<PAGE>
PRUDENTIAL ALLOCATION FUND
- --------------------------------------------------------------------------------
PROSPECTUS DATED AUGUST 1, 1994
- --------------------------------------------------------------------------------
Prudential Allocation Fund, formerly Prudential FlexiFund (the Fund), is an
open-end, diversified management investment company comprised of two separate
portfolios -- the Conservatively Managed Portfolio and the Strategy Portfolio
(the Portfolios). The investment objective of the Conservatively Managed
Portfolio is to achieve a high total investment return consistent with moderate
risk. The investment objective of the Strategy Portfolio is to achieve a high
total investment return consistent with relatively higher risk than the
Conservatively Managed Portfolio. While each Portfolio will seek to achieve its
objective by investing in a diversified portfolio of money market instruments,
debt obligations and equity securities (including securities convertible into
equity securities), the Portfolios will differ with respect to the proportions
of investments in debt and equity securities, the quality and maturity of debt
securities purchased and the price volatility and the type of issuer of equity
securities purchased. It is expected that the Strategy Portfolio will offer
investors a higher potential return with a correspondingly higher risk of loss
than the Conservatively Managed Portfolio. There can be no assurance that the
Portfolios' investment objectives will be achieved. See "How the Fund Invests --
Investment Objectives and Policies." The Fund's address is One Seaport Plaza,
New York, New York 10292, and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated August 1, 1994, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund, at the
address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL ALLOCATION FUND?
Prudential Allocation Fund is a mutual fund. A mutual fund pools the resources
of investors by selling its shares to the public and investing the proceeds of
such sale in a portfolio of securities designed to achieve its investment
objective. Technically, the Fund is an open-end, diversified management
investment company.
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES AND RISKS
The Fund is comprised of two separate portfolios -- the Conservatively Managed
Portfolio and the Strategy Portfolio. The investment objective of the
Conservatively Managed Portfolio is to achieve a high total investment return
with moderate risk. The investment objective of the Strategy Portfolio is to
achieve a high total investment return consistent with relatively higher risk
than the Conservatively Managed Portfolio. Each Portfolio will seek to achieve
its objective by investing in a diversified portfolio of equity securities, debt
obligations and money market instruments. There can be no assurance that the
Portfolios' objectives will be achieved. See "How the Fund Invests -- Investment
Objectives and Policies" at page 7.
RISK FACTORS AND SPECIAL CHARACTERISTICS
The Conservatively Managed Portfolio may invest up to 10% of its total assets
in securities rated Ba or lower by Moody's Investors Service (Moody's) or BB or
lower by Standard & Poor's Ratings Group (S&P). The Strategy Portfolio, under
normal conditions, will purchase debt securities of a lesser quality that will,
in the aggregate, have a weighted average maturity greater than that of the
Conservatively Managed Portfolio. The Strategy Portfolio may invest up to 25% of
its total assets in securities rated Ba or lower by Moody's or BB or lower by
S&P. The Strategy Portfolio will also purchase equity securities of smaller,
faster growing companies which are subject to greater price volatility than
those purchased by the Conservatively Managed Portfolio. See "How the Fund
Invests -- Investment Objectives and Policies" at page 7. In addition, each
Portfolio may engage in various hedging and income enhancement strategies,
including derivatives. These activities may be considered speculative and may
result in higher risks and costs to the Portfolios. See "How the Fund Invests --
Hedging and Income Enhancement Strategies -- Risks of Hedging and Income
Enhancement Strategies" at page 14.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager of
the Fund and is compensated for its services at an annual rate of .65 of 1% of
the Fund's average net assets. As of June 30, 1994, PMF served as manager or
administrator to 66 investment companies, including 37 mutual funds, with
aggregate assets of approximately $47 billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Fund under a Subadvisory Agreement with
PMF. See "How the Fund is Managed -- Manager" at page 16.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Fund's Class A shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .25 of 1% of the average daily
net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class B and Class C shares and is paid an annual
distribution and service fee at the rate of 1% of the average daily net assets
of each of the Class B and Class C shares.
See "How the Fund is Managed -- Distributor" at page 17.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder Guide -- How
to Buy Shares of the Fund" at page 23 and "Shareholder Guide -- Shareholder
Services" at page 31.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at
the net asset value per share (NAV) next determined after receipt of your
purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). See "How the Fund
Values its Shares" at page 19 and "Shareholder Guide -- How to Buy Shares of the
Fund" at page 23.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers three classes of shares:
- Class A Shares: Sold with an initial sales charge of up to 5% of the
offering price.
- Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from
5% to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class
B shares will automatically convert to Class A shares
(which are subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
- Class C Shares: Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to higher
ongoing distribution-related expenses than Class A shares
but do not convert to another class.
See "Shareholder Guide -- Alternative Purchase Plan" at page 24.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide -- How to Sell Your Shares" at page 26.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to pay dividends of net investment income, if any, quarterly
and make distributions of any net capital gains at least annually. Dividends and
distributions will be automatically reinvested in additional shares of the Fund
at NAV without a sales charge unless you request that they be paid to you in
cash. See "Taxes, Dividends and Distributions" at page 20.
3
<PAGE>
FUND EXPENSES
(FOR EACH PORTFOLIO)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- ------------------------------ --------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)... 5% None None
Maximum Sales Load or Deferred Sales
Load Imposed on Reinvested
Dividends............................. None None None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)......... None 5% during the first year, 1% on redemptions made within
decreasing by 1% annually to one year of purchase
1% in the fifth and sixth
years and 0% the seventh year*
Redemption Fees........................ None None None
Exchange Fee........................... None None None
</TABLE>
<TABLE>
<CAPTION>
CONSERVATIVELY MANAGED
PORTFOLIO STRATEGY PORTFOLIO
------------------------------ --------------------------------
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
(as a percentage of average net assets) SHARES SHARES SHARES** SHARES SHARES SHARES**
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Management Fees......................................... .65% .65% .65% .65% .65% .65%
12b-1 Fees+............................................. .25++ 1.00 1.00 .25++ 1.00 1.00
Other Expenses.......................................... .32 .32 .32 .36 .36 .36
--- --- --- --- --- ---
Total Fund Operating Expenses........................... 1.22% 1.97% 1.97% 1.26% 2.01% 2.01%
--- --- --- --- --- ---
--- --- --- --- --- ---
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE (CONSERVATIVELY MANAGED PORTFOLIO) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of
each time period:
Class A........................................................ $ 62 $ 87 $114 $190
Class B........................................................ $ 70 $ 92 $116 $201
Class C**...................................................... $ 30 $ 62 $106 $230
You would pay the following expenses on the same investment,
assuming no redemption:
Class A........................................................ $ 62 $ 87 $114 $190
Class B........................................................ $ 20 $ 62 $106 $201
Class C**...................................................... $ 20 $ 62 $106 $230
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE (STRATEGY PORTFOLIO) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
Class A.................................................................. $ 62 $ 88 $116 $195
Class B.................................................................. $ 70 $ 93 $118 $205
Class C**................................................................ $ 30 $ 63 $108 $234
You would pay the following expenses on the same investment, assuming no
redemption:
Class A.................................................................. $ 65 $ 90 $118 $197
Class B.................................................................. $ 20 $ 63 $108 $205
Class C**................................................................ $ 20 $ 63 $108 $234
The above example with respect to Class A and Class B shares is based on restated data for the Fund's fiscal year ended
July 31, 1993. The above example with respect to Class C shares is based on expenses expected to have been incurred if
Class C shares had been in existence during the fiscal year ended July 31, 1993. THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various costs and expenses that an investor in each
Portfolio of the Fund will bear, whether directly or indirectly. For more complete descriptions of the various costs and
expenses, see "How the Fund is Managed." "Other Expenses" include operating expenses of the Fund, such as Trustees' and
professional fees, registration fees, reports to shareholders and transfer agency and custodian fees.
<FN>
- ---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide -- Conversion Feature
-- Class B Shares."
** Estimated based on expenses expected to have been incurred if Class C
shares had been in existence during the fiscal year ended July 31, 1993.
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Fund may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation is
imposed on each class of a Portfolio of the Fund rather than on a per
shareholder basis. Therefore, long-term shareholders of the Fund may pay
more in total sales charges than the economic equivalent of 6.25% of such
shareholders' investment in such shares. See "How the Fund is Managed --
Distributor."
++ Although the Class A Distribution and Service Plan provides that the Fund
may pay a distribution fee of up to .30 of 1% per annum of the average
daily net assets of the Class A shares of each Portfolio, the Distributor
has agreed to limit its distribution fees with respect to the Class A
shares of each Portfolio to no more than .25 of 1% of the average daily
net assets of the Class A shares for the fiscal year ending July 31, 1994.
Total operating expenses without such limitation would be 1.27% and 1.31%
of the Conservatively Managed Portfolio and Strategy Portfolio,
respectively. See "How the Fund is Managed -- Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
The following financial highlights, with respect to the five year period
ended July 31, 1993, have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A and Class B share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. No Class C shares were outstanding during
the periods indicated.
CONSERVATIVELY MANAGED PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
YEAR ENDED JULY 31,
----------------------------------------------------
SIX MONTHS JANUARY 22,
ENDED 1990*
JANUARY 31, THROUGH
1994 JULY 31,
(UNAUDITED) 1993 1992 1991 1990
----------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................... $11.75 $ 11.00 $ 10.73 $ 10.23 $ 9.83
----------- ------- ------- ------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................. .17 .43 .44 .44 .26
Net realized and unrealized gain on
investment transactions.............. .50 1.16 .81 .73 .38
----------- ------- ------- ------- -----------
Total from investment operations.... .67 1.59 1.25 1.17 .64
----------- ------- ------- ------- -----------
LESS DISTRIBUTIONS
Dividends from net investment
income............................... (.17) (.37) (.44) (.44) (.24)
Dividends in excess of net investment
income............................... (.02) -- -- -- --
Distributions paid to shareholders
from net realized gains on investment
transactions......................... (.32) (.47) (.54) (.23) --
Distributions in excess of net
realized gains....................... (.22) -- -- -- --
----------- ------- ------- ------- -----------
Total distributions................. (.73) (.84) (.98) (.67) (.24)
----------- ------- ------- ------- -----------
Net asset value, end of period........ $11.69 $ 11.75 $ 11.00 $ 10.73 $10.23
----------- ------- ------- ------- -----------
----------- ------- ------- ------- -----------
TOTAL RETURN++:....................... 5.88% 15.15% 12.29% 11.99% 6.59%
RATIOS/ SUPPLEMENTAL DATA:
Net assets, end of period (000)....... $30,950 $22,605 $10,944 $4,408 $1,944
Average net assets (000).............. $26,066 $15,392 $7,103 $2,747 $1,047
Ratios to average net assets:
Expenses, including distribution
fees............................... 1.10%+ 1.17% 1.29% 1.38% 1.29%+
Expenses, excluding distribution
fees............................... .90%+ .97% 1.09% 1.18% 1.09%+
Net investment income............... 2.89%+ 3.88% 3.97% 4.44% 5.04%+
Portfolio turnover rate............... 38% 83% 105% 137% 106%
<CAPTION>
CLASS B
-----------------------------------------------------------------------------
YEAR ENDED JULY 31,
-----------------------------------------------------------------------------
SIX MONTHS SEPTEMBER 15,
ENDED 1987**
JANUARY 31, THROUGH
1994 JULY 31,
(UNAUDITED) 1993 1992 1991 1990 1989 1988***
----------- -------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................... $11.72 $ 10.98 $ 10.71 $ 10.22 $ 10.21 $ 9.43 $10.00
----------- -------- -------- -------- -------- -------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................. .13 .34 .35 .36 .45 .52 .32
Net realized and unrealized gain on
investment transactions.............. .49 1.16 .82 .73 .18 .73 (.62)
----------- -------- -------- -------- -------- -------- ------
Total from investment operations.... .62 1.50 1.17 1.09 .63 1.25 (.30)
----------- -------- -------- -------- -------- -------- ------
LESS DISTRIBUTIONS
Dividends from net investment
income............................... (.13) (.29) (.36) (.37) (.52) (.47) (.25)
Dividends in excess of net investment
income............................... (.02) -- -- -- -- -- --
Distributions paid to shareholders
from net realized gains on investment
transactions......................... (.32) (.47) (.54) (.23) (.10) -- (.02)
Distributions in excess of net
realized gains....................... (.22) -- -- -- -- -- --
----------- -------- -------- -------- -------- -------- ------
Total distributions................. (.69) (.76) (.90) (.60) (.62) (.47) (.27)
----------- -------- -------- -------- -------- -------- ------
Net asset value, end of period........ $11.65 $ 11.72 $ 10.98 $ 10.71 $ 10.22 $ 10.21 $ 9.43
----------- -------- -------- -------- -------- -------- ------
----------- -------- -------- -------- -------- -------- ------
TOTAL RETURN++:....................... 5.41% 14.27% 11.48% 11.13% 6.44% 13.73% (2.95)%
RATIOS/ SUPPLEMENTAL DATA:
Net assets, end of period (000)....... $402,342 $321,831 $225,995 $162,281 $154,917 $132,631 $149,472
Average net assets (000).............. $357,266 $267,340 $189,358 $149,907 $143,241 $139,009 $113,774
Ratios to average net assets:
Expenses, including distribution
fees............................... 1.90%+ 1.97% 2.09% 2.16% 2.07% 2.09% 2.08%+
Expenses, excluding distribution
fees............................... .90%+ .97% 1.09% 1.16% 1.08% 1.08% 1.11%+
Net investment income............... 2.10%+ 3.04% 3.25% 3.55% 4.42% 5.47% 4.22%+
Portfolio turnover rate............... 38% 83% 105% 137% 106% 137% 112%
<FN>
- -----------------
*Commencement of offering of Class A shares.
**Commencement of offering of Class B shares.
***On March 1, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
+Annualized.
++Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
5
<PAGE>
STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
YEAR ENDED JULY 31,
----------------------------------------------------
SIX MONTHS JANUARY 22,
ENDED 1990*
JANUARY 31, THROUGH
1994 JULY 31,
(UNAUDITED) 1993 1992 1991 1990
----------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.. $11.82 $ 12.03 $ 11.45 $ 10.50 $10.16
----------- ------- ------- ------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................. .18 .42 .35 .38 .25
Net realized and unrealized gain on
investment and foreign currency
transactions......................... .81 .70 1.02 .98 .33
----------- ------- ------- ------- -----------
Total from investment operations.... .99 1.12 1.37 1.36 .58
----------- ------- ------- ------- -----------
LESS DISTRIBUTIONS
Dividends from net investment income.. (.10) (.37) (.37) (.35) (.24)
Distributions paid to shareholders
from net realized gains on investment
and foreign currency transactions.... (.34) (.96) (.42) (.06) --
----------- ------- ------- ------- -----------
Total distributions................. (.44) (1.33) (.79) (.41) (.24)
----------- ------- ------- ------- -----------
Net asset value, end of period........ $12.37 $ 11.82 $ 12.03 $ 11.45 $10.50
----------- ------- ------- ------- -----------
----------- ------- ------- ------- -----------
TOTAL RETURN+++:...................... 8.50% 10.02% 12.36% 13.42% 5.83%
RATIOS/ SUPPLEMENTAL DATA:
Net assets, end of period (000)....... $31,621 $28,641 $20,378 $10,765 $5,073
Average net assets (000).............. $29,844 $24,216 $15,705 $ 6,694 $2,928
Ratios to average net assets:
Expenses, including distribution
fees............................... 1.18%++ 1.21% 1.26% 1.33% 1.51%++
Expenses, excluding distribution
fees............................... .98%++ 1.01% 1.06% 1.13% 1.26%++
Net investment income............... 2.21%++ 3.61% 3.05% 3.89% 4.58%++
Portfolio turnover rate............... 39% 145% 241% 189% 159%
<CAPTION>
CLASS B
-------------------------------------------------------------------------------
YEAR ENDED JULY 31,
-------------------------------------------------------------------------------
SIX MONTHS SEPTEMBER 15,
ENDED 1987**
JANUARY 31, THROUGH
1994 JULY 31,
(UNAUDITED) 1993 1992 1991 1990 1989 1988***
----------- -------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.. $ 11.79 $ 12.01 $ 11.43 $ 10.49 $ 10.85 $ 9.52 $ 10.00
----------- -------- -------- -------- -------- -------- --------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................. .13 .34 .26 .30 .37 .42 .23+
Net realized and unrealized gain on
investment and foreign currency
transactions......................... .81 .70 1.02 .97 .03 1.30 (.53)
----------- -------- -------- -------- -------- -------- --------------
Total from investment operations.... .94 1.04 1.28 1.27 .40 1.72 (.30)
----------- -------- -------- -------- -------- -------- --------------
LESS DISTRIBUTIONS
Dividends from net investment income.. (.08) (.30) (.28) (.27) (.40) (.39) (.18)
Distributions paid to shareholders
from net realized gains on investment
and foreign currency transactions.... (.34) (.96) (.42) (.06) (.36) -- --
----------- -------- -------- -------- -------- -------- --------------
Total distributions................. (.42) (1.26) (.70) (.33) (.76) (.39) (.18)
----------- -------- -------- -------- -------- -------- --------------
Net asset value, end of period........ $ 12.31 $ 11.79 $ 12.01 $ 11.43 $ 10.49 $ 10.85 $ 9.52
----------- -------- -------- -------- -------- -------- --------------
----------- -------- -------- -------- -------- -------- --------------
TOTAL RETURN+++:...................... 8.09% 9.21% 11.53% 12.49% 3.59% 18.53% (2.92)%
RATIOS/ SUPPLEMENTAL DATA:
Net assets, end of period (000)....... $378,114 $357,287 $314,771 $219,983 $176,078 $ 62,651 $ 55,671
Average net assets (000).............. $366,090 $339,225 $267,525 $190,913 $127,360 $ 57,326 $ 44,717
Ratios to average net assets:
Expenses, including distribution
fees............................... 1.98%++ 2.01% 2.06% 2.11% 2.10% 2.33%+ 2.40%+/++
Expenses, excluding distribution
fees............................... .98%++ 1.01% 1.06% 1.11% 1.14% 1.34%+ 1.43%+/++
Net investment income............... 2.16%++ 2.79% 2.27% 2.95% 3.61% 4.26% 3.13%+/++
Portfolio turnover rate............... 39% 145% 241% 189% 159% 132% 93%
<FN>
- -----------------
*Commencement of offering of Class A shares.
**Commencement of offering of Class B shares.
***On March 1, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
+Net of expense subsidy or reimbursement.
++Annualized.
+++Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
6
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVES AND POLICIES
THE FUND IS COMPRISED OF TWO SEPARATE DIVERSIFIED PORTFOLIOS -- THE
CONSERVATIVELY MANAGED PORTFOLIO AND THE STRATEGY PORTFOLIO -- EACH OF WHICH IS,
IN EFFECT, A SEPARATE FUND ISSUING ITS OWN SHARES. THE INVESTMENT OBJECTIVE OF
THE CONSERVATIVELY MANAGED PORTFOLIO IS TO ACHIEVE A HIGH TOTAL INVESTMENT
RETURN CONSISTENT WITH MODERATE RISK. THE INVESTMENT OBJECTIVE OF THE STRATEGY
PORTFOLIO IS TO ACHIEVE A HIGH TOTAL INVESTMENT RETURN CONSISTENT WITH
RELATIVELY HIGHER RISK THAN THE CONSERVATIVELY MANAGED PORTFOLIO. THERE CAN BE
NO ASSURANCE THAT SUCH OBJECTIVES WILL BE ACHIEVED. See "Investment Objectives
and Policies" in the Statement of Additional Information.
EACH PORTFOLIO'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE,
MAY NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE
PORTFOLIO'S OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY
ACT OF 1940, AS AMENDED (THE INVESTMENT COMPANY ACT). FUND POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
EACH PORTFOLIO PURSUES ITS OBJECTIVE THROUGH THE INVESTMENT POLICIES DESCRIBED
BELOW. WHILE EACH PORTFOLIO WILL SEEK TO ACHIEVE ITS OBJECTIVE BY INVESTING IN A
DIVERSIFIED PORTFOLIO OF EQUITY SECURITIES (INCLUDING SECURITIES CONVERTIBLE
INTO EQUITY SECURITIES), DEBT OBLIGATIONS AND MONEY MARKET INSTRUMENTS, THE
PORTFOLIOS WILL DIFFER WITH RESPECT TO THE DEGREE OF RISK INVOLVED. THE
CONSERVATIVELY MANAGED PORTFOLIO WILL BE SUBJECT TO MODERATE RISK, IN THE
OPINION OF THE FUND'S INVESTMENT ADVISER, AND THE STRATEGY PORTFOLIO WILL BE
SUBJECT TO RELATIVELY HIGHER RISK. These differences in risks will be evidenced
in the proportions of investments in debt and equity securities, the quality and
maturity of debt securities purchased and the price volatility and the type of
issuer of equity securities. The following table summarizes the differences in
the types of investments in which each Portfolio may generally invest in seeking
to achieve its objective:
<TABLE>
<CAPTION>
CONSERVATIVELY STRATEGY
DEBT SECURITIES MANAGED PORTFOLIO PORTFOLIO
- ------------------ ----------------------------- -----------------------------
<S> <C> <C>
Quality Investment grade debt Investment grade debt
securities AND up to 10% of securities AND up to 25% of
its assets in debt securities its assets in debt securities
rated below investment grade rated below investment grade
Weighted average Less than 10 years More than 10 years
maturity
<CAPTION>
EQUITY SECURITIES
- ------------------
<S> <C> <C>
Type of issuer Common stock and common stock Common stock and common stock
equivalents of major, equivalents of major,
established companies established companies AND
smaller, faster growing
companies
</TABLE>
Lower-rated debt securities, as well as debt securities with longer maturities,
typically provide a higher return and are subject to a greater degree of risk of
loss and price volatility than higher-rated securities and securities with
shorter maturities. Equity securities of smaller companies are generally subject
to a greater degree of risk and price volatility than those of major
7
<PAGE>
companies. Finally, it is anticipated that the money market instruments held by
the Conservatively Managed Portfolio will be substantially of the same quality
and have generally the same maturities as those held by the Strategy Portfolio.
A more complete description of the Portfolios' investment policies is set forth
below.
The Fund's investment adviser determines the allocation of assets among the
different investment vehicles available (asset mix) to each Portfolio on a
regular basis (at least monthly). The determination of asset mix will result in
decisions with respect to: (1) the proportion of investments among the various
financial instruments available (money market instruments, bonds and other
indebtedness and equity securities, including convertible securities); (2) the
distribution of debt securities among short, intermediate and long-term
maturities; and (3) with respect to the Strategy Portfolio, the distribution of
equity and convertible securities between those of major, established companies
and those of smaller, faster growing companies, the prices of which are
typically more volatile. The determination of asset mix for each Portfolio is
based on technical, qualitative and fundamental analyses and forecasts made by
the investment adviser, prevailing interest rates and general economic factors.
In addition, the investment adviser considers the relative risk objectives of
the Portfolios in making asset mix determinations.
CONSERVATIVELY MANAGED PORTFOLIO
THE CONSERVATIVELY MANAGED PORTFOLIO WILL INVEST IN A DIVERSIFIED PORTFOLIO
COMPRISED GENERALLY OF EQUITY SECURITIES, DEBT OBLIGATIONS AND MONEY MARKET
INSTRUMENTS. The specific asset mix of the Portfolio will be determined by the
Fund's investment adviser. Although there is no limitation on the percentage of
assets invested in the various investment categories (money market instruments,
debt obligations and equity securities), it is anticipated that the
Conservatively Managed Portfolio will generally have a smaller percentage of its
assets invested in equity securities and a larger percentage invested in money
market instruments than the Strategy Portfolio. In addition, the weighted
average maturity of the debt securities purchased by the Conservatively Managed
Portfolio will generally be shorter than that of the Strategy Portfolio and the
equity securities held by the Conservatively Managed Portfolio will be those of
larger, more mature companies, subject to less price volatility, than those held
by the Strategy Portfolio. Based upon its asset mix, the Conservatively Managed
Portfolio is expected to be subject to a relatively lower risk of loss (and
offer a correspondingly lower potential return) than the Strategy Portfolio.
MONEY MARKET INSTRUMENTS. The Conservatively Managed Portfolio may invest in
the following money market instruments generally maturing in one year or less:
1. U.S. Treasury bills and other obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities.
2. Obligations (including certificates of deposit, bankers' acceptances and
time deposits) of commercial banks, savings banks and savings and loan
associations having, at the time of acquisition by the Portfolio of such
obligations, total assets of not less than $1 billion or its equivalent. The
Portfolio may invest in obligations of domestic banks, foreign banks, and
branches and offices thereof. The term "certificates of deposit" includes both
Eurodollar certificates of deposit, for which there is generally a market, and
Eurodollar time deposits, for which there is generally not a market.
"Eurodollars" are dollars deposited in banks outside the United States.
3. Commercial paper, variable amount demand master notes, bills, notes and
other obligations issued by a U.S. company, a foreign company or a foreign
government, its agencies, instrumentalities or political subdivisions,
maturing in one year or less, denominated in U.S. dollars, and, at the date of
investment, rated at least A or A-2 by Standard & Poor's Ratings Group (S&P)
or A or Prime-2 by Moody's Investors Service (Moody's), 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. If such obligations are
guaranteed or supported by a letter of credit issued by a bank, the bank
(including a foreign bank) must meet the requirements set forth in paragraph
(2) above. If such obligations are guaranteed or insured by an insurance
company or other non-bank entity, the insurance company or other non-bank
entity must represent a credit of high quality, as determined by the Fund's
investment adviser under the supervision of the Fund's Trustees.
DEBT OBLIGATIONS. IN ADDITION TO MONEY MARKET INSTRUMENTS DESCRIBED ABOVE,
THE CONSERVATIVELY MANAGED PORTFOLIO MAY INVEST IN LONG-TERM DEBT SECURITIES. It
is anticipated that the weighted average maturity of the debt securities
8
<PAGE>
held by the Portfolio will not exceed 10 years. Such debt securities will
generally be rated at the time of purchase within the four highest categories
determined by S&P, Moody's or a similar nationally recognized rating service,
or, if not rated, be of comparable quality in the opinion of the investment
adviser. However, the Portfolio may invest up to 10% of its total assets in
securities rated at the time of purchase BB or Ba or lower by S&P or Moody's,
respectively (or a similar nationally recognized rating service), or, if not
rated, of comparable quality in the opinion of the investment adviser, all of
which are commonly known as "junk bonds." See "Investment Policies Applicable to
All Portfolios -- Risks of Investing in High Yield Securities" below.
THE PORTFOLIO MAY ALSO INVEST IN OBLIGATIONS OF THE U.S. GOVERNMENT AND ITS
AGENCIES AND INSTRUMENTALITIES. These securities include U.S. Treasury
obligations (including bills, notes and bonds) and securities issued or
guaranteed by U.S. Government agencies (such as the Export-Import Bank of the
United States, Federal Housing Administration and Government National Mortgage
Association) or by U.S. Government instrumentalities (such as the Federal Home
Loan Bank, Federal Intermediate Credit Banks and Federal Land Bank). Except for
U.S. Treasury securities, these obligations, even those that are guaranteed by
federal agencies or instrumentalities, may or may not be 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 Portfolio 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.
THE PORTFOLIO MAY INVEST IN MORTGAGE-BACKED SECURITIES INCLUDING THOSE
REPRESENTING AN UNDIVIDED OWNERSHIP INTEREST IN A POOL OF MORTGAGES, E.G., GNMA,
FNMA AND FHLMC CERTIFICATES. The mortgages backing these securities include
conventional thirty-year fixed rate mortgages, fifteen-year fixed rate
mortgages, graduated payment mortgages and adjustable rate mortgages. The U.S.
Government or the issuing agency guarantees the payment of interest and
principal of these securities; however, the guarantees do not extend to the
securities' yield or value, which are likely to vary inversely with fluctuations
in interest rates, nor do the guarantees extend to the yield or value of the
Portfolio's shares. These certificates are in most cases "pass-through"
instruments, through which the holder receives a share of all interest and
principal payments from the mortgages underlying the certificate, net of certain
fees. Because the prepayment characteristics of the underlying mortgages vary,
it is not possible to predict accurately the average life or realized yield of a
particular issue of pass-through certificates. Mortgage-backed securities are
often subject to more rapid repayment than their stated maturity date would
indicate as a result of the pass-through of prepayments of principal on the
underlying mortgage obligations. While the timing of prepayments of graduated
payment mortgages differs somewhat from that of conventional mortgages, the
prepayment experience of graduated payment mortgages is basically the same as
that of the conventional mortgages of the same maturity dates over the life of
the pool. During periods of declining interest rates, prepayment of mortgages
underlying mortgage-backed securities can be expected to accelerate. When the
mortgage obligations are prepaid, the Portfolio reinvests the prepaid amounts in
securities the yields of which reflect interest rates prevailing at the time.
Therefore, the Portfolio's ability to maintain a portfolio containing high-
yielding mortgage-backed securities will be adversely affected to the extent
that prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid mortgages. Moreover, prepayments of mortgages which
underlie securities purchased at a premium could result in capital losses.
THE PORTFOLIO MAY ALSO 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 collateralized mortgage
structure. The Portfolio 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 the same security interest in the
related collateral. Credit card receivables are generally unsecured and 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.
9
<PAGE>
EQUITY SECURITIES. THE EQUITY SECURITIES IN WHICH THE CONSERVATIVELY MANAGED
PORTFOLIO WILL PRIMARILY INVEST ARE COMMON STOCKS OF MAJOR, ESTABLISHED
CORPORATIONS WHICH, IN THE OPINION OF THE INVESTMENT ADVISER, HAVE PROSPECTS OF
PRICE APPRECIATION GREATER THAN THAT OF THE S&P 500 STOCK INDEX. The Portfolio
may also invest in preferred stocks or debt securities that either have warrants
attached or are otherwise convertible into such common stocks. See "Investment
Policies Applicable to All Portfolios -- Convertible Securities."
OTHER. The Conservatively Managed Portfolio may also make other kinds of
investments as described under "Investment Policies Applicable to All
Portfolios" below.
STRATEGY PORTFOLIO
THE STRATEGY PORTFOLIO WILL INVEST IN A DIVERSIFIED PORTFOLIO OF EQUITY
SECURITIES, DEBT OBLIGATIONS AND MONEY MARKET INSTRUMENTS. The specific asset
mix of the Portfolio will be determined by the Fund's investment adviser.
Although there is no limitation on the percentage of assets invested in the
various investment categories (money market instruments, debt obligations and
equity securities), it is anticipated that the Strategy Portfolio will generally
have a greater percentage of its assets invested in long-term bonds and equity
securities than the Conservatively Managed Portfolio. In addition, under normal
conditions the debt securities purchased by the Strategy Portfolio will be of
lesser quality and will, in the aggregate, have a weighted average maturity
above that of the Conservatively Managed Portfolio, and the equity securities
will be of smaller, faster growing companies and subject to greater price
volatility than those of the Conservatively Managed Portfolio. The Strategy
Portfolio is expected to be subject to a relatively higher risk of loss (and
offer a correspondingly higher potential return) than the Conservatively Managed
Portfolio.
MONEY MARKET INSTRUMENTS. The Strategy Portfolio may invest in the same money
market instruments permitted for the Conservatively Managed Portfolio.
DEBT OBLIGATIONS. IN ADDITION TO MONEY MARKET INSTRUMENTS DESCRIBED ABOVE,
THE STRATEGY PORTFOLIO MAY INVEST IN LONG-TERM DEBT SECURITIES. It is
anticipated that the weighted average maturity of the debt securities held by
the Portfolio in the aggregate will normally be greater than 10 years. Such
securities will generally be rated at the time of purchase within the four
highest categories determined by S&P, Moody's or a similar nationally recognized
rating service, or, if not rated, will be of comparable quality in the opinion
of the investment adviser. However, the Portfolio may invest up to 25% of its
total assets in securities rated at the time of purchase BB or Ba or lower by
S&P or Moody's, respectively (or a similar nationally recognized rating
service), or, if not rated, of comparable quality in the opinion of the
investment adviser, all of which are commonly known as "junk bonds." See
"Investment Policies Applicable to All Portfolios -- Risks of Investing in High
Yield Securities" below.
THE PORTFOLIO MAY INVEST IN OBLIGATIONS OF THE U.S. GOVERNMENT AND ITS
AGENCIES AND INSTRUMENTALITIES AND IN ASSET-BACKED SECURITIES. See
"Conservatively Managed Portfolio -- Debt Obligations" above.
EQUITY SECURITIES. LIKE THE CONSERVATIVELY MANAGED PORTFOLIO, THE STRATEGY
PORTFOLIO MAY INVEST IN COMMON STOCKS OF MAJOR, ESTABLISHED CORPORATIONS WHICH,
IN THE OPINION OF THE INVESTMENT ADVISER, HAVE PROSPECTS OF PRICE APPRECIATION
GREATER THAN THAT OF THE S&P 500 STOCK INDEX. THE STRATEGY PORTFOLIO MAY ALSO
INVEST IN COMMON STOCKS OF SMALLER, FASTER GROWING COMPANIES. These equity
securities will typically have more volatile market values and thus may be
subject to a greater risk of decline in market value than the equity securities
of major, established corporations.
The Portfolio may invest in preferred stocks or debt securities that either
have warrants attached or are otherwise convertible into such common stocks.
OTHER. The Strategy Portfolio may also make other kinds of investments as
described under "Investment Policies Applicable to All Portfolios" below.
INVESTMENT POLICIES APPLICABLE TO ALL PORTFOLIOS
GENERAL. IN PURSUIT OF ITS INVESTMENT OBJECTIVE, EACH PORTFOLIO MAY (I)
INVEST IN CONVERTIBLE SECURITIES, (II) PURCHASE AND WRITE (I.E., SELL) OPTIONS
ON EQUITY SECURITIES AND STOCK INDICES FOR HEDGING PURPOSES AND TO REALIZE
10
<PAGE>
INCOME, (III) PURCHASE AND SELL FINANCIAL AND STOCK INDEX FUTURES CONTRACTS AND
PURCHASE AND WRITE (I.E., SELL) OPTIONS THEREON FOR HEDGING PURPOSES OR, WITH
RESPECT TO WRITING OPTIONS ON FUTURES CONTRACTS, TO REALIZE A GREATER RETURN,
(IV) PURCHASE SECURITIES ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS, (V) MAKE
SHORT SALES AGAINST-THE-BOX, (VI) INVEST IN FOREIGN SECURITIES AND (VII) ENTER
INTO REPURCHASE AGREEMENTS.
CONVERTIBLE SECURITIES. EACH PORTFOLIO MAY INVEST IN PREFERRED STOCKS OR DEBT
SECURITIES THAT EITHER HAVE WARRANTS ATTACHED OR ARE OTHERWISE CONVERTIBLE INTO
COMMON STOCKS. A convertible security is typically a fixed-income security (a
bond or preferred stock) that may be converted at a stated price within a
specified period of time into a specified number of shares of common stock 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 non-convertible 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 non-convertible security), a convertible
security also affords an investor the opportunity, through its conversion
feature, to participate in capital appreciation attendant upon a market price
advance in the common stock underlying the convertible security.
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 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.
FOREIGN SECURITIES. EACH PORTFOLIO MAY INVEST UP TO 30% OF ITS TOTAL ASSETS
IN FOREIGN MONEY MARKET INSTRUMENTS AND DEBT AND EQUITY SECURITIES. For purposes
of this limitation, American Depositary Receipts, Yankee bonds (I.E., U.S.
dollar denominated bonds issued by foreign companies in the United States) and
global bonds which are U.S. dollar denominated are not deemed to be foreign
securities. In many instances, foreign securities may provide higher yields but
may be subject to greater fluctuations in price than securities of domestic
issuers which have similar maturities or quality.
INVESTING IN SECURITIES OF FOREIGN COMPANIES AND COUNTRIES INVOLVES CERTAIN
CONSIDERATIONS AND RISKS WHICH ARE NOT TYPICALLY ASSOCIATED WITH INVESTING IN
U.S. GOVERNMENT SECURITIES AND SECURITIES OF DOMESTIC COMPANIES. There may be
less publicly available information about a foreign issuer than a domestic one,
and foreign companies are not generally subject to uniform accounting, auditing
and financial standards and requirements comparable to those applicable to U.S.
companies. There may also be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than exists in the
United States. Interest and dividends paid by foreign issuers may be subject to
withholding and other foreign taxes, which may decrease the net return on such
investments as compared to dividends and interest paid to the Portfolio by
domestic companies or the U.S. Government. There may be the possibility of
expropriations, seizure or nationalization of foreign deposits, confiscatory
taxation, political, economic or social instability or diplomatic developments
which could affect assets of the Portfolio held in foreign countries. Finally,
the establishment of exchange controls or other foreign governmental laws or
restrictions could adversely affect the payment of obligations.
To the extent a Portfolio's currency exchange transactions do not fully
protect the Portfolio against adverse changes in currency exchange rates,
decreases in the value of currencies of the foreign countries in which the
Portfolio will invest relative to the U.S. dollar will result in a corresponding
decrease in the U.S. dollar value of the Portfolio's assets denominated in those
currencies (and possibly a corresponding increase in the amount of securities
required to be liquidated to meet distribution requirements). Conversely,
increases in the value of currencies of the foreign countries in which a
Portfolio invests relative to the U.S. dollar will result in a corresponding
increase in the U.S. dollar value of the Portfolio's assets (and possibly a
corresponding decrease in the amount of securities to be liquidated).
There may be less publicly available information about foreign companies and
governments compared to reports and ratings published about U.S. companies.
Foreign securities markets have substantially less volume than the New York
Stock Exchange
11
<PAGE>
and securities of some foreign companies are less liquid and more volatile than
securities of comparable U.S. companies. Brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the United States.
RISKS OF INVESTING IN HIGH YIELD SECURITIES
Securities rated Baa by Moody's, although considered to be investment grade,
lack outstanding investment characteristics and in fact have speculative
characteristics as well. Securities rated BB or Ba or lower by S&P or Moody's,
respectively, are generally considered to be predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal. The prices
of debt securities vary inversely with interest rates. In addition, lower-rated
debt obligations typically provide a higher yield than higher-rated obligations
of similar maturity. However, lower-rated obligations are also subject to a
greater degree of risk with respect to the ability of the issuer to meet the
principal and interest payments on the obligations and may also be subject to
greater price volatility due to the market's perceptions of the creditworthiness
of the issuer. A description of security ratings is contained in the Appendix.
