services.
SAUL K. FENSTER, 66, DIRECTOR--President of New Jersey Institute of Technology.
Address: 323 Martin Luther King, Jr. Boulevard, Newark, New Jersey 07102.
W. SCOTT McDONALD, JR., 62, DIRECTOR--Vice President, Kaludis Consulting Group
since 1997; 1995 to 1996: Principal, Scott McDonald & Associates; Prior to 1995:
Executive Vice President of Fairleigh Dickinson University. Address: 9 Zamrok
Way, Morristown, New Jersey 07960.
JOSEPH WEBER, 75, DIRECTOR--Vice President, Interclass (international corporate
learning). Address: 37 Beachmont Terrace, North Caldwell, New Jersey 07006.
OFFICERS WHO ARE NOT DIRECTORS
CAREN A. CUNNINGHAM, SECRETARY--Assistant General Counsel of Prudential
Investments Fund Management, LLC ("PIFM") Inc. since 1997; prior to 1997: Vice
President and Associate General Counsel of Smith Barney Mutual Fund Management
Inc.
GRACE C. TORRES, TREASURER AND PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER--First
Vice President of PIFM since 1996; prior to 1996: First Vice President of
Prudential Securities Inc.
STEPHEN M. UNGERMAN, ASSISTANT TREASURER--Vice President and Tax Director of
Prudential Investments since 1996; prior to 1996: First Vice President of
Prudential Mutual Fund Management, Inc.
- ----------
* This member of the Board is an interested person of Prudential, its affiliates
or the Fund as defined in the 1940 Act. Certain actions of the Board, including
the annual continuance of the Investment Advisory Agreement between the Fund and
Prudential, must be approved by a majority of the members of the Board who are
not interested persons of Prudential, its affiliates or the Fund. Mr. Caulfield,
one of the four members of the Board, is an interested person of Prudential and
the Fund, as that term is defined in the 1940 Act, because he is an officer
and/or affiliated person of Prudential, the investment advisor to the Fund.
Messrs. Fenster, McDonald, and Weber are not interested persons of Prudential,
its affiliates or the Fund. However, Mr. Fenster is President of the New Jersey
Institute of Technology. Prudential has issued a group annuity contract to the
Institute and provides group life and group health insurance to its employees.
No director or officer of the Fund who is also an officer, director or employee
of Prudential or its affiliates is entitled to any remuneration from the Fund
for services as one of its directors or officers. A single annual retainer fee
of $35,000 is paid to each of the directors who is not an interested person of
the Fund for services rendered to five different Prudential mutual funds,
including this Fund. (The amount paid in respect of each fund is determined on
the basis of the funds' relative average net assets.) The directors who are not
interested persons of the Fund are also reimbursed for all expenses incurred in
connection with attendance at meetings.
27
<PAGE>
The following table sets forth the aggregate compensation paid by the Fund to
the Directors who are not affiliated with Prudential for the fiscal year ended
December 31, 1998 and the aggregate compensation paid to such Directors for
service on the Fund's Board and the Boards of any other investment companies
managed by Prudential for the calendar year ended December 31, 1998. Below are
listed all Directors who have served the Fund during its most recent fiscal
year.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Pension or Retirement Estimated Annual
Aggregate Compensation from Benefits Accrued as Part of Benefits Upon Total Compensation Related to Funds
Name and Position Fund Fund Expenses Retirement Managed by Prudential (**)
- ----------------- ----------- -------------------- ---------- --------------------------
<S> <C> <C> <C> <C>
E. Michael Caulfield* -- --
Saul K. Fenster $14,000 None N/A $27,200 (5/19)
W. Scott McDonald $14,400 None N/A $27,200 (5/19)
Joseph Weber $14,400 None N/A $27,200 (5/19)
</TABLE>
* Directors who are "interested" do not receive compensation from Prudential
(including the Fund).
** Indicates number of funds and portfolios(including the Fund) to which
aggregate compensation relates.
As of April 1, 1999, the Directors and officers of the Fund, as a group,
beneficially owned less than one percent of the outstanding shares of the Fund
capital stock.
28
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
CONSERVATIVE BALANCED PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$4,496,058,447).......................... $4,762,474,785
Cash....................................... 845,314
Interest and dividends receivable.......... 42,070,945
Receivable for investments sold............ 324,115
Due from broker -- variation margin........ 85,990
Receivable for capital stock sold.......... 263,037
--------------
Total Assets............................. 4,806,064,186
--------------
LIABILITIES
Payable to investment adviser.............. 6,472,779
Payable for capital stock repurchased...... 1,730,453
Payable for investments purchased.......... 1,518,060
Accrued expenses........................... 383,124
--------------
Total Liabilities........................ 10,104,416
--------------
NET ASSETS................................... $4,795,959,770
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 3,181,043
Paid-in capital, in excess of par........ 4,507,920,747
--------------
4,511,101,790
Accumulated net realized gains on
investments.............................. 15,961,929
Net unrealized appreciation on
investments.............................. 268,896,051
--------------
Net assets, December 31, 1998.............. $4,795,959,770
--------------
--------------
Net asset value and redemption price per
share, 318,104,322 outstanding shares of
common stock (authorized 350,000,000
shares).................................. $ 15.08
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Dividends (net of $227,089 foreign
withholding tax)......................... $ 24,862,659
Interest................................... 202,415,229
---------------
227,277,888
---------------
EXPENSES
Investment advisory fee.................... 26,224,569
Shareholders' reports...................... 335,000
Accounting fees............................ 270,000
Custodian expense.......................... 210,000
Audit fees................................. 45,000
Legal fees................................. 4,000
Directors' fees............................ 3,000
Miscellaneous expenses..................... 22,800
---------------
Total expenses........................... 27,114,369
Less: Custodian fee credit................. (37,735)
---------------
Net expenses............................. 27,076,634
---------------
NET INVESTMENT INCOME........................ 200,201,254
---------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on:
Investments.............................. 252,074,816
Futures contracts........................ 11,004,301
---------------
263,079,117
---------------
Net change in unrealized appreciation on:
Investments.............................. 62,217,963
Futures contracts........................ 4,254,938
---------------
66,472,901
---------------
NET GAIN ON INVESTMENTS...................... 329,552,018
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 529,753,272
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 200,201,254 $ 209,904,550
Net realized gain on investments....................................................... 263,079,117 525,175,186
Net change in unrealized appreciation (depreciation) on investments.................... 66,472,901 (148,830,270)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 529,753,272 586,249,466
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (201,150,300) (209,004,256)
Distributions from net realized capital gains.......................................... (284,059,981) (518,358,296)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (485,210,281) (727,362,552)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [4,155,780 and 4,585,160 shares, respectively]...................... 64,306,807 74,015,405
Capital stock issued in reinvestment of dividends and distributions [32,017,520 and
47,801,252 shares, respectively]...................................................... 485,210,281 727,362,552
Capital stock repurchased [(34,980,138) and (24,112,955) shares, respectively]......... (542,332,348) (394,841,365)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 7,184,740 406,536,592
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 51,727,731 265,423,506
NET ASSETS:
Beginning of year...................................................................... 4,744,232,039 4,478,808,533
------------------ -------------------
End of year (a)........................................................................ $ 4,795,959,770 $ 4,744,232,039
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ -- $ 949,046
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A1
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
FLEXIBLE MANAGED PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$5,149,958,034).......................... $5,386,550,009
Cash....................................... 1,341
Interest and dividends receivable.......... 33,290,998
Due from broker -- variation margin........ 809,059
Receivable for investments sold............ 619,824
Receivable for capital stock sold.......... 232,095
--------------
Total Assets............................. 5,421,503,326
--------------
LIABILITIES
Payable to investment adviser.............. 7,882,895
Payable for capital stock repurchased...... 1,607,590
Payable for investments purchased.......... 1,595,867
Accrued expenses........................... 435,586
--------------
Total Liabilities........................ 11,521,938
--------------
NET ASSETS................................... $5,409,981,388
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 3,267,182
Paid-in capital, in excess of par........ 5,110,844,004
--------------
5,114,111,186
Undistributed net investment income........ 170,556
Accumulated net realized gains on
investments.............................. 43,985,733
Net unrealized appreciation on
investments.............................. 251,713,913
--------------
Net assets, December 31, 1998.............. $5,409,981,388
--------------
--------------
Net asset value and redemption price per
share, 326,718,180 outstanding shares of
common stock (authorized 350,000,000
shares).................................. $ 16.56
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Dividends (net of $614,599 foreign
withholding tax)......................... $ 41,517,034
Interest................................... 170,024,349
---------------
211,541,383
---------------
EXPENSES
Investment advisory fee.................... 33,049,940
Shareholders' reports...................... 415,000
Accounting fees............................ 242,000
Custodian expense.......................... 234,000
Audit fees and expenses.................... 57,000
Directors' fees............................ 3,000
Miscellaneous expenses..................... 26,800
---------------
Total expenses........................... 34,027,740
Less: custodian fee credit................. (74,445)
---------------
Net expenses............................. 33,953,295
---------------
NET INVESTMENT INCOME........................ 177,588,088
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain on:
Investments.............................. 471,749,472
Futures contracts........................ 42,134,442
---------------
513,883,914
---------------
Net change in unrealized appreciation on:
Investments.............................. (183,829,519)
Futures contracts........................ 16,684,360
---------------
(167,145,159)
---------------
NET GAIN ON INVESTMENTS...................... 346,738,755
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 524,326,843
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 177,588,088 $ 160,063,955
Net realized gain on investments....................................................... 513,883,914 867,691,914
Net change in unrealized appreciation on investments................................... (167,145,159) (163,603,096)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 524,326,843 864,152,773
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (178,186,396) (159,343,911)
Distributions from net realized capital gains.......................................... (552,345,875) (823,214,223)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (730,532,271) (982,558,134)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [4,188,120 and 4,859,580 shares, respectively]...................... 74,668,669 92,765,042
Capital stock issued in reinvestment of dividends and distributions [43,615,212 and
56,453,647 shares, respectively]...................................................... 730,532,271 982,558,134
Capital stock repurchased [(38,796,213) and (18,791,325) shares, respectively]......... (679,156,218) (363,698,408)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 126,044,722 711,624,768
------------------ -------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS.................................................. (80,160,706) 593,219,407
NET ASSETS:
Beginning of year...................................................................... 5,490,142,094 4,896,922,687
------------------ -------------------
End of year (a)........................................................................ $ 5,409,981,388 $ 5,490,142,094
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ 170,556 $ 768,864
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A2
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO
December 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 94.3%
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS -- 54.9% (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
AEROSPACE -- 1.3%
Raytheon Co.,
5.95%, 03/15/01............................... Baa1 $ 16,400 $ 16,543,992
6.00%, 12/15/10............................... Baa1 20,000 20,000,000
6.40%, 12/15/18............................... Baa1 25,000 24,812,500
--------------
61,356,492
--------------
AIRLINES -- 3.3%
Continental Airlines, Inc.,
8.00%, 12/15/05............................... Ba2 5,000 4,940,500
Delta Airlines, Inc.,
10.125%, 05/15/10............................. Baa3 20,000 25,019,000
10.375%, 02/01/11............................. Ba1 37,905 48,392,555
United Airlines, Inc.,
10.67%, 05/01/04.............................. Baa3 46,865 55,450,668
11.21%, 05/01/14.............................. Baa3 18,433 24,206,216
--------------
158,008,939
--------------
ASSET-BACKED SECURITIES -- 0.7%
California Infrastructure,
6.14%, 03/25/02............................... Aaa 5,500 5,517,930
6.17%, 03/25/03............................... Aaa 6,000 6,073,560
6.28%, 09/25/05............................... Aaa 7,000 7,167,160
Standard Credit Card Master Trust,
5.95%, 10/07/04............................... Aaa 4,650 4,718,262
Team Financing Corp.,
7.35%, 05/15/03............................... Aa2 11,000 11,304,219
--------------
34,781,131
--------------
BANKS AND SAVINGS & LOANS -- 3.3%
Bank of Nova Scotia,
6.50%, 07/15/07............................... A1 7,200 7,250,256
Bayerische Landesbank Girozentrale,
5.875%, 12/01/08.............................. Aaa 22,000 22,492,800
Capital One Bank,
6.97%, 02/04/02............................... Baa3 25,000 25,007,250
7.08%, 10/30/01............................... Baa3 35,100 35,295,507
7.35%, 06/20/00............................... Baa3 8,100 8,162,208
8.125%, 03/01/00.............................. Baa3 13,150 13,341,069
Citigroup,
6.375%, 11/15/08.............................. A1 17,500 18,094,475
Kansallis-Osake-Pankki, (Finland),
8.65%, 01/01/49............................... Baa1 10,000 10,147,200
National Australia Bank, (Australia),
6.40%, 12/10/07............................... A1 14,000 14,280,000
Okobank, (Finland),
6.75%, 09/27/49............................... A3 6,250 6,243,750
--------------
160,314,515
--------------
CABLE & PAY TELEVISION SYSTEMS -- 2.3%
Cable & Wire Communications, Inc.,
6.75%, 12/01/08............................... Baa1 17,000 17,329,800
Continental Cablevision, Inc.,
8.50%, 09/15/01............................... Ba2 5,545 5,881,914
<CAPTION>
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
CABLE & PAY TELEVISION SYSTEMS (CONT'D.)
<S> <C> <C> <C>
Tele-Communications, Inc.,
6.34%, 02/01/02............................... Ba1 $ 12,000 $ 12,291,000
7.375%, 02/15/00.............................. Ba1 40,700 41,585,225
8.25%, 01/15/03............................... Baa3 2,000 2,194,800
9.25%, 04/15/02............................... Baa3 9,500 10,563,525
9.875%, 06/15/22.............................. Baa3 12,900 18,288,975
--------------
108,135,239
--------------
COMMERCIAL SERVICES -- 0.8%
Cendant Corp.,
7.75%, 12/01/03............................... Baa1 39,000 39,416,130
--------------
COMPUTERS SOFTWARE & SERVICES -- 0.6%
Computer Associates International, Inc.,
6.375%, 04/15/05.............................. Baa1 14,300 14,151,852
Qwest Comm,
7.25%, 11/01/08............................... Ba1 8,000 8,180,000
Worldcom Inc,
6.125%, 08/15/01.............................. Baa2 6,700 6,807,066
--------------
29,138,918
--------------
CONSULTING -- 2.6%
Comdisco Inc., M.T.N.,
5.94%, 04/13/00............................... Baa1 12,500 12,468,750
6.32%, 11/27/00............................... Baa1 37,750 37,925,915
6.375%, 11/30/01.............................. Baa1 21,500 21,593,095
6.65%, 11/13/01............................... Baa1 50,000 50,385,000
--------------
122,372,760
--------------
CONSUMER SERVICES -- 0.3%
Loewen Group, Inc.,
7.20%, 06/01/03............................... Ba3 10,000 8,400,000
7.60%, 06/01/08............................... Ba3 3,400 2,686,000
Service Corp. International,
7.00%, 06/01/15............................... Baa1 2,500 2,588,375
--------------
13,674,375
--------------
CONTAINERS -- 0.6%
Owens-Illinois, Inc.,
7.15%, 05/15/05............................... Ba1 30,000 30,066,300
7.50%, 05/15/10............................... Ba1 800 815,216
--------------
30,881,516
--------------
DRUGS & MEDICAL SUPPLIES -- 0.5%
Mallinckrodt, Inc.,
6.30%, 03/15/11(a)............................ Baa2 16,780 16,520,958
Merck & Co Inc.,
5.95%, 12/01/28............................... Aaa 10,000 9,982,500
--------------
26,503,458
--------------
ELECTRICAL -- 0.3%
Enersis Sa,
6.90%, 12/01/06............................... Baa1 10,000 9,182,000
7.40%, 12/01/16............................... Baa1 6,400 5,267,200
--------------
14,449,200
--------------
FINANCIAL SERVICES -- 13.2%
Advanta Corp., M.T.N.,
7.50%, 08/28/00............................... Ba2 35,000 32,866,400
Arkwright Corp.,
9.625%, 08/15/26.............................. Baa3 8,000 9,568,800
Associates Corp.,
6.25%, 11/01/08............................... Aa3 21,000 21,745,920
6.95%, 11/01/18............................... Aa3 24,000 25,573,920
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B1
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
FINANCIAL SERVICES (CONT'D.)
<S> <C> <C> <C>
AT&T Capital Corp, M.T.N.,
6.25%, 05/15/01............................... Baa3 $ 35,500 $ 35,016,845
7.50%, 11/15/00............................... Baa3 47,000 47,575,280
BCH Financial Services
5.72%, 04/28/05............................... A3 10,000 9,933,200
Bear Stearns & Co,
6.50%, 07/05/00............................... A2 20,000 20,203,400
Conseco Inc.,
6.80%, 06/15/05............................... Baa3 13,000 11,801,400
8.70%, 11/15/26............................... Ba2 29,813 27,237,594
8.796%, 04/01/27.............................. Ba2 7,500 6,857,250
ContiFinancial Corp.,
7.50%, 03/15/02............................... Ba1 31,300 21,910,000
8.375%, 08/15/03.............................. Ba1 16,085 11,259,500
Donaldson Lufkin, & Jenrette Inc.,
5.625%, 02/15/16.............................. Baa1 5,480 5,415,117
Enterprise Rent-A-Car USA Finance Co., M.T.N.,
6.35%, 01/15/01............................... Baa3 11,200 11,226,992
6.95%, 03/01/04............................... Baa2 17,500 17,663,100
7.00%, 06/15/00............................... Baa3 23,000 23,098,210
7.50%, 06/15/03............................... Baa3 5,000 5,158,900
First Industrial, L.P.,
6.50%, 04/05/11............................... Baa2 9,000 8,864,730
General Motors Acceptance Corp., M.T.N.,
5.95%, 04/20/01............................... A2 30,300 30,542,400
Household Finance Corp.,
6.50%, 11/15/08............................... A2 72,000 74,520,000
Lehman Brothers Holdings, Inc.,
6.33%, 08/01/00............................... Baa1 17,200 17,317,476
6.40%, 08/30/00............................... Baa1 21,700 21,705,425
MCN Investment Corp.,
6.30%, 04/02/11............................... Baa2 8,250 8,194,725
Merrill Lynch, Pierce, Fenner & Smith, Inc.,
6.875%, 11/15/18.............................. Aa3 16,900 17,519,385
Morgan Stanley Dean Witter & Co., M.T.N.,
5.89%, 03/20/00............................... A1 20,000 20,140,800
6.09%, 03/09/11............................... A1 21,000 21,280,350
PaineWebber Group, Inc.,
7.015%, 02/10/04.............................. Baa1 6,000 6,288,840
7.625%, 10/15/08.............................. Baa1 5,000 5,387,250
PT Alatief Freeport Financial Co., Sr. Notes,
(Netherlands),
9.75%, 04/15/01 (b)/(c)....................... Ba2 8,950 6,444,000
Salomon, Inc.,
6.59%, 02/21/01............................... Baa1 9,750 9,937,200
6.75%, 02/15/03............................... Baa1 5,000 5,137,450
7.25%, 05/01/01............................... Baa1 8,625 8,933,430
Textron Financial Corp.,
6.05%, 03/16/09............................... Aaa 26,319 26,369,655
--------------
632,694,944
--------------
<CAPTION>
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
FOREST PRODUCTS -- 0.4%
Fort James Corp.,
6.234%, 03/15/11.............................. Baa3 $ 17,500 $ 17,664,675
--------------
INDUSTRIAL -- 2.5%
Compania Sud Americana de Vapores, S.A.,
(Chile),
7.375%, 12/08/03.............................. Baa 7,600 6,821,000
Scotia Pacific Co.,
7.11%, 01/20/14............................... A3 7,900 7,518,904
7.71%, 01/20/14............................... Baa2 23,800 21,321,944
Security Capital Group,
6.95%, 06/15/05............................... Baa1 4,500 4,297,500
U.S. Filter Corp.,
6.375%, 05/15/01.............................. Ba1 60,090 59,445,835
6.50%, 05/15/03............................... Ba1 20,000 19,481,800
--------------
118,886,983
--------------
LODGING -- 0.9%
ITT Corp.,
6.25%, 11/15/00............................... Ba1 23,703 22,867,232
6.75%, 11/15/03............................... Baa2 21,500 19,797,845
--------------
42,665,077
--------------
MEDIA -- 1.1%
Paramount Communications, Inc.,
7.50%, 01/15/02............................... Ba2 6,425 6,704,680
Time Warner, Inc.,
6.10%, 12/30/01............................... Ba1 27,650 27,926,500
8.11%, 08/15/06............................... Ba1 1,500 1,710,075
Viacom, Inc.,
7.75%, 06/01/05............................... Ba2 13,775 14,943,533
--------------
51,284,788
--------------
MISCELLANEOUS -- 0.1%
Tokai Pfd Capital,
9.98%, 12/29/49............................... A3 4,700 3,948,000
--------------
OIL & GAS -- 0.3%
B.J. Services Co.,
7.00%, 02/01/06............................... Ba1 4,000 4,139,880
Petro Canada,
7.00%, 11/15/28............................... A3 10,000 9,861,200
--------------
14,001,080
--------------
OIL & GAS SERVICES -- 3.7%
KN Energy, Inc.,
6.30%, 03/01/21............................... Baa2 27,550 27,627,416
6.45%, 11/30/01............................... Baa2 18,000 18,009,000
R&B Falcon Corp.
6.50%, 04/15/03............................... Ba1 44,350 40,283,992
6.75%, 04/15/05............................... Ba1 28,750 24,725,000
Seagull Energy Co.,
7.50%, 09/15/27............................... Ba1 8,000 7,165,360
Williams Companies, Inc.,
5.95%, 02/15/10............................... Baa2 59,000 59,064,900
--------------
176,875,668
--------------
REAL ESTATE INVESTMENT TRUST -- 3.5%
Camden Prop Trst,
7.23%, 10/30/00............................... Baa2 22,000 22,052,800
Colonial Realty,
7.00%, 07/14/07............................... Baa3 4,250 4,075,368
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B2
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
REAL ESTATE INVESTMENT TRUST (CONT'D.)
<S> <C> <C> <C>
EOP Operating, L.P.,
6.50%, 06/15/04............................... Baa1 $ 6,000 $ 5,900,400
6.625%, 02/15/05.............................. Baa 17,938 17,583,366
Equity Residential,
6.15%, 09/15/00............................... A3 45,000 44,703,000
ERP Operating, L.P.,
6.63%, 04/13/15............................... A3 22,400 22,103,424
Felcor Suite Hotels, Inc.,
7.625%, 10/01/07.............................. Ba1 8,000 7,620,000
Gables Realty Trust,
6.80%, 03/15/05............................... Baa2 7,500 7,157,175
Simon Debartolo Group, Inc.,
6.75%, 06/15/05............................... Baa1 17,500 16,969,750
6.75%, 07/15/04............................... Baa1 8,000 7,897,520
6.875%, 10/27/05.............................. Baa1 14,858 14,539,296
--------------
170,602,099
--------------
RETAIL -- 4.3%
Federated Department Stores, Inc.,
8.125%, 10/15/02.............................. Ba1 41,030 44,227,468
8.50%, 06/15/03............................... Ba1 32,400 35,736,552
Fred Meyer, Inc.,
7.15%, 03/01/03............................... Ba2 12,400 12,900,712
Rite Aid Corp.,
6.70%, 12/15/01............................... A3 5,000 5,128,000
Safeway Stores Inc.,
5.75%, 11/15/00............................... Baa2 6,000 6,012,000
6.05%, 11/15/03............................... Baa2 12,000 12,082,320
Saks Inc.,
7.25%, 12/01/04............................... Baa3 20,900 20,974,195
7.50%, 12/01/10............................... Baa3 22,500 22,498,425
8.25%, 11/15/08............................... Baa3 30,900 32,754,000
Sears Roebuk & Co.,
6.50%, 12/01/28............................... A2 16,000 15,704,480
--------------
208,018,152
--------------
TECHNOLOGY -- 0.7%
Time Warner Inc,
6.625%, 05/15/29.............................. Baa3 33,000 33,576,180
--------------
TELECOMMUNICATIONS -- 2.0%
360 Communication Co.,
7.125%, 03/01/03.............................. Ba2 22,550 23,863,538
7.60%, 04/01/09............................... Ba1 7,000 7,932,750
Sprint Cap Corp.,
5.70%, 11/15/03............................... Baa1 11,000 11,039,270
6.125%, 11/15/08.............................. Baa1 25,000 25,545,750
6.875%, 11/15/28.............................. Baa1 24,500 25,462,850
--------------
93,844,158
--------------
TOBACCO -- 1.3%
Philip Morris Cos., Inc.,
6.15%, 03/15/10............................... A2 40,000 40,332,000
RJR Nabisco, Inc.,
8.75%, 08/15/05............................... Baa3 6,900 6,962,584
9.25%, 08/15/13............................... Baa3 13,571 13,953,159
--------------
61,247,743
--------------
<CAPTION>
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
UTILITIES -- 0.5%
Commonwealth Edison Co.,
7.375%, 01/15/04.............................. Baa3 $ 14,000 $ 14,930,300
Niagara Mohawk Power,
7.375%, 08/01/03.............................. Ba2 10,000 10,569,100
--------------
25,499,400
--------------
WASTE MANAGEMENT -- 0.2%
USA Waste Service,
6.125%, 07/15/01.............................. Baa3 10,000 10,062,000
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 3.6%
United States Treasury Bond,
8.00%, 11/15/21............................... 55,300 73,937,759
United States Treasury Notes,
4.75%, 11/15/08............................... 8,600 8,667,166
5.50%, 08/15/28............................... 36,075 37,760,424
5.75%, 08/15/03............................... 3,900 4,072,458
5.875%, 11/15/05.............................. 2,200 2,346,784
6.375%, 08/15/27.............................. 27,000 31,032,990
7.50%, 02/15/05............................... 900 1,030,500
7.875%, 11/15/04.............................. 3,000 3,475,770
United States Treasury Strip,
6.50%, 05/15/05............................... 10,150 11,123,791
--------------
173,447,642
--------------
TOTAL LONG-TERM BONDS
(COST $2,694,909,653).................................................... 2,633,351,262
--------------
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCKS -- 38.7% SHARES
-------------
<S> <C> <C>
AEROSPACE -- 0.6%
Aeroquip-Vickers, Inc..................................... 4,400 131,725
AlliedSignal, Inc......................................... 88,300 3,912,794
Boeing Co................................................. 156,500 5,105,812
GenCorp, Inc.............................................. 98,400 2,453,850
General Dynamics Corp..................................... 19,700 1,154,912
Goodrich (B.F.) Co........................................ 11,300 405,387
Litton Industries, Inc.(b)................................ 77,600 5,063,400
Lockheed Martin Corp...................................... 30,400 2,576,400
Northrop Grumman Corp..................................... 10,500 767,812
Parker-Hannifin Corp...................................... 60,625 1,985,469
Raytheon Co. (Class "B" Stock)............................ 52,900 2,816,925
United Technologies Corp.................................. 36,500 3,969,375
--------------
30,343,861
--------------
AIRLINES -- 0.4%
AMR Corp.(b).............................................. 183,600 10,901,250
Delta Air Lines, Inc...................................... 23,400 1,216,800
Southwest Airlines Co..................................... 51,900 1,164,506
US Airways Group, Inc.(b)................................. 128,200 6,666,400
--------------
19,948,956
--------------
APPAREL -- 0.1%
Fruit of the Loom, Inc. (Class "A" Stock)(b).............. 84,100 1,161,631
Nike, Inc. (Class "B" Stock).............................. 45,500 1,845,594
Phillips-Van Heusen Corp.................................. 94,700 680,656
Reebok International Ltd.................................. 8,800 130,900
--------------
3,818,781
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B3
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
AUTOS - CARS & TRUCKS -- 1.0%
<S> <C> <C>
Cummins Engine Co., Inc................................... 6,000 $ 213,000
DaimlerChrysler AG........................................ 80,071 7,691,820
Dana Corp................................................. 25,600 1,046,400
Ford Motor Co............................................. 281,900 16,544,006
General Motors Corp....................................... 213,000 15,242,813
Genuine Parts Co.......................................... 28,000 936,250
Johnson Controls, Inc..................................... 13,200 778,800
MascoTech, Inc............................................ 94,400 1,616,600
Midas, Inc................................................ 22,100 687,862
Navistar International Corp.(b)........................... 11,300 322,050
PACCAR, Inc............................................... 12,200 501,725
Titan International, Inc.................................. 101,250 961,875
TRW, Inc.................................................. 19,300 1,084,419
--------------
47,627,620
--------------
BANKS AND SAVINGS & LOANS -- 2.2%
Banc One Corp............................................. 183,772 9,383,858
Bank of New York Co., Inc................................. 118,000 4,749,500
BankAmerica Corp.......................................... 271,761 16,339,630
BankBoston Corp........................................... 45,600 1,775,550
Bankers Trust Corp........................................ 15,300 1,307,194
BB&T Corp................................................. 44,600 1,797,937
Chase Manhattan Corp...................................... 133,600 9,093,150
Comerica, Inc............................................. 24,700 1,684,231
First Union Corp.......................................... 151,500 9,213,094
Fleet Financial Group, Inc................................ 87,000 3,887,812
Golden West Financial Corp................................ 8,900 816,019
Huntington Bancshares, Inc................................ 33,000 992,062
KeyCorp................................................... 68,800 2,201,600
Mellon Bank Corp.......................................... 39,900 2,743,125
Mercantile Bancorporation, Inc............................ 22,700 1,047,037
Morgan (J.P.) & Co., Inc.................................. 27,800 2,920,737
National City Corp........................................ 51,400 3,726,500
Northern Trust Corp....................................... 17,500 1,527,969
PNC Bank Corp............................................. 47,800 2,587,175
Providian Financial Corp.................................. 22,350 1,676,250
Regions Financial Corp.................................... 30,000 1,209,375
Republic New York Corp.................................... 17,100 779,119
Summit Bancorp............................................ 27,600 1,205,775
Suntrust Banks, Inc....................................... 33,000 2,524,500
Synovus Financial Corp.................................... 41,150 1,003,031
U.S. Bancorp.............................................. 115,300 4,093,150
Union Planters Corp....................................... 17,000 770,312
Wachovia Corp............................................. 32,300 2,824,231
Wells Fargo & Co.......................................... 251,300 10,036,294
--------------
103,916,217
--------------
BUSINESS SERVICES -- 0.1%
Equifax, Inc.............................................. 23,500 803,406
Omnicom Group, Inc........................................ 25,400 1,473,200
--------------
2,276,606
--------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
CHEMICALS -- 0.7%
Air Products & Chemicals, Inc............................. 36,900 $ 1,476,000
Dow Chemical Co........................................... 35,500 3,228,281
Du Pont (E.I.) de Nemours & Co............................ 177,200 9,402,675
Eastman Chemical Co....................................... 12,300 550,425
Engelhard Corp............................................ 22,600 440,700
Ferro Corp................................................ 134,900 3,507,400
FMC Corp.(b).............................................. 5,400 302,400
Grace (W.R.) & Co......................................... 11,600 181,975
Great Lakes Chemical Corp................................. 9,400 376,000
Hercules, Inc............................................. 15,100 413,362
Millennium Chemicals, Inc.(b)............................. 146,527 2,912,224
Monsanto Co............................................... 92,900 4,412,750
Morton International, Inc................................. 20,400 499,800
Nalco Chemical Co......................................... 10,400 322,400
OM Group, Inc............................................. 63,300 2,310,450
Praxair, Inc.............................................. 24,700 870,675
Raychem Corp.............................................. 13,300 429,756
Rohm & Haas Co............................................ 28,800 867,600
Sigma-Aldrich Corp........................................ 15,700 461,187
Union Carbide Corp........................................ 19,300 820,250
--------------
33,786,310
--------------
COMMERCIAL SERVICES -- 0.1%
Cendant Corp.(b).......................................... 129,900 2,476,219
Deluxe Corp............................................... 12,700 464,344
Moore Corp. Ltd........................................... 13,900 152,900
--------------
3,093,463
--------------
COMPUTER SERVICES -- 2.4%
3Com Corp.(b)............................................. 55,500 2,487,094
Adobe Systems, Inc........................................ 10,800 504,900
America Online, Inc.(b)................................... 10,500 1,680,000
Autodesk, Inc............................................. 7,300 311,619
Automatic Data Processing, Inc............................ 46,800 3,752,775
BMC Software, Inc.(b)..................................... 31,000 1,381,437
Cabletron Systems, Inc.(b)................................ 24,800 207,700
Ceridian Corp.(b)......................................... 11,300 788,881
Cisco Systems, Inc.(b).................................... 241,100 22,377,094
Computer Associates International, Inc.................... 85,500 3,644,437
Computer Sciences Corp.(b)................................ 24,400 1,572,275
Electronic Data Systems Corp.............................. 76,000 3,819,000
EMC Corp.(b).............................................. 77,700 6,604,500
First Data Corp........................................... 67,000 2,123,062
Microsoft Corp.(b)........................................ 383,300 53,158,919
Novell, Inc.(b)........................................... 55,000 996,875
Oracle Corp.(b)........................................... 154,100 6,645,562
Parametric Technology Corp.(b)............................ 40,200 658,275
Peoplesoft, Inc........................................... 30,000 568,125
Silicon Graphics, Inc.(b)................................. 29,400 378,525
Unisys Corp............................................... 39,100 1,346,506
--------------
115,007,561
--------------
COMPUTERS -- 1.5%
Apple Computer, Inc.(b)................................... 20,800 851,500
Compaq Computer Corp...................................... 258,789 10,852,964
Data General Corp.(b)..................................... 7,600 124,925
Dell Computer Corp.(b).................................... 196,300 14,366,706
Gateway 2000, Inc.(b)..................................... 24,300 1,243,856
Hewlett-Packard Co........................................ 162,900 11,128,106
International Business Machines Corp...................... 144,700 26,733,325
Seagate Technology, Inc.(b)............................... 37,900 1,146,475
Sun Microsystems, Inc.(b)................................. 59,100 5,060,437
--------------
71,508,294
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B4
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
CONSTRUCTION -- 0.2%
<S> <C> <C>
Centex Corp............................................... 9,300 $ 419,081
Fluor Corp................................................ 13,100 557,569
Foster Wheeler Corp....................................... 6,400 84,400
Oakwood Homes Corp........................................ 139,300 2,115,619
Pulte Corp................................................ 6,600 183,562
Standard Pacific Corp..................................... 154,000 2,175,250
Webb (Del E.) Corp........................................ 140,300 3,867,019
--------------
9,402,500
--------------
CONTAINERS -- 0.1%
Ball Corp................................................. 4,700 215,025
Bemis Co., Inc............................................ 8,300 314,881
Crown Cork & Seal Co., Inc................................ 20,100 619,331
Owens-Illinois, Inc.(b)................................... 81,500 2,495,937
Sealed Air Corp........................................... 12,900 658,706
--------------
4,303,880
--------------
COSMETICS & SOAPS -- 0.7%
Alberto Culver Co. (Class "B" Stock)...................... 8,900 237,519
Avon Products, Inc........................................ 41,400 1,831,950
Colgate-Palmolive Co...................................... 46,300 4,300,112
Gillette Co............................................... 175,400 8,474,012
International Flavors & Fragrances, Inc................... 17,100 755,606
Procter & Gamble Co....................................... 210,200 19,193,887
--------------
34,793,086
--------------
DIVERSIFIED CONSUMER PRODUCTS -- 0.1%
Eastman Kodak Co.......................................... 86,800 6,249,600
--------------
DIVERSIFIED OFFICE EQUIPMENT -- 0.2%
Avery Dennison Corp....................................... 17,300 779,581
Pitney Bowes, Inc......................................... 42,800 2,827,475
Xerox Corp................................................ 51,000 6,018,000
--------------
9,625,056
--------------
DIVERSIFIED OPERATIONS -- 1.1%
Fortune Brands, Inc....................................... 26,900 850,712
General Electric Capital Corp............................. 504,700 51,510,944
--------------
52,361,656
--------------
DRUGS AND MEDICAL SUPPLIES -- 3.8%
Abbott Laboratories....................................... 239,600 11,740,400
Allergan, Inc............................................. 10,200 660,450
ALZA Corp.(b)............................................. 13,400 700,150
American Home Products Corp............................... 203,500 11,459,594
Amgen, Inc.(b)............................................ 41,200 4,307,975
Bard (C.R.), Inc.......................................... 8,900 440,550
Bausch & Lomb, Inc........................................ 8,700 522,000
Baxter International, Inc................................. 43,900 2,823,319
Becton, Dickinson & Co.................................... 38,200 1,630,662
Biomet, Inc............................................... 17,500 704,375
Boston Scientific Corp.(b)................................ 61,000 1,635,562
Bristol-Myers Squibb Co................................... 154,300 20,647,269
Cardinal Health, Inc...................................... 29,700 2,253,487
Guidant Corp.............................................. 23,600 2,601,900
Johnson & Johnson......................................... 210,600 17,664,075
Lilly (Eli) & Co.......................................... 171,700 15,259,837
Mallinckrodt, Inc......................................... 11,400 351,262
Medtronic, Inc............................................ 73,400 5,449,950
Merck & Co., Inc.......................................... 184,800 27,292,650
Pfizer, Inc.,............................................. 204,200 25,614,337
Pharmacia & Upjohn, Inc................................... 79,500 4,501,687
Schering-Plough Corp...................................... 229,400 12,674,350
St. Jude Medical, Inc.(b)................................. 14,400 398,700
Warner-Lambert Co......................................... 127,900 9,616,481
--------------
180,951,022
--------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
ELECTRONICS -- 1.3%
Advanced Micro Devices, Inc.(b)........................... 22,200 $ 642,412
AMP Inc................................................... 34,500 1,796,156
Applied Materials, Inc.(b)................................ 57,300 2,445,994
Belden, Inc............................................... 67,100 1,421,681
EG&G, Inc................................................. 7,100 197,469
Emerson Electric Co....................................... 69,400 4,341,837
Grainger (W.W.), Inc...................................... 15,600 649,350
Harris Corp............................................... 12,500 457,812
Honeywell, Inc............................................ 19,900 1,498,719
Intel Corp................................................ 260,600 30,897,387
KLA-Tencor Corp.(b)....................................... 13,200 572,550
LSI Logic Corp.(b)........................................ 22,200 357,975
Micron Technology, Inc.................................... 33,100 1,673,619
Motorola, Inc............................................. 93,500 5,709,344
Perkin-Elmer Corp......................................... 7,600 741,475
Rockwell International Corp............................... 31,500 1,529,719
Solectron Corp............................................ 5,000 464,687
Tektronix, Inc............................................ 7,900 237,494
Texas Instruments, Inc.................................... 61,100 5,227,869
Thomas & Betts Corp....................................... 8,600 372,487
--------------
61,236,036
--------------
ENGINEERING & CONSTRUCTION
Giant Cement Holdings, Inc.(b)............................ 58,100 1,437,975
--------------
ENVIRONMENTAL SERVICES
Browning-Ferris Industries, Inc........................... 28,800 819,000
--------------
EXPLORATION & PRODUCTION
Apex Silver Mines Ltd..................................... 82,200 678,150
--------------
FINANCIAL SERVICES -- 2.2%
American Express Co....................................... 70,800 7,239,300
Associates First Capital Corp............................. 108,544 4,599,552
Bear Stearns Companies, Inc............................... 16,500 616,687
Block (H.R.), Inc......................................... 16,400 738,000
Capital One Financial Corp................................ 9,600 1,104,000
Citigroup, Inc............................................ 407,500 20,171,250
Countrywide Credit Industries, Inc........................ 17,000 853,187
Dun & Bradstreet Corp..................................... 26,700 842,719
Federal Home Loan Mortgage Corp........................... 105,700 6,811,044
Federal National Mortgage Assoc........................... 161,900 11,980,600
Fifth Third Bancorp....................................... 39,500 2,816,844
Franklin Resource, Inc.................................... 39,600 1,267,200
Household International, Inc.............................. 75,752 3,001,673
Lehman Brothers Holdings, Inc............................. 189,600 8,354,250
MBNA Corp................................................. 117,750 2,936,391
Merrill Lynch & Co., Inc.................................. 112,300 7,496,025
Morgan Stanley Dean Witter & Co........................... 146,790 10,422,090
Paychex, Inc.............................................. 23,000 1,183,062
Schwab (Charles) Corp.(b)................................. 62,400 3,506,100
SLM Holding Corp.......................................... 25,000 1,200,000
State Street Corp......................................... 25,200 1,752,975
Sunamerica, Inc........................................... 30,600 2,482,425
Transamerica Corp......................................... 9,800 1,131,900
Washington Mutual, Inc.................................... 89,178 3,405,485
--------------
105,912,759
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B5
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
FOOD & BEVERAGES -- 1.7%
<S> <C> <C>
Anheuser-Busch Companies, Inc............................. 76,700 $ 5,033,437
Archer-Daniels-Midland Co................................. 93,975 1,615,195
Bestfoods................................................. 45,100 2,401,575
Brown-Forman Corp. (Class "B" Stock)...................... 10,800 817,425
Campbell Soup Co.......................................... 71,500 3,932,500
Coca Cola Enterprises, Inc................................ 60,000 2,145,000
Coca-Cola Co.............................................. 383,500 25,646,562
ConAgra, Inc.............................................. 74,500 2,346,750
Coors (Adolph) Co. (Class "B" Stock)...................... 5,800 327,337
General Mills, Inc........................................ 24,800 1,928,200
Heinz (H.J.) & Co......................................... 57,200 3,238,950
Hershey Foods Corp........................................ 22,400 1,393,000
Kellogg Co................................................ 64,400 2,197,650
PepsiCo, Inc.............................................. 235,600 9,644,875
Pioneer Hi-Bred International, Inc........................ 38,300 1,034,100
Quaker Oats Co............................................ 21,700 1,291,150
Ralston-Ralston Purina Group.............................. 50,400 1,631,700
Sara Lee Corp............................................. 148,200 4,177,388
Seagram Co., Ltd.......................................... 55,800 2,120,400
Sysco Corp................................................ 53,300 1,462,419
Whitman Corp.............................................. 132,800 3,369,800
Wrigley (William) Jr. Co.................................. 18,200 1,630,037
--------------
79,385,450
--------------
FOREST PRODUCTS -- 0.6%
Boise Cascade Corp........................................ 152,000 4,712,000
Champion International Corp............................... 109,700 4,442,850
Fort James Corp........................................... 32,700 1,308,000
Georgia-Pacific Corp...................................... 14,500 849,156
International Paper Co.................................... 47,300 2,119,631
Louisiana-Pacific Corp.................................... 189,700 3,473,881
Mead Corp................................................. 111,300 3,262,481
Potlatch Corp............................................. 4,500 165,937
Temple-Inland, Inc........................................ 8,900 527,881
Union Camp Corp........................................... 10,900 735,750
Westvaco Corp............................................. 16,000 429,000
Weyerhaeuser Co........................................... 31,300 1,590,431
Willamette Industries, Inc................................ 86,500 2,897,750
--------------
26,514,748
--------------
GAS PIPELINES -- 0.1%
Columbia Energy Group..................................... 13,000 750,750
Consolidated Natural Gas Co............................... 15,000 810,000
Peoples Energy Corp....................................... 5,500 219,312
Sempra Energy............................................. 33,699 855,112
Sonat, Inc................................................ 17,200 465,475
Williams Companies, Inc................................... 64,400 2,008,475
--------------
5,109,124
--------------
HOSPITALS/ HEALTHCARE -- 0.3%
Columbia/HCA Healthcare Corp.............................. 301,900 7,472,025
HBO & Co.................................................. 69,000 1,979,437
Healthsouth Corp.(b)...................................... 63,600 981,825
Humana, Inc.(b)........................................... 25,700 457,781
IMS Health, Inc........................................... 25,400 1,916,112
Manor Care, Inc........................................... 12,000 352,500
Service Corp. International............................... 39,400 1,499,662
Shared Medical Systems Corp............................... 4,100 204,487
Tenet Healthcare Corp.(b)................................. 48,000 1,260,000
--------------
16,123,829
--------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
HOUSEHOLD PRODUCTS & PERSONAL CARE -- 0.2%
Clorox Co................................................. 16,200 $ 1,892,362
Kimberly-Clark Corp....................................... 87,000 4,741,500
Leggett & Platt, Inc...................................... 114,700 2,523,400
--------------
9,157,262
--------------
HOUSING RELATED -- 0.5%
Armstrong World Industries, Inc........................... 6,400 386,000
Fleetwood Enterprises, Inc................................ 5,700 198,075
Hanson, PLC, ADR, (United Kingdom)........................ 309,562 12,072,918
Kaufman & Broad Home Corp................................. 6,100 175,375
Lowe's Companies, Inc..................................... 54,800 2,805,075
Masco Corp................................................ 51,800 1,489,250
Maytag Corp............................................... 14,900 927,525
Owens Corning............................................. 106,900 3,788,269
Stanley Works............................................. 14,000 388,500
Tupperware Corp........................................... 9,600 157,800
Whirlpool Corp............................................ 11,700 647,887
--------------
23,036,674
--------------
INSURANCE -- 1.5%
Aetna, Inc................................................ 23,300 1,831,962
Allstate Corp............................................. 131,300 5,071,462
American General Corp..................................... 39,700 3,096,600
American International Group, Inc......................... 163,500 15,798,187
Aon Corp.................................................. 26,300 1,456,362
Berkley (W.R.) Corp....................................... 42,400 1,444,250
Berkshire Hathaway, Inc. (Class "B" Stock)................ 452 1,061,025
Chubb Corp................................................ 26,700 1,732,162
CIGNA Corp................................................ 34,800 2,690,475
Cincinnati Financial Corp................................. 25,800 944,925
Conseco, Inc.............................................. 49,021 1,498,204
Financial Security Assurance Holdings Ltd................. 34,000 1,844,500
Hartford Financial Services Group, Inc.................... 37,000 2,030,375
Jefferson-Pilot Corp...................................... 16,600 1,245,000
Lincoln National Corp..................................... 16,000 1,309,000
Loews Corp................................................ 47,000 4,617,750
Marsh & McLennan Companies, Inc........................... 39,900 2,331,656
MBIA, Inc................................................. 15,300 1,003,106
MGIC Investment Corp...................................... 17,900 712,644
Progressive Corp.......................................... 11,300 1,913,938
Provident Companies, Inc.................................. 70,400 2,921,600
Reinsurance Group of America, Inc......................... 115,550 8,088,500
SAFECO Corp............................................... 22,100 948,919
St. Paul Companies, Inc................................... 36,200 1,257,950
TIG Holdings, Inc......................................... 85,500 1,330,594
Torchmark Corp............................................ 21,900 773,329
Trenwick Group, Inc....................................... 64,850 2,115,731
United Healthcare Corp.................................... 29,500 1,270,344
UNUM Corp................................................. 21,700 1,266,737
--------------
73,607,287
--------------
INTRUMENTS-CONTROLS
Flowserve Corp............................................ 39,486 653,987
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B6
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
LEISURE -- 0.3%
<S> <C> <C>
Brunswick Corp............................................ 15,600 $ 386,100
Carnival Corp. (Class "A" Stock).......................... 78,500 3,768,000
Disney (Walt) Co.......................................... 317,100 9,513,000
Harrah's Entertainment, Inc.(b)........................... 15,800 247,862
Hilton Hotels Corp........................................ 39,200 749,700
King World Productions, Inc............................... 11,500 338,531
Marriott International, Inc. (Class "A" Stock)............ 40,000 1,160,000
Mirage Resorts, Inc.(b)................................... 28,100 419,744
--------------
16,582,937
--------------
MACHINERY -- 0.3%
Briggs & Stratton Corp.................................... 3,900 194,513
Case Corp................................................. 98,800 2,155,075
Caterpillar, Inc.......................................... 58,300 2,681,800
Cooper Industries, Inc.................................... 19,000 906,063
Deere & Co................................................ 39,100 1,295,188
Dover Corp................................................ 34,800 1,274,550
DT Industries, Inc........................................ 35,800 563,850
Eaton Corp................................................ 11,200 791,700
Global Industrial Technologies, Inc.(b)................... 61,400 656,213
Harnischfeger Industries, Inc............................. 7,500 76,406
Ingersoll-Rand Co......................................... 25,900 1,215,681
Milacron, Inc............................................. 6,300 121,275
Paxar Corp................................................ 229,925 2,054,955
Snap-On, Inc.............................................. 9,500 330,719
Timken Co................................................. 9,900 186,863
--------------
14,504,851
--------------
MANUFACTURING -- 0.3%
Hussmann International, Inc............................... 66,400 1,286,500
Illinois Tool Works, Inc.................................. 39,100 2,267,800
Smith (A.O.) Corp.,....................................... 105,450 2,590,116
Tyco International Ltd.................................... 98,651 7,441,985
--------------
13,586,401
--------------
MEDIA -- 1.3%
CBS Corp.(b).............................................. 304,000 9,956,000
Central Newspapers, Inc.(Class "A" Stock)................. 50,000 3,571,875
Clear Channel Communications, Inc.(b)..................... 38,600 2,103,700
Comcast Corp. (Special Class "A" Stock)................... 56,700 3,327,581
Donnelley (R.R.) & Sons Co................................ 22,800 998,925
