<PAGE> 1
PROSPECTUS OCTOBER 5, 2000
PRUDENTIAL DIVERSIFIED CONSERVATIVE GROWTH FUND
PRUDENTIAL DIVERSIFIED MODERATE GROWTH FUND
PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND
BUILD
ON THE ROCK
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 LOGO]
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1 RISK/RETURN SUMMARY
1 Investment Objectives and Principal Strategies
9 Principal Risks
11 Evaluating Performance
13 Fees and Expenses
18 HOW THE FUNDS INVEST
18 Investment Objectives and Policies
26 Other Investments and Strategies
30 Investment Risks
36 HOW THE TRUST IS MANAGED
36 Board of Trustees
36 Manager
37 Advisers and Portfolio Managers
41 Distributor
42 FUND DISTRIBUTIONS AND TAX ISSUES
42 Distributions
43 Tax Issues
45 If You Sell or Exchange Your Shares
46 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUNDS
46 How to Buy Shares
54 How to Sell Your Shares
58 How to Exchange Your Shares
59 Telephone Redemptions and Exchanges
60 FINANCIAL HIGHLIGHTS
72 THE PRUDENTIAL MUTUAL FUND FAMILY
</TABLE>
FOR MORE INFORMATION(Back Cover)
PRUDENTIAL DIVERSIFIED FUNDS [PHONE] (800) 225-1852
<PAGE> 3
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
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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 GRAPHIC]
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
conservative, moderate and aggressive investment orientations.
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 [PHONE] (800) 225-1852
<PAGE> 5
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 (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). 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.
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
3
<PAGE> 6
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 [PHONE] (800) 225-1852
<PAGE> 7
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> 8
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 [PHONE] (800) 225-1852
<PAGE> 9
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> 10
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 [PHONE] (800) 225-1852
<PAGE> 11
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> 12
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 [PHONE] (800) 225-1852
<PAGE> 13
RISK/RETURN SUMMARY
EVALUATING PERFORMANCE
A number of factors -- including risk -- can affect how the Fund performs. The
following bar chart shows the Fund's performance for its only full calendar year
of operation. The bar chart and table below demonstrate the risk of investing in
the Fund by showing how the Fund's average annual total returns compare with a
stock index and a group of similar mutual funds. Past performance does not mean
that the Fund will achieve similar results in the future.
CONSERVATIVE GROWTH FUND
ANNUAL RETURN* (CLASS A SHARES)
[BAR GRAPH OF ANNUAL RETURN]
<TABLE>
<CAPTION>
1999
<S> <C>
10.07%
</TABLE>
BEST QUARTER: 9.12% (4th quarter of 1999)
WORST QUARTER: (2.67)% (3rd quarter of 1999)
* These annual returns do not include sales charges. If the sales charges were
included, the annual returns would be lower than those shown. Without the
distribution and service (12b-1) fee waiver, the annual returns would have
been lower, too. The total return of the Fund's Class A shares from 1-1-00 to
6-30-00 was 2.63%
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-99)
<TABLE>
<CAPTION>
1 YR SINCE INCEPTION
<S> <C> <C>
Class A shares 4.56% 7.07% (since 11-18-98)
Class B shares 4.25% 7.74% (since 11-18-98)
Class C shares 7.16% 9.40% (since 11-18-98)
Class Z shares 10.45% 12.47% (since 11-18-98)
S&P 500(2) 21.03% 14.58% (since 11-18-98)
Lipper Average(3) 8.72% 11.63% (since 11-18-98)
</TABLE>
(1) The Fund's returns are after deduction of sales charges and expenses.
Without the distribution and service (12b-1) fee waiver for Class A shares,
the returns would have been lower.
(2) The Standard & Poor's 500 Composite Stock Price Index (S&P 500) -- an
unmanaged index of 500 stocks of large U.S. companies -- gives a broad look
at how stock prices have performed. These returns
11
<PAGE> 14
RISK/RETURN SUMMARY
do not include the effect of any sales charges or operating expenses of a
mutual fund. These returns would be lower if they included the effect of
sales charges and operating expenses. Source: Lipper Inc.
(3) The Lipper Average is based on the average return of all mutual funds in the
Lipper Balanced Funds category and does not include the effect of any sales
charges. Again, these returns would be lower if they included the effect of
sales charges. Source: Lipper Inc.
MODERATE GROWTH FUND
ANNUAL RETURN* (CLASS A SHARES)
[BAR GRAPH FOR ANNUAL RETURN]
<TABLE>
<CAPTION>
1999
<S> <C>
16.25%
</TABLE>
BEST QUARTER: 12.96% (4th quarter of 1999)
WORST QUARTER: (2.89)% (3rd quarter of 1999)
* These annual returns do not include sales charges. If the sales charges were
included, the annual returns would be lower than those shown. Without the
distribution and service (12b-1) fee waiver, the annual returns would have
been lower, too. The total return of the Fund's Class A shares from 1-1-00 to
6-30-00 was 1.94%.
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-99)
<TABLE>
<CAPTION>
1 YR SINCE INCEPTION
<S> <C> <C>
Class A shares 10.69% 13.98% (since 11-18-98)
Class B shares 10.38% 14.71% (since 11-18-98)
Class C shares 13.23% 16.29% (since 11-18-98)
Class Z shares 16.62% 19.47% (since 11-18-98)
S&P 500(2) 21.03% 14.58% (since 11-18-98)
Lipper Average(3) 20.53% 25.33% (since 11-18-98)
</TABLE>
(1) The Fund's returns are after deduction of sales charges and expenses.
Without the distribution and service (12b-1) fee waiver for Class A shares,
the returns would have been lower.
(2) The Standard & Poor's 500 Composite Stock Price Index (S&P 500) -- an
unmanaged index of 500 stocks of large U.S. companies -- gives a broad look
at how stock prices have performed. These returns do not include the effect
of any sales charges or operating expenses of a mutual fund. These returns
would be lower if they included the effect of sales charges and operating
expenses. Source: Lipper Inc.
(3) The Lipper Average is based on the average return of all mutual funds in the
Lipper Multi-Cap Core Funds category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Source: Lipper Inc.
12 PRUDENTIAL DIVERSIFIED FUNDS [PHONE] (800) 225-1852
<PAGE> 15
RISK/RETURN SUMMARY
HIGH GROWTH FUND
ANNUAL RETURN* (CLASS A SHARES)
[BAR GRAPH OF ANNUAL RETURN]
<TABLE>
<CAPTION>
1999
<S> <C>
27.28%
</TABLE>
BEST QUARTER: 20.08%(4th quarter of 1999)
WORST QUARTER: (3.00)%(3rd quarter of 1999)
* These annual returns do not include sales charges. If the sales charges were
included, the annual returns would be lower than those shown. Without the
distribution and service (12b-1) fee waiver, the annual returns would have
been lower, too. The total return of the Fund's Class A shares from 1-1-00 to
6-30-00 was 0.70%.
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-99)
<TABLE>
<CAPTION>
1 YR SINCE INCEPTION
<S> <C> <C>
Class A shares 20.92% 25.62% (since 11-18-98)
Class B shares 21.43% 27.04% (since 11-18-98)
Class C shares 24.17% 28.48% (since 11-18-98)
Class Z shares 27.68% 31.89% (since 11-18-98)
S&P 500(2) 21.03% 14.58% (since 11-18-98)
Lipper Average(3) 20.53% 25.33% (since 11-18-98)
</TABLE>
(1) The Fund's returns are after deduction of sales charges and expenses.
Without the distribution and service (12b-1) fee waiver for Class A shares,
the returns would have been lower.
(2) The Standard & Poor's 500 Composite Stock Price Index (S&P 500) -- an
unmanaged index of 500 stocks of large U.S. companies -- gives a broad look
at how stock prices have performed. These returns do not include the effect
of any sales charges or operating expenses of a mutual fund. These returns
would be lower if they included the effect of sales charges and operating
expenses. Source: Lipper Inc.
(3) The Lipper Average is based on the average return of all mutual funds in the
Lipper Multi-cap Core Funds category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Source: Lipper Inc.
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" --
13
<PAGE> 16
RISK/RETURN SUMMARY
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.
14 PRUDENTIAL DIVERSIFIED FUNDS [PHONE] (800) 225-1852
<PAGE> 17
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 .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>
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 .49% .49% .49% .49%
= TOTAL ANNUAL FUND OPERATING EXPENSES 1.54% 2.24% 2.24% 1.24%
- Fee waiver(1) .05% 0% 0% 0%
= NET ANNUAL FUND OPERATING EXPENSES(1) 1.49% 2.24% 2.24% 1.24%
</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 .54% .54% .54% .54%
= TOTAL ANNUAL FUND OPERATING EXPENSES 1.59% 2.29% 2.29% 1.29%
- Fee waiver(1) .05% 0% 0% 0%
= NET ANNUAL FUND OPERATING EXPENSES(1) 1.54% 2.29% 2.29% 1.29%
</TABLE>
(1) For the fiscal year ending July 31, 2001, 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.
15
<PAGE> 18
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. After the first year, the
example does not take into consideration any reduction in the Distributor's
distribution and service (12b-1) fees for Class A shares. 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 $667 $1,028 $1,412 $2,486
Class B shares $751 $1,073 $1,421 $2,563
Class C shares $449 $865 $1,407 $2,888
Class Z shares $151 $468 $808 $1,768
MODERATE GROWTH FUND
Class A shares $644 $957 $1,293 $2,239
Class B shares $727 $1,000 $1,300 $2,316
Class C shares $425 $793 $1,288 $2,649
Class Z shares $126 $393 $681 $1,500
HIGH GROWTH FUND
Class A shares $649 $972 $1,318 $2,291
Class B shares $732 $1,015 $1,325 $2,368
Class C shares $430 $808 $1,313 $2,699
Class Z shares $131 $409 $708 $1,556
</TABLE>
16 PRUDENTIAL DIVERSIFIED FUNDS [PHONE] (800) 225-1852
<PAGE> 19
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 $667 $1,028 $1,412 $2,486
Class B shares $251 $773 $1,321 $2,563
Class C shares $349 $865 $1,407 $2,888
Class Z shares $151 $468 $808 $1,768
MODERATE GROWTH FUND
Class A shares $644 $957 $1,293 $2,239
Class B shares $227 $700 $1,200 $2,316
Class C shares $325 $793 $1,288 $2,649
Class Z shares $126 $393 $681 $1,500
HIGH GROWTH FUND
Class A shares $649 $972 $1,318 $2,291
Class B shares $232 $715 $1,225 $2,368
Class C shares $330 $808 $1,313 $2,699
Class Z shares $131 $409 $708 $1,556
</TABLE>
17
<PAGE> 20
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.
18 PRUDENTIAL DIVERSIFIED FUNDS [PHONE](800) 225-1852
<PAGE> 21
HOW THE FUNDS INVEST
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.
19
<PAGE> 22
HOW THE FUNDS INVEST
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
20 PRUDENTIAL DIVERSIFIED FUNDS [PHONE](800) 225-1852
<PAGE> 23
HOW THE FUNDS INVEST
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.
21
<PAGE> 24
HOW THE FUNDS INVEST
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
22 PRUDENTIAL DIVERSIFIED FUNDS [PHONE](800) 225-1852
<PAGE> 25
HOW THE FUNDS INVEST
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.
23
<PAGE> 26
HOW THE FUNDS INVEST
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
24 PRUDENTIAL DIVERSIFIED FUNDS [PHONE](800) 225-1852
<PAGE> 27
HOW THE FUNDS INVEST
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
25
<PAGE> 28
HOW THE FUNDS INVEST
receivables. 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. The High Growth
Fund uses money market instruments for cash management purposes only.
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
26 PRUDENTIAL DIVERSIFIED FUNDS [PHONE](800) 225-1852
<PAGE> 29
HOW THE FUNDS INVEST
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 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. The High Growth Fund uses repurchase
agreements for cash management purposes only.
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.
27
<PAGE> 30
HOW THE FUNDS INVEST
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.
28 PRUDENTIAL DIVERSIFIED FUNDS [PHONE](800) 225-1852
<PAGE> 31
HOW THE FUNDS INVEST
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.
29
<PAGE> 32
HOW THE FUNDS INVEST
INVESTMENT RISKS
As noted previously, 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
<S> <C> <C>
COMMON STOCKS - Individual stocks could lose value - Historically, stocks have outperformed
other investments over the long term
Conservative Growth Fund - The equity markets could go down,
Approximately 40% resulting in a decline in value of - Generally, economic growth leads to higher
a Fund's investments corporate profits, which leads to an increase
Moderate Growth Fund in stock prices, known as capital appreciation
Approximately 65% - Companies that pay dividends may
not do so if they don't have profits - May be a source of dividend income
High Growth Fund or adequate cash flow
Up to 100%
- Changes in economic or political
conditions, both domestic and
international may result in a
decline in the value of a Fund's
investments
SMALL AND MEDIUM
CAPITALIZATION STOCKS - Stocks of smaller companies are - Highly successful smaller companies can
more volatile and may decline more outperform larger ones
than those in the S&P 500 Index
Conservative Growth Fund - Small and medium-size companies are
Approximately 10% more likely to reinvest earnings
and not pay dividends
Moderate Growth Fund - Changes in interest rates may
Approximately 15% affect the securities of small and
medium-size companies more than the
securities of larger companies
High Growth Fund
Approximately 30%
</TABLE>
30 PRUDENTIAL DIVERSIFIED FUNDS [PHONE](800) 225-1852
<PAGE> 33
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 - Bonds have generally outperformed money
total return will fluctuate in market instruments over the long term with
Conservative Growth Fund response to bond market movements less risk than stocks
Approximately 60%
- Credit risk -- the risk that the - Most bonds will rise in value when interest
Moderate Growth Fund default of an issuer would leave a rates fall
Approximately 35% 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 since companies must
- Market risk -- the risk that the pay their debts before paying stockholders
market value of an investment may
move up or down, sometimes rapidly - Investment-grade bonds have a lower risk of
or unpredictably. Market risk may default
affect an industry, a sector, or
the market as a whole - Bonds with longer maturity dates typically
have higher yields
- Interest rate risk -- the value of
most bonds will fall when interest - Intermediate-term securities may be less
rates rise: the longer a bond's susceptible to loss of principal than longer-
maturity and the lower its credit term securities
quality, the more its value
typically falls. It can lead to
price volatility, particularly for
junk bonds and stripped securities
FOREIGN SECURITIES - Foreign markets, economies and - Investors can participate in foreign markets
political systems particularly and invest in companies operating in those
Conservative Growth Fund those in developing countries may markets
Up to 15% not be as stable as in the U.S.
- Changing value of foreign currencies
Moderate Growth Fund - 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 government
Up to 35% and bonds 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
- Investments in emerging markets
securities are subject to greater
volatility and price declines
- Not all government securities are
insured or guaranteed by
government, but only by the issuing
agency
</TABLE>
31
<PAGE> 34
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 - Regular interest income
SECURITIES by the U.S. government, but only by
the issuing agency - The U.S. government guarantees interest and
All Funds principal payments on certain securities.
- Limits potential for capital
Percentage varies; appreciation - Generally more secure than lower quality debt
Up to 100% on securities and equity securities
a temporary basis - See market risk
- May preserve a Fund's assets
- See interest rate risk
MONEY MARKET - U.S. Government money market - May preserve a Fund's assets
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 and achieving our
objective
- See credit risk
- See market risk
MORTGAGE-RELATED - Prepayment risk -- the risk that - Regular interest income
SECURITIES the underlying mortgage may be
prepaid partially or completely, - The U.S. government guarantees interest and
Conservative Growth and generally during periods of falling principal payments on certain securities
Moderate Growth Funds interest rates, which could
adversely affect yield to maturity - May benefit from security interest in real
Percentage varies usually and could require a Fund to estate collateral
less than 10% reinvest in lower-yielding
securities. - Pass-through instruments provide greater
diversification than direct ownership of loans
- Credit risk -- the risk that the
underlying mortgages will not be
paid by debtors or by credit
insurers or 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>
32 PRUDENTIAL DIVERSIFIED FUNDS [PHONE](800) 225-1852
<PAGE> 35
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- - May offer higher interest income than higher-
SECURITIES (JUNK BONDS) grade debt securities grade debt securities and higher potential gains
Conservative Growth and - Higher market risk than higher-
Moderate Growth Funds grade debt securities
Up to 35%, usually less - More volatile than higher-grade
than 10% 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 than with
Conservative Growth and underlying collateral may not be as mortgage-related securities
Moderate Growth Funds great as with mortgage-related
securities - Pass-through instruments provide greater
Percentage varies, usually diversification than direct ownership of loans
less than 10% - Credit risk -- the risk that the
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, - A Fund could make money and protect against
options and foreign currency losses if the investment analysis proves correct
All Funds exchange contracts may not fully
offset the underlying positions and - One way to manage a Fund's risk/return balance is
Percentage varies, usually this could result in losses to the to lock in the value of an investment ahead of
less than 10% Fund that would not have otherwise time
occurred
- Derivatives that involve leverage could generate
- Derivatives used for risk substantial gains at low cost
management may not have the
intended effects and may result in - May be used to hedge against changes in currency
losses or missed opportunities exchange rates
- The other party to a derivatives
contract could default
- Derivatives that involve leverage
(borrowing for investment) could
magnify losses
- Certain types of derivatives
involve costs to a Fund which can
reduce returns
</TABLE>
33
<PAGE> 36
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 gains
AGREEMENTS losses
All Funds - Investment costs may exceed
potential underlying investment
Up to 33 1/3%, usually gains
less than 10%
DOLLAR ROLLS
Conservative Growth and
Moderate Growth Funds
Up to 33 1/3%, usually
less than 10%
WHEN-ISSUED AND
DELAYED-DELIVERY
SECURITIES
All Funds
Percentage varies, usually
less than 10%
BORROWING - Leverage may magnify losses - Leverage may magnify investment gains
All Funds - Interest costs and investment fees
may exceed potential investment
Up to 33 1/3%, usually gains
less than 10%
ADJUSTABLE/FLOATING RATE - Value lags value of fixed rate - Can take advantage of rising interest rates
SECURITIES securities when interest rates
change
Conservative Growth and
Moderate Growth Funds
Percentage varies, usually
less than 10%
STRIPPED SECURITIES - More volatile than securities that - Value rises faster when interest rates fall
have not separated principal and
Conservative Growth and interest
Moderate Growth Funds
- Mortgage-backed stripped securities
Percentage varies, usually have more prepayment and interest
less than 10% rate risk than other mortgage-
related securities
</TABLE>
34 PRUDENTIAL DIVERSIFIED FUNDS [PHONE](800) 225-1852
<PAGE> 37
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 of loss of
investment 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 widely traded securities
All Funds - May be difficult to sell at the
time or price desired
Up to 15% of net assets
</TABLE>
35
<PAGE> 38
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 and administers its business affairs. PIFM is also
responsible for supervising the Trust's Advisers. For the period ended July 31,
2000, 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 majority of outstanding shares of that Fund.
The Trust will notify sharehold-
36 PRUDENTIAL DIVERSIFIED FUNDS [PHONE] (800) 225-1852
<PAGE> 39
HOW THE TRUST IS MANAGED
ers 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, 2000, PIFM served as the
Manager to all 38 of the Prudential Mutual Funds and as Manager or administrator
to 22 closed-end investment companies with aggregate assets of approximately
$76.4 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.
37
<PAGE> 40
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 .375
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
for 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 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 June 30, 2000, Jennison managed
over $63.5 billion in assets for institutional and mutual fund clients. The
address of Jennison is 466 Lexington Avenue, New York, NY 10017. The Prudential
Investment Corporation (PIC) served as investment adviser from each Fund's
inception through August 2000. For the period January 1, 2000 through August 31,
2000, PIC was paid at the same rate at which Jennison currently is being paid by
PIFM.
38 PRUDENTIAL DIVERSIFIED FUNDS [PHONE] (800) 225-1852
<PAGE> 41
HOW THE TRUST IS MANAGED
KATHLEEN A. MCCARRAGHER and MICHAEL DEL BALSO have managed the
large-capitalization growth equity segments of the Funds since February 1999 and
May 2000, respectively.
Ms. McCarragher is a Director and Executive Vice President of Jennison, and
is Jennison's Growth Equity Investment Strategist. Prior to joining Jennison in
1998, Ms. McCarragher was a portfolio manager with Weiss, Peck & Grier.
Mr. Del Balso is a Director and Executive Vice President of Jennison, where
he has been part of the investment team since 1972. Mr. Del Balso is also
Jennison's Director of Equity Research. Mr. Del Balso received his B.A. from
Yale University and his M.B.A. from Columbia University. He is a member of the
New York Society of Security Analysts.
THOMAS KOLEFAS, CFA and BRADLEY L. GOLDBERG, CFA have managed the
large-capitalization value equity segments of the Funds since May 2000 and
September 2000, respectively.
Mr. Kolefas is a Senior Vice President of Jennison since September 2000.
Previously, he was a Managing Director and Senior Portfolio Manager of
Prudential Global Asset Management. He joined Prudential in May 2000 from Loomis
Sayles Co., L.P., where he headed the Large/Mid Cap Value Team. Prior to 1996,
Mr. Kolefas was employed by Mackay Shields Financial as a portfolio manager for
five years. Mr. Kolefas earned a B.S. and an M.B.A. from New York University and
holds a Chartered Financial Analyst (CFA) designation.
Mr. Goldberg is an Executive Vice President of Jennison, and he serves as
Chairman of the Asset Allocation Committee. Mr. Goldberg joined Jennison in
1974. Before joining Jennison, Mr. Goldberg served as Vice President and Group
Head in the Investment Research Division of Bankers Trust Company. Mr. Goldberg
earned a B.S. from the University of Illinois and an M.B.A. from New York
University. Mr. Goldberg holds a Chartered Financial Analyst (CFA) designation.
THE PRUDENTIAL INVESTMENT CORPORATION
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.
PIC's High Yield Team, headed by R. CASEY WALSH and PAUL E. APPLEBY, is
primarily responsible for overseeing the day-to-day management of the high yield
fixed-income segments of the Funds. Messrs. Walsh and Appleby have 17 and 11
years, respectively, of general investment experience. The PIC High
39
<PAGE> 42
HOW THE TRUST IS MANAGED
Yield Team uses a bottom-up approach, which focuses on individual securities,
while staying within the guidelines of PIC's Investment Policy Committee and
each Fund's investment restrictions and policies.In addition, PIC's Credit
Research team of analysts supports the High Yield Team using bottom-up
fundamentals, as well as economic and industry trends. As of June 30, 2000,
PIC's High Yield Team had $8.6 billion of assets under management.
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 108 domestic and international equity and
fixed-income mutual funds in the Franklin Templeton Group of funds. As of August
31, 2000, Franklin and its affiliates managed over $236 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.
THE DREYFUS CORPORATION
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 August 31,
2000, Dreyfus managed approximately $130 billion in assets for both equity and
fixed-income mutual funds. The address of Dreyfus is 200 Park Avenue, 8th floor
West, New York, NY 10166.
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.
40 PRUDENTIAL DIVERSIFIED FUNDS [PHONE] (800) 225-1852
<PAGE> 43
HOW THE TRUST IS MANAGED
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, 2000, Lazard and its global affiliates had approximately $72.8
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 $206 billion of
assets under management as of August 31, 2000. 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.
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 (the Plans) pursuant to Rule 12b-1 under 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.
41
<PAGE> 44
FUND DISTRIBUTIONS AND TAX ISSUES
Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund pays DIVIDENDS of ordinary income and distributes
realized net CAPITAL GAINS, if any, to shareholders. These distributions are
subject to federal income taxes, unless you hold your shares in a 401(k) plan,
an Individual Retirement Account (IRA) or some other qualified or tax-deferred
plan or account. Dividends and distributions from the Fund may also be subject
to state income tax in the state where you live.
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, unless you hold your shares in
a qualified or tax-deferred plan or account.
The following briefly discusses some of the important federal income 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. Capital gains 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
42 PRUDENTIAL DIVERSIFIED [PHONE] (800) 225-1852
<PAGE> 45
FUND DISTRIBUTIONS AND TAX ISSUES
a total of $1,500, the Fund has net long-term capital gains of $500, which it
will pass 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 or 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 or 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 or 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.
43
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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 AND TAX-DEFERRED RETIREMENT PLANS AND ACCOUNTS
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.
44 PRUDENTIAL DIVERSIFIED [PHONE] (800) 225-1852
<PAGE> 47
FUND DISTRIBUTIONS AND TAX ISSUES
IF YOU SELL OR EXCHANGE YOUR SHARES
[RECEIPTS FROM SALE -- GRAPHIC]
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.
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.
45
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
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 8179
PHILADELPHIA, PA 19101
You may purchase shares by check or wire. We do not accept cash or money orders.
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
46 PRUDENTIAL DIVERSIFIED FUNDS [PHONE] (800) 225-1852
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
- 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 $1,000 $1,000 $2,500 None
amount(1)
Minimum amount for $100 $100 $100 None
subsequent purchases(1)
Maximum initial 5% of the None 1% of the None
sales charge public public
offering price offering price
Contingent Deferred None If sold during: 1% on sales None
Sales Charge (CDSC)(2) Year 1 5% made within
Year 2 4% 18 months of
Year 3 3% purchase(2)
Year 4 2%
Years 5/6 1%
Year 7 0%
Annual distribution .30 of 1% 1% 1% None
and service (12b-1) (.25 of 1%
fees shown as a through July 31, 2001)
percentage of average
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 Shares -- Contingent Deferred Sales Charge (CDSC)."
(3) These distribution and service 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.
47
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
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.
48 PRUDENTIAL DIVERSIFIED FUNDS [PHONE] (800) 225-1852
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
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 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.
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
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 your
broker, who may require any supporting documents it considers appropriate.
QUALIFYING FOR CLASS Z SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class Z shares,
provided that 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.
50 PRUDENTIAL DIVERSIFIED FUNDS [PHONE} (800) 225-1852
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
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
51
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
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 most 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.
52 PRUDENTIAL DIVERSIFIED FUNDS [PHONE] (800) 225-1852
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
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 8159
PHILADELPHIA, PA 19101
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
EXCHANGE SHARES OF THE FUNDS
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will
provide you with monthly or quarterly, semi-annual or annual redemption checks.
Remember, sales 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, by wire or
by electronic deposit to your bank account) 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 (less
any applicable CDSC). If your broker holds your shares, he 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 8149
PHILADELPHIA, PA 19101
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, we will credit payment 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.
54 PRUDENTIAL DIVERSIFIED FUNDS [PHONE] (800) 225-1852
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
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 redemption
proceeds payable to or sent to someone or some place that is not in our records,
or you are a business or a trust and if you hold your shares directly with the
Transfer Agent, you will need to have the signature on your sell order signature
guaranteed by an "eligible" guarantor institution. An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. 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 shares that represent the increase in NAV above
the total amount of payments for shares made during the past six years
for Class B shares (five years for Class B shares purchased before
January 22, 1990) and 18 months for Class C shares (one year for Class
C shares purchased before November 2, 1998).
- 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.
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
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
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 (or one year for Class C shares
purchased before November 2, 1998). For both Class B and Class C shares, the
CDSC is calculated using 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 held in joint tenancy,
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 effected through 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.
56 PRUDENTIAL DIVERSIFIED FUNDS [PHONE] (800) 225-1852
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HOW TO BUY, SELL AND
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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 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
qualified or 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 and account
without paying an initial sales charge. Also, if you paid a CDSC when you
redeemed your shares, we will credit your 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.
57
<PAGE> 60
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
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 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 8157
PHILADELPHIA, PA 19101
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 or one
year for Class C shares purchased before November 2, 1998, 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 for purposes of 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
58 Prudential Diversified Funds [PHONE}(800) 225-1852
<PAGE> 61
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
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.
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.
TELEPHONE REDEMPTIONS AND EXCHANGES
You may redeem your shares in any amount by calling the Fund at (800) 225-1852.
In order to redeem your shares by telephone, you must call the Fund before 4:15
p.m. New York time to receive a redemption amount based on that day's NAV.
The Fund's Transfer Agent will record your telephone instructions and
request specific account information before redeeming shares. The Fund will not
be liable if it follows instructions that it reasonably believes are made by the
shareholder. If the Fund does not follow reasonable procedures, it may be liable
for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, you may have difficulty
in redeeming your shares by telephone. If this occurs, you should consider
redeeming your shares by mail or through your broker.
The telephone redemption procedures may be modified or terminated at
any time. If this occurs, you will receive a written notice from the Fund.
59
<PAGE> 62
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 the share class of that particular Fund,
assuming reinvestment of all dividends and other distributions.
The information is for each share class for the periods indicated. 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 SHARES
The financial highlights for the year ended July 31, 2000, and the period ended
July 31, 1999, were audited by PricewaterhouseCoopers, LLP, whose reports were
unqualified.
<TABLE>
<CAPTION>
CLASS A SHARES (FISCAL YEARS ENDED 7-31)
PER SHARE OPERATING PERFORMANCE 2000 1999(1)
-------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD 10.36 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(5) .37 .19
Net realized and unrealized gain on investments and
foreign currencies .82 .35
------ -----
TOTAL FROM INVESTMENT OPERATIONS 1.19 .54
------ -----
LESS DISTRIBUTIONS:
Dividends from net investment income (.37) (.18)
------ -----
Distributions from net realized gains (.12) --
------ -----
TOTAL DISTRIBUTIONS (.49) (.18)
------ -----
NET ASSET VALUE, END OF PERIOD 11.06 10.36
------ -----
TOTAL RETURN(2) 11.73 5.34
------ -----
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 2000 1999
-----------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, END OF PERIOD (000) 14,514 9,097
Average net assets (000) 12,535 6,157
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees(4) 1.73 1.92(3)
Expenses, excluding distribution fees 1.48 1.67(3)
Net investment income (loss) 3.46 2.69(3)
Portfolio turnover 244% 180%
</TABLE>
(1) Information shown is for the period 11-18-98 (when Class A 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 return for periods of less than a full year is not
annualized.
(3) Annualized.
(4) The Distributor of the Fund agreed to limit its distribution fees to .25 of
1% of the average daily net assets of the Class A shares.
(5) Calculated based on average month-end shares outstanding during the period.
60 Prudential Diversified Funds [PHONE] (800) 225-1852
<PAGE> 63
FINANCIAL HIGHLIGHTS
CLASS B SHARES
The financial highlights for the year ended July 31, 2000, and the period ended
July 31, 1999, were audited by PricewaterhouseCoopers, LLP, whose reports were
unqualified.
<TABLE>
<CAPTION>
CLASS B SHARES (FISCAL YEARS ENDED 7-31)
PER SHARE OPERATING PERFORMANCE 2000 1999(1)
-----------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD 10.35 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(4) .29 .14
Net realized and unrealized gain on investments and
foreign currencies .82 .34
------ ------
TOTAL FROM INVESTMENT OPERATIONS 1.11 .48
------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (.29) (.13)
------ ------
Distributions from net realized gains (.12) --
------ ------
TOTAL DISTRIBUTIONS (.41) (.13)
------ ------
NET ASSET VALUE, END OF PERIOD 11.05 10.35
====== ======
TOTAL RETURN(2) 10.89 4.77
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 2000 1999(1)
--------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, END OF PERIOD (000) 48,838 30,235
Average net assets (000) 36,574 19,308
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 2.48 2.67(3)
Expenses, excluding distribution fees 1.48 1.67(3)
Net investment income (loss) 2.71 1.94(3)
Portfolio turnover 244% 180%
</TABLE>
(1) Information is shown for the period 11-18-98 (when 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 return for periods of less than
one year is not annualized.
(3) Annualized.
(4) Calculated based on average month-end shares outstanding during the period
61
<PAGE> 64
FINANCIAL HIGHLIGHTS
CLASS C SHARES
The financial highlights for the year ended July 31, 2000, and the period ended
July 31, 1999, were audited by PricewaterhouseCoopers, LLP, whose reports were
unqualified.
<TABLE>
<CAPTION>
CLASS C SHARES (FISCAL YEARS ENDED 7-31)
PER SHARE OPERATING PERFORMANCE 2000 1999(1)
-------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD 10.35 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(4) .28 .14
Net realized and unrealized gain on investments and
foreign currencies .83 .34
------ ------
TOTAL FROM INVESTMENT OPERATIONS 1.11 .48
------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (.29) (.13)
------ ------
Distributions from net realized gains (.12) --
------ ------
TOTAL DISTRIBUTIONS (.41) (.13)
------ ------
NET ASSET VALUE, END OF PERIOD 11.05 10.35
------ ------
TOTAL RETURN(2) 10.89 4.77
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, END OF PERIOD (000) 11,301 14,035
Average net assets (000) 12,954 12,039
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 2.48 2.67(3)
Expenses, excluding distribution fees 1.48 1.67(3)
Net investment loss 2.62 1.91(3)
Portfolio turnover 244% 180%
</TABLE>
(1) Information shown is for the period 11-18-98 (when Class C 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 return for periods of less than one year is not
annualized.
(3) Annualized.
(4) Calculated based on average month-end shares outstanding during the period.
62 Prudential Diversified Funds [PHONE] (800) 225-1852
<PAGE> 65
FINANCIAL HIGHLIGHTS
CLASS Z SHARES
The financial highlights for the year ended July 31, 2000, and the period ended
July 31, 1999, were audited by PricewaterhouseCoopers, LLP, whose reports were
unqualified.
<TABLE>
<CAPTION>
CLASS Z SHARES (FISCAL YEARS ENDED 7-31)
PER SHARE OPERATING PERFORMANCE 2000 1999(1)
-------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD 10.37 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(4) .35 .21
Net realized and unrealized gain on investments and
foreign currencies .85 .35
------ ------
TOTAL FROM INVESTMENT OPERATIONS 1.20 .56
------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (.40) (.19)
------ ------
Distributions from net realized gains (.12) --
------ ------
TOTAL DISTRIBUTIONS (.52) (.19)
------ ------
NET ASSET VALUE, END OF PERIOD 11.05 10.37
------ ------
TOTAL RETURN(2) 11.84 5.58
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
Net assets, end of period (000) 471 20,843
Average net assets (000) 12,534 38,460
Ratios to average net assets:
Expenses, including distribution fees 1.48 1.67(3)
Expenses, excluding distribution fees 1.48 1.67(3)
Net investment income 3.30 2.89(3)
Portfolio turnover 244% 180%
</TABLE>
(1) Information shown is for the period 11-18-98 (when 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 return for periods of less than one year is not
annualized.
(3) Annualized.
(4) Calculated based on average month-end shares outstanding during the period
63
<PAGE> 66
FINANCIAL HIGHLIGHTS
MODERATE GROWTH FUND: CLASS A SHARES
The financial highlights for the year ended July 31, 2000, and the period ended
July 31, 1999, were audited by PricewaterhouseCoopers, LLP, whose reports were
unqualified.
<TABLE>
<CAPTION>
CLASS A SHARES (FISCAL YEARS ENDED 7-31)
PER SHARE OPERATING PERFORMANCE 2000 1999(1)
------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD 10.86 10.00
INCOME FROM INVESTMENT OPERATIONS:(5)
Net investment income .26 .12
Net realized and unrealized gain on investments and
foreign currencies 1.25 .83
------ ------
TOTAL FROM INVESTMENT OPERATIONS 1.51 .95
------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (.26) (.09)
------ ------
Distributions from net realized gains (.08) --
------ ------
TOTAL DISTRIBUTIONS (.34) (.09)
------ ------
NET ASSET VALUE, END OF PERIOD 12.03 10.86
------ ------
TOTAL RETURN(2) 13.96 9.47
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, END OF PERIOD (000) 48,786 20,372
Average net assets (000) 34,809 12,286
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees(4) 1.49 1.88(3)
Expenses, excluding distribution fees 1.24 1.63(3)
Net investment income (loss) 2.27 1.59(3)
Portfolio turnover 155% 96%
</TABLE>
(1) Information shown is for the period 11-18-98 (when Class A 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 return for periods of less than a full year is not
annualized.
(3) Annualized.
(4) The Distributor of the Fund agreed to limit its distribution fees to .25 of
1% of the average daily net assets of the Class A shares.
(5) Calculated based on average month-end shares outstanding during the period.
64 Prudential Diversified Funds [PHONE](800) 225-1852
<PAGE> 67
FINANCIAL HIGHLIGHTS
CLASS B SHARES
The financial highlights for the year ended July 31, 2000, and the period ended
July 31, 1999, were audited by PricewaterhouseCoopers, LLP, whose reports were
unqualified.
<TABLE>
<CAPTION>
CLASS B SHARES (FISCAL YEARS ENDED 7-31)
PER SHARE OPERATING PERFORMANCE 2000 1999(1)
-------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD 10.85 10.00
INCOME FROM INVESTMENT OPERATIONS:(4)
Net investment income .17 .06
Net realized and unrealized gain on investments and
foreign currencies 1.23 .83
------ ------
TOTAL FROM INVESTMENT OPERATIONS 1.40 .89
------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (.16) (.04)
------ ------
Distributions from net realized gains (.08) --
------ ------
TOTAL DISTRIBUTIONS (.24) (.04)
------ ------
NET ASSET VALUE, END OF PERIOD 12.01 10.85
------ ------
TOTAL RETURN(2) 12.88 8.99
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, END OF PERIOD (000) 99,950 58,678
Average net assets (000) 79,855 36,645
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 2.24 2.63(3)
Expenses, excluding distribution fees 1.24 1.63(3)
Net investment income (loss) 1.47 .85(3)
Portfolio turnover 155% 96%
</TABLE>
(1) Information is shown for the period 11-18-98 (when 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 return for periods of less than one year is not
annualized.
(3) Annualized.
(4) Calculated based on average month-end shares outstanding during the period.
65
<PAGE> 68
FINANCIAL HIGHLIGHTS
CLASS C SHARES
The financial highlights for the year ended July 31, 2000, and the period ended
July 31, 1999, were audited by PricewaterhouseCoopers, LLP, whose reports were
unqualified.
<TABLE>
<CAPTION>
CLASS C SHARES (FISCAL YEARS ENDED 7-31)
PER SHARE OPERATING PERFORMANCE 2000 1999(1)
-----------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD 10.85 10.00
INCOME FROM INVESTMENT OPERATIONS:(4)
Net investment income .17 .06
Net realized and unrealized gain on investments and
foreign currencies 1.23 .83
------ ------
TOTAL FROM INVESTMENT OPERATIONS 1.40 .89
------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (.16) (.04)
------ ------
Distributions from net realized gains (.08) --
------ ------
TOTAL DISTRIBUTIONS (.24) (.04)
------ ------
NET ASSET VALUE, END OF PERIOD 12.01 10.85
====== ======
TOTAL RETURN(2) 12.88 8.99
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, END OF PERIOD (000) 28,040 22,375
Average net assets (000) 25,835 18,346
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 2.24 2.63(3)
Expenses, excluding distribution fees 1.24 1.63(3)
Net investment loss 1.44 .79(3)
Portfolio turnover 155% 96%
</TABLE>
(1) Information shown is for the period 11-18-98 (when Class C 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 return for periods of less than
one year is not annualized.
(3) Annualized.
(4) Calculated based on average month-end shares outstanding during the
period.
66 Prudential Diversified Funds [PHONE] (800) 225-1852
<PAGE> 69
FINANCIAL HIGHLIGHTS
CLASS Z SHARES
The financial highlights for the year ended July 31, 2000, and the period ended
July 31, 1999, were audited by PricewaterhouseCoopers, LLP, whose reports were
unqualified.
<TABLE>
<CAPTION>
CLASS Z SHARES (FISCAL YEARS ENDED 7-31)
PER SHARE OPERATING PERFORMANCE 2000 1999(1)
-----------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD 10.87 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(4) .27 .13
----- ------
Net realized and unrealized gain on investments and
foreign currencies 1.27 .84
----- ------
TOTAL FROM INVESTMENT OPERATIONS 1.54 .97
----- ------
LESS DISTRIBUTIONS:
Dividends from net investment income (.28) (.10)
----- ------
Distributions from net realized gains (.08) --
----- ------
TOTAL DISTRIBUTIONS (.36) (.10)
----- ------
NET ASSET VALUE, END OF PERIOD 12.05 10.87
===== ======
TOTAL RETURN(2) 14.18 9.70
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, END OF PERIOD (000) 1,348 13,578
Average net assets (000) 4,102 21,914
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 1.24 1.63(3)
Expenses, excluding distribution fees 1.24 1.63(3)
Net investment income 2.11 1.68(3)
Portfolio turnover 155% 96%
</TABLE>
(1) Information shown is for the period 11-18-98 (when 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 return for periods of less than
one year is not annualized.
