<PAGE>
As filed with the Securities and Exchange Commission on September 29, 1994
Securities Act Registration No. 33-12531
Investment Company Act Registration No. 811-5055
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 13 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 15 /X/
(CHECK APPROPRIATE BOX OR BOXES)
--------------
PRUDENTIAL ALLOCATION FUND
(formerly Prudential FlexiFund)
(Exact name of registrant as specified in charter)
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 214-1250
S. JANE ROSE, ESQ.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(NAME AND ADDRESS OF AGENT FOR SERVICE)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.
--------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
/X/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)
/ / on (date) pursuant to paragraph (a) of Rule 485.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant
has previously registered an indefinite number of shares of beneficial interest,
par value $.01 per share. The Registrant filed a notice for its fiscal year
ended July 31, 1994 on or about September 26, 1994.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------------------------------------------------------------------ -------------------------------------------
<S> <C> <C> <C>
PART A
Item 1. Cover Page.................................................. Cover Page
Item 2. Synopsis.................................................... Fund Expenses
Item 3. Condensed Financial Information............................. Fund Expenses; Financial Highlights;
General Information
Item 4. General Description of Registrant........................... Cover Page; How the Fund Invests; General
Information
Item 5. Management of the Fund...................................... Financial Highlights; How the Fund is
Managed; General Information
Item 6. Capital Stock and Other Securities.......................... Taxes, Dividends and Distributions; General
Information
Item 7. Purchase of Securities Being Offered........................ Shareholder Guide; How the Fund Values its
Shares
Item 8. Redemption or Repurchase.................................... Shareholder Guide; General Information
Item 9. Pending Legal Proceedings................................... Not Applicable
PART B
Item 10. Cover Page.................................................. Cover Page
Item 11. Table of Contents........................................... Table of Contents
Item 12. General Information and History............................. General Information; Organization and
Capitalization
Item 13. Investment Objectives and Policies.......................... Investment Objectives and Policies;
Investment Restrictions
Item 14. Management of the Fund...................................... Trustees and Officers; Manager; Distributor
Item 15. Control Persons and Principal Holders of Securities......... Not Applicable
Item 16. Investment Advisory and Other Services...................... Manager; Distributor; Custodian, Transfer
and Dividend Disbursing Agent and
Independent Accountants
Item 17. Brokerage Allocation and Other Practices.................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities.......................... Not Applicable
Item 19. Purchase, Redemption and Pricing of Securities Being Purchase and Redemption of Fund Shares;
Offered..................................................... Shareholder Investment Account; Net Asset
Value
Item 20. Tax Status.................................................. Taxes
Item 21. Underwriters................................................ Distributor
Item 22. Calculation of Performance Data............................. Performance Information
Item 23. Financial Statements........................................ Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C of
this Registration Statement.
</TABLE>
<PAGE>
PRUDENTIAL ALLOCATION FUND
- --------------------------------------------------------------------------------
PROSPECTUS DATED SEPTEMBER 29, 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 September 29, 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
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
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 utilizing 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 August 31, 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?
Each Portfolio 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 Portfolio 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.......................................... .35 .35 .35 .38 .38 .38
--- --- --- --- --- ---
Total Fund Operating Expenses........................... 1.25% 2.00% 2.00% 1.28% 2.03% 2.03%
--- --- --- --- --- ---
--- --- --- --- --- ---
</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 $ 88 $115 $194
Class B........................................................ $ 70 $ 93 $118 $204
Class C**...................................................... $ 30 $ 63 $108 $233
You would pay the following expenses on the same investment,
assuming no redemption:
Class A........................................................ $ 62 $ 88 $115 $194
Class B........................................................ $ 20 $ 63 $108 $204
Class C**...................................................... $ 20 $ 63 $108 $233
</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 $ 89 $117 $197
Class B.................................................................. $ 71 $ 94 $119 $208
Class C**................................................................ $ 31 $ 64 $109 $236
You would pay the following expenses on the same investment, assuming no
redemption:
Class A.................................................................. $ 62 $ 89 $117 $197
Class B.................................................................. $ 21 $ 64 $109 $208
Class C**................................................................ $ 21 $ 64 $109 $236
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, 1994. 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, 1994. 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, 1994.
+ 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, 1995.
Total Fund Operating Expenses without such limitation would be 1.30% and
1.33% 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, 1994, have been audited by Deloitte & Touche LLP, 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
-----------------------------------------------------
JANUARY 22,
1990*
YEAR ENDED JULY 31, THROUGH
---------------------------------------- JULY 31,
1994 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................. .33 .43 .44 .44 .26
Net realized and unrealized gain
(loss) on investment transactions.... (.05) 1.16 .81 .73 .38
------------ ------- ------- ------- -----------
Total from investment operations.... .28 1.59 1.25 1.17 .64
------------ ------- ------- ------- -----------
LESS DISTRIBUTIONS
Dividends from net investment
income............................... (.37) (.37) (.44) (.44) (.24)
Distributions paid to shareholders
from net realized gains on investment
transactions......................... (.54) (.47) (.54) (.23) --
------------ ------- ------- ------- -----------
Total distributions................. (.91) (.84) (.98) (.67) (.24)
------------ ------- ------- ------- -----------
Net asset value, end of period........ $ 11.12 $ 11.75 $ 11.00 $ 10.73 $10.23
------------ ------- ------- ------- -----------
------------ ------- ------- ------- -----------
TOTAL RETURN++:....................... 2.39% 15.15% 12.29% 11.99% 6.59%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....... $37,512 $22,605 $10,944 $4,408 $1,944
Average net assets (000).............. $29,875 $15,392 $ 7,103 $2,747 $1,047
Ratios to average net assets:
Expenses, including distribution
fees............................... 1.23% 1.17% 1.29% 1.38% 1.29%+
Expenses, excluding distribution
fees............................... 1.00% .97% 1.09% 1.18% 1.09%+
Net investment income............... 2.84% 3.88% 3.97% 4.44% 5.04%+
Portfolio turnover rate............... 108% 83% 105% 137% 106%
<CAPTION>
CLASS B
------------------------------------------------------------------------------
SEPTEMBER 15,
1987**
YEAR ENDED JULY 31, THROUGH
--------------------------------------------------------------- JULY 31,
1994 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................. .24 .34 .35 .36 .45 .52 .32
Net realized and unrealized gain
(loss) on investment transactions.... (.05) 1.16 .82 .73 .18 .73 (.62)
------------ -------- -------- -------- -------- -------- -------------
Total from investment operations.... .19 1.50 1.17 1.09 .63 1.25 (.30)
------------ -------- -------- -------- -------- -------- -------------
LESS DISTRIBUTIONS
Dividends from net investment
income............................... (.28) (.29) (.36) (.37) (.52) (.47) (.25)
Distributions paid to shareholders
from net realized gains on investment
transactions......................... (.54) (.47) (.54) (.23) (.10) -- (.02)
------------ -------- -------- -------- -------- -------- -------------
Total distributions................. (.82) (.76) (.90) (.60) (.62) (.47) (.27)
------------ -------- -------- -------- -------- -------- -------------
Net asset value, end of period........ $ 11.09 $ 11.72 $ 10.98 $ 10.71 $ 10.22 $ 10.21 $ 9.43
------------ -------- -------- -------- -------- -------- -------------
------------ -------- -------- -------- -------- -------- -------------
TOTAL RETURN++:....................... 1.61% 14.27% 11.48% 11.13% 6.44% 13.73% (2.95)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....... $445,609 $321,831 $225,995 $162,281 $154,917 $132,631 $149,472
Average net assets (000).............. $392,133 $267,340 $189,358 $149,907 $143,241 $139,009 $113,774
Ratios to average net assets:
Expenses, including distribution
fees............................... 2.00% 1.97% 2.09% 2.16% 2.07% 2.09% 2.08%+
Expenses, excluding distribution
fees............................... 1.00% .97% 1.09% 1.16% 1.08% 1.08% 1.11%+
Net investment income............... 2.08% 3.04% 3.25% 3.55% 4.42% 5.47% 4.22%+
Portfolio turnover rate............... 108% 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
---------------------------------------------------
JANUARY 22,
1990*
YEAR ENDED JULY 31, THROUGH
-------------------------------------- JULY 31,
1994 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................. .30 .42 .35 .38 .25
Net realized and unrealized gain on
investment and foreign currency
transactions......................... .05 .70 1.02 .98 .33
---------- ------- ------- ------- -----------
Total from investment operations.... .35 1.12 1.37 1.36 .58
---------- ------- ------- ------- -----------
LESS DISTRIBUTIONS
Dividends from net investment
income............................... (.22) (.37) (.37) (.35) (.24)
Dividends in excess of net investment
income............................... (.01) -- -- -- --
Distributions paid to shareholders
from net realized gains on investment
and foreign currency transactions.... (.34) (.96) (.42) (.06) --
---------- ------- ------- ------- -----------
Total distributions................. (.57) (1.33) (.79) (.41) (.24)
---------- ------- ------- ------- -----------
Net asset value, end of period........ $ 11.60 $ 11.82 $ 12.03 $ 11.45 $10.50
---------- ------- ------- ------- -----------
---------- ------- ------- ------- -----------
TOTAL RETURN+++:...................... 2.88% 10.02% 12.36% 13.42% 5.83%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....... $ 32,485 $28,641 $20,378 $10,765 $5,073
Average net assets (000).............. $ 30,634 $24,216 $15,705 $ 6,694 $2,928
Ratios to average net assets:
Expenses, including distribution
fees............................... 1.26% 1.21% 1.26% 1.33% 1.51%++
Expenses, excluding distribution
fees............................... 1.03% 1.01% 1.06% 1.13% 1.26%++
Net investment income............... 2.52% 3.61% 3.05% 3.89% 4.58%++
Portfolio turnover rate............... 96% 145% 241% 189% 159%
<CAPTION>
CLASS B
-----------------------------------------------------------------------------
SEPTEMBER 15,
1987**
YEAR ENDED JULY 31, THROUGH
-------------------------------------------------------------- JULY 31,
1994 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................. .21 .34 .26 .30 .37 .42 .23+
Net realized and unrealized gain on
investment and foreign currency
transactions......................... .05 .70 1.02 .97 .03 1.30 (.53)
----------- -------- -------- -------- -------- -------- -------------
Total from investment operations.... .26 1.04 1.28 1.27 .40 1.72 (.30)
----------- -------- -------- -------- -------- -------- -------------
LESS DISTRIBUTIONS
Dividends from net investment
income............................... (.16) (.30) (.28) (.27) (.40) (.39) (.18)
Dividends in excess of net investment
income............................... (.01) -- -- -- -- -- --
Distributions paid to shareholders
from net realized gains on investment
and foreign currency transactions.... (.34) (.96) (.42) (.06) (.36) -- --
----------- -------- -------- -------- -------- -------- -------------
Total distributions................. (.51) (1.26) (.70) (.33) (.76) (.39) (.18)
----------- -------- -------- -------- -------- -------- -------------
Net asset value, end of period........ $ 11.54 $ 11.79 $ 12.01 $ 11.43 $ 10.49 $ 10.85 $ 9.52
----------- -------- -------- -------- -------- -------- -------------
----------- -------- -------- -------- -------- -------- -------------
TOTAL RETURN+++:...................... 2.11% 9.21% 11.53% 12.49% 3.59% 18.53% (2.92)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....... $ 351,140 $357,287 $314,771 $219,983 $176,078 $ 62,651 $55,671
Average net assets (000).............. $ 362,579 $339,225 $267,525 $190,913 $127,360 $ 57,326 $44,717
Ratios to average net assets:
Expenses, including distribution
fees............................... 2.03% 2.01% 2.06% 2.11% 2.10% 2.33%+ 2.40%+/++
Expenses, excluding distribution
fees............................... 1.03% 1.01% 1.06% 1.11% 1.14% 1.34%+ 1.43%+/++
Net investment income............... 1.77% 2.79% 2.27% 2.95% 3.61% 4.26% 3.13%+/++
Portfolio turnover rate............... 96% 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 Appendix A.
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 UTILIZING
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 "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 adviser 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, 1994, total expenses as a percentage of
average net assets were 1.26% and 2.03% of the Class A shares and Class B
shares, respectively, of the Strategy Portfolio and were 1.23% and 2.00% of the
Class A shares 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, 1994.
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, 1994, 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 August 31, 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, 1995.
For the fiscal year ended July 31, 1994, PMFD received payments of $69,380
from the Conservatively Managed Portfolio and $70,370 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, 1994, PMFD also received
approximately $561,000 and $220,000 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, 1994, Prudential Securities incurred
distribution expenses of approximately $7,659,500 on behalf of the
Conservatively Managed Portfolio and $3,276,000 on behalf of the Strategy
Portfolio under the Class B Plan and received $3,921,335 on behalf of the
Conservatively Managed Portfolio and $3,625,792 on behalf of the Strategy
Portfolio under the Class B Plan. In addition, Prudential Securities received
approximately $641,000 and $604,000 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, 1994.
For the fiscal year ended July 31, 1994, the Fund paid distribution expenses
of .23% 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, 1994. Prior to
August 1, 1994, 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 a Portfolio in any advertisement or information
including performance data of the Portfolio. 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 participants. 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. After a Benefit Plan or Prudential Retirement
Accumulation Program 401(k) Plan qualifies to purchase Class A shares at NAV,
all subsequent purchases will be made at NAV.
25
<PAGE>
OTHER 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 acquired 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 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.
26
<PAGE>
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.
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 acquired
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.
27
<PAGE>
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 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.
28
<PAGE>
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 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
29
<PAGE>
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 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
30
<PAGE>
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 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.
31
<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.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
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.
A-1
<PAGE>
P-2: Issuers rated "Prime-2" or "P-2" (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations.
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. 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
S&P'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
Hawaii Income 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 SEPTEMBER 29, 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 September 29, 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-24 19
Taxes............................................................................................ B-24 20
Performance Information.......................................................................... B-26 19
Organization and Capitalization.................................................................. B-28 22
Custodian, Transfer and Dividend Disbursing Agent and Independent Accountants.................... B-29 19
Financial Statements............................................................................. B-31 --
Independent Auditors' Report..................................................................... B-56 --
</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, effective August 1, 1994.
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. (NASD).
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, 1993 and 1994 were 83% and 108%, respectively. The portfolio turnover rates
for the Strategy Portfolio for the fiscal years ended July 31, 1993 and 1994
were 145% and 96%,
B-8
<PAGE>
respectively. The portfolio turnover rate is generally the percentage computed
by dividing the lesser of portfolio purchases or sales (excluding all
securities, including options, whose maturities or expiration date at
acquisition were one year or less) by the monthly average value of 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.
B-9
<PAGE>
10. Make investments for the purpose of exercising control or management.
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).
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;
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; and
5. Engage in arbitrage transactions.
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 Trustee Vice Chairman of PMF (since 1988); Managing Director, Investment
One Seaport Plaza Banking, Prudential Securities Incorporated (Prudential
New York, NY 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 Commerce;
c/o Prudential Mutual Fund formerly Rochester City Manager; Trustee of Center for
Management, Inc. Governmental Research, Inc.; Director of Blue Cross of
One Seaport Plaza Rochester, Monroe County Water Authority, Rochester Jobs, Inc.,
New York, NY Executive Service 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 (since October
One Seaport Plaza 1993), PMF; Executive Vice President, Director and Member of
New York, NY Operating Committee (since October 1993), Prudential Securities;
Director (since October 1993) of Prudential Securities Group,
Inc.; Vice President, The Prudential Investment Corporation
(since July 1994); 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 Newspapers, Inc.
c/o Prudential Mutual Fund (since August 1991); Director of Central Newspapers, Inc. (since
Management, Inc. September 1991); prior thereto, Publisher of Time Magazine (May
One Seaport Plaza 1989-March 1991); formerly President, Publisher and Chief
New York, NY 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), Director (since
One Seaport Plaza January 1989) and Executive Vice President, Treasurer and Chief
New York, NY 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 Principal Senior Vice President (since January 1989) of PMF; Senior Vice
One Seaport Plaza Financial and President (since January 1992) and Vice President (January
New York, NY Accounting Officer 1986-December 1991) of 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.
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, pursuant to an SEC exemptive order, 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 September 16, 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 September 16, 1994, Harry A. McMillen and
Jean L. McMillen, RD 6 Box 470, Kittanning, Pennsylvania 16201, Stephen W.
Mullins and Deborah L. Mullins, 1132 Mulberry Circle, Charleston West Virginia,
25314-2142, Joyce Koppes and Harvey C. Gutke, 8937 Cameo May, Sandy, Utah
84093-3740, Prudential Securities C/F Sharon K. Svroboda Sep IRA DTD 8-24-87,
32724 West Wellbrook Drive, Westlake Village, California 91361-5555, Prudential
Bank &Trust Co. C/F IRA of Janel C. Volock, 3943 Patricia Lane, Reno Nevada
89512, A Neck & Back Rehab. Center, Attn: Mark J. and Rita N. Klingert, 16319
North 36th Avenue, Phoenix, Arizona 85023-2801 and Marvel Food Stores #3 Inc.,
429 West Lockeford Street, Lodi, California 95240-2035 were the beneficial
owners of 5%, 8.1%, 5.1%, 5.4%, 5.9%, 5% and 38.2%, respectively, of the Class C
outstanding voting securities of the Conservatively Managed Portfolio. As of
September 16, 1994, Corey J. Link and Denise M. Link, 555 City Island Avenue,
Bronx, New York 10464-1104, Anthony F. Rende, 533 Highbrook Road, Pelham Manor,
New York 10803-2227 and Allen C. Bellamy Jr., 10610 Hanging Moss Trail,
Charlotte, North Carolina 28227-9768 were the beneficial owners of 9.7%, 41% and
41% of the Class C outstanding voting securities of the Strategy Portfolio.
As of September 16, 1994, Prudential Securities was record holder for other
beneficial owners of 1,014,640 Class A shares (or 28% of the outstanding Class A
shares) of the Conservatively Managed Portfolio and 1,383,795 Class A shares (or
46% of the outstanding Class A shares) of the Strategy Portfolio, 13,828,864
Class B shares (or 34% of the outstanding Class B shares) of the Conservatively
Managed Portfolio and 16,409,657 Class B shares (or 54% of the outstanding Class
B shares) of the Strategy Portfolio and 11,967 Class C shares (or 68% of the
outstanding Class C shares) of the Conservatively Managed Portfolio and 636
Class C shares (or 61% 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 August 31, 1994, PMF managed
B-12
<PAGE>
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.
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, 1994. 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 The 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
B-13
<PAGE>
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, 1994, PMF received management fees of
$2,743,056 and $2,555,883 on behalf of the Conservatively Managed Portfolio and
Strategy Portfolio, respectively. 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.
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 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 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
B-14
<PAGE>
(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 of each
Portfolio on August 1, 1994.
CLASS A PLAN. For the fiscal year ended July 31, 1994, PMFD received
payments of $69,380 and $70,370 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, 1994, PMFD also received approximately $561,000 and $220,000
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, 1994, Prudential Securities
received $3,921,335 and $3,625,792 from the Conservatively Managed Portfolio and
Strategy Portfolio, respectively, under the Class B Plan 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............... $54,900 $464,800 $1,717,200 $ 1,480,400 $3,942,200 $ 7,659,500
Strategy Portfolio....... 50,500 273,300 1,709,600 449,600 793,000 3,276,000
<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. No distribution expenses were incurred under
the Class C Plan during the fiscal year ended July 31, 1994. Class C shares were
first offered to investors on August 1, 1994.
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.
B-15
<PAGE>
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.
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
B-16
<PAGE>
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 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, 1994:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund.................................. $ 906,929 $ 714,203 $ 659,790
Total brokerage commissions paid to Prudential
Securities................................................................... $ 49,834 $ 38,171 $ 71,200
Percentage of total brokerage commissions paid to Prudential
Securities................................................................... 5.5% 5.3% 10.8%
</TABLE>
The Fund effected approximately 6.4% of the total dollar amount of its
transactions involving the payment of commissions to Prudential Securities
during the year ended July 31, 1994. Of the total brokerage commissions paid
during such period, $251,654 and $496,371 (or 76% and 86%), 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.
B-17
<PAGE>
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 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, 1994, the maximum offering price of
the Fund's shares is as follows:
<TABLE>
<CAPTION>
CONSERVATIVELY
MANAGED STRATEGY
PORTFOLIO PORTFOLIO
--------- -------
<S> <C> <C>
CLASS A
Net asset value and redemption price per Class A share..... $11.12 $ 11.60
Maximum sales charge (5% of offering price)................ .59 .61
--------- ------
Maximum offering price to public........................... $11.71 $ 12.21
--------- ------
--------- ------
CLASS B
Net asset value, offering price and redemption price to
public per Class B share*................................ $11.09 $ 11.54
--------- ------
--------- ------
CLASS C
Net asset value, offering price and redemption price to
public per Class C share*................................ $11.09 $ 11.54
--------- ------
--------- ------
<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, 1994.
</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).
B-18
<PAGE>
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
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.
</TABLE>
B-19
<PAGE>
<TABLE>
<S> <C>
Disability - An individual A copy of the Social Security
will be considered disabled if Administration award letter or a letter
he or she is unable to engage from a physician on the physician's
in any substantial gainful letterhead stating that the shareholder
activity by reason of any (or, in the case of a trust, the
medically determinable grantor) is permanently disabled. The
physical or mental impairment letter must also indicate the date of
which can be expected to disability.
result in death or to be of
long-continued and indefinite
duration.
Distribution from an IRA or A copy of the distribution form from the
403(b) Custodial Account custodial 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.
Distribution from Retirement A letter signed by the plan
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 a Portfolio
purchased prior to August 1, 1994 if, immediately after a purchase of such
shares, the aggregate cost of all Class B shares of the Portfolio owned by you
in a single account exceeded $500,000. For example, if you purchased $100,000 of
Class B shares of the Portfolio 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 Portfolio 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 OVER $1
PAYMENT MADE $500,001 TO $1 MILLION 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
B-20
<PAGE>
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. 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 a Portfolio may exchange their Class A shares for
Class A shares of another Portfolio, 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 another
Portfolio, shares 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
B-21
<PAGE>
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.
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.
(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.
</TABLE>
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.
B-22
<PAGE>
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."
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>
B-23
<PAGE>
NET ASSET VALUE
Under the Investment Company Act, the Trustees are responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Trustees, the value of investments
listed on a securities exchange and NASDAQ National Market System securities
(other than options on stock and stock indices) are valued at the last sales
price on the day of valuation, or, if there was no sale on such day, the mean
between the last bid and asked prices on such day, as provided by a pricing
service. Corporate bonds (other than convertible debt securities) and U.S.
Government securities that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed 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 last reported bid and asked
prices provided by principal market makers or independent pricing agents.
Options on stock and stock indices traded on an exchange are valued at the mean
between the most recently quoted bid and asked prices on the respective exchange
and futures contracts and options thereon are valued at their last sales prices
as of the close of the commodities exchange or board of trade. Should an
extraordinary event, which is likely to affect the value of the security, occur
after the close of an exchange on which a portfolio security is traded, such
security will be valued at fair value considering factors determined in good
faith by the investment adviser under procedures established by and under the
general supervision of the Fund's Trustees.
Securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
Trustees. Short-term debt securities are valued at cost, with interest accrued
or discount amortized to the date of maturity, if their original maturity was 60
days or less, unless this is determined by the Trustees not to represent fair
value. Short-term securities with remaining maturities of 60 days or more, for
which market quotations are readily available, are valued at their current
market quotations as supplied by an independent pricing agent or principal
market maker. The Fund will compute its net asset value at 4:15 P.M., New York
time, on each day the New York Stock Exchange is open for trading except on days
on which no orders to purchase, sell or redeem Fund shares have been received or
days on which changes in the value of the Fund's portfolio securities do not
affect net asset value.
Net asset value is calculated separately for each class. 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
B-24
<PAGE>
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 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
B-25
<PAGE>
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.
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 (January 22, 1990) periods ended July 31, 1994 was -2.99% and
9.33% for the Conservatively Managed Portfolio and -2.52% and 8.54% for the
Strategy Portfolio, respectively. The average annual total return for the Class
B shares for the one and five year and since inception (September 15, 1987)
periods ended July 31, 1994 was -3.39%, 8.74% and 7.92% for the Conservatively
Managed Portfolio and -2.89%, 7.62% and 7.77% 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.
B-26
<PAGE>
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 since
inception (January 22, 1990) periods ended on July 31, 1994 was 2.4% and 58.0%
for the Conservatively Managed Portfolio and 2.9% and 52.9% for the Strategy
Portfolio, respectively. The aggregate total return for Class B shares for the
one and five year and since inception (September 15, 1987) periods ended on July
31, 1994 was 1.6%, 53.1% and 69.0% for the Conservatively Managed Portfolio and
2.1%, 45.4% and 67.4% for the Strategy Portfolio, respectively. During these
periods, no Class C shares were outstanding.
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 for the period ended July 31, 1994 were 2.48% and 1.70%,
respectively, for the Class A shares of the Conservatively Managed Portfolio and
the Strategy Portfolio, respectively, and 1.88% and 1.06%, respectively, for the
Class B shares of the Strategy Portfolio and the Conservatively Managed
Portfolio, respectively. During this period, no Class C shares were outstanding.
B-27
<PAGE>
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
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
B-28
<PAGE>
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)
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
B-29
<PAGE>
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, 1994, the Fund incurred fees of approximately $1,323,000
($606,000--Conservatively Managed Portfolio and $717,000--Strategy Portfolio)
for the services of PMFS.
Deloitte & Touche LLP, 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-30
<PAGE>
PRUDENTIAL ALLOCATION FUND* Portfolio of Investments
CONSERVATIVELY MANAGED PORTFOLIO July 31, 1994
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--76.4%
COMMON STOCKS--45.8%
Aerospace/Defense--2.4%
225,000 Banner Aerospace, Inc.*...... $ 1,096,875
121,900 Gencorp, Inc................. 1,538,987
67,300 General Motors Corp., Class
H.......................... 2,515,337
35,500 Litton Industries, Inc....... 1,317,938
62,800 Loral Corp................... 2,339,300
48,400 Martin Marietta Corp......... 2,196,150
142,800 UNC, Inc.*................... 785,400
------------
11,789,987
------------
Automotive--1.5%
38,200 Coltec Inds., Inc.*.......... 721,025
27,500 Danaher Corp................. 1,196,250
52,000 Ford Motor Co................ 1,651,000
25,000 General Motors Corp.......... 1,284,375
58,000 General Motors Corp., Class
E.......................... 2,044,500
------------
6,897,150
------------
Chemicals--2.9%
35,000 Dexter Corp.................. 870,625
119,500 Ferro Corp................... 2,868,000
19,200 FMC Corp.*................... 1,128,000
35,000 Grace (W.R.) & Co............ 1,452,500
81,000 Hanna (M. A.) Co............. 2,146,500
68,400 Imperial Chemical Ind.