Dow Jones & Co., Inc...................................... 15,100 726,688
Gannett Co., Inc.......................................... 44,400 2,938,725
Houghton Mifflin Co....................................... 58,700 2,773,576
Interpublic Group of Companies, Inc....................... 19,700 1,571,075
Knight-Ridder, Inc........................................ 70,600 3,609,425
Lee Enterprises, Inc...................................... 50,900 1,603,350
McGraw-Hill, Inc.......................................... 15,500 1,579,063
Mediaone Group, Inc....................................... 95,100 4,469,700
Meredith Corp............................................. 8,300 314,363
New York Times Co. (Class "A" Stock)...................... 30,000 1,040,625
Tele-Communications, Inc. (Series "A" Stock)(b)........... 79,400 4,391,813
Time Warner, Inc.......................................... 183,000 11,357,438
Times Mirror Co. (Class "A" Stock)........................ 13,900 778,400
Tribune Co................................................ 19,300 1,273,800
Viacom, Inc. (Class "B" Stock)(b)......................... 55,300 4,092,200
--------------
62,478,322
--------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
METALS-FERROUS -- 0.3%
AK Steel Holding Corp..................................... 213,400 $ 5,014,900
Allegheny Teledyne, Inc................................... 30,700 627,431
Bethlehem Steel Corp.(b).................................. 241,500 2,022,563
LTV Corp.................................................. 204,900 1,190,981
Material Sciences Corp.(b)................................ 96,900 823,650
National Steel Corp. (Class "B" Stock)(b)................. 42,200 300,675
Nucor Corp................................................ 13,800 596,850
USX-U.S. Steel Group, Inc................................. 80,900 1,860,700
Worthington Industries, Inc............................... 15,200 190,000
--------------
12,627,750
--------------
METALS-NON FERROUS -- 0.3%
Alcan Aluminum Ltd........................................ 35,600 963,425
Aluminum Company of America............................... 184,300 13,741,869
Cyprus Amax Minerals Co................................... 14,600 146,000
Inco Ltd.................................................. 26,200 276,738
Reynolds Metals Co........................................ 11,600 611,175
--------------
15,739,207
--------------
MINERAL RESOURCES
ASARCO, Inc............................................... 6,300 94,894
Burlington Resources, Inc................................. 27,600 988,425
Homestake Mining Co....................................... 33,100 304,106
Phelps Dodge Corp......................................... 9,200 468,050
--------------
1,855,475
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 0.4%
AES Corp.................................................. 24,000 1,137,000
Coltec Industries, Inc.................................... 43,700 852,150
Crane Co.................................................. 10,800 326,025
Danaher Corp.............................................. 14,000 760,375
Donaldson Co., Inc........................................ 109,200 2,265,900
Ecolab, Inc............................................... 20,200 730,988
IDEX Corp................................................. 60,100 1,472,450
ITT Industries, Inc....................................... 18,500 735,375
Laidlaw, Inc.............................................. 51,500 518,219
Mark IV Industries, Inc................................... 86,542 1,125,046
Millipore Corp............................................ 6,800 193,375
NACCO Industries, Inc. (Class "A" Stock).................. 1,300 119,600
Pall Corp................................................. 19,500 493,594
PPG Industries, Inc....................................... 27,900 1,625,175
Textron, Inc.............................................. 25,700 1,951,594
Thermo Electron Corp.(b).................................. 24,900 421,744
Trinity Industries, Inc................................... 52,200 2,009,700
York International Corp................................... 27,000 1,101,938
--------------
17,840,248
--------------
MISCELLANEOUS - CONSUMER GROWTH/STAPLE -- 0.4%
American Greetings Corp. (Class "A" Stock)................ 11,400 468,113
Black & Decker Corp....................................... 14,900 835,331
Corning, Inc.............................................. 36,200 1,629,000
Jostens, Inc.............................................. 6,100 159,744
Minnesota Mining & Manufacturing Co....................... 64,000 4,552,000
Polaroid Corp............................................. 7,000 130,813
Rubbermaid, Inc........................................... 23,500 738,781
Unilever N.V., ADR, (United Kingdom)...................... 100,300 8,318,631
--------------
16,832,413
--------------
MISCELLANEOUS - INDUSTRIAL
Tenneco, Inc.............................................. 26,700 909,469
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B7
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
OIL & GAS -- 2.0%
<S> <C> <C>
Amerada Hess Corp......................................... 14,400 $ 716,400
Amoco Corp................................................ 149,000 8,995,875
Anadarko Petroleum Corp................................... 18,800 580,450
Ashland, Inc.............................................. 11,800 570,825
Atlantic Richfield Co..................................... 50,200 3,275,550
Basin Exploration, Inc.(b)................................ 17,400 218,588
Cabot Oil & Gas Corp. (Class "A" Stock)................... 88,600 1,329,000
Chevron Corp.............................................. 102,900 8,534,269
Coastal Corp.............................................. 33,200 1,159,925
Eastern Enterprises....................................... 3,200 140,000
Enron Oil & Gas Co........................................ 48,400 834,900
Exxon Corp................................................ 380,300 27,809,438
Kerr-McGee Corp........................................... 7,500 286,875
Mobil Corp................................................ 122,800 10,698,950
Murphy Oil Corp........................................... 27,600 1,138,500
NICOR, Inc................................................ 7,600 321,100
Noble Affiliates, Inc..................................... 50,900 1,253,413
Phillips Petroleum Co..................................... 41,200 1,756,150
Pioneer Natural Resources Co.............................. 334,644 2,928,135
Royal Dutch Petroleum Co.................................. 335,800 16,076,426
Seagull Energy Corp.(b)................................... 63,700 402,106
Sunoco, Inc............................................... 14,800 533,725
Texaco, Inc............................................... 85,800 4,536,675
Union Pacific Resources Group, Inc........................ 39,800 360,688
Unocal Corp............................................... 38,600 1,126,638
USX-Marathon Group........................................ 45,200 1,361,650
Western Gas Resources, Inc................................ 103,000 592,250
--------------
97,538,501
--------------
OIL & GAS EXPLORATION/PRODUCTION -- 0.2%
Elf Aquitaine SA, ADR, (France)........................... 124,800 7,066,800
Occidental Petroleum Corp................................. 53,100 896,063
Oryx Energy Co.(b)........................................ 140,000 1,881,250
--------------
9,844,113
--------------
OIL & GAS SERVICES -- 0.5%
Apache Corp............................................... 15,000 379,688
Baker Hughes, Inc......................................... 49,450 874,647
Enron Corp................................................ 51,400 2,933,013
Halliburton Co............................................ 68,500 2,029,313
Helmerich & Payne, Inc.................................... 7,900 153,063
J. Ray McDermott, SA...................................... 163,800 4,002,864
McDermott International, Inc.............................. 431,600 10,655,125
ONEOK, Inc................................................ 4,900 177,013
Rowan Companies, Inc.(b).................................. 13,600 136,000
Schlumberger Ltd.......................................... 83,000 3,828,375
Wolverine Tube, Inc.(b)................................... 37,000 777,000
--------------
25,946,101
--------------
PRECIOUS METALS -- 0.1%
Barrick Gold Corp......................................... 58,500 1,140,750
Battle Mountain Gold Co................................... 36,000 148,500
Freeport-McMoRan Copper & Gold, Inc. (Class "B").......... 30,300 316,256
Newmont Mining Corp....................................... 24,500 442,531
Placer Dome, Inc.......................................... 38,700 445,050
--------------
2,493,087
--------------
RAILROADS -- 0.2%
Burlington Northern Santa Fe Corp......................... 73,500 2,480,625
CSX Corp.................................................. 34,200 1,419,300
Norfolk Southern Corp..................................... 59,100 1,872,731
Union Pacific Corp........................................ 38,700 1,743,919
--------------
7,516,575
--------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
REAL ESTATE DEVELOPMENT -- 0.3%
Crescent Operating, Inc................................... 17,060 $ 81,035
Crescent Real Estate Equities Co.......................... 336,700 7,744,100
Equity Residential Properties Trust....................... 14,400 582,300
Vornado Operating, Inc.(b)................................ 4,920 39,668
Vornado Realty Trust(b)................................... 185,200 6,250,500
--------------
14,697,603
--------------
RESTAURANTS -- 0.2%
Darden Restaurants, Inc................................... 18,200 327,600
McDonald's Corp........................................... 107,900 8,267,838
Tricon Global Restaurants, Inc.(b)........................ 23,800 1,192,975
Wendy's International, Inc................................ 20,700 451,519
--------------
10,239,932
--------------
RETAIL -- 2.6%
Albertson's, Inc.......................................... 38,500 2,451,969
American Stores Co........................................ 42,800 1,580,925
AutoZone, Inc.(b)......................................... 23,800 783,913
Bombay Company, Inc.(b)................................... 139,200 774,300
Charming Shoppes, Inc.(b)................................. 811,300 3,498,731
Circuit City Stores, Inc.................................. 15,500 774,031
Consolidated Stores Corp.................................. 16,900 341,169
Costco Companies, Inc.(b)................................. 33,600 2,425,500
CVS Corp.................................................. 59,800 3,289,000
Dayton-Hudson Corp........................................ 68,500 3,716,125
Designs, Inc.(b).......................................... 51,900 100,556
Dillard's, Inc............................................ 49,100 1,393,213
Dollar General Corporation................................ 22,500 531,563
Federated Department Stores, Inc.(b)...................... 32,900 1,433,206
Fred Meyer, Inc........................................... 21,000 1,265,250
Great Atlantic & Pacific Tea Co., Inc..................... 6,000 177,750
Harcourt General, Inc..................................... 11,100 590,381
Home Depot, Inc........................................... 229,100 14,018,056
IKON Office Solutions, Inc................................ 21,100 180,669
J.C. Penney Co., Inc...................................... 39,100 1,832,813
Jan Bell Marketing, Inc.(b)............................... 73,200 471,225
Kmart Corp.(b)............................................ 685,800 10,501,313
Kohl's Corp.(b)........................................... 22,600 1,388,488
Kroger Co.(b)............................................. 39,923 2,415,342
Liz Claiborne, Inc........................................ 10,500 331,406
Longs Drug Stores, Inc.................................... 6,100 228,750
May Department Stores Co.................................. 36,200 2,185,575
Newell Co................................................. 24,900 1,027,125
Nordstrom, Inc............................................ 28,200 978,188
Pep Boys - Manny, Moe & Jack.............................. 9,900 155,306
Rite Aid Corp............................................. 40,400 2,002,325
Safeway, Inc.,(b)......................................... 71,000 4,326,563
Sears, Roebuck & Co....................................... 61,400 2,609,500
Sherwin-Williams Co....................................... 27,100 796,063
Staples, Inc.(b).......................................... 43,000 1,878,563
Supervalu, Inc............................................ 18,800 526,400
Tandy Corp................................................ 16,200 667,238
The Gap, Inc.............................................. 93,000 5,231,250
The Limited, Inc.......................................... 247,100 7,196,788
TJX Companies, Inc........................................ 50,600 1,467,400
Toys 'R' Us, Inc.(b)...................................... 131,700 2,222,439
Wal-Mart Stores, Inc...................................... 347,700 28,315,819
Walgreen Co............................................... 77,600 4,544,450
Winn-Dixie Stores, Inc.................................... 23,300 1,045,588
--------------
123,672,224
--------------
RUBBER -- 0.1%
Cooper Tire & Rubber Co................................... 12,300 251,381
Goodyear Tire & Rubber Co................................. 63,600 3,207,825
--------------
3,459,206
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B8
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
SEMICONDUCTORS
<S> <C> <C>
National Semiconductor Corp.(b)........................... 25,700 $ 346,950
--------------
TELECOMMUNICATIONS -- 3.5%
Airtouch Communications, Inc.(b).......................... 88,400 6,375,850
Alcatel Alsthom, ADR, (France)............................ 124,900 3,052,244
Alltel Corp............................................... 42,800 2,559,975
Ameritech Corp............................................ 171,400 10,862,476
Andrew Corp.(b)........................................... 13,900 229,350
Ascend Communications, Inc.(b)............................ 30,200 1,985,650
AT&T Corp................................................. 280,600 21,115,150
Bell Atlantic Corp........................................ 243,200 13,816,800
BellSouth Corp............................................ 305,200 15,221,850
Deutsche Telekom AG, ADR, (Germany)....................... 45,000 1,473,750
Frontier Corp............................................. 25,700 873,800
General Instrument Corp................................... 23,200 787,350
GTE Corp.................................................. 150,000 10,115,625
Lucent Technologies, Inc.................................. 205,400 22,594,000
MCI Worldcom, Inc......................................... 280,414 20,119,705
Nextel Communications, Inc. (Class "A" Stock)(b).......... 41,100 970,988
Northern Telecom Ltd...................................... 102,140 5,119,768
SBC Communications, Inc................................... 302,100 16,200,113
Scientific-Atlanta, Inc................................... 12,400 282,875
Sprint Corp............................................... 112,950 6,717,269
Tellabs, Inc.(b).......................................... 28,400 1,947,175
US West, Inc.............................................. 77,860 5,031,703
--------------
167,453,466
--------------
TEXTILES
National Service Industries, Inc.......................... 6,700 254,600
Pillowtex Corp.(b)........................................ 18,530 495,678
Russell Corp.............................................. 5,700 115,781
Springs Industries, Inc................................... 3,200 132,600
Tultex Corp.(b)........................................... 88,300 77,263
VF Corp................................................... 19,100 895,313
--------------
1,971,235
--------------
TOBACCO -- 0.7%
Philip Morris Co., Inc.................................... 479,600 25,658,600
RJR Nabisco Holdings Corp................................. 303,500 9,010,157
UST, Inc.................................................. 28,900 1,007,888
--------------
35,676,645
--------------
TOYS
Hasbro, Inc............................................... 20,800 751,400
Mattel, Inc............................................... 45,551 1,039,132
--------------
1,790,532
--------------
TRUCKING/SHIPPING -- 0.1%
Federal Express Corp...................................... 23,000 2,047,000
Ryder System, Inc......................................... 12,000 312,000
Yellow Corp.(b)........................................... 43,600 833,850
--------------
3,192,850
--------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
UTILITY - ELECTRIC -- 0.8%
Ameren Corp............................................... 21,500 $ 917,781
American Electric Power Co., Inc.......................... 29,700 1,397,757
Baltimore Gas & Electric Co............................... 23,100 713,213
Carolina Power & Light Co................................. 23,500 1,105,969
Central & South West Corp................................. 33,200 910,925
CINergy Corp.............................................. 24,700 849,063
Consolidated Edison, Inc.................................. 36,800 1,945,800
Dominion Resources, Inc................................... 30,300 1,416,525
DTE Energy Co............................................. 22,700 973,263
Duke Energy Corp.......................................... 56,400 3,613,125
Edison International...................................... 56,700 1,580,513
Entergy Corp.............................................. 38,200 1,188,975
FirstEnergy Corp.(b)...................................... 36,100 1,175,506
FPL Group, Inc............................................ 28,500 1,756,313
GPU, Inc.................................................. 19,900 879,331
Houston Industries, Inc................................... 44,300 1,423,138
New Century Energies, Inc................................. 15,000 731,250
Niagara Mohawk Power Corp.(b)............................. 22,600 364,425
Northern States Power Co.................................. 23,300 646,575
Pacific Gas & Electric Co................................. 59,700 1,880,550
PacifiCorp................................................ 46,400 977,300
PECO Energy Co............................................ 34,900 1,452,713
PP&L Resources, Inc....................................... 26,000 724,750
Public Service Enterprise Group, Inc...................... 36,300 1,452,000
Southern Co............................................... 108,100 3,141,656
Texas Utilities Co........................................ 41,600 1,942,200
Unicom Corp............................................... 33,900 1,307,269
--------------
36,467,885
--------------
WASTE MANAGEMENT -- 0.1%
Waste Management, Inc..................................... 127,902 5,963,431
--------------
TOTAL COMMON STOCKS
(COST $1,566,786,221).................................................... 1,853,914,159
--------------
<CAPTION>
PREFERRED STOCKS -- 0.7%
<S> <C> <C>
FINANCIAL SERVICES -- 0.6%
Central Hispano Capital Corp.............................. 1,225,900 31,289,903
--------------
TELECOMMUNICATIONS -- 0.1%
Telecomunicacoes Brasileiras S.A., ADR.................... 55,900 4,063,231
--------------
TOTAL PREFERRED STOCKS
(COST $36,876,618)....................................................... 35,353,134
--------------
TOTAL LONG-TERM INVESTMENTS
(COST $4,298,572,492).................................................... 4,522,618,555
--------------
</TABLE>
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
SHORT-TERM RATING AMOUNT
INVESTMENTS -- 5.0% (UNAUDITED) (000)
------------ ---------
<S> <C> <C> <C>
CERTIFICATES OF DEPOSIT-YANKEE
Alltel Corp.,
5.75%, 01/04/99............................... NR $ 1,200 1,200,000
Avery Dennison,
5.00%, 01/04/99............................... NR 1,174 1,174,000
--------------
2,374,000
--------------
COMMERCIAL PAPER -- 0.3%
Barton Capital Corp,
5.35%, 01/04/99............................... P1 1,200 1,199,465
Campbell Soup Company,
4.80%, 01/04/99............................... P1 1,270 1,269,492
Countrywide Home Loan,
5.40%, 01/04/99............................... P1 1,200 1,199,460
CXC Inc.,
5.30%, 01/04/99............................... P1 1,200 1,199,470
Dover,
5.30%, 01/04/99............................... P1 1,200 1,199,470
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B9
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHORT-TERM MOODY'S PRINCIPAL
INVESTMENTS RATING AMOUNT VALUE
(CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
COMMERCIAL PAPER (CONT'D.)
<S> <C> <C> <C>
Duke Capital Corp,
5.05%, 01/04/99............................... P1 $ 1,200 $ 1,199,495
John Hancock Cap. Corp.,
5.25%, 01/07/99............................... P1 1,200 1,198,950
Novartis Finance Corp.,
5.25%, 01/04/99............................... P1 912 911,601
Pitney Bowes Credit Corp,
5.10%, 01/04/99............................... P1 1,206 1,205,488
Reed Elsevier, Inc.,
5.05%, 01/04/99............................... P1 1,200 1,199,495
SBC Communications,
5.00%, 01/04/99............................... P1 1,200 1,199,500
Sonoco Products,
5.35%, 01/04/99............................... P1 1,000 999,554
Triple-A One Plus Funding,,
5.30%, 01/04/99............................... P1 728 727,678
Xerox Capital Corp,
5.30%, 01/04/99............................... P1 1,200 1,199,470
--------------
15,908,588
--------------
OTHER CORPORATE OBLIGATIONS -- 2.3%
Advanta Corp., M.T.N.,
6.99%, 10/18/99............................... Ba3 15,000 14,448,000
7.25%, 08/16/99............................... Ba2 3,000 2,976,150
AT&T Capital Corp., M.T.N.,
6.65%, 04/30/99............................... Baa3 32,000 32,104,319
Comdisco, Inc.,
6.11%, 08/04/99............................... Baa1 12,500 12,541,375
Enterprise Rent-A-Car USA Finance Co., M.T.N.,
8.75%, 12/15/99............................... Baa3 5,000 5,120,350
Federal Express Corp.,
10.05%, 06/15/99.............................. Baa3 500 510,090
First Union Corp.,
9.45%, 06/15/99............................... A3 4,000 4,071,961
Lehman Brothers Holdings, Inc.,
6.71%, 10/12/99............................... Baa1 6,000 6,049,020
Okobank, (Finland),
6.793%, 1/14/99............................... A3 12,500 12,500,000
SunAmerica, Inc.,
6.20%, 10/31/99............................... Baa1 9,000 9,068,850
Tele-Communications, Inc.,
6.375%, 09/15/99.............................. Ba1 8,000 8,056,240
--------------
107,446,355
--------------
REPURCHASE AGREEMENT -- 2.3%
Joint Repurchase Agreement Account,
4.693%, 01/04/99 (Note 5)..................... $ 109,421 $ 109,421,000
--------------
<CAPTION>
SHORT-TERM MOODY'S PRINCIPAL
INVESTMENTS RATING AMOUNT VALUE
(CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
U. S. GOVERNMENT OBLIGATION -- 0.1%
United States Treasury Bills,
4.32%, 03/18/99 (a)........................... 100 99,088
4.36%, 03/18/99 (a)........................... 4,650 4,607,199
--------------
4,706,287
--------------
TOTAL SHORT-TERM INVESTMENTS
(COST $197,485,955)...................................................... 239,856,230
--------------
TOTAL INVESTMENTS -- 99.3%
(cost $4,496,058,447; Note 6)............................................ 4,762,474,785
VARIATION MARGIN ON OPEN FUTURES
CONTRACTS (d)............................................................ 85,990
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.7%.............................. 33,398,995
--------------
TOTAL NET ASSETS -- 100.0%................................................. $4,795,959,770
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
AG Aktiengesellschaft (German Stock Company)
ADR American Depository Receipt
L.P. Limited Partnership
M.T.N. Medium Term Note
SA Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French
Corporation)
(a) Security segregated as collateral for futures contracts.
(b) Non-income producing security.
(c) Issue in default.
(d) Open futures contracts as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
VALUE AT
NUMBER OF EXPIRATION VALUE AT DECEMBER 31, APPRECIATION/
CONTRACTS TYPE DATE TRADE DATE 1998 DEPRECIATION
<C> <S> <C> <C> <C> <C>
Long Position:
307 U.S. T-Bond Mar 99 $39,190,000 $ 39,228,844 $ 38,844
148 S&P 500 Index Mar 99 $43,681,225 $ 46,083,500 $ 2,402,275
110 U.S. Treasury 5yr Mar 99 $12,429,218 $ 12,467,812 $ 38,594
-------------
$ 2,479,713
-------------
-------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B10
<PAGE>
FLEXIBLE MANAGED PORTFOLIO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 88.7%
VALUE
COMMON STOCKS -- 52.8% SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AEROSPACE -- 1.0%
Aeroquip-Vickers, Inc..................................... 4,500 $ 134,719
AlliedSignal, Inc......................................... 91,400 4,050,162
Boeing Co................................................. 162,100 5,288,512
GenCorp, Inc.............................................. 403,900 10,072,256
General Dynamics Corp..................................... 20,400 1,195,950
Goodrich (B.F.) Co........................................ 11,600 416,150
Litton Industries, Inc. (a)............................... 306,000 19,966,500
Lockheed Martin Corp...................................... 31,500 2,669,625
Northrop Grumman Corp..................................... 10,800 789,750
Raytheon Co. (Class "B" Stock)............................ 55,000 2,928,750
United Technologies Corp.................................. 37,700 4,099,875
--------------
51,612,249
--------------
AIRLINES -- 1.2%
AMR Corp. (a)............................................. 646,300 38,374,062
Delta Air Lines, Inc...................................... 24,200 1,258,400
Southwest Airlines Co..................................... 53,700 1,204,894
US Airways Group, Inc. (a)................................ 479,200 24,918,400
--------------
65,755,756
--------------
APPAREL -- 0.1%
Fruit of the Loom, Inc. (Class "A" Stock) (a)............. 310,300 4,286,018
Nike, Inc. (Class "B" Stock).............................. 47,200 1,914,550
Reebok International Ltd.................................. 9,100 135,362
--------------
6,335,930
--------------
AUTOS - CARS & TRUCKS -- 2.2%
Cummins Engine Co., Inc................................... 6,200 220,100
DaimlerChrysler AG........................................ 327,975 31,506,098
Dana Corp................................................. 26,550 1,085,231
Ford Motor Co............................................. 478,700 28,093,707
General Motors Corp....................................... 553,900 39,638,469
Genuine Parts Co.......................................... 29,000 969,687
Johnson Controls, Inc..................................... 13,700 808,300
MascoTech, Inc............................................ 388,000 6,644,500
Midas, Inc................................................ 90,866 2,828,204
Navistar International Corp. (a).......................... 11,700 333,450
PACCAR, Inc............................................... 12,600 518,175
Titan International, Inc.................................. 415,700 3,949,150
TRW, Inc.................................................. 19,900 1,118,131
--------------
117,713,202
--------------
BANKS AND SAVINGS & LOANS -- 2.0%
Banc One Corp............................................. 190,264 9,715,355
Bank of New York Co., Inc................................. 122,000 4,910,500
BankAmerica Corp.......................................... 281,141 16,903,603
BankBoston Corp........................................... 47,200 1,837,850
Bankers Trust Corp........................................ 15,900 1,358,456
BB&T Corp................................................. 46,200 1,862,437
Chase Manhattan Corp...................................... 136,700 9,304,144
Comerica, Inc............................................. 25,500 1,738,781
First Union Corp.......................................... 156,800 9,535,400
Fleet Financial Group, Inc................................ 90,000 4,021,875
Golden West Financial Corp................................ 9,200 843,525
Huntington Bancshares, Inc................................ 34,120 1,025,732
KeyCorp................................................... 71,200 2,278,400
Mellon Bank Corp.......................................... 41,300 2,839,375
Mercantile Bancorporation, Inc............................ 23,800 1,097,775
Morgan (J.P.) & Co., Inc.................................. 28,800 3,025,800
National City Corp........................................ 53,200 3,857,000
Northern Trust Corp....................................... 18,100 1,580,356
PNC Bank Corp............................................. 49,500 2,679,187
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
BANKS AND SAVINGS & LOANS (CONT'D.)
Providian Financial Corp.................................. 23,100 $ 1,732,500
Regions Financial Corp.................................... 32,000 1,290,000
Republic New York Corp.................................... 17,700 806,456
Summit Bancorp............................................ 28,500 1,245,094
Suntrust Banks, Inc....................................... 34,200 2,616,300
Synovus Financial Corp.................................... 42,500 1,035,937
U.S. Bancorp.............................................. 119,400 4,238,700
Union Planters Corp....................................... 18,000 815,625
Wachovia Corp............................................. 33,400 2,920,412
Wells Fargo & Co.......................................... 259,400 10,359,787
--------------
107,476,362
--------------
BUSINESS SERVICES
Equifax, Inc.............................................. 24,400 834,175
Omnicom Group, Inc........................................ 27,300 1,583,400
--------------
2,417,575
--------------
CHEMICALS -- 1.1%
Air Products & Chemicals, Inc............................. 38,100 1,524,000
Dow Chemical Co........................................... 36,800 3,346,500
Du Pont (E.I.) de Nemours & Co............................ 183,500 9,736,969
Eastman Chemical Co....................................... 12,700 568,325
Engelhard Corp............................................ 23,400 456,300
Ferro Corp................................................ 553,650 14,394,900
FMC Corp. (a)............................................. 5,600 313,600
Grace (W.R.) & Co......................................... 12,000 188,250
Great Lakes Chemical Corp................................. 9,700 388,000
Hercules, Inc............................................. 15,700 429,787
Millennium Chemicals, Inc. (a)............................ 601,600 11,956,800
Monsanto Co............................................... 96,200 4,569,500
Morton International, Inc................................. 21,200 519,400
Nalco Chemical Co......................................... 10,800 334,800
OM Group, Inc............................................. 260,300 9,500,950
Praxair, Inc.............................................. 25,600 902,400
Raychem Corp.............................................. 13,800 445,912
Rohm & Haas Co............................................ 29,700 894,712
Sigma-Aldrich Corp........................................ 16,300 478,812
Union Carbide Corp........................................ 20,800 884,000
--------------
61,833,917
--------------
COMMERCIAL SERVICES -- 0.1%
Cendant Corp. (a)......................................... 136,500 2,602,031
Deluxe Corp............................................... 13,200 482,625
Moore Corp. Ltd........................................... 14,300 157,300
--------------
3,241,956
--------------
COMPUTER SERVICES -- 2.2%
3Com Corp. (a)............................................ 57,500 2,576,719
Adobe Systems, Inc........................................ 11,200 523,600
America Online, Inc. (a).................................. 10,900 1,744,000
Autodesk, Inc............................................. 7,600 324,425
Automatic Data Processing, Inc............................ 48,500 3,889,094
BMC Software, Inc. (a).................................... 32,600 1,452,737
Cabletron Systems, Inc. (a)............................... 25,600 214,400
Ceridian Corp. (a)........................................ 11,700 816,806
Cisco Systems, Inc. (a)................................... 248,500 23,063,906
Computer Associates International, Inc.................... 88,600 3,776,575
Computer Sciences Corp. (a)............................... 25,300 1,630,269
Electronic Data Systems Corp.............................. 78,000 3,919,500
EMC Corp. (a)............................................. 80,400 6,834,000
First Data Corp........................................... 69,400 2,199,112
Microsoft Corp. (a)....................................... 396,700 55,017,331
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B11
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
COMPUTER SERVICES (CONT'D.)
Novell, Inc. (a).......................................... 56,900 $ 1,031,312
Oracle Corp. (a).......................................... 159,500 6,878,437
Parametric Technology Corp. (a)........................... 43,200 707,400
Peoplesoft, Inc........................................... 30,000 568,125
Silicon Graphics, Inc. (a)................................ 30,400 391,400
Unisys Corp............................................... 40,400 1,391,275
--------------
118,950,423
--------------
COMPUTERS -- 1.4%
Apple Computer, Inc. (a).................................. 21,600 884,250
Compaq Computer Corp...................................... 267,961 11,237,614
Data General Corp. (a).................................... 7,900 129,856
Dell Computer Corp. (a)................................... 203,200 14,871,700
Gateway 2000, Inc. (a).................................... 25,100 1,284,806
Hewlett-Packard Co........................................ 168,600 11,517,487
International Business Machines Corp...................... 149,800 27,675,550
Seagate Technology, Inc. (a).............................. 39,300 1,188,825
Sun Microsystems, Inc. (a)................................ 61,200 5,240,250
--------------
74,030,338
--------------
CONSTRUCTION -- 0.6%
Centex Corp............................................... 9,600 432,600
Fluor Corp................................................ 13,600 578,850
Foster Wheeler Corp....................................... 6,600 87,037
Oakwood Homes Corp........................................ 572,000 8,687,250
Pulte Corp................................................ 6,900 191,906
Standard Pacific Corp..................................... 632,400 8,932,650
Webb (Del E.) Corp........................................ 576,500 15,889,781
--------------
34,800,074
--------------
CONTAINERS -- 0.2%
Ball Corp................................................. 4,900 224,175
Bemis Co., Inc............................................ 8,600 326,262
Crown Cork & Seal Co., Inc................................ 20,800 640,900
Owens-Illinois, Inc. (a).................................. 260,800 7,987,000
Sealed Air Corp........................................... 13,400 684,237
--------------
9,862,574
--------------
COSMETICS & SOAPS -- 0.7%
Alberto Culver Co. (Class "B" Stock)...................... 9,200 245,525
Avon Products, Inc........................................ 42,800 1,893,900
Colgate-Palmolive Co...................................... 47,900 4,448,712
Gillette Co............................................... 181,600 8,773,550
International Flavors & Fragrances, Inc................... 17,700 782,119
Procter & Gamble Co....................................... 216,700 19,787,419
--------------
35,931,225
--------------
DIVERSIFIED OFFICE EQUIPMENT -- 0.2%
Avery Dennison Corp....................................... 17,300 779,581
Pitney Bowes, Inc......................................... 44,400 2,933,175
Xerox Corp................................................ 52,800 6,230,400
--------------
9,943,156
--------------
DIVERSIFIED OPERATIONS -- 1.3%
Fortune Brands, Inc....................................... 27,800 879,175
General Electric Corp..................................... 522,400 53,317,450
Loews Corp................................................ 183,800 18,058,350
--------------
72,254,975
--------------
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
DRUGS AND MEDICAL SUPPLIES -- 3.5%
Abbott Laboratories....................................... 248,000 $ 12,152,000
Allergan, Inc............................................. 10,600 686,350
ALZA Corp. (a)............................................ 13,900 726,275
American Home Products Corp............................... 210,700 11,865,044
Amgen, Inc. (a)........................................... 41,700 4,360,256
Bard (C.R.), Inc.......................................... 9,200 455,400
Bausch & Lomb, Inc........................................ 9,000 540,000
Baxter International, Inc................................. 45,400 2,919,787
Becton, Dickinson & Co.................................... 39,700 1,694,694
Biomet, Inc............................................... 18,100 728,525
Boston Scientific Corp. (a)............................... 63,200 1,694,550
Bristol-Myers Squibb Co................................... 159,700 21,369,856
Cardinal Health, Inc...................................... 32,250 2,446,969
Guidant Corp.............................................. 24,400 2,690,100
Johnson & Johnson......................................... 217,200 18,217,650
Lilly (Eli) & Co.......................................... 176,900 15,721,987
Mallinckrodt, Inc......................................... 11,800 363,587
Medtronic, Inc............................................ 75,900 5,635,575
Merck & Co., Inc.......................................... 191,200 28,237,850
Pfizer, Inc............................................... 210,500 26,404,594
Pharmacia & Upjohn, Inc................................... 82,300 4,660,237
Schering-Plough Corp...................................... 237,400 13,116,350
St. Jude Medical, Inc. (a)................................ 14,900 412,544
Warner-Lambert Co......................................... 132,400 9,954,825
--------------
187,055,005
--------------
ELECTRONICS -- 1.3%
Advanced Micro Devices, Inc. (a).......................... 23,000 665,562
AMP Inc................................................... 35,700 1,858,631
Applied Materials, Inc. (a)............................... 59,400 2,535,637
Belden, Inc............................................... 275,600 5,839,275
EG&G, Inc................................................. 7,300 203,031
Emerson Electric Co....................................... 71,900 4,498,244
Grainger (W.W.), Inc...................................... 16,100 670,162
Harris Corp............................................... 13,000 476,125
Honeywell, Inc............................................ 20,600 1,551,437
Intel Corp................................................ 269,700 31,976,306
KLA-Tencor Corp. (a)...................................... 13,700 594,237
LSI Logic Corp. (a)....................................... 23,000 370,875
Micron Technology, Inc.................................... 34,300 1,734,294
Motorola, Inc............................................. 96,800 5,910,850
National Semiconductor Corp. (a).......................... 26,700 360,450
Perkin-Elmer Corp......................................... 7,900 770,744
Rockwell International Corp............................... 32,500 1,578,281
Solectron Corp............................................ 5,200 483,275
Tektronix, Inc............................................ 8,200 246,512
Texas Instruments, Inc.................................... 63,200 5,407,550
Thomas & Betts Corp....................................... 9,000 389,812
--------------
68,121,290
--------------
ENGINEERING & CONSTRUCTION -- 0.1%
Giant Cement Holding, Inc. (a)............................ 244,900 6,061,275
--------------
ENVIRONMENTAL SERVICES -- 0.2%
Browning-Ferris Industries, Inc........................... 29,800 847,437
Waste Management, Inc..................................... 256,562 11,962,203
--------------
12,809,640
--------------
FINANCIAL SERVICES -- 3.0%
American Express Co....................................... 73,300 7,494,925
Associates First Capital Corp............................. 112,390 4,762,526
Bear Stearns Companies, Inc............................... 17,500 654,062
Block (H.R.), Inc......................................... 17,000 765,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B12
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
FINANCIAL SERVICES (CONT'D.)
Capital One Financial Corp................................ 10,200 $ 1,173,000
Citigroup, Inc............................................ 584,451 28,930,324
Countrywide Credit Industries, Inc........................ 17,600 883,300
Dun & Bradstreet Corp..................................... 27,600 871,125
Federal Home Loan Mortgage Corp........................... 109,600 7,062,350
Federal National Mortgage Association..................... 167,500 12,395,000
Fifth Third Bancorp....................................... 41,100 2,930,944
Franklin Resources, Inc................................... 41,000 1,312,000
Household International, Inc.............................. 78,392 3,106,283
Lehman Brothers Holdings, Inc............................. 724,900 31,940,906
MBNA Corp................................................. 121,800 3,037,387
Merrill Lynch & Co., Inc.................................. 294,000 19,624,500
Morgan Stanley Dean Witter & Co........................... 317,795 22,563,445
Paychex, Inc.............................................. 23,000 1,183,062
Schwab (Charles) Corp. (a)................................ 64,500 3,624,094
SLM Holding Corp.......................................... 26,000 1,248,000
State Street Corp......................................... 26,100 1,815,581
SunAmerica, Inc........................................... 31,700 2,571,662
Transamerica Corp......................................... 10,200 1,178,100
Washington Mutual, Inc.................................... 92,336 3,526,081
--------------
164,653,657
--------------
FOOD & BEVERAGES -- 2.3%
Anheuser-Busch Companies, Inc............................. 79,400 5,210,625
Archer-Daniels-Midland Co................................. 101,115 1,737,914
Bestfoods................................................. 46,700 2,486,775
Brown-Forman Corp. (Class "B" Stock)...................... 11,200 847,700
Campbell Soup Co.......................................... 74,000 4,070,000
Coca-Cola Co.............................................. 395,900 26,475,812
Coca-Cola Enterprises, Inc................................ 62,000 2,216,500
ConAgra, Inc.............................................. 77,100 2,428,650
Coors (Adolph) Co. (Class "B" Stock)...................... 6,000 338,625
General Mills, Inc........................................ 25,700 1,998,175
Heinz (H.J.) & Co......................................... 59,300 3,357,862
Hershey Foods Corp........................................ 23,200 1,442,750
Kellogg Co................................................ 66,600 2,272,725
PepsiCo, Inc.............................................. 240,300 9,837,281
Pioneer Hi-Bred International, Inc........................ 39,600 1,069,200
Quaker Oats Co............................................ 22,400 1,332,800
Ralston-Ralston Purina Group.............................. 52,000 1,683,500
RJR Nabisco Holdings Corp................................. 1,124,200 33,374,688
Sara Lee Corp............................................. 149,600 4,216,850
Seagram Co., Ltd.......................................... 57,800 2,196,400
Sysco Corp................................................ 55,200 1,514,550
Whitman Corp.............................................. 545,200 13,834,450
Wrigley (William) Jr. Co.................................. 18,800 1,683,775
--------------
125,627,607
--------------
FOREST PRODUCTS -- 1.5%
Boise Cascade Corp........................................ 669,400 20,751,400
Champion International Corp............................... 404,400 16,378,200
Fort James Corp........................................... 35,200 1,408,000
Georgia-Pacific Corp...................................... 15,000 878,437
International Paper Co.................................... 49,000 2,195,812
Louisiana-Pacific Corp.................................... 706,600 12,939,612
Mead Corp................................................. 406,800 11,924,325
Potlatch Corp............................................. 4,700 173,312
Temple-Inland, Inc........................................ 9,100 539,744
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
FOREST PRODUCTS (CONT'D.)
Union Camp Corp........................................... 11,300 $ 762,750
Westvaco Corp............................................. 16,600 445,087
Weyerhaeuser Co........................................... 32,300 1,641,244
Willamette Industries, Inc................................ 302,500 10,133,750
--------------
80,171,673
--------------
GAS PIPELINES -- 0.1%
Columbia Energy Group..................................... 13,500 779,625
Consolidated Natural Gas Co............................... 15,500 837,000
Peoples Energy Corp....................................... 5,700 227,287
Sempra Energy............................................. 37,053 940,220
Sonat, Inc................................................ 17,800 481,712
Williams Companies, Inc................................... 66,600 2,077,087
--------------
5,342,931
--------------
HOSPITALS/HOSPITAL MANAGEMENT -- 0.6%
Columbia/HCA Healthcare Corp.............................. 911,500 22,559,625
HBO & Co.................................................. 71,300 2,045,419
Healthsouth Corp. (a)..................................... 65,700 1,014,244
Humana, Inc. (a).......................................... 26,600 473,812
IMS Health, Inc........................................... 26,300 1,984,006
Manor Care, Inc........................................... 13,300 390,687
Service Corp. International............................... 40,800 1,552,950
Shared Medical Systems Corp............................... 4,200 209,475
Tenet Healthcare Corp. (a)................................ 49,700 1,304,625
--------------
31,534,843
--------------
HOUSEHOLD PRODUCTS & PERSONAL CARE -- 0.3%
Clorox Co................................................. 16,700 1,950,769
Kimberly-Clark Corp....................................... 90,100 4,910,450
Leggett & Platt, Inc...................................... 470,800 10,357,600
--------------
17,218,819
--------------
HOUSING RELATED -- 1.3%
Armstrong World Industries, Inc........................... 6,500 392,031
Fleetwood Enterprises, Inc................................ 6,100 211,975
Hanson, PLC, ADR, (United Kingdom)........................ 1,221,100 47,622,900
Kaufman & Broad Home Corp................................. 6,400 184,000
Lowe's Companies, Inc..................................... 56,800 2,907,450
Masco Corp................................................ 53,500 1,538,125
Maytag Corp............................................... 15,400 958,650
Owens Corning............................................. 413,400 14,649,862
Stanley Works............................................. 14,400 399,600
Tupperware Corp........................................... 9,900 162,731
Whirlpool Corp............................................ 12,100 670,037
--------------
69,697,361
--------------
INSURANCE -- 2.3%
Aetna, Inc................................................ 24,100 1,894,862
Allstate Corp............................................. 135,800 5,245,275
American General Corp..................................... 41,100 3,205,800
American International Group, Inc......................... 169,200 16,348,950
Aon Corp.................................................. 27,100 1,500,662
Berkley (W.R.) Corp....................................... 175,850 5,989,891
Berkshire Hathaway, Inc. (Class "B" Stock)................ 494 1,159,725
Chubb Corp................................................ 27,600 1,790,550
CIGNA Corp................................................ 36,000 2,783,250
Cincinnati Financial Corp................................. 26,700 977,887
Conseco, Inc.............................................. 50,687 1,549,121
Financial Security Assurance Holdings Ltd................. 140,100 7,600,425
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B13
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
INSURANCE (CONT'D.)
Hartford Financial Services Group, Inc.................... 38,300 $ 2,101,712
Jefferson-Pilot Corp...................................... 17,200 1,290,000
Lincoln National Corp..................................... 16,600 1,358,087
Marsh & McLennan Companies, Inc........................... 41,300 2,413,469
MBIA, Inc................................................. 15,900 1,042,444
Magic Investment Corp..................................... 18,500 736,531
Progressive Corp.......................................... 11,700 1,981,687
Provident Companies, Inc.................................. 238,400 9,893,600
Reinsurance Group of America, Inc......................... 474,600 33,222,000
SAFECO Corp............................................... 22,900 983,269
St. Paul Companies, Inc................................... 37,400 1,299,650
TIG Holdings, Inc......................................... 351,200 5,465,550
Torchmark Corp............................................ 22,700 801,594
Trenwick Group, Inc....................................... 273,300 8,916,413
United Healthcare Corp.................................... 30,500 1,313,406
UNUM Corp................................................. 22,500 1,313,438
--------------
124,179,248
--------------
INTRUMENTS - CONTROLS -- 0.1%
Parker-Hannifin Corp...................................... 194,900 6,382,975
--------------
LEISURE -- 0.3%
Brunswick Corp............................................ 16,200 400,950
Carnival Corp. (Class "A" Stock).......................... 78,500 3,768,000
Disney (Walt) Co.......................................... 328,300 9,849,000
Harrah's Entertainment, Inc. (a).......................... 16,400 257,275
Hilton Hotels Corp........................................ 40,600 776,475
King World Productions, Inc............................... 11,900 350,306
Marriott International, Inc. (Class "A" Stock)............ 41,400 1,200,600
Mirage Resorts, Inc. (a).................................. 29,100 434,681
--------------
17,037,287
--------------
MACHINERY -- 0.6%
Briggs & Stratton Corp.................................... 4,000 199,500
Case Corp................................................. 369,200 8,053,175
Caterpillar, Inc.......................................... 60,400 2,778,400
Cooper Industries, Inc.................................... 19,600 934,675
Deere & Co................................................ 40,500 1,341,563
Dover Corp................................................ 36,100 1,322,163
DT Industries, Inc........................................ 146,800 2,312,100
Eaton Corp................................................ 11,600 819,975
Global Industrial Technologies, Inc. (a).................. 258,100 2,758,444
Harnischfeger Industries, Inc............................. 7,800 79,463
Ingersoll-Rand Co......................................... 26,900 1,262,619
Milacron, Inc............................................. 6,400 123,200
Paxar Corp................................................ 954,575 8,531,514
Snap-On, Inc.............................................. 9,900 344,644
Timken Co................................................. 10,200 192,525
--------------
31,053,960
--------------
MANUFACTURING -- 0.5%
Flowserve Corp............................................ 161,991 2,682,976
Hussmann International, Inc............................... 272,600 5,281,625
Illinois Tool Works, Inc.................................. 40,400 2,343,200
Smith (A.O.) Corp......................................... 433,350 10,644,159
Tyco International Ltd.................................... 102,157 7,706,469
--------------
28,658,429
--------------
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
MEDIA -- 2.2%
CBS Corp. (a)............................................. 910,000 $ 29,802,500
Central Newspapers, Inc.(Class "A" Stock)................. 205,300 14,666,119
Clear Channel Communications, Inc. (a).................... 40,000 2,180,000
Comcast Corp. (Special Class "A" Stock)................... 57,600 3,380,400
Donnelley (R.R.) & Sons Co................................ 23,700 1,038,356
Dow Jones & Co., Inc...................................... 15,600 750,750
Gannett Co., Inc.......................................... 46,000 3,044,625
Houghton Mifflin Co....................................... 240,700 11,373,075
Interpublic Group of Companies, Inc....................... 21,200 1,690,700
Knight-Ridder, Inc........................................ 251,600 12,863,051
Lee Enterprises, Inc...................................... 208,900 6,580,350
McGraw-Hill, Inc.......................................... 16,100 1,640,188
Mediaone Group, Inc....................................... 98,500 4,629,500
Meredith Corp............................................. 8,600 325,725
New York Times Co. (Class "A" Stock)...................... 31,200 1,082,250
Tele-Communications, Inc. (Class "A" Stock) (a)........... 82,268 4,550,449
Time Warner, Inc.......................................... 189,400 11,754,638
Times Mirror Co. (Class "A" Stock)........................ 14,300 800,800
Tribune Co................................................ 19,900 1,313,400
Viacom, Inc. (Class "B" Stock) (a)........................ 57,300 4,240,200
--------------
117,707,076
--------------
METALS-FERROUS -- 0.8%
AK Steel Holding Corp..................................... 880,000 20,680,000
Allegheny Teledyne, Inc................................... 31,800 649,913
Bethlehem Steel Corp. (a)................................. 924,400 7,741,851
LTV Corp.................................................. 841,400 4,890,638
Material Sciences Corp. (a)............................... 397,900 3,382,150
National Steel Corp. (Class "B" Stock) (a)................ 172,800 1,231,200
Nucor Corp................................................ 14,200 614,150
USX-U.S. Steel Group, Inc................................. 291,100 6,695,300
Worthington Industries, Inc............................... 15,700 196,250
--------------
46,081,452
--------------
METALS-NON FERROUS -- 1.0%
Alcan Aluminum Ltd........................................ 36,900 998,606
Aluminum Company of America............................... 678,200 50,568,287
Cyprus Amax Minerals Co................................... 15,100 151,000
Inco Ltd.................................................. 27,000 285,188
Reynolds Metals Co........................................ 11,900 626,981
--------------
52,630,062
--------------
MINERAL RESOURCES
ASARCO, Inc............................................... 6,500 97,906
Burlington Resources, Inc................................. 28,600 1,024,237
Homestake Mining Co....................................... 34,300 315,131
Phelps Dodge Corp......................................... 9,500 483,313
--------------
1,920,587
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 0.9%
AES Corp.................................................. 25,000 1,184,375
Coltec Industries, Inc.................................... 179,200 3,494,400
Crane Co.................................................. 11,100 335,081
Danaher Corp.............................................. 14,000 760,375
Donaldson Co., Inc........................................ 448,600 9,308,450
Ecolab, Inc............................................... 20,900 756,319
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B14
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
MISCELLANEOUS - BASIC INDUSTRY (CONT'D.)
