(ICON)
Prudential
Mid-Cap
Value Fund
SEMI
ANNUAL
REPORT
July 31, 1998
(LOGO)
<PAGE>
Prudential Mid-Cap Value Fund
Performance At A Glance.
The mid-cap market (as measured by the S&P Mid-Cap 400 Index4) peaked on
April 22, 1998, and then investors turned away from small- and mid-cap firms
in search of the most stable -- and large -- companies. The Prudential Mid-Cap
Value Fund lagged the average mid-cap mutual fund tracked by Lipper Analytical
Services because of our emphasis on industrial stocks -- a sector that was
especially hard hit by the Asian economic slowdown as well as by fears of
recession. Our technology stocks, particularly electronics distributors and
semiconductor equipment manufacturers, also suffered.
<TABLE>
<CAPTION>
Cumulative
Total
Returns1
As of 7/31/98
Since Since
Inception2 Inception2
(Without Sales Charge) (With Sales Charge)
<S> <C> <C>
Class A -11.40% -15.83%
Class B -11.50 -16.50
Class C -11.50 -12.50
Class Z -11.50 -11.50
Lipper Mid-Cap Fund Avg.3 -6.38 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.
1Source: 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 B shares will
automatically convert to Class A shares, on a quarterly basis, approximately
seven years after purchase. Class C shares have a 1% CDSC for one year if
purchased before October 1998. Class Z shares are not subject to a sales
charge or distribution fee.
2Inception dates: Class A, B, C, and Z, 5/11/98.
3The Lipper Since Inception return is for all funds in each share class in the
Mid-Cap Fund category.
4The Standard & Poor's Mid-Cap 400 is a weighted, unmanaged index consisting
of medium-sized companies, which provides a broad indicator of stock price
movements. An investment cannot be made in an index.
How Investments Compared.
(As of 7/31/98)
(GRAPH)
U.S. General General U.S.
Growth Bond Muni Debt Taxable
Funds Funds Funds Money Funds
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 invest-ments.
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>
Roger Ford & Jay Kaplan, Fund Managers
(PHOTOS)
Portfolio
Managers' Report
The Prudential Mid-Cap Value Fund provides an opportunity for long-term
capital growth by investing primarily in stocks of medium-size companies that
the managers believe to be undervalued. We follow a traditional value
investment style: we look for good businesses with sound management that are
selling for substantially less than a fair price. We are aiming at good risk-
adjusted returns year after year. There can be no assurance that the Fund will
achieve its investment objective.
Time To Shop.
The rapid climb of the U.S. stock market over the past few years created a
difficult environment for value investors, who look for stocks priced below
what we consider to be their fair value. All stocks were expensive, by
historical standards, and there were few underpriced bargains. The recent
decline of the stocks of midsize companies, however, has created buying
opportunities for us. We believe many companies are selling for much less than
their earnings prospects warrant.
Strategy Session.
Portfolio Composition.
Sectors expressed as a percentage of
total net assets as of 7/31/98.
(PIE CHART)
*7% represents obligations under financial futures contracts. It represents
exposure to the broad market, not investable funds. See Note 4 in the Notes to
Financial Statements.
Industrials -- The Neglected Sector.
As value investors, we buy companies whose earnings prospects are not reflected
in their stock prices. About a third of our holdings are industrial companies
that benefit from an expanding economy. They are inexpensive because many
investors appear to be anticipating a severe recession. In our opinion,
continued slow growth is more likely -- a mild recession at worst. If the
economy should reverse course, stock prices for mid-cap industrials have
fallen to levels that we believe will provide a reasonable return. If economic
growth continues, these stocks represent exceptional value. Nonetheless, we
plan to increase our diversification with future purchases in nonindustrial
sectors.
During our start-up months, we held cash and futures contracts to ease our
entry into the markets. We benefited slightly in the declining environment by
not being fully invested. Now, we are putting those funds to work at today's
advantageous prices. In addition to increasing the number of stocks we hold,
we will add to some existing positions, averaging the lower prices into our
acquisition costs.
