<PAGE>
Prudential
Diversified Funds
(ICON)
Prudential
Diversified
Conservative
Growth Fund
ANNUAL
REPORT
July 31, 1999
(LOGO)
<PAGE>
A Message from the Fund's President September 17, 1999
- -------------------------------------------------------------------------------
(PHOTO)
Dear Shareholder,
The Prudential Diversified Conservative Growth Fund's A shares returned 5.34%
(excluding the sales charge) from inception to the end of our reporting period
(July 31, 1999). It trailed the Lipper Balanced Funds Average, reflecting our
heavy weighting in bonds, which is appropriate for a conservative fund.
High-quality bonds, which did much better last year when investors sought
security during a panic in financial markets, generally perform better in times
of low inflation and restrained economic growth. They were hurt over this
period by investor concerns that an overheated economy would generate higher
inflation.
Although bonds declined for most of the period, our return was supported by our
larger growth-style stocks, which performed even better than the average growth
stock over our reporting period. As economic conditions change, however,
investor sentiment can shift to other market segments. In the second quarter of
1999, there was evidence of such a shift as smaller, more value-oriented stocks
rallied strongly, helping to sustain our return during that period when bonds
and other stocks lagged.
The value of diversification
The Prudential Diversified Funds combine securities in different asset classes
so you are not fully exposed to the vagaries of the market for any single
investment. In addition, they offer the specialized management that different
asset classes and investment styles call for.
While no one can guarantee future results, staying with a well-balanced asset
allocation can reduce volatility, smoothing returns over time. By using a range
of investment specialists to manage the holdings of one Fund, we hope to make
the benefits of diversification as convenient as possible for long-term
investors.
Thank you for your continued confidence in Prudential mutual funds.
Sincerely,
John R. Strangfeld
President
Prudential Diversified Funds
<PAGE>
Investment Advisers' Report
- -------------------------------------------------------------------------------
Investment Advisers' Report
Prudential Investments Fund
Management LLC
- - John Van Belle, Ph.D.
- - Stacie Mintz
Sub-Advisers
(PRUDENTIAL INVESTMENTS LOGO)
(FRANKLIN TEMPLETON LOGO)
(JENNISON ASSOCIATES LOGO)
(DREYFUS LOGO)
(PIMCO LOGO)
Investment Goals and Style
The Fund seeks to provide current income and a reasonable level of capital
appreciation. It invests in a diversified portfolio of bonds and stocks. There
can be no assurance that the Fund will achieve its investment objective.
The Economic Context
Since the Fund's inception on November 18, 1998, investors lurched from
confusion to confidence in the global economy. They ended our reporting period
with a generally positive outlook, but one tempered with fears that stronger
growth could lead to higher inflation and interest rates.
In the summer of 1998, financial markets were affected seriously by a sharp and
severe recession in Asia that threatened global growth. Russia then defaulted
on loans, darkening the picture further and sending markets into turmoil.
However, central banks in Europe and the United States Federal Reserve Bank
responded aggressively in the fall, reducing interest rates to stimulate
economic activity. The medicine worked.
In the new year, the U.S. economy, driven by domestic consumer demand,
continued its vigorous expansion. That good news was joined by relative
stability in Latin America, where problems in Brazil--the region's largest
economy--appeared better contained than had been expected. Stirrings of
economic activity were felt in Europe and Asia; even long-suffering Japan
showed signs of life.
The promise of economic recovery and increased demand brought with it the
prospects of higher inflation--an indication that the pace of growth may be
exceeding its natural limits. Alan Greenspan, chairman of the Federal Reserve,
repeatedly warned that the Fed would take action, if necessary, to raise
interest rates as a way of preempting inflation. Indeed, the Federal Reserve
twice increased a key rate over the summer. Both increases were modest,
however, calming investors and allowing the rally in financial markets to
continue.
Equity Markets
Panic over the troubles in Asia and Russia sent financial markets reeling in
1998, with nearly all stocks and bonds tumbling except those investors
considered safest--in particular, bonds issued by the United States government.
The actions by the U.S. Federal Reserve and other central banks calmed markets
in the fall, however, fueling a rebound.
Sensing economic recovery abroad, investors in the first quarter of 1999 moved
money back into equities in Asia, Latin America and, to a smaller extent,
Europe. Japanese stocks improved significantly. Very strong U.S. growth sent
domestic stock market indexes to a series of record highs: for example, the
Standard & Poor's 500 Index,
<PAGE>
Dow Jones Industrials Average, and NASDAQ Composite Index pushed into
uncharted territory.
Although gains were concentrated at first in the very largest growth companies,
more stocks began to share in the advance as time went on. Growing confidence
about global growth prospects led to increases for value stocks and smaller
stocks, which saw a catch-up spurt in the second quarter.
Among large-cap stocks, value issues--as measured by the S&P/BARRA Value
Index--returned 11% in the quarter, significantly outperforming their
counterparts in the S&P/BARRA Growth Index, which returned 4%.
For our reporting period as a whole, however, large-cap stocks still provided
better returns overall, and growth stocks beat value stocks. Nearly all equity
categories fell somewhat in July, as some investors took profits and others
considered the impact that a resurgence of inflation could have on corporate
earnings.
Bond Markets
While equities advanced, most fixed-income securities fell. The safest issues,
U.S. Treasury bonds, had become very expensive last year when investors fled
emerging
Cumulative Total Returns1 As of 7/31/99
<TABLE>
<CAPTION>
Since Inception2 Since Inception2
(Without Sales Charge) (With Sales Charge)
<S> <C> <C>
Class A 5.34% 0.07%
Class B 4.77 -0.23
Class C 4.77 2.72
Class Z 5.58 5.58
Lipper Balanced Fund Avg.3 7.25 N/A
</TABLE>
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
1 Source: Prudential Investments Fund Management LLC and Lipper, Inc. Since the
Fund has been in existence less than one year, no average annual total returns
are presented. The Fund charges a maximum front-end sales charge 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 Z shares
are not subject to a sales charge or distribution and service (12b-1) fees.
2 Inception date: Class A, B, C, and Z, 11/18/98.
3 The Lipper Since Inception return is for all funds in each share class in the
Balanced Fund category.
Glossary of Terms
Asset classes are classifications of investments. The most basic classification
of securities is among stocks, bonds, and money market investments.
Stocks are shares of ownership in a firm. Owners share in the profits, after
debts are paid, and share in the firm's appreciation in value. Generally, the
prices of stocks vary with investors' estimates of a firm's earning prospects,
including the impact of broader economic conditions.
Bonds are loans to a company, government, or agency. They carry a fixed
interest rate or one that varies according to a rule that is specified in the
bond. They have a maturity date at which they must be repaid. Generally, bond
prices vary with current interest rates for new bonds and with changes in the
debtor's prospects of repaying the loan.
Money market instruments are very short-term loans of 13 months or less. Bonds
and money market instruments are called fixed-income securities.
1
<PAGE>
Advisers' Report Cont'd.
- -------------------------------------------------------------------------------
markets such as Asia, Latin America and Russia. But in 1999, as prospects for
global growth improved, investors sold high-quality bonds and moved back into
riskier markets. The Lehman Brothers Aggregate Bond Index declined 1.5% during
our reporting period.
High-yield bonds, commonly known as "junk bonds," fared a little better as
investors became more comfortable with economic prospects around the world.
Ironically, however, confidence in the economy brought with it fears of higher
costs, which can erode the value of bonds' fixed payments. Although few signs
of rising inflation surfaced, investors demanded higher yields to make up for
the possibility they would return--which resulted in lower bond prices, hurting
bond markets virtually across the board.
Our Performance
The impact of inflation fears on bond markets was the most significant factor
for the Fund's return in the year ended July 31, 1999. Our commitment of 40% of
the portfolio to high-quality bonds provides a conservative posture in times of
market panic or slower economic growth, but hurt us over the past eight months
as evidence gathered of stronger growth in Asia, Europe, and the Americas.
Under these conditions, we saw slightly better performance from the 20% of our
holdings in more aggressive high-yield bonds.
Because our portfolio is broadly diversified, we had support from other market
segments during the period. Large-capitalization stocks led financial markets
for the period; within the large-cap universe, we gained most from our growth
stocks. However, our large-cap value stocks also generated strong returns: in
the second quarter, when value stocks outperformed, our strongly disciplined
selections did particularly well, helping make up for earlier months that were
hostile to the value investing style.
It is in the nature of a diversified portfolio that not all asset classes will
perform well at the same time. It is worth remembering that should markets turn
against growth stocks or inflation concerns subside, bonds may hold their value
better. Owning a broad range of securities improves the prospects for
consistent returns over time.
Looking Ahead
The U.S. economy, approaching a record for continuous growth in 150 years of
historical data, continues to run steadily ahead. Markets remain volatile, but
investors appear willing to consider a broader range of equities than they have
considered in recent years. If inflation remains modest, consumer demand stays
strong, and global economic health continues to improve, we would expect an
environment favorable to U.S. companies to continue. While higher inflation
could mean continued trouble for bond markets, moderate growth in the U.S.
economy would help keep inflation under control and further increases in
interest rates at bay, improving prospects for bonds.
2
<PAGE>
What Is Diversification?
- -------------------------------------------------------------------------------
Diversification--spreading your investments over many different securities--is
a basic principle of investing. It helps to reduce the overall risk of your
portfolio. Moreover, when we rebalance our portfolio to restore the original
weighting of different asset classes, the discipline forces us to sell high and
buy low. Over time, this may improve your return.
How Diversification Works
Mutual funds not only provide professional money management; they also allow a
relatively small investment to be spread over many different securities. When
you own a large number of different securities, the impact of any one on your
return is reduced. In addition, if you diversify your investments among asset
classes and investment styles--between stocks and bonds, value and growth
stocks, and investment-grade and high-yield bonds--it is less likely that all
the securities you own will move in the same direction at one time. The
Prudential Diversified Funds provide more of this buffering than a fund
investing in only one asset class. We believe this will result in more
consistent returns over time.
Rebalancing--The Diversified Conservative Growth Fund has a target allocation
for each asset class. As some perform better than others, the portfolio will
drift from this original target: the securities that rise most will become a
larger proportion of the invested assets. We direct new investments to the
asset classes that have fallen below their target ratio and, when necessary,
sell certain securities in appreciated asset classes to maintain the balance.
This not only keeps your risk exposure from changing too much, but it may
reduce the average cost of our investments and increase our average selling
price over time.
Although an individual investor can diversify and rebalance, it would require
a large investment to own the range of asset classes represented in the
Prudential Diversified Conservative Growth Fund.
Moreover, calculating the amounts to allocate to each kind of security in a
rebalancing would be difficult. Prudential Diversified Funds do it all for you.
Conservative Growth Fund Diversification Target
(GRAPH)
3
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as of PRUDENTIAL DIVERSIFIED CONSERVATIVE
July 31, 1999 GROWTH FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--98.8%
COMMON STOCKS--38.3%
- ------------------------------------------------------------
Advertising--0.2%
2,500 Omnicom Group, Inc. $ 177,187
- ------------------------------------------------------------
Aerospace/Defense--0.5%
2,200 Allied Signal, Inc. 142,312
250 Cordant Technologies, Inc. 11,203
1,625 Gencorp, Inc. 42,758
1,200 General Motors Corp., Class H 73,125
5,700 Loral Space & Communications, Inc.(a) 107,588
----------
376,986
- ------------------------------------------------------------
Airlines--0.1%
700 Alaska Air Group, Inc.(a) 31,063
750 Continental Airlines, Inc.(a) 31,875
----------
62,938
- ------------------------------------------------------------
Aluminum--0.4%
3,900 Alcoa, Inc. 233,512
1,250 Reliance Steel & Aluminum Co. 42,500
----------
276,012
- ------------------------------------------------------------
Apparel--0.1%
550 American Eagle Outfitters, Inc.(a) 21,244
975 Kellwood Co. 22,120
----------
43,364
- ------------------------------------------------------------
Audio/Visual--0.1%
600 Gemstar International Group, Ltd.(a) 39,750
1,200 Polycom, Inc. 40,200
----------
79,950
- ------------------------------------------------------------
Auto & Truck--0.2%
875 Arvin Industries, Inc. 32,703
750 Borg-Warner Automotive, Inc. 38,109
768 Delphi Automotive Systems Corp. 13,824
2,500 Safety Kleen Corp.(a) $ 29,844
875 Varlen Corp. 33,141
----------
147,621
- ------------------------------------------------------------
Banking--1.8%
1,175 Bancorpsouth, Inc. 19,388
3,800 Bank America Corp. 252,225
5,000 Bank of New York Co., Inc. 184,687
100 Bank United Corp. 3,850
400 BankNorth Group, Inc. 12,950
5,900 Chase Manhattan Corp. 453,562
475 City National Corp. 16,269
1,775 Commercial Federal Corp. 41,269
475 Corus Bankshares, Inc. 14,725
2,100 Cullen/Frost Bankers, Inc. 53,944
1,142 CVB Financial Corp. 29,835
75 First Citizens Bancshares, Inc. 5,981
2,300 Golden State Bancorp, Inc.(a) 50,887
675 Harbor Florida Bancshares, Inc. 8,648
1,200 MAF Bancorp, Inc. 27,975
1,075 North Fork Bancorporation, Inc. 22,172
1,400 Peoples Heritage Financial Group,
Inc. 25,288
400 Queens County Savings Bank, Inc. 12,625
800 Republic New York Corp. 55,800
612 Washington Federal, Inc. 15,109
1,050 Westamerica Bancorporation 35,175
----------
1,342,364
- ------------------------------------------------------------
Building & Construction--0.7%
1,600 American Standard Co.(a) 70,500
2,300 Centex Corp. 77,481
2,775 D.R. Horton, Inc. 45,094
400 Dycom Industries, Inc.(a) 19,100
1,275 Lone Star Industries, Inc. 48,848
950 M.D.C. Holdings, Inc. 19,713
2,550 Pulte Corp. 57,853
425 Southdown, Inc. 25,075
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 4
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as of PRUDENTIAL DIVERSIFIED CONSERVATIVE
July 31, 1999 GROWTH FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Building & Construction (cont'd.)
1,225 Thomas Industries, Inc.(a) $ 25,648
750 Toll Brothers, Inc. 15,938
1,475 U.S. Home Corp.(a) 50,703
2,100 Webb Delaware Corp. 46,725
----------
502,678
- ------------------------------------------------------------
Business Services--0.1%
650 Franklin Covey Co.(a) 4,550
225 Navigant Consulting Co.(a) 9,506
2,575 Pacific Gateway Exchange, Inc.(a) 63,088
----------
77,144
- ------------------------------------------------------------
Cable--0.1%
700 Belden, Inc. 17,413
2,100 Jones Intercable, Inc.(a) 94,500
----------
111,913
- ------------------------------------------------------------
Chemicals--0.2%
500 Cytec Industries, Inc.(a) 13,094
1,600 Eastman Chemical Co. 82,700
1,075 Grace W. R. & Co.(a) 20,223
575 MacDermid, Inc. 20,484
750 Spartech Corp. 21,938
----------
158,439
- ------------------------------------------------------------
Computer Services--1.0%
2,500 Affiliated Computer Services, Inc.(a) 116,250
675 Ciber, Inc.(a) 11,812
6,800 Cisco Systems, Inc.(a) 422,450
325 Computer Task Group, Inc. 5,383
100 Digex, Inc.(a) 1,700
2,700 Symbol Technologies, Inc. 106,144
4,000 Whittman Hart, Inc.(a) 101,250
----------
764,989
- ------------------------------------------------------------
Computers--2.5%
550 Apex, Inc.(a) 14,369
1,200 Catapult Communications Corp.(a) 22,650
1,300 Citrix Systems, Inc.(a) $ 67,681
6,600 Compaq Computer Corp. 158,400
700 Comverse Technology, Inc.(a) 52,894
4,700 Dell Computer Corp.(a) 192,112
3,000 EMC Corp.(a) 181,687
1,200 Equant N V(a) 106,725
4,500 Hewlett-Packard Co. 471,094
2,800 International Business Machines Corp. 351,925
325 Kronos, Inc.(a) 15,722
175 SCM Microsystems, Inc.(a) 8,706
6,300 Seagate Technology, Inc.(a) 169,313
700 Sun Microsystems, Inc.(a) 47,513
----------
1,860,791
- ------------------------------------------------------------
Consumer Products--0.9%
750 Central Garden & Pet Co.(a) 6,797
475 Fossil, Inc.(a) 24,938
1,000 Hitachi, Ltd. 100,125
1,500 Kimberly-Clark Corp. 91,500
9,000 Tandy Corp. 461,812
----------
685,172
- ------------------------------------------------------------
Consumer Services--0.1%
3,500 Service Corp. International 55,563
- ------------------------------------------------------------
Distribution/Wholesalers
325 Ingram Micro, Inc.(a) 9,242
625 United Stationers, Inc. 16,406
----------
25,648
- ------------------------------------------------------------
Diversified Manufacturing--0.6%
325 Aptargroup, Inc. 9,405
600 Carpenter Technology Corp. 15,900
475 Crane Co. 12,053
800 Cuno, Inc. 15,450
3,000 General Electric Co. 327,000
750 SPS Technologies, Inc.(a) 30,703
600 Tyco International, Ltd. 58,612
----------
469,123
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as of PRUDENTIAL DIVERSIFIED CONSERVATIVE
July 31, 1999 GROWTH FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Electronic Components--1.6%
800 Alpha Industries, Inc.(a) $ 40,800
900 American Xtal Technology, Inc.(a) 27,675
4,100 Arrow Electronics, Inc.(a) 87,381
1,500 Avnet, Inc. 73,500
550 CTS Corp. 45,169
1,000 Flextronics International, Ltd.(a) 44,875
3,300 Gentex Corp.(a) 86,006
400 Innovex, Inc. 5,700
850 Intergrated Electrical Services, Inc. 14,344
350 L3 Communications Holdings Corp.(a) 15,028
1,000 Novellus Systems, Inc.(a) 64,375
1,200 Optical Coating Lab, Inc. 86,100
625 Pioneer-Standard Electronics, Inc. 8,008
550 Pittway Corp. 18,287
1,200 PMC-Sierra, Inc.(a) 93,900
100 Power-One, Inc.(a) 2,525
75 Qlogic Corp.(a) 12,516
325 Rogers Corp. 10,766
350 Semtech Corp.(a) 21,656
2,700 Texas Instruments, Inc. 388,800
450 Transwitch Corp.(a) 19,744
600 Veeco Instruments, Inc.(a) 17,512
----------
1,184,667
- ------------------------------------------------------------
Entertainment--0.1%
900 SFX Entertainment, Inc.(a) 40,331
- ------------------------------------------------------------
Fertilizer--0.1%
800 Potash Corp. of Saskatchewan, Inc. 41,050
- ------------------------------------------------------------
Financial Services--2.0%
400 Allied Capital Corp. 9,000
400 Arthur J. Gallagher & Co. 20,850
425 Chittenden Corp. 11,847
10,450 Citigroup, Inc. 465,678
150 Dain Rauscher Corp. 7,978
975 Doral Financial Corp. 16,088
1,200 Downey Financial Corp. 27,975
675 Eaton Vance Corp. $ 23,498
2,175 Financial Security Assurance
Holdings, Ltd. 114,323
400 Goldman Sachs Group, Inc. 25,725
575 Heller Financial, Inc. 14,663
400 Knight/Trimark Group, Inc.(a) 16,850
1,100 Lehman Brothers Holdings, Inc. 59,125
5,000 MBNA Corp. 142,500
1,000 Metris Companies, Inc. 39,313
400 Morgan (J.P.) & Co., Inc. 51,150
3,200 Morgan Stanley Dean Witter
Discover & Co. 288,400
2,400 Resource Bancshares Mortgage Group,
Inc. 16,800
2,100 Schwab (Charles) Corp. 92,531
1,500 Silicon Valley Bancshares 36,750
825 Webster Financial Corp. 21,759
----------
1,502,803
- ------------------------------------------------------------
Food & Beverage--0.5%
400 Adolph Coors Co. 21,300
475 Corn Products International, Inc. 14,963
550 J & J Snack Foods Corp.(a) 13,200
1,900 Mettler-Toledo International, Inc.(a) 54,981
7,400 Nabisco Group Holding Corp. 138,750
550 Performance Food Group Co.(a) 14,781
1,050 Riviana Foods, Inc. 20,344
4,500 Sara Lee Corp. 99,000
650 Universal Foods Corp. 14,178
----------
391,497
- ------------------------------------------------------------
Health Care--1.8%
11,600 Columbia/HCA Healthcare Corp. 258,100
475 Datascope Corp.(a) 16,506
8,400 Foundation Health Systems, Inc.(a) 127,575
505 Lifepoint Hospitals, Inc.(a) 4,987
1,800 Pacificare Health Systems, Inc.(a) 122,738
1,800 Parexel International Corp.(a) 19,800
350 Patterson Dental Co.(a) 13,759
275 Safeskin Corp.(a) 2,441
13,100 Tenet Healthcare Corp.(a) 234,981
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 6
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as of PRUDENTIAL DIVERSIFIED CONSERVATIVE
July 31, 1999 GROWTH FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Health Care (cont'd.)
