(ICON)
Prudential
Emerging
Growth
Fund, Inc.
ANNUAL
REPORT
Oct. 30, 1997
(LOGO)
<PAGE>
Prudential Emerging Growth Fund, Inc.
Performance At A Glance.
Stock of the average small and medium-sized U.S. company
rose sharply over the
10 months since the inception of the Prudential Emerging
Growth Fund. The Fund
performed in line with the Lipper Analytical Services' Mid-
Cap Fund Average
primarily because its aggressive growth orientation captured
23 companies in
various industries whose stocks rose 50% or better,
including four that doubled
or more in price. Its substantial holdings of electronics
companies, in
particular, provided excellent returns.
Cumulative Total Returns1
As of 10/31/97
<TABLE>
<CAPTION>
Since
Since
Inception2
Inception2
(Without Sales Charge)
(With Sales Charge)
<S> <C> <C>
Class A 19.20%
13.24%
Class B 18.50
13.50
Class C 18.50
17.50
Class Z 19.30
19.30
Lipper Mid-Cap
Funds Avg3 19.94
N/A
</TABLE>
Past performance is not indicative of future results.
Principal and investment
return will fluctuate so that an investor's shares, when
redeemed, may be worth
more or less than their original cost.
1 Source: Prudential Investments Fund Management and Lipper
Analytical
Services. The Fund charges a maximum front-end sales load of
5% for Class A
shares and a declining contingent deferred sales charge
(CDSC) of 5%, 4%, 3%,
2%, 1% and 1% for six years, for Class B shares. Class C
shares have a 1% CDSC
for one year. Class B shares will automatically convert to
Class A shares on a
quarterly basis, approximately seven years after purchase.
Class Z shares are
not subject to a sales charge or a distribution fee. Since
Class A, B, C and
Z shares have been in existence less than one year, no
average annual returns
are presented.
2 Inception date: 12/31/96 for Class A, B, C and Z shares.
3 The Lipper average return is for 247 funds.
How Investments Compared.
(As of 10/31/97)
(GRAPH)
Source: Lipper Analytical Services. Financial markets
change, so a mutual
fund's past performance should never be used to predict
future results. The
risks to each of the investments listed above are different
- -- we provide
12-month total returns for several Lipper mutual fund
categories to show you
that reaching for higher returns means tolerating more risk.
The greater the
risk, the larger the potential reward or loss. In addition,
we've included
historical 20-year average annual returns. These returns
assume the
reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors
have received higher
historical total returns from stocks than from most other
investments. Smaller
capitalization stocks offer greater potential for long-term
growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds,
which can help smooth
out their total returns year by year. But their prices still
fluctuate
(sometimes significantly) and their returns have been
historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state
governments, state
agencies and/or municipalities. This investment provides
income that is usually
exempt from federal and state income taxes.
Money Market Funds attempt to preserve a constant share
value; they don't
fluctuate much in price but, historically, their returns
have been generally
among the lowest of the major investment categories.
<PAGE>
Susan Hirsch, Fund Manager
(PHOTO)
Portfolio
Manager's Report
The Prudential Emerging Growth Fund provides an opportunity
for long-term
capital appreciation by investing in stocks of small and
medium-sized U.S.
companies with the potential for above-average growth.
Stocks of small and
medium-sized companies -- those with market capitalizations
(the price of all
outstanding stock) between $500 million and $4.5 billion --
may offer greater
growth potential than those of larger companies, but also
may fluctuate more
in price from day to day. There can be no assurance that the
Fund will achieve
its investment objective.
Discipline Is Important.
The ability to identify stocks that have a high likelihood
of rapid growth is
only part of portfolio management. The discipline to sell
when shares have
reached a fair value or when our expectations are
disappointed is equally
important. We're looking for stocks with the potential for
exceptional
performance; we sell companies that don't have it.
Strategy Session.
- ------------------------------------------------------------
- -------------------
Our investment decisions reflect both the long-term earnings
prospects of the
individual companies in which we invest and also our
judgment of how the stock
markets will react to the company in the near future.
Different economic
sectors gain and lose favor rapidly in the market for midcap
stocks and the
share prices of individual companies often temporarily
outpace their earnings
growth.
Technology. We focused on two technology sectors that
performed well for us:
capital equipment and custom manufacturing. When uncertainty
engulfed Asian
markets, we anticipated an impact on capital equipment
manufacturers and took
our profits before their stock prices declined. However, we
still have high
expectations for our custom manufacturers. They include our
fourth-largest
holding, Solectron (which gained 52% for us), Hadco and the
DII Group.
Media. We think media companies generally are well
positioned for long-term
growth, but some are better placed than others. We sold
Clear Channel
Communications (up 74%) and American Radio Systems (up 53%).
We continue to
hold companies that still have strong price appreciation
prospects, including
our second-largest holding, Univision (up 52%). Univision is
a Spanish-language
cable channel that appeals to the rapidly growing and
underserved Hispanic
population. The cable television sector is out of favor, so
we had to pay less
for its earnings prospects than we normally would.
Portfolio Composition.
Sectors expressed as a percentage of
total net assets as of 10/31/97.
(GRAPH)
<PAGE>
What Went Well.
- -------------------------------------------------
The explosive growth of the mutual fund industry created
many opportunities.
We did exceptionally well with two fund managers -- Franklin
Resources (up
102%) and Kansas City Southern (up 109%) -- and have taken
some profits on
them. Investors had priced the latter as a railroad, but it
also owned Janus
Capital and Berger Associates -- two very successful mutual
fund companies --
and DST Systems, a data processor for mutual funds.
Moreover, we bought it at
a low price because a rail acquisition in Mexico had
temporarily depressed
earnings. We also own the fund managers T. Rowe Price and
Legg Mason.
We didn't hold much in oil services, but what we did
appreciated sharply.
Coflexip rose 66% and Falcon Drilling, a deep sea driller,
doubled in price.
And Not So Well.
- -------------------------------------------------
When the Emerging Growth Fund commenced operations, we
invested our start-up
funds rapidly. We suffered when a February rise in interest
rates suggested
that the U.S. economy was overheated and small and midcap
stock prices
subsequently declined. We would have done better if we had
deployed our assets
more slowly, averaging our exposure to market changes over a
longer period.
Sometimes, we stay with management we believe in, even after
the company has a
setback. Acuson, a medical supply company, dropped 24%
because its quarterly
earnings failed to meet expectations. But we think it is a
well-managed company
with a new product line that can carry it for several years.
We added to our
holdings. On the other hand, we sold our shares in Idexx
after they declined
59%. A maker of veterinary diagnostic tests, we came to
believe they had
management problems that their cash assets had concealed.