(3) Annualized.
(4) Calculated based on average month-end shares outstanding during the
period.
67
<PAGE> 70
FINANCIAL HIGHLIGHTS
HIGH GROWTH FUND: CLASS A SHARES
The financial highlights for the year ended July 31, 2000, and the period ended
July 31, 1999, were audited by PricewaterhouseCoopers, LLP, whose reports were
unqualified.
<TABLE>
<CAPTION>
CLASS A SHARES (FISCAL YEARS ENDED 7-31)
PER SHARE OPERATING PERFORMANCE 2000 1999(1)
-----------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD 11.52 10.00
INCOME FROM INVESTMENT OPERATIONS:(4)
Net investment income (loss) -- (6) -- (6)
Net realized and unrealized gain on investments and
foreign currencies 2.14 1.52
------ ------
TOTAL FROM INVESTMENT OPERATIONS 2.14 1.52
------ ------
LESS DISTRIBUTIONS:
Dividends in excess of net investment income (.43) --
------ ------
Distributions from net realized gains (.28) --
------ ------
TOTAL DISTRIBUTIONS (.71) --
------ ------
NET ASSET VALUE, END OF PERIOD 12.95 11.52
====== ======
TOTAL RETURN(2) 18.99 15.20
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 2000 1999(1)
-----------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, END OF PERIOD (000) 35,678 21,248
Average net assets (000) 27,528 10,442
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees(4) 1.54 1.73(3)
Expenses, excluding distribution fees 1.29 1.48(3)
Net investment income (loss) .01 .02(3)
Portfolio turnover 67% 38%
</TABLE>
(1) Information shown is for the period 11-18-98 (when Class A 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 return for periods of less than a
full year is not annualized.
(3) Annualized.
(4) The Distributor of the Fund agreed to limit its distribution fees to .25
of 1% of the average daily net assets of the Class A shares.
(5) Calculated based on average month-end shares outstanding during the
period.
(6) Less than $.005 per share.
68 PRUDENTIAL DIVERSIFIED FUNDS [PHONE](800) 225-1852
<PAGE> 71
FINANCIAL HIGHLIGHTS
CLASS B SHARES
The financial highlights for the year ended July 31, 2000, and the period ended
July 31, 1999, were audited by PricewaterhouseCoopers, LLP, whose reports were
unqualified.
<TABLE>
<CAPTION>
CLASS B SHARES (FISCAL YEARS ENDED 7-31)
PER SHARE OPERATING PERFORMANCE 2000 1999(1)
------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD 11.47 10.00
INCOME FROM INVESTMENT OPERATIONS:(4)
Net investment loss (.09) (.05)
Net realized and unrealized gain on investments and
foreign currencies 2.12 1.52
------ ------
TOTAL FROM INVESTMENT OPERATIONS 2.03 1.47
------ ------
LESS DISTRIBUTIONS:
Distributions in excess of net investment income (.36) --
------ ------
Distributions from net realized gains (.28) --
------ ------
TOTAL DISTRIBUTIONS (.64) --
------ ------
NET ASSET VALUE, END OF PERIOD 12.86 11.47
====== ======
TOTAL RETURN(2) 18.13 14.70
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 2000 1999(1)
------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, END OF PERIOD (000) 79,793 41,049
Average net assets (000) 60,994 24,260
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 2.29% 2.48%(3)
Expenses, excluding distribution fees 1.29% 1.48%(3)
Net investment income (loss) (.71)% (.70)%(3)
Portfolio turnover 67% 38%
</TABLE>
(1) Information is shown for the period 11-18-98 (when 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 return for periods of less than
one year is not annualized.
(3) Annualized.
(4) Calculated based on average month-end shares outstanding during the
period.
69
<PAGE> 72
FINANCIAL HIGHLIGHTS
CLASS C SHARES
The financial highlights for the year ended July 31, 2000, and the period ended
July 31, 1999, were audited by PricewaterhouseCoopers, LLP, whose reports were
unqualified.
<TABLE>
<CAPTION>
CLASS C SHARES (FISCAL YEARS ENDED 7-31)
PER SHARE OPERATING PERFORMANCE 2000 1999(1)
------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD 11.47 10.00
INCOME FROM INVESTMENT OPERATIONS:(4)
Net investment income (loss) (.09) (.05)
Net realized and unrealized gain on investments and
foreign currencies 2.12 1.52
------ ------
TOTAL FROM INVESTMENT OPERATIONS 2.03 1.47
------ ------
LESS DISTRIBUTIONS:
Distributions in excess of net investment income (.36) --
------ ------
Distributions from net realized gains (.28) --
------ ------
TOTAL DISTRIBUTIONS (.64) --
------ ------
NET ASSET VALUE, END OF PERIOD 12.86 11.47
====== ======
TOTAL RETURN(2) 18.13 14.70
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 2000 1999(1)
-------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, END OF PERIOD (000) 31,636 19,914
Average net assets (000) 26,413 15,204
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 2.29 2.48(3)
Expenses, excluding distribution fees 1.29 1.48(3)
Net investment loss (.73) (.75)(3)
Portfolio turnover 67% 38%
</TABLE>
(1) Information shown is for the period 11-18-98 (when Class C 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 return for periods of less than one year is not
annualized.
(3) Annualized.
(4) Calculated based on average month-end shares outstanding during the period.
70 PRUDENTIAL DIVERSIFIED FUNDS [PHONE] (800) 225-1852
<PAGE> 73
FINANCIAL HIGHLIGHTS
CLASS Z SHARES
The financial highlights for the year ended July 31, 2000, and the period ended
July 31, 1999, were audited by PricewaterhouseCoopers, LLP, whose reports were
unqualified.
<TABLE>
<CAPTION>
CLASS Z SHARES (FISCAL YEARS ENDED 7-31)
PER SHARE OPERATING PERFORMANCE 2000 1999(1)
------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD 11.56 10.00
INCOME FROM INVESTMENT OPERATIONS:(4)
Net investment income .02 .02
Net realized and unrealized gain on investments and
foreign currencies 2.14 1.54
------ ------
TOTAL FROM INVESTMENT OPERATIONS 2.16 1.56
------ ------
LESS DISTRIBUTIONS:
Dividends in excess of net investment income (.46) --
------ ------
Distributions from net realized gains (.28) --
------ ------
TOTAL DISTRIBUTIONS (.74) --
------ ------
NET ASSET VALUE, END OF PERIOD 12.98 11.56
====== ======
TOTAL RETURN(2) 19.23 15.60
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 2000 1999(1)
-------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, END OF PERIOD (000) 1,318 36,413
Average net assets (000) 25,793 45,999
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 1.29 1.48(3)
Expenses, excluding distribution fees 1.29 1.48(3)
Net investment income .12 .21(3)
Portfolio turnover 67% 38%
</TABLE>
(1) Information shown is for the period 11-18-98 (when 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 return for periods of less than one year is not
annualized.
(3) Annualized.
(4) Calculated based on average month-end shares outstanding during the period.
71
<PAGE> 74
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 applicable prospectus carefully before you
invest or send money.
STOCK FUNDS
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL INDEX SERIES FUND
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Prudential Jennison Growth Fund
Prudential Jennison Equity Opportunity 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 TAX MANAGED SMALL-CAP FUND, INC.
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
PRUDENTIAL TAX-MANAGED FUNDS
PRUDENTIAL TAX-MANAGED EQUITY FUND
PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC.
PRUDENTIAL US EMERGING GROWTH FUND, INC.
PRUDENTIAL VALUE FUND
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 MARKET FUND
Prudential Developing Market Equity Fund
Prudential Latin American 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.
Prudential Global Growth Fund
Prudential International Value Fund
Prudential Jennison International Growth Fund
GLOBAL UTILITY FUND, INC.
TARGET FUNDS
International Equity Fund
GLOBAL BOND FUNDS
THE GLOBAL TOTAL RETURN FUND, INC.
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
72 Prudential Diversified Funds [PHONE] (800) 225-1852
<PAGE> 75
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 SHORT-TERM CORPORATE BOND 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
73
<PAGE> 76
FOR MORE INFORMATION
Please read this prospectus before you invest in the Trust and keep it for
future reference. For information or shareholder questions contact
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 8098
PHILADELPHIA, PA 19101
(800) 225-1852
(732) 482-7555 (CALLING FROM OUTSIDE THE U.S.)
Outside Brokers should contact
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
P.O. BOX 8310
PHILADELPHIA, PA 19101
(800) 778-8769
Visit Prudential's website 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 Trust's 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 20549-0102
BY ELECTRONIC REQUEST
[email protected] (The SEC charges a fee to copy documents.)
IN PERSON
Public Reference Room in Washington, DC
(For hours of operation, call 1(202) 942-8090)
Via the Internet on the EDGAR Database at http://www.sec.gov
<TABLE>
<CAPTION>
CUSIP Numbers NASDAQ Symbols
<S> <C>
Conservative Growth Fund
Class A: 74432F-10-9 PACGA
Class B: 74432F-20-8 PBCFX
Class C: 74432F-30-7 PCCFX
Class Z: 74432F-40-8 PDCZX
Moderate Growth Fund
Class A: 74432F-50-5 PAMGX
Class B: 74432F-60-4 DMGBX
Class C: 74432F-70-3 PIMGX
Class Z: 74432F-80-2 PDMZX
High Growth Fund
Class A: 74432F-88-5 PHGAX
Class B: 74432F-87-7 PIHGCX
Class C: 74432F-86-9 PHGCX
Class Z: 74432F-85-1 PDHZX
</TABLE>
Investment Company Act File No. 811-08915
MF186A [RECYCLE SYMBOL] Printed on Recycled Paper
<PAGE> 77
PRUDENTIAL DIVERSIFIED FUNDS
Statement of Additional Information
October 5, 2000
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 29, 2000, 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-32
Management of the Trust..................................... B-34
Control Persons and Principal Holders of Securities......... B-37
Investment Advisory and Other Services...................... B-39
Brokerage Allocation and Other Practices.................... B-46
Capital Shares, Other Securities and Organization........... B-49
Purchase, Redemption and Pricing of Fund Shares............. B-50
Shareholder Investment Account.............................. B-60
Net Asset Value............................................. B-65
Taxes, Dividends and Distributions.......................... B-66
Performance Information..................................... B-68
Financial Statements........................................ B-70
Report of Independent Accountants........................... B-90
Appendix I -- Description of Security Ratings............... I-1
Appendix II -- Historical Performance Data.................. II-1
Appendix III -- General Investment Information.............. III-1
-------------------------------------------------------------------
</TABLE>
MF186B
<PAGE> 78
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> 79
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.
B-3
<PAGE> 80
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.
B-4
<PAGE> 81
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.
B-5
<PAGE> 82
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.
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 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.
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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, 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
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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.
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,
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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.
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
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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
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.
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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.
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.
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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 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.
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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 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-
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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 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
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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.
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
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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 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
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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, 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
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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 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
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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 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
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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.
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
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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 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
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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 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
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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 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
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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.
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
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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.
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
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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
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.
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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 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
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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.
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.
B-28
<PAGE> 105
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 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
B-29
<PAGE> 106
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
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
B-30
<PAGE> 107
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: (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.
B-31
<PAGE> 108
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 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
B-32
<PAGE> 109
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 the securities of any issuer if, as a result, the Fund would
fail to be a diversified company within the meaning of the 1940 Act, and the
rules and regulations promulgated thereunder, as such statute, rules and
regulations are amended from time to time or are interpreted from time to time
by the SEC staff (collectively, the "1940 Act Laws and Interpretations") or to
the extent that the Fund may be permitted to do so by exemptive order or similar
relief (collectively, with the 1940 Act Laws and Interpretations, the "1940 Act
Laws, Interpretations and Exemptions"). Each Fund is a "diversified company" as
defined in the 1940 Act.
2. Issue senior securities or borrow money or pledge its assets, except as
permitted by the 1940 Act Laws, Interpretations and Exemptions.
3. Buy or sell real estate, except that investments in securities of
issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
in real estate are not subject to this limitation, and except that the Fund may
exercise rights under agreements relating to such securities, including the
right to enforce security interests and to hold real estate acquired by reason
of such enforcement until that real estate can be liquidated in an orderly
manner.
4. Make loans, except through loans of assets of the Fund or through
repurchase agreements, provided that for purposes of this limitation, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances or
similar instruments will not be considered the making of a loan.
5. Purchase any security if as a result 25% or more of the Fund's total
assets would be invested in the securities of issuers having their principal
business activities in the same industry, except for temporary defensive
purposes, and except that this limitation does not apply to securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities.
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.
For purposes of investment restriction number 1, each Fund may not purchase
any security (other than obligations of the U.S. Government, its agencies or
instrumentalities) if as a result: (i) with respect to 75% of a Fund's total
assets, more than 5% of such assets (determined at the time of investment) would
then be invested in securities of a single issuer, or (ii) 25% or more of the
Fund's total assets (determined at the time of investment) would be invested in
a single industry.
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.
B-33
<PAGE> 110
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. (largest national coalition
of philanthropic organizations); former
Chairman of the American Council for the Arts;
former Director of the advisory board of Chase
Manhattan Bank of Rochester.
Maurice Holmes (57) Trustee Professor (since 1989) of the Practice of
Management and Engineering at the
Massachusetts Institute of Technology; former
engineer and senior manager at Xerox
Corporation; Director of SDR, Incorporated,
Optical Dynamics Corporation and Storage
Technology Corporation; Trustee of the
Rochester Institute of Technology.
Robert E. LaBlanc (65) Trustee President (since 1981) of Robert E. LaBlanc
Associates, Inc. (telecommunications);
formerly General Partner at Salomon Brothers;
and Vice Chairman of Continental Telecom;
Director of Storage Technology Corporation,
Titan Corporation, Salient 3 Communications,
Inc. and Tribune Company; Trustee of Manhattan
College.
Douglas H. McCorkindale (60) Trustee Vice Chairman (since March 1984) and President
(since September 1997) of Gannett Co. Inc.;
Director of Continental Airlines, Inc.,
Gannett Co., Inc. and Global Crossing Ltd.
Thomas T. Mooney (58) 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,
Executive Service Corps of Rochester, Monroe
County Water Authority, Rochester Jobs, Inc.,
Monroe County Industrial Development
Corporation and Northeast Midwest Institute.
Clay T. Whitehead (62) Trustee President (since May 1983) of National Exchange
Inc. (new business development firm).
*David R. Odenath, Jr. (43) Vice Officer in Charge, President, Chief Executive
President and Officer and Chief Operating Officer (since
Trustee June 1999), PIFM; Senior Vice President (since
June 1999), Prudential; formerly Senior Vice
President (August 1993-May 1999), PaineWebber
Group Inc.
</TABLE>
B-34
<PAGE> 111
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) THE TRUST DURING PAST FIVE YEARS
------------------------ ------------- ----------------------
<S> <C> <C>
Stephen Stoneburn (56) Trustee President and Chief Executive Officer (since
June 1996) of Quadrant Media Corp.
(publishing); formerly President (June
1995-June 1996) of Argus Integrated Media,
Inc.; Senior Vice President and Managing
Director (January 1993-1995), of Cowles
Business Media; Senior Vice President (January
1991-1992) and Publishing Vice President (May
1989- December 1990) of Gralla Publications (a
division of United Newspapers, U.K.); and
Senior Vice President of Fairchild
Publications, Inc.
Saul K. Fenster Ph.D. (67) Trustee President, New Jersey Institute of Technology
(since 1978); Commissioner of the Middle
States Association, Commission on Higher
Education; a member of the New Jersey
Commission on Science and Technology; and a
Director of the New Jersey State Chamber of
Commerce, the Society of Manufacturing
Engineering Education Foundation, the Research
and Development Council of New Jersey,
Prosperity New Jersey, Inc., the Edison
Partnership, National Action Council for
Minorities in Engineering, and IDT
Corporation.
W. Scott McDonald, Jr. Ph.D. (63) Trustee Vice President, Kaludis Consulting Group, Inc.
(since 1995) (a Sallie Mae company serving
higher education); Chief Operating Officer,
Fairleigh Dickinson University (1991-1998);
Executive Vice President and Chief Operating
Officer, Drew University (1975-1991) and
founding director of School, College and
University Underwriters Ltd.
Joseph Weber Ph.D. (76) Trustee Vice President, Finance, Interclass
(international corporate learning) since
(1991); former President, The Alliance for
Learning; Vice President, Member of the Board
of Directors, Member of the Executive and
Operating Committees, Hoffmann-LaRoche Inc.;
Member, Board of Overseers, New Jersey
Institute of Technology; and Trustee and Vice
Chairman Emeritus, Fairleigh Dickinson
University.
</TABLE>
B-35
<PAGE> 112
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) THE TRUST DURING PAST FIVE YEARS
------------------------ ------------- ----------------------
<S> <C> <C>
*John R. Strangfeld, Jr. (46) President and Chief Executive Officer, Chairman, President and
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.
*Robert F. Gunia (53) Vice Executive Vice President and Chief
President and Administrative Officer (since June 1999) of
Trustee Prudential 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.
Grace C. Torres (41) Treasurer and First Vice President (since December 1996) of
Principal PIFM; First Vice President (since March 1994)
Financial and of Prudential Securities; formerly First Vice
Accounting President (March 1994-September 1996) of
Officer Prudential Mutual Fund Management, Inc.
William V. Healey (48) Assistant Executive Vice President, Chief Legal Officer
Secretary and Secretary, PIFM; Vice President and
Associate General Counsel, Prudential; Senior
Vice President, Chief Legal Officer and
Secretary, PIMS
</TABLE>
---------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of
affiliation with Prudential, PIMS 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
75.
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.
B-36
<PAGE> 113
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 SEC exemptive
order, at the daily rate of return of a Fund (the Fund rate). 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 fiscal year
ended July 31, 2000 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, 1999.
Interested trustees do not receive compensation from the Trust or any Fund in
the Fund Complex.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL 1999
COMPENSATION
FROM TRUST
AGGREGATE AND FUND
COMPENSATION COMPLEX PAID
NAME OF TRUSTEE FROM TRUST TO TRUSTEES
------------------------------------------------------------ ------------ ------------
<S> <C> <C> <C>
Eugene C. Dorsey*........................................... $3,750 $ 81,000 (43/70)**
Douglas H. McCorkindale*.................................... $3,750 $ 80,000 (24/49)**
Thomas T. Mooney*........................................... $3,750 $129,500 (35/75)**
Robert E. LaBlanc........................................... $3,750 $ 61,250 (20/39)**
Stephen Stoneburn........................................... $3,750 $ 61,250 (20/39)**
Clay T. Whitehead........................................... $3,750 $ 77,000 (38/66)**
Maurice Holmes.............................................. 0 0
W. Scott McDonald, Jr. Ph.D................................. 0 0
Joseph Weber, Ph.D. ........................................ 0 0
Saul K. Fenster Ph.D........................................ 0 0
</TABLE>
---------------
* Total compensation from all the funds in the Fund Complex for the calendar
year ended December 31, 1999 includes amounts deferred at the election of
Trustees under the funds' deferred compensation plans. Including accrued
interest, total compensation amounted to approximately $103,574 for Mr.
Dorsey, $97,916 for Mr. McCorkindale, and $135,102 for Mr. Mooney.
** Indicates number of funds/portfolios in the Fund Complex (including the
Trust) to which aggregate compensation relates.
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 15, 2000, the Trustees and officers of the Trust, as a
group, owned less than 1% of the outstanding shares of beneficial interest of
the Portfolios.
As of September 15, 2000, 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 (CLASS) (% OF PORTFOLIO)
---- ------- ------------ ----------------
<S> <C> <C> <C> <C>
Prudential Trust Company
PBO PRU-DC CLIENTS............. Att: John Sturdy Prudential Diversified 112,347 (8.17%)
30 Scranton Office Park Conservative Growth
Moosic, PA 18570 Fund(A)
Prudential Trust Company
FBO PRU-DC..................... Att: John Sturdy Prudential Diversified 15,511 (24.48%)
30 Scranton Office Park Conservative Growth
Moosic, PA 18570 Fund(Z)
First Union Securities Inc.
A/C 6262-3748.................. Att: Kimberly Nadick Prudential Diversified 5,342 (11.36%)
111 East Kilbourn Avenue Conservative Growth
Milwaukee WI 53202 Fund(Z)
</TABLE>
B-37
<PAGE> 114
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME ADDRESS FUND (CLASS) (% OF PORTFOLIO)
---- ------- ------------ ----------------
<S> <C> <C> <C> <C>
Prudential Securities
C/F............................ Att: Beverly Radulovic Prudential Diversified 6,348 (13.50%)
IRA Rollover Radulovic Conservative Growth
7404 Admiral Dr Fund(Z)
Nancy Bienia................... 11806 Lone Tree Ct. Prudential Diversified 2,645 (5.62%)
Columbia MD 21044-4385 Conservative Growth
Fund(Z)
Pur Defined Contributions Svs
FBO PRU-DU-
QUALIFIED CLIENTS.............. Att: John Sturdy Prudential Diversified 15,392 (32.73%)
30 Scranton Office Park Conservative Growth
Moosic, PA 18570 Fund(Z)
Pru Defined Contribution Svsc
FBOPRU-DC
Qualified Clients.............. Att: John Sturdy Prudential Diversified 6,601 (5.90%)
30 Scranton Office Park High Growth
Moosic, PA 18570 Fund(Z)
New Moon Investment LTD........ PO Box 2003 Georgetown Prudential Diversified 188,082 (6.52%)
Grand Pavilion Commercial High Growth
CTR Fund(A)
802 West Bay Road
Grand Cayman
Cayman Islands, BWI
Prudential Trust Company
FBO PRU-DC..................... Att: John Sturdy Prudential Diversified 51,837 (46.31%)
30 Scranton Office Park High Growth
Moosic, PA 18570 Fund(Z)
Elinor Fisher.................. 90 Broad St Prudential Diversified 14,734 (13.16%)
Flemington NJ 08822-1602 High Growth
Fund(Z)
Lucia Schramm &
Maria Signorini JT TEN......... 118 Center Ave Prudential Diversified 5,936 (5.30%)
Wheeling WV 26003-5173 High Growth Fund(Z)
Prudential Trust Company
PBO PRU-DC CLIENTS............. Att: John Sturdy Prudential Diversified 397,043 (8.68%)
30 Scranton Office Park Moderate Growth
Moosic, PA 18570 Fund(A)
Prudential Securities C/F
FBO PRU-DC..................... Att: Dr. Edward Wotycha Prudential Diversified 7,142 (5.09%)
IRA Rollover DTD 12/23/98 Moderate Growth
120 Maple Ave. Apt. 2 Fund(Z)
Moosic, PA 18570
Prudential Trust Company
PBO PRU-DC CLIENTS............. Att: John Sturdy Prudential Diversified 43,588 (31.04%)
30 Scranton Office Park Moderate Growth
Moosic, PA 18570 Fund(Z)
Prudential Securities C/F
FBO PRU-DC..................... Att: Juanita P. Kendrick Prudential Diversified 30,572 (21.77%)
IRA DTD 7/18/94 Moderate Growth
101 N Bayview St. Fund(Z)
Fairhope AL 36532
Prudential Bank & Trust C/F.... Joseph A. Caputo Prudential Diversified 7,119 (5.07%)
IRA DTD 5/31/00 Moderate Growth
424 E th St Fund(Z)
South Boston MA 02127-3045
Robert J. Scamardella
Anna Scamardella
CO-TTEES UN MATTEO
SCAMARDELLA.................... 1010 Forest Ave Prudential Diversified 16,881 (12.02%)
Staten Island, NY Moderate Growth
10310-2415 Fund(Z)
</TABLE>
B-38
<PAGE> 115
As of September 15, 2000, 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>
FUND NUMBER OF SHARES
---- ----------------
(% OF PORTFOLIO)
<S> <C> <C>
Conservative Growth Fund
Class A................................................... 41,351 (3.0%)
Class B................................................... 0
Class C................................................... 0
Class Z................................................... 0
Moderate Growth Fund
Class A................................................... 0
Class B................................................... 0
Class C................................................... 0
Class Z................................................... 91,137 (54%)
High Growth Fund
Class A................................................... 184,343 (6.39%)
Class B................................................... 0
Class C................................................... 0
Class Z................................................... 0
</TABLE>
In the event of any meetings of shareholders, Prudential Securities will
forward, or cause the forwarding of, proxy materials to beneficial owners for
which it is the record holder.
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.
PIFM is a wholly-owned subsidiary of the Prudential Insurance Company of
America. See "How the Trust is Managed -- Manager" in the Prospectus. As of
April 30, 2000 PIFM managed and/or administered open-end and closed-end
management investment companies with assets of approximately $76.2 billion.
According to the Investment Company Institute, as of September 30, 1999, the
Prudential Mutual Funds was the 20th largest family of mutual funds in the
United States.
Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), an
affiliate 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.
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. In connection
therewith, PIFM is obligated to keep certain books and records of the Trust.
PIFM also administers the Trust's corporate 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, the Trust's custodian (the Custodian), and PMFS. The management
services of PIFM for the Trust's are not exclusive under the terms of the
Management Agreement and PIFM is free to, and does, render management services
to others.
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.
B-39
<PAGE> 116
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 Investment 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 with PIFM or
the Trust's Advisers, (c) the fees and certain expenses of the Custodian and
Transfer 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, (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 (as defined in the Investment Company Act), 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.
B-40
<PAGE> 117
For the fiscal year ended July 31, 2000 and the fiscal period ended July
31, 1999 PIFM received management fees of $398,032 and $558,132 for the
Conservative Growth Fund, $467,338 and $1,084,509 for the Moderate Growth Fund
and $502,514 and $1,055,456 for the High Growth Fund, respectively.
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.
For the fiscal year ended July 31, 2000 and the fiscal period ended July
31, 1999, PIFM paid the following sub-advisory fees to the Funds' Advisers:
CONSERVATIVE GROWTH FUND
<TABLE>
<CAPTION>
YEAR ENDED
ANNUALIZED PERCENTAGE OF PERIOD ENDED JULY 31,
ADVISER AVERAGE NET ASSETS JULY 31, 1999 2000
------- --------------------------------------- ------------- ----------
<S> <C> <C> <C>
Jennison Associates .30% with respect to first $300
LLC ("Jennison").... million; .25% for amounts in excess of
$300 million $ 24,831 $ 36,353
The Prudential
Investment
Corporation
("PIC")............. .375%(1) $143,931 $215,857
Franklin Advisers,
Inc. ............... .50% $ 13,286 $ 20,433
The Dreyfus
Corporation......... .45% $ 11,857 $ 16,327
Pacific Investment
Management
Company............. .25% $ 50,867 $ 70,114
-------- --------
Total sub-advisory fees $244,772 $359,084
======== ========
</TABLE>
---------------
(1) Prior to January 1, 2000, PIC was reimbursed by PIFM for its reasonable
costs and expenses.
B-41
<PAGE> 118
MODERATE GROWTH FUND
<TABLE>
<CAPTION>
YEAR ENDED
ANNUALIZED PERCENTAGE OF PERIOD ENDED JULY 31,
ADVISER AVERAGE NET ASSETS JULY 31, 1999 2000
------- --------------------------------------- ------------- ----------
<S> <C> <C> <C>
Jennison Associates .30% with respect to first $300
LLC ("Jennison").... million; .25% for amounts in excess of
$300 million $ 37,590 $ 89,778
The Prudential
Investment
Corporation
("PIC")............. .375%(1) $166,390 $377,617
Franklin Advisers,
Inc. ............... .50% $ 23,871 $ 58,047
The Dreyfus
Corporation......... .45% $ 21,088 $ 47,247
Lazard Asset
Management.......... .40% $ 24,789 $ 56,695
Pacific Investment
Management
Company............. .25% $ 29,847 $ 66,410
-------- --------
Total sub-advisory fees $303,575 $695,794
======== ========
</TABLE>
---------------
(1) Prior to January 1, 2000, PIC was reimbursed by PIFM for its reasonable
costs and expenses.
HIGH GROWTH FUND
<TABLE>
<CAPTION>
ANNUALIZED PERCENTAGE OF PERIOD ENDED YEAR ENDED
ADVISER AVERAGE NET ASSETS JULY 31, 1999 JULY 31, 2000
------- --------------------------------------- ------------- -------------
<S> <C> <C> <C>
Jennison Associates .30% with respect to first $300
LLC ("Jennison")... million; .25% for amounts in excess of
$300 million $ 50,033 $106,426
The Prudential
Investment
Corporation
("PIC")............ .375%(1) $130,651 $371,262
Franklin Advisers,
Inc. .............. .50% $ 49,538 $113,176
The Dreyfus
Corporation........ .45% $ 44,482 $ 89,086
Lazard Asset
Management......... .40% $ 52,446 $109,307
-------- --------
Total sub-advisory fees $327,150 $789,257
======== ========
</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.
Prior to January 1, 2000, PIC was reimbursed by PIFM for its reasonable costs
and expenses.
(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.
B-42
<PAGE> 119
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 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,
2000.
<TABLE>
<CAPTION>
DISTRIBUTION FEES RECEIVED AMOUNT SPENT INITIAL SALES
FUND BY DISTRIBUTOR DISTRIBUTING CLASS A SHARES CHARGES
---- -------------------------- --------------------------- -------------
<S> <C> <C> <C>
Conservative Growth Fund............ $31,338 $23,571 $ 90,500
Moderate Growth Fund................ $87,021 $59,005 $239,300
High Growth Fund.................... $88,819 $49,751 $189,200
</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.
B-43
<PAGE> 120
CLASS B PLAN. For the fiscal period ended July 31, 2000, 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.................................... $365,743 $112,000
Moderate Growth Fund........................................ $798,551 $156,500
High Growth Fund............................................ $609,935 $137,300
</TABLE>
For the fiscal period ended July 31, 2000, 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............... $ 800 $423,200 $102,500 $279,700 $ 806,200
Moderate Growth
Fund............... $3,800 $949,400 $248,500 $574,500 $1,776,200
High Growth Fund..... $2,600 $650,700 $219,700 $503,300 $1,376,300
</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.
CLASS C. PLAN. For the fiscal period ended July 31, 2000, 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.............................. $129,543 $ 28,800 $33,700
Moderate Growth Fund.................................. $258,352 $ 86,700 $42,600
High Growth Fund...................................... $264,132 $116,400 $32,000
</TABLE>
For the fiscal period ended July 31, 2000, 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.................. $ 300 $ 4,800 $ 69,900 $16,100 $ 91,100
Moderate Growth Fund.... $1,300 $12,100 $153,000 $49,700 $216,100
High Growth Fund........ $1,200 $ 4,400 $176,800 $67,200 $249,600
</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-44
<PAGE> 121
* * *
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.
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.
B-45
<PAGE> 122
(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), 194 Wood Ave. South Iselin, New
Jersey 08853, serves as the Transfer 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, a new account
set-up fee for each manually-established account and a monthly inactive zero
balance account fee per shareholder account. 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, NY
10036, serves as the Trust's independent accountants, and in that capacity
audits the annual financial statements of the Trust.
CODES OF ETHICS
The Board of Trustees of the Fund has adopted a Code of Ethics. In
addition, the Manager, the Advisers and the Distributor have each adopted a Code
of Ethics (the Codes). The Codes permit personnel subject to the Codes to invest
in securities, including securities that may be purchased or held by the Fund.
However, the protective provisions of the Codes prohibit certain investments and
limit such personnel from making investments during periods when the Fund is
making such investments. The Codes are on public file with, and are available
from, the Commission.
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 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
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<PAGE> 123
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 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. Sec-
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<PAGE> 124
tion 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 and the fiscal year ended July 31, 2000:
<TABLE>
<CAPTION>
CONSERVATIVE CONSERVATIVE MODERATE MODERATE HIGH HIGH
GROWTH FUND GROWTH FUND GROWTH FUND GROWTH FUND GROWTH FUND GROWTH FUND
------------ ------------ ------------ ----------- ------------ -----------
PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31, JULY 31, JULY 31, JULY 31,
1999 2000 1999 2000 1999 2000
------------ ------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Total brokerage commissions paid by
the Fund.......................... $44,000 $21,448 $80,300 $113,057 $119,128 $183,802
Total brokerage commissions paid to
Prudential Securities or
affiliates of the Trust or the
Advisers.......................... $ 1,000 $ 282 $ 0 $ 0 $ 1,122 $ 1,068
Percentage of total brokerage
commissions paid to Prudential
Securities or affiliates of the
Trust or the Advisers............. 2.3% 1.0% 0% 0 0.9% 0.6%
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............. 0.2% 0% 0% 0 0.5% 0%
</TABLE>
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, 2000. As of that date,
each fund held securities of the following brokers and dealers:
CONSERVATIVE GROWTH FUND
<TABLE>
<CAPTION>
VALUE OF HOLDINGS
NAME AT JULY 31, 2000
---- -----------------
<S> <C>
Salomon Smith Barney Inc. .................................. 1,850,000
Bear, Stearns & Co., Inc. .................................. 1,300,000
Merrill Lynch, Pierce Fenner & Smith, Inc. ................. 1,125,300
Greenwich Capital Markets, Inc. ............................ 1,100,000
ABN AMBRO, Inc. ............................................ 1,000,000
Morgan Stanley Dean Witter & Co. ........................... 602,000
Lehman Brothers Inc. ....................................... 301,000
</TABLE>
MODERATE GROWTH FUND
<TABLE>
<CAPTION>
VALUE OF HOLDINGS
NAME AT JULY 31, 2000
---- -----------------
<S> <C>
ABN AMRO, Inc. ............................................. $2,890,000
Bear, Stearns & Co., Inc. .................................. 2,890,000
Greenwich Capital Markets, Inc. ............................ 3,179,000
Merrill Lynch, Pierce, Fenner & Smith, Inc. ................ 2,824,500
Salomon Smith Barney, Inc. ................................. 4,479,500
</TABLE>
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<PAGE> 125
HIGH GROWTH FUND
<TABLE>
<CAPTION>
VALUE OF HOLDINGS
NAME AT JULY 31, 2000
---- -----------------
<S> <C>
ABN AMRO, Inc. ............................................. $3,500,000
Bear, Stearns & Co., Inc. .................................. 3,500,000
Greenwich Capital Markets, Inc. ............................ 3,850,000
Merrill Lynch, Pierce, Fenner & Smith, Inc. ................ 3,396,050
Salomon Smith Barney, Inc. ................................. 5,425,000
</TABLE>
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
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<PAGE> 126
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.
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 (i) at the time of purchase (Class A or
Class C shares) or (ii) on a deferred basis (Class B and 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 investing (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: meet the investment objective
and policies of the Fund, are liquid and not subject to restrictions on resale,
have a value that is readily ascertainable via listing on or trading in a
recognized United States or international exchange or market, and are approved
by the Trust's investment adviser.
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Trust and the
Distributor, the Distributor sells Class A shares at net asset value plus a
maximum front-end sales charge of 5%, sells Class C shares* of each Fund are
sold with a front-end sales charge of 1%, and sells Class B* and Class Z
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<PAGE> 127
shares are sold at NAV. Using the NAV of each Fund at July 31, 2000, 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..... $11.06 $12.03 $12.95
Maximum sales charge (5% of offering price)................ .58 .63 .68
------ ------ ------
Maximum offering price to public........................... $11.64 $12.66 $13.63
====== ====== ======
CLASS B
Net asset value, offering price and redemption price per
Class B share*........................................... $11.05 $12.01 $12.86
====== ====== ======
CLASS C
Net asset value and redemption price per Class C share*.... $11.05 $12.01 $12.86
Sales charge (1% of offering price)........................ .11 .12 .13
------ ------ ------
Offering price to public................................... $11.16 $12.13 $12.99
====== ====== ======
CLASS Z
Net asset value, offering price and redemption price per
Class Z share............................................ $11.05 $12.05 $12.98
====== ====== ======
</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 the each
Fund's current fees and expenses:
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. See "Reduction
and Waiver of Initial Sales Charge -- Class A Shares" below. 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
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<PAGE> 128
distribution-related fee on those shares plus, in the case of Class C shares,
the 1% initial sales charge to 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,
without the initial sales charge 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 Prudential,
- 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 pension, profit sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code, deferred
compensation and annuity plans under Section 457 and 403(b)(7) of the
Internal Revenue Code of 1986, as amended (the Internal Revenue Code) and
nonqualified plans for which the Fund is an available option
(collectively, 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
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<PAGE> 129
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 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 dealer
facilitating the transaction at the time of the sale that such 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 "How to Buy, Sell and Exchange Shares of the
Funds -- Reducing or Waiving Class A's Initial Sales Charge" 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 the dealer 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
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<PAGE> 130
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 plan.
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 an investor 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 shares totaling 5% of the dollar amount of the letter of
intent will be held by the Transfer Agent in the name of the investor. 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 investor'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 satisfied 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 Transfer Agent, Distributor or the dealer 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 AND CLASS C SHARES
The offering price of Class B shares is the NAV next determined following
receipt of an order in proper form by the Transfer Agent, your Dealer or the
Distributor. Class C shares are sold with an initial sales charge of 1%.
Redemptions of Class B and Class C 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 at the
time of sale of up to 4% of the purchase price of Class B shares to Dealer,
financial advisers and other persons who sell Class B shares. This facilitates
the ability of the Funds 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. See "How the Trust is Managed -- Distributor." In
connection with the sale of Class C shares, the Distributor will pay at the time
of the sale, from its own resources, dealers, financial advisers and other
persons which distribute Class C shares, a sales commission of up to 1% of the
purchase price.
WAIVER OF INITIAL SALES CHARGE -- CLASS C SHARES
Benefit Plans. Certain group retirement plans may purchase Class C shares
at NAV, 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 your Dealer if you are entitled to this waiver
and provide it with such supporting documents as it may deem appropriate.
CLASS Z SHARES
Class Z shares of the Funds currently are available for purchase by the
following categories of investors:
- Benefit Plans, provided such Benefit Plans (in combination with other
plans sponsored by the same employer or group of related employers) have
at least $50 million in defined contribution assets,
- participants in any fee-based program sponsored by an affiliate of the
Distributor which includes mutual funds as investment options and for
which the Fund is an available option,
- 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,
- Benefit Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services and as of September 20, 1996,
(a) were Class Z shareholders of the Prudential Mutual Funds or (b)
executed a letter of intent to purchase Class Z shares of the Prudential
Mutual Funds,
- the Prudential Securities Cash Balance Pension Plan, an employee defined
benefit plan sponsored by Prudential Securities,
- current and former Directors/Trustees of Prudential mutual funds
(including the Trust),
- employees of Prudential and/or Prudential Securities who participate, in
a Prudential-sponsored employee retirement/tax qualified plan 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.
Class Z shares of each Fund may also be purchased by certain savings,
retirement and deferred compensation plans, qualified or non-qualified under the
Internal Revenue Code, provided that (i) the plan purchases shares of such Fund
pursuant to an investment management agreement with The Prudential Insurance
Company of America or its affiliates, (ii) such Fund is an available investment
option under the agreement and (iii) the plan will participate in the PruArray
and SmartPath Programs (benefit plan recordkeeping services). These plans
include Benefit Plans.
RIGHTS OF ACCUMULATION
Reduced sales charges also are 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 the Funds 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.
Rights of accumulation may
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be applied across the classes of shares of Prudential mutual funds. 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. 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, the dealer or the Transfer Agent must be notified at the
time of purchase that the shareholder is entitled to a reduced sales charge. The
reduced sales charge 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.
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 through a dealer, your dealer 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 dealer 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 must be received by the Transfer Agent,
the Distributor or your dealer 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 8157, Philadelphia, PA 19101, to the Distributor or to your
broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (i) exceed
$100,000, (ii) are to be paid to a person other than the shareholder, (iii) are
to be sent to an address other than the address on the Transfer Agent's records,
or (iv) are to be paid to a corporation, partnership, trust or fiduciary, the
signature(s) on the redemption request or stock power must be signature
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, dealer, or credit union. The Transfer Agent
reserves the right to request additional information from, and make reasonable
inquiries of, any eligible guarantor institution.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your dealer
of the certificate and written request, except as indicated below. If you hold
shares through Prudential Securities payment for shares presented for redemption
will be credited to your account at your dealer, unless you indicate otherwise.
Such payment may be postponed or the right of redemption suspended at times (a)
when the New York Stock Exchange is closed for other than customary weekends and
holidays, (b) when trading on such Exchange is restricted, (c) 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 (d) during any other period when the
Securities and Exchange Commission (SEC), by order, so permits; provided that
applicable rules and regulations of the SEC shall govern as to whether the
conditions prescribed in (b), (c) or (d) exist.
