Prudential`s Variable Universal Life Insurance

Transcription

Prospectus – May 1, 2002
Prudential’s Variable
Universal Life Insurance
The Prudential Variable
Appreciable Account
®
The Prudential Variable Appreciable Account
with respect to
Variable Appreciable Life Contracts
Variable Universal Life Contracts
Survivorship Variable Universal Life Contracts
The Report of Independent Accountants on Page B-41 of the prospectus for the above-mentioned
Prudential contracts is hereby amended to include the signature of PricewaterhouseCoopers, LLP,
and now reads as follows:
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
The Prudential Insurance Company of America
In our opinion, the accompanying consolidated statements of financial position and the related
consolidated statements of operations, of stockholder’s equity and of cash flows present fairly, in
all material respects, the financial position of The Prudential Insurance Company of America and
its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company’s management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 12, 2002
RIASUP Ed. 8-2002
PROSPECTUS
May 1, 2002
PRUCO LIFE VARIABLE APPRECIABLE ACCOUNT
Variable Universal Life
This prospectus describes an individual flexible premium variable universal life insurance contract (the "Contract")
offered by Pruco Life Insurance Company ("Pruco Life," "us," "we," or "our"). The Contract provides life insurance
coverage with flexible premium payments.
As of December 12, 2001, Pruco Life no longer offered these Contracts for sale.
Investment Choices:
Variable Universal Life offers a wide variety of investment choices, including 35 variable investment options that invest
in mutual funds managed by these leading asset managers:
•
Prudential Investments LLC
•
A I M Advisors, Inc.
•
American Century Investment Management, Inc.
•
Janus Capital Management LLC
•
MFS Investment Management7
•
T. Rowe Price International, Inc.
For a complete list of the 35 available variable investment options and their investment objectives, see The Funds,
page 7.
You may also choose to invest your Contract’s premiums and its earnings in the fixed-rate option which pays a
guaranteed interest rate. See The Fixed-Rate Option, page 12.
This prospectus describes the Contract generally and the Pruco Life Variable Appreciable Account (the "Account").
The attached prospectuses for the Funds and their related statements of additional information describe the
investment objectives and the risks of investing in the Fund portfolios. Pruco Life may add additional investment
options in the future. Please read this prospectus and keep it for future reference.
The Securities and Exchange Commission ("SEC") maintains a Web site (http://www.sec.gov) that contains material
incorporated by reference and other information regarding registrants that file electronically with the SEC.
Neither the Securities and Exchange Commission nor any state securities commission has approved or
disapproved of these securities or determined if this prospectus is accurate or complete. Any representation
to the contrary is a criminal offense.
The Contract may be purchased through registered representatives located in banks and other financial
institutions. An investment in the Contract is not a bank deposit and is not insured or guaranteed by the
Federal Deposit Insurance Corporation ("FDIC") or any other governmental agency and may lose value. An
investment is also not a condition to the provision or term of any banking service or activity. The
participating bank is not a registered broker-dealer and is not affiliated with Pruco Securities Corporation.
Pruco Life Insurance Company
213 Washington Street
Newark, New Jersey 07102-2992
Telephone: (800) 778-2255
35263(&786&217(176
Page
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS..............................................................................1
INTRODUCTION AND SUMMARY ...................................................................................................................................2
Brief Description of the Contract ................................................................................................................................2
Charges..........................................................................................................................................................................2
Types of Death Benefit .................................................................................................................................................5
Premium Payments.......................................................................................................................................................5
Refund............................................................................................................................................................................6
GENERAL INFORMATION ABOUT PRUCO LIFE INSURANCE COMPANY, THE PRUCO LIFE VARIABLE
APPRECIABLE ACCOUNT, AND THE VARIABLE INVESTMENT OPTIONS AVAILABLE
UNDER THE CONTRACT .................................................................................................................................................7
Pruco Life Insurance Company ...................................................................................................................................7
The Pruco Life Variable Appreciable Account...........................................................................................................7
The Funds......................................................................................................................................................................7
Voting Rights...............................................................................................................................................................12
The Fixed-Rate Option ...............................................................................................................................................12
Which Investment Option Should Be Selected?......................................................................................................13
DETAILED INFORMATION FOR PROSPECTIVE CONTRACT OWNERS ...................................................................13
Charges and Expenses ..............................................................................................................................................13
Requirements for Issuance of a Contract ................................................................................................................18
Short-Term Cancellation Right or "Free-Look" .......................................................................................................18
Types of Death Benefit ...............................................................................................................................................18
Changing the Type of Death Benefit .........................................................................................................................19
Contract Date ..............................................................................................................................................................19
Premiums.....................................................................................................................................................................19
Allocation of Premiums..............................................................................................................................................20
Death Benefit Guarantee ............................................................................................................................................21
Transfers......................................................................................................................................................................22
Dollar Cost Averaging ................................................................................................................................................23
Auto-Rebalancing .......................................................................................................................................................23
How a Contract’s Cash Surrender Value Will Vary..................................................................................................23
How a Type A (Fixed) Contract’s Death Benefit Will Vary ......................................................................................24
How a Type B (Variable) Contract’s Death Benefit Will Vary..................................................................................24
Surrender of a Contract..............................................................................................................................................25
Withdrawals.................................................................................................................................................................25
Increases in Basic Insurance Amount......................................................................................................................26
Decreases in Basic Insurance Amount ....................................................................................................................27
When Proceeds Are Paid ...........................................................................................................................................27
Living Needs Benefit ..................................................................................................................................................28
Illustrations of Cash Surrender Values, Death Benefits, and Accumulated Premiums.......................................28
Contract Loans............................................................................................................................................................30
Sale of the Contract and Sales Commissions .........................................................................................................31
Tax Treatment of Contract Benefits ..........................................................................................................................31
Lapse and Reinstatement ..........................................................................................................................................33
Legal Considerations Relating to Sex-Distinct Premiums and Benefits...............................................................33
Other General Contract Provisions...........................................................................................................................34
Riders...........................................................................................................................................................................34
Substitution of Fund Shares......................................................................................................................................34
Reports to Contract Owners ......................................................................................................................................35
State Regulation..........................................................................................................................................................35
Experts.........................................................................................................................................................................35
Litigation and Regulatory Proceedings....................................................................................................................35
Additional Information ...............................................................................................................................................36
Financial Statements ..................................................................................................................................................36
DIRECTORS AND OFFICERS ........................................................................................................................................37
FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF THE PRUCO LIFE
VARIABLE APPRECIABLE ACCOUNT..........................................................................................................................A1
CONSOLIDATED FINANCIAL STATEMENTS OF PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES.....B1
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35263(&786
accumulated net payments  The actual premium
payments you make accumulated at an effective
annual rate of 4%, less any withdrawals you make,
accumulated at an effective annual rate of 4%.
fixed-rate option  An investment option under which
interest is accrued daily at a rate that Pruco Life
declares periodically, but not less than an effective
annual rate of 4%.
attained age  The insured’s age on the Contract
date plus the number of years since then.
Funds  Mutual funds with separate portfolios. One
or more of the available Fund portfolios may be chosen
as an underlying investment for the Contract.
basic insurance amount  The amount of life
insurance as shown in the Contract, not including
riders. Also referred to as "face amount."
Lifetime Death Benefit Guarantee period  The
lifetime of the Contract, during which time the Lifetime
Death Benefit Guarantee is available if sufficient
premiums are paid. Lifetime Death Benefit Guarantee
not available in Massachusetts. See Death Benefit
Guarantee, page 21.
cash surrender value  The amount payable to the
Contract owner upon surrender of the Contract. It is
equal to the Contract Fund minus any Contract debt
and, during the first 10 Contract years, minus the
applicable surrender charge. Also referred to in the
Contract as "Net Cash Value."
Limited Death Benefit Guarantee period  A period
which is determined on a case-by-case basis, during
which time the Limited Death Benefit Guarantee is
available if sufficient premiums are paid. See Death
Benefit Guarantee, page 21. The period applicable to
your Contract is shown on the Contract data pages.
Contract  The variable universal life insurance policy
described in this prospectus.
Contract anniversary  The same date as the
Contract date in each later year.
Monthly date  The Contract date and the same date
in each subsequent month.
Contract date  The date the Contract is effective, as
specified in the Contract.
Pruco Life Insurance Company  Us, we, our,
Pruco Life. The company offering the Contract.
Contract debt  The principal amount of all
outstanding loans plus any interest accrued thereon.
separate account  Amounts under the Contract
that are allocated to the variable investment options
held by us in a separate account called the Pruco Life
Variable Appreciable Account (the "Account"). The
separate account is set apart from all of the general
assets of Pruco Life Insurance Company.
Contract Fund  The total amount credited to a
specific Contract. On any date it is equal to the sum of
the amounts in all the variable investment options and
the fixed-rate option, and the principal amount of any
Contract debt plus any interest earned thereon.
valuation period  The period of time from one
determination of the value of the amount invested in a
variable investment option to the next.
Such
determinations are made when the net asset values of
the portfolios of the Funds are calculated, which is
generally at 4:00 p.m. Eastern time on each day during
which the New York Stock Exchange is open.
Contract owner  You. Unless a different owner is
named in the application, the owner of the Contract is
the insured.
Contract year  A year that starts on the Contract
date or on a Contract anniversary. For any portion of a
Contract representing an increase (see page 26),
“Contract year” is a year that starts on the effective
date of the increase.
variable investment options  the 35 mutual funds
available under this Contract, whose shares are held in
the separate account.
death benefit  If the Contract is not in default, this is
the amount we will pay upon the death of the insured,
assuming no Contract debt.
you  The owner of the Contract.
1
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This Summary provides a brief overview of the more significant aspects of the Contract. We provide further detail in
the subsequent sections of this prospectus and in the Contract.
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As of December 12, 2001, Pruco Life no longer offered these Contracts for sale.
The Contract is a form of variable universal life insurance. It is based on a Contract Fund, the value of which changes
every day. The chart below describes how the value of your Contract Fund changes.
A broad objective of the Contract is to provide benefits that will increase in value if favorable investment results are
achieved. You may invest premiums in one or more of the 35 available variable investment options (in states where
they are approved) or in the fixed-rate option. Your Contract Fund value changes every day depending upon the
change in the value of the particular investment options that you have selected.
Although the value of your Contract Fund will increase if there is favorable investment performance in the variable
investment options you select, investment returns in the variable investment options are NOT guaranteed. There is a
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 13. If you select the fixed-rate option, Pruco Life credits your account with a declared rate or rates of
interest but you assume the risk that the rate may change, although it will never be lower than an effective annual rate
of 4%.
Variable life insurance contracts are unsuitable as short-term savings vehicles. Withdrawals and loans will negate any
guarantee against lapse and may result in adverse tax consequences. See Death Benefit Guarantee, page 21, and
Tax Treatment of Contract Benefits, page 31.
The replacement of life insurance is generally not in your best interest. In most cases, if you require
additional coverage, the benefits of your existing contract can be protected by purchasing additional
insurance or a supplemental contract. If you are considering replacing a contract, you should compare the
benefits and costs of supplementing your existing contract with the benefits and costs of purchasing the
Contract described in this prospectus and you should consult with a qualified tax adviser.
This prospectus may only be offered in jurisdictions in which the offering is lawful. No person is authorized
to make any representations in connection with this offering other than those contained in this prospectus
and in the prospectuses and statements of additional information for the Funds.
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The following chart outlines the components of your Contract Fund and the adjustments which may be made including
the maximum charges which may be deducted from each premium payment and from the amounts held in the
designated investment options. These charges are largely designed to cover insurance costs and risks as well as
sales and administrative expenses.
The maximum charges shown in the chart, as well as the current lower charges, are fully described under Charges
and Expenses, page 13.
2
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•
•
less a charge of up to 7.5% of the premiums paid for
taxes attributable to premiums. In Oregon this is
called a premium based administrative charge.
less a charge for sales expenses of up to 4% of the
premiums paid.
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To be invested in one or a combination of:
• 35 variable investment options
• The fixed-rate option
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On the Contract Date, the Contract Fund is equal to the invested premium amount
minus any of the charges described below which may be due on that date. Thereafter,
the value of the Contract Fund changes daily.
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•
•
•
•
•
•
•
Addition of any new invested premium amounts.
Addition of any increase due to investment results of the chosen variable investment options.
Addition of guaranteed interest at an effective annual rate of 4% (plus any excess interest if
applicable) on the portion of the Contract Fund allocated to the fixed-rate option.
Addition of guaranteed interest at an effective annual rate of 4% on the amount of any
Contract loan. (Separately, interest charged on the loan accrues at an effective annual rate of
4.5% or 5%. See Contract Loans, page 30.)
Subtraction of any decrease due to investment results of the chosen variable investment
options.
Subtraction of any amount withdrawn.
Subtraction of the charges listed below, as applicable.
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•
•
Management fees and expenses are deducted from the Fund assets. See Underlying
Portfolio Expenses chart, below.
We deduct a daily mortality and expense risk charge, equivalent to an annual rate of up to
0.9%, from the assets in the variable investment options.
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•
•
•
•
•
We reduce the Contract Fund by a monthly administrative charge of up to $10 plus $0.07 per
$1,000 ($10 plus $0.08 per $1,000 in Massachusetts) of the basic insurance amount; after the
first Contract year, the $0.07 per $1,000 ($0.08 per $1,000 in Massachusetts) portion of the
charge is reduced to $0.01 per $1,000 ($0.02 per $1,000 in Massachusetts) of the basic
insurance amount.
We deduct a cost of insurance ("COI") charge.
We reduce the Contract Fund by a Death Benefit Guarantee risk charge of $0.01 per $1,000
of the basic insurance amount (not applicable in Massachusetts).
If the Contract includes riders, we deduct rider charges from the Contract Fund.
If the rating class of an insured results in an extra charge, we will deduct that charge from the
Contract Fund.
3
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•
•
•
•
•
During the first 10 Contract years, we will assess a contingent deferred sales charge if the
Contract lapses, is surrendered, or the basic insurance amount is decreased (including as a
result of a withdrawal or a death benefit type change). For insureds age 76 or less at issue,
the maximum contingent deferred sales charge is 26% of the lesser of the target level
premium or the actual premiums paid (see Premiums, page 19) for the Contract. The charge
is level for six years and then declines monthly to zero at the end of the 10th Contract year.
For insureds age 77 or over at issue, the maximum charge will be a lesser percentage of the
target level premium for the Contract or the actual premiums paid.
During the first 10 Contract years, we will assess a contingent deferred administrative charge
if the Contract lapses, is surrendered or the basic insurance amount is decreased (including
as a result of a withdrawal or a death benefit type change). This charge equals the lesser of:
(a) $5 per $1,000 of basic insurance amount; and (b) $500. It is level for six years and then
th
declines monthly until it reaches zero at the end of the 10 Contract year.
We assess an administrative charge of up to $25 for any withdrawals.
We may assess an administrative charge of up to $25 for any change in basic insurance
amount.
We assess an administrative charge of up to $25 for each transfer exceeding 12 in any
Contract year.
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The Prudential Series Fund, Inc.
Portfolios
Investment
Advisory
Fees
Total
Other
Total Actual
Contractual
Expenses
Expenses*
Expenses
0.58%
0.03%
0.55%
Conservative Balanced
0.44%
0.04%
0.40%
Diversified Bond
0.49%
0.04%
0.45%
Equity
0.64%
0.04%
0.60%
Flexible Managed
0.84%
0.09%
0.75%
Global
0.60%
0.05%
0.55%
High Yield Bond
0.64%
0.04%
0.60%
Jennison
0.43%
0.03%
0.40%
Money Market
0.39%
0.04%
0.35%
Stock Index
0.44%
0.04%
0.40%
Value
1.74%
0.90%
0.84%
SP Aggressive Growth Asset Allocation (1)
3.45%
2.50%
0.95%
SP AIM Aggressive Growth
2.55%
1.70%
0.85%
SP AIM Core Equity
1.57%
0.90%
0.67%
SP Alliance Large Cap Growth
2.01%
3.16%
1.15%
SP Alliance Technology
1.27%
0.52%
0.75%
SP Balanced Asset Allocation (1)
1.06%
0.35%
0.71%
SP Conservative Asset Allocation (1)
1.03%
0.28%
0.75%
SP Davis Value
3.27%
2.37%
0.90%
SP Deutsche International Equity
1.46%
0.66%
0.80%
SP Growth Asset Allocation (1)
2.84%
1.89%
0.95%
SP INVESCO Small Company Growth
1.86%
1.01%
0.85%
SP Jennison International Growth
1.98%
1.18%
0.80%
SP Large Cap Value
3.04%
2.29%
0.75%
SP MFS Capital Opportunities
2.11%
1.31%
SP MFS Mid-Cap Growth
0.80%
1.08%
0.60%
0.48%
SP PIMCO High Yield
0.22%
0.82%
0.60%
SP PIMCO Total Return
1.41%
0.81%
0.60%
SP Prudential U.S. Emerging Growth
1.56%
0.90%
0.66%
SP Small/Mid Cap Value
2.61%
1.71%
0.90%
SP Strategic Partners Focused Growth
* Reflects fee waivers, reimbursement of expenses, and expense reductions, if any.
4
0.58%
0.44%
0.49%
0.64%
0.84%
0.60%
0.64%
0.43%
0.39%
0.44%
1.04%
1.07%
1.00%
1.10%
1.30%
0.92%
0.87%
0.83%
1.10%
0.97%
1.15%
1.24%
0.90%
1.00%
1.00%
0.82%
0.76%
0.90%
1.05%
1.01%
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Investment
Advisory
Fees
Other
Expenses
Total
Contractual
Expenses
Total
Actual
Expenses*
AIM Variable Insurance Funds
AIM V.I. Premier Equity Fund - Series I shares
0.60%
0.25%
0.85%
0.85%
American Century Variable Portfolios, Inc. (2)
VP Value Fund
0.97%
0.00%
0.97%
0.97%
Janus Aspen Series (3)
Growth Portfolio - Institutional Shares
0.65%
0.01%
0.66%
0.66%
MFS Variable Insurance Trust (4)
Emerging Growth Series
0.75%
0.12%
0.87%
0.86%
T. Rowe Price International Series, Inc. (5)
International Stock Portfolio
1.05%
0.00%
1.05%
1.05%
Portfolios
7
K
(1) Prudential Series Fund, Inc.
Each Asset Allocation Portfolio invests shares in other Fund Portfolios. The Advisory Fees for the Asset Allocation
Portfolios are the product of a blend of the Advisory Fees of those other Fund Portfolios, plus a 0.05% annual advisory fee
payable to PI.
(2) American Century Variable Portfolios, Inc.
The “Investment Advisory Fees” include ordinary expenses of managing and operating the Fund, except brokerage
expenses, taxes, interest, fees and expenses of the independent directors (including legal counsel fees), and extraordinary
expenses. The Fund has a stepped fee schedule. As a result, the Fund’s management fee rate decreases as the Fund’s
assets increase.
(3) Janus Aspen Series
The table reflects expenses for the fiscal year ended December 31, 2001. All expenses are shown without the effect of any
offset arrangements.
®
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(4) MFS Variable Insurance Trust
An expense offset arrangement with the Fund’s custodian resulted in a reduction in “Other Expenses” by 0.01% and is
reflected in the “Total Actual Expenses.”
(5) T. Rowe Price International Series, Inc.
The “Investment Advisory Fees” include ordinary recurring operating expenses of the Funds.
The expenses relating to the Funds (other than those of the Series Fund) have been provided to Pruco Life by
the Funds. Pruco Life has not independently verified them.
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There are two types of death benefit available. You may choose a Contract with a Type A (fixed) death benefit under
which the cash surrender value varies daily with investment experience, and the death benefit generally remains at the
basic insurance amount you initially chose. However, the Contract Fund may grow to a point where the death benefit
may increase and vary with investment experience. If you choose a Contract with a Type B (variable) death benefit,
the cash surrender value and the death benefit both vary with investment experience. For either type of death benefit,
as long as the Contract is in-force, the death benefit will never be less than the basic insurance amount shown in your
Contract. See Types of Death Benefit, page 18.
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The Contract is a flexible premium contract – there are no scheduled premiums. Except for the minimum initial
premium, and subject to a minimum of $25 per subsequent payment, you choose the timing and amount of premium
payments. The Contract will remain in-force if the Contract Fund less any applicable surrender charges is greater than
zero and more than any Contract debt. Paying insufficient premiums, poor investment results, or the taking of loans or
withdrawals from the Contract will increase the possibility that the Contract will lapse. However, if the accumulated
premiums you pay are high enough, and Contract debt does not equal or exceed the Contract Fund less any
applicable surrender charges, Pruco Life guarantees that your Contract will not lapse even if investment experience is
very unfavorable and the Contract Fund drops below zero. Each Contract generally provides two guarantees, one that
lasts for the lifetime of the Contract and another that lasts for a stated, reasonably lengthy period. The guarantee for
5
the life of the Contract requires higher premium payments. In Massachusetts, only one death benefit guarantee is
available. The length of this death benefit guarantee is generally five Contract years, however, for some Contracts, it
may be shorter. See Premiums, page 19, Death Benefit Guarantee, page 21 and Lapse and Reinstatement, page
33.
We offer and suggest regular billing of premiums even though you decide when to make premium payments and,
subject to a $25 minimum, in what amounts. You should discuss your billing options with your Pruco Life
representative when you apply for the Contract. See Premiums, page 19.
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For a limited time, you may return your Contract for a refund in accordance with the terms of its "Free-Look" provision.
See Short-Term Cancellation Right or "Free-Look," page 18.
For the DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS, see page 1.
6
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Pruco Life Insurance Company ("Pruco Life") is a stock life insurance company, organized in 1971 under the laws of
the State of Arizona. It is licensed to sell life insurance and annuities in the District of Columbia, Guam, and in all
states except New York.
Pruco Life is a wholly-owned subsidiary of The Prudential Insurance Company of America ("Prudential"), a New Jersey
stock life insurance company that has been doing business since 1875. Prudential is an indirect wholly-owned
subsidiary of Prudential Financial, Inc. (“Prudential Financial”), a New Jersey insurance holding company. As Pruco
Life’s ultimate parent, Prudential Financial exercises significant influence over the operations and capital structure of
Pruco Life and Prudential. However, neither Prudential Financial, Prudential, nor any other related company has any
legal responsibility to pay amounts that Pruco Life may owe under the contract or policy.
Pruco Life's consolidated financial statements begin on page B1 and should be considered only as bearing upon Pruco
Life's ability to meet its obligations under the Contracts.
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We have established a separate account, the Pruco Life Variable Appreciable Account (the "Account") to hold the
assets that are associated with the Contracts. The Account was established on January 13, 1984 under Arizona law
and is registered with the Securities and Exchange Commission (“SEC”) under the Investment Company Act of 1940
as a unit investment trust, which is a type of investment company. The Account meets the definition of a "separate
account" under the federal securities laws. The Account holds assets that are segregated from all of Pruco Life's other
assets.
Pruco Life is the legal owner of the assets in the Account. Pruco Life will maintain assets in the Account with a total
market value at least equal to the reserve and other liabilities relating to the variable benefits attributable to the
Account. These assets may not be charged with liabilities which arise from any other business Pruco Life conducts. In
addition to these assets, the Account's assets may include funds contributed by Pruco Life to commence operation of
the Account and may include accumulations of the charges Pruco Life makes against the Account. From time to time
these additional assets will be transferred to Pruco Life's general account. Pruco Life will consider any possible
adverse impact the transfer might have on the Account before making any such transfer.
The obligations to Contract owners and beneficiaries arising under the Contracts are general corporate obligations of
Pruco Life.
Currently, in states where they are approved, you may invest in one or a combination of 35 available variable
investment options. When you choose a variable investment option, we purchase shares of a mutual fund which are
held as an investment for that option. We hold these shares in the separate account. The division of the separate
account of Pruco Life that invests in a particular mutual fund is referred to in your Contract as the subaccount. Pruco
Life may add additional variable investment options in the future. The Account's financial statements begin on page
A1.
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Listed below are the mutual funds (the “Funds”) in which the variable investment options invest, the investment
objectives, and investment advisers.
Each Fund has a separate prospectus that is provided with this prospectus. You should read the Fund
prospectus before you decide to allocate assets to the variable investment option using that Fund. There is
no assurance that the investment objectives of the Funds will be met.
7
The Prudential Series Fund, Inc. (the "Series Fund"):
•
Conservative Balanced Portfolio: The investment objective is a total investment return consistent with a
conservatively managed diversified portfolio. The Portfolio invests in a mix of equity securities, debt obligations
and money market instruments.
•
Diversified Bond Portfolio: The investment objective is a high level of income over a longer term while providing
reasonable safety of capital. The Portfolio normally invests at least 80% of its investable assets in higher grade
debt obligations and high quality money market investments.
•
Equity Portfolio: The investment objective is capital appreciation. The Portfolio normally invests at least 80% of
its investable assets in common stocks of major established corporations as well as smaller companies that we
believe offer attractive prospects of appreciation.
•
Flexible Managed Portfolio: The investment objective is a high total return consistent with an aggressively
managed diversified portfolio. The Portfolio invests in a mix of equity securities, debt obligations and money
market instruments.
•
Global Portfolio: The investment objective is long-term growth of capital. The Portfolio invests primarily in
common stocks (and their equivalents) of foreign and U.S. companies.
•
High Yield Bond Portfolio: The investment objective is a high total return. The Portfolio normally invests at least
80% of its investable assets in high yield/high risk debt securities.
•
Jennison Portfolio (formerly Prudential Jennison Portfolio): The investment objective is long-term growth of
capital. The Portfolio invests primarily in equity securities of major, established corporations that we believe offer
above-average growth prospects.
•
Money Market Portfolio: The investment objective is maximum current income consistent with the stability of
capital and the maintenance of liquidity. The Portfolio invests in high quality short-term money market instruments
issued by the U.S. government or its agencies, as well as domestic and foreign corporations and banks.
•
Stock Index Portfolio: The investment objective is investment results that generally correspond to the
performance of publicly-traded common stocks. The Portfolio attempts to duplicate the price and yield
performance of the Standard & Poor’s 500 Composite Stock Price Index (the “S&P 500”) by investing at least 80%
of its investable assets in S&P 500 stocks.
•
Value Portfolio: The investment objective is capital appreciation. The Portfolio invests primarily in common
stocks that are trading below their underlying asset value, cash generating ability, and overall earnings and
earnings growth.
•
SP Aggressive Growth Asset Allocation Portfolio: The investment objective is capital appreciation. The
Portfolio invests primarily in large cap equity portfolios, international portfolios, and small/mid-cap equity portfolios.
•
SP AIM Aggressive Growth Portfolio: The investment objective is to achieve long-term growth of capital. The
portfolio seeks to meet this objective by investing primarily in the common stocks of companies whose earnings
the advisers expect to grow more than 15% per year.
•
SP AIM Core Equity Portfolio (formerly SP AIM Growth and Income Portfolio): The investment objective is
growth of capital with a secondary objective of current income. The Portfolio invests as least 80% of its investable
assets plus any borrowings made for investment purposes in securities of established companies that have longterm above-average growth earnings and dividends, and growth companies that the Portfolio managers believe
have the potential for above-average growth earnings and dividends.
8
•
SP Alliance Large Cap Growth Portfolio: The investment objective is growth of capital. The Portfolio will pursue
aggressive investment policies by investing at least 80% of the Portfolio’s investable assets in stocks of companies
considered to have large capitalizations.
•
SP Alliance Technology Portfolio: The investment objective is growth of capital. The Portfolio normally invests
at least 80% of its investable assets in securities of companies that use technology extensively in the development
of new or improved products or processes.
•
SP Balanced Asset Allocation Portfolio: The investment objective is to provide a balance between current
income and growth of capital. The Portfolio invests primarily in fixed income portfolios, large cap equity portfolios,
small/mid-cap equity portfolios, and international equity portfolios.
•
SP Conservative Asset Allocation Portfolio: The investment objective is to provide current income with low to
moderate capital appreciation. The Portfolio invests primarily in fixed income portfolios, large cap equity portfolios,
and small/mid-cap equity portfolios.
•
SP Davis Value Portfolio: The investment objective is growth of capital. The Portfolio invests primarily in
common stock of U.S. companies with market capitalizations of at least $5 billion.
•
SP Deutsche International Equity Portfolio: The investment objective is to invest for long-term capital
appreciation. The portfolio normally invests at least 80% of its investable assets in the stocks and other equity
securities of companies in developed countries outside the United States.
•
SP Growth Asset Allocation Portfolio: The investment objective is to provide long-term growth of capital with
consideration also given to current income. The Portfolio invests at least 80% of its investable assets in large-cap
equity portfolios, fixed income portfolios, international equity portfolios, and small/mid-cap equity portfolios.
•
SP INVESCO Small Company Growth Portfolio: The investment objective is long-term capital growth. The
Portfolio invests at least 80% of its investable assets in small-capitalization companies - those which are included
in the Russell 2000 Growth Index at the time of purchase, or if not included in that index, have market
capitalizations of $2.5 billion or below at the time of purchase.
•
SP Jennison International Growth Portfolio: The investment objective is long-term growth of capital. Under
normal circumstances, the Portfolio invests at least 65% of its total assets in the common stock of large to
medium-sized foreign companies operating or based in at least five different countries.
•
SP Large Cap Value Portfolio: The investment objective is long-term growth of capital. The Portfolio normally
invests at least 80% of its investable assets in securities of companies with large market capitalizations (those with
market capitalizations similar to companies in the Standard & Poor’s 500 Composite Stock Price Index or the
Russell 1000 Index).
•
SP MFS Capital Opportunities Portfolio: The investment objective is capital appreciation. The Portfolio invests,
under normal market conditions, at least 65% of its net assets in common stocks and related securities, such as
preferred stocks, convertible securities, and depositary receipts for those securities.
•
SP MFS Mid-Cap Growth Portfolio: The investment objective is long-term capital growth. The Portfolio invests,
under normal market conditions, at least 80% of its investable assets in common stocks and related securities,
such as preferred stocks, convertible securities, and depositary receipts for those securities.
•
SP PIMCO High Yield Portfolio: The investment objective is maximum total return, consistent with preservation
of capital and prudent investment management. Under normal circumstances, the Portfolio invests at least 80% of
its investable assets in a diversified portfolio of high yield securities (“junk bonds”) rated below investment grade,
but rated at least B by Moody’s Investor Service, Inc. or Standard & Poor’s Ratings Group, and investment grade
fixed income instruments.
9
•
SP PIMCO Total Return Portfolio: The investment objective is to seek maximum total return, consistent with
preservation of capital and prudent investment management. Under normal circumstances, the Portfolio invests at
least 65% of its assets in a diversified portfolio of fixed income instruments of varying maturities.
•
SP Prudential U.S. Emerging Growth Portfolio: The investment objective is long-term capital appreciation. The
Portfolio normally invests at least 80% of its investable assets in equity securities of small and medium sized U.S.
companies.
•
SP Small/Mid Cap Value Portfolio: The investment objective is long-term growth of capital. The Portfolio
normally invests at least 80% of its investable assets in securities of companies with small to medium market
capitalizations.
•
SP Strategic Partners Focused Growth Portfolio: The investment objective is long-term growth of capital. The
Portfolio normally invests at least 65% of its total assets in equity-related securities of U.S. companies that the
adviser believes to have strong capital appreciation potential.
Prudential Investments LLC (“PI”), an indirect wholly-owned subsidiary of Prudential Financial, serves as the overall
investment adviser for the Series Fund. PI will furnish investment advisory services in connection with the
management of the Series Fund portfolios under a “manager-of-managers” approach. Under this structure, PI is
authorized to select (with approval of the Series Fund’s independent directors) one or more sub-advisers to handle the
actual day-to-day investment management of each Portfolio. Ultimately, PI serves as the investment adviser for the
SP Aggressive Growth Asset Allocation, the SP Balanced Asset Allocation, the SP Conservative Asset Allocation, and
the SP Growth Asset Allocation Portfolios. PI’s business address is 100 Mulberry Street, Gateway Center Three,
Newark, New Jersey 07102.
Jennison Associates LLC (“Jennison”), also an indirect wholly-owned subsidiary of Prudential Financial, serves as the
sole sub-adviser for the Global, the Jennison, the SP Jennison International Growth, and the SP Prudential U.S.
Emerging Growth Portfolios. Jennison serves as a sub-adviser for a portion of the assets of the Equity, the Value, and
the SP Strategic Partners Focused Growth Portfolios. Jennison’s business address is 466 Lexington Avenue, New
York, New York 10017.
Prudential Investment Management, Inc. (“PIM”), also an indirect wholly-owned subsidiary of Prudential Financial,
serves as the sole sub-adviser for the Conservative Balanced, the Diversified Bond, the Flexible Managed, the High
Yield Bond, the Money Market, and the Stock Index Portfolios. PIM’s business address is 100 Mulberry Street,
Gateway Center Two, Newark, New Jersey 07102.
A I M Capital Management, Inc. ("A I M Capital") serves as the sub-adviser to the SP AIM Aggressive Growth Portfolio
and the SP AIM Core Equity Portfolio. A I M Capital's principal business address is 11 Greenway Plaza, Suite 100,
Houston, Texas 77046-1173.
Alliance Capital Management, L.P. ("Alliance") serves as the sub-adviser to the SP Alliance Large Cap Growth
Portfolio, the SP Alliance Technology Portfolio, and the SP Strategic Partners Focused Growth Portfolio. The subadviser is located at 1345 Avenue of the Americas, New York, New York 10105.
Davis Selected Advisers, L.P. (“Davis”) serves as the sub-adviser to the SP Davis Value Portfolio. The sub-adviser is
located at 2429 East Elvira Road, Suite 101, Tucson, Arizona 85706.
Deutsche Asset Management, Inc. (“DAMI”) serves as a sub-adviser to the SP Deutsche International Equity Portfolio
and as a sub-adviser for approximately 25% of the assets of the Value Portfolio. DAMI is a wholly-owned subsidiary of
Deutsche Bank AG. DAMI’s business address is 280 Park Avenue, New York, New York 10017.
Fidelity Management & Research Company ("FMR") serves as the sub-adviser to the SP Large Cap Value Portfolio
and the SP Small/Mid Cap Value Portfolio. FMR’s business address is 82 Devonshire Street, Boston, Massachusetts
02109.
GE Asset Management Incorporated (“GEAM”) serves as a sub-adviser to approximately 25% of the assets of the
Equity Portfolio. GEAM’s ultimate parent is General Electric Corporation. GEAM’s business address is 3003 Summer
Street, Stamford, Connecticut 06904.
10
INVESCO Funds Group, Inc. ("INVESCO’) serves as the sub-adviser to the SP INVESCO Small Company Growth
Portfolio. INVESCO’s principal business address is 4350 South Monaco Street, Denver, Colorado 80237.
Massachusetts Financial Services Company ("MFS") serves as the sub-adviser for the SP MFS Capital Opportunities
Portfolio and the SP MFS Mid-Cap Growth Portfolio. The principal business address for MFS is 500 Boylston Street,
Boston, Massachusetts 02116.
Pacific Investment Management Company LLC (“PIMCO”) serves as the sub-adviser for the SP PIMCO High Yield
Portfolio and the SP PIMCO Total Return Portfolio. PIMCO is a subsidiary of Allianz Dresdner Asset Management of
America L.P., formerly PIMCO Advisors L.P. PIMCO’s principal business address is 840 Newport Center Drive,
Newport Beach, California 92660.
Salomon Brothers Asset Management, Inc. (“Salomon”) serves as a sub-adviser for a portion of the assets of the
Equity Portfolio. It is expected that under normal circumstances Salomon will manage approximately 25% of the
Portfolio. Salomon is a part of the global asset management arm of Citigroup, Inc. which was formed in 1998 as a
result of the merger of Travelers Group and Citicorp, Inc. Salomon’s business address is 388 Greenwich Street, New
York, New York 10013.
Victory Capital Management, Inc. (“Victory”) (formerly Key Asset Management, Inc.) serves as a sub-adviser for
approximately 25% of the assets of the Value Portfolio. Victory is a wholly-owned subsidiary of KeyCorp, Inc. Victory’s
business address is 127 Public Square, Cleveland, Ohio 44114.
As an investment adviser, PI charges the Series Fund a daily investment management fee as compensation for its
services. PI pays each sub-adviser out of the fee that PI receives from the Series Fund. See Deductions from
Portfolios, page 14.
AIM Variable Insurance Funds:
•
AIM V.I. Premier Equity Fund- Series I shares (formerly AIM V.I. Value Fund). Seeks to achieve long-term
growth of capital. Income is a secondary objective.
A I M Advisors, Inc. ("AIM") is the investment adviser for this fund. The principal business address for AIM is 11
Greenway Plaza, Suite 100, Houston, Texas 77046-1173.
American Century Variable Portfolios, Inc.:
•
American Century VP Value Fund. Seeks long-term capital growth with income as a secondary objective. The
Fund seeks to achieve its objective by investing primarily in equity securities of well-established companies with
intermediate-to-large market capitalizations that are believed by management to be undervalued at the time of
purchase.
American Century Investment Management, Inc. ("ACIM") is the investment adviser for this fund. ACIM's principal
business address is American Century Tower, 4500 Main Street, Kansas City, Missouri 64111. The principal
underwriter of the Fund is American Century Investment Services, Inc., located at 4500 Main Street, Kansas City,
Missouri 64111.
Janus Aspen Series:
•
Growth Portfolio- Institutional Shares. Seeks long-term growth of capital in a manner consistent with the
preservation of capital. The Portfolio normally invests in common stocks of larger, more established companies.
Janus Capital Management LLC is the investment adviser and is responsible for the day-to-day management of the
portfolio and other business affairs of the portfolio. Janus Capital Corporation's principal business address is 100
Fillmore Street, Denver, Colorado 80206-4928.
11
®
SM
MFS Variable Insurance Trust :
•
Emerging Growth Series. Seeks long-term growth of capital. The Series invests, under normal market
conditions, at least 65% of its total assets in common stocks and related securities, such as preferred stock,
convertible securities and depositary receipts of those securities, of emerging growth companies.
MFS Investment Management7 (“Massachusetts Financial Services Company”), a Delaware corporation, is the
investment adviser to this MFS Series. The principal business address for the Massachusetts Financial Services
Company is 500 Boylston Street, Boston, Massachusetts 02116.
T. Rowe Price International Series, Inc.:
•
International Stock Portfolio. Seeks long-term growth of capital through investments primarily in common stocks
of established, non-U.S. companies.
T. Rowe Price International, Inc. is the investment manager for this fund. The principal business address for T. Rowe
Price International, Inc. is 100 East Pratt Street, Baltimore, Maryland 21202.
The investment advisers for the Funds charge a daily investment management fee as compensation for their services.
These fees are described in the table under Deductions from Portfolios in the Charges and Expenses section, see
page 13, and are more fully described in the prospectus for each Fund.
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 funds. Although neither of the companies that invest in the Funds
nor the Funds currently foresee any such disadvantage, the Board of Directors for each Fund 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. Material conflicts could result from such things as:
(1)
(2)
(3)
(4)
changes in state insurance law;
changes in federal income tax law;
changes in the investment management of any portfolio of the Funds; or
differences between voting instructions given by variable life insurance and variable annuity contract owners.
An affiliate of each of the Funds may compensate Pruco Life based upon an annual percentage of the average assets
held in the Fund by Pruco Life under the Contracts. These percentages may vary by Fund and/or Portfolio, and reflect
administrative and other services we provide.
9RWLQJ5LJKWV
We are the legal owner of the Fund shares associated with the variable investment options. However, we vote the
shares in the Fund according to voting instructions we receive from Contract owners. We will mail you a proxy, which
is a form you need to complete and return to us to tell us how you wish us to vote. When we receive those
instructions, we will vote all of the shares we own on your behalf in accordance with those instructions. We will vote
the shares for which we do not receive instructions and shares that we own, in the same proportion as the shares for
which instructions are received. We may change the way your voting instructions are calculated if it is required by
federal or state regulation. Should the applicable federal securities laws or regulations, or their current interpretation,
change so as to permit Pruco Life to vote shares of the Funds in its own right, it may elect to do so.
7KH)L[HG5DWH2SWLRQ
Because of exemptive and exclusionary provisions, interests in the fixed-rate option under the Contract have
not been registered under the Securities Act of 1933 and the general account has not been registered as an
investment company under the Investment Company Act of 1940. Accordingly, interests in the fixed-rate
option are not subject to the provisions of these Acts, and Pruco Life has been advised that the staff of the
SEC has not reviewed the disclosure in this prospectus relating to the fixed-rate option. Any inaccurate or
misleading disclosure regarding the fixed-rate option may, however, be subject to certain generally applicable
provisions of federal securities laws.
12
You may choose to invest, either initially or by transfer, all or part of your Contract Fund to a fixed-rate option. This
amount becomes part of Pruco Life’s general account. The general account consists of all assets owned by Pruco Life
other than those in the Account and in other separate accounts that have been or may be established by Pruco Life.
Subject to applicable law, Pruco Life has sole discretion over the investment of the general account assets, and
Contract owners do not share in the investment experience of those assets. Instead, Pruco Life guarantees that the
part of the Contract Fund allocated to the fixed-rate option will accrue interest daily at an effective annual rate that
Pruco Life declares periodically, but not less than an effective annual rate of 4%. Pruco Life is not obligated to credit
interest at a rate higher than an effective annual rate of 4%, although we may do so.
Transfers from the fixed-rate option are subject to strict limits, see Transfers, page 22. The payment of any cash
surrender value attributable to the fixed-rate option may be delayed up to six months. See When Proceeds are Paid,
page 27.
:KLFK,QYHVWPHQW2SWLRQ6KRXOG%H6HOHFWHG"
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, portfolios such as the Equity, Global,
Jennison, Stock Index, Value, AIM V.I. Premier Equity Fund, American Century VP Value Fund, Janus Growth, MFS
Emerging Growth Series, or T. Rowe Price International Stock, for example, may be desirable options if you are willing
to accept such volatility in your Contract values. Each of these equity portfolios involves different policies and
investment risks. See The Funds, page 7, for additional equity portfolios available under the Contract and their
specific investment objectives.
You may prefer the somewhat greater protection against loss of principal (and reduced chance of high total return)
provided by the Diversified Bond Portfolio. You may want even greater safety of principal and may prefer the Money
Market Portfolio or the fixed-rate option, recognizing that the level of short-term rates may change rather rapidly. If you
are willing to take risks and possibly achieve a higher total return, you may prefer the High Yield Bond Portfolio,
recognizing that the risks are greater for lower quality bonds with normally higher yields.
You may wish to obtain diversification by relying on Prudential’s judgment for an appropriate asset mix by choosing the
Conservative Balanced Portfolio, the Flexible Managed Portfolio, the SP Aggressive Growth Asset Allocation Portfolio,
the SP Balanced Asset Allocation Portfolio, the SP Conservative Asset Allocation Portfolio, or the SP Growth Asset
Allocation Portfolio.
You may wish to divide your invested premium among two or more of the Portfolios. Your choice should take into
account your willingness to accept investment risks, how your other assets are invested, and what investment results
you may experience in the future. You should consult your Pruco Life representative from time to time about the
choices available to you under the Contract. Pruco Life recommends against frequent transfers among the several
options. Experience generally indicates that "market timing" investing, particularly by non-professional investors, is
likely to prove unsuccessful.
'(7$,/(',1)250$7,21)25
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The total amount invested at any time in the Contract Fund consists of the sum of the amount credited to the variable
investment options, the amount allocated to the fixed-rate option, and the principal amount of any Contract loan plus
the amount of interest credited to the Contract upon that loan. See Contract Loans, page 30. Most charges,
although not all, are made by reducing the Contract Fund.
This section provides a more detailed description of each charge that is described briefly in the chart on page 3.
In several instances we will use the terms "maximum charge" and "current charge." The "maximum charge," in each
instance, is the highest charge that Pruco Life is entitled to make under the Contract. The "current charge" is the lower
13
amount that Pruco Life is now charging. If circumstances change, we reserve the right to increase each current
charge, up to the maximum charge, without giving any advance notice.
Deductions from Premium Payments
(a) We charge up to 7.5% for taxes attributable to premiums ( in Oregon this is called a premium based administrative
charge). For these purposes, "taxes attributable to premiums" shall include any federal, state or local income,
premium, excise, business or any other type of tax (or component thereof) measured by or based upon the
amount of premium received by Pruco Life. That charge is made up of two parts which currently equal a total of
3.75% of the premiums received. The first part is a charge for state and local premium taxes. The current
amount for this first part is 2.5% of the premium and is Pruco Life’s estimate of the average burden of state taxes
generally. Tax rates vary from jurisdiction to jurisdiction and generally range from 0% to 5%. The rate applies
uniformly to all policyholders without regard to state of residence. Pruco Life may collect more for this charge than
it actually pays for state and local premium taxes. The second part is for federal income taxes measured by
premiums, and it is currently equal to 1.25% of premiums. We believe that this charge is a reasonable estimate of
an increase in its federal income taxes resulting from a 1990 change in the Internal Revenue Code. It is intended
to recover this increased tax. During 2001, 2000, and 1999, Pruco Life deducted a total of approximately
$10,152,000, $10,774,000, and $17,466,000, respectively, in taxes attributable to premiums.
(b) We charge up to 4% for sales expenses. This charge, often called a “sales load”, is deducted to compensate us
for the costs of selling the Contracts, including commissions, advertising and the printing and distribution of
prospectuses and sales literature.
Currently, the charge is equal to 4% of premiums paid in each Contract year up to the amount of the target
premium (see Premiums, page 19) and 0% of premiums paid in excess of this amount. Consequently, paying
more than this amount in any Contract year could reduce your total sales load. For example, assume that a
Contract with no riders or extra insurance charges has a target premium of $884 and the Contract owner would
like to pay 10 target premiums. If the Contract owner paid $1,768 (two times the amount of the target premium)
in every other Contract year up to the ninth year (i.e. in years 1, 3, 5, 7, 9), the sales load charge would be
$176.80. If the Contract owner paid $884 in each of the first 10 Contract years, the total sales load would be
$353.60. For additional information, see Increases in Basic Insurance Amount, page 26.
Attempting to structure the timing and amount of premium payments to reduce the potential sales load may
increase the risk that your Contract will lapse without value. Delaying the payment of target premium amounts to
later years will adversely affect the Death Benefit Guarantee if the accumulated premium payments do not reach
the accumulated values shown under your Contract's Limited Death Benefit Guarantee Values. See Death
Benefit Guarantee, page 21. In addition, there are circumstances where payment of premiums that are too large
may cause the Contract to be characterized as a Modified Endowment Contract, which could be significantly
disadvantageous. See Tax Treatment of Contract Benefits, page 31. During 2001, 2000, and 1999, Pruco
Life received a total of approximately $7,302,000, $6,622,000, and $4,458,000, respectively, in sales charges.
Deductions from Portfolios
We deduct an investment advisory fee daily from each portfolio of the Funds at a rate, on an annualized basis, ranging
from 0.35% for the Series Fund Stock Index Portfolio to 1.15% for the SP Alliance Technology Portfolio. The expenses
incurred in conducting the investment operations of the portfolios (such as 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 ended December 31, 2001, expressed as a percentage of the average
assets during the year, are shown below:
14
7RWDO3RUWIROLR([SHQVHV
Portfolios
Investment
Advisory
Fees
Total
Other
Total Actual
Contractual
Expenses
Expenses*
Expenses
0.58%
0.03%
0.55%
0.44%
0.04%
0.40%
Diversified Bond
0.49%
0.04%
0.45%
Equity
0.64%
0.04%
0.60%
Flexible Managed
0.84%
0.09%
0.75%
Global
0.60%
0.05%
0.55%
High Yield Bond
0.64%
0.04%
0.60%
Jennison
0.43%
0.03%
0.40%
Money Market
0.39%
0.04%
0.35%
Stock Index
0.44%
0.04%
0.40%
Value
1.74%
0.90%
0.84%
SP Aggressive Growth Asset Allocation (1)
3.45%
2.50%
0.95%
SP AIM Aggressive Growth
2.55%
1.70%
0.85%
SP AIM Core Equity
1.57%
0.67%
0.90%
SP Alliance Large Cap Growth
3.16%
2.01%
1.15%
SP Alliance Technology
1.27%
0.52%
0.75%
SP Balanced Asset Allocation (1)
1.06%
0.35%
0.71%
SP Conservative Asset Allocation (1)
1.03%
0.28%
0.75%
SP Davis Value
3.27%
2.37%
0.90%
SP Deutsche International Equity
1.46%
0.66%
0.80%
SP Growth Asset Allocation (1)
2.84%
1.89%
0.95%
SP INVESCO Small Company Growth
1.86%
1.01%
0.85%
SP Jennison International Growth
1.98%
1.18%
0.80%
SP Large Cap Value
3.04%
2.29%
0.75%
SP MFS Capital Opportunities
2.11%
1.31%
0.80%
SP MFS Mid-Cap Growth
1.08%
0.48%
0.60%
SP PIMCO High Yield
0.82%
0.22%
0.60%
SP PIMCO Total Return
1.41%
0.81%
0.60%
SP Prudential U.S. Emerging Growth
1.56%
0.66%
0.90%
SP Small/Mid Cap Value
2.61%
1.71%
0.90%
SP Strategic Partners Focused Growth
0.58%
0.44%
0.49%
0.64%
0.84%
0.60%
0.64%
0.43%
0.39%
0.44%
1.04%
1.07%
1.00%
1.10%
1.30%
0.92%
0.87%
0.83%
1.10%
0.97%
1.15%
1.24%
0.90%
1.00%
1.00%
0.82%
0.76%
0.90%
1.05%
1.01%
Investment
Advisory
Fees
Other
Expenses
Total
Contractual
Expenses
Total
Actual
Expenses*
AIM Variable Insurance Funds
AIM V.I. Premier Equity Fund - Series I shares
0.60%
0.25%
0.85%
0.85%
American Century Variable Portfolios, Inc. (2)
VP Value Fund
0.97%
0.00%
0.97%
0.97%
Janus Aspen Series (3)
Growth Portfolio - Institutional Shares
0.65%
0.01%
0.66%
0.66%
MFS Variable Insurance Trust (4)
0.75%
0.12%
0.87%
0.86%
T. Rowe Price International Series, Inc. (5)
1.05%
0.00%
1.05%
1.05%
Portfolios
7
K
15
(1) Prudential Series Fund, Inc.
Each Asset Allocation Portfolio invests shares in other Fund Portfolios. The Advisory Fees for the Asset Allocation
Portfolios are the product of a blend of the Advisory Fees of those other Fund Portfolios, plus a 0.05% annual advisory
fee payable to PI.
(2) American Century Variable Portfolios, Inc.
The “Investment Advisory Fees” include ordinary expenses of managing and operating the Fund, except brokerage
expenses, taxes, interest, fees and expenses of the independent directors (including legal counsel fees), and
extraordinary expenses. The Fund has a stepped fee schedule. As a result, the Fund’s management fee rate
decreases as the Fund’s assets increase.
(3) Janus Aspen Series
The table reflects expenses for the fiscal year ended December 31, 2001. All expenses are shown without the effect of
any offset arrangements.
®
SM
(4) MFS Variable Insurance Trust
An expense offset arrangement with the Fund’s custodian resulted in a reduction in “Other Expenses” by 0.01% and is
reflected in the “Total Actual Expenses.”
(5) T. Rowe Price International Series, Inc.
The “Investment Management Fees” include ordinary recurring operating expenses of the Funds.
The expenses relating to the Funds (other than those of the Series Fund) have been provided to Pruco Life by
the Funds. Pruco Life has not independently verified them.
Daily Deduction from the Contract Fund
Each day we deduct a charge from the assets of each of the variable investment options in an amount equivalent to an
effective annual rate of up to 0.9%. Currently, we charge 0.6%. This charge is intended to compensate Pruco Life for
assuming mortality and expense risks under the Contract. The mortality risk assumed is that insureds may live for
shorter periods of time than Pruco Life 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 Pruco Life estimated
in fixing its administrative charges. During 2001, 2000, and 1999, Pruco Life received a total of approximately
$5,796,000, $5,378,000, and $3,352,000, respectively, in mortality and expense risk charges. This charge is not
assessed against amounts allocated to the fixed-rate option.
Monthly Deductions from the Contract Fund
Pruco Life deducts the following monthly charges proportionately from the dollar amounts held in each of the chosen
investment option[s].
(a) An administrative charge based on the basic insurance amount is deducted. The charge is intended to
compensate us for things like processing claims, keeping records and communicating with Contract owners.
Currently, the charge is equal to $10 per Contract plus $0.07 per $1,000 ($10 per Contract plus $0.08 per $1,000
in Massachusetts) of basic insurance amount in the first Contract year and $5 per Contract plus $0.01 per $1,000
($5 per Contract plus $0.02 per $1,000 in Massachusetts) of basic insurance amount in all subsequent years.
Pruco Life reserves the right, however to charge up to $10 per Contract plus $0.07 per $1,000 ($10 per Contract
plus $0.08 per $1,000 in Massachusetts) of basic insurance amount in the first Contract year and $10 per Contract
plus $0.01 per $1,000 ($10 per Contract plus $0.02 per $1,000 in Massachusetts) of basic insurance amount in all
subsequent years.
For example, a Contract with a basic insurance amount of $100,000 would currently have a charge equal to $10
plus $7 for a total of $17 ($10 plus $8 for a total of $18 in Massachusetts) per month for the first Contract year and
$5 plus $1 for a total of $6 ($5 plus $2 for a total of $7 in Massachusetts) per month in all later years. The
maximum charge for this same Contract would be $10 plus $7 for a total of $17 ($10 plus $8 for a total of $18 in
Massachusetts) per month during the first Contract year. In later years, the maximum charge would be $10 plus
$1 for a total of $11 ($10 plus $2 for a total of $12 in Massachusetts) per month. During 2001, 2000, and 1999,
Pruco Life received a total of approximately $14,662,000, $12,246,000, and $6,294,000, respectively, in monthly
administrative charges.
(b) A cost of insurance ("COI") charge is deducted. When an insured dies, the amount payable to the beneficiary
(assuming there is no Contract debt) is larger than the Contract Fund - significantly larger if the insured dies in the
early years of a Contract. The cost of insurance charges collected from all Contract owners enables Pruco Life to
16
pay this larger death benefit. The maximum COI 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 maximum COI
rates. The maximum COI rates are based upon the 1980 Commissioners Standard Ordinary ("CSO") Tables and
an insured’s current attained age, sex (except where unisex rates apply), smoker/non-smoker status, and extra
rating class, if any. At most ages, Pruco Life’s current COI rates are lower than the maximum rates. For additional
information, see Increases in Basic Insurance Amount, page 26.
(c) A charge of $0.01 per $1,000 of basic insurance amount is made to compensate Pruco Life for the risk we assume
by providing the Death Benefit Guarantee feature (not applicable in Massachusetts). See Death Benefit
Guarantee, page 21. During 2001, 2000, and 1999 , Pruco Life received a total of approximately $2,344,000,
$2,798,000, and $1,314,000, respectively, for this risk charge.
(d) You may add one or more of several riders to the Contract. Some riders are charged for separately. If you add
such a rider to the basic Contract, additional charges will be deducted.
(e) If an insured is in a substandard risk classification (for example, a person in a hazardous occupation), additional
charges will be deducted.
(f) A charge may be deducted to cover federal, state or local taxes (other than “taxes attributable to premiums”
described above, in Oregon this is called a premium based administrative charge) 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 Pruco Life. Currently, no charge is being made
to the Account for Pruco Life’s federal income taxes, other than the 1.25% charge for federal income taxes
measured by premiums. See Deductions from Premiums, page 14. Pruco Life periodically reviews the question
of a charge to the Account for Company federal income taxes. We may make such a charge in the future for any
federal income taxes that would be attributable to the Contracts.
Surrender Charges
(a) An additional sales load is charged if during the first 10 Contract years the Contract lapses, is surrendered or if
the basic insurance amount is decreased. It is not deducted from the death benefit if the insured should die
during this period. For issue ages 76 or less, this contingent deferred charge will be 26% of the lesser of: (a) the
target level premium for the Contract; and (b) the actual premiums paid (see Premiums, page 19). The rate used
in the calculation of this contingent deferred charge will be 22% for issue ages 77-79, 16% for issue ages 80-83
and 13% for issue ages 84-85. The rate used in the calculation of this contingent deferred charge will remain
level for six years. After six years, this charge will reduce monthly at a constant rate until it reaches zero at the
end of the 10th year.
(b) If during the first 10 Contract years the Contract lapses, is surrendered or if the basic insurance amount is
decreased, an administrative charge is deducted to cover the cost of processing applications, conducting medical
examinations, determining insurability and the insured's rating class, and establishing records. The charge is
equal to the lesser of: (a) $5 per $1,000 of basic insurance amount; and (b) $500. This charge is level for six
years. After six years, this charge will be reduced monthly at a constant rate until it reaches zero at the end of the
10th year.
We will show a surrender charge threshold amount in the Contract data pages. This threshold amount is the lowest
basic insurance amount since issue. If during the first 10 Contract years, the basic insurance amount is decreased
[including as a result of a withdrawal or a change in type of death benefit from Type A (fixed) to Type B (variable)], and
the new basic insurance amount is below the threshold, we will deduct a percentage of the surrender charge. The
percentage will be the amount by which the new basic insurance amount is less than the threshold, divided by the
threshold. After this transaction, the threshold will be updated and a corresponding new surrender charge schedule
will also be determined to reflect that portion of surrender charges deducted in the past. During 2001, 2000, and 1999,
Pruco Life received a total of approximately $6,001,000, $2,578,000, and $1,519,000 respectively, from surrendered
or lapsed Contracts.
17
Transaction Charges
(a) We currently charge an administrative processing fee equal to the lesser of $25 or 2% of the withdrawal amount in
connection with each withdrawal.
(b) We currently do not charge an administrative processing fee in connection with a change in basic insurance
amount. We reserve the right to make such a charge in an amount of up to $25 for any change in basic insurance
amount.
(c) We currently charge an administrative processing fee of up to $25 for each transfer exceeding 12 in any Contract
year.
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As of December 12, 2001, Pruco Life no longer offered these Contracts for sale. The Contract was generally issued
on insureds below the age of 81. Generally, the minimum basic insurance amount was $100,000. Pruco Life required
evidence of insurability, which may have included a medical examination, before issuing any Contract. Non-smokers
were offered the most favorable cost of insurance rates. We charge a higher cost of insurance rate and/or an
additional amount if an extra mortality risk is involved. These are the current underwriting requirements. We reserve
the right to change them on a non-discriminatory basis.
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Generally, you may return the Contract for a refund within 10 days after you receive it. Some states allow a longer
period of time during which a Contract may be returned for a refund. You can request a refund by mailing or delivering
the Contract to the representative who sold it or to the Home Office specified in the Contract. A Contract returned
according to this provision shall be deemed void from the beginning. You will then receive a refund of all premium
payments made, plus or minus any change due to investment experience. However, if applicable law so requires and
you exercise your short-term cancellation right, you will receive a refund of all premium payments made, with no
adjustment for investment experience.
7\SHVRI'HDWK%HQHILW
You may select either of two types of death benefit. Generally, a Contract with a Type A (fixed) death benefit has a
death benefit equal to the basic insurance amount. This type of death benefit does not vary with the investment
performance of the investment options you selected, except in certain circumstances. See How a Type A (Fixed)
Contract’s Death Benefit Will Vary, page 24. The payment of additional premiums and favorable investment results
of the variable investment options to which the assets are allocated will generally increase the cash surrender value.
See How a Contract’s Cash Surrender Value Will Vary, page 23.
A Contract with a Type B (variable) death benefit has a death benefit which will generally equal the basic insurance
amount plus the Contract Fund. Since the Contract Fund is a part of the death benefit, favorable investment
performance and payment of additional premiums generally result in an increase in the death benefit as well as in the
cash surrender value. Over time, however, the increase in the cash surrender value will be less than under a Type A
(fixed) Contract. This is because, given two Contracts with the same basic insurance amount and equal Contract
Funds, generally the cost of insurance charge for a Type B (variable) Contract will be greater. See How a Contract’s
Cash Surrender Value Will Vary, page 23 and How a Type B (Variable) Contract’s Death Benefit Will Vary, page
24. Unfavorable investment performance will result in decreases in the death benefit and in the cash surrender value.
But, as long as the Contract is not in default, the death benefit may not fall below the basic insurance amount stated in
the Contract.
In choosing a death benefit type, you should also consider whether you intend to use the withdrawal feature. Contract
owners of Type A (fixed) Contracts should note that any withdrawal may result in a reduction of the basic insurance
amount and the deduction of any applicable surrender charges. In addition, we will not allow you to make a withdrawal
that will decrease the basic insurance amount below the minimum basic insurance amount. See Withdrawals, page
25.
18
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You may change the type of death benefit on or after the first Contract anniversary and subject to Pruco Life’s
approval. We will increase or decrease the basic insurance amount so that the death benefit immediately after the
change matches the death benefit immediately before the change.
If you are changing your Contract’s type of death benefit from Type A (fixed) to Type B (variable), we will reduce the
basic insurance amount by the amount in your Contract Fund on the date the change takes place. The basic
insurance amount after the change may not be lower than the minimum basic insurance amount applicable to the
Contract. If you are changing from a Type B (variable) to a Type A (fixed) death benefit, we will increase the basic
insurance amount by the amount in your Contract Fund on the date the change takes place. This is illustrated in the
following chart.
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$50,000 $50,000
$50,000 $50,000
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$300,000 $300,000
$300,000 $300,000
Changing your Contract’s type of death benefit from Type A (fixed) to Type B (variable) during the first 10 Contract
years may result in the assessment of surrender charges. In addition, we reserve the right to make an administrative
processing charge of up to $25 for any change in basic insurance amount, although we do not currently do so. See
Charges and Expenses, page 13.
To request a change, fill out an application for change which can be obtained from your Pruco Life representative or a
Home Office. If the change is approved, we will recompute the Contract’s charges and appropriate tables and send
you new Contract data pages. We may require you to send us your Contract before making the change.
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When the first premium payment is paid with the application for a Contract, the Contract date will ordinarily be the later
of the application date or the medical examination date. If the first premium is not paid with the application, the
Contract date will be the date on which the first premium is paid and the Contract is delivered. Under certain
circumstances, we may allow the Contract to be backdated for the purpose of lowering the insured’s issue age, but
only to a date not earlier than six months prior to the application date. This may be advantageous for some Contract
owners as a lower issue age may result in lower current charges. For a Contract that is backdated, we will credit the
initial premium as of the date of receipt and will deduct any charges due on or before that date.
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The Contract is a flexible premium contract. The minimum initial premium is due on or before the Contract date.
Thereafter, you decide when to make premium payments and, subject to a $25 minimum, in what amounts. We
reserve the right to refuse to accept any payment that increases the death benefit by more than it increases the
Contract Fund. See How a Type A (Fixed) Contract’s Death Benefit Will Vary, page 24 and How a Type B
(Variable) Contract’s Death Benefit Will Vary, page 24. There are circumstances under which the payment of
premiums in amounts that are too large may cause the Contract to be characterized as a Modified Endowment
Contract, which could be significantly disadvantageous. See Tax Treatment of Contract Benefits, page 31.
The Contract has several types of "premiums" which are described below.
understand how the Contract works.
19
Understanding them will help you
Minimum initial premium  the premium needed to start the Contract. There is no insurance under the
Contract unless the minimum initial premium is paid.
Guideline premiums (not applicable in Massachusetts)  the premiums that, if paid at the beginning of each
Contract year, will keep the Contract in-force for the lifetime of the insured regardless of investment performance,
assuming no loans or withdrawals. These guideline premiums will be higher for a Type B (variable) Contract than
for a Type A (fixed) Contract. For a Contract with no riders or extra risk charges, these premiums will be level. If
certain riders are included, the guideline premium may increase each year. Payment of guideline premiums at
the beginning of each Contract year is one way to achieve the Lifetime Death Benefit Guarantee Values shown on
the Contract data pages. See Death Benefit Guarantee, below. When you purchase a Contract, your Pruco
Life representative can tell you the amount[s] of the guideline premium.
Target premiums  the premiums that, if paid at the beginning of each Contract year, will keep the Contract inforce during the Limited Death Benefit Guarantee period regardless of investment performance, assuming no
loans or withdrawals. As is the case with the guideline premium, for a Contract with no riders or extra risk
charges, these premiums will be level. If certain riders are included, the target premium may increase each year.
Payment of target premiums at the beginning of each Contract year is one way to achieve the Limited Death
Benefit Guarantee Values shown on the Contract data pages. At the end of the Limited Death Benefit Guarantee
period, continuation of the Contract will depend on the Contract Fund having sufficient money to cover all charges
or meeting the conditions of the Lifetime Death Benefit Guarantee. See Death Benefit Guarantee, below. When
you purchase a Contract, your Pruco Life representative can tell you the amount[s] of the target premium.
Target Level Premium  the target premium at issue minus any premiums associated with riders or with
aviation, avocation, occupational or temporary extra insurance charges. We use the target level premium in
calculating the contingent deferred sales charges. See Charges and Expenses, page 13.
We can bill you for the amount you select annually, semi-annually, quarterly or monthly. Because the Contract is a
flexible premium contract, there are no scheduled premium due dates. When you receive a premium notice, you are
not required to pay this amount. The Contract will remain in-force if: (1) the Contract Fund, less any applicable
surrender charges, is greater than zero and more than any Contract debt or (2) you have paid sufficient premiums, on
an accumulated basis, to meet the Death Benefit Guarantee conditions and Contract debt is not equal to or greater
than the Contract Fund, less any applicable surrender charges. You may also pay premiums automatically through
pre-authorized monthly transfers from a bank checking account. If you elect to use this feature, you choose the day of
the month on which premiums will be paid and the amount of the premiums paid.
When you apply for the Contract, you should discuss with your Pruco Life representative how frequently you would like
to be billed (if at all) and for what amount.
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On the Contract date, we deduct the charge for sales expenses and the charge for taxes attributable to premiums (in
Oregon this is called a premium based administrative charge) from the initial premium. The remainder of the initial
premium will be allocated on the Contract date among the variable investment options and/or the fixed-rate option
according to your desired allocation as specified in the application form and the first monthly deductions are made. If
the first premium is received before the Contract date, there will be a period during which the Contract owner’s initial
premium will not be invested. See Charges and Expenses, page 13.
The charge for sales expenses and the charge for taxes attributable to premiums also apply to all subsequent premium
payments. The remainder will be invested as of the end of the valuation period in which it is received at a Home
Office, in accordance with the allocation you 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 a Home Office or by
telephoning a Home Office, provided you are enrolled to use the Telephone Transfer System. There is no charge for
reallocating future premiums. All percentage allocations must be in whole numbers. For example, 33% can be
selected but 33a% cannot. Of course, the total allocation to all selected investment options must equal 100%.
20
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Although you decide what premium amounts you wish to pay, sufficient premium payments, on an accumulated basis,
will guarantee that your Contract will not lapse and a death benefit will be paid upon the death of the insured. This will
be true even if, because of unfavorable investment experience, your Contract Fund value drops to zero. However, the
guarantee is contingent upon Contract debt not being equal to or greater than the Contract Fund less any applicable
surrender charges. See Contract Loans, page 30. You should consider the importance of the Death Benefit
Guarantee to you when deciding what amounts of premiums to pay into the Contract.
For purposes of determining this guarantee, we generally calculate, and show in the Contract data pages, two sets of
values  the Lifetime Death Benefit Guarantee Values (not applicable in Massachusetts) and Limited Death Benefit
Guarantee Values. These are not cash values that you can realize by surrendering the Contract, nor are they payable
death benefits. They are values used solely to determine if a Death Benefit Guarantee is in effect. The Lifetime Death
Benefit Guarantee Values are shown for the lifetime of the Contract and are the end-of-year accumulations of
Guideline Premiums at 4% annual interest assuming premiums are paid at the beginning of each Contract year. The
Limited Death Benefit Guarantee Values are lower, but only apply for the length of the Limited Death Benefit
Guarantee period. They are the end-of-year accumulations of Target Premiums at 4% annual interest assuming
premiums are paid at the beginning of each Contract year.
The length of the Limited Death Benefit Guarantee period is determined on a case by case basis depending on things
like the insured’s age, sex (except where unisex rates apply), smoker/non-smoker status, death benefit type and extra
rating class, if any. In Massachusetts, the length of the Limited Death Benefit Guarantee period is generally five years.
The length of the Limited Death Benefit Guarantee period applicable to your particular Contract is shown on the
Contract data pages. For certain insureds, generally those who are older and/or in a substandard risk classification,
the Limited Death Benefit Guarantee period may be shorter in duration.
At the Contract date, and on each Monthly date, we calculate your Contract’s "Accumulated Net Payments" as of that
date. Accumulated Net Payments equal the premiums you paid, accumulated at an effective annual rate of 4%, less
withdrawals also accumulated at 4%.
At each Monthly date within the Limited Death Benefit Guarantee period, we will compare your Accumulated Net
Payments to the Limited Death Benefit Guarantee Value as of that date. At each Monthly date after the Limited Death
Benefit Guarantee period, we will compare your Accumulated Net Payments to the Lifetime Death Benefit Guarantee
Value as of that date (not applicable in Massachusetts). If your Accumulated Net Payments equal or exceed the
applicable (Lifetime or Limited) Death Benefit Guarantee Value and Contract debt does not equal or exceed the
Contract Fund less any applicable surrender charges, then the Contract is kept in-force, regardless of the amount in
the Contract Fund.
The Contract data pages show Lifetime Death Benefit Guarantee Values and Limited Death Benefit Guarantee Values
as of Contract anniversaries. Values for non-anniversary Monthly dates will reflect the number of months elapsed
between Contract anniversaries.
Guideline and target premiums are premium levels that, if paid at the start of each Contract year, correspond to the
Lifetime and Limited Death Benefit Guarantee Values, respectively (assuming no withdrawals or loans). See
Premiums, page 19. They are one way of reaching the Death Benefit Guarantee Values; they are certainly not the
only way.
Here is a table of typical guideline and target premiums along with corresponding Limited Death Benefit Guarantee
periods. The examples assume the insured is a male, non-smoker, with no extra risk or substandard ratings, and no
extra benefit riders added to the Contract.
21
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35
Type A (fixed)
$
1,494
$
884 for 35 years**
35
Type B (variable)
$
4,896
$
884 for 33 years**
45
Type A (fixed)
$
2,266
$ 1,272 for 25 years**
45
Type B (variable)
$
6,940
$ 1,272 for 23 years**
55
Type A (fixed)
$
3,640
$ 2,389 for 20 years**
55
Type B (variable)
$ 10,324
$ 2,389 for 18 years**
* not applicable in Massachusetts
** for 5 years in Massachusetts
You should consider carefully the value of maintaining the Death Benefit Guarantee. If you desire the Death Benefit
Guarantee for lifetime protection, you may prefer to pay generally higher premiums in all years, rather than trying to
make such payments on an as needed basis. For example, if you pay only enough premium to meet the Limited Death
Benefit Guarantee Values, a substantial amount may be required to meet the Lifetime Death Benefit Guarantee Values
in order to continue the guarantee at the end of the Limited Death Benefit Guarantee period (not applicable in
Massachusetts). In addition, it is possible that the payment required to continue the guarantee after the Limited Death
Benefit Guarantee period could cause the Contract to become a Modified Endowment Contract. See Tax Treatment
of Contract Benefits, page 31.
The Death Benefit Guarantee allows considerable flexibility as to the timing of premium payments. Your Pruco Life
representative can supply sample illustrations of various premium amount and frequency combinations that correspond
to the Death Benefit Guarantee Values.
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You may, up to 12 times each Contract year, transfer amounts from one variable investment option to another variable
investment option or to the fixed-rate option without charge. There is an administrative charge of up to $25 for each
transfer made exceeding 12 in any Contract year. All or a portion of the amount credited to a variable investment
option may be transferred.
Transfers will take effect as of the end of the valuation period in which a proper transfer request is received at a Home
Office. The request may be in terms of dollars, such as a request to transfer $5,000 from one variable investment
option to another, or may be in terms of a percentage reallocation among variable investment options. In the latter
case, as with premium reallocations, the percentages must be in whole numbers. You may transfer amounts by proper
written notice to a Home Office or by telephone, provided you are enrolled to use the Telephone Transfer System. You
will automatically be enrolled to use the Telephone Transfer System unless the Contract is jointly owned or you elect
not to have this privilege. Telephone transfers may not be available on Contracts that are assigned (see Assignment,
page 34), depending on the terms of the assignment.
We will use reasonable procedures, such as asking you to provide certain personal information provided on your
application for insurance, to confirm that instructions given by telephone are genuine. We will not be held liable for
following telephone instructions that we reasonably believe to be genuine. Pruco Life cannot guarantee that you will be
able to get through to complete a telephone transfer during peak periods such as periods of drastic economic or
market change.
Only one transfer from the fixed-rate option will be permitted during each Contract year. The maximum amount which
may 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. Pruco Life may change these limits in the future. We may waive these restrictions for limited
periods of time in a non-discriminatory way, (e.g., when interest rates are declining).
22
The Contract was not designed for professional market timing organizations, other organizations, or individuals using
programmed, large, or frequent transfers. A pattern of exchanges that coincides with a “market timing” strategy may
be disruptive to the investment option or to the disadvantage of other contract owners. If such a pattern were to be
found, we may modify your right to make transfers by restricting the number, timing, and amount of transfers. We also
reserve the right to prohibit transfer requests made by an individual acting under a power of attorney on behalf of more
than one contract owner.
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As an administrative practice, we are currently offering a feature called Dollar Cost Averaging ("DCA"). Under this
feature, either fixed dollar amounts or a percentage of the amount designated for use under the DCA option will be
transferred periodically from the DCA Money Market investment option into other variable investment options available
under the Contract, excluding the fixed-rate option. You may choose to have periodic transfers made monthly or
quarterly. DCA transfers will not begin until the end of the “free-look” period.
Each automatic transfer will take effect as of the end of the valuation period on the date coinciding with the periodic
timing you designate provided the New York Stock Exchange is open on that date. If the New York Stock Exchange is
not open on that date, or if the date does not occur in that particular month, the transfer will take effect as of the end of
the valuation period which immediately follows that date. Automatic transfers will continue until: (1) $50 or less
remains of the amount designated for Dollar Cost Averaging, at which time the remaining amount will be transferred; or
(2) you give us notification of a change in DCA allocation or cancellation of the feature. Currently, a transfer that
occurs under the DCA feature is not counted towards the 12 free transfers permitted each Contract year. We reserve
the right to change this practice, modify the requirements, or discontinue the feature.
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As an administrative practice, we are currently offering a feature called Auto-Rebalancing. This feature allows you to
automatically rebalance variable investment option assets at specified intervals based on percentage allocations that
you choose. For example, suppose your initial investment allocation of variable investment options X and Y is split 40%
and 60%, respectively. Then, due to investment results, that split changes. You may instruct that those assets be
rebalanced to your original or different allocation percentages.
Auto-Rebalancing can be performed on a quarterly, semi-annual, or annual basis. Each rebalance will take effect as of
the end of the valuation period on the date coinciding with the periodic timing you designate, provided the New York
Stock Exchange is open on that date. If the New York Stock Exchange is not open on that date, or if the date does not
occur in that particular month, the transfer will take effect as of the end of the valuation period which immediately
follows that date. The fixed-rate option cannot participate in this administrative procedure. Currently, a transfer that
occurs under the Auto-Rebalancing feature is not counted towards the 12 free transfers permitted each Contract year.
We reserve the right to change this practice, modify the requirements, or discontinue the feature.
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You may surrender the Contract for its cash surrender value (referred to as net cash value in the Contract). The
Contract's cash surrender value on any date will be the Contract Fund less any applicable surrender charges and less
any Contract debt. See Contract Loans, page 30. The Contract Fund value changes daily, reflecting: (1) increases
or decreases in the value of the variable investment options; (2) interest credited on any amounts allocated to the
fixed-rate option; (3) interest credited on any loan; and (4) the daily asset charge for mortality and expense risks
assessed against the variable investment options. The Contract Fund value also changes to reflect the receipt of
premium payments and the monthly deductions described under Charges and Expenses, page 13. Upon request,
Pruco Life will tell you the cash surrender value of your Contract. It is possible for the cash surrender value of a
Contract to decline to zero because of unfavorable investment performance or outstanding Contract debt.
The tables on pages T1 through T4 (M1 through M4 in Massachusetts) of this prospectus illustrate approximately what
the cash surrender values would be for representative Contracts paying target premium amounts (see Premiums,
page 19), assuming hypothetical uniform investment results in the Fund portfolios. Two of the tables assume current
charges will be made throughout the lifetime of the Contract and two tables assume maximum charges will be made.
See Illustrations of Cash Surrender Values, Death Benefits, and Accumulated Premiums, page 28.
23
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V'HDWK%HQHILW:LOO9DU\
As described earlier, there are two types of death benefit available under the Contract: Type A, a generally fixed death
benefit and Type B, a variable death benefit. A Type B (variable) death benefit varies with investment performance
while a Type A (fixed) death benefit does not, unless it must be increased to comply with the Internal Revenue Code’s
definition of life insurance.
Under a Type A (fixed) Contract, the death benefit is generally equal to the basic insurance amount. See Contract
Loans, page 30. If the Contract is kept in-force for several years, depending on how much premium you pay, and/or if
investment performance is reasonably favorable, the Contract Fund may grow to the point where Pruco Life will
increase the death benefit in order to ensure that the Contract will satisfy the Internal Revenue Code’s definition of life
insurance.
The death benefit under a Type A (fixed) Contract will always be the greater of:
(1) the basic insurance amount; and
(2) the Contract Fund before the deduction of any monthly charges due on that date, multiplied by
the attained age factor that applies.
A listing of attained age factors can be found on your Contract data pages. The latter provision ensures that the
Contract will always have a death benefit large enough so that the Contract will be treated as life insurance for tax
purposes under current law.
The following table illustrates at different ages how the attained age factor affects the death benefit for different
Contract Fund amounts. The table assumes a $100,000 Type A (fixed) Contract was issued when the insured was a
male nonsmoker, age 35, and there is no contract debt.
7\SH$)L[HG'HDWK%HQHILW
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WKH
LQVXUHGLV
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DQGWKH
&RQWUDFW
)XQGLV
WKHDWWDLQHG
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PXOWLSOLHGE\WKH
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40
40
40
$ 10,000
$ 30,000
$ 50,000
3.64
3.64
3.64
$ 36,400
$ 109,200
$ 182,000
$ 100,000
$ 109,200*
$ 182,000*
60
60
60
$ 30,000
$ 50,000
$ 70,000
1.96
1.96
1.96
$ 58,800
$ 98,000
$ 137,200
$ 100,000
$ 100,000
$ 137,200*
80
80
80
$ 50,000
$ 80,000
$ 90,000
1.28
1.28
1.28
$ 64,000
$ 102,400
$ 115,200
$ 100,000
$ 102,400*
$ 115,200*
* Note that the death benefit has been increased to comply with the Internal Revenue Code’s definition of life insurance.
This means, for example, that if the insured has reached the age of 60, and the Contract Fund is $70,000, the death
benefit will be $137,200, even though the original basic insurance amount was $100,000. In this situation, for every $1
increase in the Contract Fund, the death benefit will be increased by $1.96. We reserve the right to refuse to accept
any premium payment that increases the death benefit by more than it increases the Contract Fund. If we exercise
this right, it may in certain situations result in the loss of the death benefit guarantee.
+RZD7\SH%9DULDEOH&RQWUDFW
V'HDWK%HQHILW:LOO9DU\
Under a Type B (variable) Contract, while the Contract is in-force, the death benefit will never be less than the basic
insurance amount, but will also vary, immediately after it is issued, with the investment results of the selected
24
investment options. The death benefit may be further increased to ensure that the Contract will satisfy the Internal
Revenue Code’s definition of life insurance.
The death benefit under a Type B (variable) Contract will always be the greater of:
(1) the basic insurance amount plus the Contract Fund before the deduction of any monthly
charges due on that date; and
(2) the Contract Fund before the deduction of any monthly charges due on that date, multiplied by
the attained age factor that applies.
For purposes of computing the death benefit, if the Contract Fund is less than zero we will consider it to be zero. A
listing of attained age factors can be found on your Contract data pages. The latter provision ensures that the Contract
will always have a death benefit large enough so that the Contract will be treated as life insurance for tax purposes
under current law.
The following table illustrates various attained age factors and Contract Funds and the corresponding death benefits.
The table assumes a $100,000 Type B (variable) Contract was issued when the insured was a male nonsmoker, age
35, and there is no contract debt.
7\SH%9DULDEOH'HDWK%HQHILW
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7+(1
WKH
LQVXUHGLV
DJH
DQGWKH
&RQWUDFW
)XQGLV
WKHDWWDLQHG
DJHIDFWRU
LV
WKH&RQWUDFW)XQG
PXOWLSOLHGE\WKH
DWWDLQHGDJHIDFWRULV
DQGWKH
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40
40
40
$ 10,000
$ 30,000
$ 50,000
3.64
3.64
3.64
$ 36,400
$ 109,200
$ 182,000
$ 110,000
$ 130,000
$ 182,000*
60
60
60
$ 30,000
$ 50,000
$ 70,000
1.96
1.96
1.96
$ 58,800
$ 98,800
$ 137,200
$ 130,000
$ 150,000
$ 170,000
80
80
80
$ 50,000
$ 80,000
$ 90,000
1.28
1.28
1.28
$ 64,000
$ 102,400
$ 115,200
$ 150,000
$ 180,000
$ 190,000
* Note that the death benefit has been increased to comply with the Internal Revenue Code’s definition of life insurance.
This means, for example, that if the insured has reached the age of 40, and the Contract Fund is $50,000, the death
benefit will be $182,000, even though the original basic insurance amount was $100,000. In this situation, for every $1
increase in the Contract Fund, the death benefit will be increased by $3.64. We reserve the right to refuse to accept
any premium payment that increases the death benefit by more than it increases the Contract Fund. If we exercise
this right, it may in certain situations result in the loss of the death benefit guarantee.
6XUUHQGHURID&RQWUDFW
A Contract may be surrendered for its cash surrender value while the insured is living. To surrender a Contract, we
may require you to deliver or mail the Contract with a written request in a form that meets Pruco Life’s needs, to a
Home Office. The cash surrender value of a surrendered Contract will be determined as of the end of the valuation
period in which such a request is received in a Home Office. Surrender of a Contract may have tax consequences.
See Tax Treatment of Contract Benefits, page 31.
:LWKGUDZDOV
Under certain circumstances, you may withdraw a portion of the Contract's cash surrender value without surrendering
the Contract. The withdrawal amount is limited by the requirement that the cash surrender value after the withdrawal
may not be zero or less than zero after deducting the withdrawal charges. The amount withdrawn must be at least
$500. There is an administrative processing fee for each withdrawal which is the lesser of: (a) $25 and; (b) 2% of the
25
withdrawal amount. An amount withdrawn may not be repaid except as a premium subject to the applicable charges.
Upon request, we will tell you how much you may withdraw. Withdrawal of the cash surrender value may have tax
consequences. See Tax Treatment of Contract Benefits, page 31.
Whenever a withdrawal is made, the death benefit will immediately be reduced by at least the amount of the
withdrawal. For a Type B (variable) Contract, this will not change the basic insurance amount. However, under a Type
A (fixed) Contract, the resulting reduction in death benefit usually requires a reduction in the basic insurance amount.
If the basic insurance amount is decreased to an amount less than the basic insurance amount at issue, a surrender
charge may be deducted. See Charges and Expenses, page 13. No withdrawal will be permitted under a Type A
(fixed) Contract if it would result in a basic insurance amount of less than the minimum basic insurance amount. It is
important to note, however, that if the basic insurance amount is decreased, there is a possibility that the Contract
might be classified as a Modified Endowment Contract. See Tax Treatment of Contract Benefits, page 31. Before
making any withdrawal which causes a decrease in basic insurance amount, you should consult with your tax adviser
and your Pruco Life representative.
When a withdrawal is made, the Contract Fund is reduced by the sum of the cash withdrawn and the withdrawal fee.
An amount equal to the reduction in the Contract Fund will be withdrawn proportionally from the investment options
unless you direct otherwise.
Withdrawal of the cash surrender value increases the risk that the Contract Fund may be insufficient to provide
Contract benefits. If such a withdrawal is followed by unfavorable investment experience, the Contract may go into
default. Withdrawals may also affect whether a Contract is kept in-force under the Death Benefit Guarantee, since
withdrawals decrease the accumulated net payments. See Death Benefit Guarantee, page 21.
,QFUHDVHVLQ%DVLF,QVXUDQFH$PRXQW
Subject to state approval and subject to the underwriting requirements determined by Pruco Life, on or after the first
Contract anniversary, you may increase the amount of insurance by increasing the basic insurance amount of the
Contract. The following conditions must be met:
(1) you must ask for the change in a form that meets Pruco Life’s needs;
(2) the amount of the increase must be at least equal to the minimum increase in basic insurance amount shown
under Contract Limitations in your Contract data pages;
(3) you must prove to us that the insured is insurable for any increase;
(4) the Contract must not be in default;
(5) we must not be paying premiums into the Contract as a result of the insured’s total disability; and
(6) if we ask you to do so, you must send us the Contract to be endorsed.
If we approve the change, we will send you new Contract data pages showing the amount and effective date of the
change and the recomputed charges, values and limitations. If the insured is not living on the effective date, the
change will not take effect. No administrative processing charge is currently being made in connection with an
increase in basic insurance amount. We reserve the right to make such a charge in an amount of up to $25.
For sales load purposes, the target premium is calculated separately for each basic insurance amount segment. The
target premium for each segment also includes the premium for extra insurance charges associated to that segment.
When premiums are paid, each payment is allocated to each basic insurance amount segment based on the proportion
of the target premium in each segment to the total target premiums of all segments. Currently, the sales load charge
for each segment is equal to 4% of the allocated premium paid in each Contract year up to the target premium and 0%
of allocated premiums paid in excess of the target premium. See the definition of Contract year for an increase in
basic insurance amount in DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS, page 1.
The COI rates for an increase in basic insurance amount are based upon 1980 CSO Tables, the age at the increase
effective date and the number of years since then, sex (except where unisex rates apply); smoker/nonsmoker status,
and extra rating class, if any. The net amount at risk for the whole contract (the death benefit minus the Contract
Fund) is allocated to each basic insurance amount segment based on the proportion of its basic insurance amount to
the total of all basic insurance amount segments. In addition, the attained age factor for a Contract with an increase in
basic insurance amount is based on the Insured’s attained age for the initial basic insurance amount segment. For a
26
description of attained age factor, see How a Type A (Fixed) Contract’s Death Benefit Will Vary, page 24 and How
a Type B (Variable) Contract’s Death Benefit Will Vary, page 24.
Each Contract owner who elects to increase the basic insurance amount of his or her Contract will receive a "free-look"
right which will apply only to the increase in basic insurance amount, not the entire Contract. This right is comparable
to the right afforded to a purchaser of a new Contract except that, any cost of insurance charge for the increase in the
basic insurance amount will be returned to the Contract Fund instead of a refund of premium. See Short-Term
Cancellation Right or "Free-Look", page 18. Generally, the "free-look" right would have to be exercised no later
than 10 days after receipt of the Contract as increased.
An increase in basic insurance amount may cause the Contract to be classified as a Modified Endowment Contract.
See Tax Treatment of Contract Benefits, page 31. Therefore, before increasing the basic insurance amount, you
should consult with your tax adviser and your Pruco Life representative.
'HFUHDVHVLQ%DVLF,QVXUDQFH$PRXQW
As explained earlier, you may make a withdrawal (see Withdrawals, page 25). On or after the first Contract
anniversary, you also have the option of decreasing the basic insurance amount of your Contract without withdrawing
any cash surrender value. Contract owners who conclude that, because of changed circumstances, the amount of
insurance is greater than needed will be able to decrease their amount of insurance protection, and the monthly
deductions for the cost of insurance. The amount of the decrease must be at least equal to the minimum decrease in
basic insurance amount shown under Contract Limitations in your Contract data pages. In addition, the basic
insurance amount after the decrease must be at least equal to the minimum basic insurance amount shown under
Contract Limitations in your Contract data pages. If the basic insurance amount is decreased to an amount less than
the lowest basic insurance amount since issue, a surrender charge may be deducted. No administrative processing
charge is currently being made in connection with a decrease in basic insurance amount. We reserve the right to make
such a charge in an amount of up to $25. See Charges and Expenses, page 13. If we ask you to, you must send us
your Contract to be endorsed. The Contract will be amended to show the new basic insurance amount, charges,
values in the appropriate tables and the effective date of the decrease.
We may decline a reduction if we determine it would cause the Contract to fail to qualify as "life insurance" for
purposes of Section 7702 of the Internal Revenue Code. A decrease will not take effect if the insured is not living on
the effective date.
It is important to note, however, that if the basic insurance amount is decreased, there is a possibility that the Contract
might be classified as a Modified Endowment Contract. See Tax Treatment of Contract Benefits, page 31. Before
requesting any decrease in basic insurance amount, you should consult with your tax adviser and your Pruco Life
representative.
:KHQ3URFHHGV$UH3DLG
Pruco Life will generally pay any death benefit, cash surrender value, loan proceeds or withdrawal within seven days
after all the documents required for such a payment are received at a Home Office. Other than the death benefit,
which is determined as of the date of death, the amount will be determined as of the end of the valuation period in
which the necessary documents are received at a Home Office. However, Pruco Life may delay payment of proceeds
from the variable investment option[s] and the variable portion of the death benefit due under the Contract if the
disposal 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, Pruco Life expects to pay the
cash surrender value promptly upon request. However, Pruco Life has the right to delay payment of such cash
surrender value for up to six months (or a shorter period if required by applicable law). Pruco Life will pay interest of at
least 3% a year if it delays such a payment for 30 days or more (or a shorter period if required by applicable law).
27
/LYLQJ1HHGV%HQHILW
The Living Needs BenefitK is available on your Contract. The benefit may vary by state. There is no charge for
adding the benefit to a Contract. However, an administrative charge (not to exceed $150) will be made at the time the
Living Needs Benefit is paid.
Subject to state regulatory approval, the Living Needs Benefit allows you to elect to receive an accelerated payment
of all or part of the Contract’s death benefit, adjusted to reflect current value, at a time when certain special needs
exist. The adjusted death benefit will always be less than the death benefit, but will generally be greater than the
Contract’s cash surrender value. One or both of the following options may be available. A Pruco Life representative
should be consulted as to whether additional options may be available.
Terminal Illness Option. This option is available if the insured is diagnosed as terminally ill with a life expectancy of
six months or less. When satisfactory evidence is provided, Pruco Life will provide an accelerated payment of the
portion of the death benefit selected by the Contract owner as a Living Needs Benefit. The Contract owner may (1)
elect to receive the benefit in a single sum or (2) receive equal monthly payments for six months. If the insured dies
before all the payments have been made, the present value of the remaining payments will be paid to the beneficiary
designated in the Living Needs Benefit claim form in a single sum.
Nursing Home Option. This option is available after the insured has been confined to an eligible nursing home for
six months or more. When satisfactory evidence is provided, including certification by a licensed physician, that the
insured is expected to remain in the nursing home until death, Pruco Life will provide an accelerated payment of the
portion of the death benefit selected by the Contract owner as a Living Needs Benefit. The Contract owner may
(1) elect to receive the benefit in a single sum or (2) receive equal monthly payments for a specified number of years
(not more than 10 nor less than 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.