300 TLC The Laser Center, Inc.(a) $ 10,913
505 Triad Hospitals, Inc.(a) 5,334
3,500 United Healthcare Corp. 213,500
4,100 Wellpoint Health Networks, Inc.(a) 336,712
----------
1,367,346
- ------------------------------------------------------------
Home Furnishings--0.1%
1,200 Ethan Allen Interiors, Inc. 38,100
875 Furniture Brands International,
Inc.(a) 23,625
----------
61,725
- ------------------------------------------------------------
Hotels--0.2%
6,100 Hilton Hotels Corp. 79,681
9,500 Meristar Hotels & Resorts, Inc.(a) 35,031
5,400 Park Place Entertainment Corp.(a) 55,013
----------
169,725
- ------------------------------------------------------------
Human Resources--0.1%
400 CDI Corp.(a) 13,050
2,600 RemedyTemp, Inc.(a) 46,475
----------
59,525
- ------------------------------------------------------------
Industrial Technology/Instruments
1,100 EG&G, Inc. 36,919
- ------------------------------------------------------------
Insurance--2.3%
1,900 ACE, Ltd. 44,175
1,000 American Financial Group, Inc. 32,750
900 American General Corp. 69,637
2,700 American International Group, Inc. 313,537
600 Annuity & Life Reinsurance Holdings,
Ltd. 14,400
150 Blanch (E.W.) Holdings, Inc. 9,825
825 Capital Re Corp. 11,086
4,100 Chubb Corp. 245,231
640 Fidelity National Financial, Inc. 11,160
550 First American Financial Corp. 9,144
925 Harleysville Group, Inc. 18,038
362 Medical Assurance, Inc.(a) $ 10,860
4,100 Mutual Risk Management, Ltd. 122,231
5,500 Old Republic International Corp. 92,469
425 Partnerre, Ltd. 16,150
1,025 Presidential Life Corp. 19,667
950 Protective Life Corp. 33,903
293 Radian Group, Inc. 15,108
2,750 Reinsurance Group of America, Inc. 100,719
6,000 SAFECO Corp. 228,375
2,200 St. Paul Companies, Inc. 68,475
2,100 The Equitable Companies, Inc. 134,925
1,300 Tokio Marine & Fire Insurance, Ltd. 76,050
----------
1,697,915
- ------------------------------------------------------------
Internet--0.1%
1,100 America Online, Inc.(a) 104,638
- ------------------------------------------------------------
Machinery--0.2%
1,050 IDEX Corp. 29,597
900 JLG Industries, Inc. 17,944
1,850 Lincoln Electric Holdings, Inc.(a) 35,034
500 Milacron, Inc. 8,563
325 Tecumseh Products Co. 21,003
750 Terex Corp. 22,500
----------
134,641
- ------------------------------------------------------------
Media--1.2%
3,100 AT&T Corp. Liberty Media Group
Class A(a) 114,700
8,400 CBS Corp.(a) 369,075
3,000 Clear Channel Communications, Inc.(a) 208,687
700 Cumulus Media, Inc.(a) 16,888
1,050 King World Productions, Inc.(a) 36,619
1,600 Univision Communications, Inc.(a) 110,800
----------
856,769
- ------------------------------------------------------------
Medical Technology--0.1%
100 Amgen, Inc.(a) 7,603
300 Genetech, Inc.(a) 42,600
----------
50,203
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as of PRUDENTIAL DIVERSIFIED CONSERVATIVE
July 31, 1999 GROWTH FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Metals--0.1%
550 Cleveland-Cliffs, Inc. $ 17,600
800 Commercial Metals Co. 26,400
400 Kaydon Corp. 12,475
650 RTI International Metals, Inc.(a) 8,369
----------
64,844
- ------------------------------------------------------------
Mining--0.3%
7,600 Freeport-McMoRan Copper & Gold,
Inc.(a) 120,650
5,400 Newmont Mining Corp. 99,900
----------
220,550
- ------------------------------------------------------------
Office Equipment & Supplies--0.3%
5,000 Harris Corp. 151,562
550 Kimball International, Inc. 10,725
1,400 Xerox Corp. 68,250
----------
230,537
- ------------------------------------------------------------
Oil & Gas--1.8%
400 Amerada Hess Corp. 23,675
2,300 Atlantic Richfield Co. 207,144
875 Devon Energy Corp. 32,211
4,500 Elf Aquitaine Corp. 385,031
1,325 Energen Corp. 24,844
1,825 Helmerich & Payne, Inc. 46,652
1,080 Kerr-McGee Corp. 55,620
2,300 Keyspan Corp. 63,825
3,600 Marine Drilling Co., Inc.(a) 53,775
4,300 Newfield Exploration Co.(a) 124,431
2,600 Nuevo Energy Co. 40,787
2,500 Occidental Petroleum Corp. 48,906
650 Oneok, Inc. 20,678
300 SEACOR Holdings, Inc.(a) 14,906
900 Swift Energy Co.(a) 9,394
1,850 Tesoro Petroleum Corp. 29,138
1,500 Total SA, ADR (France) 95,437
450 Valero Energy Corp. $ 9,619
1,650 Wicor, Inc. 47,850
----------
1,333,923
- ------------------------------------------------------------
Paper & Packaging--1.8%
650 Ball Corp. 31,484
1,300 Fort James Corp. 47,450
5,800 Georgia-Pacific Corp. 260,637
1,900 Georgia-Pacific Corp. (Timber Group) 46,906
3,700 International Paper Co. 189,163
3,900 Mead Corp. 159,900
1,300 Rayonier, Inc. 61,831
750 Shorewood Packaging Corp.(a) 13,078
2,300 Temple-Inland, Inc. 145,475
900 Universal Forest Products, Inc. 16,763
2,800 Weyerhaeuser Co. 181,125
4,300 Willamette Industries, Inc. 193,500
----------
1,347,312
- ------------------------------------------------------------
Pharmaceuticals--1.9%
275 Alpharma, Inc. 10,209
4,100 American Home Products Corp. 209,100
500 Bindley Western, Inc. 10,813
2,400 Bristol-Myers Squibb Co. 159,600
1,300 Eli Lilly & Co. 85,312
1,800 Glaxo Wellcome PLC ADR
(United Kingdom) 93,937
225 Idec Pharmaceuticals Corp.(a) 22,303
2,000 Inhale Therapeutic Systems, Inc.(a) 49,250
2,500 Merck & Co., Inc. 169,219
900 Ocular Sciences, Inc.(a) 17,719
550 Roberts Pharmaceutical Corp.(a) 15,091
4,200 Schering-Plough Corp. 205,800
1,025 Thermoquest Corp.(a) 11,019
4,400 Warner-Lambert Co. 290,400
1,000 Waters Corp.(a) 59,750
----------
1,409,522
- ------------------------------------------------------------
Photography--0.5%
5,300 Eastman Kodak Co. 366,362
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 8
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as of PRUDENTIAL DIVERSIFIED CONSERVATIVE
July 31, 1999 GROWTH FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Printing & Publishing--0.1%
275 Consolidated Graphics, Inc.(a) $ 10,931
300 Electronics for Imaging, Inc.(a) 16,444
450 Valassis Communications, Inc.(a) 16,763
550 World Color Press, Inc.(a) 19,903
----------
64,041
- ------------------------------------------------------------
Real Estate - Developers
1,225 Rouse Co. 29,783
- ------------------------------------------------------------
Real Estate Investment Trust--0.3%
800 Cabot Industrial Trust Corp. 16,300
1,950 Catellus Development Corp.(a) 30,956
1,250 Franchise Finance Corp. of America 28,437
2,200 Glenborough Realty Trust, Inc. 38,500
3,800 Meristar Hospitality Corp. 72,675
1,150 Nationwide Health Properties, Inc. 19,694
----------
206,562
- ------------------------------------------------------------
Restaurants--0.8%
3,000 CKE Restaurants, Inc. 42,000
13,900 Darden Restaurants, Inc. 303,194
600 Foodmaker, Inc.(a) 16,425
4,600 McDonald's Corp. 191,763
3,775 Ryan's Family Steak Houses, Inc.(a) 40,345
----------
593,727
- ------------------------------------------------------------
Retail--2.6%
550 BJ's Wholesale Club, Inc.(a) 16,844
550 Buckle, Inc.(a) 16,638
1,200 Claire Stores, Inc. 28,500
2,800 CVS Corp. 139,300
425 Department 56, Inc.(a) 12,298
6,100 Dillards, Inc. 187,956
4,275 Gap, Inc. 199,856
5,100 Home Depot, Inc. 325,444
550 IHOP Corp.(a) 12,788
8,800 Ikon Office Solutions, Inc. $ 116,050
13,100 Kmart Corp.(a) 189,950
3,100 Kohl's Corp.(a) 235,794
3,500 Pep Boys - Manny, Moe & Jack, Inc. 58,187
975 Ross Stores, Inc. 46,922
1,300 Sears, Roebuck & Co. 52,650
3,700 Staples, Inc.(a) 106,837
4,100 Toys 'R' Us, Inc.(a) 66,625
2,500 Wal-Mart Stores, Inc. 105,625
650 Zale Corp.(a) 26,000
----------
1,944,264
- ------------------------------------------------------------
Schools--0.1%
1,600 Sylvan Learning Systems, Inc.(a) 40,900
- ------------------------------------------------------------
Semiconductors--1.1%
3,200 Applied Materials, Inc.(a) 230,200
2,100 Etec Systems, Inc.(a) 81,637
3,500 Intel Corp. 241,500
1,900 KLA Instruments Corp.(a) 128,725
4,300 National Semiconductor Corp.(a) 106,425
----------
788,487
- ------------------------------------------------------------
Software--1.8%
200 Accrue Software, Inc.(a) 2,233
1,400 Activision, Inc.(a) 19,162
500 Broadvision, Inc.(a) 34,844
775 Check Point Software, Ltd.(a) 53,039
3,400 HNC Software, Inc.(a) 123,675
1,200 I2 Technologies, Inc.(a) 36,900
2,100 Intuit, Inc.(a) 171,806
1,800 Legato Systems, Inc.(a) 128,700
5,700 Microsoft Corp.(a) 489,131
300 N2H2, Inc.(a) 3,860
100 NetIQ Corp.(a) 1,300
3,000 Rational Software Corp.(a) 100,125
2,400 VERITAS Software Corp.(a) 134,700
100 Verity, Inc.(a) 4,950
----------
1,304,425
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 9
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as of PRUDENTIAL DIVERSIFIED CONSERVATIVE
July 31, 1999 GROWTH FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Telecommunications--3.1%
2,400 Allegiance Telecom, Inc.(a) $ 120,750
2,300 ALLTEL Corp.(a) 165,169
3,100 AT&T Corp. 161,006
425 AVT Corp.(a) 13,148
1,200 Carrier Access Corp.(a) 39,600
1,600 Excel Switching Corp. 43,600
300 Exodus Communications, Inc.(a) 36,019
100 JDS Uniphase Corp.(a) 9,038
700 Level 3 Communications, Inc.(a) 37,100
2,390 Lucent Technologies, Inc. 155,499
5,400 MCI WorldCom, Inc.(a) 445,500
1,500 Millicom International Cellular S A
(Luxembourg)(a) 45,937
1,200 Motorola, Inc. 109,500
500 Nextlink Communications, Inc.(a) 56,062
1,900 Nokia Corp. ADR (Finland)(a) 161,619
825 Norstan, Inc.(a) 10,725
600 NTL, Inc.(a) 62,325
200 Plantronics, Inc.(a) 14,150
4,600 Qwest Communications International,
Inc.(a) 135,700
650 Tekelec, Inc.(a) 6,541
2,700 Tellabs, Inc.(a) 166,219
850 Vodafone Airtouch Group PLC ADR
(United Kingdom) 178,925
2,000 Voicestream Wireless Corp.(a) 90,250
----------
2,264,382
- ------------------------------------------------------------
Tobacco--0.7%
3,700 Loews Corp. 259,462
4,100 Philip Morris Companies, Inc. 152,725
2,500 Reynolds R J Tobacco Holdings, Inc. 68,438
1,050 Universal Corp. 31,566
----------
512,191
Trucking & Shipping--0.2%
4,400 Air Express International Corp. $ 117,700
675 U.S. Freightways Corp. 33,328
----------
151,028
- ------------------------------------------------------------
Utilities--0.6%
925 Atmos Energy Corp. 23,125
925 BEC Energy Corp. 39,428
500 California Water Service Group 14,000
475 Calpine Corp.(a) 35,714
475 Cleco Corp. 15,260
750 Conectiv, Inc. 17,203
1,300 General Public Utilities Corp. 49,888
400 Idacorp, Inc. 12,375
1,275 Public Service Company of New
Mexico(a) 25,420
2,300 Reliant Energy, Inc. 63,106
250 Rochester Gas & Electric Corp. 6,547
2,300 Unicom Corp. 90,275
2,200 Washington Gas Light Co. 61,325
550 WPS Resources Corp. 15,950
----------
469,616
- ------------------------------------------------------------
Waste Management--0.2%
2,500 Casella Waste Systems, Inc.(a) 66,563
3,300 Waste Management, Inc. 84,356
----------
150,919
----------
Total common stocks
(cost $24,843,331) 28,411,011
----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 10
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as of PRUDENTIAL DIVERSIFIED CONSERVATIVE
July 31, 1999 GROWTH FUND
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
ASSET BACKED SECURITIES--2.9%
- ------------------------------------------------------------
Capital One Bank Corp.,
Notes,
Baa2 US$ 600 6.76%, 7/23/02 $ 593,905
General Motors Acceptance
Corporation,
MTN,
A2 700 5.56%, 4/5/04 699,022
MBNA Corp.,
MTN,
Baa1 900 6.875%, 7/15/04 890,082
-----------
Total asset backed
securities
(cost $2,189,763) 2,183,009
- ------------------------------------------------------------
CORPORATE BONDS--23.5%
- ------------------------------------------------------------
Airlines--0.5%
Ba2 350 Continental Airlines, Inc.,
Sr. Notes,
8.00%, 12/15/05 332,087
- ------------------------------------------------------------
Automotive Parts--0.6%
B2 10 Collins & Aikman Products
Co.,
Sr. Sub. Notes,
11.50%, 4/15/06 10,100
B3 200 Hayes Wheels, Inc.,
Sr. Sub. Notes,
9.125%, 7/15/07(c) 200,500
Ba1 250 Lear Corp.,
Sr. Notes,
8.11%, 5/15/09 250,000
-----------
460,600
- ------------------------------------------------------------
Building & Products--0.4%
Ba3 350 Building Materials Corp.,
Sr. Notes,
8.00%, 12/1/08 325,500
Cable--1.0%
B1 US$ 280 Adelphia Communications
Corp.,
Sr. Notes,
8.125%, 7/15/03 $ 268,800
B2 150 Charter Communications
Holdings,
Sr. Notes,
8.625%, 4/1/09 143,625
B3 15 Classic Cable, Inc.,
Sr. Sub. Notes,
9.375%, 8/1/09 14,850
B1 250 CSC Holdings, Inc.,
Sr. Sub. Debs.,
9.875%, 2/15/13 262,500
B1 80 Fox Family Worldwide, Inc.,
Sr. Notes,
9.25%, 11/1/07 75,200
-----------
764,975
- ------------------------------------------------------------
Chemicals--0.6%
Baa3 150 Equistar Chemicals, Inc.,
Sr. Notes,
8.75%, 2/15/09 149,025
B2 75 Huntsman ICI Chemicals,
Inc.,
Sr. Sub. Notes,
10.125%, 7/1/09 74,625
Ba3 100 Lyondell Chemical Co.,
Sr. Secured Notes,
9.875%, 5/1/07 102,000
B3 45 Sterling Chemicals Holdings,
Inc.,
Sr. Sub. Notes,
12.375%, 7/15/06 46,013
B2 60 ZSC Specialty Corp.,
Sr. Notes,
11.00%, 7/1/09 60,300
-----------
431,963
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 11
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as of PRUDENTIAL DIVERSIFIED CONSERVATIVE
July 31, 1999 GROWTH FUND
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
Coal--0.5%
Ba3 US$ 350 P & L Coal Holdings Corp.,
Sr. Notes,
8.875%, 5/15/08(c) $ 344,750
- ------------------------------------------------------------
Containers & Packaging
B2 20 Consolidated Container
Company LLC,
Sr. Sub. Notes,
10.125%, 7/15/09 20,350
- ------------------------------------------------------------
Entertainment--0.3%
B2 100 Hollywood Park, Inc.,
Sr. Sub. Notes,
9.25%, 2/15/07 97,750
B3 125 Premier Parks, Inc.,
Sr. Notes,
9.75%, 6/15/07 125,000
-----------
222,750
- ------------------------------------------------------------
Fertilizer--0.1%
B2 60 Scotts Co.,
Sr. Sub. Notes,
8.625%, 1/15/09 59,400
- ------------------------------------------------------------
Financial Services--1.8%
Baa3 600 A T & T Capital Corp.,
MTN, FRN
5.5612%, 4/23/02 596,832
Ba1 100 Americredit Corp.,
Sr. Notes,
9.875%, 4/15/06 101,000
Ba3 15 RBF Finance Co.,
Sr. Secured Notes,
11.00%, 3/15/06 15,450
Aa3 600 Wells Fargo & Company,
Notes,
6.625%, 7/15/04 593,466
-----------
1,306,748
Food & Beverage--0.1%
B2 US$ 100 Pilgrim's Pride Corp.,
Sr. Sub. Notes,
10.875%, 8/1/03 $ 103,500
- ------------------------------------------------------------
Gaming--1.7%
B3 75 Coast Hotels & Casinos,
Inc.,
Sr. Sub. Notes,
9.50%, 4/1/09 68,299
Ba2 350 Harrahs Casinos, Inc.,
Gtd. Sr. Sub. Notes,
7.875%, 12/15/05 341,250
B2 150 Horseshoe Gaming LLC,
Sr. Sub. Notes,
8.625%, 5/15/09 144,000
Ba1 600 International Game
Technology Corp.,
Sr. Notes,
7.875%, 5/15/04 579,000
Ba2 150 Mohegan Tribal Gaming
Authority,
Sr. Notes,
8.125%, 1/1/06 145,125
-----------
1,277,674
- ------------------------------------------------------------
Health Care--1.3%
B2 100 Biovail International, Inc.,
Sr. Notes,
10.875%, 11/15/05 104,000
Columbia/HCA Healthcare
Corp.,
Debs.,
Ba2 30 7.05%, 12/1/27 22,348
Ba2 20 7.50%, 11/15/95 15,064
MTN,
Ba2 300 6.73%, 7/15/45 281,256
B2 350 Integrated Health Svcs.,
Inc.,
Sr. Sub. Notes,
9.25%, 1/15/08 220,500
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 12
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as of PRUDENTIAL DIVERSIFIED CONSERVATIVE
July 31, 1999 GROWTH FUND
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
Health Care (cont'd.)
B3 US$ 25 Lifepoint Hospitals
Holdings, Inc.,
Sr. Sub. Notes,
10.75%, 5/15/09 $ 25,187
B3 100 Magellan Health Services,
Inc.,
Sr. Sub. Notes,
9.00%, 2/15/08 87,250
Ba3 150 Tenet Healthcare Corp.,
Sr. Sub. Notes,
8.625%, 1/15/07 145,500
B3 25 Triad Hospitals Holdings,
Inc.,
Sr. Sub. Notes,
11.00%, 5/15/09 25,188
-----------
926,293
- ------------------------------------------------------------
Industrials--0.7%
B2 150 Carmike, Inc.,
Sr. Sub. Notes,
9.375%, 2/1/09 145,125
Caa1 350 Purina Mills, Inc.,
Sr. Sub. Notes,
9.00%, 3/15/10(c) 192,500
B3 350 United International
Holdings, Inc.,
Sr. Disc. Notes,
Zero Coupon (until 2/15/03)
10.75%, 2/15/08 204,750
-----------
542,375
- ------------------------------------------------------------
Machinery--0.2%
B1 150 Applied Power, Inc.,
Sr. Sub. Notes,
8.75%, 4/1/09 145,500
B3 10 Newcor, Inc.,
Sr. Sub. Notes,
9.875%, 3/1/08 9,000
-----------
154,500
Manufacturing--0.1%
B2 US$ 40 Venture Holdings, Inc.,
Sr. Notes,
9.50%, 7/1/05 $ 38,000
- ------------------------------------------------------------
Media--2.4%
B2 350 Ackerley Group, Inc.,
Sr. Sub. Notes,
9.00%, 1/15/09 343,000
B1 75 Chancellor Media Corp.,
Sr. Sub. Notes,
9.00%, 10/1/08 76,125
Ba2 350 Imax Corp.,
Sr. Notes,
7.875%, 12/1/05(c) 329,000
Ba3 250 Price Communications
Wireless, Inc.,
Sr. Secured Notes,
9.125%, 12/15/06 253,437
Baa3 200 Seagram Joseph E & Sons,
Inc.,
Sr. Notes,
6.25%, 12/15/01 196,808
Baa3 600 Time Warner, Inc.,
Sr. Notes,
6.10%, 12/30/01 586,500
-----------
1,784,870
- ------------------------------------------------------------
Oil & Gas--0.9%
B3 65 Chesapeake Energy Corp.,
Sr. Notes,
9.625%, 5/1/05 59,962
Ba2 350 Gulf Canada Resources, Ltd.,
Sr. Sub. Debs.,
9.625%, 7/1/05(c) 357,000
Ba3 210 Pride International, Inc.,
Sr. Notes,
10.00%, 6/1/09 214,200
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 13
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as of PRUDENTIAL DIVERSIFIED CONSERVATIVE
July 31, 1999 GROWTH FUND
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
Oil & Gas (cont'd.)
Ba3 US$ 25 R & B Falcon Corp.,
Sr. Notes,
9.50%, 12/15/08 $ 23,750
B2 30 Swift Energy Co.,
Sr. Sub. Notes,
10.25%, 8/1/09 29,771
-----------
684,683
- ------------------------------------------------------------
Paper & Packaging--1.2%
B1 350 Ball Corp.,
Sr. Sub. Notes,
8.25%, 8/1/08 346,500
B3 150 Packaging Corp. of America,
Sr. Sub. Notes,
9.625%, 4/1/09 152,250
B1 350 S.D. Warren Co.,
Sr. Sub. Notes,
12.00%, 12/15/04(c) 371,875
-----------
870,625
- ------------------------------------------------------------
Pharmaceuticals--0.1%
Ba3 100 ICN Pharmaceuticals, Inc.,
Sr. Notes,
8.75%, 11/15/08 96,000
- ------------------------------------------------------------
Printing & Publishing--0.9%
B1 350 Mail-Well I Corp.,
Sr. Sub. Notes,
8.75%, 12/15/08 335,125
B2 150 Transwestern Publishing Co.,
Sr. Sub. Notes,
9.625%, 11/15/07 147,750
B1 150 World Color Press, Inc.,
Sr. Sub. Notes,
7.75%, 2/15/09 150,000
-----------
632,875
Real Estate--0.4%
Ba2 US$ 350 HMH Properties, Inc.,
Sr. Notes,
8.45%, 12/1/08 $ 329,000
- ------------------------------------------------------------
Restaurants--1.0%
B2 150 Advantica Restaurant
Group, Inc.,
Sr. Notes,
11.25%, 1/15/08 141,750
B2 350 Carrols Corporation,
Sr. Sub. Notes,
9.50%, 12/1/08 306,250
Ba1 350 Felcor Suites L.P.,
Gtd. Sr. Notes,
7.375%, 10/1/04 318,500
-----------
766,500
- ------------------------------------------------------------
Schools--0.2%
B3 150 Kindercare Learning Center,
Inc.,
Sr. Sub. Notes,
9.50%, 2/15/09 146,250
- ------------------------------------------------------------
Semiconductors
B2 20 SCG Holding Corp.,
Sr. Notes,
12.00%, 8/1/09 20,150
- ------------------------------------------------------------
Software--0.1%
B3 95 PSI Net, Inc.,
Sr. Notes,
11.00%, 8/1/09 95,000
- ------------------------------------------------------------
Steel--0.9%
Ba2 250 Alaska Steel Corp.,
Sr. Notes,
7.875%, 2/15/09 243,750
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 14
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as of PRUDENTIAL DIVERSIFIED CONSERVATIVE
July 31, 1999 GROWTH FUND
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
Steel (cont'd.)
B2 US$ 25 Leviathan Corp.,
Sr. Sub. Notes,
10.375%, 6/1/09 $ 25,625
Ba3 50 National Steel Corp.,
Notes,
9.875%, 3/1/09 51,000
B2 350 UCAR Global Enterprises,
Inc.,
Sr. Sub. Notes,
12.00%, 1/15/05(c) 371,000
-----------
691,375
- ------------------------------------------------------------
Telecommunications--2.1%
B1 125 Global Crossings Holdings,
Ltd.,
Sr. Notes,
9.625%, 5/15/08 129,375
B2 250 Intermedia Communications,
Inc.,
Sr. Notes,
8.60%, 6/1/08 228,750
B3 30 Level 3 Communications,
Inc.,
Sr. Disc. Notes,
Zero Coupon (until 12/1/03)
10.50%, 12/1/08 17,325
B2 250 Mcleodusa, Inc.,
Sr. Notes,
8.125%, 2/15/09 225,625
B2 250 Nextel Communications, Inc.,
Sr. Disc. Notes,
Zero Coupon (until
10/31/02) 9.75%, 10/31/07 178,750
B3 250 NTL Communications Corp.,
Sr. Notes,
Zero Coupon (until 10/1/03)
12.375%, 10/1/08 175,000
Ba3 250 Rogers Cantel, Inc.,
Debs.,
9.375%, 6/1/08 260,000
B1 US$ 150 Telewest PLC,
Sr. Disc. Debs.,
Zero Coupon (until 10/1/00)
11.00%, 10/1/07 (United
Kingdom) $ 133,875
B3 200 Tritel PCS, Inc.,
Sr. Sub. Disc. Notes,
Zero Coupon (until 5/1/04)
12.75%, 5/15/09 108,000
B3 65 Worldwide Fiber, Inc.,
Sr. Notes,
12.00%, 8/1/09 64,188
-----------
1,520,888
- ------------------------------------------------------------
Transportation--0.1%
B1 50 American Commercial
Lines LLC,
Sr. Notes,
10.25%, 6/30/08 49,750
- ------------------------------------------------------------
Utilities--3.0%
Ba1 250 AES Corp.,
Sr. Notes,
9.50%, 6/1/09 255,000
Ba2 200 Calpine Corp.,
Sr. Notes,
7.875%, 4/1/08 190,000
Baa2 700 Cinergy Corp.,
Debs.,
6.125%, 4/15/04 674,339
Ba3 250 CMS Energy Corp.,
Sr. Notes,
7.50%, 1/15/09 232,500
Ba2 700 Niagara Mohawk Power Corp.,
Sr. Notes,
7.00%, 10/1/00 701,330
Baa3 200 Sr. Notes,
7.125%, 7/1/01 200,452
-----------
2,253,621
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 15
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as of PRUDENTIAL DIVERSIFIED CONSERVATIVE
July 31, 1999 GROWTH FUND
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
Waste Management--0.3%
Ba3 US$ 200 Allied Waste of North
America, Inc.,
Sr. Notes,
7.875%, 1/1/09 $ 184,000
-----------
Total corporate bonds
(cost $18,175,781) 17,437,052
-----------
- ------------------------------------------------------------
CONVERTIBLE BOND--0.7%
Financial Services--0.7%
A2 EURO500 Hellenic Finance Corp.,
Bonds,
2.00%, 7/15/03
(cost $526,875) 535,549
- ------------------------------------------------------------
MORTGAGE-RELATED SECURITIES--8.2%
Aaa US$ 600 Commercial Mortgage
Acceptance Corporation,
Series 1999-C1 Class A-1
6.79%, 6/15/31 591,329
Aaa 493 First Nationwide Trust
Corp.,
6.50%, 5/19/29 483,480
Aaa 500 GE Capital Mortgage
Services, Inc., Series
1999-15 Class 16
6.75%, 8/25/29 498,281
Aaa 475 GMAC Commercial Mortgage,
Inc., Series 1998 C2 Class
A-1
6.15%, 5/15/35 457,465
Aaa 500 Mellon Residental Funding
Corp.,
Series 1999 Class A-3
6.58%, 7/25/29 496,845
Aaa 358 Merrill Lynch Mortgage
Investments, Inc.,
Series 1998-F1
5.33%, 1/20/28 357,680
Aaa US$ 500 Nationslink Funding Corp.,
Series 1999 Sl Class A-3
6.297%, 11/10/02 $ 496,290
PNC Mortgage Securities
Corp.,
Aa1 600 Series 1995-2 Class A-4
6.75%, 6/25/16 593,424
Aa1 500 Series 1999-5 Class A-1
6.75%, 7/25/29(b) 478,203
Aa1 800 Series 1999-8 Class A-5
6.75%, 8/25/29 794,252
NR 843 Residential Funding
Mortgage, Inc.,
Series 1997 S-19, Class A-3
6.50%, 12/25/12 799,542
-----------
6,046,791
-----------
Total mortgage-related
securities
(cost $6,147,931) 6,046,791
-----------
- ------------------------------------------------------------
U.S. GOVERNMENT AGENCIES AND SECURITIES--25.2%
3,400 Federal Home Loan Mortgage
Corporation,
Debs.,
5.75%, 3/15/09 3,166,794
Federal National Mortgage
Association,
669 6.50%, 9/1/05 668,391
1,000 Zero Coupon, 6/1/17 297,810
Government National Mortgage
Association,
114 6.625%, 9/20/22 114,275
8,000 6.50%, 12/31/2099 7,595,040
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 16
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as of PRUDENTIAL DIVERSIFIED CONSERVATIVE
July 31, 1999 GROWTH FUND
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
U.S. GOVERNMENT AGENCIES AND SECURITIES (cont'd.)
United States Treasury
Bonds,
US$ 1,900 14.00%, 11/15/11 $ 2,750,554
200 9.25%, 2/15/16 258,124
600 8.50%, 2/15/20 743,622
1,050 7.25%, 8/15/22 1,161,888
United States Treasury
Notes,
200 6.50%, 10/15/06 204,688
1,723 3.875%, 1/15/09 (TIPS) 1,700,177
-----------
Total U.S. government
agencies and securities
(cost $19,127,230) 18,661,363
-----------
Total debt obligations
(cost $46,167,579) 44,863,764
-----------
Total long-term investments
(cost $70,010,910) 73,274,775
-----------
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS--12.8%
- ------------------------------------------------------------
CORPORATE BONDS--3.8%
B3 200 Stone Container Corp.,
Sr. Sub. Deb.,
12.25%, 4/1/00(c) 200,500
Texas Utilities Co.,
MTN,
BBB1 200 5.24%, 1/21/00 194,964
300 6.155%, 1/21/00 291,127
A2 US$ 2,100 TCI Communications, Inc.,
MTN,
6.46%, 3/6/00 $ 2,108,631
-----------
Total corporate bonds
(cost $2,798,699) 2,795,222
-----------
- ------------------------------------------------------------
SOVERIGN BONDS--2.0%
1,500 Republic of Korea,
Notes, FRN,
7.5937%, 10/8/99
(cost $1,496,863) 1,505,625
- ------------------------------------------------------------
REPURCHASE AGREEMENT--7.0%
5,227 Joint Repurchase Agreement
Account,
5.06%, 8/2/99 (Note 5)
(cost $5,227,000) 5,227,000
-----------
Total short-term investments
(cost $9,522,562) 9,527,847
-----------
- ------------------------------------------------------------
Total Investments--111.6%
(cost $80,533,472; Note 4) 82,802,622
Liabilities in excess of
other
assets--(11.6%) (8,592,399)
-----------
Net Assets--100% $74,210,223
-----------
-----------
</TABLE>
- ---------------
(a) Non-income producing security.
(b) Delayed Settlement Security.
(c) All or partial principal amount segregated as collateral.
ADR--American Depository Receipt.
FRN--Floating Rate Note.
LP--Limited Partnership.
MTN--Medium-Term Notes.
NR--Not Rated by Moody's or Standard & Poor's.
TIPS--Treasury Inflation Protection Securities.
The Fund's current Statement of Additional Information contains a description
of Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 17
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED CONSERVATIVE
Statement of Assets and Liabilities GROWTH FUND
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets July 31, 1999
<S> <C>
Investments, at value (cost $80,533,472)..................................................................... $82,802,622
Foreign currency, at value (cost $40)........................................................................ 41
Receivable for Fund shares sold.............................................................................. 790,786
Interest and dividends receivable............................................................................ 650,777
Receivable for investments sold.............................................................................. 602,388
Deferred offering costs...................................................................................... 29,535
Other assets................................................................................................. 1,706
-------------
Total assets.............................................................................................. 84,877,855
-------------
Liabilities
Bank overdraft............................................................................................... 2,402
Payable for investments purchased............................................................................ 10,223,827
Accrued expenses and other liabilities....................................................................... 195,721
Payable for Fund shares reacquired........................................................................... 135,306
Management fee payable....................................................................................... 46,890
Distribution fee payable..................................................................................... 38,667
Forward currency contracts - net amount payable to counterparties............................................ 24,819
-------------
Total liabilities......................................................................................... 10,667,632
-------------
Net Assets................................................................................................... $74,210,223
-------------
-------------
Net assets were comprised of:
Shares of beneficial interest, at par..................................................................... $ 7,167
Paid-in capital in excess of par.......................................................................... 71,163,080
-------------
71,170,247
Undistributed net investment income....................................................................... 236,864
Accumulated net realized gain on investments.............................................................. 558,783
Net unrealized appreciation on investments and foreign currencies......................................... 2,244,329
-------------
Net assets, July 31, 1999.................................................................................... $74,210,223
-------------
-------------
Class A:
Net asset value and redemption price per share
($9,096,373 / 877,784 shares of beneficial interest issued and outstanding)............................ $10.36
Maximum sales charge (5% of offering price)............................................................... .55
-------------
Maximum offering price to public.......................................................................... $10.91
-------------
-------------
Class B:
Net asset value, offering price and redemption price per share
($30,235,058 / 2,921,952 shares of beneficial interest issued and outstanding)......................... $10.35
-------------
-------------
Class C:
Net asset value and redemption price per share
($14,035,057 / 1,356,384 shares of beneficial interest issued and outstanding)......................... $10.35
Sales charge (1% of offering price)....................................................................... .10
-------------
Offering price to public.................................................................................. $10.45
-------------
-------------
Class Z:
Net asset value, offering price and redemption price per share
($20,843,093 / 2,010,488 shares of beneficial interest issued and outstanding)......................... $10.37
-------------
-------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 18
<PAGE>
PRUDENTIAL DIVERSIFED FUNDS
PRUDENTIAL DIVERSIFIED CONSERVATIVE
GROWTH FUND
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
November 18, 1998(a)
Through
Net Investment Income July 31, 1999
<S> <C>
Income
Interest............................... $2,221,162
Dividends (net of foreign withholding
taxes of $1,170).................... 212,055
-----------
Total income........................ 2,433,217
-----------
Expenses
Management fee......................... 398,032
Distribution fee--Class A.............. 10,754
Distribution fee--Class B.............. 134,891
Distribution fee--Class C.............. 84,106
Custodian's fees and expenses.......... 211,000
Registration fees...................... 69,000
Amortization of offering cost.......... 68,465
Reports to shareholders................ 55,000
Legal fees............................. 30,000
Audit fee and expenses................. 25,000
Transfer agent's fees and expenses..... 22,000
Trustees' fees and expenses............ 4,500
Miscellaneous.......................... 5,013
-----------
Total expenses...................... 1,117,761
-----------
Net investment income..................... 1,315,456
-----------
Realized and Unrealized Gain (Loss)
on Investment and Foreign Currency
Transactions
Net realized gain on:
Investment transactions................ 558,783
Foreign currency transactions.......... 18,927
-----------
577,710
-----------
Net unrealized appreciation (depreciation)
on:
Investments............................ 2,269,150
Foreign currencies..................... (24,821)
-----------
2,244,329
-----------
Net gain on investments................... 2,822,039
-----------
Net Increase in Net Assets
Resulting from Operations $4,137,495
-----------
-----------
</TABLE>
- ---------------
(a) Commencement of investment operations.
