<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 4, 1999
SECURITIES ACT REGISTRATION NOS. 333-60561
INVESTMENT COMPANY ACT REGISTRATION NO. 811-08915
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [X]
POST-EFFECTIVE AMENDMENT NO. 3 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 3 [X]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
PRUDENTIAL DIVERSIFIED FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-1495
DAVID F. CONNOR, ESQ.
100 MULBERRY STREET
GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
ARTHUR J. BROWN, ESQ.
KIRKPATRICK & LOCKHART LLP
1800 MASSACHUSETTS AVE., N.W.
WASHINGTON, D.C. 20036
------------------------
It is proposed that this filing will become effective
(check appropriate box):
[ ] immediately upon filing pursuant to
paragraph (b)
[X] on (October 7, 1999) pursuant to paragraph
(b)
[ ] 60 days after filing pursuant to paragraph
(a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph
(a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of
Rule 485
If appropriate, check the following box:
[X] this post-effective amendment designates a
new effective date for a previously filed
post-effective amendment.
<TABLE>
<S> <C>
Title of Securities Being Registered.......... Shares of Beneficial Interest, $.001 par value
per share
</TABLE>
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<PAGE> 2
PRUDENTIAL DIVERSIFIED
CONSERVATIVE
GROWTH FUND
PRUDENTIAL DIVERSIFIED MODERATE
GROWTH FUND
PRUDENTIAL DIVERSIFIED HIGH
GROWTH FUND
PROSPECTUS: OCTOBER 4, 1999
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the Trust's shares, nor has the SEC determined that this
prospectus is complete or accurate. It is a criminal offense to state otherwise.
[PRUDENTIAL INVESTMENT LOGO]
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
1 RISK/RETURN SUMMARY
1 Investment Objectives and Principal Strategies
9 Principal Risks
11 Fees and Expenses
15 HOW THE FUNDS INVEST
15 Investment Objectives and Policies
23 Other Investments and Strategies
27 Investment Risks
33 HOW THE TRUST IS MANAGED
33 Board of Trustees
33 Manager
34 Advisers and Portfolio Managers
38 Distributor
38 Year 2000 Readiness Disclosure
39 FUND DISTRIBUTIONS AND TAX ISSUES
39 Distributions
40 Tax Issues
42 If You Sell or Exchange Your Shares
43 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE TRUST
43 How to Buy Shares
51 How to Sell Your Shares
54 How to Exchange Your Shares
57 FINANCIAL HIGHLIGHTS
</TABLE>
FOR MORE INFORMATION (Back Cover)
PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 4
RISK/RETURN SUMMARY
This section highlights key information about the investment
portfolios (the Funds) of PRUDENTIAL DIVERSIFIED FUNDS (the Trust). Additional
information follows this summary.
INVESTMENT OBJECTIVES AND PRINCIPAL STRATEGIES
The following summarizes the investment objectives, principal strategies and
principal risks for each of the Funds. For more information on the risks
associated with the Funds, see "Principal Risks" below. While we make every
effort to achieve the investment objective for each Fund, we can't guarantee
success.
INTRODUCTION
A study has shown that the greatest impact on long-term investment returns is
attributable to an investor's asset allocation decisions (i.e., the mix of
stocks, bonds and money market investments) rather than market timing or
individual security selection. (1) Many investors do not have the time, the
experience or the resources to implement a sound asset allocation strategy on
their own. Investors have increasingly looked to mutual funds as a way to
diversify their investments.
Prudential Diversified Funds is designed for investors who want investment
professionals to make their asset allocation decisions. The Trust offers three
Funds designed to provide investors with a means to manage their long-term
investments prudently in light of their personal investment goals and risk
tolerance. Each Fund pursues its investment objective by investing in a mix of
equity and fixed-income securities appropriate for a particular type of
investor. Each Fund may serve as the cornerstone of a larger investment
portfolio.
(1) Source: Financial Analysts Journal. May/June 1991: "Determinants of
Portfolio Performance II: An Update," by Gary Brinson, Brian Singer and
Gilbert Beebower. Results are based on the 10-year performance records of
82 pension funds. The study updates and supports a similar study done in
1986.
1
<PAGE> 5
RISK/RETURN SUMMARY
HOW DO THE FUNDS DIFFER?
Each Fund has a distinct investment objective and is situated differently along
the risk/return spectrum.
[RISK/RETURN CHART]
High
R Growth
Fund
I Moderate
Growth
Fund
S
Conservative
Growth
K Fund
R E T U R N
The risk/return balance of each Fund depends upon the proportion of assets
it allocates to different types of investments. Of course, higher risk does not
always result in higher returns. Historic performance is no guarantee of future
results.
Prudential Investments Fund Management LLC (PIFM or the Manager) has
developed an asset allocation strategy for the Funds designed to provide a mix
of investment types and styles that is appropriate for investors with a
conservative, moderate or aggressive investment orientation.
PRUDENTIAL DIVERSIFIED CONSERVATIVE GROWTH FUND (CONSERVATIVE GROWTH FUND)
may be appropriate for investors such as those in early retirement, who need to
draw income from investments while obtaining a measure of long-term capital
growth as a hedge against inflation. The Fund's focus on bonds for stability of
principal also makes it suitable for conservative investors seeking income and
modest growth, especially those concerned about market volatility.
RISKS
Market risk
Style risk
Credit risk
Interest rate risk
Small and medium size company risk
2 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 6
RISK/RETURN SUMMARY
PRUDENTIAL DIVERSIFIED MODERATE GROWTH FUND (MODERATE GROWTH FUND) may be
appropriate for investors looking for a balance of long-term capital growth and
current income. The Fund offers a diversified approach to equities for long-term
growth, but will normally maintain a substantial component of fixed-income
securities to provide current income and a measure of stability (e.g., investors
in their 50s who are saving on a regular basis for retirement and who plan to
retire in their early to mid 60s).
RISKS
Market risk
Style risk
Small and medium size company risk
Foreign market risk
Credit risk
Interest rate risk
PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND (HIGH GROWTH FUND) may be
appropriate for investors seeking long-term capital growth. In addition,
investors who already have a diversified portfolio may find this allocation
suitable as an additional growth component (e.g., investors in their 20s, 30s or
40s who are saving for retirement and who plan to retire in their early to mid
60s).
RISKS
Market risk
Style risk
Foreign market risk
Small and medium size company risk
An investor can choose any of these three Funds, depending on his or her
financial situation, personal investment objectives, investment horizon and
level of risk tolerance.
HOW ARE THE FUNDS MANAGED?
The Manager has contracted with several highly regarded subadvisers (called
Advisers) to manage the assets of each Fund. Each Adviser manages a portion of a
Fund's assets, focusing on a particular type and style of
<PAGE> 7
RISK/RETURN SUMMARY
investing. The Manager monitors the performance of each Fund's Advisers and
allocates the Fund's assets among its Advisers.
The Manager believes that its asset allocation strategy and multi-Adviser
approach will enhance the performance of the Funds and reduce their volatility.
First, the Manager has identified a select group of proven, experienced
Advisers. Although each Adviser will focus the management of its Fund segment on
a particular type and style of investing, the Manager believes that the combined
efforts of several Advisers will result in prudently diversified Funds.
Secondly, the Manager believes that, at any given time, certain investment types
and styles will generate higher returns than others. Accordingly, the Manager
believes that diversifying each Fund among a variety of investment types and
styles will reduce volatility.
CONSERVATIVE GROWTH FUND
The Fund's investment objective is to seek to provide CURRENT INCOME and a
reasonable level of CAPITAL APPRECIATION. This means that we seek investments
that will pay income and investments that will increase in value. The Fund seeks
to achieve its objective by investing in a diversified portfolio of fixed-income
and equity securities. The table identifies the Fund's Advisers and the Fund
segments they manage.
<TABLE>
<CAPTION>
TARGET
ALLOCATION OF PRIMARY
ADVISER FUND'S ASSETS ASSET CLASS INVESTMENT TYPE/STYLE
------- ------------- ----------- ---------------------
<S> <C> <C> <C>
Jennison Associates LLC 15% Equities Growth-oriented, focusing
on large-cap stocks
The Prudential Investment 15% Equities Value-oriented, focusing
Corporation on large-cap stocks
Franklin Advisers, Inc. 5% Equities Growth-oriented, focusing
on small-cap and
mid-cap stocks
The Dreyfus Corporation 5% Equities Value-oriented, focusing
on small-cap and
mid-cap stocks
Pacific Investment Management 40% Fixed High-quality debt
Company Income instruments
The Prudential Investment 20% Fixed High-yield debt, including
Corporation Income junk bonds and emerging
market debt
</TABLE>
4 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 8
RISK/RETURN SUMMARY
In response to market developments, the Manager may rebalance the
allocation of the Fund's assets or may add or eliminate Fund segments in
accordance with the Fund's investment objective and the policies described
below.
The Fund will normally invest approximately 60% of its total assets in DEBT
OBLIGATIONS issued or guaranteed by the U.S. GOVERNMENT and its agencies, as
well as debt obligations issued by U.S. COMPANIES, FOREIGN COMPANIES AND FOREIGN
GOVERNMENTS and their agencies. The Fund may invest in MORTGAGE-RELATED
SECURITIES issued or guaranteed by U.S. government entities and in
privately-issued, mortgage-related securities (not issued or guaranteed by the
U.S. government). These investments may include collateralized mortgage
obligations and stripped mortgage-backed securities. We may also invest in
ASSET-BACKED SECURITIES. The debt obligations held by the Fund will normally
have a dollar-weighted average maturity of between 4 and 15 years.
We may invest up to 35% of the Fund's total assets in HIGH-YIELD DEBT
OBLIGATIONS -- also known as "JUNK BONDS" -- which are rated at least B by
Standard & Poor's Ratings Group (S&P), Moody's Investors Service, Inc. (Moody's)
or another major rating service, and unrated debt obligations that we believe
are comparable in quality. The Fund may continue to hold an obligation even if
it is later downgraded or no longer rated.
We may also invest up to 25% of the Fund's total assets in FOREIGN DEBT
OBLIGATIONS, including up to 10% of its total assets in debt obligations of
issuers in emerging markets.
The Fund will normally invest approximately 40% of its total assets in
COMMON STOCKS OF U.S. AND FOREIGN COMPANIES. The Fund may invest up to 15% of
its total assets in STOCKS OF FOREIGN COMPANIES, including companies in emerging
markets. These securities include American Depositary Receipts, American
Depositary Shares, Global Depositary Receipts and European Depositary Receipts,
which are certificates representing an equity investment in a foreign company.
The foreign debt obligations and foreign stocks held by the Fund will
normally be denominated in foreign currencies, including the euro -- a
multinational currency unit.
5
<PAGE> 9
RISK/RETURN SUMMARY
MODERATE GROWTH FUND
The Fund's investment objective is to seek to provide CAPITAL APPRECIATION and a
reasonable level of CURRENT INCOME. This means that we seek investments that
will increase in value and investments that will pay income. The Fund seeks to
achieve its objective by investing in a diversified portfolio of equity and
fixed-income securities. The table below identifies the Fund's Advisers and the
Fund segments they manage.
<TABLE>
<CAPTION>
TARGET
ALLOCATION OF PRIMARY
ADVISER FUND'S ASSETS ASSET CLASS INVESTMENT TYPE/STYLE
------- ------------- ----------- ---------------------
<S> <C> <C> <C>
Jennison Associates LLC 20% Equities Growth-oriented, focusing
on large-cap stocks
The Prudential Investment 20% Equities Value-oriented, focusing
Corporation on large-cap stocks
Franklin Advisers, Inc. 7.5% Equities Growth-oriented, focusing
on small-cap and
mid-cap stocks
The Dreyfus Corporation 7.5% Equities Value-oriented, focusing
on small-cap and
mid-cap stocks
Lazard Asset Management 10% International Stocks of foreign
Equities companies
Pacific Investment 20% Fixed High-quality debt
Management Company Income instruments
The Prudential Investment 15% Fixed High-yield debt, including
Corporation Income junk bonds and emerging
markets debt
</TABLE>
In response to market developments, the Manager may rebalance the
allocation of the Fund's assets or may add or eliminate Fund segments in
accordance with the Fund's investment objective and the policies described
below.
The Fund will normally invest approximately 65% of its total assets in
COMMON STOCKS OF U.S. AND FOREIGN COMPANIES. The Fund may invest up to 25% of
its total assets in STOCKS OF FOREIGN COMPANIES, including companies in emerging
markets. These securities include American Depositary Receipts, American
Depositary Shares, Global Depositary Receipts and European Depositary Receipts,
which are certificates representing an equity investment in a foreign company.
The foreign securities held by the Fund normally will
6 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 10
RISK/RETURN SUMMARY
be denominated in foreign currencies, including the euro -- a multinational
currency unit.
The Fund will normally invest approximately 35% of its total assets in DEBT
OBLIGATIONS issued or guaranteed by the U.S. GOVERNMENT and its agencies, as
well as debt obligations issued by U.S. COMPANIES, FOREIGN COMPANIES AND FOREIGN
GOVERNMENTS and their agencies. The Fund may invest in MORTGAGE-RELATED
SECURITIES issued or guaranteed by U.S. government entities and in privately
issued, mortgage-related securities (not issued or guaranteed by the U.S.
government). These investments may include collateralized mortgage obligations
and stripped mortgage-backed securities. We may also invest in ASSET-BACKED
SECURITIES. The debt obligations held by the Fund will normally have a
dollar-weighted average maturity of between 4 and 15 years.
We may invest up to 35% of the Fund's total assets in HIGH-YIELD DEBT
OBLIGATIONS -- also known as "JUNK BONDS" -- which are rated at least B by S&P,
Moody's or another major rating service, and unrated debt obligations that we
believe are comparable in quality. The Fund may continue to hold an obligation
even if it is later downgraded or no longer rated.
We may also invest up to 25% of the Fund's total assets in FOREIGN DEBT
OBLIGATIONS, including up to 10% of its total assets in debt obligations of
issuers in emerging markets.
7
<PAGE> 11
RISK/RETURN SUMMARY
HIGH GROWTH FUND
The Fund's investment objective is to seek to provide long-term CAPITAL
APPRECIATION. This means that we seek investments that will increase in value.
The Fund seeks to achieve its objective by investing in a diversified portfolio
of equity securities. The table below identifies the Fund's Advisers and the
Fund segments they manage.
<TABLE>
<CAPTION>
TARGET
Allocation of PRIMARY
Adviser Fund's Assets Asset Class Investment Type/Style
------- ------------- ----------- ---------------------
<S> <C> <C> <C>
Jennison Associates LLC 25% Equities Growth-oriented, focusing
on large-cap stocks
The Prudential Investment 25% Equities Value-oriented, focusing
Corporation on large-cap stocks
Franklin Advisers, Inc. 15% Equities Growth-oriented, focusing
on small-cap and
mid-cap stocks
The Dreyfus Corporation 15% Equities Value-oriented, focusing
on small-cap and
mid-cap stocks
Lazard Asset Management 20% International Stocks of foreign
Equities companies
</TABLE>
In response to market developments, the Manager may rebalance the
allocation of the Fund's assets or may add or eliminate Fund segments in
accordance with the Fund's investment objective and the policies described
below.
The Fund will normally invest substantially all of its assets in COMMON
STOCKS OF U.S. AND FOREIGN COMPANIES. The Fund may invest up to 35% of its total
assets in STOCKS OF FOREIGN COMPANIES, including companies in emerging markets.
These securities include American Depositary Receipts, American Depositary
Shares, Global Depositary Receipts and European Depositary Receipts, which are
certificates representing an equity investment in a foreign company. The foreign
securities held by the Fund normally will be denominated in foreign currencies,
including the euro -- a multinational currency unit.
8 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 12
RISK/RETURN SUMMARY
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Like any mutual
fund, an investment in a Fund could lose value, and you could lose money. The
following summarizes the principal risks of investing in the Funds. Unless
otherwise indicated, the following risks apply to each of the Funds.
MARKET RISK FOR COMMON STOCKS
Since the Funds invest in common stocks, there is the risk that the price of a
particular stock owned by a Fund could go down. Generally, the stock price of
large companies is more stable than the stock price of smaller companies, but
this is not always the case. In addition to an individual stock losing value,
the value of a market sector or of the equity market as a whole could go down.
In addition, different parts of a market can react differently to adverse
issuer, market, regulatory, political and economic developments.
SMALL AND MEDIUM SIZE COMPANY RISK
Each Fund has segments that are invested in stocks of small and medium-size
companies. These companies usually offer a smaller range of products and
services than larger companies. They may also have limited financial resources
and may lack management depth. As a result, the prices of stocks issued by small
and medium-size companies tend to fluctuate more than the stocks of larger, more
established companies.
STYLE RISK
Since some of the Fund segments focus on either a growth or value style, there
is the risk that a particular style may be out of favor for a period of time.
CREDIT RISK
The debt obligations in which the Conservative Growth and Moderate Growth Funds
invest are generally subject to the risk that the issuer may be unable to make
principal and interest payments when they are due.
MARKET RISK FOR DEBT OBLIGATIONS
Debt obligations are also subject to market risk, which is the possibility that
the market value of an investment may move up or down and that its movement
9
<PAGE> 13
RISK/RETURN SUMMARY
may occur quickly or unpredictably. Market risk may affect an industry, a sector
or the entire market.
INTEREST RATE RISK
Debt obligations with longer maturities typically offer higher yields, but are
subject to greater price shifts as a result of interest rate changes than debt
obligations with shorter maturities. The prices of debt obligations generally
move in the opposite direction to that of market interest rates.
FOREIGN MARKET RISK
Investing in foreign securities involves more risk than investing in securities
of U.S. issuers. Foreign markets -- especially emerging markets -- tend to be
more volatile than U.S. markets and are generally not subject to regulatory
requirements comparable to those in the U.S. The amount of income available for
distribution may be affected by our foreign currency gains or losses and certain
hedging activities. In addition, political developments and changes in currency
exchange rates may adversely affect the value of a Fund's foreign securities.
OTHER RISKS
The CONSERVATIVE GROWTH AND MODERATE GROWTH FUNDS may invest in mortgage-related
securities and asset-backed securities, which are subject to prepayment risk. If
these securities are prepaid, a Fund may have to replace them with
lower-yielding securities. Stripped mortgage-backed securities are generally
more sensitive to changes in prepayment and interest rates than other
mortgage-related securities.
The CONSERVATIVE GROWTH AND MODERATE GROWTH FUNDS may invest in
noninvestment-grade securities -- also known as "junk bonds" -- which have a
higher risk of default and tend to be less liquid than higher-rated securities.
These Funds may also invest in debt obligations of foreign issuers. Investing in
foreign securities presents additional risks.
For more information about the risks associated with the Funds, see "How
the Funds Invest -- Investment Risks."
An investment in a Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
10 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 14
RISK/RETURN SUMMARY
EVALUATING PERFORMANCE
Because the Funds have operated for less than one year, they have no performance
history as of the date of this prospectus.
FEES AND EXPENSES
These tables show the sales charges, fees and expenses that you may pay if you
buy and hold shares of each share class of the Funds -- Class A, B, C and Z.
Each share class has different sales charges -- known as "loads" -- and
expenses, but represents an investment in the same fund. Class Z shares are
available only to a limited group of investors. For more information about which
share class may be right for you, see "How to Buy, Sell and Exchange Shares of
the Funds."
SHAREHOLDER FEES(1) (PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) 5% None 1% None
Maximum deferred sales charge (load)
(as a percentage of the lower of original
purchase price or sale proceeds) None 5%(2) 1%(3) None
Maximum sales charge (load) imposed on
reinvested dividends and other distributions None None None None
Redemption fee None None None None
Exchange fee None None None None
</TABLE>
(1) Your broker may charge you a separate or additional fee for purchases and
sales of shares.
(2) The Contingent Deferred Sales Charge (CDSC) for Class B shares decreases by
1% annually to 1% in the fifth and sixth years and 0% in the seventh year.
Class B shares convert to Class A shares approximately seven years after
purchase.
(3) The CDSC for Class C shares is 1% for shares redeemed within 18 months of
purchase.
11
<PAGE> 15
RISK/RETURN SUMMARY
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
Class A Class B Class C Class Z
------- ------- ------- -------
<S> <C> <C> <C> <C>
Conservative Growth Fund
Management fees .75% .75% .75% .75%
+ Distribution and service (12b-1) fees .30% 1.00% 1.00% None
+ Other expenses .92% .92% .92% .92%
= Total annual Fund operating expenses 1.97% 2.67% 2.67% 1.67%
- Fee waiver(1) .05% 0% 0% 0%
= Net annual Fund operating expenses(1) 1.92% 2.67% 2.67% 1.67%
</TABLE>
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
Class A Class B Class C Class Z
------- ------- ------- -------
<S> <C> <C> <C> <C>
Moderate Growth Fund
Management fees .75% .75% .75% .75%
+ Distribution and service (12b-1) fees .30% 1.00% 1.00% None
+ Other expenses .88% .88% .88% .88%
= Total annual Fund operating expenses 1.93% 2.63% 2.63% 1.63%
- Fee waiver(1) .05% 0% 0% 0%
= Net annual Fund operating expenses(1) 1.88% 2.63% 2.63% 1.63%
</TABLE>
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
Class A Class B Class C Class Z
------- ------- ------- -------
<S> <C> <C> <C> <C>
High Growth Fund
Management fees .75% .75% .75% .75%
+ Distribution and service (12b-1) fees .30% 1.00% 1.00% None
+ Other expenses .73% .73% .73% .73%
= Total annual Fund operating expenses 1.78% 2.48% 2.48% 1.48%
- Fee waiver(1) .05% 0% 0% 0%
= Net annual Fund operating expenses(1) 1.73% 2.48% 2.48% 1.48%
</TABLE>
(1) For the fiscal year ending July 31, 2000, the Distributor of the Funds has
contractually agreed to reduce its distribution and service (12b-1) fees for
Class A shares to .25 of 1% of the average daily net assets of the Class A
shares.
12 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 16
RISK/RETURN SUMMARY
EXAMPLE
This example will help you compare the fees and expenses of each Fund's
different share classes and the cost of investing in each Fund with the cost of
investing in other mutual funds.
The example assumes that you invest $10,000 in a Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that
each Fund's operating expenses remain the same, except for the Distributor's
reduction of distribution and service (12b-1) fees for Class A shares of the
Funds during the first year. Although your actual costs may be higher or lower,
based on these assumptions, your costs would be:
<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
---- ----- ----- ------
<S> <C> <C> <C> <C>
CONSERVATIVE GROWTH FUND
Class A shares $685 $1,083 $1,505 $2,677
Class B shares $770 $1,129 $1,515 $2,755
Class C shares $967 $921 $1,501 $3,073
Class Z shares $170 $526 $907 $1,976
MODERATE GROWTH FUND
Class A shares $677 $1,057 $1,461 $2,587
Class B shares $766 $1,117 $1,495 $2,697
Class C shares $463 $909 $1,481 $3,034
Class Z shares $166 $514 $887 $1,933
HIGH GROWTH FUND
Class A shares $667 $1,027 $1,411 $2,483
Class B shares $751 $1,072 $1,419 $2,561
Class C shares $448 $864 $1,406 $2,885
Class Z shares $150 $467 $807 $1,766
</TABLE>
13
<PAGE> 17
RISK/RETURN SUMMARY
You would pay the following expenses on the same investment if you did not
sell your shares:
<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
---- ----- ----- ------
<S> <C> <C> <C> <C>
CONSERVATIVE GROWTH FUND
Class A shares $685 $1,083 $1,505 $2,677
Class B shares $270 $829 $1,415 $2,755
Class C shares $367 $921 $1,501 $3,073
Class Z shares $170 $526 $907 $1,976
MODERATE GROWTH FUND
Class A shares $677 $1,057 $1,461 $2,587
Class B shares $266 $817 $1,395 $2,697
Class C shares $363 $909 $1,481 $3,034
Class Z shares $166 $514 $887 $1,933
HIGH GROWTH FUND
Class A shares $667 $1,027 $1,411 $2,483
Class B shares $251 $772 $1,319 $2,561
Class C shares $348 $864 $1,406 $2,885
Class Z shares $150 $467 $807 $1,766
</TABLE>
14 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 18
- --------------------------------------------------------------------------------
HOW THE FUNDS INVEST
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
CONSERVATIVE GROWTH FUND
The Fund's investment objective is to seek to provide CURRENT INCOME and a
reasonable level of CAPITAL APPRECIATION. This means that we seek investments
that will pay income and investments that will increase in value. The Fund seeks
to achieve its objective by investing in a diversified portfolio of fixed-income
and equity securities.
FIXED-INCOME PORTION
In pursuing our objective, we normally invest approximately 60% of the Fund's
total assets in debt obligations issued or guaranteed by the U.S. GOVERNMENT and
its agencies, as well as debt obligations issued by U.S. COMPANIES, FOREIGN
COMPANIES AND FOREIGN GOVERNMENTS and their agencies.
The Fund invests in MORTGAGE-RELATED SECURITIES issued or guaranteed by U.S.
government entities, including securities issued by the Federal National
Mortgage Association (FNMA or "Fannie Mae") or the Federal Home Loan Mortgage
Corporation (FHLMC or "Freddie Mac") or guaranteed by the Government National
Mortgage Association (GNMA or "Ginnie Mae"). We may also invest in privately
issued, mortgage-related securities (those not issued or guaranteed by the U.S.
government). The mortgage-related securities in which the Fund may invest may
include COLLATERALIZED MORTGAGE OBLIGATIONS and STRIPPED MORTGAGE-BACKED
SECURITIES. We may also invest in ASSET-BACKED SECURITIES like automobile loans
and credit card receivables.
We may invest up to 35% of the Fund's total assets in HIGH YIELD DEBT
OBLIGATIONS--also known as "JUNK BONDS"--which are rated at least B by S&P,
Moody's or another major rating service, and unrated debt obligations that we
believe are comparable in quality.
The Fund can invest up to 25% of its total assets in FOREIGN DEBT
OBLIGATIONS, including up to 10% of its total assets in debt obligations of
issuers in emerging markets.
The Advisers of the Fund's fixed-income segments each focus on a particular
type of investing.
PACIFIC INVESTMENT MANAGEMENT COMPANY (PIMCO) focuses primarily on
INVESTMENT-GRADE DOMESTIC AND FOREIGN DEBT OBLIGATIONS--debt obligations rated
at least BBB by S&P, Baa by Moody's, or the equivalent by another major rating
service, and unrated debt obligations that PIMCO believes are comparable in
quality.
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THE PRUDENTIAL INVESTMENT CORPORATION (PIC) focuses primarily on HIGH-YIELD
DOMESTIC AND FOREIGN DEBT OBLIGATIONS, including junk bonds and debt obligations
of issuers from emerging markets.
In choosing debt obligations for the Fund, PIMCO and PIC consider economic
conditions and interest rate fundamentals and, for foreign debt securities,
country and currency selection. PIMCO and PIC also evaluate individual debt
securities within each fixed-income sector based upon their relative investment
merit. They also consider factors such as yield, duration and potential for
price or currency appreciation, as well as credit quality, maturity and risk.
EQUITY PORTION
We normally invest approximately 40% of the Fund's total assets in STOCKS OF
U.S. AND FOREIGN COMPANIES. We may invest up to 15% of the Fund's total assets
in stocks of companies located in foreign countries, including developing
countries. The foreign securities held by the Fund normally will be denominated
in foreign currencies, including the euro--a multinational currency unit.
The Fund may also invest in AMERICAN DEPOSITARY RECEIPTS (ADRS), AMERICAN
DEPOSITARY SHARES (ADSS), GLOBAL DEPOSITARY RECEIPTS (GDRS) and EUROPEAN
DEPOSITARY RECEIPTS (EDRS). ADRs, ADSs, GDRs and EDRs are certificates--usually
issued by a bank or trust company--that represent an equity investment in a
foreign company. ADRs and ADSs are issued by U.S. banks and trust companies and
are valued in U.S. dollars. EDRs and GDRs are issued by foreign banks and trust
companies and are usually valued in foreign currencies.
The Advisers of the Fund's equity segments each focus on a particular type
and style of investing.
JENNISON ASSOCIATES LLC (JENNISON) focuses on STOCKS OF LARGE COMPANIES,
using a GROWTH INVESTMENT STYLE. Jennison selects stocks of companies that it
believes will experience earnings growth at a faster rate than that of the U.S.
economy in general. Jennison looks for stocks of companies that have
demonstrated growth in earnings and sales, high returns on equity and assets, or
other strong financial characteristics. Jennison will consider selling a
security when it thinks the security has achieved its growth potential, or when
Jennison thinks it can find better growth opportunities.
THE PRUDENTIAL INVESTMENT CORPORATION (PIC) focuses on STOCKS OF LARGE
companies, using a VALUE INVESTMENT STYLE. PIC selects stocks that it believes
are undervalued and have an above-average potential to increase in price. PIC
looks for stocks that it believes to be undervalued based on the company's
sales, earnings, book value and cash flow. PIC will consider selling a stock if
it has increased in value to the point where PIC no longer considers it to be
undervalued.
16 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 20
FRANKLIN ADVISERS, INC. (FRANKLIN) focuses on STOCKS OF SMALL AND MEDIUM-SIZE
COMPANIES, using a GROWTH INVESTMENT STYLE. Franklin selects stocks of companies
that it believes to have potential to rapidly grow revenues, earnings or cash
flow. Although Franklin may find these companies in growing industries, its
strategy targets companies with sustainable competitive advantages, like unique
products or proprietary technology, that may provide these companies with growth
opportunities regardless of the growth outlook of the industry. Franklin will
consider selling a security when it thinks the security has achieved its growth
potential, or when Franklin thinks it can find better growth opportunities.
THE DREYFUS CORPORATION (DREYFUS) focuses on STOCKS OF SMALL AND MEDIUM-SIZE
COMPANIES, using a VALUE INVESTMENT STYLE. Dreyfus selects stocks that it
believes are undervalued and have an above-average potential to increase in
price. Dreyfus looks for stocks that it believes to be undervalued based on the
company's sales, earnings, book value and cash flow. Dreyfus generally
constructs its Fund segment to resemble the Russell 2000 Value Index, but
weights the segment toward the stocks that Dreyfus deems most attractive.
Dreyfus will consider selling a stock if it has increased in value to the point
where Dreyfus no longer considers it to be undervalued.
LAZARD ASSET MANAGEMENT (LAZARD) focuses on STOCKS OF FOREIGN COMPANIES,
using a VALUE INVESTMENT STYLE. Lazard looks for stocks that it believes to be
undervalued based on the company's earnings, cash flow or asset values. Lazard
will consider selling a stock if it has increased in value to the point where
Lazard no longer considers it to be undervalued.
MODERATE GROWTH FUND
The Fund's investment objective is to seek to provide CAPITAL APPRECIATION and a
reasonable level of CURRENT INCOME. This means that we seek investments that
will increase in value, in addition to investments that will pay income. The
Fund seeks to achieve its objective by investing in a diversified portfolio of
equity and fixed-income securities.
EQUITY PORTION
In pursuing our objective, we invest approximately 65% of the Fund's total
assets in stocks of U.S. and foreign companies. We may invest up to 25% of the
Fund's total assets in stocks of companies located in foreign countries,
including developing countries.
The Fund may also invest IN AMERICAN DEPOSITARY RECEIPTS (ADRS), AMERICAN
DEPOSITARY SHARES (ADSS), GLOBAL DEPOSITARY RECEIPTS (GDRS) and EUROPEAN
DEPOSITARY RECEIPTS (EDRS). ADRs, ADSs, GDRs and EDRs are
17
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certificates--usually issued by a bank or trust company--that represent an
equity investment in a foreign company. ADRs and ADSs are issued by U.S. banks
and trust companies and are valued in U.S. dollars. EDRs and GDRs are issued by
foreign banks and trust companies and are usually valued in foreign currencies.
The Advisers of the Fund's equity segments each focus on a particular type
and style of investing.
JENNISON ASSOCIATES LLC (JENNISON) focuses on STOCKS OF LARGE COMPANIES,
using a GROWTH INVESTMENT STYLE. Jennison selects stocks of companies that it
believes will experience earnings growth at a faster rate than that of the U.S.
economy in general. Jennison looks for stocks of companies that have
demonstrated growth in earnings and sales, high returns on equity and assets, or
other strong financial characteristics. Jennison will consider selling a
security when it thinks the security has achieved its growth potential, or when
Jennison thinks it can find better growth opportunities.
THE PRUDENTIAL INVESTMENT CORPORATION (PIC) focuses on STOCKS OF LARGE
COMPANIES, using a VALUE INVESTMENT STYLE. PIC selects stocks that it believes
are undervalued and have an above-average potential to increase in price. PIC
looks for stocks that it believes to be undervalued based on the company's
sales, earnings, book value and cash flow. PIC will consider selling a stock if
it has increased in value to the point where PIC no longer considers it to be
undervalued.
FRANKLIN ADVISERS, INC. (FRANKLIN) focuses on STOCKS OF SMALL AND MEDIUM-SIZE
COMPANIES, using a GROWTH INVESTMENT STYLE. Franklin selects stocks of companies
that it believes to have potential to rapidly grow revenues, earnings or cash
flow. Although Franklin may find these companies in growing industries, its
strategy targets companies with sustainable competitive advantages, like unique
products or proprietary technology, that may provide these companies with growth
opportunities regardless of the growth outlook of the industry. Franklin will
consider selling a security when it thinks the security has achieved its growth
potential, or when Franklin thinks it can find better growth opportunities.
THE DREYFUS CORPORATION (DREYFUS) focuses on STOCKS OF SMALL AND MEDIUM-SIZE
COMPANIES, using a VALUE INVESTMENT STYLE. Dreyfus selects stocks that it
believes are undervalued and have an above-average potential to increase in
price. Dreyfus looks for stocks that it believes to be undervalued based on the
company's sales, earnings, book value and cash flow. Dreyfus generally
constructs its Fund segment to resemble the Russell 2000 Value Index, but
weights the segment toward the stocks that Dreyfus deems most attractive.
Dreyfus will consider selling a stock if it has increased in value to the point
where Dreyfus no longer considers it to be undervalued.
18 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
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HOW THE FUNDS INVEST
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LAZARD ASSET MANAGEMENT (LAZARD) focuses on STOCKS OF FOREIGN COMPANIES using
a VALUE INVESTMENT STYLE. Lazard looks for stocks that it believes to be
undervalued based on the company's earnings, cash flow or asset values. Lazard
will consider selling a stock if it has increased in value to the point where
Lazard no longer considers it to be undervalued.
FIXED-INCOME PORTION
We normally invest approximately 35% of the Fund's total assets in debt
obligations issued or guaranteed by the U.S. government and its agencies, as
well as debt obligations issued by U.S. companies, foreign companies and foreign
governments and their agencies.
The Fund invests in MORTGAGE-RELATED SECURITIES issued or guaranteed by U.S.
government entities, including securities issued by the Federal National
Mortgage Association (FNMA or "Fannie Mae") or the Federal Home Loan Mortgage
Corporation (FHLMC or "Freddie Mac") or guaranteed by the Government National
Mortgage Association (GNMA or "Ginnie Mae"). We may also invest in privately
issued, mortgage-related securities (those not issued or guaranteed by the U.S.
government). The mortgage-related securities in which the Fund may invest may
include COLLATERALIZED MORTGAGE OBLIGATIONS and STRIPPED MORTGAGE-BACKED
SECURITIES. We may also invest in ASSET-BACKED SECURITIES like automobile loans
and credit card receivables.
We may invest up to 35% of the Fund's total assets in HIGH-YIELD DEBT
obligations--also known as "JUNK BONDS"--which are rated at least B by S&P,
Moody's or another major rating service, and unrated debt obligations that we
believe are comparable in quality.
The Fund can invest up to 25% of its total assets in FOREIGN DEBT
OBLIGATIONS, including up to 10% of its total assets in debt obligations of
issuers in emerging markets.
The Advisers of the Fund's fixed-income segments each focus on a particular
type of investing.
PACIFIC INVESTMENT MANAGEMENT COMPANY (PIMCO) focuses primarily on
INVESTMENT-GRADE DOMESTIC AND FOREIGN DEBT OBLIGATIONS--debt obligations rated
at least BBB by S&P, Baa by Moody's, or the equivalent by another major rating
service, and unrated debt obligations that PIMCO believes are comparable in
quality.
THE PRUDENTIAL INVESTMENT CORPORATION (PIC) focuses primarily on HIGH-YIELD
DOMESTIC AND FOREIGN DEBT OBLIGATIONS, including junk bonds and debt obligations
of issuers from emerging markets.
In choosing debt obligations for the Fund, PIMCO and PIC consider economic
conditions and interest rate fundamentals and, for foreign debt
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securities, country and currency selection. PIMCO and PIC also evaluate
individual debt securities within each fixed-income sector based upon their
relative investment merit. They also consider factors such as yield, duration
and potential for price or currency appreciation, as well as credit quality,
maturity and risk.
HIGH GROWTH FUND
The Fund's investment objective is to seek to provide long-term CAPITAL
APPRECIATION. This means that we seek investments that will increase in value.
The Fund seeks to achieve its objective by investing in a diversified portfolio
of equity securities.
In pursuing our objective, we invest substantially all of the Fund's assets
in STOCKS OF U.S. AND FOREIGN COMPANIES. We may invest up to 35% of the Fund's
total assets in stocks of companies located in foreign countries, including
developing countries.
The Fund may also invest in AMERICAN DEPOSITARY RECEIPTS (ADRs), AMERICAN
DEPOSITARY SHARES (ADSs), GLOBAL DEPOSITARY RECEIPTS (GDRs) AND EUROPEAN
DEPOSITARY RECEIPTS (EDRs). ADRs, ADSs, GDRs and EDRs are certificates--usually
issued by a bank or trust company--that represent an equity investment in a
foreign company. ADRs and ADSs are issued by U.S. banks and trust companies and
are valued in U.S. dollars. EDRs and GDRs are issued by foreign banks and trust
companies and are usually valued in foreign currencies.
The Advisers of the Fund's equity segments each focus on a particular type
and style of investing.
JENNISON ASSOCIATES LLC (JENNISON) focuses on STOCKS OF LARGE COMPANIES,
using a GROWTH INVESTMENT STYLE. Jennison selects stocks of companies that it
believes will experience earnings growth at a faster rate than that of the U.S.
economy in general. Jennison looks for stocks of companies that have
demonstrated growth in earnings and sales, high returns on equity and assets, or
other strong financial characteristics. Jennison will consider selling a
security when it thinks the security has achieved its growth potential, or when
Jennison thinks it can find better growth opportunities.
THE PRUDENTIAL INVESTMENT CORPORATION (PIC) focuses on STOCKS OF LARGE
COMPANIES, using a VALUE INVESTMENT STYLE. PIC selects stocks that it believes
are undervalued and have an above-average potential to increase in price. PIC
looks for stocks that it believes to be undervalued based on the company's
sales, earnings, book value and cash flow. PIC will consider selling a stock if
it has increased in value to the point where PIC no longer considers it to be
undervalued.
20 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
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FRANKLIN ADVISERS, INC. (FRANKLIN) focuses on STOCKS OF SMALL AND MEDIUM-SIZE
COMPANIES, using a GROWTH INVESTMENT STYLE. Franklin selects stocks of companies
that it believes to have potential to rapidly grow revenues, earnings or cash
flow. Although Franklin may find these companies in growing industries, its
strategy targets companies with sustainable competitive advantages, like unique
products or proprietary technology, that may provide these companies with growth
opportunities regardless of the growth outlook of the industry. Franklin will
consider selling a security when it thinks the security has achieved its growth
potential, or when Franklin thinks it can find better growth opportunities.
THE DREYFUS CORPORATION (DREYFUS) focuses on STOCKS OF SMALL AND MEDIUM-SIZE
COMPANIES, using a VALUE INVESTMENT STYLE. Dreyfus selects stocks that it
believes are undervalued and have an above-average potential to increase in
price. Dreyfus looks for stocks that it believes to be undervalued based on the
company's sales, earnings, book value and cash flow. Dreyfus generally
constructs its Fund segment to resemble the Russell 2000 Value Index, but
weights the segment toward the stocks that Dreyfus deems most attractive.
Dreyfus will consider selling a stock if it has increased in value to the point
where Dreyfus no longer considers it to be undervalued.
LAZARD ASSET MANAGEMENT (LAZARD) focuses on STOCKS OF FOREIGN COMPANIES,
using a VALUE INVESTMENT STYLE. Lazard looks for stocks that it believes to be
undervalued based on the company's earnings, cash flow or asset values. Lazard
will consider selling a stock if it has increased in value to the point where
Lazard no longer considers it to be undervalued.
For more information, see "Investment Risks" and the Statement of Additional
Information, "Description of the Funds, Their Investments and Risks." The
Statement of Additional Information--which we refer to as the SAI--contains
additional information about the Funds. To obtain a copy, see the back cover
page of this prospectus.
Although we make every effort to achieve each Fund's objective, we can't
guarantee success. Except for certain investment restrictions described in the
SAI, the Board of the Trust can change the investment objective and policies of
each Fund without obtaining shareholder approval.
MORTGAGE-RELATED SECURITIES
The CONSERVATIVE GROWTH and MODERATE GROWTH FUNDS may each invest in
MORTGAGE-RELATED SECURITIES issued or guaranteed by U.S. governmental entities
or private issuers. These securities are usually pass-through instruments that
pay investors a share of all interest and principal payments from
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an underlying pool of fixed or adjustable rate mortgages. Mortgage-related
securities issued by the U.S. government or its agencies include FNMAs, GNMAs
and debt securities issued by the FHLMC. The U.S. government or the issuing
agency directly or indirectly guarantees the payment of interest and principal
on these securities, but not their value. Private mortgage-related securities
that are not guaranteed by U.S. governmental entities generally have one or more
types of credit enhancement to ensure timely receipt of payments and to protect
against default.
Mortgage pass-through securities include collateralized mortgage obligations,
multiclass pass-through securities and stripped mortgage-backed securities. A
COLLATERALIZED MORTGAGE OBLIGATION (CMO) is a security backed by an underlying
portfolio of mortgages or mortgage-backed securities that may be issued or
guaranteed by a bank or by U.S. governmental entities. A MULTICLASS PASS-THROUGH
SECURITY is an equity interest in a trust composed of underlying mortgage
assets. Payments of principal and interest on the mortgage assets and any
reinvestment income thereon provide the funds to pay debt service on the CMO or
to make scheduled distributions on the multiclass pass-through security. A
STRIPPED MORTGAGE-BACKED SECURITY (MBS STRIP) may be issued by U.S. governmental
entities or by private institutions. MBS strips take the pieces of a debt
security (principal and interest) and break them apart. The resulting securities
may be sold separately and may perform differently.