(ADR)...................... 3,505,500
50,000 Om Group Inc................. 987,500
35,100 Vigoro Corp.................. 1,140,750
------------
14,099,375
------------
Computer & Related Equipment--0.9%
32,900 Ceridian Corp.*.............. 843,063
78,200 Diebold, Inc................. 3,519,000
------------
4,362,063
------------
Consumer Products--1.0%
700 Bush Boake Allen, Inc.*...... $ 13,038
65,000 Eastman Kodak Co............. 3,144,375
108,000 Whitman Corp................. 1,782,000
------------
4,939,413
------------
Containers & Packaging--0.6%
64,500 Ball Corp.................... 1,701,187
90,100 Owens-Illinois Holdings
Corp.*..................... 957,313
------------
2,658,500
------------
Data Processing & Reproduction--0.2%
20,000 First Financial Management
Corp....................... 1,115,000
------------
Drugs & Health Care--4.4%
70,000 Columbia Healthcare Corp..... 2,835,000
103,600 Healthtrust, Inc.*........... 2,887,850
16,800 Johnson & Johnson Co......... 789,600
160,000 National Medical Enterprises,
Inc........................ 2,720,000
52,700 Schering Plough Corp......... 3,379,388
50,000 Universal Health Services,
Inc., Class B*............. 1,387,500
50,000 Warner Lambert Co............ 3,250,000
117,766 Zeneca Group PLC............. 4,048,206
------------
21,297,544
------------
Electronics--1.7%
97,400 Belden, Inc.................. 1,753,200
113,500 Mark IV Industries, Inc...... 2,184,875
63,800 Motorola Inc................. 3,381,400
24,100 Perkin Elmer Corp............ 677,813
------------
7,997,288
------------
Financial Services--5.6%
55,600 American Express Co.......... 1,473,400
130,400 Dean Witter Discover & Co.... 5,232,300
52,100 Financial Security
Assured*................... 1,100,613
83,200 First Bank System, Inc....... 3,036,800
16,700 First Interstate Bank
Corp....................... 1,254,587
22,000 ITT Corp..................... 1,886,500
</TABLE>
* See Note 8. B-31 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL ALLOCATION FUND*
CONSERVATIVELY MANAGED PORTFOLIO
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
Financial Services--(cont'd)
156,650 Keycorp...................... $ 5,091,125
200,000 Norwest Corp................. 5,225,000
100,000 Washington Mutual Savings
Bank....................... 2,012,500
52,200 Western National Corp........ 802,575
------------
27,115,400
------------
Food & Beverage--1.3%
61,800 CKE Restaurants, Inc......... 579,375
82,500 Morrison Restaurants, Inc.... 1,825,312
41,400 Sbarro, Inc.................. 1,480,050
75,000 Shoney's, Inc.*.............. 1,059,375
47,100 Universal Foods Corp......... 1,560,188
------------
6,504,300
------------
Freight Transportation--0.4%
74,000 Ryder System, Inc............ 1,933,250
------------
Home Improvements--1.2%
100,000 Owens Corning Fiberglass*.... 3,325,000
125,000 Ply Gem Indiana, Inc......... 2,390,625
------------
5,715,625
------------
Hotels & Leisure--0.3%
54,000 Marriott International,
Inc........................ 1,498,500
------------
Insurance--3.7%
33,600 Berkley (W. R.) Corp......... 1,268,400
60,000 Emphesys Financial Group,
Inc........................ 1,830,000
80,000 Equitable of Iowa Cos........ 2,820,000
46,200 Life Re...................... 993,300
40,000 NAC Re Corp.................. 1,120,000
63,400 National Re Corp............. 1,672,175
96,000 Penncorp Financial Group,
Inc........................ 1,590,000
83,300 Reinsurance Group America,
Inc........................ 2,134,562
124,700 Tig Holdings, Inc............ $ 2,369,300
51,200 Trenwick Group, Inc.......... 2,003,200
------------
17,800,937
------------
Machinery & Equipment--2.0%
99,200 Donaldson Co., Inc........... 2,442,800
45,000 IDEX Corp.*.................. 1,760,625
38,000 Kaydon Corp.................. 807,500
100,000 Regal Beloit Corp............ 2,787,500
48,400 Smith A O Corp............... 1,355,200
20,000 Trimas Corp.................. 462,500
------------
9,616,125
------------
Media--3.4%
90,000 American Publishing Co.,
Class A*................... 1,282,500
50,000 Comcast Corp., Class A....... 812,500
11,500 Comcast Corp. Class A SPL.... 191,187
31,700 Houghton Mifflin Co.......... 1,176,862
90,000 Media General, Inc........... 2,565,000
80,000 Multimedia, Inc.*............ 2,420,000
6,100 Pulitzer Publishing Co....... 231,800
160,000 Tele-Communications, Inc.*... 3,730,000
105,400 Time Warner, Inc............. 3,912,975
------------
16,322,824
------------
Mining--0.4%
144,000 INDRESCO, Inc.*.............. 1,692,000
------------
Miscellaneous--0.9%
64,400 BWIP Holding, Inc............ 1,062,600
77,800 Titan Wheel International,
Inc........................ 2,013,075
34,300 York International Corp...... 1,346,275
------------
4,421,950
------------
Oil & Gas--3.9%
99,800 Basin Exploration, Inc.*..... 860,775
31,600 British Petroleum PLC
(ADR)...................... 2,401,600
111,200 Cabot Oil & Gas Corp......... 2,154,500
</TABLE>
* See Note 8. B-32 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL ALLOCATION FUND*
CONSERVATIVELY MANAGED PORTFOLIO
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
Oil & Gas--(cont'd)
52,200 Enron Oil & Gas Co........... $ 1,037,475
100,000 Mascotech, Inc............... 1,400,000
155,000 Mesa, Inc.*.................. 833,125
35,000 Murphy Oil Corp.............. 1,557,500
164,700 Oryx Energy Co............... 2,532,262
92,700 Seagull Energy Corp.*........ 2,282,737
99,200 Societe Nationale Elf
Aquitaine, ADR............. 3,794,400
7,100 USX -Delhi Group............. 93,188
------------
18,947,562
------------
Paper & Forest Products--1.4%
87,600 Mead Corp.................... 3,909,150
79,950 Pentair, Inc................. 3,008,119
------------
6,917,269
------------
Petroleum Services--0.1%
35,000 Enterra Corp.*............... 700,000
------------
Railroad--0.9%
95,000 Chicago & North Western
Holdgs. Co.*............... 2,066,250
70,400 Illinois Central Corp........ 2,244,000
------------
4,310,250
------------
Retail--1.4%
170,700 Best Products, Inc.*......... 1,301,587
60,000 Caldor Corp.*................ 1,747,500
36,600 Harcourt General, Inc........ 1,313,025
46,300 Rite Aid Corp................ 937,575
33,000 Sears Roebuck & Co........... 1,559,250
1,500 Stride Rite Corp............. 19,313
------------
6,878,250
------------
Steel & Metals--0.7%
112,500 Material Sciences Corp.*..... 1,800,000
63,100 Wolverine Tube, Inc.*........ 1,538,063
------------
3,338,063
------------
Telecommunications--1.9%
77,000 AirTouch Communications*..... 2,002,000
58,000 Century Telephone Enterprises
Inc........................ 1,508,000
100,000 MCI Communications Corp...... $ 2,275,000
24,900 Northern Telecom Ltd......... 803,025
101,000 Rochester Telephone Corp..... 2,436,625
------------
9,024,650
------------
Textiles--0.7%
65,000 Jones Apparel Group, Inc.*... 1,535,625
32,000 VF Corp...................... 1,640,000
------------
3,175,625
------------
Total common stocks
(cost $198,825,427).......... 221,068,900
------------
</TABLE>
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) DEBT OBLIGATIONS--30.6%
- ------------ ---------
<S> <C> <C> <C>
Corporate Bonds--10.6%
Airlines--0.7%
AMR Corp.,
Baa3 $ 1,000 7.75%, 12/1/97....... 994,450
Delta Air Lines,
Inc.,
Ba1 1,300 7.71%, 5/14/97....... 1,274,221
Ba1 700 10.375%, 2/1/11...... 711,739
Ba1 500 9.75%, 5/15/21....... 480,770
Southwest Airlines
Co.,
Baa1 100 9.40%, 7/1/01........ 109,133
------------
3,570,313
------------
Cement--0.2%
Cemex S.A.,
NR 750 6.25%, 10/25/95...... 743,438
------------
Conglomerate--0.1%
Grupo Condumex S.A.
de C.V., M.T.N.,
NR 700 6.25%, 7/27/96....... 658,000
------------
Electronics--0.1%
Westinghouse Electric
Corp.,
Ba1 450 8.70%, 6/20/96....... 461,984
------------
</TABLE>
* See Note 8. B-33 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL ALLOCATION FUND*
CONSERVATIVELY MANAGED PORTFOLIO
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<S> <C> <C> <C>
Financial Services--4.4%
Associates Corp. of
North America,
A1 $ 750 6.875%, 1/15/97...... $ 753,757
A1 200 8.375%, 1/15/98...... 207,960
Auburn Hills Trust,
Inc.,
A3 1,000 12.375%, 5/1/20...... 1,377,990
Australia & New
Zealand Banking
Group Ltd.,
A2 1,100 6.25%, 2/1/04........ 983,620
Banco Del Estado
Chile,
Baa2 700 8.39%, 8/1/01........ 698,250
Chrysler Financial
Corp.,
Baa2 1,100 5.39%, 8/27/96....... 1,074,931
Baa2 3,300 5.25%, 11/15/96...... 3,305,148
First Union Corp.,
A3 1,000 9.45%, 6/15/99....... 1,073,660
General Motors
Acceptance Corp.,
Baa1 2,000 6.50%, 6/10/96....... 1,996,120
Baa1 1,750 7.80%, 11/7/96....... 1,785,630
Baa1 2,000 7.50%, 11/4/97....... 2,021,260
Kansallis-Osake-Pankki Bank,
A3 1,000 6.125%, 5/15/98...... 969,320
Korea Development Bank,
A1 800 6.75%, 12/1/05....... 690,352
PT Alatief Freeport
Finance,
Ba2 1,400 9.75%, 4/15/01....... 1,400,000
Union Bank Finland,
A3 2,600 5.25%, 6/15/96....... 2,530,086
Westinghouse Credit
Corp.,
Ba1 400 8.75%, 6/3/96........ 411,048
------------
21,279,132
------------
Food & Beverage--0.9%
Coca Cola
Enterprises, Inc.
A3 500 6.50%, 11/15/97...... 494,440
Fomento Economico
Mexicano S.A.,
NR $ 850 9.50%, 7/22/97....... $ 858,500
Procter & Gamble Co.,
Aa2 1,700 9.36%, 1/1/21........ 1,936,980
Ralston Purina Co.
Baa1 850 9.30%, 5/1/21........ 895,348
------------
4,185,268
------------
Insurance--0.2%
New York Life
Insurance Co.,
NR 1,250 6.40%, 12/15/03...... 1,132,350
------------
Media--0.5%
Grupo Televisa, Sa De
Euro,
M.T.N.,
Ba2 1,500 10.00%, 11/9/97...... 1,543,125
News America Holdings, Inc.,
Ba1 850 9.50%, 7/15/24....... 875,381
------------
2,418,506
------------
Miscellaneous--0.1%
Federal Express
Corp.,
Baa3 500 10.05%, 6/15/99...... 546,075
------------
Oil & Gas--1.3%
Arkla, Inc.,
Ba2 1,000 9.30%, 1/15/98....... 1,038,350
Oryx Energy Co.,
Ba2 2,000 6.05%, 2/1/96........ 1,943,520
USX Corp.,
Baa3 1,250 7.19%, 9/16/99....... 1,229,875
USX Marathon Group,
Baa3 750 9.625%, 8/15/03...... 792,637
Baa3 750 7.20%, 2/15/04....... 683,378
Baa3 750 9.375%, 2/15/12...... 762,787
------------
6,450,547
------------
</TABLE>
* See Note 8. B-34 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL ALLOCATION FUND*
CONSERVATIVELY MANAGED PORTFOLIO
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<S> <C> <C> <C>
Paper Products--0.2%
Boise Cascade Corp.,
Baa3 $ 1,000 6.81%, 2/1/99........ $ 944,820
------------
Retail--0.1%
K Mart Corp.,
A3 400 7.95%, 2/1/23........ 369,572
------------
Shipping--0.3%
Compania SudAmericana
De Vapores,
NR 1,750 7.375%, 12/8/03...... 1,524,688
------------
Sovereign Bonds--0.3%
Columbia Republic,
Ba1 1,000 7.25%, 2/23/04....... 877,500
Quebec Province
Canada,
A1 800 7.125%, 2/9/24....... 677,768
------------
1,555,268
------------
Tobacco--0.1%
RJR Nabisco, Inc.
Baa3 400 8.625%, 12/1/02...... 367,544
------------
Utilities--1.1%
Commonwealth Edison
Co.
Baa2 700 8.25%, 10/1/06....... 690,179
Baa2 700 8.00%, 5/15/08....... 660,912
Hydro Quebec Corp.,
A1 500 4.25%, 9/30/49....... 417,500
Korea Electric Power
Corp.,
A1 400 7.75%, 4/1/13........ 350,356
Pennsylvania Power &
Light Co.,
A2 450 9.375%, 7/1/21....... 486,373
Philadelphia Electric
Co.,
Baa1 1,000 7.125%, 9/1/02....... 959,660
Tenaga Nasional
Berhad,
A2 1,000 7.88%, 6/15/04....... 992,900
Transco Energy Co.,
Ba3 $ 700 11.25%, 7/1/99....... $ 749,000
------------
5,306,880
------------
Total corporate bonds
(cost
$52,525,624)....... 51,514,385
------------
Asset Backed Securities--1.2%
Bank of New York
Master Credit Card
Trust,
Aaa 400 7.95%, 4/15/96....... 401,000
Standard Credit Card
Trust,
A2 1,000 9.375%, 3/10/96...... 1,023,750
Aaa 4,000 8.00%, 10/7/97....... 4,120,000
------------
Total asset backed
securities
(cost
$5,797,609)........ 5,544,750
------------
U. S. Government
Securities--18.8%
United States Treasury Bonds,
7,300 10.38%, 11/15/12..... 9,101,056
3,450 12.00%, 8/15/13...... 4,812,750
31,450 11.25%, 2/15/15...... 43,843,187
United States Treasury Notes,
16,400 6.00%, 11/30/97...... 16,192,376
12,500 5.13%, 3/31/98....... 11,949,250
900 7.88%, 11/15/99...... 944,298
1,600 7.88%, 8/15/01....... 1,680,992
1,000 7.25%, 5/15/04....... 1,009,840
United States Treasury Strips,
4,500 Zero Coupon,
2/15/11............ 1,292,895
------------
Total U. S.
Government
Securities
(cost
$94,642,493)....... 90,826,644
------------
Total debt
obligations
(cost
$152,965,726)...... 147,885,779
------------
Total long-term
investments
(cost
$351,791,153)...... 368,954,679
------------
</TABLE>
* See Note 8. B-35 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL ALLOCATION FUND*
CONSERVATIVELY MANAGED PORTFOLIO
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS--25.7%
Corporate Notes--5.3%
Banco Internacional
SA
NR $ 8,500 Zero Coupon,
8/24/94............ $ 8,458,350
Multibanco Comermex
Zcp
NR 8,000 Zero Coupon,
9/1/94............. 7,949,600
Comdisco, Inc.,
Baa2 3,000 8.95%, 5/15/95....... 3,064,920
Citicorp,
A3 1,000 7.80%, 3/24/95....... 1,013,160
Nordiska Investerings banke,
Aaa 3,000 9.50%, 12/15/94...... 3,045,690
Philip Morris Co.,
Inc.,
A2 250 8.70%, 8/1/94........ 250,000
Time Warner, Inc.,
Ba1 1,000 6.05%, 7/1/95........ 996,970
Texas Utilities
Electric Co.,
Baa2 800 9.625%, 9/30/94...... 805,200
------------
Total corporate notes
(cost
$25,811,026)....... 25,583,890
------------
Repurchase Agreement--20.4%
Joint Repurchase
Agreement Account,
$ 98,502 4.19%, 8/1/94, (Note 5)............ $ 98,502,000
------------
Total short-term investments
(cost $124,313,026)................ 124,085,890
------------
Total Investments--102.1%
(cost $476,104,179; Note 4)........ 493,040,569
Liabilities in excess of
other assets--(2.1%)............... (9,920,395)
------------
Net Assets--100%................... $483,120,174
------------
</TABLE>
------------
---------
* Non-income producing security.
(a) Par value U.S. dollar denominated.
ADR--American Depository Receipt.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Prospectus contains a description of
Moody's ratings.
* See Note 8. B-36 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL ALLOCATION FUND*
CONSERVATIVELY MANAGED PORTFOLIO
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
July 31,
Assets 1994
------------
<S> <C>
Investments, at value (cost $476,104,179)................................................. $493,040,569
Cash...................................................................................... 172,445
Dividends and interest receivable......................................................... 4,082,864
Receivable for investments sold........................................................... 3,926,531
Receivable for Fund shares sold........................................................... 837,657
Deferred expenses and other assets........................................................ 9,636
------------
Total assets.......................................................................... 502,069,702
------------
Liabilities
Payable for investments purchased......................................................... 16,838,273
Payable for Fund shares reacquired........................................................ 1,033,924
Accrued expenses.......................................................................... 431,350
Distribution fee payable.................................................................. 382,389
Management fee payable.................................................................... 263,592
------------
Total liabilities..................................................................... 18,949,528
------------
Net Assets................................................................................ $483,120,174
------------
------------
Net assets were comprised of:
Common stock, at par.................................................................... $ 435,510
Paid-in capital in excess of par........................................................ 461,120,698
------------
461,556,208
Undistributed net investment income..................................................... 1,867,647
Accumulated net realized gains on investsments.......................................... 2,759,929
Net unrealized appreciation on investments.............................................. 16,936,390
------------
Net Assets, July 31, 1994................................................................. $483,120,174
------------
------------
Class A:
Net asset value and redemption price per share
($37,511,663 / 3,372,119 shares of common stock issued and outstanding)............... $11.12
Maximum sales charge (5.25% of offering price).......................................... 0.62
------------
Maximum offering price to public........................................................ $11.74
------------
------------
Class B:
Net asset value, offering price and redemption price per share
($445,608,511 / 40,178,928 shares of common stock issued and outstanding)............. $11.09
------------
------------
</TABLE>
* See Note 8. See Notes to Financial Statements.
B-37
<PAGE>
PRUDENTIAL ALLOCATION FUND*
CONSERVATIVELY MANAGED PORTFOLIO
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
July 31,
Net Investment Income 1994
------------
<S> <C>
Income
Dividends (net of foreign withholding taxes of $77,122)................................... $ 3,341,833
Interest (net of foreign withholding taxes of $12,122).................................... 13,871,237
------------
Total income............................................................................ 17,213,070
------------
Expenses
Distribution fee--Class A................................................................. 69,380
Distribution fee--Class B................................................................. 3,921,335
Management fee............................................................................ 2,743,056
Transfer agent's fees and expenses........................................................ 795,000
Reports to shareholders................................................................... 300,000
Custodian's fees and expenses............................................................. 220,000
Registration fees......................................................................... 90,000
Trustees' fees............................................................................ 22,300
Legal fees................................................................................ 20,000
Audit fee................................................................................. 14,000
Insurance................................................................................. 10,400
Miscellaneous............................................................................. 8,748
------------
Total expenses.......................................................................... 8,214,219
------------
Net investment income....................................................................... 8,998,851
------------
Realized and Unrealized Gain (Loss) on Investments
Net realized gain on:
Investment transactions................................................................... 8,825,011
Financial futures contracts............................................................... 29,426
------------
8,854,437
Net change in unrealized depreciation on Investments........................................ (13,575,563)
------------
Net loss on investments..................................................................... (4,721,126)
------------
Net Increase in Net Assets Resulting from Operations........................................ $ 4,277,725
------------
------------
</TABLE>
* See Note 8. See Notes to Financial Statements.
B-38
<PAGE>
PRUDENTIAL ALLOCATION FUND*
CONSERVATIVELY MANAGED PORTFOLIO
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended July 31,
----------------------------
Increase (Decrease) in Net Assets 1994 1993
------------ ------------
<S> <C> <C>
Operations
Net investment income....................................................... $ 8,998,851 $ 8,734,542
Net realized gain on investments............................................ 8,854,437 13,033,133
Net change in unrealized appreciation/depreciation of investments........... (13,575,563) 16,803,076
------------ ------------
Net increase in net assets resulting from operations........................ 4,277,725 38,570,751
------------ ------------
Net equalization credits...................................................... 1,077,644 325,868
------------ ------------
Dividends and distributions (Note 1)
Dividends to shareholders from net investment income
Class A................................................................... (970,829) (490,533)
Class B................................................................... (9,728,864) (6,742,292)
------------ ------------
(10,699,693) (7,232,825)
------------ ------------
Distributions to shareholders from net realized gains on investment
transactions
Class A................................................................... (1,247,471) (557,629)
Class B................................................................... (16,812,829) (10,528,236)
------------ ------------
(18,060,300) (11,085,865)
------------ ------------
Fund share transactions (Note 6)
Net proceeds from shares subscribed......................................... 216,417,990 115,375,179
Net asset value of shares issued to shareholders in reinvestment of
dividends and distributions............................................... 26,617,480 16,869,402
Cost of shares reacquired................................................... (80,947,022) (45,324,359)
------------ ------------
Net increase in net assets from Fund transactions........................... 162,088,448 86,920,222
------------ ------------
Total increase................................................................ 138,683,824 107,498,151
Net Assets
Beginning of year............................................................. 344,436,350 236,938,199
------------ ------------
End of year................................................................... $483,120,174 $344,436,350
------------ ------------
------------ ------------
</TABLE>
* See Note 8. See Notes to Financial Statements.
B-39
<PAGE>
PRUDENTIAL ALLOCATION FUND* Portfolio of Investments
STRATEGY PORTFOLIO July 31, 1994
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--61.9%
COMMON STOCKS--58.0%
Advertising--0.2%
64,500 American Business
Information*............... $ 903,000
------------
Aerospace/Defense--1.3%
28,700 Boeing Co.................... 1,280,737
33,700 Loral Corp................... 1,255,325
24,600 Martin Marietta Corp.*....... 1,116,225
70,000 Martin Marietta, Inc......... 1,540,000
------------
5,192,287
------------
Automotive--1.9%
13,200 Danaher Corp................. 574,200
91,600 Ford Motor Co................ 2,908,300
78,800 Goodyear Tire & Rubber Co.... 2,807,250
33,700 Modine Manufacturing Co...... 905,687
------------
7,195,437
------------
Building & Related Industries--0.1%
38,500 Toll Brothers, Inc.*......... 462,000
------------
Chemicals--2.7%
51,700 Air Products & Chemicals,
Inc........................ 2,481,600
17,500 Dow Chemical Co.............. 1,217,919
27,000 Eastman Chemical Co.......... 1,393,875
36,200 IMC Fertlizer Group, Inc..... 1,411,800
25,200 Imperial Chemical Ind.
(ADR)...................... 1,291,500
49,700 Potash Corp.................. 1,590,400
30,100 Valspar Corp................. 1,023,400
------------
10,410,494
------------
Commercial Services--0.4%
67,500 ServiceMaster L. P........... 1,695,938
------------
Computer & Related Equipment--3.3%
35,400 American Management Systems,
Inc.*...................... 885,000
62,200 Automatic Data Processing,
Inc........................ 3,203,300
54,300 First Data Corp.............. 2,429,925
16,320 First Financial Management
Corp....................... 909,840
21,300 International Business
Machines Corp.............. $ 1,315,275
28,800 Microsoft Corp.*............. 1,483,200
31,500 National Data Corp........... 519,750
25,100 Policy Management Systems
Corp.*..................... 837,712
18,000 SPS Transaction Services,
Inc.*...................... 985,500
------------
12,569,502
------------
Consumer Products--3.0%
85,800 Agency Rent-A-Car, Inc....... 1,136,850
58,600 Cross A T Co................. 930,275
47,600 Eastman Kodak Co............. 2,302,650
23,500 First Brands Corp............ 807,813
12,900 Gillette Co.................. 896,550
31,300 Libbey, Inc.................. 524,275
42,000 Maybelline, Inc.............. 1,186,500
65,818 Newell Co.................... 2,937,128
29,300 The Rival Co................. 596,988
------------
11,319,029
------------
Drugs & Health Care--3.1%
46,500 Abbott Laboratories.......... 1,307,812
50,000 Baxter International, Inc.... 1,318,750
63,035 Columbia Healthcare Corp..... 2,552,917
60,000 Health Care & Retirement
Corp.*..................... 1,492,500
42,100 Healthtrust, Inc.*........... 1,173,538
32,300 Kendall International,
Inc.*...................... 1,691,712
63,400 National Medical Enterprises,
Inc........................ 1,077,800
17,900 Schering Plough Corp......... 1,147,838
------------
11,762,867
------------
Electronics--3.0%
111,200 ADT, Ltd.*................... 1,153,700
25,200 Anthem Electronics, Inc.*.... 560,700
49,600 Baldor Electric Co........... 1,202,800
50,600 Belden, Inc.................. 910,800
61,500 Emerson Electric Co.......... 3,736,125
78,800 General Electric Co.......... 3,969,550
------------
11,533,675
------------
</TABLE>
* See Note 8. B-40 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL ALLOCATION FUND*
STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
Entertainment--1.7%
88,000 Carnival Cruise Lines,
Inc........................ $ 4,158,000
37,900 Disney (Walt) Co............. 1,610,750
45,700 Sothebys Holdings, Inc....... 576,963
------------
6,345,713
------------
Environmental Services--0.7%
51,650 Thermo Electron Corp.*....... 2,059,544
38,550 Thermotrex Corp.*............ 496,331
------------
2,555,875
------------
Financial Services--7.9%
52,100 Banc One Corp................ 1,738,837
164,000 Bank of New York, Inc........ 5,186,500
46,000 Block (H&R), Inc............. 1,794,000
104,800 Dean Witter Discover & Co.... 4,205,100
59,900 Federal Home Loan Mortgage
Corp....................... 3,564,050
35,000 GFC Financial Corp........... 1,325,625
31,400 John Nuveen Co............... 679,025
92,700 Norwest Corp................. 2,421,787
91,400 Riggs National Corp.*........ 936,850
48,900 Salomon, Inc................. 2,108,812
41,700 State Street Boston Corp..... 1,600,238
19,700 T. Rowe Price & Associates,
Inc........................ 552,831
31,500 Union Planters Corp.......... 799,313
45,000 Washington Mutual Savings
Bank....................... 905,625
15,800 Wells Fargo & Co............. 2,454,925
------------
30,273,518
------------
Food & Beverage--1.7%
190,000(D) Archer-Daniels-Midland Co.... 4,678,750
46,400 Dr Pepper/Seven Up Cos.,
Inc.*...................... 1,055,600
27,400 Sbarro, Inc.................. 979,550
------------
6,713,900
------------
Freight Transportation--0.2%
34,700 Expeditors Int'l. Washington,
Inc........................ $ 624,600
------------
Hotels & Leisure--0.2%
33,000 Marriott International,
Inc........................ 915,750
------------
Insurance--2.9%
30,000 American Int'l. Group,
Inc........................ 2,827,500
32,600 CCP Insurance, Inc........... 782,400
27,300 Chubb Corp................... 2,044,087
38,500 Equitable of Iowa Cos........ 1,357,125
26,000 General Reinsurance Corp..... 3,006,250
30,000 NAC Re Corp.................. 840,000
26,200 Penncorp Financial Group,
Inc........................ 433,938
------------
11,291,300
------------
Machinery & Equipment--1.7%
50,500 Donaldson Co., Inc........... 1,243,563
34,600 Fisher Scientific
International, Inc......... 1,167,750
81,900 Illinois Tool Works, Inc..... 3,286,237
25,200 Lindsay Manufacturing Co.*... 774,900
------------
6,472,450
------------
Media--3.5%
34,000 Capital Cities ABC, Inc...... 2,626,500
56,600 Enquirer Star Group, Inc..... 933,900
21,000 Grupo Televisa S.A........... 1,176,000
50,100 Liberty Media Corp.*......... 1,120,987
75,800 Rogers Communications,
Inc.*...................... 1,083,210
28,900 Scholastic Corp.*............ 1,275,212
69,200 Shaw Communications.......... 563,294
45,000 TCA Cable TV, Inc............ 1,001,250
337,000 Television Broadcasts,
Ltd........................ 1,496,227
42,400 Tribune Co................... 2,215,400
------------
13,491,980
------------
Mining--0.5%
87,800 Placer Dome, Inc............. 1,821,850
------------
</TABLE>
* See Note 8. B-41 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL ALLOCATION FUND*
STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
Oil & Gas--1.0%
100,500 Baker Hughes, Inc............ $ 2,123,062
18,300 Cabot Corp................... 979,050
118,900 Mesa, Inc.*.................. 639,088
------------
3,741,200
------------
Paper & Forest Products--1.5%
28,700 Caraustar Inds., Inc......... 516,600
57,900 Thermo Fibertek, Inc.*....... 806,981
89,400 Willamette Industries,
Inc........................ 4,447,650
------------
5,771,231
------------
Petroleum Services--4.7%
37,000 Amoco Corp................... 2,215,375
47,400 Broken Hill Proprietary Ltd.
