<PAGE>
Prudential's
Gibraltar Fund
[PHOTO]
Annual Report to
Planholders
Prudential's Financial
Security Program
December 31, 1997
[LOGO] Prudential
The Prudential Insurance Company of America
751 Broad Street
Newark, NJ 07102-3777
[LOGO]
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Table of Contents
<S>
<C>
I. Letter to Planholder 2
1. Market Review 4
2. Investment Advisor's Outlook 8
3. Prudential's Gibraltar Fund 10
II. Prudential's Gibraltar Fund
The Prudential's Financial Security Program is the only
account investing in Prudential's Gibraltar Fund
1. Financial Statements A1
2. Schedule of Investments B1
3. Notes to Financial Statements C1
4. Report of Independent Accountants D1
</TABLE>
<PAGE>
Period Ended December 31, 1997
Letter
To Planholder
[PHOTO]
Jonathan M. Greene
President
================================================================================
"We're quite pleased with the return on stocks in the last three years, but we
don't think this divergence from historical norms can continue indefinitely."
Dear Planholder:
We are pleased to provide our Annual Report to you on the investment performance
of Prudential's Gibraltar Fund.
It has been another exceptional year. For the third year in a row (and the first
time in history), stock prices have risen by more than 20%, driven by
unexpectedly high corporate profits and surprisingly low inflation. Bonds also
performed quite well, with total returns averaging just below 10%.
We live in remarkable times. The U.S. economy grew by almost 4.0% in 1997, yet
inflation fell to 1.7%, the lowest since oil prices collapsed 11 years ago.
Unemployment dipped below 5% for the first time since the 1970s. And consumer
confidence was the highest in 28 years. Yet, we live in a global economy. The
economic turmoil, stock market and currency declines in Asia impacted global
markets in the fourth quarter and the economic effects on the world's growth are
not yet clear.
How Did the Gibraltar Fund Perform?
U.S. stocks had a third successive year of unusually high gains. Prudential's
Gibraltar Fund returned 18.88% in 1997.
It's Long Term Performance That Counts.
Although in this Report we're focusing primarily on one year performance,
remember that it's long-term performance that counts. Review your Fund's 1997
performance, but also be sure to examine its longer-term record as well. You'll
note that over the past five and 10 years, the Fund has delivered excellent
performance, both on an absolute basis and in comparison with growth funds
having similar objectives as reported by Lipper Analytical Services.
Our goal is to achieve this kind of above-average investment performance over
time. Such consistency is important, because most people buy variable annuity
products to finance long-term goals and we encourage you to consider future
returns rather than focusing on past performance, keeping in mind that past
performance is no guarantee of future performance.
2
<PAGE>
What Goes Up Can Also Go Down.
While discussing the long term, we think it's crucial to remind planholders that
stocks have offered a 10.7% average annual return over the last 70 years--about
half of what they have given us over the last three years. And since 1980,
corporate revenues have risen 4% a year, while earnings have risen almost twice
as fast, and stock prices four times as much.
Can this continue? We're quite pleased with the return on stocks in the last
three years, but we don't think this divergence from historical norms can
continue indefinitely. It's simply the law of averages. We must remember that
with return comes risk--that stocks can and do go down, as well as up. If you
have benefited more than you expected in recent years, then at some point, you
will surely benefit less. The only question is: When? Given the very serious
economic crisis in Asia, it could be sooner, rather than later.
With this in mind, your Prudential Representative/Pruco Securities Registered
Representative stands ready to discuss these issues and to assist you in any way
he or she can. We believe that your personal financial representative--one who
understands you and your long-term investment needs--is a valuable resource
given today's market.
All of us at Prudential thank you for your business and look forward to helping
you plan for your future financial security.
/s/ Jonathan M. Greene /s/ Mendel A. Melzer
Jonathan M. Greene Mendel A. Melzer, CFA
President, Chairman,
Prudential's Gibraltar Fund Prudential's Gibraltar Fund
January 30, 1998
[PHOTO]
Mendel A. Melzer, CFA
Chairman
================================================================================
Important Note
The rates of return quoted on the following pages reflect the deduction of
investment management fees and investment-related expenses, but not product
charges. They reflect the reinvestment of dividend and capital gains
distributions. They are not an estimate or a guarantee of future performance.
Contract unit values increase or decrease based on the performance of the Fund
and when redeemed, may be worth more or less than original cost. Changes in
contract values depend not only on the investment performance of the Fund but
also on the insurance and administrative charges, applicable sales charges, and
the mortality and expense risk charge applicable under the contract. These
contract charges effectively reduce the dollar amount of any net gains and
increase the dollar amount of any net losses.
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3
<PAGE>
1997
Market Review
================================================================================
How the Markets Compared.(1)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Average Retun Over
Past 20 Years
1997 (Annualized)
---- ------------
<S> <C> <C>
Money Markets 4.9% 7.7%
Bonds 9.8% 9.7%
Foreign Stocks 16.2% 15.0%
U.S. Stocks 33.4% 16.7%
</TABLE>
- --------------------------------------------------------------------------------
This chart compares the 12-month return as of 12/31/97 for various categories of
investments with the average annual total return over 20 years for the same
investment. As you can see, stock and bond market returns can vary considerably
from year to year. Unlike stocks, bonds generally offer a fixed rate of return
and principal if held to maturity. An investment's past performance should never
be used to predict future results. There are different risks associated with
each investment sector, which should be carefully considered before investing.