<PAGE>
What Went Well.
Bargains Sometimes Are Bought.
When we shop for underpriced companies, we expect that either the stock market
or another company eventually will pay us a price for them that reflects their
true worth. In the short period since our inception, even in the uncertain
current environment, two of our holdings -- Allied Group (up 76%) and Bay
Networks (up 39%) -- already have attracted buyout interest. The former is a
strong insurance company that sells property and casualty insurance to
individuals and small businesses. It has been growing despite a poor business
environment. We believe its prior stock price had reflected the conditions
affecting the entire industry, not Allied's value; Nationwide Mutual offered
to buy it, driving up its price. Similarly, the depressed networking industry
gave Northern Telecom room for an attractive offer to Bay Networks.
Five Largest
Holdings.
2.4% World Color Press, Inc.
Commercial Services
2.3% Premark Int'l., Inc.
Industrial
2.2% Borg-Warner Automotive, Inc.
Auto & Truck
2.1% Reinsurance Group
of America, Inc.
Insurance
2.1% Lincoln Electric Holdings
Electric Equipment
Expressed as a percentage of net assets as of 7/31/98.
And Not So Well.
A Poor Place To Be.
We had a large proportion of our holdings in industrial firms, and that proved
to be a poor place to be this summer. Industrial firms typically do better in
growing economies. Investors apparently fear a recession. That might explain
why a well-managed cement and steel company like Texas Industries would be
down 37%. Manufacturers of agricultural equipment also were hit hard because
farmers are expected to spend less on equipment. Agricultural products were
cheaper than at any time since June 1995 (as measured by the Goldman Sachs
Agricultural Commodity Index). Moreover, U.S. farmers no longer have the
government security blanket that protected their income in previous years. We
owned New Holland and Case, two leading farm equipment manufacturers. They
fell 39% and 44%, respectively, in anticipation of future softening of
agricultural equipment sales.
Some other companies we owned face current difficulties: Dexter, a chemical
company whose sales to electronics firms are soft (down 34%), and Belden, a
wire and cable company exposed to Asian problems (down 37%). Although these
firms face some rocky times, they are well-managed and we believe that the
sharp drop in their prices was an overreaction.
Looking Ahead.
The pace of U.S. economic growth has slowed, although the economy is still
expanding, fueled largely by consumer purchases. Unemploy-ment is low; home
sales and consumer confidence have been high. We are concerned that the Asian
recession, the difficulties facing industrial firms, and recent negative stock
market returns may reduce consumer buying. The growth engine may run out of
fuel. We are increasing our diversifi-cation by adding nonindustrial firms
and continuing to look for superior firms selling at low prices. We try to
buy primarily companies that already are out of favor, so we believe our
stocks are likely to react less to investors' apprehension.
- -------------------------------------------------------------------------------
1
<PAGE>
A Declining Market Creates Opportunity.
Portfolio Manager Jay Kaplan discusses how value investors find value in
today's market.
Q. What characterizes your value style of investing?
A. We look for stocks that are inexpensive on the basis of price/cash flow,
price/earnings, price/book value, asset values, breakup values and private
market values. We tend to focus on cash flow, because free cash enables good
managers to invest in new opportunities, pay back debt, buy back stock, and
otherwise add value for investors.
We also look for companies that are not followed by many analysts, where good
news can push prices up sharply, and for a catalyst that is likely to produce
a major shift in share price, such as a restructuring, merger, asset sale,
acquisition, spinoff, or management change. We gain an advantage from our own
extensive research. Although sometimes it takes a while for other investors
to come around to our view, other times we are just a step ahead of the pack.
For example, one of our current holdings -- Burlington Coat Factory -- has
attracted greater analyst interest in the short time since we opened the
Fund. Perhaps as a consequence, its share price has appreciated sharply. Two
other firms in our portfolio have attracted corporate buyers.