(ADR)...................... 2,660,325
67,900 Cross Timbers Oil Co......... 1,001,525
48,200 Exxon Corp................... 2,867,900
56,000 Royal Dutch Petroleum Co..... 6,328,000
28,900 Schlumberger, Ltd............ 1,705,100
58,800 Seagull Energy Corp.*........ 1,447,950
------------
18,226,175
------------
Railroad--0.4%
13,300 Kansas City Southern
Industries, Inc............ 517,038
33,700 Illinois Central Corp........ 1,074,188
------------
1,591,226
------------
Realty Investment Trust--1.9%
7,900 Charles E. Smith Residential
Realty, Inc.*.............. 198,488
40,000 Crescent Real Estate
Equities*.................. 1,080,000
35,700 Duke Reality Investments,
Inc........................ 963,900
40,000 Equity Residential Property
Trust...................... 1,310,000
32,300 Federal Reality Investment
Trust...................... 803,462
6,100 Vornado Reality Trust........ 224,175
64,900 Manufactured Home Community,
Inc........................ $ 1,330,450
35,700 Weingarten Realty
Investors.................. 1,338,750
------------
7,249,225
------------
Retail--1.1%
16,200 Edison Brothers Stores,
Inc........................ 405,000
35,000 Harcourt General, Inc........ 1,255,625
30,700 Penney (J.C.), Inc........... 1,519,650
3,855 Thermolase Corp*............. 35,659
23,600 Tiffany & Co................. 864,350
------------
4,080,284
------------
Steel & Metals--2.0%
38,100 Aluminum Co. of America...... 2,981,325
20,000 Carpenter Technology Corp.... 1,207,500
10,200 Rouge Steel Co............... 311,100
161,500 Worthington Industries,
Inc........................ 3,310,750
------------
7,810,675
------------
Technology--0.2%
35,050 McWhorter Technologies,
Inc.*...................... 587,088
------------
Telecommunications--2.9%
55,000 AirTouch Communications*..... 1,430,000
66,000 AT & T Corp.................. 3,605,250
12,400 ITT Corp..................... 1,063,300
84,700 Telefonos de Mexico, Series
A. (ADR)................... 5,145,525
------------
11,244,075
------------
Textiles--1.5%
12,600 Galey & Lord, Inc.*.......... 259,875
41,400 Kellwood Co.................. 941,850
19,400 Russell Corp................. 586,850
32,000 Unifi, Inc................... 796,000
30,000 VF Corp...................... 1,537,500
57,600 Wellman, Inc................. 1,656,000
------------
5,778,075
------------
</TABLE>
* See Note 8. B-42 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL ALLOCATION FUND*
STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C> <C>
Tobacco--0.4%
8,900 Philip Morris Cos., Inc............ $ 489,500
40,300 UST, Inc........................... 1,163,663
------------
1,653,163
------------
Utilities--0.2
39,050 AES Corp........................... 683,375
------------
Waste Management--0.2%
25,800 WMX Technologies, Inc.............. 751,425
------------
Total common stocks
(cost $208,189,470)................ 222,718,382
------------
Moody's Principal DEBT OBLIGATIONS--3.9%
Rating Amount Corporate Bonds--3.6%
(Unaudited) (000) Automotive--0.4%
- ------------ ---------
Harvard Inds., Inc.,
B2 $ 1,500 12.00%, 7/15/04...... 1,500,000
------------
Building & Related Industries--0.7%
Intermediate City
Products. Corp.,
Sr. Sec'd. Notes,
Ba3 2,000 9.75%, 3/1/00........ 1,820,000
Ryland Group, Inc.,
Ba3 1,000 9.625%, 6/1/04....... 900,000
------------
2,720,000
------------
Finance--0.4%
GB Property Funding
Corp.,
B2 1,000 10.88%, 1/15/04...... 805,000
Reliance Group
Holdings, Inc.,
B1 1,000 9.75%, 11/15/03...... 885,000
------------
1,690,000
------------
Food & Beverage--0.4%
Fresh Del Monte
Produce, N.V.,
B1 1,500 10.00%, 5/1/03....... 1,387,500
------------
Hotels & Leisure--0.1%
Host Marriott
Hospitality, Inc.,
B1 $ 500 10.50%, 5/1/06, Ser.
M,................. $ 500,000
------------
Media--0.7%
Adelphia
Communications
Corp.,
NR 1,000 9.50%, 2/15/04....... 785,000
Cablevision
Industries Corp.,
Ba3 2,000 10.75%, 1/30/02...... 1,980,000
------------
2,765,000
------------
Paper & Forest Products--0.5%
Fort Howard Paper
Corp.,
B2 1,100 9.00%, 2/1/06........ 924,000
Malette, Inc.,
Ba3 1,000 12.25%, 7/15/04...... 1,000,000
------------
1,924,000
------------
Restaurants--0.4%
Flagstar Corp.,
B2 1,500 10.88%, 12/1/02...... 1,402,500
------------
Total corporate bonds
(cost
$15,116,332)....... 13,889,000
------------
Collateralized Mortgage
Obligations--0.3%
Federal National
Mortgage
Association, REMIC,
Aaa 1,000 9.00%, 3/25/20....... 1,068,120
------------
Total debt
obligations
(cost
$16,094,193)....... 14,957,120
------------
Total long-term
investments
(cost
$224,283,663)...... 237,675,502
------------
SHORT-TERM INVESTMENTS--38.7%
Sovereign Bonds--2.7%
Mexican Tesobonos
NR 10,500 Zero Coupon, 11/10/94
(cost
$10,266,697)....... 10,284,594
------------
</TABLE>
* See Note 8. B-43 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL ALLOCATION FUND*
STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
U. S. Government & Agency
Securities--9.1%
Federal National Mortgage
Association,
$ 25,000 4.26%, 8/23/94............... $ 24,934,917
United States Treasury Notes,
10,000 4.125%, 5/31/95.............. 9,906,200
------------
Total U.S. Government
and Agency Securities
(cost $34,822,355)......... 34,841,117
------------
Repurchase Agreement--26.9%
Joint Repurchase Agreement
Account,
103,185 4.19%, 8/1/94, (Note 5)...... 103,185,000
------------
Total short-term investments
(cost $148,274,052)........ 148,310,711
------------
Total Investments--100.6%
(cost $372,557,715; Note
4)......................... 385,986,213
Liabilities in excess of
other
assets--(0.6%)............. (2,361,669)
------------
Net Assets--100%............. $383,624,544
------------
------------
</TABLE>
- ------------------
* Non-income producing security.
ADR--American Depository Receipt.
REMIC--Real Estate Mortgage Investment Conduit.
L.P.--Limited Partnership.
(D) Partial amount pledged as initial margin on financial futures contracts.
* See Note 8. B-44 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL ALLOCATION FUND*
STRATEGY PORTFOLIO
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
July 31,
Assets 1994
------------
<S> <C>
Investments, at value (cost $372,557,715)................................................. $385,986,213
Foreign currency, at value (cost $2,054,475).............................................. 2,054,449
Cash...................................................................................... 76,783
Receivable for investments sold........................................................... 3,856,279
Interest and dividends receivable......................................................... 748,054
Receivable for Fund shares sold........................................................... 386,682
Forward contracts--amount receivable from counterparties.................................. 347,135
Deferred expenses and other assets........................................................ 20,882
------------
Total assets.......................................................................... 393,476,477
------------
Liabilities
Payable for investments purchased......................................................... 8,004,180
Payable for Fund shares reacquired........................................................ 703,480
Due to broker--variation margin payable................................................... 315,400
Distribution fee payable.................................................................. 306,091
Accrued expenses.......................................................................... 296,753
Management fee payable.................................................................... 221,323
Withholding taxes payable................................................................. 1,431
Forward contracts--amount payable to counterparties....................................... 3,275
------------
Total liabilities..................................................................... 9,851,933
------------
Net Assets................................................................................ $383,624,544
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................... $ 332,289
Paid-in capital in excess of par........................................................ 358,280,006
------------
358,612,295
Undistributed net investment income..................................................... 1,547,219
Accumulated net realized gain on investments............................................ 10,160,450
Net unrealized appreciation on investments.............................................. 13,304,580
------------
Net Assets, July 31,1994.................................................................. $383,624,544
------------
------------
Class A:
Net asset value and redemption price per share
($32,484,966 / 2,799,550 shares of beneficial interest issued and outstanding)........ $11.60
Maximum sales charge (5.25% of offering price).......................................... 0.64
------------
Maximum offering price to public........................................................ $12.24
------------
------------
Class B:
Net asset value, offering price and redemption price per share
($351,139,578 / 30,429,329 shares of beneficial interest issued and outstanding)...... $11.54
------------
------------
</TABLE>
* See Note 8.
See Notes to Financial Statements.
B-45
<PAGE>
PRUDENTIAL ALLOCATION FUND*
STRATEGY PORTFOLIO
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
July 31,
Net Investment Income 1994
------------
<S> <C>
Income
Dividends (net of foreign withholding taxes of $54,294)................................... $ 4,897,587
Interest (net of foreign withholding taxes of $459)....................................... 10,028,623
------------
Total income............................................................................ 14,926,210
------------
Expenses
Distribution fee--Class A................................................................. 70,370
Distribution fee--Class B................................................................. 3,625,792
Management fee............................................................................ 2,555,883
Transfer agent's fees and expenses........................................................ 830,000
Custodian's fees and expenses............................................................. 265,000
Reports to shareholders................................................................... 305,200
Registration fees......................................................................... 26,000
Trustees' fees............................................................................ 22,300
Legal fees................................................................................ 20,000
Audit fee................................................................................. 14,000
Miscellaneous............................................................................. 19,821
------------
Total expenses.......................................................................... 7,754,366
------------
Net investment income....................................................................... 7,171,844
------------
Realized and Unrealized Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions................................................................... 15,964,132
Financial futures contracts............................................................... (1,039,395)
Foreign currency transactions............................................................. (46,117)
------------
14,878,620
------------
Net change in unrealized appreciation (depreciation)
Investments............................................................................... (13,557,587)
Financial futures contracts............................................................... (467,750)
Foreign currencies........................................................................ 343,222
------------
(13,682,115)
------------
Net gain on investments..................................................................... 1,196,505
------------
Net Increase in Net Assets Resulting from Operations........................................ $ 8,368,349
------------
------------
</TABLE>
* See Note 8.
See Notes to Financial Statements.
B-46
<PAGE>
PRUDENTIAL ALLOCATION FUND*
STRATEGY PORTFOLIO
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Years Ended July 31,
--------------------------------
Increase (Decrease) in Net Assets 1994 1993
---------------- ------------
<S> <C> <C>
Operations
Net investment income....................................................... $ 7,171,844 $ 10,348,326
Net realized gain on investments............................................ 14,878,620 10,954,676
Net change in unrealized appreciation of investments........................ (13,682,115) 11,275,901
---------------- ------------
Net increase in net assets resulting from operations........................ 8,368,349 32,578,903
---------------- ------------
Net equalization credits...................................................... 48,191 57,175
---------------- ------------
Dividends and distributions (Note 1)
Dividends to shareholders from net investment income
Class A................................................................... (549,810) (762,246)
Class B................................................................... (4,811,597) (8,432,955)
---------------- ------------
(5,361,407) (9,195,201)
---------------- ------------
Dividends to shareholders in excess of net investment income
Class A................................................................... (40,192) --
Class B................................................................... (351,923) --
---------------- ------------
(392,115) --
---------------- ------------
Distributions to shareholders from net realized gains on investments and
foreign curencies
Class A................................................................... (815,586) (1,779,498)
Class B................................................................... (10,082,411) (26,359,313)
---------------- ------------
(10,897,997) (28,138,811)
---------------- ------------
Fund share transactions (Note 5)
Proceeds from shares sold................................................... 76,851,235 95,403,980
Net asset value of shares issued in reinvestment of dividends and
distributions............................................................. 15,914,742 35,885,867
Cost of shares reacquired................................................... (86,835,010) (75,812,344)
---------------- ------------
Net increase in net assets from Fund share transactions..................... 5,930,967 55,477,503
---------------- ------------
Total increase (decrease)..................................................... (2,304,012) 50,779,569
Net Assets
Beginning of year............................................................. 385,928,556 335,148,987
---------------- ------------
End of year................................................................... $ 383,624,544 $385,928,556
---------------- ------------
---------------- ------------
</TABLE>
* See Note 8.
See Notes to Financial Statements.
B-47
<PAGE>
PRUDENTIAL ALLOCATION FUND*
Notes to Financial Statements
Prudential Allocation Fund, formerly known as 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 poli-
cies 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 or designated
subcustodians, as the case may be under triparty repurchase agreements, 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.
* See Note 8 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.
Income distributions and capital gains distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments of wash sales and foreign currencies transactions.
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 of 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.
For the year ended July 31, 1994, the Conservatively Managed Portfolio and the
Strategy Portfolio each decreased accumulated net investment income and
increased accumulated gains by $431,923 and $2,750,630,
B-49
<PAGE>
respectively. 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
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,
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 .23 of 1% of the average daily net assets
of the Class A shares for the fiscal year ended July 31, 1994. Such Class A Plan
distribution expenses are currently being assessed at a rate of .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 $781,000
($561,000--Conservatively Managed Portfolio and $220,000--Strategy Portfolio) in
front-end sales charges resulting from sales of Class A shares during the year
ended July 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 year ended July
31, 1994, it received approximately $1,245,000 ($641,000--Conservatively Managed
Portfolio and $604,000--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, 1994, the amount of distribution expenses
incurred by PSI and not yet reimbursed by the Fund or recovered through
contingent deferred sales charges approximated $20,890,000
($13,353,000--Conservatively Managed Portfolio and $7,537,000--Strategy
Portfolio). This amount may be recovered through future payments under the
Class B Plan or contingent deferred sales charges.
B-50
<PAGE>
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.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
With Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended July 31, 1994, the Fund incurred fees of approximately $1,323,000
($606,000--Conservatively Managed Portfolio and $717,000--Strategy Portfolio)
for the services of PMFS. As of July 31, 1994, approximately $124,000 ($59,000--
Conservatively Managed Portfolio and $65,000--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, 1994, PSI received approximately $49,800
($7,800--Conservatively Managed Portfolio and $42,000--Strategy Portfolio) in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
Note 4. Portfolio Purchases and sales of invest-
Securities ment securities, other than
short-term investments, for the year ended July
31, 1994, were as follows:
<TABLE>
<CAPTION>
Portfolio Purchases Sales
- ----------------------------- ------------- -------------
<S> <C> <C>
Conservatively Managed
Portfolio $ 478,603,631 $ 395,399,970
Strategy Portfolio........... $ 310,625,638 $ 396,838,310
</TABLE>
At July 31, 1994, the Strategy Portfolio had outstanding forward currency
contracts to buy and sell foreign currencies, as follows:
<TABLE>
<CAPTION>
Foreign Currency Value at Current Appreciation/
Sale Contracts Settlement Date Value (Depreciation)
- --------------------- --------------- ----------- --------------
<S> <C> <C> <C>
Swiss Francs......... $ 8,343,807 $ 7,996,725 $ 347,082
--------------- ----------- --------------
--------------- ----------- --------------
<CAPTION>
Foreign Currency Value at Current Appreciation/
Purchase Contracts Settlement Date Value (Depreciation)
- --------------------- --------------- ----------- --------------
<S> <C> <C> <C>
Swiss Francs......... $ 8,000,000 $ 7,996,725 $ (3,275)
Hong Kong Dollars.... 2,054,403 2,054,456 53
--------------- ----------- --------------
$ 10,054,403 $10,051,181 $ (3,222)
--------------- ----------- --------------
--------------- ----------- --------------
</TABLE>
The cost basis of investments for federal income tax purposes as of July 31,
1994 was $476,285,909 and $372,790,188 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................ $ 33,383,121 $20,011,159
Gross unrealized
depreciation................ (16,628,521) (6,815,134)
-------------- -----------
Net unrealized appreciation... $ 16,754,660 $13,196,025
-------------- -----------
-------------- -----------
</TABLE>
At July 31, 1994, the Strategy Portfolio sold 830 financial futures contracts
on the S&P 500 Index expiring in October 1994. The value at disposition of such
contracts is $38,088,700. The value of such contracts on July 31, 1994 was
$37,620,950, thereby resulting in an unrealized loss of $467,750.
Note 5. Joint The Fund, along with other
Repurchase affiliated registered invest-
Agreement ment companies, transfers
Account 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, 1994, the Fund
had a 26.3% (Conservatively Managed Portfolio--12.8% and Strategy
Portfolio--13.5%) undivided interest in the repurchase agreements in the joint
account. The undivided interest for the Fund represented $201,687,000,
(Conservatively Managed Portfolio--$98,502,000 and Strategy
Portfolio--$103,185,000) in the principal amount. As of such date, each
repurchase agreement in the joint account and the value of the collateral
therefor was as follows:
BT Securities Corp., 4.21%, dated 7/29/94, in the principal amount of
$175,000,000, repurchase price $175,061,396, due 8/1/94. The value of the
collateral including accrued interest is $179,326,613.
CS First Boston Corp., 4.15%, dated 7/29/94,
in the principal amount of $196,000,000, repurchase
price $196,067,783, due 8/1/94. The value of the collateral including accrued
interest is $200,263,934.
J.P. Morgan Securities, Inc., 4.20%, dated 7/23/94,
in the principal amount of $200,000,000, repurchase
price $200,070,000, due 8/1/94. The value of the collateral including accrued
interest is $204,307,217.
B-51
<PAGE>
Kidder, Peabody & Co., Inc., 4.20%, dated 7/29/93, in the principal amount of
$150,000,000, repurchase price $150,052,500, due 8/1/94. The value of the
collateral including accrued interest is $154,761,581.
Lehman Inc., 4.20%, dated 7/29/94, in the principal amount of $46,053,000,
repurchase price $46,069,119, due 8/1/94. The value of the collateral including
accrued interest is $47,036,000.
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.
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, 1994:
<S> <C> <C> <C> <C>
Shares sold.................................................... 1,936,121 $22,068,844 17,006,359 $194,349,146
Shares issued in reinvestment of dividends
and distributions............................................ 185,818 2,104,551 2,171,273 24,512,929
Shares reacquired.............................................. (673,143) (7,607,829) (6,463,788) (73,339,193)
---------- ----------- ----------- ------------
Increase in shares outstanding................................. 1,448,796 $16,565,566 12,713,844 $145,522,882
---------- ----------- ----------- ------------
---------- ----------- ----------- ------------
<CAPTION>
Class A Class B
------------------------- ---------------------------
Shares Amount Shares Amount
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
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:
<CAPTION>
Class A Class B
------------------------- ---------------------------
Shares Amount Shares Amount
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Year ended July 31, 1994:
Shares sold.................................................... 954,118 $11,209,754 5,564,589 $ 65,641,481
Shares issued in reinvestment of dividends
and distributions............................................ 115,925 1,362,807 1,243,606 14,551,935
Shares reacquired.............................................. (693,445) (8,199,850) (6,693,142) (78,635,160)
---------- ----------- ----------- ------------
Increase in shares outstanding................................. 376,598 $ 4,372,711 115,053 $ 1,558,256
---------- ----------- ----------- ------------
---------- ----------- ----------- ------------
<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
---------- ----------- ----------- ------------
---------- ----------- ----------- ------------
</TABLE>
B-52
<PAGE>
Note 7. Dividends On September 14, 1994, the
Board of Trustees of the Fund declared a dividend
from undistributed net investment income to Class A shareholders of $.065 per
share and to Class B shareholders of $.045 per share for the Conservatively
Managed Portfolio and a dividend from undistributed net investment income to
Class A shareholders of $.0525 per share and to Class B shareholders of $.03
per share for the Strategy Portfolio. All dividends are payable on September
30, 1994 to shareholders of record on September 23, 1994.
Note 8. Subsequent On July 19, 1994, a meeting
Event of the shareholders of the
Fund was held at which time the shareholders
approved among other things: a) amendments to the Fund's Declaration of
Trust to permit a conversion feature for Class B shares to Class A shares
after 7 years, and b) amendments to the Class A and Class B Distribution
Plans, under which the Distribution Plans become compensation rather than
reimbursement plans. In addition, the Trustees of the Fund approved a change in
the Fund's name from Prudential FlexiFund to Prudential Allocation Fund. These
changes were effective August 1, 1994.
B-53
<PAGE>
PRUDENTIAL ALLOCATION FUND*
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: 1994 1993 1992 1991 1990 1994 1993 1992 1991 1990
<S> <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
------- ------- ------- ------- ------ -------- -------- -------- -------- --------
Income from
investment
operations
Net investment
income............ .33 .43 .44 .44 .26 .24 .34 .35 .36 .45
Net realized and
unrealized gain
(loss) on
investment
transactions...... (.05) 1.16 .81 .73 .38 (.05) 1.16 .82 .73 .18
------- ------- ------- ------- ------ -------- -------- -------- -------- -------
Total from
investment
operations...... .28 1.59 1.25 1.17 .64 .19 1.50 1.17 1.09 .63
------- ------- ------- ------- ------ -------- -------- -------- -------- --------
Less distributions
Dividends from net
investment
income............ (.37) (.37) (.44) (.44) (.24) (.28) (.29) (.36) (.37) (.52)
Distributions paid
to shareholders
from net realized
gains on
investment
transactions...... (.54) (.47) (.54) (.23) -- (.54) (.47) (.54) (.23) (.10)
------- ------- ------- ------- ------ -------- -------- -------- -------- --------
Total
distributions..... (.91) (.84) (.98) (.67) (.24) (.82) (.76) (.90) (.60) (.62)
------- ------- ------- ------- ------ -------- -------- -------- -------- --------
Net asset value, end
of period......... $ 11.12 $ 11.75 $ 11.00 $ 10.73 $10.23 $ 11.09 $ 11.72 $ 10.98 $ 10.71 $ 10.22
------- ------- ------- ------- ------ -------- -------- -------- -------- --------
------- ------- ------- ------- ------ -------- -------- -------- -------- --------
TOTAL RETURN#:...... 2.39% 15.15% 12.29% 11.99% 6.59% 1.61% 14.27% 11.48% 11.13% 6.44%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)...... $37,512 $22,605 $10,944 $ 4,408 $1,944 $445,609 $321,831 $225,995 $162,281 $154,917
Average net assets
(000)............. $29,875 $15,392 $ 7,103 $ 2,747 $1,047 $392,133 $267,340 $189,358 $149,907 $143,241
Ratios to average
net assets:
Expenses,
including
distribution
fees............ 1.23% 1.17% 1.29% 1.38% 1.29%+ 2.00% 1.97% 2.09% 2.16% 2.07%
Expenses,
excluding
distribution
fees............ 1.00% .97% 1.09% 1.18% 1.09%+ 1.00% .97% 1.09% 1.16% 1.08%
Net investment
income.......... 2.84% 3.88% 3.97% 4.44% 5.04%+ 2.08% 3.04% 3.25% 3.55% 4.42%
Portfolio turnover
rate.............. 108% 83% 105% 137% 106% 108% 83% 105% 137% 106%
</TABLE>
- ---------------
@ Commencement of offering of Class A shares.
+ 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.
* See Note 8
See Notes to Financial Statements.
B-54
<PAGE>
PRUDENTIAL ALLOCATION FUND*
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: 1994 1993 1992 1991 1990 1994 1993 1992 1991 1990
<S> <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
------- ------- ------- ------- ------ -------- -------- -------- -------- --------
Income from investment
operations
Net investment
income............ .30 .42 .35 .38 .25 .21 .34 .26 .30 .37
Net realized and
unrealized gain on
investment and
foreign currency
transactions...... .05 .70 1.02 .98 .33 .05 .70 1.02 .97 .03
------- ------- ------- ------- ------ -------- -------- -------- -------- --------
Total from
investment
operations...... .35 1.12 1.37 1.36 .58 .26 1.04 1.28 1.27 .40
------- ------- ------- ------- ------ -------- -------- -------- -------- --------
Less distributions
Dividends from net
investment
income............ (.22) (.37) (.37) (.35) (.24) (.16) (.30) (.28) (.27) (.40)
Dividends in excess
of net investment
income............ (.01) -- -- -- -- (.01) -- -- -- --
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..... (.57) (1.33) (.79) (.41) (.24) (.51) (1.26) (.70) (.33) (.76)
------- ------- ------- ------- ------ -------- -------- -------- -------- --------
Net asset value, end
of period......... $ 11.60 $ 11.82 $ 12.03 $ 11.45 $10.50 $ 11.54 $ 11.79 $ 12.01 $ 11.43 $ 10.49
------- ------- ------- ------- ------ -------- -------- -------- -------- --------
------- ------- ------- ------- ------ -------- -------- -------- -------- --------
TOTAL RETURN#:...... 2.88% 10.02% 12.36% 13.42% 5.83% 2.11% 9.21% 11.53% 12.49% 3.59%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)...... $32,485 $28,641 $20,378 $10,765 $5,073 $351,140 $357,287 $314,771 $219,983 $176,078
Average net assets
(000)............. $30,634 $24,216 $15,705 $ 6,694 $2,928 $362,579 $339,225 $267,525 $190,913 $127,360
Ratios to average
net assets:
Expenses,
including
distribution
fees............ 1.26% 1.21% 1.26% 1.33% 1.51%++ 2.03% 2.01% 2.06% 2.11% 2.10%
Expenses,
excluding
distribution
fees............ 1.03% 1.01% 1.06% 1.13% 1.26%++ 1.03% 1.01% 1.06% 1.11% 1.14%
Net investment
income.......... 2.52% 3.61% 3.05% 3.89% 4.58%++ 1.77% 2.79% 2.27% 2.95% 3.61%
Portfolio turnover
rate.............. 96% 145% 241% 189% 159% 96% 145% 241% 189% 159%
</TABLE>
- ---------------
+ 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 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.
* See Note 8
See Notes to Financial Statements.