(1) Source: Prudential. For purposes of comparison only. U.S. money markets as
measured by Lipper Money Market Average. Bonds as measured by the Lehman
Brothers Gov't. Corp. Index. Foreign stocks as measured by the Morgan
Stanley Capital International World Index. U.S. stocks as measured by the
S&P 500 Index.
U.S. Stocks
Nothing Short of Spectacular.
U.S. stocks rose more than 20% for the third straight year for the first time in
history--measured by either the Dow Jones Industrial Average (the "Dow Jones")
or the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500").
Unexpectedly high corporate profits and exceptionally low inflation, plus strong
economic growth and the lowest unemployment rate and highest consumer confidence
in 28 years, all combined to drive emotions in the stock market to euphoric
levels.
The numbers were impressive, considering that stocks have gained only 10.7% on
average over the last 70 years. In 1997, the S&P 500 gained 33%, after rising
23% in 1996 and 37% in 1995.
Only in October did a reality check set in, when the market fell briefly by 10%
in what market professionals called a correction. But stock prices quickly
rebounded, and many major indexes moved on to new highs.
Still, the momentum of the market had clearly slowed by year-end as investors
became increasingly concerned about the economic crisis in Asia and how severely
it might affect corporate earnings in 1998.
Large, Value Stocks Dominated.
Large company stocks continued to lead the market higher in 1997. For example,
the small company-oriented Russell 2000 Index rose 22.4% during calendar year
1997, nearly 12 percentage points behind the S&P 500.
Financial stocks rose 49% in 1997 as consolidation continued to sweep the
industry and long-term interest rates fell to their lowest levels since 1993.
Banks and stock brokerage firms are continuing to achieve economies of scale
through acquisitions.
4
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Financial Stocks Top.
1997
----
<S> <C>
Finance 48.7%
Consumer Growth 36.9%
Consumer Cyclical 36.7%
Utilities 35.9%
Technology 27.1%
Energy 25.6%
Industrials 21.9%
</TABLE>
- --------------------------------------------------------------------------------
Source: Prudential.
<TABLE>
<CAPTION>
================================================================================
Large Stocks Outperformed Small Stocks.
20-Year
1997 Average
---- -------
<S> <C> <C>
S&P 500* 33.4% 16.7%
NASDAQ* 21.6% 14.5%
Russell 2000* 22.4% 15.9%
- --------------------------------------------------------------------------------
</TABLE>
*The Standard & Poor's 500, NASDAQ and Russell 2000 are unmanaged indexes that
are considered to be generally representative of U.S. stock markets. Investors
cannot invest directly in indexes or market averages. Past performance is no
guarantee of future results.
Consumer growth stocks finished second, narrowly nosing out consumer cyclical
stocks for the year. Media, drugs and leisure led the consumer growth stocks,
with Tele-Communications, Inc. (TCI) doubling, Comcast rising 78% and Gannett up
68%. Among the pharmaceuticals, Schering-Plough and Lilly nearly doubled, while
Pfizer rose 82% during the same period. Retailers led the consumer cyclical
stocks, with Gap, Costco, Tandy and Home Depot each up about 77% for the year.
================================================================================
The Dow in the Past Twelve Months.
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
1997 Dow
- ---- --------
<S> <C> <C>
Jan 6.73
Feb 6.7
Mar 6.81
In March and April,
fears of higher interest
rates shook the market.
Apr 7.12
May 6.87
Jun 6.77
Jul 6.63
July 16 The Dow passes
the 8,000-point mark for
the first time
Aug 6.45
Sep 6.64
Oct 6.29
Oct 28 The Dow surged
337 points, its largest
point gain ever, rising 4.71%
Nov 6.16
Dec 6.08
</TABLE>
- --------------------------------------------------------------------------------
Daily close of the Dow Jones Industrial Average for the past twelve months.
Technology stocks fared well for much of the year but tumbled in the fourth
quarter on worries about Asia, losing 12%, bringing their return for the year to
27%. Utilities stocks led all other market sectors in the quarter, rising 19% in
the last three months of 1997 as long- term interest rates fell sharply and
investors sought companies with safe earnings streams. Interestingly, for the
year, utilities beat the S&P 500.
5
<PAGE>
1997
Market Review
continued
================================================================================
30-Year U.S. Treasury Yields.
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
1997 Yield
- ---- -----
<S> <C>
Jan 6813.09
Feb 6877.74
Mar 6583.48
Apr 7008.99
May 7331.04
Jun 7962.31
Jul 8222.61
Aug 7622.42
Sep 7945.26
Oct 7442.08
Nov 7823.13
Dec 7908.25
- --------------------------------------------------------------------------------
</TABLE>
Monthly closing yields for the past twelve months. Source: Bloomberg, as of
12/31/97.
High Yield Bonds Performed Best.
<TABLE>
<CAPTION>
1997
----
<S> <C>
High Yield Bonds 12.8%
Corporate Bonds 10.2%
Aggregate Index 9.7%
Government Bonds 9.6%
Mortgage Bonds 9.5%
- --------------------------------------------------------------------------------
</TABLE>
Source: Lehman Brothers, as of 12/31/97.
Bonds
Inflation Fell Sharply, Pushing Prices Higher.
Nineteen ninety-seven was a very good year for bonds, as inflation fell below 2%
for the first time in 11 years and long-term interest rates dipped to their
lowest level since 1993.
Bonds returned a healthy 9.65% for the year as measured by the Lehman Brothers
Aggregate Index, led by high yield bonds in the United States, which returned
12.76%.
A financial crisis in Asia late in the year set off a major rally in the U.S.
Treasury market, where the 30-year bond returned more than 15% in 1997 as the
yield fell by nearly three-quarters of a percentage point to 5.92% at year-end.