Q. Value stocks have been trailing growth stocks recently. Is this a good
environment for value investing?
A. Early in the year, there weren't many value opportunities because the
strong flow of money into the stock market had bid up the prices even of
unpopular stocks. When we opened the Fund, we had to look very hard to find
values we liked. But investors began to fear -- more than we believe is
warranted -- that the Asian recession would spread to the U.S. When they
flocked to a very small number of familiar companies, they neglected many
well-managed firms with good earnings prospects. So the recent decline of
mid-cap stocks, although it has hurt our return to date, has created many
opportunities for us.
Q. The stocks are inexpensive, but what if they stay that way?
A. No one can predict the future, but our strategy of buying undervalued
stocks has worked for us in the past. Good values generally attract buyers
sooner or later. In the mid-cap universe, value stocks outperformed growth
stocks substantially in 1997 and have provided a higher average return over
the past five years as well (according to the Russell Mid-Cap Value and Growth
Indexes1). We manage the Mid-Cap Value Fund with the same methods we have been
using to manage Prudential's Small-Cap Value Fund.
1The Russell Mid-Cap Value/Growth Indexes measure the performance of companies
with lower/higher price-to-book ratios and forecast growth of the 800 smallest
companies in the Russell 1000 Index. An investment cannot be made in an index.
(PHOTO)
- -------------------------------------------------------------------------------
2
<PAGE>
President's Letter September 8, 1998
(PHOTO)
Managing Expectations.
Dear Shareholder:
For nearly eight years we've enjoyed above-average, double-digit returns from
stocks -- a bull market of unprecedented duration. As a result, many of us
have grown accustomed to seeing the Dow Jones Industrial Average, the S&P 500
and other market indexes set new records. That's why the fluctuations normally
seen in financial markets may take investors by surprise.
Although the media have given ample coverage to the factors that have caused
concern in 1998, we'd like to remind you that there is also good news to
report: the U.S. economy is healthy and continues to grow. Inflation remains
subdued and employment is strong.
Even with a sound economy, it isn't easy to maintain your investment
discipline when the market is fluctuating. Here are some thoughts that may
help:
- - Manage Your Expectations. Experienced mutual fund investors understand that
financial markets rise and fall. Over time, however, stocks and bonds have
produced attractive returns that have kept ahead of inflation.
- - Don't Invest Emotionally. If you have long-term (several years or longer)
investment goals, it may be counterproductive to sell an investment in
reaction to short-term market fluctuation. Over the course of several years,
it's not unusual for stocks and bonds to experience several periods of
market uncertainty.
- - Diversification Lessens Risk. Market sectors seldom move in tandem. A well-
diversified portfolio that includes stock, bond, and money market mutual
funds can lessen the effects of market volatility over time.
- - We're On Your Side. Your Prudential professional can help you understand
what's happening in the markets. He or she can assist you in making informed
decisions based upon a thorough knowledge of your financial needs and long-
term goals. Call your Prudential professional today.
Thank you for your continued confidence in Prudential mutual funds. We'll do
everything we can to keep you informed and to earn your trust.
