-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M23I9lYEALiiyyiBrFsFm70JbDL2E74KUTOzjlTSy8KiQHQIxeqVUfT77vhX/MQS VVXoFt1O8I9BzSf7bdIYUw== 0000950110-96-000457.txt : 19960426 0000950110-96-000457.hdr.sgml : 19960426 ACCESSION NUMBER: 0000950110-96-000457 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19960425 EFFECTIVENESS DATE: 19960425 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT CENTRAL INDEX KEY: 0000828972 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 221121670 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-20000 FILM NUMBER: 96550676 BUSINESS ADDRESS: STREET 1: PRUDENTIAL INSURANCE CO OF AMERICA STREET 2: 213 WASHINGTON STREET CITY: NEWARK STATE: NJ ZIP: 07102 BUSINESS PHONE: 2018026000 MAIL ADDRESS: STREET 1: PRUDENTIAL INSURANCE CO OF AMERICA STREET 2: 751 BROAD STREET CITY: NEWARK STATE: NJ ZIP: 07102 FORMER COMPANY: FORMER CONFORMED NAME: PRUDENTIAL VARIABLE LIFE INSURANCE ACCOUNT DATE OF NAME CHANGE: 19880606 485BPOS 1 REGISTRATION STATEMENT AS FILED WITH THE SEC ON _____________. REGISTRATION NO. 33-20000 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM S-6 POST-EFFECTIVE AMENDMENT NO. 16 FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2 ------------ THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT (Exact Name of Trust) THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (Name of Depositor) PRUDENTIAL PLAZA NEWARK, NEW JERSEY 07102-3777 (800) 437-4016 EXT. 46 (Address and telephone number of principal executive offices) ------------ THOMAS C. CASTANO ASSISTANT SECRETARY THE PRUDENTIAL INSURANCE COMPANY OF AMERICA PRUDENTIAL PLAZA NEWARK, NEW JERSEY 07102-3777 (Name and address of agent for service) Copy to: JEFFREY C. MARTIN SHEA & GARDNER 1800 MASSACHUSETTS AVENUE, N.W. WASHINGTON, D.C. 20036 ------------ Variable Appreciable Life Insurance Contracts--The Registrant has registered an indefinite amount of securities pursuant to Rule 24f-2 under the Investment Company Act of 1940. The Rule 24f-2 notice for fiscal year 1995 was filed on February 29, 1996. It is proposed that this filing will become effective (check appropriate space): [ ] immediately upon filing pursuant to paragraph (b) of Rule 485 [X] on May 1, 1996 pursuant to paragraph (b) of Rule 485 ---------------- (date) [ ] 60 days after filing pursuant to paragraph (a) of Rule 485 [ ] on pursuant to paragraph (a) of Rule 485 ---------------- (date) CROSS REFERENCE SHEET (AS REQUIRED BY FORM N-8B-2) N-8B-2 ITEM NUMBER LOCATION - ------------------ --------------------------------------------------------- 1. Cover Page 2. Cover Page 3. Not Applicable 4. Sale of the Contract and Sales Commissions (Part IB) 5. The Prudential Variable Appreciable Account 6. The Prudential Variable Appreciable Account 7. Not Applicable 8. Not Applicable 9. Litigation 10. Brief Description of the Contract; Short-Term Cancellation Right, or "Free Look"; Contract Forms; Premiums; Contract Date; Allocation of Premiums; Transfers; Contract Fees and Charges; How the Contract Fund Changes with Investment Experience; How a Contract's Death Benefit Will Vary; Surrender of a Contract; Lapse and Reinstatement; When Proceeds are Paid; Other General Contract Provisions; Voting Rights; Withdrawal of Excess Cash Surrender Value (Part IB); Increases in Face Amount (Part IB); Decreases in Face Amount (Part IB); Riders; Possible Replacement of the Series Fund (Part IB) 11. Brief Description of the Contract; The Prudential Variable Appreciable Account 12. Cover Page; Brief Description of the Contract; Fixed Income Portfolios; Equity Portfolios; Flexible Portfolios; Further Information About the Series Fund; Sale of the Contract and Sales Commissions (Part IB) 13. Brief Description of the Contract; Contract Fees and Charges; Reduction of Charges for Concurrent Sales to Several Individuals (Part IB); Sale of the Contract and Sales Commissions (Part IB) 14. Brief Description of the Contract; Requirements for Issuance of a Contract 15. Brief Description of the Contract; Allocation of Premiums; Transfers; Fixed-Rate Option; Information About the Account, the Real Property Account and the Fixed Rate Option 16. Brief Description of the Contract; Detailed Information About the Contract 17. Surrender of a Contract; When Proceeds are Paid 18. The Prudential Variable Appreciable Account 19. Reports to Contract Owners 20. Not Applicable N-8B-2 ITEM NUMBER LOCATION - ------------------ --------------------------------------------------------- 21. Contract Loans 22. Not Applicable 23. Not Applicable 24. Other Standard Contract Provisions (Part IB) 25. Brief Description of the Contract 26. Brief Description of the Contract; Contract Fees and Charges 27. Brief Description of the Contract; Further Information About the Series Fund 28. Brief Description of the Contract; Directors and Officers of The Prudential and Management of the Series Fund (Part IB) 29. Brief Description of the Contract 30. Not Applicable 31. Not Applicable 32. Not Applicable 33. Not Applicable 34. Not Applicable 35. Brief Description of the Contract 36. Not Applicable 37. Not Applicable 38. Sale of the Contract and Sales Commissions (Part IB) 39. Sale of the Contract and Sales Commissions (Part IB) 40. Not Applicable 41. Sale of the Contract and Sales Commissions (Part IB) 42. Not Applicable 43. Not Applicable 44. Brief Description of the Contract; Further Information About the Series Fund; How the Contract Fund Changes With Investment Experience; How a Contract's Death Benefit Will Vary 45. Not Applicable 46. Brief Description of the Contract; The Prudential Variable Appreciable Account; Further Information About the Series Fund 47. The Prudential Variable Appreciable Account; Further Information About the Series Fund 48. Not Applicable 49. Not Applicable 50. Not Applicable N-8B-2 ITEM NUMBER LOCATION - ------------------ --------------------------------------------------------- 51. Not Applicable 52. Possible Replacement of the Series Fund (Part IB) 53. Tax Treatment of Contract Benefits; Tax Treatment of Contract Benefits (Part IB) 54. Not Applicable 55. Not Applicable 56. Not Applicable 57. Not Applicable 58. Not Applicable 59. Financial Statements; Financial Statements of The Prudential Variable Appreciable Account; Consolidated Financial Statements of The Prudential Insurance Company of America and Subsidiaries PART IA INFORMATION IN PROSPECTUS PRUDENTIAL'S VARIABLE APPRECIABLE LIFE(R) INSURANCE MAY 1, 1996 PROSPECTUS THE PRUDENTIAL SERIES FUND, INC. AND THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT THE PRUDENTIAL INSURANCE COMPANY OF AMERICA PVAL-1 ED 5-96 CATALOG NO. 646960S PROSPECTUS MAY 1, 1996 THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT VARIABLE APPRECIABLE LIFE(R) INSURANCE CONTRACTS PROVIDING FOR THE INVESTMENT OF ASSETS IN THE INVESTMENT PORTFOLIOS OF THE PRUDENTIAL SERIES FUND, INC. This prospectus describes two forms of a variable life insurance contract offered by The Prudential Insurance Company of America under the name Variable APPRECIABLE LIFE(R) Insurance. The first form provides a death benefit that generally remains fixed in an amount chosen by the purchaser and cash surrender values that vary daily. The second form also provides cash surrender values that vary daily but the death benefit will also vary daily. Under both forms of contract, the death benefit will never be less than the "face amount" of insurance chosen by the purchaser. There is no guaranteed minimum cash surrender value. The assets held for the purpose of paying benefits under these and other similar contracts are segregated from the other assets of The Prudential and are invested in one or more of fifteen investment portfolios of The Prudential Series Fund, Inc. chosen by the contract owner. This prospectus also describes the securities issued by the Series Fund. The contract owner may also choose to have the assets invested in a fixed-rate option or in The Prudential Variable Contract Real Property Account, described in a prospectus attached to this one. Although it is advantageous to the purchaser to pay a Scheduled Premium amount on the dates due, which are at least once a year but may be more often, purchasers have considerable flexibility as to when and in what amounts they pay premiums. Before you sign an application to purchase this life insurance contract, you should read this prospectus with care and have any questions you may have answered by your Prudential representative. If you do purchase the contract, you should retain this prospectus for future reference, together with the contract itself that you will receive. Additional information about the contract and the Series Fund is set forth in a separate Statement of Additional Information which is incorporated by reference into this prospectus. It is available without charge upon request to The Prudential Insurance Company of America at the address shown below. REPLACING EXISTING INSURANCE WITH A CONTRACT DESCRIBED IN THIS PROSPECTUS MAY NOT BE TO YOUR ADVANTAGE. IF YOU CURRENTLY OWN A LIFE INSURANCE CONTRACT, THE BENEFITS AND COSTS OF PURCHASING ADDITIONAL INSURANCE UNDER THE EXISTING POLICY SHOULD BE COMPARED WITH THE BENEFITS AND COSTS OF PURCHASING THE CONTRACT DESCRIBED IN THIS PROSPECTUS. IN MAKING THIS COMPARISON, YOU SHOULD CONSULT WITH A QUALIFIED TAX ADVISOR. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE PRUDENTIAL INSURANCE COMPANY OF AMERICA THE PRUDENTIAL SERIES FUND, INC. Prudential Plaza Newark, New Jersey 07102-3777 Telephone: (800) 437-4016 Ext. 46 *APPRECIABLE LIFE is a registered mark of The Prudential. PVAL-1 Ed 5-96 TABLE OF CONTENTS PAGE INTRODUCTION AND SUMMARY.................................................... 1 BRIEF DESCRIPTION OF THE CONTRACT.................................. 1 FIXED INCOME PORTFOLIOS ........................................... 3 Money Market Portfolio.................................... 3 Diversified Bond Portfolio................................ 3 Government Income Portfolio............................... 3 Zero Coupon Bond Portfolios 2000 and 2005................. 3 BALANCED PORTFOLIOS................................................ 3 Conservative Balanced Portfolio........................... 3 Flexible Managed Portfolio................................ 3 HIGH YIELD BOND PORTFOLIOS......................................... 3 High Yield Bond Portfolio................................. 3 DIVERSIFIED STOCK PORTFOLIOS....................................... 3 Stock Index Portfolio..................................... 3 Equity Income Portfolio................................... 3 Equity Portfolio.......................................... 3 Prudential Jennison Portfolio............................. 4 Small Capitalization Stock Portfolio...................... 4 Global Portfolio.......................................... 4 SPECIALIZED PORTFOLIOS............................................. 4 Natural Resources Portfolio............................... 4 REAL PROPERTY ACCOUNT.............................................. 4 FIXED-RATE OPTION.................................................. 4 TRANSFERS BETWEEN INVESTMENT OPTIONS............................... 4 WHICH INVESTMENT OPTION SHOULD BE SELECTED?........................ 4 THE SCHEDULED PREMIUM.............................................. 5 PAYMENT OF SUBSTANTIALLY HIGHER PREMIUMS........................... 5 CONTRACT LOANS..................................................... 5 VARIABLE APPRECIABLE LIFE INSURANCE CONTRACTS...................... 5 FINANCIAL HIGHLIGHTS OF THE PORTFOLIOS OF THE SERIES FUND................... 5 PORTFOLIO RATES OF RETURN................................................... 14 HYPOTHETICAL ILLUSTRATION OF DEATH BENEFITS AND CASH SURRENDER VALUES....... 15 INFORMATION ABOUT THE ACCOUNT, THE REAL PROPERTY ACCOUNT AND THE FIXED RATE OPTION.................................................. 16 THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT........................ 16 THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT............. 16 THE FIXED-RATE OPTION.............................................. 16 DETAILED INFORMATION ABOUT THE CONTRACT..................................... 17 REQUIREMENTS FOR ISSUANCE OF A CONTRACT............................ 17 CONTRACT FORMS..................................................... 17 SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK"....................... 18 CONTRACT FEES AND CHARGES.......................................... 18 Deductions from Premiums.................................. 18 Deductions from Portfolios................................ 18 Monthly Deductions from Contract Fund..................... 19 Daily Deduction from the Contract Fund.................... 20 Surrender or Withdrawal Charges........................... 20 Transaction Charges....................................... 21 CONTRACT DATE...................................................... 21 PREMIUMS .......................................................... 21 ALLOCATION OF PREMIUMS............................................. 22 TRANSFERS.......................................................... 23 HOW THE CONTRACT FUND CHANGES WITH INVESTMENT EXPERIENCE........... 24 HOW A CONTRACT'S DEATH BENEFIT WILL VARY........................... 24 CONTRACT LOANS..................................................... 25 SURRENDER OF A CONTRACT............................................ 26 LAPSE AND REINSTATEMENT............................................ 26 Fixed Extended Term Insurance............................. 26 Fixed Reduced Paid-Up Insurance........................... 26 Variable Reduced Paid-Up Insurance........................ 27 PAGE What Happens If No Request Is Made?....................... 27 WHEN PROCEEDS ARE PAID............................................. 27 LIVING NEEDS BENEFIT............................................... 27 Terminal Illness Option................................... 27 Nursing Home Option....................................... 27 VOTING RIGHTS...................................................... 28 REPORTS TO CONTRACT OWNERS......................................... 28 TAX TREATMENT OF CONTRACT BENEFITS................................. 29 RIDERS .......................................................... 30 PARTICIPATION IN DIVISIBLE SURPLUS................................. 30 OTHER CONTRACT PROVISIONS.......................................... 30 FURTHER INFORMATION ABOUT THE SERIES FUND................................... 30 INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS........................ 31 FIXED INCOME PORTFOLIOS............................................ 31 MONEY MARKET PORTFOLIO.................................... 31 DIVERSIFIED BOND PORTFOLIO................................ 31 GOVERNMENT INCOME PORTFOLIO............................... 32 ZERO COUPON BOND PORTFOLIOS 2000 AND 2005................. 34 BALANCED PORTFOLIOS................................................ 35 CONSERVATIVE BALANCED PORTFOLIO........................... 35 FLEXIBLE MANAGED PORTFOLIO................................ 36 HIGH YIELD BOND PORTFOLIOS......................................... 37 HIGH YIELD BOND PORTFOLIO................................. 37 DIVERSIFIED STOCK PORTFOLIOS....................................... 38 STOCK INDEX PORTFOLIO..................................... 38 EQUITY INCOME PORTFOLIO................................... 39 EQUITY PORTFOLIO.......................................... 40 PRUDENTIAL JENNISON PORTFOLIO............................. 40 SMALL CAPITALIZATION STOCK PORTFOLIO...................... 41 GLOBAL PORTFOLIO.......................................... 42 SPECIALIZED PORTFOLIOS............................................. 43 NATURAL RESOURCES PORTFOLIO............................... 43 FOREIGN SECURITIES................................................. 44 OPTIONS, FUTURES CONTRACTS AND SWAPS............................... 44 SHORT SALES........................................................ 44 REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS..................... 45 LOANS OF PORTFOLIO SECURITIES...................................... 45 INVESTMENT RESTRICTIONS APPLICABLE TO THE PORTFOLIOS........................ 45 INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES............................. 46 PORTFOLIO BROKERAGE AND RELATED PRACTICES.......................... 46 STATE REGULATION............................................................ 46 EXPERTS..................................................................... 46 LITIGATION.................................................................. 47 EXPANDED TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION........... 47 ADDITIONAL INFORMATION...................................................... 49 FINANCIAL STATEMENTS........................................................ 49 FINANCIAL STATEMENTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT......... A1 CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES......................................... B1 THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, ITS STATEMENT OF ADDITIONAL INFORMATION, AND THE PROSPECTUS FOR THE REAL PROPERTY ACCOUNT. INTRODUCTION AND SUMMARY This section provides only an overview of the more significant provisions of the Contract. It omits details which are provided in the rest 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 that Statement of Additional Information is on page 47. As you read this prospectus you should keep in mind that you are considering the purchase of a life insurance contract. Because it is VARIABLE LIFE INSURANCE -- and variable life insurance has significant investment aspects and requires you to make investment decisions -- it is also a "security." That is why you have been given this prospectus. Securities which are offered to the public must be registered with the Securities and Exchange Commission, and the prospectus that is a part of the registration statement must be given to all prospective buyers. But because a substantial part of your premium pays for life insurance that will pay to your beneficiary, in the event of your death, an amount far exceeding your total premium payments, you should not buy this contract unless a major reason for the purchase is to provide life insurance protection. Because the contract provides whole-life or permanent insurance, it also serves a second important objective. It can be expected to provide an increasing cash surrender value that can be used during your lifetime. BRIEF DESCRIPTION OF THE CONTRACT The Variable APPRECIABLE LIFE Insurance Contract (referred to from now on as the "Contract") is issued and sold by The Prudential Insurance Company of America ("The Prudential"), a mutual insurance company founded in 1875 under the laws of the State of New Jersey. It is licensed to sell life insurance and annuities in all 50 states, the District of Columbia and Guam. It is also registered as a broker and dealer under The Securities and Exchange Act of 1934 and as an investment adviser under The Investment Advisers Act of 1940. The Prudential's consolidated financial statements begin on page B1. The Contract is a form of flexible premium variable life insurance. It is built around a Contract Fund, the amount of which changes every business day. That amount represents the value of your Contract on that day although you will have to pay a surrender charge if you decide to surrender the Contract during the first ten Contract years. A broad objective of the Contract is to provide benefits that will increase in value if favorable investment results are achieved. The Prudential has established a separate account, like a separate division within the Company, called The Prudential Variable Appreciable Account (from now on, the "Account"). Whenever you pay a premium, The Prudential first deducts certain charges (described below) and, unless you decide otherwise (as explained below) puts the remainder -- often called the "net premium" -- into the Account, where it is combined with the net premiums from all other contracts like this one. The money in the Account, including your Contract Fund, is then invested in the following way. The Account is divided into fifteen subaccounts and you must decide which subaccount or subaccounts will hold the assets of your Contract Fund. The money allocated to each subaccount is immediately invested in a corresponding portfolio of The Prudential Series Fund, Inc. (from now on the "Series Fund"). Those fifteen portfolios are described in more detail below. Each has a different investment objective (for example, common stocks, bonds, money market securities, government securities) so that you have a wide range of investment options to choose from. You also have two additional options which are regulated differently from the other fifteen because neither one is an investment company registered under the Investment Company Act of 1940. The first of these is a fixed-rate option that increases the portion of your Contract Fund allocated to this option at a guaranteed rate of interest. The remaining option is a real property option which invests in income-producing real property. It is described in a separate prospectus that is attached to this one. Thus your Contract Fund value changes every day depending upon the change in the value of the particular portfolios (or the other two investment options) that you have selected for the investment of your Contract Fund. Although the selection of any of the investment portfolios or of the real property option offers the possibility that your Contract Fund value will increase if there is favorable investment performance, you are subject to the risk that investment performance will be unfavorable and that the value of your Contract Fund will decrease. The risk will be different, depending upon which investment options you choose. See WHICH INVESTMENT OPTION SHOULD BE SELECTED, page 4. If you select the fixed-rate option, you are credited with a stated rate of interest but you assume the risk that this rate may change in later years. The Prudential deducts certain charges from each premium payment and from the amounts held in the designated investment options. In addition, The Prudential 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 18. In brief, and subject to that fuller description, the following diagram outlines the charges which may be made: 1 ------------------------------------------------ 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 Investment Portfolios of the Series Fund described below o The Fixed-Rate Option o The Real Property Account - -------------------------------------------------------------------------------- | - -------------------------------------------------------------------------------- DAILY CHARGES o Management fees and expenses are deducted from the assets of the Series Fund. o A daily charge equivalent to an annual rate of up to 0.9% is deducted from the assets of the variable investment options for mortality and expense risks. - -------------------------------------------------------------------------------- | - -------------------------------------------------------------------------------- MONTHLY CHARGES o A sales charge is currently deducted from the Contract Fund in the amount of 1/2 of 1% of the primary annual premium. o The Contract Fund is reduced by a guaranteed minimum death benefit risk charge of not more than $0.01 per $1,000 of the face amount of insurance. o The Contract Fund is reduced by an administrative charge of up to $3 per Contract and $0.03 per $1,000 of face amount of insurance; if the face amount of the Contract is greater than $100,000, the charge is reduced. o A charge for anticipated mortality is deducted, with the maximum charge based on the Non-Smoker/Smoker 1980 CSO Tables. o If the Contract includes riders, a deduction from the Contract Fund will be made for charges applicable to those riders; a deduction will also be made if the rating class of the insured results in an extra charge. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- POSSIBLE ADDITIONAL CHARGES o If the Contract lapses or is surrendered during the first 10 years, a contingent deferred sales charge is assessed; the maximum contingent deferred sales charge during the first 5 years is 50% of the first year's primary annual premium but this charge is both subject to other important limitations and reduced for Contracts that have been in force for more than 5 years. o If the Contract lapses or is surrendered during the first 10 years, a contingent deferred administrative charge is assessed; during the first 5 years, this charge equals $5 per $1,000 of face amount and it begins to decline uniformly after the fifth Contract year so that it disappears on the tenth Contract anniversary. o An administrative processing charge of up to $15 will be made in connection with each withdrawal of excess cash surrender value or a decrease in face amount. - -------------------------------------------------------------------------------- An important feature of the Contract is its death benefit. You have a choice of two different forms of the Contract which differ in the amount of the death benefit. Under Contract Form A the death benefit will generally be equal to the face amount of insurance. It can never be less than this amount, but it is possible, after the Contract has been held for many years, that the Contract Fund will become so large that The Prudential -- to meet certain requirements of the Internal Revenue Code -- will increase the death benefit. Under Contract Form B, the death benefit will increase and decrease as the amount of the Contract Fund varies with the investment performance of the selected options. However, the death benefit under Form B, as is true under Form A, will never be less than the initial face amount and it may also increase to satisfy Internal Revenue Code requirements. Throughout this prospectus the word "Contract" refers to both Form A and B unless specifically stated otherwise. Under both Form A and B Contracts there is no guaranteed minimum cash surrender value. When you first buy the Contract you give instructions to The Prudential as to which subaccounts (and, therefore, which corresponding portfolios of the Series Fund) you wish your Contract Fund invested. Thereafter you may 2 make changes in these allocations either in writing or by telephone. The investment objectives of each portfolio, described more fully at pages 31 to 43 of this prospectus, and of the other two investment options are as follows: FIXED INCOME PORTFOLIOS MONEY MARKET PORTFOLIO. The maximum current income that is consistent with stability of capital and maintenance of liquidity through investment in high-quality short-term debt obligations. The rate of return will generally follow the fluctuations in short term interest rates. DIVERSIFIED BOND PORTFOLIO (formerly the Bond Portfolio). A high level of income over the longer term while providing reasonable safety of capital through investment primarily in readily marketable intermediate and long-term fixed income securities that provide attractive yields but do not involve substantial risk of loss of capital through default. The securities will be of investment grade and should result in higher returns, but market value will fluctuate inversely with changes in interest rates of longer maturities. GOVERNMENT INCOME PORTFOLIO (formerly the Government Securities Portfolio). Achievement of a high level of income over the longer term consistent with the preservation of capital through investment primarily in U.S. Government securities, including intermediate and long-term U.S. Treasury securities and debt obligations issued by agencies of or instrumentalities established, sponsored or guaranteed by the U.S. Government. At least 65% of the total assets of the portfolio will be invested in U.S. Government securities. The rate of return is likely to be somewhat lower than that of the Diversified Bond Portfolio, but the risk of loss through default is significantly lower. Market value will also vary inversely with changes in interest rates. ZERO COUPON BOND PORTFOLIOS 2000 AND 2005. Achievement of the highest predictable compounded investment return for a specific period of time, consistent with the safety of invested capital, by investing primarily in debt obligations of the United States Treasury and investment-grade corporations that have been issued without interest coupons or stripped of their unmatured interest coupons, in interest coupons that have been stripped from such debt obligations, and receipts and in certificates for such stripped debt obligations and stripped coupons (collectively "stripped securities"). The two portfolios differ only in their liquidation dates, which for each portfolio is November 15 of the specified year. Market values are subject to greater fluctuations in interest rates than they are for the other fixed-income portfolios so that redemption, by transfer or otherwise prior to the maturity date could result in a loss. BALANCED PORTFOLIOS CONSERVATIVE BALANCED PORTFOLIO (formerly the Conservatively Managed Flexible Portfolio). Achievement of a favorable total investment return consistent with a portfolio having a conservatively managed mix of money market instruments, fixed income securities, and common stocks, in proportions believed by the investment manager to be appropriate for an investor desiring diversification of investment who prefers a relatively lower risk of loss than that associated with the Flexible Managed Portfolio while recognizing that this reduces the chances of greater appreciation. FLEXIBLE MANAGED PORTFOLIO (formerly the Aggressively Managed Flexible Portfolio). Achievement of a high total return consistent with a portfolio having an aggressively managed mix of money market instruments, fixed income securities, and common stocks, in proportions believed by the investment manager to be appropriate for an investor desiring diversification of investment who is willing to accept a relatively high level of loss in an effort to achieve greater appreciation. HIGH YIELD BOND PORTFOLIOS HIGH YIELD BOND PORTFOLIO. Achievement of a high total return through investment in high yield/high risk fixed income securities in the medium to low quality ranges. These securities are sometimes known as "junk bonds." Even higher returns are likely to be achieved but with greater risk of loss because of investment in lower grade speculative debt securities. DIVERSIFIED STOCK PORTFOLIOS STOCK INDEX PORTFOLIO. Achievement of investment results that correspond to the price and yield performance of publicly traded common stocks in the aggregate by following a policy of attempting to duplicate the price and yield performance of the Standard & Poor's 500 Composite Stock Price Index. EQUITY INCOME PORTFOLIO (formerly the High Dividend Stock Portfolio). Both current income and capital appreciation through investment primarily in common stocks and convertible securities that provide favorable prospects for investment income returns above those of the Standard & Poor's 500 Stock Index or the NYSE Composite Index. EQUITY PORTFOLIO (formerly the Common Stock Portfolio). Capital appreciation through investment primarily in common stocks of companies, including major established corporations as well as smaller capitalization companies, 3 that appear to offer attractive prospects of price appreciation that is superior to broadly-based stock indices. Current income, if any, is incidental. Higher total return, through assumption of greater risk, can be expected from this portfolio. As with all the equity portfolios, significant fluctuations in market value can be expected, with losses in some years. PRUDENTIAL JENNISON PORTFOLIO (formerly the Growth Stock Portfolio). Long-term growth of capital through investment primarily in equity securities of established companies with above-average growth prospects. Current income, if any, is incidental. SMALL CAPITALIZATION STOCK PORTFOLIO. Long-term growth of capital through investment primarily in equity securities of publicly-traded companies with small market capitalization. Current income, if any, is incidental. GLOBAL PORTFOLIO (formerly the Global Equity Portfolio). Long-term growth of capital through investment primarily in common stock and common stock equivalents of foreign and domestic issuers. Current income, if any, is incidental. While the characteristics of this portfolio are similar to other equity portfolios, there will be an additional risk because the portfolio invests a significant portion of its assets in foreign securities. SPECIALIZED PORTFOLIOS NATURAL RESOURCES PORTFOLIO. Long-term growth of capital through investment primarily in common stocks and convertible securities of "natural resource companies" and in securities (typically debt securities and preferred stock) the terms of which are related to the market value of a natural resource. While the characteristics of this portfolio are similar to the other equity portfolios, there will be additional risk because the portfolio is concentrated in a limited number of sectors. REAL PROPERTY ACCOUNT. High current income plus capital appreciation through investment in a partnership whose assets are primarily 100%-owned unmortgaged commercial real property and mortgages on real properties. Investment in real property is also subject to fluctuations in market values. FIXED-RATE OPTION. Guarantee against loss of principal plus income at a rate which may change at yearly intervals, but will never be lower than an effective annual rate of 4%. TRANSFERS BETWEEN INVESTMENT OPTIONS You may at any time change the instructions for the allocation of your premiums to the various investment options. You may also transfer amounts held in one option to another. There are restrictions upon transfers out of the Real Property Account and the fixed-rate option which The Prudential may waive. WHICH INVESTMENT OPTION SHOULD BE SELECTED? Historically, for investments held over relatively long periods, the investment performance of common stocks has generally been superior to that of short or long-term debt securities, even though common stocks have been subject to much more dramatic changes in value over short periods of time. Accordingly, the Stock Index, Equity Income, Equity, Prudential Jennison, Small Capitalization Stock, Global, or Natural Resources Portfolios may be desirable options if you are willing to accept such volatility in your Contract values. Each of these equity portfolios involves somewhat different policies and investment risks. You may prefer the somewhat greater protection against loss of principal (and reduced chance of high total return) provided by the Government Income or Diversified Bond Portfolios. There may be times when you desire even greater safety of principal and may then prefer the Money Market Portfolio or the fixed-rate option, recognizing that the level of short-term rates may change rather rapidly. Money invested in a Zero Coupon Bond Portfolio and held to its liquidation date will realize a predictable return, although the portfolio's value may fluctuate significantly with changes in interest rates prior to its liquidation date. If you are willing to take risks and possibly achieve a higher total return, you may prefer the High Yield Bond Portfolio, recognizing that with higher yielding, lower quality bonds the risks are greater. You may wish to divide your invested premium among two or more of the portfolios. You may wish to obtain diversification by relying on The Prudential's judgment for an appropriate asset mix by choosing one of the Balanced Portfolios. The Real Property Account permits you to diversify your investment under the Contract to include an interest in a pool of income-producing real property, and real estate is often considered to be a hedge against inflation. You should make a choice that takes into account how willing you are to accept investment risks, the manner in which your other assets are invested, and your own predictions about what investment results are likely to be in the future. The Prudential does recommend AGAINST frequent transfers among the several options as experience generally indicates that "market timing" investing, particularly by non-professional investors, is likely to prove unsuccessful. 4 THE SCHEDULED PREMIUM Your Contract sets forth an annual Scheduled Premium, or one that is payable more frequently, such as monthly. The Prudential 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. The Contract will not lapse even if investment experience is unexpectedly so unfavorable that the Contract Fund value drops to below zero. Your Scheduled Premium consists of two amounts. The first or initial amount is payable from the time you purchase your Contract until the Contract anniversary immediately following your 65th birthday or the Contract's seventh anniversary, whichever is later (the "Premium Change Date"). The second amount is the guaranteed maximum amount payable after the Premium Change Date. See PREMIUMS, page 21. PAYMENT OF SUBSTANTIALLY HIGHER PREMIUMS The payment of premiums in excess of scheduled premiums may cause the Contract to become a Modified Endowment Contract for federal income tax purposes. See PREMIUMS, page 21 and TAX TREATMENT OF CONTRACT BENEFITS, page 29. CONTRACT LOANS The Contract permits the owner to borrow up to 90% of the amount of the cash surrender value (100% of the portion allocated to the fixed-rate option) on favorable terms. See CONTRACT LOANS, page 25. When a loan is made, the amount held under the investment options described above is reduced, proportionately, by the amount of the loan. VARIABLE APPRECIABLE LIFE INSURANCE CONTRACTS The Prudential Variable APPRECIABLE LIFE Insurance Contract is a form of life insurance that provides much of the flexibility of variable universal life, however, it differs in two important ways. First, The Prudential 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 the face amount of insurance will be paid upon the death of the insured even if, because of unfavorable investment experience, the Contract Fund value should drop to below zero. Second, if all premiums are not paid when due (or made up), the Contract will not lapse as long as the Contract Fund is higher than a stated amount set forth in a table in the Contract -- an amount that increases each year and in later years becomes quite high; it is called the "Tabular Contract Fund." The Contract lapses when the Contract Fund falls to below this stated amount, rather than when it drops to zero. Thus, when a Variable APPRECIABLE LIFE Contract lapses, it may still have considerable value and you will, therefore, have a substantial incentive to reinstate it, as well as an opportunity to make a considered decision whether to do so or to take, in one form or another, the cash surrender value. In effect, The Prudential provides an early and timely warning against the imprudent use of the flexibility provided by the Contract. In the following pages of this prospectus we describe in much greater detail all of the provisions of the Contract. That description is preceded by two sets of tables. The first set provides, in condensed form, financial information about the portfolios of the Series 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 SERIES FUND The tables that follow provide information about the annual investment income, capital appreciation and expenses of the 15 portfolios of the Series Fund that were available as of December 31, 1995 for each year, beginning with the year after the Series 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 DEDUCTIONS FOR THE INVESTMENT MANAGEMENT FEES AND EXPENSES. 5 THE PRUDENTIAL SERIES FUND, INC. FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED) The following financial highlights information has been audited by Deloitte & Touche LLP, Independent Auditors. Their report is included in the Statement of Additional Information.
MONEY MARKET ------------------------------------------------------------------------------------------------------ 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 01/01/89 01/01/88 01/01/87 01/01/86 TO TO TO TO TO TO TO TO TO TO 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 12/31/88 12/31/87 12/31/86* -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Net Asset Value at beginning of year...... $10.000 $10.000 $10.000 $10.000 $10.000 $10.000 $10.000 $10.000 $ 10.000 $ 1.000 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Income From Investment Operations: Net investment income.... 0.564 0.402 0.290 0.372 0.596 0.778 0.877 0.717 0.630 0.062 Net realized gains (losses) and unrealized appreciation (depreciation) on investments............ 0 0 0 0 0 0 0 0 0 0 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Total from investment operations........... 0.564 0.402 0.290 0.372 0.596 0.778 0.877 0.717 0.630 0.062 Distributions to Shareholders: Distributions from net investment income...... (0.564) (0.402) (0.290) (0.372) (0.596) (0.778) (0.877) (0.717) (0.630) (0.062) Distributions from realized gains......... 0 0 0 0 0 0 0 0 0 0 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Total distributions........ (0.564) (0.402) (0.290) (0.372) (0.596) (0.778) (0.877) (0.717) (0.630) (0.062) Reverse stock split (10 to 1).................. -- -- -- -- -- -- -- -- -- 9.000 Net increase (decrease) in Net Asset Value..... 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 9.000 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Net Asset Value at end of year................... $10.000 $10.000 $10.000 $10.000 $10.000 $10.000 $10.000 $10.000 $ 10.000 $ 10.000 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Total Investment Rate of Return:**.............. 5.80 % 4.05 % 2.95 % 3.79 % 6.16 % 8.16 % 9.25 % 7.35 % 6.52 % 6.54 % Ratios/Supplemental Data: Net assets at end of year (in millions).......... $613.3 $583.3 $474.7 $528.7 $529.6 $434.2 $236.1 $155.9 $107.2 $52.5 Ratio of expenses net of reimbursement to average net assets..... 0.44 % 0.47 % 0.45 % 0.47 % 0.46 % 0.50 % 0.55 % 0.57 % 0.53 % 0.55 % Ratio of net investment income to average net assets................. 5.64 % 4.02 % 2.90 % 3.72 % 5.96 % 7.80 % 8.77 % 7.17 % 6.30 % 6.16 % Portfolio turnover rate................... -- -- -- -- -- -- -- -- -- -- Number of shares outstanding at end of period (in millions)... 61.3 58.3 47.5 52.9 53.0 43.4 23.6 15.6 10.7 5.2 DIVERSIFIED BOND ------------------------------------------------------------------------------------------------------- 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 01/01/89 01/01/88 01/01/87 01/01/86 TO TO TO TO TO TO TO TO TO TO 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 12/31/88 12/31/87 12/31/86* -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Net Asset Value at beginning of year...... $10.038 $11.103 $10.829 $11.002 $10.332 $10.321 $ 9.942 $10.038 $ 11.048 $ 10.967 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Income From Investment Operations: Net investment income.... 0.763 0.682 0.686 0.761 0.797 0.825 0.886 0.875 0.859 0.904 Net realized gains (losses) and unrealized appreciation (depreciation) on investments............ 1.293 (1.040) 0.398 0.013 0.842 (0.004) 0.424 (0.069) (0.821) 0.607 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Total from investment operations........... 2.056 (0.358) 1.084 0.774 1.639 0.821 1.310 0.806 0.038 1.511 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Distributions to Shareholders: Distributions from net investment income...... (0.755) (0.683) (0.657) (0.728) (0.779) (0.810) (0.854) (0.902) (0.990) (0.909) Distributions from net realized gains......... (0.026) (0.024) (0.153) (0.219) (0.190) 0 (0.077) 0 (0.058) (0.521) -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Total distributions........ (0.781) (0.707) (0.810) (0.947) (0.969) (0.810) (0.931) (0.902) (1.048) (1.430) -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Net increase (decrease) in Net Asset Value..... 1.275 (1.065) 0.274 (0.173) 0.670 0.011 0.379 (0.096) (1.010) 0.081 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Net Asset Value at end of year................... $11.313 $10.038 $11.103 $10.829 $11.002 $10.332 $10.321 $ 9.942 $ 10.038 $ 11.048 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Total Investment Rate of Return:**.............. 20.73 % (3.23 %) 10.13 % 7.19 % 16.44 % 8.32 % 13.49 % 8.19 % 0.29 % 14.45 % Ratios/Supplemental Data: Net assets at end of year (in millions).......... $655.8 $541.6 $576.2 $428.8 $318.7 $227.7 $191.1 $148.8 $139.5 $110.1 Ratio of expenses net of reimbursement to average net assets..... 0.44 % 0.45 % 0.46 % 0.47 % 0.49 % 0.47 % 0.53 % 0.53 % 0.53 % 0.51 % Ratio of net investment income to average net assets................. 7.00 % 6.41 % 6.05 % 6.89 % 7.43 % 8.06 % 8.56 % 8.52 % 8.15 % 8.11 % Portfolio turnover rate................... 199.09 % 31.57 % 41.12 % 60.53 % 131.01 % 42.10 % 272.85 % 222.20 % 238.41 % 246.82 % Number of shares outstanding at end of period (in millions)... 58.0 54.0 51.9 39.6 29.0 22.0 18.5 15.0 13.9 10.0
All calculations are based on average month-end shares outstanding, where applicable. *The per share information of the Portfolios of The Prudential Series Fund, Inc. has not been restated to reflect the operations of the Pruco Life Series Fund, Inc. prior to the November 1, 1986 merger. **Total investment returns are at the portfolio level and exclude contract specific charges which would reduce returns. This information should be read in conjunction with the financial statements of The Prudential Series Fund, Inc. and notes thereto, which appear in the Statement of Additional Information. Further information about the performance of the portfolios is contained in the Annual Report to Contract Owners which may be obtained without charge. 6 THE PRUDENTIAL SERIES FUND, INC. FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED) The following financial highlights information has been audited by Deloitte & Touche LLP, Independent Auditors. Their report is included in the Statement of Additional Information.
GOVERNMENT INCOME ----------------------------------------------------------------------- 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 05/01/89 TO TO TO TO TO TO TO 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 -------- -------- -------- -------- -------- -------- -------- Net Asset Value at beginning of year...... $10.461 $11.784 $11.094 $11.133 $10.146 $10.324 $10.017 -------- -------- -------- -------- -------- -------- -------- Income From Investment Operations: Net investment income.... 0.741 0.703 0.700 0.731 0.736 0.791 0.545 Net realized gains (losses) and unrealized appreciation (depreciation) on investments............ 1.275 (1.311) 0.678 (0.092) 0.847 (0.177) 0.613 -------- -------- -------- -------- -------- -------- -------- Total from investment operations........... 2.016 (0.608) 1.378 0.639 1.583 0.614 1.158 -------- -------- -------- -------- -------- -------- -------- Distributions to Shareholders: Distributions from net investment income...... (0.758) (0.723) (0.642) (0.593) (0.596) (0.769) (0.489) Distributions from net realized gains......... 0.000 0.008 (0.046) (0.085) 0.000 (0.023) (0.362) -------- -------- -------- -------- -------- -------- -------- Total distributions........ (0.758) (0.715) (0.688) (0.678) (0.596) (0.792) (0.851) -------- -------- -------- -------- -------- -------- -------- Net increase (decrease) in Net Asset Value..... 1.258 (1.323) 0.690 (0.039) 0.987 (0.178) 0.307 -------- -------- -------- -------- -------- -------- -------- Net Asset Value at end of year................... $11.719 $10.461 $11.784 $11.094 $11.133 $10.146 $10.324 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total Investment Rate of Return:**.............. 19.48 % (5.16 %) 12.56 % 5.85 % 16.11 % 6.34 % 11.60 % Ratios/Supplemental Data: Net assets at end of year (in millions).......... $501.8 $487.6 $540.1 $315.5 $95.0 $23.7 $17.0 Ratio of expenses net of reimbursement to average net assets..... 0.45 % 0.45 % 0.46 % 0.53 % 0.58 % 0.74 % 0.50 % Ratio of net investment income to average net assets................. 6.55 % 6.30 % 5.91 % 6.58 % 6.97 % 7.86 % 5.06 % Portfolio turnover rate................... 195.49 % 34.19 % 18.59 % 80.71 % 127.18 % 379.45 % 208.86 % Number of shares outstanding at end of period (in millions)... 42.8 46.6 45.8 28.3 8.5 2.3 1.6
ZERO COUPON BOND 1995 ------------------------------------------------------------------------------------------------------- 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 01/01/89 01/01/88 01/01/87 02/12/86 TO TO TO TO TO TO TO TO TO TO 11/15/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 12/31/88 12/31/87 12/31/86 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Net Asset Value at beginning of period.... $10.593 $11.282 $11.174 $11.250 $10.380 $11.094 $10.331 $10.270 $ 11.724 $ 10.156 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Income From Investment Operations: Net investment income.... 0.538 0.800 0.761 0.802 0.844 1.447 0.889 0.888 0.893 0.791 Net realized gains (losses) and unrealized appreciation (depreciation) on investments............ 0.109 (0.808) 0.107 (0.010) 0.874 (0.670) 0.766 0.027 (1.263) 1.437 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Total from investment operations........... 0.647 (0.008) 0.868 0.792 1.718 0.777 1.655 0.915 (0.370) 2.228 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Distributions to Shareholders: Distributions from net investment income...... (0.676) (0.679) (0.760) (0.798) (0.845) (1.491) (0.892) (0.854) (1.084) (0.660) Distributions from net realized gains......... (0.165) (0.002) 0.000 (0.070) (0.003) 0.000 0.000 0.000 0.000 0.000 Distributions of net assets at liquidation date................... (10.399) 0 0 0 0 0 0 0 0 0 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Total distributions........ (11.240) (0.681) (0.760) (0.868) (0.848) (1.491) (0.892) (0.854) (1.084) (0.660) -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Net increase (decrease) in Net Asset Value..... (10.593) (0.689) 0.108 (0.076) 0.870 (0.714) 0.763 0.061 (1.454) 1.568 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Net Asset Value at end of period................. $ 0.000 $10.593 $11.282 $11.174 $11.250 $10.380 $11.094 $10.331 $ 10.270 $ 11.724 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Total Investment Rate of Return:**.............. 6.20 % (0.03 %) 7.87 % 7.19 % 17.20 % 7.95 % 16.41 % 9.01% (3.25 %) 21.96 % Ratios/Supplemental Data: Net assets at end of period (in millions)... $0.0 $17.7 $15.2 $13.6 $13.0 $11.0 $10.0 $9.0 $7.5 $7.2 Ratio of expenses net of reimbursement to average net assets..... 0.49 % 0.60 % 0.63 % 0.69 % 0.71 % 0.75 % 0.75 % 0.75 % 0.69 % 0.42 % Ratio of net investment income to average net assets................. 5.39 % 6.72 % 6.61 % 7.12 % 7.86 % 13.80 % 8.13 % 8.34 % 8.17 % 6.89 % Portfolio turnover rate................... 0.00 % 4.38 % 5.84 % 34.80 % 0.77 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % Number of shares outstanding at end of period (in millions)... 0.0 1.7 1.3 1.2 1.2 1.1 0.9 0.9 0.7 0.6
All calculations are based on average month-end shares outstanding, where applicable. **Total investment returns are at the portfolio level and exclude contract specific charges which would reduce returns. This information should be read in conjunction with the financial statements of The Prudential Series Fund, Inc. and notes thereto, which appear in the Statement of Additional Information. Further information about the performance of the portfolios is contained in the Annual Report to Contract Owners which may be obtained without charge. 7 THE PRUDENTIAL SERIES FUND, INC. FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED) The following financial highlights information has been audited by Deloitte & Touche LLP, Independent Auditors. Their report is included in the Statement of Additional Information.
ZERO COUPON BOND 2000 ------------------------------------------------------------------------------------------------------- 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 01/01/89 01/01/88 01/01/87 02/12/86 TO TO TO TO TO TO TO TO TO TO 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 12/31/88 12/31/87 12/31/86 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Net Asset Value at beginning of year...... $11.862 $13.715 $12.550 $12.402 $11.279 $11.883 $11.004 $10.685 $ 12.476 $ 10.267 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Income From Investment Operations: Net investment income.... 0.592 0.927 0.850 0.892 0.908 1.114 0.919 0.919 0.934 0.807 Net realized gains (losses) and unrealized appreciation (depreciation) on investments............ 1.944 (1.907) 1.157 0.140 1.308 (0.593) 1.277 0.292 (1.623) 2.087 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Total from investment operations........... 2.536 (0.980) 2.007 1.032 2.216 0.521 2.196 1.211 (0.689) 2.894 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Distributions to Shareholders: Distributions from net investment income...... (0.593) (0.850) (0.837) (0.884) (0.944) (1.125) (0.915) (0.892) (1.102) (0.685) Distributions from net realized gains......... (0.532) (0.023) (0.005) 0.000 (0.149) 0.000 (0.402) 0.000 0.000 0.000 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Total distributions........ (1.125) (0.873) (0.842) (0.884) (1.093) (1.125) (1.317) (0.892) (1.102) (0.685) -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Net increase (decrease) in Net Asset Value..... 1.411 (1.853) 1.165 0.148 1.123 (0.604) 0.879 0.319 (1.791) 2.209 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Net Asset Value at end of year................... $13.273 $11.862 $13.715 $12.550 $12.402 $11.279 $11.883 $11.004 $ 10.685 $ 12.476 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Total Investment Rate of Return:**.............. 21.56 % (7.18 %) 16.15 % 8.59 % 20.71 % 5.11 % 20.38 % 11.56 % (5.51 %) 28.62 % Ratios/Supplemental Data: Net assets at end of year (in millions).......... $25.3 $20.6 $22.2 $16.7 $14.6 $13.9 $13.1 $10.9 $9.0 $8.1 Ratio of expenses net of reimbursement to average net assets..... 0.48 % 0.51 % 0.62 % 0.66 % 0.68 % 0.75 % 0.75 % 0.75 % 0.64 % 0.40 % Ratio of net investment income to average net assets................. 4.53 % 6.69 % 6.21 % 7.24 % 7.77 % 9.99 % 7.73 % 8.24 % 8.19 % 6.61 % Portfolio turnover rate................... 70.68 % 9.41 % 0.53 % 0.00 % 0.00 % 0.00 % 38.62 % 0.00 % 0.00 % 0.00 % Number of shares outstanding at end of period (in millions)... 1.9 1.7 1.6 1.3 1.2 1.2 1.1 1.0 0.8 0.7
ZERO COUPON BOND 2005 ----------------------------------------------------------------------- 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 05/01/89 TO TO TO TO TO TO TO 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 -------- -------- -------- -------- -------- -------- -------- Net Asset Value at beginning of year...... $10.744 $12.677 $11.029 $10.874 $ 9.798 $10.457 $10.017 -------- -------- -------- -------- -------- -------- -------- Income From Investment Operations: Net investment income.... 0.655 0.752 0.768 0.804 0.820 0.850 0.561 Net realized gains (losses) and unrealized appreciation (depreciation) on investments............ 2.733 (1.967) 1.623 0.207 1.143 (0.649) 0.598 -------- -------- -------- -------- -------- -------- -------- Total from investment operations........... 3.388 (1.215) 2.391 1.011 1.963 0.201 1.159 -------- -------- -------- -------- -------- -------- -------- Distributions to Shareholders: Distributions from net investment income...... (0.656) (0.715) (0.741) (0.792) (0.827) (0.860) (0.531) Distributions from net realized gains......... (0.286) (0.003) (0.002) (0.064) (0.060) 0.000 (0.188) -------- -------- -------- -------- -------- -------- -------- Total distributions........ (0.942) (0.718) (0.743) (0.856) (0.887) (0.860) (0.719) -------- -------- -------- -------- -------- -------- -------- Net increase (decrease) in Net Asset Value..... 2.446 (1.933) 1.648 0.155 1.076 (0.659) 0.440 -------- -------- -------- -------- -------- -------- -------- Net Asset Value at end of year................... $13.190 $10.744 $12.677 $11.029 $10.874 $ 9.798 $10.457 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total Investment Rate of Return:**.............. 31.85 % (9.61 %) 21.94 % 9.66 % 21.16 % 2.56 % 11.67 % Ratios/Supplemental Data: Net assets at end of year (in millions).......... $23.6 $16.5 $14.5 $9.8 $8.7 $7.3 $7.2 Ratio of expenses net of reimbursement to average net assets..... 0.49 % 0.60 % 0.66 % 0.75 % 0.75 % 0.75 % 0.49 % Ratio of net investment income to average net assets................. 5.32 % 6.53 % 6.17 % 7.46 % 8.08 % 8.83 % 5.25 % Portfolio turnover rate................... 69.15 % 5.94 % 3.62 % 11.48 % 5.76 % 4.36 % 59.90 % Number of shares outstanding at end of period (in millions)... 1.8 1.5 1.1 0.9 0.8 0.7 0.7
All calculations are based on average month-end shares outstanding, where applicable. **Total investment returns are at the portfolio level and exclude contract specific charges which would reduce returns. This information should be read in conjunction with the financial statements of The Prudential Series Fund, Inc. and notes thereto, which appear in the Statement of Additional Information. Further information about the performance of the portfolios is contained in the Annual Report to Contract Owners which may be obtained without charge. 8 THE PRUDENTIAL SERIES FUND, INC. FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED) The following financial highlights information has been audited by Deloitte & Touche LLP, Independent Auditors. Their report is included in the Statement of Additional Information.
CONSERVATIVE BALANCED ----------------------------------------------------------------------------------------------------- 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 01/01/89 01/01/88 01/01/87 01/01/86 TO TO TO TO TO TO TO TO TO TO 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 12/31/88 12/31/87 12/31/86* -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Net Asset Value at beginning of year...... $14.095 $14.905 $14.243 $14.318 $13.060 $13.361 $12.295 $11.889 $ 12.571 $ 12.173 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Income From Investment Operations: Net investment income.... 0.635 0.528 0.486 0.558 0.687 0.821 0.891 0.773 0.656 0.652 Net realized gains (losses) and unrealized appreciation (depreciation) on investments........... 1.775 (0.679) 1.229 0.410 1.738 (0.143) 1.155 0.424 (0.399) 1.046 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Total from investment operations........... 2.410 (0.151) 1.715 0.968 2.425 0.678 2.046 1.197 0.257 1.698 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Distributions to Shareholders: Distributions from net investment income...... (0.643) (0.505) (0.468) (0.533) (0.668) (0.812) (0.887) (0.791) (0.709) (0.517) Distributions from net realized gains......... (0.553) (0.154) (0.585) (0.510) (0.499) (0.167) (0.093) 0.000 (0.230) (0.783) -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Total distributions........ (1.196) (0.659) (1.053) (1.043) (1.167) (0.979) (0.980) (0.791) (0.939) (1.300) -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Net increase (decrease) in Net Asset Value..... 1.214 (0.810) 0.662 (0.075) 1.258 (0.301) 1.066 0.406 (0.682) 0.398 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Net Asset Value at end of year................... $15.309 $14.095 $14.905 $14.243 $14.318 $13.060 $13.361 $12.295 $ 11.889 $ 12.571 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Total Investment Rate of Return:**.............. 17.27% (0.97%) 12.20% 6.95% 19.07% 5.27% 16.99% 10.19% 1.54% 14.17% Ratios/Supplemental Data: Net assets at end of year (in millions).......... $3,940.8 $3,501.1 $3,103.2 $2,114.0 $1,500.0 $1,100.2 $976.0 $815.6 $803.9 $375.4 Ratio of expenses net of reimbursement to average net assets..... 0.58% 0.61% 0.60% 0.62% 0.63% 0.65% 0.64% 0.65% 0.66% 0.64% Ratio of net investment income to average net assets................. 4.19% 3.61% 3.22% 3.88% 4.89% 6.21% 6.81% 6.22% 5.05% 5.10% Portfolio turnover rate................... 200.68% 125.18% 79.46% 62.07% 115.35% 44.04% 153.92% 110.67% 140.69% 207.78% Number of shares outstanding at end of period (in millions)... 257.4 248.4 208.2 148.4 104.8 84.2 73.0 66.3 67.6 29.9 FLEXIBLE MANAGED ----------------------------------------------------------------------------------------------------- 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 01/01/89 01/01/88 01/01/87 01/01/86 TO TO TO TO TO TO TO TO TO TO 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 12/31/88 12/31/87 12/31/86* -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Net Asset Value at beginning of year...... $15.496 $16.957 $16.005 $16.288 $13.996 $14.446 $13.123 $12.326 $ 13.555 $ 12.810 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Income From Investment Operations: Net investment income.... 0.564 0.473 0.566 0.583 0.650 0.715 0.813 0.724 0.577 0.611 Net realized gains (losses) and unrealized appreciation (depreciation) on investments............ 3.149 (1.021) 1.882 0.607 2.809 (0.466) 1.989 0.840 (0.753) 1.342 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Total from investment operations........... 3.713 (0.548) 2.448 1.190 3.459 0.249 2.802 1.564 (0.176) 1.953 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Distributions to Shareholders: Distributions from net investment income...... (0.560) (0.451) (0.567) (0.559) (0.654) (0.699) (0.813) (0.767) (0.673) (0.456) Distributions from net realized gains......... (0.790) (0.462) (0.929) (0.914) (0.513) 0.000 (0.666) 0.000 (0.380) (0.752) -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Total distributions........ (1.350) (0.913) (1.496) (1.473) (1.167) (0.699) (1.479) (0.767) (1.053) (1.208) -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Net increase (decrease) in Net Asset Value..... 2.363 (1.461) 0.952 (0.283) 2.292 (0.450) 1.323 0.797 (1.229) 0.745 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Net Asset Value at end of year................... $17.859 $15.496 $16.957 $16.005 $16.288 $13.996 $14.446 $13.123 $ 12.326 $ 13.555 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Total Investment Rate of Return:**.............. 24.13% (3.16%) 15.58% 7.61% 25.43% 1.91% 21.77% 12.83% (1.83%) 15.48% Ratios/Supplemental Data: Net assets at end of year (in millions).......... $4,261.2 $3,481.5 $3,292.2 $2,435.6 $1,990.7 $1,507.8 $1,386.5 $1,103.9 $1,062.4 $593.6 Ratio of expenses net of reimbursement to average net assets..... 0.63% 0.66% 0.66% 0.67% 0.67% 0.69% 0.69% 0.70% 0.71% 0.67% Ratio of net investment income to average net assets................. 3.30% 2.90% 3.30% 3.63% 4.23% 5.13% 5.66% 5.52% 4.09% 4.43% Portfolio turnover rate................... 173.30% 123.63% 62.99% 59.03% 93.13% 51.87% 141.04% 128.45% 123.83% 133.76% Number of shares outstanding at end of period (in millions)... 238.6 224.7 194.1 152.2 122.2 107.7 96.0 84.1 86.2 43.8
All calculations are based on average month-end shares outstanding, where applicable. *The per share information of the Portfolios of The Prudential Series Fund, Inc. has not been restated to reflect the operations of the Pruco Life Series Fund, Inc. prior to the November 1, 1986 merger. **Total investment returns are at the portfolio level and exclude contract specific charges which would reduce returns. This information should be read in conjunction with the financial statements of The Prudential Series Fund, Inc. and notes thereto, which appear in the Statement of Additional Information. Further information about the performance of the portfolios is contained in the Annual Report to Contract Owners which may be obtained without charge. 9 THE PRUDENTIAL SERIES FUND, INC. FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED) The following financial highlights information has been audited by Deloitte & Touche LLP, Independent Auditors. Their report is included in the Statement of Additional Information.
HIGH YIELD BOND ------------------------------------------------------------------------------------------- 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 01/01/89 01/01/88 02/23/87 TO TO TO TO TO TO TO TO TO 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 12/31/88 12/31/87 -------- -------- -------- -------- -------- -------- -------- -------- --------- Net Asset Value at beginning of year...... $ 7.366 $ 8.406 $ 7.719 $ 7.212 $ 5.838 $ 7.673 $ 8.904 $8.742 $ 10.000 -------- -------- -------- -------- -------- -------- -------- -------- --------- Income From Investment Operations: Net investment income.... 0.812 0.869 0.822 0.824 0.836 0.936 1.071 1.066 0.968 Net realized gains (losses) and unrealized appreciation (depreciation) on investments............ 0.460 (1.102) 0.632 0.415 1.397 (1.792) (1.223) 0.065 (1.428) -------- -------- -------- -------- -------- -------- -------- -------- --------- Total from investment operations........... 1.272 (0.233) 1.454 1.239 2.233 (0.856) (0.152) 1.131 (0.460) -------- -------- -------- -------- -------- -------- -------- -------- --------- Distributions to Shareholders: Distributions from net investment income...... (0.838) (0.807) (0.767) (0.732) (0.859) (0.979) (1.079) (0.969) (0.798) Distributions from net realized gains......... 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 -------- -------- -------- -------- -------- -------- -------- -------- --------- Total distributions........ (0.838) (0.807) (0.767) (0.732) (0.859) (0.979) (1.079) (0.969) (0.798) -------- -------- -------- -------- -------- -------- -------- -------- --------- Net increase (decrease) in Net Asset Value..... 0.434 (1.040) 0.687 0.507 1.374 (1.835) (1.231) 0.162 (1.258) -------- -------- -------- -------- -------- -------- -------- -------- --------- Net Asset Value at end of year................... $ 7.800 $ 7.366 $ 8.406 $ 7.719 $ 7.212 $ 5.838 $ 7.673 $ 8.904 $ 8.742 -------- -------- -------- -------- -------- -------- -------- -------- --------- -------- -------- -------- -------- -------- -------- -------- -------- --------- Total Investment Rate of Return:**.............. 17.56% (2.72%) 19.27% 17.54% 39.71% (11.84%) (2.05%) 13.17% (4.91%) Ratios/Supplemental Data: Net assets at end of year (in millions).......... $367.9 $306.2 $282.9 $153.7 $78.7 $49.8 $60.0 $65.8 $40.4 Ratio of expenses net of reimbursement to average net assets..... 0.61% 0.65% 0.65% 0.70% 0.75% 0.75% 0.71% 0.75% 0.73% Ratio of net investment income to average net assets................. 10.34% 9.88% 9.91% 10.67% 12.05% 13.42% 12.29% 11.60% 10.13% Portfolio turnover rate................... 139.34% 68.67% 95.52% 75.04% 57.21% 34.66% 60.59% 70.73% 16.58% Number of shares outstanding at end of period (in millions)... 47.2 41.6 33.6 19.9 10.9 8.5 7.8 7.4 4.6 STOCK INDEX ------------------------------------------------------------------------------------------- 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 01/01/89 01/01/88 10/19/87 TO TO TO TO TO TO TO TO TO 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 12/31/88 12/31/87 -------- -------- -------- -------- -------- -------- -------- -------- --------- Net Asset Value at beginning of year...... $14.957 $15.202 $14.218 $13.605 $10.760 $11.732 $ 9.454 $8.531 $ 8.071 -------- -------- -------- -------- -------- -------- -------- -------- --------- Income From Investment Operations: Net investment income.... 0.403 0.377 0.361 0.350 0.351 0.357 0.326 0.357 0.047 Net realized gains (losses) and unrealized appreciation (depreciation) on investments............ 5.126 (0.231) 1.002 0.600 2.814 (0.792) 2.570 0.951 0.548 -------- -------- -------- -------- -------- -------- -------- -------- --------- Total from investment operations........... 5.529 0.146 1.363 0.950 3.165 (0.435) 2.896 1.308 0.595 -------- -------- -------- -------- -------- -------- -------- -------- --------- Distributions to Shareholders: Distributions from net investment income...... (0.384) (0.368) (0.346) (0.329) (0.307) (0.309) (0.354) (0.385) (0.135) Distributions from net realized gains......... (0.146) (0.023) (0.033) (0.008) (0.013) (0.228) (0.264) 0.000 0.000 -------- -------- -------- -------- -------- -------- -------- -------- --------- Total distributions........ (0.530) (0.391) (0.379) (0.337) (0.320) (0.537) (0.618) (0.385) (0.135) -------- -------- -------- -------- -------- -------- -------- -------- --------- Net increase (decrease) in Net Asset Value..... 4.999 (0.245) 0.984 0.613 2.845 (0.972) 2.278 0.923 0.460 -------- -------- -------- -------- -------- -------- -------- -------- --------- Net Asset Value at end of year................... $19.956 $14.957 $15.202 $14.218 $13.605 $10.760 $11.732 $ 9.454 $ 8.531 -------- -------- -------- -------- -------- -------- -------- -------- --------- -------- -------- -------- -------- -------- -------- -------- -------- --------- Total Investment Rate of Return:**.............. 37.06% 1.01% 9.66% 7.13% 29.72% (3.63%) 30.93% 15.44% 7.35% Ratios/Supplemental Data: Net assets at end of year (in millions).......... $1,031.3 $664.5 $615.1 $433.5 $236.9 $104.5 $53.8 $36.0 $24.5 Ratio of expenses net of reimbursement to average net assets..... 0.38% 0.42% 0.42% 0.46% 0.47% 0.60% 0.69% 0.78% 0.45% Ratio of net investment income to average net assets................. 2.27% 2.50% 2.43% 2.56% 2.82% 3.23% 2.95% 3.87% 0.53% Portfolio turnover rate................... 1.16% 1.74% 0.60% 0.43% 1.10% 17.80% 14.54% 15.62% 0.47% Number of shares outstanding at end of period (in millions)... 51.7 44.4 40.5 30.5 17.4 9.7 4.6 3.8 2.9
All calculations are based on average month-end shares outstanding, where applicable. **Total investment returns are at the portfolio level and exclude contract specific charges which would reduce returns. This information should be read in conjunction with the financial statements of The Prudential Series Fund, Inc. and notes thereto, which appear in the Statement of Additional Information. Further information about the performance of the portfolios is contained in the Annual Report to Contract Owners which may be obtained without charge. 10 THE PRUDENTIAL SERIES FUND, INC. FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED) The following financial highlights information has been audited by Deloitte & Touche LLP, Independent Auditors. Their report is included in the Statement of Additional Information.
EQUITY INCOME --------------------------------------------------------------------------------- 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 01/01/89 02/19/88 TO TO TO TO TO TO TO TO 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 12/31/88 -------- -------- -------- -------- -------- -------- -------- -------- Net Asset Value at beginning of year $14.484 $15.655 $13.673 $13.209 $11.241 $12.254 $10.621 $10.132 -------- -------- -------- -------- -------- -------- -------- -------- Income From Investment Operations: Net investment income.... 0.644 0.664 0.551 0.582 0.578 0.509 0.539 0.452 Net realized gains (losses) and unrealized appreciation (depreciation) on investments............ 2.495 (0.453) 2.459 0.723 2.430 (0.980) 1.841 0.684 -------- -------- -------- -------- -------- -------- -------- -------- Total from investment operations 3.139 0.211 3.010 1.305 3.008 (0.471) 2.380 1.136 -------- -------- -------- -------- -------- -------- -------- -------- Distributions to Shareholders: Distributions from net investment income...... (0.618) (0.562) (0.501) (0.515) (0.542) (0.461) (0.462) (0.420) (0.420) Distributions from net realized gains......... (0.734) (0.820) (0.527) (0.326) (0.498) (0.081) (0.285) (0.227) -------- -------- -------- -------- -------- -------- -------- -------- Total distributions........ (1.352) (1.382) (1.028) (0.841) (1.040) (0.542) (0.747) (0.647) -------- -------- -------- -------- -------- -------- -------- -------- Net increase (decrease) in Net Asset Value..... 1.787 (1.171) 1.982 0.464 1.968 (1.013) 1.633 0.489 -------- -------- -------- -------- -------- -------- -------- -------- Net Asset Value at end of year................... $16.271 $14.484 $15.655 $13.673 $13.209 $11.241 $12.254 $10.621 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total Investment Rate of Return:**.............. 21.70% 1.44% 22.28% 10.14% 27.50% (3.73%) 22.67% 11.31% Ratios/Supplemental Data: Net assets at end of year (in millions).......... $1,110.0 $859.7 $602.8 $234.4 $106.9 $55.5 $34.9 $11.3 Ratio of expenses net of reimbursement to average net assets..... 0.43% 0.52% 0.54% 0.57% 0.57% 0.60% 0.74% 0.64% Ratio of net investment income to average net assets................. 4.00% 3.92% 3.56% 4.32% 4.53% 4.53% 4.48% 4.08% Portfolio turnover rate................... 63.55% 62.66% 41.43% 39.98% 60.12% 54.79% 56.65% 61.31% Number of shares outstanding at end of period (in millions)... 68.2 59.4 38.5 17.1 8.1 4.9 2.9 1.1
EQUITY ----------------------------------------------------------------------------------------------------- 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 01/01/89 01/01/88 01/01/87 01/01/86 TO TO TO TO TO TO TO TO TO TO 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 12/31/88 12/31/87 12/31/86* -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Net Asset Value at beginning of year...... $20.662 $21.487 $18.903 $17.905 $15.449 $18.539 $15.463 $13.620 $14.815 $14.634 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Income From Investment Operations: Net investment income.... 0.546 0.512 0.417 0.444 0.482 0.577 0.474 0.402 0.393 0.448 Net realized gains (losses) and unrealized appreciation (depreciation) on investments............ 5.891 0.054 3.666 2.050 3.414 (1.573) 4.064 1.909 (0.065) 1.765 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Total from investment operations........... 6.437 0.566 4.083 2.494 3.896 (0.996) 4.538 2.311 0.328 2.213 Distributions to Shareholders: Distributions from net investment income...... (0.515) (0.487) (0.404) (0.439) (0.478) (0.563) (0.503) (0.468) (0.496) (0.275) Distributions from net realized gains......... (0.944) (0.904) (1.095) (1.057) (0.962) (1.531) (0.959) 0.000 (1.027) (1.757) -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Total distributions........ (1.459) (1.391) (1.499) (1.496) (1.440) (2.094) (1.462) (0.468) (1.523) (2.032) -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Net increase (decrease) in Net Asset Value..... 4.978 (0.825) 2.584 0.998 2.456 (3.090) 3.076 1.843 (1.195) 0.181 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Net Asset Value at end of year................... $25.640 $20.662 $21.487 $18.903 $17.905 $15.449 $18.539 $15.463 $ 13.620 $ 14.815 -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- -------- -------- -------- -------- -------- -------- -------- -------- --------- --------- Total Investment Rate of Return:**.............. 31.29% 2.78% 21.87% 14.17% 26.01% (5.21%) 29.73% 17.05% 1.67% 15.10% Ratios/Supplemental Data: Net assets at end of year (in millions).......... $3,813.8 $2,617.8 $2,186.5 $1,416.6 $1,032.8 $700.5 $675.5 $500.1 $451.0 $247.9 Ratio of expenses net of reimbursement to average net assets..... 0.48% 0.55% 0.53% 0.53% 0.51% 0.56% 0.56% 0.57% 0.51% 0.52% Ratio of net investment income to average net assets................. 2.28% 2.39% 1.99% 2.33% 2.66% 3.37% 2.66% 2.67% 2.34% 2.90% Portfolio turnover rate................... 17.65% 6.90% 12.95% 15.70% 20.85% 84.84% 73.54% 62.35% 79.91% 117.15% Number of shares outstanding at end of period (in millions)... 148.7 126.7 101.8 74.9 57.7 45.3 36.4 32.3 33.1 16.7
All calculations are based on average month-end shares outstanding, where applicable. *The per share information of the Portfolios of The Prudential Series Fund, Inc. has not been restated to reflect the operations of the Pruco Life Series Fund, Inc. prior to the November 1, 1986 merger. **Total investment returns are at the portfolio level and exclude contract specific charges which would reduce returns. This information should be read in conjunction with the financial statements of The Prudential Series Fund, Inc. and notes thereto, which appear in the Statement of Additional Information. Further information about the performance of the portfolios is contained in the Annual Report to Contract Owners which may be obtained without charge. 11 THE PRUDENTIAL SERIES FUND, INC. FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED) The following financial highlights information has been audited by Deloitte & Touche LLP, Independent Auditors. Their report is included in the Statement of Additional Information. PRUDENTIAL JENNISON -------- 04/25/95* TO 12/31/95 -------- Net Asset Value at beginning of period $10.000 -------- Income From Investment Operations: Net investment income.... 0.018 Net realized gains (losses) and unrealized appreciation (depreciation) on investments............ 2.535 -------- Total from investment operations........... 2.553 -------- Distributions to Shareholders: Distributions from net investment income...... (0.006) Distributions from net realized gains......... 0.000 -------- Total distributions........ (0.006) -------- Net increase (decrease) in Net Asset Value..... 2.547 -------- Net Asset Value at end of year................... $12.547 -------- -------- Total Investment Rate of Return:**.............. 24.42% Ratios/Supplemental Data: Net assets at end of year (in millions).......... $63.1 Ratio of expenses net of reimbursement to average net assets..... 0.79% Ratio of net investment income to average net assets................. 0.15% Portfolio turnover rate................... 37.45% Number of shares outstanding at end of period (in millions)... 5.0 SMALL CAPITALIZATION STOCK -------- 04/25/95* TO 12/31/95 -------- Net Asset Value at beginning of period.... $10.000 -------- Income From Investment Operations: Net investment income.... 0.077 Net realized gains (losses) and unrealized appreciation (depreciation) on investments............ 1.916 -------- Total from investment operations........... 1.993 -------- Distributions to Shareholders: Distributions from net investment income...... (0.044) Distributions from net realized gains......... (0.116) -------- Total distributions........ (0.160) -------- Net increase (decrease) in Net Asset Value..... 1.833 -------- Net Asset Value at end of year................... $11.833 -------- -------- Total Investment Rate of Return:**.............. 19.74% Ratios/Supplemental Data: Net assets at end of year (in millions).......... $47.5 Ratio of expenses net of reimbursement to average net assets..... 0.60% Ratio of net investment income to average net assets................. 0.68% Portfolio turnover rate................... 31.79% Number of shares outstanding at end of period (in millions)... 4.0 All calculations are based on average month-end shares outstanding, where applicable. *Commencement of business. **Total investment returns are at the portfolio level and exclude contract specific charges which would reduce returns. This information should be read in conjunction with the financial statements of The Prudential Series Fund, Inc. and notes thereto, which appear in the Statement of Additional Information. Further information about the performance of the portfolios is contained in the Annual Report to Contract Owners which may be obtained without charge. 12 THE PRUDENTIAL SERIES FUND, INC. FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED) The following financial highlights information has been audited by Deloitte & Touche LLP, Independent Auditors. Their report is included in the Statement of Additional Information.
GLOBAL --------------------------------------------------------------------------------- 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 01/01/89 09/19/88 TO TO TO TO TO TO TO TO 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 12/31/88 -------- -------- -------- -------- -------- -------- -------- -------- Net Asset Value at beginning of year $13.879 $14.639 $10.368 $10.792 $ 9.866 $11.547 $10.508 $9.818 -------- -------- -------- -------- -------- -------- -------- -------- Income From Investment Operations: Net investment income.... 0.065 0.028 0.023 0.051 0.096 0.203 0.079 0.052 Net realized gains (losses) and unrealized appreciation (depreciation) on investments............ 2.138 (0.744) 4.433 (0.419) 1.020 (1.802) 1.806 0.787 -------- -------- -------- -------- -------- -------- -------- -------- Total from investment operations........... 2.203 (0.716) 4.456 (0.368) 1.116 (1.599) 1.885 0.839 -------- -------- -------- -------- -------- -------- -------- -------- Distributions to Shareholders: Distributions from net investment income...... (0.242) (0.019) (0.079) (0.056) (0.100) (0.067) (0.073) (0.149) Distributions from net realized gains......... (0.307) (0.025) (0.106) 0.000 (0.090) (0.015) (0.773) 0.000 -------- -------- -------- -------- -------- -------- -------- -------- Total distributions........ (0.549) (0.044) (0.185) (0.056) (0.190) (0.082) (0.846) (0.149) -------- -------- -------- -------- -------- -------- -------- -------- Net increase (decrease) in Net Asset Value..... 1.654 (0.760) 4.271 (0.424) 0.926 (1.681) 1.039 0.690 -------- -------- -------- -------- -------- -------- -------- -------- Net Asset Value at end of year................... $15.533 $13.879 $14.639 $10.368 $10.792 $ 9.866 $11.547 $10.508 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total Investment Rate of Return:**.............. 15.88 % (4.89 %) 43.14% (3.42 %) 11.39 % (12.91 %) 18.82 % 8.57 % Ratios/Supplemental Data: Net assets at end of year (in millions).......... $400.1 $345.7 $129.1 $34.0 $34.3 $26.2 $29.4 $26.9 Ratio of expenses net of reimbursement to average net assets..... 1.06 % 1.23 % 1.44 % 1.87 % 1.62 % 1.67 % 1.47 % 0.42 % Ratio of net investment income to average net assets................. 0.44 % 0.20 % 0.18 % 0.49 % 0.92 % 1.92 % 0.70 % 0.51 % Portfolio turnover rate................... 58.52 % 37.46 % 54.54 % 78.16 % 136.21 % 43.12 % 47.95 % 6.40 % Number of shares outstanding at end of period (in millions)... 25.7 24.9 8.8 3.3 3.2 2.7 2.5 2.6 NATURAL RESOURCES --------------------------------------------------------------------------------- 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 01/01/89 05/01/88 TO TO TO TO TO TO TO TO 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 12/31/88 -------- -------- -------- -------- -------- -------- -------- -------- Net Asset Value at beginning of year...... $14.443 $15.562 $12.949 $12.450 $11.622 $12.705 $10.141 $9.910 -------- -------- -------- -------- -------- -------- -------- -------- Income From Investment Operations: Net investment income.... 0.204 0.183 0.227 0.319 0.368 0.417 0.364 0.254 Net realized gains (losses) and unrealized appreciation (depreciation) on investments............ 3.662 (0.850) 3.004 0.588 0.821 (1.143) 3.216 0.274 -------- -------- -------- -------- -------- -------- -------- -------- Total from investment operations........... 3.866 (0.667) 3.231 0.907 1.189 (0.726) 3.580 0.528 -------- -------- -------- -------- -------- -------- -------- -------- Distributions to Shareholders: Distributions from net investment income...... (0.209) (0.150) (0.207) (0.309) (0.361) (0.336) (0.358) (0.252) Distributions from net realized gains......... (0.828) (0.302) (0.411) (0.099) 0.000 (0.021) (0.658) (0.045) -------- -------- -------- -------- -------- -------- -------- -------- Total distributions........ (1.037) (0.452) (0.618) (0.408) (0.361) (0.357) (1.016) (0.297) -------- -------- -------- -------- -------- -------- -------- -------- Net increase (decrease) in Net Asset Value..... 2.829 (1.119) 2.613 0.499 0.828 (1.083) 2.564 0.231 -------- -------- -------- -------- -------- -------- -------- -------- Net Asset Value at end of year................... $17.272 $14.443 $15.562 $12.949 $12.450 $11.622 $12.705 $10.141 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total Investment Rate of Return:**.............. 26.92 % (4.30 %) 25.15 % 7.30 % 10.30 % (5.76 %) 35.64 % 5.42 % Ratios/Supplemental Data: Net assets at end of year (in millions).......... $293.2 $227.3 $158.8 $77.5 $62.6 $50.6 $17.9 $9.5 Ratio of expenses net of reimbursement to average net assets..... 0.50 % 0.61 % 0.60 % 0.72 % 0.68 % 0.75 % 0.86 % 0.58 % Ratio of net investment income to average net assets................. 1.25 % 1.09 % 1.50 % 2.44 % 2.97 % 3.45 % 3.04 % 2.46 % Portfolio turnover rate................... 46.11 % 18.10 % 19.64 % 29.20 % 21.33 % 42.18 % 49.17 % 59.33 % Number of shares outstanding at end of period (in millions)... 17.0 15.7 10.2 6.0 5.0 4.4 1.4 0.9
All calculations are based on average month-end shares outstanding, where applicable. **Total investment returns are at the portfolio level and exclude contract specific charges which would reduce returns. This information should be read in conjunction with the financial statements of The Prudential Series Fund, Inc. and notes thereto, which appear in the Statement of Additional Information. Further information about the performance of the portfolios is contained in the Annual Report to Contract Owners which may be obtained without charge. 13 PORTFOLIO RATES OF RETURN The following table, based upon the immediately preceding condensed financial information for the Series Fund, shows first the average annual compounded net rates of return for each Portfolio for the year ended 12/31/95 for the 5 year and 10 year periods ending on that date, and from the inception date of each Portfolio to December 31, 1995. Then, the annual net rates of return for each Portfolio for each year are shown. These rates of return should not be regarded as an estimate or prediction of future performance. They may be useful in assessing the competence and performance of the Series Fund's investment advisor and in helping you to decide which portfolios to choose. AS STATED ABOVE, THIS INFORMATION RELATES ONLY TO THE SERIES FUND AND DOES NOT REFLECT THE VARIOUS OTHER CHARGES MADE UNDER THE CONTRACTS SUCH AS SALES AND ADMINISTRATIVE CHARGES AND COST OF INSURANCE CHARGES. SEE CONTRACT FEES AND CHARGES, PAGE 18.