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED CONSERVATIVE
GROWTH FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
November 18, 1998(a)
Increase (Decrease) in Through
Net Assets July 31, 1999
<S> <C>
Operations
Net investment income................ $ 1,315,456
Net realized gain on investment and
foreign currency transactions..... 577,710
Net unrealized appreciation of
investments and foreign
currencies........................ 2,244,329
--------------------
Net increase in net assets resulting
from operations................... 4,137,495
--------------------
Dividends from net investment income (Note 1)
Class A........................... (118,082)
Class B........................... (278,242)
Class C........................... (155,747)
Class Z........................... (637,575)
--------------------
(1,189,646)
--------------------
Fund share transactions (net of share
conversions) (Note 6)
Net proceeds from shares sold........ 107,208,098
Net asset value of shares issued in
reinvestment of dividends......... 1,162,526
Cost of shares reacquired............ (37,138,250)
--------------------
Net increase in net assets from Fund
share transactions................ 71,232,374
--------------------
Total increase.......................... 74,180,223
Net Assets
Beginning of period..................... 30,000
--------------------
End of period(b)........................ $ 74,210,223
--------------------
--------------------
- ---------------
(a) Commencement of investment
operations.
(b) Includes undistributed net
investment income of................ $ 236,864
--------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 19
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED CONSERVATIVE
Notes to Financial Statements GROWTH FUND
- --------------------------------------------------------------------------------
Prudential Diversified Funds (the 'Trust') is registered under the Investment
Company Act of 1940, as an open-end, diversified management investment company
presently consisting of three Portfolios: Prudential Diversified Conservative
Growth Fund (the 'Fund'), Prudential Diversified Moderate Growth Fund and
Prudential Diversified High Growth Fund. The Trust was organized as a business
trust in Delaware on July 29, 1998. The Fund had no significant operations other
than the issuance of 750 shares each of Class A, Class B, Class C and Class Z
shares of beneficial interest for $30,000 on September 2, 1998 to Prudential
Investments Fund Management LLC ('PIFM' or the 'Manager'). The Fund commenced
investment operations on November 18, 1998.
The investment objective of the Fund is to provide current income and a
reasonable level of capital appreciation. The Fund seeks to achieve its
investment objective by investing in a diversified portfolio of debt obligations
and equity securities. The ability of the issuers of the debt securities held by
the Fund to meet their obligations may be affected by economic developments in a
specific industry or country.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund and the Trust in the preparation of its financial statements.
Securities Valuation: Securities for which the primary market is on an exchange
and NASDAQ National Market Securities are valued at the last sales price on such
exchange on the day of valuation, or, if there was no sale on such day, at the
mean between the last bid and asked prices on such day or at the bid price on
such day in the absence of an asked price. Securities that are actively traded
in the over-the-counter market, including listed securities for which the
primary market is believed by the Manager, in consultation with the Adviser, to
be over-the-counter, are valued by an independent pricing agent or principal
market maker. U.S. Government securities for which market quotations are
available shall be valued at a price provided by an independent pricing agent or
broker-dealer. Privately placed securities including equity securities for which
market prices may be obtained from primary dealers shall be valued at the bid
prices provided by such primary dealers. Securities for which market quotations
are not readily available, may be valued using the last available market
quotation for a period not to exceed five days, provided the Manager and Adviser
feel this is representative of market value, after that period, such securities
are valued in good faith under procedures adopted by the Trustees.
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 with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians, as the case may be under triparty repurchase agreements, take
possession of the underlying securities, the value of which exceeds the
principal amount of the repurchase transaction including accrued interest. 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.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities - at the
closing daily rates of exchange.
(ii) purchases and sales of investment securities, income and expenses - at the
rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the fiscal period, the Fund does not isolate
that portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of securities held at the end of the period. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of long-term portfolio securities sold
during the period. Accordingly, these realized foreign currency gains (losses)
are included in the reported net realized gains (losses) on investment
transactions.
Net realized gains on foreign currency transactions represent net foreign
exchange gains or losses from holdings of foreign currencies, currency gains or
losses realized between the trade and settlement dates on security transactions,
and the difference between the amounts of dividends, interest and foreign taxes
recorded on the Fund's books and the U.S. dollar equivalent amounts actually
received or paid. Net unrealized currency gains or losses from valuing foreign
currency denominated assets and liabilities (other than investments) at fiscal
period end exchange rates are
- --------------------------------------------------------------------------------
20
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED CONSERVATIVE
Notes to Financial Statements GROWTH FUND
- --------------------------------------------------------------------------------
reflected as a component of net unrealized appreciation on investments and
foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings or on specific receivables and payables denominated in a foreign
currency. The contracts are valued daily at current exchange rates and any
unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments. Gain or loss is realized on the settlement date of
the contract equal to the difference between the settlement value of the
original and renegotiated forward contracts. This gain or loss, if any, is
included in net realized gain (loss) on foreign currency transactions. Risks may
arise upon entering into these contracts from the potential inability of the
counterparties to meet the terms of their contracts.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses from investment and
currency transactions 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 unrealized and
realized 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: The Fund expects to pay dividends of net investment
income quarterly, and distributions of net realized capital and currency gains,
if any, annually. 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.
Taxes: For federal income tax purposes, each Fund in the Trust is treated as a
separate taxpaying entity. It is the intent of the Fund to meet the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to 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 Offering Cost: The Fund incurred approximately $98,000 in connection
with the initial offering of the Fund. Offering costs are being amortized over a
period of 12 months ending November 1999.
Reclassification of Capital Accounts: The Series accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gains, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to increase undistributed net investment income by $111,054,
decrease accumulated net realized gain on investments by $18,927 and decrease
paid-in capital by $92,127 for the period ended July 31, 1999, due to realized
and recognized currency gains during the period and certain expenses not
deductible for tax purposes. Net investment income, net realized gains and net
assets were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with PIFM. Pursuant to this agreement, PIFM
manages the investment operations of the Fund, administers the Fund's affairs
and supervises the Adviser's performance of all investment advisory services.
PIFM pays for the costs pursuant to the advisory agreements, the cost of
compensation of officers of the Fund, occupancy and certain clerical and
accounting 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 .75% of the average daily net assets of the Fund. PIFM, in turn, pays each
Adviser a fee, computed daily and paid monthly, equal to the annual rate
specified below based on the average daily net assets of the Fund segments they
manage.
<TABLE>
<CAPTION>
Fee Paid By PIFM
Advisers to Advisers
- ------------------------------ ---------------------------------
<S> <C>
Jennison Associates LLC .30% with respect to the first
$300 million; .25% for amounts
in excess of $300 million
</TABLE>
- --------------------------------------------------------------------------------
21
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED CONSERVATIVE
Notes to Financial Statements GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fee Paid By PIFM
Advisers to Advisers
- ------------------------------ ---------------------------------
<S> <C>
The Prudential Investment
Corporation ('PIC') N/A1
Pacific Investment Management .25%
Company
Franklin Advisers, Inc. .50%
The Dreyfus Corporation .45%
1Under the Advisory Agreement between PIFM and PIC. PIC is
reimbursed by PIFM for its reasonable costs and expenses.
</TABLE>
The Fund has a distribution agreement with Prudential Investment Management
Services LLC ('PIMS') which acts as the distributor of the Class A, Class B,
Class C and Class Z shares of the Fund. The Fund compensates 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 PIMS. The distribution fees are accrued daily and
payable monthly. No distribution or service fees are paid to PIMS as distributor
for Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates 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 .25 of 1%, 1% and 1% of the average daily net
assets of the Class A, B and C shares respectively, for the fiscal period ended
July 31, 1999.
PIMS has advised the Fund that it has received approximately $182,300 and
$71,000 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively during the fiscal period ended July 31, 1999.
PIMS has advised the Fund that for the period ended July 31, 1999, it has
received approximately $52,900 and $14,300 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIMS, PIC and PIFM are indirect, wholly owned subsidiaries of The Prudential
Insurance Company of America.
As of March 11, 1999, the Fund, along with other affiliated registered
investment companies (the 'Funds'), entered into a syndicated credit agreement
('SCA') with an unaffiliated lender. The maximum commitment under the SCA is $1
billion. The Funds pay a commitment fee at an annual rate of .065 of 1% on the
unused portion of the credit facility, which is accrued and paid quarterly on a
pro rata basis by the Funds. The SCA expires on March 9, 2000. Prior to March
11, 1999, the Funds had a credit agreement with a maximum commitment of
$200,000,000. The commitment fee was .055 of 1% on the unused portion of the
credit facility. The Fund did not borrow any amounts pursuant to either
agreement during the fiscal period ended July 31, 1999. The purpose of the
agreements is to serve as an alternative source of funding for capital share
redemptions.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Trust's transfer agent. During the fiscal period ended July 31,
1999, the Fund incurred fees of approximately $20,000 for the services of PMFS.
As of July 31, 1999 approximately $3,300 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates. For the fiscal period ended July
31, 1999, Prudential Securities Incorporated earned approximately $1,000 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term investments,
for the period ended July 31, 1999 were $210,202,411 and $135,692,277,
respectively.
At July 31, 1999, the Fund had an outstanding forward currency contract to sell
foreign currency as follows:
<TABLE>
<CAPTION>
Value at
Foreign Currency Settlement Date Current
Sale Contracts Payable Value Depreciation
- --------------------------------- --------------- -------- ---------------
<S> <C> <C> <C>
Euro,
expiring 8/26/99................ $ 511,104 $535,923 $ (24,819)
------- -------- -------
------- -------- -------
</TABLE>
The United States federal income tax basis of the Funds' investments as of July
31, 1999 was $80,866,844 and accordingly, net unrealized appreciation on
investments for federal income tax purposes was $1,935,778 (gross unrealized
appreciation--$4,665,865, gross unrealized depreciation--$2,730,087).
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. As of July 31, 1999, the Fund
had a 0.8% undivided interest in the repurchase agreements in the joint account.
The undivided interest for the Fund
- --------------------------------------------------------------------------------
22
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED CONSERVATIVE
Notes to Financial Statements GROWTH FUND
- --------------------------------------------------------------------------------
represents $5,227,000 in principal amount. As of such date, each repurchase
agreement in the joint account and the collateral therefore were as follows:
Bear, Stearns & Co. Inc., 5.06%, in the principal amount of $180,000,000
repurchase price $180,075,900, due 8/2/99. The value of the collateral including
accrued interest was $183,904,910.
Deutsche Bank Securities Corp., 5.06%, in the principal amount of $96,548,000
repurchase price $96,588,711, due 8/2/99. The value of the collateral including
accrued interest was $98,479,006.
Salomon Smith Barney Inc., 5.06%, in the principal amount of $180,000,000
repurchase price $180,075,900, due 8/2/99. The value of the collateral including
accrued interest was $184,504,113.
Warburg Dillon Read LLC, 5.07%, in the principal amount of $180,000,000
repurchase price $180,076,050, due 8/2/99. The value of the collateral including
accrued interest was $183,604,710.
- ------------------------------------------------------------
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 front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. 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 qualified 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. Of the
7,166,608 shares of beneficial interest issued and outstanding at July 31, 1999,
Prudential owned 2,083,116.
The Fund has authorized an unlimited number of shares of beneficial interest at
$.001 par value.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ---------------------------------- ----------- -------------
<S> <C> <C>
November 18, 1998(a) through
July 31, 1999:
Shares sold....................... 1,042,412 $ 10,711,221
Shares issued in reinvestment of
dividends....................... 10,808 113,563
Shares reacquired................. (177,770) (1,852,189)
----------- -------------
Net increase in shares outstanding
before conversion............... 875,450 8,972,595
Shares issued upon conversion from
Class B......................... 1,584 16,195
----------- -------------
Net increase in shares
outstanding..................... 877,034 $ 8,988,790
----------- -------------
----------- -------------
<CAPTION>
Class B
- ----------------------------------
<S> <C> <C>
November 18, 1998(a) through
July 31, 1999:
Shares sold....................... 3,203,723 $ 32,945,049
Shares issued in reinvestment of
dividends....................... 25,247 265,233
Shares reacquired................. (306,183) (3,184,477)
----------- -------------
Net increase in shares outstanding
before conversion............... 2,922,787 30,025,805
Shares reacquired upon conversion
into Class A.................... (1,585) (16,195)
----------- -------------
Net increase in shares
outstanding..................... 2,921,202 $ 30,009,610
----------- -------------
----------- -------------
<CAPTION>
Class C
- ----------------------------------
<S> <C> <C>
November 18, 1998(a) through
July 31, 1999:
Shares sold....................... 1,533,354 $ 15,566,209
Shares issued in reinvestment of
dividends....................... 13,956 146,297
Shares reacquired................. (191,676) (1,993,717)
----------- -------------
Net increase in shares
outstanding..................... 1,355,634 $ 13,718,789
----------- -------------
----------- -------------
<CAPTION>
Class Z
- ----------------------------------
<S> <C> <C>
November 18, 1998(a) through
July 31, 1999:
Shares sold....................... 4,798,062 $ 47,985,619
Shares issued in reinvestment of
dividends....................... 61,120 637,433
Shares reacquired................. (2,849,444) (30,107,867)
----------- -------------
Net increase in shares
outstanding..................... 2,009,738 $ 18,515,185
----------- -------------
----------- -------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
23
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED CONSERVATIVE
Notes to Financial Statements GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
November 18, 1998(a) Through July 31,
1999(d)
-------------------------------------------
Class A Class B Class C Class Z
------- ------- ------- -------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................................ $10.00 $ 10.00 $ 10.00 $ 10.00
------- ------- ------- -------
Income from investment operations:
Net investment income....................................................... .19 .14 .14 .21
Net realized and unrealized gain on investments and foreign currencies...... .35 .34 .34 .35
------- ------- ------- -------
Total from investment operations......................................... .54 .48 .48 .56
------- ------- ------- -------
Less distributions
Dividends from net investment income........................................ (.18) (.13) (.13) (.19)
------- ------- ------- -------
Net asset value, end of period.............................................. $10.36 $ 10.35 $ 10.35 $ 10.37
------- ------- ------- -------
------- ------- ------- -------
TOTAL RETURN(b)............................................................. 5.34% 4.77% 4.77% 5.58%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................................. $9,097 $30,235 $14,035 $20,843
Average net assets (000).................................................... $6,157 $19,308 $12,039 $38,460
Ratios to average net assets:(c)
Expenses, including distribution fees.................................... 1.92% 2.67% 2.67% 1.67%
Expenses, excluding distribution fees.................................... 1.67% 1.67% 1.67% 1.67%
Net investment income.................................................... 2.69% 1.94% 1.91% 2.89%
Portfolio turnover rate..................................................... 180% 180% 180% 180%
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day and includes reinvestment of dividends and distributions. Total
return for periods of less than a full year are not annualized.
(c) Annualized.
(d) Calculated based upon weighted average shares outstanding during the period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 24
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED CONSERVATIVE
Report of Independent Accountants GROWTH FUND
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of
Prudential Diversified Funds--
Prudential Diversified Conservative Growth Fund
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 Diversified
Funds--Prudential Diversified Conservative Growth Fund (the 'Fund') at July 31,
1999, and the results of its operations, the changes in its net assets and the
financial highlights for the period November 18, 1998 (commencement of
operations) through July 31, 1999, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as 'financial statements') are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at July 31, 1999 by correspondence with the custodian
and brokers, provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
September 20, 1999
- --------------------------------------------------------------------------------
25
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED CONSERVATIVE
Federal Income Tax Information (Unaudited) GROWTH FUND
- --------------------------------------------------------------------------------
We are required by the Internal Revenue Code to advise you within 60 days of the
Fund's fiscal year end (July 31, 1999) as to the federal tax status of dividends
paid by the Fund during such fiscal period. Accordingly, we are advising you
that during the fiscal period, the Fund paid dividends for Class A, Class B,
Class C and Class Z shares totaling $.18, $.13, $.13 and $.19 per share, of
ordinary income, which is taxable as such, respectively. Further, we wish to
advise you that 8.10% of the ordinary income dividends paid in the fiscal year
ended July 31, 1999 qualified for the corporate dividend received deduction
available to corporate taxpayers.
In January 2000, you will be advised on IRS Form 1099 DIV or substitute 1099 DIV
as to the federal tax status of the distributions received by you in calendar
year 1999.
IMPORTANT NOTICE FOR CERTAIN SHAREHOLDERS
We are required by Massachusetts, Missouri and Oregon to inform you that
dividends which have been derived from interest on federal obligations are not
taxable to shareholders providing the mutual fund meets certain requirements
mandated by the respective state's taxing authorities. We are pleased to report
that 28% of the dividends paid by the Prudential Diversified Conservative Growth
Fund qualify for such deduction.
For more detailed information regarding your state and local taxes, you should
contact your tax advisor or the state/local taxing authorities.
- --------------------------------------------------------------------------------
26
<PAGE>
Getting the Most from Your Prudential Mutual Fund
How many times have you read these reports--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.
Collateralized Mortgage Obligations (CMOs): Mortgage-backed bonds that separate
mortgage pools into different maturity classes, called tranches. 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 instruments 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. 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 product) 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" prices of a security, or between the
yields of two similar maturity bonds.
Yankee Bond: A bond sold by a foreign company or government in the U.S. market
and denominated in U.S. dollars.
<PAGE>
Comparing a $10,000 Investment
- -------------------------------------------------------------------------------
Prudential Diversified Conservative Growth Fund vs. the S&P 500 Index
Class A
(GRAPH)
Class B
(GRAPH)
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.
These graphs compare a $10,000 investment in the Prudential Diversified
Conservative Growth Fund (Class A, B, C, and Z shares) with a similar
investment in the Standard & Poor's 500 Composite Stock Price Index (S&P 500
Index) by portraying the account values at the commencement of operations of
Class A, B, C, and Z shares, and at the end of the fiscal year (July 31), as
measured on a quarterly basis, beginning in 1998 for Class A, B, C, and Z
shares. For purposes of the graphs, and unless otherwise indicated, it has been
assumed that (a) the maximum applicable front-end sales charge was deducted
from the initial $10,000 investment in Class A and Class C 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 July 31, 1999; (c) all recurring fees (including management fees) were
deducted; and (d) all dividends and distributions were reinvested. Class B
shares will automatically convert to Class A shares, on a quarterly basis,
approximately seven years
<PAGE>
Class C
(GRAPH)
Class Z
(GRAPH)
after purchase. Class Z shares are not subject to a sales charge or
distribution and service (12b-1) fees. Since the Fund has been in existence
less than one year, no average annual total returns are presented.
The S&P 500 Index is an unmanaged index of 500 stocks of large U.S. companies
that give a broad look at how stock prices have performed. The total return of
the S&P 500 Index 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 S&P 500 Index is not the only index that may be
used to characterize performance of equity funds. The securities in the S&P
500 Index may differ substantially from the securities in the Fund. Other
indexes may portray different comparative performance. Investors cannot invest
directly in an index.
These graphs are furnished to you in accordance with SEC regulations.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Class NASDAQ Cusip
A -- 74432F109
B -- 74432F208
C -- 74432F307
Z PDCZX 74432F406
Trustees
Eugene C. Dorsey
Douglas H. McCorkindale
Thomas T. Mooney
John R. Strangfeld
Officers
John R. Strangfeld, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
David F. Connor, Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three, 100 Mulberry Street, Newark, NJ 07102-4077
Investment Sub-Advisers
The Prudential Investment Corporation
Prudential Plaza, Newark, NJ 07102-3777
Jennison Associates LLC
466 Lexington Avenue, New York, NY 10017
Franklin Advisers, Inc.
777 Mariners Island Blvd., San Mateo, CA 94404
The Dreyfus Corporation200 Park Avenue, New York, NY 10166
Pacific Investment Management Company
840 Newport Center Drive, Newport Beach, CA 92660
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
Raritan Plaza One, Edison, NJ 08837
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas, New York, NY 10036
Legal Counsel
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W., Washington, DC 20036
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.
MF186E5
<PAGE>
Prudential
Diversified Funds
(ICON)
Prudential
Diversified
High Growth
Fund
ANNUAL
REPORT
July 31, 1999
(LOGO)
<PAGE>
A Message from the Fund's President September 17, 1999
(PHOTO)
Dear Shareholder,
The Prudential Diversified High Growth Fund's A shares returned
an impressive 15.20% (excluding the sales charge) from inception
to the end of our reporting period (July 31, 1999). It trailed
the Lipper Growth Fund Average slightly, mostly because
funds in that category tend to focus on the large U.S. stocks
that market conditions favored for much of our reporting
period. Our diversified approach, on the other hand, provides
exposure to a much broader range of equities--growth and value
styles, domestic and international, large and small.
Diversification reduces the risk that all of your assets will
move in one direction at the same time. Because it is diversified,
your Fund is positioned to deliver more consistent returns as
market conditions change and investor sentiment shifts.
Indeed, there was evidence of such a shift in the second
quarter of 1999: smaller, more value-oriented stocks rallied
strongly, which helped sustain our return when growth stocks
lagged.
The Prudential Diversified High Growth Fund also offers the
specialized management that different asset classes and
investment styles call for. While no one can guarantee
future results, staying with a well-balanced asset allocation
can reduce volatility, smoothing returns over time. By using
a range of investment specialists to manage the holdings of
one fund, we hope to make the benefits of diversification
as convenient as possible.
Thank you for your continued confidence in Prudential mutual funds.
Sincerely,
John R. Strangfeld
President
Prudential Diversified Funds
<PAGE>
Investment Advisers' Report
Investment Advisers
Prudential Investments Fund
Management LLC
- - John Van Belle, Ph.D.
- - Stacie Mintz
Sub-Advisers
(PRUDENTIAL INVESTMENTS LOGO)
(LAZARD LOGO)
(FRANKLIN TEMPLETON LOGO)
(JENNISON ASSOCIATES LOGO)
(DREYFUS LOGO)
Investment Goals and Style
The Fund seeks to provide long-term
capital appreciation. It invests in
a diversified portfolio of stocks.
There can be no assurance that the
Fund will achieve its investment
objective.
The Economic Context
Since the Fund's inception on November 18, 1998, investors
lurched from confusion to confidence in the global economy.
They ended our reporting period with a generally positive
outlook, but one tempered with fears that stronger growth
could lead to higher inflation and interest rates.
In the summer of 1998, financial markets were affected
seriously by a sharp and severe recession in Asia that
threatened global growth. Russia then defaulted on loans,
darkening the picture further and sending markets into
turmoil. Central banks in Europe and the United States
Federal Reserve Bank responded aggressively in the fall,
reducing interest rates to stimulate economic activity.
The medicine worked.
In the new year, the U.S. economy, driven by domestic
consumer demand, continued its vigorous expansion. That
good news was joined by relative stability in Latin
America, where problems in Brazil--the region's largest
economy--appeared better contained than had been expected.
Stirrings of economic activity were felt in Europe and
Asia; even long-suffering Japan showed signs of life.
The promise of economic recovery and increased demand
brought with it the prospects of higher inflation-- an
indication that the pace of growth may be exceeding
its natural limits. Alan Greenspan, chairman of the
Federal Reserve, repeatedly warned that the Fed would
take action, if necessary, to raise interest rates
as a way of preempting inflation. Indeed, the Federal
Reserve twice increased a key rate over the summer.
Both increases were modest, however, calming investors
and allowing the rally in financial markets to continue.
The Financial Markets
Panic over the troubles in Asia and Russia sent markets
reeling in 1998, with all but the biggest, best-known
stocks tumbling. The actions by the U.S. Federal Reserve
and other central banks calmed markets in the fall,
however, fueling a rebound.
Sensing economic recovery abroad, investors in the first
quarter of 1999 moved money back into Asia, Latin America
and, to a smaller extent, Europe. Japanese stocks improved
significantly. Very strong U.S. growth sent the Standard &
Poor's 500 Index, Dow Jones Industrials Average, and NASDAQ
Composite Index into uncharted territory.
Although gains were concentrated at first in the very
largest companies, more stocks began to share in the
<PAGE>
advance as time went on. Growing confidence about global
growth prospects led to increases for value stocks and
smaller stocks. The second quarter of 1999 saw a catch-up
spurt for these sectors: small caps, as measured by the
Russell 2000 Index, returned 16% in the quarter, outperforming
the large-cap S&P 500, which returned 7%. Even among large-cap
stocks, value issues--as measured by the S&P/BARRA Value
Index--returned 11% in the quarter, while their counterparts
in the S&P/BARRA Growth Index returned 4%.
For our reporting period as a whole, however, large-cap
stocks still provided better returns overall, and growth
stocks beat value stocks. Nearly all equity categories fell
somewhat in July, as some investors took profits and others
considered the impact that a resurgence of inflation could
have on corporate earnings.
Our Performance
The Prudential Diversified High Growth Fund's commitment of
50% of its portfolio to large-capitalization stocks was the
most significant factor for its return in the year ended July
31, 1999. Within the large-cap universe, we gained most from our
growth stocks. Our large-cap value stocks also generated
strong returns: in the second quarter, when value stocks
outperformed, our strongly disciplined selections did
particularly well, helping make up for earlier months
that were hostile to the value investing style.
After a rocky start, the Fund's international holdings
performed well, as economic conditions abroad improved.
The same was true of our smaller domestic growth stocks,
which shared considerably in the market broadening that
began in April.
<TABLE>
Cumulative Total Returns1 As of 7/31/99
<CAPTION>
Since Inception2 Since Inception2
(Without Sales Charge) (With Sales Charge)
<S> <C> <C>
Class A 15.20% 9.44%
Class B 14.70 9.70
Class C 14.70 12.55
Class Z 15.60 15.60
Lipper Growth Fund Avg.3 17.52 N/A
</TABLE>
Past performance is not indicative of future results. Principal
and investment return will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
1 Source: Prudential Investments Fund Management LLC and Lipper,
Inc. Since the Fund has been in existence less than one year, no
average annual total returns are presented. The Fund charges a
maximum front-end sales charge 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 Z shares
are not subject to a sales charge or distribution and service
(12b-1) fees.
2 Inception date: Class A, B, C, and Z, 11/18/98.
3 The Lipper Since Inception return is for all funds in each
share class in the Growth Fund category.
Looking Ahead
Europe, Japan, and other countries in Asia are all
showing signs of improved economic health. Financial
markets in these regions have performed well recently,
and we believe they will continue to present opportunities
as a return to growth gathers strength.
Meanwhile, the U.S. economy--approaching a marathon record
for growth in 150 years of historical data--continues to
run steadily ahead. Markets remain volatile, but investors
appear willing to consider a broader range of equities than
they have considered in recent years. If inflation remains
modest and consumer demand stays strong, we would expect an
environment favorable to U.S. companies to continue.
1
<PAGE>
What Is Diversification?
Diversification--spreading your investments over many
different securities--is a basic principle of investing.
It helps to reduce the overall risk of your portfolio.
Moreover, when we rebalance our portfolio to restore
the original weighting of different asset classes, the
discipline forces us to sell high and buy low. Over
time, this may improve your return.
High Growth Fund Diversification Target
(PIE CHART)
How Diversification Works
Mutual funds not only provide professional money management;
they also allow a relatively small investment to be spread
over many different securities. When you own a large number
of different securities, the impact of any one on your return is
reduced. In addition, if you diversify your investments
among asset classes and investment styles--between stocks
and bonds, value and growth stocks, and investment-grade
and high-yield bonds--it is less likely that all the
securities you own will move in the same direction at
one time. The Prudential Diversified Funds provide more
of this buffering than a fund investing in only one asset
class. We believe this will result in more consistent
returns over time.
Rebalancing--The Diversified High Growth Fund has a target
allocation for each asset class. As some perform better
than others, the portfolio will drift from this original
target: the securities that rise most will become a larger
proportion of the invested assets. We direct new investments
to the asset classes that have fallen below their target
ratio and, when necessary, sell certain securities in
appreciated asset classes to maintain the balance. This
not only keeps your risk exposure from changing too much,
but it may reduce the average cost of our investments and
increase our average selling price over time.
Although an individual investor can diversify and rebalance,
it would require a large investment to own the range of asset
classes represented in the Prudential Diversified High Growth
Fund.
Moreover, calculating the amounts to allocate to each kind
of security in a rebalancing would be difficult. Prudential
Diversified Funds do it all for you.