Five Largest
Holdings.
2.1% Royal Caribbean Cruises
Entertainment
2.0% Univision
Communications
Broadcasting
2.0% Consolidated Stores
Retail
1.9% Solectron Corp.
Electronics
1.8% Coflexip SA
(France) (ADR)
Oil & Gas Services
Expressed as a percentage of net assets as of 10/31/97.
Looking Ahead.
- -------------------------------------------------
We are looking for companies that can benefit from the
Internet. For example,
Checkfree, an online bill payment service, is among our 10
largest positions.
We bought it shortly after it signed many banks. It is up
39% already and we
think it has more growth ahead.
We believe there is strong growth potential in companies
that sell to older
people because their numbers are increasing. We recently
purchased Royal
Caribbean Cruises, now our largest holding and already up
32%. They have a new
fleet and we bought them at a discount to their larger
competitor.
1
On the Trail of Emerging Companies
- ------------------------------------------------------------
- -------------------
Fund Manager Susan Hirsch hunts for companies that can offer
accelerated
returns in the next business cycle.
Q. What kind of companies do you invest in?
A. We are looking for companies whose share prices can
appreciate substantially
over the next business cycle because either: 1) a change in
their operating
environment or something internal at the company will
accelerate earnings
growth or 2) the stock is undervalued relative to the
quality or sustainability
of its growth rate. We seek out companies which can achieve
a 15% to 25% growth
rate annually. Our preferences are for companies that have
been public for many
years and with market capitalizations of $1 billion to $3
billion. Companies of
that size and history are usually seasoned and management is
experienced. They
know how to sell their product and sell their company to
investors. We also
prefer businesses that have little debt and are healthy cash
flow generators.
The advantage is that cash can be used to support the stock
or conversely used
to complete an acquisition to ensure growth. In general, we
have found that
management decisions improve when financing considerations
are at a minimum.
Q. Is that the critical size for growth?
A. Our objective is to identify growth opportunities with
the right blend of
risk and reward characteristics. While smaller companies can
generally grow
faster than larger ones because they are nimble and haven't
saturated their
markets, they sometimes don't execute well. We prefer
businesses that have
progressed sufficiently that they have the infrastructure to
support growth and
management is aware of how rapidly they can grow market
share without undue
stress internally. This tends to favor the midcap segment
with market
capitalizations we referred to earlier. Furthermore, we have
found that once a
business has identified the growth rate it can sustain over
the long term,
investors will give it a premium valuation -- even if it's
not the fastest
growing.
Q. Prices in the midcap market can be volatile. What effect
will that have on
the Fund?
A. We can seek to minimize the effects of price fluctuations
by keeping our
positions small -- so diversification can help moderate
swings in our return.
Another source of volatility, and one where we have less
control, stems from
changing interest rates. The value of growth rises in
environments when
interest rates are expected to move lower and declines when
rates are expected
to rises. However, the market is much more sensitive to the
direction of change
than it is to the actual change itself. This is what
happened earlier in 1997.
As the reporting period ended, we owned shares in 101
companies. Our largest
holding amounted to a little more than 2% of the portfolio.
We will try to
stay close to those figures in the future.
Q. What leads you to sell a stock?
A. We may sell if our projection for a company's earnings
growth rate drops or
if it misses an earnings forecast. We may also sell if a
stock has "gotten
ahead of itself," and we believe we will have a chance to
buy it back at a
better price. Finally, we may sell a fine company with
strong earnings if its
stock price has reached what we believe is full value and we
believe it no
longer has suitable potential for price appreciation to meet
the Fund's
objectives.
2
<PAGE>
President's Letter
December 18, 1997
- ------------------------------------------------------------
- -------------------
(PHOTO)
It Was Another Good Year.
Dear Shareholder:
By many measures 1997 was another good year for investors.
The economy
continued its sixth straight year of moderate growth.
Inflation remained
subdued and unemployment fell to record lows. Thanks to this
favorable
environment, the stock market posted its third year of
double-digit returns
while bond values rose as yields declined to five-year lows.
There were periods of uncertainty, of course. The financial
markets declined
significantly three times during the year. Yet following
each episode the
markets rebounded as investors took advantage of buying
opportunities. That is
very important because it shows that investors today are not
easily swayed by
temporary setbacks -- they choose to stay the course and are
investing for the
long term.
As we begin a new year, here are a few thoughts to help
guide your investment
decisions:
- - Keep your investment expectations realistic. Seasoned
investors know that
financial markets rise and fall -- as will the value of
their holdings. Over
time, however, stocks have been shown to produce very
attractive returns. In
fact, the S&P 500 rose more than 280% from the time of the
last major market
decline (October 31, 1987) through December 31, 1996,
according to Lipper
Analytical Services.
- - Don't make rash decisions. If you have an investment plan,
stick to it. (If
you don't have one, see your Prudential Financial
Professional.) While past
performance is not indicative of future results, many
investors have profited
by the long-term growth prospects of stocks and income
producing potential of
bonds.
- - Review your portfolio. Sit down with your Prudential
Securities Financial
Advisor or Pruco Securities Registered Representative today.
Your Prudential
professional can advise you on financial strategies and
explain important new
developments, such as the federal Taxpayer Relief Act of
1997, which may
change the way you save for college, a retirement nest egg
or other long-term
financial goal.
Thank you for your continued confidence in Prudential Mutual
Funds & Annuities.
In 1998, we'll do everything we can to keep you informed and
earn your trust.
Sincerely,
Brian M. Storms
President, Prudential Mutual Funds & Annuities
3
<PAGE>
Portfolio of Investments as of
October 31, 1997 PRUDENTIAL EMERGING
GROWTH FUND, INC.
- ------------------------------------------------------------
- -------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--97.4%
COMMON STOCKS--97.4%
- ------------------------------------------------------------
Apparel & Textiles--3.5%
40,000 Kellwood Co. $
1,382,500
25,000 Liz Claiborne, Inc.
1,267,188
40,000 Westpoint Stevens, Inc. (a)
1,640,000
---------
- ---
4,289,688
- ------------------------------------------------------------
Appliances--1.5%
40,000 Sunbeam Corp.
1,812,500
- ------------------------------------------------------------
Broadcasting--6.0%
50,000 HSN, Inc. (a)
2,000,000
40,000 Sinclair Broadcast Group, Inc. (a)
1,460,000
40,000 Univision Communications, Inc. (a)
2,480,000
44,900 Westwood One, Inc. (a)
1,377,869
---------
- ---
7,317,869
- ------------------------------------------------------------
Cable & Pay Television Systems--2.3%
50,000 Liberty Media Group, Inc. (a)
1,740,625
40,000 United Video Satellite Group, Inc.