5 YEAR 10 YEAR PERIOD PERIOD INCEPTION INCEPTION YEAR ENDED ENDED ENDED DATE TO YEAR ENDED YEAR ENDED YEAR ENDED DATE 12/31/95 12/31/95 12/31/95 12/31/95 12/31/95 12/31/94 12/31/93 ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- MONEY MARKET 5/83 5.8% 4.5% 6.0% 6.6% 5.8% 4.1% 3.0% DIVERSIFIED BOND 5/83 20.7% 9.9% 9.4% 9.9% 20.7% -3.2% 10.1% GOVERNMENT INCOME 5/89 19.5% 9.4% N/A 9.8% 19.5% -5.2% 12.6% ZERO COUPON BOND 1995 2/86 6.2% 7.8% N/A 9.0% 9.2% 0.0% 7.9% ZERO COUPON BOND 2000 2/86 21.6% 11.4% N/A 11.6% 21.6% -7.2% 16.2% ZERO COUPON BOND 2005 5/89 31.9% 14.1% N/A 12.6% 31.9% -9.6% 21.9% CONSERVATIVE BALANCED 5/83 17.3% 10.7% 10.1% 10.4% 17.3% -1.0% 12.2% FLEXIBLE MANAGED 5/83 24.1% 13.4% 11.9% 11.6% 24.1% -3.2% 15.6% HIGH YIELD BOND 2/87 17.6% 17.4% N/A 8.6% 17.6% -2.7% 20.0% STOCK INDEX 10/87 37.1% 16.1% N/A 15.7% 37.1% 1.0% 9.7% EQUITY INCOME 2/88 21.7% 16.2% N/A 13.9% 21.7% 1.4% 22.3% EQUITY 5/83 31.3% 18.8% 15.0% 14.6% 31.3% 2.8% 21.9% PRUDENTIAL JENNISON 5/95 N/A N/A N/A 24.4% N/A N/A N/A SMALL CAPITALIZATION STOCK 5/95 N/A N/A N/A 19.7% N/A N/A N/A GLOBAL 9/88 15.9% 11.2% N/A 9.3% 15.9% -4.9% 43.1% NATURAL RESOURCES 5/88 26.9% 12.1% N/A 11.7% 26.9% -4.3% 25.2%
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 12/31/92 12/31/91 12/31/90 12/31/89 12/31/88 12/31/87 12/31/86 ----------- ----------- ----------- ----------- ----------- ----------- ----------- MONEY MARKET 3.8% 6.2% 8.2% 9.3% 7.4% 6.5% 6.5% DIVERSIFIED BOND 7.2% 16.4% 8.3% 13.5% 8.2% 0.3% 14.4% GOVERNMENT INCOME 5.9% 16.1% 6.3% N/A N/A N/A N/A ZERO COUPON BOND 1995 7.2% 17.2% 8.0% 16.4% 9.0% -3.3% N/A ZERO COUPON BOND 2000 8.6% 20.7% 5.1% 20.4% 11.6% -5.5% N/A ZERO COUPON BOND 2005 9.7% 21.2% 2.6% N/A N/A N/A N/A CONSERVATIVE BALANCED 6.9% 19.1% 5.3% 17.0% 10.2% 1.5% 14.2% FLEXIBLE MANAGED 7.6% 25.4% 1.9% 21.8% 12.8% -1.8% 15.5% HIGH YIELD BOND 17.5% 39.2% -11.8% -2.1% 13.2% N/A N/A STOCK INDEX 7.1% 29.7% -3.6% 30.9% 15.4% N/A N/A EQUITY INCOME 10.1% 27.5% -3.7% 22.7% N/A N/A N/A EQUITY 14.2% 26.0% -5.1% 29.7% 17.1% 1.7% 15.1% PRUDENTIAL JENNISON N/A N/A N/A N/A N/A N/A N/A SMALL CAPITALIZATION STOCK N/A N/A N/A N/A N/A N/A N/A GLOBAL -3.4% 11.4% -12.9% 18.8% N/A N/A N/A NATURAL RESOURCES 7.3% 10.3% -5.8% 35.6% N/A N/A N/A
14 HYPOTHETICAL ILLUSTRATION OF DEATH BENEFITS AND CASH SURRENDER VALUES The four tables that follow show how the death benefit and cash surrender values change with the investment experience of the Account. They are "hypothetical" because they are based, in part, upon several assumptions, each of which is described below. All four tables assume, first, that a Contract with a face amount of $100,000 has been bought by a 35 year old man in a preferred rating class. It is assumed that the Scheduled Premium of $894.06 is paid on each anniversary date, and that the deduction for taxes attributable to premiums is 3.25%. The first table assumes that a Form A Contract has been purchased and the second table assumes that a Form B Contract has been purchased. Both assume that the current charges will continue for the indefinite future. They assume also that a termination dividend will be paid, since that is The Prudential's current intention, upon death or surrender after the 16th year. The third and fourth tables are based upon the same assumptions except that it is assumed that the maximum charges permitted by the Contract have been made from the beginning and that no termination dividends are paid. In effect, the third and fourth tables represent a kind of "worst case" scenario. Another assumption is that the Contract Fund has been invested in equal amounts in each of the fifteen available portfolios of the Series Fund. 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, that is, that the average value of the Contract Fund will uniformly be 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%. These, of course, are unrealistic assumptions since actual returns will fluctuate from year to year. Nevertheless, these assumptions help show how the Contract values will change with investment experience. The first column in the following tables shows the Contract year. The second column, to provide context, shows what the aggregate amount would be if the Scheduled Premiums had been invested in a savings account paying 4% compounded interest. Of course, if that were done, there would be no life insurance protection. The next four columns show the death benefit payable in each of the years shown for the four different assumed investment returns. Note that 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 income and capital appreciation of the portfolios before any reduction is made for investment advisory fees or other Series Fund expenses. The net return reflects an average total annual expenses of the 15 portfolios of 0.55%, and the daily deduction from the Contract Fund of 0.6% per year for the first two tables, which are based on current charges, and 0.9% per year for the two tables that are based upon maximum charges. For Contracts with face amounts of less than $100,000, the current charge is 0.9% per year. Thus, assuming maximum charges, gross returns of 0%, 4%, 8% and 12% are the equivalent of net returns of -1.45%, 2.55%, 6.55% and 10.55% respectively. The death benefits and cash surrender values shown reflect the deduction of all expenses and charges both from the Series Fund and under the Contract. The amounts shown assume that there is no loan. The cash surrender values shown for the first 10 years reflect the surrender charges that would be deducted if the Contract were surrendered in those years. For years after the tenth, the cash surrender values are equal to the Contract Fund value, plus any termination dividend. Note that under the Form B Contract the death benefit changes to reflect investment returns, while under the Form A Contract the death benefit increases only when the cash surrender value becomes quite large (the small increase in death benefit in years 20 to 35 reflects a termination dividend, not investment results). Correspondingly, the cash surrender values under the Form A Contract are slightly larger than those under the Form B 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 a 35 year old woman or a 50 year old man. To take a second example, the death benefit and cash surrender values under a $50,000 Contract cannot be determined by dividing by two the amount shown in a table for a $100,000 Contract. Your Prudential representative can provide you with a comparable hypothetical illustration for a person of your own age, sex, and rating class. You can obtain an illustration using premium amounts and payment patterns that you wish to follow. You may use assumed gross returns different than those shown in the tables, although they may not be higher than 12%. 15 ILLUSTRATIONS ------------- VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT FORM A -- FIXED DEATH BENEFIT MALE PREFERRED ISSUE AGE 35 $100,000 GUARANTEED DEATH BENEFIT $894.06 MINIMUM INITIAL SCHEDULED PREMIUM (1) (3) USING CURRENT CONTRACTUAL CHARGES
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 (3) (-1.15% Net) (2.85% Net) (6.85% Net) (10.85% Net) (-1.15% Net) (2.85% Net) (6.85% Net) (10.85% Net) ------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ----------- 1 $ 930 $100,000 $100,000 $100,000 $100,000 $ 0 $ 0 $ 0 $ 0 2 $ 1,897 $100,000 $100,000 $100,000 $100,000 $ 273 $ 352 $ 433 $ 516 3 $ 2,903 $100,000 $100,000 $100,000 $100,000 $ 761 $ 914 $ 1,075 $ 1,245 4 $ 3,948 $100,000 $100,000 $100,000 $100,000 $ 1,232 $ 1,481 $ 1,751 $ 2,045 5 $ 5,036 $100,000 $100,000 $100,000 $100,000 $ 1,685 $ 2,053 $ 2,464 $ 2,922 6 $ 6,167 $100,000 $100,000 $100,000 $100,000 $ 2,373 $ 2,883 $ 3,470 $ 4,142 7 $ 7,344 $100,000 $100,000 $100,000 $100,000 $ 3,046 $ 3,724 $ 4,525 $ 5,468 8 $ 8,568 $100,000 $100,000 $100,000 $100,000 $ 3,696 $ 4,566 $ 5,622 $ 6,901 9 $ 9,840 $100,000 $100,000 $100,000 $100,000 $ 4,323 $ 5,410 $ 6,766 $ 8,455 10 $ 11,164 $100,000 $100,000 $100,000 $100,000 $ 4,924 $ 6,252 $ 7,957 $ 10,140 15 $ 18,618 $100,000 $100,000 $100,000 $100,000 $ 6,566 $ 9,461 $ 13,758 $ 20,140 20 $ 27,688 $101,115 $101,115 $101,115 $101,115 $ 8,477 $13,582 $ 22,459 $ 37,922 25 $ 38,723 $102,229 $102,229 $102,229 $126,807 $ 9,524 $17,428 $ 33,767 $ 67,221 30 (Age 65) $ 52,149 $102,225 $102,225 $102,225 $187,948 $ 7,483 $18,819 $ 47,202 $112,671 35 $ 88,305 $102,455 $102,455 $102,455 $275,357 $21,092 $37,151 $ 65,482 $184,655 40 $132,295 $102,672 $102,672 $121,997 $402,438 $31,034 $57,205 $ 90,604 $297,264 45 $185,816 $102,863 $102,863 $152,950 $590,020 $35,265 $80,898 $122,553 $471,103
(1) If premiums are paid more frequently than annually, the initial payments would be $456.85 semi-annually, $231.52 quarterly or $78.55 monthly. The ultimate payments would be $2,411.37 semi-annually, $1,218.60 quarterly or $410.34 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. (3) For a hypothetical gross investment return of 0%, the second Scheduled Premium will be $4,726.61. For a gross return of 4%, the second Scheduled Premium will be $4,412.98. For a gross return of 8%, the second Scheduled Premium will be $894.06. For a gross return of 12%, the second Scheduled Premium will be $894.06. The premiums accumulated at 4% interest in column 2 are those payable if the gross investment return is 4%. For an explanation of why the scheduled premium may increase on the premium change date, see Premiums. 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 THE PRUDENTIAL 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 VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT FORM B -- VARIABLE DEATH BENEFIT MALE PREFERRED ISSUE AGE 35 $100,000 GUARANTEED DEATH BENEFIT $894.06 MINIMUM INITIAL SCHEDULED PREMIUM (1) (3) USING CURRENT CONTRACTUAL CHARGES
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 (3) (-1.15% Net) (2.85% Net) (6.85% Net) (10.85% Net) (-1.15% Net) (2.85% Net) (6.85% Net) (10.85% Net) ------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ----------- 1 $ 930 $100,000 $100,000 $100,022 $100,050 $ 0 $ 0 $ 0 $ 0 2 $ 1,897 $100,000 $100,000 $100,062 $100,145 $ 218 $ 296 $ 377 $ 460 3 $ 2,903 $100,000 $100,000 $100,120 $100,290 $ 705 $ 857 $ 1,018 $ 1,187 4 $ 3,948 $100,000 $100,000 $100,201 $100,493 $ 1,191 $ 1,439 $ 1,708 $ 2,000 5 $ 5,036 $100,000 $100,000 $100,305 $100,761 $ 1,675 $ 2,041 $ 2,449 $ 2,905 6 $ 6,167 $100,000 $100,000 $100,485 $101,153 $ 2,369 $ 2,878 $ 3,460 $ 4,128 7 $ 7,344 $100,000 $100,000 $100,696 $101,632 $ 3,043 $ 3,717 $ 4,512 $ 5,448 8 $ 8,568 $100,000 $100,000 $100,940 $102,207 $ 3,692 $ 4,558 $ 5,605 $ 6,872 9 $ 9,840 $100,000 $100,000 $101,220 $102,890 $ 4,319 $ 5,401 $ 6,743 $ 8,413 10 $ 11,164 $100,000 $100,000 $101,538 $103,692 $ 4,921 $ 6,242 $ 7,926 $ 10,080 15 $ 18,618 $100,000 $100,000 $103,802 $110,018 $ 6,563 $ 9,443 $13,641 $ 19,857 20 $ 27,688 $101,115 $101,115 $109,180 $124,036 $ 8,537 $13,663 $22,244 $ 37,100 25 $ 38,723 $102,229 $102,381 $117,885 $149,586 $ 9,651 $17,651 $33,155 $ 64,856 30 (Age 65) $ 52,149 $102,225 $104,159 $130,070 $193,244 $ 7,674 $19,159 $45,070 $108,244 35 $ 88,175 $102,455 $106,807 $128,946 $266,449 $21,423 $37,108 $59,247 $178,708 40 $132,007 $102,672 $111,053 $131,964 $392,900 $31,646 $55,880 $76,791 $290,235 45 $185,334 $102,863 $117,595 $141,056 $581,032 $36,346 $75,122 $98,583 $463,935
(1) If premiums are paid more frequently than annually, the initial payments would be $456.85 semi-annually, $231.52 quarterly or $78.55 monthly. The ultimate payments would be $2,411.37 semi-annually, $1,218.60 quarterly or $410.34 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. (3) For a hypothetical gross investment return of 0%, the second Scheduled Premium will be $4,726.61. For a gross return of 4%, the second Scheduled Premium will be $4,389.87. For a gross return of 8%, the second Scheduled Premium will be $894.06. For a gross return of 12%, the second Scheduled Premium will be $894.06. The premiums accumulated at 4% interest in column 2 are those payable if the gross investment return is 4%. For an explanation of why the scheduled premium may increase on the premium change date, see Premiums. 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 THE PRUDENTIAL 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 VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT FORM A -- FIXED DEATH BENEFIT MALE PREFERRED ISSUE AGE 35 $100,000 GUARANTEED DEATH BENEFIT $894.06 MINIMUM INITIAL SCHEDULED PREMIUM (1) (3) USING MAXIMUM CONTRACTUAL CHARGES
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 (3) (-1.45% Net) (2.55% Net) (6.55% Net) (10.55% Net) (-1.45% Net) (2.55% Net) (6.55% Net) (10.55% Net) ------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ----------- 1 $ 930 $100,000 $100,000 $100,000 $100,000 $ 0 $ 0 $ 0 $ 0 2 $ 1,897 $100,000 $100,000 $100,000 $100,000 $ 267 $ 346 $ 427 $ 510 3 $ 2,903 $100,000 $100,000 $100,000 $100,000 $ 750 $ 902 $ 1,062 $ 1,232 4 $ 3,948 $100,000 $100,000 $100,000 $100,000 $1,215 $ 1,461 $ 1,730 $ 2,022 5 $ 5,036 $100,000 $100,000 $100,000 $100,000 $1,659 $ 2,024 $ 2,431 $ 2,886 6 $ 6,167 $100,000 $100,000 $100,000 $100,000 $2,288 $ 2,792 $ 3,372 $ 4,036 7 $ 7,344 $100,000 $100,000 $100,000 $100,000 $2,902 $ 3,567 $ 4,354 $ 5,281 8 $ 8,568 $100,000 $100,000 $100,000 $100,000 $3,491 $ 4,340 $ 5,371 $ 6,622 9 $ 9,840 $100,000 $100,000 $100,000 $100,000 $4,057 $ 5,110 $ 6,426 $ 8,069 10 $ 11,164 $100,000 $100,000 $100,000 $100,000 $4,597 $ 5,875 $ 7,519 $ 9,631 15 $ 18,618 $100,000 $100,000 $100,000 $100,000 $5,922 $ 8,626 $ 12,665 $ 18,694 20 $ 27,688 $100,000 $100,000 $100,000 $100,000 $6,196 $10,776 $ 18,817 $ 32,934 25 $ 38,723 $100,000 $100,000 $100,000 $106,835 $4,691 $11,467 $ 25,775 $ 55,736 30 (Age 65) $ 52,149 $100,000 $100,000 $100,000 $153,081 $ 114 $ 9,162 $ 33,113 $ 91,034 35 $ 90,072 $100,000 $100,000 $100,000 $214,200 $8,187 $21,463 $ 51,929 $143,009 40 $136,211 $100,000 $100,000 $105,742 $297,951 $8,551 $30,173 $ 77,922 $219,563 45 $192,347 $100,000 $100,000 $138,439 $412,067 $ 0 $30,745 $110,401 $328,611
(1) If premiums are paid more frequently than annually, the payments would be $456.85 semi-annually, $231.52 quarterly or $78.55 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. (3) For a hypothetical gross investment return of 0%, the second Scheduled Premium will be $4,726.61; for a gross return of 4% the second Scheduled Premium will be $4,726.61; for a gross return of 8% the second Scheduled Premium will be $2,950.08; for a gross return of 12% the second Scheduled Premium will be $894.06. The premiums accumulated at 4% interest in column 2 are those payable if the gross investment return is 4%. For an explanation of why the scheduled premium may increase on the premium change date, see Premiums. 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 THE PRUDENTIAL 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 VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT FORM B -- VARIABLE DEATH BENEFIT MALE PREFERRED ISSUE AGE 35 $100,000 GUARANTEED DEATH BENEFIT $894.06 MINIMUM INITIAL SCHEDULED PREMIUM (1) (3) USING MAXIMUM CONTRACTUAL CHARGES
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 (3) (-1.45% Net) (2.55% Net) (6.55% Net) (10.55% Net) (-1.45% Net) (2.55% Net) (6.55% Net) (10.55% Net) ------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ----------- 1 $ 930 $100,000 $100,000 $100,020 $100,048 $ 0 $ 0 $ 0 $ 0 2 $ 1,897 $100,000 $100,000 $100,056 $100,139 $ 212 $ 290 $ 371 $ 454 3 $ 2,903 $100,000 $100,000 $100,108 $100,277 $ 694 $ 845 $ 1,005 $ 1,174 4 $ 3,948 $100,000 $100,000 $100,180 $100,471 $1,174 $ 1,420 $ 1,687 $ 1,978 5 $ 5,036 $100,000 $100,000 $100,273 $100,725 $1,649 $ 2,012 $ 2,417 $ 2,869 6 $ 6,167 $100,000 $100,000 $100,388 $101,048 $2,285 $ 2,787 $ 3,363 $ 4,023 7 $ 7,344 $100,000 $100,000 $100,526 $101,446 $2,899 $ 3,561 $ 4,342 $ 5,262 8 $ 8,568 $100,000 $100,000 $100,690 $101,929 $3,488 $ 4,333 $ 5,355 $ 6,594 9 $ 9,840 $100,000 $100,000 $100,882 $102,507 $4,054 $ 5,102 $ 6,405 $ 8,030 10 $ 11,164 $100,000 $100,000 $101,104 $103,189 $4,594 $ 5,866 $ 7,492 $ 9,577 15 $ 18,618 $100,000 $100,000 $102,733 $108,606 $5,919 $ 8,616 $ 12,572 $ 18,445 20 $ 27,688 $100,000 $100,000 $105,456 $118,899 $6,193 $10,765 $ 18,520 $ 31,963 25 $ 38,723 $100,000 $100,000 $109,605 $137,023 $4,688 $11,453 $ 24,875 $ 52,293 30 (Age 65) $ 52,149 $100,000 $100,000 $115,485 $167,449 $ 112 $ 9,145 $ 30,485 $ 82,449 35 $ 90,072 $100,000 $100,000 $120,259 $198,068 $8,184 $21,441 $ 50,560 $128,369 40 $136,211 $100,000 $100,000 $129,182 $269,782 $8,547 $30,141 $ 74,009 $198,805 45 $192,347 $100,000 $100,000 $143,749 $375,417 $ 0 $30,693 $101,276 $299,384
(1) If premiums are paid more frequently than annually, the payments would be $456.85 semi-annually, $231.52 quarterly or $78.55 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. (3) For a hypothetical gross investment return of 0%, the second Scheduled Premium will be $4,726.61; for a gross return of 4% the second Scheduled Premium will be $4,726.61; for a gross return of 8% the second Scheduled Premium will be $3,902.07; for a gross return of 12% the second Scheduled Premium will be $1,135.16. The premiums accumulated at 4% interest in column 2 are those payable if the gross investment return is 4%. For an explanation of why the scheduled premium may increase on the premium change date, see Premiums. 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 THE PRUDENTIAL 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 INFORMATION ABOUT THE ACCOUNT, THE REAL PROPERTY ACCOUNT AND THE FIXED RATE OPTION THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT. The Account was established on August 11, 1987 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 The Prudential's other assets. The obligations to Contract owners and beneficiaries arising under the Contract are general corporate obligations of The Prudential. The Prudential is also the legal owner of the assets in the Account. But The Prudential will at all times maintain assets in the Account with a total market value at least equal to the liabilities relating to the variable benefits attributable to the Account. These assets may not be charged with liabilities which arise from any other business The Prudential conducts. Accordingly, Contract owners, under New Jersey law, have a prior claim to these assets. In addition to these assets, the Account's assets may include funds contributed by The Prudential to commence operation of the Account and may include accumulations of the charges The Prudential makes against the Account. From time to time these additional assets will be withdrawn by The Prudential but before making any such withdrawal, The Prudential will consider any possible adverse impact the withdrawal might have on the Account. The Account is registered with the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940 ("1940 Act") as a unit investment trust, which is a type of investment company. This does not involve any supervision by the SEC of the management or investment policies or practices of the Account. For state law purposes, the Account is treated as a part or division of The Prudential. There are currently fifteen subaccounts within the Account that are available investments under the Contract. Additional subaccounts may be added in the future. The Account's financial statements begin on page A1. THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT. The Prudential Variable Contract Real Property Account (the "Real Property Account") is a separate account of The Prudential that, through a general partnership formed by The Prudential and two of its subsidiaries, invests primarily in income-producing real property such as office buildings, shopping centers, agricultural land, hotels, apartments or industrial properties. It also invests in mortgage loans and other real estate-related investments, including sale-leaseback transactions. It is not registered as an investment company under the Investment Company Act of 1940 and is therefore not subject to the same regulation as the Series Fund. The objectives of the Real Property Account and the Partnership are to preserve and protect capital, provide for compounding of income as a result of reinvestment of cash flow from investments, and provide for increases over time in the amount of such income through appreciation in the value of assets. The Partnership has entered into an investment management agreement with The Prudential, under which The Prudential selects the properties and other investments held by the Partnership. The Prudential charges the Partnership a daily fee for investment management which amounts to 1.25% per year of the average daily gross assets of the Partnership. A full description of the Real Property Account, its management, policies, and restrictions, its charges and expenses, the risks associated with investment therein, the Partnership's investment objectives, and all other aspects of the Real Property Account's and the Partnership's operations is contained in the attached prospectus for the Real Property Account, which should be read together with this prospectus by any Contract owner considering the real estate investment option. There is no assurance that the investment objectives will be met. 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 Prudential 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 The Prudential 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, subject The Prudential and its directors to civil liability if that results in any damage. As explained earlier, you may elect to allocate, either initially or by transfer, all or part of the amount credited under the Contract to the fixed-rate option, and the amount so allocated or transferred becomes part of The Prudential's general assets. Sometimes this is referred to as The Prudential's general account, which consists of all assets owned by The Prudential other than those in the Account and in other separate accounts that have been or may 16 be established by The Prudential. Subject to applicable law, The Prudential has sole discretion over the investment of the assets of the general account, and Contract owners do not share in the investment experience of those assets. Instead, The Prudential guarantees that the part of the Contract Fund allocated to the fixed-rate option will accrue interest daily at an effective annual rate that The Prudential declares periodically. This rate may not be less than an effective annual rate of 4%. Currently, 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, page 21. Thereafter, a new crediting rate will be declared each year and will remain in effect for the calendar year. The Prudential reserves the right to change this practice. The Prudential is not obligated to credit interest at a higher rate than 4%, although in its sole discretion it 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, a Contract owner will be advised of the interest rates that currently apply to his or her Contract. Transfers from the fixed-rate option are subject to strict limits. (See TRANSFERS, page 23). The payment of any cash surrender value attributable to the fixed-rate option may be delayed up to 6 months (see WHEN PROCEEDS ARE PAID, page 27). DETAILED INFORMATION ABOUT THE CONTRACT REQUIREMENTS FOR ISSUANCE OF A CONTRACT Generally, the minimum initial guaranteed death benefit that can be applied for is $60,000; however, higher minimums apply to insureds over the age of 75. Insureds 14 years of age or less may apply for a minimum initial guaranteed death benefit of $40,000, which will increase by 50% at age 21. The Contract may generally be issued on insureds below the age of 81. Before issuing any Contract, The Prudential requires evidence of insurability, which may include a medical examination. Non-Smokers who meet preferred underwriting requirements are offered the most favorable premium rate. A higher premium is charged if an extra mortality risk is involved. Certain classes of Contracts, for example a Contract issued in connection with a tax-qualified pension plan, may be issued on a "guaranteed issue" basis and may have a lower minimum initial death benefit than a Contract which is individually underwritten. These are the current underwriting requirements. The Prudential reserves the right to change them on a non-discriminatory basis. CONTRACT FORMS A purchaser may select either of two forms of the Contract. The Scheduled Premiums shown in the Contract will be the same for a given insured, regardless of which Contract Form is chosen. Contract Form A has a death benefit equal to the initial face amount of insurance. The death benefit of a Form A Contract does not vary with the investment performance of the investment options selected by the owner, unless the death benefit is increased to ensure that the Contract meets the Internal Revenue Code's definition of life insurance. See HOW A CONTRACT'S DEATH BENEFIT WILL VARY, page 24. Favorable investment results of the investment options to which the assets related to the Contract are allocated and payment of greater than Scheduled Premiums will generally result in increases in the cash surrender value. See HOW THE CONTRACT FUND CHANGES WITH INVESTMENT EXPERIENCE, page 24. Contract Form B also has an initial face amount of insurance but favorable investment performance and payment of greater than Scheduled Premiums generally result in an increase in the death benefit and, over time, in a lesser increase in the cash surrender value than under the Form A Contract. See HOW THE CONTRACT FUND CHANGES WITH INVESTMENT EXPERIENCE, page 24 and HOW A CONTRACT'S DEATH BENEFIT WILL VARY, page 24. Unfavorable investment performance will result in decreases in the death benefit (but never below the face amount stated in the Contract) and in the cash surrender value. Purchasers should select the form that best meets their needs and objectives. All permanent insurance provides both protection for beneficiaries in the event of death and the opportunity to accumulate savings for possible use in later years. The Prudential's Variable APPRECIABLE LIFE Contract provides more flexible investment opportunities than do more conventional life insurance policies because it permits the owner to decide how the assets held under the Contract will be invested, because it permits considerable flexibility in determining the amount and timing of premium payments, because it permits adjustment of the face amount of insurance (subject, in the case of an increase, to evidence of insurability), and because favorable investment returns result in an increase in Contract values. Purchasers who prefer to have favorable investment results and greater than Scheduled Premiums reflected in part in the form of an increased death benefit should choose Contract Form B. Purchasers who are satisfied with the amount of their insurance coverage and wish to have favorable investment results and additional premiums reflected to the maximum extent in increasing cash surrender values should choose Contract Form A. In choosing a Contract form, purchasers should also consider whether they intend to use the withdrawal feature. Purchasers of Form A Contracts should note that an early withdrawal may result in a portion of the surrender charge being deducted from the Contract Fund. Furthermore, a purchaser of a minimum face amount Form A Contract 17 cannot make withdrawals unless the Contract's death benefit has been increased to comply with the Internal Revenue Code's definition of life insurance. Purchasers of Form B Contracts will not incur a surrender charge for a withdrawal and are not precluded from making withdrawals if they purchase a minimum size Contract. See WITHDRAWAL OF EXCESS CASH SURRENDER VALUE in the Statement of Additional Information. Withdrawal of part of the cash surrender value may have tax consequences, see TAX TREATMENT OF CONTRACT BENEFITS, page 29. SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK" Generally, you may return the Contract for a refund within 10 days after you receive it, within 45 days after Part I of the application for insurance is signed, or within 10 days after The Prudential mails or delivers a Notice of Withdrawal Right, whichever is latest. Some states allow a longer period of time during which a Contract may be returned for a refund. A refund can be requested by mailing or delivering the Contract to the representative who sold it or to The Prudential 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 in the value of the invested portion of the premiums, calculated as if no charges had been made against the Account or the Series Fund. However, if applicable law so requires, 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 detailed description of each charge that is described briefly in the chart on page 2, and an explanation of the purpose of the charge. In several instances we will use the terms "maximum charge" and "current charge." The "maximum charge," in each instance, will be the highest charge that The Prudential is entitled to make under the Contract. The "current charge" is the lower amount that The Prudential is now charging. However, if circumstances change, The Prudential reserves the right to increase each current charge, up to but to no more than the maximum charge, without giving any advance notice. A Contract owner may add several "riders" to the Contract which provide additional benefits, which are charged for separately. The statement and description of charges that follows assumes there are no riders to the Contract. DEDUCTIONS FROM PREMIUMS (a) A charge for taxes attributable to premiums is deducted from each premium payment. That charge is currently made up of two parts. The first part is in an amount equal to the state or local premium tax. It varies from state to state and generally ranges from 0.75% to 5% (but in some instances can exceed 5%) of the premium received by The Prudential. The second part is for federal income taxes measured by premiums and it is equal to 1.25% of the premium. The Prudential believes 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 1995 and 1994, The Prudential deducted a total of approximately $23,620,000 and $22,131,000, respectively, in taxes attributable to premiums. (b) A charge of $2 is deducted 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 1995 and 1994, The Prudential received a total of approximately $29,170,000 and $28,372,000, respectively, in processing charges. DEDUCTIONS FROM PORTFOLIOS (a) An investment advisory fee is deducted daily from each portfolio at a rate, on an annualized basis, from 0.35% for the Stock Index Portfolio to 0.75% for the Global Portfolio. (b) The expenses incurred in conducting the investment operations of the portfolios (such as investment advisory fees, custodian fees and preparation and distribution of annual reports) are paid out of the portfolio's income. These expenses also vary from portfolio to portfolio. The total expenses of each portfolio for the year 1995 expressed as a percentage of the average assets during the year are shown below: 18 INVESTMENT OTHER TOTAL PORTFOLIO ADVISORY EXPENSES * EXPENSES * FEE - ------------------------------------------------------------------------------- MONEY MARKET 0.40% 0.04% 0.44% DIVERSIFIED BOND 0.40% 0.04% 0.44% GOVERNMENT INCOME 0.40% 0.05% 0.45% ZERO COUPON BOND 2000 0.40% 0.00% 0.40% ZERO COUPON BOND 2005 0.40% 0.00% 0.40% CONSERVATIVE BALANCED 0.55% 0.03% 0.58% FLEXIBLE MANAGED 0.60% 0.03% 0.63% HIGH YIELD BOND 0.55% 0.06% 0.61% STOCK INDEX 0.35% 0.03% 0.38% EQUITY INCOME 0.40% 0.03% 0.43% EQUITY 0.45% 0.03% 0.48% PRUDENTIAL JENNISON 0.60% 0.19% 0.79% SMALL CAPITALIZATION STOCK 0.40% 0.20% 0.60% GLOBAL 0.75% 0.31% 1.06% NATURAL RESOURCES 0.45% 0.05% 0.50% - ------------------------------------------------------------------------------- * For some of the portfolios, the actual expenses were higher than those shown in the second and third columns. The Prudential currently makes payments to the following seven subaccounts so that the portfolio expenses indirectly borne by a Contract owner investing in: (1) the Zero Coupon Bond Portfolios will not exceed the investment management fee; and (2) the High Yield Bond, Stock Index, Equity Income, and Natural Resources Portfolios will not exceed the investment advisory fee plus 0.1% of the average daily net assets of the Portfolio. Without such adjustments the portfolio expenses indirectly borne by a Contract owner, expressed as a percentage of the average daily net assets by portfolio, would have been 0.48% for the Zero Coupon Bond Portfolio 2000, 0.49% for the Zero Coupon Bond Portfolio 2005. No such adjustments were necessary for the High Yield Bond, Stock Index, Equity Income and Natural Resources Portfolios during 1995. The Prudential intends to continue making these adjustments in the future, although it retains the right to stop doing so. For the years 1995, 1994 and 1993, The Prudential received a total of $77,610,207, $66,413,206, and $51,197,499, respectively in investment advisory fees. MONTHLY DEDUCTIONS FROM CONTRACT FUND The following monthly charges are deducted proportionately from the dollar amounts held in each of the chosen investment option[s]. (a) An administrative charge of $3 plus $0.03 per $1,000 per month of face amount of insurance is deducted each month. Thus, for a Contract with $60,000 face amount, the charge is $3 plus $1.80 for a total of $4.80. The charge is intended to pay for processing claims, keeping records, and communicating with Contract owners. The current charge for Contracts with face amounts greater than $100,000 is lower. The $0.03 per $1,000 portion of the charge is reduced to $0.01 per $1,000 for that part of the face amount that exceeds $100,000 and will not exceed $12. If premiums are paid by automatic transfer under The Prudential's Pru-Matic Plan, as described on page 21, the $0.03 per $1,000 charge is reduced to $0.01 for all Contract face amounts and will not exceed $1. During 1995 and 1994, The Prudential received a total of approximately $60,000,000, and $56,055,000, respectively, in monthly administrative charges. (b) A mortality charge is deducted 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 enables The Prudential to pay the death benefit for the few insureds who die. The maximum mortality charge is determined by multiplying the "net amount at risk" under a Contract (the amount by which the Contract's death benefit 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. The Prudential's current mortality charge is lower than the maximum for insureds of 50 years of age and older. In addition, for insureds of all ages, if a Contract has a face amount of at least $100,000 and the insured under the Contract has met strict underwriting requirements and qualifies for a "select rating" basis for the particular risk classification, the current mortality charges may be lower still. Certain Contracts, for example Contracts issued in connection with tax-qualified pension plans, may be issued on a "guaranteed issue" basis and may have current mortality charges which are different from those mortality charges for Contracts which are individually underwritten. These Contracts with different current mortality charges may be offered to categories of individuals meeting eligibility guidelines determined by The Prudential. 19 (c) A sales charge, often called a sales load, is deducted to pay part of the costs The Prudential incurs in 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" which 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 $3 part of the monthly deduction described in (a) above. The deduction is made whether the Contract owner is paying premiums annually or more frequently. It is lower on Contracts issued on insureds over 60 years of age. At present this sales charge is made only during the first five Contract years. For Contracts with face amounts of at least $7.5 million, this sales charge is made only during the first two Contract years. However, The Prudential reserves the right to make this charge in all Contract years. To summarize, for most Contracts, this charge is somewhat less than 6% of the annual Scheduled Premium for each of the first five Contract years and it may but probably will not continue to be charged after that. 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 below under SURRENDER OR WITHDRAWAL CHARGES. During 1995 and 1994, The Prudential received a total of approximately $102,068,000 and $96,357,000, in sales charges. (d) A charge of $0.01 per $1000 of face amount of insurance is made to compensate The Prudential for the risk it assumes by 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. During 1995 and 1994, The Prudential received a total of approximately $10,377,000 and $9,487,000, respectively, for this risk charge. (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), the annual Scheduled Premium will be increased and the additional charges will be deducted monthly. (f) A charge may be deducted 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. The earnings of the Account are taxed as part of the operations of The Prudential. No charge is being made currently to the Account for Company federal income taxes. The Prudential will review the question of a charge to the Account for Company federal income taxes periodically. Such a charge may be made in future years for any federal income taxes that would be attributable to the Contracts. DAILY DEDUCTION FROM THE CONTRACT FUND Each day a charge is deducted from the assets of each of the subaccounts and/or the Real Property Account (the "variable investment options") in an amount equivalent to an effective annual rate of 0.9%. For Contracts with face amounts of $100,000 or more, the current charge is 0.6%. This charge is intended to compensate The Prudential for assuming mortality and expense risks under the Contract. The mortality risk assumed is that insureds may live for shorter periods of time than The Prudential estimated when it determined what mortality charge to make. The expense risk assumed is that expenses incurred in issuing and administering the Contract will be greater than The Prudential estimated in fixing its administrative charges. The Prudential will realize a profit from this risk charge to the extent it is not needed to provide benefits and pay expenses under the Contracts. During 1995 and 1994, The Prudential received a total of approximately $22,308,000 and $16,959,000, respectively, in mortality and expense risk charges. This charge is not assessed against amounts allocated to the fixed-rate option. SURRENDER OR WITHDRAWAL CHARGES (a) An additional sales load (the CDSL) is charged if a Contract is surrendered in total or in part for its cash surrender value or lapses during the first 10 Contract years. It is not deducted from the death benefit if the insured should die during this period. This contingent deferred charge is generally at its highest in dollar amount during the Contract's fourth and fifth years and then is reduced daily at a constant rate until it reaches zero at the end of the 10th year. The exact amount is determined by a complex formula that is described 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 under a Form B Contract with $100,000 face amount of insurance, both through the monthly deductions from the Contract Fund described above and upon the surrender of the Contract. If the Contract is partially surrendered or the face amount is decreased during the first 10 years, a proportionate amount of the contingent deferred sales charge will be deducted from the Contract Fund. 20
CUMULATIVE TOTAL SALES CUMULATIVE LOAD AS SURRENDER, CUMULATIVE SALES LOAD CONTINGENT TOTAL PER- LAST DAY OF SCHEDULED DEDUCTED DEFERRED SALES CENTAGE OF YEAR NO. PREMIUMS FROM SALES LOAD SCHEDULED PAID CONTRACT LOAD PREMIUMS FUND PAID - --------------------------------------------------------------------------------------------- 1 $ 894.06 $ 49.56 $218.66 $268.22 30.00% 2 1,788.12 99.12 367.64 466.76 26.10% 3 2,682.18 148.68 398.55 547.23 20.40% 4 3,576.24 198.24 414.00 612.24 17.12% 5 4,470.30 247.80 414.00 661.80 14.80% 6 5,364.36 247.80 331.00 578.80 10.79% 7 6,258.42 247.80 248.00 495.80 7.92% 8 7,152.48 247.80 166.00 413.80 5.79% 9 8,046.54 247.80 83.00 330.80 4.11% 10 8,940.60 247.80 0.00 247.80 2.77% - ---------------------------------------------------------------------------------------------
The percentages shown in the last column will not be appreciably different for insureds of different ages. (b) An administrative charge of $5 per $1,000 of face amount of insurance is deducted 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 tenth Contract anniversary. If the Contract is partially surrendered or the face amount is decreased during the first 10 years, a proportionate amount of the charge will be deducted from the Contract Fund. During 1995 and 1994, The Prudential received a total of approximately $9,266,000 and $7,971,000, respectively, from surrendered or lapsed Contracts. The Prudential does not expect to make a profit on this charge. TRANSACTION CHARGES There may be transaction charges if certain events take place. Examples are: the face amount of insurance is decreased or part of the cash surrender value is withdrawn. The Prudential is entitled under the Contract to charge a fee in these situations, which will generally be $15 or less. Currently, it waives the fee in some instances. These fees are described at the appropriate place in this prospectus or 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 or the date of any medical examination. 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 the use by The Prudential of a lower issue age in determining the amount of the Scheduled Premium. The Prudential will permit a Contract to be back-dated but only to a date not earlier than 6 months prior to the date of the application. The Prudential will require the payment of all premiums that would have been due had the application date coincided with the back-dated Contract Date. No Contract may be back-dated to a date prior to that which is in accordance with The Prudential's regulations. 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. The term Monthly Date means the day of each month that is the same as the Contract Date. PREMIUMS As already explained, 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 3 weeks before each due date. If you pay premiums monthly, you will receive each year a book with 12 coupons that will serve as a reminder. With The Prudential'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 19. Some Contract owners may also be eligible to have monthly premiums paid by pre-authorized deductions from an employer's payroll. 21 As stated above, your Contract sets forth two Scheduled Premium amounts. Your first or initial amount is payable from the time you purchase your Contract until the Contract anniversary immediately following your 65th birthday or the Contract's 7th anniversary, whichever is later (the "Premium Change Date"). If your Contract Fund, net of any excess premiums, on the Premium Change Date is higher than it would have been had all Scheduled Premiums been paid when due, maximum contractual charges been deducted, and only a net rate of return of 4% been earned, then the second Scheduled Premium Amount will be lower than the maximum amount stated in your Contract. You will be told what the amount of your second Scheduled Premium will be. For examples of what the second Scheduled Premium might be, see Footnote 3 to the tables on pages T1 through T4. A significant feature of this Contract is that it permits you to pay greater than Scheduled Premiums. This may be done by making occasional unscheduled premium payments or on a periodic basis. If you wish, you may select a higher contemplated premium than the Scheduled Premium. The Prudential will then bill you for the chosen premium. In general, the regular payment of higher premiums will result in higher cash surrender values and, at least under Form B, in higher death benefits. Conversely, payment of a Scheduled Premium need not be made if the Contract Fund is sufficiently large to enable the charges due under the Contract to be made without causing the Contract to lapse. See LAPSE AND REINSTATEMENT, page 26. The payment of premiums in excess of Scheduled Premiums may cause the Contract to become a Modified Endowment Contract. If this happens, loans and other distributions which would otherwise not be taxable events will be subject to federal income taxation. See TAX TREATMENT OF CONTRACT BENEFITS, page 29. If you elect to add a "rider" to your Contract that provides additional benefits, see RIDERS, page 30, the Scheduled Premium may be increased. Some riders provide additional term insurance in a stated amount that does not vary with investment experience. One of these "term riders" also allows you to choose different insurance amounts in different years. For these riders, you may choose to pay a billed premium higher than your initial Scheduled Premium. Under some circumstances this could result in a higher cash surrender value and death benefit than if the same premium had been paid under a Contract with the same death benefit but without the rider. After several years, however, even if the billed premiums are paid on time, the Contract could lose its guarantee against lapse and, after many more years, could have lower cash surrender values. The Contract allows you to choose a level premium option. In that case, the Scheduled Premium, (the amount of which can be quoted by your Prudential representative), will be higher and the Scheduled Premium will not increase at age 65 (or 7 years after issue, if later), even if investment experience has been unfavorable. If that level Scheduled Premium is paid when due, or within the grace period (or missed premiums are paid later with interest), the Contract will not lapse. The Prudential will generally accept any premium payment if the payment is at least $25. The Prudential does reserve the right, however, to limit unscheduled premiums to a total of $10,000 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 24. The flexibility of premium payments provides Contract owners with different opportunities under the two Forms of the Contract. Greater than scheduled payments under a Form A Contract increase the Contract Fund. Greater than scheduled payments under a Form B Contract increase both the Contract Fund and the death benefit, but any future increases in the Contract Fund will be less than under a Form A Contract. This is because the monthly mortality charges under the Form B Contract will be higher to compensate for the higher amount of insurance. For all Contracts, the privilege of making large or additional premium payments offers a way of investing amounts which accumulate without current income taxation. Unless you elect otherwise, your Contract will include a "waiver of premium" provision under which The Prudential will pay your Scheduled Premiums if you incur a disability before age 60 that lasts over six months. If the disability begins after you become 60 and before you are 65, premiums will be paid only until the first Contract anniversary following your 65th birthday. The waiver of premium provision does not apply if you become disabled after your 65th birthday. ALLOCATION OF PREMIUMS On the Contract Date, the $2 processing charge and the charge for taxes attributable to premiums are deducted from the initial premium, and the first monthly deductions are made. See CONTRACT FEES AND CHARGES, page 18. The remainder of the initial premium will be allocated on the Contract Date among the subaccounts, the fixed-rate option or the Real Property Account according to the desired allocation 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 options on the date of receipt, but not earlier than the Contract Date. Thus, to the extent that The Prudential receives the initial premium prior to the Contract Date, there will be a period during which it will not be invested. All subsequent premium payments, after the deductions from premiums, when received by The Prudential will be placed in the subaccounts, the fixed-rate option or the Real Property Account in accordance with the allocation previously designated. Provided the Contract is not in default, you may change the way in which subsequent premiums are allocated by giving written notice to the Prudential Home Office stated in the Contract. 22 You may also change the way in which subsequent premiums are allocated by telephoning your Prudential 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%. Additionally, a feature called Dollar Cost Averaging ("DCA") is available to Contract owners. If you wish, premiums may be allocated to the portion of the Money Market Subaccount used for this feature (the "DCA account"), and designated dollar amounts will be transferred monthly from the DCA account to other investment options available under the Contract, excluding the Money Market Subaccount and the fixed-rate option, but including the Real Property Account. Automatic monthly transfers must be at least 3% of the amount allocated to the DCA account (that is, if you designate $5,000, the minimum monthly transfer is $150), with a minimum of $20 transferred into any one investment option. These amounts are subject to change at The Prudential's discretion. The minimum transfer amount will only be recalculated if the amount designated for transfer is increased. When you establish DCA at issue, you must allocate to the DCA account the greater of $2,000 or 10% of the initial premium payment. When you establish DCA after issue, you must allocate to the DCA account at least $2,000. These minimums are subject to change at The Prudential's discretion. After DCA has been established and as long as the DCA account has a positive balance, you may allocate or transfer amounts to the DCA account, subject to the limitations on premium payments and transfers generally. In addition, if you pay premiums on an annual or semi-annual basis, and you have already established DCA, your premium allocation instructions may include an allocation of all or a portion of all your premium payments to the DCA account. Each automatic monthly transfer will take effect as of the end of the valuation period on the Monthly Date, provided the New York Stock Exchange ("NYSE") is open on that date. 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 of the Series Fund are calculated, which is generally 4:15 p.m. New York City time on each day during which the New York Stock Exchange is open. If the NYSE is not open on the Monthly Date, the transfer will take effect as of the end of the valuation period on the next day that the NYSE is open. If the Monthly Date does not occur in a particular month (e.g., February 30), the transfer will take effect as of the end of the valuation period on the last day of the month that the NYSE is open. Automatic monthly transfers will continue until the balance in the DCA account reaches zero, or until the Contract owner gives notification of a change in allocation or cancellation of the feature. If you have an outstanding premium allocation to the DCA account, but your DCA option has previously been canceled, premiums allocated to the DCA account will be allocated to the Money Market Subaccount. Currently there is no charge for using the DCA feature. TRANSFERS If the Contract is not in default, or if the Contract is in force as variable reduced paid-up insurance (see LAPSE AND REINSTATEMENT, page 26), you may, up to four times in each Contract year, transfer amounts from one subaccount to another subaccount, to the fixed-rate option or to the Real Property Account. There is no 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 or the Real Property Account 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 also change your allocation instructions regarding future premiums. Transfers among 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 your Prudential Home Office. The request may be in terms of dollars, such as a request to transfer $10,000 from one subaccount to another, or may be in terms of a percentage reallocation among 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 your Prudential Home Office, or by telephone, provided you are enrolled to use the Telephone Transfer System. You will automatically be enrolled to use the Telephone Transfer System unless you elect not to have this privilege. The Prudential has adopted procedures designed to ensure that requests by telephone are genuine. The Prudential will not be held liable for following telephone instructions that we reasonably believe to be genuine. The Prudential 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. On the liquidation date of a Zero Coupon Bond Subaccount, all the shares held by it in the corresponding portfolio of the Series Fund will be redeemed and the proceeds of the redemption applicable to each Contract will be transferred to the Money Market Subaccount unless the owner directs that it be transferred to another subaccount. Affected owners will be notified in writing prior to the liquidation date and given the opportunity to transfer their 23 proceeds to another subaccount. A transfer that occurs upon the liquidation date of a Zero Coupon Bond Subaccount will not be counted as one of the four permissible transfers in a Contract year. Transfers from the fixed-rate option to the subaccounts or the Real Property Account 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 effected on the Contract anniversary. Transfer requests received within the 30-day period beginning on the Contract anniversary will be effected as of the end of the valuation period in which a proper transfer request is received at your Prudential Home Office. These limits are subject to change in the future. Transfers from the Real Property Account are also subject to restrictions, and these restrictions are described in the attached prospectus for that investment option. HOW THE CONTRACT FUND CHANGES WITH INVESTMENT EXPERIENCE As explained above, after the tenth 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, plus any termination dividend. 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 18. This amount is placed in the investment options designated by the owner. Thereafter the Contract Fund value changes daily, reflecting increases or decreases in the value of the securities in which the assets of the subaccount have been invested, the performance of the Real Property Account if that option has been selected, 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 variable investment options. 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 plus any termination dividend, reduced by the withdrawal charges, if any, and by any Contract debt. Upon request, The Prudential will tell a Contract owner the cash surrender value of his or her 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 a Contract owner continues to pay Scheduled Premiums when due. The tables on pages T1 through T4 of this prospectus 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. The tables also show, if the level premium option has not been chosen, the maximum Scheduled Premium that may be payable for the period after the insured reaches the age of 65 for the illustrated Contract under each of the assumed investment returns. HOW A CONTRACT'S DEATH BENEFIT WILL VARY The death benefit under a Form A Contract will generally be equal to the face amount of insurance chosen by the purchaser when the Contract was bought. Generally the investment experience affects only the value of the Contract Fund. This means that as the Contract Fund value grows, the deduction for the cost of mortality may decrease because the "amount at risk" becomes smaller. The death benefit cannot ever fall below the face amount of insurance. It could happen, however, that it will become higher. If the Contract is kept in force for several years and if investment performance is relatively favorable, the Contract Fund value may grow to the point where, to meet certain provisions of the Internal Revenue Code which require that the death benefit always be greater than the Contract Fund value, the death benefit must be increased. 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. If the Contract Fund value reaches this level, each premium payment increases the death benefit by an amount greater than the premium. Accordingly, The Prudential, when that occurs, reserves the right to refuse further premium payments, although in practice it will accept a payment equal to two years' Scheduled Premiums. Under a Form B Contract, the death benefit will change from the outset with investment experience. Here again the precise way in which that will occur is complicated and is described in the Statement of Additional Information. In general, if the net investment performance is 4% per year or higher, the death benefit will increase; if it is below 4%, it will decrease. The Prudential guarantees, however, that it will not decrease below the face amount of insurance. If unfavorable experience of that kind should occur, it must be offset by favorable experience before the death benefit begins to increase again. 24 The death benefit could also increase to satisfy Internal Revenue Code requirements, for the same reasons described above respecting Form A Contracts. CONTRACT LOANS The owner may borrow from The Prudential 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 variable investment options and to any prior loan[s] supported by the variable investment options, minus the portion of any charges attributable to variable investment options 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. If you request a loan you may choose one of two interest rates. You may elect to have interest charges accrued daily at a fixed effective annual rate of 5.5%. Alternatively, you may elect a variable interest rate that changes from time to time. You may switch from the fixed to variable interest loan provision, or vice-versa, with The Prudential's consent. If you elect the variable loan interest rate provision, interest charged on any loan will accrue daily at an annual rate The Prudential determines at the start of each Contract year (instead of at the fixed 5.5% rate). This interest rate will not exceed the greatest of (1) the "Published Monthly Average" for the calendar month ending two months before the calendar month of the Contract anniversary; (2) 5%; or (3) the rate permitted by law in the state of issue of the Contract. The "Published Monthly Average" means Moody's Corporate Bond Yield Average -- Monthly Average Corporates, as published by Moody's Investors Service, Inc. or any successor to that service, or if that average is no longer published, a substantially similar average established by the insurance regulator where the Contract is issued. For example, the Published Monthly Average in 1995 ranged from 7.11% to 8.71%. 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 term "Contract debt" means 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, The Prudential will notify the Contract owner of its intent to terminate the Contract in 61 days, within which time the owner may repay all or enough of the loan to reduce it to below the cash surrender value and thus keep the Contract in force. If the Contract owner fails to keep the Contract in force, the amount of unpaid Contract debt will be treated as a distribution which may be taxable. See LAPSE AND REINSTATEMENT, page 26, and TAX TREATMENT OF CONTRACT BENEFITS - PRE-DEATH DISTRIBUTIONS, page 29. When a loan is made, an amount equal to the loan proceeds (the "loan amount") will be transferred out of the subaccounts and the Real Property Account (collectively, the "variable options"), and/or the fixed-rate option to Prudential's general account. The investment options will normally be reduced proportionally based on their balances at the time the loan is made. The loan amount is treated as part of the Contract Fund. While a fixed-rate (5.5%) loan is outstanding, the loan amount will be credited with the daily equivalent of an annual return of 4% rather than with the actual rate of return of the variable options or the fixed-rate option. While a loan made pursuant to the variable loan interest rate provision is outstanding, the loan amount will be credited with the daily equivalent of a rate that is 1% less than the loan interest rate for the Contract year. If a loan remains outstanding at a time The Prudential fixes a new rate, the new interest rate will apply. When the loan is repaid, the repayment is made to the investment options. The loan repayment is first divided between the variable options as a group and the fixed-rate option in the same proportions used for the transfer at the time the loan was made. The portion of the loan repayment allocated to the variable options as a group is divided among those options proportionately based on their balances at the time of loan repayment. Choosing the variable rate option may mean a higher outlay of cash when interest payments are made or when the loan is repaid, but it may also result in a greater increase in the Contract Fund value. 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 investment 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 on the loan balance 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. 25 Consider, for example, a Contract issued on a 35 year old male, as illustrated in the table on page T1, with an 8% gross investment return. Assume a $2,500 fixed-rate (5.5%) loan was made under this Contract at the end of Contract year 8 and repaid at the end of Contract year 10 and loan interest was paid when due. Upon repayment, the cash surrender value would be $7,811.48. 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 6.85% net return for the designated subaccount[s] resulting from the 8% gross return in the underlying Series Fund. Loans from Modified Endowment Contracts may be treated for tax purposes as distributions of income. See TAX TREATMENT OF CONTRACT BENEFITS, page 29. SURRENDER OF A CONTRACT You may surrender a Contract in whole or in part for its cash surrender value while the insured is living. Partial surrender involves splitting the Contract into two Contracts. One Contract is surrendered for its cash surrender value; the other is continued in force on the same terms as the original Contract except that premiums will be based on the new face amount. You will be given a new Contract document. The cash surrender value and the guaranteed minimum death benefit of the new Contract will be proportionately reduced based upon the reduction in the face amount of insurance. The new Contract must have a face amount of insurance at least equal to the minimum face amount applicable to the insured. Otherwise a partial surrender is not permitted. See REQUIREMENTS FOR ISSUANCE OF A CONTRACT, page 17. To surrender a Contract in whole or in part, you must deliver or mail it, together with a written request, to your Prudential 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 the Home Office. Surrender of all or part of a Contract may have tax consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 29. LAPSE AND REINSTATEMENT As has already been explained, 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, a Contract will remain in force 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 or less. In addition, even if a Scheduled Premium is not paid, the Contract will remain in force 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 in force.) 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 in force, the Contract will go into default. Should this happen, The Prudential will send the Contract owner a notice of default setting forth the payment necessary to keep the Contract in force on a premium paying basis. This payment must be received at the Prudential 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 29. Neither transfers nor reallocations of premium payments may be made if a Contract is in default. A Contract that has lapsed may be reinstated within 5 years after the date of default unless the Contract has been surrendered for its cash surrender value. To reinstate a lapsed Contract, The Prudential 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 The Prudential 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 lower than that provided by fixed extended term insurance. It will increase in amount only if dividends are paid and it will decrease only if a Contract loan is taken. You will be told, if you ask, what the amount of the insurance will be. Fixed paid-up insurance has a cash surrender value and a loan value both of which 26 will gradually increase in value. It is possible for this Contract to be classified as a Modified Endowment Contract if this option is exercised during the first 7 Contract years. See TAX TREATMENT OF CONTRACT BENEFITS, page 29. 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 selected investment options. 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 paid-up insurance is not available to insureds in high risk rating classes or if the new guaranteed amount is less than $5,000. It is possible for this Contract to be classified as a Modified Endowment Contract if this option is exercised during the first 7 Contract years. See TAX TREATMENT OF CONTRACT BENEFITS, page 29. WHAT HAPPENS IF NO REQUEST IS MADE? Except in the two situations described below, if no request is made the "automatic option" will be fixed extended term insurance. If that 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 when there is a Contract debt outstanding when the Contract lapses. WHEN PROCEEDS ARE PAID The Prudential will generally pay any death benefit, cash surrender value, loan proceeds or withdrawal within 7 days after receipt at a Prudential Home Office of all the documents required for such a payment. 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. However, The Prudential 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 in force as fixed reduced paid-up insurance, The Prudential expects to pay the cash surrender value promptly upon request. However, The Prudential has the right to delay payment of such cash surrender value for up to 6 months (or a shorter period if required by applicable law). The Prudential will pay interest of at least 3% a year if it delays such a payment for 30 days or more (or a shorter period if required by applicable law). LIVING NEEDS BENEFIT Contract applicants may elect to add the LIVING NEEDS BENEFIT(SM) to their Contracts at issue, subject to The Prudential's receipt of satisfactory evidence of insurability. The benefit may vary state-by-state. It can generally be added only to Contracts of $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. The LIVING NEEDS BENEFIT allows the Contract owner 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. Depending upon state regulatory approval, one or both of the following options may be available. A Prudential 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 6 months or less. When satisfactory evidence is provided, The Prudential will provide an accelerated payment of the portion of the death benefit selected by the Contract owner as a LIVING NEEDS BENEFIT. You may (1) elect to receive the benefit in a single sum or (2) receive equal monthly payments for 6 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 6 months or more. When satisfactory evidence is provided, including certification by a licensed physician, that the insured is expected to remain in the nursing home until death, The Prudential will provide an accelerated payment of the portion of the death benefit selected by the Contract owner as a LIVING NEEDS BENEFIT. You 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 2), 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. The Prudential reserves the right to determine the minimum amount that may be accelerated. 27 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. The Prudential can furnish details about the amount of LIVING NEEDS BENEFIT that is available to an eligible Contract owner under a particular Contract, and the adjusted premium payments that would be in effect if less than the entire death benefit is accelerated. The Contract owner should consider whether adding this settlement option is appropriate in his or her given situation. Adding the LIVING NEEDS BENEFIT to the Contract has no adverse consequences; however, electing to use it could. Contract owners should consult a qualified tax advisor before electing to receive this benefit. Unlike a death benefit received by a beneficiary after the death of an insured, receipt of a LIVING NEEDS BENEFIT payment may give rise to a federal or state income tax. Receipt of a LIVING NEEDS BENEFIT payment may also affect a Contract owner's eligibility for certain government benefits or entitlements. VOTING RIGHTS As stated above, all of the assets held in the subaccounts of the Account will be invested in shares of the corresponding portfolios of the Series Fund. The Prudential is the legal owner of those shares and as such has the right to vote on any matter voted on at Series Fund shareholders meetings. However, The Prudential will vote the shares of the Series Fund at any regular and special shareholders meetings it is required to hold in accordance with voting instructions received from Contract owners. The Series Fund will not hold annual shareholders meetings when not required to do so under Maryland law or the Investment Company Act of 1940. Series Fund shares for which no timely instructions from Contract owners are received, and any shares indirectly owned by The Prudential, will be voted in the same proportion as shares in the respective portfolios for which instructions are received. Matters on which Contract owners may give voting instructions include the following: (1) election of the Board of Directors of the Series Fund; (2) ratification of the independent accountant of the Series Fund; (3) approval of the investment advisory agreement for a portfolio of the Series 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 Series 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 you 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 The Prudential instructions will be determined as of the record date chosen by the Board of Directors of the Series Fund. The Prudential will furnish Contract owners with proper forms and proxies to enable them to give these instructions. The Prudential 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. The Prudential may, if required by state insurance regulations, disregard voting instructions if such instructions 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 Series Fund's portfolios, or to approve or disapprove an investment advisory contract for the Series Fund. In addition, The Prudential itself may disregard voting instructions that would require changes in the investment policy or investment advisor of one or more of the Series Fund's portfolios, provided that The Prudential reasonably disapproves such changes in accordance with applicable federal regulations. If The Prudential 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. Contract owners also share with the owners of all Prudential Contracts and policies the right to vote in elections for members of the Board of Directors of The Prudential. REPORTS TO CONTRACT OWNERS Once each Contract year (except where the Contract is in force as fixed extended term insurance or fixed reduced paid-up insurance), you will be sent a statement that provides certain information pertinent to your own Contract. These statements show all transactions during the year that affected the value of your Contract Fund, including monthly changes attributable to investment experience. That 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 The Prudential 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 Account and of the Series Fund. That report will list the investments held in each portfolio and include audited financial statements for the Account and the Series Fund. A semi-annual report, with similar unaudited information for the Series Fund, will be sent to you, usually at the end of August. 28 TAX TREATMENT OF CONTRACT BENEFITS Each prospective purchaser is urged to consult a qualified tax advisor. 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. Rather, it provides information about how The Prudential believes the current laws apply in the most commonly occurring circumstances. There is no guarantee, however, that the current federal income tax laws, regulations or interpretations will not change. TREATMENT AS LIFE INSURANCE. The Contract will be treated as "life insurance" as long as it satisfies certain definitional tests set forth in section 7702 of the Internal Revenue Code ("the Code") and as long as the underlying investment for the Contract satisfies diversification requirements under section 817(h) of the Code. (For further details on diversification requirements, see TAX TREATMENT OF CONTRACT BENEFITS in the Statement of Additional Information.) The Prudential believes that the Contract meets these definitional and diversification requirements and accordingly will be treated as life insurance for tax purposes. This means that (1) the death benefit should be excludible from the gross income of the beneficiary under section 101(a) of the Code; and (2) except as noted below, the Contract owner should not be taxed on any part of the Contract fund, including additions attributable to interest, dividends or appreciation. However, Section 7702 of the Code which defines life insurance for tax purposes gives the Secretary of the Treasury authority to prescribe regulations to carry out the purposes of the section. In this regard, proposed regulations governing mortality charges were issued in 1991 and proposed regulations under sections 101, 7702, and 7702A governing the treatment of life insurance policies that provide accelerated death benefits were issued in 1992. None of these proposed regulations has yet been finalized. Additional regulations under section 7702 may also be promulgated in the future. Moreover, in connection with the issuance of temporary regulations under section 817(h), the Treasury Department announced that such regulations do not provide guidance concerning the extent to which Contract owners may direct their investments to particular divisions of a separate account. Such guidance will be included in regulations or rulings under section 817(d) relating to the definition of a variable contract. The Prudential intends to comply with final regulations under section 7702 and 817. Therefore, it reserves the right to make such changes as it deems necessary to assure that the Contract continues to qualify as life insurance for tax purposes. Any such changes will apply uniformly to affected Contract owners and will be made only after advance written notice to affected Contract owners. PRE-DEATH DISTRIBUTIONS. The tax treatment of any distribution received by an owner prior to an insured's death will depend upon whether the Contract is classified as a Modified Endowment Contract. If the Contract is not classified as a Modified Endowment Contract, proceeds received in the event of a lapse, total or partial surrender of the Contract, or withdrawal of part of the cash surrender value will generally not be taxable unless the total amount received exceeds the gross premiums paid less the untaxed portion of any prior withdrawals. The amount of any unpaid Contract debt will, upon surrender or lapse, be added to the cash surrender value and treated, for this purpose, as if it had been received. In certain limited circumstances, all or a portion of a withdrawal or partial surrender during the first 15 contract years may be taxable 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, pre-death distributions, including loans, withdrawals and partial surrenders (even those made during the 2 year period before the Contract became a Modified Endowment Contract), will be taxed first as investment income to the extent of gain in the Contract, and then as a return of the Contract owner's investment in the Contract. In addition, pre-death distributions (including full surrenders) will be subject to a penalty of 10% of the amount includible in income unless the amount is distributed on or after the owner reaches age 59 1/2, on account of the owner's disability, or as a life annuity. It is possible for this Contract to be classified as a Modified Endowment Contract under at least two circumstances: premiums in excess of Scheduled Premiums are paid; or a decrease in the face amount of insurance is made (or a rider removed) during the first 7 Contract years. Moreover, the addition of a rider or the increase in the face amount of insurance after the Contract date may have an impact on the Contract's status as a Modified Endowment Contract. Contract owners contemplating any of these steps should first consult a qualified tax advisor and their Prudential representative. 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. 29 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. 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 should lapse. Certain restrictions may apply; they are clearly described in the applicable rider. Under other riders, which provide a fixed amount of term insurance in exchange for increasing total scheduled annual premiums, the amount payable upon death of the insured may be substantially increased for a given total initial annual premium. The rider may be appropriate for Contract owners who reasonably expect their incomes to increase regularly so that they will be able to afford the increasing scheduled annual premiums or who may be willing to rely upon their future Contract Fund values to prevent the Contract from lapsing in later years. Certain term riders issued by The Prudential may provide for a conversion premium credit if the rider or policy is converted to a Prudential whole life policy, including the Contracts described in this prospectus. If a Contract is purchased through exercise of such a conversion privilege, the first year's scheduled premium will be reduced by the amount of the premium credit. The Prudential will add to first year scheduled premiums paid by the Contract owner the pro rata portion of the premium credit. Any Prudential representative authorized to sell the Contract can explain these extra benefits further. Samples of the provisions are available from The Prudential upon written request. PARTICIPATION IN DIVISIBLE SURPLUS The Contract is eligible to be credited part of The Prudential's divisible surplus attributable to the Contracts, as determined by The Prudential's Board of Directors. That determination is made, with respect to the insurance contracts issued by The Prudential, every year. However, The Prudential does not expect to credit any dividends upon these Contracts while they remain in force because favorable investment performance will be reflected in Contract values and because The Prudential intends, if experience indicates that current charges are greater than needed to cover expenses, to reduce those charges further so that there will be no source of distributable surplus attributable to these Contracts. If a Contract is kept in force for a number of years, The Prudential currently intends to add a termination dividend to the proceeds payable upon death or surrender. 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, page 47 and described in greater detail in the Statement of Additional Information. FURTHER INFORMATION ABOUT THE SERIES FUND The Prudential Series Fund, Inc. (the "Series Fund") is a Maryland corporation organized on November 15, 1982. It is registered under the Investment Company Act of 1940 (the "1940 Act") as an open-end, diversified, management investment company. This registration does not imply any supervision by the Securities and Exchange Commission over the Series Fund's management or its investment policies or practices. The Series Fund is currently made up of fifteen separate portfolios. Each portfolio is, for many purposes, in effect a separate investment fund, and a separate class of capital stock is issued for each portfolio. Each share of capital stock issued with respect to a portfolio has a pro-rata interest in the assets of that portfolio and has no interest in the assets of any other portfolio. Each portfolio bears its own liabilities and also its proportionate share of the general liabilities of the Series Fund. In other respects the Series Fund is treated as one entity. For example, the Series Fund has only one Board of Directors and owners of the shares of each portfolio are entitled to vote for members of the Board. Shares in the Series Fund are currently sold and redeemed at the close of each business day, at their net asset value, determined in the manner described in the Statement of Additional Information, only to separate accounts of The Prudential and its subsidiaries. They may, in the future, be sold to other insurers to fund benefits under variable life insurance and variable annuity contracts issued by those companies. 30 The Prudential is the investment advisor of the Series Fund. The Prudential has entered into a Service Agreement with its wholly-owned subsidiary 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 an Investment Advisory Agreement with the Series Fund. In addition, The Prudential has entered into a Subadvisory Agreement with its wholly-owned subsidiary Jennison Associates Capital Corp. ("Jennison"), under which Jennison furnishes investment advisory services in connection with the management of the Prudential Jennison Portfolio. See INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES, page 46. INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS Each portfolio of the Series Fund has a different objective which it pursues through separate investment policies as described below. Since each portfolio has a different investment objective, each can be expected to have different investment results and incur different market and financial risks. Those risks, as explained above, are borne by the Contract owner. The Series Fund may in the future establish other portfolios with different investment objectives. The investment objectives of each portfolio are fundamental and may not be changed without the approval of the holders of a majority of the outstanding shares of the portfolio affected (which for this purpose and under the 1940 Act means the lesser of: (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented; or (ii) more than 50% of the outstanding shares). The policies by which a portfolio seeks to achieve its investment objectives, however, are not fundamental. They may be changed by the Board of Directors of the Series Fund without the approval of the shareholders. The investment objectives of each portfolio are set forth on pages 3 through 4. For the sake of convenience, they are repeated here, followed in each case by a brief description of the policies of each portfolio. In some cases a fuller description of those policies is in the Statement of Additional Information. There is no guarantee that any of these objectives will be met. FIXED INCOME PORTFOLIOS MONEY MARKET PORTFOLIO. The objective of this portfolio is to achieve, through investment in high-quality short-term debt obligations, the maximum current income that is consistent with stability of capital and maintenance of liquidity. The portfolio seeks to achieve this objective by following the policy of investing primarily in money market instruments denominated in U.S. dollars that mature in 397 days or less from the date the portfolio acquires them. Money-market instruments include short-term obligations of the United States and foreign governments, their agencies, instrumentalities, and political subdivisions, and of domestic and foreign banks and corporations. They also include commercial paper, other corporate obligations, obligations of savings and loan associations and savings banks, and variable amount demand master notes. The portfolio may also enter into repurchase and reverse repurchase agreements and may purchase and sell securities on a when-issued and delayed delivery basis. These investment techniques may involve additional risks. A detailed description of the money market instruments in which the portfolio may invest, of the repurchase and reverse repurchase agreements it may enter into, and of the risks associated with those instruments and agreements is in the Statement of Additional Information. Because of the high quality, short-term nature of the portfolio's holdings, increases in the value of an investment in the portfolio will be derived almost entirely from interest on the securities held by it. Accordingly, the results for the portfolio will follow generally the fluctuation in short-term interest rates. DIVERSIFIED BOND PORTFOLIO. The objective of this portfolio is to achieve a high level of income over the longer term while providing reasonable safety of capital through investment primarily in readily marketable intermediate and long-term fixed income securities that provide attractive yields but do not involve substantial risk of loss of capital through default. The portfolio seeks to achieve this objective by following the policies of purchasing primarily debt securities of investment grade or, if not rated, of comparable quality in the opinion of the portfolio manager and of investing from time to time a portion of its assets in short-term debt obligations of the kind held in the Money Market Portfolio as described in the Statement of Additional Information. Since the value of fixed income securities generally fluctuates inversely with changes in interest rates, the proportions of intermediate or longer-term securities and short-term debt obligations held in the portfolio will vary to reflect The Prudential's assessment of prospective changes in interest rates, so that the portfolio may benefit from relative price appreciation when interest rates decline and suffer lesser declines in value when interest rates rise. The success of this strategy will depend on The Prudential's ability to forecast changes in interest rates, and there is a corresponding risk that the value of the securities held in the portfolio will decline. 31 At least 80% of the portfolio's holdings (including short-term debt obligations) will generally consist of debt securities that at the time of purchase have a rating within the four highest grades determined by Moody's Investor Services, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), or a similar nationally-recognized rating service. The portfolio may retain a security whose rating has dropped below the four highest grades as determined by a commercial rating service. Without limitation, the portfolio may invest in obligations of the U.S. Government and its agencies and instrumentalities. The Statement of Additional Information defines the ratings that are given to debt securities by Moody's and S&P and describes the standards applied by them in assigning these ratings. The remaining assets of the portfolio may be invested in, among other things, debt securities that are not rated within the four highest grades or in convertible debt securities and preferred or convertible preferred stocks that are rated within the four highest grades applicable to such securities. On occasion, however, the portfolio may acquire common stock, not through direct investment but by the conversion of convertible debt securities or the exercise of warrants. No more than 10% of the value of the total assets of the portfolio will be held in common stocks, and those will usually be sold as soon as a favorable opportunity is available. The portfolio may invest up to 20% of its total assets in United States currency denominated debt securities issued outside the United States by foreign or domestic issuers. The particular risks of investments in foreign securities are described under FOREIGN SECURITIES on page 44. In addition, the portfolio may (i) purchase and sell options on debt securities; (ii) purchase and sell interest rate futures contracts and options thereon; (iii) purchase securities on a when-issued or delayed delivery basis; (iv) use interest rate swaps; and (v) make short sales. These techniques are described briefly under OPTIONS, FUTURES CONTRACTS AND SWAPS and SHORT SALES on page 44, and in detail in the Statement of Additional Information. Barbara Kenworthy, Managing Director, Prudential Mutual Fund Investment Management ("PMFIM"), a division of PIC, has been portfolio manager of the Diversified Bond Portfolio since 1995. Ms. Kenworthy is also portfolio manager of the Prudential Diversified Bond Fund, Inc., the Prudential Government Income Fund, Inc., and the Government Income and Zero Coupon Bond Portfolios 2000 and 2005 of the Series Fund. Prior to 1994, Ms. Kenworthy was a portfolio manager and president of several taxable fixed-income funds for The Dreyfus Corp. GOVERNMENT INCOME PORTFOLIO. The objective of this portfolio is to achieve a high level of income over the longer term consistent with the preservation of capital through investment primarily in U.S. Government securities, including intermediate and long-term U.S. Treasury securities and debt obligations issued by agencies of or instrumentalities established, sponsored or guaranteed by the U.S. Government. At least 65% of the total assets of the portfolio will be invested in U.S. Government securities. The portfolio seeks to achieve this objective by investing at least 65% of its assets in U.S. Treasury securities, obligations issued or guaranteed by U.S. Government agencies and instrumentalities, mortgage-related securities issued by U.S. Government instrumentalities or non-governmental corporations, or related collateralized mortgage obligations. These instruments are described below. The portfolio may invest up to a total of 35% of its assets in the following three categories: (1) short-term debt obligations of the kind held in the Money Market Portfolio; (2) securities of issuers other than the U.S. government and related entities, usually foreign governments, where the principal and interest are substantially guaranteed (generally to the extent of 90% thereof) by U.S. Government agencies whose guarantee is backed by the full faith and credit of the United States and where an assurance of payment on the unguaranteed portion is provided for in a comparable way; and (3) Foreign Government Securities including debt securities issued or guaranteed, as to payment of principal and interest, by governments, governmental agencies, supranational entities and other governmental entities denominated in U.S. dollars. A supranational entity is an entity constituted by the national governments of several countries to promote economic development. Examples of such supranational entities include, among others, the World Bank (International Bank for Reconstruction and Development), the European Investment Bank and the Asian Development Bank; and (4) asset-backed securities rated in either of the top two ratings by Moody's or Standard & Poor's, or if not rated, determined by the portfolio manager to be of comparable quality. A description of debt ratings is in the Statement of Additional Information. U.S. Treasury Securities. U.S. Treasury securities include bills, notes, and bonds issued by the U.S. Treasury. These instruments are direct obligations of the U.S. Government and, as such, are backed by the full faith and credit of the United States. They differ primarily in their coupons, the lengths of their maturities, and the dates of their issuances. Obligations Issued or Guaranteed by U.S. Government Agencies and Instrumentalities. Obligations issued by agencies of the U.S. Government or instrumentalities established or sponsored by the U.S. Government include securities that are guaranteed by federal agencies or instrumentalities, and may or may not be backed by the full faith and credit of the United States. Obligations of the Government National Mortgage Association ("GNMA"), the Farmers Home Administration, and the Export-Import Bank are backed by the full faith and credit of the United States. Securities in which the portfolio may invest that are not backed by the full faith and credit of the United States include obligations issued by the Tennessee Valley Authority, The Federal National Mortgage Association 32 ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC"), the United States Postal Service, each of which has the right to borrow from the United States Treasury to meet its obligations, and obligations of the Federal Farm Credit Bank and the Federal Home Loan Bank, the obligations of which may be satisfied only by the individual credit of the issuing agency. In the case of securities not backed by the full faith and credit of the U.S. Government, the portfolio must look principally to the agency issuing or guaranteeing the obligation for ultimate repayment and may not be able to assert a claim against the U.S. Government if the agency or instrumentality does not meet its commitments. U.S. Government Securities are considered among the most creditworthy of fixed income investments. The yields available from U.S. Government Securities are generally lower than the yields available from corporate debt securities. The values of U.S. Government Securities (like those of fixed income securities, generally) will change as interest rates fluctuate. During periods of falling U.S. interest rates, the values of outstanding long-term U.S. Government Securities generally rise. Conversely, during periods of rising interest rates, the values of such securities generally decline. The magnitude of these fluctuations will generally be greater for securities with longer maturities. Although changes in the value of U.S. Government Securities will not affect investment income from those securities, they will affect the portfolio's net asset value. The proportions of intermediate and long-term securities held in the portfolio will vary to reflect The Prudential's assessment of prospective changes in interest rates, so that the portfolio may benefit from relative price appreciation when interest rates decline and suffer lesser declines in value when interest rates rise. The success of this strategy will depend on The Prudential's ability to forecast changes in interest rates, and there is a corresponding risk that the value of the securities held in the portfolio will decline. Mortgage-Related Securities Issued by U.S. Government Instrumentalities or by Non-Governmental Corporations. The portfolio may invest in the following three types of mortgage-backed securities: (i) those issued or guaranteed by the U.S. Government or one of its agencies or instrumentalities, such as Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC); (ii) those issued by private issuers that represent an interest in or are collateralized by mortgage-backed securities issued or guaranteed by the U.S. Government or one of its agencies or instrumentalities; and (iii) those issued by private issuers that represent an interest in or are collateralized by whole mortgage loans or mortgage-backed securities without government guarantee but usually having some form of private credit enhancement. The portfolio may invest in adjustable rate and fixed rate mortgage securities. With respect to private mortgage-backed securities not collateralized by securities of the U.S. Government or its agencies, the portfolio will only purchase such securities rated not lower than As by Moody's or AA by Standard & Poor's or similarly rated by another nationally recognized rating service or, if unrated, of comparable quality in the opinion of the portfolio manager. The mortgages backing these securities include conventional 30 year fixed rate mortgages, 15 year fixed rate mortgages, graduated payment mortgages, and adjustable rate mortgages (ARMs). The mortgage-backed securities may include those representing an undivided ownership interest in a pool of mortgages, e.g. GNMA, FNMA and FHLMC certificates. The U.S. Government or the issuing agency guarantees the payment of interest and principal of mortgaged-backed securities issued by the U.S. Government or its agencies/instrumentalities. However, these guarantees do not extend to the securities' yield or value, which are likely to vary inversely with fluctuations in interest rates, nor do the guarantees extend to the yield or value of the portfolio's shares. Mortgage-backed securities are in most cases pass-through instruments, through which the holders receive a share of all interest and principal payments from the mortgages underlying the securities, net of certain fees. Because the prepayment characteristics of the underlying mortgages vary, it is not possible to predict accurately the average life of a particular issue of pass-through securities. Mortgage-backed securities are often subject to more rapid repayment then their stated maturity date would indicate as a result of the pass-through of prepayments of principal on the underlying mortgage obligations. For example, securities backed by mortgages with 30 year maturities are customarily treated as prepaying fully in the 12th year and securities backed by mortgages with 15 year maturities are customarily treated as prepaying fully in the seventh year. While the timing of prepayments of graduated payment mortgages differs somewhat from that of conventional mortgages, the prepayment experience of graduated payment mortgages is basically the same as that of the conventional mortgages of the same maturity dates over the life of the pool. During periods of declining interest rates, prepayment of mortgages underlying mortgage-backed securities can be expected to accelerate. When the mortgage obligations are prepaid, the portfolio reinvests the prepaid amounts in securities, the yields of which reflect interest rates prevailing at the time. Therefore, the portfolio's ability to maintain a portfolio of high yielding mortgage-backed securities will be adversely affected to the extent that prepayments of mortgages must be reinvested in securities which have lower yields than the prepaid mortgages. Moreover, prepayments of mortgages which underlie securities purchased at a premium could result in capital losses. Mortgage-backed securities of the types described under (i) and (ii) above are considered to be U.S. Government Securities for purposes of meeting the requirement that at least 65% of the portfolio's assets be invested in U.S. Government Securities. Adjustable rate mortgage securities are pass-through mortgage securities collateralized by mortgages with adjustable rather than fixed rates. Generally ARMs have a specified maturity date and amortize principal over their 33 life. In periods of declining interest rates, there is a reasonable likelihood that ARMs will experience increased rates of pre-payment of principal, However, the major difference between ARMs and fixed rate mortgage securities is that the interest rate and the rate of amortization of principal of ARMs can and do change in accordance with movements in a particular pre-specified, published interest rate index. CMOs. The portfolio may also purchase collateralized mortgage obligations ("CMOs"). A CMO is a security issued by a corporation or a U.S. Government instrumentality that is backed by a portfolio of mortgages or mortgage-backed securities. The issuer's obligation to make interest and principal payments is secured by the underlying portfolio of mortgages or mortgage-backed securities. CMOs are partitioned into several classes with a ranked priority by which the classes of obligations are redeemed. The portfolio may invest in CMOs issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in mortgage loans, including depository institutions, mortgage banks, investment banks and special purpose subsidiaries of the foregoing. With respect to privately issued CMOs, the portfolio will only purchase such securities rated not lower than Aa by Moody's or AA by Standard & Poor's or similarly rated by another nationally recognized rating service, or if unrated, of comparable quality in the opinion of the portfolio manager. Privately issued CMOs that are collateralized by mortgage-backed securities issued by GNMA, FHLMC or FNMA, and CMOs issued by agencies or instrumentalities of the U.S. Government are considered to be U.S. Government Securities for purposes of meeting the requirement that at least 65% of the portfolio's assets be invested in U.S. Government Securities. Neither the United States Government nor any U.S. Government agency guarantees the payment of principal or interest on these securities. Asset-Backed Securities. Asset-backed securities represent a participation in, or are secured by and payable from, a stream of payments generated by particular assets, such as automobile or credit card receivables. Asset-backed securities present certain risks, including the risk that the underlying obligor on the asset, such as the automobile purchaser or the credit card holder, may default on his or her obligation. In addition, asset-backed securities often do not provide a security interest in the related collateral. For example, credit card receivables are generally unsecured, and for automobile receivables the security interests in the underlying automobiles are often not transferred when the pool is created, with the resulting possibility that the collateral could be resold. In addition, the portfolio may (i) purchase and sell options on debt securities; (ii) purchase and sell interest rate futures contracts and options thereon; (iii) purchase securities on a when-issued or delayed delivery basis; (iv) use interest rate swaps; and (v) make short sales. These techniques are described briefly under OPTIONS, FUTURES CONTRACTS AND SWAPS and SHORT SALES on page 44, and in detail in the Statement of Additional Information. Under normal circumstances, this portfolio's turnover rate is not expected to exceed 200%. Purchases of U.S. Government Securities are generally made from dealers at prices which usually include a profit to the dealer. Barbara Kenworthy, Managing Director, PMFIM, has been portfolio manager of the Government Income Portfolio since 1995. Ms. Kenworthy is also portfolio manager of the Prudential Diversified Bond Fund, Inc., the Prudential Government Income Fund, Inc., and the Diversified Bond and Zero Coupon Bond Portfolios 2000 and 2005 of the Series Fund. Prior to 1994, Ms. Kenworthy was a portfolio manager and president of several taxable fixed-income funds for The Dreyfus Corp. ZERO COUPON BOND PORTFOLIOS 2000 AND 2005. The objective of both of these portfolios is to achieve the highest predictable compounded investment return for a specific period of time, consistent with the safety of invested capital, by investing primarily in debt obligations of the United States Treasury and investment-grade corporations that have been issued without interest coupons or stripped of their unmatured interest coupons, interest coupons that have been stripped from such debt obligations, and receipts and certificates for such stripped debt obligations and stripped coupons (collectively "stripped securities"). The two portfolios differ only in their liquidation dates, which for each portfolio is November 15 of the specified year. In pursuing this objective, each Zero Coupon Bond portfolio invests only in readily marketable debt securities that do not involve substantial risk of loss of capital through default, although their value may vary because of changes in the general level of interest rates. It is the policy of each Zero Coupon Bond portfolio to invest at least 70% of its assets in stripped securities that are obligations of the United States Government maturing within 2 years of the portfolio liquidation date. Up to 30% of the assets may be invested and held either in stripped securities issued by investment-grade corporations or in high-grade interest bearing corporate debt securities, in each case with a quality rating of Baa or better, provided that no more than 20% of the assets of the portfolio may be invested in interest bearing securities. However, as a defensive position, as the liquidation date of each portfolio draws near, more than 20% of assets may be invested in interest bearing securities when deemed appropriate in the view of the portfolio manager given prevailing market conditions and investment opportunities available at the time. The Prudential will evaluate the creditworthiness of the potential investments in corporate securities in order to determine whether such securities are suitable for purchase by the portfolios. A small portion of the portfolios may be invested in short-term debt obligations of the kind held in the Money Market Portfolio in order to make effective use of cash reserves pending investments in the securities described above. 34 At the beginning of each week, The Prudential will calculate the anticipated compounded growth rate that investors purchasing shares of each portfolio that day are predicted to achieve if their investment is maintained until the portfolio liquidation date. That rate will change from day to day depending on various factors, including particularly the general level of interest rates, but daily changes will generally not be significant. If there is a significant change in interest rates (greater than a 0.30% change in the yield of a zero coupon Treasury bond maturing in the specified year), The Prudential will recalculate the predicted yield. The Prudential will furnish the anticipated compounded growth rate on request. In order to achieve a predictable compounded investment return to each portfolio's liquidation date that will be as little affected as possible by variations in the general level of interest rates during the intervening period, the composition of the securities held in each portfolio is such that the weighted average period of time until receipt of scheduled cash payments (whether of principal or interest) -- sometimes referred to as the portfolio's "duration" -- will be kept within 1 year of the period remaining until the portfolio liquidation date. When the portfolio's duration is thus maintained, differences between the market value and the face amount of unmatured bonds on the portfolio's liquidation date resulting from changes in the general level of interest rates will be approximately equal in magnitude to, but opposite in direction from, the difference between the amount of interest accumulated through the reinvestment of earlier coupon or principal payments and the amount that would have been accumulated at the originally predicted rate. Each portfolio is thus able to hold interest bearing securities and stripped securities with maturity dates before, during, and after the portfolio's liquidation date. The concept of "duration" is explained more fully in the Statement of Additional Information. Each portfolio seeks to realize a higher yield than would be obtained simply by maintaining the portfolio's initial investments. The portfolios are actively managed by The Prudential to take advantage of trading opportunities that may exist from time to time when, for various reasons, some of the securities available for purchase by the portfolio appear underpriced. There is a corresponding risk that, to the extent that this strategy is unsuccessful, the initial yield objective will not be met. Stripped securities are purchased at a substantial (or "deep") discount from their principal amounts payable at maturity. If held to maturity, these obligations provide a predictable yield. But because interest on stripped securities is not paid in cash on a current basis but rather is in effect compounded until maturity (or the payment date in the case of a coupon), the market values of securities of this type are subject to greater fluctuations, as a result of changes in interest rates, than are the values of debt securities that provide for the periodic payment of interest; and the longer the term to maturity of a portfolio, the greater the risk of such fluctuations. Accordingly, if you redeem an interest in the portfolio (for example, by a transfer to another portfolio) prior to the portfolio liquidation date, you are likely to achieve quite a different investment return than the return that was predicted on the date your investment was made. You may suffer a loss. On the liquidation date of a Zero Coupon Bond Portfolio, all of the securities held by the portfolio will be sold, all outstanding shares of the portfolio will be redeemed, and the proceeds will, unless otherwise directed by Contract owners, be allocated to the Money Market Subaccount and invested in the Money Market Portfolio. Barbara Kenworthy, Managing Director, PMFIM, has been portfolio manager of the Zero Coupon Bond Portfolios 2000 and 2005 since 1995. Ms. Kenworthy is also portfolio manager of the Prudential Diversified Bond Fund, Inc., the Prudential Government Income Fund, Inc., and the Diversified Bond and Government Income Portfolios of the Series Fund. Prior to 1994, Ms. Kenworthy was a portfolio manager and president of several taxable fixed-income funds for The Dreyfus Corp. BALANCED PORTFOLIOS CONSERVATIVE BALANCED PORTFOLIO. The objective of this portfolio is to achieve a favorable total investment return consistent with a portfolio having a conservatively managed mix of money market instruments, fixed income securities, and common stocks in proportions believed by the investment manager to be appropriate for an investor desiring diversification of investment who prefers a relatively lower risk of loss than that associated with the Flexible Managed Portfolio while recognizing that this reduces the chances of greater appreciation. To achieve this objective, the Conservative Balanced Portfolio will follow a policy of maintaining a more conservative asset mix among stocks, bonds and money market instruments than the Flexible Managed Portfolio. In general, the portfolio manager will observe the following range of target asset allocation mixes: Asset Type Minimum Normal Maximum ---------- ------- ------ ------- Stocks 15% 35% 50% Bonds and Money Market 25% 65% 70% The portfolio manager will make variations in the proportions of each investment category in accordance with its judgment about the expected returns and risks of the various investment categories, but will maintain at least 25% of the value of the portfolio's assets in fixed-income senior securities. 35 The bond portion of the portfolio will be invested primarily in securities with maturities of 2 to 10 years and ratings at the time of purchase within the four highest grades determined by Moody's, S&P, or a similar nationally-recognized rating service or if unrated, of comparable quality in the opinion of the portfolio manager. A description of debt ratings is in the Statement of Additional Information. Because of their shorter maturities, the value of the notes and bonds in this portfolio will be less sensitive to changes in interest rates than the longer-term bonds likely to be held in the Flexible Managed Portfolio. Thus, there will be less of a risk of loss of principal, but not as much of a likelihood for greater appreciation in value. Up to 20% of the bond portion of this portfolio may be invested in United States currency denominated debt securities issued outside the United States by foreign or domestic issuers. The common stock portion of this portfolio will be invested primarily in the equity securities of major, established corporations in sound financial condition that appear to offer attractive prospects of a total return from dividends and capital appreciation that is superior to broadly based stock indices. The money market portion of the portfolio will hold high-quality short-term debt obligations with a maturity of 12 months or less (as described in the Statement of Additional Information) and will maintain a dollar-weighted average maturity of 120 days or less. To the extent permitted by applicable insurance law, this portfolio may invest up to 30% of its total assets in non-United States currency denominated debt and equity securities of foreign and U.S. issuers. The particular risks of investments in foreign securities are described under FOREIGN SECURITIES on page 44. In addition, the portfolio may (i) purchase and sell options on equity securities, debt securities, stock indices and foreign currencies; (ii) purchase and sell stock index, interest rate and foreign currency futures contracts and options thereon; (iii) enter into forward foreign currency exchange contracts; (iv) purchase securities on a when-issued or delayed delivery basis; (v) use interest rate swaps; and (vi) make short sales. These techniques are described briefly under OPTIONS, FUTURES CONTRACTS AND SWAPS and SHORT SALES on page 44, and in detail in the Statement of Additional Information. The Conservative Balanced Portfolio is managed by a team of portfolio managers. Mark Stumpp, Managing Director, PIC, has been lead portfolio manager of the Conservative Balanced Portfolio since 1994 and is responsible for the overall asset allocation decisions. Mr. Stumpp shares supervisory responsibility of the portfolio management team with Theresa Hamacher, Managing Director, PIC. Ms. Hamacher and Mr. Stumpp also supervise the team of portfolio managers for the Flexible Managed Portfolio. Mr. Stumpp is also portfolio manager for several employee benefit trusts including The Prudential Retirement System for U.S. Employees and Special Agents. Prior to 1994, he was responsible for corporate pension asset management for Prudential Diversified Investment Strategies' corporate clients. Ms. Hamacher supervises a team of portfolio managers that manage over $65 billion in assets for PIC. FLEXIBLE MANAGED PORTFOLIO. The objective of this portfolio is achievement of a high total return consistent with a portfolio having an aggressively managed mix of money market instruments, fixed income securities, and common stocks, in proportions believed by The Prudential to be appropriate for an investor desiring diversification of investment who is willing to accept a relatively high level of loss in an effort to achieve greater appreciation. To achieve this objective, the Flexible Managed Portfolio will follow a policy of maintaining a more aggressive asset mix among stocks, bonds and money market investments than the Conservative Balanced Portfolio. In general, the portfolio manager will observe the following range of target asset allocation mixes: Asset Type Minimum Normal Maximum ---------- ------- ------ ------- Stocks 25% 60% 100% Bonds 0% 40% 75% Money Market 0% 0% 75% The portfolio manager may make short-run, and sometimes substantial, variations in the asset mix based upon its judgment about the expected returns and risks of the various investment categories. In varying the asset mix in accordance with these judgments, The Prudential will also seek to take advantage of imbalances in fundamental values among the different markets. The bond component of this portfolio is expected under normal circumstances to have a weighted average maturity of greater than 10 years. The values of bonds with longer maturities are generally more sensitive to changes in interest rates than those of shorter maturities. The bond portion of this portfolio will primarily be invested in securities that have a rating at the time of purchase within the four highest grades determined by Moody's, S&P, or a similar nationally-recognized rating service. A description of debt ratings is in the Statement of Additional Information. However, up to 25% of the bond component of this portfolio may be invested in securities having ratings at the time of purchase of "BB," "Ba" or lower, or if not rated, of comparable quality in the opinion of the portfolio manager, these securities are also known as high risk securities. Up to 20% of the bond portion of this portfolio may be invested in United States currency denominated debt securities issued outside the United States by foreign or domestic issuers. The established company common stock component of this portfolio will consist of the equity securities of major corporations that are believed to be in sound financial condition. In selecting 36 stocks of smaller capitalization companies, the portfolio manager will concentrate on companies with a capitalization below $5 billion that show above-average profitability (measured by return-on-equity, earnings, and dividend growth rates) with modest price/earnings ratios. The individual equity selections for this portfolio may tend to have more volatile market values than the equity securities selected for the Equity Portfolio or the Conservative Balanced Portfolio. The money market portion of the portfolio will hold high-quality short-term debt obligations with a maturity of 12 months or less (as described in the Statement of Additional Information) and will maintain a dollar-weighted average maturity of 120 days or less. To the extent permitted by applicable insurance law, this portfolio may invest up to 30% of its total assets in non-United States currency denominated debt and equity securities of foreign and U.S. issuers. The particular risks of investment in foreign securities are described under FOREIGN SECURITIES, page 44. In addition, the portfolio may (i) purchase and sell options on equity securities, debt securities, stock indices and foreign currencies; (ii) purchase and sell stock index, interest rate and foreign currency futures contracts and options thereon; (iii) enter into forward foreign currency exchange contracts; (iv) purchase securities on a when-issued or delayed delivery basis; (v) use interest rate swaps; and (vi) make short sales. These techniques are described briefly under OPTIONS, FUTURES CONTRACTS AND SWAPS and SHORT SALES on page 44, and in detail in the Statement of Additional Information. The Flexible Managed Portfolio is managed by a team of portfolio managers. Mark Stumpp, Managing Director, PIC, has been lead portfolio manager of the Flexible Managed Portfolio since 1994 and is responsible for the overall asset allocation decisions. Mr. Stumpp shares supervisory responsibility of the portfolio management team with Theresa Hamacher, Managing Director, PIC. Ms. Hamacher and Mr. Stumpp also supervise the team of portfolio managers for the Conservative Balanced Portfolio. Mr. Stumpp is also portfolio manager for several employee benefit trusts including The Prudential Retirement System for U.S. Employees and Special Agents. Prior to 1994, he was responsible for corporate pension asset management for Prudential Diversified Investment Strategies' corporate clients. Ms. Hamacher supervises a team of portfolio managers that manage over $65 billion in assets for PIC. HIGH YIELD BOND PORTFOLIOS HIGH YIELD BOND PORTFOLIO. The objective of this portfolio is to achieve a high total return through investment in a diversified portfolio of high yield/high risk fixed income securities. The portfolio seeks to achieve its objective by following a policy of generally investing in fixed income securities rated in the medium to lower categories by recognized rating services or in unrated fixed income securities of comparable quality. The portfolio expects to invest principally in fixed income securities rated Baa or lower by Moody's, or BBB or lower by S&P. Corporate bonds which are rated Baa by Moody's are described by Moody's as being investment grade, but are also characterized as having speculative characteristics. Corporate bonds rated below Baa by Moody's and BBB by S&P are considered speculative. A description of corporate bond ratings is in the Statement of Additional Information. Medium to lower rated fixed income securities tend to offer higher yields than higher rated securities because they are subject to the higher risk of an issuer's inability to meet principal and interest payments on the obligations (credit risk) and also to higher price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (market risk). In the lower quality segments of the fixed income securities market, changes in perception of the creditworthiness of individual issuers tend to occur more frequently and in a more pronounced manner than do changes in higher quality segments of the fixed income securities market. The Prudential considers both credit risk and market risk in selecting securities for the portfolio. It will evaluate, among other things, an issuer's financial history, condition, prospects and management. It will make its own independent credit analysis and will not rely principally on the ratings assigned by the ratings services (e.g., Moody's and S&P), although such ratings will be considered. By holding a diversified selection of such securities, the portfolio seeks to reduce both credit risk and volatility. The portfolio may invest up to 20% of its total assets in United States currency denominated fixed-income securities issued outside the United States by foreign and domestic issuers. The particular risks of investments in foreign securities are described under FOREIGN SECURITIES on page 44. The portfolio may also (i) purchase and sell options on debt securities; (ii) purchase and sell interest rate futures contracts and options thereon; (iii) purchase securities on a when-issued or delayed delivery basis; (iv) use interest rate swaps; and (v) make short sales. These techniques are described briefly under OPTIONS, FUTURES CONTRACTS AND SWAPS and SHORT SALES on page 44, and in detail in the Statement of Additional Information. Although the portfolio is not expected to engage in substantial short-term trading, it may sell securities it owns without regard to the length of time they have been held. The portfolio's turnover rate is not expected to exceed 150%. 