The values of mortgage-backed securities vary with changes in market interest
rates, generally, and in yields among various kinds of mortgage-related
securities. Such values are particularly sensitive to changes in prepayments of
the underlying mortgages. For example, during periods of falling interest rates,
prepayments tend to increase as homeowners and others refinance their
higher-rate mortgages; these prepayments reduce the anticipated duration of the
mortgage-related securities. Conversely, during periods of rising interest
rates, prepayments can be expected to decline, which has the effect of extending
the anticipated duration at the same time that the value of the securities
declines. MBS strips tend to be even more highly sensitive to changes in
prepayment and interest rates than mortgage-related securities and CMOs
generally.
ASSET-BACKED SECURITIES
The CONSERVATIVE GROWTH and MODERATE GROWTH FUNDS may each invest in
ASSET-BACKED DEBT SECURITIES. An asset-backed security is another type of
pass-through instrument that pays interest based upon the cash flow of an
underlying pool of assets, such as automobile loans and credit card receiv-
22 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
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ables. Unlike mortgage-related securities, asset-backed securities are usually
not collateralized.
OTHER INVESTMENTS AND STRATEGIES
In addition to their principal strategies, we may also use the following
investment strategies to increase the Funds' returns or protect their assets if
market conditions warrant.
MONEY MARKET INSTRUMENTS
Each Fund may invest in high-quality MONEY MARKET INSTRUMENTS. Money market
instruments include the commercial paper of U.S. and foreign corporations,
obligations of U.S. and foreign banks, certificates of deposit and obligations
issued or guaranteed by the U.S. government or its agencies or a foreign
government.
The Funds will generally purchase money market instruments in one of the two
highest short-term quality ratings of a major rating service. The Funds may also
invest in money market instruments that are not rated, but which we believe are
of comparable quality to the instruments described above.
U.S. GOVERNMENT SECURITIES
The Funds may invest in DEBT OBLIGATIONS ISSUED BY THE U.S. TREASURY. Treasury
securities have varying interest rates and maturities, but they are all backed
by the full faith and credit of the U.S. government.
The Funds may also invest in other DEBT OBLIGATIONS ISSUED OR GUARANTEED BY
THE U.S. GOVERNMENT and government-related entities. Some of these debt
securities are backed by the full faith and credit of the U.S. government, like
GNMA obligations. Debt securities issued by other government entities, like
obligations of FNMA and SLMA, are not backed by the full faith and credit of the
U.S. government. However, these issuers have the right to borrow from the U.S.
Treasury to meet their obligations. In contrast, the debt securities of other
issuers, like the Farm Credit System, depend entirely upon their own resources
to repay their debt.
The U.S. government sometimes "strips" its debt obligations into their
component parts: the U.S. government's obligation to make interest payments and
its obligation to repay the amount borrowed. These STRIPPED SECURITIES are sold
to investors separately. Stripped securities do not make periodic interest
payments. They are usually sold at a discount and then redeemed for their face
value on their maturity dates. These securities increase in value when interest
rates fall and lose value when interest rates rise. However, the value of
stripped
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securities generally fluctuates more in response to interest rate movements than
the value of traditional debt obligations. A Fund may try to earn money by
buying stripped securities at a discount and either selling them after they
increase in value or holding them until they mature.
TEMPORARY DEFENSIVE INVESTMENTS
In response to adverse market, economic or political conditions, we may
temporarily invest up to 100% of a Fund's assets in money market instruments or
U.S. government securities. Investing heavily in these securities limits our
ability to achieve each Fund's investment objective, but can help to preserve a
Fund's assets when the markets are unstable.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
Each Fund may enter into REVERSE REPURCHASE AGREEMENTS. When a Fund enters into
a reverse repurchase agreement, the Fund borrows money on a temporary basis by
selling a security with an obligation to repurchase it at an agreed-upon price
and time.
The Conservative Growth and Moderate Growth Funds may each enter into DOLLAR
ROLLS. When a Fund enters into a dollar roll, the Fund sells securities to be
delivered in the current month and repurchases substantially similar (same type
and coupon) securities to be delivered on a specified future date by the same
party. The Fund is paid the difference between the current sales price and the
forward price for the future purchase, as well as the interest earned on the
cash proceeds of the initial sale.
REPURCHASE AGREEMENTS
Each Fund may also use REPURCHASE AGREEMENTS, where a party agrees to sell a
security to the Fund and then repurchase it at an agreed-upon price at a stated
time. A repurchase agreement is like a loan by a Fund to the other party that
creates a fixed return for the Fund.
CONVERTIBLE SECURITIES
Each Fund may also invest in CONVERTIBLE SECURITIES. These are securities--like
bonds, corporate notes and preferred stock--that we can convert into the
company's common stock or some other equity security.
24 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
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DERIVATIVE STRATEGIES
We may use various derivative strategies to try to improve each Fund's returns
or protect its assets, although we cannot guarantee that these strategies will
work, that the instruments necessary to implement these strategies will be
available or that the Fund will not lose money. The derivatives in which the
Funds may invest include FUTURES, OPTIONS AND OPTIONS ON FUTURES. In addition,
each Fund may enter into FOREIGN CURRENCY EXCHANGE CONTRACTS and purchase
COMMERCIAL PAPER THAT IS INDEXED TO FOREIGN CURRENCY EXCHANGE RATES. Each Fund
may also use "CURRENCY HEDGES" to help protect its NAV from declining if a
particular foreign currency were to decrease in value against the U.S. dollar.
Derivatives involve costs and can be volatile. With derivatives, the
investment adviser tries to predict whether the underlying investment--a
security, market index, currency, interest rate or some other benchmark--will go
up or down at some future date. We may use derivatives to try to reduce risk or
to increase return consistent with a Fund's overall investment objective. The
investment adviser will consider other factors (such as cost) in deciding
whether to employ any particular strategy or use any particular instrument. Any
derivatives we use may not match a Fund's underlying holdings. For more
information about these strategies, see the SAI, "Description of the Funds,
Their Investments and Risks--Risk Management and Return Enhancement Strategies."
Each Fund may purchase and sell put and call options on securities and
currencies traded on U.S. or foreign securities exchanges or on the
over-the-counter market. An option is the right to buy or sell securities in
exchange for a premium. The options may be on debt securities, aggregates of
debt securities, financial indexes and U.S. government securities. The Funds
will sell only covered options.
Each Fund may purchase and sell financial futures contracts and related
options on debt securities, aggregates of debt securities, currencies, financial
indexes or U.S. government securities. A futures contract is an agreement to buy
or sell a set quantity of underlying product at a future date or to make or
receive a cash payment based on the value of a securities index. The Funds also
may enter into foreign currency forward contracts to protect the value of their
assets against future changes in the level of foreign currency exchange rates. A
foreign currency forward contract is an obligation to buy or sell a given
currency on a future date and at a set price.
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ADDITIONAL STRATEGIES
The Funds may also use additional strategies, such as purchasing debt securities
on a WHEN-ISSUED or DELAYED-DELIVERY basis. When a Fund makes this type of
purchase, the price and interest rate are fixed at the time of purchase, but
delivery and payment for the debt obligations take place at a later time. The
Fund does not earn interest income until the date the debt obligations are
delivered.
The CONSERVATIVE GROWTH and MODERATE GROWTH FUNDS may each enter into
INTEREST RATE SWAP TRANSACTIONS. In a swap transaction, a Fund and another party
"trade" income streams. The swap is done to preserve a return or spread on a
particular investment or portion of a Fund or to protect against any increase in
the price of securities the Fund anticipates purchasing at a later date.
The Funds also follow certain policies when they BORROW MONEY (each Fund can
borrow up to 33 1/3 % of the value of its total assets); and HOLD ILLIQUID
securities (each Fund may hold up to 15% of its net assets in illiquid
securities, including securities with legal or contractual restrictions, those
without a readily available market and repurchase agreements with maturities
longer than seven days).
Each Fund is subject to certain investment restrictions that are fundamental
policies, which means they cannot be changed without shareholder approval. For
more information about these restrictions, see the SAI.
PORTFOLIO TURNOVER
As a result of the strategies described above, each Fund may have an annual
portfolio turnover rate of over 100%. Portfolio turnover is generally the
percentage found by dividing the lesser of portfolio purchases and sales by the
monthly average value of the portfolio. High portfolio turnover (100% or more)
results in higher brokerage commissions and other transaction costs and can
affect a Fund's performance. It can also result in a greater amount of
distributions as ordinary income rather than long-term capital gains.
26 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
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INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Funds is no
exception. Since a Fund's holdings can vary significantly from broad market
indexes, performance of the Funds can deviate from performance of the indexes.
This chart outlines the key risks and potential rewards of the Funds' principal
investments and certain of the Fund's nonprincipal investments and strategies.
See, too, "Description of the Funds, Their Investments and Risks" in the SAI.
<TABLE>
<CAPTION>
INVESTMENT TYPE
% OF FUNDS' TOTAL ASSETS RISKS POTENTIAL REWARDS
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<S> <C> <C>
COMMON STOCKS - Individual stocks could lose value - Historically, stocks have
outperformed other investments over
Conservative Growth Fund - The equity markets could go down, the long term
Approximately 40% resulting in a decline in value of a
Moderate Growth Fund Fund's investments - Generally, economic growth means
Approximately 65% higher corporate profits, which leads
High Growth Fund - Companies that pay dividends may not to an increase in stock prices, known
Up to 100% do so if they don't have profits or as capital appreciation
adequate cash flow
- May be a source of dividend income
- Changes in economic or political
conditions, both domestic and
international, may result in a
decline in value of a Fund's
investments
- -----------------------------------------------------------------------------------------------------------------------
SMALL AND MEDIUM
CAPITALIZATION STOCKS - Stocks of smaller companies are more - Highly successful smaller companies
volatile and may decline more than can outperform larger ones
Conservative Growth Fund those in the S&P 500 Index
Approximately 10%
Moderate Growth Fund - Small and medium-size companies are
Approximately 15% more likely to reinvest earnings and
High Growth Fund not pay dividends
Approximately 30%
- Changes in interest rates may affect
the securities of small and
medium-size companies more than the
securities of larger companies
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 31
- --------------------------------------------------------------------------------
HOW THE FUNDS INVEST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT TYPE
% OF FUNDS' TOTAL ASSETS RISKS POTENTIAL REWARDS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DEBT OBLIGATIONS - A Fund's share price, yield and total - Bonds have generally outperformed
return will fluctuate in response to money market instruments over the
Conservative Growth Fund bond market movements long term with less risk than stocks
Approximately 60%
Moderate Growth Fund - Credit risk--the risk that the - Most bonds will rise in value when
Approximately 35% default of an issuer would leave a interest rates fall
Fund with unpaid interest or
principal. The lower a bond's - Regular interest income
quality, the higher its potential
volatility - High quality debt obligations are
generally more secure than stocks
- Market risk--the risk that the market since companies must pay their debts
value of an investment may move up or before paying stockholders
down, sometimes rapidly or
unpredictably. Market risk may affect - Investment-grade bonds have a lower
an industry, a sector, or the market risk of default
as a whole
- Bonds with longer maturity dates
- Interest rate risk--the value of most typically have higher yields
bonds will fall when interest rates
rise: the longer a bond's maturity - Intermediate-term securities may be
and the lower its credit quality, the less susceptible to loss of principal
more its value typically falls. It than longer-term securities
can lead to price volatility,
particularly for junk bonds and
stripped securities
- ---------------------------------------------------------------------------------------------------------------------
FOREIGN SECURITIES - Foreign markets, economies and - Investors can participate in foreign
political systems may not be as markets and invest in companies
Conservative Growth Fund stable as in the U.S., particularly operating in those markets
Up to 15% those in developing countries
Moderate Growth Fund - Changing value of foreign currencies
- Currency risk--changing value of
Up to 25% foreign currencies can cause losses - Opportunities for diversification
High Growth Fund - May be less liquid than U.S. stocks - Principal and interest on foreign
Up to 35% and bonds government securities may be
guaranteed
- Differences in foreign laws,
accounting standards, public
information, custody and settlement
practices provide less reliable
information on foreign investments
and involve more risk
- Year 2000 conversion may be more of a
problem for some foreign issuers
- Not all government securities are
insured or guaranteed by government,
but only by the issuing agency
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
28 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 32
- -------------------------------------------------------------------------------
HOW THE FUNDS INVEST
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT TYPE
% OF FUNDS' TOTAL ASSETS RISKS POTENTIAL REWARDS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT - Not all are insured or guaranteed by - Regular interest income
SECURITIES the U.S. government, but only by the
issuing agency - The U.S. government guarantees
All Funds interest and principal payments on
Percentage varies; - Limits potential for capital certain securities.
up to 100% on appreciation
a temporary basis - Generally more secure than lower
- See market risk quality debt securities and equity
securities
- See interest rate risk
- May preserve a Fund's assets
- -------------------------------------------------------------------------------------------------------------------
MONEY MARKET - U.S. Government money market
INSTRUMENTS securities offer a lower yield than
lower-quality or longer-term
All Funds securities
Up to 100% on - Limits potential for capital
a temporary basis appreciation
- See credit risk
- See market risk
- -------------------------------------------------------------------------------------------------------------------
MORTGAGE-RELATED - Prepayment risk--the risk that the - Regular interest income
SECURITIES underlying mortgage may be prepaid
partially or completely, generally - The U.S. government guarantees
Conservative Growth and during periods of falling interest interest and principal payments on
Moderate Growth Funds rates, which could adversely affect certain securities
yield to maturity and could require a
Percentage varies Fund to reinvest in lower-yielding - May benefit from security interest in
securities. real estate collateral
- Credit risk--the risk that the - Pass-through instruments provide
underlying mortgages will not be paid greater diversification than direct
by debtors or by credit insurers or ownership of loans
guarantors of such instruments. Some
private mortgage securities are
unsecured or secured by lower-rated
insurers or guarantors and thus may
involve greater risk
- See market risk
- See interest rate risk
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 33
- -------------------------------------------------------------------------------
HOW THE FUNDS INVEST
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT TYPE
% OF FUNDS' TOTAL ASSETS RISKS POTENTIAL REWARDS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HIGH-YIELD DEBT - Higher credit risk than higher-grade - May offer higher interest income than
SECURITIES (JUNK BONDS) debt securities higher-grade debt securities and
higher potential gains
Conservative Growth and - Higher market risk than higher-grade
Moderate Growth Funds debt securities
Up to 35% - More volatile than higher-grade debt
securities
- May be more illiquid (harder to value
and sell), in which case valuation
would depend more on investment
adviser's judgment than is generally
the case with higher-rated securities
- ---------------------------------------------------------------------------------------------------------------------
ASSET-BACKED - See prepayment risks - Regular interest income
SECURITIES
- The security interest in the - Prepayment risk is generally lower
Conservative Growth and underlying collateral may not be as than with mortgage-related securities
Moderate Growth Funds great as with mortgage-related
securities - Pass-through instruments provide
Percentage varies greater diversification than direct
- Credit risk--the risk that the ownership of loans
underlying receivables will not be
paid by debtors or by credit insurers
or guarantors of such instruments.
Some asset-backed securities are
unsecured or secured by lower-rated
insurers or guarantors and thus may
involve greater risk
- See market risk
- See interest rate risk
- ---------------------------------------------------------------------------------------------------------------------
DERIVATIVES - Derivatives such as futures, options - A Fund could make money and protect
and foreign currency exchange against losses if the investment
All Funds contracts may not fully offset the analysis proves correct
underlying positions and this could
Percentage varies result in losses to the Fund that - One way to manage a Fund's
would not have otherwise occurred risk/return balance is to lock in the
value of an investment ahead of time
- Derivatives used for risk management
may not have the intended effects and - Derivatives that involve leverage
may result in losses or missed could generate substantial gains at
opportunities low cost
- The other party to a derivatives - May be used to hedge against changes
contract could default in currency exchange rates
- Derivatives that involve leverage
(borrowing for investment) could
magnify losses
- Certain types of derivatives involve
costs to a Fund which can reduce
returns
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
30 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 34
- -------------------------------------------------------------------------------
HOW THE FUNDS INVEST
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT TYPE
% OF FUNDS' TOTAL ASSETS RISKS POTENTIAL REWARDS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVERSE REPURCHASE - May magnify underlying investment - May magnify underlying investment
AGREEMENTS losses gains
All Funds - Investment costs may exceed potential
underlying investment gains
Up to 33 1/3%
DOLLAR ROLLS
Conservative Growth and
Moderate Growth Funds
Up to 33 1/3%
WHEN-ISSUED AND
DELAYED-DELIVERY
SECURITIES
All Funds
Percentage varies
- --------------------------------------------------------------------------------------------------------------------
BORROWING - Leverage may magnify investment - Leverage may magnify investment gains
losses
All Funds
- Interest costs and investment fees
Up to 33 1/3% may exceed potential investment gains
- --------------------------------------------------------------------------------------------------------------------
ADJUSTABLE/FLOATING RATE - Value lags value of fixed rate - Can take advantage of rising interest
SECURITIES securities when interest rates change rates
Conservative Growth and
Moderate Growth Funds
Percentage varies
- --------------------------------------------------------------------------------------------------------------------
STRIPPED SECURITIES - More volatile than securities that - Value rises faster when interest
have not separated principal and rates fall
Conservative Growth and interest
Moderate Growth Funds
Percentage varies - Mortgage-backed stripped securities
have more prepayment and interest
rate risk than other mortgage-related
securities
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 35
- --------------------------------------------------------------------------------
HOW THE FUNDS INVEST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT TYPE
% OF FUNDS' TOTAL ASSETS RISKS POTENTIAL REWARDS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST RATE SWAPS - Helps protect the return on an - Speculative technique including risk
investment of loss of interest payment swapped
Conservative Growth and
Moderate Growth Funds
Up to 5% of net assets
- --------------------------------------------------------------------------------------------------------------------
ILLIQUID SECURITIES - May be difficult to value precisely - May offer a more attractive yield
or potential for growth than more
All Funds - May be difficult to sell at the time widely traded securities.
or price desired
Up to 15% of net assets
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
32 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 36
- --------------------------------------------------------------------------------
HOW THE TRUST IS MANAGED
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
The Board of Trustees oversees the actions of the Manager, the Advisers and the
Distributor and decides on general policies. The Board also oversees the Trust's
officers who conduct and supervise the daily business operations of the Trust.
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NJ 07102-4077
Under a management agreement with the Trust, PIFM manages the Trust's
investment operations, administers its business affairs and is responsible for
supervising the Advisers for each of the Funds. For the period ended July 31,
1999, the Trust paid PIFM the management fees set forth in the table below for
each of the Funds (shown as a percentage of average net assets).
<TABLE>
<CAPTION>
MANAGEMENT
FUND FEE PAID TO PIFM
- ---- ----------------
<S> <C>
Conservative Growth Fund .75%
Moderate Growth Fund .75%
High Growth Fund .75%
</TABLE>
Subject to the supervision of the Board of Trustees of the Trust, PIFM is
responsible for conducting the initial review of prospective Advisers for the
Trust. In evaluating a prospective Adviser, PIFM considers many factors,
including the firm's experience, investment philosophy and historical
performance. PIFM is also responsible for monitoring the performance of the
Trust's Advisers.
PIFM and the Trust operate under an exemptive order (the Order) from the
Securities and Exchange Commission that generally permits PIFM to enter into or
amend agreements with Advisers without obtaining shareholder approval each time.
This authority is subject to certain conditions, including the requirement that
the Board of Trustees approve any new or amended agreements with Advisers.
Shareholders of each Fund still have the right to terminate these agreements for
a Fund at any time by a vote of the
33
<PAGE> 37
HOW THE TRUST IS MANAGED
majority of outstanding shares of that Fund. The Trust will notify shareholders
of any new Advisers or material amendments to advisory agreements made pursuant
to the Order. On October 1, 1998, the sole shareholder of the Trust voted to
allow the Trust and PIFM to operate under the Order.
PIFM and its predecessors have served as manager or administrator to
investment companies since 1987. As of August 31, 1999, PIFM served as the
Manager to all 46 of the Prudential Mutual Funds and as Manager or administrator
to 22 closed-end investment companies with aggregate assets of approximately
$71.8 billion.
ADVISERS AND PORTFOLIO MANAGERS
INTRODUCTION
The Advisers are responsible for the day-to-day management of each Fund segment
that they manage, subject to the supervision of PIFM and the Board of Trustees.
The Advisers are paid by PIFM, not the Trust.
Each Adviser manages one or more segments of a Fund, focusing on a
particular investment type and style. The Manager allocates daily cash inflows
(i.e., purchases and reinvested dividends) and outflows (i.e., redemptions and
expense items) among the segments of each Fund. By using several Advisers for
each Fund, and by periodically rebalancing each Fund in accordance with its
asset allocation strategy, the Manager seeks long-term benefits from a balance
of different investment disciplines. The Manager believes that, at any given
time, certain investment philosophies will be more successful than others and
that a combination of different investment approaches may benefit the Funds and
help reduce their volatility. Reallocations may result in higher portfolio
turnover and correspondingly higher transactional costs. In addition, a Fund may
experience wash transactions -- where one Adviser buys a security at the same
time the other one sells it. When this happens, the Fund's position in that
security remains unchanged, but the Fund has paid additional transaction costs.
34 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 38
HOW THE TRUST IS MANAGED
The Manager pays the Advisers' fees set forth in the table below for each
of the Funds (shown as a percentage of average net assets of the Fund segments
each Adviser manages).
<TABLE>
<CAPTION>
ANNUAL FEE PAID BY
ADVISERS FUNDS PIFM TO ADVISERS
<S> <C> <C>
Jennison Associates LLC Conservative Growth .30% with respect to
Moderate Growth the first $300 million;
High Growth .25% for amounts in
excess of $300 million
The Prudential Investment Conservative Growth N/A(1)
Corporation Moderate Growth
High Growth
Lazard Asset Management Moderate Growth .40%
High Growth
Pacific Investment Conservative Growth .25%
Management Company Moderate Growth
Franklin Advisers, Inc. Conservative Growth .50%
Moderate Growth
High Growth
The Dreyfus Corporation Conservative Growth .45%
Moderate Growth
High Growth
</TABLE>
(1) Under the Advisory Agreement between PIFM and PIC, PIC is reimbursed by
PIFM its reasonable costs and expenses incurred in providing advisory
services to the Fund segments PIC manages.
The following sets forth certain information about each of the Advisers.
JENNISON ASSOCIATES LLC
JENNISON is a wholly owned subsidiary of The Prudential Insurance Company of
America (Prudential), a major diversified insurance and financial services
company. As of ____, 1999, Jennison managed over $__ billion in assets for
institutional and mutual fund clients. The address of Jennison is 466 Lexington
Avenue, New York, NY 10017.
JAMES N. KANNRY, CFA, and KATHLEEN A. MCCARRAGHER have managed the
large-capitalization growth equity segments of the Funds since February 1999.
Mr. Kannry, a Director and Executive Vice President of Jennison, has been part
of the Jennison team since 1972. He spent more than a dozen years as part of
Jennison's research team before becoming a portfolio manager in ______. Mr.
Kannry holds a Chartered Financial Analyst designation
35
<PAGE> 39
HOW THE TRUST IS MANAGED
and is a member of the New York Society of Security Analysts. Ms. McCarragher, a
Director and Executive Vice President of Jennison, is Jennison's Growth Equity
Investment Strategist. Prior to joining Jennison in 1998, Ms. McCarragher was a
portfolio manager with Weiss, Peck & Greer.
THE PRUDENTIAL INVESTMENT CORPORATION
PIC is a wholly owned subsidiary of Prudential, a major diversified insurance
and financial services company. The address of PIC is Prudential Plaza, 751
Broad Street, Newark, NJ 07102.
THOMAS R. JACKSON has managed the large-capitalization value equity
segments of the Funds since their inception. Mr. Jackson has been a portfolio
manager with PIC since 1990, and has over 30 years of professional equity
investment management experience. He is a member of the New York Society of
Security Analysts.
GEORGE EDWARDS has managed the high-yield fixed-income segments of the
Conservative Growth and Moderate Growth Funds since their inception. Mr. Edwards
has been a portfolio manager with PIC since 1985.
FRANKLIN ADVISERS, INC.
FRANKLIN is a wholly owned subsidiary of Franklin Resources, Inc., a publicly
owned company engaged in the financial services industry through its
subsidiaries. Franklin advises ___ domestic equity and fixed-income mutual funds
in the Franklin Templeton Group of funds. As of ____, 1999, Franklin and its
affiliates managed over $___ billion in assets. The address of Franklin is 777
Mariners Island Blvd., San Mateo, CA 94404.
EDWARD B. JAMIESON, MICHAEL MCCARTHY and AIDAN O'CONNELL have managed the
small/mid-capitalization growth equity segments of the Funds since their
inception. Mr. Jamieson is an Executive Vice President of Franklin and Managing
Director of Franklin's equity and high-yield groups and has been with Franklin
since 1987. Mr. McCarthy joined Franklin in 1992 and is a Vice President and
portfolio manager specializing in research analysis of several technology
sectors. Mr. O'Connell is a research analyst specializing in the semiconductor
and semiconductor capital equipment industries. Prior to joining Franklin in
1998, Mr. O'Connell was a research and corporate finance associate with
Hambrecht & Quist.
36 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 40
HOW THE TRUST IS MANAGED
THE DREYFUS CORPORATION
DREYFUS is a subsidiary of Mellon Bank Corporation, a broad-based financial
services company with a bank at its core. As of June 30, 1999, Dreyfus managed
approximately $122 in assets for both equity and fixed-income mutual funds.
WILLIAM P. RYDELL, CFA and MARK W. SIKORSKI, CFA have managed the
small/mid-capitalization value equity segments of the Funds since their
inception. Mr. Rydell is a portfolio manager at Dreyfus and is the President and
Chief Executive Officer of Mellon Equity Associates LLP. Mr. Rydell has been
with the Mellon organization since 1973. Mr. Sikorski is a portfolio manager at
Dreyfus and a Vice President of Mellon Equity Associates LLP. Prior to joining
the Mellon organization in 1996, Mr. Sikorski managed various corporation
treasury projects for Northeast Utilities, including bond refinancing and
investment evaluations.
LAZARD ASSET MANAGEMENT
LAZARD ASSET MANAGEMENT (LAZARD) is a division of Lazard Freres & Co. LLC
(Lazard Freres), a New York limited liability company. Lazard provides
investment management services to both individual and institutional clients. As
of June 30, 1999, Lazard and its global affiliates had approximately $69 billion
in assets under management. The address of Lazard is 30 Rockefeller Plaza, New
York, NY 10112.
HERBERT W. GULLQUIST and JOHN R. REINSBERG have managed the international
equity segments of the Moderate Growth and High Growth Funds since their
inception. Mr. Gullquist, a Managing Director and Vice Chairman of Lazard Freres
and Chief Investment Officer of Lazard, has been with Lazard since 1982. Mr.
Reinsberg is a Managing Director of Lazard Freres and has been with Lazard since
1992.
PACIFIC INVESTMENT MANAGEMENT COMPANY
PACIFIC INVESTMENT MANAGEMENT COMPANY (PIMCO) had approximately $172 billion of
assets under management as of June 30, 1999. The address of PIMCO is 840 Newport
Center Drive, Suite 300, Newport Beach, CA 92660.
JOHN L. HAGUE, a Managing Director of PIMCO, has managed the fixed-income
segments of the Conservative Growth and Moderate Growth Funds since their
inception. Mr. Hague has been a portfolio manager with PIMCO and its predecessor
since 1989.
37
<PAGE> 41
HOW THE TRUST IS MANAGED
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Trust's
shares under a Distribution Agreement with the Trust. The Trust has Distribution
and Service Plans under Rule 12b-1 of the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays the expenses of distributing the
Trust's Class A, B, C and Z shares and provides certain shareholder support
services. The Trust pays distribution and other fees to PIMS as compensation for
its services for each class of shares other than Class Z. These fees -- known as
12b-1 fees -- are shown in the "Fees and Expenses" tables. Because these fees
are paid out of the Funds' assets on an ongoing basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
YEAR 2000 READINESS DISCLOSURE
The services provided to the Trust and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such an
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. Although at this time
there can be no assurance that there will be no adverse impact on the Trust, the
Manager, the Advisers, the Distributor, the Transfer Agent and the Custodian
have advised the Trust that they have been actively working on necessary changes
to their computer systems to prepare for the year 2000. The Trust and its Board
receive, and have received since 1998, satisfactory quarterly reports from the
principal service providers as to their preparations for year 2000 readiness,
although there can be no assurance that the service providers (or other
securities market participants) will successfully complete the necessary changes
in a timely manner or that there will be no adverse impact on the Trust.
Moreover, the Trust at this time has not considered retaining alternative
service providers or directly undertaken efforts to achieve year 2000 readiness,
the latter of which would involve substantial expenses without an assurance of
success.
Additionally, issuers of securities generally, as well as those purchased
by the Funds, may confront Year 2000 compliance issues which, if material and
not resolved, could have an adverse impact on securities markets and/or a
specific issuer's performance and could result in a decline in the value of the
securities held by the Funds.
38 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 42
FUND DISTRIBUTIONS AND TAX ISSUES
Investors who buy shares of the Trust should be aware of some important tax
issues. For example, each Fund distributes DIVIDENDS of ordinary income and any
realized net CAPITAL GAINS to shareholders. These distributions are subject to
taxes, unless you hold your shares in a 401(k) plan, an Individual Retirement
Account (IRA), or some other qualified tax-deferred plan or account.
Also, if you sell shares of a Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit again, unless your shares are
held in a qualified tax-deferred plan or account.
The following briefly discusses some of the important federal tax issues
you should be aware of, but is not meant to be tax advice. For tax advice,
please speak with your tax adviser.
DISTRIBUTIONS
Each Fund distributes DIVIDENDS of any net investment income to shareholders on
a regular basis as shown below.
<TABLE>
<CAPTION>
FUND DIVIDENDS DECLARED AND PAID
<S> <C>
Conservative Growth Fund Quarterly
Moderate Growth Fund Semi-Annually
High Growth Fund Annually
</TABLE>
For example, if a Fund owns ACME Corp. stock and the stock pays a dividend,
the Fund will pay out a portion of this dividend to its shareholders, assuming
the Fund's income is more than its costs and expenses. The dividends you receive
from each Fund will be taxed as ordinary income, whether or not they are
reinvested in the Fund.
For Funds that invest in foreign securities, the amount of income available
for distribution to shareholders will be affected by any foreign currency gains
or losses generated by the Fund and cannot be predicted. This fact, coupled with
the different tax and accounting treatment of certain currency gains and losses,
increases the possibility that distributions, in whole or in part, may be a
return of capital to shareholders.
Each Fund also distributes realized net CAPITAL GAINS to shareholders --
typically once a year -- which are generated when the Fund sells its assets for
a profit. For example, if a Fund bought 100 shares of ACME Corp. stock for a
total of $1,000 and more than one year later sold the shares for a total of
$1,500, the Fund has net long-term capital gains of $500, which it will pass
39
<PAGE> 43
FUND DISTRIBUTIONS AND TAX ISSUES
on to shareholders (assuming the Fund's total gains are greater than any losses
it may have). Capital gains are taxed differently depending on how long the Fund
holds the security. If a security is held more than one year before it is sold,
LONG-TERM capital gains are taxed at the rate of 20%, but if the security is
held one year or less, SHORT-TERM capital gains are taxed at ordinary income
rates of up to 39.6%. Different rates apply to corporate shareholders.
For your convenience, a Fund's distributions of dividends and capital gains
are AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you ask us
to pay the distributions in cash, we will send you a check if your account is
with the Transfer Agent. Otherwise, if your account is with a broker, you will
receive a credit to your account. Either way, the distributions may be subject
to taxes, unless your shares are held in a qualified tax-deferred plan or
account. For more information about automatic reinvestment and other shareholder
services, see "Step 4: Additional Shareholder Services" in the next section.
TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year. If you own shares
of a Fund as part of a qualified tax-deferred plan or account, your taxes are
deferred, so you will not receive a Form 1099. However, you will receive a Form
1099 when you take any distributions from your qualified tax-deferred plan or
account.
Fund distributions are generally taxable to you in the calendar year they
are received, except when we declare certain dividends in the fourth quarter and
actually pay them in January of the following year. In such cases, the dividends
are treated as if they were paid on December 31 of the prior year. Corporate
shareholders are eligible for the 70% dividends-received deduction for certain
dividends.
WITHHOLDING TAXES
If federal tax law requires you to provide the Trust with your tax
identification number and certifications as to your tax status, and you fail to
do this, we will withhold and pay to the U.S. Treasury 31% of your distributions
and sale proceeds. If you are subject to backup withholding, we will withhold
and pay to the U.S.
40 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 44
FUND DISTRIBUTIONS AND TAX ISSUES
Treasury 31% of your distributions. Dividends of net investment income and
short-term capital gains paid to a nonresident foreign shareholder generally
will be subject to a U.S. withholding tax of 30%. This rate may be lower,
depending on any tax treaty the U.S. may have with the shareholder's country.
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of a Fund just before the record date (the date that
determines who receives the distribution), that distribution will be paid to
you. As explained above, the distribution may be subject to income or capital
gains taxes. You may think you've done well, since you bought shares one day and
soon thereafter received a distribution. That is not so because when dividends
are paid out, the value of each share of the Fund decreases by the amount of the
dividend and the market changes (if any) to reflect the payout. The distribution
you receive makes up for the decrease in share value. However, the timing of
your purchase does mean that part of your investment came back to you as taxable
income.
QUALIFIED RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts -- available to certain taxpayers beginning in
1998 -- contributions are not tax deductible, but distributions from the plan
may be tax-free. Please contact your financial adviser for information on a
variety of retirement plans offered by Prudential.
41
<PAGE> 45
FUND DISTRIBUTIONS AND TAX ISSUES
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of a Fund for a profit, you have REALIZED A CAPITAL GAIN,
which is subject to tax, unless you hold shares in a qualified tax-deferred plan
or account. The amount of tax you pay depends on how long you owned your shares.
If you sell shares of a Fund for a loss, you may have a capital loss, which you
may use to offset certain capital gains you have.
[RECEIPTS FROM SALE GRAPHIC]
Exchanging your shares of a Fund for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the taxes
described above.
Any gain or loss you may have from selling or exchanging Fund shares will
not be reported on the Form 1099; however, proceeds from the sale or exchange
will be reported on Form 1099-B. Therefore, unless you hold your shares in a
qualified tax-deferred plan or account, you or your financial adviser should
keep track of the dates on which you buy and sell -- or exchange -- Fund shares,
as well as the amount of any gain or loss on each transaction. For tax advice,
please see your tax adviser.
AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares -- which happens automatically approximately seven years after
purchase -- is not a "taxable event" because it does not involve an actual sale
of your Class B shares. This opinion, however, is not binding on the Internal
Revenue Service. For more information about the automatic conversion of Class B
shares, see "Class B Shares Convert to Class A Shares After Approximately Seven
Years" in the next section.
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HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Funds for you, call Prudential Mutual Fund Services
LLC (PMFS) at (800) 225-1852, or contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 15020
NEW BRUNSWICK, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After PMFS
receives your completed application, you will receive an account number. For
additional information about purchasing shares of the Funds, see the back cover
page of this prospectus. We have the right to reject any purchase order
(including an exchange into the Fund) or suspend or modify each Fund's sale of
its shares.
STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of the Funds, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that better meets
your needs. With Class A shares, you pay the sales charge at the time of
purchase, but the operating expenses each year are lower than the expenses of
Class B and Class C shares. With Class B shares, you only pay a sales charge if
you sell your shares within six years (that is why it is called a Contingent
Deferred Sales Charge or CDSC), but the operating expenses each year are higher
than the Class A share expenses. With Class C shares, you pay a 1% front-end
sales charge and a 1% CDSC if you sell within 18 months of purchase, but the
operating expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
- The amount of your investment
- The length of time you expect to hold the shares and the impact of
varying distribution fees
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HOW TO BUY, SELL AND
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- The different sales charges that apply to each share class -- Class A's
front-end sales charge vs. Class B's CDSC vs. Class C's low front-end
sales charge and low CDSC
- Whether you qualify for any reduction or waiver of sales charges
- The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase
- Whether you qualify to purchase Class Z shares.
See "How to Sell Your Shares" for a description of the impact of CDSCs.
Share Class Comparison. Use this chart to help you compare the Funds' different
share classes. The discussion following this chart will tell you whether you are
entitled to a reduction or waiver of any sales charges.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Minimum purchase amount(1) $1,000 $1,000 $2,500 None
Minimum amount for $100 $100 $100 None
subsequent purchases(1)
Maximum initial sales charge 5% of the None 1% of the None
public public
offering price offering price
Contingent Deferred Sales None If sold during: 1% on sales None
Charge (CDSC)(2) Year 1 5% made within 18
Year 2 4% months of
Year 3 3% purchase(2)
Year 4 2%
Years 5/6 1%
Year 7 0%
Annual distribution and .30 of 1%1% 1% None
service (12b-1) fees shown (.25 of 1%
as a percentage of average through July 31, 2000)
net assets(3)
</TABLE>
(1) The minimum investment requirements do not apply to certain retirement and
employee savings plans and custodial accounts for minors. The minimum
initial and subsequent investment for purchases made through the Automatic
Investment Plan is $50. For more information, see "Additional Shareholder
Services -- Automatic Investment Plan."
(2) For more information about the CDSC and how it is calculated, see "How to
sell Your Share -- Contingent Deferred Sales Charge (CDSC)."
(3) These distribution fees are paid from each Fund's assets on a continuous
basis. Over time, the fees will increase the cost of your investment and
may cost you more than paying other types of sales charges. The service fee
for Class A, Class B and Class C shares is .25 of 1%. The distribution fee
for Class A shares is limited to .30 of 1% (including the .25 of 1% service
fee) and is .75 of 1% for Class B and Class C shares.
44 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC} (800) 225-1852
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REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid paying
Class A's initial sales charge.
Increase the Amount of Your Investment. You can reduce Class A's sales charge by
increasing the amount of your investment. This table shows you how the sales
charge decreases as the amount of your investment increases.
<TABLE>
<CAPTION>
SALES CHARGE AS % SALES CHARGE AS % DEALER
AMOUNT OF PURCHASE OF OFFERING PRICE OF AMOUNT INVESTED REALLOWANCE
<S> <C> <C> <C>
LESS THAN $25,000 5.00% 5.26% 4.75%
$25,000 TO $49,999 4.50% 4.71% 4.25%
$50,000 TO $99,999 4.00% 4.17% 3.75%
$100,000 TO $249,999 3.25% 3.36% 3.00%
$250,000 to $499,999 2.50% 2.56% 2.40%
$500,000 TO $999,999 2.00% 2.04% 1.90%
$1 MILLION AND ABOVE* none none none
</TABLE>
* If you invest $1 million or more, you can buy only Class A shares unless you
qualify to buy Class Z shares.
To satisfy the purchase amounts above, you can:
- Invest with an eligible group of related investors
- Buy the Class A shares of two or more Prudential mutual funds at the
same time
- Use your RIGHTS OF ACCUMULATION, which allow you to combine the value
of Prudential mutual fund shares you already own with the value of the
shares you are purchasing for purposes of determining the applicable
sales charge (note: you must notify the Transfer Agent if you qualify
for Rights of Accumulation)
- Sign a LETTER OF INTENT, stating in writing that you or an eligible
group of related investors will purchase a certain amount of shares in
a Fund and other Prudential mutual funds within 13 months.
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HOW TO BUY, SELL AND
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Benefit Plans. Certain group retirement and savings plans may purchase Class A
shares without the initial sales charge if they meet the required minimum for
amount of assets, average account balance or number of eligible employees. For
more information about these requirements, call Prudential at (800) 353-2847.
Mutual Fund Programs. The initial sales charge will be waived for investors in
certain programs sponsored by broker-dealers, investment advisers and financial
planners who have agreements with Prudential Investments Advisory Group relating
to:
- Mutual fund "wrap" or asset allocation programs where the sponsor
places Fund trades and charges its clients a management, consulting or
other fee for its services; or
- Mutual fund "supermarket" programs where the sponsor links its client's
accounts to a master account in the sponsor's name and the sponsor
charges a fee for its services.
Broker-dealers, investments advisors or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in a
Fund in connection with different pricing options for their programs. Investors
should consider carefully any separate transaction and other fees charged by
these programs in connection with investing in each available share class before
selecting a share class.
Other Types of Investors. Other investors pay no sales charge, including certain
officers, employees or agents of Prudential and its affiliates, the Prudential
mutual funds, the subadvisers of the Prudential mutual funds and clients of
brokers that have entered into a selected dealer agreement with the Distributor.
To qualify for a reduction or waiver of the sales charge, you must notify the
Transfer Agent or your broker at the time of purchase. For more information, see
the SAI, "Purchase, Redemption and Pricing of Fund Shares -- Reduction and
Waiver of Initial Sales Charge -- Class A Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
Benefit Plans. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at (800)
353-2847.
46 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC} (800) 225-1852
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HOW TO BUY, SELL AND
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Investment of Redemption Proceeds from Other Investment Companies. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities Incorporated or one of its affiliates. These purchases must be made
within 60 days of the redemption. To qualify for this waiver, you must do one of
the following:
- Purchase your shares through an account at Prudential Securities
- Purchase your shares through an ADVANTAGE Account or an Investor
Account with Pruco Securities Corporation
- Purchase your shares through another broker.
This waiver is not available to investors who purchase shares directly from
the Transfer Agent. If you are entitled to the waiver, you must notify either
the Transfer Agent or your broker. The Transfer Agent may require any supporting
documents it considers appropriate.
QUALIFYING FOR CLASS Z SHARES
Benefit Plans. Certain group retirement plans may purchase Class Z shares if
they meet the required minimum for amount of assets, average account balance or
number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.
Mutual Fund Programs. Class Z shares can also be purchased by participants in
any fee-based program or trust program sponsored by Prudential or an affiliate
that includes the Fund as an available option. Class Z shares can also be
purchased by investors in certain programs sponsored by broker-dealers,
investment and financial planners who have agreements with Prudential
Investments Advisory Group relating to:
- Mutual fund "wrap" or asset allocation program, where the sponsor
places Fund trades, links its clients' accounts to a master account in
the sponsor's name, and charges its clients a management, consulting or
other fee for its services; or
- Mutual fund "supermarket" programs where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor
charges a fee for its services.
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HOW TO BUY, SELL AND
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Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in a
Fund in connection with different pricing options for their programs. Investors
should consider carefully any separate transaction and other fees charged by
these programs in connection with investing in each available share class before
selecting a share class.
Other Types of Investors. Class Z shares can also be purchased by any of the
following:
- Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available option;
- Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund); and
- Prudential, with an investment of $10 million or more.
In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
commission of up to 4% of the purchase price for Class B shares, up to 2% of the
purchase price for Class C shares and a finder's fee for Class Z shares from
their own resources based on a percentage of the net asset value of shares sold
or otherwise.
CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you purchased with reinvested
dividends and other distributions. Since the 12b-1 fees for Class A shares are
lower than for Class B shares, converting to Class A shares lowers your Fund
expenses.