(a)
1,085,000
---------
- ---
2,825,625
- ------------------------------------------------------------
Chemicals--1.1%
35,000 OM Group, Inc.
1,321,250
- ------------------------------------------------------------
Commercial Services--4.8%
30,000 Concord EFS, Inc. (a)
890,625
40,000 Corrections Corp. of America (a)
1,220,000
45,000 Gartner Group, Inc. (a)
1,271,250
40,000 Lason Holdings, Inc. (a)
1,032,500
17,500 MoneyGram Payment Systems, Inc. (a)
250,469
4,400 Outsource International Inc.
66,550
30,000 Paychex, Inc.
1,143,750
---------
- ---
5,875,144
Computer Software & Services--10.4%
15,000 Cadence Design Systems, Inc. (a) $
798,750
76,900 Checkfree Corp. (a)
2,076,300
49,300 DST Systems, Inc. (a)
1,740,906
36,300 GTECH Holdings Corp. (a)
1,170,675
60,000 Mentor Graphics Corp. (a)
656,250
30,500 Netscape Communications Corp. (a)
1,002,688
50,000 Sterling Commerce, Inc. (a)
1,659,375
37,500 Stratus Computer, Inc. (a)
1,326,562
57,200 Unisys Corp. (a)
761,475
76,400 USCS International, Inc. (a)
1,480,250
---------
- ---
12,673,231
- ------------------------------------------------------------
Electronics--16.0%
39,666 Analog Devices, Inc. (a)
1,212,292
32,900 Applied Materials, Inc. (a)
1,098,038
45,000 Burr-Brown Corp. (a)
1,361,250
45,000 Dallas Semiconductor Corp.
2,199,375
30,000 Hadco Corp. (a)
1,661,250
58,500 International Rectifier Corp. (a)
800,719
50,000 Kent Electronics Corp. (a)
1,746,875
22,000 KLA Instruments Corp. (a)
966,625
100 Kulicke & Soffa Industries, Inc.
(a)
2,575
10,000 Lattice Semiconductor Corp. (a)
500,625
10,000 Linear Technology Corp. (a)
628,750
57,800 Solectron Corp. (a)
2,268,650
27,500 Teradyne, Inc. (a)
1,029,531
52,500 The DII Group, Inc. (a)
1,292,812
35,000 Thermo Instrument System, Inc. (a)
1,262,187
25,000 Thermo Optek Corp.
423,438
60,000 ThermoQuest Corp. (a)
1,072,500
---------
- ---
19,527,492
- ------------------------------------------------------------
Entertainment--2.8%
5,500 N2K Inc. (a)
144,719
34,000 Regal Cinemas, Inc. (a)
782,000
54,400 Royal Caribbean Cruises Ltd.
2,526,200
---------
- ---
3,452,919
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 4
<PAGE>
Portfolio of Investments as of
October 31, 1997 PRUDENTIAL EMERGING
GROWTH FUND, INC.
- ------------------------------------------------------------
- -------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Environmental Services--1.6%
54,200 Allied Waste Industries, Inc. $
1,104,325
21,500 USA Waste Services, Inc.
795,500
---------
- ---
1,899,825
- ------------------------------------------------------------
Financial Services--7.1%
7,500 Franklin Resources, Inc.
674,063
13,367 Legg Mason, Inc.
655,802
20,000 Norrell Corp.
582,500
15,000 Peoples Heritage Financial Group,
Inc.
590,625
50,000 Select Appointments Holdings
(U.K.)(ADR)
917,187
15,000 Sirrom Capital Corp.
755,625
60,000 Sovereign Bancorp, Inc.
1,065,000
25,300 T. Rowe Price Associates, Inc.
1,676,125
25,200 Washington Mutual, Inc.
1,724,625
---------
- ---
8,641,552
- ------------------------------------------------------------
Foods--0.9%
60,000 Flowers Industries, Inc.
1,140,000
- ------------------------------------------------------------
Health Services--0.6%
24,800 Omnicare, Inc.
689,750
- ------------------------------------------------------------
HMO's--1.6%
60,000 Concentra Managed Care, Inc. (a)
1,957,500
- ------------------------------------------------------------
Insurance--0.7%
20,000 NAC Re Corp.
890,000
- ------------------------------------------------------------
Lodging--1.7%
40,000 Capstar Hotel Company
1,417,500
20,000 Four Seasons Hotels, Inc.
661,250
---------
- ---
2,078,750
- ------------------------------------------------------------
Medical Services--3.6%
50,700 Covance, Inc. (a)
896,756
741 Genzyme Corp. (a)
6,391
40,000 Pediatric Services of America, Inc.
(a)
860,000
60,000 Renal Treatment Centers, Inc. (a) $
1,991,250
25,000 Vencor, Inc. (a)
675,000
---------
- ---
4,429,397
- ------------------------------------------------------------
Medical Technology--6.8%
65,000 Acuson Corp. (a)
1,218,750
10,000 Incyte Pharmaceuticals, Inc. (a)
805,000
20,000 Luxottica Group S.p.A. (Italy)(ADR)
1,277,500
60,000 Mentor Corp.
2,186,250
50,000 Sola International, Inc. (a)
1,706,250
50,000 ThermoTrex Corp. (a)
1,150,000
---------
- ---
8,343,750
- ------------------------------------------------------------
Nursing Homes--2.5%
32,700 Atria Communities, Inc. (a)
543,638
75,000 Beverly Enterprises, Inc. (a)
1,120,312
40,000 Manor Care, Inc.
1,372,500
---------
- ---
3,036,450
- ------------------------------------------------------------
Oil & Gas Services--2.4%
40,000 Coflexip SA (France) (ADR)
2,200,000
20,000 Falcon Drilling Co., Inc. (a)
727,500
---------
- ---
2,927,500
- ------------------------------------------------------------
Pharmaceuticals--6.3%
32,900 Biochem Pharma Inc. (Canada) (a)
824,556
40,000 Elan Corp. PLC (Ireland)(ADR) (a)
1,995,000
60,000 North American Vaccine, Inc.
(Canada) (a)
1,507,500
80,000 Pharmaceutical Product Development,
Inc. (a)
1,420,000
60,000 Watson Pharmaceuticals, Inc. (a)
1,905,000
---------
- ---
7,652,056
- ------------------------------------------------------------
Publishing--0.3%
15,000 Desktop Data, Inc. (a)
155,156
12,200 The Petersen Companies Inc.
240,950
---------
- ---
396,106
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 5
<PAGE>
Portfolio of Investments as of
October 31, 1997 PRUDENTIAL EMERGING
GROWTH FUND, INC.