FIXED-INCOME SECURITIES ARE SUBJECT TO THE RISK OF AN ISSUER'S INABILITY TO
MEET PRINCIPAL AND INTEREST PAYMENTS ON THE OBLIGATIONS (CREDIT RISK) AND MAY
ALSO BE SUBJECT TO PRICE VOLATILITY DUE TO SUCH FACTORS AS INTEREST RATE
SENSITIVITY AND THE MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER
(MARKET RISK). Lower-rated or unrated (I.E., high yield) securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general level
of interest rates. The investment adviser considers both credit risk and market
risk in making investment decisions for the Portfolios. See "Investment
Objectives and Policies -- Risk Factors Relating to High Yield Securities" in
the Statement of Additional Information.
HEDGING AND INCOME ENHANCEMENT STRATEGIES
EACH PORTFOLIO MAY ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE INCOME. THESE STRATEGIES CURRENTLY INCLUDE THE USE OF OPTIONS, FORWARD
CURRENCY EXCHANGE CONTRACTS AND FUTURES CONTRACTS AND OPTIONS THEREON. The
Fund's ability to use these strategies may be limited by market conditions,
regulatory limits and tax considerations and there can be no assurance that any
of these strategies will succeed. See "Investment Objectives and Policies" in
the Statement of Additional Information. New financial products and risk
management techniques continue to be developed, and each Portfolio may use these
new investments and techniques to the extent consistent with its investment
objective and policies.
OPTIONS TRANSACTIONS
EACH PORTFOLIO MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON
SECURITIES AND CURRENCIES THAT ARE TRADED ON SECURITIES EXCHANGES OR IN THE
OVER-THE-COUNTER MARKET TO ENHANCE INCOME OR TO HEDGE THEIR PORTFOLIOS. These
options will be on equity securities, financial indices (E.G., S&P 500) and
foreign currencies. Each Portfolio may write covered put and call options 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 the price of securities it intends to purchase. Each Portfolio may
also purchase put and call options to offset previously written put and call
options of the same series. See "Investment Objectives and Policies -- Risks of
Transactions in Options" in the Statement of Additional Information.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, 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). 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 Portfolio writes a call option, the
Portfolio gives up 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.
12
<PAGE>
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, 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. The writer of the put option,
in return for the premium, has the obligation, upon exercise of the option, to
acquire the securities underlying the option at the exercise price. A Portfolio
might, therefore, be obligated to purchase the underlying securities for more
than their current market price.
EACH PORTFOLIO WILL WRITE ONLY "COVERED" OPTIONS. An option is covered if, so
long as the Portfolio is obligated under the option, it owns an offsetting
position in the underlying security or maintains cash, U.S. Government
securities or other liquid high-grade debt obligations with a value sufficient
at all times to cover its obligations. See "Investment Objectives and Policies
- -- Options on Stock Indices" in the Statement of Additional Information.
THERE IS NO LIMITATION ON THE AMOUNT OF CALL OPTIONS THE PORTFOLIOS MAY WRITE.
The Fund has undertaken with certain state securities commissions that, so long
as shares of the Fund are registered in those states, neither Portfolio will
purchase (i) put options on stocks not held by the Portfolio, (ii) put options
on indices or (iii) call options on stock or stock indices if, after any such
purchase, the total premiums paid for such options would exceed 10% of the
Portfolio's total assets; provided, however, that the Portfolio may purchase put
options on stocks held by the Portfolio if after such purchase the aggregate
premiums paid for such options do not exceed 20% of the Portfolio's total net
assets. In addition, the aggregate value of the securities that are the subject
of the put options will not exceed 50% of the Portfolio's net assets.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
EACH PORTFOLIO MAY ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO
PROTECT THE VALUE OF ITS PORTFOLIO AGAINST FUTURE CHANGES IN THE LEVEL OF
CURRENCY EXCHANGE RATES. Each Portfolio 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.
EACH PORTFOLIO'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 Portfolio generally arising in connection with
the purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Portfolio expenses. Position hedging is 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). Although there are no limits on the
number of forward contracts which a Portfolio may enter into, a Portfolio 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 sale of
forward currency) of the securities held in its portfolio denominated or quoted
in, or currently convertible into, such currency.
FUTURES CONTRACTS AND OPTIONS THEREON
EACH PORTFOLIO MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE FOR CERTAIN
HEDGING, INCOME ENHANCEMENT AND RISK MANAGEMENT PURPOSES IN ACCORDANCE WITH
REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION. These futures contracts
and options thereon will be on interest-bearing securities, financial indices
and interest rate indices. A financial futures contract is an agreement to
purchase or sell an agreed amount of securities at a set price for delivery in
the future.
A PORTFOLIO MAY NOT PURCHASE OR SELL FUTURES CONTRACTS AND OPTIONS THEREON FOR
INCOME ENHANCEMENT OR RISK MANAGEMENT PURPOSES IF, IMMEDIATELY THEREAFTER, THE
SUM OF THE AMOUNT OF INITIAL MARGIN DEPOSITS ON THE PORTFOLIO'S FUTURES
POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON WOULD EXCEED 5% OF THE
LIQUIDATION VALUE OF THE PORTFOLIO'S TOTAL ASSETS. ALTHOUGH THERE ARE NO OTHER
LIMITS APPLICABLE TO FUTURES CONTRACTS, THE VALUE OF ALL FUTURES CONTRACTS SOLD
WILL NOT EXCEED THE TOTAL MARKET VALUE OF THE PORTFOLIO.
13
<PAGE>
A PORTFOLIO'S SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET AND
INTEREST RATES AND REQUIRES SKILLS AND TECHNIQUES DIFFERENT FROM THOSE USED IN
SELECTING PORTFOLIO SECURITIES. The correlation between movements in the price
of a futures contract and movements in the price of the securities being hedged
is imperfect, and there is a risk that the value of the securities being hedged
may increase or decrease at a greater rate than the related futures contracts,
resulting in losses to the Portfolio. Certain futures exchanges or boards of
trade have established daily limits on the amount that the price of futures
contracts or options thereon may vary, either up or down, from the previous
day's settlement price. These daily limits may restrict each Portfolio's ability
to purchase or sell certain futures contracts or options thereon on any
particular day.
EACH PORTFOLIO'S ABILITY TO ENTER INTO FUTURES CONTRACTS AND OPTIONS THEREON
IS LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED
(THE INTERNAL REVENUE CODE), FOR QUALIFICATION AS A REGULATED INVESTMENT
COMPANY. See "Investment Objectives and Policies -- Risks of Transactions in
Futures Contracts" and "Taxes" in the Statement of Additional Information.
RISKS OF HEDGING AND INCOME ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY EXCHANGE
TRANSACTIONS INVOLVES INVESTMENT RISKS AND TRANSACTION COSTS TO WHICH A
PORTFOLIO WOULD NOT BE SUBJECT ABSENT THE USE OF THESE STRATEGIES. If the
investment adviser's prediction of movements in the direction of the securities,
foreign currency and interest rate markets are inaccurate, the adverse
consequences to the Portfolio may leave the Portfolio in a worse position than
if such strategies were not used. Risks inherent in the use of options, foreign
currency and futures contracts and options on futures contracts include (1)
dependence on the investment adviser's ability to predict correctly movements in
the direction of interest rates, securities prices and currency markets; (2)
imperfect correlation between the price of options and futures contracts and
options thereon and movements in the prices of the securities being hedged; (3)
the fact that the 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 possible
need to defer closing out certain hedged positions to avoid adverse tax
consequences; and (6) the possible inability of a Portfolio 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 Portfolio to sell a portfolio security at a
disadvantageous time, due to the need for a Portfolio to maintain "cover" or to
segregate securities in connection with hedging transactions. See "Taxes" and
"Investment Objectives and Policies" in the Statement of Additional Information.
OTHER INVESTMENTS AND POLICIES
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each Portfolio 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 the 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 the Portfolio at the time of entering into the
transaction. The Fund's Custodian will maintain, in a segregated account of the
Fund, cash, U.S. Government securities or other liquid high-grade debt
obligations having a value equal to or greater than the Fund's purchase
commitments; the Custodian will likewise segregate securities sold on a delayed
delivery basis. The securities so purchased are subject to market fluctuation
and no interest accrues to the purchaser during the period between purchase and
settlement. At the time of delivery of the securities, the value may be more or
less than the purchase price and an increase in the percentage of the
Portfolio's assets committed to the purchase of securities on a when-issued or
delayed delivery basis may increase the volatility of the Portfolio's net asset
value.
SHORT SALES AGAINST-THE-BOX
The Portfolios may make short sales of securities or maintain a short
position, provided that at all times when a short position is open, the
Portfolio owns an equal amount of such securities 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 U.S. Government securities in an amount
equal to such consideration must be put in a
14
<PAGE>
segregated account, for an equal amount of the securities of the same issuer as
the securities sold short (a short sale against-the-box). Not more than 25% of a
Portfolio's net assets (determined at the time of the short sale) may be subject
to such sales. Short sales will be made primarily to defer realization of gain
or loss for federal tax purposes.
INTEREST RATE SWAPS
Each Portfolio may enter into interest rate swap transactions with respect to
up to 5% of its total assets. Interest rate swaps are used to hedge the value of
existing portfolio assets or assets a Portfolio intends to acquire. Interest
rate swaps involve the exchange by a Portfolio with another party of their
respective commitments to pay or receive interest (E.G., an exchange of floating
rate payments for fixed-rate payments). Each Portfolio enters 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 it anticipates purchasing at a later date. The Portfolios use
interest rate swaps for hedging purposes and not as a speculative investment.
The use of interest rate swaps is a highly speculative activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the investment advisor were incorrect in
its forecast of market values, interest rates and other applicable factors, the
investment performance of a Portfolio would diminish compared to what it would
have been if this investment technique were never used. 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 rate swaps is limited to
the net amount of interest payments that a Portfolio is contractually obligated
to make. If the other party to an interest rate swap defaults, a Portfolio's
risk of loss consists of the net amount of interest payments that the Portfolio
is contractually entitled to receive. Since interest rate swaps are individually
negotiated, each Portfolio expects to achieve an acceptable degree of
correlation between its rights to receive interest on its portfolio securities
and its rights and obligations to receive and pay interest pursuant to interest
rate swaps.
REPURCHASE AGREEMENTS
Each Portfolio may on occasion enter into repurchase agreements whereby the
seller of a security agrees to repurchase that security from the Portfolio at a
mutually agreed-upon time and price. The repurchase date is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Portfolio's
money is invested in the security. Each Portfolio's repurchase agreements will
at all times be fully collateralized in an amount at least equal to the purchase
price, including accrued interest earned on the underlying securities. The
instruments held as collateral are valued daily, and if the value of the
instruments declines, the Portfolio will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the Portfolio may incur a loss. The Fund participates in a
joint repurchase account with other investment companies managed by Prudential
Mutual Fund Management, Inc. pursuant to an order of the Securities and Exchange
Commission (SEC).
BORROWING
Each Portfolio may borrow up to 20% of the value of its total assets
(calculated when the loan is made) for temporary, extraordinary or emergency
purposes or for the clearance of transactions. A Portfolio may pledge up to 20%
of its total assets to secure these borrowings.
ILLIQUID SECURITIES
Each Portfolio may invest up to 5% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities markets
either within or outside of the United States. Restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933, as amended
(the Securities Act), and privately placed commercial paper that have a readily
available market are not considered illiquid for purposes of this limitation.
The investment adviser will monitor the liquidity of such restricted securities
under the supervision of the Trustees. Repurchase agreements subject to demand
are deemed to have a maturity equal to the applicable notice period.
15
<PAGE>
The staff of the SEC has taken the position that purchased over-the-counter
options and the assets used as "cover" for written over-the-counter options are
illiquid securities unless a Portfolio and the counterparty have provided for
the Portfolio, at the Portfolio's election, to unwind the over-the-counter
option. The exercise of such an option ordinarily would involve the payment by
the Portfolio of an amount designed to reflect the counterparty's economic loss
from an early termination, but does allow the Portfolio to treat the assets used
as "cover" as "liquid."
PORTFOLIO TURNOVER
The portfolio turnover rate for each Portfolio is not expected to exceed 200%.
The portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of each
Portfolio's securities, excluding securities having a maturity at the date of
purchase of one year or less. High portfolio turnover may involve
correspondingly greater brokerage commissions and other transaction costs, which
will be borne directly by the Portfolio. See "Portfolio Transactions and
Brokerage" in the Statement of Additional Information. 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
Each Portfolio is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies may
not be changed without the approval of the holders of a majority of the
Portfolio's outstanding voting securities, as defined in the Investment Company
Act. See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended July 31, 1993, total expenses as a percentage of
average net assets were 1.21% and 2.01% of the Class A shares and Class B
shares, respectively, of the Strategy Portfolio and were 1.17% and 1.97% of the
Class A and Class B shares, respectively, of the Conservatively Managed
Portfolio. See "Financial Highlights." No Class C shares were outstanding during
the fiscal year ended July 31, 1993.
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .65 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF EACH PORTFOLIO. It was incorporated in May 1987 under the laws of the State
of Delaware. For the fiscal year ended July 31, 1993, the Fund paid management
fees to PMF of .65% of average net assets of both the Strategy Portfolio and the
Conservatively Managed Portfolio. See "Manager" in the Statement of Additional
Information.
As of June 30, 1994, PMF served as the manager to 37 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 29 closed-end investment companies with aggregate assets of
approximately $47 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS AFFAIRS. See
"Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS
16
<PAGE>
REIMBURSED BY PMF FOR ITS REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING
SUCH SERVICES. Under the Management Agreement, PMF continues to have
responsibility for all investment advisory services and supervises PIC's
performance of such services.
The Conservatively Managed Portfolio is managed by Prudential Diversified
Investment Strategies (PDI Strategies) and Prudential Investment Advisors, units
of PIC, using a team of portfolio managers under the supervision of James B.
McHugh, a Director of PDI Strategies, who provides overall asset allocation for
the Portfolio. Mr. McHugh has been employed by PIC since 1982. Mr. McHugh also
provides overall asset allocation for the Prudential Series Fund Conservatively
Managed Portfolio and Aggressively Managed Portfolio. The Strategy Portfolio is
managed by Prudential Investment Advisors using a team of portfolio managers
coordinated by Anthony M. Gleason. Mr. Gleason is a Director of PIC and has been
employed by PIC since 1986. Mr. Gleason also serves as equity portfolio manager
of the Prudential Series Fund Aggressively Managed Portfolio.
THE FUND'S SUBADVISER HAS ENTERED INTO A CONSULTING ARRANGEMENT WITH GREG A.
SMITH WITH RESPECT TO THE STRATEGY PORTFOLIO, PURSUANT TO WHICH MR. SMITH MAKES
RECOMMENDATIONS TO PIC WITH RESPECT TO THE ALLOCATION OF ASSETS. Mr. Smith is a
consultant to Prudential Securities Incorporated, an affiliate of both the
Subadviser and the Fund, and the President of Greg A. Smith Asset Management
Corporation, a registered investment adviser. Mr. Smith is a consultant to PIC
with respect to the allocation of assets for Prudential Multi-Sector Fund, Inc.
and is the portfolio manager of Prudential Strategist Fund, Inc. Mr. Smith is
recognized in the financial community as a leading asset allocation strategist.
Since 1983, he has been named by INSTITUTIONAL INVESTOR magazine as a member of
its All-America Research Team. He is also responsible for Prudential Securities
receiving the top ranking for asset allocation among twelve brokerage firms for
the five-year period ended March 31, 1994 in a continuing survey conducted by
THE WALL STREET JOURNAL and Wilshire Associates.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE FUND. IT IS
A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND CLASS C
SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE FUND'S CLASS A, CLASS B AND
CLASS C SHARES. These expenses include commissions and account servicing fees
paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) 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 Prudential Securities and Prusec associated with the sale
of Fund shares, including lease, utility, communications and sales promotion
expenses. The State of Texas requires that shares of the Fund may be sold in
that state only by dealers or other financial institutions which are registered
there as broker-dealers.
Under the Plans, the Fund 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 Fund 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.
17
<PAGE>
UNDER THE CLASS A PLAN, THE FUND MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
ACTIVITIES 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 OF EACH PORTFOLIO. The
Class A Plan provides that (i) 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 (ii) 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. PMFD has 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, 1994.
For the fiscal year ended July 31, 1993, PMFD received payments of $30,784
from the Conservatively Managed Portfolio and $48,431 from the Strategy
Portfolio under the Class A Plan. These amounts were primarily expended for
payment of account servicing fees to financial advisers and other persons who
sell Class A shares. For the fiscal year ended July 31, 1993, PMFD also received
approximately $405,000 and $338,000 in initial sales charges from Class A
shareholders of the Conservatively Managed Portfolio and the Strategy Portfolio,
respectively.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS PRUDENTIAL SECURITIES FOR
ITS DISTRIBUTION-RELATED ACTIVITIES 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 OF EACH PORTFOLIO. The Class B and Class C Plans provide for
the payment to Prudential Securities of (i) 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
and (ii) 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. Prudential Securities
also receives contingent deferred sales charges from certain redeeming
shareholders. See "Shareholder Guide -- How to Sell Your Shares -- Contingent
Deferred Sales Charges."
For the fiscal year ended July 31, 1993, Prudential Securities incurred
distribution expenses of approximately $4,574,800 on behalf of the
Conservatively Managed Portfolio and $3,861,500 on behalf of the Strategy
Portfolio under the Class B Plan and received $2,673,399 on behalf of the
Conservatively Managed Portfolio and $3,392,254 on behalf of the Strategy
Portfolio under the Class B Plan. In addition, Prudential Securities received
approximately $425,000 and $736,000 on behalf of the Conservatively Managed
Portfolio and the Strategy Portfolio, respectively, in contingent deferred sales
charges from redemptions of Class B shares during this period. No Class C shares
were outstanding during the fiscal year ended July 31, 1993.
For the fiscal year ended July 31, 1993, the Fund paid distribution expenses
of .20% and 1.00% of the average daily net assets of the Class A and Class B
shares of each Portfolio, respectively. The Fund records all payments made under
the Plans as expenses in the calculation of net investment income. No Class C
shares were outstanding during the fiscal year ended July 31, 1993. Prior to the
date of this Prospectus, the Class A and Class B Plans operated as
"reimbursement type" plans and, in the case of Class B, provided for the
reimbursement of distribution expenses incurred in current and prior years. See
"Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of shares of each Portfolio
will be allocated to each class based upon the ratio of sales of each class to
the sales of all shares of the Portfolio 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.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to a Portfolio at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Portfolio. The Portfolios will not be obligated to pay expenses incurred
under any Plan if it is terminated or not continued.
18
<PAGE>
In addition to distribution and service fees paid by each Portfolio of the
Fund under the Class A, Class B and Class C Plans, the Manager (or one of its
affiliates) may make payments out of its own resources to dealers and other
persons who distribute shares of the Portfolios. Such payments may be calculated
by reference to the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
PORTFOLIO TRANSACTIONS
Prudential Securities may also act as a broker or futures commission merchant
for the Fund, provided that the commissions, fees or other remuneration it
receives are fair and reasonable. See "Portfolio Transactions and Brokerage" in
the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, 02171, serves as Custodian for the Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting books
and records pursuant to an agreement with the Fund. Its mailing address is P.O.
Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
EACH PORTFOLIO'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING
ITS LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF EACH PORTFOLIO TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Fund's Trustees. See "Net Asset Value" in the Statement of
Additional Information.
Each Portfolio will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Portfolio or days on which changes in
the value of the portfolio securities do not materially affect the NAV. The New
York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different net asset
values and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. It is
expected, however, that the NAV of the three classes will tend to converge
immediately after the recording of dividends, if any, which will differ by
approximately the amount of the distribution-related expense accrual
differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME EACH PORTFOLIO OF THE FUND MAY ADVERTISE ITS TOTAL RETURN
(INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) AND YIELD
IN ADVERTISEMENTS OR SALES LITERATURE. TOTAL RETURN AND YIELD ARE CALCULATED
SEPARATELY FOR CLASS A, CLASS B AND CLASS C SHARES. THESE FIGURES ARE BASED ON
HISTORICAL EARNINGS AND ARE NOT
19
<PAGE>
INTENDED TO INDICATE FUTURE PERFORMANCE. The "total return" shows how much an
investment in the Portfolio would have increased (decreased) over a specified
period of time (I.E., one, five or ten years or since inception of the
Portfolio) assuming that all distributions and dividends by the Portfolio were
reinvested on the reinvestment dates during the period and less all recurring
fees. The "aggregate" total return reflects actual performance over a stated
period of time. "Average annual" total return is a hypothetical rate of return
that, if achieved annually, would have produced the same aggregate total return
if performance had been constant over the entire period. "Average annual" total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither "average
annual" total return nor "aggregate" total return takes into account any federal
or state income taxes which may be payable upon redemption. The "yield" refers
to the income generated by an investment in a Portfolio over a one-month or
30-day period. This income is then "annualized;" that is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each 30-day period for twelve periods and is shown as a percentage of the
investment. The income earned on the investment is also assumed to be reinvested
at the end of the sixth 30-day period. Each Portfolio of the Fund also may
include comparative performance information in advertising or marketing its
shares. Such performance information may include data from Lipper Analytical
Services, Inc., Morningstar Publications, Inc., other industry publications,
business periodicals and market indices. See "Performance Information" in the
Statement of Additional Information. The Fund will include performance data for
each class of shares of each Portfolio in any advertisement or information
including performance data of the Fund. Further performance information is
contained in the Fund's annual and semi-annual reports to shareholders, which
may be obtained without charge. See "Shareholder Guide -- Shareholder Services
- -- Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
EACH PORTFOLIO HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, EACH
PORTFOLIO WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT
INCOME AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. See
"Taxes" in the Statement of Additional Information.
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 Portfolio 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 will be treated as long-term capital gain or
loss, and the remainder will be treated as short-term capital gain or loss. See
"Taxes" in the Statement of Additional Information.
Each Portfolio 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 Portfolio's investments
in PFICs may subject the Portfolio to federal income taxes on certain income and
gains realized by the Portfolio. Certain gains or losses from fluctuations in
foreign currency exchange rates (Section 988 gains or losses) will affect the
amount of ordinary income a Portfolio will be able to pay as dividends. See
"Taxes" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
All dividends out of net investment income, together with distributions of net
short-term capital gains, will be taxable as ordinary income to the shareholder
whether or not reinvested. See "Taxes" in the Statement of Additional
Information. Any net capital gains (I.E., the excess of net long-term capital
gains over net short-term capital losses) distributed to shareholders will be
taxable as long-term capital gains to the shareholders, whether or not
reinvested and regardless of the length of time a shareholder has owned his or
her shares. The maximum long-term capital gains rate for corporate shareholders
currently is the same as the maximum tax rate for ordinary income. The maximum
long-term capital gains rate for individual shareholders is 28%.
20
<PAGE>
Both regular and capital gains dividends are taxable to shareholders in the
year in which received, whether they are received in cash or in additional
shares. In addition, certain dividends declared by a Portfolio will be treated
as received by shareholders on December 31 of the year the dividends are
declared. This rule applies to dividends declared by a Portfolio in October,
November or December of a calendar year, payable to shareholders of record on a
date in any such month, if such dividends are paid during January of the
following calendar year.
Dividends received by corporate shareholders are eligible for a dividends
received deduction of 70% to the extent a Portfolio's income is derived from
qualified dividends received by the Portfolio from domestic corporations.
Dividends attributable to foreign dividends, interest income, capital gain net
income, gain or loss from Section 1256 contracts and from some other sources
will not be eligible for the corporate dividends received deduction. Corporate
shareholders should consult their tax advisers regarding other requirements
applicable to the dividends received deduction.
Any gain or loss realized upon a sale or redemption of Fund shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, although
otherwise treated as a short-term capital loss, will be treated as long-term
capital loss to the extent of any capital gain distributions received by the
shareholder on shares that are held for six months or less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Fund is required to withhold and remit to
the U.S. Treasury 31% of dividends, capital gain income and redemption proceeds
on the accounts of those shareholders who fail to furnish their tax
identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of certain
foreign shareholders) with the required certifications regarding the
shareholder's status under the federal income tax law.
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY, QUARTERLY
AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY CAPITAL GAINS IN EXCESS OF
CAPITAL LOSSES. Dividends paid by the Fund with respect to each class of shares,
to the extent any dividends are paid, will be calculated in the same manner, at
the same time, on the same day and will be in the same amount except that each
class will bear its own distribution charges, generally resulting in lower
dividends for Class B and Class C shares. Distributions of net capital gains, if
any, will be paid in the same amount for each class of shares. See "How the Fund
Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES BASED ON
THE NAV OF EACH CLASS ON THE RECORD DATE, OR SUCH OTHER DATE AS THE TRUSTEES MAY
DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS
DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN
CASH. Such election should be submitted to Prudential Mutual Fund Services,
Inc., Attention: Account Maintenance, P.O. Box 15015, New Brunswick, New Jersey
08906-5015. If you hold shares through Prudential Securities, you should contact
your financial adviser to elect to receive dividends and distributions in cash.
The Fund will notify each shareholder after the close of the Fund's taxable year
both of the dollar amount and the taxable status of that year's dividends and
distributions on a per share basis.
WHEN THE FUND GOES "EX-DIVIDEND," THE NAV OF EACH CLASS IS REDUCED BY THE
AMOUNT OF THE DIVIDEND OR DISTRIBUTION ALLOCABLE TO EACH CLASS. IF YOU BUY
SHARES JUST PRIOR TO THE EX-DIVIDEND DATE (WHICH GENERALLY OCCURS FOUR BUSINESS
DAYS PRIOR TO THE RECORD DATE), THE PRICE YOU PAY WILL INCLUDE THE DIVIDEND OR
DISTRIBUTION AND A PORTION OF YOUR INVESTMENT WILL BE RETURNED TO YOU AS A
TAXABLE DIVIDEND OR DISTRIBUTION. YOU SHOULD, THEREFORE, CONSIDER THE TIMING OF
DIVIDENDS AND DISTRIBUTIONS WHEN MAKING YOUR PURCHASES.
21
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND IS AN OPEN-END INVESTMENT COMPANY WHICH WAS ORGANIZED UNDER THE LAWS
OF MASSACHUSETTS ON FEBRUARY 23, 1987 AS AN UNINCORPORATED BUSINESS TRUST, A
FORM OF ORGANIZATION THAT IS COMMONLY KNOWN AS A MASSACHUSETTS BUSINESS TRUST.
THE FUND WAS FORMERLY KNOWN AS PRUDENTIAL FLEXIFUND AND THE STRATEGY PORTFOLIO
WAS FORMERLY KNOWN AS THE AGGRESSIVELY MANAGED PORTFOLIO. THE FUND IS AUTHORIZED
TO ISSUE AN UNLIMITED NUMBER OF SHARES OF SEPARATE SERIES OR PORTFOLIOS, DIVIDED
INTO THREE CLASSES, DESIGNATED CLASS A, CLASS B AND CLASS C SHARES. Each class
of shares represents an interest in the same assets of the Portfolio and is
identical in all respects except that (i) each class bears different
distribution expenses, (ii) each class has exclusive voting rights with respect
to its distribution and service plan (except that the Fund has agreed with the
SEC in connection with the offering of a conversion feature on Class B shares to
submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv) only
Class B shares have a conversion feature. See "How the Fund is Managed --
Distributor." The Fund has received an order from the SEC permitting the
issuance and sale of multiple classes of shares. Currently, each Portfolio is
offering only three classes, designated Class A, Class B and Class C shares. In
accordance with the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series of shares and classes of shares within such
series, with such preferences, privileges, limitations and voting and dividend
rights as the Trustees may determine.
Shares of the Fund, 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 Fund under certain circumstances as described
under "Shareholder Guide -- How to Sell Your Shares." Each share of each class
is equal as to earnings, assets and voting privileges, except as noted above,
and each class of shares 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 each Portfolio of the 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. The Fund's shares
do not have cumulative voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND 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 A 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.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
22
<PAGE>
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares. The minimum subsequent investment is $100 for all classes. All
minimum investment requirements are waived for certain retirement and employee
savings plans or custodial accounts for the benefit of minors. For purchases
made through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. See "Shareholder Services" below.
THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. 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 Allocation Fund, specifying on the wire the account number
assigned by PMFS and your name and identifying the sales charge alternative
(Class A, Class B or Class C shares) and the name of the Portfolio.
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the 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 Allocation Fund,
the name of the Portfolio, Class A, Class B or Class C 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.
23
<PAGE>
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C SHARES)
WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE FOR YOUR
INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH OF TIME
YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES (ALTERNATIVE
PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 5% of .30 of 1% (Currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .25 of 1%)
CLASS B Maximum contingent deferred sales 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% Shares do not convert to another class
the amount invested or the redemption
proceeds on redemptions made within
one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of a Portfolio and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information -- Description of Shares"), and
(iii) only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Portfolios
will receive different compensation for selling Class A, Class B and Class C
shares and will generally receive more compensation initially for selling Class
A and Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion Feature
- -- Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Portfolios:
If you intend to hold your investment in a Portfolio for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum 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.
24
<PAGE>
If you intend to hold your investment for 7 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C 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 Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed the
initial sales charge plus 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 net asset value, the effect of the return on the
investment over this period of time or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
SEE "REDUCTION AND WAIVER OF INITIAL SALES CHARGES" BELOW.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------- ----------------- ----------------- -------------------
<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
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
BENEFIT PLANS. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (Benefit Plans), provided that the plan has existing assets of at
least $1 million invested in shares of Prudential Mutual Funds (excluding money
market funds other than those acquired pursuant to the exchange privilege) or
1,000 eligible employees or members. In the case of Benefit Plans whose accounts
are held directly with the Transfer Agent or Prudential Securities and for which
the Transfer Agent or Prudential Securities does individual account
recordkeeping (Direct Account Benefit Plans) and Benefit Plans sponsored by PSI
or its subsidiaries (PSI or Subsidiary Prototype Benefit Plans), Class A shares
may be purchased at NAV by participants who are repaying loans made from such
plans to the participant.
25
<PAGE>
PRUDENTIAL RETIREMENT ACCUMULATION PROGRAM 401(K) PLAN. Class A shares may be
purchased at net asset value, with a waiver of the initial sales charge, by or
on behalf of participants in the Prudential Retirement Accumulation Program
401(k) Plan for which the Transfer Agent or Prudential Securities provides
recordkeeping services (PruRap Plan) provided that (i) for existing plans, the
plan has existing assets of $1 million or more, as measured on the last business
day of the month, invested in shares of Prudential Mutual Funds (excluding money
market funds other than those acquired pursuant to the exchange privilege) held
at the Transfer Agent or Prudential Securities and (ii) for new plans, the plan
initially invests $1 million or more in shares of non-money market Prudential
Mutual Funds or has at least 1,000 eligible employees or members.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a Benefit Plan or PruRap
Plan qualifies to purchase Class A shares at NAV, all subsequent purchases will
be made at NAV.
MISCELLANEOUS WAIVERS. In addition, Class A shares may be purchased at NAV,
through Prudential Securities or the Transfer Agent, by the following persons:
(a) Trustees and officers of the Fund and other Prudential Mutual Funds, (b)
employees of Prudential Securities and PMF and their subsidiaries and members of
the families of such persons who maintain an "employee related" account at
Prudential Securities or the Transfer Agent, (c) 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, (d) registered
representatives and employees of dealers who have entered into a selected dealer
agreement with Prudential Securities provided that purchases at NAV are
permitted by such person's employer and (e) investors who have a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm, provided that (i) the purchase is made within 90 days
of the commencement of the financial adviser's employment at Prudential
Securities, (ii) 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) on which no deferred sales load, fee or other charge was
imposed on redemption and (iii) the financial adviser served as the client's
broker on the previous purchases.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the 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 purchased upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares -- Reduction and Waiver of Initial
Sales Charges -- Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your Shares --
Contingent Deferred Sales Charges."
HOW TO SELL YOUR 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 BY THE TRANSFER AGENT OR
PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES." In certain cases,
however, redemption proceeds will be reduced by the amount of any applicable
contingent deferred sales charge, as described below. See "Contingent Deferred
Sales Charges" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM
YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE
26
<PAGE>
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 Fund in care of its Transfer Agent, Prudential
Mutual Fund Services, Inc., Attention: Redemption Services, P.O. Box 15010, New
Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST, EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, 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 the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the 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.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the 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 a Portfolio, in lieu of cash,
in conformity with applicable rules of the SEC. Securities will be readily
marketable and will be valued in the same manner as a regular redemption. See
"How the Fund Values its Shares." If your shares are redeemed in kind, you would
incur transaction costs in converting the assets into cash. The Fund, however,
has elected to be governed by Rule 18f-1 under the Investment Company Act, under
which the Fund is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund during any 90-day period for
any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.
30-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 the Fund at the NAV next
determined after the order is received, which must be within 30 days after the
date of the redemption. No sales charge will apply to such repurchases. You will
receive PRO RATA credit for any contingent deferred sales charge paid in
connection with the redemption of Class B or Class C shares. You must notify the
Fund's Transfer Agent, either directly or through Prudential Securities or
Prusec, at the time the repurchase privilege is exercised, that you are entitled
to credit for the contingent deferred sales charge previously paid. Exercise of
the repurchase privilege will generally not affect federal income tax treatment
of any gain realized upon redemption. If the redemption results in a loss, some
or all of the loss, depending on the amount reinvested, will generally not be
allowed for federal income tax purposes.
27
<PAGE>
CONTINGENT DEFERRED SALES CHARGES
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 one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. 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 purchased
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed -- Distributor" and "Waiver of
the Contingent Deferred Sales Charges -- Class B Shares" below.
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. See "How
to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS
YEAR SINCE PURCHASE INVESTED
PAYMENT MADE OR 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 net asset value above the total amount of
payments for the purchase of Fund shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); 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 decided 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 THE CONTINGENT DEFERRED SALES CHARGES -- 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
28
<PAGE>
the grantor. The waiver is available for total or partial redemptions of shares
owned by a person, either individually or in joint tenancy (with rights of
survivorship), at the time of death or initial determination of disability,
provided that the shares were purchased prior to death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include (i) in the case of a tax-deferred
retirement plan, a lump-sum or other distribution after retirement; (ii) in the
case of an IRA or Section 403(b) custodial account, a lump-sum or other
distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (I.E.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
In addition, the CDSC will be waived on redemptions of shares held by a
Trustee of the Fund.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares -- Waiver of the Contingent Deferred Sales Charge -- Class B Shares"
in the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares -- Quantity
Discount -- Class B Shares Purchased Prior to August 1, 1994" in the Statement
of Additional Information.
CONVERSION FEATURE -- CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. It is currently anticipated that
conversions will occur during the months of February, May, August and November
commencing in or about February 1995. Conversions will be effected at relative
net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
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 (ii) 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 net asset values 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
29
<PAGE>
approximately seven years from the initial purchase (I.E., $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 net asset value 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. See "How the Fund Values its Shares."
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 will 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 described above will not be implemented and consequently, the
first conversion of Class B shares will not occur before February 1995, but as
soon thereafter as practicable. At that time all amounts representing Class B
shares then outstanding beyond the applicable conversion period will
automatically convert to Class A shares together with all shares or amounts
representing Class B shares acquired through the automatic reinvestment of
dividends and distributions then held in your account.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) 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 Portfolios will continue to be subject, possibly indefinitely,
to their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
PORTFOLIO OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES, RESPECTIVELY,
OF ANOTHER PORTFOLIO OR ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV. No sales
charge will be imposed at the time of the exchange. Any applicable CDSC payable
upon the redemption of shares exchanged 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. Class B and Class C shares may not be exchanged into money
market funds other than Prudential Special Money Market Fund. For purposes of
calculating the 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. See "Conversion Feature -- Class B Shares" above. An exchange will be
treated as a redemption and purchase for tax purposes. See "Shareholder
Investment Account -- Exchange Privilege" in the Statement of Additional
Information.
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, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON
30
<PAGE>
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, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. Commencing in or about February 1995, a special
exchange privilege is available for shareholders who qualify to purchase Class A
shares at NAV. See "Alternative Purchase Plan -- Class A Shares -- Reduction and
Waiver of Initial Sales Charges" above. 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 on a quarterly basis, unless the shareholder elects otherwise. It is
currently anticipated that this exchange will occur quarterly in February, May,
August and November. Eligibility for this exchange privilege will be calculated
on the business day prior to the date of the exchange. Amounts representing
Class B or Class C shares which are not subject to a CDSC include the following:
(1) amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends and distributions, (2) amounts representing
the increase in the net asset value 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 or Prusec that they are eligible for this special exchange
privilege.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder of the Fund, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including a
Command Account). For additional information about this service, you may contact
your Prudential Securities financial adviser, Prusec representative or the
Transfer Agent directly.
- TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
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
31
<PAGE>
plans, the administration, custodial fees and other details is available from
Prudential Securities or the Transfer Agent. If you are considering adopting
such a plan, you should consult with your own legal or tax adviser with respect
to the establishment and maintenance of such a plan.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares -- Contingent Deferred Sales Charges."
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at One Seaport
Plaza, New York, New York 10292. In addition, monthly unaudited financial data
is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
32
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of 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 such 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 Aaa 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.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company 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 company ranks in the
lower end of its generic rating category.
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.
SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
P-1: Issuers rated "Prime-1" or "P-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
P-2: Issuers rated "Prime-2" or "P-2" (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations.
A-1
<PAGE>
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
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 debt 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 for debt in higher-rated categories.