Worldwide, investors bought Treasurys after Southeast Asian currencies collapsed
under the weight of excesses in the financial sector and overinvestment in real
estate and infrastructure.
Fundamentally, economic conditions were nearly ideal for bond investors, as
inflation seemed to be slowly fading away. Prices at the wholesale level
actually fell by 1.7% as measured by the government's Producer Price Index, but
at the retail level prices continued to rise, even if only by 1.7%, as measured
by the Consumer Price Index. Still, that was the lowest increase in 11 years,
and nearly half of 1996's rate.
As interest rates fell, home mortgage refinancings rose, with 30-year rates
falling below 7%. Others, including noted investor Warren Buffett, were reported
to be investing in bonds, and cash flows into bond mutual funds quadrupled in
1997.
High yield corporate bonds led all other sectors of the U.S. bond market in 1997
as corporate profits climbed unexpectedly higher while economic growth surged.
The lowest-rated bonds performed the best. Nineteen ninety-seven was another
record-breaking year for newly issued high yield bonds. These bonds were in such
demand in 1997 that the interest rate premium they commanded over U.S. Treasurys
reached all-time lows in October.
6
<PAGE>
Foreign Stocks
A Plunge in the Pacific.
Asian stock markets plunged in 1997 as Southeast Asian currencies collapsed
under the weight of excesses in the financial sector and overinvestment in real
estate and infrastructure. Currencies in some countries fell by nearly 50%
against the U.S. dollar. Credit and cash became scarce and economies slowed. The
financial crisis eventually reached Japan, helping to halt a nascent economic
recovery.
The Morgan Stanley Capital International Pacific Index fell 25% during the year
as stocks in Thailand dropped 77%, Indonesia 74% and Malaysia 68%, all in U.S.
dollar terms. Even older, larger, more developed Pacific Basin countries did not
escape unscathed. Economic malaise continued to linger in Japan, where stocks
dropped almost 24% in U.S. dollars for the year.
European Stocks Performed Well.
In Europe, stocks performed quite well during the year, rising over 24% for
U.S.-based investors despite a strong dollar. Developing countries were strong,
such as Portugal, up 48%, and older, more established stock exchanges also
posted excellent returns, with Switzerland rising 45%, Italy up 36% and Germany
ahead 25%, all measured by Morgan Stanley in U.S. dollars.
European stocks benefited as the movement toward a European economic union
fostered less government borrowing and thus lower interest rates, which
stimulated the sluggish economies of Germany and France and led to rapid growth
in smaller countries on the periphery, such as Ireland.
In addition, corporate restructuring continued to improve productivity, driving
double-digit earnings gains. Europe has also been the region least affected by
economic turmoil in Asia, its stock prices are less expensive than those in the
United States, and Europe is earlier in its economic growth cycle than the
United States, which is now in its seventh year of economic recovery.
<TABLE>
<CAPTION>
================================================================================
Foreign Markets.
1997
----
<S> <C>
MSCI Europe Index 24.2%
MSCI World Index 16.2%
MSCI EAFE Index 2.1%
MSCI Japan Index (23.6%)
MSCI Pacific Index (25.3%)
S&P 500 Index 33.4%
- --------------------------------------------------------------------------------
</TABLE>
Source: Morgan Stanley Capital International.
The Morgan Stanley Capital International (MSCI) World Index is a weighted,
unmanaged index of the performance of 1,472 securities listed on the stock
exchanges of the U.S., Europe, Canada, Australia, New Zealand and the Far East.
Investors cannot invest directly in an index.
Morgan Stanley country indexes [Europe, Asia, Far East (EAFE), Pacific and
Japan] are unmanaged indexes that include stocks making up the largest
two-thirds of each country's total stock market capitalization. This chart is
for illustrative purposes only and is not indicative of the past, present or
future performance of any specific investment. Investors cannot invest directly
in stock indexes.
The Standard & Poor's 500 is a weighted, unmanaged index comprised of 500
stocks, which provides a broad indicator of stock price movements.
7
<PAGE>
1998
Investment Advisor's Outlook
The Economy
Expect Slower Growth.
Our economists at Prudential forecast slower economic growth plus a slight
increase in inflation and unemployment in 1998. They are looking for the U.S.
economy to grow slower than 2%, less than half as fast as it grew in 1997. We
believe inflation will remain acceptable, but that the Consumer Price Index may
rise as much as 2.2%, somewhat faster than 1997's 1.7%. As demand for U.S.
exports slows in Asia, unemployment should rise toward 5.5%, up from December's
4.7%.
Prudential's economists expect short-term interest rates to fall by half a
percentage point in 1998, and long-term rates to end the year close to where
they began--at around 6%. Our economists forecast that the Federal Reserve Bank
will lower interest rates by a quarter of a percentage point in the spring and
another quarter point in the summer, bringing the federal funds rate (or
overnight bank lending rate) down to 5%. As of this writing in early January,
interest rates on government bonds maturing in 10 years or less were priced to
yield below 5.50%, the official overnight lending rate.
U.S. Stocks
We're Looking for an Average Year.
We said it last year. And the year before. Each year we've said that surely the
U.S. stock market would not rise by 20% again in the following year. But the
market has done just that now for three years in a row--for the first time in
history. Can this remarkable performance continue? Over the last 70 years, the
historical average return for stocks is only about 10.7%. This year, more than
ever, we expect that stocks will turn in a performance much closer to average.