Subject to state approval, all or part of the Contract’s death benefit may be accelerated under the Living Needs
Benefit. If the benefit is only partially accelerated, a death benefit of at least $25,000 must remain under the Contract.
Pruco Life reserves the right to determine the minimum amount that may be accelerated.
No benefit will be payable if you are required to elect it in order to meet the claims of creditors or to obtain a
government benefit. Pruco Life can furnish details about the amount of Living Needs Benefit that is available to an
eligible Contract owner, and the effect on the Contract if less than the entire death benefit is accelerated.
You should consider whether adding this settlement option is appropriate in your given situation. Adding the Living
Needs Benefit to the Contract has no adverse consequences; however, electing to use it could. With the exception of
certain business-related Contracts, the Living Needs Benefit is excluded from income if the insured is terminally ill or
chronically ill as defined in the tax law (although the exclusion in the latter case may be limited). You should consult a
qualified tax adviser before electing to receive this benefit. Receipt of a Living Needs Benefit payment may also
affect your eligibility for certain government benefits or entitlements.
,OOXVWUDWLRQVRI&DVK6XUUHQGHU9DOXHV'HDWK%HQHILWVDQG
$FFXPXODWHG3UHPLXPV
The following six tables (pages T1 through T6; M1 through M6 in Massachusetts) show how a Contract’s 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, which are described below. All six tables assume the following:
•
a Contract with a basic insurance amount of $100,000 bought by a 35 year old male, select, non-smoker, with no
extra risks or substandard ratings, and no extra benefit riders added to the Contract.
•
the target premium amount (see Premiums, page 19) is paid on each Contract anniversary and no loans are
taken.
•
the Contract Fund has been invested in equal amounts in each of the 35 portfolios of the Funds and no portion of
the Contract Fund has been allocated to the fixed-rate option.
28
The first table (page T1; M1 in Massachusetts) assumes a Type A (fixed) Contract has been purchased and the
second table (page T2; M2 in Massachusetts) assumes a Type B (variable) Contract has been purchased. Both
assume the current charges will continue for the indefinite future. The third and fourth tables (pages T3 and T4; M3
and M4 in Massachusetts) are based upon the same assumptions except it is assumed the maximum contractual
charges have been made from the beginning. See Charges and Expenses, page 13.
Under the Type B (variable) Contract the death benefit changes to reflect investment returns. Under the Type A (fixed)
Contract, the death benefit increases only if the Contract Fund becomes large enough that an increase in the death
benefit is necessary for the Contract to satisfy the Internal Revenue Code’s definition of life insurance. See Types of
Death Benefit, page 18.
Finally, there are four assumptions, shown separately, about the average investment performance of the portfolios.
The first is that there will be a uniform 0% gross rate of return with the average value of the Contract Fund uniformly
adversely affected by very unfavorable investment performance. The other three assumptions are that investment
performance will be at a uniform gross annual rate of 4%, 8% and 12%. Actual returns will fluctuate from year to year.
In addition, death benefits and cash surrender values would be different from those shown if investment returns
averaged 0%, 4%, 8% and 12% but fluctuated from those averages throughout the years. Nevertheless, these
assumptions help show how the Contract values will change with investment experience.
The first column in the following illustrations (pages T1 through T4; M1 through M4 in Massachusetts) shows the
Contract year. The second column, to provide context, shows what the aggregate amount would be if the premiums
had been invested to earn interest, after taxes, at 4% compounded annually. The next four columns show the death
benefit payable in each of the years shown for the four different assumed investment returns. The last four columns
show the cash surrender value payable in each of the years shown for the four different assumed investment returns.
The cash surrender values in the first 10 years reflect the surrender charges that would be deducted if the Contract
were surrendered in those years.
A gross return (as well as the net return) is shown at the top of each column. The gross return represents the
combined effect of investment income and capital gains and losses, realized or unrealized, of the portfolios before any
reduction is made for investment advisory fees or other Fund expenses. The net return reflects average total annual
expenses of the 35 portfolios of 0.85%, and the daily deduction from the Contract Fund of 0.60% per year for the
tables based on current charges and 0.90% per year for the tables based on maximum charges. Thus, assuming
current 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. Assuming maximum charges, gross returns of 0%, 4%, 8% and 12% are the equivalent of net
returns of -1.75%, 2.25%, 6.25% and 10.25%, respectively. The actual fees and expenses of the portfolios associated
with a particular Contract may be more or less than 0.85% and will depend on which variable investment options are
selected. The death benefits and cash surrender values shown reflect the deduction of all expenses and charges both
from the Funds and under the Contract.
If you are considering the purchase of a variable life insurance contract from another insurance company, you should
not rely upon these tables for comparison purposes. A comparison between two tables, each showing values for a 35
year old man, may be useful for a 35 year old man but would be inaccurate if made for insureds of other ages, sex, or
rating class. Your Pruco Life representative can provide you with a hypothetical illustration for your own age, sex, and
rating class.
29
VARIABLE UNIVERSAL LIFE
TYPE A (FIXED) DEATH BENEFIT
MALE NON-SMOKER SELECT AGE 35
$100,000.00 BASIC INSURANCE AMOUNT
$884.00 ANNUAL PREMIUM PAYMENT
USING CURRENT CONTRACTUAL CHARGES
End of
Policy
Year
-----1
2
3
4
5
6
7
8
9
10
15
20
25
30
35
40
45
50
55
60
65
Premiums
Accumulated
at 4%
Per Year
----------$
919
$ 1,875
$ 2,870
$ 3,904
$ 4,980
$ 6,098
$ 7,261
$ 8,471
$ 9,729
$ 11,038
$ 18,409
$ 27,377
$ 38,288
$ 51,562
$ 67,713
$ 87,363
$111,270
$140,356
$175,744
$218,799
$271,182
Death Benefit (1)
--------------------------------------------------------Assuming Hypothetical Gross (and Net)
Annual Investment Return of
--------------------------------------------------------0% Gross
4% Gross
8% Gross
12% Gross
(-1.45 Net)
(2.55 Net)
(6.55 Net)
(10.55% Net)
-----------------------------------------$100,000
$100,000
$100,000
$ 100,000
$100,000
$100,000
$100,000
$ 100,000
$100,000
$100,000
$100,000
$ 100,000
$100,000
$100,000
$100,000
$ 100,000
$100,000
$100,000
$100,000
$ 100,000
$100,000
$100,000
$100,000
$ 100,000
$100,000
$100,000
$100,000
$ 100,000
$100,000
$100,000
$100,000
$ 100,000
$100,000
$100,000
$100,000
$ 100,000
$100,000
$100,000
$100,000
$ 100,000
$100,000
$100,000
$100,000
$ 100,000
$100,000
$100,000
$100,000
$ 100,000
$100,000
$100,000
$100,000
$ 129,917
$100,000
$100,000
$100,000
$ 191,259
$100,000
$100,000
$106,349
$ 279,982
$100,000
$100,000
$131,593
$ 404,080
$
0(2)
$100,000
$163,160
$ 588,043
$
0
$
0(2)
$201,904
$ 858,208
$
0
$
0
$248,424
$1,250,021
$
0
$
0
$303,246
$1,811,589
$
0
$
0
$372,776
$2,650,318
Cash Surrender Value (1)
--------------------------------------------------------0% Gross
4% Gross
8% Gross
12% Gross
(-1.45 Net)
(2.55 Net)
(6.55 Net)
(10.55% Net)
-----------------------------------------$
0
$
0
$
0(2) $
0(2)
$
267
$
337
$
409
$
484
$
816
$
956
$ 1,103
$
1,259
$ 1,354
$ 1,587
$ 1,839
$
2,112
$ 1,881
$ 2,231
$ 2,620
$
3,053
$ 2,395
$ 2,886
$ 3,447
$
4,088
$ 3,078
$ 3,734
$ 4,505
$
5,409
$ 3,745
$ 4,592
$ 5,613
$
6,844
$ 4,397
$ 5,458
$ 6,774
$
8,404
$ 5,031
$ 6,331
$ 7,989
$
10,099
$ 6,985
$ 9,850
$ 14,059
$
20,251
$ 8,617
$13,669
$ 22,267
$
36,994
$ 9,805
$17,717
$ 33,398
$
64,636
$ 9,719
$21,213
$ 48,025
$ 108,670
$ 7,802
$23,609
$ 67,739
$ 178,332
$ 1,961
$22,990
$ 93,328
$ 286,582
$
0(2)
$16,028
$125,508
$ 452,341
$
0
$
0(2)
$165,495
$ 703,449
$
0
$
0
$214,158
$1,077,605
$
0
$
0
$273,194
$1,632,062
$
0
$
0
$355,025
$2,524,112
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0% the cash surrender value would go to zero in year 1 and in year 42 and later. Because the Target Premium is being paid,
the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 35 years. The contract would be in default at the beginning of year
42. Based on a gross return of 4% the cash surrender value would go to zero in year 1 and in year 50 and later. Because the Target Premium is being
paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 35 years. The contract would be in default at the beginning
of year 50. Based on a gross return of 8% the cash surrender value would go to zero in year 1. Because the Target Premium is being paid, the Contract
is kept inforce through the Limited Death Benefit Guarantee Period of 35 years. Based on a gross return of 12% the cash surrender value would go to
zero in year 1. Because the Target Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 35 years.
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 rate of inflation. The Death Benefit and Cash Surrender Value for a contract would
be different from those shown if the actual rates of return average 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 Prudential or the funds that these hypothetical rates of return can be achieved
for any one year or sustained over any period of time.
T1
TYPE B (VARIABLE) DEATH BENEFIT
USING CURRENT CONTRACTUAL CHARGES
End of
Policy
Year
-----1
2
3
4
5
6
7
8
9
10
15
20
25
30
35
40
45
50
55
60
65
Premiums
Accumulated
at 4%
Per Year
----------$
919
$ 1,875
$ 2,870
$ 3,904
$ 4,980
$ 6,098
$ 7,261
$ 8,471
$ 9,729
$ 11,038
$ 18,409
$ 27,377
$ 38,288
$ 51,562
$ 67,713
$ 87,363
$111,270
$140,356
$175,744
$218,799
$271,182
Death Benefit (1)
--------------------------------------------------------0% Gross
4% Gross
8% Gross
12% Gross
(-1.45 Net)
(2.55 Net)
(6.55 Net)
(10.55% Net)
-----------------------------------------$100,436
$100,461
$100,485
$ 100,510
$100,994
$101,064
$101,136
$ 101,211
$101,541
$101,680
$101,827
$ 101,982
$102,076
$102,307
$102,558
$ 102,830
$102,598
$102,945
$103,332
$ 103,762
$103,106
$103,594
$104,151
$ 104,787
$103,600
$104,250
$105,015
$ 105,911
$104,077
$104,915
$105,926
$ 107,144
$104,537
$105,586
$106,887
$ 108,497
$104,978
$106,262
$107,897
$ 109,978
$106,852
$109,651
$113,758
$ 119,797
$108,371
$113,242
$121,522
$ 135,686
$109,391
$116,897
$131,736
$ 161,443
$109,001
$119,573
$144,151
$ 202,210
$106,648
$120,428
$158,819
$ 266,928
$100,377
$116,923
$174,071
$ 378,257
$
0(2)
$105,528
$186,891
$ 550,866
$
0
$
0(2)
$191,952
$ 804,321
$
0
$
0
$178,455
$1,171,879
$
0
$
0
$129,081
$1,698,669
$
0
$
0
$
0(2)
$2,485,434
--------------------------------------------------------0% Gross
4% Gross
8% Gross
12% Gross
(-1.45 Net)
(2.55 Net)
(6.55 Net)
(10.55% Net)
-----------------------------------------$
0
$
0
$
0
$
0(2)
$ 264
$
334
$
406
$
481
$ 811
$
950
$ 1,097
$
1,252
$1,346
$ 1,577
$ 1,828
$
2,100
$1,868
$ 2,215
$ 2,602
$
3,032
$2,376
$ 2,864
$ 3,421
$
4,057
$3,052
$ 3,703
$ 4,467
$
5,363
$3,712
$ 4,550
$ 5,561
$
6,779
$4,355
$ 5,404
$ 6,704
$
8,314
$4,978
$ 6,262
$ 7,897
$
9,978
$6,852
$ 9,651
$ 13,758
$
19,797
$8,371
$13,242
$ 21,522
$
35,686
$9,391
$16,897
$ 31,736
$
61,443
$9,001
$19,573
$ 44,151
$ 102,210
$6,648
$20,428
$ 58,819
$ 166,928
$ 377
$16,923
$ 74,071
$ 268,268
$
0(2)
$ 5,528
$ 86,891
$ 423,743
$
0
$
0(2)
$ 91,952
$ 659,279
$
0
$
0
$ 78,455
$1,010,240
$
0
$
0
$ 29,081
$1,530,333
$
0
$
0
$
0(2)
$2,367,080
(2) Based on a gross return of 0% the cash surrender value would go to zero in year 1 and in year 41 and later. Because the Target Premium is being paid,
the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 33 years. The contract would be in default at the beginning of year
41. Based on a gross return of 4% the cash surrender value would go to zero in year 1 and in year 47 and later. Because the Target Premium is being
paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 33 years. The contract would be in default at the beginning of
year 47. Based on a gross return of 8% the cash surrender value would go to zero in year 1 and in year 62 and later. Because the Target Premium is
being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 33 years. The contract would be in default at the
beginning of year 62. Based on a gross return of 12% the cash surrender value would go to zero in year 1. Because the Target Premium is being paid, the
Contract is kept inforce through the Limited Death Benefit Guarantee Period of 33 years.
T2
TYPE A (FIXED) DEATH BENEFIT
USING MAXIMUM CONTRACTUAL CHARGES
End of
Policy
Year
-----1
2
3
4
5
6
7
8
9
10
15
20
25
30
35
40
45
50
55
60
65
Premiums
Accumulated
at 4%
Per Year
----------$
919
$ 1,875
$ 2,870
$ 3,904
$ 4,980
$ 6,098
$ 7,261
$ 8,471
$ 9,729
$ 11,038
$ 18,409
$ 27,377
$ 38,288
$ 51,562
$ 67,713
$ 87,363
$111,270
$140,356
$175,744
$218,799
$271,182
Death Benefit (1)
--------------------------------------------------------0% Gross
4% Gross
8% Gross
12% Gross
(-1.75 Net)
(2.25 Net)
(6.25 Net)
(10.25% Net)
-----------------------------------------$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$114,450
$100,000
$100,000
$100,000
$159,024
$
0(2)
$
0(2)
$100,000
$215,272
$
0
$
0
$
0(2)
$290,121
$
0
$
0
$
0
$388,601
$
0
$
0
$
0
$516,449
$
0
$
0
$
0
$686,710
$
0
$
0
$
0
$878,058
--------------------------------------------------------0% Gross
4% Gross
8% Gross
12% Gross
(-1.75 Net)
(2.25 Net)
(6.25 Net)
(10.25% Net)
-----------------------------------------$
0
$
0
$
0
$
0(2)
$
96
$ 160
$
225
$
292
$ 519
$ 641
$
770
$
907
$ 923
$1,122
$ 1,338
$ 1,573
$1,307
$1,600
$ 1,928
$ 2,295
$1,668
$2,074
$ 2,540
$ 3,075
$2,189
$2,724
$ 3,356
$ 4,101
$2,688
$3,368
$ 4,194
$ 5,197
$3,161
$4,003
$ 5,056
$ 6,369
$3,608
$4,627
$ 5,939
$ 7,624
$4,475
$6,590
$ 9,755
$ 14,489
$4,292
$7,773
$13,930
$ 24,798
$2,333
$7,261
$17,886
$ 40,456
$
0
$3,412
$20,480
$ 65,028
$
0
$
0
$19,078
$101,289
$
0(2)
$
0(2)
$ 7,383
$152,675
$
0
$
0
$
0(2)
$223,170
$
0
$
0
$
0
$318,525
$
0
$
0
$
0
$445,215
$
0
$
0
$
0
$618,658
$
0
$
0
$
0
$836,246
(2) Based on a gross return of 0% the cash surrender value would go to zero in year 1 and in year 28 and later, but because the Target Premium is being
year 36. Based on a gross return of 4% the cash surrender value would go to zero in year 1 and in year 33 and later, but because the Target Premium is
beginning of year 36. Based on a gross return of 8% the cash surrender value would go to zero in year 1 and in year 42 and later. Because the Target
Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 35 years. The contract would be in default
at the beginning of year 42. Based on a gross return of 12% the cash surrender value would go to zero in year 1. Because the Target Premium is being
paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 35 years.
T3
TYPE B (VARIABLE) DEATH BENEFIT
USING MAXIMUM CONTRACTUAL CHARGES
End of
Policy
Year
-----1
2
3
4
5
6
7
8
9
10
15
20
25
30
35
40
45
50
55
60
65
Premiums
Accumulated
at 4%
Per Year
----------$
919
$ 1,875
$ 2,870
$ 3,904
$ 4,980
$ 6,098
$ 7,261
$ 8,471
$ 9,729
$ 11,038
$ 18,409
$ 27,377
$ 38,288
$ 51,562
$ 67,713
$ 87,363
$111,270
$140,356
$175,744
$218,799
$271,182
Death Benefit (1)
--------------------------------------------------------0% Gross
4% Gross
8% Gross
12% Gross
(-1.75 Net)
(2.25 Net)
(6.25 Net)
(10.25% Net)
-----------------------------------------$100,384
$100,407
$100,430
$100,453
$100,823
$100,886
$100,952
$101,019
$101,244
$101,365
$101,494
$101,630
$101,644
$101,841
$102,056
$102,290
$102,023
$102,314
$102,639
$103,003
$102,378
$102,780
$103,242
$103,771
$102,710
$103,238
$103,863
$104,599
$103,017
$103,688
$104,503
$105,492
$103,298
$104,127
$105,162
$106,455
$103,552
$104,552
$105,839
$107,492
$104,335
$106,376
$109,427
$113,987
$104,019
$107,282
$113,046
$123,209
$101,898
$106,285
$115,739
$135,811
$100,000
$101,797
$115,691
$152,298
$
0(2)
$
0(2)
$109,326
$172,254
$
0
$
0
$
0(2)
$193,367
$
0
$
0
$
0
$208,903
$
0
$
0
$
0
$206,697
$
0
$
0
$
0
$161,975
$
0
$
0
$
0
$
0(2)
$
0
$
0
$
0
$
0
--------------------------------------------------------0% Gross
4% Gross
8% Gross
12% Gross
(-1.75 Net)
(2.25 Net)
(6.25 Net)
(10.25% Net)
-----------------------------------------$
0
$
0
$
0
$
0
$
94
$ 157
$
222
$
289
$ 514
$ 635
$
764
$
900
$ 914
$1,111
$ 1,326
$ 1,560
$1,293
$1,584
$ 1,910
$ 2,273
$1,648
$2,050
$ 2,512
$ 3,041
$2,163
$2,691
$ 3,315
$ 4,052
$2,652
$3,323
$ 4,139
$ 5,127
$3,116
$3,944
$ 4,980
$ 6,272
$3,552
$4,552
$ 5,839
$ 7,492
$4,335
$6,376
$ 9,427
$ 13,987
$4,019
$7,282
$13,046
$ 23,209
$1,898
$6,285
$15,739
$ 35,811
$
0
$1,797
$15,691
$ 52,298
$
0(2)
$
0(2)
$ 9,326
$ 72,254
$
0
$
0
$
0(2)
$ 93,367
$
0
$
0
$
0
$108,903
$
0
$
0
$
0
$106,697
$
0
$
0
$
0
$ 61,975
$
0
$
0
$
0
$
0(2)
$
0
$
0
$
0
$
0
(2) Based on a gross return of 0% the cash surrender value would go to zero in year 1 and in year 28 and later, but because the Target Premium is being
year 34. Based on a gross return of 4% the cash surrender value would go to zero in year 1 and in year 32 and later, but because the Target Premium is
beginning of year 34. Based on a gross return of 8% the cash surrender value would go to zero in year 1 and in year 39 and later. Because the Target
Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 33 years. The contract would be in default at
the beginning of year 39. Based on a gross return of 12% the cash surrender value would go to zero in year 1 and in year 59 and later. Because the
Target Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 33 years. The contract would be in
default at the beginning of year 59.
T4
&RQWUDFW/RDQV
You may borrow from Pruco Life an amount up to the current loan value of your Contract less any existing Contract
debt using the Contract as the only security for the loan. The loan value at any time is equal to the sum of (1) 90% of
the portion of the cash value attributable to the variable investment options, and (2) the balance of the cash value,
provided the Contract is not in default. The cash value is equal to the Contract Fund less any surrender charge. A
Contract in default has no loan value. The minimum loan amount you may borrow is $200.
Interest charged on a loan accrues daily. Interest is due on each Contract anniversary or when the loan is paid back,
whichever comes first. If interest is not paid when due, it becomes part of the loan and we will charge interest on it,
too. Except in the case of preferred loans, we charge interest at an effective annual rate of 5%.
A portion of any amount you borrow on or after the 10th Contract anniversary may be considered a preferred loan.
The maximum preferred loan amount is the total amount you may borrow minus the total net premiums paid (net
premiums equal premiums paid less total withdrawals, if any). If the net premium amount is less than zero, we will, for
purposes of this calculation, consider it to be zero. Only new loans borrowed after the 10th Contract anniversary may
be considered preferred loans. Standard loans will not automatically be converted into preferred loans. Preferred
loans are charged interest at an effective annual rate of 4.5%.
The Contract debt is the amount of all outstanding loans plus any interest accrued but not yet due. If at any time the
Contract debt equals or exceeds the Contract Fund less any applicable surrender charges, the Contract will go into
default. See Lapse and Reinstatement, page 33. If the Contract debt equals or exceeds the Contract Fund less any
applicable surrender charges and you fail to keep the Contract in-force, the amount of unpaid Contract debt will be
treated as a distribution and will be immediately taxable to the extent of gain in the contract. Reinstatement of the
contract after lapse will not eliminate the taxable income which we are required to report to the Internal Revenue
Service. See Tax Treatment of Contract Benefits, page 31.
When a loan is made, an amount equal to the loan proceeds is transferred out of the Account and/or the fixed-rate
option, as applicable. Unless you ask us to take the loan amount from specific investment options and we agree, the
reduction will be made in the same proportions as the value in each variable investment option and the fixed-rate
option bears to the total value of the Contract. While a loan is outstanding, the amount that was so transferred will
continue to be treated as part of the Contract Fund. It will be credited with an effective annual rate of return of 4%. On
each Monthly date, we will increase the portion of the Contract Fund in the investment options by interest credits
accrued on the loan since the last Monthly date. The net cost of a standard loan is 1% and the net cost of a preferred
loan is ½%.
A loan will not cause the Contract to lapse as long as Contract debt does not equal or exceed the Contract Fund, less
any applicable surrender charges. Loans from Modified Endowment Contracts may be treated for tax purposes as
distributions of income. See Tax Treatment of Contract Benefits, page 31.
Loans you take against the Contract are ordinarily treated as debt and are not considered distributions subject to tax.
However, you should know that the Internal Revenue Service may take the position that the loan should be treated as
a distribution for tax purposes because of the relatively low differential between the loan interest rate and the
Contract’s crediting rate. Distributions are subject to income tax. Were the Internal Revenue Service to take this
position, Prudential would take reasonable steps to attempt to avoid this result, including modifying the Contract’s loan
provisions, but cannot guarantee that such efforts would be successful.
Any Contract debt will directly reduce a Contract's cash surrender value and will be subtracted from the death benefit
to determine the amount payable. In addition, even if the loan is fully repaid, it may have an effect on future death
benefits 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 amount of the loan
while the loan is outstanding, values under the Contract will not increase as rapidly as they would have if no loan had
been made. If investment results are below that rate, Contract values will be higher than they would have been had no
loan been made.
When you repay all or part of a loan, we will increase the portion of the Contract Fund in the investment options by the
amount of the loan you repay using the investment allocation for future premium payments as of the loan payment
30
date, plus interest credits accrued on the loan since the last transaction date. If loan interest is paid when due, it will
not change the portion of the Contract Fund allocated to the investment options. We reserve the right to change the
manner in which we allocate loan repayments.
6DOHRIWKH&RQWUDFWDQG6DOHV&RPPLVVLRQV
Pruco Securities Corporation ("Prusec"), an indirect wholly-owned subsidiary of Prudential, acts as the principal
underwriter of the Contract. Prusec, organized in 1971 under New Jersey law, is registered as a broker and dealer
under the Securities Exchange Act of 1934 and is a member of the National Association of Securities Dealers, Inc.
Prusec’s principal business address is 751 Broad Street, Newark, New Jersey 07102-3777. The Contract is sold by
registered representatives of Prusec who are also authorized by state insurance departments to do so. The Contract
may also be sold through other broker-dealers authorized by Prusec and applicable law to do so. Registered
representatives of such other broker-dealers may be paid on a different basis than described below.
Generally, representatives will receive a commission of no more than:
(1) 50% of the premiums received in the first year on premiums up to the target premium (see Premiums, page
19);
(2) 5% of premiums received in years two through 10 on premiums up to the target premium; and (3) 3% on
premiums received in the first 10 years in excess of the target premium or received after 10 years.
If the basic insurance amount is increased, representatives will generally receive a commission of no more than:
(1) 25% of the premiums received up to the target premium for the increase received in the first year;
(2) 5% of the premiums received up to the target premium for years two through 10; and
(3) 3% on other premiums received for the increase.
Moreover, trail commissions of up to 0.025% of an amount determined by averaging the Contract Fund less all
outstanding loans as of the first and last day of each calendar quarter may be paid.
Representatives with less than four years of service may receive compensation on a different basis. Representatives
who meet certain productivity or persistency standards may be eligible for additional compensation.
7D[7UHDWPHQWRI&RQWUDFW%HQHILWV
This summary provides general information on the federal income tax treatment of the Contract. It is not a complete
statement of what the federal income taxes will be in all circumstances. It is based on current law and interpretations,
which may change. It does not cover state taxes or other taxes. It is not intended as tax advice. You should consult
your own qualified tax adviser for complete information and advice.
Treatment as Life Insurance. The Contract must meet certain requirements to qualify as life insurance for tax
purposes. These requirements include certain definitional tests and rules for diversification of the Contract’s
investments. For further information on the diversification requirements, see Taxation of the Fund in the statement of
additional information for the Series Fund.
We believe we have taken adequate steps to insure that the Contract qualifies as life insurance for tax purposes.
Generally speaking, this means that:
•
you will not be taxed on the growth of the funds in the Contract, unless you receive a distribution from the
Contract,
•
the Contract’s death benefit will be income tax free to your beneficiary.
Although we believe that the Contract should qualify as life insurance for tax purposes, there are some uncertainties,
particularly because the Secretary of Treasury has not yet issued permanent regulations that bear on this question.
Accordingly, we reserve the right to make changes -- which will be applied uniformly to all Contract owners after
advance written notice -- that we deem necessary to insure that the Contract will qualify as life insurance.
31
Pre-Death Distributions. The tax treatment of any distribution you receive before the insured’s death depends on
whether the Contract is classified as a Modified Endowment Contract.
Contracts Not Classified as Modified Endowment Contracts.
•
If you surrender the Contract or allow it to lapse, you will be taxed on the amount you receive in
excess of the premiums you paid less the untaxed portion of any prior withdrawals. For this purpose,
you will be treated as receiving any portion of the cash surrender value used to repay Contract debt.
In other words, you will immediately have taxable income to the extent of gain in the Contract.
Reinstatement of the contract after lapse will not eliminate the taxable income which we are required
to report to the Internal Revenue Service. The tax consequences of a surrender may differ if you take
the proceeds under an income payment settlement option.
•
Generally, you will be taxed on a withdrawal to the extent the amount you receive exceeds the
premiums you paid for the Contract less the untaxed portion of any prior withdrawals. However, under
some limited circumstances, in the first 15 Contract years, all or a portion of a withdrawal may be
taxed if the Contract Fund exceeds the total premiums paid less the untaxed portions of any prior
withdrawals, even if total withdrawals do not exceed total premiums paid.
•
Extra premiums for optional benefits and riders generally do not count in computing the premiums paid
for the Contract for the purposes of determining whether a withdrawal is taxable.
•
Loans you take against the Contract are ordinarily treated as debt and are not considered distributions
subject to tax. However, there is some risk the Internal Revenue Service might assert that the
preferred loan should be treated as a distribution for tax purposes because of the relatively low
differential between the loan interest rate and Contract’s crediting rate. Were the Internal Revenue
Service to take this position, Pruco Life would take reasonable steps to avoid this result, including
modifying the Contract’s loan provisions.
Modified Endowment Contracts.
•
The rules change if the Contract is classified as a Modified Endowment Contract. The Contract could
be classified as a Modified Endowment Contract if premiums in amounts that are too large are paid or
a decrease in the face amount of insurance is made (or a rider removed). The addition of a rider or
an increase in the face amount of insurance may also cause the Contract to be classified as a
Modified Endowment Contract. You should first consult a qualified tax adviser and your Pruco Life
representative if you are contemplating any of these steps.
•
If the Contract is classified as a Modified Endowment Contract, then amounts you receive under the
Contract before the insured's death, including loans and withdrawals, are included in income to the
extent that the Contract Fund before surrender charges exceeds the premiums paid for the Contract
increased by the amount of any loans previously included in income and reduced by any untaxed
amounts previously received other than the amount of any loans excludible from income. An
assignment of a Modified Endowment Contract is taxable in the same way. These rules also apply to
pre-death distributions, including loans and assignments, made during the two-year period before the
time that the Contract became a Modified Endowment Contract.
•
Any taxable income on pre-death distributions (including full surrenders) is subject to a penalty of 10
percent unless the amount is received on or after age 59½, on account of your becoming disabled or
as a life annuity. It is presently unclear how the penalty tax provisions apply to Contracts owned by
businesses.
•
All Modified Endowment Contracts issued by us to you during the same calendar year are treated as
a single Contract for purposes of applying these rules.
Investor Control. Treasury Department regulations do not provide guidance concerning the extent to which you may
direct your investment in the particular variable investment options without causing you, instead of Pruco Life, to be
considered the owner of the underlying assets. Because of this uncertainty, Pruco Life reserves the right to make such
32
changes as it deems necessary to assure that the Contract qualifies as life insurance for tax purposes. Any such
changes will apply uniformly to affected Contract owners and will be made with such notice to affected Contract owners
as is feasible under the circumstances.
Withholding. You must affirmatively elect that no taxes be withheld from a pre-death distribution. Otherwise, the
taxable portion of any amounts you receive will be subject to withholding. You are not permitted to elect out of
withholding if you do not provide a social security number or other taxpayer identification number. You may be subject
to penalties under the estimated tax payment rules if your withholding and estimated tax payments are insufficient to
cover the tax due.
Other Tax Considerations. If you transfer or assign the Contract to someone else, there may be gift, estate and/or
income tax consequences. If you transfer the Contract to a person two or more generations younger than you (or
designate such a younger person as a beneficiary), there may be Generation Skipping Transfer tax consequences.
Deductions for interest paid or accrued on Contract debt or on other loans that are incurred or continued to purchase
or carry the Contract may be denied. Your individual situation or that of your beneficiary will determine the federal
estate taxes and the state and local estate, inheritance and other taxes due if you or the insured dies.
Business-Owned Life Insurance. If a business, rather than an individual, is the owner of the Contract, there are
some additional rules. Business Contract owners generally cannot deduct premium payments. Business Contract
owners generally cannot take tax deductions for interest on Contract debt paid or accrued after October 13, 1995. An
exception permits the deduction of interest on policy loans on Contracts for up to 20 key persons. The interest
deduction for Contract debt on these loans is limited to a prescribed interest rate and a maximum aggregate loan
amount of $50,000 per key insured person. The corporate alternative minimum tax also applies to business-owned life
insurance. This is an indirect tax on additions to the Contract Fund or death benefits received under business-owned
life insurance policies.
/DSVHDQG5HLQVWDWHPHQW
Pruco Life will determine the value of the Contract Fund on each Monthly date. If the Contract Fund less any
applicable surrender charges is zero or less, the Contract is in default unless it remains in-force under the Death
Benefit Guarantee. See Death Benefit Guarantee, page 21. If the Contract debt ever grows to be equal to or more
than the Contract Fund less any applicable surrender charges, the Contract will be in default. Should this happen,
Pruco Life will send you a notice of default setting forth the payment which we estimate will keep the Contract in-force
for three months from the date of default. This payment must be received at a Home Office within the 61-day grace
period after the notice of default is mailed or the Contract will end and have no value. A Contract that lapses with an
outstanding Contract loan may have tax consequences. See Tax Treatment of Contract Benefits, page 31.
A Contract that ended in default may be reinstated within 5 years after the date of default if the following conditions are
met: (1) renewed evidence of insurability is provided on the insured; (2) submission of certain payments sufficient to
bring the Contract up to date plus a premium that we estimate will cover all charges and deductions for the next three
months; and (3) any Contract debt with interest to date must be restored or paid back. If the Contract debt is restored
and the debt with interest would exceed the loan value of the reinstated Contract, the excess must be paid to us before
reinstatement. The reinstatement date will be the Monthly date that coincides with or next follows the date we approve
your request. We will deduct all required charges from your payment and the balance will be placed into your Contract
Fund. If we approve the reinstatement, we will credit the Contract Fund with an amount equal to the surrender charge
applicable as of the date of reinstatement.
/HJDO&RQVLGHUDWLRQV5HODWLQJWR6H['LVWLQFW3UHPLXPVDQG%HQHILWV
The Contract generally employs mortality tables that distinguish between males and females. Thus, premiums and
benefits differ under Contracts issued on males and females of the same age. However, in those states that have
adopted regulations prohibiting sex-distinct insurance rates, premiums and cost of insurance charges will be based on
male rates, whether the insureds are male or female. In addition, employers and employee organizations considering
purchase of a Contract should consult their legal advisers to determine whether purchase of a Contract based on
sex-distinct actuarial tables is consistent with Title VII of the Civil Rights Act of 1964 or other applicable law.
33
2WKHU*HQHUDO&RQWUDFW3URYLVLRQV
Assignment. This Contract may not be assigned if the assignment would violate any federal, state or local law or
regulation prohibiting sex distinct rates for insurance. Generally, the Contract may not be assigned to an employee
benefit plan or program without Pruco Life’s consent. Pruco Life assumes no responsibility for the validity or sufficiency
of any assignment. We will not be obligated to comply with any assignment unless we receive a copy at a Home
Office.
Beneficiary. You designate and name your beneficiary in the application. Thereafter, you may change the beneficiary,
provided it is in accordance with the terms of the Contract. Should the insured die with no surviving beneficiary, the
insured’s estate will become the beneficiary.
Incontestability. We will not contest the Contract after it has been in-force during the insured’s lifetime for two years
from the issue date except when any change is made in the Contract that requires Pruco Life's approval and would
increase our liability. We will not contest such change after it has been in effect for two years during the lifetime of the
insured.
Misstatement of Age or Sex. If the insured's stated age or sex or both are incorrect in the Contract, Pruco Life will
adjust the death benefit payable and any amount to be paid, as required by law, to reflect the correct age and sex. Any
such benefit will be based on what the most recent deductions from the Contract Fund would have provided at the
insured's correct age and sex.
Settlement Options. The Contract grants to most owners, or to the beneficiary, a variety of optional ways of receiving
Contract proceeds, other than in a lump sum. Any Pruco Life representative authorized to sell this Contract can
explain these options upon request.
Suicide Exclusion. Generally, if the insured, whether sane or insane, dies by suicide within two years from the
Contract date, the Contract will end and Pruco Life will return the premiums paid, less any Contract debt, and less any
withdrawals. Generally, if the insured, whether sane or insane, dies by suicide after two years from the issue date, but
within two years of the effective date of an increase in the basic insurance amount, we will pay, as to the increase in
amount, no more than the sum of the premiums paid on and after the effective date of an increase.
5LGHUV
Contract owners may be able to obtain extra fixed benefits which may require an additional premium. These optional
insurance benefits will be described in what is known as a "rider" to the Contract. Charges applicable to the riders will
be deducted from the Contract Fund on each Monthly date.
One rider pays certain premiums into the Contract if the insured is totally disabled within the meaning of the provision.
Others pay an additional amount if the insured dies within a stated number of years after issue; similar benefits may be
available if the insured's spouse or child should die. The amounts of these benefits are fully guaranteed at issue; they
do not depend on the performance of the Account, although they will no longer be available if the Contract lapses.
Certain restrictions may apply; they are clearly described in the applicable rider.
Any Pruco Life representative authorized to sell the Contract can explain these extra benefits further. Samples of the
provisions are available from Pruco Life upon written request.
6XEVWLWXWLRQRI)XQG6KDUHV
Although Pruco Life believes it to be unlikely, it is possible that in the judgment of its management, one or more of the
portfolios of the Funds 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, Pruco Life 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, may be required. Contract owners will be notified
of any such substitution.
34
5HSRUWVWR&RQWUDFW2ZQHUV
Once each year, Pruco Life will send you a statement that provides certain information pertinent to your own Contract.
This statement will detail values, transactions made, and specific Contract data that apply only to your particular
Contract.
You will also be sent annual and semi-annual reports of the Funds showing the financial condition of the portfolios and
the investments held in each portfolio.
6WDWH5HJXODWLRQ
Pruco Life is subject to regulation and supervision by the Department of Insurance of the State of Arizona, which
periodically examines its operations and financial condition. It is also subject to the insurance laws and regulations of
all jurisdictions in which it is authorized to do business.
Pruco Life is required to submit annual statements of its operations, including financial statements, to the insurance
departments of the various jurisdictions in which it does business to determine solvency and compliance with local
insurance laws and regulations.
In addition to the annual statements referred to above, Pruco Life is required to file with Arizona and other jurisdictions
a separate statement with respect to the operations of all its variable contract accounts, in a form promulgated by the
National Association of Insurance Commissioners.
([SHUWV
The consolidated financial statements of Pruco Life and its subsidiaries as of December 31, 2001 and 2000 and for
each of the three years in the period ended December 31, 2001 and the financial statements of the Variable Universal
Life Subaccounts of the Account as of December 31, 2001 and for each of the three years in the period then ended
included in this prospectus have been so included in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in auditing and accounting.
PricewaterhouseCoopers LLP’s principal business address is 1177 Avenue of the Americas, New York, New York
10036.
Actuarial matters included in this prospectus have been examined by Pamela A. Schiz, MAAA, FSA, Vice President
and Actuary of Prudential, whose opinion is filed as an exhibit to the registration statement.
/LWLJDWLRQDQG5HJXODWRU\3URFHHGLQJV
We are subject to legal and regulatory actions in the ordinary course of our businesses, including class actions.
Pending legal and regulatory actions include proceedings specific to our practices and proceedings generally
applicable to business practices in the industries in which we operate. In certain of these lawsuits, large and/or
indeterminate amounts are sought, including punitive or exemplary damages.
Beginning in 1995, regulatory authorities and customers brought significant regulatory actions and civil litigation
against Pruco Life and Prudential involving individual life insurance sales practices. In 1996, Prudential, on behalf of
itself and many of its life insurance subsidiaries, including Pruco Life, entered into settlement agreements with relevant
insurance regulatory authorities and plaintiffs in the principal life insurance sales practices class action lawsuit covering
policyholders of individual permanent life insurance policies issued in the United States from 1982 to 1995. Pursuant
to the settlements, the companies agreed to various changes to their sales and business practices controls, to a series
of fines, and to provide specific forms of relief to eligible class members. Virtually all claims by class members filed in
connection with the settlements have been resolved and virtually all aspects of the remediation program have been
satisfied.
As of December 31, 2001 Prudential and/or Pruco Life remained a party to approximately 44 individual sales practices
actions filed by policyholders who “opted out” of the class action settlement relating to permanent life insurance
policies issued in the United States between 1982 and 1995. In addition, there were 19 sales practices actions
pending that were filed by policyholders who were members of the class and who failed to “opt out” of the class action
settlement. Prudential and Pruco Life believed that those actions are governed by the class settlement release and
35
expects them to be enjoined and/or dismissed. Additional suits may be filed by class members who “opted out” of the
class settlements or who failed to “opt out” but nevertheless seek to proceed against Prudential and/or Pruco Life. A
number of the plaintiffs in these cases seek large and/or indeterminate amounts, including punitive or exemplary
damages. Some of these actions are brought on behalf of multiple plaintiffs. It is possible that substantial punitive
damages might be awarded in any of these actions and particularly in an action involving multiple plaintiffs.
Prudential has indemnified Pruco Life for any liabilities incurred in connection with sales practices litigation covering
policyholders of individual permanent life insurance policies issued in the United States from 1982 to 1995.
Pruco Life’s litigation is subject to many uncertainties, and given the complexity and scope, the outcomes cannot be
predicted. It is possible that the results of operations or the cash flow of Pruco Life in a particular quarterly or annual
period could be materially affected by an ultimate unfavorable resolution of pending litigation and regulatory matters.
Management believes, however, that the ultimate outcome of all pending litigation and regulatory matters should not
have a material adverse effect on Pruco Life’s financial position.
$GGLWLRQDO,QIRUPDWLRQ
Pruco Life has filed a registration statement with the SEC under the Securities Act of 1933, relating to the offering
described in this prospectus. This prospectus does not include all the information set forth in the registration
statement. Certain portions have been omitted pursuant to the rules and regulations of the SEC. The omitted
information may, however, be obtained from the SEC's Public Reference Section at 450 Fifth Street, N.W.,
Washington, D.C. 20549, or by telephoning (800) SEC-0330, upon payment of a prescribed fee.
To reduce costs, we now generally send only a single copy of prospectuses and shareholder reports to each
household ("householding"), in lieu of sending a copy to each contract owner that resides in the household. You
should be aware that you can revoke or "opt out" of householding at any time by calling 1-877-778-5008.
Further information may also be obtained from Pruco Life. Its address and telephone number are set forth on the
inside front cover of this prospectus.
)LQDQFLDO6WDWHPHQWV
The financial statements of the Account should be distinguished from the consolidated financial statements of Pruco
Life and its subsidiaries, which should be considered only as bearing upon the ability of Pruco Life to meet its
obligations under the Contracts.
36
',5(&7256$1'2)),&(56
The directors and major officers of Pruco Life, listed with their principal occupations during the past 5 years, are shown
below.
',5(&72562)358&2/,)(
JAMES J. AVERY, JR., Vice Chairman and Director – President, Prudential Individual Life Insurance since 1998;
prior to 1998: Senior Vice President, Chief Actuary and CFO, Prudential Individual Insurance Group.
VIVIAN L. BANTA, President, Chairman, and Director - Executive Vice President, Individual Financial Services, U.S.
Consumer Group since 2000; 1998 to 1999: Consultant, Individual Financial Services; prior to 1998: Consultant,
Morgan Stanley.
RICHARD J. CARBONE, Director – Senior Vice President and Chief Financial Officer since 1997.
HELEN M. GALT, Director – Company Actuary, Prudential since 1993.
JEAN D. HAMILTON, Director – Executive Vice President, Prudential Institutional since 1998; prior to 1998: President,
Diversified Group.
RONALD P. JOELSON, Director – Senior Vice President, Prudential Asset, Liability and Risk Management since
1999; prior to 1999: President, Guaranteed Products, Prudential Institutional.
DAVID R. ODENATH, JR., Director – President, Prudential Investments since 1999; prior to 1999: Senior Vice
President and Director of Sales, Investment Consulting Group, PaineWebber.
2)),&(56:+2$5(127',5(&7256
SHAUN M. BYRNES, Senior Vice President – Senior Vice President, Director of Mutual Funds, Annuities and UITs,
Prudential Investments since 2001; 2000 to 2001: Senior Vice President, Director of Research, Prudential Investments;
1999 to 2000: Senior Vice President, Director of Mutual Funds, Prudential Investments; prior to 1999: Vice President,
Mutual Funds, Prudential Investments.
C. EDWARD CHAPLIN, Treasurer – Senior Vice President and Treasurer, Prudential since 2000; prior to 2000, Vice
President and Treasurer, Prudential.
THOMAS F. HIGGINS, Senior Vice President – Vice President, Annuity Services, Prudential Individual Financial
Services since 1999; 1998 to 1999: Vice President, Mutual Funds, Prudential Individual Financial Services; prior to
1998: Principal, Mutual Fund Operations, The Vanguard Group.
CLIFFORD E. KIRSCH, Chief Legal Officer and Secretary – Chief Counsel, Variable Products, Prudential Law
Department since 1995.
ANDREW J. MAKO, Executive Vice President – Vice President, Finance, U.S. Consumer Group since 1999; prior to
1999: Vice President, Business Performance Management Group.
ESTHER H. MILNES, Senior Vice President – Vice President and Chief Actuary, Prudential Individual Life Insurance
since 1999; prior to 1999: Vice President and Actuary, Prudential Individual Insurance Group.
JAMES M. O’CONNOR, Senior Vice President and Actuary – Vice President, Guaranteed Products since 2001; 1998
to 2000: Corporate Vice President, Guaranteed Products; prior to 1998: Corporate Actuary, Prudential Investments.
SHIRLEY H. SHAO, Senior Vice President and Chief Actuary – Vice President and Associate Actuary, Prudential since
1996.
37
WILLIAM J. ECKERT, IV, Vice President and Chief Accounting Officer – Vice President and IFS Controller, Prudential
Enterprise Financial Management since 2000; 1999 to 2000: Vice President and Individual Life Controller, Prudential
Enterprise Financial Management; prior to 1999: Vice President, Accounting, Enterprise Financial Management.
The business address of all directors and officers of Pruco Life is 213 Washington Street, Newark, New Jersey 071022992.
Pruco Life directors and officers are elected annually.
38
SUBACCOUNTS
Prudential
Money
Market
Portfolio
Prudential
Diversified
Bond
Portfolio
Prudential
Equity
Portfolio
Prudential
Flexible
Managed
Portfolio
SUBACCOUNTS (Continued)
Prudential
Conservative
Balanced
Portfolio
Prudential
High Yield
Bond
Portfolio
Prudential
Stock
Index
Portfolio
Prudential
Value
Portfolio
Prudential
Global
Portfolio
Prudential
Jennison
Portfolio
T. Rowe Price
International
Stock
Portfolio
MFS
Emerging
Growth
Series
Portfolio
Janus
Aspen
Growth
Portfolio
AIM V.I.
Value
Fund
American
Century VP
Value
Fund
ASSETS
Investment in The Prudential Series
Fund Inc. Portfolios and nonPrudential administered funds at,
net asset value [Note 3] . . . . . . . . . .
$149,803,902
$163,498,934
$1,356,366,869
$1,267,786,516
$962,475,586
$ 77,870,620
$865,987,367
$508,784,419
$193,992,871
$451,810,994
$
905,264
$
2,066,730
$
2,535,719
$
1,378,475
$
1,237,007
Net Assets . . . . . . . . . . . . . . . . . . . .
$149,803,902
$163,498,934
$1,356,366,869
$1,267,786,516
$962,475,586
$ 77,870,620
$865,987,367
$508,784,419
$193,992,871
$451,810,994
$
905,264
$
2,066,730
$
2,535,719
$
1,378,475
$
1,237,007
NET ASSETS, representing:
Accumulation units [Note 9] . . . . . . . . .
$149,803,902
$163,498,934
$1,356,366,869
$1,267,786,516
$962,475,586
$ 77,870,620
$865,987,367
$508,784,419
$193,992,871
$451,810,994
$
905,264
$
2,066,730
$
2,535,719
$
1,378,475
$
1,237,007
$149,803,902
$163,498,934
$1,356,366,869
$1,267,786,516
$962,475,586
$ 77,870,620
$865,987,367
$508,784,419
$193,992,871
$451,810,994
$
905,264
$
2,066,730
$
2,535,719
$
1,378,475
$
1,237,007
83,793,334
65,406,382
298,797,327
390,792,044
341,216,574
37,841,595
174,445,809
105,681,938
113,393,328
191,013,777
Units outstanding . . . . . . . . . . . . . . . .
1,025,423
1,556,003
1,921,232
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
A1
A2
1,014,569
828,765
Op: ron — f88232_a1a2
Friday, April 26, 20029:39 am
STATEMENTS OF NET ASSETS
December 31, 2001
Q:/Pru-SeparateAccounts/88232/ — Prudential – Separate Accounts Financials VUL PRU
Scott Printing Corporation ö (212) 962-4405 ö (212) 943-8970
FINANCIAL STATEMENTS OF
THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
Op: ron — f88232_a1a2
STATEMENTS OF NET ASSETS
December 31, 2001
SUBACCOUNTS
Prudential
Money
Market
Portfolio
Prudential
Diversified
Bond
Portfolio
Prudential
Equity
Portfolio
Prudential
Flexible
Managed
Portfolio
Prudential
Conservative
Balanced
Portfolio
Prudential
High Yield
Bond
Portfolio
Prudential
Stock
Index
Portfolio
Prudential
Value
Portfolio
Prudential
Global
Portfolio
Prudential
Jennison
Portfolio
T. Rowe Price
International
Stock
Portfolio
MFS
Emerging
Growth
Series
Portfolio
Janus
Aspen
Growth
Portfolio
AIM V.I.
Value
Fund
American
Century VP
Value
Fund
ASSETS
Investment in The Prudential Series
Fund Inc. Portfolios and nonPrudential administered funds at,
net asset value [Note 3] . . . . . . . . . .
$149,803,902
$163,498,934
$1,356,366,869
$1,267,786,516
$962,475,586
$ 77,870,620
$865,987,367
$508,784,419
$193,992,871
$451,810,994
$
905,264
$
2,066,730
$
2,535,719
$
1,378,475
$
1,237,007
Net Assets . . . . . . . . . . . . . . . . . . . .
$149,803,902
$163,498,934
$1,356,366,869
$1,267,786,516
$962,475,586
$ 77,870,620
$865,987,367
$508,784,419
$193,992,871
$451,810,994
$
905,264
$
2,066,730
$
2,535,719
$
1,378,475
$
1,237,007
NET ASSETS, representing:
Accumulation units [Note 9] . . . . . . . . .
$149,803,902
$163,498,934
$1,356,366,869
$1,267,786,516
$962,475,586
$ 77,870,620
$865,987,367
$508,784,419
$193,992,871
$451,810,994
$
905,264
$
2,066,730
$
2,535,719
$
1,378,475
$
1,237,007
$149,803,902
$163,498,934
$1,356,366,869
$1,267,786,516
$962,475,586
$ 77,870,620
$865,987,367
$508,784,419
$193,992,871
$451,810,994
$
905,264
$
2,066,730
$
2,535,719
$
1,378,475
$
1,237,007
83,793,334
65,406,382
298,797,327
390,792,044
341,216,574
37,841,595
174,445,809
105,681,938
113,393,328
191,013,777
Units outstanding . . . . . . . . . . . . . . . .
1,025,423
1,556,003
1,921,232
A1
A2
1,014,569
828,765
Op: ron — f88232_a3a4
STATEMENTS OF OPERATIONS
For the years ended December 31, 2001, 2000 and 1999
2001
INVESTMENT INCOME
Dividend income . . . . . . . . . . . . . . . . . . .
$
5,691,321
$
7,374,565
1999
$
Prudential
Diversified Bond
Portfolio
2000
2001
5,770,360
$
9,660,311
$
9,363,742
2001
1999
0
$ 11,778,719
$ 28,717,308
$ 26,581,947
$ 49,145,298
$ 51,475,016
1999
$
Prudential
Flexible Managed
Portfolio
2001
2000
1999
Prudential
Equity
Portfolio
2000
$
2001
Prudential
Portfolio
2000
1999
66,382
$ 33,596,157
$ 39,032,025
$ 45,641,073
EXPENSES
Charges to contract owners for assuming
mortality risk and expense risk
[Note 4A] . . . . . . . . . . . . . . . . . . . . . .
1,004,822
857,383
820,458
1,154,591
1,055,858
1,044,261
10,233,632
10,912,470
11,249,143
9,313,450
10,246,499
10,502,693
7,282,105
7,930,987
8,224,025
NET INVESTMENT INCOME (LOSS) . . . . .
4,686,499
6,517,182
4,949,902
8,505,720
8,307,884
(1,044,261)
1,545,087
17,804,838
15,332,804
39,831,848
41,228,517
(10,436,311)
26,314,052
31,101,038
37,417,048
0
0
0
0
18,515
399,858
74,972,452
252,626,405
188,845,438
18,948,318
20,228,730
16,843,257
10,268,699
7,927,522
6,358,209
0
0
0
1,463,159
86,063
(62,342)
(11,972,627)
12,712,901
27,402,970
(5,121,442)
3,425,308
2,080,576
(3,219,178)
2,714,849
2,277,146
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Capital gains distributions received . . . . . .
Realized gain (loss) on shares
redeemed . . . . . . . . . . . . . . . . . . . . . .
Net change in unrealized gain (loss)
on investments . . . . . . . . . . . . . . . . . .
NET GAIN (LOSS) ON INVESTMENTS . . . .
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS . . . . . . . . . . . . . . . . . . . .
$
0
0
0
0
0
0
4,686,499
$
6,517,182
$
4,949,902
(379,997)
$
4,554,260
(1,453,759)
(248,117,507)
(246,644,445)
(58,596,445)
(141,197,546)
(96,184,606)
91,955,490
(61,523,825)
(54,474,725)
18,533,490
1,083,162
4,658,838
(1,116,243)
(185,117,682)
18,694,861
157,651,963
(127,370,670)
(72,530,568)
110,879,323
(54,474,304)
(43,832,354)
27,168,845
9,588,882
$ 12,966,722
$ (2,160,504)
$(183,572,595) $ 36,499,699
$172,984,767
$ (87,538,822) $ (31,302,051) $100,443,012
$ (28,160,252) $ (12,731,316) $ 64,585,893
A3
A4
SUBACCOUNTS
Prudential
Money Market
Portfolio
2000
Op: ron — f88232_a3a4
SUBACCOUNTS
Prudential
Money Market
Portfolio
2000
2001
INVESTMENT INCOME
Dividend income . . . . . . . . . . . . . . . . . . .
$
5,691,321
$
7,374,565
1999
$
Prudential
Diversified Bond
Portfolio
2000
2001
5,770,360
$
9,660,311
$
9,363,742
2001
1999
0
$ 11,778,719
$ 28,717,308
$ 26,581,947
$ 49,145,298
$ 51,475,016
1999
$
Prudential
Flexible Managed
Portfolio
2001
2000
1999
Prudential
Equity
Portfolio
2000
$
2001
Prudential
Portfolio
2000
1999
66,382
$ 33,596,157
$ 39,032,025
$ 45,641,073
EXPENSES
[Note 4A] . . . . . . . . . . . . . . . . . . . . . .
1,004,822
857,383
820,458
1,154,591
1,055,858
1,044,261
10,233,632
10,912,470
11,249,143
9,313,450
10,246,499
10,502,693
7,282,105
7,930,987
8,224,025
4,686,499
6,517,182
4,949,902
8,505,720
8,307,884
(1,044,261)
1,545,087
17,804,838
15,332,804
39,831,848
41,228,517
(10,436,311)
26,314,052
31,101,038
37,417,048
0
0
0
0
18,515
399,858
74,972,452
252,626,405
188,845,438
18,948,318
20,228,730
16,843,257
10,268,699
7,927,522
6,358,209
0
0
0
1,463,159
86,063
(62,342)
(11,972,627)
12,712,901
27,402,970
(5,121,442)
3,425,308
2,080,576
(3,219,178)
2,714,849
2,277,146
redeemed . . . . . . . . . . . . . . . . . . . . . .
on investments . . . . . . . . . . . . . . . . . .
OPERATIONS . . . . . . . . . . . . . . . . . . . .
$
0
0
0
0
0
0
4,686,499
$
6,517,182
$
4,949,902
(379,997)
$
4,554,260
(1,453,759)
(248,117,507)
(246,644,445)
(58,596,445)
(141,197,546)
(96,184,606)
91,955,490
(61,523,825)
(54,474,725)
18,533,490
1,083,162
4,658,838
(1,116,243)
(185,117,682)
18,694,861
157,651,963
(127,370,670)
(72,530,568)
110,879,323
(54,474,304)
(43,832,354)
27,168,845
9,588,882
$ 12,966,722
$ (2,160,504)
$(183,572,595) $ 36,499,699
$172,984,767
$ (87,538,822) $ (31,302,051) $100,443,012
$ (28,160,252) $ (12,731,316) $ 64,585,893
A3
A4
Op: ron — f88232_a5a6
2001
INVESTMENT INCOME
Dividend income . . . . . . . . . . . . . . . . . .
$
9,427,159
$
9,628,996
EXPENSES
[Note 4A]. . . . . . . . . . . . . . . . . . . . . .
580,357
601,288
NET INVESTMENT INCOME (LOSS) . . . .
8,846,802
9,027,708
0
0
1999
$
2001
251,218
$
Prudential
Stock Index
Portfolio
2000
1999
Prudential
Value
Portfolio
2000
1999
8,012,590
$ 10,338,921
$ 10,876,592
2001
$
Prudential
Global
Portfolio
2001
2000
1999
9,128,445
9,144,548
10,125,645
$
734,834
655,946
6,421,387
7,509,378
6,675,340
3,558,508
3,178,543
3,285,457
(404,728)
2,707,058
1,635,170
3,450,305
4,454,082
7,160,378
7,591,135
51,332,600
35,213,342
12,472,929
47,413,973
35,832,915
53,052,638
48,429,909
14,703,822
16,646,062
19,189,378
555,997
2,234,121
7,546,600
(7,478,356)
1,440,781
(705,947)
$
1,914,868
1,752,355
162,513
$
678,214
1,111,465
(433,251)
Prudential
Jennison
Portfolio
2000
2001
$
796,086
$
384,515
1999
$
541,083
3,229,200
3,978,955
2,115,948
(2,433,114)
(3,594,440)
(1,574,865)
Capital gains distributions received . . . . .
redeemed . . . . . . . . . . . . . . . . . . . . .
on investments. . . . . . . . . . . . . . . . . .
(1,984,736)
(1,139,978)
(7,772,594)
(15,147,733)
4,891,833
(196,280,113)
(160,730,652)
136,915,479
(66,822,363)
20,197,962
(16,047,855)
(83,717,864)
(70,915,302)
67,191,804
(96,533,999)
(198,113,004)
99,641,732
NET GAIN (LOSS) ON INVESTMENTS . . .
(9,757,330)
(16,287,711)
3,925,251
(130,243,691)
(108,871,248)
168,577,786
(18,852,393)
58,264,998
44,551,383
(42,766,311)
(53,419,302)
71,547,919
(100,754,730)
(120,415,822)
119,698,473
$ (14,398,311) $ 65,425,376
$ 52,142,518
OPERATIONS . . . . . . . . . . . . . . . . . . .
$
(910,528) $ (7,260,003) $
0
(966,582)
3,520,523
$(127,536,633) $(107,236,078) $172,028,091
16,578,985
1,189,193
4,599,398
76,293,654
18,100,277
917,015
3,166,922
(8,820,129)
1,403,528
1,956,464
$ (43,472,258) $ (53,256,789) $ 71,114,668
$(103,187,844) $(124,010,262) $118,123,608
A5
A6
SUBACCOUNTS
Prudential
High Yield Bond
Portfolio
2000
Op: ron — f88232_a5a6
SUBACCOUNTS
Prudential
High Yield Bond
Portfolio
2000
2001
INVESTMENT INCOME
Dividend income . . . . . . . . . . . . . . . . . .
$
9,427,159
$
9,628,996
EXPENSES
[Note 4A]. . . . . . . . . . . . . . . . . . . . . .
580,357
601,288
NET INVESTMENT INCOME (LOSS) . . . .
8,846,802
9,027,708
0
0
1999
$
2001
251,218
$
Prudential
Stock Index
Portfolio
2000
1999
Prudential
Value
Portfolio
2000
1999
8,012,590
$ 10,338,921
$ 10,876,592
2001
$
Prudential
Global
Portfolio
2001
2000
1999
9,128,445
9,144,548
10,125,645
$
734,834
655,946
6,421,387
7,509,378
6,675,340
3,558,508
3,178,543
3,285,457
(404,728)
2,707,058
1,635,170
3,450,305
4,454,082
7,160,378
7,591,135
51,332,600
35,213,342
12,472,929
47,413,973
35,832,915
53,052,638
48,429,909
14,703,822
16,646,062
19,189,378
555,997
2,234,121
7,546,600
(7,478,356)
1,440,781
(705,947)
$
1,914,868
1,752,355
162,513
$
678,214
1,111,465
(433,251)
Prudential
Jennison
Portfolio
2000
2001
$
796,086
$
384,515
1999
$
541,083
3,229,200
3,978,955
2,115,948
(2,433,114)
(3,594,440)
(1,574,865)
Capital gains distributions received . . . . .
redeemed . . . . . . . . . . . . . . . . . . . . .
on investments. . . . . . . . . . . . . . . . . .
(1,984,736)
(1,139,978)
(7,772,594)
(15,147,733)
4,891,833
(196,280,113)
(160,730,652)
136,915,479
(66,822,363)
20,197,962
(16,047,855)
(83,717,864)
(70,915,302)
67,191,804
(96,533,999)
(198,113,004)
99,641,732
NET GAIN (LOSS) ON INVESTMENTS . . .
(9,757,330)
(16,287,711)
3,925,251
(130,243,691)
(108,871,248)
168,577,786
(18,852,393)
58,264,998
44,551,383
(42,766,311)
(53,419,302)
71,547,919
(100,754,730)
(120,415,822)
119,698,473
$ (14,398,311) $ 65,425,376
$ 52,142,518
OPERATIONS . . . . . . . . . . . . . . . . . . .
$
(910,528) $ (7,260,003) $
0
(966,582)
3,520,523
$(127,536,633) $(107,236,078) $172,028,091
16,578,985
1,189,193
4,599,398
76,293,654
18,100,277
917,015
3,166,922
(8,820,129)
1,403,528
1,956,464
$ (43,472,258) $ (53,256,789) $ 71,114,668
$(103,187,844) $(124,010,262) $118,123,608
A5
A6
Op: ron — f88232_a7a8
2001
INVESTMENT INCOME
Dividend income . . . . . . . . . . . . . . . . . . .
$
18,843
$
4,192
1999
$
AIM V.I.
Value
Fund
2000
2001
570
$
2,693
$
1,609
1999
$
2001
1,048
$
1,491
Janus Aspen
Growth
Portfolio
2000
$
29,366
MFS Emerging
Growth Series
Portfolio
2001
2000
1999
1999
$
742
EXPENSES
[Note 4A] . . . . . . . . . . . . . . . . . . . . . . .
4,594
2,592
221
10,008
5,257
599
12,066
8,122
14,249
1,600
349
(7,315)
(3,648)
449
(10,575)
21,244
0
20,121
1,792
40,882
56,065
5,479
3,728
68,363
107
6,356
0
(25,903)
7,979
0
(90,696)
8,468
0
$
745
(3)
0
$
0
$
American Century
VP Value
2000
2001
0
6,908
4,451
424
(6,908)
(4,451)
(424)
72,082
31,841
(52,483)
19,917
$
5,401
$
1,715
1999
$
0
4,726
1,658
85
675
57
0
0
4,388
0
0
7,745
2,209
0
(85)
redeemed . . . . . . . . . . . . . . . . . . . . . .
on investments . . . . . . . . . . . . . . . . . . .
(183,179)
(129,440)
28,848
(223,173)
(265,995)
43,489
(407,229)
(461,183)
73,745
(445,703)
(273,214)
106,728
105,697
65,436
(1,710)
(197,966)
(102,963)
30,640
(208,194)
(201,951)
48,968
(494,197)
(384,352)
73,852
(426,104)
(221,456)
106,728
113,442
72,033
(1,710)
(183,717) $
(101,363) $
30,989
(215,509) $
(205,599) $
49,417
(504,772) $
(363,108) $
73,849
(433,012) $
(225,907) $
106,304
OPERATIONS. . . . . . . . . . . . . . . . . . . . .
(14,787)
$
$
$
$
$
114,117
$
A7
A8
72,090
$
(1,795)
SUBACCOUNTS
T. Rowe Price
International Stock
Portfolio
2000
Op: ron — f88232_a7a8
SUBACCOUNTS
T. Rowe Price
International Stock
Portfolio
2000
2001
INVESTMENT INCOME
Dividend income . . . . . . . . . . . . . . . . . . .
$
18,843
$
4,192
1999
$
AIM V.I.
Value
Fund
2000
2001
570
$
2,693
$
1,609
1999
$
2001
1,048
$
1,491
Janus Aspen
Growth
Portfolio
2000
$
29,366
MFS Emerging
Growth Series
Portfolio
2001
2000
1999
1999
$
742
EXPENSES
[Note 4A] . . . . . . . . . . . . . . . . . . . . . . .
4,594
2,592
221
10,008
5,257
599
12,066
8,122
14,249
1,600
349
(7,315)
(3,648)
449
(10,575)
21,244
0
20,121
1,792
40,882
56,065
5,479
3,728
68,363
107
6,356
0
(25,903)
7,979
0
(90,696)
8,468
0
$
745
(3)
0
$
0
$
American Century
VP Value
2000
2001
0
6,908
4,451
424
(6,908)
(4,451)
(424)
72,082
31,841
(52,483)
19,917
$
5,401
$
1,715
1999
$
0
4,726
1,658
85
675
57
0
0
4,388
0
0
7,745
2,209
0
(85)
redeemed . . . . . . . . . . . . . . . . . . . . . .
on investments . . . . . . . . . . . . . . . . . . .
(183,179)
(129,440)
28,848
(223,173)
(265,995)
43,489
(407,229)
(461,183)
73,745
(445,703)
(273,214)
106,728
105,697
65,436
(1,710)
(197,966)
(102,963)
30,640
(208,194)
(201,951)
48,968
(494,197)
(384,352)
73,852
(426,104)
(221,456)
106,728
113,442
72,033
(1,710)
(183,717) $
(101,363) $
30,989
(215,509) $
(205,599) $
49,417
(504,772) $
(363,108) $
73,849
(433,012) $
(225,907) $
106,304
OPERATIONS. . . . . . . . . . . . . . . . . . . . .
(14,787)
$
$
$
$
$
114,117
$
A7
A8
72,090
$
(1,795)
Op: ron — f88232_a9a10
STATEMENTS OF CHANGES IN NET ASSETS
2001
OPERATIONS
Net investment income (loss) . . . . .
Capital gains distributions received .
redeemed . . . . . . . . . . . . . . . . .
on investments . . . . . . . . . . . . . .
.......... $
..........
4,686,499 $
0
1999
6,517,182 $
0
2001
4,949,902 $
0
..........
0
0
0
..........
0
0
0
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . .
4,686,499
6,517,182
4,949,902
........
........
27,534,492
(3,880,970)
33,271,809
(2,951,631)
........
2,987,045
........
........
........
CONTRACT OWNER TRANSACTIONS
Contract Owner Net Payments . . . . . .
Policy Loans . . . . . . . . . . . . . . . . . . .
Policy Loan Repayments and
Interest . . . . . . . . . . . . . . . . . . . . .
Surrenders, Withdrawals and Death
Benefits . . . . . . . . . . . . . . . . . . . . .
Net Transfers From (To) Other
Subaccounts or Fixed Rate Option . .
Withdrawal and Other Charges . . . . . .
Prudential
Diversified Bond
Portfolio
2000
8,505,720 $
0
1999
8,307,884 $ (1,044,261)
18,515
399,858
1,463,159
2001
$
Prudential
Equity
Portfolio
2000
1999
1,545,087 $ 17,804,838 $ 15,332,804 $
74,972,452
252,626,405
188,845,438
86,063
(62,342)
(11,972,627)
12,712,901
27,402,970
4,554,260
(1,453,759)
(248,117,507)
(246,644,445)
(58,596,445)
9,588,882
12,966,722
(2,160,504)
(183,572,595)
36,499,699
29,999,800
(3,827,696)
20,475,507
(3,509,028)
23,708,710
(2,951,317)
23,078,475
(3,188,191)
209,889,474
(39,007,160)
1,690,948
2,588,192
2,352,792
1,966,848
2,135,135
(16,502,180)
(10,207,810)
(11,775,018)
(27,437,627)
(7,206,907)
9,817,151
(9,841,971)
(13,623,199)
(8,128,780)
2,629,991
(8,860,933)
13,343,277
(10,978,673)
(6,126,033)
(9,969,514)
(578,213)
(379,997)
Prudential
Flexible Managed
Portfolio
2001
2000
1999
39,831,848 $
18,948,318
(10,436,311) $
16,843,257
26,314,052 $
10,268,699
31,101,038 $
7,927,522
1999
37,417,048
6,358,209
3,425,308
2,080,576
(3,219,178)
2,714,849
2,277,146
(141,197,546)
(96,184,606)
91,955,490
(61,523,825)
(54,474,725)
18,533,490
172,984,767
(87,538,822)
(31,302,051)
100,443,012
(28,160,252)
(12,731,316)
64,585,893
222,204,944
(44,682,481)
222,112,390
(46,925,941)
152,653,244
(27,811,107)
160,739,340
(32,903,486)
155,685,002
(33,487,354)
124,589,424
(21,870,768)
132,066,783
(24,363,776)
122,128,969
(23,665,043)
29,559,815
26,549,494
25,863,007
22,716,426
20,974,631
20,075,111
17,263,176
15,280,452
15,558,408
(8,911,486)
(107,153,507)
(89,287,653)
(94,909,037)
(89,055,901)
(73,837,706)
(67,752,219)
(80,372,641)
(67,850,819)
(64,392,473)
(138,588)
(10,654,538)
(11,110,043)
(103,407,621)
(93,203,124)
(110,324,713)
(59,651,177)
(122,798,555)
(11,269,057)
(82,084,813)
(64,915,895)
(89,144,922)
(36,216,054)
(98,917,196)
(11,000,589)
(71,104,797)
(60,909,587)
(76,776,722)
(27,102,834)
(84,858,651)
2,320,807
(21,229,042)
(88,743,533)
(76,309,313)
(34,851,208)
(79,088,038)
(60,612,710)
(42,496,195)
(82,553,669)
(62,331,624)
(204,801,637)
(52,243,834)
96,675,454
(122,390,030)
(110,390,089)
39,830,302
(70,656,447)
(95,284,985)
2,254,269
ASSETS RESULTING FROM CONTRACT
OWNER TRANSACTIONS . . . . . . . . . . . . . . . . .
10,113,567
51,337
10,754,336
(5,753,752)
TOTAL INCREASE (DECREASE) IN
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . .
14,800,066
6,568,519
15,704,238
3,835,130
12,388,509
160,303
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . . . .
135,003,836
128,435,317
112,731,079
159,663,804
147,275,295
147,114,992
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . $149,803,902 $135,003,836 $128,435,317 $163,498,934 $159,663,804 $147,275,295
1,561,168,506
1,613,412,340
1,516,736,886
(5,121,442)
41,228,517 $
20,228,730
2001
Prudential
Portfolio
2000
1,390,176,546
1,500,566,635
1,460,736,333
1,033,132,033
1,128,417,018
1,126,162,749
$1,356,366,869 $1,561,168,506 $1,613,412,340 $1,267,786,516 $1,390,176,546 $1,500,566,635 $ 962,475,586 $1,033,132,033 $1,128,417,018
A9
A10
SUBACCOUNTS
Prudential
Money Market
Portfolio
2000
Op: ron — f88232_a9a10
SUBACCOUNTS
Prudential
Money Market
Portfolio
2000
2001
OPERATIONS
redeemed . . . . . . . . . . . . . . . . .
on investments . . . . . . . . . . . . . .
.......... $
..........
4,686,499 $
0
1999
6,517,182 $
0
2001
4,949,902 $
0
..........
0
0
0
..........
0
0
0
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . .
4,686,499
6,517,182
4,949,902
........
........
27,534,492
(3,880,970)
33,271,809
(2,951,631)
........
2,987,045
........
........
........
Policy Loans . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . .
Benefits . . . . . . . . . . . . . . . . . . . . .
Prudential
Diversified Bond
Portfolio
2000
8,505,720 $
0
1999
8,307,884 $ (1,044,261)
18,515
399,858
1,463,159
2001
$
Prudential
Equity
Portfolio
2000
1999
1,545,087 $ 17,804,838 $ 15,332,804 $
74,972,452
252,626,405
188,845,438
86,063
(62,342)
(11,972,627)
12,712,901
27,402,970
4,554,260
(1,453,759)
(248,117,507)
(246,644,445)
(58,596,445)
9,588,882
12,966,722
(2,160,504)
(183,572,595)
36,499,699
29,999,800
(3,827,696)
20,475,507
(3,509,028)
23,708,710
(2,951,317)
23,078,475
(3,188,191)
209,889,474
(39,007,160)
1,690,948
2,588,192
2,352,792
1,966,848
2,135,135
(16,502,180)
(10,207,810)
(11,775,018)
(27,437,627)
(7,206,907)
9,817,151
(9,841,971)
(13,623,199)
(8,128,780)
2,629,991
(8,860,933)
13,343,277
(10,978,673)
(6,126,033)
(9,969,514)
(578,213)
(379,997)
Prudential
Flexible Managed
Portfolio
2001
2000
1999
39,831,848 $
18,948,318
(10,436,311) $
16,843,257
26,314,052 $
10,268,699
31,101,038 $
7,927,522
1999
37,417,048
6,358,209
3,425,308
2,080,576
(3,219,178)
2,714,849
2,277,146
(141,197,546)
(96,184,606)
91,955,490
(61,523,825)
(54,474,725)
18,533,490
172,984,767
(87,538,822)
(31,302,051)
100,443,012
(28,160,252)
(12,731,316)
64,585,893
222,204,944
(44,682,481)
222,112,390
(46,925,941)
152,653,244
(27,811,107)
160,739,340
(32,903,486)
155,685,002
(33,487,354)
124,589,424
(21,870,768)
132,066,783
(24,363,776)
122,128,969
(23,665,043)
29,559,815
26,549,494
25,863,007
22,716,426
20,974,631
20,075,111
17,263,176
15,280,452
15,558,408
(8,911,486)
(107,153,507)
(89,287,653)
(94,909,037)
(89,055,901)
(73,837,706)
(67,752,219)
(80,372,641)
(67,850,819)
(64,392,473)
(138,588)
(10,654,538)
(11,110,043)
(103,407,621)
(93,203,124)
(110,324,713)
(59,651,177)
(122,798,555)
(11,269,057)
(82,084,813)
(64,915,895)
(89,144,922)
(36,216,054)
(98,917,196)
(11,000,589)
(71,104,797)
(60,909,587)
(76,776,722)
(27,102,834)
(84,858,651)
2,320,807
(21,229,042)
(88,743,533)
(76,309,313)
(34,851,208)
(79,088,038)
(60,612,710)
(42,496,195)
(82,553,669)
(62,331,624)
(204,801,637)
(52,243,834)
96,675,454
(122,390,030)
(110,390,089)
39,830,302
(70,656,447)
(95,284,985)
2,254,269
OWNER TRANSACTIONS . . . . . . . . . . . . . . . . .
10,113,567
51,337
10,754,336
(5,753,752)
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . .
14,800,066
6,568,519
15,704,238
3,835,130
12,388,509
160,303
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . . . .
135,003,836
128,435,317
112,731,079
159,663,804
147,275,295
147,114,992
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . $149,803,902 $135,003,836 $128,435,317 $163,498,934 $159,663,804 $147,275,295
1,561,168,506
1,613,412,340
1,516,736,886
(5,121,442)
41,228,517 $
20,228,730
2001
Prudential
Portfolio
2000
1,390,176,546
1,500,566,635
1,460,736,333
1,033,132,033
1,128,417,018
1,126,162,749
$1,356,366,869 $1,561,168,506 $1,613,412,340 $1,267,786,516 $1,390,176,546 $1,500,566,635 $ 962,475,586 $1,033,132,033 $1,128,417,018
A9
A10
Op: ron — f88232_a11a12
2001
OPERATIONS
redeemed . . . . . . . . . . . . . . . . .
on investments . . . . . . . . . . . . . .
..
..
$
8,846,802
0
$
9,027,708
0
1999
$
Prudential
Stock Index
Portfolio
2000
2001
$
1,635,170
35,213,342
1999
(404,728) $
0
2,707,058
51,332,600
$
3,450,305
12,472,929
(966,582)
14,703,822
16,646,062
19,189,378
..
(1,984,736)
(1,139,978)
..
(7,772,594)
(15,147,733)
4,891,833
(196,280,113)
(160,730,652)
136,915,479
OPERATIONS . . . . . . . . . . . . . . . . .
(910,528)
(7,260,003)
3,520,523
(127,536,633)
(107,236,078)
13,869,897
(1,978,781)
14,981,479
(2,126,320)
15,705,252
(2,428,091)
137,075,014
(22,073,451)
1,582,960
1,428,737
1,801,343
(6,304,511)
(5,853,422)
508,338
(6,339,467)
CONTRACT OWNER
TRANSACTIONS . . . . . . . . . . . . . . .
NET ASSETS . . . . . . . . . . . . . . . . . .
Policy Loans . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . .
Benefits . . . . . . . . . . . . . . . . . . . . .
Prudential
Value
Portfolio
2000
2001
$
4,454,082
47,413,973
555,997
$
7,160,378
35,832,915
Prudential
Global
Portfolio
2001
2000
1999
1999
$
7,591,135
53,052,638
$
(705,947) $
162,513
48,429,909
16,578,985
2,234,121
7,546,600
(7,478,356)
(66,822,363)
20,197,962
(16,047,855)
(83,717,864)
172,028,091
(14,398,311)
65,425,376
52,142,518
143,813,535
(31,788,094)
128,537,549
(27,496,074)
67,102,332
(12,626,611)
71,330,448
(12,152,062)
18,345,046
16,352,451
14,533,537
9,238,764
(6,795,370)
(72,921,724)
(55,218,390)
(53,330,346)
(6,209,425)
(6,624,832)
(7,871,916)
(7,570,585)
(9,290,237)
(63,635,362)
43,134,926
(69,977,646)
1,338,436
(4,403,783)
(7,159,367)
(12,500,714)
427,908
(11,663,786)
(3,638,844)
(140,037,347)
917,015
$
2001
Prudential
Jennison
Portfolio
2000
1999
(433,251) $ (2,433,114) $ (3,594,440) $ (1,574,865)
1,189,193
4,599,398
76,293,654
18,100,277
3,166,922
(8,820,129)
1,403,528
1,956,464
(70,915,302)
67,191,804
(96,533,999)
(198,113,004)
99,641,732
(43,472,258)
(53,256,789)
71,114,668
(103,187,844)
(124,010,262)
118,123,608
72,746,641
(11,949,900)
39,726,205
(5,525,598)
39,422,009
(7,601,293)
30,573,669
(4,548,965)
111,015,272
(13,191,797)
108,600,153
(19,316,019)
78,282,647
(10,302,874)
6,794,156
7,032,090
3,646,145
3,673,153
2,204,939
10,310,202
8,402,856
3,885,895
(36,169,132)
(28,058,562)
(28,641,449)
(17,174,664)
(12,990,958)
(8,960,008)
(38,427,779)
(26,583,880)
(17,393,950)
55,524,073
(68,714,043)
14,858,828
(35,679,010)
(31,865,939)
(33,187,893)
(30,030,572)
(37,398,609)
(6,966,843)
(16,037,216)
60,926,199
(17,867,845)
8,628,134
(13,826,989)
(12,719,136)
(42,382,485)
180,065,121
(47,004,963)
115,758,631
(32,069,991)
46,316,782
49,054,696
6,725,171
(27,139,852)
(28,241,799)
(2,331,971)
65,561,265
14,070,780
14,604,277
204,163,268
138,160,358
(60,919,296)
221,082,787
(7,673,140)
38,285,524
23,900,719
(45,804,229)
12,304,476
85,185,448
(88,583,567)
80,153,006
256,283,966
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . .
77,442,712
89,106,498
92,745,342
1,006,024,714
1,066,944,010
845,861,223
516,457,559
478,172,035
454,271,316
239,797,100
227,492,624
142,307,176
540,394,561
460,241,555
203,957,589
End of year . . . . . . . . . . . . . . . . . . .
$ 77,870,620
$ 77,442,712
$ 89,106,498
$ 865,987,367
$1,006,024,714
$1,066,944,010
$508,784,419
$516,457,559
$478,172,035
$193,992,871
$239,797,100
$227,492,624
$451,810,994
$540,394,561
$460,241,555
A11
A12
SUBACCOUNTS
Prudential
High Yield Bond
Portfolio
2000
Op: ron — f88232_a11a12
SUBACCOUNTS
2001
OPERATIONS
redeemed . . . . . . . . . . . . . . . . .
on investments . . . . . . . . . . . . . .
..
..
$
8,846,802
0
Prudential
High Yield Bond
Portfolio
2000
$
9,027,708
0
1999
$
Prudential
Stock Index
Portfolio
2000
2001
$
1,635,170
35,213,342
1999
(404,728) $
0
2,707,058
51,332,600
$
3,450,305
12,472,929
(966,582)
14,703,822
16,646,062
19,189,378
..
(1,984,736)
(1,139,978)
..
(7,772,594)
(15,147,733)
4,891,833
(196,280,113)
(160,730,652)
136,915,479
OPERATIONS . . . . . . . . . . . . . . . . .
(910,528)
(7,260,003)
3,520,523
(127,536,633)
(107,236,078)
13,869,897
(1,978,781)
14,981,479
(2,126,320)
15,705,252
(2,428,091)
137,075,014
(22,073,451)
1,582,960
1,428,737
1,801,343
(6,304,511)
(5,853,422)
508,338
(6,339,467)
CONTRACT OWNER
TRANSACTIONS . . . . . . . . . . . . . . .
NET ASSETS . . . . . . . . . . . . . . . . . .
Policy Loans . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . .
Benefits . . . . . . . . . . . . . . . . . . . . .
Prudential
Value
Portfolio
2000
2001
$
4,454,082
47,413,973
555,997
$
7,160,378
35,832,915
Prudential
Global
Portfolio
2001
2000
1999
1999
$
7,591,135
53,052,638
$
(705,947) $
162,513
48,429,909
16,578,985
2,234,121
7,546,600
(7,478,356)
(66,822,363)
20,197,962
(16,047,855)
(83,717,864)
172,028,091
(14,398,311)
65,425,376
52,142,518
143,813,535
(31,788,094)
128,537,549
(27,496,074)
67,102,332
(12,626,611)
71,330,448
(12,152,062)
18,345,046
16,352,451
14,533,537
9,238,764
(6,795,370)
(72,921,724)
(55,218,390)
(53,330,346)
(6,209,425)
(6,624,832)
(7,871,916)
(7,570,585)
(9,290,237)
(63,635,362)
43,134,926
(69,977,646)
1,338,436
(4,403,783)
(7,159,367)
(12,500,714)
427,908
(11,663,786)
(3,638,844)
(140,037,347)
917,015
$
2001
Prudential
Jennison
Portfolio
2000
1999
(433,251) $ (2,433,114) $ (3,594,440) $ (1,574,865)
1,189,193
4,599,398
76,293,654
18,100,277
3,166,922
(8,820,129)
1,403,528
1,956,464
(70,915,302)
67,191,804
(96,533,999)
(198,113,004)
99,641,732
(43,472,258)
(53,256,789)
71,114,668
(103,187,844)
(124,010,262)
118,123,608
72,746,641
(11,949,900)
39,726,205
(5,525,598)
39,422,009
(7,601,293)
30,573,669
(4,548,965)
111,015,272
(13,191,797)
108,600,153
(19,316,019)
78,282,647
(10,302,874)
6,794,156
7,032,090
3,646,145
3,673,153
2,204,939
10,310,202
8,402,856
3,885,895
(36,169,132)
(28,058,562)
(28,641,449)
(17,174,664)
(12,990,958)
(8,960,008)
(38,427,779)
(26,583,880)
(17,393,950)
55,524,073
(68,714,043)
14,858,828
(35,679,010)
(31,865,939)
(33,187,893)
(30,030,572)
(37,398,609)
(6,966,843)
(16,037,216)
60,926,199
(17,867,845)
8,628,134
(13,826,989)
(12,719,136)
(42,382,485)
180,065,121
(47,004,963)
115,758,631
(32,069,991)
46,316,782
49,054,696
6,725,171
(27,139,852)
(28,241,799)
(2,331,971)
65,561,265
14,070,780
14,604,277
204,163,268
138,160,358
(60,919,296)
221,082,787
(7,673,140)
38,285,524
23,900,719
(45,804,229)
12,304,476
85,185,448
(88,583,567)
80,153,006
256,283,966
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . .
77,442,712
89,106,498
92,745,342
1,006,024,714
1,066,944,010
845,861,223
516,457,559
478,172,035
454,271,316
239,797,100
227,492,624
142,307,176
540,394,561
460,241,555
203,957,589
End of year . . . . . . . . . . . . . . . . . . .
$ 77,870,620
$ 77,442,712
$ 89,106,498
$ 865,987,367
$1,006,024,714
$1,066,944,010
$508,784,419
$516,457,559
$478,172,035
$193,992,871
$239,797,100
$227,492,624
$451,810,994
$540,394,561
$460,241,555
A11
A12
Op: ron — f88232_a13a14
2001
OPERATIONS
redeemed . . . . . . . . . . . . . . . . .
on investments . . . . . . . . . . . . . .
......
......
$
14,249
0
......
(14,787)
......
(183,179)
OPERATIONS . . . . . . . . . . . . . . . . . . . . .
Policy Loans . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . .
Benefits . . . . . . . . . . . . . . . . . . . . .
....
....
$
1,600
20,121
1999
$
2001
349
1,792
$
(7,315) $
40,882
0
(25,903)
(129,440)
28,848
(223,173)
(183,717)
(101,363)
30,989
604,074
(9,549)
651,285
(948)
96,770
(3,961)
....
1,112
....
(11,390)
....
....
6,356
1999
(3,648) $
56,065
7,979
2001
449
5,479
$
0
(90,696)
(265,995)
43,489
(407,229)
(215,509)
(205,599)
49,417
1,373,089
(5,117)
1,287,439
(5,486)
309,294
(3,633)
(504,772)
(363,108)
73,849
1,805,334
(15,805)
1,854,404
(3,134)
377,988
0
87,453
(16,897)
29,146
(389,519)
OWNER TRANSACTIONS . . . . . . . . . . . . .
422,106
574,351
162,898
969,856
1,062,900
405,665
1,177,023
NET ASSETS . . . . . . . . . . . . . . . . . . . . . .
238,389
472,988
193,887
754,347
857,301
455,082
672,251
193,887
666,875
0
$
193,887
1,312,383
$
2,066,730
(424) $
0
675
0
$
57
4,388
1999
$
(85)
0
0
7,745
2,209
(273,214)
106,728
105,697
65,436
(1,710)
(433,012)
(225,907)
106,304
114,117
72,090
(1,795)
1,126,041
(9,279)
1,090,388
(4,132)
199,838
(3,837)
832,143
(21,608)
418,662
0
100,256
0
0
0
(513)
(88,774)
(5,574)
(832)
(35,185)
(3,353)
(947)
(14,793)
(1,619)
(526)
34,533
(247,849)
154,808
(54,319)
43,762
(570,150)
36,035
(463,187)
438,710
(81,753)
(25,915)
(295,919)
62,504
(225,512)
87,988
(36,163)
139,880
(240,062)
(45,524)
(101,416)
828
(13,904)
1,418,614
734,113
764,052
920,131
246,907
695,838
270,103
86,654
1,055,506
807,962
331,040
694,224
353,211
809,955
342,193
84,859
0
455,082
1,863,468
$
2,535,719
807,962
$
1,863,468
4,309
0
$
807,962
236
1,047,435
$
1,378,475
28
353,211
$
1,047,435
278
0
(5,979)
$
0
2001
2,656
1,312,383
70
American Century
VP
Value
2000
28
455,082
$
(4,451) $
31,841
(445,703)
40,079
(112,378)
$
(6,908) $
72,082
73,745
6,804
(168,945)
8,468
(3) $
107
(461,183)
(40,492)
666,875
$
19,917
(495)
905,264
1999
(52,483)
(3,852)
$
21,244
68,363
MFS Emerging
Growth Series
Portfolio
2001
2000
1999
0
2,749
End of year . . . . . . . . . . . . . . . . . . . . . . .
242
Janus Aspen
Growth
Portfolio
2000
(10,575) $
3,728
28
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . .
165
AIM V.I.
Value
Fund
2000
0
$
353,211
427,052
$
1,237,007
84,859
$
A13
A14
427,052
0
$
84,859
SUBACCOUNTS
T. Rowe Price
International Stock
Portfolio
2000
Op: ron — f88232_a13a14
SUBACCOUNTS
2001
OPERATIONS
redeemed . . . . . . . . . . . . . . . . .
on investments . . . . . . . . . . . . . .
......
......
$
T. Rowe Price
International Stock
Portfolio
2000
14,249
0
......
(14,787)
......
(183,179)
OPERATIONS . . . . . . . . . . . . . . . . . . . . .
Policy Loans . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . .
Benefits . . . . . . . . . . . . . . . . . . . . .
....
....
$
1,600
20,121
1999
$
2001
349
1,792
$
(7,315) $
40,882
0
(25,903)
(129,440)
28,848
(223,173)
(183,717)
(101,363)
30,989
604,074
(9,549)
651,285
(948)
96,770
(3,961)
....
1,112
....
(11,390)
....
....
6,356
1999
(3,648) $
56,065
7,979
2001
449
5,479
$
0
(90,696)
(265,995)
43,489
(407,229)
(215,509)
(205,599)
49,417
1,373,089
(5,117)
1,287,439
(5,486)
309,294
(3,633)
(504,772)
(363,108)
73,849
1,805,334
(15,805)
1,854,404
(3,134)
377,988
0
87,453
(16,897)
29,146
(389,519)
OWNER TRANSACTIONS . . . . . . . . . . . . .
422,106
574,351
162,898
969,856
1,062,900
405,665
1,177,023
NET ASSETS . . . . . . . . . . . . . . . . . . . . . .
238,389
472,988
193,887
754,347
857,301
455,082
672,251
193,887
666,875
0
$
193,887
1,312,383
$
2,066,730
(424) $
0
675
0
$
57
4,388
1999
$
(85)
0
0
7,745
2,209
(273,214)
106,728
105,697
65,436
(1,710)
(433,012)
(225,907)
106,304
114,117
72,090
(1,795)
1,126,041
(9,279)
1,090,388
(4,132)
199,838
(3,837)
832,143
(21,608)
418,662
0
100,256
0
0
0
(513)
(88,774)
(5,574)
(832)
(35,185)
(3,353)
(947)
(14,793)
(1,619)
(526)
34,533
(247,849)
154,808
(54,319)
43,762
(570,150)
36,035
(463,187)
438,710
(81,753)
(25,915)
(295,919)
62,504
(225,512)
87,988
(36,163)
139,880
(240,062)
(45,524)
(101,416)
828
(13,904)
1,418,614
734,113
764,052
920,131
246,907
695,838
270,103
86,654
1,055,506
807,962
331,040
694,224
353,211
809,955
342,193
84,859
0
455,082
1,863,468
$
2,535,719
807,962
$
1,863,468
4,309
0
$
807,962
236
1,047,435
$
1,378,475
28
353,211
$
1,047,435
278
0
(5,979)
$
0
2001
2,656
1,312,383
70
American Century
VP
Value
2000
28
455,082
$
(4,451) $
31,841
(445,703)
40,079
(112,378)
$
(6,908) $
72,082
73,745
6,804
(168,945)
8,468
(3) $
107
(461,183)
(40,492)
666,875
$
19,917
(495)
905,264
1999
(52,483)
(3,852)
$
21,244
68,363
MFS Emerging
Growth Series
Portfolio
2001
2000
1999
0
2,749
End of year . . . . . . . . . . . . . . . . . . . . . . .