IDEX Corp................................................. 246,700 $ 6,044,150
ITT Industries, Inc....................................... 19,300 767,175
Laidlaw, Inc.............................................. 53,300 536,331
Mark IV Industries, Inc................................... 355,500 4,621,500
Millipore Corp............................................ 7,000 199,063
NACCO Industries, Inc. (Class "A" Stock).................. 1,300 119,600
Pall Corp................................................. 20,200 511,313
PPG Industries, Inc....................................... 28,900 1,683,425
Textron, Inc.............................................. 26,700 2,027,531
Thermo Electron Corp. (a)................................. 25,800 436,988
Trinity Industries, Inc................................... 214,100 8,242,850
Wolverine Tube, Inc. (a).................................. 155,300 3,261,300
York International Corp................................... 110,600 4,513,863
--------------
48,804,089
--------------
MISCELLANEOUS - CONSUMER GROWTH/STAPLE -- 0.6%
American Greetings Corp. (Class "A" Stock)................ 11,800 484,538
Black & Decker Corp....................................... 15,400 863,362
Corning, Inc.............................................. 37,400 1,683,000
Eastman Kodak Co.......................................... 195,400 14,068,800
Jostens, Inc.............................................. 6,300 164,981
Minnesota Mining & Manufacturing Co....................... 66,200 4,708,475
Polaroid Corp............................................. 7,300 136,419
Rubbermaid, Inc........................................... 24,300 763,931
Unilever N.V., ADR, (United Kingdom)...................... 103,800 8,608,913
--------------
31,482,419
--------------
MISCELLANEOUS - INDUSTRIAL
Tenneco, Inc.............................................. 27,600 940,125
--------------
OIL & GAS -- 2.4%
Amerada Hess Corp......................................... 14,800 736,300
Amoco Corp................................................ 154,200 9,309,825
Anadarko Petroleum Corp................................... 19,400 598,975
Ashland, Inc.............................................. 12,200 590,175
Atlantic Richfield Co..................................... 52,000 3,393,000
Basin Exploration, Inc. (a)............................... 71,400 896,963
Cabot Oil & Gas Corp. (Class "A" Stock)................... 363,800 5,457,000
Chevron Corp.............................................. 106,500 8,832,844
Coastal Corp.............................................. 34,500 1,205,344
Eastern Enterprises....................................... 3,300 144,375
Enron Oil & Gas Co........................................ 198,700 3,427,575
Exxon Corp................................................ 393,100 28,745,438
Kerr-McGee Corp........................................... 7,700 294,525
Mobil Corp................................................ 125,500 10,934,188
Murphy Oil Corp........................................... 114,000 4,702,500
NICOR, Inc................................................ 7,800 329,550
Noble Affiliates, Inc..................................... 208,900 5,144,163
Phillips Petroleum Co..................................... 42,600 1,815,825
Pioneer Natural Resources Co.............................. 1,488,431 13,023,771
Royal Dutch Petroleum Co.................................. 345,700 16,550,388
Seagull Energy Corp. (a).................................. 245,500 1,549,719
Sunoco, Inc............................................... 15,300 551,756
Texaco, Inc............................................... 87,700 4,637,138
Union Pacific Resources Group, Inc........................ 41,200 373,375
Unocal Corp............................................... 39,900 1,164,581
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
OIL & GAS (CONT'D.)
USX-Marathon Group........................................ 46,800 $ 1,409,850
Western Gas Resources, Inc................................ 423,100 2,432,825
--------------
128,251,968
--------------
OIL & GAS EXPLORATION/PRODUCTION -- 0.7%
Elf Aquitaine SA, ADR, (France)........................... 513,400 29,071,275
Occidental Petroleum Corp................................. 57,100 963,563
Oryx Energy Co. (a)....................................... 524,100 7,042,594
--------------
37,077,432
--------------
OIL & GAS SERVICES -- 1.3%
Apache Corp............................................... 15,500 392,344
Baker Hughes, Inc......................................... 51,340 908,076
Enron Corp................................................ 53,200 3,035,725
Halliburton Co............................................ 70,900 2,100,413
Helmerich & Payne, Inc.................................... 8,200 158,875
J. Ray McDermott, SA...................................... 672,900 16,443,994
McDermott International, Inc.............................. 1,745,600 43,094,501
ONEOK, Inc................................................ 5,000 180,625
Rowan Companies, Inc. (a)................................. 14,100 141,000
Schlumberger Ltd.......................................... 85,800 3,957,525
--------------
70,413,078
--------------
PRECIOUS METALS -- 0.1%
Apex Silver Mines Ltd..................................... 340,400 2,808,300
Barrick Gold Corp......................................... 60,400 1,177,800
Battle Mountain Gold Co................................... 37,200 153,450
Freeport-McMoRan Copper & Gold, Inc. (Class "B" Stock).... 31,400 327,738
Newmont Mining Corp....................................... 25,400 458,788
Placer Dome, Inc.......................................... 40,000 460,000
--------------
5,386,076
--------------
RAILROADS -- 0.1%
Burlington Northern Santa Fe Corp......................... 75,900 2,561,625
CSX Corp.................................................. 35,400 1,469,100
Norfolk Southern Corp..................................... 61,100 1,936,106
Union Pacific Corp........................................ 40,000 1,802,500
--------------
7,769,331
--------------
REAL ESTATE DEVELOPMENT -- 1.2%
Crescent Operating, Inc................................... 67,240 319,390
Crescent Real Estate Equities Co.......................... 1,377,600 31,684,800
Equity Residential Properties Trust....................... 150,900 6,102,019
Vornado Operating, Inc. (a)............................... 20,000 161,250
Vornado Realty Trust (a).................................. 745,100 25,147,125
--------------
63,414,584
--------------
RESTAURANTS -- 0.2%
Darden Restaurants, Inc................................... 19,000 342,000
McDonald's Corp........................................... 111,700 8,559,013
Tricon Global Restaurants, Inc. (a)....................... 24,600 1,233,075
Wendy's International, Inc................................ 21,500 468,969
--------------
10,603,057
--------------
RETAIL -- 3.7%
Albertson's, Inc.......................................... 39,800 2,534,763
American Stores Co........................................ 44,300 1,636,331
AutoZone, Inc. (a)........................................ 24,600 810,263
Bombay Co., Inc. (a)...................................... 571,600 3,179,525
Charming Shoppes, Inc. (a)................................ 3,332,400 14,370,975
Circuit City Stores, Inc.................................. 16,000 799,000
Consolidated Stores Corp.................................. 17,400 351,263
Costco Companies, Inc. (a)................................ 34,700 2,504,906
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B15
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
RETAIL (CONT'D.)
CVS Corp.................................................. 62,000 $ 3,410,000
Dayton-Hudson Corp........................................ 70,800 3,840,900
Designs, Inc. (a)......................................... 203,900 395,056
Dillard's, Inc............................................ 148,300 4,208,013
Dollar General Corp....................................... 27,500 649,688
Federated Department Stores, Inc. (a)..................... 34,000 1,481,125
Fred Meyer, Inc........................................... 23,000 1,385,750
Great Atlantic & Pacific Tea Co., Inc..................... 6,200 183,675
Harcourt General, Inc..................................... 11,500 611,656
Home Depot, Inc........................................... 237,200 14,513,675
IKON Office Solutions, Inc................................ 21,800 186,663
J.C. Penney Co., Inc...................................... 40,500 1,898,438
Jan Bell Marketing, Inc. (a).............................. 295,700 1,903,569
Kmart Corp. (a)........................................... 2,576,000 39,445,000
Kohl's Corp. (a).......................................... 25,200 1,548,225
Kroger Co. (a)............................................ 41,300 2,498,650
Liz Claiborne, Inc........................................ 10,900 344,031
Longs Drug Stores, Inc.................................... 6,300 236,250
May Department Stores Co.................................. 37,500 2,264,063
Newell Co................................................. 25,800 1,064,250
Nordstrom, Inc............................................ 28,900 1,002,469
Pep Boys - Manny, Moe & Jack.............................. 10,300 161,581
Phillips-Van Heusen Corp.................................. 389,200 2,797,375
Rite Aid Corp............................................. 41,800 2,071,713
Safeway, Inc. (a)......................................... 72,000 4,387,500
Sears, Roebuck & Co....................................... 63,500 2,698,750
Sherwin-Williams Co....................................... 28,000 822,500
Staples, Inc. (a)......................................... 43,000 1,878,563
Supervalu, Inc............................................ 19,400 543,200
Tandy Corp................................................ 16,700 687,831
The Gap, Inc.............................................. 96,300 5,416,875
The Limited, Inc.......................................... 826,500 24,071,813
TJX Companies, Inc........................................ 52,400 1,519,600
Toys 'R' Us, Inc. (a)..................................... 404,100 6,819,188
Wal-Mart Stores, Inc...................................... 360,200 29,333,788
Walgreen Co............................................... 80,300 4,702,569
Winn-Dixie Stores, Inc.................................... 24,100 1,081,488
--------------
198,252,506
--------------
RUBBER -- 0.2%
Cooper Tire & Rubber Co................................... 12,800 261,600
Goodyear Tire & Rubber Co................................. 186,400 9,401,550
--------------
9,663,150
--------------
TELECOMMUNICATIONS -- 3.4%
Airtouch Communications, Inc. (a)......................... 91,400 6,592,225
Alcatel Alsthom, ADR, (France)............................ 513,000 12,536,438
Alltel Corp............................................... 43,000 2,571,938
Ameritech Corp............................................ 177,500 11,249,063
Andrew Corp. (a).......................................... 14,300 235,950
Ascend Communications, Inc. (a)........................... 31,300 2,057,975
AT&T Corp................................................. 290,800 21,882,700
Bell Atlantic Corp........................................ 251,800 14,305,388
BellSouth Corp............................................ 316,000 15,760,500
Deutsche Telekom AG, ADR, (Germany)....................... 185,000 6,058,750
Frontier Corp............................................. 26,700 907,800
General Instrument Corp................................... 24,000 814,500
GTE Corp.................................................. 155,300 10,473,044
Lucent Technologies, Inc.................................. 211,000 23,210,000
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
TELECOMMUNICATIONS (CONT'D.)
MCI WorldCom, Inc......................................... 287,270 $ 20,611,623
Nextel Communications, Inc. (Class "A" Stock) (a)......... 42,500 1,004,063
Northern Telecom Ltd...................................... 105,800 5,303,225
SBC Communications, Inc................................... 313,200 16,795,350
Scientific-Atlanta, Inc................................... 12,800 292,000
Sprint Corp............................................... 69,700 5,863,513
Sprint Corp. (PCS Group).................................. 46,850 1,083,406
Tellabs, Inc. (a)......................................... 30,600 2,098,013
US West, Inc.............................................. 80,441 5,198,500
--------------
186,905,964
--------------
TEXTILES -- 0.1%
National Service Industries, Inc.......................... 6,900 262,200
Pillowtex Corp. (a)....................................... 73,932 1,977,681
Russell Corp.............................................. 5,900 119,844
Springs Industries, Inc................................... 3,300 136,744
Tultex Corp. (a).......................................... 362,600 317,275
VF Corp................................................... 19,800 928,125
--------------
3,741,869
--------------
TOBACCO -- 0.8%
Philip Morris Co., Inc.................................... 801,400 42,874,900
UST, Inc.................................................. 29,800 1,039,275
--------------
43,914,175
--------------
TOYS
Hasbro, Inc............................................... 21,600 780,300
Mattel, Inc............................................... 47,200 1,076,750
--------------
1,857,050
--------------
TRUCKING/SHIPPING -- 0.1%
Federal Express Corp. (a)................................. 23,800 2,118,200
Ryder System, Inc......................................... 12,400 322,400
Yellow Corp. (a).......................................... 178,700 3,417,638
--------------
5,858,238
--------------
UTILITY - ELECTRIC -- 0.7%
Ameren Corp............................................... 22,200 947,663
American Electric Power Co., Inc.......................... 30,700 1,444,819
Baltimore Gas & Electric Co............................... 24,000 741,000
Carolina Power & Light Co................................. 24,400 1,148,325
Central & South West Corp................................. 34,400 943,850
CINergy Corp.............................................. 25,600 880,000
Consolidated Edison, Inc.................................. 38,100 2,014,538
Dominion Resources, Inc................................... 31,400 1,467,950
DTE Energy Co............................................. 23,500 1,007,563
Duke Energy Corp.......................................... 58,300 3,734,844
Edison International...................................... 58,900 1,641,838
Entergy Corp.............................................. 39,600 1,232,550
FirstEnergy Corp. (a)..................................... 37,300 1,214,581
FPL Group, Inc............................................ 29,500 1,817,938
GPU, Inc.................................................. 20,600 910,263
Houston Industries, Inc................................... 47,600 1,529,150
New Century Energies, Inc................................. 15,000 731,250
Niagara Mohawk Power Corp. (a)............................ 24,300 391,838
Northern States Power Co.................................. 24,200 671,550
Pacific Gas & Electric Co................................. 61,800 1,946,700
PacifiCorp................................................ 48,100 1,013,106
PECO Energy Co............................................ 36,100 1,502,663
PP&L Resources, Inc....................................... 26,900 749,838
Public Service Enterprise Group, Inc...................... 37,600 1,504,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B16
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
UTILITY - ELECTRIC (CONT'D.)
Southern Co............................................... 111,800 $ 3,249,188
Texas Utilities Co........................................ 44,500 2,077,594
Unicom Corp............................................... 35,100 1,353,544
--------------
37,868,143
--------------
TOTAL COMMON STOCKS
(cost $2,611,554,092).................................................... 2,858,308,143
--------------
PREFERRED STOCKS -- 0.8%
FINANCIAL SERVICES -- 0.5%
Central Hispano Capital Corp. (Portugal).................. 1,000,000 25,000,000
--------------
TELECOMMUNICATIONS -- 0.3%
Telecomunicacoes Brasileiras S.A., ADR (Brazil)........... 223,400 16,238,388
--------------
TOTAL PREFERRED STOCKS
(cost $47,988,630)....................................................... 41,238,388
--------------
MOODY'S PRINCIPAL
RATING AMOUNT
LONG-TERM BONDS -- 35.1% (UNAUDITED) (000)
------------ ---------
AEROSPACE -- 0.7%
Raytheon Co.,
5.95%, 03/15/01............................... Baa1 $ 14,000 14,122,920
6.40%, 12/15/18............................... Baa1 25,000 24,812,500
--------------
38,935,420
--------------
AIRLINES -- 2.3%
Continental Airlines, Inc.,
8.00%, 12/15/05............................... Ba2 15,000 14,821,500
Delta Airlines, Inc.,
10.125%, 05/15/10............................. Baa3 19,335 24,187,118
10.375%, 02/01/11............................. Ba1 31,250 39,896,250
United Airlines, Inc.,
10.67%, 05/01/04.............................. Baa3 19,500 23,072,400
11.21%, 05/01/14.............................. Baa3 17,500 22,981,000
--------------
124,958,268
--------------
ASSET-BACKED SECURITIES -- 0.2%
California Infrastructure,
1997-1 6.17%, 03/25/03........................ A3 4,000 4,049,040
Standard Credit Card Master Trust, 1993-2A
5.95%, 10/07/04............................... Aaa 4,500 4,566,060
--------------
8,615,100
--------------
AUTO - CARS & TRUCKS -- 0.2%
Navistar International Corp.,
7.00%, 02/01/03............................... Ba1 11,500 11,501,797
--------------
BANKS AND SAVINGS & LOANS -- 1.9%
Banco de Commercio Exterior de Columbia, SA,
M.T.N. (Colombia),
8.625%, 06/02/00.............................. NR 5,500 5,390,000
Bank of Nova Scotia (Canada),
6.50%, 07/15/07............................... A1 5,400 5,437,692
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
BANKS AND SAVINGS & LOANS (CONT'D.)
Bayerische Landesbank Girozentrale (Germany),
5.875%, 12/01/08.............................. Aaa $ 12,500 $ 12,780,000
Capital One Bank,
6.844%, 06/13/00.............................. Baa3 23,900 24,081,401
Central Hispano Financial Services (Portugal),
6.188%, 04/28/05.............................. A3 5,000 4,966,600
Citicorp, M.T.N.,
6.375%, 11/15/08.............................. A1 12,500 12,924,625
Kansallis-Osake-Pankki (Finland),
8.65%, 01/01/49............................... Baa1 9,000 9,132,480
National Australia Bank (Australia),
6.40%, 12/10/07............................... A1 8,700 8,874,000
6.60%, 12/10/07............................... A1 5,000 5,182,500
Okobank (Finland),
6.75%, 09/27/49............................... A3 16,250 16,233,750
--------------
105,003,048
--------------
CABLE & PAY TELEVISION SYSTEMS -- 1.0%
Cable & Wire Communications PLC (United
Kingdom),
6.75%, 12/01/08............................... Baa1 12,100 12,334,740
Continental Cablevision, Inc.,
8.50%, 09/15/01............................... Ba2 5,100 5,409,876
Rogers Cablesystems, Inc. (Canada),
10.00%, 03/15/05.............................. Ba3 2,000 2,240,000
Tele-Communications, Inc.,
6.34%, 02/01/02............................... Ba1 8,500 8,706,125
7.375%, 02/15/00.............................. Ba1 6,000 6,130,500
9.875%, 06/15/22.............................. Baa3 12,878 18,257,784
--------------
53,079,025
--------------
COMPUTERS SOFTWARE & SERVICES -- 0.3%
Computer Associates International, Inc.,
6.375%, 04/15/05.............................. Baa1 13,750 13,607,550
--------------
CONSULTING -- 0.6%
Comdisco, Inc.,
5.94%, 04/13/00............................... Baa1 12,500 12,468,750
6.32%, 11/27/00............................... Baa1 19,000 19,088,540
6.375%, 11/30/01.............................. Baa1 2,700 2,711,691
--------------
34,268,981
--------------
CONSUMER SERVICES -- 0.6%
Loewen Group, Inc.,
7.20%, 06/01/03............................... Ba3 20,000 16,800,000
7.60%, 06/01/08............................... Ba3 16,200 12,798,000
Service Corp. International,
7.00%, 06/01/15............................... A3 2,500 2,588,375
--------------
32,186,375
--------------
CONTAINERS -- 0.7%
Owens-Illinois, Inc.,
7.15%, 05/15/05............................... Ba1 40,000 40,088,400
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B17
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
DRUGS & MEDICAL SUPPLIES -- 0.1%
Mallinckrodt, Inc.,
6.30%, 03/15/11 (b)........................... Baa2 $ 8,000 $ 7,876,500
--------------
FINANCIAL SERVICES -- 7.7%
Advanta Corp., M.T.N.,
6.99%, 10/18/99............................... Ba3 10,000 9,632,000
Associates Corp.,
6.95%, 11/01/18............................... Aa3 29,000 30,901,820
AT&T Capital Corp,
7.50%, 11/15/00............................... Baa3 40,000 40,489,600
AT&T Capital Corp., M.T.N.,
6.25%, 05/15/01............................... Baa3 16,500 16,275,435
Calair Capital Corp.,
8.125%, 04/01/08.............................. Ba2 6,000 5,867,700
Conseco, Inc.,
6.40%, 06/15/11............................... Baa2 25,000 23,972,500
6.80%, 06/15/05............................... Baa3 2,000 1,815,600
8.70%, 11/15/26............................... Ba2 30,038 27,443,161
8.796%, 04/01/27.............................. Ba2 10,200 9,325,860
ContiFinancial Corp.,
7.50%, 03/15/02............................... Ba1 7,740 5,418,000
8.125%, 04/01/08.............................. Ba1 10,700 7,276,000
8.375%, 08/15/03.............................. Ba1 8,000 5,600,000
Enterprise Rent-A-Car USA Finance Co.,
6.35%, 01/15/01............................... Baa3 21,000 21,050,610
6.95%, 03/01/04............................... Baa2 7,500 7,569,900
7.00%, 06/15/00............................... Baa3 13,500 13,557,645
General Motors Acceptance Corp., M.T.N.,
5.95%, 04/20/01............................... A3 14,700 14,817,600
International Lease Finance Corp.,
6.00%, 05/15/02............................... A1 43,100 43,502,123
Lehman Brothers Holdings, Inc.,
6.40%, 08/30/00............................... Baa1 25,650 25,656,413
MCN Investment Corp.,
6.30%, 04/02/11............................... Baa2 8,250 8,194,725
Merrill Lynch, Pierce, Fenner & Smith, Inc.,
6.875%, 11/15/18.............................. Aa3 18,500 19,178,025
Morgan Stanley Dean Witter & Co., M.T.N.,
5.89%, 03/20/00............................... A1 15,000 15,105,600
6.09%, 03/09/11............................... A1 15,000 15,200,250
PT Alatief Freeport Co. (Netherlands),
9.75%, 04/15/01(a)/(c)........................ Ba2 7,600 5,472,000
Salomon, Inc., M.T.N.,
6.59%, 02/21/01............................... Baa1 8,250 8,408,400
6.75%, 08/15/03............................... Baa1 5,000 5,162,200
7.25%, 05/01/01............................... Baa1 8,625 8,933,430
Textron Financial Corp.,
6.05%, 03/16/09 1997-A........................ Aaa 17,639 17,672,740
--------------
413,499,337
--------------
FOREST PRODUCTS -- 0.2%
Fort James Corp.,
6.234%, 03/15/11 1997-A....................... Baa3 11,000 11,103,510
--------------
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
INDUSTRIAL -- 2.0%
Compania Sud Americana de Vapores, S.A. (Chile),
7.375%, 12/08/03.............................. NR $ 5,650 $ 5,070,875
Scotia Pacific Co.,
7.71%, 01/20/14............................... NR 9,800 9,327,248
7.71%, 01/20/14............................... NR 29,500 26,428,460
Security Capital Group,
6.95%, 06/15/05............................... Baa1 4,500 4,297,500
U.S. Filter Corp.,
6.375%, 05/15/01.............................. Ba1 20,000 19,785,600
6.50%, 05/15/03............................... Ba1 42,000 40,911,780
--------------
105,821,463
--------------
LODGING -- 1.0%
ITT Corp.,
6.25%, 11/15/00............................... Baa2 41,983 40,502,679
6.75%, 11/15/03............................... Baa2 14,000 12,891,620
--------------
53,394,299
--------------
MEDIA -- 1.2%
Paramount Communications, Inc.,
7.50%, 01/15/02............................... Ba2 9,100 9,496,123
Time Warner Inc.,
6.625%, 05/15/29.............................. Baa3 36,000 36,628,560
Viacom, Inc.,
7.75%, 06/01/05............................... Ba2 16,850 18,279,386
--------------
64,404,069
--------------
MISCELLANEOUS -- 0.1%
Tokai Preferred Capital,
9.98%, 12/29/49............................... A3 6,000 5,040,000
--------------
OIL & GAS -- 0.1%
B.J. Services Co.,
7.00%, 02/01/06............................... Ba1 4,000 4,139,880
--------------
OIL & GAS SERVICES -- 2.0%
KN Energy, Inc.,
6.30%, 03/01/21............................... Baa2 20,000 20,056,200
R&B Falcon Corp.,
6.50%, 04/15/03............................... Ba1 15,375 13,965,420
6.75%, 04/15/05............................... Ba1 30,000 25,800,000
Seagull Energy Co.,
7.50%, 09/15/27............................... Ba1 8,225 7,366,886
Williams Companies, Inc.,
5.95%, 02/15/10............................... Baa2 41,000 41,045,100
--------------
108,233,606
--------------
REAL ESTATE INVESTMENT TRUST -- 2.1%
Colonial Realty,
7.00%, 07/14/07............................... Baa3 3,350 3,212,349
EOP Operating, L.P.,
6.50%, 06/15/04............................... Baa1 6,000 5,900,400
6.625%, 02/15/05.............................. Bbb 18,187 17,827,443
Equity Residential Properties Trust,
6.15%, 09/15/00............................... A3 25,000 24,835,000
6.63%, 04/13/15............................... A3 15,300 15,097,428
Felcor Suites, L.P.,
7.375%, 10/01/04.............................. Ba1 25,000 23,812,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B18
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
REAL ESTATE INVESTMENT TRUST (CONT'D.)
Gables Realty Trust,
6.80%, 03/15/05............................... Baa2 $ 7,500 $ 7,157,175
Simon DeBartolo Group, Inc.,
6.75%, 06/15/05............................... Baa1 17,500 16,969,750
--------------
114,812,045
--------------
RETAIL -- 2.8%
Dayton Hudson,
5.95%, 06/15/00............................... A3 9,000 9,072,270
Federated Department Stores, Inc.,
8.125%, 10/15/02.............................. Ba1 3,600 3,880,548
8.50%, 06/15/03............................... Ba1 54,890 60,542,572
Meyer (Fred), Inc.,
7.15%, 03/01/03............................... Ba2 12,445 12,947,529
Saks, Inc.,
7.50%, 12/01/10............................... Baa3 29,000 28,997,970
8.25%, 11/15/08............................... Baa3 19,700 20,882,000
Sears Roebuck & Co.,
6.50%, 12/01/28............................... A2 17,000 16,686,010
--------------
153,008,899
--------------
TELECOMMUNICATIONS -- 2.1%
360 Communication Co.,
7.125%, 03/01/03.............................. Ba2 23,776 25,160,952
7.60%, 04/01/09............................... Ba1 12,885 14,601,926
Qwest Communications International Inc.,
7.50%, 11/01/08............................... Ba1 39,000 40,560,000
Sprint Corp.,
6.875%, 11/15/28.............................. Baa1 26,000 27,021,800
Worldcom Inc,
6.125%, 08/15/01.............................. Baa2 7,600 7,721,448
--------------
115,066,126
--------------
TOBACCO -- 0.6%
Philip Morris Companies, Inc.,
6.15%, 03/15/10............................... A2 20,000 20,166,000
RJR Nabisco, Inc.,
8.75%, 08/15/05............................... Baa3 4,600 4,641,722
9.25%, 08/15/13............................... Baa3 7,000 7,197,120
--------------
32,004,842
--------------
TRANSPORTATION/TRUCKING/SHIPPING -- 0.2%
Ryder System, Inc.,
7.51%, 03/24/00............................... Baa1 3,000 3,076,080
8.34%, 01/26/00............................... Baa1 5,000 5,152,750
--------------
8,228,830
--------------
UTILITIES -- 1.3%
Calenergy Co., Inc.,
6.96%, 09/15/03............................... Ba1 15,000 15,267,450
8.48%, 09/15/28............................... Ba1 23,000 25,427,190
Enersis SA, (Chile)
7.40%, 12/01/16............................... Baa1 6,400 5,267,200
Niagara Mohawk Power,
7.00%, 10/01/00............................... Ba3 25,000 25,250,000
--------------
71,211,840
--------------
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 3.1%
Federal National Mortgage Association,
Zero Coupon, 10/09/19......................... $ 11,800 $ 3,521,592
U.S. Treasury Bond,
6.25%, 08/15/23............................... 10,000 11,176,600
U.S. Treasury Note,
4.75%, 11/15/08 (b)........................... 3,700 3,728,897
5.50%, 08/15/28............................... 2,475 2,590,632
6.50%, 05/15/05............................... 9,600 10,521,024
7.50%, 02/15/05............................... 3,100 3,549,500
6.75%, 08/15/26............................... 109,900 131,656,903
--------------
166,745,148
--------------
TOTAL LONG-TERM BONDS
(cost $1,900,228,227).................................................... 1,896,834,358
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $4,559,770,949).................................................... 4,796,380,889
--------------
SHORT-TERM INVESTMENTS -- 10.9%
COMMERCIAL PAPER -- 0.4%
Barton Capital Corp,
5.35%, 01/04/99............................... P1 1,700 1,699,242
Campbell Soup Co.
4.80%, 01/04/99............................... P1 1,198 1,197,521
Countrywide Home Loan,
5.40%, 01/04/99............................... P2 1,700 1,699,235
CXC Inc.,
5.30%, 01/04/99............................... P1 1,700 1,699,249
Dover,
5.30%, 01/04/99............................... NR 1,700 1,699,249
Hershey,
5.00%, 01/04/99............................... P1 1,427 1,426,405
John Hancock Capital Corp.,
5.25%, 01/07/99............................... P1 1,700 1,698,513
Novartis Finance Corp.,
5.25%, 01/04/99............................... P1 1,500 1,499,344
Reed Elsevier, Inc.,
5.05%, 01/04/99............................... P1 1,700 1,699,285
SBC Communications,
5.00%, 01/04/99............................... P1 1,700 1,699,291
Sonoco Products,
5.35%, 01/04/99............................... P1 1,000 999,554
Triple-A One Plus Funding,
5.30%, 01/04/99............................... P1 1,500 1,499,338
Xerox Capital Corp,
5.30%, 01/04/99............................... P1 1,700 1,699,249
--------------
20,215,475
--------------
LOAN PARTICIPATIONS
Alltel Corp.,
5.75%, 01/04/99............................... P1 1,700 1,700,000
--------------
OTHER CORPORATE OBLIGATIONS -- 1.2%
AT&T Capital Corp., M.T.N.,
6.65%, 04/30/99............................... Baa3 24,500 24,579,870
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B19
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
OTHER CORPORATE OBLIGATIONS (CONT'D.)
Banco Ganadero, SA, M.T.N., (Colombia),
9.75%, 08/26/99............................... NR $ 7,300 $ 7,263,500
Comdisco, Inc.,
6.11%, 08/04/99............................... Baa1 12,500 12,541,375
Okobank (Finland)
6.793%, 1/14/99 (d)........................... NR 12,500 12,500,000
Tele-Communications, Inc.
6.375%, 09/15/99.............................. Ba1 6,400 6,444,992
--------------
63,329,737
--------------
U. S. GOVERNMENT OBLIGATION -- 0.4%
U.S. Treasury Bill,
4.32%, 03/18/99 (b)......................................... 100 99,088
4.36%, 03/18/99 (b)......................................... 22,400 22,193,820
--------------
22,292,908
--------------
REPURCHASE AGREEMENT -- 8.9%
Joint Repurchase Agreement Account
4.693%, 01/04/99 (Note 5)................................... 482,631 482,631,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $590,187,085)...................................................... 590,169,120
--------------
TOTAL INVESTMENTS -- 99.6%................................................. 5,386,550,009
(cost $5,149,958,034; Note 6)
VARIATION MARGIN ON OPEN FUTURES
CONTRACTS (e)............................................................ 809,059
OTHER ASSETS IN EXCESS OF
LIABILITIES -- 0.4%...................................................... 22,622,320
--------------
TOTAL NET ASSETS -- 100.0%................................................. $5,409,981,388
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
ADR American Depository Receipt
AG Aktiengesellschaft (German Stock Company)
L.P. Limited Partnership
M.T.N. Medium Term Note
PLC Public Limited Company (British Corporation)
SA Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French
Corporation)
(a) Non-income producing security.
(b) Security segregated as collateral for futures contracts.
(c) Issue in default.
(d) Indicates a variable rate security. The maturity date presented for this
instrument is the later of the next date on which the security can be
redeemed at par or the next date on which the rate of interest is adjusted.
The interest rate shown reflects the rate in effect at December 31, 1998.
(e) Open futures contracts as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION VALUE AT VALUE AT APPRECIATION/
CONTRACTS TYPE DATE TRADE DATE DECEMBER 31, 1998 DEPRECIATION
<S> <C> <C> <C> <C> <C>
Long positions:
1,241 U.S. Treasury Bond Mar 99 $159,480,156 $158,576,531 $ (903,625)
1,134 S&P 500 Index Mar 99 337,073,687 353,099,250 16,025,563
---------------
$15,121,938
---------------
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B20
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS OF
THE CONSERVATIVE BALANCED PORTFOLIO AND THE FLEXIBLE MANAGED PORTFOLIO OF
THE PRUDENTIAL SERIES FUND, INC.
NOTE 1: GENERAL
The Prudential Series Fund, Inc. ("Series Fund"), a Maryland corporation,
organized on November 15, 1982, is a diversified open-end management investment
company registered under the Investment Company Act of 1940, as amended. The
Series Fund is composed of fifteen Portfolios ("Portfolio" or "Portfolios"),
each with a separate series of capital stock. The information presented in these
financial statements pertains to only two Portfolios: Conservative Balanced
Portfolio and Flexible Managed Portfolio. Shares in the Series Fund are
currently sold only to certain separate accounts of The Prudential Insurance
Company of America ("The Prudential"), Pruco Life Insurance Company and Pruco
Life Insurance Company of New Jersey (together referred to as the "Companies")
to fund benefits under certain variable life insurance and variable annuity
contracts ("contracts") issued by the Companies. The accounts invest in shares
of the Series Fund through subaccounts that correspond to the Portfolios. The
accounts will redeem shares of the Series Fund to the extent necessary to
provide benefits under the contracts or for such other purposes as may be
consistent with the contracts.
NOTE 2: ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Series Fund in preparation of its financial statements.
SECURITIES VALUATION: Securities traded on an exchange (whether domestic or
foreign) are valued at the last reported sales price on the primary exchange on
which they are traded. Securities traded in the over-the-counter market
(including securities listed on exchanges for which a last sales price is not
available) are valued at the average of the last reported bid and asked prices
or at the bid price on such day in the absence of an asked price. Convertible
debt securities are valued at the mean between the most recently quoted bid and
asked prices provided by principal market makers. High yield bonds are valued
either by quotes received from principal market makers or by an independent
pricing service which determine prices by analysis of quality, coupon, maturity
and other factors. Any security for which a reliable market quotation is
unavailable is valued at fair value as determined in good faith by or under the
direction of the Series Fund's Board of Directors. Short-term securities are
valued at amortized cost.
REPURCHASE AGREEMENTS: In connection with transactions in repurchase agreements
with U.S. financial institutions, it is the Series Fund's policy that its
custodian or designated subcustodians, as the case may be under triparty
repurchase agreements, take possession of the underlying collateral securities,
the value of which exceeds the principal amount of the repurchase transaction
including accrued interest. If the seller defaults and the value of the
collateral declines or if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Series Fund may
by delayed or limited. (See Note 5).
FOREIGN CURRENCY TRANSLATION: The books and records of the Series Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) market value of investments securities, other assets and liabilities - at
the current rates of exchange.
(ii) purchases and sales of investment securities, income and expenses - at the
rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Series Fund are presented at the foreign exchange
rates and market values at the close of the fiscal year, the Series Fund does
not isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from changes
in the market prices of securities held at the end of the fiscal year.
Similarly, the Series Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market prices
of long-term portfolio securities sold during the fiscal year. Accordingly,
these realized and unrealized foreign currency gains (losses) are included in
the reported net realized gains (losses) on investment transactions.
C1
<PAGE>
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains or losses from holdings of foreign currencies, currency
gains or losses realized between the trade and settlement dates on security
transactions, and the difference between the amounts of dividends, interest and
foreign taxes recorded on the Series Fund's books and the U.S. dollar equivalent
amounts actually received or paid. Net unrealized currency gains or losses from
valuing foreign currency denominated assets and liabilities (other than
investments) at fiscal year end exchange rates are reflected as a component of
net unrealized appreciation (depreciation) on investments and foreign
currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
SHORT SALES: Conservative Balanced Portfolio and Flexible Managed Portfolio may
sell a security it does not own in anticipation of a decline in the market value
of that security (short sale). When a Portfolio makes a short sale, it must
borrow the security sold short and deliver it to the buyer. The proceeds of the
short sale will be retained by the broker-dealer through which it made the short
sale as collateral for its obligation to deliver the security upon conclusion of
the sale. The Portfolio may have to pay a fee to borrow the particular security
and may be obligated to remit any interest or dividends received on such
borrowed securities. A gain, limited to the price at which the Portfolio sold
the security short, or a loss, unlimited in magnitude, will be recognized upon
the termination of a short sale if the market price at termination is less than
or greater than, respectively, the proceeds originally received.
OPTIONS: The Series Fund may either purchase or write options in order to hedge
against adverse market movements or fluctuations in value with respect to
securities which the Series Fund currently owns or intends to purchase. The
Series Fund's principal reason for writing options is to realize, through
receipts of premiums, a greater current return than would be realized on the
underlying security alone. When the Series Fund purchases an option, it pays a
premium and an amount equal to that premium is recorded as an investment. When
the Series Fund writes an option, it receives a premium and an amount equal to
that premium is recorded as a liability. The investment or liability is adjusted
daily to reflect the current market value of the option. If an option expires
unexercised, the Series Fund realizes a gain or loss to the extent of the
premium received or paid. If an option is exercised, the premium received or
paid is an adjustment to the proceeds from the sales or the cost of the purchase
in determining whether the Series Fund has realized a gain or loss. The
difference between the premium and the amount received or paid on effecting a
closing purchase or sale transaction is also treated as a realized gain or loss.
Gain or loss on purchased options is included in net realized gain (loss) on
investment transactions. Gain or loss on written options is presented separately
as net realized gain (loss) on written option transactions.
The Series Fund, as writer of an option, may have no control over whether the
underlying securities may be sold (called) or purchased (put). As a result, the
Series Fund bears the market risk of an unfavorable change in the price of the
security underlying the written option. The Series Fund, as purchaser of an
option, bears the risk of the potential inability of the counterparties to meet
the terms of their contracts.
FINANCIAL FUTURES CONTRACTS: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series Fund is required to pledge to the broker an amount of cash and/or
other assets equal to a certain percentage of the contract amount. This amount
is known as the "initial margin." Subsequent payments, known as "variation
margin," are made or received by the Series Fund each day, depending on the
daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. When the contract expires or is closed, the gain or
loss is realized and is presented in the statement of operations as net realized
gain (loss) on financial futures contracts.
The Series Fund invests in financial futures contracts in order to hedge its
existing portfolio securities or securities the Series Fund intends to purchase,
against fluctuations in value. Under a variety of circumstances, the Series Fund
may not achieve the anticipated benefits of the financial futures contracts and
may realize a loss. The use of futures transactions involves the risk of
imperfect correlation in movements in the price of futures contracts and the
underlying assets.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; interest income, which is comprised of four elements: stated
coupon, original issue discount, market discount and market premium is recorded
on the accrual basis. Certain
C2
<PAGE>
portfolios own shares of real estate investment trusts ("REITs") which report
information on the source of their distributions annually. A portion of
distributions received from REITs during the year is estimated to be a return of
capital and is recorded as a reduction of their costs. Expenses are recorded on
the accrual basis which may require the use of certain estimates by management.
The Series Fund expenses are allocated to the respective Portfolios on the basis
of relative net assets except for expenses that are charged directly at a
Portfolio level.
CUSTODY FEE CREDITS: The Series Fund has an arrangement with its custodian
bank, whereby uninvested monies earn credits which reduce the fees charged by
the custodian. Such custody fee credits are presented as a reduction of gross
expenses in the accompanying Statement of Operations.
TAXES: For federal income tax purposes, each portfolio in the Series Fund is
treated as a separate taxpaying entity. It is the intent of the Series Fund to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends, interest and capital gains have been
provided for in accordance with the Series Fund's understanding of the
applicable country's tax rules and regulations.
DIVIDENDS AND DISTRIBUTIONS: Dividends and distributions of each Portfolio are
declared in cash and automatically reinvested in additional shares of the
Portfolio. Each Portfolio will declare and distribute dividends from net
investment income, if any, quarterly and net capital gains, if any, at least
annually. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
NOTE 3: AGREEMENTS
The Series Fund has an investment advisory agreement with The Prudential.
Pursuant to this agreement The Prudential has responsibility for all investment
advisory services and supervises the subadvisers' performance of such services.
The Prudential has entered into a service agreement with The Prudential
Investment Corporation ("PIC"), which provides that PIC will furnish to The
Prudential such services as The Prudential may require in connection with the
performance of its obligations under the investment advisory agreement with the
Series Fund. The Prudential pays for the cost of PIC's services, compensation of
officers of the Series Fund, occupancy and certain clerical and administrative
expenses of the Series Fund. The Series Fund bears all other costs and expenses.
The investment advisory fee paid The Prudential is computed daily and payable
quarterly, at the annual rates specified below of the value of each of the
Portfolio's average daily net assets.
<TABLE>
<CAPTION>
Fund Investment Advisory Fee
- --------------------------------------- ------------------------
<S> <C>
Conservative Balanced Portfolio........ 0.55%
Flexible Managed Portfolio............. 0.60
</TABLE>
The Prudential has agreed to refund to a Portfolio, the portion of the
investment advisory fee for that Portfolio equal to the amount that the
aggregate annual ordinary operating expenses (excluding interest, taxes and
brokerage commissions) exceeds 0.75% of the Portfolio's average daily net
assets. No refund was required for the fiscal year ended December 31, 1998.
PIC is an indirect, wholly-owned subsidiary of The Prudential.
The Series Fund has a credit agreement (the "Agreement") with an unaffiliated
lender. The maximum commitment under the Agreement is $250,000,000. The
Agreement expired on December 18, 1998 and has been extended through February
28, 1999 under the same terms. Interest on any such borrowings outstanding will
be at market rates. The purpose of the Agreement is to serve as an alternative
source of funding for capital share redemptions. The Series Fund did not borrow
any amounts pursuant to the Agreement during the year ended December 31, 1998.
The Series Fund pays a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly by the Series Fund.
C3
<PAGE>
NOTE 4: OTHER TRANSACTIONS WITH AFFILIATES
For the fiscal year ended December 31, 1998, Prudential Securities Incorporated,
an indirect, wholly-owned subsidiary of The Prudential, earned $135,511 in
brokerage commissions from transactions executed on behalf of the Conservative
Balanced Portfolio and the Flexible Managed Portfolio as follows:
<TABLE>
<CAPTION>
Fund Commission
- --------------------------------------- -----------
<S> <C>
Conservative Balanced Portfolio........ $ 32,490
Flexible Managed Portfolio............. 103,021
-----------
$ 135,511
</TABLE>
NOTE 5: JOINT REPURCHASE AGREEMENT ACCOUNT
The Portfolios of the Series Fund (excluding Global Portfolio) may transfer
uninvested cash balances into a single joint repurchase agreement account, the
daily aggregate balance of which is invested in one or more repurchase
agreements collateralized by U.S. Government obligations. The Series Fund's
undivided interest in the joint repurchase agreement account represented
$932,710,000 as of December 31, 1998. The Portfolios of the Series Fund with
cash invested in the joint accounts had the following principal amounts and
percentage participation in the account:
<TABLE>
<CAPTION>
Principal Percentage
Amount Interest
------------- ----------
<S> <C> <C>
Conservative Balanced Portfolio........ $ 109,421,000 11.73%
Flexible Managed Portfolio............. 482,631,000 51.75
All other portfolios (currently not
available to PRUvider)............... 340,658,000 36.52
------------- ----------
$ 932,710,000 100.00%
</TABLE>
As of such date, each repurchase agreement in the joint account and the
collateral therefor were as follows:
Bear, Stearns & Co., Inc., 4.75%, in the principal amount of $255,000,000,
repurchase price $255,134,583, due 1/4/99. The value of the collateral including
accrued interest was $260,454,041.
Credit Suisse First Boston Corp., 4.88%, in the principal amount of $50,000,000,
repurchase price $50,027,111, due 1/4/99. The value of the collateral including
accrued interest was $52,533,163.
CIBC Oppenheimer, 4.75%, in the principal amount of $255,000,000, repurchase
price $255,134,583, due 1/4/99. The value of the collateral including accrued
interest was $260,553,672.
SBC Warburg Dillon Reed Inc., 4.70%, in the principal amount of $255,000,000,
repurchase price $255,133,167, due 1/4/99. The value of the collateral including
accrued interest was $261,037,802.
Morgan (JP) Securities, Inc., 4.35%, in the principal amount of $117,710,000,
repurchase price $117,766,893, due 1/4/99. The value of the collateral including
accrued interest was $120,272,486.