B-55
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Trustees
Prudential Allocation Fund (consisting of the Conservatively Managed Portfolio
and the Strategy Portfolio)
We have audited the accompanying statements of assets and liabilities of
Prudential Allocation Fund (formerly, Prudential FlexiFund), including the
portfolios of investments, as of July 31, 1994, 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, 1994 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
Allocation Fund as of July 31, 1994, the results of its operations, the
changes in its net assets and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
September 14, 1994
B-56
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
(1) The following financial statements are included in the Prospectus
constituting Part A of this Registration Statement:
Financial Highlights.
(2) The following financial statements are included in the Statement of
Additional Information constituting Part B of this Registration Statement:
Independent Auditors' Report.
Portfolio of Investments at July 31, 1994.
Statement of Assets and Liabilities at July 31, 1994.
Statement of Operations for the year ended July 31, 1994.
Statement of Changes in Net Assets for the years ended July 31, 1994
and 1993.
Notes to Financial Statements.
Financial Highlights.
(B) EXHIBITS:
1. (a)_Amended and Restated Declaration of Trust.*
(b)_Amended and Restated Certificate of Designation.*
2. By-Laws of the Registrant.*
4. (a) Specimen receipt for shares of beneficial interest issued by the
Registrant. Incorporated by reference to Exhibit No. 4 to
Post-Effective Amendment No. 2 to the Registration Statement on Form
N-1A filed on March 1, 1988 (File No. 33-12531).
(b) Specimen receipt for Class A shares of beneficial interest of
the Conservatively Managed Portfolio of the Registrant. Incorporated
by reference to Exhibit No. 4(b) to Post-Effective Amendment No. 7
to the Registration Statement on Form N-1A filed on November 30,
1990 (File No. 33-12531).
(c) Specimen receipt for Class A and Class B shares of beneficial
interest of the Strategy Portfolio. Incorporated by reference to
Exhibit No. 4(c) to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed on November 30, 1990 (File
No. 33-12531).
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc. Incorporated by reference to Exhibit
No. 5(a) to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A filed on October 31, 1989 (File No.
33-12531).
C-1
<PAGE>
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. Incorporated by
reference to Exhibit No. 5(b) to Post-Effective Amendment No.4 to
the Registration Statement on Form N-1A filed on October 31, 1989
(File No. 33-12531).
6. (a)_Distribution Agreement for Class A shares.*
(b)_Distribution Agreement for Class B shares.*
(c)_Distribution Agreement for Class C shares.*
8. (a) Custodian Contract betwen the Registrant and State Street Bank
and Trust Company. Incorporated by reference to Exhibit No. 8 to
Post-Effective Amendment No. 4 to the Registration Statement on Form
N-1A filed on October 31, 1989 (File No. 33-12531).
(b) Amendment to Custodian Contract. Incorporated by reference to
Exhibit No. 8(b) to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed on November 30, 1990 (File
No. 33-12531).
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorporated by reference to
Exhibit No. 9 to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A filed on October 31, 1989 (File No.
33-12531).
10. Opinion of Counsel. Incorporated by reference to Exhibit No. 10 to
Pre-Effective Amendment No. 2 to the Registration Statement on Form
N-1A filed on August 31, 1987 (File No. 33-12531).
11. Consent of Independent Auditors.*
13. Purchase Agreement. Incorporated by reference to Exhibit No. 13 to
Pre-Effective Amendment No. 2 to the Registration Statement on Form
N-1A filed on August 31, 1987 (File No. 33-12531).
15. (a)_Distribution and Service Plan for Class A shares.*
(b)_Distribution and Service Plan for Class B shares.*
(c)_Distribution and Service Plan for Class C shares.*
16. (a) Schedule of Computation of Performance Quotations. Incorporated
by reference to Exhibit No. 16 to Post-Effective Amendment No. 4 to
the Registration Statement on Form N-1A filed on October 31, 1989
(File No. 33-12531).
(b) Schedule of Computation of Performance Quotations for Class A
shares. Incorporated by reference to Exhibit No. 16(b) to
Post-Effective Amendment No. 7 to the Registration Statement on Form
N-1A filed on November 30, 1990 (File No. 33-12531).
27._Financial Data Schedule.*
Other Exhibits
Powers of Attorney for: Edward D. Beach, Donald D. Lennox, Douglas H.
McCorkindale, Lawrence C. McQuade, Thomas T. Mooney and Louis A. Weil, III.
Executed copies incorporated by reference to Other Exhibits to
Post-Effective Amendment No. 4 to the Registration Statement on Form N-1A
filed on October 31, 1989 (File No. 33-12531).
------------------
* Filed herewith
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
No person is controlled by or under common control with the Registrant.
C-2
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of September 16, 1994, there were 9,544 Class A shareholders of the
Conservatively Managed Portfolio and 11,828 Class A shareholders of the Strategy
Portfolio; 52,626 Class B shareholders of the Conservatively Managed Portfolio
and 49,166 Class B shareholders of the Strategy Portfolio; and 33 Class C
shareholders of the Conservatively Managed Portfolio and 8 Class C shareholders
of the Strategy Portfolio.
ITEM 27. INDEMNIFICATION.
As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940
(the "1940 Act") and pursuant to Article VI of the Fund's By-Laws (Exhibit 2 to
the Registration Statement), officers, Trustees, employees and agents of the
Registrant will not be liable to the Registrant, any shareholder, officer,
trustee, employee, agent or other person for any action or failure to act,
except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
As permitted by Section 17(i) of the 1940 Act, pursuant to Section 10 of the
Distribution Agreements (Exhibit 6 to the Registration Statement), each
Distributor of the Registrant may be indemnified against liabilities which it
may incur, except liabilities arising from bad faith, gross negligence, willful
misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 ("Securities Act") may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1940 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a trustee, officer, or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1940 Act and
will be governed by the final adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
trustees against liabilities, and certain costs of defending claims against such
officers and trustees, to the extent such officers and trustees are not found to
have committed conduct constituting willful misfeasance, bad faith, gross
negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and trustees under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Mutual Fund
Management, Inc. ("PMF") and The Prudential Investment Corporation ("PIC"),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective obligations and duties
under the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretations of Sections 17 (h) and 17 (i) of such Act
remain in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Prudential Mutual Fund Management, Inc.
See "How the Fund is Managed -- Manager" in the Prospectus constituting Part
A of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the executive officers of PMF are
listed in Schedules A and D of Form ADV of PMF as currently on file with the
Securities and Exchange Commission, the text of which is hereby incorporated by
reference (File No. 801-3110, filed on March 30, 1994).
C-3
<PAGE>
The business and other connections of PMF's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is One Seaport Plaza, New York, NY 10292.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- ------------------------------ ------------------------------ --------------------------------------------------
<S> <C> <C>
Brendan D. Boyle Executive Vice President and Executive Vice President and Director of
Director of Marketing Marketing, PMF; Senior Vice President,
Prudential Securities Incorporated (Prudential
Securities)
John D. Brookmeyer, Jr. Director Senior Vice President, The Prudential Insurance
Two Gateway Center Company of America (Prudential)
Newark, NJ 07102
Susan C. Cote Senior Vice President Senior Vice President, PMF; Senior Vice President,
Prudential Securities
Fred A. Fiandaca Executive Vice President, Executive Vice President, Chief Operating Officer
Raritan Plaza One Chief Operating Officer and and Director, PMF; Chairman, Chief Operating
Edison, NJ 08847 Director Officer and Director, Prudential Mutual Fund
Services, Inc.
Stephen P . Fisher Senior Vice President Senior Vice President, PMF; Senior Vice President,
Prudential Securities
Frank W. Giordano Executive Vice President, Executive Vice President, General Counsel and
General Counsel and Secretary Secretary, PMF; Senior Vice President,
Prudential Securities
Robert F. Gunia Executive Vice President, Executive Vice President, Chief Financial and
Chief Financial and Administrative Officer, Treasurer and Director,
Administrative Officer, PMF; Senior Vice President, Prudential
Treasurer and Director Securities
Eugene B. Heimberg Director Senior Vice President, Prudential; President,
Prudential Plaza Director and Chief Investment Officer, PIC
Newark, NJ 07101
Lawrence C. McQuade Vice Chairman Vice Chairman, PMF
Leland B. Paton Director Executive Vice President and Director, Prudential
Securities; Director, Prudential Securities
Group, Inc. (PSG)
Richard A. Redeker President, Chief Executive President, Chief Executive Officer and Director,
Officer and Director PMF; Executive Vice President, Director and
Member of Operating Committee, Prudential
Securities; Director, PSG; Vice President, PIC
S. Jane Rose Senior Vice President, Senior Senior Vice President, Senior Counsel and
Counsel and Assistant Assistant Secretary, PMF; Senior Vice President
Secretary and Senior Counsel, Prudential Securities
Donald G. Southwell Director Senior Vice President, Prudential; Director, PSG
213 Washington Street
Newark, NJ 07102
</TABLE>
(b) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed -- Manager" in the Prospectus constituting Part
A of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
C-4
<PAGE>
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ------------------------------ ------------------------------ --------------------------------------------------
<S> <C> <C>
Martin A. Berkowitz Senior Vice President and Senior Vice President and Chief Financial and
Chief Financial and Compliance Compliance Officer, PIC; Vice President,
Officer Prudential
William M. Bethke Senior Vice President Senior Vice President, Prudential; Senior Vice
Two Gateway Center President, PIC
Newark, NJ 07102
John D. Brookmeyer, Jr. Senior Vice President Senior Vice President, Prudential; Senior Vice
Two Gateway Center President, PIC
Newark, NJ 07102
Eugene B. Heimberg President, Director and Chief President, Director and Chief Investment Officer,
Investment Officer PIC; Senior Vice President, Prudential
Garnett L. Keith, Jr. Director Vice Chairman and Director, Prudential; Director,
PIC
Harry E. Knapp, Jr. Vice President Vice President, Prudential; Vice President, PIC
Four Gateway Center
Newark, NJ 07102
William P . Link Senior Vice President Executive Vice President, Prudential; Senior Vice
Four Gateway Center President, PIC
Newark, NJ 07102
Richard A. Redeker Vice President President, Chief Executive Officer and Director,
One Seaport Plaza PMF; Executive Vice President, Director and
New York, NY 10292 member of Operating Committee, Prudential
Securities; Director, PSG
Robert E. Riley Executive Vice Executive Vice President, Prudential; Executive
800 Boylston Avenue President Vice President, PIC; Director, PSG
Boston, MA 02199
James W. Stevens Executive Vice Executive Vice President, Prudential; Executive
Four Gateway Center President Vice President, PIC; Director, PSG
Newark, NJ 07102
Robert C. Winters Director Chairman of the Board and Chief Executive Officer,
Prudential; Director, PIC; Chairman of the Board
and Director, PSG
Claude J. Zinngrabe, Jr. Executive Vice Vice President, Prudential; Executive Vice
President President, PIC
</TABLE>
C-5
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a)(i) Prudential Securities Incorporated
Prudential Securities is distributor for Prudential Government Securities
Trust (Intermediate Term Series), The Target Portfolio Trust, for Class B shares
of The BlackRock Government Income Trust and Prudential Adjustable Rate
Securities Fund, Inc., for Class B and Class C shares of Global Utility Fund,
Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund),
Prudential Allocation Fund, Prudential California Municipal Fund (California
Series and California Income Series), Prudential Equity Fund, Inc., Prudential
Equity Income Fund, Prudential Europe Growth Fund, Inc., Prudential Global Fund,
Inc., Prudential Global Genesis Fund, Inc., Prudential Global Natural Resources
Fund, Inc., Prudential GNMA Fund, Inc., Prudential Government Income Fund, Inc.,
Prudential Growth Opportunity Fund, Inc., Prudential High Yield Fund, Inc.,
Prudential IncomeVertible-R- Fund, Inc., Prudential Intermediate Global Income
Fund, Inc., Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond Fund,
Prudential Municipal Series Fund (except Connecticut Money Market Series,
Massachusetts Money Market Series, New York Money Market Series and New Jersey
Money Market Series), Prudential National Municipals Fund, Inc., Prudential
Pacific Growth Fund, Inc., Prudential Short-Term Global Income Fund, Inc.,
Prudential Strategist Fund, Inc., Prudential Structured Maturity Fund, Inc.,
Prudential U.S. Government Fund and Prudential Utility Fund, Inc. and for Class
D shares of the Florida Series of Prudential Municipal Series Fund, Prudential
Securities is also a depositor for the following unit investment trusts:
Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(ii) Prudential Mutual Fund Distributors, Inc.
Prudential Mutual Fund Distributors, Inc. is distributor for Command
Government Fund, Command Money Fund, Command Tax-Free Fund, Prudential
California Municipal Fund (California Money Market Series), Prudential
Government Securities Trust (Money Market Series and U.S. Treasury Money Market
Series), Prudential Institutional Liquidity Portfolio, Inc., Prudential-Bache
MoneyMart Assets (d/b/a Prudential MoneyMart Assets), Prudential Municipal
Series Fund (Connecticut Money Market Series, Massachusetts Money Market Series,
New York Money Market Series and New Jersey Money Market Series),
Prudential-Bache Special Money Market Fund, Inc. (d/b/a Prudential Special Money
Market Fund), Prudential-Bache Tax-Free Money Fund, Inc.
(d/b/a Prudential Tax-Free Money Fund), and for Class A shares of The BlackRock
Government Income Trust, Global Utility Fund, Inc., Nicholas-Applegate Fund,
Inc. (Nicholas-Applegate Growth Equity Fund), Prudential Adjustable Rate
Securities Fund, Inc., Prudential Allocation Fund, Prudential California
Municipal Fund (California Income Series and California Series), Prudential
Equity Fund, Inc., Prudential Equity Income Fund, Prudential Europe Growth Fund,
Inc., Prudential Global Fund, Inc., Prudential Global Genesis Fund, Inc.,
Prudential Global Natural Resources Fund, Inc., Prudential GNMA Fund, Inc.,
Prudential Government Income Fund, Inc., Prudential Growth Opportunity Fund,
Inc., Prudential High Yield Fund, Inc., Prudential IncomeVertible-R- Fund, Inc.,
Prudential Intermediate Global Income Fund, Inc., Prudential Multi-Sector Fund,
Inc., Prudential Municipal Bond Fund, Prudential Municipal Series Fund (except
Connecticut Money Market Series, Massachusetts Money Market Series, New York
Money Market Series and New Jersey Money Market Series), Prudential National
Municipals Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential
Short-Term Global Income Fund, Inc., Prudential Strategist Fund, Inc.,
Prudential Structured Maturity Fund, Inc., Prudential U.S. Government Fund and
Prudential Utility Fund, Inc.
C-6
<PAGE>
(b)(i) Information concerning the officers and directors of Prudential
Securities Incorporated is set forth below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ----------------------------------- --------------------------------------------- --------------
<S> <C> <C>
Alan D. Hogan...................... Executive Vice President, Chief None
Administrative Officer and Director
Howard A. Knight................... Executive Vice President, Director, Corporate None
Strategy and New Business Development
George A. Murray................... Executive Vice President and Director None
John P . Murray.................... Executive Vice President and Director of Risk None
Management
Leland B. Paton.................... Executive Vice President and Director None
Richard A. Redeker................. Director Trustee
Hardwick Simmons................... Chief Executive Officer, President and None
Director
Lee B. Spencer..................... General Counsel, Executive Vice President and None
Director
</TABLE>
(ii) Information concerning the officers and directors of Prudential Mutual
Fund Distributors, Inc. is set forth below.
<TABLE>
<S> <C> <C>
Joanne Accurso-Soto................ Vice President None
Dennis Annarumma................... Vice President, Assistant Treasurer and None
Assistant Comptroller
Phyllis J. Berman.................. Vice President None
Fred A. Fiandaca................... President, Chief Executive Officer and None
Raritan Plaza One Director
Edison, NJ 08847
Stephen P . Fisher................. Vice President None
Frank W. Giordano.................. Executive Vice President, General Counsel, None
Secretary and Director
Robert F. Gunia.................... Executive Vice President, Treasurer, Vice President
Comptroller and Director
Andrew J. Varley................... Vice President None
Anita L. Whelan.................... Vice President and Assistant Secretary None
<FN>
- --------------
(1) The address of each person named is One Seaport Plaza, New York, NY 10292 unless otherwise
indicated.
</TABLE>
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, The Prudential Investment Corporation, Prudential Plaza,
751 Broad Street, Newark, New Jersey 07102 the Registrant, One Seaport Plaza,
New York, New York 10292, and Prudential Mutual Fund Services, Inc., Raritan
Plaza One, Edison, New
C-7
<PAGE>
Jersey 08837. Documents required by Rules 31a-1 (b)(5), (6), (7), (9), (10) and
(11) and 31a-1(f) will be kept at Two Gateway Center, Newark, New Jersey 07102.
Documents required by Rules 31a-1(b)(4) and (11) and 31a-1(d) at One Seaport
Plaza and the remaining accounts, books and other documents required by such
other pertinent provisions of Section 31(a) and the Rules promulgated thereunder
will be kept by State Street Bank and Trust Company and Prudential Mutual Fund
Services, Inc.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is Managed --
Manager" and "How the Fund is Managed -- Distributor" in the Prospectus and the
captions "Manager" and "Distributor" in the Statement of Additional Information,
constituting Parts A and B, respectively, of this Registration Statement,
Registrant is not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS
The Registrant hereby undertakes to furnish each person to whom a Prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all the requirements
for effectiveness of this Registration Statement pursuant to Rule 485(b) and has
duly caused this Post-Effective Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, and the State of New York, on September 29, 1994.
PRUDENTIAL ALLOCATION FUND
/s/ Lawrence C. McQuade
-----------------------------------------------------------------------
(LAWRENCE C. MCQUADE, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------- ---------------------------------- ----------------
<S> <C> <C>
/s/ Susan C. Cote Treasurer and Principal Financial September 29,
- --------------------------------- and Accounting Officer 1994
SUSAN C. COTE
/s/ Edward D. Beach Trustee September 29,
- --------------------------------- 1994
EDWARD D. BEACH
/s/ Donald D. Lennox Trustee September 29,
- --------------------------------- 1994
DONALD D. LENNOX
/s/ Douglas H. McCorkindale Trustee September 29,
- --------------------------------- 1994
DOUGLAS H. MCCORKINDALE
/s/ Lawrence C. McQuade Trustee and President September 29,
- --------------------------------- 1994
LAWRENCE C. MCQUADE
/s/ Thomas T. Mooney Trustee September 29,
- --------------------------------- 1994
THOMAS T. MOONEY
/s/ Richard A. Redeker Trustee September 29,
- --------------------------------- 1994
RICHARD A. REDEKER
/s/ Louis A. Weil, III Trustee September 29,
- --------------------------------- 1994
LOUIS A. WEIL, III
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- ------------------------------------------------------------------------- ----
<C> <S> <C>
1. (a) Amended and Restated Declaration of Trust.*
(b)Amended and Restated Certificate of Designation.*
2. By-Laws of the Registrant*
4. (a) Specimen receipt for shares of beneficial interest issued by the
Registrant. Incorporated by reference to Exhibit No. 4 to
Post-Effective Amendment No. 2 to the Registration Statement on Form
N-1A filed on March 1, 1988 (File No. 33-12531).
(b) Specimen receipt for Class A shares of beneficial interest of
the Conservatively Managed Portfolio of the Registrant. Incorporated
by reference to Exhibit No. 4(b) to Post-Effective Amendment No. 7
to the Registration Statement on Form N-1A filed on November 30,
1990 (File No. 33-12531).
(c) Specimen receipt for Class A and Class B shares of beneficial
interest of the Strategy Portfolio. Incorporated by reference to
Exhibit No. 4(c) to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed on November 30, 1990 (File
No. 33-12531).
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc. Incorporated by reference to Exhibit
No. 5(a) to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A filed on October 31, 1989 (File No.
33-12531).
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. Incorporated by
reference to Exhibit No. 5(b) to Post-Effective Amendment No.4 to
the Registration Statement on Form N-1A filed on October 31, 1989
(File No. 33-12531).
6. (a)Distribution Agreement for Class A shares.*
(b)Distribution Agreement for Class B shares.*
(c)Distribution Agreement for Class C shares.*
8. (a) Custodian Contract betwen the Registrant and State Street Bank
and Trust Company. Incorporated by reference to Exhibit No. 8 to
Post-Effective Amendment No. 4 to the Registration Statement on Form
N-1A filed on October 31, 1989 (File No. 33-12531).
(b) Amendment to Custodian Contract. Incorporated by reference to
Exhibit No. 8(b) to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed on November 30, 1990 (File
No. 33-12531).]
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorpo-
rated by reference to Exhibit No. 9 to Post-Effective Amendment No.
4 to the Registration Statement on Form N-1A
filed on October 31, 1989 (File No. 33-12531).
10. Opinion of Counsel. Incorporated by reference to Exhibit No. 10 to
Pre-Effective Amendment No. 2 to the Registration Statement on Form
N-1A filed on August 31, 1987 (File No. 33-12531).
11. Consent of Independent Auditors.*
13. Purchase Agreement. Incorporated by reference to Exhibit No. 13 to
Pre-Effective Amendment No. 2 to the Registration Statement on Form
N-1A filed on August 31, 1987 (File No. 33-12531).
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
15. (a)Distribution and Service Plan for Class A shares.*
(b)Distribution and Service Plan for Class B shares.*
(c)Distribution and Service Plan for Class C shares.*
16. (a) Schedule of Computation of Performance Quotations. Incorporated
by reference to Exhibit No. 16 to Post-Effective Amendment No. 4 to
the Registration Statement on Form N-1A filed on October 31, 1989
(File No. 33-12531).
(b) Schedule of Computation of Performance Quotations for Class A
shares. Incorporated by reference to Exhibit No. 16(b) to
Post-Effective Amendment No. 7 to the Registration Statement on Form
N-1A filed on November 30,
1990 (File No. 33-12531).
27. Financial Data Schedule.*
<FN>
- --------------
*Filed herewith
</TABLE>
<PAGE>
EXHIBIT 99.B1(a)
AMENDED AND RESTATED
DECLARATION OF TRUST
OF
PRUDENTIAL ALLOCATION FUND
(FORMERLY PRUDENTIAL FLEXIFUND)
Dated August 16, 1994
WHEREAS, Section 9.3 of the Declaration of Trust of Prudential Allocation
Fund, dated February 23, 1987, as amended to date, provides that the said
Declaration of Trust may be amended for certain purposes by an instrument in
writing signed by a majority of the Trustees, and Section 11.1 thereof provides
that the said Declaration of Trust and all amendments thereto may be restated as
a single instrument if executed by a majority of the Trustees;
NOW, THEREFORE, the said Declaration of Trust, as amended to date, is
hereby restated in its entirety to read as follows:
WITNESSETH
WHEREAS, this Trust has been formed for the investment and reinvestment of
funds contributed thereto; and
WHEREAS, the beneficial interest in the Trust Property is and shall be
divided into transferable shares of beneficial interest;
NOW, THEREFORE, the Trustees hereby declare that they will hold in trust
all money and property contributed to the Trust to manage and dispose of the
same for the beneficial interest issued hereunder and subject to the provisions
hereof, to wit:
ARTICLE I.
NAME AND DEFINITIONS
Section 1.1. NAME. The name of the trust created hereby is the
Prudential Allocation Fund.
Section 1.2. DEFINITIONS. Wherever they are used herein, the following
terms have the following respective meanings:
(a) "Administrator" means the party, other than the Trust, to the
contract described in Section 4.2 hereof.
<PAGE>
(b) "By-Laws" means the By-Laws referred to in Section 3.9 hereof, as
from time to time amended.
(c) The terms "Commission," "Affiliated Person" and "Interested
Person" have the meanings given them in the 1940 Act, as defined herein,
except as otherwise defined by the Trustees in conjunction with the
establishment of any series of Shares.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Custodian" means any Person other than the Trust who has custody
of any Trust Property as required by SECTION 17(f) of the 1940 Act, but
does not include a system for the central handling of securities described
in said SECTION 17(f).
(f) "Declaration" means this Declaration of Trust as amended from
time to time. Reference in this Declaration of Trust to "Declaration,"
"hereof," "herein" and "hereunder" shall be deemed to refer to this
Declaration rather than to the article or section in which such words
appear.
(g) "Distributor" means the party, other than the Trust, to the
contract described in Section 4.3 hereof.
(h) "Fundamental Policies" means the investment objective and
investment restrictions set forth in the Prospectus and designated as
fundamental policies therein.
(i) "Investment Adviser" means the party, other than the Trust, to
the contract described in Section 4.1 hereof.
(j) "Majority Shareholder Vote" means the vote of the holders of a
majority of Shares which shall consist of: (i) a majority of Shares
represented in person or by proxy and entitled to vote at a meeting of
Shareholders at which a quorum, as determined in accordance with the By-
Laws, is present; (ii) a majority of Shares issued and outstanding and
entitled to vote when action is taken by written consent of Shareholders;
or (iii) a "majority of the outstanding voting securities," as that phrase
is defined in the 1940 Act, when action is taken by Shareholders with
respect to approval of an investment advisory or management contract or an
underwriting or distribution agreement or continuance thereof.
(k) "1940 Act" means the Investment Company Act of 1940 and the rules
and regulations thereunder, as amended from time to time.
(l) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures and other entities,
whether or not legal entities, and governments and agencies and political
subdivisions thereof.
-2-
<PAGE>
(m) "Prospectus" means the prospectus (including the statement of
additional information to the extent incorporated by reference therein)
constituting part of the Registration Statement of the Trust under the
Securities Act of 1933, as amended, as such prospectus may be amended or
supplemented and filed with the Commission from time to time.
(n) "Shareholder" means a record owner of outstanding Shares.
(o) "Shares" shall mean the equal proportionate transferable units of
interest into which the beneficial interest in any series of the Trust
shall be divided from time to time and includes fractions of Shares as well
as whole Shares. As provided in Article VI hereof, a series of the Trust
may be divided into separate classes of Shares; all references to Shares
shall be deemed to be Shares of any or all series or of a single class of a
series or all classes of a series as the context may require.
(p) "Transfer Agent" means the party, other than the Trust, to the
contract described in Section 4.5 hereof.
(q) "Trust" means the Prudential Allocation Fund.
(r) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of the
Trust or the Trustees.
(s) "Trustees" mean the person or persons who have signed the
Declaration, so long as he or they shall continue in office in accordance
with the terms hereof, and all other persons who may from time to time be
duly elected, qualified and serving as Trustees in accordance with the
provisions hereof, and reference herein to a Trustee or the Trustees shall
refer to such person or persons in their capacity as trustees hereunder.
ARTICLE II.
TRUSTEES
Section 2.1. NUMBER OF TRUSTEES. The number of Trustees shall initially
be one and thereafter shall be such number as shall be fixed from time to time
by a written instrument signed by a majority of the Trustees; provided, however,
that at all times after the Prospectus of the Trust first becomes effective, the
number of Trustees shall in no event be less than three (3) nor more than
fifteen (15).
Section 2.2. ELECTION AND TERM. The Trustees shall be elected by a
Majority Shareholder Vote at the first meeting of Shareholders following the
public offering of Shares of the Trust. The Trustees shall have the power to
set and alter the terms of office of the Trustees, and they may at any time
lengthen or lessen their own terms or make their terms of unlimited duration,
subject to the resignation and removal provisions of Section 2.3 hereof. Except
in the
-3-
<PAGE>
event of resignation or removals pursuant to Section 2.3 hereof, each Trustee
shall hold office until such time as less than a majority of the Trustees
holding office have been elected by Shareholders. In such event the Trustees
then in office will call a Shareholders' meeting for the election of Trustees.