242
Janus Aspen
Growth
Portfolio
2000
(10,575) $
3,728
28
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . .
165
AIM V.I.
Value
Fund
2000
0
$
353,211
427,052
$
1,237,007
84,859
$
A13
A14
427,052
0
$
84,859
NOTES TO FINANCIAL STATEMENTS OF
December 31, 2001
Note 1:
General
The Prudential Variable Appreciable Account (the “Account”) of The Prudential Insurance Company of
America (“Prudential”) was established on August 11, 1987 by a resolution of Prudential’s Board of
Directors in conformity with insurance laws of the State of New Jersey. The assets of the Account are
segregated from Prudential’s other assets. Proceeds from the purchases of Prudential Variable Appreciable
Life (“PVAL”), Prudential Survivorship Preferred (“SVUL”) and Prudential Variable Universal Life (“PVUL”)
contracts are invested in the Account.
The Account is registered under the Investment Company act of 1940, as amended, as a unit investment
trust. The Account is a funding vehicle for individual variable life insurance contracts. Each contract offers
the option to invest in various subaccounts, each of which invests in either a corresponding portfolio of The
Prudential Series Fund, Inc. (the “Series fund”) or one of the non-Prudential administered funds. Options
available to the VUL contracts which invest in a corresponding portfolio of the Series Fund are: Prudential
Money Market Portfolio, Prudential Diversified Bond Portfolio, Prudential Equity Portfolio, Prudential
Flexible Managed Portfolio, Prudential Conservative Balanced Portfolio, Prudential High Yield Bond
Portfolio, Prudential Stock Index Portfolio, Prudential Value Portfolio, Prudential Global Portfolio, Prudential
Jennison Portfolio. Options available to the VUL contracts which invest in a corresponding portfolio of the
non-Prudential administered funds are: T. Rowe Price International Stock Portfolio, AIM V.I. Value Portfolio,
Janus Aspen Growth Portfolio, MFS Emerging Growth Series, American Century VP Value Fund.
The Series fund is a diversified open-end management investment company, and is managed by Prudential.
Note 2:
Significant Accounting Policies
The accompanying financial statements are prepared in conformity with accounting principles generally
accepted in the United States of America (“GAAP”). The preparation of the financial statements in
conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts and disclosures. Actual results could differ from those estimates.
Investments—The investments in shares of the Series Fund or the non-Prudential administered funds are
stated at the net asset values of the respective portfolios, which value their investment securities at fair
value..
Security Transactions—Realized gains and losses on security transactions are reported on an average cost
basis. Purchase and sale transactions are recorded as of the trade date of the security being purchased
or sold.
Distributions Received—Dividend and capital gain distributions received are reinvested in additional shares
of the Series Fund or the non-Prudential administered funds and are recorded on the ex-dividend date.
A15
Note 3:
Investment Information for The Prudential Variable Appreciable Account
The net asset value per share for each portfolio of the Series Fund or the non-Prudential administered funds,
the number of shares (rounded) of each portfolio held by the subaccounts and the aggregate cost of
investments in such shares at December 31, 2001 were as follows:
PORTFOLIOS
Number of shares (rounded):
Net asset value per share:
Cost:
Prudential
Money
Market
Portfolio
Prudential
Diversified
Bond
Portfolio
Prudential
Equity
Portfolio
Prudential
Flexible
Managed
Portfolio
Prudential
Conservative
Balanced
Portfolio
14,980,390
$
10.00
$149,803,902
14,392,513
$
11.36
$159,403,802
66,196,529
$
20.49
$1,638,550,300
85,719,169
$
14.79
$1,422,830,400
70,305,010
$
13.69
$1,039,035,686
PORTFOLIOS (Continued)
Cost:
Prudential
High Yield
Bond
Portfolio
Prudential
Stock
Index
Portfolio
Prudential
Value
Portfolio
Prudential
Global
Portfolio
Prudential
Jennison
Portfolio
14,420,485
$
5.40
$105,352,732
27,370,018
$
31.64
$672,627,470
28,407,840
$
17.91
$ 515,238,599
12,687,565
$
15.29
$ 251,767,455
24,330,156
$
18.57
$ 590,108,345
T. Rowe Price
International
Stock
Portfolio
Cost:
$
$
78,924
11.47
1,189,035
AIM V.I.
Value
Fund
$
$
88,511
23.35
2,512,409
A16
Janus
Aspen Growth
Portfolio
$
$
127,487
19.89
3,330,386
MFS
Emerging
Growth Series
$
$
76,667
17.98
1,990,664
American
Century VP
Value Fund
$
$
166,264
7.44
1,067,584
Note 4:
Charges and Expenses
A. Mortality Risk and Expense Risk Charges
The mortality risk and expense risk charges, at an effective annual rates of up to 0.90% are applied
daily against the net assets of PVAL, SVUL and PVUL contract owners held in each subaccount.
Mortality risk is that contract owners may not live as long as estimated and expense risk is that the
cost of issuing and administering the policies may exceed related charges by Prudential. Prudential
currently intends to charge only 0.60% on PVAL contracts with face amounts of $100,000 or more and
for PVUL contracts but reserves the right to make the full 0.90% charge.
B. Deferred Sales Charge
A deferred sales charge is imposed upon surrenders of certain variable life insurance contracts to
compensate 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
A charge is imposed by Prudential on partial withdrawals of the cash surrender value. A charge equal to
the lesser of $25 or 2% for SVUL and VUL and $15 or 2% for PVAL will be made in connection with
each partial withdrawal of the cash surrender value of a contract.
D.
Cost of Insurance and Other Related Charges
Contract owner contributions are subject to certain deductions prior to being invested in the Account.
The deductions are for (1) transaction costs which are deducted from each premium payment for
PVAL and VUL, to cover premium collection and processing costs; (2) state premium taxes; and (3)
sales charges which are deducted in order to compensate Prudential for the cost of selling the
contract. Contracts are also subject to monthly charges for the costs of administering the contract and
to compensate Prudential for the guaranteed minimum death benefit risk.
Note 5:
Taxes
Prudential is taxed as a “life insurance company” as defined by the Internal Revenue Code. The results
of operations of the Account form a part of Prudential’s consolidated federal tax return. Under current
federal law, no federal income taxes are payable by the Account. As such, no provision for tax liability
has been recorded in these financial statements.
A17
Note 6:
Unit Activity
Transactions in units (including transfers among subaccounts) for the years ended December 31, 2001,
2000, and 1999 were as follows:
SUBACCOUNTS
Prudential
Money Market
Portfolio
2001
Prudential
Diversified Bond
Portfolio
2000
1999
2001
2000
1999
Contract Owner Contributions:
105,091,671
114,194,561
120,477,063
18,552,419
14,105,601
22,216,255
Contract Owner Redemptions :
(98,974,223)
(113,537,294)
(114,736,198)
(20,248,087)
(14,109,854)
(20,070,222)
Prudential
Equity
Portfolio
2001
Prudential
Flexible Managed
Portfolio
2000
1999
2001
2000
1999
50,172,529
55,966,094
60,448,440
46,753,155
51,084,427
55,689,347
(53,678,358)
(71,783,274)
(74,869,027)
(56,876,097)
(72,728,803)
(72,365,779)
Prudential
Portfolio
2001
2000
Prudential
High Yield Bond
Portfolio
1999
2001
2000
1999
44,140,060
48,304,976
53,724,364
26,551,188
9,772,562
19,247,980
(58,485,082)
(75,572,311)
(74,929,420)
(25,743,919)
(11,186,778)
(22,299,293)
Prudential
Stock Index
Portfolio
2001
2000
Prudential
Value
Portfolio
1999
2001
2000
1999
31,193,542
18,523,899
47,997,403
26,288,127
10,949,452
27,292,681
(32,538,122)
(9,320,711)
(36,168,261)
(23,928,211)
(16,366,923)
(33,584,226)
Prudential
Global
Portfolio
2001
2000
Prudential
Jennison
Portfolio
1999
2001
2000
1999
49,140,870
54,236,060
42,507,388
55,276,289
83,460,460
81,466,185
(50,342,322)
(28,429,088)
(35,405,377)
(49,463,953)
(27,512,457)
(33,061,952)
T. Rowe Price
International Stock
Portfolio
2001
2000
AIM V.I.
Value Fund
1999
621,120
564,964
156,396
(179,834)
(119,526)
(17,697)
A18
2001
1,010,468
(313,309)
2000
1999
775,493
294,943
(169,319)
(42,273)
Note 6:
Unit Activity (Continued)
Janus Aspen
Growth
Portfolio
2001
MFS Emerging
Growth Series
Portfolio
2000
1,349,084
(484,287)
1999
2001
2000
1999
925,017
440,125
763,094
500,468
159,851
(257,420)
(51,287)
(258,271)
(128,093)
(22,481)
American
Century VP
Value Fund
2001
Note 7:
2000
1999
679,994
376,232
86,847
(172,110)
(130,226)
(11,972)
Purchases and Sales of Investments
The aggregate costs of purchases and proceeds from sales of investments in the Series Fund and the nonPrudential administered fund for the year ended December 31, 2001 were as follows:
PORTFOLIOS
Prudential
Money
Market
Portfolio
Prudential
Diversified
Bond
Portfolio
Prudential
Flexible
Managed
Portfolio
Prudential
Equity
Portfolio
Prudential
Conservative
Balanced
Portfolio
Purchases . . . . . . . . . . . . . . .
$ 119,592,728
$ 17,909,916
$ 56,285,702
$ 26,864,265
$ 17,435,883
Sales . . . . . . . . . . . . . . . . . .
$ (110,483,982)
$ (24,818,260)
$ (87,748,376)
$ (71,028,922)
$ (67,214,182)
Prudential
High Yield
Bond
Portfolio
Prudential
Stock
Index
Portfolio
Prudential
Value
Portfolio
Prudential
Global
Portfolio
Prudential
Jennison
Portfolio
Purchases . . . . . . . . . . . . . . . .
$ 26,431,494
$ 39,362,990
$ 38,739,750
$ 52,785,875
$ 47,166,755
Sales . . . . . . . . . . . . . . . . . . .
$ (25,673,415)
$ (58,285,091)
$ (35,573,088)
$ (56,558,625)
$ (35,791,678)
MFS
Emerging
Growth
Series
Portfolio
American
Century
VP Value
Fund
T. Rowe Price
International
Stock
Portfolio
Note 8:
Janus
Aspen
Growth
Portfolio
AIM V.I.
Value
Fund
Purchases . . . . . . . . . . . . . . . .
$
485,116
$
Sales . . . . . . . . . . . . . . . . . . .
$
(67,564)
$
1,117,633
(157,785)
$
$
1,522,008
(357,051)
$
908,694
$
777,451
$
(151,550)
$
(86,266)
Related Party Transactions
Prudential has purchased multiple PVAL contracts insuring the lives of certain employees. Prudential is the
owner and beneficiary of the contracts. There were no net premium payments for the year ended December
31, 2001. Equity of contracts owners in the Flexible Managed subaccount at December 31, 2001 includes
approximately $241 million owned by Prudential.
Prudential and its affiliates perform various services on behalf of the mutual fund company that administers
the Series Fund in which the Account invests and may receive fees for the services performed. These
services include, among other things, shareholder communications, preparation, postage, fund transfer
agency and various other record keeping and customer service functions.
A19
Note 9:
Financial Highlights
Prudential sells a number of variable life insurance products that are funded by the Account. These products
have unique combinations of features and fees that are charged against the contract owner’s account
balance. Differences in the fee structures result in a variety of unit values, expense ratios and total returns.
The following table was developed by determining which products offered by the Prudential and funded by
the Account have the lowest and highest total return. Only product designs within each subaccount that had
units outstanding throughout the respective periods were considered when determining the lowest and
highest return. The summary may not reflect the minimum and maximum contract charges offered by
Prudential as contract owners may not have selected all available and applicable contract options as
discussed in note 1.
At December 31, 2001
Units
(000s)
Prudential Money Market Portfolio . . . . . . . . . .
83,793
Unit Fair Value
$1.25552 to $1.89767
For the year ended December 31, 2001
Net Assets
(000s)
149,804
Investment
Income
Ratio*
3.97%
Expense
Ratio**
0.60% to 0.90%
Prudential Diversified Bond Portfolio . . . . . . . . .
65,406
$1.31342 to $2.65097
163,499
6.00%
0.60% to 0.90%
Prudential Equity Portfolio. . . . . . . . . . . . . . . .
298,796
$1.37832 to $4.72760
1,356,367
0.83%
0.60% to 0.90%
Total
Return***
3.17% to
3.48%
6.03% to
6.34%
–11.97% to –11.71%
Prudential Flexible Managed Portfolio . . . . . . . .
390,792
$1.26663 to $3.31989
1,267,787
3.76%
0.60% to 0.90%
–6.52% to
–6.24%
Prudential Conservative Balanced Portfolio . . . .
341,217
$1.28828 to $2.89478
962,476
3.40%
0.60% to 0.90%
–2.89% to
–2.60%
–1.32% to
–1.03%
Prudential High Yield Bond Portfolio . . . . . . . . .
37,842
$1.03945 to $2.39981
77,871
11.77%
0.60% to 0.90%
Prudential Stock Index Portfolio . . . . . . . . . . . .
174,445
$1.60022 to $5.33848
865,987
1.00%
0.60% to 0.90%
–12.83% to –12.57%
Prudential Value Portfolio . . . . . . . . . . . . . . . .
105,682
$1.68979 to $5.06872
508,784
1.58%
0.60% to 0.90%
Prudential Global Portfolio . . . . . . . . . . . . . . .
113,393
$1.33447 to $1.73500
193,993
0.35%
0.60% to 0.90%
–18.35% to –18.10%
–2.94% to
Prudential Jennison Portfolio . . . . . . . . . . . . . .
191,014
$1.66508 to $2.39981
451,811
0.17%
0.60% to 0.90%
–18.98% to –18.74%
T. Rowe Price International Stock Portfolio. . . . .
1,025
$0.88282
905
2.44%
0.60% to 0.60%
–22.67% to –22.67%
AIM VI Value Fund . . . . . . . . . . . . . . . . . . . .
1,556
$1.32823
2,067
0.16%
0.60% to 0.60%
–13.08% to –13.08%
Janus Aspen Growth Portfolio . . . . . . . . . . . . .
1,921
$1.31984
2,536
0.07%
0.60% to 0.60%
–25.18% to –25.18%
MFS Emerging Growth Series Portfolio . . . . . . .
1,015
$1.35868
1,378
0.00%
0.60% to 0.60%
–33.88% to –33.88%
American Century VP Value Fund . . . . . . . . . .
829
$1.49259
1,237
0.68%
0.60% to 0.60%
12.15% to
–2.66%
12.15%
* These amounts represent the dividends, excluding distributions of capital gains, received by the subaccount from the underlying mutual fund, net
of management fees assessed by the fund manager, divided by the average net assets. This ratio excludes those expenses, such as mortality
and expense charges, that result in direct reductions in the unit values. The recognition of investment income by the subaccount is affected by the
timing of the declaration of dividends by the underlying fund in which the subaccounts invest.
** These ratios represent the annualized contract expenses of the separate account, consisting primarily of mortality and expense charges, for each
period indicated. The ratios include only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner
accounts through the redemption of units and expenses of the underlying fund are excluded.
*** These amounts represent the total return for the periods indicated, including changes in the value of the underlying fund, and reflect deductions
for all items included in the expense ratio. The total return does not include any expenses assessed through the redemption of units; inclusion of
these expenses in the calculation would result in a reduction in the total return presented.
A20
To the Contract Owners of the
Variable Universal Life Subaccounts of the
Prudential Variable Appreciable Account
and the Board of Directors of
In our opinion, the accompanying statements of net assets and the related statements of operations
and of changes in net assets present fairly, in all material respects, the financial position of each of
the Variable Universal Life Subaccounts (as defined in Note 1) of the Prudential Variable Appreciable
Account at December 31, 2001, and the results of each of their operations and the changes in each of
their net assets for each of the periods presented, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the responsibility of the
management of The Prudential Insurance Company of America; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included confirmation of fund
shares owned at December 31, 2001 with the transfer agents of the investee mutual funds, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
April 15, 2002
A21
Consolidated Statements of Financial Position
December 31, 2001 and 2000 (in Millions)
2001
2000
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost: 2001 - $83,304; 2000 - $83,115) ...........
Held to maturity, at amortized cost (fair value: 2001 - $0; 2000 - $12,615) ......................
Trading account assets, at fair value ...........................................................................................
Equity securities, available for sale, at fair value (cost: 2001 - $992; 2000 - $2,266)...............
Commercial loans........................................................................................................................
Policy loans .................................................................................................................................
Securities purchased under agreements to resell.........................................................................
Cash collateral for borrowed securities .......................................................................................
Other long-term investments.......................................................................................................
Short-term investments................................................................................................................
Total investments.................................................................................................................
$ 85,586
—
882
1,069
14,909
7,930
110
—
3,824
4,048
118,358
$ 83,827
12,448
7,217
2,317
15,919
8,046
5,395
3,858
4,459
5,029
148,515
Cash and cash equivalents...........................................................................................................
Accrued investment income........................................................................................................
Broker-dealer related receivables ................................................................................................
Deferred policy acquisition costs................................................................................................
Other assets..................................................................................................................................
Due from parent and affiliates .....................................................................................................
Separate account assets ...............................................................................................................
TOTAL ASSETS................................................................................................................
6,587
1,551
—
5,122
5,948
5,750
76,736
$ 220,052
7,676
1,916
11,860
7,063
13,506
—
82,217
$ 272,753
LIABILITIES AND STOCKHOLDER’S EQUITY
LIABILITIES
Future policy benefits..................................................................................................................
Policyholders’ account balances .................................................................................................
Unpaid claims and claim adjustment expenses ...........................................................................
Policyholders’ dividends .............................................................................................................
Securities sold under agreements to repurchase..........................................................................
Cash collateral for loaned securities ............................................................................................
Income taxes payable ..................................................................................................................
Broker-dealer related payables....................................................................................................
Securities sold but not yet purchased..........................................................................................
Short-term debt............................................................................................................................
Long-term debt ............................................................................................................................
Other liabilities ............................................................................................................................
Due to parent and affiliates .........................................................................................................
Separate account liabilities ..........................................................................................................
Total liabilities ......................................................................................................................
$ 64,328
33,525
1,647
1,363
6,130
4,808
1,571
—
108
3,837
2,726
7,047
363
76,736
204,189
$ 67,859
32,722
3,549
1,463
15,010
11,053
1,610
5,965
4,959
11,131
2,502
12,105
—
82,217
252,145
—
14,716
1,099
48
15,863
$ 220,052
—
—
234
20,374
20,608
$ 272,753
COMMITMENTS AND CONTINGENCIES (See Note 18)
STOCKHOLDER’S EQUITY
Common Stock ($5.00 par value; 1,000 shares authorized, issued
and outstanding at December 31, 2001) ...............................................................................
Additional paid-in capital............................................................................................................
Accumulated other comprehensive income ...............................................................................
Retained earnings ........................................................................................................................
Total stockholder’s equity....................................................................................................
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY........................................
See Notes to Consolid ated Financial Statements
B-1
Consolidated Statements of Operations
Years Ended December 31, 2001, 2000 and 1999 (in Millions)
2001
2000
1999
REVENUES
Premiums .......................................................................................................................
Policy charges and fee income......................................................................................
Net investment income..................................................................................................
Realized investment gains (losses), net .........................................................................
Commissions and other income ....................................................................................
$ 12,477
1,803
9,147
(709)
4,451
$ 10,181
1,639
9,497
(288)
5,475
$ 9,528
1,516
9,367
924
5,233
Total revenues ........................................................................................................
27,169
26,504
26,568
12,752
1,804
2,722
9,524
—
—
10,640
1,751
2,724
10,043
476
—
10,226
1,811
2,571
9,530
—
100
248
340
143
—
75
—
Total benefits and expenses....................................................................................
27,390
25,777
24,313
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES .................................................................................................
(221)
727
2,255
Income taxes:
Current....................................................................................................................
Deferred..................................................................................................................
(921)
863
434
(28)
690
352
Total income tax expense (benefit).................................................................
(58)
406
1,042
INCOME (LOSS) FROM CONTINUING OPERATIONS....................................
(163)
321
1,213
DISCONTINUED OPERATIONS
Gain (loss) on disposal of healthcare operations, net of taxes ......................................
16
77
(400)
BENEFITS AND EXPENSES
Policyholders’ benefits..................................................................................................
Interest credited to policyholders’ account balances .....................................................
Dividends to policyholders............................................................................................
General and administrative expenses ............................................................................
Capital markets restructuring........................................................................................
Sales practices remedies and costs................................................................................
Demutualization costs and expenses:
Administrative expenses.........................................................................................
Consideration to former Canadian branch policyholders.......................................
NET INCOME (LOSS)...............................................................................................
$
(147)
See Notes to Consolidated Financial Statements
B-2
$
398
$
813
Consolidated Statements of Stockholder’s Equity
Accumulated Other Comprehensive Income (Loss)
Common
Stock
Balance, December 31, 1998..........................
Comprehensive income:
Net income.................................................
Other comprehensive loss, net of tax:
Change in foreign currency
translation adjustments.........................
Change in net unrealized investment
gains...................................................
Additional pension liability
adjustment...........................................
Other comprehensive loss............................
Total comprehensive loss.................................
Net income.................................................
Other comprehensive income, net of tax:
gains...................................................
adjustment...........................................
Other comprehensive income.......................
Total comprehensive income............................
Demutualization reclassification of
retained earnings.........................................
Destacking dividend to parent ..........................
Policy credits issued and cash payments
to be made to eligible policyholders..............
Capital contribution from parent.......................
Net loss before date of demutualization .........
Net income after date of demutualization.......
Other comprehensive income, net of tax:
gains...................................................
adjustment...........................................
Other comprehensive income.......................
Total comprehensive income............................
$
$
—
Additional
Paid-in
Capital
$
Retained
Earnings
Net
Total
Foreign
Unrealized
Accumulated
Currency Investment
Pension
Other
Total
Translation
Gains
Liability Comprehensive Stockholder’s
Adjustments (Losses) Adjustment Income (Loss)
Equity
—
$ 19,163
$ 1,232
$ 20,395
—
—
813
—
—
—
—
813
—
—
—
13
—
—
13
13
—
—
—
—
—
(1,932)
(1,932)
—
—
—
—
—
2
2
(18)
(660)
(7)
(685)
2
(1,917)
(1,104)
19,291
—
—
19,976
—
—
398
—
—
—
—
398
—
—
—
(89)
—
—
(89)
(89)
—
—
—
—
1,019
—
—
—
—
—
—
(11)
(11)
—
—
20,374
(107)
359
(18)
234
(11)
919
1,317
20,608
—
—
13,666
—
(13,666)
(5,384)
—
220
—
(103)
—
16
—
133
—
(5,251)
—
—
—
1,050
(1,129)
—
—
—
—
—
—
—
—
—
(1,129)
1,050
—
—
—
—
(195)
48
—
—
—
—
—
—
—
—
(195)
48
—
—
—
(142)
—
—
(142)
(142)
—
—
—
—
903
—
903
903
—
—
—
—
—
(29)
(29)
—
$ 14,716
$
48
$
$
(31) $ 1,272
(1,932)
(29) $ 1,159
B-3
$
$
(9)
(31)
1,019
$ 1,099
1,019
(29)
732
585
$ 15,863
Consolidated Statements of Cash Flows
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................................................................................
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Realized investment (gains) losses, net ..........................................................................
Policy charges and fee income......................................................................................
Interest credited to policyholders’ account balances........................................................
Depreciation and amortization, including premiums and discounts...................................
Loss (gain) on disposal of healthcare operations, net of taxes...........................................
Change in:
Deferred policy acquisition costs...............................................................................
Future policy benefits and other insurance liabilities....................................................
Trading account assets..............................................................................................
Income taxes payable...............................................................................................
Broker-dealer related receivables/payables.................................................................
Securities purchased under agreements to resell..........................................................
Cash collateral for borrowed securities.......................................................................
Cash collateral for loaned securities...........................................................................
Securities sold but not yet purchased..........................................................................
Securities sold under agreements to repurchase...........................................................
Due from parent and affiliates...................................................................................
Other, net................................................................................................................
2001
2000
1999
$
$
$
(147)
813
709
(482)
1,804
446
(16)
288
(342)
1,751
740
(77)
(915)
(300)
1,811
689
400
(259)
933
2,268
(1,308)
4,538
974
(1,407)
(1,571)
(2,168)
(2,625)
(139)
3,714
(228)
1,473
2,524
214
(388)
8,549
3,266
278
(2,009)
(9,588)
—
1,016
(178)
788
(853)
933
(1,898)
(3,692)
(1,502)
3,643
1,197
3,112
—
(3,486)
5,264
7,865
562
98,150
139
5,503
5,443
764
99,971
3,266
3,025
1,632
2,044
122,790
4,957
3,190
2,640
2,169
(97,492)
(56)
(2,557)
(1,521)
(1,307)
5,912
179
(5,248)
(103,086)
(1,544)
(2,316)
(1,334)
(1,374)
—
(2,257)
—
(124,759)
(2,414)
(2,779)
(2,595)
(2,280)
—
(1,138)
—
Cash flows from operating activities....................................................................
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale/maturity of:
Fixed maturities, available for sale................................................................................
Fixed maturities, held to maturity..................................................................................
Equity securities, available for sale...............................................................................
Commercial loans.......................................................................................................
Other long-term investments........................................................................................
Payments for the purchase of:
Fixed maturities, available for sale................................................................................
Fixed maturities, held to maturity..................................................................................
Equity securities, available for sale...............................................................................
Commercial loans.......................................................................................................
Other long-term investments........................................................................................
Cash acquired from Gibraltar Life.....................................................................................
Short -term investments....................................................................................................
Due from parent and affiliates..........................................................................................
398
7,909
(1,973)
(219)
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholders’ account deposits........................................................................................
Policyholders’ account withdrawals..................................................................................
Net increase (decrease) in short-term debt .........................................................................
Proceeds from the issuance of long-term debt ....................................................................
Repayments of long-term debt..........................................................................................
Capital contribution from parent.......................................................................................
Cash destacked...............................................................................................................
6,771
(9,014)
(6,098)
1,464
(720)
1,050
(7,715)
6,813
(8,186)
(2,678)
638
(1,230)
—
—
7,667
(10,531)
444
1,844
(919)
—
—
Cash flows from (used in) investing activities.......................................................
Cash flows used in financing activities.................................................................
(14,262)
(4,643)
(1,495)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................
(1,089)
1,249
(1,152)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR......................................
7,676
6,427
7,579
CASH AND CASH EQUIVALENTS, END OF YEAR...................................................
$ 6,587
$ 7,676
$ 6,427
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid (received)............................................................................................
$
466
$
248
$
(344)
Interest paid...................................................................................................................
$
638
$ 1,040
$
824
NON-CASH TRANSACTIONS DURING THE YEAR
Policy credits issued and demutualization consideration payable
to eligible policyholders...............................................................................................
$ 1,469
B-4
$
—
$
—
Notes to Consolidated Financial Statements
1. BUSINESS
The Prudential Insurance Company of America (“Prudential Insurance”), together with its subsidiaries (collectively, the
“Company”), is a wholly owned subsidiary of Prudential Holdings, LLC (“Prudential Holdings”), which is a wholly owned
subsidiary of Prudential Financial, Inc. (“Prudential Financial”). The principal products and services of the Company include
individual life insurance, annuities, group insurance and retirement services.
Demutualization and Destacking
On December 18, 2001 (the “date of demutualization”), the Company converted from a mutual life insurance company to a stock
life insurance company and became a direct, wholly owned subsidiary of Prudential Holdings, which became a direct, wholly
owned subsidiary of Prudential Financial. The Company had 1,000 shares of common stock authorized, issued and outstanding
at December 31, 2001, all of which was owned by Prudential Holdings.
On the date of demutualization, policyholder membership interests in Prudential Insurance were extinguished and eligible
policyholders collectively received 457.1 million shares of Common Stock of Prudential Financial, the rights to receive cash
totaling $3,487 million, including $340 million of demutualization consideration payable to former Canadian branch
policyholders pertaining to certain policies Prudential Insurance previously transferred to London Life Insurance Company, and
increases to their policy values in the form of policy credits totaling $1,042 million. Of these amounts, the Company recorded a
liability to policyholders of $427 million for rights to receive cash, including $340 million of demutualization consideration
discussed above, with the remaining amounts being recorded by Prudential Financial, and increases to policy values in the form
of policy credits totaling $1,042 million. The demutualization was accounted for as a reorganization. Accordingly, the
Company’s retained earnings on the date of demutualization, net of the aforementioned cash payments other than those to former
Canadian policyholders and policy credits which were charged directly to retained earnings, were reclassified to “Additional
paid-in capital.”
Concurrent with the demutualization, the Company completed a corporate reorganization (the “destacking”) whereby various
subsidiaries (and certain related assets and liabilities) of the Company were dividended so that they became wholly owned
subsidiaries of Prudential Financial rather than of the Company. The subsidiaries distributed by the Company to Prudential
Financial included its property and casualty insurance companies, its principal securities brokerage companies, its international
insurance companies, its principal asset management operations, its international securities and investments operations, its
domestic banking operations and its residential real estate brokerage franchise and relocation services operations. The
destacking was reflected as a dividend from the Company to Prudential Financial. The effect of the destacking was to decrease
assets by $75,086 million, liabilities by $69,835 million and stockholder’s equity by $5,251 million. For financial reporting
purposes, the destacking is assumed to have occurred on December 31, 2001. The Company’s Consolidated Statements of
Financial Position at December 31, 2001 do not include the destacked companies and operations. The net income for the
destacked companies and operations for the period December 18, 2001 through December 31, 2001 that is included within the
Company’s results of operations was not material.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Prudential Insurance, its majority-owned subsidiaries, and those
partnerships and joint ventures in which the Company has a controlling financial interest, except in those instances where the
Company cannot exercise control because the minority owners have substantive participating rights in the operating and capital
decisions of the entity. The consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”). Intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, in particular deferred policy acquisition costs, investment allowances, future
policy benefits, disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the period. Actual results could differ from those estimates.
B-5
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investments
Fixed maturities classified as “available for sale” are carried at estimated fair value. Fixed maturities that the Company has both
the positive intent and ability to hold to maturity are stated at amortized cost and classified as “held to maturity.” See Note 17
for a discussion of the Company’s reclassificiation of “held to maturity” securities to “available for sale” in connection with the
implementation of new accounting standards for derivatives. The amortized cost of fixed maturities is written down to estimated
fair value when a decline in value is considered to be other than temporary. See the discussion below on realized investment
gains and losses for a description of the accounting for impairment adjustments. Unrealized gains and losses on fixed maturities
“available for sale,” net of income tax and the effect on deferred policy acquisition costs and future policy benefits that would
result from the realization of unrealized gains and losses, are included in a separate component of equity, “Accumulated other
comprehensive income (loss).”
Trading account assets and securities sold but not yet purchased are carried at estimated fair value. Realized and unrealized
gains and losses on trading account assets and securities sold but not yet purchased are included in “Commissions and other
income.”
Equity securities, available for sale, are comprised of common and non-redeemable preferred stock and are carried at estimated
fair value. The associated unrealized gains and losses, net of income tax and the effect on deferred policy acquisition costs and
future policy benefits that would result from the realization of unrealized gains and losses, are included in “Accumulated other
comprehensive income (loss).” See the discussion below on realized investment gains and losses for a description of the
accounting for impairment adjustments.
Commercial loans are stated primarily at unpaid principal balances, net of unamortized discounts and an allowance for losses.
The allowance for losses includes a loan specific reserve for impaired loans and a portfolio reserve for incurred but not
specifically identified losses. Impaired loans include those loans for which it is probable that amounts due according to the
contractual terms of the loan agreement will not all be collected. Impaired loans are measured at the present value of expected
future cash flows discounted at the loan’s effective interest rate, or at the fair value of the collateral if the loan is collateral
dependent. Interest received on impaired loans, including loans that were previously modified in a troubled debt restructuring, is
either applied against the principal or reported as revenue, according to management’s judgment as to the collectibility of
principal. Management discontinues accruing interest on impaired loans after the loans are 90 days delinquent as to principal or
interest, or earlier when management has serious doubts about collectibility. When a loan is recognized as impaired, any accrued
but uncollectible interest is reversed against interest income of the current period. Generally, a loan is restored to accrual status
only after all delinquent interest and principal are brought current and, in the case of loans where the payment of interest has
been interrupted for a substantial period, a regular payment performance has been established. The portfolio reserve for incurred
but not specifically identified losses considers the Company’s past loan loss experience, the current credit composition of the
portfolio, historical credit migration, property type diversification, default and loss severity statistics and other relevant factors.
Policy loans are carried at unpaid principal balances.
Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as collateralized
financing arrangements and are carried at the amounts at which the securities will be subsequently resold or reacquired,
including accrued interest, as specified in the respective agreements. The Company’s policy is to take possession or control of
securities purchased under agreements to resell and to value the securities daily. Assets to be repurchased are the same, or
substantially the same, as the assets transferred. The market value of securities to be repurchased or resold is monitored, and
additional collateral is obtained, where appropriate, to protect against credit exposure.
Securities borrowed and securities loaned are treated as financing arrangements and are recorded at the amount of cash advanced
or received. With respect to securities loaned, the Company obtains collateral in an amount equal to 102% and 105% of the fair
value of the domestic and foreign securities, respectively. The Company monitors the market value of securities borrowed and
loaned on a daily basis with additional collateral obtained as necessary. Substantially all of the Company’s securities borrowed
transactions are with brokers and dealers, commercial banks and institutional clients. Substantially all of the Company’s
securities loaned transactions are with large brokerage firms.
Securities repurchase and resale agreements and securities borrowed and loaned transactions are used to generate net investment
income and facilitate trading activity. These instruments are short-term in nature (usually 30 days or less) and are collateralized
B-6
principally by U.S. Government and mortgage-backed securities. The carrying amounts of these instruments approximate fair
value because of the relatively short period of time between the origination of the instruments and their expected realization.
Other long-term investments primarily represent the Company’s investments in joint ventures and limited partnerships in which
the Company does not exercise control. Other long-term investments also include investments in the Company’s own separate
accounts, which are carried at estimated fair value, investment real estate and derivatives held for purposes other than trading.
See Note 17 for a discussion of accounting policies for derivative instruments. Joint venture and partnership interests are
generally accounted for using the equity method of accounting, reduced for other than temporary declines in value, except in
instances in which the Company’s interest is so minor that it exercises virtually no influence over operating and financial
policies. In such instances, the Company applies the cost method of accounting. The Company’s net income from investments
in joint ventures and partnerships is generally included in “Net investment income.” However, for certain real estate joint
ventures, the Company’s interest is liquidated by means of one or more transactions that result in the sale of the underlying
invested assets to third parties and the ultimate distribution of the proceeds to the Company and other joint venture partners in
exchange for and settlement of the respective joint venture interests. These transactions are accounted for as disposals of the
Company’s joint venture interests and the resulting gains and losses are included in “Realized investment gains (losses), net.”
Real estate held for disposal is carried at the lower of depreciated cost or fair value less estimated selling costs and is not further
depreciated once classified as such. Real estate which the Company has the intent to hold for the production of income is carried
at depreciated cost less any write-downs to fair value for impairment losses and is reviewed for impairment whenever events or
circumstances indicate that the carrying value may not be recoverable. An impairment loss is recognized when the review
indicates that the carrying value of the investment real estate exceeds the estimated undiscounted future cash flows (excluding
interest charges) from the investment. At that time, the carrying value of the investment real estate is written down to fair value.
Depreciation on real estate held for the production of income is computed using the straight-line method over the estimated lives
of the properties, and is included in “Net investment income.”
Short-term investments consist of highly liquid debt instruments with a maturity of greater than three months and less than
twelve months when purchased. These investments are carried at amortized cost, which approximates fair value.
Realized investment gains (losses), net are computed using the specific identification method. Costs of fixed maturities and
equity securities are adjusted for impairments considered to be other than temporary. Impairment adjustments are included in
“Realized investment gains (losses), net.” Factors considered in evaluating whether a decline in value is other than temporary
are: 1) whether the decline is substantial; 2) the Company’s ability and intent to retain the investment for a period of time
sufficient to allow for an anticipated recovery in value; 3) the duration and extent to which the market value has been less than
cost; and 4) the financial condition and near-term prospects of the issuer. Provisions for losses on commercial loans are included
in “Realized investment gains (losses), net.” Decreases in the carrying value of investment real estate held for disposal or for the
production of income are recorded in “Realized investment gains (losses), net.”
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, money market instruments and other debt issues with
a maturity of three months or less when purchased.
Deferred Policy Acquisition Costs
The costs that vary with and that are related primarily to the production of new insurance and annuity busines s are deferred to the
extent such costs are deemed recoverable from future profits. Such costs include commissions, costs of policy issuance and
underwriting, and variable field office expenses. Deferred policy acquisition costs (“DAC”) are subject to recoverability testing
at the end of each accounting period. Deferred policy acquisition costs, for certain products, are adjusted for the impact of
unrealized gains or losses on investments as if these gains or losses had been realized, with corresponding credits or charges
included in “Accumulated other comprehensive income (loss).”
For participating life insurance, DAC is amortized over the expected life of the contracts (up to 45 years) in proportion to
estimated gross margins based on historical and anticipated future experience, which is updated periodically. The average rate of
assumed future investment yield used in estimating expected gross margins was 7.28% at December 31, 2001 and gradually
increases to 8.06% for periods after December 31, 2031. The effect of changes in estimated gross margins on unamortized
deferred acquisition costs is reflected in “General and administrative expenses” in the period such estimated gross margins are
B-7
revised. Policy acquisition costs related to interest-sensitive and variable life products and certain investment-type products are
deferred and amortized over the expected life of the contracts (periods ranging from 7 to 30 years) in proportion to estimated
gross profits arising principally from investment results, mortality and expense margins, and surrender charges based on
historical and anticipated future experience, which is updated periodically. The effect of changes to estimated gross profits on
unamortized deferred acquisition costs is reflected in “General and administrative expenses” in the period such estimated gross
profits are revised. DAC related to non-participating term insurance is amortized over the expected life of the contracts in
proportion to premiums.
The Company has offered programs under which policyholders, for a selected product or group of products, can exchange an
existing policy or contract issued by the Company for another form of policy or contract. These transactions are known as
internal replacements. If policyholders surrender traditional life insurance policies in exchange for life insurance policies that do
not have fixed and guaranteed terms, the Company immediately charges to expense the remaining unamortized DAC on the
surrendered policies. For other internal replacement transactions, the unamortized DAC on the surrendered policies is
immediately charged to expense if the terms of the new policies are not substantially similar to those of the former policies. If
the new policies have terms that are substantially similar to those of the earlier policies, the DAC is retained with respect to the
new policies and amortized over the life of the new policies.
For property and casualty insurance contracts, DAC is amortized over the period in which related premiums are earned. Future
investment income is considered in determining the recoverability of DAC. The property and casualty insurance operations were
destacked on the date of demutualization as discussed in Note 1.
For group life and disability insurance, group annuities and guaranteed investment contracts, acquisition costs are expensed as
incurred.
Separate Account Assets and Liabilities
Separate account assets and liabilities are reported at estimated fair value and represent segregated funds which are invested fo r
certain policyholders, pension funds and other customers. The assets consist of common stocks, fixed maturities, real estate
related securities, real estate mortgage loans and short-term investments. The assets of each account are legally segregated and
are generally not subject to claims that arise out of any other business of the Company. Investment risks associated with market
value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to
certain accounts. The investment income and gains or losses for separate accounts generally accrue to the policyholders and are
not included in the Consolidated Statements of Operations. Mortality, policy administration and surrender charges on the
accounts are included in “Policy charges and fee income.” Asset management fees charged to the accounts are included in
“Commissions and other income.”
Other Assets and Other Liabilities
Other assets consist primarily of prepaid benefit costs, reinsurance recoverables, certain restricted assets, trade receivables,
property and equipment and receivables resulting from sales of securities that had not yet settled at the balance sheet date. In
2000, other assets also include mortgage securitization inventory and mortgage servicing rights of a subsidiary that was
destacked on the date of demutualization. During 2001, the Company sold $1,409 million of commercial mortgage loans and
other securities in securitization transactions versus $1,874 million in 2000, through a subsidiary that was destacked on the date
of demutualization. The Company did not retain any material ownership interest in the financial assets that were transferred.
The Company recognized pretax gains of $42 million in 2001 versus losses of $6 million in 2000 in connection with
securitization and related hedging activity which are recorded in “Commissions and other income.” Property and equipment are
stated at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful
lives of the related assets which generally range from 3 to 40 years. Other liabilities consist primarily of trade payables,
employee benefit liabilities, demutualization consideration not yet paid to policyholders, and payables resulting from purchases
of securities that had not yet settled at the balance sheet date.
Contingencies
Amounts related to contingencies are accrued if it is probable that a liability has been incurred and an amount is reasonably
estimable. Management evaluates whether there are incremental legal or other costs directly associated with the ultimate
resolution of the matter that are reasonably estimable and, if so, they are included in the accrual.
B-8
Policyholders’ Dividends
The amount of the dividends to be paid to policyholders is determined annually by the Company’s Board of Directors. The
aggregate amount of policyholders’ dividends is based on the statutory results and past experience of Prudential Insurance,
including investment income, net realized investment gains or losses over a number of years, mortality experience and other
factors. See Note 9 for further discussion of the impact of policyholders’ dividends on earnings.
Insurance Revenue and Expense Recognition
Premiums from life insurance policies, excluding interest-sensitive life contracts, are recognized when due. Benefits are
recorded as an expense when they are incurred. A liability for future policy benefits is recorded when premiums are recognized
using the net level premium method.
Premiums from non-participating group annuities with life contingencies are recognized when earned. For single premium
immediate annuities and structured settlements with life contingencies, premiums are recognized when earned in a constant
relationship to the amount of expected future benefit payments.
Amounts received as payment for interest-sensitive life contracts, deferred annuities, structured settlements, contracts without
life contingencies and participating group annuities are reported as deposits to “Policyholders’ account balances.” Revenues from
these contracts are reflected in “Policy charges and fee income” and consist primarily of fees assessed during the period against
the policyholders’ account balances for mortality charges, policy administration charges and surrender charges. Benefits and
expenses for these products include claims in excess of related account balances, expenses of contract administration, interest
credited and amortization of DAC.
For group life and disability insurance, and property and casualty insurance, premiums are recognized over the period to which
the premiums relate in proportion to the amount of insurance protection provided. Claim and claim adjustment expenses are
recognized when incurred. The property and casualty insurance operations were destacked on the date of demutualization as
discussed in Note 1.
Premiums, benefits and expenses are stated net of reinsurance ceded to other companies. Estimated reinsurance recoverables and
the cost of reinsurance are recognized over the life of the reinsured policies using assumptions consistent with those used to
account for the underlying policies.
Foreign Currency Translation Adjustments
Assets and liabilities of foreign operations and subsidiaries reported in other than U.S. dollars are translated at the exchange rate
in effect at the end of the period. Revenues, benefits and other expenses are translated at the average rate prevailing during the
period. The effects of translating the statements of financial position of non-U.S. entities with functional currencies other than
the U.S. dollar are included, net of related hedge gains and losses and income taxes, in “Accumulated other comprehensive
income (loss).”
Commissions and Other Income
Commissions and other income principally includes securities and commodities commission revenues and asset management
fees which are recognized in the period in which the services are performed. Realized and unrealized gains from trading
activities of the Company’s securities business are also included in “Commissions and other income.” The Company’s principal
securities brokerage companies, its principal asset management operations and its international securities and investments
operations were destacked on the date of demutualization as discussed in Note 1.
Derivative Financial Instruments
Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices, or
the value of securities or commodities. Derivative financial instruments used by the Company include swaps, futures, forwards
and option contracts and may be exchange-traded or contracted in the over-the-counter market. See Note 17 for a discussion of
the Company’s use of derivative financial instruments and the related accounting and reporting treatment of such instruments.
B-9
Income Taxes
The Company and its domestic subsidiaries file a consolidated federal income tax return with Prudential Financial. The Internal
Revenue Code (the “Code”) limits the amount of non-life insurance losses that may offset life insurance company taxable
income. The Code also imposes an “equity tax” on mutual life insurance companies which, in effect, imputes an additional tax
to the Company based on a formula that calculates the difference between stock and mutual life insurance companies’ earnings.
Effective for the year ended December 31, 2001, the Company, as a stock company, is no longer subject to the equity tax. The
provision for income taxes includes an estimate for changes in the total equity tax to be paid for prior years. Subsidiaries
operating outside the United States are taxed under applicable foreign statutes.
Deferred income taxes are recognized, based on enacted rates, when assets and liabilities have different values for financial
statement and tax reporting purposes. A valuation allowance is recorded to reduce a deferred tax asset to that amount that is
expected to be realized.
Demutualization Costs and Expenses
Demutualization costs and expenses include the cost of engaging external accounting, actuarial, investment banking, legal and
other consultants to advise the Company, the New Jersey Department of Banking and Insurance and the New York State
Insurance Department in the demutualization process and related matters as well as the cost of printing and postage for
communications with policyholders and other administrative costs. Demutualization costs and expenses also include $340
million of demutualization consideration payable to former Canadian branch policyholders pertaining to certain policies that
Prudential Insurance transferred to London Life Insurance Company in 1996 in connection with the sale of most of its Canadian
branch operations. Under the Plan of Reorganization, these policyholders are required to receive demutualization compensation
in the form of cash.
New Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—
a replacement of FASB Statement No. 125.” The Company has adopted the provisions of SFAS No. 140 relating to transfers and
extinguishments of liabilities which are effective for periods occurring after March 31, 2001. The adoption did not have a
material effect on the results of operations of the Company.
In June 2001, the FASB issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible
Assets.” SFAS No. 141 requires that the Company account for all business combinations in the scope of the statement using the
purchase method. SFAS No. 142 requires that an intangible asset acquired either individually or with a group of other assets
shall initially be recognized and measured based on fair value. An intangible asset with a finite life is amortized over its useful
life to the reporting entity; an intangible asset with an indefinite useful life, including goodwill, is not amortized. All indefinite
lived intangible assets shall be tested for impairment in accordance with the statement. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001; however, goodwill and intangible assets acquired after June 30, 2001 are subject
immediately to the nonamortization and amortization provisions of this statement. The Company has ceased the amortization of
goodwill as of January 1, 2002 and believes that the effect of implementing the impairment provisions of this statement will not
be material to its results of operations and financial position.
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS
No. 144 eliminated the requirement that discontinued operations be measured at net realizable value or that entities include
losses that have not yet occurred. SFAS No. 144 eliminated the exception to consolidation for a subsidiary for which control is
likely to be temporary. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower
of book value or fair value less cost to sell. An impairment for assets that are not to be disposed of is recognized only if the
carrying amounts of long-lived assets are not recoverable and exceed their fair values. Additionally, SFAS No. 144 expands the
scope of discontinued operations to include all components of an entity with operations and cash flows that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and,
generally, its provisions are to be applied prospectively. At the date of adoption of this standard, the impact on results of
operations of the Company is not material.
B-10
Reclassifications
Certain amounts in prior years have been reclassified to conform to the current year presentation.
3. DISCONTINUED OPERATIONS
In December 1998, the Company entered into a definitive agreement to sell its healthcare business to Aetna, Inc. (“Aetna”). The
sale was completed on August 6, 1999. The healthcare business is reported as discontinued operations in the accompanying
consolidated financial statements. As of December 31, 1998, the measurement date, the Company recorded a loss on disposal of
$223 million, net of taxes, which included estimated operating losses of the healthcare business subsequent to December 31,
1998 through the date of the sale, the estimated cost of retained liabilities associated with litigation, as well as estimates of other
costs in connection with the disposition of the business. These included facilities closure and systems termination costs,
severance and termination benefits, the impact of modifications to pension and benefit plans, payments to Aetna related to the
Administrative Services Only business and payments in connection with a medical loss ratio agreement (the “MLR Agreement”).
The MLR Agreement provided for payments to Aetna in the event that the medical loss ratios (i.e., incurred medical expense
divided by earned premiums) of the sold businesses were less favorable than levels specified in the MLR Agreement for the
years 1999 and 2000.
The Company retained all liabilities associated with litigation that existed at August 6, 1999 or commenced within two years of
that date with respect to claims that were incurred prior to August 6, 1999. The loss on disposal includes management’s best
estimate of the cost of the ultimate resolution of such litigation as well as the cost of resolving certain matters pertaining to
contractual and regulatory requirements. It is possible that additional adjustments to this estimate may be necessary which might
be material to future results of operations of a particular quarterly or annual period.
The loss on disposal was increased in 1999 by $400 million, net of taxes, primarily as a result of higher than anticipated
healthcare operating losses prior to the August 6, 1999 closing date and an increase in the Company’s estimated obligation under
the MLR Agreement. Actual pretax losses of $370 million during that period exceeded the original estimate of $160 million. In
2000, upon the completion of the period covered by the MLR Agreement and taking into consideration other costs incurred
compared with those estimated in 1998 and 1999, the Company reduced the loss on disposal by $77 million, net of taxes. In
2001, upon the final settlement of the MLR Agreement, the Company reduced the loss on disposal by an additional $16 million,
net of taxes.
Pursuant to a coinsurance agreement with Aetna, the Company was required to issue additional policies for new customers in
response to proposals made to brokers or customers within six months after the closing date and to renew insurance policies until
two years after the closing date. All such additional new and renewal policies were 100% coinsured by Aetna. The purpose of
the agreement was to provide for the uninterrupted operation and growth, including renewals of existing policies and issuance of
new policies, of the healthcare business that Aetna acquired from Prudential Insurance. The operation of the business and the
attendant risks, except for the existence of the MLR Agreement, were assumed entirely by Aetna. Consequently, the following
amounts pertaining to the agreement had no effect on the Company’s results of operations. The Company ceded premiums and
benefits of $966 million and $827 million, respectively for the year ended December 31, 2001. Premium and benefits ceded for
the year ended December 31, 2000 were $1,872 million and $1,418 million, respectively, and for the period from August 6, 1999
through December 31, 1999 were $896 million and $757 million, respectively. Reinsurance recoverable under this agreement,
included in “Other assets,” was $202 million at December 31, 2001 and $355 million at December 31, 2000.
B-11
4. CAPITAL MARKETS RESTRUCTURING
In the fourth quarter of 2000, Prudential Securities Group Inc. exited the lead-managed equity underwriting for corporate issuers
and institutional fixed income businesses. Exiting these businesses resulted in staff reductions of approximately 700 positions,
350 of which were eliminated in 2000 and the remainder in 2001. The positions eliminated included investment bankers, traders,
analysts and other professional and support staff. Results for 2000 include a pretax charge of $476 million in connection with
the restructuring, which is presented as “Capital markets restructuring.” The charge includes $213 million for employee related
costs, consisting largely of severance and termination benefits. The charge also includes the write-off of $140 million of
goodwill previously recorded in connection with investment banking acquisitions. Remaining charges of $123 million consist of
lease termination payments and other facility exit costs, including office equipment and leasehold improvements write-downs,
and other related costs. Prudential Securities Group Inc. was destacked on the date of demutualization as discussed in Note 1.
5. ACQUISITION OF KYOEI LIFE INSURANCE COMPANY, LTD.
In April 2001, the Company completed the acquisition of Kyoei Life Insurance Co., Ltd. (“Kyoei”), a stock life insurance
company located in Japan, which has been accounted for as a purchase. Kyoei was renamed Gibraltar Life Insurance Company,
Ltd. (“Gibraltar Life”) by the Company concurrent with the acquisition. Gibraltar Life provides financial services throughout
Japan. Gibraltar Life primarily offers four types of insurance products: individual insurance, including life and indemnity health
coverage; individual annuities; group life insurance; and group annuities. It distributes these products through an agency force
and large employer groups. Gibraltar Life also has domestic and foreign subsidiaries, including non-insurance businesses, which
are not material to its financial position or results of operations.
On October 20, 2000, Gibraltar Life filed for reorganization under the Reorganization Law of Japan. The Reorganization Law,
similar to Chapter 11 of the U.S. Bankruptcy Code, is intended to provide a mechanism for restructuring financially troubled
companies by permitting the adjustment of the interests of creditors, shareholders and other interested parties. On October 20,
2000, the Tokyo District Court issued an order generally freezing Gibraltar Life’s assets and appointed an interim Trustee who,
on October 23, 2000, was appointed as sole Trustee.
On April 2, 2001, the Tokyo District Court issued its official recognition order approving the Reorganization Plan, which was
submitted by the Trustee and approved by Gibraltar Life’s creditors. The Reorganization Plan became effective immediately
upon the issuance of the recognition order, and is binding upon Gibraltar Life, its creditors, including policyholders, its
shareholders and other interested parties, whether or not they submitted claims or voted for or against the plan. The
Reorganization Plan included the extinguishment of all existing stock for no consideration and the issuance of 1.0 million new
shares of common stock. Pursuant to the Reorganization Plan, on April 19, 2001 the Company contributed ¥50 billion ($395
million) in cash to Gibraltar Life’s capital and on April 20, 2001 received 100% of Gibraltar Life’s newly issued common stock.
The Company also provided ¥98 billion ($775 million) to Gibraltar Life in the form of a subordinated loan. On April 23, 2001,
the Tokyo District Court declared the reorganization proceedings concluded and dismissed the Trustee.
For purposes of inclusion in the Company’s consolidated financial statements, Gibraltar Life has adopted a November 30 fiscal
year end; therefore, the Decemb er 31, 2001 consolidated financial statements include Gibraltar Life’s results of operations for
the period April 2, 2001 through November 30, 2001. The Company’s Consolidated Statements of Operations include income
from continuing operations before income taxes for Gibraltar Life of $238 million. Gibraltar Life was destacked on the date of
demutualization as discussed in Note 1.
B-12
6. INVESTMENTS
Fixed Maturities and Equity Securities
The following tables provide additional information relating to fixed maturities and equity securities (excluding trading account
assets) at December 31,
Amortized
Cost
Fixed maturities available for sale
U.S. Treasury securities and obligations of U.S. government
corporations and agencies..................................................................
Obligations of U.S. states and their political subdivisions.........................
Foreign government bonds....................................................................
Corporate securities .............................................................................
Mortgage-backed securities...................................................................
Total fixed maturities available for sale..................................................
Equity securities available for sale......................................................
$
2001
Gross
Gross
Unrealized Unrealized
Gains
Losses
(In Millions)
7,715
711
1,961
68,130
4,787
$ 83,304
$
192
24
199
2,682
157
$ 3,254
$
$
$
992
Amortized
Cost
188
Estimated
Fair
Value
$
$
33
8
14
898
19
972
$
111
$
2000
Gross
Gross
Gains
Losses
(In Millions)
7,874
727
2,146
69,914
4,925
$ 85,586
1,069
Estimated
Fair
Value
Fixed maturities available for sale
Mortgage-backed securities...................................................................
Total fixed maturities available for sale..................................................
$ 7,068
3,012
4,457
62,066
6,512
$ 83,115
$
358
164
228
1,205
188
$ 2,143
2
3
38
1,374
14
$ 1,431
$ 7,424
3,173
4,647
61,897
6,686
$ 83,827
Equity securities available for sale......................................................
$ 2,266
$
$
$ 2,317
Amortized
Cost
Fixed maturities held to maturity
Total fixed maturities held to maturity....................................................
$
239
$
188
2000
Gross
Gross
Gains
Losses
(In Millions)
Estimated
Fair
Value
7
40
193
12,208
$
—
1
13
343
$
—
1
—
189
$
7
40
206
12,362
$ 12,448
$
357
$
190
$ 12,615
The amortized cost and estimated fair value of fixed maturities by contractual maturities at December 31, 2001, is shown below:
Due in one year or less.....................................................................
Due after one year through five years.................................................
Due after five years through ten years................................................
Due after ten years...........................................................................
Mortgage-backed securities...............................................................
Total .......................................................................................
B-13
Available for Sale
Estimated
Amortized
Fair
Cost
Value
(In Millions)
$ 10,424
$ 10,577
20,859
21,364
20,152
20,676
27,082
28,044
4,787
4,925
$ 83,304
$ 85,586
6. INVESTMENTS (continued)
Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations.
Proceeds from the repayment of held to maturity fixed maturities during 2001, 2000 and 1999 were $139 million, $3,266 million,
and $4,957 million, respectively. Gross gains of $0 million, $8 million, and $73 million were realized on prepayment of held to
maturity fixed maturities during 2001, 2000 and 1999, respectively.
Proceeds from the sale of available for sale fixed maturities during 2001, 2000 and 1999 were $84,629 million, $93,653 million
and $117,685 million, respectively. Proceeds from the maturity of available for sale fixed maturities during 2001, 2000 and
1999 were $13,521 million, $6,318 million and $5,105 million, respectively. Gross gains of $1,270 million, $909 million and
$884 million, and gross losses of $1,136 million, $1,408 million and $1,231 million were realized on sales and prepayments of
available for sale fixed maturities during 2001, 2000 and 1999, respectively. Realized losses included $356 million in 2001
resulting from the sale of substantially all of the Company’s Enron Corp. holdings.
Write-downs for impairments which were deemed to be other than temporary for fixed maturities were $777 million, $540
million and $266 million, and for equity securities were $238 million, $34 million and $205 million for the years ended 2001,
2000 and 1999, respectively.
Due to the adoption of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” on January 1, 2001, the
aggregate amortized cost of the securities transferred to the “available for sale” portfolio was $11,937 million. Unrealized
investment gains of $94 million, net of tax, were recorded in “Accumulated other comprehensive income (loss)” at the time of
the transfer in 2001.
Commercial Loans
The Company’s commercial loans were as follows at December 31,
2001
Amount
(In Millions)
Collateralized loans by property type
Office buildings...............................................................................
Retail stores....................................................................................
Residential properties.......................................................................
Apartment complexes.......................................................................
Industrial buildings..........................................................................
Agricultural properties......................................................................
Other..............................................................................................
Subtotal of collateralized loans...................................................
Valuation allowance.........................................................................
Total collateralized loans..................................................................
2000
% of
Total
$ 3,548 23.5%
2,054 13.6%
158
1.0%
4,203 27.8%
2,685 17.8%
1,908 12.6%
555
3.7%
15,111 100.0%
(202)
$ 14,909
Amount
% of
(In Millions) Total
$ 3,727
23.1%
2,465
15.3%
713
4.4%
4,455
27.6%
2,331
14.4%
1,856
11.5%
597
3.7%
16,144 100.0%
(225)
$ 15,919
The commercial loans are geographically dispersed throughout the United States and Canada with the largest concentrations in
California (27.0%) and New York (10.2%) at December 31, 2001.
Activity in the allowance for losses for commercial loans, for the years ended December 31, is summarized as follows:
2001
Allowance for losses, beginning of year .............................................
Allowance on loans acquired from Gibraltar Life................................
Addition (release) of allowance for losses...........................................
Charge-offs, net of recoveries............................................................
Change in foreign exchange..............................................................
Destacking......................................................................................
Allowance for losses, end of year......................................................
B-14
$ 225
739
(24)
(412)
7
(333)
$ 202
2000
(In Millions)
$ 221
—
17
(13)
—
—
$ 225
1999
$ 427
—
(201)
(5)
—
—
$ 221
Impaired commercial loans identified in management’s specific review of probable loan losses and the related allowance for
losses at December 31, are as follows:
Impaired commercial loans with allowance for losses..........................
Impaired commercial loans with no allowance for losses......................
Allowance for losses, end of year......................................................
Net carrying value of impaired commercial loans................................
2001
2000
(In Millions)
$ 155
$ 192
222
247
(36)
(35)
$ 341
$ 404
Impaired commercial loans with no allowance for losses are loans in which the fair value of the collateral or the net present value
of the loans’ expected future cash flows equals or exceeds the recorded investment. The average recorded investment in
impaired loans before allowance for losses was $407 million, $565 million and $884 million for 2001, 2000 and 1999,
respectively. Net investment income recognized on these loans totaled $32 million, $37 million and $55 million for the years
ended December 31, 2001, 2000 and 1999, respectively.
Other Long-term Investments
The Company’s “Other long-term investments” include investments in joint ventures and limited partnerships of $2,091 million
and $2,391 million at December 31, 2001 and 2000, respectively. These investments include $957 million and $1,363 million in
real estate related interests and $1,134 million and $1,028 million in non-real estate related interests at December 31, 2001 and
2000, respectively. The Company’s share of net income from such entities was $84 million, $187 million and $217 million for
the years ended 2001, 2000 and 1999, respectively, and is reported in “Net investment income.”
Summarized combined financial information for joint ventures and limited partnership interests accounted for under the equity
method, in which the Company has an investment of $10 million or greater and an equity interest of 10% or greater, is as
follows:
At December 31,
2001
2000
(In Millions)
STATEMENTS OF FINANCIAL POSITION
Investments in real estate........................................................................
Investments in securities.........................................................................
Cash and cash equivalents.......................................................................
Other assets...........................................................................................
Total assets ..........................................................................................
Borrowed funds-third party.....................................................................
Borrowed funds-Prudential Financial.......................................................
Other liabilities......................................................................................
Total liabilities.....................................................................................
Partners’ capital ..................................................................................
Total liabilities and partners’ capital ....................................................
Equity in partners’ capital included above................................................
Equity in limited partnership interests not included above..........................
Carrying value.....................................................................................
$ 3,603
1,694
87
208
$ 5,592
$ 3,617
1,899
111
173
$ 5,800
$
598
2
1,399
1,999
3,593
$ 5,592
$
$
$ 1,030
1,361
$ 2,391
971
1,120
$ 2,091
598
—
1,450
2,048
3,752
$ 5,800
For the years ended
December 31,
2001
2000
1999
(In Millions)
Income of real estate joint ventures..........................................................
Income of other limited partnership interests.............................................
Interest expense-third party.....................................................................
Other expenses......................................................................................
Net earnings.........................................................................................
Equity in net earnings included above......................................................
Equity in net earnings of limited partnership interests not included above....
Total equity in net earnings..................................................................
B-15
$ 245
142
(31)
(251)
$ 105
$ 257
256
(31)
(226)
$ 256
$ 102
530
(7)
(121)
$ 504
$
$
$ 122
95
$ 217
$
37
47
84
79
108
$ 187
“Other long-term investments” also includes investments in the Company’s separate accounts of $975 million and $1,077
million, investment real estate of $148 million and $239 million which is held through direct ownership and other miscellaneous
investments of $610 million and $752 million at December 31, 2001 and 2000, respectively. Of the Company’s real estate, $146
million and $181 million consist of commercial and agricultural assets held for disposal at December 31, 2001 and 2000,
respectively. Impairment losses were $7 million, $0 million and $3 million for the years ended December 31, 2001, 2000 and
1999, respectively, and are included in “Realized investment gains (losses), net.”
Net Investment Income
Net investment income for the years ended December 31, was from the following sources:
2001
Fixed maturities available for sale............................................................
Fixed maturities held to maturity .............................................................
Trading account assets............................................................................
Equity securities available for sale...........................................................
Commercial loans..................................................................................
Policy loans...........................................................................................
Securities purchased under agreements to resell........................................
Broker-dealer related receivables.............................................................
Short -term investments and cash equivalents............................................
Other investment income........................................................................
Gross investment income........................................................................
Less investment expenses.......................................................................
Subtotal.........................................................................................
Less amount relating to discontinued operations........................................
Net investment income...........................................................................
2000
1999
(In Millions)
$ 6,826
$ 5,938
$ 5,602
12
1,028
1,217
294
734
622
45
67
63
1,432
1,370
1,401
522
478
448
11
28
25
513
1,222
976
461
683
490
419
479
455
10,535
12,027
11,299
(1,388)
(2,530)
(1,881)
9,147
9,497
9,418
—
—
(51)
$ 9,147
$ 9,497
$ 9,367
Based on the carrying value, assets categorized as “non-income producing” at December 31, 2001 included in fixed maturities,
equity securities, commercial loans and other long-term investments totaled $47 million, $6 million, $19 million and $33 million,
respectively.
Realized Investment Gains (Losses), Net
Realized investment gains (losses), net, for the years ended December 31, were from the following sources:
2001
Fixed maturities.....................................................................................
Equity securities available for sale...........................................................
Commercial loans..................................................................................
Investment real estate.............................................................................
Joint ventures and limited partnerships.....................................................
Derivatives............................................................................................
Other....................................................................................................
Subtotal.........................................................................................
Less amount related to discontinued operations.........................................
Realized investment gains (losses), net.....................................................
$ (639)
(245)
1
40
—
120
14
(709)
—
$ (709)
2000
(In Millions)
$ (1,066)
$
450
(5)
49
124
165
(5)
(288)
—
$ (288)
$
1999
(557)
223
209
106
656
305
(27)
915
9
924
The “joint ventures and limited partnerships” category includes net realized investment gains relating to real estate joint
ventures’ and partnerships’ sales of their underlying invested assets, as described more fully in Note 2, “Investments,” amounting
to $0 million, $91 million and $114 million for the years ended 2001, 2000 and 1999, respectively.
B-16
Net Unrealized Investment Gains (Losses)
Net unrealized investment gains and losses on securities available for sale and certain other long-term investments are included
in the Consolidated Statements of Financial Position as a component of “Accumulated other comprehensive income (loss).”
Changes in these amounts include reclassification adjustments to exclude from “Other comprehensive income (loss)” those items
that are included as part of “Net income” for a period that had been part of “Other comprehensive income (loss)” in earlier
periods. The amounts for the years ended December 31, are as follows:
Balance, December 31, 1998........................................................
Net investment gains (losses) on investments arising during
the period.............................................................................
Reclassification adjustment for (gains) losses included in net
income.................................................................................
Impact of net unrealized investment (gains) losses on deferred
policy acquisition costs..........................................................
Impact of net unrealized investment (gains) losses on future
policy benefits......................................................................
the period.............................................................................
income.................................................................................
policy benefits......................................................................
the period.............................................................................
income.................................................................................
policy benefits......................................................................
Destacking dividend to parent ......................................................
Impact of unrealized investment gains (losses) on:
Accumulated
other
comprehensive
Deferred income (loss)
Unrealized Deferred
income
related to net
gains
policy
Future
tax
unrealized
(losses) on acquisition
policy
(liability)
investment
investments
costs
benefits
benefit
gains (losses)
(In Millions)
$ 3,337
$ (260) $ (1,095) $ (710)
$ 1,272
(5,089)
—
—
1,845
(3,244)
404
—
—
(146)
258
—
566
—
(213)
353
—
(1,348)
—
306
1,092
(3)
(391)
385
701
(660)
1,458
—
—
(540)
918
621
—
—
(230)
391
—
(356)
—
132
(224)
—
731
—
(50)
(101)
(104)
35
(218)
(66)
359
796
—
—
(294)
502
884
—
—
(327)
557
—
(270)
—
97
(173)
(10)
50
$ (702)
17
(103)
$ 1,159
—
(156)
$ 2,255
—
3
$ (317)
$
27
—
(77)
The table below presents unrealized gains (losses) on investments by asset class:
At December 31,
2000
1999
(In Millions)
$ 2,282
$ 712
$ (2,118)
77
51
733
(104)
(32)
37
$ 2,255
$ 731
$ (1,348)
2001
Fixed maturities..........................................................................
Equity securities.........................................................................
Other long-term investments........................................................
Unrealized gains (losses) on investments.......................................
B-17
Securities Pledged, Restricted Assets and Special Deposits
The Company pledges investment securities it owns to unaffiliated parties through certain transactions, including securities
lending, securities sold under agreement to repurchase and futures contracts. At December 31, the carrying value of investments
pledged to third parties as reported in the Consolidated Statements of Financial Position included the following:
Fixed maturities available for sale........................................
Trading account assets........................................................
Separate account assets.......................................................
Total securities pledged......................................................
2001
2000
(In Millions)
$ 11,009
$ 20,080
269
5,796
2,659
2,558
$ 13,937
$ 28,434
In the normal course of its business activities, the Company accepts collateral that can be sold or repledged. The primary sources
of this collateral are securities in customer accounts, securities purchased under agreements to resell and securities borrowed
transactions. At December 31, 2001, the fair value of this collateral was approximately $5,162 million versus $19,329 million in
2000 of which $4,932 million versus $13,099 million in 2000 had either been sold or repledged.
Assets of $237 million and $2,538 million at December 31, 2001 and 2000, respectively, were on deposit with governmental
authorities or trustees as required by certain insurance laws. Additionally, assets valued at $960 million and $1,227 million at
December 31, 2001 and 2000, respectively, were held in voluntary trusts. Of these amounts, $244 million and $470 million at
December 31, 2001 and 2000, respectively, related to the multi-state policyholder settlement described in Note 18. The
remainder relates to trusts established to fund guaranteed dividends to certain policyholders and to fund certain employee
benefits. Assets valued at $140 million and $48 million at December 31, 2001 and 2000, respectively, were pledged as collateral
for bank loans and other financing agreements. Letter stock or other securities restricted as to sale amounted to $183 million and
$779 million at December 31, 2001 and 2000, respectively. Restricted cash and securities of $0 million and $2,196 million at
December 31, 2001 and 2000, respectively, were included in “Other assets.” The restricted cash represents funds deposited by
clients and funds accruing to clients as a result of trades or contracts.
7. DEFERRED POLICY ACQUISITION COSTS
The balances of and changes in deferred policy acquisition costs as of and for the years ended December 31, are as follows:
2001
Balance, beginning of year..................................................
Capitalization of commissions, sales and issue expenses........
Amortizat ion.....................................................................
Change in unrealized investment gains and losses .................
Foreign currency translation................................................
Acquisition of subsidiary....................................................
Destacking........................................................................
$ 7,063
1,385
(1,126)
(270)
(184)
—
(1,746)
Balance, end of year...........................................................
$ 5,122
2000
1999
(In Millions)
$ 7,324
$ 6,462
1,324
1,333
(1,096)
(1,155)
(356)
566
(154)
118
21
—
—
—
$ 7,063
$ 7,324
8. POLICYHOLDERS’ LIABILITIES
Future Policy Benefits
Future policy benefits at December 31, are as follows:
Life insurance....................................................................
Annuities..........................................................................
Other contract liabilities.....................................................
Total future policy benefits.................................................
2001
2000
(In Millions)
$ 50,886
$ 53,453
13,046
13,398
396
1,008
$ 64,328
$ 67,859
Participating insurance represented 37% and 40% of domestic individual life insurance in force at December 31, 2001 and 2000,
respectively, and 92%, 94% and 95% of domestic individual life insurance premiums for 2001, 2000 and 1999, respectively.
B-18
8. POLICYHOLDERS’ LIABILITIES (continued)
Life insurance liabilities include reserves for death and endowment policy benefits, terminal dividends and certain health
benefits. Annuity liabilities include reserves for life contingent immediate annuities and life contingent group annuities. Other
contract liabilities primarily consist of unearned premium and benefit reserves for group health products.
The following table highlights the key assumptions generally utilized in calculating these reserves (excluding consideration of
premium deficiency reserves):
Product
Life insurance.......................
Mortality
For Closed Block policies, rates guaranteed in
calculating cash surrender values; for remaining
policies, based on company experience or
standard industry tables established at policy
issue
Interest Rate
2.5% to 11.3%
Estimation Method
Net level premium
Individual annuities...............
1971 IAM, 1983 IAM and A2000 individual
annuity mortality tables with certain
modifications based on company experience
established at policy issue
3.5% to 13.4%
Present value of expected future payments
based on historical experience
Group annuities....................
1951 and 1983 Group Annuity Mortality Tables
with certain modifications based on company
experience established at policy issue
4.0% to 17.3%
2.5% to 11.5%
Other contract liabilities........
Premium deficiency reserves are established, if necessary, when the liability for future policy benefits plus the present value of
expected future gross premiums are determined to be insufficient to provide for expected future policy benefits and expenses and
to recover any unamortized policy acquisition costs. Premium deficiency reserves have been recorded for the group single
premium annuity business, which consists of limited-payment, long duration traditional and non-participating annuities;
structured settlements and single premium immediate annuities with life contingencies; and for certain individual health policies.
Liabilities of $1,867 million and $2,002 million are included in “Future policy benefits” with respect to these deficiencies at
December 31, 2001 and 2000, respectively.
Policyholders’ Account Balances
Policyholders’ account balances at December 31, are as follows:
Individual annuities...........................................................................
Group annuities................................................................................
Guaranteed investment contracts and guaranteed interest accounts.........
Interest -sensitive life contracts...........................................................
Dividend accumulations and other......................................................
2001
2000
(In Millions)
$ 5,243
$ 5,097
1,900
2,022
13,031
12,852
3,788
3,809
9,563
8,942
Policyholders’ account balances.........................................................
$ 33,525
$ 32,722
Policyholders’ account balances for interest-sensitive life and investment-type contracts represent an accumulation of account
deposits plus credited interest less withdrawals, expenses and mortality charges.
B-19
8. POLICYHOLDERS’ LIABILITIES (continued)
Certain contract provisions that determine the policyholders’ account balances are as follows:
Product
Individual annuities.............................................
Interest Rate
2.5% to 16.0%
Withdrawal/Surrender Charges
0% to 7% for up t o 9 years
Group annuities..................................................
2.0% to 13.9%
Contractually limited or subject to market value
adjustment
Guaranteed investment contracts and
guaranteed interest accounts.............................
3.0% to 15.4%
Generally, subject to market value withdrawal
provisions for any funds withdrawn other than
for benefit responsive and contractual payments
Interest -sensitive life contracts.............................
3.0% to 6.8%
Various up to 10 years
Dividend accumulations and other........................
2.0% to 11.5%
Generally, not subject to withdrawal/surrender
charges, except for certain contracts where
withdrawal/surrender is limited or subject to a
market value adjustment
Unpaid Claims and Claim Adjustment Expenses
The following table provides a reconciliation of the activity in the liability for unpaid claims and claim adjustment expenses for
property and casualty insurance, which includes the Company’s wind-down commercial lines business, primarily environmental
and asbestos-related claims, and accident and health insurance at December 31:
Balance at January 1.............................
Less reinsurance recoverables, net ..........
Net balance at January 1........................
Incurred related to:
Current year.....................................
Prior years.......................................
Total incurred.......................................
Paid related to:
Current year.....................................
Prior years.......................................
Total paid ............................................
Acquisitions (dispositions) (a)................
Destacking...........................................
Net balance at December 31...................
Plus reinsurance recoverables, net...........
Balance at December 31........................
Accident
and
Health
2001
Property
and
Casualty
2000
Accident
Property
and
and
Health
Casualty
(In Millions)
$ 1,735
$ 2,409
378
451
1,357
1,958
$ 1,701
246
1,455
$ 1,848
608
1,240
632
(45)
587
1,440
(113)
1,327
537
(22)
515
219
312
531
15
(8)
1,518
129
$ 1,647
932
553
1,485
—
(1,082)
—
—
$
—
152
265
417
—
—
1,455
246
$ 1,701
Accident
and
Health
1999
Property
and
Casualty
$ 2,307
50
2,257
$ 2,716
533
2,183
1,271
(150)
1,121
4,218
(73)
4,145
1,249
(54)
1,195
842
634
1,476
(363)
—
1,240
608
$ 1,848
3,206
874
4,080
(965)
—
1,357
378
$ 1,735
700
720
1,420
—
—
1,958
451
$ 2,409
(a) The 2001 accident and health increase relates to the acquisition of Gibraltar Life which was subsequently destacked. The reduction in the 2000 property
and casualty balance is primarily attributable to the sale of Gibraltar Casualty Company; the 1999 accident and health reduction relates to the sale of the
Company’s healthcare business.
The accident and health reinsurance recoverable balance at December 31, 2001, 2000 and 1999 includes $117 million, $239
million and $371 million, respectively, attributable to the Company’s discontinued healthcare business. The accident and health
balance at January 1, 1999 includes $1,026 million attributable to the Company’s discontinued healthcare business.
The unpaid claims and claim adjustment expenses presented above include estimates for liabilities associated with reported
claims and for incurred but not reported claims based, in part, on the Company’s experience. Changes in the estimated cost to
settle unpaid claims are charged or credited to the Consolidated Statements of Operations periodically as the estimates are
revised. Accident and health unpaid claims liabilities are discounted using interest rates ranging from 3.5% to 7.5%.
The amounts incurred for claims and claim adjustment expenses for property and casualty related to prior years were primarily
driven by lower than anticipated losses for the auto line of business. The amounts incurred for claims and claim adjustment
expenses for accident and health related to prior years were primarily due to improved long-term disability claim termination
experience.
B-20
9. CLOSED BLOCK
Effective with demutualization, the Company adopted the American Institute of Certified Public Accountants Statement of
Position (“SOP”) 00-3, “Accounting by Insurance Enterprises for Demutualizations and Formations of Mutual Insurance
Holding Companies and For Certain Long-Duration Participating Contracts.” SOP 00-3 addresses financial statement
presentation and accounting for certain participating policies after demutualization, accounting for demutualization expenses,
and accounting for retained earnings and other comprehensive income at the date of demutualization.
On the date of demutualization, Prudential Insurance established a Closed Block for certain individual life insurance policies and
annuities issued by Prudential Insurance in the United States. The Company established a separate closed block for participating
individual life insurance policies issued by the Canadian branch of Prudential Insurance. Because of the substantially smaller
number of outstanding Canadian policies, this separate closed block is insignificant in size and is not included in the information
presented below.
The policies included in the Closed Block are specified individual life insurance policies and individual annuity contracts that
were in force on the effective date of the Plan of Reorganization and for which Prudential Insurance is currently paying or
expects to pay experience-based policy dividends. Assets have been allocated to the Closed Block in an amount that has been
determined to produce cash flows which, together with revenues from policies included in the Closed Block, are expected to be
sufficient to support obligations and liabilities relating to these policies, including provision for payment of benefits, certain
expenses, and taxes and to provide for continuation of the policyholder dividend scales in effect in 2000, assuming experience
underlying such scales continues. To the extent that, over time, cash flows from the assets allocated to the Closed Block and
claims and other experience related to the Closed Block are, in the aggregate, more or less favorable than what was assumed
when the Closed Block was established, total dividends paid to Closed Block policyholders in the future may be greater than or
less than the total dividends that would have been paid to these policyholders if the policyholder dividend scales in effect in 2000
had been continued. Any cash flows in excess of amounts assumed will be available for distribution over time to Closed Block
policyholders and will not be available to stockholders. If the Closed Block has insufficient funds to make guaranteed policy
benefit payments, such payments will be made from assets outside of the Closed Block. The Closed Block will continue in
effect as long as any policy in the Closed Block remains in force unless, with the consent of the New Jersey insurance regulator,
it is terminated earlier.
The recorded assets and liabilities were allocated to the Closed Block at their historical carrying amounts. The excess of Closed
Block Liabilities over Closed Block Assets at the effective date of the demutualization (adjusted to eliminate the impact of
related amounts in “Accumulated other comprehensive income (loss)”) represents the estimated maximum future earnings from
the Closed Block expected to result from operations attributed to the Closed Block after income taxes. As required by SOP 00-3,
the Company developed an actuarial calculation of the timing of such maximum future earnings. If actual cumulative earnings in
any given period are greater than the expected cumulative earnings, only the expected earnings will be recognized in income.
Any excess of actual cumulative earnings over expected cumulative earnings will represent undistributed accumulated earnings
attributable to policyholders and will be recorded as a policyholder dividend obligation to be paid to Closed Block policyholders
as an additional policyholder dividend unless otherwise offset by future Closed Block performance that is less favorable than
originally expected. As of December 31, 2001, no such additional policyholder dividends were recorded. If over such period,
the actual cumulative earnings of the Closed Block are less than the expected cumulative earnings of the Closed Block, the
Company will recognize only the actual earnings in income. However, the Company may change policyholder dividend scales
in the future, which would be intended to increase future actual earnings until the actual cumulative earnings equal the expected
cumulative earnings.
On November 13, 2001, the Company’s Board of Directors acted to reduce dividends, effective January 1, 2002, on Closed
Block policies to reflect unfavorable investment experience that has emerged since July 1, 2000, the date the Closed Block was
originally funded. This action resulted in a $104 million reduction of the liability for policyholder dividends recognized in the
year ended December 31, 2001.
B-21
9. CLOSED BLOCK (continued)
Closed Block Liabilities and Assets designated to the Closed Block at December 31, 2001, as well as maximum future earnings
to be recognized from Closed Block Liabilities and Closed Block Assets, are as follows:
Closed Block Liabilities and Closed Block Assets
December 31, 2001
(In Millions)
Closed Block Liabilities
Future policy benefits.......................................................................
Policyholders’ dividends payable.......................................................
Policyholders’ account balances.........................................................
Other Closed Block liabilities............................................................
Total Closed Block Liabilities....................................................
$ 47,239
1,171
5,389
4,603
$ 58,402
Closed Block Assets
Total investments.............................................................................
Cash................................................................................................
Accrued investment income...............................................................
Other Closed Block assets.................................................................
Total Closed Block Assets.........................................................
$ 52,492
1,810
716
635
$ 55,653
Excess of reported Closed Block Liabilities over Closed Block Assets...........
Portion of above representing other comprehensive income..........................
$ 2,749
792
Maximum future earnings to be recognized from Closed Block Assets
and Closed Block Liabilities..................................................................
$ 3,541
Closed Block revenues and benefits and expenses for the period from the date of demutualization through December 31, 2001
were as follows:
December 18, 2001
through
December 31, 2001
(In Millions)
Closed Block Revenues and Benefits and Expenses
Revenues
Premiums..............................................................................................
Net investment income...........................................................................
Realized investment gains, net.................................................................
Other income.........................................................................................
$
293
129
24
3
Total Closed Block revenues...............................................................
449
Benefits and Expenses
Policyholders’ benefits...........................................................................
Interest credited to policyholders’ account balances...................................
Dividends to policyholders.....................................................................
General and administrative expense charge...............................................
288
5
100
33
Total Closed Block benefits and expenses............................................
426
Closed Block benefits and expenses, net of Closed Block
revenues before income taxes..............................................................
23
Income taxes.............................................................................................
2
Closed Block benefits and expenses, net of Closed Block revenues
and income taxes...................................................................................
$
21
10. REINSURANCE
The Company participates in reinsurance in order to provide additional capacity for future growth and limit the maximum net
loss potential arising from large risks. Life reinsurance is accomplished through various plans of reinsurance, primarily yearly
renewable term and coinsurance. Property and casualty reinsurance is placed on a pro-rata basis and excess of loss, including
stop loss, basis. Reinsurance ceded arrangements do not discharge the Company as the primary insurer. Ceded balances would
represent a liability of the Company in the event the reinsurers were unable to meet their obligations to the Company under the
terms of the reinsurance agreements. Reinsurance premiums, commissions, expense reimbursements, benefits and reserves
related to reinsured long-duration contracts are accounted for over the life of the underlying reinsured contracts using
assumptions consistent with those used to account for the underlying contracts. The cost of reinsurance related to short-duration
contracts is accounted for over the reinsurance contract period. Amounts recoverable from reinsurers, for both short and longduration reinsurance arrangements, are estimated in a manner consistent with the claim liabilities and policy benefits associated
with the reinsured policies.
B-22
10. REINSURANCE (continued)
The tables presented below exclude amounts pertaining to the Company’s discontinued healthcare operations. See Note 3 for a
discussion of the Company’s coinsurance agreement with Aetna.
Reinsurance amounts included in the Consolidated Statements of Operations for the years ended December 31, were as follows:
2001
Direct premiums......................................................................
Reinsurance assumed............................................................
Reinsurance ceded................................................................
Premiums................................................................................
2000
(In Millions)
$ 13,066
$ 10,686
95
86
(684)
(591)
$ 12,477
$ 10,181
$ 10,121
66
(659)
$ 9,528
Policyholders’ benefits ceded....................................................
$
$
845
$
642
1999
483
Reinsurance recoverables, included in “Other assets” at December 31, were as follows:
Life insurance..........................................................................
Property and casualty ...............................................................
Other reinsurance.....................................................................
2001
2000
(In Millions)
$
712
$
674
—
628
82
76
Total reinsurance recoverable....................................................
$
794
$ 1,378
Three major reinsurance companies account for approximately 67% of the reinsurance recoverable at December 31, 2001. The
Company periodically reviews the financial condition of its reinsurers and amounts recoverable therefrom in order to minimize
its exposure to loss from reinsurer insolvencies, recording an allowance when necessary for uncollectible reinsurance.
Reinsurance recoverables, included in “Due from parent and affiliates” and reinsurance payables included in “Due to parent and
affiliates” at December 31, 2001, were $309 million and $128 million, respectively. Reinsurance recoverables and payables are
due from/to the following companies: Prudential Life Insurance Company of Taiwan Inc., The Prudential Life Insurance
Company of Korea, Ltd., The Prudential Life Insurance Company, Ltd., Prumerica Life S.P.A. and The Prumerica Life Insurance
Company, Inc.
11. SHORT-TERM AND LONG-TERM DEBT
Short-term Debt
Short-term debt at December 31, is as follows:
Commercial paper....................................................................
Notes payable..........................................................................
Current portion of long-term debt ..............................................
Total short-term debt................................................................
2001
2000
(In Millions)
$ 3,022
$ 7,686
61
2,728
754
717
$ 3,837
$ 11,131
The weighted average interest rate on outstanding short-term debt, excluding the current portion of long-term debt, was
approximately 4.6% and 6.4% at December 31, 2001 and 2000, respectively.
At December 31, 2001, the Company had $4,075 million in committed lines of credit from numerous financial institutions, all of
which were unused. These lines of credit generally have terms ranging from one to five years.
The Company issues commercial paper primarily to manage operating cash flows and existing commitments, meet working
capital needs and take advantage of current investment opportunities. At December 31, 2001 and 2000, a portion of commercial
paper borrowings were supported by $4,000 million and $3,500 million of the Company’s existing lines of credit, respectively.
At December 31, 2001 and 2000, the weighted average maturity of commercial paper outstanding was 21 and 25 days,
respectively.
B-23
11. SHORT-TERM AND LONG-TERM DEBT (continued)
Long-term Debt
Long-term debt at December 31, is as follows:
Description
Fixed rate notes
U.S. Dollar..................................................................
Floating rate notes (“FRNs”)
U.S. Dollar..................................................................
Canadian Dollar ...........................................................
Great Britain Pound......................................................
Surplus notes...................................................................
Total long-term debt.........................................................
Maturity
Dates
Rate
2001
2000
(In Millions)
2002-2023
5.97%-8.17%
$ 1,066
$ 758
2002-2004
2003
2002
2003-2025
(a)
(b)
(c)
6.875%-8.30%
591
80
—
989
$ 2,726
640
96
20
988
$ 2,502
(a) The interest rates on the U.S. dollar denominated FRNs are generally based on rates such as LIBOR, Constant Maturity Treasury and the Federal Funds Rate.
Interest rates on the U.S. dollar denominated FRNs ranged from 2.07% to 6.99% in 2001 and 5.99% to 7.08% in 2000. The 2000 interest rate range excludes
a $29 million S&P 500 index linked note which had an interest rate range of 0.10% to 0.46%.
(b) The interest rate on the Canadian Dollar denominated FRN is based on the Canadian Bankers Acceptances Rate (CADBA) less 0.30%. This note has a
contractual floor of 6.00% with a contractual cap of 9.125%. This rate ranged from 6.00% to 6.84% and 6.12% to 6.84% in 2001 and 2000, respectively.
(c) The interest rate on the Great Britain Pound denominated FRN was based on the three month Sterling LIBOR plus 0.10% per year. This rate ranged from
6.22% to 6.89% in 2000.
Several long-term debt agreements have restrictive covenants related to the total amount of debt, net tangible assets and other
matters. At December 31, 2001 and 2000, the Company was in comp liance with all debt covenants.
Payment of interest and principal on the surplus notes issued after 1993, of which $690 million and $689 million were
outstanding at December 31, 2001 and 2000, respectively, may be made only with the prior approval of the Commissioner of
Banking and Insurance of the State of New Jersey (“the Commissioner”). The Commissioner could prohibit the payment of the
interest and principal on the surplus notes if certain statutory capital requirements are not met. At December 31, 2001, the
Company has met these statutory capital requirements.
In order to modify exposure to interest rate and currency exchange rate movements, the Company utilizes derivative instruments,
primarily interest rate swaps, in conjunction with some of its debt issues. The effect of these derivative instruments is included
in the calculation of the interest expense on the associated debt, and as a result, the effective interest rates on the debt may differ
from the rates reflected in the tables above. Floating rates are determined by contractual formulas and may be subject to certain
minimum or maximum rates. See Note 17 for additional information on the Company’s use of derivative instruments.
Interest expense for short-term and long-term debt was $641 million, $1,056 million, and $863 million, for the years ended
December 31, 2001, 2000, and 1999, respectively. Securities business related interest expense of $287 million, $456 million and
$312 million for the years ended December 31, 2001, 2000 and 1999, respectively, is included in “Net investment income.”
12. EMPLOYEE BENEFIT PLANS
Pension and Other Postretirement Plans
The Company has funded non-contributory defined benefit pension plans which cover substantially all of its employees as well
as employees of certain destacked subsidiaries. The Company also has several non-funded non-contributory defined benefit
plans covering certain executives. For some employees, benefits are based on final average earnings and length of service, while
other employees are based on an account balance that takes into consideration age, service and salary during their career. The
Company’s funding policy is to contribute annually an amount necessary to satisfy the Internal Revenue Code contribution
guidelines.
The Company provides certain life insurance and health care benefits (“other postretirement benefits”) for retired employees
(including those of certain destacked subsidiaries), their beneficiaries and covered dependents. The health care plan is
contributory; the life insurance plan is non-contributory. Employees generally become eligible to receive other postretirement
benefits if they retire after age 55 with at least 10 years of service or under certain circumstances after age 50 with at least 20
years of continuous service. These benefits are funded as considered necessary by Company management.
B-24
12. EMPLOYEE BENEFIT PLANS (continued)
The Company has elected to amortize its transition obligation for other postretirement benefits over 20 years.
Prepaid and accrued benefits costs are ni cluded in “Other assets” and “Other liabilities,” respectively, in the Company’s
Consolidated Statements of Financial Position. The status of these plans as of September 30, adjusted for fourth-quarter activity,
is summarized below:
Other
Pension Benefi ts
Postretirement Benefits
2001
2000
2001
2000
(In Millions)
Change in benefit obligation
Benefit obligation at the beginning of period.................................
Service cost...............................................................................
Interest cost...............................................................................
Plan participants’ contributions...................................................
Amendments.............................................................................