NOTE 6: PORTFOLIO SECURITIES
The aggregate cost of purchases and the proceeds from the sales of securities
(excluding short-term issues) for the fiscal year ended December 31, 1998 were
as follows:
Cost of Purchases:
<TABLE>
<CAPTION>
CONSERVATIVE FLEXIBLE
BALANCED MANAGED
--------------- ---------------
<S> <C> <C>
Government Securities.................. $ 2,907,392,972 $ 2,497,336,303
Non-Government Securities.............. $ 4,664,947,720 $ 4,533,514,880
</TABLE>
Proceeds from Sales:
<TABLE>
<CAPTION>
CONSERVATIVE FLEXIBLE
BALANCED MANAGED
--------------- ---------------
<S> <C> <C>
Government Securities.................. $ 2,956,094,381 $ 2,461,697,036
Non-Government Securities.............. $ 4,778,976,239 $ 5,139,626,859
</TABLE>
C4
<PAGE>
The federal income tax basis and unrealized appreciation (depreciation) of the
Fund's investments as of December 31, 1998 were as follows:
<TABLE>
<CAPTION>
CONSERVATIVE FLEXIBLE
BALANCED MANAGED
--------------- ---------------
<S> <C> <C>
Gross Unrealized Appreciation.......... $ 429,047,409 $ 555,358,703
Gross Unrealized Depreciation.......... 164,278,673 320,658,740
Total Net Unrealized................... 264,768,736 234,699,963
Tax Basis.............................. 4,497,706,049 5,151,850,046
</TABLE>
C5
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CONSERVATIVE BALANCED
-----------------------------------------------------
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 14.97 $ 15.52 $ 15.31 $ 14.10 $ 14.91
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. 0.66 0.76 0.66 0.63 0.53
Net realized and unrealized gains
(losses) on investments.............. 1.05 1.26 1.24 1.78 (0.68)
--------- --------- --------- --------- ---------
Total from investment operations... 1.71 2.02 1.90 2.41 (0.15)
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.66) (0.76) (0.66) (0.64) (0.51)
Distributions from net realized
gains................................ (0.94) (1.81) (1.03) (0.56) (0.15)
--------- --------- --------- --------- ---------
Total distributions................ (1.60) (2.57) (1.69) (1.20) (0.66)
--------- --------- --------- --------- ---------
Net Asset Value, end of year........... $ 15.08 $ 14.97 $ 15.52 $ 15.31 $ 14.10
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:(b)............ 11.74% 13.45% 12.63% 17.27% (0.97)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $4,796.0 $4,744.2 $4,478.8 $3,940.8 $3,501.1
Ratios to average net assets:
Expenses............................. 0.57% 0.56% 0.59% 0.58% 0.61%
Net investment income................ 4.19% 4.48% 4.13% 4.19% 3.61%
Portfolio turnover rate................ 167% 295% 295% 201% 125%
FINANCIAL HIGHLIGHTS
</TABLE>
<TABLE>
<CAPTION>
FLEXIBLE MANAGED
-----------------------------------------------------
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 17.28 $ 17.79 $ 17.86 $ 15.50 $ 16.96
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. 0.58 0.59 0.57 0.56 0.47
Net realized and unrealized gains
(losses) on investments.............. 1.14 2.52 1.79 3.15 (1.02)
--------- --------- --------- --------- ---------
Total from investment operations... 1.72 3.11 2.36 3.71 (0.55)
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.59) (0.58) (0.58) (0.56) (0.45)
Distributions from net realized
gains................................ (1.85) (3.04) (1.85) (0.79) (0.46)
--------- --------- --------- --------- ---------
Total distributions................ (2.44) (3.62) (2.43) (1.35) (0.91)
--------- --------- --------- --------- ---------
Net Asset Value, end of year........... $ 16.56 $ 17.28 $ 17.79 $ 17.86 $ 15.50
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:(b)............ 10.24% 17.96% 13.64% 24.13% (3.16)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $5,410.0 $5,490.1 $4,896.9 $4,261.2 $3,481.5
Ratios to average net assets:
Expenses............................. 0.61% 0.62% 0.64% 0.63% 0.66%
Net investment income................ 3.21% 3.02% 3.07% 3.30% 2.90%
Portfolio turnover rate................ 138% 227% 233% 173% 124%
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
SEE NOTES TO FINANCIAL STATEMENTS.
D1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF THE PRUDENTIAL SERIES FUND, INC.:
In our opinion, the accompanying statements of assets and liabilities, including
the Portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Conservative Balanced and
Flexible Managed Portfolios (the "Portfolios"), two of the fifteen portfolios
that comprise The Prudential Series Fund, Inc. at December 31, 1998, the results
of each of their operations for the year then ended, the changes in each of
their net assets for each of the two years in the period then ended and the
financial highlights for each of the three years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Portfolios' management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above. The accompanying financial
highlights for each of the two years in the period ended December 31, 1995 for
each of the Portfolios were audited by other independent accountants, whose
opinion dated February 15, 1996 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
February 12, 1999
TAX INFORMATION (UNAUDITED)
Although we understand that the vast majority, if not all, of the
shareholders/contract holders of the Series Fund currently maintain a tax
deferred status, we are nevertheless required by the Internal Revenue Code to
advise you within 60 days of the Series Fund's fiscal year end (December 31,
1998) as to the federal tax status of dividends paid by the Series Fund during
such fiscal year. Accordingly, we are advising you that in 1998, the Series Fund
paid dividends as follows:
<TABLE>
<CAPTION>
ORDINARY DIVIDENDS
----------------------------
SHORT-TERM LONG-TERM TOTAL
INCOME CAPITAL GAINS CAPITAL GAINS DIVIDENDS
----------- --------------- --------------- -----------
<S> <C> <C> <C> <C>
Conservative Balanced Portfolio $ 0.664 $ 0.898 $ 0.044 $ 1.606
Flexible Managed Portfolio 0.586 0.949 0.901 2.436
</TABLE>
E1
<PAGE>
BOARD OF
DIRECTORS THE PRUDENTIAL SERIES FUND, INC.
<TABLE>
<S> <C> <C>
MENDEL A. MELZER, CFA W. SCOTT McDONALD, JR., Ph.D. E. MICHAEL CAULFIELD
CHAIRMAN, VICE PRESIDENT, EXECUTIVE VICE PRESIDENT,
THE PRUDENTIAL SERIES FUND, INC. KALUDIS CONSULTING GROUP PRUDENTIAL FINANCIAL MANAGEMENT
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
</TABLE>
<TABLE>
<S> <C>
SAUL K. FENSTER, Ph.D. JOSEPH WEBER, Ph.D.
PRESIDENT, VICE PRESIDENT,
NEW JERSEY INSTITUTE OF TECHNOLOGY INTERCLASS (INTERNATIONAL CORPORATE LEARNING)
</TABLE>
<PAGE>
PRUvider(SM)
Variable Appreciable Life(R)
Insurance
[LOGO] Prudential
Pruco Life Insurance Company of New Jersey
213 Washington Street, Newark, NJ 07102-2992
Telephone: (800) 778-2255
SVAL-2SAI Ed 5-99 CAT # 64M087E
<PAGE>
<TABLE>
<CAPTION>
PART C
OTHER INFORMATION
ITEM 23.
EXHIBITS
<S> <C>
(a) (1) Articles of Incorporation of The Filed herewith.
Prudential Series Fund, Inc.
(2) Articles Supplementary to the Articles of Incorporated by reference to Post-Effective
Incorporation of The Prudential Series Amendment No. 33 to this Registration Statement,
Fund, Inc. filed April 28, 1997.
(3) Articles Supplementary to the Articles of Filed herewith.
Incorporation of The Prudential Series
Fund, Inc. [April 8, 1999]
(4) Articles Supplementary to the Articles of Filed herewith.
Incorporation of The Prudential Series
Fund, Inc. [August 30, 1996]
(5) Articles Supplementary to the Articles of Filed herewith.
Incorporation of The Prudential Series
Fund, Inc. [September 2, 1994]
(6) Articles Supplementary to the Articles of Filed herewith.
Incorporation of The Prudential Series
Fund, Inc. [July 18, 1988]
(7) Articles Supplementary to the Articles of Filed herewith.
Incorporation of The Prudential Series
Fund, Inc. [May 2, 1988]
(8) Articles Supplementary to the Articles of Filed herewith.
Incorporation of The Prudential Series
Fund, Inc. [February 17, 1988]
(9) Articles Supplementary to the Articles of Filed herewith.
Incorporation of The Prudential Series
Fund, Inc. [October 26, 1987]
(10) Articles Supplementary to the Articles of Filed herewith.
Incorporation of The Prudential Series
Fund, Inc. [June 4, 1986]
(b) By-laws of The Prudential Series Fund, Incorporated by reference to Post-Effective
Inc., as amended February 16, 1990. Amendment No. 33 to this Registration Statement,
filed April 28, 1997.
(d) (1) Investment Advisory Agreement, as Incorporated by reference to Post-Effective
amended July 14, 1988 between The Amendment No. 33 to this Registration Statement,
Prudential Insurance Company of America filed April 28, 1997.
and The Prudential Series Fund, Inc.
</TABLE>
C-1
<PAGE>
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<S> <C>
(2) Supplemental Investment Advisory Agreement Incorporated by reference to Post-Effective
between The Prudential Insurance Company Amendment No. 28 to this Registration Statement,
of America and The Prudential Series Fund, filed April 28, 1997.
Inc.
(3) Subadvisory Agreement between The Incorporated by reference to Post-Effective
Prudential Insurance Company of America Amendment No. 28 to this Registration Statement,
and Jennison Associates Capital Corp.
(4) Subadvisory Agreement between The Filed herewith.
Prudential Insurance Company of America
and Jennison Associates LLC.
(5) Subadvisory Agreement between The Filed herewith.
Prudential Insurance Company of America
and The Dreyfus Corporation.
(6) Subadvisory Agreement between The Filed herewith.
Prudential Insurance Company of
America and Franklin Advisers, Inc.
(7) Subadvisory Agreement between The Filed herewith.
Prudential Insurance Company of America
and Pacific Investment Management Company.
(8) Service Agreement between The Prudential Incorporated by reference to Post-Effective
Insurance Company of America and The Amendment No. 33 to this Registration Statement,
Prudential Investment Corporation. filed April 28, 1997.
(e) Distribution Agreement between The Incorporated by reference to Post-Effective
Prudential Series Fund, Inc. and Pruco Amendment No. 33 to this Registration Statement,
Securities Corporation. filed April 28, 1997.
(g) (1) Custodian Agreement between Chase Incorporated by reference to Post-Effective
Manhattan Bank (formerly Chemical Bank and Amendment No. 33 to this Registration Statement,
Manufacturers Hanover Trust Company) and filed April 28, 1997.
The Prudential Series Fund, Inc.
(1)(a) Addendum #2 to Custodian Contract Incorporated by reference to Post-Effective
Between Chase Manhattan Bank and The Amendment No. 32 to this Registration Statement,
Prudential Series Fund, Inc. filed February 28, 1997.
(2) Custodian Agreement between Brown Incorporated by reference to Post-Effective
Brothers Harriman & Co. and The Amendment No. 33 to this Registration Statement,
Prudential Series Fund, Inc. filed April 28, 1997.
(3) Form of Custodian Agreement between Incorporated by reference to Post-Effective
Investors Fiduciary Trust Company and Amendment No. 34 to this Registration Statement,
The Prudential Series Fund, Inc. filed April 24, 1998.
(4) Transfer Agent Agreement between Filed herewith.
Prudential Mutual Fund Services LLC
and The Prudential Series Fund, Inc.
</TABLE>
C-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
(h) (1) Indemnification Agreement Regarding Reg. Incorporated by reference to Post-Effective
No. 33-49994. Amendment No. 33 to this Registration Statement,
filed April 28, 1997.
(2) Indemnification Agreement Regarding Reg. Incorporated by reference to Post-Effective
No. 33-57186. Amendment No. 33 to this Registration Statement,
filed April 28, 1997.
(j) (1) Consent of PricewaterhouseCoopers LLP Filed herewith.
Independent accountants.
(2) Shea & Gardner Legal Opinion. Filed herewith.
(m) Rule 12b-1 Plan. Filed herewith.
(n) Financial Data Schedules. Filed herewith.
(o) Rule 18f-3 Plan. [February 15, 1999] Filed herewith.
</TABLE>
C-3
<PAGE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
All of Registrant's outstanding securities are owned by the following separate
accounts which are registered as unit investment trusts under the Investment
Company Act of 1940 (the "Act"): The Prudential Variable Appreciable Account,
The Prudential Individual Variable Contract Account, The Prudential Variable
Contract Account GI-2, The Prudential Qualified Individual Variable Contract
Account, The Prudential Variable Contract Account-24, The Prudential Discovery
Select Group Variable Annuity Contract Account (separate accounts of
Prudential); the Pruco Life Flexible Premium Variable Annuity Account; the Pruco
Life PRUvider Variable Appreciable Account; the Pruco Life Variable Universal
Account, the Pruco Life Variable Insurance Account, the Pruco Life Variable
Appreciable Account, the Pruco Life Single Premium Variable Life Account, the
Pruco Life Single Premium Variable Annuity Account (separate accounts of Pruco
Life Insurance Company ["Pruco Life"]); the Pruco Life of New Jersey Flexible
Premium Variable Annuity Account; the Pruco Life of New Jersey Variable
Insurance Account, the Pruco Life of New Jersey Variable Appreciable Account,
the Pruco Life of New Jersey Single Premium Variable Life Account, and the Pruco
Life of New Jersey Single Premium Variable Annuity Account (separate accounts of
Pruco Life Insurance Company of New Jersey ["Pruco Life of New Jersey"]). Pruco
Life, a corporation organized under the laws of Arizona, is a direct
wholly-owned subsidiary of Prudential. Pruco Life of New Jersey, a corporation
organized under the laws of New Jersey, is a direct wholly-owned subsidiary of
Pruco Life, and an indirect wholly-owned subsidiary of Prudential.
Registrant's shares will be voted in proportion to the directions of persons
having interests in the above-referenced separate accounts. Registrant may
nonetheless be deemed to be controlled by such entities by virtue of the
presumption contained in Section 2(a)(9) of the Act, although Registrant
disclaims such control.
The subsidiaries of Prudential are set forth in Schedule D of Prudential's
Annual Statement as shown on the following pages. In addition to those
subsidiaries, Prudential holds all of the voting securities of Prudential's
Gibraltar Fund, Inc., a Maryland corporation, in three of its separate accounts.
The Gibraltar Fund is registered as an open-end, diversified, management
investment company under the Act. The separate accounts are registered as unit
investment trusts under the Act. Registrant may also be deemed to be under
common control with The Prudential Variable Contract Account-2, The Prudential
Variable Contract Account-10, The Prudential Variable Account Contract
Account-11, (separate accounts of Prudential which are registered as open-end,
diversified management investment companies) and The Prudential Variable
Contract Account-24 (separate account of Prudential which is registered as a
unit investment trust under the Act).
C-4
<PAGE>
<TABLE>
<CAPTION>
ANNUAL STATEMENT FOR THE YEAR 1998 OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
SCHEDULE D - PART 6 - SECTION 1
Valuation of Shares of Subsidiary, Controlled or Affiliated Companies
- -----------------------------------------------------------------------------------------------------------
1 2 3 4
Do Insurer's
Admitted
Assets
NAIC Include
NAIC Valuation Intangible
Company Method (See Assets
Code or SVO Connected
Alien Purposes with Holding
CUSIP Description Insurer and of Such
Identifica- Name of Subsidiary, Controlled or Identification Procedures Company's
tion Affiliated Company Number manual) Stock?
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
74429#-12-0 Prudential of America Life Ins. Co.
(Canada) Class A ..................................... AA-1560018 ..... 3(f) ....... No
74429#-13-8 Prudential of America Life Ins. Co.
(Canada) Class B ..................................... AA-1560018 ..... 3(f) ....... No
74429#-14-6 Prudential of America Life Ins. Co.
(Canada) Class C ..................................... AA-1560018 ..... 3(f) ....... No
- -----------------------------------------------------------------------------------------------------------
0499999 - Preferred Stock - Alien Insurer
- -----------------------------------------------------------------------------------------------------------
74438*-11-5 Prudential Timber Investments, Inc. .................................... 3(f) ....... No
71953K-77-2 PIC Holdings, Ltd ...................................................... 3(f) ....... No
000000-00-0 Prudential Realty Securities ........................................... 3(f) ....... No
- -----------------------------------------------------------------------------------------------------------
0799999 - Preferred Stock - Other Affiliates
- -----------------------------------------------------------------------------------------------------------
0899999 - Total Preferred Stocks
- -----------------------------------------------------------------------------------------------------------
37465@-10-8 Gibraltar Casualty Company ........................... 35947 .......... 3(c) ....... No
- -----------------------------------------------------------------------------------------------------------
1099999 - Common Stock - U.S. P&C Insurer
- -----------------------------------------------------------------------------------------------------------
74408#-10-9 Pruco Life Insurance Company .......................... 79227 .......... 3(c) ....... No
74445@-10-6 Prudential HealthCare and Life Insurance
Co. of America ........................................ 74020 .......... 3(c) ....... No
- -----------------------------------------------------------------------------------------------------------
1199999 - Common Stock - U.S LAH Insurer
- -----------------------------------------------------------------------------------------------------------
T7415#-10-9 PRICOA Vita S.p.A. .................................... AA-1360003 ..... 3(g) ....... No
74429#-10-4 Prudential of America Life Ins. (Canada) Series 1 ..... AA-1560018 ..... 3(g) ....... No
74429#-11-2 Prudential of America Life Ins. (Canada) Series 2 ..... AA-1560018 ..... 3(g) ....... No
Y7443@-10-1 The Prudential Life Insurance Company of Korea, Ltd. .. AA-130001 ...... 3(g) ....... No
J7443#-10-6 The Prudential Life Insurance Company, Ltd. ........... AA-1580001 ..... 3(g) ....... No
AMPRU1-23-2 The American Prudential Insurance Company, Inc. ........................ 3(g) ....... No
PRUARG-12-0 Prudential Seguros, S.A. ............................................... 3(g) ....... No
P Prudential Towarzystwo Ubezpieczen na Zycie, S.A. ...................... 3(g) ....... No
- -----------------------------------------------------------------------------------------------------------
1299999 - Common Stock - Alien Insurer
- -----------------------------------------------------------------------------------------------------------
74408@-10-1 PRUCO, Inc. ............................................................ 3(b) ....... Yes
744400-10-2 Prudential Select Holdings, Inc. ....................................... 3(b) ....... No
74441@-10-0 PruServicos Participacoes, S.A. ........................................ 3(g) ....... No
- -----------------------------------------------------------------------------------------------------------
1399999 - Common Stock - Non-Insurer Which Controls Insurer
- -----------------------------------------------------------------------------------------------------------
BREE00-07-9 BREE Investors Inc. .................................................... 3(b) ....... No
42223@-10-1 Health Ventures Partner, Inc. .......................................... 3(a) ....... No
69337*-10-9 PIC Realty Canada, Ltd. ................................................ 3(b) ....... No
74430*-10-5 Prudential Mortgage Asset Corporation II ............................... 3(b) ....... No
RE Prudential Realty Securities, Inc. ..................................... 3(a) ....... No
74390@-10-1 Prudential Realty Securities II, Inc.. ................................. 3(a) ....... No
GATWAY-00-5 Gateway Holdings, Inc. ................................................. 3(a) ....... No
26244*-10-1 Dryden Holdings, Inc. .................................................. 3(a) ....... No
26243*-10-2 Dryden Finance, Inc. ................................................... 3(a) ....... No
37475X-10-5 Gibraltar Properties, Inc. ............................................. 3(a) ....... No
78487@-10-6 SVIIT Holdings, Inc. ................................................... 3(a) ....... No
78457#-10-0 SMP Holdings, Inc. ..................................................... 3(a) ....... No
- -----------------------------------------------------------------------------------------------------------
1499999 - Common Stock - Investment Subsidiary
- -----------------------------------------------------------------------------------------------------------
47620*-10-1 Jennison Associates Capital Corporation ................................ 3(d) ....... No
69332#-10-0 PGR Advisors I, Inc. ................................................... 3(a) ....... Yes
PGA100-AB-0 PGA European Holdings, Inc. ............................................ 3(a) ....... No
71953K-69-9 PIC Holdings, Ltd ...................................................... 3(b) ....... Yes
PLA100-12-9 Prudential Latin American Investments, Ltd. ............................ 3(b) ....... No
PPC100-12-8 Prudential Private Capital Management .................................. 3(b) ....... No
74408@-10-1 PRUCO, Inc. ............................................................ 3(b) ....... No
744400-10-2 Prudential Select Holdings, Inc. ....................................... 3(b) ....... Yes
74445#-10-4 Prudential Direct Distributors, Inc. ................................... 3(a) ....... No
744299-20-7 Prudential Global Funding .............................................. 3(a) ....... No
74440@-10-1 Prudential Homes Corporation ........................................... 3(a) ....... No
74442@-10-9 Prudential Private Placement Investors, Inc. ........................... 3(a) ....... No
76111#-10-2 Residential Services Corporation of America ............................ 3(d) ....... No
74437#-10-4 The Prudential Investment Corporation .................................. 3(b) ....... No
74390*-10-3 The Prudential Real Estate Affiliates, Inc. ............................ 3(b) ....... Yes
91204*-10-3 U.S. High Yield Management Company ..................................... 3(a) ....... No
74446@-10-5 Prudential Assigned Settlement Services, Inc. .......................... 3(a) ....... No
- -----------------------------------------------------------------------------------------------------------
1599999 - Common Stock - Other Affiliates
- -----------------------------------------------------------------------------------------------------------
1699999 - Total Common Stocks
- -----------------------------------------------------------------------------------------------------------
1799999 - Totals
- -----------------------------------------------------------------------------------------------------------
Amount of insurer's capital and surplus from the prior year's annual statement $ ......9,241,931,258
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1 5 6 Stock of Such Company Owned
by Insurer on Statement Date
------------------------------
7 8
CUSIP Description
Identifica- Name of Subsidiary, Controlled or Intangible Statement % of
tion Affiliated Company Assets Value Number of Shares Outstanding
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
74429#-12-0 Prudential of America Life Ins. Co.
(Canada) Class A ............................................. 0 .... 6,000,000 ......... 60,000.000 ........ 100.0
74429#-13-8 Prudential of America Life Ins. Co.
(Canada) Class B ............................................. 0 .... 8,875,000 ......... 88,750.000 ........ 100.0
74429#-14-6 Prudential of America Life Ins. Co.
(Canada) Class C ............................................. 0 ... 10,000,000 ........ 100,000.000 ........ 100.0
- --------------------------------------------------------------------------------------------------------------------------------
0499999 - Preferred Stock - Alien Insurer 0 24,875,000 XXX XXX
- --------------------------------------------------------------------------------------------------------------------------------
74438*-11-5 Prudential Timber Investments, Inc. .......................... 0 ...... 875,461 .............. 7.000 ........ 100.0
71953K-77-2 PIC Holdings, Ltd ............................................ 0 ... 11,873,000 ...... 7,750,000.000 ........ 100.0
000000-00-0 Prudential Realty Securities ................................. 0 ...... 126,000 ............ 126.000 ........ 100.0
- --------------------------------------------------------------------------------------------------------------------------------
0799999 - Preferred Stock - Other Affiliates 0 12,874,461 XXX XXX
- --------------------------------------------------------------------------------------------------------------------------------
0899999 - Total Preferred Stocks 0 37,749,461 XXX XXX
- --------------------------------------------------------------------------------------------------------------------------------
37465@-10-8 Gibraltar Casualty Company ................................... 0 ............ 0 .......... 2,000.000 ........ 100.0
- --------------------------------------------------------------------------------------------------------------------------------
1099999 - Common Stock - U.S. P&C Insurer 0 0 XXX XXX
- --------------------------------------------------------------------------------------------------------------------------------
74408#-10-9 Pruco Life Insurance Company ................................. 0 .. 931,237,453 ........ 250,000.000 ........ 100.0
74445@-10-6 Prudential HealthCare and Life Insurance
Co. of America ............................................... 0 ... 11,271,567 ........ 500,000.000 ........ 100.0
- --------------------------------------------------------------------------------------------------------------------------------
1199999 - Common Stock - U.S LAH Insurer 0 942,509,020 XXX XXX
- --------------------------------------------------------------------------------------------------------------------------------
T7415#-10-9 PRICOA Vita S.p.A. ........................................... 0 ... 15,583,345 ..... 20,000,000.000 ........ 100.0
74429#-10-4 Prudential of America Life Ins. (Canada) Series 1 ............ 0 ... (3,592,249)......... 35,715.000 ........ 100.0
74429#-11-2 Prudential of America Life Ins. (Canada) Series 2 ............ 0 ..... (179,537).......... 1,785.000 ......... 50.0
Y7443@-10-1 The Prudential Life Insurance Company of Korea, Ltd. ......... 0 ... 29,085,657 ...... 2,640,000.000 ........ 100.0
J7443#-10-6 The Prudential Life Insurance Company , Ltd. ................. 0 .. 265,045,567 ........ 100,000.000 ........ 100.0
AMPRU1-23-2 The American Prudential Insurance Company, Inc. .............. 0 .... 8,266,726 ..... 24,999,995.000 ........ 100.0
PRUARG-12-0 Prudential Seguros, S.A. ..................................... 0 .... 5,542,902 ......... 10,000.000 ........ 100.0
P Prudential Towarzystwo Ubezpieczen na Zycie, S.A. ............ 0 .... 5,316,092 ........ 999,998.000 ........ 100.0
- --------------------------------------------------------------------------------------------------------------------------------
1299999 - Common Stock - Alien Insurer 0 325,068,503 XXX XXX
- --------------------------------------------------------------------------------------------------------------------------------
74408@-10-1 PRUCO, Inc. ..........................................12,543,225 1,535,524,517 ............. 94.000 ........ 100.0
744400-10-2 Prudential Select Holdings, Inc. ............................. 0 ... 14,617,986 ......... 44,977.000 ........ 100.0
74441@-10-0 PruServicos Participacoes, S.A. .............................. 0 ... 26,933,687 ........ 422,168.000 ........ 100.0
- --------------------------------------------------------------------------------------------------------------------------------
1399999 - Common Stock - Non-Insurer Which Controls Insurer 12,543,225 1,577,076,190 XXX XXX
- --------------------------------------------------------------------------------------------------------------------------------
BREE00-07-9 BREE Investors Inc. .......................................... 0 .... 3,187,502 .............. 1.000 ......... 50.0
42223@-10-1 Health Ventures Partner, Inc. ................................ 0 ... 34,226,486 .......... 1,000.000 ........ 100.0
69337*-10-9 PIC Realty Canada, Ltd. ...................................... 0 .... 1,932,361 ..... 16,561,003.000 ........ 100.0
74430*-10-5 Prudential Mortgage Asset Corporation II ..................... 0 ....... 41,420 ............ 500.000 ......... 50.0
RE Prudential Realty Securities, Inc. ........................... 0 .. 460,927,927 ............. 92.000 ........ 100.0
74390@-10-1 Prudential Realty Securities II, Inc.. ....................... 0 ... 92,014,183 ............ 115.000 ......... 87.0
GATWAY-00-5 Gateway Holdings, Inc. ....................................... 0 .. 115,710,426 ............ 810.000 ........ 100.0
26244*-10-1 Dryden Holdings, Inc. ........................................ 0 .. 126,689,479 ............ 234.000 ........ 100.0
26243*-10-2 Dryden Finance, Inc. ......................................... 0 ... 50,500,186 ............ 278.000 ........ 100.0
37475X-10-5 Gibraltar Properties, Inc. ................................... 0 ... 45,072,649 .......... 1,000.000 ........ 100.0
78487@-10-6 SVIIT Holdings, Inc. ......................................... 0 .. 134,780,979 .......... 1,000.000 ........ 100.0
78457#-10-0 SMP Holdings, Inc. ........................................... 0 .. 181,361,894 .......... 1,000.000 ........ 100.0
- --------------------------------------------------------------------------------------------------------------------------------
1499999 - Common Stock - Investment Subsidiary 0 1,246,445,492 XXX XXX
- --------------------------------------------------------------------------------------------------------------------------------
47620*-10-1 Jennison Associates Capital Corporation ...................... 0 ... 49,364,011 ........ 913,497.000 ........ 100.0
69332#-10-0 PGR Advisors I, Inc. ................................. 5,764,644 ... 11,754,793 ............ 100.000 ........ 100.0
PGA100-AB-0 PGA European Holdings, Inc. .................................. 0 .... 1,512,000 ......... 12,000.000 ........ 100.0
71953K-69-9 PIC Holdings, Ltd .................................... 1,210,078 ... 67,717,839 ..... 32,810,256.000 ........ 100.0
PLA100-12-9 Prudential Latin American Investments, Ltd. .................. 0 ...... 100,532 ............ 100.000 ........ 100.0
PPC100-12-8 Prudential Private Capital Management ........................ 0 ...... 200,241 .............. 1.000 .......... 1.0
74408@-10-1 PRUCO, Inc. .................................................. 0 1,129,591,235 ............. 94.000 ........ 100.0
744400-10-2 Prudential Select Holdings, Inc. ....................... 974,879 .... 6,047,918 ......... 44,977.000 ........ 100.0
74445#-10-4 Prudential Direct Distributors, Inc. ......................... 0 ....... 22,665 ............ 100.000 ........ 100.0
744299-20-7 Prudential Global Funding .................................... 0 ... 15,017,148 ............ 100.000 ........ 100.0
74440@-10-1 Prudential Homes Corporation ................................. 0 ... 10,456,464 .............. 1.000 ........ 100.0
74442@-10-9 Prudential Private Placement Investors, Inc. ................. 0 ....... 73,180 ......... 40,000.000 ........ 100.0
76111#-10-2 Residential Services Corporation of America .................. 0 .... 9,451,793 .......... 1,000.000 ........ 100.0
74437#-10-4 The Prudential Investment Corporation ........................ 0 ... 55,129,874 ............. 83.000 ........ 100.0
74390*-10-3 The Prudential Real Estate Affiliates, Inc. ............ 698,138 ... 28,600,957 ............. 99.000 ........ 100.0
91204*-10-3 U.S. High Yield Management Company ........................... 0 ........ 1,000 ............ 100.000 ........ 100.0
74446@-10-5 Prudential Assigned Settlement Services, Inc. ................ 0 ...... 115,844 ............ 100.000 ........ 100.0
- --------------------------------------------------------------------------------------------------------------------------------
1599999 - Common Stock - Other Affiliates 8,647,739 1,385,157,494 XXX XXX
- --------------------------------------------------------------------------------------------------------------------------------
1699999 - Total Common Stocks 21,190,964 5,476,256,699 XXX XXX
- --------------------------------------------------------------------------------------------------------------------------------
1799999 - Totals 21,190,964 5,514,006,160 XXX XXX
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE D - PART 6 - SECTION 2
- ------------------------------------------------------------------------------------------------------------------------------------
1 2 3
Name of Company Amount of Intangible
CUSIP Listed in Section 1 Assets Included in
Identifica- Which Controls Amount Shown in
tion Name of Lower-tier Company Lower-tier Company Column 5, Section 1
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
000000-00-0 .. Clivwell Securities, Ltd. ..............................PIC Holdings, Ltd. .......................................0
000000-00-0 .. PRICOA Investment Company ..............................PIC Holdings, Ltd. .......................................0
000000-00-0 .. PRICOA Mezzanine Investment Co. ........................PIC Holdings, Ltd. .......................................0
000000-00-0 .. Prudential Capital and Investment Services, Inc. .......PRUCO, Inc. ..............................................0
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------
Stock in Lower-tier Company Owned
Indirectly by Insurer on Statement Date
----------------------------------------------
CUSIP 4 5
Identifica-
tion Number of Shares % of Outstanding
- ----------------------------------------------------------------------------
<S> <C> <C>
000000-00-0 .....................7,750,000.000 ...................100.0
000000-00-0 ....................82,132,601.000 ...................100.0
000000-00-0 .....................4,282,789.000 ...................100.0
000000-00-0 .............................0.000 .....................0.0
- ----------------------------------------------------------------------------
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
ANNUAL STATEMENT FOR THE YEAR 1998 OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
SCHEDULE D - PART 6 - SECTION 2
- ------------------------------------------------------------------------------------------------------------------------------------
1 2 3
Name of Company Amount of Intangible
CUSIP Listed in Section 1 Assets Included in
Identifica- Which Controls Amount Shown in
tion Name of Lower-tier Company Lower-tier Company Column 5, Section 1
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
000000-00-0 ...Lapine Holding Company .................................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Asia Investments, Ltd. ......................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Asia Investments, Ltd. ......................Prudential Investment Company ............................0
000000-00-0 ...Prudential-Bradesco Seguros, S.A. ......................PruServicos Participacoes, S.A. ..........................0
- ------------------------------------------------------------------------------------------------------------------------------------
0199999 - Preferred Stock 0
- ------------------------------------------------------------------------------------------------------------------------------------
000000-00-0 ...ML/MSB Acquisition, Inc. ...............................Prudential Residential Services, L.P. ....................0
000000-00-0 ...PRICOA Relocation Management, Ltd. .....................Prudential Residential Services, L.P. ....................0
000000-00-0 ...Prudential Community Interaction Consulting, Inc. ......Prudential Residential Services, L.P. ....................0
000000-00-0 ...Prudential Resources Management Asia, Limited ..........Prudential Residential Services, L.P. ....................0
000000-00-0 ...Prudential Relocation Canada Ltd. .....................Prudential Residential Services, L.P. ....................0
000000-00-0 ...Prudential Relocation, Ltd. ............................Prudential Residential Services, L.P. ....................0
000000-00-0 ...The Relocation Funding Corporation of America ..........Prudential Residential Services, L.P. ....................0
000000-00-0 ...Clivwell Securities, Ltd. ..............................PIC Holdings, Ltd. .......................................0
000000-00-0 ...PRICOA Capital Group, Ltd. .............................PIC Holdings, Ltd. .......................................0
000000-00-0 ...PRICOA Funding, Ltd. ...................................PIC Holdings, Ltd. .......................................0
000000-00-0 ...PRICOA Investment Company ..............................PIC Holdings, Ltd. .......................................0
000000-00-0 ...PRICOA Property Investment Management Ltd. .............PIC Holdings, Ltd. ...............................1,210,078
000000-00-0 ...Euro Invest (General Partner) Ltd. .....................PIC Holdings, Ltd. .......................................0
000000-00-0 ...Industrial Properties (Gen Partner), Ltd. ..............PIC Holdings, Ltd. .......................................0
000000-00-0 ...Industrial Properties (Gen Partner) II, Ltd. ...........PIC Holdings, Ltd. .......................................0
000000-00-0 ...Northern Retail Properties (General Partner) Ltd. ......PIC Holdings, Ltd. .......................................0
000000-00-0 ...PRICOA P.I.M. (Regulated) Ltd. .........................PIC Holdings, Ltd. .......................................0
000000-00-0 ...South Downs Properties (General Partner) Ltd. ..........PIC Holdings, Ltd. .......................................0
000000-00-0 ...South Downs Trading (General Partner) Ltd. .............PIC Holdings, Ltd. .......................................0
000000-00-0 ...TransEuropean Properties (General Partner) Ltd. ........PIC Holdings, Ltd. .......................................0
000000-00-0 ...TransEuropean Properties (General Partner) II Ltd. .....PIC Holdings, Ltd. .......................................0
000000-00-0 ...PRICOA Asset Management, Ltd. ..........................PIC Holdings, Ltd. .......................................0
000000-00-0 ...PRICOA Capital Management ..............................PIC Holdings, Ltd. .......................................0
000000-00-0 ...PRICOA General Partner Ltd. ............................PIC Holdings, Ltd. .......................................0
000000-00-0 ...PRICOA Management Partner Ltd. .........................PIC Holdings, Ltd. .......................................0
000000-00-0 ...PRICOA Mezzanine Funding, Ltd. .........................PIC Holdings, Ltd. .......................................0
000000-00-0 ...PRICOA Mezzanine Investment Co. ........................PIC Holdings, Ltd. .......................................0
000000-00-0 ...Argus General Partner, Ltd. ............................PIC Holdings, Ltd. .......................................0
000000-00-0 ...Argus Capital Limited ..................................PIC Holdings, Ltd. .......................................0
000000-00-0 ...Argus Capital International Ltd. .......................PIC Holdings, Ltd. .......................................0
000000-00-0 ...BREE Investments Ltd.. .................................PRUCO, Inc. ..............................................0
000000-00-0 ...Barafor ................................................PRUCO, Inc. ..............................................0
000000-00-0 ...Capital Agricultural Property Services, Inc. ...........PRUCO, Inc. ..............................................0
000000-00-0 ...Flor-Ag Corporation ....................................PRUCO, Inc. ..............................................0
000000-00-0 ...PIC Realty Corporation .................................PRUCO, Inc. ..............................................0
000000-00-0 ...Pruco Securities Corporation ...........................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Agricultural Credit, Inc. ...................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Capital and Investment Services, Inc. .......PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Securities Group Inc. - Series A ............PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Securities Group Inc. - Series B ............PRUCO, Inc. ..............................................0
000000-00-0 ...Bache Insurance Agency of Louisiana, Inc. ..............PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Securities (Germany) Inc. .............PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Management GmbH .......................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Management GmbH & Co. KG. .............PRUCO, Inc. ..............................................0
000000-00-0 ...BraeLoch Successor Corporation .........................PRUCO, Inc. ..............................................0
000000-00-0 ...BraeLoch Holdings, Inc. ................................PRUCO, Inc. ..............................................0
000000-00-0 ...Graham Resources, Inc. .................................PRUCO, Inc. ..............................................0
000000-00-0 ...Graham Depository Company II ...........................PRUCO, Inc. ..............................................0
000000-00-0 ...Graham Energy, Ltd. ....................................PRUCO, Inc. ..............................................0
000000-00-0 ...Graham Exploration, Ltd. ...............................PRUCO, Inc. ..............................................0
000000-00-0 ...Graham Royalty, Ltd. ...................................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Global Markets ........................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache International (Hong Kong) Ltd. ........PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Finance (Hong Kong) Ltd. ..............PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Bache Futures (Hong Kong) Ltd. ..............PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Bache Nominees (Hong Kong) Ltd. .............PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Bache Securities (Hong Kong) Ltd. ...........PRUCO, Inc. ..............................................0
000000-00-0 ...PB Financial Services, Inc. ............................PRUCO, Inc. ..............................................0
000000-00-0 ...P-B Finance Ltd. .......................................PRUCO, Inc. ..............................................0
000000-00-0 ...PGR Advisors, Inc. .....................................PRUCO, Inc. ..............................................0
000000-00-0 ...PBML Custodian Limited .................................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Capital Funding BV ....................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Energy Corp. ..........................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Energy Production, Inc. ...............PRUCO, Inc. ..............................................0
000000-00-0 ...Commodity Admin Services, Inc. .........................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Commodities de Mexico, S, de RL de CV .......PRUCO, Inc. ..............................................0
000000-00-0 ...Mexico Commodity Funding Corp. .........................PRUCO, Inc. ..............................................0
000000-00-0 ...Mexico Commodity Sourcing Corp. ........................PRUCO, Inc. ..............................................0
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------
Stock in Lower-tier Company Owned
Indirectly by Insurer on Statement Date
----------------------------------------------
CUSIP 4 5
Identifica-
tion Number of Shares % of Outstanding
- ----------------------------------------------------------------------------
<S> <C> <C>
000000-00-0 ......................7,499,999.000 ..................100.0
000000-00-0 ..............................1.000 ...................50.0
000000-00-0 ..............................1.000 ...................50.0
000000-00-0 ..........................5,372.000 ...................99.0
- ----------------------------------------------------------------------------
0199999 - Preferred Stock XXX XXX
- ----------------------------------------------------------------------------
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 .............................99.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 ..........................9,999.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 .............................49.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 .....................13,266,766.000 ..................100.0
000000-00-0 ......................6,204,230.000 ..................100.0
000000-00-0 .....................11,213,375.000 ..................100.0
000000-00-0 .........................15,000.000 ..................100.0
000000-00-0 ..............................2.000 ..................100.0
000000-00-0 .........................49,998.000 ...................99.0
000000-00-0 .........................30,000.000 ...................75.0
000000-00-0 .........................49,998.000 ...................99.0
000000-00-0 .........................40,000.000 ...................80.0
000000-00-0 .........................10,000.000 ..................100.0
000000-00-0 .............................99.000 ...................99.0
000000-00-0 .............................99.000 ...................99.0
000000-00-0 .........................40,000.000 ..................100.0
000000-00-0 .........................30,000.000 ...................75.0
000000-00-0 ......................1,500,000.000 ..................100.0
000000-00-0 ........................100,000.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 ........................873,985.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 .........................50,000.000 ..................100.0
000000-00-0 ..............................2.000 ..................100.0
000000-00-0 ..............................2.000 ..................100.0
000000-00-0 ..............................1.000 ...................50.0
000000-00-0 .....................10,000,001.000 ..................100.0
000000-00-0 ............................995.000 ..................100.0
000000-00-0 .............................50.000 ..................100.0
000000-00-0 ............................236.000 ..................100.0
000000-00-0 ............................995.000 ..................100.0
000000-00-0 ............................999.000 ...................99.9
000000-00-0 .............................99.000 ..................100.0
000000-00-0 ..............................0.000 ....................0.0
000000-00-0 .............................57.020 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 .........................50,000.000 ..................100.0
000000-00-0 ..............................0.000 ....................0.0
000000-00-0 ........................330,000.000 ..................100.0
000000-00-0 ......................7,758,803.000 ..................100.0
000000-00-0 ......................7,734,234.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 .............................90.000 ..................100.0
000000-00-0 ............................130.000 ..................100.0
000000-00-0 .............................20.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ..........................1,502.000 ..................100.0
000000-00-0 ..............................3.000 ..................100.0
000000-00-0 ..........................1,500.000 ..................100.0
000000-00-0 ..........................1,750.000 ..................100.0
000000-00-0 ........................550,000.000 ..................100.0
000000-00-0 .............................50.000 ..................100.0
000000-00-0 ..............................3.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 ......................5,000,000.000 ..................100.0
000000-00-0 .........................40,000.000 ..................100.0
000000-00-0 ..............................1.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 .............................50.000 ..................100.0
000000-00-0 ..........................2,999.000 ...................99.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
- ----------------------------------------------------------------------------
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
ANNUAL STATEMENT FOR THE YEAR 1998 OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
SCHEDULE D - PART 6 - SECTION 2
- ------------------------------------------------------------------------------------------------------------------------------------
1 2 3
Name of Company Amount of Intangible
CUSIP Listed in Section 1 Assets Included in
Identifica- Which Controls Amount Shown in
tion Name of Lower-tier Company Lower-tier Company Column 5, Section 1
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
000000-00-0 ...Prudential Commodities de Mexico, S, de RL de CV .......PRUCO, Inc. ..............................................0
000000-00-0 ...PSI Partners Inc. .....................................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache International Banking Corporation .....PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache International Bank Ltd. ...............PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache International, (U.K.) Ltd. ............PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Bache International Ltd. ....................PRUCO, Inc. ..............................................0
000000-00-0 ...Circle (Nominees) Limited ..............................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Forex, (U.K.) Ltd. ....................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Bache International Trust Co. (Cayman) ......PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Bache Corp. Director Services, Inc. .........PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Bache Corp. Trustee Services, Inc. ..........PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Investor Services Inc. ................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Investor Services II, Inc. ............PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Leasing Inc. ..........................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Program Services Inc. .................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Properties Inc. .......................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Securities, (Australia) Ltd. ..........PRUCO, Inc. ..............................................0
000000-00-0 ...Bache Nominees Ltd. ....................................PRUCO, Inc. ..............................................0
000000-00-0 ...Corcarr Funds Management Limited .......................PRUCO, Inc. ..............................................0
000000-00-0 ...Corcarr Management Pty. Limited ........................PRUCO, Inc. ..............................................0
000000-00-0 ...Corcarr Nominees Pty. Limited ..........................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Bache Funds Management, Ltd. ................PRUCO, Inc. ..............................................0
000000-00-0 ...Divsplit Nominees Pty. Limited .........................PRUCO, Inc. ..............................................0
000000-00-0 ...PruBache Nominees Pty. Limited .........................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Trade Services Inc. ...................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Transfer Agent Services, Inc. .........PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Securities Capmark Inc. .....................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Securities Credit Corp. .....................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Securities Municipal Derivatives, Inc. ......PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Securities Secured Financing Corporation ....PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Securities Structured Assets, Inc. ..........PRUCO, Inc. ..............................................0
000000-00-0 ...R & D Funding Corp. ....................................PRUCO, Inc. ..............................................0
000000-00-0 ...Seaport Futures Management, Inc. .......................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Securities Incorporated .....................PRUCO, Inc. ..............................................0
000000-00-0 ...Lapine Holding Company .................................PRUCO, Inc. ..............................................0
000000-00-0 ...Lapine Development Corporation .........................PRUCO, Inc. ..............................................0
000000-00-0 ...Lapine Technology Corporation ..........................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Investments Fund Management, L.L.C. .........PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Mutual Fund Distributors, Inc. ..............PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Mutual Fund Services, L.L.C. ...............PRUCO, Inc. ..............................................0
000000-00-0 ...Bache & Co. (Lebanon) S.A.L. ...........................PRUCO, Inc. ..............................................0
000000-00-0 ...Bache & Co. S.A. de C.V. (Mexico) ......................PRUCO, Inc. ..............................................0
000000-00-0 ...Bache Insurance Agency Inc.. ...........................PRUCO, Inc. ..............................................0
000000-00-0 ...P-B Holding Japan Inc. .................................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Securities (Japan) Ltd. .....................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Futures Asia Pacific Ltd. .............PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Securities Agencia de Valores S.A. ....PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Securities Asia Pacific Ltd. ..........PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Securities (Holland) Inc. .............PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Securities (Holland) N.V ..............PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Securities (Monaco) Inc. ..............PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Securities (Switzerland) Inc. .........PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential-Bache Securities (U.K.) Inc. ................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Securities (Brazil) LTDA ....................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Securities (Chile) Inc. .....................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Securities CMO Issuer Inc. ..................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Securities Futures Management Inc. ..........PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Securities (Argentina) Inc. .................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Securities (Uruguay) S.A. ...................PRUCO, Inc. ..............................................0
000000-00-0 ...Wexford Clearing Services Corporation ..................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Dental Maintenance Organization, Inc. .......PRUCO, Inc. ..............................................0
Prudential Dental Maintenance Organization of
000000-00-0 ...California, Inc. .......................................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Direct, Inc. ................................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Equity Investors, Inc. ......................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Funding Corporation .........................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Health and Dental Group Holdings, Inc. ......PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential HealthCare Group Inc. .......................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Health Care Plan, Inc. ......................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Health Care Plan of California, Inc. ........PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Health Care Plan of Connecticut, Inc. .......PRUCO, Inc. ..............................................0
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------
Stock in Lower-tier Company Owned
Indirectly by Insurer on Statement Date
----------------------------------------------
CUSIP 4 5
Identifica-
tion Number of Shares % of Outstanding
- ----------------------------------------------------------------------------
<S> <C> <C>
000000-00-0 ..............................1.000 ....................1.0
000000-00-0 ..............................1.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 .....................35,000,000.000 ..................100.0
000000-00-0 .....................41,400,211.000 ..................100.0
000000-00-0 ......................7,500,000.000 ..................100.0
000000-00-0 ..............................2.000 ..................100.0
000000-00-0 ......................3,000,000.000 ..................100.0
000000-00-0 ............................500.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ............................500.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ..............................1.000 ..................100.0
000000-00-0 .........................10,000.000 ..................100.0
000000-00-0 ..............................4.000 ..................100.0
000000-00-0 .........................50,050.000 ..................100.0
000000-00-0 ..............................2.000 ..................100.0
000000-00-0 ..............................4.000 ..................100.0
000000-00-0 ..............................4.000 ..................100.0
000000-00-0 ..............................4.000 ..................100.0
000000-00-0 ..............................2.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 .........................10,000.000 ..................100.0
000000-00-0 .............................20.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 .............................99.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 .........................46,350.000 ..................100.0
000000-00-0 ............................664.000 ..................100.0
000000-00-0 .....................12,500,000.000 ...................71.0
000000-00-0 ......................4,650,000.000 ..................100.0
000000-00-0 ..............................1.000 ..................100.0
000000-00-0 ..............................0.000 ....................0.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ..............................0.000 ....................0.0
000000-00-0 ..........................2,000.000 ..................100.0
000000-00-0 .............................96.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 ........................200,000.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ........................150,000.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 .........................40,000.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ............................200.000 ..................100.0
000000-00-0 ........................750,000.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 .............................50.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 ............................150.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 .............................99.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
- ----------------------------------------------------------------------------
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
ANNUAL STATEMENT FOR THE YEAR 1998 OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
SCHEDULE D - PART 6 - SECTION 2
- ------------------------------------------------------------------------------------------------------------------------------------
1 2 3
Name of Company Amount of Intangible
CUSIP Listed in Section 1 Assets Included in
Identifica- Which Controls Amount Shown in
tion Name of Lower-tier Company Lower-tier Company Column 5, Section 1
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
000000-00-0 ...Prudential Health Care Plan of Georgia, Inc. ...........PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Health Care Plan of New York, Inc. ..........PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Human Resources Management Co., Inc. ........PRUCO, Inc. ..............................................0
000000-00-0 ...Human Resource Finance Company, Inc. ...................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Property and Casualty Insurance Company .....PRUCO, Inc. .....................................12,543,225
000000-00-0 ...Prudential Commercial Insurance Company ................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential General Insurance Company ...................PRUCO, Inc. ..............................................0
000000-00-0 ...Merastar Corporation ...................................PRUCO, Inc. ..............................................0
000000-00-0 ...Merastar Insurance Company .............................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Insurance Brokerage, Inc. ...................PRUCO, Inc. ..............................................0
The Prudential Property and Casualty General
000000-00-0 ...Agency, Inc. ...........................................PRUCO, Inc. ..............................................0
The Prudential Property and Casualty of
000000-00-0 ...New Jersey Holdings, Inc. ..............................PRUCO, Inc. ..............................................0
The Prudential Property and Casualty Insurance
000000-00-0 ...Co. of New Jersey .....................................PRUCO, Inc. ..............................................0
The Prudential General Insurance Company of
000000-00-0 ...New Jersey .............................................PRUCO, Inc. ..............................................0
The Prudential Commercial Insurance Co. of
000000-00-0 ...New Jersey .............................................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Realty Partnerships, Inc. ...................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Realty Securities II, Inc. ..................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Trust Company ...............................PRUCO, Inc. ..............................................0
000000-00-0 ...PTC Services, Inc. .....................................PRUCO, Inc. ..............................................0
000000-00-0 ...Prudential Uniformed Services Administrators, Inc. .....PRUCO, Inc. ..............................................0
000000-00-0 ...The Prudential Bank and Trust Company ..................PRUCO, Inc. ..............................................0
000000-00-0 ...PBT Mortgage Corporation ...............................PRUCO, Inc. ..............................................0
000000-00-0 ...The Prudential Savings Bank, F.S.B. ....................PRUCO, Inc. ..............................................0
000000-00-0 ...PBT Home Equity Holdings ...............................PRUCO, Inc. ..............................................0
000000-00-0 ...Pruco Life Insurance Company of New Jersey .............Pruco Life Insurance Company .............................0
000000-00-0 ...The Prudential Life Insurance Company of Arizona .......Pruco Life Insurance Company .............................0
000000-00-0 ...Prudential Texas Residential Services Corporation ......Prudential Homes Corporation .............................0
000000-00-0 ...Prudential Select Life Insurance Company of America ....Prudential Select Holdings, Inc. .........................0
000000-00-0 ...Private Label Mortgage Services Corporation ............Residential Services Corp of America .....................0
000000-00-0 ...Residential Information Services, Inc. .................Residential Services Corp of America .....................0
000000-00-0 ...Securitized Asset Sales, Inc. ..........................Residential Services Corp of America .....................0
000000-00-0 ...PHMC Services Corporation ..............................Residential Services Corp of America .....................0
000000-00-0 ...The Prudential Home Mortgage Company, Inc. .............Residential Services Corp of America .....................0
000000-00-0 ...The Prudential Home Mortgage Securities Co., Inc. ......Residential Services Corp of America .....................0
000000-00-0 ...Gateway Holdings, S.A. .................................The Prudential Investment Corporation ....................0
000000-00-0 ...Amicus Investment Company ..............................The Prudential Investment Corporation ....................0
000000-00-0 ...Global Income Fund Management Company, S.A. ............The Prudential Investment Corporation ....................0
000000-00-0 ...Global Series Fund II Management Company, S.A. .........The Prudential Investment Corporation ....................0
000000-00-0 ...Prudential Home Building Investors, Inc. ...............The Prudential Investment Corporation ....................0
000000-00-0 ...The Prudential Asset Management Company, Inc. ..........The Prudential Investment Corporation ....................0
000000-00-0 ...Enhanced Investment Technologies, Inc. .................The Prudential Investment Corporation ....................0
000000-00-0 ...PCM International, Inc. ................................The Prudential Investment Corporation ....................0
000000-00-0 ...Prudential Asia Investments Limited ....................The Prudential Investment Corporation ....................0
000000-00-0 ...Prudential Asia Management Ltd. (BVI) ..................The Prudential Investment Corporation ....................0
000000-00-0 ...Prudential Asia Fund Management Ltd. ...................The Prudential Investment Corporation ....................0
000000-00-0 ...Prudential Asia Fund Managers (HK) Ltd. ................The Prudential Investment Corporation ....................0
000000-00-0 ...Prudential Asset Management Ltd. (BVI) .................The Prudential Investment Corporation ....................0
000000-00-0 ...PAMA (Indonesia) Limited ...............................The Prudential Investment Corporation ....................0
000000-00-0 ...PAMA (Singapore) Private Ltd. ..........................The Prudential Investment Corporation ....................0
000000-00-0 ...Prudential Asset Management Asia H K Ltd. ..............The Prudential Investment Corporation ....................0
000000-00-0 ...PT PAMA Indonesia ......................................The Prudential Investment Corporation ....................0
000000-00-0 ...Prudential Asia Infrastructure Investors Ltd. ..........The Prudential Investment Corporation ....................0
000000-00-0 ...Prudential Asia Infrastructure Investors (H.K.) Ltd. ...The Prudential Investment Corporation ....................0
000000-00-0 ...Asian Infrastructure Investors HK, Ltd. ................The Prudential Investment Corporation ....................0
000000-00-0 ...Prudential Timber Investments, Inc. ....................The Prudential Investment Corporation ....................0
000000-00-0 ...Texas Rio Grande Other Asset Group Company, Inc. .......The Prudential Investment Corporation ....................0
000000-00-0 ...The Prudential Investment Advisory Company, Ltd. .......The Prudential Investment Corporation ....................0
000000-00-0 ...The Prudential Property Company, Inc. ..................The Prudential Investment Corporation ....................0
000000-00-0 ...The Prudential Realty Advisors, Inc. ...................The Prudential Investment Corporation ....................0
000000-00-0 ...Countrywide International Realty, Ltd. .................Prudential Real Estate Affiliates, Inc. ............454,344
000000-00-0 ...Prudential Referral Services, Inc. .....................Prudential Real Estate Affiliates, Inc. ..................0
The Prudential Real Estate Financial Services
000000-00-0 ...of America, Inc. .......................................Prudential Real Estate Affiliates, Inc. ..................0
000000-00-0 ...Preferred Coastal Realty, Inc. .........................Prudential Real Estate Affiliates, Inc. ............243,794
000000-00-0 ...Real Estate Connecticut, Inc. ..........................Prudential Real Estate Affiliates, Inc. ..................0
000000-00-0 ...Referral Associates of Connecticut, Inc. ...............Prudential Real Estate Affiliates, Inc. ..................0
000000-00-0 ...Prudential-Bradesco Seguros, S.A. ......................PruServicos Participacoes, S.A. ..........................0
000000-00-0 ...Gibraltar Servicos Ltda. ...............................PruServicos Participacoes, S.A. ..........................0
- ------------------------------------------------------------------------------------------------------------------------------------
0299999 - Common Stock 14,451,441
- ------------------------------------------------------------------------------------------------------------------------------------
0399999 TOTAL 14,451,441
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------------------
Stock in Lower-tier Company Owned
Indirectly by Insurer on Statement Date
----------------------------------------------
CUSIP 4 5
Identifica-
tion Number of Shares % of Outstanding
- ----------------------------------------------------------------------------
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 ............................200.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ............................800.000 ..................100.0
000000-00-0 ..........................2,000.000 ..................100.0
000000-00-0 ..........................2,000.000 ..................100.0
000000-00-0 ........................100,000.000 ..................100.0
000000-00-0 .........................25,000.000 ..................100.0
000000-00-0 .........................25,000.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ..............................1.000 ..................100.0
000000-00-0 ............................400.000 ..................100.0
000000-00-0 ............................240.000 ..................100.0
000000-00-0 ............................240.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 .............................17.000 ..................100.0
000000-00-0 ........................300,000.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ........................500,000.000 ..................100.0
000000-00-0 ........................203,996.000 ..................100.0
000000-00-0 ..........................2,250.000 ..................100.0
000000-00-0 .........................10,000.000 ..................100.0
000000-00-0 ..........................4,000.000 ..................100.0
000000-00-0 ........................400,000.000 ..................100.0
000000-00-0 ........................200,000.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 ......................2,500,000.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 .........................20,000.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 ..........................5,000.000 ..................100.0
000000-00-0 ..........................1,400.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 .............................84.000 ..................100.0
000000-00-0 .............................98.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ......................6,300,000.000 ..................100.0
000000-00-0 ........................200,000.000 ..................100.0
000000-00-0 ............................180.000 ..................100.0
000000-00-0 .............................20.000 ..................100.0
000000-00-0 ......................1,500,000.000 ..................100.0
000000-00-0 ..........................7,500.000 ...................75.0
000000-00-0 ......................1,000,000.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ............................650.000 ...................65.0
000000-00-0 ........................800,000.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 .........................42,500.000 ...................85.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ..........................5,000.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 .............................80.000 ...................80.0
000000-00-0 ............................100.000 ..................100.0
000000-00-0 ..........................1,000.000 ..................100.0
000000-00-0 .........................54,772.000 ...................48.0
000000-00-0 ..........................1,020.000 ...................51.0
- ----------------------------------------------------------------------------
0299999 - Common Stock XXX XXX
- ----------------------------------------------------------------------------
0399999 TOTAL XXX XXX
- ----------------------------------------------------------------------------
C-8
<PAGE>
ITEM 25. INDEMNIFICATION
Article VI, paragraph (4) of Registrant's Articles of Incorporation provides
that "each director and each officer of the Corporation shall be indemnified by
the Corporation to the full extent permitted by the General Laws of the State of
Maryland and as provided in the by-laws of the Corporation." Article VIII of the
Registrant's Articles of Incorporation provides, in pertinent part, that "no
provision of these Articles of Incorporation shall be effective to (a) require a
waiver of compliance with any provision of the Securities Act of 1933, as
amended, or the Investment Company Act of 1940, as amended, or of any valid
rule, regulation or order of the Securities and Exchange Commission thereunder
or (b) protect or purport to protect any director or officer of the Corporation
against any liability to the Corporation or its security holders to which he
would otherwise by subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office."