- ------------------------------------------------------------
- -------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Retail--7.3%
50,000 BJ's Wholesale Club, Inc. (a) $
1,443,750
22,300 Brylane, Inc. (a)
968,656
60,000 Consolidated Stores Corp. (a)
2,392,500
55,300 Linens 'N Things, Inc. (a)
1,987,344
50,000 Petco Animal Supplies, Inc. (a)
1,537,500
50,000 Stride Rite Corp.
587,500
---------
- ---
8,917,250
- ------------------------------------------------------------
Schools--1.2%
30,000 Apollo Group, Inc. (a)
1,267,500
5,600 Education Management Corp. (a)
145,600
---------
- ---
1,413,100
- ------------------------------------------------------------
Telecommunications--2.3%
35,500 Teleport Communications Group, Inc.
(a)
1,717,312
69,300 Transaction Network Services, Inc.
(a)
1,152,113
---------
- ---
2,869,425
- ------------------------------------------------------------
Telecommunications Equipment--1.2%
41,200 Metromedia Fiber Network Inc.
988,800
25,000 Scientific-Atlanta, Inc.
464,063
---------
- ---
1,452,863
- ------------------------------------------------------------
Transportation-Road & Rail--0.9%
37,500 Kansas City Southern Industries,
Inc.
1,143,750
---------
- ---
Total long-term investments
(cost $102,678,514)
118,974,742
---------
- ---
SHORT-TERM INVESTMENTS--2.5%
REPURCHASE AGREEMENT
$ 3,093 Joint Repurchase Agreement Account,
5.70%, 11/3/97
(cost $3,093,000; Note 5) $
3,093,000
---------
- ---
- ------------------------------------------------------------
Total Investments--99.9%
(cost $105,771,514; Note 4)
122,067,742
Other assets in excess of
liabilities--0.1%
163,147
---------
- ---
Net Assets--100%
$122,230,889
---------
- ---
---------
- ---
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 6
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL
EMERGING GROWTH FUND, INC.
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Assets
October 31, 1997
<S>
<C>
Investments, at value (cost
$105,771,514)...............................................
.................. $122,067,742
Cash........................................................
..............................................
160,251
Receivable for investments
sold........................................................
................... 1,389,326
Receivable for Fund shares
sold........................................................
................... 761,874
Deferred expenses and other
assets......................................................
.................. 102,614
Dividends and interest
receivable..................................................
....................... 31,274
Prepaid registration
fees........................................................
......................... 27,503
- ----------------
Total
assets......................................................
..................................... 124,540,584
- ----------------
Liabilities
Payable for investments
purchased...................................................
...................... 1,747,525
Payable for Fund shares
reacquired..................................................
...................... 303,716
Accrued
expenses....................................................
...................................... 106,309
Distribution fee
payable.....................................................
............................. 86,614
Management fee
payable.....................................................
............................... 65,531
- ----------------
Total
liabilities.................................................
..................................... 2,309,695
- ----------------
Net
Assets......................................................
..........................................
$122,230,889
- ----------------
- ----------------
Net assets were comprised of:
Common stock, at
par.........................................................
.......................... $ 10,300
Paid-in capital in excess of
par.........................................................
.............. 104,398,912
- ----------------
104,409,212
Accumulated net realized gain on
investments.................................................
.......... 1,525,449
Net unrealized appreciation on
investments.................................................
............ 16,296,228
- ----------------
Net assets, October 31,
1997........................................................
...................... $122,230,889
- ----------------
- ----------------
Class A:
Net asset value and redemption price per share
($33,123,942 / 2,778,557 shares of common stock issued
and outstanding).............................
$11.92
Maximum sales charge (5% of offering
price)......................................................
...... .63
- ----------------
Maximum offering price to
public......................................................
................. $12.55
- ----------------
- ----------------
Class B:
Net asset value, offering price and redemption price per
share
($82,069,745 / 6,927,670 shares of common stock issued
and outstanding).............................
$11.85
- ----------------
- ----------------
Class C:
Net asset value, offering price and redemption price per
share
($6,476,643 / 546,701 shares of common stock issued
and outstanding)................................
$11.85
- ----------------
- ----------------
Class Z:
Net asset value, offering price and redemption price per
share
($560,559 / 46,986 shares of common stock issued and
outstanding)...................................
$11.93
- ----------------
- ----------------
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 7
<PAGE>
PRUDENTIAL EMERGING GROWTH FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1996(a)
Through
Net Investment Loss October 31, 1997
<S> <C>
Income
Dividends (net of foreign
withholding taxes of $2,717)..... $ 247,060
Interest............................ 203,351
-----------
Total income..................... 450,411
-----------
Expenses
Management fee...................... 508,126
Distribution fee--Class A........... 58,788
Distribution fee--Class B........... 563,370
Distribution fee--Class C........... 46,173
Registration fees................... 167,497
Transfer agent's fees and
expenses......................... 121,000
Custodian's fees and expenses....... 78,000
Reports to shareholders............. 66,000
Amortization of deferred
organizational costs............. 20,285
Audit fee........................... 20,000
Legal fees.......................... 20,000
Directors' fees..................... 18,750
Miscellaneous....................... 8,665
-----------
Total expenses................... 1,696,654
-----------
Net investment loss.................... (1,246,243)
-----------
Realized and Unrealized
Gain on Investments
Net realized gain on investment
transactions........................ 2,613,615
Net unrealized appreciation on
investments......................... 16,296,228
-----------
Net gain on investments................ 18,909,843
-----------
Net Increase in Net Assets
Resulting from Operations.............. $ 17,663,600
-----------
-----------
</TABLE>
- ---------------
(a) Commencement of investment operations.
PRUDENTIAL EMERGING GROWTH FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1996(a)
Increase (Decrease) Through
in Net Assets October 31,
1997
<S> <C>
Operations
Net investment loss...................... $
(1,246,243)
Net realized gain on investments.........
2,613,615
Net unrealized appreciation on
investments...........................
16,296,228
--------------
- ------
Net increase in net assets resulting from
operations............................
17,663,600
--------------
- ------
Fund share transactions (net of share
conversions) (Note 6)
Net proceeds from shares sold............
133,828,498
Cost of shares reacquired................
(29,361,209)
--------------
- ------
Net increase in net assets from Fund
share transactions....................
104,467,289
--------------
- ------
Total increase..............................
122,130,889
Net Assets
Beginning of period.........................
100,000
--------------
- ------
End of period...............................
$122,230,889
--------------
- ------
--------------
- ------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 8
<PAGE>
Notes to Financial Statements PRUDENTIAL
EMERGING GROWTH FUND, INC.