37 Lars Berkman, Managing Director, PMFIM, and Michael Snyder, Vice President, PMFIM, have been co-managers of the High Yield Bond Portfolio since 1995. Mr. Berkman is also portfolio manager of the Prudential High Yield Fund and has been employed as a portfolio manager in the mutual fund unit since 1990. Mr. Snyder is also the portfolio manager of the High Yield Income Fund, Inc. for The Prudential and has been employed as a portfolio manager in the mutual fund unit since 1987. DIVERSIFIED STOCK PORTFOLIOS STOCK INDEX PORTFOLIO. The objective of this portfolio is to achieve investment results that correspond to the price and yield performance of publicly-traded common stocks in the aggregate. The portfolio seeks to achieve this objective by following the policy of attempting to duplicate the price and yield performance of the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500 Index"), an index which represents more than 70% of the total market value of all publicly-traded common stocks and is widely viewed among investors as representative of the performance of publicly-traded common stocks as a whole. The S&P 500 Index is composed of 500 selected common stocks, over 95% of which are listed on the New York Stock Exchange ("NYSE"). Standard & Poor's Corporation chooses the stocks to be included in the index on a statistical basis taking into account market values and industry diversification. Inclusion in the index in no way implies an opinion by Standard & Poor's Corporation as to a stock's attractiveness as an investment, and Standard & Poor's Corporation is not in any way affiliated with this portfolio. "Standard & Poor's," "Standard & Poor's 500" and "500" are trademarks of McGraw Hill, Inc. and have been licensed for use by The Prudential Insurance Company of America and its affiliates and subsidiaries. The Series Fund is not sponsored, endorsed, sold or promoted by S&P and S&P makes no representation regarding the advisability of investing in the Series Fund. Reference is made to the Statement of Additional Information which sets forth certain additional disclaimers and limitations of liabilities on behalf of S&P. The S&P 500 Index is a "weighted" index in which the weighting of each stock depends on its relative total market value: its market price per share times the number of shares outstanding. Because of this weighting, approximately 10% of the S&P 500 Index's value is accounted for by the stocks of the five largest companies by relative market value. As of December 31, 1995 those companies were: General Electric Co., American Telephone and Telegraph Co., Exxon Corp., Coca-Cola Co., and Merck & Co.,Inc. This portfolio will not be "managed" in the traditional sense of using economic, financial or market analysis to determine the stocks to be purchased by the portfolio. Rather, the portfolio manager will purchase stocks for the portfolio in proportion to their weighting in the S&P 500 Index. Thus, adverse financial performance by a company will not result in reduction or elimination of the portfolio's holdings of its stock and, conversely, superior financial performance by a company will not lead the portfolio to increase its holdings of the company's stock. If a stock held by this portfolio is eliminated from the S&P 500 Index, the portfolio will sell its holdings of the stock regardless of the prospects of the company. Because the portfolio will not be "managed" in the traditional sense, portfolio turnover is expected to be low and is generally not expected to exceed 10% and brokerage commissions are also expected to be correspondingly low. The following table shows the performance of the S&P 500 Index for the 25 years ending in 1995. The period covered by this table is one of generally rising stock prices, and the performance of the S&P 500 Index in this period should not be viewed as a representation of any future performance by that index. In addition, the fees and costs involved in the operation of the Stock Index Portfolio mean that the performance of a share of stock in the portfolio may not equal the performance of the S&P 500 Stock Index even if the assets held by the portfolio do equal that performance. 38 - ------------------------------------------------------------------------------- *S&P 500 WITH DIVIDENDS REINVESTED ANNUAL PERCENTAGE CHANGE - ------------------------------------------------------------------------------- 1971 +14.56 1984 +6.10 1972 +18.90 1985 +31.57 1973 -14.77 1986 +18.56 1974 -26.39 1987 +5.10 1975 +37.16 1988 +16.61 1976 +23.57 1989 +31.69 1977 -7.42 1990 -3.10 1978 +6.38 1991 +30.47 1979 +18.20 1992 +7.61 1980 +32.27 1993 +10.08 1981 -5.01 1994 +1.32 1982 +21.44 1995 +37.58 1983 +22.38 - ------------------------------------------------------------------------------- Source: Standard & Poor's Corporation. Percentage change calculated in accordance with specifications of SEC release number IA-327. - ------------------------------------------------------------------------------- In the eight full years since this portfolio was established its total return, compared to that of the S&P 500 Index, was as follows: ------------------------------------------------------------- ANNUAL PERCENTAGE TOTAL RETURN CHANGE S&P 500 STOCK INDEX WITH PORTFOLIO DIVIDENDS (AFTER DEDUCTION OF REINVESTED EXPENSES) ------------------------------------------------------------- 1988 +16.61 +15.44 1989 +31.69 +30.93 1990 -3.10 -3.63 1991 +30.47 +29.72 1992 +7.61 +7.13 1993 +10.08 +9.66 1994 +1.32 +1.01 1995 +37.58 +37.06 ------------------------------------------------------------- A fuller description of the policies followed by the Stock Index Portfolio is in the Statement of Additional Information. EQUITY INCOME PORTFOLIO. The objective of this portfolio is both current income and capital appreciation through investment primarily in common stocks and convertible securities that provide favorable prospects for investment income returns above those of the Standard & Poor's 500 Stock Index or the NYSE Composite Index. The portfolio seeks to achieve this objective by following the policy of investing in such securities, giving emphasis to earnings, balance sheet and cash flow analysis, and the relationships that these factors have to the price and return of a given security. Under normal circumstances, the portfolio intends to invest at least 65% of its total assets in such securities. The portfolio may invest the balance of its assets in other stocks, other securities convertible into common stocks and in debt securities (including money market instruments). The portfolio may under normal circumstances invest up to 35% of its total assets in money market instruments of the type invested in by the Money Market Portfolio and without limit when the portfolio's manager believes market conditions warrant a temporary defensive posture or pending the investment of proceeds from sales of the portfolio shares. In addition, up to 35% of the portfolio's total assets may be invested in other fixed-income obligations. The portfolio anticipates that these will primarily be rated A or better by Moody's or S&P. However, the portfolio may also invest in lower-rated fixed-income securities, although it will not invest in securities rated lower than CC or Ca by Moody's or S&P, respectively. The risks of medium to lower rated securities, also known as high risk securities, are described above in connection with the High Yield Bond Portfolio. A description of debt ratings is in the Statement of Additional Information. The portfolio may also invest in non-rated fixed-income securities which, in the opinion of the manager, are of a quality comparable to rated securities in which the portfolio will invest. To the extent permitted by applicable insurance law, the portfolio may invest up to 30% of its total assets in non-United States currency denominated debt and equity securities of foreign and U.S. issuers. The particular risks of investments in foreign securities are described under FOREIGN SECURITIES on page 44. 39 In addition, the portfolio may (i) purchase and sell options on equity securities, stock indices and foreign currencies; (ii) purchase and sell stock index and foreign currency futures contracts and options thereon; (iii) enter into forward foreign currency exchange contracts; and (iv) purchase securities on a when-issued or delayed delivery basis. These techniques are described briefly under OPTIONS, FUTURES CONTRACTS AND SWAPS on page 44, and in detail in the Statement of Additional Information. As a result of its investment policies, the portfolio's turnover rate may exceed 100%, although it is not expected to exceed 200%. Warren Spitz, Managing Director, PMFIM, has been portfolio manager of the Equity Income Portfolio since 1988. Mr. Spitz is also the portfolio manager of the Prudential Equity Income Fund, Inc. EQUITY PORTFOLIO. The objective of this portfolio is to achieve capital appreciation through investment primarily in common stocks of companies, including major established corporations as well as smaller capitalization companies, that appear to offer attractive prospects of price appreciation that is superior to broadly-based stock indices. Current income, if any, is incidental. The portfolio seeks to achieve this objective by following the policy of investing primarily in common stocks. It may also invest to a limited extent in short, intermediate or long term debt, either convertible or nonconvertible into common stock, as well as in nonconvertible preferred stock. The portfolio will attempt to maintain a flexible approach to the selection of common stocks of various types of companies whose valuations appear to offer opportunities for above-average appreciation. Thus, the portfolio may invest in securities of companies whose estimated growth in earnings exceeds that projected for the market as a whole because of factors such as expanding market share, new products or changes in market environment. Or it may invest in "undervalued" securities which are often characterized by a lack of investor recognition of the basic value of a company's assets. Securities of companies with sales and earnings trends which are currently unfavorable but which are expected to reverse may also be in the portfolio. The effort to achieve price appreciation that is superior to broadly based stock indices necessarily involves accepting a greater risk of declining values. During periods when stock prices decline generally, it can be expected that the value of the portfolio will also decline. To the extent permitted by applicable insurance law, this portfolio may invest up to 30% of its total assets in non-United States currency denominated common stock and fixed-income securities convertible into common stock of foreign and U.S. issuers. The particular risks of investments in foreign securities are described in further detail under FOREIGN SECURITIES on page 44. In addition, the portfolio may (i) purchase and sell options on equity securities, stock indices and foreign currencies; (ii) purchase and sell stock index and foreign currency futures contracts and options thereon; (iii) enter into forward foreign currency exchange contracts; and (iv) purchase securities on a when-issued or delayed delivery basis. These techniques are described briefly under OPTIONS, FUTURES CONTRACTS AND SWAPS on page 44, and in detail in the Statement of Additional Information. A portion of the portfolio may be invested in short-term debt obligations of the kind held in the Money Market portfolio as described in the Statement of Additional Information in order to make effective use of cash reserves pending investment in common stocks. Thomas Jackson, Managing Director, PMFIM, has been portfolio manager of the Equity Portfolio since 1990. Mr. Jackson is also portfolio manager of the Prudential Equity Fund, Inc. PRUDENTIAL JENNISON PORTFOLIO. The objective of the Prudential Jennison Portfolio is to achieve long-term growth of capital through investment primarily in equity securities of established companies with above-average growth prospects. Current income, if any, is incidental. In order to achieve this objective, the Prudential Jennison Portfolio will follow a policy of selecting stocks on a company-by-company basis primarily through the use of fundamental analysis. The portfolio manager will look for companies that have demonstrated growth in earnings and sales, high returns on equity and assets, or other strong financial characteristics, and in the opinion of the portfolio manager, are attractively valued. These companies tend to have a unique market niche, a strong new product profile or superior management. Under normal market conditions, at least 65% of the value of the total assets of the portfolio will be invested in common stocks and preferred stocks of companies which exceed $1 billion in market capitalization. The portfolio may invest up to 35% of its total assets in: (i) common stocks, preferred stocks, and other equity-related securities of companies that are undergoing changes in management or product and marketing dynamics which have not yet been reflected in reported earnings but which are expected to impact earnings in the intermediate term -- these securities often lack investor recognition and are often favorably valued; (ii) other equity-related securities; (iii) with respect to a maximum of 30% of its total assets, common stocks, preferred stocks and other equity-related securities of non-United States currency denominated issuers or American Depository Receipts ("ADRs"); (iv) investment grade fixed income securities and mortgage-backed securities, including lower rated securities [rated in the fourth highest rating category by a nationally recognized rating service (e.g. Baa by Moody's 40 Investor Services or BBB by Standard & Poor's)] or, if not rated, determined by the portfolio manager to be of comparable quality to securities so rated. A description of debt ratings is contained in the Statement of Additional Information; and (v) obligations issued or guaranteed by the U.S. Government, its agencies and instrumentalities. In addition, the portfolio may: (i) purchase and sell options on equity securities, stock indices, and foreign currencies; (ii) lend its portfolio securities; (iii) purchase and sell stock index and foreign currency futures contracts and options thereon; (iv) enter into forward foreign currency exchange contracts; and (v) enter into repurchase agreements and purchase securities on a when-issued or delayed delivery basis. These techniques are described on pages 44 through 45, and further information about some of them is included in the Statement of Additional Information. The effort to achieve superior investment returns necessarily involves a risk of exposure to declining values. Securities in which the portfolio may primarily invest have historically been more volatile than the Standard & Poor's 500 Composite Stock Price Index. Accordingly, during periods when stock prices decline generally, it can be expected that the value of the portfolio will decline more than the market indices. David Poiesz, Director and Senior Vice President of Jennison Associates Capital Corp., has been portfolio manager of the Prudential Jennison Portfolio since its inception in 1995. Mr. Poiesz also manages the Prudential Institutional Growth Fund and the Prudential Jennison Fund. Mr. Poiesz joined Jennison Associates in 1983 as an equity research analyst and has been an equity portfolio manager since 1991. SMALL CAPITALIZATION STOCK PORTFOLIO. The objective of this portfolio is to achieve long-term growth of capital through investment primarily in equity securities of publicly-traded companies with small market capitalization. Current income, if any, is incidental. The portfolio seeks to achieve this objective by following the policy of attempting to duplicate the price and yield performance of the Standard & Poor's Small Capitalization Stock Index (the "S&P SmallCap 600 Index"), an index which consists of six-hundred smaller capitalization domestic stocks chosen for market size, liquidity, and industry group representation. Stocks in the index have market capitalizations between $35 million and $1.215 billion. However, to be included in the index, stock selections are also screened for trading volume, share turnover, ownership concentration, share price and bid/ask spreads. The initial sector weightings were selected to reflect the industry distribution of all small capitalization stocks followed by S&P. The S&P SmallCap 600 Index has above average risk and may fluctuate more than the S&P 500 Index which invests in stocks of larger, more established firms. The S&P SmallCap 600 Index is a market weighted index (stock price times shares outstanding), with each stock affecting the index in proportion to its market value. Standard & Poor's Corporation is responsible for selecting and maintaining the list of stocks to be included in the index. Inclusion in the index in no way implies an opinion by Standard & Poor's Corporation as to a stock's attractiveness as an investment. "Standard & Poor's", "Standard & Poor's Small Capitalization Stock Index" and "Standard & Poor's SmallCap 600" are trademarks of McGraw Hill. Inc. The Series Fund is not sponsored, endorsed, sold or promoted by S&P and S&P makes no representation regarding the advisability of investing in the Series Fund. Reference is made to the statement of additional information which sets forth certain additional disclaimers and limitations of liabilities on behalf of S&P. The following table shows the performance of the S&P SmallCap 600 Index for the 10 years ending in 1995. Although the index was first published in 1994, S&P reconstructed its performance for earlier years. The performance of the S&P SmallCap 600 Index in this period should not be viewed as a representation of any future performance by that index. In addition, the fees and costs involved in the operation of the Small Capitalization Stock Portfolio mean that the performance of a share of stock in the portfolio may not equal the performance of the S&P Small Cap 600 Stock Index even if the assets held by the portfolio do equal that performance. 41 S&P SMALLCAP 600 WITH DIVIDENDS REINVESTED ANNUAL PERCENTAGE CHANGE ---------------------------------------------------------- 1986 +3.23 1987 -13.50 1988 +19.49 1989 +13.89 1990 -9.90 1991 +48.49 1992 +21.04 1993 +18.79 1994 -4.77 1995 +29.96 ---------------------------------------------------------- Source: Standard & Poor's Corporation. Percentage change calculated in accordance with specifications of SEC release number IA-327. ---------------------------------------------------------- Under normal circumstances, this portfolio intends to be invested in all or a representative sample of the stocks in the S&P SmallCap 600 Index. The portfolio may hold cash or its equivalent, these holdings may cause its performance to differ from that of the S&P SmallCap 600 Index. The portfolio will attempt to minimize any such differences in performance through transactions involving stock index futures contracts, options on stock indices, and/or options on stock index future contracts. In addition, the portfolio may: (i) purchase and sell options on equity securities; (ii) lend its portfolio securities; and (iii) purchase securities on a when-issued or delayed delivery basis. These techniques are described briefly under OPTIONS, FUTURES CONTRACTS AND SWAPS on page 44, and in detail in the Statement of Additional Information. The investment policies and techniques of the Small Capitalization Stock Portfolio are not fundamental and may be changed without shareholder approval if it is determined that alternative investment techniques would be more effective in achieving the portfolio's objective. Wai Chiang, Director of Portfolio Management, Prudential Diversified Investment Strategies, has been portfolio manager of the Small Capitalization Stock Portfolio since its inception in 1995. Mr. Chiang also manages the unregistered separate accounts, Pridex and Pridex 500 for The Prudential. Mr. Chiang has been employed by The Prudential as a portfolio manager since 1986. GLOBAL PORTFOLIO. The objective of this portfolio is long-term growth of capital through investment primarily in common stocks and common stock equivalents (such as convertible debt securities) of foreign and domestic issuers. Current income, if any, is incidental. The portfolio is intended to provide investors with the opportunity to invest in a portfolio of securities of companies located throughout the world. In making the allocation of assets among the various countries and geographic regions, the portfolio manager ordinarily considers such factors as prospects for relative economic growth between foreign countries; expected levels of inflation and interest rates; government policies influencing business conditions; the range of individual investment opportunities available to international investors; and other pertinent financial, tax, social, political and national factors--all in relation to the prevailing prices of the securities in each country or region. The portfolio is not required to maintain any particular geographic or currency mix of its investments. The portfolio intends to maintain investments in at least three countries (including the United States), but may, when market conditions warrant, invest up to 35% of its assets in companies located in any one country (other than the United States). In analyzing companies for investment, the portfolio manager ordinarily looks for one or more of the following characteristics: prospects for above-average earnings growth per share; high return on invested capital; healthy balance sheet; sound financial and accounting policies and overall financial strength; strong competitive advantages; effective research and product development and marketing; efficient service; pricing flexibility; strength of management; and general operating characteristics which will enable the companies to compete successfully in their marketplace--all in relation to the prevailing prices of the securities of such companies. Investing in securities of foreign companies and countries involves special risks. See FOREIGN SECURITIES on page 44. 42 When the portfolio manager believes market conditions dictate a temporary defensive strategy, or during periods of structuring and restructuring the portfolio, the portfolio may invest without limit in money market investments of the kind in which the Money Market Portfolio invests, including repurchase agreements. In addition, the portfolio may (i) purchase and sell options on equity securities, stock indices and foreign currencies; (ii) purchase and sell stock index, interest rate and foreign currency futures contracts and options thereon; (iii) enter into forward foreign currency exchange contracts; and (iv) purchase securities on a when-issued or delayed delivery basis. These techniques are described briefly under OPTIONS, FUTURES CONTRACTS AND SWAPS on page 44, and in detail in the Statement of Additional Information. Daniel Duane, Managing Director, PMFIM, has been the portfolio manager of the Global Portfolio since 1990. Mr. Duane also manages several mutual funds including the Prudential Global Fund, Inc. SPECIALIZED PORTFOLIOS NATURAL RESOURCES PORTFOLIO. The objective of this portfolio is long-term growth of capital through investment primarily in common stocks and convertible securities of "natural resource companies" (as defined below) and in securities (typically debt securities and preferred stocks) the terms of which are related to the market value of some natural resource ("asset-indexed securities"). Under normal circumstances, the portfolio will invest at least 65% of its total assets in such securities. Companies that primarily own, explore, mine, process or otherwise develop natural resources, or supply goods and services primarily to such companies, will be considered "natural resource companies." Natural resources generally include precious metals (e.g., gold, silver and platinum), ferrous and nonferrous metals (e.g., iron, aluminum and copper), strategic metals (e.g., uranium and titanium), hydrocarbons (e.g., coal, oil and natural gases), timber land, undeveloped real property and agricultural commodities. The value of equity securities of natural resource companies (including those companies that are primarily involved in providing goods and services to natural resource companies) will fluctuate pursuant to market conditions generally, as well as to the market for the particular natural resource in which the issuer is involved. The Prudential will seek securities that are attractively priced relative to the intrinsic values of the relevant natural resource or that are of companies which are positioned to benefit under existing or anticipated economic conditions. Accordingly, the portfolio may shift its emphasis from one natural resource industry to another depending upon prevailing trends or developments. However, the portfolio will not invest 25% or more of its total assets in the securities of companies in any one natural resource industry. "Asset-indexed securities," in which the portfolio may also invest, are securities whose principal amount, redemption terms or conversion terms are related to the market price of a natural resource asset. The portfolio expects to purchase asset-indexed securities which are rated, or are issued by issuers that have outstanding obligations which are rated, at least BBB or Baa by S&P or Moody's, respectively, or commercial paper rated at least A-2, or P-2 by S&P or Moody's, respectively, or in unrated securities that The Prudential determines to be of comparable quality. The portfolio reserves the right, however, to invest in asset-indexed securities rated as low as CC or Ca by Moody's or S&P, respectively, or in unrated securities of comparable quality, also known as high risk securities. The portfolio may invest a small portion of its assets in other stocks, other securities convertible into common stocks, fixed-income securities that are primarily rated A or better by Moody's or S&P (including money market instruments), and options on stocks and on natural resource-related stock indices. A description of debt ratings is in the Statement of Additional Information. The portfolio may under normal circumstances invest up to 35% of its total assets in money market instruments of the type invested in by the Money Market Portfolio and without limit when the portfolio manager believes market conditions warrant a temporary defensive posture or during periods of structuring and restructuring the portfolio. To the extent permitted by applicable insurance law, this portfolio may invest up to 30% of its total assets in non-United States currency denominated common stock and fixed-income securities convertible into common stock of foreign and U.S. issuers. The particular risks of investments in foreign securities are described under FOREIGN SECURITIES on page 44. In addition, the portfolio may (i) purchase and sell options on equity securities, stock indices and foreign currencies; (ii) purchase and sell stock index and foreign currency futures contracts and options thereon; (iii) enter into forward foreign currency exchange contracts; and (iv) purchase securities on a when-issued or delayed delivery basis. These techniques are described briefly under OPTIONS, FUTURES CONTRACTS AND SWAPS on page 44, and in detail in the Statement of Additional Information. The portfolio's turnover rate may exceed 100%, although it is not expected to exceed 200%. Leigh Goehring, Vice President, PMFIM, has been portfolio manager of the Natural Resources Portfolio since 1992. Mr. Goehring also manages the Prudential Global Natural Resources Fund, Inc. Prior to 1992, Mr. Goehring was portfolio manager of The Prudential-Bache Option Growth Fund. 43 FOREIGN SECURITIES The Global Portfolio may invest up to 100% of its total assets in common stock and convertible securities denominated in a foreign currency and issued by foreign or domestic issuers. The Diversified Bond and High Yield Bond Portfolios may each invest up to 20% of their assets in United States currency denominated debt securities issued outside the United States by foreign or domestic issuers. In addition, the bond components of the Conservative Balanced and Flexible Managed Portfolios may each invest up to 20% of their assets in such securities. To the extent permitted by applicable insurance law, the Equity Income, Conservative Balanced 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 domestic issuers. Further, to the extent permitted by applicable insurance law, the Equity, Prudential Jennison, and Natural Resources Portfolios may invest up to 30% of their assets in non-United States currency denominated common stock and fixed income securities convertible into common stock of foreign and domestic issuers. Securities issued outside the United States and not publicly traded in the United States, as well as American Depository Receipts ("ADRs") and securities denominated in a foreign currency are referred to collectively in this prospectus as "foreign securities." ADRs are U.S. dollar-denominated certificates issued by a United States bank or trust company and represent the right to receive securities of a foreign issuer deposited in a domestic bank or foreign branch of a United States bank and traded on a United States exchange or in an over-the-counter market. Investment in ADRs has certain advantages over direct investment in the underlying foreign securities because they are easily transferable, have readily available market quotations, and the foreign issuers are usually subject to comparable auditing, accounting, and financial reporting standards as domestic issuers. Foreign securities involve risks of political and economic instability in the country of the issuer, the difficulty of predicting international trade patterns, the possibility of imposition of exchange controls and, in the case of securities not denominated in United States currency, the risk of currency fluctuations. Such securities may be subject to greater fluctuations in price than domestic securities. Under certain market conditions, foreign securities may be less liquid than domestic securities. In addition, there may be less publicly available information about a foreign company than about a domestic company. Foreign companies generally are subject to uniform accounting, auditing, and financial reporting standards comparable to those applicable to domestic companies. There is generally less government regulation of securities exchanges, brokers, and listed companies abroad than in the United States, and, with respect to certain foreign countries, there is a possibility of expropriation, confiscatory taxation or diplomatic developments which could affect investment in those countries. If the security is denominated in foreign currency, it may be affected by changes in currency rates and in exchange control regulations, and costs may be incurred in connection with conversions between currencies. Finally, in the event of a default of any foreign debt obligations, it may be more difficult for a portfolio to obtain or to enforce a judgment against the issuers of such securities. See FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS in the Statement of Additional Information. OPTIONS, FUTURES CONTRACTS AND SWAPS The description of each portfolio's investment policies also state whether they will invest in what are sometimes called derivative securities. These include options (which may be to buy or sell equity securities, debt securities, stock indices, foreign currencies and stock index futures contracts); futures contracts on interest bearing securities, stock and interest rate indices, and foreign currencies; and interest rate swaps. These investments have not in the past represented more than a very minor part of the investments of any portfolio but may increase in the future. A call option gives the owner the right to buy and a put option the right to sell a designated security or index at a predetermined price for a given period of time. They will be used primarily to hedge or minimize fluctuations in the principal value of a portfolio or to generate additional income. They involve risks which differ, depending upon the particular option. But they often offer an attractive alternative to the purchase or sale of the related security. Futures contracts represent a contractual obligation to buy or sell a designated security or index within a stated period. They can be used as a hedge against or to minimize fluctuations of a portfolio or as an efficient way of establishing certain positions more quickly than direct purchase of the securities. They can also be used to speculate, but this will not be done by any of the portfolios. They involve risks of various kinds, all of which could result in losses rather than in achieving the intended objective of any particular purchase. Because options, futures and swaps are now used to such a limited extent, a full description of these investments and the risks associated with them is in the Statement of Additional Information. SHORT SALES The Diversified Bond, High Yield Bond, Government Income, Conservative Balanced and Flexible Managed Portfolios may sell securities they do not own in anticipation of a decline in the market value of those securities ("short 44 sales"). The portfolio will incur a loss as a result of the short sale if the price of the security increases between the date of the short sale and the date on which the portfolio replaces the borrowed security. The portfolio will realize a gain if the security declines in price between those dates. This result is the opposite of what one would expect from a cash purchase of a long position in a security. The amount of any gain will be decreased, and the amount of any loss will be increased, by the amount of any premium or interest paid in connection with the short sale. REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS The Diversified Bond, High Yield Bond, and Government Income Portfolios, as well as the fixed income portions of the Conservative Balanced and Flexible Managed Portfolios, may use reverse repurchase agreements and dollar rolls. The Money Market Portfolio and the money market portion of any portfolio may use reverse repurchase agreements. Reverse repurchase agreements involve the sale of securities held by a portfolio with an agreement by the portfolio to repurchase the same securities at an agreed upon price and date. During the reverse repurchase period, the portfolio often continues to receive principal and interest payments on the sold securities. The terms of each agreement reflect a rate of interest for use of the funds for the period, and thus these agreements have the characteristics of borrowing by the portfolio. Dollar rolls involve sales by a portfolio of securities for delivery in the current month with a simultaneous contract to repurchase substantially similar securities (same type and coupon) from the same party at an agreed upon price and date. During the roll period, the portfolio forgoes principal and interest paid on the securities. A portfolio is compensated by the difference between the current sales price and the forward price for the future purchase (often referred to as the "drop") as well as by the interest earned on the cash proceeds of the initial sale. A "covered roll" is a specific type of dollar roll for which there is an offsetting cash position or a cash equivalent security position which matures on or before the forward settlement date of the dollar roll transaction. A portfolio will establish a segregated account with its custodian in which it will maintain cash, U.S. Government securities or other liquid high-grade debt obligations equal in value to its obligations in respect of reverse repurchase agreements and dollar rolls. Reverse repurchase agreements and dollar rolls involve the risk that the market value of the securities retained by the portfolio may decline below the price of the securities the portfolio has sold but is obligated to repurchase under the agreement. In the event the buyer of securities under a reverse repurchase agreement or dollar roll files for bankruptcy or becomes insolvent, the portfolio's use of the proceeds of the agreement may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the portfolio's obligation to repurchase the securities. The Diversified Bond, High Yield Bond, and Government Income Portfolios, as well as the fixed income portions of the Conservative Balanced and Flexible Managed Portfolios, will not obligate more than 30% of their net assets in connection with reverse repurchase agreements and dollar rolls. No other portfolio will obligate more than 10% of its net assets in connection with reverse repurchase agreements. LOANS OF PORTFOLIO SECURITIES All of the portfolios except the Money Market Portfolio may from time to time lend the securities they hold to broker-dealers, provided that such loans are made pursuant to written agreements and are continuously secured by collateral in the form of cash, U.S. Government Securities or irrevocable standby letters of credit in an amount equal to at least the market value at all times of the loaned securities plus the accrued interest and dividends. During the time securities are on loan, the portfolio will continue to receive the interest and dividends, or amounts equivalent thereto, on the loaned securities, while receiving a fee from the borrower or earning interest on the investment of the cash collateral. There is a slight risk that the borrower may become insolvent, which might delay carrying out a decision to sell the loaned security. This risk can be minimized by careful selection of borrowers and requiring and monitoring the adequacy of capital. No loans will be made to any broker affiliated with The Prudential. INVESTMENT RESTRICTIONS APPLICABLE TO THE PORTFOLIOS The Series Fund is subject to certain investment restrictions which are fundamental to the operations of the Series Fund and may not be changed except with the approval of a majority vote of the persons participating in the affected portfolio. The investments of the various portfolios are generally subject to certain additional restrictions under state laws. In the event of future amendments to the applicable New Jersey statutes, each portfolio will comply, without the approval of the shareholders, with the statutory requirements as so modified. A detailed discussion of investment restrictions applicable to the Series Fund is in the Statement of Additional Information. 45 INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES The Series Fund has entered into an Investment Advisory Agreement with The Prudential under which The Prudential will, subject to the direction of the Board of Directors of the Series Fund, be responsible for the management of the Series Fund, and provide investment advice and related services to each portfolio. The Prudential manages the assets that it owns as well as those of various separate accounts established by The Prudential and those held by other investment companies for which it acts as investment advisor. Total assets under management as of December 31, 1995 was over $314 billion, which includes over $219 billion owned by The Prudential and approximately $95 billion of external assets under The Prudential's management. Subject to The Prudential's supervision, substantially all of the investment advisory services provided to the Series Fund by The Prudential are furnished, with respect to 14 of the Series Fund's 15 portfolios, by its wholly-owned subsidiary PIC, pursuant to the Service Agreement between The Prudential and PIC. The Agreement provides that a portion of the fee received by The Prudential for providing investment advisory services will be paid to PIC. The Conservative Balanced and Flexible Managed Portfolios are managed by PIC, using a team of portfolio managers under the supervision of Theresa Hamacher and Mark Stumpp, Managing Directors, PIC. Investment advisory services with respect to the Prudential Jennison Portfolio provided by The Prudential are furnished by another wholly-owned subsidiary, Jennison Associates Capital Corp. ("Jennison"), pursuant to an Investment Subadvisory Agreement between The Prudential and Jennison. That Agreement provides that a portion of the fee received by The Prudential for providing investment advisory services to the Prudential Jennison Portfolio will be paid to Jennison. PIC and Jennison are both registered as investment advisors under the Investment Advisers Act of 1940. Under the Investment Advisory Agreement, The Prudential receives an investment management fee as compensation for its services to the Series Fund. The fee is a daily charge, payable quarterly, equal to an annual percentage of the average daily net assets of each individual portfolio. It is set forth on page 18. For the year ended December 31, 1995, the Series Fund's total expenses were 0.55% of the average net assets of all of the Series Fund's portfolios. The investment management fee for that period constituted 0.51% of the average net assets. Further information about the investment management arrangements and the expenses of the Series Fund is in the Statement of Additional Information. PORTFOLIO BROKERAGE AND RELATED PRACTICES The Prudential is responsible for decisions to buy and sell securities for the portfolios, the selection of brokers and dealers to effect the transactions, and the negotiation of brokerage commissions, if any. Fixed income securities, as well as equity securities traded in the over-the-counter market, are generally traded on a "net" basis with dealers acting as principals for their own accounts without a stated commission, although the price of the security usually includes a profit to the dealer. An affiliated broker may be employed to execute brokerage transactions on behalf of the portfolios, as long as the commissions are reasonable and fair compared to the commissions received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time. The Series Fund may not engage in any transactions in which The Prudential or its affiliates, including The Prudential Securities Incorporated, acts as principal, including over-the-counter purchases and negotiated trades in which such a party acts as a principal. Additional information about portfolio brokerage and related transactions is in the Statement of Additional Information. STATE REGULATION The Prudential 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. The Prudential 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, The Prudential 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 included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein, and are included in reliance upon the reports of such firm given 46 upon their authority as experts in accounting and auditing. Deloitte & Touche LLP's principal business address is Two Hilton Court, Parsippany, New Jersey 07054-0319. Actuarial matters included in this prospectus have been examined by Nancy D. Davis, FSA, MAAA, whose opinion is filed as an exhibit to the registration statement. On March 12, 1996, Deloitte & Touche LLP was dismissed as the independent accountants of The Prudential. There have been no disagreements with Deloitte & Touche LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of the accountant, would have caused them to make a reference to the matter in their reports. LITIGATION No litigation is pending that would have a material effect upon the Account or the Series Fund. EXPANDED TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION Included in the registration statements for the Contracts and the Series Fund is a Statement of Additional Information which is available without charge by writing to The Prudential at Prudential Plaza, Newark, New Jersey 07102-3777. 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 The Prudential 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 The Prudential's expenses will be reduced, some of the charges under those Contracts may be reduced. SALES TO PERSONS 14 YEARS OF AGE OR YOUNGER. The face amount will increase, on the insured's 21st birthday, to 150% of the initial face amount. The application of some of the other Contract provisions may be affected. 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. For Form A Contracts there will be a surrender charge. The death benefit will change. There may be tax consequences. You should consult your Prudential representative to discuss whether a withdrawal or a loan is preferable. INCREASES IN FACE AMOUNT. If you wish to increase the amount of your insurance, it may be preferable to increase the amount of this Contract rather than to buy another Contract. Conditions will apply, and there will be changes in the premiums and charges. Other provisions of your Contract will be affected. DECREASES IN FACE AMOUNT. In addition to effecting a partial surrender of the Contract, you may, within limits, reduce the Contract's face amount without withdrawing any cash. This reduces the amount at risk and the monthly mortality charge. There could be tax consequences. Your Prudential representative should first be consulted. 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 The 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, 10% for the next three years and smaller commissions thereafter. For new Contracts issued on or about July 1, 1996 the commission rates for the 47 second through tenth years will change to no more than 6% of the Scheduled Premiums and smaller commissions thereafter. TAX-QUALIFIED PENSION PLANS. Certain restrictions apply if the Contract is purchased to fund, in part, a tax-advantaged pension plan. 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. EXCHANGE OF FIXED-DOLLAR CONTRACT TO VARIABLE CONTRACT. Owners of an existing Prudential fixed-dollar life insurance contract may be able to exchange it for a Contract upon favorable terms. II. INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS. General Convertible Securities Warrants Options and Futures When-Issued and Delayed Delivery Securities Short Sales Short Sales Against the Box Interest Rate Swaps Loans of Portfolio Securities Illiquid Securities Forward Foreign Currency Exchange Contracts Further Information About the Policies of the Stock Index Portfolio Further Information About the Zero Coupon Bond Portfolios 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 ARRANGEMENTS AND EXPENSES. A fuller description than that in the prospectus is given. V. PORTFOLIO TRANSACTIONS AND BROKERAGE. A description is given of how securities transactions are effected and how The Prudential selects the brokers. VI. DETERMINATION OF NET ASSET VALUE. A full description is given of how the daily net asset value of each portfolio is determined. VII. SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO MAY CURRENTLY INVEST. A full description is given. VIII. DEBT RATINGS. A description is given of how Moody's Investors Services, Inc. and Standard & Poor's Corporation describe the creditworthiness of debt securities. IX. POSSIBLE REPLACEMENT OF THE SERIES FUND. Although it is most unlikely, it is conceivable that The Prudential might wish to replace the Series Fund portfolios with other investment options. SEC approval will be needed. X. OTHER INFORMATION CONCERNING THE SERIES FUND. Incorporation and Authorized Stock Dividends, Distributions and Taxes Custodian and Transfer Agent Experts Licenses 48 More detail is provided about these matters. XI. DIRECTORS AND OFFICERS OF THE PRUDENTIAL AND MANAGEMENT OF THE SERIES FUND. The names and recent affiliations of The Prudential's directors and executive officers are given. The same information is given for the Series Fund. XII. FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC. XIII. THE PRUDENTIAL SERIES FUND, INC. SCHEDULE OF INVESTMENTS. ADDITIONAL INFORMATION A registration statement has been filed 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 principal office in Washington, D.C., upon payment of a prescribed fee. Further information may also be obtained from The Prudential. Its address and telephone number are on the cover of this prospectus. FINANCIAL STATEMENTS The financial statements of the Account should be distinguished from the consolidated financial statements of The Prudential, which should be considered only as bearing upon the ability of The Prudential to meet its obligations under the Contracts. The financial statements of the Series Fund are in the Statement of Additional Information. 49 (This page intentionally left blank.) FINANCIAL STATEMENTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF NET ASSETS December 31, 1995
SUBACCOUNTS -------------------------------------------------------------- MONEY DIVERSIFIED FLEXIBLE TOTAL MARKET BOND EQUITY MANAGED -------------- -------------- -------------- -------------- -------------- ASSETS Investment in shares of The Prudential Series Fund, Inc. Portfolios at net asset value [Note 2].......... $3,599,591,117 $ 91,504,205 $ 102,110,437 $ 796,560,693 $ 955,172,457 -------------- -------------- -------------- -------------- -------------- LIABILITIES Payable to Related Separate Account............. 112,981 0 112,981 0 0 -------------- -------------- -------------- -------------- -------------- NET ASSETS........................................ $3,599,478,136 $ 91,504,205 $ 101,997,456 $ 796,560,693 $ 955,172,457 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- NET ASSETS, representing: Equity of Contract owners....................... $3,588,840,453 $ 91,078,689 $ 101,673,097 $ 792,519,007 $ 953,458,614 Equity of The Prudential Insurance Company of America....................................... 10,637,683 425,516 324,359 4,041,686 1,713,843 -------------- -------------- -------------- -------------- -------------- $3,599,478,136 $ 91,504,205 $ 101,997,456 $ 796,560,693 $ 955,172,457 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
STATEMENTS OF OPERATIONS For the year ended December 31, 1995
SUBACCOUNTS -------------------------------------------------------------- MONEY DIVERSIFIED FLEXIBLE TOTAL MARKET BOND EQUITY MANAGED -------------- -------------- -------------- -------------- -------------- INVESTMENT INCOME Dividend distributions received................. $ 111,690,657 $ 4,806,197 $ 6,288,926 $ 14,649,870 $ 27,370,012 EXPENSES Charges to Contract owners for assuming mortality risk and expense risk [Note 3A]..... 22,111,170 588,554 636,478 4,664,094 5,819,777 Reimbursement for excess expenses [Note 3D]..... (38,198) 0 0 0 0 -------------- -------------- -------------- -------------- -------------- NET EXPENSES...................................... 22,072,972 588,554 636,478 4,664,094 5,819,777 -------------- -------------- -------------- -------------- -------------- NET INVESTMENT INCOME (LOSS)...................... 89,617,685 4,217,643 5,652,448 9,985,776 21,550,235 -------------- -------------- -------------- -------------- -------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Capital gains distributions received............ 111,700,229 0 222,002 27,318,049 39,426,921 Realized gain (loss) on shares redeemed [average cost basis].......................... 235,828 0 30,407 11,957 56,509 Net unrealized gain on investments.............. 427,073,308 0 10,042,691 129,700,617 110,261,394 -------------- -------------- -------------- -------------- -------------- NET GAIN (LOSS) ON INVESTMENTS.................... 539,009,365 0 10,295,100 157,030,623 149,744,824 -------------- -------------- -------------- -------------- -------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................... $ 628,627,050 $ 4,217,643 $ 15,947,548 $ 167,016,399 $ 171,295,059 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11. A1 STATEMENTS OF NET ASSETS (CONTINUED) December 31, 1995
SUBACCOUNTS (CONTINUED) ------------------------------------------------------------------------------ ZERO ZERO COUPON COUPON HIGH CONSERVATIVE BOND BOND YIELD STOCK BALANCED 1995 2000 BOND INDEX -------------- -------------- -------------- -------------- -------------- ASSETS Investment in shares of The Prudential Series Fund, Inc. Portfolios at net asset value [Note 2].......... $ 786,605,541 $ 0 $ 20,466,375 $ 68,050,361 $ 297,367,890 -------------- -------------- -------------- -------------- -------------- LIABILITIES Payable to Related Separate Account............. 0 0 0 0 0 -------------- -------------- -------------- -------------- -------------- NET ASSETS........................................ $ 786,605,541 $ 0 $ 20,466,375 $ 68,050,361 $ 297,367,890 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- NET ASSETS, representing: Equity of Contract owners....................... $ 785,777,721 $ 0 $ 20,452,359 $ 67,967,542 $ 296,625,930 Equity of The Prudential Insurance Company of America....................................... 827,820 0 14,016 82,819 741,960 -------------- -------------- -------------- -------------- -------------- $ 786,605,541 $ 0 $ 20,466,375 $ 68,050,361 $ 297,367,890 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- EQUITY NATURAL INCOME RESOURCES GLOBAL -------------- -------------- -------------- ASSETS Investment in shares of The Prudential Series Fund, Inc. Portfolios at net asset value [Note 2].......... $ 223,168,163 $ 101,098,037 $ 49,702,460 -------------- -------------- -------------- LIABILITIES Payable to Related Separate Account............. 0 0 0 -------------- -------------- -------------- NET ASSETS........................................ $ 223,168,163 $ 101,098,037 $ 49,702,460 -------------- -------------- -------------- -------------- -------------- -------------- NET ASSETS, representing: Equity of Contract owners....................... $ 222,179,341 $ 100,775,478 $ 49,235,307 Equity of The Prudential Insurance Company of America....................................... 988,822 322,559 467,153 -------------- -------------- -------------- $ 223,168,163 $ 101,098,037 $ 49,702,460 -------------- -------------- -------------- -------------- -------------- --------------
STATEMENTS OF OPERATIONS (CONTINUED) For the year ended December 31, 1995
SUBACCOUNTS (CONTINUED) ------------------------------------------------------------------------------ ZERO ZERO COUPON COUPON HIGH CONSERVATIVE BOND BOND YIELD STOCK BALANCED 1995 2000 BOND INDEX -------------- -------------- -------------- -------------- -------------- INVESTMENT INCOME Dividend distributions received................. $ 30,522,743 $ 313,598 $ 837,457 $ 6,585,427 $ 5,408,994 EXPENSES Charges to Contract owners for assuming mortality risk and expense risk [Note 3A]..... 5,231,266 30,367 131,947 434,315 1,743,600 Reimbursement for excess expenses [Note 3D]..... 0 (6,868) (14,886) 0 0 -------------- -------------- -------------- -------------- -------------- NET EXPENSES...................................... 5,231,266 23,499 117,061 434,315 1,743,600 -------------- -------------- -------------- -------------- -------------- NET INVESTMENT INCOME (LOSS)...................... 25,291,477 290,099 720,396 6,151,112 3,665,394 -------------- -------------- -------------- -------------- -------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Capital gains distributions received............ 26,552,510 77,686 759,176 0 2,097,393 Realized gain (loss) on shares redeemed [average cost basis].......................... 97,662 (324,158) 16,969 (58,578) 293,916 Net unrealized gain on investments.............. 55,648,508 231,423 1,982,145 3,163,738 66,716,563 -------------- -------------- -------------- -------------- -------------- NET GAIN (LOSS) ON INVESTMENTS.................... 82,298,680 (15,049) 2,758,290 3,105,160 69,107,872 -------------- -------------- -------------- -------------- -------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................... $ 107,590,157 $ 275,050 $ 3,478,686 $ 9,256,272 $ 72,773,266 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- EQUITY NATURAL INCOME RESOURCES GLOBAL -------------- -------------- -------------- INVESTMENT INCOME Dividend distributions received................. $ 7,622,371 $ 1,146,237 $ 714,936 EXPENSES Charges to Contract owners for assuming mortality risk and expense risk [Note 3A]..... 1,320,659 630,840 260,887 Reimbursement for excess expenses [Note 3D]..... 0 (14) 0 -------------- -------------- -------------- NET EXPENSES...................................... 1,320,659 630,826 260,887 -------------- -------------- -------------- NET INVESTMENT INCOME (LOSS)...................... 6,301,712 515,411 454,049 -------------- -------------- -------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Capital gains distributions received............ 9,279,251 4,578,307 915,804 Realized gain (loss) on shares redeemed [average cost basis].......................... 46,601 68,144 4,998 Net unrealized gain on investments.............. 18,945,636 14,973,181 4,212,026 -------------- -------------- -------------- NET GAIN (LOSS) ON INVESTMENTS.................... 28,271,488 19,619,632 5,132,828 -------------- -------------- -------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................... $ 34,573,200 $ 20,135,043 $ 5,586,877 -------------- -------------- -------------- -------------- -------------- --------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11. A2 STATEMENTS OF NET ASSETS (CONTINUED) December 31, 1995
SUBACCOUNTS -------------------------------------------------------------- ZERO COUPON SMALL GOVERNMENT BOND PRUDENTIAL CAPITALIZATION INCOME 2005 JENNISON STOCK -------------- -------------- -------------- -------------- ASSETS Investment in shares of The Prudential Series Fund, Inc. Portfolios at net asset value [Note 2].......... $ 73,135,507 $ 21,163,904 $ 7,658,781 $ 5,826,306 LIABILITIES Payable to Related Separate Account............. 0 0 0 0 -------------- -------------- -------------- -------------- NET ASSETS........................................ $ 73,135,507 $ 21,163,904 $ 7,658,781 $ 5,826,306 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- NET ASSETS, representing: Equity of Contract owners....................... $ 73,073,051 $ 21,001,313 $ 7,426,649 $ 5,596,355 Equity of The Prudential Insurance Company of America....................................... 62,456 162,591 232,132 229,951 -------------- -------------- -------------- -------------- $ 73,135,507 $ 21,163,904 $ 7,658,781 $ 5,826,306 -------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
STATEMENTS OF OPERATIONS (CONTINUED) For the year ended December 31, 1995
SUBACCOUNTS -------------------------------------------------------------- ZERO COUPON SMALL GOVERNMENT BOND PRUDENTIAL CAPITALIZATION INCOME 2005 JENNISON* STOCK* -------------- -------------- -------------- -------------- INVESTMENT INCOME Dividend distributions received................. $ 4,467,531 $ 939,899 $ 376 $ 16,083 EXPENSES Charges to Contract owners for assuming mortality risk and expense risk [Note 3A]..... 478,032 118,323 12,370 9,661 Reimbursement for excess expenses [Note 3D]..... 0 (16,430) 0 0 -------------- -------------- -------------- -------------- NET EXPENSES...................................... 478,032 101,893 12,370 9,661 -------------- -------------- -------------- -------------- NET INVESTMENT INCOME (LOSS)...................... 3,989,499 838,006 (11,994) 6,422 -------------- -------------- -------------- -------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Capital gains distributions received............ 0 425,717 0 47,413 Realized gain (loss) on shares redeemed [average cost basis].......................... (8,599) 0 0 0 Net unrealized gain on investments.............. 7,403,233 3,328,939 281,405 181,809 -------------- -------------- -------------- -------------- NET GAIN (LOSS) ON INVESTMENTS.................... 7,394,634 3,754,656 281,405 229,222 -------------- -------------- -------------- -------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................... $ 11,384,133 $ 4,592,662 $ 269,411 $ 235,644 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- *Commenced Business on 5/1/95
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11. A3 (This page intentionally left blank.) A4 FINANCIAL STATEMENTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS For the years ended December 31, 1995 and 1994
SUBACCOUNTS -------------------------------------------------------------- MONEY DIVERSIFIED TOTAL MARKET BOND ------------------------------ ------------------------------ ------------------------------ 1995 1994 1995 1994 1995 1994 -------------- -------------- -------------- -------------- -------------- -------------- OPERATIONS: Net investment income (loss)..... $ 89,617,685 $ 63,087,032 $ 4,217,643 $ 2,402,301 $ 5,652,448 $ 4,226,871 Capital gains distributions received....................... 111,700,229 54,709,623 0 0 222,002 158,594 Realized gain (loss) on shares redeemed [average cost basis].. 235,828 167,179 0 0 30,407 4,403 Net unrealized gain (loss) on investments.................... 427,073,308 (155,373,175) 0 0 10,042,691 (7,162,380) -------------- -------------- -------------- -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS. 628,627,050 (37,409,341) 4,217,643 2,402,301 15,947,548 (2,772,512) -------------- -------------- -------------- -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS........................ 394,015,275 560,003,324 8,955,240 6,444,757 9,712,345 11,829,119 -------------- -------------- -------------- -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SURPLUS TRANSFERS........................ (10,302,284) (942,487) 161,461 (213,654) 143,151 (532,267) -------------- -------------- -------------- -------------- -------------- -------------- TOTAL INCREASE (DECREASE) IN NET ASSETS.................... 1,012,340,041 521,651,496 13,334,344 8,633,404 25,803,044 8,524,340 NET ASSETS: Beginning of year................ 2,587,138,095 2,065,486,599 78,169,861 69,536,457 76,194,412 67,670,072 -------------- -------------- -------------- -------------- -------------- -------------- End of year...................... $3,599,478,136 $2,587,138,095 $ 91,504,205 $ 78,169,861 $ 101,997,456 $ 76,194,412 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11. A5 STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) For the years ended December 31, 1995 and 1994
SUBACCOUNTS (CONTINUED) -------------------------------------------------------------- FLEXIBLE EQUITY MANAGED ------------------------------ ------------------------------ 1995 1994 1995 1994 -------------- -------------- -------------- -------------- OPERATIONS: Net investment income (loss)..... $ 9,985,776 $ 7,323,925 $ 21,550,235 $ 14,060,998 Capital gains distributions received....................... 27,318,049 19,666,506 39,426,921 18,931,168 Realized gain (loss) on shares redeemed [average cost basis].. 11,957 86,672 56,509 0 Net unrealized gain (loss) on investments.................... 129,700,617 (18,362,891) 110,261,394 (56,779,739) -------------- -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS. 167,016,399 8,714,212 171,295,059 (23,787,573) -------------- -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS........................ 130,026,767 123,951,671 86,936,282 142,298,237 -------------- -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SURPLUS TRANSFERS........................ (595,673) 452,486 (2,895,506) (55,717) -------------- -------------- -------------- -------------- TOTAL INCREASE (DECREASE) IN NET ASSETS.................... 296,447,493 133,118,369 255,335,835 118,454,947 NET ASSETS: Beginning of year................ 500,113,200 366,994,831 699,836,622 581,381,675 -------------- -------------- -------------- -------------- End of year...................... $ 796,560,693 $ 500,113,200 $ 955,172,457 $ 699,836,622 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------------------------------------------------------- ZERO COUPON CONSERVATIVE BOND BALANCED 1995 ------------------------------ ------------------------------ 1995 1994 1995 1994 -------------- -------------- -------------- -------------- OPERATIONS: Net investment income (loss)..... $ 25,291,477 $ 16,966,301 $ 290,099 $ 263,254 Capital gains distributions received....................... 26,552,510 6,635,310 77,686 1,011 Realized gain (loss) on shares redeemed [average cost basis].. 97,662 31,649 (324,158) 586 Net unrealized gain (loss) on investments.................... 55,648,508 (33,092,575) 231,423 (288,227) -------------- -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS. 107,590,157 (9,459,315) 275,050 (23,376) -------------- -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS........................ 44,932,925 127,164,401 (5,059,111) 338,277 -------------- -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SURPLUS TRANSFERS........................ (3,421,660) (1,173,893) (20,536) (106,380) -------------- -------------- -------------- -------------- TOTAL INCREASE (DECREASE) IN NET ASSETS.................... 149,101,422 116,531,193 (4,804,597) 208,521 NET ASSETS: Beginning of year................ 637,504,119 520,972,926 4,804,597 4,596,076 -------------- -------------- -------------- -------------- End of year...................... $ 786,605,541 $ 637,504,119 $ 0 $ 4,804,597 -------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11. A6 STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) For the years ended December 31, 1995 and 1994
SUBACCOUNTS ---------------------------------------------------------------------------------------------- ZERO COUPON HIGH BOND YIELD STOCK 2000 BOND INDEX ------------------------------ ------------------------------ ------------------------------ 1995 1994 1995 1994 1995 1994 -------------- -------------- -------------- -------------- -------------- -------------- OPERATIONS: Net investment income (loss)..... $ 720,396 $ 1,032,410 $ 6,151,112 $ 4,958,854 $ 3,665,394 $ 3,181,988 Capital gains distributions received....................... 759,176 31,655 0 38 2,097,393 267,733 Realized gain (loss) on shares redeemed [average cost basis].. 16,969 1,031 (58,578) 5,625 293,916 58,302 Net unrealized gain (loss) on investments.................... 1,982,145 (2,416,751) 3,163,738 (6,827,471) 66,716,563 (2,856,319) -------------- -------------- -------------- -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS. 3,478,686 (1,351,655) 9,256,272 (1,862,954) 72,773,266 651,704 -------------- -------------- -------------- -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS....................... 846,650 900,334 4,374,480 9,774,435 33,935,158 26,983,569 -------------- -------------- -------------- -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SURPLUS TRANSFERS....................... (645,588) 409,426 (119,164) (576,511) (100,558) (298,727) -------------- -------------- -------------- -------------- -------------- -------------- TOTAL INCREASE (DECREASE) IN NET ASSETS.................. . 3,679,748 (41,895) 13,511,588 7,334,970 106,607,866 27,336,546 NET ASSETS: Beginning of yea................ 16,786,627 16,828,522 54,538,773 47,203,803 190,760,024 163,423,478 -------------- -------------- -------------- -------------- -------------- -------------- End of year...................... $ 20,466,375 $ 16,786,627 $ 68,050,361 $ 54,538,773 $ 297,367,890 $ 190,760,024 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11. A7 STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) For the years ended December 31, 1995 and 1994
SUBACCOUNTS (CONTINUED) ---------------------------------------------------------------------------------------------- EQUITY NATURAL INCOME RESOURCES GLOBAL** ------------------------------ ------------------------------ ------------------------------ 1995 1994 1995 1994 1995 1994 -------------- -------------- -------------- -------------- -------------- -------------- OPERATIONS: Net investment income (loss)..... $ 6,301,712 $ 4,108,092 $ 515,411 $ 203,463 $ 454,049 $ (11,478) Capital gains distributions received....................... 9,279,251 7,633,088 4,578,307 1,375,424 915,804 5,622 Realized gain (loss) on shares redeemed [average cost basis].. 46,601 34,607 68,144 22,045 4,998 0 Net unrealized gain (loss) on investments.................... 18,945,636 (11,478,198) 14,973,181 (5,314,192) 4,212,026 (1,421,127) -------------- -------------- -------------- -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS. 34,573,200 297,589 20,135,043 (3,713,260) 5,586,877 (1,426,983) -------------- -------------- -------------- -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS........................ 38,554,244 51,018,498 9,214,757 22,317,372 16,098,541 29,174,840 -------------- -------------- -------------- -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SURPLUS TRANSFERS........................ (646,585) (376,490) (398,931) (47,480) (1,921,654) 2,190,839 -------------- -------------- -------------- -------------- -------------- -------------- TOTAL INCREASE (DECREASE) IN NET ASSETS.................... 72,480,859 50,939,597 28,950,869 18,556,632 19,763,764 29,938,696 NET ASSETS: Beginning of year................ 150,687,304 99,747,707 72,147,168 53,590,536 29,938,696 0 -------------- -------------- -------------- -------------- -------------- -------------- End of year...................... $ 223,168,163 $ 150,687,304 $ 101,098,037 $ 72,147,168 $ 49,702,460 $ 29,938,696 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- **Commenced Business on 5/1/94 GOVERNMENT INCOME ------------------------------ 1995 1994 -------------- -------------- OPERATIONS: Net investment income (loss)..... $ 3,989,499 $ 3,587,433 Capital gains distributions received....................... 0 0 Realized gain (loss) on shares redeemed [average cost basis].. (8,599) (74,828) Net unrealized gain (loss) on investments.................... 7,403,233 (7,299,824) -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS. 11,384,133 (3,787,219) -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS........................ 481,705 4,183,444 -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SURPLUS TRANSFERS........................ (293,673) (467,937) -------------- -------------- TOTAL INCREASE (DECREASE) IN NET ASSETS.................... 11,572,165 (71,712) NET ASSETS: Beginning of year................ 61,563,342 61,635,054 -------------- -------------- End of year...................... $ 73,135,507 $ 61,563,342 -------------- -------------- -------------- --------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11. A8 STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) For the years ended December 31, 1995 and 1994
SUBACCOUNTS -------------------------------------------------------------- ZERO COUPON SMALL BOND PRUDENTIAL CAPITALIZATION 2005 JENNISON* STOCK* ------------------------------ -------------- -------------- 1995 1994 1995 1995 -------------- -------------- -------------- -------------- OPERATIONS: Net investment income (loss)..... $ 838,006 $ 782,620 $ (11,994) $ 6,422 Capital gains distributions received....................... 425,717 3,474 0 47,413 Realized gain (loss) on shares redeemed [average cost basis].. 0 (2,913) 0 0 Net unrealized gain (loss) on investments.................... 3,328,939 (2,073,481) 281,405 181,809 -------------- -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS. 4,592,662 (1,290,300) 269,411 235,644 -------------- -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS........................ 2,469,936 3,624,370 7,175,027 5,360,329 -------------- -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SURPLUS TRANSFERS........................ 7,956 (146,182) 214,343 230,333 -------------- -------------- -------------- -------------- TOTAL INCREASE (DECREASE) IN NET ASSETS.................... 7,070,554 2,187,888 7,658,781 5,826,306 NET ASSETS: Beginning of year................ 14,093,350 11,905,462 0 0 -------------- -------------- -------------- -------------- End of year...................... $ 21,163,904 $ 14,093,350 $ 7,658,781 $ 5,826,306 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- *Commenced Business on 5/1/95
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11. A9 NOTES TO FINANCIAL STATEMENTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994 NOTE 1: GENERAL The Prudential Variable Appreciable Account (the "Account") of The Prudential Insurance Company of America ("The Prudential") was established on August 11, 1987 by a resolution of The Prudential's Board of Directors in conformity with insurance laws of the State of New Jersey. The assets of the Account are segregated from The Prudential's other assets. The Account is registered under the Investment Company Act of 1940, as amended, as a unit investment trust. There are sixteen 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 The Prudential. The Zero Coupon Bond 1995 subaccount was liquidated on November 15, 1995. On that date, all shares held in the corresponding portfolio of the Series Fund were redeemed and the redemption proceeds were transferred to the Money Market subaccount, unless otherwise directed, in accordance with the prospectus. NOTE 2: INVESTMENT INFORMATION FOR THE PRUDENTIAL SERIES FUND, INC. PORTFOLIOS The net asset value per share for each portfolio of the Series Fund, the number of shares of each portfolio held by the subaccounts of the Account and the aggregate cost of investments in such shares at December 31, 1995 were as follows:
PORTFOLIOS ----------------------------------------------------------------------------- PORTFOLIO MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE INFORMATION MARKET BOND EQUITY MANAGED BALANCED - ------------------------- ------------- ------------- -------------- -------------- --------------- Number of shares: 9,150,420 9,025,842 31,067,291 53,483,137 51,382,708 Net asset value per share: $ 10.0000 $ 11.3131 $ 25.6399 $ 17.8593 $ 15.3088 Cost: $ 91,504,205 $ 98,171,648 $ 646,301,327 $ 863,983,157 $ 746,204,653 PORTFOLIOS (CONTINUED) ----------------------------------------------------------------------------- ZERO ZERO COUPON COUPON HIGH PORTFOLIO BOND BOND YIELD STOCK EQUITY INFORMATION 1995 2000 BOND INDEX INCOME - ------------------------- ------------- ------------- -------------- -------------- --------------- Number of shares: 0 1,541,954 8,723,958 14,901,125 13,715,785 Net asset value per share: $ 0.0000 $ 13.2730 $ 7.8004 $ 19.9561 $ 16.2709 Cost: $ 0 $ 19,405,578 $ 69,244,984 $ 212,396,329 $ 206,403,917
PORTFOLIOS (CONTINUED) -------------------------------------------------------------------------------------------- ZERO SMALL PORTFOLIO NATURAL GOVERNMENT COUPON PRUDENTIAL CAPITALIZATION INFORMATION RESOURCES GLOBAL INCOME BOND 2005 JENNISON STOCK - ------------------------- ------------- ------------- -------------- -------------- --------------- ------------- Number of shares: 5,853,358 3,199,757 6,240,811 1,604,549 610,418 492,362 Net asset value per share: $ 17.2718 $ 15.5332 $ 11.7189 $ 13.1899 $ 12.5468 $ 11.8334 Cost: $ 83,470,176 $ 46,911,561 $ 70,390,270 $ 18,878,006 $ 7,377,376 $ 5,644,497
NOTE 3: CHARGES AND EXPENSES A. Mortality Risk and Expense Risk Charges The mortality risk and expense risk charges at an effective annual rate of up to 0.90% may be applied daily against the net assets representing equity of the Contract owners held in each subaccount. For contracts with face amounts of $100,000 or more, the annual rate is 0.60%. A10 B. Deferred Sales Charge A deferred sales charge is imposed upon the surrender of certain variable life insurance contracts to compensate The Prudential 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 The partial withdrawal of the cash surrender value from certain variable life insurance contracts invokes a charge equal to the lesser of $15 or 2% of the amount withdrawn. D. Expense Reimbursement The Account is reimbursed by The Prudential, on a non-guaranteed basis, for expenses incurred by the Series Fund in excess of the effective rate of 0.40% for all Zero Coupon Bond Portfolios, 0.45% for the Stock Index Portfolio, 0.50% for the Equity Income Portfolio, 0.55% for the Natural Resources Portfolio, and 0.65% for the High Yield Bond Portfolio of the average daily net assets of these portfolios. NOTE 4: TAXES The operations of the subaccounts form a part of, and are taxed with, the operations of The Prudential. Under the Internal Revenue Code, all ordinary income and capital gains allocated to the Contract owners are not taxed to The Prudential. As a result, the net asset values of the subaccounts are not affected by federal income taxes on distributions received by the subaccounts. NOTE 5: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SURPLUS TRANSFERS The increase (decrease) in net assets resulting from surplus transfers represents the net contributions (withdrawals) of The Prudential to the Account. NOTE 6: RELATED PARTY TRANSACTIONS The Prudential has purchased multiple individual contracts of the Account insuring the lives of certain employees. The Prudential is the owner and beneficiary of the contracts. Net premium payments of approximately $22.9 million and $23.0 million for the years ended December 31, 1995 and December 31, 1994, respectively, were directed to the Flexible Managed subaccount. Equity of Contract owners in that subaccount at December 31, 1995 and December 31, 1994 includes approximately $190.4 million and $136.7 million, respectively, owned by The Prudential. A11 INDEPENDENT AUDITORS' REPORT To the Contract Owners of The Prudential Variable Appreciable Account and the Board of Directors of The Prudential Insurance Company of America Newark, New Jersey We have audited the accompanying statements of net assets of The Prudential Variable Appreciable Account of The Prudential Insurance Company of America (comprising, respectively, the Money Market, Diversified Bond, Equity, Flexible Managed, Conservative Balanced, Zero Coupon Bond 1995, Zero Coupon Bond 2000, High Yield Bond, Stock Index, Equity Income, Natural Resources, Global, Government Income, Zero Coupon Bond 2005, Prudential Jennison, and Small Capitalization Stock subaccounts) as of December 31, 1995, the related statements of operations for the periods presented in the year then ended, and the statements of changes in net assets for each of the periods presented in the two years then ended. 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 in accordance with generally accepted auditing standards. Those standards 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. Our procedures included confirmation of securities owned as of December 31, 1995. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of each of the respective subaccounts constituting The Prudential Variable Appreciable Account as of December 31, 1995, the results of their operations, and the changes in their net assets for the respective stated periods in conformity with generally accepted accounting principles. Deloitte & Touche LLP Parsippany, New Jersey February 15, 1996 A12 CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA CONSOLIDATED STATEMENTS OF FINANCIAL POSITION December 31, 1995 1994 -------- -------- (In Millions) ASSETS Fixed maturities .............................. $ 85,585 $ 78,620 Equity securities ............................. 1,937 2,327 Mortgage loans ................................ 23,680 26,199 Investment real estate ........................ 1,568 1,600 Policy loans .................................. 6,800 6,631 Other invested assets ......................... 4,019 5,147 Short-term investments ........................ 7,874 10,630 Securities purchased under agreements to resell ......................... 5,130 5,591 Trading account securities .................... 3,658 6,341 Cash .......................................... 1,633 1,109 Accrued investment income ..................... 1,915 1,932 Premiums due and deferred ..................... 2,402 2,712 Broker-dealer receivables ..................... 8,136 8,164 Other assets .................................. 6,608 6,266 Assets held in Separate Accounts .............. 58,435 48,633 -------- -------- TOTAL ASSETS ................................... $219,380 $211,902 ======== ======== LIABILITIES, AVR AND SURPLUS Liabilities: Policy liabilities and insurance reserves: Future policy benefits and claims ............ $ 94,973 $ 98,354 Unearned premiums ............................ 836 1,144 Other policy claims and benefits payable ............................ 1,932 1,848 Policy dividends ............................. 1,894 1,822 Policyholder account balances ................ 12,540 12,195 Securities sold under agreements to repurchase ................................ 7,993 8,919 Notes payable and other borrowings ............ 9,157 12,009 Broker-dealer payables ........................ 6,083 6,198 Other liabilities ............................. 14,976 11,983 Liabilities related to Separate Accounts ...... 57,586 47,946 -------- -------- Total Liabilities .............................. 207,970 202,418 -------- -------- Asset Valuation Reserve (AVR) .................. 2,742 2,035 -------- -------- Surplus: Capital Notes ................................. 984 298 Special surplus fund .......................... 1,274 1,097 Unassigned surplus ............................ 6,410 6,054 -------- -------- Total Surplus .................................. 8,668 7,449 -------- -------- TOTAL LIABILITIES, AVR AND SURPLUS ................................... $219,380 $211,902 ======== ======== CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN SURPLUS AND ASSET VALUATION RESERVE (AVR) Years Ended December 31, 1995 1994 1993 ------- ------- ------- (In Millions) REVENUE Premiums and annuity considerations ........................... $27,413 $29,698 $29,982 Net investment income ..................... 9,844 9,595 10,090 Broker-dealer revenue ..................... 3,800 3,677 4,025 Realized investment gains/(losses) ........................... 882 (450) 953 Other income .............................. 972 1,037 924 ------- ------- ------- Total Revenue .............................. 42,911 43,557 45,974 ------- ------- ------- BENEFITS AND EXPENSES Current and future benefits and claims ............................... 27,854 30,788 30,573 Insurance and underwriting expenses ................................. 4,577 4,830 4,982 Limited partnership matters ............... 0 1,422 390 General, administrative and other expenses ........................... 6,034 5,794 5,575 ------- ------- ------- Total Benefits and Expenses ................ 38,465 42,834 41,520 ------- ------- ------- Income from operations before dividends and income taxes .......................... 4,446 723 4,454 Dividends to policyholders ................. 2,519 2,290 2,339 ------- ------- ------- Income/(loss) before income taxes .............................. 1,927 (1,567) 2,115 Income tax provision/(benefit) ............. 1,348 (392) 1,236 ------- ------- ------- NET INCOME/(LOSS) .......................... 579 (1,175) 879 Surplus, beginning of year ................. 7,449 8,004 7,365 Issuance of Capital Notes (after net charge-off of non-admitted prepaid postretirement benefit cost of $113 in 1993) ..................... 686 0 185 Net unrealized investment gains/(losses) and change in AVR .................................... (46) 620 (425) ------- ------- ------- SURPLUS, END OF YEAR ....................... 8,668 7,449 8,004 ------- ------- ------- AVR, beginning of year ..................... 2,035 2,687 2,457 Increase/(decrease) in AVR ................. 707 (652) 230 ------- ------- ------- AVR, END OF YEAR ........................... 2,742 2,035 2,687 ------- ------- ------- TOTAL SURPLUS AND AVR ...................... $11,410 $ 9,484 $10,691 ======= ======= ======= SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-1 CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1995 1994 1993 -------- -------- -------- (In Millions) CASH FLOWS FROM OPERATING ACTIVITIES: Net income/(loss) ..................... $ 579 $(1,175) $ 879 Adjustments to reconcile net income/(loss) to cash flows from operating activities: (Decrease)/increase in policy liabilities and insurance reserves ........................... (1,691) 1,289 2,747 Net increase in Separate Accounts ........................... (162) (52) (59) Realized investment (gains)/losses ..................... (882) 450 (953) Depreciation, amortization and other non-cash items ............... 217 379 261 Gain on sale and results of operations from reinsurance segment ............................ (72) 0 0 Decrease/(increase) in operating assets: Mortgage loans ...................... (305) (226) (226) Policy loans ........................ (169) (175) (174) Securities purchased under agreements to resell ............................. 139 2,979 (2,049) Trading account securities ......................... 2,707 2,324 (2,087) Broker-dealer receivables ....................... 28 969 (1,803) Other assets ........................ 205 3,254 (2,172) (Decrease)/increase in operating liabilities: Securities sold under agreements to repurchase ........... (475) (3,247) 1,134 Broker-dealer payables .............. (115) 788 1,280 Other liabilities ................... 501 (3,170) 1,794 -------- -------- -------- Cash Flows from Operating Activities ........................... 505 4,387 (1,428) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from the sale/maturity of: Fixed maturities ..................... 100,317 90,914 100,023 Equity securities .................... 2,302 1,426 1,725 Mortgage loans ....................... 5,567 4,154 4,789 Investment real estate ............... 291 407 336 Other invested assets ................ 1,943 1,022 1,352 Property and equipment ............... 3 637 6 Sale of reinsurance segment .......... 790 0 0 Payments for the purchase of: Fixed maturities ..................... (107,192) (91,032) (101,217) Equity securities .................... (1,450) (1,535) (1,085) Mortgage loans ....................... (3,002) (3,446) (3,530) Investment real estate ............... (387) (161) (196) Other invested assets ................ (515) (1,687) (531) Property and equipment ............... (238) (392) (640) Short-term investments (net) .......... 2,756 (4,281) (2,150) Net change in cash placed as collateral for securities loaned ..... 1,379 2,011 (589) -------- -------- -------- Cash Flows from Investing Activities ........................... $ 2,564 $ (1,963) $ (1,707) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (payments)/proceeds of short-term debt ...................... $ (2,489) $ (1,115) $ 1,106 Proceeds from the issuance of long-term debt ....................... 763 345 1,228 Payments for the settlement of long-term debt ....................... (1,376) (760) (721) Proceeds/(payments) from unmatched securities purchased under agreements to resell ........... 322 1,086 (47) (Payments)/proceeds for unmatched securities sold under agreements to repurchase ............. (451) (2,537) 1,707 Proceeds from the issuance of Capital Notes ........................ 686 0 298 -------- -------- -------- Cash Flows from Financing Activities ................. (2,545) (2,981) 3,571 -------- -------- -------- Net increase/(decrease) in cash .............................. 524 (557) 436 Cash, beginning of year ............... 1,109 1,666 1,230 -------- -------- -------- CASH, END OF YEAR ..................... $ 1,633 $ 1,109 $ 1,666 ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Income tax payments, net of refunds, made during 1995, 1994 and 1993 were $430 million, $64 million and $933 million, respectively. Interest payments made during 1995, 1994 and 1993 were $1,413 million, $1,429 million and $1,171 million, respectively. The 1995 amounts are presented net of the cash flow activities of the reinsurance segment. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-2 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA For The Years Ended December 31, 1995, 1994 and 1993 1. ACCOUNTING POLICIES AND PRINCIPLES A. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of The Prudential Insurance Company of America ("Prudential"), a mutual life insurance company, and its subsidiaries (collectively, "the Company"). The activities of the Company cover a broad range of financial services, including life and health care insurance, property and casualty insurance, securities brokerage, asset management, investment advisory services, and real estate development and brokerage. All significant intercompany balances and transactions have been eliminated in consolidation. B. BASIS OF PRESENTATION The consolidated financial statements are presented in conformity with generally accepted accounting principles ("GAAP"), which for mutual life insurance companies and their insurance subsidiaries are statutory accounting practices prescribed or permitted by the National Association of Insurance Commissioners ("NAIC") and their respective domiciliary state insurance departments. Prescribed statutory accounting practices include publications of the NAIC, state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The Company, with permission from the New Jersey Department of Insurance ("the Department"), prepares an Annual Report that differs from the Annual Statement filed with the Department in that subsidiaries are consolidated and certain financial statement captions are presented differently. Certain reclassifications have been made to the 1994 and 1993 financial statements to conform to the 1995 presentation. Management has used estimates and assumptions in the preparation of the financial statements that affect the reported amounts of assets, liabilities, revenue and expenses. Actual results could differ from those estimates. Life and General Insurance Operations--Life premiums are recognized as income over the premium paying period of the related policies. Annuity considerations are recognized as revenue when received. Health and property and casualty premiums are earned ratably over the terms of the related insurance and reinsurance contracts or policies. Expenses incurred in connection with acquiring new insurance business, including such acquisition costs as sales commissions, are charged to operations as incurred. Broker-Dealer Operations--The Company is engaged in the securities industry in the United States, with operations in various foreign countries. Client transactions are recorded on a settlement date basis. Securities and commodities commission revenues and related expenses are accrued for client transactions on a trade date basis. Investment banking revenue includes advisory fees, selling concessions, management and underwriting fees, and is recorded, net of related expenses, when the services are substantially completed. Asset management and portfolio service fees are fees earned on total assets under management and mutual funds sponsored by the Company and third parties. Certain costs that are directly related to the sales of mutual funds are deferred. C. INVESTED ASSETS Fixed maturities, which include long-term bonds and redeemable preferred stock, are stated primarily at amortized cost. Equity securities, which consist primarily of common stocks, are carried at fair value. Mortgage loans are stated primarily at unpaid principal balances. Mortgage loans for non-life subsidiaries are recorded net of valuation reserves. Investment real estate, except for real estate acquired in satisfaction of debt, is carried at cost less accumulated straight-line depreciation, encumbrances and permanent impairments in value. Real estate acquired in satisfaction of debt, included in "Other assets," is carried at the lower of cost or fair value less disposition costs. Policy loans are stated at unpaid principal balances. Other invested assets primarily represent the Company's investment in joint ventures and other forms of partnerships. These investments are carried primarily on the equity method where the Company has the ability to exercise significant influence over the operating and financial policies of the entity. Short-term investments are stated at amortized cost, which approximates fair value. Securities purchased under agreements to resell and securities sold under agreements to repurchase are collateralized financing transactions and are carried at their contract amounts plus accrued interest. These agreements are generally F-3 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 collateralized by cash or securities with market values in excess of the obligations under the contract. It is the Company's policy to take possession of securities purchased under resale agreements, to value the securities daily, and to require adjustment of the underlying collateral when deemed necessary. Trading account securities from broker-dealer operations are reported based upon quoted market prices. Securities lending is a program whereby securities are loaned to third parties, primarily major brokerage firms. As of December 31, 1995 and 1994, the estimated fair values of loaned securities were $7,982 million and $8,506 million, respectively. Company and NAIC policies require a minimum of 102% and 105% of the fair value of the domestic and foreign loaned securities, respectively, to be separately maintained as collateral for the loans. Cash collateral received is invested in short-term investments. The offsetting collateral liability as of December 31, 1995 and 1994 is $5,690 million and $4,252 million, respectively. Non-cash collateral is recorded in memorandum records and is not reflected in the consolidated financial statements. Derivative financial instruments--For the Company's non-insurance subsidiaries, derivatives used for trading purposes are recorded at fair value as of the reporting date. Realized and unrealized changes in fair values are recognized in "Broker-dealer revenue" and "Other income" in the period in which the changes occur. Gains and losses on hedges of existing assets or liabilities are included in the carrying amount of those assets or liabilities and are deferred and recognized in earnings in the same period as the underlying hedged item. For interest rate swaps that qualify for settlement accounting, the interest differential to be paid or received under the swap agreements is accrued over the life of the agreements as a yield adjustment. Gains and losses on early termination of derivatives that modify the characteristics of designated assets and liabilities are deferred and are amortized as an adjustment to the yield of the related assets or liabilities over their remaining lives Derivatives used in asset/liability risk management activities, which support life and health insurance and annuity contracts, are recorded at fair value with unrealized gains and losses recorded in "Net unrealized investment gains/(losses) and change in AVR." Upon termination of derivatives supporting life and health insurance and annuity contracts, the interest-related gains and losses are amortized through the Interest Maintenance Reserve (IMR). D. SEPARATE ACCOUNTS These assets and liabilities, reported at estimated market value, represent segregated funds invested for pension and other clients. Investment risks associated with market value changes are generally borne by the clients, except to the extent of minimum guarantees made by the Company with respect to certain accounts. E. CAPITAL NOTES Interest payments on the 1993 Capital Notes are preapproved by the Department. This practice differs from that prescribed by the NAIC. The NAIC practices provide for Insurance Commissioner approval of every interest payment before the payment is made. The interest payments on the Capital Notes issued in 1995 comply with prescribed NAIC practices. Prudential has included all notes as a component of surplus (Note 7). F. FUTURE APPLICATION OF ACCOUNTING STANDARDS The Financial Accounting Standards Board (the "FASB") issued Interpretation No. 40, "Applicability of Generally Accepted Accounting Principles to Mutual Life Insurance and Other Enterprises," which, as amended, is effective for fiscal years beginning after December 15, 1995. Interpretation No. 40 changes the current practice of mutual life insurance companies, with respect to utilizing statutory basis financial statements for general purposes, in not allowing such financial statements to be referred to as having been prepared in accordance with GAAP. Interpretation No. 40 requires GAAP financial statements of mutual life insurance companies to apply all GAAP pronouncements, unless specifically exempted. Implementation of Interpretation No. 40 will require significant effort and judgment. The Company is assessing the impact of Interpretation No. 40 on its consolidated financial statements. Such effort has not been completed and management currently believes surplus will increase significantly. F-4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 2. FUTURE POLICY BENEFITS, RESERVE FOR LOSSES AND LOSS EXPENSES A. For life insurance, general insurance and annuities, unpaid claims and claim adjustment expenses include estimates of benefits and associated settlement expenses on reported claims and those which are incurred but not reported. Activity in the liability for unpaid claims and claim adjustment expenses is:
1995 1994 1993 --------------------- --------------------- ----------------------- Accident Property Accident Property Accident Property and and and and and and Health Casualty Health Casualty Health Casualty -------- -------- -------- -------- -------- -------- (In Millions) Balance at January 1 ........................ $2,738 $5,116 $2,654 $4,869 $2,623 $4,712 Less reinsurance recoverables .............. 23 1,018 15 1,070 22 1,107 ------ ------ ------ ------ ------ ------ Net balance at January 1 .................... 2,715 4,098 2,639 3,799 2,601 3,605 ------ ------ ------ ------ ------ ------ Incurred related to: Current year ............................... 8,062 2,387 7,398 2,541 7,146 2,364 Prior years ................................ (48) 95 (105) 158 (167) 109 ------ ------ ------ ------ ------ ------ Total incurred .............................. 8,014 2,482 7,293 2,699 6,979 2,473 ------ ------ ------ ------ ------ ------ Paid related to: Current year ............................... 5,972 1,010 5,568 1,237 5,336 1,119 Prior years ................................ 1,807 959 1,649 1,163 1,605 1,160 ------ ------ ------ ------ ------ ------ Total paid .................................. 7,779 1,969 7,217 2,400 6,941 2,279 ------ ------ ------ ------ ------ ------ Less reinsurance segment (Note 10) .......................... 0 2,326 0 0 0 0 ------ ------ ------ ------ ------ ------ Net balance at December 31 .................. 2,950 2,285 2,715 4,098 2,639 3,799 Plus reinsurance recoverables .............. 15 819 23 1,018 15 1,070 ------ ------ ------ ------ ------ ------ Balance at December 31 ...................... $2,965 $3,104 $2,738 $5,116 $2,654 $4,869 ====== ====== ====== ====== ====== ======
As a result of changes in estimates of insured events in prior years, the declines of $48 million, $105 million and $167 million in the provision for claims and claim adjustment expenses for accident and health business in 1995, 1994 and 1993, respectively, were due to lower-than-expected trends in claim costs and an accelerated decline in indemnity health business. As a result of changes in estimates of insured events in prior years, the provision for claims and claim adjustment expenses for property and casualty business (net of reinsurance recoveries of $88 million, $47 million and $120 million in 1995, 1994 and 1993, respectively) increased by $95 million, $158 million and $109 million in 1995, 1994 and 1993, respectively, due to increased loss development and reserve strengthening for asbestos and environmental claims. B. Reserves for individual life insurance are calculated using various methods, interest rates and mortality tables, which produce reserves that meet the aggregate requirements of state laws and regulations. Approximately 39% of individual life insurance reserves are determined using the net level premium method, or by using the greater of the net level premium reserve or the policy cash value. About 54% of individual life insurance reserves are calculated according to the Commissioner's Reserve Valuation Method ("CRVM"), or methods which compare CRVM to policy cash values. The remaining reserves include universal life reserves which are equal to the greater of the policyholder account value less the unamortized expense allowance and the policy cash value, or are for supplementary benefits whose reserves are calculated using methods, interest rates and tables appropriate for the benefit provided. For group life insurance, about 56% of the reserves are associated with extended death benefits. These reserves are primarily calculated using modified group tables at various interest rates. The remainder are unearned premium reserves (calculated using the 1960 Commissioner's Standard Group Table), reserves for group life fund accumulations and other miscellaneous reserves. Reserves for deferred individual annuity contracts are determined using the Commissioner's Annuity Reserve Valuation Method. These account for 72% of the individual annuity reserves. The remaining reserves are equal to the present value of future payments with the annuity mortality table and interest rates based on the date of issue or maturity as appropriate. Reserves for other deposit funds or other liabilities with life contingencies reflect the contract deposit account or experience accumulation for the contract and any purchased annuity reserves. For money purchase annuities issued in Canada, the reserve equals the present value of each deposit accumulated to the end of its guarantee period at its guaranteed interest rate, discounted at the valuation interest rate. F-5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 Accident and health reserves represent the present value of the future potential payments, discounted for contingencies and interest. The remaining material reserves for active life reserves and unearned premiums are valued using the preliminary term method, gross premium valuation method, or a pro-rata portion of gross premiums. Reserves are also held for amounts not yet due on hospital benefits and other coverages. The reserve for guaranteed interest contracts, deposit funds and other liabilities without life contingencies equal either the present value of future payments discounted at the guaranteed rate or the fund value. 3. INCOME TAXES Under the Internal Revenue Code ("the Code"), Prudential and its life insurance subsidiaries are taxed on their gain from operations after dividends to policyholders. In calculating this tax, the Code requires the capitalization and amortization of policy acquisition expenses. The Code also imposes an "equity tax" on mutual life insurance companies based on an imputed surplus which, in effect, reduces the deduction for policyholder dividends. The amount of the equity tax is estimated in the current year based on the anticipated equity tax rate, and is adjusted in subsequent years as the rate is finalized. Prudential files a consolidated federal income tax return with all of its domestic subsidiaries. Net operating losses of the non-life subsidiaries may be used in this consolidated return, but are limited each year to the lesser of 35% of cumulative eligible non-life subsidiary losses or 35% of life company taxable income. The provision reported in the consolidated financial statements also includes tax liabilities for foreign subsidiaries. The non-insurance subsidiaries of the Company recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in their financial statements. Included in "Income tax provision/(benefit)" are deferred taxes of $109 million, $(477) million and $21 million for the years ended December 31, 1995, 1994 and 1993, respectively. At December 31, 1995, the Company had consolidated non-life tax loss carryforwards of $595 million which will expire between 1998 and 2010, if not utilized. 4. INVESTED ASSETS A. FIXED MATURITIES The Company invests in both investment grade and non-investment grade public and private fixed maturities. The Securities Valuation Office of the NAIC rates the fixed maturities held by insurers for regulatory purposes and groups investments into six categories ranging from highest quality bonds to those in or near default. The lowest three NAIC categories represent primarily high-yield securities and are defined by the NAIC as including any security with a public agency rating equivalent to B+ or B1 or less. These securities approximate 0.9% and 1.6% of the Company's consolidated assets at December 31, 1995 and 1994, respectively. The carrying value and estimated fair value of fixed maturities at December 31, 1995 and 1994, are as follows:
1995 ------------------------------------------------- Gross Gross Estimated Carrying Unrealized Unrealized Fair Value Gains Losses Value -------- ---------- ---------- --------- (In Millions) U.S. Treasury securities and obligations of U.S. government corporations and agencies ..................................................... $16,494 $1,409 $ 1 $17,902 Obligations of U.S. states and their political subdivisions ....................................... 1,365 70 2 1,433 Fixed maturities issued by foreign governments and their agencies and political subdivisions ................ 3,641 275 4 3,912 Corporate securities .......................................... 58,998 4,792 108 63,682 Mortgage-backed securities .................................... 5,048 276 10 5,314 Other fixed maturities ........................................ 39 0 0 39 ------- ------ ---- ------- Total ......................................................... $85,585 $6,822 $125 $92,282 ======= ====== ==== =======
F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1994 ------------------------------------------------ Gross Gross Estimated Carrying Unrealized Unrealized Fair Value Gains Losses Value -------- ---------- ---------- --------- (In Millions) U.S. Treasury securities and obligations of U.S. government corporations and agencies .................. $13,576 $ 122 $ 646 $13,052 Obligations of U.S. states and their political subdivisions ..................................... 2,776 32 165 2,643 Fixed maturities issued by foreign governments and their agencies and political subdivisions .............. 3,093 37 153 2,977 Corporate securities ........................................ 54,076 1,191 1,772 53,495 Mortgage-backed securities .................................. 4,889 82 148 4,823 Other fixed maturities ...................................... 210 0 0 210 ------- ------ ------ ------- Total ....................................................... $78,620 $1,464 $2,884 $77,200 ======= ====== ====== ========
The carrying value and estimated fair value of fixed maturities at December 31, 1995, categorized by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may prepay obligations with or without call or prepayment penalties. Estimated Carrying Fair Value Value -------- --------- (In Millions) Due in one year or less .................... $ 398 $ 402 Due after one year through five years ...... 26,936 27,748 Due after five years through ten years ..... 23,124 24,637 Due after ten years ........................ 30,079 34,181 ------- ------- 80,537 86,968 Mortgage-backed securities ................. 5,048 5,314 ------- ------- Total ...................................... $85,585 $92,282 ======= ======= Proceeds from the sale and maturity of fixed maturities during 1995, 1994 and 1993 were $100,317 million, $90,914 million and $100,023 million, respectively. Gross gains of $2,083 million, $693 million and $2,473 million and gross losses of $943 million, $2,009 million and $698 million were realized on such sales during 1995, 1994 and 1993, respectively. B. MORTGAGE LOANS Mortgage loans at December 31, 1995 and 1994, are as follows:
1995 1994 -------------------- -------------------- Amount Percent Amount Percent ------ ------- ------ ------- (In Millions) Commercial and agricultural loans: In good standing ...................................... $17,792 75.1% $19,752 75.4% In good standing with restructured terms .............................. 976 4.1% 1,412 5.4% Past due 90 days or more .............................. 145 0.6% 339 1.3% In process of foreclosure ............................. 158 0.7% 387 1.5% Residential loans ...................................... 4,609 19.5% 4,309 16.4% ------- ----- ------- ----- Total mortgage loans ................................... $23,680 100.0% $26,199 100.0% ======= ===== ======= =====
At December 31, 1995, the Company's mortgage loans were collateralized by the following property types: office buildings (29%), retail stores (20%), residential properties (19%), apartment complexes (13%), industrial buildings (10%), agricultural properties (7%) and other commercial properties (2%). The mortgage loans are geographically dispersed throughout the United States and Canada with the largest concentrations in California (23%) and New York (9%). Included in these balances F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 are mortgage loans with affiliated joint ventures of $653 million and $684 million at December 31, 1995 and 1994, respectively. C. INVESTMENT REAL ESTATE Accumulated depreciation on investment real estate was $643 million and $748 million at December 31, 1995 and 1994, respectively. D. OTHER INVESTED ASSETS The Company's net equity in joint ventures and other forms of partnerships amounted to $2,612 million and $3,357 million as of December 31, 1995 and 1994, respectively. The Company's share of net income from such entities was $326 million, $354 million and $375 million for 1995, 1994 and 1993, respectively. E. NET UNREALIZED INVESTMENT GAINS/(LOSSES) Net unrealized investment gains/(losses), which result principally from changes in the carrying values of invested assets, were $661 million, $(32) million and $(195) million for the years ended December 31, 1995, 1994 and 1993, respectively. F. ASSET VALUATION RESERVE AND INTEREST MAINTENANCE RESERVE These reserves are required for life insurance companies under NAIC regulations. The AVR is calculated based on a statutory formula and is designed to mitigate the effect of valuation and credit-related losses on unassigned surplus. The IMR captures net realized capital gains and losses resulting from changes in the general level of interest rates. These gains and losses are amortized into investment income over the expected remaining life of the investments sold. At December 31, 1995, the components of AVR are 67% for fixed maturities, equity securities and short-term investments; 21% for mortgage loans; and 12% for investment real estate and other invested assets. The IMR balance at December 31, 1995 and 1994 was $1,191 million and $502 million, respectively. During 1995, 1994 and 1993, $775 million, $(929) million and $1,082 million of net realized investment gains/(losses) were deferred, respectively. G. RESTRICTED ASSETS AND SPECIAL DEPOSITS Assets in the amounts of $6,271 million and $5,901 million at December 31, 1995 and 1994, respectively, were on deposit with governmental authorities or trustees as required by law. Assets valued at $3,558 million and $5,855 million at December 31, 1995 and 1994, respectively, were maintained as compensating balances or pledged as collateral for bank loans and other financing agreements. Restricted cash and securities of $1,137 million and $897 million at December 31, 1995 and 1994, respectively, were included in the consolidated financial statements. The restricted cash represents funds deposited by clients and funds accruing to clients as a result of trades or contracts. 5. EMPLOYEE BENEFIT PLANS A. PENSION PLANS The Company has several defined benefit pension plans, which cover substantially all of its employees. Benefits are generally based on career average earnings and credited length of service. The Company's funding policy for U.S. plans is to contribute annually the amount necessary to satisfy the Internal Revenue Service contribution guidelines. Employee pension benefit plan status is as follows:
September 30, 1995 September 30, 1994 ------------------------ ------------------------ Assets Accumulated Assets Accumulated Exceed Benefits Exceed Benefits Accumulated Exceed Accumulated Exceed Benefits Assets Benefits Assets ----------- ----------- ----------- ----------- (In Millions) Actuarial present value of benefit obligation: Vested benefit obligation ..................................... $(3,270) $(236) $(2,749) $(207) ======= ===== ====== ===== Accumulated benefit obligation ................................ (3,572) (261) (3,025) (230) ======= ===== ====== ===== Projected benefit obligation ................................... (4,330) (297) (3,975) (272) Plan assets at fair value ...................................... 6,688 206 5,524 180 ------- ----- ------ ----- Plan assets in excess of projected benefit obligation .......... 2,358 (91) 1,549 (92) Unrecognized transition amount ................................. (904) (4) (976) (4) Unrecognized prior service cost ................................ 199 16 211 17 Unrecognized net (gain)/loss ................................... (753) 15 (18) 27 Additional minimum liability ................................... 0 (8) 0 (8) ------- ----- ------ ----- Prepaid/(accrued) pension cost ................................. $ 900 $ (72) $ 766 $ (60) ======= ===== ====== =====
F-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 Plan assets consist primarily of equity securities, bonds, real estate and short-term investments, of which $4,974 million and $4,325 million are included in Separate Account assets and liabilities at December 31, 1995 and 1994, respectively. In compliance with statutory accounting principles, Prudential's prepaid pension costs of $900 million and $766 million at December 31, 1995 and 1994, respectively, are considered non-admitted assets. These assets are excluded from the consolidated assets and the changes in these non-admitted assets were $134 million, $(19) million, and $142 million in 1995, 1994 and 1993, respectively. The components of the net periodic pension (benefit)/expense for 1995, 1994 and 1993 are as follows:
1995 1994 1993 ---- ---- ---- (In Millions) Service cost--benefits earned during the year ............................. $ 133 $ 163 $ 133 Interest cost on projected benefit obligation ............................. 392 311 301 Actual return on assets ................................................... (1,288) 56 (854) Net amortization and deferral ............................................. 629 (639) 301 Net curtailment gains and special termination benefits .................... 0 156 0 ------- ----- ----- Net periodic pension (benefit)/expense .................................... $ (134) $ 47 $(119) ======= ===== =====
The net reduction to surplus relating to the Company's pension plans is $0, $28 million and $23 million in 1995, 1994 and 1993, respectively, which considers the changes in Prudential's non-admitted prepaid pension asset of $134 million, $(19) million and $142 million, respectively. The accounting assumptions used by Prudential were: As of September 30, -------------------- 1995 1994 1993 ---- ---- ---- Discount rate ................................. 7.5% 8.5% 7.0% Rate of increase in compensation levels ....... 4.5% 5.5% 5.0% Expected long-term rate of return on assest ... 9.0% 9.0% 9.0% The 1995 pension benefit for the Company's non-U.S. plans is $8 million. B. POSTRETIREMENT BENEFITS The Company provides certain life insurance and health care benefits for its retired employees. Substantially all of the Company's employees may become eligible to receive a benefit if they retire after age 55 with at least 10 years of service. Postretirement benefits, with respect to Prudential, are recognized in accordance with prescribed NAIC policy. Prudential has elected to amortize its transition obligation over 20 years. The Company's funding of its postretirement benefit obligations totaled $48 million, $31 million and $404 million in 1995, 1994 and 1993, respectively. F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA For The Years Ended December 31, 1995, 1994 and 1993 The postretirement benefit plan status is as follows: September 30, ------------------ 1995 1994 -------- ------- (In Millions) Accumulated postretirement benefit obligation (APBO): Retirees ............................................... $(1,526) $(1,337) Fully eligible active plan participants ................ (152) (188) ------- ------- Total APBO ............................................... (1,678) (1,525) ------- ------- Plan assets at fair value ................................ 1,309 1,232 ------- ------- Funded status ............................................ (369) (293) Unrecognized transition amount ........................... 423 448 Unrecognized net loss/(gain) ............................. 1 (41) ------- ------- Prepaid postretirement benefit cost ...................... $ 55 $ 114 ======= ======= Plan assets consist of group and individual variable life insurance policies, group life and health contracts and short-term investments, of which $990 million and $996 million are included in the Consolidated Statement of Financial Position at December 31, 1995 and 1994, respectively. In compliance with statutory accounting principles, Prudential's prepaid postretirement benefit costs of $99 million and $127 million at December 31, 1995 and 1994, respectively, are considered non-admitted assets. These assets are excluded from the consolidated assets and the changes in these non-admitted assets of $(28) million, $(90) million and $217 million in 1995, 1994 and 1993, respectively, are reported in "General, administrative and other expenses" in 1995 and 1994, and in "Issuance of Capital Notes" in 1993. Net periodic postretirement benefit cost for 1995, 1994 and 1993 includes the following components:
1995 1994 1993 ----- ----- ----- (In Millions) Service cost .................................................. $ 56 $ 38 $ 41 Interest cost ................................................. 123 112 124 Actual return on plan assets .................................. (144) (98) (86) Amortization of transition obligation ......................... 25 23 39 Other ......................................................... 47 (3) 77 Net curtailment and special termination benefits .............. 0 58 0 ----- ---- ---- Net periodic postretirement benefit cost ...................... $ 107 $130 $195 ===== ==== ====
The net reduction to surplus relating to the Company's postretirement benefit plans is $79 million, $40 million, and $412 million in 1995, 1994 and 1993, respectively, which considers the changes in the non-admitted prepaid postretirement benefit cost of $(28) million, $(90) million and $217 million in 1995, 1994 and 1993, respectively. The accounting assumptions used by Prudential were:
As of September 30, ------------------------------------------ 1995 1994 1993 --------- -------- ------- Discount rate ............................................... 7.5% 8.5% 7.0% Expected long-term rate of return on plan assets ............ 8.0% 9.0% 9.0% Rate of increase in compensation levels ..................... 4.5% 5.5% 5.0% Health care cost trend rates ................................ 8.9-13.3% 9.1-13.9% 9.5-14.7% Ultimate health care cost trend rate at 2006 ................ 5.0% 6.0% 5.0%
The effect of a 1% increase in health care cost trend rates on the September 30, 1995, accumulated postretirement benefit obligation and service and interest costs would be $138 million and $16 million, respectively. C. POSTEMPLOYMENT BENEFITS The Company accrues for postemployment benefits primarily for life and health benefits provided to former or inactive employees who are not retirees. The net accumulated liability for these benefits at December 31, 1995 and 1994 was $102 million and $151 million, respectively. The Company funded $45 million of postemployment benefits during 1995. F-10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA For The Years Ended December 31, 1995, 1994 and 1993 6. NOTES PAYABLE AND OTHER BORROWINGS Notes payable and other borrowings consisted of the following:
December 31, 1995 December 31, 1994 ------------------------- ------------------------- Weighted Weighted Average Average Balance Cost of Funds Balance Cost of Funds -------- ------------- ------- ------------- (In Millions) Short-term debt: Commercial paper ........................... $3,711 5.8% $ 4,108 5.6% Medium-term notes payable .................. 9 7.4% 204 4.8% Other ...................................... 2,007 6.4% 4,876 5.8% ------ ------- Total Short Term ............................ 5,727 6.0% 9,188 5.7% ------ ------- Long-term debt: Notes payable .............................. 1,309 7.2% 1,684 7.3% Medium-term notes payable .................. 377 5.6% 535 5.9% Euro medium-term notes payable ............. 537 6.0% 584 4.7% Other ...................................... 1,207 6.2% 18 10.3% ------ ------- Total Long Term ............................. 3,430 6.5% 2,821 6.5% ------ ------- Total ....................................... $9,157 6.2% $12,009 5.9% ====== =======
Scheduled repayments of long-term debt as of December 31, 1995, are as follows: $321 million in 1996, $448 million in 1997, $868 million in 1998, $667 million in 1999, $620 million in 2000, and $593 million thereafter. As of December 31, 1995, the Company had $6,770 million in lines of credit from numerous financial institutions of which $4,263 million were unused. 7. SURPLUS A. Capital Notes A summary of the outstanding Capital Notes as of December 31, 1995 is as follows: Principal Interest Maturity Issue Date (Par) Rate Date ---------- --------- -------- -------- (In Millions) April 1993 ................ $ 300 6.875% April 2003 June 1995 ................. 250 7.650% July 2007 July 1995 ................. 100 8.100% July 2015 June 1995 ................. 350 8.300% July 2025 ------ Total ..................... $1,000 ====== The notes are subordinate in right of payment to policyholder claims and to senior indebtedness, and principal repayments are subject to a risk-based capital test. The net proceeds from the April 1993 notes, approximately $298 million, were contributed to a voluntary employee benefit association trust to prefund certain obligations of Prudential to provide postretirement medical and other benefits. This resulted in a prepaid asset, which is non-admitted for statutory purposes. The net increase to surplus from the issuance of the notes, including a tax benefit of $104 million less the charge-off of the non-admitted asset of $217 million, was $185 million (Note 5B). B. SPECIAL SURPLUS FUND In accordance with the requirements of various states, a special surplus fund has been established for contingency reserves of $1,274 million and $1,097 million as of December 31, 1995 and 1994, respectively. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values presented on the next page have been determined using available information and reasonable valuation methodologies. Considerable judgment is applied in interpreting data to develop the estimates of fair value. Accordingly, such estimates F-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA For The Years Ended December 31, 1995, 1994 and 1993 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 is a reasonable estimate of fair value.) Fixed Maturities--Fair values for fixed maturities, 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 fair value of certain non-performing private placement securities is based on amounts provided by state regulatory authorities. Equity Securities--Fair value is based on quoted market prices, where available, or prices provided by state regulatory authorities. Mortgage Loans--The fair value of residential mortgages is based on recent market trades or quotes, adjusted where necessary for differences in risk characteristics. The fair value of the commercial mortgage and agricultural loan portfolio is primarily based upon the present value of the scheduled cash flows discounted at the appropriate U.S. Treasury rate, adjusted for the current market spread for a similar quality mortgage. For certain non-performing and other loans, fair value is based upon the value of the underlying collateral. 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. Derivative Financial Instruments--The fair value of swap agreements is estimated based on the present value of future cash flows under the agreements discounted at the applicable zero coupon U.S. Treasury rate and swap spread. The fair value of forwards and futures is estimated based on market quotes for a transaction with similar terms, while the fair value of options is based principally on market quotes. The fair value of loan commitments is estimated based on fees actually charged or those currently charged for similar arrangements, adjusted for changes in interest rates and credit quality subsequent to origination. Investment-Type Insurance Contract Liabilities--Fair values for the Company's investment-type insurance contract liabilities are estimated using a discounted cash flow model, based on interest rates currently being offered for similar contracts. Notes Payable and Other Borrowings--The estimated fair value of notes payable and other borrowings is based on the borrowing rates currently available to the Company for debt with similar terms and maturities. The following table discloses the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1995 and 1994.