We're cautious, conservative investors, so we build our portfolios
one stock at a time. This year, with continued economic growth and modest
inflation expected, we believe that earnings will be the key force driving stock
market performance. We'll be looking even more closely than usual at a company's
ability to meet its corporate earnings expectations, because investors have
become very unforgiving of even the slightest shortfall in earnings.
8
<PAGE>
In the United States, we are particularly interested in smaller company stocks,
because we believe they are very attractively priced, considering their earnings
expectations. These stocks have trailed large company stocks for several years
now, but small company stocks have historically fared better than larger company
stocks.
U.S. Bonds
Off to a Great Start.
The U.S. bond market performed well in the early days of 1998 as
the interest rates on the 30-year U.S. Treasury fell to their lowest level since
the government first started to sell them regularly in 1977.
Despite the rally, interest rates remain quite favorable when adjusted for
inflation. So if we experience slower economic growth and continued low
inflation, bond holders may yet enjoy more price appreciation in addition to
their coupon income.
We are firm believers in corporate bonds, which we expect will continue to
perform well as the economy grows and the effects of the Asian economic crisis
are more fully understood in the months ahead. Similarly, we expect certain
emerging markets bonds that have been badly beaten down by this crisis to return
to more realistic price levels.
Foreign Stocks
Watching Closely.
Overseas, we are watching the Asian situation closely, but believe it may be too
early to make a substantial commitment there. We are being selective, choosing
stocks rather than countries. In Europe, we expect strong economies and stock
markets in 1998 as companies there continue to restructure.
================================================================================
A Reality Check.
Stock prices in general have nearly doubled in the last three years. We're quite
pleased with the unusually high returns that stocks have provided for our
Contract Owners over the past few years and we are certain that you are, too.
Those types of returns bring you closer to your goals of financial security
faster than you might have expected.
Since 1927, the U.S. stock market's average return has been 10.7%, as measured
by the S&P 500. Yet, in recent years returns have been much higher, as the chart
below shows.
================================================================================
Returns of the U.S. Stock
Market.
<TABLE>
<CAPTION>
Average
Annual
Return
------
<S> <C>
Last 70 Years
1927-1997 10.7%
Source: Ibbotson Associates.
<CAPTION>
Last Three Years
<S> <C>
1995 37.4%
1996 23.0%
1997 33.4%
</TABLE>
Source: Lipper Analytical Services, Inc.
As much as we would like this tremendous performance to continue year after
year, we know it cannot. It's simply the law of averages.
9
<PAGE>
Prudential
Gibraltar Fund
Performance Summary.
U.S. stocks had a third successive year of unusually high gains and in 1997
Prudential's Gibraltar Fund returned 18.88%. The return of the Gibraltar Fund
was eight percentage points above the 70 year historical average return for
stocks, but for the year both the Fund and general equity funds trailed the
overall market, as measured by the Standard & Poor's 500 Composite Stock Index
(the "S&P 500").
After an outstanding 1996, when the Fund returned 27.1%, outperforming both the
Lipper (VIP) Growth Average (19.8%) and the S&P 500 Index (23.0%), Prudential's
Gibraltar Fund trailed the average (VIP) growth fund as reported by Lipper
Analytical Services.
================================================================================
Average Annual Returns Through December 31, 1997
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gibraltar Fund(1) 18.88% 21.66% 17.07% 17.89%
- --------------------------------------------------------------------------------
Lipper (VIP) Growth Avg.(2) 25.36% 26.15% 17.27% 16.59%
- --------------------------------------------------------------------------------
S&P 500(3) 33.35% 31.13% 20.25% 18.02%
- --------------------------------------------------------------------------------
</TABLE>
Gibraltar Fund inception date: 3/14/68.
================================================================================
$10,000 Invested Over Ten Years
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
$46,590
$52,448 $51,884 Lipper (VIP)
S&P 500(3) Gibralter Fund(1) Growth Average(2)
---------- ----------------- -----------------
<S> <C> <C> <C>
1987 $10,000.00 $10,000.00 $10,000.00
1988 12,566.30 11,428.60 11,656.20
1989 15,361.90 14,694.10 15,343.30
1990 14,930.50 14,005.20 14,866.30
1991 20.059.80 19,081.90 19,385.60
1992 23,587.20 20,596.50 20,860.50
1993 29,197.50 23,502.00 22,958.40
1994 28,809.80 23,027.20 23,260.00
1995 34,322.20 30,532.20 31,990.30
1996 43,634.30 36,651.90 39,330.50
1997 51,884.10 46,589.80 52,447.60
</TABLE>
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(1) Past performance is not predictive of future performance. Portfolio
performance is net of investment fees and fund expenses but not product
charges.
(2) The Lipper Variable Insurance Products (VIP) Growth Average is calculated
by Lipper Analytical Services, Inc., and reflects the investment return of
certain portfolios underlying variable life and annuity products. These
returns are net of investment fees and fund expenses but not product
charges.
(3) The S&P 500 is a capital-weighted index representing the aggregate market
value of the common equity of 500 stocks primarily traded on the New York
Stock Exchange. The S&P 500 is an unmanaged index and includes the
reinvestment of all dividends but does not reflect the payment of
transaction costs and advisory fees associated with an investment in the
Portfolio. The securities that comprise the S&P 500 may differ
substantially from the securities in the Portfolio. The S&P 500 is not the
only index that may be used to characterize performance of this Portfolio,
and other indices may portray different comparative performance.
================================================================================
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Low Risk Fixed Income
Balanced
High Yield Bond
DIVERSIFIED STOCK
High Risk Specialized
- --------------------------------------------------------------------------------
</TABLE>
Investment Goal
Growth
Types of Investments
Primarily stocks of a diversified group of companies in a variety of industries.