- ------------------------------------------------------------
- -------------------
Prudential Emerging Growth Fund, Inc. (the 'Fund') is
registered under the
Investment Company Act of 1940 as a diversified, open-end
management investment
company. The Fund was incorporated in Maryland on August 23,
1996. The Fund
issued 2,500 shares each of Class A, Class B, Class C and
Class Z common stock
for $100,000 on October 21, 1996 to Prudential Investments
Fund Management LLC
('PIFM'). Investment operations commenced on December 31,
1996.
The Fund's investment objective is to achieve long-term
capital appreciation by
investing primarily in equity securities of small and medium
sized U.S.
companies, ranging from $500 million to $4.5 billion in
market capitalization,
with the potential for above-average growth.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting
policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: Securities listed on a securities
exchange (other than
options on stock and stock indices) are valued at the last
sales price on the
day of valuation, or, if there was no sale on such day, at
the mean between the
closing bid and asked prices on such day, or at the bid
price in the absence of
an asked price as provided by a pricing service. Securities
that are actively
traded in the over-the-counter market, including listed
securities for which the
primary market is believed to be over-the-counter, are
valued by an independent
pricing service. Convertible debt securities that are
actively traded in the
over-the-counter market, including listed securities for
which the primary
market is believed to be over-the-counter, are valued at the
mean between the
most recently quoted bid and asked prices provided by a
principal market maker
or independent pricing agent. Options on securities and
indices traded on an
exchange are valued at the mean between the most recently
quoted bid and asked
prices provided by the respective exchange. Futures
contracts and options
thereon are valued at the last sales price as of the close
of business of the
exchange. Securities for which market quotations are not
readily available are
valued at fair value as determined in good faith by or under
the direction of
the Board of Directors of the Fund.
Short-term securities which mature in more than 60 days are
valued at current
market quotations. Short-term securities which mature in 60
days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements, it
is the Fund's
policy that its custodian or designated subcustodians under
triparty repurchase
agreements, as the case may be, take possession of the
underlying collateral
securities, the value of which exceeds the principal amount
of the repurchase
transaction, including accrued interest. To the extent that
any repurchase
transaction exceeds one business day, the value of the
collateral is
marked-to-market on a daily basis to ensure the adequacy of
the collateral. If
the seller defaults, and the value of the collateral
declines or, if bankruptcy
proceedings are commenced with respect to the seller of the
security,
realization of the collateral by the Fund may be delayed or
limited.
All securities are valued as of 4:15 P.M., New York time.
Securities Transactions and Net Investment Income:
Securities transactions are
recorded on the trade date. Realized gains and losses on
sales of securities are
calculated on the identified cost basis. Dividend income is
recorded on the
ex-dividend date; interest income is recorded on the accrual
basis. Expenses are
recorded on the accrual basis which may require the use of
certain estimates by
management.
Net investment income (loss), other than distribution fees,
and realized and
unrealized gains or losses are allocated daily to each class
of shares based
upon the relative proportion of net assets of each class at
the beginning of the
day.
Dividends and Distributions: Dividends from net investment
income are declared
and paid annually. The Fund will distribute at least
annually net capital gains
in excess of loss carryforwards, if any. Dividends and
distributions are
recorded on the ex-dividend date.
Income distributions and capital gain distributions are
determined in accordance
with income tax regulations which may differ from generally
accepted accounting
principles.
Reclassification of Capital Accounts: The Fund accounts and
reports for
distributions to shareholders in accordance with the
A.I.C.P.A.'s Statement of
Position 93-2: Determination, Disclosure, and Financial
Statement Presentation
of Income, Capital Gain and Return of Capital Distributions
by Investment
Companies. The effect of applying this statement was to
decrease undistributed
net investment income by $1,246,243, decrease accumulated
realized gains by
$1,088,166, and decrease paid-in capital by $158,077. Net
investment income, net
realized gains and net assets were not affected by this
change.
Taxes: It is the Fund's policy to continue to meet the
requirements of the
Internal Revenue Code applicable to regulated investment
companies and to
distribute all of its taxable net income and net capital
gains, if any, to its
shareholders. Therefore, no federal income tax provision is
required.
Withholding taxes on foreign dividends have been provided
for in accordance with
the Fund's understanding of the applicable country's tax
rules and rates.
Deferred Organization Expenses: Approximately $122,000 of
expenses were incurred
in connection with the organization of the Fund. These
- ------------------------------------------------------------
- --------------------
9
<PAGE>
Notes to Financial Statements PRUDENTIAL
EMERGING GROWTH FUND, INC.
- ------------------------------------------------------------
- -------------------
costs have been deferred and are being amortized ratably
over a period of sixty
months from the date the Fund commenced investment
operations.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with PIFM. Pursuant to
this agreement, PIFM
has responsibility for all investment advisory services and
supervises the
subadviser's performance of such services. PIFM has entered
into a subadvisory
agreement with The Prudential Investment Corporation
('PIC'). PIC furnishes
investment advisory services, in connection with the
management of the Fund.
PIFM pays for the cost of the subadviser's services, the
compensation of
officers of the Fund, occupancy and certain clerical and
bookkeeping costs of
the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable
monthly, at an annual
rate of .60 of 1% of the average daily net assets of the
Fund.
The Fund has a distribution agreement with Prudential
Securities Incorporated
('PSI'), which acts as the distributor of the Class A, Class
B, Class C and
Class Z shares of the Fund. The Fund compensates PSI for
distributing and
servicing the Fund's Class A, Class B and Class C shares,
pursuant to plans of
distribution (the 'Class A, B and C Plans') regardless of
expenses actually
incurred by them. The distribution fees are accrued daily
and payable monthly.
No distribution or service fees are paid to PSI as
distributor of the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates
PSI for
distribution-related activities at an annual rate of up to
.30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C
shares, respectively.
Such expenses under the Plans were charged at an annual rate
of .25 of 1%, 1%
and 1% of the average daily net assets of the Class A, B and
C shares,
respectively, for the period December 31, 1996 through
October 31, 1997.
PSI has advised the Fund that it has received approximately
$197,300 in
front-end sales charges resulting from sales of Class A
shares for the period
December 31, 1996 through October 31, 1997. From these fees,
PSI paid such sales
charges to dealers, which in turn paid commissions to
salespersons and incurred
other distribution costs.
PSI has advised the Fund that for the period December 31,
1996 through October
31, 1997, it received approximately $147,900 and $4,300 in
contingent deferred
sales charges imposed upon certain redemptions by certain
Class B and Class C
shareholders, respectively.
The Fund, along with other affiliated registered investment
companies (the
'Funds'), entered into a credit agreement (the 'Agreement')
on December 31, 1996
with an unaffiliated lender. The maximum commitment under
the Agreement is
$200,000,000. The Agreement expires on December 30, 1997.