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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. See "Sales of Shares" above. 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 qualified or tax-deferred retirement plan
or account, whose account has a net asset value of less than $500 due to a
redemption. The Trust will give such 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 one 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 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.
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<PAGE> 134
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 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, 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 qualified or 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 effected through 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.
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<PAGE> 135
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 or your broker 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 certified copy of the shareholder's death
certificate or, in the case of a trust, a
certified copy of the grantor's death
certificate, plus a copy of the trust agreement
identifying the grantor.
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 is permanently disabled. In the
impairment which can be expected to result in case of a trust, a copy of the trust agreement
death or to be of long-continued and indefinite identifying the grantor will be required. The
duration. letter must also indicate the date of
disability.
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 (excluding
shares acquired through the automatic reinvestment of dividends and other
distributions) eligible to convert to Class A shares (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
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<PAGE> 136
(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%), 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 Shareholder Investment 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
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<PAGE> 137
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 to the Transfer Agent within 30 days after the payment date. The
reinvestment will be made at the NAV next determined after receipt of the check
by the Transfer Agent. Shares purchased with reinvested dividends or
distributions will not be subject to any CDSC upon redemption.
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 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 8:00 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 Trust 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. The Exchange Privilege is available only in states where the
exchange may legally be made.
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 must be returned in order for
the shares to be exchanged. See "Sales of Shares" above.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 8157, Philadelphia, PA
19101.
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 Class
A shares of Prudential Short-Term Corporate Bond Fund, Inc., 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)
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<PAGE> 138
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 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 exchanged 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
B-62
<PAGE> 139
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 dealer 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 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 dealer. The special 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 for the
1993-1994 academic year 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 may be worth more or less than their original cost
when redeemed.
B-63
<PAGE> 140
AUTOMATIC INVESTMENT PLAN (AIP)
Under AIP, an investor may arrange to have a fixed amount automatically
invested in shares of the Funds 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 Funds. The
investor's bank must be a member of the Automatic Clearing House System.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your dealer.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through
Prudential Securities or the Transfer Agent. Such plan provides for monthly, or
quarterly, semi-annual or annual redemption checks in any amount, except as
provided below, up to the value of the shares in the shareholder's account.
Systematic 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) redemptions may not be for less than $100 and (3) the
shareholder must elect to have all dividends and/or distributions automatically
reinvested. See "Automatic Reinvestment of Dividends or Distributions" above.
The Transfer Agent, the Distributor or the applicable dealer acts as an
agent for the shareholder in redeeming sufficient full and fractional shares to
provide the amount of the systematic 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.
Systematic withdrawals should not be considered as dividends, yield or
income. If systematic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each systematic withdrawal constitutes a redemption of shares,
and any gain or loss realized must be recognized for federal income tax
purposes. In addition, systematic 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 and/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-64
<PAGE> 141
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 pursuit of greater diversification,
protection from interest rate movements or access to different management
styles. In the event that 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-65
<PAGE> 142
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 NAVs 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-66
<PAGE> 143
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-67
<PAGE> 144
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-68
<PAGE> 145
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.
Below are the aggregate total returns for each Fund's share classes for the
period ended July 31, 2000.
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION 11/18/98
------ ------- -------- -------------------
<S> <C> <C> <C> <C>
Conservative Growth Fund
Class A...................................... 11.73 N/A N/A 17.69%
Class B...................................... 10.89 N/A N/A 16.18
Class C...................................... 10.89 N/A N/A 16.18
Class Z...................................... 11.84 N/A N/A 18.08
Moderate Growth Fund
Class A...................................... 13.96 N/A N/A 24.75%
Class B...................................... 12.88 N/A N/A 23.02
Class C...................................... 12.88 N/A N/A 23.02
Class Z...................................... 14.18 N/A N/A 25.25
High Growth Fund
Class A...................................... 18.99 N/A N/A 37.08%
Class B...................................... 18.13 N/A N/A 35.49
Class C...................................... 18.13 N/A N/A 35.49
Class Z...................................... 19.23 N/A N/A 37.83
</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.
ADVERTISING. Advertising materials for the Fund may include biographical
information relating to its portfolio manager(s), and may include or refer to
commentary by the Fund's manager(s) concerning investment style, investment
discipline, asset growth, current or past business experience, business
capabilities, political, economic or financial conditions and other matters of
general interest to investors. Advertising materials for the Fund also may
include mention of The Prudential Insurance Company of America, its affiliates
and subsidiaries, and reference the assets, products and services of those
entities.
From time to time, advertising materials for the Fund may include
information concerning retirement an investing for retirement, may refer to the
approximate number of Fund shareholders and may refer to Lipper rankings or
Morningstar ratings, other related analysis supporting those ratings, other
industry publications, business periodicals and market indices. In addition
advertising materials may reference studies or analyses performed by the manager
or its affiliates. Advertising materials for sector funds, funds that focus on
market capitalizations, index funds and international/global funds may discuss
the potential benefits and risks of that investment style. Advertising materials
for fixed income funds may discuss the benefits and risks of investing in the
bond market including discussions of credit quality, duration and maturity.
B-69
<PAGE> 146
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS 107.6%
Common Stocks 36.1%
-------------------------------------------------------------------------------------
Advertising 0.2%
1,300 Omnicom Group, Inc. $ 110,500
400 Penton Media, Inc. 13,850
475 True North Communications, Inc. 23,186
----------------
147,536
-------------------------------------------------------------------------------------
Aerospace/Defense 0.2%
275 ADVO, Inc. 11,258
1,525 Gencorp, Inc. 12,105
1,053 General Motors Corp., Class H 59,955
6,300 Loral Space & Communications, Inc.(a) 32,681
625 Scott Technologies, Inc. 12,031
----------------
128,030
-------------------------------------------------------------------------------------
Airlines
800 Airborne Freight Corp. 12,350
350 Skywest, Inc. 15,619
----------------
27,969
-------------------------------------------------------------------------------------
Aluminum 0.4%
8,600 Alcoa, Inc. 260,150
787 Reliance Steel & Aluminum Co. 16,527
----------------
276,677
-------------------------------------------------------------------------------------
Apparel 0.1%
575 American Eagle Outfitters, Inc.(a) 8,553
600 Kellwood Co. 13,425
1,050 Polo Ralph Lauren Corp. 16,997
675 Russell Corp. 13,289
375 Springs Industries, Inc. 12,094
----------------
64,358
</TABLE>
See Notes to Financial Statements
B-70
<PAGE> 147
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
Audio/Visual 0.1%
300 Harman International Industries, Inc. $ 18,975
700 Polycom, Inc. 66,402
----------------
85,377
-------------------------------------------------------------------------------------
Auto & Truck 0.1%
850 Arvinmeritor, Inc. 13,281
400 Borg-Warner Automotive, Inc. 13,575
768 Delphi Automotive Systems Corp. 11,376
1,675 Dura Automotive Systems, Inc.(a) 17,274
825 Lear Corp. 19,233
375 Superior Industries International, Inc. 11,273
----------------
86,012
-------------------------------------------------------------------------------------
Banking 0.9%
1,225 Bancorpsouth, Inc. 18,605
575 BancWest Corp. 10,602
4,200 Bank America Corp. 198,975
980 Bank of New York Co., Inc. 45,876
500 Bank United Corp. 18,219
1,505 BankNorth Group, Inc. 23,045
600 BSB Bancorp, Inc. 12,825
500 City National Corp. 18,344
525 Corus Bankshares, Inc. 15,356
1,550 Cullen/Frost Bankers, Inc. 44,078
1,558 CVB Financial Corp. 24,538
75 First Citizens Bancshares, Inc. 4,575
900 Fulton Financial Corp. 19,350
2,300 Golden State Bancorp, Inc.(a) 43,987
375 Greater Bay Bancorp 20,180
725 Harbor Florida Bancshares, Inc. 8,247
1,225 MAF Bancorp, Inc. 24,423
800 PFF Bancorp, Inc. 13,900
525 Queens County Savings Bank, Inc. 12,141
600 Southwest Bancorp(a) 15,712
1,212 Washington Federal, Inc. 22,725
825 Westamerica Bancorporation 22,894
</TABLE>
See Notes to Financial Statements
B-71
<PAGE> 148
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
425 Whitney Holding Corp. $ 15,805
----------------
654,402
-------------------------------------------------------------------------------------
Building & Construction 0.5%
1,800 American Standard Co.(a) 80,212
2,500 Centex Corp. 59,844
1,400 D.R. Horton, Inc. 21,700
200 Dycom Industries, Inc.(a) 8,550
675 Kaufman & Broad Home Corp. 13,205
1,325 M.D.C. Holdings, Inc. 26,500
1,600 Pulte Corp. 36,700
400 Texas Industries, Inc. 12,975
1,300 Thomas Industries, Inc.(a) 27,137
500 Toll Brothers, Inc. 12,094
1,375 Webb Delaware Corp. 20,969
----------------
319,886
-------------------------------------------------------------------------------------
Cable 0.1%
500 Belden, Inc. 12,563
425 Cable Design Technologies Corp. 14,981
1,125 General Cable Corp. 9,703
----------------
37,247
-------------------------------------------------------------------------------------
Chemicals 0.4%
375 Albany Molecular Research, Inc. 20,766
800 Albemarle Corp. 19,750
475 Arch Chemicals, Inc. 9,500
100 Cambrex Corp. 4,519
725 Cytec Industries, Inc.(a) 22,656
1,800 Eastman Chemical Co. 84,375
225 H.B. Fuller Co. 8,690
1,100 Olin Corp. 17,256
250 Om Group, Inc. 11,859
800 Spartech Corp. 21,450
450 The Geon Co. 7,397
725 The Lubrizol Corp. 15,497
875 W.R. Grace & Co.(a) 18,516
----------------
262,231
</TABLE>
See Notes to Financial Statements
B-72
<PAGE> 149
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
Commercial Products/Services 0.1%
700 John H. Harland Co.(a) $ 9,362
1,400 Luminant Worldwide Corp.(a) 11,375
800 Potash Corp. of Saskatchewan, Inc. 42,950
325 United Stationers, Inc. 9,466
100 Ventro Corp. 1,206
----------------
74,359
-------------------------------------------------------------------------------------
Computers 2.2%
1,500 ASM Lithography Holding N.V. (Netherlands) 59,625
700 Axent Technologies, Inc.(a) 17,238
600 Brooktrout, Inc.(a) 18,150
3,200 Catapult Communications Corp.(a) 42,600
1,500 Citrix Systems, Inc.(a) 22,875
12,000 Compaq Computer Corp. 336,750
1,400 Comverse Technology, Inc.(a) 122,850
2,300 Dell Computer Corp.(a) 101,056
2,900 EMC Corp.(a) 246,862
2,800 Hewlett-Packard Co. 305,725
525 InFocus Corp.(a) 18,375
775 Phoenix Technologies, Ltd.(a) 13,175
1,500 Sun Microsystems, Inc.(a) 158,156
500 Verisign, Inc.(a) 79,344
----------------
1,542,781
-------------------------------------------------------------------------------------
Computer Services 0.8%
1,700 Affiliated Computer Services, Inc.(a) 76,606
100 AnswerThink Consulting Group(a) 1,681
6,000 Cisco Systems, Inc.(a) 392,625
2,700 NetSolve, Inc.(a) 63,450
475 Onyx Software Corp.(a) 11,489
100 Predictive Systems, Inc.(a) 2,200
325 PurchasePro.Com, Inc.(a) 12,675
337 RadiSys Corp.(a) 20,726
600 Virage Logic Corp.(a) 7,200
----------------
588,652
-------------------------------------------------------------------------------------
Consumer Products/Services 0.1%
787 Fossil, Inc.(a) 14,363
6,600 Service Corp. International(a) 16,912
700 Tupperware Corp. 13,606
----------------
44,881
</TABLE>
See Notes to Financial Statements
B-73
<PAGE> 150
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
Diversified Manufacturing 0.5%
325 Aptargroup, Inc. $ 8,105
1,125 Carpenter Technology Corp. 34,453
500 Corning, Inc. 116,969
600 Cuno, Inc. 18,150
3,100 General Electric Co. 159,456
825 Hon Industries, Inc. 22,017
275 Libbey, Inc. 8,577
500 Trinity Industries, Inc. 9,625
----------------
377,352
-------------------------------------------------------------------------------------
Electrical Services 0.1%
225 Littelfuse, Inc. 7,931
300 PerkinElmer, Inc. 19,181
250 RGS Energy Group, Inc. 5,735
----------------
32,847
-------------------------------------------------------------------------------------
Electronic Components 1.9%
1,000 Alpha Industries, Inc.(a) 34,063
700 Applied Micro Circuits Corp. 104,475
4,500 Arrow Electronics, Inc.(a) 148,781
425 ATMI, Inc.(a) 10,944
1,700 Avnet, Inc. 96,794
400 Broadcom Corp.(a) 89,700
125 Brooks Automation, Inc.(a) 6,203
150 Electro Scientific Industries, Inc.(a) 6,816
425 Electroglas, Inc.(a) 8,500
900 Flextronics International, Ltd.(a) 63,717
2,300 Gentex Corp.(a) 52,325
275 Integrated Silicon Solution, Inc. 5,775
525 Kemet Corp.(a) 12,600
1,700 Novellus Systems, Inc.(a) 91,694
700 PMC-Sierra, Inc.(a) 135,712
75 Power-One, Inc.(a) 8,855
100 QLogic Corp.(a) 7,450
700 Rogers Corp. 25,025
2,100 STMicroelectronics N.V. (Netherlands) 119,569
900 Tektronix, Inc. 55,350
3,500 Texas Instruments, Inc. 205,406
175 Varian Semiconductor Equipment, Inc. 8,498
300 Veeco Instruments, Inc.(a) 23,625
----------------
1,321,877
</TABLE>
See Notes to Financial Statements
B-74
<PAGE> 151
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
Entertainment 0.1%
200 Anchor Gaming(a) $ 10,837
425 Gaylord Entertainment Co. 10,545
500 SFX Entertainment, Inc.(a) 23,000
----------------
44,382
-------------------------------------------------------------------------------------
Financial Services 2.2%
1,175 Allied Capital Corp. 22,252
3,800 American Express Co. 215,412
725 Arthur J. Gallagher & Co. 35,570
5,600 Citigroup, Inc. 395,150
200 Dain Rauscher Corp. 13,563
1,300 Doral Financial Corp. 16,900
850 Downey Financial Corp. 29,750
450 Eaton Vance Corp. 23,316
2,550 Federated Investors, Inc. 66,779
250 Investment Technology Group 12,156
1,100 LaBranche & Co., Inc.(a) 22,412
1,200 Merrill Lynch & Co., Inc. 155,100
1,350 Metris Companies, Inc. 39,572
3,300 Morgan Stanley Dean Witter & Co. 301,125
425 National Discount Brokers Group, Inc.(a) 13,998
2,000 Schwab (Charles) Corp. 72,250
2,375 Silicon Valley Bancshares 104,055
400 Triad Guaranty, Inc. 9,700
900 Webster Financial Corp. 20,137
----------------
1,569,197
-------------------------------------------------------------------------------------
Food & Beverage 0.7%
175 Adolph Coors Co. 11,025
475 Dean Foods Co. 16,536
600 Fleming Cos., Inc. 9,413
900 Mettler-Toledo International, Inc.(a) 36,450
725 Michael Foods, Inc. 17,400
8,200 Nabisco Group Holding Corp.(a) 217,300
625 Performance Food Group Co.(a) 20,586
1,125 Riviana Foods, Inc. 18,281
</TABLE>
See Notes to Financial Statements
B-75
<PAGE> 152
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
4,900 Sara Lee Corp. $ 90,344
700 Smithfield Foods, Inc.(a) 19,906
650 Universal Foods Corp. 12,675
----------------
469,916
-------------------------------------------------------------------------------------
Health Care 3.3%
1,025 Apria Healthcare Group, Inc.(a) 15,311
1,350 Bergen Brunswig Corp. 11,813
525 Datascope Corp.(a) 19,819
9,300 Foundation Health Systems, Inc.(a) 135,431
12,800 HCA Healthcare Co. 435,200
1,100 Health Care Properties Investments, Inc. 32,725
10,400 HEALTHSOUTH Corp.(a) 61,750
100 Oxford Health Plans, Inc.(a) 2,394
2,000 Pacificare Health Systems, Inc.(a) 130,000
1,300 Parexel International Corp.(a) 12,919
500 Patterson Dental Co.(a) 13,250
3,975 Pharmacia Corp. 217,631
14,400 Tenet Healthcare Corp.(a) 438,300
525 Trigon Healthcare, Inc.(a) 27,825
3,900 UnitedHealth Group, Inc. 319,068
525 Varian Med Systems, Inc. 22,575
5,100 Wellpoint Health Networks, Inc.(a) 444,656
----------------
2,340,667
-------------------------------------------------------------------------------------
Home Furnishings 0.1%
525 Ethan Allen Interiors, Inc. 13,387
925 Furniture Brands International, Inc.(a) 13,702
----------------
27,089
-------------------------------------------------------------------------------------
Hotels 0.1%
6,700 Hilton Hotels Corp. 68,675
8,500 Meristar Hotels & Resorts, Inc.(a) 22,844
----------------
91,519
-------------------------------------------------------------------------------------
Human Resources 0.1%
2,300 Careerbuilder, Inc.(a) 18,040
450 CDI Corp.(a) 8,944
</TABLE>
See Notes to Financial Statements
B-76
<PAGE> 153
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
775 Spherion Corp.(a) $ 14,822
----------------
41,806
-------------------------------------------------------------------------------------
Insurance 2.1%
800 Alfa Corp. 14,600
1,100 American Financial Group, Inc. 27,500
900 American General Corp. 60,019
2,363 American International Group, Inc. 207,162
600 Annuity & Life Reinsurance Holdings, Ltd. 14,775
4,600 AXA Financial, Inc. 175,950
4,500 Chubb Corp. 333,000
675 Commerce Group, Inc. 18,731
415 Fidelity National Financial, Inc. 7,340
550 First American Financial Corp. 8,559
3,100 John Hancock Financial Services, Inc.(a) 73,238
650 Leucadia National Corp. 17,347
725 MONY Group, Inc. 25,919
6,100 Old Republic International Corp. 136,106
1,350 Presidential Life Corp. 19,491
400 Quotesmith.com, Inc.(a) 975
468 Radian Group, Inc. 28,490
2,600 Reinsurance Group of America, Inc. 82,713
6,600 SAFECO Corp. 152,212
2,200 St. Paul Companies, Inc. 97,762
400 StanCorp Financial Group, Inc. 13,800
----------------
1,515,689
-------------------------------------------------------------------------------------
Internet 0.3%
350 Agency Common Limited 7,547
100 Alteon Websystems, Inc.(a) 13,194
2,100 America Online, Inc.(a) 111,956
100 Go2Net, Inc.(a) 5,906
100 Interwoven, Inc.(a) 6,456
100 ITXC Corp.(a) 1,813
375 Keynote Systems, Inc.(a) 14,227
400 Liberate Technologies, Inc.(a) 9,175
225 Proxicom, Inc.(a) 9,295
100 Software.com, Inc.(a) 10,087
</TABLE>
See Notes to Financial Statements
B-77
<PAGE> 154
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
100 Viant Corp.(a) $ 3,300
100 Ziff-Davis, Inc.(a) 1,713
----------------
194,669
-------------------------------------------------------------------------------------
Machinery 0.2%
275 Helix Technology Corp. 8,938
400 IDEX Corp. 13,200
1,025 JLG Industries, Inc. 10,442
450 Kulicke & Soffa Industries, Inc.(a) 20,306
1,425 Lincoln Electric Holdings, Inc.(a) 21,553
575 Manitowoc Co., Inc. 14,159
575 Milacron, Inc. 8,266
775 Terex Corp. 12,787
575 Toro Co. 17,322
100 Varian, Inc.(a) 4,212
----------------
131,185
-------------------------------------------------------------------------------------
Media 0.9%
6,600 AT&T Corp. Liberty Media 146,850
450 Banta Corp. 8,690
2,400 Clear Channel Communications, Inc.(a) 182,850
300 Cumulus Media, Inc.(a) 2,925
250 Entercom Communications Corp. 9,703
600 Gemstar TV Guide International, Inc. 36,488
650 Lee Enterprises, Inc. 16,562
1,000 Primedia, Inc. 92,250
250 Scholastic, Corp.(a) 15,969
300 Time Warner, Inc. 23,006
1,100 Univision Communications, Inc.(a) 136,675
----------------
671,968
-------------------------------------------------------------------------------------
Medical Products/Services 0.5%
2,300 Amgen, Inc.(a) 149,356
700 Genentech, Inc.(a) 106,488
125 Quest Diagnostics, Inc.(a) 12,617
2,200 Serono SA (Switzerland) 59,400
----------------
327,861
</TABLE>
See Notes to Financial Statements
B-78
<PAGE> 155
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
Metals 0.3%
550 Cleveland-Cliffs, Inc. $ 13,647
850 Commercial Metals Co. 24,969
525 Kaydon Corp. 10,992
2,300 Phelps Dodge Corp. 93,581
375 Precision Castparts Corp. 23,977
850 Worthington Industries, Inc. 8,978
----------------
176,144
-------------------------------------------------------------------------------------
Mining 0.3%
8,400 Freeport-McMoRan Copper & Gold, Inc.(a) 71,925
6,000 Newmont Mining Corp. 106,500
----------------
178,425
-------------------------------------------------------------------------------------
Networking 0.3%
100 Adaptec, Inc.(a) 2,475
475 Anixter International, Inc.(a) 13,805
200 C-COR.net Corp.(a) 5,287
500 Juniper Networks, Inc.(a) 71,219
2,100 Metromedia Fiber Network, Inc.(a) 73,762
500 Network Appliance, Inc.(a) 43,094
----------------
209,642
-------------------------------------------------------------------------------------
Office Equipment & Supplies 0.3%
5,500 Harris Corp. 188,375
5,500 Lanier Worldwide, Inc.(a) 3,781
----------------
192,156
-------------------------------------------------------------------------------------
Oil & Gas 1.5%
400 Amerada Hess Corp. 24,200
3,936 BP Amoco PLC 205,902
1,425 Energen Corp. 32,063
775 Helmerich & Payne, Inc. 24,800
1,280 Kerr-McGee Corp. 70,240
2,500 Keyspan Corp. 79,375
2,600 Marine Drilling Co., Inc.(a) 56,550
2,200 Newfield Exploration Co.(a) 74,938
</TABLE>
See Notes to Financial Statements
B-79
<PAGE> 156
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
1,600 Nuevo Energy Co. $ 24,400
2,700 Occidental Petroleum Corp. 54,675
900 Oneok, Inc. 24,019
525 Patterson Energy, Inc. 13,092
1,400 Schlumberger, Ltd. 103,512
3,344 Total SA, ADR (France) 245,993
750 Valero Energy Corp. 19,453
----------------
1,053,212
-------------------------------------------------------------------------------------
Oil & Gas Exploration/Production 0.1%
775 Berry Petroleum Co. 14,095
725 Mitchell Energy & Development Corp. 23,110
250 St. Mary Land & Exploration Co. 7,484
425 Ultramar Diamond Shamrock Corp. 9,722
----------------
54,411
-------------------------------------------------------------------------------------
Paper & Packaging 1.5%
450 Chesapeake Corp. 11,784
1,500 Fort James Corp. 45,844
6,900 Georgia-Pacific Corp. 171,206
2,100 Georgia-Pacific Corp. (Timber Group) 63,656
4,100 International Paper Co. 139,400
4,800 Mead Corp. 121,800
1,850 Pactiv Corp. 17,113
900 Pope & Talbot, Inc. 17,325
2,050 Rayonier, Inc. 83,410
2,700 Temple-Inland, Inc. 117,281
3,100 Weyerhaeuser Co. 141,631
4,700 Willamette Industries, Inc. 142,469
----------------
1,072,919
-------------------------------------------------------------------------------------
Pharmaceuticals 1.2%
325 Alpharma, Inc. 21,287
3,100 American Home Products Corp. 164,494
775 Bindley Western Industries, Inc. 20,392
1,200 Lilly (Eli) & Co. 124,650
1,300 Inhale Therapeutic Systems, Inc.(a) 105,544
7,950 Pfizer, Inc. 342,844
</TABLE>
See Notes to Financial Statements
B-80
<PAGE> 157
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
600 Waters Corp.(a) $ 71,175
----------------
850,386
-------------------------------------------------------------------------------------
Photography 0.5%
6,100 Eastman Kodak Co. 334,737
-------------------------------------------------------------------------------------
Real Estate Investment Trusts 0.7%
200 Alexandria Real Estate Equities, Inc. 7,163
900 Amli Residential Properties Trust 21,937
925 Arden Reality, Inc. 24,512
500 Avalonbay Communities, Inc. 23,562
900 Bradley Real Estate, Inc. 19,350
750 BRE Properties, Inc. 24,328
875 Cabot Industrial Trust Corp. 17,937
450 Camden Property Trust 14,063
300 Catellus Development Corp.(a) 5,175
600 Developers Diversified Reality Corp. 9,450
625 First Industrial Reality Trust, Inc. 20,000
750 Franchise Finance Corp. of America 18,000
625 Gables Residential Trust 16,992
300 General Growth Properties, Inc. 10,163
750 Health Care REIT, Inc. 13,500
950 Highwoods Properties, Inc. 25,650
650 Hospitality Properties Trust 16,088
1,800 JDN Realty Corp. 18,900
2,300 Meristar Hospitality Corp. 51,031
1,300 Nationwide Health Properties, Inc. 20,475
1,375 Reckson Associates Reality Corp. 36,094
850 Regency Reality Corp. 20,400
200 SL Green Reality Corp. 5,938
875 Summit Properties, Inc. 20,891
550 Weingarten Realty Investors 22,756
----------------
484,355
-------------------------------------------------------------------------------------
Restaurants 0.4%
3,500 CKE Restaurants, Inc. 10,281
15,400 Darden Restaurants, Inc. 251,213
300 Jack in the Box, Inc.(a) 6,431
</TABLE>
See Notes to Financial Statements
B-81
<PAGE> 158
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
950 Ruby Tuesday, Inc. $ 11,697
2,225 Ryan's Family Steak Houses, Inc.(a) 20,303
----------------
299,925
-------------------------------------------------------------------------------------
Retail 2.6%
575 Alberto-Culver Co. 17,466
1,225 Ames Department Stores, Inc. 8,728
550 BJ's Wholesale Club, Inc.(a) 16,466
3,500 Consolidated Stores Corp.(a) 41,781
6,700 Dillards, Inc. (Class 'A' Stock) 91,706
500 Dress Barn, Inc.(a) 10,375
1,200 Estee Lauder Cos., Inc. 52,800
275 Factory 2 U, Inc. 11,413
4,075 Gap, Inc. 145,936
6,800 Home Depot, Inc. 351,900
9,700 IKON Office Solutions, Inc. 39,406
2,100 J.C. Penney Co., Inc. 33,862
14,400 Kmart Corp.(a) 100,800
3,800 Kohl's Corp.(a) 215,650
400 Michaels Stores, Inc.(a) 17,325
700 Pep Boys - Manny, Moe & Jack, Inc. 4,069
1,350 Pier 1 Imports, Inc. 16,116
3,800 RadioShack Corp. 214,225
1,350 Ross Stores, Inc. 20,756
100 Sears, Roebuck & Co. 2,988
3,400 Tiffany & Co. 116,450
4,500 Toys 'R' Us, Inc.(a) 74,250
1,300 Venator Group, Inc. 18,363
3,800 Wal-Mart Stores, Inc. 208,762
675 Zale Corp.(a) 25,228
----------------
1,856,821
-------------------------------------------------------------------------------------
Semiconductors 0.7%
1,600 Applied Materials, Inc.(a) 121,400
100 Cirrus Logic, Inc.(a) 1,938
550 Gasonics International Corp.(a) 13,200
5,400 Intel Corp. 360,450
</TABLE>
See Notes to Financial Statements
B-82
<PAGE> 159
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
100 Micrel, Inc.(a) $ 5,007
----------------
501,995
-------------------------------------------------------------------------------------
Shipbuilding
275 Newport News Shipbuilding, Inc. 11,103
-------------------------------------------------------------------------------------
Software 0.9%
125 Allaire Corp.(a) 3,857
100 Broadbase Software, Inc.(a) 2,356
1,800 Broadvision, Inc.(a) 65,138
1,400 Computer Associates International, Inc. 34,738
100 E Piphany, Inc. 9,306
100 Exchange Applications, Inc.(a) 2,200
800 HNC Software, Inc.(a) 35,300
100 Informatica Corp.(a) 8,000
3,600 Marchfirst, Inc. 74,475
800 Microsoft Corp.(a) 55,850
394 NetIQ Corp.(a) 19,011
725 Progress Software Corp.(a) 10,920
600 RSA Security, Inc.(a) 38,025
100 Sapient Corp.(a) 11,375
700 Sybase, Inc.(a) 16,888
1,850 VERITAS Software Corp.(a) 188,584
700 Verity, Inc.(a) 25,506
----------------
601,529
-------------------------------------------------------------------------------------
Telecommunications 4.1%
200 Advanced Fibre Communications, Inc.(a) 8,575
1,450 Allegiance Telecom, Inc.(a) 80,566
2,400 ALLTEL Corp. 147,900
2,700 AT&T Corp. 83,531
500 Audiovox Corp. 7,750
100 Copper Mountain Networks, Inc.(a) 7,886
100 Ditech Communications Corp.(a) 4,787
100 Dobson Communications Corp.(a) 2,188
6,400 Ericsson (L.M.) AB (ADR) (Sweden) 125,600
600 Exodus Communications, Inc.(a) 26,662
4,907 General Motors Corp., Class H 126,969
</TABLE>
See Notes to Financial Statements
B-83
<PAGE> 160
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
5,100 Global Crossing Ltd.(a) $ 123,994
500 Intermedia Communications, Inc. 8,812
2,368 JDS Uniphase Corp.(a) 279,720
325 Leap Wireless International, Inc.(a) 20,596
700 Level 3 Communications, Inc.(a) 47,906
1,000 Millicom International Cellular SA
(Luxembourg)(a) 44,125
2,100 Motorola, Inc. 69,431
900 Net2000 Communications, Inc.(a) 8,550
2,400 Nextel Communications, Inc.(a) 134,250
1,600 NEXTLINK Communications(a) 52,900
6,700 Nokia Corp. (ADR) (Finland)(a) 296,895
2,800 Nortel Networks Corp. 208,250
2,218 NTL, Inc.(a) 99,949
5,500 Qwest Communications International, Inc.(a) 258,156
4,940 Viacom, Inc.(a) 327,584
7,098 Vodafone Airtouch Group PLC, (ADR) (United
Kingdom) 306,101
----------------
2,909,633
-------------------------------------------------------------------------------------
Tobacco 0.6%
4,100 Loews Corp. 257,275
4,500 Philip Morris Companies, Inc. 113,625
2,700 R.J. Reynolds Tobacco Holdings, Inc. 76,613
----------------
447,513
-------------------------------------------------------------------------------------
Transportation 0.1%
600 Alexander & Baldwin, Inc. 15,112
1,125 Roadway Express, Inc. 26,719
575 Sea Containers, Ltd. 15,094
700 U.S. Freightways Corp. 19,425
----------------
76,350
-------------------------------------------------------------------------------------
Utilities 0.6%
550 California Water Service Group 13,131
475 CH Energy Group, Inc. 15,497
525 Cleco Corp. 19,359
775 Conectiv, Inc. 12,836
1,500 General Public Utilities Corp. 39,750
850 Equitable Resources, Inc. 44,253
</TABLE>
See Notes to Financial Statements
B-84
<PAGE> 161
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
650 Idacorp, Inc. $ 24,050
1,500 Minnesota Power & Light Co. 31,969
1,650 Public Service Company of New Mexico(a) 29,906
2,500 Reliant Energy, Inc. 83,750
775 Sierra Pacific Resources 10,947
2,500 Unicom Corp. 102,656
975 Washington Gas Light Co. 24,010
----------------
452,114
-------------------------------------------------------------------------------------
Waste Management 0.1%
700 Waste Connections, Inc. 14,175
3,700 Waste Management, Inc. 69,144
----------------
83,319
----------------
Total common stocks (cost $22,264,619) 25,345,111
----------------
</TABLE>
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
-------------------------------------------------------------------------------------
ASSET BACKED SECURITIES 2.6%
Capital One Bank Corp., Notes,
Baa2 US$ 300 6.76%, 7/23/02 294,673
General Motors Acceptance Corp.,
MTN,
A2 700 7.02%, 10/5/00 698,467
MBNA Corp., MTN,
Baa1 900 6.875%, 7/15/04 861,526
----------------
Total asset backed securities
(cost $1,893,241) 1,854,666
----------------
CORPORATE BONDS 31.9%
-------------------------------------------------------------------------------------
Aerospace/Defense 0.1%
BE Aerospace, Inc., Sr. Sub.
Notes,
B1 50 9.50%, 11/1/08 47,375
Sequa Corp.,
Ba2 35 9.00%, 8/1/09 33,950
----------------
81,325
</TABLE>
See Notes to Financial Statements
B-85
<PAGE> 162
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
----------------------------------------------------------------------------------------
Airlines 0.4%
Continental Airlines, Inc., Sr.
Notes,
Ba2 US$ 75 8.00%, 12/15/05 $ 70,036
Delta Air Lines, Inc., Debs.,
Baa3 100 9.75%, 5/15/21 105,222
Notes,
Baa3 100 8.30%, 12/15/29 89,652
United Airlines, Inc., Debs.,
Baa3 5 9.75%, 8/15/21 4,927
U.S. Air, Inc., Sr. Notes,
B3 50 9.625%, 2/1/01 49,507
----------------
319,344
-------------------------------------------------------------------------------------
Apparel 0.1%
Burlington Inds., Inc., Debs.,
Ba2 100 7.25%, 8/1/27 60,000
Phillips-Van Heusen Corp., Sr.
Sub. Notes,
B1 15 9.50%, 5/1/08 13,650
----------------
73,650
-------------------------------------------------------------------------------------
Auto/Equipment Rental 0.1%
United Rentals, Inc., Sr. Sub.
Notes,
B1 50 9.25%, 1/15/09 46,500
-------------------------------------------------------------------------------------
Automotive Parts 1.3%
Collins & Aikman Products Co.,
Sr. Sub. Notes,
B2 110 11.50%, 4/15/06 106,700
Eagle Picher Industries, Inc.,
Sr. Sub. Notes,
B3 50 9.375%, 3/1/08 41,500
Federal Mogul Corp., Sr. Notes,
Ba2 70 7.50%, 1/15/09 53,550
Hayes Wheels, Inc., Sr. Sub.
Notes,
B2 200 9.125%, 7/15/07 183,000
Lear Corp., Sr. Notes,
Ba1 250 8.11%, 5/15/09 229,375
</TABLE>
See Notes to Financial Statements
B-86
<PAGE> 163
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tenneco, Inc., Sr. Sub. Notes,
B2 US$ 40 11.625%, 10/15/09 $ 35,600
TRW, Inc., Notes,
Baa1 250 8.34%, 5/15/06 255,764
----------------
905,489
-------------------------------------------------------------------------------------
Banks 1.0%
Bank Tokyo Mitsubishi, Ltd.,
Global Sr. Sub. Notes,
A3 400 8.40%, 4/15/10 403,555
Export-Import Bank of Korea,
Sr. Notes,
Ba2 180 7.25%, 6/25/01 178,911
Sovereign Bancorp Inc., Sr. Note,
Ba3 50 10.50%, 11/15/06 50,000
Ba3 150 10.25%, 5/15/04 148,113
----------------
780,579
-------------------------------------------------------------------------------------
Building & Products 0.1%
Lennar Corp., Sr. Notes,
Ba1 15 9.95%, 5/1/10 15,150
Nortek, Inc., Sr. Sub. Notes,
B1 40 9.125%, 9/1/07 37,600
----------------
52,750
-------------------------------------------------------------------------------------
Cable 1.0%
Adelphia Communications Corp., Sr.
Notes,
B1 130 8.125%, 7/15/03 120,900
Century Communications Corp.,
B1 40 9.50%, 8/15/00 39,900
Classic Cable, Inc., Sr. Sub.
Notes,
B3 20 9.375%, 8/1/09 16,200
B3 20 10.50%, 3/1/10 17,700
Coaxial Communications, Inc., Sr.
Notes,
B3 25 10.00%, 8/15/06 23,875
</TABLE>
See Notes to Financial Statements
B-87
<PAGE> 164
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fox Family Worldwide, Inc.,
Sr. Notes,
B1 US$ 15 9.25%, 11/1/07 $ 14,175
International Wire Group, Inc.,
Sr. Sub. Notes
B3 100 11.75%, 6/1/05 100,000
Lin Holdings Corp.,
Sr. Disc. Notes, Zero Coupon
(until 3/1/03),
B3 115 10.00%, 3/1/08 77,337
Pecunia 1 Vermogeensverwaltung,
Sr. Disc. Notes, Zero Coupon
(until 7/15/05),
B3 50 16.00%, 7/15/10 22,250
Sr. Notes,
B3 50 14.00%, 7/15/10 49,250
Rogers Cablesystems Ltd.,
Sr. Sub. Gtd. Debs.,
Ba3 50 11.00%, 12/1/15 55,000
United Pan-European Communications
(Netherlands), Sr. Notes,
B2 200 10.875%, 8/1/09 175,000
----------------
711,587
-------------------------------------------------------------------------------------
Chemicals 0.5%
Avecia Group PLC, Sr. Sub. Notes,
B2 45 11.00%, 7/1/09 44,887
Huntsman ICI Chemicals, Inc.,
Sr. Sub. Notes,
B2 70 10.125%, 7/1/09 71,400
Huntsman Polymers Corp., Sr.
Notes,
B1 50 11.75%, 12/1/04 50,750
Lyondell Chemical Co., Sr. Sec'd.
Notes,
Ba3 100 9.875%, 5/1/07 100,000
NL Industries, Inc., Sr. Sec'd.
Notes,
B1 15 11.75%, 10/15/03 15,263
</TABLE>
See Notes to Financial Statements
B-88
<PAGE> 165
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sterling Chemical Holdings, Inc.,
Sr. Sub. Notes,
B3 US$ 45 12.375%, 7/15/06 $ 46,125
B3 60 11.75%, 8/15/06 48,000
Texas Petrochemicals Corp.,
Sr. Sub. Notes,
B3 5 11.125%, 7/1/06 4,450
----------------
380,875
-------------------------------------------------------------------------------------
Commercial Services 0.6%
Cox Enterprises, Inc.,
Baa1 300 7.5525%, 5/1/03 300,825
Metris Cos, Inc., Sr. Notes,
Ba3 150 10.125%, 7/15/06 142,500
----------------
443,325
-------------------------------------------------------------------------------------
Computer Services 0.2%
Globix Corp., Sr. Notes,
B-Pound 150 12.50%, 2/1/10 117,000
Unisys Corp., Sr. Sub. Notes,
Ba1 50 11.75%, 10/15/04 53,000
----------------
170,000
-------------------------------------------------------------------------------------
Distribution/Wholesalers
Core Mark International, Inc.,
Sr. Sub. Notes,
B3 10 11.375%, 9/15/03 9,300
-------------------------------------------------------------------------------------
Electronics 0.2%
Flextronics International Ltd.,
Sr. Sub. Notes,
Ba3 50 9.875%, 7/1/10 50,563
TNP Enterprises, Inc., Sr. Sub.
Notes,
Ba3 100 10.25%, 4/1/10 104,250
----------------
154,813
</TABLE>
See Notes to Financial Statements
B-89
<PAGE> 166
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Energy 1.6%
Aes Drax Energy Ltd., Sr. Sec'd
Notes,
Ba2 US$ 100 11.50%, 8/30/10 $ 102,750
Cinergy Corp., Debs.,
Baa2 700 6.125%, 4/15/04 653,513
Hollywood Park, Inc., Sr. Sub.
Notes
B2 100 9.25%, 2/15/07 101,250
Premier Parks, Inc., Sr. Notes,
B3 250 9.75%, 6/15/07 237,500
----------------
1,095,013
-------------------------------------------------------------------------------------
Financial Services 5.9%
AT & T Capital Corp., MTN, Ser. G
A1 600 7.01%, 4/23/02 601,275
A1 600 6.60%, 5/15/05 571,926
Americredit Corp., Sr. Notes,
Ba1 100 9.875%, 4/15/06 98,000
The Bear Stearns Cos., Inc., Sr.
