(ICON)
Prudential
Emerging
Growth
Fund, Inc.
ANNUAL
REPORT
Oct. 31, 1998
(LOGO)
<PAGE>
Prudential Emerging Growth Fund, Inc.
Performance At A Glance.
The Prudential Emerging Growth Fund's small gain over the turbulent 12 months
ended October 31, 1998 beat the Lipper Mid-Cap Average by several percentage
points. Investors, afraid of the global consequences of the recession in Asia,
pulled back sharply in the summer, particularly from stocks of the small- and
mid-size companies where we look for rapid earnings growth. Our substantial
focus on the technology sector -- 35% of assets on October 31 -- drove our
performance, as technology stocks bounced highest after the market bottomed.
Cumulative Total Returns1 As of 10/31/98
<TABLE>
<CAPTION>
One Since
Year Inception2
<S> <C> <C>
Class A 2.63% 22.34%
Class B 1.71 20.52
Class C 1.71 20.52
Class Z 2.97 22.85
Lipper Mid-Cap
Funds Avg3 -2.89 14.65
</TABLE>
Average Annual Total Returns1 As of 9/30/98
<TABLE>
<CAPTION>
One Since
Year Inception2
<S> <C> <C>
Class A -15.43% 4.13%
Class B -16.70 4.14
Class C -12.70 6.35
Class Z -10.66 7.45
</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, Inc. The
cumulative total returns do not take into account sales charges. The average
annual total returns do take into account applicable sales charges. The Fund
charges a maximum front-end sales load of 5% for Class A shares. Class B
shares are subject to a declining contingent deferred sales charge (CDSC) of
5%, 4%, 3%, 2%, 1% and 1% for six years. Class B shares will automatically
convert to Class A shares, on a quarterly basis, approximately seven years
after purchase. Class C shares are subject to a front-end sales charge of 1%
and a CDSC of 1% for 18 months. Class C shares bought before November 2, 1998,
have a 1% CDSC if sold within one year. Class Z shares are not subject to a
sales charge or distribution fee.
2 Inception dates: Class A, B, C, and Z, 12/31/96.
3 Lipper average returns are for all funds in each share class for the one-year
period in the Mid-Cap Fund category.
How Investments Compared.
(As of 10/31/98)
(GRAPH)
Source: Lipper, Inc. 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.
U.S. Taxable Money 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-size U.S.
companies with the potential for above-average growth. Stocks of small- and
medium-size 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.
Swimming Against The Stream.
It was a topsy-turvy market over our reporting period. When investors were
pessimistic, they produced a bear market for small company stocks and sharp
drops for the medium-size companies we favor. Even when they were positive,
they tended to favor the very largest companies. It was a difficult
environment for our investing style, and our peer group averaged a negative
return for the period. We had enough large winners to post a positive return,
but we were swimming against the stream.
Strategy Session.
Our portfolio is broadly diversified, but is most focused in three areas:
technology, health care, and media. We believe there is a long-term trend to
improve productivity by outsourcing the parts of a business that do not
represent its core strengths. In technology, many companies are focusing on
their design and marketing strengths and using contract manufacturers for
production. We like the contract manufacturers Jabil Circuit and Solectron.
We also favor other outsourcing firms that have recurring revenues and strong
balance sheets, such as Policy Management Systems and Bisys.
In health care, we believe the global focus on cost-cutting will benefit
generic drug manufacturers. They have a large share of the U.S. market and the
regulatory environment in Europe is becoming more favorable to them. Teva
Pharmaceuticals, Watson Pharmaceuticals (which returned 76% over our reporting
period), and Elan are among our larger holdings.
We believe new distribution media are increasing the overall demand for media
and the content they deliver. Cablevision and Telecom Liberty Media both were
large and profitable holdings for us on October 31. We also like United Video
Satellite Group, Young & Rubicam (for Internet advertising), and Pixar
(responsible for the technology underlying the film "A Bug's Life").
Portfolio Composition.
Sectors expressed as a percentage of
total net assets as of 10/31/98.
(PIE CHART)
<PAGE>
What Went Well.
Royal Caribbean had been a large holding for us for some time. Its shares
almost doubled before peaking on July 20 and then plummeting. We sold high and
rebought, making a substantial profit. We continue to think highly of the
company, but we have a somewhat smaller holding now. It is a good example of
how we balance a company's long-term growth prospects against changes in its
current market price.
We believe the computer industries -- both hardware and software/services --
are driving U.S. productivity increases and are a long-term growth story. We
had focuses in both areas. Our holdings of Unisys almost doubled in value.
Lexmark International -- which makes printers -- and Symbol Technologies also
made particularly large contributions. However, we owned a diversified group
of companies within these industries and, overall, our hardware companies
returned about 75% and our larger selection of software/service companies
about 45%.