Interest on any such
borrowings outstanding will be at market rates. The purpose
of the Agreement is
to serve as an alternative source of funding for capital
share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement
as of October 31,
1997. The Funds pay a commitment fee at an annual rate of
.055 of 1% on the
unused portion of the credit facility. The commitment fee is
accrued and paid
quarterly on a pro-rata basis by the Funds.
PSI, PIFM and PIC are indirect, wholly-owned subsidiaries of
The Prudential
Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned
subsidiary of PIFM,
serves as the Fund's transfer agent. During the period ended
December 31, 1996
through October 31, 1997, the Fund incurred fees of
approximately $102,000 for
the services of PMFS. As of October 31, 1997, approximately
$12,000 of such fees
were due to PMFS. Transfer agent fees and expenses in the
Statement of
Operations also include certain out-of-pocket expenses paid
to non-affiliates.
During the period ended December 31, 1996 through October
31, 1997, PSI received
approximately $4,500 in brokerage commissions from portfolio
transactions
executed on behalf of the Fund.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than
short-term investments,
for the period ended December 31, 1996 through October 31,
1997 were
$208,902,343 and $108,837,098, respectively.
The cost basis of investments for federal income tax
purposes is $106,462,186.
As of October 31, 1997, net unrealized appreciation of
investments for federal
income tax purposes was $15,605,556 (gross unrealized
appreciation--$19,212,446;
gross unrealized depreciation--$3,606,890).
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund along with other affiliated registered investment
companies, transfers
uninvested cash balances into a single joint account, the
daily aggregate
balance of which is invested in one or more repurchase
agreements collateralized
by U.S. Treasury or Federal agency obligations. As of
October 31, 1997, the Fund
had a 0.4% undivided interest in the repurchase agreements
in the joint account.
The undivided interest for the Fund represented $3,093,000
in principal amount.
As of such date, each repurchase agreement in the joint
account and the value of
the collateral therefor were as follows:
- ------------------------------------------------------------
- --------------------
10
<PAGE>
Notes to Financial Statements PRUDENTIAL
EMERGING GROWTH FUND, INC.
- ------------------------------------------------------------
- -------------------
Bear Stearns, 5.70%, in the principal amount of
$236,000,000, repurchase price
$236,112,100, due 11/3/97. The value of the collateral
including accrued
interest is $241,912,917.
Credit Suisse First Boston Corp., 5.72%, in the principal
amount of
$237,440,000, repurchase price $237,553,180, due 11/3/97.
The value of the
collateral including accrued interest is $246,134,363.
Deutsche Morgan Grenfell, 5.70%, in the principal amount of
$236,000,000,
repurchase price $236,112,100, due 11/3/97. The value of the
collateral
including accrued interest is $240,720,618.
SBC Warburg, 5.66%, in the principal amount of $92,714,000,
repurchase price
$92,757,730, due 11/3/97. The value of the collateral
including accrued interest
is $94,588,984.
- ------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z
shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B
shares are sold with a
contingent deferred sales charge which declines from 5% to
zero depending on the
period of time the shares are held. Class C shares are sold
with a contingent
deferred sales charge of 1% during the first year. Class B
shares automatically
convert to Class A shares on a quarterly basis approximately
seven years after
purchase. Special exchange privileges are also available for
shareholders who
qualify to purchase Class A shares at net asset value. Class
Z shares are not
subject to any sales or redemption charge and are offered
exclusively for sale
to a limited group of investors.
There are 2 billion shares of $.001 par value common stock
authorized divided
into four classes, designated Class A, Class B, Class C and
Class Z, each of
which consists of 1 billion, 500 million, 300 million and
200 million authorized
shares, respectively.
Transactions in shares of common stock for the period
December 31, 1996 through
October 31, 1997 were as follows:
<TABLE>
<CAPTION>
Class A Shares
Amount
- ------------------------------------- ---------- --------
- ----
<S> <C> <C>
December 31, 1996(a) through
October 31, 1997:
Shares sold.......................... 4,426,371 $
46,029,734
Shares reacquired.................... (1,709,715)
(18,558,290)
---------- --------
- ----
Net increase in shares outstanding
before conversion.................. 2,716,656
27,471,444
Shares issued upon conversion from
Class B............................ 59,401
693,915
---------- --------
- ----
Net increase in shares outstanding... 2,776,057 $
28,165,359
---------- --------
- ----
---------- --------
- ----
<CAPTION>
Class B Shares
Amount
- ------------------------------------- ---------- --------
- ----
<S> <C> <C>
December 31, 1996(a) through
October 31, 1997:
Shares sold.......................... 7,897,636 $
80,935,138
Shares reacquired.................... (912,794)
(9,938,884)
---------- --------
- ----
Net increase in shares outstanding
before conversion.................. 6,984,842
70,996,254
Shares reacquired upon conversion
into Class A....................... (59,672)
(693,915)
---------- --------
- ----
Net increase in shares outstanding... 6,925,170 $
70,302,339
---------- --------
- ----
---------- --------
- ----
<CAPTION>
Class C
- -------------------------------------
<S> <C> <C>
December 31, 1996(a) through
October 31, 1997:
Shares sold.......................... 603,231 $
6,123,875
Shares reacquired.................... (59,030)
(606,543)
---------- --------
- ----
Net increase in shares outstanding... 544,201 $
5,517,332
---------- --------
- ----
---------- --------
- ----
<CAPTION>
Class Z
- -------------------------------------
<S> <C> <C>
December 31, 1996(a) through
October 31, 1997:
Shares sold.......................... 68,252 $
739,751
Shares reacquired.................... (23,766)
(257,492)
---------- --------
- ----
Net increase in shares outstanding... 44,486 $
482,259
---------- --------
- ----
---------- --------
- ----
</TABLE>
- ---------------
(a) Commencement of investment operations.
- ------------------------------------------------------------
Note 7. Distributions
On December 10, 1997 the Board of Directors of the Fund
declared a short-term
capital gain distribution of $0.214 per share for Class A,
B, C and Z shares
respectively, payable on December 18, 1997 to shareholders
of record on December
15, 1997.
- ------------------------------------------------------------
- --------------------
11
<PAGE>
Financial Highlights PRUDENTIAL
EMERGING GROWTH FUND, INC.
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class A Class B Class C
- ------------ ------------ ------------
<S>
<C> <C> <C>
December 31, December 31, December 31,
1996(a) 1996(a) 1996(a)
Through Through Through
October 31, October 31, October 31,
1997 1997 1997
- ------------ ------------ ------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period..................................... $ 10.00
$ 10.00 $10.00
- ------ ------ -----
Income from investment operations
Net investment
loss......................................................