Notes,
A2 300 6.76625%, 8/1/02 300,193
Donaldson Lufkin & Jenrette,
A3 300 7.25%, 7/18/03 300,000
Ford Motor Credit Co.,
A2 600 7.50%, 3/15/05 596,592
GS Escrow Corp. Sr. Note,
Ba1 100 6.75%, 8/1/01 96,750
Lehman Brothers Holdings, Inc.,
MTN,
Ser. E,
A3 300 7.68%, 4/1/02 301,271
Midland Funding Corp.,
Sr. Sec'd. Note, Ser. A
Ba3 50 11.75%, 7/23/05 55,507
Morgan Stanley Dean Witter, MTN,
Aa3 600 6.838%, 1/28/02 600,672
Orion Power Holdings, Inc., Sr.
Notes
Ba3 100 12.00%, 5/1/10 105,500
</TABLE>
See Notes to Financial Statements
B-90
<PAGE> 167
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
RBF Finance Co., Sr. Sec'd. Notes,
Ba3 US$ 175 11.00%, 3/15/06 $ 189,000
Salomon Smith Barney, Inc.,
Sr. Notes,
Aa3 300 7.06%, 7/18/07 299,919
Stone Container Finance Co., Sr.
Notes,
B2 10 11.50%, 8/15/06 10,363
----------------
4,126,968
-------------------------------------------------------------------------------------
Food & Beverage 0.5%
Agrilink Foods, Inc., Sr. Sub.
Notes,
B3 50 11.875%, 11/1/08 38,000
Aurora Foods, Inc., Sr. Sub.
Notes,
B1 90 9.875%, 2/15/07 56,025
Del Monte Foods Co., Sr. Disc.
Notes, Zero Coupon (until
12/15/02),
Caa1 50 12.50%, 12/15/07 37,500
Pilgrim's Pride Corp., Sr. Sub.
Notes,
B1 100 10.875%, 8/1/03 100,250
Stater Brothers Holdings, Inc.,
Sr. Notes,
B2 35 10.75%, 8/15/06 30,975
Vlasic Foods International, Inc.,
Sr. Sub. Notes,
B2 105 10.25%, 7/1/09 53,025
----------------
315,775
-------------------------------------------------------------------------------------
Gaming 1.8%
Boyd Gaming Corp., Sr. Sub. Notes,
B1 50 9.50%, 7/15/07 48,000
Circus Circus Enterprises, Inc.,
Debs.,
Baa3 100 6.70%, 11/15/96 91,967
Sr. Sub. Notes,
Ba2 100 6.45%, 2/1/06 86,577
Coast Hotels & Casinos, Inc.,
Sr. Sub. Notes,
B3 75 9.50%, 4/1/09 71,625
</TABLE>
See Notes to Financial Statements
B-91
<PAGE> 168
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Harrahs Casinos, Inc., Gtd. Sr.
Sub. Notes,
Ba2 US$ 60 7.875%, 12/15/05 $ 56,925
Harveys Casino Resorts, Sr. Sub.
Notes,
B2 100 10.625%, 6/1/06 102,000
Horseshoe Gaming Holding Corp.,
Sr. Sub. Notes,
B2 30 8.625%, 5/15/09 28,538
International Game Technology
Corp.,
Sr. Notes,
Ba1 600 7.875%, 5/15/04 579,000
Mohegan Tribal Gaming Auth., Sr.
Notes,
Ba2 150 8.125%, 1/1/06 143,625
Park Place Entertainment Corp.,
Sr. Sub. Notes,
Ba2 20 9.375%, 2/15/07 20,100
Station Casinos, Inc., Sr. Notes,
B1 40 9.875%, 7/1/10 40,000
----------------
1,268,357
-------------------------------------------------------------------------------------
Health Care 1.9%
Abbey Healthcare Group, Inc.,
Sr. Sub. Notes,
B2 140 9.50%, 11/1/02 138,600
Columbia/HCA Healthcare Corp.,
Debs.,
Ba2 55 7.05%, 12/1/27 42,350
Ba2 20 7.50%, 11/15/95 15,100
Ba2 300 6.73%, 7/15/45 278,250
Ba2 100 7.69%, 6/15/25 83,000
Concentra Operating Corp.,
Sr. Sub. Notes,
B3 25 13.00%, 8/15/09 21,500
HEALTHSOUTH Corp., Sr. Notes,
Baa3 45 6.875%, 6/15/05 38,569
</TABLE>
See Notes to Financial Statements
B-92
<PAGE> 169
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Integrated Health Services, Inc.,
Sr. Sub. Notes,
C US$ 350(b) 9.25%, 1/15/08 $ 6,564
Lifepoint Hospitals Holdings,
Inc.,
Sr. Sub. Notes,
B3 25 10.75%, 5/15/09 26,000
Long Island College Hosp.,
Rev., FHA Mtge., Ser. B,
Aa2 500 8.90%, 8/15/30 507,341
Magellan Health Services, Inc.,
Sr. Sub. Notes,
B3 50 9.00%, 2/15/08 26,250
Tenet Healthcare Corp.,
Sr. Sub. Notes, Ser. B,
Ba3 85 8.125%, 12/1/08 80,112
Triad Hospitals, Sr. Sub. Notes,
B3 50 11.00%, 5/15/09 51,750
----------------
1,315,386
-------------------------------------------------------------------------------------
Industrials 0.7%
AES Drax Holdings, Ltd., Sr.
Sec'd. Notes,
Baa3 100 10.41%, 12/31/20 103,536
Purina Mills, Inc., Sr. Sub.
Notes,
B2 350 9.00%, 3/15/10 101,500
United International Holdings,
Inc., Sr. Disc.
Notes, Zero Coupon (until
2/15/03),
B3 350 10.75%, 2/15/08 252,000
----------------
457,036
-------------------------------------------------------------------------------------
Internet 0.3%
Exodus Communications, Inc., Sr.
Notes,
B3 50 10.75%, 12/15/09 48,750
B3 70 11.625%, 7/15/10 70,525
PSI Net, Inc., Sr. Notes,
B3 80 11.00%, 8/1/09 64,800
</TABLE>
See Notes to Financial Statements
B-93
<PAGE> 170
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Verio, Inc., Sr. Notes,
B3 US$ 5 11.25%, 12/1/08 $ 5,788
B3 30 10.625%, 11/15/09 33,900
----------------
223,763
-------------------------------------------------------------------------------------
Lodging 0.1%
ITT Corp., Debs.,
Ba1 115 7.375%, 11/15/15 96,283
-------------------------------------------------------------------------------------
Machinery 0.2%
Applied Power, Inc., Sr. Sub.
Notes,
B1 150 8.75%, 4/1/09 164,625
-------------------------------------------------------------------------------------
Manufacturing 0.3%
Corning Consumer Products Co.,
Sr. Sub. Notes,
B3 50 9.625%, 5/1/08 32,500
Foamex JPS Automotive LLC,
Sr. Sub. Notes,
B1 60 11.125%, 6/15/01 61,200
Gentek, Inc., Sr. Sub. Notes,
B2 75 11.00%, 8/1/09 75,750
Polymer Group, Inc., Sr. Sub.
Notes,
B2 20 8.75%, 3/1/08 16,400
Venture Holdings, Inc., Sr. Notes,
B2 40 9.50%, 7/1/05 30,400
----------------
216,250
-------------------------------------------------------------------------------------
Media 1.6%
Ackerley Group, Inc., Sr. Sub.
Notes,
B2 200 9.00%, 1/15/09 187,000
Alliance Atlantis Communications,
Inc.,
Sr. Sub. Notes,
B2 20 13.00%, 12/15/09 51,250
Imax Corp., Sr. Notes,
Ba2 15 7.875%, 12/1/05 14,400
</TABLE>
See Notes to Financial Statements
B-94
<PAGE> 171
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Paxson Communications Corp.,
Sr. Sub. Notes,
B3 US$ 50 11.625%, 10/1/02 $ 51,125
Seagram, Joseph E. & Sons, Inc.,
Sr. Notes,
Baa3 200 6.25%, 12/15/01 196,598
Time Warner, Inc., Sr. Notes,
Baa3 600 6.10%, 12/30/01 589,200
----------------
1,089,573
-------------------------------------------------------------------------------------
Metals 0.3%
Golden Northwest Aluminum, Inc.,
First Mtge. Notes,
B2 10 12.00%, 12/15/06 10,150
Kaiser Aluminum & Chemical Corp.,
Sr. Notes,
B1 75 9.875%, 2/15/02 72,094
LTV Corp., Sr. Notes,
Ba3 70 11.75%, 11/15/09 59,850
WHX Corp., Sr. Sub. Notes,
B3 65 10.50%, 4/15/05 52,000
----------------
194,094
-------------------------------------------------------------------------------------
Miscellaneous Services 0.3%
Fresenius Med. Care Cap. Trust
III,
Gtd. Notes,
Ba3 200 7.875%, 2/1/08 187,000
IT Group, Inc., Sr. Sub. Notes,
B3 50 11.25%, 4/1/09 44,500
Sun World International, Inc.,
First Mtge. Notes,
B2 5 11.25%, 4/15/04 4,763
----------------
236,263
-------------------------------------------------------------------------------------
Networking 0.5%
Intersil Corp., Sr. Sub. Notes,
B1 35 13.25%, 8/15/09 40,250
</TABLE>
See Notes to Financial Statements
B-95
<PAGE> 172
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Metromedia Fiber Network, Inc.,
Sr. Notes,
B2 US$ 85 10.00%, 12/15/09 $ 82,450
Williams Communications Group,
Inc.,
Sr. Notes,
B2 275 10.875%, 10/1/09 261,250
----------------
383,950
-------------------------------------------------------------------------------------
Oil & Gas 0.6%
Canadian Forest Oil, Ltd., Sr.
Sub. Notes,
B2 30 8.75%, 9/15/07 28,800
Comstock Resources, Inc., Sr. Sub.
Notes,
B2 55 11.25%, 5/1/07 55,550
Eott Energy Partners LP, Sr.
Notes,
Ba2 80 11.00%, 10/1/09 81,600
Houston Exploration Co., Sr. Sub.
Notes,
B2 15 8.625%, 1/1/08 14,400
Leviathan Gas Pipeline LP, Sr.
Sub. Notes,
Ba2 25 10.375%, 6/1/09 25,750
Parker Drilling Co., Sr. Notes,
B1 55 9.75%, 11/15/06 53,075
Plains Resources, Inc., Sr. Sub.
Notes,
B2 20 10.25%, 3/15/06 20,150
Swift Energy Co., Sr. Sub. Notes,
B2 40 10.25%, 8/1/09 40,600
Vintage Petroleum, Inc., Sr. Sub.
Notes,
B1 70 9.75%, 6/30/09 71,400
----------------
391,325
-------------------------------------------------------------------------------------
Paper & Packaging 1.3%
Ball Corp., Sr. Sub. Notes,
B1 200 8.25%, 8/1/08 192,000
Doman Industries Ltd. (Canada),
Sr. Notes,
B1 45 8.75%, 3/15/04 36,900
</TABLE>
See Notes to Financial Statements
B-96
<PAGE> 173
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sr. Notes, Ser. B,
B1 US$ 20 9.25%, 11/15/07 $ 15,200
Norampac, Inc., Sr. Notes,
B2 10 9.50%, 2/1/08 9,800
Owens-Illinois, Inc., Sr. Notes,
Ba1 100 7.85%, 5/15/04 92,171
Packaged Ice, Inc., Sr. Notes,
B3 106 9.75%, 2/1/05 90,100
Radnor Holdings, Inc., Sr. Notes,
B2 100 10.00%, 12/1/03 89,000
Repap New Brunswick (Canada),
Inc.,
Sr. Sec'd. Notes,
Caa 75 10.625%, 4/15/05 68,625
Silgan Holdings, Inc., Sr. Sub.
Deb.,
B1 100 9.00%, 6/1/09 91,500
Stone Container Corp., Mtg. Notes,
B1 10 10.75%, 10/1/02 10,100
Sr. Sub. Deb.,
B3 200 12.25%, 4/1/02 201,000
----------------
896,396
-------------------------------------------------------------------------------------
Pharmaceuticals 0.2%
Bio Rad Labs, Inc., Sr. Sub.
Notes,
B2 20 11.625%, 2/15/07 20,900
ICN Pharmaceuticals, Inc., Sr.
Notes,
Ba3 100 8.75%, 11/15/08 98,250
----------------
119,150
-------------------------------------------------------------------------------------
Printing & Publishing 0.3%
Mail-Well Corp., Sr. Sub. Notes,
B1 250 8.75%, 12/15/08 215,000
Transwestern Publishing Co.,
Sr. Sub. Notes,
B2 20 9.625%, 11/15/07 19,500
----------------
234,500
</TABLE>
See Notes to Financial Statements
B-97
<PAGE> 174
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real Estate 0.4%
HMH Properties, Inc., Sr. Notes,
Ba2 US$ 185 8.45%, 12/1/08 $ 172,050
Intrawest Corp., Sr. Notes,
B1 100 10.50%, 2/1/10 103,500
----------------
275,550
-------------------------------------------------------------------------------------
Recreation 0.1%
Bally's Total Fitness Holdings,
Sr. Sub. Notes,
B3 80 9.875%, 10/15/07 73,200
-------------------------------------------------------------------------------------
Restaurants 1.0%
Advantica Restaurant Group, Inc.,
Sr. Notes,
B3 70 11.25%, 1/15/08 46,200
Carrols Corp., Sr. Sub. Notes,
B2 350 9.50%, 12/1/08 290,500
Felcor Suites LP, Gtd. Sr. Notes,
Ba2 350 7.375%, 10/1/04 317,625
Sbarro, Inc., Sr. Notes,
Ba3 25 11.00%, 9/15/09 25,750
----------------
680,075
-------------------------------------------------------------------------------------
Retail 0.1%
Musicland Group, Inc., Sr. Sub.
Notes,
B2 50 9.00%, 6/15/03 46,500
-------------------------------------------------------------------------------------
Schools 0.1%
Kindercare Learning Center, Inc.,
Sr. Sub. Notes,
B3 80 9.50%, 2/15/09 73,200
-------------------------------------------------------------------------------------
Semiconductors
SCG Holding Corp., Sr. Notes,
B2 32 12.00%, 8/1/09 34,400
</TABLE>
See Notes to Financial Statements
B-98
<PAGE> 175
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sovereign Bonds 0.3%
State of Qatar, Sr. Notes,
Baa2 US$ 200 9.75%, 6/15/30 $ 202,500
-------------------------------------------------------------------------------------
Steel 0.1%
Algoma Steel, Inc., First Mtge.
Notes,
B2 40 12.375%, 7/15/05 35,600
National Steel Corp., Notes,
Ba3 15 9.875%, 3/1/09 13,238
Sheffield Steel Corp., First Mtge.
Notes,
Caa2 20 11.50%, 12/1/05 12,800
----------------
61,638
-------------------------------------------------------------------------------------
Telecommunications 3.3%
Clearnet Communications, Inc.,
Sr. Disc. Notes, Zero Coupon
(until 5/01/04)
B3 10 10.125%, 5/1/09 5,800
Fairpoint Commerce, Sr. Sub. Note,
B3 40 12.50%, 5/1/10 40,400
Focal Communications Corp., Sr.
Notes,
B3 125 11.875%, 1/15/10 124,375
Global Crossing Holdings Ltd., Sr.
Notes,
Ba2 250 9.50%, 11/15/09 243,750
Hyperion Telecom, Sr. Disc. Notes,
Zero Coupon (until 4/15/01)
B3 40 13.00%, 4/15/03 35,400
Level 3 Communications, Inc., Sr.
Disc. Notes, Zero Coupon (until
12/1/03),
B3 30 10.50%, 12/1/08 17,625
Zero Coupon (until 3/15/05)
B3 250 12.875%, 3/15/10 132,500
Sr. Notes,
B3 55 11.00%, 3/15/08 52,250
McleodUSA, Inc., Sr. Notes,
B1 95 8.125%, 2/15/09 85,261
</TABLE>
See Notes to Financial Statements
B-99
<PAGE> 176
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Microcell Telecommunications, Sr.
Disc. Notes, Zero Coupon (until
6/1/04),
B3 US$ 250 12.00%, 6/1/09 $ 168,750
Millicom International Cellular,
Sr. Disc. Notes, Zero Coupon
(until 6/1/01),
B3 45 13.50%, 6/1/06 39,375
Netia Holdings BV, (Poland), Gtd.
Sr. Disc. Notes, Zero Coupon
(until 11/1/01),
B2 100 11.25%, 11/1/07 71,500
Nextel Communications, Inc., Sr.
Notes,
B2 175 10.75%, 6/1/09 171,500
B1 130 9.375%, 11/15/09 124,150
Sr. Disc. Notes, Zero Coupon
(until 9/15/02)
B1 155 10.65%, 9/15/07 120,900
NTL Communications Corp., Sr.
Notes,
Zero Coupon (until 10/01/03)
B2 250 12.375%, 10/1/08 161,250
Primus Telecommunications, Inc.,
Sr. Notes,
B3 100 12.75%, 10/15/09 60,000
RCN Corp., Sr. Notes,
B3 25 10.125%, 1/15/10 20,000
Spectrasite Holdings, Inc., Sr.
Disc. Notes, Zero Coupon (until
3/15/05),
B3 140 12.875%, 3/15/10 78,400
Tritel PCS, Inc., Sr. Sub. Disc.
Notes,
Zero Coupon (until 5/15/04)
B3 55 12.75%, 5/15/09 40,425
Vodafone Airtouch PLC, Notes,
A2 300 7.00%, 12/19/01 301,038
Voicestream Wireless Corp., Sr.
Disc. Notes, Zero Coupon (until
11/15/04),
>B2 120 11.875%, 11/15/09 84,600
Sr. Notes,
B2 80 10.375%, 11/15/09 86,400
</TABLE>
See Notes to Financial Statements
B-100
<PAGE> 177
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Worldwide Fiber, Inc. Sr. Sub.
Notes,
B3 US$ 30 12.00%, 8/1/09 $ 26,850
----------------
2,292,499
-------------------------------------------------------------------------------------
Transportation 0.1%
American Commercial Lines LLC, Sr.
Notes,
B1 50 10.25%, 6/30/08 42,000
-------------------------------------------------------------------------------------
Utilities 1.2%
AES Corp., Sr. Notes,
Ba1 150 9.50%, 6/1/09 151,500
Niagara Mohawk Power Corp., Sr.
Notes,
Ba2 529 7.00%, 10/1/00 528,464
Baa3 151 7.125%, 7/1/01 150,709
----------------
830,673
-------------------------------------------------------------------------------------
Waste Management 1.2%
Atlanta Georgia Wtr. and
Wastewtr.,
Rev. Ref. Ser. A,
Aaa 600 5.00%, 11/1/38 526,482
Allied Waste of North America,
Inc.,
Sr. Notes,
Ba3 150 7.875%, 1/1/09 132,000
Sr. Sub. Notes,
B2 25 10.00%, 8/1/09 21,625
Waste Management, Inc., Sr. Notes,
Ba1 150 6.00%, 5/15/01 146,316
----------------
826,423
----------------
Total corporate bonds (cost
$23,542,704) 22,392,902
----------------
CONVERTIBLE BONDS 1.0%
-------------------------------------------------------------------------------------
Financial Services 0.6%
Hellenic Finance Corp.,
A3 EURO 500 2.00%, 7/15/03 451,839
</TABLE>
See Notes to Financial Statements
B-101
<PAGE> 178
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Utilities 0.4%
Alliant Energy Resources, Inc.,
A3 US$ 5 7.25%, 2/15/30 $ 303,125
----------------
Total convertible bonds (cost
$560,750) 754,964
----------------
MORTGAGE-RELATED SECURITIES 6.5%
<CAPTION>
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bear Stearns Mortgage Securities,
Inc.,
Series 1997-7, Class A-9
Aaa 600 7.00%, 2/25/28 565,308
GE Capital Mortgage Services,
Inc.,
Series 1999-15, Class 16,
AAAPound 403 6.75%, 8/25/29 396,852
Mellon Residental Funding Corp.,
Series 1999, Class A-3,
Aaa 500 6.58%, 7/25/29 490,927
Merrill Lynch Mortgage Investors,
Inc., Series 1998-F1,
AAAPound 63 6.78%, 1/20/28 63,119
Nationslink Funding Corp.,
Series 1999-Sl, Class A-3,
Aaa 500 6.297%, 12/10/02 490,190
PNC Mortgage Securities Corp.,
Series 1995-2, Class A-4,
Aa1 550 6.75%, 6/25/16 540,928
Series 1999, Class A-3,
AAAPound 500 7.25%, 10/25/29 482,104
Series 1999-8, Class A-5,
AAAPound 676 6.75%, 8/25/29 666,240
Residential Funding Mortgage,
Inc.,
Series 1997 S-19, Class A-3,
AAAPound 805 6.50%, 12/25/12 762,472
----------------
Total mortgage-related securities
(cost $4,537,483) 4,458,140
----------------
</TABLE>
See Notes to Financial Statements
B-102
<PAGE> 179
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
---------------------------------------------------------------------------------------
FOREIGN GOVERNMENT SECURITIES 0.6%
Government of Germany,
EURO 20 6.25%, 1/4/24 $ 20,316
70 6.25%, 1/4/30 73,009
PLN 500 Government of Poland,
3.50% (until 10/27/00)
5.00%, 10/27/24 333,467
----------------
Total foreign government securities (cost
$397,149) 426,792
----------------
U.S. GOVERNMENT AND AGENCY SECURITIES 28.9%
US$ 1,000 Federal Home Loan Mortgage Corp.,
7.00%, 3/31/26 966,560
1,799 Debs.,
10.00%, 5/15/20 1,877,284
Federal National Mortgage Association,
546 6.50%, 5/1/06 535,958
262 5.00%, 4/1/14 239,072
348 5.00%, 4/1/14 317,031
1,000 7.50%, 1/31/27 985,310
Government National Mortgage Association,
91 6.75%, 9/20/22 91,949
585 7.50%, 12/15/28 579,569
3,500 6.00%, 9/30/27 3,222,205
2,500 6.50%, 3/31/27 2,370,325
600 7.50%, 1/31/26 594,564
2,000 8.50%, 12/31/24 2,041,880
1,500 8.50%, 12/31/24 1,524,367
1,075 United States Department Veteran Affairs,
6.83501%, 1/15/30 1,026,648
1,500 United States Treasury Bond, Principal Only,
11.25%, 02/15/15 624,405
United States Treasury Notes,
645 3.625%, 7/15/02 642,838
324 3.375%, 1/15/07 312,392
1,776 3.875%, 1/15/09, TIPS 1,755,107
</TABLE>
See Notes to Financial Statements
B-103
<PAGE> 180
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
---------------------------------------------------------------------------------------
<C> <S> <C>
United States Treasury Security, Interest only,
$ 1,000 Zero Coupon, 5/15/11 $ 516,710
----------------
Total U. S. government and agency securities (cost
$20,213,183) 20,224,174
----------------
Total debt obligations (cost $51,144,510) 50,111,638
----------------
Total long-term investments (cost $73,409,129) 75,456,749
----------------
SHORT-TERM INVESTMENTS 10.6%
COMMERCIAL PAPER 2.7%
Edison Mission Midwest Holdings,
400 6.85%, 9/7/00 397,184
1,000 6.78%, 9/13/00 991,902
200 Reseau Ferre De France,
6.52%, 10/26/00 196,885
Washington Mutual Finance,
300 6.70%, 8/28/00 298,492
----------------
Total commercial paper (cost $1,884,463) 1,884,463
----------------
REPURCHASE AGREEMENT 7.9%
5,540 Joint Repurchase Agreement Account,
6.538%, 8/1/00
(cost $5,540,000; Note 5) 5,540,000
----------------
Total short-term investments (cost $7,424,463) 7,424,463
----------------
Total Investments 118.2%
(cost $80,833,592; Note 4) 82,881,212
Liabilities in excess of other assets (18.2)% (12,756,727)
----------------
Net Assets 100% $ 70,124,485
----------------
----------------
</TABLE>
See Notes to Financial Statements
B-104
<PAGE> 181
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund Cont'd.
Portfolio of Investments as of July 31, 2000
------------------------------
(a) Non-income producing security.
(b) Represents issuer in default on interest payments, non income producing
security.
Pound S&P rating.
AB--Aktiebolag (Swedish stock company).
ADR--American Depository Receipt.
FHA--Federal Housing Administration.
LLC--Limited Liability Company.
LP--Limited Partnership.
MTN--Medium-Term Note.
NR--Not Rated by Moody's or Standard & Poor's.
N.V.--Naamloze Vennootschaap (Dutch Corporation).
PLC--Public Limited Company.
SA--Societe Anonyme (French Corporation).
TIPS--Treasury Inflation Protection Securities.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
See Notes to Financial Statements
B-105
<PAGE> 182
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
July 31, 2000
---------------------------------------------------------------------------------------
<C> <S> <C> <
ASSETS
Investments, at value (cost $80,833,592) $ 82,881,212
Cash 192,862
Foreign currency, at value (cost $7,661) 7,499
Receivable for investments sold 3,116,083
Interest and dividends receivable 553,306
Receivable for Fund shares sold 168,946
Unrealized appreciation on forward currency contracts 3,595
Deferred expenses and other assets 368
-------------
Total assets 86,923,871
-------------
LIABILITIES
Payable for investments purchased 15,944,320
Payable for Fund shares reacquired 556,549
Accrued expenses and other liabilities 176,487
Distribution fee payable 49,613
Management fee payable 44,439
Payable for swaps purchased 16,228
Unrealized depreciation on interest rate swaps 11,016
Foreign withholding tax payable 734
-------------
Total liabilities 16,799,386
-------------
NET ASSETS $ 70,124,485
-------------
-------------
Net assets were comprised of:
Shares of beneficial interest, at par $ 6,344
Paid-in capital in excess of par 61,755,125
-------------
61,761,469
Undistributed net investment income 392,105
Accumulated net realized gain on investments 5,937,943
Net unrealized appreciation on investments, foreign currency
and interest rate swaps transactions 2,032,968
-------------
Net assets, July 31, 2000 $ 70,124,485
-------------
-------------
</TABLE>
See Notes to Financial Statements
B-106
<PAGE> 183
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund
Statement of Assets and Liabilities Cont'd.
<TABLE>
<CAPTION>
July 31, 2000
-------------------------------------------------------------------------------------
<C> <S> <C>
Class A:
Net asset value and redemption price per share ($14,514,046 /
1,312,702 shares of beneficial interest issued and
outstanding) $11.06
Maximum sales charge (5% of offering price) .58
-------------
Maximum offering price to public $11.64
-------------
-------------
Class B:
Net asset value, offering price and redemption price per
share ($43,837,693 / 3,965,946 shares of beneficial
interest issued and outstanding) $11.05
-------------
-------------
Class C:
Net asset value and redemption price per share ($11,301,315 /
1,022,356 shares of beneficial interest issued and
outstanding) $11.05
Sales charge (1% of offering price) .11
-------------
Offering price to public $11.16
-------------
-------------
Class Z:
Net asset value, offering price and redemption price per
share ($471,430 / 42,653 shares of beneficial interest
issued and outstanding) $11.05
-------------
-------------
</TABLE>
See Notes to Financial Statements
B-107
<PAGE> 184
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund
Statement of Operations
<TABLE>
<CAPTION>
Year
Ended
July 31,
2000
<S> <C>
-------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest $3,500,952
Dividends (net of foreign withholding taxes of $1,304) 297,390
------------
Total income 3,798,342
------------
Expenses
Management fee 558,132
Distribution fee--Class A 31,338
Distribution fee--Class B 365,743
Distribution fee--Class C 129,543
Custodian's fees and expenses 300,000
Transfer agent's fees and expenses 63,000
Reports to shareholders 63,000
Registration fees 60,000
Audit fee 25,000
Legal fees 14,000
Amortization of offering costs 9,033
Trustees' fees and expenses 6,000
Miscellaneous 2,929
------------
Total expenses 1,627,718
------------
Net investment income 2,170,624
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
Net realized gain on:
Investment transactions 6,219,031
Foreign currency transactions 65,465
Swaps 52,224
------------
6,336,720
------------
Net change in unrealized appreciation (depreciation) on:
Investments (221,530)
Foreign currencies 21,185
Swaps (11,016)
------------
(211,361)
------------
Net gain on investments 6,125,359
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $8,295,983
------------
------------
</TABLE>
See Notes to Financial Statements
B-108
<PAGE> 185
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year November 18, 1998(a)
Ended Through
July 31, 2000 July 31, 1999
<S> <C> <C>
-----------------------------------------------------------------------------------
INCREASE (DECREASE)
IN NET ASSETS
Operations
Net investment income $ 2,170,624 $ 1,315,456
Net realized gain on investment and
foreign currency transactions 6,336,720 577,710
Net change in unrealized
appreciation/(depreciation) of
investments, foreign currencies and
swaps (211,361) 2,244,329
------------- --------------------
Net increase in net assets resulting
from operations 8,295,983 4,137,495
------------- --------------------
Dividends and distributions (Note 1)
Dividends from net investment income
Class A (419,711) (118,082)
Class B (1,002,217) (278,242)
Class C (337,721) (155,747)
Class Z (348,570) (637,575)
------------- --------------------
(2,108,219) (1,189,646)
------------- --------------------
Distributions from net realized gains on
investment transactions
Class A (113,245) --
Class B (387,774) --
Class C (152,973) --
Class Z (219,765) --
------------- --------------------
(873,757) --
------------- --------------------
Fund share transactions (net of share
conversions)
(Note 6)
Net proceeds from shares sold $ 35,877,305 $107,208,098
Net asset value of shares issued in
reinvestment of dividends and
distributions 2,861,038 1,162,526
Cost of shares reacquired (48,138,088) (37,138,250)
------------- --------------------
Net decrease in net assets from Fund
share transactions (9,399,745) 71,232,374
------------- --------------------
Total increase/(decrease) (4,085,738) 74,180,223
NET ASSETS
Beginning of year 74,210,223 30,000
------------- --------------------
End of year(b) $ 70,124,485 $ 74,210,223
------------- --------------------
------------- --------------------
------------------------------
(a) Commencement of investment operations.
(b) Includes undistributed net investment
income of $ 392,105 $ 236,864
------------- --------------------
</TABLE>
See Notes to Financial Statements
B-109
<PAGE> 186
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund
Notes to Financial Statements
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.
Jennison Associates, The Prudential Investment Corporation, Pacific Investment
Management Company, Franklin Advisers, Inc. and The Dreyfus Corporation are the
Fund's 'Advisers'.
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.
B-110
<PAGE> 187
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund
Notes to Financial Statements Cont'd.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost.
In connection with transactions in repurchase agreements with U.S.
financial institutions, it is the Fund's policy that its custodian or designated
subcustodians, as the case may be under triparty repurchase agreements, take
possession of the underlying securities, the value of which exceeds the
principal amount of the repurchase transaction including accrued interest. If
the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
All securities are valued as of 4:15 p.m., New York time.
Foreign Currency Translation: The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) market value of investment securities, other assets and liabilities -
at the closing daily rates of exchange.
(ii) purchases and sales of investment securities, income and expenses -
at the rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the fiscal period, the Fund does not
isolate that portion of the results of operations arising as a result of changes
in the foreign exchange rates from the fluctuations arising from changes in the
market prices of securities held at the end of the period. Similarly, the Fund
does not isolate the effect of changes in foreign exchange rates from the
fluctuations arising from changes in the market prices of long-term portfolio
securities sold during the period. Accordingly, these realized foreign currency
gains (losses) are included in the reported net realized gains (losses) on
investment transactions.
Net realized gains on foreign currency transactions represent net foreign
exchange gains or losses from holdings of foreign currencies, currency gains or
losses realized between the trade and settlement dates on security transactions,
and the difference between the amounts of dividends, interest and foreign taxes
recorded on the Fund's books and the U.S. dollar equivalent amounts actually
received or paid. Net unrealized currency gains or losses from valuing foreign
currency denominated assets and liabilities (other than investments) at fiscal
period end exchange rates are reflected as a component of net unrealized
appreciation on investments and foreign currencies.
B-111
<PAGE> 188
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund
Notes to Financial Statements Cont'd.
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.
Interest Rate Swaps: In a simple interest rate swap, one investor pays a
floating rate of interest on a notional principal amount and receives a fixed
rate of interest on the same notional principal amount for a specified period of
time. Alternatively, an investor may pay a fixed rate and receive a floating
rate. Interest rate swaps were conceived as asset/liability management tools. In
more complex swaps, the notional principal amount may decline (or amortize) over
time.
During the term of the swap, changes in the value of the swap are
recognized as unrealized gains or losses by 'marking-to-market' to reflect the
market value of the swap. When the swap is terminated, the Fund will record a
realized gain or loss equal to the difference between the proceeds from (or cost
of) the closing transaction and the Fund's basis in the contract, if any.
The Fund is exposed to credit loss in the event of non-performance by the
other party to the interest rate swap. However, the Fund does not anticipate
non-performance by any counterparty.
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.
B-112
<PAGE> 189
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund
Notes to Financial Statements Cont'd.
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.
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.
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 $77,498 in connection with the
initial offering of the Fund. Offering costs were amortized over a period of 12
months ended November 1999.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified
B-113
<PAGE> 190
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund
Notes to Financial Statements Cont'd.
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 $92,836, decrease accumulated
net realized gain on investments by $83,803, and decrease paid-in capital by
$9,033 for the period ended July 31, 2000, 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 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 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
('Jennison') $300 million; .25% for amounts
in excess of $300 million
The Prudential Investment
Corporation ('PIC') .375%(1)
Pacific Investment Management
Company .25%
Franklin Advisers, Inc. .50%
The Dreyfus Corporation .45%
(1)Prior to January 1, 2000, PIC was reimbursed by PIFM for its reasonable costs
and expenses.
</TABLE>
The Fund has a distribution agreement with Prudential Investment
Management Services LLC ('PIMS') which acts as the distributor of the Class A,
Class B, Class C and Class Z shares of the Fund. The Fund compensates PIMS for
distributing and servicing the Fund's Class A, Class B and Class C shares,
pursuant to plans of distribution, (the 'Class A, B and C Plans'), regardless of
expenses actually incurred by
B-114
<PAGE> 191
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund
Notes to Financial Statements Cont'd.
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 year ended July 31,
2000.
PIMS has advised the Fund that it has received approximately $90,500 and
$28,800 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively, during the year ended July 31, 2000.
PIMS has advised the Fund that for the year ended July 31, 2000, it has
received approximately $112,000 and $33,700 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
Jennison, PIMS, PIC and PIFM are indirect, wholly owned subsidiaries of
The Prudential Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
'Funds'), entered into a syndicated credit agreement ('SCA') with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any such borrowings will be at market rates. The purpose of the
agreement is to serve as an alternative source of funding for capital share
redemptions. The Funds pay a commitment fee of .080 of 1% of the unused portion
of the credit facility. The commitment fee is accrued and paid quarterly on a
pro rata basis by the Funds. The expiration date of the SCA is March 9, 2001.
Prior to March 9, 2000, the commitment fee was .065 of 1% of the unused portion
of the credit facility. The Fund did not borrow any amounts pursuant to the SCA
during the period ended July 31, 2000.
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 year ended July 31, 2000, the
Fund incurred fees of approximately $54,000 for the services of PMFS. As of July
31, 2000 approximately $5,200 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 year ended July 31, 2000 were $190,136,013 and $196,606,023,
respectively.
B-115
<PAGE> 192
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund
Notes to Financial Statements Cont'd.
At July 31, 2000, the Fund had outstanding forward currency contracts to
sell foreign currencies as follows:
<TABLE>
<CAPTION>
Value at
Foreign Currency Settlement Date Value at
Sale Contracts Payable July 31, 2000 Appreciation
----------------------------------- --------------- ------------- ------------
<S> <C> <C> <C>
Euro,
expiring 8/14/00 $ 558,385 $ 554,790 $3,595
--------------- ------------- ------------
--------------- ------------- ------------
</TABLE>
The Fund entered into 6 interest rate swap agreements. Under the agreement
the Fund receives a floating rate and pays a respective fixed rate. Details of
the swaps at July 31, 2000 are as follows:
<TABLE>
<CAPTION>
Notional Unrealized
Amount Fixed Floating Termination Appreciation
(000) Rate Rate Date (Depreciation)
-------- ------ -------------- ------------ --------------
<C> <S> <C> <C> <C>
$ 20 6.25% 6 month LIBOR 1/4/24(c) $ (3,573)
80 6.175 6 month LIBOR 5/22/30(a) (1,479)
2,500 7.75 3 month LIBOR 1/1/01(b) 6,250
1,300 7.498 3 month LIBOR 5/8/03(b) (11,546)
500 7.00 3 month LIBOR 9/15/00(b) (353)
500 7.00 3 month LIBOR 9/22/00(a) (315)
--------------
$(11,016)
--------------
--------------
</TABLE>
------------------------------
(a) Counterparty--Goldman Sachs
(b) Counterparty--Morgan Stanley Dean Witter
(c) Counterparty--J.P. Morgan
The United States federal income tax basis of the Fund's investments,
including short-term investments, as of July 31, 2000 was $81,030,809;
accordingly, net unrealized appreciation on investments for federal income tax
purposes was $1,850,403 (gross unrealized appreciation--$5,941,922, gross
unrealized depreciation--$4,091,519).
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, 2000, the Fund
had a 1.0% undivided interest in the repurchase agreements in the joint account.
The undivided interest for the Fund represents $5,540,000 in principal amount.
As of such date, each repurchase agreement in the joint account and the
collateral therefore were as follows:
B-116
<PAGE> 193
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund
Notes to Financial Statements Cont'd.
ABN AMRO Incorporated, 6.56%, in the principal amount of $100,000,000,
repurchase price $100,018,222, due 8/1/00. The value of the collateral including
accrued interest was $102,000,029.
Bear, Stearns & Co. Inc., 6.55%, in the principal amount of $100,000,000,
repurchase price $100,018,194, due 8/1/00. The value of the collateral including
accrued interest was $102,926,906.
Greenwich Capital Markets, Inc., 6.57%, in the principal amount of
$110,000,000, repurchase price $110,020,075, due 8/1/00. The value of the
collateral including interest was $112,201,716.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 6.45%, in the principal
amount of $97,030,000, repurchase price $97,047,384, due 8/1/00. The value of
the collateral including accrued interest was $98,970,864.
Salomon Smith Barney, Inc., 6.55%, in the principal amount of
$155,000,000, repurchase price $155,028,201, due 8/1/00. The value of the
collateral including accrued interest was $158,174,190.
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.
The Fund has authorized an unlimited number of shares of beneficial
interest at $.001 par value.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
----------------------------------------------------------- ---------- ------------
<S> <C> <C>
Year ended July 31, 2000:
Shares sold 1,090,045 $ 11,650,462
Shares issued in reinvestment of dividends and
distributions 47,988 515,634
Shares reacquired (812,925) (8,741,195)
---------- ------------
Net increase in shares outstanding before conversion 325,108 3,424,901
Shares issued upon conversion from Class B 109,810 1,201,204
---------- ------------
Net increase in shares outstanding 434,918 $ 4,626,105
---------- ------------
---------- ------------
</TABLE>
B-117
<PAGE> 194
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund
Notes to Financial Statements Cont'd.
<TABLE>
<CAPTION>
Class A Shares Amount
----------------------------------------------------------- ---------- ------------
November 18, 1998(a) through July 31, 1999:
<S> <C> <C>
Shares sold 1,042,412 $ 10,711,221
Shares issued in reinvestment of dividends 10,808 113,563
Shares reacquired (177,770) (1,852,189)
---------- ------------
Net increase in shares outstanding before conversion 875,450 8,972,595
Shares issued upon conversion from Class B 1,584 16,195
---------- ------------
Net increase in shares outstanding 877,034 $ 8,988,790
---------- ------------
---------- ------------
<CAPTION>
Class B
-----------------------------------------------------------
<S> <C> <C>
Year ended July 31, 2000:
Shares sold 1,916,483 $ 20,536,163
Shares issued in reinvestment of dividends and
distributions 123,462 1,322,329
Shares reacquired (885,951) (9,503,752)
---------- ------------
Net increase in shares outstanding before conversion 1,153,994 12,354,740
Shares issued upon conversion into Class A (110,000) (1,201,204)
---------- ------------
Net increase in shares outstanding 1,043,994 $ 11,153,536
---------- ------------
---------- ------------
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 issued upon conversion into Class A (1,585) (16,195)
---------- ------------
Net increase in shares outstanding 2,921,202 $ 30,009,610
---------- ------------
---------- ------------
------------------------------
(a) Commencement of investment operations.