1995 1994 ------------------------ ----------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value --------- ---------- --------- ---------- (In Millions) FINANCIAL ASSETS: Fixed maturities ........................... $ 85,585 $ 92,282 $ 78,620 $77,200 Equity securities .......................... 1,937 1,937 2,327 2,327 Mortgage loans ............................. 23,680 24,268 26,199 24,955 Policy loans ............................... 6,800 7,052 6,631 6,018 Short-term investments ..................... 7,874 7,874 10,630 10,630 Securities purchased under agreements to resell ...................... 5,130 5,130 5,591 5,591 Trading account securities ................. 3,658 3,658 6,341 6,341 Cash ....................................... 1,633 1,633 1,109 1,109 Broker-dealer receivables .................. 8,136 8,136 8,164 8,164 Assets held in Separate Accounts ........... 58,435 58,435 48,633 48,633 Derivative financial instruments ........... 1,473 1,640 1,219 1,268 FINANCIAL LIABILITIES: Investment-type insurance contracts ........ 35,336 36,258 39,747 38,934 Securities sold under agreements to repurchase ................................ 7,993 7,993 8,919 8,919 Notes payable and other borrowings ......... 9,157 9,231 12,009 11,828 Broker-dealer payables ..................... 6,083 6,083 6,198 6,198 Liabilities related to Separate Accounts .................................. 57,586 57,586 47,946 47,946 Derivative financial instruments ........... 1,704 1,781 1,611 1,665
F-12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA For The Years Ended December 31, 1995, 1994 and 1993 9. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS A. Derivative Financial Instruments Derivatives, including swaps, forwards, futures, options, and loan commitments subject to market risk, are used for trading and other than trading activities (Note 1C). The following two tables summarize the Company's outstanding positions on a gross basis before netting pursuant to rights of offset, qualifying master netting agreements with counterparties or collateral arrangements as of December 31, 1995 and 1994, respectively: DERIVATIVE FINANCIAL INSTRUMENTS As of December 31, 1995 (In Millions)
Trading Other Than Trading Total -------------------- -------------------- ------------------------------- Estimated Estimated Carrying Estimated Notional Fair Value Notional Fair Value Notional Amount Fair Value -------- ---------- -------- ---------- -------- -------- ---------- Swaps: Assets ................. $12,720 $1,131 $ 114 $ 10 $12,834 $1,132 $1,141 Liabilities ............ 11,488 1,317 4,476 62 15,964 1,371 1,379 Forwards: Assets ................. 20,351 291 2,281 33 22,632 305 324 Liabilities ............ 22,068 278 6,675 48 28,743 291 326 Futures: Assets ................. 1,387 14 2,590 34 3,977 20 48 Liabilities ............ 3,065 18 1,821 11 4,886 24 29 Options: Assets ................. 1,961 20 4,345 97 6,306 20 117 Liabilities ............ 1,700 17 2,724 20 4,424 18 37 Loan Commitments: Assets ................. 0 0 123 10 123 (4) 10 Liabilities ............ 0 0 1,412 10 1,412 0 10 ------- ------ ------- ---- ------- ------ ------ Total: Assets ................. $36,419 $1,456 $ 9,453 $184 $45,872 $1,473 $1,640 ======= ====== ======= ==== ======= ====== ====== Liabilities ............ $38,321 $1,630 $17,108 $151 $55,429 $1,704 $1,781 ======= ====== ======= ==== ======= ====== ======
F-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA For The Years Ended December 31, 1995, 1994 and 1993 DERIVATIVE FINANCIAL INSTRUMENTS As of December 31, 1994 (In Millions)
Trading Other Than Trading Total -------------------- -------------------- ------------------------------- Estimated Estimated Carrying Estimated Notional Fair Value Notional Fair Value Notional Amount Fair Value -------- ---------- -------- ---------- -------- -------- ---------- Swaps: Assets ................. $13,852 $ 837 $ 184 $ 9 $14,036 $ 845 $ 846 Liabilities ............ 14,825 1,216 4,993 48 19,818 1,236 1,264 Forwards: Assets ................. 21,988 300 2,720 24 24,708 312 324 Liabilities ............ 19,898 289 3,112 19 23,010 299 308 Futures: Assets ................. 1,520 40 4,296 17 5,816 30 57 Liabilities ............ 1,878 35 505 3 2,383 35 38 Options: Assets ................. 2,924 31 2,407 8 5,331 34 39 Liabilities ............ 3,028 38 2,217 2 5,245 40 40 Loan Commitments: Assets ................. 0 0 212 2 212 (2) 2 Liabilities ............ 0 0 1,543 15 1,543 1 15 ------- ------ ------- --- ------- ------ ------ Total: Assets ................. $40,284 $1,208 $ 9,819 $60 $50,103 $1,219 $1,268 ======= ====== ======= === ======= ====== ====== Liabilities ............ $39,629 $1,578 $12,370 $87 $51,999 $1,611 $1,665 ======= ====== ======= === ======= ====== ======
Derivatives Held for Trading Purposes--The Company uses derivatives for trading purposes in securities broker-dealer activities and in a limited-purpose swap subsidiary to meet the financial and hedging needs of its customers. Net trading revenues for the years ended December 31, 1995 and 1994, relating to forwards and futures and swaps were $110 million, $42 million and $3 million, and $42 million, $33 million and $8 million, respectively. Net trading revenues for options were not material. Average fair values for trading derivatives in an asset position during the years ended December 31, 1995 and 1994 were $1,394 million and $1,526 million, respectively, and for derivatives in a liability position were $1,582 million and $1,671 million, respectively. Of those derivatives held for trading purposes at December 31, 1995, 55% of the notional amount consisted of interest rate derivatives, 40% consisted of foreign currency derivatives, and 5% consisted of equity and commodity derivatives. Derivatives Held for Purposes Other Than Trading--The Company uses derivatives primarily for asset/liability risk management and to reduce exposure to interest rate, currency and other market risks. Of the total notional amount of derivatives held for purposes other than trading at December 31, 1995, 16% were used by the Company to hedge its investment portfolio to reduce interest rate, currency and other market risks, and 84% were used to hedge interest rate risk related to the Company's mortgage banking segment activities. Of those derivatives held for purposes other than trading at December 31, 1995, 92% of notional consisted of interest rate derivatives and 8% consisted of foreign currency derivatives. B. Off-Balance Sheet Credit-Related Instruments During the normal course of its business, the Company utilizes financial instruments with off-balance sheet credit risk such as commitments, financial guarantees, loans sold with recourse and letters of credit. Commitments include commitments to purchase and sell mortgage loans, the unfunded portion of commitments to fund investments in private placement securities, and unused credit card and home equity lines. The Company also provides financial guarantees incidental to other transactions and letters of credit that guarantee the performance of customers to third parties. These credit-related financial instruments have off-balance sheet credit risk because only their origination fees, if any, and accruals for probable losses, if any, are recognized until the obligation under the instrument is fulfilled or expires. These instruments can extend for several years and expirations are not concentrated in any period. The Company seeks to control credit risk associated with these instruments by limiting credit, maintaining collateral where customary and appropriate, and performing other monitoring procedures. The notional amount of these instruments, which represents the Company's maximum exposure to credit loss from other parties' non-performance, was $15,498 million and $17,389 million at December 31, 1995 and 1994, respectively. Because many of these amounts expire without being advanced in whole or in part, the notional amounts do not represent future cash F-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA For The Years Ended December 31, 1995, 1994 and 1993 flows. The above notional amounts include $6,001 million and $4,150 million of unused available lines of credit under credit card and home equity commitments as of December 31, 1995 and 1994, respectively. The Company has not experienced, and does not anticipate experiencing, all of its customers exercising their entire available lines of credit at any given point in time. The estimated fair value of off-balance sheet credit-related instruments was $(67) million and $(91) million at December 31, 1995 and 1994, respectively. 10. DIVESTITURES In October 1995, the Company completed the sale of its reinsurance segment, Prudential Reinsurance Holdings, Inc. ("Holdings"), through an initial public offering of common stock. As a result of the sale, an after-tax gain of $72 million was recorded in 1995. In March 1995, the Company announced its intention to sell its mortgage banking segment. On January 26, 1996, the Company entered into a definitive agreement to sell substantially all the assets of Prudential Home Mortgage Company, Inc. and it has also liquidated certain mortgage-backed securities and extended warehouse loans. The Company recorded an after-tax loss of $98 million, which includes operating gains and losses, asset write downs, and other costs directly related to the planned sale. The Company continues to have discussions with prospective buyers for the sale of the remaining assets. A summary of the assets and liabilities of the mortgage banking segment at December 31 follows: ASSETS AND LIABILITIES OF MORTGAGE BANKING SEGMENT 1995 1994 ------ ------ (In Millions) Total assets ............................ $4,293 $4,357 Total liabilities ....................... 4,215 4,199 ------ ------ Net assets .............................. $ 78 $ 158 ====== ====== 11. CONTINGENCIES A. Aggregate Stop Loss Retrocession Agreement As a result of the sale of Holdings, in 1995, Prudential Reinsurance (a Holdings subsidiary) and Gibraltar Casualty Co. (a Prudential subsidiary) entered into an Aggregate Stop Loss Agreement. The Stop Loss Agreement is intended to mitigate the impact on Prudential Reinsurance of adverse development of loss reserves as of June 30, 1995, of up to $375 million of the first $400 million of adverse development. The Company has recorded a loss reserve of $230 million as of December 31, 1995. B. Environmental and Asbestos-Related Claims The Company receives claims under expired contracts which assert alleged injuries and/or damages relating to or resulting from toxic torts, toxic waste and other hazardous substances. The liabilities for such claims cannot be estimated by traditional reserving techniques. As a result of judicial decisions and legislative actions, the coverage afforded under these contracts may be expanded beyond their original terms. Extensive litigation between insurers and insureds over these issues continues and the outcome is not predictable. In establishing the unpaid claim reserves for these losses, management considered the available information. However, given the expansion of coverage and liability by the courts and legislatures in the past, and potential for other unfavorable trends in the future, the ultimate cost of these claims could increase from the levels currently established. C. Lawsuits Various lawsuits against the Company have arisen in the course of the Company's business. In certain of these matters, large and/or indeterminate amounts are sought. Several purported class actions and individual actions have been brought against the Company on behalf of those persons who purchased life insurance policies allegedly because of deceptive sales practices engaged in by the Company and its insurance agents in violation of state and federal laws. The sales practices alleged to have occurred are contrary to Company policy. Some of these cases seek very substantial damages while others seek unspecified compensatory, punitive and treble damages. The Company intends to defend these cases vigorously. F-15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA For The Years Ended December 31, 1995, 1994 and 1993 In response to this litigation, several state insurance departments have initiated market conduct examinations relating to Prudential's sales practices. The Attorney General of one state has conducted an investigation and made its report to the state insurance commissioner. Another Attorney General has also made inquiries. The New Jersey Insurance Commissioner is leading a multi-state task force of insurance commissioners to examine life insurance industry sales and marketing practices. There are now approximately thirty insurance departments participating in this effort. The Company is cooperating fully in this examination. Litigation is subject to many uncertainties, and given the complexity and scope of these suits, their outcome cannot be predicted. It is also not possible to predict the likely results of any regulatory inquiries or their effect on litigation which might be initiated in response to widespread media coverage of these matters. Accordingly, management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of all pending litigation and the regulatory inquiries. It is possible that the results of operations or the cash flows of the Company in particular quarterly or annual periods could be materially affected by an ultimate unfavorable outcome of certain pending litigation and regulatory matters. Management believes, however, that the ultimate outcome of all pending litigation and regulatory matters referred to above should not have a material adverse effect on the Company's financial position. In 1993, Prudential Securities Incorporated (PSI), a subsidiary of Prudential, entered into an agreement with the Securities and Exchange Commission, the National Association of Securities Dealers, Inc., and state securities commissions whereby PSI agreed to pay $330 million into a settlement fund to pay eligible claims on certain limited partnership matters. Under this agreement, if partnership matter claims exceed the established settlement fund, PSI is obligated to pay such additional claims. The agreement also required PSI to take measures to enhance the adequacy of its sales practices compliance controls. In October 1994, the United States Attorney for the Southern District of New York (the "U.S. Attorney") filed a complaint against PSI in connection with its sale of certain limited partnerships. Simultaneously, PSI entered into an agreement to comply with certain conditions for a period of three years, and to pay an additional $330 million into the settlement fund. At the end of the three year period, assuming PSI has fully complied with the terms of the agreement, the U.S. Attorney will institute no further action. In the opinion of management, PSI is in compliance with all provisions of the aforementioned agreements and, after consideration of applicable accruals, the ultimate liability for litigation, including partnership settlement matters, will not have a material adverse effect on the Company's financial position. F-16 INDEPENDENT AUDITORS' REPORT To the Board of Directors of The Prudential Insurance Company of America Newark, New Jersey We have audited the accompanying consolidated statements of financial position of The Prudential Insurance Company of America and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations and changes in surplus and asset valuation reserve and of cash flows for each of the three years in the period ended December 31, 1995. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Prudential Insurance Company of America and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Parsippany, New Jersey March 1, 1996 F-17 PRUDENTIAL'S VARIABLE APPRECIABLE LIFE(R) INSURANCE THE PRUDENTIAL INSURANCE COMPANY OF AMERICA Prudential Plaza Newark, New Jersey 07102-3777 Telephone: (800) 437-4016, Ext. 46 PART IB INFORMATION IN STATEMENT OF ADDITIONAL INFORMATION STATEMENT OF ADDITIONAL INFORMATION MAY 1, 1996 THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT VARIABLE APPRECIABLE LIFE(R) INSURANCE CONTRACTS PROVIDING FOR THE INVESTMENT OF ASSETS IN THE INVESTMENT PORTFOLIOS OF THE PRUDENTIAL SERIES FUND, INC. The Prudential Insurance Company of America offers two forms of variable life insurance contracts under the name Variable APPRECIABLE LIFE(R) Insurance*. The first form provides a death benefit that generally remains fixed in an amount chosen by the purchaser and cash surrender values that vary daily. The second form also provides cash surrender values that vary daily but the death benefit will also vary daily. Under both forms of contract, the death benefit will never be less than the "face amount" of insurance chosen by the purchaser. There is no guaranteed minimum cash surrender value. The assets held for the purpose of paying benefits under these contracts can be invested in one or more of fifteen subaccounts of The Prudential 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 fifteen Series Fund portfolios are: the MONEY MARKET PORTFOLIO, the DIVERSIFIED BOND PORTFOLIO, the GOVERNMENT INCOME PORTFOLIO, the two ZERO COUPON BOND PORTFOLIOS with different liquidation dates -- 2000 and 2005, the CONSERVATIVE BALANCED PORTFOLIO, the FLEXIBLE MANAGED PORTFOLIO, the HIGH YIELD BOND PORTFOLIO, the STOCK INDEX PORTFOLIO, the EQUITY INCOME PORTFOLIO, the EQUITY PORTFOLIO, the PRUDENTIAL JENNISON PORTFOLIO, the SMALL CAPITALIZATION STOCK PORTFOLIO, the GLOBAL PORTFOLIO, and the NATURAL RESOURCES 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 The Prudential and certain other insurers to fund the benefits under variable life insurance and variable annuity contracts issued by those companies. The Variable APPRECIABLE LIFE(R) Insurance Contract owner may also choose to invest in a fixed-rate option or in The Prudential Variable Contract Real Property Account, which is described in a separate prospectus attached to the prospectus of The Prudential Variable Appreciable Account. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT DATED MAY 1, 1996, WHICH IS AVAILABLE WITHOUT CHARGE UPON WRITTEN REQUEST TO THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, PRUDENTIAL PLAZA, NEWARK, NEW JERSEY 07102-3777 OR BY TELEPHONING (800) 437-4016 EXT. 46. THE PRUDENTIAL INSURANCE COMPANY OF AMERICA THE PRUDENTIAL SERIES FUND, INC. Prudential Plaza Newark, New Jersey 07102-3777 Telephone: (800) 437-4016 Ext. 46 *APPRECIABLE LIFE is a registered mark of The Prudential. PVAL-SAI Ed 5-96 Catalog No. 640466W 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 SALES TO PERSONS 14 YEARS OF AGE OR YOUNGER........................... 1 PAYING PREMIUMS BY PAYROLL DEDUCTION.................................. 2 UNISEX PREMIUMS AND BENEFITS.......................................... 2 HOW THE DEATH BENEFIT WILL VARY....................................... 2 WITHDRAWAL OF EXCESS CASH SURRENDER VALUE............................. 3 INCREASES IN FACE AMOUNT.............................................. 4 DECREASES IN FACE AMOUNT.............................................. 5 TAX TREATMENT OF CONTRACT BENEFITS.................................... 5 SALE OF THE CONTRACT AND SALES COMMISSIONS............................ 7 TAX-QUALIFIED PENSION PLANS........................................... 8 OTHER STANDARD CONTRACT PROVISIONS.................................... 8 EXCHANGE OF FIXED-DOLLAR CONTRACT TO VARIABLE CONTRACT................ 9 INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS....................... 9 GENERAL ............................................................. 9 CONVERTIBLE SECURITIES................................................ 9 WARRANTS ............................................................. 9 OPTIONS AND FUTURES................................................... 10 WHEN-ISSUED AND DELAYED DELIVERY SECURITIES........................... 16 SHORT SALES........................................................... 17 SHORT SALES AGAINST THE BOX........................................... 17 INTEREST RATE SWAPS................................................... 17 LOANS OF PORTFOLIO SECURITIES......................................... 18 ILLIQUID SECURITIES................................................... 18 FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS........................... 18 FURTHER INFORMATION ABOUT THE POLICIES OF THE STOCK INDEX PORTFOLIO... 20 FURTHER INFORMATION ABOUT THE ZERO COUPON BOND PORTFOLIOS............. 20 INVESTMENT RESTRICTIONS.................................................... 21 INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES............................ 24 PORTFOLIO TRANSACTIONS AND BROKERAGE....................................... 26 DETERMINATION OF NET ASSET VALUE........................................... 27 SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO MAY CURRENTLY INVEST........ 29 DEBT RATINGS............................................................... 31 POSSIBLE REPLACEMENT OF THE SERIES FUND.................................... 32 OTHER INFORMATION CONCERNING THE SERIES FUND............................... 33 INCORPORATION AND AUTHORIZED STOCK.................................... 33 DIVIDENDS, DISTRIBUTIONS AND TAXES.................................... 33 CUSTODIAN AND TRANSFER AGENT.......................................... 33 EXPERTS ............................................................. 33 LICENSES ............................................................. 34 DIRECTORS AND OFFICERS OF THE PRUDENTIAL................................... 34 FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC. .................. A1 THE PRUDENTIAL SERIES FUND, INC. SCHEDULE OF INVESTMENTS.................. B1 MORE DETAILED INFORMATION ABOUT THE CONTRACT SALES LOAD UPON SURRENDER A contingent deferred sales load is assessed if the Contract lapses or is surrendered during the first 10 Contract years, or if a withdrawal is made under a Form A Contract during that 10 year period. 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 5 Contract years the charge will be equal to 50% of the first year's primary annual premium. In the next 5 Contract years that percentage is reduced uniformly on a daily basis until it reaches zero on the tenth 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 7, the maximum deferred sales charge will be 30% of the first year's primary annual premium, and so forth. The contingent deferred sales load is also subject to a further limit at older issue ages (approximately above age 67) 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 5 or 6 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 (c) under MONTHLY DEDUCTIONS FROM CONTRACT FUND.) The limitation is applied in order to conform with the requirements of the Investment Company Act of 1940 and regulations adopted thereunder, which limit the amount of non-refundable sales load that may be charged on contracts within the first 2 years. The limitation is as follows: (Every Contract has associated with it a Guideline Annual Premium ("GAP"), which is an amount, generally larger than the gross annual scheduled premium for the Contract, determined actuarially in accordance with a definition set forth in a regulation of the Securities and Exchange Commission ("SEC").) The maximum aggregate sales load that The Prudential will charge (that is, the sum of the monthly sales load deduction and the contingent deferred sales charge) 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 5 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 the charge, to the extent of any excess, will not be made. REDUCTION OF CHARGES FOR CONCURRENT SALES TO SEVERAL INDIVIDUALS The Prudential 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. The Prudential 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 The Prudential 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 The Prudential on a uniform basis. The Prudential's reductions in charges for these sales will not be unfairly discriminatory to the interests of any individual Contract owners. SALES TO PERSONS 14 YEARS OF AGE OR YOUNGER Both Form A and Form B Contracts covering insureds of 14 years of age or less contain a special provision providing that the face amount of insurance will automatically be increased on the Contract anniversary after the insured's 21st birthday to 150% of the initial face amount, so long as the Contract is not then in default. The death benefit will also usually increase, at the same time, by the same dollar amount. In certain circumstances, however, it may increase by a smaller amount. See HOW A CONTRACT'S DEATH BENEFIT WILL VARY in the prospectus. This increase in death benefit will also generally increase the net amount at risk under the Contract, thus increasing the mortality charge deducted each month from amounts invested under the Contract. See item (b) under MONTHLY DEDUCTIONS FROM CONTRACT FUND in the prospectus. The automatic increase in the face amount of insurance may affect future premium payments if the Contract owner wants to avoid the Contract being classified as a Modified Endowment Contract. A Contract owner should consult his or her Prudential representative before making unscheduled premium payments. 1 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 The Prudential monthly. Some Contracts sold using the payroll budget method may be eligible for a guaranteed issue program under which the initial minimum death benefit is $25,000 and the Contracts are based on unisex mortality tables. Any Prudential 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 employs mortality tables that distinguish between males and females. Thus, premiums and benefits under Contracts issued on males and females of the same age will generally differ. 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 advisors 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. The Prudential may offer the Contract with unisex mortality rates to such prospective purchasers. HOW THE DEATH BENEFIT WILL VARY As noted above, there are two Forms of the Contract, Form A and Form B. The death benefit under a Form B Contract varies with investment performance while the death benefit under a Form A Contract does not, unless it must be increased to satisfy tax requirements. Under a Form A Contract, the guaranteed minimum death benefit is equal to the face amount of insurance. (However, should the death benefit become payable while a Contract loan is outstanding, the debt will be deducted from the death benefit.) If the Contract is kept in force for several years and if investment performance is reasonably favorable, the Contract Fund value may grow to the point where it is necessary to increase the death benefit in order to ensure that the Contract will satisfy the Internal Revenue Code's definition of life insurance. Thus, the death benefit under a Form A Contract will always be the greater of (1) the guaranteed minimum death benefit; and (2) the Contract Fund divided by the "net single premium" per $1 of death benefit at the insured's attained age on that date. The latter provision ensures that the Contract will always have a death benefit large enough to be treated as life insurance for tax purposes under current law. The net single premium is used only in the calculation of the death benefit, not for premium payment purposes. The following is a table of illustrative net single premiums for $1 of death benefit under Contracts issued on insureds in the preferred rating class. - -------------------------------------------------------------------------------- INCREASE IN INSURANCE MALE NET SINGLE AMOUNT PER $1 ATTAINED AGE PREMIUM INCREASE IN CONTRACT FUND - -------------------------------------------------------------------------------- 5 .09151 $10.93 25 .17000 $ 5.88 35 .23700 $ 4.22 55 .45209 $ 2.21 65 .59468 $ 1.68 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INCREASE IN INSURANCE FEMALE NET SINGLE AMOUNT PER $1 ATTAINED AGE PREMIUM INCREASE IN CONTRACT FUND - -------------------------------------------------------------------------------- 5 .07919 $12.63 25 .15112 $ 6.62 35 .21127 $ 4.73 55 .40090 $ 2.49 65 .53639 $ 1.86 - -------------------------------------------------------------------------------- Whenever the death benefit is determined in this way, The Prudential reserves the right to refuse to accept further premium payments, although in practice the payment of the lesser of 2 years' scheduled premiums or the average of all premiums paid over the last 5 years will generally be allowed. 2 Under a Form B Contract, the death benefit will vary with investment experience. Assuming no withdrawals, 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 only scheduled premiums were paid, they were paid when due, the selected investment options earned a net return at a uniform rate of 4% per year, full mortality charges based upon the 1980 CSO Table were deducted, maximum sales load and expense charges were deducted, and there was no Contract debt. Thus, under a Form B Contract with no withdrawals, 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; however, this 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. Again, the death benefit will reflect a deduction for the amount of any Contract debt. See CONTRACT LOANS in the prospectus. As is the case under a Form A Contract, the Contract Fund of a Form B Contract 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 under a Form B Contract 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 divided by the net single premium per $1 of death benefit at the insured's attained age on that date. A Contract owner may also increase or decrease the face amount of his or her Contract, subject to certain conditions. See INCREASE IN FACE AMOUNT and DECREASE IN FACE AMOUNT, below. WITHDRAWAL OF EXCESS CASH SURRENDER VALUE Under certain circumstances, a Contract owner may withdraw a portion of the Contract's cash surrender value without surrendering the Contract in whole or in part. The amount that a Contract owner may withdraw 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 in force.) 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 $2,000 under a Form A Contract (in which the death benefit is generally equal to the face-amount of insurance) and at least $500 under a Form B Contract (in which the death benefit varies daily). An owner 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 or 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, The Prudential will tell a Contract owner how much he or she may withdraw. Withdrawal of part of the cash surrender value may have tax consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 5. A temporary need for funds may also be met by making a loan and you should consult your Prudential representative about how best to meet your needs. Under a Form A Contract, the face amount of insurance is reduced by not more than the amount of the withdrawal. No partial withdrawal will be permitted under a Form A Contract if it would result in a new face amount of less than the minimum face amount applicable to the insured's Contract. See REQUIREMENTS FOR ISSUANCE OF A CONTRACT in the prospectus. It is important to note, however, that if the face amount is decreased at any time during the first 7 Contract years, there is a danger that the Contract might be classified as a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS, page 5. Before making any withdrawal which causes a decrease in face amount, a Contract owner should consult with his or her Prudential representative. Also, if a withdrawal under a Form A Contract is made before the end of the tenth year, the Contract Fund may be reduced not only by the amount withdrawn but also by a proportionate amount of any surrender charges that would be made if the Contract were surrendered. The proportion is based on the percentage reduction in face amount. Form A Contract owners who make a partial withdrawal will be sent replacement Contract pages showing the new face amount, scheduled premiums, maximum surrender charges, tabular values, and monthly deductions. 3 Under a Form B Contract, the cash surrender value and Contract Fund value are reduced by the amount of the withdrawal, and the death benefit is accordingly reduced. Neither the face amount of insurance nor the amount of scheduled premiums will be changed due to a withdrawal of excess cash surrender value under a Form B Contract. No surrender charges will be assessed upon a withdrawal under a Form B Contract. Withdrawal of part of the cash surrender value increases the risk that the Contract Fund may be insufficient to provide for benefits under the Contract. 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, The Prudential treats withdrawals as a return of premium. INCREASES IN FACE AMOUNT An owner who wishes to increase the amount of his or her insurance may do so by increasing the face amount of the Contract (which is also the guaranteed minimum death benefit), subject to state approval and underwriting requirements determined by The Prudential. An increase in face amount is in many ways similar to the purchase of a second Contract, but it differs in the following respects: the minimum permissible increase is $25,000, while the minimum for a new Contract is $60,000; monthly fees are lower because only a single $3 per month administrative charge is made rather than two; a combined premium payment results in deduction of a single $2 per premium processing charge while separate premium payments for separate Contracts would involve two charges; the monthly expense charge of $0.03 per $1,000 of face amount may be lower if the increase is to a face amount greater than $100,000; and the Contract will lapse as a unit, unlike the case if two separate Contracts are purchased. These differences aside, the decision to increase face amount is comparable to the purchase of a second Contract in that it involves a commitment to higher scheduled premiums in exchange for greater insurance benefits. A Contract owner may elect to increase the face amount of his or her Contract no earlier than the first anniversary of the Contract. The following conditions must be met: (1) the owner must ask for the increase in writing on an appropriate form; (2) the amount of the increase in face amount must be at least $25,000; (3) the insured must supply evidence of insurability for the increase satisfactory to The Prudential; (4) if The Prudential requests, the owner must send in the Contract to be suitably endorsed; (5) the Contract must not be in default on the date the increase takes effect; (6) the owner must pay an appropriate premium at the time of the increase; (7) The Prudential has the right to deny more than one increase in a Contract year; and (8) if The Prudential has, between the Contract Date and the date that any requested increase in face amount will take effect, changed any of the bases on which benefits and charges are calculated under newly issued Contracts, The Prudential has the right to deny the increase. An increase in face amount resulting in a total face amount under the Contract of at least $100,000 may, subject to strict underwriting requirements, render the Contract eligible for a Select Rating. Upon an increase in face amount, The Prudential will recompute the Contract's scheduled premiums, contingent deferred sales and administrative charges, tabular values, and monthly deductions from the Contract Fund. The Contract owner has a choice, limited only by applicable state law, as to whether the recomputation will be made as of the prior or next Contract anniversary. There will be a payment required on the date of increase; the amount of the payment will depend, in part, on which Contract anniversary the Contract owner selects for the recomputation. The Prudential will tell the owner the amount of the required payment. If should also be noted that an increase in face amount may impact the status of the Contract as a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS, page 5. Therefore, before increasing the face amount, a Contract owner should consult with his or her Prudential representative. The effective date of the increase in the amount of insurance will be determined by the same rules that apply when a new Contract is purchased. Generally speaking, an increase will take effect on the latest of the date the owner applies for it, the date satisfactory evidence of insurability is provided to The Prudential or the date designated by the Contract owner, provided the necessary payment is made on or before that date. The Prudential will supply the Contract owner with pages which show the increased face amount, the effective date of the increase, and the recomputed items described two paragraphs above. The pages will also describe how the increase in face amount affects the various provisions of the Contract, including a statement that, for the amount of the increase in face amount, the period stated in the Incontestability and Suicide provisions (see OTHER STANDARD CONTRACT PROVISIONS, below on page 8) will run from the effective date of the increase. For the purpose of determining the sales load that will be charged after the increase and upon any subsequent lapse or surrender, the Contract is treated as if there were two separate Contracts, a "base Contract" representing the Contract before the increase and an "incremental Contract" representing the increase viewed as a separate Contract. At the time of the increase, a certain portion of the Contract Fund is allocated to the incremental Contract as a prepayment of premiums for purposes of the sales load limit. That portion is equal to the Guideline Annual Premium ("GAP") of the incremental Contract divided by the GAP of the entire Contract after the increase. Premium payments made after the increase are also allocated between the base Contract and the incremental 4 Contract for purposes of the sales load limit. A portion of each premium payment after the increase is allocated to the increase based on the GAP for the incremental Contract divided by the GAP for the entire Contract. A monthly deduction equal to 0.5% of the primary annual premium for each part of the Contract (i.e., the base and incremental Contracts, respectively) will be made until each part of the Contract has been in force for 5 years, although The Prudential reserves the right to continue to make this deduction thereafter. Similarly, the amount, if any, of sales charges upon lapse or surrender and the application of the overall limitation upon sales load, as described above in SALES LOAD UPON SURRENDER, page 1, will be determined as explained in that section as if there were two Contracts rather than one. Moreover, the contingent deferred administrative charge is also determined as if there were two separate Contracts. Thus, an owner considering an increase in face amount should be aware that such an increase will entail charges, including periodic sales load deductions and contingent deferred sales and administrative charges, comparable to the purchase of a new Contract. Each Contract owner who elects to increase the face amount of his or her Contract will be granted a "free-look" right which will apply only to the increase in face amount, not the entire Contract. The right is comparable to the right afforded to a purchaser of a new Contract. See SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK" in the prospectus. The "free-look" right would have to be exercised no later than 45 days after execution of the application for the increase or, if later, within 10 days after either receipt of the Contract as increased or receipt of the withdrawal right notice by the owner. Upon exercise of the "free-look" right, the owner will receive a refund in the amount of the aggregate premiums paid since the increase was requested and attributable to the increase, not the base Contract, as determined pursuant to the proportional premium allocation rule described above. There will be no adjustment for investment experience. All charges deducted after the increase will be reduced to what they would have been had no increase been effected. A Contract owner may transfer the total amount attributable to the increase in face amount from the subaccounts or the Real Property Account to the fixed-rate option at any time within 2 years after the increase in face amount. DECREASES IN FACE AMOUNT A Contract owner may effect a partial surrender of a Contract (see SURRENDER OF A CONTRACT in the prospectus) or a partial withdrawal of excess cash surrender value (see WITHDRAWAL OF EXCESS CASH SURRENDER VALUE above). A Contract owner also has the additional option of decreasing the face amount (which is also the guaranteed minimum death benefit) of his or her Contract without withdrawing any such surrender value. Contract owners who conclude that, because of changed circumstances, the amount of insurance is greater than needed will thus be able to decrease their amount of insurance protection, and the monthly deductions for the cost of insurance, without decreasing their current cash surrender value. The cash surrender value of the Contract on the date of the decrease will not change, except that an administrative processing fee of $15 may be deducted from that value (unless that fee is separately paid at the time the decrease in face amount is requested). The Contract's Contract Fund value, however, will be reduced by deduction of a proportionate part of the then applicable contingent deferred sales and administrative charges, if any. Scheduled premiums for the Contract will also be proportionately reduced. The Contracts of owners who exercise the right to reduce face amount will be amended to show the new face amount, tabular values, scheduled premiums, monthly charges, and, if applicable, the remaining contingent deferred sales and administrative charges. The minimum permissible decrease is $10,000. No decrease will be permitted that causes the face amount of the Contract to drop below the minimum face amount applicable to the insured's Contract. See REQUIREMENTS FOR ISSUANCE OF A CONTRACT in the prospectus. No reduction will be permitted to the extent that it would cause the Contract to fail to qualify as "life insurance" for purposes of Section 7702 of the Internal Revenue Code. If the face amount of a Contract in force on a Select Rating basis is reduced below $100,000, it is no longer eligible for the Select Rating. A decrease in face amount will generally be effected as of the Monthly date immediately preceding receipt of a proper request to decrease face amount. A decrease requested while the Contract is in default, however, will be effected as of the Monthly date the Contract went into default. Monthly charges previously deducted on the effective date of the decrease and attributed to the decreased portion of the face amount will be credited to the Contract Fund as of that date. It is important to note, however, that if the face amount is decreased at any time during the first 7 Contract years, there is a danger the Contract might be classified as a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS, below. Before requesting any decreases in face amount, a Contract owner should consult his or her Prudential representative. TAX TREATMENT OF CONTRACT BENEFITS Each prospective purchaser is urged to consult a qualified tax advisor. 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. Rather, it provides information about how The Prudential believes the tax laws apply in the most 5 commonly occurring circumstances. There is no guarantee, however, that the current federal income tax laws and regulations or interpretations will not change. TREATMENT AS LIFE INSURANCE. The Contract will be treated as "life insurance" as long as it satisfies certain definitional tests set forth in Section 7702 of the Internal Revenue Code (the "Code") and as long as the underlying investments for the Contract satisfy diversification requirements set forth in Treasury Regulations issued pursuant to Section 817(h) of the Code. These diversification requirements must ordinarily be met within 1 year after Contract owner funds are first allocated to the particular portfolio of the Series Fund, and within 30 days after the end of each calendar quarter thereafter. Each portfolio must meet one of two alternative tests. Under the first test, no more than 55% of the portfolio's assets can be invested in any one investment; no more than 70% of the assets can be invested in any two investments; no more than 80% can be invested in any three investments; and no more than 90% can be invested in any four investments. Under the second test, the portfolio must meet the tax law diversification requirements for a regulated investment company and no more than 55% of the value of the portfolio's assets can be invested in cash, cash items, Government securities, and securities of other regulated investment companies. A third test is available for portfolios that underlie only variable life insurance contracts, such as the Zero Coupon Bond Portfolios. Under this test, such portfolios can be invested without limit in Treasury securities and, where the portfolio is invested in part in Treasury securities, the percentages of the first test are revised and applied to the portion of the portfolio not invested in Treasury securities. For purposes of determining whether a variable account is adequately diversified, each United States Government agency or instrumentality is treated as a separate issuer. Compliance with diversification requirements will generally limit the amount of assets that may be invested in federally insured certificates of deposit and all types of securities issued or guaranteed by each United States Government agency or instrumentality. The Prudential believes that it has taken adequate steps to cause the Contract to be treated as life insurance for tax purposes. This means that (1) except as noted below, the Contract owner should not be taxed on any part of the Contract Fund, including additions attributable to interest, dividends or appreciation; and (2) the death benefit should be excludible from the gross income of the beneficiary under section 101(a) of the Code. However, Section 7702 of the Code, which defines life insurance for tax purposes, gives the Secretary of the Treasury authority to prescribe regulations to carry out the purposes of the Section. In this regard, proposed regulations governing mortality charges were issued in 1991 and proposed regulations under Sections 101, 7702, and 7702A governing the treatment of life insurance policies that provide accelerated death benefits were issued in 1992. None of these proposed regulations has yet been finalized. Additional regulations under Section 7702 may also be promulgated in the future. Moreover, in connection with the issuance of temporary regulations under Section 817(h), the Treasury Department announced that such regulations do not provide guidance concerning the extent to which Contract owners may direct their investments to particular divisions of a separate account. Such guidance will be included in regulations or rulings under Section 817(d) relating to the definition of a variable contract. The Prudential intends to comply with final regulations issued under sections 7702 and 817. Therefore, it reserves the right to make such changes as it deems necessary to assure that the Contract continues to qualify as life insurance for tax purposes. Any such changes will apply uniformly to affected Contract owners and will be made only after advance written notice to affected Contract owners. PRE-DEATH DISTRIBUTIONS. The taxation of pre-death distributions depends on whether the Contract is classified as a Modified Endowment Contract. The following discussion first deals with distributions under Contracts not so classified, and then with Modified Endowment Contracts. 1. A surrender or lapse of the Contract may have tax consequences. Upon surrender, the owner will not be taxed on the cash surrender value except for the amount, if any, that exceeds the gross premiums paid less the untaxed portion of any prior withdrawals. The amount of any unpaid Contract debt will, upon surrender or lapse, be added to the cash surrender value and treated, for this purpose, as if it had been received. Any loss incurred upon surrender is generally not deductible. The tax consequences of a surrender may differ if the proceeds are received under any income payment settlement option. A withdrawal generally is not taxable unless it exceeds total premiums paid to the date of withdrawal less the untaxed portion of any prior withdrawals. However, under certain limited circumstances, in the first 15 Contract years all or a portion of a withdrawal may be taxable 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 to date. Extra premiums for optional benefits and riders generally do not count in computing the gross premiums paid, which in turn determines the extent to which a withdrawal might be taxed. 6 Loans received under the Contract will ordinarily be treated as indebtedness of the owner and will not be considered to be distributions subject to tax. 2. Some of the above rules are changed if the Contract is classified as a Modified Endowment Contract under section 7702A of the Code. It is possible for the Contract to be classified as a Modified Endowment Contract under at least two circumstances: premiums substantially in excess of scheduled premiums are paid; or a decrease in the face amount of insurance is made (or a rider removed) during the first 7 Contract years. Moreover, the addition of a rider or the increase in the face amount of insurance after the Contract Date may have an impact on the Contract's status as a Modified Endowment Contract. Contract owners contemplating any of these steps should first consult a qualified tax advisor and their Prudential representative. If the Contract is classified as a Modified Endowment Contract, then pre-death distributions, including loans and withdrawals, are includible in income to the extent that the Contract Fund prior to surrender charges exceeds the gross premiums paid for the Contract increased by the amount of any loans previously includible in income and reduced by any untaxed amounts previously received other than the amount of any loans excludible from income. These rules may also apply to pre-death distributions, including loans, made during the 2 year period prior to the Contract becoming a Modified Endowment Contract. In addition, pre-death distributions from such Contracts (including full surrenders) will be subject to a penalty of 10 per cent of the amount includible in income unless the amount is distributed on or after age 59 1/2, on account of the taxpayer's disability or as a life annuity. It is presently unclear how the penalty tax provisions apply to Contracts owned by nonnatural persons such as corporations. Under certain circumstances, Modified Endowment Contracts issued during any calendar year will be treated as a single contract for purposes of applying the above rules. WITHHOLDING. The taxable portion of any amounts received under the Contract will be subject to withholding to meet federal income tax obligations if the Contract owner fails to elect that no taxes be withheld or in certain other circumstances. Contract owners who do not provide a social security number or other taxpayer identification number will not be permitted to elect out of withholding. All recipients of such amounts may be subject to penalties under the estimated tax payment rules if withholding and estimated tax payments are not sufficient. OTHER TAX CONSIDERATIONS. Transfer of the Contract to a new owner or assignment of the Contract may have tax consequences depending on the circumstances. In the case of a transfer of the Contract for a valuable consideration, the death benefit may be subject to federal income taxes under section 101(a)(2) of the Code. In addition, a transfer of the Contract to or the designation of a beneficiary who is either 37 1/2 years younger than the Contract owner or a grandchild of the Contract owner may have Generation Skipping Transfer tax consequences under Section 2601 of the Code. In certain circumstances, 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 under section 163 of the Code as personal interest or under section 264 of the Code. Contract owners should consult a tax advisor regarding the application of these provisions to their circumstances. Business-owned life insurance is subject to additional rules. Section 264(a)(1) of the Code generally precludes business Contract owners from deducting premium payments. Under section 264(a)(4) of the Code, a deduction is not allowed for any interest paid or accrued on any Contract debt on an insurance policy to the extent the indebtedness exceeds $50,000 per officer, employee or financially interested person. The Congress is also considering legislation to deny interest deductions generally for loans on business-owned policies. The Code also imposes an indirect tax upon additions to the Contract Fund or the receipt of death benefits under business-owned life insurance policies under certain circumstances by way of the corporate alternative minimum tax. The individual situation of each Contract owner or beneficiary will determine the federal estate taxes and the state and local estate, inheritance and other taxes due if the owner or insured dies. SALE OF THE CONTRACT AND SALES COMMISSIONS Pruco Securities Corporation ("Prusec"), an indirect wholly-owned subsidiary of The 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 1111 Durham Avenue, South Plainfield, New Jersey 07080. 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 no more 7 than 50% of the Scheduled Premiums for the first year, no more than 10% of the Scheduled Premiums for the second, third, and fourth years, no more than 3% of the Scheduled Premiums for the fifth through tenth years, and no more than 2% of the Scheduled Premiums thereafter. For new Contracts issued on or about July 1, 1996, the commission rates for the second through tenth years will change to no more than 6% of the Scheduled Premiums. 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 3 years of service may be paid on a different basis. Representatives who meet certain productivity, profitability, and persistency standards with regard to the sale of the Contract will be eligible for additional compensation. Sales expenses in any year are not equal to the deduction for sales load in that year. The Prudential 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 The Prudential'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. TAX-QUALIFIED PENSION PLANS The Contracts may be acquired in connection with the funding of retirement plans satisfying the qualification requirements of Section 401 of the Internal Revenue Code. Such Contracts may be issued with a minimum face amount of $10,000, and increases and decreases in face amount may be effected in minimum increments of $10,000. The monthly charge for anticipated mortality costs and the scheduled premiums under such Contracts will be the same for male and female insureds of a particular age and underwriting classification. Illustrations reflecting such premiums and charges will be given to purchasers of Contracts issued in connection with qualified plans. Only certain of the riders normally available with the Contracts are available to Contracts issued in connection with qualified plans. See RIDERS in the prospectus. Moreover, fixed reduced paid-up insurance and payment of the cash surrender value are the only options on lapse available to Contracts issued in connection with qualified plans. See LAPSE AND REINSTATEMENT in the prospectus. Finally, Contracts issued in connection with qualified plans may not invest in the Real Property Account. Prior to purchase of a Contract in connection with a qualified plan, the provisions of the Code relating to such plans and life insurance thereunder should be examined. OTHER STANDARD CONTRACT PROVISIONS BENEFICIARY. The beneficiary is designated and named in the application by the Contract owner. Thereafter, the owner 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. After the Contract has been in force during the insured's lifetime for 2 years from the Contract Date or, with respect to any change in the Contract that requires The Prudential's approval and could increase its liability, after the change has been in effect during the insured's lifetime for 2 years from the effective date of the change, The Prudential will not contest its liability under the Contract in accordance with its terms. 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, The Prudential 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. SUICIDE EXCLUSION. Generally, if the insured, whether sane or insane, dies by suicide within 2 years from the Contract Date, The Prudential will pay no more under the Contract than the sum of the premiums paid. If the insured, whether sane or insane, dies by suicide within 2 years from the effective date of an increase in the face amount of insurance, The Prudential will pay, with respect to the amount of the increase, no more than the sum of the scheduled premiums attributable to the increase. ASSIGNMENT. This Contract may not be assigned if such 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 The Prudential's consent. The Prudential 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 one of its Home Offices. 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 Prudential representative authorized to sell this Contract can explain these options upon request. 8 EXCHANGE OF FIXED-DOLLAR CONTRACT TO VARIABLE CONTRACT The Prudential may, on a non-discriminatory basis, permit the owner of an APPRECIABLE LIFE insurance policy issued by The Prudential (an APPRECIABLE LIFE policy is a general account, universal life type policy with guaranteed minimum values) to exchange his or her policy for a comparable Variable APPRECIABLE LIFE Contract with the same Contract Date, scheduled premiums, and Contract fund. No charge will be made for the exchange. There is no new "free look" right when an APPRECIABLE LIFE insurance policy owner elects to exchange his or her policy for a comparable Variable APPRECIABLE LIFE Contract. Although The Prudential does not give tax advice, The Prudential does believe, based on its understanding of federal income tax laws as currently interpreted, that the original date exchange of an APPRECIABLE LIFE Contract should be considered to be a tax-free exchange under the Internal Revenue Code of 1986 as amended. It should be noted, however, that the exchange of an APPRECIABLE LIFE Contract for a Variable APPRECIABLE LIFE Contract may impact the status of the Contract as Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS, page 5. A contract owner should consult with his or her tax advisor and Prudential representative before making an exchange. INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS GENERAL The Prudential Series Fund, Inc. (the "Series Fund") has fifteen separate portfolios available to Contract owners: the Money Market Portfolio, the Diversified Bond Portfolio, the Government Income Portfolio, the two Zero Coupon Bond Portfolios with different liquidation dates -- 2000 and 2005, the Conservative Balanced Portfolio, the Flexible Managed Portfolio, the High Yield Bond Portfolio, the Stock Index Portfolio, the Equity Income Portfolio, the Equity Portfolio, the Prudential Jennison Portfolio, the Small Capitalization Stock Portfolio, the Global Portfolio, and the Natural Resources Portfolio. The portfolios are managed by The Prudential Insurance Company of America ("The Prudential"), see INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES, page 24. 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 Series Fund's portfolios can be found under INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS in the prospectus. The policies employed to manage the Zero Coupon Bond Portfolios are also discussed in greater detail in FURTHER INFORMATION ABOUT THE ZERO COUPON BOND PORTFOLIOS, page 20. CONVERTIBLE SECURITIES The Conservative Balanced, Flexible Managed, Equity Income, Equity, Prudential Jennison, Small Capitalization Stock, Global, and Natural Resources Portfolios may invest in convertible securities and such securities may constitute a major part of the holdings of the Equity Income, Natural Resources and Global Portfolios. A convertible security is a fixed-income security (a bond or preferred stock) which may be converted at a stated price within a specified period of time into a certain quantity of the common stock of the same or a different issuer. Convertible securities are senior to common stocks in a corporation's capital structure, but are usually subordinated to similar nonconvertible securities. While providing a fixed income stream (generally higher in yield than the income derivable from a common stock but lower than that afforded by a similar nonconvertible security), a convertible security also affords an investor the opportunity, through its conversion feature, to participate in capital appreciation attendant upon a market price advance in the convertible security's underlying common stock. The price of a convertible security tends to increase as the market value of the underlying stock rises, whereas it tends to decrease as the market value of the underlying stock declines. While no securities investment is without risk, investments in convertible securities generally entail less risk than investments in the common stock of the same issuer. WARRANTS The Conservative Balanced, Flexible Managed, Equity Income, Equity, Prudential Jennison, Small Capitalization Stock, Global, and Natural Resources Portfolios may invest in warrants on common stocks. Warrants are options to buy a number of shares of stock at a predetermined price during a specified period. The risk associated with the purchase of a warrant is that the purchase price will be lost if the market price of the stock does not reach a 9 level that justifies the exercise or sale of the warrant before it expires. 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 will ordinarily be sold rather than be exercised. OPTIONS AND FUTURES OPTIONS ON EQUITY SECURITIES. The Conservative Balanced, Flexible Managed, Equity Income, Equity, Prudential Jennison, Small Capitalization Stock, Global, and Natural Resources Portfolios may purchase and write (i.e., sell) put and call options on equity securities that are traded on securities exchanges or that are listed on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or that result from privately negotiated transactions with broker-dealers ("OTC options"). A call option is a short-term contract pursuant to which the purchaser or holder, in return for a premium paid, has the right to buy the equity security underlying the option at a specified exercise price at any time during the term of the option. The writer of the call option, who receives the premium, has the obligation, upon exercise of the option, to deliver the underlying equity security against payment of the exercise price. A put option is a similar contract which gives the purchaser or holder, in return for a premium, the right to sell the underlying equity security at a specified price during the term of the option. The writer of the put, who receives the premium, has the obligation to buy the underlying security at the exercise price upon exercise by the holder of the put. A portfolio will write only "covered" options on stocks. A call option is covered if: (1) the portfolio owns the security underlying the option; or (2) the portfolio has an absolute and immediate right to acquire that security without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other securities it holds; or (3) the portfolio holds on a share-for-share basis a call on the same security as the call written where the exercise price of the call held is equal to or less than the exercise price of the call written or greater than the exercise price of the call written if the difference is maintained by the portfolio in cash, Treasury bills or other high grade short-term debt obligations in a segregated account with its custodian. A put option is covered if: (1) the portfolio deposits and maintains with its custodian in a segregated account cash, U.S. Government securities or other liquid high-grade debt obligations having a value equal to or greater than the exercise price of the option; or (2) the portfolio holds on a share-for-share basis a put on the same security as the put written where the exercise price of the put held is equal to or greater than the exercise price of the put written or less than the exercise price if the difference is maintained by the portfolio in cash, Treasury bills or other high grade short-term debt obligations in a segregated account with its custodian. The Conservative Balanced, Flexible Managed, Equity Income, Equity, Prudential Jennison, Small Capitalization Stock, Global, and Natural Resources Portfolios may also purchase "protective puts" (i.e., put options acquired for the purpose of protecting a portfolio security from a decline in market value). In exchange for the premium paid for the put option, the portfolio acquires the right to sell the underlying security at the exercise price of the put regardless of the extent to which the underlying security declines in value. The loss to the portfolio is limited to the premium paid for, and transaction costs in connection with, the put plus the initial excess, if any, of the market price of the underlying security over the exercise price. However, if the market price of the security underlying the put rises, the profit the portfolio realizes on the sale of the security will be reduced by the premium paid for the put option less any amount (net of transaction costs) for which the put may be sold. Similar principles apply to the purchase of puts on debt securities and stock indices, as described below under Options on Debt Securities and Options on Stock Indices. These portfolios may purchase call options for hedging and investment purposes. No portfolio intends to invest more than 5% of its net assets at any one time in the purchase of call options on stocks. These portfolios may also purchase putable and callable equity securities, which are securities coupled with a put or a call option provided by the issuer. If the writer of an exchange-traded option wishes to terminate the obligation, he or she may effect a "closing purchase transaction" by buying an option of the same series as the option previously written. Similarly, the holder of an exchange-traded option may liquidate his or her position by exercise of the option or by effecting a "closing sale transaction" by selling an option of the same series as the option previously purchased. A portfolio will realize a profit from a closing transaction if the price of the transaction is less than the premium received from writing the option or is more than the premium paid to purchase the option. Because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, any loss resulting from a closing purchase transaction with respect to a call option is likely to be offset in whole or in part by appreciation of the underlying equity security owned by the portfolio. Unlike exchange-traded options, OTC options generally do not have a continuous liquid market. Consequently, the portfolio will generally be able to realize the value of an OTC option it has purchased only by exercising it or reselling it to the dealer who issued it. Similarly, when the portfolio writes an OTC option, it generally will be able to close out the OTC option prior to its expiration only by entering 10 into a closing purchase transaction with the dealer to which the portfolio originally wrote the OTC option. There is, in general, no guarantee that closing purchase or closing sale transactions can be effected. A portfolio's use of options on equity securities is subject to certain special risks, in addition to the risk that the market value of the security will move adversely to the portfolio's option position. An 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 a portfolio will generally purchase or write only those 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 may be 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 at all times be adequate to handle current 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 (or in the class or series of options) 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, which might cause an exchange to institute special procedures that might 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 and which are expected to be able to be capable of entering into closing transactions with the portfolio, there can be no assurance that the 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, the portfolio may be unable to liquidate an OTC option. The Prudential monitors the creditworthiness of dealers with whom the Series Fund enters into OTC option transactions under the general supervision of the Series Fund's Board of Directors. OPTIONS ON DEBT SECURITIES. The Diversified Bond, Government Income, Conservative Balanced, Flexible Managed, and High Yield Bond Portfolios may purchase and write (i.e., sell) put and call options on debt securities (including U.S. Government debt securities) that are traded on U.S. securities exchanges or that result from privately negotiated transactions with primary U.S. Government securities dealers recognized by the Federal Reserve Bank of New York ("over-the-counter" or "OTC" options). Options on debt are similar to options on stock, except that the option holder has the right to take or make delivery of a debt security, rather than stock. A portfolio will write only "covered" options. Options on debt securities are covered in the same manner as options on stocks, discussed above, except that, in the case of call options on U.S. Treasury Bills, the portfolio might own U.S. Treasury Bills of a different series from those underlying the call option, but with a principal amount and value corresponding to the option contract amount and a maturity date no later than that of the securities deliverable under the call option. The principal reason for a portfolio to write an option on one or more of its securities is to realize through the receipt of the premiums paid by the purchaser of the option a greater current return than would be realized on the underlying security alone. Calls on debt securities will not be written when, in the opinion of The Prudential, interest rates are likely to decline significantly, because under those circumstances the premium received by writing the call likely would not fully offset the foregone appreciation in the value of the underlying security. These portfolios may also write straddles (i.e., a combination of a call and a put written on the same security at the same strike price where the same issue of the security is considered "cover" for both the put and the call). In such cases, the portfolio will also segregate or deposit for the benefit of the portfolio's broker cash or liquid high- 11 grade debt obligations equivalent to the amount, if any, by which the put is "in the money." It is contemplated that each portfolio's use of straddles will be limited to 5% of the portfolio's net assets (meaning that the securities used for cover or segregated as described above will not exceed 5% of the portfolio's net assets at the time the straddle is written). The writing of a call and a put on the same security at the same strike price where the call and the put are covered by different securities is not considered a straddle for purposes of this limit. These portfolios may purchase "protective puts" in an effort to protect the value of a security that it owns against a substantial decline in market value. Protective puts are described above in Options on Equity Securities, page 10. A portfolio may wish to protect certain portfolio securities against a decline in market value at a time when put options on those particular securities are not available for purchase. A portfolio may therefore purchase a put option on securities other than those it wishes to protect even though it does not hold such other securities in its portfolio. While changes in the value of the put option should generally offset changes in the value of the securities being hedged, the correlation between the two values may not be as close in these transactions as in transactions in which the portfolio purchases a put option on an underlying security it owns. These portfolios may also purchase call options on debt securities for hedging or investment purposes. No portfolio currently intends to invest more than 5% of its net assets at any one time in the purchase of call options on debt securities. A portfolio may also purchase putable and callable debt securities, which are securities coupled with a put or call option provided by the issuer. If the writer of an exchange-traded option wishes to terminate the obligation, he or she may effect a "closing purchase transaction" or a "closing sale transaction" in a manner similar to that discussed above in connection with options on equity securities. The staff of the Securities and Exchange Commission has taken the position that purchased OTC options and the assets used as "cover" for written OTC options are illiquid for purposes of a portfolio's 15% limitation on investment in illiquid securities. However, pursuant to the terms of certain no-action letters issued by the staff, the securities used as cover for written OTC options may be considered liquid provided that the portfolio sells OTC options only to qualified dealers who agree that the portfolio may repurchase any OTC option it writes for a maximum price to be calculated by a predetermined formula. In such cases, the OTC option would be considered illiquid only to the extent that the maximum repurchase price under the formula exceeds the intrinsic value of the option. The use of debt options is subject to the same risks described above in connection with stock options. OPTIONS ON STOCK INDICES. The Conservative Balanced, Flexible Managed, Equity Income, Equity, Prudential Jennison, Global, and Natural Resources Portfolios may purchase and sell put and call options on stock indices traded on securities exchanges or listed on NASDAQ or that result from privately negotiated transactions with broker-dealers ("OTC options"). The Stock Index and Small Capitalization Stock Portfolios may utilize options on stock indices by constructing "put/call" combinations that are functionally comparable to a long stock index futures position as described below under Additional Information Regarding the Use of Options and Futures Contracts by the Stock Index Portfolio. Options on stock indices are similar to options on stock except that rather than the right to take or make delivery of stock at a specified price, an option on a stock index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the stock index upon which the option is based is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. This amount of cash is equal to such difference between the closing price of the index and the exercise price of the option expressed in dollars times a specified multiple (the "multiplier"). The writer of the option is obligated, in return for the premium received, to make delivery of this amount. Unlike stock options, all settlements are in cash, and gain or loss depends on price movements in the stock market generally (or in a particular industry or segment of the market) rather than price movements in individual stocks. The multiplier for an index option performs a function similar to the unit of trading for a stock option. It determines the total dollar value per Contract of each point in the difference between the exercise price of an option and the current level of the underlying index. A multiplier of 100 means that a one-point difference will yield $100. Options on different indices may have different multipliers. These portfolios may purchase put and call options for hedging and investment purposes. No portfolio intends to invest more than 5% of its net assets at any one time in the purchase of puts and calls on stock indices. A portfolio may effect closing sale and purchase transactions involving options on stock indices, as described above in connection with stock options. A portfolio will write only "covered" options on stock indices. A call option is covered if the portfolio holds a portfolio of stocks at least equal to the value of the index times the multiplier times the number of contracts. When a portfolio writes a call option on a broadly based stock market index, the portfolio will segregate or put into escrow with its custodian or pledge to a broker as collateral for the option, cash, cash equivalents or "qualified securities" 12 (defined below) with a market value at the time the option is written of not less than 100% of the current index value times the multiplier times the number of contracts. If a portfolio has written an option on an industry or market segment index, it will segregate or put into escrow with its custodian or pledge to a broker as collateral for the option at least five "qualified securities," all of which are stocks of issuers in such industry or market segment, with a market value at the time the option is written of not less than 100% of the current index value times the multiplier times the number of contracts. Such stocks 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 segregated, pledged or escrowed in the case of broadly based stock market index options or 25% of such amount in the case of industry or market segment index options. If at the close of business on any day the market value of such qualified securities so segregated, escrowed or pledged falls below 100% of the current index value times the multiplier times the number of contracts, the portfolio will so segregate, escrow or pledge an amount in cash, Treasury bills or other high-grade short-term obligations 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 call is written, the portfolio will segregate with its custodian or pledge to the broker as collateral, cash or U.S. Government or other high-grade short-term debt obligations equal in value to the amount by which the call is in-the-money times the multiplier times the number of contracts. Any amount segregated pursuant to the foregoing sentence 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 index value times the multiplier times the number of contracts. A "qualified security" is an equity security which is listed on a securities exchange or 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, if the portfolio holds a call on the same index as the call written where the exercise price of the call held is equal to or less than the exercise price of the call written or greater than the exercise price of the call written if the difference is maintained by the portfolio in cash, Treasury bills or other high-grade short-term obligations in a segregated account with its custodian, it will not be subject to the requirement described in this paragraph. A put option is covered if: (1) the portfolio holds in a segregated account cash, Treasury bills or other high-grade short-term debt obligations 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 cash, Treasury bills or other high-grade short-term debt obligations in a segregated account with its custodian. In instances involving the purchase of futures contracts by a portfolio, 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 such futures is unleveraged. The purchase and sale of options on stock indices will be subject to the risks described above under Options on Equity Securities. In addition, the distinctive characteristics of options on indices create certain risks that are not present with stock options. Index prices may be distorted if trading of certain stocks included in the index is interrupted. Trading in the 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, might 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 indices 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 such options will be subject to the development and maintenance of a liquid secondary market. A portfolio will not purchase or sell any index option contract unless and until, in its 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 special risks associated with writing calls on stock indices. 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. The portfolios, however, will follow the "cover" procedures described above. Price movements in a portfolio's equity security portfolio probably will not correlate precisely with movements in the level of the index and, 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 such event, the portfolio would bear a loss on the call which is not 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 portfolio and might also experience a loss in its securities portfolio. However, because the value of a diversified securities 13 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 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 the 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 indices 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 indices. 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 the 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. The Conservative Balanced, Flexible Managed, Equity Income, Equity, Prudential Jennison, Global, and Natural Resources 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 (see FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS, page 18) and futures contracts on foreign currencies (discussed under Futures Contracts, page 15) will be employed. Options on foreign currencies are similar to options on stock, except that the option holder has the right to take or make delivery of a specified amount of foreign currency, rather than stock. A portfolio may purchase and write options to hedge the portfolio's securities denominated in foreign currencies. If there is a decline in the dollar value of a foreign currency in which the portfolio's securities are denominated, the dollar value of such securities will decline even though the foreign currency value remains the same. To hedge against the decline of the foreign currency, a portfolio may purchase put options on such foreign currency. If the value of the foreign currency declines, the gain realized on the put option would offset, in whole or in part, the adverse effect such decline would have on the value of the portfolio's securities. Alternatively, a portfolio may write a call option on the foreign currency. If the foreign currency declines, the option would not be exercised and the decline in the value of the portfolio securities denominated in such foreign currency would be offset in part by the premium the portfolio received for the option. If, on the other hand, the portfolio manager anticipates purchasing a foreign security and also anticipates a rise in such foreign currency (thereby increasing the cost of such security), the portfolio may purchase call options on the foreign currency. The purchase of such options could offset, at least partially, the effects of the adverse movements of the exchange rates. Alternatively, a portfolio could write a put option on the currency and, if the exchange rates move as anticipated, the option would expire unexercised. A portfolio's successful use of currency exchange options on foreign currencies depends upon the manager's ability to predict the direction of the currency exchange markets and political conditions, which requires different skills and techniques than predicting changes in the securities markets generally. For instance, if the currency being hedged has moved in a favorable direction, the corresponding appreciation of the portfolio's securities denominated in such currency would be partially offset by the premiums paid on the options. Further, if the currency exchange rate does not change, the portfolio net income would be less than if the portfolio had not hedged since there are costs associated with options. The use of these options is subject to various additional risks. The correlation between movements in the price of options and the price of the currencies being hedged is imperfect. The use of these instruments will hedge only the currency risks associated with investments in foreign securities, not market risks. The portfolio's ability to establish and maintain positions will depend on market liquidity. The ability of the portfolio to close out an option 14 depends upon 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. The Conservative Balanced, Flexible Managed, Stock Index, Equity Income, Equity, Prudential Jennison, Small Capitalization Stock, Global, and Natural Resources Portfolios may, to the extent permitted by applicable regulations, attempt to reduce the risk of investment in equity securities by hedging a portion of their equity portfolios through the use of stock index futures contracts. A stock index futures contract is an agreement in which the seller of the contract agrees to deliver to the buyer an amount of cash equal to a specific dollar amount times the difference between the value of a specific stock index at the close of the last trading day of the contract and the price at which the agreement is made. No physical delivery of the underlying stocks in the index is made. The Diversified Bond, High Yield Bond, Government Income, Conservative Balanced, Flexible Managed, and Global Portfolios may, to the extent permitted by applicable regulations, purchase and sell for hedging purpose futures contracts on interest-bearing securities (such as U.S. Treasury bonds and notes) or interest rate indices (referred to collectively as "interest rate futures contracts"). The Conservative Balanced, Flexible Managed, Equity Income, Equity, Prudential Jennison, Global, and Natural Resources Portfolios may, to the extent permitted by applicable regulations, purchase and sell futures contracts on foreign currencies or groups of foreign currencies for hedging purposes. When the futures contract is entered into, each party deposits with a broker or in a segregated custodial account approximately 5% of the contract amount, called the "initial margin." Subsequent payments to and from the broker, called the "variation margin," will be made on a daily basis as the underlying security, index or rate fluctuates making the long and short positions in the futures contracts more or less valuable, a process known as "marking to the market." The Board of Directors currently intends to limit futures trading so that a portfolio will not enter into futures contracts or related options if the aggregate initial margins and premiums exceed 5% of the fair market value of its assets, after taking into account unrealized profits and unrealized losses on any such contracts and options. A portfolio's successful use of futures contracts depends upon the investment manager's ability to predict the direction of the relevant market. The correlation between movement in the price of the futures contract and the price of the securities or currencies being hedged is imperfect. The ability of a portfolio to close out a futures position depends on a liquid secondary market. There is no assurance that liquid secondary markets will exist for any particular futures contract at any particular time. There are several additional risks associated with a portfolio's use of futures contracts for hedging purposes. One such risk arises because 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 indices, the correlation between the price of the futures contract and movements in the index might not be perfect. To compensate for differences in historical volatility, a portfolio could purchase or sell future contracts with a greater or lesser value than the securities or currency it wished to hedge or purchase. In addition, 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. Further, each portfolio's successful use of futures contracts is to some extent dependent on the ability of the portfolio manager to predict correctly movements in the direction of the market, interest rates and/or currency exchange rates. In addition, the hours of trading of futures contracts may not conform to the hours during which the 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. ADDITIONAL INFORMATION REGARDING THE USE OF OPTIONS AND FUTURES CONTRACTS 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 S&P 500 Index and the Small Capitalization Stock Portfolio seeks to duplicate the performance of the S&P SmallCap 600 Index. The portfolios will be as fully invested in the S&P Indices 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 600 Indices, respectively. When the portfolios do have short-term investments, they may purchase stock index futures contracts in an effort to have the portfolio better mimic the performance of a fully invested portfolio. When a portfolio purchases stock index futures contracts, an amount 15 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 with the other portfolios, the Board of Directors currently intends to limit futures trading so that the Stock Index and Small Capitalization Stock Portfolios will not enter into futures contracts or related options if the aggregate initial margins and premiums exceed 5% of the fair market value of its assets, after taking into account unrealized profits and unrealized losses on any such contracts and options. As an alternative to the purchase of a stock index futures contract, the portfolio may construct synthetic positions involving options on stock indices and options on stock index futures that are equivalent to such a long futures position. In particular, the portfolio may utilize "put/call combinations" as synthetic long stock index futures positions. A put/call combination is the simultaneous purchase of a call and the sale of a put 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 segregate 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. OPTIONS ON FUTURES CONTRACTS. To the extent permitted by applicable insurance law and federal regulations, the Conservative Balanced, Flexible Managed, Stock Index, Equity Income, Equity, Prudential Jennison, Small Capitalization Stock, Global and Natural Resources, Portfolios may enter into certain transactions involving options on stock index futures contracts, and the Diversified Bond, Government Income, Conservative Balanced, Flexible Managed, High Yield Bond, and Global Portfolios may enter into certain transactions involving options on interest rate futures contracts; and the Conservative Balanced, Flexible Managed, Equity Income, Equity, Prudential Jennison, Global, and Natural Resources Portfolios may enter into certain transactions involving options on foreign currency futures contracts. An option on a futures contract gives the purchaser or holder the right, but not the obligation, to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put) at a specified price at any time during the option exercise period. The writer of the option is required upon exercise to assume an offsetting futures position (a short position if the option is a call and a long position if the option is a put). Upon exercise of the option, the assumption of offsetting futures positions by the writer and holder of the option will be accomplished by delivery of the accumulated balance in the writer's futures margin account which represents the amount by which the market price of the futures contract, at exercise, exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option on the futures contract. As an alternative to exercise, the holder or writer of an option may terminate a position by selling or purchasing an option of the same series. There is no guarantee that such closing transactions can be effected. As noted above, the Stock Index and Small Capitalization Stock Portfolios intend to utilize options on stock index futures contracts by constructing "put/call" combinations that are economically comparable to a long stock index futures position. The other portfolios intend to utilize options on futures contracts for the same purposes that they use the underlying futures contracts. Options on futures contracts are subject to risks similar to those described above with respect to option on securities, options on stock indices, 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, the 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. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES From time to time, in the ordinary course of business, the Diversified Bond, Government Income, Conservative Balanced, Flexible Managed, High Yield Bond, Equity Income, Equity, Prudential Jennison, Small Capitalization Stock, Global and Natural Resources Portfolios may purchase or sell securities on a when-issued or delayed delivery basis, that is, delivery and payment can take place a month or more after the date of the transaction. Each of these portfolios will limit such purchases to those in which the date for delivery and payment falls within 120 days of the date of the commitment. A portfolio will make commitments for such when-issued transactions only with the intention of actually acquiring the securities. A portfolio's custodian will maintain, in a separate account, cash, U.S. Government securities or other high grade debt obligations having a value equal to or greater than such commitments. If a portfolio chooses to dispose of the right to acquire a when-issued security prior to its acquisition, it could, as with the disposition of any other portfolio security, incur a gain or loss due to market fluctuations. In addition, the Money Market Portfolio and short-term portions of the other portfolios may purchase 16 money market securities on a when-issued or delayed delivery basis on the terms set forth under item 6 in SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO MAY CURRENTLY INVEST, page 29. SHORT SALES The Diversified Bond, Government Income, Conservative Balanced, Flexible Managed and High Yield Bond Portfolios may sell securities they do not own in anticipation of a decline in the market value of those securities ("short sales"). To complete such a transaction, the portfolio will borrow the security to make delivery to the buyer. The portfolio is then obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the portfolio. Until the security is replaced, the portfolio is required to pay to the lender any interest which accrues during the period of the loan. To borrow the security the portfolio may be required to pay a premium which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker to the extent necessary to meet margin requirements until the short position is closed out. Until the portfolio replaces the borrowed security, it will (a) maintain in a segregated account cash or U.S. Government securities at such a level that the amount deposited in the account plus the amount deposited with the broker as collateral will equal the current market value of the security sold short and will not be less than the market value of the security at the time it was sold short or (b) otherwise cover its short position. The portfolio will incur a loss as a result of the short sale if the price of the security increases between the date of the short sale and the date on which the portfolio replaces the borrowed security. The portfolio will realize a gain if the security declines in price between those dates. This result is the opposite of what one would expect from a cash purchase of a long position in a security. The amount of any gain will be decreased, and the amount of any loss will be increased, by the amount of any premium or interest paid in connection with the short sale. No more than 25% of any portfolio's net assets will be, when added together: (i) deposited as collateral for the obligation to replace securities borrowed to effect short sales and (ii) allocated to segregated accounts in connection with short sales. SHORT SALES AGAINST THE BOX All portfolios (other than the Money Market and Zero Coupon Bond Portfolios) may make short sales of securities or maintain a short position, provided that at all times when a short position is open the portfolio owns an equal amount of such securities or securities convertible into or exchangeable, with or without payment of any further consideration, for an equal amount of the securities of the same issuer as the securities sold short (a "short sale against the box"); provided, that if further consideration is required in connection with the conversion or exchange, cash or U.S. Government securities in an amount equal to such consideration must be put in a segregated account. INTEREST RATE SWAPS The Diversified Bond, 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 to increase or decrease a portfolio's exposure to long- or short-term interest rates. No portfolio currently intends to invest more than 5% of its net assets at any one time in interest rate swaps. 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 indices 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 investment 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. A portfolio will maintain 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 17 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. LOANS OF PORTFOLIO SECURITIES All of the portfolios except the Money Market Portfolio may from time to time lend the securities they hold to broker-dealers, provided that such loans are made pursuant to written agreements and are continuously secured by collateral in the form of cash, U.S. Government securities or irrevocable standby letters of credit in an amount equal to at least the market value at all times of the loaned securities plus the accrued interest and dividends. During the time securities are on loan, the portfolio will continue to receive the interest and dividends or amounts equivalent thereto on the loaned securities while receiving a fee from the borrower or earning interest on the investment of the cash collateral. The right to terminate the loan will be given to either party subject to appropriate notice. Upon termination of the loan, the borrower will return to the lender securities identical to the loaned securities. The portfolio will not have the right to vote securities on loan, but would terminate the loan and retain the right to vote if that were considered important with respect to the investment. The primary risk in lending securities is that the borrower may become insolvent on a day on which the loaned security is rapidly advancing in price. In such event, if the borrower fails to return the loaned securities, the existing collateral might be insufficient to purchase back the full amount of the security loaned, and the borrower would be unable to furnish additional collateral. The borrower would be liable for any shortage; but the portfolio would be an unsecured creditor with respect to such shortage and might not be able to recover all or any of it. However, this risk may be minimized by a careful selection of borrowers and securities to be lent and by monitoring collateral. No portfolio will lend securities to broker-dealers affiliated with The Prudential, including Prudential Securities Incorporated. This will not affect a portfolio's ability to maximize its securities lending opportunities. ILLIQUID SECURITIES Each portfolio, other than the Money Market Portfolio, may invest up to 15% of its net assets in illiquid securities. The Money Market Portfolio may invest up to 10% of its net assets in illiquid securities. Illiquid securities are those which may not be sold in the ordinary course of business within seven days at approximately the value at which the portfolio has valued them. Variable and floating rate instruments that cannot be disposed of within seven days and 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. Any such security will not be considered illiquid so long as it is determined by the 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 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 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 adviser must determine that the security is of equivalent quality; and (3) the adviser must consider the trading market for the specific security, taking into account all relevant factors. The 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. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS To the extent permitted by applicable insurance law, the Conservative Balanced, Flexible Managed, Equity Income, Equity, Prudential Jennison, Global, and Natural Resources Portfolios may purchase securities denominated in foreign currencies. To address the currency fluctuation risk that such investments entail, these portfolios may enter into forward foreign currency exchange contracts in several circumstances. 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 18 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 subject 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's 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. A portfolio's custodian will place cash or liquid high-grade equity or debt securities into a segregated account of the portfolio in an amount equal to the value of the portfolio's total assets committed to the consummation of forward foreign currency exchange contracts. If the value of the securities placed in the segregated account declines, additional cash or securities will be placed in the account on a daily basis so that the value of the account will equal the amount of the portfolio's commitments with respect to such contracts. The portfolios generally will not enter into a forward contract with a term of greater than 1 year. At the maturity of a forward contract, a portfolio may either sell the portfolio 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 portfolio 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 portfolio 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. Should 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. Should 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 the portfolio 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 hedge 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. The High Yield Bond Portfolio may also invest up to 10% of its total assets in foreign currency denominated debt securities of foreign or domestic issuers; however, the portfolio will not engage in such investment activity unless 19 it has been first authorized to do so by the Series Fund's Board of Directors. If the portfolio does engage in such investment activity, it may also enter into forward foreign currency exchange contracts. FURTHER INFORMATION ABOUT THE POLICIES OF THE STOCK INDEX PORTFOLIO Under normal circumstances, the Stock Index Portfolio generally intends to purchase all 500 stocks represented in the S&P 500 Index and to invest its assets as fully in those stocks (in proportion to their weighting in the index) as is feasible in light of cash flows into and out of the portfolio. In order to reduce transaction costs, a weighted investment in the 500 stocks comprising the S&P 500 Index is most efficiently made in relatively large amounts. Prior to the commencement of the public offering of this portfolio's shares, The Prudential purchased $25,000,000 worth of shares of this portfolio in order to permit the portfolio to make an initial investment in the 500 stocks (in proportion to their weighting in the S&P 500 index). As additional cash is received from the purchase of shares in the portfolio, it may be held temporarily in short-term, high quality investments of the sort in which the Money Market Portfolio invests, until the portfolio has a sufficient amount of assets in such investments to make an efficient weighted investment in the 500 stocks comprising the S&P 500 Index. If net cash outflows from the portfolio are anticipated, the portfolio may sell stocks (in proportion to their weighting in the S&P 500 Index) in amounts in excess of those needed to satisfy the cash outflows and hold the balance of the proceeds in short-term investments if such a transaction appears, taking into account transaction costs, to be more efficient than selling only the amount of stocks needed to meet the cash requirements. The portfolio will not, however, increase its holdings of cash in anticipation of any decline in the value of the S&P 500 Index or of the stock markets generally. The portfolio will instead remain as fully invested in the S&P 500 Index stocks as feasible in light of its cash flow patterns during periods of market declines as well as advances, and investors in the portfolio thus run the risk of remaining fully invested in common stocks during a period of general decline in the stock markets. Tracking accuracy is measured by the difference between total return for the S&P Index with dividends reinvested and total return for the portfolio with dividends reinvested before deductions of portfolio fees and expenses. Tracking accuracy is monitored by the portfolio manager on a daily basis. All tracking accuracy deviations are reviewed to determine the effectiveness of investment policies and techniques. If the portfolio does hold short-term investments as a result of the patterns of cash flows to and from the portfolio, such holdings may cause its performance to differ from that of the S&P 500 Index. The portfolio will attempt to minimize any such difference in performance through transactions involving stock index futures contracts, options on stock indices, and/or options on stock index future contracts. These derivative investment instruments are described above under Options on Stock Indices, Stock Index Futures Contracts, and Options on Futures Contracts on pages 12 through 16. The portfolio will not use such instruments for speculative purposes or to hedge against any decline in the value of the stocks held in the portfolio, but instead will employ them only as a temporary substitute for investment of cash holdings directly in the 500 stocks when the portfolio's cash holdings are too small to make such an investment in an efficient manner. For example, if the portfolio's cash reserves are insufficient to invest efficiently in another unit of the basket of stocks comprising the S&P 500 Index, the portfolio may purchase S&P 500 futures contracts to hedge against a rise in the value of the stocks the portfolio intends to acquire. In its attempt to minimize any difference in performance between the portfolio and the S&P 500 Index, the portfolio currently intends to engage in transactions involving the S&P 500 Index futures contracts; the NYSE Composite Index futures contracts; options on the S&P 500 Index, the S&P 100 Index, and the NYSE Composite Index; and options on the S&P 500 Index futures contracts and the NYSE Composite Index futures contracts. There can be no assurance that the portfolio's attempt to minimize such performance difference through the use of any of these instruments will succeed. See Additional Information Regarding the Use of Options and Futures Contracts by the Stock Index and Small Capitalization Stock Portfolios, page 15, for a more detailed discussion of the manner in which the portfolio will employ these instruments, and Options on Stock Indices, page 12, for a description of other risks involved in the use of such instruments. The above described investment policies and techniques of the Stock Index portfolio are non-fundamental and may be changed without shareholder approval if it is determined that alternative investment techniques would be more effective in achieving the portfolio's objective. FURTHER INFORMATION ABOUT THE ZERO COUPON BOND PORTFOLIOS As stated in the prospectus, the objective of Zero Coupon 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 20 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 advisor (The Prudential) 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 (i.e., 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 (i.e., fluctuations caused by market risk). By maintaining each portfolio's duration within 1 year of the length of time remaining until its liquidation date, The Prudential 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 Prudential 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 Prudential 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 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 8-11 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 21 the Balanced Portfolios may purchase and sell interest rate futures contracts and related options; and all portfolios (other than the Money Market, Government Income and 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, 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, 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, Small Capitalization Stock, Equity Income, Natural Resources, Global, Flexible Managed and Conservative Balanced Portfolios may purchase securities on a when-issued or a delayed delivery basis. The Series 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 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 indices, foreign currencies) and the Small Capitalization Stock Portfolio (options on equity securities, stock indices); Balanced Portfolios (options on debt securities, equity securities, stock indices, foreign currencies); Diversified Bond and High Yield Bond Portfolios (options on debt securities, foreign currencies); Government Income Portfolio (options on debt securities). Collateral arrangements entered into by the Fixed Income Portfolios (other than the Money Market and Zero Coupon Bond Portfolios) 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, 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 22 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 Series 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 Series 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 or invest more than 10% of its net assets in the securities of unseasoned issuers. (The Money Market Portfolio will not invest more than 10% of its net assets in illiquid securities.) For purposes of this restriction, (a) illiquid securities are those deemed illiquid pursuant to SEC regulations and guidelines, as they may be revised from time to time: and (b) unseasoned issuers are issuers (other than U.S. Government agencies or instrumentalities) having a record, together with predecessors, of less than 3 years' continuous operation. This restriction shall not apply to mortgage-backed securities, collateralized mortgage obligations or obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities. 