When we do the conversion, you will get fewer Class A shares than the
number of converted Class B shares if the price of the Class A shares is higher
than the price of Class B shares. The total dollar value will be the same, so
you will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your
48 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC} (800) 225-1852
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HOW TO BUY, SELL AND
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purchase. For more information, see the SAI, "Purchase, Redemption and Pricing
of Fund Shares -- Conversion Feature -- Class B Shares."
MUTUAL FUND SHARES
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if Fund XYZ holds ACME Corp. stock in
its portfolio and the price of ACME stock goes up while the value of the fund's
other holdings remains the same and expenses don't change, the NAV of Fund XYZ
will increase.
STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of a Fund is based on the share value. The
share value of a mutual fund -- known as the NET ASSET VALUE or NAV -- is
determined by a simple calculation: it's the total value of the Fund (assets
minus liabilities) divided by the total number of shares outstanding. For
example, if the value of the investments held by Fund XYZ (minus its
liabilities) is $1,000 and there are 100 shares of Fund XYZ owned by
shareholders, the price of one share of the fund -- or the NAV -- is $10 ($1,000
divided by 100). Portfolio securities are valued based upon market quotations
or, if not readily available, at fair value as determined in good faith under
procedures established by the Trust's Board. Most national newspapers report the
NAVs of most mutual funds, which allows investors to check the price of mutual
funds daily.
We determine the NAV of our shares once each business day at 4:15 p.m. New
York Time on days that the New York Stock Exchange (NYSE) is open for
trading.The NYSE is closed on national holidays and Good Friday. We do not
determine the NAV on days when we have not received any orders to purchase, sell
or exchange Fund shares, or when changes in the value of a Fund's portfolio do
not materially affect the NAV.
WHAT PRICE WILL YOU PAY FOR SHARES OF A FUND?
For Class A and Class C shares, you'll pay the public offering price, which is
the NAV next determined after we receive your order to purchase, plus an initial
sales charge (unless you're entitled to a waiver). For Class B and Class Z
shares, you will pay the NAV next determined after we receive your order to
purchase (remember, there are no up-front sales charges for these share
classes). Your broker may charge you a separate or additional fee for purchases
of shares.
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HOW TO BUY, SELL AND
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STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Fund shareholder, you can take advantage of the following services and
privileges:
Automatic Reinvestment. As we explained in the "Fund Distributions and Tax
Issues" section, each Fund pays out -- or distributes -- its net investment
income and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Fund at NAV without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date we
determine who receives dividends.
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015
Automatic Investment Plan. You can make regular purchases of a Fund for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.
Retirement Plan Services. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs or SEP-IRAs for a one-person business,
please contact your financial adviser. If you are interested in opening a 401(k)
or other company-sponsored retirement plan (SIMPLES, SEP plans, Keoghs, 403(b)
plans, pension and profit-sharing plans), your financial adviser will help you
determine which retirement plan best meets your needs. Complete instructions
about how to establish and maintain your plan and how to open accounts for you
and your employees will be included in the retirement plan kit you receive in
the mail.
The PruTector Program. Optional group term life insurance -- which protects the
value of your Prudential mutual fund investment for your beneficiaries against
market declines -- is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges and is
not available in all states.
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HOW TO BUY, SELL AND
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Systematic Withdrawal Plan. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks. Remember, the sale of Class B and
Class C shares may be subject to a CDSC.
Reports to Shareholders. Every year we will send you an annual report (along
with an updated prospectus) and a semiannual report, which contain important
financial information about the Funds. To reduce Fund expenses, we will send one
annual shareholder report, one semiannual shareholder report and one annual
prospectus per household, unless you instruct us or your broker otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of a Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of a Fund -- also known as redeeming your shares --
the price you will receive will be the NAV next determined after the Transfer
Agent, the Distributor or your broker receives your order to sell. If your
broker holds your shares, your broker must receive your order to sell by 4:15
p.m. New York Time to process the sale on that day. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: REDEMPTION SERVICES
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay sending you the proceeds until your check clears, which can take up to 10
days from the purchase date. You can avoid delay if you purchase shares by wire,
certified check or cashier's check. Your broker may charge you a separate or
additional fee for sales of shares.
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HOW TO BUY, SELL AND
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RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of a Fund, or
when we may delay paying you the proceeds from a sale. This may happen during
unusual market conditions or emergencies when the Fund can't determine the value
of its assets or sell its holdings. For more information, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares -- Sale of Shares."
If you are selling more than $100,000 of shares, you want the check sent to
someone or some place that is not in our records, or you are a business or a
trust and you hold your shares directly with the Transfer Agent, you will need
to have the signature on your sell order guaranteed by a financial institution.
For more information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares -- Sale of Shares -- Signature Guarantee."
CONTINGENT DEFERRED SALES CHARGE (CDSC)
If you sell Class B shares within six years of purchase or Class C shares within
18 months of purchase, you will have to pay a CDSC. To keep the CDSC as low as
possible, we will sell amounts representing shares in the following order:
- Amounts representing shares you purchased with reinvested dividends and
distributions
- Amounts representing the increase in NAV above the total amount of
payments for shares made during the past six years for Class B shares
and 18 months for Class C shares.
- Amounts representing the cost of shares held beyond the CDSC period
(six years for Class B shares and 18 months for Class C shares).
Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid -- or at least
minimize -- the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the cost
of shares held for the longest period of time within the applicable CDSC period.
As we noted before in the "Share Class Comparison" chart, the CDSC for
Class B shares is 5% in the first year, 4% in the second, 3% in the third, 2% in
the fourth and 1% in the fifth and sixth years. The rate decreases on the first
52 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
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HOW TO BUY, SELL AND
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day of the month following the anniversary date of your purchase, not on the
anniversary date itself. The CDSC is 1% for Class C shares -- which is applied
to shares sold within 18 months of purchase. For both Class B and Class C
shares, the CDSC is calculated based on the lesser of the original purchase
price or the redemption proceeds. For purposes of determining how long you've
held your shares, all purchases during the month are grouped together and
considered to have been made on the last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase, excluding any
time shares were held in a money market fund.
WAIVER OF THE CDSC -- CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
- After a shareholder is deceased or disabled (or, in the case of a trust
account, the death or disability of the grantor). This waiver applies
to individual shareholders, as well as shares owned in joint tenancy
(with rights of survivorship), provided the shares were purchased
before the death or disability
- To provide for certain distributions -- made without IRS penalty --
from a tax-deferred retirement plan, IRA or Section 403(b) custodial
account
- On certain sales from a Systematic Withdrawal Plan.
For more information on the above and other waivers, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares -- Waiver of Contingent
Deferred Sales Charge -- Class B Shares."
WAIVER OF THE CDSC -- CLASS C SHARES
Benefit Plans. The CDSC will be waived for redemptions by certain group
retirement plans for which Prudential or brokers not affiliated with Prudential
provide administrative or recordkeeping services. The CDSC will also be waived
for certain redemptions by benefit plans sponsored by Prudential and its
affiliates. For more information, call Prudential at (800) 353-2847.
REDEMPTION IN KIND
If the sales of Fund shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of a Fund's net assets, we can then give
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you securities from the Fund's portfolio instead of cash. If you want to sell
the securities for cash, you would have to pay the costs charged by a broker.
SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your account.
We would do this to minimize the Funds' expenses paid by other shareholders. We
will give you 60 days' notice, during which time you can purchase additional
shares to avoid this action. This involuntary sale does not apply to
shareholders who own their shares as part of a 401(k) plan, an IRA or some other
tax-deferred plan or account.
90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the same Fund without
paying an initial sales charge. Also, if you paid a CDSC when you redeemed your
shares, we will credit your new account with the appropriate number of shares to
reflect the amount of the CDSC you paid. In order to take advantage of this
one-time privilege, you must notify the Transfer Agent or your broker at the
time of the repurchase. See the SAI, "Purchase, Redemption and Pricing of Fund
Shares -- Sale of Shares."
RETIREMENT PLANS
To sell shares and receive a distribution from a retirement account, call your
broker or the Transfer Agent for a distribution request form. There are special
distribution and income tax withholding requirements for distributions from
retirement plans and you must submit a withholding form with your request to
avoid delay. If your retirement plan account is held for you by your employer or
plan trustee, you must arrange for the distribution request to be signed and
sent by the plan administrator or trustee. For additional information, see the
SAI.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of a Fund for shares of the same class in certain
other Prudential mutual funds -- including certain money market funds -- if you
satisfy the minimum investment requirements. For example, you can exchange Class
A shares of the Fund for Class A shares of another Prudential mutual
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fund, but you can't exchange Class A shares for Class B, Class C or Class Z
shares. Class B and Class C shares may not be exchanged into money market funds
other than Prudential Special Money Market Fund, Inc. After an exchange, at
redemption the CDSC will be calculated from the first day of the month after
initial purchase, excluding any time shares were held in a money market fund. We
may change the terms of the exchange privilege after giving you 60 days' notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
There is no sales charge for such exchanges. However, if you exchange --
and then sell -- Class B shares within approximately six years of your original
purchase or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged Class B or Class C shares
into a money market fund, the time you hold the shares in the money market
account will not be counted in calculating the required holding period for CDSC
liability.
Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues -- If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account -- Exchange Privilege."
If you own Class B or Class C shares and qualify to purchase Class A shares
without paying an initial sales charge, we will automatically exchange your
Class B or Class C shares which are not subject to a CDSC for Class A shares. We
make such exchanges on a quarterly basis if you qualify for this exchange
privilege. We have obtained a legal opinion that this exchange is not a "taxable
event" for federal income tax purposes. This opinion is not binding on the IRS.
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FREQUENT TRADING
Frequent trading of Fund shares in response to short-term fluctuations in the
market -- also known as "market timing" -- may make it very difficult to manage
a Fund's investments. When market timing occurs, a Fund may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Fund's performance may be hurt. When large dollar amounts are
involved, market timing can also make it difficult to use long-term investment
strategies because we cannot predict how much cash the Fund will have to invest.
When, in our opinion, such activity would have a disruptive effect on portfolio
management, the Trust reserves the right to refuse purchase orders and exchanges
into each Fund by any person, group or commonly controlled account. The Trust
may notify a market timer of rejection of an exchange or purchase order after
the day the order is placed. If the Trust allows a market timer to trade Fund
shares, it may require the market timer to enter into a written agreement to
follow certain procedures and limitations.
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FINANCIAL HIGHLIGHTS
The financial highlights will help you evaluate each Fund's financial
performance. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of that particular Fund,
assuming reinvestment of all dividends and other distributions. The information
is for each share class for the period indicated. Certain information reflects
financial results for a single Fund share.
Review each chart with the financial statements and report of independent
accountants, which appear in the annual report and the SAI and are available
upon request. Additional performance information for each share class is
contained in the annual report, which you can receive at no charge.
CONSERVATIVE GROWTH FUND: CLASS A AND CLASS B SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent
accountants, whose report was unqualified and is contained in the Annual
Report.
CLASS A AND CLASS B SHARES (FISCAL PERIOD ENDED 7-31)(1)
<TABLE>
<CAPTION>
CLASS A CLASS B
PER SHARE OPERATING PERFORMANCE 1999(4) 1999(4)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .19 .14
Net realized and unrealized gain
on investment transactions and foreign currency transactions .35 .34
-------- --------
TOTAL FROM INVESTMENT OPERATIONS .54 .48
-------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income (.18) (.13)
-------- --------
NET ASSET VALUE, END OF PERIOD $ 10.36 $ 10.35
======== ========
TOTAL RETURN(2) 5.34% 4.77%
RATIOS/SUPPLEMENTAL DATA 1999 1999
NET ASSETS, END OF PERIOD (000) $ 9,096 $ 30,235
Average net assets (000) $ 6,157 $ 19,308
RATIOS TO AVERAGE NET ASSETS(3):
Expenses, including distribution fees 1.92% 2.67%
Expenses, excluding distribution fees 1.67% 1.67%
Net investment income 2.69% 1.94%
Portfolio turnover 180% 180%
</TABLE>
(1) Information is shown for the period 11-18-98 (when Class A and Class B
shares were first offered) through 7-31-99.
(2) Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each
period reported. Total returns for periods of less than one year are not
annualized.
(3) Annualized.
(4) Calculated based upon weighted average shares outstanding during the
period.
57
<PAGE> 61
FINANCIAL HIGHLIGHTS
CONSERVATIVE GROWTH FUND: CLASS C AND CLASS Z SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent
accountants, whose report was unqualified and is contained in the Annual
Report.
CLASS C AND CLASS Z SHARES (FISCAL PERIOD ENDED 7-31)(1)
<TABLE>
<CAPTION>
CLASS C CLASS Z
PER SHARE OPERATING PERFORMANCE 1999(4) 1999(4)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .14 .21
Net realized and unrealized gain
on investment transactions and foreign
currency transactions .34 .35
------- -------
TOTAL FROM INVESTMENT OPERATIONS .48 .56
------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income (.13) (.19)
------- -------
NET ASSET VALUE, END OF PERIOD $ 10.35 $ 10.37
======= =======
TOTAL RETURN(2) 4.77% 5.58%
RATIOS/SUPPLEMENTAL DATA 1999 1999
NET ASSETS, END OF PERIOD (000) $14,035 $20,843
Average net assets (000) $12,039 $38,460
RATIOS TO AVERAGE NET ASSETS(3):
Expenses, including distributions fees 2.67% 1.67%
Expenses, excluding distributions fees 1.67% 1.67%
Net investment income 1.91% 2.89%
Portfolio turnover 178% 178%
</TABLE>
(1) Information is shown for the period 11-18-98 (when Class C and Class Z
shares were first offered) through 7-31-99.
(2) Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each
period reported. Total returns for periods of less than one year are not
annualized.
(3) Annualized.
(4) Calculated based upon weighted average shares outstanding during the
period.
58 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 62
FINANCIAL HIGHLIGHTS
MODERATE GROWTH FUND: CLASS A AND CLASS B SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent
accountants, whose report was unqualified and is contained in the Annual
Report.
CLASS A AND CLASS B SHARES (FISCAL PERIOD ENDED 7-31)(1)
<TABLE>
<CAPTION>
CLASS A CLASS B
PER SHARE OPERATING PERFORMANCE 1999 1999
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(4) .12 .06
Net realized and unrealized gain
on investments and foreign currencies .83 .83
------- -------
TOTAL FROM INVESTMENT OPERATIONS .95 .89
LESS DISTRIBUTIONS:
Dividends from net investment income (.09) (.04)
------- -------
NET ASSET VALUE, END OF PERIOD $ 10.86 $ 10.85
TOTAL RETURN(2) 9.47% 8.99%
RATIOS/SUPPLEMENTAL DATA 1999 1999
NET ASSETS, END OF PERIOD (000) $20,372 $58,678
Average net assets (000) $12,286 $36,645
RATIOS TO AVERAGE NET ASSETS(3):
Expenses, including distribution fees 1.88% 2.63%
Expenses, excluding distribution fees 1.63% 1.63%
Net investment income 1.09% .85%
Portfolio turnover 96% 96%
</TABLE>
(1) Information is shown for the period 11-18-98 (when Class A and Class B
shares were first offered) through 7-31-99.
(2) Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each
period reported. Total returns for periods of less than one year are not
annualized.
(3) Annualized.
(4) Calculated based upon weighted average shares outstanding during the
period.
59
<PAGE> 63
FINANCIAL HIGHLIGHTS
MODERATE GROWTH FUND: CLASS C AND CLASS Z SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent
accountants, whose report was unqualified and is contained in the Annual Report.
CLASS C AND CLASS Z SHARES (FISCAL PERIOD ENDED 7-31)(1)
<TABLE>
<CAPTION>
CLASS C CLASS Z
PER SHARE OPERATING PERFORMANCE 1999 1999
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(4) .06 .13
Net realized and unrealized gain
on investments and foreign currencies .83 .84
------- -------
TOTAL FROM INVESTMENT OPERATIONS .89 .97
LESS DISTRIBUTIONS:
Dividends from net investment income (.04) (.10)
------- -------
NET ASSET VALUE, END OF PERIOD $ 10.85 $ 10.87
TOTAL RETURN(2) 8.99% 9.70%
RATIOS/SUPPLEMENTAL DATA 1999 1999
NET ASSETS, END OF PERIOD (000) $22,375 $13,578
Average net assets (000) $18,346 $21,914
RATIOS TO AVERAGE NET ASSETS(3):
Expenses, including distributions fees 2.63% 1.63%
Expenses, excluding distributions fees 1.63% 1.63%
Net investment income .79% 1.68%
Portfolio turnover 96% 96%
</TABLE>
(1) Information is shown for the period 11-18-98 (when Class C and Class Z
shares were first offered) through 7-31-99.
(2) Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each
period reported. Total returns for periods of less than one year are not
annualized.
(3) Annualized.
(4) Calculated based upon weighted average shares outstanding during the
period.
60 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 64
FINANCIAL HIGHLIGHTS
HIGH GROWTH FUND: CLASS A AND CLASS B SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent
accountants, whose report was unqualified and is contained in the Annual Report.
CLASS A AND CLASS B SHARES (FISCAL PERIOD ENDED 7-31)(1)
<TABLE>
<CAPTION>
CLASS A CLASS B
PER SHARE OPERATING PERFORMANCE 1999(4) 1999(4)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) --(5) (0.05)
Net realized and unrealized
on investment transactions and foreign
currency transactions 1.52 1.52
------- -------
TOTAL FROM INVESTMENT OPERATIONS 1.52 1.47
NET ASSET VALUE, END OF PERIOD $ 11.52 $ 11.47
======= =======
TOTAL RETURN(2) 15.20% 14.70%
RATIOS/SUPPLEMENTAL DATA 1999 1999
NET ASSETS, END OF PERIOD (000) $21,428 $41,049
Average net assets (000) $10,442 24,260
RATIOS TO AVERAGE NET ASSETS(3):
Expenses, including distribution fees 1.73% 2.48%
Expenses, excluding distribution fees 1.48% 1.48%
Net investment income 0.02% (0.70)%
Portfolio turnover 38% 38%
</TABLE>
(1) Information is shown for the period 11-18-98 (when Class A and Class B
shares were first offered) through 7-31-99.
(2) Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each
period reported. Total returns for periods of less than one year are not
annualized.
(3) Annualized.
(4) Based on weighted average shares outstanding during the period.
(5) Less than $.005 per share.
61
<PAGE> 65
FINANCIAL HIGHLIGHTS
HIGH GROWTH FUND: CLASS C AND CLASS Z SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent
accountants, whose report was unqualified and is contained in the Annual Report.
CLASS C AND CLASS Z SHARES (FISCAL PERIOD ENDED 7-31)(1)
<TABLE>
<CAPTION>
CLASS C CLASS Z
PER SHARE OPERATING PERFORMANCE 1999(4) 1999(4)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (0.05) 0.02
Net realized and unrealized
on investment transactions and foreign
currency transactions 1.52 1.54
------- -------
TOTAL FROM INVESTMENT OPERATIONS 1.47 1.56
NET ASSET VALUE, END OF PERIOD $ 11.47 $ 11.56
======= =======
TOTAL RETURN(2) 14.70% 15.60%
RATIOS/SUPPLEMENTAL DATA 1999 1999
NET ASSETS, END OF PERIOD (000) $19,914 $36,413
Average net assets (000) $15,204 $45,999
RATIOS TO AVERAGE NET ASSETS(3):
Expenses, including distribution fees 2.48% 1.48%
Expenses, excluding distribution fees 1.48% 1.48%
Net investment income (0.75)% 0.21%
Portfolio turnover 38% 38%
</TABLE>
(1) Information is shown for the period 11-18-98 (when Class C and Class Z
shares were first offered) through 7-31-99.
(2) Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each
period reported. Total returns for periods of less than one year are not
annualized.
(3) Annualized.
(4) Based on weighted average shares outstanding during the period.
62 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 66
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For information about these funds, contact your financial adviser or call
us at (800) 225-1852. Please read the prospectus carefully before you invest or
send money.
STOCK FUNDS
PRUDENTIAL DISTRESSED SECURITIES
FUND, INC.
PRUDENTIAL EMERGING GROWTH FUND, INC.
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL EQUITY INCOME FUND
PRUDENTIAL INDEX SERIES FUND
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
THE PRUDENTIAL INVESTMENT
PORTFOLIOS, INC.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
PRUDENTIAL MID-CAP VALUE FUND
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SECTOR FUNDS, INC.
Prudential Financial Services Fund
Prudential Health Sciences Fund
Prudential Technology Fund
Prudential Utility Fund
PRUDENTIAL SMALL-CAP QUANTUM
FUND, INC.
PRUDENTIAL SMALL COMPANY VALUE
FUND, INC.
PRUDENTIAL TAX-MANAGED EQUITY FUND
PRUDENTIAL 20/20 FOCUS FUND
NICHOLAS-APPLEGATE FUND, INC.
Nicholas-Applegate Growth
Equity Fund
TARGET FUNDS
Large Capitalization Growth Fund
Large Capitalization Value Fund
Small Capitalization Growth Fund
Small Capitalization Value Fund
ASSET ALLOCATION/BALANCED FUNDS
PRUDENTIAL BALANCED FUND
PRUDENTIAL DIVERSIFIED FUNDS
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Prudential Active Balanced Fund
GLOBAL FUNDS
GLOBAL STOCK FUNDS
PRUDENTIAL DEVELOPING MARKETS FUND
Prudential Developing Markets
Equity Fund
Prudential Latin America Equity Fund
PRUDENTIAL EUROPE GROWTH FUND, INC.
PRUDENTIAL GLOBAL GENESIS FUND, INC.
PRUDENTIAL INDEX SERIES FUND
Prudential Europe Index Fund
Prudential Pacific Index Fund
PRUDENTIAL NATURAL RESOURCES
FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
Global Series
International Stock Series
GLOBAL UTILITY FUND, INC.
TARGET FUNDS
International Equity Fund
GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL LIMITED MATURITY FUND, INC.
Limited Maturity Portfolio
PRUDENTIAL INTERMEDIATE GLOBAL
INCOME FUND, INC.
PRUDENTIAL INTERNATIONAL BOND
FUND, INC.
THE GLOBAL TOTAL RETURN FUND, INC.
63
<PAGE> 67
THE PRUDENTIAL MUTUAL FUND FAMILY
BOND FUNDS
TAXABLE BOND FUNDS
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
PRUDENTIAL GOVERNMENT INCOME
FUND, INC.
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Short-Intermediate Term Series
PRUDENTIAL HIGH YIELD FUND, INC.
PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.
PRUDENTIAL INDEX SERIES FUND
Prudential Bond Market Index Fund
PRUDENTIAL STRUCTURED MATURITY
FUND, INC.
Income Portfolio
Target Funds
Total Return Bond Fund
TAX-EXEMPT BOND FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
California Series
California Income Series
PRUDENTIAL MUNICIPAL BOND FUND
High Income Series
Insured Series
PRUDENTIAL MUNICIPAL SERIES FUND
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
PRUDENTIAL NATIONAL MUNICIPALS
FUND, INC.
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
CASH ACCUMULATION TRUST
Liquid Assets Fund
National Money Market Fund
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Money Market Series
U.S. Treasury Money Market Series
PRUDENTIAL SPECIAL MONEY MARKET
FUND, INC.
Money Market Series
PRUDENTIAL MONEYMART ASSETS, INC.
TAX-FREE MONEY MARKET FUNDS
PRUDENTIAL TAX-FREE MONEY FUND, INC.
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
California Money Market Series
PRUDENTIAL MUNICIPAL SERIES FUND
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
COMMAND FUNDS
COMMAND MONEY FUND
COMMAND GOVERNMENT FUND
COMMAND TAX-FREE FUND
INSTITUTIONAL MONEY MARKET FUNDS
PRUDENTIAL INSTITUTIONAL LIQUIDITY PORTFOLIO, INC.
Institutional Money Market Series
64 PRUDENTIAL DIVERSIFIED FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 68
FOR MORE INFORMATION:
- --------------------------------------------------------------------------------
Please read this prospectus before you invest in the Trust and keep it for
future reference. For information or shareholder questions, or to receive a copy
of the SAI or Annual Report, contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling from outside the U.S.)
- --------------------------------------------------------------------------------
Outside Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 778-8769
- --------------------------------------------------------------------------------
Visit Prudential's Web Site At:
HTTP://WWW.PRUDENTIAL.COM
- --------------------------------------------------------------------------------
Additional information about the Trust can be obtained without charge and can be
found in the following documents:
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
(incorporated by reference into this prospectus)
ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies
that significantly affected the Portfolios' performance)
SEMI-ANNUAL REPORT
You can also obtain copies of Trust documents from the Securities and Exchange
Commission as follows:
By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
(The SEC charges a fee to copy documents.)
In Person:
Public Reference Room in Washington, DC
(For hours of operation, call 1(800) SEC-0330)
Via the Internet:
http://www.sec.gov
- --------------------------------------------------------------------------------
CUSIP Numbers:
Conservative Growth Fund
<TABLE>
<S> <C>
Class A: 74432F-10-9 Class C: 74432F-30-7
Class B: 74432F-20-8 Class Z: 74432F-40-8
</TABLE>
Moderate Growth Fund
<TABLE>
<S> <C>
Class A: 74432F-50-5 Class C: 74432F-70-3
Class B: 74432F-60-4 Class Z: 74432F-80-2
</TABLE>
High Growth Fund
<TABLE>
<S> <C>
Class A: 74432F-88-5 Class C: 74432F-86-9
Class B: 74432F-87-7 Class Z: 74432F-85-1
</TABLE>
Investment Company Act File No:
811-08915
MF186A
[LOGO] Printed on Recycled Paper
<PAGE> 69
PRUDENTIAL DIVERSIFIED FUNDS
Statement of Additional Information
September 30, 1999
Prudential Diversified Funds (the Trust) is an open-end, management
investment company currently composed of three separate investment portfolios
(the Funds) professionally managed by Prudential Investments Fund Management LLC
(PIFM or the Manager). Each Fund benefits from discretionary advisory services
provided by several highly regarded sub-advisers (each, an Adviser,
collectively, the Advisers) identified, retained, supervised and compensated by
the Manager. The Trust consists of the following three Funds:
- Prudential Diversified Conservative Growth Fund (the Conservative Growth
Fund)
- Prudential Diversified Moderate Growth Fund (the Moderate Growth Fund)
- Prudential Diversified High Growth Fund (the High Growth Fund)
The Trust's address is Gateway Center Three, 100 Mulberry Street, Newark,
New Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Trust's Prospectus dated September 30, 1999, a copy
of which may be obtained from the Trust upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
History of the Trust........................................ B-2
Description of the Funds, Their Investments and Risks....... B-2
Investment Restrictions..................................... B-33
Management of the Trust..................................... B-34
Control Persons and Principal Holders of Securities......... B-36
Investment Advisory and Other Services...................... B-37
Brokerage Allocation and Other Practices.................... B-44
Capital Shares, Other Securities and Organization........... B-47
Purchase, Redemption and Pricing of Shares.................. B-48
Shareholder Investment Account.............................. B-58
Net Asset Value............................................. B-63
Taxes, Dividends and Distributions.......................... B-64
Performance Information..................................... B-66
Financial Statements........................................ B-
Report of Independent Accountants........................... B-
Appendix I -- Description of Security Ratings............... I-1
Appendix II -- Historical Performance Data.................. II-1
Appendix III -- General Investment Information.............. III-1
Appendix IV -- Information Relating to Prudential........... IV-1
- -------------------------------------------------------------------
</TABLE>
MF186B
<PAGE> 70
HISTORY OF THE TRUST
The Trust was organized as a Delaware business trust on July 29, 1998.
DESCRIPTION OF THE FUNDS, THEIR INVESTMENTS AND RISKS
(a) CLASSIFICATION. The Trust is an open-end management investment
company. Each of the Funds is classified as a diversified fund.
(b) AND (c) INVESTMENT STRATEGIES, POLICIES AND RISKS. The investment
objectives of the Funds and the principal investment policies and strategies for
seeking to achieve the Funds' objectives are set forth in the Trust's
Prospectus. This section provides additional information on the principal
investment policies and strategies of the Funds, as well as information on
certain non-principal investment policies and strategies. The Funds may not be
successful in achieving their respective objectives and you could lose money.
U.S. GOVERNMENT SECURITIES
Each Fund may invest in U.S. Government securities.
U.S. TREASURY SECURITIES. U.S. Treasury securities include bills, notes,
bonds and other debt securities issued by the U.S. Treasury. These instruments
are direct obligations of the U.S. Government and, as such, are backed by the
"full faith and credit" of the United States. They differ primarily in their
interest rates, the lengths of their maturities and the dates of their
issuances.
OBLIGATIONS ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. Securities issued or guaranteed by agencies or
instrumentalities of the U.S. Government include, but are not limited to, GNMA,
FNMA and FHLMC securities. Obligations of GNMA, the Federal Housing
Administration, Farmers Home Administration and the Export-Import Bank are
backed by the full faith and credit of the United States. In the case of
securities not backed by the full faith and credit of the United States, the
Trust must look principally to the agency issuing or guaranteeing the obligation
for ultimate repayment and may not be able to assert a claim against the United
States itself in the event the agency or instrumentality does not meet its
commitments. Such securities include obligations issued by the Student Loan
Marketing Association (SLMA), FNMA and FHLMC, each of which may borrow from the
U.S. Treasury to meet its obligations, although the U.S. Treasury is under no
obligation to lend to such entities. GNMA, FNMA and FHLMC may also issue
collateralized mortgage obligations.
STRIPPED U.S. GOVERNMENT SECURITIES. A Fund may invest in component parts
of U.S. Government securities, namely either the corpus (principal) of such
obligations or one of the interest payments scheduled to be paid on such
obligations. These obligations may take the form of (1) obligations from which
the interest coupons have been stripped; (2) the interest coupons that are
stripped; and (3) book-entries at a Federal Reserve member bank representing
ownership of obligation components.
MORTGAGE-RELATED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES AND INSTRUMENTALITIES. A Fund may invest in mortgage backed securities
and other derivative mortgage products, including those representing an
undivided ownership interest in a pool of mortgages, e.g., GNMA, FNMA and FHLMC
certificates where the U.S. Government or its agencies or instrumentalities
guarantees the payment of interest and principal of these securities. However,
these guarantees do not extend to the securities' yield or value, which are
likely to vary inversely with fluctuations in interest rates, nor do these
guarantees extend to the yield or value of a Fund's shares. See "Mortgage-Backed
Securities and Asset Backed Securities" below.
Mortgages backing the securities which may be purchased by a Portfolio
include conventional thirty-year fixed-rate mortgages, graduated payment
mortgages, fifteen-year mortgages, adjustable rate mortgages and balloon payment
mortgages. A balloon payment mortgage backed security is an amortized mortgage
security with installments of principal and interest, the last installment of
which is predominantly principal. All of these mortgages can be used to create
"pass-through securities." A pass-
B-2
<PAGE> 71
through security is formed when mortgages are pooled together and undivided
interests in the pool or pools are sold. The cash flow from the mortgages is
passed through to the holders of the securities in the form of periodic payments
of interest, principal and prepayments (net of a service fee). Prepayments occur
when the holder of an undivided mortgage prepays the remaining principal before
the mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, mortgage backed
securities are often subject to more rapid prepayment of principal than their
stated maturity would indicate. The remaining expected average life of a pool of
mortgage loans underlying a mortgage backed security is a prediction of when the
mortgage loans will be repaid and is based upon a variety of factors, such as
the demographic and geographic characteristics of the borrowers and the
mortgaged properties, the length of time that each of the mortgage loans has
been outstanding, the interest rates payable on the mortgage loans and the
current interest rate environment.
In addition to GNMA, FNMA or FHLMC certificates through which the holder
receives a share of all interest and principal payments from the mortgages
underlying the certificate, a Portfolio may also invest in mortgage pass-through
securities issued by the U.S. Government or its agencies and instrumentalities,
commonly referred to as mortgage-backed security strips or MBS strips. MBS
strips are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of stripped mortgage security will have one class
receiving some of the interest and most of the principal from the mortgage
assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class), while the other class will
receive all of the principal (the principal-only or "PO" class). The yields to
maturity on IOs and POs are sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and principal
payments may have a material effect on yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Portfolio may not fully recoup its initial investment in IOs. Conversely, if
the underlying mortgage assets experience less than anticipated prepayments of
principal, the yield on POs could be materially adversely affected.
During periods of declining interest rates, prepayment of mortgages
underlying mortgage backed securities can be expected to accelerate. When
mortgage obligations are prepaid, a Fund reinvests the prepaid amounts in
securities, the yields on which reflect interest rates prevailing at that time.
Therefore, a Fund's ability to maintain a portfolio of high-yielding
mortgage-backed securities will be adversely affected to the extent that
prepayments of mortgages are reinvested in securities which have lower yields
than the prepaid mortgages. Moreover, prepayments of mortgages which underlie
securities purchased at a premium generally will result in capital losses.
During periods of rising interest rates, the rate of prepayment of mortgages
underlying mortgage-backed securities can be expected to decline, extending the
projected average maturity of the mortgage-backed securities. This maturity
extension risk may effectively change a security which was considered short- or
intermediate-term at the time of purchase into a long-term security. Long-term
securities generally fluctuate more widely in response to changes in interest
rates than short- or intermediate-term securities.
ZERO COUPON SECURITIES. Zero coupon U.S. Government securities are debt
obligations that are issued or purchased at a significant discount from face
value. The discount approximates the total amount of interest the security will
accrue and compound over the period until maturity or the particular interest
payment date at a rate of interest reflecting the market rate of the security at
the time of issuance. Zero coupon U.S. Government securities do not require the
periodic payment of interest. These investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of cash. These investments
may experience greater volatility in market value than U.S. Government
securities that make regular payments of interest. A Fund accrues income on
these investments for tax and accounting purposes, which is distributable to
shareholders and which, because no cash is received at the time of accrual, may
require the liquidation of other portfolio securities to satisfy the Fund's
distribution obligations, in which case the Fund will forego the purchase of
additional income producing assets with these funds. Zero coupon U.S.
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Government securities include STRIPS and CUBES, which are issued by the U.S.
Treasury as component parts of U.S. Treasury bonds and represent scheduled
interest and principal payments on the bonds.
SPECIAL CONSIDERATIONS. Fixed-income U.S. Government securities are
considered among the most creditworthy of fixed income investments. The yields
available from U.S. Government securities are generally lower than the yields
available from corporate debt securities. The values of U.S. Government
securities will change as interest rates fluctuate. To the extent U.S.
Government securities are not adjustable rate securities, these changes in value
in response to changes in interest rates generally will be more pronounced.
During periods of falling interest rates, the values of outstanding long-term
fixed-rate U.S. Government securities generally rise. Conversely, during periods
of rising interest rates, the values of such securities generally decline. The
magnitude of these fluctuations will generally be greater for securities with
longer maturities. Although changes in the value of U.S. Government securities
will not affect investment income from those securities, they may affect the net
asset value of a Fund.
At a time when a Fund has written call options on a portion of its U.S.
Government securities, its ability to profit from declining interest rates will
be limited. Any appreciation in the value of the securities held in the Fund
above the strike price would likely be partially or wholly offset by unrealized
losses on call options written by a Fund. The termination of option positions
under these conditions would generally result in the realization of capital
losses, which would reduce a Fund's capital gains distribution. Accordingly, a
Fund would generally seek to realize capital gains to offset realized losses by
selling portfolio securities. In such circumstances, however, it is likely that
the proceeds of such sales would be reinvested in lower yielding securities.
CUSTODIAL RECEIPTS
Each Fund may invest in receipts evidencing the component parts (corpus or
coupons) of U.S. Government obligations that have not actually been stripped.
Such receipts evidence ownership of component parts of U.S. Government
obligations (corpus or coupons) purchased by a third party (typically an
investment banking firm) and held on behalf of the third party in physical or
book entry form by a major commercial bank or trust company pursuant to a
custody agreement with the third party. These custodial receipts include
"Treasury Receipts," "Treasury Investment Growth Receipts" (TIGRs) and
"Certificates of Accrual on Treasury Securities" (CATS). Each Fund will not
invest more than 5% of its net assets in such custodial receipts.
Custodial receipts held by a third party are not issued or guaranteed by
the United States Government and are not considered U.S. Government securities.
Each Fund may also invest in such custodial receipts.
MONEY MARKET INSTRUMENTS
Each Fund may invest in high-quality money market instruments, including
commercial paper of a U.S. or non-U.S. company or foreign government securities,
certificates of deposit, bankers' acceptances and time deposits of domestic and
foreign banks, and obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities. Money market obligations will be generally U.S.
dollar denominated. Commercial paper will be rated, at the time of purchase, at
least "A-2" by S&P or "Prime-2" by Moody's, or the equivalent by another NRSRO
or, if not rated, issued by an entity having an outstanding unsecured debt issue
rated at least "A" or "A-2" by S&P or "A" or "Prime-2" by Moody's or the
equivalent by another NRSRO.
CORPORATE AND OTHER DEBT OBLIGATIONS
The Conservative Growth and Moderate Growth Funds may each invest in
corporate and other debt obligations. These debt securities may have adjustable
or fixed rates of interest and in certain instances may be secured by assets of
the issuer. Adjustable rate corporate debt securities may have features similar
to those of adjustable rate mortgage backed securities, but corporate debt
securities, unlike mortgage backed securities, are not subject to prepayment
risk other than through contractual call provisions which generally impose a
penalty for prepayment. Fixed-rate debt securities may also be subject to call
provisions.
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The market value of fixed-income obligations of the Funds will be affected
by general changes in interest rates, which will result in increases or
decreases in the value of such obligations. The market value of the obligations
held by a Fund can be expected to vary inversely with changes in prevailing
interest rates. Investors also should recognize that, in periods of declining
interest rates, a Fund's yield will tend to be somewhat higher than prevailing
market rates and, in periods of rising interest rates, a Fund's yield will tend
to be somewhat lower. Also, when interest rates are falling, the inflow of net
new money to a Fund from the continuous sale of its shares will tend to be
invested in instruments producing lower yields than the balance of its
portfolio, thereby reducing the Fund's current yield. In periods of rising
interest rates, the opposite can be expected to occur. In addition, securities
in which a Fund may invest may not yield as high a level of current income as
might be achieved by investing in securities with less liquidity, less
creditworthiness or longer maturities.
Ratings made available by S&P, Moody's and other NRSRO's are relative and
subjective and are not absolute standards of quality. Although these ratings are
initial criteria for selection of portfolio investments, each Adviser will also
make its own evaluation of these securities on behalf of the Fund. Among the
factors that will be considered are the long-term ability of the issuers to pay
principal and interest and general economic trends.
MEDIUM AND LOWER-RATED SECURITIES. The Conservative Growth and Moderate
Growth Funds may each invest in medium (i.e., rated Baa by Moody's or BBB by S&P
or the equivalent by another NRSRO) and lower-rated securities (i.e., rated
lower than Baa by Moody's or lower than BBB by S&P or the equivalent by another
NRSRO). However, neither Fund will purchase a security rated lower than B by
Moody's or S&P or the equivalent by another NRSRO. Securities rated Baa by
Moody's or BBB by S&P or the equivalent by another NRSRO, although considered
investment grade, possess speculative characteristics, including the risk of
default, and changes in economic or other conditions are more likely to impair
the ability of issuers of these securities to make interest and principal
payments than is the case with respect to issuers of higher-grade bonds.
Generally, medium or lower-rated securities and unrated securities of
comparable quality, sometimes referred to as "junk bonds" (i.e., securities
rated lower than Baa by Moody's or BBB by S&P or the equivalent by another
NRSRO), offer a higher current yield than is offered by higher-rated securities,
but also (i) will likely have some quality and protective characteristics that,
in the judgment of the rating organizations, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (ii) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. The market
values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
higher-quality bonds. In addition, medium and lower-rated securities and
comparable unrated securities generally present a higher degree of credit risk.
The risk of loss due to default by these issuers is significantly greater
because medium and lower-rated securities and unrated securities of comparable
quality generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness. The Advisers, under the supervision of the
Manager and the Trustees, in evaluating the creditworthiness of an issue whether
rated or unrated, take various factors into consideration, which may include, as
applicable, the issuer's financial resources, its sensitivity to economic
conditions and trends, the operating history of and the community support for
the facility financed by the issue, the ability of the issuer's management and
regulatory matters.
In addition, the market value of securities in lower-rated categories is
more volatile than that of higher-quality securities, and the markets in which
medium and lower-rated or unrated securities are traded are more limited than
those in which higher-rated securities are traded. The existence of limited
markets may make it more difficult for each Fund to obtain accurate market
quotations for purposes of valuing its portfolio and calculating its net asset
value. Moreover, the lack of a liquid trading market may restrict the
availability of securities for a Fund to purchase and may also have the effect
of limiting the ability of a Fund to sell securities at their fair value either
to meet redemption requests or to respond to changes in the economy or the
financial markets.
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Lower-rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, a Fund may have
to replace the security with a lower-yielding security, resulting in a decreased
return for investors. Also, as the principal value of bonds moves inversely with
movements in interest rates, in the event of rising interest rates the value of
the securities held by a Fund may decline proportionately more than a portfolio
consisting of higher-rated securities. If a Fund experiences unexpected net
redemptions, it may be forced to sell its higher-rated bonds, resulting in a
decline in the overall credit quality of the securities held by the Fund and
increasing the exposure of the Fund to the risks of lower-rated securities.
Investments in zero coupon bonds may be more speculative and subject to greater
fluctuations in value due to changes in interest rates than bonds that pay
interest currently.
Ratings of fixed-income securities represent the rating agency's opinion
regarding their credit quality and are not a guarantee of quality. Rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than a rating indicates. See "Description of Security Ratings" in the
Prospectus.
Subsequent to its purchase by a Fund, an issue of securities may cease to
be rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither event will require sale of these securities by the Fund, but
the Adviser will consider this event in its determination of whether the Fund
should continue to hold the securities.
During the fiscal period ended July 31, 1999, the monthly dollar-weighted
average ratings of the debt obligations held by the Funds, expressed as a
percentage of each Fund's total investments, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
RATINGS INVESTMENTS
- ------- --------------------------
CONSERVATIVE MODERATE
GROWTH FUND GROWTH FUND
------------ -----------
<S> <C> <C>
AAA/Aaa --% --%
AA/Aa --% --%
A/A -- --%
BBB/Baa -- --%
BB/Ba -- --%
B/B -- --
CCC/Caa -- --
CC/Ca -- --
C/C -- --
Unrated -- --%
- ------------------------------------------------
</TABLE>
COMMERCIAL PAPER. Each Fund may invest in commercial paper. Commercial
paper consists of short-term (usually from 1 to 270 days) unsecured promissory
notes issued by corporations in order to finance their current operations. A
variable amount master demand note (which is a type of commercial paper)
represents a direct borrowing arrangement involving periodically fluctuating
rates of interest under a letter agreement between a commercial paper issuer and
an institutional lender pursuant to which the lender may determine to invest
varying amounts.