Subject to Section 16(c) of the 1940 Act, no Trustee shall continue to hold
office after the holders of record of not less than two-thirds of the
outstanding Shares of the Trust have declared that such Trustee be removed from
office either by declaration in writing filed with the Custodian or by votes
cast in person or by proxy at a meeting called for the purpose. The Trustees
shall promptly call a meeting of the Shareholders for the purpose of voting upon
the question of removal of any Trustee or Trustees when requested in writing to
do so by the record holders of not less than 10 percent of the outstanding
Shares. Except for the foregoing circumstances, the Trustees shall continue to
hold office and may appoint successor Trustees.
Section 2.3. RESIGNATION AND REMOVAL. Any Trustee may resign his trust
(without need for prior or subsequent accounting) by an instrument in writing
signed by him and delivered to the other Trustees and such resignation shall be
effective upon such delivery, or at a later date according to the terms of the
instrument. Any of the Trustees may be removed (provided that the aggregate
number of Trustees after such removal shall not be less than the number required
by Section 2.1 hereof) with cause, by the action of two-thirds of the remaining
Trustees. Upon the resignation or removal of a Trustee, or his otherwise
ceasing to be a Trustee, he shall execute and deliver such documents as the
remaining Trustees shall require for the purpose of conveying to the Trust or
the remaining Trustees any Trust Property or property of any series of the Trust
held in the name of the resigning or removed Trustee. Upon the incapacity or
death of any Trustee, his legal representative shall execute and deliver on his
behalf such documents as the remaining Trustees shall require as provided in the
preceding sentence.
Section 2.4. VACANCIES. The term of office of a Trustee shall terminate
and a vacancy shall occur in the event of the death, resignation, removal,
bankruptcy, adjudicated incompetence or other incapacity to perform the duties
of the office of a Trustee. No such vacancy shall operate to annul the
Declaration or to revoke any existing agency created pursuant to the terms of
the Declaration. In the case of an existing vacancy, including a vacancy
existing by reason of an increase in the number of Trustees, subject to the
provisions of Section 16(a) of the 1940 Act, the remaining Trustees or, prior to
the public offering of Shares of the Trust, if only one Trustee shall then
remain in office, the remaining Trustee, shall fill such vacancy by the
appointment of such other person as they or he, in their or his discretion,
shall see fit, made by a written instrument signed by a majority of the
remaining Trustees or by the remaining Trustee, as the case may be. Any such
appointment shall not become effective, however, until the person named in the
written instrument of appointment shall have accepted in writing such
appointment and agreed in writing to be bound by the terms of the Declaration.
An appointment of a Trustee may be made in anticipation of a vacancy to occur at
a later date by reason of retirement, resignation or increase in the number of
Trustees, provided that such appointment shall not become effective prior to
such retirement, resignation or increase in the number of Trustees. Whenever a
vacancy in the number of Trustees shall occur, until such vacancy is filled as
provided in this Section 2.4, the Trustees in office, regardless of their
number, shall have all the powers granted to the Trustees and shall discharge
all the duties imposed upon the Trustees by the Declaration. A
-4-
<PAGE>
written instrument certifying the existence of such vacancy signed by a majority
of the Trustees shall be conclusive evidence of the existence of such vacancy.
Section 2.5. DELEGATION OF POWER TO OTHER TRUSTEES. Any Trustee may, by
power of attorney, delegate his power for a period not exceeding six (6) months
at any one time to any other Trustee or Trustees; provided that in no case shall
less than two (2) Trustees personally exercise the powers granted to the
Trustees under the Declaration except as herein otherwise expressly provided.
ARTICLE III.
POWERS OF TRUSTEES
Section 3.1. GENERAL. The Trustees shall have exclusive and absolute
control over the property and business of the Trust and of any series of the
Trust to the same extent as if the Trustees were the sole owners of such
property and business in their own right, but with such powers of delegation as
may be permitted by the Declaration. The Trustees shall have power to conduct
the business of the Trust and carry on its operations in any and all of its
branches and maintain offices both within and without The Commonwealth of
Massachusetts, in any and all states of the United States of America, in the
District of Columbia, and in any and all commonwealths, territories,
dependencies, colonies, possessions, agencies or instrumentalities of the United
States of America and of foreign governments, and to do all such other things
and execute all such instruments as they deem necessary, proper or desirable in
order to promote the interests of the Trust although such things are not herein
specifically mentioned. Any determination as to what is in the interests of the
Trust made by the Trustees in good faith shall be conclusive. In construing the
provisions of the Declaration, the presumption shall be in favor of a grant of
power to the Trustees.
The enumeration of any specific power herein shall not be construed as
limiting the aforesaid powers. Such powers of the Trustees may be exercised
without order of or resort to any court.
Section 3.2. INVESTMENTS. The Trustees shall have the power to:
(a) conduct, operate and carry on the business of an investment
company;
(b) subscribe for, invest in, reinvest in, purchase or otherwise
acquire, hold, pledge, sell, assign, transfer, exchange, distribute, lend
or otherwise deal in or dispose of negotiable or non-negotiable
instruments, obligations, evidences of indebtedness, certificates of
deposit or indebtedness, commercial paper, repurchase agreements, reverse
repurchase agreements, options, futures and other securities of any kind,
including, without limitation, those issued, guaranteed or sponsored by any
and all Persons including, without limitation, states, territories and
possessions of the United States, the District of Columbia and any of the
political subdivisions, agencies or instrumentalities
-5-
<PAGE>
thereof, and by the United States Government or its agencies or
instrumentalities, or international instrumentalities, or by any bank or
savings institution, or by any corporation or organization organized under
the laws of the United States or of any state, territory or possession
thereof, and of corporations or organizations organized under foreign laws,
or in "when issued" contracts for any such securities, or retain assets of
the Trust or any series thereof in cash and from time to time change the
investments of the assets of the Trust or any series thereof; and to
exercise any and all rights, powers and privileges of ownership or interest
in respect of any and all such investments of every kind and description,
including, without limitation, the right to consent and otherwise act with
respect thereto, with power to designate one or more persons, firms,
associations or corporations to exercise any of said rights, powers and
privileges in respect of any of said instruments; and the Trustees shall be
deemed to have the foregoing powers with respect to any additional
securities in which the Trust or any series of the Trust may invest should
the Fundamental Policies be amended.
The Trustees shall not be limited to investing in obligations maturing before
the possible termination of the Trust, nor shall the Trustees be limited by any
law limiting the investments which may be made by fiduciaries.
Section 3.3. LEGAL TITLE. Legal title to all of the Trust Property shall
be vested in the Trustees as joint tenants except that the Trustees shall have
power to cause legal title to any Trust Property to be held by or in the name of
one or more of the Trustees, or in the name of the Trust or any series of the
Trust, or in the name of any other Person as nominee, on such terms as the
Trustees may determine, provided that the interest of the Trust therein is
appropriately protected. The right, title and interest of the Trustees in the
Trust Property shall vest automatically in each Person who may hereafter become
a Trustee. Upon the resignation, removal or death of a Trustee he shall
automatically cease to have any right, title or interest in any of the Trust
Property, and the right, title and interest of such Trustee in all such property
shall vest automatically in the remaining Trustees. Such vesting and cessation
of title shall be effective without the requirement that conveyancing documents
be executed and delivered.
Section 3.4. ISSUANCE AND REPURCHASE OF SECURITIES. The Trustees shall
have the power to issue, sell, repurchase, redeem, retire, cancel, acquire,
hold, resell, reissue, dispose of, transfer and otherwise deal in Shares and,
subject to the provisions set forth in Articles VII, VIII and IX and Section 6.9
hereof, to apply to any such repurchase, redemption, retirement, cancellation or
acquisition of Shares any funds or property of the particular series of the
Trust with respect to which such Shares are issued, whether capital or surplus
or otherwise, to the full extent now or hereafter permitted by laws of The
Commonwealth of Massachusetts governing business corporations.
Section 3.5. BORROWING MONEY; LENDING TRUST ASSETS. The Trustees shall
have power to borrow money or otherwise obtain credit and to secure the same by
mortgaging, pledging or otherwise subjecting as security the assets of the
Trust, to endorse, guarantee or undertake the performance of any obligation,
contract or engagement of any other Person and to lend Trust assets.
-6-
<PAGE>
Section 3.6. DELEGATION; COMMITTEES. The Trustees shall have power,
consistent with their continuing exclusive authority over the management of the
Trust and the Trust Property, to delegate from time to time to such of their
number or to officers, employees or agents of the Trust the doing of such things
and the execution of such instruments either in the name of the Trust or any
series of the Trust or the names of the Trustees or otherwise as the Trustees
may deem expedient.
Section 3.7. COLLECTION AND PAYMENT. The Trustees shall have power to
collect all property due to the Trust; to pay all claims, including taxes,
against the Trust Property; to prosecute, defend, compromise or abandon any
claims relating to the Trust Property; to foreclose any security interest
securing any obligations, by virtue of which any property is owed to the Trust;
and to enter into releases, agreements and other instruments.
Section 3.8. EXPENSES. The Trustees shall have the power to incur and
pay any expenses which in the opinion of the Trustees are necessary or
incidental to carry out any of the purposes of the Declaration and to pay
reasonable compensation from the funds of the Trust to themselves as Trustees.
The Trustees shall fix the compensation of all officers, employees and Trustees.
Section 3.9. MANNER OF ACTING; BY-LAWS. Except as otherwise provided
herein or in the By-Laws or by any provision of law, any action to be taken by
the Trustees may be taken by a majority of the Trustees present at a meeting of
Trustees (a quorum being present), including any meeting held by means of a
conference telephone circuit or similar communications equipment by means of
which all persons participating in the meeting can hear each other, or by
written consent of all the Trustees. The Trustees may adopt By-Laws not
inconsistent with this Declaration to provide for the conduct of the business of
the Trust and may amend or repeal such By-Laws to the extent such power is not
reserved to the Shareholders.
Section 3.10. MISCELLANEOUS POWERS. Subject to Section 6.9 hereof, the
Trustees shall have the power to: (a) employ or contract with such Persons as
the Trustees may deem desirable for the transaction of the business of the Trust
or any series thereof; (b) enter into joint ventures, partnerships and any other
combinations or associations; (c) remove Trustees or fill vacancies in or add to
their number, elect and remove such officers and appoint and terminate such
agents or employees as they consider appropriate, and appoint from their own
number or otherwise, and terminate, any one or more committees which may
exercise some or all of the power and authority of the Trustees as the Trustees
may determine; (d) purchase, and pay for out of Trust Property or the property
of the appropriate series of the Trust, insurance policies insuring the
Shareholders, Trustees, officers, employees, agents, investment advisers,
distributors, selected dealers or independent contractors of the Trust against
all claims arising by reason of holding any such position or by reason of any
action taken or omitted to be taken by any such Person in such capacity, whether
or not constituting negligence, or whether or not the Trust would have the power
to indemnify such Person against such liability; (e) establish pension, profit-
sharing, Share purchase and other retirement, incentive and benefit plans for
any Trustees, officers, employees and agents of the Trust; (f) to the extent
permitted by law, indemnify any person with whom the
-7-
<PAGE>
Trust or any series thereof has dealings, including the Investment Adviser,
Administrator, Distributor, Custodian, Transfer Agent and selected dealers, to
such extent as the Trustees shall determine; (g) guarantee indebtedness or
contractual obligations of others; (h) determine and change the fiscal year of
the Trust or any series thereof and the method by which its accounts shall be
kept; (i) adopt a seal for the Trust, but the absence of such seal shall not
impair the validity of any instrument executed on behalf of the Trust; (j) aid
by further investment any corporation, company, trust, association or firm, any
obligation of or interest in which is included in the Trust Property or in the
affairs of which the Trustees have any direct or indirect interest; to do all
acts and things designed to protect, preserve, improve or enhance the value of
such obligation or interest; to guarantee or become surety on any or all of the
contracts, stocks, bonds, notes, debentures and other obligations of any such
corporation, company, trust, association or firm; (k) enter into a plan of
distribution and any related agreements whereby the Trust may finance directly
or indirectly any activity which is primarily intended to result in sale of
Shares; and (l) in general, carry on any other business in connection with or
incidental to any of the foregoing powers, to do everything necessary, suitable
or proper for the accomplishment of any purpose or the attainment of any object
or the furtherance of any power hereinbefore set forth, either alone or in
association with others, and to do every other act or thing incidental or
appurtenant to or growing out of or connected with the aforesaid business or
purposes, objects or powers.
The foregoing clauses shall be construed both as objects and powers, and
the foregoing enumeration of specific powers shall not be held to limit or
restrict in any manner the general powers of the Trustees.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust, nor shall the Trustees be limited
by any law limiting the investments which may be made by fiduciaries.
Section 3.11. PRINCIPAL TRANSACTIONS. Except in transactions permitted by
the 1940 Act or any order of exemption issued by the Commission, or effected to
implement the provisions of any agreement to which the Trust is a party, the
Trustees shall not, on behalf of the Trust, buy any securities (other than
Shares) from or sell any securities (other than Shares) to, or lend any assets
of the Trust or any series thereof to, any Trustee or officer of the Trust or
any firm of which any such Trustee or officer is a member acting as principal,
or have any such dealings with the Investment Adviser, Administrator, Custodian,
Distributor or Transfer Agent or with any Affiliated Person of such Person; but
the Trust or a series thereof may employ any such Person, or firm or company in
which such Person is an Interested Person, as broker, legal counsel, registrar,
transfer agent, dividend disbursing agent or custodian upon customary terms.
-8-
<PAGE>
ARTICLE IV.
INVESTMENT ADVISER, ADMINISTRATOR, DISTRIBUTOR,
CUSTODIAN AND TRANSFER AGENT
Section 4.1. INVESTMENT ADVISER. Subject to approval by a Majority
Shareholder Vote, the Trustees may in their discretion from time to time enter
into an investment advisory or management contract or contracts whereby the
other party to such contract shall undertake to furnish the Trust or any series
thereof such management, investment advisory, administration, accounting, legal,
statistical and research facilities and services, promotional activities and
such other facilities and services, if any, as the Trustees shall from time to
time consider desirable, all upon such terms and conditions as the Trustees may
in their discretion determine. Notwithstanding any provisions of the
Declaration, the Trustees may authorize the Investment Adviser (subject to such
general or specific instructions as the Trustees may from time to time adopt) to
effect purchases, sales, loans or exchanges of portfolio securities of the Trust
or any series thereof on behalf of the Trustees or may authorize any officer,
employee or Trustee to effect such purchases, sales, loans or exchanges pursuant
to recommendations of the Investment Adviser, all without further action by the
Trustees. Any such purchases, sales, loans and exchanges shall be deemed to
have been authorized by all of the Trustees. The Trustees may, in their sole
discretion, call a meeting of Shareholders in order to submit to a vote of
Shareholders at such meeting the approval of continuance of any such investment
advisory or management contract.
Section 4.2. ADMINISTRATOR. The Trustees may in their discretion from
time to time enter into an administrative services contract or contracts whereby
the other party or parties to such contract or contracts shall undertake to
furnish administrative services. The contract or contracts shall have such
terms and conditions as the Trustees may in their discretion determine are not
inconsistent with the Declaration. Such services may be provided by one or more
Persons.
Section 4.3. DISTRIBUTOR. The Trustees may in their discretion from time
to time enter into a contract providing for the sale of Shares of the Trust or
applicable series thereof at not less than the net asset value per Share (as
described in Article VIII hereof) and pursuant to which the Trust or series
thereof may either agree to sell the Shares to the other party to the contract
or appoint such other party its sales agent for such Shares. In either case,
the contract shall be on such terms and conditions as the Trustees may in their
discretion determine is not inconsistent with the provisions of this Article IV,
including, without limitation, the provision for the repurchase or sale of
Shares of the Trust by such other party as principal or as agent of the Trust.
Section 4.4. CUSTODIAN. The Trustees shall employ at all times a
custodian or custodians, meeting the qualifications for custodians of portfolio
securities under the 1940 Act, as custodian with respect to the Trust and may
from time to time enter into a custodian contract or contracts whereby the other
party or parties to such contract or contracts shall undertake to furnish
custodial services. The contract or contracts shall have such terms and
conditions as the
-9-
<PAGE>
Trustees may in their discretion determine are not inconsistent with the
Declaration. Such services may be provided by one or more Persons.
Section 4.5. TRANSFER AGENT. The Trustees may in their discretion from
time to time enter into a transfer agency and shareholder service contract
whereby the other party to such contract shall undertake to furnish transfer
agency and shareholder services to the Trust. The contract shall have such
terms and conditions as the Trustees may in their discretion determine that are
not inconsistent with the Declaration. Such services may be provided by one or
more Persons.
Section 4.6. PARTIES TO CONTRACT. Any contract of the character
described in Section 4.1, 4.2, 4.3, 4.4 or 4.5 of this Article IV and any other
contract may be entered into with any Person, although one or more of the
Trustees or officers of the Trust may be an officer, director, trustee,
shareholder or member of such other party to the contract, and no such contract
shall be invalidated or rendered voidable by reason of the existence of any such
relationship; not shall any Person holding such relationship be liable merely by
reason of such relationship for any loss or expense to the Trust under or by
reason of said contract or accountable for any profit realized directly or
indirectly therefrom, provided that the contract when entered into was not
inconsistent with the provisions of this Article IV. The same Person may be the
other party to any contracts entered into pursuant to Sections 4.1, 4.2, 4.3,
4.4 and 4.5 above or otherwise, and any individual may be financially interested
or otherwise affiliated with Persons who are parties to any or all of the
contracts referred to in this Section 4.6.
ARTICLE V.
LIMITATION OF LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS
Section 5.1. NO PERSONAL LIABILITY OF SHAREHOLDERS, TRUSTEES, ETC. No
Shareholder shall be subject to any personal liability whatsoever to any Person
in connection with Trust Property, or the acts, obligations or affairs of the
Trust. No Trustee, officer, employee or agent of the Trust shall be subject to
any personal liability whatsoever to any Person, other than the Trust or its
Shareholders, in connection with Trust Property or the affairs of the Trust,
save only that arising from bad faith, willful misfeasance, gross negligence or
reckless disregard of his duty to such Person; and all such Persons shall look
solely to the Trust Property or the property of one or more specific series of
the Trust, for satisfaction of claims of any nature arising in connection with
the affairs of the Trust. If any Shareholder, Trustee, officer, employee or
agent, as such, of the Trust is made a party to any suit or proceeding to
enforce any such liability, he shall not, on account thereof, be held to any
personal liability. The Trust shall indemnify and hold each Shareholder
harmless from and against all claims by reason of his being or having been a
Shareholder, and shall reimburse the Shareholder for all legal and other
expenses reasonably incurred by him in connection with any such claim or
liability, provided that any such expenses shall be paid solely out of the Trust
Property or the property of one or more series thereof. Indemnification and
reimbursement required by the preceding sentence shall be made only out of
-10-
<PAGE>
assets of the one or more series whose shares were held by said Shareholder at
the time the act or event occurred which gave rise to the claim against or
liability of said Shareholder. The rights accruing to a Shareholder under this
Section 5.1 shall not exclude any other right to which the Shareholder may be
lawfully entitled, nor shall anything herein contained restrict the right of the
Trust to indemnify or reimburse a Shareholder in any appropriate situation even
though not specifically provided herein.
Section 5.2. NON-LIABILITY OF TRUSTEES, ETC. No Trustee, officer,
employee or agent of the Trust shall be liable to the Trust, its Shareholders or
to any Shareholder, Trustee, officer, employee or agent thereof for any action
or failure to act (including without limitation the failure to compel in any way
any former or acting Trustee to redress any breach of trust) except for his own
bad faith, willful misfeasance, gross negligence or reckless disregard of his
duties.
Section 5.3. INDEMNIFICATION.
(a) The Trustees shall provide for indemnification by the Trust or by
one or more series thereof if the claim arises from conduct with respect to
only such series of every person who is, or has been, a Trustee or officer
of the Trust against all liability and against all expenses reasonably
incurred or paid by him in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or otherwise by virtue
of his being or having been a Trustee or officer and against amounts paid
or incurred by him in the settlement thereof, in such manner as the
Trustees may provide from time to time in the By-Laws.
(b) The words "claim," "action," "suit" or "proceeding" shall apply
to all claims, actions, suits or proceedings (civil, criminal or other,
including appeals), actual or threatened; and the words "liability" and
"expenses" shall include, without limitation, attorneys' fees, costs,
judgments, amounts paid in settlement, fines, penalties and other
liabilities.
Section 5.4. NO BOND REQUIRED OF TRUSTEES. No Trustee shall be obligated
to give any bond or other security for performance of any of his duties
hereunder.
Section 5.5. NO DUTY OF INVESTIGATION; NOTICE IN TRUST INSTRUMENTS;
INSURANCE. No purchaser, lender, transfer agent or other Person dealing with
the Trustees or any officer, employee or agent of the Trust or any series
thereof shall be bound to make any inquiry concerning the validity of any
transaction purporting to be made by the Trustees or by said officer, employee
or agent or be liable for the application of money or property paid, loaned or
delivered to or on the order of the Trustees or of said officer, employee or
agent. Every obligation, contract, instrument, certificate, Share, other
security of the Trust or any series thereof or undertaking, and every other act
or thing whatsoever executed in connection with the Trust or any series thereof,
shall be conclusively presumed to have been executed or done by the executors
thereof only in their capacity as Trustees under the Declaration or in their
capacity as officers, employees or agents of the Trust or any series thereof.
Every written obligation, contract, instrument, certificate, Share, other
security of the Trust or a series thereof or
-11-
<PAGE>
undertaking made or issued by the Trustees shall recite that the same is
executed or made by them not individually, but as Trustees under the
Declaration, and that the obligations of any such instrument are not binding
upon any of the Trustees or Shareholders, individually, but bind only the Trust
Property or a series thereof, and may contain any further recital which they or
he may deem appropriate, but the omission of such recital shall not operate to
bind the Trustees or Shareholders individually. The Trustees shall at all times
maintain insurance for the protection of the Trust Property and any property of
a series thereof, its Shareholders, Trustees, officers, employees and agents in
such amount as the Trustees shall deem adequate to cover possible tort
liability, and such other insurance as the Trustees in their sole judgment shall
deem advisable.
Section 5.6. RELIANCE ON EXPERTS, ETC. Each Trustee and officer or
employee of the Trust or any series thereof shall, in the performance of his
duties, be fully and completely justified and protected with regard to any act
or any failure to act resulting from reliance in good faith upon the books of
account or other records of the Trust or any series thereof, upon an opinion of
counsel or upon reports made to the Trust or any series thereof by any of its
officers or employees or by the Investment Adviser, Administrator, Distributor,
Custodian, Transfer Agent, selected dealers, accountants, appraisers or other
experts or consultants selected with reasonable care by the Trustees, officers
or employees of the Trust or any series thereof, regardless of whether such
counsel or expert may also be a Trustee.
ARTICLE VI.
SHARES OF BENEFICIAL INTEREST
Section 6.1. BENEFICIAL INTEREST. The interest of the beneficiaries
hereunder shall be divided into transferable shares of beneficial interest with
$.01 par value. The number of such shares of beneficial interest authorized
hereunder is unlimited. All shares issued hereunder including, without
limitation, shares issued in connection with a dividend in Shares or a split in
Shares, shall be fully paid and nonassessable.
Section 6.2. RIGHTS OF SHAREHOLDERS. The ownership of the Trust Property
and the right to conduct any business hereinbefore described are vested
exclusively in the Trustees, and the Shareholders shall have no interest therein
other than the beneficial interest conferred by their Shares, and they shall
have no right to call for any partition or division of any property, profits,
rights or interests of the Trust nor can they be called upon to assume any
losses of the Trust or suffer an assessment of any kind by virtue of their
ownership of Shares. The Shares shall be personal property giving only the
rights specifically set forth in the Declaration. The Shares shall not entitle
the holder to preference, preemptive, appraisal, conversion or exchange rights,
except as the Trustees may determine.
Section 6.3. TRUST ONLY. It is the intention of the Trustees to create
only the relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to
create a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
-12-
<PAGE>
Nothing in the Declaration shall be construed to make the Shareholders, either
by themselves or with the Trustees, partners or members of a joint stock
association.
Section 6.4. ISSUANCE OF SHARES. The Trustees, in their discretion may,
from time to time without vote of the Shareholders, issues Shares, in addition
to the then issued and outstanding Shares and Shares held in the treasury, to
such party or parties and for such amount and type of consideration, including
cash or property, at such time or times (including, without limitation, each
business day) and on such terms as the Trustees may deem best, and may in such
manner acquire other assets (including the acquisition of assets subject to, and
in connection with, the assumption of liabilities) and businesses. In
connection with any issuance of Shares, the Trustees may issue fractional
Shares. Reductions in the number of outstanding Shares may be made pursuant to
the provisions of Section 8.3. Contributions to the Trust may be accepted for,
and Shares shall be redeemed as, whole Shares and/or fractions of a Share as
described in the Prospectus.
Section 6.5. REGISTER OF SHARES. A register shall be kept at the
principal office of the Trust or at an office of the Transfer Agent which shall
contain the names and addresses of the Shareholders and the number of Shares
held by each of them and a record of all transfers thereof. Such register may
be in written form or any other form capable of being converted into written
form within a reasonable time for visual inspection. Such register shall be
conclusive as to who are the holders of the Shares and who shall be entitled to
receive dividends or distributions or otherwise to exercise or enjoy the rights
of Shareholders. No Shareholder shall be entitled to receive payment of any
dividend or distribution, nor to have notice given to him as herein or in the
By-Laws provided, until he has given his address to the Transfer Agent or such
other officer or agent of the Trustees as shall keep the said register for entry
thereon. It is not contemplated that certificates will be issued for the
Shares; however, the Trustees, in their discretion, may authorize the issuance
of Share certificates and promulgate appropriate rules and regulations as to
their use.
Section 6.6. TRANSFER OF SHARES. Shares shall be transferable on the
records of the Trust only by the record holder thereof or by his agent thereunto
duly authorized in writing, upon delivery to the Trustees or the Transfer Agent
of a duly executed instrument of transfer, together with such evidence of the
genuineness of each such execution and authorization and of other matters as may
reasonably be required. Upon this delivery the transfer shall be recorded on
the register of the Trust. Until this record is made, the Shareholder of record
shall be deemed to be the holder of the Shares for all purposes hereunder and
neither the Trustees nor any Transfer Agent or registrar nor any officer,
employee or agent of the Trust shall be affected by any notice of the proposed
transfer.
Any person becoming entitled to any Shares in consequence of the death,
bankruptcy or incompetence of any Shareholder, or otherwise by operation of law,
shall be recorded on the register of Shares as the holder of such Shares upon
production of the proper evidence thereof to the Trustees or the Transfer Agent,
but until such record is made, the Shareholder of record shall be deemed to be
the holder of such Shares for all purposes hereunder and neither the Trustees
nor any Transfer Agent or registrar nor any officer or agent of the Trust shall
be affected by any
-13-
<PAGE>
notice of such death, bankruptcy or incompetence, or other operation of law,
except as may otherwise be provided by the laws of The Commonwealth of
Massachusetts.
Section 6.7. NOTICES. Any and all notices to which any Shareholder may
be entitled and any and all communications shall be deemed duly served or given
if mailed, postage prepaid, addressed to any Shareholder of record at his last
known address as recorded on the register of the Trust.