</TABLE>
B-118
<PAGE> 195
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund
Notes to Financial Statements Cont'd.
<TABLE>
<CAPTION>
Class C Shares Amount
----------------------------------------------------------- ---------- ------------
Year ended July 31, 2000:
<S> <C> <C>
Shares sold 304,558 $ 3,288,339
Shares issued in reinvestment of dividends and
distributions 42,720 455,132
Shares reacquired (681,306) (7,334,166)
---------- ------------
Net decrease in shares outstanding (334,028) $ (3,590,695)
---------- ------------
---------- ------------
November 18, 1998(a) through
July 31, 1999:
Shares sold 1,533,354 $ 15,566,209
Shares issued in reinvestment of dividends 13,956 146,297
Shares reacquired (191,676) (1,993,717)
---------- ------------
Net increase in shares outstanding 1,355,634 $ 13,718,789
---------- ------------
---------- ------------
<CAPTION>
Class Z
-----------------------------------------------------------
<S> <C> <C>
Year ended July 31, 2000:
Shares sold 37,256 $ 402,341
Shares issued in reinvestment of dividends and
distributions 54,363 567,943
Shares reacquired (2,059,454) (22,558,975)
---------- ------------
Net decrease in shares outstanding (1,967,835) $(21,588,691)
---------- ------------
---------- ------------
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-119
<PAGE> 196
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund
Financial Highlights
<TABLE>
<CAPTION>
Class A
--------------------------------------
November 18, 1998(a)
Year Ended Through
July 31, 2000 July 31, 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE(d):
Net asset value, beginning of period $ 10.36 $10.00
------------- -------
Income from investment operations:
Net investment income .37 .19
Net realized and unrealized gain on
investments and foreign currencies .82 .35
------------- -------
Total from investment operations 1.19 .54
------------- -------
Less distributions
Dividends from net investment income (.37) (.18)
Distributions from net realized capital
gains (.12) --
------------- -------
Total dividends and distributions (.49) (.18)
------------- -------
Net asset value, end of period $ 11.06 $10.36
------------- -------
------------- -------
TOTAL RETURN(b) 11.73% 5.34%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $14,514 $9,097
Average net assets (000) $12,535 $6,157
Ratios to average net assets:
Expenses, including distribution fees 1.73% 1.92%(c)
Expenses, excluding distribution fees 1.48% 1.67%(c)
Net investment income 3.46% 2.69%(c)
For Class A, B, C and Z shares:
Portfolio turnover rate 244% 180%
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day and includes reinvestment of dividends and distributions. Total
return for periods of less than a full year are not annualized.
(c) Annualized.
(d) Calculated based upon weighted average shares outstanding during the period.
See Notes to Financial Statements
B-120
<PAGE> 197
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class B
--------------------------------------
November 18, 1998(a)
Year Ended Through
July 31, 2000 July 31, 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE(d):
Net asset value, beginning of period $ 10.35 $ 10.00
------------- --------
Income from investment operations:
Net investment income .29 .14
Net realized and unrealized gain on
investments and foreign currencies .82 .34
------------- --------
Total from investment operations 1.11 .48
------------- --------
Less distributions
Dividends from net investment income (.29) (.13)
Distributions from net realized capital
gains (.12) --
------------- --------
Total dividends and distributions (.41) (.13)
------------- --------
Net asset value, end of period $ 11.05 $ 10.35
------------- --------
------------- --------
TOTAL RETURN(b) 10.89% 4.77%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $43,838 $ 30,235
Average net assets (000) $36,574 $ 19,308
Ratios to average net assets:
Expenses, including distribution fees 2.48% 2.67%(c)
Expenses, excluding distribution fees 1.48% 1.67%(c)
Net investment income 2.70% 1.94%(c)
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day and includes reinvestment of dividends and distributions. Total
return for periods of less than a full year are not annualized.
(c) Annualized.
(d) Calculated based upon weighted average shares outstanding during the period.
See Notes to Financial Statements
B-121
<PAGE> 198
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class C
-----------------------------------------
<S> <C> <C>
November 18, 1998(a)
Year Ended Through
July 31, 2000 July 31, 1999
<CAPTION>
------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE(d):
Net asset value, beginning of period $ 10.35 $ 10.00
-------- --------
Income from investment operations:
Net investment income .28 .14
Net realized and unrealized gain on
investments and foreign currencies .83 .34
-------- --------
Total from investment operations 1.11 .48
-------- --------
Less distributions
Dividends from net investment income (.29) (.13)
Distributions from net realized capital
gains (.12) --
-------- --------
Total dividends and distributions (.41) (.13)
-------- --------
Net asset value, end of period $ 11.05 $ 10.35
-------- --------
-------- --------
TOTAL RETURN(b) 10.89% 4.77%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 11,301 $ 14,035
Average net assets (000) $ 12,954 $ 12,039
Ratios to average net assets:
Expenses, including distribution fees 2.48% 2.67%(c)
Expenses, excluding distribution fees 1.48% 1.67%(c)
Net investment income 2.63% 1.91%(c)
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day and includes reinvestment of dividends and distributions. Total
return for periods of less than a full year are not annualized.
(c) Annualized.
(d) Calculated based upon weighted average shares outstanding during the period.
See Notes to Financial Statements
B-122
<PAGE> 199
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class Z
-----------------------------------------
November 18, 1998(a)
Year Ended Through
July 31, 2000 July 31, 1999
------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE(d):
Net asset value, beginning of period $ 10.37 $ 10.00
-------- --------
Income from investment operations:
Net investment income .35 .21
Net realized and unrealized gain on
investments and foreign currencies .85 .35
-------- --------
Total from investment operations 1.20 .56
-------- --------
Less distributions
Dividends from net investment income (.40) (.19)
Distributions from net realized capital
gains (.12) --
-------- --------
Total dividends and distributions (.52) (.19)
-------- --------
Net asset value, end of period $ 11.05 $ 10.37
-------- --------
-------- --------
TOTAL RETURN(b) 11.84% 5.58%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 471 $ 20,843
Average net assets (000) $ 12,354 $ 38,460
Ratios to average net assets:
Expenses, including distribution fees 1.48% 1.67%(c)
Expenses, excluding distribution fees 1.48% 1.67%(c)
Net investment income 3.30% 2.89%(c)
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day and includes reinvestment of dividends and distributions. Total
return for periods of less than a full year are not annualized.
(c) Annualized.
(d) Calculated based upon weighted average shares outstanding during the period.
See Notes to Financial Statements
B-123
<PAGE> 200
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund
Report of Independent Accountants
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,
2000, the results of its operations for the year then ended, and the changes in
its net assets and the financial highlights for the year then ended and for the
period November 18, 1998 (commencement of operations) through July 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at July 31, 2000 by correspondence with the custodian and brokers,
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
September 22, 2000
B-124
<PAGE> 201
Prudential Diversified Funds Prudential Diversified Conservative
Growth Fund
Federal Income Tax Information
We are required by the Internal Revenue Code to advise you within 60 days
of the Fund's fiscal year end (July 31, 2000) 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 $.37, $.29, $.29 and $.40 per
share, of ordinary income, which is taxable as such, respectively. In addition,
the Fund paid to Class A, B, C and Z shares a short-term capital gain
distribution of $.12 which is taxable as such. Further, we wish to advise you
that 6.96% of the ordinary income dividends paid in the fiscal year ended July
31, 2000 qualified for the corporate dividend received deduction available to
corporate taxpayers.
In January 2001, 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 2000.
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 6.73% 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-125
<PAGE> 202
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
----------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 96.7%
Common Stocks 58.8%
-------------------------------------------------------------------------------------
Aerospace 0.3%
37,900 British Aerospace PLC (United Kingdom)(a) $ 255,560
5,825 GenCorp., Inc. 46,236
19,300 Loral Space & Communications, Inc. 100,119
1,350 Skywest, Inc. 60,244
----------------
462,159
-------------------------------------------------------------------------------------
Agriculture & Equipment
2,175 Toro Co. 65,522
-------------------------------------------------------------------------------------
Airlines 0.1%
10,100 Deutsche Lufthansa AG (Germany) 249,008
-------------------------------------------------------------------------------------
Aluminum 0.5%
26,400 Alcoa, Inc. 798,600
3,012 Reliance Steel & Aluminum Co. 63,252
----------------
861,852
-------------------------------------------------------------------------------------
Apparel 0.1%
2,225 American Eagle Outfitters, Inc.(a) 33,097
2,300 Kellwood Co. 51,462
----------------
84,559
-------------------------------------------------------------------------------------
Audio/Visual 0.4%
1,175 Harman International Industries, Inc. 74,319
3,000 Polycom, Inc.(a) 284,578
3,800 Sony Corp. (Japan) 349,349
----------------
708,246
-------------------------------------------------------------------------------------
Auto & Truck 0.6%
1,475 Borg-Warner Automotive, Inc. 50,058
2,237 Delphi Automotive Systems Corp. 33,136
6,375 Dura Automotive Systems, Inc.(a) 65,742
3,610 General Motors Corp. 205,544
11,100 GKN PLC (United Kingdom) 142,127
</TABLE>
See Notes to Financial Statements
B-126
<PAGE> 203
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
----------------------------------------------------------------------------------------
<C> <S> <C>
3,200 Lear Corp.(a) $ 74,600
87,000 Nissan Motor Co., Ltd. (Japan)(a) 434,464
1,450 Superior Industries Int'l, Inc. 43,591
----------------
1,049,262
-------------------------------------------------------------------------------------
Banking 3.4%
4,650 BancorpSouth, Inc. 70,622
3,000 Bank of New York Co., Inc. 140,438
1,000 Bank United Corp. (Class A) 36,438
13,700 BankAmerica Corp. 649,037
5,758 Banknorth Group, Inc. 88,169
2,320 Banque Nationale de Paris (France) 229,006
6,600 Bayerische Vereinsbank AG (Germany) 383,243
2,275 BSB Bancorp, Inc. 48,628
1,875 City National Corp. 68,789
1,975 CORUS Bankshares, Inc. 57,769
5,950 Cullen/Frost Bankers, Inc. 169,203
5,968 CVB Financial Corp. 93,996
250 First Citizens BancShares, Inc. (Class A) 15,250
17,000 Fuji Bank (Japan) 109,883
6,000 Golden State Bancorp, Inc.(a) 114,750
1,400 Greater Bay Bancorp 75,338
20,700 Halifax Group PLC (United Kingdom) 162,224
2,750 Harbor Florida BancShares, Inc. 31,281
23,300 HSBC Holdings PLC (Hong Kong)(a) 315,447
19,000 IND Bank (Japan) 121,943
5,100 ING Groep N.V. (Netherlands) 341,001
20,500 Investor AB (Sweden) 297,228
5,700 LaBranche & Co., Inc.(a) 116,138
4,650 MAF Bancorp, Inc. 92,709
35,400 Overseas-Chinese Banking Corp. Ltd. (Singapore) 257,432
2,000 Queens County Bancorp, Inc. 46,250
13,200 Sao Paolo Imi SpA (Italy) 223,890
9,800 Silicon Valley Bancshares 429,362
2,325 Southwest Bancorp of Texas(a) 60,886
35,000 Sumitomo Trust & Banking Co. Ltd. (Japan) 225,590
12,460 Svenska Handelsbanken, Ser. A (Sweden) 187,448
</TABLE>
See Notes to Financial Statements
B-127
<PAGE> 204
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
----------------------------------------------------------------------------------------
<C> <S> <C>
41,000 The Sakura Bank Ltd. (Japan) $ 237,687
45,896 United Overseas Bank Ltd. 328,462
4,675 Washington Federal, Inc. 87,656
3,200 Westamerica Bancorporation 88,800
1,625 Whitney Holding Corp. 60,430
----------------
6,062,423
-------------------------------------------------------------------------------------
Broadcasting
100 Wink Communications, Inc.(a) 2,450
-------------------------------------------------------------------------------------
Building & Products 1.0%
2,565 ABB AG (Switzerland) 305,750
5,700 American Standard Companies, Inc.(a) 254,006
7,600 Centex Corp. 181,925
5,375 D.R.Horton, Inc. 83,313
775 Dycom Industries, Inc.(a) 33,131
2,575 Kaufman & Broad Home Corp. 50,373
5,050 M.D.C. Holdings, Inc. 101,000
6,175 Pulte Corp. 141,639
7,150 Rayonier, Inc. 290,916
1,525 Texas Industries, Inc. 49,467
5,000 Thomas Industries, Inc. 104,375
1,925 Toll Brothers, Inc.(a) 46,561
5,250 Webb Delaware Corp. 80,063
----------------
1,722,519
-------------------------------------------------------------------------------------
Cable 0.1%
1,875 Belden, Inc. 47,109
1,650 Cable Design Technologies Corp. 58,163
4,275 General Cable Corp. 36,872
7,000 Sumitomo Electric Industries (Japan) 113,370
----------------
255,514
-------------------------------------------------------------------------------------
Casinos
775 Anchor Gaming(a) 41,995
</TABLE>
See Notes to Financial Statements
B-128
<PAGE> 205
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
----------------------------------------------------------------------------------------
<C> <S> <C>
Chemicals 0.7%
5,700 Akzo Nobel N.V. (Netherlands) $ 253,533
3,050 Albemarle Corp. 75,297
1,800 Arch Chemicals, Inc. 36,000
200 Cambrex Corp. 9,038
2,800 Cytec Industries, Inc.(a) 87,500
5,400 Eastman Chemical Co. 253,125
825 H.B. Fuller Co. 31,866
12,300 Imperial Chemical Industries PLC (United Kingdom) 88,376
4,250 Olin Corp. 66,672
1,000 OM Group, Inc. 47,437
3,050 Spartech Corp. 81,778
1,700 The Geon Co. 27,944
2,800 The Lubrizol Corp. 59,850
7,200 W.R. Grace & Co.(a) 71,100
----------------
1,189,516
-------------------------------------------------------------------------------------
Commercial Services
2,900 Luminant Worlwide Corp.(a) 23,562
-------------------------------------------------------------------------------------
Computers 2.7%
5,300 ASM Lithography Holding N.V. (Netherlands)(a) 210,675
2,275 Brooktrout, Inc.(a) 68,819
7,200 Catapult Communications Corp.(a) 95,850
1,200 Citrix Systems, Inc.(a) 18,300
40,800 Compaq Computer Corp. 1,144,950
4,500 Comverse Technology, Inc.(a) 394,875
8,300 Dell Computer Corp.(a) 364,681
10,100 EMC Corp.(a) 859,763
9,800 Hewlett-Packard Co. 1,070,037
2,000 InFocus Corp.(a) 70,000
2,700 Microsoft Corp.(a) 188,494
3,100 TDK Corp. 393,700
----------------
4,880,144
-------------------------------------------------------------------------------------
Computer Services 1.8%
8,400 Affiliated Computer Services, Inc.(a) 378,525
</TABLE>
See Notes to Financial Statements
B-129
<PAGE> 206
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
----------------------------------------------------------------------------------------
<C> <S> <C>
300 AnswerThink Consulting Group, Inc.(a) $ 5,044
2,700 Axent Technologies, Inc.(a) 66,488
21,000 Cisco Systems, Inc.(a) 1,374,187
100 E Piphany, Inc. 9,306
8,500 Marchfirst, Inc.(a) 175,844
7,500 NetSolve, Inc.(a) 176,250
100 Predictive Systems, Inc.(a) 2,200
1,300 RadiSys Corp.(a) 79,950
2,000 RSA Security, Inc.(a) 126,750
300 Sapient Corp.(a) 34,125
4,700 Sun Microsystems, Inc.(a) 495,556
1,600 Verisign, Inc.(a) 253,900
----------------
3,178,125
-------------------------------------------------------------------------------------
Consumer Products 0.4%
2,962 Fossil, Inc. 54,056
2,000 PerkinElmer, Inc. 127,875
1,340 Siemens AG (Germany) 207,411
2,675 Tupperware Corp. 51,995
2,400 Waters Corp.(a) 284,700
----------------
726,037
-------------------------------------------------------------------------------------
Cosmetics/Toiletries 0.3%
9,000 Kao Corp. (Japan) 266,216
4,100 The Estee Lauder Co., Inc. 180,400
----------------
446,616
-------------------------------------------------------------------------------------
Dental Supplies
1,925 Patterson Dental Co.(a) 51,013
-------------------------------------------------------------------------------------
Diversified Manufacturing 0.9%
1,800 Corning, Inc. 421,087
2,000 CUNO, Inc.(a) 60,500
11,000 General Electric Co. 565,812
66,800 Invensys PLC (United Kingdom) 239,481
1,875 Trinity Industries, Inc. 36,094
5,350 Veba AG (Germany) 299,007
----------------
1,621,981
</TABLE>
See Notes to Financial Statements
B-130
<PAGE> 207
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
----------------------------------------------------------------------------------------
<C> <S> <C>
Diversified Operations 0.3%
2,000 Lagardere S.A. (France) $ 129,481
7,075 Pactiv Corp.(a) 65,444
1,225 United Stationers, Inc. 35,678
3,239 Vivendi (France) 258,778
----------------
489,381
-------------------------------------------------------------------------------------
Drugs & Medical Supplies 0.5%
2,000 Datascope Corp.(a) 75,500
7,000 Sankyo Co. Ltd. (Japan) 164,240
26,000 Smithkline Beecham PLC (United Kingdom)(a) 335,054
5,433 Zeneca Group PLC (United Kingdom)(a) 234,138
----------------
808,932
-------------------------------------------------------------------------------------
Electrical Utilities 0.5%
24,277 British Energy 87,307
1,825 CH Energy Group, Inc. 59,541
3,025 Conectiv, Inc. 50,101
17,020 Endesa S.A. (Spain) 353,202
5,775 Minnesota Power, Inc. 123,080
6,300 Public Service Co. of New Mexico 114,187
950 RGS Energy Group, Inc. 21,791
2,975 Sierra Pacific Resources 42,022
----------------
851,231
-------------------------------------------------------------------------------------
Electronic Components 3.3%
4,700 Alpha Industries, Inc.(a) 160,094
2,500 Applied Micro Circuits Corp.(a) 373,125
13,900 Arrow Electronics, Inc.(a) 459,569
1,650 ATMI, Inc.(a) 42,488
5,200 Avnet, Inc. 296,075
1,300 Broadcom Corp.(a) 291,525
2,050 Cleco Corp. 75,594
575 Electro Scientific Industries, Inc.(a) 26,127
1,625 Electroglas, Inc.(a) 32,500
11,040 Electrolux AB, Ser. B (Sweden) 164,280
3,200 Flextronics International Ltd.(a) 226,550
</TABLE>
See Notes to Financial Statements
B-131
<PAGE> 208
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
----------------------------------------------------------------------------------------
<C> <S> <C>
17,101 General Motors Corp (Class H) $ 442,488
10,000 Gentex Corp.(a) 227,500
8,000 Hitachi Ltd. (Japan) 95,677
2,450 Idacorp, Inc. 90,650
1,100 Integrated Silicon Solution, Inc.(a) 23,100
7,500 Motorola, Inc. 247,969
6,000 Novellus Systems, Inc.(a) 323,625
4,904 Philips Electronic N.V. (Netherlands) 222,173
2,500 PMC-Sierra, Inc.(a) 484,687
225 Power-One, Inc.(a) 26,564
300 Q-Logic Corp. 22,350
7,600 Reliant Energy, Inc. 254,600
2,700 Rogers Corp.(a) 96,525
7,400 Stmicroelectronics N.V. (Netherlands) 421,337
13,300 Texas Instruments, Inc. 780,544
700 Veeco Instruments, Inc.(a) 55,125
----------------
5,962,841
-------------------------------------------------------------------------------------
Entertainment 0.1%
1,625 Gaylord Entertainment Co. 40,320
1,900 SFX Entertainment, Inc.(a) 87,400
----------------
127,720
-------------------------------------------------------------------------------------
Fertilizers 0.1%
2,000 Potash Corp. of Saskatchewan, Inc. 107,375
-------------------------------------------------------------------------------------
Financial Services 3.2%
900 ACOM Co. Ltd. (Japan) 68,197
4,075 Allied Capital Corp. 77,170
13,700 American Express Co. 776,619
2,750 Arthur J. Gallagher & Co. 134,922
2,175 Bancwest Corp. 40,102
19,850 Citigroup, Inc. 1,400,666
750 Dain Rauscher Corp. 50,859
5,025 Doral Financial Corp. 65,325
3,250 Downey Financial Corp. 113,750
1,700 Eaton Vance Corp. 88,081
9,000 Federated Investment, Inc. 235,687
</TABLE>
See Notes to Financial Statements
B-132
<PAGE> 209
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
----------------------------------------------------------------------------------------
<C> <S> <C>
3,500 Fulton Financial Corp. $ 75,250
12,000 Getronics N.V. (Netherlands) 202,424
2,700 John H. Harland Co. 36,113
4,300 Merrill Lynch & Co., Inc. 555,775
5,250 Metris Co., Inc. 153,891
11,900 Morgan Stanley Dean Witter 1,085,875
1,800 Orix Corp. (Japan) 232,528
3,100 PFF Bancorp, Inc. 53,863
7,100 Schwab Charles Corp. 256,487
3,500 Webster Financial Corp. 78,313
----------------
5,781,897
-------------------------------------------------------------------------------------
Food & Beverage 1.4%
700 Adolph Coors Co. 44,100
34,300 Cadbury Schweppes PLC (United Kingdom) 221,906
1,800 Dean Foods Co. 62,663
29,100 Diageo PLC (United Kingdom) 255,525
2,325 Fleming Cos., Inc. 36,473
4,800 Heineken N.V. (Netherlands) 274,496
2,750 Michael Foods, Inc. 66,000
27,200 Nabisco Group Holding Corp. 720,800
2,400 Performance Food Group Co.(a) 79,050
4,350 Riviana Foods, Inc. 70,687
16,400 Sara Lee Corp. 302,375
2,675 Smithfield Foods, Inc.(a) 76,070
84,200 Tesco PLC (United Kingdom) 277,573
2,500 Universal Foods Corp. 48,750
----------------
2,536,468
-------------------------------------------------------------------------------------
Gold Mines
2,575 Commerce Group Corp.(a) 71,456
-------------------------------------------------------------------------------------
Health Care 3.0%
3,925 Apria Healthcare Group, Inc.(a) 58,630
29,200 Foundation Health Systems, Inc. 425,225
39,600 HCA-The Healthcare Corp. 1,346,400
33,900 HEALTHSOUTH Corp.(a) 201,281
4,950 Nationwide Health Properties, Inc. 77,962
</TABLE>
See Notes to Financial Statements
B-133
<PAGE> 210
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
----------------------------------------------------------------------------------------
<C> <S> <C>
7,400 PacifiCare Health Systems, Inc.(a) $ 481,000
4,500 PAREXEL International Corp.(a) 44,719
48,100 Tenet Healthcare Corp.(a) 1,464,044
2,000 Trigon Healthcare, Inc.(a) 106,000
2,050 Varian Med Systems, Inc. 88,150
11,700 Wellpoint Health Networks, Inc.(a) 1,020,094
----------------
5,313,505
-------------------------------------------------------------------------------------
Home Furnishings 0.1%
2,000 Ethan Allen Interiors, Inc. 51,000
3,550 Furniture Brands International, Inc.(a) 52,584
----------------
103,584
-------------------------------------------------------------------------------------
Hotels 0.2%
20,500 Hilton Hotels Corp. 210,125
27,400 MeriStar Hotels & Resorts, Inc. 73,638
----------------
283,763
-------------------------------------------------------------------------------------
Household Products
1,050 Libbey, Inc. 32,747
-------------------------------------------------------------------------------------
Human Resources 0.1%
1,750 CDI Corp.(a) 34,781
2,925 Spherion Corp.(a) 55,941
----------------
90,722
-------------------------------------------------------------------------------------
Industrial
525 Brooks Automation, Inc.(a) 26,053
1,400 Springs Industries, Inc. 45,150
----------------
71,203
-------------------------------------------------------------------------------------
Insurance 4.1%
3,100 Alfa Corp. 56,575
7,700 Alleanza Assicurazionni (Italy)(a) 95,989
1,124 Allianz AG (Germany) 416,722
3,600 American Financial Group, Inc. 90,000
2,900 American General Corp. 193,394
8,213 American International Group, Inc. 720,134
</TABLE>
See Notes to Financial Statements
B-134
<PAGE> 211
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
----------------------------------------------------------------------------------------
<C> <S> <C>
2,000 Annuity & Life Ltd. $ 49,250
15,800 AXA Financial, Inc. 604,350
1,700 AXA-UAP (France) 258,406
14,800 Chubb Corp. 1,095,200
1,640 Fidelity National Financial, Inc. 29,008
2,100 First American Financial Corp. 32,681
10,000 John Hancock Financial Services, Inc.(a) 236,250
2,500 Leucadia National Corp. 66,719
18,900 Old Republic International Corp. 421,706
500 Oxford Health Plans, Inc.(a) 11,969
5,150 Presidential Life Corp. 74,353
11,600 Prudential Corp. PLC (United Kingdom) 158,350
800 Quotesmith.com, Inc.(a) 1,950
1,779 Radian Group, Inc. 108,297
9,000 Reinsurance Group of America, Inc. 286,312
20,900 SAFECO Corp. 482,006
6,100 St. Paul Companies, Inc. 271,069
1,575 Stancorp Financial Group, Inc. 54,337
2,750 The MONY Group, Inc. 98,312
1,575 Triad Guaranty, Inc.(a) 38,194
11,900 Unitedhealth Group, Inc. 973,569
598 Zurich Versicherungs-Gesellschaft (Switzerland) 322,382
----------------
7,247,484
-------------------------------------------------------------------------------------
Internet 0.1%
475 Allaire Corp.(a) 14,658
400 Go2Net, Inc.(a) 23,625
100 Interwoven, Inc.(a) 6,456
1,000 Investment Technology Group, Inc.(a) 48,625
1,650 National Discount Brokers Group, Inc.(a) 54,347
1,225 PurchasePro.com Inc.(a) 47,775
300 Viant Corp.(a) 9,900
300 Ziff-Davis, Inc.(a) 5,138
----------------
210,524
</TABLE>
See Notes to Financial Statements
B-135
<PAGE> 212
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
----------------------------------------------------------------------------------------
<C> <S> <C>
Machinery & Equipment 0.2%
1,050 Helix Technology Corp. $ 34,125
1,525 IDEX Corp. 50,325
3,925 JLG Industries, Inc. 39,986
1,700 Kulicke & Soffa Industries, Inc.(a) 76,712
5,475 Lincoln Electric Holdings, Inc. 82,809
2,175 Milacron, Inc. 31,266
2,975 Terex Corp.(a) 49,088
2,225 The Manitowoc Co., Inc. 54,791
----------------
419,102
-------------------------------------------------------------------------------------
Manufacturing 0.4%
1,275 AptarGroup, Inc. 31,795
1,290 Cie De Saint Gobain (France) 189,508
900 Cirrus Logic, Inc.(a) 17,438
2,100 GaSonics International Corp.(a) 50,400
2,000 KEMET Corp.(a) 48,000
4,900 Mettler-Toledo International, Inc.(a) 198,450
2,350 Scott Technologies, Inc. 45,237
6,520 Thyssen AG (Germany) 111,918
100 Varian, Inc.(a) 4,213
----------------
696,959
-------------------------------------------------------------------------------------
Media 1.4%
8,500 Clear Channel Communications, Inc.(a) 647,594
1,400 Cumulus Media, Inc. 13,650
3,600 Gemstar-TV Guide Int'l, Inc.(a) 218,925
4,400 Omnicom Group, Inc. 374,000
1,575 Penton Media Inc. 54,534
1,200 Time Warner, Inc. 92,025
17,330 Viacom, Inc. (Class B)(a) 1,149,196
----------------
2,549,924
-------------------------------------------------------------------------------------
Medical Products & Services
5,150 Bergen Brunswig Corp. (Class A) 45,062
200 Coherent, Inc.(a) 11,975
----------------
57,037
</TABLE>
See Notes to Financial Statements
B-136
<PAGE> 213
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
----------------------------------------------------------------------------------------
<C> <S> <C>
Medical Technology 0.9%
1,400 Albany Molecular Research, Inc. $ 77,525
8,000 Amgen, Inc.(a) 519,500
2,600 Genetech, Inc. 395,525
5,500 Inhale Therapeutic Systems, Inc.(a) 446,531
7,900 Serono S.A., ADR(a) 213,300
----------------
1,652,381
-------------------------------------------------------------------------------------
Metals 0.5%
21,500 Broken Hill Proprietary Co. Ltd. (Australia) 227,499
2,100 Cleveland-Cliffs, Inc. 52,106
3,275 Commercial Metals Co. 96,203
1,975 Kaydon Corp. 41,352
8,400 Phelps Dodge Corp. 341,775
1,450 Precision Castparts Corp. 92,709
3,225 Worthington Industries, Inc. 34,064
----------------
885,708
-------------------------------------------------------------------------------------
Mining 0.3%
27,600 Freeport-McMoRan Copper & Gold, Inc.(a) 236,325
18,000 Newmont Mining Corp. 319,500
----------------
555,825
-------------------------------------------------------------------------------------
Networking 0.3%
400 Adaptec, Inc.(a) 9,900
1,800 Anixter International, Inc.(a) 52,313
400 C-COR.net Corp.(a) 10,575
1,800 Juniper Networks, Inc.(a) 256,387
1,800 Network Appliance, Inc.(a) 155,137
----------------
484,312
-------------------------------------------------------------------------------------
Office Equipment & Supplies 0.6%
6,000 Canon, Inc. (Japan) 267,312
15,200 Harris Corp. 520,600
3,150 HON Industries, Inc. 84,065
30,200 IKON Office Solutions, Inc. 122,687
16,900 Lanier Worldwide, Inc.(a) 11,619
----------------
1,006,283
</TABLE>
See Notes to Financial Statements
B-137
<PAGE> 214
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
----------------------------------------------------------------------------------------
<C> <S> <C>
Oil & Gas Services 2.9%
5,000 Alliant Energy Resources, Inc. $ 303,125
1,800 Amerada Hess Corp. 108,900
3,025 Berry Petroleum Co. 55,017
35,200 BP Amoco PLC (United Kingdom) 308,033
10,004 BP Amoco PLC, ADR 523,334
5,475 Energen Corp. 123,188
36,500 ENI SpA (Italy) 204,333
3,225 Equitable Resources, Inc. 167,902
2,925 Helmerich & Payne, Inc. 93,600
3,676 Kerr-McGee Corp. 201,721
7,600 Keyspan Energy 241,300
9,000 Marine Drilling Companies, Inc.(a) 195,750
2,775 Mitchell Energy & Development Corp. 88,453
8,500 Newfield Exploration Co.(a) 289,531
5,200 Nuevo Energy Co. 79,300
8,900 Occidental Petroleum Corp. 180,225
3,475 Oneok, Inc. 92,739
2,000 Patterson Energy, Inc 49,875
525 Quest Diagnostics, Inc.(a) 52,992
5,000 Schlumberger Ltd. 369,687
1,000 St. Mary Land & Exploration Co. 29,937
11,585 Total S.A., ADR 852,222
2,853 Total S.A., Ser. B (France) 422,824
1,625 Ultramar Diamond Shamrock Corp. 37,172
2,850 Valero Energy Corp. 73,922
1 Varco International, Inc.(a) 9
----------------
5,145,091
-------------------------------------------------------------------------------------
Paper & Packaging 1.9%
1,750 Chesapeake Corp. 45,828
5,000 Fort James Corp. 152,813
6,300 Georgia-Pacific Corp. (Timber Group) 190,969
25,100 Georgia-Pacific Group 622,793
13,200 International Paper Co. 448,800
15,700 Mead Corp. 398,387
14,000 Nippon Paper Industries Co. Ltd. (Japan) 102,250
</TABLE>
See Notes to Financial Statements
B-138
<PAGE> 215
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
----------------------------------------------------------------------------------------
<C> <S> <C>
3,500 Pope & Talbot, Inc. $ 67,375
8,800 Temple- Inland, Inc. 382,250
6,300 UPM-Kymmene OY (Finland) 155,322
10,400 Weyerhaeuser Co. 475,150
14,300 Willamette Industries, Inc. 433,469
----------------
3,475,406
-------------------------------------------------------------------------------------
Pharmaceuticals 2.2%
1,225 Alpharma, Inc. 80,238
11,000 American Home Products Corp. 583,687
3,025 Bindley Western Industries, Inc. 79,595
4,300 Eli Lilly & Co. 446,663
28,325 Pfizer, Inc. 1,221,516
14,078 Pharmacia Corp. 770,770
5,800 Rhone Poulenc S.A., Ser. A (France) 446,723
27 Roche Holdings AG (Switzerland) 253,592
----------------
3,882,784
-------------------------------------------------------------------------------------
Photography 0.7%
22,400 Eastman Kodak Co. 1,229,200
-------------------------------------------------------------------------------------
Printing & Publishing 0.3%
1,700 Banta Corp. 32,831
2,400 Lee Enterprises, Inc. 63,600
1,000 Primedia, Inc. 92,250
28,200 Reed International PLC (United Kingdom) 225,438
1,000 Scholastic Corp.(a) 63,875
----------------
477,994
-------------------------------------------------------------------------------------
Radio & Television
950 Entercom Communications Corp.(a) 36,872
-------------------------------------------------------------------------------------
Real Estate Development
700 Catellus Development Corp.(a) 12,075
-------------------------------------------------------------------------------------
Real Estate 1.0%
400 Alexandria Real Estate Equities, Inc. 14,325
3,450 Amli Residential Properties Trust 84,094
3,575 Arden Realty, Inc. 94,737
</TABLE>
See Notes to Financial Statements
B-139
<PAGE> 216
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
----------------------------------------------------------------------------------------
<C> <S> <C>
1,925 Avalonbay Communities, Inc. $ 90,716
3,450 Bradley Real Estate, Inc. 74,175
2,850 BRE Properties, Inc. 92,447
3,375 Cabot Industrial Trust 69,188
1,750 Camden Property Trust 54,688
2,000 Developers Diversified Realty Corp. 31,500
2,350 First Industrial Realty Trust, Inc. 75,200
2,875 Franchise Finance Corp. of America 69,000
2,400 Gables Residential Trust 65,250
800 General Growth Properties, Inc. 27,100
1,600 Health Care Property Investments, Inc. 47,600
2,850 Health Care REIT, Inc. 51,300
3,625 Highwoods Properties, Inc. 97,875
2,525 Hospitality Properties Trust 62,494
6,950 JDN Realty Corp. 72,975
9,000 MeriStar Hospitality Corp. 199,687
5,300 Reckson Associates Realty Corp. 139,125
3,275 Regency Realty Corp. 78,600
600 SL Green Realty Corp. 17,813
3,325 Summit Properties, Inc. 79,384
2,100 Weingarten Realty Investors 86,887
----------------
1,776,160
-------------------------------------------------------------------------------------
Restaurants 0.5%
11,600 CKE Restaurants, Inc. 34,075
38,400 Darden Restaurants, Inc. 626,400
1,900 Jack in the Box, Inc.(a) 40,731
3,625 Ruby Tuesday, Inc. 44,633
8,525 Ryan's Family Steak Houses, Inc.(a) 77,791
----------------
823,630
-------------------------------------------------------------------------------------
Retail 3.5%
2,175 Alberto-Culver Co. (Class B) 66,066
4,725 Ames Department Stores, Inc.(a) 33,666
2,100 BJ's Wholesale Club, Inc.(a) 62,869
10,300 Consolidated Stores Corp.(a) 122,956
20,500 Dillards, Inc. (Class A) 280,594
</TABLE>
See Notes to Financial Statements
B-140
<PAGE> 217
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
----------------------------------------------------------------------------------------
<C> <S> <C>
1,875 Dress Barn, Inc.(a) $ 38,906
1,100 Factory 2-U Stores, Inc.(a) 45,650
14,400 Gap, Inc. 515,700
31,900 Great Universal Stores PLC (United Kingdom) 211,039
23,800 Home Depot, Inc. 1,231,650
5,000 J.C. Penney Co., Inc. 80,625
48,100 Kmart Corp.(a) 336,700
13,500 Kohl's Corp.(a) 766,125
1,525 Michaels Stores, Inc.(a) 66,052
4,700 Pep Boys - Manny, Moe & Jack 27,319
5,150 Pier 1 Imports, Inc. 61,478
4,025 Polo Ralph Lauren Corp.(a) 65,155
11,500 RadioShack Corp. 648,312
5,200 Ross Stores, Inc. 79,950
2,625 Russell Corp. 51,680
700 Sears, Roebuck & Co. 20,912
11,000 Tiffany & Co. 376,750
13,800 Toys 'R' Us, Inc.(a) 227,700
4,950 Venator Group, Inc. 69,919
300 Ventro Corp. 3,619
13,400 Wal-Mart Stores, Inc. 736,162
2,575 Zale Corp.(a) 96,241
----------------
6,323,795
-------------------------------------------------------------------------------------
Semiconductors 1.0%
5,800 Applied Materials, Inc.(a) 440,075
19,200 Intel Corp. 1,281,600
200 Micrel, Inc.(a) 10,012
200 Silicon Laboratories, Inc.(a) 23,025
700 Varian Semiconductor Equipment, Inc. 33,994
----------------
1,788,706
-------------------------------------------------------------------------------------
Services 0.3%
1,100 ADVO, Inc. 45,031
8,000 Fujitsu (Japan) 224,951
875 Littelfuse, Inc. 30,844
</TABLE>
See Notes to Financial Statements
B-141
<PAGE> 218
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
----------------------------------------------------------------------------------------
<C> <S> <C>
23,400 National Grid Co. PLC (United Kingdom) $ 192,149
20,900 Service Corp. International(a) 53,556
----------------
546,531
-------------------------------------------------------------------------------------
Shipbuilding
1,050 Newport News Shipbuilding, Inc. 42,394
-------------------------------------------------------------------------------------
Software 1.2%
100 Actuate Corp.(a) 4,925
1,300 Agency.com, Inc.(a) 28,031
100 Alteon Websystems, Inc.(a) 13,194
7,500 America Online, Inc.(a) 399,844
300 Broadbase Software, Inc.(a) 7,069
5,400 BroadVision, Inc.(a) 195,412
100 Clarus Corp.(a) 3,700
4,700 Computer Associates International, Inc.(a) 116,619
1,600 Exodus Communications, Inc.(a) 71,100
4,200 HNC Software, Inc.(a) 185,325
100 Informatica Corp.(a) 8,000
300 ITXC Corp.(a) 5,438
1,400 Keynote Systems, Inc.(a) 53,062
700 Liberate Technologies(a) 16,056
782 NetIQ Corp.(a) 37,732
200 Nuance Communications, Inc.(a) 28,075
1,800 Onyx Software Corp.(a) 43,537
2,975 Phoenix Technologies Ltd.(a) 50,575
2,800 Progress Software Corp.(a) 42,175
825 Proxicom, Inc.(a) 34,083
200 Software.com, Inc.(a) 20,175
2,700 Sybase, Inc.(a) 65,137
600 U.S. Interactive, Inc.(a) 8,100
6,850 VERITAS Software Corp.(a) 698,272
2,200 Verity, Inc.(a) 80,162
----------------
2,215,798
</TABLE>
See Notes to Financial Statements
B-142
<PAGE> 219
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
----------------------------------------------------------------------------------------
<C> <S> <C>
Steel
2,400 Carpenter Technology Corp. $ 73,500
-------------------------------------------------------------------------------------
Telecommunications 6.7%
900 Advanced Fibre Communications, Inc.(a) 38,588
5,000 Alcatel (France) 368,886
4,800 Allegiance Telecommunications, Inc.(a) 266,700
7,100 ALLTEL Corp. 437,538
32,600 AT&T Corp.(a) 808,750
1,875 Audiovox Corp.(a) 29,062
16,800 British Telecommunications PLC (United Kingdom) 222,034
500 Copper Mountain Networks, Inc.(a) 39,430
1,382 Deutsche Telekom (Germany) 60,215
400 Ditech Communications Corp.(a) 19,150
500 Dobson Communications Corp. (Class A)(a) 10,938
22,300 Ericsson (L.M.) Telephone Co., Inc., ADR 437,638
18,000 Global Crossing Ltd.(a) 437,625
1,600 Intermedia Communications, Inc.(a) 28,200
9,200 JDS Uniphase Corp.(a) 1,086,750
1,375 Leap Wireless International, Inc. 87,141
2,300 Level 3 Communications, Inc.(a) 157,406
7,400 Metromedia Fiber Network, Inc. 259,925
3,600 Millicom International Cellular S.A., ADR(a) 158,850
3,500 Net2000 Communication, Inc.(a) 33,250
8,300 Nextel Communications, Inc.(a) 464,281
5,700 Nextlink Communications, Inc. 188,456
24 Nippon Telegraph & Telephone Corp. (Japan) 287,032
23,600 Nokia Corp., ADR(a) 1,045,775
9,800 Nortel Networks Corp. 728,875
7,537 NTL, Inc.(a) 339,636
8 NTT Mobile Communications (Japan) 200,849
28,800 Portugal Telecom S.A. (Portugal) 313,646
19,000 Qwest Communications International, Inc.(a) 891,812
3,200 Tektronix, Inc. 196,800
3,700 Tele Danmark AS (Denmark) 227,637
</TABLE>
See Notes to Financial Statements
B-143
<PAGE> 220
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
----------------------------------------------------------------------------------------
<C> <S> <C>
9,509 Telefonica S.A. (Spain) $ 200,065
1,800 True North Communications, Inc. 87,863
3,900 Univision Communications, Inc.(a) 3484,575
25,196 Vodafone AirTouch PLC, ADR 1,086,577
62,500 Vodafone Group PLC (United Kingdom) 276,277
----------------
12,008,232
-------------------------------------------------------------------------------------
Tobacco 0.8%
13,200 Loews Corp. 828,300
14,500 Philip Morris Co., Inc. 366,125
8,833 R.J. Reynolds Tobacco Holdings, Inc. 250,636
----------------
1,445,061
-------------------------------------------------------------------------------------
Transportation 0.2%
2,325 Alexander & Baldwin, Inc. 58,561
3,225 ArvinMeritor, Inc. 50,391
4,275 Roadway Express, Inc. 101,531
2,225 Sea Containers Ltd. 58,406
----------------
268,889
-------------------------------------------------------------------------------------
Trucking & Shipping 0.1%
3,050 Airborne Freight Corp. 47,084
2,700 US Freightways Corp. 74,925
----------------
122,009
-------------------------------------------------------------------------------------
Utilities 0.5%
2,100 California Water Service Group 50,137
4,900 General Public Utilities Corp. 129,850
1,470 Suez Lyonnaise des Eaux (France) 240,476
7,600 Unicom Corp. 312,075
3,750 Washington Gas Light Co. 92,344
----------------
824,882
</TABLE>
See Notes to Financial Statements
B-144
<PAGE> 221
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
----------------------------------------------------------------------------------------
<C> <S> <C>
Waste Management 0.1%
2,675 Waste Connections, Inc.(a) $ 54,169
11,600 Waste Management, Inc. 216,775
----------------
270,944
----------------
Total common stocks (cost $92,948,043) 104,870,820
----------------
</TABLE>
CORPORATE BONDS 20.9%
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
--------------------------------------------------------------------------------------------
Aerospace 0.2%
BE Aerospace, Inc., Sr. Sub. Notes,
B1 $ 50 9.50%, 11/1/08 47,375
Sequa Corp., Sr. Notes,
Ba2 250 9.00%, 8/1/09 242,500
----------------
289,875
-------------------------------------------------------------------------------------
Airlines 0.3%
Continental Airlines Inc., Sr.