ADJUSTABLE RATE SECURITIES. The Conservative Growth and Moderate Growth
Funds may each invest in adjustable rate securities. Adjustable rate securities
are debt securities having interest rates which are adjusted or reset at
periodic intervals ranging from one month to three years. The interest rate of
an adjustable rate security typically responds to changes in general market
levels of interest. The interest paid on any particular adjustable rate security
is a function of the index upon which the interest rate of that security is
based.
The adjustable rate feature of the securities in which a Fund may invest
will tend to reduce sharp changes in a Fund's net asset value in response to
normal interest rate fluctuations. As the coupon rates of a Fund's adjustable
rate securities are reset periodically, yields of these portfolio securities
will reflect changes in market rates and should cause the net asset value of a
Fund's shares to fluctuate less
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dramatically than that of a fund invested in long-term fixed-rate securities.
However, while the adjustable rate feature of such securities will tend to limit
sharp swings in a Fund's net asset value in response to movements in general
market interest rates, it is anticipated that during periods of fluctuations in
interest rates, the net asset value of a Fund will fluctuate.
INFLATION-INDEXED BONDS. The Conservative Growth and Moderate Growth Funds
may invest in inflation-indexed bonds issued by governmental entities and
corporations. Inflation-indexed bonds are fixed income securities whose
principal value is periodically adjusted according to the rate of inflation.
Such bonds generally are issued at an interest rate lower than typical bonds,
but are expected to retain their principal value over time. The interest rate on
these bonds is fixed at issuance, but over the life of the bond this interest
may be paid on an increasing principal value, which has been adjusted for
inflation.
Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity.
FOREIGN SECURITIES
The Conservative Growth and Moderate Growth Funds may each invest in
foreign equity and debt securities and the High Growth Fund may invest in
foreign equity securities, including securities of issuers in emerging market
countries.
A Fund's investments in foreign government securities may include debt
securities issued or guaranteed, as to payment of principal and interest, by
governments, semi-governmental entities, governmental agencies, supranational
entities and other governmental entities (collectively, the Government Entities)
of countries considered stable by an Adviser. A "supranational entity" is an
entity constituted by the national governments of several countries to promote
economic development. Examples of such supranational entities include, among
others, the World Bank, the European Investment Bank and the Asian Development
Bank. Debt securities of "semi-governmental entities" are issued by entities
owned by a national, state, or equivalent government or are obligations of a
political unit that are not backed by the national government's "full faith and
credit" and general taxing powers. Examples of semi-governmental issuers
include, among others, the Province of Ontario and the City of Stockholm.
Foreign government securities also include mortgage-backed securities issued by
foreign government entities including semi-governmental entities.
A Fund may invest in mortgage-backed securities issued or guaranteed by
foreign government entities including semi-governmental entities, and Brady
Bonds, which are long term bonds issued by government entities in developing
countries as part of a restructuring of their commercial loans.
The values of foreign investments are affected by changes in currency rates
or exchange control regulations, restrictions or prohibitions on the
repatriation of foreign currencies, application of foreign tax laws, including
withholding taxes, changes in governmental administration or economic or
monetary policy (in the United States or abroad) or changed circumstances in
dealings between nations. Costs are also incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions and
custody fees are generally higher than those charged in the United States, and
foreign securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the United States,
including expropriation, confiscatory taxation, lack of uniform accounting and
auditing standards and potential difficulties in enforcing contractual
obligations and could be subject to extended clearance and settlement periods.
CURRENCY RISKS. Because some of the securities purchased by the Funds are
denominated in currencies other than the U.S. dollar, changes in foreign
currency exchange rates will affect each Fund's net asset value; the value of
interest earned; gains and losses realized on the sale of securities; and net
investment income and capital gain, if any, to be distributed to shareholders by
each Fund. If the value of a foreign currency rises against the U.S. dollar, the
value of a Fund's assets denominated in that currency will increase;
correspondingly, if the value of a foreign currency declines against the U.S.
dollar,
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<PAGE> 76
the value of a Fund's assets denominated in that currency will decrease. Under
the Internal Revenue Code, the Funds are required to separately account for the
foreign currency component of gains or losses, which will usually be viewed
under the Internal Revenue Code as items of ordinary and distributable income or
loss, thus affecting the Funds' distributable income.
The exchange rates between the U.S. dollar and foreign currencies are a
function of such factors as supply and demand in the currency exchange markets,
international balances of payments, governmental interpretation, speculation and
other economic and political conditions. Although the Funds value their assets
daily in U.S. dollars, the Funds will not convert their holdings of foreign
currencies to U.S. dollars daily. When a Fund converts its holdings to another
currency, it may incur conversion costs. Foreign exchange dealers may realize a
profit on the difference between the price at which they buy and sell
currencies.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN EURO-DENOMINATED
SECURITIES. On January 1, 1999, 11 of the 15 member states of the European
Monetary Union introduced the "euro" as a common currency. During a three year
transitional period, the euro will coexist with each participating state's
currency and on July 1, 2002, the euro is expected to become the sole currency
of the participating states. During the transition period, the Funds will treat
the euro as a separate currency from that of any participating state.
The conversion may adversely affect the Funds if the euro does not take
effect as planned; if a participating state withdraws from the European Monetary
Union; or if the computing, accounting and trading systems used by the Funds'
service providers, or by entities with which the Trust or its service providers
do business, are not capable of recognizing the euro as a distinct currency at
the time of, and following, euro conversion. In addition, the conversion could
cause markets to become more volatile.
The overall effect of the transition of member states' currencies to the
euro is not known at this time. It is likely that more general short- and
long-term ramifications can be expected, such as changes in the economic
environment and change in the behavior of investors, which would affect a Fund's
investments and its net asset value. In addition, although U.S. Treasury
regulations generally provide that the euro conversion will not, in itself,
cause a U.S. taxpayer to realize gain or loss, other changes that may occur at
the time of the conversion, such as accrual periods, holiday conventions,
indices, and other features may require the realization of a gain or loss by the
Funds as determined under existing tax law.
The Trust's Manager has taken steps: (1) that it believes will reasonably
address euro-related changes to enable the Trust and its service providers to
process transactions accurately and completely with minimal disruption to
business activities and (2) to obtain reasonable assurances that appropriate
steps have been taken by the Trust's other service providers to address the
conversion. The Trust has not borne any expense relating to these actions.
MORTGAGE-BACKED SECURITIES AND ASSET-BACKED SECURITIES
MORTGAGE BACKED SECURITIES -- GENERAL. The Conservative Growth and
Moderate Growth Funds may each invest in mortgage backed securities. Mortgage
backed securities are securities that directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans secured by
real property. There are currently three basic types of mortgage backed
securities: (1) those issued or guaranteed by the U.S. Government or one of its
agencies or instrumentalities, such as GNMA, FNMA and FHLMC, described under
"U.S. Government Securities" above; (2) those issued by private issuers that
represent an interest in or are collateralized by mortgage backed securities
issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities; and (3) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or mortgage backed
securities without a government guarantee but usually having some form of
private credit enhancement. In addition, the Conservative Growth and Moderate
Growth Funds may invest in mortgage-related securities issued or guaranteed by
foreign, national, state or provincial governmental instrumentalities, including
semi-governmental agencies.
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GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association (GNMA Certificates) are mortgage-backed securities which evidence an
undivided interest in a pool or pools of mortgages. GNMA Certificates that the
Funds purchase are the "modified pass-through" type, which entitle the holder to
receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment. The GNMA Certificates will
represent a pro rata interest in one or more pools of the following types of
mortgage loans: (1) fixed rate level payment mortgage loans; (2) fixed rate
graduated payment mortgage loans; (3) fixed rate growing equity mortgage loans;
(4) fixed rate mortgage loans secured by manufactured (mobile) homes; (5)
mortgage loans on multifamily residential properties under construction; (6)
mortgage loans on completed multifamily projects; (7) fixed rate mortgage loans
as to which escrowed funds are used to reduce the borrower's monthly payments
during the early years of the mortgage loans ("buydown" mortgage loans); (8)
mortgage loans that provide for adjustments in payments based on periodic
changes in interest rates or in other payment terms of the mortgage loans; and
(9) mortgage-backed serial notes. All of these mortgage loans will be FHA Loans
or VA Loans and, except as otherwise specified above, will be fully-amortizing
loans secured by first liens on one-to-four family housing units.
FNMA CERTIFICATES. The Federal National Mortgage Association (FNMA) is a
federally chartered and privately owned corporation organized and existing under
the Federal National Mortgage Association Charter Act. FNMA provides funds to
the mortgage market primarily by purchasing home mortgage loans from local
lenders, thereby replenishing their funds for additional lending. FNMA acquires
funds to purchase home mortgage loans from many capital market investors that
may not ordinarily invest in mortgage loans directly.
Each FNMA Certificate will entitle the registered holder thereof to receive
amounts, representing such holder's pro rata interest in scheduled principal
payments and interest payments (at such FNMA Certificate's pass-through rate,
which is net of any servicing and guarantee fees on the underlying mortgage
loans), and any principal prepayments on the mortgage loans in the pool
represented by such FNMA Certificate and such holder's proportionate interest in
the full principal amount of any foreclosed or otherwise finally liquidated
mortgage loan. The full and timely payment of principal and interest on each
FNMA Certificate will be guaranteed by FNMA, which guarantee is not backed by
the full faith and credit of the U.S. Government.
Each FNMA Certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (1) fixed rate level payment mortgage loans; (2) fixed rate
growing equity mortgage loans; (3) fixed rate graduated payment mortgage loans;
(4) variable rate California mortgage loans; (5) other adjustable rate mortgage
loans; and (6) fixed rate mortgage loans secured by multifamily projects.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation (FHLMC) is a
corporate instrumentality of the United States created pursuant to the Emergency
Home Finance Act of 1970, as amended (the FHLMC Act). Its purpose is to promote
development of a nationwide secondary market in conventional residential
mortgages. The principal activity of FHLMC consists of the purchase of first
lien, conventional, residential mortgage loans and participation interests in
such mortgage loans and the resale of the mortgage loans so purchased in the
form of mortgage securities, primarily FHLMC Certificates.
FHLMC issues two types of mortgage pass-through securities, mortgage
participation certificates (PCs) and guaranteed mortgage certificates (GMCs).
PCs resemble GNMA Certificates in that each PC represents a pro rata share of
all interest and principal payments made and owned on the underlying pool. FHLMC
guarantees timely monthly payment of interest on PCs and the ultimate payment of
principal.
GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years.
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FHLMC CERTIFICATES. FHLMC guarantees to each registered holder of the
FHLMC Certificate the timely payment of interest at the rate provided for by
such FHLMC Certificate, whether or not received. FHLMC also guarantees to each
registered holder of a FHLMC Certificate ultimate collection of all principal on
the related mortgage loans, without any offset or deduction, but does not,
generally, guarantee the timely payment of scheduled principal. FHLMC may remit
the amount due on account of its guarantee of collection of principal at any
time after default on an underlying mortgage loan, but not later than 30 days
following (1) foreclosure sale, (2) payment of a claim by any mortgage insurer
or (3) the expiration of any right of redemption, whichever occurs later, but in
any event no later than one year after demand has been made upon the mortgagor
for accelerated payment of principal. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by the full faith
and credit of the U.S. Government.
FHLMC Certificates represent a pro rata interest in a group of mortgage
loans (a FHLMC Certificate group) purchased by FHLMC. The mortgage loans
underlying the FHLMC Certificates will consist of fixed rate or adjustable rate
mortgage loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first liens on one-to four-family
residential properties or multifamily projects. Each mortgage loan must meet the
applicable standards set forth in the FHLMC Act. An FHLMC Certificate group may
include whole loans, participation interests in whole loans and undivided
interests in whole loans and participations comprising another FHLMC Certificate
group.
The market value of mortgage securities, like other securities, will
generally vary inversely with changes in market interest rates, declining when
interest rates rise and rising when interest rates decline. However, mortgage
securities, while having comparable risk of decline during periods of rising
rates, usually have less potential for capital appreciation than other
investments of comparable maturities due to the likelihood of increased
prepayments of mortgages as interest rates decline. In addition, to the extent
such mortgage securities are purchased at a premium, mortgage foreclosures and
unscheduled principal prepayments generally will result in some loss of the
holders' principal to the extent of the premium paid. On the other hand, if such
mortgage securities are purchased at a discount, an unscheduled prepayment of
principal will increase current and total returns and will accelerate the
recognition of income which when distributed to shareholders will be taxable as
ordinary income.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
(ARMs) are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed rates. Generally, ARMs have a specified maturity
date and amortize principal over their life. In periods of declining interest
rates, there is a reasonable likelihood that ARMs will experience increased
rates of prepayment of principal. However, the major difference between ARMs and
fixed rate mortgage securities is that the interest rate and the rate of
amortization of principal of ARMs can and do change in accordance with movements
in a particular, pre-specified, published interest rate index.
The amount of interest on an ARM is calculated by adding a specified
amount, the "margin," to the index, subject to limitations on the maximum and
minimum interest that can be charged to the mortgagor during the life of the
mortgage or to maximum and minimum changes to that interest rate during a given
period. Because the interest rate on ARMs generally moves in the same direction
as market interest rates, the market value of ARMs tends to be more stable than
that of long-term fixed rate securities.
There are two main categories of indices which serve as benchmarks for
periodic adjustments to coupon rates on ARMs; those based on U.S. Treasury
securities and those derived from a calculated measure such as a cost of funds
index or a moving average of mortgage rates. Commonly utilized indices include
the one-year and five-year constant maturity Treasury Note rates, the
three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on
longer-term Treasury securities, the 11th District Federal Home Loan Bank Cost
of Funds, the National Median Cost of Funds, the one-month or three-month London
Interbank Offered Rate ("LIBOR"), the prime rate of a specific bank, or
commercial paper rates. Some indices, such as the one-year constant maturity
Treasury Note rate, closely mirror changes in market interest rate levels.
Others, such as the 11th District Home Loan Bank Cost of Funds index (often
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related to ARMs issued by FNMA), tend to lag changes in market rate levels and
tend to be somewhat less volatile.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES. CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by GNMA,
FNMA or FHLMC Certificates, but also may be collateralized by whole loans or
private mortgage pass-through securities (such collateral collectively
hereinafter referred to as "Mortgage Assets"). Multiclass pass-through
securities are equity interests in a trust composed of Mortgage Assets. Payments
of principal and interest on the Mortgage Assets, and any reinvestment income
thereon, provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass-through securities. CMOs may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including depository institutions, mortgage
banks, investment banks and special purpose subsidiaries of the foregoing. The
issuer of a series of CMOs may elect to be treated as a Real Estate Mortgage
Investment Conduit (REMIC). All future references to CMOs include REMICs.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on all classes of CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a CMO series in a number of
different ways. Generally, the purpose of the allocation of the cash flow of a
CMO to the various classes is to obtain a more predictable cash flow to the
individual tranches than exists with the underlying collateral of the CMO. As a
general rule, the more predictable the cash flow on a CMO tranche, the lower the
anticipated yield will be on that tranche at the time of issuance relative to
prevailing market yields on mortgage-backed securities.
A Fund also may invest in, among other things, parallel pay CMOs and
Planned Amortization Class CMOs (PAC Bonds). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
In reliance on a Securities and Exchange Commission (the SEC)
interpretation, a Fund's investments in certain qualifying collateralized
mortgage obligations (CMOs), including CMOs that have elected to be treated as
REMICs, are not subject to the Investment Company Act's limitation on acquiring
interests in other investment companies. In order to be able to rely on the
SEC's interpretation, the CMOs and REMICs must be unmanaged, fixed-asset
issuers, that (1) invest primarily in mortgage-backed securities, (2) do not
issue redeemable securities, (3) operate under general exemptive orders
exempting them from all provisions of the Investment Company Act and (4) are not
registered or regulated under the Investment Company Act as investment
companies. To the extent that a Fund selects CMOs or REMICs that do not meet the
above requirements, the Fund may not invest more than 10% of its assets in all
such entities, may not invest more than 5% of its total assets in a single
entity, and may not acquire more than 3% of the voting securities of any single
such entity.
STRIPPED MORTGAGE BACKED SECURITIES. Stripped mortgage backed securities
or MBS strips are derivative multiclass mortgage securities. In addition to MBS
strips issued by agencies or instrumentalities of the U.S. Government, a Fund
may purchase MBS strips issued by private originators of, or investors in,
mortgage loans, including depository institutions, mortgage banks, investment
banks and special purpose subsidiaries of the foregoing. See "U.S. Government
Securities--Mortgage Related Securities Issued or Guaranteed by U.S. Government
Agencies and Instrumentalities" above.
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ASSET-BACKED SECURITIES. The Conservative Growth and Moderate Growth Funds
may each invest in asset-backed securities. Through the use of trusts and
special purpose corporations, various types of assets, primarily automobile and
credit card receivables and home equity loans, have been securitized in
pass-through structures similar to the mortgage pass-through structures or in a
pay-through structure similar to the CMO structure. A Fund may invest in these
and other types of asset-backed securities that may be developed in the future.
Asset-backed securities present certain risks that are not presented by mortgage
backed securities. Primarily, these securities do not have the benefit of a
security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, some of which may reduce the ability
to obtain full payment. In the case of automobile receivables, the security
interests in the underlying automobiles are often not transferred when the pool
is created, with the resulting possibility that the collateral could be resold.
In general, these types of loans are of shorter average life than mortgage loans
and are less likely to have substantial prepayments.
TYPES OF CREDIT ENHANCEMENT. Mortgage backed securities and asset-backed
securities are often backed by a pool of assets representing the obligations of
a number of different parties. To lessen the effect of failures by obligors on
underlying assets to make payments, those securities may contain elements of
credit support which fall into two categories: (1) liquidity protection and (2)
protection against losses resulting from ultimate default by an obligor on the
underlying assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to seek to ensure that
the receipt of payments on the underlying pool occurs in a timely fashion.
Protection against losses resulting from default seeks to ensure ultimate
payment of the obligations on at least a portion of the assets in the pool. This
protection may be provided through guarantees, insurance policies or letters of
credit obtained by the issuer or sponsor from third parties, through various
means of structuring the transaction or through a combination of such
approaches. The degree of credit support provided for each issue is generally
based on historical information respecting the level of credit risk associated
with the underlying assets. Delinquencies or losses in excess of those
anticipated could adversely affect the return on an investment in a security. A
Fund will not pay any additional fees for credit support, although the existence
of credit support may increase the price of a security.
RISK FACTORS RELATING TO INVESTING IN MORTGAGE BACKED AND ASSET-BACKED
SECURITIES. The yield characteristics of mortgage backed and asset-backed
securities differ from traditional debt securities. Among the major differences
are that interest and principal payments are made more frequently, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans or other assets generally may be prepaid at any time. As a
result, if a Fund purchases such a security at a premium, a prepayment rate that
is faster than expected will reduce yield to maturity, while a prepayment rate
that is slower than expected will have the opposite effect of increasing yield
to maturity. Alternatively, if a Fund purchases these securities at a discount,
faster than expected prepayments will increase, while slower than expected
prepayments will reduce, yield to maturity. Moreover, slower than expected
prepayments may effectively change a security which was considered short- or
intermediate-term at the time of purchase into a long-term security. Long-term
securities generally lead to increased volatility of net asset value because
they tend to fluctuate more widely in response to changes in interest rates than
short- or intermediate-term securities. A Fund may invest a portion of its
assets in derivative mortgage backed securities such as MBS Strips which are
highly sensitive to changes in prepayment and interest rates. Each Adviser will
seek to manage these risks (and potential benefits) by diversifying its
investments in such securities and, in certain circumstances, through hedging
techniques.
In addition, mortgage backed securities which are secured by manufactured
(mobile) homes and multi-family residential properties, such as GNMA and FNMA
certificates, are subject to a higher risk of default than are other types of
mortgage backed securities.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed-rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by a Fund are likely to be greater during a period of
declining interest rates and, as a
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result, likely to be reinvested at lower interest rates than during a period of
rising interest rates. Asset-backed securities, although less likely to
experience the same prepayment rates as mortgage-backed securities, may respond
to certain of the same factors influencing prepayments, while at other times
different factors will predominate. Mortgage backed securities and asset-backed
securities may decrease in value as a result of increases in interest rates and
may benefit less than other fixed-income securities from declining interest
rates because of the risk of prepayment. During periods of rising interest
rates, the rate of prepayment of mortgages underlying mortgage-backed securities
can be expected to decline, extending the projected average maturity of the
mortgage-backed securities. This maturity extension risk may effectively change
a security which was considered short- or intermediate-term at the time of
purchase into a long-term security. Long-term securities generally fluctuate
more widely in response to changes in interest rates than short- or
intermediate-term securities.
CONVERTIBLE SECURITIES
Each Fund may invest in convertible securities. A convertible security is
typically a bond, debenture, corporate note, preferred stock or other similar
security which may be converted at a stated price within a specified period of
time into a specified number of shares of common stock or other equity
securities of the same or a different issuer. Convertible securities are
generally senior to common stocks in a corporation's capital structure, but are
usually subordinated to similar nonconvertible securities. While providing a
fixed income stream (generally higher in yield than the income derivable from a
common stock but lower than that afforded by a similar nonconvertible security),
a convertible security also affords an investor the opportunity, through its
conversion feature, to participate in the capital appreciation attendant upon a
market price advance in the convertible security's underlying common stock.
Convertible securities also include preferred stocks, which technically are
equity securities.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security) or
its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security is
also influenced by the market value of the security's underlying common stock.
The price of a convertible security tends to increase as the market value of the
underlying common stock rises, whereas it tends to decrease as the market value
of the underlying stock declines. While no securities investment is without some
risk, investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
LOAN PARTICIPATIONS
Each of the Conservative Growth and Moderate Growth Funds may invest up to
5% of its net assets in high quality participation interests having remaining
maturities not exceeding one year in loans extended by banks to United States
and foreign companies. In a typical corporate loan syndication, a number of
lenders, usually banks (co-lenders), lend a corporate borrower a specified sum
pursuant to the terms and conditions of a loan agreement. One of the co-lenders
usually agrees to act as the agent bank with respect to the loan. The loan
agreement among the corporate borrower and the co-lenders identifies the agent
bank as well as sets forth the rights and duties of the parties. The agreement
often (but not always) provides for the collateralization of the corporate
borrower's obligations thereunder and includes various types of restrictive
covenants which must be met by the borrower.
The participation interests acquired by a Fund may, depending on the
transaction, take the form of a direct or co-lending relationship with the
corporate borrower, an assignment of an interest in the loan by a co-lender or
another participant, or a participation in the seller's share of the loan.
Typically, the Fund will look to the agent bank to collect principal of and
interest on a participation interest, to monitor compliance with loan covenants,
to enforce all credit remedies, such as foreclosures on collateral, and to
notify co-lenders of any adverse changes in the borrower's financial condition
or declarations of insolvency. The agent bank in such cases will be qualified to
serve as a custodian for a registered investment company
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such as the Trust. The agent bank is compensated for these services by the
borrower pursuant to the terms of the loan agreement.
When a Fund acts as co-lender in connection with a participation interest
or when the Fund acquires a participation interest the terms of which provide
that the Fund will be in privity with the corporate borrower, the Fund will have
direct recourse against the borrower in the event the borrower fails to pay
scheduled principal and interest. In cases where the Fund lacks such direct
recourse, the Fund will look to the agent bank to enforce appropriate credit
remedies against the borrower.
The Funds believe that the principal credit risk associated with acquiring
participation interests from a co-lender or another participant is the credit
risk associated with the underlying corporate borrower. A Fund may incur
additional credit risk, however, when a Fund is in the position of participant
rather than a co-lender because the Fund must assume the risk of insolvency of
the co-lender from which the participation interest was acquired and that of any
person interpositioned between the Fund and the co-lender. However, in acquiring
participation interests, the Fund will conduct analysis and evaluation of the
financial condition of each such co-lender and participant to ensure that the
participation interest meets the Fund's high quality standard and will continue
to do so as long as it holds a participation. For purposes of a Fund's
requirement to maintain diversification for tax purposes, the issuer of a loan
participation will be the underlying borrower. In cases where a Fund does not
have recourse directly against the borrower, both the borrower and each agent
bank and co-lender interposed between the Fund and the borrower will be deemed
issuers of the loan participation for tax diversification purposes.
For purposes of each Fund's fundamental investment restriction against
investing 25% or more of its total assets in any one industry, a Fund will
consider all relevant factors in determining who is the issuer of a loan
participation including the credit quality of the underlying borrower, the
amount and quality of the collateral, the terms of the loan participation
agreement and other relevant agreements (including any intercreditor
agreements), the degree to which the credit of such intermediary was deemed
material to the decision to purchase the loan participation, the interest
environment, and general economic conditions applicable to the borrower and such
intermediary.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from a Fund at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. Each Portfolio does not currently intend to invest in repurchase
agreements whose maturities exceed one year. The resale price is in excess of
the purchase price, reflecting an agreed-upon rate of return effective for the
period of time a Fund's money is invested in the repurchase agreement. A Fund's
repurchase agreements will at all times be fully collateralized in an amount at
least equal to the resale price. The instruments held as collateral are valued
daily, and if the value of instruments declines, a Fund will require additional
collateral. In the event of a default, insolvency or bankruptcy by a seller, the
Fund will promptly seek to liquidate the collateral. In such circumstances, the
Fund could experience a delay or be prevented from disposing of the collateral.
To the extent that the proceeds from any sale of such collateral upon a default
in the obligation to repurchase are less than the resale price, the Fund will
suffer a loss.
The Funds will only enter into repurchase transactions with parties meeting
creditworthiness standards approved by the Trustees. Each Adviser will monitor
the creditworthiness of such parties.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
Each Fund may each enter into reverse repurchase agreements and the
Conservative Growth and Moderate Growth Funds may enter into dollar rolls. The
proceeds from such transactions will be used for the clearance of transactions
or to take advantage of investment opportunities.
Reverse repurchase agreements involve sales by a Fund of securities
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price. During the reverse
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repurchase agreement period, the Fund continues to receive principal and
interest payments on these securities.
Dollar rolls involve sales by a Fund of securities for delivery in the
current month and a simultaneous contract to repurchase substantially similar
(same type and coupon) securities on a specified future date from the same
party. During the roll period, a Fund forgoes principal and interest paid on the
securities. A Fund is compensated by the difference between the current sales
price and the forward price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale. A "covered roll" is a specific type of dollar roll for which there is an
offsetting cash position or a cash equivalent security position which matures on
or before the forward settlement date of the dollar roll transaction.
A Fund will segregate with its custodian cash or other liquid assets equal
in value to its obligations in respect of reverse repurchase agreements and
dollar rolls. Reverse repurchase agreements and dollar rolls involve the risk
that the market value of the securities retained by a Fund may decline below the
price of the securities a Fund has sold but is obligated to repurchase under the
agreement. If the buyer of securities under a reverse repurchase agreement or
dollar roll files for bankruptcy or becomes insolvent, a Fund's use of the
proceeds of the agreement may be restricted pending a determination by the other
party, or its trustee or receiver, whether to enforce a Fund's obligation to
repurchase the securities.
Reverse repurchase agreements and dollar rolls, including covered dollar
rolls, are speculative techniques involving leverage and are considered
borrowings by a Fund for purposes of the percentage limitations applicable to
borrowings. See "Borrowing" below.
INTEREST RATE SWAP TRANSACTIONS
The Conservative Growth and Moderate Growth Funds may each enter into
interest rate swap transactions. Interest rate swaps involve the exchange by a
Fund with another party of their respective commitments to pay or receive
interest, for example, an exchange of floating rate payments for fixed-rate
payments. A Fund expects to enter into these transactions primarily to preserve
a return or spread on a particular investment or portion of its portfolio or to
protect against any increase in the price of securities a Fund anticipates
purchasing at a later date. A Fund intends to use these transactions as a hedge
and not as a speculative investment.
Each Fund may enter into either asset-based interest rate swaps or
liability-based interest rate swaps, depending on whether it is hedging its
assets or its liabilities. A Fund will usually enter into interest rate swaps on
a net basis, i.e., the two payment streams are netted out, with a Fund receiving
or paying, as the case may be, only the net amount of the two payments. Since
these hedging transactions are entered into for good faith hedging purposes and
cash or other liquid assets are segregated, the Manager and the Advisers believe
such obligations do not constitute senior securities and, accordingly, will not
treat them as being subject to the borrowing restrictions applicable to each
Fund. The net amount of the excess, if any, of a Fund's obligations over its
entitlements with respect to each interest rate swap will be accrued on a daily
basis and an amount of cash or other liquid assets having an aggregate net asset
value at least equal to the accrued excess will be segregated by a custodian
that satisfies the requirements of the Investment Company Act. To the extent
that a Fund enters into interest rate swaps on other than a net basis, the
amount segregated will be the full amount of a Fund's obligations, if any, with
respect to such interest rate swaps, accrued on a daily basis. The Funds will
not enter into any interest rate swaps unless the unsecured senior debt or the
claims-paying ability of the other party thereto is rated in the highest rating
category of at least one nationally recognized rating organization at the time
of entering into such transaction. If there is a default by the other party to
such a transaction, a Fund will have contractual remedies pursuant to the
agreement related to the transaction. The swap market has grown substantially in
recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid.
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The use of interest rate swaps is highly speculative activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Adviser is incorrect in its
forecast of market values, interest rates and other applicable factors, the
investment performance of a Fund would diminish compared to what it would have
been if this investment technique was never used.
A Fund may only enter into interest rate swaps to hedge its portfolio.
Interest rate swaps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rates swaps is limited to the net amount of interest payments that a
Fund is contractually obligated to make. This amount will not exceed 5% of a
Fund's net assets. If the other party to an interest rate swap defaults, a
Fund's risk of loss consists of the net amount of interest payments that a Fund
is contractually entitled to receive. Since interest rate swaps are individually
negotiated, a Fund expects to achieve an acceptable degree of correlation
between its rights to receive interest on its portfolio securities and its
rights and obligations to receive and pay interest pursuant to interest rate
swaps.
ILLIQUID SECURITIES
Each Fund may hold up to 15% of its net assets in illiquid securities.
Illiquid securities include repurchase agreements which have a maturity of
longer than seven days, securities that are not readily marketable in securities
markets either within or outside of the United States and securities that have
legal or contractual restrictions on resale (restricted securities). Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (Securities Act),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The Manager anticipates that the market for
certain restricted securities such as institutional commercial paper,
convertible securities and foreign securities will expand further as a result of
this regulation and the development of automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the NASD.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and privately placed commercial paper for which there is a
readily available market are treated as liquid only when
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deemed liquid under procedures established by the Trustees. The Advisers will
monitor the liquidity of such restricted securities subject to the supervision
of the Trustees. In reaching liquidity decisions, the Advisers will consider,
among others, the following factors: (1) the frequency of trades and quotes for
the security; (2) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (3) dealer undertakings to make a
market in the security and (4) the nature of the security and the nature of the
marketplace trades (that is, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer). In addition, in
order for commercial paper that is issued in reliance on Section 4(2) of the
Securities Act to be considered liquid, (a) it must be rated in one of the two
highest rating categories by at least two NRSROs, or if only one NRSRO rates the
securities, by that NRSRO, or, if unrated, be of comparable quality in the view
of the Adviser; and (2) it must not be "traded flat" (i.e., without accrued
interest) or in default as to principal or interest. The Portfolio's investments
in Rule 144A securities could have the effect of increasing illiquidity to the
extent that qualified institutional buyers become, for a time, uninterested in
purchasing Rule 144A securities.
The staff of the Commission has taken the position that purchased
over-the-counter (OTC) options and the assets used as "cover" for written OTC
options are illiquid securities unless the Fund and the counterparty have
provided for the Fund, at the Fund's election, to unwind the OTC option. The
exercise of such an option ordinarily would involve the payment by the Fund of
an amount designated to effect the counterparty's economic loss from an early
termination, but does allow the Fund to treat the assets used as "cover" as
"liquid." However, with respect to U.S. Government securities, a Fund may treat
the securities it uses as "cover" for written OTC options on U.S. Government
securities as liquid provided it follows a specified procedure. A Fund may sell
such OTC options only to qualified dealers who agree that a Fund may repurchase
any options it writes for a maximum price to be calculated by a predetermined
formula. In such cases, OTC options would be considered liquid only to the
extent that the maximum repurchase price under the formula exceeds the intrinsic
value of the option.
When a Fund enters into interest rate swaps on other than a net basis, the
entire amount of the Fund's obligations, if any, with respect to such interest
rate swaps will be treated as illiquid. To the extent that a Fund enters into
interest rate swaps on a net basis, the net amount of the excess, if any, of the
Fund's obligations over its entitlements with respect to each interest rate swap
will be treated as illiquid. The Funds will also treat non-U.S. Government POs
and IOs as illiquid securities so long as the staff of the Commission maintains
its position that such securities are illiquid.
INVESTMENT COMPANY SECURITIES
The Funds may invest in securities issued by other investment companies
which invest in short-term debt securities and which seek to maintain a $1.00
net asset value per share (money market funds). The Funds may also invest in
securities issued by other investment companies with similar investment
objectives. The Funds may purchase shares of investment companies investing
primarily in foreign securities, including so-called "country funds." Country
funds have portfolios consisting primarily of securities of issuers located in
one foreign country. Securities of other investment companies will be acquired
within the limits prescribed by the Investment Company Act. As a shareholder of
another investment company, a Portfolio would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the expenses
each Portfolio bears in connection with its own operations.
RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
The Funds may each engage in various portfolio strategies, including using
derivatives, to seek to reduce certain risks of its investments and to enhance
return. A Fund, and thus its investors, may lose money through any unsuccessful
use of these strategies. These strategies currently include the use of foreign
currency forward contracts, options, futures contracts and options thereon. A
Fund's ability to use these strategies may be limited by various factors, such
as market conditions, regulatory limits and tax considerations, and there can be
no assurance that any of these strategies will succeed. See "Taxes,
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Dividends and Distributions." If new financial products and risk management
techniques are developed, each Fund may use them to the extent consistent with
its investment objectives and policies.
RISKS OF RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES -- GENERAL.
Participation in the options and futures markets and in currency exchange
transactions involves investment risks and transaction costs to which a Fund
would not be subject absent the use of these strategies. A Fund, and thus its
investors, may lose money through any unsuccessful use of these strategies. If
an Adviser's predictions of movements in the direction of the securities,
foreign currency or interest rate markets are inaccurate, the adverse
consequences to a Fund may leave the Fund in a worse position than if such
strategies were not used. Risks inherent in the use of these strategies include
(1) dependence on the Advisor's ability to predict correctly movements in the
direction of interest rates, securities prices and currency markets; (2)
imperfect correlation between the price of options and futures contracts and
options thereon and movements in the prices of the securities being hedged; (3)
the fact that skills needed to use these strategies are different from those
needed to select portfolio securities; (4) the possible absence of a liquid
secondary market for any particular instrument at any time; (5) the risk that
the counterparty may be unable to complete the transaction; and (6) the possible
inability of a Fund to purchase or sell a portfolio security at a time that
otherwise would be favorable for it to do so, or the possible need for a Fund to
sell a portfolio security at a disadvantageous time, due to the need for a Fund
to maintain "cover" or to segregate assets in connection with hedging
transactions.
OPTIONS TRANSACTIONS. A Fund may purchase and write (that is, sell) put
and call options on securities, currencies and financial indices that are traded
on U.S. and foreign securities exchanges or in the OTC market to seek to enhance
return or to protect against adverse price fluctuations in securities in its
portfolio. These options will be on equity securities, debt securities,
aggregates of debt securities, financial indices (for example, S&P 500) and U.S.
Government securities. The Funds may also purchase and write put and call
options on foreign currencies and foreign currency futures. A Fund may write
covered put and call options to attempt to generate additional income through
the receipt of premiums, purchase put options in an effort to protect the value
of a security that it owns against a decline in market value and purchase call
options in an effort to protect against an increase in price of securities or
currencies it intends to purchase. A Fund may also purchase put and call options
to offset previously written put and call options of the same series.
A call option gives the purchaser, in exchange for a premium paid, the
right for a specified period of time to purchase the securities or currency
subject to the option at a specified price (the exercise price or strike price).
The writer of a call option, in return for the premium, has the obligation, upon
exercise of the option, to deliver, depending upon the terms of the option
contract, the underlying securities or a specified amount of cash to the
purchaser upon receipt of the exercise price. When a Fund writes a call option,
the Fund gives up the potential for gain on the underlying securities or
currency in excess of the exercise price of the option during the period that
the option is open. There is no limitation on the amount of call options a Fund
may write.
A put option gives the purchaser, in return for a premium, the right, for a
specified period of time, to sell the securities or currency subject to the
option to the writer of the put at the specified exercise price. The writer of
the put option, in return for the premium, has the obligation, upon exercise of
the option, to acquire the securities or currency underlying the option at the
exercise price. The Fund might, therefore, be obligated to purchase the
underlying securities or currency for more than their current market price.
A Fund will write only "covered" options. A written option is covered if,
so long as the Fund is obligated under the option, it (1) owns an offsetting
position in the underlying security or currency or (2) segregates cash or other
liquid assets, in an amount equal to or greater than its obligation under the
option. Under the first circumstance, the Fund's losses are limited because it
owns the underlying security; under the second circumstance, in the case of a
written call option, the Fund's losses are potentially unlimited. A Fund may
only write covered put options to the extent that cover for such options does
not exceed 25% of the Fund's net assets. A Fund will not purchase an option if,
as a result of such
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purchase, more than 20% of its total assets would be invested in premiums for
options and options on futures.
OPTIONS ON SECURITIES. The purchaser of a call option has the right, for a
specified period of time, to purchase the securities subject to the option at a
specified price (the exercise price or strike price). By writing a call option,
the Fund becomes obligated during the term of the option, upon exercise of the
option, to deliver the underlying securities or a specified amount of cash to
the purchaser against receipt of the exercise price. When a Fund writes a call
option, the Fund loses the potential for gain on the underlying securities in
excess of the exercise price of the option during the period that the option is
open.
The purchaser of a put option has the right, for a specified period of
time, to sell the securities subject to the option to the writer of the put at
the specified exercise price. By writing a put option, the Fund becomes
obligated during the term of the option, upon exercise of the option, to
purchase the securities underlying the option at the exercise price. The Fund
might, therefore, be obligated to purchase the underlying securities for more
than their current market price.
The writer of an option retains the amount of the premium, although this
amount may be offset or exceeded, in the case of a covered call option, by an
increase and, in the case of a covered put option, by a decline in the market
value of the underlying security during the option period.
A Fund may wish to protect certain portfolio securities against a decline
in market value at a time when put options on those particular securities are
not available for purchase. The Fund may therefore purchase a put option on
other carefully selected securities, the values of which the Adviser expects
will have a high degree of positive correlation to the values of such portfolio
securities. If the Adviser's judgment is correct, changes in the value of the
put options should generally offset changes in the value of the portfolio
securities being hedged. If the Adviser's judgment is not correct, the value of
the securities underlying the put option may decrease less than the value of the
Fund's investments and therefore the put option may not provide complete
protection against a decline in the value of the Fund's investments below the
level sought to be protected by the put option.
A Fund may similarly wish to hedge against appreciation in the value of
debt securities that it intends to acquire at a time when call options on such
securities are not available. The Fund may, therefore, purchase call options on
other carefully selected debt securities the values of which the Adviser expects
will have a high degree of positive correlation to the values of the debt
securities that the Fund intends to acquire. In such circumstances the Fund will
be subject to risks analogous to those summarized above in the event that the
correlation between the value of call options so purchased and the value of the
securities intended to be acquired by the Fund is not as close as anticipated
and the value of the securities underlying the call options increases less than
the value of the securities to be acquired by the Fund.
A Fund may write options on securities in connection with buy-and-write
transactions; that is, the Fund may purchase a security and concurrently write a
call option against that security. If the call option is exercised, the Fund's
maximum gain will be the premium it received for writing the option, adjusted
upwards or downwards by the difference between the Fund's purchase price of the
security and the exercise price of the option. If the option is not exercised
and the price of the underlying security declines, the amount of the decline
will be offset in part, or entirely, by the premium received.
The exercise price of a call option may be below ("in-the-money"), equal to
("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is written. A Fund may also buy and
write straddles (i.e., a combination of a call and a put written on the same
security at the same strike price where the same segregated collateral is
considered "cover" for both the put and the call). In such cases, a Fund will
segregate with its Custodian cash or other liquid assets equivalent to the
amount, if any, by which the put is "in-the-money, "i.e., the amount by which
the exercise price of the put exceeds the current market value of the underlying
security. It is contemplated that a Fund's use of straddles will be limited to
5% of the Fund's net assets (meaning that the securities
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used for cover or segregated as described above will not exceed 5% of the Fund's
net assets at the time the straddle is written). The writing of a call and a put
on the same security at the same stock price where the call and put are covered
by different securities is not considered a straddle for the purposes of this
limit. Buy-and-write transactions using in-the-money call options may be used
when it is expected that the price of the underlying security will remain flat
or decline moderately during the option period. Buy-and-write transactions using
at-the-money call options may be used when it is expected that the price of the
underlying security will remain fixed or advance moderately during the option
period. A buy-and-write transaction using an out-of-the-money call option may be
used when it is expected that the premium received from writing the call option
plus the appreciation in the market price of the underlying security up to the
exercise price will be greater than the appreciation in the price of the
underlying security alone. If the call option is exercised in such a
transaction, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
Fund's purchase price of the security and the exercise price of the option. If
the option is not exercised and the price of the underlying security declines,
the amount of the decline will be offset in part, or entirely, by the premium
received.
Prior to being notified of exercise of the option, the writer of an
exchange-traded option that wishes to terminate its obligation may effect a
"closing purchase transaction" by buying an option of the same series as the
option previously written. (Options of the same series are options with respect
to the same underlying security, having the same expiration date and the same
strike price.) The effect of the purchase is that the writer's position will be
cancelled by the exchange's affiliated clearing organization. Likewise, an
investor who is the holder of an exchange-traded option may liquidate a position
by effecting a "closing sale transaction" by selling an option of the same
series as the option previously purchased. There is no guarantee that either a
closing purchase or a closing sale transaction can be effected.
Exchange-traded options are issued by a clearing organization affiliated
with the exchange on which the option is listed which, in effect, gives its
guarantee to every exchange-traded option transaction. In contrast, OTC options
are contracts between the Fund and its counter-party with no clearing
organization guarantee. Thus, when the Fund purchases an OTC option, it relies
on the dealer from which it has purchased the OTC option to make or take
delivery of the securities underlying the option. Failure by the dealer to do so
would result in the loss of the premium paid by the Fund as well as the loss of
the expected benefit of the transaction. As such, the value of an OTC option is
particularly dependent upon the financial viability of the OTC counterparty. The
Trustees will approve a list of dealers with which the Funds may engage in OTC
options.