Section 6.8. VOTING POWERS. The Shareholders shall have power to vote
(i) for the election of Trustees as provided in Section 2.2; (ii) with respect
to any advisory or management contract of a series as provided in Section 4.1;
(iii) with respect to the amendment of this Declaration as provided in
Section 9.3; (iv) with respect to such additional matters relating to the Trust
as may be required or authorized by the 1940 Act, the laws of The Commonwealth
of Massachusetts or other applicable law or by this Declaration or the By-Laws
of the Trust; and (v) with respect to such additional matters relating to the
Trust as may be properly submitted for Shareholder approval. If the Shares of a
series shall be divided into classes as provided in Section 6.9 hereof, the
Shares of each class shall have identical voting rights except that the
Trustees, in their discretion, may provide a class of a series with exclusive
voting rights with respect to matters related to expenses being borne solely by
such class.
Section 6.9. SERIES DESIGNATION. The Trustees, in their discretion from
time to time, may authorize the division of Shares into two or more series, each
series relating to a separate portfolio of investments. The different series
shall be established and designated, and the variations in the relative rights
and preferences as between the different series shall be fixed and determined,
by the Trustees; provided that all Shares shall be identical except that there
may be variations between different series as to purchase price, determination
of net asset value, the price, terms and manner of redemption, special and
relative rights as to dividends and on liquidation, conversion rights, and
conditions under which the several series shall have separate voting rights.
The Trustees, in their discretion without a vote of the Shareholders, may
divide the Shares of any series into classes. In such event, each class of a
series shall represent interests in the Trust Property of a series and have
identical voting, dividend, liquidation and other rights and the same terms and
conditions except that expenses related directly or indirectly to the
distribution of the Shares of a class of a series may be borne solely by such
class (as shall be determined by the Trustees) and, as provided in Section 6.8,
a class of a series may have exclusive voting rights with respect to matters
relating to the expenses being borne solely by such class. The bearing of such
expenses solely by a class of Shares shall be appropriately reflected (in the
manner determined by the Trustees) in the net asset value, dividend and
liquidation rights of the Shares of such class. The division of the Shares of a
series into classes and the terms and conditions pursuant to which the Shares of
the classes of a series will be issued must be made in compliance with the 1940
Act. No division of Shares of a series into classes shall result in the
creation of a class of Shares having a preference as to dividends or
distributions or a preference in the event of any liquidation, termination or
winding up of the Trust.
-14-
<PAGE>
If the Trustees shall divide the Shares into two or more series, the
following provisions shall be applicable:
(a) The number of Shares of each series and of each class of a series
that may be issued shall be unlimited. The Trustees may classify or
reclassify any unissued Shares or any Shares previously issued and
reacquired of any series into one or more series that may be established
and designated from time to time. The Trustees may hold as treasury Shares
(of the same or some other series), reissue Shares for such consideration
and on such terms as they may determine, or cancel any Shares of any series
reacquired by the Trust at their discretion from time to time.
(b) The power of the Trustees to invest and reinvest the Trust
Property of each series that may be established shall be governed by
Section 3.2 of this Declaration.
(c) All consideration received by the Trust for the issue or sale of
Shares of a particular series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that series for all purposes, subject only to the
rights of creditors, and shall be so recorded upon the books of account of
the Trust. In the event that there are any assets, income, earnings,
profits, and proceeds thereof, funds, or payments which are not readily
identifiable as belonging to any particular series, the Trustees shall
allocate them among any one or more of the series established and
designated from time to time in such manner and on such basis as they, in
their sole discretion, deem fair and equitable. Each such allocation by
the Trustees shall be conclusive and binding upon the Shareholders of all
series for all purposes.
(d) The assets belonging to each particular series shall be charged
with the liabilities of the Trust in respect of that series only and all
expenses, costs, charges and reserves attributable to that series and shall
not be charged with the liabilities, expenses, costs, charges and reserves
attributable to other series and any general liabilities, expenses, costs,
charges or reserves of the Trust which are not readily identifiable as
belonging to any particular series shall be allocated and charged by the
Trustees to and among any one or more of the series established and
designated from time to time in such manner and on such basis as the
Trustees in their sole discretion deem fair and equitable. Each allocation
of liabilities, expenses, costs, charges and reserves by the Trustees shall
be conclusive and binding upon the shareholders of all series for all
purposes. The Trustees shall have full discretion, to the extent not
inconsistent with the 1940 Act, to determine which items shall be treated
as income and which items as capital; and each such determination and
allocation shall be conclusive and binding upon the Shareholders.
(e) The power of the Trustees to pay dividends and make distributions
with respect to any one or more series shall be governed by Section 8.2 of
this Declaration. Dividends and distributions on Shares of a particular
series may be paid with such
-15-
<PAGE>
frequency as the Trustees may determine, to the holders of Shares of that
series, from such of the income and capital gains, accrued or realized,
from the assets belonging to that series, as the Trustees may determine,
after providing for actual and accrued liabilities belonging to that
series. All dividends and distributions on Shares of a particular series
shall be distributed pro rata to the shareholders of that series in
proportion to the number of Shares of that series held by such holders at
the date and time of record established for the payment of such dividends
or distributions, except that such dividends and distributions shall
appropriately reflect expenses related directly or indirectly to the
distribution of Shares of a class of such series.
The establishment and designation of any series or class within such series
of Shares shall be effective upon the execution by a majority of the then
Trustees (or by an officer of the Trust pursuant to a vote of a majority of the
Trustees) of an instrument setting forth the establishment and designation of
such series or class within such series. Such instrument shall also set forth
any rights and preferences of such series or class within such series which are
in addition to the rights and preferences of Shares set forth in this
Declaration. At any time that there are no Shares outstanding of any particular
series or class within such series previously established and designated, the
Trustees may by an instrument executed by a majority of their number (or by an
officer of the Trust pursuant to a vote of a majority of the Trustees) abolish
that series or class within such series and the establishment and designation
thereof. Each instrument referred to in this paragraph shall have the status of
an amendment to this Declaration.
ARTICLE VII.
REDEMPTIONS
Section 7.1. REDEMPTIONS. All outstanding Shares may be redeemed at the
option of the holders thereof, upon and subject to the terms and conditions
provided in this Article VII. The Trust shall, upon application of any
Shareholder or pursuant to authorization from any Shareholder, redeem or
repurchase from the Shareholder outstanding Shares for an amount per share
determined by the Trustees in accordance with any applicable laws and
regulations; provided that (a) the amount per share shall not exceed the cash
equivalent of the proportionate interest of each share in the assets of the
Trust or any series thereof at the time of the redemption or repurchase and
(b) if so authorized by the Trustees, the Trust may, at any time and from time
to time, charge fees for effecting such redemption or repurchase, at rates the
Trustees may establish, as and to the extent permitted under the 1940 Act, and
may, at any time and from time to time, pursuant to the Act, suspend the right
of redemption. The procedures for effecting and suspending redemption shall be
as set forth in the Prospectus from time to time. Payment will be made in the
manner described in the Prospectus.
Section 7.2. REDEMPTION OF SHARES; DISCLOSURE OF HOLDING. If the
Trustees shall, at any time and in good faith, be of the opinion that direct or
indirect ownership of Shares or other securities of the Trust or any series
thereof has or may become concentrated in any Person to an extent which would
disqualify the Trust as a regulated investment company under the Code, then
-16-
<PAGE>
the Trustees shall have the power by lot or other means deemed equitable by them
(i) to call for redemption by any such Person a number, or principal amount, of
Shares or other securities of the Trust or series thereof sufficient, in the
opinion of the Trustees, to maintain or bring the direct or indirect ownership
of Shares or other securities of the Trust or series thereof into conformity
with the requirements for such qualification and (ii) to refuse to transfer or
issue Shares or other securities of the Trust or any series thereof to any
Person whose acquisition of the Shares or other securities of the Trust in
question would in the opinion of the Trustees result in such disqualification.
The redemption shall be effected at a redemption price determined in accordance
with Section 7.1 hereof.
The holders of Shares or other securities of the Trust or any series
thereof shall upon demand disclose to the Trustees in writing such information
with respect to direct and indirect ownership of Shares or other securities of
the Trust or series thereof as the Trustees deem necessary to comply with the
provisions of the Code, or to comply with the requirements of any other
authority.
Section 7.3. REDEMPTIONS OF ACCOUNTS OF LESS THAN $500. The Trustees
shall have the power at any time to redeem Shares of any Shareholder at a
redemption price determined in accordance with Section 7.1 if at such time the
aggregate net asset value of the Shares in the Shareholder's account is less
than $500. A Shareholder will be notified that the value of his account is less
than $500 and allowed at least sixty (60) days to make an additional investment
before redemption is processed.
Section 7.4. PAYMENT FOR REDEEMED SHARES IN KIND. Subject to any
applicable provisions of the 1940 Act, payment for any Shares redeemed pursuant
to Section 7.1 or 7.2 hereof may, at the option of the Trustees or such officer
or officers of the Trust as they may authorize for the purpose, be made in cash
or in kind, or partially in cash and partially in kind, and, in case of full or
partial payment in kind, the Trustees or such authorized officer or officers
shall have absolute discretion to determine the securities or other assets of
the Trust and the amount thereof to be distributed in kind. For such purpose,
the value of any securities or other non-cash assets delivered in payment for
Shares redeemed shall be determined in the same manner as the value of such
securities or other non-cash assets are determined in accordance with
Section 8.1 hereof for purposes of determining the net asset value per Share
applicable to such Shares, as of the same time that the net asset value per
Share applicable to such Shares is determined.
Section 7.5. OTHER REDEMPTIONS. The Trust or any series thereof may also
reduce the number of outstanding Shares pursuant to the provisions of
Section 8.3 hereof.
-17-
<PAGE>
ARTICLE VIII.
DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS
Section 8.1. NET ASSET VALUE. The net asset value of each outstanding
Share of each series of the Trust shall be determined at such time or times on
such days as the Trustees may determine, in accordance with the 1940 Act, with
respect to each series. The method of determination of net asset value of
Shares of each class of a series shall be determined by the Trustees and shall
be as set forth in the Prospectus with respect to the applicable series with any
expenses being borne solely by a class of Shares being reflected in the net
asset value of Shares of each class. The power and duty to make the daily
calculations for any series may be delegated by the Trustees to the adviser,
administrator, manager, custodian, transfer agent or such other person as the
Trustees may determine. The Trustees may suspend the daily determination of net
asset value to the extent permitted by the 1940 Act.
Section 8.2. DISTRIBUTIONS TO SHAREHOLDERS. The Trustees shall from time
to time distribute ratably among the Shareholders of any series such proportion
of the net profits, surplus (including paid-in-surplus), capital, or assets with
respect to such series held by the Trustees as they deem proper with any
expenses being borne solely by a class of Shares of any series being reflected
in the net profits or other assets being distributed to such class. Such
distribution may be made in cash or property (including without limitation any
type of obligations of the Trust or any assets thereof), and the Trustees may
distribute ratably among the Shareholders of any series additional Shares of
such series issuable hereunder in such manner, at such times, and on such terms
as the Trustees may deem proper. Such distributions may be among the
Shareholders of record at the time of declaring a distribution or among the
Shareholders of record at such later date as the Trustees shall determine. The
Trustees may always retain from the net profits such amount as they may deem
necessary to pay the debts or expenses of the Trust or to meet obligations of
the Trust, or as they deem desirable to use in the conduct of its affairs or to
retain for future requirements or extensions of the business. The Trustees may
adopt and offer to Shareholders of any series such dividend reinvestment plans,
cash dividend payout plans, or related plans as the Trustees shall deem
appropriate for such series.
Inasmuch as the computation of net income and gains for federal income tax
purposes may vary from the computation thereof on the books, the above
provisions shall be interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient to
enable the Trust to avoid or reduce liability for taxes.
Section 8.3. DETERMINATION OF NET INCOME. The Trustees shall have the
power to determine the net income of the Trust or any series thereof one or more
times on each business day and at each determination to declare the net income
as dividends in additional Shares. The determination of net income and the
resultant declaration of dividends shall be as set forth in the Prospectus. It
is expected that the Trust or any series thereof will have a positive net income
at the time of each determination. If for any reason the net income is a
negative amount, the
-18-
<PAGE>
Trustees shall have authority to reduce the number of outstanding Shares. The
reduction will be effected by having each Shareholder proportionately contribute
to the capital the necessary Shares that represent the amount of the excess upon
such determination. Each Shareholder will be deemed to have agreed to such
contribution in these circumstances by his investment in the Trust or any series
thereof. The Trustees shall have full discretion to determine whether any cash
or property received shall be treated as income or as principal and whether any
item of expenses shall be charged to the income or the principal account, and
their determination made in good faith shall be conclusive upon the
Shareholders. In the case of stock dividends received, the Trustees shall have
full discretion to determine, in the light of the particular circumstances, how
much, if any, of the value thereof shall be treated as income, with the balance,
if any, to be treated as principal.
Section 8.4. POWER TO MODIFY FOREGOING PROCEDURES. Notwithstanding any
of the foregoing provisions of this Article VIII, the Trustees may prescribe, in
their absolute discretion, such other bases and times for determining the per
share net asset value of the Trust's Shares or net income, or the declaration
and payment of dividends and distributions as they deem necessary or desirable
or to enable the Trust to comply with any provision of the 1940 Act, including
any rule or regulation adopted pursuant to Section 22 of the 1940 Act by the
Securities and Exchange Commission or any securities association registered
under the Securities Exchange Act of 1934, all as in effect now or hereafter
amended or modified.
ARTICLE IX.
DURATION; TERMINATION OF
TRUST; AMENDMENT; MERGERS, ETC.
Section 9.1. DURATION. The Trust or any series thereof shall continue
without limitation of time but subject to the provisions of this Article IX.
Section 9.2. TERMINATION.
(a) The Trust may be terminated by (1) the affirmative vote of the
holders of not less than two-thirds of the Shares of each series of the
Trust at any meeting of Shareholders, (2) by an instrument in writing,
without a meeting, signed by a majority of the Trustees and consented to by
the holders of not less than two-thirds of such Shares, or (3) by the
Trustees by written notice to the Shareholders. In addition, any series
may be so terminated by vote or written consent of not less than two-thirds
of the Shares of such series. Upon the termination of the Trust or any
series:
(i) The Trust or such series shall carry on no business except for
the purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the Trust or
such series and all of the powers of the Trustees under this Declaration
shall continue until the
-19-
<PAGE>
affairs of the Trust or such series shall have been wound up, including the
power to fulfill or discharge the contracts of the Trust or such series,
collect its assets, sell, convey, assign, exchange, transfer or otherwise
dispose of all or any part of the remaining Trust Property to one or more
persons at public or private sale for consideration which may consist in
whole or in part of cash, securities or other property of any kind,
discharge or pay its liabilities, and do all other acts appropriate to
liquidate its business; provided that any sale, conveyance, assignment,
exchange, transfer or other disposition of all or substantially all the
Trust Property shall require approval of the principal terms of the
transaction and the nature and amount of the consideration by vote or
consent of the holders of a majority of the Shares entitled to vote.
(iii) After paying or adequately providing for the payment of all
liabilities, and upon receipt of such releases, indemnities and refunding
agreements, as they deem necessary for their protection, the Trustees may
distribute the remaining Trust Property of any series, in cash or in kind
or partly each, among the Shareholders of such series and each class of
such series, according to their respective rights taking into account their
respective net asset values and the proper allocation of expenses being
borne solely by any series or any class of Shares of a series.
(b) After termination of the Trust or a series and distribution to
the Shareholders as herein provided, a majority of the Trustees (or an
officer of the Trust pursuant to a vote of a majority of the Trustees)
shall execute and lodge among the records of the Trust an instrument in
writing setting forth the fact of such termination, and such instrument
shall be filed with the Secretary of The Commonwealth of Massachusetts, as
well as with any other governmental office where such filing may from time
to time be required by the laws of Massachusetts. Upon termination of the
Trust, the Trustees shall thereupon be discharged from all further
liabilities and duties hereunder, and the rights and interests of all
Shareholders shall thereupon cease. Upon termination of any series, the
Trustees shall thereupon be discharged from all further liabilities and
duties with respect to such series, and the rights and interests of all
Shareholders of such series shall thereupon cease.
Section 9.3. AMENDMENT PROCEDURE.
(a) This Declaration may be amended by a Majority Shareholder Vote,
at a meeting of Shareholders, or by written consent without a meeting. The
Trustees may also amend this Declaration without the vote or consent of
Shareholders to change the name of the Trust or a series, to supply any
omission, to cure, correct or supplement any ambiguous, defective or
inconsistent provision hereof, or if they deem it necessary to conform this
Declaration to the requirements of applicable federal laws or regulations
or the requirements of the regulated investment company provisions of the
Code, but the Trustees shall not be liable for failing so to do.
(b) No amendment may be made under this Section 9.3 which would
change any rights with respect to any Shares of the Trust or a series by
reducing the amount
-20-
<PAGE>
payable thereon upon liquidation of the Trust or a series or by diminishing
or eliminating any voting rights pertaining thereto, except with the vote
or consent of the holders of two-thirds of the Shares outstanding and
entitled to vote. Nothing contained in this Declaration shall permit the
amendment of this Declaration to impair the exemption from personal
liability of the Shareholders, Trustees, officers, employees and agents of
the Trust or a series or to permit assessments upon Shareholders.
(c) A certificate signed by a majority of the Trustees or by the
Secretary or any Assistant Secretary of the Trust, setting forth an
amendment and reciting that it was duly adopted by the Shareholders or by
the Trustees as aforesaid or a copy of the Declaration, as amended, and
executed by a majority of the Trustees or certified by the Secretary or any
Assistant Secretary of the Trust, shall be conclusive evidence of such
amendment when lodged among the records of the Trust. Such amendment shall
be effective when lodged among the records of the Trust unless some later
effective date is specified.
Notwithstanding any other provision hereof, until such time as a
Registration Statement under the Securities Act of 1933, as amended, covering
the first public offering of securities of the Trust or a series thereof shall
have become effective, this Declaration may be terminated or amended in any
respect by the affirmative vote of a majority of the Trustees or by an
instrument signed by a majority of the Trustees.
Section 9.4. MERGER, CONSOLIDATION AND SALE OF ASSETS. The Trust or any
series thereof may merge or consolidate with any other corporation, association,
trust or other organization or may sell, lease or exchange all or substantially
all of the Trust Property or property of a series, including its good will, upon
such terms and conditions and for such consideration when and as authorized, at
any meeting of Shareholders called for the purpose, by the affirmative vote of
the holders of not less than two-thirds of the Shares; provided, however, that,
if the merger, consolidation, sale, lease or exchange is recommended by the
Trustees, a Majority Shareholder Vote shall be sufficient authorization.
Section 9.5. INCORPORATION. With approval of a Majority Shareholder
Vote, the Trustees may cause to be organized or assist in organizing a
corporation or corporations under the laws of any jurisdiction or any other
trust, partnership, association or other organization to take all of the Trust
Property or property of a series or to carry on any business in which the Trust
or any series shall directly or indirectly have any interest, and to sell,
convey and transfer the Trust Property or the property of a series to any
corporation, trust, association or organization in exchange for the shares or
securities thereof or otherwise, and to lend money to, subscribe for the shares
or securities of, and enter into any contracts with any corporation, trust,
partnership, association or organization in which the Trust or any series holds
or is about to acquire shares or any other interest. The Trustees may also
cause a merger or consolidation between the Trust or any series or any successor
thereto and any corporation, trust, partnership, association or other
organization if and to the extent permitted by law, as provided under the law
then in effect. Nothing contained herein shall be construed as requiring
approval of Shareholders for the Trustees to organize or assist in organizing
one or more corporations, trusts, partnerships,
-21-
<PAGE>
associations or other organizations and selling, conveying or transferring a
portion of the Trust Property to such organizations or entities.
ARTICLE X.
REPORTS TO SHAREHOLDERS
The Trustees shall at least semi-annually submit to the Shareholders a
written financial report of the transactions of the Trust or a series thereof,
including financial statements which shall at least annually be certified by
independent public accountants.
ARTICLE XI.
MISCELLANEOUS
Section 11.1. FILING. This Declaration and any amendment hereto shall be
filed in the office of the Secretary of The Commonwealth of Massachusetts and in
such other places as may be required under the laws of Massachusetts and may
also be filed or recorded in such other places as the Trustees deem appropriate.
Each amendment so filed shall be accompanied by a certificate signed and
acknowledged by a Trustee or by the Secretary or any Assistant Secretary of the
Trust stating that such action was duly taken in a manner provided herein. A
restated Declaration, integrating into a single instrument all of the provisions
of the Declaration which are then in effect and operative, may be executed from
time to time by a majority of the Trustees and shall, upon filing with the
Secretary of The Commonwealth of Massachusetts, be conclusive evidence of all
amendments contained therein and may thereafter be referred to in lieu of the
original Declaration and the various amendments thereto.
Section 11.2. RESIDENT AGENT. The Trust may appoint and maintain a
resident agent in The Commonwealth of Massachusetts.
Section 11.3. GOVERNING LAW. This Declaration is executed by the Trustees
with reference to the laws of The Commonwealth of Massachusetts, and the rights
of all parties and the validity and construction of every provision hereof shall
be subject to and construed according to the laws of the Commonwealth,
notwithstanding any Massachusetts law governing choice of law which may require
the construction of this Declaration in accordance with the laws of another
state or jurisdiction.
Section 11.4. COUNTERPARTS. The Declaration may be simultaneously
executed in several counterparts, each of which shall be deemed to be an
original, and such counterparts, together, shall constitute one and the same
instrument, which shall be sufficiently evidenced by any such original
counterpart.
-22-
<PAGE>
Section 11.5. RELIANCE BY THIRD PARTIES. Any certificate executed by an
individual who, according to the records of the Trust, appears to be a Trustee
hereunder, or Secretary or Assistant Secretary of the Trust, certifying to: (a)
the number or identity of Trustees or Shareholders, (b) the due authorization of
the execution of any instrument or writing, (c) the form of any vote passed at a
meeting of Trustees or Shareholders, (d) the fact that the number of Trustees or
Shareholders present at any meeting or executing any written instrument
satisfies the requirements of this Declaration, (e) the form of any By-Laws
adopted by or the identity of any officers elected by the Trustees or (f) the
existence of any fact of facts which in any manner relate to the affairs of the
Trust, shall be conclusive evidence as to the matters so certified in favor of
any Person dealing with the Trustees and their successors.
Section 11.6. PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS.
(a) The provisions of the Declaration are severable, and if the
Trustees shall determine, with the advice of counsel, that any of such
provisions is in conflict with the 1940 Act, the regulated investment
company provisions of the Code or with other applicable laws and
regulations, the conflicting provisions shall be deemed never to have
constituted a part of the Declaration; provided, however, that such
determination shall not affect any of the remaining provisions of the
Declaration or render invalid or improper any action taken or omitted prior
to such determination.
(b) If any provision of the Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability
shall affect only the provision in the jurisdiction and shall not in any
manner affect the provision in any other jurisdiction or any other
provision of the Declaration in any jurisdiction.
-23-
<PAGE>
IN WITNESS WHEREOF, the undersigned have set their hands and seals this
16th day of August, 1994.
/s/ Edward D. Beach
-------------------------------
Edward D. Beach
/s/ Donald D. Lennox
-------------------------------
Donald D. Lennox
/s/ Douglas H. McCorkindale
-------------------------------
Douglas H. McCorkindale
/s/ Lawrence C. McQuade
-------------------------------
Lawrence C. McQuade
/s/ Thomas T. Mooney
-------------------------------
Thomas T. Mooney
/s/ Richard A. Redeker
-------------------------------
Richard A. Redeker
/s/ Louis A. Weil, III
-------------------------------
Louis A. Weil, III
-24-
<PAGE>
CERTIFICATE
The undersigned, as Secretary of Prudential Allocation Fund (the "Fund"),
does hereby certify that the amended and restated Declaration of Trust attached
hereto was duly adopted by the Fund's Trustees on August 16, 1994, pursuant to
Sections 9.3 and 11.1 of the Declaration of Trust.
/s/ S. Jane Rose
-------------------------------
S. Jane Rose, Secretary
Acknowledged:
/s/ Marguerite E. H. Morrison
- ------------------------------------
Marguerite E. H. Morrison, Assistant
Secretary
-25-
<PAGE>
EXHIBIT 99.B1(b)
AMENDED AND RESTATED CERTIFICATE OF DESIGNATION
PRUDENTIAL FLEXIFUND
The undersigned, being the Assistant Secretary of Prudential FlexiFund
(hereinafter referred to as the "Trust"), a trust with transferable shares of
the type commonly called a Massachusetts business trust, DOES HEREBY CERTIFY
that, pursuant to the authority conferred upon the Trustees of the Trust by
Section 6.9 and Section 9.3 of the Declaration of Trust dated February 23, 1987,
as amended to date (referred to as the "Declaration of Trust"), and pursuant to
the rights granted to the Shareholders of the Trust by Section 9.3 of the
Declaration of Trust, and by the affirmative vote of a majority of the Trustees
and of the Shareholders at meetings duly called and held on March 17, 1993, and
July 19, 1994, respectively, the Amended and Restated Establishment and
Designation of Series of Shares of Beneficial Interest, $.01 Par Value, dated
November 16, 1990 and filed with the Secretary of The Commonwealth of
Massachusetts on November 27, 1990, and the Certificate of Designation dated
January 11, 1990 and filed with the Secretary of The Commonwealth of
Massachusetts on January 18, 1990 amending the Declaration of Trust are amended
and restated effective as of August 1, 1994, as follows:
The shares of beneficial interest of the Trust are divided into two
separate series, each series to have the following special and relative rights:
(1) The series shall be designated as follows:
Conservatively Managed Portfolio
Strategy Portfolio
(2) Each series shall be authorized to invest in cash, securities,
instruments and other property as from time to time described in the Trust's
then currently effective registration statement under the Securities Act of
1933. Each share of beneficial interest of each series ("share") shall be
redeemable, shall be entitled to one vote or fraction thereof in respect of a
fractional share on matters on which shares of that series shall be entitled to
vote and shall
<PAGE>
represent a pro rata beneficial interest in the assets allocated to that series,
and shall be entitled to receive its pro rata share of net assets of that series
upon liquidation of that series, all as provided in the Declaration of Trust.
(3) The shares of beneficial interest of each series of the Trust are
classified into three classes, designated "Class A Shares," "Class B Shares,"
and "Class C Shares." An unlimited number of each such class of each such
series may be issued. All Class A Shares and Class B Shares of each such series
outstanding on the date on which the amendments provided for herein become
effective shall be and continue to be Class A Shares and Class B Shares,
respectively, of such series.
(4) The holders of Class A Shares, Class B Shares and Class C Shares of
each series having the same shall be considered Shareholders of such series, and
shall have the relative rights and preferences set forth herein and in the
Declaration of Trust with respect to Shares of such series, and shall also be
considered Shareholders of the Trust for all other purposes (including, without
limitation, for purposes of receiving reports and notices and the right to vote)
and, for matters reserved to the Shareholders of one or more other classes or
series by the Declaration of Trust or by any instrument establishing and
designating a particular class or series, or as required by the Investment
Company Act of 1940 and/or the rules and regulations of the Securities and
Exchange Commission thereunder (collectively, as from time to time in effect,
the "1940 Act") or other applicable laws.