Our return also reflected substantial gains on Lason, which provides document
management and business communication services. It, too, represents the
outsourcing theme woven through our portfolio. Lason more than doubled over
the year.
And Not So Well.
Our hospital management firms were hurt because of a change in the system of
government reimbursements that slowed payments to our firms and reduced their
earnings. In the bear market this summer, any negative earnings impact had an
exaggerated effect. We continue to believe that these are good growth
businesses in the long term.
Pharmerica provides pharmaceutical benefits to the elderly and disabled and
operates a mail-order pharmacy. Its shares dropped very sharply because it
bungled an acquisition. However, its underlying business is still growing
healthily. We reduced our holdings, but still hope to benefit from
Pharmerica's earnings recovery when its strong basic business carries it over
the temporary setback.
Our return also was hurt by our holdings of Sinclair Broadcasting, a
television broadcaster that may be vulnerable to the reduction in advertising
income that might accompany an economic slowdown. Stock market prices appear
to have anticipated a strong recession. Most economists think the United
States is more resilient and expect nothing worse than slowing growth. We
continue to own the stock.
Five Largest Holdings.
2.9% Metzler Group, Inc.
Financial Services
2.8% Jabil Circuit Inc.
Electronic
2.7% Policy Mgmt. Sys. Corp.
Computer Software &
Services
2.6% Synopsys Inc.
Computer Software &
Services
2.4% Solectron Corp.
Electronics
Expressed as a percentage of net assetsas of 10/31/98.
Looking Ahead.We find the prices of growth stocks particularly attractive as
we are not paying a premium for their growth potential. In the uncertain eco-
nomic climate, investors generally have favored stocks whose earnings are
visibly secure. They are paying more for security and letting growth potential
go cheaply. That may be a positive environment for future performance. We are
buying some high-quality growth companies at attractive prices.
- -------------------------------------------------------------------------------
1
<PAGE>
Portfolio Manager Susan Hirsch on the past year:
Mid-Cap Growth Was Half Right!
Q. "Emerging Growth" is not a standard mutual fund category. How does the
label capture your investing style?
A. I am an aggressive growth investor, but I try to catch companies at the
beginning of a long expansion of their businesses. I think we can find better
values there than among established large companies. Unlike the largest
firms, mid-caps have substantial room to grow and less inertia. By the time a
company reaches mid-cap size, we have a better idea of whether it has a
product line that is viable for long-term growth. At this size, they are
poised for rapid expansion. Moreover, unlike many of the smallest firms, they
are well-established in their businesses: their managers are seasoned, their
markets and suppliers are clearer, their profits are more stable.
Q. What happened to them over the past 12 months?
A. The global economic and financial systems are going through historic
upheaval. Asian economies, which had been growing rapidly, actually shrank.
Many financial institutions and hedge funds faced large losses on their market
exposures. Then Russia defaulted on debt and devalued the ruble. Many
investors were troubled by world events and any risk was more than they felt
they needed to take. So despite basically sound -- although slowing -- U.S.
and European economies, they bailed out of any stock that didn't seem
invulnerable.
Smaller and mid-cap companies were particularly exposed. Their stocks tend to
perform exceptionally well when the U.S. economy begins a growth phase and to
do poorly when investors fear a recession. The unfounded fear of recession
made mid-cap and small company stocks extraordinary values. For most of the
period, their earnings growth held up better than that of larger companies,
while their stock prices trailed. In fact, the Emerging Growth Fund is
currently looking at somewhat smaller companies than usual because the
investment opportunities are better there. We do look at the price we pay for
growth, and the better values are now in the smaller companies because of
investors' fears.
Q. The Asian slowdown hit technology firms particularly hard. Is your
technology focus a problem?
A. Technology firms certainly were exposed to both reduced business and
increased competition from Asia. However, we think the worst Asian scenario is
already priced into most stocks. Many prices plummeted. Over the entire 12
months, our companies held up well, on average. Mid-cap technology stocks are
inexpensive now. We're looking for companies that have both good earnings
prospects and prices that don't reflect that growth potential.
- -------------------------------------------------------------------------------
2
<PAGE>
President's Letter December 18, 1998
(PHOTO)
Dear Shareholder:
As 1998 draws to a close, the news from the financial markets is decidedly
mixed. After a series of sharp sell-offs in late summer, some stock prices
began to rebound in early fall, helped by three interest rate cuts by the
Federal Reserve.
There was other good news. U.S. Treasuries and Western European bonds
appreciated during the year as investors fled troubled Asian markets and other
emerging markets. The U.S. economy remained strong with steady growth and low
inflation.
The periods of uncertainty we experienced in 1998 illustrate why it is
important to manage your expectations and diversify your portfolio.