Exchange traded options generally have a continuous liquid market while OTC
options may not. When a Fund writes an OTC option, it generally will be able to
close out the OTC options prior to its expiration only by entering into a
closing purchase transaction with the dealer to which the Fund originally wrote
the OTC option. While the Fund will enter into OTC options only with dealers
which agree to, and which are expected to be capable of, entering into closing
transactions with the Fund, there can be no assurance that the Fund will be able
to liquidate an OTC option at a favorable price at any time prior to expiration.
Until the Fund is able to effect a closing purchase transaction in a covered OTC
call option the Fund has written, it will not be able to liquidate securities
used as cover until the option expires or is exercised or different cover is
substituted. In the event of insolvency of the counterparty, the Fund may be
unable to liquidate an OTC option. With respect to options written by a Fund,
the inability to enter into a closing purchase transaction could result in
material losses to the Fund.
OTC options purchased by a Fund will be treated as illiquid securities
subject to any applicable limitation on such securities. Similarly, the assets
used to "cover" OTC options written by the Fund will be treated as illiquid
unless the OTC options are sold to qualified dealers who agree that the Fund may
repurchase any OTC options it writes for a maximum price to be calculated by a
formula set forth in the option agreement. The "cover" for an OTC option written
subject to this procedure would be considered illiquid only to the extent that
the maximum repurchase price under the formula exceeds the intrinsic value of
the option.
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Each Fund may write only "covered" options. A call option written by the
Fund is "covered" if the Fund owns the security underlying the option or has an
absolute and immediate right to acquire that security without additional
consideration (or for additional consideration segregated by its Custodian) upon
conversion or exchange of other securities held in its portfolio. A call option
is also covered if the Fund holds on a share-for-share basis a call on the same
security as the call written where the exercise price of the call held is equal
to or less than the exercise price of the call written; where the exercise price
of the call held is greater than the exercise price of the call written, the
Fund will segregate cash or other liquid assets with its Custodian. A put option
written by the Fund is "covered" if the Fund holds on a share-for-share basis a
put on the same security as the put written where the exercise price of the put
held is equal to or greater than the exercise price of the put written;
otherwise the Fund will segregate cash or other liquid assets with its Custodian
equivalent in value to the exercise price of the option. This means that so long
as the Fund is obligated as the writer of a call option, it will own the
underlying securities subject to the option or an option to purchase the same
underlying securities, having an exercise price equal to or less than the
exercise price of the "covered" option, or will segregate with its Custodian for
the term of the option cash or other liquid assets having a value equal to or
greater than the exercise price of the option. In the case of a straddle written
by the Fund, the amount segregated will equal the amount, if any, by which the
put is "in-the-money."
OPTIONS ON GNMA CERTIFICATES. Options on GNMA Certificates are not
currently traded on any exchange. However, each Fund may each purchase and write
such options should they commence trading on any exchange and may purchase or
write OTC Options on GNMA certificates.
Since the remaining principal balance of GNMA Certificates declines each
month as a result of mortgage payments, the Fund, as a writer of a covered GNMA
call holding GNMA Certificates as "cover" to satisfy its delivery obligation in
the event of assignment of an exercise notice, may find that its GNMA
Certificates no longer have a sufficient remaining principal balance for this
purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA Certificates from the same pool (if
obtainable) or replacement GNMA Certificates in the cash market in order to
remain covered.
A GNMA Certificate held by a Fund to cover an option position in any but
the nearest expiration month may cease to represent cover for the option in the
event of a decline in the GNMA coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time. Should this occur,
the Fund will no longer be covered, and the Fund will either enter into a
closing purchase transaction or replace the GNMA Certificate with a GNMA
Certificate which represents cover. When the Fund closes its position or
replaces the GNMA Certificate, it may realize an unanticipated loss and incur
transaction costs.
RISKS OF OPTIONS TRANSACTIONS. An exchange-traded option position may be
closed out only on an exchange which provides a secondary market for an option
of the same series. Although the Fund will generally purchase or write only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange will exist for any
particular option, or at any particular time, and for some exchange-traded
options, no secondary market on an exchange may exist. In such event, it might
not be possible to effect closing transactions in particular options, with the
result that the Fund would have to exercise its exchange-traded options in order
to realize any profit and may incur transaction costs in connection therewith.
If the Fund as a covered call option writer is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (4) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (5) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle
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<PAGE> 90
current trading volume; or (6) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date, to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in the class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by a clearing corporation as a result of trades on that exchange
would continue to be exercisable in accordance with their terms. There is no
assurance that higher than anticipated trading activity or other unforeseen
events might not, at times, render certain of the facilities of any of the
clearing corporations inadequate, and thereby result in the institution by an
exchange of special procedures which may interfere with the timely execution of
customers' orders.
In the event of the bankruptcy of a broker through which the Fund engages
in options transactions, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an OTC option purchased by the Fund,
the Fund could experience a loss of all or part of the value of the option.
Transactions are entered into by the Fund only with brokers or financial
institutions deemed creditworthy by the investment adviser.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.
OPTIONS ON SECURITIES INDICES. Each Fund may purchase and write call and
put options on securities indices in an attempt to hedge against market
conditions affecting the value of securities that the Fund owns or intends to
purchase, and not for speculation. Through the writing or purchase of index
options, the Fund can achieve many of the same objectives as through the use of
options on individual securities. Options on securities indices are similar to
options on a security except that, rather than the right to take or make
delivery of a security at a specified price, an option on a securities index
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the securities index upon which the option is based
is greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. This amount of cash is equal to such difference
between the closing price of the index and the exercise price of the option. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike security options, all settlements are in cash
and gain or loss depends upon price movements in the market generally (or in a
particular industry or segment of the market), rather than upon price movements
in individual securities. Price movements in securities that the Fund owns or
intends to purchase will probably not correlate perfectly with movements in the
level of an index and, therefore, the Fund bears the risk that a loss on an
index option would not be completely offset by movements in the price of such
securities.
When a Fund writes an option on a securities index, it will be required to
deposit with its custodian, and mark-to-market, eligible securities equal in
value to 100% of the exercise price in the case of a put, or the contract value
in the case of a call. In addition, where the Fund writes a call option on a
securities index at a time when the contract value exceeds the exercise price,
the Fund will segregate and mark-to-market, until the option expires or is
closed out, cash or cash equivalents equal in value to such excess.
Options on a securities index involve risks similar to those risks relating
to transactions in financial futures contracts described below. Also, an option
purchased by the Fund may expire worthless, in which case the Fund would lose
the premium paid therefor.
RISKS OF OPTIONS ON INDICES. A Fund's purchase and sale of options on
indices will be subject to risks described above under "Risks of Options
Transactions." In addition, the distinctive characteristics of options on
indices create certain risks that are not present with stock options.
Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this occurred, the Fund would not be able to
close
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<PAGE> 91
out options which it had purchased or written and, if restrictions on exercise
were imposed, may be unable to exercise an option it holds, which could result
in substantial losses to the Fund. It is the policy of each Fund to purchase or
write options only on indices which include a number of stocks sufficient to
minimize the likelihood of a trading halt in the index.
The ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop in all index option contracts. A Fund
will not purchase or sell any index option contract unless and until, in the
Adviser's opinion, the market for such options has developed sufficiently that
the risk in connection with such transactions is not substantially greater than
the risk in connection with options on securities in the index.
SPECIAL RISKS OF WRITING CALLS ON INDICES. Because exercises of index
options are settled in cash, a call writer such as a Fund cannot determine the
amount of its settlement obligations in advance and, unlike call writing on
specific stocks, cannot provide in advance for, or cover, its potential
settlement obligations by acquiring and holding the underlying securities.
However, a Fund will write call options on indices only under the circumstances
described herein.
Price movements in a Fund's security holdings probably will not correlate
precisely with movements in the level of the index and, therefore, the Fund
bears the risk that the price of the securities held by the Fund may not
increase as much as the index. In such event, the Fund would bear a loss on the
call which is not completely offset by movements in the price of the Fund's
security holdings. It is also possible that the index may rise when the Fund's
stocks do not rise. If this occurred, the Fund would experience a loss on the
call which is not offset by an increase in the value of its portfolio and might
also experience a loss in its portfolio. However, because the value of a
diversified portfolio will, over time, tend to move in the same direction as the
market, movements in the value of the Fund in the opposite direction as the
market would be likely to occur for only a short period or to a small degree.
Unless a Fund has other liquid assets which are sufficient to satisfy the
exercise of a call, the Fund would be required to liquidate portfolio securities
in order to satisfy the exercise. Because an exercise must be settled within
hours after receiving the notice of exercise, if the Fund fails to anticipate an
exercise, it may have to borrow from a bank (in amounts not exceeding 33 1/3% of
the Fund's total assets) pending settlement of the sale of securities in its
portfolio and would incur interest charges thereon.
When a Fund has written a call, there is also a risk that the market may
decline between the time the Fund has a call exercised against it, at a price
which is fixed as of the closing level of the index on the date of exercise, and
the time the Fund is able to sell stocks in its portfolio. As with stock
options, the Fund will not learn that an index option has been exercised until
the day following the exercise date but, unlike a call on stock where the Fund
would be able to deliver the underlying securities in settlement, the Fund may
have to sell part of its investment portfolio in order to make settlement in
cash, and the price of such securities might decline before they can be sold.
This timing risk makes certain strategies involving more than one option
substantially more risky with index options than with stock options. For
example, even if an index call which the Fund has written is "covered" by an
index call held by the Fund with the same strike price, the Fund will bear the
risk that the level of the index may decline between the close of trading on the
date the exercise notice is filed with the clearing corporation and the close of
trading on the date the Fund exercises the call it holds or the time the Fund
sells the call which, in either case, would occur no earlier than the day
following the day the exercise notice was filed.
If the Fund holds an index option and exercises it before final
determination of the closing index value for that day, it runs the risk that the
level of the underlying index may change before closing. If such a change causes
the exercised option to fall out-of-the-money, the Fund will be required to pay
the difference between the closing index value and the exercise price of the
option (times the applicable multiplier) to the assigned writer. Although the
Fund may be able to minimize this risk by withholding exercise instructions
until just before the daily cutoff time or by selling rather than exercising an
option when the index level is close to the exercise price, it may not be
possible to eliminate this risk entirely
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because the cutoff times for index options may be earlier than those fixed for
other types of options and may occur before definitive closing index values are
announced.
FUTURES CONTRACTS. Each Fund may enter into futures contracts and related
options which are traded on a commodities exchange or board of trade to reduce
certain risks of its investments and to attempt to enhance returns, in each case
in accordance with regulations of the Commodity Futures Trading Commission. The
Funds, and thus their investors, may lose money through any unsuccessful use of
these strategies.
As a purchaser of a futures contract, a Fund incurs an obligation to take
delivery of a specified amount of the obligation underlying the futures contract
at a specified time in the future for a specified price. As a seller of a
futures contract, the Fund incurs an obligation to deliver the specified amount
of the underlying obligation at a specified time in return for an agreed upon
price. A Fund may purchase futures contracts on debt securities, aggregates of
debt securities, financial indices and U.S. Government securities including
futures contracts or options linked to LIBOR. Eurodollar futures contracts are
currently traded on the Chicago Mercantile Exchange. They enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate
for borrowings. A Fund would use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps are
linked. See the discussion of "Risks of Options Transactions."
A Fund will purchase or sell futures contracts for the purpose of hedging
its portfolio (or anticipated portfolio) securities against changes in
prevailing interest rates. If the Adviser anticipates that interest rates may
rise and, concomitantly, the price of the Fund's securities holdings may fall,
the Fund may sell a futures contract. If declining interest rates are
anticipated, the Fund may purchase a futures contract to protect against a
potential increase in the price of securities the Fund intends to purchase.
Subsequently, appropriate securities may be purchased by the Fund in an orderly
fashion; as securities are purchased, corresponding futures positions would be
terminated by offsetting sales of contracts. In addition, futures contracts will
be bought or sold in order to close out a short or long position in a
corresponding futures contract.
Although most futures contracts call for actual delivery or acceptance of
securities, the contracts usually are closed out before the settlement date
without the making or taking of delivery. A futures contract sale is closed out
by effecting a futures contract purchase for the same aggregate amount of the
specific type of security and the same delivery date. If the sale price exceeds
the offsetting purchase price, the seller would be paid the difference and would
realize a gain. If the offsetting purchase price exceeds the sale price, the
seller would pay the difference and would realize a loss. Similarly, a futures
contract purchase is closed out by effecting a futures contract sale for the
same aggregate amount of the specific type of security and the same delivery
date. If the offsetting sale price exceeds the purchase price, the purchaser
would realize a gain, whereas if the purchase price exceeds the offsetting sale
price, the purchaser would realize a loss. There is no assurance that the Fund
will be able to enter into a closing transaction.
When a Fund enters into a futures contract it is initially required to
deposit with its Custodian, in a segregated account in the name of the broker
performing the transaction an "initial margin" of cash or other liquid
securities equal to approximately 2-3% of the contract amount. Initial margin
requirements are established by the exchanges on which futures contracts trade
and may, from time to time, change. In addition, brokers may establish margin
deposit requirements in excess of those required by the exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a brokers' client but is, rather, a good faith deposit on a futures
contract which will be returned to the Fund upon the proper termination of the
futures contract. The margin deposits made are marked-to-market daily and the
Fund may be required to make subsequent deposits into the segregated account,
maintained at its Custodian for that purpose, or cash or U.S. Government
securities, called "variation margin," in the name of the broker, which are
reflective of price fluctuations in the futures contract.
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OPTIONS ON FUTURES CONTRACTS. The Funds may each purchase call and put
options on futures contracts which are traded on an exchange and enter into
closing transactions with respect to such options to terminate an existing
position. An option on a futures contract gives the purchaser the right (in
return for the premium paid), and the writer the obligation, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put) at a specified exercise price at any time
during the term of the option. Upon exercise of the option, the assumption of an
offsetting futures position by the writer and holder of the option will be
accompanied by delivery of the accumulated cash balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract at exercise exceeds, in the case of a call, or is less than, in
the case of a put, the exercise price of the option on the futures contract.
A Fund may only write "covered" put and call options on futures contracts.
A Fund will be considered "covered" with respect to a call option it writes on a
futures contract if the Fund owns the assets which are deliverable under the
futures contract or an option to purchase that futures contract having a strike
price equal to or less than the strike price of the "covered" option and having
an expiration date not earlier than the expiration date of the "covered" option,
or if it segregates with its Custodian for the term of the option cash or other
liquid assets equal to the fluctuating value of the optioned future. The Fund
will be considered "covered" with respect to a put option it writes on a futures
contract if it owns an option to sell that futures contract having a strike
price equal to or greater than the strike price of the "covered" option, or if
it segregates with its Custodian for the term of the option cash or other liquid
assets at all times equal in value to the exercise price of the put (less any
initial margin deposited by the Portfolio with its Custodian with respect to
such option). There is no limitation on the amount of the Fund's assets which
can be segregated.
A Fund will purchase options on futures contracts for identical purposes to
those set forth above for the purchase of a futures contract (purchase of a call
option or sale of a put option) and the sale of a futures contract (purchase of
a put option or sale of a call option), or to close out a long or short position
in futures contracts. If, for example, the Adviser wished to protect against an
increase in interest rates and the resulting negative impact on the value of a
portion of its U.S. Government securities holdings, it might purchase a put
option on an interest rate futures contract, the underlying security which
correlates with the portion of the securities holdings the Adviser seeks to
hedge.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. A Fund may
purchase or sell futures contracts or purchase related options thereon for bona
fide hedging transactions without limit. In addition, a Fund may use futures
contracts and options thereon for any other purpose to the extent that the
aggregate initial margin and option premium does not exceed 5% of the market
value of the Fund. There is no overall limitation on the percentage of the
Fund's assets which may be subject to a hedge position. In addition, in
accordance with the regulations of the Commodity Futures Trading Commission
(CFTC) the Fund is exempt from registration as a commodity pool operator.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. A Fund's
successful use of futures contracts and related options depends upon the
investment adviser's ability to predict the direction of the market and is
subject to various additional risks. The correlation between movements in the
price of a futures contract and the price of the securities or currencies being
hedged is imperfect and there is a risk that the value of the securities or
currencies being hedged may increase or decrease at a greater rate than a
specified futures contract resulting in losses to a Fund.
A Fund may sell a futures contract to protect against the decline in the
value of securities held by the Fund. However, it is possible that the futures
market may advance and the value of securities held in the Fund's portfolio may
decline. If this were to occur, the Fund would lose money on the futures
contracts and also experience a decline in value in its portfolio securities.
If a Fund purchases a futures contract to hedge against the increase in
value of securities it intends to buy, and the value of such securities
decreases, then the Fund may determine not to invest in the securities as
planned and will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities.
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In order to assure that the Fund is entering into transactions in futures
contracts for hedging purposes as such term is defined by the CFTC, either: (1)
a substantial majority (i.e., approximately 75%) of all anticipatory hedge
transactions (transactions in which the Fund does not own at the time of the
transaction, but expects to acquire, the securities underlying the relevant
futures contract) involving the purchase of futures contracts will be completed
by the purchase of securities which are the subject of the hedge, or (2) the
underlying value of all long positions in futures contracts will not exceed the
total value of (a) all short-term debt obligations held by the Fund; (b) cash
held by the Fund; (c) cash proceeds due to the Fund on investments within thirty
days; (d) the margin deposited on the contracts; and (e) any unrealized
appreciation in the value of the contracts.
If a Fund maintains a short position in a futures contract, it will cover
this position by segregating with its Custodian, cash or other liquid assets
equal in value (when added to any initial or variation margin on deposit) to the
market value of the securities underlying the futures contract. Such a position
may also be covered by owning the securities underlying the futures contract, or
by holding a call option permitting the Fund to purchase the same contract at a
price no higher than the price at which the short position was established.
In addition, if a Fund holds a long position in a futures contract, it will
segregate cash or other liquid assets equal to the purchase price of the
contract (less the amount of initial or variation margin on deposit) with its
Custodian. Alternatively, the Fund could cover its long position by purchasing a
put option on the same futures contract with an exercise price as high or higher
than the price of the contract held by the Fund.
Exchanges limit the amount by which the price of a futures contract may
move on any day. If the price moves equal the daily limit on successive days,
then it may prove impossible to liquidate a futures position until the daily
limit moves have ceased. In the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin on open
futures positions. In such situations, if the Fund has insufficient cash, it may
be disadvantageous to do so. In addition, the Fund may be required to take or
make delivery of the instruments underlying futures contracts it holds at a time
when it is disadvantageous to do so. The ability to close out options and
futures positions could also have an adverse impact on the Fund's ability to
hedge its portfolio effectively.
In the event of the bankruptcy of a broker through which a Fund engages in
transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the broker
and/or incur a loss of all or part of its margin deposits with the broker.
Transactions are entered into by the Fund only with brokers or financial
institutions deemed creditworthy by the Adviser.
There are risks inherent in the use of futures contracts and options
transactions for the purpose of hedging a Fund's securities. One such risk which
may arise in employing futures contracts to protect against the price volatility
of portfolio securities is that the prices of securities subject to futures
contracts (and thereby the futures contract prices) may correlate imperfectly
with the behavior of the cash prices of the Fund's portfolio securities. Another
such risk is that prices of futures contracts may not move in tandem with the
changes in prevailing interest rates against which the Fund seeks a hedge. A
correlation may also be distorted by the fact that the futures market is
dominated by short-term traders seeking to profit from the difference between a
contract or security price objective and their cost of borrowed funds. Such
distortions are generally minor and would diminish as the contract approached
maturity.
Successful use of futures contracts is also subject to the ability of an
Adviser to forecast movements in the direction of the market and interest rates
and other factors affecting equity securities and currencies generally. In
addition, there may exist an imperfect correlation between the price movements
of futures contracts purchased by the Fund and the movements in the prices of
the securities which are the subject of the hedge. If participants in the
futures market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions in the
normal relationships between the debt securities and futures market could
result. Price distortions could also result if investors in futures contracts
elect to make or take delivery of underlying securities rather than engage in
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closing transactions due to the resultant reduction in the liquidity of the
futures market. In addition, due to the fact that, from the point of view of
speculators, the deposit requirements in the futures markets are less onerous
than margin requirements in the cash market, increased participation by
speculators in the futures markets could cause temporary price distortions. Due
to the possibility of price distortions in the futures market and because of the
imperfect correlation between movements in the prices of securities and
movements in the prices of futures contracts, a correct forecast of interest
rate trends by the Adviser may still not result in a successful hedging
transaction.
Compared to the purchase or sale of futures contracts, the purchase of call
or put options on futures contracts involves less potential risk to the Fund
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase of a
call or put option on a futures contract would result in a loss to the Fund
notwithstanding that the purchase or sale of a futures contract would not result
in a loss, as in the instance where there is no movement in the prices of the
futures contracts or underlying U.S. Government securities.
OPTIONS ON CURRENCIES. Instead of purchasing or selling futures, options
on futures or forward currency exchange contracts, the Funds may each attempt to
accomplish similar objectives by purchasing put or call options on currencies
either on exchanges or in over-the-counter markets or by writing put options or
covered call options on currencies. A put option gives a Fund the right to sell
a currency at the exercise price until the option expires. A call option gives a
Fund the right to purchase a currency at the exercise price until the option
expires. Both types of options serve to insure against adverse currency price
movements in the underlying portfolio assets designated in a given currency.
RISKS OF OPTIONS ON FOREIGN CURRENCIES. Because there are two currencies
involved, developments in either or both countries affect the values of options
on foreign currencies. Risks include government actions affecting currency
valuation and the movements of currencies from one country to another. The
quantity of currency underlying option contracts represent odd lots in a market
dominated by transactions between banks; this can mean extra transaction costs
upon exercise. Option markets may be closed while round-the-clock interbank
currency markets are open, and this can create price and rate discrepancies.
FOREIGN CURRENCY FORWARD CONTRACTS. The Funds may each enter into foreign
currency forward contracts to protect the value of its portfolio against future
changes in the level of currency exchange rates. A Fund may enter into such
contracts on a spot, i.e., cash, basis at the rate then prevailing in the
currency exchange market or on a forward basis, by entering into a forward
contract to purchase or sell currency. A forward contract on foreign currency is
an obligation to purchase or sell a specific currency at a future date, which
may be any fixed number of days agreed upon by the parties from the date of the
contract at a price set on the date of the contract.
A Fund's dealings in forward contracts will be limited to hedging involving
either specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of a forward contract with respect to specific receivables or
payables of the Fund generally arising in connection with the purchase or sale
of its portfolio securities and accruals of interest or dividends receivable and
Fund expenses. Position hedging is (1) the sale of a foreign currency with
respect to portfolio security positions denominated or quoted in that currency
or in a currency bearing a substantial correlation to the value of that currency
(cross-hedge) when the Advisor believes that such currency may decline against
the U.S. dollar or (2) the purchase of a foreign currency when the Adviser
believes that the U.S. dollar may decline against that foreign currency.
Although there are no limits on the number of forward contracts which a Fund may
enter into, a Fund may not position hedge with respect to a particular currency
for an amount greater than the aggregate market value (determined at the time of
making any purchase or sale of foreign currency) of the securities being hedged.
The Funds may each enter into foreign currency forward contracts in several
circumstances. When a Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, or when a Fund anticipates the
receipt in a foreign currency of dividends or interest payments on a security
which it holds, the Fund may desire to "lock-in" the U.S. dollar price of the
security or the U.S. dollar
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equivalent of such dividend or interest payment, as the case may be. By entering
into a forward contract for a fixed amount of dollars, for the purchase or sale
of the amount of foreign currency involved in the underlying transactions, a
Fund may be able to protect itself against a possible loss resulting from an
adverse change in the relationship between the U.S. dollar and the foreign
currency during the period between the date on which the security is purchased
or sold, or on which the dividend or interest payment is declared, and the date
on which such payments are made or received.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the forward
contract is entered into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the successful execution of
a short-term hedging strategy is highly uncertain. A Fund does not intend to
enter into such forward contracts to protect the value of its portfolio
securities on a regular or continuous basis. A Fund does not intend to enter
into such forward contracts or maintain a net exposure to such contracts where
the consummation of the contracts would obligate the Fund to deliver an amount
of foreign currency in excess of the value of the Fund's securities holdings or
other assets denominated in that currency.
A Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the forward contract.
Accordingly, if a decision is made to sell the security and make delivery of the
foreign currency and if the market value of the security is less than the amount
of foreign currency that the Fund is obligated to deliver, then it would be
necessary for the Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase).
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. Should forward contract prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent that the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward contract prices increase,
the Fund will suffer a loss to the extent that the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
A Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. Of course, a Fund is
not required to enter into such transactions with regard to its foreign
currency-denominated securities. It also should be recognized that this method
of protecting the value of a Fund's securities holdings against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities which are unrelated to exchange rates. Additionally, although
such contracts tend to minimize the risk of loss due to a decline in the value
of the hedged currency, at the same time they tend to limit any potential gain
which might result should the value of such currency increase.
Although each Fund values its assets daily in terms of U.S. dollars, it
does not intend physically to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the spread) between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to a Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
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The Adviser may use foreign currency hedging techniques, including
cross-currency hedges, to attempt to protect against declines in the U.S. dollar
value of income available for distribution to shareholders and declines in the
net asset value of a Fund's shares resulting from adverse changes in currency
exchange rates. For example, the return available from securities denominated in
a particular foreign currency would diminish in the event the value of the U.S.
dollar increased against such currency. Such a decline could be partially or
completely offset by an increase in value of a position hedge involving a
foreign currency forward contract to (1) sell the currency in which the position
being hedged is denominated, or a currency bearing a substantial correlation to
the value of such currency, or (2) purchase either the U.S. dollar or a foreign
currency expected to perform better than the currency being sold. Position
hedges may, therefore, provide protection of net asset value in the event of a
general rise in the U.S. dollar against foreign currencies. However, a
cross-currency hedge cannot protect against exchange rates perfectly, and if the
Adviser is incorrect in its judgment of future exchange rate relationships, the
Fund could be in a less advantageous position than if such a hedge had not been
established.
INDEXED COMMERCIAL PAPER. The Funds may each invest in commercial paper
which is indexed to certain specific foreign currency exchange rates. The terms
of such commercial paper provide that its principal amount is adjusted upwards
or downwards (but not below zero) at maturity to reflect changes in the exchange
rate between two currencies while the obligation is outstanding. A Fund will
purchase such commercial paper with the currency in which it is denominated and,
at maturity, will receive interest and principal payments thereon in that
currency, but the amount of principal payable by the issuer at maturity will
change in proportion to the change (if any) in the exchange rate between the two
specified currencies between the date the instrument is issued and the date the
instrument matures. With respect to its investments in this type of commercial
paper, a Fund will segregate cash or other liquid assets having a value at least
equal to the aggregate principal amount of outstanding commercial paper of this
type. While such commercial paper entails the risk of loss of principal, the
potential for realizing gains as a result of changes in foreign currency
exchange rates enables the Portfolio to hedge (or cross-hedge) against a decline
in the U.S. dollar value of investments denominated in foreign currencies while
providing an attractive money market rate of return.
LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS AND OPTIONS ON STOCK
INDICES, FOREIGN CURRENCIES AND FUTURES CONTRACTS ON FOREIGN CURRENCIES. A Fund
may write put and call options on stocks only if they are covered, and such
options must remain covered so long as the Fund is obligated as a writer. The
Funds will each write put options on foreign currencies and futures contracts on
foreign currencies for bona fide hedging purposes only if there is segregated
with the Fund's Custodian an amount of cash or other liquid assets equal to or
greater than the aggregate exercise price of the puts. In addition, each Fund
may use futures contracts or related options for non-hedging or speculative
purposes to the extent that aggregate initial margin and option premiums do not
exceed 5% of the market value of the Fund's assets. A Fund does not intend to
purchase options on equity securities or securities indices if the aggregate
premiums paid for such outstanding options would exceed 10% of its total assets.
Except as described below, a Fund will write call options on indices only
if on such date it holds a portfolio of stocks at least equal to the value of
the index times the multiplier times the number of contracts. When a Fund writes
a call option on a broadly-based stock market index, the Fund will segregate
with its Custodian, or pledge to a broker as collateral for the option, cash,
other liquid assets or at least one "qualified securities" with a market value
at the time the option is written of not less than 100% of the current index
value times the multiplier times the number of contracts.
If a Fund has written an option on an industry or market segment index, it
will segregate with its Custodian, or pledge to a broker as collateral for the
option, at least ten "qualified securities," which are stocks of issuers in such
industry or market segment, with a market value at the time the option is
written of not less than 100% of the current index value times the multiplier
times the number of contracts. Such stocks will include stocks which represent
at least 50% of the weighting of the industry or market segment index and will
represent at least 50% of the Fund's holdings in that industry or market
segment. No individual security will represent more than 15% of the amount so
segregated or pledged in the case of
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broadly-based stock market index options or 25% of such amount in the case of
industry or market segment index options.
If at the close of business on any day the market value of such qualified
securities so segregated or pledged falls below 100% of the current index value
times the multiplier times the number of contracts, the Fund will so segregate
or pledge an amount in cash or other liquid assets equal in value to the
difference. In addition, when a Fund writes a call on an index which is
in-the-money at the time the call is written, the Fund will segregate with its
Custodian or pledge to the broker as collateral cash or other liquid assets
equal in value to the amount by which the call is in-the-money times the
multiplier times the number of contracts. Any amount segregated pursuant to the
foregoing sentence may be applied to the Fund's obligation to segregate
additional amounts in the event that the market value of the qualified
securities falls below 100% of the current index value times the multiplier
times the number of contracts. A "qualified security" is an equity security
which is listed on a national securities exchange or listed on NASDAQ against
which a Fund has not written a stock call option and which has not been hedged
by the Fund by the sale of stock index futures. However, if the Fund holds a
call on the same index as the call written where the exercise price of the call
held is equal to or less than the exercise price of the call written or greater
than the exercise price of the call written if the difference is segregated by
the Fund in cash or other liquid assets with its Custodian, it will not be
subject to the requirements described in this paragraph.
A Fund may engage in futures contracts and options on futures transactions
as a hedge against changes, resulting from market or political conditions, in
the value of the currencies to which the Fund is subject or to which the Fund
expects to be subject in connection with future purchases. A Fund may engage in
such transactions when they are economically appropriate for the reduction of
risks inherent in the ongoing management of the Fund. A Fund may write options
on futures contracts to realize through the receipt of premium income a greater
return than would be realized in the Fund's securities holdings alone.
OTHER INVESTMENT STRATEGIES
LENDING OF SECURITIES. Consistent with applicable regulatory requirements,
each Fund may lend portfolio securities to brokers, dealers and other financial
institutions, provided that such loans are callable at any time by a Portfolio,
and are at all times secured by cash or other liquid assets or secured by an
irrevocable letter of credit in favor of the Fund in an amount equal to at least
100% determined daily, of the market value of the loaned securities. The
collateral is segregated pursuant to applicable regulations. During the time
portfolio securities are on loan, the borrower will pay the Fund an amount
equivalent to any dividend or interest paid on such securities and the Fund may
invest the cash collateral and earn additional income, or it may receive an
agreed-upon amount of interest income from the borrower. A Fund cannot lend more
than 33 1/3% of the value of its total assets (including the amount of the loan
collateral). The advantage of such loans is that a Fund continues to receive the
income on the loaned securities while at the same time earning interest on the
cash amounts deposited as collateral, which will be invested in short-term
obligations.
A loan may be terminated by the borrower on one business day's notice, or
by a Fund on two business days' notice. If the borrower fails to maintain the
requisite amount of collateral, the loan automatically terminates and the Fund
could use the collateral to replace the securities while holding the borrower
liable for any excess of replacement cost over collateral. If the borrower fails
to deliver the loaned securities within two days after receipt of notice, a Fund
could use the collateral to replace the securities while holding the borrower
liable for any excess of replacement cost over collateral. As with any
extensions of credit, there are risks of delay in recovery and in some cases
even loss of rights in the collateral should the borrower of the securities fail
financially. However, these loans of portfolio securities will only be made to
firms deemed by a Fund's Adviser to be creditworthy and when the income which
can be earned from such loans justifies the attendant risks. Upon termination of
the loan, the borrower is required to return the securities to a Fund. Any gain
or loss in the market price during the loan period would inure to a Fund. The
creditworthiness of firms to which a Fund lends its portfolio securities will be
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monitored on an ongoing basis by the Adviser pursuant to procedures adopted and
reviewed, on an ongoing basis, by the Trustees.
Since voting or consent rights which accompany loaned securities pass to
the borrower, a Fund will follow the policy of calling the loaned securities, in
whole or in part as may be appropriate, to be delivered within one day after
notice, to permit the exercise of such rights if the matters involved would have
a material effect on a Fund's investment in such loaned securities. A Fund may
pay reasonable finders', administrative and custodial fees in connection with a
loan of its securities or may share the interest earned on collateral with the
borrower.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Fund may purchase or
sell securities on a when-issued or delayed-delivery basis. When-issued or
delayed-delivery transactions arise when securities are purchased or sold by a
Portfolio with payment and delivery taking place in the future in order to
secure what is considered to be an advantageous price and yield to a Portfolio
at the time of entering into the transaction. The securities so purchased are
subject to market fluctuation and no interest accrues to the purchaser during
this period. While a Fund will only purchase securities on a when-issued,
delayed delivery or forward commitment basis with the intention of acquiring the
securities, a Fund may sell the securities before the settlement date, if it is
deemed advisable. At the time a Fund makes the commitment to purchase securities
on a when-issued or delayed delivery basis, a Fund will record the transaction
and thereafter reflect the value, each day, of such security in determining the
net asset value of a Fund. At the time of delivery of the securities, the value
may be more or less than the purchase price. A Fund will also segregate with a
Fund's custodian bank cash or other liquid assets equal in value to commitments
for such when-issued or delayed delivery securities; subject to this
requirement, a Fund may purchase securities on such basis without limit. An
increase in the percentage of a Fund's assets committed to the purchase of
securities on a when-issued or delayed delivery basis may increase the
volatility of a Fund's net asset value. The Manager and the Advisers do not
believe that a Fund's net asset value or income will be adversely affected by a
Fund's purchase of securities on such basis.
One form of when-issued or delayed-delivery security that the Mortgage
Backed Securities Portfolio may purchase is a "to be announced" mortgage-backed
security. A "to be announced" mortgage-backed security transaction arises when a
mortgage-backed security, such as a GNMA pass-through security, is purchased or
sold with the specific pools that will constitute that GNMA pass-through
security to be announced on a future settlement date.
SHORT SALES. Each Fund may sell a security it does not own in anticipation
of a decline in the market value of that security (i.e., make short sales).
Generally, to complete the transaction, a Fund will borrow the security to make
delivery to the buyer. The Fund is then obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement. The
price at such time may be more or less than the price at which the security was
sold by the Fund. Until the security is replaced, the Fund is required to pay to
the lender any interest which accrues during the period of the loan. To borrow
the security, the Fund may be required to pay a premium which would increase the
cost of the security sold. The proceeds of the short sale will be retained by
the broker to the extent necessary to meet margin requirements until the short
position is closed out. Until the Fund replaces the borrowed security, it will
(1) segregate with its Custodian cash or other liquid assets at such a level
that the amount deposited in the account plus the amount deposited with the
broker as collateral will equal the current market value of the security sold
short and will not be less than the market value of the security at the time it
was sold short or (2) otherwise cover its short position.
A Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. The Fund will realize a gain if the
security declines in price between those dates. This result is the opposite of
what one would expect from a cash purchase of a long position in a security. The
amount of any gain will be decreased, and the amount of any loss will be
increased, by the amount of any premium or interest paid in connection with the
short sale. No more than 5% of the Fund's net assets will be, when added
together:
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(1) deposited as collateral for the obligation to replace securities borrowed to
effect short sales and (2) segregated in connection with short sales.
Each Fund may also make short sales against-the-box. A short sale
against-the-box is a short sale in which the Fund owns an equal amount of the
securities sold short or securities convertible into or exchangeable for, with
or without payment of any further consideration, such securities; provided that
if further consideration is required in connection with the conversion or
exchange, cash or other liquid assets, in an amount equal to such consideration
must be segregated for an equal amount of the securities of the same issuer as
the securities sold short.
BORROWING. Each Fund may borrow from banks or through dollar rolls or
reverse repurchase agreements an amount equal to no more than 33 1/3% of the
value of its total assets (calculated when the loan is made) for temporary,
extraordinary or emergency purposes, for the clearance of transactions or to
take advantage of investment opportunities. Each Fund may pledge its assets to
secure these borrowings.
If a Fund borrows to invest in securities, or if a Fund purchases
securities at a time when borrowings exceed 5% of its total assets, any
investment gains made on the securities in excess of interest paid on the
borrowing will cause the net asset value of the shares to rise faster than would
otherwise be the case. On the other hand, if the investment performance of the
additional securities purchased fails to cover their cost (including any
interest paid on the money borrowed) to a Fund, the net asset value of the
Fund's shares will decrease faster than would otherwise be the case. This is the
speculative characteristic known as "leverage." See "Reverse Repurchase
Agreements and Dollar Rolls" above.
If any Fund's asset coverage for borrowings falls below 300%, such Fund
will take prompt action (within 3 days) to reduce its borrowings even though it
may be disadvantageous from an investment standpoint to sell securities at that
time.
SEGREGATED ASSETS
When a Fund is required to segregate assets in connection with certain
portfolio transactions, it will designate cash or liquid assets as segregated
with the Trust's Custodian, State Street Bank and Trust Company (State Street).
"Liquid assets" mean cash, U.S. Government securities, equity securities
(including foreign securities), debt securities or other liquid, unencumbered
assets equal in value to its obligations in respect of potentially leveraged
transactions, marked-to-market daily. These include forward contracts,
when-issued and delayed delivery securities, futures contracts, written options
and options on futures contracts (unless otherwise covered). If collateralized
or otherwise covered, in accordance with Commission guidelines, these will not
be deemed to be senior securities.
(d) DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a temporary defensive strategy or pending
investment of proceeds from sales of the Funds' shares, the Funds may invest
without limit in money market instruments, including commercial paper of
domestic and foreign corporations, certificates of deposit, bankers' acceptances
and other obligations of domestic and foreign banks, and obligations issued or
guaranteed by the U.S. Government, its instrumentalities and its agencies.
Commercial paper will be rated, at the time of purchase, at least "A-2" by S&P
or "Prime-2" by Moody's, or the equivalent by another NRSRO or, if not rated,
issued by an entity having an outstanding unsecured debt issue rated at least
"A" or "A-2" by S&P or "A" or "Prime-2" by Moody's or the equivalent by another
NRSRO. In addition, the Funds may invest without limit in corporate and other
debt obligations and in repurchase agreements when the Adviser believes that a
temporary defensive position is appropriate.
(e) PORTFOLIO TURNOVER
Portfolio turnover rate is generally the percentage computed by dividing
the lesser of portfolio purchases or sales (excluding all securities, including
options, whose maturities or expiration date at
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acquisition were one year or less) by the monthly average value of the long-term
portfolio. High portfolio turnover (100% or more) may involve correspondingly
greater brokerage commissions and other transaction costs, which will be borne
directly by each Fund. See "Brokerage Allocation and Other Practices." In
addition, high portfolio turnover may result in increased short-term capital
gains, which when distributed to shareholders, are treated as ordinary income.
See "Taxes, Dividends, and Distributions."
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of a Fund's outstanding voting securities. The term "majority of the
outstanding voting securities" of either the Trust or a particular Fund means,
with respect to the approval of an investment advisory agreement, a distribution
plan or a change in a fundamental investment policy, the vote of the lesser of
(i) 67% or more of the shares of the Trust or such Fund present at a meeting, if
the holders of more than 50% of the outstanding shares of the Trust or such Fund
are present or represented by proxy, or (ii) more than 50% of the outstanding
shares of the Trust or such Fund.
Each Fund may not:
1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); provided that
the deposit or payment by the Fund of initial or variation margin in connection
with options or futures contracts is not considered the purchase of a security
on margin.
2. Make short sales of securities, or maintain a short position if, when
added together, more than 25% of the value of the Fund's net assets would be (i)
deposited as collateral for the obligation to replace securities borrowed to
effect short sales and (ii) allocated to segregated accounts in connection with
short sales. Short sales "against-the-box" are not subject to this limitation.
3. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow from banks or through dollar rolls or reverse repurchase
agreements up to 33 1/3% of the value of its total assets (calculated when the
loan is made) for temporary, extraordinary or emergency purposes, to take
advantage of investment opportunities or for the clearance of transactions and
may pledge its assets to secure such borrowings. For purposes of this
restriction, the purchase or sale of securities on a when-issued or delayed
delivery basis, forward foreign currency exchange contracts and collateral
arrangements relating thereto, and collateral arrangements with respect to
futures contracts and options thereon and with respect to the writing of options
and obligations of the Trust to Trustees pursuant to deferred compensation
arrangements are not deemed to be a pledge of assets or the issuance of a senior
security subject to this restriction.
4. Purchase any security (other than obligations of the U.S. Government,
its agencies and instrumentalities) if as a result 25% or more of the Fund's
total assets (determined at the time of investment) would be invested in one or
more issuers having their principal business activities in the same industry.
5. Buy or sell real estate or interests in real estate, except that the
Fund may purchase and sell mortgaged-backed securities, securities
collateralized by mortgages, securities which are secured by real estate,
securities of companies which invest or deal in real estate and publicly traded
securities of real estate investment trusts.
6. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws. Each Fund may purchase restricted securities
without limit.
7. Make investments for the purpose of exercising control or management.
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8. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities limited to 33 1/3% of the value of the Fund's total assets.
For purposes of this limitation on securities lending, the value of a Fund's
total assets includes the collateral received in the transactions.
9. Purchase more than 10% of all outstanding voting securities of any one
issuer.
The foregoing restrictions are fundamental policies that may not be changed
without the approval of a majority of the Fund's outstanding voting securities.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of a Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that any Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
As a matter of non-fundamental operating policy, a Fund will not purchase
rights if as a result the Fund would then have more than 5% of its assets
(determined at the time of investment) invested in rights.
MANAGEMENT OF THE TRUST
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) THE TRUST DURING PAST FIVE YEARS
------------------------ ------------- ----------------------
<S> <C> <C>
Eugene C. Dorsey (72) Trustee Retired President, Chief Executive Officer and
Trustee of the Gannett Foundation (now Freedom
Forum); former Publisher of four Gannett
newspapers and Vice President of Gannett Co.,
Inc.; past Chairman, Independent Sector,
Washington, D.C. (national coalition of
philanthropic organizations); former Chairman of
the American Council for the Arts; Director of
the advisory board of Chase Manhattan Bank of
Rochester; and Trustee or Director of 17 other
funds within the Prudential Mutual Funds.