(5) The Class A Shares, Class B Shares and Class C Shares of each series
shall represent an equal proportionate interest in the share of such class in
the Trust Property belonging to that series, adjusted for any liabilities
specifically allocable to the Shares of that class, and each Share of any such
class shall have identical voting, dividend, liquidation and other rights and
the same terms and conditions, except that the expenses related directly or
indirectly to the distribution of the Shares of a class, and any service fees to
which such class is subject (as determined by the Trustees), shall be borne
solely by such class, and such expenses
-2-
<PAGE>
shall be appropriately reflected in the determination of net asset value and the
dividend, distribution and liquidation rights of such class.
(6) (a) Class A Shares of each series shall be subject to (i) a front-end
sales charge and (ii) (A) an asset-based sales charge pursuant to a plan under
Rule 12b-1 of the 1940 Act (a "Plan"), and/or (B) a service fee for the
maintenance of shareholder accounts and personal services, in such amounts as
shall be determined from time to time.
(b) Class B Shares of each series shall be subject to (i) a
contingent deferred sales charge and (ii) (A) an asset-based sales charge
pursuant to a Plan, and/or (B) a service fee for the maintenance of shareholder
accounts and personal services, in such amounts as shall be determined from time
to time.
(c) Class C Shares of each series shall be subject to (i) a
contingent deferred sales charge and (ii) (A) an asset-based sales charge
pursuant to a Plan, and/or (B) a service fee for the maintenance of shareholder
accounts and personal services, in such amounts as shall be determined from time
to time.
(7) Subject to compliance with the requirements of the 1940 Act, the
Trustees shall have the authority to provide that holders of Shares of any
series shall have the right to convert said Shares into Shares of one or more
other series of registered investment companies specified for the purpose in
this Trust's Prospectus for the series accorded such right, that holders of any
class of Shares of a series shall have the right to convert such Shares into
Shares of one or more other classes of such series, and that Shares of any class
of a series shall be automatically converted into Shares of another class of
such series, in each case in accordance with such requirements and procedures as
the Trustees may from time to time establish. The requirements and procedures
applicable to such mandatory or optional conversion of Shares of any such class
or series shall be set forth in the Prospectus in effect with respect to such
Shares.
(8) Shareholders of each series and class shall vote as a separate series
or class, as the case may be, on any matter to the extent required by, and any
matter shall be deemed to have been effectively acted upon with respect to any
series or class as provided in, Rule 18f-2, as from
-3-
<PAGE>
time to time in effect, under the 1940 Act, or any successor rule and by the
Declaration of Trust. Except as otherwise required by the 1940 Act, the
Shareholders of each class of any series having more than one class of Shares,
voting as a separate class, shall have sole and exclusive voting rights with
respect to the provisions of any Plan applicable to Shares of such class, and
shall have no voting rights with respect to provisions of any Plan applicable
solely to any other class of Shares of such series.
(9) The assets and liabilities of the Trust shall be allocated among the
above-referenced series as set forth in Section 6.9 of the Declaration of Trust,
except as provided below.
(a) Costs incurred and payable by the Trust in connection with its
organization and initial registration and public offering of shares shall be
divided equally between the Conservatively Managed Portfolio and Strategy
Portfolio and shall be amortized for each such series over the period beginning
on the date that such costs become payable and ending sixty months after the
commencement of operations of the Trust.
(b) The liabilities, expenses, costs, charges or reserves of the
Trust (other than the investment advisory fee or the organization expenses paid
by the Trust) which are not readily identifiable as belonging to any particular
series shall be allocated among the series on the basis of their relative
average daily net assets.
(10) The Trustees (including any successor Trustees) shall have the right
at any time and from time to time to reallocate assets and expenses or to change
the designation of any series now or hereafter created, or to otherwise change
the special and relative rights of any such series provided that such change
shall not adversely affect the rights of holders of shares of a series.
IN WITNESS WHEREOF, the undersigned has set her hand and seal this
27 day of July, 1994.
/s/ Marguerite E. H. Morrison
-------------------------------
Marguerite E. H. Morrison,
Assistant Secretary
-4-
<PAGE>
ACKNOWLEDGMENT
STATE OF NEW YORK )
) SS July 27, 1994
COUNTY OF NEW YORK )
Then personally appeared before me the above named Marguerite E. H.
Morrison, Assistant Secretary, and acknowledged the foregoing instrument to be
her free act and deed.
Kathleen M. Dietz
---------------------------
Notary Public
-5-
<PAGE>
Exhibit 99.B2
BY-LAWS
OF
PRUDENTIAL ALLOCATION FUND
As amended through September 1, 1994
<PAGE>
BY-LAWS
OF
PRUDENTIAL ALLOCATION FUND
ARTICLE I.
DEFINITIONS
The terms "ADMINISTRATOR," "COMMISSION," "CUSTODIAN," "DECLARATION,"
"DISTRIBUTOR," "INVESTMENT ADVISER," "1940 ACT," "SHAREHOLDER," "SHARES,"
"TRANSFER," "TRANSFER AGENT," "TRUST," "TRUST PROPERTY," "TRUSTEES," and
"MAJORITY SHAREHOLDER VOTE," have the respective meanings given them in the
Declaration of Trust of Prudential Allocation Fund (formerly Prudential-Bache
FlexiFund) dated February 23, 1987, as amended from time to time.
ARTICLE II.
OFFICES
Section 1. PRINCIPAL OFFICE. Until changed by the Trustees, the
principal office of the Trust in The Commonwealth of Massachusetts shall be in
the City of Boston, County of Suffolk.
Section 2. OTHER OFFICES. The Trust may have offices in such other
places without as well as within the Commonwealth as the Trustees may from time
to time determine.
ARTICLE III.
SHAREHOLDERS
Section 1. MEETINGS. Meetings of the Shareholders shall be held to the
extent provided in the Declaration at such place within or without The
Commonwealth of Massachusetts as the Trustees shall designate. The holders of a
majority of outstanding Shares of the Trust or series of the Trust present in
person or by proxy and entitled to vote shall constitute a quorum with respect
to Shares of the Trust or such series at any meeting of the Shareholders.
Section 2. NOTICE OF MEETINGS. Notice of all meetings of the
Shareholders, stating the time, place and purposes of the meeting, shall be
given by the Trustees by mail to each
<PAGE>
Shareholder at his or her address as recorded on the register of the Trust
mailed at least (10) days and not more than ninety (90) days before the meeting.
Only the business stated in the notice of the meeting shall be considered at
such meeting. Any adjourned meeting may be held as adjourned without further
notice. No notice need be given to any Shareholder who shall have failed to
inform the Trust of his or her current address or if a written waiver of notice,
executed before or after the meeting by the Shareholder or his or her attorney
thereunto authorized, is filed with the records of the meeting.
Section 3. RECORD DATE FOR MEETINGS AND OTHER PURPOSES. For the
purpose of determining the Shareholders who are entitled to notice of and to
vote at any meeting, or to participate in any distribution, or for the purpose
of any other action, the Trustees may from time to time close the transfer books
for such period, not exceeding thirty (30) days, as the Trustees may determine;
or without closing the transfer books the Trustees may fix a date not more than
ninety (90) days prior to the date of any meeting of Shareholders or
distribution or other action as a record date for the determinations of the
persons to be treated as Shareholders of record for such purposes, except for
dividend payments which shall be governed by the Declaration.
Section 4. PROXIES. At any meeting of Shareholders, any holder of
Shares entitled to vote thereat may vote by proxy, provided that no proxy shall
be voted at any meeting unless it shall have been placed on file with the
Secretary, or with such other officer or agent of the Trust as the Secretary may
direct, for verification prior to the time at which such vote shall be taken.
Proxies may be solicited in the name of one or more Trustees or one or more of
the officers of the Trust. Only Shareholders of record shall be entitled to
vote. Each whole Share shall be entitled to one vote as to any matter on which
it is entitled by the Declaration to vote, and each fractional Share shall be
entitled to a proportionate fractional vote. When any Share is held jointly by
several persons, any one of them may vote at any meeting in person or by proxy
in respect of such Share, but if more than one of them shall be present at such
meeting in person or by proxy, and such joint owners or their proxies so present
disagree as to any vote to be cast, such vote shall not be received in respect
of such Share. A proxy purporting to be executed by or
-2-
<PAGE>
on behalf of a Shareholder shall be deemed valid unless challenged at or prior
to its exercise, and the burden of proving invalidity shall rest on the
challenger. If the holder of any such Share is a minor or a person of unsound
mind, and subject to guardianship or the legal control of any other person as
regards the charge or management of such Share, he or she may vote by his or her
guardian or such other person appointed or having such control, and such vote
may be given in person or by proxy.
Section 5. INSPECTION OF RECORDS. The records of the Trust shall be
open to inspection by Shareholders to the same extent as is permitted
shareholders of a Massachusetts business corporation.
Section 6. ACTION WITHOUT MEETING. Any action which may be taken by
Shareholders may be taken without a meeting if a majority of Shareholders of the
Trust or the applicable series of the Trust entitled to vote on the matter (or
such larger proportion thereof as shall be required by law, the Declaration or
these By-Laws for approval of such matter) consent to the action in writing and
the written consents are filed with the records of the meetings of Shareholders.
Such consents shall be treated for all purposes as a vote taken at a meeting of
Shareholders.
ARTICLE IV.
TRUSTEES
Section 1. MEETINGS OF THE TRUSTEES. The Trustees may in their
discretion provide for regular or stated meetings of the Trustees. Notice of
regular or stated meetings need not be given. Meetings of the Trustees other
than regular or stated meetings shall be held whenever called by the President,
or by any one of the Trustees, at the time being in office. Notice of the time
and place of each meeting other than regular or stated meetings shall be given
by the Secretary or an Assistant Secretary or by the officer or Trustee calling
the meeting and shall be mailed to each Trustee at least two days before the
meeting, or shall be telegraphed, cabled, or wired to each Trustee at his or her
business address, or personally delivered to him or her at least one day before
the meeting. Such notice may, however, be waived by any Trustee. Notice of a
meeting need not be given to any Trustee if a written waiver of notice, executed
by him or her
-3-
<PAGE>
before or after the meeting, is filed with the records of the meeting, or to any
Trustee who attends the meeting without protesting prior thereto or at its
commencement the lack of notice to him or her. A notice or waiver of notice
need not specify the purpose of any meeting. The Trustees may meet by means of
a telephone conference circuit or similar communications equipment by means of
which all persons participating in the meeting are connected, which meeting
shall be deemed to have been held at a place designated by the Trustees at the
meeting. Except as hereinafter described, participation in a telephone
conference meeting shall constitute presence in person at such meeting. Except
as otherwise required by law, any action required or permitted to be taken at
any meeting of the Trustees may be taken by the Trustees without a meeting if
all the Trustees consent to the action in writing and the written consents are
filed with the records of the Trustees' meetings. Such consents shall be
treated for all purposes as a vote taken at a meeting of the Trustees. Matters
required by law to be approved by vote of a majority of the Trustees cast in
person at a meeting called for the purpose of voting on such approval may not be
delegated to any other Trustee for vote, nor shall participation in a telephone
conference meeting constitute presence in person for such a meeting.
Section 2. QUORUM AND MANNER OF ACTING. A majority of the Trustees
shall be present in person at any regular or special meeting of the Trustees in
order to constitute a quorum for the transaction of business at such meetings
and (except as otherwise required by law, the Declaration or these By-Laws) the
act of a majority of the Trustees present at any such meeting, at which a quorum
is present, shall be the act of the Trustees. In the absence of a quorum, a
majority of the Trustees present may adjourn the meeting from time to time until
a quorum shall be present. Notice of an adjourned meeting need not be given.
ARTICLE V.
COMMITTEES
Section 1. EXECUTIVE AND OTHER COMMITTEES. The Trustees by vote of a
majority of all the Trustees may elect from their own number an Executive
Committee to consist of not less than three (3) Trustees to hold office at the
pleasure of the Trustees, which shall have the power
-4-
<PAGE>
to conduct the current and ordinary business of the Trust while the Trustees are
not in session, including the purchase and sale of securities and the
designation of securities to be delivered upon redemption of Shares of the
Trust, and such other powers of the Trustees as the Trustees may, from time to
time, delegate to them except those powers which by law, the Declaration or
these By-Laws they are prohibited from delegating. The Trustees may also elect
from their own number or otherwise other Committees from time to time, the
number composing such Committees, the powers conferred upon the same (subject to
the same limitations as with respect to the Executive Committee) and the term of
membership on such Committees to be determined by the Trustees. The Trustees
may designate a chairman of any such Committee. In the absence of such
designation the Committee may elect its own Chairman.
Section 2. MEETINGS, QUORUM AND MANNER OF ACTING. The Trustees may
(1) provide for stated meetings of any Committee, (2) specify the manner of
calling and notice required for special meetings of any Committee, (3) specify
the number of members of a Committee required to constitute a quorum and the
number of members of a Committee required to exercise specified powers delegated
to such Committee, (4) authorize the making of decisions to exercise specified
powers by written assent of the requisite number of members of a Committee
without a meeting, and (5) authorize the members of a Committee to meet by means
of a telephone conference circuit.
The Executive Committee shall keep regular minutes of its meetings and
records of decisions taken without a meeting and cause them to be recorded in a
book designated for that purpose and kept in the Office of the Trust.
ARTICLE VI.
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Trust shall be a
President, a Treasurer and a Secretary, who shall be elected by the Trustees.
The Trustees may elect or appoint such other officers or agents as the business
of the Trust may require, including one or more Vice Presidents, one or more
Assistant Secretaries, and one or more Assistant Treasurers.
-5-
<PAGE>
The Trustees may delegate to any officer or committee the power to appoint any
subordinate officers or agents.
Section 2. TERM OF OFFICE AND QUALIFICATIONS. Except as otherwise
provided by law, the Declaration or these By-Laws, the President, the Treasurer
and the Secretary shall each hold office until his or her successor shall have
been duly elected and qualified, and all other officers shall hold office at the
pleasure of the Trustees. The Secretary and Treasurer may be the same person.
A Vice President and the Treasurer or a Vice President and the Secretary may be
the same person, but the offices of Vice President, Secretary and Treasurer
shall not be held by the same person. The President shall hold no other office.
Except as above provided, any two offices may be held by the same person. Any
officer may be but none need be a Trustee or Shareholder.
Section 3. REMOVAL. The Trustees, at any regular or special meeting of
the Trustees, may remove any officer without cause, by a vote of a majority of
the Trustees then in office. Any officer or agent appointed by an officer or
Committee may be removed with or without cause by such appointing officer or
Committee.
Section 4. POWERS AND DUTIES OF THE PRESIDENT. The President shall be
the principal executive officer of the Trust. He or she may call meetings of
the Trustees and of any Committee thereof when he or she deems it necessary and
shall preside at all meetings of the Shareholders. Subject to the control of
the Trustees and to the control of any Committees of the Trustees, within their
respective spheres, as provided by the Trustees, the President shall at all
times exercise a general supervision and direction over the affairs of the
Trust. The President shall have the power to employ attorneys and counsel for
the Trust and to employ such subordinate officers, agents, clerks and employees
as he or she may find necessary to transact the business of the Trust. He or
she shall also have the power to grant, issue, execute or sign such powers of
attorney, proxies or other documents as may be deemed advisable or necessary in
furtherance of the interests of the Trust. The President shall have such other
powers and duties as from time to time may be conferred upon or assigned to him
or her by the Trustees.
-6-
<PAGE>
Section 5. POWERS AND DUTIES OF VICE PRESIDENT. In the absence or
disability of the President, the Vice President or, if there be more than one
Vice President, any Vice President designated by the Trustees shall perform all
the duties and may exercise any of the powers of the President, subject to the
control of the Trustees. Each Vice President shall perform such other duties as
may be assigned to him or her from time to time by the Trustees and the
President.
Section 6. POWERS AND DUTIES OF THE TREASURER. The Treasurer shall be
the principal financial and accounting officer of the Trust. The Treasurer
shall deliver all funds of the Trust which may come into his or her hands to
such Custodian as the Trustees may employ pursuant to Article X of these By-
Laws. He or she shall render a statement of condition of the finances of the
Trust to the Trustees as often as they shall require the same and he or she
shall in general perform all the duties incident to the office of Treasurer and
such other duties as from time to time may be assigned to him or her by the
Trustees. The Treasurer shall give a bond for the faithful discharge of his or
her duties, if required so to do by the Trustees, in such sum and with such
surety or sureties as the Trustees shall require.
Section 7. POWERS AND DUTIES OF THE SECRETARY. The Secretary shall
keep the minutes of all meetings of the Trustees and of the Shareholders in
proper books provided for that purpose; he or she shall have custody of the seal
of the Trust; he or she shall have charge of the Share transfer books, lists and
records unless the same are in the charge of the Transfer Agent. The Secretary
shall attend to the giving and serving of all notices by the Trust in accordance
with the provisions of these By-Laws and as required by law; and subject to
these By-Laws, he or she shall in general perform all duties incident to the
office of Secretary and such other duties as from time to time may be assigned
to him or her by the Trustees.
Section 8. POWERS AND DUTIES OF ASSISTANT TREASURERS. In the absence
or disability of the Treasurer, any Assistant Treasurer designated by the
Trustees shall perform all the duties, and may exercise any of the powers, of
the Treasurer. Each Assistant Treasurer shall give a bond for the faithful
discharge of his or her duties, if required so to do by the Trustees, in such
sum and with such surety or sureties as the Trustees shall require.
-7-
<PAGE>
Section 9. POWERS AND DUTIES OF ASSISTANT SECRETARIES. In the absence
or disability of the Secretary, any Assistant Secretary designated by the
Trustees shall perform all the duties, and may exercise any of the powers, of
the Secretary. Each Assistant Secretary shall perform such other duties as from
time to time may be assigned to him by the Trustees.
Section 10. COMPENSATION OF OFFICERS AND TRUSTEES AND MEMBERS OF THE
ADVISORY BOARD. Subject to any applicable provisions of the Declaration, the
compensation of the officers and Trustees and members of the Advisory Board
shall be fixed from time to time by the Trustees or, in the case of officers, by
any Committee or officer upon whom such power may be conferred by the Trustees.
No officer shall be prevented from receiving such compensation as such officer
by reason of the fact that he or she is also a Trustee.
ARTICLE VII.
FISCAL YEAR
The fiscal year of the Trust shall begin on the first day of August in each
year and shall end on the last day of July in each year, provided, however, that
the Trustees may from time to time change the fiscal year.
ARTICLE VIII.
SEAL
The Trustees may adopt a seal which shall be in such form and shall have
such inscription thereon as the Trustees may from time to time prescribe.
ARTICLE IX.
WAIVERS OF NOTICE
Whenever any notice whatever is required to be given by law, the
Declaration or these By-Laws, a waiver thereof in writing, signed by the person
or persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto. A notice shall be deemed to have
been telegraphed, cabled or wired for the purposes of these By-Laws when it has
been delivered to a representative of any telegraph, cable or wire company with
instructions that it be telegraphed, cabled or wired.
-8-
<PAGE>
ARTICLE X.
CUSTODY OF SECURITIES
Section 1. EMPLOYMENT OF A CUSTODIAN. The Trust shall place and at all
times maintain in the custody of a Custodian (including any sub-custodian for
the Custodian) all funds, securities and similar investments included in the
Trust Property. The Custodian (and any sub-custodian) shall be a bank having
not less than $20,000,000 aggregate capital, surplus and undivided profits and
shall be appointed from time to time by the Trustees, who shall fix its
remuneration.
Section 2. ACTION UPON TERMINATION OF CUSTODIAN AGREEMENT. Upon
termination of a Custodian Agreement or inability of the Custodian to continue
to serve, the Trustees shall promptly appoint a successor custodian, but in the
event that no successor custodian can be found who has the required
qualifications and is willing to serve, the Trustees shall call as promptly as
possible a special meeting of the Shareholders to determine whether the Trust
shall function without a custodian or shall be liquidated. If so directed by a
Majority Shareholder Vote, the Custodian shall deliver and pay over all Trust
Property held by it as specified in such vote.
Section 3. PROVISIONS OF CUSTODIAN CONTRACT. The following provisions
shall apply to the employment of a Custodian and to any contract entered into
with the Custodian so employed: The Trustees shall cause to be delivered to the
Custodian all securities included in the Trust Property or to which the Trust
may become entitled, and shall order the same to be delivered by the Custodian
only in completion of a sale, exchange, transfer, pledge, loan of portfolio
securities to another person, or other disposition thereof, all as the Trustees
may generally or from time to time require or approve or to a successor
Custodian; and the Trustees shall cause all funds included in the Trust Property
or to which it may become entitled to be paid to the Custodian, and shall order
the same disbursed only for investment against delivery of the securities
acquired (including securities acquired under a repurchase agreement), or the
return of cash held as collateral for loans of portfolio securities, or in
payment of expenses, including management compensation, and liabilities of the
Trust, including distributions to Shareholders, or to a
-9-
<PAGE>
successor Custodian. Notwithstanding anything to the contrary in these By-Laws,
upon receipt of proper instructions, which may be standing instructions, the
Custodian may deliver funds in the following cases. In connection with
repurchase agreements, the Custodian shall transmit prior to receipt on behalf
of the Trust of any securities or other property, funds from the Trust's
custodian account to a special custodian approved by the Trustees of the Trust,
which funds shall be used to pay for securities to be purchased by the Trust
subject to the Trust's obligation to sell and the seller's obligation to
repurchase such securities. In such case, the securities shall be held in the
custody of the special custodian. In connection with the Trust's purchase or
sale of financial futures contracts, the Custodian shall transmit, prior to
receipt on behalf of the Trust of any securities or other property, funds from
the Trust's custodian account in order to furnish to and maintain funds with
brokers as margin to guarantee the performance of the Trust's futures
obligations in accordance with the applicable requirements of commodities
exchanges and brokers.
Section 4. CENTRAL CERTIFICATE SYSTEM. Subject to applicable rules,
regulations and orders adopted by the Commission, the Trustees may direct the
Custodian to deposit all or any part of the securities owned by the Trust in a
system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, or such other person as
may be permitted by the Commission, or otherwise in accordance with the 1940
Act, pursuant to which system all securities of any particular class or series
of any issuer deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical delivery of such
securities, provided that all such deposits shall be subject to withdrawal only
upon the order of the Trust.
ARTICLE XI.
INDEMNIFICATION
A representative of the Trust shall be indemnified by the Trust with
respect to each proceeding against such representative, except a proceeding
brought by or on behalf of the Trust,
-10-
<PAGE>
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such representative in
connection with such proceeding, provided that such representative acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the Trust and, with respect to any criminal proceeding,
had no reasonable cause to believe his or her conduct was unlawful. The
termination of any proceeding by judgment, order, settlement, conviction or upon
a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith in a manner which he or
she reasonably believed to be in or not opposed to the best interests of the
Trust and, with respect to any criminal proceeding, had reasonable cause to
believe that his or her conduct was unlawful.
A representative of the Trust shall be indemnified by the Trust, with
respect to each proceeding brought by or on behalf of the Trust to obtain
judgment or decree in its favor, against expenses (including attorneys' fees)
actually and reasonably incurred by him or her in connection with the defense or
settlement of such proceeding, if he or she acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interests of
the Trust; except that no indemnification shall be made in respect of any claim,
issue, or matter as to which such representative has been adjudged to be liable
for negligence or misconduct in the performance of his or her duty to the Trust,
unless and only to the extent that the court in which the proceeding was
brought, or a court of equity in the county in which the Trust has its principal
office, determines upon application that, despite the adjudication of liability
but in view of all circumstances of the case, such representative is fairly and
reasonably entitled to indemnity for the expenses which the court considers
proper.
To the extent that the representative of the Trust has been successful on
the merits or otherwise in defense of any proceeding referred to in the
preceding two paragraphs, or in defense of any claim, issue or matter therein,
the Trust shall indemnify him or her against all expenses (including attorneys'
fees) actually and reasonably incurred by him or her in connection therewith.
-11-
<PAGE>
Except as provided in the preceding paragraph any indemnification under the
first two paragraphs of this Article XI (unless ordered by a court) shall be
made by the Trust only as authorized in the specific case upon a determination
that indemnification of the representative of the Trust is proper in the
circumstances because he or she has met the applicable standard of conduct set
forth in such paragraphs. The determination shall be made (1) by the Trustees
by a majority vote of a quorum consisting of Trustees who were not parties to
the proceeding, or (2) if a quorum is not obtainable or if a quorum of
disinterested Trustees so directs, by independent legal counsel in a written
opinion, or (3) by a Majority Shareholder Vote.
Expenses (including attorneys' fees) incurred in defending a proceeding may
be paid by the Trust in advance of the final disposition thereof if
(1) authorized by the Trustees in the specific case, and (2) the Trust receives
an undertaking by or on behalf of the representative of the Trust to repay the
advance if it is not ultimately determined that he or she is entitled to be
indemnified by the Trust as authorized in this Article XI.
The indemnification provided by this Article XI shall not be deemed
exclusive of any other rights to which a representative of the Trust or other
person may be entitled under any agreement, vote of Shareholders or
disinterested Trustees or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding the office, and
shall continue as to a person who has ceased to be a Trustee, officer, employee
or agent and inure to the benefit of his or her heirs and personal
representatives.
The Trust may purchase and maintain insurance on behalf of any person who
is or was a Trustee, officer, employee or agent of the Trust, or is or was
serving at the request of the Trust as a trustee, director, officer, employee or
agent of another trust, corporation, partnership, joint venture or other
enterprise, against any liability asserted against him or her and incurred by
him or her in any such capacity or arising out of his or her status as such,
regardless of whether the Trust would have the power to indemnify him or her
against the liability under the provisions of this Article XI, provided such
insurance shall be consistent with the provisions of applicable federal and
state laws.
-12-
<PAGE>
Nothing contained in this Article XI shall be construed to indemnify any
representative of the Trust against any liability to the Trust or to its
Shareholders to which he or she would otherwise be subject by reason of
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
As used in this Article XI, "representative of the Trust" means an
individual (1) who is a present or former Trustee, officer, agent or employee of
the Trust or who serves or has served another trust, corporation, partnership,
joint venture or other enterprise in one of such capacities at the request of
the Trust, and (2) who by reason of his or her position is, has been or is
threatened to be made a party to a proceeding; and "proceeding" includes any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administration or investigative.
ARTICLE XII.
AMENDMENTS
These By-Laws, or any of them, may be altered, amended or repealed, or new
By-Laws may be adopted (a) by a Majority Shareholder Vote or (b) by the
Trustees, provided, however, that no By-Law may be amended, adopted or repealed
by the Trustees if such amendment, adoption or repeal requires, pursuant to law,
the Declaration or these By-Laws, a vote of the Shareholders.
End of By-Laws
-13-
<PAGE>
EXHIBIT 99.B6(a)
PRUDENTIAL ALLOCATION FUND
(formerly Prudential FlexiFund)
Distribution Agreement
(CLASS A SHARES)
Agreement made as of January 22, 1990, and amended and restated as of
August 1, 1994, between Prudential Allocation Fund, a Massachusetts Business
Trust (the Fund) and Prudential Mutual Fund Distributors, Inc., a Delaware
Corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
Class A shares for sale continuously;
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the Fund's Class A
shares from and after the date hereof in order to promote the growth of the Fund
and facilitate the distribution of its Class A shares; and
WHEREAS, upon approval by the Class A shareholders of the Fund it is
contemplated that the Fund will adopt a plan of distribution pursuant to Rule
12b-1 under the Investment Company Act (the Plan) authorizing payments by the
Fund to the Distributor with respect to the distribution of Class A shares of
the Fund and the maintenance of Class A shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR
The Fund hereby appoints the Distributor as the principal underwriter
and distributor of the Class A shares of the Fund to sell Class A shares to the
public and the Distributor hereby accepts such appointment and agrees to act
hereunder. The Fund hereby agrees during the term of this Agreement to sell
Class A shares of the Fund to the Distributor on the terms and conditions set
forth below.