Investment Style
This Portfolio uses a "growth" investment style to select stocks based on their
potential to deliver above-average growth in revenue and earnings.
Performance Review.
Health maintenance companies lost ground. Our hospital management and some of
our medical device companies fell back in 1997, pulling down our return.
Columbia/ HCA Healthcare and Aetna were particular disappointments.
Uneven terrain for networking. Some of our computer networking stocks, such as
Cisco Systems, performed well. Others, such as 3Com and Bay Networks, stumbled.
However, the networking industry is just beginning a new product cycle which
could lead to growth of more than 20%, in 1998.
Stranded nuclear assets. We bought several electric utilities that had built
nuclear plants decades ago and were negotiating with state regulators for
recovery of their investment.
We were right on oil service. About 11% of our holdings were in oil service
companies. In the aggregate, our oil service stocks provided a 59% return over
the year.
10
<PAGE>
Strategy Session.
We are buying large, blue-chip firms. We expect the blue-chips to reduce our
share price volatility and improve the quality of our holdings. Opinions differ
about how much impact an Asian economic slowdown will have on U.S. companies. In
this uncertainty, we are being strategically defensive, buying large blue-chip
stocks, that are focused on the domestic market.
We need the health care industry. Health care companies provide an essential
service that cannot be supplied by inexpensive foreign labor. So, they are
buffered from the impact of economic slowdown in other parts of the world.
Competitive market forces are restructuring U.S. health care. Some cost problems
were uncovered in 1997, but we believe the industry is on its way to solving
them. Since we can't do without health care, our future depends on allowing
health care companies to make a reasonable profit by providing those services.
We've bought some of the industry leaders. They have a large, growing market. We
think they are good investments.
Utilities also are defensive. Historically, utilities are less responsive to the
economic cycle than most other industries. These stocks were not popular in the
go-go growth market, but when investors feared an economic slowdown, they shot
ahead. We focused on electric and telecommunications companies. Among the
electrics, we have particularly emphasized companies that own uncompetitive
nuclear plants. We expect governments to provide tax concessions to make it
financially feasible for their owners to decommission the plants, boosting their
earnings prospects.
Outlook
PORTFOLIO MANAGER
Greg P. Goldberg
Opportunity in Energy and Utilities.
"We expect the sharp earnings growth of U.S. firms to slow in 1998, as the
economic turmoil in Asia and domestic wage pressure will squeeze profits.
Current stock prices appear to be based on the assumption that the rising
earnings trends will continue. Investors have punished firms that do not meet
their earnings expectations. We think that in this environment, the stocks to be
in are those with a clear picture of their 1998 earnings: stocks that are
domestically focused, such as health care and blue-chip firms with consumer
markets."
[PHOTO]
PORTFOLIO MANAGER
Greg P. Goldberg
================================================================================
Portfolio Composition
<TABLE>
<CAPTION>
as of 12/31/97
--------------
<S> <C>
Consumer Growth 32%
Technology 15%
Energy 15%
Finance 13%
Industrials 7%
Utilities 7%
Consumer Cyclical 6%
Cash 5%
- --------------------------------------------------------------------------------
</TABLE>
Source: Prudential. Holdings are subject to change.
================================================================================
Top Ten Holdings
<TABLE>
<CAPTION>
as of 12/31/97
--------------
<S> <C>
Cisco Systems, Inc. 4.1%
Novartis Corp., AG, ADR 3.8%
General Electric Co. 3.1%
Schlumberger Ltd. 3.0%
PepsiCo, Inc. 2.9%
Nordstrom, Inc. 2.6%
3Com Corp. 2.5%
McDermott International 2.4%
Unilever NV, ADR 2.4%
Uniphase Corp. 2.3%
- --------------------------------------------------------------------------------
</TABLE>
Source: Prudential. Holdings are subject to change.
11
<PAGE>
================================================================================
This report is authorized for use with prospective investors only when preceded
or accompanied by current prospectuses for Systematic Investment Plan Contracts,
Variable Annuity Contracts and Prudential's Gibraltar Fund. These prospectuses
contain more information concerning sales charges and other material facts and
should be read carefully before you invest or send money.
(215) 784-3543
<PAGE>
[LOGO]==========================================================================
Whether providing insurance protection for home, family and business, or
arranging to cover future education and retirement expenses, Prudential people
have always been able to deliver something more: personal service, quality,
attention to detail and the financial strength of The Rock(R). Since 1875,
Prudential has been helping individuals and families meet their financial needs.