Douglas H. McCorkindale (59) Trustee Vice Chairman (since March 1984) and President
(since September 1997) of Gannett Co. Inc.
(publishing and media); Director of Continental
Airlines, Inc., Gannett Co., Inc. and Frontier
Corporation; and Trustee or Director of 23 other
funds within the Prudential Mutual Funds.
Thomas T. Mooney (57) Trustee President of the Greater Rochester Metro Chamber of
Commerce; former Rochester City Manager; Trustee
of Center for Governmental Research, Inc.;
Director of Blue Cross of Rochester, The Business
Council of New York State, Executive Service
Corps of Rochester, Monroe County Water
Authority, Rochester Jobs, Inc., Monroe County
Industrial Development Corporation and Northeast
Midwest Institute; and Trustee or Director of 33
other funds within the Prudential Mutual Funds.
</TABLE>
B-34
<PAGE> 103
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) THE TRUST DURING PAST FIVE YEARS
------------------------ ------------- ----------------------
<S> <C> <C>
*John R. Strangfeld, Jr. President and Chief Executive Officer, Chairman, President and
(45) Trustee Director (since January 1990), of The Prudential
Investment Corporation, Executive Vice President
(since February 1998), Prudential Global Asset
Management of Prudential; Chairman (since August
1989), Pricoa Capital Group; formerly various
positions to Chief Executive Officer (November
1994-December 1998), Private Asset Management
Group of Prudential and Senior Vice President
(January 1986-August 1989), Prudential Capital
Group, a unit of Prudential; President and
Director or Trustee of 44 funds within the
Prudential Mutual Funds.
Robert F. Gunia (51) Vice Vice President (since September 1997) of Prudential
President Investments; Executive Vice President and
Treasurer (since December 1996), Prudential
Investments Fund Management LLC (PIFM); Senior
Vice President (since March 1987) of Prudential
Securities Incorporated (Prudential Securities);
formerly Chief Administrative Officer (July 1990-
September 1996), Director (January 1989-
September 1996), and Executive Vice President,
Treasurer and Chief Financial Officer (June 1987-
September 1996) of Prudential Mutual Fund
Management, Inc.; Vice President and Director
(since May 1989) of The Asia Pacific Fund, Inc.
and Director or Trustee of 44 funds within the
Prudential Mutual Funds.
Grace C. Torres (39) Treasurer and First Vice President (since December 1996) of PIFM;
Principal First Vice President (since March 1994) of
Financial and Prudential Securities; formerly First Vice
Accounting President (March 1994-September 1996) of
Officer Prudential Mutual Fund Management, Inc. and Vice
President (July 1989-March 1994) of Bankers Trust
Corporation.
David F. Connor (35) Secretary Assistant General Counsel (since March 1998) of
PIFM; Associate Attorney, Drinker Biddle & Reath
LLP prior thereto.
Stephen M. Ungerman (45) Assistant Tax Director (since March 1996) of Prudential
Treasurer Investments; formerly First Vice President
(February 1993-September 1996) of Prudential
Mutual Fund Management, Inc.
</TABLE>
- ---------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of
affiliation with Prudential, Prudential Securities or PIFM.
** Unless otherwise indicated, the addresses of the Trustees and Officers is c/o
Prudential Mutual Funds, Gateway Center Three, 100 Mulberry Street, Newark,
New Jersey 07102-4077.
The Trust has Trustees who, in addition to overseeing the actions of the
Trust's Manager, Advisers and Distributor, decide upon matters of general
policy. The Trustees also review the actions of the Trust's officers, who
conduct and supervise the daily business operations of the Trust.
The Trustees have adopted a retirement policy which calls for the
retirement of Trustees on December 31 of the year in which they reach the age of
72, except that retirement is being phased in for
B-35
<PAGE> 104
Trustees of Prudential Mutual Funds who were age 68 or older as of December 31,
1993. Mr. Dorsey is scheduled to retire on December 31, 1999.
Pursuant to the terms of the Management Agreement with the Trust, the
Manager pays all compensation of officers and employees of the Trust as well as
the fees and expenses of all Trustees of the Trust who are affiliated persons of
the Manager.
The Trust pays each of its Trustees who is not an affiliated person of PIFM
or any Adviser annual compensation of $5,000 in addition to certain
out-of-pocket expenses. The amount of annual compensation paid to each Trustee
may change as a result of the introduction of additional funds upon the boards
of which the Trustee will be asked to serve.
Trustees may receive their Trustee's fees pursuant to a deferred fee
agreement with the Trust. Under the terms of the agreement, the Trust accrues
daily the amount of Trustee's fees in installments which accrue interest at a
rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury Bills
at the beginning of each calendar quarter or, pursuant to an exemptive order
from the Commission, at the daily rate of return of a Fund. Payment of the
interest so accrued is also deferred and accruals become payable at the option
of the Trustee. The Trust's obligation to make payments of deferred Trustees'
fees, together with interest thereon, is a general obligation of the Trust.
The following table sets forth the aggregate compensation paid by the Trust
to the Trustees who are not affiliated with the Manager for the period November
18, 1998 through July 31, 1999 and the aggregate compensation paid to such
Trustees for service on the Trust's Board and the boards of all other investment
companies managed by PIFM (Fund Complex) for the calendar year ended December
31, 1998.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL 1998
COMPENSATION
FROM TRUST
AGGREGATE AND FUND
COMPENSATION COMPLEX PAID
NAME OF TRUSTEE FROM TRUST TO TRUSTEES
- ------------------------------------------------------------ ------------ -----------------
<S> <C> <C>
Eugene C. Dorsey*........................................... $3,750 $ 70,000(17/46)**
Douglas H. McCorkindale*.................................... $3,750 $ 70,000(23/40)**
Thomas T. Mooney*........................................... $3,750 $115,000(35/70)**
John R. Strangfeld, Jr.+....................................
</TABLE>
- ---------------
* Total compensation from all the funds in the Fund Complex for the calendar
year ended December 31, 1998 includes amounts deferred at the election of
Trustees under the funds' deferred compensation plans. Including accrued
interest, total compensation amounted to approximately $85,445 for Mr.
Dorsey, $71,145 for Mr. McCorkindale, and $119,740 for Mr. Mooney.
** Indicates number of funds/portfolios in the Fund Complex (including the
Trust) to which aggregate compensation relates.
+ Interested Trustees do not receive compensation from the Trust or any fund in
the Fund Complex.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Trustees of the Trust are eligible to purchase Class Z shares of the Fund,
which are sold without either an initial sales charge or contingent deferred
sales charge to a limited group of investors.
As of September 10, 1999, the Trustees and officers of the Trust, as a
group, owned less than 1% of the outstanding shares of beneficial interest of
the Portfolios.
B-36
<PAGE> 105
As of September 10, 1999, the owners, directly or indirectly, of more than
5% of the outstanding shares of beneficial interest of any Fund were as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME ADDRESS FUND (% OF PORTFOLIO)
- ---- ------- ---- ----------------
<S> <C> <C> <C>
</TABLE>
As of , 1999, Prudential Securities was record holder for other
beneficial owners of the following shares of beneficial interest outstanding and
entitled to vote in each Fund:
<TABLE>
<CAPTION>
NUMBER OF
FUND SHARES
---- ---------
<S> <C> <C>
Conservative Growth Fund
Class A................................................... ( %)
------- ------
Class B................................................... ( %)
------- ------
Class C................................................... ( %)
------- ------
Class Z................................................... ( %)
------- ------
Moderate Growth Fund
Class A................................................... ( %)
------- ------
Class B................................................... ( %)
------- ------
Class C................................................... ( %)
------- ------
Class Z................................................... ( %)
------- ------
High Growth Fund
Class A................................................... ( %)
------- ------
Class B................................................... ( %)
------- ------
Class C................................................... ( %)
------- ------
Class Z................................................... ( %)
------- ------
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
(a) MANAGER AND ADVISERS
The manager of the Trust is Prudential Investments Fund Management LLC
(PIFM or the Manager), 100 Mulberry Street, Gateway Center Three, Newark, New
Jersey 07102-4077. PIFM serves as manager to all of the other investment
companies that, together with the Trust, comprise the Prudential Mutual Funds.
See "How the Trust is Managed -- Manager" in the Prospectus. As of August 31,
1999, PIFM managed and/or administered open-end and closed-end management
investment companies with assets of approximately $71.8 billion. According to
the Investment Company Institute, as of December 31, 1998, the Prudential Mutual
Funds was the 18th largest family of mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities Incorporated (Prudential
Securities) and The Prudential Insurance Company of America (Prudential).
Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), a wholly-owned
subsidiary of PIFM, serves as the transfer and disbursing agent for the
Prudential Mutual Funds and, in addition, provides customer service,
recordkeeping and management and administration services to qualified plans.
B-37
<PAGE> 106
Pursuant to the Management Agreement with the Trust (the Management
Agreement), PIFM, subject to the supervision of the Trustees and in conformity
with the stated policies of the Trust, manages both the investment operations of
the Trust and the composition of the Trust's Funds, including the purchase,
retention, disposition and loan of securities and other assets. The Manager is
authorized to enter into subadvisory agreements for investment advisory services
in connection with the management of the Trust and each Fund thereof. The
Manager will continue to have responsibility for all investment advisory
services furnished pursuant to any such investment advisory agreements.
The Manager reviews the performance of all Advisers, and makes
recommendations to the Trustees with respect to the retention and renewal of
contracts. In connection therewith, PIFM is obligated to keep certain books and
records of the Trust. PIFM also administers the Trust's business affairs and, in
connection therewith, furnishes the Trust with office facilities, together with
those ordinary clerical and bookkeeping services which are not being furnished
by State Street Bank and Trust Company (the Custodian), and PMFS, the Trust's
transfer and dividend disbursing agent. The management services of PIFM for the
Trust are not exclusive under the terms of the Management Agreement and PIFM is
free to, and does, render management services to others.
The following table sets forth the annual management fee rates currently
paid by each Fund to PIFM pursuant to the Management Agreement, expressed as a
percentage of the Fund's average daily net assets:
<TABLE>
<CAPTION>
TOTAL
FUND MANAGEMENT FEE
---- --------------
<S> <C>
Conservative Growth Fund.................................... .75%
Moderate Growth Fund........................................ .75%
High Growth Fund............................................ .75%
</TABLE>
The fee is computed daily and payable monthly. The Management Agreement
also provides that, in the event the expenses of the Trust (including the fees
of PIFM, but excluding interest, taxes, brokerage commissions, distribution fees
and litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Trust's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Trust's
shares are qualified for offer and sale, the compensation due to PIFM will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PIFM will be paid by PIFM to the Trust. No jurisdiction
currently limits the Trust's expenses.
In connection with its management of the business affairs of the Trust,
PIFM bears the following expenses:
(a) the salaries and expenses of all of its and the Trust's personnel
except the fees and expenses of Trustees who are not affiliated persons of PIFM
or any Adviser;
(b) all expenses incurred by PIFM or by the Trust in connection with
managing the ordinary course of the Trust's business, other than those assumed
by the Trust as described below; and
(c) the fees payable to each Adviser pursuant to the subadvisory agreements
between PIFM and each Adviser (the Advisory Agreements).
Under the terms of the Management Agreement, the Trust is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Trustees who are not affiliated persons of the Manager
or any Adviser, (c) the fees and certain expenses of the Custodian and Transfer
and Dividend Disbursing Agent, including the cost of providing records to the
Manager in connection with its obligation of maintaining required records of the
Trust and of pricing the Trust's shares, (d) the charges and expenses of legal
counsel and independent accountants for the Trust, (e) brokerage commissions and
any issue or transfer taxes chargeable to the Trust in connection with its
securities transactions, (f) all taxes and corporate fees payable by the Trust
to governmental agencies, (g) the fees of any trade associations of which the
Trust may be a member, (h) the cost of share certificates representing shares of
the Trust, (i) the cost of fidelity and liability insurance,
B-38
<PAGE> 107
(j) certain organization expenses of the Trust and the fees and expenses
involved in registering and maintaining registration of the Trust and of its
shares with the Commission and the states including the preparation and printing
of the Trust's registration statements and prospectuses for such purposes, (k)
allocable communications expenses with respect to investor services and all
expenses of shareholders' and Trustees meetings and of preparing, printing and
mailing reports, proxy statements and prospectuses to shareholders in the amount
necessary for distribution to the shareholders and (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Trust's business.
The Management Agreement provides that PIFM will not be liable for any
error of judgment or for any loss suffered by the Trust in connection with the
matters to which the Management Agreement relates, except a loss resulting from
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
The Management Agreement provides that it will terminate automatically if
assigned, and that it may be terminated without penalty by either party upon not
more than 60 days' nor less than 30 days' written notice. The Management
Agreement will continue in effect for a period of more than two years from the
date of execution only so long as such continuance is specifically approved at
least annually in conformity with the Investment Company Act.
For the fiscal period ended July 31, 1999 PIFM received management fees of
$398,032 for the Conservative Growth Fund, $467,338 for the Moderate Growth Fund
and $502,514 for the High Growth Fund.
As noted in the Prospectus, subject to the supervision and direction of the
Manager and, ultimately, the Trustees, each Adviser manages the securities held
by a particular segment of a Fund in accordance with the Fund's stated
investment objectives and policies, makes investment decisions for that Fund
segment and places orders to purchase and sell securities on behalf of that Fund
segment.
Each Advisory Agreement provides that it will terminate in the event of its
assignment (as defined in the Investment Company Act) or upon the termination of
the Management Agreement. Each Advisory Agreement may be terminated by the
Trust, PIFM or the Adviser upon not more than 60 days' written notice. Each
Advisory Agreement provides that it will continue in effect for a period of more
than two years from its execution only so long as such continuance is
specifically approved at least annually in accordance with the requirements of
the Investment Company Act.
The Manager and the Trust operate under an exemptive order from the
Commission which permits the Manager, subject to certain conditions, to enter
into or amend Advisory Agreements without obtaining shareholder approval each
time. On October 1, 1998 the sole shareholder of the Trust voted affirmatively
to give the Trust this ongoing authority. With Board approval, the Manager is
permitted to replace Advisers or employ additional Advisers for the Funds,
change the terms of the Funds' Advisory Agreements or enter into a new Advisory
Agreement with an existing Adviser after events that cause an automatic
termination of the old Advisory Agreement with that Adviser. Shareholders of a
Fund continue to have the right to terminate an Advisory Agreement for the Fund
at any time by a vote of the majority of the outstanding voting securities of
the Fund. Shareholders will be notified of any Adviser changes or other material
amendments to Advisory Agreements that occur under these arrangements.
The Manager pays the Advisers the fees set forth in the Prospectus for
their services with respect to each Fund. The Advisers perform all
administrative functions associated with serving as Adviser to a Fund. Subject
to the supervision and direction of the Manager and, ultimately, the Trustees,
each Adviser is responsible for managing the securities held by a particular
Fund segment in accordance with the Fund's stated investment objective and
policies, making investment decisions for that Fund segment, placing orders to
purchase and sell securities on behalf of that Fund segment, and performing
various administrative duties.
B-39
<PAGE> 108
For the period ended July 31, 1999, PIFM paid the following sub-advisory
fees to the Funds' Advisers:
CONSERVATIVE GROWTH FUND
<TABLE>
<CAPTION>
ANNUALIZED PERCENTAGE OF
ADVISER AVERAGE NET ASSETS AMOUNT($)
------- ---------------------------------- ---------
<S> <C> <C>
Jennison Associates LLC........... .30% with respect to first $300
million; .25% for amounts in
excess of $300 million $ 24,831
The Prudential Investment
Corporation..................... N/A(1) $143,931
Franklin Advisers, Inc. .......... .50% $ 13,286
The Dreyfus Corporation........... .45% $ 11,857
Pacific Investment Management
Company......................... .25% $ 50,867
--------
Total sub-advisory fees $244,772
========
</TABLE>
- ---------------
(1) Under the Advisory Agreement between PIFM and PIC, PIC is reimbursed by PIFM
for its reasonable costs and expenses incurred in providing advisory
services.
MODERATE GROWTH FUND
<TABLE>
<CAPTION>
ANNUALIZED PERCENTAGE OF
ADVISER AVERAGE NET ASSETS AMOUNT($)
------- ---------------------------------- ---------
<S> <C> <C>
Jennison Associates LLC........... .30% with respect to first $300
million; .25% for amounts in
excess of $300 million $ 37,590
The Prudential Investment
Corporation..................... N/A(1) $166,390
Franklin Advisers, Inc. .......... .50% $ 23,871
The Dreyfus Corporation........... .45% $ 21,088
Lazard Asset Management........... .40% $ 24,789
Pacific Investment Management
Company......................... .25% $ 29,847
--------
Total sub-advisory fees $303,575
========
</TABLE>
- ---------------
(1) Under the Advisory Agreement between PIFM and PIC, PIC is reimbursed by PIFM
for its reasonable costs and expenses incurred in providing advisory
services.
B-40
<PAGE> 109
HIGH GROWTH FUND
<TABLE>
<CAPTION>
ANNUALIZED PERCENTAGE OF
ADVISER AVERAGE NET ASSETS AMOUNT($)
------- ---------------------------------- ---------
<S> <C> <C>
Jennison Associates LLC........... .30% with respect to first $300
million; .25% for amounts in
excess of $300 million $ 50,033
The Prudential Investment
Corporation..................... N/A(1) $130,651
Franklin Advisers, Inc. .......... .50% $ 49,538
The Dreyfus Corporation........... .45% $ 44,482
Lazard Asset Management........... .40% $ 52,446
--------
Total sub-advisory fees $327,150
========
</TABLE>
- ---------------
(1) Under the Advisory Agreement between PIFM and PIC, PIC is reimbursed by PIFM
for its reasonable costs and expenses incurred in providing advisory
services.
(b) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12B-1 PLANS
Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, 14th Floor, Newark, New Jersey
07102-4077, acts as the distributor of the shares of the Trust.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Trust
under Rule 12b-1 under the Investment Company Act and a distribution agreement
(the Distribution Agreement), the Distributor incurs the expenses of
distributing each Fund's Class A, Class B and Class C shares, respectively. The
Distributor also incurs the expenses of distributing the Funds' Class Z shares
under the Distribution Agreement with the Trust, none of which are reimbursed by
or paid for by the Trust.
The expenses incurred under the Plans include commissions and account
servicing fees paid to, or on account of, brokers or financial institutions
which have entered into agreements with the Distributor, advertising expenses,
the cost of printing and mailing prospectuses to potential investors and
indirect and overhead costs of the Distributor associated with the sale of Fund
shares, including lease, utility, communications and sales promotion expenses.
Under the Plans, the Trust is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Trust will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis brokers in consideration for the distribution,
marketing, administrative and other services and activities provided by brokers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
CLASS A PLAN. Under the Class A Plan, each Fund may pay the Distributor
for its distribution-related expenses with respect to Class A shares at an
annual rate of up to .30 of 1% of the average daily net assets of the Class A
shares. The Class A Plan provides that (1) up to .25 of 1% of the average daily
net assets of the Class A shares may be used to pay for personal service and/or
the maintenance of shareholder accounts (service fee) and (2) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1% of the
average daily net assets of the Class A shares. The Distributor has
contractually agreed to limit its distribution-related fees payable under the
Class A Plan to .25 of 1% of the average daily net assets of the Class A shares
for the fiscal year ending July 31, 2000 and voluntarily limited its
distribution-related fees for the fiscal period ended July 31, 1999 to .25 of 1%
of the average
B-41
<PAGE> 110
daily net assets of the Class A shares. The Distributor also receives an initial
sales charge from shareholders.
The table below sets forth the payments received by the Distributor under
the Class A Plan, the amount spent by the Distributor in distributing Class A
shares and the amount of initial sales charges received by the Distributor in
connection with the sale of Class A shares for the fiscal period ended July 31,
1999.
<TABLE>
<CAPTION>
DISTRIBUTION FEES RECEIVED AMOUNT SPENT INITIAL SALES
FUND BY DISTRIBUTOR DISTRIBUTING CLASS A SHARES CHARGES
- ---- -------------------------- --------------------------- -------------
<S> <C> <C> <C>
Conservative Growth Fund............ $10,754 $ 9,405 $177,500
Moderate Growth Fund................ $21,458 $18,651 $321,200
High Growth Fund.................... $18,234 $ $308,000
</TABLE>
The amounts spent by the Distributor in distributing Class A shares was
primarily for the payment of account servicing fees to financial advisers and
other persons who sell Class A shares.
CLASS B AND CLASS C PLANS. Under the Class B and Class C Plans, each Fund
pays the Distributor for its distribution-related expenses with respect to Class
B and Class C shares at an annual rate of 1% of the average daily net assets of
each of the Class B and Class C shares. The Class B and Class C Plans provide
for the payment to the Distributor of (1) an asset-based sales charge of .75 of
1% of the average daily net assets of each of the Class B and Class C shares,
respectively, and (2) a service fee of .25 of 1% of the average daily net assets
of each of the Class B and Class C shares. The service fee is used to pay for
personal service and/or the maintenance of shareholder accounts. The Distributor
also receives contingent deferred sales charges from certain redeeming
shareholders and, with respect to Class C shares, an initial sales charge.
CLASS B PLAN. For the fiscal period ended July 31, 1999, the Distributor
received the distribution fees paid by the Funds and the proceeds of contingent
deferred sales charges paid by investors on the redemption of Class B shares as
set forth below:
<TABLE>
<CAPTION>
APPROXIMATE
CONTINGENT
AMOUNT OF DEFERRED
FUND DISTRIBUTION FEE SALES CHARGES
- ---- ---------------- -------------
<S> <C> <C>
Conservative Growth Fund.................................... $134,891 $52,900
Moderate Growth Fund........................................ $256,014 $57,000
High Growth Fund............................................ $169,491 $42,000
</TABLE>
For the fiscal period ended July 31, 1999, it is estimated that the
Distributor spent approximately the following amounts in connection with the
distribution of the Funds' Class B shares:
<TABLE>
<CAPTION>
PRINTING AND MAILING COMPENSATION TO COMMISSION
PROSPECTUSES BROKER/DEALERS FOR PAYMENTS TO TOTAL
TO OTHER THAN COMMISSIONS TO FINANCIAL AMOUNT
CURRENT REPRESENTATIVES AND ADVISERS OF OVERHEAD SPENT BY
FUND SHAREHOLDERS OTHER EXPENSES* PRUDENTIAL SECURITIES COSTS* DISTRIBUTOR
---- -------------------- ------------------- --------------------- -------- -----------
<S> <C> <C> <C> <C> <C>
Conservative Growth
Fund............... $2,000 $394,000 $ 77,000 $248,000 $ 721,000
Moderate Growth
Fund............... $2,000 $753,400 $156,500 $525,400 $1,437,300
High Growth Fund..... $2,000 $554,000 $122,000 $360,000 $1,038,000
</TABLE>
- ---------------
* Includes (a) the expenses of operating the branch offices of Prudential
Securities and Prusec in connection with the sale of Fund shares, including
lease costs, the salaries and employee benefits of operations and sales
support personnel, utility costs, communication costs and the costs of
stationery and supplies, (b) the cost of client sales seminars, (c) expenses
of mutual fund sales coordinators to promote the sale of Fund shares and (d)
other incidental expenses relating to branch promotion of Fund sales.
B-42
<PAGE> 111
CLASS C. PLAN. For the fiscal period ended July 31, 1999, the Distributor
received the distribution fees paid by the Funds under the Class C Plan, initial
sales charges, and the proceeds of contingent deferred sales charges paid by
investors on the redemption of shares as set forth below:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE CONTINGENT
AMOUNT OF INITIAL SALES DEFERRED
FUND DISTRIBUTION FEE CHARGES SALES CHARGES
---- ---------------- ------------- -------------
<S> <C> <C> <C>
Conservative Growth Fund.............................. $ 84,106 $ 71,000 $14,300
Moderate Growth Fund.................................. $128,172 $117,100 $24,200
High Growth Fund...................................... $106,217 $103,700 $12,900
</TABLE>
For the fiscal period ended July 31, 1999, it is estimated that the
Distributor spent approximately the following amounts in connection with the
distribution of the Funds' Class C shares:
<TABLE>
<CAPTION>
PRINTING AND MAILING COMPENSATION TO COMMISSION
PROSPECTUSES BROKER/DEALERS FOR PAYMENTS TO TOTAL
TO OTHER THAN COMMISSIONS TO FINANCIAL AMOUNT
CURRENT REPRESENTATIVES AND ADVISERS OF OVERHEAD SPENT BY
FUND SHAREHOLDERS OTHER EXPENSES* PRUDENTIAL SECURITIES COSTS* DISTRIBUTOR
---- -------------------- ------------------- --------------------- -------- -----------
<S> <C> <C> <C> <C> <C>
Conservative Growth
Fund................. $1,000 $5,000 $18,000 $ 34,000 $ 58,000
Moderate Growth Fund... $1,100 $8,200 $42,300 $ 59,100 $110,700
High Growth Fund....... $1,000 $5,000 $39,000 $ 54,000 $ 99,000
</TABLE>
- ---------------
* Includes (a) the expenses of operating the branch offices of Prudential
Securities and Prusec in connection with the sale of Fund shares, including
lease costs, the salaries and employee benefits of operations and sales
support personnel, utility costs, communication costs and the costs of
stationery and supplies, (b) the cost of client sales seminars, (c) expenses
of mutual fund sales coordinators to promote the sale of Fund shares and (d)
other incidental expenses relating to branch promotion of Fund sales.
* * *
Distribution expenses attributable to the sale of Class A, Class B or Class
C shares of each Fund will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of that Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
The Class A, Class B and Class C Plans continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Trustees, including a majority vote of the Trustees who are
not interested persons of the Trust and who have no direct or indirect financial
interest in the Class A, Class B and Class C Plan or in any agreement related to
the Plans (the Rule 12b-1 Trustees), cast in person at a meeting called for the
purpose of voting on such continuance. The Plans may each be terminated at any
time, without penalty, by the vote of a majority of the Rule 12b-1 Trustees or
by the vote of the holders of a majority of the outstanding shares of the
applicable class on not more than 60 days', nor less than 30 days', written
notice to any other party to the Plans. The Plans may not be amended to increase
materially the amounts to be spent for the services described therein without
approval by the shareholders of the applicable class, and all material
amendments are required to be approved by the Board of Trustees in the manner
described above. Each Plan will automatically terminate in the event of its
assignment. The Trust will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
Pursuant to each Plan, the Board of Trustees will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of the Trust by the Distributor. The report will include an
itemization of the distribution expenses and the purposes of such expenditures.
In addition, as long as the Plans remain in effect, the selection and nomination
of Rule 12b-1 Trustees shall be committed to the Rule 12b-1 Trustees.
Pursuant to the Distribution Agreement, the Trust has agreed to indemnify
the Distributor to the extent permitted by applicable law against certain
liabilities under the federal securities laws.
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<PAGE> 112
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments to dealers (including Prudential Securities) and other persons who
distribute shares of the Trust (including Class Z shares). Such payments may be
calculated by reference to the net asset value of shares sold by such persons or
otherwise.
FEE WAIVERS/SUBSIDIES
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Trust. In addition,
the Distributor has contractually agreed to waive a portion of its distribution
fees for the Class A shares as described above. Fee waivers and subsidies will
increase a Fund's total return.
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares of each Fund. In
the case of Class B shares, interest charges equal to the prime rate plus one
percent per annum may be added to the 6.25% limitation. Sales from the
reinvestment of dividends and distributions are not required to be included in
the calculation of the 6.25% limitation. The annual asset-based sales charge
with respect to Class B and Class C shares of a Fund may not exceed .75 of 1%.
The 6.25% limitation applies to each Fund rather than on a per shareholder
basis. If aggregate sales charges were to exceed 6.25% of total gross sales of
any class, all sales charges on shares of that class would be suspended.
(c) OTHER SERVICE PROVIDERS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Trust and cash and in that capacity maintains certain financial and accounting
books and records pursuant to an agreement with the Trust. Subcustodians provide
custodial services for the Trust's foreign assets held outside the United
States.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Trust.
PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary transfer
agency services to the Trust, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, payment of dividends and distributions and related
functions. For these services, PMFS receives an annual fee per shareholder
account of $10.00, a new account set-up fee for each manually established
account of $2.00 and a monthly inactive zero balance account fee per shareholder
account of $.20. PMFS is also reimbursed for its out-of-pocket expenses,
including but not limited to postage, stationery, printing, allocable
communication expenses and other costs.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New
York, 10036, serves as the Trust's independent accountants, and in that capacity
audits the annual financial statements of the Trust.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Each Adviser is responsible for decisions to buy and sell securities,
futures contracts and options thereon for the Funds, the selection of brokers,
dealers and futures commission merchants to effect the transactions and the
negotiation of brokerage commissions, if any.
Broker-dealers may receive negotiated brokerage commissions on transactions
in portfolio securities, including options, futures, and options on futures
transactions and the purchase and sale of underlying securities upon the
exercise of options. On foreign securities exchanges, commissions may be fixed.
Orders may be directed to any broker, dealer or futures commission merchant
including, to the
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<PAGE> 113
extent and in the manner permitted by applicable law, Prudential Securities, one
of the Advisers or an affiliate thereof (an "affiliated broker").
The Funds do not normally incur any brokerage commission expenses on
portfolio transactions involving fixed income securities. These securities are
generally traded on a "net" basis, with dealers acting as principal for their
own accounts without a stated commission, although the price of the security
usually includes a profit to the dealer. In underwritten offerings, securities
are purchased at a fixed price which includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or discount.
On occasion, certain money market instruments and U.S. Government agency
securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
Equity securities traded in the over-the-counter market and convertible
bonds are generally traded on a "net" basis with dealers acting as principal for
their own accounts without a stated commission, although the price of the
security usually includes a profit to the dealer. In underwritten offerings,
securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. The Trust will not deal with an affiliated broker in any
transaction in which such affiliated broker acts as principal. Thus, for
example, a Fund will not deal with an affiliated broker/dealer acting as market
maker, and it will not execute a negotiated trade with an affiliated
broker/dealer if execution involves an affiliated broker/dealer acting as
principal with respect to any part of the Fund's order.
In placing orders for securities for the Funds of the Trust, each Adviser
is required to give primary consideration to obtaining the most favorable price
and efficient execution. This means that an Adviser will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable under the circumstances. While an
Adviser generally seeks reasonably competitive spreads or commissions, the Trust
will not necessarily be paying the lowest spread or commission available. Within
the framework of this policy, an Adviser may consider research and investment
services provided by brokers, dealers or futures commission merchants who effect
or are parties to portfolio transactions of the Trust, an Adviser or an
Adviser's other clients. Such research and investment services are those which
brokerage houses customarily provide to institutional investors and include
statistical and economic data and research reports on particular companies and
industries. Such services are used by an Adviser in connection with all of its
investment activities, and some of such services obtained in connection with the
execution of transactions for an Adviser may be used in managing other
investment accounts. Conversely, brokers, dealers or futures commission
merchants furnishing such services may be selected for the execution of
transactions for such other accounts, whose aggregate assets are larger than the
Trust's, and the services furnished by such brokers, dealers or futures
commission merchants may be used by an Adviser in providing investment
management for the Funds. Commission rates are established pursuant to
negotiations with the broker, dealer or futures commission merchant based on the
quality and quantity of execution services provided by the broker or futures
commission merchant in the light of generally prevailing rates. Each Adviser may
pay brokers, dealers and futures commission merchants, other than an affiliated
broker, higher commissions for particular transactions than might be charged if
a different broker had been selected, on occasions when, in an Adviser's
opinion, this policy furthers the objective of obtaining best price and
execution. In addition, each Adviser is authorized to pay higher commissions on
brokerage transactions for the Funds to brokers, dealers and futures commission
merchants, other than to an affiliated broker, in order to secure research and
investment services described above when, in the Adviser's opinion, the higher
commission is reasonable in relation to the value of research and investment
services provided by such brokers, dealers or futures commission merchants
viewed in terms of either that particular transaction or the Adviser's
responsibilities with respect to its other investment accounts, provided that
this practice is otherwise consistent with the objective of obtaining best price
and execution. The allocation of orders among brokers, dealers and futures
commission merchants and the commission rates paid are reviewed periodically by
the Trustees. While such services are useful and important in supplementing the
Advisers' own research and facilities, services so received are in addition to
and not in lieu of services required to
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<PAGE> 114
be performed by the Advisers and the Advisers' fees are not reduced as a
consequence of the receipt of such information.
Subject to the above considerations, an affiliated broker may act as a
securities broker, dealer or futures commission merchant for the Trust. In order
for an affiliated broker to effect any portfolio transactions for the Trust, the
commissions, fees or other remuneration received by the affiliated broker must
be reasonable and fair compared to the commissions, fees or other remuneration
paid to other brokers in connection with comparable transactions involving
similar securities being purchased or sold during a comparable period of time.
This standard would allow an affiliated broker to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker in
a commensurate arm's-length transaction. Furthermore, the Trustees, including a
majority of the Trustees who are not "interested" persons, have adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to affiliated brokers are consistent with the
foregoing standard.
In accordance with Section 11(a) under the Securities Exchange Act of 1934,
as amended, an affiliated broker may not retain compensation for effecting
transactions on a national securities exchange for the Trust unless the Trust
has expressly authorized the retention of such compensation. Section 11(a)
provides that an affiliated broker must furnish to the Trust at least annually a
statement setting forth the total amount of all compensation retained by such
affiliated broker for transactions effected by the Trust during the applicable
period. Brokerage transactions with an affiliated broker are also subject to
such fiduciary standards as may be imposed by applicable law.
The table below sets forth certain information concerning the payment of
commissions by the Funds, including the commissions paid to Prudential
Securities or any affiliate of the Trust or the Advisers for the period ended
July 31, 1999.
<TABLE>
<CAPTION>
CONSERVATIVE MODERATE HIGH
GROWTH FUND GROWTH FUND GROWTH FUND
------------ ------------ ------------
PERIOD ENDED PERIOD ENDED PERIOD ENDED
JULY 31, JULY 31, JULY 31,
1999 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund............ $44,000 $80,300 $119,128
Total brokerage commissions paid to Prudential
Securities or affiliates of the Trust or the
Advisers.............................................. $ 1,000 $ --% 1,000
Percentage of total brokerage commissions paid to
Prudential Securities or affiliates of the Trust or
the Advisers.......................................... 2.3% --% 0.8%
Percentage of the aggregate dollar amount of portfolio
transactions involving the payment of commissions
through Prudential Securities or affiliates of the
Trust or the Advisers................................. --% --% --%
</TABLE>
Of the total brokerage commissions paid during the period ended July 31,
1999, the Conservative Growth Fund, Moderate Growth Fund and High Growth Fund
paid $ ( %), $ ( %) and $ ( %), respectively, to firms
which provided research, statistical or other services to the Advisers. The
Advisers have not separately identified a portion of such brokerage commissions
as applicable to the provision of such research, statistical or other services.
The Trust is required to disclose the Funds' holdings of securities of the
Trust's regular brokers and dealers (as defined under Rule 10b-1 of the
Investment Company Act) and their parents at July 31, 1999. As of July 31, 1999,
[Info to come].
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<PAGE> 115
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
The Trust is authorized to issue an unlimited number of shares of
beneficial interest, $.001 par value per share divided into three series (the
Funds). Each Fund is divided into four classes, designated Class A, Class B,
Class C and Class Z shares. Each class of shares represents an interest in the
same assets of the Fund and is identical in all respects except that (1) each
class is subject to different sales charges and distribution and/or service fees
(except for Class Z shares, which are not subject to any sales charges and
distribution and/or service fees), which may affect performance, (2) each class
has exclusive voting rights on any matter submitted to shareholders that relates
solely to its arrangement and has separate voting rights on any matter submitted
to shareholders in which the interests of one class differ from the interests of
any other class, (3) each class has a different exchange privilege, (4) only
Class B shares have a conversion feature and (5) Class Z shares are offered
exclusively for sale to a limited group of investors. In accordance with the
Trust's Declaration of Trust, the Trustees may authorize the creation of
additional series and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Trustees may
determine. The voting rights of the shareholders of a series or class can be
modified only by the vote of shareholders of that series or class.
Shares of the Trust, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Trust under certain circumstances. Each share of
each class is equal as to earnings, assets and voting privileges, except as
noted above, and each class of shares (with the exception of Class Z shares,
which are not subject to any distribution or service fees) bears the expenses
related to the distribution of its shares. Except for the conversion feature
applicable to the Class B shares, there are no conversion, preemptive or other
subscription rights. In the event of liquidation, each share of a Fund is
entitled to its portion of all of the Fund's assets after all debt and expenses
of the Fund have been paid. Since Class B and Class C shares generally bear
higher distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders and to Class Z shareholders, whose shares are not subject to any
distribution and/or service fees.
The Trust does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Trust will not be required to hold meetings of
shareholders unless, for example, the election of Trustees is required to be
acted on by shareholders under the Investment Company Act. Shareholders have
certain rights, including the right to call a meeting upon the vote of 10% of
the Fund's outstanding shares for the purpose of voting on the removal of one or
more Trustees or to transact any other business.
Under the Declaration of Trust, the Trustees may authorize the creation of
additional series of shares (the proceeds of which would be invested in
separate, independently managed portfolios with distinct investment objectives
and policies and share purchase, redemption and net asset value procedures) with
such preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine. All consideration received by the Trust for shares of
any additional series, and all assets in which such consideration is invested,
would belong to that series (subject only to the rights of creditors of that
series) and would be subject to the liabilities related thereto.
The Trustees have the power to alter the number and the terms of office of
the Trustees, provided that at all times at least a majority of the Trustees
have been elected by the shareholders of the Trust. The voting rights of
shareholders are not cumulative, so that holders of more than 50 percent of the
shares voting can, if they choose, elect all Trustees being selected, while the
holders of the remaining shares would be unable to elect any Trustees.
B-47
<PAGE> 116
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Shares of a Fund may be purchased at a price equal to the next determined
net asset value (NAV) per share plus a sales charge which, at the election of
the Investor, may be imposed either (1) at the time of purchase (Class A or
Class C shares) or (2) on a deferred basis (Class B or Class C shares). Class Z
shares of the Fund are offered to a limited group of investors at NAV without
any sales charges.
PURCHASE BY WIRE
For an initial purchase of shares of a Fund by wire, you must complete an
application and telephone PMFS to receive an account number at (800) 225-1852
(toll-free). The following information will be requested: your name, address,
tax identification number, class election, dividend distribution election,
amount being wired and wiring bank. Instructions should then be given by you to
your bank to transfer funds by wire to State Street Bank and Trust Company
(State Street), Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: Prudential Diversified Funds, specifying on the wire the
account number assigned by PMFS and your name and identifying the Fund and class
in which you are eligible to invest (Class A, Class B, Class C or Class Z
shares).
If you arrange for receipt by State Street of federal funds prior to the
calculation of NAV (4:15 P.M., New York time) on a business day, you may
purchase shares of a Fund as of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Diversified
Funds, the Fund in which you would like to invest, Class A, Class B, Class C or
Class Z shares and your name and individual account number. It is not necessary
to call PMFS to make subsequent purchase orders utilizing federal funds. The
minimum amount which may be invested by wire is $1,000.
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations, (2) statutory mergers, or (3)
other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Trust's investment adviser.
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Trust and the
Distributor, Class A shares of each Fund are sold with a maximum front-end sales
charge of 5%, Class C shares* of each Fund are sold
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<PAGE> 117
with a front-end sales charge of 1%, and Class B* and Class Z shares are sold at
NAV. Using the NAV of each Fund at July 31, 1999, the maximum offering price of
the Funds' shares is as follows:
<TABLE>
<CAPTION>
CONSERVATIVE MODERATE HIGH
GROWTH GROWTH GROWTH
FUND FUND FUND
------------ -------- ------
<S> <C> <C> <C>
CLASS A
Net asset value and redemption price per Class A share..... $10.36 $10.86 $11.52
Maximum sales charge (5% of offering price)................ .55 .57 .61
------ ------ ------
Maximum offering price to public........................... $10.91 $11.43 $12.13
====== ====== ======
CLASS B
Net asset value, offering price and redemption price per
Class B share*........................................... $10.35 $10.85 $11.47
====== ====== ======
CLASS C
Net asset value and redemption price per Class C share*.... $10.35 $10.85 $11.47
Sales charge (1% of offering price)........................ .10 .11 .12
------ ------ ------
Offering price to public................................... $10.45 $10.96 $11.59
====== ====== ======
CLASS Z
Net asset value, offering price and redemption price per
Class Z share............................................ $10.37 $10.87 $11.56
====== ====== ======
</TABLE>
- ---------------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions.
SELECTING A PURCHASE ALTERNATIVE
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 4 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to an initial sales charge of 5% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6 year period, you should
consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for longer than 4 years, but less
than 5 years, and do not qualify for a reduced sales charge on Class A shares,
you should consider purchasing Class B or Class C shares over Class A shares.
This is because the initial sales charge plus the cumulative annual
distribution-related fee on Class A shares would exceed those of the Class B and
Class C shares if you redeem your investment during this time period. In
addition, more of your money would be invested initially in the case of Class C
shares, because of the relatively low initial sales charge, and all of your
money would be invested initially in the case of Class B shares, which are sold
at NAV.
If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual
distribution-related fee on Class A shares would be less than those of the Class
B and Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B shares, you would not have all of your money invested initially
because the sales charge on Class A shares is deducted at the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and for more than 5 years in the
case of Class C shares for the higher cumulative annual distribution-related fee
on those shares plus, in the case of Class C shares, the 1% initial sales charge
to
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<PAGE> 118
exceed the initial sales charge plus the cumulative annual distribution-related
fees on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class B or Class C
distribution-related fee on the investment, fluctuations in NAV, the effect of
the return on the investment over this period of time or redemptions when the
CDSC is applicable.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES -- CLASS A SHARES
Benefit Plans. Certain group retirement and savings plans may purchase
Class A shares without the initial sales charge if they meet the required
minimum for amount of assets, average account balance or number of eligible
employees. For more information about these requirements, call Prudential at
(800) 353-2847.