Sincerely,
Brian M. Storms
President, Prudential Mutual Funds & Annuities
- -------------------------------------------------------------------------------
3
<PAGE>
Portfolio of Investments as of
July 31, 1998 (Unaudited) PRUDENTIAL MID-CAP VALUE FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- -----------------------------------------------------------
LONG-TERM INVESTMENTS--82.1%
COMMON STOCKS--82.1%
- -----------------------------------------------------------
Aerospace/Defense--4.3%
58,000 GenCorp Inc. $ 1,337,625
28,400 Litton Industries, Inc.(a) 1,627,675
22,600 Precision Castparts Corp. 1,031,125
-----------
3,996,425
- ------------------------------------------------------------
Auto & Truck--4.0%
43,400 Borg-Warner Automotive, Inc. 2,042,512
31,900 Lear Corp.(a) 1,692,694
-----------
3,735,206
- ------------------------------------------------------------
Chemicals--2.0%
157,900 Agrium, Inc., (Canada) 1,884,931
- ------------------------------------------------------------
Coal--1.3%
57,500 Arch Coal, Inc. 1,167,969
- ------------------------------------------------------------
Commercial Services--2.4%
65,700 World Color Press, Inc.(a) 2,237,906
- ------------------------------------------------------------
Electric Utilities--1.1%
68,700 Niagara Mohawk Power Corp.(a) 1,043,381
- ------------------------------------------------------------
Electrical Equipment--3.4%
47,300 Belden Inc. 1,247,537
87,000 Lincoln Electric Holdings 1,935,750
-----------
3,183,287
- ------------------------------------------------------------
Electronics--6.3%
72,100 Arrow Electronics, Inc. 1,446,506
31,600 Avnet, Inc. 1,734,050
39,800 National Semiconductor Corp.(a) 490,038
48,300 Varian Associates, Inc. 1,678,425
29,800 VLSI Technology, Inc.(a) 476,800
-----------
5,825,819
Engineering & Construction--1.2%
29,900 Texas Industries, Inc. $ 1,113,775
- ------------------------------------------------------------
Food/Drug Retail--1.3%
56,200 Richfood Holdings, Inc. 1,215,325
- ------------------------------------------------------------
Hospital Management--3.2%
44,800 Trigon Healthcare, Inc.(a) 1,402,800
29,900 Universal Health Services, Inc.(a) 1,532,375
-----------
2,935,175
- ------------------------------------------------------------
Housing Related--1.2%
52,300 D.R. Horton, Inc. 1,130,988
- ------------------------------------------------------------
Insurance--12.4%
33,400 ALLIED Group, Inc. 1,573,975
55,200 AmerUs Life Holdings, Inc. 1,721,550
35,800 Capital Re Corp. 1,181,400
30,600 Enhance Financial Services Group
Inc. 960,075
35,900 Financial Security Assurance
Holdings Ltd. 1,869,044
34,700 Old Republic International Corp. 921,719
18,600 PMI Group, Inc. 1,260,150
32,600 Reinsurance Group of America, Inc. 1,982,487
-----------
11,470,400
- ------------------------------------------------------------
Lodging/Gaming--1.7%
76,000 Harrah's Entertainment, Inc.(a) 1,605,500
- ------------------------------------------------------------
Machinery--2.0%
22,600 Case Corp. 766,988
69,600 New Holland NV (Netherlands) 1,070,100
-----------
1,837,088
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 4
<PAGE>
Portfolio of Investments as of
July 31, 1998 (Unaudited) PRUDENTIAL MID-CAP VALUE FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- -----------------------------------------------------------
Miscellaneous Industrial--14.3%
60,400 Blount International, Inc. $ 1,608,150
32,200 Crane Co. 1,593,900
44,200 Harsco Corp. 1,908,887
47,300 IDEX Corp. 1,345,094
63,300 Mark IV Industries, Inc. 1,218,525
40,700 Pentair, Inc. 1,617,825
69,000 Premark International, Inc. 2,139,000
57,900 United Dominion Industries Ltd. 1,791,281
-----------
13,222,662
- ------------------------------------------------------------
Office Equipment & Supplies--1.3%
65,600 Kimball International, Inc. 1,164,400
- ------------------------------------------------------------
Oil Exploration & Production--6.4%
73,200 Oryx Energy Co.(a) 1,349,625
58,600 Pioneer Natural Resources Co. 1,153,687
182,700 Santa Fe Energy Resources, Inc.(a) 1,610,044
128,400 Vintage Petroleum, Inc. 1,837,725
-----------
5,951,081
- ------------------------------------------------------------
Railroads--1.6%
70,000 Wisconsin Central Transportation
Corp.(a) 1,437,188
- ------------------------------------------------------------
Regional Banks--1.5%
59,200 Peoples Heritage Financial Group,
Inc. 1,339,400
- ------------------------------------------------------------
Retail--1.8%
65,800 Burlington Coat Factory Warehouse
Corp. 1,612,100
Savings & Loan--2.9%
28,000 Astoria Financial Corp. $ 1,403,500
40,200 Charter One Financial, Inc. 1,309,013
-----------
2,712,513
- ------------------------------------------------------------
Specialty Chemicals--3.2%
59,000 Dexter Corp. 1,615,125
58,500 Ferro Corp. 1,345,500
-----------
2,960,625
- ------------------------------------------------------------
Steel--1.3%
44,400 UCAR International Inc.(a) 1,171,050
-----------