--------------
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P.O. Box 197 U.S. Postage
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[LOGO]
FSP AR 12/97 Printed in the U.S.A. PI-MV-0198-2360
on recycled paper. MRA-A022965
<PAGE>
FINANCIAL STATEMENTS OF
PRUDENTIAL'S GIBRALTAR FUND
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<S> <C>
ASSETS
Investments, at value (cost:
$276,988,335)............................ $ 322,652,484
Cash....................................... 1,502
Receivable for investments sold............ 5,655,023
Interest and dividends receivable.......... 427,753
--------------
Total Assets............................. 328,736,762
--------------
LIABILITIES
Payable for investments purchased.......... 2,669,207
Payable to investment adviser.............. 103,022
Accrued expenses........................... 45,786
--------------
Total Liabilities........................ 2,818,015
--------------
NET ASSETS................................... $ 325,918,747
--------------
--------------
Net assets were comprised of:
Common stock, at $1 par value............ $ 29,771,740
Paid-in capital, in excess of par........ 247,676,370
--------------
277,448,110
Accumulated net realized gains on
investments.............................. 2,806,488
Net unrealized appreciation on
investments.............................. 45,664,149
--------------
Net assets, December 31, 1997.............. $ 325,918,747
--------------
--------------
Net asset value and redemption price per
share, 29,771,740 outstanding shares of
common stock (authorized 75,000,000
shares).................................. $ 10.95
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1997
<S> <C> <C>
INVESTMENT INCOME
Dividends (net of $28,169 foreign
withholding tax)......................... $ 3,968,815
Interest................................... 1,369,649
---------------
5,338,464
---------------
EXPENSES
Investment advisory fee.................... 390,676
State franchise tax expense................ 61,320
Directors' fees............................ 9,000
Miscellaneous expenses..................... 8,515
Custodian expense.......................... 6,439
---------------
Total expenses........................... 475,950
Less custodian fee credit.................. (1,439)
---------------
Net expenses............................. 474,511
---------------
NET INVESTMENT INCOME........................ 4,863,953
---------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on investments........... 50,505,594
Net change in unrealized appreciation on
investments.............................. 547,282
---------------
NET GAIN ON INVESTMENTS...................... 51,052,876
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 55,916,829
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 4,863,953 $ 3,868,291
Net realized gain on investments....................................................... 50,505,594 35,522,025
Net change in unrealized appreciation on investments................................... 547,282 28,188,380
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 55,916,829 67,578,696
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (5,623,695) (3,659,501)
Distributions from net realized capital gains.......................................... (59,469,378) (31,301,947)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (65,093,073) (34,961,448)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [232,480 and -0- shares, respectively].............................. 3,000,000 --
Capital stock issued in reinvestment of dividends and distributions [5,819,002 and
2,971,950 shares, respectively]....................................................... 63,060,874 33,969,659
Capital stock repurchased [(2,645,935) and (2,374,885) shares, respectively]........... (32,262,504) (26,513,694)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 33,798,370 7,455,965
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 24,622,126 40,073,213
NET ASSETS:
Beginning of year...................................................................... 301,296,621 261,223,408
------------------ -------------------
End of year............................................................................ $ 325,918,747 $ 301,296,621
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A1
<PAGE>
PRUDENTIAL'S GIBRALTAR FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 95.1%
VALUE
COMMON STOCKS -- 94.1% SHARES (NOTE 1)
------------- --------------
<S> <C> <C>
BANKS AND SAVINGS & LOANS -- 1.4%
Chase Manhattan Corp............................ 30,500 $ 3,339,750
Washington Mutual, Inc.......................... 21,400 1,365,587
--------------
4,705,337
--------------
CHEMICALS -- 0.7%
Agrium, Inc..................................... 177,300 2,160,844
--------------
COMPUTER SERVICES -- 3.4%
Bay Networks, Inc. (a).......................... 200,000 5,112,500
Larscom, Inc. (Class "A" Stock) (a)............. 167,700 1,593,150
Microsoft Corp. (a)............................. 34,000 4,394,500
--------------
11,100,150
--------------
COMPUTERS -- 6.6%
3Com Corp. (a).................................. 234,000 8,175,375
Cisco Systems, Inc. (a)......................... 237,600 13,246,200
--------------
21,421,575
--------------
COSMETICS & SOAPS -- 3.1%
Avon Products, Inc.............................. 73,200 4,492,650
Colgate Palmolive Co............................ 77,900 5,725,650
--------------
10,218,300
--------------
DIVERSIFIED OPERATIONS -- 3.1%
General Electric Co............................. 136,500 10,015,687
--------------
DRUGS AND MEDICAL SUPPLIES -- 8.9%
Bristol-Myers Squibb Co......................... 58,200 5,507,175
Johnson & Johnson............................... 82,000 5,401,750
Novartis Corp., AG, ADR (Switzerland)........... 150,600 12,236,250
Pfizer, Inc..................................... 78,200 5,830,787
--------------
28,975,962
--------------
ELECTRONICS -- 0.5%
VLSI Technology, Inc. (a)....................... 67,400 1,592,325
--------------
ENVIRONMENTAL SERVICES -- 1.1%
U.S.A. Waste Services, Inc. (a)................. 90,000 3,532,500
--------------
FINANCIAL SERVICES -- 4.0%
Federal National Mortgage Association........... 126,000 7,189,875
Imperial Credit Industries, Inc. (a)............ 26,800 549,400
The Money Store, Inc............................ 257,400 5,405,400
--------------
13,144,675
--------------
FOOD & BEVERAGES -- 4.0%
Archer-Daniels-Midland Co....................... 157,500 3,415,781
PepsiCo, Inc.................................... 260,800 9,502,900
--------------
12,918,681
--------------
HOSPITALS/ HOSPITAL MANAGEMENT -- 2.1%