2
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as
of July 31, 1999 PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--95.2%
COMMON STOCKS
Advertising--0.4%
6,600 Omnicom Group Inc. $ 467,775
- ------------------------------------------------------------
Aerospace/Defense--1.2%
5,900 AlliedSignal Inc. 381,656
69,100 British Aerospace PLC
(United Kingdom)(a) 457,936
1,550 Cordant Technologies Inc. 69,459
8,150 Gencorp Inc. 214,447
15,000 Loral Space & Communications, Inc. 283,125
------------
1,406,623
- ------------------------------------------------------------
Airlines--0.3%
3,600 Alaska Air Group, Inc.(a) 159,750
3,700 Continental Airlines, Inc.(a) 157,250
------------
317,000
- ------------------------------------------------------------
Aluminum--0.5%
9,100 Alcoa Inc. 544,862
- ------------------------------------------------------------
Apparel--0.1%
5,050 Kellwood Co. 114,572
- ------------------------------------------------------------
Appliances--0.2%
13,700 Electrolux AB, Ser. B (Sweden) 284,764
- ------------------------------------------------------------
Auto & Truck--1.3%
4,250 Arvin Industries, Inc. 158,844
3,700 Borg-Warner Automotive, Inc. 188,006
3,160 DaimlerChrysler AG (Germany) 240,650
1,747 Delphi Automotive Systems Corp. 31,446
2,800 General Motors Corp. 170,625
61,000 Nissan Motor Co., Ltd. (Japan)(a) 363,765
4,500 Varlen Corp. $ 170,438
7,600 Volvo AB, Series B (Sweden) 237,652
------------
1,561,426
- ------------------------------------------------------------
Banking--6.6%
5,600 BancorpSouth, Inc. 92,400
12,100 Bank of New York Co., Inc. 446,944
1,400 Bank United Corp. (Class 'A' Stock) 53,900
2,050 Banknorth Group, Inc. 66,369
4,800 Banque Nationale de Paris (France) 395,878
15,900 Chase Manhattan Corp. 1,222,312
2,250 City National Corp. 77,063
8,500 Commercial Federal Corp. 197,625
17,200 Corporacion Bancaria de Espana,
(Spain) 379,328
2,250 CORUS Bankshares, Inc. 69,750
10,600 Cullen/Frost Bankers, Inc. 272,287
5,740 CVB Financial Corp. 149,957
300 First Citizens BancShares, Inc. 23,925
15,000 Fuji Bank Ltd. (Japan) 115,420
12,000 Golden State Bancorp, Inc.(a) 265,500
2,850 Harbor Florida Bancshares, Inc. 36,516
25,200 HSBC Holdings PLC (Hong Kong)(a) 297,072
29,000 Industrial Bank of Japan, Ltd.
(Japan) 236,077
5,800 ING Groep NV (Netherlands)(a) 296,952
6,000 MAF Bancorp, Inc. 139,875
19,300 Merita PLC (Finland) 104,395
20,700 National Westminster Bank PLC
(United Kingdom) 408,856
17,000 Nordbanken Holding AB (Sweden) 100,101
5,450 North Fork Bancorporation, Inc. 112,406
17,000 Overseas-Chinese Banking Corp.,
Ltd. (Singapore) 142,467
7,000 Peoples Heritage Financial Group,
Inc. 126,437
2,050 Queens County Bancorp Inc. 64,703
2,400 Republic New York Corp. 167,400
17,500 Sao Paolo Imi SpA (Italy) 222,307
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as
of July 31, 1999 PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Banking (cont'd.)
7,600 Silicon Valley Bancshares(a) $ 186,200
76,000 Sumitomo Trust & Banking Co.,
Ltd. (Japan) 482,455
20,700 Svenska Handelsbanken, Ser. A
(Sweden) 273,805
800 Unidanmark A/S (Denmark) 52,950
34,000 United Overseas Bank, Ltd.
(Singapore) 248,559
2,950 Washington Federal, Inc. 72,828
5,300 WestAmerica Bancorporation 177,550
------------
7,778,569
- ------------------------------------------------------------
Building & Construction--1.9%
4,600 American Standard Companies Inc.(a) 202,688
5,500 Centex Corp. 185,281
13,450 D.R. Horton, Inc. 218,563
1,800 Dycom Industries, Inc.(a) 85,950
4,250 Integrated Electrical Services,
Inc. 71,719
6,200 Lone Star Industries, Inc. 237,538
4,800 M.D.C. Holdings, Inc. 99,600
12,850 Pulte Corp. 291,534
2,150 Southdown, Inc. 126,850
5,900 Thomas Industries, Inc. 123,531
3,400 Toll Brothers Inc.(a) 72,250
7,550 U.S. Home Corp.(a) 259,531
12,050 Webb (Del E.) Corp. 268,112
------------
2,243,147
- ------------------------------------------------------------
Cable & Pay Television Systems--0.3%
9,400 Jones Intercable, Inc.(a) 423,000
- ------------------------------------------------------------
Chemicals--1.1%
2,625 Cytec Industries Inc.(a) 68,742
4,300 Eastman Chemical Co. 222,256
5,100 Grace (W.R.) & Co.(a) 95,944
7,800 Hoechst AG (Germany) 329,170
29,000 Imperial Chemical Industries PLC
(United Kingdom) 339,154
2,850 MacDermid, Inc. 101,531
3,700 Spartech Corp. 108,225
------------
1,265,022
Computer Services--3.4%
12,700 Affiliated Computer Services,
Inc.(a) $ 590,550
3,000 America Online, Inc.(a) 285,375
1,900 AVT Corp.(a) 58,781
6,500 Catapult Communications Corp.(a) 122,687
3,100 CIBER, Inc.(a) 54,250
18,200 Cisco Systems, Inc.(a) 1,130,675
1,850 Computer Task Group, Inc. 30,641
3,300 Comverse Technology, Inc.(a) 249,356
3,300 Equant NV(a) 293,494
1,800 Exodus Communications, Inc.(a) 216,112
400 NetIQ Corp. 5,862
2,400 Sun Microsystems, Inc.(a) 162,900
7,650 Symbol Technologies, Inc. 300,741
20,000 Whittman-Hart, Inc.(a) 506,250
------------
4,007,674
- ------------------------------------------------------------
Computers--3.8%
2,700 Apex Inc.(a) 70,537
6,400 Citrix Systems, Inc.(a) 333,200
16,400 Compaq Computer Corp. 393,600
12,500 Dell Computer Corp.(a) 510,937
1,550 Electronics for Imaging, Inc.(a) 84,959
7,900 EMC Corp.(a) 478,444
11,300 Hewlett-Packard Co. 1,182,969
7,400 International Business Machines
Corp. 930,087
1,650 Kronos Inc.(a) 79,819
800 SCM Microsystems, Inc. 39,800
15,300 Seagate Technology, Inc.(a) 411,188
------------
4,515,540
- ------------------------------------------------------------
Consumer Products--1.7%
3,800 Central Garden & Pet Co.(a) 34,438
2,550 Fossil Inc.(a) 133,875
2,500 Hitachi Ltd. ADR (Japan) 250,312
4,850 Siemens AG (Germany) 401,561
22,600 Tandy Corp. 1,159,662
------------
1,979,848
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 4
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as
of July 31, 1999 PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- -----------------------------------------------------------
Cosmetics/Toiletries--0.4%
10,000 Kao Corp. (Japan) $ 278,931
4,100 Kimberly-Clark Corp. 250,100
------------
529,031
- ------------------------------------------------------------
Distribution/Wholesalers--0.1%
1,500 Ingram Micro Inc.(a) 42,656
3,150 United Stationers Inc.(a) 82,688
------------
125,344
- ------------------------------------------------------------
Diversfied Consumer Products
3,150 Franklin Covey Co.(a) 22,050
- ------------------------------------------------------------
Diversified Operations--1.5%
8,600 General Electric Co. 937,400
42,200 Granada Group PLC (United Kingdom) 420,869
5,998 Vivendi (France) 471,876
------------
1,830,145
- ------------------------------------------------------------
Diversified Manufacturing--1.8%
2,400 Crane Co. 60,900
4,100 CUNO, Inc.(a) 79,181
200 JDS Uniphase Corp.(a) 18,075
9,400 Mettler-Toledo International
Inc.(a) 272,013
78,300 Siebe PLC (United Kingdom) 425,426
125 Swatch Group AG (Switzerland) 97,728
3,700 SPS Technologies, Inc.(a) 151,469
8,900 Thyssen Krupp AG (Germany)(a) 207,815
5,600 Veba AG (Germany) 344,294
2,400 Vodafone Airtouch PLC ADR (United
Kingdom)(a) 505,200
------------
2,162,101
- ------------------------------------------------------------
Electronics--1.3%
3,200 Gemstar International Group Ltd.(a) 212,000
2,750 Koninklijke (Royal) Phillips
Electronics NV (Netherlands) 281,150
1,700 L-3 Communications Holdings,
Inc.(a) 72,994
5,600 Polycom, Inc.(a) 187,600
100 Power-One, Inc.(a) $ 2,525
3,400 Sony Corp. (Japan) 433,752
3,600 TDK Corp. ADR (Japan) 360,450
------------
1,550,471
- ------------------------------------------------------------
Electronic Components--2.3%
11,100 Arrow Electronics, Inc.(a) 236,569
4,000 Avnet, Inc. 196,000
3,550 Belden Inc. 88,306
2,400 CTS Corp. 197,100
4,900 Flextronics International Ltd.(a) 219,888
16,500 Gentex Corp.(a) 430,031
2,050 Idacorp Inc. 63,422
1,950 Innovex, Inc. 27,788
5,900 Optical Coating Laboratory, Inc. 423,325
3,150 Pioneer-Standard Electronics, Inc. 40,359
2,650 Pittway Corp. 88,113
5,800 PMC-Sierra, Inc.(a) 453,850
1,600 Rogers Corp.(a) 53,000
1,750 Semtech Corp(a) 108,281
3,000 Veeco Instruments Inc.(a) 87,562
------------
2,713,594
- ------------------------------------------------------------
Entertainment--0.2%
4,500 SFX Entertainment, Inc.(a) 201,656
- ------------------------------------------------------------
Fertilizer--0.1%
1,800 Potash Corp. of Saskatchewan Inc. 92,363
- ------------------------------------------------------------
Financial Services--5.1%
2,100 Allied Capital Corp. 47,250
8,900 Bank of America Corp. 590,737
750 Blanch (E.W.) Holdings, Inc. 49,125
2,250 Chittenden Corp. 62,719
27,100 Citigroup Inc. 1,207,644
550 Dain Rauscher Corp. 29,253
5,900 Doral Financial Corp. 97,350
6,000 Downey Financial Corp. 139,875
3,500 Eaton Vance Corp. 121,844
10,850 Financial Security Assurance
Holdings Ltd. 570,303
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as
of July 31, 1999 PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Financial Services (cont'd.)
2,050 Gallagher (Arthur J.) & Co. $ 106,856
1,000 Goldman Sachs Group, Inc. 64,312
2,900 Heller Financial, Inc. 73,950
1,600 Knight/Trimark Group, Inc.(a) 67,400
3,000 Lehman Brothers Holdings Inc. 161,250
13,300 MBNA Corp. 379,050
5,000 Metris Companies Inc. 196,563
1,000 Morgan (J.P.) & Co., Inc. 127,875
8,300 Morgan Stanley Dean Witter Discover
& Co. 748,037
4,000 Orix Corp. (Japan) 413,413
4,000 Promise Co., Ltd. (Japan) 265,816
1,413 Radian Group Inc. 72,858
12,350 Resource Bancshares Mortgage Group,
Inc. 86,450
5,800 Schwab (Charles) Corp. 255,562
4,150 Webster Financial Corp. 109,456
------------
6,044,948
- ------------------------------------------------------------
Food & Beverage--2.1%
19,000 Asahi Breweries, Ltd. (Japan) 249,036
29,500 Cadbury Schweppes PLC
(United Kingdom) 188,313
1,750 Coors (Adolph) Co. 93,188
2,400 Corn Products International, Inc. 75,600
30,800 Diageo PLC (United Kingdom) 313,678
6,400 Heineken NV (Netherlands) 346,865
2,650 J & J Snack Foods Corp.(a) 63,600
18,400 Nabisco Group Holding Corp. 345,000
2,700 Performance Food Group Co.(a) 72,563
5,300 Riviana Foods Inc. 102,687
11,600 Sara Lee Corp. 255,200
28,825 Unilever PLC (United Kingdom) 276,943
3,150 Universal Foods Corp. 68,709
------------
2,451,382
- ------------------------------------------------------------
Forestry & Paper--0.1%
5,400 Georgia-Pacific Corp. (Timber
Group) 133,313
- ------------------------------------------------------------
Funeral Services--0.1%
8,600 Service Corp. International 136,525
Gas Distribution--0.5%
6,450 Energen Corp. $ 120,938
5,700 KeySpan Corp. 158,175
3,150 ONEOK, Inc. 100,209
8,400 WICOR, Inc. 243,600
------------
622,922
- ------------------------------------------------------------
Health Care--2.9%
28,600 Columbia/HCA Healthcare Corp. 636,350
22,400 Foundation Health Systems, Inc. 340,200
1,263 LifePoint Hospitals, Inc.(a) 12,472
5,100 Pacificare Health Systems(a) 347,756
9,000 PAREXEL International Corp.(a) 99,000
1,450 Safeskin Corp.(a) 12,869
33,700 Tenet Healthcare Corp.(a) 604,494
1,263 Triad Hospitals, Inc.(a) 13,340
9,100 United Healthcare Corp. 555,100
10,400 Wellpoint Health Networks Inc.(a) 854,100
------------
3,475,681
- ------------------------------------------------------------
Home Furnishings--0.3%
6,375 Ethan Allen Interiors, Inc. 202,406
4,500 Furniture Brands International,
Inc.(a) 121,500
------------
323,906
- ------------------------------------------------------------
Hotels--0.4%
16,100 Hilton Hotels Corp. 210,306
47,400 MeriStar Hotels & Resorts, Inc.(a) 174,788
14,200 Park Place Entertainment Corp.(a) 144,663
------------
529,757
- ------------------------------------------------------------
Human Resources--0.3%
2,000 CDI Corp.(a) 65,250
1,150 Navigant Consulting, Inc.(a) 48,587
13,000 RemedyTemp, Inc.(a) 232,375
------------
346,212
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 6
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as
of July 31, 1999 PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Industrial Technology/Instruments--0.4%
5,500 EG&G, Inc. $ 184,594
5,100 Waters Corp.(a) 304,725
------------
489,319
- ------------------------------------------------------------
Insurance--5.6%
4,500 ACE, Ltd. 104,625
833 Allianz AG (Germany) 222,164
15,200 Allied Zurich (United Kingdom) 186,281
2,800 American Financial Group Inc. 91,700
2,000 American General Corp. 154,750
7,200 American International Group, Inc. 836,100
2,800 Annuity And Life Re (Holdings),
Ltd. 67,200
2,700 Axa-UAP (France)(a) 316,671
4,150 Capital Re Corp. 55,766
10,400 Chubb Corp. 622,050
5,300 Equitable Companies, Inc. 340,525
3,040 Fidelity National Financial, Inc. 53,010
2,650 First American Financial Corp. 44,056
4,500 Harleysville Group, Inc. 87,750
1,960 Medical Assurance, Inc.(a) 58,800
2,650 Milacron Inc. 45,381
14,900 Mutual Risk Management, Ltd. 444,206
14,200 Old Republic International Corp. 238,738
2,250 PartnerRe Ltd. 85,500
5,100 Presidential Life Corp. 97,856
4,800 Protective Life Corp. 171,300
15,800 Prudential Corp. PLC (United
Kingdom) 235,338
13,700 Reinsurance Group of America, Inc. 501,762
40,617 Royal & Sun Alliance Insurance
Group (United Kingdom) 335,149
14,100 SAFECO Corp. 536,681
5,500 St. Paul Companies, Inc. 171,188
3,600 Terex Corp. 108,000
3,100 Tokio Marine & Fire Insurance Co.
Ltd ADR (Japan) 181,350
435 Zurich Versicherungs-Gesellschaft
(Switzerland) 252,517
------------
6,646,414
Machinery--0.5%
5,300 IDEX Corp. $ 149,394
4,700 JLG Industries, Inc. 93,706
9,400 Lincoln Electric Holdings Inc. 178,012
1,850 Tecumseh Products Co.(a) 119,556
------------
540,668
- ------------------------------------------------------------
Manufacturing--0.8%
1,600 AptarGroup, Inc. 46,300
2,140 Compagnie de Saint Gobain (France) 388,520
3,200 Compagnie Generale des
Etablissements Michelin, Ser. B
(France) 129,903
1,800 Nintendo Co., Ltd. (Japan) 264,417
1,600 Tyco International Ltd. 156,300
------------
985,440
- ------------------------------------------------------------
Media--1.9%
21,900 CBS Corp.(a) 962,231
8,000 Clear Channel Communications,
Inc.(a) 556,500
3,500 Cumulus Media Inc.(a) 84,438
5,100 King World Productions, Inc.(a) 177,863
31,100 Reed International PLC (United
Kingdom) 237,676
4,200 Univision Communications Inc.(a) 290,850
------------
2,309,558
- ------------------------------------------------------------
Medical Products & Services--0.8%
100 Amgen Inc.(a) 7,603
2,250 Datascope Corp.(a) 78,188
800 Genetech, Inc.(a) 113,600
1,100 IDEC Pharmaceuticals Corp.(a) 109,037
10,000 Inhale Therapeutic Systems, Inc.(a) 246,250
1,700 Patterson Dental Co.(a) 66,831
10,000 Sankyo Co., Ltd. (Japan)(a) 264,941
1,500 TLC The Laser Center Inc.(a) 54,563
------------
941,013
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as
of July 31, 1999 PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Metals--0.6%
38,400 Broken Hill Proprietary Co., Ltd.
(Australia) $ 424,927
2,650 Cleveland-Cliffs Inc. 84,800
4,250 Commercial Metals Co. 140,250
1,850 Kaydon Corp. 57,697
3,150 RTI International Metals, Inc. 40,556
------------
748,230
- ------------------------------------------------------------
Mining--0.5%
19,100 Freeport-McMoRan Copper & Gold,
Inc.(a) 303,212
14,100 Newmont Mining Corp. 260,850
------------
564,062
- ------------------------------------------------------------
Office Equipment & Supplies--0.9%
12,000 Canon, Inc. (Japan) 380,886
13,200 Harris Corp. 400,125
2,750 Kimball International, Inc.
(Class 'B' Stock) 53,625
3,700 Xerox Corp. 180,375
------------
1,015,011
- ------------------------------------------------------------
Oil & Gas--4.2%
1,600 Amerada Hess Corp. 94,700
5,500 Atlantic Richfield Co. 495,344
20,100 BP Amoco PLC (United Kingdom) 394,719
4,050 Devon Energy Corp. 149,091
2,740 Elf Aquitaine SA (France) 469,570
11,500 Elf Aquitaine SA ADR (France) 983,969
49,100 ENI SpA (Italy) 299,243
8,150 Helmerich & Payne, Inc. 208,334
2,877 Kerr-McGee Corp. 148,165
17,800 Marine Drilling Companies, Inc.(a) 265,887
21,500 Newfield Exploration Co.(a) 622,156
12,700 Nuevo Energy Co.(a) 199,231
5,900 Occidental Petroleum Corp. 115,419
1,750 SEACOR SMIT Inc. 86,953
4,650 Swift Energy Co.(a) 48,534
9,600 Tesoro Petroleum Corp. $ 151,200
4,100 Total Fina SA ADR (France) 260,862
2,100 Valero Energy Corp. 44,888
------------
5,038,265
- ------------------------------------------------------------
Paper & Packaging--3.1%
3,150 Ball Corp. 152,578
3,800 Fort James Corp. 138,700
15,000 Georgia-Pacific Group 674,062
8,900 International Paper Co. 455,012
10,800 Mead Corp. 442,800
4,000 Rayonier Inc. 190,250
3,750 Shorewood Packaging Corp.(a) 65,391
5,500 Temple-Inland Inc. 347,875
4,700 Universal Forest Products Inc. 87,537
4,100 UPM-Kymmene Oyj (Finland) 138,333
6,900 Weyerhaeuser Co. 446,344
11,400 Willamette Industries, Inc. 513,000
------------
3,651,882
- ------------------------------------------------------------
Pharmaceuticals--3.8%
1,550 Alpharma Inc. 57,544
10,800 American Home Products Corp. 550,800
8,869 AstraZeneca Group PLC (Sweden) 323,826
2,600 Bindley Western Industries Inc. 56,225
6,400 Bristol-Myers Squibb Co. 425,600
4,800 Glaxo Wellcome PLC ADR (United
Kingdom) 250,500
3,600 Lilly (Eli) & Co. 236,250
6,700 Merck & Co., Inc. 453,506
4,600 Ocular Sciences, Inc.(a) 90,563
6,200 Rhone-Poulenc SA, Ser. A (France) 303,485
2,750 Roberts Pharmaceutical Corp. 75,453
28 Roche Holdings AG (Switzerland) 309,858
11,100 Schering-Plough Corp. 543,900
15,100 SmithKline Beecham PLC (United
Kingdom) 186,895
5,200 ThermoQuest Corp. 55,900
9,100 Warner-Lambert Co. 600,600
------------
4,520,905
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 8
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as
of July 31, 1999 PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Photography--0.8%
13,600 Eastman Kodak Co. $ 940,100
- ------------------------------------------------------------
Printing & Publishing--0.2%
1,650 Consolidated Graphics, Inc.(a) 65,587
2,475 Valassis Communications, Inc.(a) 92,194
2,650 World Color Press, Inc.(a) 95,897
------------
253,678
- ------------------------------------------------------------
Railroad Equipment--0.3%
3,359 ABB AG (Switzerland)(a) 323,050
- ------------------------------------------------------------
Real Estate Development--0.1%
9,800 Catellus Development Corp.(a) 155,575
- ------------------------------------------------------------
Real Estate Investment Trust--0.9%
4,000 Cabot Industrial Trust 81,500
6,650 Franchise Finance Corp. of America 151,287
11,000 Glenborough Realty Trust Inc. 192,500
19,400 MeriStar Hospitality Corp. 371,025
5,800 Nationwide Health Properties, Inc. 99,325
5,900 Rouse Co. 143,444
------------
1,039,081
- ------------------------------------------------------------
Restaurants--1.5%
8,100 CKE Restaurants, Inc. 113,400
35,200 Darden Restaurants, Inc. 767,800
3,000 Foodmaker, Inc.(a) 82,125
3,300 IHOP Corp. 76,725
13,400 McDonald's Corp. 558,612
19,000 Ryan's Family Steak Houses, Inc.(a) 203,063
------------
1,801,725
- ------------------------------------------------------------
Retail--5.2%
3,300 American Eagle Outfitters Inc.(a) 127,463
3,050 BJ's Wholesale Club, Inc.(a) 93,406
2,750 Buckle Inc. 83,188
5,900 Claire's Stores, Inc. 140,125
7,400 CVS Corp. $ 368,150
2,250 Department 56, Inc. 65,109
16,100 Dillard's, Inc. (Class 'A' Stock) 496,081
11,325 GAP, Inc. 529,444
31,000 Great Universal Stores PLC
(United Kingdom) 317,729
13,300 Home Depot, Inc. 848,706
23,500 IKON Office Solutions Inc. 309,906
33,000 Kmart Corp.(a) 478,500
7,800 Kohl's Corp.(a) 593,287
5,580 Metro AG (Germany) 306,009
9,100 Pep Boys - Manny, Moe & Jack 151,288
4,700 Ross Stores, Inc. 226,188
3,800 Sears, Roebuck & Co. 153,900
9,800 Staples, Inc.(a) 282,975
11,000 Toys 'R' Us, Inc.(a) 178,750
6,700 Wal-Mart Stores, Inc. 283,075
3,150 Zale Corp.(a) 126,000
------------
6,159,279
- ------------------------------------------------------------
Schools--0.1%
7,400 Sylvan Learning Systems, Inc.(a) 189,163
- ------------------------------------------------------------
Semiconductors--3.5%
4,300 Alpha Industries, Inc.(a) 219,300
4,600 American Xtal Technology, Inc.(a) 141,450
8,500 Applied Materials, Inc.(a) 611,469
10,000 Etec Systems, Inc.(a) 388,750
9,400 Intel Corp. 648,600
5,100 KLA-Tencor Corp.(a) 345,525
11,400 National Semiconductor Corp. 282,150
5,100 Novellus Systems, Inc.(a) 328,312
325 QLogic Corp.(a) 54,234
7,200 Texas Instruments, Inc. 1,036,800
2,100 Transwitch Corp.(a) 92,138
------------
4,148,728
- ------------------------------------------------------------
Software--4.1%
1,000 Accrue Software, Inc.(a) 11,166
6,700 Activision, Inc.(a) 91,706
2,700 BroadVision, Inc.(a) 188,156
300 Digex Inc.(a) 5,100
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 9
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as
of July 31, 1999 PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Software (cont'd.)
3,800 Check Point Software Technologies
Ltd. $ 260,063
16,700 HNC Software Inc.(a) 607,462
6,100 I2 Technologies Inc.(a) 187,575
7,400 Intuit, Inc.(a) 605,412
8,800 Legato Systems, Inc.(a) 629,200
15,200 Microsoft Corp.(a) 1,304,350
1,300 N2H2, Inc. 16,726
8,100 Rational Software Corp.(a) 270,338
11,200 VERITAS Software Corp.(a) 628,600
100 Verity, Inc.(a) 4,950
------------
4,810,804
- ------------------------------------------------------------
Steel - Producers--0.5%
10,700 AK Steel Holding Corp. 241,419
3,000 Carpenter Technology Corp. 79,500
6,650 Reliance Steel & Aluminum Co. 226,100
------------
547,019
- ------------------------------------------------------------
Telecommunications--7.7%
3,060 Alcatel (France) 471,314
6,300 Allegiance Telecom, Inc.(a) 316,969
5,300 ALLTEL Corp. 380,606
16,000 AT&T Corp. 710,006
6,000 Carrier Access Corp.(a) 198,000
2,534 Deutsche Telekom AG (Germany) 104,360
8,000 Excel Switching Corp. 218,000
200 Level 3 Communications, Inc.(a) 10,600
6,205 Lucent Technologies, Inc. 403,713
14,200 MCI WorldCom, Inc.(a) 1,171,500
7,400 Millicom International Cellular
SA(a) 226,625
3,100 Motorola, Inc. 282,875
1,400 NEXTLINK Communications, Inc.(a) 156,975
22 Nippon Telegraph & Telephone Corp.
(Japan) 280,855
4,900 Nokia Corp. ADR (Finland)(a) 416,806
4,200 Norstan, Inc.(a) 54,600
1,500 NTL Inc.(a) $ 155,813
45 NTT Mobile Communications (Japan) 697,241
12,675 Pacific Gateway Exchange, Inc.(a) 310,537
1,000 Plantronics Inc. 70,750
12,200 Qwest Communications International,
Inc.(a) 359,900
3,150 Tekelec(a) 31,697
3,200 Tele Danmark A/S 191,540
74,800 Telecom Italia SpA (Italy) 408,603
36,237 Telefonica SA (Spain) 580,261
7,200 Tellabs, Inc.(a) 443,250
10,000 VoiceStream Wireless Corp.(a) 451,250
------------
9,104,646
- ------------------------------------------------------------
Tobacco--1.6%
34,000 British America Tobacco PLC
(United Kingdom) 288,281
27 Japan Tobacco, Inc. (Japan) 325,799
8,800 Loews Corp. 617,100
10,100 Philip Morris Co., Inc. 376,225
6,133 Reynolds (R.J.) Tobacco Holdings,
Inc. 167,891
5,300 Universal Corp. 159,331
------------
1,934,627
- ------------------------------------------------------------
Trucking & Shipping--0.6%
21,900 Air Express International Corp. 585,825
3,250 USFreightways Corp. 160,469
------------
746,294
- ------------------------------------------------------------
Utilities--2.1%
4,050 Atmos Energy Corp. 101,250
4,350 BEC Energy 185,419
26,900 British Energy PLC (United
Kingdom)(a) 229,392
2,450 California Water Service Group 68,600
2,400 Calpine Corp.(a) 180,450
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 10
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as
of July 31, 1999 PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Utilities (cont'd.)
2,450 Cleco Corp. $ 78,706
3,700 Conectiv Inc. 84,869
11,600 Endesa SA (Spain) 229,237
3,000 GPU, Inc. 115,125
6,350 Public Service Company of New
Mexico(a) 126,603
5,300 Reliant Energy, Inc. 145,419
1,550 Rochester Gas & Electric Corp. 40,591
1,560 Suez Lyonnaise des Eaux (France) 275,701
5,500 Unicom Corp. 215,875
11,000 Washington Gas Light Co. 306,625
2,650 WPS Resources Corp. 76,850
------------
2,460,712
- ------------------------------------------------------------
Waste Management--0.6%
12,000 Casella Waste Systems, Inc.(a) 319,500
12,400 Safety-Kleen Corp.(a) 148,025
8,300 Waste Management, Inc. 212,169
------------
679,694
Total long-term investments
(cost $101,335,037) 112,946,165
------------
<CAPTION>
Principal
Amount Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS--5.7%
- ------------------------------------------------------------
REPURCHASE AGREEMENT
$ 6,777 Joint Repurchase Agreement Account,
5.062%, 08/02/99
(cost $6,777,000; Note 5) $ 6,777,000
------------
- ------------------------------------------------------------
Total Investments--100.9%
(cost $108,112,037; Note 4) 119,723,165
Liabilities in excess of other
assets--(0.9%) (1,100,361)
------------
Net Assets--100% $118,622,804
------------
------------
</TABLE>
- ---------------
(a) Non-income producing security.
AB--Aktiebolag (Swedish Stock Company)
ADR--American Depository Receipt.
AG--Aktiengesellschaft (German Stock Company).
NV--Naamloze Vennootschop (Dutch Corporation).
PLC--Public Limited Company (British Corporation).
SA-- Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French
Corporation).