Notes,
Ba2 140 8.00%, 12/15/05 130,733
Delta Air Lines, Inc., Sr. Notes,
Baa3 250 9.75%, 5/15/21 263,055
Baa3 100 8.30%, 12/15/29 89,652
United Airlines, Inc., Sr. Deb.
Notes,
Baa3 15 9.75%, 8/15/21 14,783
US Airways, Inc., Sr. Notes,
B3 50 9.625%, 2/1/01 49,517
----------------
547,740
-------------------------------------------------------------------------------------
Audio/Visual
Imax Corp., Sr. Notes,
Ba2 45 7.875%, 12/1/05 43,200
-------------------------------------------------------------------------------------
Auto & Truck 0.1%
Federal-Mogul Corp., Sr. Notes,
Ba2 50 7.375%, 1/15/06 40,500
Ba2 105 7.50%, 1/15/09 80,325
</TABLE>
See Notes to Financial Statements
B-145
<PAGE> 222
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lear Seating Corp., Sr. Sub. Notes,
Ba3 $ 75 8.25%, 2/1/02 $ 73,427
----------------
194,252
-------------------------------------------------------------------------------------
Auto Rental
United Rentals, Inc., Gtd. Notes,
B1 55 9.25%, 1/15/09 51,150
-------------------------------------------------------------------------------------
Automotive Parts 0.4%
Collins & Aikman Products Co., Gtd.
Notes,
B2 110 11.50%, 4/15/06 106,700
Eagle-Picher, Inc., Gtd. Notes
B3 75 9.375%, 3/1/08 62,250
Hayes Wheels Int'l, Inc., Sr. Sub.
Notes,
B2 250 9.125%, 7/15/07 228,750
Lear Corp. Sr. Notes, Ser. B
Ba1 250 8.11%, 5/15/09 229,375
----------------
627,075
-------------------------------------------------------------------------------------
Banking 1.1%
Bank of Tokyo-Mitsubishi Ltd., Sr. Sub. Notes,
A3 400 8.40%, 4/15/10 403,554
Central Bank of Philippines, Bonds,
NR 88 7.8125%, 1/5/05 82,129
Chevy Chase Savings Bank, Sub. Deb.
B1 100 9.25%, 12/1/05 94,000
KBC Bank Funding Trust, Gtd. Notes,
A1 300 9.86%, 11/29/49 306,822
Korea Development Bank, Sr. Notes,
Baa2 200 7.125%, 9/17/01 198,652
Baa2 300 7.90%, 2/1/02 300,081
Royal Bank of Scotland Group PLC,
Sr. Notes,
A1 300 9.118%, 3/31/49 312,213
Sovereign Bancorp, Inc., Sr. Notes,
Ba3 110 10.25%, 5/15/04 108,616
</TABLE>
See Notes to Financial Statements
B-146
<PAGE> 223
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sovereign Bancorp, Sr. Notes,
Ba3 $ 90 10.50%, 11/15/06 $ 90,000
----------------
1,896,067
-------------------------------------------------------------------------------------
Broadcasting
Paxson Communications Corp., Sr.
Sub. Notes,
B3 80 11.625%, 10/1/02 81,800
-------------------------------------------------------------------------------------
Building & Products
Lennar Corp., Sr. Notes,
Ba1 20 9.95%, 5/1/10 20,200
Nortek, Inc., Sr. Notes,
B1 70 9.125%, 9/1/07 65,800
----------------
86,000
-------------------------------------------------------------------------------------
Cable 0.8%
Adelphia Communications Corp., Sr.
Notes,
B1 300 8.125%, 7/15/03 279,000
Callahan NRH (Denmark), Sr. Disc.
Notes,
Zero Coupon, (until 7/15/05)
B3 50 16.00%, 7/15/10 22,250
Sr. Notes,
B3 100 14.00%, 7/15/10 98,500
Charter Communications Holdings
LLC.,
Sr. Disc. Notes, Zero Coupon
(until 4/1/04)
B2 100 9.92%, 4/1/11 57,000
Classic Cable, Inc., Sr. Sub.
Notes,
B3 25 9.375%, 8/1/09 20,250
B3 30 10.50%, 3/1/10 26,550
Diamond Cable Comm. Co. (United
Kingdom), Sr. Disc. Notes,
B2 150 13.25%, 9/30/04 157,500
Fox Family Worldwide, Inc., Sr.
Notes,
B1 30 9.25%, 11/1/07 28,350
</TABLE>
See Notes to Financial Statements
B-147
<PAGE> 224
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Wire Group, Inc.,
Sr. Sub. Notes,
B3 $ 150 11.75%, 6/1/05 $ 150,000
Metromedia Fiber Network, Sr.
Notes,
B2 90 10.00%, 12/15/09 87,300
Mediacom LLC Capital Corp., Sr.
Notes,
B2 250 7.875%, 2/15/11 215,000
Rogers Cablesystems, Inc., Sr.
Notes,
Ba1 100 9.625%, 8/1/02 102,000
United Pan Europe Communications
(Netherlands), Sr. Disc. Notes,
Zero Coupon (until 8/1/04)
B2 100 12.50%, 8/1/09 46,000
Sr. Notes,
B2 200 10.875%, 8/1/09 175,000
----------------
1,464,700
-------------------------------------------------------------------------------------
Casinos 0.7%
Aztar Corp., Sr. Sub. Notes,
B2 150 8.875%, 5/15/07 142,500
Boyd Gaming Corp., Sr. Sub. Notes,
B1 50 9.50%, 7/15/07 48,000
Harrahs Operating, Inc., Gtd. Sr. Sub. Notes,
Ba2 90 7.875%, 12/15/05 85,388
Harvey Casino & Resorts, Sr. Sub.
Notes,
B2 100 10.625%, 6/1/06 102,000
Hollywood Park, Inc., Sr. Sub. Notes, Ser. B,
B2 250 9.25%, 2/15/07 253,125
Horseshoe Gaming LLC, Sr. Sub.
Notes,
B2 65 8.625%, 5/15/09 61,831
Mandalay Resort Group,
Deb. Notes,
Ba2 100 6.70%, 11/15/96 91,967
Sr. Sub. Deb.
Ba2 100 7.625%, 7/15/13 79,250
</TABLE>
See Notes to Financial Statements
B-148
<PAGE> 225
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mohegan Tribal Gaming Authority,
Sr. Notes,
Ba2 $ 250 8.125%, 1/1/06 $ 239,375
Park Place Entertainment Corp.,
Sr. Sub. Notes,
Ba2 40 9.375%, 2/15/07 40,200
Station Casinos, Inc, Sr. Sub
Notes,
B1 70 9.875%, 7/1/10 70,000
----------------
1,213,636
-------------------------------------------------------------------------------------
Chemicals 0.5%
Arco Chemical Co., Deb. Notes
Ba3 250 9.90%, 11/1/00 249,375
Avecia Group PLC, Sr. Notes,
B2 80 11.00%, 7/1/09 79,800
Huntsman ICI Chemicals, Inc., Sr.
Sub. Notes,
B2 115 10.125%, 7/1/09 117,300
Huntsman Polymers Corp., Sr. Notes
B1 50 11.75%, 12/1/04 50,750
Lyondell Chemical Co., Sr. Sub.
Notes,
Ba3 100 9.875%, 5/1/07 100,000
NL Industries, Inc., Sr. Sec'd.
Notes,
B1 30 11.75%, 10/15/03 30,525
Sterling Chemicals, Inc., Sr. Sub.
Notes,
B3 55 12.375%, 7/15/06 56,375
B3 75 11.75%, 8/15/06 60,000
Texas Petrochemicals Corp., Sr.
Sub. Notes,
Caa1 20 11.125%, 7/1/06 17,800
USEC, Inc., Sr. Notes,
Ba1 100 6.75%, 1/20/09 72,400
----------------
834,325
-------------------------------------------------------------------------------------
Commercial Services 0.1%
Iron Mountain, Inc., Sr. Sub.
Notes, MTN,
B2 100 8.25%, 7/1/11 88,000
</TABLE>
See Notes to Financial Statements
B-149
<PAGE> 226
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computer Services 0.1%
Globix Corp., Sr. Notes,
B-* $ 200 12.50%, 2/1/10 $ 156,000
Unisys Corp., Sr. Notes,
Ba1 100 11.75%, 10/15/04 106,000
----------------
262,000
-------------------------------------------------------------------------------------
Containers 0.3%
Norampac, Inc., Sr. Notes,
B1 20 9.50%, 2/1/08 19,600
Owens-Illinois, Inc., Deb. Notes,
Ba1 50 7.50%, 5/15/10 41,117
Sr. Notes,
Ba1 100 7.85%, 5/15/04 92,171
Packaged Ice, Inc., Sr. Notes,
B3 135 9.75%, 2/1/05 114,750
Radnor Holdings Corp., Sr. Notes,
B2 150 10.00%, 12/1/03 133,500
Silgan Holdings, Inc., Sr. Sub.
Deb.,
B1 150 9.00%, 6/1/09 137,250
----------------
538,388
-------------------------------------------------------------------------------------
Distribution
Core- Mark Int'l, Inc., Sr. Sub.
Notes,
B3 15 11.375%, 9/15/03 13,950
-------------------------------------------------------------------------------------
Diversified Manufacturing 0.2%
Corning Consumer Products,
Sr. Sub. Notes,
B3 200 9.625%, 5/1/08 130,000
Gentek, Inc., Gtd. Notes,
B2 150 11.00%, 8/1/09 151,500
Tenneco, Inc., Sr. Sub. Notes,
B2 55 11.625%, 10/15/09 48,950
----------------
330,450
</TABLE>
See Notes to Financial Statements
B-150
<PAGE> 227
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Diversified Operations 0.2%
Cox Enterprises, Inc., Sr. Notes,
Baa1 $ 300 7.55%, 8/1/00 $ 300,825
SCG Holding Corp., Sr. Sub. Notes,
B2 49 12.00%, 8/1/09 52,675
----------------
353,500
-------------------------------------------------------------------------------------
Electrical Utilities 0.6%
Calpine Corp., Sr. Notes,
Ba1 500 10.50%, 5/15/06 525,000
Sierra Pacific Resources, Sr.
Notes,
Baa2 500 7.39%, 4/20/02 500,000
----------------
1,025,000
-------------------------------------------------------------------------------------
Electrical Equipment 0.1%
Motors & Gears, Inc., Sr. Notes,
B3 125 10.75%, 11/15/06 121,250
-------------------------------------------------------------------------------------
Electrical Services 0.1%
TNP Enterprises, Inc., Sr. Sub.
Notes,
NR 225 10.25%, 4/1/10 234,563
-------------------------------------------------------------------------------------
Electronics 0.1%
Flextronics Int'l Ltd., Sr. Sub.
Notes,
Ba3 100 9.875%, 7/1/10 101,125
-------------------------------------------------------------------------------------
Engineering & Construction 0.2%
CSC Holdings, Inc., Sr. Sub. Deb.,
Ba3 329 10.50%, 5/15/16 348,740
-------------------------------------------------------------------------------------
Financial Services 4.9%
AT&T Capital Corp., MTN,
A1 500 6.60%, 5/15/05 476,605
Americredit Corp., Sr. Notes,
Ba1 100 9.875%, 4/15/06 98,000
Associates Corp. of North America,
Sr. Notes,
A1 600 6.96%, 5/8/03 605,430
</TABLE>
See Notes to Financial Statements
B-151
<PAGE> 228
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bear Stearns Cos., Inc., Sr. Notes,
A2 $ 300 6.15%, 3/2/04 $ 284,349
Capital One Bank, Sr. Notes,
Baa2 500 6.76%, 7/23/02 491,121
Coinstar, Inc., Sr. Disc. Notes,
NR 100 13.00%, 10/1/06 101,000
Credit Asset Receivable LLC, Sr. Sec'd. Notes,
NR 247 6.274%, 10/31/03 242,374
Finova Capital Corp., MTN,
Baa2 300 5.98%, 2/27/01 288,639
Ford Motor Credit Co., Sr. Notes,
A2 500 7.50%, 3/15/05 497,160
A2 500 6.75%, 5/15/05 481,970
General Motors Acceptance Corp.,
MTN,
A2 400 6.54%, 4/5/04 399,124
GS Escrow Corp., Sr. Notes,
Ba1 100 6.75%, 8/1/01 96,750
Ba1 50 7.125%, 8/1/05 45,436
GS Escrow Corp., Notes,
Ba1 100 7.05%, 8/1/03 95,211
Heller Financial, Inc., MTN,
A3 500 6.50%, 7/22/02 490,525
Household Finance Corp., Notes,
A2 700 7.00%, 8/1/03 688,112
MBNA America Bank NA, MTN,
Baa1 500 6.875%, 7/15/04 478,625
Metris Co., Inc., Sr. Deb. Notes,
Ba3 150 10.125%, 7/15/06 142,500
Midland Funding Corp., Sec. Deb.
Notes,
Ba3 100 11.75%, 7/23/05 111,014
Morgan J.P. & Co., Inc., Sr. Notes,
A1 300 5.75%, 2/25/04 283,839
Morgan Stanley Dean Witter, Sr.
Notes,
Aa3 600 6.99%, 4/22/04 599,619
Orion Power Holdings, Inc., Sr.
Notes,
Ba3 500 12.00%, 5/1/10 527,500
</TABLE>
See Notes to Financial Statements
B-152
<PAGE> 229
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Orix Credit Alliance, Inc., MTN,
Baa2 $ 300 6.785%, 4/16/01 $ 299,040
Paine Webber Group, Inc., Sr.
Notes,
Baa1 300 7.29%, 7/15/02 299,778
RBF Finance Co., Sr. Notes,
Ba3 275 11.00%, 3/15/06 297,000
Salomon Smith Barney Holdings,
Inc., Sr. Notes,
Aa3 300 7.06%, 7/18/03 299,919
----------------
8,720,640
-------------------------------------------------------------------------------------
Food & Beverage 0.4%
Agrilink Foods., Inc., Sr. Sub.
Notes,
B3 150 11.875%, 11/1/08 114,000
Aurora Foods, Inc., Sr. Sub. Notes,
Caa1 90 9.875%, 2/15/07 56,025
Cott Corp., Sr. Notes,
B1 250 8.50%, 5/1/07 228,750
Del Monte Foods Co., Sr. Disc.
Notes,
Ser. B, Zero Coupon (until
Caa 125 12/15/02) 12.50%, 12/15/07 93,750
Pilgrim's Pride Corp., Sr. Sub.
Notes,
B1 150 10.875%, 8/1/03 150,375
Vlasic Foods Intl., Inc., Sr. Sub.
Notes,
B2 200 10.25%, 7/1/09 101,000
----------------
743,900
-------------------------------------------------------------------------------------
Gaming
Coast Hotels & Casinos, Inc., Gtd.
Notes,
B3 75 9.50%, 4/1/09 71,625
-------------------------------------------------------------------------------------
Health Care 0.8%
Apria Healthcare Group, Sr. Sub.
Notes,
B2 100 9.50%, 11/1/02 99,000
Bio-Rad Labs, Inc., Sr. Sub. Notes,
B2 40 11.625%, 2/15/07 41,800
</TABLE>
See Notes to Financial Statements
B-153
<PAGE> 230
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Columbia/HCA Healthcare Co.,
Deb. Notes,
Ba2 $ 50 8.36%, 4/15/24 $ 45,000
Ba2 55 7.05%, 12/1/27 42,350
Ba2 175 7.50%, 11/15/50 132,125
MTN,
Ba2 100 7.69%, 6/15/25 83,000
Ba2 200 6.73%, 7/15/45 185,500
Concentra Operating Corp., Sr. Sub.
Notes, Ser. A,
B3 30 13.00%, 8/15/09 25,800
Fresenius MedCare CapTrust, Gtd.
Notes,
Ba3 125 9.00%, 12/1/06 123,125
Ba3 75 7.875%, 2/1/08 70,125
Healthsouth Corp., Sr. Notes,
Ba1 85 6.875%, 6/15/05 72,853
HEALTHSOUTH Corp., Sr. Notes,
Baa3 250 7.00%, 6/15/08 197,730
Integrated Health Services, Inc.,
Sr. Sub. Notes, Ser. A,
C 250(b) 9.25%, 1/15/08 4,687
LifePoint Hospitals Holdings, Inc.,
Sr. Sub. Notes,
B3 55 10.75%, 5/15/09 57,200
Magellan Health Services, Inc., Sr.
Sub. Notes,
B3 50 9.00%, 2/15/08 26,250
Tenet Healthcare Corp. Sr. Sub.
Notes,
Ba3 60 8.125%, 12/1/08 56,550
Triad Hospitals Holdings, Inc., Sr.
Sub. Notes,
B3 90 11.00%, 5/15/09 93,150
----------------
1,356,245
</TABLE>
See Notes to Financial Statements
B-154
<PAGE> 231
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Hotels
Starwood Hotel & Resorts, Deb.
Notes,
Ba1 $ 120 7.375%, 11/15/15 $ 100,469
-------------------------------------------------------------------------------------
Industrial 0.3%
Aes Drax Holdings Ltd., Sr. Sec.
Notes,
Ba2 175 10.41%, 12/31/20 181,188
Intersil Corp., Sr. Notes,
B1 41 13.25%, 8/15/09 47,150
Purina Mills, Inc., Sr. Sub. Notes,
NR 250(b) 9.00%, 3/15/10 72,500
United Int'l. Holdings, Inc., Sr.
Disc. Notes, Zero Coupon (until
B3 250 2/15/03) 10.75%, 2/15/08 180,000
----------------
480,838
-------------------------------------------------------------------------------------
Machinery & Equipment 0.1%
Applied Power, Inc., Sr. Sub.
Notes,
B1 150 8.75%, 4/1/09 164,625
-------------------------------------------------------------------------------------
Manufacturing 0.1%
JPS Products, Sr. Notes,
B1 75 11.125%, 6/15/01 76,500
Phillips Van-Heusen, Sr. Sub.
Notes,
B1 50 9.50%, 5/1/08 45,500
Polymer Group, Inc., Sr. Sub.
Notes,
B2 20 9.00%, 7/1/07 16,600
B2 25 8.75%, 3/1/08 20,500
Sun World International, Inc.,
First Mtge., Ser. B,
B2 5 11.25%, 4/15/04 4,763
Venture Holdings Trust, Sr. Notes,
B2 40 9.50%, 7/1/05 30,400
----------------
194,263
-------------------------------------------------------------------------------------
Media 0.6%
Ackerley Group, Inc., Sr. Sub.
Notes,
B2 250 9.00%, 1/15/09 233,750
</TABLE>
See Notes to Financial Statements
B-155
<PAGE> 232
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Adelphia Communications Corp., Sr.
Notes, Ser. B,
B2 $ 500 9.25%, 10/1/02 $ 495,000
Lin Holdings Corp., Sr. Disc.
Notes, Zero Coupon, 8/1/00 Zero
B3 175 Coupon (until 3/1/03) 117,687
Time Warner, Inc., Series 97-1
Baa3 265 6.10%, 12/30/01 260,230
----------------
1,106,667
-------------------------------------------------------------------------------------
Metals 0.1%
Golden Northwest Aluminum, Gtd.
Notes,
B2 15 12.00%, 12/15/06 15,225
Kaiser Aluminum & Chemical Corp.,
Sr. Notes,
B1 225 9.875%, 2/15/02 216,281
----------------
231,506
-------------------------------------------------------------------------------------
Oil & Gas 1.2%
Canadian Forest Oil Ltd., Sr. Sub.
Notes,
B2 60 8.75%, 9/15/07 57,600
Comstock Resources, Inc., Sr.
Notes,
B2 55 11.25%, 5/1/07 55,550
Eott Energy Partners, Sr. Notes,
Ba2 85 11.00%, 10/1/09 86,700
Houston Exploration Co., Sr. Sub.
Notes,
B2 20 8.625%, 1/1/08 19,200
Parker Drilling Co., Sr. Notes,
B1 80 9.75%, 11/15/06 77,200
Petroleos Mexicanos (Mexico), Gtd. Notes,
Baa3 200 9.375%, 12/2/08 205,000
Plains Resources, Inc., Sr. Sub.
Notes,
B2 120 10.25%, 3/15/06 121,150
Public Service Enterprise Group,
Notes,
NR 1,100 7.01%, 6/15/01 1,099,993
</TABLE>
See Notes to Financial Statements
B-156
<PAGE> 233
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Swift Energy Co., Sr. Sub. Notes,
B2 $ 55 10.25%, 8/1/09 $ 55,825
Triton Energy Ltd., Sr. Notes,
B1 250 9.25%, 4/15/05 250,000
Vintage Petroleum, Inc., Sr. Sub.
Notes,
B1 95 9.75%, 6/30/09 96,900
----------------
2,125,118
-------------------------------------------------------------------------------------
Paper & Packaging 0.4%
Ball Corp., Sr. Sub. Notes,
B1 250 8.25%, 8/1/08 240,000
Doman Industries Ltd. (Canada), Sr.
Notes,
B1 60 8.75%, 3/15/04 49,200
B1 100 9.25%, 11/15/07 76,000
Repap New Brunswick (Canada), Sr.
Notes,
Caa 50 11.50%, 6/1/04 50,875
Caa 75 10.625%, 4/15/05 68,625
Stone Container Corp., First Mtge.,
B1 20 10.75%, 10/1/02 20,200
Sr. Notes,
B2 15 11.50%, 8/15/06 15,544
Sr. Sub. Deb.,
B3 250 12.25%, 4/1/02 251,250
----------------
771,694
-------------------------------------------------------------------------------------
Pharmaceuticals 0.1%
ICN Pharmaceuticals, Inc., Sr.
Notes,
Ba3 100 8.75%, 11/15/08 98,250
-------------------------------------------------------------------------------------
Printing & Publishing 0.1%
Mail Well I Corp., Sr. Sub. Notes,
B1 250 8.75%, 12/15/08 215,000
Transwestern Publishing Co., LP Sr.
Sub. Notes, Series D,
B2 40 9.625%, 11/15/07 39,000
----------------
254,000
</TABLE>
See Notes to Financial Statements
B-157
<PAGE> 234
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real Estate 0.2%
HMH Properties, Inc., Sr. Notes,
Ba2 $ 300 8.45%, 12/1/08 $ 279,000
Intrawest Corp. Sr. Notes,
B1 100 10.50%, 2/1/10 103,500
----------------
382,500
-------------------------------------------------------------------------------------
Recreation 0.2%
Ballys Total Fitness Holdings, Sr.
Sub. Notes, Ser. C,
B3 100 9.875%, 10/15/07 91,500
Premier Parks, Inc., Sr. Notes,
B3 350 9.75%, 6/15/07 332,500
----------------
424,000
-------------------------------------------------------------------------------------
Restaurants 0.3%
Advantica Restaurant Group, Inc., Sr. Notes,
B3 125 11.25%, 1/15/08 82,500
Carrols Corp., Sr. Sub. Notes,
B2 250 9.50%, 12/1/08 207,500
CKE Restaurants, Inc., Sr. Notes,
B3 50 9.125%, 5/1/09 32,500
Felcor Suites LP, Gtd. Sr. Notes,
Ba2 250 7.375%, 10/1/04 226,875
Sbarro, Inc., Sr. Notes,
Ba3 30 11.00%, 9/15/09 30,900
----------------
580,275
-------------------------------------------------------------------------------------
Retail 0.1%
Musicland Group, Inc., Sr. Sub.
Notes,
B2 80 9.00%, 6/15/03 74,400
Stater Brothers Holdings, Inc., Sr.
Notes,
B2 65 10.75%, 8/15/06 57,525
----------------
131,925
</TABLE>
See Notes to Financial Statements
B-158
<PAGE> 235
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Schools 0.1%
Kindercare Learning Center, Inc., Sr. Sub. Notes,
B3 $ 190 9.50%, 2/15/09 $ 173,850
La Petite Holdings, Sr. Notes,
B3 25 10.00%, 5/15/08 15,250
----------------
189,100
-------------------------------------------------------------------------------------
Services 0.4%
Alliance Atlantis Commerce, Inc., Sr. Sub. Notes,
B2 150 13.00%, 12/15/09 153,750
IT Group, Inc., Sr. Sub. Notes,
Ser. B,
B3 50 11.25%, 4/1/09 44,500
Midamerican Funding LLC, Sr. Notes,
Baa1 450 5.85%, 3/1/01 445,625
----------------
643,875
-------------------------------------------------------------------------------------
Software 0.3%
Exodus Communications, Sr. Notes,
B3 50 10.75%, 12/15/09 48,750
B3 170 11.625%, 7/15/10 171,275
Psinet, Inc., Sr. Notes,
B3 145 11.00%, 8/1/09 117,450
Verio, Inc., Sr. Notes,
B3 5 11.25%, 12/1/08 5,788
B3 100 10.625%, 11/15/09 113,000
----------------
456,263
-------------------------------------------------------------------------------------
Steel 0.2%
Algoma Steel, Inc., First Mtge.
Notes,
B2 75 12.375%, 7/15/05 66,750
Leviathan Corp., Sr. Sub. Notes,
Ba2 25 10.375%, 6/1/09 25,750
LTV Corp., Sr. Notes,
Ba3 100 11.75%, 11/15/09 85,500
National Steel Corp., First Mtge.,
Ser. D,
Ba3 25 9.875%, 3/1/09 22,062
</TABLE>
See Notes to Financial Statements
B-159
<PAGE> 236
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sheffield Steel Corp., First Mtge.,
Ser. B,
Caa2 $ 25 11.50%, 12/1/05 $ 16,000
WHX Corp., Sr. Notes,
B3 145 10.50%, 4/15/05 116,000
----------------
332,062
-------------------------------------------------------------------------------------
Telecommunications 2.9%
AT&T Corp., MTN, Ser. G,
A1 600 6.31%, 4/23/02 600,984
Adelphia Business Solution, Sr. Disc. Notes,
Zero Coupon (until 4/15/01)
B3 85 13.00%, 4/15/03 75,225
Caprock Communications Corp., Sr.
Notes,
B3 250 11.50%, 5/1/09 155,000
Clearnet Communications, Inc., Sr.
Disc. Notes, Zero Coupon (until
B3 110 5/1/04) 10.125%, 5/1/09 63,800
Coaxial Communications, Inc., Sr.
Notes,
B3 25 10.00%, 8/15/06 24,000
Fairpoint Communications, Sr. Sub.
Notes,
B3 95 12.50%, 5/1/10 95,950
Focal Communications Corp., Sr.
Notes,
B3 125 11.875%, 1/15/10 124,375
Global Crossing Holdings Ltd., Sr.
Notes,
Ba2 500 9.50%, 11/15/09 487,500
Level 3 Communications, Inc., Sr. Disc. Notes,
Zero Coupon (until 3/15/05)
B3 500 12.875%, 3/15/10 265,000
Zero Coupon (until 12/1/03)
B3 130 10.50%, 12/1/08 76,375
Sr. Notes,
B3 30 11.00%, 3/15/08 28,500
Mcleodusa, Inc., Sr. Notes,
B1 95 8.125%, 2/15/09 85,262
</TABLE>
See Notes to Financial Statements
B-160
<PAGE> 237
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Microcell Telecommunications, Sr.
Disc. Notes, Zero Coupon (until
6/1/04)
B3 $ 250 12.00%, 6/1/09 $ 168,750
Millicom Int'l. Cellular, Sr. Disc.
Notes, Zero Coupon (until 6/1/01)
Caa1 65 13.50%, 6/1/06 56,875
Netia Holdings BV (Poland), Gtd.
Sr. Disc. Notes, Zero Coupon
B2 250 (until 11/1/01) 11.25%, 11/1/07 178,750
Nextel Communications, Inc., Sr.
Disc. Notes, Zero Coupon (until
B1 300 9/15/02) 10.65%, 9/15/07 234,000
Sr. Notes,
B1 200 9.375%, 11/15/09 191,000
Nextlink Communications, Inc., Sr.
Disc. Notes,
B2 330 10.75%, 6/1/09 323,400
NTL Communications Corp., Sr.
Notes, Zero Coupon (until 10/1/03)
B2 250 12.375%, 10/1/08 161,250
Primus Telecomm Group, Sr. Notes,
B3 100 12.75%, 10/15/09 60,000
RCN Corp., Sr. Notes,
B3 45 10.125%, 1/15/10 36,000
RSL Communications PLC (United
Kingdom), Gtd. Sr. Notes,
B3 150 9.875%, 11/15/09 46,500
Spectrasite Holdings, Inc., Sr.
Disc. Notes, Zero Coupon (until
3/15/05)
B3 305 12.875%, 3/15/10 170,800
Telewest Communications PLC (United
Kingdom), Sr. Disc. Notes, (Zero
Coupon until 2/1/05, 11.375%,
B1 235 2/1/10 131,600
Tritel PCS, Inc., Sr. Sub. Disc.
Notes, Zero Coupon (until 5/15/04)
B3 110 12.75%, 5/15/09 80,850
</TABLE>
See Notes to Financial Statements
B-161
<PAGE> 238
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Vodafone Airtouch PLC (United
Kingdom), Sr. Notes,
A2 $ 300 6.96%, 12/19/01 $ 301,038
Voicestream Wireless Corp.,
Sr. Disc. Notes,
Zero Coupon (until 11/15/04)
B2 240 11.875%, 11/15/09 169,200
Sr. Notes,
B2 130 10.375%, 11/15/09 140,400
Williams Communications Group,
Inc., Sr. Notes,
B2 25 10.70%, 10/1/07 24,125
B2 245 10.875%, 10/1/09 232,750
Worldcom, Inc., FRN,
A3 300 7.05%, 11/26/01 301,113
Worldwide Fiber, Inc., Sr. Notes,
B3 30 12.00%, 8/1/09 26,850
----------------
5,117,222
-------------------------------------------------------------------------------------
Textile-Apparel Manufacturing 0.1%
Burlington Industries, Inc., Sr.
Disc. Deb.,
Ba2 250 7.25%, 8/1/27 150,000
Collins & Aikman Floorcovering, Sr. Sub. Notes,
B3 15 10.00%, 1/15/07 14,700
----------------
164,700
-------------------------------------------------------------------------------------
Transportation
American Commercial Lines LLC, Sr.
Notes,
B1 50 10.25%, 6/30/08 42,000
Kitty Hawk, Inc., Gtd. Notes,
Ca 60(a) 9.95%, 11/15/04 24,900
----------------
66,900
-------------------------------------------------------------------------------------
Utilities 0.6%
AES Corp., Sr. Notes,
Ba1 250 9.50%, 6/1/09 252,500
</TABLE>
See Notes to Financial Statements
B-162
<PAGE> 239
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sr. Sub. Debs.,
Ba3 $ 100 8.875%, 11/1/27 $ 84,000
Aes Drax Energy Ltd., (United
Kingdom),
Sr. Sec. Notes,
Ba2 100 11.50%, 8/30/10 102,750
CMS Energy Corp., Sr. Notes,
Ba3 250 7.50%, 1/15/09 226,250
Niagara Mohawk Power Corp., Sr.
Notes, Ser. C,
Ba2 227 7.00%, 10/1/00 226,485
Baa3 151 7.125%, 7/1/01 150,709
----------------
1,042,694
-------------------------------------------------------------------------------------
Waste Management 0.3%
Allied Waste of North America, Inc., Sr. Notes,
Ba3 250 7.875%, 1/1/09 220,000
Sr. Sub. Notes,
B2 45 10.00%, 8/1/09 38,925
Waste Management, Inc.,
Gtd. Notes,
Ba1 150 6.00%, 5/15/01 146,316
Sr. Deb Notes,
Ba1 100 8.75%, 5/1/18 98,040
----------------
503,281
----------------
Total corporate bonds (cost
$38,656,267) 37,201,423
----------------
CONVERTIBLE BONDS 0.3%
-------------------------------------------------------------------------------------
Financial Services
Hellenic Finance,
2.00%, 7/15/03
A2 Euro 500 (cost $526,875) 451,840
----------------
FOREIGN GOVERNMENT BONDS 0.1%
German Government Bonds, 6.25%,
$ 30,000 1/4/24 30,475
German Government Bonds, 6.25%,
80,000 1/4/30 83,439
----------------
113,914
----------------
Total foreign government bonds
(cost $106,815) 37,201,423
----------------
</TABLE>
See Notes to Financial Statements
B-163
<PAGE> 240
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SOVEREIGN BONDS 0.3%
Republic Of Phillippines, Bonds,
Ba1 $ 74 9.50%, 10/21/24 $ 68,820
United Mexican States, Sr. Notes,
Baa3 500 8.50%, 2/1/06 499,000
----------------
Total soverign bonds (cost
$570,673) 567,820
----------------
COLLATERALIZED MORTGAGE OBLIGATIONS 3.2%
Bear Stearns Mortgage Secs, Inc.,
Series 97-7, Class 1,
Aaa 500 7.00%, 2/25/28 471,090
Capital Asset Research Funding LP,
Series 97-A, Class I,
Aaa 110 6.40%, 12/15/04 109,515
Contimortgage Home Equity Loan
Trust, Series 1998-2, Class A4,
Aaa 500 6.19%, 1/15/14 491,875
Federal Home Loan Mortgage Corp.,
Debs.,
1,000 7.00%, 12/31/30 966,560
Series 7, Class A,
243 7.00%, 9/17/31 241,008
Series 119, Class H,
670 7.50%, 1/15/21 664,469
Series 1599, Class A,
31 5.80%, 6/15/19 30,795
Federal National Mortgage Assoc.,
Series 1998-73, Class MZ,
541 6.30%, 10/17/38 434,021
GE Capital Mortgage Services, Inc.,
Series 1999-S, Class A29,
Aaa 300 6.50%, 5/25/29 273,177
Istar Receivables Trust, Mtge.
Bonds,
Class A,
Aaa 497 6.92%, 9/25/22 497,263
</TABLE>
See Notes to Financial Statements
B-164
<PAGE> 241
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Merrill Lynch Mortgage Investors,
Inc., Series 1998-FF1, Class A,
Aaa $ 53 6.80%, 1/20/28 $ 52,599
PNC Mortgage Secs. Corp., Series
1999-5, Class A1,
Aaa 400 7.25%, 10/25/29 385,683
Residential Funding Mortgage,
Series 1993-S36, Class A9,
Aaa 163 6.48%, 10/25/08 161,442
Series 1994-S5, Class A6,
Aa1 500 6.50%, 2/25/24 435,465
Series 1999-S8, Class A1,
Aaa 203 6.25%, 3/25/14 191,338
Salomon Brothers Mortgage, Series
1999-LB1, Class A,
Aaa 330 6.95%, 6/25/29 329,860
----------------
Total collateralized mortgage
obligations (cost $3,474,689) 5,736,160
----------------
MUNICIPAL BONDS 0.6%
Central Puget Sound Washington
Regional, Revenue Bonds,
Aaa 500 4.75%, 2/1/28 423,974
New York City Gen. Oblig., Series
B,
A3 300 6.00%, 8/1/01 296,500
New York State Twy. Auth. Gen.
Rev., Series E,
Aa3 300 5.00%, 1/1/25 257,910
----------------
Total municipal bond (cost
$566,909) 978,384
----------------
</TABLE>
See Notes to Financial Statements
B-165
<PAGE> 242
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
-----------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES AND SECURITIES 12.5%
Federal National Mortgage Assoc.,
$ 993 6.00%, 8/1/06 $ 948,196
2,500 6.00%, 12/31/30 2,293,750
700 7.50%, 12/31/30 689,717
Government National Mortgage Assoc.,
1,900 7.50%, 12/15/28 1,883,599
2,038 6.50%, 5/15/29 1,932,151
462 6.50%, 6/15/29 438,384
500 6.50%, 7/15/29 474,060
470 7.50%, 11/15/29 465,738
30 7.50%, 3/15/30 29,731
1,750 6.00%, 12/31/30 1,611,102
3,300 6.50%, 12/31/30 3,128,829
1,470 7.50%, 12/31/30 1,456,682
1,500 8.50%, 12/31/30 1,524,367
83 6.75%, 9/20/22 83,535
United States Treasury Bonds,
800 11.25%, 2/15/15 1,187,376
318 3.625%, 4/15/28, TIPS 305,215
United States Treasury Notes,
645 3.625%, 7/15/02, TIPS 642,838
973 3.375%, 1/15/07, TIPS 937,176
209 3.875%, 1/15/09, TIPS 206,483
United States
Treasury Strips,
3,800 Zero Coupon, 2/15/11 1,992,720
----------------
Total U. S. government agencies and securities
(cost $24,607,793) 22,231,649
----------------
Total debt obligations (cost $68,510,021) 67,281,190
----------------
Total long-term investments (cost $161,458,064) 172,152,010
----------------
SHORT-TERM INVESTMENTS 10.0%
-------------------------------------------------------------------------------------
Commercial Paper 0.9%
1,100 General Dynamics Corp.,
6.61%, 9/6/00 1,087,714
</TABLE>
See Notes to Financial Statements
B-166
<PAGE> 243
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund Cont'd.
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
-----------------------------------------------------------------------------------------
<C> <S> <C>
General Electric Credit Capital of Puerto Rico,
$ 200 6.61%, 9/6/00 $ 198,678
200 6.57%, 12/6/00 195,365
100 Washington Mutual Finance Corp.,
6.85%, 8/30/00 99,152
----------------
Total commercial paper (cost $1,586,293) 1,580,909
----------------
REPURCHASE AGREEMENT 9.1%
16,263 Joint Repurchase Agreement Account, 6.54%, 8/1/00
(cost $16,263,000; Note 5) 16,263,000
----------------
Total short-term investments (cost $17,849,293) 17,843,909
----------------
Total investments 106.7%
(cost $179,307,357; Note 4) 189,995,919
Liabilities in excess of other assets (6.7%) (11,871,807)
----------------
Net Assets 100% $ 178,124,112
----------------
----------------
</TABLE>
------------------------------
(a) Non-income producing security.