Columbia/HCA Healthcare Corp.,.................. 156,800 4,645,200
Manor Care, Inc................................. 66,400 2,324,000
--------------
6,969,200
--------------
INSURANCE -- 6.0%
Aetna, Inc...................................... 59,200 4,177,300
American International Group, Inc............... 27,255 2,963,981
CIGNA Corp...................................... 35,400 6,126,412
Provident Companies, Inc........................ 63,000 2,433,375
Travelers Group, Inc............................ 73,999 3,986,696
--------------
19,687,764
--------------
LEISURE -- 6.0%
Carnival Corp. (Class "A" Stock)................ 89,000 4,928,375
Hilton Hotels Corp.............................. 144,200 4,289,950
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 1)
------------- --------------
<S> <C> <C>
La Quinta Inns, Inc............................. 222,300 $ 4,293,169
Walt Disney Co.................................. 62,000 6,141,875
--------------
19,653,369
--------------
METALS-FERROUS -- 1.9%
UCAR International, Inc. (a).................... 156,100 6,234,244
--------------
METALS-NON FERROUS -- 0.7%
Aluminum Company of America..................... 31,800 2,237,925
--------------
MISCELLANEOUS - CONSUMER GROWTH/STABLE -- 2.4%
Unilever N.V., ADR (United Kingdom)............. 124,000 7,742,250
--------------
OIL & GAS -- 4.8%
Exxon Corp...................................... 108,600 6,644,962
Pioneer Natural Resources Co.................... 165,500 4,789,156
Texaco, Inc..................................... 77,000 4,186,875
--------------
15,620,993
--------------
OIL & GAS SERVICES -- 9.7%
Bouyges Offshore SA, ADR (France) (a)........... 184,200 4,006,350
J. Ray McDermott, SA............................ 126,600 5,443,800
McDermott International, Inc.................... 213,500 7,819,438
Schlumberger Ltd................................ 119,800 9,643,900
Smith International, Inc. (a)................... 74,600 4,578,575
--------------
31,492,063
--------------
REAL ESTATE DEVELOPMENT -- 2.5%
CCA Prison Realty Trust......................... 80,200 3,578,925
Developers Diversified Realty................... 89,000 3,404,250
Patriot American Hospitality, Inc............... 46,300 1,334,019
--------------
8,317,194
--------------
RETAIL -- 7.4%
American Stores Co.............................. 180,600 3,713,588
CVS Corp........................................ 52,900 3,388,906
Nordstrom, Inc.................................. 139,600 8,428,350
Sears, Roebuck & Co............................. 62,000 2,805,500
Toys 'R' Us, Inc. (a)........................... 181,000 5,690,188
--------------
24,026,532
--------------
TELECOMMUNICATIONS -- 6.0%
ADC Telecommunications, Inc. (a)................ 107,500 4,488,125
BellSouth Corp.................................. 60,200 3,390,013
Glenayre Technologies, Inc. (a)................. 200,000 1,975,000
Tellabs, Inc. (a)............................... 45,000 2,379,375
Uniphase Corp. (a).............................. 178,200 7,373,025
--------------
19,605,538
--------------
TOBACCO -- 1.8%
Phillip Morris Co. Inc.......................... 127,400 5,772,813
--------------
UTILITY - ELECTRIC -- 6.0%
Duke Energy Corp................................ 133,000 7,364,875
Long Island Lighting Co......................... 76,800 2,313,600
Pinnacle West Capital Corp...................... 137,000 5,805,375
Texas Utilities Co.............................. 98,600 4,098,063
--------------
19,581,913
--------------
TOTAL COMMON STOCKS
(cost $260,817,908)............................................ 306,727,834
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B1
<PAGE>
PRUDENTIAL'S GIBRALTAR FUND (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
CONVERTIBLE BONDS -- 1.0% (UNAUDITED) (000) (NOTE 1)
------------ --------- --------------
<S> <C> <C> <C>
RETAIL -- 1.0%
Sunglass Hut International,
5.25%, 06/15/03
(cost $3,461,427)............................. B2 $ 4,405 $ 3,215,650
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $264,279,335)...................................................... 309,943,484
--------------
SHORT-TERM
INVESTMENTS -- 3.9%
COMMERCIAL PAPER -- 3.9%
BBL North America,
6.73%, 01/02/98
(cost $12,709,000)............................ NR 12,709 12,709,000
--------------
TOTAL INVESTMENTS -- 99.0%
(cost $276,988,335; Note 3).............................................. 322,652,484
--------------
OTHER ASSETS IN EXCESS OF LIABILITIES -- 1.0%..............................
3,266,263
--------------
TOTAL NET ASSETS -- 100.0%................................................. $ 325,918,747
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
ADR American Depository Receipt
SA Societe Anonyme (French Corporation)
(a) Non-income producing security
SEE NOTES TO FINANCIAL STATEMENTS.
B2
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS OF
PRUDENTIAL'S GIBRALTAR FUND
GENERAL
Prudential's Gibraltar Fund (the "Fund") was originally incorporated in the
State of Delaware on March 14, 1968 and was reincorporated in the State of
Maryland effective May 1, 1997. It is registered as an open-end, diversified
management investment company under the Investment Company Act of 1940, as
amended. The Fund was organized by The Prudential Insurance Company of America
(The Prudential) to serve as the investment medium for the variable contracts
accounts of The Prudential Financial Security Program. The Fund does not sell
its shares to the public. The 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.
NOTE 1: ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
fund in the preparation of its financial statements.
SECURITIES VALUATION: Securities traded on a national securities exchange are
valued at the last sales price (or the last bid price if there were no sales of
the security that day) on the New York Stock Exchange, or if not traded on such
exchange, such last sales or bid price at the time of close of the New York
Stock Exchange on the principal exchange on which such securities are traded.
For any securities not traded on a national securities exchange but traded in
the over-the-counter market, the value is the last bid price available, except
that securities for which quotations are furnished through a nationwide
automated quotation system approved by the National Association of Securities
Dealers, Inc. (NASDAQ) are valued at the closing best bid price on the date of
valuation provided by a pricing service which utilizes NASDAQ quotations.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the 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 Fund may be delayed or limited.