Keep A Good Perspective.
Experienced mutual fund investors understand that financial markets will
always rise and fall - that's what markets do. Although past performance may
not be indicative of future results, stocks and bonds have, over time,
consistently produced attractive returns that have kept ahead of inflation.
In fact, investors who remained focused on the long term and did not sell
during summer's volatility were rewarded. Stock prices, as measured by the
Standard & Poor's 500 Index, recovered strongly in November regaining lost
ground and even setting a new record high.
Diversify. Diversify. Diversify.
Because asset classes seldom move in lockstep, owning a mix of stock, bond,
and money market mutual funds can help lessen the effects of a market downturn
over time. In fact, a well-diversified portfolio may retain or perhaps even
gain value during times of uncertainty.
We're Here To Help.
How diversified is your portfolio? Your Prudential professional will be glad
to review your current allocations. He or she will recommend adjustments based
upon your goals, market conditions, risk tolerance, and potential investment
opportunities.
Thank you for your confidence in Prudential mutual funds. We'll continue to do
our part in keeping you informed.
Sincerely,
Brian M. Storms
President
- -------------------------------------------------------------------------------
3
<PAGE>
Portfolio of Investments as of October 31, 1998
PRUDENTIAL EMERGING GROWTH FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--96.4%
COMMON STOCKS
- ------------------------------------------------------------
Aerospace--1.6%
61,600 Orbital Sciences Corp.(a) $ 2,032,800
- ------------------------------------------------------------
Airlines--0.6%
17,000 Mesaba Hldgs. Inc.(a) 310,250
15,500 Skywest, Inc. 395,250
------------
705,500
- ------------------------------------------------------------
Banks & Financial Services--1.2%
63,500 Dime Bancorp, Inc. 1,512,094
- ------------------------------------------------------------
Broadcasting--5.9%
17,400 Jacor Communications, Inc.(a) 957,000
77,800 Tele-Comm, Inc.(a) 2,961,262
80,000 Sinclair Broadcast Group, Inc.(a) 1,040,000
103,800 USA Networks, Inc.(a) 2,335,500
------------
7,293,762
- ------------------------------------------------------------
Cable & Pay Television Systems--4.0%
62,300 Cablevision Systems Corp.(a) 3,005,975
20,800 Comcast Corp. 1,027,000
60,000 United Video Satellite Group,
Inc.(a) 952,500
------------
4,985,475
- ------------------------------------------------------------
Commercial Services--2.1%
24,600 Convergys Corp.(a) 342,862
41,500 Lason Holdings, Inc.(a) 2,272,125
------------
2,614,987
- ------------------------------------------------------------
Computer Software & Services--22.9%
30,500 Avid Technology, Inc.(a) 789,188
42,100 BISYS Group, Inc.(a) 1,841,875
36,700 C-NET, Inc.(a) 1,396,894
74,900 Checkfree Holdings Corp.(a) 1,177,334
27,800 Computer Sciences Corp.(a) 1,466,450
37,800 DST Systems, Inc.(a) 1,890,000
56,100 Infoseek Corp.(a) $ 1,661,962
93,000 Micron Electronics, Inc.(a) 1,947,187
52,700 Netscape Communications Corp.(a) 1,129,756
72,400 Novell, Inc.(a) 1,076,950
45,300 Pixar, Inc.(a) 2,151,750
74,100 Policy Management Systems Corp.(a) 3,366,919
52,700 Safeguard Scientifics, Inc.(a) 1,413,019
19,800 Sterling Commerce, Inc.(a) 697,950
70,800 Synopsys, Inc.(a) 3,203,700
77,800 The Learning Company, Inc.(a) 2,008,212
39,300 Unisys Corp.(a) 1,046,363
12,300 USCS International, Inc.(a) 365,925
------------
28,631,434
- ------------------------------------------------------------
Cosmetics/Toiletries--0.6%
54,900 Playtex Products Inc.(a) 723,994
- ------------------------------------------------------------
Diversified Industries--1.0%
15,000 Bally Total Fitness Hldg. Corp.(a) 283,125
44,400 Parexel International Corp.(a) 979,575
------------
1,262,700
- ------------------------------------------------------------
Electronics--13.5%
25,100 Cognex Corp.(a) 389,050
30,000 Diebold, Inc. 935,625
15,000 Etec Systems, Inc.(a) 508,125
36,000 International Rectifier Corp.(a) 324,000
75,700 Jabil Circuit, Inc.(a) 3,505,857
30,000 KLA Instruments Corp. 1,106,250
27,500 Lexmark International Group,
Inc.(a) 1,923,281
52,800 Solectron Corp.(a) 3,022,800
30,000 Speedfam International, Inc.(a) 483,750
60,000 Symbol Technologies, Inc. 2,685,000
30,000 Teradyne, Inc.(a) 975,000
21,000 Xilinx, Inc.(a) 937,781
------------
16,796,519
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 4
<PAGE>
Portfolio of Investments as of October 31, 1998
PRUDENTIAL EMERGING GROWTH FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Entertainment--2.5%
67,400 International Game Tech., Inc. $ 1,520,712
36,000 Royal Caribbean Cruises Ltd. 1,003,500
26,400 Steiner Leisure Ltd.(a) 643,500
------------
3,167,712
- ------------------------------------------------------------
Financial Services--10.8%
18,000 Capital One Financial 1,831,500
116,200 Federated Investors, Class B 2,084,337
36,000 H&R Block, Inc. 1,613,250
44,400 Metris Companies, Inc. 1,459,650
85,400 Metzler Group, Inc.(a) 3,586,800
63,000 Select Appointments Holdings
(U.K.)(ADR)(a) 1,071,000
52,100 Sovereign Bancorp, Inc. 683,813
52,800 Waddell & Reed Financial, Inc. 1,105,500
------------
13,435,850