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 11
<PAGE>
Statement of Assets and PRUDENTIALDIVERSIFIED FUNDS
Liabilities PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets July 31, 1999
<S> <C>
Investments, at value (cost $108,112,037).................................................................... $119,723,165
Foreign currency, at value (cost $28,455).................................................................... 29,016
Cash......................................................................................................... 48,127
Receivable for Fund shares sold.............................................................................. 857,153
Receivable for investments sold.............................................................................. 629,491
Dividends and interest receivable............................................................................ 95,723
Deferred offering cost....................................................................................... 29,535
Other assets................................................................................................. 20,516
-------------
Total assets.............................................................................................. 121,432,726
-------------
Liabilities
Payable for investments purchased............................................................................ 2,513,868
Accrued expenses............................................................................................. 140,738
Due to Manager............................................................................................... 76,087
Due to Distributor........................................................................................... 55,847
Payable for Fund shares reacquired........................................................................... 22,168
Foreign withholding tax payable.............................................................................. 1,214
-------------
Total liabilities......................................................................................... 2,809,922
-------------
Net Assets................................................................................................... $118,622,804
-------------
-------------
Net assets were comprised of:
Shares of beneficial interest, at par..................................................................... $ 10,308
Paid-in capital in excess of par.......................................................................... 105,568,595
-------------
105,578,903
Net investment loss....................................................................................... (136,344)
Accumulated net realized gain on investments.............................................................. 1,568,496
Net unrealized appreciation on investments and foreign currency transactions.............................. 11,611,749
-------------
Net assets, July 31, 1999.................................................................................... $118,622,804
-------------
-------------
Class A:
Net asset value and redemption price per share
($21,247,702 / 1,843,681 shares of beneficial interest issued and outstanding)......................... $11.52
Maximum sales charge (5% of offering price)............................................................... .61
-------------
Maximum offering price to public.......................................................................... $12.13
-------------
-------------
Class B:
Net asset value, offering price and redemption price per share
($41,048,579 / 3,577,875 shares of beneficial interest issued and outstanding)......................... $11.47
-------------
-------------
Class C:
Net asset value and redemption price per share
($19,913,835 / 1,735,599 shares of beneficial interest issued and outstanding)......................... $11.47
Sales charge (1% of offering price)....................................................................... .12
-------------
Offering price to public.................................................................................. $11.59
-------------
-------------
Class Z:
Net asset value, offering price and redemption price per share
($36,412,688 / 3,150,862 shares of beneficial interest issued and outstanding)......................... $11.56
-------------
-------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 12
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
November 18, 1998(a)
Through
Net Investment Loss July 31, 1999
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $41,787)................. 847,778
Interest............................. $ 305,083
--------------------
Total income...................... 1,152,861
--------------------
Expenses
Management fee....................... 502,514
Distribution fee--Class A............ 18,237
Distribution fee--Class B............ 169,491
Distribution fee--Class C............ 106,217
Custodian's fees and expenses........ 186,000
Amortization of offering cost........ 68,465
Transfer agent's fees and expenses... 64,000
Reports to shareholders.............. 55,000
Registration fees.................... 52,000
Legal fees........................... 30,000
Audit fee and expenses............... 25,000
Trustees' fees and expenses.......... 4,500
Miscellaneous........................ 2,514
--------------------
Total expenses.................... 1,283,938
--------------------
Net investment loss..................... (131,077)
--------------------
Realized and Unrealized Gain (Loss)
on Investment and Foreign Currency
Transactions
Net realized gain (loss) on:
Investment transactions.............. 1,582,764
Foreign currency transactions........ (112,867)
--------------------
1,469,897
Net unrealized appreciation on
investments and foreign currency
transactions......................... 11,611,749
--------------------
Net gain on investments................. 13,081,646
--------------------
Net Increase in Net Assets
Resulting from Operations............... $ 12,950,569
--------------------
--------------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
November 18, 1998(a)
Increase (Decrease) In Through
Net Assets July 31, 1999
<S> <C>
Operations
Net investment loss..................... $ (131,077)
Net realized gain on investments and
foreign currency transactions........ 1,469,897
Net unrealized appreciation of
investments.......................... 11,611,749
--------------------
Net increase in net assets resulting
from operations...................... 12,950,569
--------------------
Fund share transactions (net of share
conversions) (Note 6)
Net proceeds from shares sold........... 130,702,522
Cost of shares reacquired............... (25,070,287)
--------------------
Net increase in net assets from Fund
share transactions................... 105,632,235
--------------------
Total increase............................. 118,582,804
Net Assets
Beginning of period........................ 40,000
--------------------
End of period.............................. $118,622,804
--------------------
--------------------
- ---------------
(a) Commencement of investment
operations.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 13
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Notes to Financial Statements PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND
- --------------------------------------------------------------------------------
Prudential Diversified Funds (the 'Trust') is registered under the Investment
Company Act of 1940, as an open-end, diversified management investment company
presently consisting of three Portfolios: Prudential Diversified High Growth
Fund ('the Fund'), Prudential Diversified Conservative Growth Fund and
Prudential Diversified Moderate Growth Fund. The Trust was organized as a
business trust in Delaware on July 29, 1998. The Fund had no significant
operations other than the issuance of 1,000 shares each of Class A, Class B,
Class C and Class Z shares for each Portfolio of beneficial interest for $40,000
on June 16, 1998 to Prudential Investments Fund Management LLC ('PIFM' or the
'Manager'). The Fund commenced investment operations on November 18, 1998.
The investment objective of the Fund is to seek to provide long-term capital
appreciation. The Fund pursues its objective by investing in a diversified
portfolio of equity securities issued by U.S. and foreign companies. Under
normal circumstances, substantially all of the Fund's assets will be invested in
equity securities, including common stock, securities convertible into common
stock and preferred stock.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Trust and the Fund in the preparation of its financial statements.
Securities Valuation: Securities listed on a securities exchange are valued at
the last sales price on such exchange on the day of valuation, or, if there was
no sale on such day, at the mean between the last bid and asked prices on such
day or at the bid price on such day in the absence of an asked price. Securities
that are actively traded in the over-the-counter market, including listed
securities for which the primary market is believed by the Manager, in
consultation with the subadviser, to be over-the-counter, are valued by an
independent pricing agent or principal market maker. Convertible debt securities
that are actively traded in the over-the-counter market, including listed
securities for which the primary market is believed by the Manager and the
subadviser to be over-the-counter, are valued at the mean between the last
reported bid and asked prices provided by a principal market maker. Options on
securities and indices traded on an exchange are valued at the last sale price,
or if there was no sale on such day, at the mean between the most recently
quoted bid and asked prices on such exchange. Futures contracts and options
thereon traded on a commodities exchange or board of trade are valued at the
last sales price at the close of trading on such exchange or board of trade or,
if there was no sale on the applicable commodities exchange or board of trade on
such day, at the mean between the most recently quoted bid and asked prices on
such exchange or board of trade. Privately placed securities including equity
securities for which market prices may be obtained from primary dealers shall be
valued at the bid prices provided by such primary dealers. Securities for which
market quotations are not readily available, may be valued using the last
available market quotation for a period not to exceed five days, provided the
Manager and subadviser feel this is representative of market value, afterwards,
such securities are valued in good faith under procedures adopted by the
Trustees.
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 with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians, as the case may be under triparty repurchase agreements, take
possession of the underlying securities, the value of which exceeds the
principal amount of the repurchase transaction including accrued interest. 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.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities - at the
closing daily rates of exchange.
(ii) purchases and sales of investment securities, income and expenses - at the
rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the fiscal period, the Fund does not isolate
that portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of securities held at the end of the period. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of long-term portfolio securities sold
during the period. Accordingly, these realized foreign currency gains (losses)
are included in the reported net realized gains (losses) on investment
transactions.
- --------------------------------------------------------------------------------
14
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Notes to Financial Statements PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND
- --------------------------------------------------------------------------------
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains or losses from holdings of foreign currencies, currency
gains or losses realized between the trade and settlement dates on security
transactions, and the difference between the amounts of dividends, interest and
foreign taxes recorded on the Fund's books and the U.S. dollar equivalent
amounts actually received or paid. Net unrealized currency gains or losses from
valuing foreign currency denominated assets and liabilities (other than
investments) at fiscal period end exchange rates are reflected as a component of
net unrealized appreciation on investments and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses from investment and
currency transactions 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 unrealized and
realized 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: The Fund expects to pay dividends of net investment
income and distributions of net realized capital and currency gains, if any,
annually. 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.
Taxes: For federal income tax purposes, each Fund in the Trust is treated as a
separate taxpaying entity. It is the intent of the Fund to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to 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 Offering Cost: The Fund incurred approximately $98,000 in connection
with the initial offering of the Fund. Offering costs are being amortized over a
period of 12 months ending November 1999.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gains, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to increase undistributed net investment loss by $5,267,
increase accumulated net realized gain on investments by $98,599 and decrease
paid-in capital by $93,332 for the period ended July 31, 1999, due to realized
and recognized currency gains during the period and certain expenses not
deductible for tax purposes. Net investment income, net realized gains and net
assets were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with PIFM. Pursuant to this agreement, PIFM
manages the investment operations of the Fund, administers the Fund's affairs
and supervises the Adviser's performance of all investment advisory services.
PIFM pays for the costs pursuant to the advisory agreements, the cost of
compensation of officers of the Fund, occupancy and certain clerical and
accounting costs of the Fund. The management fee paid PIFM is computed daily and
payable monthly at an annual rate of .75% of the average daily net assets of the
Fund. PIFM, in turn, pays the Advisers' fees, computed daily and paid monthly,
equal to the annual rate specified below based on the average daily net assets
of the Fund segments they manage.
<TABLE>
<CAPTION>
Fee Paid By PIFM
Advisers to Advisers
- ------------------------------ ---------------------------------
<S> <C>
Jennison Associates LLC .30% with respect to the first
$300 million; .25% for amounts
in excess of $300 million
The Prudential Investment
Corporation ('PIC') N/A1
Lazard Asset Management .40%
Franklin Advisers, Inc. .50%
The Dreyfus Corporation .45%
1Under the Advisory Agreement between PIFM and PIC, PIC is
reimbursed by PIFM for its reasonable costs and expenses.
</TABLE>
The Fund has a distribution agreement with Prudential Investment Management
Services LLC ('PIMS') which acts as the distributor of the Class
- --------------------------------------------------------------------------------
15
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Notes to Financial Statements PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND
- --------------------------------------------------------------------------------
A, Class B, Class C and Class Z shares of the Fund. The Fund compensates 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 PIMS. The distribution fees are accrued daily and
payable monthly. No distribution or service fees are paid to PIMS as distributor
for Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates 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 .25 of 1%, 1% and 1% of the average daily net
assets of the Class A, B and C shares respectively, for the period ended July
31, 1999.
PIMS has advised the Fund that it has received approximately $308,000 and
$103,700 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively, during the period ended July 31, 1999.
PIMS has advised the Fund that for the period ended July 31, 1999, it has
received approximately $42,000 and $12,900 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIMS, PIC and PIFM are indirect, wholly owned subsidiaries of The Prudential
Insurance Company of America.
As of March 11, 1999, the Fund, along with other affiliated registered
investment companies (the 'Funds'), entered into a syndicated credit agreement
('SCA') with an unaffiliated lender. The maximum commitment under the SCA is $1
billion. The Funds pay a commitment fee at an annual rate of .065 of 1% on the
unused portion of the credit facility, which is accrued and paid quarterly on a
pro rata basis by the Funds. The SCA expires on March 9, 2000. Prior to March
11, 1999, the Funds had a credit agreement with a maximum commitment of
$200,000,000. The commitment fee was .055 of 1% on the unused portion of the
credit facility. The Fund did not borrow any amounts pursuant to either
agreement during the period ended July 31, 1999. The purpose of the agreements
is to serve as an alternative source of funding for capital share redemptions.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Trust's transfer agent. During the period ended July 31, 1999, the
Fund incurred fees of approximately $59,800 for the services of PMFS. As of July
31, 1999 approximately $10,300 of such fees were due to PMFS. Transfer agent
fees and expenses in the Statement of Operations include certain out-of-pocket
expenses paid to nonaffiliates.
For the period ended July 31, 1999, PSI earned approximately $1,000 in brokerage
commissions from portfolio transactions executed on behalf of the Fund.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term investments,
for the period ended July 31, 1999 were $133,794,917 and $33,881,981,
respectively.
The United States federal income tax basis of the Funds' investments as of July
31, 1999 was $108,432,143 and accordingly, net unrealized appreciation on
investments for federal income tax purposes was $11,291,022 (gross unrealized
appreciation--$15,977,121, gross unrealized depreciation--$4,686,099).
The Fund will elect, for United States Federal income tax purposes, to treat net
currency losses of approximately $112,867 incurred in the nine month period
ended July 31, 1999 as having been incurred in the following fiscal year.
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. As of July 31, 1999, the Fund
had a 1.1% undivided interest in the repurchase agreements in the joint account.
The undivided interest for the Fund represents $6,777,000 in principal amount.
As of such date, each repurchase agreement in the joint account and the
collateral therefore were as follows:
Bear, Stearns & Co. Inc., 5.06%, in the principal amount of $180,000,000
repurchase price $180,075,900, due 8/2/99. The value of the collateral including
accrued interest was $183,904,910.
Deutsche Bank Securities Corp., 5.06%, in the principal amount of $96,548,000
repurchase price $96,588,711, due 8/2/99. The value of the collateral including
accrued interest was $98,479,006.
Salomon Smith Barney Inc., 5.06%, in the principal amount of $180,000,000
repurchase price $180,075,900, due 8/2/99. The value of the collateral including
accrued interest was $184,504,113.
- --------------------------------------------------------------------------------
16
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Notes to Financial Statements PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND
- --------------------------------------------------------------------------------
Warburg Dillon Read LLC, 5.07%, in the principal amount of $180,000,000
repurchase price $180,076,050, due 8/2/99. The value of the collateral including
accrued interest was $183,604,710.
- ------------------------------------------------------------
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 front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. 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 qualified 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. Of the
10,308,017 shares of beneficial interest issued and outstanding at July 31,
1999, Prudential owned 3,124,031.
The Fund has authorized an unlimited number of shares of beneficial interest at
$.001 par value.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------- ---------- -----------
<S> <C> <C>
November 18, 1998(a) through
July 31, 1999:
Shares sold.......................... 2,085,850 $22,693,721
Shares reacquired.................... (264,575) (2,915,672)
---------- -----------
Net increase in shares outstanding
before conversion.................. 1,842,681 19,778,049
Shares issued upon conversion from
Class B............................ 21,406 236,761
---------- -----------
Net increase in shares outstanding... 1,842,681 $20,014,810
---------- -----------
---------- -----------
<CAPTION>
Class B Shares Amount
- ------------------------------------- ---------- -----------
<S> <C> <C>
November 18, 1998(a) through
July 31, 1999:
Shares sold.......................... 3,792,825 $40,686,002
Shares reacquired.................... (194,476) (2,146,432)
---------- -----------
Net increase in shares outstanding
before conversion.................. 3,598,349 38,539,570
Shares reacquired upon conversion
into Class A....................... (21,474) (236,761)
---------- -----------
Net increase in shares outstanding... 3,576,875 $38,302,809
---------- -----------
---------- -----------
<CAPTION>
Class C
- -------------------------------------
<S> <C> <C>
November 18, 1998(a) through
July 31, 1999:
Shares sold.......................... 1,902,895 $19,882,224
Shares reacquired.................... (168,296) (1,835,812)
---------- -----------
Net increase in shares outstanding... 1,734,599 $18,046,412
---------- -----------
---------- -----------
<CAPTION>
Class Z
- -------------------------------------
<S> <C> <C>
November 18, 1998(a) through
July 31, 1999:
Shares sold.......................... 4,741,404 $47,440,575
Shares reacquired.................... (1,591,542) (18,172,371)
---------- -----------
Net increase in shares outstanding... 3,149,862 $29,268,204
---------- -----------
---------- -----------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
17
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Financial Highlights PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
November 18, 1998(a) through July 31,
1999(d)
--------------------------------------------
Class A Class B Class C Class Z
-------- ------- ------- -------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................................... $ 10.00 $ 10.00 $ 10.00 $ 10.00
-------- ------- ------- -------
Income from investment operations:
Net investment income (loss)............................................. --(e) (0.05) (0.05) 0.02
Net realized and unrealized gain on investment and foreign currency
transactions.......................................................... 1.52 1.52 1.52 1.54
-------- ------- ------- -------
Total from investment operations...................................... 1.52 1.47 1.47 1.56
-------- ------- ------- -------
Net asset value, end of period........................................... $ 11.52 $ 11.47 $ 11.47 $ 11.56
-------- ------- ------- -------
-------- ------- ------- -------
TOTAL RETURN(b).......................................................... 15.20% 14.70% 14.70% 15.60%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......................................... $ 21,248 $41,049 $19,914 $36,413
Average net assets (000)................................................. $ 10,442 $24,260 $15,204 $45,999
Ratios to average net assets:(c)
Expenses, including distribution fees................................. 1.73% 2.48% 2.48% 1.48%
Expenses, excluding distribution fees................................. 1.48% 1.48% 1.48% 1.48%
Net investment income (loss).......................................... 0.02% (0.70)% (0.75)% 0.21%
Portfolio turnover rate.................................................. 38% 38% 38% 38%
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day and includes reinvestment of dividends and distributions. Total
return for periods of less than a full year is not annualized.
(c) Annualized.
(d) Based on weighted average shares outstanding during the period.
(e) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 18
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Report of Independant Accountants PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Diversified Funds--
Prudential Diversified High Growth Fund
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 Diversified
Funds--Prudential Diversified High Growth Fund (the 'Fund') at July 31, 1999,
and the results of its operations, the changes in its net assets and the
financial highlights for the period November 18, 1998 (commencement of
operations) through July 31, 1999, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as 'financial statements') are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at July 31, 1999 by correspondence with the custodian
and brokers, provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
September 20, 1999
- --------------------------------------------------------------------------------
19
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Federal Income Tax Information
(Unaudited) PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND
- --------------------------------------------------------------------------------
In January 2000, you will be advised on IRS Form 1099 DIV or substitute 1099 DIV
as to the federal tax status of the distributions received by you in calendar
year 1999.
- --------------------------------------------------------------------------------
20
<PAGE>
Getting the Most from Your Prudential Mutual Fund
How many times have you read these reports--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.
Collateralized Mortgage Obligations (CMOs): Mortgage-backed
bonds that separate mortgage pools into different maturity
classes, called tranches. 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 instruments
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. 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
product) 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" prices
of a security, or between the yields of two similar maturity
bonds.
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
Some mutual fund shareholders won't ever read this--they
don't read annual and semiannual reports. It's quite
understandable. These annual and semi-annual reports
are prepared to comply with federal regulations, and
are often written in language that
is difficult to understand. So, when most people run
into those particularly daunting sections of these
reports, they don't read them.
We think that's a mistake.
At Prudential Mutual Funds, we've made some changes
to our report to make it easier to understand and more
pleasant to read. We hope you'll find it profitable to
spend a few minutes familiarizing yourself with your
investment. Here's what you'll find in the report:
Performance at a Glance
Since an investment's performance is often a shareholder's
primary concern, we present performance information in two
different formats. You'll find it first on the "Performance
at a Glance" page where we compare the Fund and the
comparable average calculated by Lipper, Inc., a
nationally recognized mutual fund rating agency.
We report both the cumulative total returns and
the average annual total returns. The cumulative
total return is the total amount of income and
appreciation the Fund has achieved in various time
periods. The average annual total return is an
annualized representation of the Fund's performance.
It gives you an idea of how much the Fund has earned
in an average year for a given time period. Under the
performance box, you'll see legends that explain the
performance information, whether fees and sales charges
have been included in returns, and the inception dates
for the Fund's share classes.
See the performance comparison charts at the back of
the report for more performance information. Please
keep in mind that past performance is not indicative
of future results.
Portfolio Manager's Report
The portfolio manager, who invests your money for you,
reports on successful--and not-so-successful--strategies
in this section of your report. Look for recent purchases
and sales here, as well as information about the sectors
the portfolio manager favors, and any changes that are
on the drawing board.
Portfolio of Investments
This is where the report begins to appear technical,
but it's really just a listing of each security held
at the end of the reporting period, along with valuations
and other information. Please note that sometimes we discuss
a security in the Portfolio Manager's Report that doesn't
appear in this listing because it was sold before the close
of the reporting period.
<PAGE>
Statement of Assets and Liabilities
The balance sheet shows the assets (the value of the
Fund's holdings), liabilities (how much the Fund owes),
and net assets (the Fund's equity, or holdings after the
Fund pays its debts) as of the end of the reporting
period. It also shows how we calculate the net asset
value per share for each class of shares. The net asset
value is reduced by payment of your dividend, capital
gain, or other distribution, but remember that the
money or new shares are being paid or issued to you. The net
asset value fluctuates daily, along with the value
of every security in the portfolio.
Statement of Operations
This is the income statement, which details income (mostly
interest and dividends earned) and expenses (including what
you pay us to manage your money). You'll also see capital
gains here--both realized and unrealized.
Statement of Changes in Net Assets
This schedule shows how income and expenses translate
into changes in net assets. The Fund is required to pay
out the bulk of its income to shareholders every year,
and this statement shows you how we do it--through dividends
and distributions--and how that affects the net assets. This
statement also shows how money from investors flowed into
and out of the Fund.
Notes to Financial Statements
This is the kind of technical material that can intimidate
readers, but it does contain useful information. The Notes
provide a brief history and explanation of your Fund's
objectives. In addition, they outline how Prudential
Mutual Funds prices securities. The Notes also explain
who manages and distributes the Fund's shares and, more
importantly, how much they are paid for doing so. Finally,
the Notes explain how many shares are outstanding and the
number issued and redeemed over the period.
Financial Highlights
This information contains many elements from prior pages,
but on a per-share basis. It is designed to help you
understand how the Fund performed, and to compare this
year's performance and expenses to those of prior years.
Independent Auditor's Report
Once a year, an outside auditor looks over our books and
certifies that the information is fairly presented and
complies with generally accepted accounting principles.
Tax Information
This is information which we report annually about how
much of your total return is taxable. Should you have
any questions, you may want to consult a tax adviser.
Performance Comparison
These charts are included in the annual report and are
required by the Securities Exchange Commission. Performance
is presented here as a hypothetical $10,000 investment in the
Fund since its inception or for 10 years (whichever is shorter).
To help you put that return in context, we are required to
include the performance of an unmanaged, broad-based securities
index as well. The index does not reflect the cost of buying the
securities it contains or the cost of managing a mutual fund. Of
course, the index holdings do not mirror those of the Fund--the
index is a broad-based reference point commonly used by investors
to measure how well they are doing. A definition of the selected
index is also provided. Investors cannot invest
directly in an index.
<PAGE>
Comparing a $10,000 Investment
- --------------------------------------------------------------
Prudential Diversified High Growth Fund vs. the S&P 500 Index
Class A
(GRAPH)
Class B
(GRAPH)
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.
These graphs compare a $10,000 investment in the Prudential
Diversified High Growth Fund (Class A, B, C, and Z shares)
with a similar investment in the Standard & Poor's 500 Composite
Stock Price Index (S&P 500 Index) by portraying the account
values at the commencement of operations of Class A, B, C, and
Z shares, and at the end of the fiscal year (July 31), as
measured on a quarterly basis, beginning in 1998 for Class
A, B, C, and Z shares. For purposes of the graphs, and unless
otherwise indicated, it has been assumed that (a) the maximum
applicable front-end sales charge was deducted from the
initial $10,000 investment in Class A and Class C 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 July 31, 1999;
(c) all recurring fees (including management fees) were
deducted; and (d) all dividends and distributions were
reinvested. Class B shares will automatically convert to
Class A shares, on a quarterly basis, approximately seven
years after purchase.
<PAGE>
Class C
(GRAPH)
Class Z
(GRAPH)
Class Z shares are not subject to a sales charge or distribution
and service (12b-1) fees. Since the Fund has been in existence
less than one year, no average annual total returns are presented.
The S&P 500 Index is an unmanaged index of 500 stocks of large
U.S. companies that give a broad look at how stock prices have
performed. The total return of the S&P 500 Index 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 S&P 500 Index is not
the only index that may be used to characterize performance
of equity funds. The securities in the S&P 500 Index may differ
substantially from the securities in the Fund. Other indexes
may portray different comparative performance. Investors
cannot invest directly in an index.
These graphs are furnished to you in accordance with SEC
regulations.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Class NASDAQ Cusip
A -- 74432F885
B -- 74432F877
C -- 74432F869
Z PDHZX 74432F851
Trustees
Eugene C. Dorsey
Douglas H. McCorkindale
Thomas T. Mooney
John R. Strangfeld
Officers
John R. Strangfeld, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
David F. Connor, Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three, 100 Mulberry Street, Newark, NJ 07102-4077
Investment Sub-Advisers
The Prudential Investment Corporation
Prudential Plaza, Newark, NJ 07102-3777
Jennison Associates LLC
466 Lexington Avenue, New York, NY 10017
Franklin Advisers, Inc.
777 Mariners Island Blvd., San Mateo, CA 94404
The Dreyfus Corporation
200 Park Avenue, New York, NY 10166
Lazard Asset Management
30 Rockefeller Plaza, New York, NY 10112
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
Raritan Plaza One, Edison, NJ 08837
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas, New York, NY 10036
Legal Counsel
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W., Washington, DC 20036
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.
MF186E5
<PAGE>
Prudential
Diversified Funds
(ICON)
Prudential
Diversified
Moderate Growth
Fund
ANNUAL
REPORT
July 31, 1999
(LOGO)
<PAGE>
A Message from the Fund's President September 17, 1999
- -------------------------------------------------------------------------------
(PHOTO)
Dear Shareholder,
The Prudential Diversified Moderate Growth Fund's A shares returned 9.47%
(excluding the sales charge) from inception to the end of our reporting period
(July 31, 1999). It trailed the Lipper Growth & Income average, mostly because
funds in that category tend to focus on the large U.S. stocks that market
conditions favored for much of our reporting period. Our diversified approach,
on the other hand, provides exposure to a much broader range of equities--
growth and value styles, domestic and international, large and small--and
considerable bond holdings for a fund in the Lipper Growth & Income category.
Although our growth stocks performed even better than average, fixed-income
markets suffered this year. While the safest bonds held up very well during
last summer's financial panic, most bonds did poorly in this reporting period,
in part because investors felt more confident returning to riskier investments.
Diversification reduces the risk that all of your assets will move in one
direction at the same time. Because it is diversified, your Fund is positioned
to deliver more consistent returns as market conditions change and investor
sentiment shifts. Indeed, there was evidence of such a shift in the second
quarter of 1999: smaller, more value-oriented stocks rallied strongly, which
helped sustain our return when growth stocks lagged.
The Prudential Diversified Moderate Growth Fund also offers the specialized
management that different asset classes and investment styles call for. While
no one can guarantee future results, staying with a well-balanced asset
allocation can reduce volatility, smoothing returns over time. By using a range
of investment specialists to manage the holdings of one Fund, we hope to make
the benefits of diversification as convenient as possible.
Thank you for your continued confidence in Prudential mutual funds.
Sincerely,
John R. Strangfeld
President
Prudential Diversified Funds
<PAGE>
Investment Advisers' Report
- -------------------------------------------------------------------------------
Investment Advisers
Prudential Investments Fund Management LLC
- - John Van Belle, Ph.D.
- - Stacie Mintz
Sub-Advisers
(PRUDENTIAL INVESTMENTS LOGO)
(LAZARD LOGO)
(FRANKLIN TEMPLETON LOGO)
(JENNISON ASSOCIATES LOGO)
(DREYFUS LOGO)
(PIMCO LOGO)
Investment Goals and Style
The Fund seeks to provide capital appreciation and a reasonable level of
current income. It invests in a diversified portfolio of stocks and bonds.
There can be no assurance that the Fund will achieve its investment objective.
The Economic Context
Since the Fund's inception on November 18, 1998, investors lurched from
confusion to confidence in the global economy. They ended our reporting period
with a generally positive outlook, but one tempered with fears that stronger
growth could lead to higher inflation and interest rates.
In the summer of 1998, financial markets were affected seriously by a severe
recession in Asia that threatened global growth. Russia then defaulted on
loans, darkening the picture further and sending markets into turmoil. Central
banks in Europe and the United States Federal Reserve Bank responded
aggressively in the fall, reducing interest rates to stimulate economic
activity. The medicine worked.
In the new year, the U.S. economy, driven by domestic consumer demand,
continued its vigorous expansion. That good news was joined by relative
stability in Latin America, where problems in Brazil--the region's largest
economy--appeared better contained than had been expected. Stirrings of
economic activity were felt in Europe and Asia; even long-suffering Japan
showed signs of life.