Total long-term investments
(cost $87,881,230) 75,954,194
-----------
<CAPTION>
Principal
Amount
(000)
<C> <S> <C>
SHORT-TERM INVESTMENT--18.5%
REPURCHASE AGREEMENT
- ------------------------------------------------------------
$ 17,087 Joint Repurchase Agreement Account,
5.61%, 8/3/98
(cost $17,087,000; Note 5) 17,087,000
-----------
- ------------------------------------------------------------
Total Investments--100.6%
(cost $104,968,230; Note 4) 93,041,194
Liabilities in excess of other
assets--(0.6%) (515,409)
-----------
Net Assets--100% $92,525,785
-----------
-----------
</TABLE>
- ---------------
(a) Non-income producing security.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>
Statement of Assets and Liabilities (Unaudited) PRUDENTIAL MID-CAP VALUE FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets July 31, 1998
<S> <C>
Investments, at value (cost $104,968,230).................................................................... $ 93,041,194
Cash......................................................................................................... 789
Cash collateral for futures contracts........................................................................ 215,000
Deferred expenses and other assets........................................................................... 256,980
Receivable for investments sold.............................................................................. 219,805
Receivable for Fund shares sold.............................................................................. 110,855
Dividends and interest receivable............................................................................ 37,123
-------------
Total assets.............................................................................................. 93,881,746
-------------
Liabilities
Payable for investments purchased............................................................................ 892,662
Accrued expenses............................................................................................. 263,851
Due to broker-variation margin............................................................................... 134,292
Management fee payable....................................................................................... 58,150
Payable for Fund shares reacquired........................................................................... 4,760
Distribution fee payable..................................................................................... 2,246
-------------
Total liabilities......................................................................................... 1,355,961
-------------
Net Assets................................................................................................... $ 92,525,785
-------------
-------------
Net assets were comprised of:
Common stock, at par...................................................................................... $ 104,562
Paid-in capital in excess of par.......................................................................... 104,278,698
-------------
104,383,260
Undistrbuted net investment income........................................................................ 105,446
Accumulated net realized gain on investments.............................................................. 170,440
Net unrealized depreciation on investments................................................................ (12,133,361 )
-------------
Net assets, July 31, 1998.................................................................................... $ 92,525,785
-------------
-------------
Class A:
Net asset value and redemption price per share
($1,147,816 / 129,560 shares of common stock issued and outstanding)................................... $8.86
Maximum sales charge (5% of offering price)............................................................... .47
-------------
Maximum offering price to public.......................................................................... $9.33
-------------
-------------
Class B:
Net asset value, offering price and redemption price per share
($2,387,245 / 269,809 shares of common stock issued and outstanding)................................... $8.85
-------------
-------------
Class C:
Net asset value, offering price and redemption price per share
($250,146 / 28,275 shares of common stock issued and outstanding)...................................... $8.85
-------------
-------------
Class Z:
Net asset value, offering price and redemption price per share
($88,740,578 / 10,028,528 shares of common stock issued and outstanding)............................... $8.85
-------------
-------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 6
<PAGE>
PRUDENTIAL MID-CAP VALUE FUND
Statement of Operations (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
May 11, 1998(a)
Through
Net Investment Income July 31, 1998
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $11,162)..................... $ 181,019