Acquisitions..............................................................................
Variable annuity purchase...........................................................
Actuarial gains (losses)...............................................................
Contractual termination benefits..................................................
Benefits paid.............................................................................
Foreign currency changes...........................................................
Destacking................................................................................
Benefit obligation at end of period...............................................
$ (5,461)
(167)
(431)
—
6
(765)
232
(510)
(1)
462
28
756
$ (5,851)
$ (5,430)
(140)
(427)
—
112
—
—
34
(17)
407
—
—
$ (5,461)
$ (1,996)
(18)
(150)
(8)
—
—
—
(77)
—
152
1
69
$ (2,027)
$ (1,941)
(29)
(151)
(7)
221
—
—
(262)
—
172
1
—
$ (1,996)
Change in plan assets
Fair value of plan assets at beginning of period.............................
Actual return on plan assets........................................................
Variable annuity purchase...........................................................
Employer contributions..............................................................
Plan participants’ contributions...................................................
Benefits paid.............................................................................
Destacking................................................................................
Fair value of plan assets at end of period......................................
$ 10,356
(1,114)
(232)
81
—
(462)
(1)
$ 8,628
$ 9,468
1,270
—
25
—
(407)
—
$ 10,356
$ 1,560
(82)
—
9
8
(152)
—
$ 1,343
$ 1,548
170
—
7
7
(172)
—
$ 1,560
Funded status
Funded status at end of period.....................................................
Unrecognized transition (asset) liability........................................
Unrecognized prior service costs.................................................
Unrecognized actuarial net gain...................................................
Effects of fourth quarter activity..................................................
Net amount recognized...............................................................
$ 2,777
(236)
42
(351)
6
$ 2,238
$ 4,895
(342)
65
(2,956)
9
$ 1,671
$ (684)
159
1
(169)
1
$ (692)
$ (436)
207
1
(498)
2
$ (724)
Amounts recognized in the Statements of Financial Position
Prepaid benefit cost....................................................................
Accrued benefit liability .............................................................
Intangible asset..........................................................................
Accumulated other comprehensive income...................................
Net amount recognized...............................................................
$ 2,570
(379)
2
45
$ 2,238
$ 2,022
(382)
7
24
$ 1,671
$
$
—
(692)
—
—
$ (692)
—
(724)
—
—
$ (724)
The projected benefit obligations, accumulated benefit obligations and fair value of plan assets for the pension plans with
accumulated benefit obligations in excess of plan assets were $461 million, $379 million and $0 million, respectively, at
September 30, 2001 and $464 million, $384 million and $1 million, respectively, at September 30, 2000.
Pension plan assets consist primarily of equity securities, bonds, real estate and short-term investments, of which $6,867 million
and $7,381 million are included in Separate Account assets and liabilities at September 30, 2001 and 2000, respectively.
In 2001, the pension plan purchased a variable annuity contract for $232 million from Prudential Insurance. The approximate
future annual benefit payment for the variable annuity contract was $14 million.
The benefit obligation for pensions decreased by $6 million in the year 2001 for miscellaneous changes related to the cash
balance formula. The benefit obligation for pensions decreased by a net $112 million in the year 2000 for the effect of a Cost of
Living Adjustment (“COLA”) and the introduction of the cash balance formula of ($134) million and $246 million, respectively.
The COLA was effective as of July 1, 2000 and increased benefits, subject to a maximum, to retirees based upon their year of
B-25
retirement. The introduction of the cash balance formula was a feature of the substantive plan as of the measurement date and is
effective January 1, 2001 for new employees and January 1, 2002 for existing employees.
Other postretirement benefit plan assets consist of group and individual life insurance policies, common stocks, corporate debt
securities, U.S. government securities, short-term investments and tax-exempt municipal debt. Plan assets include $395 million
and $463 million of Company insurance policies at September 30, 2001 and 2000, respectively.
The benefit obligation for other postretirement benefits was not affected by amendments in 2001. The benefit obligation for
other postretirement benefits decreased by $221 million in the year 2000 for changes in the substantive plan made to medical,
dental and life benefits for individuals retiring on or after January 1, 2001. The significant cost reduction features relate to the
medical and life benefits. The Company adopted a cap that limits its long-term cost commitment to retiree medical coverage.
The cap is defined as two times the estimated company contribution toward the cost of coverage per retiree in 2000. The new
life insurance plan provides a reduced benefit of $10,000 of life insurance to retirees.
The pension benefits were amended during the time period presented to provide contractual termination benefits to certain plan
participants whose employment had been terminated. Costs related to these amendments are reflected in contractual termination
benefits in the table below.
Net periodic (benefit) cost included in “General and administrative expenses” in the Company’s Consolidated Statements of
Operations for the years ended December 31, includes the following components:
Other
Pension Benefits
2001
2000
1999
2001
2000
1999
(In Millions)
Components of net periodic (benefit) cost
Service cost.................................................................
Interest cost.................................................................
Expected return on plan assets.......................................
Amortization of transition amount .................................
Amortization of prior service cost..................................
Amortization of actuarial net (gain) loss.........................
Special termination benefits – discontinued operations.....
Curtailment (gain) loss – discontinued operations............
Contractual termination benefits....................................
Subtotal...............................................................
Less amounts included in discontinued operations...........
$ 167 $ 140 $ 193
431
427
410
(880)
(799)
(724)
(106)
(106)
(106)
12
47
45
(85)
(77)
4
—
—
51
—
—
(122)
4
6
48
(457)
(362)
(201)
—
—
84
$
18
150
(134)
17
—
(16)
—
—
—
35
—
$
Net periodic (benefit) cost.............................................
$ (457) $ (362) $ (117)
$
35
$
29 $ 39
150
141
(133)
(121)
36
47
—
—
(24)
(10)
—
2
—
108
—
—
58
206
—
(130)
58
$
76
The assumptions at September 30, used by the Company to calculate the benefit obligations as of that date and to determine the
benefit cost in the subsequent year are as follows:
Pension Benefits
2001
2000
1999
Weighted-average assumptions
Discount rate (beginning of period)................................
Discount rate (end of period).........................................
Rate of increase in compensation levels
(beginning of period) ................................................
Rate of increase in compensation levels
(end of period) .........................................................
Expected return on plan assets.......................................
Health care cost trend rates...........................................
Ultimate health care cost trend rate after
gradual decrease until 2006.......................................
2001
Other
2000
1999
7.75%
7.25%
7.75%
7.75%
6.50%
7.75%
7.75%
7.25%
7.75%
7.75%
6.50%
7.75%
4.50%
4.50%
4.50%
4.50%
4.50%
4.50%
4.50%
9.50%
—
4.50%
9.50%
—
4.50%
9.50%
—
4.50%
9.00%
6.76 – 8.76%
4.50%
9.00%
7.10 – 9.50%
4.50%
9.00%
7.50 - 10.30%
—
—
—
5.00%
5.00%
5.00%
B-26
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage
point increase and decrease in assumed health care cost trend rates would have the following effects:
Other
2001
(In Millions)
One percentage point increase
Increase in total service and interest costs.......................
Increase in postretirement benefit obligation...................
One percentage point decrease
Decrease in total service and interest costs......................
Decrease in postretirement benefit obligation..................
$ 10
125
$
8
108
Postemployment Benefits
The Company accrues 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, 2001 and 2000 was $183 million and $152
million, respectively, and is included in “Other liabilities.”
Other Employee Benefits
The Company sponsors voluntary savings plans for employees (401(k) plans). The plans provide for salary reduction
contributions by employees and matching contributions by the Company of up to 4%, 3% and 3% of annual salary for 2001,
2000 and 1999, respectively. The matching contributions by the Company included in “General and administrative expenses”
are as follows:
Company match...........................................................
Less amount included in discontinued operations............
401(k) Company match included in general and
administrative expenses.............................................
401(k) Company Match
2001
2000
1999
(In Millions)
$ 72
$ 62
$ 60
—
—
(8)
$ 72
$ 62
$ 52
Stock Options
Prudential Financial adopted a stock option plan pursuant to which it may grant stock options, as well as stock appreciation
rights, to employees and non-employees (i.e., statutory agents who perform services for Prudential Financial and participating
subsidiaries) of the Company. Prudential Financial elected to apply Accounting Principles Board Opinion No. 25 “Accounting
for Stock Issued to Employees” and related interpretations in accounting for employee stock options, pursuant to which
compensation expense is not recorded if the option exercise price is no less than the fair market value of Prudential Financial
common stock on the date the option is granted. Prudential Financial charges the Company for expenses incurred in connection
with grants of options to non-employees. These charges were $270 thousand in 2001.
B-27
13. INCOME TAXES
The components of income tax expense (benefit) for the years ended December 31, were as follows:
2001
Current tax expense (benefit)
U.S......................................................................
State and local......................................................
Foreign ................................................................
Total ...................................................................
Deferred tax expense (benefit)
U.S......................................................................
State and local......................................................
Foreign ................................................................
Total ...................................................................
Total income tax expense (benefit)................................
2000
(In Millions)
$ (1,021)
57
43
(921)
$ 362
31
41
434
765
(73)
171
863
(86)
(37)
95
(28)
$
(58)
$ 406
1999
$
614
84
(8)
690
206
44
102
352
$ 1,042
The Company’s actual income tax expense (benefit) for the years ended December 31, differs from the expected amount
computed by applying the statutory federal income tax rate of 35% to income from continuing operations before income taxes
for the following reasons:
2001
Expected federal income tax expense.............................
Non-deductible expenses..............................................
Equity tax ...................................................................
Non-taxable investment income.....................................
State and local income taxes..........................................
Other..........................................................................
Total income tax expense (benefit).........................
2000
(In Millions)
$ (77)
$ 254
228
61
(200)
100
(83)
(42)
(12)
(4)
86
37
1999
$ (58)
$ 1,042
$ 406
$
789
33
190
(78)
83
25
Deferred tax assets and liabilities at December 31, resulted from the items listed in the following table:
2001
2000
(In Millions)
Deferred tax assets
Insurance reserves.................................................
Policyholder dividends..........................................
Litigation related reserves......................................
Net operating loss carryforwards............................
Investments..........................................................
Deferred tax assets before valuation allowance.........
Valuation allowance..............................................
$
1,185
231
84
51
60
1,611
(25)
$ 1,371
297
32
353
(129)
1,924
(38)
Deferred tax assets after valuation allowance...........
1,586
1,886
Deferred tax liabilities
Deferred policy acquisition costs............................
Net unrealized investment gains (losses)..................
Employee benefits................................................
Depreciation.........................................................
Other...................................................................
Deferred tax liabilities...........................................
1,212
845
740
40
378
3,215
1,858
273
16
71
(137)
2,081
Net deferred tax liability...............................................
$ (1,629)
$
(195)
Management believes that based on its historical pattern of taxable income, the Company will produce sufficient income in the
future to realize its deferred tax asset after valuation allowance. Adjustments to the valuation allowance will be made if there is
a change in management’s assessment of the amount of the deferred tax asset that is realizable. At December 31, 2001 and 2000,
respectively, the Company had federal net operating loss carryforwards of $61 million and $848 million, which expire between
2009 and 2018. At December 31, 2001 and 2000, respectively, the Company had state operating loss carryforwards for tax
purposes approximating $1,867 million and $509 million, which expire between 2005 and 2021.
The Internal Revenue Service (the “Service”) has completed all examinations of the consolidated federal income tax returns
through 1992. The Service has examined the years 1993 through 1995. Discussions are being held with the Service with respect
B-28
13. INCOME TAXES (continued)
to proposed adjustments. Management, however, believes there are adequate defenses against, or sufficient reserves to provide
for such adjustments. The Service has completed its examination of 1996 and has begun its examination of 1997 through 2000.
14. STOCKHOLDER’S EQUITY
Dividend Restrictions
New Jersey insurance law provides that dividends or distributions may be declared or paid by Prudential Insurance without prior
regulatory approval only from unassigned surplus, as determined pursuant to statutory accounting principles, less unrealized
capital gains and certain other adjustments. In connection with the demutualization, unassigned surplus was reduced to zero,
thereby limiting Prudential Insurance’s ability to pay a dividend in 2002 primarily to the amount of its statutory net gain from
operations, not including realized investment gains, for the period subsequent to the date of demutualization. In addition,
Prudential Insurance must obtain prior non-disapproval from the New Jersey insurance regulator prior to paying a dividend if the
dividend, together with other dividends or distributions made within the preceding twelve months, would exceed the greater of
10% of Prudential Insurance’s surplus as of the preceding December 31 or its net gain from operations for the twelve month
period ending on the preceding December 31. The laws regulating dividends of Prudential Insurance’s insurance subsidiaries
domiciled in other states are similar, but not identical, to New Jersey’s.
Statutory Net Income and Surplus
Prudential Insurance is required to prepare statutory financial statements in accordance with statutory accounting practices
prescribed or permitted by the New Jersey Department of Banking and Insurance. Statutory accounting practices primarily differ
from GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using
different actuarial assumptions and valuing investments and certain assets on a different basis. Statutory net income (loss) of
Prudential Insurance amounted to $(896) million, $149 million and $333 million for the years ended December 31, 2001, 2000
and 1999, respectively. Statutory surplus of Prudential Insurance amounted to $6,420 million and $8,640 million at December
31, 2001 and 2000, respectively.
The New York State Insurance Department recognizes only statutory accounting practices for determining and reporting the
financial condition and results of operations of an insurance company for determining its solvency under the New York
Insurance Law and for determining whether its financial condition warrants the payment of a dividend to its policyholders. No
consideration is given by the New York State Insurance Department to financial statements prepared in accordance with GAAP
in making such determinations.
15. RELATED PARTY TRANSACTIONS
Service Agreements
The Company has service agreements with Prudential Financial and certain subsidiaries of Prudential Financial, that prior to the
destacking, were subsidiaries of Prudential Insurance. These companies include, along with their subsidiaries, PRUCO, Inc.
(includes Prudential Securities Group Inc. and Prudential P&C Holdings, Inc.), Prudential Asset Management Holding
Company, Prudential International Insurance Holdings, Ltd., Prudential IBH Holdco, Inc., The Prudential Real Estate Affiliates,
Inc., Prudential International Investments Corporation, and Prudential Japan Holdings Inc. Under the agreements, the Company
furnishes the services of its officers and employees, provides supplies, use of equipment, office space, accounts payable
processing functions, makes operating advances, and engages in other transactions in the normal course of business. The
Company charges these companies based on the level of service provided and amounts advanced. The amounts due to the
Company at December 31, 2001 totaled $193 million and are included in “Due from parent and affiliates.”
Prudential Financial and certain of its subsidiaries have service agreements with the Company. Under the agreements, the
Company receives the services of the officers and employees of Prudential Financial, asset management services from Prudential
Asset Management Holding Company and Prudential Financial makes tax payments under the consolidated federal income tax
return for the Company. The Company is charged based on the level of service received and payments made on their behalf.
The amounts due to Prudential Financial and certain subsidiaries at December 31, 2001 totaled $235 million and are included in
“Due to parent and affiliates.”
B-29
15. RELATED PARTY TRANSACTIONS (continued)
Notes Receivable
Prudential Funding, LLC, a wholly owned consolidated subsidiary of the Company borrows funds primarily through the issuance
of commercial paper, private placement medium-term notes, Eurobonds, Euro-commercial paper and Euro medium-term notes
which are reflected in “Short-term debt” and “Long-term debt.” Historically, Prudential Funding, LLC lent net proceeds to
Prudential Insurance and its subsidiaries generally at cost. At demutualization, the interest rates on loans to the destacked
subsidiaries were adjusted to market rates. Loans made to destacked subsidiaries after demutualization will be made at market
rates of interest. Accrued interest receivable related to these loans is included in “Due from parent and affiliates.” At December
31, 2001, “Due from parent and affiliates” includes affiliated notes receivable of the following:
Description
U.S. Dollar floating rate notes (a) ...........................................................
Japanese Yen fixed rate note..................................................................
Great Britain Pound floating rate note.....................................................
Total long-term notes receivable – affiliated (b) .......................................
Short -term notes receivable – affiliated (c)..............................................
Total notes receivable – affiliated...........................................................
Maturity
Dates
Rates
2002-2005
2008
2004
1.78% - 7.29%
1.92%
2.99% - 5.59%
2001
(In Millions)
$ 2,590
565
77
3,232
2,016
$ 5,248
(a) On the date of demutualizat ion , Prudential Financial made a contribution of capital to the Company amounting to $1,050 million that was financed with
the proceeds from the purchase by Prudential Insurance of a series of notes issued by Prudential Financial with market rates of interest and maturities
ranging from nineteen months to three years which is included in floating rate notes. Also, included within floating rate notes is the current portion of longterm notes receivable, which is $150 million at December 31, 2001.
(b) All long-term notes receivable may be called for prepayment prior to the respective maturity dates under specified circumstances, with the exception of
the Prudential Financial notes described in (a) above.
(c) Short -term notes receivable have variable rates which averaged 2.28% at December 31, 2001. Short-term notes receivable are payable on demand.
Reinsurance
As discussed in Note 10, the Company participates in reinsurance transactions with certain subsidiaries of Prudential Financial.
Stock Based Compensation
Prudential Financial adopted a stock option plan in which eligible participants were granted options to purchase shares of
Prudential Financial’s common stock as discussed in Note 12.
B-30
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values presented below have been determined by using available market information and by applying
valuation methodologies. Considerable judgment is applied in interpreting data to develop the estimates of fair value. Estimated
fair values 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 methods and assumptions discussed below were
used in calculating the estimated fair values of the instruments. See Note 17 for a discussion of derivative instruments.
Fixed Maturities and Equity Securities
Estimated fair values for fixed maturities and equity securities, other than private placement securities, are based on quoted
market prices or estimates from independent pricing services. Generally, fair values for private placement fixed maturities 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 fixed maturities is based on amounts estimated by management.
Commercial Loans
The estimated fair value of commercial loans is primarily based upon the present value of the expected future cash flows
discounted at the appropriate U.S. Treasury rate, adjusted for the current market spread for similar quality loans.
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 repayment patterns.
Mortgage Securitization Inventory
The estimated fair value of the mortgage securitization inventory is primarily based upon the intended exit strategy for the
mortgage loans, including securitization and whole loan sales. For loans expected to be securitized, the value is estimated using
a pricing model that, among other factors, considers current investor yield requirements for subordination and yield. This
activity was part of operations destacked on the date of demutualization as discussed in Note 1.
Notes Receivable – Affiliated
The estimated fair value of affiliated notes receivable is derived by using discount rates based on the borrowing rates currently
available to the Company for notes with similar terms and remaining maturities.
Investment Contracts
For guaranteed investment contracts, income annuities, and other similar contracts without life contingencies, estimated fair
values are derived using discounted projected cash flows based on interest rates being offered for similar contracts with
maturities consistent with those of the contracts being valued. For individual deferred annuities and other deposit liabilities, fair
value approximates carrying value.
Debt
The estimated fair value of short-term and long-term debt is derived by using discount rates based on the borrowing rates
currently available to the Company for debt with similar terms and remaining maturities.
B-31
16. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The following table discloses the carrying amounts and estimated fair values of the Company’s financial instruments at
December 31,
2001
2000
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In Millions)
FINANCIAL ASSETS
Other than trading
Fixed maturities
Available for sale........................................................
Held to maturity.........................................................
Equity securities................................................................
Commercial loans..............................................................
Policy loans.......................................................................
Short -term investments.......................................................
Mortgage securitization inventory........................................
Cash and cash equivalents...................................................
Restricted cash and securities..............................................
Notes receivable – affiliated................................................
Separate account assets.......................................................
Trading
Trading account assets........................................................
Broker-dealer related receivables.........................................
Securities purchased under agreements to resell....................
Cash collateral for borrowed securities.................................
FINANCIAL LIABILITIES
Other than trading
Investment contracts..........................................................
Securities sold under agreements to repurchase.....................
Cash collateral for loaned securities.....................................
Short -term and long-term debt.............................................
Securities sold but not yet purchased....................................
Separate account liabilities..................................................
Trading
Broker-dealer related payables............................................
Securities sold under agreements to repurchase.....................
Cash collateral for loaned securities.....................................
Securities sold but not yet purchased....................................
$ 85,586
—
1,069
14,909
7,930
4,048
—
6,587
—
5,248
76,736
$ 85,586
—
1,069
15,568
8,867
4,048
—
6,587
—
5,299
76,736
$ 83,827
12,448
2,317
15,919
8,046
5,029
1,420
7,676
2,196
—
82,217
$ 83,827
12,615
2,317
15,308
8,659
5,029
1,448
7,676
2,196
—
82,217
$
$
882
—
110
—
$ 7,217
11,860
5,395
3,858
$ 7,217
11,860
5,395
3,858
$ 25,814
5,952
4,808
6,563
—
76,736
$ 26,346
5,952
4,808
6,713
—
76,736
$ 25,033
7,162
4,762
13,633
157
82,217
$ 25,359
7,162
4,762
13,800
157
82,217
$
$
$ 5,965
7,848
6,291
4,802
$ 5,965
7,848
6,291
4,802
882
—
110
—
—
178
—
108
—
178
—
108
17. DERIVATIVE INSTRUMENTS
Adoption of Statement of Financial Accounting Standards (“SFAS”) No. 133
The Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, on January
1, 2001. Except as noted below, the adoption of this statement did not have a material impact on the results of operations of the
Company.
Upon its adoption of SFAS No. 133, the Company reclassified “held to maturity” securities with a fair market value of
approximately $12,085 million to “available -for-sale” as permitted by the new standard. This reclassification resulted in
unrealized investment gains of $94 million, net of tax, which were recorded as a component of “Accumulated other
comprehensive income (loss).”
Accounting for Derivatives and Hedging Activities
Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices, or
the value of securities or commodities. Derivative financial instruments used by the Company include swaps, futures, forwards
and option contracts and may be exchange-traded or contracted in the over-the-counter market.
B-32
17. DERIVATIVE INSTRUMENTS (continued)
Derivatives held for trading purposes were used in the Company’s securities operations to meet the needs of customers and by
the Company’s commercial mortgage securitizations business. Both of these businesses have been destacked. Trading
derivatives are also utilized in a limited-purpose subsidiary primarily through the operation of hedge portfolios. Trading
derivative positions are carried at estimated fair value, generally by obtaining quoted market prices or through the use of pricing
models. Values are affected by changes in interest rates, currency exchange rates, credit spreads, market volatility and liquidity.
Derivatives held for trading purposes are recorded at fair value in the Consolidated Statements of Financial Position either as
assets, within “Trading account assets” or “Broker-dealer related receivables,” or as liabilities within “Broker-dealer related
payables” or “Other liabilities.” Realized and unrealized changes in fair value are included in “Commissions and other income”
in the Consolidated Statements of Operations in the periods in which the changes occur. Cash flows from trading derivatives are
reported in the operating activities section of the Consolidated Statements of Cash Flows.
Derivatives held for purposes other than trading are used to seek to reduce exposure to interest rate and foreign currency risks
associated with assets held or expected to be purchased or sold, and liabilities incurred or expected to be incurred. Other than
trading derivatives are also used to manage the characteristics of the Company’s asset/liability mix, manage the interest rate
characteristics of invested assets and to mitigate the risk of a diminution, upon translation to U.S. dollars, of expected non-U.S.
earnings resulting from unfavorable changes in currency exchange rates.
Derivatives held for purposes other than trading are recognized on the Consolidated Statements of Financial Position at their fair
value. On the date the derivative contract is entered into, the Company designates the derivative as either (1) a hedge of the fair
value of a recognized asset or liability or unrecognized firm commitment (“fair value” hedge), (2) a hedge of a forecasted
transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge),
(3) a foreign-currency fair value or cash flow hedge (“foreign currency” hedge), (4) a hedge of a net investment in a foreign
operation, or (5) a derivative entered into as an economic hedge that does not qualify for hedge accounting.
To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated risk of the hedged
item. Effectiveness of the hedge is formally assessed at inception and throughout the life of the hedging relationship. Even if a
derivative qualifies for special hedge accounting treatment, there may be an element of ineffectiveness of the hedge. Under such
circumstances, the ineffective portion of adjusting the derivative to fair value is recorded in “Realized investment gains (losses),
net.” The ineffective portion of derivatives accounted for using both cash flow and fa ir value hedge accounting for the period
ended December 31, 2001 was not material to the results of operations of the Company.
The Company discontinues hedge accounting prospectively when (1) it is determined that the derivative is no longer highly
effective in offsetting changes in the fair value or cash flows of a hedged item (including firm commitments or forecasted
transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) the derivative is no longer designated as a hedge
instrument, because (a) it is unlikely that a forecasted transaction will occur; (b) because a hedged firm commitment no longer
meets the definition of a firm commitment; or (c) management determines that designation of the derivative as a hedge
instrument is no longer appropriate.
When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as a highly effective fair
value hedge, the derivative will continue to be carried on the balance sheet at its fair value, and the hedged asset or liability,
which normally would not be carried at fair value, will no longer be adjusted for changes in fair value. When hedge accounting
is discontinued because the hedged item no longer meets the definition of a firm commitment, the derivative will continue to be
carried on the balance sheet at its fair value, and any asset or liability that was recorded pursuant to recognition of the firm
commitment will be removed from the balance sheet and recognized as a gain or loss in current-period earnings. When hedge
accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative will continue to be
carried on the balance sheet at its fair value, and gains and losses that were accumulated in other comprehensive income will be
recognized immediately in earnings. In all other situations in which hedge accounting is discontinued, the derivative will be
carried at its fair value on the balance sheet, with changes in its fair value recognized in current-period earnings. For the year
ended December 31, 2001, there were no reclassifications to earnings due to firm commitments no longer deemed probable or
due to forecasted transactions that had not occurred by the end of the originally specified time period.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its riskmanagement objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives
B-33
designated as fair value, cash flow, or foreign currency hedges to specific assets and liabilities on the balance sheet or to specific
firm commitments or forecasted transactions.
When a derivative is designated as a fair value hedge and is determined to be highly effective, changes in its fair value, along
with changes in the fair value of the hedged asset or liability (including losses or gains on firm commitments), are reported on a
net basis in the income statement line item associated with the hedged item. Under certain circumstances, the change in fair
value of an unhedged item is either not recorded or recorded instead in “Accumulated other comprehensive income (loss).”
When such items are hedged and the hedge qualifies as a fair value hedge, the change in fair value of the hedged item and the
derivative are reported on a net basis in “Realized investment gains (losses), net.”
When a derivative is designated as a cash flow hedge and is determined to be highly effective, changes in its fair value are
recorded in “Accumulated other comprehensive income (loss)” until earnings are affected by the variability of cash flows (e.g.,
when periodic settlements on a variable-rate asset or liability are recorded in earnings). At that time, the related portion of
deferred gains or losses are reclassified to the income statement classification of the hedged item.
Presented below is a roll forward of current period cash flow hedges in “Accumulated other comprehensive income (loss)”
before taxes.
(In Millions)
Additions due to cumulative effect of change in accounting principle upon
adoption of SFAS No. 133 at January 1, 2001..........................................................
$ 8
Net deferred losses on cash flow hedges from January 1 to December 31, 2001 ...............
3
Amount reclassified into current period earnings..........................................................
(18)
Destacking...............................................................................................................
15
Balance, December 31, 2001.............................................................................
$ 8
It is anticipated that a pre-tax gain of approximately $29 million will be reclassified from “Accumulated other comprehensive
income (loss)” to earnings during the year ended December 31, 2002 and offset by equal amounts pertaining to the hedged items.
The maximum length for which variable cash flows are hedged is 7 years. Income amounts deferred in “Accumulated other
comprehensive income (loss)” as a result of cash flow hedges are included in “Net unrealized investment gains (losses)” in the
Consolidated Statements of Stockholder’s Equity.
When a derivative is designated as a foreign currency hedge and is determined to be effective, changes in its fair value are
recorded in either current period earnings or “Accumulated other comprehensive income (loss),” depending on whether the
hedge transaction is a fair value hedge (e.g., a hedge of a firm commitment that is to be settled in a foreign currency) or a cash
flow hedge (e.g., a foreign currency denominated forecasted transaction). If, however, a derivative is used as a hedge of a net
investment in a foreign operation, its changes in fair value, to the extent effective as a hedge, are recorded in the cumulative
translation adjustments account within “Accumulated other comprehensive income (loss).” Those amounts, before applicable
taxes, were gains of $75 million in 2001, $88 million in 2000 and a loss of $47 million in 1999.
If a derivative does not qualify for hedge accounting as described above, it is recorded at fair value in “Other long-term
investments” or “Other liabilities” in the Consolidated Statements of Financial Position, and changes in its fair value are included
in current earnings without considering changes in fair value of the hedged assets or liabilities. See “Types of Derivative
Instruments” for further discussion of the classification of derivative activity in current earnings. Cash flows from other than
trading derivatives are reported in the investing activities section in the Consolidated Statements of Cash Flows.
The Company occasionally purchases a financial instrument that contains a derivative instrument that is “embedded” in the
financial instrument. Upon purchasing the instrument, the Company assesses whether the economic characteristics of the
embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial
instrument (i.e., the host contract) and whether a separate instrument with the same terms as the embedded instrument would
meet the definition of a derivative instrument. When it is determined that (1) the embedded derivative possesses economic
characteristics that are not clearly and closely related to the economic characteristics of the host contract, and (2) a separate
instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host
contract, carried at fair value, and changes in its fair value are included in “Realized investment gains (losses), net.”
B-34
Types of Derivative Instruments
Interest rate swaps are used by the Company to manage interest rate exposures arising from mismatches between assets and
liabilities (including duration mismatches) and to hedge against changes in the value of assets it anticipates acquiring and other
anticipated transactions and commitments. Under interest rate swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed
notional principal amount. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by
either party. Cash is paid or received based on the terms of the swap. These transactions are entered into pursuant to master
agreements that provide for a single net payment to be made by one counterparty at each due date. The fair value of swap
agreements is estimated based on proprietary pricing models or market quotes.
As discussed above, if an interest rate swap does not qualify for hedge accounting, changes in its fair value are included in
“Realized investment gains (losses), net” without considering changes in fair value of the hedged assets or liabilities. During the
period that interest rate swaps are outstanding, net receipts or payments are included in “Net investment income.” Net interest
receipts (payments) were $(29) million in 2001, $11 million in 2000 and $(4) million in 1999.
Exchange-traded futures and options are used by the Company to reduce market risks from changes in interest rates, to alter
mismatches between the duration of assets in a portfolio and the duration of liabilities supported by those assets, and to hedge
against changes in the value of securities it owns or anticipates acquiring or selling. In exchange-traded futures transactions, the
Company agrees to purchase or sell a specified number of contracts, the value of which are determined by the value of
designated classes of Treasury securities, and to post variation margin on a daily basis in an amount equal to the difference in the
daily market values of those contracts. The Company enters into exchange-traded futures and options with regulated futures
commissions merchants who are members of a trading exchange. The fair value of those futures and options is based on market
quotes.
Treasury futures typically are used to hedge duration mismatches between assets and liabilities by replicating Treasury
performance. Treasury futures move substantially in value as interest rates change and can be used to either modify or hedge
existing interest rate risk. This strategy protects against the risk that cash flow requirements may necessitate liquidation of
investments at unfavorable prices resulting from increases in interest rates. This strategy can be a more cost effective way of
temporarily reducing the Company’s exposure to a market decline than selling fixed income securities and purchasing a similar
portfolio when such a decline is believed to be over.
When the Company anticipates a significant decline in the stock market that will correspondingly affect its diversified portfolio,
it may purchase put index options where the basket of securities in the index is appropriate to provide a hedge against a decrease
in the value of the Company’s equity portfolio or a portion thereof. This strategy effects an orderly sale of hedged securities.
When the Company has large cash flows which it has allocated for investment in equity securities, it may purchase call index
options as a temporary hedge against an increase in the price of the securities it intends to purchase. This hedge is intended to
permit such investment transactions to be executed with less adverse market impact.
Currency derivatives, including exchange-traded currency futures and options, currency forwards and currency swaps, are used
by the Company to reduce market risks from changes in currency exchange rates with respect to investments denominated in
foreign currencies that the Company either holds or intends to acquire or sell.
Under exchange-traded currency futures and options, the Company agrees to purchase or sell a specified number of contracts and
to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. The
Company enters into exchange-traded currency futures and options with regulated futures commissions merchants who are
members of a trading exchange.
Under currency forwards, the Company agrees with other parties upon delivery of a specified amount of an identified currency at
a specified future date. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at
the specified future date.
Under currency swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between one
currency and another at a forward exchange rate and calculated by reference to an agreed principal amount. Generally, the
principal amount of each currency is exchanged at the beginning and termination of the currency swap by each party. These
B-35
transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty
for payments made in the same currency at each due date.
Forward contracts are used by the Company to manage market risks relating to interest rates and commodities and trades in
mortgage-backed securities forward contracts. The later activity was exited in connection with the restructuring of Prudential
Securities Group Inc.’s capital markets activities as discussed in Note 4. Typically, the price is agreed upon at the time of the
contract and payment for such a contract is made at the specified future date.
The tables below summarize the Company’s outstanding positions by derivative instrument types at December 31, 2001 and
2000. The amounts presented are classified as either trading or other than trading, based on management’s intent at the time of
contract inception and throughout the life of the contract. The table includes the estimated fair values of outstanding derivative
positions only and does not include the changes in fair values of associated financial and non-financial assets and liabilities,
which generally offset derivative gains and losses. The fair value amounts presented also do not reflect the netting of amounts
pursuant to right of setoff, qualifying master netting agreements with counterparties or collateral arrangements.
December 31, 2001
Trading
Other than Trading
Total
Non-Hedge
Hedge Accounting
Accounting
Estimated
Estimated
Estimated
Estimated
Fair
Fair
Fair
Fair
Notional
Value
Notional
Value
Notional
Value
Notional
Value
(In Millions)
Swap Instruments
Interest rate
Asset .......................................................................
Liability...................................................................
Currency
Asset .......................................................................
Liability...................................................................
Equity and commodity
Asset .......................................................................
Liability...................................................................
Forward contracts
Interest rate
Asset .......................................................................
Liability...................................................................
Currency
Asset .......................................................................
Liability...................................................................
Futures contracts
Interest rate
Asset .......................................................................
Liability...................................................................
Asset .......................................................................
Liability...................................................................
Option contracts
Interest rate
Asset .......................................................................
Liability...................................................................
Total Derivatives
Assets......................................................................
Liabilities.................................................................
$ 16,824
18,084
$
724
767
$
—
—
$
—
—
$ 2,039
1,402
$
69 $ 18,863
26
19,486
$
793
793
1,201
1,307
135
177
605
—
32
—
742
234
88
17
2,548
1,541
255
194
35
70
7
7
—
—
—
—
29
—
2
—
64
70
9
7
600
851
2
2
—
—
—
—
—
—
—
—
600
851
2
2
2,903
3,689
100
111
1,006
362
7
6
3,537
1,016
127
41
7,446
5,067
234
158
3,732
398
1
—
—
—
—
—
1,610
599
11
9
5,342
997
12
9
—
—
—
—
—
—
—
—
171
625
4
1
171
625
4
1
10,635
8,250
72
48
—
—
—
—
338
—
3
—
10,973
8,250
75
48
$ 35,930
$ 1,041
$ 1,611
$
39 $ 8,466
$
304 $ 46,007
$ 1,384
$ 32,649
$ 1,112
$
$
6 $ 3,876
$
94 $ 36,887
$ 1,212
B-36
362
December 31, 2000
Trading
Other than Trading
Total
Non-Hedge
Hedge Accounting
Accounting
Estimated
Estimated
Estimated
Estimated
Fair
Fair
Fair
Fair
Notional
Value
Notional
Value
Notional
Value
Notional
Value
(In Millions)
Swap Instruments
Interest rate
Asset .......................................................................
Liability...................................................................
Currency
Asset .......................................................................
Liability...................................................................
Asset .......................................................................
Liability...................................................................
Forward contracts
Interest rate
Asset .......................................................................
Liability...................................................................
Currency
Asset .......................................................................
Liability...................................................................
Asset .......................................................................
Liability...................................................................
Futures contracts
Interest rate
Asset .......................................................................
Liability...................................................................
Asset .......................................................................
Liability...................................................................
Option contracts
Interest rate
Asset .......................................................................
Liability...................................................................
Currency
Asset .......................................................................
Liability...................................................................
Asset .......................................................................
Liability...................................................................
Total Derivatives
Assets......................................................................
Liabilities.................................................................
$ 9,693
10,521
$
352
370
$
—
—
$
— $ 1,908
—
2,126
$
57 $ 11,601
81
12,647
$
409
451
7
30
—
34
—
—
—
—
383
302
31
20
390
332
31
54
55
55
14
12
—
—
—
—
46
—
17
—
101
55
31
12
3,469
3,319
33
33
—
—
—
—
—
—
—
—
3,469
3,319
33
33
6,044
5,897
185
195
472
429
9
9
2,319
27
29
79
8,835
6,353
223
283
2,091
1,923
75
75
—
—
—
—
—
—
—
—
2,091
1,923
75
75
11,582
6,513
14
29
—
—
—
—
2,410
1,468
55
21
13,992
7,981
69
50
782
1,324
27
36
—
—
—
—
—
—
—
—
782
1,324
27
36
4,141
4,273
48
29
—
—
—
—
—
—
—
—
4,141
4,273
48
29
1,108
1,174
27
26
—
—
—
—
—
—
—
—
1,108
1,174
27
26
175
126
3
1
—
—
—
—
—
—
—
—
175
126
3
1
9
9
$ 7,066
$ 3,923
189 $ 46,685
201 $ 39,507
$ 976
$ 1,050
$ 39,147
$ 35,155
$
$
778
840
$
472
$ 429
$
$
$
$
Credit Risk
The Company is exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial
instruments. Generally, the current credit exposure of the Company’s derivative contracts is limited to the fair value at the
reporting date. The credit exposure of the Company’s swaps transactions is represented by the fair value (market value) of
contracts with a positive fair value (market value) at the reporting date. Because exchange-traded futures and options are
effected through regulated exchanges, and positions are marked to market on a daily basis, the Company has little exposure to
credit-related losses in the event of nonperformance by counterparties to such financial instruments. The credit exposure of
exchange-traded instruments is represented by the negative change, if any, in the fair value (market value) of contracts from the
fair value (market value) at the reporting date. The credit exposure of currency forwards is represented by the difference, if any,
between the exchange rate specified in the contract and the exchange rate for the same currency at the reporting date.
B-37
The Company manages credit risk by entering into transactions with creditworthy counterparties and obtaining collateral where
appropriate and customary. In addition, the Co mpany enters into over-the-counter swaps pursuant to master agreements that
provide for a single net payment to be made by one counterparty to another at each due date and upon termination. Likewise, the
Company effects exchange-traded futures and options through regulated exchanges and these positions are marked to market on
a daily basis.
18. COMMITMENTS AND GUARANTEES, CONTINGENCIES AND LITIGATION
Commitments and Guarantees
The following table presents, as of December 31, 2001, the Company’s future commitments on short-term and long-term debt, as
more fully described in Note 11 and future minimum lease payments under non-cancelable operating leases:
2002...........................................................................
2003...........................................................................
2004...........................................................................
2005...........................................................................
2006...........................................................................
Beyond 2006...............................................................
Total ..........................................................................
Short-term and
Operating
Long-term Debt
Leases
(In Millions)
$ 3,837
$ 126
651
108
454
95
58
77
62
68
1,501
195
$ 6,563
$ 669
The Company occupies leased office space in many locations under various long-term leases and has entered into numerous
leases covering the long-term use of computers and other equipment. Rental expense incurred for the years ended December 31,
2001, 2000 and 1999 was $520 million, $498 million and $456 million, respectively, excluding expenses relating to the
Company’s healthcare business.
During the normal course of its business, the Company utilizes financial instruments with off-balance sheet credit risk such as
commitments, financial guarantees and letters of credit. Commitments include commitments to purchase and sell mortgage loans
and the underfunded portion of commitments to fund investments in private placement securities. These mortgage loans and
private commitments were $1,727 million, of which $781 million remain available at Decemb er 31, 2001.
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. At December 31, 2001, financial guarantees and
letters of credit issued by the Company were $325 million.
Contingencies
On September 19, 2000, the Company sold Gibraltar Casualty Company (“Gibraltar Casualty”), a subsidiary engaged in the
commercial property and casualty insurance business, to Everest Re Group, Ltd. (“Everest”). Upon closing of the sale, a
subsidiary of the Company entered into a stop-loss reinsurance agreement with Everest whereby the subsidiary reinsured Everest
for up to 80% of the first $200 million of any adverse loss development in excess of Gibraltar Casualty’s carried reserves as of
the closing of the sale. The subsidiary was among those that Prudential Insurance dividended to Prudential Financial in
conjunction with the destacking. Prudential Insurance has indemnified the subsidiary for any losses it may incur in connection
with this agreement. As of December 31, 2001, no liability has been recorded by Prudential Insurance in connection with this
agreement.
It is possible that the results of operations or the cash flow of the Company in a particular quarterly or annual period could be
materially affected as a result of payments in connection with the matter discussed above depending, in part, upon the results of
operations or cash flow for such period. Management believes, however, that ultimate payments in connection with this matter
should not have a material adverse effect on the Company’s financial position.
B-38
18. COMMITMENTS AND GUARANTEES, CONTINGENCIES AND LITIGATION (continued)
Litigation
The Company is subject to legal and regulatory actions in the ordinary course of its businesses . Pending legal and regulatory
actions include proceedings relating to aspects of our businesses and operations that are specific to the Company and proceedings
that are typical of the businesses in which the Company operates, including in both cases businesses that have either been
divested or placed in wind-down status. Some of these proceedings have been brought on behalf of various alleged classes of
complainants. In certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or
exemplary damages.
In particular, the Company has been subject to substantial regulatory actions and civil litigation involving individual life
insurance sales practices. In 1996, the Company entered into settlement agreements with relevant insurance regulatory
authorities and plaintiffs in the principal life insurance sales practices class action lawsuit covering policyholders of individual
permanent life insurance policies issued in the United States from 1982 to 1995. Pursuant to the settlements, the Company
agreed to various changes to its sales and business practices controls, to a series of fines, and to provide specific forms of relief
to eligible class members. Virtually all claims by class members filed in connection with the settlements have been resolved and
virtually all aspects of the remediation program have been satisfied. While the approval of the class action settlement is now
final, the Company remains subject to oversight and review by insurance regulators and other regulatory authorities with respect
to its sales practices and the conduct of the remediation program. The U.S. District Court has also retained jurisdiction as to all
matters relating to the administration, consummation, enforcement and interpretation of the settlements.
As of December 31, 2001, the Company remained a party to approximately 44 individual sales practices actions filed by
policyholders who “opted out” of the class action settlement relating to permanent life insurance policies the Company issued in
the United States between 1982 and 1995. In addition, there were 19 sales practices actions pending that were filed by
policyholders who were members of the class and who failed to “opt out” of the class action settlement. The Company believes
that those actions are governed by the class settlement release and expects them to be enjoined and/or dismissed. Additional
suits may be filed by class members who “opted out” of the class settlement or who failed to “opt out” but nevertheless seek to
proceed against the Company. A number of the plaintiffs in these cases seek large and/or indeterminate amounts, including
punitive or exemplary damages. Some of these actions are brought on behalf of multiple plaintiffs. It is possible that substantial
punitive damages might be awarded in any of these actions and particularly in an action involving multiple plaintiffs.
The Company believes that its reserves related to sales practices, as of December 31, 2001, are adequate. No incremental
provisions were recorded in 2001 or 2000. In 1999, 1998, 1997 and 1996, the Company recorded provisions in its Consolidated
Statements of Operations of $100 million, $1,150 million, $2,030 million and $1,125 million, respectively, to provide for
estimated remediation costs, and additional sales practices costs including related administrative costs, regulatory fines, penalties
and related payments, litigation costs and settlements, including settlements associated with the resolution of claims of deceptive
sales practices asserted by policyholders who elected to “opt-out” of the class action settlement and litigate their claims against
the Company separately and other fees and expenses associated with the resolution of sales practices issues.
The following table summarizes the Company’s charges for the estimated total costs of sales practices remedies and additional
sales practices costs and related liability balances as of the dates indicated:
2001
Year Ended December 31,
1999
1998
(In Millions)
$ 891
$ 3,058
$ 2,553
2000
Liability balance at beginning of period..........................
Charges to expense
Remedy costs.......................................................
Additional sales practices costs..............................
Total charges to expense..................................
Amounts paid or credited
Remedy costs.......................................................
Additional sales practices costs..............................
Total amounts paid or credited.........................
$ 253
Liability balance at end of period...................................
$
—
—
—
(54)
54
—
71
130
201
448
190
638
52
$ 253
B-39
(99)
199
100
1997
$ 963
1996
$
—
510
640
1,150
1,640
390
2,030
410
715
1,125
1,708
559
2,267
147
498
645
—
440
440
—
162
162
$ 891
$ 3,058
$ 2,553
$ 963
18. COMMITMENTS AND GUARANTEES, CONTINGENCIES AND LITIGATION (continued)
In 1996, the Company recorded in its Consolidated Statement of Operations the cost of $410 million before taxes as a guaranteed
minimum remediation expense pursuant to the settlement agreement. Management had no better information available at that
time upon which to make a reasonable estimate of the losses associated with the settlement. Charges were also recorded in 1996
for estimated additional sales practices costs totaling $715 million before taxes.
In 1997, management increased the estimated liability for the cost of remedying policyholder claims by $1,640 million before
taxes. This increase was based on additional information derived from claim sampling techniques, the terms of the settlement
and the number of claim forms received. The Company also recorded additional charges of $390 million before taxes to
recognize the increase in estimated total additional sales practices costs.
In 1998, the Company recorded an additional charge of $510 million before taxes to recognize the increase of the estimated total
cost of remedying policyholder claims to a total of $2,560 million before taxes. This increase was based on (1) estimates derived
from an analysis of claims actually remedied (including interest); (2) a sample of claims still to be remedied; (3) an estimate of
additional liabilities associated with a claimant’s right to “appeal” the Company’s decision; and (4) an estimate of an additional
liability associated with the results of an investigation by a court-appointed independent expert regarding the impact of the
Company’s failure to properly implement procedures to preserve all documents relevant to the class action and remediation
program. The Company also recorded additional charges of $640 million before taxes to recognize the increase in estimated
total additional sales practices costs.
In 1999, the Company recorded an increase of $199 million of the estimate of total additional sales practices costs. This increase
was partially offset by a $99 million release of the previously recorded liability relative to remedy costs reflecting a decrease in
the estimate of the total costs of remedying policyholder claims.
In 2000, the Company recorded an increase of $54 million of the estimate of total additional sales practices costs. This increase
was offset by a $54 million release of the previously recorded liability relative to remedy costs reflecting a decrease in the
estimate of the total costs of remedying policyholder claims.
In addition, the Company retained all liabilities for the litigation associated with its discontinued healthcare business that existed
at the date of closing with Aetna (August 6, 1999), or commenced within two years of that date, with respect to claims relating to
events that occurred prior to the closing date. This litigation includes purported class actions and individual suits involving
various issues, including payment of claims, denial of benefits, vicarious liability for malpractice claims, and contract disputes
with provider groups and former policyholders. Some of the purported class actions challenge practices of the Company’s
former managed care operations and assert nationwide classes. On October 23, 2000, by Order of the Judicial Panel on Multidistrict Litigation, a number of these class actions were consolidated for pre-trial purposes, along with lawsuits pending against
other managed health care companies, in the United States District Court for the Southern District of Florida in a consolidated
proceeding captioned In Re Managed Care Litigation. Some of these class actions allege, among other things, misrepresentation
of the level of services and quality of care, failure to disclose financial incentive agreements with physicians, interference with
the physician-patient relationship, breach of contract and fiduciary duty, violations of ERISA, violations of and conspiracy to
violate RICO, deprivation of plaintiffs’ rights to the delivery of honest medical services and industry-wide conspiracy to defraud
physicians by failing to pay under provider agreements and by unlawfully coercing providers to enter into agreements with unfair
and unreasonable terms. The remedies sought include unspecified damages, restitution, disgorgement of profits, treble damages,
punitive damages and injunctive relief. Motions to dismiss certain of the amended complaints and plaintiff’s motions to certify
nationwide classes in the consolidated proceedings are pending. In one of the consolidated actions the court granted our motion
to dismiss, in part.
The Company’s litigation is subject to many uncertainties, and given the complexity and scope, the outcomes cannot be
predicted. It is possible that the results of operations or the cash flow of the Company in a particular quarterly or annual period
could be materially affected by an ultimate unfavorable resolution of pending litigation and regulatory matters depending, in
part, upon the results of operations or cash flow for such period. Management believes, however, that the ultimate outcome of
all pending litigation and regulatory matters, after consideration of applicable reserves, should not have a material adverse effect
on the Company’s financial position.
B-40
To the Board of Directors and Stockholder of
In our opinion, the accompanying consolidated statements of financial position and the related consolidated
statements of operations, of stockholder’s equity and of cash flows present fairly, in all material respects, the
financial position of The Prudential Insurance Company of America and its subsidiaries at December 31, 2001 and
2000, and the results of their operations and their cash flows for each of the three years in the period ended December
31, 2001, in conformity with accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
New York, New York
February 12, 2002
B-41
SP Mid Cap Growth Portfolio
Prospectus dated May 1, 2002
Supplement dated December 16, 2002
Effective December 16, 2002, Calamos Asset Management, Inc. will replace Massachusetts Financial
Services Company (MFS) as subadviser to the SP Mid Cap Growth Portfolio (formerly, SP MFS Mid Cap
Growth Portfolio).
The following replaces the discussion of MFS in the section of the prospectus titled ‘‘How the Fund is
Managed—Portfolio Managers:’’
Calamos Asset Management, Inc. (‘‘Calamos’’) is the subadviser to the SP Mid-Cap Growth
Portfolio. Calamos, a registered investment advisor, is a wholly-owned subsidiary of Calamos Holdings,
Inc. As of October 31, 2002, Calamos managed approximately $11.7 billion in assets for institutions,
individuals, investment companies and hedge funds. Calamos’ address is 1111 E. Warrenville Road,
Naperville, Illinois 60563-1463.
John P. Calamos, Chief Executive Officer and President of Calamos, Nick P. Calamos, Chief
Investment Officer and Executive Vice President of Calamos, and John P. Calamos, Jr., Executive Vice
President of Calamos, manage the SP Mid Cap Growth Portfolio. Each has been with Calamos since
1987. John P. Calamos and Nick P. Calamos have managed money together at Calamos or a related
entity for nearly 20 years.
PSFSUP5
Supplement dated December 13, 2002 to
Value Portfolio
The following amends the sections of the prospectus entitled ‘‘How the Portfolios Invest—Investment
Objectives and Policies, ’’How the Fund Is Managed—Investment Sub-Advisers,‘‘ and ’’How the Fund is
Managed—Portfolio Managers:‘‘
Effective as of the close of business on December 12, 2002, Jennison Associates LLC is responsible for
managing 100% of the Portfolio’s assets. The portfolio managers for the Portfolio are Tom Kolefas and
Bradley Goldberg. Bradley Goldberg has announced his intention to retire effective December 31, 2002.
Following Mr. Goldberg’s retirement, Mr. Kolefas will continue as the portfolio manager for the Portfolio.
Equity Portfolio
The following amends the section of the prospectus entitled ’’How the Fund is Managed—Portfolio
Managers:‘‘
Bradley Goldberg has announced his intention to retire effective December 31, 2002. Following Mr.
Goldberg’s retirement, the portion of the Portfolio managed by Jennison Associates LLC will continue to be
managed by Tom Kolefas.
PSFSUP6
Supplement dated October 18, 2002
SP PIMCO High Yield Portfolio
Effective immediately, Raymond G. Kennedy will replace Benjamin L. Trosky as portfolio manager. The
following replaces the section titled ‘‘How the Fund is Managed—Portfolio Managers:’’
The Portfolio is managed by Raymond G. Kennedy. Mr. Kennedy is a Managing Director of PIMCO, and he
joined PIMCO as a credit analyst in 1996. Prior to joining PIMCO, Mr. Kennedy was associated with the
Prudential Insurance Company of America as a private placement asset manager.
SP MFS Capital Opportunities Portfolio
Effective immediately, S. Irfan Ali and Kenneth J. Enright, CFA, will serve as co-portfolio managers of the
SP MFS Capital Opportunities Portfolio replacing Maura Shaughnessy. The following replaces the section
titled ‘‘How the Fund is Managed—Portfolio Managers:’’
The Portfolio is managed by S. Irfan Ali and Kenneth J. Enright. Mr. Ali is a Senior Vice President and
portfolio manager of the MFS Strategic Growth portfolios. He joined MFS as a research analyst in 1993 and
earned his M.B.A. from the Harvard Business School. Mr. Enright is a Senior Vice President and portfolio
manager of the MFS Strategic Value portfolios and assists on the team managed MFS Total Return portfolios.
He joined MFS in 1986 as a research analyst and earned his M.B.A. from Babson College.
PSFSUP4
Supplement dated September 19, 2002 to Prospectus and
Statement of Additional Information, dated May 1, 2002
SP AIM Core Equity Portfolio
The following supplements the sections of the prospectus entitled ‘‘Investment Objectives and Principal
Strategies,’’ and ‘‘How the Portfolios Invest—Investment Objectives and Policies:’’
The Portfolio’s investment objective is growth of capital. The Portfolio’s secondary objective of current
income is deleted.
SP Deutsche International Equity Portfolio
The following supplements the sections of the prospectus entitled ‘‘Investment Objectives and Principal
Strategies,’’ ‘‘How The Portfolios Invest—Investment Objectives and Policies,’’ ‘‘How The Fund Is Managed—
Investment Sub-Advisers,’’ and ‘‘How The Fund Is Managed—Portfolio Managers:’’
Effective September 30, 2002, Deutsche Asset Management Investment Services Limited (DeAMIS) is the
sub-adviser to the Portfolio. DeAMIS is a wholly owned subsidiary of Deutsche Bank AG. As of June 30, 2002
DeAMIS’ total assets under management were $5.667 billion. DeAMIS’ address is One Appold Street, London
EC2A 2UU.
The following portfolio managers are responsible for the day-to-day management of the Portfolio’s
investments:
Alexander Tedder, Managing Director of DeAMIS and Co-Manager of the Portfolio
앫 Head of EAFE Equity Portfolio Selection Team
앫 Joined DeAMIS in 1994 as a portfolio manager
앫 Was a European analyst (1990-1994) and representative (1992-1994) for Schroeders
앫 12 years of investment experience
앫 Fluent in German, French, Italian and Spanish
앫 Masters in Economics and Business Administration from Freiburg University
Clare Brody, Director of DeAMIS and Co-Manager of the Portfolio
앫 Joined DeAMIS in 1993
앫 10 years of investment industry experience
앫 Chartered Financial Analyst
앫 B.S., Cornell University
Stuart Kirk, Vice President of DeAMIS and Co-Manager of the Portfolio
앫 Joined Deutsche Bank AG, Paris Branch in 1995
앫 Seven years of investment industry experience
앫 Asia-Pacific analyst
앫 M.A. from Cambridge University
PSFSUP3
Marc Slendebroek,Vice President of DeAMIS and Co-Manager of the Portfolio
앫 Portfolio manager for EAFE Equities: London
앫 Joined Deutsche Asset Management Americas, Inc. (formerly, Zurich Scudder Investments, Inc.) in 1994
after five years of experience as equity analyst at Kleinwort Benson Securities and at Enskilda Securities
앫 Fluent in English, Dutch, German, Swedish and Norwegian
앫 M.A. from University of Leiden, Netherlands
Joseph DeSantis, Managing Director of DeAMIS and Co-Manager of the Portfolio
앫 Oversees all equity portfolio managers based in the Americas region
앫 Joined Deutsche Asset Management, Inc. (formerly, Zurich Scudder Investments, Inc.) in 2000
앫 Chief Investment Officer at Chase Trust Bank in Tokyo, Japan, a division of Chase Global Asset
Management and Mutual Funds (1996-2000)
앫 Head of International Equities at Chase in New York (1992-1996)
앫 Positions as a portfolio manager at Chase and as the founder and later Investment Strategist at Strategic
Research International, Inc.
앫 B.A. from the University of Cincinnati
The following supplements the section of the Statement of Additional Information entitled ‘‘Investment
Management And Distribution Arrangements—Investment Management Arrangements:’’
Deutsche Asset Management Investment Services Limited (DeAMIS) is the subadviser to the SP Deutsche
International Equity Portfolio. All references to Deutsche Asset Management, Inc. and/or DAMI with respect to
the SP Deutsche International Equity Portfolio are hereby deleted and replaced accordingly.
Supplement dated August 29, 2002 to
Prospectus, dated May 1, 2002
SP Alliance Large Cap Growth Portfolio
The following supplements the section of the prospectus entitled ‘‘How the Portfolios Invest—Investment
Objectives and Policies:’’
The Portfolio usually invests in about 40-60 companies, with the 25 most highly regarded of these
companies generally constituting approximately 70% of the Portfolio’s investable assets. Alliance seeks to gain
positive returns in good markets while providing some measure of protection in poor markets.
SP MFS Mid-Cap Growth Portfolio
The following supplements the section of the prospectus entitled ‘‘Portfolio Managers:’’
The Portfolio is managed by a team. MFS Senior Vice President Mark Regan, who had been a co-manager
for the Portfolio, retired effective June 30, 2002. David Sette-Ducati will continue as a member of the
management team.
Eric Fischman joined the management team during April 2002. Mr. Fischman is a Senior Vice President of
MFS. Mr. Fischman joined MFS as a research analyst during 2000 and was named a portfolio manager in
April 2002. He earned an M.B.A. degree from Columbia Business School in 1998, a law degree from Boston
University School of Law, and a bachelor’s degree from Cornell University. From 1998 to 2000, Mr. Fischman
served as an equity research analyst at State Street Research. Prior to that, he served as an equity research
analyst at Dreyfus Corporation. Mr. Fischman also holds the Chartered Financial Analyst (CFA) designation.
SP INVESCO Small Company Growth Portfolio
The following supplements the section of the Prospectus entitled ‘‘Portfolio Managers:’’
The following individuals are primarily responsible for the day-to-day management of the Portfolio’s
holdings:
Stacie L. Cowell, a senior vice president of INVESCO, is the lead portfolio manager of the Portfolio. Before
joining INVESCO in 1997, Stacie was senior equity analyst with Founders Asset Management and a capital
markets and trading analyst with Chase Manhattan Bank in New York. She is a CFA charterholder. Stacie
holds an M.S. in Finance from the University of Colorado and a B.A. in Economics from Colgate University.
Cameron Cooke is the co-portfolio manager of the Portfolio. Mr. Cooke joined the investment division of
INVESCO in 2000. Prior to joining INVESCO, Cameron was a senior equity analyst at Wells Capital Management. Mr. Cooke holds a B.A. in economics from the University of North Carolina at Chapel Hill.
PSFSUP1
SP PIMCO Total Return Portfolio
Diversified Conservative Growth Portfolio
The following supplements the section of the prospectus entitled ‘‘How the Portfolios Invest—Investment
Each Portfolio may invest in swap agreements, including interest rate, credit default, currency exchange
rate and total return swaps. Each Portfolio may also invest in preferred stock, and may invest in debt from
emerging markets. Each Portfolio may invest in event-linked bonds.
Jennison Portfolio
The following supplements the section of the Prospectus entitled ‘‘How the Portfolios Invest—Investment
The Portfolio may invest in equity swap agreements.
Diversified Conservative Growth Portfolio
The following supplements the section of the Prospectus entitled ‘‘How the Portfolios Invest—Investment
The Portfolio may enter into short sales of securities. No more than 25% of the Portfolio’s net assets may
be used as collateral or segregated for purposes of securing a short sale obligation.
AIM VARIABLE INSURANCE FUNDS
AIM V.I. AGGRESSIVE GROWTH FUND
(Series I shares)
Supplement dated June 28, 2002
to the Prospectus dated May 1, 2002
Effective July 1, 2002, the following paragraph replaces in its entirety the first paragraph under the heading “FUND
MANAGEMENT - Portfolio Managers” on page 3 of the prospectus:
The advisor uses a team approach to investment management. The individual members of the
team (co-managers) who are primarily responsible for the management of the fund’s portfolio
are:
•
Robert M. Kippes (lead manager), Senior Portfolio Manager, who has been responsible for
the fund since 1998 and has been associated with the advisor and/or its affiliates since 1989.
•
Ryan E. Crane, Senior Portfolio Manager, who has been responsible for the fund since 1999
and has been associated with the advisor and/or its affiliates since 1994.
•
Jay K. Ruchin, Portfolio Manager, who has been responsible for the fund since 2000 and has
been associated with the advisor and/or its affiliates since 1998. From 1996 to 1998, he was
an associate equity analyst for Prudential Securities.
They are assisted by the Mid Cap Growth Team. More information on the fund’s management
team may be found on our website (http://www.aimfunds.com).
AIM V.I. CORE EQUITY FUND
(Series I shares)
Supplement dated July 1, 2002
Effective September 30, 2002, the following paragraph replaces in its entirety the first paragraph under the heading
“INVESTMENT OBJECTIVES AND STRATEGIES - AIM V.I. Core Equity Fund (formerly, AIM V.I. Growth and
Income Fund)” on page 1 of the prospectus:
The fund’s primary investment objective is growth of capital.
Effective July 1, 2002, the following paragraph replaces in its entirety the first paragraph under the heading “FUND
MANAGEMENT - Portfolio Managers” on page 3 of the prospectus:
•
Ronald S. Sloan (lead manager), Senior Portfolio Manager, who has been responsible for the
fund since 2002 and has been associated with the advisor and/or its affiliates since 1998.
From 1993 to 1998, he was President of Verissimo Research and Management, Inc.
•
Michael Yellen, Senior Portfolio manager, who has been responsible for the fund since 2002
They are assisted by the Mid Cap Core Team. More information on the fund’s management team
may be found on our website (http://www.aimfunds.com).
PSFSUP2 Ed. 7/2002
Prospectus
May 1, 2002
Conservative Balanced Portfolio
Diversified Bond Portfolio
Equity Portfolio
Flexible Managed Portfolio
Global Portfolio
High Yield Bond Portfolio
Jennison Portfolio
Money Market Portfolio
Stock Index Portfolio
Value Portfolio
SP Aggressive Growth Asset Allocation Portfolio
SP AIM Aggressive Growth Portfolio
SP Alliance Technology Portfolio
SP Balanced Asset Allocation Portfolio
SP Conservative Asset Allocation Portfolio
SP Davis Value Portfolio
SP Growth Asset Allocation Portfolio
SP Jennison International Growth Portfolio
SP Large Cap Value Portfolio
SP Prudential U.S. Emerging Growth Portfolio
SP Small/Mid-Cap Value Portfolio
SP Strategic Partners Focused Growth Portfolio
As with all mutual funds, the Securities and Exchange Commission
has not approved or disapproved the Fund’s shares nor has the
SEC determined that this prospectus is complete or accurate. It is
a criminal offense to state otherwise.
A particular Portfolio may not be available under the variable life
insurance or variable annuity contract which you have chosen. The
prospectus of the specific contract which you have chosen will
indicate which Portfolios are available and should be read in
conjunction with this prospectus.
Table of Contents
1
RISK/RETURN SUMMARY
1
12
16
Investment Objectives and Principal Strategies
Principal Risks
Evaluating Performance
45
HOW THE PORTFOLIOS INVEST
45
Investment Objectives and Policies
45
46
47
48
50
50
51
52
53
54
55
56
58
59
60
61
62
62
63
63
64
67
67
69
70
71
72
73
75
77
78
Equity Portfolio
Global Portfolio
Jennison Portfolio
Value Portfolio
SP Asset Allocation Portfolios
Table of Contents (continued)
81
OTHER INVESTMENTS AND STRATEGIES
81
81
81
81
81
81
81
82
82
82
82
82
83
83
83
83
83
83
ADRs
Convertible Debt and Convertible Preferred Stock
Derivatives
Dollar Rolls
Equity Swaps
Forward Foreign Currency Exchange Contracts
Futures Contracts
Interest Rate Swaps
Joint Repurchase Account
Loans and Assignments
Mortgage-related Securities
Options
Real Estate Investment Trusts
Repurchase Agreements
Reverse Repurchase Agreements
Short Sales
Short Sales Against-the-Box
When-Issued and Delayed Delivery Securities
84
HOW THE FUND IS MANAGED
84
84
85
87
Board of Directors
Investment Adviser
Investment Sub-Advisers
Portfolio Managers
94
HOW TO BUY AND SELL SHARES OF THE FUND
95
96
Net Asset Value
Distributor
96
OTHER INFORMATION
96
97
Federal Income Taxes
Monitoring for Possible Conflicts
97
FINANCIAL HIGHLIGHTS
(For more information—see back cover)
2
RISK/RETURN SUMMARY
This prospectus provides information about The Prudential Series Fund, Inc. (the Fund), which consists of 36
separate portfolios (each, a Portfolio).
The Fund offers two classes of shares in each Portfolio: Class I and Class II. Class I shares are sold only to separate
accounts of The Prudential Insurance Company of America and its affiliates (Prudential) as investment options under
variable life insurance and variable annuity contracts (the Contracts). (A separate account keeps the assets supporting
certain insurance contracts separate from the general assets and liabilities of the insurance company.) Class II shares
are offered only to separate accounts of non-Prudential insurance companies for the same types of Contracts. Not
every Portfolio is available under every Contract. The prospectus for each Contract lists the Portfolios currently
available through that Contract.
This section highlights key information about each Portfolio available under your Contract. Additional information
follows this summary and is also provided in the Fund’s Statement of Additional Information (SAI).
INVESTMENT OBJECTIVES AND PRINCIPAL STRATEGIES
The following summarizes the investment objectives, principal strategies and principal risks for each of the Portfolios.
We describe the terms listed as principal risks on page 12. While we make every effort to achieve the investment
objective for each Portfolio, we can’t guarantee success and it is possible that you could lose money.
The Portfolio’s investment objective is total investment return consistent with a conservatively managed
diversified portfolio. This Portfolio may be appropriate for an investor who wants diversification with a relatively lower
risk of loss than that associated with the Flexible Managed Portfolio (see below). To achieve our objective, we invest in
a mix of equity securities, debt obligations and money market instruments. Up to 30% of the Portfolio’s total assets may
be invested in foreign securities. We may invest a portion of the Portfolio’s assets in high-yield/high-risk debt securities,
which are riskier than high-grade securities. While we make every effort to achieve our objective, we can’t guarantee
success and it is possible that you could lose money.
Principal Risks:
‰ company risk
‰ credit risk
‰ foreign investment risk
‰ high yield risk
‰ interest rate risk
‰ market risk
‰ management risk
The Portfolio’s investment objective is a high level of income over a longer term while providing reasonable
safety of capital. This means we look for investments that we think will provide a high level of current income, but
which are not expected to involve a substantial risk of loss of capital through default. To achieve our objective, we
normally invest at least 80% of the Portfolio’s investable assets (net assets plus any borrowings made for investment
purposes) in high-grade debt obligations and high-quality money market investments. We may purchase securities that
are issued outside the U.S. by foreign or U.S. issuers. In addition, we may invest a portion of the Portfolio’s assets in
high-yield/high-risk debt securities, which are riskier than high-grade securities. While we make every effort to achieve
our objective, we can’t guarantee success and it is possible that you could lose money.
Principal Risks:
‰ credit risk
‰ high yield risk
‰ management risk
Equity Portfolio
The Portfolio’s investment objective is long-term growth of capital. To achieve our objective, we normally invest at
least 80% of the Portfolio’s investable assets (net assets plus any borrowings made for investment purposes) in
common stocks of major established corporations as well as smaller companies that we believe offer attractive
prospects of appreciation. The Portfolio may invest up to 30% of its total assets in foreign securities. While we make
every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.
Principal Risks:
company risk
foreign investment risk
market risk
management risk
‰
‰
‰
‰
The Portfolio’s investment objective is a high total return consistent with an aggressively managed diversified
portfolio. This Portfolio may be appropriate for an investor who wants diversification and is willing to accept a relatively
high level of loss in an effort to achieve greater appreciation. To achieve our objective, we invest in a mix of equity
securities, debt obligations and money market instruments. The Portfolio may invest in foreign securities. A portion of
the debt portion of the Portfolio may be invested in high-yield/high-risk debt securities, which are riskier than high-grade
securities. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you
could lose money.
Principal Risks:
‰ company risk
‰ credit risk
‰ high yield risk
‰ market risk
‰ management risk
Global Portfolio
The Portfolio’s investment objective is long-term growth of capital. To achieve this objective, we invest primarily in
common stocks (and their equivalents) of foreign and U.S. companies. Generally, we invest in at least three countries,
including the U.S., but we may invest up to 35% of the Portfolio’s assets in companies located in any one country other
than the U.S. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that
you could lose money.
Principal Risks:
company risk
market risk
management risk
‰
‰
‰
‰
The Portfolio’s investment objective is a high total return. In pursuing our objective, we normally invest at least 80% of
the Portfolio’s investable assets (net assets plus any borrowings made for investment purposes) in high-yield/high-risk
debt securities. Such securities have speculative characteristics and are riskier than high-grade securities. The Portfolio
may invest up to 20% of its total assets in foreign debt obligations. While we make every effort to achieve our objective,
we can’t guarantee success and it is possible that you could lose money.
2
Principal Risks:
‰ credit risk
‰ high yield risk
‰ market risk
‰ management risk
Jennison Portfolio (formerly, Prudential Jennison Portfolio)
The Portfolio’s investment objective is to achieve long-term growth of capital. To achieve this objective, we invest
primarily in equity securities of major, established corporations that we believe offer above-average growth prospects.
The Portfolio may invest up to 30% of its total assets in foreign securities. While we make every effort to achieve our
objective, we can’t guarantee success and it is possible that you could lose money.
Principal Risks:
‰ company risk
‰ management risk
‰ market risk
The Portfolio’s investment objective is maximum current income consistent with the stability of capital and the
maintenance of liquidity. To achieve our objective, we invest in high-quality short-term money market instruments
issued by the U.S. government or its agencies, as well as by corporations and banks, both domestic and foreign. The
Portfolio will invest only in instruments that mature in thirteen months or less, and which are denominated in U.S.
dollars. While we make every effort to achieve our objective, we can’t guarantee success.
Principal Risks:
‰ credit risk
‰ management risk
An investment in the Money Market Portfolio is not a bank deposit and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. Although the Portfolio seeks to maintain a net asset
value of $10 per share, it is possible to lose money by investing in the Portfolio.
Principal Risks:
‰ company risk
‰ credit risk
‰ derivatives risk
‰ industry/sector risk
‰ management risk
‰ market risk
The Portfolio’s investment objective is investment results that generally correspond to the performance of
publicly-traded common stocks. To achieve our objective, we attempt to duplicate the price and yield of the
Standard & Poor’s 500 Composite Stock Price Index (S&P 500) by investing at least 80% of the Portfolio’s investable
assets (net assets plus any borrowings made for investment purposes) in S&P 500 stocks. The S&P 500 represents
3
more than 70% of the total market value of all publicly-traded common stocks and is widely viewed as representative of
publicly-traded common stocks as a whole. The Portfolio is not “managed” in the traditional sense of using market and
economic analyses to select stocks. Rather, the portfolio manager purchases stocks in proportion to their weighting in
the S&P 500. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that
Principal Risks:
‰ company risk
‰ market risk
Value Portfolio
The Portfolio’s investment objective is capital appreciation. To achieve our objective, we invest primarily in common
stocks that are undervalued — those stocks that are trading below their underlying asset value, cash generating ability and
overall earnings and earnings growth. We normally invest at least 65% of the Portfolio’s total assets in the common stock
and convertible securities of companies that we believe will provide investment returns above those of the Standard &
Poor’s 500 Composite Stock Price Index (S&P 500) or the New York Stock Exchange (NYSE) Composite Index. Most of
our investments will be securities of large capitalization companies. The Portfolio may invest up to 25% of its total assets in
real estate investment trusts (REITs) and up to 30% of its total assets in foreign securities. There is a risk that “value”
stocks can perform differently from the market as a whole and other types of stocks and can continue to be undervalued by
the markets for long periods of time. While we make every effort to achieve our objective, we can’t guarantee success and
it is possible that you could lose money.
Principal Risks:
‰ company risk
‰ credit risk
‰ market risk
The SP Aggressive Growth Asset Allocation Portfolio seeks capital appreciation by investing in large cap equity
Portfolios, international Portfolios, and small/mid-cap equity Portfolios. Pertinent risks are those associated with each
Portfolio in which this Portfolio invests. While we make every effort to achieve our objective, we can’t guarantee
The SP Aggressive Growth Asset Allocation Portfolio invests in shares of the following Fund Portfolios:
‰
a large capitalization equity component (approximately 40% of the Portfolio, invested in shares of the SP
Davis Value Portfolio (20% of Portfolio), the SP Alliance Large Cap Growth Portfolio (10% of Portfolio), and
the Jennison Portfolio (10% of Portfolio)); and
‰
an international component (approximately 35% of the Portfolio, invested in shares of the SP Jennison
International Growth Portfolio (17.5% of Portfolio) and the SP Deutsche International Equity Portfolio (17.5%
of Portfolio)); and
‰
a small/mid-capitalization equity component (approximately 25% of the Portfolio, invested in shares of the SP
Small/Mid-Cap Value Portfolio (12.5% of Portfolio) and the SP Prudential U.S. Emerging Growth Portfolio
(12.5% of Portfolio)).
For more information on the underlying Portfolios, please refer to their investment summaries included in this
prospectus.
The Portfolio’s investment objective is to achieve long-term growth of capital. The Portfolio seeks to meet this
objective by investing primarily in the common stocks of companies whose earnings the portfolio managers expect to
4
grow more than 15% per year. Growth stocks usually involve a higher level of risk than value stocks, because growth
stocks tend to attract more attention and more speculative investments than value stocks. On behalf of the Portfolio,
A I M Capital Management, Inc. will invest in securities of small- and medium-sized growth companies, may invest up
to 25% of its total assets in foreign securities and may invest up to 25% of its total assets in real estate investment
trusts (REITs). While we make every effort to achieve our objective, we can’t guarantee success and it is possible that
Principal Risks:
‰ company risk
‰ liquidity risk
‰ management risk
‰ market risk
SP AIM Core Equity Portfolio (formerly, SP AIM Growth and Income Portfolio)
The Portfolio’s primary investment objective is growth of capital with a secondary objective of current income. The
Portfolio seeks to meet these objectives by investing at least 80% of its investable assets (net assets plus any
borrowings made for investment purposes) in equity securities, including convertible securities of established
companies that have long-term above-average growth in earnings and dividends, and growth companies that the
portfolio managers believe have the potential for above-average growth in earnings and dividends. In complying with
this 80% requirement, the Portfolio’s investments may include synthetic instruments. Synthetic instruments are
investments that have economic characteristics similar to the Portfolio’s direct investments and may include warrants,
futures, options, exchange-traded funds and ADRs. A I M Capital Management, Inc. considers whether to sell a
particular security when they believe the security no longer has that potential or the capacity to generate income. The
Portfolio may invest up to 20% of its total assets in foreign securities. While we make every effort to achieve our
Principal Risks:
‰ company risk
‰ credit risk
‰ leveraging risk
‰ liquidity risk
‰ management risk
‰ market risk
The Portfolio’s investment objective is growth of capital by pursuing aggressive investment policies. The Portfolio
normally invests at least 80% of the Portfolio’s investable assets (net assets plus any borrowings made for investment
purposes) in stocks of companies considered to have large capitalizations (i.e., similar to companies included in the S&P
500 Index). Up to 15% of the Portfolio’s total assets may be invested in foreign securities. Unlike most equity funds, the
Portfolio focuses on a relatively small number of intensively researched companies. Alliance Capital Management, L.P.
(“Alliance”) selects the Portfolio’s investments from a research universe of more than 500 companies that have strong
management, superior industry positions, excellent balance sheets, and superior earnings growth prospects. “Alliance”,
“Alliance Capital” and their logos are registered marks of Alliance Capital Management, L.P. While we make every effort
to achieve our objective, we can’t guarantee success and it is possible that you could lose money.
Principal Risks:
‰ company risk
‰ management risk
‰ market risk
5
The Portfolio’s objective is growth of capital. The Portfolio normally invests at least 80% of its investable assets (net
assets plus any borrowings made for investment purposes) in securities of companies that use technology extensively
in the development of new or improved products or processes. Within this framework, the Portfolio may invest in any
company and industry and in any type of security with potential for capital appreciation. It invests in well-known,
established companies or in new or unseasoned companies. The Portfolio also may invest in debt securities and up to
25% of its total assets in foreign securities. In addition, technology stocks, especially those of smaller, less-seasoned
companies, tend to be more volatile than the overall stock market. The Portfolio may invest up to 25% of its total assets
in foreign securities. While we make every effort to achieve our objective, we can’t guarantee success and it is possible
that you could lose money. This Portfolio is advised by Alliance Capital Management, L.P.
Principal Risks:
company risk
credit risk
industry/sector risk
interest rate risk
liquidity risk
management risk
market risk
‰
‰
‰
‰
‰
‰
‰
‰
The SP Balanced Asset Allocation Portfolio seeks to provide a balance between current income and growth of capital
by investing in fixed income Portfolios, large cap equity Portfolios, small/mid-cap equity Portfolios, and international
equity Portfolios. Pertinent risks are those associated with each Portfolio in which this Portfolio invests. While we make
The SP Balanced Asset Allocation Portfolio invests in shares of the following Portfolios:
‰
a fixed income component (approximately 40% of the Portfolio, invested in shares of the SP PIMCO Total
Return Portfolio (25% of Portfolio) and the SP PIMCO High Yield Portfolio (15% of Portfolio)); and
‰
Davis Value Portfolio (17.5% of Portfolio), the SP Alliance Large Cap Growth Portfolio (8.75% of Portfolio),
and the Jennison Portfolio (8.75% of Portfolio)); and
‰
a small/mid capitalization equity component (approximately 15% of the Portfolio, invested in shares of the SP
Small/Mid-Cap Value Portfolio (7.5% of Portfolio) and the SP Prudential U.S. Emerging Growth Portfolio (7.5%
of Portfolio)); and
‰
International Growth Portfolio (5% of Portfolio) and the SP Deutsche International Equity Portfolio (5% of
Portfolio)).
prospectus.
The SP Conservative Asset Allocation Portfolio seeks to provide current income with low to moderate capital
appreciation by investing in fixed income Portfolios, large cap equity Portfolios, and small/mid-cap equity Portfolios.
Pertinent risks are those associated with each Portfolio in which this Portfolio invests. While we make every effort to
achieve our objective, we can’t guarantee success and it is possible that you could lose money.
The SP Conservative Asset Allocation Portfolio invests in shares of the following Portfolios:
‰
a fixed income component (approximately 60% of the Portfolio, invested in shares of the SP PIMCO Total
Return Portfolio (40% of Portfolio) and the SP PIMCO High Yield Portfolio (20% of Portfolio)); and
6
‰
Davis Value Portfolio (15% of Portfolio), the SP Alliance Large Cap Growth Portfolio (7.5% of Portfolio), and
the Jennison Portfolio (7.5% of Portfolio)); and
‰
Small/Mid-Cap Value Portfolio (5% of Portfolio) and the SP Prudential U.S. Emerging Growth Portfolio (5% of
Portfolio)).
prospectus.
SP Davis Value Portfolio’s investment objective is growth of capital. The Portfolio invests primarily in common stock of
U.S. companies with market capitalizations of at least $5 billion.
The portfolio managers use the investment philosophy of Davis Selected Advisers, L.P. to select common stocks of
quality, overlooked growth companies at value prices and to hold them for the long-term. They look for companies with
sustainable growth rates selling at modest price-earnings multiples that they hope will expand as other investors
recognize the company’s true worth. The portfolio managers believe that if you combine a sustainable growth rate with
a gradually expanding multiple, these rates compound and can generate returns that could exceed average returns
earned by investing in large capitalization domestic stocks. They consider selling a company if the company no longer
exhibits the characteristics that they believe foster sustainable long-term growth, minimize risk and enhance the
potential for superior long-term returns. There is a risk that “Value” Stocks can perform differently from the market as a
whole and other types of stocks and can continue to be undervalued by the markets for long periods of time. While we
make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.
Principal Risks:
company risk
liquidity risk
management risk
market risk
‰
‰
‰
‰
The Portfolio’s investment objective is to invest for long-term capital appreciation. The Portfolio normally invests at
least 80% of its investable assets (net assets plus borrowings made for investment purposes) in the stocks and other
equity securities of companies in developed countries outside the United States. The Portfolio seeks to achieve its goal
by investing primarily in companies in developed foreign countries. The companies are selected by an extensive
tracking system plus the input of experts from various financial disciplines. While we make every effort to achieve our
objective, we can’t guarantee success and it is possible that you could lose money. This Portfolio is advised by
Deutsche Asset Management Inc. (DAMI)
Principal Risks:
‰ company risk
‰ management risk
‰ market risk
The SP Growth Asset Allocation Portfolio seeks to provide long-term growth of capital with consideration also given to
current income, by investing in large-cap equity Portfolios, fixed income Portfolios, international equity Portfolios, and
small/mid-cap equity Portfolios. Pertinent risks are those associated with each Portfolio in which this Portfolio invests.
While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose
money.
7
The Growth Asset Allocation Portfolio invests in shares of the following Portfolios:
‰
Davis Value Portfolio (22.5% of Portfolio), the SP Alliance Large Cap Growth Portfolio (11.25% of Portfolio),
and the Jennison Portfolio (11.25% of Portfolio)); and
‰
a fixed income component (approximately 20% of the Portfolio, invested in shares of the SP PIMCO High
Yield Portfolio (10% of Portfolio) and the SP PIMCO Total Return Portfolio (10% of Portfolio)); and
‰
International Growth Portfolio (10% of Portfolio) and the SP Deutsche International Equity Portfolio (10% of
Portfolio)); and
‰
Small/Mid-Cap Value Portfolio (7.5% of Portfolio) and the SP Prudential U.S. Emerging Growth Portfolio (7.5%
of Portfolio)).
prospectus.
The Portfolio seeks long-term capital growth. Under normal circumstances, the Portfolio will invest at least 80% of its
investable assets (net assets plus any borrowings made for investment purposes) in small-capitalization companies —
those which are included in the Russell 2000 Growth Index at the time of purchase, or if not included in that index,
have market capitalizations of $2.5 billion or below at the time of purchase.
Investments in small, developing companies carry greater risk than investments in larger, more established companies.
Developing companies generally face intense competition, and have a higher rate of failure than larger companies. On
the other hand, large companies were once small companies themselves, and the growth opportunities of some small
companies may be quite high. While we make every effort to achieve our objective, we can’t guarantee success and it
is possible that you could lose money. This Portfolio is advised by INVESCO Funds Group, Inc.
Principal Risks:
‰ company risk
‰ management risk
‰ market risk
The Portfolio’s investment objective is long-term growth of capital. The Portfolio seeks to achieve this objective by
investing in equity-related securities of foreign issuers. This means the Portfolio looks for investments that Jennison
Associates LLC thinks will increase in value over a period of years. To achieve its objective, the Portfolio invests
primarily in the common stock of large and medium-sized foreign companies. Under normal circumstances, the
Portfolio invests at least 65% of its total assets in common stock of foreign companies operating or based in at least
five different countries. The Portfolio looks primarily for stocks of companies whose earnings are growing at a faster
rate than other companies. These companies typically have characteristics such as above average growth in earnings
and cash flow, improving profitability, strong balance sheets, management strength and strong market share for its
products. The Portfolio also tries to buy such stocks at attractive prices in relation to their growth prospects. While we
Principal Risks:
company risk
market risk
‰
‰
‰
8
The Portfolio’s investment objective is long-term growth of capital. The portfolio’s investment strategy includes
normally investing at least 80% of its investable assets (net assets plus any borrowings made for investment purposes)
in securities of companies with large market capitalizations (those with market capitalizations similar to companies in
the Standard & Poor’s 500 Composite Stock Price Index or the Russell 1000 Index). The Portfolio normally invests its
assets primarily in common stocks. The Portfolio invests in securities of companies that Fidelity Management &
Research Company (FMR) believes are undervalued in the marketplace in relation to factors such as assets, earnings,
growth potential or cash flow in relation to securities of other companies in the same industry (stocks of these
companies are often called “value” stocks). The Portfolio invests in domestic and foreign issuers. The Portfolio uses
fundamental analysis of each issuer’s financial condition, its industry position and market and economic conditions,
along with statistical models to evaluate growth potential, valuation, liquidity and investment risk, to select investments.
There is a risk that “value” stocks can perform differently from the market as a whole and other types of stocks and can
continue to be undervalued by the markets for long periods of time. An investment in this Portfolio, like any Portfolio, is
not a deposit of a bank, and is not insured by the Federal Deposit Insurance Corporation or any other government
agency. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you
could lose money.
Principal Risks:
company risk
management risk
market risk
‰
‰
‰
‰
The Portfolio’s investment objective is capital appreciation. The Portfolio invests, under normal market conditions, at
least 65% of its net assets in common stocks and related securities, such as preferred stocks, convertible securities
and depositary receipts for those securities. The Portfolio focuses on companies which Massachusetts Financial
Services Company (MFS) believes have favorable growth prospects and attractive valuations based on current and
expected earnings or cash flow. The Portfolio’s investments may include securities listed on a securities exchange or
traded in the over-the-counter markets. MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the Portfolio. This means that securities are selected based upon fundamental analysis (such as an analysis
of earnings, cash flows, competitive position and management’s abilities) performed by the Portfolio’s portfolio manager
and MFS’s large group of equity research analysts. The Portfolio may invest in foreign securities (including emerging
market securities), through which it may have exposure to foreign currencies. The Portfolio may engage in active and
frequent trading to achieve its principal investment strategies. While we make every effort to achieve our objective, we
can’t guarantee success and it is possible that you could lose money. High portfolio turnover results in higher
transaction costs and can affect the Portfolio’s performance.
Principal Risks:
company risk
management risk
market risk
portfolio turnover risk
‰
‰
‰
‰
‰
The Portfolio’s investment objective is long-term growth of capital. The Portfolio invests, under normal market
conditions, at least 80% of its investable assets (net assets plus any borrowings made for investment purposes) in
common stocks and related securities, such as preferred stocks, convertible securities and depositary receipts for
those securities. These securities typically are of medium market capitalizations, which Massachusetts Financial
Services Company (MFS) believes have above-average growth potential.
Medium market capitalization companies are defined by the Portfolio as companies with market capitalizations equaling
or exceeding $250 million but not exceeding the top of the Russell Midcap™ Growth Index range at the time of the
9
Portfolio’s investment. This Index is a widely recognized, unmanaged index of mid-cap common stock prices.
Companies whose market capitalizations fall below $250 million or exceed the top of the Russell Midcap™ Growth
Index range after purchase continue to be considered medium-capitalization companies for purposes of the Portfolio’s
80% investment policy. The Portfolio’s investments may include securities listed on a securities exchange or traded in
the over-the-counter markets. MFS uses a bottom-up, as opposed to a top-down, investment style in managing the
Portfolio. This means that securities are selected based upon fundamental analysis (such as an analysis of earnings,
cash flows, competitive position and management’s abilities) performed by the portfolio manager and MFS’s large
group of equity research analysts. The Portfolio is a non-diversified mutual fund portfolio. This means that the Portfolio
may invest a relatively high percentage of its assets in a small number of issuers. The Portfolio may invest in foreign
securities (including emerging markets securities). The Portfolio is expected to engage in active and frequent trading to
achieve its principal investment strategies. While we make every effort to achieve our objective, we can’t guarantee
Principal Risks:
‰ company risk
‰ management risk
‰ market risk
‰ portfolio turnover risk
The investment objective of the Portfolio is to seek maximum total return, consistent with preservation of capital
and prudent investment management. The Portfolio seeks to achieve its investment objective by investing under
normal circumstances at least 80% of its investable assets (net assets plus any borrowings made for investment
purposes) in a diversified portfolio of high yield/high risk securities rated below investment grade but rated at least B by
Moody’s Investor Service, Inc. (Moody’s) or Standard & Poor’s Ratings Group (S&P), or, if unrated, determined by
Pacific Investment Management Company (PIMCO) to be of comparable quality. The remainder of the Portfolio’s
assets may be invested in investment grade fixed income instruments. The average duration of the Portfolio normally
varies within a two- to six-year time frame based on PIMCO’s forecast for interest rates. The Portfolio may invest
without limit in U.S. dollar-denominated securities of foreign issuers. The Portfolio may invest up to 15% of its assets in
euro-denominated securities. The Portfolio normally will hedge at least 75% of its exposure to the euro to reduce the
risk of loss due to fluctuations in currency exchange rates. While we make every effort to achieve our objective, we
can’t guarantee success and it is possible that you could lose money.
Principal Risks:
‰ credit risk
‰ high yield risk
‰ leveraging risk
‰ liquidity risk
‰ management risk
‰ market risk
‰ mortgage risk
The investment objective of the Portfolio is to seek maximum total return, consistent with preservation of capital
and prudent investment management. The Portfolio seeks to achieve its investment objective by investing under
normal circumstances at least 65% of its assets in a diversified portfolio of fixed income instruments of varying
maturities. The average portfolio duration of this Portfolio normally varies within a three- to six-year time frame based
on PIMCO’s forecast for interest rates. While we make every effort to achieve our objective, we can’t guarantee
10
Principal Risks:
‰ credit risk
‰ management risk
The Portfolio’s investment objective is long-term capital appreciation, which means that the Portfolio seeks
investments whose price will increase over several years. The Portfolio normally invests at least 80% of its investable
assets (net assets plus any borrowings made for investment purposes) in equity securities of small and medium-sized
U.S. companies that Jennison Associates LLC believes have the potential for above-average growth. The Portfolio also
may use derivatives for hedging or to improve the Portfolio’s returns. The Portfolio may actively and frequently trade its
portfolio securities. High portfolio turnover results in higher transaction costs and can affect the Portfolio’s performance.
While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose
money.