Other Waivers. In addition, Class A shares may be purchased at NAV,
through the Distributor or the Transfer Agent, by:
- officers of the Prudential mutual funds (including the Trust),
- employees of the Distributor, Prudential Securities, PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer
Agent,
- employees of subadvisers of the Prudential mutual funds provided that
purchases at NAV are permitted by such person's employer,
- Prudential, employees and special agents of Prudential and its
subsidiaries and all persons who have retired directly from active
service with Prudential or one of its subsidiaries,
- members of the Board of Directors of The Prudential Insurance Company of
America,
- registered representatives and employees of brokers who have entered into
a selected dealer agreement with the Distributor provided that purchases
at NAV are permitted by such person's employer,
- investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities, or within one
year in the case of benefit plans, (2) the purchase is made with proceeds
of a redemption of shares of any open-end non-money market fund sponsored
by the financial adviser's previous employer (other than a fund which
imposes a distribution or service fee of .25 of 1% or less) and (3) the
financial adviser served as the client's broker on the previous purchase,
- investors in Individual Retirement Accounts, provided the purchase is
made in a directed rollover to such Individual Retirement Account or with
the proceeds of a tax-free rollover of assets from a benefit plan for
which Prudential provides administrative or recordkeeping services and
further provided that such purchase is made within 60 days of receipt of
the benefit plan distribution,
- orders placed by broker-dealers, investment advisers or financial
planners who have entered into an agreement with the Distributor, who
place trades for their own accounts or the accounts of their clients and
who charge a management, consulting or other fee for their services (for
example, mutual fund "wrap" or asset allocation programs), and
- orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the accounts
are linked to the master account of such broker-dealer, investment
adviser or financial planner and the broker-dealer, investment adviser or
financial planner charges the clients a separate fee for its services
(for example, mutual fund "supermarket programs").
Broker-dealers, investment advisers or financial planners sponsoring
fee-based programs (such as mutual fund "wrap" or asset allocation programs and
mutual fund "supermarket" programs) may offer
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<PAGE> 119
their clients more than one class of shares in the Fund in connection with
different pricing options of their programs. Investors should consider carefully
any separate transaction and other fees charged by these programs in connection
with investing in each available share class before selecting a share class.
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the broker
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions.
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of a Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "Shareholder
Guide -- Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
- an individual,
- the individual's spouse, their children and their parents,
- the individual's and spouse's Individual Retirement Account (IRA),
- any company controlled by the individual (a person, entity or group
that holds 25% or more of the outstanding voting securities of a company
will be deemed to control the company, and a partnership will be deemed to
be controlled by each of its general partners),
- a trust created by the individual, the beneficiaries of which are
the individual, his or her spouse, parents or children,
- a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act
account created by the individual or the individual's spouse, and
- one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Transfer Agent, the Distributor or your broker must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charge will be granted subject to confirmation of the investor's
holdings. The Combined Purchase and Cumulative Purchase Privilege does not apply
to individual participants in any retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of a
Fund and shares of other Prudential mutual funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. The value of shares held directly with the Transfer Agent
and through your broker will not be aggregated to determine the reduced sales
charge. The value of existing holdings for purposes of determining the reduced
sales charge is calculated using the maximum offering price (NAV plus maximum
sales charge) as of the previous business day. The Distributor or the Transfer
Agent must be notified at the time of purchase that the investor is entitled to
a reduced sales charge. The reduced sales charges will be granted subject to
confirmation of the investor's holdings. Rights of Accumulation are not
available to individual participants in any retirement or group plans.
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<PAGE> 120
LETTERS OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors) who enter into a written Letter of Intent
providing for the purchase, within a thirteen-month period, of shares of a Fund
and shares of other Prudential mutual funds. Retirement and group plans may not
enter into a Letter of Intent.
For purposes of the Letter of Intent, all shares of the Funds and shares of
other Prudential mutual funds (excluding money market funds other than those
acquired pursuant to the exchange privilege) which were previously purchased and
are still owned are also included in determining the applicable reduction.
However, the value of shares held directly with the Transfer Agent and through
your broker will not be aggregated to determine the reduced sales charge.
A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in the name of the
purchaser. The effective date of a Letter of Intent may be back-dated up to 90
days, in order that any investments made during this 90-day period, valued at
the purchaser's cost, can be applied to the fulfillment of the Letter of Intent
goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Trust to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the purchaser is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and sales charge actually paid. Such payment may be made
directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain such difference. Investors electing to
purchase Class A shares of the Funds pursuant to a Letter of Intent should
carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following receipt
of an order in proper form by the Transfer Agent, your broker or the
Distributor. Although there is no sales charge imposed at the time of purchase,
redemptions of Class B shares may be subject to CDSC. See "Sale of
Shares -- Contingent Deferred Sales Charge" below.
The Distributor will pay, from its own resources, sales commissions of up
to 4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates the
ability of the Fund to sell the Class B shares without an initial sales charge
being deducted at the time of purchase. The Distributor anticipates that it will
recoup its advancement of sales commissions from the combination of the CDSC and
the distribution fee.
CLASS C SHARES
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, brokers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 2% of the purchase
price at the time of the sale.
WAIVER OF INITIAL SALES CHARGE -- CLASS C SHARES
Benefit Plans. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at (800)
353-2847.
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Investment of Redemption Proceeds from Other Investment
Companies. Investors may purchase Class C shares at NAV, without the initial
sales charge, with the proceeds from the redemption of shares of any
unaffiliated registered investment company which were not held through an
account with any Prudential affiliate. Such purchases must be made within 60
days of the redemption. Investors eligible for this waiver include: (1)
investors purchasing shares through an account at Prudential Securities; (2)
investors purchasing shares through an ADVANTAGE Account or an Investor Account
with Prusec; and (3) investors purchasing shares through other brokers. This
waiver is not available to investors who purchase shares directly from the
Transfer Agent. You must notify the Transfer Agent directly or through your
broker if you are entitled to this waiver and provide the Transfer Agent with
such supporting documents as it may deem appropriate.
CLASS Z SHARES
Benefit Plans. Certain group retirement plans may purchase Class Z shares
if they meet the required minimum for amount of assets, average account balance
or number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.
Mutual Fund Programs. Class Z shares can also be purchased by participants
in any fee-based program or trust program sponsored by Prudential or an
affiliate that includes the Trust as an available option. Class Z shares can
also be purchased by investors in certain programs sponsored by broker-dealers,
investment advisers and financial planners who have agreements with Prudential
Investments Advisory Group relating to:
- Mutual fund "wrap" or asset allocation programs, where the sponsor places
Fund trades, links its clients' accounts to a master account in the
sponsor's name and charges its clients a management, consulting or other
fee for its services; or
- Mutual fund "supermarket" programs, where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor
charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Trust in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
Other Types of Investors. Class Z shares currently are also available for
purchase by the following categories of investors:
- certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available investment option,
- current and former Directors/Trustees of the Prudential mutual funds
(including the Trust), and
- Prudential, with an investment of $10 million or more.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay brokers, financial advisers and other persons
which distribute shares a finder's fee, from its own resources, based on a
percentage of the net asset value of shares sold by such persons.
SALES OF SHARES
You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent, the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charge"
below. If you are redeeming your shares
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through a broker, your broker must receive your sell order before a Fund
computes its NAV for that day (that is, 4:15 P.M., New York time) in order to
receive that day's NAV. Your broker will be responsible for furnishing all
necessary documentation to the Distributor and may charge you for its services
in connection with redeeming shares of a Fund.
If you hold shares of a Fund through Prudential Securities, you must redeem
your shares through Prudential Securities. Please contact your Prudential
Securities financial adviser.
If you hold shares in non-certificate form, a written request for
redemption signed by you exactly as the account is registered is required. If
you hold certificates, the certificates, signed in the name(s) shown on the face
of the certificates, must be received by the Transfer Agent, the Distributor or
your broker in order for the redemption request to be processed. If redemption
is requested by a corporation, partnership, trust or fiduciary, written evidence
of authority acceptable to the Transfer Agent must be submitted before such
request will be accepted. All correspondence and documents concerning
redemptions should be sent to the Trust in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010, the Distributor or to your broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed
$100,000, (2) are to be paid to a person other than the record owner, (3) are to
be sent to an address other than the address on the Transfer Agent's records, or
(4) are to be paid to a corporation, partnership, trust or fiduciary, and your
shares are held directly with the Transfer Agent, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office manager
of most Prudential Insurance and Financial Services or Preferred Services
offices. In the case of redemptions from a PruArray Plan, if the proceeds of the
redemption are invested in another investment option of the plan in the name of
the record holder and at the same address as reflected in the Transfer Agent's
records, a signature guarantee is not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the certificate and/or written request, except as indicated below. If you
hold shares through a broker payment for shares presented for redemption will be
credited to your account at your broker, unless you indicate otherwise. Such
payment may be postponed or the right of redemption suspended at times (1) when
the New York Stock Exchange is closed for other than customary weekends and
holidays, (2) when trading on such Exchange is restricted, (3) when an emergency
exists as a result of which disposal by a Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for a Fund fairly to
determine the value of its net assets, or (4) during any other period when the
Commission, by order, so permits; provided that applicable rules and regulations
of the Commission shall govern as to whether the conditions prescribed in (2),
(3) or (4) exist.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental
to the best interests of the remaining shareholders of a Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the fund, in lieu of cash, in conformity with applicable rules of the
Commission. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. If your shares are redeemed in kind, you
would incur transaction costs in converting the assets into cash. The Trust,
however, has elected to be governed by Rule 18f-1 under the Investment Company
Act, under which each Fund is obligated to redeem shares solely in cash up to
the lesser of $250,000 or 1% of the NAV of the Fund during any 90-day period for
any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Funds, the
Trustees may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Trust will give
such
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shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of a Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. (If less than a full repurchase is made,
the credit will be on a pro rata basis.) You must notify the Transfer Agent,
either directly or through the Distributor or your broker, at the time the
repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales Charge"
below. Exercise of the repurchase privilege will generally not affect federal
tax treatment of any gain realized upon redemption. However, if the redemption
was made within a 30 day period of the repurchase and if the redemption resulted
in a loss, some or all of the loss, depending on the amount reinvested, may not
be allowed for federal income tax purposes.
CONTINGENT DEFERRED SALES CHARGE
Redemptions of Class B shares will be subject to a contingent deferred
sales charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within 18 months of purchase (one year in the case of shares
purchased before November 2, 1998) will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and 18 months, in the case of Class C shares (one year for Class
C shares purchased before November 2, 1998). A CDSC will be applied on the
lesser of the original purchase price or the current value of the shares being
redeemed. Increases in the value of your shares or shares acquired through
reinvestment of dividends or distributions are not subject to a CDSC. The amount
of any CDSC will be paid to and retained by the Distributor.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund.
The following table sets forth the rates of the CDSC applicable to
redemption of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
<S> <C>
First..................................................... 5.0%
Second.................................................... 4.0%
Third..................................................... 3.0%
Fourth.................................................... 2.0%
Fifth..................................................... 1.0%
Sixth..................................................... 1.0%
Seventh................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in NAV above the total amount of
payments for the purchase of Class B shares made during the preceding six years
and 18 months for Class C shares (one year for
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Class C shares bought before November 2, 1998); then of amounts representing the
cost of shares held beyond the applicable CDSC period; and finally, of amounts
representing the cost of shares held for the longest period of time within the
applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decide to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the
gain, or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE -- CLASS B SHARES. The CDSC
will be waived in the case of a redemption following the death or disability of
a shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability.
The CDSC will also be waived in the case of a total or partial redemption
in connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. For more information, call Prudential at (800) 353-2847.
Finally, the CDSC will be waived to the extent that the proceeds from
shares redeemed are invested in Prudential Mutual Funds, The Guaranteed
Investment Account, the Guaranteed Insulated Separate Account or units of The
Stable Value Fund.
Systematic Withdrawal Plan. The CDSC will be waived (or reduced) on
certain redemptions from a Systematic Withdrawal Plan. On an annual basis, up to
12% of the total dollar amount subject to the CDSC may be redeemed without
charge. The Transfer Agent will calculate the total amount available for this
waiver annually on the anniversary date of your purchase. The CDSC will be
waived (or reduced) on redemptions until this threshold 12% is reached.
In addition, the CDSC will be waived on redemptions of shares held by
Trustees of the Fund.
You must notify the Trust's Transfer Agent either directly or through your
broker at the time of redemption, that you are entitled to waiver of the CDSC
and provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
------------------ -----------------------------------------------
<S> <C>
Death A copy of the shareholder's death certificate
or, in the case of a trust, a copy of the
grantor's death certificate, plus a copy of the
trust agreement identifying the grantor.
</TABLE>
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<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
------------------ -----------------------------------------------
<S> <C>
Disability -- An individual will be considered A copy of the Social Security Administration
disabled if he or she is unable to engage in award letter or a letter from a physician on
any substantial gainful activity by reason of the physician's letterhead stating that the
any medically determinable physical or mental shareholder (or, in the case of a trust, the
impairment which can be expected to result in grantor) is permanently disabled. The letter
death or to be of long-continued and indefinite must also indicate the date of disability.
duration.
Distribution from an IRA or 403(b) Custodial A copy of the distribution form from the
Account custodial firm indicating (i) the date of birth
of the shareholder and (ii) that the
shareholder is over age 59 and is taking a
normal distribution -- signed by the
shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the reason for
the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or
the plan administrator/ trustee on company
letterhead indicating the amount of the excess
and whether or not taxes have been paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE -- CLASS C SHARES
Benefit Plans. The CDSC will be waived for redemptions by certain group
retirement plans for which Prudential or brokers not affiliated with Prudential
provide administrative or recordkeeping services. The CDSC will also be waived
for certain redemptions by benefit plans sponsored by Prudential and its
affiliates. For more information, call Prudential at (800) 353-2847.
CONVERSION FEATURE -- CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Trust tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (1)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (2) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different NAVs per share, the number of Eligible Shares calculated
as described above will generally be either more or less than the number of
shares actually purchased approximately seven years before such conversion date.
For example, if 100 shares were initially purchased at $10 per share (for a
total of $1,000) and a second purchase of 100 shares was subsequently made at
$11 per share (for a total of $1,100), 95.24 shares would convert approximately
seven years from the initial purchase (that is, $1,000 divided by $2,100
(47.62%),
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multiplied by 200 shares equals 95.24 shares). The Manager reserves the right to
modify the formula for determining the number of Eligible Shares in the future
as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B shares at the time of conversion. Thus, although the aggregate
dollar value will be the same, you may receive fewer Class A shares than Class B
shares converted.
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year would not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (1) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (2) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Trust shares, a Shareholder Investment Account
is established for each investor under which a record of the shares held is
maintained by the Transfer Agent. If a stock certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Trust makes available to its
shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the relevant Fund. An
investor may direct the Transfer Agent in writing not less than five full
business days prior to the record date to have subsequent dividends or
distributions sent in cash rather than reinvested. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payment will be made directly to the dealer. Any
shareholder who receives a cash payment representing a dividend or distribution
may reinvest such dividend or distribution at NAV by returning the check or the
proceeds to the Transfer Agent within 30 days after the payment date. Such
investment will be made at the NAV per share next determined after receipt of
the check or proceeds by the Transfer Agent. Such shareholder will receive
credit for any CDSC paid in connection with the amount of proceeds being
reinvested.
EXCHANGE PRIVILEGE
The Trust makes available to its shareholders the exchange privilege. This
privilege allows shareholders to exchange their shares of each Fund for shares
of certain other Prudential Mutual Funds, including one or more specified money
market funds, subject in each case to the minimum investment requirements of
such funds. Shares of such other Prudential Mutual Funds may also be exchanged
for
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shares of the Funds. All exchanges are made on the basis of the relative NAV
next determined after receipt of an order in proper form. An exchange will be
treated as a redemption and purchase for tax purposes. For retirement and group
plans having a limited menu of Prudential Mutual Funds, the exchange privilege
is available for those funds eligible for investment in the particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. Neither
the Fund nor its agents will be liable for any loss, liability or cost which
results from acting upon instructions reasonably believed to be genuine under
the foregoing procedures. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order.
If you hold shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial adviser.
If you hold certificates, the certificates, signed in the name(s) shown on
the face of the certificates, must be returned in order for the shares to be
exchanged.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
In periods of severe market or economic conditions the telephone exchange
of shares may be difficult to implement and you should make exchanges by mail by
writing to Prudential Mutual Fund Services LLC, at the address noted above.
CLASS A. Shareholders of a Fund may exchange their Class A shares for
shares of certain other Prudential Mutual Funds, shares of Prudential Government
Securities Trust (Short-Intermediate Term Series) and shares of the money market
funds specified below. No fee or sales load will be imposed upon the exchange.
Shareholders of money market funds who acquired such shares upon exchange of
Class A shares may use the exchange privilege only to acquire Class A shares of
the Prudential Mutual Funds participating in the exchange privilege.
The following money market funds participate in the Class A exchange
privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New York Money Market Series)
(New Jersey Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Trust may exchange their Class B
and Class C shares of a Fund for Class B and Class C shares, respectively, of
certain other Prudential Mutual Funds and shares of Prudential Special Money
Market Fund, Inc. No CDSC will be payable upon such exchange, but a
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<PAGE> 128
CDSC may be payable upon the redemption of the Class B and Class C shares
acquired as a result of the exchange. The applicable sales charge will be that
imposed by the fund in which shares were initially purchased and the purchase
date will be deemed to be the date of the initial purchase, rather than the date
of the exchange.
Class B and Class C shares of a Fund may also be exchanged for Class B and
Class C shares, respectively, of an eligible money market fund without
imposition of any CDSC at the time of exchange. Upon subsequent redemption from
such money market fund or after re-exchange into the Fund, such shares will be
subject to the CDSC calculated without regard to the time such shares were held
in the money market fund. In order to minimize the period of time in which
shares are subject to a CDSC, shares exchanged out of the money market fund will
be exchanged on the basis of their remaining holding periods, with the longest
remaining holding periods being transferred first. In measuring the time period
shares are held in a money market fund and "tolled" for purposes of calculating
the CDSC holding period, exchanges are deemed to have been made on the last day
of the month. Thus, if shares are exchanged into a Fund from a money market fund
during the month (and are held in the Fund at the end of the month), the entire
month will be included in the CDSC holding period. Conversely, if shares are
exchanged into a money market fund prior to the last day of the month (and are
held in the money market fund on the last day of the month), the entire month
will be excluded from the CDSC holding period. For purposes of calculating the
seven year holding period applicable to the Class B conversion feature, the time
period during which Class B shares were held in a money market fund will be
excluded.
At any time after acquiring shares of other funds participating in the
Class B or Class C exchange privilege, a shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
shares, respectively, of a Fund without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C exchange privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares, respectively, of other funds without
being subject to any CDSC.
CLASS Z. Class Z shares of a Fund may be exchanged for Class Z shares of
other Prudential Mutual Funds.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for shareholders
who qualify to purchase Class Z shares. Under this exchange privilege, amounts
representing any Class B and Class C shares which are not subject to a CDSC held
in such a shareholder's account will be automatically exchanged for Class A
shares for shareholders who qualify to purchase Class A shares at NAV on a
quarterly basis, unless the shareholder elects otherwise.
Shareholders who qualify to purchase Class Z shares will have their Class B
and Class C shares which are not subject to a CDSC and their Class A shares
exchanged for Class Z shares on a quarterly basis. Eligibility for this exchange
privilege will be calculated on the business day prior to the date of the
exchange. Amounts representing Class B or Class C shares which are not subject
to a CDSC include the following: (1) amounts representing Class B or Class C
shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the NAV above the total
amount of payments for the purchase of Class B or Class C shares and (3) amounts
representing Class B or Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either directly
or through Prudential Securities, Prusec or another broker that they are
eligible for this special exchange privilege.
Participants in any fee-based program for which a Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at NAV.
Similarly, participants in Prudential Securities' 401(k) Plan for which the
Fund's Class Z shares is an available option and who wish to transfer their
Class Z shares out of the Prudential Securities 401(k) Plan following separation
from service (that is, voluntary or
B-60
<PAGE> 129
involuntary termination of employment or retirement) will have their Class Z
shares exchanged for Class A shares at NAV.
Additional details about the exchange privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Trust's Transfer Agent,
the Distributor or your broker. The exchange privilege may be modified,
terminated or suspended on 60 days' notice, and any fund, including the Trust,
or the Distributor, has the right to reject any exchange application relating to
such fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
-------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years................................ $ 110 $ 165 $ 220 $ 275
20 Years................................ 176 264 352 440
15 Years................................ 296 444 592 740
10 Years................................ 555 833 1,110 1,388
5 Years................................ 1,371 2,057 2,742 3,428
See "Automatic Investment Plan."
</TABLE>
- ---------------
(1) Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room and
board for the 1993-1994 academic year.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the Funds.
The investment return and principal value of an investment will fluctuate so
that an investor's shares when redeemed may be worth more or less than their
original cost. See "Automatic Savings Accumulation Plan."
AUTOMATIC INVESTMENT PLAN (AIP)
Under AIP, an investor may arrange to have a fixed amount automatically
invested in shares of the Funds monthly by authorizing his or her bank account
or brokerage account (including a Prudential Securities Command Account) to be
debited to invest specified dollar amounts in shares of the Portfolios. The
investor's bank must be a member of the Automatic Clearing House System. Stock
certificates are not issued to AIP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.
B-61
<PAGE> 130
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through the
Transfer Agent, the Distributor or your broker. Such withdrawal plan provides
for monthly or quarterly checks in any amount, except as provided below, up to
the value of the shares in the shareholder's account. Withdrawals of Class B or
Class C shares may be subject to a CDSC.
In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) withdrawals may not be for less than $100 and (3) the
shareholder must elect to have all dividends and/or distributions automatically
reinvested in additional full and fractional shares at NAV on shares held under
this plan.
The Transfer Agent, the Distributor or your broker acts as an agent for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charges applicable to (1) the purchase of Class
A and Class C shares and (2) the withdrawal of Class B and Class C shares. Each
shareholder should consult his or her own tax adviser with regard to the tax
consequences of the plan, particularly if used in connection with a retirement
plan.
TAX-DEFERRED RETIREMENT PLANS
Various qualified retirement plans, including a 401(k) plan, self-directed
individual retirement accounts and "tax-deferred accounts" under Section
403(b)(7)of the Internal Revenue Code of 1986 are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, and the administration, custodial fees and other
details are available from the Distributor or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, an 8% rate of return and a 39.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.
B-62
<PAGE> 131
TAX-DEFERRED COMPOUNDING(1)
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
- ------------- -------- --------
<S> <C> <C>
10 years $26,165 $31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
</TABLE>
- ---------------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Funds or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated.
Earnings in a traditional IRA account will be subject to tax when withdrawn
from the account. Distributions from a Roth IRA which meet the conditions
required under the Internal Revenue Code will not be subject to tax upon
withdrawal from the account.
MUTUAL FUND PROGRAMS
From time to time, the Funds may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, such as to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Trust may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as part of
a program. Since the allocation of portfolios included in the program may not be
appropriate for all investors, investors should consult their financial adviser
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
Under the Investment Company Act, the Board of Trustees is responsible for
determining in good faith the fair value of securities of each Fund. In
accordance with procedures adopted by the Board of Trustees the value of
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indices) are valued at the
last sales price on such exchange system on the day of valuation, or, if there
was no sale on such day, 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. Corporate
bonds (other than convertible debt securities) and U.S. Government 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 on the basis of
valuations provided by an independent pricing agent or principal market maker
which uses information with respect to transactions in bonds, quotations from
bond dealers, agency ratings, market transactions in comparable securities and
various relationships between securities in determining value. 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 in
consultation with the Adviser to be over-the-counter, are valued at the mean
between the last reported bid and asked prices provided by principal market
makers or independent pricing agents. Options on stock and stock indices traded
on an exchange are valued at the mean between the most recently quoted bid and
asked prices on the respective exchange and futures contracts and options
thereon are valued at their last sales prices as of the close of trading
B-63
<PAGE> 132
on the applicable commodities 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. Should an extraordinary event, which is likely to affect the
value of the security, occur after the close of an exchange on which a portfolio
security is traded, such security will be valued at fair value considering
factors determined in good faith by the Adviser under procedures established by
and under the general supervision of the Board of Trustees.
Securities or other assets for which reliable market quotations are not
readily available, or for which the pricing agent or principal market maker does
not provide a valuation or methodology or provides a valuation or methodology
that, in the judgment of the Manager or the Adviser (or Valuation Committee or
Board of Trustees), does not represent fair value, are valued by the Valuation
Committee or Board of Trustees in consultation with the Manager and the Adviser,
including its portfolio managers, traders and its research and credit analysts,
on the basis of the following factors: cost of the security, transactions in
comparable securities, relationships among various securities and such other
factors as may be determined by the Manager, the Adviser, Board of Trustees or
Valuation Committee to materially affect the value of the security. Short-term
debt securities are valued at cost, with interest accrued or discount amortized
to the date of maturity, if their original maturity was 60 days or less, unless
this is determined by the Board of Trustees not to represent fair value.
Short-term securities with remaining maturities of more than 60 days, for which
market quotations are readily available, are valued at their current market
quotations as supplied by an independent pricing agent or principal market
maker.
NAV is calculated separately for each class. The NAV of Class B and Class C
shares of a Fund will generally be lower than the NAV of Class A shares of the
same Fund as a result of the larger distribution-related fee to which Class B
and Class C shares are subject. The NAV of Class Z shares of a Fund will
generally be higher than the NAV of Class A, Class B or Class C shares of the
same Fund because Class Z shares are not subject to any distribution or service
fee. It is expected, however, that the NAV per share of each class will tend to
converge immediately after the recording of dividends, if any, which will differ
by approximately the amount of the distribution and/or service fee expense
accrual differential among the classes.
Each Fund will compute its net asset value at 4:15 P.M., New York time on
each day the New York Stock Exchange is open for trading except on days on which
no orders to purchase, sell or redeem Fund shares have been received or days on
which changes in the value of the Fund's portfolio securities holdings do not
affect NAV. In the event the New York Stock Exchange closes early on any
business day, the NAV of each Fund's shares shall be determined at a time
between such closing and 4:15 P.M., New York time. The New York Stock Exchange
is closed on the following holidays: New Year's Day, Martin Luther King, Jr.
Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
TAXES, DIVIDENDS AND DISTRIBUTIONS
GENERAL
Each Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves each Fund (but not its shareholders) from paying federal income
tax on income and gains which are distributed to shareholders, and permits net
capital gains of a Fund (i.e., the excess of net long-term capital gains over
net short-term capital losses) to be treated as long-term capital gains of the
shareholders, regardless of how long shares in the Fund are held.
Qualification as a regulated investment company requires, among other
things, that (a) each Fund derive at least 90% of its gross income (without
reduction for losses from the sale or other disposition of securities or foreign
currencies) from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of securities or foreign
currencies, or other income, including, but not limited to, gains from options,
futures on such securities or foreign currencies; (b) each Fund diversify its
holdings so that, at the end of each fiscal quarter, (i) 50% of the value of the
Fund's assets is
B-64
<PAGE> 133
represented by cash, U.S. Government securities and other securities limited, in
respect of any one issuer, to an amount not greater than 5% of the value of the
Fund's assets and 10% of the outstanding voting securities of such issuer, and
(ii) not more than 25% of the value of its assets is invested in the securities
of any one issuer (other than U.S. Government securities); and (c) each Fund
distribute to its shareholders at least 90% of its net investment income and net
short-term gains (i.e., the excess of net short-term capital gains over net
long-term capital losses) in each year.
Distributions of net investment income and net short-term capital gains
will be taxable to the shareholder at ordinary income rates regardless of
whether the shareholder receives such distributions in additional shares or in
cash. To the extent a Fund's income is derived from certain dividends received
from domestic corporations, a portion of the dividends paid to corporate
shareholders of the Fund will be eligible for the 70% dividends received
deduction. Distributions of net capital gains, if any, are taxable as long-term
capital gains regardless of how long the investor has held his or her shares.
However, if a shareholder holds shares in a Fund for not more than six months,
then any loss recognized on the sale of such shares will be treated as long-term
capital loss to the extent any distribution on the shares was treated as
long-term capital gain. Shareholders will be notified annually by the Trust as
to the federal tax status of distributions made by a Fund of the Trust. A 4%
nondeductible excise tax will be imposed on a Fund of the Trust to the extent a
Fund does not meet certain distribution requirements by the end of each calendar
year. Distributions may be subject to additional state and local taxes. Any
distributions of net investment income or short-term capital gains made to a
foreign shareholder will generally be subject to U.S. withholding tax of 30% (or
a lower treaty rate if applicable to such shareholder). See "Taxes, Dividends
and Distributions" in the Prospectus.
ORIGINAL ISSUE DISCOUNT
A Fund may purchase debt securities that contain original issue discount.
Original issue discount that accrues in a taxable year is treated as income
earned by the Fund and therefore is subject to the distribution requirements of
the Internal Revenue Code. Because the original issue discount income earned by
the Fund in a taxable year may not be represented by cash income, the Fund may
have to dispose of other securities and use the proceeds to make distributions
to satisfy the Internal Revenue Code's distribution requirements.
OPTIONS AND FUTURES TRANSACTIONS
In addition, under the Internal Revenue Code, special rules apply to the
treatment of certain options and futures contracts ("Section 1256 contracts").
At the end of each year, such investments held by a Fund will be required to be
"marked-to-market" for federal income tax purposes; that is, treated as having
been sold at market value. Sixty percent of any gain or loss recognized on these
"deemed sales" and on actual dispositions may be treated as long-term capital
gain or loss, and the remainder will be treated as short-term capital gain or
loss.
CURRENCY FLUCTUATIONS
Gains or losses attributable to fluctuations in exchange rates which occur
between the time a Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities are treated as
ordinary income or ordinary loss. Similarly, gains or losses on disposition of
debt securities denominated in a foreign currency attributable to fluctuations
in the value of foreign currency between the date of acquisition of the security
and the date of disposition also are treated as ordinary gain or loss. These
gains or losses, referred to under the Internal Revenue Code as "Section 988"
gains or losses, increase or decrease the amount of the Fund's investment
company taxable income available to be distributed to shareholders as ordinary
income, rather than increasing or decreasing the amount of the Fund's net
capital gain. If Section 988 losses exceed other investment company taxable
income during a taxable year, distributions made by the Fund during the year
would be characterized as a return of capital to shareholders, reducing each
shareholder's basis in their shares.
B-65
<PAGE> 134
FOREIGN WITHHOLDING
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties may reduce or eliminate such taxes. It is impossible to determine in
advance the effective rate of foreign tax to which the Portfolio will be
subject, since the amount of the Fund's assets to be invested in various
countries is not known. It is not anticipated that any Fund will qualify to
pass-through to the shareholders the ability to claim as a foreign tax credit
the foreign taxes paid by a Fund.
BACKUP WITHHOLDING
With limited exceptions, each Fund is required to withhold federal income
tax at the rate of 31% of all taxable distributions payable to shareholders who
fail to provide the Trust with their correct taxpayer identification number or
to make required certification or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Any amounts withheld may be
credited against a shareholder's federal income tax liability.
PASSIVE FOREIGN INVESTMENT COMPANIES
A Fund may, from time to time, invest in Passive Foreign Investment
Companies ("PFICs"). PFICs are foreign corporations which derive a majority of
their income from passive sources. For tax purposes, a Fund's investments in
PFICs are subject to special tax provisions that may result in the taxation of
certain gains realized and unrealized by the Fund.
OTHER TAXATION
Distributions may also be subject to state, local and foreign taxes
depending on each shareholder's particular situation. The foregoing summarizes
certain additional tax considerations generally affecting the Funds and their
shareholders that are not described in the Prospectus. No attempt is made to
present a detailed explanation of the tax treatment of the Funds or their
shareholders, and the discussions here and in the Prospectus are not intended as
a substitute for careful tax planning. Shareholders are advised to consult their
own tax advisers with respect to the particular tax consequences to them of an
investment in the Trust.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Trust may from time to time advertise the
average annual total return of a Fund. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z Shares.
Average annual total return is computed according to the following formula:
P(1+T)(n) = ERV
<TABLE>
<S> <C> <C> <C>
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
</TABLE>
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1,
5 or 10 year periods (or fractional portion thereof).
Average annual total return takes into account any applicable initial or
deferred sales charges but does not take into account any federal or state
income taxes that may be payable upon redemption.
B-66
<PAGE> 135
Below are the average annual total returns for each Fund's share classes
for the period ended July 31, 1999.
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION (11/18/98)
------ ------- -------- --------------------
<S> <C> <C> <C> <C>
Conservative Growth Fund
Class A............................... N/A N/A N/A %
Class B............................... N/A N/A N/A
Class C............................... N/A N/A N/A
Class Z............................... N/A N/A N/A
Moderate Growth Fund
Class A............................... N/A N/A N/A N/A%
Class B............................... N/A N/A N/A N/A
Class C............................... N/A N/A N/A N/A
Class Z............................... N/A N/A N/A N/A
High Growth Fund
Class A............................... N/A N/A N/A %
Class B............................... N/A N/A N/A
Class C............................... N/A N/A N/A
Class Z............................... N/A N/A N/A
</TABLE>
AGGREGATE TOTAL RETURN
The Trust may from time to time advertise the aggregate total return of a
Fund. A Fund's aggregate total return figures represent the cumulative change in
the value of an investment in the Fund for the specified period and are computed
by the following formula:
ERV-P
-----------
P
<TABLE>
<S> <C> <C> <C>
Where: P = a hypothetical initial payment of $1,000.
</TABLE>
ERV = ending redeemable value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
B-67
<PAGE> 136
Below are the aggregate total returns for each Fund's share classes for the
period ended July 31, 1999.
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION 11/18/98
------ ------- -------- -------------------
<S> <C> <C> <C> <C>
Conservative Growth Fund
Class A...................................... N/A N/A N/A %
Class B...................................... N/A N/A N/A
Class C...................................... N/A N/A N/A
Class Z...................................... N/A N/A N/A
Moderate Growth Fund
Class A...................................... N/A N/A N/A 9.47%
Class B...................................... N/A N/A N/A 8.99
Class C...................................... N/A N/A N/A 8.99
Class Z...................................... N/A N/A N/A 9.70
High Growth Fund
Class A...................................... N/A N/A N/A %
Class B...................................... N/A N/A N/A
Class C...................................... N/A N/A N/A
Class Z...................................... N/A N/A N/A
</TABLE>
Comparative performance information may be used from time to time in
advertising or marketing the Funds' shares, including data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., The Bank Rate
Monitor, other industry publications, business periodicals and market indices.
B-68
<PAGE> 137
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
CONSERVATIVE 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
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
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
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
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-69
<PAGE> 138
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
CONSERVATIVE GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
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
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
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
- ---------------------------------------------------------
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
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-70
<PAGE> 139
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
CONSERVATIVE GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
FERTILIZER (CONT'D)
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
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
13,100 Tenet Healthcare Corp.(a) $ 234,981
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
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-71
<PAGE> 140
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
CONSERVATIVE GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
INSURANCE (CONT'D)
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
- ---------------------------------------------------------
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
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
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
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-72
<PAGE> 141
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
CONSERVATIVE GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
PHARMACEUTICALS (CONT'D)
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
- ---------------------------------------------------------
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
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
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
- ---------------------------------------------------------
TELECOMMUNICATIONS--3.1%
2,400 Allegiance Telecom, Inc.(a) 120,750
2,300 ALLTEL Corp.(a) 165,169
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-73
<PAGE> 142
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
CONSERVATIVE GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
TELECOMMUNICATIONS--3.1% (CONT'D)
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
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
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
$24,843,331) 28,411,011
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-74
<PAGE> 143
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
CONSERVATIVE GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------------------
<C> <C> <S> <C>
ASSET BACKED SECURITIES--2.9%
- ----------------------------------------------------------------------
Capital One Bank Corp.,
Notes,
Baa2 US$ 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 280 Adelphia Communications 268,800
Corp.,
Sr. Notes,
8.125%, 7/15/03
B2 150 Charter Communications 143,625
Holdings,
Sr. Notes,
8.625%, 4/1/09
B3 15 Classic Cable, Inc., 14,850
Sr. Sub. Notes,
9.375%, 8/1/09
</TABLE>
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------------------
<C> <C> <S> <C>
B1 $ 250 CSC Holdings, Inc., $ 262,500
Sr. Sub. Debs.,
9.875%, 2/15/13
B1 80 Fox Family Worldwide, Inc., 75,200
Sr. Notes,
9.25%, 11/1/07
-----------
764,975
- ----------------------------------------------------------------------
CHEMICALS--0.6%
Baa3 150 Equistar Chemicals, Inc., 149,025
Sr. Notes,
8.75%, 2/15/09
B2 75 Huntsman ICI Chemicals, 74,625
Inc.,
Sr. Sub. Notes,
10.125%, 7/1/09
Ba3 100 Lyondell Chemical Co., 102,000
Sr. Secured Notes,
9.875%, 5/1/07
B3 45 Sterling Chemicals Holdings, 46,013
Inc.,
Sr. Sub. Notes,
12.375%, 7/15/06
B2 60 ZSC Specialty Corp., 60,300
Sr. Notes,
11.00%, 7/1/09
-----------
431,963
- ----------------------------------------------------------------------
COAL--0.5%
Ba3 350 P & L Coal Holdings Corp., 344,750
Sr. Notes,
8.875%, 5/15/08(c)
- ----------------------------------------------------------------------
CONTAINERS & PACKAGING
B2 20 Consolidated Container 20,350
Company LLC,
Sr. Sub. Notes,
10.125%, 7/15/09
- ----------------------------------------------------------------------
ENTERTAINMENT--0.3%
B2 100 Hollywood Park, Inc., 97,750
Sr. Sub. Notes,
9.25%, 2/15/07
B3 125 Premier Parks, Inc., 125,000
Sr. Notes,
9.75%, 6/15/07
-----------
222,750
- ----------------------------------------------------------------------
FERTILIZER--0.1%
B2 60 Scotts Co., 59,400
Sr. Sub. Notes,
8.625%, 1/15/09
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-75
<PAGE> 144
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
CONSERVATIVE GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------------------
<C> <C> <S> <C>
FINANCIAL SERVICES--1.8%
Baa3 $ 600 A T & T Capital Corp., $ 596,832
MTN, FRN
5.5612%, 4/23/02
Ba1 100 Americredit Corp., 101,000
Sr. Notes,
9.875%, 4/15/06
Ba3 15 RBF Finance Co., 15,450
Sr. Secured Notes,
11.00%, 3/15/06
Aa3 600 Wells Fargo & Company, 593,466
Notes,
6.625%, 7/15/04
-----------
1,306,748
- ----------------------------------------------------------------------
FOOD & BEVERAGE --0.1%
B2 100 Pilgrim's Pride Corp., 103,500
Sr. Sub. Notes,
10.875%, 8/1/03
- ----------------------------------------------------------------------
GAMING--1.7%
B3 75 Coast Hotels & Casinos, 68,299
Inc.,
Sr. Sub. Notes,
9.50%, 4/1/09
Ba2 350 Harrahs Casinos, Inc., 341,250
Gtd. Sr. Sub. Notes,
7.875%, 12/15/05
B2 150 Horseshoe Gaming LLC, 144,000
Sr. Sub. Notes,
8.625%, 5/15/09
Ba1 600 International Game 579,000
Technology Corp.,
Sr. Notes,
7.875%, 5/15/04
Ba2 150 Mohegan Tribal Gaming 145,125
Authority,
Sr. Notes,
8.125%, 1/1/06
-----------
1,277,674
- ----------------------------------------------------------------------
HEALTH CARE--1.3%
B2 100 Biovail International, Inc., 104,000
Sr. Notes,
10.875%, 11/15/05
Columbia/HCA Healthcare
Corp.,
Debs.,
Ba2 30 7.05%, 12/1/27 22,348
Ba2 20 7.50%, 11/15/95 15,064
MTN,
</TABLE>
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------------------
<C> <C> <S> <C>
Ba2 $ 300 6.73%, 7/15/45 $ 281,256
B2 350 Integrated Health Svcs., 220,500
Inc.,
Sr. Sub. Notes,
9.25%, 1/15/08
B3 25 Lifepoint Hospitals 25,187
Holdings, Inc.,
Sr. Sub. Notes,
10.75%, 5/15/09
B3 100 Magellan Health Services, 87,250
Inc.,
Sr. Sub. Notes,
9.00%, 2/15/08
Ba3 150 Tenet Healthcare Corp., 145,500
Sr. Sub. Notes,
8.625%, 1/15/07
B3 25 Triad Hospitals Holdings, 25,188
Inc.,
Sr. Sub. Notes,
11.00%, 5/15/09
-----------
926,293
- ----------------------------------------------------------------------
INDUSTRIALS--0.7%
B2 150 Carmike, Inc., 145,125
Sr. Sub. Notes,
9.375%, 2/1/09
Caa1 350 Purina Mills, Inc., 192,500
Sr. Sub. Notes,
9.00%, 3/15/10(c)
B3 350 United International 204,750
Holdings, Inc.,
Sr. Disc. Notes,
Zero Coupon (until 2/15/03)
10.75%, 2/15/08
-----------
542,375
- ----------------------------------------------------------------------
MACHINERY--0.2%
B1 150 Applied Power, Inc., 145,500
Sr. Sub. Notes,
8.75%, 4/1/09
B3 10 Newcor, Inc., 9,000
Sr. Sub. Notes,
9.875%, 3/1/08
-----------
154,500
- ----------------------------------------------------------------------
MANUFACTURING--0.1%
B2 40 Venture Holdings, Inc., 38,000
Sr. Notes,
9.50%, 7/1/05
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-76
<PAGE> 145
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
CONSERVATIVE GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------------------
<C> <C> <S> <C>
MEDIA--2.4%
B2 $ 350 Ackerley Group, Inc., $ 343,000
Sr. Sub. Notes,
9.00%, 1/15/09
B1 75 Chancellor Media Corp., 76,125
Sr. Sub. Notes,
9.00%, 10/1/08
Ba2 350 Imax Corp., 329,000
Sr. Notes,
7.875%, 12/1/05(c)
Ba3 250 Price Communications 253,437
Wireless, Inc.,
Sr. Secured Notes,
9.125%, 12/15/06
Baa3 200 Seagram Joseph E & Sons, 196,808
Inc.,
Sr. Notes,
6.25%, 12/15/01
Baa3 600 Time Warner, Inc., 586,500
Sr. Notes,
6.10%, 12/30/01
-----------
1,784,870
- ----------------------------------------------------------------------
OIL & GAS--0.9%
B3 65 Chesapeake Energy Corp., 59,962
Sr. Notes,
9.625%, 5/1/05
Ba2 350 Gulf Canada Resources, Ltd., 357,000
Sr. Sub. Debs.,
9.625%, 7/1/05(c)
Ba3 210 Pride International, Inc., 214,200
Sr. Notes,
10.00%, 6/1/09
Ba3 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., 346,500
Sr. Sub. Notes,
8.25%, 8/1/08
B3 150 Packaging Corp. of America, 152,250
Sr. Sub. Notes,
9.625%, 4/1/09
B1 350 S.D. Warren Co., 371,875
Sr. Sub. Notes,
12.00%, 12/15/04(c)
-----------
870,625
</TABLE>
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------------------
<C> <C> <S> <C>
PHARMACEUTICALS--0.1%
Ba3 $ 100 ICN Pharmaceuticals, Inc., $ 96,000
Sr. Notes,
8.75%, 11/15/08
- ----------------------------------------------------------------------
PRINTING & PUBLISHING--0.9%
B1 350 Mail-Well I Corp., 335,125
Sr. Sub. Notes,
8.75%, 12/15/08
B2 150 Transwestern Publishing Co., 147,750
Sr. Sub. Notes,
9.625%, 11/15/07
B1 150 World Color Press, Inc., 150,000
Sr. Sub. Notes,
7.75%, 2/15/09
-----------
632,875
- ----------------------------------------------------------------------
REAL ESTATE--0.4%
Ba2 350 HMH Properties, Inc., 329,000
Sr. Notes,
8.45%, 12/1/08
- ----------------------------------------------------------------------
RESTAURANTS--1.0%
B2 150 Advantica Restaurant Group, 141,750
Inc.,
Sr. Notes,
11.25%, 1/15/08
B2 350 Carrols Corporation, 306,250
Sr. Sub. Notes,
9.50%, 12/1/08
Ba1 350 Felcor Suites L.P., 318,500
Gtd. Sr. Notes,
7.375%, 10/1/04
-----------
766,500
- ----------------------------------------------------------------------
SCHOOLS--0.2%
B3 150 Kindercare Learning Center, 146,250
Inc.,
Sr. Sub. Notes,
9.50%, 2/15/09
- ----------------------------------------------------------------------
SEMICONDUCTORS
B2 20 SCG Holding Corp., 20,150
Sr. Notes,
12.00%, 8/1/09
- ----------------------------------------------------------------------
SOFTWARE--0.1%
B3 95 PSI Net, Inc., 95,000
Sr. Notes,
11.00%, 8/1/09
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-77
<PAGE> 146
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
CONSERVATIVE GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------------------
<C> <C> <S> <C>
STEEL--0.9%
Ba2 $ 250 Alaska Steel Corp., $ 243,750
Sr. Notes,
7.875%, 2/15/09
B2 25 Leviathan Corp.,
Sr. Sub. Notes,
10.375%, 6/1/09 25,625
Ba3A 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 150 Telewest PLC,
Sr. Disc. Debs.,
Zero Coupon (until 10/1/00)
11.00%, 10/1/07 (United
Kingdom) 133,875
</TABLE>
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------------------
<C> <C> <S> <C>
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
- ----------------------------------------------------------------------
WASTE MANAGEMENT--0.3%
Ba3 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 E500 Hellenic Finance Corp.,
Bonds,
2.00%, 7/15/03
(cost $526,875) 535,549
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-78
<PAGE> 147
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
CONSERVATIVE GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------------------
<C> <C> <S> <C>
) CONVERTIBLE BOND (CONT'D
MORTGAGE-RELATED SECURITIES--8.2%
Aaa $ 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 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
-----------
</TABLE>
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------------------
<C> <C> <S> <C>
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
United States Treasury
Bonds,
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 2,100 TCI Communications, Inc.,
MTN,
6.46%, 3/6/00 2,108,631
-----------
Total corporate bonds
(cost $2,798,699) 2,795,222
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-79
<PAGE> 148
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
CONSERVATIVE GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------------------
<C> <C> <S> <C>
) CORPORATE BONDS (CONT'D
SOVEREIGN 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.