BB, B, CCC, CC and C: Debt rated BB, B, CCC, CC and C is regarded, on balance,
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 degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
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 strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-2
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds designed
to meet your individual needs. We welcome you to review the investment options
available through our family of funds. For more information on the Prudential
Mutual Funds, including charges and expenses, contact your Prudential Securities
financial adviser or Prusec representative or telephone the Funds at (800)
225-1852 for a free prospectus. Read the prospectus carefully before you invest
or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-R- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
-TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
-TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
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
B-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell, or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
----------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS........................................................... 2
Risk Factors and Special Characteristics................................ 2
FUND EXPENSES............................................................. 4
FINANCIAL HIGHLIGHTS...................................................... 5
HOW THE FUND INVESTS...................................................... 7
Investment Objectives and Policies...................................... 7
Hedging and Income Enhancement Strategies............................... 12
Other Investments and Policies.......................................... 14
Investment Restrictions................................................. 16
HOW THE FUND IS MANAGED................................................... 16
Manager................................................................. 16
Distributor............................................................. 17
Portfolio Transactions.................................................. 19
Custodian and Transfer and Dividend Disbursing Agent.................... 19
HOW THE FUND VALUES ITS SHARES............................................ 19
HOW THE FUND CALCULATES PERFORMANCE....................................... 19
TAXES, DIVIDENDS AND DISTRIBUTIONS........................................ 20
GENERAL INFORMATION....................................................... 22
Description of Shares................................................... 22
Additional Information.................................................. 22
SHAREHOLDER GUIDE......................................................... 23
How to Buy Shares of the Fund........................................... 23
Alternative Purchase Plan............................................... 24
How to Sell Your Shares................................................. 26
Conversion Feature -- Class B Shares.................................... 29
How to Exchange Your Shares............................................. 30
Shareholder Services.................................................... 31
DESCRIPTION OF SECURITY RATINGS........................................... A-1
THE PRUDENTIAL MUTUAL FUND FAMILY......................................... B-1
</TABLE>
----------------------------------------------
MF134A 44414OE
<TABLE>
<S> <C> <C>
Conservative: Class A: 74429R108
Class B: 74429R207
CUSIP Nos.: Class C: 74429R306
Strategy: Class A: 74429R405
Class B: 74429R504
Class C: 74429R603
</TABLE>
Prudential
Allocation Fund
(formerly Prudential FlexiFund)
Conservatively
Managed Portfolio
Strategy Portfolio
-------------------------
[Logo]
<PAGE>
PRUDENTIAL ALLOCATION FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED AUGUST 1, 1994
Prudential Allocation Fund, formerly Prudential FlexiFund (the Fund), is an
open-end, diversified management investment company. The Fund is comprised of
two separate portfolios--the Conservatively Managed Portfolio and the Strategy
Portfolio. The investment objective of the Conservatively Managed Portfolio is
to achieve a high total investment return consistent with moderate risk. The
investment objective of the Strategy Portfolio is to achieve a high total
investment return consistent with relatively higher risk than the Conservatively
Managed Portfolio. While each Portfolio will seek to achieve its objective by
investing in a diversified portfolio of money market instruments, debt
obligations and equity securities (including securities convertible into equity
securities), the Portfolios will differ with respect to the proportions of
investments in debt and equity securities, the quality and maturity of debt
securities purchased, and the price volatility and the type of issuer of equity
securities purchased. It is expected that the Strategy Portfolio will offer
investors a higher potential return with a correspondingly higher risk of loss
than the Conservatively Managed Portfolio. There can be no assurance that the
Portfolios' investment objectives will be achieved. See "Investment Objectives
and Policies."
The Fund's address is One Seaport Plaza, New York, New York 10292, 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 Fund's Prospectus dated August 1, 1994, a copy of
which may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE TO
PAGE PAGE IN PROSPECTUS
--------- -------------------
<S> <C> <C>
General Information.............................................................................. B-2 22
Investment Objectives and Policies............................................................... B-2 7
Investment Restrictions.......................................................................... B-9 16
Trustees and Officers............................................................................ B-10 16
Manager.......................................................................................... B-12 16
Distributor...................................................................................... B-14 17
Portfolio Transactions and Brokerage............................................................. B-16 19
Purchase and Redemption of Fund Shares........................................................... B-17 23
Shareholder Investment Account................................................................... B-20 31
Net Asset Value.................................................................................. B-23 19
Taxes............................................................................................ B-24 20
Performance Information.......................................................................... B-26 19
Organization and Capitalization.................................................................. B-27 22
Custodian, Transfer and Dividend Disbursing Agent and Independent Accountants.................... B-29 19
Financial Statements............................................................................. B-30 --
Independent Auditors' Report..................................................................... B-78 --
</TABLE>
- --------------------------------------------------------------------------------
MF134B 444141C
<PAGE>
GENERAL INFORMATION
The Fund was organized on February 23, 1987 and consisted of two Portfolios,
the Aggressively Managed Portfolio and the Conservatively Managed Portfolio. On
November 30, 1990, the name of the Aggressively Managed Portfolio was changed to
the Strategy Portfolio. On February 28, 1991, the Trustees approved an amendment
to the Declaration of Trust to change the Fund's name from Prudential-Bache
FlexiFund to Prudential FlexiFund and, on February 8, 1994, the Trustees
approved an amendment to the Declaration of Trust to change the Fund's name from
Prudential FlexiFund to Prudential Allocation Fund.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Conservatively Managed Portfolio is to
achieve a high total investment return consistent with moderate risk. The
investment objective of the Strategy Portfolio is to achieve a high total
investment return consistent with relatively higher risk than the Conservatively
Managed Portfolio. Each Portfolio will seek to achieve its objective by
investing in a diversified portfolio of money market instruments, debt
obligations and equity securities. However, the asset mix and the type of
portfolio securities purchased by the Portfolios will differ. It is anticipated
that, under normal conditions, the Conservatively Managed Portfolio will have a
smaller percentage of its assets invested in equity securities and a larger
percentage invested in money market instruments than the Strategy Portfolio. In
addition, the average weighted maturity of the debt securities held by the
Conservatively Managed Portfolio will be shorter than that of the Strategy
Portfolio, and the equity securities held by the Conservatively Managed
Portfolio will typically be less volatile securities of larger and more mature
companies than the Strategy Portfolio. There can be no assurance that the
Portfolios' investment objectives will be achieved. See "How the Fund Invests--
Investment Objectives and Policies" in the Prospectus.
RISKS OF TRANSACTIONS IN OPTIONS
A Portfolio will write (I.E., sell) covered call options only on equity
securities, on stock indices which are traded on a securities exchange or which
are listed on NASDAQ or in the over-the-counter market, on currencies and on
futures contracts which are traded on an exchange or board of trade. A call
option gives the purchaser of the option the right to buy, and the writer the
obligation to sell, the underlying security at the exercise price during the
option period. A Portfolio will write covered call options for hedging purposes
and to augment its income.
So long as the obligation of the writer of the call continues, the writer
may be assigned an exercise notice. The exercise notice would require the writer
of a call option to deliver the underlying security against payment of the
exercise price. This obligation terminates upon expiration of the option, or at
such earlier time that the writer effects a closing purchase transaction by
purchasing an option covering the same underlying security and having the same
exercise price and expiration date (of the same series) as the one previously
sold. Once an option has been exercised, the writer may not execute a closing
purchase transaction. To secure the obligation to deliver the underlying
security the writer of the option is required to deposit in escrow the
underlying security or other assets in accordance with the rules of The Options
Clearing Corporation (the OCC), the Chicago Board of Trade and the Chicago
Mercantile Exchange, institutions which interpose themselves between buyers and
sellers of options. Technically, each of these institutions assumes the other
side of every purchase and sale transaction on an exchange and, by doing so,
gives its guarantee to the transaction.
An option position may be closed out only on an exchange, board of trade or
other trading facility which provides a secondary market for an option of the
same series. Although a Portfolio 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 options no secondary
market on an exchange or otherwise may exist. In such event it might not be
possible to effect closing transactions in particular options, with the result
that the Portfolio would have to exercise its options in order to realize any
profit and would incur brokerage commissions upon the exercise of call options
and upon the subsequent disposition of underlying securities acquired through
the exercise of call options or upon the purchase of underlying securities for
the exercise of put options. If a Portfolio 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: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an
B-2
<PAGE>
exchange; (v) the facilities of an exchange or a clearing corporation may not at
all times be adequate to handle current trading volume; or (vi) 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. However, the OCC, based on forecasts
provided by the U.S. exchanges, believes that its facilities are adequate to
handle the volume of reasonably anticipated options transactions, and such
exchanges have advised such clearing corporation that they believe their
facilities will also be adequate to handle reasonably anticipated volume.
OPTIONS ON STOCK INDICES
Except as described below, a Portfolio will write call options on indices
only if on such date it holds a portfolio of securities at least equal to the
value of the index times the multiplier times the number of contracts. When a
Portfolio writes a call option on a broadly-based stock market index, the
Portfolio will segregate or put into escrow with its Custodian, or pledge to a
broker as collateral for the option, cash, cash equivalents or at least one
"qualified security" 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. A Portfolio will write call options on broadly-based stock
market indices only if at the time of writing it holds a diversified portfolio
of stocks.
If a Portfolio has written an option on an industry or market segment index,
it will so segregate or put into escrow with the Fund's Custodian, or pledge to
a broker as collateral for the option, at least ten "qualified securities," all
of which are stocks of an issuer 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
Portfolio's holdings in that industry or market segment. No individual security
will represent more than 15% of the amount so segregated, pledged or escrowed 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, escrowed or pledged falls below 100% of the current
index value times the multiplier times the number of contracts, a Portfolio will
segregate, escrow or pledge an amount in cash, Treasury bills or other
high-grade short-term debt obligations equal in value to the difference. In
addition, when the Portfolio writes a call on an index which is in-the-money at
the time the call is written, the Portfolio will segregate with the Fund's
Custodian or pledge to the broker as collateral cash, U.S. Government or other
high-grade short-term debt obligations 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
Portfolio'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 securities exchange or listed on
NASDAQ against which the Portfolio has not written a stock call option and which
has not been hedged by the Portfolio by the sale of stock index futures.
However, if the Portfolio holds a call on the same index as the call written
where the exercise price of the call held is equal to or less than the exercise
price of the call written or greater than the exercise price of the call written
if the difference is maintained by the Portfolio in cash, Treasury bills or
other high-grade short-term debt obligations in a segregated account with the
Fund's Custodian, it will not be subject to the requirements described in this
paragraph.
RISKS OF OPTIONS ON INDICES
A Portfolio's purchase and sale of options on indices will be subject to
risks described above under "Risks of Transactions in Options." In addition, the
distinctive characteristics of options on indices create certain risks that are
not present with stock options.
Because the value of an index option depends upon movements in the level of
the index rather than the price of a particular stock, successful use by the
Fund of options on indices would be subject to the investment adviser's ability
to predict correctly movements in the direction of the stock market generally or
of a particular industry. This requires different skills and techniques than
predicting changes in the price of individual stocks.
B-3
<PAGE>
Index prices may be distorted if trading of certain securities included in
the index is interrupted. Trading in the index options also may be interrupted
in certain circumstances, such as if trading were halted in a substantial number
of securities included in the index. If this occurred, the Portfolio would not
be able to close out options which it had purchased or written and, if
restrictions on exercise were imposed, might be unable to exercise an option it
holds, which could result in substantial losses to the Portfolio. It is each
Portfolio's policy to purchase or write options only on indices which include a
number of securities sufficient to minimize the likelihood of a trading halt in
the index.
Trading in stock index options commenced in April 1983 with the S&P 100
option (formerly called the CBOE 100). Since that time a number of additional
index option contracts have been introduced, including options on industry
indices. Although the markets for certain index option contracts have developed
rapidly, the markets for other index options are still relatively illiquid. 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. Neither Portfolio
will purchase or sell any index option contract unless and until, in the
investment adviser's opinion, the market for such options has developed
sufficiently that the risk in connection with such transactions is no greater
than the risk in connection with options on stocks.
SPECIAL RISKS OF WRITING CALLS ON INDICES. Unless a Portfolio has other
liquid assets which are sufficient to satisfy the exercise of a call, the
Portfolio 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 Portfolio fails to anticipate an
exercise, it may have to borrow from a bank (in amounts not exceeding 20% of the
Portfolio's total assets) pending settlement of the sale of securities in its
portfolio and would incur interest charges thereon.
When a Portfolio has written a call, there is also a risk that the market
may decline between the time the Portfolio 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 Portfolio is able to sell securities in its
portfolio. As with stock options, the Portfolio 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 Portfolio would be able to deliver the underlying
securities in settlement, the Portfolio may have to sell part of its 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 Portfolio has
written is "covered" by an index call held by the Portfolio with the same strike
price, the Portfolio 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 Portfolio
exercises the call it holds or the time the Portfolio sells the call, which in
either case would occur no earlier than the day following the day the exercise
notice was filed.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks involved in the use of futures contracts as a
hedging device. Due to the imperfect correlation between the price of futures
contracts and movements in the price of the underlying securities, the price of
a futures contract may move more or less than the price of the securities being
hedged. Therefore, a correct forecast of interest rate or stock market trends by
the investment adviser may still not result in a successful hedging transaction.
Although a Portfolio will purchase or sell futures contracts only on
exchanges where there appears to be an adequate secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular contract or at any particular time. Accordingly, there can be no
assurance that it will be possible, at any particular time, to close a futures
position. In the event a Portfolio could not close a futures position and the
value of such position declined, the Portfolio would be required to continue to
make daily cash payments of variation margin. However, in the event a futures
contract has been used to hedge portfolio securities, such securities will not
be sold until the futures contract can be terminated. In such circumstances, an
increase in the price of the securities, if any, may partially or completely
offset losses on the futures contract. However, there is no guarantee that the
price movements of the securities will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on the
futures contract.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act of 1940, as amended (the Investment
Company Act), are exempt from the definition of "commodity pool operator,"
subject to compliance with certain conditions. The exemption is conditioned upon
the Portfolio's purchasing and selling futures contracts and options thereon for
BONA FIDE hedging transactions, except that a Portfolio of the Fund may purchase
and sell futures contracts or options thereon for any other purpose, to the
extent that the aggregate initial margin and option premiums do not exceed 5% of
the liquidation value of the Portfolio's total assets. In addition, a Portfolio
may not enter into futures contracts or
B-4
<PAGE>
options thereon if the sum of initial and variation margin on outstanding
futures contracts, together with the premium paid on outstanding options exceeds
20% of the Portfolio's total assets. The Fund will use futures and options
thereon in a manner consistent with these requirements.
Successful use of futures contracts by a Portfolio is also subject to the
ability of the Fund's investment adviser to predict correctly movements in the
direction of interest rates and other factors affecting markets for securities.
For example, if a Portfolio has hedged against the possibility of an increase in
interest rates which would adversely affect the price of securities in its
portfolio and the price of such securities increases instead, the Portfolio will
lose part or all of the benefit of the increased value of its securities because
it will have offsetting losses in its futures positions. In addition, in such
situations, if a Portfolio has insufficient cash to meet daily variation margin
requirements, it may need to sell securities to meet such requirements. Such
sales of securities may be, but will not necessarily be, at increased prices
which reflect the rising market. A Portfolio may have to sell securities at a
time when it is disadvantageous to do so.
The hours of trading of futures contracts may not conform to the hours
during which a Portfolio may trade the underlying securities. To the extent that
the futures markets close before the securities markets, significant price and
rate movements can take place in the securities markets that cannot be reflected
in the futures markets.
OPTIONS ON FUTURES CONTRACTS
An option on a futures contract gives the purchaser the right, but not 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 option exercise period. The writer of the
option is required upon exercise to assume an offsetting futures position (a
short position if the option is a call and a long position if the option is a
put). Upon exercise of the option, the assumption of offsetting futures
positions 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. Currently, options can
be purchased or written with respect to futures contracts on U.S. Treasury
Bills, Notes and Bonds and on the S&P 500 Stock Index and the NYSE Composite
Index.
The holder or writer of an option may terminate his or her position by
selling or purchasing an option of the same series. There is no guarantee that
such closing transactions can be effected.
LIMITATIONS ON PURCHASE AND SALE OF OPTIONS, FUTURES AND OPTIONS THEREON
Each Portfolio may write 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 Fund has undertaken with certain state securities commissions that,
so long as shares of a Portfolio of the Fund are registered in those states,
neither Portfolio will purchase (i) put options on stocks not held by the
Portfolio, (ii) put options on indices and (iii) call options on stock or stock
indices or foreign currencies if, after any such purchase, the total premiums
paid for such options would exceed 10% of the Portfolio's total assets;
provided, however, that a Portfolio may purchase put options on stock held by
the Portfolio if after such purchase the aggregate premiums paid for such
options do not exceed 20% of the Portfolio's total net assets. In addition, the
aggregate value of the securities that are the subject of put options will not
exceed 50% of the Portfolio's net assets.
POSITION LIMITS. Transactions by a Portfolio in futures contracts and
options will be subject to limitations, if any, established by each of the
exchanges, boards of trade or other trading facilities (including NASDAQ)
governing the maximum number of options in each class which may be written or
purchased by a single investor or group of investors acting in concert,
regardless of whether the options are written on the same or different
exchanges, boards of trade or other trading facilities or are held or written in
one or more accounts or through one or more brokers. Thus, the number of futures
contracts and options which the Portfolio may write or purchase may be affected
by the futures contracts and options written or purchased by other investment
advisory clients of the investment adviser. An exchange, board of trade or other
trading facility may order the liquidations of positions found to be in excess
of these limits, and it may impose certain other sanctions.
RISK FACTORS RELATING TO HIGH YIELD SECURITIES
Fixed-income securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and general
market liquidity (market risk). Lower-rated or unrated (I.E., high
B-5
<PAGE>
yield) securities are more likely to react to developments affecting market and
credit risk than are more highly-rated securities, which react primarily to
movements in the general level of interest rates. The investment adviser
considers both credit risk and market risk in making investment decisions for
the Portfolios.
The amount of high yield securities outstanding proliferated in the 1980's
in conjunction with the increase in merger and acquisition and leveraged buyout
activity. An economic downturn could severely affect the ability of highly
leveraged issuers to service their debt obligations or to repay their
obligations upon maturity. In addition, the secondary market for high yield
securities which is concentrated in relatively few market makers, may not be as
liquid as the secondary market for more highly rated securities. Under adverse
market or economic conditions, the secondary market for high yield securities
could contract further, independent of any specific adverse changes in the
condition of a particular issuer. As a result, the investment adviser could find
it more difficult to sell these securities or may be able to sell the securities
only at prices lower than if such securities were widely traded. Prices realized
upon the sale of such lower-rated or unrated securities, under these
circumstances, may be less than the prices used in calculating a Portfolio's net
asset value.
Federal laws require the divestiture by federally insured savings and loan
associations of their investments in high yield bonds and limit the
deductibility of interest by certain corporate issuers of high yield bonds.
These laws could adversely affect a Portfolio's net asset value and investment
practices, the secondary market for high yield securities, the financial
condition of issuers of these securities and the value of outstanding high yield
securities.
Lower-rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, a Portfolio may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Portfolio experiences unexpected net
redemptions, it may be forced to sell its higher-rated securities, resulting in
a decline in the overall credit quality of the Portfolio and increasing the
exposure of the Portfolio to the risks of high yield securities.
MORTGAGE-RELATED SECURITIES
Each Portfolio may also invest in Collateralized Mortgage Obligations
(CMOs). A CMO is a debt security that is backed by a portfolio of mortgages or
mortgage-backed securities. The issuer's obligation to make interest and
principal payments is secured by the underlying portfolio of mortgages or
mortgage-backed securities. CMOs generally are partitioned into several classes
with a ranked priority as to the time that principal payments will be made with
respect to each of the classes.
Each Portfolio may also invest in Real Estate Mortgage Investment Conduits
(REMICs). An issuer of REMICs may be a trust, partnership, corporation,
association, segregated pool of mortgages, or agency of the U.S. Government and,
in each case, must qualify and elect treatment as such under the Tax Reform Act
of 1986. A REMIC must consist of one or more classes of "regular interests" some
of which may be adjustable rate, and a single class of "residual interests." To
qualify as a REMIC, substantially all the assets of the entity must be directly
or indirectly secured, principally by real property. The Fund does not intend to
invest in residual interests. REMICs are intended by the U.S. Congress
ultimately to become the exclusive vehicle for the issuance of multi-class
securities backed by real estate mortgages. As of January 1, 1992, if a trust or
partnership that issues CMOs does not elect or qualify for REMIC status, it is
taxed at the entity level as a corporation.
Certain issuers of CMOs, including CMOs that have elected to be treated as
REMICs, are not considered investment companies pursuant to a Rule adopted by
the Securities and Exchange Commission (SEC), and each Portfolio may invest in
the securities of such issuers without the limitations imposed by the Investment
Company Act of 1940 on investments by an investment company in other investment
companies. In addition, in reliance on an earlier SEC interpretation, a
Portfolio's investments in certain qualifying CMOs, which cannot or do not rely
on the rule, 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
(a) invest primarily in mortgage-backed securities, (b) do not issue redeemable
securities, (c) operate under general exemptive orders exempting them from all
provisions of the Investment Company Act, and (d) are not registered or
regulated under the Investment Company Act as investment companies. To the
extent that a Portfolio selects CMOs or REMICs that do not meet the above
requirements, the Portfolio may not invest more than 10% of its assets in all
such entities and may not acquire more than 3% of the voting securities of any
single such entity.
B-6
<PAGE>
MONEY MARKET INSTRUMENTS
Each Portfolio may invest in money market instruments, including commercial
paper of 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 or its agencies. A Portfolio will
invest in foreign banks and foreign branches of U.S. banks only if, after giving
effect to such investment, all such investments would constitute less than 10%
of such Portfolio's total assets (taken at current value). Such investments may
be subject to certain risks, including future political and economic
developments, the possible imposition of withholding taxes on interest income,
the seizure or nationalization of foreign deposits and foreign exchange controls
or other restrictions.
Each Portfolio may also invest in money market instruments that are
guaranteed by an insurance company or other non-bank entity. Under the
Investment Company Act, a guaranty is not deemed to be a security of the
guarantor for purposes of satisfying the diversification requirements provided
that the securities issued or guaranteed by the guarantor and held by a
Portfolio do not exceed 10% of the Portfolio's total assets.
REPURCHASE AGREEMENTS
The Fund's repurchase agreements will be collateralized by U.S. Government
obligations. The Fund will enter into repurchase transactions only with parties
meeting creditworthiness standards approved by the Fund's Trustees. The Fund's
investment adviser will monitor the creditworthiness of such parties under the
general supervision of the Trustees. In the event of a default or bankruptcy by
a seller, the Fund will promptly seek to liquidate 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 repurchase price, the Fund will
suffer a loss.
The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Mutual Fund Management, Inc. (PMF) pursuant to
an order of the SEC. On a daily basis, any uninvested cash balances of the Fund
may be aggregated with those of such investment companies and invested in one or
more repurchase agreements. Each fund participates in the income earned or
accrued in the joint account based on the percentage of its investment.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, each Portfolio may lend
its portfolio securities to brokers, dealers and financial institutions provided
that outstanding loans do not exceed in the aggregate 33% of the value of the
Portfolio's total assets and provided further that such loans are callable at
any time by the Portfolio and are at all times secured by cash or equivalent
collateral that is equal to at least the market value, determined daily, of the
loaned securities. The advantage of such loans is that a Portfolio continues to
receive payments in lieu of the interest and dividends of the loaned securities,
while at the same time earning interest either directly from the borrower or on
the 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 Portfolio at any time. If the borrower fails to maintain the requisite amount
of collateral, the loan automatically terminates and the Portfolio can 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 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 determined to be
creditworthy pursuant to procedures approved by the Trustees of the Fund. On
termination of the loan, the borrower is required to return the securities to
the Portfolio, and any gain or loss in the market price during the loan would
inure to the Portfolio.
Since voting or consent rights which accompany loaned securities pass to the
borrower, each Portfolio will follow the policy of calling the loan, in whole or
in part as may be appropriate, to permit the exercise of such rights if the
matters involved would have a material effect on the Portfolio's investment in
the securities which are the subject of the loan. A Portfolio will pay
reasonable finder's, administrative and custodial fees in connection with a loan
of its securities or may share the interest earned on collateral with the
borrower.
WARRANTS
Each Portfolio will not invest more than 5% of its net assets in warrants,
nor will it invest more than 2% of its net assets in warrants which are not
listed on the New York or American Stock Exchanges or a major foreign exchange.
In the application of such limitation, warrants will be valued at the lower of
cost or market value, except that warrants acquired by a Portfolio in units or
attached to other securities will be deemed to be without value.
B-7
<PAGE>
ILLIQUID SECURITIES
The Fund may not invest more than 5% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market (either within or outside of the United States) or
legal or contractual restrictions on resale. 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 investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
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 National Association of Securities Dealers, Inc.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Trustees. In reaching liquidity decisions, the investment adviser will consider,
INTER ALIA, the following factors: (1) the frequency of trades and quotes for
the security; (2) the number of dealers wishing to puchase 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 (E.G., 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, (i) it must be rated in one of the two
highest rating categories by at least two nationally recognized statistical
rating organizations (NRSRO), or if only one NRSRO rates the securities, by that
NRSRO, or, if unrated, be of comparable quality in the view of the investment
adviser, and (ii) it must not be "traded flat" (I.E., without accrued interest)
or in default as to principal or interest. Repurchase agreements subject to
demand are deemed to have a maturity equal to the notice period.
SECURITIES OF OTHER INVESTMENT COMPANIES
Each Portfolio may invest up to 5% of its total assets in securities of
other registered investment companies. Generally, the Portfolios do not intend
to invest in such securities. If a Portfolio does invest in securities of other
registered investment companies, shareholders of the Portfolio may be subject to
duplicate management and advisory fees.
PORTFOLIO TURNOVER
As a result of the investment policies described above, each Portfolio may
engage in a substantial number of portfolio transactions, but each Portfolio's
portfolio turnover rate is not expected to exceed 200%. The portfolio turnover
rates for the Conservatively Managed Portfolio for the fiscal years ended July
31, 1992 and 1993 were 83% and 105%, respectively. The portfolio turnover rate
for the Strategy Portfolio for the fiscal year ended July 31, 1993 was 145%. Due
to market volatility, the portfolio turnover rate for the Strategy Portfolio for
the fiscal year ended July 31, 1992 was 241%. The portfolio turnover rate is
B-8
<PAGE>
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 such portfolio securities. High portfolio turnover involves
correspondingly greater brokerage commissions and other transaction costs, which
are borne directly by each Portfolio. In addition, high portfolio turnover may
also mean that a proportionately greater amount of distributions to shareholders
will be taxed as ordinary income rather than long-term capital gains compared to
investment companies with lower portfolio turnover. See "Portfolio Transactions
and Brokerage" and "Taxes."
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 the outstanding voting securities of a Portfolio. A "majority of the
outstanding voting securities of a Portfolio," when used in this Statement of
Additional Information, means the lesser of (i) 67% of the voting shares
represented at a meeting at which more than 50% of the outstanding voting shares
are present in person or represented by proxy or (ii) more than 50% of the
outstanding voting shares.
Each Portfolio may not:
1. Purchase securities on margin (but the Portfolio may obtain such
short-term credits as may be necessary for the clearance of transactions);
provided that the deposit or payment by the Portfolio of initial or maintenance
margin in connection with futures contracts or options thereon is not considered
the purchase of a security on margin.
2. Make short sales of securities or maintain a short position, except
short sales against-the-box.
3. Issue senior securities, borrow money or pledge its assets, except that
the Portfolio may borrow up to 20% of the value of its total assets (calculated
when the loan is made) for temporary, extraordinary or emergency purposes or for
the clearance of transactions. The Portfolio may pledge up to 20% of the value
of its total assets to secure such borrowings. For purposes of this restriction,
the preference as to shares of a Portfolio in liquidation and as to dividends
over all other Portfolios of the Fund with respect to assets specifically
allocated to that Portfolio, the purchase or sale of securities on a when-issued
or delayed delivery basis, the purchase of forward foreign currency exchange
contracts and collateral arrangements relating thereto, the purchase and sale of
options, financial futures contracts, options on such contracts and collateral
arrangements with respect thereto and with respect to interest rate swap
transactions and obligations of the Fund to Trustees pursuant to deferred
compensation arrangements are not deemed to be the issuance of a senior security
or a pledge of assets.
4. 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
the Portfolio's assets, more than 5% of the total assets of the Portfolio
(determined at the time of investment) would then be invested in securities of a
single issuer or (ii) more than 25% of the total assets of the Portfolio
(determined at the time of investment) would be invested in a single industry.
As to utility companies, gas, electric and telephone companies will be
considered as separate industries.
5. Purchase any security if as a result the Portfolio would then hold more
than 10% of the outstanding voting securities of an issuer.
6. Purchase any security if as a result the Portfolio would then have more
than 5% of its total assets (determined at the time of investment) invested in
securities of companies (including predecessors) less than three years old,
except that the Portfolio may invest in the securities of any U.S. Government
agency or instrumentality, and in any security guaranteed by such an agency or
instrumentality.
7. Buy or sell real estate or interests in real estate, except that it may
purchase and sell securities which are secured by real estate, securities of
companies which invest or deal in real estate and publicly traded securities of
real estate investment trusts.
8. Buy or sell commodities or commodity contracts, except that it may
purchase and sell futures contracts and options thereon. (For purposes of this
restriction, a forward foreign currency exchange contract is not deemed to be a
commodity or commodity contract.)
9. 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.
10. Make investments for the purpose of exercising control or management.
B-9
<PAGE>
11. Invest in securities of other registered investment companies, except by
purchases in the open market involving only customary brokerage commissions and
as a result of which not more than 5% of its total assets (determined at the
time of investment) would be invested in such securities, or except as part of a
merger, consolidation or other acquisition.
12. Invest in interests in oil, gas or other mineral exploration or
development programs, except that the Portfolio may invest in the securities of
companies which invest in or sponsor such programs.
13. Make loans, except through repurchase agreements and loans of portfolio
securities (limited to 33% of the Portfolio's total assets).
Each Portfolio has undertaken with certain state securities commissions that
it does not intend to engage in arbitrage transactions.
In order to comply with certain state "blue sky" restrictions, each
Portfolio will not as a matter of operating policy:
1._Purchase the securities of any one issuer if, to the knowledge of the
Fund, any officer or Trustee of the Fund or any officer or director of the
Manager or Subadviser owns more than 1/2 of 1% of the outstanding securities of
such issuer, and such officers, Trustees and directors who own more than 1/2 of
1% own in the aggregate more than 5% of the outstanding securities of such
issuer;
2._Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, or securities of
issuers which are restricted as to disposition, if more than 15% of its total
assets would be invested in such securities. This restriction shall not apply to
mortgage-backed securities, asset-backed securities or obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities;
3._Invest more than 5% of its total assets in securities of unseasoned
issuers, including their predecessors, which have been in operation for less
than three years, and in equity securities of issuers which are not readily
marketable; and
4._Purchase securities which are secured by real estate or securities of
companies which invest or deal in real estate unless such securities are readily
marketable; and invest in oil, gas and mineral leases.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of a Portfolio'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 the
Portfolio's asset coverage for borrowings falls below 300%, the Portfolio will
take prompt action to reduce its borrowings, as required by applicable law.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST 5 YEARS
- --------------------------- ----------------------- -----------------------------------------------------------------
<S> <C> <C>
Edward D. Beach Trustee President and Director of BMC Fund, Inc., a closed-end investment
c/o Prudential Mutual Fund company; prior thereto Vice Chairman of Broyhill Furniture
Management, Inc. Industries, Inc.; Certified Public Accountant; Secretary and
One Seaport Plaza Treasurer of Broyhill Family Foundation, Inc.; President,
New York, NY Treasurer and Director of First Financial Fund, Inc. and The
High Yield Plus Fund, Inc.; Director of The Global Government
Plus Fund, Inc. and The Global Yield Fund, Inc.
Donald D. Lennox Trustee Chairman (since February 1990) and Director (since April 1989) of
c/o Prudential Mutual Fund International Imaging Materials, Inc.; Retired Chairman, Chief
Management, Inc. Executive Officer and Director of Schlegel Corporation
One Seaport Plaza (industrial manufacturing) (March 1987-February 1989); Director
New York, NY of Gleason Corporation, Navistar International Corporation,
Personal Sound Technologies, Inc., The Global Government Plus
Fund, Inc. and The High Yield Income Fund, Inc.
Douglas H. McCorkindale Trustee Vice Chairman, Gannett Co. Inc. (publishing and media) (since
c/o Prudential Mutual Fund March 1984); Director of Continental Airlines, Inc., Gannett Co.
Management, Inc. Inc., Rochester Telephone Corporation and The Global Government
One Seaport Plaza Plus Fund, Inc.
New York, NY
</TABLE>
B-10
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST 5 YEARS
- --------------------------- ----------------------- -----------------------------------------------------------------
<S> <C> <C>
*Lawrence C. McQuade President and Vice Chairman of Prudential Mutual Fund Management,
One Seaport Plaza Trustee Inc. (PMF) (since 1988); Managing Director,
New York, NY Investment Banking, Prudential Securities
Incorporated (Prudential Securities) (1988-1991);
Director of Quixote Corporation (since February
1992) and BUNZL, P.L.C. (since June 1991); formerly
Director of Kaiser Tech. Ltd. and Kaiser Aluminum
and Chemical Corp. (March 1987-November 1988) and
Crazy Eddie Inc. (1987-1990); formerly Executive
Vice President and Director of W.R. Grace & Company
(1975-1987); President and Director of The Global
Government Plus Fund, Inc., The Global Yield Fund,
Inc. and The High Yield Income Fund, Inc.
Thomas T. Mooney Trustee President of the Greater Rochester Metro Chamber of
c/o Prudential Mutual Commerce; formerly Rochester City Manager; Trustee
Fund of Center for Governmental Research, Inc.; Director
Management, Inc. of Blue Cross of Rochester, Monroe County Water
One Seaport Plaza Authority, Rochester Jobs, Inc., Executive Service
New York, NY Corps of Rochester, Monroe County Industrial
Development Corporation, Northeast Midwest
Institute, First Financial Fund, Inc., The Global
Government Plus Fund, Inc., The Global Yield Fund,
Inc. and The High Yield Plus Fund, Inc.
*Richard A. Redeker Trustee President, Chief Executive Officer and Director
One Seaport Plaza (since October 1993), PMF; Executive Vice
New York, NY President, Director and Member of Operating
Committee (since October 1993), Prudential
Securities; Director (since October 1993) of
Prudential Securities Group, Inc.; formerly Senior
Executive Vice President and Director of Kemper
Financial Services, Inc. (September 1978-September
1993); Director of The Global Government Plus Fund,
Inc. and The High Yield Income Fund, Inc.
Louis A. Weil, III Trustee Publisher and Chief Executive Officer, Phoenix
c/o Prudential Mutual Newspapers, Inc. (since August 1991); Director of
Fund Central Newspapers, Inc. (since September 1991);
Management, Inc. prior thereto, Publisher of Time Magazine (May
One Seaport Plaza 1989-March 1991); formerly President, Publisher and
New York, NY Chief Executive Officer of The Detroit News
(February 1986-August 1989); formerly member of the
Advisory Board, Chase Manhattan Bank-Westchester;
Director of The Global Government Plus Fund, Inc.
Robert F. Gunia Vice President Chief Administrative Officer (since July 1990),
One Seaport Plaza Director (since January 1989) and Executive Vice
New York, NY President, Treasurer and Chief Financial Officer
(since June 1987) of PMF; Senior Vice President
(since March 1987) of Prudential Securities; Vice
President and Director (since May 1989) of The Asia
Pacific Fund, Inc.
Susan C. Cote Treasurer and Senior Vice President (since January 1989) and First
One Seaport Plaza Principal Vice President (June 1987-December 1988) of PMF;
New York, NY Financial and Senior Vice President (since January 1992) and Vice
Accounting President (January 1986-December 1991) of
Officer Prudential Securities.
<FN>
- ------------------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
</TABLE>
B-11
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST 5 YEARS
- --------------------------- ----------------------- -----------------------------------------------------------------
<S> <C> <C>
S. Jane Rose Secretary Senior Vice President (since January 1991), Senior Counsel (since
One Seaport Plaza June 1987) and First Vice President (June 1987-December 1990) of
New York, NY PMF; Senior Vice President and Senior Counsel (since July 1992)
of Prudential Securities; formerly Vice President and Associate
General Counsel of Prudential Securities.
Marguerite E. H. Morrison Assistant Secretary Vice President and Associate General Counsel (since June 1991) of
One Seaport Plaza PMF; Vice President and Associate General Counsel of Prudential
New York, NY Securities.
</TABLE>
Trustees and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities or Prudential Mutual Fund Distributors, Inc. (PMFD)
The officers conduct and supervise the daily business operations of the
Fund, while the Trustees, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
The Fund pays each of its Trustees who is not an affiliated person of PMF
annual compensation of $8,500 in addition to certain out-of-pocket expenses.
Trustees may receive their Trustees' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of Trustees' fees 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 at the daily rate of return of the Fund. Payment of the
interest so accrued is also deferred and accruals become payable at the option
of the Trustee. The Fund's obligation to make payments of deferred Trustees'
fees, together with interest thereon, is a general obligation of the Fund.
As of June 17, 1994, the Trustees and officers of the Fund, as a group,
owned beneficially less than 1% of the outstanding shares of beneficial interest
of each Portfolio of the Fund.
As of June 17, 1994, Prudential Securities was record holder for other
beneficial owners of 978,524 Class A shares (or 31% of the outstanding Class A
shares) of the Conservatively Managed Portfolio and 1,465,175 Class A shares (or
52% of the outstanding Class A shares) of the Strategy Portfolio and 14,137,451
Class B shares (or 35% of the outstanding Class B shares) of the Conservatively
Managed Portfolio and 17,098,536 Class B shares (or 55% of the outstanding Class
B shares) of the Strategy Portfolio. In the event of any meetings of
shareholders, Prudential Securities will forward, or cause the forwarding of,
proxy material to the beneficial owners for which it is the record holder.