Principal Risks:
‰ company risk
‰ management risk
‰ market risk
The Portfolio’s investment objective is long-term growth of capital. The Portfolio’s investment strategy includes
normally investing at least 80% of its investable assets (net assets plus any borrowings made for investment purposes)
in securities of companies with small to medium market capitalizations (those with market capitalizations similar to
companies in the S&P Small Cap 600 or the Russell 2000 for small market capitalization and the S&P MidCap 400 or
the Russell Midcap® Index for medium market capitalization). The Portfolio normally invests its assets primarily in
common stocks. The Portfolio invests in securities of companies that Fidelity Management & Research Company
(FMR) believes are undervalued in the marketplace in relation to factors such as assets, earnings, growth potential or
cash flow, or in relation to securities of other companies in the same industry, (stocks of these companies are often
called “value” stocks). The Portfolio invests in domestic and foreign issuers. The Portfolio uses fundamental analysis of
each issuer’s financial condition, its industry position and market and economic conditions, along with statistical models
to evaluate growth potential, valuation, liquidity and investment risk to select investments. There is a risk that “value”
stocks can perform differently from the market as a whole and other types of stocks and can continue to be
undervalued by the markets for long periods of time. An investment in this Portfolio, like any Portfolio, is not a deposit
of a bank, and is not insured by the Federal Deposit Insurance Corporation or any other government agency. While we
Principal Risks:
‰ company risk
‰ liquidity risk
‰ management risk
‰ market risk
The Portfolio’s investment objective is long-term growth of capital. This means the Portfolio seeks investments
whose price will increase over several years. The Portfolio normally invests at least 65% of its total assets in equityrelated securities of U.S. companies that the adviser believes to have strong capital appreciation potential. The
Portfolio’s strategy is to combine the efforts of two investment advisers and to invest in the favorite stock selection
ideas of three portfolio managers (two of whom invest as a team). Each investment adviser to the Portfolio utilizes a
growth style to select approximately 20 securities. The portfolio managers build a portfolio with stocks in which they
11
have the highest confidence and may invest more than 5% of the Portfolio’s assets in any one issuer. The Portfolio is
nondiversified, meaning it can invest a relatively high percentage of its assets in a small number of issuers. Investing in
a nondiversified portfolio, particularly a portfolio investing in approximately 40 equity-related securities, involves greater
risk than investing in a diversified portfolio because a loss resulting from the decline in the value of one security may
represent a greater portion of the total assets of a nondiversified portfolio. The Portfolio may actively and frequently
trade its portfolio securities. While we make every effort to achieve our objective, we can’t guarantee success and it is
possible that you could lose money. This Portfolio is advised by Jennison Associates LLC and Alliance Capital
Management, L.P.
Principal Risks:
‰ company risk
‰ management risk
‰ market risk
‰ portfolio turnover risk
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Like any mutual fund, an investment in a Portfolio could
lose value, and you could lose money. The following summarizes the principal risks of investing in the Portfolios.
Company risk. The price of the stock of a particular company can vary based on a variety of factors, such as the
company’s financial performance, changes in management and product trends, and the potential for takeover and
acquisition. This is especially true with respect to equity securities of smaller companies, whose prices may go up and
down more than equity securities of larger, more established companies. Also, since equity securities of smaller
companies may not be traded as often as equity securities of larger, more established companies, it may be difficult or
impossible for a Portfolio to sell securities at a desirable price. Foreign securities have additional risks, including
exchange rate changes, political and economic upheaval, the relative lack of information about these companies,
relatively low market liquidity and the potential lack of strict financial and accounting controls and standards.
Credit risk. Debt obligations are generally subject to the risk that the issuer may be unable to make principal and
interest payments when they are due. There is also the risk that the securities could lose value because of a loss of
confidence in the ability of the borrower to pay back debt. Non-investment grade debt — also known as “high-yield
bonds” and “junk bonds” — have a higher risk of default and tend to be less liquid than higher-rated securities.
Derivatives risk. Derivatives are financial contracts whose value depends on, or is derived from, the value of an
underlying asset, interest rate or index. The Portfolios typically use derivatives as a substitute for taking a position in
the underlying asset and/or as part of a strategy designed to reduce exposure to other risks, such as interest rate or
currency risk. A Portfolio may also use derivatives for leverage, in which case their use would involve leveraging risk. A
Portfolio’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with
investing directly in securities and other traditional investments. Derivatives are subject to a number of risks described
elsewhere, such as liquidity risk, interest rate risk, market risk, credit risk and management risk. They also involve the
risk of mispricing or improper valuation and the risk that changes in the value of the derivative may not correlate
perfectly with the underlying asset, rate or index. A Portfolio investing in a derivative instrument could lose more than
the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances.
Foreign investment risk. Investing in foreign securities generally involves more risk than investing in securities of
U.S. issuers. Foreign investment risk includes the specific risks described below.
Currency risk. Changes in currency exchange rates may affect the value of foreign securities held by a Portfolio
and the amount of income available for distribution. If a foreign currency grows weaker relative to the U.S. dollar,
the value of securities denominated in that foreign currency generally decreases in terms of U.S. dollars. If a
Portfolio does not correctly anticipate changes in exchange rates, its share price could decline as a result. In
addition, certain hedging activities may cause the Portfolio to lose money and could reduce the amount of income
available for distribution.
12
Emerging market risk. To the extent that a Portfolio invests in emerging markets to enhance overall returns, it
may face higher political, information, and stock market risks. In addition, profound social changes and business
practices that depart from norms in developed countries’ economies have sometimes hindered the orderly growth
of emerging economies and their stock markets in the past. High levels of debt may make emerging economies
heavily reliant on foreign capital and vulnerable to capital flight.
Foreign market risk. Foreign markets, especially those in developing countries, tend to be more volatile than U.S.
markets and are generally not subject to regulatory requirements comparable to those in the U.S. Because of
differences in accounting standards and custody and settlement practices, investing in foreign securities generally
involves more risk than investing in securities of U.S. issuers.
Information risk. Financial reporting standards for companies based in foreign markets usually differ from those in
the United States. Since the “numbers” themselves sometimes mean different things, the sub-advisers devote
much of their research effort to understanding and assessing the impact of these differences upon a company’s
financial conditions and prospects.
Liquidity risk. Stocks that trade less can be more difficult or more costly to buy, or to sell, than more liquid or
active stocks. This liquidity risk is a factor of the trading volume of a particular stock, as well as the size and
liquidity of the entire local market. On the whole, foreign exchanges are smaller and less liquid than the U.S.
market. This can make buying and selling certain shares more difficult and costly. Relatively small transactions in
some instances can have a disproportionately large effect on the price and supply of shares. In certain situations, it
may become virtually impossible to sell a stock in an orderly fashion at a price that approaches an estimate of its
value.
Political developments. Political developments may adversely affect the value of a Portfolio’s foreign securities.
Political risk. Some foreign governments have limited the outflow of profits to investors abroad, extended
diplomatic disputes to include trade and financial relations, and imposed high taxes on corporate profits.
Regulatory risk. Some foreign governments regulate their exchanges less stringently, and the rights of
shareholders may not be as firmly established.
High yield risk. Portfolios that invest in high yield securities and unrated securities of similar credit quality (commonly
known as “junk bonds”) may be subject to greater levels of interest rate, credit and liquidity risk than Portfolios that do
not invest in such securities. High yield securities are considered predominantly speculative with respect to the issuer’s
continuing ability to make principal and interest payments. An economic downturn or period of rising interest rates could
adversely affect the market for high yield securities and reduce a Portfolio’s ability to sell its high yield securities
(liquidity risk).
Industry/sector risk. Portfolios that invest in a single market sector or industry can accumulate larger positions in
single issuers or an industry sector. As a result, the Portfolio’s performance may be tied more directly to the success or
failure of a smaller group of portfolio holdings.
Interest rate risk. Fixed income securities are subject to the risk that the securities could lose value because of
interest rate changes. For example, bonds tend to decrease in value if interest rates rise. Debt obligations with longer
maturities sometimes offer higher yields, but are subject to greater price shifts as a result of interest rate changes than
debt obligations with shorter maturities.
Leveraging risk. Certain transactions may give rise to a form of leverage. Such transactions may include, among
others, reverse repurchase agreements, loans of portfolio securities, and the use of when-issued, delayed delivery or
forward commitment contracts. The use of derivatives may also create leveraging risks. To mitigate leveraging risk, a
sub-adviser can segregate liquid assets or otherwise cover the transactions that may give rise to such risk. The use of
leverage may cause a Portfolio to liquidate portfolio positions when it may not be advantageous to do so to satisfy its
obligations or to meet segregation requirements. Leverage, including borrowing, may cause a Portfolio to be more
volatile than if the Portfolio had not been leveraged. This is because leveraging tends to exaggerate the effect of any
increase or decrease in the value of a Portfolio’s securities.
13
Liquidity risk. Liquidity risk exists when particular investments are difficult to purchase or sell. A Portfolio’s
investments in illiquid securities may reduce the returns of the Portfolio because it may be unable to sell the illiquid
securities at an advantageous time or price. Portfolios with principal investment strategies that involve foreign
securities, derivatives or securities with substantial market and/or credit risk tend to have the greatest exposure to
liquidity risk.
Management risk. Actively managed investment portfolios are subject to management risk. Each sub-adviser will
apply investment techniques and risk analyses in making investment decisions for the Portfolios, but there can be no
guarantee that these will produce the desired results.
Market risk. Common stocks are subject to market risk stemming from factors independent of any particular security.
Investment markets fluctuate. All markets go through cycles and market risk involves being on the wrong side of a
cycle. Factors affecting market risk include political events, broad economic and social changes, and the mood of the
investing public. You can see market risk in action during large drops in the stock market. If investor sentiment turns
gloomy, the price of all stocks may decline. It may not matter that a particular company has great profits and its stock is
selling at a relatively low price. If the overall market is dropping, the values of all stocks are likely to drop. Generally, the
stock prices of large companies are more stable than the stock prices of smaller companies, but this is not always the
case. Smaller companies often offer a smaller range of products and services than large companies. They may also
have limited financial resources and may lack management depth. As a result, stocks issued by smaller companies
may fluctuate in value more than the stocks of larger, more established companies.
Mortgage risk. A Portfolio that purchases mortgage related securities is subject to certain additional risks. Rising
interest rates tend to extend the duration of mortgage-related securities, making them more sensitive to changes in
interest rates. As a result, in a period of rising interest rates, a Portfolio that holds mortgage-related securities may
exhibit additional volatility. This is known as extension risk. In addition, mortgage-related securities are subject to
prepayment risk. When interest rates decline, borrowers may pay off their mortgages sooner than expected. This can
reduce the returns of a Portfolio because the Portfolio will have to reinvest that money at the lower prevailing interest
rates.
Portfolio turnover risk. A Portfolio’s investments may be bought and sold relatively frequently. A high turnover rate
may result in higher brokerage commissions and taxable capital gain distributions to a Portfolio’s shareholders.
*
*
*
For more information about the risks associated with the Portfolios, see “How the Portfolios Invest — Investment
Risks.”
*
*
14
*
EVALUATING PERFORMANCE
A number of factors — including risk — can affect how the Portfolio performs. The bar chart and table below
demonstrate the risk of investing in the Portfolio by showing how returns can change from year to year and by showing
how the Portfolio’s average annual returns compare with a stock index and a group of similar mutual funds. Past
performance does not mean that the Portfolio will achieve similar results in the future.
* These annual returns do not include Contract charges. If Contract charges were included, the annual returns would
have been lower than those shown. See the accompanying Contract prospectus.
Average Annual Returns* (as of 12/31/01)
Class I shares
S&P 500**
Conservative Balanced Custom Blended Index***
Lipper Average****
1 YEAR
5 YEARS
10 YEARS
ⳮ2.02%
ⳮ11.88%
ⳮ2.22%
ⳮ2.87%
5.69%
10.70%
8.81%
8.04%
7.55%
12.93%
9.81%
9.19%
* The Portfolio’s returns are after deduction of expenses and do not include Contract charges.
** The Standard & Poor’s 500 Composite Stock Price Index (S&P 500) — an unmanaged index of 500 stocks of large
U.S. companies — gives a broad look at how stock prices have performed. These returns do not include the effect
of any investment management expenses. These returns would have been lower if they included the effect of
these expenses. Source: Lipper, Inc.
*** The Conservative Balanced Custom Blended Index consists of the Standard & Poor’s 500 Composite Stock Price
Index (50%), the Lehman Aggregate Bond Index (40%) and the T-Bill 3 Month Blend (10%). These returns do not
include the effect of investment management expenses. These returns would have been lower if they included the
effect of these expenses. Source: Prudential Investments LLC.
**** The Lipper/Variable Insurance Products (VIP) Balanced Average is calculated by Lipper Analytical Services, Inc.
and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are
net of investment fees and fund expenses but not product charges. These returns would have been lower if they
included the effect of product charges. Source: Lipper, Inc.
15
how the Portfolio’s average annual returns compare with a market index and a group of similar mutual funds. Past
Class I shares
Lehman Aggregate Bond Index**
Lipper Average***
1 YEAR
5 YEARS
10 YEARS
6.98%
8.44%
7.57%
6.27%
7.43%
6.44%
6.92%
7.23%
7.07%
** The Lehman Aggregate Bond Index is comprised of more than 5,000 government and corporate bonds. These
returns do not include the effect of any investment management expenses. These returns would have been lower
if they included the effect of these expenses. Source: Lipper, Inc.
*** The Lipper Variable Insurance Products (VIP) Corporate Debt BBB Average is calculated by Lipper Analytical
Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products.
The returns are net of investment fees and fund expenses but not product charges. These returns would have
been lower if they included the effect of product charges. Source: Lipper, Inc.
16
Equity Portfolio
Class I shares
Class II shares
S&P 500**
Russell 1000® Index***
Lipper Average****
1 YEAR
5 YEARS
10 YEARS
SINCE
CLASS II
INCEPTION
(5/3/99)
ⳮ11.18%
ⳮ11.57%
ⳮ11.88%
ⳮ20.42%
ⳮ13.03%
7.06%
—
10.70%
8.27%
7.94%
12.09%
—
12.93%
10.79%
11.14%
—
ⳮ3.75%
ⳮ4.31%
—
—
*** The Russell 1000® Index consists of the 1000 largest securities in the Russell 3000 Index. The Russell 3000 Index
consists of the 3000 largest companies, as determined by market capitalization. These returns do not include the
effect of any investment management expenses. These returns would have been lower if they included the effect
of these expenses. Source: Lipper, Inc.
**** The Lipper Variable Insurance Products (VIP) Large Cap Core Funds Average is calculated by Lipper Analytical
been lower if they included the effect of these charges. Source: Lipper, Inc.
17
Class I shares
S&P 500**
Flexible Managed
Custom Blended Index***
Lipper Average****
1 YEAR
5 YEARS
10 YEARS
ⳮ5.68%
ⳮ11.88%
5.43%
10.70%
8.27%
12.93%
ⳮ4.00%
ⳮ5.27%
9.26%
7.95%
10.52%
9.62%
** The Standard & Poor’s 500 Composite Stock Price Index (S&P 500) — an unmanaged index of 500 stocks of
large U.S. companies — gives a broad look at how stock prices have performed. These returns do not include the
effect of any investment management expenses. These returns would have been lower if they included the effect
of these expenses. Source: Lipper, Inc.
*** The Flexible Managed Custom Blended Index consists of the S&P 500 (60%), the Lehman Aggregate Bond Index
(35%) and the T-Bill 3-month Blend (5%). The returns do not include the effect of any investment management
expenses. These returns would have been lower if they included the effect of these expenses. Source Prudential
Investments LLC.
**** The Lipper Variable Insurance Products (VIP) Flexible Portfolio Funds Average is calculated by Lipper Analytical
18
Global Portfolio
Class I shares
MSCI World Index**
Lipper Average***
1 YEAR
5 YEARS
10 YEARS
ⳮ17.64%
ⳮ16.82%
ⳮ15.28%
6.11%
5.37%
6.38%
9.39%
8.06%
9.57%
** The Morgan Stanley Capital International World Index (MSCI World Index) is a weighted index comprised of
approximately 1,500 companies listed on the stock exchanges of the U.S.A., Europe, Canada, Australia, New
Zealand and the Far East. These returns do not include the effect of any investment management expenses.
These returns would have been lower if they included the effect of these expenses. Source: Lipper, Inc.
*** The Lipper Variable Insurance Products (VIP) Global Funds Average is calculated by Lipper Analytical Services,
Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The
returns are net of investment fees and fund expenses but not product charges. These returns would have been
lower if they included the effect of these charges. Source: Lipper, Inc.
19
Class I shares
Lehman High Yield Index**
Lipper Average***
1 YEAR
5 YEARS
10 YEARS
ⳮ0.44%
5.28%
1.13%
1.28%
3.11%
1.60%
6.64%
7.58%
6.59%
** The Lehman High Yield Index is made up of over 700 noninvestment grade bonds. The index is an unmanaged
index that includes the reinvestment of all interest but does not reflect the payment of transaction costs and
advisory fees associated with an investment in the Portfolio. These returns would have been lower if they included
the effect of these expenses. Source: Lipper, Inc.
*** The Lipper Variable Insurance Products (VIP) High Current Yield Funds Average is calculated by Lipper Analytical
20
Class I shares
Class II shares
S&P 500**
Russell 1000® Growth Index***
Lipper Average****
1 YEAR
5 YEARS
SINCE CLASS I
INCEPTION
(4/25/95)
ⳮ18.25%
ⳮ18.60%
ⳮ11.88%
ⳮ20.42%
ⳮ21.88%
11.70%
—
10.70%
8.27%
8.75%
14.66%
—
14.66%
12.90%
12.70%
SINCE CLASS II
INCEPTION
(2/10/00)
—
ⳮ21.45%
ⳮ8.50%
—
—
U.S. Companies — gives a broad look at how stock prices have performed. These returns do not include the effect
these expenses. The “Since Inception” return reflects the closest calendar month-end return. Source: Lipper, Inc.
*** The Russell 1000® Growth Index consists of those securities included in the Russell 1000 Index that have a
greater-than-average growth orientation. These returns do not include the effect of any investment management
expenses. These returns would have been lower if they included the effect of these expenses. The “Since
Inception” return reflects the closest calendar month-end return. Source: Lipper, Inc.
**** The Lipper Variable Insurance Products (VIP) Large Cap Growth Funds Average is calculated by Lipper Analytical
been lower if they included the effect of these charges. The “Since Inception” return reflects the closest calendar
month-end return. Source: Lipper, Inc.
21
how the Portfolio’s average annual returns compare with a group of similar mutual funds. Past performance does not
assure that the Portfolio will achieve similar results in the future.
1 YEAR
Class I shares
Lipper Average**
4.22%
3.73%
5 YEARS
10 YEARS
5.24%
4.96%
4.80%
4.54%
** The Lipper Variable Insurance Products (VIP) Money Market Average is calculated by Lipper Analytical Services,
Inc., and reflects the investment return of certain portfolios underlying variable life and annuity products. These
lower if they included the effect of these charges. Source: Lipper, Inc.
7-Day Yield* (as of 12/31/01)
Average Money Market Fund**
1.89%
1.45%
* The Portfolio’s yield is after deduction of expenses and does not include Contract charges.
** Source: iMoneyNet, Inc. As of 12/31/01, based on the iMoneyNet First and Second Tier General Purpose Retail
Universe.
22
Class I shares
S&P 500**
Lipper Average***
1 YEAR
5 YEARS
10 YEARS
ⳮ12.05%
ⳮ11.88%
ⳮ12.22%
10.47%
10.70%
10.37%
12.61%
12.93%
12.53%
*** The Lipper Variable Insurance Products (VIP) S&P 500 Index Funds Average is calculated by Lipper Analytical
23
Value Portfolio
Class I Shares
S&P 500**
Russell® 1000 Value Index***
Lipper Large Cap Value Funds
Average****
Lipper Multi Cap Value Funds Average****
1 YEAR
5 YEARS
10 YEARS
ⳮ2.08%
ⳮ11.88%
ⳮ5.59%
11.18%
10.70%
11.13%
13.14%
12.93%
14.13%
ⳮ5.98%
ⳮ0.22%
8.68%
9.81%
12.38%
11.17%
* The Portfolio’s returns are after deduction of expenses and do not include Contract charges. Returns shown are
for Class I shares only. Returns are not shown for Class II shares, because Class II shares have not yet been in
existence for a full calendar year (Class II inception date: 5/14/01). Returns for Class II shares would have been
lower than for Class I due to higher expenses.
of investment management expenses. These returns would have been lower if they included the effect of these
expenses. Source: Lipper, Inc.
*** The Russell® 1000 Value Index consists of those securities included in the Russell 1000 Index that have a lessthan-average growth orientation. These returns do not include the effect of investment management expenses.
These returns would have been lower if they included the effect of these expenses. Source: Lipper, Inc.
**** The Lipper Variable Insurance Products (VIP) Large Cap Value Funds Average and Multi Cap Value Funds
Average are calculated by Lipper Analytical Services, Inc. and reflect the return of certain portfolios underlying
variable life and annuity products. The returns are net of investment fees and fund expenses but not product
charges. These returns would have been lower if they included the effect of these charges. Although Lipper
classifies the Portfolio within the Multi Cap Value Funds Average, the returns for the Large Cap Value Funds
Average is also shown, because the management of the portfolios included in the Large Cap Value Funds Average
are more consistent with the management of the Portfolio.
24
demonstrate the risk of investing in the Portfolio by showing how the Portfolio’s average annual returns compare with a
stock index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar
results in the future.
Class I shares
S&P 500**
Aggressive Growth AA Custom Blended Index***
Lipper Average****
1 YEAR
SINCE
INCEPTION
(9/22/00)
ⳮ17.92%
ⳮ11.88%
ⳮ12.46%
ⳮ12.94%
ⳮ18.84%
ⳮ15.32%
ⳮ16.17%
ⳮ15.14%
*** The Aggressive Growth AA Custom Blended Index consists of the Russell® 1000 Value Index (20%), the Russell
1000 Growth Index (20%), the Russell 2500 Value Index (12.5%), the Russell Mid-Cap Growth Index (12.5%), and
the MSCI EAFE Index (35%). These returns do not include the effect of any investment management expenses.
These returns would have been lower if they included the effect of these expenses. The “Since Inception” return
reflects the closest calendar month-end return. Source:
**** The Lipper Variable Insurance Products (VIP) Multi-Cap Core Funds Average is calculated by Lipper Analytical
25
Class I shares
Russell 2500® Index**
Russell 2500™ Growth Index***
Lipper Average****
1 YEAR
SINCE
INCEPTION
(9/22/00)
ⳮ24.53%
1.22%
ⳮ10.75%
ⳮ23.31%
ⳮ28.74%
ⳮ2.00%
ⳮ23.14%
ⳮ32.40%
** The Russell 2500® Index measures the performance of the 500 smallest companies in the Russell 1000 Index and
all 2000 companies included in the Russell 2000 Index. These returns do not include the effect of any investment
management expenses. These returns would have been lower if they included the effect of these expenses. The
“Since Inception” return reflects the closest calendar month-end return. Source: Lipper, Inc.
*** The Russell 2500™ Growth Index measures the performance of the 2,500 smallest companies in the Russell 3000
Index, which represents approximately 16% of the total market capitalization of the Russell 3000 Index. These
if they included the effect of these expenses. The “Since Inception” return reflects the closest calendar month-end
return. Source: Lipper, Inc.
**** The Lipper Variable Insurance Products (VIP) Mid-Cap Growth Funds Average is calculated by Lipper Analytical
26
Class I Shares
S&P 500**
Lipper Large Cap Growth Funds Average****
Lipper Large Cap Core Funds Average****
1 YEAR
SINCE
INCEPTION
(9/22/00)
ⳮ22.68%
ⳮ11.88%
ⳮ12.45%
ⳮ21.88%
ⳮ13.03%
ⳮ28.53%
ⳮ15.32%
ⳮ16.74%
ⳮ28.52%
ⳮ15.58%
expenses. The “Since Inception” return reflects the closest calendar month-end return. Source: Lipper, Inc.
*** The Russell 1000® Index consists of the 1000 largest companies included in the Russell 3000 Index. The Russell
3000 Index consists of the 3000 largest companies, as determined by market capitalization. These returns do not
effect of these expenses. The “Since Inception” return reflects the closest calendar month-end return. Source:
Lipper, Inc.
**** The Lipper Variable Insurance Products (VIP) Large Cap Growth Funds Average and Large Cap Core Funds
Average are calculated by Lipper Analytical Services, Inc. and reflects the return of certain portfolios underlying
charges. These returns would have been lower if they included the effect of these charges. The “Since Inception”
return reflects the closest calendar month-end return. Although Lipper classifies the Portfolio within the Large Cap
Growth Funds Average, the returns for the Large Cap Core Funds Average is also shown, because the
management of the portfolios included in the Large Cap Core Funds Average is more consistent with the
management of the Portfolio.
27
demonstrate the risk of investing by showing how the Portfolio’s average annual returns compare with a stock index
and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in
the future.
Class I shares
Lipper Large Cap Growth Funds Average****
Lipper Multi-Cap Core Funds Average****
1 YEAR
SINCE
INCEPTION
(9/22/00)
ⳮ14.47%
ⳮ12.45%
ⳮ20.42%
ⳮ21.88%
ⳮ12.94%
ⳮ21.71%
ⳮ16.74%
ⳮ31.26%
ⳮ28.52%
ⳮ15.14%
** The Russell 1000® Index consists of the 1000 largest companies in the Russell 3000 Index. The Russell 3000
Index consists of the 3000 largest companies, as determined by market capitalization. These returns do not
Lipper, Inc.
*** The Russell 1000® Growth Index consists of those securities included in the Russell 1000 Index that have a
greater-than-average growth orientation. These returns do not include the effect of investment management
expenses. The returns would have been lower if they included the effect of these expenses. The “Since Inception”
return reflects the closest calendar month-end return.
**** The Lipper Variable Insurance Products (VIP) Large Cap Growth Funds Average and Multi-Cap Core Funds
Average are calculated by Lipper Analytical Services, Inc. and reflects the return of certain portfolios underlying
return reflects the closest calendar month-end return. Although Lipper classifies the Portfolio within the Multi-Cap
Core Funds Average, the returns for the Large Cap Growth Funds Average is also shown, because the
management of the portfolios included in the Large Cap Growth Funds average is more consistent with the
28
Class I shares
S&P 500**
S&P Supercomposite 1500
Technology Index***
Lipper Average****
1 YEAR
SINCE
INCEPTION
(9/22/00)
ⳮ25.07%
ⳮ11.88%
ⳮ35.49%
ⳮ15.32%
ⳮ22.16%
ⳮ21.29%
ⳮ39.58%
ⳮ27.50%
*** The Standard & Poor’s Supercomposite 1500 Technology Index is a capitalization-weighted index designed to
measure the performance of the technology component of the S&P 500 Index. These returns do not include the
effect of investment management expenses. These returns would have been lower if they included the effect of
**** The Lipper Variable Insurance Products (VIP) Specialty/Miscellaneous Funds Average is calculated by Lipper
Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity
products. The returns are net of investment fees and fund expenses but not product charges. These returns would
have been lower if they included the effect of these charges. The “Since Inception” return reflects the closest
calendar month-end return. Source: Lipper, Inc.
29
demonstrate the risk of investing in the Portfolio by showing how the Portfolio’s average annual returns compare with
market indexes and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve
similar results in the future.
1 YEAR
ⳮ5.99%
ⳮ11.88%
ⳮ2.97%
ⳮ2.87%
Class I shares
S&P 500**
Balanced AA Custom Blended Index***
Lipper Average****
SINCE
INCEPTION
(9/22/00)
ⳮ5.79%
ⳮ15.32%
ⳮ5.95%
ⳮ2.87%
*** The Balanced AA Custom Blended Index consists of the Russell 1000® Value Index (17.5%), the Russell 1000
Growth Index (17.5%), the Russell 2500 Value Index (7.5%), the Russell Mid-Cap Growth Index (7.5%), the
Lehman Brothers Aggregate Bond Index (25%), the Lehman Brothers Intermediate BB Index (15%) and the MSCI
EAFE Index (10%). These returns do not include the effect of any investment management expenses. These
returns would have been lower if they included the effect of these expenses. The “Since Inception” return reflects
the closest calendar month-end return. Source: Prudential Investments LLC.
**** The Lipper Variable Insurance Products (VIP) Balanced Funds Average is calculated by Lipper Analytical Services,
lower if they included the effect of these charges. The “Since Inception” return reflects the closest calendar monthend return. Source: Lipper, Inc.
30
1 YEAR
ⳮ0.23%
ⳮ11.88%
1.68%
ⳮ0.28%
Class I shares
S&P 500**
Conservative AA Custom Blended Index***
Lipper Average****
SINCE
INCEPTION
(9/22/00)
0.47%
ⳮ15.32%
ⳮ0.63%
0.70%
*** The Conservative AA Custom Blended Index consists of the Russell 1000® Value Index (15%), the Russell 1000
Growth Index (15%), the Russell 2500 Value Index (5%), the Lehman Brothers Aggregate Bond Index (40%), the
Lehman Brothers Intermediate BB Index (20%) and the Russell Mid-Cap Growth Index (5%). These returns do not
include the effect of any investment management expenses. These returns would have been lower if they included
the effect of these expenses. The “Since Inception” return reflects the closest calendar month-end return. Source:
Prudential Investments LLC.
**** The Lipper Variable Insurance Products (VIP) Income Funds Average is calculated by Lipper Analytical Services,
31
1 YEAR
ⳮ10.46%
ⳮ5.59%
ⳮ5.98%
Class I shares
Russell 1000® Value Index**
Lipper Average***
SINCE
INCEPTION
(9/22/00)
ⳮ7.08%
ⳮ1.76%
ⳮ1.00%
** The Russell 1000® Value Index consists of those companies in the Russell 1000 Index that have a less-thanaverage growth orientation. These returns do not include the effect of any investment management expenses.
reflects the closest calendar month-end return. Source: Lipper, Inc.
*** The Lipper Variable Insurance Products (VIP) Large-Cap Value Funds Average is calculated by Lipper Analytical
32
Class I shares
MSCI EAFE Index**
Lipper Average***
1 YEAR
SINCE
INCEPTION
(9/22/00)
ⳮ22.07%
ⳮ21.44%
ⳮ21.48%
ⳮ21.12%
ⳮ19.33%
ⳮ20.77%
** The Morgan Stanley Capital International (MSCI) Europe, Australia, Far East (EAFE) Index is a weighted,
unmanaged index of performance that reflects stock price movements in Europe, Australasia, and the Far East.
These returns do not include the effect of any investment management expenses. These returns would have been
lower if they included the effect of these expenses. The “Since Inception” return reflects the closest calendar
*** The Lipper Variable Insurance Products (VIP) International Funds Average is calculated by Lipper Analytical
33
1 YEAR
ⳮ11.77%
ⳮ11.88%
ⳮ8.47%
ⳮ12.94%
Class I shares
S&P 500**
Growth AA Custom Blended Index***
Lipper Average****
SINCE
INCEPTION
(9/22/00)
ⳮ12.60%
ⳮ15.32%
ⳮ11.50%
ⳮ15.14%
*** The Growth AA Custom Blended Index consists of the Russell 1000® Value Index (22.5%), the Russell 1000
Growth Index (22.5%), the Russell 2500 Value Index (7.5%), the Russell Mid-Cap Growth Index (7.5%), the
Lehman Brothers Aggregate Bond Index (10%), the Lehman Brothers Intermediate BB Index (10%) and the MSCI
EAFE Index (20%). These returns do not include the effect of any investment management expenses. These
the closest calendar month-end return. Source: Prudential Investments LLC.
**** The Lipper Variable Insurance Products (VIP) Multi-Cap Core Funds Average is calculated by Lipper Analytical
34
Class I shares
Lipper Average****
1 YEAR
SINCE
INCEPTION
(9/22/00)
ⳮ17.18%
2.49%
ⳮ9.23%
ⳮ12.40%
ⳮ24.90%
ⳮ3.69%
ⳮ22.74%
ⳮ21.64%
** The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index.
*** The Russell 2000® Growth Index consists of those companies in the Russell 2000 Index that have a greater-thanaverage growth orientation. These returns do not include the effect of any investment management expenses.
reflects the closest calendar month-end return. Source: Lipper, Inc.
**** The Lipper Variable Insurance Products (VIP) Small-Cap Growth Funds Average is calculated by Lipper Analytical
35
Class I shares
Class II shares
MSCI EAFE Index**
Lipper Average***
1 YEAR
SINCE
CLASS I
INCEPTION
(9/22/00)
SINCE
CLASS II
INCEPTION
(10/4/00)
ⳮ35.64%
ⳮ35.92%
ⳮ21.44%
ⳮ21.48%
ⳮ37.67%
—
ⳮ19.33%
ⳮ20.77%
—
ⳮ37.67%
ⳮ19.33%
ⳮ20.77%
** The Morgan Stanley Capital International (MSCI) Europe, Australia, Far East (EAFE) Index is a weighted,
unmanaged index of performance that reflects stock price movements in Europe, Australia, and the Far East.
month-end return. Source: Lipper, inc.
*** The Lipper Variable Insurance Products (VIP) International Funds Average is calculated by Lipper Analytical
36
Class I shares
Russell 1000® Value Index***
Lipper Average****
1 YEAR
SINCE
INCEPTION
(9/22/00)
ⳮ8.65%
ⳮ12.45%
ⳮ5.59%
ⳮ5.98%
3.34%
ⳮ16.74%
ⳮ1.76%
ⳮ4.97%
** The Russell 1000® Index measures the performance of the 1000 largest companies in the Russell 3000 Index. The
Russell 3000 index consists of the 3000 largest U.S. companies, as determined by total market capitalization.
*** The Russell 1000® Value Index measures the performance of those Russell 1000® companies that have a lessthan-average growth orientation. These returns do not include the effect of any investment management
**** The Lipper Variable Insurance Products (VIP) Large Cap Value Funds Average is calculated by Lipper Analytical
37
Class I Shares
S&P 500**
Lipper Multi-Cap Core Funds Average****
Lipper Large Cap Core Funds Average****
1 YEAR
SINCE
INCEPTION
(9/22/00)
ⳮ23.28%
ⳮ11.88%
ⳮ12.45%
ⳮ12.94%
ⳮ13.03%
ⳮ24.15%
ⳮ15.32%
ⳮ16.74%
ⳮ15.14%
ⳮ15.58%
*** The Russell 1000® Index consists of the 1000 largest companies included in the Russell 3000 Index. The Russell
3000 Index consists of the 3000 largest companies, as determined by market capitalization. These returns do not
Lipper, Inc.
**** The Lipper Variable Insurance Products (VIP) Multi-Cap Core Funds Average and Large Cap Core Funds Average
are calculated by Lipper Analytical Services, Inc. and reflects the return of certain portfolios underlying variable life
and annuity products. The returns are net of investment fees and fund expenses but not product charges. These
returns would have been lower if they included the effect of these charges. The “Since Inception” return reflects the
closest calendar month-end return. Although Lipper classifies the Portfolio within the Multi-Cap Core Funds
Average, the returns for the Large Cap Core Funds Average is also shown, because the management of the
portfolios included in the Large Cap Core Funds Average is more consistent with the management of the Portfolio.
38
demonstrate the risk of investing by showing how the Portfolio’s average annual returns compare with a stock index
and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in
the future.
Class I shares
Russell MidCap® Index**
Russell MidCap Growth® Index***
Lipper Average****
1 YEAR
SINCE
INCEPTION
(9/22/00)
ⳮ20.93%
ⳮ5.62%
ⳮ20.15%
ⳮ23.31%
ⳮ18.29%
ⳮ7.27%
ⳮ32.41%
ⳮ31.98%
** The Russell MidCap® Index consists of the 800 smallest securities in the Russell 1000 Index, as ranked by total
market capitalization. These returns do not include the effect of investment management expenses. These returns
would have been lower if they included the effect of these expenses. The “Since Inception” return reflects the
closest calendar month-end return. Source: Lipper, Inc.
*** The Russell MidCap Growth® Growth Index consists of those securities included in the Russell MidCap Index that
have a greater-than-average growth orientation. These returns do not include the effect of investment
management expenses. The returns would have been lower if they included the effect of these expenses. The
“Since Inception” return reflects the closest calendar month-end return.
****The Lipper Variable Insurance Products (VIP) Mid Cap Growth Funds Average is calculated by Lipper Analytical
Services, Inc. and reflects the return of certain portfolios underlying variable life and annuity products. The returns
are net of investment fees and fund expenses but not product charges. These returns would have been lower if
they included the effect of these charges. The “Since Inception” return reflects the closest calendar month-end
return.
39
market index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve
1 YEAR
Class I shares
Lehman Brothers Intermediate BB Corporate Index**
Lipper Average***
3.97%
10.17%
1.13%
SINCE
INCEPTION
(9/22/00)
4.66%
7.99%
ⳮ3.78%
** The Lehman Brothers Intermediate BB Corporate Index is an unmanaged index comprised of various fixed-income
securities rated BB. These returns do not include the effect of any investment management expenses. These
the closest calendar month-end return. Source: Lipper, Inc.
*** The Lipper Variable Insurance Products (VIP) High Current Yield Funds Average is calculated by Lipper Analytical
40
market index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve
Class I shares
Lehman Brothers Aggregate Bond Index**
Lipper Average***
1 YEAR
SINCE
INCEPTION
(9/22/00)
8.66%
8.44%
5.76%
11.03%
10.28%
5.98%
** The Lehman Brothers Aggregate Bond Index is an unmanaged index comprised of more than 5,000 government
and corporate bonds. These returns do not include the effect of any investment management expenses. These
returns would have been lower if they included the effect of these expenses. The “Since Inception’’ return reflects
the closest calendar month-end return. Source: Lipper, Inc.
*** The Lipper Variable Insurance Products (VIP) General Bond Funds Average is calculated by Lipper Analytical
been lower if they included the effect of these charges. The “Since Inception’’ return reflects the closest calendar
41
Class I Shares
S&P MidCap 400 Index**
Russell Midcap Growth® Index***
Lipper Multi-Cap Growth Funds Average****
Lipper Mid Cap Growth Funds Average****
1 YEAR
SINCE
CLASS I
INCEPTION
(9/22/00)
ⳮ17.78%
ⳮ0.62%
ⳮ20.15%
ⳮ26.81%
ⳮ23.31%
ⳮ25.26%
ⳮ3.57%
ⳮ32.41%
ⳮ35.76%
ⳮ31.98%
** The Standard & Poor’s MidCap 400 Composite Stock Price Index (S&P MidCap 400) — an unmanaged index of
400 domestic stocks chosen for market size, liquidity and industry group representation — gives a broad look at
how mid-cap stock prices have performed. These returns do not include the effect of investment management
*** The Russell Midcap Growth® Index consists of those securities in the Russell Midcap Index that have a greaterthan-average growth orientation. The Russell Midcap Index consists of the 800 smallest securities in the Russell
1000 Index, as ranked by total market capitalization. These returns do not include the effect of investment
management expenses. These returns would have been lower if they included the effect of these expenses. The
“Since Inception” return reflects the closest calendar month-end return. Source: Lipper, Inc.
**** The Lipper Variable Insurance Products (VIP) Multi-Cap Growth Funds Average and Mid Cap Growth Funds
Average are calculated by Lipper Analytical Services, Inc. and reflect the return of certain portfolios underlying
return reflects the closest calendar month-end return. Although Lipper classifies the Portfolio within the Multi-Cap
Growth Funds Average, the returns for the Mid Cap Growth Fund Average is also shown, because the
management of the portfolios included in the Mid Cap Growth Funds Average is more consistent with the
42
Class I shares
Russell 2500™ Value Index***
Lipper Average****
1 YEAR
SINCE
INCEPTION
(9/22/00)
3.11%
1.22%
9.73%
7.33%
11.42%
ⳮ2.00%
15.05%
11.96%
** The Russell 2500 Index consists of the smallest 500 securities in the Russell 1000 Index and all 2000 securities in
the Russell 2000 Index. The Russell 1000 Index consists of the 1000 largest securities in the Russell 3000 Index,
and the Russell 2000 Index consists of the smallest 2000 securities in the Russell 3000 Index. The Russell 3000
Index consists of the 3000 largest U.S. companies, as determined by total market capitalization. These returns do
not include the effect of any investment management expenses. These returns would have been lower if they
included the effect of these expenses. The “Since Inception” return reflects the closest calendar month-end return.
Source: Lipper, Inc.
*** The Russell 2500™ Value Index measures the performance of Russell 2500™ companies with higher price-to-book
ratios. These returns do not include the effect of any investment management expenses. These returns would
have been lower if they included the effect of these expenses. The “Since Inception” return reflects the closest
calendar month-end return. Source: Lipper, Inc.
**** The Lipper Variable Insurance Products (VIP) Mid-Cap Value Funds is calculated by Lipper Analytical Services,
43
Class I shares
S&P 500**
Lipper Average****
1 YEAR
SINCE
CLASS I
INCEPTION
(9/22/00)
ⳮ15.32%
ⳮ11.88%
ⳮ20.42%
ⳮ22.94%
ⳮ26.64%
ⳮ15.32%
ⳮ31.26%
ⳮ28.52%
*** The Russell 1000® Growth Index consists of those Russell 1000 securities that have a greater-than-average
growth orientation. The Russell 1000 Index consists of the 1000 largest securities in the Russell 3000 Index. The
Russell 3000 Index consists of the 3000 largest U.S. securities, as determined by total market capitalization. These
if they included the effect of these expenses. The “Since Inception” return reflects the closest calendar month-end
return. Source: Lipper, Inc.
**** The Lipper Variable Insurance Products (VIP) Large Cap Growth Funds is calculated by Lipper Analytical Services,
44
HOW THE PORTFOLIOS INVEST
Investment Objectives and Policies
We describe each Portfolio’s investment objective and policies below. We describe certain investment instruments that
appear in bold lettering below in the section entitled Other Investments and Strategies. Although we make every effort
to achieve each Portfolio’s objective, we can’t guarantee success and it is possible that you could lose money. Unless
otherwise stated, each Portfolio’s investment objective is a fundamental policy that cannot be changed without
shareholder approval. The Board of Directors can change investment policies that are not fundamental.
An investment in a Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
The investment objective of this Portfolio is to seek a total investment return consistent with a conservatively
managed diversified portfolio.
Balanced Portfolio
We invest in equity, debt and money market securities in
order to achieve diversification. We seek to maintain a
conservative blend of investments that will have strong
performance in a down market and solid, but not
necessarily outstanding, performance in up markets.
This Portfolio may be appropriate for an investor looking
for diversification with less risk than that of the Flexible
Managed Portfolio, while recognizing that this reduces
the chances of greater appreciation.
To achieve our objective, we invest in a mix of equity and
equity-related securities, debt obligations and money
market instruments. We adjust the percentage of Portfolio
assets in each category depending on our expectations
regarding the different markets. While we make every
effort to achieve our objective, we can’t guarantee
We will vary how much of the Portfolio’s assets are
invested in a particular type of security depending on
how we think the different markets will perform.
Under normal conditions, we will invest within the ranges shown below:
Asset Type
Stocks
Debt obligations and money
market securities
Minimum
15%
25%
Normal
50%
50%
Maximum
75%
85%
The equity portion of the Portfolio is generally managed as an index fund, designed to mirror the holdings of the
Standard & Poor’s 500 Composite Stock Price Index. For more information about the index and index investing, see the
investment summary for Stock Index Portfolio included in this prospectus.
Debt securities in general are basically written promises to repay a debt. There are numerous types of debt securities
which vary as to the terms of repayment and the commitment of other parties to honor the obligations of the issuer.
Most of the securities in the debt portion of this Portfolio will be rated “investment grade.” This means major rating
services, like Standard & Poor’s Ratings Group (S&P) or Moody’s Investors Service, Inc. (Moody’s), have rated the
securities within one of their four highest rating categories. The Portfolio also invests in high quality money market
instruments.
The Portfolio may also invest in lower-rated securities, which are riskier and are considered speculative. These
securities are sometimes referred to as “junk bonds.” We may also invest in instruments that are not rated, but which
we believe are of comparable quality to the instruments described above. The Portfolio’s investment in debt securities
may include investments in mortgage-related securities.
The Portfolio may invest up to 30% of its total assets in foreign equity and debt securities that are not denominated in
the U.S. dollar. Up to 20% of the Portfolio’s total assets may be invested in debt securities that are issued outside the
45
U.S. by foreign or U.S. issuers, provided the securities are denominated in U.S. dollars. For these purposes, we do not
consider American Depositary Receipts (ADRs) as foreign securities.
In response to adverse market conditions or when restructuring the Portfolio, we may temporarily invest up to 100% of
the Portfolio’s total assets in money market instruments. Investing heavily in these securities limits our ability to achieve
our investment objective, but can help to preserve the value of the Portfolio’s assets when the markets are unstable.
We may also invest in fixed and floating rate loans (secured or unsecured) arranged through private negotiations
between a corporation which is the borrower and one or more financial institutions that are the lenders. Generally,
these types of investments are in the form of loans or assignments.
We may also use alternative investment strategies — including derivatives — to try to improve the Portfolio’s returns,
protect its assets or for short-term cash management.
We may: purchase and sell options on equity securities, debt securities, stock indexes and foreign currencies;
purchase and sell exchange-traded fund shares; purchase and sell stock index, interest rate, interest rate swap and
foreign currency futures contracts and options on those contracts; enter into forward foreign currency exchange
contracts; and purchase securities on a when-issued or delayed delivery basis.
The Portfolio may also enter into short sales. No more than 25% of the Portfolio’s net assets may be used as collateral
or segregated for purposes of securing a short sale obligation. The Portfolio may also enter into short sales againstthe-box.
We may also use interest rate swaps in the management of the fixed-income portion of the Portfolio.
The Portfolio may also enter into repurchase agreements. The Portfolio may participate with certain other Portfolios of
the Fund and other affiliated funds in a joint repurchase account under an order obtained from the SEC. The Portfolio
may invest in equity and/or debt securities issued by Real Estate Investment Trusts (REITs).
We may also invest in reverse repurchase agreements and dollar rolls in the management of the fixed-income
portion of the Portfolio. The Portfolio will not use more than 30% of its net assets in connection with reverse repurchase
transactions and dollar rolls.
The investment objective of this Portfolio is a high level of income over a longer term while providing reasonable
safety of capital. This means we look for investments that we think will provide a high level of current income, but
which are not expected to involve a substantial risk of loss of capital through default. To achieve our objective, we
normally invest at least 80% of the Portfolio’s investable assets in intermediate and long term debt obligations that are
rated investment grade and high-quality money market investments. While we make every effort to achieve our
Our Strategy
In general, the value of debt obligations moves in the
opposite direction as interest rates — if a bond is
purchased and then interest rates go up, newer bonds
will be worth more relative to existing bonds because
they will have a higher rate of interest. We will adjust the
mix of the Portfolio’s short-term, intermediate and long
term debt obligations in an attempt to benefit from price
appreciation when interest rates go down and to incur
smaller declines when rates go up.
Debt obligations, in general, are basically written
promises to repay a debt. The terms of repayment vary
among the different types of debt obligations, as do the
commitments of other parties to honor the obligations of
the issuer of the security. The types of debt obligations
in which we can invest include U.S. government
securities, mortgage-related securities and corporate
bonds.
Usually, at least 80% of the Portfolio’s investable assets will be invested in debt securities that are investment grade.
This means major rating services, like Standard and Poor’s Ratings Group (S&P) or Moody’s Investor Service, Inc.46
(Moody’s), have rated the securities within one of their four highest rating categories. The Portfolio may continue to
hold a debt obligation if it is downgraded below investment grade after it is purchased or if it is no longer rated by a
major rating service. We may also invest up to 20% of the Portfolio’s investable assets in lower rated securities which
are riskier and considered speculative. These securities are sometimes referred to as “junk bonds.” We may also invest
in instruments that are not rated, but which we believe are of comparable quality to the instruments described above.
The Portfolio may invest without limit in debt obligations issued or guaranteed by the U.S. government and
government-related entities. An example of a debt security that is backed by the full faith and credit of the U.S.
government is an obligation of the Government National Mortgage Association (Ginnie Mae). In addition, we may invest
in U.S. government securities issued by other government entities, like the Federal National Mortgage Association
(Fannie Mae) and the Student Loan Marketing Association (Sallie Mae) which are not backed by the full faith and credit
of the U.S. government. Instead, these issuers have the right to borrow from the U.S. Treasury to meet their
obligations. The Portfolio may also invest in the debt securities of other government-related entities, like the Farm
Credit System, which depend entirely upon their own resources to repay their debt.
We may invest up to 20% of the Portfolio’s total assets in debt securities issued outside the U.S. by U.S. or foreign
issuers whether or not such securities are denominated in the U.S. dollar.
The Portfolio may also invest in convertible debt and convertible and preferred stocks and non-convertible
preferred stock of any rating. The Portfolio will not acquire any common stock except by converting a convertible
security or exercising a warrant. No more than 10% of the Portfolio’s total assets will be held in common stocks, and
those will usually be sold as soon as a favorable opportunity arises. The Portfolio may lend its portfolio securities to
brokers, dealers and other financial institutions to earn income.
We may also invest in loans or assignments arranged through private negotiations between a corporation which is the
borrower and one or more financial institutions that are the lenders.
Under normal conditions, the Portfolio may invest a portion of its assets in high-quality money market instruments. In
response to adverse market conditions or when restructuring the Portfolio, we may temporarily invest up to 100% of the
Portfolio’s assets in money market instruments. Investing heavily in these securities limits our ability to achieve our
investment objective, but can help to preserve the value of the Portfolio’s assets when the markets are unstable.
We may: purchase and sell options on debt securities; purchase and sell interest rate and interest rate swap futures
contracts and options on those contracts; invest in forward foreign currency exchange contracts; and purchase
securities on a when-issued or delayed delivery basis.
The Portfolio may also enter into short sales. No more than 25% of the Portfolio’s net assets may be used as collateral or
segregated for purposes of securing a short sale obligation. The Portfolio may also enter into short sales against-the-box.
We may also use interest rate swaps in the management of the Portfolio.
the Fund in a joint repurchase account under an order obtained from the SEC.
The Portfolio may also invest up to 30% of its net assets in reverse repurchase agreements and dollar rolls. The
Portfolio will not use more than 30% of its net assets in connection with reverse repurchase transactions and dollar rolls.
Equity Portfolio
The investment objective of this Portfolio is capital appreciation. This means we seek investments that we believe will
provide investment returns above broadly based market indexes. While we make every effort to achieve our objective,
we can’t guarantee success and it is possible that you could lose money.
47
Blend Approach
In deciding which stocks to buy, our portfolio managers
use a blend of investment styles. That is, we invest in
stocks that may be undervalued given the company’s
earnings, assets, cash flow and dividends and also
invest in companies experiencing some or all of the
following: a price/earnings ratio lower than earnings per
share growth, strong market position, improving
profitability and distinctive attributes such as unique
marketing ability, strong research and development, new
product flow, and financial strength.
To achieve our investment objective, we normally invest
at least 80% of the Portfolio’s investable assets in
common stocks of major established corporations as
well as smaller companies.
20% of the Portfolio’s investable assets may be invested
in short, intermediate or long-term debt obligations,
convertible and nonconvertible preferred stock and other
equity-related securities. Up to 5% of these investable
assets may be rated below investment grade. These
securities are considered speculative and are sometimes
referred to as “junk bonds.”
Up to 30% of the Portfolio’s total assets may be invested in foreign securities, including money market instruments,
equity securities and debt obligations. For these purposes, we do not consider American Depositary Receipts (ADRs)
as foreign securities.
Under normal circumstances, the Portfolio may invest a portion of its assets in money market instruments. In addition,
we may temporarily invest up to 100% of the Portfolio’s assets in money market instruments in response to adverse
market conditions or when we are restructuring the portfolio. Investing heavily in these securities limits our ability to
achieve our investment objective, but can help to preserve the Portfolio’s assets when the markets are unstable.
We may: purchase and sell options on equity securities, stock indexes and foreign currencies; purchase and sell stock
index and foreign currency futures contracts and options on these futures contracts; enter into forward foreign
currency exchange contracts; and purchase securities on a when-issued or delayed delivery basis.
The Portfolio may also enter into short sales against-the-box.
the Fund in a joint repurchase account under an order obtained from the SEC. The Portfolio may invest in equity and/
or debt securities of Real Estate Investment Trusts (REITs).
Jennison Associates LLC is responsible for managing approximately 50% of the Portfolio’s assets. GE Asset
Management Inc. and Salomon Brothers Asset Management Inc. are each responsible for managing approximately
25% of the Portfolio’s assets.
The investment objective of this Portfolio is to seek a high total return consistent with an aggressively managed
diversified portfolio.
Balanced Portfolio
We invest in equity, debt and money market
securities — in order to achieve diversification in a single
Portfolio. We seek to maintain a more aggressive mix of
investments than the Conservative Balanced Portfolio.
This Portfolio may be appropriate for an investor looking
for diversification who is willing to accept a relatively high
level of loss in an effort to achieve greater appreciation.
To achieve our objective, we invest in a mix of equity
and equity-related securities, debt obligations and
money market instruments. We adjust the percentage of
Portfolio assets in each category depending on our
expectations regarding the different markets. While we
make every effort to achieve our objective, we can’t
guarantee success and it is possible that you could lose
money.
48
Generally, we will invest within the ranges shown below:
Asset Type
Stocks
Fixed income securities
Minimum
25%
0%
Normal
60%
40%
Maximum
100%
75%
The equity portion of the Fund is generally managed under an “enhanced index style.” Under this style, the portfolio
managers utilize a quantitative approach in seeking to out-perform the Standard & Poor’s 500 Composite Stock Price
Index and to limit the possibility of significantly under-performing that index.
The stock portion of the Portfolio will be invested in a broadly diversified portfolio of stocks generally consisting of large
and mid-size companies, although it may also hold stocks of smaller companies. We will invest in companies and
industries that, in our judgment, will provide either attractive long-term returns, or are desirable to hold in the Portfolio to
manage risk.
Most of the securities in the fixed income portion of this Portfolio will be investment grade. However, we may also
invest up to 25% of this portion of the Portfolio in debt securities rated as low as BB, Ba or lower by a major rating
service at the time they are purchased. These high-yield or “junk bonds” are riskier and considered speculative. We
may also invest in instruments that are not rated, but which we believe are of comparable quality to the instruments
described above. The fixed income portion of the Portfolio may also include loans or assignments in the form of loan
participations and mortgage-related securities.
The Portfolio may also invest up to 30% of its total assets in foreign equity and debt securities that are not denominated
in the U.S. dollar. In addition, up to 20% of the Portfolio’s total assets may be invested in debt securities that are issued
outside of the U.S. by foreign or U.S. issuers provided the securities are denominated in U.S. dollars. For these
purposes, we do not consider American Depositary Receipts (ADRs) as foreign securities.
In response to adverse market conditions or when we are restructuring the Portfolio, we may temporarily invest up to
100% of the Portfolio’s assets in money market instruments. Investing heavily in these securities limits our ability to
achieve our investment objective, but can help to preserve the Portfolio’s assets when the markets are unstable.
The Portfolio may also invest in Real Estate Investment Trusts (REITs).
We may: purchase and sell options on equity securities, debt securities, stock indexes, and foreign currencies;
purchase and sell exchange-traded fund shares; purchase and sell stock index, interest rate, interest rate swap and
foreign currency futures contracts and options on those contracts; enter into forward foreign currency exchange
contracts; and purchase securities on a when-issued or delayed delivery basis.
The Portfolio may lend its portfolio securities to brokers, dealers and other financial institutions to earn income.
We may also use interest rate swaps in the management of the fixed income portion of the Portfolio.
We may also invest in reverse repurchase agreements and dollar rolls in the management of the fixed-income
portion of the Portfolio. The Portfolio will not use more than 30% of its net assets in connection with reverse repurchase
transactions and dollar rolls.
49
Global Portfolio
The investment objective of this Portfolio is long-term growth of capital. To achieve this objective, we invest primarily
in equity and equity-related securities of foreign and U.S. companies. While we make every effort to achieve our
When selecting stocks, we use a growth approach which
means we look for companies that have above-average
growth prospects. In making our stock picks, we look for
companies that have had growth in earnings and sales,
high returns on equity and assets or other strong
financial characteristics. Often, the companies we
choose have superior management, a unique market
niche or a strong new product.
Global Investing
This Portfolio is intended to provide investors with the
opportunity to invest in companies located throughout
the world. Although we are not required to invest in a
minimum number of countries, we intend generally to
invest in at least three countries, including the U.S.
However, in response to market conditions, we can
invest up to 35% of the Portfolio’s total assets in any one
country other than the U.S. (The 35% limitation does not
apply to U.S. investments).
The Portfolio may invest up to 100% of its assets in money market instruments in response to adverse market
conditions or when we are restructuring the Portfolio. Investing heavily in these securities limits our ability to achieve
our investment objective, but can help to preserve the Portfolio’s assets when the markets are unstable.
We may: purchase and sell options on equity securities, stock indexes and foreign currencies; purchase and sell
futures contracts on stock indexes, debt securities, interest rate indexes and foreign currencies and options on these
futures contracts; enter into forward foreign currency exchange contracts; and purchase securities on a whenissued or delayed delivery basis.
The Portfolio may invest in equity swaps. The Portfolio may also lend its portfolio securities to brokers, dealers and
other financial institutions to earn income.
the Fund in a joint repurchase account under an order obtained from the SEC. The portfolio may invest in equity and/
or debt securities issued by Real Estate Investment Trusts (REITs).
The investment objective of this Portfolio is a high total return. In pursuing our objective, we invest in high yield/high
risk debt securities. While we make every effort to achieve our objective, we can’t guarantee success and it is possible
that you could lose money.
50
High Yield/High Risk
Lower rated and comparable unrated securities tend to
offer better yields than higher rated securities with the
same maturities because the issuer’s financial condition
may not have been as strong as that of higher rated
issuers. Changes in the perception of the
creditworthiness of the issuers of lower rated securities
tend to occur more frequently and in a more pronounced
manner than for issuers of higher rated securities.
Normally, we will invest at least 80% of the Portfolio’s
investable assets in medium to lower rated debt
securities. These high-yield or “junk bonds” are riskier
than higher rated bonds and are considered speculative.
The Portfolio may invest up to 20% of its total assets in
U.S. dollar denominated debt securities issued outside
the U.S. by foreign and U.S. issuers.
The Portfolio may also acquire common and preferred stock, debt securities and convertible debt and preferred stock.
We may also invest in loans or assignments arranged through private negotiations between a corporation which is the
borrower and one or more financial institutions that are the lenders.
Under normal circumstances, the Portfolio may invest in money market instruments. In response to adverse market
conditions or when we are restructuring the Portfolio, we may temporarily invest up to 100% of the Portfolio’s assets in
money market instruments. Investing heavily in these securities limits our ability to achieve our investment objective,
but can help to preserve the Portfolio’s assets when the markets are unstable.
We may: purchase and sell options on debt securities; purchase and sell interest rate and interest rate swap futures
contracts and options on these futures contracts; and purchase securities on a when-issued or delayed delivery
basis. The Portfolio may invest in PIK bonds.
We may also use interest rate swaps in the management of the Portfolio.
The Portfolio may use up to 30% of its net assets in connection with reverse repurchase agreements and dollar rolls.
The investment objective of this Portfolio is to achieve long-term growth of capital. This means we seek investments
whose price will increase over several years. While we make every effort to achieve our objective, we can’t guarantee
Investment Strategy
We seek to invest in equity securities of established
companies with above-average growth prospects. We
select stocks on a company-by-company basis using
fundamental analysis. In making our stock picks, we look
for companies that have had growth in earnings and
sales, high returns on equity and assets or other strong
financial characteristics. Often, the companies we
choose have superior management, a unique market
niche or a strong new product.
In pursuing our objective, we normally invest 65% of the
Portfolio’s total assets in common stocks and preferred
stocks of companies with capitalization in excess of $1
billion.
For the balance of the Portfolio, we may invest in
common stocks, preferred stocks and other equityrelated securities of companies that are undergoing
changes in management, product and/or marketing
dynamics which we believe have not yet been reflected
in reported earnings or recognized by investors.
51
In addition, we may invest in debt securities and mortgage-related securities. These securities may be rated as low
as Baa by Moody’s or BBB by S&P (or if unrated, of comparable quality in our judgment).
The Portfolio may also invest in obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities. Up to 30% of the Portfolio’s assets may be invested in foreign equity and equity-related securities.
For these purposes, we do not consider American Depositary Receipts (ADRs) as foreign securities.
In response to adverse market conditions or when restructuring the Portfolio, we may invest up to 100% of the
Portfolio’s assets in money market instruments. Investing heavily in these securities limits our ability to achieve our
investment objective, but can help to preserve the Portfolio’s assets when the markets are unstable.
index and foreign currency futures contracts and options on those futures contracts; enter into forward foreign
The Portfolio may also lend its portfolio securities to brokers, dealers and other financial institutions to earn income.
The investment objective of this Portfolio is to seek the maximum current income that is consistent with stability
of capital and maintenance of liquidity. This means we seek investments that we think will provide a high level of
current income. While we make every effort to achieve our objective, we can’t guarantee success.
We invest in a diversified portfolio of short-term debt
obligations of the U.S. government, its agencies and
instrumentalities, as well as commercial paper, asset
backed securities, funding agreements, certificates of
deposit, floating and variable rate demand notes, notes
and other obligations issued by banks, corporations and
other companies (including trust structures), and
obligations issued by foreign banks, companies or
foreign governments.
Steady Net Asset Value
The net asset value for the Portfolio will ordinarily remain
issued at $10 per share because dividends are declared
and reinvested daily. The price of each share remains
the same, but when dividends are declared the value of
your investment grows.
We make investments that meet the requirements of specific rules for money market mutual funds, such as Investment
Company Act Rule 2a-7. As such, we will not acquire any security with a remaining maturity exceeding thirteen months,
and we will maintain a dollar-weighted average portfolio maturity of 90 days or less. In addition, we will comply with the
diversification, quality and other requirements of Rule 2a-7. This means, generally, that the instruments that we
purchase present “minimal credit risk” and are of “eligible quality.” “Eligible quality” for this purpose means a security is:
(i) rated in one of the two highest short-term rating categories by at least two major rating services (or if only one major
rating service has rated the security, as rated by that service); or (ii) if unrated, of comparable quality in our judgment.
All securities that we purchase will be denominated in U.S. dollars.
Commercial paper is short-term debt obligations of banks, corporations and other borrowers. The obligations are
usually issued by financially strong businesses and often include a line of credit to protect purchasers of the obligations.
An asset-backed security is a loan or note that pays interest based upon the cash flow of a pool of assets, such as
mortgages, loans and credit card receivables. Funding agreements are contracts issued by insurance companies that
52
guarantee a return of principal, plus some amount of interest. When purchased by money market funds, funding
agreements will typically be short-term and will provide an adjustable rate of interest.
Certificates of deposit, time deposits and bankers’ acceptances are obligations issued by or through a bank. These
instruments depend upon the strength of the bank involved in the borrowing to give investors comfort that the
borrowing will be repaid when promised.
We may purchase debt securities that include demand features, which allow us to demand repayment of a debt
obligation before the obligation is due or “matures.” This means that longer term securities can be purchased because
of our expectation that we can demand repayment of the obligation at a set price within a relatively short period of time,
in compliance with the rules applicable to money market mutual funds.
The Portfolio may also purchase floating rate and variable rate securities. These securities pay interest at rates that
change periodically to reflect changes in market interest rates. Because these securities adjust the interest they pay,
they may be beneficial when interest rates are rising because of the additional return the Portfolio will receive, and they
may be detrimental when interest rates are falling because of the reduction in interest payments to the Portfolio.
The securities that we may purchase may change over time as new types of money market instruments are developed.
We will purchase these new instruments, however, only if their characteristics and features follow the rules governing
money market mutual funds.
We may also use alternative investment strategies to try to improve the Portfolio’s returns, protect its assets or for
short-term cash management. There is no guarantee that these strategies will work, that the instruments necessary to
implement these strategies will be available or that the Portfolio will not lose money.
We may purchase securities on a when-issued or delayed delivery basis.
The Portfolio may use up to 10% of its net assets in connection with reverse repurchase agreements.
An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Portfolio seeks to preserve the value of an
investment at $10 per share, it is possible to lose money by investing in the Portfolio.
The investment objective of this Portfolio is to achieve investment results that generally correspond to the
performance of publicly-traded common stocks. To achieve this goal, we attempt to duplicate the performance of
the Standard & Poor’s 500 Composite Stock Price Index (S&P 500 Index). While we make every effort to achieve our
Under normal conditions, we attempt to invest in all 500
stocks represented in the S&P 500 Index in proportion to
their weighting in the S&P 500 Index. We will normally
invest at least 80% of the Portfolio’s investable assets in
S&P 500 Index stocks, but we will attempt to remain as
fully invested in the S&P 500 Index stocks as possible in
light of cash flow into and out of the Portfolio.
S&P 500 Index
We attempt to duplicate the performance of the S&P 500
Index, a market-weighted index which represents more
than 70% of the market value of all publicly-traded
common stocks.
To manage investments and redemptions in the Portfolio, we may temporarily hold cash or invest in high-quality money
market instruments. To the extent we do so, the Portfolio’s performance will differ from that of the S&P 500 Index. We
53
attempt to minimize differences in the performance of the Portfolio and the S&P 500 Index by using stock index futures
contracts, options on stock indexes and options on stock index futures contracts. The Portfolio will not use these
derivative securities for speculative purposes or to hedge against a decline in the value of the Portfolio’s holdings.
We may also use alternative investment strategies to try to improve the Portfolio’s returns or for short-term cash
management. The Portfolio may lend its portfolio securities to brokers, dealers and other financial institutions to earn
income. There is no guarantee that these strategies will work, that the instruments necessary to implement these
strategies will be available or that the Portfolio will not lose money.
We may: purchase and sell options on stock indexes; purchase and sell stock futures contracts and options on those
futures contracts; and purchase and sell exchange-traded fund shares.
The Portfolio may also enter into short sales and short sales against-the-box. No more than 5% of the Portfolio’s
total assets may be used as collateral or segregated for purposes of securing a short sale obligation.
A stock’s inclusion in the S&P 500 Index in no way implies S&P’s opinion as to the stock’s attractiveness as an
investment. The portfolio is not sponsored, endorsed, sold or promoted by S&P. S&P makes no representations
regarding the advisability of investing in the portfolio. “Standard & Poor’s,” “Standard & Poor’s 500” and “500” are
trademarks of McGraw Hill.
Value Portfolio
The investment objective of this Portfolio is to seek capital appreciation. This means we focus on stocks that are
undervalued — those stocks that are trading below their underlying asset value, cash generating ability, and overall
earnings and earnings growth. While we make every effort to achieve our objective, we can’t guarantee success and it
is possible that you could lose money.
We will normally invest at least 65% of the Portfolio’s
total assets in equity and equity-related securities. Most
of our investments will be securities of large
capitalization companies. When deciding which stocks to
buy, we look at a company’s earnings, balance sheet
and cash flow and then at how these factors impact the
stock’s price and return. We also buy equity-related
securities — like bonds, corporate notes and preferred
stock — that can be converted into a company’s
common stock or other equity security.
Contrarian Approach
To achieve our value investment strategy, we generally
take a strong contrarian approach to investing. In other
words, we usually buy stocks that are out of favor and
that many other investors are selling, and we attempt to
invest in companies and industries before other
investors recognize their true value. Using these
guidelines, we focus on long-term performance, not
short-term gain.
Up to 35% of the Portfolio’s total assets may be invested in other debt obligations including non-convertible preferred
stock. When acquiring these types of securities, we usually invest in obligations rated A or better by Moody’s or S&P.
We may also invest in obligations rated as low as CC by Moody’s or Ca by S&P. These securities are considered
speculative and are sometimes referred to as “junk bonds.” We may also invest in instruments that are not rated, but
which we believe are of comparable quality to the instruments described above.
Up to 30% of the Portfolio’s total assets may be invested in foreign securities, including money market instruments,
equity securities and debt obligations. For these purposes, we do not consider American Depositary Receipts (ADRs)
as foreign securities.
Under normal circumstances, the Portfolio may invest up to 35% of its total assets in high-quality money market
instruments. In response to adverse market conditions or when we are restructuring the Portfolio, we may temporarily
54
invest up to 100% of the Portfolio’s assets in money market instruments. Investing heavily in these securities limits our
ability to achieve our investment objective, but can help to preserve the Portfolio’s assets when the markets are
unstable.
protect its assets or for short-term cash management. The Portfolio may lend its portfolio securities to brokers, dealers
and other financial institutions to earn income.
index and foreign currency futures contracts and options on these futures contracts; enter into forward foreign
Jennison Associates LLC is responsible for managing approximately 50% of the Portfolio’s assets. Victory Capital
Management Inc. (formerly, Key Asset Management Inc.) and Deutsche Asset Management, Inc. (DAMI) are each
responsible for managing approximately 25% of the Portfolio’s assets.
The Portfolio’s investment objective is to achieve long-term growth of capital. This investment objective is nonfundamental, meaning that we can change the objective without seeking a vote of contractholders. The Portfolio seeks
to meet this objective by investing principally in securities of companies whose earnings the portfolio managers expect
to grow more than 15% per year. While we make every effort to achieve our objective, we can’t guarantee success and
it is possible that you could lose money.
The Portfolio will invest in small- and medium-sized
growth companies. The portfolio managers focus on
companies they believe are likely to benefit from new or
innovative products, services or processes as well as
those that have experienced above-average, long-term
growth in earnings and have excellent prospects for
future growth. The portfolio managers consider whether
to sell a particular security when any of those factors
materially changes.
Aggressive Growth Stock Investing
The Portfolio invests primarily in the common stock of
small and medium-sized companies that are anticipated
to have excellent prospects for long-term growth of
earnings.
The Portfolio may invest up to 25% of its total assets in foreign securities. In anticipation of or in response to adverse
market conditions, for cash management purposes, or for defensive purposes, the Portfolio may temporarily hold all or
a portion of its assets in cash, money market instruments, shares of affiliated money market funds, bonds or other debt
securities. The Portfolio may borrow for emergency or temporary purposes. As a result, the Portfolio may not achieve
its investment objective.
The Portfolio may purchase and sell stock index futures contracts and related options on stock index futures, and
may purchase and sell futures contracts on foreign currencies and related options on foreign currency futures
contracts. The Portfolio may invest up to 25% of its total assets in Real Estate Investment Trusts (REITs), and the
Portfolio may invest in the securities of other investment companies to the extent otherwise permissible under the
Investment Company Act of 1940, and the rules, regulations and orders promulgated thereunder. The Portfolio also
may invest in preferred stock, convertible debt, convertible preferred stock, forward foreign currency exchange
contracts, restricted securities, repurchase agreements, reverse repurchase agreements and dollar rolls, warrants,
when-issued and delayed delivery securities, options on stock and debt securities, options on stock indexes,
55
options on foreign currencies, and may loan portfolio securities. The Portfolio may also invest in equity-linked derivative
products designed to replicate the composition and performance of particular indices. Examples of such products
include S&P Depositary Receipts, World Equity Benchmark Series, NASDAQ 100 tracking shares, Dow Jones
Industrial Average Instruments and Optimised Portfolios as Listed Securities. Investments in equity-linked derivatives
involve the same risks associated with a direct investment in the types of securities included in the indices such
products are designed to track. There can be no assurance that the trading price of the equity-linked derivatives will
equal the underlying value of the basket of securities purchased to replicate a particular index or that such basket will
replicate the index. Investments in equity-linked derivatives may constitute investment in other investment companies.
The Portfolio may invest in U.S. Government securities and may make short sales against-the-box (no more than
10% of the Portfolio’s total assets may be deposited or pledged as collateral for short sales at any one time).
The Portfolio is managed by A I M Capital Management, Inc.
The Portfolio’s investment objective is growth of capital with a secondary objective of current income. This investment
objective is non-fundamental, meaning that we can change the objective without seeking a vote of contractholders. The
Portfolio seeks to meet its objective by investing, normally, at least 80% of investible assets in equity securities,
including convertible securities, of established companies that have long-term above-average growth in earnings and
dividends, and growth companies that the portfolio managers believe have the potential for above-average growth in
earnings and dividends. In complying with this 80% requirement, the Portfolio’s investments may include synthetic
instruments. Synthetic instruments are investments that have economic characteristics similar to the Portfolio’s direct
investments, and may include warrants, futures, options, exchange-traded funds and ADRs. While we make every
effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.
Growth And Income Investing
This Portfolio invests in a wide variety of equity
securities and debt securities in an effort to achieve both
capital appreciation as well as current income.
The Portfolio may invest in corporate debt
securities. Corporations issue debt securities of
various types, including bonds and debentures
(which are long-term), notes (which may be shortor long-term), bankers acceptances (indirectly
secured borrowings to facilitate commercial
transactions) and commercial paper (short-term
unsecured notes).
The Portfolio may also invest in convertible securities whose values will be affected by market interest rates, the risk
that the issuer may default on interest or principal payments and the value of the underlying common stock into which
these securities may be converted. Specifically, since these types of convertible securities pay fixed interest and
dividends, their values may fall if interest rates rise and rise if market interest rates fall. Additionally, an issuer may
have the right to buy back certain of the convertible securities at a time and price that is unfavorable to the Portfolio.
The values of fixed rate income securities tend to vary inversely with changes in interest rates, with longer-term
securities generally being more volatile than shorter-term securities. Corporate securities frequently are subject to call
provisions that entitle the issuer to repurchase such securities at a predetermined price prior to their stated maturity. In
the event that a security is called during a period of declining interest rates, the Portfolio may be required to reinvest
the proceeds in securities having a lower yield. In addition, in the event that a security was purchased at a premium
over the call price, the Portfolio will experience a capital loss if the security is called. Adjustable rate corporate debt
securities may have interest rate caps and floors.
The Portfolio may invest in securities issued or guaranteed by the United States government or its agencies or
instrumentalities. These include Treasury securities (bills, notes, bonds and other debt securities) which differ only in
their interest rates, maturities and times of issuance. U.S. Government agency and instrumentality securities include
securities which are supported by the full faith and credit of the U.S., securities that are supported by the right of the
agency to borrow from the U.S. Treasury, securities that are supported by the discretionary authority of the U.S.
Government to purchase certain obligations of the agency or instrumentality and securities that are supported only by
56
the credit of such agencies. While the U.S. Government may provide financial support to such U.S. governmentsponsored agencies or instrumentalities, no assurance can be given that it always will do so. The U.S. government, its
agencies and instrumentalities do not guarantee the market value of their securities. The values of such securities
fluctuate inversely to interest rates.
To the extent consistent with its investment objective and policies, the Portfolio may invest in equity and/or debt
securities issued by Real Estate Investment Trusts (REITs). Such investments will not exceed 25% of the total assets
of the Portfolio. To the extent that the Portfolio has the ability to invest in REITs, it could conceivably own real estate
directly as a result of a default on the securities it owns. The Portfolio, therefore, may be subject to certain risks
associated with the direct ownership of real estate including difficulties in valuing and trading real estate, declines in the
value of real estate, risks related to general and local economic condition, adverse change in the climate for real estate,
environmental liability risks, increases in property taxes and operating expense, changes in zoning laws, casualty or
condemnation losses, limitations on rents, changes in neighborhood values, the appeal of properties to tenants, and
increases in interest rates.
The Portfolio may hold up to 20% of its assets in foreign securities. Such investments may include American
Depositary Receipts (ADRs), European Depositary Receipts (EDRs) and other securities representing underlying
securities of foreign issuers. These securities may not necessarily be denominated in the same currency as the
securities into which they may be converted.
The Portfolio has authority to deal in foreign exchange between currencies of the different countries in which it will
invest either for the settlement of transactions or as a hedge against possible variations in the foreign exchange rates
between those currencies. This may be accomplished through direct purchases or sales of foreign currency, purchases
of futures contracts with respect to foreign currency (and options thereon), and contractual agreements to purchase or
sell a specified currency at a specified future date (up to one year) at a price set at the time of the contract. Such
contractual commitments may be forward contracts entered into directly with another party or exchange-traded futures
contracts. The Portfolio may purchase and sell options on futures contracts or forward contracts which are
denominated in a particular foreign currency to hedge the risk of fluctuations in the value of another currency.
For the purpose of realizing additional income, the Portfolio may make secured loans of portfolio securities amounting
to not more than 33 1⁄ 3% of its total assets.
The Portfolio may invest in reverse repurchase agreements with banks. The Portfolio may employ reverse
repurchase agreements (i) for temporary emergency purposes, such as to meet unanticipated net redemptions so as to
avoid liquidating other portfolio securities during unfavorable market conditions; (ii) to cover short-term cash
requirements resulting from the timing of trade settlements; or (iii) to take advantage of market situations where the
interest income to be earned from the investment of the proceeds of the transaction is greater than the interest
expense of the transaction.
The Portfolio may purchase securities of unseasoned issuers. Securities in such issuers may provide opportunities for
long term capital growth. Greater risks are associated with investments in securities of unseasoned issuers than in the
securities of more established companies because unseasoned issuers have only a brief operating history and may
have more limited markets and financial resources. As a result, securities of unseasoned issuers tend to be more
volatile than securities of more established companies.
The Portfolio may invest in other investment companies to the extent permitted by the Investment Company Act, and
rules and regulations thereunder, and if applicable, exemptive orders granted by the SEC.
The Portfolio may purchase and sell stock index futures contracts and related options on stock index futures, and
may purchase and sell futures contracts on foreign currencies and related options on foreign currency futures
contracts. The Portfolio may invest in the securities of other investment companies to the extent otherwise permissible
under the Investment Company Act of 1940, and the rules, regulations and orders promulgated thereunder. The
Portfolio also may invest in preferred stock, convertible debt, convertible preferred stock, forward foreign currency
exchange contracts, restricted securities, repurchase agreements, reverse repurchase agreements and dollar
rolls, warrants, when-issued and delayed delivery securities, options on stock and debt securities, options on
stock indexes, options on foreign currencies, and may loan portfolio securities. The Portfolio may also invest in equity57
linked derivative products designed to replicate the composition and performance of particular indices. Examples of
such products include S&P Depositary Receipts, World Equity Benchmark Series, NASDAQ 100 tracking shares, Dow
Jones Industrial Average Instruments and Optimised Portfolios as Listed Securities. Investments in equity-linked
derivatives involve the same risk associated with a direct investment in the types of securities included in the indices
such products are designed to track. There can be no assurance that the trading price of the equity-linked derivatives
will equal the underlying value of the basket of securities purchased to replicate a particular index or that such basket
will replicate the index. Investments in equity-linked derivatives may constitute investment in other investment
companies. This Portfolio may invest in U.S. Government securities, and short sales “against-the-box” (no more
than 10% of the Portfolio’s total assets may be deposited or pledged as collateral for short sales at any one time).
In anticipation of or in response to adverse market conditions, for cash management purposes, or for defensive
purposes, the Portfolio may temporarily hold all or a portion of its assets in cash, money market instruments, shares of
affiliated money market funds, bonds or other debt securities. The Portfolio may borrow for emergency or temporary
purposes. As a result, the Portfolio may not achieve its investment objective.
The Portfolio is managed by A I M Capital Management, Inc.
The investment objective of this Portfolio is growth of capital by pursuing aggressive investment policies. While
we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose
money.
During market declines, while adding to positions in
favored stocks, the Portfolio becomes somewhat
more aggressive, gradually reducing the number of
companies represented in its portfolio. Conversely,
in rising markets, while reducing or eliminating
fully-valued positions, the Portfolio becomes
somewhat more conservative, gradually increasing
the number of companies represented in the
portfolio. Through this approach, Alliance seeks to
gain positive returns in good markets while
providing some measure of protection in poor
markets. The Portfolio also may invest up to 20%
of its investable assets in convertible debt and
convertible preferred stock and up to 15% of its
total assets in equity securities of non-U.S.
companies.
Large Cap Growth
The Portfolio usually invests in about 40-60 companies,
with the 25 most highly regarded of these companies
generally constituting approximately 80% of the
Portfolio’s investable assets. Alliance seeks to gain
positive returns in good markets while providing some
measure of protection in poor markets.
The Portfolio will invest in special situations from time to time. A special situation arises when, in the opinion of Alliance,
the securities of a particular company will, within a reasonably estimable period of time, be accorded market recognition
at an appreciated value solely by reason of a development particularly or uniquely applicable to that company, and
regardless of general business conditions or movements of the market as a whole. Developments creating special
situations might include, among other, liquidations, reorganizations, recapitalizations or mergers, material litigation,
technological breakthroughs and new management or management policies. Although large and well-known
companies may be involved, special situations often involve much greater risk than is inherent in ordinary investment
securities.
Among the principal risks of investing in the Portfolio is market risk. Because the Portfolio invests in a smaller number
of securities than many other equity funds, your investment has the risk that changes in the value of a single security
may have a more significant effect, either negative or positive, on the Portfolio’s net asset value.
58
The Portfolio seeks long-term growth of capital by investing predominantly in the equity securities of a limited number of
large, carefully selected, high-quality U.S. companies that are judged likely to achieve superior earnings growth. As a
matter of fundamental policy, the Portfolio normally invests at least 85% of its total assets in the equity securities of
U.S. companies. The Portfolio is thus atypical from most equity mutual funds in its focus on a relatively small number of
intensively researched companies. The Portfolio is designed for those seeking to accumulate capital over time with less
volatility than that associated with investment in smaller companies.
Alliance’s investment strategy for the Portfolio emphasizes stock selection and investment in the securities of a limited
number of issuers. Alliance relies heavily upon the fundamental analysis and research of its large internal research
staff, which generally follows a primary research universe of more than 500 companies that have strong management,
superior industry positions, excellent balance sheets and superior earnings growth prospects. An emphasis is placed
on identifying companies whose substantially above average prospective earnings growth is not fully reflected in
current market valuations.
In managing the Portfolio, Alliance seeks to utilize market volatility judiciously (assuming no change in company
fundamentals), striving to capitalize on apparently unwarranted price fluctuations, both to purchase or increase
positions on weakness and to sell or reduce overpriced holdings. The Portfolio normally remains nearly fully invested
and does not take significant cash positions for market timing purposes.
Alliance normally invests at least 80% of the Portfolio’s investable assets in stocks of companies considered to have
large capitalizations (i.e., similar to companies included in the S&P 500 Index).
The Portfolio also may:
‰
‰
‰
‰
‰
invest up to 15% of its total assets in foreign securities;
purchase and sell exchange-traded index options and stock index futures contracts;
write covered exchange-traded call options on its securities of up to 15% of its total assets, and purchase and
sell exchange-traded call and put options on common stocks written by others of up to, for all options, 10% of
its total assets;
make short sales “against-the-box” of up to 15% of its net assets; and
invest up to 10% of its total assets in illiquid securities.
The Portfolio may invest in a wide variety of equity securities including large cap stocks, convertible and preferred
securities, warrants and rights. The Portfolio may also invest in foreign securities, including foreign equity securities,
and other securities that represent interests in foreign equity securities, such as European Depositary Receipts (EDRs)
and Global Depositary Receipts (GDRs). The Portfolio may invest in American Depositary Receipts (ADRs), which are
not subject to the 15% limitation on foreign securities. The Portfolio may also invest in derivatives and in short term
investments, including money market securities, short term U.S. government obligations, repurchase agreements,
commercial paper, banker’s acceptances and certificates of deposit.
In response to adverse market conditions or when restructuring the Portfolio, Alliance may invest up to 100% of the
Portfolio’s assets in money market instruments. Investing heavily in these securities limits the ability to achieve the
The Portfolio is managed by Alliance Capital Management, L.P.
The Portfolio emphasizes growth of capital and invests for capital appreciation. Current income is only an
incidental consideration. While we make every effort to achieve our objective, we can’t guarantee success and it is
possible that you could lose money.
59
The Portfolio invests primarily in securities of companies
expected to benefit from technological advances and
improvements (i.e., companies that use technology
extensively in the development of new or improved
products or processes). The Portfolio will normally have
at least 80% of its investable assets invested in the
securities of these companies.
A Technology Focus
This Portfolio normally invests at least 80% of its
investable assets in technology.
The Portfolio normally will have substantially all of its assets invested in equity securities, but it also invests in debt
securities offering an opportunity for price appreciation. The Portfolio will invest in listed and unlisted securities, in U.S.
securities, and up to 25% of its total assets in foreign securities. The Portfolio may seek income by writing listed call
options.
The Portfolio’s policy is to invest in any company and industry and in any type of security with potential for capital
appreciation. It invests in well-known and established companies and in new and unseasoned companies.
The Portfolio also may:
‰
write covered call options on its securities of up to 15% of its total assets and purchase exchange-listed call
and put options, including exchange-traded index put options of up to, for all options, 10% of its total assets;
‰
invest up to 10% of its total assets in warrants;
‰
invest up to 15% of its net assets in illiquid securities; and
‰
make loans of portfolio securities of up to 30% of its total assets.
Because the Portfolio invests primarily in technology companies, factors affecting those types of companies could have
a significant effect on the Portfolio’s net asset value. In addition, the Portfolio’s investments in technology stocks,
especially those of small, less-seasoned companies, tend to be more volatile than the overall market. The Portfolio’s
investments in debt and foreign securities have credit risk and foreign risk.
In response to adverse market conditions or when restructuring the Portfolio, Alliance may invest up to 100% of the
Portfolio’s assets in money market instruments. Investing heavily in these securities limits the ability to achieve the
The Portfolio is managed by Alliance Capital Management, L.P.
There are four Asset Allocation Portfolios, entitled SP Aggressive Growth Asset Allocation Portfolio, SP Balanced Asset
Allocation Portfolio, SP Conservative Asset Allocation Portfolio, and SP Growth Asset Allocation Portfolio. The
investment objective of each of the Portfolios is to obtain the highest potential total return consistent with the
specified level of risk tolerance. The definition of risk tolerance level is not a fundamental policy and, therefore, can
be changed by the Fund’s Board of Directors at any time. While each Portfolio will try to achieve its objective, we can’t
guarantee success and it is possible that you could lose money. The Asset Allocation Portfolios are designed for:
‰
the investor who wants to maximize total return potential, but lacks the time, or expertise to do so effectively;
‰
the investor who does not want to watch the financial markets in order to make periodic exchanges among
Portfolios; and
‰
the investor who wants to take advantage of the risk management features of an asset allocation program.
The investor chooses an Asset Allocation Portfolio by determining which risk tolerance level most closely corresponds
to the investor’s individual planning needs, objectives and comfort.
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Each Asset Allocation Portfolio invests its assets in shares of underlying Portfolios according to the target percentages
indicated in the Portfolio descriptions below. Periodically, we will rebalance each Asset Allocation Portfolio to bring the
Portfolio’s holdings in line with those target percentages. The manager expects that the rebalancing will occur on a
monthly basis, although the rebalancing may occur less frequently. In addition, the manager will review the target
percentages annually. Based on its evaluation the target percentages may be adjusted. Such adjustments will be
reflected in the annual update to this prospectus. With respect to each of the four Asset Allocation Portfolios, Prudential
Investments LLC reserves the right to alter the percentage allocations indicated below and/or the underlying Fund
Portfolios in which the Asset Allocation Portfolio invests if market conditions warrant. Although we will make every effort
to meet each Asset Allocation Portfolio’s investment objective, we can’t guarantee success.
The performance of each Asset Allocation Portfolio depends on how its assets are allocated and reallocated between
the underlying Portfolios. A principal risk of investing in each Asset Allocation Portfolio is that Prudential Investments
LLC will make less than optimal decisions regarding allocation of assets in the underlying Portfolios. Because each of
the Asset Allocation Portfolios invests all of its assets in underlying Portfolios, the risks associated with each Asset
Allocation Portfolio are closely related to the risks associated with the securities and other investments held by the
underlying Portfolios. The ability of each Asset Allocation Portfolio to achieve its investment objective will depend on
the ability of the underlying Portfolios to achieve their investment objectives.
Each Asset Allocation Portfolio is managed by Prudential Investments LLC.
The SP Aggressive Growth Asset Allocation Portfolio
invests in shares of the following Fund Portfolios:
An Asset Allocation Portfolio Investing Fully in
Equity Portfolios
This Portfolio aggressively seeks capital appreciation by
investing in large cap equity Portfolios, international
Portfolios, and small/mid-cap equity Portfolios.
‰
a large capitalization equity component
(approximately 40% of the Portfolio, invested in
shares of the SP Davis Value Portfolio (20% of
Portfolio), the SP Alliance Large Cap Growth
Portfolio (10% of Portfolio), and the Jennison
Portfolio (10% of Portfolio)); and
‰
an international component (approximately 35%
of the Portfolio, invested in shares of the SP
Jennison International Growth Portfolio (17.5%
of Portfolio) and the SP Deutsche International
Equity Portfolio (17.5% of Portfolio)); and
‰
a small/mid capitalization equity component
shares of the SP Small/Mid-Cap Value Portfolio
(12.5% of Portfolio) and the SP Prudential U.S.
Emerging Growth Portfolio (12.5% of Portfolio)).
For more information on the underlying Portfolios, please refer to the descriptions of each Portfolio’s investment
objectives and policies included in this prospectus.
61
The SP Balanced Asset Allocation Portfolio invests in
shares of the following Portfolios:
A Balance Between Current Income And Capital
Appreciation
This Portfolio seeks to balance current income and
growth of capital by investing in fixed income Portfolios,
large cap equity Portfolios, small/mid-cap equity
Portfolios, and international equity Portfolios.
‰
a fixed income component (approximately 40%
PIMCO Total Return Portfolio (25% of Portfolio)
and the SP PIMCO High Yield Portfolio (15% of
Portfolio)); and
‰
shares of the SP Davis Value Portfolio (17.5%
of Portfolio), the SP Alliance Large Cap Growth
Portfolio (8.75% of Portfolio), and the Jennison
Portfolio (8.75% of Portfolio)); and
‰
Emerging Growth Portfolio (7.5% of Portfolio));
and
‰
Jennison International Growth Portfolio (5% of
Portfolio) and the SP Deutsche International
Equity Portfolio (5% of Portfolio)).
For more information on the underlying Portfolios, please refer to the description of each Portfolio’s investment
The SP Conservative Asset Allocation Portfolio invests
in shares of the following Portfolios:
An Asset Allocation Portfolio Investing Primarily In
Fixed Income Portfolios
This Portfolio is invested in fixed income, large cap
equity, and small/mid-cap equity Portfolios.
‰
PIMCO Total Return Portfolio (40% of Portfolio)
and the SP PIMCO High Yield Portfolio (20% of
Portfolio)); and
‰
shares of the SP Davis Value Portfolio (15% of
Portfolio), the SP Alliance Large Cap Growth
Portfolio (7.5% of Portfolio), and the Jennison
Portfolio (7.5% of Portfolio)); and
‰
(5% of Portfolio) and the SP Prudential U.S.
Emerging Growth Portfolio (5% of Portfolio)).
For more information on the underlying Portfolios, please refer to the description of each Portfolio’s investment
62
The Growth Asset Allocation Portfolio invests in shares
of the following Portfolios:
An Asset Allocation Portfolio Investing
Primarily In Equity Portfolios
This Portfolio seeks to provide long-term growth of
capital with consideration also given to current income.
‰
shares of the SP Davis Value Portfolio (22.5%
of Portfolio), the SP Alliance Large Cap Growth
Portfolio (11.25% of Portfolio), and the
Jennison Portfolio (11.25% of Portfolio)); and
‰
PIMCO High Yield Portfolio (10% of Portfolio)
and the SP PIMCO Total Return Portfolio (10%
of Portfolio)); and
‰
Jennison International Growth Portfolio (10% of
Portfolio) and the SP Deutsche International
Equity Portfolio (10% of Portfolio)); and
‰
a small/mid-capitalization equity component
Emerging Growth Portfolio (7.5% of Portfolio)).
For more information on the underlying Portfolios, please refer to the descriptions of each Portfolio’s investment
SP Davis Value Portfolio’s investment objective is growth of capital. In keeping with the Davis investment philosophy,
the portfolio managers select common stocks that offer the potential for capital growth over the long-term. While we will
try to achieve our objective, we can’t guarantee success and it is possible that you could lose money.
The Portfolio invests primarily in common stocks of U.S.
companies with market capitalizations of at least $5
billion, but it may also invest in foreign companies and
U.S. companies with smaller capitalizations.