B-80
<PAGE> 149
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<S> <C>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
STATEMENT OF ASSETS AND LIABILITIES CONSERVATIVE GROWTH FUND
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JULY 31, 1999
-------------
<S> <C>
ASSETS
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>
B-81
<PAGE> 150
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<S> <C>
PRUDENTIAL DIVERSIFED FUNDS PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED PRUDENTIAL DIVERSIFIED
CONSERVATIVE GROWTH FUND CONSERVATIVE GROWTH FUND
STATEMENT OF OPERATIONS STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------- --------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 18, 1998(A)
THROUGH
JULY 31, 1999
NET INVESTMENT INCOME --------------------
<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
==========
- ---------------
(a) Commencement of investment operations.
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 18, 1998(A)
INCREASE (DECREASE) INNET THROUGH
JULY 31, 1999
--------------------
ASSETS
<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>
B-82
<PAGE> 151
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
NOTES TO FINANCIAL STATEMENTS CONSERVATIVE 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
- --------------------------------------------------------------------------------
B-83
<PAGE> 152
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
NOTES TO FINANCIAL STATEMENTS CONSERVATIVE GROWTH FUND
- --------------------------------------------------------------------------------
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 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
- --------------------------------------------------------------------------------
B-84
<PAGE> 153
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
NOTES TO FINANCIAL STATEMENTS CONSERVATIVE GROWTH FUND
- --------------------------------------------------------------------------------
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
The Prudential Investment N/A(1)
Corporation ("PIC")
Pacific Investment .25%
Management Company
Franklin Advisers, Inc. .50%
The Dreyfus Corporation .45%
</TABLE>
- ---------------
(1) Under the Advisory Agreement between PIFM and PIC. PIC is reimbursed by PIFM
for its reasonable costs and expenses.
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>
- --------------------------------------------------------------------------------
B-85
<PAGE> 154
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
NOTES TO FINANCIAL STATEMENTS CONSERVATIVE GROWTH FUND
- --------------------------------------------------------------------------------
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 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>
SHARES AMOUNT
---------- -----------
<S> <C> <C>
CLASS A
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
========== ===========
CLASS B
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
========== ===========
CLASS 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
========== ===========
</TABLE>
- --------------------------------------------------------------------------------
B-86
<PAGE> 155
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
NOTES TO FINANCIAL STATEMENTS CONSERVATIVE GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES AMOUNT
---------- -----------
<S> <C> <C>
CLASS Z
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.
- --------------------------------------------------------------------------------
B-87
<PAGE> 156
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<S> <C>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
NOTES TO FINANCIAL STATEMENTS CONSERVATIVE GROWTH FUND
</TABLE>
- --------------------------------------------------------------------------------
<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.
B-88
<PAGE> 157
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
REPORT OF INDEPENDENT ACCOUNTANTS CONSERVATIVE GROWTH FUND
</TABLE>
- --------------------------------------------------------------------------------
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
B-89
<PAGE> 158
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
FEDERAL INCOME TAX INFORMATION (UNAUDITED) CONSERVATIVE GROWTH FUND
</TABLE>
- --------------------------------------------------------------------------------
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.
B-90
<PAGE> 159
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
PORTFOLIO OF INVESTMENTS AS 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
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
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
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
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-91
<PAGE> 160
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
BANKING (CONT'D)
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
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
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
- ---------------------------------------------------------
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
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-92
<PAGE> 161
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
DENTAL SUPPLIES
850 Patterson Dental Co.(a) $ 33,416
- ---------------------------------------------------------
DISTRIBUTION/WHOLE-SALERS--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
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
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
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
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-93
<PAGE> 162
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
FINANCIAL SERVICES (CONT'D)
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
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
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
- ---------------------------------------------------------
HOME FURNISHINGS AIRLINES--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
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-94
<PAGE> 163
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
INSURANCE (CONT'D)
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
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
1,570 Compagnie Generale des
Etablissements Michelin,
Series B (France) $ 63,734
900 Nintendo Co., Ltd. (Japan) 132,208
------------
399,906
- ---------------------------------------------------------
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
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-95
<PAGE> 164
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
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
- ---------------------------------------------------------
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
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
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
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-96
<PAGE> 165
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
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
- ---------------------------------------------------------
SEMI-CONDUCTORS--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
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
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
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
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-97
<PAGE> 166
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
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
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------
<C> <S> <C>
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.
B-98
<PAGE> 167
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS--20.6%
- ------------------------------------------------------------------------
AIRLINES--0.2%
Ba2 $ 250 Continental Airlines, Inc.,
Sr. Notes,
8.00%, 12/15/05 $ 237,205
- ------------------------------------------------------------------------
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
</TABLE>
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ------------------------------------------------------------------------
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
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-99
<PAGE> 168
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ------------------------------------------------------------------------
<S> <C> <C> <C>
A2 $ 700 Household Finance Corp.,
Notes,
7.00%, 8/1/03 $ 697,003
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
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-100
<PAGE> 169
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ------------------------------------------------------------------------
<S> <C> <C> <C>
HEALTH CARE (CONT'D)
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
- ------------------------------------------------------------------------
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
</TABLE>
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-101
<PAGE> 170
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ------------------------------------------------------------------------
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
</TABLE>
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ------------------------------------------------------------------------
<S> <C> <C> <C>
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
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
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-102
<PAGE> 171
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ------------------------------------------------------------------------
<S> <C> <C> <C>
TELECOMMUNICATIONS--2.9% (CONT'D)
B1 $ 100 Telewest Communications PLC,
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
Ba2 300 Niagara Mohawk Power Corp.,
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
</TABLE>
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ------------------------------------------------------------------------
<S> <C> <C> <C>
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 E 500 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
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
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-103
<PAGE> 172
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ------------------------------------------------------------------------
<S> <C> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS (CONT'D)
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>
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
- ------------------------------------------------------------------------
<S> <C> <C> <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 PURCHASE
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).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-104
<PAGE> 173
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
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.
B-105
<PAGE> 174
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<S> <C>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
STATEMENT OF ASSETS AND LIABILITIES GROWTH FUND
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JULY 31, 1999
-------------
<S> <C>
ASSETS
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>
B-106
<PAGE> 175
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<S> <C>
PRUDENTIAL DIVERSIFIED FUNDS PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE PRUDENTIAL DIVERSIFIED MODERATE
GROWTH FUND GROWTH FUND
STATEMENT OF OPERATIONS STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------- --------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 18, 1998(A)
THROUGH
JULY 31, 1999
NET INVESTMENT INCOME --------------------
<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
==========
- ---------------
(a) Commencement of investment operations.
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 18, 1998(A)
INCREASE (DECREASE) IN THROUGH
JULY 31, 1999
--------------------
NET ASSETS
<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>
B-107
<PAGE> 176
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
- --------------------------------------------------------------------------------
B-108
<PAGE> 177
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
NOTES TO FINANCIAL STATEMENTS GROWTH 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.
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.
- --------------------------------------------------------------------------------
B-109
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PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
NOTES TO FINANCIAL STATEMENTS GROWTH FUND
- --------------------------------------------------------------------------------
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 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/A(1)
Corporation ("PIC")
Lazzard Asset Management .40%
Pacific Investment .25%
Management Company
Franklin Advisers, Inc. .50%
The Dreyfus Corporation .45%
</TABLE>
- ---------------
(1) Under the Advisory Agreement between PIFM and PIC, PIC is reimbursed by PIFM
for its reasonable costs and expenses.
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
- --------------------------------------------------------------------------------
B-110
<PAGE> 179
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
NOTES TO FINANCIAL STATEMENTS GROWTH FUND
- --------------------------------------------------------------------------------
"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.
- ---------------------------------------------------------
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
- --------------------------------------------------------------------------------
B-111
<PAGE> 180
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
NOTES TO FINANCIAL STATEMENTS GROWTH FUND
- --------------------------------------------------------------------------------
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>
SHARES AMOUNT
---------- -----------
<S> <C> <C>
CLASS A
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
========== ===========
CLASS B
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
Shares reacquired upon
conversion into Class A...... (15,291) (163,070)
---------- -----------
Net increase in shares
outstanding.................. 5,404,753 $56,492,190
========== ===========
</TABLE>
<TABLE>
<CAPTION>
SHARES AMOUNT
---------- -----------
<S> <C> <C>
CLASS 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
========== ===========
CLASS Z
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.
- --------------------------------------------------------------------------------
B-112
<PAGE> 181
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<S> <C>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
FINANCIAL HIGHLIGHTS GROWTH FUND
</TABLE>
- --------------------------------------------------------------------------------
<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.
B-113
<PAGE> 182
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
REPORT OF INDEPENDENT ACCOUNTANTS GROWTH FUND
</TABLE>
- --------------------------------------------------------------------------------
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
B-114
<PAGE> 183
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED MODERATE
TAX INFORMATION (UNAUDITED) GROWTH FUND
</TABLE>
- --------------------------------------------------------------------------------
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.
B-115
<PAGE> 184
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED HIGH
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
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
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------
<C> <S> <C>
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
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 Inc. 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
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-116
<PAGE> 185
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED HIGH
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------
<C> <S> <C>
BUILDING & CONSTRUCTION (CONT'D)
4,800 M.D.C. Holdings, Inc. $ 99,600
12,850 Pulte Inc. 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.) Inc. 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 Inc. 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 Inc. 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 Inc. 393,600
12,500 Dell Computer Corp.(a) 510,937
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------
<C> <S> <C>
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
Inc. 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 Inc. 1,159,662
------------
1,979,848
- ----------------------------------------------------------
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
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-117
<PAGE> 186
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED HIGH
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------
<C> <S> <C>
DIVERSIFIED MANUFACTURING (CONT'D)
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
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------
<C> <S> <C>
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
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
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-118
<PAGE> 187
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED HIGH
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------
<C> <S> <C>
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
- ----------------------------------------------------------
INDUSTRIAL TECHNOLOGY/INSTRUMENTS--0.4%
5,500 EG&G, Inc 184,594
5,100 Waters Corp.(a) 304,725
------------
489,319
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------
<C> <S> <C>
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
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-119
<PAGE> 188
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED HIGH
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------
<C> <S> <C>
MACHINERY (CONT'D)
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
- ----------------------------------------------------------
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
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------
<C> <S> <C>
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
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-120
<PAGE> 189
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED HIGH
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------
<C> <S> <C>
PHARMACEUTICALS (CONT'D)
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
- ----------------------------------------------------------
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
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------
<C> <S> <C>
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
- ----------------------------------------------------------
SEMI-CONDUCTORS--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
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-121
<PAGE> 190
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED HIGH
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------
<C> <S> <C>
SEMI-CONDUCTORS (CONT'D)
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
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
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------
<C> <S> <C>
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
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
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-122
<PAGE> 191
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED HIGH
PORTFOLIO OF INVESTMENTS AS OF JULY 31, 1999
GROWTH FUND
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ----------------------------------------------------------
<C> <S> <C>
UTILITIES (CONT'D)
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
------------
- ----------------------------------------------------------
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
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
- -------------------------------------------------------------
<C> <S> <C>
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.
B-123
<PAGE> 192
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<S> <C>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
STATEMENT OF ASSETS AND LIABILITIES HIGH GROWTH FUND
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JULY 31, 1999
-------------
<S> <C>
ASSETS
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>
B-124
<PAGE> 193
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<S> <C>
PRUDENTIAL DIVERSIFIED FUNDS PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED PRUDENTIAL DIVERSIFIED
HIGH GROWTH FUND HIGH GROWTH FUND
STATEMENT OF OPERATIONS STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------- --------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 18, 1998(A)
THROUGH
JULY 31, 1999
NET INVESTMENT LOSS --------------------
<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
===========
- ---------------
(a) Commencement of investment operations.
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 18, 1998(A)
INCREASE (DECREASE) IN THROUGH
JULY 31, 1999
--------------------
NET ASSETS
<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>
B-125
<PAGE> 194
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
NOTES TO FINANCIAL STATEMENTS 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
- --------------------------------------------------------------------------------
B-126
<PAGE> 195
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
NOTES TO FINANCIAL STATEMENTS HIGH GROWTH FUND
- --------------------------------------------------------------------------------
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 (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.
- --------------------------------------------------------------------------------
B-127
<PAGE> 196
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
NOTES TO FINANCIAL STATEMENTS HIGH GROWTH FUND
- --------------------------------------------------------------------------------
<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/A(1)
Corporation ("PIC")
Lazard Asset Management .40%
Franklin Advisers, Inc. .50%
The Dreyfus Corporation .45%
</TABLE>
- ---------------
(1) Under the Advisory Agreement between PIFM and PIC, PIC is reimbursed by PIFM
for its reasonable costs and expenses.
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 $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.
- --------------------------------------------------------------------------------
B-128
<PAGE> 197
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
NOTES TO FINANCIAL STATEMENTS HIGH GROWTH FUND
- --------------------------------------------------------------------------------
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.
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>
SHARES AMOUNT
---------- -----------
<S> <C> <C>
CLASS A
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
========== ===========
CLASS B
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
========== ===========
CLASS 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
========== ===========
CLASS Z
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.
- --------------------------------------------------------------------------------
B-129
<PAGE> 198
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<S> <C>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
FINANCIAL HIGHLIGHTS HIGH GROWTH FUND
</TABLE>
- --------------------------------------------------------------------------------
<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.
B-130
<PAGE> 199
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
REPORT OF INDEPENDANT ACCOUNTANTS HIGH GROWTH FUND
</TABLE>
- --------------------------------------------------------------------------------
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
B-131
<PAGE> 200
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
FEDERAL INCOME TAX INFORMATION (UNAUDITED) HIGH GROWTH FUND
</TABLE>
- --------------------------------------------------------------------------------
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.
B-132
<PAGE> 201
APPENDIX I
DESCRIPTION OF SECURITY RATINGS
DESCRIPTION OF S&P CORPORATE BOND RATINGS:
AAA -- Debt rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB and B -- Debt rated BB and B is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB represents a lower degree of
speculation than B. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
exposures to adverse conditions.
BB, B, CCC, CC and C -- Debt rated BB, B, CCC, CC and C is regarded as
having predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B -- Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC -- Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC -- The rating CC typically is applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C -- The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
C1 -- The rating C1 is reserved for income bonds on which no interest is
being paid.
D -- Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired,
I-1
<PAGE> 202
unless S&P believes that such payments will be made during such grace period.
The D rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
Aaa -- Bonds rated Aaa are judged to be the best quality. They carry the
smallest degree of Investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of these issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding Investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements:
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable Investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS:
Standard & Poor's commercial paper ratings are current assessments of the
likelihood of timely payment of debt considered short-term in the relevant
market.
A-1 -- The A-1 designation indicates that the degree of safety regarding
timely payment is very strong.
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<PAGE> 203
A-2 -- Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming as for
issues designated A-1.
A-3 -- Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS:
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Prime-1 -- Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-2 -- Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
Prime-3 -- Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
Not Prime -- Issuers rated Not Prime do not fall within any of the Prime
rating categories.
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<PAGE> 204
APPENDIX II -- HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart illustrates that large pension plans use the methods listed in
the percentages indicated for the period December 1977 through December 1987.
HOW YOU ALLOCATE YOUR ASSETS
MAINLY DETERMINES YOUR RETURN
(BASED ON A STUDY OF LARGE PENSION PLANS)
[PIE CHART]
<TABLE>
<CAPTION>
<S> <C>
Asset Allocation ................ 91.5%
Security Selection/Other......... 6.7%
Market Timing.................... 1.8%
</TABLE>
Source: Financial Analysts Journal, May/June 1991: "Deteminants of
Portfolio Performance II: An Update," by Gary Brinson, Brian Singer and Gilbert
Beebower. Results are based on the 10-year performance records of 82 pension
funds. The study updates and supports a similar study done in 1986. This chart
is for illustrative purposes only and is not indicative of the past, present, or
future performance of any Fund.
II-1
<PAGE> 205
This chart shows the long-term performance of various asset classes and the
rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
(VALUE OF $1 INVESTED ON 12/31/25 THROUGH 12/31/97)
[DOLLAR GRAPH]
<TABLE>
<CAPTION>
<S> <C>
Small Stock.......................... $5,520
Common Stock......................... $1,828
Bonds................................ $ 39
T-Bills.............................. $ 14
Inflation............................ $ 9
</TABLE>
Source: "Stocks, Bonds, Bills, and Inflation 1998 Yearbook,(TM) " Ibbotson
Associates, annually updates work by Roger Ibbotson and Rex Sinquefeld. Used
with permission. This chart is for illustrative purposes only and is not
indicative of the past, present, or future performance of any Fund.
Generally, stock returns are due to capital appreciation and reinvesting
any gains. Bond returns are due mainly to reinvesting interest. Also, stock
prices usually are more volatile than bond prices over the long-term.
SMALL STOCK returns for 1926-1980 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. For 1981 through 1997, returns are
those of the Dimensional Fund Advisors ("DFA") Small Company Fund, which is a
market-value-weighted index of the ninth and tenth deciles of the New York Stock
Exchange ("NYSE"), plus stocks listed on the American Stock Exchange and
over-the-counter with the same or less capitalization as the upper bound of the
NYSE decile.
COMMON STOCK returns are based on the S&P 500 Composite Index, a
market-weighted, unmanaged index of 500 stocks (currently) in a variety of
industries. It is often used as a broad measure of stock market performance.
LONG-TERM GOVERNMENT BOND returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years.
TREASURY BILL returns are for a one-month bill. Treasuries are guaranteed
by the government as to the timely payment of principal and interest; equities
are not.
INFLATION is measured by the consumer price index ("CPI").
II-2
<PAGE> 206
The following chart shows the performance of a hypothetical investment in
the following stock indices for the period indicated.
DIFFERENT TYPES OF STOCKS, DIFFERENT RETURNS
VALUE OF $1 INVESTED ON 12/31/69
[BAR CHART]
<TABLE>
<CAPTION>
<S> <C>
Common Stocks........................ $30.44
Small Stocks......................... $43.73
Foreign Stock........................ $28.37
</TABLE>
COMMON STOCK returns are based on the S&P 500 Composite Index, a
market-weighted, unmanaged index of 500 stocks (currently) in a variety of
industries. It is often used as a broad measure of stock market performance.
SMALL STOCK performance for the beginning of the period through 1980 is
based on the returns of stocks making up the 5th quintile of the New York Stock
Exchange ("NYSE") and, for 1981-1997, is based on the returns of the DFA Small
Company Fund, which is a market-value-weighted index of the ninth and tenth
deciles of the NYSE, plus stocks listed on the American Stock Exchange and
over-the-counter with the same or less capitalization as the upper bound of the
NYSE decile.
FOREIGN STOCK returns are represented by the Morgan Stanley Capital
International Europe Australia Far East ("EAFE") index, a common measure of
foreign stock performance. It is a market-weighted index of 20 countries.
Geometric Returns are through 1997. Generally, returns of foreign stocks
are more volatile than those of common or small stocks.
This chart is for illustrative purposes only and is not indicative of the
past, present, or future performance of any Fund.
Source: Lipper Analytical Services.
II-3
<PAGE> 207
This chart shows the performance of a hypothetical investment in short-term
U.S. Government securities adjusted for inflation for the period from January 1,
1997 through December 31, 1997.
TOO MANY SHORT-TERM SECURITIES
MAY NOT MAKE SENSE
INFLATION AND TAXES CAN ERODE YOUR INVESTMENT
<TABLE>
<S> <C>
Initial investment.......................................... $ 10,000
Interest income: 5.26%...................................... 526
Tax paid on interest (assumes 31% tax rate)................. -163
-------------
Net interest income......................................... 363
Adjust for 1.7% inflation................................... -170
Net investment.............................................. $ 10,193
-------------
</TABLE>
THE INVESTOR'S NET RETURN WAS ONLY 1.93%!
1997 Salomon Brothers 30-day T-bill return used for short-term interest
rate. Federal tax rate of 31% and 1997 inflation rate ("CPI") were used.
Short-term rates can fluctuate.
Past performance is no guarantee of future results. This hypothetical
example is provided for informational purposes only. It is not intended to
represent any specific investment and is not indicative of past, present, or
future performance of any Fund.
II-4
<PAGE> 208
Each bar shows the best
and worst annualized return for
the specified holding periods
through 1997. For example, the
best one-year return occurred
in 1933 and the worst 10-year
annualized return occurred from
1929-1938. The first holding
period started on 12/31/25 and
the first 20-year period ended
on 12/31/45.
Common stock returns are
based on the S&P 500 Composite
Index, a market-weighted,
unmanaged index of 500 stocks
(currently) in a variety of
industries. It is often used as
a broad measure of stock market
performance.
This chart is for
illustrative purposes only and
is not indicative of the past,
present, or future performance
of any Fund.
Source: "Stocks, Bonds,
Bills, and Inflation 1998
Yearbook,(TM)" Ibbotson
Associates, annually updates
work by Roger Ibbotson and Rex
Sinquefeld. Used with
permission.
TIME REDUCES YOUR RISK
BEST AND WORST ANNUALIZED RETURNS OF THE S&P
[BAR CHART]
II-5
<PAGE> 209
This graph represents the historical risk and return possibilities of
hypothetical blends of investments in the described indices for the period
indicated.
FOREIGN STOCKS CAN ADD VALUE
[RISK/RETURN CHART]
Adding foreign stocks to a portfolio of U.S. stocks can increase the
portfolio's return and, to an extent, reduce the volatility of its annualized
returns. For example, note the higher return and lower risk of the 80/20 blend
compared to the 100% U.S. stock portfolio. There is no guarantee that this
relationship will hold in the future, however.
This chart was constructed using the Morgan Stanley Capital International
Europe Australia Far East ("EAFE") Index, a market-weighted index of 20
countries that is a common measure of foreign stock performance, and the
arithmetic returns of the S&P 500 Composite Index, a market-weighted, unmanaged
index of 500 stocks (currently) in a variety of industries. The S&P Composite
500 is often used as a broad measure of stock market performance. The chart
covers the 25-year period ended 12/31/97. The chart is not meant to demonstrate
the future performance of either type of stock and is for illustrative purposes
only. Also, it is not indicative of the past, present, or future performance of
any Fund.
II-6
<PAGE> 210
APPENDIX III -- GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns, while
enabling investors to work toward their financial goal(s). Asset allocation is
also a strategy to gain exposure to better performing asset classes while
maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks and (general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years -- the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing -- buying securities when prices are low and selling them
when prices are relatively higher -- may not work for many investors because it
is impossible to predict with certainty how the price of a security will
fluctuate. However, owning a security for a long period of time may help
investors offset short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.
III-1
<PAGE> 211
APPENDIX IV--INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "Management of the Fund--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1996 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Trust.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC(1) are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1997. Principal products and services include life and health insurance, other
healthcare products, property and casualty insurance, securities brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs almost 79,000 persons
worldwide, and maintains a sales force of approximately 10,100 agents and 6,500
domestic and international financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the Rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
Insurance. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to nearly 40 million people
worldwide. Long one of the largest issuers of life insurance, the Prudential has
25 million life insurance policies in force today with a face value of almost $1
trillion. Prudential has the largest capital base ($12.3 billion) of any life
insurance company in the United States. Prudential provides auto insurance for
approximately 1.5 million cars and insures approximately 1.2 million homes.
Money Management. The Prudential is one of the largest pension fund
managers in the country, providing pension services to 1 in 3 Fortune 500 firms.
It manages $36 billion of individual retirement plan assets, such as 401(k)
plans. As of December 31, 1997, Prudential had more than $370 billion in assets
under management. Prudential Investments, a business group of Prudential (of
which Prudential Mutual Funds is a key part), manages over $211 billion in
assets of institutions and individuals. In Pension & Investments, May 12, 1997,
Prudential was ranked third in terms of total assets under management.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest
real estate brokerage network in the United States, has more than 37,000 brokers
and agents and more than 1,100 offices throughout the United States.(2)
Healthcare. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.6
million Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Savings Bank FSB, a wholly-owned
subsidiary of the Prudential, has over $1 billion in assets and serves nearly
1.5 million customers across 50 states.
- ---------------
(1) PIC serves as the Subadviser to substantially all of the Prudential Mutual
Funds. Wellington Management Company serves as the subadviser to Global
Utility Fund, Inc., Nicholas-Applegate Capital Management as the subadviser
to Nicholas-Applegate Fund, Inc., Jennison Associates LLC as the subadviser
to Prudential Jennison Series Fund, Inc. and Mercator Asset Management, LP
as the subadviser to The International Stock Series, a portfolio of
Prudential World Fund, Inc. There are multiple subadvisers for Presidential
Diversified Funds and The Target Portfolio Trust.
(2) As of December 31, 1996.
IV-1
<PAGE> 212
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of December 31, 1997 Prudential Investments Fund Management was the
eighteenth largest mutual fund company in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the subadvisers
in national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.
Equity Funds. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Series Fund, Inc., a
growth-style equity fund managed by Jennison Associates LLC, a premier
institutional equity manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitors
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase.(3) Non-investment grade bonds, also
known as junk bonds or high yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential Mutual
Fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over
1,200 companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
- ---------------
(3) As of December 31, 1996. The number of bonds and the size of the Fund are
subject to change.
IV-2
<PAGE> 213
Prudential Mutual Fund global equity managers conducted many of their
visits overseas, often holding private meetings with a company in a foreign
language (our global equity managers speak 7 different languages, including
Mandarin Chinese).
Trading Data.(4) On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.(5) Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.(6)
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services LLC, the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1997, assets held by Prudential Securities for its
clients approximated $235 billion. During 1997, approximately 29,000 new
customer accounts were opened each month at PSI.(7)
Prudential Securities has a two-year Financial Advisor training program
plus advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas.
Prudential Securities is the only Wall Street firm to have its own in-house
Certified Financial Planner ("CFP") program.
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey. Three
Prudential Securities analysts were ranked as first-team finishers.(8)
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect(SM), a state-of-the-art asset allocation software program
which helps financial advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ---------------
(4) Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts managed
by Prudential Investments, a business group of PIC, for the year ended
December 31, 1995.
(5) Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage funds.
(6) As of December 31, 1994.
(7) As of December 31, 1997.
(8) On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual analyst
and weighting them based on the size of the voting institution. In total,
the magazine sends its survey to approximately 2,000 institutions and a
group of European and Asian institutions.
IV-3
<PAGE> 214
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
<TABLE>
<C> <S>
(a)(1) Certificate of Trust.**
(2) Agreement and Declaration of Trust.**
(3) Amendment No. 1 to Agreement and Declaration of Trust.***
(b) By-Laws.**
(c) In response to this item, Registrant incorporates by
reference the following provisions from its Agreement and
Declaration of Trust and By-Laws, filed herewith as Exhibit
a(1) and Exhibit (b), defining rights of the Trust's
shareholders: Articles III and V of Agreement and
Declaration of Trust; Article III of By-Laws.
(d)(1) Management Agreement between the Registrant and Prudential
Investments Fund Management LLC.*
(2) Subadvisory Agreement between Prudential Investments Fund
Management LLC and Pacific Investment Management Company
with respect to the Conservative Growth Fund.*
(3) Subadvisory Agreement between Prudential Investments Fund
Management LLC and Pacific Investment Management Company
with respect to the Moderate Growth Fund.*
(4) Subadvisory Agreement between Prudential Investments Fund
Management LLC and Lazard Asset Management with respect to
the Moderate Growth Fund.*
(5) Subadvisory Agreement between Prudential Investments Fund
Management LLC and Lazard Asset Management with respect to
the High Growth Fund.*
(6) Subadvisory Agreement between Prudential Investments Fund
Management LLC and The Dreyfus Corporation with respect to
the Conservative Growth Fund.*
(7) Subadvisory Agreement between Prudential Investments Fund
Management LLC and The Dreyfus Corporation with respect to
the Moderate Growth Fund.*
(8) Subadvisory Agreement between Prudential Investments Fund
Management LLC and The Dreyfus Corporation with respect to
the High Growth Fund.*
(9) Subadvisory Agreement between Prudential Investments Fund
Management LLC and Franklin Advisers, Inc with respect to
the Conservative Growth Fund.*
(10) Subadvisory Agreement between Prudential Investments Fund
Management LLC and Franklin Advisers, Inc with respect to
the Moderate Growth Fund.*
(11) Subadvisory Agreement between Prudential Investments Fund
Management LLC and Franklin Advisers, Inc with respect to
the High Growth Fund.*
(12) Subadvisory Agreement between Prudential Investments Fund
Management LLC and The Prudential Investment Corporation
with respect to the Conservative Growth Fund.*
(13) Subadvisory Agreement between Prudential Investments Fund
Management LLC and The Prudential Investment Corporation
with respect to the Moderate Growth Fund.*
(14) Subadvisory Agreement between Prudential Investments Fund
Management LLC and The Prudential Investment Corporation
with respect to the High Growth Fund.*
(15) Subadvisory Agreement between Prudential Investments Fund
Management LLC and Jennison Associates LLC with respect to
the Conservative Growth Fund.*
(16) Subadvisory Agreement between Prudential Investments Fund
Management LLC and Jennison Associates LLC with respect to
the Moderate Growth Fund.*
(17) Subadvisory Agreement between Prudential Investments Fund
Management LLC and Jennison Associates LLC with respect to
the High Growth Fund.*
(e)(1) Distribution Agreement between the Registrant and Prudential
Investment Management Services LLC.*
(2) Form of Selected Dealer Agreement*
(g)(1) Custodian Contract between the Registrant and State Street
Bank and Trust Company.*
(2) Amendment to Custodian Contract dated February 22, 1999.*
</TABLE>
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<TABLE>
<C> <S>
(h) Transfer Agency and Service Agreement between the Registrant
and Prudential Mutual Fund Services, Inc.*
(i) Opinion of Morris, Nichols, Arsht & Tunnell dated August 3,
1998.**
(j) Consent of Independent Accountants.*
(l) Purchase Agreement.*
(m)(1) Distribution and Service Plan for Class A shares.**
(2) Distribution and Service Plan for Class B shares.**
(3) Distribution and Service Plan for Class C shares.**
(n) Rule 18f-3 Plan.**
</TABLE>
- ---------------
* To be filed in a future Post-Effective Amendment.
** Incorporated by reference to the Registrant's initial Registration
Statement on Form N-1A, filed with the Commission on August 4, 1998 (File
No. 333-60561).
*** Incorporated by reference to the Registrant's Pre-Effective Amendment No. 1
filed with the Commission on September 17, 1998 (File No. 333-60561).
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not Applicable.
ITEM 25. INDEMNIFICATION.
As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940, as amended, (the "Investment Company Act") and pursuant to Article VII of
the Agreement and Declaration of Trust (Exhibit (a)(2)) to the Registration
Statement) and Article XI of the Trust's By-Laws (Exhibit (b) to the
Registration Statement), officers, trustees, employees and agents of the
Registrant will not be liable to the Registrant, any stockholder, officer,
director, employee, agent or other person for any action or failure to act,
except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 3817 of the Delaware Business Trust Act permits indemnification of
trustees who acted in good faith and reasonably believed that the conduct was in
the best interest of the Registrant. As permitted by Section 17(i) of the
Investment Company Act, pursuant to Section 10 of the Distribution Agreement
(Exhibit (e) to the Registration Statement), the Distributor of the Registrant
may be indemnified against liabilities which it may incur, except liabilities
arising from bad faith, gross negligence, willful misfeasance or reckless
disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, ("Securities Act") may be permitted to trustees, officers
and controlling persons of the Registrant pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Investment Company Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a trustee, officer
or controlling person of the Registrant in connection with the successful
defense of any action, suit or proceeding) is asserted against the Registrant by
such trustee, officer or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Investment Company Act and will be governed by the
final adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
trustees against liabilities, and certain costs of defending claims against such
officers and trustees, to the extent such officers and trustees are not found to
have committed conduct constituting willful misfeasance,
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bad faith, gross negligence or reckless disregard in the performance of their
duties. The insurance policy also insures the Registrant against the cost of
indemnification payments to officers and trustees under certain circumstances.
Section 8 of the Management Agreement (Exhibit (d)(1) to the Registration
Statement) and Section 4 of the Subadvisory Agreements (Exhibits (d)(2) through
(d)(17) to the Registration Statement) limit the liability of Prudential
Investments Fund Management LLC (PIFM) and each Adviser, respectively, to
liabilities arising from willful misfeasance, bad faith or gross negligence in
the performance of their respective duties or from reckless disregard by them of
their respective obligations and duties under the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the
Investment Company Act as long as the interpretation of Section 17(h) and 17(i)
of such Act remain in effect and are consistently applied.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Prudential Investments Fund Management LLC (PIFM)
See "How the Trust is Managed -- Manager" in the Prospectus constituting
Part A of this Registration Statement and "Investment Advisory and Other
Services" in the Statement of Additional Information constituting Part B of this
Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, as most recently amended (File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
---------------- ------------------ ---------------------
<S> <C> <C>
Robert F. Gunia.............. Executive Vice President Vice President, Prudential Investments;
and Treasurer Executive Vice President and Treasurer,
PIFM; Senior Vice President, Prudential
Securities
Neil A. McGuinness........... Executive Vice President Executive Vice President, and Director of
Marketing, PMF&A; Executive Vice
President; PIFM
</TABLE>
(b) Jennison Associates LLC
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Investment
Advisory and Other Services" in the Statement of Additional Information
constituting Part B of this Registration Statement.
Information as to Jennison Associates LLC's directors and executive
officers is included in its Form ADV filed with the Securities and Exchange
Commission (File No. 801-5608), as most recently amended, the text of which is
incorporated herein by reference.
(c) The Prudential Investment Corporation
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Investment
Advisory and Other Services" in the Statement of Additional Information
constituting Part B of this Registration Statement.
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<PAGE> 217
Information as to The Prudential Investment Corporation's directors and
executive officers is included in its Form ADV filed with the Securities and
Exchange Commission (File No. 801-22808), as most recently amended, the text of
which is incorporated herein by reference.
(d) Lazard Asset Management
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Investment
Advisory and Other Services" in the Statement of Additional Information
constituting Part B of this Registration Statement.
Information as to the general members of Lazard Freres & Co. LLC is
included in its Form ADV filed with the Securities and Exchange Commission (File
No. 801-6568), as most recently amended, the text of which is incorporated
herein by reference.
(e) Franklin Advisers, Inc.
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Investment
Advisory and Other Services" in the Statement of Additional Information
constituting Part B of this Registration Statement.
Information as to Franklin Advisers, Inc.'s directors and executive
officers is included in its Form ADV filed with the Securities and Exchange
Commission (File No. 801-26292), as most recently amended, the text of which is
incorporated herein by reference.
(f) Pacific Investment Management Company
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Investment
Advisory and Other Services" in the Statement of Additional Information
constituting Part B of this Registration Statement.
Information as to Pacific Investment Management Company's directors and
executive officers is included in its Form ADV filed with the Securities and
Exchange Commission (File No. 801-48187), as most recently amended, the text of
which is incorporated herein by reference.
(g) The Dreyfus Corporation
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Investment
Advisory and Other Services" in the Statement of Additional Information
constituting Part B of this Registration Statement.
Information as to The Dreyfus Corporation's directors and executive
officers is included in its Form ADV filed with the Securities and Exchange
Commission (File No. 801-8147), as most recently amended, the text of which is
incorporated herein by reference.
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) Prudential Investment Management Services LLC (PIMS)
Prudential Investment Management Services LLC is distributor for the Cash
Accumulation Trust, Command Government Fund, Command Money Fund, Command
Tax-Free Fund, The Global Total Return Fund, Inc., Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund),
Prudential Balanced Fund, Prudential California Municipal Fund, Prudential
Distressed Securities Fund, Inc., Prudential Diversified Bond Fund, Inc.,
Prudential Diversified Funds, Prudential Emerging Growth Fund, Inc., Prudential
Equity Fund, Inc., Prudential Equity Income Fund, Inc., Prudential Europe Growth
Fund, Inc., Prudential Global Genesis Fund, Inc., Prudential Global Limited
Maturity Fund, Inc., Prudential Government Income Fund, Inc., Prudential
Government Securities Trust, Prudential High Yield Fund, Inc., Prudential Index
Series Fund, Prudential Institutional Liquidity Portfolio, Inc., Prudential
Intermediate Global Income Fund,
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<PAGE> 218
Inc., Prudential International Bond Fund, Inc., Prudential Mid-Cap Value Fund,
Prudential MoneyMart Assets, Inc., Prudential Municipal Bond Fund, Prudential
Municipal Series Fund, Prudential National Municipals Fund, Inc., Prudential
Natural Resources Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential
Real Estate Securities Fund, Prudential Sector Funds, Inc., Target Funds,
Prudential Small-Cap Quantum Fund, Inc., Prudential Small Company Value Fund,
Inc., Prudential Special Money Market Fund, Inc., Prudential Structured Maturity
Fund, Inc., Prudential Tax-Free Money Fund, Inc., Prudential Tax-Managed Equity
Fund, Prudential 20/20 Focus Fund, Prudential World Fund, Inc., The Prudential
Investment Portfolios, Inc., and The Target Portfolio Trust.
(b) Information concerning the directors and officers of PIMS is set forth
below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
NAME(1) OFFICES WITH UNDERWRITER OFFICES WITH REGISTRANT
------- ------------------------ -----------------------
<S> <C> <C>
Margaret Deverell..................... Vice President and Chief None
Financial Officer
Robert F. Gunia....................... President Vice President
and Trustee
Kevin Frawley......................... Senior Vice President and Chief None
Compliance Officer
William V. Healey..................... Senior Vice President, Secretary None
and Chief Legal Officer
Brian Henderson....................... Senior Vice President and Chief None
Operating Officer
John R. Strangfeld, Jr................ Advisory Board Member President
and Trustee
</TABLE>
- ---------------
(1) The address of each person named is Gateway Center Three, 100 Mulberry
Street, 14th Floor, Newark, New Jersey 07102-4077 unless otherwise
indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the
offices of State Street Bank and Trust Company, One Heritage Drive, North
Quincy, Massachusetts 02171, The Registrant, Gateway Center Three, 100 Mulberry
Street, Newark, New Jersey 07102-4077, and Prudential Mutual Fund Services LLC,
Raritan Plaza One, Edison, New Jersey 08837. Documents required by Rules
31a-1(b)(4), (5), (6), (7), (9), (10) and (11), 31a-1(d), and 31a-1(f) will be
kept at 100 Mulberry Street, Gateway Center Three, Newark, New Jersey 07102-4077
and the remaining accounts, books and other documents required by such other
pertinent provisions of Section 31(a) and the Rules promulgated thereunder will
be kept by State Street Bank and Trust Company and Prudential Mutual Fund
Services LLC.
ITEM 29. MANAGEMENT SERVICES.
Other than as set forth under the captions "How the Trust is
Managed -- Manager", "How the Trust is Managed -- Advisers and Portfolio
Managers" and "How the Trust is Managed -- Distributor" in the Prospectus and
the caption "Investment Advisory and Other Services" in the Statement of
Additional Information, constituting Parts A and B, respectively, of this
Post-Effective Amendment to the Registration Statement, Registrant is not a
party to any management-related service contract.
ITEM 30. UNDERTAKINGS.
Not Applicable.
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<PAGE> 219
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Newark and State of New Jersey, on the 4th day of October, 1999.
PRUDENTIAL DIVERSIFIED FUNDS
/s/ JOHN R. STRANGFELD
--------------------------------------
John R. Strangfeld, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ EUGENE C. DORSEY Trustee October 4, 1999
- ---------------------------------------------------
Eugene C. Dorsey
/s/ DOUGLAS H. MCCORKINDALE Trustee October 4, 1999
- ---------------------------------------------------
Douglas H. McCorkindale
/s/ THOMAS T. MOONEY Trustee October 4, 1999
- ---------------------------------------------------
Thomas T. Mooney
/s/ JOHN R. STRANGFELD President and Trustee October 4, 1999
- ---------------------------------------------------
John R. Strangfeld
/s/ GRACE C. TORRES Treasurer and Principal October 4, 1999
- --------------------------------------------------- Financial and Accounting Officer
Grace C. Torres
</TABLE>
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