Paragraph 6 of both the Investment Advisory Agreement and the Supplemental
Investment Advisory Agreement between Registrant and Prudential provides that
"Prudential will not be liable for any error of judgment or mistake of law or
for any loss suffered by the Fund in connection with the matters to which this
Agreement relates, except for a loss resulting from willful misfeasance, bad
faith, or gross negligence in the performance of its duties on behalf of the
Fund or from reckless disregard of its obligation and duties under this
Agreement."
The Registrant, in conjunction with certain affiliates, maintains insurance on
behalf of any person who is or was a trustee, director, officer, employee, or
agent of the Registrant, or who is or was serving at the request of the
Registrant as a trustee, director, officer, employee or agent of such other
affiliated trust or corporation, against any liability asserted against and
incurred by him or her arising out of his or her position with such trust or
corporation.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
Prudential Investment Corporation (PIC) is the investment unit of Prudential and
actively engages in the business of giving investment advice. The officers and
directors of Prudential and PIC who are engaged directly or indirectly in
activities relating to the registrant have no business, profession, vocation, or
employment of a substantial nature other than with Prudential and PIC, and have
not had such other connections during the past two years.
The business and other connections of Prudential's Directors are listed in the
Post-Effective Amendment No. 21 to the Registration Statement of The Prudential
Variable Appreciable Account, Registration No. 33-20000, filed on April 19,
1999, the text of which is hereby incorporated by reference.
C-9
<PAGE>
ITEM 27. PRINCIPAL UNDERWRITERS
(a)Prudential Investment Management Services LLC (PIMS) is principal underwriter
for Prudential's Gibraltar Fund, Inc., The Prudential Variable Contract
Account-2, The Prudential Variable Contract Account-10, The Prudential Variable
Contract Account-11, The Prudential Variable Contract Account-24, The Prudential
Discovery Select Group Variable Contract Account, Pruco Life Flexible Premium
Variable Annuity Account, Pruco Life of New Jersey Flexible Premium Variable
Annuity Account, Cash Accumulation Trust, Command Money Fund, Command Government
Fund, Command Tax-Free Fund, The Global Total Return Fund, Inc., Global Utility
Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity
Fund), Prudential Balanced Fund, Prudential California Municipal Fund,
Prudential Distressed Securities Fund, Inc., Prudential Diversified Bond Fund,
Inc., Prudential Emerging Growth Fund, Inc., Prudential Equity Fund, Inc.,
Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc., Prudential
Global Genesis Fund, Inc., Prudential Global Limited Maturity Fund, Inc.,
Prudential Government Income Fund, Inc., Prudential Government Securities Trust,
Prudential High Yield Fund, Inc., Prudential High Total Return Fund, Inc.,
Prudential Index Series Fund, Prudential Institutional Liquidity Portfolio,
Inc., Prudential Intermediate Global Income Fund, Inc., Prudential International
Bond Fund, Inc. The Prudential Investment Portfolios, Inc., Prudential Mid-Cap
Value Fund, Prudential MoneyMart Assets, Inc., Prudential Mortgage Income Fund,
Inc., Prudential Municipal Bond Fund, Prudential Municipal Series Fund,
Prudential National Municipals Fund, Inc., Prudential Natural Resources Fund,
Inc., Prudential Pacific Growth Fund, Inc., Prudential Real Estate Securities
Fund, Prudential Small-Cap Quantum Fund, Inc., Prudential Small Company Value
Fund, Inc., Prudential Special Money Market Fund, Inc., Prudential Structured
Maturity Fund, Inc., Prudential Tax-Free Money Fund, Inc., Prudential 20/20
Focus Fund, Prudential Utility Fund, Inc., Prudential World Fund, Inc. and The
Target Portfolio Trust.
<TABLE>
<CAPTION>
(b) NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITER WITH REGISTRANT
---------------- ---------------- ---------------
<S> <C> <C>
Robert F. Gunia*** President None
Jean D. Hamilton* Executive Vice President None
John R. Strangfeld, Jr.*** Executive Vice President None
Brian Henderson*** Sr. Vice President and Chief Operating Officer None
William V. Healey*** Vice President, Secretary and Chief Legal Officer None
Margaret M. Deverell*** Vice President, Comptroller and Chief Financial None
C. Edward Chaplin * Treasurer None
Kevin B. Frawley ** Sr. Vice President and Chief Compliance Officer None
</TABLE>
* Principal Business Address: 751 Broad Street, Newark, NJ 07102
** Principal Business Address: 213 Washington Street, Newark, NJ 07102
*** Principal Business Address: 100 Mulberry Street, Newark, NJ 07102
(c) Not applicable.
C-10
<PAGE>
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books, or other documents required to be maintained by Section 31
(a) of the 1940 Act and the rules promulgated thereunder are maintained by the
Registrant, 751 Broad Street, Newark, New Jersey 07102-3777; the Registrant's
Investment Advisor, The Prudential Insurance Company of America, 751 Broad
Street, Newark, New Jersey 07102-3777, the Registrant's Accounting Agent,
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, MO
64105-1716 or the Registrant's Custodians, Investors Fiduciary Trust Company,
127 West 10th Street, Kansas City, MO 64105-1716, and Brown Brothers Harriman &
Co., 40 Water Street, Boston, MA 02109.
The Fund has entered into Sub-Advisory Agreements with Jennison Associates LLC,
466 Lexington Avenue, New York, New York 10017; Prudential Investment
Corporation, 751 Broad Street, Newark, New Jersey 07102; Franklin Advisers,
Inc., 777 Mariners Island Blvd., San Mateo, California 94404; The Dreyfus
Corporation, 200 Park Avenue, New York, NY 10266; and Pacific Investment
Management Company, 840 Newport Center Drive, Newport Beach, California 92660.
ITEM 29. MANAGEMENT SERVICES
Not Applicable.
ITEM 30. UNDERTAKINGS
Not Applicable.
C-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment Company
Act, the Fund certifies that it meets all of the requirements for effectiveness
of this registration statement under rule 485(b) under the Securities Act and
has duly caused this registration statement to be signed on its behalf by the
undersigned, duly authorized, in the City of Newark, and State of New Jersey, on
the 26th day of April, 1999.
THE PRUDENTIAL SERIES FUND, INC.
By: /s/ E. Michael Caulfield
----------------------------
E. Michael Caulfield
President and Director
Pursuant to the requirements of the Securities Act, this Post-Effective
Amendment No. 36 to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
SIGNATURE AND TITLE DATE
- ------------------- ----
/s/ E. Michael Caulfield April 26, 1999
- ---------------------------------
E. Michael Caulfield
President and Director
/s/ Grace C. Torres April 26, 1999
- ---------------------------------
Grace C. Torres
Treasurer and Principal Financial
and Accounting Officer
*By: /s/ Caren Cunningham
----------------------
Caren Cunningham
(Attorney-in-Fact)
/s/* April 26, 1999
- ---------------------------------
Saul K. Fenster
Director
/s/* April 26, 1999
- ---------------------------------
W. Scott McDonald, Jr.
Director
/s/* April 26, 1999
- ---------------------------------
Joseph Weber
Director
C-12
<PAGE>
EXHIBIT INDEX PAGE
(a) (1) Articles of Incorporation of The Prudential Series Fund, Inc.
(3) Articles Supplementary to the Articles of Incorporation of The
Prudential Series Fund, Inc. [April 8, 1999]
(4) Articles Supplementary to the Articles of Incorporation of The
Prudential Series Fund, Inc. [August 30, 1996]
(5) Articles Supplementary to the Articles of Incorporation of The
Prudential Series Fund, Inc. [September 2, 1994]
(6) Articles Supplementary to the Articles of Incorporation of The
Prudential Series Fund, Inc. [July 18, 1988]
(7) Articles Supplementary to the Articles of Incorporation of The
Prudential Series Fund, Inc. [May 2, 1988]
(8) Articles Supplementary to the Articles of Incorporation of The
Prudential Series Fund, Inc. [February 17, 1988]
(9) Articles Supplementary to the Articles of Incorporation of The
Prudential Series Fund, Inc. [October 26, 1987]
(10) Articles Supplementary to the Articles of Incorporation of The
Prudential Series Fund, Inc. [June 4, 1986]
(d) (4) Subadvisory Agreement between the Prudential Insurance Company of
America and Jennison Associates LLC.
(5) Subadvisory Agreement between the Prudential Insurance Company of
America and The Dreyfus Corporation.
(6) Subadvisory Agreement between the Prudential Insurance Company of
America and Franklin Advisers, Inc.
(7) Subadvisory Agreement between the Prudential Insurance Company of
America and Pacific Investment Management Company.
(g) (4) Transfer Agent Agreement between Prudential Mutual Fund Services LLC
and The Prudential Series Fund, Inc.
(j) (1) Consent of PricewaterhouseCoopers LLP Independent accountants.
(2) Shea & Gardner Legal Opinion.
(m) Rule 12b-1 Plan.
(n) Financial Data Schedules.
(o) Rule 18f-3 Plan. [February 25, 1999]
(
C-13
[LOGO] MARYLAND
STATE DEPARTMENT OF ASSESSMENTS AND TAXATION
8304688
THE ARTICLES OF INCORPORATION
OF
THE PRUDENTIAL SERIES FUND, INC.
HAVE BEEN RECEIVED AND APPROVED BY THE STATE DEPARTMENT OF ASSESSMENTS AND
TAXATION THIS 15TH DAY OF NOVEMBER, 1982 AT 4:00 P.M. AND WILL BE RECORDED.
BY /S/ PAUL B. ANDERSON
---------------------
Paul B. Anderson
301 West Preston Street, Baltimore, Maryland 21201 / Phone: 383-3720
<PAGE>
================================================================================
STATE OF MARYLAND
[LOGO NO.] NO. 4359
STATE DEPARTMENT OF
ASSESSMENTS AND TAXATION
301 West Preston Street, Baltimore, Maryland 21201
THIS IS TO CERTIFY THAT the within instrument is a true copy of the
ARTICLES OF INCORPORATION
OF
THE PRUDENTIAL SERIES FUND, INC.
as approved and received for record by the State Department of Assessments and
Taxation of Maryland, November 15, 1982
at 4:00 o'clock P.M.
AS WITNESS my hand and official seal of the said
Department at Baltimore this twenty-third day
of November, 1982
/S/ PAUL B. ANDERSON
------------------------------------
Paul B. Anderson, Charter Specialist
================================================================================
<PAGE>
ARTICLES OF INCORPORATION
OF
THE PRUDENTIAL SERIES FUND, INC.
ARTICLE I
THE UNDERSIGNED, Christopher P. Nicholas, whose post office address is
PRUDENTIAL PLAZA, 745 Broad Street, Newark, New Jersey 07101, being at least 18
years of age, does hereby act as an incorporator, under and by virtue of the
General Corporation Laws of the State of Maryland authorizing the formation of
corporations and with the intention of forming a corporation.
ARTICLE II
NAME
----
The name of the corporation is THE PRUDENTIAL SERIES FUND, INC.
ARTICLE III
PURPOSE AND POWERS
------------------
The purpose or purposes for which the Corporation is formed and the business or
objects to be transacted, carry on and promoted by it are as follows:
(1) To conduct and carry on the business of an investment company of the
management type.
<PAGE>
(2) To hold, invest and reinvest its assets in securities, and in connection
therewith to hold part or all of its assets in cash.
(3) To issue and sell shares of its own capital stock in such amounts and on
such terms and conditions, for such purposes and for such amount or kind of
consideration now or hereafter permitted by the General Corporation Law of the
State of Maryland and by these Articles of Incorporation, as its Board of
Directors may determine, provided, however, that the value of the consideration
per share to be received by the Corporation upon the sale or other disposition
of any shares of its capital stock shall be not less than the net asset value
per share of such capital stock outstanding at the time of such event.
(4) To redeem, purchase or otherwise acquire, hold, dispose of, resell,
transfer, reissue or cancel (all without the vote or consent of the stockholders
of the Corporation) shares of its capital stock, in any manner and to the extent
now or hereafter permitted by the General Corporation Law of the State of
Maryland and by these Articles of Incorporation.
(5) To do any and all such further acts or things and to exercise any and all
such further powers or rights as may be necessary, incidental, relative,
conducive, appropriate or desirable for the accomplishment, carrying out or
attainment of any of the foregoing purposes or objects.
The Corporation shall be authorized to exercise and enjoy all the powers, rights
and privileges granted to, or conferred upon, corporations by the General
Corporation law of the State of Maryland now or hereafter in force, and the
enumeration of the foregoing shall not be deemed to exclude any powers, rights
or privileges so granted or conferred.
-2-
<PAGE>
ARTICLE IV
PRINCIPAL OFFICE AND RESIDENT AGENT
-----------------------------------
The post office address of the principal office of the Corporation in this State
is c/o United States Corporation Company, 2 Hopkins Plaza, 1300 Mercantile Bank
and Trust Building, Baltimore, Maryland 21201. The name of the resident agent of
the Corporation in this State is United States Corporation Company, a
corporation in this State, and the post office address of the resident agent is
2 Hopkins Plaza, 1300 Mercantile Bank and Trust Building, Baltimore, Maryland
21201.
ARTICLE V
CAPITAL STOCK
-------------
The total number of shares of capital stock which the Corporation shall have
authority to issue is TWO BILLION (2,000,000,000) shares of the par value of One
Cent ($0.01) per share and of the aggregate par value of $20,000,000. One
billion eight hundred million ($1,800,000,000) shares shall be divided into the
following classes of capital stock, each class comprising the number of shares
and having the designations indicated, subject, however, to the authority to
increase and decrease the number of shares of any class hereinafter granted to
the Board of Directors.
-3-
<PAGE>
CLASS NUMBER OF SHARES
----- ----------------
Money Market Portfolio Capital Stock 400,000,000
Long Term Bond Portfolio Capital Stock 200,000,000
Common Stock Portfolio Capital Stock 200,000,000
Qualified Common Stock Portfolio Capital Stock 200,000,000
Aggressively Managed Flexible Portfolio Capital Stock 200,000,000
Qualified Aggressively Managed Flexible Portfolio
Capital Stock 200,000,000
Conservatively Managed Flexible Portfolio
Capital Stock 200,000,000
Qualified Conservatively Managed Flexible Portfolio
Capital Stock 200,000,000
The balance of two hundred million (200,000,000) shares of such stock may be
issued in such classes, or in any new class or classes each comprising such
number of shares and having such designations, such powers, preferences and
rights and such qualifications, limitations and restrictions as shall be fixed
and determined from time to time by resolution or resolutions providing for the
issuance of such stock adopted by the Board of Directors, to whom authority so
to fix and determine the same is hereby expressly granted. In addition, the
Board of Directors is hereby expressly granted authority to increase or decrease
the number of shares of any class, but the number of shares of any class shall
not be decreased by the Board of Directors below the number of shares thereof
then outstanding.
The holder of each share of stock of the Corporation shall be entitled to one
vote for each full share, and a fractional vote for each fractional share of
stock, irrespective of the class, then standing in his name on the books of the
Corporation. On any matter submitted to a vote of stockholders, all shares of
the Corporation then issued and outstanding and entitled to vote shall be voted
in the aggregate and not by class expect that (1) when otherwise expressly
required by the Maryland General Corporation Law or the Invest-
-4-
<PAGE>
ment Company Act of 1940, as amended, shares shall be voted by individual class;
(2) only shares of the respective portfolios are entitled to vote on matters
concerning only that Portfolio; and (3) fundamental policies, as specified in
Article XIV of the by-laws, may be changed, with respect to any Portfolio, if
such change is approved by a majority (as defined under the Investment Company
Act of 1940) of the capital stock of such Portfolio.
Each class of stock of the Corporation shall have the following powers,
preferences or other special rights, and the qualifications, restrictions, and
limitations thereof shall be as follows:
(1) The shares of each class, when issued, will be fully paid and nonassessable,
have no preference, preemptive, conversion, exchange, or similar rights, except
as set forth in (2) below, and will be freely transferable.
(2) The consideration received by the Corporation for the sale of capital stock
shall become part of the assets of the Portfolio to which the capital stock of
the class relates. Each share of the capital stock of each class shall have a
pro rata interest in the assets of the Portfolio to which the capital stock of
that class relates and shall have no interest in the assets of any other
Portfolio.
(3) The Board of Directors may from time to time declare and pay dividends or
distributions, in stock or in cash, on any or all classes of stock, the amount
of such dividends and distributions and the payment of them being wholly in the
discretion of the Board of Directors.
-5-
<PAGE>
(i) Dividends or distributions on shares of any class of stock shall be paid
only out of earned surplus or other lawfully available assets belonging to such
class.
(ii) Inasmuch as one goal of the Corporation is to qualify as a "regulated
investment company" under the Internal Revenue Code of 1954, as amended, or any
successor or comparable statute thereto, and Regulations promulgated thereunder,
and inasmuch as the computation of net income and gains for Federal income tax
purposes may vary from the computation thereof on the books of the Corporation,
the Board of Directors shall have the power in its discretion to distribute in
any fiscal years as dividends, including dividends designated in whole or in
part as capital gains distributions, amounts sufficient in the opinion of the
Board of Directors, to enable the Corporation to qualify as a regulated
investment company and to avoid liability for the Corporation for Federal income
tax in respect of that year. In furtherance, and not in limitation of the
foregoing, in the event that a class of shares has a net capital loss for a
fiscal year, and to the extent that a net capital loss for a fiscal year offsets
net capital gains from one or more of the other classes, the amount to be deemed
available for distribution to the class or classes with the net capital gain may
be reduced by the amount offset.
(4) The assets belonging to any class of stock shall be charged with the
liabilities in respect to such class, and shall also be charged with their share
of the general liabilities of the Corporation in proportion to the asset values
of the respective classes. The determination of the Board of Directors shall be
conclusive as to the amount of liabilities or the amount of any general assets
of the Corporation, as to whether such liabilities or assets are
-6-
<PAGE>
allocable to one or more classes, and as to the allocation of such liabilities
or assets to a given class or among several classes.
(5) With the approval of a majority of the stockholders of each of the affected
classes of capital stock, the Board of Directors may transfer the assets of any
Portfolio to any other Portfolio. Upon such a transfer, the Corporation shall
issue shares of capital stock representing interests in the Portfolio to which
the assets were transferred in exchange for all shares of capital stock
representing interests in the Portfolio from which the assets were transferred.
Such shares shall be exchanged at their respective net asset values.
-7-
<PAGE>
ARTICLE VI
PROVISIONS FOR DEFINING, LIMITING, AND REGULATING
-------------------------------------------------
CERTAIN POWERS OF THE CORPORATION AND OF
----------------------------------------
THE DIRECTORS AND STOCKHOLDERS
------------------------------
(1) The number of directors of the Corporation shall be five (5), which number
may be increased or decreased pursuant to the by-laws of the Corporation but
shall never be less than three (3). The names of the directors who shall act
until the first annual meeting or until their successors are duly elected and
qualify are:
A. Douglas Murch
Martin D. Vogt
George E. Hartz, Jr.
Paul S. Feinberg
Christopher P. Nicholas
-8-
<PAGE>
(2) The Board of Directors of the Corporation is hereby empowered to authorize
the issuance from time to time of shares of capital stock, whether now or
hereafter authorized, for such consideration as the Board of Directors may deem
advisable, subject to such limitations as may be set forth in these Articles of
Incorporation or in the by-laws of the Corporation or in the General Corporation
Law of the State of Maryland or in the Investment Company Act of 1940, as
amended.
(3) No holder of stock of the Corporation shall, as such holder, have any right
to purchase or subscribe for any shares of the capital stock of the Corporation
or any other security of the Corporation which it may issue or sell (whether out
of the number of shares authorized by these Articles of Incorporation, or out of
any shares of the capital stock of the Corporation acquired by it after the
issue thereof, or otherwise) other than such right, if any, as the Board of
Directors, in its discretion, may determine.
(4) Each director and each officer of the Corporation shall be indemnified by
the Corporation to the full extent permitted by the General Laws of the State of
Maryland and as provided in the by-laws of the Corporation.
(5) The Board of Directors of the Corporation may make, alter or repeal from
time to time any of the by-laws of the Corporation except any particular by-law
which is specified as not subject to alteration or repeal by the Board of
Directors, subject to the requirements of the Investment Company Act of 1940, as
amended.
-9-
<PAGE>
ARTICLE VII
REDEMPTION
----------
Each holder of shares of capital stock of the Corporation shall be entitled to
require the Corporation to redeem all or any part of the shares of capital stock
of the Corporation standing in the name of such holder on the books of the
Corporation, and the Corporation shall redeem all shares of such capital stock
tendered to it for redemption at the redemption price of such shares as in
effect from time to time as may be determined by the Board of Directors of the
Corporation in accordance with the provisions hereof, subject to the right of
the Board of Directors of the Corporation to suspend the right of redemption of
shares of capital stock of the Corporation or postpone the date of payment of
such redemption price in accordance with provisions of applicable law. The
redemption price of shares of capital stock of the Corporation shall be the net
asset value thereof as determined by the Board of Directors of the Corporation
from time to time in accordance with the provisions of applicable law, less such
redemption fee or other charge, if any, as may be fixed by resolution of the
Board of Directors of the Corporation. Payment of the redemption price shall be
made in cash by the Corporation at such time and in such manner as may be
determined from time to time by the Board of Directors of the Corporation,
except that capital stock of any class may be redeemed in kind with the assets
of the Portfolio to which the class relates if the Board of Directors deems such
action desirable.
-10-
<PAGE>
ARTICLE VIII
DETERMINATION BINDING
---------------------
Any determination made in good faith, so far as accounting matters are involved,
in accordance with accepted accounting practice by or pursuant to the direction
of the Board of Directors, as to the amount of assets, obligations or
liabilities of the Corporation, as to the amount of net income of the
Corporation from dividends and interest for any period or amounts at any time
legally available for the payment of dividends, as to the amount of any reserves
or charges set up and the propriety thereof, as to the time of or purpose for
creating reserves or as to the use, alteration or cancellation of any reserves
or charges (whether or not any obligation or liability for which such reserves
or charges shall have been created shall have been paid or discharged or shall
be then or thereafter required to be paid or discharged), as to the price of any
security owned by the Corporation or as to any other matters relating to the
issuance, sale, redemption or other acquisition or disposition of securities or
shares of capital stock of the Corporation, and any reasonable determination
made in good faith by the Board of Directors as to whether any transaction
constitutes a purchase of securities on "margin", a sale of securities "short",
or an underwriting of the sale of, or a participation in any underwriting or
selling group in connection with the public distribution of, any securities,
shall be final and conclusive, and shall be binding upon the Corporation and all
holders of its capital stock, past, present and future, and shares of the
capital stock of the Corporation are issued and sold on the condition and
understanding, evidenced by the purchase of shares of capital stock or
acceptance of share certificates, that any and all such determinations shall be
binding as aforesaid. No provision of these Articles
-11-
<PAGE>
of Incorporation shall be effective to (a) require a waiver of compliance with
any provision of the Securities Act of 1933, as amended, or the Investment
Company Act of 1940, as amended, or of any valid rule, regulation or order of
the Securities and Exchange Commission thereunder or (b) protect or purport to
protect any director or officer of the Corporation against any liability to the
Corporation or its security holders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office.
ARTICLE IX
PERPETUAL EXISTENCE
-------------------
The duration of the Corporation shall be perpetual.
ARTICLE X
AMENDMENT
---------
The Corporation reserves the right from time to time to make any amendment of
its charter, now or hereafter authorized by law, including any amendment which
alters the contract rights, as expressly set forth in its charter, of any
outstanding stock.
IN WITNESS WHEREOF, the undersigned incorporator of THE PRUDENTIAL SERIES FUND,
INC. hereby executes the foregoing Articles of Incorporation and acknowledges
the same to be his act and further acknowledges that, to the best of his
knowledge, the matters and facts set forth therein are true in all material
respects under the penalties of perjury.
-12-
<PAGE>
Dated the 12th day of November, 1982.
BY /S/ CHRISTOPHER P. NICHOLAS
---------------------------
Christopher P. Nicholas
State of New Jersey)
County of Essex )ss
On this 12th day of November, 1982, before me personally appeared
Christopher P. Nicholas, to me known and known to me to be the person mentioned
and described in and who executed the foregoing instrument and he duly
acknowledged to me that he executed the same.
/S/ VICKI HERBST
-----------------
Notary Public
[STAMP}
VICKI HERBST
A Notary Public of New Jersey
My Commission Expires July 12, 1987
-----------------------------------
-13-
<PAGE>
[8304688]
[550]
[STAMP]
STATE DEPARTMENT OF
ASSESSMENTS AND TAXATION
APPROVED FOR RECORD
Time Mo. Day Year
[4:00 11/15/82]
---------------------------------
690 BONUS TAX
---------------------------------
36 RECORDING FEE
---------------------------------
LIMITED PARTNERSHIP FEE
---------------------------------
[#4359] 6 OTHER [1-CC]
---------------------------------
CASH [ ] APPROVED BY
732 TOTAL CHECK [x] [2A]
---------------------------------
[SEAL]
[STAMP]
AFTER RECORDING RETURN TO
U.S. CORPORATION LAWS
1300 Mercantile Bank and Trust Building
2 Hopkins Plaza
Baltimore, Maryland 21201
<PAGE>
ARTICLES OF INCORPORATION
[ROLL 174 FACE 612]
OF
THE PRUDENTIAL SERIES FUND, INC.
[175]
approved and received for record by the State Department of Assessments and
Taxation of Maryland November 15, 1982 at 4:00 o'clock P.M. as in conformity
with law and order recorded.
[14]
----------
Recorded in Liber [2563], folio 00795 one of the Charter Records of the
State Department of Assessments and Taxation of Maryland.
----------
Bonus tax paid $690.00 Recording fee paid $36.00 Special Fee Paid $
------- ------ --------
----------
To the clerk of the Superior Court of Baltimore City
IT IS HEREBY CERTIFIED, that the within instrument, together with all
indorsements thereon, has been received, approved and recorded by the State
Department of Assessments and Taxation of Maryland.
AS WITNESS my hand and seal of the said Department of Baltimore
/S/ PAUL B. ANDERSON
---------------------
[SEAL]
A 133942
8304688
RECEIVED FOR RECORD
MARCH 16, 1983 AT 9 O'CLOCK,
A.M. SAME DAY RECORDED IN LIBER
S.E.B. NO. 174 FOLIO 599 &c,
ONE OF THE CHARTER RECORD OF
Exhibit (a)(3)
================================================================================
STATE OF MARYLAND
72151
STATE DEPARTMENT OF
ASSESSMENTS AND TAXATION
301 West Preston Street, Baltimore, Maryland 21201
Date: April 08, 1999
THIS IS TO ADVISE YOU THAT THE ARTICLES SUPPLEMENTARY FOR THE PRUDENTIAL
SERIES FUND, INC., WERE RECEIVED AND APPROVED FOR RECORD ON APRIL 8, 1999
AT 10:33 AM.
FEE PAID: 81.00
[STATE SEAL]
JOSEPH V. STEWART
CHARTER SPECIALIST
AT5-031
================================================================================
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
--------------------------------
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
THE PRUDENTIAL SERIES FUND, INC., a Maryland corporation having its
principal office in this State c/o Prentice Hall Corporate Services, 2 Hopkins
Plaza, 1300 Merchantile Bank and Trust Building, Baltimore, Maryland 21201
(hereinafter called the Corporation), hereby certifies to the State Department
of Assessments and Taxation of Maryland, that:
FIRST: The Board of Directors of the Corporation, at a meeting duly
convened and held on February 25, 1999, adopted a resolution classifying or
reclassifying two billion (2,000,000,000) authorized shares of capital stock of
the Corporation of the par value of $0.01 per share by establishing two (2) new
classes of capital stock designated as Diversified Conservative Growth Portfolio
Capital Stock and 20/20 Focus Portfolio Capital Stock and by allocating or
reallocating such two billion shares so that the total number of shares of
authorized capital stock of the Corporation shall be divided among the following
classes of capital stock, each class compromising the number of shares and
having the designations, preferences, rights, voting powers and such
qualifications, limitations and restrictions as are hereinafter set forth:
<PAGE>
CLASS NUMBER OF SHARES
----- ----------------
Money Market Portfolio Capital Stock 140,000,000
Diversified Bond Portfolio Capital Stock 140,000,000
Equity Portfolio Capital Stock 230,000,000
Flexible Managed Portfolio Capital Stock 350,000,000
Conservative Balanced Portfolio Capital Stock 350,000,000
Zero Coupon Bond-2000 Portfolio Capital Stock 15,000,000
Zero Coupon Bond-2005 Portfolio Capital Stock 15,000,000
High Yield Bond Portfolio Capital Stock 135,000,000
Stock Index Portfolio Capital Stock 115,000,000
Equity Income Portfolio Capital Stock 130,000,000
Natural Resources Portfolio Capital Stock 35,000,000
Global Portfolio Capital Stock 60,000,000
Government Income Portfolio Capital Stock 60,000,000
Prudential Jennison Portfolio Capital Stock 75,000,000
Small Capitalization Stock Portfolio Capital Stock 50,000,000
Diversified Conservative Growth Portfolio Capital Stock 50,000,000
20/20 Focus Portfolio Capital Stock 50,000,000
The holder of each share of stock of the Corporation shall be entitled to one
vote for each full share, and a fractional vote for each fractional share of
stock, irrespective of the class, then standing in his name on the books of the
Corporation. On any matter submitted to a vote of stockholders, all shares of
the Corporation then issued and outstanding and entitled to vote shall be voted
in the aggregate and not by class except that (1) when otherwise expressly
required by the Maryland General Corporation Law or the Investment Company Act
of 1940, as amended, shares shall be voted by individual class; (2) only shares
of the respective portfolios are entitled to vote on matters concerning only
that Portfolio; and (3) fundamental policies, as specified in the by-laws of the
Corporation, may be changed, with respect to any Portfolio, if such change is
approved by a majority (as defined under the Investment Company Act of 1940) of
the capital stock of such Portfolio.
2
<PAGE>
Each class of stock of the Corporation shall have the following powers,
preferences or other special rights, and the qualifications, restrictions, and
limitations thereof shall be as follows:
(1) The shares of each class, when issued, will be fully paid and
nonassessable, have no preference, preemptive, conversion, exchange, or similar
rights, except as set forth in
(2) below, and will be freely transferable.
(2) The consideration received by the Corporation for the sales of capital stock
shall become part of the assets of the Portfolio to which the capital stock of
the class relates. Each share of the capital stock of each class shall have a
pro rata interest in the assets of the Portfolio to which the capital stock of
that class relates and shall have no interest in the assets of any other
Portfolio.
(3) The Board of Directors may from time to time declare and pay dividends or
distributions, in stock or in case, on any or all classes of stock, the amount
of such dividends and distributions and the payment of them being wholly in the
discretion of the Board of Directors.
(i) Dividends or distributions on shares of any class of stock shall be paid
only out of earned surplus or other lawfully available assets belonging to such
class.
(ii) Inasmuch as one goal of the Corporation is to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended, or any
successor or comparable statute thereto, and Regulations promulgated thereunder,
and inasmuch as the computation of net income and gains for Federal income tax
purposes may vary from the computation thereof on the books of the Corporation,
the Board of Directors shall have the power in its discretion to distribute in
any fiscal years as dividends, including dividends designated in whole or in
part as capital gains distributions, amounts
3
<PAGE>
sufficient in the opinion of the Board of Directors, to enable the Corporation
to qualify as a regulated investment company and to avoid liability for the
Corporation for Federal income tax in respect of that year. In furtherance, and
not in limitation of the foregoing, in the event that a class of shares has a
net capital loss for a fiscal year, and to the extent that a net capital loss
for a fiscal year offsets net capital gains from one or more of the other
classes the amount to be deemed for distribution to the class or classes with
the net capital gain may be reduced by the amount offset.
(4) The assets belonging to any class of stock shall be charged with the
liabilities in respect to such class, and shall also be charged with their share
of the general liabilities of the Corporation in proportion to the asset values
of the respective classes. The determination of the Board of Directors shall be
conclusive as to the amount of liabilities or the amount of any general assets
of the Corporation, as to whether such liabilities or assets are allocable to
one or more classes, and as to the allocation of such liabilities or assets to a
given class or among several classes.
(5) With the approval of a majority of the stockholders of each of the affected
classes of capital stock, the Board of Directors may transfer the assets of any
Portfolio to any other Portfolio. Upon such a transfer, the Corporation shall
issue shares of capital stock representing interests in the Portfolio to which
the assets were transferred in exchange for all shares of capital stock
representing interests in the Portfolio from which the assets were transferred.
Such shares shall be exchanged at their respective net asset values.
SECOND: The shares aforesaid have been duly classified or reclassified
by the Board of Directors pursuant to authority and power contained in Article V
of the Articles of Incorporation of the Corporation.
4
<PAGE>
IN WITNESS WHEREOF, THE PRUDENTIAL SERIES FUND, INC. has caused these
presents to be signed in its name and on its behalf by its President and its
corporate seal to be hereunto affixed and attested by its Secretary, on February
25, 1999.
THE PRUDENTIAL SERIES FUND, INC.
By: ________________________
Michael Caulfield
President
Attest:
___________________
Caren Cunningham
Secretary
THE UNDERSIGNED, President of THE PRUDENTIAL SERIES FUND, INC., who
executed on behalf of said Corporation the foregoing Articles Supplementary to
the Articles of Incorporation, of which this certificate is made a part, hereby
acknowledges, in the name and on behalf of said Corporation, the foregoing
Articles Supplementary to the Articles of Incorporation to be the corporate act
of said Corporation and further certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
________________________
Michael Caulfield
5
<PAGE>
STATE OF MARYLAND
[LOGO]
State Department of Assessments and Taxation
DOCUMENT CODE __160__ BUSINESS CODE __03__ COUNTY __74__
#_D1484427_ __P.A __Religious __Close _X_Stock __Nonstock
Merging Surviving
(Transferor)__________________________ (Transferee)__________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
CODE AMOUNT FEE REMITTED
- ---- ------ ------------
20 ______ Organ. & Capitalization Name Change
61 ______ Rec. Fee (Arts. of Inc.) -----------
62 __22__ Rec. Fee (Amendment) (New Name)____________________________
63 ______ Rec. Fee (Merger or ______________________________________
Consolidation) ______________________________________
64 ______ Rec. Fee (Transfer)
65 ______ Rec. Fee (Dissolution)
66 ______ Rec. Fee (Revival) ___ Change of Name
52 ______ Foreign Qualification
50 ______ Cert. of Qual. or Reg. ___ Change of Principal Office
51 ______ Foreign Name Registration
13 ______ ___Certified Copy________ ___ Change of Resident Agent
56 ______ Penalty
54 ______ For. Supplemental Cert. ___ Change of Resident Agent
53 ______ Foreign Resolution Address
73 ______ Certificate of Conveyance
_________________________ ___ Resignation of Resident Agent
_________________________
73 ______ Certificate of Merger/
Transfer_________________
_________________________
_________________________
75 ______ Special Fee Code_______________
80 ______ For. Limited Partnership
83 ______ Cert. Limited Partnership Attention:____________________________
84 ______ Amendment to Limited ______________________________________
Partnership ______________________________________
85 ______ Termination of Limited
Partnership
21 ______ Recordation Tax
22 ______ State Transfer Tax
23 ______ Local Transfer Tax MAIL TO ADDRESS:______________________
31 ______ ____ Corp. Good Standing _The_Prudential_______________________
NA ______ Foreign Corporation _Att:_Thomas_Castano__________________
Registration _213 Washington_St.___________________
87 ______ ___Limited Part. Good _Newark_NJ__07102_____________________
Standing
71 ______ Financial NOTE:
600 ______ ____________ Personal -----
Property Reports and ____
_________ late filing
penalties
70 ______ Change of P.O., R.A. or
R.A.A.
__ ______ Other ___________________
__ ______ Other ___________________
TOTAL
FEES _22_
__X__ Check _____ Cash
_____ Documents on _____ checks
APPROVED BY: /s/[ILLEGIBLE]
ARTICLES SUPPLEMENTARY
OF
THE PRUDENTIAL SERIES FUND, INC.
APPROVED AND RECEIVED FOR RECORD BY THE STATE DEPARTMENT OF ASSESSMENTS AND
TAXATION OF MARYLAND AUGUST 30, 1996 AT 8:47 O'CLOCK A.M. AS IN CONFORMITY WITH
LAW AND ORDERED RECORDED.
ORGANIZATION AND RECORDING SPECIAL
CAPITALIZATION FEE PAID: FEE PAID: FEE PAID:
$______________________ $__20.00________ $_______________
_____________________
D1484427
IT IS HEREBY CERTIFIED, THAT THE WITHIN INSTRUMENT, TOGETHER WITH ALL
INDORSEMENTS THEREON, HAS BEEN RECEIVED, APPROVED AND RECORDED BY THE STATE
DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND.
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
751 BROAD STREET
NEWARK NJ 07102 3777
04703102794
A533420
[SEAL]
RECORDED IN THE RECORDS OF THE
STATE DEPARTMENT OF ASSESSMENTS
AND TAXATION OF MARYLAND AND IN LIBER, FOLIO.