The promise of economic recovery and increased demand brought with it the
prospects of higher inflation--an indication that the pace of growth may be
exceeding its natural limits. Alan Greenspan, chairman of the Federal Reserve,
repeatedly warned that the Fed would take action, if necessary, to raise
interest rates as a way of preempting inflation. Indeed, the Federal Reserve
twice increased a key rate over the summer. Both increases were modest,
however, calming investors and allowing the rally in financial markets to
continue.
The Financial Markets
Panic over the troubles in Asia and Russia sent markets reeling in 1998, with
all but the biggest, best-known stocks tumbling. The actions by the U.S.
Federal Reserve and other central banks calmed markets in the fall, however,
fueling a rebound.
Sensing economic recovery abroad, investors in the first quarter of 1999 moved
money back into Asia, Latin America and, to a smaller extent, Europe. Japanese
stocks improved significantly. Very strong U.S. growth sent market indexes to
a series of record highs; for example, the Standard & Poor's 500 Index, Dow
Jones Industrials Average, and NASDAQ Composite Index were pushed into
uncharted territory.
<PAGE>
Although gains were concentrated at first in the very largest growth companies,
more stocks began to share in the advance as time went on. Growing confidence
about global growth prospects led to increases for value stocks and smaller
stocks. The second quarter of 1999 saw a catch-up spurt for these sectors:
small caps, as measured by the Russell 2000 Index, returned 16% in the quarter,
well over twice as much as the 7% return of the large-cap S&P 500. Even among
large-cap stocks, value issues--as measured by the S&P/BARRA Value Index--
returned 11% in the quarter, while the S&P/BARRA Growth Index returned 4%.
For our reporting period as a whole, however, large-cap stocks still provided
better returns overall, and growth stocks beat value stocks. Nearly all equity
categories fell somewhat in July, as some investors took profits and others
considered the impact that a resurgence of inflation could have on corporate
earnings.
While equities advanced, most fixed-income securities declined. The safest
issues, U.S. Treasury bonds, had become very expensive last year when investors
fled emerging markets such as Asia, Latin America and Russia. But in 1999, as
prospects for global growth improved, investors sold high-quality bonds and
moved back into riskier markets. The Lehman Brothers Aggregate Bond Index
declined 1.5% during our reporting period. High-yield bonds, commonly known
as "junk bonds," fared a little better as investors became more comfortable
with economic prospects around the world. Ironically, however, confidence in
the economy brought with it fears that higher costs could erode the value of
the fixed payments of bonds. To make up for inflation, investors demanded
higher yields--which mean lower bond prices--hurting bond markets virtually
across the board.
Our Performance
The Prudential Diversified Moderate Growth Fund's commitment of 40% of its
portfolio to large-capitalization stocks was the most significant factor for
its return in the year ended July 31, 1999. Within the large-cap universe, we
gained most from our growth stocks. Our large-cap value stocks also generated
strong returns: in the second quarter when value stocks outperformed, our
strongly disciplined selections did particularly well, helping make up for
earlier months that were hostile to the value investing style.
After a rocky start, the Fund's international holdings performed well as
economic conditions abroad improved. The same was true of our small- and
mid-cap growth stocks, which shared considerably in the market broadening that
began in April.
Cumulative Total Returns1 As of 7/31/99
<TABLE>
<CAPTION>
Since Inception2 Since Inception2
(Without Sales Charge) (With Sales Charge)
<S> <C> <C>
Class A 9.47% 3.99%
Class B 8.99 3.99
Class C 8.99 6.90
Class Z 9.70 9.70
Lipper Growth & Income Fund Avg.3 12.56 N/A
</TABLE>
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
1 Source: Prudential Investments Fund Management LLC and Lipper, Inc. Since the
Fund has been in existence less than one year, no average annual total returns
are presented. The Fund charges a maximum front-end sales charge 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 Z shares are
not subject to a sales charge or distribution and service (12b-1) fees.
2 Inception date: Class A, B, C, and Z, 11/18/98.
3 The Lipper Since Inception return is for all funds in each share class in
the Growth & Income Fund category.
1
<PAGE>
Advisers' Report Cont'd.
- -------------------------------------------------------------------------------
Our bond holdings detracted from performance during these eight months. It is
in the nature of a diversified portfolio that not all asset classes will
perform well at the same time. It is worth remembering that should markets turn
against growth stocks or inflation concerns subside, bonds may hold their value
better. Owning a broad range of securities improves the prospects for more
consistent returns over time.
Looking Ahead
Europe, Japan, and other countries in Asia are all showing signs of improved
economic health. Financial markets in these regions have performed well
recently, and we believe they will continue to present opportunities as a
return to growth gathers strength.
Meanwhile, the U.S. economy--approaching a record for continuous growth in 150
years of data--continues to run steadily ahead. Markets remain volatile, but
investors appear willing to consider a broader range of equities than they have
in recent years. If inflation remains modest and consumer demand stays strong,
we would expect an environment favorable to U.S. companies to continue.
Moderate Growth Fund Diversification Target
(GRAPH)
What Is Diversification?
- -------------------------------------------------
Diversification--spreading your investments over many different securities--is
a basic principle of investing. It helps to reduce the overall risk of your
portfolio.
Mutual funds not only provide professional money management; they also allow a
relatively small investment to be spread over many different securities. When
you own a large number of different securities, the impact of any one on your
return is reduced. In addition, if you diversify your investments among asset
classes and investment styles--between stocks and bonds, large-cap stocks and
small-/mid-cap stocks, value and growth styles, and investment-grade and
high-yield bonds--it is less likely that all the securities you own will move
in the same direction at one time. The Prudential Diversified Funds provide
more of this buffering than a fund investing in only one asset class. We
believe this will result in more consistent returns over time.
Rebalancing--The Diversified Moderate Growth Fund has a target allocation for
each asset class. As some perform better than others, the portfolio will drift
from this original target: the securities that rise most will become a larger
proportion of the invested assets. We direct new investments to the asset
classes that have fallen below their target ratio and, when necessary, sell
certain securities in appreciated asset classes to maintain the balance. This
keeps your risk exposure from changing too much; by forcing us to sell high,
it may also increase our average selling price over time.
2
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as PRUDENTIAL DIVERSIFIED MODERATE
of July 31, 1999 GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--92.8%
COMMON STOCKS--61.7%
- ------------------------------------------------------------
Aerospace/Defense--0.7%
4,500 AlliedSignal, Inc. $ 291,094
32,500 British Aerospace PLC (United
Kingdom)(a) 215,382
575 Cordant Technologies, Inc. 25,767
4,050 GenCorp, Inc. 106,566
10,900 Loral Space & Communications, Inc. 205,737
----------
844,546
- ------------------------------------------------------------
Airlines--0.1%
1,750 Alaska Air Group, Inc.(a) 77,656
1,775 Continental Airlines, Inc.(a) 75,438
----------
153,094
- ------------------------------------------------------------
Aluminum--0.5%
7,500 Alcoa, Inc. 449,062
3,275 Reliance Steel & Aluminum Co. 111,350
----------
560,412
- ------------------------------------------------------------
Apparel--0.1%
1,600 American Eagle Outfitters, Inc.(a) 61,800
2,125 Kellwood Co. 48,211
----------
110,011
- ------------------------------------------------------------
Audio/Visual--0.4%
1,600 Gemstar International Group Ltd.(a) 106,000
2,800 Polycom, Inc.(a) 93,800
1,600 Sony Corp. (Japan) 204,118
----------
403,918
- ------------------------------------------------------------
Auto & Truck--0.6%
1,950 Arvin Industries, Inc. 72,881
1,800 Borg-Warner Automotive, Inc. 91,462
1,530 Daimlerchrysler AG (Germany) 116,517
1,537 Delphi Automotive Systems Corp. 27,666
29,000 Nissan Motor Co., Ltd.(a) (Japan) 172,938
6,200 Safety Kleen Corp. $ 74,013
2,100 Varlen Corp. 79,538
3,500 Volvo AB, Series B (Sweden) 109,445
----------
744,460
- ------------------------------------------------------------
Banking--4.2%
2,450 BancorpSouth, Inc. 40,425
9,800 Bank of New York Co., Inc. 361,987
500 Bank United Corp. (Class 'A' Stock) 19,250
7,700 BankAmerica Corp. 511,087
950 Banknorth Group, Inc. 30,756
2,270 Banque Nationale de Paris (France) 187,218
12,200 Chase Manhattan Corp. 937,875
1,075 City National Corp. 36,819
4,325 Commercial Federal Corp. 100,556
8,080 Corporacion Bancaria de Espana
(Spain) 178,196
1,050 CORUS Bankshares, Inc. 32,550
5,150 Cullen/Frost Bankers, Inc. 132,291
2,810 CVB Financial Corp. 73,411
275 First Citizens BancShares, Inc.
(Class 'A' Stock) 21,931
7,000 Fuji Bank (Japan) 53,863
6,000 Golden State Bancorp, Inc.(a) 132,750
1,425 Harbor Florida Bancshares, Inc. 18,258
12,000 HSBC Holdings PLC (Hong Kong)(a) 141,463
14,000 IND Bank (Japan) 113,968
2,700 ING Groep N.V. (Netherlands) 138,236
2,875 MAF Bancorp, Inc. 67,023
9,200 Merita PLC, Series A (Finland) 49,763
10,000 National Westminster Bank PLC
(United Kingdom)(a) 197,515
8,300 Nordbanken Holding AB (Sweden) 48,873
2,675 North Fork Bancorporation, Inc. 55,172
8,000 Overseas-Chinese Banking Corp., Ltd.
(Singapore) 67,043
3,375 Peoples Heritage Financial Group,
Inc. 60,961
900 Queens County Bancorp. Inc. 28,406
1,600 Republic New York Corp. 111,600
8,500 Sao Paolo Imi SpA (Italy) 107,978
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as PRUDENTIAL DIVERSIFIED MODERATE
of July 31, 1999 GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Banking (cont'd.)
3,800 Silicon Valley Bancshares $ 93,100
35,000 Sumitomo Trust & Banking Co., Ltd.
(Japan) 222,183
9,660 Svenska Handelsbanken, Series A
(Sweden) 127,775
800 Unidanmark AS (Denmark) 52,950
16,000 United Overseas Bank, Ltd.
(Singapore) 116,969
1,575 Washington Federal, Inc. 38,883
2,575 Westamerica Bancorporation 86,263
----------
4,795,347
- ------------------------------------------------------------
Building & Construction--1.2%
1,615 ABB AG (Sweden) 155,342
3,200 American Standard Companies, Inc.(a) 141,000
4,300 Centex Corp. 144,856
6,700 D.R. Horton, Inc. 108,875
900 Dycom Industries Inc.(a) 42,975
2,025 Integrated Electrical Services,
Inc.(a) 34,172
3,125 Lone Star Industries, Inc. 119,727
2,350 M.D.C. Holdings, Inc. 48,763
6,150 Pulte Corp. 139,528
925 Southdown, Inc. 54,575
2,675 Thomas Industries, Inc. 56,008
1,475 Toll Brothers, Inc.(a) 31,344
3,625 U S Home Corp.(a) 124,609
6,025 Webb Delaware Corp. 134,056
----------
1,335,830
- ------------------------------------------------------------
Cable--0.2%
1,700 Belden, Inc. 42,287
4,650 Jones Intercable, Inc.(a) 209,250
----------
251,537
- ------------------------------------------------------------
Chemicals--0.6%
1,250 Cytec Industries, Inc.(a) 32,734
3,000 Eastman Chemical Co. 155,063
3,800 Hoechst AG (Germany) 160,365
13,700 Imperial Chemical Industries PLC
(United Kingdom) 160,221
1,450 MacDermid, Inc. 51,656
1,800 Spartech Corp. $ 52,650
2,600 W.R. Grace & Co.(a) 48,913
----------
661,602
- ------------------------------------------------------------
Communications
925 Avt Corp.(a) 28,617
- ------------------------------------------------------------
Computers--3.4%
1,300 Apex, Inc. 33,962
3,300 Catapult Communications Corp.(a) 62,287
3,100 Citrix Systems, Inc.(a) 161,394
13,600 Compaq Computer Corp. 326,400
1,600 Comverse Technology, Inc.(a) 120,900
9,600 Dell Computer Corp.(a) 392,400
6,000 EMC Corp.(a) 363,375
2,400 Equant(a) 213,450
8,800 Hewlett-Packard Co. 921,250
5,500 International Business Machines Corp. 691,281
650 Kronos, Inc.(a) 31,444
525 SCM Microsystems, Inc. 26,119
12,600 Seagate Technology, Inc.(a) 338,625
1,800 TDK Corp. 180,225
----------
3,863,112
- ------------------------------------------------------------
Computer Services--1.7%
6,300 Affiliated Computer Services, Inc.(a) 292,950
1,500 CIBER, Inc.(a) 26,250
13,900 Cisco Systems, Inc.(a) 863,537
900 Computer Task Group, Inc. 14,906
2,100 Sun Microsystems, Inc.(a) 142,538
7,750 Symbol Technologies, Inc. 304,672
10,000 Whittman-Hart, Inc.(a) 253,125
----------
1,897,978
- ------------------------------------------------------------
Consulting Services
1,500 Franklin Covey Co.(a) 10,500
600 The Metzler Group, Inc.(a) 25,350
----------
35,850
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 4
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as PRUDENTIAL DIVERSIFIED MODERATE
of July 31, 1999 GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Consumer Products & Services--2.1%
1,800 Central Garden & Pet Co.(a) $ 16,312
1,250 Fossil, Inc. 65,625
2,200 Hitachi Ltd., ADR 220,275
2,230 Siemens AG (Germany) 184,635
3,800 Sylvan Learning Systems, Inc.(a) 97,138
18,000 Tandy Corp. 923,625
5,500 Texas Instruments, Inc. 792,000
13,542 Unilever PLC (United Kingdom) 130,108
----------
2,429,718
- ------------------------------------------------------------
Cosmetics/Toiletries--0.3%
5,000 Kao Corp. (Japan) 139,466
3,100 Kimberly-Clark Corp. 189,100
----------
328,566
- ------------------------------------------------------------
Dental Supplies
850 Patterson Dental Co.(a) 33,416
- ------------------------------------------------------------
Distribution/Wholesalers--0.1%
750 Ingram Micro, Inc. 21,328
1,500 United Stationers, Inc. 39,375
----------
60,703
- ------------------------------------------------------------
Diversified Manufacturing--1.2%
1,100 Crane Co. 27,912
2,000 CUNO, Inc.(a) 38,625
6,300 General Electric Co. 686,700
37,800 Invensys PLC (United Kingdom) 205,378
1,800 SPS Technologies, Inc.(a) 73,687
60 Swatch Group (Switzerland)(a) 46,910
1,300 Tyco International Ltd. 126,994
2,600 Veba AG (Germany) 159,851
----------
1,366,057
Diversified Operations--0.4%
20,000 Granada Group PLC (United Kingdom)(a) $ 199,464
2,729 Vivendi (France) 214,697
----------
414,161
- ------------------------------------------------------------
Drugs & Medical Supplies--0.4%
4,133 AstraZeneca Group PLC (Sweden) 150,905
1,100 Datascope Corp.(a) 38,225
5,000 Sankyo Co., Ltd. (Japan) 132,470
7,300 Smithkline Beecham PLC
(United Kingdom)(a) 90,353
----------
411,953
- ------------------------------------------------------------
Electrical Utilities--0.3%
12,700 British Energy PLC (United Kingdom) 108,300
1,825 Conectiv, Inc. 41,861
5,620 Endesa SA (Spain) 111,061
2,550 Public Service Company of New Mexico 50,841
525 Rochester Gas & Electric Corp. 13,748
1,275 WPS Resources Corp. 36,975
----------
362,786
- ------------------------------------------------------------
Electronic Components--2.3%
2,100 Alpha Industries, Inc.(a) 107,100
2,200 American Xtal Technology, Inc.(a) 67,650
7,900 Arrow Electronics, Inc.(a) 168,369
2,900 Avnet, Inc. 142,100
1,250 Cleco Corp. 40,156
1,200 CTS Corp. 98,550
6,540 Electrolux AB, Series B (Sweden) 135,939
2,500 Flextronics International Ltd.(a) 112,187
2,600 General Motors Corp. 158,438
8,000 Gentex Corp.(a) 208,500
950 Idacorp, Inc. 29,391
875 Innovex, Inc. 12,469
800 L-3 Communications Holdings, Inc.(a) 34,350
2,400 Motorola, Inc. 219,000
2,500 Novellus Systems, Inc.(a) 160,937
2,900 Optical Coating Lab, Inc. 208,075
2,800 PMC-Sierra, Inc.(a) 219,100
1,500 Pioneer-Standard Electronics, Inc. 19,219
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as PRUDENTIAL DIVERSIFIED MODERATE
of July 31, 1999 GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------------
Electronic Components (cont'd.)
1,400 Pittway Corp. $ 46,550
100 Power-One, Inc.(a) 2,525
150 QLogic Corp. 25,031
4,300 Reliant Energy, Inc. 117,981
775 Rogers Corp.(a) 25,672
1,246 Royal Philips Electronics NV
(Netherlands) 127,387
1,100 Semtech Corp.(a) 68,062
825 TranSwitch Corp.(a) 36,197
1,400 Veeco Instruments, Inc.(a) 40,863
----------
2,631,798
- ------------------------------------------------------------
Entertainment--0.1%
2,250 SFX Entertainment, Inc.(a) 100,828
- ------------------------------------------------------------
Fertilizer
1,100 Potash Corp. of Saskatchewan, Inc. 56,444
- ------------------------------------------------------------
Financial Services--3.2%
1,440 Alcatel Alsthom (France) 221,795
1,100 Allied Capital Corp. 24,750
950 Arthur J. Gallagher & Co. 49,519
1,050 Chittenden Corp. 29,269
20,950 Citigroup, Inc. 933,584
350 Dain Rauscher Corp. 18,616
2,800 Doral Financial Corp. 46,200
2,725 Downey Financial Corp. 63,527
1,675 Eaton Vance Corp. 58,311
5,450 Financial Security Assurance
Holdings, Ltd. 286,466
900 Goldman Sachs Group, Inc. 57,881
1,400 Heller Financial, Inc. 35,700
700 Knight-Trimark Group, Inc.(a) 29,487
2,600 Lehman Brothers Holdings, Inc. 139,750
9,900 MBNA Corp. 282,150
2,500 Metris Companies, Inc. 98,281
1,000 Morgan (J.P.) & Co., Inc. 127,875
6,300 Morgan Stanley Dean Witter 567,787
2,100 Orix Corp. (Japan) 217,042
1,800 Promise Co., Ltd. (Japan) 119,617
5,825 Resource Bancshares Mortgage Group,
Inc. $ 40,775
4,300 Schwab (Charles) Corp. 189,469
2,100 Webster Financial Corp. 55,387
----------
3,693,238
- ------------------------------------------------------------
Food & Beverage--1.1%
975 Adolph Coors Co. 51,919
9,000 Asahi Breweries, Ltd. (Japan) 117,964
13,900 Cadbury Schweppes PLC
(United Kingdom) 88,731
1,200 Corn Products International, Inc. 37,800
14,500 Diageo PLC (United Kingdom) 147,673
3,100 Heineken N.V. (Netherlands) 168,013
1,275 J & J Snack Foods Corp.(a) 30,600
15,300 Nabisco Group Holding Corp. 286,875
1,300 Performance Food Group Co.(a) 34,937
2,575 Riviana Foods, Inc. 49,891
9,300 Sara Lee Corp. 204,600
1,400 Universal Foods Corp. 30,538
----------
1,249,541
- ------------------------------------------------------------
Forestry--0.1%
3,500 Georgia-Pacific Corp. 86,406
2,275 Universal Forest Product, Inc. 42,372
----------
128,778
- ------------------------------------------------------------
Health Care--2.4%
22,300 Columbia/HCA Healthcare Corp. 496,175
16,400 Foundation Health Systems, Inc. 249,075
1,026 LifePoint Hospitals, Inc.(a) 10,132
3,000 Nationwide Health Properties, Inc. 51,375
4,100 PacifiCare Health Systems, Inc.(a) 279,569
4,500 PAREXEL International Corp.(a) 49,500
600 Safeskin Corp. 5,325
27,200 Tenet Healthcare Corp.(a) 487,900
725 TLC The Laser Center, Inc.(a) 26,372
1,026 Triad Hospitals, Inc.(a) 10,837
6,700 United Healthcare Corp. 408,700
8,100 Wellpoint Health Networks, Inc.(a) 665,212
----------
2,740,172
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 6
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as PRUDENTIAL DIVERSIFIED MODERATE
of July 31, 1999 GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Home Furnishings--0.1%
2,925 Ethan Allen Interiors, Inc. $ 92,869
2,025 Furniture Brands International,
Inc.(a) 54,675
----------
147,544
- ------------------------------------------------------------
Hotels--0.3%
11,500 Hilton Hotels Corp. 150,219
23,400 MeriStar Hotels and Resorts, Inc. 86,287
9,700 Park Place Entertainment Corp.(a) 98,819
----------
335,325
- ------------------------------------------------------------
Human Resources--0.1%
975 CDI Corp.(a) 31,809
6,000 RemedyTemp, Inc.(a) 107,250
----------
139,059
- ------------------------------------------------------------
Industrial Technology/Instruments--0.3%
2,700 EG&G, Inc. 90,619
4,600 Mettler-Toledo International, Inc.(a) 133,112
2,425 ThermoQuest Corp.(a) 26,069
2,500 Waters Corp.(a) 149,375
----------
399,175
- ------------------------------------------------------------
Insurance--3.7%
3,200 ACE, Ltd. 74,400
379 Allianz AG (Germany) 101,081
7,500 Allied Zurich PLC (United Kingdom) 91,915
2,100 American Financial Group, Inc. 68,775
1,700 American General Corp. 131,537
5,500 American International Group, Inc. 638,687
1,400 Annuity and Life Re (Holdings), Ltd. 33,600
1,290 Axa-UAP (France) 151,298
2,100 Capital Re Corp. 28,219
8,300 Chubb Corp. 496,444
350 E.W. Blanch Holdings, Inc. 22,925
1,540 Fidelity National Financial, Inc. 26,854
1,275 First American Financial Corp. 21,197
1,975 Harleysville Group, Inc. 38,513
900 Medical Assurance, Inc.(a) 27,000
8,500 Mutual Risk Management, Ltd. $ 253,406
10,600 Old Republic International Corp. 178,212
1,075 PartnerRe Ltd. 40,850
2,600 Presidential Life Corp. 49,888
2,350 Protective Life Corp. 83,866
7,500 Prudential Corp. PLC (United Kingdom) 111,711
679 Radian Group, Inc. 35,011
6,500 Reinsurance Group of America, Inc. 238,062
19,271 Royal & Sun Alliance Insurance Group
PLC (United Kingdom)(a) 159,014
11,700 SAFECO Corp. 445,331
4,500 St. Paul Companies, Inc. 140,062
4,400 The Equitable Companies, Inc. 282,700
2,700 Tokio Marine & Fire Insurance Co.,
Ltd., ADR 157,950
213 Zurich Versicherungs-Gesellschaft AG
(Switzerland) 123,646
----------
4,252,154
- ------------------------------------------------------------
Internet--0.2%
2,300 America Online, Inc.(a) 218,787
600 N2H2, Inc.(a) 7,720
----------
226,507
- ------------------------------------------------------------
Machinery--0.3%
2,300 IDEX Corp. 64,831
2,275 JLG Industries, Inc. 45,358
4,050 Lincoln Electric Holdings, Inc. 76,697
1,250 Milacron, Inc. 21,406
800 Tecumseh Products Co. 51,700
1,825 Terex Corp.(a) 54,750
----------
314,742
- ------------------------------------------------------------
Manufacturing--0.3%
900 AptarGroup, Inc. 26,044
980 Cie De Saint Gobain (France) 177,920
1,570 Compagnie Generale des Etablissements
Michelin, Series B (France) 63,734
900 Nintendo Co., Ltd. (Japan) 132,208
----------
399,906
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as PRUDENTIAL DIVERSIFIED MODERATE
of July 31, 1999 GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Media--1.4%
16,700 CBS Corp.(a) $ 733,756
6,200 Clear Channel Communications, Inc.(a) 431,287
1,700 Cumulus Media, Inc. 41,013
2,625 King World Productions, Inc.(a) 91,547
4,800 Omnicom Group, Inc. 340,200
----------
1,637,803
- ------------------------------------------------------------
Medical Technology--0.2%
100 Amgen, Inc.(a) 7,603
600 Genetech Inc. 85,200
5,000 Inhale Therapeutic Systems, Inc.(a) 123,125
----------
215,928
- ------------------------------------------------------------
Metals--0.3%
18,600 Broken Hill Proprietary Co., Ltd.
(Australia) 205,824
1,275 Cleveland-Cliffs, Inc. 40,800
1,950 Commercial Metals Co. 64,350
900 Kaydon Corp. 28,069
1,550 RTI International Metals, Inc. 19,956
----------
358,999
- ------------------------------------------------------------
Mining--0.4%
15,600 Freeport-McMoRan Copper & Gold,
Inc.(a) 247,650
10,100 Newmont Mining Corp. 186,850
----------
434,500
- ------------------------------------------------------------
Miscellaneous--0.2%
800 SEACOR Holdings Inc.(a) 39,750
6,700 Service Corporation International 106,362
4,220 Thyssen AG (Germany) 98,537
----------
244,649
- ------------------------------------------------------------
Office Equipment & Supplies--0.6%
6,000 Canon, Inc. (Japan) 190,443
9,500 Harris Corp. 287,969
1,400 Kimball International, Inc.
(Class 'B' Stock) $ 27,300
2,800 Xerox Corp. 136,500
----------
642,212
- ------------------------------------------------------------
Oil & Gas Services--3.0%
1,000 Amerada Hess Corp. 59,188
4,300 Atlantic Richfield Co. 387,269
9,200 BP Amoco PLC (United Kingdom) 180,668
1,925 Devon Energy Corp. 70,864
9,500 Elf Aquitaine SA, ADR 812,844
1,290 Elf Aquitaine SA (France) 221,075
3,275 Energen Corp. 61,406
23,700 ENI SpA (Italy) 144,441
4,425 Helmerich & Payne, Inc. 113,114
2,176 Kerr-McGee Corp. 112,064
4,300 Keyspan Energy 119,325
8,800 Marine Drilling Companies, Inc.(a) 131,450
10,500 Newfield Exploration Co.(a) 303,844
6,200 Nuevo Energy Co. 97,262
5,100 Occidental Petroleum Corp. 99,769
1,500 Oneok, Inc. 47,719
2,225 Swift Energy Co.(a) 23,223
4,550 Tesoro Petroleum Corp. 71,662
3,200 Total SA, ADR 203,600
1,025 Valero Energy Corp. 21,909
4,050 Wicor, Inc. 117,450
----------
3,400,146
- ------------------------------------------------------------
Paper & Packaging--2.3%
1,500 Ball Corp. 72,656
2,800 Fort James Corp. 102,200
12,400 Georgia-Pacific Group 557,225
7,500 International Paper Co. 383,438
7,700 Mead Corp. 315,700
2,800 Rayonier, Inc. 133,175
1,800 Shorewood Packaging Corp.(a) 31,388
4,300 Temple-Inland, Inc. 271,975
2,000 UPM-Kymmene Oy (Finland) 67,479
5,900 Weyerhaeuser Co. 381,656
8,000 Willamette Industries, Inc. 360,000
----------
2,676,892
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 8
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as PRUDENTIAL DIVERSIFIED MODERATE
of July 31, 1999 GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Pharmaceuticals--2.4%
650 Alpharma, Inc. $ 24,131
8,200 American Home Products Corp. 418,200
1,200 Bindley Western Industries, Inc. 25,950
4,900 Bristol-Myers Squibb Co. 325,850
2,900 Eli Lilly & Co. 190,312
3,700 Glaxo Wellcome PLC, ADR 193,094
525 Idec Pharmaceuticals Corp.(a) 52,041
5,200 Merck & Co., Inc. 351,975
2,100 Ocular Sciences, Inc.(a) 41,344
3,000 Rhone-Poulenc SA, Series A (France) 146,848
1,400 Roberts Pharmaceutical Corp. 38,412
13 Roche Holdings AG (Switzerland) 143,863
8,400 Schering-Plough Corp. 411,600
6,800 Warner-Lambert Co. 448,800
----------
2,812,420
- ------------------------------------------------------------
Photography--0.6%
10,700 Eastman Kodak Co. 739,637
- ------------------------------------------------------------
Power Generation--0.1%
1,150 Calpine Corp. 86,466
- ------------------------------------------------------------
Printing & Publishing--0.2%
600 Consolidated Graphics, Inc.(a) 23,850
650 Electronics for Imaging, Inc.(a) 35,628
14,600 Reed International PLC (United
Kingdom) 111,578
1,200 Valassis Communications, Inc.(a) 44,700
1,350 World Color Press, Inc.(a) 48,853
----------
264,609
- ------------------------------------------------------------
Real Estate - Developers--0.1%
4,750 Catellus Development Corp.(a) 75,406
- ------------------------------------------------------------
Real Estate Investment Trust--0.4%
1,950 Cabot Industrial Trust 39,731
3,125 Franchise Finance Corp. of America 71,094
5,000 Glenborough Realty Trust, Inc. 87,500
9,500 MeriStar Hospitality Corp. 181,687
2,675 The Rouse Co. 65,036
----------
445,048
- ------------------------------------------------------------
Restaurants--1.1%
6,300 CKE Restaurants, Inc. 88,200
25,400 Darden Restaurants, Inc. $ 554,037
1,500 Foodmaker, Inc.(a) 41,063
1,200 IHOP Corp. 27,900
9,900 McDonald's Corp. 412,706
9,200 Ryan's Family Steak Houses, Inc.(a) 98,325
----------
1,222,231
- ------------------------------------------------------------
Retail--3.6%
1,200 BJ's Wholesale Club, Inc.(a) 36,750
1,400 Buckle, Inc. 42,350
2,800 Claire Stores, Inc. 66,500
5,600 CVS Corp. 278,600
1,075 Department 56, Inc. 31,108
11,500 Dillards, Inc. (Class 'A' Stock) 354,344
8,700 Gap, Inc. 406,725
14,600 Great Universal Stores PLC (United
Kingdom) 149,640
9,900 Home Depot, Inc. 631,744
17,100 IKON Office Solutions, Inc. 225,506
27,200 Kmart Corp.(a) 394,400
5,600 Kohl's Corp.(a) 425,950
2,700 Metro AG (Germany) 148,069
6,700 Pep Boys - Manny, Moe & Jack 111,387
2,375 Ross Stores, Inc. 114,297
2,800 Sears, Roebuck & Co. 113,400
7,000 Staples, Inc.(a) 202,125
7,800 Toys 'R' Us, Inc.(a) 126,750
5,200 Wal-Mart Stores, Inc. 219,700
1,550 Zale Corp.(a) 62,000
----------
4,141,345
- ------------------------------------------------------------
Semiconductors--1.4%
6,500 Applied Materials, Inc.(a) 467,594
5,000 Etec Systems, Inc.(a) 194,375
7,200 Intel Corp. 496,800
3,900 KLA Tencor Corp.(a) 264,225
8,000 National Semiconductor Corp. 198,000
----------
1,620,994
- ------------------------------------------------------------
Software--2.6%
3,000 I2 Technologies, Inc.(a) 92,250
500 Accrue Software, Inc.(a) 5,583
3,300 Activision, Inc.(a) 45,169
1,300 BroadVision, Inc.(a) 90,594
1,650 Check Point Software Technologies
Ltd.(a) 112,922
100 Digex, Inc.(a) 1,700
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 9
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as PRUDENTIAL DIVERSIFIED MODERATE
of July 31, 1999 GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Software (cont'd.)