(.08) (.14) (.14)
Net realized and unrealized loss on investment
transactions.............. 2.00 1.99
1.99
- ------ ------ -----
Total from investment
operations......................................
1.92 1.85 1.85
- ------ ------ -----
Net asset value, end of
period........................................... $
11.92 $ 11.85 $11.85
- ------ ------ -----
- ------ ------ -----
TOTAL
RETURN(c):..................................................
....... 19.20% 18.50% 18.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000).......................................... $
33,124 $ 82,070 $6,477
Average net assets
(000).................................................
$ 28,141 $ 67,420 $5,526
Ratios to average net assets(b):
Expenses, including distribution
fees................................. 1.46%
2.21% 2.21%
Expenses, excluding distribution
fees................................. 1.21%
1.21% 1.21%
Net investment
loss...................................................
(.92)% (1.67)% (1.69)%
Portfolio turnover
rate..................................................
107% 107% 107%
Average commission rate paid per
share................................... $ .0521
$ .0521 $.0521
<CAPTION>
Class Z
- ------------
<S>
<C>
December 31,
1996(a)
Through
October 31,
1997
- ------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period..................................... $10.00
- -----
Income from investment operations
Net investment
loss......................................................
(.03)
Net realized and unrealized loss on investment
transactions.............. 1.96
- -----
Total from investment
operations...................................... 1.93
- -----
Net asset value, end of
period........................................... $11.93
- -----
- -----
TOTAL
RETURN(c):..................................................
....... 19.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000).......................................... $ 561
Average net assets
(000)................................................. $
261
Ratios to average net assets(b):
Expenses, including distribution
fees................................. 1.21%
Expenses, excluding distribution
fees................................. 1.21%
Net investment
loss...................................................
(.73)%
Portfolio turnover
rate..................................................
107%
Average commission rate paid per
share................................... $.0521
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Total return does not consider the effects of sales
loads. Total return is
calculated assuming a purchase of shares on the first
day and a sale on the
last day of each period reported and includes
reinvestment of dividends and
distributions. Total returns for periods of less than a
full year are not
annualized.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 12
<PAGE>
Report of Independent Accountants PRUDENTIAL
EMERGING GROWTH FUND, INC.
- ------------------------------------------------------------
- -------------------
To the Shareholders and Board of Directors of
Prudential Emerging Growth Fund, Inc.
In our opinion, the accompanying statement of assets and
liabilities, including
the portfolio of investments, and the related statements of
operations and of
changes in net assets and the financial highlights present
fairly, in all
material respects, the financial position of Prudential
Emerging Growth Fund,
Inc. (the 'Fund') at October 31, 1997, and the results of
its operations, the
changes in its net assets and the financial highlights for
the period December
31, 1996 (commencement of operations) through October 31,
1997, in conformity
with generally accepted accounting principles. These
financial statements and
financial highlights (hereafter referred to as 'financial
statements') are the
responsibility of the Fund's management; our responsibility
is to express an
opinion on these financial statements based on our audit. We
conducted our audit
of these financial statements in accordance with generally
accepted auditing
standards which require that we plan and perform the audit
to obtain reasonable
assurance about whether the financial statements are free of
material
misstatement. An audit includes examining, on a test basis,
evidence supporting
the amounts and disclosures in the financial statements,
assessing the
accounting principles used and significant estimates made by
management, and
evaluating the overall financial statement presentation. We
believe that our
audit, which included confirmation of securities at October
31, 1997 by
correspondence with the custodian and brokers and the
application of alternative
auditing procedures where confirmations from brokers were
not received, provides
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
December 19, 1997
- ------------------------------------------------------------
- --------------------
13
<PAGE>
Getting The Most From Your Prudential Mutual Fund.
Some mutual fund shareholders won't ever read this--they
don't read annual and
semi-annual reports. It's quite understandable. These annual
and semi-annual
reports are prepared to comply with Federal regulations.
They are often written
in language that is difficult to understand. So when most
people run into those
particularly daunting sections of these reports, they don't
read them.
We think that's a mistake.
At Prudential Mutual Funds, we've made some changes to our
report to make it
easier to understand and more pleasant to read, in hopes
you'll find it
profitable to spend a few minutes familiarizing yourself
with your investment.
Here's what you'll find in the report:
At A Glance
Since an investment's performance is often a shareholder's
primary concern, we
present performance information in two different formats.
You'll find it first
on the "At A Glance" page where we compare the Fund and the
comparable average
calculated by Lipper Analytical Services, a nationally
recognized mutual fund
rating agency. We report both the cumulative total returns
and the average
annual total returns. The cumulative total return is the
total amount of income
and appreciation the Fund has achieved in various time
periods. The average
annual total return is an annualized representation of the
Fund's performance--
it generally smoothes out returns and gives you an idea how
much the Fund has
earned in an average year, for a given time period. Under
the performance box,
you'll see legends that explain the performance information,
whether fees and
sales charges have been included in returns, and the
inception dates for the
Fund's share classes.
See the performance comparison charts at the back of the
report for more
performance information. And keep in mind that past
performance is not
indicative of future results.
Portfolio Manager's Report
The portfolio manager who invests your money for you reports
onsuccessful --
and not-so-successful -- strategies in this section of your
report. Look for
recent purchases and sales here, as well as information
about the sectors the
portfolio manager favors and any changes that are on the
drawing board.
Portfolio Of Investments
This is where the report begins to look technical, but it's
really just a
listing of each security held at the end of the reporting
period, along with
valuations and other information. Please note that sometimes
we discuss a
security in the Portfolio Manager's Report that doesn't
appear in this listing
because it was sold before the close of the reporting
period.
<PAGE>
Statement Of Assets And Liabilities
The balance sheet shows the assets (the value of the Fund's
holdings),
liabilities (how much the Fund owes) and net assets (the
Fund's equity, or
holdings after the Fund pays its debts) as of the end of the
reporting period.
It also shows how we calculate the net asset value per share
for each class of
shares. The net asset value is reduced by payment of your
dividend, capital
gain, or other distribution, but remember that the money or
new shares are
being paid or issued to you. The net asset value fluctuates
daily along with
the value of every security in the portfolio.
Statement Of Operations
This is the income statement, which details income (mostly
interest and
dividends earned) and expenses (including what you pay us to
manage your
money). You'll also see capital gains here -- both realized
and unrealized.
Statement Of Changes In Net Assets
This schedule shows how income and expenses translate into
changes in net
assets. The Fund is required to pay out the bulk of its
income to shareholders
every year, and this statement shows you how we do it --
through dividends and
distributions -- and how that affects the net assets. This
statement also shows
how money from investors flowed into and out of the Fund.