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 (e.g., nickel, lead), gold, silver, platinum, mining finance, plantations (e.g., 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 Series 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. 23 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 Series Fund's Board of Directors. See INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS, page 9. 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. 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 Series 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. For example, the Series Fund will generally invest no more than 10% of its assets in the obligations of banks of the foreign countries described in item 2 of SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO MAY CURRENTLY INVEST, page 29. In addition, the Series Fund adheres to additional restrictions relating to such practices as the lending of securities, borrowing, and the purchase of put and call options, futures contracts, and derivative instruments on securities to comply with investment guidelines issued by the California Department of Insurance. Current federal income tax laws require that the assets of each portfolio be adequately diversified so that The Prudential and other insurers with separate accounts which invest in the Series Fund and not the Contract owners, are considered the owners of assets held in the Account for federal income tax purposes. See TAX TREATMENT OF CONTRACT BENEFITS, page 5. The Prudential intends to maintain the assets of each portfolio pursuant to those diversification requirements. INVESTMENT MANAGEMENT ARRANGEMENTS AND EXPENSES The Series Fund and The Prudential have entered into an Investment Advisory Agreement under which The Prudential will, subject to the direction of the Board of Directors of the Series Fund, be responsible for the management of the Series Fund, and provide investment advice and related services to each portfolio. As noted in the prospectus, The Prudential has also entered into a Service Agreement with its wholly-owned subsidiary, 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 Prudential's performance of its obligations under the Investment Advisory Agreement. In addition, The Prudential has entered into a Subadvisory Agreement with its wholly-owned 24 subsidiary Jennison Associates Capital Corp. ("Jennison") under which Jennison furnishes investment advisory services in connection with the management of the Prudential Jennison Portfolio. Under the Investment Advisory Agreement, The Prudential receives an investment management fee as compensation for its services to the Series Fund. The fee is a daily charge, payable quarterly, equal to an annual percentage of the average daily net assets of each individual portfolio. The investment management fee for the Stock Index Portfolio is equal to an annual rate of 0.35% of the average daily net assets of the portfolio. For the Money Market, Diversified Bond, Government Income, Equity Income, and Zero Coupon Bond and Small Capitalization Stock Portfolios, that fee is equal to an annual rate of 0.4% 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 0.6% of the average daily net assets of the portfolio. The fee for the Global Portfolio is equal to an annual rate of 0.75% of the average daily net assets of the portfolio. Under the Service Agreement, The Prudential pays PIC a portion of the fee it receives for providing investment advisory services. The Prudential pays Jennison a portion of the fee it receives for providing investment advisory services to the Prudential Jennison Portfolio. The Investment Advisory Agreement requires The Prudential to pay for maintaining any Prudential staff and personnel who perform clerical, accounting, administrative, and similar services for the Series Fund, other than investor services and any daily Series Fund accounting services. It also requires The 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 Series Fund who are affiliated persons of The Prudential or any subsidiary of The Prudential. Each portfolio pays all other expenses incurred in its individual operation and also pays a portion of the Series 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, costs of stock certificates, Securities and Exchange Commission fees, accounting costs, the fees and expenses of directors of the Series Fund who are not affiliated persons of The Prudential or any subsidiary of The Prudential, and other expenses properly payable by the entire Series Fund. If the Series Fund is sued, litigation costs may be directly applicable to one or more portfolios or allocated on the basis of the size of the respective portfolios, depending upon the nature of the lawsuit. The Series Fund's Board of Directors has determined that this is an appropriate method of allocating expenses. Under the Investment Advisory Agreement, The Prudential has agreed to refund to a portfolio (except the Global 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. There is no expense limitation or reimbursement provision for the Global Portfolio. The Investment Advisory Agreement with The Prudential was most recently approved by the Series Fund's Board of Directors, including a majority of the Directors who are not interested persons of The Prudential, on March 1, 1996 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 all portfolios except the Prudential Jennison and Small Capitalization Stock Portfolios. A Supplemental Advisory Agreement regarding the Prudential Jennison and Small Capitalization Stock Portfolios was approved by the Series 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. 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 Series 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 Series Fund. The Agreements provide that they may not be assigned by The Prudential and that they may be terminated upon 60 days notice by the Series Fund's Board of Directors or by a majority vote of its shareholders. The Prudential may terminate the Agreements upon 90 days notice. The Service Agreement between The Prudential and PIC was most recently ratified by shareholders of the Series Fund at their 1989 annual meeting with respect to all portfolios except for the Prudential Jennison and Small Capitalization Stock Portfolios, which had not yet been established. The Service Agreement with respect to those 25 portfolios and the Investment Subadvisory Agreement with Jennison were ratified by the sole shareholder of those portfolios on April 5, 1995. The Service Agreement between The Prudential and PIC will continue in effect as to the Series 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 The Prudential and the Series 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 Series Fund in the event of the assignment or termination of the Investment Advisory Agreement between The Prudential and the Series Fund. The Prudential is not relieved of its responsibility for all investment advisory services under the Investment Advisory Agreement. The Prudential also serves as the investment advisor to several other investment companies. When investment opportunities arise that may be appropriate for more than one entity for which The Prudential serves as investment advisor, The 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 The Prudential acts as investor advisor have different investment objectives and positions, The 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. PORTFOLIO TRANSACTIONS AND BROKERAGE The Prudential is responsible for decisions to buy and sell securities, options on securities and indices, and futures and related options for the Series Fund. The 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 Series Fund 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 The Prudential. Bonds, including convertible bonds, and equity securities traded in the over-the-counter market 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 Series Fund will not deal with Prudential Securities Incorporated in any transaction in which Prudential Securities Incorporated acts as principal. Thus, it will not deal with Prudential Securities Incorporated if execution involves Prudential Securities Incorporated's acting as principal with respect to any part of the Series Fund's order. Portfolio securities may not be purchased from any underwriting or selling syndicate of which Prudential Securities Incorporated, during the existence of the syndicate, is a principal underwriter (as defined in the 1940 Act) except in accordance with rules of the Securities and Exchange Commission. This limitation, in the opinion of the Series Fund, will not significantly affect the portfolios' current ability to pursue their respective investment objectives. However, in the future it is possible that the Series 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 Series Fund, The Prudential is required to give primary consideration to obtaining the most favorable price and efficient execution. Within the framework of this policy, The Prudential will consider the research and investment services provided by brokers, dealers or futures commission merchants who effect or are parties to portfolio transactions of the Series Fund, The Prudential or The Prudential's other clients. Such research and investment services are those which brokerage houses customarily provide to institutional investors and include statistical and economic data and research reports on particular companies and industries. Such services are used by The Prudential in connection with all of its investment activities, and some of such services obtained in connection with the execution of transactions for the Series Fund may be used in managing other investment accounts. Conversely, brokers, dealers or futures commission merchants furnishing such services may be selected for the execution of transactions for such other accounts, and the services furnished by such brokers, dealers or futures commission merchants may be used by The Prudential in providing investment management for the Series Fund. Commission rates are established pursuant to negotiations with the broker, dealer or futures commission merchant based on the quality and quantity of execution services provided by the broker in the light of generally prevailing rates. The Prudential's policy is to pay higher commissions to brokers, other than Prudential Securities Incorporated, for particular transactions than might be charged if a different broker had been selected on occasions when, in The Prudential's opinion, this policy furthers the objective of obtaining best price and execution. The Prudential's present policy is not to permit higher commissions to be paid on Series Fund transactions in order to secure research, statistical, and investment services from brokers. The Prudential might 26 in the future authorize the payment of such higher commissions but only with the prior concurrence of the Board of Directors of the Series Fund, if it is determined that the higher commissions are necessary in order to secure desired research and are reasonable in relation to all the services that the broker provides. Subject to the above considerations, Prudential Securities Incorporated may act as a securities broker or futures commission merchant for the Series Fund. In order for Prudential Securities Incorporated to effect any portfolio transactions for the Series Fund, the commissions received by Prudential Securities Incorporated 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 Prudential Securities Incorporated 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 Series Fund, including a majority of the non-interested directors, has adopted procedures which are reasonably designed to provide that any commissions, fees or other remuneration paid to Prudential Securities Incorporated are consistent with the foregoing standard. In accordance with Rule 11a2-2(T) under the Securities Exchange Act of 1934, Prudential Securities Incorporated may not retain compensation for effecting transactions on a securities exchange for the Series Fund unless the Series Fund has expressly authorized the retention of such compensation in a written contract executed by the Series Fund and Prudential Securities Incorporated. Rule 11a2-2(T) provides that Prudential Securities Incorporated must furnish to the Series Fund at least annually a statement setting forth the total amount of all compensation retained by Prudential Securities Incorporated from transactions effected for the Series Fund during the applicable period. Brokerage and futures transactions with Prudential Securities Incorporated are also subject to such fiduciary standards as may be imposed by applicable law. For the years 1995, 1994, and 1993, the Series Fund paid a total of $11,607,197, $11,579,886, and $9,492,283, respectively, in brokerage commissions. Of those amounts, $899,739, $560,155, and $977,695, for 1995, 1994, and 1993, respectively, was paid out to Prudential Securities Incorporated. For 1995, the commissions paid to this affiliated broker constituted 7.75% of the total commissions paid by the Series Fund for that year. Transactions through this affiliated broker accounted for 5.81% of the aggregate dollar amount of transactions for the Series Fund involving the payment of commissions. DETERMINATION OF NET ASSET VALUE Shares in the Series Fund are currently offered continuously, without sales charge, at prices equal to the respective net asset values of the portfolios, only to separate accounts to fund benefits payable under the Contracts described in the variable life insurance and variable annuity prospectuses. The Series Fund may at some later date also offer its shares to other separate accounts of The Prudential or other insurers. The Prudential acts as principal underwriter to the Series Fund. As such, The Prudential receives no underwriting compensation from the Series Fund. As noted in the prospectus, the net asset value of the shares of each portfolio is determined once daily on each day the New York Stock Exchange ("NYSE") is open for business. The NYSE is open for business Monday through Friday except for the days on which the following holidays are observed: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. In the event the New York Stock Exchange closes early on any business day, the net asset value of each portfolio shall be determined at a time between such closing and 4:15 p.m. New York City time. In determining the net asset value of the Diversified Bond, High Yield Bond, and Government Income Portfolios, securities (other than debt obligations with remaining maturities of less than 60 days, which are valued at amortized cost) will be valued utilizing an independent pricing service to determine valuations for normal institutional size trading units of securities. The pricing service considers such factors as security prices, yields, maturities, call features, ratings, and developments relating to specific securities in arriving at securities valuations. The net asset value of shares of the Money Market Portfolio will normally remain at $10 per share, because the net investment income of this portfolio (including realized and unrealized gains and losses on portfolio holdings) will be declared as a dividend each time the portfolio's net income is determined. See DIVIDENDS, DISTRIBUTIONS AND TAXES, page 33. If in the view of the Board of Directors of the Series Fund it is inadvisable to continue to maintain the net asset value of the Money Market Portfolio at $10 per share, the Board reserves the right to alter the procedure. The Series Fund will notify Contract owners of any such alteration. All short-term debt obligations in the Money Market Portfolio of 397 days' maturity or less are valued on an amortized cost basis. This means that each obligation will be valued initially at its purchase price and thereafter by amortizing any discount or premium uniformly to maturity, regardless of the impact of fluctuating interest rates on the market value of the obligation. This highly practical method of valuation is in widespread use and almost always results in a value that is extremely close to the actual market value. In order to continue to utilize the 27 amortized cost method of valuation, the Money Market Portfolio may not purchase any security with a remaining maturity of more than 397 days and must maintain a dollar-weighted average portfolio maturity of 90 days or less. In the event of sizeable changes in interest rates, however, the value determined by this method may be higher or lower than the price that would be received if the obligation were sold. The Series Fund's Board of Directors has established procedures to determine whether, on these occasions, if any should occur, the deviation might be enough to affect the value of shares in the Money Market Portfolio by more than 1/2 of one percent, and, if it does, an appropriate adjustment will be made in the value of the obligations. The portfolio may only be invested in securities of high quality as described in detail below in SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO MAY CURRENTLY INVEST. The net asset value of the Stock Index, Equity Income, Equity, Prudential Jennison, Small Capitalization Stock, Global, and Natural Resources Portfolios will be determined in the following manner. Any security for which the primary market is on an exchange is generally valued at the last sale price on such exchange as of the close of the NYSE (which is currently 4:00 p.m. New York City time) or, in the absence of recorded sales, at the mean between the most recently quoted bid and asked prices. NASDAQ National Market System equity securities are valued at the last sale price or, if there was no sale on such day, at the mean between the most recently quoted bid and asked prices. Other over-the-counter equity securities are valued at the mean between the most recently quoted bid and asked prices. Convertible debt securities that are actively traded in the over-the-counter market, including listed securities for which the primary market is believed to be over-the-counter, are valued at the mean between the most recently quoted bid and asked prices. Corporate bonds (other than convertible debt securities) and Government bonds held by the Equity Income and Natural Resources Portfolios are valued on the same basis as securities in the Diversified Bond and High Yield Bond Portfolios, as described above. Short-term debt instruments which mature in less than 60 days are valued at amortized cost. For valuation purposes, quotations of foreign securities in a foreign currency are converted to U.S. dollar equivalents. Generally, trading in foreign securities, as well as corporate bonds, U.S. Government securities, and money market instruments, is substantially completed each day at various times prior to the close of the NYSE. The values of any such securities are determined as of such times for purposes of computing a portfolio's net asset value. Foreign currency exchange rates are also generally determined prior to the close of the NYSE. If an extraordinary event occurs after the close of an exchange on which that security is traded, the security will be valued at fair value as determined in good faith by the applicable portfolio manager under procedures established by and under the general supervision of the Series Fund's Board of Directors. In determining the net asset value of each of the Balanced Portfolios, the method of valuation of a security depends on the type of investment involved. Intermediate or long-term fixed income securities are valued in the same way as such securities are valued in the Diversified Bond Portfolio, and common stocks and convertible debt securities are valued in the same way as such securities are valued in the Equity Portfolio. Short-term debt obligations with a maturity of 12 months or less are valued on an amortized cost basis in accordance with an order obtained from the Securities and Exchange Commission. Each Balanced Portfolio must maintain a dollar-weighted average maturity for its short-term debt obligations of 120 days or less. As discussed above in connection with the Money Market Portfolio, the values determined by the amortized cost method may deviate from market value under certain circumstances. The Series Fund's Board of Directors has established procedures to monitor whether any material deviation occurs and, if so, will promptly consider what action, if any, should be initiated to prevent unfair results to Contract owners. The short-term portion of these portfolios may be invested only in high quality instruments, as described below in SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO MAY CURRENTLY INVEST. In determining the net asset value of the shares of the Zero Coupon Bond Portfolios 2000 and 2005, securities (other than debt obligations with maturities of less than 60 days, which are valued at amortized cost) will be valued utilizing an independent pricing service to determine valuations for normal institutional size trading units of securities. The pricing service considers such factors as security prices, yields, maturities, call features, ratings, and developments relating to specific securities in arriving at securities valuations. With respect to all the portfolios which utilize such investments, options on stock and stock indices traded on national securities exchanges are valued at the average of the bid and asked prices as of the close of the respective exchange (which is currently 4:10 p.m. New York City time). Futures contracts and options thereon are valued at the last sale price at the close of the applicable commodities exchanges or board of trade (which is currently 4:15 p.m. New York City time) or, if there was no sale on the applicable commodities exchange or board of trade on such day, at the mean between the most recently quoted bid and asked prices on such exchange or board of trade. Securities or assets for which market quotations are not readily available will be valued at fair value as determined by The Prudential under the direction of the Board of Directors of the Series Fund. 28 SECURITIES IN WHICH THE MONEY MARKET PORTFOLIO MAY CURRENTLY INVEST The Money Market Portfolio, and the other portfolios to the extent their investment policies so provide, may invest in the following liquid, short-term, debt securities regularly bought and sold by financial institutions: 1. U.S. Treasury Bills and other obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities. These are debt securities (including bills, certificates of indebtedness, notes, and bonds) issued or guaranteed by the U.S. Treasury or by an agency or instrumentality of the U.S. Government that is established under the authority of an act of Congress. Although all obligations of agencies and instrumentalities are not direct obligations of the U.S. Treasury, payment of the interest and principal on them is generally backed directly or indirectly by the U.S. Government. This support can range from the backing of the full faith and credit of the United States, to U.S. Treasury guarantees or to the backing solely of the issuing instrumentality itself. Securities which are not backed by the full faith and credit of the United States include but are not limited to obligations of the Tennessee Valley Authority, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the United States Postal Service, each of which has the right to borrow from the U.S. Treasury to meet its obligations, and obligations of the Federal Farm Credit System and the Federal Home Loan Banks, the obligations of which may only be satisfied by the individual credit of the issuing agency. Obligations of the Government National Mortgage Association, the Farmers Home Administration, and the Export-Import Bank are examples of securities that are backed by the full faith and credit of the United States. 2. Obligations (including certificates of deposit, bankers' acceptances, and time deposits) of domestic banks, foreign branches of U.S. banks, U.S. branches of foreign banks, and foreign offices of foreign banks provided that such bank has, at the time of the portfolio's investment, total assets of at least $1 billion or the equivalent. Obligations of any savings and loan association or savings bank organized under the laws of the United States or any state thereof, provided that such association or savings bank has, at the time of the portfolio's investment, total assets of at least $1 billion. The term "certificates of deposit" includes both Eurodollar certificates of deposit, which are traded in the over-the-counter market, and Eurodollar time deposits, for which there is generally not a market. "Eurodollars" are dollars deposited in banks outside the United States. An investment in Eurodollar instruments involves risks that are different in some respects from an investment in debt obligations of domestic issuers, including future political and economic developments such as possible expropriation or confiscatory taxation that might adversely affect the payment of principal and interest on the Eurodollar instruments. "Certificates of deposit" are certificates evidencing the indebtedness of a commercial bank to repay funds deposited with it for a definite period of time (usually from 14 days to 1 year). "Bankers' acceptances" are credit instruments evidencing the obligation of a bank to pay a draft which has been drawn on it by a customer. These instruments reflect the obligation both of the bank and of the drawer to pay the face amount of the instrument upon maturity. "Time deposits" are non-negotiable deposits in a bank for a fixed period of time. 3. Commercial paper, variable amount demand master notes, bills, notes and other obligations issued by a U.S. company, a foreign company or a foreign government, its agencies, instrumentalities or political subdivisions, denominated in U.S. dollars, and, at the date of investment, rated at least A or A-2 by Standard & Poor's Corporation ("S&P"), A or Prime-2 by Moody's Investors Service ("Moody's") or, if not rated, issued by an entity having an outstanding unsecured debt issue rated at least A or A-2 by S&P or A or Prime-2 by Moody's. For a description of corporate bond ratings, see DEBT RATINGS, page 31. If such obligations are guaranteed or supported by a letter of credit issued by a bank, such bank (including a foreign bank) must meet the requirements set forth in paragraph 2 above. If such obligations are guaranteed or insured by an insurance company or other non-bank entity, such insurance company or other non-bank entity must represent a credit of high quality, as determined by the Series Fund's investment adviser (which as noted above is currently The Prudential) under the supervision of the Series Fund's Board of Directors. As stated above in paragraphs 2 and 3, the Money Market Portfolio and short-term portions of the other portfolios may contain obligations of foreign branches of domestic banks and domestic branches of foreign banks, as well as commercial paper, bills, notes, and other obligations issued in the United States by foreign issuers, including foreign governments, their agencies, and instrumentalities. This involves certain additional risks. These risks include future political and economic developments in the country of the issuer, the possible imposition of withholding taxes on interest income payable on such obligations held by the Series Fund, the possible seizure or nationalization of foreign deposits, and the possible establishment of exchange controls or other foreign governmental laws or restrictions which might affect adversely the payment of principal and interest on such obligations held by the Series Fund. In addition, there may be less publicly available information about a foreign issuer than about a domestic one, and foreign issuers may not be subject to the same accounting, auditing and financial recordkeeping standards and requirements as domestics issuers. Securities issued by foreign issuers may be subject to greater fluctuations in price than securities issued by U.S. entities. Finally, in the event of default 29 with respect to any such foreign debt obligations, it may be more difficult for the Series Fund to obtain or to enforce a judgment against the issuers of such securities. 4. Repurchase Agreements. When the Money Market Portfolio purchases money market securities of the types described above, it may on occasion enter into a repurchase agreement with the seller wherein the seller and the buyer agree at the time of sale to repurchase of the security at a mutually agreed upon time and price. The period of maturity is usually quite short, possibly overnight or a few days, although it may extend over a number of months. The resale price is in excess of the purchase price, reflecting an agreed-upon market rate effective for the period of time the portfolio's money is invested in the security, and is not related to the coupon rate of the purchased security. Repurchase agreements may be considered loans of money to the seller of the underlying security, which are collateralized by the securities underlying the repurchase agreement. The Series Fund will not enter into repurchase agreements unless the agreement is "fully collateralized" (i.e., the value of the securities is, and during the entire term of the agreement remains, at least equal to the amount of the 'loan' including accrued interest). The Series Fund will take possession of the securities underlying the agreement and will value them daily to assure that this condition is met. The Series Fund has adopted standards for the parties with whom it will enter into repurchase agreements which it believes are reasonably designed to assure that such a party presents no serious risk of becoming involved in bankruptcy proceedings within the time frame contemplated by the repurchase agreement. In the event that a seller defaults on a repurchase agreement, the Series Fund may incur a loss in the market value of the collateral, as well as disposition costs; and, if a party with whom the Series Fund had entered into a repurchase agreement becomes involved in bankruptcy proceedings, the Series Fund's ability to realize on the collateral may be limited or delayed and a loss may be incurred if the collateral securing the repurchase agreement declines in value during the bankruptcy proceedings. The Series Fund will not enter into repurchase agreements with The Prudential or its affiliates, including Prudential Securities Incorporated. This will not affect the Series Fund's ability to maximize its opportunities to engage in repurchase agreements. 5. Reverse Repurchase Agreements. The Money Market Portfolio may use reverse repurchase agreements, which are described under REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS in the prospectus. No portfolio may obligate more than 10% of its net assets in connection with reverse repurchase agreements, except that the Diversified Bond, High Yield Bond, and Government Income Portfolios, as well as the fixed income portions of the Conservative Balanced and Flexible Managed Portfolios, may obligate up to 30% of their net assets in connection with reverse repurchase agreements and dollar rolls. 6. When-Issued and Delayed Delivery Securities. From time to time, in the ordinary course of business, the Money Market Portfolio may purchase securities on a when-issued or delayed delivery basis (i.e., delivery and payment can take place a month or more after the date of the transaction). The purchase price and the interest rate payable on the securities are fixed on the transaction date. The securities so purchased are subject to market fluctuation, and no interest accrues to the portfolio until delivery and payment take place. At the time the portfolio makes the commitment to purchase securities on a when-issued or delayed delivery basis, it will record the transaction and thereafter reflect the value, each day, of such securities in determining its net asset value. The portfolio will make commitments for when-issued transactions only with the intention of actually acquiring the securities and, to facilitate such acquisitions, the Series Fund's custodian bank will maintain in a separate account securities of the portfolio having a value equal to or greater than such commitments. On delivery dates for such transactions, the portfolio will meet its obligations from maturities or sales of the securities held in the separate account and/or from then available cash flow. If the portfolio chooses to dispose of the right to acquire a when-issued security prior to its acquisition, it could, as with the disposition of any other obligation, incur a gain or loss due to market fluctuation. No when-issued commitments will be made if, as a result, more than 15% of the portfolio's net assets would be so committed. The Board of Directors of the Series Fund has adopted policies for the Money Market Portfolio to conform to amendments of an SEC rule applicable to money market funds, like the portfolio. These policies do not apply to any other portfolio. The policies are as follows: (1) The portfolio will not invest more than 5% of its assets in the securities of any one issuer (except U.S. Government securities); however, the portfolio may exceed the 5% limit with respect to a single security rated in the highest rating category for up to three business days after the purchase thereof; (2) To be eligible for investment, a security must be a United States dollar-denominated instrument that the Series Fund's Board has determined to present minimal credit risks and must be rated in one of the two highest rating categories by at least two nationally recognized statistical rating organizations ("NRSROs") assigning a rating to the security or issue, or if only one NRSRO has assigned a rating, that NRSRO. An unrated security must be deemed to be of comparable quality as determined by the Series Fund's Board. In other words, the portfolio will invest in only first tier or second tier securities. First tier securities are securities which are rated by at least two NRSROs, or by the only NRSRO that has rated the security, in the highest short-term rating category, or unrated securities of comparable quality as determined by the Series Fund's Board. Second tier securities are eligible securities that are not first tier securities; (3) The portfolio will not invest more than 5% of 30 its total assets in second tier securities; (4) The portfolio may not invest more than 1% of its assets in second tier securities of any one issuer; (5) In the event a first tier security held by the portfolio is downgraded and becomes a second tier security, or in the case of an unrated security the Series Fund's Board determines it is no longer of comparable quality to a first tier security, or in the event The Prudential becomes aware that an NRSRO has rated a second tier security or an unrated portfolio security below its second highest rating, the Board will reassess promptly whether the security presents minimal credit risks and shall cause the portfolio to take such action as the Board determines is in the best interests of the portfolio and its shareholders; (6) In the event of a default or if because of a rating downgrade a security held in the portfolio is no longer an eligible investment, the portfolio will sell the security as soon as practicable unless the Series Fund's Board makes a specific finding that such action would not be in the best interest of the portfolio; and (7) The portfolio's dollar-weighted average maturity will be no more than 90 days. The Series Fund's Board of Directors has adopted written procedures delegating to the investment advisor under certain guidelines the responsibility to make several of the above-described determinations, including certain credit quality determinations. 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 edge." 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. 31 Commercial paper: o Issuers rated Prime-1 (or related supporting institutions) have a superior capacity for repayment of short-term promissory obligations. Prime-1 repayment capacity will normally be evidenced by the following characteristics: -- Leading market positions in well-established industries. -- High rates of return of funds employed. -- Conservative capitalization structures 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 related supporting institutions) have a strong capacity for repayment of short-term promissory 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, will 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 Corporation describes its grades of corporate debt securities and its "A" commercial paper as follows: Bonds: AAA Bonds rated AAA are highest grade obligations. They possess the ultimate degree of protection as to principal and interest. Marketwise they move with interest rates, and hence provide the maximum safety on all counts. AA Bonds rated AA also qualify as high grade obligations, and in the majority of instances differ from AAA issues only in small degree. Here, too, prices move with the long term money market. A Bonds rated A are regarded as upper medium grade. They have considerable investment strength but are not entirely free from adverse effects of changes in economic and trade conditions. Interest and principal are regarded as safe. They predominately reflect money rates in their market behavior, but to some extent, also economic conditions. BBB Bonds rated BBB, or medium grade, are borderline between definitely sound obligations and those where the speculative element begins to predominate. These bonds have adequate asset coverage and normally are protected by satisfactory earnings. Their susceptibility to changing conditions, particularly to depressions, necessitates constant watching. Marketwise, the bonds are more responsive to business and trade conditions than to interest rates. This group is the lowest which qualifies for commercial bank investment. BB-B-CCC-CC Bonds rated BB, B, CCC and CC are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Commercial paper: Commercial paper rated A by Standard & Poor's Corporation 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 borrowings. 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. POSSIBLE REPLACEMENT OF THE SERIES FUND Although The Prudential believes it to be unlikely, it is possible that in the judgment of its management, one or more of the portfolios of the Series Fund may become unsuitable for investment by Contract owners because of investment policy changes, tax law changes, or the unavailability of shares for investment. In that event, The Prudential may seek to substitute the shares of another portfolio or of an entirely different mutual fund. Before this can be done, the approval of the SEC, and possibly one or more state insurance departments, will be required. Contract owners will be notified of such substitution. In addition, although it is highly unlikely, it is conceivable that in the future it may become disadvantageous for both variable life insurance and variable annuity contract separate accounts to invest in the same underlying mutual fund. 32 Although neither the companies which invest in the Series Fund nor the Series Fund currently foresees any such disadvantage, the Series Fund's Board of Directors intends to monitor events in order to identify any material conflict between variable life insurance and variable annuity contract owners and to determine what action, if any, should be taken in response thereto. Material conflicts could result from such things as: (1) changes in state insurance law; (2) changes in federal income tax law; (3) changes in the investment management of any portfolio of the Series Fund; or (4) difference between voting instructions given by variable life insurance and variable annuity contract owners. The Prudential will bear the expense, if it does become necessary, of remedying any material conflict including establishing a new underlying investment company and segregating the assets held under variable life insurance and variable annuity contracts. OTHER INFORMATION CONCERNING THE SERIES FUND INCORPORATION AND AUTHORIZED STOCK The Series Fund was incorporated under Maryland law on November 15, 1982. The authorized Capital Stock of the Series Fund consists of 2 billion shares, par value $0.01 per share. The shares of Capital Stock are divided into fifteen classes: Money Market Portfolio Capital Stock (225 million shares), Diversified Bond Portfolio Capital Stock (200 million shares), Government Income Portfolio Capital Stock (100 million shares), Zero Coupon Bond Portfolio 2000 Capital Stock (25 million shares), Zero Coupon Bond Portfolio 2005 Capital Stock (50 million shares), Conservative Balanced Portfolio Capital Stock (300 million shares), Flexible Managed Portfolio Capital Stock (300 million shares), High Yield Bond Portfolio Capital Stock (100 million shares), Stock Index Portfolio Capital Stock (100 million shares), Equity Income Portfolio Capital Stock (100 million shares), Equity Portfolio Capital Stock (200 million shares), Prudential Jennison Portfolio Capital Stock (50 million shares), Small Capitalization Stock Portfolio Capital Stock (50 million shares), Global Portfolio Capital Stock (100 million shares), Natural Resources Portfolio Capital Stock (100 million shares). The shares of each portfolio, when issued, will be fully paid and non-assessable, will have no conversion, exchange or similar rights, and will be freely transferable. Each share of stock will have a pro rata interest in the assets of the portfolio to which the stock of that class relates and will have no interest in the assets of any other portfolio. DIVIDENDS, DISTRIBUTIONS AND TAXES The Series Fund is qualified as a regulated investment company under Section 851 of the Internal Revenue Code and distributes substantially all of each portfolio's net investment income and realized gains from securities transactions to the respective subaccounts, which immediately reinvest it. For each taxable year in which it and each of its portfolios so qualify, the Series Fund will not be subject to tax on net investment income and realized gains from securities transactions distributed to shareholders. CUSTODIAN AND TRANSFER AGENT Chemical Bank, 4 New York Plaza, New York, N.Y. 10004, is the custodian of the assets held by all the portfolios, except the Global Portfolio, 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. Chemical Bank is also authorized to use the facilities of the Mortgage Backed Security Clearing Corporation (a subsidiary of the Midwest Stock Exchange) with respect to mortgage-backed securities held by any of these portfolios. Chemical Bank maintains certain financial and accounting books and records pursuant to an agreement with the Series Fund. Brown Brothers Harriman & Co. ("Brown Brothers"), 40 Water Street, Boston, MA 02109, is the custodian of the assets of the Global Portfolio. Brown Brothers employs subcustodians, who were approved by the directors of the Series Fund in accordance with regulations of the Securities and Exchange Commission, for the purpose of providing custodial service for the Global Portfolio's foreign assets held outside the United States. Morgan Guaranty Trust Company, 60 Wall Street, New York, NY 10260 is 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 book-entry system of the Federal Reserve Bank. The directors of the Series Fund monitor the activities of the custodians and the subcustodians. The Prudential is the transfer agent and dividend-disbursing agent for the Series Fund. The Prudential as transfer agent issues and redeems shares of the Series Fund and maintains records of ownership for the shareholders. EXPERTS The financial statements of the Series Fund included in this statement of additional information and the FINANCIAL HIGHLIGHTS included in the prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. Deloitte & Touche LLP's principal business address is Two Hilton Court, Parsippany, NJ 07054-0319. 33 LICENSES As part of the Investment Advisory Agreement, The Prudential has granted the Series Fund a royalty-free, non-exclusive license to use the words "The Prudential" and its registered service mark of a rock representing the Rock of Gibraltar. However, The Prudential may terminate this license if The Prudential or a company controlled by it ceases to be the Series Fund's investment advisor. The 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 Series Fund of such notice, unless a majority of the outstanding voting securities of the Series Fund vote to continue the Agreement notwithstanding termination of the license. The Series 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 Series 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 Series 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 Series Fund, the Stock Index Portfolio or the Small Capitalization Stock Portfolio. S&P has no obligation to take the needs of the Series 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 Series 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 Series 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 SERIES 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. DIRECTORS AND OFFICERS OF THE PRUDENTIAL AND MANAGEMENT OF THE SERIES FUND DIRECTORS AND OFFICERS OF THE PRUDENTIAL The directors and certain officers of The Prudential, listed with their principal occupations during the past 5 years, are shown below. DIRECTORS OF THE PRUDENTIAL FRANKLIN E. AGNEW. Director. -- Business Consultant and former Senior Vice President of H.J. Heinz. Address: One Mellon Bank Center, Suite 2120, Pittsburgh, PA 15219. FREDERIC K. BECKER, Director. -- President of Wilentz, Goldman, and Spitzer (law firm). Address: 90 Woodbridge Center Drive, Woodbridge, NJ 07095. WILLIAM W. BOESCHENSTEIN, Director.--Director, Owens-Corning Fiberglas Corporation. Address: One Seagate, Toledo, OH 43604. LISLE C. CARTER, JR., Director.--Former Senior Vice President and General Counsel, United Way of America. Address: 701 North Fairfax Avenue, Alexandria, VA 22314. JAMES G. CULLEN, Director.--Vice Chairman, Bell Atlantic Corporation since 1995; 1993 to 1995: President, Bell Atlantic Corporation; Prior to 1993: President, New Jersey Bell. Address: 1310 North Court House Road, 11th floor, Alexandria, VA 22201. CAROLYNE K. DAVIS, Director.--Health Care Advisor, Ernst & Young. Address: 5480 Cayuga Lake Road, Romulus, NY 14541. 34 ROGER A. ENRICO, Director.--Chairman and Chief Executive Officer, Pepsico Worldwide Restaurants since 1994; 1993 to 1994: Vice Chairman, Pepsi Co. Inc.; 1991 to 1993: Chairman and Chief Executive Officer, Pepsi Co. Worldwide Foods. Address: 6303 Forest Park, Dallas, TX 75235. ALLAN D. GILMOUR, Director.--Former Vice Chairman, Ford Motor Company. Address: Prudential Plaza, Newark, NJ 07102-3777. WILLIAM H. GRAY, III, Director.--President and Chief Executive Officer, United Negro College Fund, Inc. since 1991. Address: 8260 Willow Oaks Corporate Drive, Fairfax, VA 22031. JON F. HANSON, Director.--Chairman, Hampshire Management Co. Address: 235 Moore Street, Suite 200, Hackensack, NJ 07601. CONSTANCE J. HORNER, Director.--Guest Scholar, The Brookings Institution since 1993; 1991 to 1992 Assistant to the President and Director of Presidential Personnel, U.S. Government. Address: 1775 Massachusetts Avenue, N.W., Washington, DC 20036-2188. ALLEN F. JACOBSON, Director.--Former Chairman and Chief Executive Officer, Minnesota Mining & Manufacturing Co. Address: 30 Seventh Street East, St. Paul, MN 55101-4901. GARNETT L. KEITH, JR., Director and Vice Chairman.--Vice Chairman of The Prudential. Address: Prudential Plaza, Newark, NJ 07102-3777. BURTON G. MALKIEL, Director.--Professor, Princeton University. Address: Princeton University, 110 Fisher Hall, Prospect Avenue, Princeton, NJ 08544-1021. JOHN R. OPEL, Director.--Prior to 1994, Chairman of the Executive Committee, International Business Machines Corporation. Address: 590 Madison Avenue, New York, NY 10022. ARTHUR F. RYAN, Chairman of the Board, President, and Chief Executive Officer. - -- Chairman of the Board, President, and Chief Executive Officer, The Prudential since 1994; Prior to 1994, President and Chief Operating Officer, Chase Manhattan Corporation. Address: 751 Broad Street, Newark, NJ 07102-3777. CHARLES R. SITTER, Director.--Former President and Director, Exxon Corporation. Address: 225 John W. Carpenter Freeway, Irving, TX 75062. DONALD L. STAHELI, Director.--Chairman and Chief Executive Officer, Continental Grain Company since 1994; Prior to 1994; Chairman, Continental Grain Company. Address: 277 Park Avenue, New York, NY 10172. RICHARD M. THOMSON, Director.--Chairman of the Board and Chief Executive Officer, The Toronto-Dominion Bank. Address: P.O. Box 1, Toronto-Dominion Centre, Toronto, Ontario, M5K 1A2, Canada. P. ROY VAGELOS, M.D., Director.--Former Chairman, President and Chief Executive Officer, Merck & Co., Inc. Address: One Crossroads Drive, Bedminster, NJ 07921. STANLEY C. VAN NESS, Director.--Attorney, Picco, Herbert, and Kennedy (law firm). Address: One State Street Square, Suite 1000, Trenton, NJ 08607-1388. PAUL A. VOLCKER, Director.--Chairman, James D. Wolfensohn, Inc. Address: 599 Lexington Avenue, New York, NY 10022. JOSEPH H. WILLIAMS, Director.--Director, The Williams Companies since 1994; Prior to 1994: Chairman and Chief Executive Officer, The Williams Companies. Address: P.O. Box 2400, Tulsa, OK 74102. OTHER EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS MARK B. GRIER, Chief Financial Officer.--Chief Financial Officer of The Prudential since 1995; Prior to 1995: Executive Vice President and Head of Global Markets, Chase Manhattan Corporation. SUSAN L. BLOUNT, Vice President and Secretary.--Vice President and Secretary of The Prudential since 1995; Prior to 1995: Assistant General Counsel for Prudential Residential Services Company. C. EDWARD CHAPLIN, Vice President and Treasurer.--Vice President and Treasurer of The Prudential since 1995; 1993 to 1995: Managing Director and Assistant Treasurer of The Prudential; 1992 to 1993: Vice President and Assistant Treasurer, Banking and Cash Management for The Prudential; Prior to 1992: Regional Vice President of Prudential Mortgage Capital Company. 35 MANAGEMENT OF THE SERIES FUND The names of all directors and officers of the Series 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 Prudential Plaza, Newark, New Jersey 07102-3777. MENDEL A. MELZER*, Chairman of the Board--Chief Financial Officer of the Money Management Group of The Prudential since 1995; 1993 to 1995: Senior Vice President and Chief Financial Officer of Prudential Preferred Financial Services; 1991 to 1993: Managing Director, The Prudential Investment Corporation. E. MICHAEL CAULFIELD*, President and Director--Chief Executive Officer of the Money Management Group of The Prudential since 1995; 1995: Chief Executive Officer, Prudential Preferred Financial Services; 1993 to 1995: President, Prudential Preferred Financial Services; 1992 to 1993: President, Prudential Property and Casualty Insurance Company; Prior to 1992: President of Investment Services of The Prudential. SAUL K. FENSTER, Director--President of New Jersey Institute of Technology. Address: 323 Martin Luther King Boulevard, Newark, New Jersey 07102. W. SCOTT MCDONALD, JR., Director--Principal, Scott McDonald & Associates since 1995; Prior to 1995: Executive Vice President of Fairleigh Dickinson University. Address: 9 Zamrok Way, Morristown, New Jersey 07960. JOSEPH WEBER, Director--Vice President, Interclass (international corporate learning). Address: 37 Beachmont Terrace, North Caldwell, New Jersey 07006. I. EDWARD PRICE, Vice President--Senior Vice President and Actuary, Prudential Individual Insurance Group since 1995; 1994 to 1995: Chief Executive Officer, Prudential International Insurance; 1993 to 1994: President, Prudential International Insurance; Prior to 1993: Senior Vice President and Company Actuary of The Prudential. STEPHEN P. TOOLEY, Comptroller--Vice President and Comptroller of the Individual Insurance Group of The Prudential since 1995; 1993 to 1995: Vice President and Comptroller of Prudential Insurance and Financial Services; Prior to 1993: Director, Financial Analysis of The Prudential. THOMAS C. CASTANO, Secretary and Treasurer--Assistant General Counsel of The Prudential since 1993; Prior to 1993: Assistant General Counsel of Pruco Life Insurance Company. No director or officer of the Series Fund who is also an officer, director or employee of The Prudential or its affiliates is entitled to any remuneration from the Series Fund for services as one of its directors or officers. Each director of the Series Fund who is not an interested person of the Series Fund will receive a fee of $2,000 per year plus $200 per portfolio for each meeting of the Board attended and will be reimbursed for all expenses incurred in connection with attendance at meetings. *These members of the Board are interested persons of The Prudential, its affiliates or the Series Fund as defined in the 1940 Act. Certain actions of the Board, including the annual continuance of the Investment Advisory Agreement between the Series Fund and The Prudential, must be approved by a majority of the members of the Board who are not interested persons of The Prudential, its affiliates or the Series Fund. Mr. Melzer and Mr. Caulfield, two of the five members of the Board, are interested persons of The Prudential and the Series Fund, as that term is defined in the 1940 Act, because they are officers and/or affiliated persons of The Prudential, the investment advisor to the Series Fund. Messrs. Fenster, McDonald, and Weber are not interested persons of The Prudential, its affiliates or the Series Fund. However, Mr. Fenster is President of the New Jersey Institute of Technology. The Prudential has issued a group annuity contract to the Institute and provides group life and group health insurance to its employees. 36 FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC. MONEY MARKET PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES December 31, 1995 ASSETS Investments................................ $610,184,940 Cash....................................... 1,689 Interest receivable........................ 3,877,634 ------------ Total Assets............................. 614,064,263 ------------ LIABILITIES Accrued expenses........................... 115,780 Payable to investment adviser.............. 628,843 ------------ Total Liabilities........................ 744,623 ------------ NET ASSETS................................... $613,319,640 ------------ ------------ Net assets were comprised of: Common stock, at $0.01 par value......... $ 613,320 Paid-in capital, in excess of par........ 612,706,320 ------------ Net assets, December 31, 1995.............. $613,319,640 ------------ ------------ Net asset value per share of 61,331,964 outstanding shares of common stock (authorized 200,000,000 shares).......... $ 10.0000 ------------ ------------ STATEMENT OF OPERATIONS Year Ended December 31, 1995 INVESTMENT INCOME Interest................................... $ 36,565,684 ------------- EXPENSES Investment management fee.................. 2,399,559 Shareholders' reports...................... 137,786 Accounting fees............................ 66,340 Professional fees.......................... 30,370 Custodian expense -- net................... 10,710 Directors' expense......................... 2,988 Miscellaneous expenses..................... 928 S.E.C. fees................................ (3,240) ------------- 2,645,441 ------------- NET INVESTMENT INCOME........................ 33,920,243 ------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... $ 33,920,243 ------------- -------------
STATEMENTS OF CHANGES IN NET ASSETS YEARS ENDED DECEMBER 31 --------------------------------- 1995 1994 ------------ -------------- OPERATIONS: Net investment income .................................................................. $ 33,920,243 $ 21,549,333 DIVIDENDS TO SHAREHOLDERS FROM: Net investment income .................................................................. (33,920,243) (21,549,333) CAPITAL TRANSACTIONS: Capital stock sold [13,987,392 and 18,862,200 shares, respectively] 139,873,920 188,622,000 Reinvestment of dividend distributions [3,392,024 and 2,154,934 shares, respectively] ......................................................................... 33,920,243 21,549,333 Capital stock repurchased [(14,375,600) and (10,162,500) shares, respectively] ......... (143,756,000) (101,625,000) ------------ ------------- NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS ......................... 30,038,163 108,546,333 ------------ ------------- TOTAL INCREASE IN NET ASSETS ............................................................. 30,038,163 108,546,333 NET ASSETS: Beginning of year ...................................................................... 583,281,477 474,735,144 ------------ ------------- End of year ............................................................................ $613,319,640 $ 583,281,477 ------------ ------------- ------------ -------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. A1 FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC. DIVERSIFIED BOND PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES December 31, 1995 ASSETS Investments, at value (cost: $610,310,688)............................ $643,573,628 Cash....................................... 395 Interest receivable........................ 12,716,449 Receivable for portfolio shares sold....... 216,916 ------------ Total Assets............................. 656,507,388 ------------ LIABILITIES Accrued expenses........................... 36,960 Payable to investment adviser.............. 634,002 ------------ Total Liabilities........................ 670,962 ------------ NET ASSETS................................... $655,836,426 ------------ ------------ Net assets were comprised of: Common stock, at $0.01 par value......... $ 579,713 Paid-in capital, in excess of par........ 629,568,137 ------------ 630,147,850 Undistributed net investment income........ 714,398 Accumulated net realized losses............ (8,288,762) Net unrealized appreciation................ 33,262,940 ------------ Net assets, December 31, 1995.............. $655,836,426 ------------ ------------ Net asset value per share of 57,971,325 outstanding shares of common stock (authorized 200,000,000 shares).......... $ 11.3131 ------------ ------------ STATEMENT OF OPERATIONS Year Ended December 31, 1995 INVESTMENT INCOME Interest................................... $ 43,710,915 ------------ EXPENSES Investment management fee.................. 2,337,700 Shareholders' reports...................... 147,832 Accounting fees............................ 56,490 Custodian expense -- net................... 42,968 Professional fees.......................... 19,278 Directors' expense......................... 2,862 Miscellaneous expenses..................... 863 S.E.C. fees................................ (3,513) ------------ 2,604,480 ------------ NET INVESTMENT INCOME........................ 41,106,435 ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on investments -- Securities transactions.................. 3,993,423 Options written.......................... (48,047) ------------ Net realized gain on investments........... 3,945,376 Net unrealized gain on investments......... 65,195,088 ------------ NET GAIN ON INVESTMENTS...................... 69,140,464 ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... $110,246,899 ------------ ------------ STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31 --------------------------------------- 1995 1994 ------------------ ------------------- OPERATIONS: Net investment income .................................................................. $ 41,106,435 $ 36,112,155 Net realized gain (loss) on investments ................................................ 3,945,376 (4,246,256) Net unrealized gain (loss) on investments .............................................. 65,195,088 (50,839,016) ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ........................ 110,246,899 (18,973,117) ------------ ------------ DIVIDENDS TO SHAREHOLDERS FROM: Net investment income .................................................................. (40,773,047) (35,627,999) Net realized gain from investment transactions ......................................... (1,426,845) (1,267,553) ------------ ------------ TOTAL DIVIDENDS TO SHAREHOLDERS ........................................................ (42,199,892) (36,895,552) ------------ ------------ CAPITAL TRANSACTIONS: Capital stock sold [3,596,587 and 3,414,897 shares, respectively] ...................... 39,971,262 36,662,212 Reinvestment of dividend distributions [3,793,654 and 3,610,015 shares, respectively] ......................................................................... 42,199,892 36,895,552 Capital stock repurchased [(3,376,822) and (4,963,909) shares, respectively] ........... (36,030,334) (52,266,357) ------------ ------------ NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS ......................... 46,140,820 21,291,407 ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS ............................................................................ 114,187,827 (34,577,262) NET ASSETS: Beginning of year ...................................................................... 541,648,599 576,225,861 ------------ ------------ End of year ............................................................................ $655,836,426 $541,648,599 ------------ ------------ ------------ ------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. A2 FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC. GOVERNMENT INCOME PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES December 31, 1995 ASSETS Investments, at value (cost: $457,607,665)............................ $495,028,292 Cash....................................... 648 Interest receivable........................ 7,178,766 Receivable for portfolio shares sold....... 57,123 Other Assets............................... 5,758 ------------ Total Assets............................. 502,270,587 ------------ LIABILITIES Payable to investment adviser.............. 495,282 ------------ NET ASSETS................................... $501,775,305 ------------ ------------ Net assets were comprised of: Common stock, at $0.01 par value......... $ 428,176 Paid-in capital, in excess of par........ 486,408,830 ------------ 486,837,006 Undistributed net investment income........ 1,261,089 Accumulated net realized losses............ (23,743,417) Net unrealized appreciation................ 37,420,627 ------------ Net assets, December 31, 1995.............. $501,775,305 ------------ ------------ Net asset value per share of 42,817,582 outstanding shares of common stock (authorized 100,000,000 shares).......... $ 11.7189 ------------ ------------ STATEMENT OF OPERATIONS Year Ended December 31, 1995 INVESTMENT INCOME Interest................................... $ 33,602,845 ------------- EXPENSES Investment management fee.................. 1,913,517 Shareholders' reports...................... 122,340 Accounting fees............................ 68,428 Custodian expense -- net................... 32,925 Professional fees.......................... 9,933 Directors' expense......................... 2,908 Miscellaneous expenses..................... 774 S.E.C. fees................................ (11,433) ------------- 2,139,392 ------------- NET INVESTMENT INCOME........................ 31,463,453 ------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized loss on investments........... (12,819,604) Net unrealized gain on investments......... 66,364,196 ------------- NET GAIN ON INVESTMENTS...................... 53,544,592 ------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... $ 85,008,045 ------------- ------------- STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31 --------------------------------- 1995 1994 ------------ ------------ OPERATIONS: Net investment income .................................................................. $ 31,463,453 $ 33,431,928 Net realized loss on investments ....................................................... (12,819,604) (10,380,614) Net unrealized gain (loss) on investments .............................................. 66,364,196 (52,690,952) ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ........................ 85,008,045 (29,639,638) ------------ ------------ DIVIDENDS TO SHAREHOLDERS FROM: Net investment income .................................................................. (31,133,859) (32,955,665) ------------ ------------ CAPITAL TRANSACTIONS: Capital stock sold [863,496 and 3,591,224 shares, respectively] ........................ 9,888,081 41,656,912 Reinvestment of dividend distributions [2,693,392 and 3,094,061 shares, respectively] ......................................................................... 31,133,859 32,955,665 Capital stock repurchased [(7,346,525) and (5,912,961) shares, respectively] ........... (80,695,126) (64,569,681) ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS .............. (39,673,186) 10,042,896 ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS .................................................. 14,201,000 (52,552,407) NET ASSETS: Beginning of year ...................................................................... 487,574,305 540,126,712 ------------ ------------ End of year ............................................................................ $501,775,305 $487,574,305 ------------ ------------ ------------ ------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. A3 FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC. ZERO COUPON BOND 1995 PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES December 31, 1995 ASSETS Total Assets............................. $ 0 -------------- LIABILITIES Total Liabilities........................ $ 0 -------------- NET ASSETS -------------- -------------- Net assets, December 31, 1995.............. $ 0 -------------- -------------- Net asset value per share of -0- outstanding shares of common stock (authorized 25,000,000 shares)....................... $ 0 -------------- -------------- STATEMENT OF OPERATIONS Year Ended December 31, 1995 INVESTMENT INCOME Interest................................... $ 717,426 --------------- EXPENSES Investment management fee.................. 42,824 Accounting fees............................ 1,876 Custodian expense -- net................... 8,044 Shareholders' reports...................... 2,251 S.E.C...................................... (954) Directors' expense......................... 2,374 Professional fees.......................... 3,487 Miscellaneous expenses..................... 27 --------------- 59,929 --------------- NET INVESTMENT INCOME........................ 657,497 --------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain on investments........... 170,059 Net unrealized loss on investments......... (36,893) --------------- NET GAIN ON INVESTMENTS...................... 133,166 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... $ 790,663 --------------- --------------- STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31 -------------------------------- 1995 1994 ------------ ------------- OPERATIONS: Net investment income .................................................................... $ 657,497 $ 1,027,426 Net realized gain on investments ......................................................... 170,059 1,948 Net unrealized loss on investments ....................................................... (36,893) (1,029,896) ------------ ------------ NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .......................... 790,663 (522) ------------ ------------ DIVIDENDS TO SHAREHOLDERS FROM: Net investment income .................................................................... (684,785) (1,001,231) Net realized gain from investment transactions ........................................... (169,638) (3,573) ------------ ------------ TOTAL DIVIDENDS TO SHAREHOLDERS .......................................................... (854,423) (1,004,804) ------------ ------------ CAPITAL TRANSACTIONS: Capital stock sold [11,399 and 301,289 shares, respectively] ............................. 123,131 3,295,000 Reinvestment of dividend distributions [81,330 and 94,042 shares, respectively] .......... 854,423 1,004,804 Capital stock repurchased [(10,740) and (52,950) shares, respectively] ................... (116,000) (592,000) Initial capitalization repurchased [(680,487) and (18,027) shares, respectively] ......... (7,346,506) (197,000) Capital stock repurchased at liquidation date [(1,075,615) and 0 shares, respectively] ........................................................................... (11,184,920) 0 ------------ ------------ NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS ................ (17,669,872) 3,510,804 ------------ ------------ TOTAL INCREASE/(DECREASE) IN NET ASSETS .................................................... (17,733,632) 2,505,478 NET ASSETS: Beginning of year ........................................................................ 17,733,632 15,228,154 ------------ ------------ End of year .............................................................................. $ 0 $ 17,733,632 ------------ ------------ ------------ ------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. A4 FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC. ZERO COUPON BOND 2000 PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES December 31, 1995 ASSETS Investments, at value (cost: $22,164,986)............................. $ 25,287,653 Cash....................................... 311 Interest receivable........................ 200 -------------- Total Assets............................. 25,288,164 -------------- LIABILITIES Accrued expenses and other liabilities..... 4,480 Payable to investment adviser.............. 24,865 -------------- Total Liabilities........................ 29,345 -------------- NET ASSETS................................... $ 25,258,819 -------------- -------------- Net assets were comprised of: Common stock, at $0.01 par value......... $ 19,030 Paid-in capital, in excess of par........ 22,151,149 -------------- 22,170,179 Distributions in excess of net investment income................................... (34,156) Accumulated net realized gains............. 129 Net unrealized appreciation................ 3,122,667 -------------- Net assets, December 31, 1995.............. $ 25,258,819 -------------- -------------- Net asset value per share of 1,903,021 outstanding shares of common stock (authorized 25,000,000 shares)........... $ 13.2730 -------------- -------------- STATEMENT OF OPERATIONS Year Ended December 31, 1995 INVESTMENT INCOME Interest................................... $ 1,156,958 --------------- EXPENSES Investment management fee.................. 92,250 Accounting fees............................ 6,931 Shareholders' reports...................... 4,623 Custodian expense -- net................... 2,995 Directors' expense......................... 2,533 Professional fees.......................... 1,602 Miscellaneous expenses..................... 33 --------------- 110,967 --------------- NET INVESTMENT INCOME........................ 1,045,991 --------------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain on investments........... 945,638 Net unrealized gain on investments......... 2,457,617 --------------- NET GAIN ON INVESTMENTS...................... 3,403,255 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... $ 4,449,246 --------------- --------------- STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31 --------------------------------- 1995 1994 ------------- -------------- OPERATIONS: Net investment income ...................................................................... $ 1,045,991 $ 1,414,358 Net realized gain on investments ........................................................... 945,638 38,776 Net unrealized gain (loss) on investments .................................................. 2,457,617 (3,049,221) ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ............................ 4,449,246 (1,596,087) ------------ ------------ DIVIDENDS TO SHAREHOLDERS FROM: Net investment income ...................................................................... (1,046,055) (1,398,377) Net realized gain from investment transactions ............................................. (945,910) (38,912) ------------ ------------ TOTAL DIVIDENDS TO SHAREHOLDERS ............................................................ (1,991,965) (1,437,289) ------------ ------------ CAPITAL TRANSACTIONS: Capital stock sold [111,200 and 102,167 shares, respectively] .............................. 1,481,434 1,340,000 Reinvestment of dividend distributions [151,186 and 118,462 shares, respectively] .......... 1,991,965 1,437,289 Capital stock repurchased [(89,987) and (60,345) shares, respectively] ..................... (1,195,434) (787,000) Initial capitalization repurchased [(8,965) and (38,338) shares, respectively] ............. (111,423) (507,000) ------------ ------------ NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS ............................. 2,166,542 1,483,289 ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS ...................................................... 4,623,823 (1,550,087) NET ASSETS: Beginning of year .......................................................................... 20,634,996 22,185,083 ------------ ------------ End of year ................................................................................ $ 25,258,819 $ 20,634,996 ------------ ------------ ------------ ------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. A5 FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC. ZERO COUPON BOND 2005 PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES December 31, 1995 ASSETS Investments, at value (cost: $19,934,260)............................. $ 23,588,178 Cash....................................... 915 Interest receivable........................ 605 Receivable for portfolio shares sold....... 85,000 -------------- Total Assets............................. 23,674,698 -------------- LIABILITIES Accrued expenses........................... 5,550 Payable to investment adviser.............. 22,029 -------------- Total Liabilities........................ 27,579 -------------- NET ASSETS................................... $ 23,647,119 -------------- -------------- Net assets were comprised of: Common stock, at $0.01 par value......... $ 17,928 Paid-in capital, in excess of par........ 19,955,995 -------------- 19,973,923 Undistributed net investment income........ 19,278 Net unrealized appreciation................ 3,653,918 -------------- Net assets, December 31, 1995.............. $ 23,647,119 -------------- -------------- Net asset value per share of 1,792,815 outstanding shares of common stock (authorized 50,000,000 shares)........... $ 13.1899 -------------- -------------- STATEMENT OF OPERATIONS Year Ended December 31, 1995 INVESTMENT INCOME Interest................................... $ 1,122,819 --------------- EXPENSES Investment management fee.................. 76,677 Accounting fees............................ 6,748 Shareholders' reports...................... 4,342 Custodian expense -- net................... 3,459 Directors' expense......................... 2,531 Professional fees.......................... 1,763 Miscellaneous expenses..................... 26 --------------- 95,546 --------------- NET INVESTMENT INCOME........................ 1,027,273 --------------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain on investments........... 471,329 Net unrealized gain on investments......... 3,840,819 --------------- NET GAIN ON INVESTMENTS...................... 4,312,148 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... $ 5,339,421 --------------- --------------- STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31 --------------------------------- 1995 1994 ----------- ------------- OPERATIONS: Net investment income .................................................................... $ 1,027,273 $ 955,176 Net realized gain on investments ......................................................... 471,329 0 Net unrealized gain (loss) on investments ................................................ 3,840,819 (2,370,041) ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .......................... 5,339,421 (1,414,865) ------------ ------------ DIVIDENDS TO SHAREHOLDERS FROM: Net investment income .................................................................... (1,031,193) (938,283) Net realized gain from investment transactions ........................................... (471,329) (3,855) ------------ ------------ TOTAL DIVIDENDS TO SHAREHOLDERS .......................................................... (1,502,522) (942,138) ------------ ------------ CAPITAL TRANSACTIONS: Capital stock sold [292,895 and 461,883 shares, respectively] ............................ 3,700,000 5,262,071 Reinvestment of dividend distributions [116,304 and 86,081 shares, respectively] ......... 1,502,522 942,138 Capital stock repurchased [(152,641) and (31,239) shares, respectively] .................. (1,898,000) (366,000) Initial capitalization repurchased [-0- and (122,127) shares, respectively] .............. 0 (1,448,071) ------------ ------------ NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS ........................... 3,304,522 4,390,138 ------------ ------------ TOTAL INCREASE IN NET ASSETS ............................................................... 7,141,421 2,033,135 NET ASSETS: Beginning of year ........................................................................ 16,505,698 14,472,563 ------------ ------------ End of year .............................................................................. $ 23,647,119 $ 16,505,698 ------------ ------------ ------------ ------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. A6 FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC. CONSERVATIVE BALANCED PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES December 31, 1995 ASSETS Investments, at value (cost: $3,622,931,201).......................... $3,912,781,300 Cash....................................... 44,660 Interest and dividends receivable.......... 30,959,621 Receivable for securities sold............. 2,833,722 Receivable for portfolio shares sold....... 23,400 -------------- Total Assets............................. 3,946,642,703 -------------- LIABILITIES Accrued expenses........................... 165,851 Payable for securities purchased........... 374,361 Payable to investment adviser.............. 5,328,226 -------------- Total Liabilities........................ 5,868,438 -------------- NET ASSETS................................... $3,940,774,265 -------------- -------------- Net assets were comprised of: Common stock, at $0.01 par value......... $ 2,574,196 Paid-in capital, in excess of par........ 3,629,566,275 -------------- 3,632,140,471 Distributions in excess of net investment income................................... (2,286,857) Accumulated net realized gains............. 21,070,552 Net unrealized appreciation................ 289,850,099 -------------- Net assets, December 31, 1995.............. $3,940,774,265 -------------- -------------- Net asset value per share of 257,419,587 outstanding shares of common stock (authorized 300,000,000 shares).......... $ 15.3088 -------------- -------------- STATEMENT OF OPERATIONS Year Ended December 31, 1995 INVESTMENT INCOME Dividends (net of $401,184 foreign withholding tax)......................... $ 23,484,206 Interest................................... 153,295,065 --------------- 176,779,271 --------------- EXPENSES Investment management fee.................. 20,327,574 Shareholders' reports...................... 902,869 Accounting fees............................ 97,831 Custodian expense -- net................... 92,207 Professional fees.......................... 74,702 Miscellaneous expenses..................... 5,573 Directors' expense......................... 4,934 S.E.C. fees................................ (20,409) --------------- 21,485,281 --------------- NET INVESTMENT INCOME........................ 155,293,990 --------------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain on investments........... 167,342,297 Net unrealized gain on investments......... 264,773,974 --------------- NET GAIN ON INVESTMENTS...................... 432,116,271 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... $ 587,410,261 --------------- --------------- STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31 --------------------------------------- 1995 1994 ------------------ ------------------- OPERATIONS: Net investment income ................................................................ $ 155,293,990 $ 122,670,711 Net realized gain on investments ..................................................... 167,342,297 30,751,021 Net unrealized gain (loss) on investments ............................................ 264,773,974 (184,854,002) --------------- --------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ...................... 587,410,261 (31,432,270) --------------- --------------- DIVIDENDS TO SHAREHOLDERS FROM: Net investment income ................................................................ (154,987,434) (120,740,360) Net realized gain from investment transactions ....................................... (133,660,168) (37,214,012) --------------- --------------- TOTAL DIVIDENDS TO SHAREHOLDERS ...................................................... (288,647,602) (157,954,372) --------------- --------------- CAPITAL TRANSACTIONS: Capital stock sold [5,345,143 and 34,889,459 shares, respectively] ................... 81,026,772 514,344,688 Reinvestment of dividend distributions [19,023,739 and 11,198,868 shares, respectively] ....................................................................... 288,647,602 157,954,372 Capital stock repurchased [(15,343,313) and (5,887,371) shares, respectively] ........ (228,767,054) (84,977,146) --------------- --------------- NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS ....................... 140,907,320 587,321,914 --------------- --------------- TOTAL INCREASE IN NET ASSETS ........................................................... 439,669,979 397,935,272 NET ASSETS: Beginning of year .................................................................... 3,501,104,286 3,103,169,014 --------------- --------------- End of year .......................................................................... $ 3,940,774,265 $ 3,501,104,286 --------------- --------------- --------------- ---------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. A7 FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC. FLEXIBLE MANAGED PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES December 31, 1995 ASSETS Investments, at value (cost: $3,687,627,278).......................... $4,228,358,720 Cash....................................... 626 Interest and dividends receivable.......... 25,934,506 Receivable for securities sold............. 59,091,478 Receivable for portfolio shares sold....... 42,700 -------------- Total Assets............................. 4,313,428,030 -------------- LIABILITIES Accrued expenses........................... 178,423 Payable for securities purchased........... 45,774,778 Payable to investment adviser.............. 6,269,992 -------------- Total Liabilities........................ 52,223,193 -------------- NET ASSETS................................... $4,261,204,837 -------------- -------------- Net assets were comprised of: Common stock, at $0.01 par value......... $ 2,385,984 Paid-in capital, in excess of par........ 3,657,681,610 -------------- 3,660,067,594 Distributions in excess of net investment income................................... (5,751,188) Accumulated Net Realized Gains............. 66,155,086 Net unrealized appreciation Securities............................... 540,731,442 Foreign currency translations............ 1,903 -------------- Net assets, December 31, 1995.............. $4,261,204,837 -------------- -------------- Net asset value per share of 238,598,423 outstanding shares of common stock (authorized 300,000,000 shares).......... $ 17.8593 -------------- -------------- STATEMENT OF OPERATIONS Year Ended December 31, 1995 INVESTMENT INCOME Dividends (net of $632,445 foreign withholding tax)......................... $ 47,779,646 Interest................................... 103,109,112 --------------- 150,888,758 --------------- EXPENSES Investment management fee.................. 22,971,401 Shareholders' reports...................... 933,420 Custodian expense -- net................... 170,999 Professional fees.......................... 86,407 Accounting fees............................ 84,962 Miscellaneous expenses..................... 5,560 Directors' expense......................... 4,806 S.E.C. fees................................ (9,458) --------------- 24,248,097 --------------- NET INVESTMENT INCOME........................ 126,640,661 --------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCIES Net realized gain (loss) on investments and foreign currencies-- Securities transactions.................. 291,714,860 Foreign currency transactions............ (1,080) Futures contracts........................ 554,055 --------------- Net realized gain on investments and foreign currencies....................... 292,267,835 --------------- Net unrealized gain on investments and foreign currencies-- Securities............................... 410,037,562 Foreign currency translations............ 3,540 --------------- Net unrealized gain on investments and foreign currencies....................... 410,041,102 --------------- NET GAIN ON INVESTMENTS AND FOREIGN CURRENCIES................................... 702,308,937 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... $ 828,949,598 --------------- --------------- STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31 ----------------------------------- 1995 1994 ------------------ --------------- OPERATIONS: Net investment income.................................................................. $ 126,640,661 $ 98,878,114 Net realized gain on investments and foreign currency transactions..................... 292,267,835 23,838,273 Net unrealized gain(loss) on investments and foreign currency translations............. 410,041,102 (230,571,359) --------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS........................ 828,949,598 (107,854,972) --------------- -------------- DIVIDENDS TO SHAREHOLDERS FROM: Net investment income.................................................................. (124,621,227) (96,126,295) Net realized gain from investment transactions......................................... (176,844,671) (98,311,584) --------------- -------------- TOTAL DIVIDENDS TO SHAREHOLDERS........................................................ (301,465,898) (194,437,879) --------------- -------------- CAPITAL TRANSACTIONS: Capital stock sold [8,486,525 and 22,611,559 shares, respectively]..................... 146,641,074 370,947,414 Reinvestment of dividend distributions [17,050,711 and 12,531,550 shares, respectively]......................................................................... 301,465,898 194,437,879 Capital stock repurchased [(11,612,102) and (4,617,224) shares, respectively].......... (195,926,134) (73,719,278) --------------- -------------- NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 252,180,838 491,666,015 --------------- -------------- TOTAL INCREASE IN NET ASSETS............................................................. 779,664,538 189,373,164 NET ASSETS: Beginning of year...................................................................... 3,481,540,299 3,292,167,135 --------------- -------------- End of year............................................................................ $ 4,261,204,837 $3,481,540,299 --------------- -------------- --------------- --------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. A8 FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC. HIGH YIELD BOND PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES December 31, 1995 ASSETS Investments, at value (cost: $354,568,957)............................ $ 361,288,048 Cash....................................... 632 Interest and dividends receivable.......... 5,586,015 Receivable for portfolio shares sold....... 1,576,000 -------------- Total Assets............................. 368,450,695 -------------- LIABILITIES Accrued expenses........................... 51,477 Payable to investment adviser.............. 489,831 -------------- Total Liabilities........................ 541,308 -------------- NET ASSETS................................... $ 367,909,387 -------------- -------------- Net assets were comprised of: Common stock, at $0.01 par value......... $ 471,654 Paid-in capital, in excess of par........ 384,457,545 -------------- 384,929,199 Distributions in excess of net investment income................................... (2,640,746) Accumulated net realized losses............ (21,098,157) Net unrealized appreciation................ 6,719,091 -------------- Net assets, December 31, 1995.............. $ 367,909,387 -------------- -------------- Net asset value per share of 47,165,429 outstanding shares of common stock (authorized 100,000,000 shares).......... $ 7.8004 -------------- -------------- STATEMENT OF OPERATIONS Year Ended December 31, 1995 INVESTMENT INCOME Dividends.................................. $ 704,709 Interest................................... 36,153,363 --------------- 36,858,072 --------------- EXPENSES Investment management fee.................. 1,845,783 Accounting fees............................ 103,280 Shareholders' reports...................... 78,409 Professional fees.......................... 17,800 Custodian expense -- net................... 7,782 Directors' expense......................... 2,729 Miscellaneous expenses..................... 488 S.E.C. fees................................ (106) --------------- 2,056,165 --------------- NET INVESTMENT INCOME........................ 34,801,907 --------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized loss on investments........... (14,399,977) Net unrealized gain on investments......... 33,692,744 --------------- NET GAIN ON INVESTMENTS...................... 19,292,767 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... $ 54,094,674 --------------- --------------- STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31 ------------------------------------ 1995 1994 ------------------ ---------------- OPERATIONS: Net investment income.................................................................. $ 34,801,907 $ 30,009,666 Net realized loss on investments....................................................... (14,399,977) (4,761,509) Net unrealized gain(loss) on investments............................................... 33,692,744 (34,417,342) ---------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS........................ 54,094,674 (9,169,185) ---------------- -------------- DIVIDENDS TO SHAREHOLDERS FROM: Net investment income.................................................................. (36,032,307) (30,650,298) Net realized gain from investment transactions......................................... 0 (228) ---------------- -------------- TOTAL DIVIDENDS TO SHAREHOLDERS........................................................ (36,032,307) (30,650,526) ---------------- -------------- CAPITAL TRANSACTIONS: Capital stock sold [4,596,182 and 7,836,280 shares, respectively]...................... 36,443,000 64,526,000 Reinvestment of dividend distributions [4,650,470 and 4,067,658 shares, respectively]......................................................................... 36,032,307 30,650,526 Capital stock repurchased [(3,656,896) and (3,976,156) shares, respectively]........... (28,853,000) (31,985,000) ---------------- -------------- NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 43,622,307 63,191,526 ---------------- -------------- TOTAL INCREASE IN NET ASSETS............................................................. 61,684,674 23,371,815 NET ASSETS: Beginning of year...................................................................... 306,224,713 282,852,898 ---------------- -------------- End of year............................................................................ $ 367,909,387 $ 306,224,713 ---------------- -------------- ---------------- --------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. A9 FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC. STOCK INDEX PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES December 31, 1995 ASSETS Investments, at value (cost: $726,828,799)............................ $1,034,546,771 Cash....................................... 388 Interest and dividends receivable.......... 2,009,493 Receivable for securities sold............. 104,888 Receivable for portfolio shares sold....... 593,387 Receivable for daily variation margin on open futures contracts (see Note 2)...... 42,000 -------------- Total Assets............................. 1,037,296,927 -------------- LIABILITIES Accrued expenses and other liabilities..... 17,953 Payable for securities purchased........... 5,143,518 Payable to investment adviser.............. 857,388 -------------- Total Liabilities........................ 6,018,859 -------------- NET ASSETS................................... $1,031,278,068 -------------- -------------- Net assets were comprised of: Common stock, at $0.01 par value......... $ 516,774 Paid-in capital, in excess of par........ 720,145,607 -------------- 720,662,381 Distributions in excess of net investment income................................... (317,155) Accumulated net realized gains............. 3,562,520 Net unrealized appreciation (depreciation) Securities............................... 307,717,972 Futures contracts........................ (347,650) -------------- Net assets, December 31, 1995.............. $1,031,278,068 -------------- -------------- Net asset value per share of 51,677,409 outstanding shares of common stock (authorized 100,000,000 shares).......... $ 19.9561 -------------- -------------- STATEMENT OF OPERATIONS Year Ended December 31, 1995 INVESTMENT INCOME Dividends (net of $107,942 foreign withholding tax)......................... $ 20,346,508 Interest................................... 1,720,583 --------------- 22,067,091 --------------- EXPENSES Investment management fee.................. 2,904,883 Shareholders' reports...................... 187,848 Accounting fees............................ 71,353 Professional fees.......................... 17,219 Custodian expense -- net................... 15,898 Directors' expense......................... 3,279 Miscellaneous expenses..................... 1,233 --------------- 3,201,713 --------------- NET INVESTMENT INCOME........................ 18,865,378 --------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain on investments -- Securities transactions.................. 4,372,198 Futures contracts........................ 7,787,530 --------------- Net realized gain on investments........... 12,159,728 --------------- Net unrealized gain (loss) on investments -- Securities............................ 226,745,682 Futures contracts........................ (862,800) --------------- Net unrealized gain on investments......... 225,882,882 --------------- NET GAIN ON INVESTMENTS...................... 238,042,610 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... $ 256,907,988 --------------- --------------- STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31 ------------------------------------ 1995 1994 ------------------ ---------------- OPERATIONS: Net investment income.................................................................. $ 18,865,378 $ 15,899,579 Net realized gain (loss) on investments................................................ 12,159,728 (811,766) Net unrealized gain(loss) on investments............................................... 225,882,882 (8,435,032) ---------------- -------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 256,907,988 6,652,781 ---------------- -------------- DIVIDENDS TO SHAREHOLDERS FROM: Net investment income.................................................................. (18,734,051) (15,754,398) Net realized gain from investment transactions......................................... (7,293,493) (958,203) ---------------- -------------- TOTAL DIVIDENDS TO SHAREHOLDERS........................................................ (26,027,544) (16,712,601) ---------------- -------------- CAPITAL TRANSACTIONS: Capital stock sold [7,147,197 and 4,553,644 shares, respectively]...................... 130,752,103 68,598,345 Reinvestment of dividend distributions [1,331,092 and 1,130,115 shares, respectively]......................................................................... 26,027,544 16,712,601 Capital stock repurchased [(1,230,332) and (1,718,830) shares, respectively]........... (20,916,230) (25,854,984) ---------------- -------------- NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 135,863,417 59,455,962 ---------------- -------------- TOTAL INCREASE IN NET ASSETS............................................................. 366,743,861 49,396,142 NET ASSETS: Beginning of year...................................................................... 664,534,207 615,138,065 ---------------- -------------- End of year............................................................................ $ 1,031,278,068 $ 664,534,207 ---------------- -------------- ---------------- --------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. A10 FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC. EQUITY INCOME PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES December 31, 1995 ASSETS Investments, at value (cost: $1,029,615,764).......................... $1,106,522,324 Cash....................................... 327 Interest and dividends receivable.......... 5,277,929 Receivable for securities sold............. 256,065 -------------- Total Assets............................. 1,112,056,645 -------------- LIABILITIES Accrued expenses........................... 37,511 Payable for securities purchased........... 967,161 Payable to investment adviser.............. 1,088,778 -------------- Total Liabilities........................ 2,093,450 -------------- NET ASSETS................................... $1,109,963,195 -------------- -------------- Net assets were comprised of: Common stock, at $0.01 par value......... $ 682,177 Paid-in capital, in excess of par........ 1,017,172,654 -------------- 1,017,854,831 Undistributed net investment income........ 1,279,672 Accumulated net realized gains............. 13,922,132 Net unrealized appreciation................ 76,906,560 -------------- Net assets, December 31, 1995.............. $1,109,963,195 -------------- -------------- Net asset value per share of 68,217,704 outstanding shares of common stock (authorized 100,000,000 shares).......... $ 16.2709 -------------- -------------- STATEMENT OF OPERATIONS Year Ended December 31, 1995 INVESTMENT INCOME Dividends (net of $104,796 foreign withholding tax)......................... $ 35,978,077 Interest................................... 8,258,536 --------------- 44,236,613 --------------- EXPENSES Investment management fee.................. 3,999,197 Shareholders' reports...................... 214,575 Accounting fees............................ 71,068 Custodian expense -- net................... 14,712 Professional fees.......................... 13,351 Directors' expense......................... 3,134 S.E.C. fees................................ 2,880 Miscellaneous expenses..................... 1,378 --------------- 4,320,295 --------------- NET INVESTMENT INCOME........................ 39,916,318 --------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on investments -- Securities transactions.................. 61,983,178 Futures contracts........................ (716,385) --------------- Net realized gain on investments........... 61,266,793 Net unrealized gain on investments......... 90,522,832 --------------- NET GAIN ON INVESTMENTS...................... 151,789,625 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... $ 191,705,943 --------------- --------------- STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31 ------------------------------------ 1995 1994 ------------------ ---------------- OPERATIONS: Net investment income.................................................................. $ 39,916,318 $ 29,929,976 Net realized gain on investments....................................................... 61,266,793 41,343,251 Net unrealized gain (loss) on investments.............................................. 90,522,832 (64,632,006) ---------------- ---------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 191,705,943 6,641,221 ---------------- ---------------- DIVIDENDS TO SHAREHOLDERS FROM: Net investment income.................................................................. (38,782,405) (29,421,933) Net realized gain from investment transactions......................................... (46,564,566) (44,325,396) ---------------- ---------------- TOTAL DIVIDENDS TO SHAREHOLDERS........................................................ (85,346,971) (73,747,329) ---------------- ---------------- CAPITAL TRANSACTIONS: Capital stock sold [4,803,598 and 16,514,586 shares, respectively]..................... 76,990,000 261,909,000 Reinvestment of dividend distributions [5,213,794 and 5,080,100 shares, respectively]......................................................................... 85,346,971 73,747,329 Capital stock repurchased [(1,152,259) and (746,813) shares, respectively]............. (18,404,000) (11,659,000) ---------------- ---------------- NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 143,932,971 323,997,329 ---------------- ---------------- TOTAL INCREASE IN NET ASSETS............................................................. 250,291,943 256,891,221 NET ASSETS: Beginning of year...................................................................... 859,671,252 602,780,031 ---------------- ---------------- End of year............................................................................ $ 1,109,963,195 $ 859,671,252 ---------------- ---------------- ---------------- ----------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. A11 FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC. EQUITY PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES December 31, 1995 ASSETS Investments, at value (cost: $3,003,199,288).......................... $3,802,800,150 Cash....................................... 114 Interest and dividends receivable.......... 7,563,838 Receivable for securities sold............. 8,368,268 Receivable for portfolio shares sold....... 1,112,768 -------------- Total Assets............................. 3,819,845,138 -------------- LIABILITIES Accrued expenses........................... 111,877 Payable for securities purchased........... 1,777,024 Payable to investment adviser.............. 4,145,541 Unrealized depreciation on foreign exchange contracts................................ 6,569 -------------- Total Liabilities........................ 6,041,011 -------------- NET ASSETS................................... $3,813,804,127 -------------- -------------- Net assets were comprised of: Common stock, at $0.01 par value......... $ 1,487,452 Paid-in capital, in excess of par........ 2,910,528,030 -------------- 2,912,015,482 Distributions in excess of net investment income................................... (3,492,970) Accumulated net realized gain.............. 105,687,322 Net unrealized appreciation on investments and foreign currency translations........ 799,594,293 -------------- Net assets, December 31, 1995.............. $3,813,804,127 -------------- -------------- Net asset value per share of 148,745,174 outstanding shares of common stock (authorized 200,000,000 shares).......... $ 25.6399 -------------- -------------- STATEMENT OF OPERATIONS Year Ended December 31, 1995 INVESTMENT INCOME Dividends (net of $668,015 foreign withholding tax)......................... $ 61,955,672 Interest................................... 27,142,094 --------------- 89,097,766 --------------- EXPENSES Investment management fee.................. 14,518,058 Shareholders' reports...................... 717,827 Accounting fees............................ 67,844 Professional fees.......................... 51,182 Custodian expense -- net................... 37,963 S.E.C. fees................................ 13,790 Directors' expense......................... 4,525 Miscellaneous expenses..................... 4,216 --------------- 15,415,405 --------------- NET INVESTMENT INCOME........................ 73,682,361 --------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCIES Net realized gain on investments........... 234,571,951 Net unrealized gain (loss) on investments and foreign currencies-- Securities............................... 553,129,317 Foreign currency translations............ (6,569) --------------- Net unrealized gain on investments and foreign currencies....................... 553,122,748 --------------- NET GAIN ON INVESTMENTS AND FOREIGN CURRENCIES................................... 787,694,699 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... $ 861,377,060 --------------- --------------- STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31 ----------------------------------- 1995 1994 --------------- ---------------- OPERATIONS: Net investment income ................................................................... $ 73,682,361 $ 57,699,769 Net realized gain on investments ........................................................ 234,571,951 84,713,465 Net unrealized gain (loss) on investments and foreign currency translations ............. 553,122,748 (76,779,978) --------------- --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .................................... 861,377,060 65,633,256 --------------- --------------- DIVIDENDS TO SHAREHOLDERS FROM: Net investment income ................................................................... (71,456,482) (56,757,732) Net realized gain from investment transactions .......................................... (132,219,093) (106,046,594) --------------- --------------- TOTAL DIVIDENDS TO SHAREHOLDERS ......................................................... (203,675,575) (162,804,326) --------------- --------------- CAPITAL TRANSACTIONS: Capital stock sold [15,687,254 and 19,167,446 shares, respectively] ..................... 374,478,697 412,393,503 Reinvestment of dividend distributions [8,038,373 and 7,934,974 shares, respectively] .......................................................................... 203,675,575 162,804,326 Capital stock repurchased [(1,673,110) and (2,170,186) shares, respectively] ............ (39,823,647) (46,752,467) --------------- --------------- NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS .......................... 538,330,625 528,445,362 --------------- --------------- TOTAL INCREASE IN NET ASSETS .............................................................. 1,196,032,110 431,274,292 NET ASSETS: Beginning of year ....................................................................... 2,617,772,017 2,186,497,725 --------------- --------------- End of year ............................................................................. $ 3,813,804,127 $ 2,617,772,017 --------------- --------------- --------------- ---------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52 A12 FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC. PRUDENTIAL JENNISON STATEMENT OF ASSETS AND LIABILITIES December 31, 1995 ASSETS Investments, at value (cost: $62,811,423)............................. $ 66,855,842 Cash....................................... 666 Interest and dividends receivable.......... 46,157 Receivable for securities sold............. 169,111 Receivable for portfolio shares sold....... 430,000 -------------- Total Assets............................. 67,501,776 -------------- LIABILITIES Accrued expenses........................... 31,994 Payable for securities purchased........... 4,310,619 Payable to investment adviser.............. 68,593 -------------- Total Liabilities........................ 4,411,206 -------------- NET ASSETS................................... $ 63,090,570 -------------- -------------- Net assets were comprised of: Common stock, at $0.01 par value......... $ 50,284 Paid-in capital, in excess of par........ 58,830,254 -------------- 58,880,538 Undistributed net investment income........ 35,015 Accumulated net realized gains............. 130,598 Net unrealized appreciation................ 4,044,419 -------------- Net assets, December 31, 1995.............. $ 63,090,570 -------------- -------------- Net asset value per share of 5,028,425 outstanding shares of common stock (authorized 50,000,000 shares)........... $ 12.5468 -------------- -------------- STATEMENT OF OPERATIONS For the Period April 25, 1995 (Commencement of Business) to December 31, 1995 INVESTMENT INCOME Dividends (net of $1,840 foreign withholding tax)......................... $ 129,428 Interest................................... 83,481 --------------- 212,909 --------------- EXPENSES Investment management fee.................. 118,016 Accounting fees............................ 20,964 Custodian expense -- net................... 18,469 Shareholders' reports...................... 7,755 Professional fees.......................... 3,530 Directors' expense......................... 1,622 --------------- 170,356 --------------- NET INVESTMENT INCOME........................ 42,553 --------------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain on investments........... 130,598 Net unrealized gain on investments......... 4,044,419 --------------- NET GAIN ON INVESTMENTS...................... 4,175,017 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... $ 4,217,570 --------------- --------------- STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD APRIL 25, 1995 (COMMENCEMENT OF BUSINESS) TO DECEMBER 31, 1995 -------------------------- OPERATIONS: Net investment income ............................................................. $ 42,553 Net realized gain on investments .................................................. 130,598 Net unrealized gain on investments ................................................ 4,044,419 ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .............................. 4,217,570 ------------ DIVIDENDS TO SHAREHOLDERS FROM: Net investment income ............................................................. (7,538) ------------ CAPITAL TRANSACTIONS: Initial capitalization [990,000 shares] ........................................... 9,900,000 Capital stock sold [4,215,890 shares] ............................................. 51,219,000 Reinvestment of dividend distributions [667 shares] ............................... 7,538 Capital stock repurchased [(188,132) shares] ...................................... (2,346,000) ------------ NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS .................... 58,780,538 ------------ TOTAL INCREASE IN NET ASSETS ........................................................ 62,990,570 NET ASSETS: Beginning of year ................................................................. *100,000 ------------ End of year ....................................................................... $ 63,090,570 ------------ ------------