- ------------------------------------------------------------
Foods--0.4%
18,500 United Natural Foods, Inc.(a) 515,688
- ------------------------------------------------------------
Insurance--1.4%
43,200 HSB Group, Inc. 1,744,200
- ------------------------------------------------------------
Lodging--0.2%
9,900 Four Seasons Hotels, Inc. (Canada) 227,700
- ------------------------------------------------------------
Medical Products--2.1%
16,000 Allegiance Corp. 595,000
6,100 ESC Medical Systems Ltd.(a) 49,563
51,900 Henry Schein, Inc.(a) 2,007,881
------------
2,652,444
Medical Services--3.8%
45,500 Genzyme Corp. $ 1,913,844
16,600 IMPATH, Inc.(a) 508,375
95,500 Total Renal Care Holdings, Inc.(a) 2,339,750
------------
4,761,969
- ------------------------------------------------------------
Medical Technology--5.7%
27,300 Acuson Corp.(a) 411,206
49,000 Barr Laboratories, Inc.(a) 1,675,187
30,000 Cerner Corp.(a) 701,250
37,400 Incyte Pharmaceuticals, Inc.(a) 1,140,700
98,500 Luxottica Group S.p.A. (Italy)(ADR) 886,500
43,700 Mylan Laboratories 1,504,919
35,100 STERIS Corp.(a) 807,300
------------
7,127,062
- ------------------------------------------------------------
Oil & Gas Services--2.9%
20,400 Anadarko Petroleum Corp. 691,050
37,400 Devon Energy Corp. 1,266,925
47,100 Petroleum Geo-Services ASA (ADR)(a) 1,006,762
19,000 Smith International, Inc.(a) 682,813
------------
3,647,550
- ------------------------------------------------------------
Pharmaceuticals--5.8%
27,100 Elan Corp. PLC (Ireland)(ADR)(a) 1,898,694
103,600 PharMerica, Inc.(a) 349,650
98,800 Schein Pharmaceutical, Inc.(a) 1,049,750
51,800 Teva Pharmaceutical Industries Ltd.
(Israel) (ADR) 2,042,862
33,500 Watson Pharmaceuticals, Inc.(a) 1,863,438
------------
7,204,394
- ------------------------------------------------------------
Printing--0.6%
16,000 Consolidated Graphics, Inc.(a) 759,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>
Portfolio of Investments as of October 31, 1998
PRUDENTIAL EMERGING GROWTH FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Publishing--0.1%
4,300 The Petersen Companies, Inc.(a) $ 114,219
- ------------------------------------------------------------
Radio & Television--0.7%
19,700 Emmis Broadcasting Corp.(a) 645,175
36,200 Granite Broadcasting Corp.(a) 185,525
------------
830,700
- ------------------------------------------------------------
Retail--2.8%
36,200 Barnes & Noble, Inc.(a) 1,181,025
34,100 BJ's Wholesale Club, Inc.(a) 1,225,469
41,500 Office Depot, Inc.(a) 1,037,500
------------
3,443,994
- ------------------------------------------------------------
Telecommunications--1.0%
25,000 Cincinnati Bell, Inc. 648,437
15,000 General Instruments Corp.(a) 385,313
47,600 Premiere Technologies, Inc.(a) 261,800
------------
1,295,550
- ------------------------------------------------------------
Transportation/Shipping--0.6%
19,000 Kansas City Southern Industries,
Inc. 733,875
- ------------------------------------------------------------
Waste Management--0.4%
23,400 Republic Services, Inc.(a) 511,875
- ------------------------------------------------------------
Schools--1.2%
48,000 Apollo Group, Inc.(a) 1,542,000
------------
Total long-term investments
(cost $104,424,866) 120,275,047
------------
<CAPTION>
Principal
Amount
(000)
SHORT-TERM INVESTMENTS--3.7%
REPURCHASE AGREEMENT
$ 4,598 Joint Repurchase Agreement Account
5.40%, 11/2/98
(cost $4,598,000; Note 5) $ 4,598,000
------------
- ------------------------------------------------------------
Total Investments--100.1%
(cost $109,022,866; Note 4) 124,873,047
Liabilities in excess of other
assets--(0.1%) (70,498)
------------
Net Assets--100% $124,802,549
------------
------------
</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>
Assets October 31, 1998
<S> <C>
Investments, at value (cost $109,022,866)................................................................. $124,873,047
Cash...................................................................................................... 33,114
Receivable for investments sold........................................................................... 1,525,171
Receivable for Fund shares sold........................................................................... 405,747
Deferred expenses and other assets........................................................................ 78,710
Dividends and interest receivable......................................................................... 18,597
----------------
Total assets........................................................................................... 126,934,386
----------------
Liabilities
Payable for investments purchased......................................................................... 1,635,880
Payable for Fund shares reacquired........................................................................ 302,181
Distribution fee payable.................................................................................. 74,342
Management fee payable.................................................................................... 56,604
Accrued expenses.......................................................................................... 62,830
----------------