The Davis Back-to-Basics Approach
Under the Davis philosophy, Davis seeks to identify
companies possessing ten basic characteristics, which
Davis believes will foster sustainable long-term growth.
COMMON STOCKS
What They Are. Common stock represents ownership of a company.
How They Pick Them. The Davis investment philosophy stresses a back-to-basics approach: they use extensive
research to buy growing companies at value prices and hold on to them for the long-term. Over the years, Davis
Selected Advisers has developed a list of ten characteristics that they believe foster sustainable long-term growth,
minimize risk and enhance the potential for superior long-term returns. While very few companies have all ten, Davis
searches for those possessing several of the characteristics that are listed below.
Why They Buy Them. SP Davis Value Portfolio buys common stock to take an ownership position in companies with
growth potential, and then holds that position long enough to realize the benefits of growth.
63
The Portfolio may also invest in foreign securities, primarily as a way of providing additional opportunities to invest in
quality overlooked growth stocks. Investment in foreign securities can also offer the Portfolio the potential for economic
diversification.
WHAT DAVIS LOOKS FOR IN A COMPANY
1.
First-Class Management. The Davis investment philosophy believes that great companies are created by great
managers. In visiting companies, they look for managers with a record of doing what they say they are going to do.
2.
Management Ownership. Just as they invest heavily in their own portfolios, they look for companies where
individual managers own a significant stake.
3.
Strong Returns on Capital. They want companies that invest their capital wisely and reap superior returns on
those investments.
4.
Lean Expense Structure. Companies that can keep costs low are able to compete better, especially in difficult
times. A low cost structure sharply reduces the risk of owning a company’s shares.
5.
Dominant or Growing Market Share in a Growing Market. A company that is increasing its share of a growing
market has the best of both worlds.
6.
Proven Record as an Acquirer. When an industry or market downturn occurs, it is a good idea to own companies
that can take advantage of attractive prices to expand operations through inexpensive acquisitions.
7.
Strong Balance Sheet. Strong finances give a company staying power to weather difficult economic cycles.
8.
Competitive Products or Services. Davis invests in companies with products that are not vulnerable to
obsolescence.
9.
Successful International Operations. A proven ability to expand internationally reduces the risk of being tied too
closely to the U.S. economic cycle.
10. Innovation. The savvy use of technology in any business, from a food company to an investment bank, can help
reduce costs and increase sales.
Other Securities and Investment Strategies
The Portfolio invests primarily in the common stock of large capitalization domestic companies. There are other
securities in which the Portfolio may invest, and investment strategies which the Portfolio may employ, but they are not
principal investment strategies. The Portfolio may invest in equity and/or debt securities issued by Real Estate
Investment Trusts (REITs).
The Portfolio uses short-term investments to maintain flexibility while evaluating long-term opportunities. The Portfolio
also may use short-term investments for temporary defensive purposes; in the event the portfolio managers anticipate
a decline in the market values of common stock of large capitalization domestic companies, they may reduce the risk
by investing in short-term securities until market conditions improve. Unlike common stocks, these investments will not
appreciate in value when the market advances. In such a circumstance, the short-term investments will not contribute
to the Portfolio’s investment objective.
The Portfolio is managed by Davis Selected Advisers, L.P.
The Portfolio seeks long-term capital appreciation. Under normal circumstances, the Portfolio invests at least 80% of
its investable assets in the stocks and other securities with equity characteristics of companies in developed countries
outside the United States. While we make every effort to achieve our objective, we can’t guarantee success and it is
possible that you could lose money.
64
The Portfolio invests for capital appreciation, not income;
any dividend or interest income is incidental to the
pursuit of that goal.
International Equities From Developed Countries
The Portfolio invests primarily in the stocks of companies
located in developed foreign countries that make up the
MSCI EAFE Index, plus Canada. The Portfolio also may
invest in emerging markets securities.
The Portfolio invests for the long term. The Portfolio employs a strategy of growth at a reasonable price. The Portfolio
seeks to identify companies outside the United States that combine strong potential for earnings growth with
reasonable investment value. Such companies typically exhibit increasing rates of profitability and cash flow, yet their
share prices compare favorably to other stocks in a given market and to their global peers. In evaluating stocks, the
Portfolio considers factors such as sales, earnings, cash flow and enterprise value. Enterprise value is a company’s
market capitalization plus the value of its net debt. The Portfolio further considers the relationship between these and
other quantitative factors. Together, these indicators of growth and value may identify companies with improving
prospects before the market in general has taken notice.
Principal Investments
Almost all the companies in which the Portfolio invests are based in the developed foreign countries that make up the
MSCI EAFE Index, plus Canada. The Portfolio may also invest a portion of its assets in companies based in the
emerging markets of Latin America, the Middle East, Europe, Asia and Africa if it believes that its return potential more
than compensates for the extra risks associated with these markets. Under normal market conditions investment in
emerging markets is not considered to be a central element of the Portfolio’s strategy. Typically, the Portfolio will not
hold more than 15% of its net assets in emerging markets. The Portfolio may invest in a variety of debt securities,
equity securities, and other instruments, including convertible securities, warrants, foreign securities, options (on
stock, debt, stock indices, foreign currencies, and futures), futures contracts, forward foreign currency exchange
contracts, interest rate swaps, loan participations, reverse repurchase agreements, dollar rolls, when-issued
and delayed delivery securities, short sales, and illiquid securities. We explain each of these instruments in detail in
the Statement of Additional Information.
Investment Process
Company research lies at the heart of Deutsche Asset Management Inc.’s (DAMI’s) investment process, as it does with
many stock mutual fund portfolios. Several thousand companies are tracked to arrive at the approximately 100 stocks
the Portfolio normally holds. But the process brings an added dimension to this fundamental research. It draws on the
insight of experts from a range of financial disciplines — regional stock market specialists, global industry specialists,
economists and quantitative analysts. They challenge, refine and amplify each other’s ideas. Their close collaboration
is a critical element of the investment process.
Temporary Defensive Position. The Portfolio may from time to time adopt a temporary defensive position in response
to extraordinary adverse political, economic or stock market events. The Portfolio may invest up to 100% of its assets
in U.S. or foreign government money market investments, or other short-term bonds that offer comparable safety, if the
situation warranted. To the extent the Portfolio might adopt such a position over the course of its duration, the Portfolio
may not meet its goal of long-term capital appreciation.
Primary Risks
Market Risk. Although individual stocks can outperform their local markets, deteriorating market conditions might
cause an overall weakness in the stock prices of the entire market.
Stock Selection Risk. A risk that pervades all investing is the risk that the securities an investor has selected will not
perform to expectations. To minimize this risk, DAMI monitors each of the stocks in the Portfolio according to three
basic quantitative criteria. They subject a stock to intensive review if:
‰
its rate of price appreciation begins to trail that of its national stock index;
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‰
the financial analysts who follow the stock, both within DAMI and outside, cut their estimates of the stock’s
future earnings; or
‰
the stock’s price approaches the downside target set when they first bought the stock (and may since have
modified to reflect changes in market and economic conditions).
In this review, DAMI seeks to learn if the deteriorating performance accurately reflects deteriorating prospects or if it
merely reflects investor overreaction to temporary circumstances.
Foreign Stock Market Risk. From time to time, foreign capital markets have exhibited more volatility than those in the
United States. Trading stocks on some foreign exchanges is inherently more difficult than trading in the United States
for reasons including:
‰
Political Risk. Some foreign governments have limited the outflow of profits to investors abroad, extended
diplomatic disputes to include trade and financial relations, and imposed high taxes on corporate profits. While
these political risks have not occurred recently in the major countries in which the Portfolio invests, DAMI
analyzes countries and regions to try to anticipate these risks.
‰
Information Risk. Financial reporting standards for companies based in foreign markets differ from those in
the United States. Since the “numbers” themselves sometimes mean different things, DAMI devotes much of
its research effort to understanding and assessing the impact of these differences upon a company’s financial
conditions and prospects.
‰
Liquidity Risk. Stocks that trade less can be more difficult or more costly to buy, or to sell, than more liquid or
active stocks. This liquidity risk is a factor of the trading volume of a particular stock, as well as the size and
liquidity of the entire local market. On the whole, foreign exchanges are smaller and less liquid than the U.S.
market. This can make buying and selling certain shares more difficult and costly. Relatively small
transactions in some instances can have a disproportionately large effect on the price and supply of shares. In
certain situations, it may become virtually impossible to sell a stock in an orderly fashion at a price that
approaches an estimate of its value.
‰
Regulatory Risk. Some foreign governments regulate their exchanges less stringently, and the rights of
shareholders may not be as firmly established.
In an effort to reduce these foreign stock market risks, the Portfolio diversifies its investments, just as you may spread
your investments among a range of securities so that a setback in one does not overwhelm your entire strategy. In this
way, a reversal in one market or stock need not undermine the pursuit of long-term capital appreciation.
Currency Risk. The Portfolio invests in foreign securities denominated in foreign currencies. This creates the
possibility that changes in foreign exchange rates will affect the value of foreign securities or the U.S. dollar amount of
income or gain received on these securities. DAMI seeks to minimize this risk by actively managing the currency
exposure of the Portfolio.
Emerging Market Risk. To the extent that the Portfolio does invest in emerging markets to enhance overall returns, it
may face higher political, information, and stock market risks. In addition, profound social changes and business
practices that depart from norms in developed countries’ economies have hindered the orderly growth of emerging
economies and their stock markets in the past. High levels of debt tend to make emerging economies heavily reliant on
foreign capital and vulnerable to capital flight. For all these reasons, the Portfolio carefully limits and balances its
commitment to these markets.
Secondary Risks
Small Company Risk. Although the Portfolio generally invests in the shares of large, well-established companies, it
may occasionally take advantage of exceptional opportunities presented by small companies. Such opportunities pose
unique risks. Small company stocks tend to experience steeper price fluctuations — down as well as up — than the
stocks of larger companies. A shortage of reliable information — the same information gap that creates opportunity in
small company investing — can also pose added risk. Industrywide reversals have had a greater impact on small
companies, since they lack a large company’s financial resources. Finally, small company stocks are typically less liquid
than large company stocks; when things are going poorly, it is harder to find a buyer for a small company’s shares.
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Pricing Risk. When price quotations for securities are not readily available, they are valued by the method that most
accurately reflects their current worth in the judgment of the Board. This procedure implies an unavoidable risk, the risk
that our prices are higher or lower than the prices that the securities might actually command if we sold them.
The Portfolio is managed by Deutsche Asset Management, Inc. (DAMI).
The Portfolio seeks long-term capital growth. Most holdings are in small-capitalization companies. While we make
INVESCO is primarily looking for companies in the
accelerated developing stages of their life cycles,
which are currently priced below INVESCO’s
estimation of their potential, have earnings which may
be expected to grow faster than the U.S. economy in
general, and/or offer earnings growth of sales, new
products, management changes, or structural
changes in the economy. The Portfolio may invest up
to 25% of its assets in securities of non-U.S. issuers.
Securities of Canadian issuers and ADRs are not
subject to this 25% limitation.
A Small-Cap Stock Portfolio
The Portfolio generally invests primarily in the stocks of
companies with small market capitalizations.
Under normal circumstances, the Portfolio will invest at least 80% of its investable assets in small-capitalization
companies — those which are included in the Russell 2000 Growth Index at the time of purchase, or if not included in
that index, have market capitalizations of $2.5 billion or below at the time of purchase. Although not a principal
investment, the Portfolio may use derivatives. A derivative is a financial instrument whose value is “derived,” in some
manner, from the price of another security, index, asset or rate. Derivatives include options and futures contracts,
among a wide range of other instruments.
Although not a principal investment, the Portfolio may invest in options and futures contracts. Options and futures
contracts are common types of derivatives that the Portfolio may occasionally use to hedge its investments. An option
is the right to buy or sell a security or other instrument, index or commodity at a specific price on or before a specific
date. A futures contract is an agreement to buy or sell a security or other instrument, index or commodity at a specific
price on a specific date.
Although not a principal investment, the Portfolio may invest in repurchase agreements. In addition, the Portfolio may
invest in debt securities, ADRs, convertible securities, junk bonds, warrants, forward foreign currency exchange
contracts, interest rate swaps, when-issued and delayed delivery securities, short sales against-the-box, U.S.
government securities, Brady Bonds, and illiquid securities. The Portfolio may lend its portfolio securities. In response
to adverse market conditions or when restructuring the Portfolio, INVESCO may invest up to 100% of the Portfolio’s
assets in money market instruments. Investing heavily in these securities limits the ability to achieve the investment
objective, but can help to preserve the Portfolio’s assets when the markets are unstable.
The Portfolio is managed by INVESCO Funds Group, Inc.
The investment objective of the Portfolio is to seek long-term growth of capital. The Portfolio seeks to achieve its
objective through investment in equity-related securities of foreign companies. While we make every effort to achieve
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This means the Portfolio seeks investments — primarily
the common stock of foreign companies — that will
increase in value over a period of years. A company is
considered to be a foreign company if it satisfies at least
one of the following criteria: its securities are traded
principally on stock exchanges in one or more foreign
countries; it derives 50% or more of its total revenue
from goods produced, sales made or services performed
in one or more foreign countries; it maintains 50% or
more of its assets in one or more foreign countries; it is
organized under the laws of a foreign country; or its
principal executive office is located in a foreign country.
A Foreign Stock Growth Portfolio
The Portfolio seeks long-term growth by investing in the
common stock of foreign companies. The Portfolio
generally invests in about 60 securities of issuers
located in at least five different foreign countries.
The Portfolio invests in about 60 securities of primarily non-U.S. growth companies whose shares appear attractively
valued on a relative and absolute basis. The Portfolio looks for companies that have above-average actual and
potential earnings growth over the long term and strong financial and operational characteristics. The Portfolio selects
stocks on the basis of individual company research. Thus, country, currency and industry weightings are primarily the
result of individual stock selections. Although the Portfolio may invest in companies of all sizes, the Portfolio typically
focuses on large and medium sized companies. Under normal conditions, the Portfolio intends to invest at least 65% of
its total assets in the equity-related securities of foreign companies in at least five foreign countries. The Portfolio may
invest anywhere in the world, including North America, Western Europe, the United Kingdom and the Pacific Basin, but
generally not the U.S.
The principal type of equity-related security in which the Portfolio invests is common stock. In addition to common
stock, the Portfolio may invest in other equity-related securities that include, but are not limited to, preferred stock,
rights that can be exercised to obtain stock, warrants and debt securities or preferred stock convertible or
exchangeable for common or preferred stock and master limited partnerships. The Portfolio may also invest in ADRs,
which we consider to be equity-related securities.
In deciding which stocks to purchase for the Portfolio, Jennison looks for growth companies that have both strong
fundamentals and appear to be attractively valued relative to their growth potential. Jennison uses a bottom-up
approach in selecting securities for the Portfolio, which means that they select stocks based on individual company
research, rather than allocating by country or sector. In researching which stocks to buy, Jennison looks at a
company’s basic financial and operational characteristics as well as compare the company’s stock price to the price of
stocks of other companies that are its competitors, absolute historic valuation levels for that company’s stock, its
earnings growth and the price of existing portfolio holdings. Another important part of Jennison’s research process is to
have regular contact with management of the companies that they purchase in order to confirm earnings expectations
and to assess management’s ability to meet its stated goals. Although the Portfolio may invest in companies of all
sizes, it typically focuses on large and medium sized companies.
Generally, Jennison looks for companies that have one or more of the following characteristics: actual and potential
growth in earnings and cash flow; actual and improving profitability; strong balance sheets; management strength; and
strong market share for the company’s products.
In addition, Jennison looks for companies whose securities appear to be attractively valued relative to: each company’s
peer group; absolute historic valuations; and existing holdings of the Portfolio. Generally, they consider selling a
security when there is an identifiable change in a company’s fundamentals or when expectations of future earnings
growth become fully reflected in the price of that security.
The Portfolio may invest in bonds, money market instruments and other fixed income obligations. Generally, the
Portfolio will purchase only “Investment-Grade” fixed income investments. This means the obligations have received
one of the four highest quality ratings determined by Moody’s Investors Service, Inc. (Moody’s), or Standard & Poor’s
Ratings Group (S&P), or one of the other nationally recognized statistical rating organizations (NRSROs). Obligations
rated in the fourth category (Baa for Moody’s or BBB for S&P) have speculative characteristics and are subject to a
greater risk of loss of principal and interest. On occasion, the Portfolio may buy instruments that are not rated, but that
are of comparable quality to the investment-grade bonds described above.
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In response to adverse market, economic or political conditions, the portfolio may temporarily invest up to 100% of its
assets in money market instruments or in the stock and other equity-related securities of U.S. companies. Investing
heavily in money market instruments limits the ability to achieve capital appreciation, but may help to preserve the
portfolio’s assets when global or international markets are unstable. When the portfolio is temporarily invested in equityrelated securities of U.S. companies, the portfolio may achieve capital appreciation, although not through investment in
foreign companies.
We may: purchase and sell options on equity securities, stock indexes and foreign currencies; purchase and sell
futures contracts on stock indexes, debt securities, interest rate indexes and foreign currencies and options on these
futures contracts; enter into forward foreign currency exchange contracts; purchase securities on a when-issued
or delayed delivery basis; and borrow up to 33-1/3% of the value of the Portfolio’s total assets.
This Portfolio is managed by Jennison Associates LLC.
The investment objective of the SP Large Cap Value Portfolio is long-term growth of capital. The Portfolio is
managed by Fidelity Management & Research Company (FMR). The Portfolio normally invests at least 80% of the
Portfolio’s investable assets in securities of companies with large market capitalizations. The Portfolio normally invests
its assets primarily in common stocks.
Although a universal definition of large market
capitalization companies does not exist, FMR generally
defines large market capitalization companies as those
whose market capitalization is similar to the market
capitalization of companies in the S&P 500 or the
Russell 1000. A company’s market capitalization is
based on its current market capitalization or its market
capitalization at the time of the Portfolio’s investment.
Companies whose capitalization is below this level after
purchase continue to be considered to have large
market capitalizations for purposes of the 80% policy.
A Large-Cap Value Portfolio
The Portfolio is managed by Fidelity Management and
Research Company. The Portfolio normally invests at
least 80% of its investable assets in securities of
companies with large market capitalizations. The
Portfolio normally invests its assets primarily in common
stocks.
FMR invests the Portfolio’s assets in companies that it believes are undervalued in the marketplace in relation to
factors such as the company’s assets, earnings, growth potential, or cash flow, or in relation to securities of other
companies in the same industry. Companies with these characteristics tend to have lower than average price/earnings
(P/E) or price/book (P/B) ratios. The stocks of these companies are often called “value” stocks.
FMR may invest the Portfolio’s assets in securities of foreign issuers in addition to securities of domestic issuers.
FMR relies on fundamental analysis of each issuer and its potential for success in light of its current financial condition,
its industry position, and economic and market factors. Factors considered include growth potential, earnings
estimates, and management. These securities may then be analyzed using statistical models to further evaluate growth
potential, valuation, liquidity and investment risk. In buying and selling securities for the Portfolio, FMR invests for the
long term and selects those securities it believes offer strong opportunities for the long-term growth of capital and are
attractively valued.
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The Portfolio primarily invests in equity securities which represent an ownership interest, or the right to acquire an
ownership interest, in an issuer. Different types of equity securities provide different voting and dividend rights and
priority in the event of the bankruptcy of the issuer. Equity securities include common stocks, preferred stocks,
convertible securities, and warrants.
FMR may use various techniques, such as buying and selling futures contracts, and exchange traded funds to
increase or decrease the Portfolio’s exposure to changing security prices or other factors that affect security values. If
FMR’s strategies do not work as intended, the Portfolio may not achieve its objective. While we make every effort to
achieve our objective, we can’t guarantee success and it is possible that you could lose money.
Many factors affect the Portfolio’s performance. The Portfolio’s share price changes daily based on changes in market
conditions and interest rates and in response to other economic, political or financial developments. The Portfolio’s
reaction to these developments will be affected by the types of the securities in which the Portfolio invests, the financial
condition, industry and economic sector, and geographic location of an issuer, and the Portfolio’s level of investment in
the securities of that issuer. When you sell units corresponding to shares of the Portfolio, they could be worth more or
less than what you paid for them.
In addition to company risk, derivatives risk, foreign investment risk, leveraging risk, liquidity risk, management risk,
and market risk, the following factor can significantly affect the Portfolio’s performance:
“Value” stocks can react differently to issuer, political, market and economic developments than the market as a whole
and other types of stocks. “Value” stocks tend to be inexpensive relative to their earnings or assets compared to other
types of stocks. However, “value” stocks can continue to be inexpensive for long periods of time and may not ever
realize their full value.
In response to market, economic, political or other conditions, FMR may temporarily use a different investment strategy
for defensive purposes. If FMR does so, different factors could affect the Portfolio’s performance and the Portfolio may
not achieve its investment objective.
The Portfolio is managed by Fidelity Management and Research Company.
The Portfolio invests, under normal market conditions, at least 65% of its total assets in common stocks and related
securities, such as preferred stocks, convertible securities and depositary receipts for those securities. While we make
The portfolio focuses on companies which
Massachusetts Financial Services Company (MFS)
believes have favorable growth prospects and attractive
valuations based on current and expected earnings or
cash flow. The Portfolio’s investments may include
securities listed on a securities exchange or traded in the
over-the-counter markets.
Capital Opportunities In Both U.S. and Foreign
Stocks
The Portfolio invests primarily in stocks, convertible
securities, and depositary receipts of companies in both
the United States and in foreign countries.
MFS uses a bottom-up, as opposed to a top-down, investment style in managing the Portfolio. This means that
securities are selected based upon fundamental analysis (such as an analysis of earnings, cash flows, competitive
position and management’s abilities) performed by the portfolio manager and MFS’ large group of equity research
analysts. The Portfolio may invest in foreign securities (including emerging market securities), through which it
may have exposure to foreign currencies. The Portfolio may engage in active and frequent trading to achieve its
principal investment strategies. Generally, the Portfolio will invest no more than (i) 35% of its net assets in foreign
securities and (ii) 15% in lower rated bonds, and the Portfolio will not lend more than 30% of the value of its securities.
The Portfolio can invest in a wide variety of debt and equity securities, including corporate debt, lower-rated bonds,
U.S. Government securities, variable and floating rate obligations, zero coupon bonds, deferred interest bonds, PIK
70
bonds, Brady Bonds, depositary receipts, forward contracts, futures contracts, investment company securities,
options (on currencies, futures, securities and stock indices), repurchase agreements, mortgage dollar rolls,
restricted securities, short sales, short sales against-the-box, warrants, and when-issued and delayed delivery
securities. The Portfolio may lend its securities. The Portfolio may invest in equity and/or debt securities issued by
Real Estate Investment Trusts (REITs).
The Portfolio also may assume a temporary defensive position. In response to adverse market conditions or when
restructuring the Portfolio, MFS may invest up to 100% of the Portfolio’s assets in money market instruments. Investing
heavily in these securities limits the ability to achieve the investment objective, but can help to preserve the Portfolio’s
assets when the markets are unstable.
The Portfolio is managed by Massachusetts Financial Services Company (MFS).
The Portfolio’s investment objective is long-term growth of capital. While we make every effort to achieve our
objective, we can’t guarantee success and it is possible you could lose money.
The Portfolio invests, under normal market conditions, at
least 80% of its investable assets in common stocks and
related securities, such as preferred stocks, convertible
securities and depositary receipts for those securities, of
companies with medium market capitalization which
Massachusetts Financial Services Company (MFS)
believes have above-average growth potential.
A Mid-Cap Growth Stock Portfolio
The Portfolio invests primarily in companies with market
capitalizations equaling or exceeding $250 million but
not exceeding the top of the Russell Midcap™ Growth
Index range at the time of purchase.
Medium market capitalization companies are defined by the Portfolio as companies with market capitalizations equaling
or exceeding $250 million but not exceeding the top of the Russell Midcap™ Growth Index range at the time of the
Portfolio’s investment. This Index is a widely recognized, unmanaged index of mid-cap common stock prices.
Companies whose market capitalizations fall below $250 million or exceed the top of the Russell Midcap™ Growth
Index range after purchase continue to be considered medium-capitalization companies for purposes of the fund’s 80%
investment policy. As of December 28, 2001, the top of the Russell Midcap™ Growth Index range was approximately
$15.7 billion. The Portfolio’s investments may include securities listed on a securities exchange or traded in the overthe-counter markets. MFS uses a bottom-up, as opposed to a top-down, investment style in managing the Portfolio.
This means that securities are selected based upon fundamental analysis (such as an analysis of earnings, cash flows,
competitive position and management’s abilities) performed by the portfolio manager and MFS’s large group of equity
research analysts.
The Portfolio is a non-diversified mutual fund portfolio. This means that the Portfolio may invest a relatively high
percentage of its assets in a small number of issuers. As a result, the Portfolio’s performance may be tied more closely
to the success or failure of a smaller group of Portfolio holdings. The Portfolio may invest in foreign securities (including
emerging markets securities) through which it may have exposure to foreign currencies. The Portfolio is expected to
engage in active and frequent trading to achieve its principal investment strategies. Generally, the Portfolio will invest no
more than (i) 20% of its net assets in foreign securities and (ii) 10% in lower rated bonds, and the Portfolio will not lend
more than 30% of the value of its securities. The Portfolio may invest in a variety of debt securities, equity securities, and
other instruments, including corporate debt, lower-rated bonds, U.S. government securities, variable and floating rate
obligations, zero coupon bonds, deferred interest bonds, PIK bonds, depository receipts, emerging markets equity
securities, forward contracts, futures contracts, investment company securities, options (on currencies, futures,
securities, and stock indices), repurchase agreements, restricted securities, short sales, short sales against-the-box,
short-term debt, warrants, and when-issued and delayed delivery securities. The Portfolio may borrow for temporary
purposes, and lend its portfolio securities.
In response to adverse market conditions or when restructuring the Portfolio, MFS may invest up to 100% of the
Portfolio’s assets in money market instruments. Investing heavily in the securities limits the ability to achieve the
investment objective, but can help to preserve the Portfolio’s assets when markets are unstable.
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The Portfolio is managed by Massachusetts Financial Services Company (MFS).
The investment objective of the Portfolio is a high total return. Under normal circumstances, the Portfolio invests at
least 80% of its investable assets in high yield/high risk bonds.
The Portfolio may invest up to 15% of its assets in
derivative instruments, such as options, futures
contracts or swap agreements. The Portfolio may also
invest in mortgage-related securities or asset-backed
securities.
A High-Yield, High-Risk Bond Portfolio
The Portfolio invests primarily in high-yield, high-risk
bonds, also known as “junk bonds.”
The Portfolio may seek to obtain market exposure to the securities in which it primarily invests by entering into a series
of purchase and sale contracts or by using other investment techniques (such as buy backs or dollar rolls). The “total
return” sought by the Portfolio consists of income earned on the Portfolio’s investments, plus capital appreciation, if
any, which generally arises from decreases in interest rates or improving credit fundamentals for a particular sector or
security.
In selecting securities for the Portfolio, PIMCO develops an outlook for interest rates, currency exchange rates and the
economy; analyzes credit and call risks, and uses other security selection techniques. The proportion of a Portfolio’s
assets committed to investment in securities with particular characteristics (such as quality, sector, interest rate or
maturity) varies based on PIMCO’s outlook for the U.S. economy and the economies of other countries in the world, the
financial markets and other factors.
PIMCO attempts to identify areas of the bond market that are undervalued relative to the rest of the market. PIMCO
identifies these areas by grouping bonds into the following sectors: money markets, governments, corporates,
mortgages, asset-backed and international. Sophisticated proprietary software then assists in evaluating sectors and
pricing specific securities. Once investment opportunities are identified, PIMCO will shift assets among sectors
depending upon changes in relative valuations and credit spreads. There is no guarantee that PIMCO’s security
selection techniques will produce the desired results. While we make every effort to achieve our objective, we can’t
guarantee success and it is possible that you could lose money.
The Portfolio may also invest in Brady Bonds, which are described below in the section on the SP PIMCO Total Return
Portfolio.
Securities rated lower than Baa by Moody’s Investors Service, Inc. (Moody’s) or lower than BBB by Standard & Poor’s
Ratings Services (“S&P”) are sometimes referred to as “high yield” or “junk” bonds. Investing in high yield securities
involves special risks in addition to the risks associated with investments in higher-rated fixed income securities. While
offering a greater potential opportunity for capital appreciation and higher yields, high yield securities typically entail
greater potential price volatility and may be less liquid than higher-rated securities. High yield securities may be
regarded as predominantly speculative with respect to the issuer’s continuing ability to meet principal and interest
payments. They may also be more susceptible to real or perceived adverse economic and competitive industry
conditions than higher-rated securities.
The Portfolio may invest in inflation-indexed bonds, which are described below in the section on the SP PIMCO Total
Return Portfolio.
The Portfolio may invest in convertible debt and convertible preferred stock securities.
The Portfolio may also enter into, or acquire participations in, delayed funding loans and revolving credit facilities, which
are described in the section on SP PIMCO Total Return Portfolio.
For the purpose of achieving income, each Portfolio may lend its portfolio securities to brokers, dealers, and other
financial institutions provided a number of conditions are satisfied, including that the loan is fully collateralized.
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The Portfolio may make short sales as part of its overall portfolio management strategies or to offset a potential
decline in value of a security.
The Portfolio may purchase securities which it is eligible to purchase on a when-issued or delayed delivery basis,
and may make contracts to purchase such securities for a fixed price at a future date beyond normal settlement time
(forward commitments).
The Portfolio may enter into repurchase agreements.
The Portfolio may enter into reverse repurchase agreements and dollar rolls, subject to a Portfolio’s limitations on
borrowings.
The Portfolio may invest in “event-linked bonds,” which are described in the section below on the SP PIMCO Total
Return Portfolio.
The Portfolio may invest up to 15% of its net assets in illiquid securities.
The Portfolio may invest up to 10% of its assets in securities of other investment companies, such as closed-end
management investment companies, or in pooled accounts or other investment vehicles which invest in foreign
markets. As a shareholder of an investment company, a Portfolio may indirectly bear service and other fees which are
in addition to the fees the Portfolio pays its service providers.
For temporary or defensive purposes, the Portfolio may invest without limit in U.S. debt securities, including taxable
securities and short-term money market securities, when PIMCO deems it appropriate to do so. When the Portfolio
engages in such strategies, it may not achieve its investment objective.
The Portfolio is managed by Pacific Investment Management Company LLC (PIMCO).
The Portfolio invests primarily in investment grade debt securities. It may also invest up to 10% of its assets in high
yield/high risk securities (also known as “junk bonds”) rated B or higher by Moody’s or S&P or, if unrated, determined
by PIMCO to be of comparable quality.
An Investment Grade Bond Portfolio
The Portfolio invests primarily in investment grade debt
securities, including foreign debt securities, but may
invest some of its assets in high yield bonds.
The Portfolio may invest up to 20% of its assets in
securities denominated in foreign currencies, and may
invest beyond this limit in U.S. dollar-denominated
securities of foreign issuers. The Portfolio will normally
hedge at least 75% of its exposure to foreign currency to
reduce the risk of loss due to fluctuations in currency
exchange rates.
The Portfolio may invest all of its assets in derivative instruments, such as options, futures contracts or swap
agreements, or in mortgage- or asset-backed securities. The Portfolio may lend its portfolio securities to brokers,
dealers and other financial institutions to earn income. The Portfolio may seek to obtain market exposure to the
securities in which it primarily invests by entering into a series of purchase and sale contracts or by using other
investment techniques (such as buy backs or dollar rolls). The “total return” sought by the Portfolio consists of income
earned on the Portfolio’s investments, plus capital appreciation, if any, which generally arises from decreases in
interest rates or improving credit fundamentals for a particular sector or security.
In selecting securities for a Portfolio, PIMCO develops an outlook for interest rates, currency exchange rates and the
economy; analyzes credit and call risks, and uses other security selection techniques. The proportion of a Portfolio’s
assets committed to investment in securities with particular characteristics (such as quality, sector, interest rate or
maturity) varies based on PIMCO’s outlook for the U.S. economy and the economies of other countries in the world, the
financial markets and other factors.
73
PIMCO attempts to identify areas of the bond market that are undervalued relative to the rest of the market. PIMCO
identifies these areas by grouping bonds into the following sectors: money markets, governments, corporates,
mortgages, asset-backed and international. Sophisticated proprietary software then assists in evaluating sectors and
pricing specific securities. Once investment opportunities are identified, PIMCO will shift assets among sectors
depending upon changes in relative valuations and credit spreads. There is no guarantee that PIMCO’s security
selection techniques will produce the desired results. While we make every effort to achieve our objective, we can’t
guarantee success and it is possible that you could lose money.
The Portfolio may invest in Brady Bonds, which are securities created through the exchange of existing commercial
bank loans to sovereign entities for new obligations in connection with a debt restructuring. Investments in Brady Bonds
may be viewed as speculative. Brady Bonds acquired by the Portfolio may be subject to restructuring arrangements or
to requests for new credit, which may cause the Portfolio to suffer a loss of interest or principal on any of its holdings.
The Portfolio may invest in inflation-indexed bonds, which are fixed income securities whose principal value is
periodically adjusted according to the rate of inflation. If the index measuring inflation falls, the principal value of
inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities
(calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon
maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds. For bonds that do
not provide a similar guarantee, the adjusted principal value of the bond repaid at maturity may be less than the original
principal. The value of inflation-indexed bonds is expected to change in response to changes in real interest rates. Real
interest rates are tied to the relationship between nominal interest rates and the rate of inflation. If nominal interest
rates increase at a faster rate than inflation, real interest rates may rise, leading to a decrease in value of inflationindexed bonds. Short-term increases in inflation may lead to a decline in value. Any increase in the principal amount of
an inflation-indexed bond will be considered taxable ordinary income, even though investors do not receive their
principal until maturity.
The Portfolio may invest in convertible debt and convertible preferred stock.
The Portfolio may invest in mortgage-related securities or other asset-backed securities.
The Portfolio may also enter into, or acquire participations in, delayed funding loans and revolving credit facilities, in
which a lender agrees to make loans up to a maximum amount upon demand by the borrower during a specified term.
These commitments may have the effect of requiring a Portfolio to increase its investment in a company at a time when
it might not otherwise decide to do so (including at a time when the company’s financial condition makes it unlikely that
such amounts will be repaid). To the extent that a Portfolio is committed to advance additional Portfolios, it will
segregate assets determined to be liquid by PIMCO in accordance with procedures established by the Board of
Directors in an amount sufficient to meet such commitments. Delayed loans and revolving credit facilities are subject to
credit, interest rate and liquidity risk and the risks of being a lender.
For the purpose of achieving income, each Portfolio may lend its portfolio securities to brokers, dealers, and other
financial institutions provided a number of conditions are satisfied, including that the loan is fully collateralized.
The Portfolio may make short sales as part of its overall portfolio management strategies or to offset a potential
decline in value of a security. The Portfolio may use interest rate swaps in the management of the Portfolio.
The Portfolio may purchase securities which it is eligible to purchase on a when-issued or delayed delivery basis,
and may make contracts to purchase such securities for a fixed price at a future date beyond normal settlement time
(forward commitments).
The Portfolio may enter into repurchase agreements.
The Portfolio may enter into reverse repurchase agreements and dollar rolls.
The Portfolio may invest in “event-linked bonds,” which are fixed income securities for which the return of principal and
payment of interest is contingent on the non-occurrence of a specific “trigger” event, such as a hurricane, earthquake,
or other physical or weather-related phenomenon. If a trigger event occurs, a Portfolio may lose a portion or all of its
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principal invested in the bond. Event-linked bonds often provide for an extension of maturity to process and audit loss
claims where a trigger event has, or possibly has, occurred. An extension of maturity may increase volatility. Eventlinked bonds may also expose the Portfolio to certain unanticipated risks including credit risk, adverse regulatory or
jurisdictional interpretations, and adverse tax consequences. Event-linked bonds may also be subject to liquidity risk.
The Portfolio may invest up to 15% of its net assets in illiquid securities.
The Portfolio may invest up to 10% of its assets in securities of other investment companies, such as closed-end
management investment companies, or in pooled accounts or other investment vehicles which invest in foreign
markets. As a shareholder of an investment company, the Portfolio may indirectly bear service and other fees which
are in addition to the fees the Portfolio pays its service providers.
For temporary or defensive purposes, the Portfolio may invest without limit in U.S. debt securities, including taxable
securities and short-term money market securities, when PIMCO deems it appropriate to do so. When the Portfolio
engages in such strategies, it may not achieve its investment objective.
The Portfolio is managed by Pacific Investment Management Company LLC (PIMCO).
The Portfolio’s investment objective is long-term capital appreciation. This means the Portfolio seeks investments
whose price will increase over several years. While we make every effort to achieve its objective, we can’t guarantee
In deciding which equities to buy, the Portfolio uses what
is known as a growth investment style. This means the
Portfolio invests in companies that it believes could
experience superior sales or earnings growth. In
pursuing this objective, the Portfolio normally invests at
least 80% of the Portfolio’s investable assets in equity
securities of small and medium-sized U.S. companies
with the potential for above-average growth.
A Small/Medium-Sized Stock Portfolio
The Portfolio invests primarily in the stocks of small and
medium-sized companies with the potential for aboveaverage growth.
The Portfolio considers small and medium-sized companies to be those with market capitalizations that are less than
the largest capitalization of the Standard and Poor’s Mid-Cap 400 Stock Index as of the end of a calendar quarter. As
of December 31, 2001, this number was $10.5 billion. We use the market capitalization measurements used by S&P at
time of purchase.
In addition to buying equities, the Portfolio may invest in other equity-related securities. Equity-related securities include
American Depositary Receipts (ADRs); common stocks; nonconvertible preferred stocks; warrants and rights that can
be exercised to obtain stock; investments in various types of business ventures, including partnerships and joint
ventures; Real Estate Investment Trusts (REITs); and similar securities.
The Portfolio also may buy convertible debt securities and convertible preferred stock. These are securities that the
Portfolio can convert into the company’s common stock or some other equity security. The Portfolio will only invest in
investment-grade convertible securities. Generally, the Portfolio considers selling a security when, in the opinion of the
investment adviser, the stock has experienced a fundamental disappointment in earnings; it has reached an
intermediate-term price objective and its outlook no longer seems sufficiently promising; a relatively more attractive
stock emerges; or the stock has experienced adverse price movements.
The Portfolio can invest up to 20% of investable assets in equity securities of companies with larger or smaller market
capitalizations than previously noted. The Portfolio may participate in the initial public offering (IPO) market. IPO
investments may increase the Portfolio’s total returns. As the Portfolio’s assets grow, the impact of IPO investments will
decline, which may reduce the Portfolio’s total returns.
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The Portfolio can invest up to 35% of total assets in foreign securities, including stocks and other equity-related
securities, money market instruments and other investment-grade fixed-income securities of foreign issuers, including
those in developing countries. For purposes of the 35% limit, the Portfolio does not consider ADRs and other similar
receipts or shares to be foreign securities.
The Portfolio can invest up to 20% of investable assets in investment-grade corporate or government obligations.
Investment-grade obligations are rated in one of the top four long-term quality ratings by a major rating service (such as
Baa/BBB or better by Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Group, respectively). The Portfolio
also may invest in obligations that are not rated, but which it believes to be of comparable quality. Obligations rated in the
fourth category (Baa/BBB) have speculative characteristics. These lower-rated obligations are subject to a greater risk of
loss of principal and interest. Generally, fixed-income securities provide a fixed rate of return, but provide less opportunity
for capital appreciation than investing in stocks. The Portfolio will purchase money market instruments only in one of the
two highest short-term quality ratings of a major rating service.
In response to adverse market, economic or political conditions, the Portfolio may temporarily invest up to 100% of the
Portfolio’s assets in cash or money market instruments. Investing heavily in these securities limits the Portfolio’s ability
to achieve capital appreciation, but can help to preserve its assets when the equity markets are unstable.
The Portfolio may also use repurchase agreements.
The Portfolio may enter into foreign currency forward contracts to protect the value of its portfolio against future
changes in the level of currency exchange rates. The Portfolio may enter into such contracts on a spot, that is, cash,
basis at the rate then prevailing in the currency exchange market or on a forward basis, by entering into a forward
contract to purchase or sell currency.
The Portfolio may use various derivative strategies to try to improve its returns or protect its assets. The Portfolio
cannot guarantee that these strategies will work, that the instruments necessary to implement these strategies will be
available or that the Portfolio will not lose money.
The Portfolio may invest in securities issued by agencies of the U.S. Government or instrumentalities of the U.S.
Government. These obligations, including those which are guaranteed by Federal agencies or instrumentalities, 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 Small Business Administration are backed by the full
faith and credit of the United States. In the case of securities not backed by the full faith and credit of the United States,
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 United States if the agency or instrumentality does not meet its commitments.
Securities in which the Portfolio may invest which are not backed by the full faith and credit of the United States include
obligations such as those issued by the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation
(FHLMC), the Federal National Mortgage Association, the Student Loan Marketing Association, Resolution Funding
Corporation and the Tennessee Valley Authority, each of which has the right to borrow from the U.S. Treasury to meet
its obligations, and obligations of the Farm Credit System, the obligations of which may be satisfied only by the
individual credit of the issuing agency. FHLMC investments may include collateralized mortgage obligations.
The Portfolio may invest in mortgage-backed securities, including those which represent undivided ownership interests
in pools of mortgages. The U.S. Government or the issuing agency or instrumentality guarantees the payment of
interest on and principal of these securities. However, the guarantees do not extend to the yield or value of the
securities nor do the guarantees extend to the yield or value of the Portfolio’s shares. These 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.
The Portfolio may purchase and write (that is, sell) put and call options on securities, stock indexes and currencies that
are traded on U.S. or foreign securities exchanges or in the over-the-counter market to seek to enhance return or to
protect against adverse price fluctuations in securities in the Portfolio’s portfolio. These options will be on equity
securities, financial indexes (for example, S&P 500 Composite Stock Price Index) and foreign currencies. The Portfolio
may write put and call options to generate additional income through the receipt of premiums, purchase put options in
an effort to protect the value of securities (or currencies) that it owns against a decline in market value and purchase
call options in an effort to protect against an increase in the price of securities (or currencies) it intends to purchase.
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The Portfolio may purchase and sell financial futures contracts and options thereon which are traded on a
commodities exchange or board of trade to reduce certain risks of its investments and to attempt to enhance return in
accordance with regulations of the Commodity Futures Trading Commission (CFTC).
The Portfolio also follows certain policies when it borrows money (the Portfolio can borrow up to 20% of the value of its
total assets); lends its securities to others (the Portfolio can lend up to 33 1⁄ 3% of the value of its total assets, including
collateral received in the transaction); and holds illiquid securities (the Portfolio may hold up to 15% of its net assets in
illiquid securities, including securities with legal or contractual restrictions on resale, those without a readily available
market and repurchase agreements with maturities longer than seven days).
Portfolio Turnover
As a result of the strategies described above, the Portfolio may have an annual portfolio turnover rate of up to 200%.
Portfolio turnover is generally the percentage found by dividing the lesser of portfolio purchases or sales by the monthly
average value of the portfolio. High portfolio turnover (100% or more) results in higher brokerage commissions and
other transaction costs and can affect the Portfolio’s performance.
The Portfolio is managed by Jennison Associates LLC.
The investment objective of the SP Small/Mid-Cap Value Portfolio is long-term growth of capital. The Portfolio is
managed by Fidelity Management & Research Company (FMR). The Portfolio normally invests at least 80% of its
investable assets in securities of companies with small to medium market capitalizations.
The Portfolio normally invests its assets primarily in
common stocks. Although universal definitions of small
and medium market capitalization does not exist, FMR
generally defines small and medium market
capitalization companies as those whose market
capitalizations is similar to the market capitalization of
companies in the S&P Small Cap 600 or the Russell
2000, and the S&P MidCap 400 or the Russell Midcap,
respectively. A company’s market capitalization is based
on its current market capitalization or its market
capitalization at the time of the Portfolio’s investment.
Companies whose capitalization is above this level after
purchase continue to have a small or medium market
capitalization for purposes of the 80% policy. The size of
companies in each index changes with market
conditions, and the composition of each index. FMR may
also invest the Portfolio’s assets in companies with
larger market capitalizations.
A Small/Mid-Cap Value Portfolio
The Portfolio normally invests at least 80% of its
investable assets in companies with small to medium
market capitalizations.
FMR invests the Portfolio’s assets in companies that it believes are undervalued in the marketplace in relation to
factors such as the company’s assets, earnings, or growth potential, or cash flow, or in relation to securities of other
companies in the same industry. Companies with these characteristics tend to have lower than average price/earnings
(P/E) or price/book (P/B) ratios. The stocks of these companies are often called “value” stocks.
FMR may invest the Portfolio’s assets in securities of foreign issuers in addition to securities of domestic issuers.
FMR relies on fundamental analysis of each issuer and its potential for success in light of its current financial condition,
its industry position, and economic and market factors. Factors considered include growth potential, earnings estimates
and management. These securities may then be analyzed using statistical models to further evaluate growth potential,
valuation, liquidity and investment risk. In buying and selling securities for the Portfolio, FMR invests for the long term
and selects those securities it believes offer strong opportunities for the long-term growth of capital and are attractively
valued.
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The Portfolio invests primarily in equity securities, which represent an ownership interest, or the right to acquire an
ownership interest, in an issuer. Different types of equity securities provide different voting and dividend rights and
priority in the event of the bankruptcy of the issuer. Equity securities include common stocks, preferred stocks,
convertible securities, and warrants.
FMR may use various techniques, such as buying and selling futures contracts and exchange traded funds, to increase
or decrease the Portfolio’s exposure to changing security prices or other factors that affect security values. The
Portfolio may invest in equity and/or debt securities issued by Real Estate Investment Trusts (REITs). If FMR’s
strategies do not work as intended, the Portfolio may not achieve its objective. While we make every effort to achieve
Many factors affect the Portfolio’s performance. The Portfolio’s share price changes daily based on changes in market
conditions and interest rates and in response to other economic, political, or financial developments. The Portfolio’s
reaction to these developments will be affected by the types of securities in which the Portfolio invests, the financial
condition, industry and economic sector, and geographic location of an issuer, and the Portfolio’s level of investment in
the securities of that issuer. When you sell units corresponding to shares of the Portfolio, they could be worth more or
less than what you paid for them.
In addition to company risk, derivatives risk, foreign investment risk, leveraging risk, liquidity risk, management risk,
and market risk, the following factors can significantly affect the Portfolio’s performance:
The value of securities of smaller, less well-known issuers can be more volatile than that of larger issuers and can react
differently to issuer, political, market and economic developments than the market as a whole and other types of
stocks. Smaller issuers can have more limited product lines, markets and financial resources.
“Value” stocks can react differently to issuer, political, market and economic developments than the market as a whole
and other types of stocks. “Value” stocks tend to be inexpensive relative to their earnings or assets compared to other
types of stocks. However, “value” stocks can continue to be inexpensive for long periods of time and may not ever
realize their full value.
In response to market, economic, political or other conditions, FMR may temporarily use a different investment strategy
for defensive purposes. If FMR does so, different factors could affect the Portfolio’s performance and the Portfolio may
not achieve its investment objective.
In pursuing its objective of long-term growth of capital, the Portfolio normally invests at least 65% of its total assets in
equity-related securities of U.S. companies that are believed to have strong capital appreciation potential. While we
The Portfolio’s strategy is to combine the efforts of two
investment advisers and to invest in the favorite stock
selection ideas of three portfolio managers (two of whom
invest as a team). Each investment adviser to the
Portfolio utilizes a growth style to select approximately
20 securities. The portfolio managers build a portfolio
with stocks in which they have the highest confidence
and may invest more than 5% of the Portfolio’s assets in
any one issuer.
A Growth Stock Portfolio
The Portfolio normally invests at least 65% of its total
assets in the equity-related securities of U.S. companies
that are believed to have strong capital appreciation
potential. The Portfolio is managed according to a
growth investment style.
The Portfolio may actively and frequently trade its portfolio securities. The Portfolio is a non-diversified mutual fund
portfolio. This means that the Portfolio may invest in a relatively high percentage of net assets in a small number of
issuers. Investing in a nondiversified mutual fund, particularly a fund investing in approximately 40 equity-related
securities, involves greater risk than investing in a diversified fund because a loss resulting from the decline in the value
of one security may represent a greater portion of the total assets of a nondiversified fund.
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The primary equity-related securities in which the Portfolio invests are common stocks. Generally, each investment
adviser will consider selling or reducing a stock position when, in their opinion, the stock has experienced a
fundamental disappointment in earnings; it has reached an intermediate-term price objective and its outlook no longer
seems sufficiently promising; a relatively more attractive stock emerges; or the stock has experienced adverse price
movement. A price decline of a stock does not necessarily mean that an investment adviser will sell the stock at that
time. During market declines, either investment adviser may add to positions in favored stocks, which can result in a
somewhat more aggressive strategy, with a gradual reduction of the number of companies in which the adviser invests.
Conversely, in rising markets, either investment adviser may reduce or eliminate fully valued positions, which can result
in a more conservative investment strategy, with a gradual increase in the number of companies represented in the
adviser’s portfolio segment.
In deciding which stocks to buy, each investment adviser uses what is known as a growth investment style. This means
that each adviser will invest in stocks they believe could experience superior sales or earnings growth.
In addition to common stocks in which the Portfolio primarily invests, equity-related securities include nonconvertible
preferred stocks; convertible debt and convertible preferred stock; American Depository Receipts (ADRs); warrants
and rights that can be exercised to obtain stock; investments in various types of business ventures, including
partnerships and joint ventures; Real Estate Investment Trusts (REITs); and similar securities.
The Portfolio may buy common stocks of companies of every size — small-, medium- and large-capitalization —
although its investments are mostly in medium- and large-capitalization stocks. The Portfolio intends to be fully
invested, holding less than 5% of its total assets in cash under normal market conditions.
Under normal conditions, there will be an approximately equal division of the Portfolio’s assets between the two
investment advisers. All daily cash inflows (that is, purchases and reinvested distributions) and outflows (that is,
redemptions and expense items) will usually be divided between the two investment advisers as the portfolio manager
deems appropriate. There will be a periodic rebalancing of each segment’s assets to take account of market
fluctuations in order to maintain the approximately equal allocation. As a consequence, the manager may allocate
assets from the portfolio segment that has appreciated more to the other.
Alliance Capital Management’s portfolio manager, Alfred Harrison, utilizes the fundamental analysis and research of
Alliance’s large internal research staff. In selecting stocks for the Portfolio, he emphasizes stock selection and
investment in a limited number of companies that have strong management, superior industry positions, excellent
balance sheets and the ability to demonstrate superior earnings growth.
Jennison Associates’ portfolio managers, Spiros Segalas and Kathleen McCarragher, invest in mid-size and large
companies experiencing some or all of the following: high sales growth, high unit growth, high or improving returns on
assets and equity and a strong balance sheet. These companies generally trade at high prices relative to their current
earnings.
Reallocations may result in additional costs since sales of securities may result in higher portfolio turnover. Also,
because each investment adviser selects portfolio securities independently, it is possible that a security held by one
portfolio segment may also be held by the other portfolio segment of the Portfolio or that the two advisers may
simultaneously favor the same industry. Prudential Investments LLC will monitor the overall portfolio to ensure that any
such overlaps do not create an unintended industry concentration. In addition, if one investment adviser buys a security
as the other adviser sells it, the net position of the Portfolio in the security may be approximately the same as it would
have been with a single portfolio and no such sale and purchase, but the Portfolio will have incurred additional costs.
The portfolio manager will consider these costs in determining the allocation of assets. The portfolio manager will
consider the timing of reallocation based upon the best interests of the Portfolio and its shareholders. To maintain the
Portfolio’s federal income tax status as a regulated investment company, Jennison Associates also may have to sell
securities on a periodic basis.
The Portfolio may invest up to 20% of its total assets in foreign securities, including stocks and other equity-related
securities, money market instruments and other fixed-income securities of foreign issuers. The Portfolio does not
consider ADRs and other similar receipts or shares to be foreign securities.
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The Portfolio may temporarily hold cash or invest in high-quality foreign or domestic money market instruments pending
investment of proceeds from new sales of Portfolio shares or to meet ordinary daily cash needs subject to the policy of
normally investing at least 65% of the Portfolio’s assets in equity-related securities. In response to adverse market,
economic, political or other conditions, the Portfolio may temporarily invest up to 100% of its assets in money market
instruments. Investing heavily in these securities limits the ability to achieve the investment objective, but can help to
preserve the Portfolio’s assets when the equity markets are unstable.
The Portfolio may use repurchase agreements.
The Portfolio may purchase and write (that is, sell) put and call options on securities indexes that are traded on U.S. or
foreign securities exchanges or in the over-the-counter market to try to enhance return or to hedge the Portfolio’s
portfolio. The Portfolio may write covered put and call options to generate additional income through the receipt of
premiums, purchase put options in an effort to protect the value of a security that it owns against a decline in market
value and purchase call options in an effort to protect against an increase in the price of securities it intends to
purchase. The Portfolio also may purchase put and call options to offset previously written put and call options of the
same series. The Portfolio will write only “covered” options. The Portfolio may purchase and sell stock index futures
contracts and related options on stock index futures. The Portfolio may purchase and sell futures contracts on foreign
currencies and related options on foreign currency futures contracts.
The Portfolio may invest in securities issued or guaranteed by the U.S. Treasury or by an agency or instrumentality of
the U.S. government. Not all U.S. government securities are backed by the full faith and credit of the United States.
Some are supported only by the credit of the issuing agency.
The Portfolio will also use futures contracts and options on futures contracts for certain bona fide hedging, return
enhancement and risk management purposes. The Portfolio may purchase put and call options and write (that is, sell)
“covered” put and call options on futures contracts that are traded on U.S. and foreign exchanges.
The Portfolio may use short sales.
The Portfolio may use various derivatives to try to improve the Portfolio’s returns. The Portfolio may use hedging
techniques to try to protect the Portfolio’s assets. We cannot guarantee that these strategies will work, that the
instruments necessary to implement these strategies will be available, or that the Portfolio will not lose money.
The Portfolio also follows certain policies when it borrows money (the Portfolio can borrow up to 33 1⁄ 3% of the value of
its total assets); lends its securities to others for cash management purposes (the Portfolio can lend up to 33 1⁄ 3% of the
value of its total assets including collateral received in the transaction); and holds illiquid securities (the Portfolio may
hold up to 15% of its net assets in illiquid securities, including securities with legal or contractual restrictions on resale,
those without a readily available market and repurchase agreements with maturities longer than seven days). The
Portfolio is subject to certain investment restrictions that are fundamental policies, which means they cannot be
changed without shareholder approval. For more information about these restrictions, see the SAI.
It is not a principal strategy of the Portfolio to actively and frequently trade its portfolio securities to achieve its
investment objective. Nevertheless, the Portfolio may have an annual portfolio turnover rate of up to 200%. Portfolio
turnover is generally the percentage found by dividing the lesser of portfolio purchases and sales by the monthly
average value of the portfolio. High portfolio turnover (100% or more) results in higher brokerage commissions and
other costs and can affect the Portfolio’s performance.
The Portfolio is managed by Jennison Associates LLC and Alliance Capital Management, L.P.
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*
*
The Statement of Additional Information — which we refer to as the SAI — contains additional information about the
Portfolios. To obtain a copy, see the back cover page of this prospectus.
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OTHER INVESTMENTS AND STRATEGIES
As indicated in the description of the Portfolios above, we may use the following investment strategies to increase a
Portfolio’s return or protect its assets if market conditions warrant.
ADRs are certificates representing the right to receive foreign securities that have been deposited with a U.S. bank or a
foreign branch of a U.S. bank.
Convertible Debt and Convertible Preferred Stock — A convertible security is a security — for example, a bond or
preferred stock — that may be converted into common stock of the same or different issuer. The convertible security
sets the price, quantity of shares and time period in which it may be so converted. Convertible stock is senior to a
company’s common stock but is usually subordinated to debt obligations of the company. Convertible securities provide
a steady stream of income which is generally at a higher rate than the income on the company’s common stock but
lower than the rate on the company’s debt obligations. At the same time, they offer — through their conversion
mechanism — the chance to participate in the capital appreciation of the underlying common stock. The price of a
convertible security tends to increase and decrease with the market value of the underlying common stock.
Derivatives — A derivative is an investment instrument that derives its price, performance, value, or cash flow from
one or more underlying securities or other interests. Derivatives involve costs and can be volatile. With derivatives, the
investment adviser tries to predict whether the underlying investment — a security, market index, currency, interest rate
or some other benchmark — will go up or down at some future date. We may use derivatives to try to reduce risk or to
increase return consistent with a Portfolio’s overall investment objective. The investment adviser will consider other
factors (such as cost) in deciding whether to employ any particular strategy, or use any particular instrument. Any
derivatives we use may not fully offset a Portfolio’s underlying positions and this could result in losses to the Portfolio
that would not otherwise have occurred.
Dollar Rolls — Dollar rolls involve the sale by the Portfolio of a security for delivery in the current month with a promise
to repurchase from the buyer a substantially similar — but not necessarily the same — security at a set price and date
in the future. During the “roll period,” the Portfolio does not receive any principal or interest on the security. Instead, it is
compensated by the difference between the current sales price and the price of the future purchase, as well as any
interest earned on the cash proceeds from the original sale.
Equity Swaps — In an equity swap, the Portfolio and another party agree to exchange cash flow payments that are
based on the performance of equities or an equity index.
Forward Foreign Currency Exchange Contracts — A foreign currency forward contract is an obligation to buy or sell
a given currency on a future date at a set price. When a Portfolio enters into a contract for the purchase or sale of a
security denominated in a foreign currency, or when a Portfolio anticipates the receipt in a foreign currency of dividends
or interest payments on a security which it holds, the Portfolio may desire to “lock-in” the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment, as the case may be. By entering into a
forward contract for a fixed amount of dollars, for the purchase or sale of the amount of foreign currency involved in the
underlying transactions, the Portfolio will be able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the foreign currency during the period between the date on
which the security is purchased or sold, or on which the dividend or interest payment is declared, and the date on which
such payments are made or received. At the maturity of a forward contract, a Portfolio may either sell the security and
make delivery of the foreign currency or it may retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an “offsetting” contract with the same currency trader obligating it to purchase, on the
same maturity date, the same amount of the foreign currency.
Futures Contracts — A futures contract is an agreement to buy or sell a set quantity of an underlying product at a
future date, or to make or receive a cash payment based on the value of a securities index. When a futures contract is
entered into, each party deposits with a futures commission merchant (or in a segregated account) approximately 5% of
the contract amount. This is known as the “initial margin.” Every day during the futures contract, either the buyer or the
futures commission merchant will make payments of “variation margin.” In other words, if the value of the underlying
security, index or interest rate increases, then the buyer will have to add to the margin account so that the account
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balance equals approximately 5% of the value of the contract on that day. The next day, the value of the underlying
security, index or interest rate may decrease, in which case the borrower would receive money from the account equal to
the amount by which the account balance exceeds 5% of the value of the contract on that day. A stock index futures
contract is an agreement between the buyer and the seller of the contract to transfer an amount of cash equal to the
daily variation margin of the contract. No physical delivery of the underlying stocks in the index is made.
Interest Rate Swaps — In an interest rate swap, the Portfolio and another party agree to exchange interest payments.
For example, the Portfolio may wish to exchange a floating rate of interest for a fixed rate. We would enter into that
type of a swap if we think interest rates are going down.
Joint Repurchase Account — In a joint repurchase transaction, uninvested cash balances of various Portfolios are
added together and invested in one or more repurchase agreements. Each of the participating Portfolios receives a
portion of the income earned in the joint account based on the percentage of its investment.
Loans and Assignments — Loans are privately negotiated between a corporate borrower and one or more financial
institutions. The Portfolio acquires interests in loans directly (by way of assignment from the selling institution) or
indirectly (by way of the purchase of a participation interest from the selling institution. Purchasers of loans depend
primarily upon the creditworthiness of the borrower for payment of interest and repayment of principal. If scheduled
interest or principal payments are not made, the value of the instrument may be adversely affected. Interests in loans
are also subject to additional liquidity risks. Loans are not generally traded in organized exchange markets but are
traded by banks and other institutional investors engaged in loan syndications. Consequently, the liquidity of a loan will
depend on the liquidity of these trading markets at the time that the Portfolio sells the loan.
In assignments, the Portfolio will have no recourse against the selling institution, and the selling institution generally
makes no representations about the underlying loan, the borrowers, the documentation or the collateral. In addition, the
rights against the borrower that are acquired by the Portfolio may be more limited than those held by the assigning
lender.
Mortgage-related Securities are usually pass-through instruments that pay investors a share of all interest and
principal payments from an underlying pool of fixed or adjustable rate mortgages. We may invest in mortgage-related
securities issued and guaranteed by the U.S. government or its agencies like the Federal National Mortgage
Association (Fannie Maes) and the Government National Mortgage Association (Ginnie Maes) and debt securities
issued (but not guaranteed) by the Federal Home Loan Mortgage Company (Freddie Macs). Private mortgage-related
securities that are not guaranteed by U.S. governmental entities generally have one or more types of credit
enhancement to ensure timely receipt of payments and to protect against default.
Mortgage-related securities include collateralized mortgage obligations, multi-class pass through securities and
stripped mortgage-backed securities. A collateralized mortgage-backed obligation (CMO) is a security backed by an
underlying portfolio of mortgages or mortgage-backed securities that may be issued or guaranteed by entities such as
banks, U.S. governmental entities or broker-dealers. A multi-class pass-through security is an equity interest in a trust
composed of underlying mortgage assets. Payments of principal and interest on the mortgage assets and any
reinvestment income provide the money to pay debt service on the CMO or to make scheduled distributions on the
multi-class pass-through security. A stripped mortgage-backed security (MBS strip) may be issued by U.S.
governmental entities or by private institutions. MBS strips take the pieces of a debt security (principal and interest) and
break them apart. The resulting securities may be sold separately and may perform differently. MBS strips are highly
sensitive to changes in prepayment and interest rates.
Options — A call option on stock is a short-term contract that gives the option purchaser or “holder” the right to acquire
a particular equity security for a specified price at any time during a specified period. For this right, the option purchaser
pays the option seller a certain amount of money or “premium” which is set before the option contract is entered into.
The seller or “writer” of the option is obligated to deliver the particular security if the option purchaser exercises the
option. A put option on stock is a similar contract. In a put option, the option purchaser has the right to sell a particular
security to the option seller for a specified price at any time during a specified period. In exchange for this right, the
option purchaser pays the option seller a premium. Options on debt securities are similar to stock options except that
the option holder has the right to acquire or sell a debt security rather than an equity security. Options on stock indexes
82
are similar to options on stocks, except that instead of giving the option holder the right to receive or sell a stock, it
gives the holder the right to receive an amount of cash if the closing level of the stock index is greater than (in the case
of a call) or less than (in the case of a put) the exercise price of the option. The amount of cash the holder will receive
is determined by multiplying the difference between the index’s closing price and the option’s exercise price, expressed
in dollars, by a specified “multiplier”. Unlike stock options, stock index options are always settled in cash, and gain or
loss depends on price movements in the stock market generally (or a particular market segment, depending on the
index) rather than the price movement of an individual stock.
Real Estate Investment Trusts (REITs) — A REIT is a company that manages a portfolio of real estate to earn profits
for its shareholders. Some REITs acquire equity interests in real estate and then receive income from rents and capital
gains when the buildings are sold. Other REITs lend money to real estate developers and receive interest income from
the mortgages. Some REITs invest in both types of interests.
Repurchase Agreements — In a repurchase transaction, the Portfolio agrees to purchase certain securities and the
seller agrees to repurchase the same securities at an agreed upon price on a specified date. This creates a fixed return
for the Portfolio.
Reverse Repurchase Agreements — In a reverse repurchase transaction, the Portfolio sells a security it owns and
agrees to buy it back at a set price and date. During the period the security is held by the other party, the Portfolio may
continue to receive principal and interest payments on the security.
Short Sales — In a short sale, we sell a security we do not own to take advantage of an anticipated decline in the
stock’s price. The Portfolio borrows the stock for delivery and if it can buy the stock later at a lower price, a profit
results.
Short Sales Against-the-Box — A short sale against-the-box means the Portfolio owns securities identical to those
sold short.
When-Issued and Delayed Delivery Securities — With when-issued or delayed delivery securities, the delivery and
payment can take place a month or more after the date of the transaction. A Portfolio will make commitments for when98 issued transactions only with the intention of actually acquiring the securities. A Portfolio’s custodian will maintain in
a segregated account, liquid assets having a value equal to or greater than such commitments. If the Portfolio chooses
to dispose of the right to acquire a when-issued security prior to its acquisition, it could, as with the disposition of any
other security, incur a gain or loss.
*
*
*
Except for the Money Market Portfolio, each Portfolio also follows certain policies when it borrows money (each
Portfolio may borrow up to 5% of the value of its total assets, except that SP Large Cap Value Portfolio and SP Small/
Mid-Cap Value Portfolio may each borrow up to 33 1⁄ 3% of their total assets); lends its securities; and holds illiquid
securities (a Portfolio may hold up to 15% of its net assets in illiquid securities, including securities with legal or
contractual restrictions on resale, those without a readily available market and repurchase agreements with maturities
longer than seven days). If the Portfolio were to exceed this limit, the investment adviser would take prompt action to
reduce a Portfolio’s holdings in illiquid securities to no more than 15% of its net assets, as required by applicable law. A
Portfolio is subject to certain investment restrictions that are fundamental policies, which means they cannot be
changed without shareholder approval. For more information about these restrictions, see the SAI.
The Money Market Portfolio also follows certain policies when it borrows money (the Portfolio may borrow up to 5% of
the value of its total assets) and holds illiquid securities (the Portfolio may hold up to 10% of its net assets in illiquid
securities, including securities with legal or contractual restrictions on resale, those without a readily available market
and repurchase agreements with maturities longer than seven days). If the Portfolio were to exceed this limit, the
investment adviser would take prompt action to reduce the Portfolio’s holdings in illiquid securities to no more than 10%
of its net assets, as required by applicable law. The Portfolio is subject to certain investment restrictions that are
fundamental policies, which means they cannot be changed without shareholder approval. For more information about
these restrictions, see the SAI.
83
We will consider other factors (such as cost) in deciding whether to employ any particular strategy or use any particular
instrument. For more information about these strategies, see the SAI, “Investment Objectives and Policies of the
Portfolios.”
HOW THE FUND IS MANAGED
Board Of Directors
The Board of Directors oversees the actions of the Investment Adviser, the sub-advisers and the Distributor and
decides on general policies. The Board also oversees the Fund’s officers who conduct and supervise the daily business
operations of the Fund.
Investment Adviser
Prudential Investments LLC (“PI”), a wholly-owned subsidiary of Prudential Financial, Inc., serves as the overall
investment adviser for the Fund. PI is located at Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PI and its predecessors have served as manager and administrator to investment companies since 1987.
As of December 31, 2001, PI served as the investment manager to all of the Prudential U.S. and offshore investment
companies, and as manager or administrator to closed-end investment companies, with aggregate assets of
approximately $100.8 billion.
The Fund uses a “manager-of-managers” structure. Under this structure, PI is authorized to select (with approval of the
Fund’s independent directors) one or more sub-advisers to handle the actual day-to-day investment management of
each Portfolio. PI monitors each sub-adviser’s performance through quantitative and qualitative analysis, and
periodically reports to the Fund’s board of directors as to whether each sub-adviser’s agreement should be renewed,
terminated or modified. PI also is responsible for allocating assets among the sub-advisers if a Portfolio has more than
one sub-adviser. In those circumstances, the allocation for each sub-adviser can range from 0% to 100% of a
Portfolio’s assets, and PI can change the allocations without board or shareholder approval. The Fund will notify
shareholders of any new sub-adviser or any material changes to any existing sub-advisory agreement.
84
The following chart lists the total annualized investment advisory fees paid in 2001 with respect to each of the Fund’s
Portfolios.
Total advisory fees as %
of average net assets
Portfolio
Conservative Balanced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.55
Diversified Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.40
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.45
Flexible Managed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.60
Global . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.75
High Yield Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.55
Jennison (formerly, Prudential Jennison) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.60
Money Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.40
Stock Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.35
Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.40
SP Aggressive Growth Asset Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.84*
SP AIM Aggressive Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.95
SP AIM Core Equity (formerly, SP AIM Growth and Income) . . . . . . . . . . . . . . . . . . . . . .
0.85
SP Alliance Large Cap Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.90
SP Alliance Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.15
SP Balanced Asset Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.75*
SP Conservative Asset Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.71*
SP Davis Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.75
SP Deutsche International Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.90
SP Growth Asset Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.80*
SP INVESCO Small Company Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.95
SP Jennison International Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.85
SP Large Cap Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.80
SP MFS Capital Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.75
SP MFS Mid-Cap Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.80
SP PIMCO High Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.60
SP PIMCO Total Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.60
SP Prudential U.S. Emerging Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.60
SP Small/Mid-Cap Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.90
SP Strategic Partners Focused Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.90
*
Each Asset Allocation Portfolio invests only in shares of other underlying Fund Portfolios. The advisory fees for the
Asset Allocation Portfolios are the product of a blend of the advisory fees of the underlying Fund Portfolios, plus a
0.05% annual advisory fee paid to PI. The only advisory fee directly paid by the Asset Allocation Portfolios is the
0.05% fee paid to PI.
Investment Sub-Advisers
Each Portfolio has one or more sub-advisers providing the day-to-day investment management. PI pays each subadviser out of the fee that PI receives from the Fund.
Jennison Associates LLC (Jennison) serves as the sole sub-adviser for the Global Portfolio, the Jennison Portfolio,
the SP Jennison International Growth Portfolio, and the SP Prudential U.S. Emerging Growth Portfolio. Jennison serves
as a sub-adviser for a portion of the assets of the Equity Portfolio, the Value Portfolio and the SP Strategic Partners
Focused Growth Portfolio. Jennison’s address is 466 Lexington Avenue, New York, New York 10017. Jennison is a
wholly owned subsidiary of Prudential Financial, Inc. As of December 31, 2001, Jennison had over $62 billion in assets
under management for institutional and mutual fund clients.
Prudential Investment Management, Inc. (PIM) serves as the sole sub-adviser for the Conservative Balanced
Portfolio, the Diversified Bond Portfolio, the Flexible Managed Portfolio, the High Yield Bond Portfolio, the Money
85
Market Portfolio, and the Stock Index Portfolio. PIM is a wholly owned subsidiary of Prudential Financial, Inc. PIM’s
address is Gateway Center Two, 100 Mulberry Street, Newark, New Jersey 07102.
A I M Capital Management, Inc. (A I M Capital) serves as sub-adviser to the SP AIM Aggressive Growth Portfolio and
the SP AIM Core Equity Portfolio. The firm is located at 11 Greenway Plaza, Suite 100, Houston, Texas 77046-1173.
The sub-adviser provides investment advisory services to each Portfolio by obtaining and evaluating economic,
statistical and financial information and formulating and implementing investment programs. A I M Capital, together with
its affiliates, advises or manages approximately 150 investment portfolios as of December 31, 2001, encompassing a
broad range of investment objectives. A I M Capital uses a team approach to investment management. As of
December 31, 2001, A I M and its affiliates managed approximately $158 billion in assets.
Alliance Capital Management, L.P. (Alliance) serves as the sub-adviser to the SP Alliance Technology Portfolio, SP
Alliance Large Cap Growth Portfolio and a portion of the SP Strategic Partners Focused Growth Portfolio. The subadviser is located at 1345 Avenue of the Americas, New York, New York 10105. Alliance is a leading international
investment manager. Alliance’s clients are primarily major corporate employee benefit funds, public employee
retirement systems, investment companies, foundations and endowment funds. As of December 31, 2001, Alliance
managed $455 billion in assets.
Davis Selected Advisers, L.P. (Davis) serves as the sub-adviser to the SP Davis Value Portfolio. Davis is located at
2429 East Elvira Road, Suite 101, Tucson, Arizona 85706. As of December 31, 2001, Davis managed approximately
$41.8 billion in assets.
Deutsche Asset Management, Inc. (DAMI) serves as a sub-adviser to the SP Deutsche International Equity Portfolio
and as subadviser for approximately 25% of the assets of the Value Portfolio. DAMI is a wholly-owned subsidiary of
Deutsche Bank AG. As of December 31, 2001 DAMI’s total assets under management exceeded $96.1 billion. DAMI’s
address is 280 Park Avenue, New York, New York 10017.
Fidelity Management & Research Company (FMR) is the sub-adviser to the SP Large Cap Value Portfolio and the
SP Small/Mid-Cap Value Portfolio. As of December 31, 2001, FMR and its wholly-owned subsidiaries had
approximately $912 billion in assets under management. The address of FMR is 82 Devonshire Street, Boston,
Massachusetts 02109.
GE Asset Management, Incorporated (GEAM) serves as a sub-adviser to approximately 25% of the Equity Portfolio.
GEAM’s ultimate parent is General Electric Company. Its address is 3003 Summer Street, Stamford, Connecticut
06904. As of December 31, 2001, GEAM oversees in excess of $112.2 billion under management.
INVESCO Funds Group, Inc. (INVESCO), located at 4350 South Monaco Street, Denver, Colorado 80237, is the subadviser of the SP INVESCO Small Company Growth Portfolio. INVESCO was founded in 1932 and as of December 31,
2001, managed almost $35 billion in assets. INVESCO is a subsidiary of AMVESCAP PLC, an international investment
management company based in London, with money managers in Europe, North and South America and the Far East.
Massachusetts Financial Services Company (MFS), located at 500 Boylston Street, Boston, Massachusetts, acts as
the sub-adviser for the SP MFS Capital Opportunities Portfolio and the SP MFS Mid-Cap Growth Portfolio. MFS and its
predecessor organizations have a history of money management dating from 1924. MFS is an indirect wholly-owned
subsidiary of Sun Life Assurance Company of Canada. As of November 30, 2001, MFS managed over $135.3 billion in
assets.
Pacific Investment Management Company LLC (PIMCO) acts as the sole sub-adviser for the SP PIMCO Total
Return Portfolio and the SP PIMCO High Yield Portfolio. PIMCO is located at 840 Newport Center Drive, Newport
Beach, California 92660 and is a subsidiary of Allianz Dresdner Asset Management of America L.P., formerly PIMCO
Advisors L.P. As of December 31, 2001, PIMCO managed over $241 billion in assets.
Salomon Brothers Asset Management Inc. (Salomon) serves as sub-adviser for a portion of the assets of the Equity
Portfolio. Salomon is part of the global asset management arm of Citigroup Inc., which was formed in 1998 as a result
of the merger of Travelers Group and Citicorp Inc. As of December 31, 2001, Salomon managed more than $30 billion
in total assets. Salomon’s address is 125 Broad Street, New York, New York 10004.
86
Victory Capital Management Inc. (Victory) (formerly, Key Asset Management Inc.) serves as a sub-adviser for a
portion of the assets of the Value Portfolio. Victory is a wholly-owned subsidiary of KeyCorp, Inc. As of December 31,
2001, Victory’s total assets under management exceeded $72 billion. Victory’s address is 127 Public Square,
Cleveland, Ohio 44114.
Portfolio Managers
An Introductory Note About Prudential Investment Management’s Fixed Income Group
PIM’s Fixed Income Group, which provides portfolio management services to the Conservative Balanced, Diversified
Bond, Flexible Managed, High Yield Bond and Money Market Portfolios, manages more than $135 billion for
Prudential’s retail investors, institutional investors, and policyholders. Senior Managing Director James J. Sullivan
heads the Group, which is organized into teams specializing in different market sectors. Top-down, broad investment
decisions are made by the Fixed Income Policy Committee, whereas bottom-up security selection is made by the
sector teams.
Prior to joining PIM in 1998, Mr. Sullivan was a Managing Director in Prudential’s Capital Management Group, where
he oversaw portfolio management and credit research for Prudential’s General Account and subsidiary fixed-income
portfolios. He has more than 18 years of experience in risk management, arbitrage trading and corporate bond
investing.
The Fixed Income Investment Policy Committee is comprised of key senior investment managers, including Fixed
Income’s Chief Investment Officer and the head of risk management. The Committee uses a top-down approach to
investment strategy, asset allocation and general risk management, identifying sectors in which to invest.
Conservative Balanced Portfolio and Flexible Managed Portfolio
These Portfolios are managed by a team of portfolio managers. M. Stumpp, Ph.D., Senior Managing Director of PIM,
has been the lead portfolio manager of the Portfolios since 1994 and is responsible for the overall asset allocation
decisions.
The Fixed Income segments are managed by the Fixed Income Group of PIM. This Group uses a bottom-up approach,
which focuses on individual securities, while staying within the guidelines of the Investment Policy Committee and the
Portfolios’ investment restrictions and policies. In addition, the Credit Research team of analysts supports the sector
teams using bottom-up fundamentals, as well as economic and industry trends. Other sector teams may contribute to
securities selection when appropriate.
The equity portion of the Conservative Balanced Portfolio is managed by M. Stumpp, John Moschberger, and Michael
Lenarcic. M. Stumpp’s background is discussed above. Mr. Lenarcic is a Managing Director within PIM’s Quantitative
Management team. Prior to joining the Quantitative Management team in 1985, Mr. Lenarcic was a Vice President at
Wilshire Associates, where he was head of the Asset Allocation Division. Mr. Lenarcic holds a B.A. degree from Kent
State University and A.M. and Ph.D. degrees in Business Economics from Harvard University. John Moschberger,
CFA, is a Vice President of Prudential Investments. Mr. Moschberger joined Prudential in 1980 and has been a portfolio
manager since 1986.
The equity portion of the Flexible Managed Portfolio is managed by M. Stumpp, and James Scott. The background of
M. Stumpp is discussed above. James Scott is a Senior Managing Director of PIM’s Quantitative Management Group.
Mr. Scott has managed balanced and equity portfolios for Prudential’s pension plans and several institutional clients
since 1987. Mr. Scott received a B.A. from Rice University and an M.S. and a Ph.D. from Carnegie Mellon University.
The Corporate Team of PIM, headed by Steven Kellner, is primarily responsible for overseeing the day-to-day
management of the Portfolio. This team uses a bottom-up approach, which focuses on individual securities, while
87
staying within the guidelines of the Investment Policy Committee and the Portfolios’ investment restrictions and policies.
In addition, the Credit Research team of analysts supports the sector teams using bottom-up fundamentals, as well as
economic and industry trends. Other sector teams may contribute to securities selection when appropriate.
Corporate Team
Assets Under Management (as of December 31, 2001):
$42 billion.
Team Leader: Steven Kellner, CFA. General Investment Experience: 16 years.
Portfolio Managers: 7. Average General Investment Experience: 12 years, which includes team members with
significant mutual fund experience.
Sector:
U.S. investment-grade corporate securities.
Investment Strategy: Focus is on identifying spread, credit quality and liquidity trends to capitalize on changing
opportunities in the market. Ultimately, they seek the highest expected return with the least risk.
Equity Portfolio
Jeffrey Siegel, Bradley Goldberg and David Kiefer are co-managers of the portion of the Portfolio assigned to Jennison.
Mr. Siegel has been an Executive Vice President of Jennison since June 1999. Previously he was at TIAA-CREF from
1988-1999, where he held positions as a portfolio manager and analyst. Prior to joining TIAA-CREF, Mr. Siegel was an
analyst for Equitable Capital Management and held positions at Chase Manhattan Bank and First Fidelity Bank. Mr.
Siegel earned a B.A. from Rutgers University. Mr. Goldberg is an Executive Vice President of Jennison, where he also
serves as Chairman of the Asset Allocation Committee. Prior to joining Jennison in 1974 he served as Vice President
and Group Head in the Investment Research Division of Bankers Trust Company. He earned a B.S. from the University
of Illinois and an M.B.A. from New York University. Mr. Goldberg holds a Chartered Financial Analyst (C.F.A.)
designation. Mr. Kiefer has been a Senior Vice President of Jennison since September 2000. Previously, he was a
Managing Director of Prudential Global Asset Management and has been with Prudential since 1986. Mr. Kiefer earned
a B.S. from Princeton University and an M.B.A. from Harvard Business School. He holds a Chartered Financial Analyst
(C.F.A.) designation.
Richard Sanderson, Senior Vice President and Director of Investment Research, Domestic Equities, for GEAM,
manages the portion of the Equity Portfolio assigned to GEAM. Mr. Sanderson, a Chartered Financial Analyst, has 29
years of asset management experience and has been employed with GEAM for over 5 years, and holds B.A. and
M.B.A. degrees from the University of Michigan.
Michael Kagan, a Director of Salomon, manages the portion of the Equity Portfolio assigned to Salomon. Mr. Kagan
has over 15 years of asset management experience, including experience as an analyst covering the consumer
products, aerospace, chemicals, and housing industries. Mr. Kagan received his B.A. from Harvard College and
attended the MIT Sloan School of Management.
Global Portfolio
Daniel Duane and Michelle Picker manage this Portfolio. Mr. Duane has been an Executive Vice President of Jennison
since October 2000 and was previously a Managing Director of Prudential Global Asset Management. He has been
managing the Portfolio since 1991. Prior to joining Prudential, he was with First Investors Asset Management where he
was in charge of all global equity investments. He earned a B.A. from Boston College, a Ph.D. from Yale University and
an M.B.A. from New York University. He holds a Chartered Financial Analyst (C.F.A.) designation. Michelle Picker has
been a Vice President of Jennison since October 2000 and was previously a Vice President of Prudential Investment
Management, Inc. Ms. Picker joined Prudential in 1992 and has co-managed the Portfolio since October 1997.
Ms. Picker earned a B.A. from the University of Pennsylvania and an M.B.A. from New York University. She holds a
Chartered Financial Analyst (C.F.A.) designation.
88
The High Yield Team of PIM, headed by Paul Appleby, is primarily responsible for overseeing the day-to-day
management of the fixed income portfolio of the Portfolio. This Team uses a bottom-up approach, which focuses on
individual securities, while staying within the guidelines of the Investment Policy Committee and the Portfolio’s
investment restrictions and policies. In addition, the Credit Research team of analysts supports the sector teams using
bottom-up fundamentals, as well as economic and industry trends. Other sector teams may contribute to securities
selection when appropriate.
High Yield Team
Assets Under Management (as of December 31, 2001):
$8 billion.
Team Leader: Paul Appleby. General Investment Experience: 15 years.
Sector:
Below-investment-grade corporate securities.
Investment Strategy: The High Yield Team of PIM, headed by Paul Appleby, is primarily responsible for
overseeing the day-to-day management of the fixed income portion of the Portfolio assigned to Prudential
Investment Management. Focus is generally on bonds with high total return potential, given existing risk
parameters. They also seek securities with high current income, as appropriate. The Team uses a relative value
approach while staying within the guidelines of the Investment Policy Committee and the Portfolio’s investment
restrictions and policies. In addition, the Credit Research team of analysts supports the sector teams using bottomup fundamentals, as well as economic and industry trends. Other sector trends may contribute to securities
selection when appropriate.
Jennison Portfolio
This Portfolio has been managed by Spiros Segalas, Michael Del Balso and Kathleen McCarragher of Jennison since
1999. Mr. Segalas is a founding member and a Director, President and Chief Investment Officer of Jennison. He has
been in the investment business for over 41 years. Mr. Del Balso, a Director and Executive Vice President of Jennison,
is also Jennison’s Director of Equity Research. He has been part of the Jennison team since 1972 when he joined the
firm from White, Weld & Company. Mr. Del Balso is a member of the New York Society of Security Analysts. Ms.
McCarragher, Director and Executive Vice President of Jennison, is also Jennison’s Domestic Equity Investment
Strategist. Prior to joining Jennison in 1998, she was a Managing Director and Director of Large Cap Growth Equities at
Weiss, Peck & Greer L.L.C. Prior to 1992, Ms. McCarragher served as an analyst, portfolio manager and member of
the Investment Committee for State Street Research & Management Company.
The Money Market Team of PIM, headed by Joseph Tully, is primarily responsible for overseeing the day-to-day
management of the Portfolio. This team uses a bottom-up approach, which focuses on individual securities, while
staying within the guidelines of the Investment Policy Committee and the Portfolio’s investment restrictions and policies.
Money Market Team
Assets Under Management (as of December 31, 2001): $52 billion.
Team Leader: Joseph Tully. General Investment Experience: 18 years.
89
Sector:
High-quality short-term debt securities, including both taxable and tax-exempt instruments.
Investment Strategy: Focus is on safety of principal, liquidity and controlled risk.
John Moschberger, CFA, Vice President of PIM, has managed this Portfolio since 1990. Mr. Moschberger joined
Prudential in 1980 and has been a portfolio manager since 1986.
Value Portfolio
Tom Kolefas and Bradley Goldberg are the co-portfolio managers of the portion of the Portfolio assigned to Jennison.
Mr. Kolefas has been a Senior Vice President of Jennison since September 2000. Previously, he was a Managing
Director and Senior Portfolio Manager of Prudential Global Asset Management. He joined Prudential in May 2000 from
Loomis Sayles and Company, L.P., where he headed the Large/Mid-Cap Value Team. Prior to 1996, Mr. Kolefas was
employed by Mackay Shields Financial as a portfolio manager for five years. Mr. Kolefas earned a B.S. from the
Cooper Union School of Engineering and an M.B.A. from New York University and holds the Chartered Financial
Analyst (C.F.A.) designation. Mr. Goldberg is an Executive Vice President of Jennison, and also serves as Chairman of
the Asset Allocation Committee. He joined Jennison in 1974. Prior to joining Jennison, he served as Vice President and
Group Head in the Investment Research Division of Bankers Trust Company. He earned a B.S. from the University of
Illinois and an M.B.A from the New York University. Mr. Goldberg holds the Chartered Financial Analyst (C.F.A.)
designation.
James Giblin, a Chartered Financial Analyst, manages the portion of the Portfolio assigned to DAMI. Mr. Giblin joined
DAMI in 1995 with 22 years of investment experience, including 15 years as a portfolio manager for Cigna Equity
Advisors. He received his B.S. from Pennsylvania State University and an M.B.A. from the Wharton School, University
of Pennsylvania.
Neil A. Kilbane manages the portion of the Portfolio assigned to Victory. Mr. Kilbane is a Senior Portfolio and Managing
Director for Victory, and is a Chartered Financial Analyst. Mr. Kilbane began his investment career with Victory in 1995,
and prior to that was employed by Duff & Phelps Investment Management Company and National City Bank. Mr.
Kilbane holds a B.S. from Cleveland State University, an M.S. from Kansas State University, and an M.B.A. from Tulsa
University.
A I M Capital Management, Inc. (A I M Capital) uses a team approach to investment management. The individual
members of the team who are primarily responsible for the day-to-day management of the Portfolio are Ryan E. Crane,
Portfolio Manager, who has been responsible for the Portfolio since 2000 and has been associated with A I M Capital
and/or its affiliates since 1994, Jay K. Rushin, CFA, Portfolio Manager, who has been responsible for the Portfolio since
2001 and has been associated with A I M Capital and/or its affiliates since 1994, and Robert M. Kippes, Senior Portfolio
Manager, who has been associated with A I M Capital and/or its affiliates since 1989.
A I M Capital Management, Inc. (A I M Capital) uses a team approach to investment management. The individual
members of the team who are primarily responsible for the day-to-day management of the Portfolio are:
Ronald Sloan, Senior Portfolio Manager, joined AIM Capital in 1998 from Verissimo Research and Management, where
he served as president since 1993. Prior to Verissimo Research and Management, he was partner and executive vice
president at Wood Island Associates, Inc./Siebel Capital Management, Inc. from 1981 to 1993. Mr. Sloan has been in
90
the investment industry since 1971. Mr. Sloan holds a B.S. in business administration as well as an M.B.A. from the
University of Missouri. He is a Chartered Financial Analyst.
Michael Yellen, Portfolio Manager, joined AIM Capital in 1994 from INVESCO (NY), Inc., formerly known as Chancellor
LGT Asset Management, Inc., as an investment analyst for health care industries. He also had primary responsibility
for the GT Applied Science Fund and the GT Healthcare Fund, both offshore funds, until assuming his present
responsibilities with AIM Capital. Mr. Yellen began his career at Franklin Resources, Inc. as a senior securities analyst.
Mr. Yellen holds a B.A. from Stanford University.
Alfred Harrison, Director and Vice Chairman of Alliance Capital Management Corporation (ACMC) leads the team
managing this Portfolio, with Syed Hasnain, a Senior Portfolio Manager, also being directly involved.
Mr. Hasnain joined ACMC after working as a strategist with Merrill Lynch Capital Markets. Previously he was an
international economist with Citicorp and a financial analyst at Goldman Sachs & Co. He holds a M. Phil in Finance
from Cambridge University, and Sc.B. from Brown University, and studied towards a doctorate at Stanford Business
School. Investment experience: 12 years.
Gerald T. Malone manages the SP Alliance Technology Portfolio. Mr. Malone is a Senior Vice President of Alliance
Capital Management Corporation (ACMC) and has been associated with ACMC for more than five years.
For the four Asset Allocation Portfolios, PI invests in shares of other Fund Portfolios according to the percentage
allocations discussed in this prospectus.
The following individuals provide day-to-day management of the SP Davis Value Portfolio.
Christopher C. Davis
Responsibilities:
‰
‰
President of Davis New York Venture Fund, Inc.
Also manages or co-manages other equity funds advised by Davis Selected Advisers.
Other Experience:
‰
‰
Portfolio Manager of Davis New York Venture Fund since October 1995.
Assistant Portfolio Manager and research analyst working with Shelby M.C. Davis from September 1989 to
September 1995.
Kenneth Charles Feinberg
Responsibilities:
‰
‰
Co-Portfolio Manager of Davis New York Venture Fund with Christopher C. Davis since May 1998.
Also co-manages other equity funds advised by Davis Selected Advisers.
91
Other Experience:
‰
‰
Research analyst at Davis Selected Advisers since December 1994.
Assistant Vice President of Investor Relations for Continental Corp. from 1988 to 1994.
The following portfolio managers are responsible for the day-to-day management of the Portfolio’s investments:
Irene Cheng, Manager Director
‰
‰
‰
Head of EAFE Portfolio Selection Team
Joined firm in 1993 after 10 years of experience as portfolio manager at Blackstone Group and an equity
analyst at Sanford C. Bernstein & Co., Inc.
BA from Harvard / Radcliffe (1976), MS from MIT (1978) and MBA from Harvard Business School (1980)
Alex Tedder, Director
‰
‰
‰
Portfolio Manager, EAFE Portfolio Selection Team; Head of International Select Equity strategy
Joined the Company in 1994, previously managing European equities and responsible for insurance sector
with 4 years of experience at Schroder Investment Management
MA from Freiburg University
Marc Slendebroek, Vice President
‰
‰
‰
Portfolio Manager, EAFE Portfolio Selection Team
Joined the Company in 1994 after 5 years of experience as an equity analyst at Kleinwort Benson Securities
and at Enskilda Securities
MA from University of Leiden, Netherlands
Clare Brody, CFA, Director
‰
‰
‰
Joined the Company in 1993 after 3 years of experience in international investments and corporate finance
with Citicorp Securities
BSc from Cornell University
Stuart Kirk, Associate Director
‰
‰
‰
Joined the Company in 1995 as analyst and fund manager
MA from Cambridge University
92
The following individual is primarily responsible for the day-to-day management of the Portfolio’s holdings:
Stacie Cowell is the lead portfolio manager of the SP INVESCO Small Company Growth Portfolio and a Chartered
Financial Analyst (CFA) who joined INVESCO in 1997. She is also a vice president of INVESCO. Before joining the
company, she was senior equity analyst with Founders Asset Management and capital markets and trading analyst
with Chase Manhattan Bank in New York. She holds a B.A. in Economics from Colgate University and an M.S from the
University of Colorado (Boulder).