*Prior to April 25, 1995 (commencement of business), the Portfolio issued 10,000 shares to The Prudential for $100,000. SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. A13 FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC. SMALL CAPITALIZATION STOCK STATEMENT OF ASSETS AND LIABILITIES December 31, 1995 ASSETS Investments, at value (cost: $47,793,195)............................. $ 50,390,130 Interest and dividends receivable.......... 36,959 Receivable for securities sold............. 340,996 Receivable for portfolio shares sold....... 151,000 Receivable for daily variation margin on open futures contracts (see Note 2)...... 16,780 -------------- Total Assets............................. 50,935,865 -------------- LIABILITIES Bank overdraft............................. 125 Accrued expenses........................... 10,003 Payable for securities purchased........... 3,420,232 Payable to investment adviser.............. 38,579 -------------- Total Liabilities........................ 3,468,939 -------------- NET ASSETS................................... $ 47,466,926 -------------- -------------- Net assets were comprised of: Common stock, at $0.01 par value......... $ 40,113 Paid-in capital, in excess of par........ 44,389,420 -------------- 44,429,533 Undistributed net investment income........ 32,633 Accumulated net realized gains............. 396,600 Net unrealized appreciation Securities................................. 2,596,935 Futures contracts.......................... 11,225 -------------- Net assets, December 31, 1995.............. $ 47,466,926 -------------- -------------- Net asset value per share of 4,011,270 outstanding shares of common stock (authorized 50,000,000 shares)........... $ 11.8334 -------------- -------------- STATEMENT OF OPERATIONS For the Period April 25, 1995 (Commencement of Business) to December 31, 1995 INVESTMENT INCOME Dividends.................................. $ 173,046 Interest................................... 128,246 --------------- 301,292 --------------- EXPENSES Investment management fee.................. 72,904 Accounting fees............................ 24,836 Custodian expense -- net................... 22,778 Shareholders' reports...................... 2,875 Directors' expense......................... 1,622 Professional fees.......................... 758 --------------- 125,773 --------------- NET INVESTMENT INCOME........................ 175,519 --------------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain on investments -- Securities transactions.................. 735,017 Futures contracts........................ 66,230 --------------- Net realized gain on investments........... 801,247 --------------- Net unrealized gain on investments -- Securities............................... 2,596,935 Futures contracts........................ 11,225 --------------- Net unrealized gain on investments......... 2,608,160 --------------- NET GAIN ON INVESTMENTS...................... 3,409,407 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... $ 3,584,926 --------------- --------------- STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD APRIL 25, 1995 (COMMENCEMENT OF BUSINESS) TO DECEMBER 31, 1995 ---------------------------- OPERATIONS: Net investment income........................................................................... $ 175,519 Net realized gain on investments................................................................ 801,247 Net unrealized gain on investments.............................................................. 2,608,160 ---------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................................ 3,584,926 ---------------- DIVIDENDS TO SHAREHOLDERS FROM: Net investment income........................................................................... (142,886) Net realized gain from investment transactions.................................................. (404,647) ---------------- TOTAL DIVIDENDS TO SHAREHOLDERS................................................................. (547,533) ---------------- CAPITAL TRANSACTIONS: Initial capitalization [990,000 shares]......................................................... 9,900,000 Capital stock sold [3,181,402 shares]........................................................... 36,389,000 Reinvestment of dividend distributions [46,817 shares].......................................... 547,533 Capital stock repurchased [(216,949) shares].................................................... (2,507,000) ---------------- NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS.................................. 44,329,533 ---------------- TOTAL INCREASE IN NET ASSETS...................................................................... 47,366,926 NET ASSETS: Beginning of year............................................................................... *100,000 ---------------- End of year..................................................................................... $ 47,466,926 ---------------- ----------------
*Prior to April 25, 1995 (commencement of business), the Portfolio issued 10,000 shares to The Prudential for $100,000. SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. A14 FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC. GLOBAL PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES December 31, 1995 ASSETS Investments, at value (cost: $338,204,955)............................ $ 380,896,625 Foreign currency, at value (cost: $13,535,659)............................. 13,526,107 Cash....................................... 6,836 Dividends and interest receivable.......... 358,772 Forward foreign exchange contracts receivable............................... 3,237,470 Receivable for securities sold............. 6,143,019 Other assets............................... 217,575 -------------- Total Assets............................. 404,386,404 -------------- LIABILITIES Accrued expenses........................... 1,099,231 Payable for securities purchased........... 2,424,949 Payable to investment adviser.............. 748,469 Payable for portfolio shares redeemed...... 14,221 -------------- Total Liabilities........................ 4,286,870 -------------- NET ASSETS................................... $ 400,099,534 -------------- -------------- Net assets were comprised of: Common stock, at $0.01 par value......... $ 257,577 Paid-in capital, in excess of par........ 353,239,217 -------------- 353,496,794 Distributions in excess of net investment income................................... (4,668,585) Accumulated net realized gains............. 5,349,172 Net unrealized appreciation on securities and foreign currency transactions........ 45,922,153 -------------- Net assets, December 31, 1995.............. $ 400,099,534 -------------- -------------- Net asset value per share of 25,757,706 outstanding shares of common stock (authorized 100,000,000 shares).......... $ 15.5332 -------------- -------------- STATEMENT OF OPERATIONS December 31, 1995 INVESTMENT INCOME Dividends (net of $501,975 foreign withholding tax)......................... $ 5,245,748 Interest................................... 314,961 --------------- 5,560,709 --------------- EXPENSES Investment management fee.................. 2,806,038 Custodian expense -- net................... 973,290 Accounting fees............................ 144,789 Shareholders' reports...................... 7,653 Miscellaneous expenses..................... 4,198 Directors' expense......................... 2,031 Professional fees.......................... 1,760 --------------- 3,939,759 --------------- NET INVESTMENT INCOME........................ 1,620,950 --------------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCIES Net realized gain on investments and foreign currency transactions............ 13,763,168 Net unrealized gain on investments and foreign currency translations............ 39,034,318 --------------- NET GAIN ON INVESTMENTS AND FOREIGN CURRENCIES................................... 52,797,486 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... $ 54,418,436 --------------- --------------- STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31 ------------------------------ 1995 1994 ------------- ------------ OPERATIONS: Net investment income ........................................................... 1,620,950 474,722 Net realized gain (loss) on investments and foreign currency transactions ....... 13,763,168 (578,250) Net unrealized gain (loss) on investments and foreign currency translations ..... 39,034,318 (16,334,560) ------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ................. 54,418,436 (16,438,088) ------------- ------------- DIVIDENDS TO SHAREHOLDERS FROM: Net investment income ........................................................... (5,982,859) (499,141) Net realized gain from investment transactions .................................. (7,583,630) (394,438) ------------- ------------- TOTAL DIVIDENDS TO SHAREHOLDERS ................................................. (13,566,489) (893,579) ------------- ------------- CAPITAL TRANSACTIONS: Capital stock sold [2,817,622 and 17,513,960 shares, respectively] .............. 42,294,857 254,421,899 Reinvestment of dividend distributions [872,571 and 64,991 shares, respectively] 13,566,489 893,579 Capital stock repurchased [(2,794,423) and (751,122) shares, respectively] ...... (41,558,737) (10,781,034) Initial capitalization repurchased [(48,679) and (735,674) shares, respectively] (789,000) (10,558,000) ------------- ------------- NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS .................. 13,513,609 233,976,444 ------------- ------------- TOTAL INCREASE IN NET ASSETS ...................................................... 54,365,556 216,644,777 NET ASSETS: Beginning of year ............................................................... 345,733,978 129,089,201 ------------- ------------- End of year ..................................................................... $ 400,099,534 $ 345,733,978 ------------- ------------- ------------- -------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. A15 FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC. NATURAL RESOURCES PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES December 31, 1995 ASSETS Investments, at value (cost: $251,010,642)............................ $ 293,115,218 Cash....................................... 330 Interest and dividends receivable.......... 528,400 -------------- Total Assets............................. 293,643,948 -------------- LIABILITIES Accrued expenses........................... 24,887 Outstanding call options written, at value (premiums received: $163,675)............ 132,000 Payable to investment adviser.............. 315,432 -------------- Total Liabilities........................ 472,319 -------------- NET ASSETS................................... $ 293,171,629 -------------- -------------- Net assets were comprised of: Common stock, at $0.01 par value......... $ 169,740 Paid-in capital, in excess of par........ 243,474,453 -------------- 243,644,193 Distributions in excess of net investment income................................... (41,370) Accumulated net realized gains............. 7,432,593 Net unrealized appreciation on investments and foreign currency translations........ 42,136,213 -------------- Net assets, December 31, 1995.............. $ 293,171,629 -------------- -------------- Net asset value per share of 16,974,000 outstanding shares of common stock (authorized 100,000,000 shares).......... $ 17.2718 -------------- -------------- STATEMENT OF OPERATIONS Year Ended December 31, 1995 INVESTMENT INCOME Dividends (net of $92,277 foreign withholding tax)......................... $ 3,977,254 Interest................................... 624,350 --------------- 4,601,604 --------------- EXPENSES Investment management fee.................. 1,183,826 Shareholders' reports...................... 58,258 Accounting fees............................ 52,795 Professional fees.......................... 7,376 Custodian expense -- net................... 3,554 Directors' expense......................... 2,668 S.E.C. fees................................ 777 Miscellaneous expenses..................... 363 --------------- 1,309,617 --------------- NET INVESTMENT INCOME........................ 3,291,987 --------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCIES Net realized gain (loss) on investments and foreign currencies-- Securities transactions.................. 19,566,210 Options written.......................... 191,132 Foreign currency transactions............ (22,895) --------------- Net realized gain on investments and foreign currencies....................... 19,734,447 --------------- Net unrealized gain (loss) on investments and foreign currencies-- Securities............................... 39,030,629 Options written.......................... 31,675 Foreign currency translations............ (38) --------------- Net unrealized gain on investments and foreign currencies....................... 39,062,266 --------------- NET GAIN ON INVESTMENTS AND FOREIGN CURRENCIES................................... 58,796,713 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... $ 62,088,700 --------------- --------------- STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31 -------------------------------- 1995 1994 ------------- ------------- OPERATIONS: Net investment income ..................................................................... $ 3,291,987 $ 2,229,099 Net realized gain on investments and foreign currency transactions ........................ 19,734,447 4,072,054 Net unrealized gain(loss) on investments and foreign currency translations ................ 39,062,266 (16,859,455) ------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ........................... 62,088,700 (10,558,302) ------------- ------------- DIVIDENDS TO SHAREHOLDERS FROM: Net investment income ..................................................................... (3,370,234) (2,145,214) Net realized gain from investment transactions ............................................ (13,348,694) (4,370,759) ------------- ------------- TOTAL DIVIDENDS TO SHAREHOLDERS ........................................................... (16,718,928) (6,515,973) ------------- ------------- CAPITAL TRANSACTIONS: Capital stock sold [1,205,152 and 5,475,055 shares, respectively] ......................... 19,186,000 85,097,000 Reinvestment of dividend distributions [981,450 and 446,624 shares, respectively] ......... 16,718,928 6,515,973 Capital stock repurchased [(948,328) and (393,177) shares, respectively] .................. (15,377,000) (6,107,000) ------------- ------------- NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS ............................ 20,527,928 85,505,973 ------------- ------------- TOTAL INCREASE IN NET ASSETS ................................................................ 65,897,700 68,431,698 NET ASSETS: Beginning of year ......................................................................... 227,273,929 158,842,231 ------------- ------------- End of year ............................................................................... $ 293,171,629 $ 227,273,929 ------------- ------------- ------------- -------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. A16 THE PRUDENTIAL SERIES FUND, INC. SCHEDULE OF INVESTMENTS MONEY MARKET PORTFOLIO DECEMBER 31, 1995 PRINCIPAL SHORT-TERM INVESTMENTS -- 99.5% AMOUNT VALUE ------------- -------------- BANK-RELATED INSTRUMENTS -- 12.2% Bank of Montreal, C.D., 5.800%, 01/22/96............................. $ 10,000,000 $ 10,000,000 Banque Nationale De Paris, C.D., 5.770%, 01/29/96............................. 5,000,000 4,999,815 5.780%, 01/17/96............................. 2,000,000 1,999,978 5.800%, 02/02/96............................. 7,000,000 7,000,000 Bayerische Hypotheken, C.D., 5.780%, 01/16/96............................. 4,000,000 3,999,931 5.800%, 01/16/96............................. 5,000,000 4,999,987 5.820%, 01/16/96............................. 15,000,000 15,000,058 Commerzbank, C.D., 7.100%, 02/02/96............................. 2,000,000 2,000,733 7.320%, 01/24/96............................. 1,000,000 1,000,397 National Westminster Bank, C.D. PLC, 5.810%, 01/12/96............................. 12,000,000 12,000,000 Societe Generale, C.D., 5.800%, 02/01/96............................. 12,000,000 12,000,000 -------------- 75,000,899 -------------- COMMERCIAL PAPER -- 57.7% American Express Credit Corp., 5.600%, 02/09/96............................. 5,000,000 4,970,444 5.650%, 02/09/96............................. 1,315,000 1,307,157 American Honda Finance Corp., 5.750%, 01/17/96............................. 2,000,000 1,995,208 5.800%, 01/30/96-02/15/96.................... 6,000,000 5,960,044 5.850%, 01/22/96............................. 1,000,000 996,750 Aristar, Inc., 5.770%, 02/05/96............................. 1,000,000 994,551 Associates Corp. of North America, 4.500%, 09/30/96, Tranche #TR0076............ 2,000,000 1,981,016 4.750%, 08/01/96............................. 1,500,000 1,490,086 5.680%, 02/08/96............................. 10,000,000 9,941,622 5.710%, 02/02/96............................. 11,610,000 11,552,914 Barnett Banks, Inc., 5.800%, 01/19/96............................. 5,000,000 4,986,306 Bradford & Bingley Building Society, 5.520%, 03/05/96............................. 4,000,000 3,961,360 5.740%, 01/17/96............................. 2,000,000 1,995,217 Caterpillar Financial Services Corp., 5.660%, 02/21/96............................. 2,000,000 1,984,278 5.670%, 02/27/96............................. 2,000,000 1,982,360 Chase Manhattan Corp., 5.670%, 02/12/96............................. 5,000,000 4,967,713 CIT Group Holdings, Inc., 5.670%, 02/05/96............................. 4,000,000 3,978,580 5.680%, 02/07/96............................. 10,000,000 9,943,200 5.780%, 01/25/96............................. 11,270,000 11,228,382 Countrywide Funding Corp., 6.100%, 01/04/96-01/08/96.................... 17,585,000 17,570,230 Dean Witter Discover and Company, 5.700%, 02/08/96-02/14/96.................... 7,000,000 6,956,142 Duracell Inc., 5.950%, 01/02/96............................. 1,124,000 1,124,000 Finova Capital Corp., 5.970%, 01/05/96-01/08/96.................... 8,000,000 7,994,030 6.000%, 01/12/96............................. 5,640,000 5,630,600 First Union Corp., 5.710%, 02/09/96............................. 13,000,000 12,921,646 DECEMBER 31, 1995 PRINCIPAL SHORT-TERM INVESTMENTS (CONTINUED) AMOUNT VALUE ------------- -------------- Ford Motor Credit Co., 5.670%, 02/13/96............................. $ 1,000,000 $ 993,385 5.680%, 02/08/96............................. 15,000,000 14,912,433 5.710%, 02/01/96............................. 2,305,000 2,294,032 Ford Motor Credit Corp., 5.530%, 03/04/96............................. 3,000,000 2,971,428 General Electric Capital Corp., 5.580%, 04/09/96-04/11/96.................... 13,000,000 12,799,430 5.660%, 02/08/96............................. 10,000,000 9,941,828 General Motors Acceptance Corp., 5.730%, 02/06/96............................. 7,919,000 7,874,885 5.750%, 02/09/96-02/20/96.................... 11,500,000 11,412,632 GTE Corp., 5.950%, 01/30/96............................. 2,000,000 1,990,744 Hanson Finance, PLC, 5.700%, 01/30/96-02/08/96.................... 15,000,000 14,924,792 Heinz (H.J.) Company, 5.580%, 02/12/96............................. 7,000,000 6,955,515 Heller Financial, Inc., 5.900%, 01/11/96............................. 4,000,000 3,994,100 International Business Machines Credit, Corp., 5.590%, 03/05/96............................. 22,000,000 21,784,786 Merrill Lynch & Co. Inc, 5.760%, 01/31/96............................. 1,000,000 995,360 5.600%, 03/29/96............................. 2,000,000 1,972,933 5.640%, 02/29/96............................. 10,000,000 9,909,133 5.720%, 01/31/96............................. 3,000,000 2,986,177 Mitsubishi International Corp., 5.600%, 02/27/96............................. 1,500,000 1,486,933 5.780%, 01/31/96............................. 1,700,000 1,692,085 %Money Market Auto Loan Trust 1990-1, 6.085%, 01/15/96............................. 4,120,000 4,120,218 Morgan Stanley Group, Inc., 5.750%, 01/25/96............................. 11,000,000 10,959,590 National Westminster Bank, PLC, 5.800%, 01/31/96............................. 10,000,000 10,000,000 NYNEX Corporation, 5.750%, 02/06/96............................. 2,850,000 2,834,068 5.800%, 01/19/96............................. 1,000,000 997,261 5.820%, 01/09/96-01/16/96.................... 5,000,000 4,992,078 PNC Funding Corp., 5.730%, 02/08/96............................. 2,000,000 1,988,222 5.710%, 03/01/96............................. 2,000,000 1,981,284 Preferred Receivables Funding Corp., 5.500%, 03/07/96............................. 4,575,000 4,529,568 5.750%, 02/06/96............................. 3,825,000 3,803,617 Riverwood Funding Corp., 5.680%, 02/16/96............................. 1,000,000 992,900 5.700%, 02/06/96............................. 3,000,000 2,983,375 5.710%, 02/07/96............................. 1,000,000 994,290 Robins (A.H.) Co., Inc., 5.800%, 01/26/96............................. 4,000,000 3,984,533 Sears Roebuck Acceptance Corp., 5.720%, 02/26/96............................. 2,000,000 1,982,522 5.700%, 02/06/96............................. 4,000,000 3,977,833 Smith Barney, 5.740%, 01/30/96............................. 5,000,000 4,977,678 Sumitomo Corp. of America, 5.900%, 01/22/96............................. 3,175,000 3,164,593 B1 MONEY MARKET PORTFOLIO (CONTINUED) DECEMBER 31, 1995 PRINCIPAL SHORT-TERM INVESTMENTS (CONTINUED) AMOUNT VALUE ------------- ------------- Transamerica Financial Corp., 5.700%, 02/05/96............................. $ 1,700,000 $ 1,690,848 WCP Funding, Inc., 5.750%, 01/24/96............................. 1,000,000 996,486 Whirlpool Financial Corp., 5.710%, 03/04/96............................. 9,000,000 8,911,495 5.800%, 01/29/96-01/30/96.................... 2,000,000 1,991,139 -------------- 353,160,045 -------------- TERM NOTES -- 24.6% American Express Centurion Bank, %5.938%, 02/16/96, Tranche #TR00088.......... 1,000,000 999,975 Associates Corp. of North America, 8.800%, 03/01/96............................. 3,600,000 3,613,799 Bank of America, 5.79%, 01/16/96, Tranche #TR00034............ 2,000,000 1,999,992 Bank One Indianapolis N.A., 7.180%, 02/05/96, Tranche #TR00002........... 1,000,000 1,000,365 Bayerische Hypotheken, 6.376%, 04/24/96, Tranche #TR00005........... 3,000,000 2,999,328 Beneficial Corp., 5.25%, 01/23/96, Tranche #TR00776............ 3,000,000 2,999,532 BP America, Inc., 10.150%, 03/15/96............................ 1,000,000 1,006,580 CIT Group Holdings, Inc., 4.750%, 03/15/96............................. 1,000,000 996,571 8.875%, 06/15/96............................. 1,800,000 1,822,135 Federal National Mortgage Association, 5.755%, 09/27/96............................. 10,000,000 10,000,000 First Union National Bank of North Carolina, 5.800%, 01/31/96, Tranche #TR00037........... 8,000,000 8,000,000 Ford Motor Credit Co., 8.250%, 05/15/96............................. 2,500,000 2,517,966 8.875%, 03/15/96............................. 2,000,000 2,008,408 General Electric Capital Corp., 6.950%, 03/01/96, Tranche #TR00649........... 4,000,000 4,001,974 General Motors Acceptance Corp., 4.800%, 01/16/96, Tranche #TR00001........... 1,000,000 999,473 8.250%, 08/01/96............................. 1,500,000 1,518,456 8.800%, 07/03/96, Tranche #TR00612........... 1,000,000 1,012,522 %5.975%, 02/21/96, Tranche #TR00407.......... 1,000,000 1,000,146 6.300%, 02/02/96............................. 2,000,000 2,000,418 8.650%, 05/29/96, Tranche #TR00579........... 5,500,000 5,557,531 Goldman Sachs Group, L.P., %5.813%, 01/25/97, Tranche #TR00023.......... 2,000,000 2,000,000 %5.813%, 01/25/97, Tranche #TR00017.......... 28,000,000 28,000,000 International Lease Finance Corp., 6.625%, 06/01/96............................. 1,000,000 1,002,359 International Lease Finance Corp., 5.400%, 04/01/96, Tranche #TR00139........... 1,000,000 996,648 DECEMBER 31, 1995 PRINCIPAL SHORT-TERM INVESTMENTS (CONTINUED) AMOUNT VALUE ------------- ------------ Merrill Lynch & Co., Inc., %5.977%, 10/02/96, Tranche #TR00195.......... $ 11,000,000 $ 10,997,604 9.000%, 03/22/96............................. 1,000,000 1,006,863 Morgan Stanley Group, Inc., %6.062%, 01/15/96, Tranche #TR00100.......... 4,000,000 4,000,000 %6.070%, 02/14/96, Tranche #TR00102.......... 7,000,000 7,000,000 NationsBank of Texas, N.A., 7.000%, 02/06/96, Tranche #TR00050........... 8,000,000 8,000,146 7.300%, 01/26/96, Tranche #TR00043........... 5,000,000 5,001,365 7.550%, 01/09/96, Tranche #TR00037........... 3,000,000 3,000,456 SMM Trust 1995-Q, %5.938%, 01/15/96............................ 19,000,000 18,998,189 Student Loan Marketing Association, %5.700%, 05/14/96............................ 3,000,000 2,998,345 Westdeutsche Landesbank, 6.850%, 03/01/96, Tranche #TR00021........... 3,000,000 3,000,764 -------------- 152,057,910 -------------- PROMISSORY NOTES -- 2.0% 75 State Street Capital Corp., 6.000%, 01/19/96............................. 5,000,000 4,985,833 Lehman Brothers Holdings, Inc., %6.142%, 05/29/96............................ 7,000,000 7,000,000 -------------- 11,985,833 -------------- U. S. GOVERNMENT & AGENCY OBLIGATIONS -- 3.0% Federal Home Loan Bank, 6.050%, 06/13/96............................. 4,000,000 4,001,050 Federal Home Loan Mortgage Corp., 5.645%, 08/15/96............................. 10,000,000 9,984,266 Federal National Mortgage Association, 5.710%, 06/10/96............................. 4,000,000 3,994,937 -------------- 17,980,253 -------------- TOTAL SHORT-TERM INVESTMENTS.................................... 610,184,940 -------------- OTHER ASSETS -- 0.5% (net of liabilities).......................................... 3,134,700 -------------- TOTAL NET ASSETS -- 100.0%...................................... $ 613,319,640 -------------- -------------- The following abbreviations are used in portfolio descriptions: C.D. Certificates of Deposit PLC Public Limited Company (British Corporation) %Indicates a variable rate security. SEE NOTES TO FINANCIAL STATEMENTS ON PAGES C48 THROUGH C52. B2 DIVERSIFIED BOND PORTFOLIO DECEMBER 31, 1995 PAR MARKET LONG-TERM BONDS -- 95.0% VALUE VALUE ------------- -------------- FINANCIAL -- 18.7% Advanta Mortgage Loan Trust, Series 1994-3 8.490%, 01/25/26............................. $ 8,500,000 $ 8,930,313 Advanta National Bank, C.D., 6.260%, 09/01/97............................. 5,000,000 5,045,000 Allmerica Finance, 7.625%, 10/15/25............................. 4,000,000 4,202,760 Aristar, Inc., 5.750%, 07/15/98............................. 2,000,000 2,004,940 7.500%, 07/01/99............................. 2,000,000 2,105,140 Associates Corp. of North America, 8.375%, 01/15/98............................. 500,000 526,905 %Baybanks, Inc., 5.812%, 09/30/97............................. 5,000,000 4,991,200 Chase Manhattan Corp., 8.000%, 06/15/99............................. 2,000,000 2,134,680 Chemical Bank, 6.625%, 08/15/05............................. 2,000,000 2,046,960 Chrysler Financial Corp., 9.500%, 12/15/99............................. 5,000,000 5,619,400 Citicorp, M.T.N. 8.500%, 02/24/97, Tranche #TR00128........... 3,000,000 3,094,650 Enterprise Rent-A-Car USA Finance Co., M.T.N., **7.875%, 03/15/98, Tranche #TR00003......... 5,000,000 5,188,125 **8.750%, 12/15/99, Tranche #TR00001......... 3,000,000 3,260,700 **Equitable Life Assurance Society, 6.950%, 12/01/05............................. 8,500,000 8,622,188 Ford Motor Credit Co., 6.250%, 02/26/98............................. 3,000,000 3,044,730 6.375%, 10/06/00............................. 4,000,000 4,072,400 General Motors Acceptance Corp., 8.400%, 10/15/99............................. 3,700,000 4,018,570 General Motors Acceptance Corp., M.T.N., 7.500%, 11/04/97, Tranche #TR00598........... 2,000,000 2,066,320 Los Angeles County, California, MBIA Insured, Zero Coupon, 06/30/08........................ 15,000,000 6,565,500 Mellon Financial Co., 6.500%, 12/01/97............................. 2,000,000 2,032,140 **Nationwide CSN Trust, 9.875%, 02/15/25............................. 5,000,000 5,782,950 Orion Capital Corp., 9.125%, 09/01/02............................. 8,844,000 9,989,740 **Potomac Capital Investment Corp., M.T.N., 6.190%, 04/28/97, Series B................... 3,500,000 3,519,688 **Principal Mutual Life Insurance, 7.875%, 03/01/24............................. 5,000,000 5,101,750 Santander Financial Issuances, Inc., 7.250%, 11/01/15............................. 2,500,000 2,560,700 Sears Roebuck Acceptance Corp., 6.750%, 09/15/05............................. 10,000,000 10,371,200 Sears Roebuck Acceptance Corp., M.T.N., 6.340%, 10/12/00, Tranche #TR00038........... 3,000,000 3,047,670 DECEMBER 31, 1995 PAR MARKET LONG-TERM BONDS (CONTINUED) VALUE VALUE ------------- -------------- Union Bank of Finland, Ltd., 5.250%, 06/15/96............................. $ 3,000,000 $ 2,987,340 -------------- 122,933,658 -------------- FOREIGN -- 12.9% African Development Bank, 6.875%, 10/15/15............................. 5,000,000 5,151,350 Australia & New Zealand Banking Group, Ltd., 6.250%, 02/01/04............................. 3,000,000 3,000,870 **Banco de Commercio Exterior de Columbia, SA, M.T.N., 8.625%, 06/02/00, Tranche #TR00001........... 2,000,000 2,056,000 **Banco Ganadero, SA, M.T.N., 9.750%, 08/26/99, Tranche #TR00001........... 4,100,000 4,202,500 Banco Nacional de Comercio Exterior, 7.500%, 07/01/00............................. 5,000,000 4,350,000 Central Puerto and Cent Neuquen, SA, 10.750%, 11/02/97............................ 3,000,000 3,052,500 **Compania Sud Americana de Vapores, SA, 7.375%, 12/08/03............................. 3,000,000 2,955,000 **Financiera Energetica Nacional, SA, M.T.N. 9.000%, 11/08/99............................. 1,750,000 1,835,312 Hydro-Quebec, 8.050%, 07/07/24............................. 5,000,000 5,708,800 Kansallis-Osake Pankki, N.Y., **%8.650%, 12/29/49.......................... 5,000,000 5,312,500 10.000%, 05/01/02............................ 5,000,000 5,982,200 National Australia Bank, Ltd., 9.700%, 10/15/98............................. 1,700,000 1,868,164 Nippon Telegraph & Telephone Corp., 9.500%, 07/27/98............................. 1,800,000 1,965,852 Nova Scotia, Province of Canada, 8.875%, 07/01/19............................. 3,000,000 3,640,800 Ontario, Province of Canada, 15.750%, 03/15/12............................ 3,475,000 4,059,565 **%Petroleos Mexicanos, 6.812%, 03/08/99............................. 2,500,000 2,212,500 **Petroliam Nasional Berhad, 7.125%, 08/15/05............................. 5,000,000 5,284,600 Quebec, Province of Canada, 7.125%, 02/09/24............................. 5,250,000 5,279,557 Republic of Columbia, 7.250%, 02/23/04............................. 2,500,000 2,398,100 8.750%, 10/06/99............................. 1,750,000 1,849,960 Republic of South Africa, 9.625%, 12/15/99............................. 4,750,000 5,123,208 Saskatchewan, Province of Canada, 8.000%, 07/15/04............................. 4,000,000 4,458,880 )United States of Mexico with Rights, 6.250%, 12/31/19, Series B................... 4,000,000 2,620,000 -------------- 84,368,218 -------------- B3 DIVERSIFIED BOND PORTFOLIO (CONTINUED) DECEMBER 31, 1995 PAR MARKET LONG-TERM BONDS (CONTINUED) VALUE VALUE ------------- ------------- INDUSTRIAL -- 40.1% AMR Corp., 9.000%, 08/01/12............................. $ 9,000,000 $ 10,149,930 Arkla, Inc., M.T.N., 9.320%, 12/18/00, Tranche #TR00043........... 2,000,000 2,180,960 9.380%, 03/15/96, Tranche #TR00018........... 1,300,000 1,306,851 Auburn Hills Trust, 12.000%, 05/01/20............................ 10,000,000 15,737,600 Boise Cascade Corp., 9.875%, 02/15/01............................. 1,000,000 1,103,070 Canadian Pacific Forest Products Ltd., 10.250%, 01/15/03............................ 4,000,000 4,682,960 Columbia Gas Systems, Inc., 7.620%, 11/28/25............................. 6,500,000 6,616,935 Columbia/HCA Healthcare Corp., 6.910%, 06/15/05............................. 10,000,000 10,447,400 7.050%, 12/01/27............................. 2,000,000 2,013,140 Comsat Corp., 8.125%, 04/01/04............................. 4,000,000 4,470,120 **Continental Cablevision, Inc., 8.300%, 05/15/06............................. 3,000,000 3,011,250 Crane Co., 7.250%, 06/15/99............................. 3,000,000 3,100,680 Delta Air Lines, Inc., 9.250%, 03/15/22............................. 9,000,000 10,631,250 9.875%, 05/15/00............................. 6,000,000 6,783,960 Delta Air Lines, Inc., M.T.N., 7.790%, 12/01/98............................. 1,000,000 1,037,710 8.380%, 06/12/98, Tranche #TR00017........... 2,000,000 2,086,700 Federal Express Corp., 9.650%, 06/15/12............................. 3,000,000 3,702,390 Federated Dept Stores, 8.125%, 10/15/02............................. 8,000,000 8,040,000 10.000%, 02/15/01............................ 3,000,000 3,240,000 Fleming Companies, Inc., 10.625%, 12/15/01............................ 3,500,000 3,395,000 J.C. Penney Co., Inc., 9.750%, 06/15/21............................. 6,400,000 7,731,968 News America Holdings, Inc., 7.500%, 03/01/00............................. 6,000,000 6,310,500 Noble Affiliates, Inc., 7.250%, 10/15/23............................. 2,000,000 1,967,580 Occidental Petroleum Corp., 10.125%, 11/15/01............................ 5,000,000 5,979,950 11.125%, 08/01/10............................ 5,000,000 6,896,500 Oryx Energy Co., M.T.N., 6.050%, 02/01/96, Tranche #TR00013........... 3,000,000 2,999,100 Paramount Communications, Inc., 7.500%, 01/15/02............................. 5,000,000 5,184,000 Parker & Parsley Petroleum Co., 8.250%, 08/15/07............................. 4,000,000 4,324,880 PT Alatief Freeport Financial Co., 9.750%, 04/15/01............................. 5,750,000 6,444,542 RJR Nabisco, Inc., 6.700%, 06/15/02............................. 5,000,000 5,084,450 8.750%, 08/15/05............................. 2,000,000 2,048,620 Rodamco NV, 7.300%, 05/15/05............................. 5,000,000 5,376,750 DECEMBER 31, 1995 PAR MARKET LONG-TERM BONDS (CONTINUED) VALUE VALUE ------------- ------------ Rogers Cablesystems Ltd., 10.000%, 03/15/05, Series B.................. $ 4,000,000 $ 4,300,000 Royal Caribbean Cruises Ltd., 11.375%, 05/15/02............................ 5,000,000 5,450,000 TCI Communications, Inc., 8.650%, 09/15/04............................. 7,000,000 7,778,190 8.750%, 08/01/15............................. 12,900,000 14,301,843 Time Warner Entertainment Co., L.P., 8.375%, 03/15/23............................. 9,000,000 9,688,590 Time Warner, Inc., 7.750%, 06/15/05............................. 5,000,000 5,205,150 Transco Energy Co., 9.125%, 05/01/98............................. 3,000,000 3,205,380 9.375%, 08/15/01............................. 6,000,000 6,884,940 United Air Lines, Inc., 9.125%, 01/15/12............................. 7,700,000 8,604,750 11.210%, 05/01/14, Series B.................. 4,250,000 5,625,513 USX Corp., 9.800%, 07/01/01............................. 4,900,000 5,644,261 Viacom, Inc., 7.625%, 01/15/16............................. 2,500,000 2,529,688 7.750%, 06/01/05............................. 7,550,000 8,017,873 Westinghouse Electric Corp., 8.375%, 06/15/02............................. 2,000,000 2,062,800 Westvaco Corp., 9.750%, 06/15/20............................. 5,000,000 6,762,400 Whitman Corp., 7.500%, 08/15/01............................. 3,000,000 3,201,300 -------------- 263,349,424 -------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 21.6% Federal Farm Credit Bank, 8.650%, 10/01/99, Series A................... 150,000 165,633 Federal Farm Credit Bank, M.T.N., 7.900%, 03/01/96............................. 2,800,000 2,808,988 Federal Home Loan Bank, 9.800%, 03/25/96............................. 4,000,000 4,040,000 Federal Home Loan Mortgage Corp., 6.820%, 06/29/05............................. 10,000,000 10,310,900 Federal National Mortgage Association, 6.550%, 09/12/05............................. 5,500,000 5,774,120 9.000%, 10/01/16-09/01/21.................... 713,710 759,332 Government National Mortgage Association, 7.500%, 05/20/02-12/15/09.................... 20,469,529 21,158,711 International Bank for Reconstruction and Development, 12.375%, 10/15/02............................ 750,000 1,022,573 Resolution Funding Corp., Zero Coupon, 10/15/15........................ 17,100,000 4,936,086 8.125%, 10/15/19, Principle Only............. 700,000 861,329 8.625%, 01/15/21............................. 200,000 260,032 United States Treasury Bonds, 11.250%, 02/15/15............................ 5,000,000 8,003,900 12.000%, 08/15/13............................ 22,000,000 33,897,160 United States Treasury Notes, 5.500%, 02/28/99............................. 3,000,000 3,020,610 5.875%, 08/15/98-11/15/05.................... 6,500,000 6,612,650 6.500%, 08/15/05............................. 6,100,000 6,498,391 7.250%, 02/15/98............................. 5,000,000 5,199,200 7.500%, 02/29/96............................. 9,300,000 9,333,387 B4 DIVERSIFIED BOND PORTFOLIO (CONTINUED) DECEMBER 31, 1995 PAR MARKET LONG-TERM BONDS (CONTINUED) VALUE VALUE ------------- -------------- 7.875%, 07/31/96............................. $ 7,000,000 $ 7,102,830 9.250%, 01/15/96............................. 10,000,000 10,014,100 -------------- 141,779,931 -------------- UTILITIES -- 1.7% Norsk Hydro A.S., 7.750%, 06/15/23............................. 5,000,000 5,588,250 Pennsylvania Power & Light Co., 9.375%, 07/01/21............................. 1,150,000 1,350,307 Texas Utilities Electric Co., 5.875%, 04/01/98............................. 4,000,000 4,013,840 -------------- 10,952,397 -------------- TOTAL LONG-TERM BONDS (Cost $590,122,688)........................................... 623,383,628 -------------- PRINCIPAL SHORT-TERM INVESTMENTS -- 3.1% AMOUNT VALUE ------------- -------------- MEDIUM TERM NOTES -- 1.5% %Salomon, Inc., 6.725%, 02/14/96............................. 10,000,000 10,002,000 -------------- REPURCHASE AGREEMENTS -- 1.6% Joint Repurchase Agreement Account, 5.838%, 01/02/96 (see Note 4)................ 10,188,000 10,188,000 -------------- TOTAL SHORT-TERM INVESTMENTS.................................... 20,190,000 -------------- OTHER ASSETS -- 1.9% (net of liabilities).......................................... 12,262,798 -------------- TOTAL NET ASSETS -- 100.0%...................................... $ 655,836,426 -------------- -------------- The following abbreviations are used in portfolio descriptions: M.T.N. Medium Term Note SA Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French Corporation) **Indicates a restricted security; the aggregate cost of the restricted securities is $55,826,086. The aggregate value, $58,345,063 is approximately 8.9% of net assets. (See Note 2) %Indicates a variable rate security. )These rights are indexed to the average price of Mexican crude oil exports and will pay a rate of return, beginning on June 30, 1996, if certain economic events occur. SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. B5 GOVERNMENT INCOME PORTFOLIO DECEMBER 31, 1995 PAR MARKET LONG-TERM BONDS -- 94.7% VALUE VALUE ------------- -------------- FINANCIAL -- 3.1% Chase Manhattan Credit Card Trust, %6.067%, 08/15/01, Series 1995-2............. $ 12,500,000 $ 12,496,000 Equicon Home Equity Loan Trust, CMO, 7.850%, 03/18/14, Series 1994-2.............. 3,000,000 3,106,406 -------------- 15,602,406 -------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 91.6% Federal Home Loan Bank, 6.780%, 07/24/02............................. 10,000,000 10,239,100 Federal Home Loan Mortgage Corp., 6.710%, 06/11/02............................. 5,000,000 5,150,800 6.820%, 06/29/05............................. 5,000,000 5,155,450 %6.875%, 06/01/25............................ 17,120,560 17,644,877 6.970%, 06/16/05............................. 15,000,000 15,506,250 Federal National Mortgage Association, 8.500%, 05/01/24-04/01/25.................... 40,501,200 42,273,127 9.000%, 02/01/25-04/01/25.................... 17,931,541 18,884,065 Federal National Mortgage Association Debentures, 6.550%, 08/10/00............................. 6,000,000 6,140,640 Government National Mortgage Association, 7.000%, 09/15/22-05/15/24.................... 28,079,102 28,423,397 8.000%, 09/15/23-10/15/25.................... 24,906,302 25,949,136 Main Place Funding, %5.960%, 07/17/98............................ 10,000,000 10,025,000 Resolution Funding Corp., Zero Coupon, 07/15/20........................ 22,500,000 4,745,250 8.125%, 10/15/19, Principle Only Class A..... 4,200,000 5,167,974 Student Loan Market Association, 7.500%, 03/08/00............................. 12,000,000 12,855,000 United States Treasury Bonds, 7.500%, 11/15/24............................. 35,000,000 42,071,050 8.125%, 08/15/19............................. 50,000,000 62,867,000 United States Treasury Notes, 5.000%, 01/31/99............................. 16,000,000 15,880,000 7.500%, 11/15/01............................. 15,000,000 16,521,150 7.750%, 12/31/99............................. 57,000,000 61,854,120 7.875%, 11/15/04............................. 45,000,000 52,087,500 -------------- 459,440,886 -------------- TOTAL LONG-TERM BONDS (Cost $437,622,665)........................................... 475,043,292 -------------- DECEMBER 31, 1995 PRINCIPAL SHORT-TERM INVESTMENTS -- 4.0% AMOUNT VALUE ------------- -------------- REPURCHASE AGREEMENTS Joint Repurchase Agreement Account, 5.838%, 01/02/96 (see Note 4)................ $ 19,985,000 $ 19,985,000 -------------- OTHER ASSETS -- 1.3% (net of liabilities).......................................... 6,747,013 -------------- TOTAL NET ASSETS -- 100.0%...................................... $ 501,775,305 -------------- -------------- The following abbreviations are used in portfolio descriptions: CMO Collateralized Mortgage Obligations %Indicates a variable rate security. SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. B6 ZERO COUPON BOND 2000 PORTFOLIO DECEMBER 31, 1995 PAR MARKET LONG-TERM BONDS -- 98.9% VALUE VALUE ------------- -------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS United States Treasury Bonds, Stripped, Zero Coupon, 02/15/00-02/15/02.............. $ 33,250,000 $ 24,979,653 -------------- 24,979,653 -------------- TOTAL LONG-TERM BONDS (Cost $21,856,986)........................................... 24,979,653 -------------- PRINCIPAL SHORT-TERM INVESTMENTS -- 1.2% AMOUNT VALUE ------------- -------------- REPURCHASE AGREEMENTS Joint Repurchase Agreement Account, 5.838%, 01/02/96 (see Note 4)............... 308,000 308,000 -------------- LIABILITIES -- (0.1%) (net of other assets)........................................ (28,834) -------------- TOTAL NET ASSETS -- 100.0%..................................... $ 25,258,819 -------------- -------------- SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. B7 ZERO COUPON BOND 2005 PORTFOLIO DECEMBER 31, 1995 PAR MARKET LONG-TERM BONDS -- 95.8% VALUE VALUE ------------- -------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS Financing Corp. Coupon Strips, Zero Coupon, 03/07/04......................... $ 3,350,000 $ 2,079,278 Resolution Funding Corp., Stripped, Zero Coupon, 07/15/07......................... 10,000,000 5,050,700 United States Treasury Bonds, Stripped, Interest Only, Zero Coupon, 11/15/05-05/15/06............... 18,000,000 10,060,130 United States Treasury Bonds, Stripped, Principal Only, Zero Coupon, 11/15/04........................ 9,000,000 5,465,070 -------------- TOTAL LONG-TERM BONDS (Cost $19,001,260)............................................ 22,655,178 -------------- PRINCIPAL SHORT-TERM INVESTMENTS -- 4.0% AMOUNT VALUE ------------- -------------- REPURCHASE AGREEMENTS Joint Repurchase Agreement Account, 5.838%, 01/02/96 (see Note 4)................ 933,000 933,000 -------------- OTHER ASSETS -- 0.2% (net of liabilities).......................................... 58,941 -------------- TOTAL NET ASSETS -- 100.0%...................................... $ 23,647,119 -------------- -------------- SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. B8 CONSERVATIVE BALANCED PORTFOLIO DECEMBER 31, 1995 MARKET COMMON STOCKS -- 39.6% SHARES VALUE ------------ ------------- AEROSPACE -- 0.8% +Coltec Industries, Inc........................ 311,000 $ 3,615,375 GenCorp, Inc................................... 676,800 8,290,800 Loral Corp..................................... 77,800 2,752,175 Rockwell International Corp.................... 253,100 13,382,661 +UNC, Inc...................................... 289,100 1,734,600 -------------- 29,775,611 -------------- AIRLINES -- 0.3% +AMR Corp...................................... 100,000 7,425,000 +USAir Group, Inc.............................. 335,000 4,438,750 -------------- 11,863,750 -------------- AUTOS - CARS & TRUCKS -- 3.1% A.O. Smith Corp................................ 466,800 9,686,100 Chrysler Corp.................................. 500,000 27,687,500 Ford Motor Co.................................. 318,300 9,230,700 General Motors Corp............................ 500,000 26,437,500 General Motors Corp. (Class 'E' Stock)......... 243,900 12,682,800 General Motors Corp. (Class 'H' Stock)......... 465,900 22,887,337 Titan Wheel International, Inc................. 748,350 12,160,686 -------------- 120,772,623 -------------- BANKS AND SAVINGS & LOANS -- 1.8% First Bank System, Inc......................... 366,600 18,192,525 First Interstate Bancorp....................... 120,000 16,380,000 KeyCorp........................................ 502,800 18,226,500 Norwest Corp................................... 570,400 18,823,200 -------------- 71,622,225 -------------- CHEMICALS -- 1.2% +FMC Corp...................................... 110,800 7,492,850 Imperial Chemical Industries, PLC, ADR......... 371,300 17,358,275 OM Group, Inc.................................. 308,400 10,215,750 W.R. Grace & Co................................ 218,800 12,936,550 -------------- 48,003,425 -------------- CHEMICALS - SPECIALTY -- 0.7% Ferro Corp..................................... 655,200 15,233,400 M.A. Hanna Co.................................. 489,700 13,711,600 -------------- 28,945,000 -------------- COMPUTER SERVICES -- 0.9% +Amdahl Corp................................... 900,000 7,650,000 National Data Corp............................. 620,100 15,347,475 +Paxar Corp.................................... 1,022,928 13,553,794 -------------- 36,551,269 -------------- CONSTRUCTION -- 0.2% +J. Ray McDermott, SA.......................... 500,000 8,937,500 -------------- CONTAINERS -- 0.2% +Sealed Air Corp............................... 290,400 8,167,500 -------------- DIVERSIFIED GAS -- 0.6% +Basin Exploration, Inc........................ 148,000 730,750 Sonat Offshore Drilling, Inc................... 228,100 10,207,475 Tidewater, Inc................................. 73,600 2,318,400 Weatherford Enterra, Inc....................... 321,353 9,279,066 Western Gas Resources, Inc..................... 162,100 2,613,863 -------------- 25,149,554 -------------- DRUGS AND HOSPITAL SUPPLIES -- 0.2% United States Surgical Corp.................... 365,500 7,812,563 -------------- DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ------------- -------------- ELECTRICAL EQUIPMENT -- 0.5% +Anixter International, Inc.................... 337,400 $ 6,284,075 Belden, Inc.................................... 524,300 13,500,725 -------------- 19,784,800 -------------- ELECTRONICS -- 0.7% +ADT Ltd....................................... 620,000 9,300,000 +Digital Equipment Corp........................ 200,000 12,825,000 +IMO Industries, Inc........................... 596,900 4,103,686 -------------- 26,228,686 -------------- FINANCIAL SERVICES -- 2.2% American Express Co............................ 319,000 13,198,625 Dean Witter Discover and Company............... 736,500 34,615,500 Lehman Brothers Holdings, Inc.................. 400,000 8,500,000 Reinsurance Group of America, Inc.............. 487,800 17,865,675 Salomon, Inc................................... 300,000 10,650,000 -------------- 84,829,800 -------------- FOODS -- 0.4% Philip Morris Companies, Inc................... 188,000 17,014,000 -------------- FOREST PRODUCTS -- 0.9% Louisiana-Pacific Corp......................... 700,000 16,975,000 Mead Corp...................................... 350,800 18,329,300 -------------- 35,304,300 -------------- FURNITURE -- 0.2% Leggett & Platt, Inc........................... 380,200 9,219,850 -------------- GAS PIPELINES -- 0.6% Enron Oil & Gas Co............................. 332,700 7,984,800 +Global Marine, Inc............................ 615,800 5,388,250 +Seagull Energy Corp........................... 387,200 8,615,200 -------------- 21,988,250 -------------- HOSPITAL MANAGEMENT -- 0.6% Columbia/HCA Healthcare Corp................... 161,816 8,212,160 +Tenet Healthcare Corp......................... 825,000 17,118,750 -------------- 25,330,910 -------------- HOUSING RELATED -- 0.9% +Giant Cement Holdings, Inc.................... 415,200 4,774,800 +Owens-Corning Fiberglas Corp.................. 662,800 29,743,150 -------------- 34,517,950 -------------- INSURANCE -- 2.9% Allstate Corp.................................. 129,599 5,329,758 Equitable of Iowa Companies.................... 372,700 11,972,987 Financial Security Assurance Holdings, Ltd..... 226,200 5,626,725 National Re Corp............................... 207,600 7,888,800 PennCorp Financial Group, Inc.................. 638,400 18,753,000 Provident Companies, Inc....................... 177,200 6,002,650 TIG Holdings, Inc.............................. 588,300 16,766,550 Trenwick Group, Inc............................ 276,200 15,536,250 W.R. Berkley Corp.............................. 192,800 10,363,000 Western National Corp.......................... 900,000 14,512,500 -------------- 112,752,220 -------------- MACHINERY -- 1.2% Case Corp...................................... 642,800 29,408,100 DT Industries, Inc............................. 234,500 3,165,750 +Global Industrial Technologies, Inc........... 390,700 7,374,463 Parker-Hannifin Corp........................... 204,750 7,012,688 -------------- 46,961,001 -------------- B9 CONSERVATIVE BALANCED PORTFOLIO (CONTINUED) DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ------------- -------------- MEDIA -- 2.3% Central Newspapers, Inc. (Class 'A' Stock)..... 331,700 $ 10,407,088 Comcast Corp. (Class 'A' Stock)................ 362,500 6,389,063 Comcast Corp. (Special Class 'A' Stock)........ 9,600 174,600 +Cox Communications, Inc. (Class 'A' Stock).... 246,115 4,799,243 Gannett Co., Inc............................... 200,000 12,275,000 Hollinger International, Inc................... 161,400 1,694,700 Knight-Ridder, Inc............................. 200,000 12,500,000 Lee Enterprises, Inc........................... 337,400 7,760,200 McGraw-Hill, Inc............................... 96,200 8,381,425 Media General, Inc. (Class 'A' Stock).......... 123,600 3,754,350 +Tele-Communications, Inc. (Series 'A' Stock).. 606,200 12,048,225 Times Mirror Co. (Class 'A' Stock)............. 280,276 9,494,350 -------------- 89,678,244 -------------- MISCELLANEOUS - BASIC INDUSTRY -- 3.6% BW/IP, Inc. (Class 'A' Stock).................. 379,200 6,256,800 Danaher Corp................................... 455,600 14,465,300 Donaldson Company, Inc......................... 400,400 10,060,050 +IDEX Corp..................................... 285,600 11,638,200 +Jan Bell Marketing, Inc....................... 1,000,000 2,500,000 +Litton Industries, Inc........................ 259,700 11,556,650 Mark IV Industries, Inc........................ 572,565 11,308,158 Mascotech, Inc................................. 650,000 7,068,750 Pentair, Inc................................... 472,950 23,529,263 +SPS Transaction Services, Inc................. 192,800 5,711,700 Textron, Inc................................... 96,400 6,507,000 Trinity Industries, Inc........................ 385,500 12,143,250 +Wolverine Tube, Inc........................... 279,500 10,481,250 York International Corp........................ 199,000 9,353,000 -------------- 142,579,371 -------------- MISCELLANEOUS - CONSUMER GROWTH/STABLE -- 1.3% Eastman Kodak Co............................... 372,300 24,944,100 Houghton Mifflin Co............................ 132,600 5,701,800 Whitman Corp................................... 913,400 21,236,550 -------------- 51,882,450 -------------- PETROLEUM -- 1.0% Amerada Hess Corp.............................. 100,000 5,300,000 Cabot Oil & Gas Corp. (Class 'A' Stock)........ 594,400 8,693,100 Elf Aquitaine, ADR............................. 530,100 19,481,175 Parker & Parsley Petroleum Co.................. 257,800 5,671,600 -------------- 39,145,875 -------------- PETROLEUM SERVICES -- 2.5% Baker Hughes, Inc.............................. 300,000 7,312,500 Coflexip, ADR.................................. 500,000 9,437,500 +ENSCO International, Inc...................... 600,000 12,450,000 +Hornbeck Offshore Services, Inc............... 208,000 4,082,000 ICO, Inc....................................... 500,000 2,437,500 +Marine Drilling Co., Inc...................... 1,000,000 5,125,000 +Mesa, Inc..................................... 1,008,400 3,781,500 Murphy Oil Corp................................ 190,800 7,918,200 Noble Affiliates, Inc.......................... 200,000 5,975,000 +Noble Drilling Corp........................... 800,000 7,200,000 +Oryx Energy Co................................ 849,400 11,360,725 DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ------------- -------------- +Pride Petroleum Services, Inc................. 360,100 $ 3,826,063 +Rowan Companies, Inc.......................... 269,400 2,660,325 +Western Atlas, Inc............................ 300,000 15,150,000 -------------- 98,716,313 -------------- RAILROADS -- 0.9% Burlington Northern, Inc....................... 259,000 20,202,000 Illinois Central Corp.......................... 440,000 16,885,000 -------------- 37,087,000 -------------- REAL ESTATE DEVELOPMENT -- 0.5% Zeneca Group, PLC, ADR......................... 357,400 20,863,225 -------------- RETAIL -- 1.7% +Best Products Company, Inc.................... 1,094,500 5,198,875 +Burlington Coat Factory Warehouse............. 244,600 2,507,150 Charming Shoppes, Inc.......................... 2,000,000 5,750,000 Dillard Department Stores, Inc. (Class 'A' Stock)....................................... 500,000 14,250,000 +Filene's Basement Corp........................ 160,000 370,000 K mart Corp.................................... 1,058,700 7,675,575 Rite Aid Corp.................................. 6,000 205,500 Sears, Roebuck & Co............................ 139,800 5,452,200 TJX Companies, Inc............................. 914,900 17,268,738 Woolworth Corp................................. 600,000 7,800,000 -------------- 66,478,038 -------------- RUBBER -- 0.3% Goodyear Tire & Rubber Co...................... 269,800 12,242,175 -------------- STEEL -- 1.6% +Bethlehem Steel Corp.......................... 1,000,000 14,000,000 +LTV Corp...................................... 1,500,000 20,625,000 +Material Sciences Corp........................ 675,000 10,040,625 +National Steel Corp. (Class 'B' Stock)........ 300,000 3,862,500 USX-U.S. Steel Group........................... 450,000 13,837,500 -------------- 62,365,625 -------------- TELECOMMUNICATIONS -- 1.2% +Airtouch Communications, Inc.................. 385,500 10,890,375 Century Telephone Enterprises, Inc............. 337,300 10,709,275 Frontier Corp.................................. 297,700 8,931,000 MCI Communications Corp........................ 331,100 8,649,988 +Nextel Communications, Inc. (Class 'A' Stock)....................................... 495,400 7,307,150 -------------- 46,487,788 -------------- TEXTILES -- 1.2% +Farah, Inc.................................... 258,500 1,227,874 +Fieldcrest Cannon, Inc........................ 460,000 7,647,500 +Fruit of the Loom, Inc. (Class 'A' Stock)..... 500,000 12,187,500 +Owens-Illinois, Inc........................... 552,700 8,014,150 Phillips-Van Heusen Corp....................... 600,000 5,925,000 +Tultex Corp................................... 579,000 2,388,375 V.F. Corp...................................... 154,600 8,155,149 -------------- 45,545,549 -------------- TOBACCO -- 0.4% RJR Nabisco Holdings Corp...................... 500,000 15,437,500 -------------- TOTAL COMMON STOCKS (Cost $1,308,436,835)......................................... 1,560,041,940 -------------- B10 CONSERVATIVE BALANCED PORTFOLIO (CONTINUED) DECEMBER 31, 1995 MARKET PREFERRED STOCKS -- 0.1% SHARES VALUE ------------- -------------- MEDIA Times Mirror Co. (Cum. Conv.), Series B........ 119,724 $ 3,090,376 -------------- (Cost $2,725,059) PAR MARKET LONG-TERM BONDS -- 33.2% VALUE VALUE ------------- -------------- FINANCIAL -- 10.0% Advanta Corp Mid, 8.180%, 02/09/97, Tranche #TR00028........... $ 10,000,000 $ 10,271,700 Advanta Corp., 5.125%, 11/15/96............................. 12,535,000 12,464,303 Allmerica Finance, 7.625%, 10/15/25............................. 7,200,000 7,564,968 Associates Corp. of North America, 8.375%, 01/15/98............................. 1,100,000 1,159,191 Banc One Credit Card Master Trust, Series 94-B 7.750%, 12/15/99............................. 5,100,000 5,292,831 Capital One Bank, M.T.N., 6.660%, 08/17/98, Tranche #TR00055........... 10,050,000 10,237,734 6.740%, 05/31/99, Tranche #TR00038........... 22,250,000 22,756,410 8.125%, 02/27/98, Tranche #TR00032........... 6,500,000 6,788,860 Chrysler Financial Corp., M.T.N., 5.390%, 08/27/96, Tranche #TR00041........... 7,300,000 7,287,079 CIGNA Mortgage Securities, Inc., Series 88-1 9.400%, 01/15/02............................. 2,285,774 2,319,878 Discover Card Trust, Series 1991-C, Class B 7.875%, 04/16/98............................. 10,000,000 10,050,000 **Equitable Life Assurance Society, 6.950%, 12/01/05............................. 25,000,000 25,359,375 Federal Express Corp., M.T.N., 10.010%, 06/01/98, Tranche #TR00067.......... 3,000,000 3,255,300 10.050%, 06/15/99, Tranche #TR00068.......... 500,000 557,650 First Union Corp., 9.450%, 06/15/99............................. 4,000,000 4,450,800 Ford Motor Credit Co., 6.375%, 10/06/00............................. 26,500,000 26,979,650 Ford Motor Credit, Co., M.T.N., 6.137%, 10/04/99............................. 23,750,000 23,808,188 6.850%, 08/15/00............................. 8,500,000 8,823,255 General Motors Acceptance Corp., 8.250%, 08/01/96............................. 5,000,000 5,066,300 General Motors Acceptance Corp., M.T.N., 6.300%, 09/10/97, Tranche #TR00532........... 5,000,000 5,058,300 6.700%, 04/30/97, Tranche #TR00319........... 11,000,000 11,158,840 7.375%, 07/20/98, Tranche #TR00667........... 4,650,000 4,837,070 7.850%, 03/05/97, Tranche #TR00187........... 3,300,000 3,384,744 DECEMBER 31, 1995 PAR MARKET LONG-TERM BONDS (CONTINUED) VALUE VALUE ------------- -------------- []Marine Midland Bank N.A., 5.812%, 09/27/96............................. $ 6,500,000 $ 6,487,000 Mellon Financial Co., 6.500%, 12/01/97............................. 1,650,000 1,676,516 Okobank, **[]7.387%, 10/29/49......................... 3,500,000 3,539,375 []7.387%, 10/29/49........................... 9,000,000 9,101,250 []7.375%, 09/27/49........................... 18,750,000 19,341,563 Salomon Inc., M.T.N., 5.440%, 01/13/97, Tranche #TR00641........... 5,000,000 4,972,000 5.470%, 08/29/97, Tranche #SR00492........... 10,500,000 10,446,660 5.320%, 09/16/96, Tranche #TR00572........... 10,400,000 10,347,168 5.470%, 09/22/97, Tranche #SR00504........... 12,525,000 12,377,706 Santander Financial Issuances, Inc., 7.250%, 11/01/15............................. 14,500,000 14,852,060 Sears Roebuck Acceptance Corp., 6.750%, 09/15/05............................. 35,050,000 36,351,056 Sears Roebuck Acceptance Corp., M.T.N., 6.340%, 10/12/00, Tranche #TR00038........... 11,000,000 11,174,790 Standard Credit Card Master Trust, 5.950%, 03/07/96............................. 4,650,000 4,612,196 Union Bank of Finland, Ltd., 5.250%, 06/15/96............................. 16,650,000 16,579,737 Westinghouse Credit Corp., M.T.N., 8.750%, 06/03/96, Tranche #TR00248........... 2,600,000 2,616,276 -------------- 383,407,779 -------------- FOREIGN -- 6.0% **Banco de Commercio Exterior, SA, M.T.N., 8.625%, 06/02/00, Tranche #TR00001........... 5,500,000 5,654,000 **Banco Ganadero, SA, M.T.N., 9.750%, 08/26/99, Tranche #TR00001........... 7,300,000 7,482,500 **Cemex, SA, M.T.N., 9.500%, 09/20/01, Tranche #TR00010........... 12,500,000 11,375,000 **Compania Sud Americana de Vapores, SA, 7.375%, 12/08/03............................. 7,600,000 7,486,000 Controladora Commercial Mexicana, SA, 8.750%, 04/21/98............................. 5,190,000 4,567,200 Empresa Columbia de Petroleos, 7.250%, 07/08/98............................. 8,250,000 8,208,750 Financiera Energetica Nacional, 6.625%, 12/13/96............................. 5,000,000 5,000,000 Financiera Energetica Nacional, SA, M.T.N., 9.000%, 11/08/99............................. 2,000,000 2,097,500 **9.000%, 11/08/99........................... 5,375,000 5,637,031 Fomento Economico Mexicano, SA, 9.500%, 07/22/97............................. 5,150,000 5,104,938 **Grupo Condumex, SA, M.T.N., 6.250%, 07/27/96............................. 4,300,000 4,165,625 **Grupo Embotellador Mexicana, 10.750%, 11/19/97............................ 8,015,000 7,994,963 B11 CONSERVATIVE BALANCED PORTFOLIO (CONTINUED) DECEMBER 31, 1995 PAR MARKET LONG-TERM BONDS (CONTINUED) VALUE VALUE ------------- -------------- Grupo Televisa, SA, 10.000%, 11/09/97............................ $ 7,250,000 $ 7,105,000 Hydro-Quebec, 8.050%, 07/07/24............................. 22,100,000 25,232,896 Kansallis-Osake Pankki, N.Y., **[]8.650%, 12/29/49......................... 10,000,000 10,625,000 9.750%, 12/15/98............................. 16,950,000 18,736,022 Kansallis-Osake Pankki, N.Y., C.D., 6.125%, 05/15/98............................. 6,160,000 6,227,375 Quebec, Province of Canada, 7.500%, 07/15/02............................. 8,625,000 9,157,766 Republic of Columbia, 7.125%, 05/11/98............................. 2,775,000 2,795,813 7.250%, 02/23/04............................. 5,400,000 5,179,896 8.750%, 10/06/99............................. 4,950,000 5,232,744 Republic of Italy, 6.875%, 09/27/23............................. 15,000,000 14,648,250 Republic of South Africa, 9.625%, 12/15/99............................. 22,221,000 23,966,904 **Telekom Malaysia, 7.875%, 08/01/25............................. 22,000,000 24,159,520 United Mexican States, 5.820%, 06/28/01............................. 1,375,000 990,000 6.970%, 08/12/00............................. 2,300,000 1,840,000 8.500%, 09/15/02............................. 6,850,000 5,959,500 -------------- 236,630,193 -------------- INDUSTRIAL -- 13.0% AMR Corp., 10.000%, 04/15/21............................ 5,000,000 6,213,250 9.000%, 08/01/12............................. 10,000,000 11,277,700 9.800%, 10/01/21............................. 5,000,000 5,944,000 9.880%, 06/15/20............................. 9,565,000 11,501,913 Arkla, Inc., M.T.N., 9.250%, 12/18/97, Tranche #TR00027........... 3,000,000 3,151,590 Auburn Hills Trust, 12.000%, 05/01/20............................ 28,670,000 45,119,699 Coca-Cola Enterprises, Inc., 6.500%, 11/15/97............................. 3,750,000 3,808,875 Columbia Gas Systems, Inc., 7.620%, 11/28/25............................. 6,500,000 6,616,935 Columbia/HCA Healthcare Corp., 7.050%, 12/01/27............................. 32,200,000 32,411,554 7.580%, 09/15/25, M.T.N., Tranche #TR00015... 16,000,000 17,157,120 Delta Air Lines, Inc., 9.750%, 05/15/21............................. 5,000,000 6,168,650 Federated Dept Stores, 8.125%, 10/15/02............................. 10,500,000 10,552,500 Hanson Overseas Corp., 5.500%, 01/15/96............................. 2,000,000 1,999,840 Nabisco, Inc., 6.850%, 06/15/05............................. 20,000,000 20,312,000 News America Holdings, Inc., 7.750%, 12/01/45............................. 51,000,000 51,659,940 9.125%, 10/15/99............................. 15,000,000 16,580,700 PT Alatief Freeport Financial Co., 9.750%, 04/15/01............................. 8,950,000 10,031,070 RJR Nabisco, Inc., 8.750%, 08/15/05............................. 4,000,000 4,097,240 Sears, Roebuck & Co., M.T.N., 9.420%, 04/01/96............................. 1,000,000 1,014,375 Sears, Roebuck Acceptance Corp., 9.000%, 09/15/96............................. 2,000,000 2,043,760 DECEMBER 31, 1995 PAR MARKET LONG-TERM BONDS (CONTINUED) VALUE VALUE ------------- -------------- Service Corp. International, 7.000%, 06/01/15............................. $ 2,500,000 $ 2,785,575 TCI Communications, Inc., 8.750%, 08/01/15............................. 27,175,000 30,128,107 Tele-Communications, Inc., 7.875%, 08/01/13............................. 5,250,000 5,399,678 9.250%, 04/15/02............................. 5,000,000 5,680,900 9.800%, 02/01/12............................. 18,000,000 21,585,060 Time Warner Entertainment Co., L.P., 8.375%, 03/15/23-07/15/33.................... 33,740,000 36,131,467 9.625%, 05/01/02............................. 14,140,000 16,379,352 Time Warner, Inc., 7.750%, 06/15/05............................. 10,000,000 10,410,300 United Air Lines, Inc., 9.750%, 08/15/21............................. 15,000,000 17,993,550 10.670%, 05/01/04............................ 21,750,000 26,236,590 11.210%, 05/01/14............................ 2,500,000 3,309,125 Viacom, Inc., 7.625%, 01/15/16............................. 16,000,000 16,190,000 7.750%, 06/01/05............................. 45,175,000 47,974,494 Westinghouse Electric Corp., M.T.N., 8.700%, 06/20/96, Tranche #TR00029........... 2,950,000 2,970,680 -------------- 510,837,589 -------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 4.2% Federal National Mortgage Association, 9.050%, 04/10/00............................. 14,000,000 15,837,500 United States Treasury Bonds, 7.625%, 02/15/25............................. 200,000 244,562 12.000%, 08/15/13............................ 5,400,000 8,320,212 United States Treasury Notes, 6.125%, 07/31/00............................. 3,350,000 3,448,390 6.500%, 04/30/97............................. 61,000,000 61,981,490 5.875%, 08/15/98-11/15/05.................... 32,200,000 32,850,580 6.125%, 09/30/00............................. 13,500,000 13,905,000 6.375%, 08/15/02............................. 26,500,000 27,787,635 6.500%, 05/15/05............................. 2,900,000 3,085,339 -------------- 167,460,708 -------------- TOTAL LONG-TERM BONDS (Cost $1,260,456,592)......................................... 1,298,336,269 -------------- PRINCIPAL SHORT-TERM INVESTMENTS -- 26.4% AMOUNT VALUE ------------- -------------- BANK-RELATED INSTRUMENTS -- 3.4% Abbey National Treasury Services, C.D. PLC, 5.850%, 01/03/96............................. 48,000,000 48,000,012 Advanta National Bank, C.D. 6.260%, 09/01/97............................. 10,500,000 10,594,500 Bayerische Hypotheken, C.D., 5.800%, 01/16/96............................. 12,000,000 11,999,970 5.830%, 01/16/96............................. 23,000,000 23,000,176 Berliner Handels, C.D., 5.830%, 01/16/96............................. 12,000,000 12,000,046 National Westminister Bank, C.D. PLC, 5.810%, 01/12/96............................. 36,000,000 36,000,000 Societe Generale Bank, C.D., 7.650%, 01/08/96............................. 3,000,000 3,000,472 -------------- 144,595,176 -------------- B12 CONSERVATIVE BALANCED PORTFOLIO (CONTINUED) DECEMBER 31, 1995 PRINCIPAL SHORT-TERM INVESTMENTS (CONTINUED) AMOUNT VALUE ------------- -------------- COMMERCIAL PAPER -- 16.1% American Express Credit Corp., 5.590%, 03/15/96............................. $ 14,000,000 $ 13,841,306 American Home Products Corp., 5.680%, 03/07/96............................. 13,000,000 12,866,678 American Honda Finance Corp., 5.750%, 02/08/96............................. 6,000,000 5,964,542 5.850%, 01/12/96-01/22/96.................... 9,000,000 8,978,875 Aristar Inc., 5.800%, 02/02/96............................. 2,000,000 1,990,011 Asset Securitization Cooperative Corp., 5.660%, 02/20/96............................. 28,000,000 27,784,291 Associates Corp. of North America, 5.680%, 02/08/96-02/12/96.................... 43,300,000 43,026,208 Banque Nationale De Paris, 5.780%, 01/22/96............................. 11,000,000 10,999,845 Bradford & Bingley Building Society, 5.680%, 02/06/96............................. 22,000,000 21,878,511 Caterpillar Financial Services Corp., 5.660%, 02/21/96............................. 3,000,000 2,976,417 5.670%, 02/27/96............................. 3,000,000 2,973,540 Chase Manhattan Corp., 5.670%, 02/12/96............................. 8,000,000 7,948,340 CIT Group Holdings, Inc., 5.670%, 02/05/96............................. 8,000,000 7,957,160 5.680%, 02/07/96............................. 17,000,000 16,903,440 5.780%, 01/25/96............................. 16,981,000 16,918,293 Cogentrix of Richmond, Inc., 5.950%, 01/24/96............................. 18,457,000 18,389,888 Corporate Receivables Corp., 5.750%, 01/16/96-01/18/96.................... 8,000,000 7,980,514 Countrywide Funding Corp., 5.830%, 01/16/96............................. 2,000,000 1,995,466 5.840%, 01/18/96............................. 8,000,000 7,979,236 5.870%, 01/22/96............................. 3,000,000 2,990,217 6.000%, 01/22/96............................. 8,000,000 7,973,333 Dean Witter Discover and Company, 5.700%, 02/14/96............................. 4,000,000 3,972,767 Finova Capital Corp., 5.970%, 01/05/96-01/25/96.................... 19,360,000 19,324,797 First Union Corp., 5.710%, 02/09/96............................. 15,000,000 14,909,592 Fleet Mortgage Group, Inc., 5.800%, 01/16/96............................. 6,000,000 5,986,467 Ford Motor Credit Co., 5.530%, 03/04/96............................. 20,800,000 20,601,903 6.070%, 01/05/96............................. 14,300,000 14,292,767 General Electric Capital Corp., 5.580%, 04/08/96-04/09/96.................... 10,000,000 9,848,565 5.660%, 02/08/96............................. 36,000,000 35,790,580 General Motors Acceptance Corp., 5.650%, 02/09/96............................. 4,261,000 4,235,588 5.750%, 02/20/96............................. 9,000,000 8,929,563 5.800%, 02/09/96............................. 20,000,000 19,877,556 Goldman Sachs Group L.P, 6.050%, 01/11/96-01/12/96.................... 22,000,000 21,964,540 GTE Corp., 5.870%, 01/19/96............................. 4,000,000 3,988,912 5.950%, 01/29/96............................. 4,544,000 4,523,722 5.970%, 01/30/96-01/31/96.................... 7,491,000 7,455,719 Hanson Finance, PLC, 5.650%, 02/29/96............................. 8,000,000 7,927,178 5.700%, 01/26/96-02/08/96.................... 19,389,000 19,296,480 DECEMBER 31, 1995 PRINCIPAL SHORT-TERM INVESTMENTS (CONTINUED) AMOUNT VALUE ------------- -------------- McKenna Triangle National Corp., 5.750%, 01/16/96............................. $ 3,831,000 $ 3,822,433 Merrill Lynch & Co., Inc., 5.750%, 01/26/96............................. 21,000,000 20,919,500 Mitsubishi International Corp., 5.780%, 01/29/96............................. 2,500,000 2,489,163 5.810%, 01/23/96............................. 4,200,000 4,185,766 Morgan Stanley Group, Inc., 5.750%, 01/25/96............................. 34,000,000 33,875,097 NYNEX Corporation, 5.800%, 01/19/96............................. 2,000,000 1,994,522 5.820%, 01/09/96-01/16/96.................... 6,000,000 5,990,947 PHH Corporation, 5.830%, 01/23/96............................. 3,000,000 2,989,798 PNC Funding Corp, 5.730%, 02/08/96............................. 2,000,000 1,988,222 Preferred Receivables Funding Corp., 5.680%, 02/07/96............................. 7,150,000 7,109,388 5.850%, 01/17/96............................. 15,000,000 14,963,438 Riverwood Funding Corp., 5.680%, 02/16/96............................. 4,000,000 3,971,600 Sears Roebuck Acceptance Corp., 5.720%, 02/26/96............................. 11,000,000 10,903,872 Special Purpose A/R Cooperative Corp., 5.750%, 01/24/96............................. 4,000,000 3,985,944 5.780%, 01/24/96............................. 3,000,000 2,989,403 Transamerica Corp., 5.780%, 01/19/96............................. 16,072,000 16,028,132 Whirlpool Corp., 5.800%, 01/23/96............................. 2,000,000 1,993,233 Whirlpool Financial Corp., 5.710%, 03/04/96............................. 18,972,000 18,785,431 5.800%, 02/02/96............................. 1,300,000 1,293,507 -------------- 633,522,203 -------------- TERM NOTES -- 5.6% Associates Corp. of North America, 8.800%, 03/01/96............................. 2,000,000 2,007,278 Bank of America, 5.79%, 01/16/96, Tranche #TR00034............ 2,000,000 1,999,992 Bank One Indianapolis N.A., 7.180%, 02/05/96, Tranche #TR00002........... 6,000,000 6,002,187 Bayerische Hypotheken, 5.770%, 01/23/96............................. 4,000,000 3,999,789 Beneficial Corp., 5.25%, 01/23/96, Tranche #TR00776............ 5,000,000 4,999,220 Exxon Capital Corp., 7.875%, 04/15/96............................. 5,500,000 5,527,256 First Union National Bank of North Carolina, 5.800%, 01/31/96............................. 13,000,000 13,000,000 Ford Motor Credit Co., 5.000%, 03/25/96............................. 4,000,000 3,991,407 8.900%, 04/08/96............................. 4,300,000 4,332,346 9.850%, 02/27/96............................. 5,000,000 5,024,368 General Motors Acceptance Corp., []5.70%, 10/20/97............................ 8,000,000 7,996,425 6.300%, 02/02/96, Tranche #TR00646........... 2,000,000 2,000,418 8.250%, 08/01/96............................. 2,000,000 2,024,935 B13 CONSERVATIVE BALANCED PORTFOLIO (CONTINUED) DECEMBER 31, 1995 PRINCIPAL SHORT-TERM INVESTMENTS (CONTINUED) AMOUNT VALUE ------------- -------------- []Merrill Lynch & Co., Inc., 5.929%, 09/13/96, Tranche #TR00197........... $ 27,000,000 $ 26,994,526 NationsBank of Texas, N.A., 7.000%, 02/06/96, Tranche #TR00037........... 40,000,000 40,002,205 7.300%, 01/26/96, Tranche #TR00043........... 4,000,000 4,001,092 7.550%, 01/09/96, Tranche #TR00050........... 8,500,000 8,501,291 []Norwest Corp., 5.929%, 05/23/96, Tranche #TR00176........... 5,500,000 5,499,923 []Salomon, Inc., 6.725%, 02/14/96............................. 25,000,000 25,000,000 []SMM Trust, 5.937%, 12/16/96............................. 27,000,000 26,997,556 Society National Bank, 6.000%, 04/25/96, Tranche #TR00010........... 1,940,000 1,940,000 Student Loan Marketing Association, []5.20%, 08/09/96............................ 7,650,000 7,641,227 []5.22%, 02/08/96............................ 3,000,000 2,999,276 USX Corp., 6.562%, 02/15/96............................. 7,500,000 7,502,619 -------------- 219,985,336 -------------- PROMISSORY NOTES -- 0.3% []Lehman Brothers Holdings, Inc., 6.142%, 05/29/96............................. 10,000,000 10,000,000 -------------- REPURCHASE AGREEMENTS -- 1.0% Joint Repurchase Agreement Account, 5.839%, 01/02/96............................. 43,210,000 43,210,000 -------------- TOTAL SHORT-TERM INVESTMENTS.................................... 1,051,312,715 -------------- OTHER ASSETS -- 0.7% (net of liabilities).......................................... 27,992,965 -------------- TOTAL NET ASSETS -- 100.0%...................................... $3,940,774,265 -------------- -------------- The following abbreviations are used in portfolio descriptions: ADR American Depository Receipt C.D. Certificates of Deposit 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) **Indicates a restricted security; the aggregate cost of the restricted securities is $96,403,735. The aggregate value, $96,894,639 is approximately 2.5% of net assets. (See Note 2) +No dividend was paid on this security during the 12 months ending December 31, 1995. []Indicates a variable rate security. SEE NOTES TO FINANCIAL STATEMENTS ON PAGES C48 THROUGH C52. B14 FLEXIBLE MANAGED PORTFOLIO DECEMBER 31, 1995 MARKET COMMON STOCKS -- 60.3% SHARES VALUE ------------- -------------- AEROSPACE -- 1.9% Boeing Co...................................... 582,600 $ 45,661,275 +Coltec Industries, Inc........................ 503,800 5,856,675 United Technologies Corp....................... 300,000 28,462,500 -------------- 79,980,450 -------------- AUTOS - CARS & TRUCKS -- 1.8% Chrysler Corp.................................. 870,000 48,176,250 General Motors Corp. (Class 'E' Stock)......... 542,400 28,204,800 -------------- 76,381,050 -------------- BANKS AND SAVINGS & LOANS -- 3.9% Bank of New York Company, Inc.................. 1,000,000 48,750,000 J.P. Morgan & Co., Inc......................... 550,000 44,137,500 NationsBank Corp............................... 568,800 39,602,700 Norwest Corp................................... 997,800 32,927,400 UJB Financial Company.......................... 120,200 4,297,150 -------------- 169,714,750 -------------- CHEMICALS -- 2.4% Agrium, Inc.................................... 907,300 40,828,500 Arcadian Corp.................................. 694,200 13,450,125 E.I. Du Pont de Nemours & Co................... 600,000 41,925,000 +McWhorter Technologies, Inc................... 35,000 516,250 +Mississippi Chemical Corp..................... 324,700 7,549,275 -------------- 104,269,150 -------------- CHEMICALS - SPECIALTY -- 0.7% IMC Global, Inc................................ 703,500 28,755,563 -------------- COMMUNICATIONS -- 0.1% Infinity Broadcasting Corp. (Class 'A' Stock).. 86,400 3,218,400 -------------- COMPUTER SERVICES -- 3.1% Automatic Data Processing, Inc................. 740,400 54,974,700 +Bay Networks, Inc............................. 400,000 16,450,000 +Cisco Systems, Inc............................ 202,700 15,126,488 First Data Corp................................ 422,500 28,254,687 +Sun Microsystems, Inc......................... 350,000 15,968,750 -------------- 130,774,625 -------------- COSMETICS & SOAPS -- 0.6% Procter & Gamble Co............................ 325,000 26,975,000 -------------- DIVERSIFIED GAS -- 0.4% Cross Timbers Oil Co........................... 1,010,000 17,801,250 -------------- DIVERSIFIED OFFICE EQUIPMENT -- 0.6% International Business Machines Corp........... 290,500 26,653,375 -------------- DRUGS AND HOSPITAL SUPPLIES -- 3.5% American Home Products Corp.................... 448,100 43,465,700 Baxter International, Inc...................... 725,000 30,359,375 Genzyme Corp................................... 168,700 10,522,664 Pharmacia & Upjohn, Inc........................ 1,100,000 42,625,000 Schering-Plough Corp........................... 400,000 21,900,000 -------------- 148,872,739 -------------- ELECTRICAL EQUIPMENT -- 0.6% Baldor Electric Co............................. 602,460 12,124,508 Belden, Inc.................................... 519,900 13,387,425 -------------- 25,511,933 -------------- ELECTRONICS -- 2.6% +ADT Ltd....................................... 1,641,200 24,618,000 Emerson Electric Co............................ 600,000 49,050,000 DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ------------- -------------- Hewlett-Packard Co............................. 175,000 $ 14,656,250 Teleflex, Inc.................................. 500,000 20,500,000 -------------- 108,824,250 -------------- FINANCIAL SERVICES -- 3.6% Dean Witter, Discover and Co................... 800,000 37,600,000 Federal Home Loan Mortgage Corp................ 684,700 57,172,450 Manufactured Home Communities, Inc............. 59,300 1,037,750 MBNA Corp...................................... 981,100 36,178,063 Morgan Stanley Group, Inc...................... 300,000 24,187,500 -------------- 156,175,763 -------------- FOODS -- 2.8% Nabisco Holdings Corporation (Class 'A' Stock)....................................... 564,000 18,400,500 Philip Morris Companies, Inc................... 600,000 54,300,000 Pioneer Hi-Bred International, Inc............. 808,400 44,967,250 -------------- 117,667,750 -------------- FOREST PRODUCTS -- 1.4% Kimberly-Clark Corp............................ 277,800 22,987,950 Willamette Industries, Inc..................... 686,000 38,587,500 -------------- 61,575,450 -------------- HEALTHCARE -- 0.3% +Sybron International Corp..................... 520,400 12,359,500 -------------- HOSPITAL MANAGEMENT -- 1.7% Columbia/HCA Healthcare Corp................... 498,362 25,291,872 Guidant Corp................................... 307,486 12,991,284 +Health Care and Retirement Corp............... 590,800 20,678,000 +Tenet Healthcare Corp......................... 583,600 12,109,700 -------------- 71,070,856 -------------- INSURANCE -- 4.2% American International Group, Inc.............. 657,700 60,837,250 CIGNA Corp..................................... 125,000 12,906,250 General Re Corp................................ 215,000 33,325,000 Mid Ocean Ltd Ordinary Shares.................. 525,000 19,490,625 NAC Re Corp.................................... 277,400 9,986,400 TIG Holdings, Inc.............................. 268,500 7,652,250 W.R. Berkley Corp.............................. 610,000 32,787,500 -------------- 176,985,275 -------------- LEISURE -- 2.3% +Argosy Gaming Co.............................. 30,500 232,563 +Bally Entertainment Corp...................... 1,946,000 27,244,000 Carnival Corp. (Class 'A' Stock)............... 1,100,000 26,812,500 Hasbro, Inc.................................... 500,000 15,500,000 +Mirage Resorts, Inc........................... 632,200 21,810,900 Royal Caribbean Cruise, Ltd.................... 233,800 5,143,600 -------------- 96,743,563 -------------- MACHINERY -- 0.7% +Thermo Fibertek, Inc.......................... 149,350 3,379,044 +Varity Corp................................... 658,400 24,443,100 -------------- 27,822,144 -------------- MEDIA -- 2.8% Comcast Corp. (Class 'A' Stock)................ 830,400 14,635,800 Shaw Communications, Inc. (Class 'B' Stock).... 703,700 4,448,072 +Tele-Communications, Inc. (Series 'A' Stock).. 1,934,400 38,446,200 B15 FLEXIBLE MANAGED PORTFOLIO (CONTINUED) DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ------------- -------------- Tele-Communications, Inc. (Series 'A' Stock)... 483,600 $ 12,996,750 +Viacom, Inc. (Class 'B' Stock)................ 994,500 47,114,438 -------------- 117,641,260 -------------- MINERAL RESOURCES -- 2.3% Pittston Services Group........................ 350,000 10,981,250 Potash Corp. of Saskatchewan, Inc.............. 608,300 43,113,263 +Sante Fe Pacific Gold Corp.................... 974,000 11,809,750 Vigoro Corp.................................... 533,100 32,918,925 -------------- 98,823,188 -------------- MISCELLANEOUS - BASIC INDUSTRY -- 4.2% +American Business Information, Inc............ 510,150 9,884,156 General Electric Co............................ 327,300 23,565,600 Illinois Tool Works, Inc....................... 710,000 41,890,000 Libbey, Inc.................................... 521,700 11,738,250 Martin Marietta Materials, Inc................. 647,600 13,356,750 Modine Manufacturing Co........................ 289,100 6,938,400 Pentair, Inc................................... 263,200 13,094,200 TJ International, Inc.......................... 539,700 9,984,450 Tyco International Ltd......................... 687,600 24,495,750 York International Corp........................ 500,000 23,500,000 -------------- 178,447,556 -------------- MISCELLANEOUS - CONSUMER GROWTH/STABLE -- 0.3% +DeVRY, Inc.................................... 529,200 14,288,400 -------------- PETROLEUM -- 1.8% Exxon Corp..................................... 410,000 32,851,250 Royal Dutch Petroleum Co., ADR................. 300,000 42,337,500 -------------- 75,188,750 -------------- PETROLEUM SERVICES -- 1.3% Baker Hughes, Inc.............................. 581,700 14,178,938 Halliburton Co................................. 267,200 13,527,000 Total SA, ADR.................................. 757,500 25,755,000 -------------- 53,460,938 -------------- RAILROADS -- 1.6% Illinois Central Corp.......................... 682,000 26,171,750 Norfolk Southern Corp.......................... 549,400 43,608,625 -------------- 69,780,375 -------------- REAL ESTATE DEVELOPMENT -- 0.7% Crescent Real Estate Equities, Inc............. 492,600 16,809,975 Duke Realty Investments, Inc................... 444,800 13,955,600 -------------- 30,765,575 -------------- RETAIL -- 2.2% Dollar General Corporation..................... 600,000 12,450,000 +Federated Department Stores, Inc.............. 1,500,000 41,250,000 Harcourt General, Inc.......................... 320,500 13,420,938 Nine West Group................................ 350,000 13,125,000 Office Depot, Inc.............................. 700,000 13,825,000 -------------- 94,070,938 -------------- TELECOMMUNICATIONS -- 2.5% +Airtouch Communications, Inc.................. 641,100 18,111,075 AT&T Corp...................................... 350,000 22,662,500 MCI Communications Corp........................ 1,000,000 26,125,000 SBC Communications, Inc........................ 475,000 27,312,500 TCA Cable TV, Inc.............................. 494,300 13,655,038 -------------- 107,866,113 -------------- TEXTILES -- 0.0% Unifi, Inc..................................... 90,000 1,991,250 -------------- DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ------------- -------------- TOBACCO -- 1.4% RJR Nabisco Holdings Corp...................... 1,905,000 $ 58,816,875 -------------- TOTAL COMMON STOCKS (Cost $2,074,306,562)......................................... 2,569,274,054 -------------- MARKET PREFERRED STOCKS -- 0.7% SHARES VALUE ------------- -------------- LEISURE -- 0.2% Bally Entertainment Corporation (Conv.)........ 600,000 8,175,000 -------------- MEDIA -- 0.5% News Corp., Ltd., ADR.......................... 1,140,000 21,945,000 -------------- TOTAL PREFERRED STOCKS (Cost $24,005,010)............................................ 30,120,000 -------------- PAR MARKET LONG-TERM BONDS -- 26.3% VALUE VALUE ------------- -------------- FINANCIAL -- 7.0% Advanta Corp., 5.125%, 11/15/96............................. $ 9,000,000 $ 8,949,240 Advanta National Bank, CD, 6.140%, 02/28/97............................. 17,000,000 17,174,760 Allmerica Financial Corp., 7.625%, 10/15/25............................. 7,200,000 7,564,968 Banc One Credit Card Master Trust, 7.750%, 12/15/99, Series 94-B Class B........ 5,000,000 5,189,050 Capital One Bank, M.T.N., 6.740%, 05/31/99, Tranche #TR00038........... 22,250,000 22,756,410 8.125%, 02/27/98, Tranche #TR00032........... 6,500,000 6,788,860 Chase Manhattan Credit Card Master Trust, 7.400%, 05/15/00, Series 1992-1.............. 5,000,000 5,096,850 Equitable Life Assurance Society, **6.950%, 12/01/05........................... 10,000,000 10,143,750 First USA Bank, M.T.N., []6.237%, 10/16/97........................... 20,000,000 19,970,000 Ford Motor Credit Co., 6.375%, 10/06/00............................. 13,500,000 13,744,350 Ford Motor Credit, Co., M.T.N., 6.137%, 10/04/99............................. 6,250,000 6,265,313 6.850%, 08/15/00............................. 8,500,000 8,823,255 General Motors Acceptance Corp., M.T.N., 7.000%, 05/19/97, Tranche #TR00041........... 10,000,000 10,189,300 7.000%, 06/02/97, Tranche #TR00476........... 6,000,000 6,116,460 7.375%, 07/20/98, Tranche #TR00667........... 4,500,000 4,681,035 7.850%, 03/05/97, Tranche #TR00187........... 3,200,000 3,282,176 7.875%, 03/15/00............................. 5,000,000 5,366,600 Marine Midland Bank N.A., []5.812%, 09/27/96........................... 6,500,000 6,487,000 MBNA Master Credit Card Trust, []6.370%, 01/15/02, Series 1994-1 Class A.... 7,500,000 7,509,375 B16 FLEXIBLE MANAGED PORTFOLIO (CONTINUED) DECEMBER 31, 1995 PAR MARKET LONG-TERM BONDS (CONTINUED) VALUE VALUE ------------- -------------- Okobank, **[]7.387%, 10/29/49......................... $ 3,500,000 $ 3,539,375 []7.387%, 10/29/49........................... 9,000,000 9,101,250 []7.375%, 09/27/49........................... 18,750,000 19,341,563 Salomon, Inc., M.T.N., 5.470%, 09/22/97, Tranche #SR00504........... 15,000,000 14,823,600 5.790%, 11/26/97, Tranche #TR00571........... 6,700,000 6,647,338 5.880%, 07/29/97, Tranche #SR00456........... 5,650,000 5,626,101 Santander Financial Issuances, LTD., 7.250%, 11/01/15............................. 11,000,000 11,267,080 Sears Roebuck Acceptance Corp., 6.750%, 09/15/05............................. 34,950,000 36,247,344 Sears Roebuck Acceptance Corp., M.T.N., 6.340%, 10/12/00, Tranche #TR00038........... 10,000,000 10,158,900 Standard Credit Card Master Trust, 5.950%, 10/07/04, Series 1993-2A............. 4,500,000 4,463,415 Westinghouse Credit Corp., M.T.N., 8.750%, 06/03/96, Tranche #TR00248........... 3,330,000 3,350,846 -------------- 300,665,564 -------------- FOREIGN -- 5.1% Banco de Commercio Exterior de Columbia, SA, M.T.N., **8.625%, 06/02/00, Tranche #TR00001......... 5,500,000 5,654,000 Banco Ganadero, SA, M.T.N., 9.750%, 08/26/99............................. 2,300,000 2,357,500 **9.750%, 08/26/99, Tranche #TR00001......... 5,000,000 5,125,000 Banco Nacional de Comercio Exterior, 7.500%, 07/01/00............................. 5,000,000 4,350,000 Cemex, SA, M.T.N., **9.500%, 09/20/01, Tranche #TR00010......... 12,500,000 11,375,000 Compania Sud Americana de Vapores, SA, **7.375%, 12/08/03........................... 5,650,000 5,565,250 Controladora Commercial Mexicana, SA, 8.750%, 04/21/98............................. 15,100,000 13,288,000 Empresa Columbia de Petroleos, 7.250%, 07/08/98............................. 8,250,000 8,208,750 Empresas La Moderna, SA, 10.250%, 11/12/97............................ 2,000,000 1,980,000 Financiera Energetica Nacional, 6.625%, 12/13/96............................. 5,100,000 5,100,000 Financiera Energetica Nacional, M.T.N., 9.000%, 11/08/99............................. 2,000,000 2,097,500 **9.000%, 11/08/99........................... 5,375,000 5,637,031 Fomento Economico Mexicano, SA, 9.500%, 07/22/97............................. 6,300,000 6,244,875 Grupo Embotellador Mexicana, **10.750%, 11/19/97.......................... 8,020,000 7,999,950 Grupo Televisa, SA, 10.000%, 11/09/97............................ 4,000,000 3,920,000 Hydro-Quebec, 8.050%, 07/07/24............................. 17,100,000 19,524,096 DECEMBER 31, 1995 PAR MARKET LONG-TERM BONDS (CONTINUED) VALUE VALUE ------------- -------------- Kansallis-Osake Pankki, N.Y., **[]8.650%, 12/29/49......................... $ 9,000,000 $ 9,562,500 9.750%, 12/15/98............................. 16,760,000 18,526,001 New Zealand Government, 9.875%, 01/15/11............................. 7,300,000 9,746,814 Quebec, Province of Canada, 7.500%, 07/15/02............................. 8,500,000 9,025,045 Republic of Columbia, 7.125%, 05/11/98............................. 2,700,000 2,720,250 7.250%, 02/23/04............................. 4,100,000 3,932,884 8.750%, 10/06/99............................. 4,925,000 5,206,316 Republic of Italy, 6.875%, 09/27/23............................. 15,000,000 14,648,250 Republic of South Africa, 9.625%, 12/15/99............................. 21,750,000 23,458,898 Telekom Malaysia, **7.875%, 08/01/25........................... 3,000,000 3,294,480 United Mexican States, 5.820%, 06/28/01............................. 1,375,000 990,000 6.970%, 08/12/00............................. 2,300,000 1,840,000 8.500%, 09/15/02............................. 6,925,000 6,024,750 -------------- 217,403,140 -------------- INDUSTRIAL -- 13.3% AMR Corp., 9.000%, 08/01/12............................. 5,000,000 5,638,850 9.800%, 10/01/21............................. 5,000,000 5,944,000 Auburn Hills Trust, 12.000%, 05/01/20............................ 26,300,000 41,389,888 Columbia Gas Systems, 7.620%, 11/28/25............................. 6,500,000 6,616,935 Columbia/HCA Healthcare Corp., 7.050%, 12/01/27............................. 21,200,000 21,339,284 7.580%, 09/15/25, M.T.N., Tranche #TR00015... 10,000,000 10,723,200 Comdisco, Inc., 7.250%, 04/15/98............................. 10,000,000 10,296,800 Continental Cablevision, Inc., **8.300%, 05/15/06........................... 5,000,000 5,018,750 Delta Air Lines, Inc., 9.250%, 03/15/22............................. 8,709,000 10,287,506 9.750%, 05/15/21............................. 34,956,000 43,126,266 9.875%, 01/01/98............................. 6,000,000 6,400,080 Federated Dept Stores, 8.125%, 10/15/02............................. 30,600,000 30,753,000 Fleming Companies, Inc, M.T.N., 9.125%, 02/27/98, Tranche #TR00018........... 6,000,000 6,259,800 9.240%, 02/28/00, Tranche #TR00019........... 5,000,000 5,367,700 Fleming Companies, Inc., 10.625%, 12/15/01............................ 22,750,000 22,067,500 Nabisco, Inc., 6.850%, 06/15/05............................. 10,000,000 10,156,000 News America Holdings, Inc., 7.750%, 12/01/45............................. 53,000,000 53,685,820 9.125%, 10/15/99............................. 5,000,000 5,526,900 Oryx Energy Co., 9.300%, 05/01/96............................. 2,350,000 2,372,866 Oryx Energy Co., M.T.N., 6.050%, 02/01/96, Tranche #TR00013........... 10,500,000 10,496,850 PT Alatief Freeport Financial Co., 9.750%, 04/15/01............................. 7,600,000 8,518,004 B17 FLEXIBLE MANAGED PORTFOLIO (CONTINUED) DECEMBER 31, 1995 PAR MARKET LONG-TERM BONDS (CONTINUED) VALUE VALUE ------------- -------------- RJR Nabisco, Inc., 8.750%, 08/15/05............................. $ 3,000,000 $ 3,072,930 Rogers Cablesystems Ltd., 10.000%, 03/15/05, Series B.................. 2,000,000 2,150,000 Service Corp. International, 7.000%, 06/01/15............................. 2,500,000 2,785,575 TCI Communications, Inc., 8.750%, 08/01/15............................. 27,050,000 29,989,524 Tele-Communications, Inc., 7.875%, 08/01/13............................. 5,250,000 5,399,678 9.250%, 04/15/02............................. 5,000,000 5,680,900 9.800%, 02/01/12............................. 13,000,000 15,589,210 Time Warner Entertainment Co., L.P., 8.375%, 03/15/23-07/15/33.................... 28,250,000 30,234,433 Time Warner Entertainment Co., L.P., 9.625%, 05/01/02............................. 14,140,000 16,379,352 Time Warner, Inc., 7.750%, 06/15/05............................. 10,000,000 10,410,300 Transco Energy Co., 9.125%, 05/01/98............................. 14,000,000 14,958,440 United Air Lines, Inc., 9.750%, 08/15/21............................. 13,000,000 15,594,410 10.670%, 05/01/04, Series A.................. 21,750,000 26,236,590 11.210%, 05/01/14, Series B.................. 2,500,000 3,309,125 Viacom, Inc., 7.625%, 01/15/16............................. 15,500,000 15,684,063 7.750%, 06/01/05............................. 40,675,000 43,195,630 Woolworth Corp, 7.000%, 06/01/00............................. 2,084,000 2,120,637 -------------- 564,776,796 -------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 0.9% Federal National Mortgage Association, Zero Coupon, 10/09/19........................ 11,800,000 2,546,204 United States Treasury Notes, 5.875%, 08/15/98-11/15/05, Series Y 1998..... 14,200,000 14,445,580 6.125%, 09/30/00............................. 3,500,000 3,605,000 6.375%, 08/15/02, Series 2002................ 17,000,000 17,826,030 6.500%, 05/15/05............................. 1,450,000 1,542,670 -------------- 39,965,484 -------------- TOTAL LONG-TERM BONDS (Cost $1,083,162,024)......................................... 1,122,810,984 -------------- PRINCIPAL SHORT-TERM INVESTMENTS -- 11.9% AMOUNT VALUE ------------- -------------- BANK-RELATED INSTRUMENTS -- 0.5% Abbey National Treasury Services, C.D. PLC, 5.850%, 01/03/96............................. $ 5,000,000 $ 5,000,001 Abn-Amro Bank North America, C.D., 5.770%, 02/01/96............................. 1,000,000 999,969 Banque Nationale De Paris, C.D., 5.780%, 01/17/96............................. 2,000,000 1,999,978 Barclays Bank PLC, C.D., 5.700%, 02/13/96............................. 1,000,000 999,872 Bayerische Hypotheken, C.D., 5.780%, 01/16/96............................. 1,000,000 999,983 5.800%, 01/16/96............................. 2,000,000 1,999,995 5.830%, 01/16/96............................. 3,000,000 3,000,023 DECEMBER 31, 1995 PRINCIPAL SHORT-TERM INVESTMENTS (CONTINUED) AMOUNT VALUE ------------- -------------- Berliner Handels, C.D., 5.830%, 01/16/96............................. $ 2,000,000 $ 2,000,008 National Westminister Bank, C.D. PLC, 5.810%, 01/12/96............................. 4,000,000 4,000,000 -------------- 20,999,829 -------------- COMMERCIAL PAPER -- 1.8% American Express Credit Corp., 5.590%, 03/15/96............................. 1,000,000 988,665 American Home Products Corp., 5.680%, 03/07/96............................. 2,000,000 1,979,489 American Honda Finance Corp., 5.750%, 02/08/96............................. 1,000,000 994,090 5.850%, 01/12/96............................. 1,000,000 998,375 5.900%, 01/29/96............................. 1,000,000 995,575 Aristar, Inc., 5.770%, 02/05/96............................. 1,000,000 994,551 Asset Securitization Cooperative Corp., 5.660%, 02/20/96............................. 3,000,000 2,976,888 Associates Corp. of North America, 5.680%, 02/12/96............................. 1,700,000 1,689,003 Bradford & Bingley Building Society, 5.680%, 02/06/96............................. 1,000,000 994,478 Caterpillar Financial Services Corp., 5.670%, 02/27/96............................. 1,000,000 991,180 Chase Manhattan Corp., 5.670%, 02/12/96............................. 1,000,000 993,543 CIT Group Holdings, Inc., 5.670%, 02/05/96............................. 4,000,000 3,978,580 5.780%, 01/25/96............................. 2,019,000 2,011,544 Cogentrix of Richmond, Inc., 5.950%, 01/24/96............................. 1,869,000 1,862,204 Countrywide Funding Corp., 5.870%, 01/22/96............................. 1,000,000 996,739 6.000%, 01/22/96............................. 1,182,000 1,178,060 Dean Witter Discover and Company, 5.700%, 02/14/96............................. 1,000,000 993,192 Finova Capital Corp., 5.970%, 01/25/96-01/26/96.................... 1,640,000 1,633,575 First Union Corp., 5.710%, 02/09/96............................. 2,000,000 1,987,946 Fleet Mortgage Group, Inc., 5.800%, 01/16/96............................. 1,000,000 997,744 Ford Motor Credit Corp., 5.530%, 03/04/96............................. 1,600,000 1,584,762 General Electric Capital Corp., 5.580%, 04/08/96-04/09/96.................... 2,000,000 1,969,775 5.660%, 02/08/96............................. 4,000,000 3,976,731 General Motors Acceptance Corp., 5.650%, 02/09/96............................. 1,232,000 1,224,652 5.750%, 02/20/96............................. 1,000,000 992,174 5.800%, 02/09/96............................. 2,000,000 1,987,756 Goldman Sachs Group L.P, 6.050%, 01/11/96-01/12/96.................... 2,000,000 1,996,807 GTE Corp., 5.870%, 01/19/96............................. 1,000,000 997,228 5.970%, 01/30/96............................. 1,009,000 1,004,315 Hanson Finance, PLC, 5.650%, 02/29/96............................. 1,565,000 1,550,754 5.700%, 01/26/96-02/08/96.................... 3,265,000 3,249,110 Merrill Lynch & Co. Inc, 5.760%, 01/31/96............................. 2,000,000 1,990,720 B18 FLEXIBLE MANAGED PORTFOLIO (CONTINUED) DECEMBER 31, 1995 PRINCIPAL SHORT-TERM INVESTMENTS (CONTINUED) AMOUNT VALUE ------------- -------------- Mitsubishi International Corp., 5.780%, 01/31/96............................. $ 1,000,000 $ 995,344 Morgan Stanley Group, Inc., 5.750%, 01/25/96............................. 5,000,000 4,981,632 National Westminister Bank, PLC, 5.800%, 01/31/96............................. 1,000,000 1,000,000 Nynex Corp, 5.820%, 01/10/96-01/16/96.................... 1,847,000 1,843,790 PNC Funding Corp, 5.730%, 02/08/96............................. 1,000,000 994,111 Preferred Receivables Funding Corp., 5.650%, 02/06/96............................. 5,000,000 4,972,535 5.700%, 02/12/96............................. 1,650,000 1,639,289 Riverwoods Funding Corp, 5.750%, 02/15/96............................. 1,000,000 992,972 Sears Roebuck Acceptance Corp., 5.720%, 02/26/96............................. 4,000,000 3,965,044 Special Purpose A/R Cooperative Corp, 5.750%, 01/24/96............................. 1,000,000 996,486 Transamerica Finance Group, Inc., 5.700%, 02/05/96............................. 1,000,000 994,617 Whirlpool Corp., 5.710%, 03/04/96............................. 1,028,000 1,017,891 -------------- 77,153,916 -------------- TERM NOTES -- 1.6% Associates Corp. of North America, 4.500%, 02/15/96............................. 3,200,000 3,191,504 8.800%, 03/01/96............................. 2,000,000 2,007,278 Bank One Indianapolis N.A., 7.180%, 02/05/96, Tranche #TR00002........... 1,000,000 1,000,365 First Union National Bank of North Carolina, 5.800%, 01/31/96, Tranche #TR00037........... 2,000,000 2,000,000 Ford Motor Credit Co., 5.150%, 03/15/96, Tranche #TR00690........... 2,000,000 1,994,761 []6.082%, 06/17/96, Tranche #TR00826......... 1,000,000 1,001,128 8.250%, 05/15/96............................. 2,300,000 2,320,274 General Motors Acceptance Corp., 5.300%, 07/12/96, Tranche #TR00760........... 1,500,000 1,495,485 []5.700%, 10/20/97, Tranche #TR00065......... 1,000,000 999,553 Merrill Lynch & Co., Inc., []5.929%, 09/13/96, Tranche #TR00197......... 4,000,000 3,999,189 NationsBank of Texas N.A., 7.000%, 02/06/96, Tranche #TR00050........... 9,000,000 9,000,391 Salomon, Inc., []6.725%, 02/14/96........................... 25,000,000 25,000,000 SMM Trust, []5.937%, 12/16/96........................... 6,375,000 6,374,423 USX Corp., 6.562%, 02/15/96............................. 7,500,000 7,502,619 -------------- 67,886,970 -------------- DECEMBER 31, 1995 PRINCIPAL SHORT-TERM INVESTMENTS (CONTINUED) AMOUNT VALUE ------------- -------------- PROMISSORY NOTES -- 0.0% Lehman Brothers Holdings, Inc., 6.142%, 05/29/96............................. $ 1,000,000 $ 1,000,000 -------------- REPURCHASE AGREEMENTS -- 7.9% Joint Repurchase Agreement Account, 5.838%, 01/02/96 (See Note 4)................ 335,658,000 335,658,000 -------------- U. S. GOVERNMENT & AGENCY OBLIGATIONS -- 0.1% Student Loan Marketing Association, []5.400%, 03/20/96........................... 3,455,000 3,454,967 -------------- TOTAL SHORT-TERM INVESTMENTS.................................... 506,153,682 -------------- OTHER ASSETS -- 0.8% (net of liabilities).......................................... 32,846,117 -------------- TOTAL NET ASSETS -- 100.0%...................................... $4,261,204,837 -------------- -------------- The following abbreviations are used in portfolio descriptions: ADR American Depository Receipt C.D. Certificates of Deposit 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) **Indicates a restricted security; the aggregate cost of the restricted securities is $72,616,786. The aggregate value, $72,915,086 is approximately 1.7% of net assets. (See Note 2) +No dividend was paid on this security during the 12 months ending December 31, 1995. []Indicates a variable rate security. SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. B19 HIGH YIELD BOND PORTFOLIO DECEMBER 31, 1995 MARKET COMMON STOCKS -- 0.1% SHARES VALUE ------------- -------------- BEVERAGES -- 0.0% **+Dr. Pepper Bottling Holdings, Inc. (Class 'B'Stock)............................. 5,807 $ 20,325 -------------- CONTAINERS -- 0.0% +Gaylord Container Corp. (Class 'A' Stock)..... 9,301 74,989 -------------- FINANCIAL SERVICES -- 0.0% **+PM Holdings Corp............................ 1,103 0 -------------- MISCELLANEOUS - BASIC INDUSTRY -- 0.1% **Sam Houston Race Park, Ltd., Equity.......... 149 200,000 -------------- RETAIL -- 0.0% **+Loehmann's Holdings, Inc.................... 19,708 24,635 -------------- TOTAL COMMON STOCKS (Cost $513,891)............................................... 319,949 -------------- MARKET PREFERRED STOCKS -- 1.2% SHARES VALUE ------------- -------------- BANKS AND SAVINGS & LOANS -- 0.5% **Riggs National Corp., Series B............... 75,000 2,081,250 -------------- MISCELLANEOUS - BASIC INDUSTRY -- 0.7% o Harvard Industries, Inc. (Cum. Ex.).......... 47,701 1,267,058 o PNP Prime Corp. (Cum. Ex.)................... 82,384 0 o Supermarkets General Holdings Corp. (Ex.).... 45,645 1,141,125 -------------- 2,408,183 -------------- RETAIL -- 0.0% Color Tile, Inc................................ 10,000 10,000 **oGrand Union Holdings Corp., Series C (Cum.)....................................... 9,000 0 -------------- 10,000 -------------- TOTAL PREFERRED STOCKS (Cost $8,319,552)............................................. 4,499,433 -------------- MARKET RIGHTS AND WARRANTS -- 0.1% SHARES VALUE ------------- -------------- COMMUNICATIONS -- 0.0% **++American Telecasting (Warrants)............ 6,500 0 ++Clearnet Communications, Inc. (Warrants)..... 6,732 0 **++Dial Call Communications, Inc. (Warrants).. 1,543 15 ++Dial Call Communications, Inc. (Warrants).... 2,250 22 -------------- 37 -------------- HOUSING RELATED -- 0.0% ++Miles Homes, Inc. (Warrants)................. 15,000 150 -------------- LEISURE -- 0.0% ++Casino America, Inc. (Warrants).............. 6,526 20 **++Casino Magic Corp. (Warrants).............. 10,500 105 ++Cellular Communications International Inc. (Warrants)................................... 4,375 0 **++Fitzgeralds Gaming Corp. (Warrant)......... 500 5,000 **++Louisiana Casino Cruise, Inc. (Warrants)... 4,200 0 ++President Casinos Inc. (Warrants)............ 15,000 7,500 ++President Casinos, Inc. (Warrants)........... 22,075 11,038 ++Sam Houston Race Park, Ltd. (Warrants)....... 4,000 20,000 -------------- 43,663 -------------- MACHINERY -- 0.0% **++Terex Corp. (Rights)....................... 8,000 0 -------------- DECEMBER 31, 1995 MARKET RIGHTS AND WARRANTS (CONTINUED) SHARES VALUE ------------- -------------- MISCELLANEOUS - BASIC INDUSTRY -- 0.1% ++CellNet Data System, Inc. (Warrants)......... 17,000 $ 0 ++Foamex - JPS Automotive, L.P. (Warrants)..... 2,000 10,000 ++Gaylord Container (Warrants)................. 11,958 89,685 **++Pagemart Nationwide, Inc. (Warrants)....... 13,125 123,047 -------------- 222,732 -------------- TELECOMMUNICATIONS -- 0.0% ++IntelCom Group, Inc. (Warrants).............. 20,790 103,950 **++Pagemart, Inc. (Warrants).................. 9,200 55,200 -------------- 159,150 -------------- UTILITY - COMMUNICATIONS -- 0.0% **++Intermedia Communications of Florida, Inc. (Warrants)................................... 3,000 0 -------------- TOTAL RIGHTS AND WARRANTS (Cost $61,218)................................................ 425,732 -------------- PAR MARKET LONG-TERM BONDS -- 93.9% VALUE VALUE ------------- -------------- FINANCIAL -- 3.2% Empress River Casino Finance Corp., 10.750%, 04/01/02............................ $ 4,500,000 $ 4,646,250 Indah Kiat International Finance Co., 12.500%, 06/15/06............................ 3,000,000 2,970,000 *PM Holdings Corp., Zero Coupon, 09/01/05, Series B.............. 2,981,000 1,565,025 PSF Finance, L.P., 12.250%, 06/15/04............................ 1,000,000 920,000 Reliance Group Holdings, Inc., 9.750%, 11/15/03............................. 