Notes To Financial Statements
This is the kind of technical material that can intimidate
readers, but it does
contain useful information. The Notes provide a brief
history and explanation
of your Fund's objectives. In addition, they also outline
how Prudential Mutual
Funds prices securities. The Notes also explain who manages
and distributes the
Fund's shares, and more importantly, how much they are paid
for doing so.
Finally, the Notes explain how many shares are outstanding
and the number
issued and redeemed over the period.
Financial Highlights
This information contains many elements from prior pages,
but on a per share
basis. It is designed to help you understand how the Fund
performed and to
compare this year's performance and expenses to those of
prior years.
Independent Auditor's Report
Once a year, an outside auditor looks over our books and
certifies that the
information is fairly presented and complies with generally
accepted accounting
principles.
Tax Information
This is information which we report annually about how much
of your total
return is taxable. Should you have any questions, you may
want to consult a
tax advisor.
Performance Comparison
These charts are included in the annual report and are
required by the
Securities Exchange Commission. Performance is presented
here as a hypothetical
$10,000 investment in the Fund since its inception or for 10
years (whichever
is shorter). To help you put that return in context, we are
required to include
the performance of an unmanaged, broad based securities
index, as well. The
index does not reflect the cost of buying the securities it
contains or the
cost of managing a mutual fund. Of course, the index
holdings do not mirror
those of the fund -- the index is a broadly based reference
point commonly used
by investors to measure how well they are doing. A
definition of the selected
index is also provided. Investors generally cannot invest
directly in an index.
<PAGE>
Getting The Most From Your Prudential Mutual Fund.
How many times have you read these letters -- or other
financial materials --
and stumbled across a word that you don't understand?
Many shareholders have run into the same problem. We'd like
to help. So we'll
use this space from time to time to explain some of the
words you might have
read, but not understood. And if you have a favorite word
that no one can
explain to your satisfaction, please write to us.
Basis Point: One 1/100th of 1%. For example, one half of one
percentage point
is 50 basis points.
Call Option: A contract giving the holder a right to buy
stocks or bonds at a
predetermined price (called the strike price) before a
predetermined expiration
date. A buyer of a call option generally expects to benefit
from a rise in the
price of the stock or bond.
Capital Gain/Capital Loss: The difference between the cost
of a capital asset
(for example, a stock, bond or mutual fund share) and its
selling price. Under
current law the federal income tax rate for individuals on a
long-term capital
gain is up to 28%.
Collateralized Mortgage Obligations (CMOs): Pools of
mortgage-backed securities
sliced in maturity ranges that bear differing interest
rates. These instruments
are sensitive to changes in interest rates and homeowner
refinancing activity.
They are subject to prepayment and maturity extension risk.
Derivatives: Securities that derive their value from another
security. The rate
of return of these financial products rises and falls --
sometimes very
suddenly -- in response to changes in some specific interest
rate, currency,
stock or other variable.
Discount Rate: The interest rate charged by the Federal
Reserve on loans to
banks and other depository institutions.
Federal Funds Rate: The interest rate charged by one bank to
another on
overnight loans.
Futures Contract: An agreement to deliver a specific amount
of a commodity or
financial instrument at a set price at a stipulated time in
the future.
Leverage: The use of borrowed assets to enhance return on
equity. The
expectation is that the interest rate charged will be lower
than the return on
the investment. While leverage can increase profits, it can
also magnify
losses.
Liquidity: The ease with which a financial instrument (or
mutual fund) can be
bought or sold (converted into cash) in the financial
markets.
Price/Earnings Ratio: The price of a share of stock divided
by the earnings per
share for a 12-month period.
Option: An agreement to sell something, such as shares of
stock, by a certain
time for a specified price. An option need not be exercised.
Spread: The difference between two values; most often used
to describe the
difference between prices bid and asked for a security.
Yankee Bond: A bond denominated in U.S. dollars but sold by
a foreign company
or government in the U.S. market.
<PAGE>
Comparing A $10,000 Investment.
- ---------------------------------------------
Prudential Emerging Growth Fund, Inc. vs. S&P
MidCap 400 Index.
Past performance is not indicative of future results.
Investment return and
principal value will fluctuate so an investor's shares, when
redeemed, may be
worth more or less than their original cost.
These graphs are furnished to you in accordance with SEC
regulations. They
compare a $10,000 investment in the Prudential Emerging
Growth Fund (Class A,
B, C and Class Z shares) with a similar investment in the
Standard & Poor's
MidCap 400 Index (the Index) by portraying the initial
account values at the
commencement of operations of each class, and subsequent
account values at the
end of this reporting period (October 31, 1997), as measured
on a quarterly
basis, beginning in 1996 for Class A, B, C and Z shares. For
purposes of the
graphs, and unless otherwise indicated, in the accompanying
tables it has been
assumed (a) that the maximum applicable front-end sales
charge was deducted
from the initial $10,000 investment in Class A shares; (b)
the maximum
applicable contingent deferred sales charge was deducted
from the value of the
investment in Class B and Class C shares, assuming full
redemption on October
31, 1997; (c) all recurring fees (including management fees)
were deducted;
and (d) all dividends and distributions were reinvested.
Class B shares will
automatically convert to Class A shares, on a quarterly
basis, beginning
approximately seven years after purchase. This conversion
feature is not
reflected in the graph. Class Z shares are not subject to a
sales charge or
distribution fee. Because Class A, B, C and Z shares have
been in existence
less than one year, no average annual total returns are
presented.
The Index is a weighted index comprised of approximately 400
domestic stocks
chosen for market size, liquidity, and industry group
representation. The Index
is comprised of industrial, utility, financial, and
transportation stocks. The
Index is unmanaged and includes the reinvestment of all
dividends, but does not
reflect the payment of transaction costs and advisory fees
associated with an
investment in the Fund. The securities in the Index may
differ substantially
from the securities in the Fund. The Index is not the only
one that may be
used to characterize performance of stock funds and other
indexes may portray
different comparative performance.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Directors
Edward D. Beach
Delayne Dedrick Gold
Robert F. Gunia
Donald D. Lennox
Douglas H. McCorkindale
Mendel A. Melzer
Thomas T. Mooney
Stephen P. Munn
Richard A. Redeker
Robin B. Smith
Louis A. Weil, III
Clay T. Whitehead
Officers
Richard A. Redeker, President
Thomas A. Early, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Marguerite E.H. Morrison, Assistant Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential PlazaNewark, NJ 07102-3777
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
The views expressed in this report and information about the
Fund's portfolio
holdings are for the period covered by this report and are
subject to change
thereafter.
This report is not authorized for distribution to
prospective investors unless
preceded or accompanied by a current prospectus.
74431L107 MF173E
74431L206 Cat. #42M258H
74431L305 74431L404