MANAGER
The manager of the Fund is Prudential Mutual Fund Management, Inc. (PMF or
the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as manager
to all of the other investment companies that, together with the Fund, comprise
the Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus. As of June 30, 1994, PMF managed and/or administered open-end and
closed-end management investment companies with assets of approximately $47
billion. According to the Investment Company Institute, as of April 30, 1994,
the Prudential Mutual Funds were the 12th largest family of mutual funds in the
United States.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Trustees and in
conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolios, including
the purchase, retention, disposition and loan of securities. In connection
therewith, PMF is obligated to keep certain books and records of the Fund. PMF
also administers the Fund's business affairs and, in connection therewith,
furnishes the Fund with office facilities, together with those ordinary clerical
and bookkeeping services which are not being furnished by State Street Bank and
Trust Company (State Street or the Custodian), the Fund's custodian, and
Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), the Fund's
transfer and dividend disbursing agent. The management services of PMF for the
Fund are not exclusive under the terms of the Management Agreement and PMF is
free to, and does, render management services to others.
B-12
<PAGE>
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .65 of 1% of the average daily net assets of each
Portfolio. The fee is computed daily and payable monthly. The Management
Agreement also provides that, in the event the expenses of the Fund (including
the fees of PMF, 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 Fund'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 Fund's shares are qualified for offer and sale,
the compensation due PMF will be reduced by the amount of such excess.
Reductions in excess of the total compensation payable to PMF will be paid by
PMF to the Fund. No such reductions were required during the fiscal year ended
July 31, 1993. Currently, the Fund believes that the most restrictive expense
limitation of state securities commissions is 2 1/2% of a fund's average daily
net assets up to $30 million, 2% of the next $70 million of such assets and
1 1/2% of such assets in excess of $100 million.
In connection with its management of the business affairs of the Fund, PMF
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Trustees who are not affiliated persons of PMF or the
Fund's investment adviser;
(b) all expenses incurred by PMF or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the Fund
as described below; and
(c) the costs and expenses payable to Prudential Investment Corporation
(PIC) pursuant to the subadvisory agreement between PMF and PIC (the Subadvisory
Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b) the
fees and expenses of Trustees who are not affiliated persons of the Manager or
the Fund's investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer and Dividend Disbursing Agent, including the cost of
providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Fund to governmental agencies, (g) the fees of any
trade associations of which the Fund may be a member, (h) the cost of share
certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) certain organization expenses of the Fund and the fees
and expenses involved in registering and maintaining registration of the Fund
and of its shares with the SEC, registering the Fund and qualifying its shares
under state securities laws, including the preparation and printing of the
Fund'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, (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business and (m) distribution fees.
The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act. The Management Agreement
was last approved by the Trustees of the Fund, including a majority of the
Trustees who are not parties to the contract or interested persons of any such
party, as defined in the Investment Company Act, on May 3, 1994 and by
shareholders of each Portfolio of the Fund on February 19, 1988.
For the fiscal year ended July 31, 1993, PMF received management fees of
$1,837,757 and $2,362,366 on behalf of the Conservatively Managed Portfolio and
Strategy Portfolio, respectively. For the fiscal year ended July 31, 1992, PMF
received management fees of $1,276,999 and $1,840,991 on behalf of the
Conservatively Managed Portfolio and Strategy Portfolio, respectively, and for
the fiscal year ended July 31, 1991, PMF received management fees of $992,289
and $1,240,934 on behalf of the Conservatively Managed Portfolio and the
Strategy Portfolio, respectively.
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser).
The Subadvisory Agreement provides that PIC will furnish investment advisory
services in connection with the management of the Fund. In connection therewith,
PIC is
B-13
<PAGE>
obligated to keep certain books and records of the Fund. PMF continues to have
responsibility for all investment advisory services pursuant to the Management
Agreement and supervises PIC's performance of such services. PIC is reimbursed
by PMF for the reasonable costs and expenses incurred by PIC in furnishing those
services.
The Subadvisory Agreement was last approved by the Trustees, including a
majority of the Trustees who are not parties to the contract or interested
persons of any such party as defined in the Investment Company Act, on May 3,
1994, and by shareholders of each Portfolio of the Fund on February 19, 1988.
The Subadvisory 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. The Subadvisory Agreement may be
terminated by the Fund, PMF or PIC upon not more than 60 days', nor less than 30
days', written notice. The Subadvisory 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 Subadviser (The Prudential Investment Corporation) are
subsidiaries of Prudential which, as of December 31, 1993, is one of the largest
financial insititutions in the world and the largest insurance company in North
America. Prudential has been engaged in the insurance business since 1875. In
July 1993, INSTITUTIONAL INVESTOR ranked Prudential the third largest
institutional money manager of the 300 largest money management organizations in
the United States as of December 31, 1992.
DISTRIBUTOR
Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New
York, New York 10292, acts as the distributor of the Class A shares of the Fund.
Prudential Securities Incorporated (Prudential Securities), One Seaport Plaza,
New York, New York 10292, acts as the distributor of the Class B and Class C
shares of the Fund.
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 Fund
under Rule 12b-1 under the Investment Company Act and separate distribution
agreements (the Distribution Agreements), PMFD and Prudential Securities
(collectively, the Distributor) incur the expenses of distributing the Fund's
Class A, Class B and Class C shares. See "How the Fund is Managed--Distributor"
in the Prospectus.
Prior to January 22, 1990, the Fund offered only one class of shares (the
then existing Class B shares). On October 11, 1989, the Trustees, including a
majority of the Trustees who are not interested persons of the Fund and who have
no direct or indirect financial interest in the operation of the Class A or
Class B Plan or in any agreement related to either Plan (the Rule 12b-1
Trustees), at a meeting called for the purpose of voting on each Plan, adopted a
new plan of distribution for the Class A shares of the Fund (the Class A Plan)
and approved an amended and restated plan of distribution with respect to the
Class B shares of the Fund (the Class B Plan). On May 4, 1993, the Trustees,
including a majority of the Rule 12b-1 Trustees, at a meeting called for the
purpose of voting on each Plan, approved the continuance of the Plans and
Distribution Agreements and approved modifications of the Fund's Class A and
Class B Plans and Distribution Agreements to conform them with recent amendments
to the National Association of Securities Dealers, Inc. (NASD) maximum sales
charge rule described below. As so modified, the Class A Plan provides that (i)
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 the maintenance of shareholder accounts
(service fee) and (ii) total distribution fees (including the service fee of .25
of 1%) may not exceed .30 of 1%. As so modified, the Class B Plan provides that
(i) up to .25 of 1% of the average daily net assets of the Class B shares may be
paid as a service fee and (ii) up to .75 of 1% (not including the service fee)
of the average daily net assets of the Class B shares (asset-based sales charge)
may be used as reimbursement for distribution-related expenses with respect to
the Class B shares. On May 4, 1993, the Trustees, including a majority of the
Rule 12b-1 Trustees, at a meeting called for the purpose of voting on each Plan,
adopted a plan of distribution for the Class C shares of the Fund and approved
further amendments to the plans of distribution for the Fund's Class A and Class
B shares, changing them from reimbursement type plans to compensation type
plans. The Plans were last approved by the Trustees, including a majority of the
Rule 12b-1 Trustees, on May 3, 1994. The Class A Plan, as amended, was approved
by Class A and Class B shareholders, and the Class B Plan, as amended, was
approved by Class B shareholders on July 19, 1994. The Class C Plan was approved
by the sole shareholder of Class C shares on August 1, 1994.
B-14
<PAGE>
CLASS A PLAN. For the fiscal year ended July 31, 1993, PMFD received
payments of $30,784 and $48,431 on behalf of the Conservatively Managed
Portfolio and Strategy Portfolio, respectively, under the Class A Plan. These
amounts were primarily expended for payments of account servicing fees to
financial advisers and other persons who sell Class A shares. For the fiscal
year ended July 31, 1993, PMFD also received approximately $405,000 and $338,000
on behalf of the Conservatively Managed Portfolio and Strategy Portfolio,
respectively, in initial sales charges.
CLASS B PLAN
For the fiscal year ended July 31, 1993, Prudential Securities received
$425,000 and $736,000 from the Conservatively Managed Portfolio and Strategy
Portfolio, respectively, in contingent deferred sales charges and spent
approximately the following amounts on behalf of the Portfolios of the Fund:
<TABLE>
<CAPTION>
PRINTING AND COMMISSION COMPENSATION APPROXIMATE
MAILING PAYMENTS TO TO PRUSEC FOR TOTAL AMOUNT
PROSPECTUSES TO INTEREST FINANCIAL OVERHEAD COMMISSION SPENT BY
OTHER THAN AND/OR ADVISERS OF COSTS PAYMENTS TO DISTRIBUTOR ON
CURRENT CARRYING PRUDENTIAL OF PRUDENTIAL REPRESENTATIVES AND BEHALF OF
PORTFOLIO SHAREHOLDERS CHARGES SECURITIES SECURITIES* OTHER EXPENSES* PORTFOLIO
- ------------------------- --------------- --------- ----------- --------------- ------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Conservatively Managed
Portfolio............... $19,400 $358,900 $ 887,800 $ 1,182,900 $2,125,800 $ 4,574,800
Strategy Portfolio....... 18,600 298,900 1,115,100 1,571,200 857,700 3,861,500
<FN>
- ------------------------
* Including lease, utility and sales promotional expenses.
</TABLE>
The term "overhead costs" represents (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.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by investors upon certain redemptions of Class B shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges"
in the Prospectus.
CLASS C PLAN. Prudential Securities receives the proceeds of contingent
deferred sales charges paid by investors upon certain redemptions of Class C
shares. See "Shareholder Guide -- How to Sell Your Shares -- Contingent Deferred
Sales Charges" in the Prospectus. Prior to the date of this Statement of
Additional Information, no distribution expenses were incurred under the Class C
Plan.
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 Trustees, including a majority vote of 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 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 (by both Class A
and Class B shareholders, voting separately, in the case of material amendments
to the Class A Plan), and all material amendments are required to be approved by
the Trustees in the manner described above. Each Plan will automatically
terminate in the event of its assignment. The Fund will not be contractually
obligated to pay expenses incurred under any Plan if it is terminated or not
continued.
Pursuant to each Plan, the Trustees will review at least quarterly a written
report of the distribution expenses incurred on behalf of each class of shares
of the Portfolios by the Distributor. The report includes 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 the Rule
12b-1 Trustees shall be committed to the Rule 12b-1 Trustees.
B-15
<PAGE>
Pursuant to each Distribution Agreement, the Fund has agreed to indemnify
PMFD and Prudential Securities to the extent permitted by applicable law against
certain liabilities under the Securities Act of 1933, as amended. Each
Distribution Agreement was last approved by the Trustees, including a majority
of the Rule 12b-1 Trustees, on May 3, 1994.
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. Interest charges on unreimbursed distribution expenses 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 included in
the calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of the Fund may not exceed .75 of 1% per class. The 6.25% limitation
applies to each class of a Portfolio of the 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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities and
options on securities and futures for each Portfolio of the Fund, the selection
of brokers, dealers and futures commission merchants to effect the transactions
and the negotiation of brokerage commissions, if any. The term "Manager" as used
in this section includes the Subadviser. Broker-dealers may receive brokerage
commissions on portfolio transactions, including options and the purchase and
sale of underlying securities upon the exercise of options. Orders may be
directed to any broker or futures commission merchant including, to the extent
and in the manner permitted by applicable law, Prudential Securities and its
affiliates. Brokerage commissions on United States securities, options and
futures exchanges or boards of trade are subject to negotiation between the
Manager and the broker or futures commission merchant.
In the over-the-counter market, securities and bonds, including 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. On occasion, certain money market instruments and U.S.
Government agency securities may be purchased directly from the issuer, in which
case no commissions or discounts are paid. The Fund will not deal with
Prudential Securities in any transaction in which Prudential Securities (or any
affiliate) acts as principal. Thus, it will not deal with Prudential Securities
acting as market maker, and it will not execute a negotiated trade with
Prudential Securities if execution involves Prudential Securities acting as
principal with respect to any part of the Fund's order.
In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. Within the framework of this policy, the Manager will
consider the research and investment services provided by brokers, dealers or
futures commission merchants who effect or are parties to portfolio transactions
of the Fund, the Manager or the Manager'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 the
Manager in connection with all of its investment activities, and some of such
services obtained in connection with the execution of transactions for the Fund
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 of such other accounts, whose aggregate assets are far
larger than the Fund's, and the services furnished by such brokers, dealers or
futures commission merchants may be used by the Manager in providing investment
management for the Fund. 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, dealer or
futures commission merchant in the light of generally prevailing rates. The
policy of the Manager is to pay higher commissions to brokers, other than
Prudential Securities, for particular transactions than might be charged if a
different broker had been selected, on occasions when, in the Manager's opinion,
this policy furthers the objective of obtaining best price and execution. In
addition, the Manager is authorized to pay higher commissions on brokerage
transactions for the Fund to brokers other than Prudential Securities in order
to secure research and investment services described above, subject to review by
the Fund's Trustees from time to time as to the extent and continuation of this
practice. The allocation of orders among brokers and the commission rates paid
are reviewed periodically by the Fund's Trustees. Portfolio securities may not
be purchased from any underwriting or selling syndicate of which Prudential
Securities (or any affiliate), during the existence of the syndicate, is a
principal underwriter (as defined in the Investment Company Act), except in
accordance with rules of the SEC. This limitation, in
B-16
<PAGE>
the opinion of the Fund, will not significantly affect the Portfolios' ability
to pursue their present investment objectives. However, in the future in other
circumstances, the Portfolios may be at a disadvantage because of this
limitation in comparison to other funds with similar objectives but not subject
to such limitations.
Subject to the above considerations, Prudential Securities may act as a
securities broker or futures commission merchant for the Fund. In order for
Prudential Securities (or any affiliate) to effect any portfolio transactions
for the Fund, the commissions, fees or other remuneration received by Prudential
Securities (or any affiliate) must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers or futures
commission merchants in connection with comparable transactions involving
similar securities or futures contracts being purchased or sold on an exchange
or board of trade during a comparable period of time. This standard would allow
Prudential Securities (or any affiliate) to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker or
futures commission merchant in a commensurate arm's-length transaction.
Furthermore, the Trustees of the Fund, including a majority of the
non-interested Trustees, have adopted procedures which are reasonably designed
to provide that any commissions, fees or other remuneration paid to Prudential
Securities (or any affiliate) are consistent with the foregoing standard. In
accordance with Section 11(a) of the Securities Exchange Act of 1934, Prudential
Securities may not retain compensation for effecting transactions on a national
securities exchange for a Portfolio unless the Fund has expressly authorized the
retention of such compensation. Prudential Securities must furnish to the Fund
at least annually a statement setting forth the total amount of all compensation
retained by Prudential Securities from transactions effected for the Portfolios
during the applicable period. Brokerage and futures transactions with Prudential
Securities (or any affiliate) are also subject to such fiduciary standards as
may be imposed upon Prudential Securities (or such affiliate) by applicable law.
Transactions in options by the Fund will be subject to limitations
established by each of the exchanges governing the maximum number of options
which may be written or held by a single investor or group of investors acting
in concert, regardless of whether the options are written or held on the same or
different exchanges or are written or held in one or more accounts or through
one or more brokers. Thus, the number of options which the Fund may write or
hold may be affected by options written or held by the Manager and other
investment advisory clients of the Manager. An exchange may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
The table below sets forth information concerning the payment of commissions
by the Fund, including the amount of such commissions paid to Prudential
Securities, for the three years ended July 31, 1993:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1993 1992 1991
------------ ------------ ------------
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund.................................. $ 714,203 $ 659,790 $ 536,465
Total brokerage commissions paid to Prudential
Securities................................................................... $ 38,171 $ 71,200 $ 47,000
Percentage of total brokerage commissions paid to Prudential
Securities................................................................... 5.3% 10.8% 8.8%
</TABLE>
The Fund effected approximately 5.6% of the total dollar amount of its
transactions involving the payment of commissions to Prudential Securities
during the year ended July 31, 1993. Of the total brokerage commissions paid
during such period, $216,608 and $385,021 (or 30% and 53%), respectively, were
paid to firms which provide research, statistical or other services to PMF on
behalf of the Conservatively Managed Portfolio and Strategy Portfolio,
respectively. PMF has not separately identified a portion of such brokerage
commissions as applicable to the provision of such research, statistical or
other services.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of each Portfolio of the Fund may be purchased at a price equal to
the next determined net asset value 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 shares) or (ii) on a deferred basis (Class B or Class C shares). See
"Shareholder Guide--How to Buy Shares of the Fund" in the Prospectus.
Each class of shares represents an interest in the same portfolio of
investments of each Portfolio of the Fund and has the same rights, except that
(i) each class bears the separate expenses of its Rule 12b-1 distribution and
service plan, (ii) each class has exclusive voting rights with respect to its
plan (except that the Fund has agreed with the SEC in connection with the
offering
B-17
<PAGE>
of a conversion feature on Class B shares to submit any amendment of the Class A
distribution and service plan to both Class A and Class B shareholders) and
(iii) only Class B shares have a conversion feature. See "Distributor." Each
class also has separate exchange privileges. See "Shareholder Investment
Account--Exchange Privilege."
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of 5%
and Class B* and Class C* shares of the Fund are sold at net asset value. Using
each Portfolio's net asset value at July 31, 1993, the maximum offering price of
the Fund's shares is as follows:
<TABLE>
<CAPTION>
CONSERVATIVELY
STRATEGY MANAGED
PORTFOLIO PORTFOLIO
--------- --------------
<S> <C> <C>
CLASS A
Net asset value and redemption price per Class A share..... $ 11.72 $11.75
Maximum sales charge (5% of offering price)................ .62 .62
--------- ------
Maximum offering price to public........................... $ 12.34 $12.37
CLASS B
Net asset value, offering price and redemption price to
public per Class B share*................................ $ 11.79 $11.72
--------- ------
--------- ------
CLASS C
Net asset value, offering price and redemption price to
public per Class C share*................................ $ 11.79 $11.72
--------- ------
--------- ------
<FN>
- ------------------------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus. Class C shares
did not exist on July 31, 1993.
</TABLE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "Shareholder
Guide--Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) 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);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefits 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 Distributor 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. 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
B-18
<PAGE>
Privilege," may aggregate the value of their existing holdings of shares of a
Portfolio 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. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (net asset value plus maximum sales charge) as
of the previous business day. See "How the Fund Values its Shares" in the
Prospectus. The Distributor 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.
LETTERS OF INTENT. Reduced sales charges are also 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 Portfolio and shares of other Prudential Mutual Funds. All shares of each
Portfolio 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 Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The Distributor must be
notified at the time of purchase that the investor is entitled to a reduced
sales charge. The reduced sales charge will be granted subject to confirmation
of the investor's holdings. Letters of Intent are not available to individual
participants any retirement or group plans.
A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in the name of the
purchaser. The effective date of a Letter of Intent may be back-dated up to 90
days, in order that any investments made during this 90-day period, valued at
the purchaser's cost, can be applied to the fulfillment of the Letter of Intent
goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the purchaser is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and the 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. If the goal is exceeded in
an amount which qualifies for a lower sales charge, a price adjustment is made
by refunding to the purchaser the amount of excess sales charge, if any, paid
during the thirteen-month period. Investors electing to purchase Class A shares
of a Portfolio pursuant to a Letter of Intent should carefully read such Letter
of Intent.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide--How to Sell Your Shares--Waiver of
the Contingent Deferred Sales Charges--Class B Shares" in the Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit the
supporting documentation set forth below.
<TABLE>
<S> <C>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death certificate or, in
the case of a trust, a copy of the grantor's death
certificate, plus a copy of the trust agreement
identifying the grantor.
Disability - An individual will be A copy of the Social Security Administration award
considered disabled if he or she is letter or a letter from a physician on the physician's
unable to engage in any substantial letterhead stating that the shareholder (or, in the
gainful activity by reason of any case of a trust, the grantor) is permanently disabled.
medically determinable physical or mental The letter must also indicate the date of disability.
impairment which can be expected to
result in death or to be of
long-continued and indefinite duration.
Distribution from an IRA or 403(b) A copy of the distribution form from the custodial
Custodial Account firm indicating (i) the date of birth of the
shareholder and (ii) that the shareholder is over age
59 1/2 and is taking a normal distribution--signed by
the shareholder.
</TABLE>
B-19
<PAGE>
<TABLE>
<S> <C>
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.
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchase an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares of
the Fund following the second purchase was $550,000, the quantity discount would
be available for the second purchase of $450,000 but not for the first purchase
of $100,000. The quantity discount will be imposed at the following rates
depending on whether the aggregate value exceeded $500,000 or $1 million:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVESTED
OR REDEMPTION PROCEEDS
YEAR SINCE PURCHASE ----------------------------------------
PAYMENT MADE $500,001 TO $1 MILLION OVER $1 MILLION
- ----------------------------------------------------------- ---------------------- ---------------
<S> <C> <C>
First...................................................... 3.0% 2.0%
Second..................................................... 2.0% 1.0%
Third...................................................... 1.0% 0%
Fourth and thereafter...................................... 0% 0%
</TABLE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of any Portfolio, a Shareholder
Investment Account is established for each investor under which the shares are
held for the investor by the Transfer Agent. If a share certificate is desired,
it must be requested in writing for each transaction. Certificates are issued
only for full shares and may be redeposited in the Account at any time. There is
no charge to the investor for issuance of a certificate. The Fund 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 a Portfolio. 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 and/or
distributions sent in cash rather than reinvested. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payment will be made directly to the dealer. Any
shareholder who receives a cash payment representing a dividend or distribution
may reinvest such dividend or distribution at net asset value by returning the
check or the proceeds to the Transfer Agent within 30 days after the payment
date. The investment will be made at the net asset value per share next
determined after receipt of the check or proceeds by the Transfer Agent. Such
shareholders will receive credit for any contingent deferred sales charge paid
in connection with the amount of proceeds being reinvested.
EXCHANGE PRIVILEGE
Each Portfolio of the Fund makes available to its shareholders the privilege
of exchanging their shares 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 a Portfolio. All exchanges are
made on the basis of relative net asset value next determined after receipt of
an order in proper form.
B-20
<PAGE>
An exchange will be treated as a redemption and purchase for tax purposes.
Shares may be exchanged for shares of another fund only if shares of such fund
may legally be sold under applicable state laws. 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.
CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds, shares of Prudential
Government Securities Trust (Intermediate Term Series) and shares of the money
market funds specified below. No fee or sales load will be imposed upon the
exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the Exchange Privilege only to acquire Class
A shares of the Prudential Mutual Funds participating in the Exchange Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets
Prudential Tax-Free Money Fund
CLASS B AND CLASS C. Shareholders of each Portfolio may exchange their Class
B and Class C shares for Class B and Class C shares, respectively, of certain
other Prudential Mutual Funds and shares of Prudential Special Money Market
Fund, a money market fund. 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 an 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 first day of the month after the initial purchase,
rather than the date of the exchange.
Class B and Class C shares of each Portfolio may also be exchanged for
shares of an eligible money market fund without imposition of any CDSC at the
time of exchange. Upon subsequent redemption from such money market fund or
after re-exchange into the Fund, such shares will be subject to the CDSC
calculated without regard to the time such shares were held in the money market
fund. In order to minimize the period of time in which shares are subject to a
CDSC, shares exchanged out of the money market fund will be exchanged on the
basis of their remaining holding periods, with the longest remaining holding
periods being transferred first. In measuring the time period shares are held in
a money market fund and "tolled" for purposes of calculating the CDSC holding
period, exchanges are deemed to have been made on the last day of the month.
Thus, if shares are exchanged into the Fund from a money market fund during the
month (and are held in the Fund at the end of 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
of each Portfolio, respectively, 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 of other funds, respectively, without
being subject to any CDSC.
B-21
<PAGE>
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on sixty days' notice, and any fund, including the Fund,
or the Distributor, has the right to reject any exchange application relating to
such fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $4,800 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2007, the cost of four years at a private
college could reach $163,000 and over $97,000 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 Savings Accumulation Plan."
<FN>
- ------------------------
(1) Source information concerning the costs of education at public universities
is available from The College Board Annual Survey of Colleges, 1992. Information
about the costs of private colleges is from the Digest of Education Statistics,
1992; The National Center for Educational Statistics; and the U.S. Department of
Education. Average costs for private institutions include tuition, fees, room
and board.
</TABLE>
(2) The chart assumes an effective rate of return of 8% (assuming compounding).
This example is for illustrative purposes only and is not intended to reflect
the performance of an investment in shares of the Fund. The investment return
and principal value of an investment will fluctuate so that an investor's shares
when redeemed may be worth more or less than their original cost.
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of a Portfolio monthly by authorizing his or her bank account
or Prudential Securities account (including a Command Account) to be debited to
invest specified dollar amounts in shares of the Portfolio. The investor's bank
must be a member of the Automatic Clearing House System. Share certificates are
not issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through Prudential
Securities or the Transfer Agent. Such withdrawal plan provides for monthly or
quarterly checks in any amount, except as provided below, up to the value of the
shares in the shareholder's account. Withdrawals of Class B or Class C shares
may be subject to a CDSC. See "Shareholder Guide-- How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment Account--
Automatic Reinvestment of Dividends and/or Distributions."
B-22
<PAGE>
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must generally be recognized for federal income tax
purposes. In addition, withdrawals made concurrently with purchases of
additional shares are inadvisable because of the sales charges applicable to (i)
the purchase of Class A shares and (ii) 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 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, the administration, custodial fees and other details are available
from Prudential Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNT. 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.
<TABLE>
<CAPTION>
TAX-DEFERRED COMPOUNDING(1)
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
<FN>
- ------------------------
(1) The chart is for illustrative purposes only and does not represent the
performance of either Portfolio of the Fund or any specific investment. It shows
taxable versus tax-deferred compounding for the periods and on the terms
indicated. Earnings in the IRA account will be subject to tax when withdrawn
from the account.
</TABLE>
NET ASSET VALUE
Under the Investment Company Act, the Trustees are responsible for
determining in good faith the fair value of securities of each Portfolio of the
Fund. Net asset value is calculated separately for each class. The Trustees have
fixed the specific time of day for the computation of each Portfolio's net asset
value to be as of 4:15 P.M., New York time.
In accordance with procedures adopted by the Trustees, the values of each
Portfolio's investments are determined as follows:
Securities for which the primary market is on a national securities exchange
or NASDAQ National Market System, including options on stocks and stock indices,
are valued at the last sale 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 quoted on such day. Corporate obligations (other than convertible debt
securities) and U.S. Government securities that are actively traded in the
over-the-counter market, including
B-23
<PAGE>
listed securities for which the primary market is believed to be
over-the-counter, are valued on the basis of valuations provided by an
independent pricing agent; the independent pricing agent will use information
with respect to transactions in bonds, quotations from bond dealers, 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 to be over-the-counter, are valued at the mean
between the most recently quoted bid and asked prices provided by principal
market makers. Stock index futures and options thereon traded on a commodities
exchange or board of trade shall be valued at the last sale price at the close
of trading on such exchange or board of trade or, if there was no such sale on
such day, at the mean between the last bid and asked price quoted on such day.
Other securities are valued at the mean between the most recently quoted bid and
asked prices. Securities or other assets for which reliable market quotations
are not readily available are valued at fair value in accordance with 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, if their term to maturity from date of purchase
was 60 days or less, or by amortizing their value on the 61st day prior to
maturity, if their original term to maturity exceeded 60 days.
Because the New York Stock Exchange or the national securities exchanges on
which stock options are traded have adopted different trading hours on either a
permanent or temporary basis, the Trustees of the Fund may reconsider the time
at which net asset value is computed. In addition, the Fund may compute its net
asset value as of any time permitted pursuant to any exemption, order or
statement of the SEC or its staff.
The net asset value of Class B and Class C shares will generally be lower
than the net asset value of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. It is
expected, however, that the net asset value per share of each class will tend to
converge immediately after the recording of dividends, which will differ by
approximately the amount of the distribution-related expense accrual
differential among the classes.
TAXES
Each Portfolio of the 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 the Portfolio (but not its shareholders) from paying
federal tax on income, which is distributed to shareholders, provided that it
distributes at least 90% of its net investment income and short-term capital
gains and permits net capital gains of the Portfolio (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 Portfolio are held.
Qualification of a Portfolio as a regulated investment company requires,
among other things, that (a) at least 90% of the Portfolio's annual gross
income, without offset for losses from the sale or other disposition of
securities, be derived from payments with respect to securities loans, interest,
dividends and gains from the sale or other disposition of securities, futures
contracts or options thereon or foreign currencies, or other income (including
but not limited to gains from options, futures or forward contracts) derived
with respect to its business of investing in such securities or currencies; (b)
the Portfolio derive less than 30% of its gross income from gains (without
offset for losses) from the sale or other disposition of securities, options
thereon, futures contracts, options thereon, forward contracts and foreign
currencies held for less than three months (except for foreign currencies
directly related to the Fund's business of investing in foreign securities); and
(c) the Portfolio diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of its assets is
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 market value
of the assets of the Portfolio 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).
For federal tax purposes, each Portfolio is treated as a separate taxable
entity. Net capital gains of a Portfolio which are available for distribution to
shareholders will be computed by taking into account any capital loss
carryforward of the Portfolio.
Gains or losses on sales of securities by each Portfolio of the Fund will be
treated as long-term capital gains or losses if the securities have been held by
it for more than one year except in certain cases where the Portfolio acquires a
put or writes a call thereon or makes a short sale against-the-box. Other gains
or losses on the sale of securities will be short-term capital gains or losses.
Gains and losses on the sale, lapse or other termination of options on
securities will generally be treated as gains and losses from the sale of
securities (assuming they do not qualify as "Section 1256 contracts"). If an
option written by a Portfolio on securities lapses or is terminated through a
closing transaction, such as a repurchase by the Portfolio of the option from
its
B-24
<PAGE>
holder, the Portfolio will generally realize short-term capital gain or loss. If
securities are sold by the Portfolio pursuant to the exercise of a call option
written by it, the Portfolio will include the premium received in the sale
proceeds of the securities delivered in determining the amount of gain or loss
on the sale. If securities are purchased by a Portfolio pursuant to the exercise
of a put option written by it, the Portfolio will subtract the premium received
from its cost basis in the securities purchased. Certain transactions of a
Portfolio may be subject to wash sale, short sale, straddle and anti-conversion
provisions of the Internal Revenue Code. In addition, debt securities acquired
by the Portfolios may be subject to original issue discount and market discount
rules.
Special rules will apply to most options on stock indices, futures contracts
and options thereon, and forward foreign currency exchange contracts in which
the Portfolios may invest. See "Investment Objectives and Policies." These
investments will generally constitute "Section 1256 contracts" and will be
required to be "marked to market" for federal income tax purposes at the end of
each Portfolio's taxable year; that is, treated as having been sold at market
value. Except with respect to forward foreign currency exchange contracts, 60
percent of any gain or loss recognized on such "deemed sales" and on actual
dispositions will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss. The Portfolios'
ability to invest in forward foreign currency exchange contracts, options on
equity securities and on stock indices, futures contracts and options thereon
may be affected by the 30% limitation on gains derived from securities held less
than three months, discussed above.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time a Portfolio accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Portfolio actually collects such receivables or pays such liabilities are
treated as ordinary income or ordinary loss. Similarly, gains or losses on
forward foreign currency exchange contracts or dispositions of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the 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,
referred to under the Internal Revenue Code as "Section 988" gains or losses,
increase or decrease the amount of the Portfolio's investment company taxable
income available to be distributed to its shareholders as ordinary income,
rather than increasing or decreasing the amount of the Portfolio's net capital
gain. If Section 988 losses exceed other investment company taxable income
during a taxable year, the Portfolio would not be able to make any ordinary
dividend distributions, or distributions made before the losses were realized
would be recharacterized as a return of capital to shareholders, rather than as
an ordinary dividend, reducing each shareholder's basis in his or her Portfolio
shares.
Shareholders electing to receive dividends and distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share of the applicable
Portfolio of the Fund on the reinvestment date.
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or distributions, although in effect a return of capital, are
subject to federal income taxes. Therefore, prior to purchasing shares of any
Portfolio of the Fund, the investor should carefully consider the impact of
dividends or capital gains distributions which are expected to be or have been
announced.
Each Portfolio of the Fund is required under the Internal Revenue Code to
distribute 98% of its ordinary income in the same calendar year in which it is
earned. Each Portfolio is also required to distribute during the calendar year
98% of the capital gain net income it earned during the twelve months ending on
October 31 of such calendar year. In addition, each Portfolio must distribute
during the calendar year any undistributed ordinary income and undistributed
capital gain net income from the prior year or the twelve month period ending on
October 31 of such prior year, respectively. To the extent it does not meet
these distribution requirements, a Portfolio will be subject to a nondeductible
4% excise tax on the undistributed amount. For purposes of this excise tax,
income on which a Portfolio pays income tax is treated as distributed.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares and sells or otherwise disposes of such
shares within 90 days of acquisition may not be allowed to include certain sales
charges incurred in acquiring such shares for purposes of calculating gain or
loss realized upon a sale or exchange of shares of the Fund.
B-25
<PAGE>
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share distributions of net capital gains, if any, will be paid in the same
amount for Class A, Class B and Class C shares. See "Net Asset Value."
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which the Fund will be subject, since the amount of the Fund's
assets to be invested in various countries is not known.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. Each Portfolio of the Fund may from time to
time advertise its average annual total return. Average annual total return is
determined separately for Class A, Class B and Class C shares. See "How the Fund
Calculates Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P(1+T)to the power of n = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical $1000
payment made at the beginning of the 1, 5 or 10 year periods.
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
The average annual total return for the Class A shares for the one year and
since inception periods ended January 31, 1994 was 8.2% and 11.4% for the
Conservatively Managed Portfolio and 8.1% and 11% for the Strategy Portfolio,
respectively. The average annual total return for the Class B shares for the one
and five year and since inception periods ended January 31, 1994 was 8.3%, 11.4%
and 9.1% for the Conservatively Managed Portfolio and 8.2%, 11.4% and 9.6% for
the Strategy Portfolio, respectively. During these periods, no Class C shares
were outstanding.
AGGREGATE TOTAL RETURN. Each Portfolio may also advertise its aggregate
total return. Aggregate total return is determined separately for Class A, Class
B and Class C shares. See "How the Fund Calculates Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in a Portfolio of the Fund and is computed according to the following
formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1000.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical $1000
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.
The aggregate total return for Class A shares for the one year and four year
periods ended on January 31, 1994 was 14.2% and 63.4% for the Conservatively
Managed Portfolio and 14.1% and 61.2% for the Strategy Portfolio, respectively.
The aggregate total return for Class B shares for the one, five and six and
three-eighths year periods ended on January 31, 1994 was 13.3%, 73% and 75.3%
for the Conservatively Managed Portfolio and 13.3%, 73% and 79.9% for the
Strategy Portfolio, respectively. During these periods, no Class C shares were
outstanding.
B-26
<PAGE>
YIELD. A Portfolio of the Fund may from time to time advertise its yield as
calculated over a 30-day period. Yield is calculated separately for Class A,
Class B and Class C shares. This yield will be computed by dividing the
Portfolio's net investment income per share earned during this 30-day period by
the maximum offering price per share on the last day of this period. Yield is
calculated according to the following formula:
a - b
YIELD = 2[( ------- +1)to the power of 6 - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in a Portfolio will actually yield for any
given period.
The 30-day yields in the period ended January 31, 1994 were 2.2% and 2.2%,
respectively, for the Class A shares of the Conservatively Managed Portfolio and
the Strategy Portfolio, respectively, and 1.6% and 1.5%, respectively, for the
Class B shares of the Strategy Portfolio and the Conservatively Managed
Portfolio, respectively. During these periods, no Class C shares were
outstanding.
From time to time, the performance of the Portfolios may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.(1)
[GRAPHIC]
(1) Source: Ibbotson Associates. "Stocks, Bonds, Bills and Inflation--1993
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Common stock returns are based on the Standard & Poor's 500 Stock
Index, a market-weighted, unmanaged index of 500 common stocks in a variety of
industry sectors. It is a commonly used indicator of broad stock price
movements. This chart is for illustrative purposes only, and is not intended to
represent the performance of any particular investment or fund.
ORGANIZATION AND CAPITALIZATION
The Declaration of Trust and the By-Laws of the Fund are designed to make
the Fund similar in certain respects to a Massachusetts business corporation.
The principal distinction between a Massachusetts business trust and a
Massachusetts business corporation relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, in certain
B-27
<PAGE>
circumstances, be held personally liable for the obligations of the Fund, which
is not the case with a corporation. The Fund believes that this risk is not
material. The Declaration of Trust of the Fund provides that shareholders shall
not be subject to any personal liability for the acts or obligations of the Fund
and that every written obligation, contract, instrument or undertaking made by
the Fund shall contain a provision to the effect that the shareholders are not
individually bound thereunder.
Massachusetts counsel for the Fund has advised the Fund that no personal
liability with respect to contract obligations will attach to the shareholders
under any undertaking containing such provisions when adequate notice of such
provision is given, except possibly in a few jurisdictions. With respect to all
types of claims in the latter jurisdictions and with respect to tort claims,
contract claims when the provision referred to is omitted from the undertaking,
claims for taxes and certain statutory liabilities, a shareholder may be held
personally liable to the extent that claims are not satisfied by the Fund.
However, upon payment of any such liability, the shareholder will be entitled to
reimbursement from the general assets of the appropriate Portfolio of the Fund.
The Trustees intend to conduct the operations of the Fund in such a way as to
avoid, to the extent possible, ultimate liability of the shareholders for
liabilities of the Fund.
The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his or her
own bad faith, willful misfeasance, gross negligence, or reckless disregard of
his or her duties. It also provides that all third parties shall look solely to
the Fund property or the property of the appropriate Portfolio for satisfaction
of claims arising in connection with the affairs of the Fund or of the
particular Portfolio of the Fund, respectively. With the exceptions stated, the
Declaration of Trust permits the Trustees to provide for the indemnification of
Trustees, officers, employees or agents of the Fund against all liability in
connection with the affairs of the Fund.
The Fund does not intend to hold annual meetings of shareholders.
The Fund and each Portfolio thereof shall continue without limitation of
time subject to the provisions in the Declaration of Trust concerning
termination by action of the shareholders or by the Trustees by written notice
to the shareholders.