(b) Represents issuer in default on interest payments.
* Rated by Standard and Poor's.
AB--Antiebolay (Swedish Stock Company).
ADR--American Depository Receipt.
AG--Aktiengesellschate (German Stock Company).
FRN--Flating Rate Note.
LLC--Limited Liability Company.
LP--Limited Partnership.
MTN--Medium Term Note.
NR--Not Rated by Moody's or Standard & Poor's
N.V.--Naamkee Vennootachap (Dutch Corporation).
OY--Osakeyhtio (Finland Stock Company).
PLC--Public Limited Company (British Corporation).
S.A.--Sociedad Anomima (Spanish Corpiration or Societe Anonyme or French
Corporation).
SpA--Societa par Atione (Italian Corporation).
TIPS--Treasury Inflation Protection Securities.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
See Notes to Financial Statements
B-167
<PAGE> 244
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
July 31, 2000
<S> <C>
---------------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $179,307,357) $ 189,995,919
Foreign currency, at value (cost $397,278) 389,771
Cash 304,736
Receivable for investments sold 1,534,905
Interest and dividends receivable 1,000,964
Receivable for Fund shares sold 601,446
Unrealized appreciation on forward currency contracts 3,880
Receivable for interest rate swaps 3,737
Unrealized appreciation on interest rate swaps (Note 1 & 4) 3,410
Other assets 4,416
-------------
Total assets 193,843,184
-------------
LIABILITIES
Payable for investments purchased 15,152,708
Payable for Fund shares reacquired 270,619
Distribution fee payable 118,911
Management fee payable 113,495
Accrued expenses and other liabilities 59,940
Withholding taxes payable 2,586
Unrealized depreciation on forward currency contracts 813
-------------
Total liabilities 15,719,072
-------------
NET ASSETS $ 178,124,112
-------------
-------------
Net assets were comprised of:
Shares of beneficial interest, at par $ 14,826
Paid-in capital in excess of par 157,912,523
-------------
157,927,349
Undistributed net investment income 403,745
Accumulated net realized gain on investments 9,104,720
Net unrealized appreciation on investments 10,688,298
-------------
Net assets, July 31, 2000 $ 178,124,112
-------------
-------------
</TABLE>
See Notes to Financial Statements
B-168
<PAGE> 245
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund
Statement of Assets and Liabilities Cont'd.
<TABLE>
<CAPTION>
July 31, 2000
---------------------------------------------------------------------------------------
<S> <C>
Class A:
Net asset value and redemption price per share ($48,786,361
/ 4,054,185 shares of beneficial interest issued and
outstanding) $12.03
Maximum sales charge (5% of offering price) 0.63
-------------
Maximum offering price to public $12.66
-------------
-------------
Class B:
Net asset value, offering price and redemption price per
share ($99,950,347 / 8,324,305 shares of beneficial
interest issued and outstanding) $12.01
-------------
-------------
Class C:
Net asset value and redemption price per share ($28,039,543
/ 2,335,158 shares of beneficial interest issued and
outstanding) $12.01
Sales charge (1% of offering price) 0.12
-------------
Offering price to public $12.13
-------------
-------------
Class Z:
Net asset value, offering price and redemption price per
share ($1,347,861 / 111,898 shares of beneficial interest
issued and outstanding) $12.05
-------------
-------------
</TABLE>
See Notes to Financial Statements
B-169
<PAGE> 246
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund
Statement of Operations
<TABLE>
<CAPTION>
Year
Ended
July 31, 2000
<S> <C>
----------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest (net of foreign withholding taxes of $3,139) $ 4,358,879
Dividends (net of foreign withholding taxes of $41,475) 1,015,803
-------------
Total income 5,374,682
-------------
Expenses
Management fee 1,084,509
Distribution fee--Class A 87,021
Distribution fee--Class B 798,551
Distribution fee--Class C 258,352
Custodian's fees and expenses 323,000
Transfer agent's fees and expenses 189,500
Registration fees 62,000
Reports to shareholders 56,000
Legal fees 30,000
Audit fees 25,000
Trustees' fees and expenses 15,300
Amortization of offering costs 10,535
Miscellaneous 3,445
-------------
Total expenses 2,943,213
-------------
Net investment income 2,431,469
-------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized gain on:
Investment transactions 10,006,048
Interest Rate Swaps 55,483
Foreign currency transactions 25,824
-------------
10,087,355
-------------
Net change in unrealized appreciation on:
Investments 4,403,007
Foreign currencies 21,728
Interest Rate Swaps 3,410
-------------
4,428,145
-------------
Net gain on investments and foreign currency transactions 14,515,500
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 16,946,969
-------------
-------------
</TABLE>
See Notes to Financial Statements
B-170
<PAGE> 247
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
November 18,
1998(a)
Year Ended Through
July 31, 2000 July 31, 1999
<S> <C> <C>
----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 2,431,469 $ 711,879
Net realized gain on investment and foreign
currency transactions 10,087,355 66,328
Net change in unrealized appreciation of
investments and foreign currencies 4,428,145 6,260,153
------------- -------------
Net increase in net assets resulting from
operations 16,946,969 7,038,360
------------- -------------
Dividends and distributions (Note 1)
Dividends to shareholders from net investment
income
Class A (845,618) (132,253)
Class B (1,192,915) (170,151)
Class C (367,691) (73,278)
Class Z (80,073) (152,622)
------------- -------------
(2,486,297) (528,304)
------------- -------------
Distributions from net realized gains on
investment transactions
Class A (197,082) --
Class B (490,277) --
Class C (167,209) --
Class Z (35,210) --
------------- -------------
(889,778) --
------------- -------------
Fund share transactions (net of share
conversions)
(Note 6)
Net proceeds from shares sold $96,274,299 $ 132,889,254
Net asset value of shares issued to
shareholders in reinvestment of dividends
and distributions 3,273,405 516,607
Cost of shares reacquired (49,998,187) (24,942,216)
------------- -------------
Net increase in net assets from Fund shares
transactions 49,549,517 108,463,645
------------- -------------
Total increase 63,120,411 114,973,701
NET ASSETS
Beginning of period 115,003,701 30,000
------------- -------------
End of period(b) $ 178,124,112 $ 115,003,701
------------- -------------
------------- -------------
------------------------------
(a) Commencement of investment operations.
(b) Includes undistributed net investment income
of $ 333,724 $ 296,575
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements
B-171
<PAGE> 248
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund
Notes to Financial Statements
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.
B-172
<PAGE> 249
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund
Notes to Financial Statements Cont'd.
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.
The Fund, as writer of an option, has no control over whether the
underlying securities or currencies may be sold (called) or purchased (put). As
a result, the Fund bears the market risk of an unfavorable change in the price
of the security or currency underlying the written option. The Fund, as
purchaser of an option, bears the risk of the potential inability of the
counterparties to meet the terms of their contracts.
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.
B-173
<PAGE> 250
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund
Notes to Financial Statements Cont'd.
(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.
Interest Rate Swaps: In a simple interest rate swap, one investor pays
a floating rate of interest on a notional principal amount and receives a fixed
rate of
B-174
<PAGE> 251
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund
Notes to Financial Statements Cont'd.
interest on the same notional principal amount for a specified period of time.
Alternatively, an investor may pay a fixed rate and receive a floating rate.
Interest rate swaps were conceived as asset/liability management tools. In more
complex swaps, the notional principal amount may decline (or amortize) over
time.
During the term of the swap, changes in the value of the swap are
recognized as unrealized gains or losses by 'marking-to-market' to reflect the
market value of the swap. When the swap is terminated, the Fund will record a
realized gain or loss equal to the difference between the proceeds from (or cost
of) the closing transaction and the Fund's basis in the contract, if any.
The Fund is exposed to credit loss in the event of non-performance by the
other party to the interest rate swap. However, the Fund does not anticipate
non-performance by any counterparty.
Securities Transactions and Net Investment Income: Securities transactions
are recorded on the trade date. Realized gains and losses from investment and
currency transactions are calculated on the identified cost basis. Dividend
income is recorded on the ex-dividend date; interest income is recorded on the
accrual basis. Expenses are recorded on the accrual basis which may require the
use of certain estimates by management.
Net investment income (loss), other than distribution fees, and unrealized
and realized gains or losses are allocated daily to each class of shares based
upon the relative proportion of net assets of each class at the beginning of the
day.
Dividends and Distributions: The Fund expects to pay dividends of net
investment income semi-annually, and distributions of net realized capital and
currency gains, if any, annually. Dividends and distributions are recorded on
the ex-dividend date.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Taxes: For federal income tax purposes, each Fund is treated as a separate
taxpaying entity. It is the intent of the Fund to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to shareholders. Therefore, no federal
income tax provision is required.
Withholding taxes on foreign dividends have been provided for in
accordance with the Fund's understanding of the applicable country's tax rules
and rates.
B-175
<PAGE> 252
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund
Notes to Financial Statements Cont'd.
Deferred Offering Cost: The Fund incurred approximately $77,500 in
connection with the initial offering of the Fund. Offering costs were being
amortized over a period of 12 months, that ended in 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 $152,963, increase undistributed net investment
income by $161,998 and decrease paid-in capital in excess of par by $9,035 due
to nondeductible stock issuance expenses, the reclass of net realized foreign
currency gains and the reclass of passive foreign investment company gains. 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 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
('Jennison') first
$300 million; .25% for
amounts
in excess of $300 million
The Prudential Investment
Corporation ('PIC') .375%(1)
Lazard Asset Management .40%
Pacific Investment Management
Company .25%
Franklin Advisers, Inc. .50%
The Dreyfus Corporation .45%
(1)Prior to January 1, 2000, PIC was reimbursed by PIFM for its reasonable costs
and expenses.
</TABLE>
B-176
<PAGE> 253
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund
Notes to Financial Statements Cont'd.
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 year ended
July 31, 2000.
PIMS has advised the Fund that it has received approximately $239,300 and
$86,700 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively, during the fiscal year ended July 31, 2000.
PIMS has advised the Fund that for the fiscal year ended July 31, 2000, it
has received approximately $156,500 and $42,600 in contingent deferred sales
charges imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
Jennison, PIMS, PIC and PIFM are indirect, wholly owned subsidiaries of
The Prudential Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
'Funds'), entered into a syndicated credit agreement ('SCA') with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any such borrowings will be at market rates. The purpose of the
agreement is to serve as an alternative source of funding for capital share
redemptions. The Funds pay a commitment fee of .080 of 1% of the unused portion
of the credit facility. The commitment fee is accrued and paid quarterly on a
pro rata basis by the Funds. The expiration date of the SCA is March 9, 2001.
Prior to March 9, 2000, the commitment fee was .065 of 1% of the unused portion
of the credit facility. The Fund did not borrow any amounts pursuant to the SCA
during the year ended March 31, 2000.
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 fiscal year ended July 31, 2000,
the Fund incurred fees of approximately $145,200 for the services of PMFS. As of
July 31, 2000 approximately $14,500 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 year ended July 31, 2000,
PSI earned approximately $1,000 in brokage commission fees from portfolio
transactions executed on behalf of the Fund.
B-177
<PAGE> 254
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund
Notes to Financial Statements Cont'd.
Note 4. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term investments,
for the fiscal year ended July 31, 2000 were $258,784,131 and $214,755,237,
respectively.
At July 31, 2000, the Fund had outstanding forward currency contracts both
to purchase and sell foreign currencies, as follows:
<TABLE>
<CAPTION>
Value at Value
Foreign Currency Settlement Date at Appreciation/
Purchase Contracts Payable July 31, 2000 (Depreciation)
----------------------------------- --------------- ------------- --------------
<S> <C> <C> <C>
Euro Dollars,
expiring 8/1/00 $ 4,690 $ 4,712 $ (22)
expiring 8/14/00 577,994 574,273 3,721
expiring 8/31/00 80,768 81,040 (272)
Great Britain Pounds,
expiring 8/3/00 23,262 23,103 159
--------------- ------------- --------------
$ 686,714 $ 683,128 $ 3,586
--------------- ------------- --------------
--------------- ------------- --------------
<CAPTION>
Value at Value
Foreign Currency Settlement Date at
Sale Contracts Receivable July 31, 2000 (Depreciation)
----------------------------------- --------------- ------------- --------------
<S> <C> <C> <C>
Japanese Yen,
expiring 8/1/00 $ 46,668 $ 46,441 $ (227)
Swedish Krona,
expiring 8/1/00 36,098 35,806 (292)
--------------- ------------- --------------
$ 82,766 $ 82,247 $ (519)
--------------- ------------- --------------
--------------- ------------- --------------
</TABLE>
The Fund entered into 4 swap agreements. For each interest rate swap
agreement, the Fund receives a floating rate and pays a respective fixed rate.
Details of each swap agreement are as follows:
<TABLE>
<CAPTION>
Open Termination Notional Fixed Floating Appreciation
Counterparty Date Date Amount Rate Rate (Depreciation)
--------------- -------- ----------- ---------- ------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
J.P. Morgan 5/19/00 1/04/24 $ 30,000 6.25% 6.78% plus 6 $ 32
mo LIBOR
Morgan Stanley 5/31/00 9/13/24 2,500,000 7.75 6.66% plus 3 5,466
mo LIBOR
Goldman Sachs 5/18/00 5/22/30 90,000 6.175 6.78% plus 6 (1,664)
mo LIBOR
Morgan Stanley 6/21/00 9/15/00 600,000 7.00 6.66% plus 3 (424)
mo LIBOR
-------
$ 3,410
-------
-------
</TABLE>
B-178
<PAGE> 255
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund
Notes to Financial Statements Cont'd.
The United States federal income tax cost basis of the Fund's investments
as of July 31, 2000 was $179,785,410 and accordingly, net unrealized
appreciation of investments for federal income tax purposes was $10,210,509
(gross unrealized appreciation $19,926,223, gross unrealized depreciation
$9,715,714).
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, 2000, the Fund
had a 2.89% undivided interest in the repurchase agreements in the joint
account. The undivided interest for the Fund represents $16,263,000 in principal
amount. As of such date, each repurchase agreement in the joint account and the
collateral therefore were as follows:
ABN AMRO Incorporated, 6.56%, in the principal amount of $100,000,000,
repurchase price $100,018,222, due 8/1/00. The value of the collateral including
accrued interest was $102,000,029.
Bear, Stearns & Co. Inc., 6.55%, in the principal amount of $100,000,000,
repurchase price $100,018,194, due 8/1/00. The value of the collateral including
accrued interest was $102,926,906.
Greenwich Capital Markets, Inc., 6.57%, in the principal amount of
$110,000,000, repurchase price $110,020,075, due 8/1/00. The value of the
collateral including accrued interest was $112,201,716.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 6.45%, in the principal
amount of $97,030,000, repurchase price $97,047,384, due 8/1/00. The value of
the collateral including accrued interest was $98,970,864.
Salomon Smith Barney, Inc., 6.55%, in the principal amount of
$155,000,000, repurchase price $155,028,201, due 8/1/00. The value of the
collateral including accrued interest was $158,174,190.
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.
The Fund has authorized an unlimited number of shares of beneficial
interest at $.001 par value per share.
B-179
<PAGE> 256
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund
Notes to Financial Statements Cont'd.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
------------------------------------------------------------ ---------- ------------
<S> <C> <C>
Year ended July 31, 2000:
Shares sold 3,134,768 $ 36,505,644
Shares issued in reinvestment of dividends and distributions 86,639 1,018,090
Shares reacquired (1,196,414) (13,887,233)
---------- ------------
Net increase in shares outstanding before conversion 2,024,993 23,636,501
Shares issued upon conversion from Class B 153,988 1,821,985
---------- ------------
Net increase in shares outstanding 2,178,981 $ 25,458,486
---------- ------------
---------- ------------
November 18, 1998(a) through July 31, 1999:
Shares sold 2,104,901 $ 22,082,276
Shares issued in reinvestment of dividends 11,721 130,122
Shares reacquired (257,414) (2,765,509)
---------- ------------
Net increase in shares outstanding before conversion 1,859,208 19,446,889
Shares issued upon conversion from Class B 15,246 163,070
---------- ------------
Net increase in shares outstanding 1,874,454 $ 19,609,959
---------- ------------
---------- ------------
<CAPTION>
Class B
------------------------------------------------------------
<S> <C> <C>
Year ended July 31, 2000:
Shares sold 4,174,726 $ 48,125,208
Shares issued in reinvestment of dividends and distributions 139,553 1,627,356
Shares reacquired (1,240,994) (14,314,656)
---------- ------------
Net increase in shares outstanding before conversion 3,073,285 35,437,908
Shares reacquired upon conversion from Class A (154,483) (1,821,985)
---------- ------------
Net increase in shares outstanding 2,918,802 $ 33,615,923
---------- ------------
---------- ------------
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
---------- ------------
---------- ------------
------------------------------
(a) Commencement of investment operations.
</TABLE>
B-180
<PAGE> 257
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund
Notes to Financial Statements Cont'd.
<TABLE>
<CAPTION>
Class C Shares Amount
------------------------------------------------------------ ---------- ------------
Year ended July 31, 2000:
<S> <C> <C>
Shares sold 864,615 $ 9,952,845
Shares issued in reinvestment of dividends and distributions 44,150 512,945
Shares reacquired (635,034) (7,388,381)
---------- ------------
Net increase in shares outstanding 273,731 $ 3,077,409
---------- ------------
---------- ------------
November 18, 1998(a) through July 31, 1999:
Shares sold 2,362,554 $ 24,279,763
Shares issued in reinvestment of dividends 6,349 69,993
Shares reacquired (308,226) (3,281,900)
---------- ------------
Net increase in shares outstanding 2,060,677 $ 21,067,856
---------- ------------
---------- ------------
<CAPTION>
Class Z
------------------------------------------------------------
<S> <C> <C>
Year ended July 31, 2000:
Shares sold 139,641 $ 1,690,602
Shares issued in reinvestment of dividends and distributions 10,092 115,014
Shares reacquired (1,287,052) (14,407,917)
---------- ------------
Net decrease in shares outstanding (1,137,319) $(12,602,301)
---------- ------------
---------- ------------
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-181
<PAGE> 258
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund
Financial Highlights
<TABLE>
<CAPTION>
Class A
-----------------------------------------
<S> <C> <C>
November 18, 1998(a)
Year Ended Through
July 31, 2000 July 31, 1999
<CAPTION>
-----------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 10.86 $ 10.00
-------- --------
Income from investment operations:(d)
Net investment income .26 .12
Net realized and unrealized gain on
investments and foreign currencies 1.25 .83
-------- --------
Total from investment operations 1.51 .95
-------- --------
Less distributions
Dividends from net investment income (.26) (.09)
Distributions from net realized capital
gains (.08) --
-------- --------
Total dividends and distributions (.34) (.09)
-------- --------
Net asset value, end of period $ 12.03 $ 10.86
-------- --------
-------- --------
TOTAL RETURN(b) 13.96% 9.47%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 48,786 $ 20,372
Average net assets (000) $ 34,809 $ 12,286
Ratios to average net assets:
Expenses, including distribution fees 1.49% 1.88%(c)
Expenses, excluding distribution fees 1.24% 1.63%(c)
Net investment income 2.27% 1.59%(c)
For Class A, B, C and Z shares:
Portfolio turnover rate 155% 96%
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day and includes reinvestment of dividends and distributions. Total
return for periods of less than a full year are not annualized.
(c) Annualized.
(d) Calculated based upon weighted average shares outstanding during the period.
See Notes to Financial Statements
B-182
<PAGE> 259
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class B
-----------------------------------------
<S> <C> <C>
November 18, 1998(a)
Year Ended Through
July 31, 2000 July 31, 1999
<CAPTION>
-----------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 10.85 $ 10.00
-------- --------
Income from investment operations:(d)
Net investment income 0.17 .06
Net realized and unrealized gain on
investments and foreign currencies 1.23 .83
-------- --------
Total from investment operations 1.40 .89
-------- --------
Less distributions
Dividends from net investment income (.16) (.04)
Distributions from net realized capital
gains (.08) --
-------- --------
Total dividends and distributions (.24) (.04)
-------- --------
Net asset value, end of period $ 12.01 $ 10.85
-------- --------
-------- --------
TOTAL RETURN(b) 12.88% 8.99%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 99,950 $ 58,678
Average net assets (000) $ 79,855 $ 36,645
Ratios to average net assets:
Expenses, including distribution fees 2.24% 2.63%(c)
Expenses, excluding distribution fees 1.24% 1.63%(c)
Net investment income 1.48% .85%(c)
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day and includes reinvestment of dividends and distributions. Total
return for periods of less than a full year are not annualized.
(c) Annualized.
(d) Calculated based upon weighted average shares outstanding during the period.
See Notes to Financial Statements
B-183
<PAGE> 260
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class C
-----------------------------------------
<S> <C> <C>
November 18, 1998(a)
Year Ended Through
July 31, 2000 July 31, 1999
<CAPTION>
-----------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 10.85 $ 10.00
-------- --------
Income from investment operations:(d)
Net investment income .17 .06
Net realized and unrealized gain on
investments and foreign currencies 1.23 .83
-------- --------
Total from investment operations 1.40 .89
-------- --------
Less distributions
Dividends from net investment income (.16) (.04)
Distributions from net realized capital
gains (.08) --
-------- --------
Total dividends and distributions (.24) (.04)
-------- --------
Net asset value, end of period $ 12.01 $ 10.85
-------- --------
-------- --------
TOTAL RETURN(b) 12.88% 8.99%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 28,040 $ 22,375
Average net assets (000) $ 25,835 $ 18,346
Ratios to average net assets:
Expenses, including distribution fees 2.24% 2.63%(c)
Expenses, excluding distribution fees 1.24% 1.63%(c)
Net investment income 1.44% .79%(c)
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day and includes reinvestment of dividends and distributions. Total
return for periods of less than a full year are not annualized.
(c) Annualized.
(d) Calculated based upon weighted average shares outstanding during the period.
See Notes to Financial Statements
B-184
<PAGE> 261
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class Z
-----------------------------------------
<S> <C> <C>
November 18, 1998(a)
Year Ended Through
July 31, 2000 July 31, 1999
<CAPTION>
-----------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $10.87 $ 10.00
------- --------
Income from investment operations:(d)
Net investment income .27 .13
Net realized and unrealized gain on
investments and foreign currencies 1.27 .84
------- --------
Total from investment operations 1.54 .97
------- --------
Less distributions
Dividends from net investment income (.28) (.10)
Distributions from net realized capital
gains (.08) --
------- --------
Total dividends and distributions (.36) (.10)
------- --------
Net asset value, end of period $12.05 $ 10.87
------- --------
------- --------
TOTAL RETURN(b) 14.18% 9.70%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $1,348 $ 13,578
Average net assets (000) $4,102 $ 21,914
Ratios to average net assets:
Expenses, including distribution fees 1.24% 1.63%(c)
Expenses, excluding distribution fees 1.24% 1.63%(c)
Net investment income 2.11% 1.68%(c)
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day and includes reinvestment of dividends and distributions. Total
return for periods of less than a full year are not annualized.
(c) Annualized.
(d) Calculated based upon weighted average shares outstanding during the period.
See Notes to Financial Statements
B-185
<PAGE> 262
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund
Report of Independent Accountants
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,
2000, the results of its operations for the year then ended, and the changes in
its net assets and the financial highlights for the year then ended and for the
period November 18, 1998 (commencement of operations) through July 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at July 31, 2000 by correspondence with the custodian and brokers,
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
September 22, 2000
See Notes to Financial Statements
B-186
<PAGE> 263
Prudential Diversified Funds Prudential Diversified Moderate Growth
Fund
Tax Information (Unaudited)
We are required by the Internal Revenue Code to advise you within 60 days
of the Fund's fiscal year end (July 31, 2000) 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 $.34 per share, $.24 per share, $.24 per share and $.36 per share,
respectively, which represents net investment income and short-term capital
gains and is taxable as ordinary income. Further, we wish to advise you that 15%
of the ordinary income dividends paid in the fiscal period ended July 31, 2000
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 4.06% of the dividends paid from
ordinary income in the fiscal year ended July 31, 2000, 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.
See Notes to Financial Statements
B-187
<PAGE> 264
Prudential Diversified Funds Prudential Diversified High Growth Fund
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
-------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 87.5%
Common Stocks
-------------------------------------------------------------------------------------
Advertising 0.4%
1,750 ADVO, Inc. $ 71,641
4,300 Omnicom Group, Inc. 365,500
2,550 Penton Media, Inc. 88,294
2,900 True North Communications, Inc. 141,556
----------------
666,991
-------------------------------------------------------------------------------------
Aerospace/Defense 0.4%
59,500 British Aerospace PLC (United Kingdom)(a) 401,210
9,450 Gencorp, Inc. 75,009
20,000 Loral Space & Communications, Inc. 103,750
3,850 Scott Technologies, Inc. 74,113
----------------
654,082
-------------------------------------------------------------------------------------
Airlines 0.3%
15,900 Deutsche Lufthansa AG (Germany)(a) 392,002
2,200 SkyWest, Inc. 98,175
----------------
490,177
-------------------------------------------------------------------------------------
Auto & Truck 1.3%
5,250 ArvinMeritor, Inc. 82,031
2,400 Borg-Warner Automotive, Inc. 81,450
1,847 Delphi Automotive Systems Corp. 27,359
10,350 Dura Automotive Systems, Inc.(a) 106,734
18,767 General Motors Corp. 574,373
17,500 GKN PLC (United Kingdom) 224,074
5,200 Lear Corp.(a) 121,225
136,000 Nissan Motor Co., Ltd. (Japan)(a) 679,162
2,350 Superior Industries International, Inc. 70,647
----------------
1,967,055
-------------------------------------------------------------------------------------
Banking 5.4%
7,600 BancorpSouth, Inc. 115,425
3,550 BancWest Corp. 65,453
3,200 Bank of New York Co., Inc. 149,800
1,300 Bank United Corp. (Class 'A' Stock) 47,369
9,301 Banknorth Group, Inc. 142,422
</TABLE>
See Notes to Financial Statements
B-188
<PAGE> 265
Prudential Diversified Funds Prudential Diversified High Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------------
<C> <S> <C>
3,700 Banque Nationale de Paris (France) $ 365,225
10,600 Bayerische Vereinsbank AG (Germany) 615,512
3,700 BSB Bancorp, Inc. 79,088
3,050 City National Corp. 111,897
3,200 CORUS BankShares, Inc. 93,600
9,650 Cullen/Frost Bankers, Inc. 274,422
9,475 CVB Financial Corp. 149,231
450 First Citizens BancShares, Inc. 27,450
31,000 Fuji Bank Ltd. (Japan) 200,374
5,650 Fulton Financial Corp. 121,475
12,000 Golden State Bancorp, Inc.(a) 229,500
2,250 Greater Bay Bancorp 121,078
4,450 Harbor Florida Bancshares, Inc. 50,619
36,500 HSBC Holdings PLC (United Kingdom) 494,155
33,000 Industrial Bank of Japan, Ltd. (Japan)(a) 211,795
8,200 ING Groep NV (Netherlands)(a) 548,276
7,550 MAF Bancorp, Inc. 150,528
55,850 Overseas-Chinese Banking Corp., Ltd. (Singapore) 406,147
5,050 PFF Bancorp, Inc. 87,744
3,250 Queens County Bancorp, Inc. 75,156
69,000 Sakura Bank, Ltd. (Japan) 400,009
21,300 San Paolo Imi SpA (Italy) 361,277
17,450 Silicon Valley Bancshares(a) 764,528
3,750 Southwest Bancorpoation of Texas, Inc.(a) 98,203
58,000 Sumitomo Trust & Banking Co., Ltd. (Japan) 373,835
22,000 Svenska Handelsbanken, Ser. A (Sweden) 330,968
72,904 United Overseas Bank, Ltd. (Singapore) 521,750
7,600 Washington Federal, Inc. 142,500
5,200 WestAmerica Bancorporation 144,300
----------------
8,071,111
-------------------------------------------------------------------------------------
Building & Construction 1.4%
6,200 American Standard Companies, Inc.(a) 276,287
1,500 Catellus Development Corp.(a) 25,875
7,400 Centex Corp. 177,137
8,700 D.R. Horton, Inc. 134,850
1,300 Dycom Industries, Inc. 55,575
</TABLE>
See Notes to Financial Statements
B-189
<PAGE> 266
Prudential Diversified Funds Prudential Diversified High Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------
<C> <S> <C>
4,200 Kaufman & Broad Home Corp. $ 82,163
8,200 M.D.C. Holdings, Inc. 164,000
10,000 Pulte Corp. 229,375
2,500 Texas Industries, Inc. 81,094
8,100 Thomas Industries, Inc. 169,088
3,100 Toll Brothers, Inc.(a) 74,981
5,018 Vivendi SA (France) 400,911
8,500 Webb (Del E.) Corp. 129,625
----------------
2,000,961
-------------------------------------------------------------------------------------
Chemicals 1.4%
8,900 Akzo Nobel NV (Netherlands) 395,868
2,250 Albany Molecular Research, Inc. 124,594
4,950 Albemarle Corp. 122,203
2,900 Arch Chemicals, Inc. 58,000
200 Cambrex Corp. 9,038
4,525 Cytec Industries, Inc.(a) 141,406
5,700 Eastman Chemical Co. 267,187
2,750 Geon Co. 45,203
11,700 Grace (W.R.) & Co.(a) 115,537
1,350 H.B. Fuller Co. 52,144
19,300 Imperial Chemical Industries PLC (United
Kingdom) 138,672
4,550 Lubrizol Corp. 97,256
6,900 Olin Corp. 108,244
1,650 OM Group, Inc. 78,272
2,300 Potash Corp. of Saskatchewan, Inc. 123,481
4,950 Spartech Corp. 132,722
----------------
2,009,827
-------------------------------------------------------------------------------------
Computer Services 3.2%
13,200 Affiliated Computer Services, Inc.(a) 594,825
500 AnswerThink Consulting Group, Inc.(a) 8,406
5,100 ASM Lithography Holding NV (Netherlands)(a) 202,725
4,400 AXENT Technologies, Inc.(a) 108,350
3,700 Brooktrout, Inc.(a) 111,925
14,000 Catapult Communications Corp.(a) 186,375
20,300 Cisco Systems, Inc.(a) 1,328,381
</TABLE>
See Notes to Financial Statements
B-190
<PAGE> 267
Prudential Diversified Funds Prudential Diversified High Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
18,900 Getronics NV (Netherlands)(a) $ 318,818
3,250 InFocus Corp.(a) 113,750
2,000 Liberate Technologies, Inc.(a) 45,875
6,200 Luminant Worldwide Corp.(a) 50,375
16,000 MarchFirst, Inc.(a) 331,000
16,200 NetSolve, Inc.(a) 380,700
2,125 RadiSys Corp.(a) 130,688
3,400 RSA Security, Inc.(a) 215,475
500 Sapient Corp.(a) 56,875
4,800 Sun Microsystems, Inc.(a) 506,100
----------------
4,690,643
-------------------------------------------------------------------------------------
Computers 2.6%
9,000 Citrix Systems, Inc.(a) 137,250
41,200 Compaq Computer Corp. 1,156,175
7,900 Dell Computer Corp.(a) 347,106
9,800 EMC Corp.(a) 834,225
13,000 Fujitsu, Ltd. (Japan) 365,545
9,500 Hewlett-Packard Co. 1,037,281
200 Nuance Communications, Inc.(a) 28,075
100 Predictive Systems, Inc.(a) 2,200
----------------
3,907,857
-------------------------------------------------------------------------------------
Consumer Products 1.9%
3,550 Alberto-Culver Co. (Class 'B' Stock) 107,831
20,500 Eastman Kodak Co. 1,124,938
17,300 Electrolux AB, Ser. B (Sweden) 257,432
4,000 Estee Lauder Co., Inc. (Class 'A' Stock) 176,000
4,825 Fossil, Inc.(a) 88,056
14,000 Kao Corp. (Japan) 414,114
13,600 Philip Morris Co., Inc. 343,400
8,133 Reynolds (R.J.) Tobacco Holdings, Inc. 230,774
4,350 Tupperware Corp. 84,553
----------------
2,827,098
-------------------------------------------------------------------------------------
Consumer Services 0.3%
2,000 PurchasePro.com, Inc.(a) 78,000
19,500 Service Corp. International(a) 49,969
</TABLE>
See Notes to Financial Statements
B-191
<PAGE> 268
Prudential Diversified Funds Prudential Diversified High Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
4,350 Waste Connections, Inc.(a) $ 88,088
11,100 Waste Management, Inc. 207,431
----------------
423,488
-------------------------------------------------------------------------------------
Diversified Manufacturing 1.7%
1,800 Corning, Inc. 421,088
4,100 CUNO, Inc.(a) 124,025
10,700 General Electric Co. 550,381
104,700 Invensys PLC (United Kingdom) 375,354
3,250 KEMET Corp.(a) 78,000
2,130 Siemens AG (Germany) 329,690
10,200 Thyssen Krupp AG (Germany)(a) 175,086
8,300 Veba AG (Germany) 463,879
----------------
2,517,503
-------------------------------------------------------------------------------------
Electronics 1.1%
1 Agilent Technologies, Inc.(a) 41
9,350 Minnesota Power, Inc. 199,272
36,600 National Grid Group PLC (United Kingdon) 300,541
4,500 Polycom, Inc.(a) 426,867
6,100 Sony Corp. (Japan) 560,798
13,000 Sumitomo Electric Industries, Ltd. (Japan) 210,545
----------------
1,698,064
-------------------------------------------------------------------------------------
Electronic Components 4.8%
4,108 ABB Ltd. (Switzerland) 489,677
2,400 Applied Micro Circuits Corp.(a) 358,200
14,700 Arrow Electronics, Inc.(a) 486,019
2,700 ATMI, Inc.(a) 69,525
3,050 Audiovox Corp.(a) 47,275
5,300 Avnet, Inc. 301,769
3,050 Belden, Inc. 76,631
2,700 Cable Design Technologies Corp.(a) 95,175
2,600 Electroglas, Inc.(a) 52,000
900 Electronic Scientific Industries, Inc.(a) 40,894
7,800 Flextronics International, Ltd. (Singapore)(a) 552,216
14,500 Gentex Corp.(a) 329,875
13,000 Hitachi, Ltd. (Japan) 155,475
</TABLE>
See Notes to Financial Statements
B-192
<PAGE> 269
Prudential Diversified Funds Prudential Diversified High Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------
<C> <S> <C>
3,950 Idacorp, Inc. $ 146,150
1,750 Integrated Silicon Solution, Inc. 36,750
7,780 KPN NV (Netherlands)(a) 352,469
1,400 Littelfuse, Inc.(a) 49,350
12,000 Novellus Systems, Inc.(a) 647,250
4,600 PMC-Sierra, Inc.(a) 891,825
4,400 Rogers Corp.(a) 157,300
200 Silicon Laboratories, Inc.(a) 11,512
7,300 STMicroelectronics NV (France) 415,644
5,000 TDK Corp. ADR (Japan) 635,000
13,100 Texas Instruments, Inc. 768,806
----------------
7,166,787
-------------------------------------------------------------------------------------
Financial Services 5.4%
1,700 Acom Co., Ltd. (Japan)(a) 128,817
6,900 Allied Capital Corp. 130,669
12,900 American Express Co. 731,269
11,900 Bank of America Corp. 563,762
6,900 Charles Schwab Corp. 249,262
19,050 Citigroup, Inc. 1,344,216
1,200 Dain Rauscher Corp. 81,375
8,150 Doral Financial Corp. 105,950
5,250 Downey Financial Corp. 183,750
2,750 Eaton Vance Corp. 142,484
12,900 Federated Investors, Inc. 337,819
32,400 Halifax Group PLC (United Kingdom)(a) 253,915
1,600 Investment Technology, Inc.(a) 77,800
33,500 Investor AB (Sweden) 485,714
9,400 John Hancock Financial Services, Inc. 222,075
8,700 Labranche & Co., Inc.(a) 177,262
4,300 Merrill Lynch & Co., Inc. 555,775
7,500 Metris Companies, Inc. 219,844
11,600 Morgan Stanley Dean Witter & Co. 1,058,500
2,700 National Discount Brokers Group, Inc.(a) 88,931
2,800 Orix Corp. (Japan) 361,711
2,813 Radian Group, Inc. 171,241
</TABLE>
See Notes to Financial Statements
B-193
<PAGE> 270
Prudential Diversified Funds Prudential Diversified High Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------
<C> <S> <C>
2,550 Triad Guaranty, Inc. $ 61,838
5,650 Webster Financial Corp. 126,419
2,600 Whitney Holding Corp. 96,688
----------------
7,957,086
-------------------------------------------------------------------------------------
Food & Beverage 2.6%
1,150 Adolph Coors Co. 72,450
53,500 Cadbury Schweppes PLC (United Kingdom) 346,121
11,500 CKE Restaurants, Inc. 33,781
53,100 Darden Restaurants, Inc. 866,194
2,900 Dean Foods Co. 100,956
45,600 Diageo PLC (United Kingdom) 400,410
3,750 Fleming Cos., Inc. 58,828
7,500 Heineken NV (Netherlands) 428,900
4,450 Michael Foods, Inc. 106,800
24,500 Nabisco Group Holding Corp. 649,250
3,900 Performance Food Group Co.(a) 128,456
6,850 Riviana Foods, Inc. 111,313
13,850 Ryan's Family Steak Houses, Inc.(a) 126,381
15,400 Sara Lee Corp. 283,938
4,350 Smithfield Foods, Inc.(a) 123,703
4,050 Universal Foods Corp. 78,975
----------------
3,916,456
-------------------------------------------------------------------------------------
Gas Distribution 0.5%
3,000 CH Energy Group, Inc. 97,875
8,850 Energen Corp. 199,125
7,700 KeySpan Corp. 244,475
5,500 ONEOK, Inc. 146,781
----------------
688,256
-------------------------------------------------------------------------------------
Health Care 4.1%
6,400 Apria Healthcare Group, Inc.(a) 95,600
29,900 Foundation Health Systems, Inc. 435,419
38,200 HCA-The Healthcare Corp. 1,298,800
32,600 HEALTHSOUTH Corp.(a) 193,563
700 Oxford Health Plans, Inc.(a) 16,756
9,000 PAREXEL International Corp.(a) 89,438
</TABLE>
14 See Notes to Financial Statements
B-194
<PAGE> 271
Prudential Diversified Funds Prudential Diversified High Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
45,000 Tenet Healthcare Corp.(a) $ 1,369,687
3,250 Trigon Healthcare, Inc.(a) 172,250
12,200 UnitedHealth Group, Inc. 998,112
15,200 Wellpoint Health Networks, Inc.(a) 1,325,250
----------------
5,994,875
-------------------------------------------------------------------------------------
Home Furnishings 0.3%
3,275 Ethan Allen Interiors, Inc. 83,512
5,750 Furniture Brands International, Inc.(a) 85,172
5,100 HON INDUSTRIES, Inc. 136,106
8,350 Pier 1 Imports, Inc. 99,678
2,250 Springs Industries, Inc. 72,563
----------------
477,031
-------------------------------------------------------------------------------------
Hotels & Leisure 0.4%
1,300 Anchor Gaming(a) 70,444
2,600 Gaylord Entertainment Co. 64,513
21,600 Hilton Hotels Corp. 221,400
39,400 MeriStar Hotels & Resorts, Inc.(a) 105,887
3,400 SFX Entertainment, Inc.(a) 156,400
----------------
618,644
-------------------------------------------------------------------------------------
Human Resources 0.1%
2,850 CDI Corp.(a) 56,644
4,750 Spherion Corp.(a) 90,844
----------------
147,488
-------------------------------------------------------------------------------------
Insurance 5.4%
5,050 Alfa Corp. 92,163
12,295 Alleanza Assicurazioni (Italy) 153,271
1,771 Allianz AG (Germany) 656,597
3,800 American Financial Group, Inc. 95,000
2,800 American General Corp. 186,725
7,950 American International Group, Inc. 697,116
2,800 Annuity and Life Re (Holdings), Ltd. 68,950
4,450 Arthur J. Gallagher & Co. 218,328