900 Exodus Communications, Inc.(a) $ 108,056
8,200 HNC Software, Inc.(a) 298,275
4,500 Intuit, Inc.(a) 368,156
5,000 Legato Systems, Inc.(a) 357,500
11,600 Microsoft Corp.(a) 995,425
300 NetIQ Corp.(a) 4,396
5,900 Rational Software Corp.(a) 196,913
5,600 VERITAS Software Corp.(a) 314,300
100 Verity, Inc.(a) 4,950
----------
2,996,189
- ------------------------------------------------------------
Steel - Producers--0.1%
5,150 AK Steel Holding Corp. 116,197
1,500 Carpenter Technology Corp. 39,750
----------
155,947
- ------------------------------------------------------------
Telecommunications--5.3%
5,900 Allegiance Telecommunications,
Inc.(a) 296,844
4,300 ALLTEL Corp. 308,794
13,000 AT&T Corp.(a) 578,094
2,900 Carrier Access Corp.(a) 95,700
1,212 Deutsche Telekom (Germany) 49,915
4,000 Excel Switching Corp. 109,000
200 JDS Uniphase Corp.(a) 18,075
1,300 Level 3 Communications, Inc.(a) 68,900
4,680 Lucent Technologies, Inc. 304,492
10,800 MCI WorldCom, Inc.(a) 891,000
3,600 Millicom International Cellular SA(a) 110,250
1,000 Nextlink Communications, Inc. 112,125
11 Nippon Telegraph & Telephone Corp.
(Japan) 140,428
3,800 Nokia Corp., ADR(a) 323,237
2,000 Norstan, Inc.(a) 26,000
1,100 NTL, Inc.(a) 114,262
20 NTT Mobile Communications (Japan) 309,885
6,175 Pacific Gateway Exchange, Inc.(a) 151,287
450 Plantronics, Inc.(a) 31,838
9,200 Qwest Communications International,
Inc.(a) 271,400
1,450 Tekelec, Inc.(a) 14,591
1,600 Tele Danmark A/S (Denmark) 95,770
36,100 Telecom. Italia SpA (Italy) $ 197,200
16,929 Telefonica SA (Spain) 271,083
5,500 Tellabs, Inc.(a) 338,594
3,300 Univision Communications, Inc.(a) 228,525
1,900 Vodafone AirTouch PLC, ADR 399,950
5,000 VoiceStream Wireless Corp.(a) 225,625
----------
6,082,864
- ------------------------------------------------------------
Tobacco--1.2%
16,000 British America Tobacco PLC (United
Kingdom) 135,662
13 Japan Tobacco, Inc. (Japan) 156,866
7,500 Loews Corp. 525,937
8,100 Philip Morris Co., Inc. 301,725
5,033 RJR Nabisco Holdings, Inc.(a) 137,778
2,575 Universal Corp. 77,411
----------
1,335,379
- ------------------------------------------------------------
Trucking & Shipping--0.3%
10,700 Air Express International Corp. 286,225
1,650 US Freightways Corp. 81,469
----------
367,694
- ------------------------------------------------------------
Utilities--0.6%
2,275 Atmos Energy Corp. 56,875
2,175 BEC Energy 92,709
1,225 California Water Service Group 34,300
2,700 General Public Utilities Corp. 103,613
720 Suez Lyonnaise des Eaux (France) 127,247
4,300 Unicom Corp. 168,775
5,325 Washington Gas Light Co. 148,434
----------
731,953
- ------------------------------------------------------------
Waste Management--0.3%
6,000 Casella Waste Systems, Inc.(a) 159,750
6,500 Waste Management, Inc. 166,156
----------
325,906
----------
Total common stocks
(cost $63,486,271) 70,924,102
----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 10
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as PRUDENTIAL DIVERSIFIED MODERATE
of July 31, 1999 GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
- ------------------------------------------------------------
CORPORATE BONDS--20.6%
- ------------------------------------------------------------
Airlines--0.2%
Ba2 $ 250 Continental Airlines, Inc.,
Sr. Notes,
8.00%, 12/15/05 $ 237,205
- ------------------------------------------------------------
Audio/Visual--0.2%
Ba2 250 Imax Corp.,
Sr. Notes,
7.875%, 12/1/05 235,000
- ------------------------------------------------------------
Automotive Parts--0.5%
B2 10 Collins & Aikman Products
Co.,
Sr. Sub. Notes,
11.50%, 4/15/06 10,100
B3 250 Hayes Wheels Int'l., Inc.,
Sr. Sub. Notes,
9.125%, 7/15/07 250,625
Ba1 250 Lear Corp.,
Sr. Notes,
8.11%, 5/15/09 250,000
------------
510,725
- ------------------------------------------------------------
Banking--0.6%
NR 183 Central Banking Corp.,
Bonds,
6.38%, 1/5/05 175,770
Korea Development Bank,
Sr. Notes,
Ba2 200 7.125%, 9/17/01 195,946
Baa3 300 7.90%, 2/1/02 300,070
------------
671,786
- ------------------------------------------------------------
Building & Products--0.2%
Ba3 250 Building Materials Corp. of
America,
Sr. Notes,
8.00%, 12/1/08 232,500
Cable--0.6%
B1 $ 200 Adelphia Communications
Corp.,
Sr. Notes,
8.125%, 7/15/03 $ 192,000
Ba3 250 Cablevision SA,
Bonds,
13.75%, 5/1/09 211,250
B3 15 Classic Cable, Inc.,
Sr. Sub. Notes,
9.375%, 8/1/09 14,850
B1 80 Fox Family Worldwide, Inc.,
Sr. Notes,
9.25%, 11/1/07 75,200
B2 250 Mediacom LLC Capital Corp.,
Sr. Notes,
7.875%, 2/15/11 225,000
------------
718,300
- ------------------------------------------------------------
Casinos--0.9%
B3 75 Coast Hotels & Casinos,
Inc.,
Sr. Sub. Notes,
9.50%, 4/1/09 68,299
Ba2 250 Harrahs Operating, Inc.,
Gtd. Sr. Sub. Notes,
7.875%, 12/15/05 243,750
B2 250 Hollywood Park, Inc.,
Sr. Sub. Notes, Series B,
9.25%, 2/15/07 244,375
B2 150 Horseshoe Gaming LLC,
Sr. Sub. Notes,
8.625%, 5/15/09 144,000
B3 100 Isle Capri Casinos, Inc.,
Sr. Sub. Notes,
8.75%, 4/15/09 92,250
Ba2 250 Mohegan Tribal Gaming
Authority,
Sr. Notes,
8.125%, 1/1/06 241,875
------------
1,034,549
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 11
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as PRUDENTIAL DIVERSIFIED MODERATE
of July 31, 1999 GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
- ------------------------------------------------------------
Chemicals--0.5%
Baa3 $ 250 Equistar Chemicals LP,
Sr. Notes,
8.75%, 2/15/09 $ 248,375
B2 75 Huntsman ICI Chemicals,
Inc.,
Sr. Sub. Notes,
10.125%, 7/1/09 74,625
Ba3 100 Lyondell Chemical Co.,
Sr. Sub. Notes,
9.875%, 5/1/07 102,000
B3 55 Sterling Chemicals, Inc.,
Sr. Sub. Notes,
12.375%, 7/15/06 56,238
B2 65 ZSC Specialty Chemicals PLC,
Sr. Notes,
11.00%, 7/1/09 65,325
------------
546,563
- ------------------------------------------------------------
Coal--0.2%
Ba3 250 P & L Coal Holdings Corp.,
Sr. Notes,
8.875%, 5/15/08 246,250
- ------------------------------------------------------------
Commercial Services--0.1%
B2 100 Iron Mountain, Inc.,
Sr. Sub. Notes, MTN,
8.25%, 7/1/11 93,000
- ------------------------------------------------------------
Diversified Operations
B2 20 SCG Holding & Semiconductor
Co.,
Sr. Sub. Notes,
12.00%, 8/1/09 20,150
- ------------------------------------------------------------
Engineering & Construction--0.4%
CSC Holdings, Inc.,
Sr. Sub. Deb.,
B1 250 9.875%, 2/15/13 262,500
B1 129 10.50%, 5/15/16 145,448
------------
407,948
Entertainment--0.1%
B3 $ 160 AMC Entertainment, Inc.,
Sr. Sub. Notes,
9.50%, 2/1/11 $ 148,000
- ------------------------------------------------------------
Fertilizer
B2 40 Scotts Co.,
Sr. Sub. Notes,
8.625%, 1/15/09 39,600
- ------------------------------------------------------------
Financial Services--4.3%
Ba1 100 Americredit Corp.,
Sr. Notes,
9.875%, 4/15/06 101,000
A2 300 Bear Stearns Cos., Inc.,
Sr. Notes,
6.15%, 3/2/04 289,608
Baa2 500 Capital One Bank,
Sr. Notes,
6.76%, 7/23/02 494,922
NR 100 Coinstar, Inc.,
Sr. Disc. Notes,
Zero Coupon (until
10/1/99),
13.00%, 10/1/26 102,000
NR 286 Credit Asset Receivable LLC,
Sr. Sec'd. Notes,
6.274%, 10/31/03 282,374
Baa1 300 Finova Capital Corp.,
MTN,
5.98%, 2/27/01 299,130
A2 400 General Motors Acceptance
Corp., MTN,
5.56%, 4/5/04 399,441
Ba1 100 GS Escrow Corp.,
Notes,
5.995%, 8/1/03 97,615
A2 700 Household Finance Corp.,
Notes,
7.00%, 8/1/03 697,003
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 12
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as PRUDENTIAL DIVERSIFIED MODERATE
of July 31, 1999 GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
- ------------------------------------------------------------
Financial Services (cont'd.)
Baa1 $ 500 MBNA America Bank NA,
MTN,
6.875%, 7/15/04 $ 494,490
A1 300 Morgan J.P. & Co., Inc.,
Sr. Notes,
5.75%, 2/25/04 285,111
Aa3 600 Morgan Stanley Dean Witter,
Sr. Notes,
5.56%, 4/22/04 600,666
Baa2 300 Orix Credit Alliance, Inc.,
MTN,
6.785%, 4/16/01 301,206
Ba3 20 RBF Finance Co.,
Sr. Notes,
11.00%, 3/15/06 20,600
Aa3 500 Wells Fargo & Co.
Notes,
6.625%, 7/15/04 494,555
------------
4,959,721
- ------------------------------------------------------------
Food & Beverage--0.2%
B2 100 Ameriserve Food
Distribution, Inc., Sr.
Notes,
8.875%, 10/15/06 86,500
B2 100 Pilgrim's Pride Corp.,
Sr. Sub. Notes,
10.875%, 8/1/03 103,500
------------
190,000
- ------------------------------------------------------------
Health Care--0.6%
B2 100 Biovail Corp. International,
Sr. Notes,
10.875%, 11/15/05 104,000
Columbia/HCA Healthcare
Corp.,
MTN,
Ba2 200 6.73%, 7/15/45 187,504
Debs.,
Ba2 40 7.05%, 12/1/27 29,797
Ba2 25 7.50%, 11/15/95 18,830
B2 $ 250 Integrated Health Services,
Inc.,
Sr. Sub. Notes, Series A,
9.25%, 1/15/08 $ 157,500
B3 25 LifePoint Hospitals
Holdings, Inc.,
Sr. Sub. Notes,
10.75%, 5/15/09 25,188
B3 100 Magellan Health Services,
Inc.,
Sr. Sub. Notes,
9.00%, 2/15/08 87,250
B3 100 Triad Hospitals Holdings,
Inc.,
Sr. Sub. Notes,
11.00%, 5/15/09 100,750
------------
710,819
- ------------------------------------------------------------
Industrials--0.3%
B2 250 Purina Mills, Inc.,
Sr. Sub. Notes,
9.00%, 3/15/10 137,500
B3 250 United Int'l. Holdings,
Inc.,
Sr. Disc. Notes,
Zero Coupon (until
2/15/03), 10.75%, 2/15/08 146,250
United Pan-Europe Comm.,
B2 30 Sr. Disc. Notes,
Zero Coupon (until
8/1/04),
12.50%, 8/1/09 16,275
B2 35 Sr. Notes,
10.875%, 8/1/09 32,900
------------
332,925
- ------------------------------------------------------------
Machinery & Equipment--0.2%
B1 250 Applied Power, Inc.,
Sr. Sub. Notes,
8.75%, 4/1/09 242,500
B3 10 Newcor, Inc.,
Sr. Sub. Notes,
9.875%, 3/1/08 9,000
------------
251,500
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 13
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as PRUDENTIAL DIVERSIFIED MODERATE
of July 31, 1999 GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
- ------------------------------------------------------------
Media--0.7%
B2 $ 250 Ackerley Group, Inc.,
Sr. Sub. Notes,
9.00%, 1/15/09 $ 245,000
B1 75 Chancellor Media Corp.,
Sr. Sub. Notes,
9.00%, 10/1/08 76,125
B1 250 Garden State Newspapers,
Sr. Sub. Notes,
8.625%, 7/1/11 233,750
Baa3 265 Time Warner, Inc.,
Series 97-1,
6.10%, 12/30/01 259,038
------------
813,913
- ------------------------------------------------------------
Miscellaneous--0.4%
Baa1 450 Midamerican Funding LLC,
Sr. Notes,
5.85%, 3/1/01 446,310
- ------------------------------------------------------------
Oil & Gas--1.7%
B3 80 Chesapeake Energy Corp.,
Sr. Notes,
9.625%, 5/1/05 73,800
Ba2 250 Gulf Canada Resources Ltd.,
Sr. Sub. Deb.,
9.625%, 7/1/05 255,000
Ba2 200 Petroleos Mexicanos
(Mexico),
Gtd. Notes,
9.375%, 12/2/08 203,500
Ba3 210 Pride International, Inc.,
Sr. Notes,
10.00%, 6/1/09 214,200
Baa2 1,100 Public Service Enterprise
Group,
Notes, Series C,
5.44%, 6/15/01 1,098,888
Ba3 30 RB Falcon Corp.,
Sr. Notes,
9.50%, 12/15/08 28,500
B2 $ 35 Swift Energy Co.,
Sr. Sub. Notes,
10.25%, 8/1/09 $ 34,732
------------
1,908,620
- ------------------------------------------------------------
Paper & Packaging--0.9%
B1 250 Ball Corp.,
Sr. Sub. Notes,
8.25%, 8/1/08 247,500
B2 20 Consolidated Container Co.,
LLC, Sr. Sub. Notes,
10.125%, 7/15/09 20,350
B3 250 Packaging Corp. of America,
Sr. Sub. Notes,
9.625%, 4/1/09 253,750
B1 250 S.D. Warren Co.,
Sr. Sub. Notes,
12.00%, 12/15/04 265,625
B3 250 Stone Container Corp.,
Sr. Sub. Deb.,
12.25%, 4/1/02 250,625
------------
1,037,850
- ------------------------------------------------------------
Pharmaceuticals--0.1%
Ba3 100 ICN Pharmaceuticals, Inc.,
Sr. Notes,
8.75%, 11/15/08 96,000
- ------------------------------------------------------------
Printing & Publishing--0.6%
B1 250 Mail Well I Corp.,
Sr. Sub. Notes,
8.75%, 12/15/08 239,375
B2 250 Transwestern Publishing Co.,
LP,
Sr. Sub. Notes, Series D,
9.625%, 11/15/07 246,250
B1 250 World Color Press, Inc.,
Sr. Sub. Notes,
7.75%, 2/15/09 250,000
------------
735,625
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 14
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as PRUDENTIAL DIVERSIFIED MODERATE
of July 31, 1999 GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
- ------------------------------------------------------------
Real Estate--0.2%
Ba2 $ 250 HMH Properties, Inc.,
Sr. Notes,
8.45%, 12/1/08 $ 235,000
- ------------------------------------------------------------
Recreation--0.2%
B3 125 Premier Parks, Inc.,
Sr. Notes,
9.75%, 6/15/07 125,000
B1 150 Vail Resorts, Inc.,
Sr. Sub. Notes,
8.75%, 5/15/09 145,125
------------
270,125
- ------------------------------------------------------------
Restaurants--0.5%
B2 125 Advantica Restaurant Group,
Inc., Sr. Notes,
11.25%, 1/15/08 118,125
B2 250 Carrols Corp.,
Sr. Sub. Notes,
9.50%, 12/1/08 218,750
Ba1 250 Felcor Suites, LP,
Gtd. Sr. Notes,
7.375%, 10/1/04 227,500
------------
564,375
- ------------------------------------------------------------
Schools--0.1%
B3 100 Kindercare Learning Center,
Inc.,
Sr. Sub. Notes,
9.50%, 2/15/09 97,500
- ------------------------------------------------------------
Software--0.1%
B3 105 Psinet, Inc.,
Sr. Notes,
11.00%, 8/1/09 105,000
Steel--0.6%
Ba2 $ 250 AK Steel Corp.,
Sr. Notes,
7.875%, 2/15/09 $ 243,750
B2 25 Leviathan Gas
Pipeline/Finance Corp.,
Sr. Sub. Notes,
10.375%, 6/1/09 25,625
Ba3 150 National Steel Corp.,
1st Mtg., Series D,
9.875%, 3/1/09 153,000
B2 250 UCAR Global Enterprises,
Inc.,
Sr. Sub. Notes,
12.00%, 1/15/05 265,000
------------
687,375
- ------------------------------------------------------------
Telecommunications--2.9%
Baa3 600 AT&T Capital Corp.,
MTN, Series G,
5.56%, 4/23/02 596,832
B2 250 Charter Communications
Holdings,
Sr. Notes,
8.625%, 4/1/09 239,375
B1 250 Global Crossings Holdings
Ltd.,
Sr. Notes,
9.625%, 5/15/08 258,750
B2 250 Intermedia Communications,
Inc.,
Sr. Notes,
8.60%, 6/1/08 228,750
B3 30 Level 3 Communications,
Inc.,
Sr. Disc. Notes,
Zero Coupon (until
12/1/03)
10.50%, 12/1/08 17,325
B2 500 Mcleodusa, Inc.,
Sr. Notes,
8.125%, 2/15/09 451,250
B2 350 Nextel Communications, Inc.,
Sr. Disc. Notes,
Zero Coupon (until
10/31/02)
9.75%, 10/31/07 250,250
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 15
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as PRUDENTIAL DIVERSIFIED MODERATE
of July 31, 1999 GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
- ------------------------------------------------------------
Telecommunications (cont'd.)
B3 $ 250 NTL Communications Corp.,
Sr. Notes,
Zero Coupon (until
10/1/03)
12.38%, 10/1/08 $ 175,000
Baa3 200 Paramount Communications,
Inc., Sr. Notes,
5.875%, 7/15/00 199,070
Ba3 250 Price Communications
Wireless Inc., Sr. Notes,
Series B,
9.125%, 12/15/06 253,437
Ba3 250 Rogers Cantel, Inc.,
(Canada)
Sr. Disc. Deb.,
9.375%, 6/1/08 260,000
Telewest Communications PLC,
B1 100 Sr. Disc. Notes,
Zero Coupon (until
4/15/04)
9.25%, 4/15/09 62,000
B1 150 Sr. Disc. Deb.,
Zero Coupon (until
10/1/00) 11.00%, 10/1/07
(United Kingdom) 133,875
B3 250 Tritel PCS, Inc.,
Sr. Sub. Disc. Notes,
Zero Coupon (until
5/1/04)
12.75%, 5/15/09 135,000
B3 75 Worldwide Fiber, Inc.,
Sr. Notes,
12.00%, 8/1/09 74,063
------------
3,334,977
- ------------------------------------------------------------
Textile-Apparel Manufacturing--0.2%
Baa3 250 Burlington Industries, Inc.,
Sr. Disc. Deb.,
7.25%, 8/1/27 222,500
- ------------------------------------------------------------
Transportation
B1 50 American Commercial Lines
LLC,
Sr. Notes,
10.25%, 6/30/08 49,750
Utilities--1.1%
Ba1 $ 250 AES Corp.,
Sr. Notes,
9.50%, 6/1/09 $ 255,000
Ba2 250 Calpine Corp.,
Sr. Notes,
7.875%, 4/1/08 237,500
Ba3 250 CMS Energy Corp.,
Sr. Notes,
7.50%, 1/15/09 232,500
Niagara Mohawk Power Corp.,
Ba2 300 Sr. Notes, Series B
7.00%, 10/1/00 300,570
Baa3 200 Sr. Notes, Series C
7.125%, 7/1/01 200,452
------------
1,226,022
- ------------------------------------------------------------
Waste Management--0.2%
Ba3 250 Allied Waste of North
America Corp., Sr. Notes,
7.875%, 1/1/09 230,000
------------
Total corporate bonds
(cost $24,427,207) 23,647,483
------------
- ------------------------------------------------------------
CONVERTIBLE BOND--0.4%
- ------------------------------------------------------------
Financial Services--0.4%
A2 EURO500 Hellenic Finance,
2.00%, 7/15/03
(cost $526,875) 526,875
- ------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS--6.7%
Aaa $ 163 Capital Asset Research
Funding LP,
Series 97-A, Class I,
6.40%, 12/15/04 162,791
Aaa 500 Contimortgage Home Equity
Loan Trust,
Series 1998-2, Class A4,
6.19%, 1/15/14 488,905
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 16
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as PRUDENTIAL DIVERSIFIED MODERATE
of July 31, 1999 GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
- ------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (cont'd.)
Federal Home Loan Mortgage
Corp., Deb.,
$ 2,700 5.75%, 3/15/09 $ 2,514,807
Federal National Mortgage
Assoc.,
3,000 Zero Coupon, 6/1/17 893,430
508 Series 1998-73, Class MZ
6.30%, 10/17/38 424,584
First Nationwide Trust
Aaa 197 6.50%, 5/19/29 193,392
Aaa 474 Series 98-2, Class A1,
6.75%, 6/19/28 456,636
262 Series P/T-NM, Class 7-A,
7.00%, 9/17/31 262,536
71 Series 1599, Class -A,
5.80%, 6/15/19 70,410
Aaa 300 GE Capital Mortgage
Services, Inc., Series
1999-S, Class A29,
6.50%, 5/25/29 275,193
Aaa 298 Merrill Lynch Mortgage
Investors, Inc., Series
1998-FF1, Class A,
5.07%, 1/20/28 298,067
Aaa 400 PNC Mortgage Secs. Corp.
Series 1999-5, Class A1,
6.75%, 7/25/29 382,562
Residential Funding
Mortgage,
Aaa 200 Series 1993-S36, Class A9,
6.478%, 10/25/08 199,686
Aa1 500 Series-1994 S5, Class A6,
6.50%, 2/25/24 450,310
Aaa 212 Series 1999-S8, Class A1,
6.25%, 3/25/14 203,329
Aaa 398 Salomon Brothers Mortgage,
Series 1999-LB1, Class A,
5.39%, 6/25/29 398,162
------------
Total collateralized
mortgage obligations
(cost $7,883,918) 7,674,800
------------
U.S. GOVERNMENT AGENCIES AND SECURITIES--2.9%
$ 103 Government National Mortgage
Assoc., Single Family,
6.625%, 9/20/22 $ 103,818
United States Treasury
Bonds,
200 8.50%, 2/15/20 247,874
150 9.25%, 2/15/16 193,593
500 11.25%, 2/15/15 739,920
United States Treasury
Notes,
104 3.625%, 7/15/02 102,672
811 3.875%, 1/15/09 800,083
1,100 6.50%, 10/15/06 1,125,784
------------
Total U. S. government
agencies and securities
(cost $3,374,604) 3,313,744
------------
- ------------------------------------------------------------
Foreign Securities--0.2%
Ba1 300 United Mexican States,
6.52%, 6/27/02
(cost $279,741) 290,250
- ------------------------------------------------------------
MUNICIPAL BOND--0.3%
NR 300 New York City Gen. Oblig.,
Series B,
6.00%, 8/1/01
(cost $303,420) 299,643
------------
Total long-term investments
(cost $100,282,036) 106,676,897
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 17
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
Portfolio of Investments as PRUDENTIAL DIVERSIFIED MODERATE
of July 31, 1999 GROWTH FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS--14.9%
- ------------------------------------------------------------
CORPORATE BONDS--1.2%
Baa1 $ 300 Banco Latinoamericano SA,
MTN,
6.15%, 5/2/00 $ 298,590
NR 400 MCI Worldcom, Inc.,
5.36%, 1/27/00 389,340
A2 300 TCI Communications, Inc.,
MTN,
6.46%, 3/6/00 301,233
Baa1 400 US West Capital Funding,
Inc.,
5.957%, 3/24/00 384,379
------------
(cost $1,375,549) 1,373,542
- ------------------------------------------------------------
U.S. Government Agencies--5.8%
1,000 Federal Home Loan Mortgage
Corp.,
6.00%, 12/31/99 970,312
Government National Mortgage
Assoc.,
Single Family,
250 6.00%, 12/31/99 230,390
5,800 6.50%, 12/31/99 5,506,404
------------
(cost $6,809,124) 6,707,106
REPURCHASE AGREEMENT--7.9%
$ 9,117 Joint Repurchase Agreement
Account,
5.06%, 8/2/99
(cost $9,117,000; Note 5) $ 9,117,000
------------
- ------------------------------------------------------------
CALL OPTIONS PURCHASED
Contracts
40 United States Treasury Bond,
7.50%, 2/15/05,
expires 10/14/99, @
$98.25
(cost $37,906) 32,625
------------
Total short-term investments
(cost $17,339,579) 17,230,273
------------
- ------------------------------------------------------------
Total Investments--107.7%
(cost $117,621,615; Note 4) 123,907,170
Liabilities in excess of
other assets--(7.7%) (8,903,469)
------------
Net Assets--100% $115,003,701
------------
------------
</TABLE>
- ---------------
(a) Non-income producing security.
AB--Antiebolay (Swedish Stock Company).
ADR--American Depository Receipt.
AG--Aktiengesellschaft (German Stock Company).
LP--Limited Partnership.
MTN--Medium Term Note.
NV--Naamloze Vennootschap (Dutch Corporation).
NR--Not Rated by Moody's or Standard & Poor's.
Oy--Osakeyhtio (Finland Stock Company).
PLC--Public Limited Company (British Corporation).