The authorized capital of the Fund consists of an unlimited number of shares
of beneficial interest, $.01 par value, issued in separate Portfolios and
divided into separate classes. Each Portfolio of the Fund, for federal income
tax and Massachusetts state law purposes, will constitute a separate trust which
will be governed by the provisions of the Declaration of Trust. All shares of
any Portfolio issued and outstanding are fully paid and nonassessable by the
Fund. Each share of each Portfolio represents an equal proportionate interest in
that Portfolio with each other share of that Portfolio. The assets of the Fund
received for the issue or sale of the shares of each Portfolio and all income,
earnings, profits and proceeds thereof, subject only to the rights of creditors
of that Portfolio, are specially allocated to the Portfolio and constitute the
underlying assets of the Portfolio. The underlying assets of each Portfolio are
segregated on the books of account and are to be charged with the liabilities in
respect to the Portfolio and with a share of the general liabilities of the
Fund. Under no circumstances would the assets of a Portfolio be used to meet
liabilities that are not otherwise properly chargeable to it. Expenses with
respect to any two or more Portfolios are to be allocated in proportion to the
asset value of the respective Portfolio except where allocations of direct
expenses can otherwise be fairly made. The officers of the Fund, subject to the
general supervision of the Trustees, have the power to determine which
liabilities are allocable to a given Portfolio or which are general. Upon
redemption of shares of a Portfolio of the Fund, the shareholder will receive
proceeds solely of the assets of such Portfolio. In the event of the dissolution
or liquidation of the Fund, the holders of the shares of any Portfolio are
entitled to receive as a class the underlying assets of that Portfolio available
for distribution to shareholders.
Shares of the Fund entitle their holders to one vote per share. Matters will
be acted upon by the vote of the shareholders of each Portfolio separately,
except to the extent otherwise provided in the Investment Company Act. A change
in the investment objective or investment restrictions for a Portfolio would be
voted upon only by shareholders of the Portfolio involved. In addition, approval
of the investment advisory agreement is a matter to be determined separately by
each Portfolio. Approval by the shareholders of a Portfolio is effective as to
that Portfolio whether or not enough votes are received from the shareholders of
the other Portfolio to approve the proposal as to that Portfolio.
Pursuant to 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
Fund for shares of any additional series, and all assets in which such
consideration is invested would belong to that series (subject only to the
rights of creditors of that series)
B-28
<PAGE>
and would be subject to the liabilities related thereto. Pursuant to the
Investment Company Act, shareholders of any additional series of shares would
normally have to approve the adoption of any advisory contract relating to such
series and of any changes in the investment policies related thereto.
The Trustees have the power to alter the number and the terms of office of
the Trustees and they may at any time lengthen their own terms or make their
terms of unlimited duration and appoint their own successors, provided that at
all times at least a majority of the Trustees has been elected by the
shareholders of the Fund. The voting rights of shareholders are not cumulative,
so that holders of more than 50% 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.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash, and in that capacity maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Subcustodians provide custodial
services for the Fund's foreign assets held outside the United States. See "How
the Fund is Managed--Custodian and Transfer and Dividend Disbursing Agent" in
the Prospectus.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer and Dividend Disbursing Agent of the Fund. It
is a wholly-owned subsidiary of PMF. PMFS provides customary transfer agency
services to the Fund, including the handling of shareholder communications, the
processing of shareholder transactions, the maintenance of shareholder account
records, the 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 communications expenses and other costs. For the fiscal year
ended July 31, 1993, the Fund incurred fees of approximately $1,066,000
($410,000--Conservatively Managed Portfolio and $656,000--Strategy Portfolio)
for the services of PMFS.
Deloitte & Touche, 1633 Broadway, New York, New York 10019, serves as the
Fund's independent accountants and in that capacity audits the Fund's annual
financial statements.
B-29
<PAGE>
LETTER TO SHAREHOLDERS, 1994
PRUDENTIAL FLEXIFUND PORTFOLIO OF INVESTMENTS
CONSERVATIVELY MANAGED PORTFOLIO JANUARY 31, 1994 (UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
SHARES DESCRIPTION VALUE
(NOTE 1)
- -------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--84.8%
COMMON STOCKS--46.6%
AEROSPACE/DEFENSE--2.0%
<S> <C> <C>
61,300 Aviall, Inc.* . . . . . . . . . . . . . . . . . . $ 1,072,750
203,200 Banner Aerospace, Inc.* . . . . . . . . . . . . . 1,143,000
20,000 Furon Co. . . . . . . . . . . . . . . . . . . . . 335,000
56,500 Gencorp, Inc. . . . . . . . . . . . . . . . . . . 826,312
52,500 General Motors Corp., Class H . . . . . . . . . . 2,060,625
70,000 Martin Marietta Corp. . . . . . . . . . . . . . . 3,141,250
------------
8,578,937
------------
AUTOMOTIVE--1.6%
27,100 Coltec Inds., Inc.* . . . . . . . . . . . . . . . 575,875
27,500 Danaher Corp. . . . . . . . . . . . . . . . . . . 1,034,687
26,000 Ford Motor Co.. . . . . . . . . . . . . . . . . . 1,742,000
25,000 General Motors Corp.. . . . . . . . . . . . . . . 1,534,375
64,300 General Motors Corp. Class E. . . . . . . . . . . 1,941,000
------------
6,827,937
------------
CHEMICALS--3.6%
18,400 Cytec Inds., Inc.*. . . . . . . . . . . . . . . . 296,705
35,000 Dexter Corp.. . . . . . . . . . . . . . . . . . . 835,625
41,450 Eastman Chemical Co.* . . . . . . . . . . . . . . 1,813,437
70,000 Ferro Corp. . . . . . . . . . . . . . . . . . . . 2,450,000
19,200 FMC Corp.*. . . . . . . . . . . . . . . . . . . . 926,400
35,000 Grace (W.R.) & Co.. . . . . . . . . . . . . . . . 1,596,875
60,000 Hanna (M. A.) Co. . . . . . . . . . . . . . . . . 2,250,000
79,700 Imperial Chemical Ind. (ADR). . . . . . . . . . . 3,885,375
46,600 Vigoro Corp.. . . . . . . . . . . . . . . . . . . 1,467,900
------------
15,522,317
------------
COMPUTER AND RELATED EQUIPMENT--2.4%
44,000 Ceridian Corp.* . . . . . . . . . . . . . . . . . 1,001,000
56,900 Diebold, Inc. . . . . . . . . . . . . . . . . . . 3,243,300
29,100 Digital Equipment Corp.*. . . . . . . . . . . . . $ 880,275
32,200 First Data Corp.. . . . . . . . . . . . . . . . . 1,473,150
40,200 Motorola, Inc.. . . . . . . . . . . . . . . . . . 3,959,700
------------
10,557,425
------------
CONSUMER PRODUCTS--1.1%
65,000 Eastman Kodak Co. . . . . . . . . . . . . . . . . 2,868,125
43,900 Newell Co.. . . . . . . . . . . . . . . . . . . . 1,838,313
------------
4,706,438
------------
CONTAINERS & PACKAGING--0.6%
64,200 Ball Corp.. . . . . . . . . . . . . . . . . . . . 1,693,275
85,000 Owens-Illinois Holdings Corp.*. . . . . . . . . . 988,125
------------
2,681,400
------------
DATA PROCESSING & REPRODUCTION--0.4%
26,100 First Financial Management Corp.. . . . . . . . . 1,543,163
------------
DRUGS & HEALTH CARE--4.8%
40,000 American Cyanamid Co. . . . . . . . . . . . . . . 2,015,000
87,400 HCA Hospital Corp. America* . . . . . . . . . . . 3,397,675
90,900 Healthtrust, Inc.*. . . . . . . . . . . . . . . . 2,556,563
179,300 National Medical Enterprises, Inc.. . . . . . . . 2,846,387
52,700 Schering Plough Corp. . . . . . . . . . . . . . . 3,320,100
36,200 Warner Lambert Co.. . . . . . . . . . . . . . . . 2,357,525
117,766 Zeneca Group PLC. . . . . . . . . . . . . . . . . 4,254,297
------------
20,747,547
------------
ELECTRONICS--1.6%
43,700 Belden, Inc.* . . . . . . . . . . . . . . . . . . 846,687
70,000 Loral Corp. . . . . . . . . . . . . . . . . . . . 2,791,250
80,000 Mark IV Industries, Inc.. . . . . . . . . . . . . 1,650,000
41,600 Perkin Elmer Corp.. . . . . . . . . . . . . . . . 1,627,600
------------
6,915,537
------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes To Financial Statements
B-30
<PAGE>
PRUDENTIAL FLEXIFUND
CONSERVATIVELY MANAGED PORTFOLIO
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
SHARES DESCRIPTION VALUE
(NOTE 1)
- -------------------------------------------------------------------------------
FINANCIAL SERVICES--5.1%
<C> <S> <C>
55,600 American Express Co.. . . . . . . . . . . . . . . $ 1,820,900
100,000 Dean Witter Discover & Co.. . . . . . . . . . . . 3,837,500
83,200 First Bank System, Inc. . . . . . . . . . . . . . 2,610,400
16,700 First Interstate Bank Corp. . . . . . . . . . . . 1,171,087
25,000 ITT Corp. . . . . . . . . . . . . . . . . . . . . 2,459,375
110,000 KeyCorp . . . . . . . . . . . . . . . . . . . . 4,070,000
148,000 Norwest Corp. . . . . . . . . . . . . . . . . . . 3,903,500
100,000 Washington Mutual Savings Bank. . . . . . . . . . 2,462,500
------------
22,335,262
------------
FOOD & BEVERAGE--1.0%
47,600 Karcher Carl Enterprises, Inc.. . . . . . . . . . 636,650
70,000 Morrison Restaurants, Inc.. . . . . . . . . . . . 1,750,000
47,000 Sbarro, Inc.. . . . . . . . . . . . . . . . . . . 1,903,500
------------
4,290,150
------------
FREIGHT TRANSPORTATION--1.1%
50,000 Illinois Central Corp.. . . . . . . . . . . . . . 1,875,000
70,000 Ryder System, Inc.. . . . . . . . . . . . . . . . 1,881,250
15,300 Union Pacific Corp. . . . . . . . . . . . . . . . 1,000,238
------------
4,756,488
------------
HOME IMPROVEMENTS--0.7%
70,000 Owens Corning Fiberglass* . . . . . . . . . . . . 3,158,750
------------
HOTELS & LEISURE--0.5%
75,000 Marriott International, Inc.. . . . . . . . . . . 2,203,125
------------
INSURANCE--3.3%
33,600 Berkley (W.R.) Corp. . . . . . . . . . . . . . . 1,201,200
64,000 Equitable of Iowa Cos.. . . . . . . . . . . . . . 1,864,000
71,000 Life Re . . . . . . . . . . . . . . . . . . . . 1,579,750
40,000 NAC Re Corp.. . . . . . . . . . . . . . . . . . . 1,260,000
60,800 National Re Corp. . . . . . . . . . . . . . . . . 1,763,200
74,700 Reinsurance Group America, Inc. . . . . . . . . . 1,960,875
124,700 Tig Holdings, Inc.. . . . . . . . . . . . . . . . 2,696,637
51,200 Trenwick Group, Inc.. . . . . . . . . . . . . . . 1,881,600
------------
14,207,262
------------
MACHINERY & EQUIPMENT--1.8%
49,600 Donaldson Co., Inc. . . . . . . . . . . . . . . . $ 2,337,400
45,000 IDEX Corp.* . . . . . . . . . . . . . . . . . . . 1,710,000
38,000 Kaydon Corp.. . . . . . . . . . . . . . . . . . . 774,250
85,800 Regal Beloit Corp.. . . . . . . . . . . . . . . . 2,273,700
37,000 Trimas Corp.. . . . . . . . . . . . . . . . . . . 883,375
------------
7,978,725
------------
MEDIA--3.7%
50,000 Houghton Mifflin Co.. . . . . . . . . . . . . . . 2,250,000
75,000 Media General, Inc. . . . . . . . . . . . . . . . 2,034,375
60,000 Multimedia, Inc.* . . . . . . . . . . . . . . . . 2,100,000
6,100 Scholastic Corp.* . . . . . . . . . . . . . . . . 257,725
135,000 Tele-Communications, Inc.*. . . . . . . . . . . . 3,678,750
105,400 Time Warner, Inc. . . . . . . . . . . . . . . . . 4,216,000
42,300 Viacom, Inc.* . . . . . . . . . . . . . . . . . . 1,469,925
------------
16,006,775
------------
MISCELLANEOUS--0.6%
64,400 BWIP Holding, Inc.. . . . . . . . . . . . . . . . 1,288,000
34,300 York International Corp.. . . . . . . . . . . . . 1,294,825
------------
2,582,825
------------
MINING--0.5%
150,000 INDRESCO, Inc.* . . . . . . . . . . . . . . . . . 2,100,000
------------
OIL & GAS EXPLORATION/
PRODUCTION--3.5%
23,600 Anadarko Petroleum Corp.. . . . . . . . . . . . . 1,121,000
99,800 Basin Exploration, Inc.*. . . . . . . . . . . . . 1,272,450
40,000 British Petroleum PLC (ADR) . . . . . . . . . . . 2,730,000
70,000 Cabot Oil & Gas Corp. . . . . . . . . . . . . . . 1,548,750
26,100 Enron Oil & Gas Co. . . . . . . . . . . . . . . . 1,151,662
35,000 Murphy Oil Corp.. . . . . . . . . . . . . . . . . 1,448,125
164,700 Oryx Energy Co. . . . . . . . . . . . . . . . . . 2,964,600
37,400 Seagull Energy Corp.* . . . . . . . . . . . . . . 995,775
55,500 Societe Nationale Elf Aquitaine . . . . . . . . . 1,998,000
7,100 USX-Delhi Group . . . . . . . . . . . . . . . . . 123,363
------------
15,353,725
------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes To Financial Statements
B-31
<PAGE>
PRUDENTIAL FLEXIFUND
CONSERVATIVELY MANAGED PORTFOLIO
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
SHARES DESCRIPTION VALUE
(NOTE 1)
- -------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS--1.7%
<C> <S> <C>
90,000 Mead Corp.. . . . . . . . . . . . . . . . . . . . $ 4,263,750
65,650 Pentair, Inc. . . . . . . . . . . . . . . . . . . 2,371,606
34,800 Riverwood International Corp. . . . . . . . . . . 661,200
------------
7,296,556
------------
PETROLEUM SERVICES--0.2%
35,000 Enterra Corp.*. . . . . . . . . . . . . . . . . . 721,875
------------
RETAIL--1.4%
55,100 AnnTaylor Stores Corp.* . . . . . . . . . . . . . 1,177,763
60,000 Caldor Corp.* . . . . . . . . . . . . . . . . . . 1,590,000
60,000 Federated Department Stores, Inc.*. . . . . . . . 1,312,500
33,000 Sears Roebuck & Co. . . . . . . . . . . . . . . . 1,810,875
------------
5,891,138
------------
STEEL & METALS--0.4%
17,000 Material Sciences Corp.*. . . . . . . . . . . . . 446,250
63,100 Wolverine Tube, Inc.. . . . . . . . . . . . . . . 1,443,413
------------
1,889,663
------------
TELECOMMUNICATIONS--2.1%
58,000 Century Telephone Enterprises Inc.. . . . . . . . 1,580,500
100,000 MCI Communications Corp.. . . . . . . . . . . . . 2,762,500
37,400 Northern Telecom Ltd. . . . . . . . . . . . . . . 1,215,500
40,000 Pacific Telesis Group . . . . . . . . . . . . . . 2,305,000
12,000 Pactel Corp.* . . . . . . . . . . . . . . . . . . 303,000
24,900 Rochester Telephone Corp. . . . . . . . . . . . . 1,083,150
------------
9,249,650
------------
TEXTILES--0.9%
80,000 Jones Apparel Group, Inc.*. . . . . . . . . . . . 2,390,000
32,000 VF Corp. . . . . . . . . . . . . . . . . . . . . 1,484,000
------------
3,874,000
------------
Total Common Stocks
(cost $168,839,838) . . . . . . . . . . . . . . . 201,976,670
------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
PRINCIPAL DESCRIPTION VALUE
MOODY'S AMOUNT (NOTE 1)
RATING (000)
- -------------------------------------------------------------------------------
DEBT OBLIGATIONS(a)--38.2%
CORPORATE BONDS--18.9%
AIRLINES--1.0%
AMR Corp.,
<S> <C> <C> <C>
Baa3 $1,000 7.75%, 12/1/97. . . . . . . . . . . . . $1,037,250
DELTA AIR LINES, INC.,
Ba1 1,300 7.71%, 5/14/97. . . . . . . . . . . . . 1,345,500
Ba1 5007. 79%, 12/1/985 . . . . . . . . . . . . . 11,935
Ba1 8008. 63%, 12/12/05 . . . . . . . . . . . . . 854,488
Ba1 5009. 75%, 5/15/21 . . . . . . . . . . . . . 558,100
SOUTHWEST AIRLINES CO.,
Baa1 1009. 40%, 7/1/01. . . . . . . . . . . . . . 118,705
------------
4,425,978
------------
CEMENT--0.6%
CEMEX S.A.,
NR 750 6.25%, 10/25/95. . . . . . . . . . . . . . . 765,000
Ba2 750 8.875%, 6/10/98. . . . . . . . . . . . . . . 806,250
Ba2 500 8.75%, 6/10/98. . . . . . . . . . . . . . . 537,500
TOLMEX S.A. DE C.V.,
Ba2 500 8.375%, 11/1/03. . . . . . . . . . . . . . . 528,750
------------
2,637,500
------------
CHEMICALS--0.4%
Eastman Chemical Co.,
Baa1 1,500 6.375%, 1/15/04 . . . . . . . . . . . . 1,498,635
------------
COMPUTER AND RELATED EQUIPMENT--0.7%
Comdisco, Inc.,
Baa2 3,000 8.95%, 5/15/95. . . . . . . . . . . . . 3,160,740
------------
ELECTRONICS--0.7%
Westinghouse Electric Corp.,
Ba1 1,100 7.75%, 4/15/96. . . . . . . . . . . . . 1,151,095
Ba1 450 8.70%, 6/20/96. . . . . . . . . . . . . 478,215
</TABLE>
- -------------------------------------------------------------------------------
See Notes To Financial Statements
B-32
<PAGE>
PRUDENTIAL FLEXIFUND
CONSERVATIVELY MANAGED PORTFOLIO
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
PRINCIPAL DESCRIPTION VALUE
MOODY'S AMOUNT (NOTE 1)
RATING (000)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
ELECTRONICS(CONT'D)
WESTINGHOUSE ELECTRIC CORP.,
Ba1 $800 8.875%, 6/1/01 . . . . . . . . . . . . . . . $ 881,832
Baa3 600 8.375%, 6/15/02. . . . . . . . . . . . . . . 635,400
------------
3,146,542
------------
FINANCIAL SERVICES--6.4%
ANZ BANKING
A2 1,100 6.25%, 2/1/04. . . . . . . . . . . . . . . . 1,096,755
Associates Corp. of North America,
A1 750 6.875%, 1/15/97. . . . . . . . . . . . . . . 790,770
A1 200 8.375%, 1/15/98. . . . . . . . . . . . . . . 222,322
Bancomer S.A.,
NR 1,000 8.00%, 7/7/98. . . . . . . . . . . . . . . . 1,047,500
Chrysler Financial Corp.,
Baa2 1,100 5.39%, 8/27/96. . . . . . . . . . . . . . 1,112,650
Baa2 3,300 3.8125%, 11/15/96. . . . . . . . . . . . . . 3,298,053
Baa2 1,000 9.50%, 12/15/99. . . . . . . . . . . . . . 1,174,590
Citicorp,
Baa1 1,000 7.80%, 3/24/95. . . . . . . . . . . . . . 1,040,170
First Union Corp.,
A3 1,000 9.45%, 6/15/99. . . . . . . . . . . . . . 1,156,540
Ford Motor Credit Co.,
A2 1,000 6.25%, 2/26/98. . . . . . . . . . . . . . 1,034,570
General Motors
Acceptance Corp.,
Baa1 1,750 7.80%, 11/7/96 . . . . . . . . . . . . . . 1,866,655
Baa1 2,000 7.50%, 11/4/97 . . . . . . . . . . . . . . 2,130,880
Baa1 1,100 8.40%, 10/15/99. . . . . . . . . . . . . . 1,220,582
Goldman Sachs Group,
A1 2,000 6.10%, 4/15/98. . . . . . . . . . . . . . 2,059,560
Kansallis-Osake-
Pankki Bank,
A3 1,000 6.125%, 5/15/98. . . . . . . . . . . . . . 1,026,370
Potomac Capital
Investment Corp.,
A3 1,000 6.19%, 4/28/97. . . . . . . . . . . . . . 1,016,290
Shawmut National Corp.,
Baa2 $2,100 8.625%, 12/15/99. . . . . . . . . . . . . . $2,333,037
Shearson Lehman
Holdings, Inc.,
A3 1,000 5.75%, 2/15/98. . . . . . . . . . . . . . 1,007,420
Union Bank Finland,
A3 2,600 5.25%, 6/15/96. . . . . . . . . . . . . . 2,607,722
Westinghouse Credit Corp.,
Ba1 400 8.75%, 6/3/96 . . . . . . . . . . . . . . 425,152
------------
27,667,588
------------
FOOD & BEVERAGE--1.2%
Borden, Inc.,
Baa2 1,000 7.875%, 2/15/23 . . . . . . . . . . . . . . 984,410
Coca Cola Enterprises, Inc.
A3 500 6.50%, 11/15/97 . . . . . . . . . . . . . . 521,585
Fomento Economico
Mexicano S.A.,
NR 850 9.50%, 7/22/97 . . . . . . . . . . . . . . 926,500
Philip Morris Cos, Inc.,
A2 700 8.75%, 6/15/97 . . . . . . . . . . . . . . 777,714
Procter & Gamble Co.,
Aa2 1,700 9.36%, 1/1/21. . . . . . . . . . . . . . . 2,162,825
------------
5,373,034
------------
INSURANCE--0.2%
Zurich Reinsurancecentre Holdings, Inc.,
A1 1,000 7.125%, 10/15/23 . . . . . . . . . . . . . . 963,810
------------
MEDIA--2.2%
Grupo Televisa, SA De Euro, M.T.N.,
Ba2 1,500 10.00%, 11/9/97. . . . . . . . . . . . . . . 1,661,250
News America
Holdings, Inc.,
Ba1 300 7.50%, 3/1/00. . . . . . . . . . . . . . . 314,055
Ba1 1,000 7.45%, 6/1/00. . . . . . . . . . . . . . . 1,046,890
Ba1 1,600 8.25%, 8/10/18 . . . . . . . . . . . . . . 1,665,040
</TABLE>
- -------------------------------------------------------------------------------
See Notes To Financial Statements
B-33
<PAGE>
PRUDENTIAL FLEXIFUND
CONSERVATIVELY MANAGED PORTFOLIO
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
PRINCIPAL DESCRIPTION VALUE
MOODY'S AMOUNT (NOTE 1)
RATING (000)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
MEDIA(CONT'D)
Time Warner, Inc.,
Ba1 $1,000 6.05%, 7/1/95 . . . . . . . . . . . . . $1,015,720
Ba1 600 7.45%, 2/1/98 . . . . . . . . . . . . . 632,430
Baa3 2,000 7.25%, 9/1/08 . . . . . . . . . . . . . 2,036,100
Tele-Communications, Inc.,
Baa3 1,000 10.125%, 4/15/22. . . . . . . . . . . . 1,327,540
------------
9,699,025
------------
MISCELLANEOUS--0.3%
Federal Express Corp.,
Baa3 500 10.05%, 6/15/99 . . . . . . . . . . . . 590,915
Laidlaw, Inc.,
Baa2 700 8.25%, 5/15/23 . . . . . . . . . . . . 719,740
------------
1,310,655
------------
OIL & GAS--0.8%
Arkla, Inc.,
Ba2 1,200 9.875%, 4/15/97 . . . . . . . . . . . . 1,329,000
Ba1 1,000 9.30%, 1/15/98 . . . . . . . . . . . . 1,083,050
Mitchell Energy &
Development Corp.,
Baa3 1,000 5.10%, 2/15/97 . . . . . . . . . . . . 999,820
------------
3,411,870
------------
PAPER & FOREST
PRODUCTS--0.6%
Boise Cascade Corp.,
Baa3 1,500 6.82%, 2/1/99. . . . . . . . . . . . . 1,500,000
Baa3 363 9.875%, 2/15/01 . . . . . . . . . . . . 404,066
Georgia Pacific Corp.,
Baa3 500 9.625%, 3/15/22 . . . . . . . . . . . . 599,800
------------
2,503,866
------------
RETAIL--0.8%
Dayton Hudson Corp.,
A3 1,150 9.00%, 10/1/21. . . . . . . . . . . . . 1,361,393
Sears Roebuck & Co.,
Baa1 $2,000 9.25%, 8/1/97. . . . . . . . . . . . . $2,252,880
------------
3,614,273
------------
SHIPPING--0.4%
Compania Sudamericana
De Vapores,
NR 1,750 7.375%, 12/8/03 . . . . . . . . . . . . 1,736,875
------------
TELECOMMUNICATIONS--0.3%
American Telephone & Telegraph Co.,
Aa3 1,000 8.625%, 12/1/31 . . . . . . . . . . . . 1,142,910
------------
UTILITIES--1.0%
Commonwealth Edison Co.,
Baa1 2,000 9.05%, 10/15/99 . . . . . . . . . . . . 2,295,720
Hydro Quebec Corp.,
A1 500 3.375%, 9/30/49 . . . . . . . . . . . . 435,000
Pennsylvania Power & Light Co.,
A2 450 9.375%, 7/1/21. . . . . . . . . . . . . 527,274
Philadelphia Electric CcO.,
Baa1 1,000 7.125%, 9/1/02. . . . . . . . . . . . . 1,034,080
------------
4,292,074
------------
SOVEREIGN BONDS--1.3%
Banco Nacional De Comercio,
Ba2 1,000 7.50%, 7/1/00 . . . . . . . . . . . . . 1,030,000
Grupo Condumex
S.A. DE C.V., M.T.N.,
NR 700 6.25%, 7/27/96. . . . . . . . . . . . . 692,125
Quebec Province Canada,
A1 700 7.125%, 2/9/24. . . . . . . . . . . . . 696,395
Republic of Italy Global Bond,
A1 1,250 6.875%, 9/27/23 . . . . . . . . . . . . 1,197,625
United Mexican States,
Ba2 1,650 8.50%, 9/15/02. . . . . . . . . . . . . 1,788,188
------------
5,404,333
------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes To Financial Statements
B-34
<PAGE>
PRUDENTIAL FLEXIFUND
CONSERVATIVELY MANAGED PORTFOLIO
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
PRINCIPAL DESCRIPTION VALUE
MOODY'S AMOUNT (NOTE 1)
RATING (000)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL CORPORATE BONDS
(cost $80,472,489). . . . . . . . . . . . . . . $81,989,708
------------
ASSET BACKED SECURITIES--1.5%
BANK OF NEW YORK MASTER
CREDIT CARD TRUST,
Aaa $1,200 7.95%, 4/15/96. . . . . . . . . . . . . 1,218,000
Standard Credit Card Trust,
A2 1,000 9.375%, 5/10/95 . . . . . . . . . . . . 1,058,750
Aaa 4,000 8.00%, 8/7/96 . . . . . . . . . . . . . 4,302,480
------------
Total Asset Backed
Securities
(cost $6,594,859). . . . . . . . . . . 6,579,230
------------
U. S. GOVERNMENT AND AGENCY
SECURITIES--17.8%
United States Treasury Bonds,
17,900 11.25%, 2/15/15 . . . . . . . . . . . . 28,150,614
1,250 8.875%, 8/15/17 . . . . . . . . . . . . 1,625,975
United States Treasury Bonds,
3,800 12.00%, 8/15/13 . . . . . . . . . . . . 5,978,464
4,700 7.50%, 11/15/16 . . . . . . . . . . . . 5,321,998
United States Treasury Notes,
11,600 6.00%, 11/30/97 . . . . . . . . . . . . 12,111,096
1,600 7.875%, 8/15/01 . . . . . . . . . . . . 1,841,504
United States Treasury Notes,
1,600 4.25%, 7/31/95 . . . . . . . . . . . . 1,608,992
1,700 7.625%, 4/30/96 . . . . . . . . . . . . 1,822,723
800 6.50%, 11/30/96 . . . . . . . . . . . . 843,496
1,800 6.875%, 3/31/97 . . . . . . . . . . . . 1,922,904
3,700 9.00%, 5/15/98 . . . . . . . . . . . . 4,286,783
United States Treasury Notes,
$1,200 8.75%, 8/15/00 . . . . . . . . . . . . $1,429,872
7,850 7.50%, 11/15/01 . . . . . . . . . . . . 8,856,998
United States Treasury Strips,
4,500 Zero Coupon, 2/15/11. . . . . . . . . . 1,484,775
------------
Total U. S. Government and Agency Securities
(cost $76,050,629). . . . . . . . . . . 77,286,194
------------
Total Debt Obligations
(cost $163,117,977) . . . . . . . . . . 165,855,132
------------
Total Long-Term Investments
(cost $331,957,815) . . . . . . . . . . 367,831,802
SHORT-TERM INVESTMENTS(a)--13.9%
CORPORATE NOTES--2.5%
Nordiska Investeringsbanke,
Aaa 3,000 9.50%, 12/15/94 . . . . . . . . . . . . 3,137,190
Phillip Morris Co., Inc.,
A2 250 8.70%, 8/1/94 . . . . . . . . . . . . . 255,977
Texas Utilities Electric Co.,
Baa2 800 9.625%, 9/30/94 . . . . . . . . . . . . 828,432
Bancomer S.A., Euro C.D.,
NR 3,400 Zero Coupon, 3/17/94. . . . . . . . . . 3,382,296
NR 3,000 Zero Coupon, 4/5/94 . . . . . . . . . . 2,972,793
------------
Total Corporate Notes
(cost $10,552,920) . . . . . . . . . . 10,576,688
------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes To Financial Statements
B-35
<PAGE>
PRUDENTIAL FLEXIFUND
CONSERVATIVELY MANAGED PORTFOLIO
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT DESCRIPTION VALUE
(000) (NOTE 1)
- --------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT--11.4%
$49,474 Joint Repurchase Agreement
Account, 3.14%, 2/1/94
(Note 5)...................... $49,474,000
-----------
Total short-term investments
(cost $60,026,920)............ 60,050,688
----------
TOTAL INVESTMENTS--98.7%
(cost $391,984,735;
Note 4)....................... 427,882,490
Other assets in excess
of liabilities--1.3%........... 5,409,291
-----------
NET ASSETS--100% ............... $433,291,781
============
<FN>
- -----------------------
* Non-income producing security.
(a) Par value U.S. dollar denominated.
ADR--American Depository Receipt.
C.D.--Certificate of Deposit.
M.T.N.--Medium Term Note.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Prospectus contains a description of
Moody's ratings.
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
B-36
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PRUDENTIAL FLEXIFUND
CONSERVATIVELY MANAGED PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS JANUARY 31,
1994
------------
<S> <C>
Investments, at value (cost $391,984,735)................. $427,882,490
Cash...................................................... 1,173,298
Receivable for investments sold........................... 15,954,820
Dividends and interest receivable......................... 3,716,881
Receivable for Fund shares sold........................... 3,416,179
Deferred expenses and other assets........................ 5,358
------------
Total assets.............................................. 452,149,026
------------
LIABILITIES
Payable for investments purchased......................... 16,941,286
Payable for Fund shares reacquired........................ 1,278,053
Distribution fee payable.................................. 337,034
Management fee payable.................................... 231,379
Withholding taxes payable................................. 19,172
Accrued expenses.......................................... 50,321
------------
Total liabilities.................................... 18,857,245
------------
NET ASSETS................................................ $433,291,781
------------
------------
Net assets were comprised of:
Common stock, at par.................................... $ 371,808
Paid-in capital in excess of par........................ 389,997,986
-----------
390,348,662
Undistributed net investment income..................... 2,947,168
Accumulated net realized gains on investsments.......... 4,098,196
Net unrealized appreciation on investments.............. 35,897,755
----------
Net Assets, January 31, 1994.............................. $433,291,781
------------
------------
Class A:
Net asset value and redemption price per share
($30,949,634 divided by 2,647,468 shares of common
stock issued and outstanding)........................ $11.69
Maximum sales charge (5.25% of offering price)........ 0.65
------
Maximum offering price to public...................... $12.34
------
------
Class B:
Net asset value, offering price and redemption
price per share ($402,342,147 divided by 34,533,379
shares of shares of common stock issued and
outstanding)......................................... $11.65
------
------
</TABLE>
See Notes to Financial Statements.