Total liabilities...................................................................................... 2,131,837
----------------
Net Assets................................................................................................ $124,802,549
----------------
----------------
Net assets were comprised of:
Common stock, at par................................................................................... $ 10,502
Paid-in capital in excess of par....................................................................... 106,097,250
----------------
106,107,752
Accumulated net realized gain on investments........................................................... 2,844,616
Net unrealized appreciation on investments............................................................. 15,850,181
----------------
Net assets, October 31, 1998.............................................................................. $124,802,549
----------------
----------------
Class A:
Net asset value and redemption price per share
($32,182,576 / 2,679,652 shares of common stock issued and outstanding)............................. $12.01
Maximum sales charge (5% of offering price)............................................................ .63
----------------
Maximum offering price to public....................................................................... $12.64
----------------
----------------
Class B:
Net asset value, offering price and redemption price per share
($83,407,057 / 7,047,871 shares of common stock issued and outstanding)............................. $11.83
----------------
----------------
Class C:
Net asset value, offering price and redemption price per share
($6,773,927 / 572,399 shares of common stock issued and outstanding)................................ $11.83
----------------
----------------
Class Z:
Net asset value, offering price and redemption price per share
($2,438,989 / 202,298 shares of common stock issued and outstanding)................................ $12.06
----------------
----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7
<PAGE>
PRUDENTIAL EMERGING GROWTH FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Loss October 31, 1998
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $3,647)..................... $ 275,404
Interest................................ 209,037
----------------
Total income......................... 484,441
----------------
Expenses
Management fee.......................... 772,662
Distribution fee--Class A............... 84,579
Distribution fee--Class B............... 867,132
Distribution fee--Class C............... 69,491
Transfer agent's fees and expenses...... 197,000
Custodian's fees and expenses........... 95,000
Reports to shareholders................. 67,000
Amortization of deferred organizational
costs................................ 24,400
Registration fees....................... 70,000
Audit fees and expenses................. 20,000
Legal fees and expenses................. 20,000
Directors' fees and expenses............ 16,000
Miscellaneous........................... 7,486
----------------
Total expenses....................... 2,310,750
----------------
Net investment loss........................ (1,826,309)
----------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on investment
transactions............................ 3,541,253
Net change in unrealized appreciation on
investments............................. (446,047)
----------------
Net gain on investments.................... 3,095,206
----------------
Net Increase in Net Assets
Resulting from Operations.................. $ 1,268,897
----------------
----------------
</TABLE>
PRUDENTIAL EMERGING GROWTH FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1996(a)
Increase (Decrease) Year Ended Through
in Net Assets October 31, 1998 October 31, 1997
<S> <C> <C>
Operations
Net investment loss....... $ (1,826,309) $ (1,246,243)
Net realized gain on
investments............ 3,541,253 2,613,615
Net change in unrealized
appreciation
(depreciation)
on investments......... (446,047) 16,296,228
---------------- --------------------
Net increase in net assets
resulting from
operations............. 1,268,897 17,663,600
---------------- --------------------
Distributions from net
realized gains (Note 1)
Class A................ (590,230) --
Class B................ (1,495,124) --
Class C................ (125,163) --
Class Z................ (11,569) --
---------------- --------------------
(2,222,086) --
---------------- --------------------
Fund share transactions (net
of share conversion) (Note
6)
Net proceeds from shares
sold................... 47,455,553 133,828,498
Net asset value of shares
issued in reinvestment
of distributions....... 2,134,825 --
Cost of shares
reacquired............. (46,065,529) (29,361,209)
---------------- --------------------
Net increase in net assets
from Fund share
transactions........... 3,524,849 104,467,289
---------------- --------------------
Total increase............... 2,571,660 122,130,889
Net Assets
Beginning of period.......... 122,230,889 100,000
---------------- --------------------
End of period................ $124,802,549 $122,230,889
---------------- --------------------
---------------- --------------------
- ---------------
(a) Commencement of investment operations.