The Portfolio is co-managed by Blair Boyer and Daniel Duane. Mr. Boyer, Executive Vice President of Jennison, has
been in the investment business for over 18 years. Prior to joining Jennison in March 1993, he managed international
equity portfolios at Arnhold and S. Bleichroeder, Inc. Previously, he was a research analyst and senior portfolio
manager at Verus Capital. He earned a B.A. from Bucknell University in 1983 and an M.B.A. from New York University
in 1988. Mr. Duane has been an Executive Vice President of Jennison since October 2000 and was previously a
Managing Director of Prudential Global Asset Management. Prior to joining Prudential, he was in charge of all global
equity investments at First Investors Asset Management, managed a portion of TIAA-CREF’s global portfolio and was a
research analyst at Value Line. He earned a dual A.B. from Boston College, a Ph.D. from Yale University and an
M.B.A. from New York University. Mr. Duane also was Fulbright Scholar at the University of Tubingen in Germany. He
holds a Chartered Financial Analyst (C.F.A.) designation.
SP Large Cap Value Portfolio And SP Small/Mid-Cap Value Portfolio
Fidelity Management & Research Company (FMR) is the Portfolios’ sub-adviser. Robert Macdonald is portfolio
manager of the SP Large Cap Value Portfolio and the SP Small/Mid-Cap Value Portfolio. Mr. Macdonald is a senior
vice president and portfolio manager for other accounts managed by FMR and its affiliates. He joined FMR in 1985.
The Portfolio is managed by Maura A. Shaughnessy, a Senior Vice President of Massachusetts Financial Services
Company (MFS), who has been employed in the investment management area of MFS since 1991.
The Portfolio is managed by Mark Regan, a Senior Vice President of MFS, who has been employed in the investment
management area of MFS since 1989 and David E. Sette-Ducati, a Vice President of MFS, has been employed in the
investment management area of MFS since 1995.
93
MFS and its predecessor organizations have a history of money management dating from 1924. MFS is an indirect
wholly-owned subsidiary of Sun Life Assurance Company of Canada.
The Portfolio is managed by Benjamin L. Trosky. Mr. Trosky, Managing Director of PIMCO, joined PIMCO as a portfolio
manager in 1990, and has managed fixed income accounts for various institutional clients and funds since that time.
The Portfolio is managed by a portfolio management team led by William H. Gross, Managing Director, Chief
Investment Officer and a founding partner of PIMCO. The portfolio management team develops and implements
strategy for the Portfolio.
Susan Hirsch, Executive Vice President of Jennison, has managed the retail fund counterpart of this Portfolio since it
began. Prior to joining Jennison, Ms. Hirsch was a Managing Director of Prudential Investments, which she joined in
July 1996. Before that she was employed by Lehman Brothers Global Asset Management from 1986 to 1996 and
Delphi Asset Management in 1996. She managed growth stock portfolios at both firms. Ms. Hirsch holds a B.S. from
Brooklyn College and is a member of the Financial Analysts Federation and the New York Society of Security Analysts.
Alfred Harrison is portfolio manager for the portion of the Portfolio’s assets advised by Alliance. Mr. Harrison joined
Alliance in 1978 and is manager of the firm’s Minneapolis office. He is Vice Chairman of Alliance Capital Management
Corporation.
Spiros Segalas and Kathleen McCarragher are co-portfolio managers for the portion of the Portfolio’s assets advised by
Jennison. Mr. Segalas is a Director, founding member and President and Chief Investment Officer of Jennison. He has
been in the investment business for over 41 years. Ms. McCarragher, Director and Executive Vice President of
Jennison, is also Jennison’s Domestic Equity Investment Strategist. Prior to joining Jennison in 1998, she was a
Managing Director and Director of Large Cap Growth Equities at Weiss, Peck & Greer LLC. Prior to 1992, Ms.
McCarragher served as an analyst portfolio manager and member of the Investment Committee for State Street
Research and Management Company.
HOW TO BUY AND SELL SHARES OF THE FUND
The Fund offers two classes of shares in each Portfolio — Class I and Class II. Each Class participates in the same
investments within a given Portfolio, but the Classes differ as far as their charges. Class I shares are sold only to
separate accounts of Prudential Insurance Company of America and its affiliates as investment options under certain
Contracts. Class II is offered only to separate accounts of non-Prudential insurance companies as investment options
under certain of their Contracts. Please refer to the accompanying Contract prospectus to see which Portfolios are
available through your Contract.
The Fund sells its shares to separate accounts issuing variable annuity contracts and variable life insurance policies.
To the extent dictated by its agreement with a separate account, the Fund will cooperate with the separate account in
monitoring for transactions that are indicative of market timing. In addition, to the extent permitted by applicable laws and
agreements, the Fund may cease selling its shares to a separate account to prevent market timing transactions.
The way to invest in the Portfolios is through certain variable life insurance and variable annuity contracts. Together
with this prospectus, you should have received a prospectus for such a Contract. You should refer to that prospectus
for further information on investing in the Portfolios.
94
Both Class I and Class II shares of a Portfolio are sold without any sales charge at the net asset value of the Portfolio.
Class II shares, however, are subject to an annual distribution or “12b-1” fee of 0.25% and an administration fee of
0.15% of the average daily net assets of Class II. Class I shares do not have a distribution or administration fee.
Shares are redeemed for cash within seven days of receipt of a proper notice of redemption or sooner if required by
law. There is no redemption charge. We may suspend the right to redeem shares or receive payment when the New
York Stock Exchange is closed (other than weekends or holidays), when trading on the New York Stock Exchange is
restricted, or as permitted by the SEC.
Net Asset Value
Any purchase or sale of Portfolio shares is made at the net asset value, or NAV, of such shares. The price at which a
purchase or redemption is made is based on the next calculation of the NAV after the order is received in good order.
The NAV of each share class of each Portfolio is determined on each day the New York Stock Exchange is open for
trading as of the close of the exchange’s regular trading session (which is generally 4:00 p.m. New York time). The
NYSE is closed on most national holidays and Good Friday. The Fund does not price, and shareholders will not be able
to purchase or redeem, the Fund’s shares on days when the NYSE is closed but the primary markets for the Fund’s
foreign securities are open, even though the value of these securities may have changed. Conversely, the Fund will
ordinarily price its shares, and shareholders may purchase and redeem shares, on days that the NYSE is open but
foreign securities markets are closed.
The NAV for each of the Portfolios other than the Money Market Portfolio is determined by a simple calculation. It’s the
total value of a Portfolio (assets minus liabilities) divided by the total number of shares outstanding. The NAV for the
Money Market Portfolio will ordinarily remain at $10 per share. (The price of each share remains the same but you will
have more shares when dividends are declared.)
To determine a Portfolio’s NAV, its holdings are valued as follows:
Equity Securities are generally valued at the last sale price on an exchange or NASDAQ, or if there is not a sale on
that day, at the mean between the most recent bid and asked prices on that day. If there is no asked price, the security
will be valued at the bid price. Equity securities that are not sold on an exchange or NASDAQ are generally valued by
an independent pricing agent or principal market maker.
A Portfolio may own securities that are primarily listed on foreign exchanges that trade on weekends or other days
when the Portfolios do not price their shares. Therefore, the value of a Portfolio’s assets may change on days when
shareholders cannot purchase or redeem Portfolio shares.
All Short-term Debt Securities held by the Money Market Portfolio are valued at amortized cost. Short-term debt
securities with remaining maturities of 12 months or less held by the Conservative Balanced and Flexible Managed
Portfolios are valued on an amortized cost basis. The amortized cost valuation method is widely used by mutual funds.
It means that the security is valued initially at its purchase price and then decreases in value by equal amounts each
day until the security matures. It almost always results in a value that is extremely close to the actual market value. The
Fund’s Board of Directors has established procedures to monitor whether any material deviation between valuation and
market value occurs and if so, will promptly consider what action, if any, should be taken to prevent unfair results to
Contract owners.
For each Portfolio other than the Money Market Portfolio, and except as discussed above for the Conservative
Balanced and Flexible Managed Portfolios, short-term debt securities, including bonds, notes, debentures and other
debt securities, and money market instruments such as certificates of deposit, commercial paper, bankers’
acceptances and obligations of domestic and foreign banks, with remaining maturities of more than 60 days, for which
market quotations are readily available, are valued by an independent pricing agent or principal market maker (if
available, otherwise a primary market dealer).
Short-term Debt Securities with remaining maturities of 60 days or less are valued at cost with interest accrued or
discount amortized to the date of maturity, unless such valuation, in the judgment of PI or a sub-adviser, does not
represent fair value.
95
Convertible debt securities that are traded in the over-the-counter market, including listed convertible debt securities
for which the primary market is believed by PI or a sub-adviser to be over-the-counter, are valued at the mean between
the last bid and asked prices provided by a principal market maker (if available, otherwise a primary market dealer).
Other debt securities — those that are not valued on an amortized cost basis — are valued using an independent
pricing service.
Options on stock and stock indexes that are traded on a national securities exchange are valued at the last sale
price on such exchange on the day of valuation or, if there was no such sale on such day, at the mean between the
most recently quoted bid and asked prices on such exchange.
Futures contracts and options on futures contracts are valued at the last sale price at the close of the commodities
exchange or board of trade on which they are traded. If there has been no sale that day, the securities will be valued at
the mean between the most recently quoted bid and asked prices on that exchange or board of trade.
Forward currency exchange contracts are valued at the cost of covering or offsetting such contracts calculated on
the day of valuation. Securities which are valued in accordance herewith in a currency other than U.S. dollars shall be
converted to U.S. dollar equivalents at a rate obtained from a recognized bank, dealer or independent service on the
day of valuation.
Over-the-counter (OTC) options are valued at the mean between bid and asked prices provided by a dealer (which
may be the counterparty). A sub-adviser will monitor the market prices of the securities underlying the OTC options
with a view to determining the necessity of obtaining additional bid and ask quotations from other dealers to assess the
validity of the prices received from the primary pricing dealer.
Securities for which no market quotations are available will be valued at fair value by PI under the direction of the
Fund’s Board of Directors. The Fund also may use fair value pricing if it determines that a market quotation is not
reliable based among other things, on events that occur after the quotation is derived or after the close of the primary
market on which the security is traded, but before the time that the Fund’s NAV is determined. This use of fair value
pricing most commonly occurs with securities that are primarily traded outside the U.S., but also may occur with U.S.traded securities. The fair value of a portfolio security that the Fund uses to determine its NAV may differ from the
security’s quoted or published price. For purposes of computing the Fund’s NAV, we will value the Fund’s futures
contracts 15 minutes after the close of regular trading on the New York Stock Exchange (NYSE). Except when we fair
value securities, we normally value each foreign security held by the Fund as of the close of the security’s primary
market.
Distributor
Prudential Investment Management Services LLC (PIMS) distributes the Fund’s shares under a Distribution Agreement
with the Fund. PIMS’ principal business address is Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-3777. The Fund has adopted a distribution plan under Rule 12b-1 of the Investment Company Act of 1940
covering Class II shares. Under that plan, Class II of each Portfolio pays to PIMS a distribution or “12b-1” fee at the
annual rate of 0.25% of the average daily net assets of Class II. This fee pays for distribution services for Class II
shares. Because these fees are paid out of the Portfolio’s assets on an on-going basis, over time these fees will
increase the cost of your investment in Class II shares and may cost you more than paying other types of sales
charges. These 12b-1 fees do not apply to Class I.
OTHER INFORMATION
Federal Income Taxes
If you own or are considering purchasing a variable contract, you should consult the prospectus for the variable
contract for tax information about that variable contract. You should also consult with a qualified tax adviser for
information and advice.
The SAI provides information about certain tax laws applicable to the Fund.
96
Monitoring For Possible Conflicts
The Fund sells its shares to fund variable life insurance contracts and variable annuity contracts and is authorized to
offer its shares to qualified retirement plans. Because of differences in tax treatment and other considerations, it is
possible that the interest of variable life insurance contract owners, variable annuity contract owners and participants in
qualified retirement plans could conflict. The Fund will monitor the situation and in the event that a material conflict did
develop, the Fund would determine what action, if any, to take in response.
The financial highlights which follow will help you evaluate the financial performance of each Portfolio available under
your Contract. The total return in each chart represents the rate that a shareholder earned on an investment in that
share class of the Portfolio, assuming reinvestment of all dividends and other distributions. The charts do not reflect
any charges under any variable contract. The information is for Class I shares for the periods indicated, unless
otherwise indicated.
The information has been audited by PricewaterhouseCoopers LLP, whose unqualified report, along with the
financial statements, appears in the annual report, which is available upon request.
97
2001
Per Share Operating Performance:
Net Asset Value, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended
December 31,
2000
1999
1998
$ 14.63
$ 15.36
1997
$ 15.08
$ 14.97
$ 15.52
Income From Investment Operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized gains (losses) on investments . . . . . . . . . . . . . . . . . . . . . . . . .
0.44
(0.75)
0.59
(0.65)
0.62
0.37
0.66
1.05
0.76
1.26
Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.31)
(0.06)
0.99
1.71
2.02
Less Distributions:
Dividends from net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions from net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions in excess of net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.48)
(0.15)
—
(0.56)
(0.11)
—
(0.62)
(0.06)
(0.03)
(0.66)
(0.94)
—
(0.76)
(1.81)
—
Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Asset Value, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Investment Return:(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratios/Supplemental Data:
Net assets, end of year (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratios to average net assets:
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.63)
$ 13.69
(2.02)%
$3,259.7
0.58%
3.05%
239%
(0.67)
$ 14.63
(0.48)%
$3,714.3
0.60%
3.79%
85%
(0.71)
$ 15.36
6.69%
$4,387.1
0.57%
4.02%
109%
(1.60)
$ 15.08
11.74%
$4,796.0
(2.57)
$ 14.97
13.45%
$4,744.2
0.57%
4.19%
167%
0.56%
4.48%
295%
(a) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and
includes reinvestment of dividends and distributions.
2001
Year Ended
December 31,
2000
1999
1998
Net Asset Value, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 11.28
$ 10.95
Net realized and unrealized gains (losses) on investments . . . . . . . . . . . . . . . . . . . . . . . . .
0.67
0.12
0.77
0.26
Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.79
1.03
Less Distributions:
Dividends from net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions from net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Asset Value, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Investment Return(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets, end of year (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.71)
—
(0.71)
$ 11.36
6.98%
$1,400.7
0.44%
6.35%
257%
(0.70)
—(b)
(0.70)
$ 11.28
9.72%
$1,269.8
0.45%
6.83%
139%
$ 11.06
1997
$ 11.02
$11.07
0.67
(0.75)
0.69
0.08
0.80
0.11
(0.08)
0.77
0.91
—
(0.03)
(0.69)
(0.04)
(0.83)
(0.13)
(0.03)
$ 10.95
(0.74)%
$1,253.8
0.43%
6.25%
171%
(0.73)
$ 11.06
7.15%
$1,122.6
0.42%
6.40%
199%
(0.96)
$11.02
8.57%
$816.7
0.43%
7.18%
224%
(a) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported includes
reinvestment of dividends and distributions.
(b) Less than $0.005 per share.
F1
Equity Portfolio
Class I
2001
Net Asset Value, beginning of period . . . . . . . . . . .
Income from Investment Operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized gains (losses) on
investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total from investment operations . . . . . . . . . . .
Less Distributions:
Dividends from net investment income . . . . . . . . . .
Distributions in excess of net investment
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions from net realized gains . . . . . . . . . . . .
Total distributions . . . . . . . . . . . . . . . . . . . . . . .
Net Asset Value, end of period . . . . . . . . . . . . . . . .
Total Investment Return(a) . . . . . . . . . . . . . . . . . .
Net assets, end of period (in millions) . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . .
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . .
Class II
Year Ended
December 31,
2000
1999
1998
Year Ended
December 31,
2001
2000
1997
May 3, 1999(c)
through
December 31,
1999
$ 24.50
$ 28.90
$ 29.64
$ 31.07
$ 26.96
$24.51
$28.92
$32.79
0.18
0.51
0.54
0.60
0.69
0.09
0.39
0.28
(2.83)
0.26
3.02
2.21
5.88
(2.83)
0.26
(0.60)
(2.65)
0.77
3.56
2.81
6.57
(2.74)
0.65
(0.32)
(0.18)
(0.51)
(0.53)
(0.60)
(0.70)
(0.10)
(0.40)
(0.34)
—
(1.18)
(0.02)
(4.64)
—
(3.77)
—
(3.64)
—
(1.76)
—
(1.18)
(0.02)
(4.64)
—
(3.21)
(1.36)
(5.17)
(4.30)
(4.24)
(2.46)
(1.28)
(5.06)
(3.55)
$ 20.49
(11.18)%
$4,615.9
0.49%
0.84%
153%
$ 24.50
$ 28.90
3.28%
$5,652.7
12.49%
$6,235.0
0.49%
1.75%
78%
0.47%
1.72%
9%
$ 29.64
$ 31.07
9.34%
$6,247.0
$20.49
24.66%
$6,024.0
0.47%
1.81%
25%
$24.51
(11.57)%
$
0.46%
2.27%
13%
1.1
$
0.89%
0.45%
153%
$28.92
2.83%
1.8
0.91%
1.26%
78%
(0.68)%
$
0.3
0.87%(b)
1.33%(b)
9%
(a) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and
includes reinvestment of dividends and distributions. Total investment returns for less than a full year are not annualized.
(b) Annualized.
(c) Commencement of offering of Class II shares.
2001
Net Asset Value, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 16.53
$ 17.28
$ 17.79
0.61
(0.86)
0.58
0.69
0.58
1.14
0.59
2.52
(0.93)
(0.25)
1.27
1.72
3.11
(0.58)
(0.23)
(0.62)
(0.24)
—
(0.19)
(0.59)
(1.85)
(0.58)
(3.04)
0.42
(1.35)
Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less Distributions:
Dividends from net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions from net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Investment Return(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets, end of year (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.81)
$ 14.79
(5.68)%
$3,896.6
0.64%
2.61%
236%
$ 17.64
1997
$ 16.56
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized gains (losses) on investments . . . . . . . . . .
Net Asset Value, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended
December 31,
2000
1999
1998
(0.86)
$ 16.53
(1.44)%
$4,463.8
0.64%
3.22%
132%
(0.19)
$ 17.64
7.78%
$5,125.3
0.62%
3.20%
76%
(2.44)
$ 16.56
10.24%
$5,410.0
(3.62)
$ 17.28
17.96%
$5,490.1
0.61%
3.21%
138%
F2
0.62%
3.02%
227%
Net Asset Value, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Global Portfolio
Year Ended
December 31,
1999
2001
2000
$ 23.61
$ 30.98
1998
1997
$ 21.16
$17.92
$17.85
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized gains (losses) on investments . . . . . . . . . . .
0.09
(3.58)
0.07
(5.30)
0.06
10.04
0.07
4.38
0.09
1.11
(3.49)
(5.23)
10.10
4.45
1.20
Less Distributions:
Dividends from net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions in excess of net investment income . . . . . . . . . . . . . . . . . . .
Distributions from net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.06)
—
(4.77)
(0.07)
(0.13)
(1.94)
—
(0.10)
(0.18)
(0.16)
(0.12)
(0.93)
(0.13)
(0.10)
(0.90)
Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Asset Value, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Investment Return(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets, end of year (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratios to average net assets: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4.83)
$ 15.29
(2.14)
$ 23.61
(17.64)%
$ 885.0
(17.68)%
$1,182.1
0.84%
0.58%
67%
0.85%
0.25%
95%
(0.28)
$ 30.98
48.27%
$1,298.3
0.84%
0.21%
76%
(1.21)
$21.16
(1.13)
$17.92
25.08%
$844.5
6.98%
$638.4
0.86%
0.29%
73%
0.85%
0.47%
70%
2001
Net Asset Value, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6.14
Year Ended
December 31,
2000
1999
1998
$ 7.52
$ 7.21
$ 8.14
1997
$ 7.87
Net realized and unrealized gains (losses) on investments . . . . . . . . . . . .
0.58
(0.62)
0.74
(1.30)
0.79
(0.46)
0.77
(0.94)
0.78
0.26
Total from Investment operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.04)
(0.56)
0.33
(0.17)
1.04
Less Distributions:
(0.70)
Net Asset Value, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5.40
Total Investment Return(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets, end of year (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.44)%
$655.8
0.60%
10.93%
84%
(0.82)
$ 6.14
(7.91)%
$661.3
0.60%
10.47%
76%
(0.02)
$ 7.52
4.61%
$802.2
0.60%
10.48%
58%
(0.76)
$ 7.21
(2.36)%
$789.3
(0.77)
$ 8.14
13.78%
$568.7
0.58%
10.31%
63%
F3
0.57%
9.78%
106%
2001
Net Asset Value, beginning of period . . . . . . . . . . .
Class I
Class II
Year Ended
Year Ended
February 10, 2000(a)
December 31, 2001
December 31,
through
2000
1999
1998
1997
2001
December 31, 2000
$ 22.97
$ 32.39
$ 23.91
$ 17.73
$14.32
$22.88
$34.25
Net investment income (loss) . . . . . . . . . . . . . . . . . .
Net realized and unrealized gains (losses) on
investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.04
0.01
0.05
0.04
0.04
0.01
(0.03)
(4.22)
(5.61)
9.88
6.56
4.48
(4.25)
(7.54)
Total from investment operations . . . . . . . . . . .
(4.18)
(5.60)
9.93
6.60
4.52
(4.24)
(7.57)
Less Distributions:
Dividends from net investment income . . . . . . . . . .
Distributions from net realized gains . . . . . . . . . . . .
(0.03)
(0.19)
—(d)
(3.82)
(0.05)
(1.40)
(0.04)
(0.38)
(0.04)
(1.07)
—(d)
(0.19)
—(d)
(3.80)
Total distributions . . . . . . . . . . . . . . . . . . . . . . . .
Net Asset Value, end of period . . . . . . . . . . . . . . . . .
Total Investment Return(b) . . . . . . . . . . . . . . . . . .
Net assets, end of period (in millions) . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income (loss) . . . . . . . . . . . . . . . .
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . .
(0.22)
$ 18.57
(18.25)%
$2,186.9
(3.82)
(1.45)
$ 22.97
$ 32.39
(17.38)%
$2,892.7
0.64%
0.18%
86%
41.76%
$2,770.7
0.64%
0.02%
89%
0.63%
0.17%
58%
(0.42)
$ 23.91
(1.11)
$17.73
37.46% 31.71%
$1,198.7
$495.9
0.63%
0.20%
54%
0.64%
0.25%
60%
(0.19)
(3.80)
$18.45
$22.88
(18.60)%
(22.19)%
$ 59.6
$ 13.3
1.04%
(0.19)%
86%
1.04%(c)
(0.39)%(c)
89%(e)
(a) Commencement of offering of Class II shares.
(b) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and
includes reinvestment of dividends and distributions. Total investment returns for less than a full year are not annualized.
(c) Annualized.
(d) Less than $0.01 per share.
(e) Not annualized.
2001
Net Asset Value, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10.00
Net investment income and realized and unrealized gains . . . . . . . . . .
Dividend and distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Asset Value, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Investment Return(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets, end of year (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.41
(0.41)
$ 10.00
4.22%
$1,501.9
0.43%
3.86%
Year Ended
December 31,
2000
1999
$ 10.00
0.60
(0.60)
$ 10.00
6.20%
$1,238.2
0.44%
6.03%
$ 10.00
0.49
(0.49)
$ 10.00
4.97%
$1,335.5
0.42%
4.90%
1998
1997
$10.00
$10.00
0.52
(0.52)
$10.00
0.54
(0.54)
$10.00
5.39%
$920.2
5.41%
$657.5
0.41%
5.20%
(a) Total investment return is calculated assuming a purchase on the first day and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
F4
0.43%
5.28%
2001
Net Asset Value, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 38.66
Year Ended
December 31,
2000
1999
1998
$ 44.45
1997
$ 37.74
$ 30.22
$ 23.74
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized gains (losses) on investments . . . . . . . . . . . . . . . . . . . .
0.36
(5.05)
0.36
(4.37)
0.44
7.23
0.42
8.11
0.43
7.34
Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4.69)
(4.01)
7.67
8.53
7.77
Less Distributions:
Dividends from net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions from net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.35)
(1.98)
(0.37)
(1.41)
(0.43)
(0.53)
(0.42)
(0.59)
(0.42)
(0.87)
Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2.33)
(1.78)
(0.96)
(1.01)
(1.29)
Net Asset Value, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Investment Return(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets, end of year (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 31.64
(12.05)%
$3,394.1
0.39%
1.02%
3%
$ 38.66
$ 44.45
(9.03)%
$4,186.0
0.39%
0.83%
7%
$ 37.74
20.54%
$4,655.0
$ 30.22
28.42%
$3,548.1
0.39%
1.09%
2%
32.83%
$2,448.2
0.37%
1.25%
3%
0.37%
1.55%
5%
Value Portfolio
Class I
2001
Net Asset Value, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 18.51
$19.79
$ 20.03
0.25
(0.69)
0.46
2.45
0.51
1.89
0.56
(1.03)
0.61
6.06
0.12
(1.01)
(0.44)
2.91
2.40
(0.47)
6.67
(0.89)
Less Distributions:
Distributions from net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.30)
(1.81)
(0.44)
(1.53)
(0.50)
(2.41)
(0.59)
(1.30)
(0.57)
(2.22)
(0.14)
(0.85)
Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Asset Value, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Investment Return(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets, end of period (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2.11)
$ 17.91
(2.08)%
$1,801.4
0.44%
1.32%
175%
(1.97)
$ 20.46
15.59%
$1,975.3
0.45%
2.31%
85%
(2.91)
$ 19.52
2.52%
$2,024.0
0.42%
2.34%
16%
$ 22.39
1997
May 14, 2001(a)
through
December 31,
2001
$ 19.52
Net realized and unrealized gains (losses) on investments . . . . . . . . . . .
$ 20.46
Year Ended
December 31,
2000
1999
1998
Class II
(1.89)
$ 20.03
(2.38)%
$2,142.3
0.42%
2.54%
20%
(2.79)
$ 22.39
(0.99)
$17.91
36.61%
$2,029.8
0.41%
2.90%
38%
(4.34)%
$
1.1
0.84%(c)
0.94%(c)
175%
(a) Commencement of offering of Class II shares.
(b) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and
includes reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized.
(c) Annualized.
F5
September 22, 2000(a)
Year Ended
through
December 31, 2001
December 31, 2000
Net Asset Value, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9.33
$10.00
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized losses on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.02
(1.69)
0.01
(0.67)
Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1.67)
(0.66)
Less Distributions:
Dividends from net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions from net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.02)
(0.06)
(0.01)
—
Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.08)
(0.01)
Net Asset Value, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Investment Return(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets, end of period (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7.58
$ 9.33
(17.92)%
$
7.5
(6.65)%
$
0.05%
0.39%
62%
2.1
0.05%(c)
0.36%(c)
6%(d)
(a) Commencement of operations.
(b) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported includes
reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized.
(c) Annualized.
(d) Not annualized.
Year Ended
December 31, 2001
through
December 31, 2000
$ 8.60
$ 10.00
Net investment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized losses on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.04)
(2.07)
Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Investment Return(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets, end of period (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratios to average net assets:(d)
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.01)
(1.39)
(2.11)
$ 6.49
(1.40)
$ 8.60
(24.53)%
$
5.7
1.07%
(0.73)%
87%
(14.00)%
$
3.9
1.07%(c)
(0.40)%(c)
16%(e)
(c) Annualized.
(d) Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment loss ratios would have
been 3.45% and (3.11)%, respectively, for the year ended December 31, 2001 and 5.57% and (4.90)%, respectively, for the period ended
December 31, 2000.
(e) Not annualized.
F6
(formerly, SP AIM Growth and Income Portfolio)
Year Ended
through
December 31, 2001
December 31, 2000
Net investment income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8.41
(—)(f)
(1.90)
0.01
(1.59)
(1.90)
(1.58)
Less Dividends:
Dividends from net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
$ 6.51
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10.00
(0.01)
$ 8.41
(22.68)%
$ 10.2
1.00%
(0.02)%
65%
(15.74)%
$
4.3
1.00%(c)
0.26%(c)
15%(e)
(b) Total investment return calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and
(c) Annualized.
December 31, 2000.
(e) Not annualized.
(f)
Less than $0.005 per share.
F7
Year Ended
through
December 31, 2001
December 31, 2000
$ 8.55
$ 10.00
(0.01)
(1.23)
0.01
(1.45)
(1.24)
(1.44)
Less Distributions:
Tax return of capital distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—(f)
(0.01)
—
—(f)
$ 7.31
(0.01)
$ 8.55
(14.47)%
$ 35.9
1.10%
(0.08)%
47%
(14.44)%
$
7.1
1.10%(c)
0.44%(c)
10%(e)
(c) Annualized.
December 31, 2000.
(e) Not annualized.
(f)
F8
Year Ended
through
December 31, 2001
December 31, 2000
$ 7.62
$ 10.00
(0.03)
(1.88)
0.01
(2.38)
(1.91)
(2.37)
Less Distributions:
Distributions in excess of net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
(0.01)
—(b)
—
(0.01)
$ 5.71
Total Investment Return(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratios to average net assets: (e)
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7.62
(25.07)%
$
7.7
(23.71)%
$
1.30%
(0.69)%
47%
6.1
1.30%(d)
0.37%(d)
23%(f)
(c) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and
(d) Annualized.
(e) Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment loss ratios would have
December 31, 2000.
(f)
Not annualized.
Year Ended
through
December 31, 2001
December 31, 2000
$ 9.80
$10.00
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.14
(0.73)
0.06
(0.20)
(0.59)
(0.14)
Less Distributions:
Distributions from net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.14)
(0.05)
(0.06)
—
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.19)
$ 9.02
(0.06)
$ 9.80
(5.99)%
$ 66.1
0.05%
3.26%
35%
(1.42)%
$
3.7
0.05%(c)
4.89%(c)
4%(d)
(c) Annualized.
(d) Not annualized.
F9
Year Ended
through
December 31, 2001
December 31, 2000
$10.00
$10.00
Net realized and unrealized gains (losses) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.21
(0.24)
0.08
—(c)
0.08
(0.03)
Less Distributions:
(0.16)
(0.04)
(0.08)
—(c)
(0.20)
(0.08)
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9.77
$10.00
(0.23)%
$ 47.9
0.05%
4.76%
29%
0.84%
$
1.9
0.05%(d)
8.07%(d)
4%(e)
(c) Less than $0.005 per share.
(d) Annualized.
(e) Not annualized.
Year Ended
through
December 31, 2001
December 31, 2000
$ 10.15
$10.00
Net realized and unrealized gains (losses) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.05
(1.11)
0.02
0.15
(1.06)
0.17
Less Dividends:
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.05)
$ 9.04
(10.46)%
$ 94.4
0.83%
0.64%
17%
(0.02)
$10.15
1.69%
$ 12.8
0.83%(c)
1.48%(c)
3%(e)
(b) Total investment is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized.
(c) Annualized.
(d) Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment income (loss) ratios
would have been 1.03% and 0.43%, respectively, for the year ended December 31, 2001 and 3.16% and (0.85)%, respectively, for the period
ended December 31, 2000.
(e) Not annualized.
F10
Year Ended
through
December 31, 2001
December 31, 2000
$ 9.44
$10.00
0.05
(2.09)
0.01
(0.57)
(2.04)
(0.56)
Less Dividends:
Total Investment Return(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratios to average net assets:(e)
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.05)
$ 7.35
—
$ 9.44
(22.07)%
$ 24.7
(5.20)%
$
1.10%
0.61%
155%
7.8
1.10%(d)
0.55%(d)
51%(f)
(d) Annualized.
December 31, 2000.
(f)
Not annualized.
Year Ended
through
December 31, 2001
December 31, 2000
$ 9.52
$10.00
0.09
(1.21)
0.03
(0.49)
(1.12)
(0.46)
Less Distributions:
(0.08)
(0.05)
(0.02)
—
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.13)
$ 8.27
(0.02)
$ 9.52
(11.77)%
$ 46.8
0.05%
1.71%
43%
(4.56)%
$
3.9
0.05%(c)
2.95%(c)
39%(d)
(c) Annualized
(d) Not annualized.
F11
Year Ended
through
December 31, 2001
December 31, 2000
$ 8.38
Net investment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.02)
(1.42)
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10.00
—(f)
(1.62)
(1.44)
$ 6.94
(1.62)
$ 8.38
(17.18)%
$
8.4
1.15%
(0.28)%
83%
(16.20)%
$
5.5
1.15%(c)
(0.10)%(c)
29%(e)
(c) Annualized.
December 31, 2000.
(e) Not annualized.
(f)
F12
Class I
Class II
October 4, 2000(b)
Year Ended
through
Year Ended
through
December 31, 2001(i)
December 31, 2000
December 31, 2001(i)
December 31, 2000
Net Asset Value, beginning of period . . .
Net investment income (loss) . . . . . . . . .
Net realized and unrealized losses on
investments . . . . . . . . . . . . . . . . . . . . .
Total from investment operations . .
Less Distributions:
Tax return of capital distributions . . . . . .
Net Asset Value, end of period . . . . . . . .
Total Investment Return(c) . . . . . . . . .
Net assets, end of period (in millions) . .
Expenses . . . . . . . . . . . . . . . . . . . . . . .
Net investment income (loss) . . . . . . .
Portfolio turnover rate . . . . . . . . . . . . . . .
$ 8.50
$ 10.00
0.02
0.01
(3.05)
(1.51)
(3.04)
(1.31)
(3.03)
(1.50)
(3.04)
(1.31)
(0.02)
—
$ 5.45
$ 8.50
(35.64)%
(15.00)%
$ 19.9
$
1.24%
0.31%(h)
86%
7.6
1.24%(d)
0.51%(d)
12%(f)
$ 8.48
$ 9.79
(—)(g)
(—)(g)
(0.01)
$ 5.43
(35.92)%
$ 14.9
1.64%
(0.03)%(h)
86%
—
$ 8.48
(13.28)%
$
2.7
1.64%(d)
(—)%(d)
12%(f)
(a) Commencement of offering of Class I shares.
(b) Commencement of offering of Class II shares.
(d) Annualized.
been 1.86% and (0.30)%, respectively, for Class I and 2.26% and (0.66)%, respectively, for Class II for the year ended December 31, 2001 and
3.44% and (1.69)%, respectively, for Class I and 3.84% and (2.20)%, respectively, for Class II for the period ended December 31, 2000.
(f)
Not annualized.
(g) Less than $0.005 per share.
(h) Includes custodian fee credits of 0.12% for Class I and 0.13% for Class II. If the Portfolio had not earned custodian fee credits, the annual net
investment income (loss) ratios would have been 0.19% and (0.16)%, respectively, for Class I and Class II for the year ended December 31,
2001.
(i)
Calculated based upon weighted average shares outstanding during the year.
F13
Year Ended
through
December 31, 2001
December 31, 2000
Net Asset Value, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10.44
$10.00
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized gains (losses) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.09
(0.99)
0.04
0.44
Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.90)
0.48
Less Distributions:
Dividends from net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions in excess of net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.10)
—
Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Asset Value, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Investment Return(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets, end of period (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.04)
—(e)
(0.10)
$ 9.44
(0.04)
$10.44
(8.65)%
$ 23.7
0.90%
1.18%
61%
4.82%
$
3.9
0.90%(c)
1.60%(c)
13%(f)
(c) Annualized.
(d) Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment income (loss) ratios
(e) Less than $0.005 per share.
(f)
Not annualized.
F14
Year Ended
through
December 31, 2001
December 31, 2000
$ 9.15
Net investment income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized losses on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less Dividends:
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10.00
(—)(f)
(2.13)
0.01
(0.85)
(2.13)
(0.84)
(0.01)
$ 7.01
(0.01)
$ 9.15
(23.28)%
$
8.2
(8.39)%
$
1.00%
(—)%(g)
99%
4.3
1.00%(c)
0.40%(c)
25%(e)
(c) Annualized.
December 31, 2000.
(e) Not annualized.
(f)
(g) Less than 0.005%.
Year Ended
December 31, 2001
through
December 31, 2000
$ 9.69
$10.00
Net investment income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized losses on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.01)
(2.01)
0.02
(0.25)
(2.02)
(0.23)
Less Distributions:
Distributions from net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.01)
(0.04)
(0.02)
(0.06)
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.05)
$ 7.62
(0.08)
$ 9.69
(20.93)%
$ 15.9
1.00%
(0.20)%
93%
(2.26)%
$
5.6
1.00%(c)
1.16%(c)
27%(e)
(c) Annualized.
December 31, 2000.
(e) Not annualized.
F15
Year Ended
through
December 31, 2001
December 31, 2000
Net realized and unrealized gains (losses) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less Distributions:
Distributions in excess of net realized capital gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10.02
$10.00
0.59
(0.21)
0.17
0.02
0.38
0.19
(0.59)
—
—
(0.16)
(0.01)
—(d)
(0.59)
$ 9.81
(0.17)
$10.02
3.97%
$ 52.0
0.82%
7.44%
105%
1.94%
$
8.0
0.82%(c)
7.78%(c)
88%(f)
(c) Annualized.
(d) Less than $0.005 per share.
(e) Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment income ratios would
have been 1.08% and 7.18%, respectively, for the year ended December 31, 2001 and 3.42% and 5.18%, respectively, for the period ended
December 31, 2000.
(f)
Not annualized.
F16
Year Ended
through
December 31, 2001
December 31, 2000
$10.40
$10.00
Net realized and unrealized gains on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.32
0.57
0.13
0.39
0.89
0.52
(0.34)
(0.25)
(0.11)
(0.01)
Less Distributions:
Ratios to average net assets(d):
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.59)
(0.12)
$10.70
$10.40
8.66%
5.18%
$147.0
$ 10.7
0.76%
3.69%
718%
0.76%(c)
5.94%(c)
239%(e)
(c) Annualized.
(d) Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment income ratios would
have been 0.82% and 3.63%, respectively, for the year ended December 31, 2001 and 2.73% and 3.97%, respectively, for the period ended
December 31, 2000.
(e) Not annualized.
Class I
Class II
July 9, 2001(b)
Year Ended
through
through
December 31, 2001
December 31, 2000
December 31, 2001
Net Asset Value, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8.38
$ 10.00
$ 7.56
Net investment income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized losses on investments . . . . . . . . . . . . . . . . . . . . .
(0.01)
(1.48)
0.01
(1.62)
(0.01)
(0.67)
Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1.49)
(1.61)
(0.68)
Less Dividends:
Dividends from net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Net Asset Value, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6.89
Total Investment Return(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets, end of period (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.01)
$ 8.38
(17.78)%
$ 31.2
0.90%
(0.37)%
258%
(16.11)%
$
6.4
0.90%(e)
0.49%(e)
82%(f)
—
$ 6.88
(8.99)%
$ 0.2
1.30%(e)
(0.87)%(e)
258%(f)
been 1.41% and (0.88)%, respectively, for Class I and 1.81% and (1.38)%, respectively, for Class II for the period ended December 31, 2001
and 4.26% and (2.87)%, respectively, for Class I for the period ended December 31, 2000.
(e) Annualized.
(f)
Not annualized.
F17
SP Small/Mid Cap Value Portfolio
Year Ended
through
December 31, 2001
December 31, 2000
Net Asset Value, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11.13
$10.00
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized gains on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.08
0.26
0.03
1.10
Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.34
1.13
Less Dividends:
Dividends from net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Asset Value, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Investment Return(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets, end of period (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.11)
$11.36
—(b)
$11.13
3.11%
$ 47.4
1.05%
1.08%
89%
11.33%
$
6.1
1.05%(d)
1.79%(d)
18%(f)
(d) Annualized.
(e) Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment income (loss) ratios
(f) Not annualized.
F18
Class I
Class II
January 12, 2001(b)
Year Ended
through
through
December 31, 2001(h)
December 31, 2000
December 31, 2001(h)
Net Asset Value, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7.94
$ 10.00
$ 8.43
Net investment income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized losses on investments . . . . . . . . . . . . . . . .
(0.01)
(1.20)
—(g)
(2.06)
(0.03)
(1.70)
Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1.21)
(2.06)
(1.73)
Less Distributions:
Dividends from net investment income(g) . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
Net Asset Value, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6.73
$ 7.94
$ 6.70
Total Investment Return(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets, end of period (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(15.32)%
$
7.7
1.01%
(0.16)%
116%
(20.47)%
$
5.9
1.01%(d)
0.18%(d)
37%(f)
(20.80)%
$
2.0
1.41%(d)
(0.58)%(d)
116%(f)
(a) Commencement of offering of Class I shares.
(d) Annualized.
been 2.61% and (1.76)%, respectively, for Class I and 3.01% and (2.18)%, respectively, for Class II for the period ended December 31, 2001
and 3.88% and (2.69)%, respectively, for Class I for the period ended December 31, 2000.
(f)
Not annualized.
(g) Less than $0.005 per share.
(h) Calculated based upon weighted average shares outstanding during the period.
F19
For more information
Additional information about the Fund and each Portfolio can be obtained upon request without charge and can be
found in the following documents:
Statement of Additional Information (SAI)
(incorporated by reference into this prospectus)
Annual Report
(including a discussion of market conditions and strategies that significantly affected the Portfolios’ performance during
the previous year)
Semi-Annual Report
To obtain these documents or to ask any questions about the Fund:
Call toll-free (800) 778-2255
Write to The Prudential Series Fund, Inc., Gateway Center Three, 100 Mulberry Street, Newark, NJ 07102
You can also obtain copies of Fund documents from the Securities and Exchange Commission as follows:
By Mail:
In Person:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-0102
Public Reference Room
in Washington, DC
(For hours of operation, call 1-202-942-8090)
By Electronic Request:
Via the Internet:
on the EDGAR Database at
http://www.sec.gov
[email protected]
(The SEC charges a fee to copy documents.)
SEC File No. 811-03623
AIM V.I. PREMIER EQUITY FUND
---------------------------------------------------------------------------------------------------------------
Series I Shares
Shares of the fund are currently offered only to insurance company separate accounts.
AIM V.I. Premier Equity Fund seeks to achieve long-term growth of capital. Income is a secondary
objective.
AIM
˛
Prospectus
May 1, 2002
This prospectus contains important information about the
Series I class shares (‘‘Series I shares’’) of the fund. Please
read it before investing and keep it for future reference.
As with all other mutual fund securities, the Securities and
Exchange Commission has not approved or disapproved
these securities or determined whether the information in
this prospectus is adequate or accurate. Anyone who tells you
otherwise is committing a crime.
An investment in the fund:
) is not FDIC insured;
) may lose value; and
) is not guaranteed by a bank.
Invest with DISCIPLINE˛
(Series I shares)
Supplement dated December 31, 2002
Effective December 31, 2002, the following paragraph replaces in its entirety the first paragraph under the heading
“FUND MANAGEMENT – Portfolio Managers” on page 3 of the prospectus:
•
Evan G. Harrel (lead manager), Senior Portfolio Manager, who has been responsible for the
fund since 1998 and has been associated with the advisor and/or its affiliates since 1998.
From 1994 to 1998, he was Vice President and portfolio manager of Van Kampen American
Capital Asset Management, Inc. and portfolio manager for various growth and equity funds.
•
Robert A. Shelton, Senior Portfolio Manager, who has been responsible for the fund since 1997
They are assisted by the Premier Equity Team. More information on the fund’s management team
may be found on our website (http://www.aimfunds.com).
AIMSUP2 Ed. 12-02
AIM
V.I.
PREMIER
EQUITY
FUND
Table of Contents
Investment Objectives and Strategies
1
Principal Risks of Investing in the Fund
1
Performance Information
2
Annual Total Returns
2
Performance Table
2
Fund Management
3
The Advisor
3
Advisor Compensation
3
Portfolio Managers
3
Other Information
4
Purchase and Redemption of Shares
4
Pricing of Shares
4
Taxes
4
Dividends and Distributions
4
Share Classes
4
5
Obtaining Additional Information
Back Cover
The AIM Family of Funds, The AIM Family of Funds and Design
(i.e., the AIM logo), AIM and Design, AIM, AIM Funds, AIM
Funds and Design, AIM Investor, AIM LINK, AIM Institutional
Funds, aimfunds.com, La Familia AIM de Fondos, La Familia AIM
de Fondos and Design, Invierta con DISCIPLINA and Invest with
DISCIPLINE are registered service marks and AIM Bank
Connection, AIM Internet Connect, AIM Private Asset Management, AIM Private Asset Management and Design, AIM stylized
and/or Design, AIM Alternative Assets and Design, myaim.com,
The AIM College Savings Plan, AIM Solo 401(k) and AIM Lifetime
America are service marks of A I M Management Group Inc.
No dealer, salesperson or any other person has been authorized
to give any information or to make any representations other
than those contained in this prospectus, and you should not rely
on such other information or representations.
Investment Objectives and Strategies
The fund’s investment objective is to achieve long-term growth of
capital. Income is a secondary objective. The investment objective and policies of the fund may be changed by the Board of
Trustees without shareholder approval
The fund seeks to meet its objectives by investing, normally, at
least 80% of its net assets, plus the amount of any borrowings
for investment purposes, in equity securities, including convertible securities. In complying with this 80% investment requirement, the fund’s investments may include synthetic instruments.
Synthetic instruments are investments that have economic characteristics similar to the fund’s direct investments, and may
include warrants, futures, options, exchange-traded funds and
American Depositary Receipts. The fund also may invest in
preferred stocks and debt instruments that have prospects for
growth of capital. The fund also may invest up to 25% of its total
assets in foreign securities. Any percentage limitations with
respect to the assets of the fund are applied at the time of
purchase.
The portfolio managers focus on undervalued equity securities
of (1) out-of-favor cyclical growth companies; (2) established
growth companies that are undervalued compared to historical
relative valuation parameters; (3) companies where there is
early but tangible evidence of improving prospects that are not
yet reflected in the price of the company’s equity securities; and
(4) companies whose equity securities are selling at prices that
do not reflect the current market value of their assets and where
there is reason to expect realization of this potential in the form
of increased equity values. The portfolio managers consider
whether to sell a particular security when they believe the
company no longer fits into any of the above categories.
In anticipation of or in response to adverse market or other
conditions, or atypical circumstances such as unusually large
cash inflows or redemptions, the fund may temporarily hold all
or a portion of its assets in cash or the following liquid assets:
money market instruments, shares of affiliated money market
funds or high-quality debt obligations. As a result, the fund may
not achieve its investment objective. For cash management
purposes, the fund may also hold a portion of its assets in cash
or such liquid assets.
A larger cash position or liquid assets could also detract from
the achievement of the funds’ objective(s), but could also
reduce the funds’ exposure in the event of a market downturn.
Any percentage limitations with respect to assets of the fund are
applied at the time of purchase.
Principal Risks of Investing in the Fund
There is a risk that you could lose all or a portion of your
investment in the fund and that the income you may receive from
your investment may vary. The value of your investment in the
fund will go up and down with the prices of the securities in
which the fund invests. The price of equity securities change in
response to many factors, including the historical and prospective earnings of the issuer, the value of its assets, general
economic conditions, interest rates, investor perceptions and
market liquidity.
The prices of foreign securities may be further affected by
other factors, including:
) Markets—The securities markets of other countries are
smaller than U.S. securities markets. As a result, many foreign
securities may be less liquid and more volatile than
U.S. securities.
These factors may affect the prices of securities issued by
foreign companies located in developing countries more than
those in countries with mature economies. For example, many
developing countries have, in the past, experienced high rates of
inflation or sharply devaluated their currencies against the
U.S. dollar, thereby causing the value of investments in companies located in those countries to decline. Transaction costs are
often higher in developing countries and there may be delays in
settlement procedures.
To the extent the fund holds cash or liquid assets rather than
equity securities, the fund may not achieve its investment
objective.
If the seller of a repurchase agreement in which the fund
invests defaults on its obligation or declares bankruptcy, the fund
may experience delays in selling the securities underlying the
repurchase agreement. As a result, the fund may incur losses
arising from decline in the value of those securities, reduced
levels of income and expenses of enforcing its rights.
) Currency exchange rates—The dollar value of the fund’s
foreign investments will be affected by changes in the exchange
rates between the dollar and the currencies in which those
investments are traded.
) Political and economic conditions—The value of the fund’s
foreign investments may be adversely affected by political and
social instability in their home countries and by changes in
economic or taxation policies in those countries.
) Regulations—Foreign companies generally are subject to less
stringent regulations, including financial and accounting controls, than are U.S. companies. As a result, there generally is
less publicly available information about foreign companies
than about U.S. companies.
1
Performance Information
The bar chart and table shown below provide an indication of the risks of investing in the fund. The fund’s past performance is not
necessarily an indication of its future performance. All performance shown assumes the reinvestment of dividends and capital gains. The
bar chart and performance table shown do not reflect charges at the separate rate account level; if they did, the performance shown would
be lower.
ANNUAL TOTAL RETURNS
The following bar chart shows changes in the performance of the fund’s shares from year to year.
80%
60
36.25%
40
32.41%
15.02%
20
29.90%
23.69%
4.04%
0
-20
-14.65%
-12.56%
12/31/00
12/31/01
-40
12/31/94
12/31/95
12/31/96
12/31/97
12/31/98
12/31/99
During the periods shown in the bar chart, the highest quarterly return was 27.04% (quarter ended December 31, 1998) and the lowest
quarterly return was -15.58% (quarter ended September 30, 2001).
PERFORMANCE TABLE
The following performance table compares the fund’s performance to that of a broad-based securities market index.
Average Annual Total Returns
(for the periods
ended December 31, 2001)
1 Year
AIM V.I. Premier Equity Fund
Standard & Poor’s 500 Index(1)
5 Years
Since
Inception
Inception
Date
(12.56)%
9.69%
13.41%
05/05/93
(11.88)%
10.70%
13.85%(2)
04/30/93(2)
(1) The Standard & Poor’s 500 Index is an unmanaged index of common stocks frequently used as a general measure of U.S. stock market performance.
(2) The average annual total return given is since the date closest to the inception date of the fund’s Series I shares.
2
Fund Management
THE ADVISOR
A I M Advisors, Inc. (the advisor) serves as the fund’s investment
advisor. The advisor is located at 11 Greenway Plaza, Suite 100,
Houston, Texas 77046-1173. The advisor supervises all aspects
of the fund’s operations and provides investment advisory
services to the fund, including obtaining and evaluating economic, statistical and financial information to formulate and
implement investment programs for the fund.
The advisor has acted as an investment advisor since its
organization in 1976. Today, the advisor, together with its
subsidiaries, advises or manages over 150 investment portfolios,
including the fund, encompassing a broad range of investment
objectives.
PORTFOLIO MANAGERS
The advisor uses a team approach to investment management.
The individual members of the team who are primarily responsible for the day-to-day management of the fund’s portfolio are
as follows:
) Joel E. Dobberpuhl, Senior Portfolio Manager, who has been
responsible for the fund since 1993, and has been associated
with the advisor and/or its affiliates since 1990.
) Evan G. Harrel, Senior Portfolio Manager, who has been
responsible for the fund since 1998 and has been associated
with the advisor and/or its affiliates since 1998. From 1994 to
1998, he was Vice President and portfolio manager of Van
Kampen American Capital Asset Management, Inc. and portfolio manager for various growth and equity funds.
ADVISOR COMPENSATION
During the fund’s fiscal year ended December 31, 2001, the
advisor received compensation of 0.60% of the fund’s average
daily net assets.
) Robert A. Shelton, Senior Portfolio Manager, who has been
responsible for the fund since 1997 and has been associated
with the advisor and/or its affiliates since 1995.
3
Other Information
security, the fund may value the security at its fair value as
determined in good faith by or under the supervision of the
Board of Trustees. The effect of using fair value pricing is that the
fund’s net asset value will be subject to the judgment of the
Board of Trustees or its designee instead of being determined by
the market. Because the fund may invest in securities that are
primarily listed on foreign exchanges, the value of the fund’s
shares may change on days when the separate account will not
be able to purchase or redeem shares. The fund determines the
net asset value of its shares as of the close of the customary
trading session of the NYSE on each day the NYSE is open for
business.
PURCHASE AND REDEMPTION OF SHARES
The fund ordinarily effects orders to purchase and redeem
shares at the fund’s next computed net asset value after it
receives an order. Life insurance companies participating in the
fund serve as the fund’s designee for receiving orders of
separate accounts that invest in the fund.
Shares of the fund are offered in connection with mixed and
shared funding, i.e., to separate accounts of affiliated and
unaffiliated life insurance companies funding variable annuity
contracts and variable life insurance policies. The fund currently
offers shares only to insurance company separate accounts. In
the future, the fund may offer them to pension and retirement
plans that qualify for special federal income tax treatment. Due to
differences in tax treatment and other considerations, the
interests of variable contract owners investing in separate
accounts investing in the fund, and the interests of plan
participants investing in the fund, may conflict.
Mixed and shared funding may present certain conflicts of
interest. For example, violation of the federal tax laws by one
separate account investing in a fund could cause owners of
contracts and policies funded through another separate account
to lose their tax-deferred status, unless remedial actions were
taken. The Board of Trustees of the fund will monitor for the
existence of any material conflicts and determine what action, if
any, should be taken. A fund’s net asset value could decrease if
it had to sell investment securities to pay redemption proceeds
to a separate account (or plan) withdrawing because of a
conflict.
TAXES
The amount, timing and character of distributions to the separate
account may be affected by special tax rules applicable to
certain investments purchased by the fund. Holders of variable
contracts should refer to the prospectus for their contracts for
information regarding the tax consequences of owning such
contracts and should consult their tax advisors before investing.
DIVIDENDS AND DISTRIBUTIONS
Dividends
The fund generally declares and pays dividends, if any, annually
to separate accounts of participating life insurance companies.
Capital Gains Distributions
The fund generally distributes long-term and short-term capital
gains, if any, annually to separate accounts of participating life
insurance companies.
At the election of participating life insurance companies,
dividends and distributions are automatically reinvested at net
asset value in shares of the fund.
PRICING OF SHARES
The fund prices its shares based on its net asset value. The fund
values portfolio securities for which market quotations are
readily available at market value. The fund values short-term
investments maturing within 60 days at amortized cost, which
approximates market value. The fund values all other securities
and assets at their fair value. Securities and other assets quoted
in foreign currencies are valued in U.S. dollars based on the
prevailing exchange rates on that day. In addition, if, between the
time trading ends on a particular security and the close of the
customary trading session of the New York Stock Exchange
(NYSE), events occur that materially affect the value of the
SHARE CLASSES
The fund has two classes of shares, Series I and Series II. Each
class is identical except that Series II has a distribution plan or
‘‘Rule 12b-1 Plan’’ that is described in the prospectus relating
to the Series II shares.
4
The financial highlights table is intended to help you understand
the fund’s financial performance of the fund’s Series I shares.
Certain information reflects financial results for a single fund
share.
The total returns in the table represent the rate that an
investor would have earned (or lost) on an investment in the
fund (assuming reinvestment of all dividends and distributions).
The table shows the financial highlights for a share of the fund
outstanding during each of the fiscal years (or periods)
indicated.
This information has been audited by Tait, Weller & Baker,
whose report, along with the fund’s financial statements, is
included in the fund’s annual report, which is available upon
request.
2001(a)
Net asset value, beginning of period
$
Income from investment operations:
Net investment income
Net gains (losses) on securities (both realized and unrealized)
Total from investment operations
2000(a)
27.30
$
33.50
1999(a)
$
26.25
1998
$
1997
20.83
$ 17.48
0.06
0.04
0.06
0.09
0.08
(3.50)
(4.94)
7.76
6.59
4.05
(3.44)
(4.90)
7.82
6.68
4.13
Less distributions:
Dividends from net investment income
(0.03)
(0.04)
(0.09)
(0.13)
(0.19)
Distributions from net realized gains
(0.48)
(1.26)
(0.48)
(1.13)
(0.59)
(0.51)
(1.30)
(0.57)
(1.26)
(0.78)
Total distributions
Net asset value, end of period
Total return(b)
Ratios /supplemental data:
Net assets, end of period (000s omitted)
$
23.35
$
(12.53)%
$2,558,120
27.30
(14.68)%
$2,746,161
$
33.50
$
29.90%
$2,383,367
26.25
32.41%
$1,221,384
$ 20.83
23.69%
$690,841
Ratio of expenses to average net assets
(c)
0.85%
0.84%
0.76%
0.66%
0.70%
Ratio of net investment income to average net assets
0.24%(c)
0.12%
0.20%
0.68%
1.05%
62%
62%
100%
127%
Portfolio turnover rate
(a)
(b)
(c)
40%
Calculated using average shares outstanding.
Total returns do not reflect charges at the separate account level and these changes would reduce total returns for all periods shown.
Ratios are based on average daily net assets of $2,590,014,174.
5
Obtaining Additional Information
More information may be obtained free of charge upon request.
The Statement of Additional Information (SAI), a current version
of which is on file with the Securities and Exchange Commission (SEC), contains more details about the fund and is
incorporated by reference into the prospectus (is legally a part of
this prospectus). Annual and semiannual reports to shareholders contain additional information about the fund’s investments.
The fund’s annual report also discusses the market conditions
and investment strategies that significantly affected the fund’s
performance during its last fiscal year.
If you wish to obtain free copies of the fund’s current SAI,
please send a written request to A I M Distributors, Inc.,
11 Greenway Plaza, Suite 100, Houston, Texas 77046-1173 or
call (800) 410-4246.
You also can review and obtain copies of the fund’s SAI,
reports and other information at the SEC’s Public Reference
Room in Washington, DC; on the EDGAR database on the SEC’s
Internet website (http://www.sec.gov); or, after paying a duplication fee, by sending a letter to the SEC’s Public Reference
Section, Washington, DC 20549-0102 or by sending an electronic
mail request to [email protected]. Please call the SEC at
1-202-942-8090 for information about the Public Reference
Room.
AIM V.I. Premier Equity Fund
SEC 1940 Act file number: 811-7452
www.aimfunds.com
Invest with DISCIPLINE˛
VP_Value_I_
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Page iii
Your
American Century
prospectus
CLASS I
May 1, 2002
VP Value Fund
The Securities and Exchange
Commission has not approved or
disapproved these securities or
determined if this Prospectus is
accurate or complete. Anyone
who tells you otherwise is
committing a crime.
American Century
Investment Services, Inc.
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Table of Contents
An Overview of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Fund Performance History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Objectives, Strategies and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Share Price, Distributions and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Throughout this book you’ll find
definitions of key investment terms
and phrases. When you see a word
printed in green italics, look for
its definition in the margin.
Multiple Class Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
▲
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
This symbol highlights special
information and helpful tips.
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An Overview of the Fund
What are the fund’s investment objectives?
This fund seeks long-term capital growth. Income is a secondary objective.
What are the fund’s primary investment strategy and principal risks?
In selecting stocks for VP Value, the fund managers look for companies whose stock price
is less than they believe the company is worth. The managers attempt to purchase the
stock of these undervalued companies and hold them until their stock price has increased
to, or is higher than, a level the managers believe more accurately reflects the fair value of
the company. A more detailed description of the fund’s value investment strategy begins
on page 4.
The fund’s principal risks include
• Market Risk – The value of the fund’s shares will go up and down based on the
performance of the companies whose securities it owns and other factors generally
affecting the securities market.
• Price Volatility – The value of the fund’s shares may fluctuate significantly in the
short term.
• Principal Loss – At any given time your shares may be worth more or less than the
price you paid for them. In other words, it is possible to lose money by investing
in the funds
• Style Risk – If the fund’s investment style is out of favor with the market, the fund’s
performance may suffer.
Who may want to invest in the fund?
▲
An investment in the fund is not a
bank deposit, and it is not insured or
guaranteed by the Federal Deposit
Insurance Corporation (FDIC) or
any other government agency.
The fund may be a good investment if you are
• seeking long-term capital growth and income from your investment
• seeking an equity fund that utilizes a value style of investing
• comfortable with the risks associated with the fund’s investment strategy
• comfortable with the fund’s short-term price volatility
Who may not want to invest in the fund?
The fund may not be a good investment if you are
• investing for a short period of time
• uncomfortable with volatility in the value of your investment
2
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Fund Performance History
Annual Total Returns
The following bar chart shows the performance of the fund’s Class I shares for each full
calendar year in the life of the fund. It indicates the volatility of the fund’s historical
returns from year to year.
▲
2001
The performance information on this
page is designed to help you see how
the fund’s returns can vary. Keep in
mind that past performance does not
predict how the fund will perform in
the future.
12.82%
2000
18.14%
1999
-0.85%
1998
4.81%
26.08%
1997
-20%
-10%
0%
10%
20%
30%
40%
The highest and lowest returns for the period reflected in the bar chart are:
VP Value
Highest
Lowest
18.09% (2Q 1999)
-11.05% (3Q 1999)
Average Annual Total Returns
The following table shows the average annual total returns of the fund’s Class I shares for
the periods indicated. The benchmarks are unmanaged indices that have no operating
costs and are included in the table for performance comparison. The S&P 500 is viewed as
a broad measure of U.S. Stock performance. The Lipper Multicap Value Index is an index
of multicap value funds that have management styles similar to the fund’s.
For the calendar year ended December 31,2001
VP Value
S&P 500 Index
Lipper Multicap Value Index
1
5 years
Life of Fund (1)
12.82%
11.80%
12.61%
-11.87%
10.70%
12.12%
1.30%
9.73%
10.83%
1 year
The inception date for VP Value is May 1, 1996.
3
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Objectives, Strategies and Risks
VP Value Fund
What are the fund’s investment objectives?
The fund seeks long-term capital growth. Income is a secondary objective.
How does the fund pursue its investment objective?
The fund managers look for stocks of companies that they believe are undervalued at the
time of purchase. The managers use a value investment strategy that looks for companies
that are temporarily out of favor in the market. The managers attempt to purchase the
stocks of these undervalued companies and hold them until they have returned to favor in
the market and their stock prices have gone up.
Companies may be undervalued due to market declines, poor economic conditions, actual
or anticipated bad news regarding the issuer or its industry, or because they have been
overlooked by the market. To identify these companies, the fund managers look for
companies with earnings, cash flows and/or assets that may not be reflected accurately in
the companies’ stock prices or may be outside the companies’ historical ranges.
Nonleveraged means that the fund
may not invest in futures contracts
when it would be possible to lose more
than the fund invested.
The fund managers do not attempt to time the market. Instead, under normal market
conditions, they intend to keep at least 80% of the fund’s assets invested in U.S. equity
securities at all times. When the managers believe it is prudent, the fund may invest a
portion of its assets in convertible debt securities, equity-equivalent securities, foreign
securities, debt securities of companies, debt obligations of governments and their
agencies, nonleveraged stock index futures contracts and other similar securities. Stock
index futures contracts, a type of derivative security, can help the fund’s cash assets remain
liquid while performing more like stocks. The fund has a policy governing stock index
futures contracts and similar derivative securities to help manage the risk of these types of
investments. For example, the fund managers cannot invest in a derivative security if it
would be possible for the fund to lose more money than it invested. A complete description of the derivatives policy is included in the Statement of Additional Information.
In the event of exceptional market or economic conditions, the fund may, as a temporary
defensive measure, invest all or a substantial portion of its assets in cash or short-term
debt securities. To the extent the fund assumes a defensive position, it will not be
pursuing its objective of capital growth. The fund generally limits its purchase of debt
securities to investment-grade obligations, except for convertible debt securities, which
may be rated below investment grade.
4
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Page 5
What are the principal risks of investing in the fund?
The value of the fund’s shares depends on the value of the stocks and other securities it
owns. The value of the individual securities the fund owns will go up and down
depending on the performance of the companies that issued them, general market and
economic conditions, and investor confidence.
At any given time your shares may be worth more or less than the price you paid for
them. In other words, it is possible to lose money by investing in the fund.
If the market does not consider the individual stocks purchased by the fund to be undervalued, the value of the fund’s shares may not rise as high as other funds and may in fact
decline, even if stock prices generally are increasing.
Market performance tends to be cyclical, and, in the various cycles, certain investment
styles may fall in and out of favor. If the market is not favoring the fund’s style, the fund’s
gains may not be as big as, or its losses may be bigger than, other equity funds using
different investment styles.
Although the fund managers intend to invest the fund’s assets primarily in U.S. stocks,
the fund may invest in securities of foreign companies. Foreign investment involves
additional risks, including fluctuations in currency exchange rates, less stable political
and economic structures, reduced availability of public information, and lack of uniform
financial reporting and regulatory practices similar to those that apply in the United
States. These factors make investing in foreign securities generally riskier than investing
in U.S. stocks.
The fund is offered only to insurance companies for the purpose of offering the fund as
an investment option under variable annuity or variable life insurance contracts. Although
the fund does not foresee any disadvantages to contract owners due to the fact that it
offers its shares as an investment medium for both variable annuity and variable life
products, the interests of various contract owners participating in the fund might, at some
time, be in conflict due to future differences in tax treatment of variable products or other
considerations. Consequently, the fund’s Board of Directors will monitor events in order
to identify any material irreconcilable conflicts that may possibly arise and to determine
what action, if any, should be taken in response to such conflicts. If a conflict were to
occur, an insurance company separate account might be required to withdraw its investments in the fund, and the fund might be forced to sell securities at disadvantageous
prices to redeem such investments.
5
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Management
Who manages the fund?
The Board of Directors, investment advisor and fund management team play key roles in
the management of the fund.
The Board of Directors
The Board of Directors oversees the management of the fund and meets at least quarterly
to review reports about fund operations. Although the Board of Directors does not
manage the fund, it has hired an investment advisor to do so. More than two-thirds of the
directors are independent of the fund’s advisor; that is, they are not employed by and have
no financial interest in the advisor.
The Investment Advisor
The fund’s investment advisor is American Century Investment Management, Inc. The
advisor has been managing mutual funds since 1958 and is headquartered at 4500 Main
Street, Kansas City, Missouri 64111.
The advisor is responsible for managing the investment portfolios of the fund and
directing the purchase and sale of its investment securities. The advisor also arranges
for transfer agency, custody and all other services necessary for the fund to operate.
For the services it provided to the fund during the most recent fiscal year, the advisor
received a unified management fee of 0.97% of the average net assets of the Class I shares
of the fund. The amount of the management fee is calculated daily and paid monthly
in arrears.
Out of that fee, the advisor paid all expenses of managing and operating the fund except
brokerage expenses, taxes, interest, fees and expenses of the independent directors
(including legal counsel fees), and extraordinary expenses. A portion of the management
fee may be paid by the fund’s advisor to unaffiliated third parties who provide recordkeeping and administrative services that would otherwise be performed by an affiliate of
the advisor.
6
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The Fund Management Team
The advisor uses a team of portfolio managers, assistant portfolio managers and analysts
to manage the fund. The team meets regularly to review portfolio holdings and discuss
purchase and sale activity. Team members buy and sell securities for the fund as they see
fit, guided by the fund’s investment objective and strategy.
The portfolio managers on the investment team are identified below:
Scott A. Moore
Mr. Moore, Vice President and Portfolio Manager, has been a member of the team that
manages VP Value since October 1996 and Portfolio Manager since February 1999. He
joined American Century in August 1993 as an Investment Analyst. He has a bachelor’s
degree in finance from Southern Illinois University and an MBA in finance from the
University of Missouri – Columbia. He is a CFA charterholder.
Fund Performance
▲
Phillip N. Davidson
Mr. Davidson, Senior Vice President and Senior Portfolio Manager,has been a member of
the team that manages VP Value since May 1996. He joined American Century in
September 1993 as a Portfolio Manager. Prior to joining American Century, he spent 11
years at Boatmen’s Trust Company in St. Louis and served as Vice President and Portfolio
Manager responsible for institutional value equity clients. He has a bachelor’s degree in
finance and an MBA from Illinois State University. He is a CFA charterholder.
Code of Ethics
American Century has a Code of
Ethics designed to ensure that the
interests of fund shareholders come
before the interests of the people who
manage the fund. Among other provisions, the Code of Ethics prohibits
portfolio managers and other investment personnel from buying securities
in an initial public offering or profiting
from the purchase and sale of the
same security within 60 calendar days.
In addition, the Code of Ethics requires
portfolio managers and other
employees with access to information
about the purchase or sale of securities
by the fund to obtain approval before
executing permitted personal trades.
VP Value has the same management team and investment policies as another fund in the
American Century family of funds. The fees and expenses of the funds are expected to be
similar, and they will be managed with substantially the same investment objective and
strategies. Notwithstanding these general similarities, this fund and the retail fund are
separate mutual funds that will have different investment performance. Differences in
cash flows into the two funds, the size of their portfolios and specific investments held by
the two funds, as well as the additional expenses of the insurance product, will cause
performance to differ.
Please consult the separate account prospectus for a description of the insurance product
through which the fund is offered and its associated fees.
Fundamental Investment Policies
Fundamental investment policies contained in the Statement of Additional Information
and the investment objective of the fund may not be changed without shareholder
approval. The Board of Directors may change any other policies and investment strategies.
7
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Page 8
Share Price, Distributions and Taxes
Purchase and Redemption of Shares
For instructions on how to purchase and redeem shares, read the prospectus of your
insurance company separate account. Your order will be priced at the net asset value next
determined after your request is received in the form required by the insurance company
separate account. There are no sales commissions or redemption charges. However, certain
sales or deferred sales charges and other charges may apply to the variable annuity or life
insurance contracts. Those charges are disclosed in the separate account prospectus.
Abusive Trading Practices
We do not permit market timing or other abusive trading practices in our funds.
Excessive, short-term (market timing) or other abusive trading practices may disrupt portfolio management strategies and harm fund performance. To minimize harm to the fund
and its shareholders, we reserve the right to reject any purchase order (including
exchanges) from any investor we believe has a history of abusive trading or whose trading,
in our judgment, has been or may be disruptive to a fund. In making this judgment, we
may consider trading done in multiple accounts under common ownership or control.
We also reserve the right to delay delivery of redemption proceeds up to seven days.
Modifying or Canceling an Investment
Investment instructions are irrevocable. That means that once you have mailed or otherwise transmitted your investment instruction, you may not modify or cancel it. The fund
reserves the right to suspend the offering of shares for a period of time, and to reject any
specific investment (including a purchase by exchange). Additionally, we may refuse a
purchase if, in our judgment, it is of a size that would disrupt the management of the fund.
Share Price
American Century determines the net asset value (NAV) of the fund as of the close of
regular trading on the New York Stock Exchange (usually 4 p.m. Eastern time) on each
day the Exchange is open. On days when the Exchange is closed (including certain U.S.
holidays), we do not calculate the NAV. A fund share’s NAV is the current value of the
fund’s assets, minus any liabilities, divided by the number of fund shares outstanding.
If current market prices of securities owned by a fund are not readily available, the advisor
may determine their fair value in accordance with procedures adopted by the fund’s
Board. Trading of securities in foreign markets may not take place every day the Exchange
is open. Also, trading in some foreign markets and on some electronic trading networks
may take place on weekends or holidays when a fund’s NAV is not calculated. So, the value
of a fund’s portfolio may be affected on days when you can’t purchase or redeem shares of
the fund.
Good order means that your
instructions have been received
in the form required by American
Century. This may include, for example,
providing the fund name and account
number, the amount of the transaction
and all required signatures.
8
We will price your purchase, exchange or redemption at the NAV next determined after
the insurance company separate account receives your transaction request in good order.
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Page 9
Distributions
Federal tax laws require the fund to make distributions to its shareholders in order to
qualify as a “regulated investment company.” Qualification as a regulated investment
company means the fund will not be subject to state or federal income tax on amounts
distributed. The distributions generally consist of dividends and interest received by a
fund, as well as capital gains realized by a fund on the sale of its investment securities.
The fund generally pays distributions from net income and capital gains, if any, once a
year in March. The fund may make more frequent distributions, if necessary, to comply
with Internal Revenue Code provisions.
Capital gains are increases in the
values of capital assets, such as stock,
from the time the assets are purchased.
You will participate in fund distributions when they are declared, starting the next
business day after your purchase is effective. For example, if you purchase shares on a
day that a distribution is declared, you will not receive that distribution. If you redeem
shares, you will receive any distribution declared on the day you redeem. If you redeem
all shares, we will include any distributions received with your redemption proceeds. All
distributions from the fund will be invested in additional shares.
Provided that all shareholders agree, the fund may utilize the consent dividend provision
of Internal Revenue Code section 565 which treats the income earned by the fund as
distributed to the shareholders as of the end of the taxable year.
Taxes
Consult the prospectus of your insurance company separate account for a discussion of
the tax status of your variable contract.
9
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Page 10
Multiple Class Information
American Century offers three classes of the fund: Class I (the original class), Class II and
Class III. The shares offered by this Prospectus are Class I shares. All classes are offered
exclusively to insurance companies to fund their obligations under the variable annuity
and variable life contracts purchased by their clients.
Class I and Class III have the same fees and expenses, with one exception. Class III shares
have a 1.0% redemption fee for shares that are redeemed or exchanged within 60 days of
purchase. Class II shares have different fees and expenses. The difference in the fee
structures between the classes is the result of their separate arrangements for distribution
services and not the result of any difference in amounts charged by the advisor for core
investment advisory services. Accordingly, the core investment advisory expenses do
not vary by class. Different fees and expenses will affect performance. For additional
information concerning the other classes of shares not offered by this Prospectus, call us
at 1-800-345-3533.
Except as described below, all classes of shares of the fund have identical voting, dividend,
liquidation and other rights, preferences, terms and conditions. The only differences
between the classes are (a) each class may be subject to different expenses specific to that
class; (b) each class has a different identifying designation or name; (c) each class has
exclusive voting rights with respect to matters solely affecting that class; and (d) each class
may have different exchange privileges.
10
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Understanding the Financial Highlights
The table on the next page itemizes what contributed to the changes in share price during
the most recently ended fiscal year. It also shows the changes in share price for this
period in comparison to changes over the last five fiscal years or less, if the fund is not
five years old.
On a per-share basis, the table includes as appropriate
• share price at the beginning of the period
• investment income and capital gains or losses
• distributions of income and capital gains paid to investors
• share price at the end of the period
The table also includes some key statistics for the period as appropriate
• Total Return – the overall percentage of return of the fund, assuming the reinvestment
of all distributions
• Expense Ratio – the operating expenses of the fund as a percentage of average
net assets
• Net Income Ratio – the net investment income of the fund as a percentage of average
net assets
• Portfolio Turnover – the percentage of the fund’s buying and selling activity
The Financial Highlights have been audited by Deloitte & Touche LLP, independent auditors.
Their Independent Auditors’ Report and the financial statements are included in the
fund’s Annual Report, which is available upon request.
11
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VP Value Fund
Class I
For a Share Outstanding Throughout the Years Ended December 31
Per-Share Data
Net Asset Value, Beginning of Period
2001
2000
1999
1998
1997
$6.67
$5.95
$6.73
$6.93
$5.58
Income From Investment Operations
Net Investment Income
0.08(1)
0.08
0.08
0.08(1)
0.07
Net Realized and Unrealized Gain (Loss)
0.77
0.90
(0.15)
0.27
1.37
Total From Investment Operations
0.85
0.98
(0.07)
0.35
1.44
(0.08)
(0.07)
(0.07)
(0.04)
(0.04)
.—
(0.19)
(0.64)
(0.51)
(0.05)
Distributions
From Net Investment Income
From Net Realized Gains
Total Distributions
Net Asset Value, End of Period
Total Return(2)
(0.08)
(0.26)
(0.71)
(0.55)
(0.09)
$7.44
$6.67
$5.95
$6.73
$6.93
12.82%
18.14%
(0.85)%
2001
2000
1999
4.81%
26.08%
Ratios/Supplemental Data
Ratio of Operating Expenses to Average Net Assets
0.97%
1.00%
1.00%
Ratio of Net Investment Income to Average Net Assets
1.28%
1.81%
1.40%
Portfolio Turnover Rate
Net Assets, End of Period (in thousands)
12
1998
1.00%
1.21%
1997
1.00%
1.60%
174%
159%
118%
158%
138%
$1,424,235
$672,214
$416,166
$316,624
$188,015
1
Computed using average shares outstanding throughout the year.
2
Total return assumes reinvestment of dividends and capital gains distributions, if any. The total return of the classes may not precisely reflect the class expense
differences because of the impact of calculating the net asset values to two decimal places. If net asset values were calculated to three decimal places, the
total return differences would more closely reflect the class expense differences. The calculation of net asset values to two decimal places is made in accordance with SEC guidelines and does not result in any gain or loss of value between one class and another.
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Page 13
Notes
13
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Page ii
More information about the fund is contained in these documents.
Annual and Semiannual Reports
Annual and semiannual reports contain more information about the fund’s investments
and the market conditions and investment strategies that significantly affected the fund’s
performance during the most recent fiscal period.
Statement of Additional Information (SAI)
The SAI contains a more detailed, legal description of the fund’s operations, investment
restrictions, policies and practices. The SAI is incorporated by reference into this
Prospectus. This means that it is legally part of this Prospectus, even if you don’t request
a copy.
You may obtain a free copy of the SAI or annual and semiannual reports, and ask questions about the fund or your accounts, by contacting the insurance company from which
you purchased the fund or American Century at the address or telephone numbers
listed below.
You also can get information about the fund (including the SAI) from the Securities
and Exchange Commission (SEC). The SEC charges a duplicating fee to provide copies
of this information.
In person
SEC Public Reference Room
Washington, D.C.
Call 202-942-8090 for location and hours.
On the Internet
• EDGAR database at www.sec.gov
• By email request at [email protected]
By mail
SEC Public Reference Section
Washington, D.C. 20549-0102
Investment Company Act File No. 811-5188
American Century Investments
P.O. Box 419385
Kansas City, Missouri 64141-6385
1-800-345-6488 or 816-531-5575
www.americancentury.com
0205
SH-PRS-28991
▼
May 1, 2002
Janus Aspen Series
Institutional Shares
Growth Portfolio
Prospectus
The Securities and Exchange Commission has not approved or disapproved of these securities or passed on the accuracy or
adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
This prospectus describes Growth Portfolio (the ‘‘Portfolio’’). This Portfolio of Janus Aspen Series
currently offers two classes of shares. The Institutional Shares (the ‘‘Shares’’) are offered by this
prospectus in connection with investment in and payments under variable annuity contracts and
variable life insurance contracts (collectively, ‘‘variable insurance contracts’’), as well as certain
qualified retirement plans.
Janus Aspen Series sells and redeems its Shares at net asset value without sales charges or
commissions. Each variable insurance contract involves fees and expenses that are not described in
this Prospectus. See the accompanying contract prospectus for information regarding contract fees
and expenses and any restrictions on purchases or allocations.
This prospectus contains information that a prospective purchaser of a variable insurance contract
or plan participant should consider in conjunction with the accompanying separate account
prospectus of the specific insurance company product before allocating purchase payments or
premiums to the Portfolio.
TABLE
OF CONTENTS
RISK/RETURN
SUMMARY
Growth Portfolio ****************************************************************
Fees and expenses ***************************************************************
INVESTMENT
2
4
OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment objective and principal investment strategies ********************************
General portfolio policies**********************************************************
Risks **************************************************************************
MANAGEMENT
OF THE
5
6
7
PORTFOLIO
Investment adviser *************************************************************** 10
Management expenses ************************************************************ 10
Portfolio manager **************************************************************** 11
OTHER
INFORMATION *************************************************************
DISTRIBUTIONS
AND TAXES
Distributions ********************************************************************
Taxes **************************************************************************
SHAREHOLDER’S
12
13
13
GUIDE
Pricing of portfolio shares *********************************************************
Purchases **********************************************************************
Redemptions ********************************************************************
Excessive trading ****************************************************************
Shareholder communications*******************************************************
14
14
15
15
15
HIGHLIGHTS ***********************************************************
16
FINANCIAL
GLOSSARY
OF INVESTMENT TERMS
Equity and debt securities *********************************************************
Futures, options and other derivatives ***********************************************
Other investments, strategies and/or techniques ***************************************
17
19
19
Table of contents 1
RISK/RETURN
SUMMARY
GROWTH PORTFOLIO
The Portfolio is designed for long-term investors who primarily seek growth of capital and who can
tolerate the greater risks associated with common stock investments.
1. What is the investment objective of the Portfolio?
Growth Portfolio seeks long-term growth of capital in a manner consistent with the preservation of
capital.
The Portfolio’s Trustees may change this objective or the Portfolio’s principal investment policies without
a shareholder vote. The Portfolio will notify you at least 60 days before making any changes to its
objective or principal investment policies. If there is a material change to the Portfolio’s objective or
principal investment policies, you should consider whether the Portfolio remains an appropriate
investment for you. There is no guarantee that the Portfolio will meet its objective.
2. What are the main investment strategies of the Portfolio?
The portfolio manager applies a ‘‘bottom up’’ approach in choosing investments. In other words, he looks
at companies one at a time to determine if a company is an attractive investment opportunity and is
consistent with the Portfolio’s investment policies. If the portfolio manager is unable to find investments
with earnings growth potential, a significant portion of the Portfolio’s assets may be in cash or similar
investments.
Within the parameters of its specific investment policies discussed below, the Portfolio may invest without
limit in foreign equity and debt securities.
Within the parameters of its specific investment policies discussed below, the Portfolio will limit its
investment in high-yield/high-risk bonds to less than 35% of its net assets.
The Portfolio invests primarily in common stocks selected for their growth potential. Although the
Portfolio can invest in companies of any size, it generally invests in larger, more established companies.
3. What are the main risks of investing in the Portfolio?
The biggest risk is that the Portfolio’s returns may vary, and you could lose money. The Portfolio is
designed for long-term investors who can accept the risks of investing in a portfolio with significant
common stock holdings. Common stocks tend to be more volatile than other investment choices.
The value of the Portfolio’s holdings may decrease if the value of an individual company in the portfolio
decreases. The value of the Portfolio’s holdings could also decrease if the stock market goes down. If the
value of the Portfolio’s holdings decreases, the Portfolio’s net asset value (NAV) will also decrease, which
means if you sell your shares in the Portfolio you may get back less money.
An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
2 Janus Aspen Series
The following information provides some indication of the risks of investing in the Portfolio by showing
how the Portfolio’s performance has varied over time. The bar chart depicts the change in performance
from year to year during the periods indicated. The table compares the average annual returns for the
Shares of the Portfolio for the periods indicated to a broad-based securities market index.
Growth Portfolio – Institutional Shares
Annual returns for periods ended 12/31
50%
43.98%
40%
35.66%
30.17%
18.45%
30%
22.75%
20%
10%
2.76%
(14.55%) (24.73%)
0%
-10%
(20%)
(30%)
1994
1995
Best Quarter: 4th-1998
1996
1997
1998
27.71% Worst Quarter:
1999
3rd-2001
2000
2001
(24.79%)
Average annual total return for periods ended 12/31/01
Since Inception
1 year
5 years
(9/13/93)
S&P 500 Index*
(24.73%)
(11.88%)
9.05%
10.70%
11.83%
13.70%
* The S&P 500 is the Standard & Poor’s Composite Index of 500 Stocks, a widely recognized, unmanaged index of common stock
prices.
The Portfolio’s past performance does not necessarily indicate how it will perform in the future.
Risk return summary 3
FEES
AND EXPENSES
Shareholder fees, such as sales loads, redemption fees or exchange fees, are charged directly to an
investor’s account. The Janus funds are no-load investments, so you will generally not pay any shareholder
fees when you buy or sell shares of the Portfolio. However, each variable insurance contract involves fees
and expenses not described in this prospectus. See the accompanying contract prospectus for information
regarding contract fees and expenses and any restrictions on purchases or allocations.
Annual fund operating expenses are paid out of the Portfolio’s assets and include fees for portfolio
management, maintenance of shareholder accounts, shareholder servicing, accounting and other services.
You do not pay these fees directly but, as the example below shows, these costs are borne indirectly by all
shareholders.
This table and example are designed to assist participants in qualified plans that invest in the Shares of the
Portfolio in understanding the fees and expenses that you may pay as an investor in the Shares. Owners of
variable insurance contracts that invest in the Shares should refer to the variable insurance contract
prospectus for a description of fees and expenses, as the table and example do not reflect deductions
at the separate account level or contract level for any charges that may be incurred under a contract.
Growth Portfolio
Management
Fee
Other
Expenses
0.65%
0.01%
Total Annual Fund
Operating
Expenses*
0.66%
* Expenses are based upon expenses for the year ended December 31, 2001. All expenses are shown without the effect of any expense offset
arrangements.
EXAMPLE:
This example is intended to help you compare the cost of investing in the Portfolio with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in the Portfolio for the time periods indicated and then redeem all of your shares at the end of
those periods. The example also assumes that your investment has a 5% return each year, and that the Portfolio’s operating expenses remain
the same. Since no sales load applies, the results apply whether or not you redeem your investment at the end of each period. Although your
actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year
3 Years
5 Years
10 Years
Growth Portfolio
$67
$211
$368
$822
INVESTMENT
OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES AND RISKS
The Portfolio has a similar investment objective and similar principal investment strategies to Janus Fund.
Although it is anticipated that the Portfolio and its corresponding retail fund will hold similar securities,
differences in asset size, cash flow needs and other factors may result in differences in investment
performance. The expenses of the Portfolio and its corresponding retail fund are expected to differ. The
variable contract owner will also bear various insurance related costs at the insurance company level. You
should review the accompanying separate account prospectus for a summary of fees and expenses.
INVESTMENT
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
This section takes a closer look at the investment objectives of the Portfolio, its principal investment
strategies and certain risks of investing in the Portfolio. Strategies and policies that are noted as
‘‘fundamental’’ cannot be changed without a shareholder vote.
Please carefully review the ‘‘Risks’’ section of this Prospectus for a discussion of risks associated with
certain investment techniques. We’ve also included a Glossary with descriptions of investment terms used
throughout this Prospectus.
Growth Portfolio seeks long-term growth of capital in a manner consistent with the preservation of capital.
It pursues its objective by investing primarily in common stocks selected for their growth potential.
Although the Portfolio can invest in companies of any size, it generally invests in larger, more established
companies.
The following questions and answers are designed to help you better understand the Portfolio’s principal investment
strategies.
1. How are common stocks selected?
Consistent with its investment objective and policies, each of the Portfolio may invest substantially all of its
assets in common stocks if the portfolio manager believes that common stocks will appreciate in value.
The portfolio manager generally takes a ‘‘bottom up’’ approach to selecting companies. This means that he
seeks to identify individual companies with earnings growth potential that may not be recognized by the
market at large. The portfolio manager makes this assessment by looking at companies one at a time,
regardless of size, country of organization, place of principal business activity, or other similar selection
criteria.
Realization of income is not a significant consideration when choosing investments for the Portfolio.
Income realized on the Portfolio’s investments may be incidental to its objective.
2. Are the same criteria used to select foreign securities?
Generally, yes. The portfolio manager seeks companies that meet his selection criteria, regardless of where
a company is located. Foreign securities are generally selected on a stock-by-stock basis without regard to
any defined allocation among countries or geographic regions. However, certain factors such as expected
levels of inflation, government policies influencing business conditions, the outlook for currency
relationships, and prospects for economic growth among countries, regions or geographic areas may
warrant greater consideration in selecting foreign securities. There are no limitations on the countries in
which the Portfolio may invest and the Portfolio may at times have significant foreign exposure.
3. What does ‘‘market capitalization’’ mean?
Market capitalization is the most commonly used measure of the size and value of a company. It is
computed by multiplying the current market price of a share of the company’s stock by the total number
of its shares outstanding. The Portfolio does not emphasize companies of any particular size.
Investment objective, principal investment strategies and risks 5
GENERAL
PORTFOLIO POLICIES
The percentage limitations included in these policies and elsewhere in this Prospectus apply at the time of
purchase of a security. So, for example, if the Portfolio exceeds a limit as a result of market fluctuations or
the sale of other securities, it will not be required to dispose of any securities.
Cash Position
When the portfolio manager believes that market conditions are unfavorable for profitable investing, or
when he is otherwise unable to locate attractive investment opportunities, the Portfolio’s cash or similar
investments may increase. In other words, the Portfolio does not always stay fully invested in stocks and
bonds. Cash or similar investments generally are a residual – they represent the assets that remain after the
portfolio manager has committed available assets to desirable investment opportunities. However, the
portfolio manager may also temporarily increase the Portfolio’s cash position to, for example, protect its
assets, maintain liquidity or meet unusually large redemptions. The Portfolio’s cash position may also
increase temporarily due to unusually large cash inflows. When the Portfolio’s investments in cash or
similar investments increase, it may not participate in market advances or declines to the same extent that
it would if the Portfolio remained more fully invested in stocks or bonds.
Other Types of Investments
The Portfolio invests primarily in domestic and foreign equity securities, which may include preferred
stocks, common stocks and securities convertible into common or preferred stocks. To a lesser degree, the
Portfolio may invest in other types of domestic and foreign securities and use other investment strategies,
which are described in the Glossary. These may include:
) debt securities
) indexed/structured securities
) high-yield/high-risk bonds (less than 35% of the Portfolio’s assets)
) options, futures, forwards, swaps and other types of derivatives for hedging purposes or for non-hedging
purposes such as seeking to enhance return
) short sales (no more than 8% of the Portfolio’s assets may be invested in ‘‘naked’’ short sales)
) securities purchased on a when-issued, delayed delivery or forward commitment basis
Illiquid Investments
The Portfolio may invest up to 15% of its net assets in illiquid investments. An illiquid investment is a
security or other position that cannot be disposed of quickly in the normal course of business. For
example, some securities are not registered under U.S. securities laws and cannot be sold to the
U.S. public because of SEC regulations (these are known as ‘‘restricted securities’’). Under procedures
adopted by the Portfolio’s Trustees, certain restricted securities may be deemed liquid, and will not be
counted toward this 15% limit.
Foreign Securities
Within the parameters of its specific investment policies, the Portfolio may invest without limit in foreign
equity and debt securities. The Portfolio may invest directly in foreign securities denominated in a foreign
currency and not publicly traded in the United States. Other ways of investing in foreign securities include
depositary receipts or shares and passive foreign investment companies.
Special Situations
The Portfolio may invest in special situations. A special situation arises when, in the opinion of the
portfolio manager, the securities of a particular issuer will be recognized and appreciate in value due to a
specific development with respect to that issuer. Special situations may include significant changes in a
company’s allocation of its existing capital, a restructuring of assets, or a redirection of free cash flow.
Developments creating a special situation might include, among others, a new product or process, a
technological breakthrough, a management change or other extraordinary corporate event, or differences in
market supply of and demand for the security. The Portfolio’s performance could suffer if the anticipated
development in a ‘‘special situation’’ investment does not occur or does not attract the expected attention.