B-37
<PAGE>
- --------------------------------------------------------------------------------
PRUDENTIAL FLEXIFUND
CONSERVATIVELY MANAGED PORTFOLIO
STATEMENT OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JANUARY 31,
1994
NET INVESTMENT INCOME --------------
<S> <C>
Income
Interest (net of foreign withholding taxes of $17,247)...... $ 6,067,093
Dividends (net of foreign withholding taxes of $22,689)..... 1,614,313
------------
Total income............................................. 7,681,406
------------
Expenses
Distribution fee--Class A................................... 27,543
Distribution fee--Class B................................... 1,801,013
Management fee.............................................. 1,256,070
Transfer agent's fees and expenses.......................... 256,000
Custodian's fees and expenses............................... 96,000
Reports to shareholders..................................... 33,000
Registration fees........................................... 30,000
Directors' fees............................................. 13,000
Audit fee................................................... 8,000
Legal fees.................................................. 5,000
Miscellaneous............................................... 883
-------------
Total expenses........................................... 3,526,509
-------------
Net investment income......................................... 4,154,897
-------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investment transactions.................. 10,623,243
Net change in unrealized appreciation/depreciation
on Investment................................................. 5,385,802
----------
Net gain on investments....................................... 16,009,045
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.......... $20,163,942
-----------
-----------
</TABLE>
See Notes to Financial Statements
B-38
<PAGE>
- --------------------------------------------------------------------------------
PRUDENTIAL FLEXIFUND
CONSERVATIVELY MANAGED PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JANUARY 31, JULY 31,
1994 1993
---------- ----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income......................... $ 4,154,897 $ 8,734,542
Net realized gain on investments.............. 10,623,243 13,033,133
Net change in unrealized
appreciation of investments................... 5,385,802 16,803,076
----------- -----------
Net increase in net assets resulting from
operations.................................... 20,163,942 38,570,751
----------- ----------
Net equalization credits........................ 620,253 325,868
----------- ----------
Dividends and distributions (Note 1)
Dividends to shareholders from net
investment income
Class A..................................... (361,478) (490,533)
Class B..................................... (3,793,419) (6,742,292)
----------- -----------
(4,154,897) (7,232,825)
----------- -----------
Dividends to shareholders in excess of net
investment income
Class A........................................ (51,840) ---
Class B........................................ (544,013) ---
----------- ----------
(595,853) ---
----------- ----------
Distributions to shareholders from net realized
gains on investment transactions
Class A........................................ (733,654) (577,629)
Class B........................................ (9,889,589) (10,528,236)
------------ ------------
(10,623,243) (11,085,865)
------------ ------------
Distributions to shareholders in excess of
net realized gains
Class A....................................... (513,520) ---
Class B....................................... (6,922,153) ---
------------ ------------
(7,435,673) ---
------------ ------------
Fund share transactions (Note 6)
Net proceeds from shares subscribed............ 101,823,684 115,375,179
Net asset value of shares issued to
shareholders in reinvestment of dividends
and distributions.............................. 1,087,882 16,869,402
Cost of shares reacquired...................... (32,030,664) (45,324,359)
------------ -------------
Net increase in net assets from Fund share
transactions................................... 90,880,902 86,920,222
------------ -----------
Total increase................................... 88,855,431 107,498,151
NET ASSETS
Beginning of period............................... 344,436,350 236,938,199
------------ -----------
End of period..................................... 433,291,781 $344,436,350
------------ -----------
</TABLE>
See Notes to Financial Statements
B-39
<PAGE>
PRUDENTIAL FLEXIFUND
STRATEGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
JANUARY 31, 1994 (UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SHARES DESCRIPTION VALUE
(NOTE 1)
- --------------------------------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS--89.2%
COMMON STOCKS--67.7%
ADVERTISING--0.5%
43,225 ADVO, Inc....................... $ 783,453
71,000 American Business Information*.. 1,242,500
-------------
2,025,953
-------------
AEROSPACE/DEFENSE--1.3%
21,000 General Dynamics Corp........... 1,934,625
73,200 Martin Marietta Corp............ 3,284,850
-------------
5,219,475
-------------
AUTOMOTIVE--3.6%
101,800 Agency Rent-A-Car,Inc*.......... 1,323,400
114,000 Ford Motor Co................... 7,638,000
9,700 General Motors Corp............. 291,000
93,600 Goodyear Tire & Rubber Co....... 4,527,900
40,000 Modine Manufacturing Co......... 1,180,000
------------
14,960,300
------------
BUILDING & RELATED INDUSTRIES--1.0%
50,000 ABT Building Products Corp*..... 1,362,500
28,625 Clayton Homes, Inc*............. 726,359
38,500 TJ International, Inc........... 1,097,250
45,700 Toll Brothers, Inc*............. 874,013
-----------
4,060,122
-----------
CHEMICALS--2.5%
81,500 Air Products & Chemicals, Inc... 4,044,437
14,150 Eastman Chemical Co*............ 619,063
32,900 IMC Fertlizer Group, Inc........ 1,435,262
30,000 Imperial Chemical Ind. (ADR).... 1,462,500
75,600 Praxair, Inc.................... 1,417,500
35,700 Valspar Corp.................... 1,445,850
-----------
10,424,612
-----------
COMMERCIAL SERVICES--0.5%
80,100 ServiceMaster L. P............... 2,202,750
-----------
COMPUTER AND RELATED EQUIPMENT--5.0%
42,000 American Management Systems, Inc* $ 845,250
73,800 Automatic Data Processing, Inc... 3,865,275
124,600 First Data Corp.................. 5,700,450
49,200 Fiserv, Inc*..................... 947,100
52,000 International Business Machines
Corp............................ 2,951,000
40,700 LEGENT Corp*..................... 1,210,825
17,000 Microsoft Corp*.................. 1,447,125
10,300 Motorola, Inc.................... 1,014,550
37,500 National Data Corp............... 778,125
22,100 Policy Management Systems Corp*.. 729,300
21,400 SPS Transaction Services, Inc*... 1,241,200
-----------
20,730,200
-----------
CONSUMER PRODUCTS--2.3%
56,600 Eastman Kodak Co................. 2,497,475
39,200 Industrie Natuzzi Spa (ADR)...... 1,038,800
92,418 Newell Co........................ 3,870,004
7,900 Premark International, Inc....... 680,387
30,900 Scholastic Corp*................. 1,305,525
----------
9,392,191
----------
DRUGS & HEALTH CARE--4.2%
63,600 Caremark Int'l., Inc*............ 1,224,300
115,010 Columbia Healthcare Corp......... 4,356,004
82,500 HCA Hospital Corp. America*...... 3,207,187
50,000 Health Care & Retirement Corp*... 1,281,250
50,000 Healthtrust, Inc*................ 1,406,250
30,000 Kendall International, Inc*...... 1,500,000
65,000 Schering Plough Corp............. 4,095,000
-----------
17,069,991
-----------
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
B-40
<PAGE>
PRUDENTIAL FLEXIFUND
STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SHARES DESCRIPTION VALUE
(NOTE1)
- --------------------------------------------------------------------------------
<C> <S> <C>
ELECTRONICS--3.9%
120,000 ADT, Ltd*......................... $1,200,000
27,000 Anthem Electronics, Inc.*......... 884,250
58,800 Baldor Electric Co................ 1,543,500
60,000 Belden, Inc.*..................... 1,162,500
73,000 Emerson Electric Co............... 4,471,250
46,800 General Electric Co............... 5,042,700
40,000 Loral Corp........................ 1,595,000
-----------
15,899,200
-----------
ENTERTAINMENT--2.0%
104,500 Carnival Cruise Lines, Inc........ 5,172,750
35,000 Disney (Walt) Co.................. 1,653,750
53,400 TCA Cable TV, Inc................. 1,381,725
-----------
8,208,225
-----------
ENVIRONMENTAL SERVICES--1.2%
61,350 Thermo Electron Corp*............. 2,630,381
47,450 Thermo Instrument System, Inc.*... 1,583,644
45,450 Thermotrex Corp.*................. 630,619
-----------
4,844,644
-----------
FINANCIAL SERVICES--7.5%
35,500 American Express Co............... 1,162,625
75,000 Bank of New York, Inc............. 4,228,125
54,600 Block (H&R), Inc.................. 2,395,575
18,600 Cash America International, Inc... 165,075
124,400 Dean Witter Discover & Co......... 4,773,850
59,300 First Financial Management Corp... 3,506,112
37,200 John Nuveen Co.................... 930,000
63,100 Kansas City Southern Industries,Inc. 2,910,487
110,100 Norwest Corp...................... 2,903,887
49,500 State Street Boston Corp.......... 1,881,000
41,200 T. Rowe Price & Associates, Inc... 1,339,000
37,300 Union Planters Corp............... 918,513
25,300 United Asset Management Corp...... 1,002,513
53,400 Washington Mutual Savings Bank.... 1,314,975
9,300 Wells Fargo & Co.................. 1,275,263
----------
30,707,000
----------
FOOD & BEVERAGE--2.0%
96,000 Archer-Daniels-Midland Co......... $2,544,000
55,000 Dr Pepper/Seven Up Cos., Inc*..... 1,313,125
108,000 PepsiCo, Inc...................... 4,360,500
----------
8,217,625
-----------
FREIGHT TRANSPORTATION--0.5%
32,500 Expeditors Int'l. Washington,Inc*. 524,063
40,000 Illinois Central Corp............. 1,500,000
-----------
2,024,063
-----------
HOTELS & LEISURE--0.4%
39,200 Host Marriott Corp................ 485,100
39,200 Marriott International, Inc....... 1,151,500
-----------
1,636,600
-----------
INSURANCE--2.9%
55,400 American General Corp............. 1,585,825
38,700 CCP Insurance, Inc................ 914,287
32,500 Chubb Corp........................ 2,701,562
85,200 Equitable Companies, Inc.......... 2,481,450
30,800 General Reinsurance Corp.......... 3,515,050
12,800 Mid Ocean, Ltd*................... 329,600
31,100 Penncorp Financial Group, Inc..... 540,363
-----------
12,068,137
-----------
MACHINERY & EQUIPMENT--2.0%
30,000 AES Corp.......................... 1,068,750
30,000 Donaldson Co., Inc................ 1,413,750
10,300 Fisher Scientific International, Inc. 391,400
87,800 Illinois Tool Works, Inc.......... 3,731,500
30,000 Lindsay Manufacturing Co*......... 952,500
8,800 Nordson Corp...................... 499,400
4,500 Tuscarora, Inc.................... 85,500
----------
8,142,800
----------
MEDIA--3.6%
4,000 Capital Cities ABC, Inc........... 2,620,000
49,000 Enquirer Star Group, Inc.......... 918,750
18,600 Grupo Televisa S.A*............... 1,320,600
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
B-41
<PAGE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
(NOTE 1)
- --------------------------------------------------------------------------------
<C> <S> <C>
MEDIA -- (CONT'D)
59,100 Liberty Media Corp.*. . . . . . . . . . . . . $ 1,536,600
90,000 Rogers Communications, Inc.*. . . . . . . . . 1,526,805
41,000 Shaw Communications . . . . . . . . . . . . . 776,691
400,000 Television Broadcasts, Ltd. . . . . . . . . . 1,683,175
41,400 Time Warner, Inc. . . . . . . . . . . . . . . 1,656,000
30,400 Times Mirror Co.. . . . . . . . . . . . . . . 1,102,000
21,100 Tribune Co. . . . . . . . . . . . . . . . . . 1,268,637
6,400 Viacom, Inc.* . . . . . . . . . . . . . . . . 222,400
------------
14,631,658
------------
MINING -- 0.6%
96,000 Placer Dome, Inc. . . . . . . . . . . . . . . 2,436,000
------------
PAPER & FOREST PRODUCTS -- 1.9%
16,100 Longview Fibre Co. Washington . . . . . . . . 348,163
68,700 Thermo Fibertek, Inc. . . . . . . . . . . . . 1,107,787
107,800 Willamette Industries, Inc. . . . . . . . . . 6,198,500
------------
7,654,450
------------
PETROLEUM SERVICES -- 5.9%
44,000 Amoco Corp. . . . . . . . . . . . . . . . . . 2,365,000
67,000 Coastal Corp. . . . . . . . . . . . . . . . . 2,068,625
60,600 Cross Timbers Oil Co. . . . . . . . . . . . . 886,275
99,300 Exxon Corp. . . . . . . . . . . . . . . . . . 6,603,450
66,500 Royal Dutch Petroleum Co. . . . . . . . . . . 7,315,000
50,300 Schlumberger, Ltd.. . . . . . . . . . . . . . 2,986,562
69,800 Seagull Energy Corp.* . . . . . . . . . . . . 1,858,425
------------
24,083,337
------------
REALTY INVESTMENT TRUST -- 1.3%
33,700 Duke Reality Investments, Inc.. . . . . . . . 775,100
38,300 Federal Reality Investment Trust. . . . . . . 923,988
38,500 Manufactured Home Community, Inc. . . . . . . 1,665,125
58,600 Property Trust America. . . . . . . . . . . . 1,113,400
21,100 Weingarten Realty Investors . . . . . . . . . 785,975
------------
5,263,588
------------
RETAIL -- 0.8%
37,000 Edison Brothers Stores, Inc.. . . . . . . . . 1,114,625
30,000 Penney (J.C.), Inc. . . . . . . . . . . . . . $ 1,571,250
28,000 Tiffany & Co. . . . . . . . . . . . . . . . . 819,000
------------
3,504,875
------------
STEEL & METALS -- 1.8%
25,300 Aluminum Co. of America . . . . . . . . . . . 2,001,863
39,400 Inland Steel Industries, Inc.*. . . . . . . . 1,383,925
17,300 USX Corp. . . . . . . . . . . . . . . . . . . 761,200
160,200 Worthington Industries, Inc.. . . . . . . . . 3,163,950
------------
7,310,938
------------
TELECOMMUNICATIONS -- 6.9%
14,200 American Telephone & Telegraph Co.. . . . . . 805,850
18,400 Bell Atlantic Corp. . . . . . . . . . . . . . 1,044,200
32,600 ITT Corp. . . . . . . . . . . . . . . . . . . 3,207,025
49,800 LDDS Communications, Inc.*. . . . . . . . . . 1,369,500
137,500 MCI Communications Corp.. . . . . . . . . . . 3,798,437
34,200 Rochester Telephone Corp. . . . . . . . . . . 1,487,700
70,500 Southwestern Bell Corp. . . . . . . . . . . . 2,952,188
179,100 Tele-Communications, Inc.*. . . . . . . . . . 4,880,475
100,600 Telefonos de Mexico, Series A (ADR) . . . . . 7,431,825
23,200 Telephone & Data System, Inc. . . . . . . . . 1,145,500
------------
28,122,700
------------
TEXTILES -- 0.3%
32,800 Kellwood Co.. . . . . . . . . . . . . . . . . 1,217,700
------------
TRUCKING & SHIPPING -- 1.3%
72,200 Consolidated Rail Corp. . . . . . . . . . . . 4,693,000
36,800 Southern Pacific Rail Corp.*. . . . . . . . . 777,400
------------
5,470,400
------------
Total Common Stocks
(cost $238,349,102) 277,529,534
------------
PRINCIPAL
MOODY'S AMOUNT
RATING (000)
- -------- -------- DEBT OBLIGATIONS -- 21.5%
CORPORATE BONDS -- 21.2%
AEROSPACE/DEFENSE -- 1.3%
BE Aerospace, Inc.,
Ba3 $3,000 9.75%, 3/1/03 . . . 3,120,000
</TABLE>
Notes to Financial Statements.
B-42
<PAGE>
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL DESCRIPTION VALUE
RATING AMOUNT (NOTE 1)
(000)
<C> <C> <S> <C>
- ---------------------------------------------------------------------------
AEROSPACE/DEFENSE -- (CONT'D)
Colt Industries, Inc.,
Ba2 $2,010 11.25%, 12/1/15. . . . . . . . . . . $ 2,170,800
------------
5,290,800
------------
AIRLINES -- 1.0%
Delta Air Lines, Inc.,
Ba1 1,000 10.375%, 12/15/22. . . . . . . . . . 1,174,780
USAir, Inc.,
Ba3 3,000 10.00%, 7/1/03 . . . . . . . . . . . 3,009,030
------------
4,183,810
------------
AUTOMOTIVE -- 0.6%
Lear Seating Corp.,
B2 750 8.25%, 2/1/02. . . . . . . . . . . . 750,000
Motor Wheel Corp.,
B2 1,500 11.50%, 3/1/00 . . . . . . . . . . . 1,642,500
------------
2,392,500
------------
BUILDING & RELATED
INDUSTRIES -- 3.8%
American Standard, Inc.,
B1 3,000 9.875%, 6/1/01 . . . . . . . . . . . 3,165,000
Intermediate City Products Corp.,
Ba3 2,000 9.75%, 3/1/00. . . . . . . . . . . . 2,005,000
Kaufman & Broad Home Corp.,
Ba3 2,500 9.375%, 5/1/03 . . . . . . . . . . . 2,612,500
Ryland Group, Inc.,
Ba3 2,000 9.625%, 6/1/04 . . . . . . . . . . . 2,040,000
Standard Pacific Corp.,
Ba2 2,500 10.50%, 3/1/00 . . . . . . . . . . . 2,625,000
USG Corp.,
B2 3,000 10.25%, 12/15/02 . . . . . . . . . . 3,105,000
------------
15,552,500
------------
CHEMICALS -- 0.7%
Georgia Gulf Corp.,
B1 2,500 15.00%, 4/15/00. . . . . . . . . . . 2,775,000
------------
COMPUTER AND RELATED EQUIPMENT -- 0.9%
Unisys Corp.,
Ba3 $3,000 15.00%, 7/1/97 . . . . . . . . . . . $3,480,000
------------
CONTAINERS & PACKAGING -- 1.9%
Container Corp.,
B2 5,000 13.50%, 12/1/99. . . . . . . . . . . 5,550,000
Riverwood International Corp.,
B1 2,000 11.25%, 6/15/02. . . . . . . . . . . 2,200,000
------------
7,750,000
------------
DRUGS & HEALTH CARE -- 1.7%
Healthtrust, Inc.,
B1 3,000 10.75%, 5/1/02 . . . . . . . . . . . 3,337,500
Hospital Corp. of America,
Ba2 3,500 11.25%, 12/1/15. . . . . . . . . . . 3,745,000
------------
7,082,500
------------
FINANCIAL SERVICES -- 0.2%
Auburn Hills Trust, Inc.,
Baa2 625 15.375%, 5/1/20. . . . . . . . . . . 969,275
------------
FOOD & BEVERAGE -- 1.7%
Fresh Del Monte Produce, N.V.,
B3 3,000 10.00%, 5/1/03 . . . . . . . . . . . 2,910,000
RJR Nabisco, Inc.,
Baa3 2,000 8.75%, 4/15/04 . . . . . . . . . . . 2,082,020
Rykoff Sexton, Inc.,
Ba2 2,000 8.875%, 11/1/03. . . . . . . . . . . 2,085,000
------------
7,077,020
------------
HOTELS & LEISURE -- 0.5%
Host Marriott Hospitality, Inc.,
B1 2,000 11.00%, 5/1/07 . . . . . . . . . . . 2,050,000
------------
INSURANCE -- 0.3%
Reliance Group Holdings, Inc.,
B1 1,000 9.75%, 11/15/03. . . . . . . . . . . 1,052,500
------------
</TABLE>
See Notes to Financial Statements.
B-43
<PAGE>
<TABLE>
PRUDENTIAL FLEXIFUND STRATEGY PORTFOLIO
STRATEGY PORTFOLIO
<CAPTION>
MOODY'S PRINCIPAL DESCRIPTION VALUE
RATING AMOUNT (NOTE 1)
(000)
<C> <C> <S> <C>
- ---------------------------------------------------------------------------
MEDIA -- 1.7%
Cablevision Industries Corp.,
Ba3 $2,000 10.75%, 1/30/02. . . . . . . . . . . $ 2,165,000
Continental Cablevision, Inc.,
Ba2 2,000 9.50%, 8/1/13. . . . . . . . . . . . 2,210,000
News America Holdings, Inc.,
Ba1 2,000 12.00%, 12/15/01 . . . . . . . . . . 2,422,560
------------
6,797,560
------------
MINING -- 0.5%
Magma Copper Co.,
Ba3 2,000 11.50%, 1/15/02. . . . . . . . . . . 2,220,000
------------
OIL & GAS -- 0.6%
Triton Energy Corp.,
B1 3,000 Zero Coupon, 12/15/00. . . . . . . . . 2,295,000
------------
PAPER & FOREST PRODUCTS -- 1.0%
Canadian Pacific Forest Products Ltd.,
Ba1 1,000 9.25%, 6/15/02 . . . . . . . . . . . 980,150
Fort Howard Paper Corp.,
B2 3,000 12.625%, 11/1/00 . . . . . . . . . . 3,172,500
------------
4,152,650
------------
PETROLEUM SERVICES -- 0.5%
Clark Oil & Refining Corp.,
Ba2 2,000 9.50%, 9/15/04 . . . . . . . . . . . 2,125,000
------------
STEEL & METALS -- 0.5%
Wheeling Pittsburgh Corp.,
B1 2,000 9.375%, 11/15/03 . . . . . . . . . . 2,105,000
------------
TEXTILES -- 0.5%
Westpoint Stevens, Inc.,
B3 2,000 9.375%, 12/15/05 . . . . . . . . . . 2,080,000
------------
TRUCKING & SHIPPING -- 0.5%
Southern Pacific Transportation Co.,
Ba1 2,000 10.50%, 7/1/99 . . . . . . . . . . . 2,220,000
------------
MISCELLANEOUS -- 0.8%
Flagstar Corp.,
B1 3,000 10.875%, 12/1/02 . . . . . . . . . . 3,180,000
------------
Total Corporate Bonds
(cost $84,580,981) . . . . . . . . . 86,831,115
------------
COLLATERALIZED MORTGAGE
OBLIGATIONS -- 0.3%
Federal National Mortgage
Association, REMIC,
Aaa 1,000 9.00%, 3/25/20
(cost $977,861). . . . . . . . . . . 1,079,370
------------
Total Debt Obligations
(cost $85,558,842) . . . . . . . . . 87,910,485
------------
Total long-term investments
(cost $323,907,944). . . . . . . . . 365,440,019
------------
SHORT-TERM INVESTMENTS -- 8.4%
REPURCHASE AGREEMENT -- 8.4%
34,301 Joint Repurchase Agreement
Account, 3.14%, 2/1/94
(Note 5) . . . . . . . . . . . . . . 34,301,000
------------
TOTAL INVESTMENTS -- 97.6%
(cost $358,208,944; Note 4). . . . . 399,741,019
Other assets in excess of
liabilities -- 2.4%. . . . . . . . . 9,993,866
------------
NET ASSETS -- 100% . . . . . . . . . . $409,734,885
------------
------------
<FN>
- ---------
*Non-income producing security.
ADR -- American Depository Receipt.
REMIC -- Real Estate Mortgage Investment Conduit.
L.P. -- Limited Partnership.
</TABLE>
See Notes to Financial Statements.
B-44
<PAGE>
<TABLE>
PRUDENTIAL FLEXIFUND
STRATEGY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
<CAPTION>
- --------------------------------------------------------------------------------
JANUARY 31,
1994
------------
<S> <C>
ASSETS
Investments, at value (cost $358,208,944). . . . . . . . . . . . $399,741,019
Foreign currency, at value (cost $1,745,723) . . . . . . . . . . 1,746,524
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195,940
Receivable for investments sold. . . . . . . . . . . . . . . . . 12,539,234
Interest and dividends receivable. . . . . . . . . . . . . . . . 2,398,463
Receivable for Fund shares sold. . . . . . . . . . . . . . . . . 1,206,413
Deferred expenses and other assets . . . . . . . . . . . . . . . 17,409
------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . 417,845,002
------------
LIABILITIES
Payable for investments purchased. . . . . . . . . . . . . . . . 6,280,203
Payable for Fund shares reacquired . . . . . . . . . . . . . . . 1,042,312
Distribution fee payable . . . . . . . . . . . . . . . . . . . . 325,842
Management fee payable . . . . . . . . . . . . . . . . . . . . . 233,724
Withholding taxes payable. . . . . . . . . . . . . . . . . . . . 1,889
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . 226,147
------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . 8,110,117
------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . $409,734,885
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par . . . . . . . . . . . . . $ 332,774
Paid-in capital in excess of par. . . . . . . . . . . . . . . . 358,602,003
------------
358,928,008
Undistributed net investment income . . . . . . . . . . . . . . 4,561,660
Accumulated net realized gain on investments. . . . . . . . . . 4,711,875
Net unrealized appreciation on investments. . . . . . . . . . . 41,533,342
------------
Net Assets, January 31,1994. . . . . . . . . . . . . . . . . . . $409,734,885
------------
------------
Class A:
Net asset value and redemption price per share
($31,620,546 divided by 555,336 shares of beneficial
interest issued and outstanding) . . . . . . . . . . . . . . . $12.37
Maximum sales charge (5.25% of offering price). . . . . . . . . 0.69
------
Maximum offering price to public. . . . . . . . . . . . . . . . $13.06
------
------
Class B:
Net asset value, offering price and redemption price per share
($378,114,339 divided by 30,722,019 shares of
beneficial interest issued and outstanding). . . . . . . . . . $12.31
------
------
</TABLE>
See Notes to Financial Statements.
B-45
<PAGE>
<TABLE>
<CAPTION>
PRUDENTIAL FLEXIFUND
STRATEGY PORTFOLIO
STATEMENT OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------
SIX MONTHS
ENDED
JANUARY 31,
1994
------------
<S> <C>
NET INVESTMENT INCOME
Income
Interest (net of foreign withholding taxes of $1,889) . . . . . $ 5,299,098
Dividends (net of foreign withholding taxes of $22,215) . . . . 2,853,578
------------
Total income . . . . . . . . . . . . . . . . . . . . . . . . . 8,152,676
------------
Expenses
Distribution fee -- Class A . . . . . . . . . . . . . . . . . . 31,398
Distribution fee -- Class B . . . . . . . . . . . . . . . . . . 1,845,495
Management fee. . . . . . . . . . . . . . . . . . . . . . . . . 1,297,363
Transfer agent's fees and expenses. . . . . . . . . . . . . . . 394,000
Custodian's fees and expenses . . . . . . . . . . . . . . . . . 151,000
Reports to shareholders . . . . . . . . . . . . . . . . . . . . 49,000
Registration fees . . . . . . . . . . . . . . . . . . . . . . . 37,000
Directors' fees . . . . . . . . . . . . . . . . . . . . . . . . 13,000
Audit fee . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000
Legal fees. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . 9,508
------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . 3,840,764
------------
Net investment income. . . . . . . . . . . . . . . . . . . . . . 4,311,912
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions . . . . . . . . . . . . . . . . . . . . 12,082,523
Financial futures contracts . . . . . . . . . . . . . . . . . . 124,955
Foreign currency transactions . . . . . . . . . . . . . . . . . (28,540)
------------
12,178,938
------------
Net change in unrealized appreciation/depreciation
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 14,545,990
Foreign currencies. . . . . . . . . . . . . . . . . . . . . . . 657
------------
14,546,647
------------
Net gain on investments. . . . . . . . . . . . . . . . . . . . . 26,725,585
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . $31,037,497
------------
------------
</TABLE>
See Notes to Financial Statements.
B-46
<PAGE>
<TABLE>
<CAPTION>
PRUDENTIAL FLEXIFUND
STRATEGY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)
- --------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
JANUARY 31, JULY 31,
1994 1993
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income . . . . . . . . . . . . . . . $ 4,311,912 $10,348,326
Net realized gain on investments. . . . . . . . . . 12,178,938 10,954,676
Net change in unrealized appreciation
of investments. . . . . . . . . . . . . . . . . . 14,546,647 11,275,901
------------ ------------
Net increase in net assets resulting
from operations . . . . . . . . . . . . . . . . . 31,037,497 32,578,903
------------ ------------
Net equalization credits . . . . . . . . . . . . . . 57,433 57,175
------------ ------------
Dividends and distributions (Note 1)
Dividends to shareholders from net investment income
Class A . . . . . . . . . . . . . . . . . . . . . (242,713) (762,246)
Class B . . . . . . . . . . . . . . . . . . . . . (2,396,308) (8,432,955)
------------ ------------
(2,639,021) (9,195,201)
------------ ------------
Distributions to shareholders from net realized
gains on investments and foreign curencies
Class A . . . . . . . . . . . . . . . . . . . . . (815,737) (1,779,498)
------------ ------------
Class B . . . . . . . . . . . . . . . . . . . . . (10,080,523) (26,359,313)
------------ ------------
(10,896,260) (28,138,811)
------------ ------------
Fund share transactions (Note 5)
Proceeds from shares sold. . . . . . . . . . . . . 36,830,260 95,403,980
Net asset value of shares issued in reinvestment
of dividends and distributions. . . . . . . . . . 12,946,740 35,885,867
Cost of shares reacquired. . . . . . . . . . . . . (43,530,320) (75,812,344)
------------ ------------
Net increase in net assets from Fund
share transactions. . . . . . . . . . . . . . . . 6,246,680 55,477,503
------------ ------------
Total increase . . . . . . . . . . . . . . . . . . . 23,806,329 50,779,569
NET ASSETS
Beginning of period. . . . . . . . . . . . . . . . . 385,928,556 335,148,987
------------ ------------
End of period. . . . . . . . . . . . . . . . . . . . $409,734,885 $385,928,556
------------ ------------
</TABLE>
See Notes to Financial Statements.
B-47
<PAGE>
- --------------------------------------------------------------------------------
PRUDENTIAL FLEXIFUND
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
Prudential FlexiFund, (the "Fund"), is registered under the Investment
Company Act of 1940, as a diversified, open-end management investment company.
The Fund was organized as an unincorporated business trust in Massachusetts on
February 23, 1987 and consists of two series, the Conservatively Managed
Portfolio and the Strategy Portfolio. The investment objective of the
Conservatively Managed Portfolio is to achieve a high total investment return
consistent with moderate risk by investing in a diversified portfolio of money
market instruments, debt obligations and equity securities. The investment
objective of the Strategy Portfolio is to achieve a high total investment return
consistent with relatively higher risk than the Conservatively Managed Portfolio
through varying the proportions of investments in debt and equity securities,
the quality and maturity of debt securities purchased and the price volatility
and the type of issuer of equity securities purchased. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic developments in a specific country, industry or region.
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: Any security for which the primary market is on an
exchange (including NASDAQ National Market System equity securities) is valued
at the last sale price on such exchange on the day of valuation or, if there was
no sale on such day, the mean between the last bid and asked prices quoted on
such day. Corporate bonds (other than convertible debt securities) and U.S.
Government and agency securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued on the basis of valuations
provided by a pricing service 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 to be over-the-counter, are valued at the mean
between the most recently quoted bid and asked prices provided by principal
market makers. Forward currency exchange contracts are valued at the current
cost of offsetting the contract on the day of valuation. Other securities
(including options and futures contracts) are valued at the mean between the
most recently quoted bid and asked prices.
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 take possession of the
underlying collateral securities, the value of which exceeds the principal
amount of the repurchase transaction, including accrued interest. To the extent
that any repurchase transaction exceeds one business day, the value of the
collateral is marked-to-market on a daily basis to ensure the adequacy of the
collateral. If the seller defaults and the value of the collateral declines or
if bankruptcy proceedings are commenced with respect to the seller of the
security, realization of the collateral by the Fund may be delayed or limited.
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 rate 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 long-term securities held at the end of the fiscal 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 fiscal period. Accordingly,
realized foreign currency gains (losses) are included in the reported net
realized gains on investment transactions.
B-48
<PAGE>
Net realized gains on foreign currency transactions represent net foreign
exchange gains from the holding of foreign currencies, currency gains or losses
realized between the trade and settlement dates on securities 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.
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 or
the level of governmental supervision and regulation of foreign securities
markets.
FINANCIAL FUTURES CONTRACTS: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Fund is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the "initial margin". Subsequent payments, known as "variation margin",
are made or received by the Fund each day, depending on the daily fluctuations
in the value of the underlying security. Such variation margin is recorded for
financial statement purposes on a daily basis as unrealized gain or loss until
the contracts expire or are closed, at which time the gain or loss is
reclassified to realized gain or loss. The Fund invests in financial futures
contracts solely for the purpose of hedging its existing portfolio securities or
securities the Fund intends to purchase against fluctuations in value caused by
changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Fund may not achieve the anticipated benefits of the financial
futures contracts and may realize a loss. The use of futures transactions
involves the risk of imperfect correlation in movements in the price of futures
contracts, interest rates and the underlying hedged assets.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; interest income is recorded on the accrual basis. Net
investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares of each series based
upon the relative proportion of net assets at the beginning of the day of each
class.
EQUALIZATION: The Fund follows the accounting practice known as equalization by
which a portion of the proceeds from sales and costs of reacquisitions of Fund
shares, equivalent on a per share basis to the amount of distributable net
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. As a result, undistributed net investment
income per share is unaffected by sales or reacquisitions of the Fund's shares.
FEDERAL INCOME TAXES: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of each series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its taxable net income
to its shareholders. Therefore, no federal income tax provision is required.
Withholding taxes on foreign interest and dividends have been provided for in
accordance with the Fund's understanding of the applicable country's tax rates.
DIVIDENDS AND DISTRIBUTIONS: The Fund expects to pay dividends of net investment
income quarterly and make distributions at least annually of any net capital
gains. Dividends and distributions are recorded on the ex-dividend date.
RECLASSIFICATION OF CAPITAL ACCOUNTS: Effective August 1, 1993, the Fund began
accounting and reporting for distributions to shareholders in accordance with
Statement of Position 93-2: Determination, Disclosure, and Financial Statement
Presentation of Income, Capital Gain, and Return of Capital Distributions by
Investment Companies. As a result of this statement, the Fund changed the
classification of distributions to shareholders to better disclose the
differences between financial statement amounts and distributions determined in
accordance with income tax regulations. The effect caused by adopting this
statement was to decrease paid-in capital for the Conservatively Managed
Portfolio and the Strategy Portfolio by $21,132 and $6,769, respectively,
increase (decrease) undistributed net investment income for the Conservatively
Managed Portfolio and the Strategy Portfolio by $214,969 and $(329,527),
respectively, and increase (decrease) accumulated net realized gains on
investments for the Conservatively Managed Portfolio and the Strategy Portfolio
by $(193,837) and $336,296, respectively, as compared to amounts previously
reported through July 31, 1993. 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 Prudential Mutual Fund Management, Inc.
("PMF"). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation ("PIC"); PIC furnishes investment advisory services in connection
with the
B-49
<PAGE>
management of the Fund. PMF pays for the services of PIC, the compensation of
officers of the Fund, occupancy and certain clerical and bookkeeping costs of
the Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly at an
annual rate of .65 of 1% of the average daily net assets of each of the series.
PMF has agreed that, in any fiscal year, it will reimburse the Fund for each
of the series' expenses (including the fees of PMF but excluding interest,
taxes, brokerage commissions, distribution fees, litigation and indemnification
expenses and other extraordinary expenses) in excess of the most restrictive
expense limitation imposed by state securities commissions. The most
restrictive expense limitation is presently believed to be 2.5% of the series'
average daily net assets up to $30 million, 2.0% of the next $70 million of
average daily net assets and 1.5% of the series' average daily net assets in
excess of $100 million. Such expense reimbursement, if any, will be estimated
and accrued daily and payable monthly. No reimbursement was required for the six
months ended January 31, 1994.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. ("PMFD"), who acts as the distributor of the Class A shares
of the Fund, and PSI, who acts as distributor of the Class B shares of the Fund
(collectively the "Distributors"). To reimburse the Distributors for their
expenses incurred in distributing and servicing the Fund's Class A and B
shares, the Fund, pursuant to plans of distribution, pays the Distributors a
reimbursement, accrued daily and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD 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. Such
expenses under the Class A Plan were .20 of 1% of the average daily net assets
of the Class A shares for the five months ended December 31, 1993. Effective
January 1, 1994, PMF increased the Class A Plan distribution expenses to .25 of
1% of the average daily net assets. PMFD pays various broker-dealers, including
PSI and Pruco Securities Corporation ("Prusec"), affiliated broker-dealers, for
account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to the Class B shares at an annual
rate of up to 1% of the average daily net assets of the Class B shares. Unlike
the Class A Plan, there are carryforward amounts under the Class B Plan, and
interest expenses are incurred under the Class B Plan.
The Class B distribution expenses include commission credits for payments of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Fund under the plans and
the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Fund that it has received approximately $376,000
($278,000 -- Conservatively Managed Portfolio and $98,000 -- Strategy Portfolio)
in front-end sales charges resulting from sales of Class A shares during the six
months ended January 31, 1994. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons and
incurred other distribution costs.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Fund's shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total reimbursement made by the Fund
pursuant to the Class B Plan. PSI advised the Fund that for the six months ended
January 31, 1994, it received approximately $535,000 ($242,000 -- Conservatively
Managed Portfolio and $293,000 -- Strategy Portfolio) in contingent deferred
sales charges imposed upon certain redemptions by investors. PSI, as
distributor, has also advised the Fund that at January 31, 1994, the amount
of distribution expenses incurred by PSI and not yet reimbursed by the Fund
or recovered through contingent deferred sales charges approximated $19,830,500
($11,846,000 Conservatively Managed Portfolio and $7,984,500 -- Strategy
Portfolio). This amount may be recovered through future payments under the
Class B Plan or contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
B-50
<PAGE>
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services, Inc. ("PMFS"), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the six months ended January
31, 1994, the Fund incurred fees of approximately $554,000 ($220,0000--
Conservatively Managed Portfolio and $334,000--Strategy Portfolio) for the
services of PMFS. As of January 31, 1994, approximately $105,000 ($49,000--
Conservatively Managed Portfolio and $56,000--Strategy Portfolio) of such fees
were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations also include certain out of pocket expenses paid to non-affiliates.
For the six months ended January 31, 1994, PSI received approximately $30,500
($4,000--Conservatively Managed Portfolio and $26,500--Strategy Portfolio) in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term
investments, for the six months ended January 31, 1994, were as follows:
<TABLE>
<CAPTION>
PORTFOLIO PURCHASES SALES
--------- ------------ ------------
<S> <C> <C>
Conservatively Managed Portfolio . . . . $178,529,049 $131,752,019
Strategy Portfolio . . . . . . . . . . . $155,263,976 $147,796,278
</TABLE>
The cost basis of investments for federal income tax purposes as of
January 31, 1994 was $392,013,569 and $358,490,526 for the Conservatively
Managed Portfolio and the Strategy Portfolio, respectively, and net and gross
unrealized appreciation of investments for federal income tax purposes was as
follows:
<TABLE>
<CAPTION>
CONSERVATIVELY
MANAGED STRATEGY
PORTFOLIO PORTFOLIO
-------------- -----------
<S> <C> <C>
Gross unrealized appreciation. . . . . . . . . . . $41,469,237 $44,674,578
Gross unrealized depreciation. . . . . . . . . . . 5,600,316 3,424,085
-------------- -----------
Net unrealized appreciation. . . . . . . . . . . . $35,868,921 $41,250,493
-------------- -----------
-------------- -----------
</TABLE>
NOTE 5. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund, along with other affiliated registered investment companies,
transfers uninvested cash balances into a single joint account, the daily
aggregate balance of which is invested in one or more repurchase agreements
collateralized by U.S. Government or federal agency obligations. As of
January 31, 1994, the Fund had a 6.9% (Conservatively Managed Portfolio--2.8%
and Strategy Portfolio--4.1%) undivided interest in the repurchase agreements
in the joint account. The undivided interest for the Fund represented
$83,775,000, (Conservatively Managed Portfolio--$49,474,000 and Strategy
Portfolio--$34,301,000) in the principal amount. As of such date, each
repurchase agreement in the joint account and the collateral therefor was as
follows:
BT Securities Corp., 3.18%, dated 1/31/94, in the principal amount of
$175,000,000, repurchase price $175,015,458, due 2/1/94; collateralized by
$31,590,000 U.S. Treasury Notes, 7.50%, 11/15/01, $50,000,000 U.S. Treasury
Notes, 6.375%, 1/15/00, $27,100,000 U.S. Treasury Notes, 6.375%, 7/15/99,
$20,000,000 U.S. Treasury Notes, 7.00%, 4/15/99, and $33,500,000 U.S. Treasury
Notes, 8.25%, 7/15/98; value including accrued interest--$178,679,927.
Goldman Sachs & Co., Inc., 3.125%, dated 1/31/94, in the principal amount of
$395,000,000, repurchase price $395,034,288, due 2/1/94; collateralized by
$351,115,000 U.S. Treasury Bonds, 7.50%, 11/15/16; value including accrued
interest--$404,665,486.
J.P. Morgan Securities, Inc., 3.125%, dated 1/31/94, in the principal amount
of $137,000,000, repurchase price $137,011,892, due 2/1/94; collateralized by
$52,575,000 U.S. Treasury Bonds, 7.125%, 2/15/23, and $50,000,000 U.S. Treasury
Bonds, 11.75%, 11/15/14; value including accrued interest--$139,894,253.
Kidder, Peabody & Co., Inc., 3.15%, dated 1/31/94, in the principal amount of
$301,000,000, repurchase price $301,026,337, due 2/1/94; collateralized by
$89,455,000 U.S. Treasury Notes, 7.50%, 5/15/02, $13,230,000 U.S. Treasury
Notes, 7.875%, 11/15/99, $43,195,000 U.S. Treasury Notes, 6.00%, 11/30/97,
$99,730,000 U.S. Treasury Notes, 6.875%, 3/31/97, and $34,010,000 U.S. Treasury
Notes, 4.625%, 12/31/94; value including accrued interest--$307,201,387.
Smith Barney Shearson, Inc., 3.15%, dated 1/31/94 in the principal amount of
$200,000,000 repurchase price $200,017,500, due 2/1/94; collateralized by
$11,700,000 U.S. Treasury Bonds, 7.25%, 8/15/22, $15,000,000, U.S Treasury
Bonds, 8.00%, 11/15/21, $50,000,000 U.S Treasury Notes, 6.00%, 10/15/99,
$13,000,000 U.S. Treasury Notes, 6.875%, 4/30/97, $11,600,000 U.S. Treasury
Notes 4.625%, 8/15/95, $60,000,00 U.S. Treasury Notes, 11.625%, 11/15/94,
$9,880,000 U.S. Treasury Notes 12.625%, 8/15/94, and $16,600,000 U.S. Treasury
Notes, 5.375%, 4/30/94; value including accrued interest--$204,251,368.
NOTE 6. CAPITAL
Class A shares are sold with a front-end sales charge of up to 5.25%.