Interest................................. 221,005
---------------
Total income.......................... 402,024
---------------
Expenses
Management fee........................... 149,964
Distribution fee--Class A................ 430
Distribution fee--Class B................ 3,203
Distribution fee--Class C................ 359
Amortization of deferred organizational
costs................................. 44,271
Custodian's fees and expenses............ 27,000
Transfer agent's fees and expenses....... 27,000
Reports to shareholders.................. 15,000
Legal fees and expenses.................. 9,000
Audit fees and expenses.................. 8,000
Registration fees........................ 6,000
Trustees' fees and expenses.............. 5,000
Miscellaneous............................ 1,351
---------------
Total expenses........................ 296,578
---------------
Net investment income....................... 105,446
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................. 810,015
Financial futures contracts.............. (639,575)
---------------
170,440
---------------
Net change in unrealized depreciation of:
Investments.............................. (11,927,036)
Financial futures........................ (206,325)
---------------
(12,133,361)
---------------
Net loss on investments..................... (11,962,921)
---------------
Net Decrease in Net Assets
Resulting from Operations................... $ (11,857,475)
---------------
---------------
- ---------------
(a) Commencement of investment operations.
</TABLE>
<TABLE>
PRUDENTIAL MID-CAP VALUE FUND
Statement of Changes in Net Assets (Unaudited)
<CAPTION>
May 11, 1998(a)
Increase In Through
Net Assets July 31, 1998
<S> <C>
Operations
Net investment income........................ $ 105,446
Net realized gain on investments............. 170,440
Net change in unrealized depreciation of
investments............................... (12,133,361)
---------------
Net decrease in net assets resulting
from operations........................... (11,857,475)
---------------
Fund share transactions (net of share
conversion)
(Note 6)
Net proceeds from shares sold................ 104,492,699
Cost of shares reacquired.................... (209,439)
---------------
Net increase in net assets from Fund share
transactions.............................. 104,283,260
---------------
Total increase.................................. 92,425,785
Net Assets
Beginning of period............................. 100,000
---------------
End of period(b)................................ $ 92,525,785
---------------
---------------
- ---------------
(a) Commencement of investment operations.
(b) Includes undistributed net investment income
of.............................................. $ 105,446
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL MID-CAP VALUE FUND
- --------------------------------------------------------------------------------
Prudential Mid-Cap Value Fund (the 'Fund') is registered under the Investment
Company Act of 1940 as a diversified, open-end, management investment company.
The Fund was organized in Delaware on October 24, 1997 as a business trust. The
Fund issued 2,500 shares each of Class A, Class B, Class C and Class Z common
stock for $100,000 on April 14, 1998 to Prudential Investments Fund Management
LLC ('PIFM').
The Fund's investment objective is to achieve long-term capital growth by
investing primarily in equity-related securities of mid-cap companies, ranging
from $1 billion to $5 billion in market capitalization.
- ------------------------------------------------------------
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 Trustees 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.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Fund is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the 'initial margin.' Subsequent payments, known as 'variation margin,'
are made or received by the Fund each day, depending on the daily fluctuations
in the value of the underlying security. Such variation margin is recorded for
financial statement purposes on a daily basis as unrealized gain or loss. When
the contract expires or is closed, the gain or loss is realized and is presented
in the statement of operations as net realized gain (loss) on financial futures
contracts.
The Fund invests in financial futures contracts in order to hedge its existing
portfolio securities, or securities the Fund intends to purchase, against
fluctuations in value caused by changes in prevailing interest rates. Should
interest rates move unexpectedly, the Fund may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. The use of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged assets.
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 semi-annually. The Fund will distribute net capital gains in excess of
loss carryforwards, if any, at least annually. Dividends and distributions are
recorded on the ex-dividend date.