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
THE PRUDENTIAL SERIES FUND, INC., a Maryland corporation having its
principal office in this State c/o Prentice Hall Corporate Services, 2 Hopkins
Plaza, 1300 Merchantile Bank and Trust Building, Baltimore, Maryland 21201
(hereinafter called the Corporation), hereby certifies to the State Department
of Assessments and Taxation of Maryland, that:
FIRST: The Board of Directors of the Corporation, at a meeting duly
convened and held on March 1, 1996, adopted a resolution redesignating classes
of capital stock designated as Common Stock Portfolio Capital Stock, High
Dividend Stock Portfolio Capital Stock, Global Equity Portfolio Capital Stock,
Growth Stock Portfolio Capital Stock, Conservatively Managed Flexible Portfolio
Capital Stock, Aggressively Managed Flexible Portfolio Capital Stock, Bond
Portfolio Capital Stock and Government Securities Portfolio Capital Stock as
hereinafter set forth:
<TABLE>
<CAPTION>
OLD DESIGNATION NEW DESIGNATION
--------------- ---------------
<S> <C>
Common Stock Portfolio Capital Stock Equity Portfolio Capital Stock
High Dividend Stock Portfolio Capital Stock Equity Income Portfolio Capital Stock
Global Equity Portfolio Capital Stock Global Portfolio Capital Stock
Growth Stock Portfolio Capital Stock Prudential Jennison Portfolio Capital Stock
Conservatively Managed Flexible Portfolio Capital Stock Conservative Balanced Portfolio Capital Stock
Aggressively Managed Flexible Portfolio Capital Stock Flexible Managed Portfolio Capital Stock
Bond Portfolio Capital Stock Diversified Bond Portfolio Capital Stock
Government Securities Portfolio Capital Stock Government Income Portfolio Capital Stock
</TABLE>
SECOND: The Board of Directors of the Corporation, at a meeting duly
convened and held on March 1, 1996, adopted a resolution classifying or
reclassifying twenty five million (25,000,000) unissued shares of capital stock
designated as Zero Coupon Bond - 1995 Portfolio Capital Stock and by allocating
or reallocating such twenty five million shares so that the total number of
shares of authorized capital stock of the Corporation shall be divided among the
following classes of capital stock, each class comprising the number of shares
and having the designations, preferences, rights, voting powers and such
qualifications, limitations and restrictions as are hereinafter set forth:
<PAGE>
CLASS NUMBER OF SHARES
----- ----------------
Money Market Portfolio Capital Stock 225,000,000
Diversified Bond Portfolio Capital Stock 200,000,000
Equity Portfolio Capital Stock 200,000,000
Flexible Managed Portfolio Capital Stock 300,000,000
Conservative Balanced Portfolio Capital Stock 300,000,000
Zero Coupon Bond-2000 Portfolio Capital Stock 25,000,000
Zero Coupon Bond-2005 Portfolio Capital Stock 50,000,000
High Yield Bond Portfolio Capital Stock 100,000,000
Stock Index Portfolio Capital Stock 100,000,000
Equity Income Portfolio Capital Stock 100,000,000
Natural Resources Portfolio Capital Stock 100,000,000
Global Portfolio Capital Stock 100,000,000
Government Income Portfolio Capital Stock 100,000,000
Prudential Jennison Portfolio Capital Stock 50,000,000
Small Capitalization Stock Portfolio Capital Stock 50,000,000
The holder of each share of stock of the Corporation shall be entitled to one
vote for each full share, and a fractional vote for each fractional share of
stock, irrespective of the class, then standing in his name on the books of the
Corporation. On any matter submitted to a vote of stockholders, all shares of
the Corporation then issued and outstanding and entitled to vote shall be voted
in the aggregate and not by class except that (1) when otherwise expressly
required by the Maryland General Corporation Law of the Investment Company Act
of 1940, as amended, shares shall be voted by individual class; (2) only shares
of the respective portfolios are entitled to vote on matters concerning only
that Portfolio; and (3) fundamental policies, as specified in the by-laws of the
Corporation, may be changed, with respect to any Portfolio, if such change is
approved by a majority (as defined under the Investment Company Act of 1940) of
the capital stock of such Portfolio.
Each class of stock of the Corporation shall have the following powers
preferences or other special rights, and the qualifications, restrictions, and
limitations thereof shall be as follows:
(1) The shares of each class, when issued, will be fully paid and nonassessable,
have no preferences, preemptive, conversion, exchange, or similar rights, except
as set forth in (2) below, and will be freely transferable.
(2) The consideration received by the Corporation for the sale of capital stock
shall become part of the assets of the Portfolio to which the capital stock of
the class relates. Each share of the capital stock of each
<PAGE>
class shall have a pro rata interest in the assets of the Portfolio to which the
capital stock of that class relates and shall have no interest in the assets of
any other Portfolio.
(3) The Board of Directors may from time to time declare and pay dividends or
distributions, in stock or in cash, on any or all classes of stock, the amount
of such dividends and distributions and the payment of them being wholly in the
discretion of the Board of Directors.
(i) Dividends or distributions on shares of any class of stock shall be paid
only out of earned surplus or other lawfully available assets belonging to such
class.
(ii) Inasmuch as one goal of the Corporation is to qualify as a "regulated
investment company" under the Internal Revenue Code of 1954, as amended, or any
successor or comparable statute thereto, and Regulations promulgated thereunder,
and inasmuch as the computation of net income and gains for Federal income tax
purposes may vary from the computation thereof on the books of the Corporation,
the Board of Directors shall have the power in its discretion to distribute in
any fiscal years as dividends, including dividends designated in whole or in
part as capital gains distributions, amounts sufficient in the opinion of the
Board of Directors, to enable the Corporation to qualify as a regulated
investment company and to avoid liability for the Corporation for Federal income
tax in respect of that year. In furtherance, and not in limitation of the
foregoing, in the event that a class of shares has a net capital loss for a
fiscal year, and to the extent that a net capital loss for a fiscal year offsets
net capital gains from one or more of the other classes the amount to be deemed
for distribution to the class or classes with the net capital gain may be
reduced by the amount offset.
(4) The assets belonging to any class of stock shall be charged with the
liabilities in respect to such class, and shall also be charged with their share
of the general liabilities of the Corporation in proportion to the asset values
of the respective classes. The determination of the Board of Directors shall be
conclusive as to the amount of liabilities or the amount of any general assets
of the Corporation, as to whether such liabilities or assets are allocable to
one or more classes, and as to the allocation of such liabilities or assets to a
given class or among several classes.
(5) With the approval of a majority of the stockholders of each of the affected
classes of capital stock, the Board of Directors may transfer the assets of any
Portfolio to any other Portfolio. Upon such a transfer, the Corporation shall
issue shares of capital stock representing interests in the Portfolio to which
the assets are transferred in exchange for all shares of capital stock
representing interests in the Portfolio from which the assets were transferred.
Such shares shall be exchanged at their respective net asset value.
<PAGE>
THIRD: The shares aforesaid have been duly classified or reclassified by
the Board of Directors pursuant to authority and power contained in Article V of
the Articles of Incorporation of the Corporation.
IN WITNESS WHEREOF, THE PRUDENTIAL SERIES FUND, INC. has caused these
presents to be signed in its name and on its behalf by its President or one of
its Vice Presidents and its corporate seal to be hereunto affixed and attested
by its Assistant Secretary, on July 23, 1996.
THE PRUDENTIAL SERIES FUND, INC.
By: /s/ L. Edward Price
-------------------
Vice President
Attest:
/s/ Thomas C. Castano
- ---------------------
Thomas Castano
Secretary
THE UNDERSIGNED, Vice President of THE PRUDENTIAL SERIES FUND, INC., who
executed on behalf of said Corporation the foregoing Articles Supplementary to
the Articles of Incorporation, of which this certificate is made a part, hereby
acknowledges, in the name and on behalf of said Corporation, the foregoing
Articles Supplementary to the Articles of Incorporation to be the corporate act
of said Corporation and further certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
L. Edward Price
---------------
<PAGE>
State of Maryland PARRIS N. GLENDENING
DEPARTMENT OF [SEAL] Governor
ASSESSMENTS AND TAXATION RONALD W. WINEHOLT
Director
Charter Division PAUL B. ANDERSON
Adminstrator
- --------------------------------------------------------------------------------
DOCUMENT CODE __16__ BUSINESS CODE ________ COUNTY ___74___
#D1484427 ___P.A. ___Religious ___Close ___Stock ___Nonstock
Merging Surviving
(Transferor)__________________________ (Transferee)__________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
CODE AMOUNT FEE REMITTED
- ---- ------ ------------
10 ______ Expedited Fee (New Name)____________________________
61 ______ Rec. Fee (Arts. of Inc.) ______________________________________
20 ______ Organ. & Capitalization ______________________________________
62 __20__ Rec. Fee (Amendment)
63 ______ Rec. Fee (Merger, Consol.)
64 ______ Rec. Fee (Transfer) _____ Change of Name
66 ______ Rec. Fee (Revival) _____ Change of Principal Office
65 ______ Rec. Fee (Dissolution) _____ Change of Resident Agent
75 ______ Special Fee _____ Change of Resident Agent
73 ______ Certificate of Conveyance Address
_______________________ _____ Resignation of Resident Agent
_______________________ _____ Designation of Resident Agent
_______________________ and Resident Agent's Address
21 ______ Recordation Tax _____ Change of Business Code
22 ______ State Transfer Tax ________________________________
23 ______ Local Transfer Tax _____ Adoption of Assumed Name
70 ______ Change of P.O., R.A. ________________________________
or R.A.A. ________________________________
31 ______ _____Corp. Good Standing ________________________________
600 ______ Returns __X__ Other Change(s)_Reclassifying___
- ------------------------------------------ _authorized stock_______________
52 ______ Foreign Qualification ________________________________
NA ______ Foreign Registration
51 ______ Foreign Name Registration CODE____________________________
53 ______ Foreign Resolution ATTENTION:______________________
54 ______ For. Supplement Cert. ________________________________
56 ______ Penalty ________________________________
50 ______ Cert. of Qual. or Reg.
- ------------------------------------------ MAIL TO ADDRESS:________________
83 ______ Foreign Qualification _The Prudential Insurance_______
84 ______ Amendment to Limited _Company of America_____________
Partnership _751 Broad St___________________
85 ______ Termination of Limited _Newark,_NJ_07102-3777__________
80 ______ For. Limited Partnership
91 ______ Amend/Cancellation, For. NOTE:
Limited Part. -----
87 ______ Limited Part. Good Standing
- ------------------------------------------
67 ______ Cert. Limited Liability
Partnership
68 ______ LLP Amendment - Domestic
69 ______ Foreign Limited Liability
Partnership
74 ______ LLP Amendment - Foreign
- ------------------------------------------
99 ______ Art. of Organization (LLC)
98 ______ LLC Amend, Diss,
Continuation
97 ______ LLC Cancellation.
96 ______ Registration Foreign LLC
94 ______ Foreign LLC Supplemental
92 ______ LLC Good Standing (Short)
- ------------------------------------------
13 ______ ______Certified Copy_______
__ ______ Other______________________
TOTAL _____Credit Card
FEES __20__
__X__ Check _____ Cash
_________ Documents on _______ Checks
APPROVED BY: ___[ILLEGIBLE]___
TELEPHONE (410) 767-1350
Room 809 - 301 West Preston Street - Baltimore, Maryland 21201
MRS (Maryland Relay Service) 1-800-735-2258 TT/Voice
FAX (410) 333-7097
web site: http:/www.dat.state.md.us
<PAGE>
ARTICLES OF SUPPLEMENTARY
OF
THE PRUDENTIAL SERIES FUND, INC.
APPROVED AND RECEIVED FOR RECORD BY THE STATE DEPARTMENT OF ASSESSMENTS AND
TAXATION OF MARYLAND AUGUST 30, 1996 AT 8:47 O'CLOCK A.M. AS IN CONFORMITY WITH
LAW AND ORDERED RECORDED.
-------------------------
ORGANIZATION AND RECORDING SPECIAL
CAPITALIZATION FEE PAID: FEE PAID: FEE PAID:
$_______________________ $___20.00_______________ $___________________
---------------
D1484427
IT IS HEREBY CERTIFIED, THAT THE WITHIN INSTRUMENT, TOGETHER WITH ALL
INDORSEMENTS THEREON, HAS BEEN RECEIVED, APPROVED AND RECORDED BY THE STATE
DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND.
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
751 BROAD STREET
NEWARK NJ 07102 3777
0470312794
A533420
[SEAL] RECORDED IN THE RECORDS OF THE
STATE DEPARTMENT OF ASSESSMENTS
AND TAXATION OF MARYLAD IN LIBER, FOLIO.
ARTICLES SUPPLEMENT
OF
THE PRUDENTIAL SERIES FUND, INC.
APPROVED AND RECEIVED FOR RECORD BY THE STATE DEPARTMENT OF ASSESSMENTS AND
TAXATION OF MARYLAND SEPTEMBER 2, 1994 AT 8:23 O'CLOCK A.M. AS IN CONFORMITY
WITH LAW AND ORDERED RECORDED.
ORGANIZATION AND RECORDED SPECIAL
CAPITALIZATION FEE PAID: FEE PAID: FEE PAID:
$______________________ $___20.00_________ $_____________________
____________________
D1484427
IT IS HEREBY CERTIFIED, THAT THE WITHIN INSTRUMENT, TOGETHER WITH ALL
INDORSEMENTS THEREON, HAS BEEN RECEIVED, APPROVED AND RECORDED IN THE STATE
DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND
THE PRUDENTIAL SERIES FUND, INC.
ATTN PATRICIA ENCINAS
213 WASHINGTON STR
NEWARK NJ 07102
[SEAL] 04903083579
A463659
RECORDED IN THE RECORDS OF THE
STATE DEPARTMENT OF ASSESSMENTS
AND TAXATION OF MARYLAND IN LIBER, FOLIO
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
9-2-94 8:23a
THE PRUDENTIAL SERIES FUND, INC., a Maryland corporation having its
principal office in this State c/o Prentice Hall Corporate Services, 11 East
Chase Street, Suite 7C, Baltimore, Maryland 21201 (hereinafter called the
Corporation), hereby certifies to the State Department of Assessments and
Taxation of Maryland, that:
FIRST: The Board of Directors of the Corporation, by Unanimous Written
Consent in Lieu of Meeting on December 8, 1993, duly adopted a resolution
classifying or reclassifying two hundred million (200,000,000) unissued shares
of capital stock of the Corporation of the par value of $0.01 per share by
allocating or reallocating such two hundred million shares so that the total
number of shares of authorized capital stock of the Corporation shall be divided
among the following classes of capital stock, each class comprising the number
of shares and having the designations, preferences, rights, voting powers and
such qualifications, limitations and restrictions as are hereinafter set forth:
Shares of Reclassified
Authorized Stock Shares of
as Previously Authorized
Classified Stock
---------------- -------------
Money Market Portfolio 300,000,000 250,000,000
Bond Portfolio 200,000,000 200,000,000
Common Stock Portfolio 200,000,000 200,000,000
Aggressively Managed Flexible Portfolio 200,000,000 300,000,000
Conservatively Managed Flexible Portfolio 200,000,000 300,000,000
Zero Coupon Bond-1995 Portfolio 100,000,000 50,000,000
Zero Coupon Bond-2000 Portfolio 100,000,000 50,000,000
Zero Coupon Bond-2005 Portfolio 100,000,000 50,000,000
High Yield Bond Portfolio 100,000,000 100,000,000
<PAGE>
Stock Index Portfolio 100,000,000 100,000,000
High Dividend Stock Portfolio 100,000,000 100,000,000
Natural Resources Portfolio 100,000,000 100,000,000
Global Equity Portfolio 100,000,000 100,000,000
Governmental Securities Portfolio 100,000,000 100,000,000
----------- -----------
Total 2,000,000,000 2,000,000,000
The holder of each share of stock of the Corporation shall be entitled to one
vote for each full share, and a fractional vote for each fractional share of
stock, irrespective of the class, then standing in his name on the books of the
Corporation. On any matter submitted to a vote of stockholders, all shares of
the Corporation then issued and outstanding each class shall have a pro rata
interest in the assets of the Portfolio to which the capital stock of that class
relates and shall have no interest in the assets of any other Portfolio.
(3) The Board of Directors may from time to time declare and pay dividends
or distributions, in stock or in cash, on any or all classes of stock, the
amount of such dividends and distributions and the payment of them being wholly
in the discretion of the Board of Directors.
(i) Dividends or distributions on shares of any class of stock shall be
paid only out of earned surplus or other lawfully available assets
belonging to such class.
(ii) Inasmuch as one goal of the Corporation is to qualify as a "regulated
investment company" under the Internal Revenue Code of 1954, as amended, or any
successor or comparable statute thereto, and
<PAGE>
Regulations promulgated thereunder, and inasmuch as the computation of net
income and gains for Federal income tax purposes may vary from the computation
thereof on the books of the Corporation, the Board of Directors shall have the
power in its discretion to distribute in any fiscal years as dividends,
including dividends designated in whole or in part as capital gains
distributions, amounts sufficient in the opinion of the Board of Directors, to
enable the Corporation to qualify as a regulated investment company and to avoid
liability for the Corporation for Federal income tax in respect of that year. In
furtherance, and not in limitation of the foregoing, in the event that a class
of shares has a net capital loss for a fiscal year, and to the extent that a net
capital loss for a fiscal year offsets net capital gains from one or more of the
other classes the amount to be deemed for distribution to the class or classes
with the net capital gain may be reduced by the amount offset.
(4) The assets belonging to any class of stock shall be charged with
liabilities in respect to such class, and shall also be charged with their share
of the general liabilities of the Corporation in proportion to the asset values
of the respective classes. The determination of the Board of Directors shall be
conclusive as to the amount of liabilities or the amount of any general assets
of the Corporation, as to whether such liabilities or assets are allocable to
one or more classes, and as to the allocation of such liabilities or assets to a
given class or among several classes.
(5) With the approval of a majority of the stockholders of each
<PAGE>
of the affected classes of capital stock, the Board of Directors may transfer
the assets of any Portfolio to any other Portfolio. Upon such a transfer, the
Corporation shall issue shares of capital stock representing interests in the
Portfolio to which the assets were transferres in exchange for all shares of
capital stock representing interests in the Portfolio from which the assets were
transferred. Such shares be exchanged at their respective net asset values.
SECOND: The shares aforesaid have been duly classified or reclassified by
the Board of Directors pursuant to authority and power contained in Article V of
the Articles of Incorporation of the Corporation.
IN WITNESS WHEREOF, THE PRUDENTIAL SERIES FUND, INC. has caused these
presents to be signed in its name and on its behalf by its President or one of
its Vice Presidents and its corporate seal to be hereunto affixed and attested
by its Secretary, on April [ILLEGIBLE], 1994.
THE PRUDENTIAL SERIES FUND, INC.
By: /s/ Mendel Melzer
-----------------------------
Mendel Melzer
Vice President
Attest:
/s/ Thomas C. Castano
- ---------------------------
Thomas C. Castano
Secretary
<PAGE>
THE UNDERSIGNED, Vice President of THE PRUDENTIAL SERIES FUND,INC., who
executed on behalf of said Corporation the foregoing Articles Supplementary to
the Articles of Incorporation, of which this certificate is made a part, hereby
acknowledges, in the name and on behalf of said Corporation, the foregoing
Articles Supplementary to the Articles of Incorporation to be the corporate act
of said Corporation and further certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
/s/ Mendel Melzer
-----------------------------
Mendel Melzer
Vice President
<PAGE>
THE PRUDENTIAL SERIES FUNDS INC.
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
THE PRUDENTIAL SERIES FUND, INC., a Maryland corporation having its
principal office in this State c/o Prentice Hall Corporate Services, 11 East
Chase Street, Suite 7C, Baltimore, Maryland 21201 (hereinafter called the
Corporation), hereby certifies to the State Department of Assessments and
Taxation of Maryland, that:
FIRST: The Board of Directors of the Corporation, by Unanimous Written
Consent in Lieu of Meeting on December 8, 1993, duly adopted a resolution
classifying or reclassifying two hundred million (200,000,000) unissued shares
of capital stock of the Corporation of the par value of $0.01 per share by
allocating or reallocating such two hundred million shares so that the total
number of shares of authorized capital stock of the Corporation shall be divided
among the following classes of capital stock, each class comprising the number
of shares and having the designations, preferences, rights, voting powers and
such qualifications, limitations and restrictions as are hereinafter set forth:
Shares of Reclassified
Authorized Stock Shares of
as Previously Authorized
Classified Stock
----------- -----------
Money Market Portfolio 300,000,000 250,000,000
Bond Portfolio 200,000,000 200,000,000
Common Stock Portfolio 200,000,000 200,000,000
Aggressively Managed Flexible
Portfolio 200,000,000 300,000,000
Conservatively Managed Flexible
Portfolio 200,000,000 300,000,000
Zero Coupon Bond-1995 Portfolio 100,000,000 50,000,000
Zero Coupon Bond-2000 Portfolio 100,000,000 50,000,000
Zero Coupon Bond-2005 Portfolio 100,000,000 50,000,000
High Yield Bond Portfolio 100,000,000 100,000,000
<PAGE>
Stock Index Portfolio 100,000,000 100,000,000
High Dividend Stock Portfolio 100,000,000 100,000,000
Natural Resources Portfolio 100,000,000 100,000,000
Global Equity Portfolio 100,000,000 100,000,000
Government Securities Portfolio 100,000,000 100.000.000
------------- -------------
Total 2,000,000,000 2,000,000,000
The holder of each share of stock of the Corporation shall be entitled to one
vote for each full share, and a fractional vote for each fractional share of
stock, irrespective of the class, then standing in his name on the books of the
Corporation. On any matter submitted to a vote of stockholders, all shares of
the Corporation then issued and outstanding each class shall have a pro rata
interest in the assets of the Portfolio to which the capital stock of that class
relates and shall have no interest in the assets of any other Portfolio.
(3) The Board of Directors may from time to time declare and pay dividends
or distributions, in stock or in cash, on any or all classes of stock, the
amount of such dividends and distributions and the payment of them being wholly
in the discretion of the Board of Directors.
(i) Dividends or distributions on shares of any class of stock shall be
paid only out of earned surplus or other lawfully available assets
belonging to such class.
(ii) Inasmuch as one goal of the Corporation is to qualify as a "regulated
investment company" under the Internal Revenue Code of 1954, as amended, or any
successor or comparable statute thereto, and
<PAGE>
Regulations promulgated thereunder, and inasmuch as the computation of net
income and gains for Federal income tax purposes may vary from the computation
thereof on the books of the Corporation, the Board of Directors shall have the
power in its discretion to distribute in any fiscal years as dividends,
including dividends designated in whole or in part as capital gains
distributions, amounts sufficient in the opinion of the Board of Directors, to
enable the Corporation to qualify as a regulated investment company and to avoid
liability for the Corporation for Federal income tax in respect of that year. In
furtherance, and not in limitation of the foregoing, in the event that a class
of shares has a net capital loss for a fiscal year, and to the extent that a net
capital loss for a fiscal year offsets net capital gains from one or more of the
other classes the amount to be deemed for distribution to the class or classes
with the net capital gain may be reduced by the amount offset.
(4) The assets belonging to any class of stock shall be charged with the
liabilities in respect to such class, and shall also be charged with their share
of the general liabilities of the Corporation in proportion to the asset values
of the respective classes. The determination of the Board of Directors shall be
conclusive as to the amount of liabilities or the amount of any general assets
of the Corporation, as to whether such liabilities or assets are allocable to
one or more classes, and as to the allocation of such liabilities or assets to a
given class or among several classes.
(5) With the approval of a majority of the stockholders of each
<PAGE>
of the affected classes of capital stock, the Board of Directors may transfer
the assets of any Portfolio to any other Portfolio. Upon such a transfer, the
Corporation shall issue shares of capital stock representing interests in the
Portfolio to which the assets were transferred in exchange for all shares of
capital stock representing interests in the Portfolio from which the assets were
transferred. Such shares shall be exchanged at their respective net asset
values.
SECOND: The shares aforesaid have been duly classified or reclassified by
the Board of Directors pursuant to authority and power contained in Article V of
the Articles of Incorporation of the Corporation.
IN WITNESS WHEREOF, THE PRUDENTIAL SERIES FUND, INC. has caused these
presents to be signed in its name and on its behalf by its President or one of
its Vice Presidents and its corporate seal to be hereunto affixed and attested
by its Secretary, on April 21, 1994.
THE PRUDENTIAL SERIES FUND, INC.
By: /s/ MENDEL MELZER
-----------------------------
Mendel Melzer
Vice President
Attest:
/s/ THOMAS C. CASTANO
- -------------------------------
Thomas C. Castano
Secretary
<PAGE>
THE UNDERSIGNED, Vice President of THE PRUDENTIAL SERIES FUND, INC., who
executed on behalf of said Corporation the foregoing Articles Supplementary to
the Articles of Incorporation, of which this certificate is made a part, hereby
acknowledges, in the name and on behalf of said Corporation, the foregoing
Articles Supplementary to the Articles of Incorporation to be the corporate act
of said Corporation and further certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
/s/ MENDEL MELZER
-----------------------------
Mendel Melzer
Vice President
State of Maryland
State Department of Assessments and Taxation
AUG 10 1988
THE PRUDENTIAL
ATTN: THOMAS CASTANO
213 WASHINGTON STREET
NEWARK NJ [ILLEGIBLE]
THE ARTICLES SUPPLEMENTARY
OF
THE PRUDENTIAL SERIES FUND, INC.
HAVE BEEN RECEIVED AND APPROVED BY THE STATE DEPARTMENT OF ASSESSMENTS AND
TAXATION THIS 18TH DAY OF JULY, 1988, AT 9:50 A.M. AND WILL BE RECORDED.
DEAN W. KITCHEN
By: CORPORATE ADMINISTRATOR
------------------------------
FEE PAID AMOUNT
- -------- ------
RECORDING FEE 22.00
TOTAL - $22.00
THE ACCOUNT NUMBER WITH THIS OFFICE IS D1484427
--------
301 West Preston Street, Baltimore, Maryland 21201 /Phone: 225-1340
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
THE PRUDENTIAL SERIES FUND, INC., a Maryland corporation having its
principal office in this State c/o Prentice Hall Corporate Services, 2 Hopkins
Plaza, 1300 Merchantile Bank and Trust Building, Baltimore, Maryland 21201
(hereinafter called the Corporation), hereby certifies to the State Department
of Assessments and Taxation of Maryland, that:
FIRST: The Board of Directors of the Corporation, at a meeting duly
convened and held on July 7, 1988, adopted a resolution classifying or
reclassifying one hundred million (100,000,000) unissued shares of capital stock
of the Corporation of the par value of $0.01 per share by establishing one (1)
new class of capital stock designated as Global Equity Portfolio Capital Stock
and by allocating or reallocating such one hundred million shares so that the
total number of shares of authorized capital stock of the Corporation shall be
divided among the following classes of capital stock, each class comprising the
number of shares and having the designations, preferences, rights, voting powers
and such qualifications, limitations and restrictions are hereinafter set forth:
<PAGE>
CLASS NUMBER OF SHARES
----- ----------------
Money Market Portfolio Capital Stock 300,000,000
Bond Portfolio Capital Stock 200,000,000
Common Stock Portfolio Capital Stock 200,000,000
Aggressively Managed Flexible Portfolio
Capital Stock 200,000,000
Conservatively Managed Flexible Portfolio
Capital Stock 200,000,000
Zero Coupon Bond-1990 Portfolio Capital
Stock 100,000,000
Zero Coupon Bond-1995 Portfolio Capital
Stock 100,000,000
Zero Coupon Bond-2000 Portfolio Capital
Stock 100,000,000
High Yield Bond Portfolio Capital Stock 200,000,000
Stock Index Portfolio Capital Stock 100,000,000
High Dividend Stock Portfolio Capital
Stock 100,000,000
Natural Resources Portfolio Capital
Stock 100,000,000
Global Equity Portfolio Capital Stock 100,000,000
The holder of each share of stock of the Corporation shall be entitled to one
vote for each full share, and a fractional vote for each fractional share of
stock, irrespective of the class, then standing in his name on the books of the
Corporation. On any matter submitted to a vote of stockholders, all shares of
the Corporation then issued and outstanding and entitled to vote shall be voted
in the aggregate and not by class except that (1) when otherwise expressly
required by the Maryland General Corporation Law or the Investment Company Act
of 1940, as amended, shares shall be voted by individual class; (2) only shares
of the respective portfolios are entitled to vote on matters concerning only
that Portfolio; and (3) fundamental policies, as specified in the by-laws of the
Corporation, may be changed, with respect to any Portfolio, if such change is
approved by a majority (as defined under the
- 2 -
<PAGE>
Investment Company Act of 1940) of the capital stock of such Portfolio.
Each class of stock of the Corporation shall have the following powers
preferences or other special rights, and the qualifications, restrictions, and
limitations thereof shall be as follows:
(1) The shares of each class, when issued, will be fully paid and nonassessable,
have no preference, preemptive, conversion, exchange, or similar rights, except
as set forth in (2) below, and will be freely transferable.
(2) The consideration received by the Corporation for the sale of capital stock
shall become part of the assets of the Portfolio to which the capital stock of
the class relates. Each share of the capital stock of each class shall have a
pro rata interest in the assets of the Portfolio to which the capital stock of
that class relates and shall have no interest in the assets of any other
Portfolio.
(3) The Board of Directors may from time to time declare and pay dividends or
distributions, in stock or in cash, on any or all classes of stock, the amount
of such dividends and distributions and the payment of them being wholly in the
discretion of the Board of Directors.
- 3 -
<PAGE>
(i) Dividends or distributions on shares of any class of stock shall be paid
only out of earned surplus or other lawfully available assets belonging to such
class.
(ii) Inasmuch as one goal of the Corporation is to qualify as a "regulated
investment company" under the Internal Revenue Code of 1954, as amended, or any
successor or comparable statute thereto, and Regulations promulgated thereunder,
and inasmuch as the computation of net income and gains for Federal income tax
purposes may vary from the computation thereof on the books of the Corporation,
the Board of Directors shall have the power in its discretion to distribute in
any fiscal years as dividends, including dividends designated in whole or in
part as capital gains distributions, amounts sufficient in the opinion of the
Board of Directors, to enable the Corporation to qualify as a regulated
investment company and to avoid liability for the Corporation for Federal income
tax in respect of that year. In furtherance, and not in limitation of the
foregoing, in the event that a class of shares has a net capital loss for a
fiscal year, and to the extent that a net capital loss for a fiscal year offsets
net capital gains from one or more of the other classes the amount to be deemed
for distribution to the class or classes with the net capital gain may be
reduced by the amount offset.
- 4-
<PAGE>
(4) The assets belonging to any class of stock shall be charged with the
liabilities in respect to such class, and shall also be charged with their share
of the general liabilities of the Corporation in proportion to the asset values
of the respective classes. The determination of the Board of Directors shall be
conclusive as to the amount of liabilities or the amount of any general assets
of the Corporation, as to whether such liabilities or assets are allocable to
one or more classes, and as to the allocation of such liabilities or assets to a
given class or among several classes.
(5) With the approval of a majority of the stockholders of each of the affected
classes of capital stock, the Board of Directors may transfer the assets of any
Portfolio to any other Portfolio. Upon such a transfer, the Corporation shall
issue shares of capital stock representing interests in the Portfolio to which
the assets were transferred in exchange for all shares of capital stock
representing interests in the Portfolio from which the assets were transferred.
Such shares shall be exchanged at their respective net asset values.
SECOND: The shares aforesaid have been duly classified or reclassified by
the Board of Directors pursuant to authority and power contained in Article V of
the Articles of Incorporation of the Corporation.
- 5 -
<PAGE>
IN WITNESS WHEREOF, THE PRUDENTIAL SERIES FUND, INC. has caused these
presents to be signed in its name and on its behalf by its President or one of
its Vice Presidents and its corporate seal to be hereunto affixed and attested
by its Assistant Secretary, on July 13, 1988.
THE PRUDENTIAL SERIES FUND, INC.
By: /s/ John P. Gualtieri, Jr.
--------------------------------------
John P. Gualtieri, Jr.
Vice President
Attest:
/s/ Matthew K. Duffy
- ---------------------------------------
Matthew K. Duffy
Assistant Secretary
THE UNDERSIGNED, Vice President of THE PRUDENTIAL SERIES FUND, INC., who
executed on behalf of said Corporation the foregoing Articles Supplementary to
the Articles of Incorporation, of which this certificate is made a part, hereby
acknowledges, in the name and on behalf of said Corporation, the foregoing
Articles Supplementary to the Articles of Incorporation to be the corporate act
of said Corporation and further certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
/s/ John P. Gualtieri, Jr.
--------------------------------------
John P. Gualtieri, Jr.
- 6 -
<PAGE>
STATE OF MARYLAND
[LOGO]
State Department of Assessments and Taxation
DOCUMENT CODE __160__ BUSINESS CODE __03__ COUNTY __74__
#_D1484427_ __P.A __Religious __Close _X_Stock __Nonstock
Merging Surviving
(Transferor)__________________________ (Transferee)__________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
CODE AMOUNT FEE REMITTED
- ---- ------ ------------
20 ______ Organ. & Capitalization Name Change
61 ______ Rec. Fee (Arts. of Inc.) -----------
62 __22__ Rec. Fee (Amendment) (New Name)____________________________
63 ______ Rec. Fee (Merger or ______________________________________
Consolidation) ______________________________________
64 ______ Rec. Fee (Transfer)
65 ______ Rec. Fee (Dissolution)
66 ______ Rec. Fee (Revival) ___ Change of Name
52 ______ Foreign Qualification
50 ______ Cert. of Qual. or Reg. ___ Change of Principal Office
51 ______ Foreign Name Registration
13 ______ ___Certified Copy________ ___ Change of Resident Agent
56 ______ Penalty
54 ______ For. Supplemental Cert. ___ Change of Resident Agent
53 ______ Foreign Resolution Address
73 ______ Certificate of Conveyance
_________________________ ___ Resignation of Resident Agent
_________________________
73 ______ Certificate of Merger/
Transfer_________________
_________________________
_________________________
75 ______ Special Fee Code_______________
80 ______ For. Limited Partnership
83 ______ Cert. Limited Partnership Attention:____________________________
84 ______ Amendment to Limited ______________________________________
Partnership ______________________________________
85 ______ Termination of Limited
Partnership
21 ______ Recordation Tax
22 ______ State Transfer Tax
23 ______ Local Transfer Tax MAIL TO ADDRESS:______________________
31 ______ ____ Corp. Good Standing _The_Prudential_______________________
NA ______ Foreign Corporation _Att:_Thomas_Castano__________________
Registration _213 Washington_St.___________________
87 ______ ___Limited Part. Good _Newark_NJ__07102_____________________
Standing
71 ______ Financial NOTE:
600 ______ ____________ Personal -----
Property Reports and ____
_________ late filing
penalties
70 ______ Change of P.O., R.A. or
R.A.A.
__ ______ Other ___________________
__ ______ Other ___________________
TOTAL
FEES _22_
__X__ Check _____ Cash
_____ Documents on _____ checks
APPROVED BY: /s/[ILLEGIBLE]
[LOGO] STATE OF MARYLAND
State Department of Assessments and Taxation
PRUDENTIAL 216C3011197
THOMAS C. CASTANO
213 WASHINGTON STREET
NEWARK NJ 07102
THE ARTICLES SUPPLEMENTARY
OF
THE PRUDENTIAL SERIES FUND, INC.
HAVE BEEN RECEIVED AND APPROVED BY THE STATE DEPARTMENT OF ASSESSMENTS AND
TAXATION THIS 2ND DAY OF MAY, 1988, AT 10:58 A.M. AND WILL BE RECORDED.
By: DEAN W. KITCHEN
CORPORATE ADMINISTRATOR
..........................
FEE PAID AMOUNT
-------- ------
RECORDING FEE 22.00
TOTAL- $22.00
THE ACCOUNT NUMBER WITH THIS OFFICE IS D1484427
301 West Preston Street, Baltimore, Maryland 21201/Phone: 225-1340
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
THE PRUDENTIAL SERIES FUND, INC., a Maryland corporation having its
principal office in this State c/o Prentice Hall Corporate Services, 2 Hopkins
Plaza, 1300 Merchantile Bank and Trust Building, Baltimore, Maryland 21201
(hereinafter called the Corporation), hereby certifies to the State Department
of Assessments and Taxation of Maryland, that:
FIRST: The Board of Directors of the Corporation, at a meeting duly
convened and held on February 18, 1988, adopted a resolution classifying or
reclassifying one hundred million (100,000,000) unissued shares of capital stock
of the Corporation of the par value of $0.01 per share by establishing one (1)
new class of capital stock designated as Natural Resources Portfolio Capital
Stock and by allocating or reallocating such one hundred million shares so that
the total number of shares of authorized capital stock of the Corporation shall
be divided among the following classes of capital stock, each class comprising
the number of shares and having the designations, preferences, rights, voting
powers and such qualifications, limitations and restrictions are hereinafter set
forth:
<PAGE>
CLASS NUMBER OF SHARES
----- ----------------
Money Market Portfolio Capital Stock 400,000,000
Bond Portfolio Capital Stock 200,000,000
Common Stock Portfolio Capital Stock 200,000,000
Aggressively Managed Flexible Portfolio
Capital Stock 200,000,000
Conservatively Managed Flexible Portfolio
Capital Stock 200,000,000
Zero Coupon Bond-1990 Portfolio Capital
Stock 100,000,000
Zero Coupon Bond-1995 Portfolio Capital
Stock 100,000,000
Zero Coupon Bond-2000 Portfolio Capital
Stock 100,000,000
High Yield Bond Portfolio Capital Stock 200,000,000
Stock Index Portfolio Capital Stock 100,000,000
High Dividend Stock Portfolio Capital
Stock 100,000,000
Natural Resources Portfolio Capital
Stock 100,000,000
The holder of each share of stock of the Corporation shall be entitled to one
vote for each full share, and a fractional vote for each fractional share of
stock, irrespective of the class, then standing in his name on the books of the
Corporation. On any matter submitted to a vote of stockholders, all shares of
the Corporation then issued and outstanding and entitled to vote shall be voted
in the aggregate and not by class except that (1) when otherwise expressly
required by the Maryland General Corporation Law or the Investment Company Act
of 1940, as amended, shares shall be voted by individual class; (2) only shares
of the respective portfolios are entitled to vote on matters concerning only
that Portfolio; and (3) fundamental policies, as specified in the by-laws of the
Corporation, may be changed, with respect to any Portfolio, if such change is
approved by a majority (as defined under the
-2-
<PAGE>
Investment Company Act of 1940) of the capital stock of such Portfolio.
Each class of stock of the Corporation shall have the following powers
preferences or other special rights, and the qualifications, restrictions, and
limitations thereof shall be as follows:
(1) The shares of each class, when issued, will be fully paid and nonassessable,
have no preference, preemptive, conversion, exchange, or similar rights, except
as set forth in (2) below, and will be freely transferable.
(2) The consideration received by the Corporation for the sale of capital stock
shall become part of the assets of the Portfolio to which the capital stock of
the class relates. Each share of the capital stock of each class shall have a
pro rata interest in the assets of the Portfolio to which the capital stock of
that class relates and shall have no interest in the assets of any other
Portfolio.
(3) The Board of Directors may from time to time declare and pay dividends or
distributions, in stock or in cash, on any or all classes of stock, the amount
of such dividends and distributions and the payment of them being wholly in the
discretion of the Board of Directors.
-3-
<PAGE>
(i) Dividends or distributions on shares of any class of stock shall be paid
only out of earned surplus or other lawfully available assets belonging to such
class.
(ii) Inasmuch as one goal of the Corporation is to qualify as a "regulated
investment company" under the Internal Revenue Code of 1954, as amended, or any
successor or comparable statute thereto, and Regulations promulgated thereunder,
and inasmuch as the computation of net income and gains for Federal income tax
purposes may vary from the computation thereof on the books of the Corporation,
the Board of Directors shall have the power in its discretion to distribute in
any fiscal years as dividends, including dividends designated in whole or in
part as capital gains distributions, amounts sufficient in the opinion of the
Board of Directors, to enable the Corporation to qualify as a regulated
investment company and to avoid liability for the Corporation for Federal income
tax in respect of that year. In furtherance, and not in limitation of the
foregoing, in the event that a class of shares has a net capital loss for a
fiscal year, and to the extent that a net capital loss for a fiscal year offsets
net capital gains from one or more of the other classes the amount to be deemed
for distribution to the class or classes with the net capital gain may be
reduced by the amount offset.
-4-
<PAGE>
(4) The assets belonging to any class of stock shall be charged with the
liabilities in respect to such class, and shall also be charged with their share
of the general liabilities of the Corporation in proportion to the asset values
of the respective classes. The determination of the Board of Directors shall be
conclusive as to the amount of liabilities or the amount of any general assets
of the Corporation, as to whether such liabilities or assets are allocable to
one or more classes, and as to the allocation of such liabilities or assets to a
given class or among several classes.
(5) With the approval of a majority of the stockholders of each of the affected
classes of capital stock, the Board of Directors may transfer the assets of any
Portfolio to any other Portfolio. Upon such a transfer, the Corporation shall
issue shares of capital stock representing interests in the Portfolio to which
the assets were transferred in exchange for all shares of capital stock
representing interests in the Portfolio from which the assets were transferred.
Such shares shall be exchanged at their respective net asset values.
SECOND: The shares aforesaid have been duly classified or reclassified by
the Board of Directors pursuant to authority and power contained in Article V of
the Articles of Incorporation of the Corporation.
-5-
<PAGE>
IN WITNESS WHEREOF, THE PRUDENTIAL SERIES FUND, INC. has caused these
presents to be signed in its name and on its behalf by its President or one of
its Vice Presidents and its corporate seal to be hereunto affixed and attested
by its Assistant Secretary, on February 9, 1988.
THE PRUDENTIAL SERIES FUND, INC.
By: /s/ JOHN P. GUALTIERI, JR.
--------------------------------------
John P. Gualtieri, Jr.
Vice President
Attest:
/s/ MATTHEW K. DUFFY
- ----------------------------------
Matthew K. Duffy
Assistant Secretary
THE UNDERSIGNED, Vice President of THE PRUDENTIAL SERIES FUND, INC., who
executed on behalf of said Corporation the foregoing Articles Supplementary to
the Articles of Incorporation, of which this certificate is made a part, hereby
acknowledges, in the name and on behalf of said Corporation, the foregoing
Articles Supplementary to the Articles of Incorporation to be the corporate act
of said Corporation and further certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
/s/ JOHN P. GUALTIERI, JR.
------------------------------
John P. Gualtieri, Jr.
-6-
THE ARTICLES SUPPLEMENTARY
OF
THE PRUDENTIAL SERIES FUND, INC.
APPROVED AND RECEIVED FOR RECORD BY THE STATE DEPARTMENT OF ASSESSMENTS AND
TAXATION OF MARYLAND FEBRUARY 17, 1988, AT 10:20 A.M. AS IN CONFORMITY
WITH LAW AND ORDERED RECORDED.
-----------------
ORGANIZATION AND RECORDING SPECIAL
CAPITALIZATION FEE PAID: FEE PAID: FEE PAID:
$ $22.00 $
-------------- ------ -----
D1484427
--------
TO THE CLERK OF THE COURT OF BALTIMORE CITY
----------------------------------
IT IS HEREBY CERTIFIED, THAT THE WITHIN INSTRUMENT, TOGETHER WITH ALL
INDORESEMENTS THEREON, HAS BEEN RECEIVED, APPROVED AND REOCORDED BY THE STATE
DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND.
RETURN TO:
THE PRUDENTIAL
THOMAS CASTANO
213 WASHINGTON ST.
NEWARK NJ 07102
[SEAL]
163C3010236
A 254686
RECORDED IN THE RECORDS OF THE
STATE DEPARTMENT OF ASSESSMENTS
AND TAXATION OF MARYLAND IN LIBER, FOLIO
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
THE PRUDENTIAL SERIES FUND, INC., a Maryland corporation having its
principal office in this State c/o Prentice Hall Corporate Services, 2 Hopkins
Plaza, 1300 Merchantile Bank and Trust Building, Baltimore, Maryland 21201
(hereinafter called the Corporation), hereby certifies to the State Department
of Assessments and Taxation of Maryland, that:
FIRST: The Board of Directors of the Corporation, at a meeting duly
convened and held on February 1, 1988, adopted a resolution classifying or
reclassifying one hundred million (100,000,000) unissued shares of capital stock
of the Corporation of the par value of $0.01 per share by establishing one (1)
new class of capital stock designated as High Dividend Portfolio Capital Stock
and by allocating or reallocating such one hundred million shares so that the
total number of shares of authorized capital stock of the Corporation shall be
divided among the following classes of capital stock, each class comprising the
number of shares and having the designations, preferences, rights, voting powers
and such qualifications, limitations and restrictions are hereinafter set forth:
<PAGE>
CLASS NUMBER OF SHARES
----- ----------------
Money Market Portfolio Capital Stock 400,000,000
Bond Portfolio Capital Stock 200,000,000
Common Stock Portfolio Capital Stock 200,000,000
Aggressively Managed Flexible Portfolio
Capital Stock 200,000,000
Conservatively Managed Flexible Portfolio
Capital Stock 200,000,000
Zero Coupon Bond-1990 Portfolio Capital
Stock 100,000,000
Zero Coupon Bond-1995 Portfolio Capital
Stock 100,000,000
Zero Coupon Bond-2000 Portfolio Capital
Stock 100,000,000
High Yield Bond Portfolio Capital Stock 200,000,000
Stock Index Portfolio Capital Stock 100,000,000
High Dividend Stock Portfolio Capital
Stock 100,000,000
The holder of each share of stock of the Corporation shall be entitled to one
vote for each full share, and a fractional vote for each fractional share of
stock, irrespective of the class, then standing in his name on the books of the
Corporation. On any matter submitted to a vote of stockholders, all shares of
the Corporation then issued and outstanding and entitled to vote shall be voted
in the aggregate and not by class except that (1) when otherwise expressly
required by the Maryland General Corporation Law or the Investment Company Act
of 1940, as amended, shares shall be voted by individual class; (2) only shares
of the respective portfolios are entitled to vote on matters concerning only
that Portfolio; and (3) fundamental policies, as specified in the by-laws of the
Corporation, may be changed, with respect to any Portfolio, if such change is
approved by a majority (as defined under the
-2-
<PAGE>
Investment Company Act of 1940) of the capital stock of such Portfolio.
Each class of stock of the Corporation shall have the following powers
preferences or other special rights, and the qualifications, restrictions, and
limitations thereof shall be as follows:
(1) The shares of each class, when issued, will be fully paid and nonassessable,
have no preference, preemptive, conversion, exchange, or similar rights, except
as set forth in (2) below, and will be freely transferable.
(2) The consideration received by the Corporation for the sale of capital stock
shall become part of the assets of the Portfolio to which the capital stock of
the class relates. Each share of the capital stock of each class shall have a
pro rata interest in the assets of the Portfolio to which the capital stock of
that class relates and shall have no interest in the assets of any other
Portfolio.
(3) The Board of Directors may from time to time declare and pay dividends or
distributions, in stock or in cash, on any or all classes of stock, the amount
of such dividends and distributions and the payment of them being wholly in the
discretion of the Board of Directors.
-3-
<PAGE>
(i) Dividends or distributions on shares of any class of stock shall be paid
only out of earned surplus or other lawfully available assets belonging to such
class.