1,500,000 1,545,000 -------------- 11,646,275 -------------- FOREIGN -- 0.8% *Diamond Cable Communications Co., PLC, 13.250%, 09/30/04............................ 2,000,000 1,410,000 *Videotron Holdings, PLC, Zero Coupon, 07/01/04........................ 2,175,000 1,517,063 -------------- 2,927,063 -------------- INDUSTRIAL -- 89.5% *American Standard, Inc., Zero Coupon, 06/01/05........................ 5,000,000 4,287,500 American Telecasting, *Zero Coupon, 06/15/04....................... 3,000,000 2,062,500 * **Zero Coupon, 08/15/05...................... 6,500,000 4,103,125 'Anacomp, Inc., 15.000%, 11/01/00............................ 3,118,000 2,182,600 *Apparel Retailers, Inc., Zero Coupon, 08/15/05, Series B.............. 4,000,000 2,440,000 Applied Extrusion Technologies, Inc., 11.500%, 04/01/02, Series B.................. 1,700,000 1,827,500 Bally's Park Place Funding, Inc., 9.250%, 03/15/04............................. 5,500,000 5,596,250 Benedek Broadcasting Corp., 11.875%, 03/01/05............................ 2,800,000 2,975,000 Big Flower Press, Inc., 10.750%, 08/01/03............................ 1,334,000 1,420,710 Boyd Gaming Corp., Series B 10.750%, 09/01/03............................ 5,500,000 5,802,500 Bruno's Inc., 10.500%, 08/01/05............................ 2,000,000 1,980,000 *Building Materials Corp. of America, Zero Coupon, 07/01/04, Series B.............. 5,000,000 3,400,000 B20 HIGH YIELD BOND PORTFOLIO (CONTINUED) DECEMBER 31, 1995 PAR MARKET LONG-TERM BONDS (CONTINUED) VALUE VALUE ------------- -------------- Cablevision Systems Corp., 9.250%, 11/01/05............................. $ 3,575,000 $ 3,735,875 9.875%, 02/15/13............................. 1,300,000 1,381,250 10.750%, 04/01/04............................ 1,000,000 1,055,000 CAI Wireless Systems Inc., 12.250%, 09/15/02............................ 3,000,000 3,225,000 Casino America, Inc., 11.500%, 11/15/01............................ 4,225,000 3,908,125 *CellNet Data System, Inc., Zero Coupon, 06/15/05........................ 4,250,000 2,550,000 *Cellular Communications International Inc., Zero Coupon, 08/15/00........................ 4,375,000 2,690,625 *Cencall Communications Corp., Zero Coupon, 01/15/04........................ 2,625,000 1,483,125 Centennial Cellular Corp., 10.125%, 05/15/05............................ 4,500,000 4,736,250 Chancellor Broadcasting Co., 12.500%, 10/01/04............................ 1,600,000 1,708,000 Clark R & M Holdings, Inc., Zero Coupon, 02/15/00........................ 1,500,000 995,625 **Clark USA Inc., 10.875%, 12/01/05............................ 1,875,000 1,968,750 Clean Harbors, Inc., 12.500%, 05/15/01............................ 200,000 90,000 *Clearnet Communications, Zero Coupon, 12/15/05........................ 2,040,000 1,065,900 Comcast Cellular, Zero Coupon, 03/05/00, Series B.............. 4,000,000 3,080,000 Comcast Corp., 9.125%, 10/15/06............................. 1,500,000 1,563,750 9.375%, 05/15/05............................. 5,000,000 5,287,500 *Comcast UK Cable, Zero Coupon, 11/15/07........................ 2,500,000 1,462,500 Continental Cablevision, Inc., **8.300%, 05/15/06........................... 1,000,000 1,003,750 9.500%, 08/01/13............................. 7,000,000 7,525,000 **+X+Del Monte Corp., 12.250%, 09/01/02............................ 2,689,000 2,124,310 Dial Call Communications, Inc., *Zero Coupon, 04/15/04....................... 2,250,000 1,282,500 * **Zero Coupon, 12/15/05, Series B............ 1,000,000 530,000 *Diamond Cable Communications Co., PLC, Zero Coupon, 12/15/05........................ 3,500,000 2,056,250 Dictaphone Corp, 11.750%, 08/01/05............................ 3,350,000 3,316,500 Dominick's Finer Foods, Inc., 10.875%, 05/01/05............................ 2,250,000 2,390,625 Exide Corp., *Zero Coupon, 12/15/04....................... 2,000,000 1,690,000 10.000%, 04/15/05............................ 2,750,000 2,983,750 Fairchild Industries, Inc., 12.250%, 02/01/99............................ 2,340,000 2,480,400 Falcon Drilling Co. Inc., 9.750%, 01/15/01, Series B................... 1,500,000 1,541,250 12.500%, 03/15/05, Series B.................. 2,500,000 2,737,500 +X+Falcon Holdings Group, L.P., 11.000%, 09/15/03............................ 3,311,058 3,162,061 Foamex, L.P., 11.250%, 10/01/02............................ 1,500,000 1,500,000 11.875%, 10/01/04............................ 500,000 490,000 *Foamex - JPS Automotive, L.P., Zero Coupon, 07/01/04, Series B.............. 2,000,000 1,120,000 *Food 4 Less Inc., Zero Coupon, 07/15/05, Series B.............. 1,900,000 902,500 Fresh Del Monte Produce, 10.000%, 05/01/03, Series B.................. 3,000,000 2,700,000 G-I Holdings, Inc., Zero Coupon, 10/01/98, Series B.............. 4,200,000 3,244,500 DECEMBER 31, 1995 PAR MARKET LONG-TERM BONDS (CONTINUED) VALUE VALUE ------------- -------------- *Gaylord Container Corp., Zero Coupon, 05/15/05........................ $ 2,615,000 $ 2,562,700 11.500%, 05/15/01............................ 500,000 515,000 *Geotek Communication Inc., Zero Coupon, 07/15/05, Series B.............. 3,000,000 1,425,000 Grand Casinos Inc., 10.125%, 12/01/03............................ 2,800,000 2,936,500 * **GST Telecommunications, Inc., Zero Coupon, 12/15/05........................ 4,860,000 2,308,500 Gulf Canada Resources, Ltd., 9.625%, 07/01/05............................. 4,000,000 4,220,000 Harvard Industries, Inc., 11.125%, 08/01/05............................ 750,000 750,000 12.000%, 07/15/04............................ 1,125,000 1,184,063 Herff Jones Inc., 11.000%, 08/15/05............................ 3,500,000 3,745,000 **HMC Acquisition Properties, 9.000%, 12/15/07............................. 5,500,000 5,555,000 HMH Properties, Inc., 9.500%, 05/15/05, Series B................... 3,550,000 3,629,875 Hollywood Casino Corp., 12.750%, 11/01/03............................ 1,500,000 1,361,250 Horsehead Industries, Inc., 14.000%, 06/01/99............................ 2,000,000 2,093,400 Host Marriott Travel Plaza, 9.500%, 05/15/05, Series B................... 5,000,000 4,950,000 Imo Industries, Inc., 12.000%, 11/01/01............................ 1,500,000 1,530,000 *Indspec Chemical Corp., Zero Coupon, 12/01/03, Class B............... 2,500,000 2,087,500 *IntelCom Group (USA), Inc., Zero Coupon, 09/15/05........................ 6,300,000 3,654,000 Interlake Corp., 12.000%, 11/15/01............................ 2,260,000 2,282,600 12.125%, 03/01/02............................ 1,865,000 1,771,750 Intermedia Communications of Florida, Inc., 13.500%, 06/01/05, Series B.................. 3,000,000 3,345,000 International Cabletel, Inc., *Zero Coupon, 04/15/05, Series A............. 4,350,000 2,751,375 *Zero Coupon, 10/15/03....................... 1,500,000 1,080,000 Jones Intercable, Inc., 10.500%, 03/01/08............................ 2,000,000 2,190,000 11.500%, 07/15/04............................ 1,250,000 1,387,500 JPS Automotive Products Corp., 11.125%, 06/15/01............................ 2,250,000 2,238,750 K & F Industries, Inc., 11.875%, 12/01/03............................ 1,500,000 1,612,500 13.750%, 08/01/01............................ 778,000 807,175 Kaiser Aluminum & Chemical Corp., 9.875%, 02/15/02............................. 4,190,000 4,305,225 Lenfest Communications Inc., 8.375%, 11/01/05............................. 3,000,000 3,011,250 Louisiana Casino Cruises, Inc., 11.500%, 12/01/98............................ 1,400,000 1,309,000 *Marcus Cable Operating Co., L.P., Zero Coupon, 08/01/04........................ 5,750,000 4,326,875 *Maxxam Group, Inc., Zero Coupon, 08/01/03........................ 2,500,000 1,712,500 Metrocall Inc., 10.375%, 10/01/07............................ 4,500,000 4,770,000 *MFS Communications Company, Inc., Zero Coupon, 01/15/04........................ 6,500,000 5,248,750 Miles Homes Services, Inc., 12.000%, 04/01/01............................ 1,250,000 925,000 MobileMedia Corp., 9.375%, 11/01/07............................. 3,500,000 3,605,000 **Mohegan Tribal Gaming, 13.500%, 11/15/02............................ 2,000,000 2,160,000 B21 HIGH YIELD BOND PORTFOLIO (CONTINUED) DECEMBER 31, 1995 PAR MARKET LONG-TERM BONDS (CONTINUED) VALUE VALUE ------------- -------------- Motor Wheel Corp., 11.500%, 03/01/00, Series B.................. $ 2,500,000 $ 2,200,000 NewCity Communications, Inc., 11.375%, 11/01/03............................ 2,250,000 2,070,000 Newflo Corp., 13.250%, 11/15/02............................ 1,500,000 1,560,000 *Nextel Communications, Inc., Zero Coupon, 09/01/03-08/15/04............... 3,525,000 2,144,187 *Pagemart Nationwide, Inc., Zero Coupon, 02/01/05........................ 6,500,000 4,257,500 *Pagemart, Inc., Zero Coupon, 11/01/03........................ 2,000,000 1,485,000 Paging Network, Inc., 10.125%, 08/01/07............................ 5,250,000 5,683,125 Pathmark Stores, Inc., 11.625%, 06/15/02............................ 2,500,000 2,506,250 Penn Traffic Co., 10.375%, 10/01/04............................ 2,880,000 2,721,600 10.650%, 11/01/04............................ 3,150,000 3,008,250 Petroleum Heat & Power Company, Inc., 9.375%, 02/01/06............................. 2,000,000 1,920,000 12.250%, 02/01/05............................ 1,250,000 1,378,125 Pilgrim's Pride Corp., 10.875%, 08/01/03............................ 1,835,000 1,623,975 *Pricecellular Wireless CRP, Zero Coupon, 10/01/03........................ 4,490,000 3,468,525 Ralph's Grocery Co., Inc., 10.450%, 06/15/04............................ 1,450,000 1,471,750 * **Remington Arms Co., 10.00%, 12/01/03............................. 1,000,000 830,000 Repap New Brunswick, Inc., 9.875%, 07/15/00............................. 2,100,000 2,079,000 Republic Engineered Steel, Inc., 9.875%, 12/15/01............................. 2,000,000 1,800,000 Revlon Consumer Products Corp., 9.375%, 04/01/01............................. 3,000,000 3,037,500 Revlon Worldwide Corp., Zero Coupon, 03/15/98, Series B.............. 3,500,000 2,598,750 Rogers Cablesystems Ltd., 10.000%, 03/15/05-12/01/07, Series B......... 5,250,000 5,646,250 ++Sam Houston Race Park, Ltd., 11.000%, 07/15/99............................ 504,736 200,000 Sinclair Broadcast Group, 10.000%, 09/30/05............................ 2,450,000 2,505,125 Specialty Retailers, Inc., Series B, 11.000%, 08/15/03............................ 1,500,000 1,365,000 SPX Corp., 11.750%, 06/01/02............................ 2,500,000 2,650,000 Stone Consolidated Corp., 10.250%, 12/15/00............................ 3,500,000 3,745,000 Stone Container Corp., 10.750%, 10/01/02............................ 1,500,000 1,548,750 12.625%, 07/15/98............................ 1,500,000 1,582,500 *Talley Industries, Inc., Zero Coupon, 10/15/05........................ 2,500,000 1,843,750 *Telewest PLC, Zero Coupon, 10/01/07........................ 9,025,000 5,448,843 Tenet Healthcare Corp., 8.625%, 12/01/03............................. 2,500,000 2,625,000 10.125%, 03/01/05............................ 4,500,000 5,006,250 **Terex Corp., 13.750%, 05/15/02............................ 2,000,000 1,750,000 Terra Industries, Inc., 10.500%, 06/15/05, Series B.................. 2,500,000 2,756,250 Trism, Inc., 10.750%, 12/15/00............................ 2,150,000 2,117,750 *Triton Energy Corp., Zero Coupon, 12/15/00........................ 2,000,000 1,885,000 +X+Trump Taj Mahal Funding, Inc., 11.350%, 11/15/99, Series A.................. 5,120,000 4,928,000 DECEMBER 31, 1995 PAR MARKET LONG-TERM BONDS (CONTINUED) VALUE VALUE ------------- -------------- United International Holdings, Inc., Zero Coupon, 11/15/99, Series B.............. $ 1,750,000 $ 1,093,750 United Stationer Supply, 12.750%, 05/01/05............................ 3,500,000 3,823,750 *Videotron Holdings PLC, Zero Coupon, 08/15/05........................ 3,200,000 1,984,000 Waters Corp., 12.750%, 09/30/04, Series B.................. 1,715,000 1,920,800 Westpoint Stevens, Inc., 9.375%, 12/15/05............................. 1,500,000 1,481,250 * **Winstar Communications, Inc., Zero Coupon, 10/15/05........................ 6,825,000 3,605,647 -------------- 329,550,096 -------------- UTILITIES -- 0.4% *California Energy Co., Inc., Zero Coupon, 01/15/04........................ 1,500,000 1,417,500 -------------- TOTAL LONG-TERM BONDS (Cost $335,172,296)........................................... 345,540,934 -------------- PRINCIPAL SHORT-TERM INVESTMENTS -- 2.9% AMOUNT VALUE ------------- -------------- REPURCHASE AGREEMENTS Joint Repurchase Agreement Account, 5.839%, 01/02/96 (see Note 4)................ $ 10,502,000 10,502,000 -------------- OTHER ASSETS -- 1.8% (net of liabilities).......................................... 6,621,339 -------------- TOTAL NET ASSETS -- 100.0%...................................... $ 367,909,387 -------------- -------------- The following abbreviations are used in portfolio descriptions: L.P. Limited Partnership PLC Public Limited Company (British Corporation) *Denotes deferred interest security that accrues no interest until a predetermined date at which time a specified coupon rate becomes effective. **Indicates a restricted security; the aggregate cost of the restricted securities is $29,810,655. The aggregate value, $28,448,659 is approximately 7.7% of net assets. (See Note 2) +No dividend was paid on this security during the 12 months ending December 31, 1995. ++Non-income producing. [Payment-in-kind preferred stock--dividend is paid in additional preferred shares in lieu of cash. +X+Payment-in-kind bonds--interest is paid in additional bonds in lieu of cash. 'Bond is currently in default. SEE NOTES TO FINANCIAL STATEMENTS ON PAGES C48 THROUGH C52. B22 STOCK INDEX PORTFOLIO DECEMBER 31, 1995 MARKET COMMON STOCKS -- 96.1% SHARES VALUE ------------- -------------- AEROSPACE -- 2.3% AlliedSignal, Inc.............................. 60,600 $ 2,878,500 Boeing Co...................................... 74,150 5,811,506 General Dynamics Corp.......................... 13,600 804,100 Lockheed Martin Corp........................... 42,849 3,385,071 Loral Corp..................................... 36,800 1,301,800 McDonnell Douglas Corp......................... 24,100 2,217,200 Northrop Grumman Corp.......................... 10,700 684,800 Raytheon Co.................................... 52,600 2,485,350 Rockwell International Corp.................... 46,200 2,442,825 United Technologies Corp....................... 26,700 2,533,163 -------------- 24,544,315 -------------- AIRLINES -- 0.3% +AMR Corp...................................... 16,800 1,247,400 Delta Air Lines, Inc........................... 11,000 812,625 Southwest Airlines Co.......................... 30,700 713,775 +USAir Group, Inc.............................. 16,100 213,325 -------------- 2,987,125 -------------- ALUMINUM -- 0.4% Alcan Aluminum, Ltd............................ 49,050 1,526,680 Aluminum Co. of America........................ 38,500 2,035,688 Reynolds Metals Co............................. 13,300 753,113 -------------- 4,315,481 -------------- AUTOS - CARS & TRUCKS -- 2.3% Chrysler Corp.................................. 82,100 4,546,288 Cummins Engine Co., Inc........................ 8,300 307,100 Dana Corp...................................... 21,500 628,875 Echlin, Inc.................................... 13,000 474,500 Ford Motor Co.................................. 232,000 6,728,000 General Motors Corp............................ 161,200 8,523,450 Genuine Parts Co............................... 26,650 1,092,650 Johnson Controls, Inc.......................... 8,700 598,125 +Navistar International Corp................... 14,500 152,250 Safety Kleen Corp.............................. 11,050 172,656 -------------- 23,223,894 -------------- BANKS AND SAVINGS & LOANS -- 6.3% Banc One Corp.................................. 84,822 3,202,030 Bank of Boston Corp............................ 24,200 1,119,250 Bank of New York Company, Inc.................. 43,000 2,096,250 BankAmerica Corp............................... 79,948 5,176,632 Bankers Trust NY Corp.......................... 16,500 1,097,250 Barnett Banks, Inc............................. 20,900 1,233,100 Boatmen's Bancshares, Inc...................... 28,800 1,177,200 Chase Manhattan Corp........................... 38,705 2,346,491 Chemical Banking Corp.......................... 53,682 3,153,817 Citicorp....................................... 91,100 6,126,475 Comerica, Inc.................................. 24,400 979,050 CoreStates Financial Corp...................... 30,200 1,143,825 First Bank System, Inc......................... 28,900 1,434,162 First Chicago NBD Corp......................... 68,115 2,690,543 First Fidelity Bancorp......................... 17,500 1,319,063 First Interstate Bancorp....................... 16,300 2,224,950 First Union Corp............................... 36,700 2,041,438 Fleet Financial Group, Inc..................... 55,100 2,245,325 Golden West Financial Corp..................... 12,200 674,050 Great Western Financial Corp................... 29,800 759,900 H.F. Ahmanson & Co............................. 25,000 662,500 J.P. Morgan & Co., Inc......................... 40,250 3,230,063 KeyCorp........................................ 51,000 1,848,750 Mellon Bank Corp............................... 31,350 1,685,063 NationsBank Corp............................... 58,139 4,047,928 Norwest Corp................................... 75,100 2,478,300 DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ------------- -------------- PNC Bank Corp.................................. 50,100 $ 1,615,725 Suntrust Banks, Inc............................ 24,400 1,671,400 U.S. Bancorp................................... 32,600 1,096,175 Wachovia Corp.................................. 36,400 1,665,300 Wells Fargo & Co............................... 10,400 2,246,400 -------------- 64,488,405 -------------- BEVERAGES -- 3.6% Adolph Coors Co. (Class 'B' Stock)............. 9,500 210,187 Anheuser-Busch Companies, Inc.................. 55,000 3,678,125 Brown-Forman Corp. (Class 'B' Stock)........... 15,300 558,450 Coca-Cola Co................................... 270,500 20,084,625 PepsiCo, Inc................................... 170,000 9,498,750 Seagram Co., Ltd............................... 79,900 2,766,538 -------------- 36,796,675 -------------- CHEMICALS -- 2.4% Air Products & Chemicals, Inc.................. 23,900 1,260,725 Dow Chemical Co................................ 57,600 4,053,600 E.I. du Pont de Nemours & Co................... 119,900 8,378,012 Eastman Chemical Co............................ 17,100 1,070,887 +FMC Corp...................................... 8,000 541,000 Hercules, Inc.................................. 24,100 1,358,638 Mallinckrodt Group, Inc........................ 17,300 629,288 Monsanto Co.................................... 24,900 3,050,250 Nalco Chemical Co.............................. 13,900 418,738 Rohm & Haas Co................................. 14,600 939,875 Sigma-Aldrich Corp............................. 10,600 524,700 Union Carbide Corp............................. 29,900 1,121,250 W.R. Grace & Co................................ 20,400 1,206,150 -------------- 24,553,113 -------------- CHEMICALS - SPECIALTY -- 0.4% Engelhard Corp................................. 31,375 682,406 Great Lakes Chemical Corp...................... 13,700 986,400 Morton International, Inc...................... 32,000 1,148,000 Praxair, Inc................................... 29,000 975,125 Raychem Corp................................... 9,500 540,313 -------------- 4,332,244 -------------- COMMERCIAL SERVICES -- 0.5% +CUC International, Inc........................ 38,350 1,308,694 Deluxe Corp.................................... 17,800 516,200 Dun & Bradstreet Corp.......................... 36,160 2,341,360 John H. Harland Co............................. 5,900 123,162 Moore Corp., Ltd............................... 22,800 424,650 Ogden Corp..................................... 11,000 235,125 -------------- 4,949,191 -------------- COMPUTER SERVICES -- 3.8% 3Com Corp...................................... 24,000 1,119,000 +Amdahl Corp................................... 23,300 198,050 Autodesk, Inc.................................. 9,700 332,225 Automatic Data Processing, Inc................. 31,200 2,316,600 +Cabletron Systems, Inc........................ 15,300 1,239,300 +Ceridian Corp................................. 14,200 585,750 +Cisco Systems, Inc............................ 58,800 4,387,950 +COMPAQ Computer Corp.......................... 57,100 2,740,800 Computer Associates International, Inc......... 52,475 2,984,516 +Computer Sciences Corp........................ 11,900 835,975 First Data Corp................................ 48,000 3,210,000 +Intergraph Corp............................... 11,300 177,975 +Microsoft Corp................................ 128,300 11,258,325 +Novell, Inc................................... 81,400 1,159,950 B23 STOCK INDEX PORTFOLIO (CONTINUED) DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ------------- -------------- +Oracle Corp................................... 94,050 $ 3,985,369 +Silicon Graphics, Inc......................... 35,700 981,750 +Sun Microsystems, Inc......................... 41,000 1,870,625 +Tandem Computers, Inc......................... 24,900 264,562 -------------- 39,648,722 -------------- CONSTRUCTION -- 0.2% Fluor Corp..................................... 18,400 1,214,400 Foster Wheeler Corp............................ 9,000 382,500 Kaufman & Broad Home Corp...................... 6,366 94,694 Pulte Corp..................................... 5,900 198,388 -------------- 1,889,982 -------------- CONTAINERS -- 0.1% Ball Corp...................................... 6,300 173,250 Bemis Co., Inc................................. 11,400 292,125 +Crown Cork & Seal Co., Inc.................... 20,200 843,350 -------------- 1,308,725 -------------- COSMETICS & SOAPS -- 2.2% Alberto Culver Co. (Class 'B' Stock)........... 5,700 195,937 Avon Products, Inc............................. 14,400 1,085,400 Clorox Co...................................... 11,400 816,525 Colgate Palmolive Co........................... 31,300 2,198,825 Gillette Co.................................... 96,100 5,009,213 International Flavors & Fragrances, Inc........ 23,900 1,147,200 Procter & Gamble Co............................ 147,852 12,271,716 -------------- 22,724,816 -------------- DIVERSIFIED GAS -- 0.2% Ashland, Inc................................... 13,400 470,675 Coastal Corp................................... 22,400 834,400 Eastern Enterprises............................ 4,100 144,525 ENSERCH Corp................................... 14,400 234,000 NICOR, Inc..................................... 10,300 283,250 ONEOK, Inc..................................... 6,400 146,400 -------------- 2,113,250 -------------- DIVERSIFIED OFFICE EQUIPMENT -- 1.9% Alco Standard Corp............................. 23,776 1,084,780 Avery Dennison Corp............................ 11,500 576,438 Honeywell, Inc................................. 27,700 1,346,912 International Business Machines Corp........... 122,800 11,266,900 Pitney Bowes, Inc.............................. 32,500 1,527,500 +Unisys Corp................................... 36,100 203,063 Xerox Corp..................................... 23,182 3,175,934 -------------- 19,181,527 -------------- DRUGS AND HOSPITAL SUPPLIES -- 9.1% Abbott Laboratories............................ 170,600 7,122,550 Allergan, Inc.................................. 13,500 438,750 +ALZA Corp..................................... 17,000 420,750 American Home Products Corp.................... 67,700 6,566,900 +Amgen, Inc.................................... 58,800 3,491,250 Bausch & Lomb, Inc............................. 12,300 487,387 Baxter International, Inc...................... 60,300 2,525,062 Becton, Dickinson & Co......................... 14,000 1,050,000 +Biomet, Inc................................... 26,100 466,537 +Boston Scientific Corp........................ 35,400 1,734,600 Bristol-Myers Squibb Co........................ 109,440 9,398,160 C.R. Bard, Inc................................. 12,800 412,800 Eli Lilly & Co................................. 118,800 6,682,500 Johnson & Johnson.............................. 139,700 11,961,813 Medtronic, Inc................................. 49,600 2,771,400 Merck & Co., Inc............................... 266,550 17,525,663 DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ------------- -------------- Pfizer, Inc.................................... 137,000 $ 8,631,000 +Pharmacia & Upjohn, Inc....................... 108,525 4,205,344 Schering-Plough Corp........................... 80,000 4,380,000 St. Jude Medical, Inc.......................... 15,000 645,000 United States Surgical Corp.................... 12,200 260,775 Warner-Lambert Co.............................. 28,900 2,806,913 -------------- 93,985,154 -------------- ELECTRICAL EQUIPMENT -- 0.3% +Applied Materials, Inc........................ 38,300 1,508,063 W.W. Grainger, Inc............................. 10,500 695,625 Westinghouse Electric Corp..................... 84,100 1,387,650 -------------- 3,591,338 -------------- ELECTRONICS -- 4.2% +Advanced Micro Devices, Inc................... 21,800 359,700 AMP, Inc....................................... 47,344 1,816,826 Apple Computer, Inc............................ 26,000 828,750 +Cray Research, Inc............................ 4,700 116,325 +Data General Corp............................. 9,000 123,750 +Digital Equipment Corp........................ 32,300 2,071,238 EG&G, Inc...................................... 11,800 286,150 Emerson Electric Co............................ 48,600 3,973,050 Harris Corp.................................... 8,100 442,462 Hewlett-Packard Co............................. 110,300 9,237,625 Intel Corp..................................... 179,200 10,169,600 +LSI Logic Corp................................ 27,000 884,250 Micron Technology, Inc......................... 44,400 1,759,350 Motorola, Inc.................................. 127,000 7,239,000 +National Semiconductor Corp................... 27,500 611,875 Perkin-Elmer Corp.............................. 9,300 351,075 Tandy Corp..................................... 14,965 621,048 Tektronix, Inc................................. 7,200 353,700 Texas Instruments, Inc......................... 40,400 2,090,700 Thomas & Betts Corp............................ 4,000 295,000 -------------- 43,631,474 -------------- ENVIRONMENTAL SERVICES -- 0.1% Laidlaw, Inc. (Class 'B' Stock)................ 61,800 633,450 -------------- FINANCIAL SERVICES -- 2.7% American Express Co............................ 104,000 4,303,000 Beneficial Corp................................ 11,300 526,862 Dean Witter Discover and Company............... 36,345 1,708,215 Federal Home Loan Mortgage Corp................ 39,250 3,277,375 Federal National Mortgage Association.......... 58,900 7,310,962 H & R Block, Inc............................... 22,600 915,300 Household International , Inc.................. 21,300 1,259,362 MBNA Corp...................................... 32,300 1,191,063 Merrill Lynch & Co., Inc....................... 38,100 1,943,100 Morgan Stanley Group, Inc...................... 16,500 1,330,313 National City Corp............................. 32,400 1,073,250 Republic New York Corp......................... 12,300 764,138 Salomon, Inc................................... 22,800 809,400 Transamerica Corp.............................. 14,800 1,078,550 -------------- 27,490,890 -------------- FOODS -- 4.4% Archer-Daniels-Midland Co...................... 115,722 2,082,996 Campbell Soup Co............................... 53,500 3,210,000 ConAgra, Inc................................... 51,900 2,140,875 CPC International, Inc......................... 31,400 2,154,825 Fleming Companies, Inc......................... 7,400 152,625 General Mills, Inc............................. 34,000 1,963,500 Giant Food, Inc. (Class 'A' Stock)............. 12,200 384,300 H.J. Heinz & Co................................ 78,650 2,605,281 B24 STOCK INDEX PORTFOLIO (CONTINUED) DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ------------- -------------- Hershey Foods Corp............................. 17,600 $ 1,144,000 Kellogg Co..................................... 47,100 3,638,475 Philip Morris Companies, Inc................... 181,200 16,398,600 Pioneer Hi-Bred International, Inc............. 18,300 1,017,937 Quaker Oats Co................................. 28,400 979,800 Ralston-Ralston Purina Group................... 22,940 1,430,883 Sara Lee Corp.................................. 104,000 3,315,000 Sysco Corp..................................... 38,900 1,264,250 W. M. Wrigley, Jr. Co.......................... 24,900 1,307,250 -------------- 45,190,597 -------------- FOREST PRODUCTS -- 1.6% Boise Cascade Corp............................. 9,886 342,302 Champion International Corp.................... 21,100 886,200 Federal Paper Board Co., Inc................... 10,400 539,500 Georgia-Pacific Corp........................... 19,300 1,324,462 International Paper Co......................... 54,600 2,067,975 James River Corp. of Virginia.................. 18,500 446,313 Kimberly-Clark Corp............................ 60,194 4,981,054 Louisiana-Pacific Corp......................... 24,200 586,850 Mead Corp...................................... 11,700 611,325 Potlatch Corp.................................. 5,800 232,000 Stone Container Corp........................... 21,566 310,011 Temple Inland, Inc............................. 12,100 533,913 Union Camp Corp................................ 15,200 723,900 Westvaco Corp.................................. 21,300 591,075 Weyerhaeuser Co................................ 43,700 1,890,025 Willamette Industries, Inc..................... 12,000 675,000 -------------- 16,741,905 -------------- GAS PIPELINES -- 0.6% +Columbia Gas System, Inc...................... 10,700 469,462 Consolidated Natural Gas Co.................... 19,900 902,962 Enron Corp..................................... 54,000 2,058,750 NorAm Energy Corp.............................. 29,700 263,588 Panhandle Eastern Corp......................... 33,190 925,171 Peoples Energy Corp............................ 7,900 250,825 Williams Companies, Inc........................ 22,100 969,638 -------------- 5,840,396 -------------- HOSPITAL MANAGEMENT -- 0.8% +Beverly Enterprises, Inc...................... 20,200 214,625 Columbia/HCA Healthcare Corp................... 95,632 4,853,324 Community Psychiatric Centers.................. 7,900 96,775 +Humana, Inc................................... 34,400 941,700 Manor Care, Inc................................ 13,050 456,750 Service Corp. International.................... 22,900 1,007,600 Shared Medical Systems Corp.................... 4,700 255,563 +Tenet Healthcare Corp......................... 43,500 902,625 -------------- 8,728,962 -------------- HOUSING RELATED -- 0.5% Armstrong World Industries, Inc................ 7,800 483,600 Centex Corp.................................... 6,000 208,500 Fleetwood Enterprises, Inc..................... 9,600 247,200 Lowe's Companies, Inc.......................... 34,900 1,169,150 Masco Corp..................................... 34,300 1,076,163 Maytag Corp.................................... 23,000 465,750 +Owens-Corning Fiberglas Corp.................. 11,800 529,525 Stanley Works.................................. 9,500 489,250 Whirlpool Corp................................. 16,400 873,300 -------------- 5,542,438 -------------- INSURANCE -- 4.0% Aetna Life & Casualty Co....................... 24,500 1,696,625 Alexander & Alexander Services, Inc............ 9,400 178,600 DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ------------- -------------- Allstate Corp.................................. 96,594 $ 3,972,428 American General Corp.......................... 44,000 1,534,500 American International Group, Inc.............. 102,437 9,475,422 Chubb Corp..................................... 19,000 1,838,250 CIGNA Corp..................................... 16,300 1,682,975 General Re Corp................................ 17,650 2,735,750 +ITT Hartford Group, Inc....................... 25,000 1,209,375 Jefferson-Pilot Corp........................... 15,375 714,938 Lincoln National Corp.......................... 22,700 1,220,125 Marsh & McLennan Companies, Inc................ 15,600 1,384,500 Providian Corp................................. 20,500 835,375 SAFECO Corp.................................... 26,800 924,600 St. Paul Companies, Inc........................ 18,300 1,017,938 Torchmark Corp................................. 16,000 724,000 Travelers Group, Inc........................... 68,731 4,321,461 U.S. Healthcare, Inc........................... 32,600 1,515,900 United Healthcare Corp......................... 37,700 2,469,350 UNUM Corp...................................... 15,300 841,500 USF&G Corp..................................... 23,800 401,625 USLIFE Corp.................................... 6,900 206,138 -------------- 40,901,375 -------------- LEISURE -- 1.0% +Bally Entertainment Corporation............... 10,200 142,800 Brunswick Corp................................. 20,300 487,200 Handleman Co................................... 5,850 33,638 +Harrah's Entertainment, Inc................... 22,450 544,412 Hasbro, Inc.................................... 18,900 585,900 +King World Productions, Inc................... 7,550 293,506 Mattel, Inc.................................... 47,445 1,458,934 Outboard Marine Corp........................... 3,900 79,463 Walt Disney Co................................. 113,200 6,678,800 -------------- 10,304,653 -------------- LODGING -- 0.4% Hilton Hotels Corp............................. 10,600 651,900 Loews Corp..................................... 25,200 1,975,050 Marriott International, Inc.................... 26,900 1,028,925 -------------- 3,655,875 -------------- MACHINERY -- 1.0% Briggs & Stratton Corp......................... 6,300 273,262 Caterpillar, Inc............................... 42,200 2,479,250 Cincinnati Milacron, Inc....................... 6,900 181,125 Cooper Industries, Inc......................... 23,000 845,250 Deere & Co..................................... 56,300 1,984,575 Dover Corp..................................... 24,600 907,125 Eaton Corp..................................... 18,200 975,975 Giddings & Lewis, Inc.......................... 6,900 113,850 Harnischfeger Industries, Inc.................. 9,500 315,875 Ingersoll-Rand Co.............................. 22,900 804,363 PACCAR, Inc.................................... 8,630 363,539 Parker-Hannifin Corp........................... 16,150 553,138 Snap-On, Inc................................... 9,000 407,250 Timken Co...................................... 6,400 244,800 +Varity Corp................................... 8,810 327,071 -------------- 10,776,448 -------------- MEDIA -- 2.5% Capital Cities/ABC, Inc........................ 33,100 4,083,713 Comcast Corp. (Special Class 'A' Stock)........ 50,500 918,469 Dow Jones & Co., Inc........................... 21,500 857,313 Gannett Co., Inc............................... 30,000 1,841,250 Interpublic Group of Companies, Inc............ 17,400 754,725 Knight-Ridder, Inc............................. 10,500 656,250 B25 STOCK INDEX PORTFOLIO (CONTINUED) DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ------------- -------------- McGraw-Hill, Corporation, Inc................... 10,900 $ 949,663 Meredith Corp................................... 5,800 242,875 New York Times Co. (Class 'A' Stock)............ 21,300 631,013 R. R. Donnelley & Sons Co....................... 32,800 1,291,500 +Tele-Communications, Inc. (Series 'A' Stock)... 142,500 2,832,187 Time Warner, Inc................................ 82,840 3,137,565 Times Mirror Co. (Class 'A' Stock).............. 24,000 813,000 Tribune Co...................................... 13,700 837,412 +US West Media Group............................ 101,700 1,932,300 +Viacom, Inc. (Class 'B' Stock)................. 78,867 3,736,323 -------------- 25,515,558 -------------- MINERAL RESOURCES -- 1.0% ASARCO, Inc..................................... 8,700 278,400 Barrick Gold Corporation........................ 75,400 1,988,675 Burlington Resources, Inc....................... 27,700 1,087,225 Cyprus Amax Minerals Co......................... 20,800 543,400 Echo Bay Mines, Ltd............................. 26,400 273,900 Freeport-McMoRan Copper & Gold, Inc. (Class 'B' Stock)........................................ 42,800 1,203,750 Homestake Mining Co............................. 28,800 450,000 Inco, Ltd....................................... 26,000 864,500 Newmont Mining Corp............................. 20,200 914,050 Phelps Dodge Corp............................... 15,200 946,200 Pittston Services Group......................... 8,600 269,825 Placer Dome, Inc................................ 50,900 1,227,962 Sante Fe Pacific Gold Corp...................... 34,916 423,357 -------------- 10,471,244 -------------- MISCELLANEOUS - BASIC INDUSTRY -- 4.1% Browning-Ferris Industries, Inc................. 46,200 1,362,900 Crane Co........................................ 6,600 243,375 Ecolab, Inc..................................... 13,400 402,000 General Electric Co............................. 361,500 26,028,000 General Signal Corp............................. 10,662 345,181 Illinois Tool Works, Inc........................ 25,100 1,480,900 ITT Corp........................................ 25,000 1,325,000 ITT Industries, Inc............................. 25,000 600,000 Millipore Corp.................................. 11,000 452,375 NACCO Industries, Inc. (Class 'A' Stock)........ 1,600 88,800 Pall Corp....................................... 25,100 674,563 PPG Industries Inc.............................. 43,200 1,976,400 Teledyne, Inc................................... 11,800 302,375 Textron, Inc.................................... 18,100 1,221,750 Trinova Corp.................................... 5,600 160,300 TRW, Inc........................................ 14,300 1,108,250 Tyco International, Ltd......................... 33,300 1,186,313 WMX Technologies, Inc........................... 104,100 3,109,988 -------------- 42,068,470 -------------- MISCELLANEOUS - CONSUMER GROWTH/STABLE -- 2.1% American Greetings Corp. (Class 'A' Stock)...... 16,300 450,288 Black & Decker Corp............................. 18,800 662,700 Corning, Inc.................................... 49,700 1,590,400 Dial Corp....................................... 20,900 619,163 Eastman Kodak Co................................ 74,100 4,964,700 Jostens, Inc.................................... 9,900 240,075 Minnesota Mining & Manufacturing Co............. 90,500 5,995,625 Polaroid Corp................................... 9,500 450,062 Premark International, Inc...................... 14,000 708,750 Rubbermaid, Inc................................. 33,300 849,150 DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ------------- -------------- Unilever N.V., ADR.............................. 34,500 $ 4,855,875 Whitman Corp.................................... 21,700 504,525 -------------- 21,891,313 -------------- PETROLEUM -- 8.0% Amerada Hess Corp............................... 19,900 1,054,700 Amoco Corp...................................... 107,130 7,699,969 Atlantic Richfield Co........................... 34,485 3,819,213 Chevron Corp.................................... 141,500 7,428,750 Exxon Corp...................................... 267,900 21,465,487 Kerr-McGee Corp................................. 11,400 723,900 Louisiana Land & Exploration Co................. 7,600 325,850 Mobil Corp...................................... 85,400 9,564,800 Occidental Petroleum Corp....................... 68,400 1,462,050 Pennzoil Co..................................... 10,000 422,500 Phillips Petroleum Co........................... 56,800 1,938,300 Royal Dutch Petroleum Co........................ 115,600 16,314,050 +Santa Fe Energy Resources, Inc................. 17,970 172,961 Sun Co., Inc.................................... 19,000 520,125 Tenneco, Inc.................................... 39,100 1,940,338 Texaco, Inc..................................... 56,700 4,450,950 Unocal Corp..................................... 53,300 1,552,363 USX-Marathon Group.............................. 63,700 1,242,150 -------------- 82,098,456 -------------- PETROLEUM SERVICES -- 0.8% Baker Hughes, Inc............................... 30,200 736,125 Dresser Industries, Inc......................... 40,400 984,750 Halliburton Co.................................. 24,800 1,255,500 Helmerich & Payne, Inc.......................... 5,100 151,725 McDermott International, Inc.................... 10,900 239,800 +Oryx Energy Co................................. 21,500 287,563 +Rowan Companies, Inc........................... 15,200 150,100 Schlumberger, Ltd............................... 52,200 3,614,850 Sonat, Inc...................................... 18,400 655,500 +Western Atlas, Inc............................. 11,300 570,650 -------------- 8,646,563 -------------- RAILROADS -- 1.0% Burlington Northern Sante Fe, Inc............... 31,642 2,468,076 Conrail Inc..................................... 17,000 1,190,000 CSX Corp........................................ 45,112 2,058,235 Norfolk Southern Corp........................... 27,900 2,214,563 Union Pacific Corp.............................. 43,800 2,890,800 -------------- 10,821,674 -------------- RESTAURANTS -- 0.8% Darden Restaurants, Inc......................... 35,000 415,625 Luby's Cafeterias, Inc.......................... 4,550 101,238 McDonald's Corp................................. 149,200 6,732,650 +Ryan's Family Steak Houses, Inc................ 8,500 59,500 +Shoney's, Inc.................................. 7,900 80,975 Wendy's International, Inc...................... 21,900 465,375 -------------- 7,855,363 -------------- RETAIL -- 4.8% Albertson's, Inc................................ 54,600 1,794,975 American Stores Co.............................. 31,900 853,325 Brown Group, Inc................................ 3,000 42,750 Charming Shoppes, Inc........................... 18,300 52,613 Circuit City Stores, Inc........................ 21,500 593,938 Dayton-Hudson Corp.............................. 15,214 1,141,050 Dillard Department Stores, Inc. (Class 'A' Stock)........................................ 24,850 708,225 +Federated Department Stores, Inc............... 43,500 1,196,250 Great Atlantic & Pacific Tea Co., Inc........... 9,100 209,300 B26 STOCK INDEX PORTFOLIO (CONTINUED) DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ------------- -------------- Harcourt General, Inc.......................... 15,406 $ 645,126 Home Depot, Inc................................ 103,949 4,976,558 J.C. Penney Co., Inc........................... 49,000 2,333,625 K mart Corp.................................... 95,000 688,750 +Kroger Co..................................... 26,600 997,500 Liz Claiborne, Inc............................. 15,600 432,900 Longs Drug Stores, Inc......................... 4,600 220,225 May Department Stores Co....................... 53,200 2,247,700 Melville Corp.................................. 22,400 688,800 Mercantile Stores Co., Inc..................... 8,000 370,000 Newell Co...................................... 34,800 900,450 Nike, Inc. (Class 'B' Stock)................... 30,600 2,130,525 Nordstrom, Inc................................. 17,200 696,600 Pep Boys-Manny, Moe & Jack..................... 13,200 338,250 +Price/Costco, Inc............................. 42,566 649,131 Reebok International, Ltd...................... 16,700 471,775 Rite Aid Corp.................................. 18,500 633,625 Sears, Roebuck & Co............................ 84,100 3,279,900 Sherwin-Williams Co............................ 18,300 745,725 Stride Rite Corp............................... 9,400 70,500 Supervalu, Inc................................. 15,100 475,650 The Gap, Inc................................... 30,500 1,281,000 The Limited, Inc............................... 76,600 1,330,925 TJX Companies, Inc............................. 14,300 269,913 +Toys 'R' Us, Inc.............................. 59,750 1,299,563 Wal-Mart Stores, Inc........................... 495,300 11,082,337 Walgreen Co.................................... 53,700 1,604,287 Winn Dixie Stores, Inc......................... 32,600 1,202,125 Woolworth Corp................................. 29,200 379,600 -------------- 49,035,491 -------------- RUBBER -- 0.2% B.F. Goodrich Co............................... 5,400 367,875 Cooper Tire & Rubber Co........................ 17,400 428,475 Goodyear Tire & Rubber Co...................... 33,100 1,501,913 -------------- 2,298,263 -------------- STEEL -- 0.3% +Armco, Inc.................................... 26,700 156,862 +Bethlehem Steel Corp.......................... 23,600 330,400 Inland Steel Industries, Inc................... 10,100 253,763 Nucor Corp..................................... 19,300 1,102,512 USX-U.S. Steel Group........................... 17,740 545,505 Worthington Industries, Inc.................... 19,100 397,519 -------------- 2,786,561 -------------- TELECOMMUNICATIONS -- 5.1% +Airtouch Communications, Inc.................. 106,800 3,017,100 Alltel Corp.................................... 41,600 1,227,200 Ameritech Corp................................. 119,100 7,026,900 +Andrew Corp................................... 8,050 307,913 AT&T Corp...................................... 343,373 22,233,401 +DSC Communications Corp....................... 25,000 921,875 MCI Communications Corp........................ 148,200 3,871,725 Northern Telecom, Ltd.......................... 55,300 2,377,900 SBC Communications, Inc........................ 131,600 7,567,000 Scientific-Atlanta, Inc........................ 16,500 247,500 Sprint Corp.................................... 74,800 2,982,650 +Tellabs, Inc.................................. 18,500 684,500 -------------- 52,465,664 -------------- TEXTILES -- 0.2% +Fruit of the Loom, Inc. (Class 'A' Stock)..... 18,000 438,750 National Service Industries, Inc............... 11,000 356,125 Russell Corp................................... 8,400 233,100 DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ------------- -------------- Springs Industries, Inc........................ 4,200 $ 173,775 V.F. Corp...................................... 13,918 734,175 -------------- 1,935,925 -------------- TOBACCO -- 0.3% American Brands, Inc........................... 40,000 1,785,000 UST, Inc....................................... 41,600 1,388,400 -------------- 3,173,400 -------------- TRUCKING/SHIPPING -- 0.2% Consolidated Freightways, Inc.................. 9,200 243,800 +Federal Express Corp.......................... 12,000 886,500 Roadway Services, Inc.......................... 8,400 410,550 Ryder System, Inc.............................. 17,900 443,025 Yellow Corp.................................... 6,000 74,250 -------------- 2,058,125 -------------- UTILITY - COMMUNICATIONS -- 3.5% Bell Atlantic Corp............................. 94,400 6,313,000 BellSouth Corp................................. 214,000 9,309,000 GTE Corp....................................... 208,920 9,192,480 NYNEX Corp..................................... 92,100 4,973,400 Pacific Telesis Group.......................... 92,600 3,113,675 U S West Communications, Inc................... 101,900 3,642,925 -------------- 36,544,480 -------------- UTILITY - ELECTRIC -- 3.6% American Electric Power Co., Inc............... 39,700 1,607,850 Baltimore Gas & Electric Co.................... 32,450 924,825 Carolina Power & Light Co...................... 33,100 1,141,950 Central & South West Corp...................... 41,000 1,142,875 CINergy Corp................................... 33,739 1,033,257 Consolidated Edison Co. of NY, Inc............. 50,200 1,606,400 Detroit Edison Co.............................. 31,000 1,069,500 Dominion Resources, Inc........................ 37,150 1,532,438 Duke Power Co.................................. 44,000 2,084,500 Entergy Corp................................... 48,500 1,418,625 FPL Group, Inc................................. 40,000 1,855,000 General Public Utilities Corp.................. 26,200 890,800 Houston Industries, Inc........................ 56,200 1,362,850 Niagara Mohawk Power Corp...................... 31,700 305,113 Northern States Power Co....................... 14,600 717,225 Ohio Edison Co................................. 33,700 791,950 P P & L Resources, Inc......................... 33,700 842,500 Pacific Enterprises............................ 19,100 539,575 Pacific Gas & Electric Co...................... 90,900 2,579,287 PacifiCorp..................................... 62,700 1,332,375 PECO Energy Co................................. 48,500 1,461,062 Public Service Enterprise Group, Inc........... 53,000 1,623,125 SCEcorp........................................ 95,100 1,688,025 Southern Co.................................... 143,800 3,541,075 Texas Utilities Co............................. 48,629 1,999,868 Unicom Corp.................................... 46,900 1,535,975 Union Electric Company......................... 21,800 910,150 -------------- 37,538,175 -------------- TOTAL COMMON STOCKS (Cost $683,558,889)........................................... 991,277,137 -------------- MARKET PREFERRED STOCKS -- 0.0% SHARES VALUE ------------- -------------- MISCELLANEOUS - BASIC INDUSTRY Teledyne, Inc. (Cum.), Series E................ 442 6,354 -------------- (Cost $6,630) B27 STOCK INDEX PORTFOLIO (CONTINUED) DECEMBER 31, 1995 PRINCIPAL SHORT-TERM INVESTMENTS -- 4.2% AMOUNT VALUE ------------- -------------- REPURCHASE AGREEMENTS -- 4.1% Joint Repurchase Agreement Account, 5.838%, 01/02/96 (see Note 4)............... $ 41,878,000 $ 41,878,000 -------------- U. S. GOVERNMENT & AGENCY OBLIGATIONS -- 0.1% US Treasury Bills, 5.255%, 03/14/96............................ 1,300,000 1,286,336 5.280%, 03/14/96............................ 100,000 98,944 -------------- 1,385,280 -------------- TOTAL SHORT-TERM INVESTMENTS.................................. 43,263,280 -------------- ##VARIATION MARGIN ON OPEN FUTURES CONTRACTS -- 0.0%.......... 42,000 -------------- LIABILITIES -- (0.3%) (net of other assets)........................................ (3,310,703) -------------- TOTAL NET ASSETS -- 100.0%..................................... $1,031,278,068 -------------- -------------- The following abbreviations are used in portfolio descriptions: ADR American Depository Receipt +No dividend was paid on this security during the 12 months ending December 31, 1995. ##Open futures contracts as of December 31, 1995 are as follows: PAR VALUE COVERED BY CONTRACT TYPE EXPIRATION DATE VALUE OF CONTRACTS $37,454,650 S&P 500 Index Futures Mar 96 $37,107,000 (120 contracts) SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. B28 EQUITY INCOME PORTFOLIO DECEMBER 31, 1995 MARKET COMMON STOCKS -- 78.7% SHARES VALUE ------------- -------------- AEROSPACE -- 4.0% Northrop Grumman Corp.......................... 388,600 $ 24,870,400 Thiokol Corp................................... 606,100 20,531,638 -------------- 45,402,038 -------------- AUTOS - CARS & TRUCKS -- 3.1% Chrysler Corp.................................. 624,017 34,554,941 -------------- CHEMICALS -- 1.8% Dow Chemical Co................................ 278,800 19,620,550 -------------- COMMERCIAL SERVICES -- 1.2% Dun & Bradstreet Corp.......................... 195,600 12,665,100 John H. Harland Co............................. 32,400 676,350 -------------- 13,341,450 -------------- COMPUTER SERVICES -- 1.5% +Amdahl Corp................................... 800,000 6,800,000 +Intergraph Corp............................... 607,700 9,571,275 -------------- 16,371,275 -------------- DIVERSIFIED GAS -- 0.5% British Gas, PLC, ADR.......................... 110,600 4,327,225 Yankee Energy System, Inc...................... 30,400 767,600 -------------- 5,094,825 -------------- DIVERSIFIED OFFICE EQUIPMENT -- 4.0% International Business Machines Corp........... 479,100 43,957,425 -------------- ELECTRICAL EQUIPMENT -- 3.1% Kuhlman Corp................................... 560,000 7,000,000 Westinghouse Electric Corp..................... 1,669,500 27,546,750 -------------- 34,546,750 -------------- ELECTRONICS -- 7.0% +Digital Equipment Corp........................ 319,100 20,462,287 +IMO Industries, Inc........................... 434,600 2,987,875 Micron Technology, Inc......................... 451,000 17,870,875 +National Semiconductor Corp................... 320,000 7,120,000 Newport Corp................................... 300,500 2,441,563 Pacific Scientific Co.......................... 185,700 4,596,075 Texas Instruments, Inc......................... 429,000 22,200,750 -------------- 77,679,425 -------------- FINANCIAL SERVICES -- 7.2% A.G. Edwards, Inc.............................. 211,000 5,037,625 Bear Stearns Companies, Inc.................... 413,380 8,215,928 Lehman Brothers Holdings, Inc.................. 1,759,100 37,380,875 Manufactured Home Communities, Inc............. 581,500 10,176,250 Salomon, Inc................................... 560,000 19,880,000 -------------- 80,690,678 -------------- FOODS -- 1.4% Philip Morris Companies, Inc................... 175,000 15,837,500 -------------- FOREST PRODUCTS -- 0.7% Fletcher Challenge, Ltd., ADR.................. 62,400 897,000 Louisiana-Pacific Corp......................... 71,700 1,738,725 Rayonier, Inc.................................. 149,900 5,002,912 -------------- 7,638,637 -------------- GAS PIPELINES -- 1.9% Nova Corp...................................... 927,000 7,416,000 Panhandle Eastern Corp......................... 299,600 8,351,350 TransCanada Pipelines, Ltd..................... 389,600 5,357,000 -------------- 21,124,350 -------------- DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ------------- -------------- HOUSING RELATED -- 0.7% Irvine Apartment Communities, Inc.............. 400,000 $ 7,700,000 -------------- INSURANCE -- 6.4% Alexander & Alexander Services, Inc............ 812,000 15,428,000 Fremont General Corp........................... 96,260 3,537,555 Marsh & McLennan Companies, Inc................ 243,800 21,637,250 Ohio Casualty Corp............................. 314,900 12,202,374 SAFECO Corp.................................... 350,200 12,081,900 Selective Insurance Group, Inc................. 198,800 7,057,400 -------------- 71,944,479 -------------- MACHINERY -- 0.4% +Esterline Technologies Corp................... 188,700 4,458,038 -------------- MEDIA -- 0.7% Gannett Co., Inc............................... 120,000 7,365,000 -------------- MINERAL RESOURCES -- 0.6% Coeur D'Alene Mines Corp....................... 194,678 3,333,861 Echo Bay Mines, Ltd............................ 298,499 3,096,926 -------------- 6,430,787 -------------- MISCELLANEOUS - BASIC INDUSTRY -- 0.5% Morrison Knudsen Corp.......................... 1,172,900 4,984,825 United Industrial Corp......................... 31,700 182,275 -------------- 5,167,100 -------------- PETROLEUM -- 3.1% KN Energy, Inc................................. 261,900 7,627,837 Mobil Corp..................................... 600 67,200 Petroleum Heat and Power Co., Inc. (Class 'A' Stock)....................................... 47,300 384,313 Quaker State Corp.............................. 544,400 6,873,050 Tenneco, Inc................................... 227,700 11,299,613 USX-Marathon Group............................. 430,600 8,396,700 -------------- 34,648,713 -------------- PETROLEUM SERVICES -- 6.9% Baker Hughes, Inc.............................. 908,200 22,137,375 **+Crestar Energy, Inc......................... 200,000 2,766,581 Dresser Industries, Inc........................ 577,600 14,079,000 McDermott International, Inc................... 1,091,400 24,010,800 Sonat, Inc..................................... 206,300 7,349,438 +Varco International, Inc...................... 558,900 6,706,800 -------------- 77,049,994 -------------- REAL ESTATE DEVELOPMENT -- 13.2% Alexander Haagen Properties, Inc............... 420,000 5,145,000 Amli Residential Properties Trust.............. 208,300 4,166,000 Avalon Properties, Inc......................... 265,000 5,697,500 Beacon Properties Corp......................... 184,800 4,250,400 Bradley Real Estate, Inc....................... 240,000 3,240,000 Carr Realty Corp............................... 26,500 645,937 Crescent Real Estate Equities, Inc............. 597,000 20,372,625 Crown American Realty Trust.................... 675,100 5,316,413 Equity Residential Properties Trust............ 901,000 27,593,125 Essex Property Trust, Inc...................... 146,000 2,810,500 First Union Real Estate Investments............ 122,100 854,700 Gables Residential Trust....................... 435,800 9,968,925 Glimcher Realty Trust.......................... 565,000 9,746,250 JDN Realty Corp................................ 293,200 6,560,350 JP Realty, Inc................................. 84,000 1,837,500 Kimco Realty Corp.............................. 56,250 1,532,813 Malan Realty Investors, Inc.................... 140,000 1,732,500 MGI Properties, Inc............................ 34,800 582,900 Patriot American Hospitality, Inc.............. 181,900 4,683,925 B29 EQUITY INCOME PORTFOLIO (CONTINUED) DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ------------- -------------- Pennsylvania Real Estate Investment Trust...... 50,100 $ 1,039,575 Security Capital Pacific Trust................. 527,034 10,408,921 Simon Property Group, Inc...................... 214,300 5,223,562 Sunstone Hotel Investors, Inc.................. 37,800 387,450 Vornado Realty Trust........................... 278,800 10,455,000 Weingarten Realty Investors.................... 62,500 2,375,000 -------------- 146,626,871 -------------- RETAIL -- 2.2% +Gibson Greetings, Inc......................... 469,900 7,518,400 J.C. Penney Co., Inc........................... 309,800 14,754,225 K mart Corp.................................... 299,200 2,169,200 -------------- 24,441,825 -------------- STEEL -- 2.7% +LTV Corp...................................... 90,000 1,237,500 USX-U.S. Steel Group........................... 928,500 28,551,375 -------------- 29,788,875 -------------- TELECOMMUNICATIONS -- 0.6% Telefonos de Mexico (Class 'L' Stock), ADR SA.. 198,000 6,311,250 -------------- TEXTILES -- 0.7% Garan, Inc..................................... 2,900 48,938 Kellwood Co.................................... 338,900 6,905,087 Oxford Industries, Inc......................... 34,500 577,875 -------------- 7,531,900 -------------- TOBACCO -- 1.2% RJR Nabisco Holdings Corp...................... 420,000 12,967,500 -------------- TRUCKING/SHIPPING -- 0.3% Yellow Corp.................................... 259,700 3,213,788 -------------- UTILITY - ELECTRIC -- 1.1% Centerior Energy Corporation................... 46,600 413,575 Central Louisiana Electric Co.................. 6,100 163,938 Entergy Corp................................... 177,200 5,183,100 Pacific Gas & Electric Co...................... 240,000 6,810,000 -------------- 12,570,613 -------------- TOTAL COMMON STOCKS (Cost $798,340,265)........................................... 874,076,577 -------------- MARKET PREFERRED STOCKS -- 9.7% SHARES VALUE ------------- -------------- ALUMINUM -- 1.0% Kaiser Aluminum Corp. (Cum. Conv.)............. 319,900 4,118,712 Reynolds Metals Co. (Cum. Conv.)............... 146,900 7,436,812 -------------- 11,555,524 -------------- DRUGS & HOSPITAL SUPPLIES -- 0.6% U.S. Surgical Corp. (Cum. Conv.)............... 208,300 5,259,575 -------------- ELECTRICAL EQUIPMENT -- 2.1% **Westinghouse Electric Corp. (Cum. Conv.), Series C..................................... 1,457,000 22,492,438 -------------- FINANCIAL SERVICES -- 0.6% **Parker & Parsley Capital, LLC (Cum. Conv.)... 118,800 5,613,300 -------------- DECEMBER 31, 1995 MARKET PREFERRED STOCKS (CONTINUED) SHARES VALUE ------------- -------------- INSURANCE -- 0.6% **Alexander & Alexander Services, Inc. (Cum.Conv.), Series A........................ 100,000 $ 4,950,000 **Unocal Corp. (Cum. Conv.).................... 30,800 1,697,850 USF&G Corp. (Conv. Ex.), Series A.............. 10,900 558,625 -------------- 7,206,475 -------------- MISCELLANEOUS - BASIC INDUSTRY -- 0.2% Hecla Mining Co. (Cum. Conv.), Series B........ 60,000 2,400,000 -------------- PETROLEUM SERVICES -- 1.0% **McDermott International, Inc. (Cum. Conv.), Series C..................................... 88,000 3,575,000 Noble Drilling Corp. (Cum. Conv.).............. 88,200 2,271,150 Reading & Bates Corp. (Cum. Conv.)............. 128,100 5,764,500 -------------- 11,610,650 -------------- REAL ESTATE DEVELOPMENT -- 0.1% Security Capital Pacific Trust (Cum. Conv.), Series A..................................... 54,500 1,335,250 -------------- STEEL -- 1.5% **Bethlehem Steel Corp. (Cum. Conv.)........... 264,000 11,682,000 USX Corp. (Cum. Conv.)......................... 114,600 5,457,825 -------------- 17,139,825 -------------- TEXTILES -- 0.3% Fieldcrest Cannon, Inc. (Cum. Conv.), Series A............................................ 85,000 3,782,500 -------------- TOBACCO -- 1.7% RJR Nabisco Holdings Corp. (Conv.), Series C... 2,955,000 18,838,125 -------------- TOTAL PREFERRED STOCKS (Cost $108,249,201)........................................... 107,233,662 -------------- MARKET RIGHTS AND WARRANTS -- 0.0% SHARES VALUE ------------- -------------- MACHINERY -- 0.0% **+Terex Corp. (Rights)........................ 16,950 0 -------------- PAR MARKET CONVERTIBLE BONDS -- 5.4% VALUE VALUE ------------- -------------- INDUSTRIAL -- 5.3% AMR Corp., 6.125%, 11/01/24............................. $ 34,675,000 $ 35,888,625 Baker Hughes, Inc., Zero Coupon, 05/05/08........................ 5,940,000 3,801,600 Cross Timbers Oil Co., 5.250%, 11/01/03............................. 2,809,000 2,640,460 Malan Realty Investors, Inc., 9.500%, 07/15/04............................. 3,000,000 2,490,000 Noble Affiliates, Inc., 4.250%, 11/01/03............................. 11,701,000 11,701,000 Oryx Energy Co., 7.500%, 05/15/14............................. 1,760,000 1,566,400 -------------- 58,088,085 -------------- B30 EQUITY INCOME PORTFOLIO (CONTINUED) DECEMBER 31, 1995 PAR MARKET CONVERTIBLE BONDS (CONTINUED) VALUE VALUE ------------- -------------- REAL ESTATE DEVELOPMENT -- 0.1% Alexander Haagen Properties, Inc., 7.500%, 01/15/01............................. $ 600,000 $ 507,000 7.500%, 01/15/01............................. 1,000,000 835,000 -------------- 1,342,000 -------------- TOTAL CONVERTIBLE BONDS (Cost $57,244,298)............................................ 59,430,085 -------------- PRINCIPAL SHORT-TERM INVESTMENTS -- 5.9% AMOUNT VALUE ------------- -------------- REPURCHASE AGREEMENTS Joint Repurchase Agreement Account, 5.838%, 01/02/96 (see Note 4)................ 65,782,000 65,782,000 -------------- OTHER ASSETS -- 0.3% (net of liabilities).......................................... 3,440,871 -------------- TOTAL NET ASSETS -- 100.0%...................................... $1,109,963,195 -------------- -------------- 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) **Indicates a restricted security; the aggregate cost of the restricted securities is $55,599,606. The aggregate value, $52,777,169 is approximately 4.8% of net assets. (See Note 2) +No dividend was paid on this security during the 12 months ending Decenber 31, 1995. SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. B31 EQUITY PORTFOLIO DECEMBER 31, 1995 MARKET COMMON STOCKS -- 78.9% SHARES VALUE ------------- ------------- AEROSPACE -- 2.3% AAR Corp...................................... 650,000 $ 14,300,000 Lockheed Martin Corp.......................... 70,300 5,553,700 Loral Corp.................................... 1,800,000 63,675,000 United Technologies Corp...................... 40,900 3,880,388 -------------- 87,409,088 -------------- ALUMINUM -- 1.0% +Alumax, Inc.................................. 267,500 8,192,188 Aluminum Co. of America....................... 600,000 31,725,000 -------------- 39,917,188 -------------- AUTOS - CARS & TRUCKS -- 3.9% Chrysler Corp................................. 1,963,910 108,751,515 General Motors Corp........................... 700,000 37,012,500 +Navistar International Corp.................. 395,200 4,149,600 -------------- 149,913,615 -------------- BANKS AND SAVINGS & LOANS -- 7.5% Bank of New York Company, Inc................. 900,000 43,875,000 BankAmerica Corp.............................. 550,000 35,612,500 Chase Manhattan Corp.......................... 600,000 36,375,000 Comerica, Inc................................. 1,000,000 40,125,000 First of America Bank Corp.................... 187,000 8,298,125 Great Western Financial Corp.................. 1,000,000 25,500,000 J.P. Morgan & Co., Inc........................ 395,400 31,730,850 Mellon Bank Corp.............................. 276,398 14,856,392 Mercantile Bankshares Corp.................... 279,600 7,793,850 NationsBank Corp.............................. 600,000 41,775,000 -------------- 285,941,717 -------------- CHEMICALS -- 0.8% Eastman Chemical Co........................... 466,550 29,217,694 -------------- CHEMICALS - SPECIALTY -- 0.2% Witco Corp.................................... 268,800 7,862,400 -------------- COMMERCIAL SERVICES -- 0.5% Wellman, Inc.................................. 798,200 18,159,050 -------------- COMPUTER SERVICES -- 1.9% +Amdahl Corp.................................. 4,000,000 34,000,000 Comdisco, Inc................................. 1,350,000 30,543,750 Gerber Scientific, Inc........................ 419,800 6,821,750 +Harris Computer Systems Corp................. 15,000 202,500 -------------- 71,568,000 -------------- DIVERSIFIED OFFICE EQUIPMENT -- 0.7% International Business Machines Corp.......... 300,000 27,525,000 -------------- DRUGS AND HOSPITAL SUPPLIES -- 2.3% Baxter International, Inc..................... 2,100,000 87,937,500 -------------- ELECTRICAL EQUIPMENT -- 0.0% +Rexel, Inc................................... 107,199 1,447,187 -------------- ELECTRONICS -- 6.0% +Digital Equipment Corp....................... 2,500,000 160,312,500 Harris Corp................................... 300,000 16,387,500 Tandy Corp.................................... 1,218,000 50,547,000 Zero Corp..................................... 120,500 2,138,875 -------------- 229,385,875 -------------- FINANCIAL SERVICES -- 7.3% American Express Co........................... 2,100,000 86,887,500 Dean Witter Discover and Company.............. 1,600,000 75,200,000 Lehman Brothers Holdings, Inc................. 900,000 19,125,000 Republic New York Corp........................ 225,000 13,978,125 DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ------------- ------------- Salomon, Inc.................................. 700,000 $ 24,850,000 Travelers Group, Inc.......................... 900,000 56,587,500 -------------- 276,628,125 -------------- FOREST PRODUCTS -- 6.6% Crown Vantage, Inc............................ 56,000 798,000 Georgia-Pacific Corp.......................... 250,000 17,156,250 International Paper Co........................ 1,325,400 50,199,525 James River Corp. of Virginia................. 560,000 13,510,000 Kimberly-Clark Corp........................... 1,610,676 133,283,438 Mead Corp..................................... 173,500 9,065,375 Rayonier, Inc................................. 125,000 4,171,875 Temple Inland, Inc............................ 231,100 10,197,288 Willamette Industries, Inc.................... 214,100 12,043,125 -------------- 250,424,876 -------------- GAS PIPELINES -- 0.3% NorAm Energy Corp............................. 1,300,000 11,537,500 -------------- HEALTHCARE -- 1.7% +Foundation Health Corp....................... 1,547,900 66,559,700 -------------- HOSPITAL MANAGEMENT -- 1.8% +Tenet Healthcare Corp........................ 3,237,832 67,185,014 -------------- HOUSING RELATED -- 0.5% Centex Corp................................... 600,000 20,850,000 -------------- INSURANCE -- 9.8% Alexander & Alexander Services, Inc........... 1,050,000 19,950,000 American Financial Group, Inc................. 303,700 9,300,813 American General Corp......................... 1,000,000 34,875,000 Chubb Corp.................................... 700,000 67,725,000 Citizens Corp................................. 700,000 13,037,500 Equitable Companies, Inc...................... 1,800,000 43,200,000 First Colony Corp............................. 1,253,600 31,810,100 Old Republic International Corp............... 1,000,590 35,520,945 Providian Corp................................ 340,500 13,875,375 SAFECO Corp................................... 1,600,000 55,200,000 St. Paul Companies, Inc....................... 476,900 26,527,563 Transport Holdings, Inc. (Class 'A' Stock).... 4,500 183,375 Western National Corp......................... 1,624,300 26,191,837 -------------- 377,397,508 -------------- LODGING -- 2.5% Loews Corp.................................... 1,200,000 94,050,000 -------------- MACHINERY -- 0.2% +American Standard Companies.................. 273,900 7,669,200 -------------- MINERAL RESOURCES -- 1.1% +Amax Gold, Inc............................... 131,342 952,230 Cyprus Amax Minerals Co....................... 1,533,200 40,054,850 +Nord Resources Corp.......................... 130,500 293,625 -------------- 41,300,705 -------------- MISCELLANEOUS - BASIC INDUSTRY -- 0.8% American Water Works Co., Inc................. 135,000 5,248,125 TRW, Inc...................................... 309,000 23,947,500 +Worldtex, Inc................................ 107,199 616,394 -------------- 29,812,019 -------------- PETROLEUM -- 3.6% Amerada Hess Corp............................. 325,000 17,225,000 Atlantic Richfield Co......................... 250,000 27,687,500 Elf Aquitaine, ADR............................ 1,924,433 70,722,913 Occidental Petroleum Corp..................... 1,100,000 23,512,500 -------------- 139,147,913 -------------- B32 EQUITY PORTFOLIO (CONTINUED) DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ------------- ------------- PETROLEUM SERVICES -- 1.9% +B.J. Services Co............................. 500,000 $ 14,500,000 +Oryx Energy Co............................... 1,600,000 21,400,000 Total SA, ADR................................. 738,365 25,104,410 Union Texas Petroleum Holdings, Inc........... 504,500 9,774,688 -------------- 70,779,098 -------------- RAILROADS -- 0.6% Canadian National Railway..................... 192,300 2,884,500 +Southern Pacific Rail Corp................... 809,810 19,435,440 -------------- 22,319,940 -------------- RETAIL -- 6.6% Dayton-Hudson Corp............................ 119,600 8,970,000 Dillard Department Stores, Inc. (Class 'A' Stock)...................................... 1,991,700 56,763,450 +Federated Department Stores, Inc............. 700,000 19,250,000 +Gibson Greetings, Inc........................ 750,000 12,000,000 K mart Corp................................... 6,000,000 43,500,000 Liz Claiborne, Inc............................ 1,200,000 33,300,000 Petrie Stores Corp............................ 540,000 1,485,000 TJX Companies, Inc............................ 1,790,600 33,797,574 +Toys 'R' Us, Inc............................. 854,000 18,574,500 +Waban, Inc................................... 1,300,000 24,375,000 -------------- 252,015,524 -------------- STEEL -- 0.9% +Bethlehem Steel Corp......................... 500,000 7,000,000 Birmingham Steel Corp......................... 1,468,400 21,842,450 Carpenter Technology Corp..................... 100,000 4,112,500 -------------- 32,954,950 -------------- TELECOMMUNICATIONS -- 3.2% Sprint Corp................................... 1,700,000 67,787,500 Telefonica de Espana, SA, ADR................. 1,300,000 54,437,500 -------------- 122,225,000 -------------- TOBACCO -- 1.3% RJR Nabisco Holdings Corp..................... 1,600,000 49,400,000 -------------- TRUCKING/SHIPPING -- 0.5% +OMI Corp..................................... 1,000,000 6,500,000 Overseas Shipholding Group, Inc............... 600,000 11,400,000 -------------- 17,900,000 -------------- UTILITY - ELECTRIC -- 0.6% American Electric Power Co., Inc.............. 180,000 7,290,000 General Public Utilities Corp................. 500,000 17,000,000 -------------- 24,290,000 -------------- TOTAL COMMON STOCKS (Cost $2,210,630,913)......................... 3,010,731,386 -------------- MARKET PREFERRED STOCKS -- 0.7% SHARES VALUE ------------- ------------- TOBACCO RJR Nabisco Holdings Corp. (Conv.)............ 4,000,000 25,500,000 ------------- (Cost $25,999,610) PRINCIPAL SHORT-TERM INVESTMENTS -- 20.1% AMOUNT VALUE ------------- ------------- PROMISSORY NOTES -- 0.0% Federal Home Loan Banks, 5.430%, 03/20/96............................ $ 1,550,000 1,531,764 ------------- DECEMBER 31, 1995 PRINCIPAL SHORT-TERM INVESTMENTS (CONTINUED) AMOUNT VALUE ------------- ------------- REPURCHASE AGREEMENTS -- 20.1% Joint Repurchase Agreement Account, 5.838%, 01/02/96 (see Note 4)............... $ 765,037,000 $ 765,037,000 ------------- TOTAL SHORT-TERM INVESTMENTS..................................... 766,568,764 ------------- * UNREALIZED DEPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS...................................................... (6,569) ------------- OTHER ASSETS -- 0.3% (net of liabilities)........................................... 11,010,546 ------------- TOTAL NET ASSETS -- 100.0%....................................... 3,813,804,127 ------------- ------------- The following abbreviations are used in portfolio descriptions: ADR American Depository Receipt SA Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French Corporation) +No dividend was paid on this security during the 12 months ending December 31, 1995. *Forward Foreign Exchange Contracts as of December 31, 1995 were as follows: FOREIGN CURRENCY EXPIRATION UNREALIZED PURCHASED DATE (DEPRECIATION) ------------ ---------- -------------- C$ 2,067,225 March 1996 $(6,569) Total (US $ Commitment - ------- $1,521,305) $(6,569) ======= SEE NOTES TO FINANCIAL STATEMENTS ON PAGES C48 THROUGH C52. B33 PRUDENTIAL JENNISON DECEMBER 31, 1995 MARKET COMMON STOCKS -- 94.0% SHARES VALUE ----------- ----------- AEROSPACE -- 3.3% Boeing Co..................................... 26,400 $ 2,069,100 -------------- AIRLINES -- 1.6% +AMR Corp..................................... 13,200 980,100 -------------- AUTOS - CARS & TRUCKS -- 0.6% General Motors Corp. (Class 'E' Stock)........ 7,300 379,600 -------------- BEVERAGES -- 3.0% Coca-Cola Co.................................. 9,700 720,225 PepsiCo, Inc.................................. 20,600 1,151,025 -------------- 1,871,250 -------------- COMMERCIAL SERVICES -- 1.4% +CUC International, Inc....................... 25,400 866,775 -------------- COMMUNICATIONS -- 1.6% +Clear Channel Communications, Inc............ 22,800 1,006,050 -------------- COMPUTER SERVICES -- 18.9% +3Com Corp.................................... 24,600 1,146,975 Adobe Systems, Inc............................ 15,400 954,800 +America Online, Inc.......................... 19,000 712,500 Autodesk, Inc................................. 21,800 746,650 Bay Networks, Inc............................. 15,750 647,718 +Broderbund Software, Inc..................... 7,900 479,925 +Cisco Systems, Inc........................... 19,600 1,462,650 Computer Associates International, Inc........ 22,600 1,285,375 First Data Corp............................... 16,174 1,081,630 +Intuit, Inc.................................. 11,900 928,200 +Microsoft Corp............................... 11,300 991,575 **SAP AG, ADR................................. 18,400 936,100 +Silicon Graphics, Inc........................ 19,900 547,250 -------------- 11,921,348 -------------- COSMETICS & SOAPS -- 1.5% Gillette Co................................... 18,000 938,250 -------------- DIVERSIFIED OFFICE EQUIPMENT -- 1.4% +COMPAQ Computer Corp......................... 19,000 912,000 -------------- DRUGS AND HOSPITAL SUPPLIES -- 12.3% Astra AB (ADR A).............................. 38,000 1,501,000 +Chiron Corporation........................... 8,700 961,350 Eli Lilly & Co................................ 22,700 1,276,875 Johnson & Johnson............................. 8,700 744,937 Merck & Co., Inc.............................. 13,200 867,900 Pfizer, Inc................................... 13,400 844,200 Smithkline Beecham PLC, ADR, UTS.............. 28,600 1,587,300 -------------- 7,783,562 -------------- ELECTRICAL EQUIPMENT -- 1.4% +Applied Materials, Inc....................... 21,700 854,437 -------------- ELECTRONICS -- 16.4% Duracell International, Inc................... 17,300 895,275 Hewlett-Packard Co............................ 22,000 1,842,500 Intel Corp.................................... 30,100 1,708,175 +International Rectifier Corp................. 41,200 1,030,000 +LSI Logic Corp............................... 35,200 1,152,800 DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ---------- -------------- +Macromedia Inc............................... 15,200 $ 794,200 Motorola, Inc................................. 12,300 701,100 Nokia AB Corp. (ADR A)........................ 16,900 656,988 +Symbol Technologies, Inc..................... 24,500 967,750 Texas Instruments, Inc........................ 12,200 631,350 -------------- 10,380,138 -------------- FINANCIAL SERVICES -- 2.5% Federal National Mortgage Association......... 12,900 1,601,213 -------------- HOSPITAL MANAGEMENT -- 1.0% +PhyCor, Inc.................................. 12,300 621,919 -------------- INSURANCE -- 6.3% CIGNA Corp.................................... 6,400 660,800 ITT Hartford Group, Inc....................... 6,000 290,250 MGIC Investment Corp.......................... 16,500 895,125 Mutual Risk Management, Ltd................... 15,200 695,400 United Healthcare Corp........................ 22,800 1,493,400 -------------- 4,034,975 -------------- LEISURE -- 3.0% +Harrah's Entertainment, Inc.................. 17,800 431,650 Walt Disney Co................................ 24,700 1,457,300 -------------- 1,888,950 -------------- MACHINERY -- 1.2% Harnischfeger Industries, Inc................. 23,400 778,050 -------------- MEDIA -- 3.5% Omnicom Group, Inc............................ 33,400 1,244,150 Reuters Holdings PLC, ADR..................... 18,000 992,250 -------------- 2,236,400 -------------- MINERAL RESOURCES -- 1.0% Minerals Technologies, Inc.................... 16,500 602,250 -------------- MISCELLANEOUS - BASIC INDUSTRY -- 2.9% +ITT Corp..................................... 13,700 726,100 +Scholastic Corp.............................. 14,000 1,088,500 -------------- 1,814,600 -------------- RESTAURANTS -- 0.2% McDonald's Corp............................... 2,100 94,763 -------------- RETAIL -- 6.2% +AutoZone, Inc................................ 36,400 1,051,050 Dollar General Corporation.................... 12,500 259,375 Home Depot, Inc............................... 21,100 1,010,162 +Kohl's Corp.................................. 17,300 908,250 +Micro Warehouse, Inc......................... 16,000 692,000 -------------- 3,920,837 -------------- TELECOMMUNICATIONS -- 2.8% +Tellabs, Inc................................. 24,700 913,900 Vodafone Group PLC, ADR....................... 23,500 828,375 -------------- 1,742,275 -------------- TOTAL COMMON STOCKS (Cost $55,254,423)........................................... 59,298,842 -------------- B34 PRUDENTIAL JENNISON (CONTINUED) DECEMBER 31, 1995 PRINCIPAL SHORT-TERM INVESTMENTS -- 12.0% AMOUNT VALUE ------------- -------------- REPURCHASE AGREEMENTS Joint Repurchase Agreement Account, 5.838%, 01/02/96 (see Note 4)............... $ 7,557,000 $ 7,557,000 -------------- LIABILITIES -- (6.0%) (net of other assets)........................................ (3,765,272) -------------- TOTAL NET ASSETS -- 100.0%..................................... $ 63,090,570 -------------- -------------- The following abbreviations are used in portfolio descriptions: ADR American Depository Receipt PLC Public Limited Company (British Corporation) UTS Unit Trust Shares **Indicates a restricted security; the aggregate cost of the restricted securities is $920,661. The aggregate value, $936,100 is approximately 1.48% of net assets. (See Note 2) +No dividend was paid on this security during the 12 months ending December 31, 1995. SEE NOTES TO FINANCIAL STATEMENTS ON PAGES C48 THROUGH C52. B35 SMALL CAPITALIZATION STOCK DECEMBER 31, 1995 MARKET COMMON STOCKS -- 91.1% SHARES VALUE ------------- ------------- AEROSPACE -- 0.6% AAR Corp...................................... 2,900 $ 63,800 +BE Aerospace, Inc............................ 2,900 30,813 Kaman Corp. (Class 'A' Stock)................. 3,200 35,600 +Orbital Sciences Corp........................ 5,100 65,025 +UNC, Inc..................................... 3,100 18,600 Watkins-Johnson Co............................ 1,500 65,625 -------------- 279,463 -------------- AIRLINES -- 0.4% Comair Holdings, Inc.......................... 5,550 149,156 +Mesa Airlines, Inc........................... 400 3,600 SkyWest, Inc.................................. 1,900 24,463 -------------- 177,219 -------------- ALUMINUM -- 0.1% +IMCO Recycling, Inc.......................... 2,200 53,900 -------------- AUTOS - CARS & TRUCKS -- 0.9% A.O. Smith Corp............................... 3,900 80,925 +Custom Chrome, Inc........................... 1,000 23,125 Myers Industries, Inc......................... 3,120 51,090 Simpson Industries, Inc....................... 3,300 29,700 Spartan Motors, Inc........................... 2,400 26,400 Standard Motor Products, Inc.................. 2,500 37,500 Standard Products Co.......................... 3,100 54,638 +TBC Corp..................................... 4,000 34,500 Wabash National Corp.......................... 3,500 77,875 Wynn's International, Inc..................... 1,000 29,625 -------------- 445,378 -------------- BANKS AND SAVINGS & LOANS -- 8.4% +Astoria Financial Corp....................... 2,200 100,375 Bell Bancorp, Inc............................. 1,400 50,050 +California Federal Bank (Class 'A' Stock).... 9,100 143,325 CCB Financial Corp............................ 2,500 138,750 Center Financial Corp......................... 2,200 38,500 Centura Banks, Inc............................ 4,000 140,500 +Coast Savings Financial, Inc................. 3,400 117,725 Collective Bancorp, Inc....................... 3,500 88,812 +Commercial Federal Corp...................... 2,400 90,600 Cullen/Frost Bankers, Inc..................... 1,900 95,000 Deposit Guaranty Corp......................... 3,200 142,400 Downey Financial Corp......................... 3,230 70,656 First Commercial Corp......................... 4,787 157,971 First Financial Corp.......................... 5,200 119,600 First Michigan Bank Corp...................... 3,430 95,182 +FirstBank Puerto Rico........................ 2,700 60,413 Firstmerit Corp............................... 6,100 183,000 JSB Financial, Inc............................ 2,000 63,250 Keystone Financial, Inc....................... 4,200 126,000 Liberty Bancorp, Inc.......................... 1,600 59,600 Loyola Capital Corp........................... 1,300 49,237 Magna Group, Inc.............................. 4,500 106,875 Mark Twain Bancshares, Inc.................... 2,600 100,750 N.S. Bancorp, Inc............................. 1,000 38,750 North American Mortgage Co.................... 2,600 55,250 ONBANcorp, Inc................................ 2,700 90,113 +Premier Bancorp, Inc......................... 4,900 114,537 Provident Bancorp, Inc........................ 3,000 141,000 RCSB Financial, Inc........................... 2,500 59,375 +Riggs National Corp.......................... 5,000 65,000 Roosevelt Financial Group, Inc................ 7,200 139,500 Sovereign Bancorp, Inc........................ 8,500 86,063 St. Paul Bancorp, Inc......................... 3,500 89,250 DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ---------- -------------- Summit Bancorp................................ 6,000 $ 189,000 Union Planters Corp........................... 7,500 239,063 Whitney Holding Corp.......................... 2,500 77,500 Zions Bancorp................................. 2,700 216,675 -------------- 3,939,647 -------------- BEVERAGES -- 0.1% Coca Cola Bottling Co......................... 1,600 56,000 -------------- CHEMICALS -- 1.1% Chemed Corp................................... 1,900 73,863 +Cytec Industries, Inc........................ 3,100 193,362 +Hauser Chemical Research, Inc................ 1,700 7,650 Lilly Industries, Inc. (Class 'A' Stock)...... 3,800 48,450 +McWhorter Technologies, Inc.................. 2,100 30,975 +Mycogen Corp................................. 3,100 52,700 Quaker Chemical Corp.......................... 1,400 18,900 +Scotts Co. (Class 'A' Stock)................. 3,200 63,600 WD-40 Co...................................... 1,200 49,200 -------------- 538,700 -------------- CHEMICALS - SPECIALTY -- 0.3% First Mississippi Corp........................ 3,800 100,700 Penwest, Ltd.................................. 1,100 27,225 -------------- 127,925 -------------- COMMERCIAL SERVICES -- 2.1% ABM Industries, Inc........................... 1,800 49,950 ADVO, Inc..................................... 3,900 101,400 Bowne & Company, Inc.......................... 3,200 64,000 +CDI Corp..................................... 3,700 66,600 +Corrections Corp. of America................. 5,500 204,187 +Franklin Quest Co............................ 4,100 79,950 +Insurance Auto Auction, Inc.................. 1,900 20,425 +Interim Services, Inc........................ 2,000 69,500 LSB Industries, Inc........................... 2,200 9,625 Merrill Corp.................................. 1,200 19,200 +NFO Research, Inc............................ 900 23,850 +Pharmaceutical Marketing Services, Inc....... 2,100 31,763 Plenum Publishing Corp........................ 700 27,300 +Primark Corp................................. 4,300 129,000 Thomas Nelson, Inc............................ 3,000 39,000 True North Communications, Inc................ 4,400 81,400 -------------- 1,017,150 -------------- COMPUTER SERVICES -- 9.3% +Acxiom Corp.................................. 3,900 106,763 +America Online, Inc.......................... 15,100 566,250 +American Management Systems, Inc............. 4,100 123,000 Amtech Corp................................... 2,800 14,350 +Auspex Systems, Inc.......................... 1,200 21,900 +BancTec, Inc................................. 3,300 61,050 +Banyan Systems, Inc.......................... 3,100 31,775 +BBN Corp..................................... 3,200 131,600 +BISYS Group, Inc............................. 3,700 113,775 +Broderbund Software, Inc..................... 3,900 236,925 +Cerner Corp.................................. 6,100 125,050 +Chips & Technologies, Inc.................... 3,800 34,200 +Comverse Technology, Inc..................... 4,000 80,000 +Continuum Inc................................ 3,500 138,250 +Control Data Systems, Inc.................... 2,400 47,100 +FileNet Corp................................. 2,400 112,800 Gerber Scientific, Inc........................ 4,400 71,500 +Hyperion Software Corp....................... 2,800 59,500 +Keane, Inc................................... 2,600 57,524 B36 SMALL CAPITALIZATION STOCK (CONTINUED) DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE --------- ------------ +Komag, Inc................................... 4,800 $ 221,400 National Data Corp............................ 4,000 99,000 +Network General Corp......................... 3,900 130,163 +Norand Corp.................................. 1,200 15,000 +Paxar Corp................................... 4,050 53,663 +Platinum Software Corp....................... 2,500 14,063 +PLATINUM Technology, Inc..................... 8,400 154,350 +Progress Software Corp....................... 2,200 82,500 +Read-Rite Corp............................... 8,500 197,625 +Standard Microsystems Corp................... 2,500 41,250 +Sterling Software, Inc....................... 4,900 305,637 +SunGard Data Systems, Inc.................... 7,200 205,200 System Software Associates, Inc............... 7,300 158,775 +Tech Data Corp............................... 7,200 108,000 Telxon Corp................................... 2,700 61,087 +Tricord Systems, Inc......................... 2,200 6,600 +Viewlogic Systems, Inc....................... 3,100 31,000 +Wall Data, Inc............................... 1,700 28,050 +Xircom, Inc.................................. 3,600 44,550 +Zebra Technologies Corp. (Class 'A' Stock)... 4,200 142,800 +Zilog, Inc................................... 3,600 131,850 -------------- 4,365,875 -------------- CONSTRUCTION -- 0.7% +BMC West Corp................................ 1,500 22,125 +Insituform Technologies, Inc. (Class 'A' Stock)...................................... 5,100 59,287 +Kasler Holding Co............................ 5,100 33,150 M.D.C. Holdings, Inc.......................... 3,200 22,800 Ply-Gem Industries, Inc....................... 2,800 45,500 Republic Group, Inc........................... 1,900 26,600 +Southern Energy Homes, Inc................... 1,575 27,563 Stone & Webster, Inc.......................... 2,700 96,863 -------------- 333,888 -------------- CONTAINERS -- 0.1% +Shorewood Packaging Corp..................... 3,100 44,175 -------------- COSMETICS & SOAPS -- 0.2% Helene Curtis Industries, Inc................. 1,900 60,088 Nature's Sunshine Products, Inc............... 2,000 50,500 -------------- 110,588 -------------- DIVERSIFIED GAS -- 4.6% Atmos Energy Corp............................. 2,900 66,700 +Barrett Resources Corp....................... 4,710 138,356 +Benton Oil & Gas Co.......................... 4,700 70,500 +Box Energy Corp. (Class 'B' Stock)........... 3,700 31,913 Cascade Natural Gas Corp...................... 1,722 27,766 Connecticut Energy Corp....................... 1,700 37,825 Cross Timbers Oil Co.......................... 3,300 58,163 Daniel Industries............................. 2,200 31,350 Devon Energy Corp............................. 4,200 107,100 Energen Corp.................................. 2,000 48,250 +Gerrity Oil & Gas Corp....................... 2,600 10,400 +HS Resources, Inc............................ 2,000 25,750 KCS Energy, Inc............................... 2,100 31,500 New Jersey Resources Corp..................... 3,200 96,400 Northwest Natural Gas Co...................... 2,600 85,800 +Oceaneering International, Inc............... 4,400 56,650 Pennsylvania Enterprises, Inc................. 1,000 37,875 Phoenix Resource Companies, Inc............... 2,800 48,300 +Plains Resources, Inc........................ 2,800 25,200 Pogo Producing Co............................. 6,100 172,325 DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ----------- ------------ Public Service Company of North Carolina, Inc......................................... 3,400 $ 60,775 Snyder Oil Corp............................... 5,700 69,113 Sonat Offshore Drilling, Inc.................. 5,100 228,225 Southwest Gas Corp............................ 4,500 79,313 Southwestern Energy Co........................ 4,600 58,650 St. Mary Land & Exploration Co................ 1,400 19,600 +Tuboscope Vetco International, Inc........... 3,400 19,337 United Cities Gas Co.......................... 2,200 41,250 +United Meridian Corp......................... 5,200 90,350 Vintage Petroleum, Inc........................ 3,600 81,000 Washington Energy Co.......................... 4,400 81,950 WICOR, Inc.................................... 3,400 109,650 Wiser Oil Co.................................. 1,700 20,400 -------------- 2,167,736 -------------- DIVERSIFIED OFFICE EQUIPMENT -- 0.2% Nashua Corp................................... 1,200 16,350 New England Business Service, Inc............. 2,700 59,063 -------------- 75,413 -------------- DRUGS AND HOSPITAL SUPPLIES -- 7.4% ADAC Laboratories............................. 3,100 37,588 +Advanced Tissue Sciences, Inc................ 6,400 64,800 +Alliance Pharmaceutical Corp................. 4,700 64,038 Alpharma Inc. (Class 'A' Stock)............... 3,900 101,887 +American Medical Response, Inc............... 3,500 113,750 +Amsco International, Inc..................... 6,000 89,250 Ballard Medical Products...................... 5,000 89,375 +Calgene, Inc................................. 5,400 24,975 +CellPro, Inc................................. 2,700 43,200 +Cephalon, Inc................................ 4,200 171,150 +Circon Corp.................................. 2,300 46,575 Collagen Corp................................. 1,500 31,687 +COR Therapeutics, Inc........................ 3,100 25,963 +Cygnus, Inc.................................. 3,400 76,075 +CytRx Corp................................... 5,000 5,625 +Enzo Biochem, Inc............................ 4,070 78,347 +Heart Technology, Inc........................ 2,700 88,763 +IDEXX Laboratories, Inc...................... 5,700 267,900 +ImmuLogic Pharmaceutical Corp................ 3,300 63,525 Invacare Corp................................. 5,500 138,875 +Liposome Company, Inc........................ 5,300 106,000 +Medimmune, Inc............................... 2,600 52,000 +Molecular Biosystems, Inc.................... 2,200 15,125 +NBTY, Inc.................................... 3,100 14,725 +North American Vaccine, Inc.................. 5,500 77,687 +Noven Pharmaceuticals, Inc................... 3,000 33,750 Omnicare, Inc................................. 4,900 219,275 Owens & Minor, Inc............................ 5,800 73,950 +Patterson Dental Co.......................... 3,000 81,000 +Perseptive Biosystems, Inc................... 2,500 21,250 +Pharmaceutical Resources, Inc................ 3,200 24,000 +Protein Design Labs, Inc..................... 2,900 67,063 +Regeneron Pharmaceuticals, Inc............... 3,800 48,450 +Resound Corp................................. 2,600 18,850 +Respironics, Inc............................. 3,200 67,200 +Roberts Pharmaceutical Corp.................. 3,500 62,125 +SciClone Pharmaceuticals, Inc................ 2,700 13,837 +Sequus Pharmaceuticals, Inc.................. 4,700 66,975 +SpaceLabs Medical, Inc....................... 1,700 48,875 +STERIS Corp.................................. 3,400 109,650 +Summit Technology, Inc....................... 5,400 182,250 +Sunrise Medical, Inc......................... 3,400 62,900 +Syncor International Corp.................... 1,700 11,475 B37 SMALL CAPITALIZATION STOCK (CONTINUED) DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ----------- ----------- +TECNOL Medical Products, Inc................. 3,800 $ 68,400 +The Immune Response Corp..................... 3,200 17,800 +TheraTech, Inc............................... 2,100 37,800 +U.S. Bioscience, Inc......................... 7,300 33,763 +Vertex Pharmaceuticals, Inc.................. 3,100 82,150 +VISX, Inc.................................... 2,700 105,300 Vital Signs, Inc.............................. 2,300 60,662 +Zoll Medical Corp............................ 1,000 9,000 -------------- 3,516,635 -------------- ELECTRICAL EQUIPMENT -- 2.1% Augat, Inc.................................... 3,500 59,937 Baldor Electric Co............................ 5,150 103,644 Fluke Corp.................................... 1,500 56,625 +KEMET Corp................................... 7,200 171,900 +Kent Electronics Corp........................ 2,200 128,425 Kuhlman Corp.................................. 2,500 31,250 +Microchip Technology, Inc.................... 5,800 211,700 +Rexel, Inc................................... 4,400 59,400 +Valence Technology, Inc...................... 4,100 18,450 +Vicor Corp................................... 8,000 160,000 -------------- 1,001,331 -------------- ELECTRONICS -- 7.0% Allen Group, Inc.............................. 4,900 109,638 Bell Industries, Inc.......................... 1,320 29,700 +Benchmark Electronics, Inc................... 800 22,000 BMC Industries, Inc........................... 5,100 118,575 +C-COR Electronics, Inc....................... 600 14,100 Core Industries, Inc.......................... 1,800 23,175 +Cyrix Corp................................... 3,500 80,500 Dallas Semiconductor Corp..................... 4,900 101,675 +Dionex Corp.................................. 1,100 62,425 +Dynatech Corp................................ 2,800 47,600 +IMO Industries, Inc.......................... 3,100 21,313 +Input/Output, Inc............................ 3,800 219,450 +Integrated Circuit Systems, Inc.............. 2,000 24,750 +Intermagnetics General Corp.................. 2,218 46,577 +International Rectifier Corp................. 9,300 232,500 +Itron, Inc................................... 2,000 67,500 +Lattice Semiconductor Corp................... 3,900 127,238 +Marshall Industries.......................... 3,300 106,013 +Maxim Integrated Products, Inc............... 10,000 385,000 +Oak Industries, Inc.......................... 3,300 61,875 Pacific Scientific Co......................... 2,000 49,500 Pioneer Standard Electronics, Inc............. 3,900 51,675 +Plexus Corp.................................. 1,000 16,625 +S3, Inc...................................... 8,700 153,337 +Sanmina Corp................................. 1,200 62,250 +SCI Systems, Inc............................. 5,600 173,600 +StrataCom, Inc............................... 6,900 507,150 +Three-Five Systems, Inc...................... 1,500 25,312 Tseng Laboratories, Inc....................... 3,500 32,812 +Video Lottery Technologies, Inc.............. 2,000 9,500 +VLSI Technology, Inc......................... 8,800 159,500 Wyle Electronics.............................. 2,300 80,787 X-Rite, Inc................................... 3,600 50,850 Zero Corp..................................... 3,000 53,250 -------------- 3,327,752 -------------- ENVIRONMENTAL SERVICES -- 1.8% +Addington Resources, Inc..................... 2,700 39,487 +Allwaste, Inc................................ 7,400 35,150 Dames & Moore, Inc............................ 4,200 50,925 +Groundwater Technology, Inc.................. 1,200 16,800 DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ---------- ----------- +Ionics, Inc.................................. 2,600 $ 113,100 +OHM Corp..................................... 4,900 36,137 +Omega Environmental, Inc..................... 5,500 18,563 +Pure Technology International, Inc........... 4,700 11,456 +Sanifill, Inc................................ 3,300 110,138 +TETRA Technologies, Inc...................... 2,200 38,225 +U.S.A. Waste Services, Inc................... 10,575 199,603 +United States Filter Corp.................... 4,800 127,800 +Western Waste Industries..................... 2,700 73,913 -------------- 871,297 -------------- FINANCIAL SERVICES -- 3.3% Alex Brown, Inc............................... 2,900 121,800 +AMRESCO, Inc................................. 4,400 56,100 Charter One Financial, Inc.................... 8,240 252,350 Eaton Vance Corp.............................. 1,600 45,200 +Envoy Corporation............................ 2,100 36,356 Inter-Regional Financial Group, Inc........... 2,100 53,025 +Investors Financial Services Corp............ 69 1,432 Legg Mason, Inc............................... 2,500 68,750 +Medaphis Corp................................ 2,400 88,800 +National Auto Credit, Inc.................... 4,700 76,375 Pioneer Group, Inc............................ 4,700 128,075 Piper Jaffray Companies, Inc.................. 3,000 41,250 Quick & Reilly Group, Inc..................... 4,725 96,863 Raymond James Financial, Inc.................. 3,900 82,388 SEI Corp...................................... 3,500 76,125 TCF Financial Corp............................ 6,500 215,313 United States Trust Corp...................... 1,600 79,600 Waterhouse Investor Services, Inc............. 1,975 48,880 -------------- 1,568,682 -------------- FOODS -- 1.5% Chiquita Brands International, Inc............ 10,100 138,875 Dekalb Genetics Corp. (Class 'B' Stock)....... 800 36,100 GoodMark Foods, Inc........................... 1,300 23,075 Interstate Bakeries Corp...................... 6,800 152,150 +J & J Snack Foods Corp....................... 1,500 16,500 Nash-Finch Co................................. 1,900 34,675 Richfood Holdings, Inc........................ 4,900 131,075 Rykoff-Sexton, Inc............................ 2,700 47,250 +Smithfield Foods, Inc........................ 2,600 82,550 Super Food Services, Inc...................... 2,100 27,300 -------------- 689,550 -------------- FOREST PRODUCTS -- 0.4% Caraustar Industries, Inc..................... 4,600 92,000 Mosinee Paper Corp............................ 1,300 33,475 Pope & Talbot, Inc............................ 2,400 31,800 Universal Forest Products, Inc................ 2,900 26,825 -------------- 184,100 -------------- FURNITURE -- 0.6% +Ethan Allen Interiors, Inc................... 2,700 55,013 Interface, Inc. (Class 'A' Stock)............. 2,900 49,300 Juno Lighting, Inc............................ 3,200 51,200 La-Z-Boy Chair Co............................. 3,400 104,975 Thomas Industries, Inc........................ 1,900 44,650 -------------- 305,138 -------------- HEALTHCARE -- 0.7% +Coventry Corp................................ 6,100 125,813 +Sybron International Corp.................... 8,200 194,750 -------------- 320,563 -------------- B38 SMALL CAPITALIZATION STOCK (CONTINUED) DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ---------- ------------ HOSPITAL MANAGEMENT -- 4.2% +Community Health Systems, Inc................ 3,500 $ 124,688 +Express Scripts, Inc. (Class 'A' Stock)...... 2,100 107,100 +Genesis Health Ventures, Inc................. 2,700 98,550 +GranCare, Inc................................ 4,300 62,350 Integrated Health Services, Inc............... 3,900 97,500 +Lincare Holdings, Inc........................ 5,100 127,500 +Living Centers of America, Inc............... 3,700 129,500 +Magellan Health Services, Inc................ 5,300 127,200 +Mariner Health Group, Inc.................... 3,600 60,300 +PhyCor, Inc.................................. 6,550 331,184 +Quantum Health Resources, Inc................ 2,800 27,475 +Universal Health Services, Inc. (Class 'B' Stock)...................................... 2,500 110,937 +Vencor, Inc.................................. 13,388 435,110 +Vivra, Inc................................... 6,800 170,850 -------------- 2,010,244 -------------- HOUSING RELATED -- 0.9% +Champion Enterprises, Inc.................... 2,700 83,363 Continental Homes Holding Corp................ 1,200 29,550 Fedders Corp.................................. 7,100 40,825 Oakwood Homes Corp............................ 4,200 161,175 Ryland Group, Inc............................. 2,800 39,200 Skyline Corp.................................. 1,900 39,425 Standard-Pacific Corp......................... 5,700 35,625 -------------- 429,163 -------------- INSURANCE -- 4.3% Arthur J. Gallagher and Co.................... 2,800 104,300 Allied Group, Inc............................. 1,500 54,000 American Bankers Insurance Group, Inc......... 3,400 132,600 Capital Re Corp............................... 2,700 83,026 Capitol American Financial Corp............... 3,100 70,137 CMAC Investment Corp.......................... 2,000 88,000 Enhance Financial Services Group, Inc......... 3,300 87,863 Fidelity National Financial, Inc.............. 1,900 35,387 First American Financial Corp................. 2,100 56,175 Fremont General Corp.......................... 3,080 113,190 Frontier Insurance Group, Inc................. 2,300 73,600 Hilb, Rogal and Hamilton Co................... 2,700 36,113 Integon Corp.................................. 2,900 59,812 Life Partners Group, Inc...................... 5,200 70,850 Life Re Corp.................................. 2,700 67,500 Mutual Risk Management, Ltd................... 2,400 109,800 National Re Corp.............................. 3,100 117,800 Orion Capital Corp............................ 2,700 117,112 Protective Life Corp.......................... 5,100 159,375 Selective Insurance Group, Inc................ 2,700 95,850 +Sierra Health Services, Inc.................. 3,300 104,775 Trenwick Group, Inc........................... 1,000 56,250 Washington National Corp...................... 2,300 63,537 Zenith National Insurance Corp................ 3,200 68,400 -------------- 2,025,452 -------------- LEISURE -- 2.4% Anthony Industries, Inc....................... 2,100 48,300 Arctco, Inc................................... 5,600 72,800 +Aztar Corp................................... 7,000 56,000 +Bally Gaming International, Inc.............. 1,500 12,187 +Bell Sports Corp............................. 2,700 21,600 +Boomtown, Inc................................ 1,700 8,500 DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ---------- ----------- +Carmike Cinemas, Inc. (Class 'A' Stock)...... 2,000 $ 45,000 +Casino Magic Corp............................ 6,300 19,687 +Cineplex Odeon Corp.......................... 20,300 30,450 +Cobra Golf, Inc.............................. 3,400 121,125 +Grand Casinos, Inc........................... 7,650 177,863 +Hollywood Park, Inc.......................... 3,500 35,218 Huffy Corp.................................... 2,500 25,312 +International Lottery & Totalizator Systems, Inc......................................... 3,200 4,400 +Players International, Inc................... 5,400 57,713 +Regal Cinemas, Inc........................... 3,350 99,663 +Roadmaster Industries, Inc................... 9,200 21,850 +Score Board, Inc............................. 1,900 8,313 Showboat, Inc................................. 2,800 73,850 Sturm Ruger & Company, Inc.................... 2,400 65,700 Thor Industries, Inc.......................... 1,600 31,000 Winnebago Industries, Inc..................... 4,600 35,650 +WMS Industries, Inc.......................... 4,600 75,325 -------------- 1,147,506 -------------- LODGING -- 0.3% Marcus Corp................................... 3,550 97,181 +Prime Hospitality Corp....................... 5,500 55,000 -------------- 152,181 -------------- MACHINERY -- 2.3% AGCO Corp..................................... 4,200 214,200 +Astec Industries, Inc........................ 1,900 18,762 +Cognex Corp.................................. 6,800 236,300 +Global Industrial Technologies, Inc.......... 4,300 81,162 Kysor Industrial Corp......................... 1,100 26,675 +Lindsay Manufacturing Co..................... 700 26,950 Manitowoc Company, Inc........................ 1,500 45,937 +Novellus Systems, Inc........................ 3,100 167,400 Regal Beloit Corp............................. 3,700 80,475 Roper Industries, Inc......................... 2,300 84,525 +Royal Appliance Manufacturing Co............. 4,400 11,000 SPX Corp...................................... 2,300 36,513 Toro Co....................................... 2,300 75,613 -------------- 1,105,512 -------------- MEDIA -- 0.6% +Catalina Marketing Corp...................... 1,700 106,675 +International Family Entertainment, Inc. (Class 'B' Stock)........................... 6,800 111,350 +NTN Communications, Inc...................... 4,100 18,706 +Westcott Communications, Inc................. 3,700 50,875 -------------- 287,606 -------------- METALS - DIVERSIFIED -- 1.0% Amcast Industrial Corp........................ 1,600 29,200 AMCOL International Corp...................... 3,600 51,300 Brenco, Inc................................... 1,700 17,425 +Castech Aluminum Group, Inc.................. 2,400 32,400 Glamis Gold, Ltd.............................. 5,000 31,250 Handy & Harman................................ 2,700 44,550 +Hecla Mining Co.............................. 8,600 59,125 +Magma Copper Co.............................. 8,100 225,788 -------------- 491,038 -------------- MINERAL RESOURCES -- 0.3% Coeur D'Alene Mines Corp...................... 3,400 58,225 Dravo Corp.................................... 2,800 33,600 +Sunshine Mining and Refining Co.............. 34,200 47,025 ------------- 138,850 ------------- B39 SMALL CAPITALIZATION STOCK (CONTINUED) DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE -------- ----------- MISCELLANEOUS - BASIC INDUSTRY -- 4.9% Air Express International Corp................ 2,900 $ 66,700 +Alliant Techsystems, Inc..................... 2,300 116,438 AMTROL, Inc................................... 1,300 19,825 Apogee Enterprises, Inc....................... 2,600 44,200 Aquarion Co................................... 1,200 30,600 Bassett Furniture Industries, Inc............. 2,700 62,775 Butler Manufacturing Co....................... 1,400 54,950 BW/IP, Inc. (Class 'A' Stock)................. 4,200 69,300 Clarcor, Inc.................................. 2,700 55,013 Consumers Water Co............................ 1,300 23,725 +Cyrk International, Inc...................... 2,000 19,500 +Fibreboard Corp.............................. 1,600 35,800 +Figgie International, Inc. (Class 'A' Stock). 3,000 31,125 Fisher Scientific International, Inc.......... 3,000 100,125 +Flow International Corp...................... 2,800 26,250 +Gentex Corp.................................. 2,700 59,400 Greenfield Industries, Inc.................... 2,900 90,625 +Griffon Corp................................. 5,400 48,600 Harmon Industries, Inc........................ 1,200 18,900 Hayes Wheels International, Inc............... 3,200 82,000 Insteel Industries, Inc....................... 1,600 11,000 +Intermet Corp................................ 4,400 46,200 +Jan Bell Marketing, Inc...................... 4,500 11,250 Justin Industries, Inc........................ 4,900 53,900 K-Swiss, Inc. (Class 'A' Stock)............... 