- --------------------------------------------------------------------------------
8
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL MID-CAP VALUE FUND
- --------------------------------------------------------------------------------
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income 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 $300,000 of expenses were incurred
in connection with the organization of the Fund. These 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 .70 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. The Fund compensated 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 were accrued daily and payable monthly.
No distribution or service fees were paid to PSI as distributor of the Class Z
shares of the Fund. Effective July 1, 1998, Prudential Investment Management
Services LLC ('PIMS') became the distributor of the Fund and will serve the Fund
under the same terms and conditions as under the arrangement with PSI.
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 May 11, 1998 through July 31, 1998.
PSI has advised the Fund that it has received approximately $30,000 in front-end
sales charges resulting from sales of Class A shares for the period May 11, 1998
through July 31, 1998. From these fees, PSI paid such sales charges to dealers,
which in turn paid commissions to salespersons and incurred other distribution
costs.
PSI, PIFM, PIMS 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 May 11, 1998 through July
31, 1998, the Fund incurred fees of approximately $1,700 for the services of
PMFS. As of July 31, 1998, approximately $1,700 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.
During the period May 11, 1998 through July 31, 1998, PSI received approximately
$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 May 11, 1998 through July 31, 1998 were $94,071,853 and $7,001,
respectively.
The cost basis of investments for federal income tax purposes at July 31, 1998
was substantially the same as for financial reporting purposes and accordingly,
net unrealized depreciation of investments for federal income tax purposes was
$11,927,036 (gross unrealized appreciation--$1,643,660; gross unrealized
depreciation--$13,570,696).
- --------------------------------------------------------------------------------
9
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL MID-CAP VALUE FUND
- --------------------------------------------------------------------------------
During the period ended July 31, 1998, the Fund entered into financial futures
contracts. Details of open contracts as of July 31, 1998 are as follows:
<TABLE>
<CAPTION>
Value at Value at Unrealized
Number of Expiration July 31, Trade Appreciation/
Contracts Type Date 1998 Date (Depreciation)
- -------------- ------------ ---------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
Long Positions:
35 S&P 400 Sept. 1998 $6,082,125 $6,288,450 $ (206,325)
--------------
--------------
</TABLE>
- ------------------------------------------------------------
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. Government or federal agency obligations. As of July 31, 1998, the Fund
had a 2.2% undivided interest in the repurchase agreements in the joint account.
The undivided interest for the Fund represented $17,087,000 in principal amount.
As of such date, each repurchase agreement in the joint account and the value of
the collateral therefor were as follows:
Credit Suisse First Boston Corp., 5.67%, dated 7/31/98, in the principal amount
of $175,000,000, repurchase price $175,082,689, due 8/3/98. The value of the
collateral including accrued interest is $180,594,823.
Bear, Stearns & Co. Inc., 5.66%, dated 7/31/98, in the principal amount of
$175,000,000, repurchase price $175,082,542, due 8/3/98. The value of the
collateral including accrued interest is $179,027,728.
Salomon Smith Barney Inc., 5.64%, dated 7/31/98, in the principal amount of
$175,000,000, repurchase price $175,082,251, due 8/3/98. The value of the
collateral including accrued interest is $178,789,931.
Walburg Dillon Read LLC, 5.52%, dated 7/31/98, in the principal amount of
$235,118,000, repurchase price $235,226,153, due 8/3/98. The value of the
collateral including accrued interest is $240,150,611.
- ------------------------------------------------------------
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. 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.