(ii) Inasmuch as one goal of the Corporation is to qualify as a "regulated
investment company" under the Internal Revenue Code of 1954, as amended, or any
successor or comparable statute thereto, and Regulations promulgated thereunder,
and inasmuch as the computation of net income and gains for Federal income tax
purposes may vary from the computation thereof on the books of the Corporation,
the Board of Directors shall have the power in its discretion to distribute in
any fiscal years as dividends, including dividends designated in whole or in
part as capital gains distributions, amounts sufficient in the opinion of the
Board of Directors, to enable the Corporation to qualify as a regulated
investment company and to avoid liability for the Corporation for Federal income
tax in respect of that year. In furtherance, and not in limitation of the
foregoing, in the event that a class of shares has a net capital loss for a
fiscal year, and to the extent that a net capital loss for a fiscal year offsets
net capital gains from one or more of the other classes the amount to be deemed
for distribution to the class or classes with the net capital gain may be
reduced by the amount offset.
-4-
<PAGE>
(4) The assets belonging to any class of stock shall be charged with the
liabilities in respect to such class, and shall also be charged with their share
of the general liabilities of the Corporation in proportion to the asset values
of the respective classes. The determination of the Board of Directors shall be
conclusive as to the amount of liabilities or the amount of any general assets
of the Corporation, as to whether such liabilities or assets are allocable to
one or more classes, and as to the allocation of such liabilities or assets to a
given class or among several classes.
(5) With the approval of a majority of the stockholders of each of the affected
classes of capital stock, the Board of Directors may transfer the assets of any
Portfolio to any other Portfolio. Upon such a transfer, the Corporation shall
issue shares of capital stock representing interests in the Portfolio to which
the assets were transferred in exchange for all shares of capital stock
representing interests in the Portfolio from which the assets were transferred.
Such shares shall be exchanged at their respective net asset values.
SECOND: The shares aforesaid have been duly classified or reclassified by
the Board of Directors pursuant to authority and power contained in Article V of
the Articles of Incorporation of the Corporation.
-5-
<PAGE>
IN WITNESS WHEREOF, THE PRUDENTIAL SERIES FUND, INC. has caused these
presents to be signed in its name and on its behalf by its President or one of
its Vice Presidents and its corporate seal to be hereunto affixed and attested
by its Assistant Secretary, on February 9, 1988.
THE PRUDENTIAL SERIES FUND, INC.
By: /s/ WILLIAM J. KELLY
--------------------------------------
William J. Kelly
President
Attest:
/s/ JOHN P. GUALTIERI, JR.
- ----------------------------------
John P. Gualtieri, Jr.
Assistant Secretary
THE UNDERSIGNED, Vice President of THE PRUDENTIAL SERIES FUND, INC., who
executed on behalf of said Corporation the foregoing Articles Supplementary to
the Articles of Incorporation, of which this certificate is made a part, hereby
acknowledges, in the name and on behalf of said Corporation, the foregoing
Articles Supplementary to the Articles of Incorporation to be the corporate act
of said Corporation and further certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
/s/ WILLIAM J. KELLY
------------------------------
William J. Kelly
-6-
[LOGO] STATE OF MARYLAND
State Department of Assessments and Taxation
PRUCO LIFE INSURANCE COMPANY 084C3012073
ATTN: THOMAS C. CASTANO
213 WASHINGTON STREET
NEWARK NJ 07102
THE ARTICLES SUPPLEMENTARY
OF
THE PRUDENTIAL SERIES FUND, INC.
HAVE BEEN RECEIVED AND APPROVED BY THE STATE DEPARTMENT OF ASSESSMENTS AND
TAXATION THIS 25TH DAY OF OCTOBER, 1987, AT 11:09 A.M. AND WILL BE RECORDED.
By: DEAN W. KITCHEN
CORPORATE ADMINISTRATOR
-----------------------
FEE PAID AMOUNT DOCUMENT
-------- ------ REFERENCE
RECORDING FEE 22.00 ---------
TOTAL- $22.00
THE ACCOUNT NUMBER WITH THIS OFFICE IS D1484427
301 West Preston Street, Baltimore, Maryland 21201/Phone: 225-1340
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
THE PRUDENTIAL SERIES FUND, INC., a Maryland corporation having its
principal office in this State c/o Prentice Hall Corporate Services, 2 Hopkins
Plaza, 1300 Merchantile Bank and Trust Building, Baltimore, Maryland 21201
(hereinafter called the Corporation), hereby certifies to the State Department
of Assessments and Taxation of Maryland, that:
FIRST: The Board of Directors of the Corporation, at a meeting duly
convened and held on August 25, 1987, adopted a resolution classifying or
reclassifying one hundred million (100,000,000) unissued shares of capital stock
of the Corporation of the par value of $0.01 per share by establishing one (1)
new class of capital stock designated as Stock Index Portfolio Capital Stock and
by allocating or reallocating such one hundred million shares so that the total
number of shares of authorized capital stock of the Corporation shall be divided
among the following classes of capital stock, each class comprising the number
of shares and having the designations, preferences, rights, voting powers and
such qualifications, limitations and restrictions and restrictions as are
hereinafter set forth:
<PAGE>
CLASS NUMBER OF SHARES
----- ----------------
Money Market Portfolio Capital Stock 400,000,000
Bond Portfolio Capital Stock 200,000,000
Common Stock Portfolio Capital Stock 200,000,000
Aggressively Managed Flexible Portfolio
Capital Stock 200,000,000
Conservatively Managed Flexible Portfolio
Capital Stock 200,000,000
Zero Coupon Bond-1990 Portfolio Capital
Stock 200,000,000
Zero Coupon Bond-1995 Portfolio Capital
Stock 200,000,000
Zero Coupon Bond-2000 Portfolio Capital
Stock 100,000,000
High Yield Bond Portfolio Capital Stock 200,000,000
Stock Index Portfolio Capital Stock 100,000,000
The holder of each share of stock of the Corporation shall be entitled to one
vote for each full share, and a fractional vote for each fractional share of
stock, irrespective of the class, then standing in his name on the books of the
Corporation. On any matter submitted to a vote of stockholders, all shares of
the Corporation then issued and outstanding and entitled to vote shall be voted
in the aggregate and not by class except that (1) when otherwise expressly
required by the Maryland General Corporation Law or the Investment Company Act
of 1940, as amended, shares shall be voted by individual class; (2) only shares
of the respective portfolios are entitled to vote on matters concerning only
that Portfolio; and (3) fundamental policies, as specified in the by-laws of the
Corporation, may be changed, with respect to any Portfolio, if such change is
approved by a majority (as defined under the
<PAGE>
Investment Company Act of 1940) of the capital stock of such Portfolio.
Each class of stock of the Corporation shall have the following powers
preferences or other special rights, and the qualifications, restrictions, and
limitations thereof shall be as follows:
(1) The shares of each class, when issued, will be fully paid and nonassessable,
have no preference, preemptive, conversion, exchange, or similar rights, except
as set forth in (2) below, and will be freely transferable.
(2) The consideration received by the Corporation for the sale of capital stock
shall become part of the assets of the Portfolio to which the capital stock of
the class relates. Each share of the capital stock of each class shall have a
pro rata interest in the assets of the Portfolio to which the capital stock of
that class relates and shall have no interest in the assets of any other
Portfolio.
(3) The Board of Directors may from time to time declare and pay dividends or
distributions, in stock or in cash, on any or all classes of stock, the amount
of such dividends and distributions and the payment of them being wholly in the
discretion of the Board of Directors.
<PAGE>
(i) Dividends or distributions on shares of any class of stock shall be paid
only out of earned surplus or other lawfully available assets belonging to such
class.
(ii) Inasmuch as one goal of the Corporation is to qualify as a "regulated
investment company" under the Internal Revenue Code of 1954, as amended, or any
successor or comparable statute thereto, and Regulations promulgated thereunder,
and inasmuch as the computation of net income and gains for Federal income tax
purposes may vary from the computation thereof on the books of the Corporation,
the Board of Directors shall have the power in its discretion to distribute in
any fiscal years as dividends, including dividends designated in whole or in
part as capital gains distributions, amounts sufficient in the opinion of the
Board of Directors, to enable the Corporation to qualify as a regulated
investment company and to avoid liability for the Corporation for Federal income
tax in respect of that year. In furtherance, and not in limitation of the
foregoing, in the event that a class of shares has a net capital loss for a
fiscal year, and to the extent that a net capital loss for a fiscal year offsets
net capital gains from one or more of the other classes the amount to be deemed
for distribution to the class or classes with the net capital gain may be
reduced by the amount offset.
<PAGE>
(4) The assets belonging to any class of stock shall be charged with the
liabilities in respect to such class, and shall also be charged with their share
of the general liabilities of the Corporation in proportion to the asset values
of the respective classes. The determination of the Board of Directors shall be
conclusive as to the amount of liabilities or the amount of any general assets
of the Corporation, as to whether such liabilities or assets are allocable to
one or more classes, and as to the allocation of such liabilities or assets to a
given class or among several classes.
(5) With the approval of a majority of the stockholders of each of the affected
classes of capital stock, the Board of Directors may transfer the assets of any
Portfolio to any other Portfolio. Upon such a transfer, the Corporation shall
issue shares of capital stock representing interests in the Portfolio to which
the assets were transferred in exchange for all shares of capital stock
representing interests in the Portfolio from which the assets were transferred.
Such shares shall be exchanged at their respective net asset values.
SECOND: The shares aforesaid have been duly classified or reclassified by
the Board of Directors pursuant to authority and power contained in Article V of
the Articles of Incorporation of the Corporation.
<PAGE>
IN WITNESS WHEREOF, THE PRUDENTIAL SERIES FUND, INC. has caused these
presents to be signed in its name and on its behalf by its President or one of
its Vice Presidents and its corporate seal to be hereunto affixed and attested
by its Assistant Secretary, on September 21, 1987.
THE PRUDENTIAL SERIES FUND, INC.
By: /s/ WILLIAM J. KELLY
--------------------------
William J. Kelly
President
Attest:
/s/ JOHN P. GUALTIERI, JR.
- --------------------------
John P. Gualtieri, Jr.
Assistant Secretary
THE UNDERSIGNED, President of THE PRUDENTIAL SERIES FUND, INC., who
executed on behalf of said Corporation the foregoing Articles Supplementary to
the Articles of Incorporation, of which this certificate is made a part, hereby
acknowledges, in the name and on behalf of said Corporation, the foregoing
Articles Supplementary to the Articles of Incorporation to be the corporate act
of said Corporation and further certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
/s/ WILLIAM J. KELLY
--------------------------
William J. Kelly
[LOGO] STATE OF MARYLAND
State Department of Assessments and Taxation
THE ARTICLES SUPPLEMENTARY
OF
THE PRUDENTIAL SERIES FUND, INC.
HAVE BEEN RECEIVED AND APPROVED BY THE STATE DEPARTMENT OF ASSESSMENTS AND
TAXATION THIS 4TH DAY OF JUNE, 1986, AT 10:16 A.M. AND WILL BE RECORDED.
By: [ILLEGIBLE]
-------------------------
FEE CO. DOCUMENT
FEE PAID CODE AMOUNT CODE REFERENCE
-------- ---- ------ ---- ---------
301 West Preston Street, Baltimore, Maryland 21201/Phone: 225-1340
<PAGE>
================================================================================
The Prudential [LOGO] Pruco Life Insurance Company
213 Washington Street Newark NJ 07102
201 877-2000
June 2, 1986
State of Maryland
State Department of Assessments and Taxation
Charter Division
301 West Preston Street
Baltimore, MD 21201
RE: Articles Supplementary
The Prudential Series Fund, Inc.
Gentlemen:
Enclosed for filing are Articles Supplementary to the Articles of Incorporation
of The Prudential Series Fund, Inc., a Maryland corporation, together with a
check in the amount of $20.00 representing the applicable filing fees.
If you have any questions concerning this submission, please contact me at (201)
877-4708.
Sincerely,
/s/ THOMAS C. CASTANO
TC5 :dm Thomas C. Castano
Assistant Counsel
enclosure
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
THE PRUDENTIAL SERIES FUND, INC., a Maryland corporation having its
principal office in this State c/o United States Corporation Company, 2 Hopkins
Plaza, 1300 Merchantile Bank and Trust Building, Baltimore, Maryland 21201
(hereinafter called the Corporation), hereby certifies to the State Department
of Assessments and Taxation of Maryland, that:
FIRST: The Board of Directors of the Corporation, at a meeting duly
convened and held on May 23, 1986, adopted a resolution classifying or
reclassifying six hundred million (600,000,000) unissued shares of capital stock
of the Corporation of the par value of $0.01 per share by establishing three (3)
new classes of capital stock designated as Zero Coupon Bond-1990 Portfolio
Capital Stock, Zero Coupon Bond-1995 Portfolio Capital Stock and Zero Coupon
Bond-2000 Capital Stock and by allocating or reallocating such six hundred
million shares so that the total number of shares of authorized capital stock of
the Corporation shall be divided among the following classes of capital stock,
each class comprising the number of shares and having the designations,
preferences, rights, voting powers and such qualifications, limitations and
restrictions as are hereinafter set forth:
CLASS NUMBER OF SHARES
----- -----------------
Money Market Portfolio Capital Stock 400,000,000
Bond Portfolio Capital Stock 200,000,000
Common Stock Portfolio Capital Stock 200,000,000
Aggressively Managed Flexible Portfolio Capital Stock 300,000,000
Conservatively Managed Flexible Portfolio Capital Stock 300,000,000
Zero Coupon Bond-1990 Portfolio Capital Stock 200,000,000
Zero Coupon Bond-1995 Portfolio Capital Stock 200,000,000
Zero Coupon Bond-2000 Portfolio Capital Stock 200,000,000
<PAGE>
The holder of each share of stock of the Corporation shall be entitled to
one vote for each full share, and a fractional vote for each fractional share of
stock, irrespective of the class, then standing in his name on the books of the
Corporation. On any matter submitted to a vote of stockholders, all shares of
the Corporation then issued and outstanding and entitled to vote shall be voted
in the aggregate and not by class except that (1) when otherwise expressly
required by the Maryland General Corporation Law or the Investment Company Act
of 1940, as amended, shares shall be voted by individual class; (2) only shares
of the respective portfolios are entitled to vote on matters concerning only
that Portfolio; and (3) fundamental policies, as specified in the by-laws of the
Corporation, may be changed, with respect to any Portfolio, if such change is
approved by a majority (as defined under the Investment Company Act of 1940) of
the capital stock of such Portfolio.
Each class of stock of the Corporation shall have the following powers
preferences or other special rights, and the qualifications, restrictions, and
limitations thereof shall be as follows:
(1) The shares of each class, when issued, will be fully paid and nonassessable,
have no preference, preemptive, conversion, exchange, or similar rights, except
as set forth in (2) below, and will be freely transferable.
(2) The consideration received by the Corporation for the sale of capital stock
shall became part of the assets of the Portfolio to which the capital stock of
the class relates. Each share of the capital stock of
<PAGE>
each class shall have a pro rata interest in the assets of the Portfolio to
which the capital stock of that class relates and shall have no interest in the
assets of any other Portfolio.
(3) The Board of Directors may from time to time declare and pay dividends or
distributions, in stock or in cash, on any or all classes of stock, the amount
of such dividends and distributions and the payment of them being wholly in the
discretion of the Board of Directors.
(i) Dividends or distributions on shares of any class of stock shall be paid
only out of earned surplus or other lawfully available assets belonging to such
class.
(ii) Inasmuch as one goal of the Corporation is to qualify as a "regulated
investment company" under the Internal Revenue Code of 1954, as amended, or any
successor or comparable statute thereto, and Regulations promulgated thereunder,
and inasmuch as the computation of net income and gains for Federal income tax
purposes may vary from the computation thereof on the books of the Corporation,
the Board of Directors shall have the power in its discretion to distribute in
any fiscal years as dividends, including dividends designated in whole or in
part as capital gains distributions, amounts sufficient in the opinion of the
Board of Directors, to enable the Corporation to qualify as a regulated
investment company and to avoid liability for the Corporation for Federal income
tax in respect of that year. In furtherance, and not in limitation of the
foregoing, in the event that a class of shares has a net capital loss for a
fiscal year, and to the extent that a net capital loss for a fiscal year
<PAGE>
offsets net capital gains from one or more of the other classes the amount to be
deemed for distribution to the class or classes with the net capital gain may be
reduced by the amount offset.
(4) The assets belonging to any class of stock shall be charged with the
liabilities in respect to such class, and shall also be charged with their share
of the general liabilities of the Corporation in proportion to the asset values
of the respective classes. The determination of the Board of Directors shall be
conclusive as to the amount of liabilities or the amount of any general assets
of the Corporation, as to whether such liabilities or assets are allocable to
one or more classes, and as to the allocation of such liabilities or assets to a
given class or among several classes.
(5) With the approval of a majority of the stockholders of each of the affected
classes of capital stock, the Board of Directors may transfer the assets of any
Portfolio to any other Portfolio. Upon such a transfer, the Corporation shall
issue shares of capital stock representing interests in the Portfolio to which
the assets were transferred in exchange for all shares of capital stock
representing interests in the Portfolio from which the assets were transferred.
Such shares shall be exchanged at their respective net asset values.
SECOND: The shares aforesaid have been duly classified or reclassified by
the Board of Directors pursuant to authority and power contained in Article V of
the Articles of Incorporation of the Corporation.
<PAGE>
IN WITNESS WHEREOF, THE PRUDENTIAL SERIES FUND, INC. has caused these
presents to be signed in its name and on its behalf by its President or one of
its Vice Presidents and its corporate seal to be hereunto affixed and attested
by its Assistant Secretary, on June 2, 1986.
THE PRUDENTIAL SERIES FUND, INC.
By /s/ DONALD G. SOUTHWELL
----------------------------
Donald G. Southwell
President
Attest:
/s/ PAUL S. FEINBERG
- ---------------------------
Paul S. Feinberg
Assistant Secretary
THE UNDERSIGNED, President of THE PRUDENTIAL SERIES FUND, INC., who
executed on behalf of said Corporation the foregoing Articles Supplementary to
the Articles of Incorporation, of which this certificate is made a part, hereby
acknowledges, in the name and on behalf of said Corporation, the foregoing
Articles Supplementary to the Articles of Incorporation to be the corporate act
of said Corporation and further certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
/s/ DONALD G. SOUTHWELL
----------------------------
Donald G. Southwell
EXHIBIT (d)(4)
INVESTMENT SUBADVISORY AGREEMENT
AGREEMENT, made this ___ day of ________, 1999, among The Prudential Series
Fund, Inc. (the "Fund"), a Maryland corporation, The Prudential Insurance
Company of America ("Prudential"), a New Jersey insurance company, and Jennison
Associates LLC (the "Subadviser"), a New York limited liability corporation.
WHEREAS, the Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"); and
WHEREAS, Prudential and the Subadviser are both registered as investment
advisers under the Investment Advisers Act of 1940; and
WHEREAS, the Fund is authorized to issue shares of beneficial interest in
separate Portfolios, with each such Portfolio representing interests in a
separate portfolio of securities and other assets; and
WHEREAS, Prudential has entered into an advisory agreement (the "Management
Agreement") with the Fund, pursuant to which Prudential will manage the
operations of the Fund; and
WHEREAS, the fund and Prudential desire to retain the Subadviser to provide
investment advisory services to a portion of the assets of the 20/20 Focus
Portfolio of the Fund (the " 20/20 Portfolio") and a portion of the assets of
the Diversified Conservative Growth Portfolio (the "DCG Portfolio" and,
collectively with the 20/20 Portfolio, the "Portfolios), and the Subadviser is
willing to render such services.
NOW, THEREFORE, the parties agree as follows:
1. Appointment. The Fund and Prudential hereby appoint the Subadviser to
provide day-to-day investment management of such portion of the
Portfolios as Prudential shall direct, from time to time, for the
period and on the terms set forth in this Agreement, subject to the
direction of the Board of Directors of the Fund (the "Board") and
Prudential. The Subadviser accepts such appointment and agrees to
render the services described herein for the compensation provided in
paragraph 14.
2. Services of Prudential. Subject to the supervision of the Board and
Prudential, the Subadviser shall provide day-to-day investment
management to such portion of the Portfolios as Prudential shall
direct, from time to time. More particularly:
(a) The Subadviser will provide investment research and conduct a
continuous program of evaluation, investment, sales, and reinvestment of such
portion of the Portfolios' assets as Prudential shall direct, from time to time,
by determining the securities and other investments that will be purchased,
entered into, sold, or exchanged, when these transactions will be executed, and
what securities and other investments in which each Portfolio may invest. The
Subadviser will provide services in
<PAGE>
accordance with the Portfolios' investment objective or objectives, policies,
and restrictions as stated in the Fund's registration statement under the
Securities Act of 1933 and the 1940 Act as filed with the Securities and
Exchange Commission ("SEC") and amended from time to time (the "Registration
Statement") and in accordance with any written instructions and directions of
Prudential or the Board.
(b) The Subadviser shall meet periodically with Prudential to review and
agree upon current investment strategies and programs in the light of
anticipated cash flows. The Subadviser shall comply with reasonable requests
made by Prudential so that Prudential can fulfill its monitoring and oversight
responsibilities under the Management Agreement.
(c) The Subadviser shall provide to Prudential the information and
documents Prudential reasonably requests so that it may keep the records of the
Portfolios and otherwise manage the Fund and the Portfolios as required by the
Management Agreement. The Subadviser shall provide such information and
documents to the custodian or other entities as directed by Prudential.
(d) The Subadviser shall report to the Board on the investment program for
the portions of the Portfolios for which it is responsible as frequently as the
Board may request, and will furnish the Board such periodic and special reports
as the Board may reasonably request.
(e) The Subadviser will manage the portions of the Portfolios for which it
is responsible so that it will comply with the diversification requirements of
Section 817(h) of the Internal Revenue Code.
3. Investment Opportunities. When investment opportunities arise that may
be appropriate for more than one client for which the Subadviser
serves as investment manager or adviser, the Subadviser may allocate
investments among them in a manner that the Subadviser believes to be
equitable to each client involved. The allocations will be based on
each client's investment objectives and its current cash and
investment positions. The Subadviser may from time to time buy a
particular security for one or more clients while at the same time it
sells such securities for another. On occasions when the subadviser
deems the purchase or sale of a security to be in the best interest of
a Portfolio as well as any other investment advisory client, the
Subadviser may, to the extent permitted by applicable laws and
regulations, including, but not limited to Section 17(d) of the 1940
Act, but shall not be obligated to, aggregate the securities to be
sold or purchased with those of its other clients where such
aggregation is not inconsistent with the policies set forth in the
Registration Statement. In such event, allocation of the securities so
purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Subadviser in a manner it believes to
be equitable to each client involved. All records pertaining to such
allocation shall be available to Prudential.
4. Broker-Dealer Selection. The Subadviser is responsible for
broker-dealer selection and negotiation of brokerage commission rates.
The
2
<PAGE>
Subadviser's primary consideration in effecting a security transaction
will be to obtain the most favorable price and best execution. It may
also take into account the capability of the broker in effecting
difficult trades and trades in large amounts and the value to the
Portfolios of research services provided to the Subadviser by the
broker. Subject to the representations in the Registration Statement
and such policies as the Board may determine and consistent with
Section 28(3) of the Securities Exchange Act of 1934, the Subadviser
shall not be deemed to have breached any duty created by this
Agreement or otherwise solely by reason of its having caused the
Portfolios to pay a broker-dealer for effecting a Portfolio investment
transaction in excess of the amount of commission another
broker-dealer would have charged for effecting that transaction, if
the Subadviser or its affiliate determines in good faith that such
amount of commission was reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer, viewed
in terms of either that particular transaction or the Subadviser's
overall responsibilities with respect to the Portfolios and to its
other clients as to which it exercises investment discretion. Subject
to the representations in the Registration Statement and such policies
as the Board may determine and consistent with the federal securities
laws, the Subadviser shall not be deemed to have breached any duty
created by this Agreement or otherwise solely by using a broker who is
an affiliated person of the Subadviser, as that term is defined in the
1940 Act.
5. Conformity with Applicable Law. The Subadviser, in the performance of
its duties and obligations under this Agreement, shall act in
conformity with the Registration Statement and with the instructions
and directions of the Board and will conform to, and comply with, all
mandatory requirements of the 1940 Act and all other applicable
federal and state securities laws and regulations and state insurance
law governing separate account investments.
6. Employees. All services to be furnished by the Subadviser under this
Agreement may be furnished through the medium of any directors,
officers or employees of the Subadviser.
7. Exclusivity. The services of the Subadviser under this Agreement are
not to be deemed exclusive, and the Subadviser, or any affiliate
thereof, shall be free to render similar services to other investment
companies and other clients (whether or not their investment
objectives and policies are similar to those of the Portfolios) and to
engage in other activities. The Fund understands that the Subadviser
now serves, and will continue to serve, as investment manager or
adviser to other investment companies and to clients that are not
investment companies. The Fund understands that the employees of the
Subadviser who assist in the performance of the services called for by
this Agreement will also devote time to rendering similar services to
the other entities for which the Subadviser also acts as investment
manager or adviser.
3
<PAGE>
8. Confidential Treatment. It is understood that any information or
recommendations supplied by the Subadviser in connection with the
performance of its obligations hereunder is to be regarded as
confidential and for use only by the Fund, Prudential in its capacity
as Investment Adviser to the Fund, or such persons as Prudential may
designate in connection with the Portfolios. It is also understood
that any information supplied to the Subadviser in connection with the
performance of its obligations hereunder, particularly, but not
limited to, any list of securities which, on a temporary basis, may
not be bought or sold for the Portfolios, is to be regarded as
confidential and for use only by the Subadviser in connection with its
obligation to provide investment advice and other services to the
Portfolios.
9. Documents. Prudential has delivered copies of each of the following
documents to the Subadviser and will deliver to it all future
amendments and supplements thereto, if any:
(a) the Fund's articles of incorporation and by-laws;
(b) The Registration Statement;
(c) the Code of Ethics of the Fund as currently in effect; and
(d) a list of companies the securities of which are not to be bought or
sold for the Portfolios because of non-public information regarding
such companies that is available to Prudential, or which, in the sole
opinion of Prudential, would be deemed to be available to Prudential
or the Fund.
(e) The current Prospectus, Statement of Additional Information and Part C
of the Fund's Registration Statement, and all amendments and
supplements thereto, will be furnished promptly to the Subadviser
after filing with the SEC and the Subadviser will be notified in
writing or by telephone as to the date on which such amendments or
supplements are to become effective.
Prudential will furnish the Subadviser from time to time with copies, properly
certified or otherwise authenticated, of all amendments of or supplements to the
foregoing, if any. Such amendments or supplements as to items (a) through (c)
above will be provided within 30 days of the time such materials become
available to Prudential. Revisions to Item (d) shall be provided the same day
such revisions are determined by Prudential.
10. Delivery of Documents to Prudential. The Subadviser has furnished
Prudential with copies of each of the following documents:
(a) The Subadviser's Form ADV as filed with the SEC;
(b) The Subadviser's most recent balance sheet;
4
<PAGE>
(c) Separate lists of persons who the Subadviser wishes to have authorized
to give written and/or oral instructions to custodians of the Fund's
assets for the Portfolios;
(d) The Code of Ethics of the Subadviser as currently in effect.
The Subadviser will furnish Prudential from time to time with copies, properly
certified or otherwise authenticated if requested by Prudential, of all material
amendments of or supplements to the foregoing, if any. Such amendments or
supplements as to items (a) through (d) above will be provided within 30 days of
the time such materials became available to the Subadviser.
11. Records. The Subadviser agrees to maintain and to preserve records
relating to the Fund as required by the 1940 Act. The Subadviser
further agrees that all records which it maintains for the Fund are
the property of the Fund to the extent provided in the 1940 Act, and
it will promptly surrender any of such records (or copies, printouts
or computerized forms thereof) upon request provided, however, that
Subadviser may maintain copies (or originals) of all such records to
the extent required by law or in accordance with customary business
practices.
12. Compliance. The Subadviser agrees that it shall promptly notify
Prudential and the Fund in the event that:
(a) The SEC has censured the Subadviser; placed limitations upon is
activities, functions or operations; suspended or revoked its registration
as an investment adviser; or commenced proceedings or an investigation that
may result in any of these actions; or
(b) the Subadviser has a reasonable basis for believing that one of the
Portfolios has ceased to comply or might not comply with the
diversification provisions of Section 817(h) of the Internal Revenue Code
or the regulations thereunder.
5
<PAGE>
13. Expenses.
(a) The Subadviser will pay all expenses incurred by it in connection with
its activities under this Agreement, including all rent and other expenses
involved in providing office space and equipment required by the Subadviser
and the salaries and expenses of all personnel of the Subadviser.
(b) The Portfolios will bear the respective expenses incurred in its
individual operation, including but not limited to redemption and
transaction expenses, daily accounting services (including maintaining for
a Portfolio a daily trial balance, investment ledger, and other accounts
and documents computing a Portfolio's daily net asset value per share, and
computing daily cash flow and transaction status information), advisory
fees to Prudential (but not to the Subadvisers), brokerage, shareholder
servicing costs, pricing costs, interest taxes, and the charges of the
custodians and transfer agent.
(c) The Fund will pay all other expenses not attributable to a specific
Portfolio, but these expenses will be allocated proportionately among all
of the portfolios of the Fund on the basis of the value of their respective
aggregate net assets. These expenses include, without limitation:
insurance, legal expenses, auditing fees, state franchise and Blue Sky
qualification fees, if any, the cost of printing stock certificates,
proxies, and shareholder reports, SEC fees, the expense of registering
securities issued by the Fund under applicable securities laws, the fees
and expenses of all directors of the Fund who are not affiliated persons of
Prudential, of any Prudential subsidiary, or of the Subadviser and
litigation and other extraordinary or non-recurring expenses.
(d) Prudential shall pay the fee of the Subadviser. Prudential shall pay
for maintaining any Prudential staff and personnel who perform accounting
services in connection with the preparation of financial statements
required for the Fund's semiannual reports to shareholders and clerical,
administrative and similar services for the Fund, other than investor
services and daily Fund accounting services, which shall be paid for the
Fund. Prudential shall also pay for the equipment, office space, and
related facilities necessary to perform these services and shall pay the
fees or salaries of all officers and directors of the Fund who are
affiliated persons of Prudential or of any Prudential subsidiary. The Fund
shall reimburse Prudential for the expenses of maintaining personnel who
perform investor services and, if applicable, daily accounting services for
the Fund.
14. Compensation.
(a) 20/20 Portfolio. As compensation for the services performed and
expenses incurred by the Subadviser under this Agreement in respect of the
20/20 Portfolio, Prudential (not the Fund) shall pay to the Subadviser an
investment management fee.
The fee will be a daily charge, payable quarterly, based on the annual
rates set forth in the following schedule:
6
<PAGE>
0.30 of 1% on the first $300 million of the 20/20 Portfolio's average
daily net assets under the Subadviser's management; and
0.25 of 1% on the balance of the 20/20 Portfolio's average daily net
assets under the Subadviser's management.
(b) DCG Portfolio. As compensation for the services performed and expenses
incurred by the Subadviser under this Agreement in respect of the DCG Portfolio,
Prudential (not the Fund) shall pay to the Subadviser an investment management
fee.
The fee will be a daily charge, payable quarterly, based on the annual
rates set forth in the following schedule:
0.30 of 1% on the first $300 million of the DCG Portfolio's average
daily net assets under the Subadviser's management; and
0.25 of 1% on the balance of the DCG Portfolio's average daily net
assets under the Subadviser's management.
15. Limitation on Liability of Subadviser. Neither Subadviser nor any of
its officers, directors, employees or agents shall be liable for any error
of judgment or mistake of law or for any loss suffered by the Portfolios,
the Fund or Prudential in connection with the matters to which this
Agreement relates, except for a loss resulting from willful misfeasance,
bad faith or gross negligence on the Subadviser's part in the performance
of its duties on behalf of the Fund or from reckless disregard of its
obligations and duties under this Agreement.
16. Warranty.
(a) Prudential represents and warrants that (i) the appointment of the
Subadviser by Prudential has been duly authorized and (ii) it has acted and
will continue to act in connection with the transactions contemplated
hereby, and the transactions contemplated hereby are, in conformity with
the 1940 Act, the Fund's governing documents and other applicable laws.
(b) The Fund represents and warrants that the approval of this Agreement by
the Fund has been duly authorized.
(c) The Subadviser represents and warrants that it is authorized to perform
the services contemplated to be performed hereunder.
17. Continuation and Termination. This Agreement shall take effect on the
date first written above, and shall continue in effect, unless sooner
terminated as provided herein, for two years from such date and shall
continue from year to year thereafter so long as such continuance is
specifically approved at least annually (i) by the vote of a majority
of the Board; or (ii) by vote of a majority of the outstanding voting
shares of the
7
<PAGE>
respective Portfolios; provided, further, in either event that
continuance is also approved by the vote of a majority of the Board
who are not parties to this Agreement or "interested persons" (as
defined in the 1940 Act) of the Fund, Prudential or the Subadviser,
cast in person at a meeting called for the purpose of voting on such
approval. This Agreement may be terminated by the Fund at any time,
without the payment of any penalty, by vote of a majority of the
entire Board or by a vote of a majority of the outstanding voting
shares of the respective Portfolio, on sixty (60) days' written notice
to Prudential and the Subadviser. This Agreement may be terminated by
Prudential at any time, without the payment of any penalty, on ninety
(90) days' written notice to the Fund and the Subadviser. This
Agreement may be terminated by the Subadviser at any time, without the
payment of any penalty, on ninety (90) days' written notice to the
Fund and Prudential. This Agreement will automatically and immediately
terminate in the event of its "assignment" (as defined in the 1940
Act).
18. Independent Contractor. The Subadviser shall for all purposes herein
be deemed to be an independent contractor and shall, unless otherwise
expressly provided herein or authorized by the Board from time to
time, have no authority to act for or represent the Fund in any way or
otherwise be deemed its agent.
19. Notice. Notices of any kind to be given to the Fund and to Prudential
shall be in writing and shall be duly given if sent by first class
mail or delivered to the Fund at 3 Gateway Center, 9th Floor, 100
Mulberry Street, Newark, New Jersey 07102, Attn: Secretary, or at such
other address or to such individual as shall be specified by the Fund
(with proper notice to Prudential and the Subadviser). Notices of any
kind to be given to the Subadviser shall be in writing and shall be
duly given if sent by first class mail or delivered to the Subadviser
at 466 Lexington Avenue, New York, New York 10017,
Attn:_________________or at such other address or to such individual
as shall be specified by the Subadviser (with proper notice to the
Fund and Prudential).
20. Counterparts. This agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
21. Applicable law. This Agreement shall be governed by the laws of New
Jersey, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Investment Advisers Act of 1940,
or any rules or order of the SEC thereunder.
22. Captions. The captions of this Agreement are included for convenience
only and in no way define or limit any of the provisions hereof or
otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below on the day and year first above
written.
8
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
_____________________________ By:_____________________________
Witness Name
Title
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
_____________________________ By:_____________________________
Witness Name
Title
JENNISON ASSOCIATES LLC
_____________________________ By:_____________________________
Witness Name
Title
9
EXHIBIT (d)(5)
THE PRUDENTIAL SERIES FUND, INC.
(Diversified Conservative Growth Portfolio)
SUBADVISORY AGREEMENT
Agreement made as of this _____ day of ___________, 1999, between The
Prudential Insurance Company of America (the "Manager"), a New Jersey insurance
company, and The Dreyfus Corporation (the "Adviser"), a company organized under
the laws of New York.
WHEREAS, the Manager has entered into a management agreement (the
"Management Agreement") with The Prudential Series Fund, Inc. (the "Fund"), a
Maryland corporation and a diversified open-end management investment company
registered under the Investment Company Act of 1940 (the "1940 Act"), pursuant
to which the Manager will act as manager of the Fund.
WHEREAS, shares of the Fund are divided into separate series or portfolios
(each a portfolio), each of which is established pursuant to a resolution of the
Directors of the Fund, and the Directors may from time to time terminate such
portfolios or establish and terminate additional portfolios.
WHEREAS, the Manager desires to retain the Adviser to provide investment
advisory services to the Diversified Conservative Growth Portfolio of the Fund
(the "Portfolio") in connection with the management of the Fund and to manage
such portion of the Portfolio as the Manager shall from time to time direct (the
"Adviser Assets") and the Adviser is willing to render such investment advisory
services.
<PAGE>
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Directors of the
Fund, the Adviser shall manage the Adviser Assets, including the composition,
purchase, retention and disposition thereof, in accordance with the Portfolio's
investment objective, policies and restrictions as stated in the Prospectus
(such Prospectus and Statement of Additional Information as currently in effect
and as amended or supplemented from time to time being herein called the
"Prospectus") as delivered to the Adviser from time to time by the Manager and
subject to the following understandings:
(i) The Adviser shall provide supervision of the Adviser Assets and
determine from time to time what investments and securities will be
purchased, retained, sold or loaned with respect to the Adviser Assets, and
what portion of the Adviser Assets it manages will be invested or held
uninvested as cash.
(ii) In the performance of its duties and obligations under this
Agreement, the Adviser shall act in conformity with the Articles of
Incorporation, By-Laws and Prospectus of the Fund and Portfolio as provided
to the Adviser by the Manager and with the written instructions and
directions of the Manager and of the Directors of the Fund and will conform
to and comply with the requirements of the 1940 Act, the Internal Revenue
Code of 1986, as amended (the "Code"), and all other applicable federal and
state laws and regulations. Notwithstanding the foregoing, the Manager
shall remain responsible for ensuring the overall compliance of the Fund
and the Portfolio with the 1940 Act, the Code and all other applicable
federal and state laws and regulations, and the Adviser is only responsible
for complying with this subsection (ii) with respect to the Adviser Assets.
The Manager will provide the Adviser with reasonable advance notice of any
change in the Portfolio's investment objective, policies and restrictions
as stated in the Prospectus, and the Adviser shall, in the performance of
its duties
2
<PAGE>
and obligations under this Agreement, manage the Adviser Assets consistent
with such changes, provided the Adviser has received notice of the
effectiveness of such changes from the Fund or the Manager. For purposes of
this subsection, receipt of a modified Prospectus by the Adviser shall
constitute notice of the effectiveness of such changes. The Manager
acknowledges and agrees that the Prospectus will at all times be in
compliance with all disclosure requirements under all applicable federal
and state laws and regulations relating to the Fund or the Portfolio,
including, without limitation, the 1940 Act, and the rules and regulations
thereunder, and that the Adviser shall have no liability in connection
therewith, except as to the accuracy of material information furnished by
the Adviser to the Fund or to the Manager specifically for inclusion in the
Prospectus. The Adviser hereby agrees to provide to the Manager in a timely
manner such information relating to the Adviser and its relationship to,
and actions for, the Portfolio as may be required to be contained in the
Fund's Registration Statement.
(iii) The Adviser shall determine the securities and futures contracts
or other assets to be purchased or sold with respect to the Adviser Assets
and will place orders pursuant to its determination with or through such
persons, brokers, dealers or futures commission merchants (including but
not limited to Prudential Securities Incorporated) as the Adviser may
elect, provided that this is consistent with the policy with respect to
brokerage set forth in the Fund's Registration Statement and Prospectus or
as the Directors may direct from time to time. In providing the Adviser
Assets with investment supervision, it is recognized that the Adviser will
give primary consideration to securing the most favorable price and best
execution. Within the framework of this policy, the Adviser may consider
the financial responsibility, research and investment information and other
services provided by brokers, dealers or futures commission merchants who
may effect or be a party to any such transaction or other transactions to
which the
3
<PAGE>
Adviser's other clients may be a party. It is understood that Prudential
Securities Incorporated may be used as broker for securities transactions
to the extent permitted by the 1940 Act and the rules and regulations
thereunder, but that no formula has been adopted for allocation of the
Portfolio's investment transaction business. It is also understood that it
is desirable for the Fund that the Adviser have access to supplemental
investment and market research and security and economic analysis provided
by brokers or futures commission merchants who may execute brokerage
transactions at a higher cost to the Fund than may result when allocating
brokerage to other brokers on the basis of seeking the most favorable price
and best execution. Therefore, the Adviser is authorized to place orders
for the purchase and sale of securities and commodities or other assets for
the Adviser Assets with such brokers or futures commission merchants,
subject to review by the Directors from time to time with respect to the
extent and continuation of this practice. It is understood that the
services provided by such brokers or futures commission merchants may be
useful to the Adviser in connection with the Adviser's services to other
clients.
On occasions when the Adviser deems the purchase or sale of a
security, commodity or other asset to be in the best interest of the
Portfolio as well as other clients of the Adviser, the Adviser, to the
extent permitted by applicable laws and regulations, may, but shall be
under no obligation to, aggregate the securities, commodities or other
assets to be sold or purchased in order to obtain the most favorable price
or lower brokerage commissions and best execution. In such event,
allocation of the securities, commodities or other assets so purchased or
sold, as well as the expenses incurred in the transaction, will be made by
the Adviser in the manner the Adviser considers to be the most equitable
and consistent with its fiduciary obligations to the Fund and to such other
clients. It is understood that in some cases this procedure may adversely
affect the price paid
4
<PAGE>
or received by the Portfolio, or the size of the position obtained for, or
disposed of by, the Portfolio.
(iv) The Adviser shall maintain all books and records with respect to
the portfolio transactions required by subparagraphs (b)(5), (6), (7), (9),
(10) and (11) and paragraph (f) of Rule 31a-1 under the 1940 Act and shall
render to the Directors such periodic and special reports as the Board may
reasonably request.
(v) The Adviser shall provide the Fund's custodian (the "Custodian")
on each business day with information relating to all transactions
concerning the Adviser Assets and shall provide the Manager with such
information upon request of the Manager. The Adviser shall reconcile its
records of the Adviser Assets with statements provided by the Custodian at
least once each month. The Adviser shall provide the Manager with a written
report on each such reconciliation, including information on any
discrepancies noted and actions taken by the Adviser in response thereto,
by the tenth business day of the following month.
(vi) The investment management services provided by the Adviser
hereunder are not exclusive, and the Adviser shall be free to render
similar services to others.
(b) Services to be furnished by the Adviser under this Agreement
may be furnished through the medium of any of its directors, officers
or employees.
(c) The Adviser shall keep the Portfolio's books and records
required to be maintained by the Adviser pursuant to paragraph
1(a)(iv) hereof and shall timely furnish to the Manager all
information relating to the Adviser's services hereunder needed by the
Manager to keep the other books and records of the Fund required by
Rule 31a-1 under the 1940 Act. The Adviser agrees that all records
which it maintains for the Portfolio are the property of the Fund and
the Adviser will surrender promptly to the Fund any of such records
upon the Fund's request. The Adviser further agrees to preserve
5
<PAGE>
for the periods prescribed by Rule 31a-2 under the 1940 Act any such
records as are required to be maintained by it pursuant to paragraph
1(a) hereof.
(d) The Adviser agrees to maintain adequate compliance procedures
to ensure its compliance with the 1940 Act, the Investment Advisers
Act of 1940 (the "Advisers Act") and other applicable state and
federal laws and regulations.
(e) The Adviser shall furnish to the Manager copies of all
records prepared in connection with (i) the performance of this
Agreement and (ii) the maintenance of reports prepared in accordance
with the compliance procedures maintained pursuant to paragraph 1(d)
hereof as the Manager may reasonably request.
2. The Manager shall continue to have responsibility for all services to be
provided to the Portfolio pursuant to the Management Agreement and shall oversee
and review the Adviser's performance of its duties under this Agreement.
3. The Manager shall compensate the Adviser for the services provided and
the expenses assumed pursuant to this Subadvisory Agreement at the annual rate
of .45 of 1% of the average daily net assets of the Adviser Assets. This fee
will be computed daily and paid monthly no later than the 15th day following the
end of each month. The method of determining net assets of the Adviser Assets
for purposes hereof shall be the same as the method of determining net assets
for purposes of establishing the offering and redemption price of the Fund's
shares as described in the Prospectus. If this Agreement shall be effective for
only a portion of a month, the aforesaid fee shall be prorated for the portion
of such month during which this Agreement is in effect.
4. The Adviser shall not be liable for any error of judgment or mistake of
law for any loss suffered by the Portfolio, the Fund or the Manager in
connection with the matters to which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the
Adviser's part in the performance of its duties or from its reckless disregard
of its obligations and duties under this Agreement. The Adviser shall indemnify
the Manager, its affiliated persons, its officers, directors and employees, for
any liability and expenses, including attorneys fees, which may be sustained as
a result of the Adviser's willful misfeasance, bad faith, gross negligence,
reckless disregard of its duties hereunder or violation of applicable law,
including, without limitation, the 1940 Act and federal and state securities
laws. The Manager shall indemnify the Adviser, its affiliated persons, its
officers, directors and employees,
6
<PAGE>
for any liability and expenses, including attorneys fees, which may be sustained
as a result of the Manager's willful misfeasance, bad faith, gross negligence,
reckless disregard of its duties hereunder or violation of applicable law,
including, without limitation, the 1940 Act and federal and state securities
laws.
5. This Agreement shall continue in effect for a period of more than two
years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Fund at any
time, without the payment of any penalty, by the Directors or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio, or by the Manager or the Adviser at any time, without the payment
of any penalty, on not more than 60 days' nor less than 30 days' written notice
to the other party. This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any of
the Adviser's directors, officers or employees to engage in any other business
or to devote his or her time and attention to the management or other aspects of
any business, whether of a similar or dissimilar nature, nor limit the Adviser's
right to engage in any other business or to render services of any kind to any
other corporation, firm, individual or association.
7. During the term of this Agreement, the Manager agrees to furnish the
Adviser at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of the Fund or
7
<PAGE>
the public, which refer to the Adviser in any way; provided, however, that the
Manager or any affiliate or agent thereof shall not refer to or use the
Adviser's name, or that of any of Adviser's clients, in any such item without
the prior approval of the Adviser, which approval shall not be unreasonably
withheld or delayed.
This Agreement may be amended by mutual consent, but the consent of the
Fund must be obtained in conformity with the requirements of the 1940 Act.
9. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
By ____________________________________________
Name:
Title:
THE DREYFUS CORPORATION
By _______________________________________________
Name:
Title:
8
EXHIBIT (d)(6)
THE PRUDENTIAL SERIES FUND, INC.
(Diversified Conservative Growth Portfolio)
SUBADVISORY AGREEMENT
Agreement made as of this ___ day of ________, 1999, between The
Prudential Insurance Company of America (the "Manager"), a New Jersey insurance
company, and Franklin Advisers, Inc. (the "Adviser"), a company organized under
the laws of California.
WHEREAS, the Manager has entered into a management agreement (the
"Management Agreement") with The Prudential Series Fund, Inc. (the "Fund"), a
Maryland corporation and a diversified open-end management investment company
registered under the Investment Company Act of 1940 (the "1940 Act"), pursuant
to which the Manager will act as manager of the Fund.
WHEREAS, shares of the Fund are divided into separate series or portfolios
(each a portfolio), each of which is established pursuant to a resolution of the
Directors of the Fund, and the Directors may from time to time terminate such
portfolios or establish and terminate additional portfolios.