</TABLE>
- --------------------------------------------------------------------------------
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. 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 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 reliable market quotations are not available or for which
the pricing agent or principal market maker does not provide a valuation or
methodology or provides a valuation or methodology that does not represent fair
value are valued in accordance with procedures adopted by 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 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 increase undistributed
net investment income and decrease paid-in capital by $1,826,309 due to the Fund
incurring a net investment loss during the year ended October 31, 1998. 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 Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. Pursuant to a subadvisory agreement between PIFM and 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 had a distribution agreement with Prudential Securities Incorporated
('PSI'), which acted as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund through May 31, 1998. Prudential Investment
Management Services LLC ('PIMS') became the distributor of the Fund effective
June 1, 1998 and is serving the Fund under the same terms and conditions as
under the arrangement with PSI. The Fund compensated PSI and PIMS 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 PIMS as distributor
of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI and PIMS 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 year ended October 31, 1998.
PSI and PIMS have advised the Fund that they received approximately $156,800 in
front-end sales charges resulting from sales of Class A shares for the year
ended October 31, 1998. From these fees, PSI and PIMS paid such sales charges to
affiliated broker-dealers, which in turn paid commissions to salespersons and
incurred other distribution costs.
PSI and PIMS have advised the Fund that for the year ended October 31, 1998,
they received approximately $292,800 and $4,800 in contingent deferred sales
charges imposed upon certain redemptions by certain Class B and Class C
shareholders, respectively.
PSI, PIFM, PIC and PIMS are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
'Funds'), entered into a credit agreement (the 'Agreement') with an unaffiliated
lender. The maximum commitment under the Agreement is $200,000,000. 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 did not borrow any amounts pursuant to the Agreement
during the year ended October 31, 1998. 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.
The Agreement expired on December 30, 1997 and has been extended through
December 29, 1998 under the same terms.
- ------------------------------------------------------------
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 year ended October 31, 1998, the
Fund incurred fees of approximately $174,000 for the services of PMFS. As of
October 31, 1998, approximately $16,500 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 nonaffiliates.
For the year ended October 31, 1998, PSI received approximately $7,700 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 year ended October 31, 1998 were $221,178,761 and $222,968,412,
respectively.
The cost basis of investments for federal income tax purposes at October 31,
1998 was $110,248,202 and, accordingly, net unrealized appreciation of
investments for federal income tax purposes was $14,624,845 (gross unrealized
appreciation--$21,519,750; gross unrealized depreciation--$6,894,905).
- ------------------------------------------------------------
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
- --------------------------------------------------------------------------------
10
<PAGE>
Notes to Financial Statements PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
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,
1998, the Fund had a .5% undivided interest in the repurchase agreements in the
joint account. The undivided interest for the Fund represented $4,598,000 in
principal amount. As of such date, each repurchase agreement in the joint
account and the value of the collateral therefor were as follows:
Bear, Stearns & Co., Inc., 5.40%, in the principal amount of $260,000,000,
repurchase price $260,117,000, due 11/2/98. The value of the collateral
including accrued interest was $265,935,719.
Salomon Smith Barney Inc., 5.40%, in the principal amount of $260,000,000,
repurchase price $260,117,000, due 11/2/98. The value of the collateral
including accrued interest was $265,365,298.
Deutsche Morgan Grenfell Inc., 5.41%, in the principal amount of $260,000,000,
repurchase price $260,117,217, due 11/2/98. The value of the collateral
including accrued interest was $265,200,735.
SBC Warburg Dillon Read, Inc., 5.38%, in the principal amount of $160,825,000,
repurchase price $160,897,103, due 11/2/98. The value of the collateral
including accrued interest was $164,045,205.
- ------------------------------------------------------------
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. Prior to November 2, 1998 Class C shares are
sold with a contingent deferred sales charge of 1% during the first year.