The Fund is authorized to issue an unlimited number of shares of beneficial
interest, $.001 per value per share, equally divided into four classes,
designated Class A, Class B, Class C and Class Z shares
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
May 11, 1998(a) through July 31,
1998:
Shares sold......................... 143,218 $ 1,379,066
Shares reacquired................... (16,714) (157,905)
---------- ------------
Net increase in shares outstanding
before conversion................. 126,504 1,221,161
Shares issued upon conversion from
Class B........................... 556 5,199
---------- ------------
Net increase in shares
outstanding....................... 127,060 $ 1,226,360
---------- ------------
---------- ------------
<CAPTION>
Class B
- ------------------------------------
May 11, 1998(a) through July 31,
1998:
Shares sold......................... 271,118 $ 2,601,132
Shares reacquired................... (3,253) (30,870)
---------- ------------
Net increase in shares outstanding
before conversion................. 267,865 2,570,262
Shares reacquired upon conversion
into Class A...................... (556) (5,199)
---------- ------------
Net increase in shares
outstanding....................... 267,309 $ 2,565,063
---------- ------------
---------- ------------
<CAPTION>
Class C
- ------------------------------------
May 11, 1998(a) through July 31,
1998:
Shares sold......................... 28,827 $ 248,383
Shares reacquired................... (52) (505)
---------- ------------
Net increase in shares
outstanding....................... 25,775 $ 247,878
---------- ------------
---------- ------------
<CAPTION>
Class Z
- ------------------------------------
May 11, 1998(a) through July 31,
1998:
Shares sold......................... 10,028,100 $100,264,118
Shares reacquired................... (2,072) (20,159)
---------- ------------
Net increase in shares
outstanding....................... 10,026,028 $100,243,959
---------- ------------
---------- ------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
10
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL MID-CAP VALUE FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C
--------------- --------------- ---------------
May 11, 1998(a) May 11, 1998(a) May 11, 1998(a)
Through Through Through
July 31, July 31, July 31,
1998 1998 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $ 10.00 $ 10.00 $ 10.00
------ ------ -----
Income from investment operations
Net investment income (loss)................................. --(d) (.01) (.01)
Net realized and unrealized loss on investment
transactions.............................................. (1.14) (1.14) (1.14)
------ ------ -----
Total from investment operations.......................... 8.86 8.85 8.85
------ ------ -----
Net asset value, end of period............................... $ 8.86 $ 8.85 $ 8.85
------ ------ -----
------ ------ -----
TOTAL RETURN(c):............................................. (11.40)% (11.50)% (11.50)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $ 1,148 $ 2,387 $ 250
Average net assets (000)..................................... $ 766 $ 1,426 $ 160
Ratios to average net assets(b):
Expenses, including distribution fees..................... 1.62%(b) 2.37%(b) 2.37%(b)
Expenses, excluding distribution fees..................... 1.37%(b) 1.37%(b) 1.37%(b)
Net investment income (loss).............................. .16%(b) (.65)%(b) (.60)%(b)
Portfolio turnover rate...................................... .01% .01% .01%
<CAPTION>
Class Z
---------------
May 11, 1998(a)
Through
July 31,
1998
---------------
PER SHARE OPERATING PERFORMANCE:
<S> <C>
Net asset value, beginning of period......................... $ 10.00
------
Income from investment operations
Net investment income (loss)................................. .01
Net realized and unrealized loss on investment
transactions.............................................. (1.16)
------
Total from investment operations.......................... 8.85
------
Net asset value, end of period............................... $ 8.85
------
------
TOTAL RETURN(c):............................................. (11.50)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $88,741
Average net assets (000)..................................... $93,009
Ratios to average net assets(b):
Expenses, including distribution fees..................... 1.37%(b)
Expenses, excluding distribution fees..................... 1.37%(b)
Net investment income (loss).............................. .51%(b)
Portfolio turnover rate...................................... .01%
</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.
(d) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 11
<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>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Trustees
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
Louis A. Weil, III
Clay T. Whitehead
Officers
Richard A. Redeker, President
Robert F. Gunia, 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 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.
The accompanying financial statements as of July 31, 1998 were not audited
and, accordingly, no opinion is expressed on them.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
<PAGE>
(LOGO)
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
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