WHEREAS, the Manager desires to retain the Adviser to provide investment
advisory services to the Diversified Conservative Growth Portfolio of the Fund
(the "Portfolio") in connection with the management of the Fund and to manage
such portion of the Portfolio as the Manager shall from time to time direct, and
the Adviser is willing to render such investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
<PAGE>
1.(a) Subject to the supervision of the Manager and of the Directors of the
Fund, the Adviser shall manage such portion of the investment operations of
the Portfolio as the Manager shall direct and shall manage the composition
of such portion of the Portfolio including the purchase, retention and
disposition thereof, in accordance with the Portfolio's investment
objective, policies and restrictions as stated in the Prospectus (such
Prospectus and Statement of Additional Information as currently in effect
and as amended or supplemented from time to time being herein called the
"Prospectus") as delivered to the Adviser from time to time by the Manager
and subject to the following understandings:
(i) The Adviser shall provide supervision of such portion of the
Portfolio's investments and determine from time to time what investments
and securities will be purchased, retained, sold or loaned by the
Portfolio, and what portion of the assets it manages will be invested or
held uninvested as cash.
(ii) In the performance of its duties and obligations under this
Agreement with respect to the portion of the Portfolio it manages, the
Adviser shall act in conformity with the Articles of Incorporation,
By-Laws and Prospectus of the Fund and the Portfolio to the extent that
the Manager provides all pertinent information to Adviser relating to
other investments held by the Portfolio or the Fund. In the performance of
its duties and obligations under the Agreement, the Adviser shall act in
conformity with the written instructions and directions of the Manager and
of the Directors of the Fund and will conform to and comply with the
requirements of the 1940 Act, the Internal Revenue Code of 1986, as
amended, and all other applicable federal and state laws and regulations
to the extent that the Manager provides all
2
<PAGE>
pertinent information to Adviser relating to other investments held by the
Portfolio or the Fund.
(iii) The Adviser shall in its discretion determine the securities
and commodities or other assets to be purchased or sold by such portion of
the Portfolio and will place orders pursuant to its determination with or
through such persons, brokers, dealers or futures commission merchants
(including but not limited to Prudential Securities Incorporated) to carry
out the policy with respect to brokerage as set forth in the Fund's
Registration Statement and Prospectus or as the Directors may direct from
time to time. In providing the Portfolio with investment supervision, it
is recognized that the Adviser will give primary consideration to securing
best execution. Within the framework of this policy, the Adviser may
consider the financial responsibility, research and investment information
and other services provided by brokers, dealers or futures commission
merchants who may effect or be a party to any such transaction or other
transactions to which the Adviser's other clients may be a party. It is
understood that Prudential Securities Incorporated may be used as
principal broker for securities transactions but that no formula has been
adopted for allocation of the Portfolio's investment transaction business.
It is also understood that it is desirable for the Fund that the Adviser
have access to brokerage and research services, as such services are
defined in Section 28(e) of the Securities Exchange Act of 1934, including
supplemental investment and market research and security and economic
analysis provided by brokers or futures commission merchants who may
execute brokerage transactions at a higher cost to the Fund than may
result when allocating brokerage to other brokers solely
3
<PAGE>
on the basis of seeking best execution. Therefore, the Adviser is
authorized to place orders for the purchase and sale of securities and
commodities or other assets for the Portfolio with such brokers or futures
commission merchants, subject to review by the Directors from time to time
with respect to the extent and continuation of this practice. It is
understood that the services provided by such brokers or futures commission
merchants may be useful to the Adviser in connection with the Adviser's
services to other clients and not all research may be used by the Adviser
for the Portfolio.
On occasions when the Adviser deems the purchase or sale of a
security, commodity or other asset to be in the best interest of the
Portfolio as well as other clients of the Adviser, the Adviser, to the
extent permitted by applicable laws and regulations, may, but shall be
under no obligation to, aggregate the securities, commodities or other
assets to be sold or purchased in order to obtain best execution. In such
event, allocation of the securities, commodities or other assets so
purchased or sold, as well as the expenses incurred in the transaction,
will be made by the Adviser in the manner the Adviser considers to be the
most equitable and consistent with its fiduciary obligations to the Fund
and to such other clients.
(iv) The Adviser shall maintain all books and records required by
subparagraphs (b)(5), (6), (7), (9), (10) and (11) and paragraph (f) of
Rule 31a-1 under the 1940 Act with respect to the portfolio transactions of
the Portfolio for which it is responsible and shall render to the Directors
such periodic and special reports as the Board may reasonably request.
4
<PAGE>
(v) The Adviser is not authorized to accept delivery of cash or
securities for the Portfolio or to establish or maintain custodial
arrangements for the Portfolio. The Fund shall choose a custodian (the
"Custodian") to hold physical custody of the assets of the Portfolio. The
Adviser shall provide the Custodian on each business day with information
relating to all transactions concerning the portion of the Portfolio's
assets it manages and shall provide the Manager with such information upon
request of the Manager. The Adviser shall reconcile its records of the
Portfolio's securities and cash managed by the Adviser with statements
provided by the Custodian at least once each month. The Adviser shall
provide the Manager with a written report on each such reconciliation,
including information on any discrepancies noted and actions taken by the
Adviser in response thereto, by the tenth business day of the following
month.
(vi) The investment management services provided by the Adviser
hereunder are not exclusive, and the Adviser shall be free to render
similar services to others.
(vii) The Adviser shall furnish at its own expense all necessary
services, facilities and personnel in connection with its responsibilities
under this Agreement. It is understood that the Portfolio will pay all of
its own expenses, including without limitation: governmental fees; interest
charges; loan commitment fees; taxes; fees and expenses of independent
auditors, legal counsel and any transfer agent or registrar; expenses of
issuing or redeeming shares and servicing shareholders' accounts; expenses
of preparing, typesetting, printing and mailing notices and reports to
shareholders and regulators; expenses connected with the execution,
5
<PAGE>
recording and settlement of securities transactions; insurance premiums;
fees and expenses of the Custodian for all services to the Portfolio;
expenses of calculating the net asset value of the Portfolio, including but
not limited to the fees of independent pricing services; and such
non-recurring or extraordinary expenses as may arise including those
relating to actions, suits or proceedings to which the Portfolio or the
Fund may be a party.
(b) Services to be furnished by the Adviser under this Agreement may
be furnished through the medium of any of its directors, officers or
employees.
(c) The Adviser shall keep the books and records required to be
maintained by the Adviser pursuant to paragraph 1(a)(iv) hereof with
respect to the portion of the Portfolio it manages and shall timely furnish
to the Manager all information relating to the Adviser's services hereunder
needed by the Manager to keep the other books and records of the Fund
required by Rule 31a-1 under the 1940 Act. The parties agree that all
records which Adviser maintains for the Portfolio are the property of the
Fund and the Manager. The Adviser will surrender promptly to the Fund any
of such records (or copies thereof) upon the Fund's request. The Adviser
further agrees to preserve for the periods prescribed by Rule 31a-2 under
the 1940 Act any such records as are required to be maintained by it
pursuant to paragraph 1(a) hereof.
(d) The Adviser agrees to maintain compliance procedures which it
deems adequate to ensure its compliance with the 1940 Act, the Investment
6
<PAGE>
Advisers Act of 1940 (the "Advisers Act") and other applicable state and
federal laws and regulations.
(e) The Adviser shall furnish to the Manager copies of all records
prepared in connection with (i) the performance of this Agreement and (ii)
the reports prepared in accordance with the compliance procedures
maintained pursuant to paragraph 1(d) hereof as the Manager may reasonably
request.
2. The Manager shall continue to have responsibility for all services
to be provided to the Portfolio pursuant to the Management Agreement and
shall oversee and review the Adviser's performance of its duties under this
Agreement.
3. The Manager shall compensate the Adviser for the services provided
and the expenses assumed pursuant to this Subadvisory Agreement at the
annual rate of .50 of 1% of the average daily net assets of the portion of
the Portfolio managed by the Adviser. This fee will be computed daily and
paid monthly.
4. The Adviser shall not be liable for any error of judgment or for
any loss suffered by the Fund, the Portfolio or the Manager in connection
with the matters to which this Agreement relates, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the Adviser's
part in the performance of its duties or from its reckless disregard of its
obligations and duties under this Agreement.
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is
specifically approved at least annually in conformity with the requirements
of the 1940 Act; provided, however, that this Agreement may be terminated
by the Fund at any time, without the payment of any penalty, by the
Directors or by vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Portfolio, or by the Manager or the Adviser
at any time, without the payment of any penalty, on not more than 60 days'
nor less than 30 days' written notice to the other party. This Agreement
shall terminate automatically in the event of its assignment (as defined in
7
<PAGE>
the 1940 Act) or upon the termination of the Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any
of the Adviser's directors, officers or employees to engage in any other
business or to devote his or her time and attention in part to the
management or other aspects of any business, whether of a similar or
dissimilar nature, nor limit the Adviser's right to engage in any other
business or to render services of any kind to any other corporation, firm,
individual or association.
7. During the term of this Agreement, the Manager agrees to furnish
the Adviser at its principal office all prospectuses, proxy statements,
reports to shareholders, sales literature or other material prepared for
distribution to shareholders of the Fund or the public, which refer to the
Adviser in any way; provided, however, that any such item which describes
the Adviser or characterizes the Adviser's investment process with respect
to the Portfolio, or discloses the names of any of its clients (other than
the Fund or advisory clients of the Manager and its affiliates) or any of
its performance results shall be furnished to the Adviser by first class or
overnight mail, facsimile transmission equipment or hand delivery prior to
use thereof, and such item shall not be used if the Adviser reasonably
objects to such use in writing within five (5) business days (or such other
time as may be mutually agreed) after receipt thereof.
8. This Agreement may be amended by mutual consent, but the consent of
the Fund must be obtained in conformity with the requirements of the 1940
Act.
8
<PAGE>
9. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW
YORK.
10. All notices, reports and other communications required to be in
writing shall be delivered in person or sent by firsts-class mail postage
prepaid, overnight courier, or confirmed facsimile with original to follow.
If to Adviser:
Franklin Advisers, Inc.
777 Mariners Island Blvd.
San Mateo, CA 94404
If to Manager:
The Prudential Series Fund, Inc.
3 Gateway Center, 9th Floor
Newark, NJ 07102-4077
Fax (973) 367-8065
Attention: General Counsel
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
By __________________________________________
Name:
Title:
FRANKLIN ADVISERS, INC.
By __________________________________________
Name:
Title:
9
EXHIBIT (d)(7)
THE PRUDENTIAL SERIES FUND, INC.
(Diversified Conservative Growth Portfolio)
SUBADVISORY AGREEMENT
Agreement made as of this _____ day of ___________, 1999, between The
Prudential Insurance Company of America (the "Manager"), a New Jersey insurance
company and Pacific Investment Management Company (the "Adviser"), a Delaware
general partnership.
WHEREAS, the Manager has entered into a management agreement (the
"Management Agreement") with The Prudential Series Fund, Inc. (the "Fund"), a
Maryland corporation and a diversified open-end management investment company
registered under the Investment Company Act of 1940 (the "1940 Act"), pursuant
to which the Manager acts as manager of the Fund.
WHEREAS, shares of the Fund are divided into separate series or portfolios
(each a portfolio), each of which is established pursuant to a resolution of the
Directors of the Fund, and the Directors may from time to time terminate such
portfolios or establish and terminate additional portfolios.
WHEREAS, the Manager desires to retain the Adviser to provide investment
advisory services to the Diversified Conservative Growth Portfolio of the Fund
(the "Portfolio") in connection with the management of the Fund and to manage
such portion of the Portfolio as the Manager shall from time to time direct, and
the Adviser is willing to render such investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the
Directors of the Fund, the Adviser shall manage such portion of the
investment operations of the Portfolio as the Manager shall direct and
shall manage the composition of such portion of the Portfolio,
including the purchase, retention and disposition
<PAGE>
thereof, in accordance with the Portfolio's investment objective,
policies and restrictions as stated in the Prospectus (such Prospectus
and Statement of Additional Information as currently in effect and as
amended or supplemented from time to time being herein called the
"Prospectus") as delivered to the Adviser from time to time by the
Manager and subject to the following understandings:
(i) The Adviser shall provide supervision of such portion of the
Portfolio's investments and determine from time to time what
investments and securities will be purchased, retained, sold or loaned
by the Portfolio, and what portion of the assets it manages will be
invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under this
Agreement, the Adviser shall act in conformity with the Agreement and
Articles of Incorporation, By-Laws and Prospectus of the Fund and the
Portfolio as provided to the Adviser by the Manager and with the
written instructions and directions of the Manager and of the
Directors of the Fund and will conform to and comply with the
requirements of the 1940 Act, the Internal Revenue Code of 1986, as
amended, and all other applicable federal and state laws and
regulations.
(iii) The Adviser shall determine the securities and futures
commodities or other assets to be purchased or sold by such portion of
the Portfolio and will place orders pursuant to its determination with
or through such persons, brokers, dealers or futures commission
merchants (including but not limited to Prudential Securities
Incorporated) to carry out the policy with respect to brokerage as set
forth in the Fund's Registration Statement and Prospectus or as the
Directors may direct from time to time. In providing the Portfolio
with investment supervision, it is recognized that the Adviser will
give primary consideration to securing the most favorable price and
best execution. Within the framework of this policy, the Adviser may
consider the financial responsibility, research and investment
2
<PAGE>
information and other services provided by brokers, dealers or futures
commission merchants who may effect or be a party to any such
transaction or other transactions to which the Adviser's other clients
may be a party. It is understood that Prudential Securities
Incorporated may be used as broker for securities transactions but
that no formula has been adopted for allocation of the Portfolio's
investment transaction business. It is also understood that it is
desirable for the Fund that the Adviser have access to supplemental
investment and market research and security and economic analysis
provided by brokers or futures commission merchants who may execute
brokerage transactions at a higher cost to the Fund than may result
when allocating brokerage to other brokers on the basis of seeking the
most favorable price and best execution. Therefore, the Adviser is
authorized to place orders for the purchase and sale of securities and
commodities or other assets for the Portfolio with such brokers or
futures commission merchants, subject to review by the Directors from
time to time with respect to the extent and continuation of this
practice. It is understood that the services provided by such brokers
or futures commission merchants may be useful to the Adviser in
connection with the Adviser's services to other clients.
On occasions when the Adviser deems the purchase or sale of a
security, commodity or other asset to be in the best interest of the
Portfolio as well as other clients of the Adviser, the Adviser, to the
extent permitted by applicable laws and regulations, may, but shall be
under no obligation to, aggregate the securities, commodities or other
assets to be sold or purchased in order to obtain the most favorable
price or lower brokerage commissions and best execution. In such
event, allocation of the securities, commodities or other assets so
purchased or sold, as well as the expenses incurred in the
transaction, will be made by the
3
<PAGE>
Adviser in the manner the Adviser considers to be the most equitable
and consistent with its fiduciary obligations to the Fund and to such
other clients.
(iv) The Adviser shall maintain all books and records with
respect to the portfolio transactions required by subparagraphs
(b)(5), (6), (7), (9), (10) and (11) and paragraph (f) of Rule 31a-1
under the 1940 Act and shall render to the Directors such periodic and
special reports as the Board may reasonably request.
(v) The Adviser shall provide the Fund's custodian (the
"Custodian") on each business day with information relating to all
transactions concerning the portion of the Portfolio's assets it
manages and shall provide the Manager with such information upon
request of the Manager. The Adviser shall reconcile its records of the
Portfolio's securities and cash managed by the Adviser with statements
provided by the Custodian at least once each month. The Adviser shall
provide the Manager with a written report on each such reconciliation,
including information on any discrepancies noted and actions taken by
the Adviser in response thereto, by the tenth business day of the
following month.
(vi) The investment management services provided by the Adviser
hereunder are not exclusive, and the Adviser shall be free to render
similar services to others.
(b) Services to be furnished by the Adviser under this Agreement may be
furnished through the medium of any of its partners, officers or employees.
(c) The Adviser shall keep the Portfolio's books and records required to be
maintained by the Adviser pursuant to paragraph 1(a)(iv) hereof and shall timely
furnish to the Manager all information relating to the Adviser's services
hereunder needed by the Manager to keep the other books and records of the Fund
required by Rule 31a-1 under the 1940 Act. The Adviser agrees that all records
which it maintains for the Portfolio are the property of the Fund and the
Adviser will surrender promptly to the
4
<PAGE>
Fund any of such records upon the Fund's request. The Adviser further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any such
records as are required to be maintained by it pursuant to paragraph 1(a)
hereof.
(d) The Adviser agrees to maintain adequate compliance procedures to ensure
its compliance with the 1940 Act, the Investment Advisers Act of 1940 ("Advisers
Act") and other applicable state and federal laws and regulations.
(e) The Adviser shall furnish to the Manager copies of all records prepared
in connection with (i) the performance of this Agreement and (ii) the
maintenance of reports prepared in accordance with the compliance procedures
maintained pursuant to paragraph 1(d) hereof as the Manager may reasonably
request.
2. The Manager shall continue to have responsibility for all services to be
provided to the Portfolio pursuant to the Management Agreement and shall oversee
and review the Adviser's performance of its duties under this Agreement.
3. The Manager shall compensate the Adviser for the services provided and
the expenses assumed pursuant to this Subadvisory Agreement at the annual rate
of .25 of 1% of the average daily net assets of the portion of the Portfolio
managed by the Adviser. This fee will be computed daily and paid monthly.
4. The Adviser shall not be liable for any error of judgment or for any
loss suffered by the Portfolio, the Fund or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the Adviser's part in the
performance of its duties or from its reckless disregard of its obligations and
duties under this Agreement.
5. This Agreement shall continue in effect for a period of more than two
years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Fund at any
time, without the payment of
5
<PAGE>
any penalty, by the Directors or by vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Portfolio, or by the Manager or
the Adviser at any time, without the payment of any penalty, on not more than 60
days' nor less than 30 days' written notice to the other party. This Agreement
shall terminate automatically in the event of its assignment (as defined in the
1940 Act) or upon the termination of the Management Agreement. Adviser shall
promptly notify Manager in the event that there is a change in the partners of
Adviser that may constitute an assignment of this Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any of
the Adviser's partners, officers or employees to engage in any other business or
to devote his or her time and attention in part to the management or other
aspects of any business, whether of a similar or dissimilar nature, nor limit
the Adviser's right to engage in any other business or to render services of any
kind to any other corporation, firm, individual or association.
7. During the term of this Agreement, the Manager agrees to furnish the
Adviser at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of the Fund or the public, which refer to the Adviser in any way;
provided, however, that any such item which describes or characterizes the
Adviser's investment process with respect to the Portfolio, the names of any of
its clients (other than the Fund or advisory clients of the Manager and its
affiliates) or any of its performance results shall be furnished to the Adviser
by first class or overnight mail, facsimile transmission equipment or hand
delivery prior to use thereof, and such item shall not be used if the Adviser
reasonably objects to such use in writing within twenty-four (24) hours (or such
other time as may be mutually agreed) after receipt thereof (provided, however,
that if such item is not received by the Adviser during normal business hours on
a business day, such period
6
<PAGE>
shall end twenty-four (24) hours after the start of normal business hours on the
next succeeding business day).
8. Concurrently with the execution of this Agreement, the Adviser is
delivering to the Manager a copy Part II of its Form ADV, as revised, on file
with the Securities and Exchange Commission and a copy of its Disclosure
Document, dated March 31, 1998, on file with the Commodity Futures Trading
Commission. The Manager acknowledges receipt of such documents.
9. Any written notice required by or pertaining to this Agreement shall be
personally delivered to the party for whom it is intended, at the address stated
below, or shall be sent to such party by prepaid first class mail or facsimile.
If to Prudential: The Prudential Series Fund Inc.
3 Gateway Center, 9th Floor
Newark, NJ 07102-4077
Fax: (973) 367-8065
Attention: General Counsel
If to the Adviser: Pacific Investment Management Company
840 Newport Center Drive, Suite 360
Newport Beach, CA 92660
Fax: (714) 720-1376
Attention: John S. Loftus, Executive Vice President
cc: Chief Administrative Officer
10. This Agreement may be amended by mutual consent, but the consent of the
Fund must be obtained in conformity with the requirements of the 1940 Act.
11. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
THE PRUDENTIAL INVESTMENTS FUND MANAGEMENT
By________________________________________________________
Name:
Title:
PACIFIC INVESTMENT MANAGEMENT COMPANY
By: PIMCO Management Inc., a general partner
By________________________________________________________
James F. Muzzy, Managing Director of Pacific Investment
Management Company and PIMCO Management Inc.
8
TRANSFER AGENCY AND SERVICE AGREEMENT
between
THE PRUDENTIAL SERIES FUND, INC.
and
PRUDENTIAL MUTUAL FUND SERVICES LLC
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
Article 1 Terms of Appointment; Duties of PMFS.........................2
Article 2 Fees and Expenses............................................4
Article 3 Representations and Warranties of PMFS.......................5
Article 4 Representations of Warranties of the Fund....................5
Article 5 Duty of Care and Indemnification.............................6
Article 6 Documents and Covenants of the Fund and PMFS.................9
Article 7 Termination of Agreement....................................10
Article 8 Assignment..................................................10
Article 9 Affiliations................................................11
Article 10 Amendment...................................................11
Article 11 Applicable Law..............................................12
Article 12 Miscellaneous...............................................12
Article 13 Merger of Agreement.........................................12
2
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
-------------------------------------
AGREEMENT made as of the 8th day of March, 1999 by and between THE
PRUDENTIAL SERIES FUND, INC. a Maryland corporation having its principal office
and place of business at Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102 (the Fund), and PRUDENTIAL MUTUAL FUND SERVICES LLC, a New Jersey
limited liability corporation, having its principal office and place of business
at Raritan Plaza One, Edison, New Jersey 08837 (PMFS).
WHEREAS, the Fund desires to appoint PMFS as its transfer agent,
dividend disbursing agent and shareholder servicing agent in connection with
certain other activities, and PMFS desires to accept such appointment;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of PMFS
------------------------------------
1.01 Subject to the terms and conditions set forth in this
Agreement, the Fund hereby employs and appoints PMFS to act as, and PMFS agrees
to act as, the transfer agent for the authorized and issued shares of the common
stock of the Fund, dividend disbursing agent and shareholder servicing agent in
connection
3
<PAGE>
with any accumulation, open-account or similar plans provided to the
shareholders of the Fund or any series thereof (Shareholders) and set out in the
currently effective prospectuses and statement of additional information
(prospectus) of the Fund, including without limitation any periodic investment
plan or periodic withdrawal program.
1.02 PMFS agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund and PMFS, PMFS shall:
(i) obtain all properly executed documents necessary to set up accounts on an
omnibus level for customers of The Prudential Insurance Company of
America (Prudential) and of any other insurers that offer the Fund as an
investment option (Outside Insurers);
(ii) maintain accounts in the Fund by insuring orderly and timely processing
of transactions;
(iii) receive and consolidate all transaction requests via transmission, NSCC
or fax;
(iv) notify the Fund's portfolio managers and custodian(s) of all share
activity;
(v) reconcile outstanding shares for each class of each portfolio of the Fund
with the Fund's custodian(s) on a daily basis;
(vi) perform daily accrual tracking;
(vii) monitor and distribute all dividend distributions for the Fund;
(viii) receive payments for trades by the Outside Insurers and forward funds to
or from, as the case may be, the Fund's custodian(s);
(ix) receive for acceptance redemption requests and redemption directions and
deliver the appropriate documentation therefor to the Fund's
custodian(s);
(x) reconcile cash for Outside Insurers' trades and dividends;
(xi) price the Fund's shares nightly;
4
<PAGE>
(xii) produce and mail shareholder statements on a quarterly basis;
(xiii) provide Prudential and its affiliates with on-line access to omnibus
account history and balances;
(xiv) provide annual and semi-annual purchase, redemption and dividend activity
information;
(xv) calculate and distribute 12b-1 fees; and
(xvi) provide customer service to the Outside Insurers.
(b) In addition, the Fund shall (i) identify to PMFS in writing those
transactions and assets to be treated as exempt from Blue Sky reporting for each
State and (ii) verify the establishment of transactions for each State on the
system prior to activation and thereafter monitor the daily activity for each
State. The responsibility of PMFS for the Fund's registration status under the
Blue Sky or securities laws of any State or other jurisdiction is solely limited
to the initial establishment of transactions subject to Blue Sky compliance by
the Fund and the reporting of such transactions to the Fund as provided above
and as agreed from time to time by the Fund and PMFS.
PMFS may also provide such additional services and functions not
specifically described herein as may be mutually agreed between PMFS and the
Fund.
Procedures applicable to certain of these services may be established
from time to time by agreement between the Fund and PMFS.
Article 2 Fees and Expenses
-----------------
2.01 For performance by PMFS pursuant to this Agreement, the
Fund
5
<PAGE>
agrees to pay PMFS an annual fee of $125,000 and certain out-of-pocket expenses
including, but not limited to, postage, stationery, printing, allocable
communication costs, microfilm or microfiche, and expenses incurred at the
specific direction of the Fund. The fee and out-of-pocket expenses identified
under this Section 2.01 may be changed from time to time subject to mutual
written agreement between the Fund and PMFS.
2.02 The Fund agrees to pay the annual fee and reimbursable
out-of-pocket expenses within a reasonable period of time following the mailing
of the respective billing notice.
Article 3 Representations and Warranties of PMFS
--------------------------------------
PMFS represents and warrants to the Fund that:
3.01 It is a limited liability company duly organized and
existing and in good standing under the laws of New York and it is duly
qualified to carry on its business in each jurisdiction in which it operates.
3.02 It is and will remain registered with the U.S. Securities
and Exchange Commission (SEC) as a Transfer Agent pursuant to the requirements
of Section 17A of the 1934 Act.
3.03 It is empowered under applicable laws and by its Operating
Agreement to enter into and perform this Agreement.
3.04 All requisite proceedings have been taken to authorize it
to enter into and perform this Agreement.
6
<PAGE>
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
Article 4 Representations and Warranties of the Fund
------------------------------------------
The Fund represents and warrants to PMFS that:
4.01 It is a corporation duly organized and existing and in good
standing under the laws of Maryland.
4.02 It is empowered under applicable laws and by its Articles
of Incorporation and By-Laws to enter into and perform this Agreement.
4.03 All proceedings required by said Articles of Incorporation
and By-Laws have been taken to authorize it to enter into and perform this
Agreement.
4.04 It is an investment company registered with the SEC under
the Investment Company Act of 1940, as amended (the 1940 Act).
4.5 A registration statement under the Securities Act of 1933 (the 1933 Act) is
currently effective, and will remain effective, and appropriate state securities
law notice filings have been made and will continue to be made, with respect to
all shares of the Fund being offered for sale.
Article 5 Duty of Care and Indemnification
--------------------------------
5.01 PMFS shall not be responsible for, and the Fund shall
indemnify and hold PMFS harmless from and against, any and all losses, damages,
costs, charges, counsel fees, payments, expenses and liability arising out of or
attributable to:
(a) All actions of PMFS or its agents or subcontractors required to
be taken pursuant to this Agreement, provided that such actions are taken in
good faith and without negligence or willful misconduct.
7
<PAGE>
(b) The Fund's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Fund's lack of good faith, negligence or
willful misconduct or which arise out of the breach of any representation or
warranty of the Fund hereunder.
(c) The reliance on or use by PMFS or its agents or subcontractors of
information, records and documents which (i) are received by PMFS or its agents
or subcontractors and furnished to it by or on behalf of the Fund, and (ii) have
been prepared and/or maintained by the Fund or any other person or firm on
behalf of the Fund.
(d) The reliance on, or the carrying out by PMFS or its agents or
subcontractors of, any instructions or requests of the Fund.
(e) The offer or sale of shares in violation of any requirement under
the federal securities laws or regulations or the securities or Blue Sky laws of
any State or other jurisdiction that notice of such shares be filed in such
State or other jurisdiction or in violation of any stop order or other
determination or ruling by any federal agency or any State or other jurisdiction
with respect to the offer or sale of such shares in such State or other
jurisdiction.
5.02 PMFS shall indemnify and hold the Fund harmless from and
against any and all losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributable to any action or failure
or omission to act by PMFS as a result of PMFS' lack of good faith, negligence
or willful misconduct.
5.03 At any time PMFS may apply to any officer of the Fund for
instructions,
8
<PAGE>
and may consult with legal counsel, with respect to any matter arising in
connection with the services to be performed by PMFS under this Agreement, and
PMFS and its agents or subcontractors shall not be liable and shall be
indemnified by the Fund for any action taken or omitted by it in reliance upon
such instructions or upon the opinion of such counsel. PMFS, its agents and
subcontractors shall be protected and indemnified in acting upon any paper or
document furnished by or on behalf of the Fund, reasonably believed to be
genuine and to have been signed by the proper person or persons, or upon any
instruction, information, data, records or documents provided to PMFS or its
agents or subcontractors by machine readable input, telex, CRT data entry or
other similar means authorized by the Fund, and shall not be held to have notice
of any change of authority of any person, until receipt of written notice
thereof from the Fund.
5.04 In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of God, strikes,
equipment or transmission failure or damage reasonably beyond its control, or
other causes reasonably beyond its control, such party shall not be liable for
damages to the other for any damages resulting from such failure to perform or
otherwise from such causes.
5.05 Neither party to this Agreement shall be liable to the
other party for consequential damages under any provision of this Agreement or
for any act or failure to act hereunder.
5.06 In order that the indemnification provisions contained in
this Article 5
9
<PAGE>
shall apply, upon the assertion of a claim for which either party may be
required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.
Article 6 Documents and Covenants of the Fund and PMFS
--------------------------------------------
6.01 PMFS hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of check forms and
facsimile signature imprinting devices, if any; and for the preparation or use,
and for keeping account of, such forms and devices.
6.02 PMFS shall prepare and keep records relating to the
services to be performed hereunder, in the form and manner as it may deem
advisable. To the extent required by Section 31 of the 1940 Act, and the Rules
and Regulations thereunder, PMFS agrees that all such records prepared or
maintained by PMFS relating to the services to be performed by PMFS hereunder
are the property of the Fund and will be preserved, maintained and made
available in accordance with such Section 31 of the 1940 Act, and the Rules and
Regulations thereunder, and will be surrendered promptly to the Fund on and in
accordance with its request.
10
<PAGE>
6.03 PMFS and the Fund agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential and shall not be voluntarily disclosed to
any other person except as may be required by law or with the prior consent of
PMFS and the Fund.
6.04 In case of any requests or demands for the inspection of
the Shareholder records of the Fund, PMFS will endeavor to notify the Fund and
to secure instructions from an authorized officer of the Fund as to such
inspection. PMFS reserves the right, however, to exhibit the Shareholder records
to any person whenever it is advised by its counsel that it may be held liable
for the failure to exhibit the Shareholder records to such person.
Article 7 Termination of Agreement
------------------------
7.01 This Agreement may be terminated by either party upon one
hundred twenty (120) days' written notice to the other.
7.02 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and other
materials will be borne by the Fund. Additionally, PMFS reserves the right to
charge for any other reasonable fees and expenses associated with such
termination.
Article 8 Assignment
----------
8.01 Except as provided in Section 8.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the
11
<PAGE>
written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.
8.03 PMFS may, in its sole discretion and without further
consent by the Fund, subcontract, in whole or in part, for the performance of
its obligations and duties hereunder with any person or entity including but not
limited to: (i) Prudential Securities Incorporated (Prudential Securities), a
registered broker-dealer, (ii) Prudential, (iii) Pruco Securities Corporation, a
registered broker-dealer, (iv) any Prudential Securities or Prudential
subsidiary or affiliate duly registered as a broker-dealer and/or a transfer
agent pursuant to the 1934 Act or (vi) any other Prudential Securities or
Prudential affiliate or subsidiary; provided, however, that PMFS shall be as
fully responsible to the Fund for the acts and omissions of any agent or
subcontractor as it is for its own acts and omissions.
Article 9 Affiliations
------------
9.01 PMFS may now or hereafter, without the consent of or notice
to the Fund, function as Transfer Agent and/or Shareholder Servicing Agent for
any other investment company registered with the SEC under the 1940 Act,
including without limitation any investment company whose adviser,
administrator, sponsor or principal underwriter is or may become affiliated with
Prudential Securities and/or Prudential or any of its or their direct or
indirect subsidiaries or affiliates.
9.02 It is understood and agreed that the directors, officers,
employees,
12
<PAGE>
agents and Shareholders of the Fund, and the directors, officers, employees,
agents and shareholders of the Fund's investment adviser and/or distributor, are
or may be interested in PMFS as directors, officers, employees, agents,
shareholders or otherwise, and that the directors, officers, employees, agents
or shareholders of PMFS may be interested in the Fund as directors, officers,
employees, agents, Shareholders or otherwise, or in the investment adviser
and/or distributor as officers, directors, employees, agents, shareholders or
otherwise.
Article 10 Amendment
---------
10.01 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution of
the Board of Directors of the Fund.
Article 11 Applicable Law
--------------
11.01 This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of the State of New
Jersey.
Article 12 Miscellaneous
-------------
12.01 Any notice or other instrument authorized or required by
this Agreement to be given in writing to the Fund or to PMFS shall be
sufficiently given if addressed to that party and received by it at its office
set forth below or at such other place as it may from time to time designate in
writing.
13
<PAGE>
To the Fund:
The Prudential Series Fund, Inc.
Gateway Center Three - 9th Floor
100 Mulberry Street
Newark, New Jersey 07102
Attention: Grace Torres
Treasurer
To PMFS:
Prudential Mutual Fund Services LLC
Raritan Plaza One
Edison, NJ 08837
Attention: President
Article 13 Merger of Agreement
-------------------
13.01 This Agreement constitutes the entire agreement between
the parties hereto and supersedes any prior agreement with respect to the
subject matter hereof whether oral or written.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
ATTEST: THE PRUDENTIAL SERIES FUND, INC.
______________________ By: _______________________________
Caren Cunningham Name:
Secretary Title:
14
<PAGE>
ATTEST: PRUDENTIAL MUTUAL
FUND SERVICES LLC
______________________ By: _______________________________
Name: Name:
Title: Title:
15
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statements of Additional Information
constituting part of this Post-Effective Amendment No. 36 to the registration
statement on Form N-1A (the "Registration Statement") of our reports dated
February 12, 1999, relating to the financial statements and financial highlights
of the portfolios of The Prudential Series Fund, Inc., which appear in such
Statements of Additional Information, and to the incorporation by reference of
our reports into the Prospectuses which constitute part of this Registration
Statement. We also consent to the references to us under the headings "Experts"
in such Statements of Additional Information and to the references to us under
the headings "Financial Highlights" in such Prospectuses.
We also consent to the use in the Prospectus of the Pruco Life of New Jersey
Variable Appreciable Account constituting part of this Registration Statement of
our reports dated March 19, 1999 and February 26, 1999, relating to the
financial statements of the PRUvider Variable Appreciable Life Subaccounts of
Pruco Life of New Jersey Variable Appreciable Account and the Pruco Life
Insurance Company of New Jersey, respectively, which appear in such Prospectus.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
We also consent to the use in the Prospectus of the Pruco Life PRUvider Variable
Appreciable Account constituting part of this Registration Statement of our
reports dated March 19, 1999 and February 26, 1999, relating to the financial
statements of the Pruco Life PRUvider Variable Appreciable Account and the Pruco
Life Insurance Company and Subsidiaries, respectively, which appear in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
April 23, 1999
EXHIBIT (j)(2)
SHEA & GARDNER
1600 Massachusetts Avenue, N.W.
Washington, D.C. 20036
(202) 828-2000
Fax: (202) 828-2195
April 8, 1999
The Prudential Series Fund, Inc.
213 Washington Street
Newark, NJ 07102
Ladies & Gentlemen:
We have served as counsel to The Prudential Series Fund, Inc. (the "Fund")
in connection with various matters relating to the registration of the Fund's
securities under the Securities Act of 1933, as amended, and registration of the
Fund under the Investment Company Act of 1940, as amended.
Based on our examination of the relevant documents contained in the Fund's
registration statement, and in reliance upon certain exhibits to that
registration statement, and assuming that the securities were issued in
accordance with the terms described in the registration statement, and that the
Fund received payment for the securities, we are of the opinion that the
securities are valid, legal and binding obligations of the Fund in accordance
with their terms and are nonassessable.
We consent to the filing of this opinion with the Securities and Exchange
Commission as an exhibit to the Fund's registration statement.
Yours truly,
SHEA & GARDNER
By: /s/ MICHAEL K. ISENMAN
---------------------------------------
Michael K. Isenman
EXHIBIT (m)
THE PRUDENTIAL SERIES FUND, INC.
Distribution Plan
(Class II Shares)
Introduction
1. This Distribution Plan (the "Plan"), when effective in accordance with its
terms, shall be the written plan contemplated by Securities and Exchange
Commission Rule 12b-1 under the Investment Company Act of 1940, as amended (the
"Act"), for Class II shares ("Class II") of each of the portfolios (the
"Portfolios") of The Prudential Series Fund Inc. (the "Fund"). The Portfolios'
shares of beneficial interest ("Shares") may from time to time be offered to
insurance companies for allocation to certain of their separate accounts
established for the purpose of funding variable annuity contracts and variable
life insurance policies ("Variable Products") and pension and retirement plans
as permitted by Treasury Regulations and Rulings ("Qualified Plans").
2. The Fund has entered into a Distribution Agreement on behalf of the
Portfolios with Prudential Investment Management Services LLC (the
"Distributor"), under which the Distributor uses all reasonable efforts,
consistent with its other business, to secure purchasers of the Portfolios'
Shares. Such efforts may include, but neither are required to include nor are
limited to, the following: (1) formulation and implementation of marketing and
promotional activities, such as mail promotions and television, radio,
newspaper, magazine and other mass media advertising; (2) preparation and
distribution of sales literature; (3) preparation and distribution of
prospectuses of the Portfolios and
<PAGE>
reports to recipient other than existing shareholders; (4) obtaining such
information, analyses and reports with respect to marketing and promotional
activities as the Distributor may, from time to time, deem advisable; (5) making
payments to insurance companies and others engaged in the sale of Shares or who
engage in shareholder support services; and (6) providing training, marketing
and support to such insurance companies and others with respect to Shares.
3. In consideration for the services provided and the expenses incurred by the
Distributor pursuant to the Distribution Agreement and paragraph 2 hereof, all
with respect to Class II shares, Class II of each Portfolio shall pay to the
Distributor a fee at the annual rate of 0.25% (or such lesser amount as the
Fund's Directors may, from time to time, determine) of the average daily net
assets of Class II made at the close of business each day throughout the month
and computed in the manner specified in the respective Portfolio's then current
Prospectus for the determination of the net asset value of the Class II Shares.
4. The Distributor may use all or any portion of the fee received pursuant to
this Plan to compensate insurance companies or others who have engaged in the
sale of Class II Shares or in the shareholder support services pursuant to
agreements with the Distributor, or to pay any of the expenses associated with
other activities authorized under paragraph 2 hereof. Such services may include,
but are not limited to, the following: (1) answering questions about the
Portfolios from owners of Variable Products or Qualified Plans; (2) receiving
and answering correspondence from owners of Variable Products or Qualified Plans
<PAGE>
(including requests for prospectuses and statements of additional information
for the Portfolios); (3) performing sub-accounting with respect to Variable
Product and Qualified Plan values allocated to the Portfolios; (4) preparing and
distributing reports of values to Variable Product and Qualified Plan owners who
have values allocated to the Portfolios; (5) distributing prospectuses,
statements of additional information, any supplements thereto, and shareholder
reports; (6) preparing and distributing marketing materials for Variable
Products and Qualified Plans; (7) assisting customers in completing applications
for Variable Products and selecting underlying mutual fund investment options;
(8) preparing and distributing sub-accounts performance figures for sub-accounts
investing in Class II Shares; and (9) providing other reasonable assistance in
connection with the distribution of Class II Shares.
5. Each Portfolio presently pays, and will continue to pay, a management fee to
The Prudential Insurance Company of America (the "Adviser") pursuant to an
investment advisory agreement between the Fund in respect of the Portfolios and
the Adviser (the "Advisory Contract"). It is recognized that the Adviser may use
its management fee revenue, as well as its past profits or its resources from
any other source, to make payments to the Distributor with respect to any
expenses incurred in connection with the distribution of Class II Shares,
including the activities referred to in paragraph 2 hereof. To the extent that
the payment of management fees by a Portfolio to the Adviser should be deemed to
be indirect financing of any activity primarily intended to result in the sale
of Class II Shares
<PAGE>
within the meaning of Rule 12b-1, then such payment shall be deemed to be
authorized by this Plan.
6. This Plan shall become effective upon approval by a vote of a majority of the
Directors of the Fund, including a majority of the Directors who are not
"interested persons" of the Fund (as defined in the Act) and who have no direct
or indirect financial interest in the operation of this Plan or in any agreement
related to the Plan (the "Independent Directors"), cast in person at a meeting
called for the purpose of voting on this Plan.
7. This Plan shall, unless terminated as hereinafter provided, remain in effect
until May 28, 1999, and from year to year thereafter; provided, however, that
such continuance is subject to approval annually by a vote of a majority of the
Directors of the Fund, including a majority of the Independent Directors, cast
in person at a meeting called for the purpose of voting on this Plan. This Plan
may be amended at any time by the Board of Directors, provided that (a) any
amendment to increase materially the fee provided for in paragraph 3 hereof or
any amendment of the Advisory Contract to increase the amount to be paid by the
Fund thereunder shall be effective only upon approval by a vote of a majority of
the outstanding voting securities of Class II in the case of this Plan, or upon
approval by a vote of a majority of the outstanding voting securities of the
Fund, in the case of the Advisory Contract, and (b) any material amendment of
this Plan shall be effective only upon approval in the manner provided in the
first sentence of this paragraph 7.
<PAGE>
8. This Plan may be terminated at any time with respect to a Portfolio, without
the payment of any penalty, by a vote of a majority of the Independent Directors
or by a vote of a majority of the outstanding voting securities of Class II of
that Portfolio.
9. During the existence of this Plan, the Fund shall require the Adviser and/or
the Distributor to provide the Fund, for review by the Directors, and the
Directors shall review, at least quarterly, a written report of the amounts
expended in connection with financing any activity primarily intended to result
in the sale of shares of Class II (making estimates of such costs where
necessary or desirable) and the purposes for which such expenditures were made.
10. This Plan does not require the Adviser or Distributor to perform any
specific type or level of distribution activities or to incur any specific level
of expenses for activities primarily intended to result in the sale of Class II
Shares.
11. Consistent with the limitation of shareholder liability as set forth in the
Fund's Articles of Incorporation, any obligation assumed by Class II pursuant to
this Plan and any agreement related to this Plan shall be limited in all cases
to Class II and its assets and shall not constitute an obligation of any
shareholder of the Fund or of any other class of a Portfolio, series of the
Fund, or class of such series.
12. If any provision of the Plan shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of the Plan shall not be
affected thereby.
Adopted with respect to the following portfolios on August 19, 1998:
Conservative Balanced Portfolio
<PAGE>
Diversified Bond Portfolio
Equity Income Portfolio
Equity Portfolio
Flexible Managed Portfolio
Global Portfolio
Government Income Portfolio
High Yield Bond Portfolio
Money Market Portfolio
Natural Resources Portfolio
Prudential Jennison Portfolio
Small Capitalization Portfolio
Stock Index Portfolio
Zero Coupon Bond 2000 Portfolio
Zero Coupon Bond 2005 Portfolio
Adopted with respect to the following portfolios on February 25, 1999:
Diversified Conservative Growth Portfolio
20/20 Focus Portfolio
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000711175
<NAME> THE PRUDENTIAL SERIES FUND, INC.
<SERIES>
<NUMBER> 006
<NAME> CONSERVATIVE BALANCED PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 4,496,058,447
<INVESTMENTS-AT-VALUE> 4,762,474,785
<RECEIVABLES> 42,658,097
<ASSETS-OTHER> 931,304
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 1,518,060
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,586,356
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,511,101,790
<SHARES-COMMON-STOCK> 318,104,322
<SHARES-COMMON-PRIOR> 316,911,160
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 15,961,929
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 268,896,051
<NET-ASSETS> (635,015,482)
<DIVIDEND-INCOME> 24,862,659
<INTEREST-INCOME> 202,415,229
<OTHER-INCOME> 0
<EXPENSES-NET> 27,076,634
<NET-INVESTMENT-INCOME> 200,201,254
<REALIZED-GAINS-CURRENT> 263,079,117
<APPREC-INCREASE-CURRENT> 66,472,901
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> THE PRUDENTIAL SERIES FUND, INC.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> THE PRUDENTIAL SERIES FUND, INC.
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<TABLE> <S> <C>
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<NAME> PRUDENTIAL JENNISON PORTFOLIO
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<NAME> THE PRUDENTIAL SERIES FUND, INC.
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<NAME> SMALL CAPITALIZATION STOCK PORTFOLIO
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<NAME> THE PRUDENTIAL SERIES FUND, INC.
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<NAME> THE PRUDENTIAL SERIES FUND, INC.
<SERIES>
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<NAME> ZERO COUPON BOND 2000 PORTFOLIO
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<NAME> THE PRUDENTIAL SERIES FUND, INC.
<SERIES>
<NUMBER> 005
<NAME> ZERO COUPON BOND 2005 PORTFOLIO
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EXHIBIT (o)
THE PRUDENTIAL SERIES FUND, INC.
(the Fund)
(Diversified Conservative Growth Portfolio)
(20/20 Focus Portfolio)
PLAN PURSUANT TO RULE 18f-3
The Fund hereby adopts this plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940 (the "1940 Act"), setting forth the separate
arrangement and expense allocation of each class of shares of the above-named
portfolios. Any material amendment to this plan is subject to prior approval of
the Board of Directors, including a majority of the independent Directors.
CLASS CHARACTERISTICS
CLASS I SHARES: Class I shares are not subject to any sales charge or
distribution and/or service fee at the Fund level (however,
sales loads and other charges may be imposed at the Contract
level). This Class will be offered to separate accounts of
The Prudential Insurance Company of America to fund the
benefits under variable life insurance and variable annuity
contracts.
CLASS II SHARES: Class II shares are not subject to an initial sales charge
but are subject to a Rule 12b-1 fee of 0.25% per annum of the
average daily net assets of the class payable to the Fund's
distributor and an administration fee of 0.15% per annum of
the average daily net assets of the class payable to
Prudential Investments Fund Management LLC. This Class will
be offered only to separate accounts of unaffiliated
insurance companies to fund the benefits under variable life
insurance and variable annuity contracts and qualified
pension and retirement plans as permitted by Treasury
Regulations and Rulings.
INCOME AND EXPENSE ALLOCATIONS
Income, any realized and unrealized capital gains and losses, and expenses
not allocated to a particular class, will be allocated to each class on the
basis of the net asset value of that class in relation to the net asset
value of the Fund.
DIVIDENDS AND DISTRIBUTIONS
Dividends and other distributions paid by the Fund to each class of shares,
to the extent paid, will be paid on the same day and at the same time, and
will be
<PAGE>
determined in the same manner and will be in the same amount, except that
the amount of the dividends and other distributions declared and paid by a
particular class may be different from that paid by another class because
of Rule 12b-1 fees and other expenses borne exclusively by that class.
GENERAL
A. Each class of shares shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and shall
have separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other
class.
B. On an ongoing basis, the Directors, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund
for the existence of any material conflicts among the interests of its
several classes. The Directors, including a majority of the independent
Directors, shall take such action as is reasonably necessary to eliminate
any such conflicts that may develop. The Prudential Insurance Company of
America, the Fund's Manager, will be responsible for reporting any
potential or existing conflicts to the Directors.
Dated: February 25, 1999