Effective November 2, 1998, Class C shares are sold with a front-end sales
charge of 1% and a contingent deferred sales charge of 1% during the first 18
months. Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. A special exchange
privilege is 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 year ended October 31, 1998 and
October 31, 1997 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------- ---------- ------------
<S> <C> <C>
Year ended October 31, 1998:
Shares sold.......................... 1,456,524 $ 18,249,777
Shares issued in reinvestment of
distributions...................... 50,213 576,443
Shares reacquired.................... (1,662,596) (20,468,264)
---------- ------------
Net decrease in shares outstanding
before conversion.................. (155,859) (1,642,044)
Shares issued upon conversion from
Class B............................ 56,954 708,635
---------- ------------
Net decrease in shares outstanding... (98,905) $ (933,409)
---------- ------------
---------- ------------
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
- -------------------------------------
Year ended October 31, 1998:
Shares sold.......................... 1,908,638 $ 23,615,032
Shares issued in reinvestment of
distributions...................... 125,018 1,425,202
Shares reacquired.................... (1,855,918) (22,284,596)
---------- ------------
Net increase in shares outstanding
before conversion.................. 177,738 2,755,638
Shares reacquired upon conversion
into
Class A............................ (57,537) (708,635)
---------- ------------
Net increase in shares outstanding... 120,201 $ 2,047,003
---------- ------------
---------- ------------
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 issued upon conversion from
Class A............................ (59,672) (693,915)
---------- ------------
Net increase in shares outstanding... 6,925,170 $ 70,302,339
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE>
Notes to Financial Statements PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Shares Amount
- ------------------------------------- ---------- ------------
Year ended October 31, 1998:
<S> <C> <C>
Shares sold.......................... 254,644 $ 3,157,537
Shares issued in reinvestment of
distributions...................... 10,741 122,442
Shares reacquired.................... (239,687) (2,875,061)
---------- ------------
Net increase in shares outstanding... 25,698 $ 404,918
---------- ------------
---------- ------------
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
- -------------------------------------
Year ended October 31, 1998:
Shares sold.......................... 190,511 $ 2,433,207
Shares issued in reinvestment of
distributions...................... 935 10,738
Shares reacquired.................... (36,134) (437,608)
---------- ------------
Net increase in shares outstanding... 155,312 $ 2,006,337
---------- ------------
---------- ------------
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 November 19, 1998 the Board of Directors of the Fund declared a long-term
capital gain distribution of $0.325 per share for Class A, B, C and Z shares
respectively, payable on November 23, 1998 to shareholders of record on November
20, 1998.
- --------------------------------------------------------------------------------
12
<PAGE>
Financial Highlights PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C
---------------------------- ---------------------------- -----------
December 31, December 31,
1996(a) 1996(a)
Year Ended Throuth Year Ended Throuth Year Ended
October 31, October 31, October 31, October 31, October 31,
1998 1997 1998 1997 1998
----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 11.92 $ 10.00 $ 11.85 $ 10.00 $ 11.85
----------- ------ ----------- ------ -----
Income from investment operations
Net investment loss........................... (.11) (.08) (.20) (.14) (.20)
Net realized and unrealized gain on investment
transactions............................... .41 2.00 .39 1.99 .39
----------- ------ ----------- ------ -----
Total from investment operations........... .30 1.92 .19 1.85 .19
----------- ------ ----------- ------ -----
Less distributions
Distributions from net realized gains on
investment transactions.................... (.21) -- (.21) -- (.21)
----------- ------ ----------- ------ -----
Net asset value, end of period................ $ 12.01 $ 11.92 $ 11.83 $ 11.85 $ 11.83
----------- ------ ----------- ------ -----
----------- ------ ----------- ------ -----
TOTAL RETURN(c):.............................. 2.63% 19.20% 1.71% 18.50% 1.71%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $32,183 $ 33,124 $83,407 $ 82,070 $ 6,774
Average net assets (000)...................... $33,831 $ 28,141 $86,713 $ 67,420 $ 6,949
Ratios to average net assets:
Expenses, including distribution fees...... 1.25% 1.46%(b) 2.00% 2.21%(b) 2.00%
Expenses, excluding distribution fees...... 1.00% 1.21%(b) 1.00% 1.21%(b) 1.00%
Net investment loss........................ (.88)% (.92)%(b) (1.63)% (1.67)%(b) (1.63)%
Portfolio turnover rate.................... 177% 107% 177% 107% 177%
<CAPTION>
Class Z
----------------------------
December 31, December 31,
1996(a) 1996(a)
Throuth Year Ended Throuth
October 31, October 31, October 31,
1997 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $10.00 $ 11.93 $10.00
----- ----- -----
Income from investment operations
Net investment loss........................... (.14) (.04) (.03)
Net realized and unrealized gain on investment
transactions............................... 1.99 .38 1.96
----- ----- -----
Total from investment operations........... 1.85 .34 1.93
----- ----- -----
Less distributions
Distributions from net realized gains on
investment transactions.................... -- (.21) --
----- ----- -----
Net asset value, end of period................ $11.85 $ 12.06 $11.93
----- ----- -----
----- ----- -----
TOTAL RETURN(c):.............................. 18.50% 2.97% 19.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $6,477 $ 2,439 $ 561
Average net assets (000)...................... $5,526 $ 1,283 $ 261
Ratios to average net assets:
Expenses, including distribution fees...... 2.21%(b) 1.00% 1.21%(b)
Expenses, excluding distribution fees...... 1.21%(b) 1.00% 1.21%(b)
Net investment loss........................ (1.69)%(b) (.63)% (.73)%(b)
Portfolio turnover rate.................... 107% 177% 107%
</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. 13
<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, 1998, the results of its operations for the
year then ended, and the changes in its net assets and the financial highlights
for the year then ended and 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 audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at October 31, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 21, 1998
- --------------------------------------------------------------------------------
14
<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: 1/100th of 1%. For example, one-half of one percent 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.