Class B shares are sold with a contingent deferred
B-51
<PAGE>
sales charge which declines from 5% to zero depending on the period of time the
shares are held. Both classes of shares have equal rights as to earnings, assets
and voting privileges except that each class bears different distribution
expenses and has exclusive voting rights with respect to its distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share, divided into two classes, designated
Class A and Class B.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
CONSERVATIVELY MANAGED PORTFOLIO:
CLASS A CLASS B
-------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Six months ended January 31, 1994:
Shares sold. . . . . . . . . . . . . . . . . 785,164 $ 9,274,961 7,862,928 $ 92,548,723
Shares issued in reinvestment of dividends
and distributions. . . . . . . . . . . . . 138,677 1,579,156 1,720,969 19,508,726
Shares reacquired. . . . . . . . . . . . . . (199,696) (2,361,012) (2,515,602) (29,669,652)
--------- ----------- ---------- ------------
Increase in shares outstanding . . . . . . . 724,145 $ 8,493,105 7,068,295 $ 82,387,797
--------- ----------- ---------- ------------
--------- ----------- ---------- ------------
CLASS A CLASS B
-------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- ---------- ------------
Year ended July 31, 1993:
Shares sold. . . . . . . . . . . . . . . . . 1,111,058 $12,515,640 9,197,549 $102,859,539
Shares issued in reinvestment of dividends
and distributions. . . . . . . . . . . . . 90,896 994,506 1,459,840 15,874,896
Shares reacquired. . . . . . . . . . . . . . (273,750) (3,079,784) (3,783,156) (42,244,575)
--------- ----------- ---------- ------------
Increase in shares outstanding . . . . . . . 928,204 $10,430,362 6,874,233 $ 76,489,860
--------- ----------- ---------- ------------
--------- ----------- ---------- ------------
STRATEGY PORTFOLIO:
CLASS A CLASS B
-------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- ---------- ------------
Six months ended January 31, 1994:
Shares sold. . . . . . . . . . . . . . . . . 359,901 $ 4,339,213 2,707,213 $ 32,491,047
Shares issued in reinvestment of dividends
and distributions. . . . . . . . . . . . . 87,258 1,029,925 1,015,842 11,916,815
Shares reacquired. . . . . . . . . . . . . . (314,775) (3,807,535) (3,315,312) (39,722,785)
--------- ----------- ---------- ------------
Increase in shares outstanding . . . . . . . 132,384 $1,561,603 407,743 $ 4,685,077
--------- ----------- ---------- ------------
--------- ----------- ---------- ------------
CLASS A CLASS B
-------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- ---------- ------------
Year ended July 31, 1993:
Shares sold. . . . . . . . . . . . . . . . . 948,490 $11,062,181 7,245,790 $ 84,341,799
Shares issued in reinvestment of dividends
and distributions. . . . . . . . . . . . . 219,562 2,486,431 2,958,707 33,399,436
Shares reacquired. . . . . . . . . . . . . . (439,023) (5,122,055) (6,093,273) (70,690,289)
--------- ----------- ---------- ------------
Increase in shares outstanding . . . . . . . 729,029 $ 8,426,557 4,111,224 $ 47,050,946
--------- ----------- ---------- ------------
--------- ----------- ---------- ------------
</TABLE>
NOTE 7. DIVIDENDS
On March 2, 1994, the Board of Trustees of the Fund delcared a dividend from
undistributed net investment income to Class A shareholders of $.105 per share
and to Class B shareholders of $.08 per share for the Conservatively Managed
Portfolio and a dividend from undistributed net investment income to Class A
shareholders of $.07 per share and to Class B shareholders of $.05 per share for
the Strategy Portfolio. All dividends are payable on March 31, 1994 to
shareholders of record on March 24, 1994.
- ----------
These financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
period presented.
B-52
<PAGE>
- --------------------------------------------------------------------------------
PRUDENTIAL FLEXIFUND CONSERVATIVELY MANAGED PORTFOLIO
FINANCIAL HIGHLIGHTS
(UNAUDITED)
- --------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated:
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------- ----------------------------------------------------------
JANUARY 22,
SIX MONTHS 1990@ SIX MONTHS
ENDED YEAR ENDED JULY 31, THROUGH ENDED YEAR ENDED JULY 31,
PER SHARE OPERATING JANUARY 31, -------------------- JULY 31, JANUARY 31, ---------------------------------------------
PERFORMANCE: 1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1989
------- ------- ------- ------ --------- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period. . . . . . . . $ 11.75 $ 11.00 $ 10.73 $10.23 $ 9.83 $ 11.72 $ 10.98 $ 10.71 $ 10.22 $ 10.21 $ 9.43
------- ------- ------- ------ ------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income. . . .17 .43 .44 .44 .26 .13 .34 .35 .36 .45 .52
Net realized and
unrealized gain on
investment transactions. .50 1.16 .81 .73 .38 .49 1.16 .82 .73 .18 .73
------- ------- ------- ------ ------- -------- -------- -------- -------- -------- --------
Total from investment
operations . . . . . . . .67 1.59 1.25 1.17 .64 .62 1.50 1.17 1.09 .63 1.25
------- ------- ------- ------ ------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net
investment income. . . . (.17) (.37) (.44) (.44) (.24) (.13) (.29) (.36) (.37) (.52) (.47)
Dividends in excess of net
investment income. . . . (.02) -- -- -- -- (.02) -- -- -- -- --
Distributions paid to
shareholders from net
realized gains on
investment transactions. (.32) (.47) (.54) (.23) -- (.32) (.47) (.54) (.23) (.10) --
Distributions in excess of
net realized gains . . . (.22) -- -- -- -- (.22) -- -- -- -- --
------- ------- ------- ------ ------- -------- -------- -------- -------- -------- --------
Total distributions. . . (.73) (.84) (.98) (.67) (.24) (.69) (.76) (.90) (.60) (.62) (.47)
------- ------- ------- ------ ------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period . . . . . . . . . $ 11.69 $ 11.75 $ 11.00 $10.73 $10.23 $ 11.65 $ 11.72 $ 10.98 $ 10.71 $ 10.22 $ 10.21
------- ------- ------- ------ ------- -------- -------- -------- -------- -------- --------
------- ------- ------- ------ ------- -------- -------- -------- -------- -------- --------
TOTAL RETURN#: . . . . . . 5.88% 15.15% 12.29% 11.99% 6.59% 5.41% 14.27% 11.48% 11.13% 6.44% 13.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000). . . . . . . . . . $30,950 $22,605 $10,944 $4,408 $1,944 $402,342 $321,831 $225,995 $162,281 $154,917 $132,631
Average net assets (000) . $26,066 $15,392 $7,103 $2,747 $1,047 $357,266 $267,340 $189,358 $149,907 $143,241 $139,009
Ratios to average net
assets:
Expenses, including
distribution fees. . . 1.10%* 1.17% 1.29% 1.38% 1.29%* 1.90%* 1.97% 2.09% 2.16% 2.07% 2.09%
Expenses, excluding
distribution fees. . . .90%* .97% 1.09% 1.18% 1.09%* .90%* .97% 1.09% 1.16% 1.08% 1.08%
Net investment income. . 2.89%* 3.88% 3.97% 4.44% 5.04%* 2.10%* 3.04% 3.25% 3.55% 4.42% 5.47%
Portfolio turnover rate. . 38% 83% 105% 137% 106% 38% 83% 105% 137% 106% 137%
<FN>
- ----------
@ Commencement of offering of Class A shares.
* Annualized.
# Total return does not consider the effects of sales loads. Total returns for
periods of less than a full year are not annualized.
</TABLE>
See Notes to Financial Statements
B-53
<PAGE>
- --------------------------------------------------------------------------------
PRUDENTIAL FLEXIFUND STRATEGY PORTFOLIO
FINANCIAL HIGHLIGHTS
(UNAUDITED)
- --------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated:
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------------- ------------------------------------------------------
JANUARY 22,
SIX MONTHS 1990@ SIX MONTHS
ENDED YEAR ENDED JULY 31, THROUGH ENDED YEAR ENDED JULY 31,
PER SHARE OPERATING JANUARY 31, -------------------- JULY 31, JANUARY 31, ----------------------------------------
PERFORMANCE: 1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1989
---------- ------- ------- ------- ----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period. . . . $ 11.82 $ 12.03 $ 11.45 $ 10.50 $10.16 $ 11.79 $ 12.01 $ 11.43 $ 10.49 $ 10.85 $ 9.52
------- ------- ------- ------- ------ -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income. . . . .18 .42 .35 .38 .25 .13 .34 .26 .30 .37 .42
Net realized and unrealized
gain on investment and
foreign currency
transactions . . . . . . . .81 .70 1.02 .98 .33 .81 .70 1.02 .97 .03 1.30
------- ------- ------- ------- ------ -------- -------- -------- -------- -------- --------
Total from investment
operations . . . . . . . . .99 1.12 1.37 1.36 .58 .94 1.04 1.28 1.27 .40 1.72
------- ------- ------- ------- ------ -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net
investment income. . . . . (.10) (.37) (.37) (.35) (.24) (.08) (.30) (.28) (.27) (.40) (.39)
Distributions paid to
shareholders from net
realized gains on
investment and foreign
currency transactions. . . (.34) (.96) (.42) (.06) -- (.34) (.96) (.42) (.06) (.36) --
------- ------- ------- ------- ------ -------- -------- -------- -------- -------- --------
Total distributions. . . . (.44) (1.33) (.79) (.41) (.24) (.42) (1.26) (.70) (.33) (.76) (.39)
------- ------- ------- ------- ------ -------- -------- -------- -------- -------- --------
Net asset value, end of
period . . . . . . . . . . $ 12.37 $ 11.82 $ 12.03 $ 11.45 $10.50 $ 12.31 $ 11.79 $ 12.01 $ 11.43 $ 10.49 $ 10.85
------- ------- ------- ------- ------ -------- -------- -------- -------- -------- --------
------- ------- ------- ------- ------ -------- -------- -------- -------- -------- --------
TOTAL RETURN#: . . . . . . . 8.50% 10.02% 12.36% 13.42% 5.83% 8.09% 9.21% 11.53% 12.49% 3.59% 18.53%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000). . . . . . . . . . . $31,621 $28,641 $20,378 $10,765 $5,073 $378,114 $357,287 $314,771 $219,983 $176,078 $ 62,651
Average net assets (000) . . $29,844 $24,216 $15,705 $ 6,694 $2,928 $366,090 $339,225 $267,525 $190,913 $127,360 $ 57,326
Ratios to average net
assets:
Expenses, including
distribution fees. . . . 1.18%* 1.21% 1.26% 1.33% 1.51%* 1.98%* 2.01% 2.06% 2.11% 2.10% 2.33%+
Expenses, excluding
distribution fees. . . . .98%* 1.01% 1.06% 1.13% 1.26%* .98%* 1.01% 1.06% 1.11% 1.14% 1.34%+
Net investment income. . . 2.21%* 3.61% 3.05% 3.89% 4.58%* 2.16%* 2.79% 2.27% 2.95% 3.61% 4.26%+
Portfolio turnover rate. . . 39% 145% 241% 189% 159% 39% 145% 241% 189% 159% 132%
<FN>
- ----------
+ Net of expense subsidy or reimbursement.
* Annualized.
@ Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total returns for
periods of less than a full year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-54
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--90.8%
EQUITY INVESTMENTS--51.0%
AEROSPACE/DEFENSE--1.2%
203,200 Banner Aerospace, Inc.*....... $ 1,066,800
20,000 Furon Co...................... 287,500
35,000 Martin Marietta Corp.......... 2,843,750
------------
4,198,050
------------
AUTOMOTIVE--1.6%
27,500 Danaher Corp.................. 914,375
26,000 Ford Motor Co................. 1,374,750
25,000 General Motors Corp........... 1,212,500
64,300 General Motors Corp. Class E.. 1,768,250
------------
5,269,875
------------
CHEMICALS--5.0%
40,000 American Cyanamid Co.......... 2,110,000
35,000 Dexter Corp................... 752,500
70,000 Ferro Corp.................... 2,056,250
19,200 FMC Corp.*.................... 926,400
50,000 Fuller, H.B. Co............... 1,750,000
46,000 Geon Co....................... 1,017,750
35,000 Grace (W.R.) & Co............. 1,404,375
60,000 Hanna (M. A.) Co.............. 1,590,000
79,700 Imperial Chemical Ind. (ADR).. 3,217,888
90,200 Praxair, Inc.................. 1,409,375
42,300 Vigoro Corp................... 1,009,913
------------
17,244,451
------------
COAL--0.5%
86,000 Pittston Co................... $ 1,687,750
------------
COMPUTER AND RELATED
EQUIPMENT--3.5%
44,000 Ceridian Corp.*............... 660,000
45,000 Diebold, Inc.................. 2,497,500
45,200 Digital Equipment Corp.*...... 1,604,600
32,200 First Data Corp............... 1,151,150
21,000 Intel Corp.................... 1,097,250
12,000 Measurex Corp................. 222,000
55,200 Motorola, Inc................. 5,002,500
------------
12,235,000
------------
CONSUMER PRODUCTS--1.3%
65,000 Eastman Kodak Co.............. 3,493,750
10,000 Unilever N.V.................. 967,500
------------
4,461,250
-----------
DRUGS & HEALTH CARE--2.8%
59,800 Healthtrust, Inc.*............ 1,233,375
20,600 Rhone Poulenc Rorer, Inc...... 991,375
45,400 Schering Plough Corp.......... 2,780,750
36,200 Warner Lambert Co............. 2,429,925
67,466 Zeneca Group PLC*............. 1,905,915
------------
9,341,340
------------
</TABLE>
B-55 See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
ELECTRONICS--1.8%
35,000 Loral Corp.................... $ 2,231,250
84,300 MagneTek, Inc.*............... 1,496,325
62,000 Mark IV Industries, Inc....... 1,278,750
46,700 Perkin Elmer Corp............. 1,535,263
------------
6,541,588
------------
ENTERTAINMENT--2.2%
131,100 Time Warner, Inc.............. 5,014,575
43,000 Viacom, Inc.*................. 2,375,750
------------
7,390,325
------------
ENVIRONMENTAL SERVICES--0.1%
37,000 Air & Water Technologies
Corp.*................... 397,750
------------
EQUIPMENT LEASING/RENTAL--0.6%
66,000 Ryder System, Inc............. 2,186,250
------------
FINANCIAL SERVICES--6.3%
28,000 American Express Co........... 913,500
41,600 Aon Corp...................... 2,251,600
20,000 Beneficial Corp............... 1,492,500
40,400 Dean Witter Discover & Co..... 1,504,900
40,000 Equitable Companies, Inc...... 810,000
64,000 Equitable of Iowa............. 1,792,000
83,200 First Bank System, Inc........ 2,527,200
26,100 First Financial Management
Corp..................... 1,207,125
67,000 First of America Bank Corp.... 2,646,500
65,000 KeyCorp....................... 2,543,125
114,200 Norwest Corp.................. 2,997,750
28,900 Washington Mutual Savings
Bank..................... 1,148,775
------------
21,834,975
------------
FOOD & BEVERAGE--0.8%
29,000 Morrison Restaurants, Inc..... 906,250
47,000 Sbarro, Inc................... 1,874,125
------------
2,780,375
------------
FREIGHT TRANSPORTATION--0.8%
50,000 Illinois Central Corp......... $ 1,475,000
22,900 Union Pacific Corp............ 1,457,013
------------
2,932,013
------------
GAS PIPELINES--0.3%
37,400 Seagull Energy Corp.*......... 977,075
------------
HOME IMPROVEMENTS--1.2%
40,000 Black & Decker Corp........... 850,000
70,000 Owens Corning Fiberglass*..... 2,913,750
------------
3,763,750
------------
INSURANCE--3.9%
33,600 Berkley (W. R.) Corp.......... 1,428,000
71,000 Life Re....................... 2,493,875
31,000 NAC Re Corp................... 1,046,250
45,000 National Re Corp.............. 1,541,250
25,700 Reinsurance Group America,
Inc.*.................... 883,438
124,700 Tig Holdings, Inc.*........... 3,164,263
40,000 Trenwick Group, Inc........... 1,765,000
30,000 Unitrin, Inc.................. 1,335,000
------------
13,657,076
------------
MACHINERY & EQUIPMENT--1.6%
2,400 Duriron, Inc.................. 55,800
45,000 IDEX Corp..................... 1,293,750
38,000 Kaydon Corp................... 845,500
43,900 Newell Co..................... 1,426,750
103,200 Rexnord Corp.*................ 1,702,800
------------
5,324,600
------------
MEDIA--1.5%
26,300 Dow Jones & Co., Inc.......... 779,138
50,000 Houghton Mifflin Co........... 2,250,000
50,000 Media General, Inc............ 1,087,500
27,000 Scholastic Corp.*............. 1,171,125
------------
5,287,763
------------
MINING--0.4%
150,000 INDRESCO, Inc.*............... 1,537,500
------------
</TABLE>
B-56 See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
MISCELLANEOUS--0.8%
46,100 BWIP Holding, Inc............. $ 1,117,925
21,300 Minerals Technologies, Inc.... 599,063
34,300 York International Corp....... 1,140,475
------------
2,857,463
------------
OIL & GAS EXPLORATION/
PRODUCTION--1.8%
70,000 Cabot Oil & Gas Corp.......... 1,610,000
26,100 Enron Oil & Gas Co............ 1,112,513
164,700 Oryx Energy Co................ 3,355,763
------------
6,078,276
------------
PAPER & FOREST PRODUCTS--2.2%
59,000 Champion International
Corp..................... 1,939,625
90,000 Mead Corp..................... 3,948,750
28,050 Pentair, Inc.................. 1,009,800
34,800 Riverwood International
Corp..................... 482,850
------------
7,381,025
------------
PETROLEUM SERVICES--2.1%
15,000 American Oil & Gas Corp.*..... 161,250
28,000 Anadarko Petroleum Corp....... 1,095,500
40,000 British Petroleum Plc (ADR)... 2,225,000
35,000 Enterra Corp.*................ 857,500
35,000 Murphy Oil Corp............... 1,430,625
70,000 Occidental Petroleum Corp..... 1,478,750
7,100 USX -Delhi Group.............. 148,213
------------
7,396,838
------------
RAILROADS--0.3%
48,100 Santa-Fe Pacific Corp......... 889,850
------------
RETAIL--1.7%
32,800 AnnTaylor Stores Corp.*....... 873,300
21,500 Dayton Hudson Corp............ 1,478,125
72,500 Federated Department Stores,
Inc.*.................... $ 1,667,500
33,000 Sears Roebuck & Co............ 1,654,125
------------
5,673,050
------------
STEEL & METALS--0.1%
17,000 Material Sciences Corp.*...... 333,625
------------
TELECOMMUNICATIONS--3.5%
58,200 Ericsson (L.M.) Telephone Co.,
(ADR).................... 2,611,725
30,000 ITT Corp...................... 2,662,500
117,000 MCI Communications Corp....... 3,276,000
135,000 Tele-Communications, Inc.*.... 3,223,125
------------
11,773,350
------------
TEXTILES--1.1%
17,000 Fruit of the Loom, Inc.*...... 484,500
80,000 Jones Apparel Group, Inc.*.... 1,940,000
32,000 VF Corp....................... 1,408,000
------------
3,832,500
------------
TOTAL EQUITY INVESTMENTS
(cost $148,663,027)...... 175,264,733
------------
</TABLE>
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DEBT OBLIGATIONS--39.8%
- ------------ ---------
<S> <C> <C> <C>
CORPORATE BONDS--13.8%
AIRLINES--0.2%
AMR Corp.
Baa3 $ 500 9.00%, 8/1/12...... 523,165
Southwest Airlines Co.,
Baa1 100 9.40%, 7/1/01...... 117,584
------------
640,749
------------
COMPUTER & RELATED
EQUIPMENT--0.6%
Comdisco, Inc.,
Baa2 1,000 8.95%, 5/15/95..... 1,057,010
Baa2 1,000 9.75%, 1/15/97..... 1,105,540
------------
2,162,550
------------
</TABLE>
B-57 See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
<S> <C> <C> <C>
ELECTRONICS--0.7%
Commonwealth Edison Co.,
Baa3 $ 2,000 9.05%, 10/15/99..... $ 2,273,400
------------
ENTERTAINMENT--0.5%
Time Warner, Inc.,
NR 1,000 6.05%, 7/1/95....... 1,004,270
Ba2 600 7.45%, 2/1/98....... 621,564
------------
1,625,834
------------
FINANCIAL SERVICES--6.1%
Associates Corp. of
North America,
A2 500 12.75%, 8/15/94..... 542,275
A1 300 8.80%, 1/14/95...... 317,709
A1 200 8.375%, 1/15/98..... 221,128
Chase Manhattan Corp.,
Baa3 500 8.00%, 6/15/99...... 542,645
Chrysler Financial Corp.,
Baa1 1,200 5.34%, 7/5/95....... 1,202,100
Baa1 400 5.26%, 7/6/95....... 400,112
Baa1 700 6.00%, 4/15/96...... 705,544
Baa1 700 9.50%, 12/15/99..... 793,765
Citicorp,
Baa1 1,000 7.80%, 3/24/95...... 1,048,340
First Union Corp.,
A3 1,000 9.45%, 6/15/99...... 1,156,860
Ford Motor Credit Co.,
A2 1,000 6.25%, 2/26/98...... 1,016,650
Goldman Sachs Group, L.P.,
A1 2,000 6.10%, 4/15/98...... 2,032,560
Kansallis-Osake-Pankki
Bank,
Baa1 $ 700 6.125%, 5/15/98..... $ 707,434
Korea Development Bank,
A1 1,800 7.92%, 3/25/97...... 1,940,796
Nordiska Investering-
sbanke,
NR 3,000 9.50%, 12/15/94..... 3,191,430
Potomac Capital
Investment Corp.,
NR 1,000 6.19%, 4/28/97...... 1,006,500
Shearson Lehman
Holdings, Inc.,
A3 1,000 5.75%, 2/15/98...... 987,140
Tiphook Finance Corp.,
Ba1 1,500 7.125%, 5/1/98...... 1,498,470
Union Bank Finland,
A3 1,650 5.25%, 6/15/96...... 1,646,519
------------
20,957,977
------------
FOOD & BEVERAGE--0.8%
Coca Cola Enterprises,
Inc.,
A3 500 6.50%, 11/15/97..... 517,745
Phillip Morris Co., Inc.,
A2 250 8.70%, 8/1/94....... 260,678
Procter & Gamble Co.,
Aa2 1,700 9.36%, 1/1/21....... 2,106,045
------------
2,884,468
------------
MEDIA--0.5%
News America Holdings,
Inc.,
Baa3 1,000 7.45%, 6/1/00....... 1,012,250
</TABLE>
B-58 See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
<S> <C> <C> <C>
MEDIA--(CONT'D.)
RHI Entertainment, Inc.,
NR $ 836 6.50%, 6/1/03....... $ 846,450
------------
1,858,700
------------
MISCELLANEOUS--1.2%
Banmer S.A.,
NR 1,000 8.00%, 7/7/98....... 1,002,500
Cemex S.A.,
Ba2 1,500 8.875%, 6/10/98..... 1,543,120
Federal Express Corp.,
Baa3 500 10.05%, 6/15/99..... 584,180
Laidlaw, Inc.,
Baa2 700 8.25%, 5/15/23...... 719,500
------------
3,849,300
------------
PAPER & FOREST
PRODUCTS--0.2%
Georgia Pacific Corp.,
Baa3 500 9.625%, 3/15/22..... 576,340
------------
RETAIL--1.4%
Penney (J.C.) Co., Inc.,
A2 2,000 9.75%, 6/15/21...... 2,447,620
Sears Roebuck & Co.,
Baa1 2,000 9.25%, 8/1/97....... 2,246,380
------------
4,694,000
------------
TELECOMMUNICATIONS--0.3%
American Telephone &
Telegraph Co.,
Aa3 1,000 8.625%, 12/1/31..... 1,127,860
Tele-Communications,
Inc.,
Ba2 310 Zero Coupon,
4/25/08........... 125,163
------------
1,253,023
------------
UTILITIES--1.3%
Cleveland Electric
Illuminating Co.,
Baa3 1,000 8.33%, 10/30/98..... 1,075,300
Hydro Quebec Corp.,
Aa3 $ 600 9.40%, 2/1/21....... $ 733,320
Aa3 500 3.375%, 9/30/49..... 437,500
Pennsylvania Power
& Light Co.,
A2 450 9.375%, 7/1/21...... 525,024
Philadelphia Electric
Co.,
Baa1 1,000 7.125%, 9/1/02...... 1,037,540
Texas Utilities
Electric Co.,
Baa2 800 9.625%, 9/30/94..... 842,584
------------
4,651,268
------------
Total Corporate Bonds
(cost $45,792,136).. 47,427,609
------------
U.S. GOVERNMENT AND
AGENCY SECURITIES--24.7%
United States Treasury
Bonds,
2,650 11.625%, 11/15/04... 3,877,268
1,700 10.75%, 8/15/05..... 2,389,826
10,300 11.25%, 2/15/15..... 15,947,284
4,500 7.50%, 11/15/16..... 4,994,280
3,100 8.875%, 8/15/17..... 3,959,754
United States Treasury
Notes,
5,000 7.25%, 11/15/96..... 5,392,200
800 6.50%, 11/30/96..... 844,872
13,600 6.00%, 11/30/97..... 14,127,000
5,300 9.00%, 5/15/98...... 6,168,723
11,000 9.25%, 8/15/98...... 12,976,590
2,000 5.50%, 4/15/00...... 2,005,320
9,750 7.50%, 11/15/01..... 10,912,395
United States Treasury
Strips,
4,200 Zero Coupon,
2/15/08............. 1,636,572
------------
Total U. S.
government and
agency securities
(cost $82,740,610).. 85,232,084
------------
</TABLE>
B-59 See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
<S> <C> <C> <C>
COLLATERALIZED MORTGAGE
OBLIGATIONS--0.4%
Federal Home Loan
Mortgage Corp.,
Ser. 1435, Class D,
REMIC,
$ 1,000 7.00%, 12/15/16..... $ 1,033,750
Federal National
Mortgage Association,
Ser. 92-78, Class J,
REMIC, PAC IO,
23 6/25/07............. 493,923
------------
Total collateralized
mortgage obligations
(cost $1,748,109)... 1,527,673
------------
ASSET BACKED
SECURITIES--0.9%
Bank of New York Master
Credit Card Trust,
Aaa 1,600 7.95%, 4/15/96...... 1,648,496
Standard Credit
Card Trust,
Aaa 1,000 9.375%, 5/10/95..... 1,069,680
Aaa 400 8.75%, 6/3/96....... 431,688
------------
Total asset backed
securities (cost
$3,084,754)......... 3,149,864
------------
Total debt obligations
(cost $133,365,609). 137,337,230
------------
Total long-term
investments (cost
$282,028,636)....... 312,601,963
------------
SHORT-TERM INVESTMENTS--8.0%
CORPORATE NOTES--0.9%
Associates Corp. of
America,
A1 $ 655 8.875%, 11/1/93..... $ 663,030
First USA Credit Card
Trust,
Aa1 66 8.55%, 7/15/94...... 66,134
General Motors
Acceptance Corp.,
Baa1 500 8.60%, 12/30/93..... 508,875
Great Atlantic & Pacific
Tea, Inc.,
Baa2 800 8.125%, 1/15/94..... 812,568
Westinghouse Credit
Corp.,
Baa3 1,000 8.86%, 9/19/93...... 1,005,300
------------
Total corporate notes
(cost $3,117,281)... 3,055,907
------------
REPURCHASE AGREEMENT--7.1%
Joint Repurchase Agreement
Account,
24,579 3.008%, 8/2/93
(Note 5)............ 24,579,000
------------
Total short-term
investments (cost
$27,696,281)........ 27,634,907
------------
Total investments--98.8%
(cost $309,724,917;
Note 4)............. 340,236,870
Other assets in
excess of
liabilities--1.2%... 4,199,480
------------
NET ASSETS--100%...... $344,436,350
------------
------------
<FN>
- ------------------
* Non-income producing security.
ADR--American Depository Receipt.
PAC IO--Planned Amortization Class Interest Only.
L.P.--Limited Partnership.
REMIC--Real Estate Mortgage Investment Conduit.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Prospectus contains a description of
Moody's ratings.
</TABLE>
B-60 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL FLEXIFUND
CONSERVATIVELY MANAGED PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
July 31,
ASSETS 1993
------------
<S> <C>
Investments, at value (cost $309,724,917)................................................. $340,236,870
Cash...................................................................................... 41,859
Receivable for investments sold........................................................... 8,207,495
Interest and dividends receivable......................................................... 2,954,369
Receivable for Fund shares sold........................................................... 1,344,542
Deferred expenses and other assets........................................................ 9,747
------------
Total assets.......................................................................... 352,794,882
------------
LIABILITIES
Payable for investments purchased......................................................... 7,442,893
Due to Distributors....................................................................... 272,893
Payable for Fund shares reacquired........................................................ 264,987
Accrued expenses.......................................................................... 190,696
Due to Manager............................................................................ 187,063
------------
Total liabilities..................................................................... 8,358,532
------------
NET ASSETS................................................................................ $344,436,350
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................... $ 293,884
Paid-in capital in excess of par........................................................ 299,195,008
------------
299,488,892
Undistributed net investment income..................................................... 2,707,799
Accumulated net realized gains.......................................................... 11,727,706
Net unrealized appreciation............................................................. 30,511,953
------------
Net assets, July 31, 1993............................................................... $344,436,350
------------
------------
Class A:
Net asset value and redemption price per share ($22,605,489 + 1,923,323 shares of
beneficial interest issued and outstanding)........................................... $11.75
Maximum sales charge (5.25% of offering price).......................................... .65
------------
Maximum offering price to public........................................................ $12.40
------------
------------
Class B:
Net asset value, offering price and redemption price per share ($321,830,861 +
27,465,084 shares of beneficial interest issued and outstanding)...................... $11.72
------------
------------
</TABLE>
See Notes to Financial Statements.
B-61
<PAGE>
PRUDENTIAL FLEXIFUND
CONSERVATIVELY MANAGED PORTFOLIO
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
JULY 31,
NET INVESTMENT INCOME 1993
-----------
<S> <C>
INCOME
Interest............................. $ 9,988,829
Dividends (net of foreign withholding
taxes of $36,235).................. 4,148,144
-----------
Total income....................... 14,136,973
-----------
EXPENSES
Distribution fee--Class A............ 30,784
Distribution fee--Class B............ 2,673,399
Management fee....................... 1,837,757
Transfer agent's fees and expenses... 500,000
Custodian's fees and expenses........ 177,500
Registration fees.................... 67,000
Reports to shareholders.............. 64,000
Trustees' fees....................... 25,500
Audit fee............................ 14,000
Legal fees........................... 10,000
Amortization of organization
expenses............................. 2,246
Miscellaneous........................ 245
-----------
Total expenses..................... 5,402,431
-----------
Net investment income.................. 8,734,542
-----------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Net realized gain on
investment transactions.............. 13,033,133
Net change in unrealized appreciation
on investments....................... 16,803,076
-----------
Net gain on investments................ 29,836,209
-----------
NET INCREASE IN NET ASSETS
Resulting from Operations.............. $38,570,751
-----------
-----------
</TABLE>
PRUDENTIAL FLEXIFUND
CONSERVATIVELY MANAGED PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INCREASE (DECREASE) YEARS ENDED JULY 31,
IN NET ASSETS 1993 1992
------------- -------------
<S> <C> <C>
Operations
Net investment income... $ 8,734,542 $ 6,431,238
Net realized gain on
investment
transactions.......... 13,033,133 12,244,567
Net change in unrealized
appreciation on
investments........... 16,803,076 2,143,846
------------- -------------
Net increase in net
assets
resulting from
operations............ 38,570,751 20,819,651
------------- -------------
Net equalization
credits................. 325,868 287,441
------------- -------------
Dividends and
distributions (Note 1)
Dividends to
shareholders from
net investment income
Class A............... (490,533) (282,634)
Class B............... (6,742,292) (6,248,189)
------------- -------------
(7,232,825) (6,530,823)
------------- -------------
Distributions to
shareholders
from net realized
gains on
investment
transactions
Class A............... (557,629) (282,143)
Class B............... (10,528,236) (8,537,608)
------------- -------------
(11,085,865) (8,819,751)
------------- -------------
Fund share transactions
(Note 6)
Net proceeds from shares
subscribed............ 115,375,179 85,104,820
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions......... 16,869,402 13,845,678
Cost of shares
reacquired.............. (45,324,359) (34,457,473)
------------- -------------
Net increase in net
assets from Fund share
transactions.......... 86,920,222 64,493,025
------------- -------------
Total increase............ 107,498,151 70,249,543
NET ASSETS
Beginning of year......... 236,938,199 166,688,656
------------- -------------
End of year............... $ 344,436,350 $ 236,938,199
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements.
B-62
<PAGE>
PRUDENTIAL FLEXIFUND Portfolio of Investments
STRATEGY PORTFOLIO July 31, 1993
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--85.9%
EQUITY INVESTMENTS--58.5%
ADVERTISING--0.4%
40,625 ADVO, Inc..................... $ 680,463
61,100 American Business
Information*................ 687,375
------------
1,367,838
------------
AEROSPACE/DEFENSE--1.5%
32,200 General Dynamics Corp......... 2,906,050
34,400 Martin Marietta Corp.......... 2,795,000
------------
5,701,050
------------
AUTOMOTIVE--1.8%
64,600 Durakon Industries, Inc.*..... 1,162,800
43,200 Ford Motor Co................. 2,284,200
87,900 Goodyear Tire & Rubber Co..... 3,669,825
------------
7,116,825
------------
CHEMICALS--2.4%
76,500 Air Products & Chemicals,
Inc......................... 3,079,125
22,800 Fuller, H.B. Co............... 798,000
30,000 Imperial Chemical Ind.
(ADR)....................... 1,211,250
52,166 Lawter International, Inc..... 691,200
150,600 Praxair, Inc.................. 2,353,125
33,500 Valspar Corp.................. 1,222,750
------------
9,355,450
------------
COMMERCIAL SERVICES--1.1%
24,300 Olsten Corp................... 631,800
29,000 Premark International, Inc.... 1,769,000
78,300 ServiceMaster L. P............ 1,977,075
------------
4,377,875
------------
COMPUTER AND RELATED EQUIPMENT--4.1%
45,800 Automatic Data Processing,
Inc......................... 2,278,550
34,300 Borland International, Inc.... 630,263
117,000 First Data Corp............... 4,182,750
46,200 Fiserv, Inc................... 924,000
37,800 HBO & Co...................... 1,228,500
13,000 Hewlett-Packard Co............ 936,000
36,000 LEGENT Corp.*................. 715,500
41,700 Motorola, Inc................. 3,779,063
21,400 SPS Transaction Services,
Inc.*....................... 1,003,125
------------
15,677,751
------------
CONSUMER PRODUCTS--1.8%
46,100 Eastman Kodak Co.............. 2,477,875
19,900 Hillenbrand Industries,
Inc......................... 880,575
15,400 International Flavors &
Fragrances, Inc............. 1,759,450
44,400 Scholastic Corp.*............. 1,925,850
------------
7,043,750
------------
DRUGS & HEALTH CARE--2.4%
14,900 Diagnostic Products Corp...... 316,625
139,300 Galen Health Care, Inc.*...... 2,855,650
9,600 Hooper Holmes, Inc............ 108,000
50,700 Schering Plough Corp.......... 3,105,375
41,800 Warner Lambert Co............. 2,805,825
------------
9,191,475
------------
ELECTRONICS--3.2%
66,800 Ametek, Inc................... 910,150
126,200 Emerson Electric Co........... 7,319,600
43,900 General Electric Co........... 4,324,150
------------
12,553,900
------------
ENTERTAINMENT--1.3%
98,100 Carnival Cruise Lines, Inc.... 3,985,313
45,400 TCA Cable TV, Inc............. 998,800
------------
4,984,113
------------
ENVIRONMENTAL SERVICES--0.9%
38,400 Thermo Electron Corp.*........ 2,155,200
44,550 Thermo Instrument System,
Inc.*....................... 1,236,263
10,400 Thermotrex Corp.*............. 176,800
------------
3,568,263
------------
</TABLE>
B-63 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL FLEXIFUND
STRATEGY PROTFOLIO
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
FINANCIAL SERVICES--11.3%
61,000 American Express Co........... $ 1,990,125
45,000 American General Corp......... 1,395,000
36,700 Banc One Corp................. 1,986,388
44,000 Capital Holding Corp.......... 1,897,500
18,600 Cash America International,
Inc......................... 137,175
25,800 Chubb Corp.................... 2,360,700
67,800 Dean Witter Discover & Co..... 2,525,550
15,000 Dreyfus Corp.................. 598,125
80,000 Equitable Companies, Inc...... 2,240,000
51,000 First Financial Management
Corp........................ 2,358,750
24,100 General Reinsurance Corp...... 2,925,138
34,100 Horace Mann Educators Corp.... 912,175
31,200 John Nuveen Co................ 1,080,300
59,200 Kansas City Southern
Industries, Inc............. 2,301,400
10,500 Mellon Bank Corp.............. 586,688
103,400 Norwest Corp.................. 2,714,250
44,610 Republic New York Corp........ 2,263,958
55,200 SAFECO Corp................... 3,450,000
19,300 T. Rowe Price & Associates,
Inc......................... 1,047,025
45,400 Travelers Corp................ 1,430,100
35,000 Union Planters Corp........... 905,625
26,600 United Asset Management
Corp........................ 1,054,025
26,462 UNUM Corp..................... 1,514,950
64,400 Wachovia Corp................. 2,262,050
33,400 Washington Mutual Savings
Bank........................ 1,327,650
------------
43,264,647
------------
FOOD & BEVERAGE--0.2%
32,700 Eskimo Pie Corp.*............. 604,950
------------
FREIGHT TRANSPORTATION--0.1%
15,000 Expeditores Int'l. Washington,
Inc.*....................... 382,500
12,000 M.S. Carriers, Inc.*.......... 132,675
------------
515,175
------------
MACHINERY & EQUIPMENT--2.5%
82,400 Illinois Tool Works, Inc...... 2,976,700
30,000 Lindsay Manufacturing Co.*.... 840,000
33,600 Minnesota Mining &
Manufacturing, Co........... 3,528,000
51,118 Newell Co..................... 1,661,335
20,000 Snap On Tools Corp............ 870,000
------------
9,876,035
------------
MEDIA--2.5%
6,000 Capital Cities ABC, Inc....... 3,030,000
69,600 Liberty Media Corp.*.......... 1,757,400
95,200 Time Warner, Inc.............. 3,641,400
17,800 Viacom, Inc................... 983,450
------------
9,412,250
------------
MINING--0.3%
51,000 Placer Dome, Inc.............. 1,141,125
------------
PAPER & FOREST PRODUCTS--1.1%
110,600 Willamette Industries, Inc.... 4,202,800
------------
PETROLEUM--0.1%
37,000 Cygne Designs Inc.,........... 370,000
------------
PETROLEUM SERVICES--6.2%
60,100 Amoco Corp.................... 3,290,475
44,800 Burlington Resources, Inc..... 2,234,400
62,900 Coastal Corp.................. 1,737,613
28,700 Cross Timbers Oil Co.......... 459,200
13,109 El Paso Natural Gas Co........ 521,083
93,200 Exxon Corp.................... 6,116,250
53,000 Royal Dutch Petroleum Co...... 4,995,250
47,200 Schlumberger, Ltd............. 3,003,100
60,800 Seagull Energy Corp.*......... 1,588,400
------------
23,945,771
------------
REALTY INVESTMENT TRUST--1.4%
36,000 Federal Reality Investment
Trust....................... 976,500
38,800 General Growth Properties
Inc......................... 955,450
30,000 Manufactured Home Community,
Inc......................... 1,080,000
55,000 Property Trust America........ 1,065,625
23,900 United Dominion Reality Trust,
Inc......................... 334,600
19,800 Weingarten Realty Investors... 821,700
------------
5,233,875
------------
</TABLE>
B-64 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL FLEXIFUND
STRATEGY PROTFOLIO
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (A) (NOTE 1)
<C> <S> <C>
RETAIL--0.2%
31,000 Edison Brothers Stores,
Inc......................... $ 968,750
------------
STEEL & METALS--0.8%
106,800 Worthington Industries,
Inc......................... 3,204,000
------------
TELECOMMUNICATIONS--8.1%
37,100 Alltel Corp................... 973,875
110,200 American Telephone & Telegraph
Co.......................... 6,983,925
55,000 Cincinnati Bell, Inc.......... 1,141,250
53,000 Ericsson (L.M.) Telephone Co.,
(ADR)....................... 2,378,375
16,800 General Instrument Corp.*..... 703,500
53,100 ITT Corp...................... 4,712,625
199,000 MCI Communications Corp....... 5,572,000
25,000 Mobile Telecommunication Tech.