SECURITIES TRANSACTIONS AND NET INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
DIVIDENDS AND DISTRIBUTIONS: Dividends from net investment income are declared
and paid semi-annually. The Fund will distribute at least annually net capital
gains in excess of capital loss carryforwards, if any. Dividends and
distributions are recorded on the ex-dividend date. Dividends from net
investment income and net realized capital gains of the Fund will normally be
declared and reinvested in additional full and fractional shares twice a year.
Some dividends are paid in cash.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
TAXES: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required. State franchise taxes were paid for
the period that the Fund was incorporated in Delaware. No such commitments exist
following reincorporation in Maryland.
Withholding taxes on foreign dividends have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
C1
<PAGE>
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants (A.I.C.P.A.). Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. The
effect of applying this statement was to decrease undistributed net investment
income by $42,059, increased net realized gains by $2,789 and increased paid-in
capital in excess of par by $39,270. In addition the Fund reclassified $199,247
of dividends in excess of net investment income to accumulated capital gain.
Such reclassifications had no effect on net assets, results of operations, or
net asset value per share.
NOTE 2: INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE: The investment advisory fee, which is computed daily
at an effective annual rate of 0.125% of the net assets of the Fund, is payable
quarterly to The Prudential Insurance Company of America ("The Prudential") as
required under the investment advisory agreement. The Prudential pays all
expenses of the Fund except for fees and expenses of those members of the Fund's
Board of Directors who are not officers or employees of The Prudential and its
affiliates; transfer and any other local, state or federal taxes; and brokers'
commissions and other fees and charges attributable to investment transactions.
During the year ended December 31, 1997, Prudential Securities Incorporated, an
affiliate of The Prudential, earned approximately $25,000 in brokerage
commissions as a result of executing transactions in portfolio securities on
behalf of the Fund.
NOTE 3: PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term investments,
for the year ended December 31, 1997 aggregated $297,205,094 and $303,041,488,
respectively.
The federal income tax basis of the Fund's investments at December 31, 1997 was
substantially the same as for financial reporting purposes, $276,988,335 and,
accordingly, net unrealized appreciation for federal income tax purposes was
$45,664,149 (gross unrealized appreciation $57,881,924; gross unrealized
depreciation $12,217,775).
C2
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year ended
December 31,
------------------------------------------------
1997 1996 1995(a) 1994(a) 1993(a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 11.43 $ 10.14 $ 9.40 $ 11.29 $ 11.13
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. 0.22 0.16 0.18 0.21 0.18
Net realized and unrealized gains
(losses) on investments.............. 1.84 2.56 1.65 (0.40) 2.43
-------- -------- -------- -------- --------
Total from investment operations... 2.06 2.72 1.83 (0.19) 2.61
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.21) (0.15) (0.17) (0.22) (0.19)
Distributions from realized gains...... (2.33) (1.28) (0.92) (1.48) (2.26)
-------- -------- -------- -------- --------
Total distributions................ (2.54) (1.43) (1.09) (1.70) (2.45)
-------- -------- -------- -------- --------
Net Asset Value, end of year........... $ 10.95 $ 11.43 $ 10.14 $ 9.40 $ 11.29
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN(b)............. 18.88% 27.13% 19.13% (1.33)% 23.79%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $325.9 $301.3 $261.2 $242.5 $264.3
Ratios to average net assets:
Expenses............................. 0.15% 0.16% 0.14% 0.15% 0.16%
Net investment income................ 1.56% 1.38% 1.68% 1.98% 1.45%
Portfolio turnover rate................ 101% 97% 105% 93% 92%
Average commission rate paid per
share................................ $0.0578 $0.0576 N/A N/A N/A
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total 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.
SEE NOTES TO FINANCIAL STATEMENTS.
C3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Prudential's Gibraltar Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule 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 Prudential's Gibraltar Fund, Inc.
(the "Fund") at December 31, 1997, the results of its operations for the year
then ended and the changes in its net assets and the financial highlights for
the two years in the period then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund'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 securities at December 31, 1997 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above. The financial highlights for each of the three
years in the period ended December 31, 1995 were audited by other independent
accountants whose report thereon dated February 15, 1996 expressed an
unqualified opinion on those statements.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, NY 10036
February 11, 1998
D1
<PAGE>
BOARD OF
DIRECTORS PRUDENTIAL'S GIBRALTAR FUND
MENDEL A. MELZER, CFA W. SCOTT McDONALD, JR., JONATHAN M. GREENE
CHAIRMAN, Ph.D. PRESIDENT,
PRUDENTIAL'S GIBRALTAR PRINCIPAL, PRUDENTIAL'S GIBRALTAR
FUND KALUDIS CONSULTING FUND
GROUP
SAUL K. FENSTER, Ph.D. JOSEPH WEBER, Ph.D.
PRESIDENT, NEW JERSEY VICE PRESIDENT,
INSTITUTE OF TECHNOLOGY INTERCLASS
(INTERNATIONAL
CORPORATE LEARNING)
- --------------------------------------------------------------------------------
TAX INFORMATION
We are required by the Internal Revenue Code to advise you within 60 days of the
Fund's fiscal year end (December 31, 1997) as to the federal tax status of
dividends paid by the Fund during such fiscal year. Accordingly, we are advising
you that in 1997, the Fund paid dividends as follows:
<TABLE>
<CAPTION>
ORDINARY DIVIDENDS
- ------------------------ LONG-TERM CAPITAL GAINS
SHORT-TERM ---------------------------- TOTAL
INCOME CAPITAL GAINS TAXED @ 28% TAXED @ 20% DIVIDENDS
- --------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
$ 0.21 $ 0.47 $ 0.90 $ 0.96 $ 2.54
</TABLE>