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 other securities. 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
member banks.
Federal Funds Rate: The interest rate charged by one bank to another on
overnight loans.
Futures Contract: An agreement to purchase or sell a specific amount of a
commodity or financial instrument at a set price at a specified date in the
future.
Leverage: The use of borrowed assets to enhance return on equity. The
expectation is that the interest rate charged on borrowed funds 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 purchase or 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; often used to describe the
difference between "bid" and "asked for" prices of a security.
Yankee Bond: A bond sold by a foreign company or government in the U.S. market
and denominated in U.S. dollars.
<PAGE>
Getting The Most From Your Prudential Mutual Fund.
When you invest through Prudential Mutual Funds, you receive financial advice
through a Prudential Securities financial advisor or Prudential/Pruco
Securities registered representative. Your advisor or representative can
provide you with the following services:
There's No Reward Without Risk; But Is This Risk Worth It?
Your financial advisor or registered representative can help you match the
reward you seek with the risk you can tolerate. And risk can be difficult to
gauge --sometimes even the simplest investments bear surprising risks. The
educated investor knows that markets seldom move in just one direction -- there
are times when a market sector or asset class will lose value or provide little
in the way of total return. Managing your own expectations is easier with help
from someone who understands the markets and who knows you!
Keeping Up With The Joneses.
A financial advisor or registered representative can help you wade through the
numerous mutual funds available to find the ones that fit your own individual
investment profile and risk tolerance. While the newspapers and popular
magazines are full of advice about investing, they are aimed at generic groups
of people or representative individuals, not at you personally. Your financial
advisor or registered representative will review your investment objectives
with you. This means you can make financial decisions based on the assets and
liabilities in your current portfolio and your risk tolerance -- not just
based on the current investment fad.
Buy Low, Sell High.
Buying at the top of a market cycle and selling at the bottom are among the
most common investor mistakes. But sometimes it's difficult to hold on to an
investment when it's losing value every month. Your financial advisor or
registered representative can answer questions when you're confused or worried
about your investment, and remind you that you're investing for the long haul.
<PAGE>
Comparing A $10,000 Investment.
Prudential Emerging Growth Fund, Inc. vs. S&P
Mid-Cap 400 Index.
Past performance is not indicative of future results. Principal and investment
return 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, Inc.
(Class A, B, C, and Z shares) with a similar investment in the Standard &
Poor's Mid-Cap 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 each fiscal year (October 31), 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 charges were deducted from the value of the
investment in Class B and Class C shares, assuming full redemption on October
31, 1998; (c) beginning November 2, 1998, Class C shares are subject to a
front-end sales charge of 1% and a CDSC of 1% for 18 months. This change is
not reflected in the charts to the right; (d) all recurring fees (including
management fees) were deducted; and (e) all dividends and distributions were
reinvested. Class B shares will automatically convert to Class A shares, on a
quarterly basis, approximately seven years after purchase. This conversion
feature is not reflected in the graphs. Class Z shares are not subject to a
sales charge or distribution fee.
The Index is a weighted index comprised of approximately 400 medium-size
companies, chosen for market size, liquidity, and industry group
representation. The Index is comprised of industrial, utility, financial, and
transportation stocks that provide a broad indicator of stock price movements.
The Index is unmanaged and the total return 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 equity funds, and
other indexes may portray different comparative performance. Investors cannot
invest directly in an index.
<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
Douglas H. McCorkindale
Mendel A. Melzer, CFA
Thomas T. Mooney
Stephen P. Munn
Richard A. Redeker
Robin B. Smith
Brian M. Storms
Louis A. Weil, III
Clay T. Whitehead
Officers
Brian M. Storms, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
Marguerite E.H. Morrison, Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777
Distributor
Prudential Investment Management Services LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
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
PricewaterhouseCoopers 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
74431L305
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