Corp.*...................... 575,000
23,400 Resurgens Communications
Group*...................... 991,575
66,200 Southwestern Bell Corp........ 2,681,100
145,600 Tele-Communications, Inc.*.... 3,476,200
21,800 Telephone & Data System,
Inc......................... 1,008,250
------------
31,197,675
------------
TEXTILES--0.3%
28,000 Kellwood Co................... 822,500
16,400 Nautica Enterprises, Inc...... 364,900
------------
1,187,400
------------
TRUCKING/SHIPPING--0.9%
64,000 Consolidated Rail Corp........ 3,608,000
------------
UTILITIES--0.9%
58,600 Entergy Corp.................. 2,182,850
83,700 Public Service Co. of New
Mexico*..................... 1,067,175
------------
3,250,025
------------
U.S. GOVERNMENT AGENCIES--0.7%
34,400 Federal National Mortgage
Assn........................ 2,833,700
------------
Total equity investments
(cost $199,966,267)........... 225,754,468
------------
</TABLE>
<TABLE>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (A) (NOTE 1)
<S> <C> <C> <C>
DEBT OBLIGATIONS--27.4%
Corporate Bonds--22.2%
Aerospace/ Defense--1.6%
BE Aerospace, Inc.,
Sr. Notes,
Ba3 $ 3,000 9.75%, 3/1/03.......... $ 3,082,500
Colt Industries, Inc.,
Sr. Sub. Deb.,
Ba2 2,951 11.25%, 12/1/15........ 3,194,458
------------
6,276,958
------------
AIRLINES--1.7%
AMR Corp.
Baa3 1,000 9.00%, 8/1/12.......... 1,046,330
Delta Air Lines, Inc.,
Ba1 2,000 10.375%, 12/15/22...... 2,145,740
USAir, Inc.,
Gtd. Sr. Notes,
Ba3 3,000 10.00%, 7/1/03......... 3,034,950
------------
6,227,020
------------
BUILDING & RELATED
INDUSTRIES--3.4%
American Standard, Inc.,
Sr. Sub. Notes,
NR 3,000 9.875%, 6/1/01......... 3,067,500
Intermediate City
Products Corp.,
Sr. Sec'd. Notes,
NR 2,000 9.75%, 3/1/00.......... 1,935,000
Kaufman & Broad Home Corp.,
Sr. Sub. Notes,
NR 2,500 9.375%, 5/1/03......... 2,606,250
Standard Pacific Corp.,
Sr. Notes,
Ba2 2,500 10.50%, 3/1/00......... 2,575,000
</TABLE>
B-65 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL FLEXIFUND
STRATEGY PROTFOLIO
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (A) (NOTE 1)
<S> <C> <C> <C>
BUILDING & RELATED
INDUSTRIES--(CONT'D.)
USG Corp.,
Sr. Notes,
B2 $ 3,000 10.25%, 12/15/02.... $ 3,063,750
------------
13,247,500
------------
CHEMICALS--0.7%
Georgia Gulf Corp.,
Sr. Sub. Notes,
B1 2,500 15.00%, 4/15/00..... 2,850,000
------------
COMPUTER AND RELATED
EQUIPMENT--0.9%
Unisys Corp.,
Ba3 3,000 15.00%, 7/1/97...... 3,495,000
------------
CONTAINERS & PACKAGING--2.1%
Container Corp.,
Sr. Sub. Notes,
B2 5,000 13.50%, 12/1/99..... 5,687,500
Owens-Illinois
Holdings Corp.,
Sr. Deb.,
Ba3 2,000 11.00%, 12/1/03..... 2,315,000
------------
8,002,500
------------
DRUGS & HEALTH CARE--1.9%
Healthtrust, Inc.,
Sub. Note,
B1 3,000 10.75%, 5/1/02...... 3,330,000
Hospital Corp. of
America,
Ba2 3,500 11.25%, 12/1/15..... 3,744,965
------------
7,074,965
------------
FINANCIAL SERVICES--1.7%
Auburn Hills Trust,
Inc.,
B2 4,500 15.375%, 5/1/20.... 6,626,250
------------
FOOD & BEVERAGE--0.8%
Fresh Del Monte
Produce, N.V.,
Sr. Notes,
B3 3,000 10.00%, 5/1/03..... 3,000,000
------------
MEDIA--2.0%
Cablevision Industries
Corp., Sr. Notes,
Ba3 2,000 10.75%, 1/30/02..... 2,055,000
News America
Holdings, Inc.,
Sr. Notes,
Ba2 2,000 12.00%, 12/15/01.... 2,442,920
Turner Broadcasting
System, Inc.,
Sr. Sub. Deb.,
B1 3,000 12.00%, 10/15/01.... 3,345,000
------------
7,842,920
------------
MISCELLANEOUS--0.8%
Flagstar Corp.,
Sr. Notes,
NR 3,000 10.875%, 12/1/02.... 3,045,000
------------
PETROLEUM SERVICES--0.5%
Clark Oil & Refining
Corp.,
Sr. Notes,
Ba2 2,000 9.50%, 9/15/04...... 2,060,000
------------
RETAIL--3.5%
Bradlees, Inc.,
Sr. Sub. Notes,
NR 4,050 9.25%, 3/1/03....... 4,090,500
B-66 See Notes to Financial Statements.
<PAGE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (A) (NOTE 1)
<S> <C> <C> <C>
RETAIL--(CONT'D.)
Kroger Co.,
Sr. Sub. Notes,
B1 $ 4,000 9.875%, 8/1/02...... $ 4,209,960
Sealy Corp.,
Sr. Sub. Notes,
NR 2,000 9.50%, 5/1/03....... 2,045,000
Southland Corp.,
Sr. Notes,
NR 3,000 12.00%, 12/15/96.... 3,060,000
------------
13,405,460
------------
TRANSPORTATION--0.6%
Southern Pacific
Transportation Co.,
Sr. Sec'd. Notes,
NR 2,000 10.50%, 7/1/99...... 2,175,000
------------
Total corporate bonds
(cost $83,457,435).. 85,328,573
------------
COLLATERALIZED MORTGAGE
OBLIGATIONS--0.3%
Federal National
Mortgage Association,
REMIC,
Aaa 1,000 9.00%, 3/25/20,
(cost $977,862)..... 1,115,000
------------
FOREIGN GOVERNMENT
OBLIGATIONS--4.9%
French Government
Bonds,
FF 20,650 8.50%, 3/28/00...... 3,846,785
Italian Government
Bonds,
Lira 4,200,000 12.00%, 1/17/99..... 2,708,916
Spanish Government Bonds,
Pts. 810,500 11.30%, 1/15/02..... 6,010,798
United Kingdom
Treasury Bonds,
L 4,250 8.00%, 6/10/03...... 6,562,768
------------
Total foreign government
obligations (cost
$19,939,659)........ 19,129,267
------------
Total debt obligations
(cost $104,374,956). 105,572,840
------------
Total long-term
investments (cost
$304,341,223)....... 331,327,308
------------
SHORT-TERM INVESTMENTS-- 7.9%
REPURCHASE AGREEMENT--7.9%
Joint Repurchase
Agreement Account,
$ 30,586 3.008%, 8/2/93
(Note 5)
Total short-term
investments
(cost $30,586,000).. 30,586,000
------------
Total Investments--93.8%
(cost $334,927,223;
Note 4)............. 361,913,308
Other assets in excess of
liabilities--6.2%... 24,015,248
------------
Net Assets--100%...... $385,928,556
------------
------------
<FN>
- ------------------
* Non-income producing security.
ADR--American Depository Receipt.
REMIC--Real Estate Mortgage Investment Conduit.
L.P.--Limited Partnership.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Prospectus contains a description of Moody's ratings.
</TABLE>
B-67 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL FLEXIFUND
STRATEGY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
July 31,
ASSETS 1993
------------
<S> <C>
Investments, at value (cost $334,927,223)................................................. $361,913,308
Cash...................................................................................... 44,288
Foreign currency, at value (cost $12,697)................................................. 11,621
Receivable for investments sold........................................................... 27,923,675
Interest and dividends receivable......................................................... 2,868,500
Receivable for Fund shares sold........................................................... 986,799
Forward contracts--net amount receivable from counterparties.............................. 90,799
Deferred expenses and other assets........................................................ 7,450
------------
Total assets.......................................................................... 393,846,440
------------
LIABILITIES
Payable for investments purchased......................................................... 6,425,534
Payable for Fund shares reacquired........................................................ 697,629
Due to Distributors....................................................................... 308,298
Due to Manager............................................................................ 212,978
Accrued expenses.......................................................................... 273,445
------------
Total liabilities..................................................................... 7,917,884
------------
NET ASSETS................................................................................ $385,928,556
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................... $ 327,372
Paid-in capital in excess of par........................................................ 352,360,725
------------
352,688,097
Undistributed net investment income..................................................... 3,160,863
Accumulated net realized gains on investments and foreign currencies.................... 3,092,901
Net unrealized appreciation on investments and foreign currencies....................... 26,986,695
------------
Net assets, July 31, 1993............................................................... $385,928,556
------------
------------
Class A:
Net asset value and redemption price per share ($28,641,187 + 2,422,952 shares of
beneficial interest issued and outstanding)........................................... $11.82
Maximum sales charge (5.25% of offering price).......................................... .65
------------
Maximum offering price to public........................................................ $12.47
------------
------------
Class B:
Net asset value, offering price and redemption price per share ($357,287,369 +
30,314,276 shares of beneficial interest issued and outstanding)...................... $11.79
------------
------------
</TABLE>
See Notes to Financial Statements.
B-68
<PAGE>
PRUDENTIAL FLEXIFUND
STRATEGY PORTFOLIO
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
JULY 31,
NET INVESTMENT INCOME 1993
-----------
<S> <C>
Income
Interest............................. $12,498,106
Dividends (net of foreign withholding
taxes of $50,177).................. 4,959,580
-----------
Total income....................... 17,457,686
-----------
Expenses
Distribution fee--Class A............ 48,431
Distribution fee--Class B............ 3,392,254
Management fee....................... 2,362,366
Transfer agent's fees and expenses... 796,500
Custodian's fees and expenses........ 286,000
Reports to shareholders.............. 75,000
Registration fees.................... 75,000
Trustees' fees....................... 25,500
Audit fee............................ 14,000
Legal fees........................... 10,000
Amortization of organization
expenses............................. 2,246
Miscellaneous........................ 22,063
-----------
Total expenses..................... 7,109,360
-----------
Net investment income................ 10,348,326
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain (loss) on:
Investment transactions.............. 8,388,223
Foreign currency transactions........ 2,838,088
Financial futures contracts.......... (271,635)
-----------
10,954,676
-----------
Net change in unrealized
appreciation/depreciation on:
Investments.......................... 11,300,212
Foreign currencies................... (24,311)
-----------
11,275,901
-----------
Net gain on investments................ 22,230,577
-----------
NET INCREASE IN NET ASSETS
Resulting from Operations.............. $32,578,903
-----------
-----------
</TABLE>
PRUDENTIAL FLEXIFUND
STRATEGY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INCREASE (DECREASE) YEARS ENDED JULY 31,
IN NET ASSETS 1993 1992
------------- -------------
<S> <C> <C>
Operations
Net investment income... $ 10,348,326 $ 6,562,245
Net realized gain on
investment and foreign
currency
transactions.......... 10,954,676 22,802,156
Net change in unrealized
appreciation on
investments and
foreign currency...... 11,275,901 782,489
------------- -------------
Net increase in net
assets
resulting from
operations............ 32,578,903 30,146,890
------------- -------------
Net equalization
credits................. 57,175 347,822
------------- -------------
Dividends and
distributions (Note 1)
Dividends to
shareholders from net
investment income
Class A............... (762,246) (490,593)
Class B............... (8,432,955) (6,280,551)
------------- -------------
(9,195,201) (6,771,144)
------------- -------------
Distributions to
shareholders from net
realized gains on
investments and
foreign currencies
Class A............... (1,779,498) (494,165)
Class B............... (26,359,313) (8,902,530)
------------- -------------
(28,138,811) (9,396,695)
------------- -------------
Fund share transactions
(Note 6)
Net proceeds from shares
subscribed............ 95,403,980 123,189,307
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions......... 35,885,867 15,413,803
Cost of shares
reacquired.............. (75,812,344) (48,529,391)
------------- -------------
Net increase in net
assets
from Fund share
transactions.......... 55,477,503 90,073,719
------------- -------------
Total increase............ 50,779,569 104,400,592
NET ASSETS
Beginning of year......... 335,148,987 230,748,395
------------- -------------
End of year............... $ 385,928,556 $ 335,148,987
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements.
B-69
<PAGE>
PRUDENTIAL FLEXIFUND
NOTES TO FINANCIAL STATEMENTS
Prudential FlexiFund, (the "Fund"), is registered under the Investment
Company Act of 1940, as a diversified, open-end management investment company.
The Fund was organized as an unincorporated business trust in Massachusetts on
February 23, 1987 and consists of two series, the Conservatively Managed
Portfolio and the Strategy Portfolio. The investment objective of the
Conservatively Managed Portfolio is to achieve a high total investment return
consistent with moderate risk by investing in a diversified portfolio of money
market instruments, debt obligations and equity securities. The investment
objective of the Strategy Portfolio is to achieve a high total investment return
consistent with relatively higher risk than the Conservatively Managed Portfolio
through varying the proportions of investments in debt and equity securities,
the quality and maturity of debt securities purchased and the price volatility
and the type of issuer of equity securities purchased. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic developments in a specific country, industry or region.
Note 1. ACCOUNTING The following is a summary
POLICIES of significant accounting
policies followed by the Fund in the preparation
of its financial statements.
SECURITIES VALUATION: Any security for which the primary market is on an
exchange (including NASDAQ National Market System equity securities) is valued
at the last sale price on such exchange on the day of valuation or, if there was
no sale on such day, the mean between the last bid and asked prices quoted on
such day. Corporate bonds (other than convertible debt securities) and U.S.
Government and agency securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued on the basis of valuations
provided by a pricing service 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 to be over-the-counter, are valued at the mean
between the most recently quoted bid and asked prices provided by principal
market makers. Forward currency exchange contracts are valued at the current
cost of offsetting the contract on the day of valuation. Other securities
(including options and futures contracts) are valued at the mean between the
most recently quoted bid and asked prices.
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 take possession of the
underlying collateral securities, the value of which exceeds the principal
amount of the repurchase transaction, including accrued interest. To the extent
that any repurchase transaction exceeds one business day, the value of the
collateral is marked-to-market on a daily basis to ensure the adequacy of the
collateral. If the seller defaults and the value of the collateral declines or
if bankruptcy proceedings are commenced with respect to the seller of the
security, realization of the collateral by the Fund may be delayed or limited.
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 rate 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 long-term securities held at the end of the fiscal 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 fiscal period. Accordingly,
realized foreign currency gains (losses) are included in the reported net
realized gains on investment transactions.
Net realized gains on foreign currency transactions represent net foreign
exchange gains from the holding of foreign currencies, currency gains or losses
realized
B-70
<PAGE>
between the trade and settlement dates on securities 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.
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 or
the level of governmental supervision and regulation of foreign securities
markets.
FINANCIAL FUTURES CONTRACTS: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Fund is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the "initial margin". Subsequent payments, known as "variation
margin", are made or received by the Fund each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss until the contracts expire or are closed, at which time the gain or loss is
reclassified to realized gain or loss. The Fund invests in financial futures
contracts solely for the purpose of hedging its existing portfolio securities or
securities the Fund intends to purchase against fluctuations in value caused by
changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Fund may not achieve the anticipated benefits of the financial
futures contracts and may realize a loss. The use of futures transactions
involves the risk of imperfect correlation in movements in the price of futures
contracts, interest rates and the underlying hedged assets.
FORWARD CURRENCY CONTRACTS: 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. A forward contract is a commitment to purchase or
sell a foreign currency at a future date (usually the security transaction
settlement date) at a negotiated forward rate. In the event that a security
fails to settle within the normal settlement period, the forward currency
contract is renegotiated at a new rate. The gain or loss arising from the
difference between the settlement value of the original and renegotiated forward
contracts is isolated and is included in net realized gain from foreign currency
transactions. Risks may arise as a result of the potential inability of the
counterparties to meet the terms of their contract.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; interest income is recorded on the accrual basis. Net
investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares of each series based
upon the relative proportion of net assets at the beginning of the day of each
class.
EQUALIZATION: The Fund follows the accounting practice known as equalization by
which a portion of the proceeds from sales and costs of reacquisitions of Fund
shares, equivalent on a per share basis to the amount of distributable net
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. As a result, undistributed net investment
income per share is unaffected by sales or reacquisitions of the Fund's shares.
FEDERAL INCOME TAXES: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of each series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its taxable net income
to its shareholders. Therefore, no federal income tax provision is required.
Withholding taxes on foreign interest and dividends have been provided for in
accordance with the Fund's understanding of the applicable country's tax rates.
DIVIDENDS AND DISTRIBUTIONS: The Fund expects to pay dividends of net investment
income quarterly and make distributions at least annually of any net capital
gains. Dividends and distributions are recorded on the ex-dividend date.
DEFERRED ORGANIZATION EXPENSES: Prudential Securities Incorporated ("PSI"),
incurred expenses of approximately $187,000 ($93,500 per series) in connection
with the organization and initial registration of the Fund and was reimbursed by
the Fund for this amount. These costs have been deferred and amortized over 60
months. As of July 31, 1993, the organization costs have been fully amortized.
Note 2. Agreements The Fund has a management agreement with
Prudential Mutual Fund Management, Inc. ("PMF"). Pursuant to this agreement,
PMF has responsibility for all investment advisory services and supervises the
B-71
<PAGE>
subadviser's performance of such services. PMF has entered into a subadvisory
agreement with The Prudential Investment Corporation ("PIC"); PIC furnishes
investment advisory services in connection with the management of the Fund. PMF
pays for the services of PIC, the compensation of officers of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears
all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly at an
annual rate of .65 of 1% of the average daily net assets of each of the series.
PMF has agreed that, in any fiscal year, it will reimburse the Fund for each
of the series' expenses (including the fees of PMF but excluding interest,
taxes, brokerage commissions, distribution fees, litigation and indemnification
expenses and other extraordinary expenses) in excess of the most restrictive
expense limitation imposed by state securities commissions. The most restrictive
expense limitation is presently believed to be 2.5% of the series' average daily
net assets up to $30 million, 2.0% of the next $70 million of average daily net
assets and 1.5% of the series' average daily net assets in excess of $100
million. Such expense reimbursement, if any, will be estimated and accrued daily
and payable monthly. No reimbursement was required for the year ended July 31,
1993.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. ("PMFD"), who acts as the distributor of the Class A shares
of the Fund, and PSI, who acts as distributor of the Class B shares of the Fund
(collectively the "Distributors"). To reimburse the Distributors for their
expenses incurred in distributing and servicing the Fund's Class A and B shares,
the Fund, pursuant to plans of distribution, pays the Distributors a
reimbursement, accrued daily and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD 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. Such
expenses under the Class A Plan were .20 of 1% of the average daily net assets
of the Class A shares for the year ended July 31, 1993. PMFD pays various
broker-dealers, including PSI and Pruco Securities Corporation ("Prusec"),
affiliated broker-dealers, for account servicing fees and other expenses
incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to the Class B shares at an annual
rate of up to 1% of the average daily net assets of the Class B shares. Unlike
the Class A Plan, there are carryforward amounts under the Class B Plan, and
interest expenses are incurred under the Class B Plan.
The Class B distribution expenses include commission credits for payments of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Fund under the plans and
the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Fund that it has received approximately $743,000
($405,000--Conservatively Managed Portfolio and $338,000--Strategy Portfolio) in
front-end sales charges resulting from sales of Class A shares during the year
ended July 31, 1993. From these fees, PMFD paid such sales charges to dealers
(PSI and Prusec) which in turn paid commissions to salespersons and incurred
other distribution costs.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Fund's shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total reimbursement made by the Fund
pursuant to the Class B Plan. PSI advised the Fund that for the year ended July
31, 1993, it received approximately $1,161,000 ($425,000--Conservatively Managed
Portfolio and $736,000--Strategy Portfolio) in contingent deferred sales charges
imposed upon certain redemptions by investors. PSI, as distributor, has also
advised the Fund that at July 31, 1993, the amount of distribution expenses
incurred by PSI and not yet reimbursed by the Fund or recovered through
contingent deferred sales charges approximated $18,728,000
($10,268,000--Conservatively Managed Portfolio and $8,460,000--Strategy
Portfolio). This amount may be recovered through future payments under the Class
B Plan or contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
B-72
<PAGE>
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
NOTE 3. OTHER TRANSACTIONS Prudential Mutual Fund Services, Inc.
WITH AFFILIATES ("PMFS"), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent.
During the year ended July 31, 1993, the
Fund incurred fees of approximately $1,066,000 ($410,000--Conservatively
Managed Portfolio and $656,000--Strategy Portfolio) for the services of PMFS.
As of July 31, 1993, approximately $205,000 ($83,000-- Conservatively Managed
Portfolio and $122,000--Strategy Portfolio) of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations also include
certain out of pocket expenses paid to non-affiliates.
For the year ended July 31, 1993, PSI received approximately $38,000
($6,000--Conservatively Managed Portfolio and $32,000--Strategy Portfolio) in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
NOTE 4. PORTFOLIO SECURITIES Purchases and sales of investment securities,
other than short-term investments, for the
fiscal year ended July 31, 1993, were as follows:
<TABLE>
<CAPTION>
PORTFOLIO PURCHASES SALES
- --------------------------- ------------- -------------
<S> <C> <C>
Conservatively Managed
Portfolio................ $ 298,135,511 $ 208,675,914
Strategy Portfolio......... $ 445,454,030 $ 411,076,196
</TABLE>
At July 31, 1993, the Strategy Portfolio had outstanding forward currency
contracts to sell foreign currencies, as follows:
<TABLE>
<CAPTION>
VALUE AT
FOREIGN CURRENCY SETTLEMENT CURRENT APPRECIATION/
SALE CONTRACTS DATE VALUE (DEPRECIATION)
- -------------------- ----------- ------------ --------------
<S> <C> <C> <C>
British Pounds,
expiring 8/4/93... $ 6,701,010 $ 6,672,035 $ 28,975
French Francs,
expiring 8/3/93... $ 3,965,704 $ 3,955,032 $ 10,672
French Francs,
expiring 8/9/93... 6,093,591 6,309,806 (216,215)
Italian Lira,
expiring 8/4/93... 2,756,120 2,753,922 2,198
Spanish Pesetas,
expiring 8/4/93... 6,348,595 6,354,947 (6,352)
----------- ------------ --------------
$25,865,020 $ 26,045,742 $ (180,722)
----------- ------------ --------------
----------- ------------ --------------
<CAPTION>
VALUE AT
FOREIGN CURRENCY SETTLEMENT CURRENT APPRECIATION/
PURCHASE CONTRACT DATE VALUE (DEPRECIATION)
- -------------------- ----------- ------------ --------------
<S> <C> <C> <C>
French Francs,
expiring 8/9/93... $ 6,365,112 $ 6,093,591 $ 271,521
----------- ------------ --------------
----------- ------------ --------------
</TABLE>
The cost basis of investments for federal income tax purposes as of July 31,
1993 was $309,756,308 and $335,238,619 for the Conservatively Managed Portfolio
and the Strategy Portfolio, respectively, and net and gross unrealized
appreciation of investments for federal income tax purposes was as follows:
<TABLE>
<CAPTION>
CONSERVATIVELY
MANAGED STRATEGY
PORTFOLIO PORTFOLIO
-------------- -----------
<S> <C> <C>
Gross unrealized
appreciation................ $ 35,817,843 $31,791,152
Gross unrealized
depreciation................ 5,337,281 5,116,463
-------------- -----------
Net unrealized
appreciation................ $ 30,480,562 $26,674,689
-------------- -----------
-------------- -----------
</TABLE>
Note 5. JOINT REPURCHASE The Fund, along with other affiliated
AGREEMENT ACCOUNT registered investment companies, transfers
uninvested cash balances into a single joint
account, the daily aggregate balance of which is
invested in one or more repurchase agreements collateralized by U.S. Government
or federal agency obligations. As of July 31, 1993, the Fund had a 4.8%
(Conservatively Managed Portfolio--2.1% and Strategy Portfolio--2.7%) undivided
interest in the repurchase agreements in the joint account. The undivided
interest for the Fund represented $55,165,000, (Conservatively Managed
Portfolio-- $24,579,000 and Strategy Portfolio--$30,586,000) in the principal
amount. As of such date, each repurchase agreement in the joint account and the
collateral therefor was as follows:
Bear Stearns & Co., Inc., 3.05%, dated 7/31/93, in the principal amount of
$370,000,000, repurchase price $370,092,500, due 8/2/93; collateralized by
$117,000,000 U.S. Treasury Bills, 3.00%, 7/28/94, $30,720,000 U.S. Treasury
Notes, 4.625%, 12/31/94, and $200,000,000 U.S. Treasury Notes, 8.75%, 10/15/97;
value including accrued interest-- $378,035,770.
J.P. Morgan Securities, Inc., 3.05%, dated 7/31/93, in the principal amount
of $325,000,000, repurchase price $325,082,504, due 8/2/93; collateralized by
$100,000,000 U.S. Treasury Notes, 3.875%, 3/31/95, $20,895,000 U.S. Treasury
Bonds, 14.25%, 2/15/02, and $150,000,000 U.S. Treasury Bonds, 8.75%, 8/15/20;
value including accrued interest--$332,345,551.
B-73
<PAGE>
Kidder, Peabody & Co., Inc., 3.05%, dated 7/31/93, in the principal amount of
$310,000,000, repurchase price $310,078,792, due 8/2/93; collateralized by
$42,445,000 U.S. Treasury Notes, 7.00%, 1/15/94, $30,640,000 U.S. Treasury
Notes, 4.25%, 7/31/94, $22,000,000 U.S. Treasury Notes, 4.25%, 8/31/94, $135,000
U.S. Treasury Notes, 6.875%, 4/30/97, $34,115,000 U.S. Treasury Notes, 8.00%,
8/15/99, and $113,290,000 U.S. Treasury Bonds, 11.75%, 11/15/14; value including
accrued interest--$316,410,057.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 2.85%, dated 7/31/93, in the
principal amount of $145,000,000, repurchase price $145,034,438, due 8/2/93;
collateralized by $146,800,000 U.S. Treasury Notes, 4.125%, 5/31/95; value
including accrued interest-- $148,005,533.
NOTE 6. CAPITAL Class A shares are sold with a front-end sales charge of
up to 5.25%. 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. Both classes of shares have equal rights as to
earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share, divided into two classes, designated
Class A and Class B. Of the shares outstanding at July 31, 1993, PSI owned 5,000
Class B shares of each series.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
CONSERVATIVELY MANAGED PORTFOLIO:
Class A Class B
------------------------- ---------------------------
Shares Amount Shares Amount
---------- ----------- ----------- ------------
Year ended July 31, 1993:
<S> <C> <C> <C> <C>
Shares sold............................................... 1,111,058 $12,515,640 9,197,549 $102,859,539
Shares issued in reinvestment of dividends and
distributions........................................... 90,896 994,506 1,459,840 15,874,896
Shares reacquired......................................... (273,750) (3,079,784) (3,783,156) (42,244,575)
---------- ----------- ----------- ------------
Increase in shares outstanding............................ 928,204 $10,430,362 6,874,233 $ 76,489,860
---------- ----------- ----------- ------------
---------- ----------- ----------- ------------
<CAPTION>
Class A Class B
------------------------- ---------------------------
Shares Amount Shares Amount
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Year ended July 31, 1992:
Shares sold............................................... 663,286 $ 7,158,440 7,228,409 $ 77,946,380
Shares issued in reinvestment of dividends and
distributions........................................... 52,136 547,017 1,273,597 13,298,661
Shares reacquired......................................... (131,231) (1,416,013) (3,062,513) (33,041,460)
---------- ----------- ----------- ------------
Increase in shares outstanding............................ 584,191 $ 6,289,444 5,439,493 $ 58,203,581
---------- ----------- ----------- ------------
---------- ----------- ----------- ------------
STRATEGY PORTFOLIO:
<CAPTION>
Class A Class B
------------------------- ---------------------------
Shares Amount Shares Amount
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Year ended July 31, 1993:
Shares sold............................................... 948,490 $11,062,181 7,245,790 $ 84,341,799
Shares issued in reinvestment of dividends and
distributions........................................... 219,562 2,486,431 2,958,707 33,399,436
Shares reacquired......................................... (439,023) (5,122,055) (6,093,273) (70,690,289)
---------- ----------- ----------- ------------
Increase in shares outstanding............................ 729,029 $ 8,426,557 4,111,224 $ 47,050,946
---------- ----------- ----------- ------------
---------- ----------- ----------- ------------
<CAPTION>
Class A Class B
------------------------- ---------------------------
Shares Amount Shares Amount
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Year ended July 31, 1992:
Shares sold............................................... 924,582 $10,881,022 9,577,890 $112,308,285
Shares issued in reinvestment of dividends and
distributions........................................... 83,717 955,803 1,268,889 14,458,000
Shares reacquired......................................... (254,775) (2,995,192) (3,884,771) (45,534,199)
---------- ----------- ----------- ------------
Increase in shares outstanding............................ 753,524 $ 8,841,633 6,962,008 $ 81,232,086
---------- ----------- ----------- ------------
---------- ----------- ----------- ------------
</TABLE>
B-74
<PAGE>
NOTE 7. DIVIDENDS On September 9, 1993, the Board of Trustees of the Fund
delcared a dividend from undistributed net investment
income to Class A shareholders of $.085 per share and to Class B shareholders
of $.065 per share for the Conservatively Managed Portfolio and a dividend from
undistributed net investment income to Class A shareholders of $.10 per share
and to Class B shareholders of $.08 per share for the Strategy Portfolio. All
dividends are payable on September 30, 1993 to shareholders of record on
September 23, 1993.
B-75
<PAGE>
PRUDENTIAL FLEXIFUND CONSERVATIVELY MANAGED PORTFOLIO
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated:
<TABLE>
<CAPTION>
Class A Class B
-------------------------------------------- ------------------------------------------------------
January 22,
1990@
Year Ended July 31, through Year Ended July 31,
PER SHARE OPERATING ----------------------------- July 31, ------------------------------------------------------
PERFORMANCE: 1993 1992 1991 1990 1993 1992 1991 1990 1989
--------- ------- ------- -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 11.00 $ 10.73 $ 10.23 $ 9.83 $ 10.98 $ 10.71 $ 10.22 $ 10.21 $ 9.43
---------- ------- ------- ------ ---------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... .43 .44 .44 .26 .34 .35 .36 .45 .52
Net realized and
unrealized gain on
investment
transactions........... 1.16 .81 .73 .38 1.16 .82 .73 .18 .73
---------- ------- ------- ------ ---------- -------- -------- -------- --------
Total from investment
operations........... 1.59 1.25 1.17 .64 1.50 1.17 1.09 .63 1.25
---------- ------- ------- ------ ---------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (.37) (.44) (.44) (.24) (.29) (.36) (.37) (.52) (.47)
Distributions paid to
shareholders from net
realized gains on
investment
transactions........... (.47) (.54) (.23) -- (.47) (.54) (.23) (.10) --
---------- ------- ------- ------ ---------- -------- -------- -------- --------
Total distributions.... (.84) (.98) (.67) (.24) (.76) (.90) (.60) (.62) (.47)
---------- ------- ------- ------ ---------- -------- -------- -------- --------
Net asset value, end of
period................. $ 11.75 $ 11.00 $ 10.73 $10.23 $ 11.72 $ 10.98 $ 10.71 $ 10.22 $ 10.21
---------- ------- ------- ------ ---------- -------- -------- -------- --------
---------- ------- ------- ------ ---------- -------- -------- -------- --------
TOTAL RETURN#:........... 15.15% 12.29% 11.99% 6.59% 14.27% 11.48% 11.13% 6.44% 13.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (000)........... $ 22,605 $10,944 $ 4,408 $1,944 $ 321,831 $225,995 $162,281 $154,917 $132,631
Average net
assets (000)........... $ 15,392 $ 7,103 $ 2,747 $1,047 $ 267,340 $189,358 $149,907 $143,241 $139,009
Ratios to average net
assets:
Expenses, including
distribution fees.... 1.17% 1.29% 1.38% 1.29%* 1.97% 2.09% 2.16% 2.07% 2.09%
Expenses, excluding
distribution fees.... .97% 1.09% 1.18% 1.09%* .97% 1.09% 1.16% 1.08% 1.08%
Net investment
income............... 3.88% 3.97% 4.44% 5.04%* 3.04% 3.25% 3.55% 4.42% 5.47%
Portfolio turnover
rate................... 83% 105% 137% 106% 83% 105% 137% 106% 137%
<FN>
- ---------------
@ Commencement of offering of Class A shares.
* Annualized.
# Total return does not consider the effects of sales loads. Total returns for periods of less than a full
year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-76
<PAGE>
PRUDENTIAL FLEXIFUND STRATEGY PORTFOLIO
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated:
<TABLE>
<CAPTION>
Class A Class B
-------------------------------------------- ------------------------------------------------------
January 22,
1990@
Year Ended July 31, through Year Ended July 31,
PER SHARE OPERATING ----------------------------- July 31, -----------------------------------------------------
PERFORMANCE: 1993 1992 1991 1990 1993 1992 1991 1990 1989
--------- ------- ------- -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 12.03 $ 11.45 $ 10.50 $10.16 $ 12.01 $ 11.43 $ 10.49 $ 10.85 $ 9.52
---------- ------- ------- ------ ---------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... .42 .35 .38 .25 .34 .26 .30 .37 .42
Net realized and
unrealized gain on
investment and foreign
currency transactions.. .70 1.02 .98 .33 .70 1.02 .97 .03 1.30
---------- ------- ------- ------ ---------- -------- -------- -------- --------
Total from investment
operations........... 1.12 1.37 1.36 .58 1.04 1.28 1.27 .40 1.72
---------- ------- ------- ------ ---------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (.37) (.37) (.35) (.24) (.30) (.28) (.27) (.40) (.39)
Distributions paid to
shareholders from net
realized gains on
investment and foreign
currency transactions.. (.96) (.42) (.06) -- (.96) (.42) (.06) (.36) --
---------- ------- ------- ------ ---------- -------- -------- -------- --------
Total distributions.... (1.33) (.79) (.41) (.24) (1.26) (.70) (.33) (.76) (.39)
---------- ------- ------- ------ ---------- -------- -------- -------- --------
Net asset value, end of
period................. $ 11.82 $ 12.03 $ 11.45 $10.50 $ 11.79 $ 12.01 $ 11.43 $ 10.49 $ 10.85
---------- ------- ------- ------ ---------- -------- -------- -------- --------
---------- ------- ------- ------ ---------- -------- -------- -------- --------
TOTAL RETURN#:........... 10.02% 12.36% 13.42% 5.83% 9.21% 11.53% 12.49% 3.59% 18.53%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (000)........... $ 28,641 $20,378 $10,765 $5,073 $ 357,287 $314,771 $219,983 $176,078 $ 62,651
Average net
assets (000)........... $ 24,216 $15,705 $ 6,694 $2,928 $ 339,225 $267,525 $190,913 $127,360 $ 57,326
Ratios to average net
assets:
Expenses, including
distribution fees.... 1.21% 1.26% 1.33% 1.51%* 2.01% 2.06% 2.11% 2.10% 2.33%+
Expenses, excluding
distribution fees.... 1.01% 1.06% 1.13% 1.26%* 1.01% 1.06% 1.11% 1.14% 1.34%+
Net investment income.. 3.61% 3.05% 3.89% 4.58%* 2.79% 2.27% 2.95% 3.61% 4.26%+
Portfolio turnover rate.. 145% 241% 189% 159% 145% 241% 189% 159% 132%
<FN>
- ---------------
+ Net of expense subsidy or reimbursement.
* Annualized.
@ Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total returns for periods of less than a full
year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-77
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Trustees
Prudential FlexiFund (consisting of the Conservatively Managed Portfolio and the
Strategy Portfolio)
We have audited the accompanying statements of assets and liabilities of
Prudential FlexiFund, including the portfolios of investments, as of July 31,
1993, the related statements of operations for the year then ended and of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
July 31, 1993 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential FlexiFund
as of July 31, 1993, the results of its operations, the changes in its net
assets and the financial highlights for the respective periods in conformity
with generally accepted accounting principles.
Deloitte & Touche
New York, New York
September 9, 1993
B-78