SA-- Sociedad Anonima (Spanish Corporation or Societe Anonyme or French
Corporation).
SpA--Societa per Azione (Italian Corporation).
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 18
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
Statement of Assets and Liabilities GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets July 31, 1999
<S> <C>
Investments, at value (cost $117,621,615).................................................................... $123,907,170
Receivable for Fund shares sold.............................................................................. 1,582,356
Receivable for investments sold.............................................................................. 1,232,871
Interest and dividends receivable............................................................................ 626,144
Deferred offering costs...................................................................................... 30,856
-------------
Total assets.............................................................................................. 127,379,397
-------------
Liabilities
Bank overdraft............................................................................................... 17,764
Payable for investments purchased............................................................................ 11,503,690
Payable for Fund shares reacquired........................................................................... 506,406
Accrued expenses and other liabilities....................................................................... 177,286
Management fee payable....................................................................................... 72,363
Distribution fee payable..................................................................................... 72,060
Forward currency contracts - amount payable to counterparties................................................ 25,508
Withholding taxes payable.................................................................................... 619
-------------
Total liabilities......................................................................................... 12,375,696
-------------
Net Assets................................................................................................... $115,003,701
-------------
-------------
Net assets were comprised of:
Shares of beneficial interest, at par..................................................................... $ 10,592
Paid-in capital in excess of par.......................................................................... 108,376,275
-------------
108,386,867
Undistributed net investment income....................................................................... 296,575
Accumulated net realized gain on investments.............................................................. 60,106
Net unrealized appreciation on investments and foreign currencies translations............................ 6,260,153
-------------
Net assets, July 31, 1999.................................................................................... $115,003,701
-------------
-------------
Class A:
Net asset value and redemption price per share
($20,372,463 / 1,875,204 shares of beneficial interest issued and outstanding)......................... $10.86
Maximum sales charge (5% of offering price)............................................................... .57
-------------
Maximum offering price to public.......................................................................... $11.43
-------------
-------------
Class B:
Net asset value, offering price and redemption price per share
($58,678,010 / 5,405,503 shares of beneficial interest issued and outstanding)......................... $10.85
-------------
-------------
Class C:
Net asset value and redemption price per share
($22,375,479 / 2,061,427 shares of beneficial interest issued and outstanding)......................... $10.85
Sales charge (1% of offering price)....................................................................... .11
-------------
Offering price to public.................................................................................. $10.96
-------------
-------------
Class Z:
Net asset value, offering price and redemption price per share
($13,577,749 / 1,249,217 shares of beneficial interest issued and outstanding)......................... $10.87
-------------
-------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 19
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
GROWTH FUND
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
November 18, 1998(a)
Through
Net Investment Income July 31, 1999
<S> <C>
Income
Interest............................ $1,638,369
Dividends (net of foreign
withholding taxes of $21,833).... 491,970
-----------
Total income..................... 2,130,339
-----------
Expenses
Management fee...................... 467,338
Distribution fee--Class A........... 21,458
Distribution fee--Class B........... 256,014
Distribution fee--Class C........... 128,172
Custodian's fees and expenses....... 235,000
Registration fees................... 70,000
Amortization of offering costs...... 68,465
Reports to shareholders............. 55,000
Transfer agent's fees and
expenses......................... 54,000
Legal fees.......................... 30,000
Audit fees and expenses............. 25,000
Trustees' fees and expenses......... 4,500
Miscellaneous....................... 3,513
-----------
Total expenses................... 1,418,460
-----------
Net investment income.................. 711,879
-----------
Realized and Unrealized Gain
on Investment and Foreign Currency
Transactions
Net realized gain on:
Investment transactions............. 60,106
Foreign currency transactions....... 6,222
-----------
66,328
Net unrealized appreciation on:
Investments and foreign currency
translation...................... 6,260,153
-----------
Net gain on investments............. 6,326,481
-----------
Net Increase in Net Assets
Resulting from Operations $7,038,360
-----------
-----------
</TABLE>
- ---------------
(a) Commencement of investment operations.
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
GROWTH FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
November 18, 1998(a)
Increase (Decrease) in Through
Net Assets July 31, 1999
<S> <C>
Operations
Net investment income................... $ 711,879
Net realized gain on investment and
foreign currency transactions........ 66,328
Net unrealized appreciation of
investments and foreign currency
translation.......................... 6,260,153
--------------------
Net increase in net assets resulting
from operations...................... 7,038,360
--------------------
Dividends from net investment income (Note
1)
Class A.............................. (132,253)
Class B.............................. (170,151)
Class C.............................. (73,278)
Class Z.............................. (152,622)
--------------------
(528,304)
--------------------
Fund share transactions (net of share
conversions) (Note 6)
Net proceeds from shares sold........... 132,889,254
Net asset value of shares issued to
shareholders in reinvestment of
dividends............................ 516,607
Cost of shares reacquired............... (24,942,216)
--------------------
Net increase in net assets from Fund
shares transactions.................. 108,463,645
--------------------
Total increase............................. 114,973,701
Net Assets
Beginning of period........................ 30,000
--------------------
End of period(b)........................... $115,003,701
--------------------
--------------------
- ---------------
(a) Commencement of investment operations.
(b) Includes undistributed net investment
income of:.............................. $ 296,575
--------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 20
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
Notes to Financial Statements GROWTH FUND
- --------------------------------------------------------------------------------
Prudential Diversified Funds (the 'Trust'), is registered under the Investment
Company Act of 1940 as an open-end, diversified management investment company
presently consisting of three portfolios: Prudential Diversified Moderate Growth
Fund (the 'Fund'), Prudential Diversified Conservative Growth Fund and
Prudential Diversified High Growth Fund. The Trust was organized as a business
trust in Delaware on July 29, 1998. The Fund had no significant operations other
than the issuance of 750 shares each of Class A, Class B, Class C and Class Z
shares of beneficial interest for $30,000 on September 2, 1998 to Prudential
Investments Fund Management LLC ('PIFM' or the 'Manager'). The Fund commenced
investment operations on November 18, 1998.
The investment objective of the Fund is to provide capital appreciation and a
reasonable level of current income. The Fund seeks to achieve its investment
objective by investing in a diversified portfolio of equity and fixed income
securities. The ability of the issuers of the debt securities held by the Fund
to meet their obligations may be affected by economic developments in a specific
industry or country.
- ------------------------------------------------------------
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 for which the primary market is on an exchange
and NASDAQ National Market Securities are valued at the last sales price on such
exchange on the day of valuation, or, if there was no sale on such day, at the
mean between the last bid and asked prices on such day or at the bid price on
such day in the absence of an asked price. Securities that are actively traded
in the over-the-counter market, including listed securities for which the
primary market is believed by the Manager, in consultation with the subadviser,
to be over-the-counter, are valued by an independent pricing agent or principal
market maker. U.S. Government securities for which market quotations are
available shall be valued at a price provided by an independent pricing agent or
broker-dealer. Privately placed securities including equity securities for which
market prices may be obtained from primary dealers shall be valued at the bid
prices provided by such primary dealers. Securities for which market quotations
are not readily available, may be valued using the last available market
quotation for a period not to exceed five days, provided the Manager and
Subadviser feel this is representative of market value; after that period, such
securities and other securities are valued in good faith under procedures
adopted by the Trustees.
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.
All securities are valued as of 4:15 p.m., New York time.
Repurchase Agreements: In connection with transactions in repurchase agreements
with U.S. financial institutions, it is the Fund's policy that its custodian or
designated subcustodians, as the case may be under triparty repurchase
agreements, take possession of the underlying securities, the value of which
exceeds the principal amount of the repurchase transaction including accrued
interest. 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.
Options: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates or foreign currency exchange rates with respect to
securities or currencies which the Fund currently owns or intends to purchase.
When the Fund purchases an option, it pays a premium and an amount equal to that
premium is recorded as an investment. When the Fund writes an option, it
receives a premium and an amount equal to that premium is recorded as a
liability. The investment or liability is adjusted daily to reflect the current
market value of the option. If an option expires unexercised, the Fund realizes
a gain or loss to the extent of the premium received or paid. If an option is
exercised, the premium received or paid is an adjustment to the proceeds from
the sale or the cost basis of the purchase in determining whether the Fund has
realized a gain or loss. The difference between the premium and the amount
received or paid on effecting a closing purchase or sale transaction is also
treated as a realized gain or loss. Gain or loss on purchased options is
included in net realized gain (loss) on investment transactions. Gain or loss on
written options is presented separately as net realized gain (loss) on written
option transactions.
The Fund, as writer of an option, has no control over whether the underlying
securities or currencies may be sold (called) or purchased (put). As a result,
the Fund bears the market risk of an unfavorable change in the price of the
security or currency underlying the written option. The Fund, as purchaser of an
option, bears the risk of the potential inability of the counterparties to meet
the terms of their contracts.
- --------------------------------------------------------------------------------
21
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
Notes to Financial Statements GROWTH FUND
- --------------------------------------------------------------------------------
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities - at the
closing daily rates of exchange.
(ii) purchases and sales of investment securities, income and expenses - at the
rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the fiscal period, the Fund does not isolate
that portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of securities held at the end of the period. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of long-term portfolio securities sold
during the period. Accordingly, these realized foreign currency gains and losses
are included in the reported net realized gains and losses on investment
transactions.
Net realized gains and losses on foreign currency transactions represent net
foreign exchange gains or losses from holdings of foreign currencies, currency
gains or losses realized between the trade and settlement dates on security
transactions, and the difference between the amounts of dividends, interest and
foreign taxes recorded on the Fund's books and the U.S. dollar equivalent
amounts actually received or paid. Net unrealized currency gains or losses from
valuing foreign currency denominated assets and liabilities (other than
investments) at fiscal period end exchange rates are reflected as a component of
net unrealized appreciation on investments and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings or on specific receivables and payables denominated in a foreign
currency. The contracts are valued daily at current exchange rates and any
unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments. Gain or loss is realized on the settlement date of
the contract equal to the difference between the settlement value of the
original and renegotiated forward contracts. This gain or loss, if any, is
included in net realized gain (loss) on foreign currency transactions. Risks may
arise upon entering into these contracts from the potential inability of the
counterparties to meet the terms of their contracts.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses from investment and
currency transactions 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 unrealized and
realized 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: The Fund expects to pay dividends of net investment
income semi-annually, and distributions of net realized capital and currency
gains, if any, annually. 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.
Taxes: For federal income tax purposes, each Fund is treated as a separate
taxpaying entity. It is the intent of the Fund to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to 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 Offering Cost: The Fund incurred approximately $98,000 in connection
with the initial offering of the Fund. Offering costs are being amortized over a
period of 12 months ending November 1999.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position 93-2: Determination,
Disclosure and Financial Statement Presentation of
- --------------------------------------------------------------------------------
22
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
Notes to Financial Statements GROWTH FUND
- --------------------------------------------------------------------------------
Income, Capital Gain, and Return of Capital Distributions by Investment
Companies. The effect of applying this statement was to decrease accumulated net
realized gain on investments and foreign currency transactions by $6,222,
increase undistributed net investment income by $113,000 and decrease paid-in
capital in excess of par by $106,778 due to nondeductible stock issuance
expenses and realized foreign currency gains. Net investment loss, net realized
loss and net assets were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with PIFM. Pursuant to this agreement, PIFM
manages the investment operations of the Fund, administers the Fund's affairs
and supervises the Advisers' performance of all investment advisory services.
PIFM pays for the costs pursuant to the advisory agreements, the cost of
compensation of officers of the Fund, occupancy and certain clerical and
accounting 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 .75% of the average daily net assets of the Fund. PIFM, in turn, pays the
Advisers' fees, computed daily and paid monthly, equal to the annual rate
specified below based on the average daily net assets of the Fund segments they
manage.
<TABLE>
<CAPTION>
Fee Paid By PIFM
Advisers to Advisers
- ------------------------------ ---------------------------------
<S> <C>
Jennison Associates LLC .30% with respect to the first
$300 million; .25% for amounts
in excess of $300 million
The Prudential Investment N/A1
Corporation ('PIC')
Lazzard Asset Management .40%
Pacific Investment Management
Company .25%
Franklin Advisers, Inc. .50%
The Dreyfus Corporation .45%
1Under the Advisory Agreement between PIFM and PIC, PIC is
reimbursed by PIFM for its reasonable costs and expenses.
</TABLE>
The Fund has a distribution agreement with Prudential Investment Management
Services LLC ('PIMS') which acts as the distributor of the Class A, Class B,
Class C and Class Z shares of the Fund. The Fund compensates 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 PIMS. The distribution fees are accrued daily and
payable monthly. No distribution or service fees are paid to PIMS as distributor
for Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates 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 .25 of 1%, 1% and 1% of the average daily net
assets of the Class A, B and C shares respectively, for the period ended July
31, 1999.
PIMS has advised the Fund that it has received approximately $342,700 and
$117,100 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively, during the period ended July 31, 1999.
PIMS has advised the Fund that for the period ended July 31, 1999, it has
received approximately $57,000 and $24,200 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIMS, PIC and PIFM are indirect, wholly owned subsidiaries of The Prudential
Insurance Company of America.
As of March 11, 1999, the Fund, along with other affiliated registered
investment companies (the 'Funds'), entered into a syndicated credit agreement
('SCA') with an unaffiliated lender. The maximum commitment under the SCA is $1
billion. The Funds pay a commitment fee at an annual rate of .065 of 1% on the
unused portion of the credit facility, which is accrued and paid quarterly on a
pro rata basis by the Funds. The SCA expires on March 9, 2000. Prior to March
11, 1999, the Funds had a credit agreement with a maximum commitment of
$200,000,000. The commitment fee was .055 of 1% on the unused portion of the
credit facility. The Fund did not borrow any amounts pursuant to either
agreement during the period ended July 31, 1999. The purpose of the agreements
is to serve as an alternative source of funding for capital share redemptions.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the period ended July 31, 1999, the
Fund incurred fees of approximately $52,000 for the services of PMFS. As of July
31, 1999 approximately $8,800 of such fees were due to PMFS. Transfer agent fees
and expenses in the Statement of Operations include certain out-of-pocket
expenses paid to nonaffiliates.
- --------------------------------------------------------------------------------
23
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
Notes to Financial Statements GROWTH FUND
- --------------------------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term investments,
for the period ended July 31, 1999 were $188,413,251 and $80,627,111,
respectively.
At July 31, 1999, the Fund had outstanding forward currency contracts to sell
foreign currency, as follows:
<TABLE>
<CAPTION>
Value at
Foreign Currency Settlement Date Current
Sale Contracts Payable Value Depreciation
- --------------------- --------------- -------- ---------------
<S> <C> <C> <C>
Euro Dollars,
expiring 9/13/99... $ 511,104 $536,612 $ (25,508)
--------------- -------- ---------------
--------------- -------- ---------------
</TABLE>
The United States federal income tax basis of the Fund's investments as of July
31, 1999 was $117,808,661 and accordingly, net unrealized appreciation of
investments for federal income tax purposes was $6,098,509 (gross unrealized
appreciation--$10,169,644, gross unrealized depreciation--$4,071,135).
For federal income tax purposes, the Fund is electing to treat net currency
losses of approximately $19,300 incurred in the nine-month period ended July 31,
1999 as having been incurred in the following fiscal year.
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. As of July 31, 1999, the Fund
had a 1.43% undivided interest in the repurchase agreements in the joint
account. The undivided interest for the Fund represents $9,117,000 in principal
amount. As of such date, each repurchase agreement in the joint account and the
collateral therefore were as follows:
Warburg Dillon Read LLC, 5.07% in the principal amount of $180,000,000,
repurchase price $180,076,050, due 8/2/99. The value of the collateral including
accrued interest is $183,604,710.
Bear, Stearns & Co. Inc., 5.06% in the principal amount of $180,000,000,
repurchase price $180,075,900, due 8/2/99. The value of the collateral including
accrued interest is $183,904,910.
Salomon Smith Barney Inc., 5.06% in the principal amount of $180,000,000,
repurchase price $180,075,900, due 8/2/99. The value of the collateral including
accrued interest is $184,504,113.
Deutsche Bank Securities Inc., 5.06% in the principal amount of $96,548,000,
repurchase price $96,588,711, due 8/2/99. The value of the collateral including
accrued interest is $98,479,006.
- ------------------------------------------------------------
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 front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. 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 qualified 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. Of the
10,591,351 shares of beneficial interest issued and outstanding at July 31,
1999, Prudential owned 1,469,254.
The Fund has authorized an unlimited number of shares of beneficial interest at
$.001 par value per share.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- -----------
<S> <C> <C>
November 18, 1998(a) through
July 31, 1999:
Shares sold......................... 2,104,901 $22,082,276
Shares issued in reinvestment of
dividends......................... 11,721 130,122
Shares reacquired................... (257,414) (2,765,509)
---------- -----------
Net increase in shares outstanding
before conversion................. 1,859,208 19,446,889
Shares issued upon conversion from
Class B........................... 15,246 163,070
---------- -----------
Net increase in shares
outstanding....................... 1,874,454 $19,609,959
---------- -----------
---------- -----------
<CAPTION>
Class B
- ------------------------------------
<S> <C> <C>
November 18, 1998(a) through
July 31, 1999:
Shares sold......................... 5,754,697 $60,238,518
Shares issued in reinvestment of
dividends......................... 14,797 163,946
Shares reacquired................... (349,450) (3,747,204)
---------- -----------
Net increase in shares outstanding
before conversion................. 5,420,044 56,655,260
</TABLE>
- --------------------------------------------------------------------------------
24
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
Notes to Financial Statements GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
- ------------------------------------ ---------- -----------
Shares reacquired upon conversion
into Class A...................... (15,291) $ (163,070)
<S> <C> <C>
---------- -----------
Net increase in shares
outstanding....................... 5,404,753 $56,492,190
---------- -----------
---------- -----------
<CAPTION>
Class C
- ------------------------------------
<S> <C> <C>
November 18, 1998(a) through
July 31, 1999:
Shares sold......................... 2,362,554 $24,279,763
Shares issued in reinvestment of
dividends......................... 6,349 69,993
Shares reacquired................... (308,226) (3,281,900)
---------- -----------
Net increase in shares
outstanding....................... 2,060,677 $21,067,856
---------- -----------
---------- -----------
<CAPTION>
Class Z
- ------------------------------------
<S> <C> <C>
November 18, 1998(a) through
July 31, 1999:
Shares sold......................... 2,627,588 $26,288,697
Shares issued in reinvestment of
dividends......................... 14,003 152,546
Shares reacquired................... (1,393,124) (15,147,603)
---------- -----------
Net increase in shares
outstanding....................... 1,248,467 $11,293,640
---------- -----------
---------- -----------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
25
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
Financial Highlights GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
November 18, 1998(a) Through July 31, 1999
---------------------------------------------------------------------
Class A Class B Class C Class Z
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 10.00 $ 10.00 $ 10.00 $ 10.00
------ ------ ------ ------
Income from investment operations:
Net investment income(d)............................... .12 .06 .06 .13
Net realized and unrealized gain on investments and
foreign currencies.................................. .83 .83 .83 .84
------ ------ ------ ------
Total from investment operations.................... .95 .89 .89 .97
------ ------ ------ ------
Less distributions:
Dividends from net investment income................... (.09) (.04) (.04) (.10)
------ ------ ------ ------
Net asset value, end of period......................... $ 10.86 $ 10.85 $ 10.85 $ 10.87
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN(b)........................................ 9.47% 8.99% 8.99% 9.70%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $ 20,372 $ 58,678 $ 22,375 $ 13,578
Average net assets (000)............................... $ 12,286 $ 36,645 $ 18,346 $ 21,914
Ratios to average net assets:(c)
Expenses, including distribution fees............... 1.88% 2.63% 2.63% 1.63%
Expenses, excluding distribution fees............... 1.63% 1.63% 1.63% 1.63%
Net investment income............................... 1.59% .85% .79% 1.68%
Portfolio turnover rate................................ 96% 96% 96% 96%
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day and includes reinvestment of dividends and
distributions. Total return for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Calculated based upon weighted average shares outstanding during the period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 26
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
Report of Independent Accountants GROWTH FUND
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Diversified Funds--
Prudential Diversified Moderate Growth Fund
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 Diversified
Funds--Prudential Diversified Moderate Growth Fund (the 'Fund') at July 31,
1999, and the results of its operations, the changes in its net assets and the
financial highlights for the period November 18, 1998 (commencement of
operations) through July 31, 1999, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as 'financial statements') are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at July 31, 1999 by correspondence with the custodian
and brokers, provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
September 20, 1999
- --------------------------------------------------------------------------------
27
<PAGE>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
Tax Information (Unaudited) GROWTH FUND
- --------------------------------------------------------------------------------
We are required by the Internal Revenue Code to advise you within 60 days of the
Fund's fiscal year end (July 31, 1999) as to the federal income tax status of
dividends paid by the Fund during such fiscal period. Accordingly, we are
advising you that during its fiscal period ended July 31, 1999, the Fund paid an
ordinary distribution for Class A, Class B, Class C and Class Z shares of $.09
per share, $.04 per share, $.04 per share and $.10 per share, respectively,
which is taxable as ordinary income. Further, we wish to advise you that 34% of
the ordinary income dividends paid in the fiscal period ended July 31, 1999
qualified for the corporate dividend received deduction available to corporate
taxpayers.
We are required by Massachusetts, Missouri and Oregon to inform you that
dividends which have been derived from interest on federal obligations are not
taxable to shareholders. Please be advised that 13.63% of the dividends paid
from ordinary income in the fiscal period ended July 31, 1999, qualify for each
of these states' tax exclusion.
For the purpose of preparing your annual federal income tax return, however, you
should report the amounts as reflected on the appropriate Form 1099-DIV or
substitute 1099-DIV.
- --------------------------------------------------------------------------------
28
<PAGE>
Getting the Most from Your Prudential Mutual Fund
How many times have you read these reports--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.
Collateralized Mortgage Obligations (CMOs): Mortgage-backed bonds that separate
mortgage pools into different maturity classes, called tranches. 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 instruments 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. 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 product) 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" prices of a security, or between the
yields of two similar maturity bonds.
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
Some mutual fund shareholders won't ever read this--they don't read annual and
semiannual reports. It's quite understandable. These annual and semi-annual
reports are prepared to comply with federal regulations, and are often written
in language that is difficult to understand. So, when most people run into
those particularly daunting sections of these reports, they don't read them.
We think that's a mistake.
At Prudential Mutual Funds, we've made some changes to our report to make it
easier to understand and more pleasant to read. We hope you'll find it
profitable to spend a few minutes familiarizing yourself with your investment.
Here's what you'll find in the report:
Performance at a Glance
Since an investment's performance is often a shareholder's primary concern, we
present performance information in two different formats. You'll find it first
on the "Performance at a Glance" page where we compare the Fund and the
comparable average calculated by Lipper, Inc., a nationally recognized mutual
fund rating agency. We report both the cumulative total returns and the average
annual total returns. The cumulative total return is the total amount of income
and appreciation the Fund has achieved in various time periods. The average
annual total return is an annualized representation of the Fund's performance.
It gives you an idea of how much the Fund has earned in an average year for a
given time period. Under the performance box, you'll see legends that explain
the performance information, whether fees and sales charges have been included
in returns, and the inception dates for the Fund's share classes.
See the performance comparison charts at the back of the report for more
performance information. Please keep in mind that past performance is not
indicative of future results.
Portfolio Manager's Report
The portfolio manager, who invests your money for you, reports on successful--
and not-so-successful--strategies in this section of your report. Look for
recent purchases and sales here, as well as information about the sectors the
portfolio manager favors, and any changes that are on the drawing board.
Portfolio of Investments
This is where the report begins to appear technical, but it's really just a
listing of each security held at the end of the reporting period, along with
valuations and other information. Please note that sometimes we discuss a
security in the Portfolio Manager's Report that doesn't appear in this listing
because it was sold before the close of the reporting period.
<PAGE>
Statement of Assets and Liabilities
The balance sheet shows the assets (the value of the Fund's holdings),
liabilities (how much the Fund owes), and net assets (the Fund's equity, or
holdings after the Fund pays its debts) as of the end of the reporting period.
It also shows how we calculate the net asset value per share for each class of
shares. The net asset value is reduced by payment of your dividend, capital
gain, or other distribution, but remember that the money or new shares are
being paid or issued to you. The net asset value fluctuates daily, along with
the value of every security in the portfolio.
Statement of Operations
This is the income statement, which details income (mostly interest and
dividends earned) and expenses (including what you pay us to manage your
money). You'll also see capital gains here--both realized and unrealized.
Statement of Changes in Net Assets
This schedule shows how income and expenses translate into changes in net
assets. The Fund is required to pay out the bulk of its income to shareholders
every year, and this statement shows you how we do it--through dividends and
distributions--and how that affects the net assets. This statement also shows
how money from investors flowed into and out of the Fund.
Notes to Financial Statements
This is the kind of technical material that can intimidate readers, but it does
contain useful information. The Notes provide a brief history and explanation
of your Fund's objectives. In addition, they outline how Prudential Mutual
Funds prices securities. The Notes also explain who manages and distributes the
Fund's shares and, more importantly, how much they are paid for doing so.
Finally, the Notes explain how many shares are outstanding and the number
issued and redeemed over the period.
Financial Highlights
This information contains many elements from prior pages, but on a per-share
basis. It is designed to help you understand how the Fund performed, and to
compare this year's performance and expenses to those of prior years.
Independent Auditor's Report
Once a year, an outside auditor looks over our books and certifies that the
information is fairly presented and complies with generally accepted accounting
principles.
Tax Information
This is information which we report annually about how much of your total
return is taxable. Should you have any questions, you may want to consult a
tax adviser.
Performance Comparison
These charts are included in the annual report and are required by the
Securities Exchange Commission. Performance is presented here as a hypothetical
$10,000 investment in the Fund since its inception or for 10 years (whichever
is shorter). To help you put that return in context, we are required to include
the performance of an unmanaged, broad-based securities index as well. The
index does not reflect the cost of buying the securities it contains or the
cost of managing a mutual fund. Of course, the index holdings do not mirror
those of the Fund--the index is a broad-based reference point commonly used by
investors to measure how well they are doing. A definition of the selected
index is also provided. Investors cannot invest directly in an index.
<PAGE>
Comparing a $10,000 Investment
- -------------------------------------------------------------------------------
Prudential Diversified Moderate Growth Fund vs. the S&P 500 Index
Class A
(GRAPH)
Class B
(GRAPH)
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.
These graphs compare a $10,000 investment in the Prudential Diversified
Moderate Growth Fund (Class A, B, C, and Z shares) with a similar investment
in the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index) by
portraying the account values at the commencement of operations of Class A, B,
C, and Z shares, and at the end of the fiscal year (July 31), as measured on a
quarterly basis, beginning in 1998 for Class A, B, C, and Z shares. For
purposes of the graphs, and unless otherwise indicated, it has been assumed
that (a) the maximum applicable front-end sales charge was deducted from the
initial $10,000 investment in Class A and Class C 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 July
31, 1999; (c) all recurring fees (including management fees) were deducted; and
(d) all dividends and distributions were reinvested. Class B shares will
automatically convert to Class A shares, on a quarterly basis, approximately
seven years after purchase.
<PAGE>
Class C
(GRAPH)
Class Z
(GRAPH)
Class Z shares are not subject to a sales charge or distribution and service
(12b-1) fees. Since the Fund has been in existence less than one year, no
average annual total returns are presented.
The S&P 500 Index is an unmanaged index of 500 stocks of large U.S. companies
that give a broad look at how stock prices have performed. The total return of
the S&P 500 Index 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 S&P 500 Index is not the only index that may be
used to characterize performance of equity funds. The securities in the S&P 500
Index may differ substantially from the securities in the Fund. Other indexes
may portray different comparative performance. Investors cannot invest directly
in an index.
These graphs are furnished to you in accordance with SEC regulations.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Class NASDAQ Cusip
A -- 74432F505
B DMGBX 74432F604
C -- 74432F703
Z PDMZX 74432F802
Trustees
Eugene C. Dorsey
Douglas H. McCorkindale
Thomas T. Mooney
John R. Strangfeld
Officers
John R. Strangfeld, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
David F. Connor, Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three, 100 Mulberry Street, Newark, NJ 07102-4077
Investment Sub-Advisers
The Prudential Investment Corporation
Prudential Plaza, Newark, NJ 07102-3777
Jennison Associates LLC
466 Lexington Avenue, New York, NY 10017
Franklin Advisers, Inc.
777 Mariners Island Blvd., San Mateo, CA 94404
The Dreyfus Corporation
200 Park Avenue, New York, NY 10166
Lazard Asset Management
30 Rockefeller Plaza, New York, NY 10112
Pacific Investment Management Company
840 Newport Center Drive, Newport Beach, CA 92660
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
Raritan Plaza One, Edison, NJ 08837
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas, New York, NY 10036
Legal Counsel
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W., Washington, DC 20036
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.
MF186E3