1,100 11,962 +L.A. Gear, Inc............................... 3,900 6,825 +Lydall, Inc.................................. 3,300 75,075 Medusa Corp................................... 3,000 79,500 +Mohawk Industries, Inc....................... 6,000 93,750 +Mueller Industries, Inc...................... 3,100 90,675 O'Sullivan Corp............................... 3,000 31,125 +Paragon Trade Brands, Inc.................... 2,100 49,088 +SPS Technologies, Inc........................ 1,000 53,375 Standex International Corp.................... 2,600 85,150 Texas Industries, Inc......................... 2,100 111,300 +Timberland Co. (Class 'A' Stock)............. 2,000 39,750 TJ International, Inc......................... 3,200 59,200 Tredegar Industries, Inc...................... 1,500 48,750 Valmont Industries, Inc....................... 2,300 56,924 Walbro Corp................................... 1,600 28,800 +Whittaker Corp............................... 1,500 32,625 +Wolverine Tube, Inc.......................... 2,600 97,500 Wolverine World Wide, Inc..................... 3,350 105,525 -------------- 2,335,100 -------------- MISCELLANEOUS - CONSUMER GROWTH/STABLE -- 0.9% +DeVRY, Inc................................... 3,000 81,000 Hughes Supply, Inc............................ 1,100 31,075 Ideon Group, Inc.............................. 5,200 52,650 +Mail Boxes, Etc.............................. 2,000 25,000 +Merisel, Inc................................. 5,600 24,500 Philadelphia Suburban Corp.................... 2,200 45,650 Southern California Water Co.................. 1,500 30,375 +Valassis Communications, Inc................. 8,200 143,500 -------------- 433,750 -------------- PETROLEUM -- 0.4% Cabot Oil & Gas Corp. (Class 'A' Stock)....... 4,200 61,425 KN Energy, Inc................................ 5,100 148,538 -------------- 209,963 -------------- DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ---------- ----------- PETROLEUM SERVICES -- 1.8% Camco International, Inc...................... 4,600 $ 128,800 +Hornbeck Offshore Services, Inc.............. 2,200 43,175 +Landmark Graphics Corp....................... 2,700 62,775 +Mesa, Inc.................................... 11,900 44,625 +Newfield Exploration Co...................... 3,100 83,700 +Noble Drilling Corp.......................... 15,200 136,800 +Offshore Logistics, Inc...................... 3,700 46,713 Piedmont Natural Gas Company, Inc............. 5,200 120,900 +Pool Energy Services Co...................... 2,400 22,800 +Pride Petroleum Services, Inc................ 4,600 48,875 Production Operators Corp..................... 1,600 52,800 +Seitel, Inc.................................. 1,722 60,915 -------------- 852,878 -------------- RAILROADS -- 0.1% +RailTex, Inc................................. 1,600 33,600 -------------- REAL ESTATE DEVELOPMENT -- 0.3% +Toll Brothers, Inc........................... 6,300 144,900 -------------- RESTAURANTS -- 1.0% Applebee's International, Inc................. 5,700 129,675 +Au Bon Pain, Inc. (Class 'A' Stock).......... 2,200 18,150 +Bertucci's, Inc.............................. 1,500 7,500 +Checkers Drive-In Restaurants, Inc........... 9,700 10,003 +Cheesecake Factory........................... 1,700 36,550 +Flagstar Companies, Inc...................... 7,700 24,063 +Foodmaker, Inc............................... 5,700 33,487 +Fresh Choice, Inc............................ 1,000 6,250 +IHOP Corp.................................... 1,700 44,200 +Showbiz Pizza Time, Inc...................... 2,300 27,888 +Sonic Corp................................... 2,350 44,650 +Taco Cabana (Class 'A' Stock)................ 800 4,000 TCBY Enterprises, Inc......................... 4,600 18,400 +TPI Enterprises, Inc......................... 3,600 11,250 +Triarc Companies, Inc. (Class 'A' Stock)..... 5,500 60,500 -------------- 476,566 -------------- RETAIL -- 3.4% Arbor Drugs, Inc.............................. 4,650 97,650 Big B, Inc.................................... 3,100 31,000 +Bombay Company, Inc.......................... 6,900 43,987 +Books-A-Million, Inc......................... 3,300 42,488 Casey's General Stores, Inc................... 4,500 98,438 Cash America International, Inc............... 5,000 27,500 Cato Corp. (Class 'A' Stock).................. 4,600 35,650 +CompUSA, Inc................................. 3,900 121,387 +Damark International, Inc.................... 1,400 10,500 +Designs, Inc................................. 2,900 20,300 +Dress Barn, Inc.............................. 3,900 38,513 +Eagle Hardware & Garden, Inc................. 4,300 32,250 Fabri-Centers of America (Class 'A' Stock).... 3,500 46,375 Fay's, Inc.................................... 3,800 28,500 +Filene's Basement Corp....................... 3,600 8,325 +Forschner Group, Inc......................... 1,400 17,325 +Gottschalks, Inc............................. 1,900 9,975 Hechinger Co. (Class 'A' Stock)............... 8,000 35,000 +Hi-Lo Automotive, Inc........................ 1,800 9,225 J. Baker, Inc................................. 2,600 14,950 +Lechters, Inc................................ 900 5,794 +Levitz Furniture, Inc........................ 5,600 18,900 Lillian Vernon Corp........................... 1,800 24,075 +Michaels Stores, Inc......................... 4,000 55,000 B40 SMALL CAPITALIZATION STOCK (CONTINUED) DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ---------- ----------- +MicroAge, Inc................................ 2,700 $ 21,937 +Musicland Stores Corp........................ 6,400 27,200 Oshkosh B' Gosh, Inc. (Class 'A' Stock)....... 2,200 38,500 +Payless Cashways, Inc........................ 7,200 30,600 Pier 1 Imports, Inc........................... 7,300 83,037 +Proffitt's, Inc.............................. 1,800 47,250 Ross Stores, Inc.............................. 4,700 89,887 Russ Berrie & Company, Inc.................... 4,000 50,500 +Shoe Carnival, Inc........................... 2,300 8,625 Shopko Stores, Inc............................ 6,000 67,500 +Sports & Recreation, Inc..................... 3,700 26,363 +Stein Mart, Inc.............................. 4,000 44,000 Strawbridge & Clothier (Class 'A' Stock)...... 1,700 40,800 +Tyco Toys, Inc............................... 6,400 28,800 Venture Stores, Inc........................... 3,200 10,800 +Whole Foods Market, Inc...................... 2,500 34,687 +Williams-Sonoma, Inc......................... 4,600 85,100 -------------- 1,608,693 -------------- STEEL -- 0.8% +Acme Metals, Inc............................. 2,100 29,925 Birmingham Steel Corp......................... 5,400 80,325 Commercial Metals Co.......................... 2,900 71,775 +Material Sciences Corp....................... 2,900 43,138 +Northwestern Steel and Wire Co............... 4,500 36,563 +NS Group, Inc................................ 2,600 6,500 Quanex Corp................................... 2,400 46,500 Steel Technologies, Inc....................... 2,300 19,837 +WHX Corp..................................... 4,800 52,200 -------------- 386,763 -------------- TELECOMMUNICATIONS -- 2.2% +Aspect Telecommunications Corp............... 3,900 130,650 +BroadBand Technologies, Inc.................. 2,400 39,000 +California Microwave, Inc.................... 2,800 46,550 +Cellular Communications, Inc. (Class 'A' Stock)...................................... 2,300 114,425 +Centigram Communications Corp................ 1,200 23,700 +CommNet Cellular, Inc........................ 2,500 72,187 +Compression Labs, Inc........................ 2,900 18,125 +Digi International, Inc...................... 2,600 49,400 +Digital Microwave Corp....................... 3,000 30,000 +Geotek Communications, Inc................... 9,500 59,968 +InterVoice, Inc.............................. 3,000 57,000 +Network Equipment Technologies, Inc.......... 3,600 98,550 +Picturetel Corp.............................. 5,800 250,125 +Symmetricom, Inc............................. 2,800 38,500 -------------- 1,028,180 -------------- TEXTILES -- 1.9% +Ashworth, Inc................................ 2,200 11,275 Authentic Fitness Corp........................ 3,700 76,775 +Cone Mills Corp.............................. 5,100 57,375 Delta Woodside Industries, Inc................ 4,600 30,475 Dixie Yarns, Inc.............................. 1,700 6,587 +Fieldcrest Cannon, Inc....................... 1,600 26,600 G & K Services, Inc. (Class 'A' Stock)........ 3,300 84,150 DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE --------- ------------ +Galey & Lord, Inc............................ 2,100 $ 22,575 Guilford Mills, Inc........................... 2,600 52,975 Haggar Corp................................... 1,600 28,800 +Hartmarx Corp................................ 6,100 26,687 Johnston Industries, Inc...................... 1,800 14,400 Kellwood Co................................... 3,800 77,425 +Nautica Enterprises, Inc..................... 3,750 164,063 Oxford Industries, Inc........................ 1,600 26,800 Phillips-Van Heusen Corp...................... 5,000 49,375 +Pillowtex Corp............................... 1,900 22,087 St. John Knits, Inc........................... 1,600 85,000 +Tultex Corp.................................. 5,500 22,688 -------------- 886,112 -------------- TOBACCO -- 0.3% Dimon, Inc.................................... 6,800 119,850 -------------- TRUCKING/SHIPPING -- 1.3% +American Freightways, Inc.................... 5,800 60,175 Arkansas Best Corp............................ 3,400 26,775 Frozen Food Express Industries, Inc........... 2,800 24,500 +Heartland Express, Inc....................... 3,233 63,852 +Kirby Corp................................... 5,100 82,875 +Landstar Systems, Inc........................ 2,300 61,525 +M.S. Carriers, Inc........................... 1,900 38,000 Rollins Truck Leasing Corp.................... 8,300 92,337 TNT Freightways Corp.......................... 3,900 78,487 Werner Enterprises, Inc....................... 4,600 93,150 -------------- 621,676 -------------- UTILITY - ELECTRIC -- 1.6% Bangor Hydro-Electric Co...................... 1,200 13,800 Central Hudson Gas & Electric Corp............ 3,300 101,888 Central Vermont Public Service Corp........... 2,200 29,425 Commonwealth Energy System.................... 2,000 89,500 Eastern Utilities Associates.................. 3,800 89,775 Green Mountain Power Corp..................... 900 24,975 Interstate Power Co........................... 1,800 59,850 Orange & Rockland Utilities, Inc.............. 2,500 89,375 Sierra Pacific Resources...................... 5,400 126,225 TNP Enterprises, Inc.......................... 2,000 37,500 United Illuminating Co........................ 2,600 97,175 -------------- 759,488 -------------- TOTAL COMMON STOCKS (Cost $40,606,241)........................................... 43,203,176 -------------- PRINCIPAL SHORT-TERM INVESTMENTS -- 15.1% AMOUNT VALUE ------------- ------------- REPURCHASE AGREEMENTS -- 14.9% Joint Repurchase Agreement Account, 5.839%, 01/02/96 (see Note 4)............... $ 7,088,000 $ 7,088,000 ------------- U. S. GOVERNMENT & AGENCY OBLIGATIONS -- 0.2% US Treasury Bills, 5.230%, 03/14/96............................ 100,000 98,954 ------------- TOTAL SHORT-TERM INVESTMENTS.................................... $ 7,186,954 -------------- B41 SMALL CAPITALIZATION STOCK (CONTINUED) DECEMBER 31, 1995 ## VARIATION MARGIN ON OPEN FUTURES CONTRACTS -- 0.0%...................................... $ 16,780 -------------- LIABILITIES -- (6.2%) (net of other assets).................................... (2,939,984) -------------- TOTAL NET ASSETS -- 100.0%................................. $ 47,466,926 -------------- -------------- +No dividend was paid on this security during the 12 months ending December 31, 1995. ##Open futures contracts as of December 31, 1995 are as follows: PAR VALUE COVERED BY CONTRACT TYPE EXPIRATION DATE VALUE OF CONTRACTS - ------------------- ---- ----------------------------------- $3,257,100 MIDCAP 400 Index Mar 96 $3,270,750 Futures(30 contracts) $ 930,100 S&P 500 Index Futures Mar 96 $ 927,675 ---------- (3 contracts) ---------- $4,187,200 $4,198,425 SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. B42 GLOBAL PORTFOLIO DECEMBER 31, 1995 MARKET COMMON STOCKS -- 93.4% SHARES VALUE ---------- -------------- AUSTRALIA -- 4.9% Brambles Industries, Ltd. (Miscellaneous - Basic Industry)............ 393,500 $ 4,382,900 Broken Hill Proprietary Co., Ltd. (Metals - Diversified)...................... 428,331 6,043,085 Coca-Cola Amatil, Ltd. (Foods)..................................... 1,060,632 8,450,649 Publishing and Broadcasting, Ltd. (Media)..................................... 152,400 530,742 Qantas Airways, Ltd. (Airlines).................................. 317,000 527,270 -------------- 19,934,646 -------------- BELGIUM -- 1.0% Bekaert, SA (Miscellaneous - Basic Industry)............ 4,900 4,036,694 -------------- FEDERAL REPUBLIC OF GERMANY -- 2.4% Linde, AG (Machinery)................................. 8,040 4,684,636 Siemens, AG (Electrical Equipment)...................... 9,000 4,918,204 -------------- 9,602,840 -------------- FINLAND -- 0.7% Nokia Corp. (Class 'A' Stock) (Telecommunications)........................ 71,900 2,772,427 -------------- FRANCE -- 5.7% Carrefour Supermarche, SA (Retail).................................... 9,400 5,691,919 Imetal (Mineral Resources)......................... 29,552 3,523,473 **Lafarge, SA (Construction).............................. 1,210 77,806 Lafarge, SA (Construction).............................. 62,491 4,018,325 Legrand, SA (Electrical Equipment)...................... 26,900 4,144,788 Plastic Omnium (Autos - Cars & Trucks)..................... 7,265 497,511 Valeo, SA (Autos - Cars & Trucks)..................... 105,785 4,889,848 -------------- 22,843,670 -------------- HONG KONG -- 8.3% CDL Hotels International, Ltd. (Real Estate Development)................... 4,950,145 2,528,687 Citic Pacific, Ltd. (Miscellaneous - Basic Industry)............ 1,870,000 6,396,573 Guoco Group, Ltd. (Financial Services)........................ 1,553,000 7,531,523 Henderson Land Development (Real Estate Development)................... 677,000 4,079,948 Hung Hing Printing Group, Ltd. (Miscellaneous - Basic Industry)............ 3,452,000 830,355 Hutchison Whampoa, Ltd. (Miscellaneous - Basic Industry)............ 1,051,000 6,388,231 New World Development Co., Ltd. (Real Estate Development)................... 1,210,000 5,257,808 -------------- 33,013,125 -------------- DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ---------- ------------ INDONESIA -- 1.0% PT Kabelmetal Indonesia (Foreign) (Telecommunications)........................ 943,400 $ 773,616 Sampoerna H.M. (Foreign) (Tobacco)................................... 313,000 3,257,993 -------------- 4,031,609 -------------- ITALY -- 1.2% Telecom Italia Mobile SpA (Telecommunications)........................ 2,700,000 4,750,548 -------------- JAPAN -- 16.9% Aiwa, Co. (Electronics)............................... 127,000 2,970,904 Daibiru Corp. (Real Estate Development)................... 177,000 2,001,837 DDI Corp. (Telecommunications)........................ 540 4,175,930 Keyence Corp. (Electrical Equipment)...................... 31,800 3,657,999 Mitsubishi Bank (Banks and Savings & Loans)................. 81,000 1,902,658 Mitsui Fudosan (Real Estate Development)................... 400,000 4,910,585 Nichiei Co., Ltd. (Financial Services)........................ 96,000 7,145,481 Nintendo Corp. Ltd. (Other Technology).......................... 129,000 9,788,787 Nippon Television Network (Media)..................................... 20,500 5,469,309 Nissen Co., Ltd. (Retail).................................... 1,420 33,218 Nomura Securities Co., Ltd (Financial Services)........................ 200,000 4,349,928 Omron Corp. (Electronics)............................... 178,000 4,095,118 Onward Kashiyama Co., Ltd. (Textiles).................................. 100,000 1,623,973 Rohm Co. (Electronics)............................... 88,000 4,959,304 Sanwa Bank, Ltd. (Banks and Savings & Loans)................. 102,000 2,070,565 Sony Music Entertainment, Inc. (Leisure)................................... 117,600 6,138,618 Sumitomo Bank (Banks and Savings & Loans)................. 102,000 2,159,304 -------------- 67,453,518 -------------- MALAYSIA -- 2.2% I.J.M. Corp. Berhad (Construction).............................. 3,250,000 5,171,328 Renong Berhad (Miscellaneous - Basic Industry)............ 2,428,000 3,595,620 -------------- 8,766,948 -------------- MEXICO -- 1.2% Apasco, SA de CV (Miscellaneous - Basic Industry)............ 469,700 1,926,349 Cifra, SA de CV (Class 'B' Stock) (Retail).................................... 1,387,800 1,444,537 Fomento Economico Mexicano, SA de CV (Class 'B' Stock)(Miscellaneous -- Basic Industry)............................ 665,100 1,496,799 -------------- 4,867,685 -------------- B43 GLOBAL PORTFOLIO (CONTINUED) DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ---------- ----------- NETHERLANDS -- 2.5% Heineken, N.V. (Beverages)................................. 34,225 $ 6,060,762 Royal Dutch Petroleum (Petroleum)................................. 29,500 4,113,902 -------------- 10,174,664 -------------- NEW ZEALAND -- 0.4% Fletcher Challenge Forestry Division (Forest Products)........................... 279,204 397,640 Fletcher Challenge, Ltd. (Forest Products)........................... 453,800 1,046,531 -------------- 1,444,171 -------------- REPUBLIC OF KOREA -- 0.9% Samsung Electronics (New Common 3)(Electronics)................. 587 106,315 Samsung Electronics Co. (Electronics)............................... 13,830 2,513,735 Samsung Electronics Co. (New) (Electronics)............................... 5,810 1,048,534 -------------- 3,668,584 -------------- SINGAPORE -- 3.9% Overseas Chinese Banking Corp., Ltd. (Foreign) (Banks and Savings & Loans)................. 330,000 4,129,958 Overseas Union Bank, Ltd. (Foreign) (Banks and Savings & Loans)................. 925,000 6,376,830 Sembawang Maritime, Ltd. (Trucking/Shipping)......................... 883,500 2,811,107 Wing Tai Holdings, Ltd. (Miscellaneous - Basic Industry)............ 1,070,250 2,186,964 -------------- 15,504,859 -------------- SPAIN -- 2.2% Banco Popular Espanol, SA (Banks and Savings & Loans)................. 23,800 4,377,573 Centros Commerciales Pryca, SA (Retail).................................... 116,762 2,443,317 Dragados Y Construcciones, SA (Construction).............................. 141,500 1,855,699 -------------- 8,676,589 -------------- SWEDEN -- 4.3% Astra, AB (Series 'B' Free) (Drugs and Hospital Supplies)............... 181,350 7,173,439 Autoliv, AB (Free) (Autos - Cars & Trucks)..................... 60,000 3,501,363 Hennes & Mauritz (Series 'B' Free) (Retail).................................... 71,000 3,951,065 Mo Och Domsjo, AB (Series 'B' Free) (Forest Products)........................... 64,700 2,753,879 -------------- 17,379,746 -------------- THAILAND -- 0.0% Land & House Public Co., Ltd. (Foreign) (Construction).............................. 7,500 123,263 -------------- UNITED KINGDOM -- 10.7% Bank of Ireland (Banks and Savings & Loans)................. 700,000 5,108,712 Barclays, PLC (Banks and Savings & Loans)................. 294,000 3,369,141 DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ------------- ------------- Britannic Assurance, PLC (Insurance)................................. 28,000 $ 333,914 British Sky Broadcasting Group, PLC (Media)..................................... 738,900 4,664,033 Carlton Communications (Communications)............................ 229,300 3,437,730 Commercial Union, PLC (Insurance)................................. 324,000 3,159,513 Guest Kean & Nettlefolds, PLC (Autos - Cars & Trucks)..................... 536,170 6,485,678 **Guest Kean & Nettlefolds, PLC (Autos - Cars & Trucks)..................... 22,870 276,643 J. Sainsbury, PLC (Retail).................................... 356,700 2,173,994 Siebe, PLC (Machinery)................................. 596,340 7,347,784 Vodafone Group, PLC (Telecommunications)........................ 1,790,700 6,423,183 -------------- 42,780,325 -------------- UNITED STATES -- 23.0% Gucci Group (Textiles).................................. 106,900 4,155,738 Mattel, Inc. (Leisure)................................... 280,887 8,637,275 McDonald's Corp. (Restaurants)............................... 125,100 5,645,138 MCI Communications Corp. (Telecommunications)........................ 251,800 6,578,275 +Microsoft Corp. (Computer Services)......................... 95,700 8,397,675 +Mirage Resorts, Inc. (Leisure)................................... 157,000 5,416,500 Mobil Corp. (Petroleum)................................. 63,700 7,134,400 Norwest Corp. (Banks and Savings & Loans)................. 203,600 6,718,800 +Oracle Corp. (Computer Services)......................... 132,000 5,593,500 **Qantas Airways, Ltd., ADR (Airlines).................................. 51,300 853,278 SGS Thomson Microelectronics, N.V. (Electronics)............................... 76,000 3,059,000 +Silicon Graphics, Inc. (Computer Services)......................... 252,000 6,930,000 Texas Instruments, Inc. (Electronics)............................... 88,000 4,554,000 Tiffany & Co. (Retail).................................... 72,000 3,627,000 Time Warner, Inc. (Media)..................................... 135,800 5,143,425 +Viacom, Inc. (Class 'A' Stock) (Media)..................................... 115,000 5,275,625 Walt Disney Co. (Leisure)................................... 72,500 4,277,500 -------------- 91,997,129 -------------- TOTAL COMMON STOCKS (Cost $331,329,354).......................................... 373,823,040 ------------- B44 GLOBAL PORTFOLIO (CONTINUED) DECEMBER 31, 1995 MARKET RIGHTS AND WARRANTS -- 1.0% SHARES VALUE ---------- ------------- FRANCE -- 0.0% **Lafarge (Warrants), Expire 04/01/96, (Construction).............................. 1,000 $ 428 -------------- SINGAPORE -- 0.5% United Overseas Bank Ltd. (Warrants), Expire 06/17/97, (Banks and Savings & Loans)................. 510,800 2,058,658 -------------- SWITZERLAND -- 0.1% \Nitori Co., Ltd. (Warrants), Expire 02/06/98, (Furniture)................................. 2,232 216,624 -------------- UNITED STATES -- 0.4% #Onward Kashiyama Co., Ltd. (Warrants), Expire 03/26/96, (Textiles)........................ 580 1,634,875 -------------- TOTAL RIGHTS AND WARRANTS (Cost $3,712,601)............................................ 3,910,585 -------------- PRINCIPAL SHORT-TERM INVESTMENTS -- 0.8% AMOUNT VALUE ------------- ------------ UNITED STATES )Triparty Repo, 5.900%, 1/2/96................................ $ 3,163,000 $ 3,163,000 ------------ OTHER ASSETS -- 4.8% (net of liabilities)........................................... 19,202,909 ------------ TOTAL NET ASSETS -- 100.0%...................................... $ 400,099,534 ------------- ------------- The following abbreviations are used in portfolio descriptions: AB Akiteboiag (Swedish Stock Company) ADR American Depository Receipt AG Aktiengesellschaft (West 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) #These are American warrants with an underlying Japanese security. \These are Swiss warrants with an underlying Japanese security. **Indicates a restricted security; the aggregate cost of the restricted securities is $1,003,876. The aggregate value, $1,208,155 is approximately .30% of net assets. (See Note 2) +No dividend was paid on this security during the 12 months ending December 31, 1995. )Triparty Repo, 5.900%, entered 12/29/95; maturing 01/02/96 in the amount of $3,163,000; Collateralized by $3,174,000 United States Treasury Notes, 6.1250%, 05/31/97. SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. B45 NATURAL RESOURCES PORTFOLIO DECEMBER 31, 1995 MARKET COMMON STOCKS -- 92.9% SHARES VALUE ------------- ------------- ALUMINUM -- 4.4% Aluminum Co. of America....................... 175,000 $ 9,253,125 Comalco, Ltd., ADR............................ 134,900 3,617,532 -------------- 12,870,657 -------------- CHEMICALS -- 2.7% Arcadian Corp................................. 171,800 3,328,625 +Sherritt, Inc................................ 365,000 4,714,639 -------------- 8,043,264 -------------- CHEMICALS - SPECIALTY -- 1.4% First Mississippi Corp........................ 155,000 4,107,500 -------------- CONSTRUCTION -- 1.4% +J. Ray McDermott, SA......................... 226,100 4,041,538 -------------- DIVERSIFIED GAS -- 11.3% Arethusa (Off-Shore) Ltd...................... 142,500 3,990,000 +Beau Canada Exploration, Ltd. (Class 'A' Stock)...................................... 810,900 968,682 Cross Timbers Oil Co.......................... 220,200 3,881,025 +Rigel Energy Corp............................ 318,600 2,807,663 Sonat Offshore Drilling, Inc.................. 132,700 5,938,325 +Talisman Energy, Inc......................... 316,500 6,407,704 USX-Delhi Group............................... 139,200 1,444,200 Weatherford Enterra, Inc...................... 103,174 2,979,149 Western Gas Resources, Inc.................... 294,400 4,747,200 -------------- 33,163,948 -------------- ENVIRONMENTAL SERVICES -- 0.3% +Core Laboratories N.V........................ 80,600 967,200 -------------- FOREST PRODUCTS -- 8.1% +Asia Pacific Resource International Holdings Ltd......................................... 441,700 2,098,075 Fletcher Challenge, Ltd., ADR................. 431,200 6,198,500 Louisiana-Pacific Corp........................ 270,000 6,547,500 Rayonier, Inc................................. 188,200 6,281,175 Timberwest Forest, Ltd........................ 244,700 2,555,497 -------------- 23,680,747 -------------- GAS PIPELINES -- 4.7% Enron Oil & Gas Co............................ 98,900 2,373,600 +Reading & Bates Offshore Drilling Co......... 253,500 3,802,500 +Seagull Energy Corp.......................... 161,900 3,602,275 +Tejas Gas Corp............................... 73,645 3,893,979 -------------- 13,672,354 -------------- METALS - DIVERSIFIED -- 8.2% Cambior, Inc.................................. 160,000 1,744,228 Cambior, Inc.................................. 380,000 4,132,500 Cameco Corporation............................ 166,300 6,185,214 +Firstmiss Gold, Inc.......................... 177,211 3,942,945 Kloof Gold Mining Company Ltd., ADR........... 257,900 2,433,931 +Stillwater Mining Co......................... 290,800 5,597,900 -------------- 24,036,718 -------------- MINERAL RESOURCES -- 26.1% Agnico-Eagle Mines, Ltd....................... 464,500 5,864,313 Barrick Gold Corporation...................... 229,953 6,065,010 +Barrington Petroleum Ltd..................... 398,400 1,153,301 Battle Mountain Gold Co....................... 154,200 1,291,425 +Chancellor Energy Resources, Inc............. 1,285,000 517,955 +Chancellor Energy Resources, Inc............. 1,423,100 573,620 Coeur D'Alene Mines Corp...................... 90,525 1,550,241 CRA Limited, ADR.............................. 65,700 3,858,935 DECEMBER 31, 1995 MARKET COMMON STOCKS (CONTINUED) SHARES VALUE ----------- ------------ +Falcon Drilling Company, Inc................. 184,300 $ 2,764,500 Freeport-McMoRan Copper & Gold, Inc. (Class 'A' Stock)............................ 147,200 4,103,200 Inco, Ltd..................................... 134,000 4,455,500 Newmont Mining Corp........................... 120,007 5,430,317 Pegasus Gold, Inc............................. 163,400 2,267,175 Placer Dome, Inc.............................. 189,700 4,576,513 Potash Corp. of Saskatchewan, Inc............. 119,400 8,462,475 +Rio Alto Exploration Ltd..................... 343,200 1,351,923 Sante Fe Pacific Gold Corp.................... 443,300 5,375,013 +Seacor Holdings.............................. 88,300 2,384,100 +Tesco Corporation............................ 293,800 1,426,474 +Tom Brown, Inc............................... 300,000 4,387,500 +TVX Gold, Inc................................ 570,000 4,061,250 Western Mining Corp. Holdings, Ltd., ADR...... 178,100 4,652,863 -------------- 76,573,603 -------------- MISCELLANEOUS - BASIC INDUSTRY -- 0.8% TJ International, Inc......................... 131,400 2,430,900 -------------- PETROLEUM -- 6.8% Anadarko Petroleum Corp....................... 90,300 4,887,488 NGC Corp...................................... 496,788 4,408,994 +Northstar Energy Corp........................ 548,400 5,626,676 Parker & Parsley Petroleum Co................. 137,800 3,031,600 +Stolt Comex Seaway, SA....................... 209,000 1,776,500 -------------- 19,731,258 -------------- PETROLEUM SERVICES -- 16.7% Abacan Resource Corp.......................... 522,600 1,404,488 +Cairn Energy USA, Inc........................ 252,500 3,535,000 Camco International, Inc...................... 125,000 3,500,000 Coflexip, ADR................................. 270,299 5,101,894 +Crestar Energy, Inc.......................... 19,000 262,825 **+Crestar Energy, Inc........................ 209,000 2,891,077 +Dreco Energy Services, Ltd. (Class 'A' Stock)...................................... 83,700 1,485,675 +ENSCO International, Inc..................... 175,800 3,647,850 +Hornbeck Offshore Services, Inc.............. 147,800 2,900,575 ICO, Inc...................................... 182,700 890,663 +Marine Drilling Co., Inc..................... 1,147,900 5,882,988 +Newfield Exploration Co...................... 164,200 4,433,400 Noble Affiliates, Inc......................... 228,300 6,820,463 +Noble Drilling Corp.......................... 133,600 1,202,400 +PetroCorp, Inc............................... 206,600 1,497,850 +Pride Petroleum Services, Inc................ 227,000 2,411,875 +Varco International, Inc..................... 69,300 831,600 -------------- 48,700,623 -------------- TOTAL COMMON STOCKS (Cost $230,530,554).......................................... 272,020,310 -------------- MARKET PREFERRED STOCKS -- 4.2% SHARES VALUE ----------- ------------ MINERAL RESOURCES -- 1.3% Amax Gold, Inc. (Conv.), Series B............. 47,500 2,588,750 Freeport - McMoRan Copper & Gold, Inc......... 57,000 1,204,125 -------------- 3,792,875 -------------- MISCELLANEOUS - BASIC INDUSTRY -- 1.1% Hecla Mining Co. (Cum. Conv.), Series B....... 82,700 3,308,000 ------------- B46 NATURAL RESOURCES PORTFOLIO (CONTINUED) DECEMBER 31, 1995 MARKET PREFERRED STOCKS (CONTINUED) SHARES VALUE ------------- ------------- PETROLEUM SERVICES -- 1.8% Noble Drilling Corp. (Cum. Conv.)............. 142,500 $ 3,669,375 Reading & Bates Corp. (Cum. Conv.)............ 37,900 1,705,500 -------------- 5,374,875 -------------- TOTAL PREFERRED STOCKS (Cost $12,008,616)........................................... 12,475,750 -------------- MARKET RIGHTS AND WARRANTS -- 0.1% SHARES VALUE ------------- ------------- PETROLEUM SERVICES BJ Services Company (Warrants)................ 32,440 247,355 -------------- (Cost $56,770) PAR MARKET CONVERTIBLE BONDS -- 1.3% VALUE VALUE ------------- ------------- INDUSTRIAL Coeur d'Alene Mines Corp., 6.375%, 01/31/04............................ $ 4,099,000 3,883,803 -------------- (Cost $3,926,702) PRINCIPAL SHORT-TERM INVESTMENTS -- 1.4% AMOUNT VALUE ------------- -------------- REPURCHASE AGREEMENTS Joint Repurchase Agreement Account, 5.839%, 01/02/96 (see Note 4)............... 4,488,000 4,488,000 -------------- CALL OPTIONS WRITTEN -- .1% PAR STRIKE EXPIRATION VALUE ISSUE PRICE DATE PREMIUMS PAID ----- ----- ------ ----------- ------------- 44,000 Potash Corp. of 70 Jan. 20, (132,000) Saskatchewan, Inc. 1996 Total Options Written (Premiums Received - $163,675) (132,000) OTHER ASSETS -- 0.0% (net of liabilities)....................................... 188,411 -------------- TOTAL NET ASSETS -- 100.0%.................................. $ 293,171,629 -------------- -------------- The following abbreviations are used in portfolio descriptions: ADR American Depository Receipt SA Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French Corporation) **Indicates a restricted security; the aggregate cost of the restricted securities is $2,649,951. The aggregate value, 2,891,077 is approximately 1% of net assets. (See Note 2) +No dividend was paid on this security during the 12 months ending December 31, 1995. SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B48 THROUGH B52. B47 NOTES TO THE FINANCIAL STATEMENTS OF THE PRUDENTIAL SERIES FUND, INC. FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994 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 sixteen Portfolios, each with a separate series of capital stock. 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 issued by the Companies. The Zero Coupon Bond Portfolio 1995 was liquidated on November 15, 1995. On that date, all shares held were redeemed and unless otherwise directed, the redemption proceeds were transferred to the Money Market Portfolio in accordance with the prospectus. The shareholders of Pruco Life Series Fund, Inc. ("Pruco Fund") and the Series Fund approved the merger of the Pruco Fund into the Series Fund as of November 1, 1986. The merger combined five portfolios with identical investment strategies (Money Market, Diversified Bond, Equity, Flexible Managed and Conservative Balanced) of the Pruco Fund with their counterpart in the Series Fund. The merger was effected by converting the net assets of the Pruco Fund at the merger date into shares of the Series Fund at the share price of that day and was accounted for as a pooling of interest. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Securities Valuation: Equity securities are valued at market. Securities traded on a national securities exchange are valued at the last sales price on such exchange as of the close of the New York Stock Exchange or, in the absence of recorded sales, at the mean between the most recently quoted bid and asked prices. For any securities not traded on a national securities exchange but traded in the over-the-counter market, the securities are valued at the mean between the most recently quoted bid and asked prices, 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 last sales price or if there was no sale on such day, at the mean between the most recently quoted bid and asked prices. Convertible debt securities are valued at the mean between the most recently quoted bid and asked prices provided by principal market makers. High yield bonds are valued either by quotes received from principal market makers or by an independent pricing service which determines prices by analysis of quality, coupon, maturity and other adjustment factors. Long-term bonds are valued at market, based on valuation prices by an independent pricing service which determines prices by analysis of quality, coupon, maturity and other adjustment factors. Short-term investments are valued at amortized cost, which with accrued interest approximates market value. Amortized cost is computed using the cost on the date of purchase adjusted for constant amortization of discount or premium to maturity. The interest rates shown for Commercial Paper, Promissory Notes, and certain U.S. Government Agency Obligations on the Schedules of Investments are the discount rates paid at the time of purchase. Any security for which a 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 ability of issuers of debt securities held by specific Portfolios of the Series Fund to meet their obligations may be affected by economic developments in a specific country or industry. Each portfolio, other than the Money Market Portfolio, may invest up to 15% of its net assets in securities which are subject to legal or contractual restrictions on resale or for which no readily available market exists ("restricted securities"). The Money Market Portfolio may invest up to 10% of its net assets in restricted securities. Restricted securities are valued pursuant to the valuation procedures noted above. Accounting Estimates: The preparation of financial statements in conformity with generally accepted accounting principles 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 reporting period. Actual results could differ from those estimates. B48 Derivative Financial Instruments: The Series Fund may engage in various portfolio strategies to seek increased returns by hedging the portfolios against adverse movements in the equity, debt, and currency markets. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. Option Writing: When the Series Fund sells an option, an amount equal to the premium received is recorded as a liability and is subsequently adjusted to the current market value of the option written. Premiums received from writing options which expire unexercised are treated on the expiration date as gains from the sale of securities. As to options which are closed, the difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a gain, or if the premium received is less than the amount paid for the closing purchase transaction, as a loss. If a call option is exercised, the premium is added to the proceeds from the sale in determining whether a gain or loss has been realized. The Series Fund's use of written options involves, to varying degrees, elements of market risk in excess of the amount recognized in the statement of assets and liabilities. The contract or notional amounts reflect the extent of the Series Fund's involvement in these financial instruments. Risks arise from the possible movements in foreign exchange rates and securities values underlying these instruments. Stock Index Futures: Portfolios of the Fund may attempt to reduce the risk of investment in equity securities by hedging a portion of their equity portfolios through the use of stock index futures traded on a commodities exchange or board of trade. A stock index futures contract is an agreement in which the seller of the contract agrees to deliver to the buyer an amount of cash equal to a specific dollar amount times the difference between the value of a specific stock index at the close of the last trading day of the contract and the price at which the agreement was made. Upon entering into a futures contract, a Portfolio is required to pledge to the broker liquid assets equal to the minimum "initial margin," approximately 5% of the contract amount. The Portfolio further agrees to receive or pay to the broker an amount of cash equal to the futures contract's daily fluctuation in value. These receipts or payments are known as the "variation margin" and are recorded as unrealized gains or losses. When a futures contract is closed, the Portfolio records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Foreign Currency Transactions: 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 investment securities, other assets and liabilities at the mid daily rate of exchange as reported by a major New York City bank; (ii) purchases and sales of investment securities, income and expenses at the rate of exchange prevailing on the respective dates of such transactions. Since the net assets of the Series Fund are presented at the foreign exchange rates and market values at the close of the fiscal period, it is not practical to isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the fluctuations arising from change in the market prices of securities held at the end of the fiscal period. Similarly, it is not practical to isolate the effect of changes in foreign exchange rates from the fluctuations arising from changes in the market prices of equities sold during the fiscal year. 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 government supervision and regulation of foreign security markets. The Global Portfolio may invest up to 100% of its total assets in common stock and convertible securities denominated in a foreign currency and issued by foreign or domestic issuers. The Diversified Bond and High Yield Bond Portfolios may each invest up to 20% of their assets in United States currency denominated debt securities issued outside the United States by foreign or domestic issuers. In addition, the bond components of the Conservative Balanced and Flexible Managed Portfolios may each invest up to 20% of their assets in such securities. [Further, the 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 domestic issuers. In addition, Equity and Natural Resources Portfolios may invest up to 30% of their total assets in nonUnited States currency denominated common stock and fixed-income securities convertible into common stock of foreign and U.S. issuers.] B49 Net realized gains and losses on foreign currency transactions represent net foreign exchange gains and losses from holding of foreign currencies; currency gains or losses realized between the trade and settlement dates on security transactions; and the difference between the amounts of the dividends and foreign taxes recorded on the Series Fund's books and the U.S. dollar equivalent amounts actually received or paid. Net currency gains and losses from valuing foreign currency denominated assets and liabilities at fiscal period end exchange rates are reflected as a component of unrealized loss on foreign currencies. Forward Foreign Exchange Contracts: The Series Fund is authorized to enter into forward foreign exchange contracts as a hedge against either specific transactions or portfolio positions. Such contracts are not entered on the Series Fund's records. However, the effect on operations is recorded from the date the Series Fund enters into such contracts. Premium or discount is amortized over the life of the contracts. Securities Transactions And Investment Income: Dividend income is recorded on the ex-dividend date. Interest income is accrued daily on both long-term bonds and short-term investments. Interest income also includes net amortization from the purchase of fixed-income securities. Long-term security and option transactions are recorded on the first business day following the trade date, except that transactions on the last business day of the reporting cycle are recorded on that date. Short-term security and futures transactions are recorded on trade date. Realized gains and losses from security transactions are determined and accounted for on the basis of identified cost. Distributions And Taxes: The Portfolios of the Series Fund intend to continue to qualify for and elect the special tax treatment afforded regulated investment companies under Subchapter M of the Internal Revenue Code, thereby relieving the Series Fund of Federal income taxes. To so qualify, the Series Fund intends to distribute substantially all of its net investment income and net realized capital gains, if any, less any available capital loss carry forward. As of December 31, 1995, (based on an October 31 measurement period) the High Yield Bond Portfolio had a net capital loss carry forward of $20,939,951 ($3,756,791 expiring in 1999, $1,384,431 expiring in 2002, and $15,798,729 expiring in 2003). The Government Income Portfolio had a net capital loss carry forward of $22,539,329 ($6,229,349 expiring in 2002, $16,310,043 expiring in 2003). Finally, the Prudential Jennison Portfolio had a net capital loss carry forward of $102,752 (expiring in 2003). These amounts will be available to offset any future taxable gains. The Money Market Portfolio declares dividends of net investment income (including realized and unrealized gains and losses on Portfolio securities) on each business day. These dividends are reinvested in additional full and fractional shares of the Portfolio. This policy enables the Money Market Portfolio to maintain a net asset value of $10.00 per share. Dividends from investment income of the other Portfolios will normally be declared and reinvested in additional full and fractional shares four times annually. Dividends from net realized capital gains are declared and reinvested in additional full and fractional shares twice a year. Expenses: Each Portfolio pays for certain expenses incurred in its individual operation, and also pays a portion of the Series Fund's general administrative expenses allocated on the basis of the asset size of the respective Portfolios. The Series Fund has an arrangement with Chemical Banking Corporation, a custodian bank. On a daily basis, cash funds which are not invested earn a credit which is used to offset custody charges on a Portfolio basis, exclusive of the Global Portfolio, for which Brown Brothers Harriman & Co. is the custodian bank. For the year ended December 31, 1995, the total of the credits used was: Money Market Portfolio.......................... $ 18,025 High Yield Bond Portfolio....................... 15,358 Flexible Managed Portfolio...................... 3,202 Government Income Portfolio..................... 1,612 Zero Coupon Bond 2000 Portfolio................. 1,218 Zero Coupon Bond 2005 Portfolio................. 637 Natural Resources Portfolio..................... 380 Stock Index Portfolio........................... 170 NOTE 3: INVESTMENT MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES Investment Management And Accounting Fees: Pursuant to an investment advisory agreement (the "Agreement"), The Prudential receives an investment management fee, calculated daily, at an effective annual rate of 0.35% of the average daily net assets of the Stock Index Portfolio: 0.40% of the average daily net assets of the Money Market, Diversified Bond, Government Income, Zero Coupon Bond 1995, Zero Coupon Bond 2000, B50 Zero Coupon Bond 2005, Equity Income, and Small Capitalization Stock Portfolios; 0.45% of average daily net assets of the Equity and Natural Resources Portfolios; 0.55% of the average daily net assets of the Conservative Balanced and the High Yield Bond Portfolios; 0.60% of the average daily net assets of the Flexible Managed and Prudential Jennison Portfolios; and 0.75% of the average daily net assets of the Global Portfolio. Under the Agreement, The Prudential has agreed to refund to a portfolio (other than the Global Portfolio), the portion of the management 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. Directors' Expenses: The Series Fund pays for the fees and expenses of those members of the Series Fund's Board of Directors who are not officers or employees of The Prudential or its affiliates. Brokerage Commissions: For the year ended December 31, 1995, Prudential Securities Inc., an indirect, wholly-owned subsidiary of The Prudential, earned $899,739 in brokerage commissions from Portfolio transactions executed on behalf of the Series Fund. Other Transactions With Affiliates: As of December 31, 1995, The Prudential had investments of $12,553,119 in the Prudential Jennison Portfolio; $11,995,545 in the Small Capitalization Stock Portfolio; and $560,555 in the Global Portfolio. NOTE 4: JOINT REPURCHASE AGREEMENT ACCOUNT The Portfolios of the Series Fund transfer uninvested cash balances into a single joint 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 investment in the joint repurchase agreement account represented, in principal, $1,312,614,000 as of December 31, 1995. The Portfolios of the Series Fund with cash invested in the joint account had the following percentage participation in the account: Equity Portfolio........................... 58.28% Flexible Managed Portfolio................. 25.57% Equity Income Portfolio.................... 5.01% Conservative Balanced Portfolio............ 3.29% Stock Index Portfolio...................... 3.19% Government Income Portfolio................ 1.52% High Yield Bond Portfolio.................. .80% Diversified Bond Portfolio................. .78% Prudential Jennison Portfolio.............. .58% Small Capitalization Stock Portfolio....... .54% Natural Resources Portfolio................ .34% Zero Coupon Bond 2005 Portfolio............ .07% Zero Coupon Bond 2000 Portfolio............ .03% ------ 100.00% Bear Stearns Repurchase Agreement, dated 12/29/95, in the principal amount of $43,000,000, repurchase price $43,027,710, due 1/2/96; collateralized by $5,190,000 U.S. Treasury Notes, 6.25%, due 8/31/00; $38,036,000 U.S. Treasury Notes, 5.50%, due 4/30/96. Goldman Sachs Repurchase Agreement, dated 12/29/95, in the principal amount of $418,000,000, repurchase price $418,270,770, due 1/2/96; collateralized by $339,980,000 U.S. Treasury Diversified Bonds, 7.875%, due 2/15/21. J.P. Morgan Securities Repurchase Agreement, dated 12/29/95, in the principal amount of $300,000,000, repurchase price $300,193,333, due 1/2/96; collateralized by $50,000,000 U.S. Treasury Notes, 7.625%, due 4/30/96; $53,212,000 U.S. Treasury Notes, 7.0%, due 4/15/99; $51,060,000 U.S. Treasury Notes, 5.125%, due 11/30/98; $49,755,000 U.S. Treasury Notes, 6.875%, due 7/31/99; $37,947,000 U.S. Treasury Notes, 6.125%, due 5/31/00; $52,695,000 U.S. Treasury Notes, 6.0%, due 8/31/97. Morgan Stanley and Company Repurchase Agreement, dated 12/29/95, in the principal amount of $418,000,000, repurchase price $418,273,552, due 1/2/96; collateralized by $300,000,000 U.S. Treasury Notes, 6.75%, due 4/30/00; $108,300,000 U.S. Treasury Notes, 5.125%, due 11/30/98. B51 Salomon Brothers Repurchase Agreement, dated 12/29/95, in the principal amount of $75,000,000, repurchase price $75,048,748, due 1/2/96; collateralized by $8,717,000 U.S. Treasury Notes, 7.25%, due 11/30/96; $26,000,000 U.S. Treasury Notes, 6.125%, due 5/15/98; $40,000,000 U.S. Treasury Notes, 5.75%, due 9/30/97. Smith Barney Repurchase Agreement, dated 12/29/95, in the principal amount of $58,614,000, repurchase price $58,651,447, due 1/2/96; collateralized by $62,440,000 U.S. Treasury Bills, 5.75%, due 10/17/96. NOTE 5: PURCHASE AND SALE OF SECURITIES The aggregate cost of purchase and the proceeds from the sales of securities (excluding short-term issues) for the year ended December 31, 1995 were as follows: Cost of Purchases:
ZERO ZERO ZERO HIGH DIVERSIFIED GOVERNMENT COUPON COUPON COUPON CONSERVATIVE FLEXIBLE YIELD BOND INCOME 1995 2000 2005 BALANCED MANAGED BOND ------------ ------------ ------------ ----------- ----------- -------------- -------------- ----------- Debt Securities... $1,152,659,582 $885,113,323 $ 0 $16,200,140 $14,191,504 $4,882,722,531 $4,212,735,834 $473,648,052 Equity Securities...... $ 0 $ 0 $ 0 $ 0 $ 0 $ 480,812,048 $1,827,087,395 $ 4,647,944
SMALL STOCK EQUITY PRUDENTIAL CAPITALIZATION NATURAL INDEX INCOME EQUITY JENNISON STOCK GLOBAL RESOURCES ------------ ------------ ------------ ----------- ----------- -------------- -------------- Debt Securities... $ 0 $120,205,175 $ 0 $ 0 $ 0 $ 0 $ 0 Equity Securities...... $ 131,109,105 $579,685,171 $486,698,253 $66,053,630 $47,690,639 $ 224,358,200 $ 128,563,575
Proceeds From Sales:
ZERO ZERO ZERO HIGH DIVERSIFIED GOVERNMENT COUPON COUPON COUPON CONSERVATIVE FLEXIBLE YIELD BOND INCOME 1995 2000 2005 BALANCED MANAGED BOND ------------ ------------ ------------ ----------- ----------- -------------- -------------- ----------- Debt Securities... $1,109,474,697 $888,238,284 $ 18,395,935 $16,435,388 $12,825,478 $4,679,687,138 $4,084,931,841 $425,797,501 Equity Securities...... $ 0 $ 0 $ 0 $ 0 $ 0 $ 428,286,138 $1,842,532,499 $ 12,914,791
SMALL STOCK EQUITY PRUDENTIAL CAPITALIZATION NATURAL INDEX INCOME EQUITY JENNISON STOCK GLOBAL RESOURCES ------------ ------------ ------------ ----------- ----------- -------------- -------------- Debt Securities... $ 0 $134,773,213 $ 0 $ 0 $ 0 $ 0 $ 1,752,580 Equity Securities...... $ 9,292,175 $460,810,015 $560,871,071 $10,929,805 $ 7,819,414 $ 209,264,836 $ 116,657,662
Transactions in call options during the six months ended December 31, 1995 were as follows:
DIVERSIFIED BOND DIVERSIFIED BOND NATURAL RESOURCES ------------------------ ------------------------ ------------------------ CALL OPTIONS WRITTEN PUT OPTIONS WRITTEN CALL OPTIONS WRITTEN ------------------------ ------------------------ ------------------------ NUMBER OF PREMIUMS NUMBER OF PREMIUMS NUMBER OF PREMIUMS CONTRACTS RECEIVED CONTRACTS RECEIVED CONTRACTS RECEIVED ----------- ----------- ----------- ----------- ----------- ----------- Options outstanding at December 31, 1994....... 0 $ 0 0 $ 0 0 $ 0 Options written........... 1,500 99,609 1,500 45,703 1,280 388,647 Options terminated in closing purchase transactions............ (1,500) (99,609) (1,500) (45,703) (840) (224,972) ------- --------- ------- --------- ------- --------- Options outstanding at December 31, 1995....... 0 $ 0 0 $ 0 440 $ 163,675
The federal income tax basis and unrealized appreciation/depreciation of the Fund's investments as of December 31, 1995 were as follows:
ZERO ZERO ZERO MONEY DIVERSIFIED GOVERNMENT COUPON COUPON COUPON MARKET BOND INCOME 1995 2000 2005 ------------- ------------- ------------- ------------- ------------- ------------- Gross Unrealized Appreciation... $ 0 $ 34,614,448 $ 37,434,616 $ 0 $3,122,667 $ 3,653,918 Gross Unrealized Depreciation... 0 (1,351,508) (13,989) 0 0 0 Total Net Unrealized............ 0 33,262,940 37,420,627 0 3,122,667 3,653,918 Tax Basis....................... $610,184,940 $ 610,310,688 $457,607,665 $ 0 $22,164,986 $19,934,260
CONSERVATIVE FLEXIBLE BALANCED MANAGED --------------- --------------- Gross Unrealized Appreciation... $ 378,149,704 $ 568,373,680 Gross Unrealized Depreciation... (88,299,605) (27,642,238) Total Net Unrealized............ 289,850,099 540,731,442 Tax Basis....................... $3,622,931,201 $3,687,627,278
HIGH SMALL YIELD STOCK EQUITY PRUDENTIAL CAPITALIZATION BOND INDEX INCOME EQUITY JENNISON STOCK ------------- ------------- ------------- ------------- ------------- ------------- Gross Unrealized Appreciation... $16,024,184 $ 319,972,806 $119,718,028 $895,616,406 $ 5,890,547 $ 4,726,512 Gross Unrealized Depreciation... (9,488,623) (12,254,834) (42,811,468) (96,015,544) (1,846,128) (2,129,577) Total Net Unrealized............ 6,535,561 307,717,972 76,906,560 799,600,862 4,044,419 2,596,935 Tax Basis....................... $354,752,487 $ 726,828,799 1$,029,615,764 3$,003,199,288 $62,811,423 $47,793,195 NATURAL GLOBAL RESOURCES --------------- --------------- Gross Unrealized Appreciation... $ 52,646,874 $ 53,158,550 Gross Unrealized Depreciation... (9,955,204) (11,053,974) Total Net Unrealized............ 42,691,670 42,104,576 Tax Basis....................... $ 338,204,955 $ 251,010,642
B52 INDEPENDENT AUDITORS' REPORT The Shareholders and Board of Directors of The Prudential Series Fund, Inc.: We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of the Money Market, Diversified Bond, Equity, Flexible Managed, Conservative Balanced, Zero Coupon Bond 1995, Zero Coupon Bond 2000, Zero Coupon Bond 2005, High Yield Bond, Stock Index, Equity Income, Natural Resources, Government Income and Global Portfolios of The Prudential Series Fund, Inc. as of December 31, 1995, the related statements of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended and the financial highlights contained in the prospectus for each of the periods presented. We also have audited the accompanying statements of assets and liabilities, including the schedules of investments, of Small Capitalization Stock and Prudential Jennison Portfolios of The Prudential Series Fund, Inc. as of December 31, 1995, and the related statements of operations and changes in net assets and the financial highlights for the period April 25, 1995 (commencement of business) to December 31, 1995. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1995 by correspondence with the custodians and brokers; where replies were not received from brokers, we performed other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of each of the respective portfolios of The Prudential Series Fund, Inc. as of December 31, 1995, the results of their operations, changes in their net assets, and the financial highlights for the respective stated periods in conformity with generally accepted accounting principles. Deloitte & Touche LLP Parsippany, New Jersey February 15, 1996 B53 PART II OTHER INFORMATION UNDERTAKING TO FILE REPORTS Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with the Securities and Exchange Commission such supplementary and periodic information, documents, and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred in that section. UNDERTAKING WITH RESPECT TO INDEMNIFICATION The Prudential Directors' and Officers' Liability and Corporation Reimbursement Insurance Program, purchased by The Prudential from Aetna Casualty & Surety Company, CNA Insurance Companies, Lloyds of London, Great American Insurance Company, Reliance Insurance Company, Corporate Officers & Directors Assurance Ltd., A.C.E. Insurance Company, Ltd., XL Insurance Company, Ltd., and Zurich-American Insurance Company, provides reimbursement for "Loss" (as defined in the policies) which the Company pays as indemnification to its directors or officers resulting from any claim for any actual or alleged act, error, misstatement, misleading statement, omission, or breach of duty by persons in the discharge of their duties in their capacities as directors or officers of The Prudential, any of its subsidiaries, or certain investment companies affiliated with The Prudential. Coverage is also provided to the individual directors or officers for such Loss, for which they shall not be indemnified. Loss essentially is the legal liability on claims against a director or officer, including adjudicated damages, settlements and reasonable and necessary legal fees and expenses incurred in defense of adjudicatory proceedings and appeals therefrom. Loss does not include punitive or exemplary damages or the multiplied portion of any multiplied damage award, criminal or civil fines or penalties imposed by law, taxes or wages, or matters which are uninsurable under the law pursuant to which the policies are construed. There are a number of exclusions from coverage. Among the matters excluded are Losses arising as the result of (1) claims brought about or contributed to by the criminal or fraudulent acts or omissions or the willful violation of any law by a director or officer, (2) claims based on or attributable to directors or officers gaining personal profit or advantage to which they were not legally entitled, and (3) claims arising from actual or alleged performance of, or failure to perform, services as, or in any capacity similar to, an investment adviser, investment banker, underwriter, broker or dealer, as those terms are defined in the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, the Investment Company Act of 1940, any rules or regulations thereunder, or any similar federal, state or local statute, rule or regulation. The limit of coverage under the Program for both individual and corporate reimbursement coverage is $150,000,000. The retention for corporate reimbursement coverage is $10,000,000 per loss. The relevant provisions of New Jersey law permitting or requiring indemnification, New Jersey being the state of organization of The Prudential, can be found in Section 14A:3-5 of the New Jersey Statutes Annotated. The text of The Prudential's by-law 26, which relates to indemnification of officers and directors, is incorporated by reference to Exhibit 1.A.(6)(b) of Post-Effective Amendment No. 1 to Form S-6, Registration No. 33-61079, filed April 25, 1996, on behalf of The Prudential Variable Appreciable Account. Insofar as indemnification for liabilities arising under the Securities Act of 1933 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. II-1 CONTENTS OF REGISTRATION STATEMENT This Registration Statement comprises the following papers and documents: The facing sheet. Cross-reference to items required by Form N-8B-2. The prospectus consisting of 87 pages. The statement of additional information consisting of 107 pages. The undertaking to file reports. The undertaking with respect to indemnification. The signatures. Written consents of the following persons: None. The following exhibits: 1. The following exhibits correspond to those required by paragraph A of the instructions as to exhibits in Form N-8B-2: A. (1) Resolution of Board of Directors of The Prudential Insurance Company of America establishing The Prudential Variable Appreciable Account. (Note 19) (2) Not Applicable. (3) Distributing Contracts: (a) Distribution Agreement between Pruco Securities Corporation and The Prudential Insurance Company of America. (Note 9) (b) Proposed form of Agreement between Pruco Securities Corporation and independent brokers with respect to the Sale of the Contracts. (Note 19) (c) Schedules of Sales Commissions. (Note 3) (4) Not Applicable. (5) Variable Appreciable Life Insurance Contracts: (Note 2) (a) With fixed death benefit for use in New Jersey and domicile approval states. (b) With variable death benefit for use in New Jersey and domicile approval states. (c) With fixed death benefit for use in non-domicile approval states. (d) With variable death benefit for use in non-domicile approval states. (6) (a) Charter of The Prudential Insurance Company of America, as amended February 26, 1988. (Note 7) (b) By-laws of The Prudential Insurance Company of America, as amended August 8, 1995. (Note 18) (7) Not Applicable. (8) Not Applicable. (9) Not Applicable. (10) (a) Application Form for Variable Appreciable Life Insurance Contract. (Note 3) (b) Supplement to the Application for Variable Appreciable Life Insurance Contract. (Note 3) (11 Form of Notice of Withdrawal Right. (Note 2) (12) Memorandum describing The Prudential's issuance, transfer, and redemption procedures for the Contracts pursuant to Rule 6e-3(T)(b)(12)(iii) and method of computing adjustments in payments and cash surrender values upon conversion to fixed-benefit policies pursuant to Rule 6e-3(T)(b)(13)(v)(B). (Note 1) (13) Available Contract Riders and Endorsements: (a) Rider for Insured's Waiver of Premium Benefit. (Note 3) (b) Rider for Applicant's Waiver of Premium Benefit. (Note 3) (c) Rider for Insured's Accidental Death Benefit. (Note 3) (d) Rider for Level Term Insurance Benefit on Life of Insured. (Note 3) II-2 (e) Rider for Decreasing Term Insurance Benefit on Life of Insured. (Note 3) (f) Rider for Interim Term Insurance Benefit. (Note 3) (g) Rider for Option to Purchase Additional Insurance on Life of Insured. (Note 3) (h) Rider for Decreasing Term Insurance Benefit on Life of Insured Spouse. (Note 3) (i) Rider for Level Term Insurance Benefit on Dependent Children. (Note 3) (j) Rider for Level Term Insurance Benefit on Dependent Children--from Term Conversions. (Note 3) (k) Rider for Level Term Insurance Benefit on Dependent Children--from Term Conversions or Attained Age Change. (Note 3) (l) Endorsement defining Insured Spouse. (Note 3) (m) Rider covering lack of Evidence of Insurability on a Child. (Note 3) (n) Rider modifying Waiver of Premium Benefit. (Note 3) (o) Rider to terminate a Supplementary Benefit. (Note 3) (p) Rider providing for election of Variable Reduced Paid-up Insurance. (Note 3) (q) Rider to provide for exclusion of Aviation Risk. (Note 3) (r) Rider to provide for exclusion of Military Aviation Risk. (Note 3) (s) Rider to provide for exclusion for War Risk. (Note 3) (t) Rider to provide for Reduced Paid-up Insurance. (Note 3) (u) Rider providing for Option to Exchange Policy. (Note 3) (v) Endorsement defining Ownership and Control of the Contract. (Note 3) (w) Rider providing for Modification of Incontestability and Suicide Provisions. (Note 3) (x) Endorsement issued in connection with Non-Smoker Qualified Contracts. (Note 3) (y) Endorsement issued in connection with Smoker Qualified Contracts. (Note 3) (z) Home Office Endorsement. (Note 3) (aa) Endorsement showing Basis of Computation for Non-Smoker Contracts. (Note 3) (bb) Endorsement showing Basis of Computation for Smoker Contracts. (Note 3) (cc) Rider for Term Insurance Benefit on Life of Insured--Decreasing Amount After Three Years. (Note 3) (dd) Rider for Renewable Term Insurance Benefit on Life of Insured. (Note 3) (ee) Rider for Level Term Insurance Benefit on Life of Insured Spouse. (Note 2) (ff) Living Needs Benefit Rider (i) for use in Florida. (Note 10) (ii) for use in all approved jurisdictions except Florida and New York. (Note 10) (iii)for use in New York. (Note 15) (gg) Rider for Renewable Term Insurance Benefit on Life of Insured Spouse. (Note 12) (hh) Rider for Level Term Insurance Benefit on Life of Insured--Premium Increases Annually. (Note 12) (ii) Rider for Term Insurance Benefit on Life of Insured--Decreasing Amount. (Note 14) (jj) Rider for a Level Premium Option. (Note 15) (kk) Payment of Unscheduled Premium Benefit (Note 16) (ll) Rider for Scheduled Term Insurance Benefit on Life of Insured. (Note 16) (mm) Endorsement altering the Assignment provision. (Note 4) 2. See Exhibit 1.A.(5). 3. Opinion and Consent of Clifford E. Kirsch, Esq. as to the legality of the securities being registered. (Note 1) 4. None. 5. Not Applicable. 6. Opinion and Consent of Nancy D. Davis, FSA, MAAA, as to actuarial matters pertaining to the securities being registered. (Note 1) 7. The Prudential's representations regarding mortality and expense risks and sales loads. (Note 2) 8. Indemnification Agreement. (Note 15) II-3 9. Powers of Attorney: (a) F. Agnew, F. Becker, W. Boeschenstein L. Carter, Jr., J. Cullen, C. Davis, R. Enrico A. Gilmour, W. Gray, III, J. Hanson, C. Horner A. Jacobson, G. Keith, B. Malkiel, J. Opel A. Ryan, C. Sitter, D. Staheli, R. Thompson P. Vagelos, S. Van Ness, P. Volcker, J. Williams (Note 19) (b) M. Grier (Note 7) 27. Financial Data Schedule. (Note 1) (Note 1) Filed herewith. (Note 2) Incorporated by reference to Pre-Effective Amendment No. 1 to this Registration Statement, filed June 15, 1988. (Note 3) Incorporated by reference to Registrant's Form S-6, filed February 4, 1988. (Note 4) Incorporated by reference to Post-Effective Amendment No. 14 to this Registration Statement, filed February 15, 1995. (Note 5) Incorporated by reference to Form N-8B-2, File Number 2-80897, filed December 15, 1982, on behalf of The Prudential Individual Variable Contract Account. (Note 6) Incorporated by reference to Post-Effective Amendment No. 1 to this Registration Statement, filed September 1, 1988. (Note 7) Incorporated by reference to Form S-6 Registration Statement, Registration No. 33-61079, filed July 17, 1995 on behalf of The Prudential Variable Appreciable Account. (Note 8) Incorporated by reference to Post-Effective Amendment No. 3 to this Registration Statement, filed April 28, 1989. (Note 9) Incorporated by reference to Post-Effective Amendment No. 4 to this Registration Statement, filed March 2, 1990. (Note 10) Incorporated by reference to Post-Effective Amendment No. 5 to this Registration Statement, filed March 30, 1990. (Note 11) Incorporated by reference to Post-Effective Amendment No. 22 to Form S-1, Registration No. 2-56179, filed April 27, 1989, on behalf of The Prudential Insurance Company of America Variable Contract Account--Investment Fund. (Note 12) Incorporated by reference to Post-Effective Amendment No. 6 to this Registration Statement, filed March 1, 1991. (Note 13) Incorporated by reference to Post-Effective Amendment No. 8 to this Registration Statement, filed December 30, 1991. (Note 14) Incorporated by reference to Post-Effective Amendment No. 9 to this Registration Statement, filed March 12, 1992. (Note 15) Incorporated by reference to Post-Effective Amendment No. 11 to this Registration Statement, filed April 8, 1993. (Note 16) Incorporated by reference to Post-Effective Amendment No. 12 to this Registration Statement, filed March 2, 1994. (Note 17) Incorporated by reference to Post-Effective Amendment No. 13 to this Registration Statement, filed April 26, 1994. (Note 18) Incorporated by reference to Post-Effective Amendment No. 1 to Form S-6, Registration No. 33-61079, filed April 25, 1996 on behalf of The Prudential Variable Appreciable Account. (Note 19) Incorporated by reference to Post-Effective Amendment No. 15 to this Registration Statement filed May 1, 1995. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant, Prudential Variable Appreciable Account, certifies that this Amendment is filed solely for one or more of the purposes specified in Rule 485(b)(1) under the Securities Act of 1933 and that no material event requiring disclosure in the prospectus, other than one listed in Rule 485(b)(1), has occurred since the effective date of the most recent Post-Effective Amendment to the Registration Statement which included a prospectus and has caused this Registration Statement to be signed on its behalf by the undersigned thereunto duly authorized, and its seal hereunto affixed and attested, all in the city of Newark and the State of New Jersey, on this 25th day of April, 1996. (Seal) THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT (Registrant) By: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (Depositor) Attest: /s/ Thomas C. Castano By: /s/ Esther H. Milnes ------------------------- ------------------------------ Thomas C. Castano Esther H. Milnes Assistant Secretary Vice President and Actuary Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 16 to the Registration Statement has been signed below by the following persons in the capacities indicated on this 25th day of April, 1996. SIGNATURE AND TITLE /s/ * - -------------------------------------- Arthur F. Ryan Chairman of the Board, President and Chief Executive Officer /s/ * - -------------------------------------- Garnett L. Keith, Jr. Vice Chairman and Director /s/ * - -------------------------------------- *By: /s/ Thomas C. Castano Mark B. Grier ------------------------ Principal Financial Officer Thomas C. Castano (Attorney-in-Fact) /s/ * - -------------------------------------- Franklin A. Agnew Director /s/ * - -------------------------------------- Frederic K. Becker Director /s/ * - -------------------------------------- William W. Boeschenstein Director /s/ * - -------------------------------------- Lisle C. Carter, Jr. Director /s/ * - -------------------------------------- James G. Cullen Director II-5 /s/ * - -------------------------------------- Carolyne K. Davis Director /s/ * - -------------------------------------- Roger A. Enrico Director /s/ * - -------------------------------------- Allan D. Gilmour Director /s/ * - -------------------------------------- William H. Gray, III Director /s/ * - -------------------------------------- Jon F. Hanson Director /s/ * - -------------------------------------- Constance J. Horner Director /s/ * - -------------------------------------- Allen F. Jacobson Director /s/ * - -------------------------------------- *By: /s/ Thomas C. Castano Burton G. Malkiel ------------------------ Director Thomas C. Castano (Attorney-in-Fact) /s/ * - -------------------------------------- John R. Opel Director /s/ * - -------------------------------------- Charles R. Sitter Director /s/ * - -------------------------------------- Donald L. Staheli Director /s/ * - -------------------------------------- Richard M. Thomson Director /s/ * - -------------------------------------- P. Roy Vagelos, M.D. Director /s/ * - -------------------------------------- Stanley C. Van Ness Director /s/ * - -------------------------------------- Paul A. Volcker Director /s/ * - -------------------------------------- Joseph H. Williams Director II-6 EXHIBIT INDEX Consent of Deloitte & Touche LLP, independent Page II-7 auditors. 1.A.(12) Memorandum describing The Prudential's issuance, Page II-9 transfer, and redemption procedures for the Contracts pursuant to Rule 6e-3(T)(b)(12)(iii) and method of computing adjustments in payments and cash surrender values upon conversion to fixed-benefit policies pursuant to Rule 6e-3(T)(b)(13)(v)(B). 3. Opinion and Consent of Clifford E. Kirsch, Esq., Page II-21 as to the legality of the securities being registered. 6. Opinion and Consent of Nancy D. Davis, FSA, MAAA as Page II-22 to actuarial matters pertaining to the securities being registered. 27. Financial Data Schedule. Page II-23 II-8 EX-99.C1 2 AUDITORS' CONSENT INDEPENDENT AUDITORS' CONSENT We consent to the use in this Post-Effective Amendment No. 16 to Registration Statement No. 33-20000 on Form S-6 of The Prudential Variable Appreciable Account of The Prudential Insurance Company of America (1) of our report dated February 15, 1996, relating to the financial statements of The Prudential Variable Appreciable Account, and of our report dated March 1, 1996, relating to the consolidated financial statements of The Prudential Insurance Company of America and subsidiaries appearing in the Prospectus, which is a part of such Registration Statement; and (2) of our report dated February 15, 1996, relating to the financial statements of The Prudential Series Fund, Inc. Money Market, Diversified Bond, Equity, Flexible Managed, Conservative Balanced, Zero Coupon Bond 1995, Zero Coupon Bond 2000, High Yield Bond, Stock Index, Equity Income Stock, Natural Resources, Global, Government Income, Zero Coupon Bond 2005, Prudential Jennison and Small Capitalization Stock portfolios (sixteen of the portfolios comprising The Prudential Series Fund, Inc.) appearing in the Statement of Additional Information, which is a part of such Registration Statement, and to the reference to us under the headings of "Experts" in such Registration Statement. /s/ Deloitte & Touche LLP Parsippany, New Jersey April 25, 1996 II-7 EX-99.1A(12) 3 TRANSFER, REDEMPTION COMPUTATION PROCEDURES Exhibit 1.A.(12) Description of The Prudential's Issuance, Transfer and Redemption Procedures for Variable Appreciable Life Insurance Contracts Pursuant to Rule 6e-3(T)(b)(12)(iii) and Method of Computing Adjustments in Payments and Cash Surrender Values Upon Conversion to Fixed Benefit Policies Pursuant to Rule 6e-3(T)(b)(13)(v)(B) This document sets forth the administrative procedures that will be followed by The Prudential Insurance Company of America ("The Prudential") in connection with the issuance of its Variable Appreciable Life Insurance Contract ("Contract"), the transfer of assets held thereunder, and the redemption by contract owners of their interests in said Contracts. The document also explains the method that The Prudential will follow in making a cash adjustment when a Contract is exchanged for a fixed benefit insurance policy pursuant to Rule 6e-3(T)(b)(13)(v)(B). I. Procedures Relating to Issuance and Purchase of the Contracts A. Premiums Schedules and Underwriting Standards Premiums for the Contract will not be the same for all owners. Insurance is based on the principle of pooling and distribution of mortality risks, which assumes that each owner pays a premium commensurate with the Insured's mortality risk as actuarially determined utilizing factors such as age, sex (in most cases), smoking status, health and occupation. A uniform premium for all Insureds would discriminate unfairly in favor of those Insureds representing greater risks. However, for a given face amount of insurance, Contracts issued on insureds in a given risk classification will have the same scheduled premium. The underwriting standards and premium processing practices followed by The Prudential are similar to those followed in connection with the offer and sale of fixed-benefit life insurance, modified where necessary to meet the requirements of the federal securities laws. B. Application and Initial Premium Processing Upon receipt of a completed application form from a prospective owner, The Prudential will follow certain insurance underwriting (i.e., evaluation of risk) procedures designed to determine whether the proposed Insured is insurable. In the majority of cases this will involve only evaluation of the answers to the questions on the application and will not include a medical examination. In other cases, the process may involve such verification procedures as medical examinations and may require that further information be provided by the proposed Insured before a determination II-9 can be made. A Contract cannot be issued, i.e., physically issued through The Prudential's computerized issue system, until this underwriting procedure has been completed. These processing procedures are designed to provide immediate benefits to every prospective owner who pays the initial scheduled premium at the time the application is submitted, without diluting any benefit payable to any existing owner. Although a Contract cannot be issued until after the underwriting process has been completed, such a proposed Insured will receive immediate insurance coverage for the face amount of the Contract, if he or she proves to be insurable and the owner has paid the first scheduled premium. The Contract Date marks the date on which benefits begin to vary in accordance with the investment performance of the selected investment option(s). It is also the date as of which the insurance age of the proposed Insured is determined. It represents the first day of the Contract year and therefore determines the Contract anniversary and also the Monthly Dates. It also represents the commencement of the suicide and contestable periods for purposes of the Contract. If the initial scheduled premium is paid with the application and no medical examination is required (so that Part 2 of the application is not completed) the Contract Date will ordinarily be the date of the application. If an unusual delay is encountered (for example, if a request for further information is not met promptly), the Contract Date will be 21 days prior to the date on which the Contract is physically issued. If a medical examination is required, the Contract Date will ordinarily be the date on which Part 2 of the application (the medical report) is completed, subject to the same qualification as that noted above. If the initial scheduled premium is not paid with the application, the Contract Date will be the Contract Date stated in the Contract, which will generally be the date the initial premium is received from the owner and the Contract is delivered. There are two principal variations from the foregoing procedure. First, if the owner wishes permanent insurance protection and variability of benefits to commence at a future date, he or she can designate that date and purchase term insurance in a fixed amount for the intervening period. The maximum length of initial term insurance available is eleven months. Second, if permitted by the insurance laws of the state in which the Contract is issued, the Contract may be back dated up to six months, provided that all past due scheduled premiums are paid with the application and that the backdating results in a lower insurance age for the Insured. The values under the Contract and the amount(s) II-10 deposited into the selected investment option(s) will be calculated upon the assumptions that the Contract has been issued on the Contract Date and all scheduled premiums had been received on their due dates. If the initial premium paid is in excess of the aggregate of the scheduled premiums due since the Contract Date, the excess (after the front-end deductions) will be credited to the Contract and placed in the selected investment option(s) on the date of receipt. In general, (1) the invested portion of the initial scheduled premium will be placed in the Contract Fund and allocated to the selected investment options as of the Contract Date; and (2) the invested portion of any premiums in excess of the initial scheduled premium will be placed in the Contract Fund and allocated to the selected investment options as of the later of the Contract Date and the date received. If, however, one or more premium due dates has passed before all requirements for the issuance of the Contract have been satisfied, (1) the invested portion of the initial scheduled premium will be placed in the Contract Fund as of the Contract Date, (2) scheduled premiums will be placed in the Contract Fund as of the intervening premium due dates, and (3) any premium payments in excess of the aggregate premiums due since the Contract Date will be placed in the Contract Fund as of the date of receipt. C. Premium Processing Whenever a premium after the first is received, unless the Contract is in default past its days of grace, The Prudential will subtract the front-end deductions. What is left will be invested in the selected investment option(s) on the date received (or, if that is not a business day, on the next business day). There is an exception if the Contract is in default within its days of grace. Then, to the extent necessary to end the default, premiums will be credited as of the date of the default or the Monthly Date after default, and premiums greater than this amount will be credited when received. The Contract provides a grace period of 61 days from the date The Prudential mails the Contract owner a notice of default. As an administrative practice, The Prudential extends the grace period by seven days to minimize manual processing required when premium payments are processed shortly after the 61st day. D. Reinstatement The Contract may be reinstated within five years after default (this period will be longer if required by state law) unless the Contract has been surrendered for its cash surrender value. A Contract will be reinstated upon receipt by The Prudential of a written application for reinstatement, production of evidence of insurability satisfactory to II-11 The Prudential and payment of at least the amount required to bring the premium account up to zero on the first monthly date on which a scheduled premium is due after the date of reinstatement. Any contract debt under reduced paid-up insurance must be repaid with interest or carried over to the reinstated contract. The Prudential will treat the amount paid upon reinstatement as a premium. It will deduct the front-end charges, plus any charges in arrears, other than mortality charges, with interest. The contract fund of the reinstated Contract will, immediately upon reinstatement, be equal to this net premium payment, plus the cash surrender value of the Contract immediately before reinstatement, plus a refund of that part of the deferred sales and administrative charges which would be charged if the Contract were surrendered immediately after reinstatement. An adjustment will be made for any termination dividend paid at the time of lapse. The original Contract Date still controls for purposes of calculating any contingent deferred sales and administrative charges, and any termination dividends. The reinstatement will take effect as of the date the required proof of insurability and payment of the reinstatement amount have been received by The Prudential at its Home Office. The Prudential may agree to accept a lower amount than described above. This lower amount must be at least the amount necessary to bring the contract fund after reinstatement up to the tabular contract fund, plus the estimated monthly charges for the next three months. The contract fund after reinstatement will be calculated in the same way as described above. In this case, the premium account after reinstatement will be negative, so payment of future scheduled premiums does not guarantee that the contract will not lapse at some time in the future. There is an alternative to this reinstatement procedure that applies only if reinstatement is requested within three months after the contract went into default. In such a case evidence of insurability will not be required and the amount of the required payment will be the lesser of the unpaid scheduled premiums and the amount necessary to make the contract fund equal to the tabular contract fund on the third Monthly Date following the date on which the Contract went into default. E. Repayment of Loan A loan made under the Contract may be repaid with an amount equal to the monies borrowed plus interest which accrues daily, either at a fixed annual rate of 5-1/2% or, if a contract owner has elected to have a variable loan interest rate applicable to loans made under the Contract, at the variable loan interest rate then applicable to the II-12 loan. When a loan is made, The Prudential will transfer an amount equal to the contract loan from the investment option(s). Under the fixed-rate contract loan provision, the amount of contract fund attributable to the outstanding contract loan will be credited with interest at an annual rate of 4%, and The Prudential thus will realize the difference between that rate and the fixed loan interest rate, which will be used to cover the loan investment expenses, income taxes, if any, and processing costs. If an owner so desires, the owner may elect to have a variable loan interest rate apply to the contract loans, if any, that he or she may make. If this election is made: 1. Interest on the loan will accrue daily at an annual rate The Prudential determines at the start of each contract year (instead of at a fixed rate), as described in the prospectus. 2. While a loan is outstanding, the amount of the contract fund attributable to the outstanding contract loan will be credited with interest at a rate which is less than the loan interest rate for the contract year by 1% (instead of 4%). Upon repayment of Contract debt, the loan portion of the payment (i.e., not the interest) will be added to the investment option(s). Amounts originally borrowed from the fixed-rate option will be allocated to the fixed-rate option, and the rest will be allocated among the variable investment option(s) in proportion to the amounts in each variable investment option attributable to the Contract as of the date of repayment. II. Transfers The Prudential Variable Appreciable Account ("Account") currently has 16 subaccounts, each of which is invested in shares of a corresponding portfolio of The Prudential Series Fund, Inc. ("Fund"), which is registered under the 1940 Act as an open-end diversified management investment company. In addition, a fixed-rate option and Real Property Account are available for investment by contract owners. Provided the Contract is not in default or is in force as variable reduced paid-up insurance, the owner may, up to four times in each contract year, transfer amounts from one subaccount to another subaccount, to the fixed-rate option, or to the Real Property Account without charge. All or a portion of the amount credited to a subaccount may be transferred. In addition, the entire amount of the contract fund may be transferred to the fixed-rate option at any time during the first two contract years. A contract owner who wishes to convert his or her variable contract to a fixed-benefit contract in this manner must request a complete transfer of funds to the fixed-rate option and should also change his or her allocation instructions regarding any future premiums. II-13 Transfers among subaccounts will take effect at the end of the valuation period during which a proper written request or authorized telephone request is received at a Prudential Home Office. The request may be in terms of dollars, such as a request to transfer $10,000 from one account to another, or may be in terms of a percentage reallocation among subaccounts. In the latter case, as with premium reallocations, the percentages must be in whole numbers. Transfers from either the fixed-rate option or the Real Property Account to other investment options are currently permitted only once each contract year and only during the thirty-day period beginning on the contract anniversary. The maximum amount which may currently be transferred out of the fixed-rate option each year is the greater of: (a) 25% of the amount in the fixed-rate option, and (b) $2,000. The maximum amount which may currently be transferred out of the Real Property Account each year is the greater of: (a) 50% of the amount in the Real Property Account, and (b) $10,000. Such transfer requests received prior to the contract anniversary will be effected on the contract anniversary. Transfer requests received within the thirty-day period beginning on the contract anniversary will be effected as of the end of the valuation period during which the request is received. These limits are subject to change in the future. III. "Redemption" Procedures: Surrender and Related Transactions A. Surrender for Cash Surrender Value If the insured party under a Contract is alive, The Prudential will pay, within seven days, the Contract's cash surrender value as of the date of receipt at its Home Office of the Contract and a signed request for surrender. The Contract's cash surrender value is computed as follows: 1. If the Contract is not in default: The cash surrender value is the contract fund, minus any surrender charge, consisting of a deferred sales charge and a deferred administrative charge, minus any contract debt, plus any termination dividend. The deferred sales charge and deferred administrative charge are described in the prospectus. The deferred administrative charge is designed to recover the administrative expenses, such as underwriting expenses, incurred in connection with the issuance of a Contract. As a result, in the early months after issue, there may be no cash surrender value if only scheduled premiums are paid. 2.If the Contract is in default during its days of grace, The Prudential will compute the cash surrender value as of the date the Contract went into default. It will adjust this value for any loan the owner took out or paid back or II-14 any premium payments or withdrawals made in the days of grace. 3. If the Contract is in default beyond its days of grace, the cash surrender value as of any date will be either the value on the date of any extended insurance benefit then in force, or the value on that date of any fixed or variable reduced paid-up insurance benefit then in force, less any Contract debt. In lieu of the payment of the cash surrender value in a single sum upon surrender of a Contract, an election may be made by the owner to apply all or a portion of the proceeds under one of the fixed benefit settlement options described in the Contract or, with the approval of The Prudential, a combination of options. An option is available only if the proceeds to be applied are 1,000 or more or would result in periodic payments of at least 20.00. The fixed-benefit settlement options are subject to the restrictions and limitations set forth in the Contract. B. Partial Surrenders and Withdrawal of Excess Cash Surrender Value An owner may surrender a Contract in part. Partial surrender involves splitting the Contract into two Contracts. One is surrendered for its cash surrender value; the other is continued in force on the same terms as the original Contract except that future scheduled premiums are reduced based upon the continued Contract's face amount and all values under the Contract are proportionately reduced based upon the reduction in the face amount of insurance. The Contract continued must have at least the minimum face amount of insurance stated in the contract. An alternative to surrender or partial surrender of a Contract is a withdrawal of cash surrender value without splitting the Contract into two Contracts. A withdrawal may be made only if the following conditions are satisfied. First, the amount withdrawn, plus the cash surrender value after withdrawal, may not be more than the cash surrender value before withdrawal. Second, the contract fund after the withdrawal must not be less than the tabular contract fund after the withdrawal. Third, the amount withdrawn must be at least $500 under a Form B Contract and at least $2,000 under a Form A Contract. An owner may make no more than four such withdrawals in a Contract year, and there is a fee of the lesser of $15 and 2% of the amount withdrawn for each such withdrawal. An amount withdrawn may not be repaid except as a premium subject to the Contract charges. Whenever a withdrawal is made, the death benefit payable will immediately be reduced by at least the amount of the withdrawal. This will not change the guaranteed minimum amount of insurance under a Form B Contract (i.e., the face amount) nor the amount of the scheduled premium that will be payable thereafter on such a Contract. Under a Form A Contract, however, the resulting reduction in death benefit may require a reduction in the face amount. No withdrawal will be permitted under a Form A Contract if it would result in a new face amount less II-15 than the minimum face amount. Furthermore, any applicable deferred administrative and sales charges are reduced in proportion to the reduction in face amount. The contract fund is reduced by the sum of the cash withdrawn, the fee for the withdrawal and the reduction in the backload. An amount equal to the reduction in the contract fund will be withdrawn from the investment options. In addition, the amount of the scheduled premiums due thereafter under a Form A Contract will be reduced to reflect the lower face amount of insurance. C. Death Claims The Prudential will pay a death benefit to the beneficiary within seven days after receipt at its Service Office of due proof of death of the Insured and all other requirements necessary to make payment. State Insurance laws impose various requirements, such as receipt of a tax waiver, before payment of the death benefit may be made. In addition, payment of the death benefit is subject to the provisions of the Contract regarding suicide and incontestability. In the event The Prudential should contest the validity of a death claim, an amount up to the portion of the Contract fund in the variable investment options will be withdrawn, if appropriate, and held in The Prudential's general account. The following describes the death benefit if the Contract is not in default past its days of grace. The death benefit under a Form A Contract is the face amount less any contract debt. The death benefit under a Form B Contract is the face amount, plus any excess of the contract fund over the tabular contract fund, less any contract debt. There may be an additional amount payable from an extra benefit added to the Contract by rider. Tabular contract funds on Contract anniversaries are shown in the contract data pages. Tabular contract funds at intermediate times can be obtained by interpolation. If the contract fund grows to exceed the net single premium at the insured's attained age for the death benefit described above, the death benefit will be the contract fund, divided by such net single premium. The death benefit will be adjusted for any contract debt and any extra benefits in the same manner as above. The proceeds payable on death also will include interest (at a rate determined by The Prudential from time to time) from the date that the death benefit is computed (the date of death) until the date of payment. The Prudential will make payment of the death benefit out of its general account, and will transfer assets, if appropriate, from the Account and/or the Real Property Account to the general account in an amount up to the contract fund. In lieu of payment of the death benefit in a single sum, an election may be made to apply all or a portion of the II-16 proceeds under one of the fixed benefit settlement options described in the Contract or, with the approval of The Prudential, a combination of options. The election may be made by the owner during the Insured's lifetime, or, at death, by the beneficiary. An option in effect at death may not be changed to another form of benefit after death. An option is available only if the proceeds to be applied are $1,000 or more or would result in periodic payments of at least $20.00. The fixed benefit settlement options are subject to the restrictions and limitations set forth in the Contract. D. Default and Options on Lapse The Contract is in default on any Monthly Date on which the premium account is less than zero and the contract fund is less than an amount which will grow at the assumed net rate of return to the tabular contract fund applicable on the next Monthly Date. Monthly Dates occur on the Contract Date and in each later month on the same day of the month as the Contract Date. The Contract provides for a grace period commencing on the Monthly Date on which the Contract goes into default and extending at least 61 days after the mailing date of the notice of default. The insurance coverage continues in force during the grace period, but if the Insured dies during the grace period, any charges due during the grace period are deducted from the amount payable to the beneficiary. Except for Contracts issued on certain insureds in high risk rating classes, a lapsed Contract will normally provide extended term insurance at expiration of the grace period. The death benefit of the extended term insurance is equal to the death benefit of the Contract (excluding riders) as of the date of default, less any Contract debt. The extended term insurance will continue for a length of time that depends on the cash benefit of the extended term insurance is equal to the death benefit of the Contract (excluding riders) as of the due date of the premium in default, less any Contract debt. The extended term insurance will continue for a length of time that depends on the cash surrender value on the due date of first unpaid premium, the amount of insurance, and the age and sex of the insured. However, extended term insurance may be exchanged, if the contract owner so elects, for fixed or variable reduced paid-up insurance within three months of the due date of the premium in default. The face amount of the reduced paid-up insurance will depend on the cash surrender value on the due date of the premium in default, and the age and sex of the insured. Variable reduced paid-up is only available if the amount of such insurance is at least $5,000, and if the insured is not in a high risk rating class. II-17 Contracts issued on the above mentioned high risk insureds will be converted to fixed reduced paid-up whole life insurance at expiration of the grace period. If the amount of variable reduced paid-up (VRPU) is at least equal to the amount of extended term insurance, and VRPU is available, then VRPU will be the automatic option on lapse. E. Loans The Contract provides that an owner, if no premium is in default beyond the grace period, may take out a loan at any time a loan value is available. The Contract also provides for a loan value if the Contract is in effect under the contract value option for fixed or variable reduced paid-up insurance, but not if it is in effect as extended term insurance. The owner may borrow money on completion of a form satisfactory to The Prudential. The Contract is the only security for the loan. Disbursement of the amount of the loan will be made within seven days of receipt of the form at The Prudential's Home Office. The investment options will be debited in the amount of the loan on the date the form is received. The percentage of the loan withdrawn from each investment option will normally be equal to the percentage of the value of such assets held in the investment option. An owner may borrow up to the Contract's full loan value. The loan provision is described in the prospectus. A loan does not affect the amount of premiums due. When a loan is made, the contract fund is not reduced, but the value of the assets relating to the Contract held in the investment option(s) is reduced. Accordingly, the daily changes in the cash surrender value will be different from what they would have been had no loan been taken. Cash surrender values and the death benefit are thus permanently affected by any Contract debt, whether or not repaid. The guaranteed minimum death benefit is not affected by Contract debt if premiums are duly paid. However, on settlement the amount of any Contract debt is subtracted from the insurance proceeds. If Contract debt ever becomes equal to or more than what the cash surrender value would be if there was no Contract debt, all the Contract's benefits will end 31 days after notice is mailed to the owner and any known assignee, unless payment of an amount sufficient to end the default is made within that period. F. Key Employee Rider Many life insurance companies offer fixed-benefit "key person" insurance policies. Those policies enable an employer to purchase life insurance payable to the employer upon the death of an important or "key" employee whose death would constitute a financial disadvantage to the employer. Such policies often permit the owner the II-18 right to change the person insured under the policy, a right often exercised when the original insured terminates his or her employment with the company and is replaced by another person. If permitted by the insurance laws of the state in which the Contract is issued, a rider to the Contract is available, referred to herein as the "key person" rider, that allows the owner the option to continue the Contract in force on the life of a different insured, subject to certain conditions. This rider is primarily offered to corporate and non-corporate employers who own or may purchase a Contract issued on the life of a key employee. The rider may be included at the time the original Contract is issued or added after issue. If the Contract includes this rider, the owner will be able to continue the Contract in force on the life of a different key employee. Thus, the rider provides employers with a way to purchase the Contract on the life of a key employee that may continue in force in an appropriately modified form on the life of a new employee when the original insured leaves the owner's employment. The revised Contract will have a new scheduled premium and certain other revised specifications, which will be set forth in a new Contract document. An Owner's exercise of the option provided by the key person rider could be viewed as an exchange of the existing Contract for a new Contract. The Contract prior to the owner's exercise of the option to change insureds will be referred to as the "original Contract". The Contract in force after the exchange is effected will be referred to as the "new Contract." An Owner's exercise of the right granted by the key person rider is subject to several conditions. These conditions include but are not limited to the following: (i) the new insured must have been alive as of the original Contract Date (i.e., the date the Contract was issued) and must be less than 70 years old as of the date of the proposed change of insureds; (ii) the new insured must satisfy The Prudential's underwriting requirements; (iii) the owner of the new Contract must remain the same as the owner of the original Contract and that owner must have an insurable interest in the new insured's life; and (iv) The Prudential must not be waiving any premiums under the Contract pursuant to a rider that waives premiums in the event of disability. The specifications of the new Contract will be determined as follows: The Contract date will remain the same as that of the original Contract. The face amount of the new Contract will generally be the amount requested by the owner in the application to effect the change of insureds, except that it cannot be more than the face amount of the original Contract. The contract fund of the original Contract will become the initial contract fund of the new Contract. The premium for the new Contract will be based on The Prudential's rates in force on the date of the change for the new insured's rating class. If the original Contract has contract debt due to an outstanding loan, II-19 the contract debt may be transferred to the new Contract unless that debt would exceed the new Contract's loan value, in which case the excess contract debt must be paid off. Upon the exchange of the original Contract for the new Contract, neither the contingent deferred sales charge nor the contingent deferred administrative charge is assessed. If the new Contract is subsequently surrendered, however, the Contract's cash surrender value will be determined by using the greater of the surrender charges that would apply under the original or the new Contract. Thus, with respect to the contingent deferred administrative charge, the amount of this charge upon surrender of the new Contract will be determined on the basis of the face amount of the original Contract since the face amount cannot be increased upon exercise of the right to change insureds. The original Contract Date, however, will govern for purposes of determining whether this charge will be reduced or eliminated for persistency. With respect to the contingent deferred sales load, the amount of this charge can be increased following exercise of the option granted by the key person rider because the scheduled premiums on the new Contract can be higher than the scheduled premiums on the original Contract due to the replacement of the original insured with an insured of an older issue age. If this is so, the contingent deferred sales load will be calculated as if the Contract had originally been issued on the life of the new insured. The original Contract Date will control for purposes of calculating the reduction in the contingent deferred sales charge for persistency. IV. Cash Adjustment Upon Exchange of Contract As described previously, at any time during the first 24 months after a Contract is issued, so long as the Contract is not in default, the Owner may transfer all amounts in the variable investment options into the fixed-rate option. This option is provided in lieu of the option to exchange to a comparable fixed-benefit life insurance combined. II-20 EX-99.C1 4 OPINION AND CONSENT Exhibit 3 April 25, 1996 The Prudential Insurance Company of America Prudential Plaza Newark, New Jersey 07102-3777 Gentlemen: In my capacity as Chief Counsel, Variable Products, Law Department of The Prudential Insurance Company of America, I have reviewed the establishment on August 11, 1987 of The Prudential Variable Appreciable Account (the "Account") by the Finance Committee of the Board of Directors of The Prudential Insurance Company of America ("The Prudential") as a separate account for assets applicable to certain variable life insurance contracts, pursuant to the provisions of Section 17B:28-7 of the Revised Statutes of New Jersey. I am responsible for oversight of the preparation and review of the Registration Statements on Form S-6, as amended, filed by The Prudential with the Securities and Exchange Commission (Registration No. 33-20000, Registration No. 33-25372 and Registration No. 33-61079) under the Securities Act of 1933 for the registration of certain variable appreciable life insurance contracts issued with respect to the Account. I am of the following opinion: 1. The Prudential is a corporation duly organized under the laws of the State of New Jersey and is a validly existing corporation. 2. The Account has been duly created and is validly existing as a separate account pursuant to the aforesaid provisions of New Jersey law. 3. The portion of the assets held in the Account equal to the reserve and other liabilities for variable benefits under the variable appreciable life insurance contracts is not chargeable with liabilities arising out of any other business The Prudential may conduct. 4. The variable appreciable life insurance contracts are legal and binding obligations of The Prudential, in accordance with their terms. In arriving at the foregoing opinion, I have made such examination of law and examined such records and other documents as I judged to be necessary or appropriate. I hereby consent to the filing of this opinion as an exhibit to the Registration Statement. Very truly yours, Clifford E. Kirsch II-21 EX-99.C6 5 OPINION AND CONSENT Exhibit 6 April 25, 1996 The Prudential Insurance Company of America Prudential Plaza Newark, New Jersey 07102-3777 To The Prudential: This opinion is furnished in connection with the registration by The Prudential Insurance Company of America of variable appreciable life insurance contracts ("Contracts") under the Securities Act of 1933. The prospectus included in Post-Effective Amendment No. 16 to Registration Statement No. 33-20000 on Form S-6 describes the Contracts. I have reviewed the two Contract forms and I have participated in the preparation and review of the Registration Statement and Exhibits thereto. In my opinion: (1) The illustrations of cash surrender values and death benefits included in the section of the prospectus entitled "Hypothetical Illustration of Death Benefits and Cash Surrender Values", based on the assumptions stated in the illustrations, are consistent with the provisions of the respective forms of the Contracts. The rate structure of the Contracts has not been designed so as to make the relationship between premiums and benefits, as shown in the illustrations, appear more favorable to a prospective purchaser of a Contract issued on a male age 35, than to prospective purchasers of Contracts on males of other ages or on females. (2) The illustration of the effect of a Contract loan on the cash surrender value included in the section of the prospectus entitled "Contract Loans", based on the assumptions stated in the illustration, is consistent with the provisions of the Form A Contract. (3) The deduction in an amount equal to 1.25% of each premium is a reasonable charge in relation to the additional income tax burden imposed upon The Prudential Insurance Company of America as the result of the enactment of Section 848 of the Internal Revenue Code. In reaching that conclusion a number of factors were taken into account that, in my opinion, were appropriate and which resulted in a projected after-tax rate of return that is a reasonable rate to use in discounting the tax benefit of the deductions allowed in Section 848 in taxable years subsequent to the year in which the premiums are received. I hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the reference to my name under the heading "Experts" in the prospectus. Very truly yours, Nancy D. Davis, FSA, MAAA Vice President and Assistant Actuary The Prudential Insurance Company of America II-22 EX-27 6 FINANCIAL DATA SCHEDULES
6 1000 YEAR DEC-31-1995 DEC-31-1995 3,186,288 3,599,591 0 (113) 0 3,559,591 0 0 0 0 0 0 210,993 0 0 0 0 0 0 3,559,478 111,691 0 111,700 22,073 89,618 236 427,073 628,627 0 0 0 0 0 0 0 1,012,340 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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