Portfolio Turnover
The Portfolio generally intends to purchase securities for long-term investment, although, to the extent
permitted by its specific investment policies, the Portfolio may purchase securities in anticipation of
relatively short-term price gains. Short-term transactions may also result from liquidity needs, securities
having reached a price or yield objective, changes in interest rates or the credit standing of an issuer, or by
reason of economic or other developments not foreseen at the time of the investment decision. The
Portfolio may also sell one security and simultaneously purchase the same or a comparable security to take
advantage of short-term differentials in bond yields or securities prices. Portfolio turnover is affected by
market conditions, changes in the size of the Portfolio, the nature of the Portfolio’s investments and the
investment style of the portfolio manager. Changes are made in the Portfolio’s holdings whenever the
portfolio manager believes such changes are desirable. Portfolio turnover rates are generally not a factor in
making buy and sell decisions.
Increased portfolio turnover may result in higher costs for brokerage commissions, dealer mark-ups and
other transaction costs and may also result in taxable capital gains. Higher costs associated with increased
portfolio turnover may offset gains in the Portfolio’s performance. The Financial Highlights section of this
Prospectus shows the Portfolio’s historical turnover rates.
RISKS
Because the Portfolio may invest substantially all of its assets in common stocks, the main risk is the risk
that the value of the stocks it holds might decrease in response to the activities of an individual company
or in response to general market and/or economic conditions. If this occurs, the Portfolio’s share price may
also decrease. The Portfolio’s performance may also be affected by risks specific to certain types of
investments, such as foreign securities, derivative investments, non-investment grade bonds, initial public
offerings (IPOs) or companies with relatively small market capitalizations. IPOs and other investment
techniques may have a magnified performance impact on a Portfolio with a small asset base. A Portfolio
may not experience similar performance as its assets grow.
The following questions and answers are designed to help you better understand some of the risks of investing in the
Portfolio.
1. The Portfolio may invest in smaller or newer companies. Does this create any special risks?
Many attractive investment opportunities may be smaller, start-up companies offering emerging products or
services. Smaller or newer companies may suffer more significant losses as well as realize more substantial
growth than larger or more established issuers because they may lack depth of management, be unable to
generate funds necessary for growth or potential development, or be developing or marketing new
products or services for which markets are not yet established and may never become established. In
addition, such companies may be insignificant factors in their industries and may become subject to
intense competition from larger or more established companies. Securities of smaller or newer companies
may have more limited trading markets than the markets for securities of larger or more established
issuers, or may not be publicly traded at all, and may be subject to wide price fluctuations. Investments in
such companies tend to be more volatile and somewhat more speculative.
2. How could the Portfolio’s investments in foreign securities affect its performance?
Within the parameters of its specific investment policies, the Portfolio may invest without limit in foreign
securities either indirectly (e.g., depositary receipts) or directly in foreign markets. Investments in foreign
securities, including those of foreign governments, may involve greater risks than investing in domestic
securities because the Portfolio’s performance may depend on issues other than the performance of a
particular company. These issues include:
) Currency Risk. As long as the Portfolio holds a foreign security, its value will be affected by the value of
the local currency relative to the U.S. dollar. When the Portfolio sells a foreign denominated security, its
value may be worth less in U.S. dollars even if the security increases in value in its home country.
U.S. dollar denominated securities of foreign issuers may also be affected by currency risk.
) Political and Economic Risk. Foreign investments may be subject to heightened political and economic
risks, particularly in emerging markets which may have relatively unstable governments, immature
economic structures, national policies restricting investments by foreigners, different legal systems, and
economies based on only a few industries. In some countries, there is the risk that the government may
take over the assets or operations of a company or that the government may impose taxes or limits on
the removal of the Portfolio’s assets from that country.
) Regulatory Risk. There may be less government supervision of foreign markets. As a result, foreign
issuers may not be subject to the uniform accounting, auditing and financial reporting standards and
practices applicable to domestic issuers and there may be less publicly available information about
foreign issuers.
) Market Risk. Foreign securities markets, particularly those of emerging market countries, may be less
liquid and more volatile than domestic markets. Certain markets may require payment for securities
before delivery and delays may be encountered in settling securities transactions. In some foreign
markets, there may not be protection against failure by other parties to complete transactions.
) Transaction Costs. Costs of buying, selling and holding foreign securities, including brokerage, tax and
custody costs, may be higher than those involved in domestic transactions.
3. Are there special risks associated with investments in high-yield/high-risk bonds?
High-yield/high-risk bonds (or ‘‘junk’’ bonds) are bonds rated below investment grade by the primary
rating agencies such as Standard & Poor’s and Moody’s. The value of lower quality bonds generally is
more dependent on credit risk and default risk than investment grade bonds. Issuers of high-yield bonds
may not be as strong financially as those issuing bonds with higher credit ratings and are more vulnerable
to real or perceived economic changes, political changes or adverse developments specific to the issuer. In
addition, the junk bond market can experience sudden and sharp price swings.
4. How does the Portfolio try to reduce risk?
The Portfolio may use futures, options, swaps and other derivative instruments to ‘‘hedge’’ or protect its
portfolio from adverse movements in securities prices and interest rates. The Portfolio may also use a
variety of currency hedging techniques, including forward currency contracts, to manage exchange rate
risk. The portfolio manager believes the use of these instruments will benefit the Portfolio. However, the
Portfolio’s performance could be worse than if the Portfolio had not used such instruments if the portfolio
manager’s judgement proves incorrect.
5. What is ‘‘industry risk’’?
Industry risk is the possibility that a group of related stocks will decline in price due to industry-specific
developments. Companies in the same or similar industries may share common characteristics and are
more likely to react similarly to industry-specific market or economic developments. The Portfolio may at
times have significant exposure to industry risk as a result of investing in multiple companies in a
particular industry.
MANAGEMENT
INVESTMENT
OF THE
PORTFOLIO
ADVISER
Janus Capital Management LLC (‘‘Janus Capital’’), 100 Fillmore Street, Denver, Colorado 80206-4928, is
the investment adviser to the Portfolio and is responsible for the day-to-day management of the investment
portfolio and other business affairs of the Portfolio.
Janus Capital began serving as investment adviser to Janus Fund in 1970 and currently serves as
investment adviser to all of the Janus retail funds, acts as sub-adviser for a number of private-label mutual
funds and provides separate account advisory services for institutional accounts.
Janus Capital furnishes continuous advice and recommendations concerning the Portfolio’s investments.
Janus Capital also furnishes certain administrative, compliance and accounting services for the Portfolio,
and may be reimbursed by the Portfolio for its costs in providing those services. In addition, Janus Capital
employees serve as officers of the Trust and Janus Capital provides office space for the Portfolio and pays
the salaries, fees and expenses of all Portfolio officers and those Trustees who are affiliated with Janus
Capital.
Participating insurance companies that purchase the Portfolio’s Shares may perform certain administrative
services relating to the Portfolio and Janus Capital or the Portfolio may pay those companies for such
services.
MANAGEMENT
EXPENSES
The Portfolio pays Janus Capital a management fee which is calculated daily and paid monthly. The
Portfolio’s advisory agreement spells out the management fee and other expenses that the Portfolio must
pay. A new investment advisory agreement approved at a special meeting of the shareholders on
January 31, 2002, that is the same in all material respects as the previous advisory agreement, became
effective on April 3, 2002. For the year ended December 31, 2001, the Portfolio paid Janus Capital a
management fee of 0.65% of the Portfolio’s average net assets.
The Shares of the Portfolio incur expenses not assumed by Janus Capital, including transfer agent and
custodian fees and expenses, legal and auditing fees, printing and mailing costs of sending reports and
other information to existing shareholders, and independent Trustees’ fees and expenses.
PORTFOLIO
MANAGER
Blaine P. Rollins
is Executive Vice President and Portfolio Manager of Growth Portfolio, which he has managed since
January 2000. He previously served as Executive Vice President and Portfolio Manager of Equity Income
Portfolio from its inception to December 1999 and Balanced Portfolio from May 1996 to December
1999. Mr. Rollins is also Portfolio Manager of other Janus accounts. Mr. Rollins joined Janus Capital in
1990. He holds a Bachelor of Science degree in Finance from the University of Colorado. Mr. Rollins
has earned the right to use the Chartered Financial Analyst designation.
Management of the Portfolio 11
OTHER
INFORMATION
Classes of Shares
The Portfolio currently offers two classes of shares, one of which, the Institutional Shares, is offered
pursuant to this prospectus and sold under the name Janus Aspen Series. The Shares offered by this
Prospectus are available only in connection with investment in and payments under variable insurance
contracts, as well as certain qualified retirement plans. Service Shares of the Portfolio are available only in
connection with investment in and payments under variable insurance contracts as well as certain qualified
retirement plans that require a fee from Portfolio assets to procure distribution and administrative services
to contract owners and plan participants. Because the expenses of each class may differ, the performance of
each class is expected to differ. If you would like additional information about the Service Shares, please
call 1-800-525-0020.
Conflicts of Interest
The Shares offered by this prospectus are available only to variable annuity and variable life separate
accounts of insurance companies that are unaffiliated with Janus Capital and to certain qualified retirement
plans. Although the Portfolio does not currently anticipate any disadvantages to policy owners because the
Portfolio offers its shares to such entities, there is a possibility that a material conflict may arise. The
Trustees monitor events in order to identify any disadvantages or material irreconcilable conflicts and to
determine what action, if any, should be taken in response. If a material disadvantage or conflict occurs,
the Trustees may require one or more insurance company separate accounts or qualified plans to withdraw
its investments in the Portfolio or substitute Shares of another Portfolio. If this occurs, the Portfolio may be
forced to sell its securities at disadvantageous prices. In addition, the Trustees may refuse to sell Shares of
the Portfolio to any separate account or qualified plan or may suspend or terminate the offering of the
Portfolio’s Shares if such action is required by law or regulatory authority or is in the best interests of the
Portfolio’s shareholders. It is possible that a qualified plan investing in the Portfolio could lose its qualified
plan status under the Internal Revenue Code, which could have adverse tax consequences on insurance
company separate accounts investing in the Portfolio. Janus Capital intends to monitor such qualified plans
and the Portfolio may discontinue sales to a qualified plan and require plan participants with existing
investments in the Portfolio to redeem those investments if a plan loses (or in the opinion of Janus Capital
is at risk of losing) its qualified plan status.
Distribution of the Portfolio
The Portfolio is distributed by Janus Distributors LLC, which is a member of the National Association of
Securities Dealers, Inc. (‘‘NASD’’). To obtain information about NASD member firms and their associated
persons, you may contact NASD Regulation, Inc. at www.nasdr.com, or the Public Disclosure Hotline at
800-289-9999. An investor brochure containing information describing the Public Disclosure Program is
available from NASD Regulation, Inc.
DISTRIBUTIONS
AND TAXES
DISTRIBUTIONS
To avoid taxation of the Portfolio, the Internal Revenue Code requires the Portfolio to distribute net
income and any net gains realized on its investments at least annually. The Portfolio’s income from
dividends and interest and any net realized short-term gains are paid to shareholders as ordinary income
dividends. Net realized long-term gains are paid to shareholders as capital gains distributions.
Distribution Schedule
Dividends for the Portfolio are normally declared and distributed in June and December. Capital gains are
normally declared and distributed in June for the Portfolio.
How Distributions Affect the Portfolio’s NAV
Distributions are paid to shareholders as of the record date of the distribution of the Portfolio, regardless of
how long the shares have been held. Undistributed income and realized gains are included in the daily
NAV of the Portfolio’s Shares. The Share price of the Portfolio drops by the amount of the distribution, net
of any subsequent market fluctuations. For example, assume that on December 31, the Shares of Growth
Portfolio declared a dividend in the amount of $0.25 per share. If the price of Growth Portfolio’s Shares
was $10.00 on December 30, the share price on December 31 would be $9.75, barring market
fluctuations.
TAXES
Taxes on Distributions
Because Shares of the Portfolio may be purchased only through variable insurance contracts and qualified
plans, it is anticipated that any income dividends or capital gains distributions made by the Shares of the
Portfolio will be exempt from current taxation if left to accumulate within the variable insurance contract
or qualified plan. Generally, withdrawals from such contracts may be subject to ordinary income tax and,
if made before age 591/2, a 10% penalty tax. The tax status of your investment depends on the features of
your qualified plan or variable insurance contract. Further information may be found in your plan
documents or in the prospectus of the separate account offering such contract.
Taxation of the Portfolio
Dividends, interest and some gains received by the Portfolio on foreign securities may be subject to tax
withholding or other foreign taxes. The Portfolio may from year to year make the election permitted under
Section 853 of the Internal Revenue Code to pass through such taxes to shareholders as a foreign tax
credit. If such an election is not made, any foreign taxes paid or accrued will represent an expense to the
Portfolio.
The Portfolio does not expect to pay any federal income or excise taxes because it intends to meet certain
requirements of the Internal Revenue Code. In addition, because the Shares of the Portfolio are sold in
connection with variable insurance contracts, the Portfolio intends to qualify under the Internal Revenue
Code with respect to the diversification requirements related to the tax-deferred status of insurance
company separate accounts.
Distributions and taxes 13
SHAREHOLDER’S
GUIDE
INVESTORS MAY NOT PURCHASE OR REDEEM SHARES OF THE PORTFOLIO DIRECTLY. SHARES
MAY BE PURCHASED OR REDEEMED ONLY THROUGH VARIABLE INSURANCE CONTRACTS
OFFERED BY THE SEPARATE ACCOUNTS OF PARTICIPATING INSURANCE COMPANIES OR
THROUGH QUALIFIED RETIREMENT PLANS. REFER TO THE PROSPECTUS FOR THE PARTICIPATING INSURANCE COMPANY’S SEPARATE ACCOUNT OR YOUR PLAN DOCUMENTS FOR
INSTRUCTIONS ON PURCHASING OR SELLING OF VARIABLE INSURANCE CONTRACTS AND
ON HOW TO SELECT THE PORTFOLIO AS AN INVESTMENT OPTION FOR A CONTRACT OR A
QUALIFIED PLAN.
PRICING
OF PORTFOLIO SHARES
Investments will be processed at the NAV next calculated after an order is received and accepted by the
Portfolio or its agent. In order to receive a day’s price, your order must be received by the close of the
regular trading session of the New York Stock Exchange. Securities of the Portfolio are valued at market
value or, if a market quotation is not readily available, at their fair value determined in good faith under
procedures established by and under the supervision of the Trustees. Short-term instruments maturing
within 60 days are valued at amortized cost, which approximates market value.
Because foreign securities markets may operate on days that are not business days in the United States, the
value of the Portfolio’s holdings may change on days when you will not be able to purchase or redeem the
Portfolio’s Shares.
PURCHASES
Purchases of Shares may be made only by the separate accounts of insurance companies for the purpose of
funding variable insurance contracts or by qualified plans. Refer to the prospectus of the appropriate
insurance company separate account or your plan documents for information on how to invest in the
Shares of the Portfolio. Participating insurance companies and certain other designated organizations are
authorized to receive purchase orders on the Portfolio’s behalf.
The Portfolio is not intended for excessive trading or market timing. Excessive purchases of Portfolio
Shares disrupt portfolio management and drive Portfolio expenses higher. The Portfolio reserves the right
to reject any specific purchase order, including exchange purchases, for any reason. For example, purchase
orders may be refused if the Portfolio would be unable to invest the money effectively in accordance with
its investment policies or would otherwise be adversely affected due to the size of the transaction,
frequency of trading or other factors. The Portfolio may also suspend or terminate your exchange privilege
if you engage in an excessive pattern of exchanges. For more information about the Portfolio’s policy on
market timing, see ‘‘Excessive Trading’’ on the next page.
Although there is no present intention to do so, the Portfolio may discontinue sales of its shares if
management and the Trustees believe that continued sales may adversely affect the Portfolio’s ability to
achieve its investment objective. If sales of the Portfolio’s Shares are discontinued, it is expected that
existing policy owners and plan participants invested in the Portfolio would be permitted to continue to
authorize investment in the Portfolio and to reinvest any dividends or capital gains distributions, absent
highly unusual circumstances.
The Portfolio may discontinue sales to a qualified plan and require plan participants with existing
investments in the Shares to redeem those investments if the plan loses (or in the opinion of Janus Capital,
is at risk of losing) its qualified plan status.
REDEMPTIONS
Redemptions, like purchases, may be effected only through the separate accounts of participating insurance
companies or through qualified plans. Please refer to the appropriate separate account prospectus or plan
documents for details.
Shares of the Portfolio may be redeemed on any business day. Redemptions are processed at the NAV next
calculated after receipt and acceptance of the redemption order by the Portfolio or its agent. Redemption
proceeds will normally be wired to the participating insurance company the business day following receipt
of the redemption order, but in no event later than seven days after receipt of such order.
EXCESSIVE
TRADING
Frequent trading into and out of the Portfolio can disrupt portfolio investment strategies and increase
portfolio expenses for all shareholders, including long-term shareholders who do not generate these costs.
The Portfolio is not intended for market timing or excessive trading. The Portfolio and its agents reserve
the right to reject any purchase request (including exchange purchases if permitted by your insurance
company or plan sponsor) by any investor or group of investors indefinitely if they believe that any
combination of trading activity in the account(s) is attributable to market timing or is otherwise excessive
or potentially disruptive to the Portfolio. The Portfolio may refuse purchase orders (including exchange
purchases) for any reason without prior notice, particularly orders that the Portfolio believes are made on
behalf of market timers.
The trading history of accounts under common ownership or control may be considered in enforcing these
policies. Transactions placed through the same insurance company or plan sponsor on an omnibus basis
may be deemed part of a group for the purpose of this policy and may be rejected in whole or in part by
the Portfolio. Transactions accepted by your insurance company or plan sponsor in violation of our
excessive trading policy are not deemed accepted by the Portfolio and may be cancelled or revoked by the
Portfolio on the next business day following receipt by your intermediary.
SHAREHOLDER
COMMUNICATIONS
Shareholders will receive annual and semiannual reports including the financial statements of the Shares of
the Portfolio that they have authorized for investment. Each report will show the investments owned by
the Portfolio and the market values thereof, as well as other information about the Portfolio and its
operations. The Trust’s fiscal year ends December 31.
Shareholder’s guide 15
FINANCIAL
HIGHLIGHTS
The financial highlights table is intended to help you understand the Institutional Shares’ financial
performance for each of the five most recent years. Items 1 through ‘‘Net asset value, end of period’’ reflect
financial results for a single Share. The total returns in the table represent the rate that an investor would
have earned (or lost) on an investment in the Institutional Shares of the Portfolio (assuming reinvestment
of all dividends and distributions) but do not include charges and expenses attributable to any insurance
product. This information has been audited by PricewaterhouseCoopers LLP, whose report, along with the
Portfolio’s financial statements, is included in the Annual Report, which is available upon request and
incorporated by reference into the SAI.
2001
1. Net asset value, beginning of period
Years ended December 31
2000
1999
1998
1997
$26.48
$33.65
$23.54
$18.48
$15.51
Income from investment operations:
2. Net investment income
3. Net gains or losses on securities (both realized and unrealized)
0.02
(6.56)
0.05
(4.59)
0.07
10.24
0.05
6.36
0.15
3.34
4. Total from investment operations
(6.54)
(4.54)
10.31
6.41
3.49
Less distributions:
5. Dividends (from net investment income)
6. Distributions (from capital gains)
(0.01)
(0.04)
(0.06)
(2.57)
(0.06)
(0.14)
(0.05)
(1.30)
(0.15)
(0.37)
7. Total distributions
(0.05)
(2.63)
(0.20)
(1.35)
(0.52)
$19.89
$26.48
$33.65
$23.54
$18.48
(24.73%)
(14.55%)
43.98%
35.66%
22.75%
8. Net asset value, end of period
9. Total return
10. Net assets, end of period (in thousands)
11. Average net assets for the period (in thousands)
12. Ratio of gross expenses to average net assets(1)
13. Ratio of net expenses to average net assets(3)
14. Ratio of net investment income to average net assets
15. Portfolio turnover rate
$2,490,954
$3,529,807
$2,942,649
$1,103,549
$608,281
$2,911,331
$3,734,449
$1,775,373
$789,454 $477,914
0.66%(2)
0.67%(2)
0.67%(2)
0.68%(2)
0.70%(2)
0.66%
0.67%
0.67%
0.68%
0.69%
0.07%
0.19%
0.30%
0.26%
0.91%
48%
47%
53%
73%
122%
(1) The expense ratio reflects expenses prior to any expense offset arrangements.
(2) The ratio was 0.66% in 2001, 0.67% in 2000, 0.69% in 1999, 0.75% in 1998 and 0.78% in 1997 before waiver of certain fees and/or reduction of
adviser’s fees to the effective rate of Janus Fund.
(3) The expense ratio reflects expenses after any expense offset arrangements.
GLOSSARY
OF INVESTMENT TERMS
This glossary provides a more detailed description of some of the types of securities, investment strategies
and other instruments in which the Portfolio may invest. The Portfolio may invest in these instruments to
the extent permitted by its investment objective and policies. The Portfolio is not limited by this discussion
and may invest in any other types of instruments not precluded by the policies discussed elsewhere in this
Prospectus.
I. EQUITY
AND DEBT SECURITIES
Bonds are debt securities issued by a company, municipality, government or government agency. The
issuer of a bond is required to pay the holder the amount of the loan (or par value of the bond) at a
specified maturity and to make scheduled interest payments.
Commercial paper is a short-term debt obligation with a maturity ranging from 1 to 270 days issued by
banks, corporations and other borrowers to investors seeking to invest idle cash. The Portfolio may
purchase commercial paper issued in private placements under Section 4(2) of the Securities Act of 1933.
Common stocks are equity securities representing shares of ownership in a company and usually carry
voting rights and earn dividends. Unlike preferred stock, dividends on common stock are not fixed but are
declared at the discretion of the issuer’s board of directors.
Convertible securities are preferred stocks or bonds that pay a fixed dividend or interest payment and are
convertible into common stock at a specified price or conversion ratio.
Debt securities are securities representing money borrowed that must be repaid at a later date. Such
securities have specific maturities and usually a specific rate of interest or an original purchase discount.
Depositary receipts are receipts for shares of a foreign-based corporation that entitle the holder to
dividends and capital gains on the underlying security. Receipts include those issued by domestic banks
(American Depositary Receipts), foreign banks (Global or European Depositary Receipts) and broker-dealers
(depositary shares).
Equity securities generally include domestic and foreign common stocks; preferred stocks; securities
convertible into common stocks or preferred stocks; warrants to purchase common or preferred stocks;
and other securities with equity characteristics.
Fixed-income securities are securities that pay a specified rate of return. The term generally includes shortand long-term government, corporate and municipal obligations that pay a specified rate of interest,
dividends or coupons for a specified period of time. Coupon and dividend rates may be fixed for the life
of the issue or, in the case of adjustable and floating rate securities, for a shorter period.
High-yield/High-risk bonds are bonds that are rated below investment grade by the primary rating agencies
(e.g., BB or lower by Standard & Poor’s and Ba or lower by Moody’s). Other terms commonly used to
describe such bonds include ‘‘lower rated bonds,’’ ‘‘noninvestment grade bonds’’ and ‘‘junk bonds.’’
Mortgage- and asset-backed securities are shares in a pool of mortgages or other debt. These securities are
generally pass-through securities, which means that principal and interest payments on the underlying
securities (less servicing fees) are passed through to shareholders on a pro rata basis. These securities
involve prepayment risk, which is the risk that the underlying mortgages or other debt may be refinanced
or paid off prior to their maturities during periods of declining interest rates. In that case, the portfolio
manager may have to reinvest the proceeds from the securities at a lower rate. Potential market gains on a
security subject to prepayment risk may be more limited than potential market gains on a comparable
security that is not subject to prepayment risk.
Glossary of investment terms 17
Passive foreign investment companies (PFICs) are any foreign corporations which generate certain
amounts of passive income or hold certain amounts of assets for the production of passive income. Passive
income includes dividends, interest, royalties, rents and annuities. To avoid taxes and interest that the
Portfolio must pay if these investments are profitable, the Portfolio may make various elections permitted
by the tax laws. These elections could require that the Portfolio recognize taxable income, which in turn
must be distributed, before the securities are sold and before cash is received to pay the distributions.
Pay-in-kind bonds are debt securities that normally give the issuer an option to pay cash at a coupon
payment date or give the holder of the security a similar bond with the same coupon rate and a face value
equal to the amount of the coupon payment that would have been made.
Preferred stocks are equity securities that generally pay dividends at a specified rate and have preference
over common stock in the payment of dividends and liquidation. Preferred stock generally does not carry
voting rights.
Rule 144A securities are securities that are not registered for sale to the general public under the Securities
Act of 1933, but that may be resold to certain institutional investors.
Standby commitments are obligations purchased by the Portfolio from a dealer that give the Portfolio the
option to sell a security to the dealer at a specified price.
Step coupon bonds are debt securities that trade at a discount from their face value and pay coupon
interest. The discount from the face value depends on the time remaining until cash payments begin,
prevailing interest rates, liquidity of the security and the perceived credit quality of the issuer.
Strip bonds are debt securities that are stripped of their interest (usually by a financial intermediary) after
the securities are issued. The market value of these securities generally fluctuates more in response to
changes in interest rates than interest-paying securities of comparable maturity.
Tender option bonds are generally long-term securities that are coupled with an option to tender the
securities to a bank, broker-dealer or other financial institution at periodic intervals and receive the face
value of the bond. This type of security is commonly used as a means of enhancing the security’s liquidity.
U.S. government securities include direct obligations of the U.S. government that are supported by its full
faith and credit. Treasury bills have initial maturities of less than one year, Treasury notes have initial
maturities of one to ten years and Treasury bonds may be issued with any maturity but generally have
maturities of at least ten years. U.S. government securities also include indirect obligations of the U.S.
government that are issued by federal agencies and government sponsored entities. Unlike Treasury
securities, agency securities generally are not backed by the full faith and credit of the U.S. government.
Some agency securities are supported by the right of the issuer to borrow from the Treasury, others are
supported by the discretionary authority of the U.S. government to purchase the agency’s obligations and
others are supported only by the credit of the sponsoring agency.
Variable and floating rate securities have variable or floating rates of interest and, under certain limited
circumstances, may have varying principal amounts. Variable and floating rate securities pay interest at
rates that are adjusted periodically according to a specified formula, usually with reference to some interest
rate index or market interest rate (the ‘‘underlying index’’). The floating rate tends to decrease the security’s
price sensitivity to changes in interest rates.
Warrants are securities, typically issued with preferred stock or bonds, that give the holder the right to
buy a proportionate amount of common stock at a specified price. The specified price is usually higher
than the market price at the time of issuance of the warrant. The right may last for a period of years
or indefinitely.
Zero coupon bonds are debt securities that do not pay regular interest at regular intervals, but are issued at
a discount from face value. The discount approximates the total amount of interest the security will accrue
from the date of issuance to maturity. The market value of these securities generally fluctuates more in
response to changes in interest rates than interest-paying securities.
II. FUTURES,
OPTIONS AND OTHER DERIVATIVES
Forward contracts are contracts to purchase or sell a specified amount of a financial instrument for an
agreed upon price at a specified time. Forward contracts are not currently exchange traded and are
typically negotiated on an individual basis. The Portfolio may enter into forward currency contracts to
hedge against declines in the value of securities denominated in, or whose value is tied to, a currency
other than the U.S. dollar or to reduce the impact of currency appreciation on purchases of such securities.
It may also enter into forward contracts to purchase or sell securities or other financial indices.
Futures contracts are contracts that obligate the buyer to receive and the seller to deliver an instrument or
money at a specified price on a specified date. The Portfolio may buy and sell futures contracts on foreign
currencies, securities and financial indices including indices of U.S. government, foreign government,
equity or fixed-income securities. The Portfolio may also buy options on futures contracts. An option on a
futures contract gives the buyer the right, but not the obligation, to buy or sell a futures contract at a
specified price on or before a specified date. Futures contracts and options on futures are standardized and
traded on designated exchanges.
Indexed/structured securities are typically short- to intermediate-term debt securities whose value at
maturity or interest rate is linked to currencies, interest rates, equity securities, indices, commodity prices
or other financial indicators. Such securities may be positively or negatively indexed (i.e. their value may
increase or decrease if the reference index or instrument appreciates). Indexed/structured securities may
have return characteristics similar to direct investments in the underlying instruments and may be more
volatile than the underlying instruments. The Portfolio bears the market risk of an investment in the
underlying instruments, as well as the credit risk of the issuer.
Interest rate swaps involve the exchange by two parties of their respective commitments to pay or receive
interest (e.g., an exchange of floating rate payments for fixed rate payments).
Inverse floaters are debt instruments whose interest rate bears an inverse relationship to the interest rate
on another instrument or index. For example, upon reset the interest rate payable on a security may go
down when the underlying index has risen. Certain inverse floaters may have an interest rate reset
mechanism that multiplies the effects of change in the underlying index. Such mechanism may increase the
volatility of the security’s market value.
Options are the right, but not the obligation, to buy or sell a specified amount of securities or other assets
on or before a fixed date at a predetermined price. The Portfolio may purchase and write put and call
options on securities, securities indices and foreign currencies.
III. OTHER
INVESTMENTS, STRATEGIES AND/OR TECHNIQUES
Repurchase agreements involve the purchase of a security by the Portfolio and a simultaneous agreement
by the seller (generally a bank or dealer) to repurchase the security from the Portfolio at a specified date or
upon demand. This technique offers a method of earning income on idle cash. These securities involve the
risk that the seller will fail to repurchase the security, as agreed. In that case, the Portfolio will bear the
Glossary of investment terms 19
risk of market value fluctuations until the security can be sold and may encounter delays and incur costs
in liquidating the security.
Reverse repurchase agreements involve the sale of a security by the Portfolio to another party (generally a
bank or dealer) in return for cash and an agreement by the Portfolio to buy the security back at a specified
price and time. This technique will be used primarily to provide cash to satisfy unusually high redemption
requests, or for other temporary or emergency purposes.
Short sales in which the Portfolio may engage may be of two types, short sales ‘‘against the box’’ or
‘‘naked’’ short sales. Short sales against the box involve selling either a security that the Portfolio owns, or
a security equivalent in kind or amount to the security sold short that the Portfolio has the right to obtain,
for delivery at a specified date in the future. Naked short sales involve selling a security that the Portfolio
borrows and does not own. The Portfolio may enter into a short sale to hedge against anticipated declines
in the market price of a security or to reduce portfolio volatility. If the value of a security sold short
increases prior to the scheduled delivery date, the Portfolio loses the opportunity to participate in the gain.
For ‘‘naked’’ short sales, the Portfolio will incur a loss if the value of a security increases during this period
because it will be paying more for the security than it has received from the purchaser in the short sale
and if the price declines during this period, the Portfolio will realize a short-term capital gain. Although
the Portfolio’s potential for gain as a result of a short sale is limited to the price at which it sold the
security short less the cost of borrowing the security, its potential for loss is theoretically unlimited because
there is no limit to the cost of replacing the borrowed security.
When-issued, delayed delivery and forward transactions generally involve the purchase of a security with
payment and delivery at some time in the future – i.e., beyond normal settlement. The Portfolio does not
earn interest on such securities until settlement and bear the risk of market value fluctuations in between
the purchase and settlement dates. New issues of stocks and bonds, private placements and
U.S. government securities may be sold in this manner.
You can request other information, including a Statement of Additional
Information, Annual Report or Semiannual Report, free of charge, by
contacting your insurance company or plan sponsor or visiting our Web
site at janus.com. In the Portfolio’s Annual and Semiannual Reports, you
will find a discussion of the market conditions and investment strategies
that significantly affected the Portfolio’s performance during its last
fiscal year. Other information is also available from financial
intermediaries that sell Shares of the Portfolio.
The Statement of Additional Information provides detailed information
about the Portfolio and is incorporated into this Prospectus by reference.
You may review and copy information about the Portfolio (including the
Portfolio’s Statement of Additional Information) at the Public Reference
Room of the SEC or get text only copies, after paying a duplicating fee,
by sending an electronic request by e-mail to [email protected] or by
writing to or calling the Public Reference Room, Washington, D.C.
20549-0102 (1-202-942-8090). You may also obtain reports and other
information about the Portfolio from the Electronic Data Gathering
Analysis and Retrieval (EDGAR) Database on the SEC’s Web site at
http://www.sec.gov.
www.janus.com
100 Fillmore Street
Denver, CO 80206-4928
1-800-525-0020
Investment Company Act File No. 811-7736
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MFS® VARIABLE INSURANCE TRUST
SM
MAY 1, 2002
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Prospectus
Initial Class
MFS® EMERGING GROWTH SERIES
This Prospectus describes one series of the MFS Variable Insurance Trust (referred to as the trust):
1. MFS Emerging Growth Series seeks to provide long-term growth of capital (referred to as the Emerging Growth Series).
The Securities and Exchange Commission has not approved or disapproved the series’ shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is committing a crime.
NAME: MFS CUNA Mutual #1 Tailored VIT
PROJ: P1930wbn02
JOB: 02wbn2494
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AS: Merrill Woburn: 781-939-0500
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GRAPHICS: mfs¤ no tag.eps
TRIM: 8.5" x 11"
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TABLE OF CONTENTS
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Page
I
Expense Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
II
Risk Return Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
1. Emerging Growth Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
III
Certain Investment Strategies and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
IV
Management of the Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
V
Description of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
VI
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
VII
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7
Appendix A — Investment Techniques and Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A-1
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The trust offers shares of its 15 series to separate accounts established by insurance companies in order to serve as investment vehicles for
variable annuity and variable life insurance contracts and to qualified pension and retirement plans. Each of these series is managed by
Massachusetts Financial Services Company (referred to as MFS or the adviser). One of these is described below.
I EXPENSE SUMMARY
Expense Table
This table describes the fees and expenses that you may pay when you hold initial class shares of each series. These fees and expenses do not
take into account the fees and expenses imposed by insurance companies through which your investment in a series may be made.
Annual Series Operating Expenses (expenses that are deducted from a series’ assets):
Emerging
Growth
Series
Management Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Expenses(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Annual Series Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Expenses(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.75%
0.12%
0.87%
N/A
0.87%
(1) Each series has an expense offset arrangement which reduces the series’ custodian fee based upon the amount of cash maintained by the series with its custodian and
dividend disbursing agent. Each series may enter into other such arrangements and directed brokerage arrangements, which would also have the effect of reducing the
series’ expenses. “Other Expenses” do not take into account these expense reductions, and are therefore higher than the actual expenses of the series. Had these fee
reductions been taken into account, “Net Expenses” would be lower for certain series and would equal 0.86% for Emerging Growth Series.
(2) “Other Expenses” are based on estimated amounts for the current fiscal year.
Example of Expenses—Initial Class
These examples are intended to help you compare the cost of investing in the series with the cost of investing in other mutual funds. These examples
do not take into account the fees and expenses imposed by insurance companies through which your investment in a series may be made.
The examples assume that:
• You invest $10,000 in the series for the time periods indicated and you redeem your shares at the end of the time periods;
• Your investment has a 5% return each year and dividends and other distributions are reinvested; and
• The series’ operating expenses remain the same, except that for the Capital Opportunities Series, Mid Cap Growth Series, New Discovery
Series, High Income Series, Strategic Income Series, Global Equity Series, Bond Series, Money Market Series and Value Series the series’
total operating expenses are assumed to be the series’ “Net Expenses” for the first year, and the series’ “Total Annual Series Operating
Expenses” for subsequent years (see the expense table on the previous page).
Although your actual costs may be higher or lower, under these assumptions your costs would be:
Period
1 Year
3 Years
5 Years
10 Years
$89
$278
$482
$1,073
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RISK RETURN SUMMARY
Investment strategies which are common to all series are described under the caption “Certain Investment Strategies.”
1: Emerging Growth Series
Investment Objective
The series’ investment objective is long term growth of capital. This objective may be changed without shareholder approval.
Principal Investment Policies
The series invests, under normal market conditions, at least 65% of its net assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts for those securities, of emerging growth companies. Emerging growth companies are
companies which MFS believes are either:
• early in their life cycle but which have the potential to become major enterprises, or
• major enterprises whose rates of earnings growth are expected to accelerate because of special factors, such as rejuvenated management,
new products, changes in consumer demand, or basic changes in the economic environment.
Emerging growth companies may be of any size, and MFS would expect these companies to have products, technologies, management,
markets and opportunities which will facilitate earnings growth over time that is well above the growth rate of the overall economy and the
rate of inflation. The series’ investments may include securities listed on a securities exchange or traded in the over-the-counter (OTC) markets.
MFS uses a bottom-up, as opposed to a top-down, investment style in managing the equity-oriented funds (such as the series) it advises. This
means that securities are selected based upon fundamental analysis (such as an analysis of earnings, cash flows, competitive position and
management’s abilities) performed by the series’ portfolio manager and MFS’ large group of equity research analysts.
While the series is a diversified fund and therefore spreads its investments across a number of issuers, it may invest a relatively large percentage
of its assets in a single issuer as compared to other funds managed by MFS.
The series may invest in foreign securities (including emerging market securities), through which it may have exposure to foreign currencies.
The series has engaged and may engage in active and frequent trading to achieve its principal investment strategies.
Principal Risks of an Investment
The principal risks of investing in the series and the circumstances reasonably likely to cause the value of your investment in the series to
decline are described below. The share price of the series generally changes daily based on market conditions and other factors. Please note
that there are many circumstances which could cause the value of your investment in the series to decline, and which could prevent the series
from achieving its objective, that are not described here.
The principal risks of investing in the series are:
• Market Risk: This is the risk that the price of a security held by the series will fall due to changing economic, political or market conditions
or disappointing earnings results.
• Emerging Growth Risk: Prices of securities react to the economic condition of the company that issued the security. The series’ equity
investments in an issuer may rise and fall based on the issuer’s actual and anticipated earnings, changes in management and the potential
for takeovers and acquisitions. Investments in emerging growth companies may be subject to more abrupt or erratic market movements and
may involve greater risks than investments in other companies. Emerging growth companies often:
have limited product lines, markets and financial resources
are dependent on management by one or a few key individuals
have shares which suffer steeper than average price declines after disappointing earnings reports and are more difficult to sell at
satisfactory prices
• Over-the-Counter Risk: OTC transactions involve risks in addition to those incurred by transactions in securities traded on exchanges. OTClisted companies may have limited product lines, markets or financial resources. Many OTC stocks trade less frequently and in smaller
volume than exchange-listed stocks. The values of these stocks may be more volatile than exchange-listed stocks, and the series may
experience difficulty in purchasing or selling these securities at a fair price.
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• Foreign Securities Risk: Investments in foreign securities involve risks relating to political, social and economic developments abroad, as well
as risks resulting from the differences between the regulations to which U.S. and foreign issuers and markets are subject:
These risks may include the seizure by the government of company assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets, and political or social instability.
Enforcing legal rights may be difficult, costly and slow in foreign countries, and there may be special problems enforcing claims
against foreign governments.
Foreign companies may not be subject to accounting standards or governmental supervision comparable to U.S. companies, and there
may be less public information about their operations.
Foreign markets may be less liquid and more volatile than U.S. markets.
Foreign securities often trade in currencies other than the U.S. dollar, and the series may directly hold foreign currencies and purchase
and sell foreign currencies through forward exchange contracts. Changes in currency exchange rates will affect the series’ net asset
value, the value of dividends and interest earned, and gains and losses realized on the sale of securities. An increase in the strength
of the U.S. dollar relative to these other currencies may cause the value of the series to decline. Certain foreign currencies may be
particularly volatile, and foreign governments may intervene in the currency markets, causing a decline in value or liquidity in the
series’ foreign currency holdings. By entering into forward foreign currency exchange contracts, the series may be required to forego
the benefits of advantageous changes in exchange rates and, in the case of forward contracts entered into for the purpose of
increasing return, the series may sustain losses which will reduce its gross income. Forward foreign currency exchange contracts
involve the risk that the party with which the series enters into the contract may fail to perform its obligations to the series.
• Emerging Markets Risk: Emerging markets are generally defined as countries in the initial stages of their industrialization cycles with low
per capita income. The markets of emerging markets countries are generally more volatile than the markets of developed countries with
more mature economies. All of the risks of investing in foreign securities described above are heightened by investing in emerging markets
countries.
• Issuer Concentration Risk: Because the series may invest a relatively large percentage of its assets in a single issuer as compared to other
funds managed by MFS, the series performance may be particularly sensitive to changes in the value of securities of these issuers.
• Active or Frequent Trading Risk: The series has engaged and may engage in active and frequent trading to achieve its principal investment
strategies. Frequent trading increases transaction costs, which could detract from the series’ performance.
• As with any mutual fund, you could lose money on your investment in the series.
An investment in the series is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
Bar Chart and Performance Table
The bar chart and performance table below are intended to indicate some of the risks of investing in the series by showing changes in the
series’ performance over time. The performance table also shows how the series performance over time compares with that of one or more
broad measures of market performance. The chart and table provide past performance information based on calendar year periods. The series’
past performance does not necessarily indicate how the series will perform in the future. The returns shown do not reflect fees and charges
imposed under the variable annuity and life insurance contracts through which an investment may be made. If these fees and charges were
included, they would reduce these returns.
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Bar Chart
The bar chart shows changes in the annual total returns of the series’ initial class, assuming the reinvestment of distributions.
100
76.71%
80
60
34.16%
40
20
17.02%
21.90%
0
-20
(19.61)%
-40
(33.49)%
-60
1996
1997
1999
1998
2000
2001
During the period shown in the bar chart, the highest quarterly return was 55.05% (for the calendar quarter ended December 31, 1999) and
the lowest quarterly return was (29.03)% (for the calendar quarter ended September 30, 2001).
Performance Table
This table shows how the average annual total returns of the series’ shares compares to a broad measure of market performance and various
other market indicators and assumes the reinvestment of distributions.
Average Annual Total Returns as of December 31, 2001
1 Year
Emerging Growth Series—Initial Class
Russell 2000 Index**†
Russell 3000® Growth Index**††
(33.49)%
2.49%
(19.63)%
5 Year
9.10%
7.52%
7.72%
Life*
12.41%
9.37%
10.77%
* Series performance figures are for the period from the commencement of the series’ investment operations, July 24, 1995, through December 31, 2001. Index returns
are from August 1, 1995.
** Source: Standard & Poor’s Micropal, Inc.
† The Russell 2000 Index is a broad-based, unmanaged index comprised of 2,000 of the smallest U.S.-domiciled company common stocks (on the basis of capitalization)
that are traded in the United States on the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and NASDAQ.
†† The Russell 3000 companies are the largest U.S. companies based on total market capitalization, which represent approximately 98% of the investable U.S. market.
The Russell 3000 Growth Index measures the performance of those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth
values.
Portfolio Managers
The series is managed by a team of portfolio managers.
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III
CLEAN
CERTAIN INVESTMENT STRATEGIES AND RISKS
Further Information on Investment Strategies and Risks
Each series may invest in various types of securities and engage in various investment techniques and practices which are not the principal
focus of the series and therefore are not described in this prospectus. The types of securities and investment techniques and practices in which
a series may engage, including the principal investment techniques and practices described above, are identified in Appendix A to this
Prospectus, and are discussed, together with their risks, in the trust’s Statement of Additional Information (referred to as the SAI), which you
may obtain by contacting MFS Service Center, Inc. (see back cover for address and phone number).
Temporary Defensive Policies
Each series may depart from its principal investment strategies by temporarily investing for defensive purposes when adverse market,
economic or political conditions exist. While a series invests defensively, it may not be able to pursue its investment objective. A series
defensive investment position may not be effective in protecting its value.
Active or Frequent Trading
Each series may engage in active and frequent trading to achieve its principal investment strategies. This may result in the realization and
distribution to shareholders of higher capital gains as compared to a series with less active trading policies. Frequent trading also increases
transaction costs, which could detract from the series’ performance.
IV
MANAGEMENT OF THE SERIES
Investment Adviser
Massachusetts Financial Services Company (referred to as MFS or the adviser) is the investment adviser to each series. MFS is America’s
oldest mutual fund organization. MFS and its predecessor organizations have a history of money management dating from 1924 and the
founding of the first mutual fund, Massachusetts Investors Trust. Net assets under the management of the MFS organization were
approximately $137 billion as of December 31, 2001. MFS is located at 500 Boylston Street, Boston, Massachusetts 02116.
MFS provides investment management and related administrative services and facilities to each series, including portfolio management and
trade execution. For these services, each series pays MFS an annual management fee as set forth in the Expense Summary.
MFS or its affiliates generally pay an administrative service fee to insurance companies which use the series as underlying investment vehicles
for their variable annuity and variable life insurance contracts based upon the aggregate net assets of the series attributable to these contracts.
These fees are not paid by the series, their shareholders, or by the contract holders.
Administrator
MFS provides each series with certain financial, legal, compliance, shareholder communications and other administrative services. MFS is
reimbursed by each series for a portion of the costs it incurs in providing these services.
Distributor
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned subsidiary of MFS, is the distributor of shares of the series.
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Shareholder Servicing Agent
MFS Service Center, Inc. (referred to as MFSC), a wholly owned subsidiary of MFS, performs transfer agency and certain other services for each
series, for which it receives compensation from each series.
V
DESCRIPTION OF SHARES
The trust offers two classes of shares—initial class shares and service class shares. Initial class shares are offered through this prospectus.
Service class shares, which bear a Rule 12b-1 distribution fee, are available through a separate prospectus supplement. These shares are
offered to separate accounts established by insurance companies in order to serve as investment vehicles for variable annuity and variable life
insurance contracts. The trust also offers shares of each of its series to qualified pension and retirement plans. All purchases, redemptions and
exchanges of shares are made through these insurance company separate accounts and plans, which are the record owner of the shares.
Contract holders and plan beneficiaries seeking to purchase, redeem or exchange interests in the trust’s shares should consult with the
insurance company which issued their contracts or their plan sponsor.
VI
OTHER INFORMATION
Pricing of Series’ Shares
The price of each series’ shares is based on its net asset value. The net asset value of each series’ shares is determined once each day during
which the New York Stock Exchange is open for trading as of the close of regular trading on the New York Stock Exchange (generally, 4:00 p.m.,
Eastern time) (referred to as the valuation time). The New York Stock Exchange is closed on most national holidays and Good Friday. To
determine net asset value, each series values its assets at current market values, or at fair value as determined by the adviser under the
direction of the Board of Trustees that oversees the series if current market values are unavailable.
The securities held by each series that trade in foreign markets are usually valued on the basis of the most recent closing market prices in
those markets. Most foreign markets close before the series’ valuation time, generally at 4:00 p.m., Eastern time. For example, for securities
primarily traded in the Far East, the most recent closing prices may be as much as 15 hours old at 4:00 p.m., Eastern time. Normally,
developments that could affect the values of portfolio securities that occur between the close of the foreign market and the series’ valuation
time will not be reflected in the series’ net asset value. However, if a determination is made that such developments are so significant that
they will clearly and materially affect the value of the series’ securities, the series may adjust the previous closing prices to reflect what it
believes to be the fair value of the securities as of the series’ valuation time. The series may fair value securities in other situations, for
example, when a particular foreign market is closed but the series is open.
Insurance companies and plan sponsors are the designees of the trust for receipt of purchase, exchange and redemption orders from
contractholders and plan beneficiaries. An order submitted to the trust’s designee by the valuation time will receive the net asset value next
calculated; provided that the trust receives notice of the order generally by 9:30 a.m. eastern time on the next day on which the New York Stock
Exchange is open for trading.
Certain series invest in securities which are primarily listed on foreign exchanges that trade on weekends and other days when the series does
not price its shares. Therefore, the value of these series’ shares may change on days when you will not be able to purchase or redeem their
shares.
Distributions
Each series intends to pay substantially all of its net income (including any realized net capital and net foreign currency gains) to shareholders
as dividends at least annually.
Tax Considerations
The following discussion is very general. You are urged to consult your tax adviser regarding the effect that an investment in a series may have
on your tax situation. Each series of the trust is treated as a separate corporation for federal tax purposes. As long as a series qualifies for
treatment as a regulated investment company (which each series has done in the past and intends to do in the future), it pays no federal income
tax on the net earnings and net realized gains it distributes to shareholders. In addition, each series also intends to continue to diversify its
assets to satisfy the federal diversification tax rules applicable to separate accounts that fund variable insurance and annuity contracts.
Shares of the series are offered to insurance company separate accounts and to qualified retirement and pension plans. You should consult
with the insurance company that issued your contract or your plan sponsor to understand the federal tax treatment of your investment.
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Right to Reject or Restrict Purchase and Exchange Orders
Purchases and exchanges should be made for investment purposes only. Each series reserves the right to reject or restrict any specific purchase
or exchange request. Because an exchange request involves both a request to redeem shares of one series and to purchase shares of another
series, the series consider the underlying redemption and purchase requests conditioned upon the acceptance of each of these underlying
requests. Therefore, in the event that the series reject an exchange request, neither the redemption nor the purchase side of the exchange will
be processed. When a series determines that the level of exchanges on any day may be harmful to its remaining shareholders, the series may
delay the payment of exchange proceeds for up to seven days to permit cash to be raised through the orderly liquidation of its portfolio
securities to pay the redemption proceeds. In this case, the purchase side of the exchange will be delayed until the exchange proceeds are
paid by the redeeming series.
Excessive Trading Practices
The series do not permit market-timing or other excessive trading practices. Excessive, short-term (market-timing) trading practices may disrupt
portfolio management strategies and harm series’ performance. As noted above, each series reserves the right to reject or restrict any purchase
order (including exchanges) from any investor. To minimize harm to the series and their shareholders, the series will exercise these rights if an
investor has a history of excessive trading or if an investor’s trading, in the judgment of the series, has been or may be disruptive to a series.
In making this judgment, the series may consider trading done in multiple accounts under common ownership or control.
In-kind Distributions
The series have reserved the right to pay redemption proceeds by a distribution in-kind of portfolio securities (rather than cash). In the event
that the series makes an in-kind distribution, you could incur the brokerage and transaction charges when converting the securities to cash,
and the securities may increase or decrease in value until you sell them. The series do not expect to make in-kind distributions.
Unique Nature of Series
MFS may serve as the investment adviser to other funds which have investment goals and principal investment policies and risks similar to
those of the series, and which may be managed by the series’ portfolio manager(s). While a series may have many similarities to these other
funds, its investment performance will differ from their investment performance. This is due to a number of differences between a series and
these similar products, including differences in sales charges, expense ratios and cash flows.
Potential Conflicts
Shares of the series are offered to the separate accounts of insurance companies that may be affiliated or unaffiliated with MFS and each
other (“shared funding”) and may serve as the underlying investments for both variable annuity and variable life insurance contracts (“mixed
funding”). Due to differences in tax treatment or other considerations, the interests of various contract owners might at some time be in
conflict. The trust currently does not foresee any such conflict. Nevertheless, the board of trustees which oversees the series intends to monitor
events in order to identify any material irreconcilable conflicts which may possibly arise and to determine what action, if any, should be taken
in response. If such a conflict were to occur, one or more separate accounts of the insurance companies might be required to withdraw its
investments in one or more series. This might force a series to sell securities at disadvantageous prices.
VII
The financial highlights table is intended to help you understand the series’ financial performance for the past five years, or, if a series has not
been in operation that long, since the time it commenced investment operations. Certain information reflects financial results for a single
series’ share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in a series
(assuming reinvestment of all distributions). This information has been audited by the trust’s independent auditors, whose report, together with
the trust’s financial statements, are included in the trust’s Annual Report to shareholders. The series’ Annual Report is available upon request
by contacting MFSC (see back cover for address and telephone number). These financial statements are incorporated by reference into the SAI.
The trust’s independent auditors are Deloitte & Touche LLP.
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1. Emerging Growth Series—Initial Class
2001
Per share data (for a share outstanding throughout
each period):
Net asset value — beginning of period . . . . . . . . . . . . . . . . . .
Income from investment operations# —
Net investment income (loss)§ . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized gain on investments and
foreign currency transactions . . . . . . . . . . . . . . . . . . . . .
Total from investment operations . . . . . . . . . . . . . . .
Less distributions declared to shareholders —
From net realized gain on investments and foreign
currency transactions . . . . . . . . . . . . . . . . . . . . . . . . . . .
In excess of net realized gain on investments and
foreign currency transactions . . . . . . . . . . . . . . . . . . . . .
Total distributions declared to shareholders . . . . . . .
Net asset value — end of period . . . . . . . . . . . . . . . . . . . . . . .
Total return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratios (to average net assets)/Supplemental data§:
Expenses## . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income (loss) . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets at end of period (000 Omitted) . . . . . . . . . . . . . . . .
2000
1999
1998
1997
$
28.85
$
37.94
$
21.47
$ 16.13
$ 13.24
$
(0.03)
$
(0.01)
$
(0.06)
$
(0.05)
$ (0.06)
$
(9.44)
(9.47)
$
(7.07)
(7.08)
$
16.53
16.47
$
5.55
5.50
$
2.95
2.89
(1.04)
$
(2.01)
$
—
$
(0.05)
$
—
(0.36)
(1.40)
$
17.98
$
(33.49)%
—
—
37.94
76.71%
(0.11)
$ (0.16)
$ 21.47
34.16%
—
$
—
$ 16.13
21.90%
0.87%
0.85%
0.84%
(0.14)%
(0.04)%
(0.23)%
231%
200%
176%
$1,462,469
$2,312,406
$2,132,528
0.85%
(0.29)%
71%
$908,987
0.90%
(0.38)%
112%
$384,480
$
$
—
(2.01)
$
28.85
$
(19.61)%
§ Prior to January 1, 1998, the investment adviser voluntarily agreed to maintain, subject to reimbursement by the series, the expenses of the series at not more than
1.00% of average daily net assets. To the extent actual expenses were over or under this limitation, the net investment loss per share and the ratios would have been:
Net investment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratios (to average net assets):
Expenses## . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
—
—
—
—
$
(0.05)
0.87%
(0.35)%
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from certain offset arrangements.
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Appendix A
CLEAN
Investment Techniques and Practices
In pursuing its investment objective and investment policies, the Emerging Growth Series may engage in the following principal and nonprincipal investment techniques and practices to the extent to which these techniques and practices are consistent with the series’ investment
objective. Investment techniques and practices which the series will use or currently anticipates using are denoted by a check () mark.
However, the series may not use all of these techniques and practices. Investment techniques and practices which the series does not currently
anticipate using but which the series reserves the freedom to use are denoted by a dash (—) mark. Investment techniques and practices which
are the principal focus of the series are also described, together with their risks, in the Risk Return Summary of the Prospectus. Both principal
and non-principal investment techniques and practices are described, together with their risks, in the SAI.
Investment Techniques/Practices
Symbols
series uses, or currently
anticipates using
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities
Corporate Asset-Backed Securities
Mortgage Pass-Through Securities
Stripped Mortgage-Backed Securities
Corporate Securities
Loans and Other Direct Indebtedness
Lower Rated Bonds
Municipal Bonds
U.S. Government Securities
Variable and Floating Rate Obligations
Zero Coupon Bonds, Deferred Interest Bonds
and PIK Bonds
Equity Securities
Foreign Securities Exposure
Brady Bonds
Depositary Receipts
Dollar-Denominated Foreign Debt Securities
Emerging Markets
Foreign Securities
Forward Contracts
Futures Contracts
Indexed Securities/Structured Products
Inverse Floating Rate Obligations
— permitted, but series does not
currently anticipate using
Investment in Other Investment Companies
Open-End Funds
Closed-End Funds
Lending of Portfolio Securities
Leveraging Transactions
Bank Borrowings
—
—
—
—
—
—
Mortgage “Dollar-Roll” Transactions
Reverse Repurchase Agreements
Options
Options on Foreign Currencies
Options on Futures Contracts
Options on Securities
Options on Stock Indices
Reset Options
“Yield Curve” Options
Repurchase Agreements
Short Sales
Short Term Instruments
Swaps and Related Derivative Instruments
Temporary Borrowings
Temporary Defensive Positions
“When-Issued” Securities
·
—
—
—
—
—
—
—
—
—
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CLEAN
MFS® VARIABLE INSURANCE TRUSTSM
If you want more information about the trust and its series, the following documents are available free upon request:
Annual/Semiannual Reports. These reports contain information about the series’ actual investments. Annual reports discuss the effect of
recent market conditions and the series’ investment strategy on the series’ performance during their last fiscal year.
Statement of Additional Information (SAI). The SAI, dated May 1, 2002, provides more detailed information about the trust and its series
and is incorporated into this prospectus by reference.
You can get free copies of the annual/semiannual reports, the SAI and other information about the trust and its series, and
make inquiries about the trust and its series, by contacting:
MFS Service Center, Inc.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-343-2829, ext. 3500
Internet: http://www.mfs.com
Information about the trust and its series (including its prospectus, SAI and shareholder reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-0102
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 202-942-8090. Reports and other
information about the trust and its series are available on the EDGAR Databases on the Commission’s Internet website at http://www.sec.gov,
and copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address:
[email protected], or by writing the Public Reference Section at the above address.
The trust’s Investment Company Act file number is 811-8326
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ISP02.fm Page -1 Monday, April 8, 2002 3:24 PM
P ROSPECTUS
May 1, 2002
T. ROWE PRICE
International
Stock Portfolio
A stock fund seeking long-term capital growth
through investments in non-U.S. companies.
Invest With Confidence
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to the
contrary is a criminal offense.
ISP02.fm Page 0 Monday, April 8, 2002 3:24 PM
T. Rowe Price International Series, Inc.
T. Rowe Price International Stock Portfolio
Prospectus
May 1, 2002
1
2
3
T. Rowe Price International,
ABOUT THE FUND
Objective, Strategy, Risks, and Expenses
1
Other Information About the Fund
4
Inc. managed $24.4 billion in
foreign stocks and bonds as of
ABOUT YOUR ACCOUNT
December 31, 2001, through
Pricing Shares and Receiving
Sale Proceeds
5
Rights Reserved by the Funds
6
its offices in Baltimore,
Dividends and Other Distributions
7
London, Tokyo, Singapore,
MORE ABOUT
THE
Hong Kong, Buenos Aires, and
FUND
Organization and Management
Understanding Performance Information
8
10
Investment Policies and Practices
10
14
Mutual fund shares are not deposits or
obligations of, or guaranteed by, any
depository institution. Shares are not
insured by the FDIC, Federal Reserve, or
any other government agency, and are
subject to investment risks, including
possible loss of the principal amount
invested.
Paris.
A BOUT THE F UND
1
OBJECTIVE, STRATEGY, RISKS, AND EXPENSES
The fund should be used as an investment option for variable annuity and variable life insurance contracts.
What is the fund’s objective?
The fund seeks long-term growth of capital through investments primarily in the common stocks of
established, non-U.S. companies.
What is the fund’s principal investment strategy?
We expect to invest substantially all of the fund’s assets in stocks outside the U.S. and to diversify
broadly among developed and emerging countries throughout the world. Stock selection reflects a
growth style. We may purchase the stocks of companies of any size, but our focus will typically be on
large and, to a lesser extent, medium-sized companies. Normally, at least 80% of the fund’s net assets
will be invested in stocks.
T. Rowe Price International, Inc. (“T. Rowe Price International”) employs in-depth fundamental
research in an effort to identify companies capable of achieving and sustaining above-average, longterm earnings growth. We seek to purchase such stocks at reasonable prices in relation to present or
anticipated earnings, cash flow, or book value, and valuation factors often influence our allocations
among large-, mid-, or small-cap shares.
While we invest with an awareness of the global economic backdrop and our outlook for industry
sectors and individual countries, bottom-up stock selection is the focus of our decision-making.
Country allocation is driven largely by stock selection, though we may limit investments in markets
that appear to have poor overall prospects.
In selecting stocks, we generally favor companies with one or more of the following characteristics:
•
•
•
•
•
•
•
leading market position;
attractive business niche;
strong franchise or monopoly;
technological leadership or proprietary advantages;
seasoned management;
earnings growth and cash flow sufficient to support growing dividends; and
healthy balance sheet with relatively low debt.
In pursuing its investment objective, the fund’s management has the discretion to purchase some
securities that do not meet its normal investment criteria, as described above, when it perceives an
unusual opportunity for gain. These special situations might arise when the fund’s management
believes a security could increase in value for a variety of reasons, including a change in management,
an extraordinary corporate event, or a temporary imbalance in the supply of or demand for the securities.
While the fund invests primarily in common stocks, the fund may also purchase other securities,
including futures and options, in keeping with the fund’s objective.
The fund may sell securities for a variety of reasons, such as to secure gains, limit losses, or redeploy
assets into more promising opportunities.
T. R OWE P RICE
2
What are the main risks of investing in the fund?
As with all stock funds, the fund’s share price can fall because of weakness in one or more of its primary equity markets, a particular industry, or specific holdings. Stock markets can decline for many
reasons, including adverse political or economic developments, changes in investor psychology, or
heavy institutional selling. The prospects for an industry or company may deteriorate because of a
variety of factors, including disappointing earnings or changes in the competitive environment. In
addition, our assessment of companies held in the fund may prove incorrect, resulting in losses or
poor performance even in rising markets.
Funds that invest overseas generally carry more risk than funds that invest strictly in U.S. assets. Even
investments in countries with highly developed economies are subject to significant risks. Some particular risks affecting this fund include the following:
• Currency risk This refers to a decline in the value of a foreign currency versus the U.S. dollar, which
reduces the dollar value of securities denominated in that currency. The overall impact on a fund’s
holdings can be significant, unpredictable, and long-lasting depending on the currencies represented
in the portfolio and how each one appreciates or depreciates in relation to the U.S. dollar, and whether
currency positions are hedged. Under normal conditions, the fund does not engage in extensive
foreign currency hedging programs. Further, exchange rate movements are volatile and it is not
possible to effectively hedge the currency risks of many developing countries.
• Geographic risk The economies and financial markets of certain regions–such as Latin America and
Asia–can be interdependent and may decline all at the same time.
• Emerging market risk To the extent the fund invests in emerging markets, it is subject to greater risk
than a fund investing only in developed markets. The economic and political structures of developing nations, in most cases, do not compare favorably with the U.S. or other developed countries in
terms of wealth and stability, and their financial markets often lack liquidity. Fund performance will
likely be hurt by exposure to nations in the midst of hyperinflation, currency devaluation, trade disagreements, sudden political upheaval, or interventionist government policies. Significant buying or
selling by a few major investors may also heighten the volatility of emerging markets. These factors
make investing in such countries significantly riskier than in other countries and any one of them
could cause the fund’s share price to decline.
• Other risks of foreign investing Risks can result from the varying stages of economic and political
development, differing regulatory environments, trading days, and accounting standards, and higher
transaction costs of non-U.S. markets. Investments outside the United States could be subject to governmental actions such as capital or currency controls, nationalization of a company or industry,
expropriation of assets, or imposition of high taxes.
3 While certain countries have made progress in economic growth, liberalization, fiscal discipline, and
political and social stability, there is no assurance these trends will continue.
• Futures/options risk To the extent the fund uses futures and options, it is exposed to additional volatility and potential losses.
As with any mutual fund, there can be no guarantee the fund will achieve its objective.
3 The fund’s share price may decline, so when you sell your shares, you may lose money.
A BOUT
TH E
3
F UND
How can I tell if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and your tolerance for risk. If
you want to diversify your domestic stock portfolio by adding foreign investments, seek the longterm capital appreciation potential of growth stocks, and are comfortable with the risks that accompany foreign investments, the fund could be an appropriate part of your overall investment strategy.
3 The fund should not represent your complete investment program or be used for short-term trading
purposes.
How has the fund performed in the past?
The bar chart showing calendar year returns and the average annual total return table indicate risk by
illustrating how much returns can differ from one year to the next and over time. Fund past performance is no guarantee of future returns.
The fund can also experience short-term performance swings, as shown by the best and worst calendar quarter returns during the years depicted.
Calendar Year Returns
'95
11.18
'96
14.70
'97
3.09
'98
15.86
'99
33.32
'00
-17.84
'01
-22.21
-24
-16
-8
0
8
16
Quarter
Ended
24
32
40 48%
Total
Return
Best Quarter
12/31/99
24.01%
Worst Quarter
3/31/01
-15.20%
Table 1 Average Annual Total Returns
Periods ended
December 31, 2001
1 year
5 years
Since inception
(3/31/94)
-22.21%
0.35%
3.66%
MSCI EAFE Index
-21.21
1.17
3.57
Lipper Variable Annuity Underlying
International Funds Average
-21.48
2.09
5.17
These figures include changes in principal value, reinvested dividends, and capital gain distributions, if any.
Figures do not reflect fees at the insurance product or contract level; if those fees were included, returns would be lower.
T. R OWE P RICE
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OTHER INFORMATION ABOUT THE FUND
What are some of the potential rewards of investing overseas through the fund?
Investing abroad increases the opportunities available to you. Some foreign countries may have
greater potential for economic growth than the U.S. Investing a portion of your overall portfolio in
foreign stock funds can enhance your diversification while providing the opportunity to boost longterm returns.
How does the portfolio manager try to reduce risk?
The principal tools we use to try to reduce risk are intensive research and limiting exposure to any one
industry or company. Currency hedging techniques may be used from time to time.
• T. Rowe Price International employs a team of experienced portfolio managers and analysts, and has
offices in London, Tokyo, Singapore, Hong Kong, Buenos Aires, Paris, and Baltimore. Portfolio
managers keep close watch on individual investments as well as on political and economic trends in
each country and region. Holdings are adjusted according to the manager’s analysis and outlook.
• The impact on the fund’s share price from a drop in the price of a particular stock is reduced substantially by investing in a portfolio with dozens of different companies. Likewise, the impact of unfavorable developments in a particular country is reduced when investments are spread among many
countries. However, the economies and financial markets of countries in a certain region may be
influenced heavily by one another.
Is there other information I can review before making a decision?
Investment Policies and Practices in Section 3 discusses various types of portfolio securities the fund
may purchase as well as types of management practices the fund may use.
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PRICING SHARES AND RECEIVING SALE PROCEEDS
Here are some procedures you should know when investing in the fund. For instructions on
how to purchase and redeem shares of the fund, read the insurance contract prospectus.
Shares of the fund are designed to be offered to insurance company separate accounts established for the purpose of funding variable annuity contracts. They may also be offered to insurance company separate accounts established for the purpose of funding variable life contracts.
Variable annuity and variable life contract holders or participants are not the shareholders of
the fund. Rather, the separate account of the insurance company is the shareholder. The variable annuity and variable life contracts are described in separate prospectuses issued by the
insurance companies. The fund assumes no responsibility for such prospectuses, or variable
annuity or variable life contracts.
Shares of the fund are sold and redeemed without the imposition of any sales commission or
redemption charge. However, certain other charges may apply to annuity or life contracts.
Those charges are disclosed in the insurance contract prospectus.
Your ability to exchange from this fund to any other T. Rowe Price fund that serves as an
investment option under your insurance contract is governed by the terms of that contract and
the insurance contract prospectus, as well as the fund’s excessive trading policy described in
this section.
How and when shares are priced
The share price (also called “net asset value” or NAV per share) for a fund is calculated at the
close of the New York Stock Exchange, normally 4 p.m. ET, each day the New York Stock
Exchange is open for business. To calculate the NAV, the fund’s assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by the number of shares
outstanding. Market values are used to price stocks and bonds. Amortized cost is used to price
securities held by money market funds.
The securities of funds investing in foreign markets are usually valued on the basis of the
most recent closing market prices at 4 p.m. ET. Most foreign markets close before that time.
For securities primarily traded in the Far East, for example, the most recent closing prices
may be as much as 15 hours old at 4 p.m. Normally, developments that could affect the values of portfolio securities that occur between the close of the foreign market and 4 p.m. ET
will not be reflected in a fund NAV. However, if a fund determines that such developments
are so significant that they will, in its judgment, clearly and materially affect the value of the
fund’s securities, the fund may adjust the previous closing prices to reflect what it believes to
be the fair value of the securities as of 4 p.m. ET. A fund may fair value securities in other situations, for example, when a particular foreign market is closed but the fund is open.
How your purchase, sale, or exchange price is determined
Purchases
The insurance companies purchase shares of the fund for their separate accounts, using premiums allocated by the contract holders or participants. Shares are purchased at the NAV next
determined after the insurance company receives the premium payment in acceptable form.
T. R OWE P RICE
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Initial and subsequent payments allocated to the fund are subject to the limits stated in the
insurance contract prospectus issued by the insurance company.
Redemptions
The insurance companies redeem shares of the fund to make benefit or surrender payments
under the terms of its contracts. Redemptions are processed on any day on which the New
York Stock Exchange is open and are priced at the fund’s NAV next determined after the insurance company receives a surrender request in acceptable form.
Note: The time at which transactions and shares are priced and the time until which orders
are accepted may be changed in case of an emergency or if the New York Stock Exchange
closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
Payment for redeemed shares will be made promptly, but in no event later than seven days
after receipt of your redemption order. However, the right of redemption may be suspended or
the date of payment postponed in accordance with the Investment Company Act of 1940
(“1940 Act”). The amount received upon redemption of the shares of the fund may be more or
less than the amount paid for the shares, depending on the fluctuations in the market value of
the assets owned by the fund.
Excessive Trading
3 T. Rowe Price may bar excessive traders from purchasing shares.
Frequent trades or market timing involving your account or accounts controlled by you can
disrupt management of a fund and raise its expenses. To deter such activity, each fund has
adopted an excessive trading policy. If you violate this policy, you may be barred indefinitely
and without further notice from further purchases of the T. Rowe Price funds. Our excessive
trading policy applies to contract holders and participants notwithstanding any provisions in
your insurance contract:
You can make one purchase and one sale involving the same fund within any 120-day period.
If you exceed this limit or you hold fund shares for less than 60 calendar days, you are in violation of our excessive trading policy. Systematic purchases and redemptions are exempt from
this policy. Transactions accepted by insurance companies in violation of this excessive trading policy or from persons believed to be market timers are subject to rejection or cancellation by the funds.
The terms of your insurance contract may also restrict your ability to trade between the investment options available under your contract.
RIGHTS RESERVED BY THE FUNDS
T. Rowe Price funds and their agents reserve the following rights: (1) to waive or lower investment minimums; (2) to refuse any purchase or exchange order; (3) to cancel or rescind any
purchase or exchange order (including, but not limited to, orders deemed to result in excessive
trading, market timing, fraud, or 5% ownership by individual contract holders or participants)
upon notice to the contract holder or participant within five business days of the trade or if the
written confirmation has not been received by the contract holder or participant, whichever is
A BOUT Y OUR A CCOUNT
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sooner; (4) to freeze any account and suspend account services when notice has been received
of a dispute between the registered or beneficial account owners or there is reason to believe a
fraudulent transaction may occur; (5) to otherwise modify the conditions of purchase and any
services at any time; or (6) to act on instructions believed to be genuine. These actions will be
taken when, in the sole discretion of management, they are deemed to be in the best interest of
the fund.
In an effort to protect T. Rowe Price funds from the possible adverse effects of a substantial
redemption in a large account, as a matter of general policy, no contract holder or participant
or group of contract holders or participants controlled by the same person or group of persons
will knowingly be permitted to purchase in excess of 5% of the outstanding shares of the fund,
except upon approval of the fund’s management.
DIVIDENDS AND OTHER DISTRIBUTIONS
For a discussion of the tax status of your variable annuity contract, please refer to the insurance
contract prospectus.
Dividends and Other Distributions
The policy of the fund is to distribute all of its net investment income and net capital gains
each year to its shareholders, which are the separate accounts established by the various insurance companies in connection with their issuance of variable annuity and variable life contracts. Dividends from net investment income are declared daily and paid monthly for the
Limited-Term Bond and Prime Reserve Portfolios; declared and paid quarterly for the Equity
Income, Equity Index 500, and Personal Strategy Portfolios; and declared and paid annually
for all other portfolios. All fund distributions made to a separate account will be reinvested
automatically in additional fund shares, unless a shareholder (separate account) elects to
receive distributions in cash. Under current law, dividends and distributions made by the
fund to separate accounts generally are not taxable to the separate accounts, the insurance
company, or the contract holder, provided that the separate account meets the diversification
requirements of Section 817(h) of the Internal Revenue Code of 1986, as amended, and other
tax-related requirements are satisfied. The fund intends to diversify its investments in the
manner required under Code Section 817(h).
Foreign Transactions
If the fund pays nonrefundable taxes to foreign governments during the year, the taxes will
reduce fund dividends.
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ORGANIZATION AND MANAGEMENT
How is the fund organized?
The T. Rowe Price International Series, Inc. (the “corporation”) was incorporated in Maryland in
1994. Currently, the corporation consists of one series, the International Stock Portfolio.
While the fund is managed in a manner similar to that of the T. Rowe Price International Stock Fund,
investors should be aware that the fund is not the same fund and will not have the same performance.
Investments made by the fund at any given time may not be the same as those made by the T. Rowe
Price International Stock Fund. Different performance will result due to factors such as differences in
the cash flows into and out of the fund, different fees and expenses, and differences in portfolio size
and positions.
What is meant by “shares”?
Contract holders and participants indirectly (through the insurance company separate account) purchase shares when they put money in a fund offered as an investment option in their insurance contracts. These shares are part of a fund’s authorized capital stock, but share certificates are not issued.
Each share and fractional share entitles the shareholder (the insurance company separate account) to
cast one vote per share on certain fund matters, including the election of fund directors, changes in
fundamental policies, or approval of changes in the fund’s management contract.
The shares of the fund have equal voting rights. The various insurance companies own the outstanding shares of the fund in their separate accounts. These separate accounts are registered under the
Investment Company Act of 1940 or are excluded from registration thereunder. Under current law,
the insurance companies must vote the shares held in registered separate accounts in accordance with
voting instructions received from variable contract holders or participants having the right to give
such instructions.
Do T. Rowe Price funds have annual shareholder meetings?
The funds are not required to hold annual meetings and, to avoid unnecessary costs to fund
shareholders, do not do so except when certain matters, such as a change in fundamental policies,
must be decided. In addition, shareholders representing at least 10% of all eligible votes may call a
special meeting, if they wish, for the purpose of voting on the removal of any fund director or trustee.
If a meeting is held and you cannot attend, you can vote by proxy. Before the meeting, the insurance
company will send you the fund’s proxy materials that explain the issues to be decided and include
instructions on voting.
Who runs the fund?
General Oversight
The corporation is governed by a Board of Directors that meets regularly to review the fund investments, performance, expenses, and other business affairs. The Board elects the corporation’s officers.
The majority of Board members are independent of T. Rowe Price International.
3 All decisions regarding the purchase and sale of fund investments are made by T. Rowe Price
International–specifically by the fund’s Investment Advisory Group.
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Investment Manager
T. Rowe Price International is responsible for the selection and management of the fund’s portfolio
investments. The company, a wholly owned subsidiary of T. Rowe Price Associates. The U.S. office of
T. Rowe Price International is located at 100 East Pratt Street, Baltimore, Maryland 21202. Offices are
also located in London, Tokyo, Singapore, Hong Kong, Buenos Aires, and Paris.
Portfolio Management
The fund has an Investment Advisory Group that has day-to-day responsibility for managing the
portfolio and developing and executing the fund’s investment program. The members of the advisory
group are: Mark C.J. Bickford-Smith, Frances Dydasco, John R. Ford, James B.M. Seddon, and
David J.L. Warren.
Mark Bickford-Smith joined T. Rowe Price International in 1995 and has 17 years of experience in
research and financial analysis. Frances Dydasco joined T. Rowe Price International in 1996 and has
13 years of experience in research and financial analysis. John Ford joined T. Rowe Price International
in 1982 and has 22 years of experience in research and portfolio management. James Seddon joined
T. Rowe Price International in 1987 and has 15 years of experience in portfolio management. David
Warren joined T. Rowe Price International in 1983 and has 22 years of experience in equity research,
fixed-income research, and portfolio management.
The Management Fee
The fund pays T. Rowe Price International an annual fee that includes investment management services and ordinary, recurring operating expenses, but does not cover interest, taxes, brokerage, nonrecurring and extraordinary items or fees and expenses for the fund’s independent directors. The fee is
based on fund average daily net assets and is calculated and accrued daily. The fee for the fund for the
most recent fiscal year was 1.05%.
In addition, from time to time, T. Rowe Price International may pay eligible insurance companies for
services they provide to the fund for contract holders. These payments range from 0.15% to 0.25% of
the average annual total assets invested by the separate accounts of the insurance company in the
fund.
Variable Annuity and Variable Life Charges
Variable annuity and variable life fees and charges imposed on contract holders and participants by
the insurance companies are in addition to those described previously and are described in the variable annuity and variable life contract prospectuses.
Variable Annuity and Variable Life Conflicts
The fund may serve as an investment medium for both variable annuity contracts and variable life
insurance policies. Shares of the fund may be offered to separate accounts established by any number
of insurance companies. The fund currently does not foresee any disadvantages to variable annuity
contract owners due to the fact that the fund may serve as an investment medium for both variable life
insurance policies and annuity contracts; however, due to differences in tax treatment or other considerations, it is theoretically possible that the interests of owners of annuity contracts and insurance policies for which the fund serves as an investment medium might at some time be in conflict. However,
the fund’s Board of Directors is required to monitor events to identify any material conflicts between
variable annuity contract owners and variable life policy owners, and will determine what action, if
any, should be taken in the event of such a conflict. If such a conflict were to occur, an insurance company participating in the fund might be required to redeem the investment of one or more of its separate accounts from the fund. This might force the fund to sell securities at disadvantageous prices.
T. R OWE P RICE
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UNDERSTANDING PERFORMANCE INFORMATION
This section should help you understand the terms used to describe fund performance. You may see
these terms used in shareholder reports you receive from your insurance company.
Total Return
This tells you how much an investment has changed in value over a given time period. It reflects any
net increase or decrease in the share price and assumes that all dividends and capital gains (if any)
paid during the period were reinvested in additional shares. Therefore, total return numbers include
the effect of compounding.
Advertisements may include cumulative or average annual total return figures, which may be compared with various indices, other performance measures, or other mutual funds.
Cumulative Total Return
This is the actual return of an investment for a specified period. A cumulative return does not
indicate how much the value of the investment may have fluctuated during the period. For example,
an investment could have a 10-year positive cumulative return despite experiencing some negative
years during that time.
Average Annual Total Return
This is always hypothetical and should not be confused with actual year-by-year results. It smooths
out all the variations in annual performance to tell you what constant year-by-year return would have
produced the investment’s actual cumulative return. This gives you an idea of an investment’s annual
contribution to your portfolio, provided you held it for the entire period.
Total returns and yields quoted for the fund include the effect of deducting the fund’s expenses, but
may not include charges and expenses attributable to any particular insurance product. Since you can
only purchase shares of the fund through an insurance product, you should carefully review the prospectus of the insurance product you have chosen for information on relevant charges and expenses.
Excluding these charges from quotations of the fund’s performance has the effect of increasing the
performance quoted.
INVESTMENT POLICIES AND PRACTICES
This section takes a detailed look at some of the types of fund securities and the various kinds of
investment practices that may be used in day-to-day portfolio management. Fund investments are
subject to further restrictions and risks described in the Statement of Additional Information.
Shareholder approval is required to substantively change fund objectives and certain investment
restrictions noted in the following section as “fundamental policies.” The managers also follow certain “operating policies” which can be changed without shareholder approval. However, significant
changes are discussed with shareholders in fund reports. Fund investment restrictions and policies
apply at the time of investment. A later change in circumstances will not require the sale of an investment if it was proper at the time it was made.
Fund holdings of certain kinds of investments cannot exceed maximum percentages of total assets,
which are set forth in this prospectus. For instance, fund investments in hybrid instruments are limited to 10% of total assets. While these restrictions provide a useful level of detail about fund investments, investors should not view them as an accurate gauge of the potential risk of such investments.
For example, in a given period, a 5% investment in hybrid instruments could have significantly more
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of an impact on a fund’s share price than its weighting in the portfolio. The net effect of a particular
investment depends on its volatility and the size of its overall return in relation to the performance of
all other fund investments.
Changes in fund holdings, fund performance, and the contribution of various investments are discussed in the shareholder reports sent to you by your insurance company.
3 Fund managers have considerable leeway in choosing investment strategies and selecting securities
they believe will help achieve fund objectives.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type of security or instrument
(including certain potentially high-risk derivatives described in this section) whose investment characteristics are consistent with its investment program. The following pages describe various types of
fund securities and investment management practices.
Fundamental policy The fund will not purchase a security if, as a result, with respect to 75% of its
total assets, more than 5% of its total assets would be invested in securities of a single issuer, or if more
than 10% of the outstanding voting securities of the issuer would be held by the fund.
Fund investments are primarily in common stocks (normally, at least 80% of net assets) and, to a
lesser degree, other types of securities as described below.
Common and Preferred Stocks
Stocks represent shares of ownership in a company. Generally, preferred stock has a specified dividend and ranks after bonds and before common stocks in its claim on income for dividend payments
and on assets should the company be liquidated. After other claims are satisfied, common stockholders participate in company profits on a pro-rata basis; profits may be paid out in dividends or reinvested in the company to help it grow. Increases and decreases in earnings are usually reflected in a
company’s stock price, so common stocks generally have the greatest appreciation and depreciation
potential of all corporate securities. While most preferred stocks pay a dividend, preferred stock may
be purchased where the issuer has omitted, or is in danger of omitting, payment of its dividend. Such
investments would be made primarily for their capital appreciation potential.
Convertible Securities and Warrants
Investments may be made in debt or preferred equity securities convertible into, or exchangeable for,
equity securities. Traditionally, convertible securities have paid dividends or interest at rates higher
than common stocks but lower than nonconvertible securities. They generally participate in the appreciation or depreciation of the underlying stock into which they are convertible, but to a lesser degree.
In recent years, convertibles have been developed which combine higher or lower current income
with options and other features. Warrants are options to buy a stated number of shares of common
stock at a specified price anytime during the life of the warrants (generally, two or more years). Warrants can be highly volatile, have no voting rights, and pay no dividends.
Fixed-Income Securities
From time to time, we may invest in corporate and government fixed-income securities. These securities would be purchased in companies that meet fund investment criteria. The price of a bond fluctuates with changes in interest rates, generally rising when interest rates fall and falling when interest
rates rise.
T. R OWE P RICE
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Hybrid Instruments
These instruments (a type of potentially high-risk derivative) can combine the characteristics of securities, futures, and options. For example, the principal amount, redemption, or conversion terms of a
security could be related to the market price of some commodity, currency, or securities index. Such
securities may bear interest or pay dividends at below market or even relatively nominal rates. Under
some conditions, the redemption value of such an investment could be zero.
3 Hybrids can have volatile prices and limited liquidity, and their use may not be successful.
Operating policy Fund investments in hybrid instruments are limited to 10% of total assets.
Private Placements
These securities are sold directly to a small number of investors, usually institutions. Unlike public
offerings, such securities are not registered with the SEC. Although certain of these securities may be
readily sold, for example, under Rule 144A, others may be illiquid, and their sale may involve substantial delays and additional costs.
Operating policy Fund investments in illiquid securities are limited to 15% of net assets.
Types of Investment Management Practices
Reserve Position
A certain portion of fund assets will be held in money market reserves. Fund reserve positions are
expected to consist primarily of shares of one or more T. Rowe Price internal money market funds.
Short-term, high-quality U.S. and foreign dollar-denominated money market securities, including
repurchase agreements, may also be held. For temporary, defensive purposes, there is no limit on fund
investments in money market reserves. The effect of taking such a position is that the fund may not
achieve its investment objective. The reserve position provides flexibility in meeting redemptions,
paying expenses, and in the timing of new investments and can serve as a short-term defense during
periods of unusual market volatility.
Borrowing Money and Transferring Assets
Fund borrowings may be made from banks and other T. Rowe Price funds for temporary emergency
purposes to facilitate redemption requests, or for other purposes consistent with fund policies as set
forth in this prospectus. Such borrowings may be collateralized with fund assets, subject to restrictions.
Fundamental policy Borrowings may not exceed 33¹/³% of total fund assets.
Operating policy Fund transfers of portfolio securities as collateral will not be made except as necessary in connection with permissible borrowings or investments, and then such transfers may not
exceed 33¹/³% of fund total assets. Fund purchases of additional securities will not be made when borrowings exceed 5% of total assets.
Foreign Currency Transactions
The fund will normally conduct its foreign currency exchange transactions, if any, either on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through entering into forward contracts to purchase or sell foreign currencies. The fund will generally not enter into
a forward contract with a term greater than one year.
The fund will generally enter into forward foreign currency exchange contracts only under two
circumstances. First, when the fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to “lock in” the U.S. dollar price of the security.
Second, when T. Rowe Price International believes that the currency of a particular foreign country
may move substantially against another currency, it may enter into a forward contract to sell or buy
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the former foreign currency (or another currency that acts as a proxy for that currency). The contract
may approximate the value of some or all of the fund portfolio securities denominated in such foreign
currency. Under unusual circumstances, the fund may commit a substantial portion or the entire value
of its portfolio to the consummation of these contracts. T. Rowe Price International will consider the
effect such a commitment to forward contracts would have on the fund’s investment program and the
flexibility of the fund to purchase additional securities. Although forward contracts will be used
primarily to protect the fund from adverse currency movements, they also involve the risk that
anticipated currency movements will not be accurately predicted, and fund total return could be
adversely affected as a result.
There are some markets where it is not possible to engage in effective foreign currency hedging. This is
generally true, for example, for the currencies of various emerging markets where the foreign exchange
markets are not sufficiently developed to permit hedging activity to take place.
Futures and Options
Futures, a type of potentially high-risk derivative, are often used to manage or hedge risk because they
enable the investor to buy or sell an asset in the future at an agreed-upon price. Options, another type
of potentially high-risk derivative, give the investor the right (where the investor purchases the
option), or the obligation (where the investor “writes” or sells the option), to buy or sell an asset at a
predetermined price in the future. Futures and options contracts may be bought or sold for any number of reasons, including: to manage fund exposure to changes in securities prices and foreign currencies; as an efficient means of adjusting fund overall exposure to certain markets; in an effort to
enhance income; to protect the value of portfolio securities; and as a cash management tool. Call or
put options may be purchased or sold on securities, financial indices, and foreign currencies.
Futures contracts and options may not always be successful hedges; their prices can be highly volatile;
using them could lower fund total return; and the potential loss from the use of futures can exceed a
fund’s initial investment in such contracts.
Operating policies Futures: Initial margin deposits and premiums on options used for nonhedging
purposes will not exceed 5% of fund net asset value. Options on securities: The total market value of
securities covering call or put options may not exceed 25% of fund total assets. No more than 5% of
fund total assets will be committed to premiums when purchasing call or put options.
Tax Consequences of Hedging
Hedging may result in the application of the mark-to-market and straddle provisions of the Internal
Revenue Code. These provisions could result in an increase (or decrease) in the amount of taxable dividends paid by the fund and could affect whether dividends paid are classified as capital gains or ordinary income.
Lending of Portfolio Securities
Fund securities may be lent to broker-dealers, other institutions, or other persons to earn additional
income. Risks include the potential insolvency of the broker-dealer or other borrower that could result
in delays in recovering securities and capital losses. Additionally, losses could result from the reinvestment of collateral received on loaned securities.
Fundamental policy The value of loaned securities may not exceed 33¹/³% of total fund assets.
Portfolio Turnover
Turnover is an indication of frequency of trading. The fund will not generally trade in securities for
short-term profits, but, when circumstances warrant, securities may be purchased and sold without
regard to the length of time held. A high turnover rate may increase transaction costs, result in additional capital gain distributions, and reduce fund total return. The fund’s portfolio turnover rates are
shown in the Financial Highlights table.
14
T. R OWE P RICE
Table 2, which provides information about the fund’s financial history, is based on a single share outstanding throughout the periods shown. The table is part of the fund’s financial statements, which are
included in its annual report and are incorporated by reference into the Statement of Additional Information (available upon request). The total returns in the table represent the rate that an investor would
have earned or lost on an investment in the fund (assuming reinvestment of all dividends and distributions and no payment of account or (if applicable) redemption fees). The financial statements in the
annual report were audited by the fund’s independent accountants, PricewaterhouseCoopers LLP.
Table 2 Financial Highlights
Year ended December 31
1997
Net asset value,
beginning of period
$
12.64
1998
$
12.74
1999
$
2000
14.52
$
19.04
2001
$
15.07
Income From Investment Operations
Net investment income
0.12
0.17
0.12
0.07
0.24
Net gains or losses on
securities (both realized
and unrealized)
0.27a
1.84
4.69
(3.46)
(3.59)
Total from investment
operations
0.39
2.01
4.81
(3.39)
(3.35)
Dividends (from net
investment income)
(0.12)
(0.17)
(0.07)
(0.10)
(0.25)
Distributions (from
capital gains)
(0.06)
(0.06)
(0.22)
(0.48)
In excess of net
realized gain
(0.11)
Less Distributions
Returns of capital
—
Total distributions
Net asset value,
end of period
Total return
(0.29)
$
12.74
3.09%
—
—
—
—
—
—
(0.23)
$
14.52
15.86%
(0.29)
$
19.04
33.32%
—
—
—
(0.58)
$
15.07
(17.84)%
(0.25)
$
11.47
(22.21)%
Ratios/Supplemental Data
Net assets, end of period
(in thousands)
$369,400
$497,946
$707,330
$662,159
$550,329
Ratio of expenses to
average net assets
1.05%
1.05%
1.05%
1.05%
1.05%
Ratio of net income to
average net assets
1.10%
1.25%
0.83%
0.43%
1.90%
Portfolio turnover rate
16.6%
18.1%
25.4%
41.7%
27.7%
a
The amount presented is calculated pursuant to a methodology prescribed by the Securities and Exchange Commission for a share outstanding throughout the period. This amount is inconsistent with the fund’s aggregate gains and losses because of the timing of sales and redemptions of fund shares in relation to fluctuating market values for the investment portfolio.
A fund Statement of Additional Information has been filed with
the Securities and Exchange Commission and is incorporated by
reference into this prospectus. Further information about fund
investments, including a review of market conditions and the
manager’s recent strategies and their impact on performance, is
available in the annual and semiannual shareholder reports. To
obtain a free copy of a fund report or Statement of Additional
Information, or for inquiries, contact your insurance company.
Fund information and Statements of Additional Information are
also available from the Public Reference Room of the Securities
and Exchange Commission. Information on the operation of the
Public Reference Room may be obtained by calling the SEC at
1-202-942-8090. Fund reports and other fund information are
available on the EDGAR Database on the SEC’s Internet site at
http://www.sec.gov. Copies of this information may be obtained,
after paying a duplicating fee, by electronic request at
[email protected], or by writing the Public Reference Room,
Washington D.C. 20549-0102.
1940 Act File No.: 811-07145
Invest With Confidence
5/1/02
Variable Universal
Life Insurance
Variable Universal Life was issued by The Prudential Insurance
Company of America and offered through Pruco Securities Corporation,
both are Prudential companies. Both located at 751 Broad Street,
Newark, NJ 07102-3777.
Prudential Financial is a service mark of The Prudential Insurance
Company of America, Newark, NJ, and its affiliates.
For online access to your policy information, visit
www.prudential.com
751 Broad Street, Newark, NJ 07102-3777
Telephone: 800 944-8786
PVUL1 ED 5/2002