2,680 AXA Financial, Inc. (France) 407,369
14,400 AXA Financial, Inc. 550,800
13,900 Chubb Corp. 1,028,600
</TABLE>
See Notes to Financial Statements
B-195
<PAGE> 272
Prudential Diversified Funds Prudential Diversified High Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------------
<C> <S> <C>
4,200 Commerce Group, Inc. $ 116,550
2,640 Fidelity National Financial, Inc. 46,695
3,400 First American Financial Corp. 52,913
4,050 Leucadia National Corp. 108,084
11,800 Loews Corp. 740,450
3,550 Milacron, Inc. 51,031
4,450 MONY Group, Inc. 159,088
18,900 Old Republic International Corp. 421,706
8,350 Presidential Life Corp. 120,553
18,500 Prudential Corp. PLC (United Kingdom) 252,541
1,500 Quotesmith.com, Inc.(a) 3,656
13,700 Reinsurance Group of America, Inc. 435,831
18,700 SAFECO Corp. 431,269
6,000 St. Paul Companies, Inc. 266,625
2,550 StanCorp Financial Group, Inc. 87,975
4,800 Terex Corp. 79,200
940 Zurich Versicherungs-Gesellschaft (Switzerland) 506,754
----------------
8,035,840
-------------------------------------------------------------------------------------
Machinery 0.3%
1,700 Helix Technology Corp. 55,250
2,500 IDEX Corp. 82,500
6,400 JLG Industries, Inc. 65,200
8,850 Lincoln Electric Holdings, Inc. 133,856
3,600 Manitowoc Co., Inc. 88,650
3,050 Trinity Industrial Corp. (Japan) 58,713
----------------
484,169
-------------------------------------------------------------------------------------
Manufacturing 1.1%
2,050 AptarGroup, Inc. 51,122
850 Brooks Automation, Inc. 42,181
300 Coherent, Inc. 17,963
2,050 Compagnie de Saint Gobain (France) 301,157
8,000 Mettler-Toledo International Inc.(a) 324,000
4,900 Tektronix, Inc.(a) 301,350
3,550 The Toro Co. 106,944
100 Varian, Inc.(a) 4,213
</TABLE>
See Notes to Financial Statements
B-196
<PAGE> 273
Prudential Diversified Funds Prudential Diversified High Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
3,900 Waters Corp.(a) $ 462,637
----------------
1,611,567
-------------------------------------------------------------------------------------
Media 2.7%
2,750 Banta Corp. 53,109
8,300 Clear Channel Communications, Inc.(a) 632,356
2,200 Cumulus Media, Inc.(a) 21,450
1,550 Entercom Communications Corp.(a) 60,159
5,000 Gemstar-TV Guide International, Inc.(a) 304,062
6,950 General Cable Corp. 59,944
1,900 Harman International Industries, Inc. 120,175
3,200 Lagardere SCA (France) 207,170
3,900 Lee Enterprises, Inc. 103,350
7,200 Metromedia Fiber Network, Inc.(a) 252,900
44,400 Reed International PLC (United Kingdom) 354,944
1,650 Scholastic Corp.(a) 105,394
1,100 Time Warner, Inc. 84,356
3,800 Univision Communications, Inc.(a) 472,150
17,024 Viacom, Inc.(a) 1,128,904
100 Wink Communications, Inc.(a) 2,450
500 Ziff Davis, Inc.(a) 8,563
----------------
3,971,436
-------------------------------------------------------------------------------------
Medical Products & Services 3.2%
7,600 Amgen, Inc.(a) 493,525
9,269 AstraZeneca Group PLC (United Kingdom)(a) 399,452
8,350 Bergen Brunswig Corp. 73,063
3,250 Datascope Corp.(a) 122,687
2,400 Genetech, Inc.(a) 365,100
9,000 Inhale Therapeutic Systems, Inc.(a) 730,687
6,800 PacifiCare Health Systems, Inc.(a) 442,000
3,100 Patterson Dental Co.(a) 82,150
2,300 PerkinElmer, Inc. 147,056
12,901 Pharmacia Corp. 706,330
850 Quest Diagnostics, Inc.(a) 85,797
11,000 Sankyo Co., Ltd. (Japan)(a) 258,091
7,700 Serono SA (Switzerland)(a) 207,900
</TABLE>
See Notes to Financial Statements
B-197
<PAGE> 274
Prudential Diversified Funds Prudential Diversified High Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------------
<C> <S> <C>
41,100 Smithkline Beecham PLC (United Kingdom) $ 529,642
3,350 Varian Medical Systems, Inc. 144,050
----------------
4,787,530
-------------------------------------------------------------------------------------
Metals 1.4%
24,400 Alcoa, Inc. 738,100
33,600 Broken Hill Proprietary Co., Ltd. (Australia) 355,533
3,900 Carpenter Technology Corp. 119,438
3,400 Cleveland-Cliffs, Inc. 84,363
5,300 Commercial Metals Co. 155,687
3,200 Kaydon Corp. 67,000
7,700 Phelps Dodge Corp. 313,294
2,350 Precision Castparts Corp. 150,253
4,775 Reliance Steel & Aluminum Co. 100,275
5,250 Worthington Industries, Inc. 55,453
----------------
2,139,396
-------------------------------------------------------------------------------------
Mining 0.4%
25,700 Freeport-McMoRan Copper & Gold, Inc.(a) 220,056
18,700 Newmont Mining Corp. 331,925
----------------
551,981
-------------------------------------------------------------------------------------
Networking 0.5%
600 Adaptec, Inc.(a) 14,850
2,900 Anixter International, Inc.(a) 84,281
1,200 Broadcom Corp.(a) 269,100
1,700 Juniper Networks, Inc.(a) 242,144
1,800 Network Appliance, Inc.(a) 155,138
----------------
765,513
-------------------------------------------------------------------------------------
Office Equipment & Supplies 0.4%
10,000 Canon, Inc. (Japan) 445,519
4,400 John H. Harland Co. 58,850
17,700 Lanier Worldwide, Inc.(a) 12,169
2,000 United Stationers, Inc. 58,250
----------------
574,788
</TABLE>
See Notes to Financial Statements
B-198
<PAGE> 275
Prudential Diversified Funds Prudential Diversified High Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------------
<C> <S> <C>
Oil & Gas 2.7%
2,100 Amerada Hess Corp. $ 127,050
57,300 ENI SpA (Italy) 320,775
4,750 Helmerich & Payne, Inc. 152,000
3,877 Kerr-McGee Corp. 212,750
13,800 Marine Drilling Companies, Inc.(a) 300,150
14,200 Newfield Exploration Co.(a) 483,687
9,700 Nuevo Energy Co.(a) 147,925
7,900 Occidental Petroleum Corp. 159,975
3,250 Patterson Energy, Inc.(a) 81,047
4,800 Schlumberger, Ltd. (France) 354,900
11,233 Total Fina SA ADR (France) 826,328
4,510 Total Fina SA, (France) 668,397
2,600 Ultramar Diamond Shamrock Corp. 59,475
4,600 Valero Energy Corp. 119,313
----------------
4,013,772
-------------------------------------------------------------------------------------
Oil & Gas Exploration/Production 1.1%
4,900 Berry Petroleum Co. 89,119
55,300 BP Amoco PLC (United Kingdom) 483,928
12,464 BP Amoco PLC 652,023
5,250 Equitable Resources, Inc. 273,328
4,300 Mitchell Energy & Development Corp.(a) 137,062
1,650 St. Mary Land & Exploration Co. 49,397
----------------
1,684,857
-------------------------------------------------------------------------------------
Paper & Packaging 2.8%
2,850 Chesapeake Corp. 74,634
5,100 Fort James Corp. 155,869
7,300 Georgia-Pacific Corp. (Timber Group) 221,281
23,500 Georgia-Pacific Group 583,094
13,700 International Paper Co. 465,800
16,300 Mead Corp. 413,612
26,000 Nippon Paper Industries Co., Ltd.(Japan) 189,894
11,500 Pactiv Corp.(a) 106,375
5,650 Pope & Talbot, Inc. 108,763
8,750 Rayonier, Inc. 356,016
9,200 Temple-Inland, Inc. 399,625
</TABLE>
See Notes to Financial Statements
B-199
<PAGE> 276
Prudential Diversified Funds Prudential Diversified High Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
10,100 UPM-Kymmene Oyj (Finland) $ 249,008
9,400 Weyerhaeuser Co. 429,462
15,200 Willamette Industries, Inc. 460,750
----------------
4,214,183
-------------------------------------------------------------------------------------
Pharmaceuticals 2.4%
2,000 Alpharma, Inc. 131,000
10,700 American Home Products Corp. 567,769
9,051 Aventis SA, (France) 697,119
4,900 Bindley Western Industries, Inc. 128,931
4,200 Eli Lilly & Co. 436,275
27,500 Pfizer, Inc. 1,185,937
43 Roche Holdings AG (Switzerland) 403,870
----------------
3,550,901
-------------------------------------------------------------------------------------
Real Estate Investment Trusts 2.1%
700 Alexandria Real Estate Equities, Inc. 25,069
5,600 Amli Residential Properties Trust 136,500
5,800 Arden Realty, Inc. 153,700
3,100 Avalonbay Communities, Inc. 146,087
5,600 Bradley Real Estate, Inc. 120,400
4,600 BRE Properties, Inc. 149,212
5,350 Cabot Industrial Trust 109,675
2,850 Camden Property Trust 89,063
2,700 Developers Diversified Realty Corp. 42,525
3,850 First Industrial Reality Trust, Inc. 123,200
4,700 Franchise Finance Corp. of America 112,800
3,900 Gables Residential Trust 106,031
1,500 General Growth Properties, Inc. 50,813
3,400 Health Care Property Investors, Inc. 101,150
4,600 Health Care REIT, Inc. 82,800
5,900 Highwoods Properties, Inc. 159,300
4,100 Hospitality Properties Trust 101,475
11,300 JDN Realty Corp. 118,650
16,400 MeriStar Hospitality Corp. 363,875
8,000 Nationwide Health Properties, Inc. 126,000
8,600 Reckson Associates Reality Corp. 225,750
</TABLE>
See Notes to Financial Statements
B-200
<PAGE> 277
Prudential Diversified Funds Prudential Diversified High Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
5,300 Regency Realty Corp. $ 127,200
1,100 SL Green Realty Corp. 32,656
5,400 Summit Properties, Inc. 128,925
3,400 Weingarten Realty Investors 140,675
----------------
3,073,531
-------------------------------------------------------------------------------------
Retail 5.1%
3,600 American Eagle Outfitters, Inc.(a) 53,550
7,650 Ames Department Stores, Inc. 54,506
3,400 BJ's Wholesale Club, Inc.(a) 101,787
10,200 Consolidated Stores Corp.(a) 121,762
21,600 Dillard's, Inc. (Class 'A' Stock) 295,650
3,050 Dress Barn, Inc.(a) 63,288
1,750 Factory 2-U Stores, Inc.(a) 72,625
13,925 GAP, Inc. 498,689
50,000 Great Universal Stores PLC (United Kingdom) 330,783
23,100 Home Depot, Inc. 1,195,425
31,500 IKON Office Solutions, Inc. 127,969
6,800 J.C. Penney Co., Inc. 109,650
2,700 Jack In The Box, Inc.(a) 57,881
3,700 Kellwood Co. 82,788
44,200 Kmart Corp.(a) 309,400
13,100 Kohl's Corp.(a) 743,425
1,700 Libbey, Inc. 53,019
2,500 Michaels Stores, Inc.(a) 108,281
6,700 Pep Boys - Manny, Moe & Jack 38,944
6,550 Polo Ralph Lauren Corp.(a) 106,028
11,400 RadioShack Corp. 642,675
8,450 Ross Stores, Inc. 129,919
5,900 Ruby Tuesday, Inc. 72,644
4,250 Russell Corp. 83,672
1,100 Sears, Roebuck & Co. 32,863
131,900 Tesco PLC (United Kingdom)(a) 434,820
10,800 Tiffany & Co. 369,900
14,700 Toys 'R' Us, Inc.(a) 242,550
8,000 Venator Group, Inc. 113,000
13,000 Wal-Mart Stores, Inc. 714,187
</TABLE>
See Notes to Financial Statements
B-201
<PAGE> 278
Prudential Diversified Funds Prudential Diversified High Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
4,200 Zale Corp.(a) $ 156,975
----------------
7,518,655
-------------------------------------------------------------------------------------
Semiconductors 1.6%
6,000 Alpha Industries, Inc.(a) 204,375
5,400 Applied Materials, Inc.(a) 409,725
1,300 Cirrus Logic, Inc.(a) 25,187
3,400 GaSonics International Corp.(a) 81,600
18,600 Intel Corp. 1,241,550
2,750 Kulicke & Soffa Industries, Inc.(a) 124,094
300 Micrel, Inc.(a) 15,019
400 QLogic Corp.(a) 29,800
1,150 Varian Semiconductor Equipment Associates,
Inc.(a) 55,847
2,800 Veeco Instruments, Inc.(a) 220,500
----------------
2,407,697
-------------------------------------------------------------------------------------
Shipbuilding
1,700 Newport News Shipbuilding, Inc. 68,638
-------------------------------------------------------------------------------------
Software 3.0%
100 Actuate Corp.(a) 4,925
2,150 Agency.com, Inc.(a) 46,359
1,200 Allaire Corp.(a) 37,031
100 Alteon Websystems, Inc.(a) 13,194
7,300 America Online, Inc.(a) 389,181
500 Broadbase Software, Inc.(a) 11,781
15,300 BroadVision, Inc.(a) 553,669
100 Clarus Corp.(a) 3,700
4,800 Computer Associates International, Inc. 119,100
200 EPiphany, Inc. 18,613
200 Exchange Applications, Inc.(a) 4,400
4,000 Exodus Communications, Inc.(a) 177,750
8,200 HNC Software, Inc.(a) 361,825
200 Informatica Corp.(a) 16,000
200 Interwoven, Inc.(a) 12,913
600 ITXC Corp.(a) 10,875
2,150 Keynote Systems, Inc. 81,525
2,700 Microsoft Corp.(a) 188,494
</TABLE>
See Notes to Financial Statements
B-202
<PAGE> 279
Prudential Diversified Funds Prudential Diversified High Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
1,558 NetIQ Corp.(a) $ 75,173
2,900 ONYX Software Corp.(a) 70,144
4,800 Phoenix Technologies Ltd. 81,600
4,550 Progress Software Corp.(a) 68,534
1,350 Proxicom, Inc.(a) 55,772
300 Software.com, Inc.(a) 30,262
4,400 Sybase, Inc.(a) 106,150
1,200 U.S. Interactive, Inc.(a) 16,200
1,600 VeriSign, Inc.(a) 253,900
13,500 VERITAS Software Corp.(a) 1,376,156
4,800 Verity, Inc. 174,900
400 Viant Corp.(a) 13,200
----------------
4,373,326
-------------------------------------------------------------------------------------
Telecommunications 9.6%
1,300 Advanced Fibre Communications, Inc.(a) 55,738
7,900 Alcatel (France) 582,840
4,900 Allegiance Telecom, Inc.(a) 272,256
6,600 ALLTEL Corp. 406,725
31,200 AT&T Corp. 770,650
26,500 British Telecommunications PLC (United Kingdom) 350,233
800 C-COR.net Corp.(a) 21,150
6,600 Comverse Technology, Inc.(a) 579,150
700 Copper Mountain Networks, Inc.(a) 55,202
2,154 Deutsche Telekom AG (Germany)(a) 93,852
600 Ditech Communications Corp.(a) 28,724
800 Dobson Communications Corp.(a) 17,500
21,600 Ericsson (L.M.) AB (ADR) (Sweden) 423,900
17,600 Global Crossing Ltd.(a) 427,900
600 Go2Net, Inc.(a) 35,438
17,100 Harris Corp. 585,675
2,200 Intermedia Communications, Inc.(a) 38,775
11,500 JDS Uniphase Corp.(a) 1,358,437
2,200 Leap Wireless International, Inc.(a) 139,425
2,200 Level 3 Communications, Inc.(a) 150,563
7,400 Millicom International Cellular SA
(Luxembourg)(a) 326,525
7,300 Motorola, Inc. 241,356
</TABLE>
See Notes to Financial Statements
B-203
<PAGE> 280
Prudential Diversified Funds Prudential Diversified High Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------------
<C> <S> <C>
5,650 Net2000 Communications, Inc.(a) $ 53,675
8,100 Nextel Communications, Inc.(a) 453,094
5,700 NEXTLINK Communications, Inc.(a) 188,456
43 Nippon Telegraph & Telephone Corp. (Japan) 514,265
23,000 Nokia Corp. ADR (Finland)(a) 1,019,187
9,600 Nortel Networks Corp 714,000
7,400 NTL, Inc.(a) 333,462
13 NTT Mobile Communication (Japan) 326,380
45,300 Portugal Telecom SA (Portugal) 493,339
19,200 Qwest Communications International, Inc.(a) 901,200
5,800 Tele Danmark A/S (Denmark) 356,837
14,915 Telefonica SA (Spain) 313,804
600 Ventro Corp.(a) 7,238
122,275 Vodafone Airtouch PLC, ADR (United Kingdom)(a) 1,483,932
----------------
14,120,883
-------------------------------------------------------------------------------------
Trucking & Shipping 0.4%
4,950 Airborne Freight Corp. 76,416
3,750 Alexander & Baldwin, Inc. 94,453
6,950 Roadway Express, Inc. 165,062
3,600 Sea Containers, Ltd. (Bermuda) 94,500
4,400 USFreightways Corp. 122,100
----------------
552,531
-------------------------------------------------------------------------------------
Utilities 1.7%
38,597 British Energy PLC (Class 'A' Stock) (United
Kingdom) 138,806
3,400 California Water Service Group 81,175
3,350 Cleco Corp. 123,531
4,900 Conectiv, Inc. 81,156
26,800 Endesa SA (Spain) 556,158
4,000 GPU, Inc. 106,000
10,200 Public Service Company of New Mexico(a) 184,875
7,100 Reliant Energy, Inc. 237,850
1,550 RGS Energy Group, Inc. 35,553
4,800 Sierra Pacific Resources 67,800
2,310 Suez Lyonnaise des Eaux (France) 377,891
</TABLE>
See Notes to Financial Statements
B-204
<PAGE> 281
Prudential Diversified Funds Prudential Diversified High Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------
<C> <S> <C>
7,400 Unicom Corp. $ 303,862
6,100 Washington Gas Light Co. 150,213
----------------
2,444,870
----------------
Total long-term investments (cost $112,321,225) 129,837,544
----------------
SHORT-TERM INVESTMENTS 13.3%
<CAPTION>
Principal
Amount
(000)
<C> <S> <C>
-------------------------------------------------------------------------------------
Repurchase Agreement
$ 19,783 Joint Repurchase Agreement Account,
6.56%, 8/1/00 (cost $19,783,000; Note 5) 19,783,000
----------------
Total Investments 100.8%
(cost $132,104,225; Note 4) 149,620,544
Liabilities in excess of other
assets (0.8%) (1,195,137)
----------------
Net Assets 100% $ 148,425,407
----------------
----------------
</TABLE>
------------------------------
(a) Non-income producing security.
AB--Aktiebolag (Swedish Stock Company)
ADR--American Depository Receipt.
AG--Aktiengesellschaft (German Stock Company).
NV--Naamloze Vennoutschop (Dutch Corporation).
PLC--Public Limited Company (British Corporation).
SA-- Sociedada Anonima (Spanish Corporation) or Societe Anonyme (French
Corporation).
SCA--Societe Capital Anonyme (French Corporation).
See Notes to Financial Statements
B-205
<PAGE> 282
Prudential Diversified Funds Prudential Diversified High Growth Fund
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
July 31, 2000
<S> <C>
---------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $112,321,225) $ 129,837,544
Joint repurchase agreement, at value (cost $19,783,000) 19,783,000
Foreign currency, at value (cost $160,606) 157,352
Cash 92,289
Receivable for investments sold 1,397,240
Receivable for Fund shares sold 723,388
Dividends and interest receivable 117,355
Prepaid assets 143
-------------
Total assets 152,108,311
-------------
LIABILITIES
Payable for investments purchased 2,880,584
Payable for Fund shares reacquired 513,088
Due to Distributor 102,253
Due to Manager 94,593
Accrued expenses 89,322
Foreign withholding tax payable 3,064
-------------
Total liabilities 3,682,904
-------------
NET ASSETS $ 148,425,407
-------------
-------------
Net assets were comprised of:
Shares of beneficial interest, at par $ 11,524
Paid-in capital in excess of par 119,510,520
-------------
119,522,044
Distributions in excess of net investment income (241,221)
Accumulated net realized gain on investments 11,632,832
Net unrealized appreciation on investments and foreign
currency transactions 17,511,752
-------------
Net assets, July 31, 2000 $ 148,425,407
-------------
-------------
</TABLE>
See Notes to Financial Statements
B-206
<PAGE> 283
Prudential Diversified Funds Prudential Diversified High Growth Fund
Statement of Assets and Liabilities Cont'd.
<TABLE>
<CAPTION>
July 31, 2000
---------------------------------------------------------------------------------
<S> <C>
Class A:
Net asset value and redemption price per share ($35,677,785
/ 2,756,080 shares of beneficial interest issued and
outstanding) $12.95
Maximum sales charge (5% of offering price) .68
-------------
Maximum offering price to public $13.63
-------------
-------------
Class B:
Net asset value, offering price and redemption price per
share ($79,793,490 / 6,206,110 shares of beneficial
interest issued and outstanding) $12.86
-------------
-------------
Class C:
Net asset value and redemption price per share ($31,636,329
/ 2,460,442 shares of beneficial interest issued and
outstanding) $12.86
Sales charge (1% of offering price) .13
-------------
Offering price to public $12.99
-------------
-------------
Class Z:
Net asset value, offering price and redemption price per
share ($1,317,803 / 101,507 shares of beneficial interest
issued and outstanding) $12.98
-------------
-------------
</TABLE>
See Notes to Financial Statements
B-207
<PAGE> 284
Prudential Diversified Funds Prudential Diversified High Growth Fund
Statement of Operations
<TABLE>
<CAPTION>
Year
Ended
July 31, 2000
<S> <C>
-----------------------------------------------------------------------------------
NET INVESTMENT LOSS
Income
Dividends (net of foreign withholding taxes of $71,319) $ 1,508,810
Interest 660,653
-------------
Total income 2,169,463
-------------
Expenses
Management fee 1,055,456
Distribution fee--Class A 68,819
Distribution fee--Class B 609,935
Distribution fee--Class C 264,132
Custodian's fees and expenses 316,000
Transfer agent's fees and expenses 208,000
Reports to shareholders 105,000
Registration fees 56,000
Legal fees 27,000
Audit fees 25,000
Trustees' fees and expenses 14,000
Offering expense 9,034
Miscellaneous 4,840
-------------
Total expenses 2,763,216
-------------
Net investment loss (593,753)
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS
Net realized gain (loss) on:
Investment transactions 18,037,391
Foreign currency transactions (101,823)
-------------
17,935,568
-------------
Net change in unrealized appreciation (depreciation) of:
Investments 5,905,191
Foreign currency (5,188)
-------------
5,900,003
-------------
Net gain on investments 23,835,571
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 23,241,818
-------------
-------------
</TABLE>
See Notes to Financial Statements
B-208
<PAGE> 285
Prudential Diversified Funds Prudential Diversified High Growth Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year November 18, 1998(a)
Ended Through
July 31, 2000 July 31, 1999
<S> <C> <C>
-----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment loss $ (593,753) $ (131,077)
Net realized gain on investments and
foreign currency transactions 17,935,568 1,469,897
Net unrealized appreciation of
investments 5,900,003 11,611,749
------------- --------------------
Net increase in net assets resulting
from operations 23,241,818 12,950,569
------------- --------------------
Dividends and distributions (Note 1)
Distributions in excess of net
investment income
Class A (798,740) --
Class B (1,548,906) --
Class C (694,850) --
Class Z (1,329,649) --
------------- --------------------
(4,372,145) --
------------- --------------------
Distributions from net realized gains
Class A (510,822) --
Class B (1,183,192) --
Class C (530,788) --
Class Z (794,899) --
------------- --------------------
(3,019,701) --
------------- --------------------
Fund share transactions (net of share
conversions) (Note 6)
Net proceeds from shares sold 75,419,062 130,702,522
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions 7,276,356 --
Cost of shares reacquired (68,742,787) (25,070,287)
------------- --------------------
Net increase in net assets from Fund
share transactions 13,952,631 105,632,235
------------- --------------------
Total increase 29,802,603 118,582,804
NET ASSETS
Beginning of period 118,622,804 40,000
------------- --------------------
End of period $ 148,425,407 $118,622,804
------------- --------------------
------------- --------------------
---------------
(a) Commencement of investment operations.
</TABLE>
See Notes to Financial Statements
B-209
<PAGE> 286
Prudential Diversified Funds Prudential Diversified High Growth Fund
Notes to Financial Statements
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 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
B-210
<PAGE> 287
Prudential Diversified Funds Prudential Diversified High Growth Fund
Notes to Financial Statements Cont'd.
from primary dealers shall be valued at the bid prices provided by such primary
dealers. Securities for which market quotations are not readily available, may
be valued using the last available market quotation for a period not to exceed
five days, provided the Manager and subadviser feel this is representative of
market value, afterwards, such securities are valued in good faith under
procedures adopted by the Trustees.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost.
In connection with transactions in repurchase agreements with U.S.
financial institutions, it is the Fund's policy that its custodian or designated
subcustodians, as the case may be under triparty repurchase agreements, take
possession of the underlying securities, the value of which exceeds the
principal amount of the repurchase transaction including accrued interest. If
the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
All securities are valued as of 4:15 p.m., New York time.
Foreign Currency Translation: The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) market value of investment securities, other assets and liabilities -
at the closing daily rates of exchange.
(ii) purchases and sales of investment securities, income and expenses -
at the rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the fiscal period, the Fund does not
isolate that portion of the results of operations arising as a result of changes
in the foreign exchange rates from the fluctuations arising from changes in the
market prices of securities held at the end of the period. Similarly, the Fund
does not isolate the effect of changes in foreign exchange rates from the
fluctuations arising from changes in the market prices of long-term portfolio
securities sold during the period. Accordingly, these realized foreign currency
gains (losses) are included in the reported net realized gains (losses) on
investment transactions.
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
B-211
<PAGE> 288
Prudential Diversified Funds Prudential Diversified High Growth Fund
Notes to Financial Statements Cont'd.
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.
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.
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.
B-212
<PAGE> 289
Prudential Diversified Funds Prudential Diversified High Growth Fund
Notes to Financial Statements Cont'd.
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 $77,955 in connection with the
initial offering of the Fund. Offering costs were amortized over a period of 12
months ended 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 decrease distributions in excess of net investment loss by
$4,861,021, decrease accumulated net realized gain on investments by $4,851,531
and decrease paid-in capital by $9,490 for the year ended July 31, 2000, due to
dividend distribution reclasses, 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 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 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
('Jennison') $300 million; .25% for amounts
in excess of $300 million
The Prudential Investment
Corporation ('PIC') .375%(1)
Lazard Asset Management .40%
Franklin Advisers, Inc. .50%
The Dreyfus Corporation .45%
(1)Under the Advisory Agreement between PIFM and PIC, PIC was reimbursed by PIFM
for its reasonable costs and expenses for the period August 1, 1999 through
December 31, 1999.
</TABLE>
B-213
<PAGE> 290
Prudential Diversified Funds Prudential Diversified High Growth Fund
Notes to Financial Statements Cont'd.
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 year ended July 31,
2000.
PIMS has advised the Fund that it has received approximately $189,200 and
$116,400 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively, during the year ended July 31, 2000.
PIMS has advised the Fund that for the year ended July 31, 2000, it has
received approximately $137,300 and $32,000 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
Jennison, PIMS, PIC and PIFM are wholly owned subsidiaries of The
Prudential Insurance Company of America.
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.
Interest on any such borrowings will be at market rates. The purpose of the
agreement is to serve as an alternative source of funding for capital share
redemptions. The Funds pay a commitment fee of .080 of 1% of the unused portion
of the credit facility. The commitment fee is accrued and paid quarterly on a
pro rata basis by the Funds. The expiration date of the SCA is March 9, 2001.
Prior to March 9, 2000, the commitment fee was .065 of 1% of the unused portion
of the credit facility. The Fund did not borrow any amounts pursuant to the SCA
during the period ended July 31, 2000.
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 year ended July 31, 2000, the
Fund incurred fees of approximately $175,000 for the services of PMFS. As of
July 31,
B-214
<PAGE> 291
Prudential Diversified Funds Prudential Diversified High Growth Fund
Notes to Financial Statements Cont'd.
2000 approximately $18,000 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 year ended July 31, 2000, 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 year ended July 31, 2000 were $96,819,710 and $85,830,743, respectively.
The United States federal income tax basis of the Funds' investments as of
July 31, 2000 was $133,166,809 and accordingly, net unrealized appreciation on
investments for federal income tax purposes was $16,453,735 (gross unrealized
appreciation $25,878,600, gross unrealized depreciation $9,424,865).
The Fund will elect, for United States Federal income tax purposes, to
treat net currency losses of approximately $84,593 incurred in the nine month
period ended July 31, 2000 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,
2000, the Fund had a 3.5% undivided interest in the repurchase agreements in
the joint account. The undivided interest for the Fund represents $19,783,000
in principal amount. As of such date, each repurchase agreement in the joint
account and the collateral therefore were as follows: ABN AMRO Incorporated,
6.56%, in the principal amount of $100,000,000, repurchase price $100,018,222,
due 8/1/00. The value of the collateral including accrued interest was
$102,000,029. Bear, Stearns & Co. Inc., 6.55%, in the principal amount of
$100,000,000, repurchase price $100,018,194, due 8/1/00. The value of the
collateral including accrued interest was $102,926,906. Greenwich Capital
Markets, Inc., 6.57%, in the principal amount of $110,000,000, repurchase price
$110,020,075, due 8/1/00. The value of the collateral including accrued
interest was $112,201,716. Merrill Lynch, Pierce, Fenner & Smith, Inc., 6.45%,
in the principal amount of $97,030,000, repurchase price $97,047,384, due
8/1/00. The value of the collateral including accrued interest was $98,970,864.
B-215
<PAGE> 292
Prudential Diversified Funds Prudential Diversified High Growth Fund
Notes to Financial Statements Cont'd.
Salomon Smith Barney, Inc., 6.55%, in the principal amount of
$155,000,000, repurchase price $155,028,201, due 8/1/00. The value of the
collateral including accrued interest was $158,174,190.
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. The Fund has authorized an unlimited number of shares of beneficial
interest at $.001 par value. Transactions in shares of beneficial interest were
as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
------------------------------------------------------------ ---------- ------------
<S> <C> <C>
Year ended July 31, 2000:
Shares sold 1,540,352 $ 19,257,931
Shares issued in reinvestment of dividends and distributions 106,417 1,264,231
Shares reacquired (967,716) (12,147,899)
---------- ------------
Net increase in shares outstanding before conversion 679,053 8,374,263
Shares issued upon conversion from Class B 233,346 3,014,476
---------- ------------
Net increase in shares outstanding 912,399 $ 11,388,739
---------- ------------
---------- ------------
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 1,821,275 19,778,049
Shares issued upon conversion from Class B 21,406 236,761
---------- ------------
Net increase in shares outstanding 1,842,681 $ 20,014,810
---------- ------------
---------- ------------
<CAPTION>
Class B
------------------------------------------------------------
<S> <C> <C>
Year ended July 31, 2000:
Shares sold 3,291,551 $ 40,858,317
Shares issued in reinvestment of dividends and distributions 226,817 2,687,787
Shares reacquired (655,599) (8,105,781)
---------- ------------
Net increase in shares outstanding before conversion 2,862,769 35,440,323
Shares reacquired upon conversion into Class A (234,534) (3,014,476)
---------- ------------
Net increase in shares outstanding 2,628,235 $ 32,425,847
---------- ------------
---------- ------------
</TABLE>
B-216
<PAGE> 293
Prudential Diversified Funds Prudential Diversified High Growth Fund
Notes to Financial Statements Cont'd.
<TABLE>
<CAPTION>
Class B Shares Amount
------------------------------------------------------------ ---------- ------------
November 18, 1998(a) through July 31, 1999:
<S> <C> <C>
Shares sold 3,792,825 $ 40,686,002
Shares reacquired (194,476) (2,146,432)
---------- ------------
Net increase in shares outstanding before conversion 3,598,349 38,539,570
Shares reacquired upon conversion into Class A (21,474) (236,761)
---------- ------------
Net increase in shares outstanding 3,576,875 $ 38,302,809
---------- ------------
---------- ------------
<CAPTION>
Class C
------------------------------------------------------------
<S> <C> <C>
Year ended July 31, 2000:
Shares sold 1,132,420 $ 14,053,104
Shares issued in reinvestment of dividends and distributions 101,310 1,200,525
Shares reacquired (508,887) (6,343,433)
---------- ------------
Net increase in shares outstanding 724,843 $ 8,910,196
---------- ------------
---------- ------------
November 18, 1998(a) through July 31, 1999:
Shares sold 1,902,895 $ 19,882,224
Shares reacquired (168,296) (1,835,812)
---------- ------------
Net increase in shares outstanding 1,734,599 $ 18,046,412
---------- ------------
---------- ------------
<CAPTION>
Class Z
------------------------------------------------------------
<S> <C> <C>
Year ended July 31, 2000:
Shares sold 96,668 $ 1,249,710
Shares issued in reinvestment of dividends and distributions 178,772 2,123,813
Shares reacquired (3,324,795) (42,145,674)
---------- ------------
Net decrease in shares outstanding (3,049,355) $(38,772,151)
---------- ------------
---------- ------------
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-217
<PAGE> 294
Prudential Diversified Funds Prudential Diversified High Growth Fund
Financial Highlights
<TABLE>
<CAPTION>
Class A
-----------------------------------------
Year November 18, 1998(a)
Ended Through
July 31, 2000 July 31, 1999
-----------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE(d):
Net asset value, beginning of period $ 11.52 $ 10.00
-------- --------
Income from investment operations:
Net investment income (loss) --(e) --(e)
Net realized and unrealized gain on
investment and foreign currency
transactions 2.14 1.52
-------- --------
Total from investment operations 2.14 1.52
-------- --------
Less distributions:
Dividends in excess of net investment
income (0.43) --
Distributions from net realized gains (0.28) --
-------- --------
Total dividends and distributions (0.71) --
-------- --------
Net asset value, end of period $ 12.95 $ 11.52
-------- --------
-------- --------
TOTAL RETURN(b) 18.99% 15.20%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 35,678 $ 21,248
Average net assets (000) $ 27,528 $ 10,442
Ratios to average net assets:
Expenses, including distribution fees 1.54% 1.73%(c)
Expenses, excluding distribution fees 1.29% 1.48%(c)
Net investment income (loss) 0.01% 0.02%(c)
For Classes A, B, C and Z shares:
Portfolio turnover rate 67% 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 are not annualized.
(c) Annualized.
(d) Based on weighted average shares outstanding during the period.
(e) Less than $.005 per share.
See Notes to Financial Statements
B-218
<PAGE> 295
Prudential Diversified Funds Prudential Diversified High Growth Fund
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class B
-----------------------------------------
Year November 18, 1998(a)
Ended Through
July 31, 2000 July 31, 1999
-----------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE(d):
Net asset value, beginning of period $ 11.47 $ 10.00
-------- --------
Income from investment operations:
Net investment income (loss) (0.09) (0.05)
Net realized and unrealized gain on
investment and foreign currency
transactions 2.12 1.52
-------- --------
Total from investment operations 2.03 1.47
-------- --------
Less distributions:
Dividends in excess of net investment
income (0.36) --
Distributions from net realized gains (0.28) --
-------- --------
Total dividends and distributions (0.64) --
-------- --------
Net asset value, end of period $ 12.86 $ 11.47
-------- --------
-------- --------
TOTAL RETURN(b) 18.13% 14.70%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 79,793 $ 41,049
Average net assets (000) $ 60,994 $ 24,260
Ratios to average net assets:
Expenses, including distribution fees 2.29% 2.48%(c)
Expenses, excluding distribution fees 1.29% 1.48%(c)
Net investment income (loss) (0.71)% (0.70)%(c)
</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) Based on weighted average shares outstanding during the period.
See Notes to Financial Statements
B-219
<PAGE> 296
Prudential Diversified Funds Prudential Diversified High Growth Fund
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class C
-----------------------------------------
Year November 18, 1998(a)
Ended Through
July 31, 2000 July 31, 1999
-----------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE(d):
Net asset value, beginning of period $ 11.47 $ 10.00
-------- --------
Income from investment operations:
Net investment income (loss) (0.09) (0.05)
Net realized and unrealized gain on
investment and foreign currency
transactions 2.12 1.52
-------- --------
Total from investment operations 2.03 1.47
-------- --------
Less distributions:
Dividends in excess of net investment
income (0.36) --
Distributions from net realized gains (0.28) --
-------- --------
Total dividends and distributions (0.64) --
-------- --------
Net asset value, end of period $ 12.86 $ 11.47
-------- --------
-------- --------
TOTAL RETURN(b) 18.13% 14.70%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 31,636 $ 19,914
Average net assets (000) $ 26,413 $ 15,204
Ratios to average net assets:
Expenses, including distribution fees 2.29% 2.48%(c)
Expenses, excluding distribution fees 1.29% 1.48%(c)
Net investment income (loss) (0.73)% (0.75)%(c)
</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) Based on weighted average shares outstanding during the period.
See Notes to Financial Statements
B-220
<PAGE> 297
Prudential Diversified Funds Prudential Diversified High Growth Fund
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class Z
-----------------------------------------
Year November 18, 1998(a)
Ended Through
July 31, 2000 July 31, 1999
-----------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE(d):
Net asset value, beginning of period $ 11.56 $ 10.00
-------- --------
Income from investment operations:
Net investment income (loss) 0.02 0.02
Net realized and unrealized gain on
investment and foreign currency
transactions 2.14 1.54
-------- --------
Total from investment operations 2.16 1.56
-------- --------
Less distributions:
Dividends in excess of net investment
income (0.46) --
Distributions from net realized gains (0.28) --
-------- --------
Total dividends and distributions (0.74) --
-------- --------
Net asset value, end of period $ 12.98 $ 11.56
-------- --------
-------- --------
TOTAL RETURN(b) 19.23% 15.60%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 1,318 $ 36,413
Average net assets (000) $ 25,793 $ 45,999
Ratios to average net assets:
Expenses, including distribution fees 1.29% 1.48%(c)
Expenses, excluding distribution fees 1.29% 1.48%(c)
Net investment income (loss) 0.12% 0.21%(c)
</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) Based on weighted average shares outstanding during the period.
See Notes to Financial Statements
B-221
<PAGE> 298
Prudential Diversified Funds Prudential Diversified High Growth Fund
Report of Independent Accountants
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, 2000,
the results of its operations for the year then ended, and the changes in its
net assets and the financial highlights for the year then ended and for the
period November 18, 1998 (commencement of operations) through July 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at July 31, 2000 by correspondence with the custodian and brokers,
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
September 22, 2000
See Notes to Financial Statements
B-222
<PAGE> 299
Prudential Diversified Funds Prudential Diversified High Growth Fund
Federal Tax Information (Unaudited)
We are required by the Internal Revenue Code to advise you within 60 days
of the Fund's fiscal year end (March 31, 2000) as to the federal tax status of
dividends paid by the Fund during such fiscal period. Accordingly, we are
advising you that in the fiscal period ended March 31, 2000, dividends were paid
of $.43, $.36, $.36 and $.46 per share (representing net investment income for
Class A, B, C and Z shares respectively, which are taxable as ordinary income)
and a short-term capital gain distribution of $.28 per share which is taxable as
ordinary icome. Further, we wish to advise you that 15.51% of the ordinary
income dividends paid in the fiscal period ended March 31, 2000 qualified for
the corporate dividends received deduction available to corporate taxpayers.
In January 2001, you will be advised on IRS Form 1099 DIV or substitute
1099 DIV as to the federal tax status of the dividends received by you in
calendar year 2000.
See Notes to Financial Statements
B-223
<PAGE> 300
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> 301
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.
I-2
<PAGE> 302
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.
I-3
<PAGE> 303
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>
<S> <C>
Market Timing 1.8%
Security Selection/Other 6.7
Asset Allocation 91.5
</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> 304
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>
<S> <C>
Inflation $ 9
T-Bills $ 14
Bonds $ 39
Common Stock $1,828
Small Stock $5,520
</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> 305
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>
<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> 306
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> 307
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> 308
APPENDIX III -- GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk and 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