<PAGE>
Section 2. EXCLUSIVE NATURE OF DUTIES
The Distributor shall be the exclusive representative of the Fund to
act as principal underwriter and distributor of the Fund's Class A shares,
except that:
2.1 The exclusive rights granted to the Distributor to purchase Class
A shares from the Fund shall not apply to Class A shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding shares of
any such company by the Fund.
2.2 Such exclusive rights shall not apply to Class A shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions.
2.3 Such exclusive rights shall not apply to Class A shares issued by
the Fund pursuant to the reinstatement privilege afforded redeeming
shareholders.
2.4 Such exclusive rights shall not apply to purchases made through
the Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean
the Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. PURCHASE OF CLASS A SHARES FROM THE FUND
3.1 The Distributor shall have the right to buy from the Fund the
Class A shares needed, but not more than the Class A shares needed (except for
clerical errors in transmission) to fill unconditional orders for Class A shares
placed with the Distributor by investors or registered and qualified securities
dealers and other financial institutions (selected dealers). The price which
the Distributor shall pay for the Class A shares so purchased from the Fund
shall be the net asset value, determined as set forth in the Prospectus.
3.2 The Class A shares are to be resold by the Distributor or
selected dealers, as described in Section 6.4 hereof, to investors at the
offering price as set forth in the Prospectus.
2
<PAGE>
3.3 The Fund shall have the right to suspend the sale of its Class A
shares at times when redemption is suspended pursuant to the conditions in
Section 4.3 hereof or at such other times as may be determined by the Trustees.
The Fund shall also have the right to suspend the sale of its Class A shares if
a banking moratorium shall have been declared by federal or New York
authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class A shares
received by the Distributor. Any order may be rejected by the Fund; provided,
however, that the Fund will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class A shares. The Fund (or
its agent) will confirm orders upon their receipt, will make appropriate book
entries and upon receipt by the Fund (or its agent) of payment therefore, will
deliver deposit receipts for such Class A shares pursuant to the instructions of
the Distributor. Payment shall be made to the Fund in New York Clearing House
funds or federal funds. The Distributor agrees to cause such payment and such
instructions to be delivered promptly to the Fund (or its agent).
Section 4. REPURCHASE OR REDEMPTION OF CLASS A SHARES BY THE FUND
4.1 Any of the outstanding Class A shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class A
shares so tendered in accordance with its Declaration of Trust as amended from
time to time, and in accordance with the applicable provisions of the
Prospectus. The price to be paid to redeem or repurchase the Class A shares
shall be equal to the net asset value determined as set forth in the Prospectus.
All payments by the Fund hereunder shall be made in the manner set forth in
Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh calendar day subsequent to its having received the
notice of redemption in proper form. The proceeds of any redemption of Class A
shares shall be paid by the Fund to or for the account of the redeeming
shareholder, in each case in accordance with applicable provisions of the
Prospectus.
4.3 Redemption of Class A shares or payment may be suspended at times
when the New York Stock Exchange is closed for other than customary weekends and
holidays, when trading on said Exchange is restricted, 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 during any other period when the
Securities and Exchange Commission, by order,
3
<PAGE>
so permits.
Section 5. DUTIES OF THE FUND
5.1 Subject to the possible suspension of the sale of Class A shares
as provided herein, the Fund agrees to sell its Class A shares so long as it has
Class A shares available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class A shares, and this
shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Trustees and the shareholders, all necessary action to
fix the number of authorized Class A shares and such steps as may be necessary
to register the same under the Securities Act, to the end that there will be
available for sale such number of Class A shares as the Distributor reasonably
may expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Class A shares for sales under
the securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Declaration of Trust
or By-Laws to comply with the laws of any state, to maintain an office in any
state, to change the terms of the offering of its Class A shares in any state
from the terms set forth in its Registration Statement, to qualify as a foreign
corporation in any state or to consent to service of process in any state other
than with respect to claims arising out of the offering of its Class A shares.
Any such qualification may be withheld, terminated or withdrawn by the Fund at
any time in its discretion. As provided in Section 9.1 hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualifications.
4
<PAGE>
Section 6. DUTIES OF THE DISTRIBUTOR
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Class A shares of the Fund, but shall not be obligated to sell any
specific number of Class A shares. Sales of the Class A shares shall be on the
terms described in the Prospectus. The Distributor may enter into like
arrangements with other investment companies. The Distributor shall compensate
the selected dealers as set forth in the Prospectus.
6.2 In selling the Class A shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of the National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of Class A shares, provided
that the Fund shall approve the forms of such agreements. Within the United
States, the Distributor shall offer and sell Class A shares only to such
selected dealers as are members in good standing of the NASD. Class A shares
sold to selected dealers shall be for resale by such dealers only at the
offering price determined as set forth in the Prospectus.
Section 7. PAYMENTS TO THE DISTRIBUTOR
The Distributor shall receive and may retain any portion of any
front-end sales charge which is imposed on sales of Class A shares and not
reallocated to selected dealers as set forth in the Prospectus, subject to the
limitations of Article III, Section 26 of the NASD Rules of Fair Practice.
Payment of these amounts to the Distributor is not contingent upon the adoption
or continuation of the Plan.
Section 8. PAYMENT OF THE DISTRIBUTOR UNDER THE PLAN
8.1 The Fund shall pay to the Distributor as compensation for
services under the Distribution and Service Plan and this Agreement a fee of .30
of 1% (including an asset-based sales charge of .05 of 1% and a service fee of
.25 of 1%) per annum
5
<PAGE>
of the average daily net assets of the Class A shares of each Portfolio of the
Fund. Amounts payable under the Plan shall be accrued daily and paid monthly or
at such other intervals as the Trustees may determine. Amounts payable under
the Plan shall be subject to the limitations of Article III, Section 26 of the
NASD Rules of Fair Practice.
8.2 So long as the Plan or any amendment thereto is in effect, the
Distributor shall inform the Trustees of the commissions and account servicing
fees to be paid by the Distributor to account executives of the Distributor and
to broker-dealers and financial institutions which have dealer agreements with
the Distributor. So long as the Plan (or any amendment thereto) is in effect,
at the request of the Trustees or any agent or representative of the Fund, the
Distributor shall provide such additional information as may reasonably be
requested concerning the activities of the Distributor hereunder and the costs
incurred in performing such activities.
8.3 Expenses of distribution with respect to the Class A shares of
the Fund include, among others:
(a) amounts paid to Prudential Securities for performing
services under a selected dealer agreement between
Prudential Securities and the Distributor for sale of Class
A shares of the Fund, including sales commissions and
trailer commissions paid to, or on account of, account
executives and indirect and overhead costs associated with
distribution activities, including central office and branch
expenses;
(b) amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor
for sale of Class A shares of the Fund, including sales
commissions and trailer commissions paid to, or on account
of, agents and indirect and overhead costs associated with
distribution activities;
(c) sales commissions and trailer commissions paid to, or on
account of, broker-dealers and financial institutions (other
than Prudential Securities and Prusec) which have entered
into selected dealer agreements with the Distributor with
respect to Class A shares of the Fund;
(d) amounts paid to, or an account of, account executives of
Prudential Securities, Prusec, or of other broker-dealers or
financial institutions for personal service and/or the
6
<PAGE>
maintenance of shareholder accounts; and
(e) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing
Fund Prospectuses, and periodic financial reports and sales
literature to persons other than current shareholders of the
Fund.
Indirect and overhead costs referred to in clauses (a) and (b) of the
foregoing sentence include (i) lease expenses, (ii) salaries and benefits of
personnel including operations and sales support personnel, (iii) utility
expenses, (iv) communications expenses, (v) sales promotion expenses, (vi)
expenses of postage, stationery and supplies and (vii) general overhead.
Section 9. ALLOCATION OF EXPENSES
9.1 The Fund shall bear all costs and expenses of the continuous
offering of its Class A shares, including fees and disbursements of its counsel
and auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and preparing and mailing annual and periodic reports and
proxy materials to shareholders (including but not limited to the expense of
setting in type any such Registration Statements, Prospectuses, annual or
periodic reports or proxy materials). The Fund shall also bear the cost of
expenses of qualification of the Class A shares for sale, and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer,
in such states of the United States or other jurisdictions as shall be selected
by the Fund and the Distributor pursuant to Section 5.4 hereof and the cost and
expense payable to each such state for continuing qualification therein until
the Fund decides to discontinue such qualification pursuant to Section 5.4
hereof. As set forth in Section 8 above, the Fund shall also bear the expenses
it assumes pursuant to the Plan with respect to Class A shares, so long as the
Plan is in effect.
Section 10. INDEMNIFICATION
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus
7
<PAGE>
or arising out of or based upon any alleged omission to state a material fact
required to be stated in either thereof or necessary to make the statements in
either thereof not misleading, except insofar as such claims, demands,
liabilities or expenses arise out of or are based upon any such untrue statement
or omission or alleged untrue statement or omission made in reliance upon and in
conformity with information furnished in writing by the Distributor to the Fund
for use in the Registration Statement or Prospectus; provided, however, that
this indemnity agreement shall not inure to the benefit of any such officer,
director or controlling person unless a court of competent jurisdiction shall
determine in a final decision on the merits, that the person to be indemnified
was not liable by reason of willful misfeasance, bad faith or gross negligence
in the performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement (disabling conduct), or, in the absence of such
a decision, a reasonable determination, based upon a review of the facts, that
the indemnified person was not liable by reason of disabling conduct, by (a) a
vote of a majority of a quorum of Trustees who are neither "interested persons"
of the Fund as defined in Section 2(a)(19) of the Investment Company Act nor
parties to the proceeding, or (b) an independent legal counsel in a written
opinion. The Fund's agreement to indemnify the Distributor, its officers or
directors and any such controlling person as aforesaid is expressly conditioned
upon the Fund's being promptly notified of any action brought against the
Distributor, its officers or directors, or any such controlling person, such
notification to be given by letter or telegram addressed to the Fund at its
principal business office. The Fund agrees promptly to notify the Distributor
of the commencement of any litigation or proceedings against the Fund or any of
its officers or Trustees in connection with the issue and sale of any Class A
shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Trustees and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any counsel fees incurred in connection therewith) which the Fund, its
officers and Trustees or any such controlling person may incur under the
Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its Trustees or officers or such
controlling person resulting from such claims or demands shall arise out of or
be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state a material fact in connection with such information
required to be stated in the Registration Statement or Prospectus or necessary
to make such information not misleading. The Distributor's agreement
8
<PAGE>
to indemnify the Fund, its officers and Trustees and any such controlling person
as aforesaid, is expressly conditioned upon the Distributor's being promptly
notified of any action brought against the Fund, its officers and Trustees or
any such controlling person, such notification being given to the Distributor at
its principal business office.
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Trustees of the Fund, or by the vote of a majority of
the outstanding voting securities of the Class A shares of the Fund, and (b) by
the vote of a majority of those Trustees who are not parties to this Agreement
or interested persons of any such parties and who have no direct or indirect
financial interest in this Agreement or in the operation of the Fund's Plan or
in any agreement related thereto (Rule 12b-1 Trustees), cast in person at a
meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the Rule 12b-1 Trustees or by vote of a
majority of the outstanding voting securities of the Class A shares of the Fund,
or by the Distributor, on sixty (60) days' written notice to the other party.
This Agreement shall automatically terminate in the event of its assignment.
11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. AMENDMENTS TO THIS AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Trustees of the Fund, or by the vote of a
majority of the outstanding voting securities of the Class A shares of the Fund,
and (b) by the vote of a majority of the Rule 12b-1 Trustees cast in person at a
meeting called for the purpose of voting on such amendment.
Section 13. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
9
<PAGE>
latter shall control.
Section 14 LIABILITIES OF THE FUND
The name "Prudential Allocation Trust" is the designation of the
Trustees under a Declaration of Trust dated February 23, 1987, as amended and
all persons dealing with the Fund must look solely to the property of the Fund
for the enforcement of any claims against the Fund, and neither the Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Mutual Fund
Distributors, Inc.
By: /s/ Robert F. Gunia
------------------------
Robert F. Gunia
Executive Vice President
Prudential Allocation Fund
By: /s/ Lawrence C. McQuade
------------------------
Lawrence C. McQuade
President
[mc]cla-comp.agr
10
<PAGE>
EXHIBIT 99.B6(b)
PRUDENTIAL ALLOCATION FUND
(formerly Prudential FlexiFund)
Distribution Agreement
(CLASS B SHARES)
Agreement made as of September 4, 1987, and amended and restated as of
August 1, 1994, between Prudential Allocation Fund, a Massachusetts Business
Trust and Prudential Securities Incorporated, a Delaware Corporation (the
Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
Class B shares for sale continuously;
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the Fund's Class B
shares from and after the date hereof in order to promote the growth of the Fund
and facilitate the distribution of its Class B shares; and
WHEREAS, the Fund has adopted a distribution and service plan pursuant
to Rule 12b-1 under the Investment Company Act (the Plan) authorizing payments
by the Fund to the Distributor with respect to the distribution of Class B
shares of the Fund and the maintenance of Class B shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR
The Fund hereby appoints the Distributor as the principal underwriter
and distributor of the Class B shares of the Fund to sell Class B shares to the
public and the Distributor hereby accepts such appointment and agrees to act
hereunder. The Fund hereby agrees during the term of this Agreement to sell
Class B shares of the Fund to the Distributor on the terms and conditions set
forth below.
Section 2. EXCLUSIVE NATURE OF DUTIES
The Distributor shall be the exclusive representative of the Fund to
act as principal underwriter and distributor of the
<PAGE>
Fund's Class B shares, except that:
2.1 The exclusive rights granted to the Distributor to purchase Class
B shares from the Fund shall not apply to Class B shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding shares of
any such company by the Fund.
2.2 Such exclusive rights shall not apply to Class B shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions.
2.3 Such exclusive rights shall not apply to Class B shares issued by
the Fund pursuant to the reinstatement privilege afforded redeeming
shareholders.
2.4 Such exclusive rights shall not apply to purchases made through
the Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean
the Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (the Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. PURCHASE OF CLASS B SHARES FROM THE FUND
3.1 The Distributor shall have the right to buy from the Fund the
Class B shares needed, but not more than the Class B shares needed (except for
clerical errors in transmission) to fill unconditional orders for Class B shares
placed with the Distributor by investors or registered and qualified securities
dealers and other financial institutions (selected dealers). The price which
the Distributor shall pay for the Class B shares so purchased from the Fund
shall be the net asset value, determined as set forth in the Prospectus.
3.2 The Class B shares are to be resold by the Distributor or
selected dealers, as described in Section 6.4 hereof, to investors at the
offering price as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of its Class B
shares at times when redemption is suspended pursuant to the conditions in
Section 4.3 hereof or at such other times as may be determined by the Trustees.
The Fund shall also have the right to suspend the sale of its Class B shares if
a banking moratorium shall have been declared by federal or New York
2
<PAGE>
authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class B shares
received by the Distributor. Any order may be rejected by the Fund; provided,
however, that the Fund will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class B shares. The Fund (or
its agent) will confirm orders upon their receipt, will make appropriate book
entries and upon receipt by the Fund (or its agent) of payment therefore, will
deliver deposit receipts for such Class B shares pursuant to the instructions of
the Distributor. Payment shall be made to the Fund in New York Clearing House
funds or federal funds. The Distributor agrees to cause such payment and such
instructions to be delivered promptly to the Fund (or its agent).
Section 4. REPURCHASE OR REDEMPTION OF CLASS B SHARES BY THE FUND
4.1 Any of the outstanding Class B shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class B
shares so tendered in accordance with its Declaration of Trust as amended from
time to time, and in accordance with the applicable provisions of the
Prospectus. The price to be paid to redeem or repurchase the Class B shares
shall be equal to the net asset value determined as set forth in the Prospectus.
All payments by the Fund hereunder shall be made in the manner set forth in
Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Class B shares
shall be paid by the Fund as follows: (a) any applicable contingent deferred
sales charge shall be paid to the Distributor and (b) the balance shall be paid
to or for the account of the redeeming shareholder, in each case in accordance
with applicable provisions of the Prospectus.
4.3 Redemption of Class B shares or payment may be suspended at times
when the New York Stock Exchange is closed for other than customary weekends and
holidays, when trading on said Exchange is restricted, 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 during any other period when the
Securities and Exchange Commission, by order, so permits.
3
<PAGE>
Section 5. DUTIES OF THE FUND
5.1 Subject to the possible suspension of the sale of Class B shares
as provided herein, the Fund agrees to sell its Class B shares so long as it has
Class B shares available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class B shares, and this
shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Trustees and the shareholders, all necessary action to
fix the number of authorized Class B shares and such steps as may be necessary
to register the same under the Securities Act, to the end that there will be
available for sale such number of Class B shares as the Distributor reasonably
may expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Class B shares for sales under
the securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Declaration of Trust
or By-Laws to comply with the laws of any state, to maintain an office in any
state, to change the terms of the offering of its Class B shares in any state
from the terms set forth in its Registration Statement, to qualify as a foreign
corporation in any state or to consent to service of process in any state other
than with respect to claims arising out of the offering of its Class B shares.
Any such qualification may be withheld, terminated or withdrawn by the Fund at
any time in its discretion. As provided in Section 9.1 hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualifications.
4
<PAGE>
Section 6. DUTIES OF THE DISTRIBUTOR
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Class B shares of the Fund, but shall not be obligated to sell any
specific number of Class B shares. Sales of the Class B shares shall be on the
terms described in the Prospectus. The Distributor may enter into like
arrangements with other investment companies. The Distributor shall compensate
the selected dealers as set forth in the Prospectus.
6.2 In selling the Class B shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of the National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of Class B shares, provided
that the Fund shall approve the forms of such agreements. Within the United
States, the Distributor shall offer and sell Class B shares only to such
selected dealers as are members in good standing of the NASD. Class B shares
sold to selected dealers shall be for resale by such dealers only at the
offering price determined as set forth in the Prospectus.
Section 7. PAYMENTS TO THE DISTRIBUTOR
The Distributor shall receive and may retain any contingent deferred
sales charge which is imposed with respect to repurchases and redemptions of
Class B shares as set forth in the Prospectus, subject to the limitations of
Article III, Section 26 of the NASD Rules of Fair Practice. Payment of these
amounts to the Distributor is not contingent upon the adoption or continuation
of the Plan.
Section 8. PAYMENT OF THE DISTRIBUTOR UNDER THE PLAN
8.1 The Fund shall pay to the Distributor as compensation for
services under the Distribution and Service Plan and this Agreement a fee of 1%
(including an asset-based sales charge of .75 of 1% and a service fee of .25 of
1%) per annum of
5
<PAGE>
the average daily net assets of the Class B shares of each Portfolio of the
Fund. Amounts payable under the Plan shall be accrued daily and paid monthly or
at such other intervals as the Trustees may determine. Amounts payable under
the Plan shall be subject to the limitations of Article III, Section 26 of the
NASD Rules of Fair Practice.
8.2 So long as the Plan or any amendment thereto is in effect, the
Distributor shall inform the Trustees of the commissions (including trailer
commissions) and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and financial institutions
which have selected dealer agreements with the Distributor. So long as the Plan
(or any amendment thereto) is in effect, at the request of the Board of Trustees
or any agent or representative of the Fund, the Distributor shall provide such
additional information as may reasonably be requested concerning the activities
of the Distributor hereunder and the costs incurred in performing such
activities.
8.3 Expenses of distribution with respect to the Class B shares of
the Fund include, among others:
(a) sales commissions (including trailer commissions) paid to,
or on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated
with performance of distribution activities, including
central office and branch expenses;
(c) amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor
for sale of Class B shares of the Fund, including sales
commissions and trailer commissions paid to, or on account
of, agents and indirect and overhead costs associated with
distribution activities;
(d) sales commissions (including trailer commissions) paid to,
or on account of, broker-dealers and financial institutions
(other than Prusec) which have entered into selected dealer
agreements with the Distributor with respect to Class B
shares of the Fund;
(e) amounts paid to, or an account of, account executives of the
Distributor or of other broker-dealers or financial
institutions for personal service and/or the maintenance of
6
<PAGE>
shareholder accounts; and
(f) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing
Fund Prospectuses, and periodic financial reports and sales
literature to persons other than current shareholders of the
Fund.
Indirect and overhead costs referred to in clauses (b) and (c) of the
foregoing sentence include (i) lease expenses, (ii) salaries and benefits of
personnel including operations and sales support personnel, (iii) utility
expenses, (iv) communications expenses, (v) sales promotion expenses, (vi)
expenses of postage, stationery and supplies and (vii) general overhead.
Section 9. ALLOCATION OF EXPENSES
9.1 The Fund shall bear all costs and expenses of the continuous
offering of its Class B shares, including fees and disbursements of its counsel
and auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and preparing and mailing annual and periodic reports and
proxy materials to shareholders (including but not limited to the expense of
setting in type any such Registration Statements, Prospectuses, annual or
periodic reports or proxy materials). The Fund shall also bear the cost of
expenses of qualification of the Class B shares for sale, and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer,
in such states of the United States or other jurisdictions as shall be selected
by the Fund and the Distributor pursuant to Section 5.4 hereof and the cost and
expense payable to each such state for continuing qualification therein until
the Fund decides to discontinue such qualification pursuant to Section 5.4
hereof. As set forth in Section 8 above, the Fund shall also bear the expenses
it assumes pursuant to the Plan with respect to Class B shares, so long as the
Plan is in effect.
Section 10. INDEMNIFICATION
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and Directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, Directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus
7
<PAGE>
or arising out of or based upon any alleged omission to state a material fact
required to be stated in either thereof or necessary to make the statements in
either thereof not misleading, except insofar as such claims, demands,
liabilities or expenses arise out of or are based upon any such untrue statement
or omission or alleged untrue statement or omission made in reliance upon and in
conformity with information furnished in writing by the Distributor to the Fund
for use in the Registration Statement or Prospectus; provided, however, that
this indemnity agreement shall not inure to the benefit of any such officer,
Director or controlling person unless a court of competent jurisdiction shall
determine in a final decision on the merits, that the person to be indemnified
was not liable by reason of willful misfeasance, bad faith or gross negligence
in the performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement (disabling conduct), or, in the absence of such
a decision, a reasonable determination, based upon a review of the facts, that
the indemnified person was not liable by reason of disabling conduct, by (a) a
vote of a majority of a quorum of Trustees who are neither "interested persons"
of the Fund as defined in Section 2(a)(19) of the Investment Company Act nor
parties to the proceeding, or (b) an independent legal counsel in a written
opinion. The Fund's agreement to indemnify the Distributor, its officers and
Directors and any such controlling person as aforesaid is expressly conditioned
upon the Fund's being promptly notified of any action brought against the
Distributor, its officers or Directors, or any such controlling person, such
notification to be given in writing addressed to the Fund at its principal
business office. The Fund agrees promptly to notify the Distributor of the
commencement of any litigation or proceedings against the Fund or any of its
officers or Trustees in connection with the issue and sale of any Class B
shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Trustees and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any counsel fees incurred in connection therewith) which the Fund, its
officers and Trustees or any such controlling person may incur under the
Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its Trustees or officers or such
controlling person resulting from such claims or demands shall arise out of or
be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state a material fact in connection with such information
required to be stated in the Registration Statement or Prospectus or necessary
to make such information not misleading. The Distributor's agreement
8
<PAGE>
to indemnify the Fund, its officers and Trustees and any such controlling person
as aforesaid, is expressly conditioned upon the Distributor's being promptly
notified of any action brought against the Fund, its officers and Trustees or
any such controlling person, such notification to be given to the Distributor in
writing at its principal business office.
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Board of Trustees of the Fund, or by the vote of a
majority of the outstanding voting securities of the Class B shares of the Fund,
and (b) by the vote of a majority of those Trustess who are not parties to this
Agreement or interested persons of any such parties and who have no direct or
indirect financial interest in this Agreement or in the operation of the Fund's
Plan or in any agreement related thereto (Rule 12b-1 Trustees), cast in person
at a meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the Rule 12b-1 Trustees or by vote of a
majority of the outstanding voting securities of the Class B shares of the Fund,
or by the
Distributor, on sixty (60) days' written notice to the other party. This
Agreement shall automatically terminate in the event of its assignment.
11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. AMENDMENTS TO THIS AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Trustees of the Fund, or by the vote of a
majority of the outstanding voting securities of the Class B shares of the Fund,
and (b) by the vote of a majority of the Rule 12b-1 Trustees cast in person at a
meeting called for the purpose of voting on such amendment.
Section 13. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
9
<PAGE>
latter shall control.
Section 14. LIABILITIES OF THE FUND
The name "Prudential Allocation Trust" is the designation of the
Trustees under a Declaration of Trust dated February 23, 1987, as amended and
all persons dealing with the Fund must look solely to the property of the Fund
for the enforcement of any claims against the Fund, and neither the Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Securities
Incorporated
By: /s/ Robert F. Gunia
----------------------
Robert F. Gunia
Senior Vice President
Prudential Allocation Fund
By: /s/ Lawrence C. McQuade
-----------------------
Lawrence C. McQuade
President
[mc]clb-comp.agr
10
<PAGE>
EXHIBIT 99.B6(c)
PRUDENTIAL ALLOCATION FUND
(formerly Prudential FlexiFund)
Distribution Agreement
(CLASS C SHARES)
Agreement made as of August 1, 1994, between Prudential Allocation
Fund, a Massachusetts Business Trust (the Fund) and Prudential Securities
Incorporated, a Delaware Corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
Class C shares for sale continuously;
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the Fund's Class C
shares from and after the date hereof in order to promote the growth of the Fund
and facilitate the distribution of its Class C shares; and
WHEREAS, the Fund has adopted a distribution and service plan pursuant
to Rule 12b-1 under the Investment Company Act (the Plan) authorizing payments
by the Fund to the Distributor with respect to the distribution of Class C
shares of the Fund and the maintenance of Class C shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR
The Fund hereby appoints the Distributor as the principal underwriter
and distributor of the Class C shares of the Fund to sell Class C shares to the
public and the Distributor hereby accepts such appointment and agrees to act
hereunder. The Fund hereby agrees during the term of this Agreement to sell
Class C shares of the Fund to the Distributor on the terms and conditions set
forth below.
Section 2. EXCLUSIVE NATURE OF DUTIES
The Distributor shall be the exclusive representative of the Fund to
act as principal underwriter and distributor of the Fund's Class C shares,
except that:
<PAGE>
2.1 The exclusive rights granted to the Distributor to purchase Class
C shares from the Fund shall not apply to Class C shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding shares of
any such company by the Fund.
2.2 Such exclusive rights shall not apply to Class C shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions.
2.3 Such exclusive rights shall not apply to Class C shares issued by
the Fund pursuant to the reinstatement privilege afforded redeeming
shareholders.
2.4 Such exclusive rights shall not apply to purchases made through
the Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean
the Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (the Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. PURCHASE OF CLASS C SHARES FROM THE FUND
3.1 The Distributor shall have the right to buy from the Fund the
Class C shares needed, but not more than the Class C shares needed (except for
clerical errors in transmission) to fill unconditional orders for Class C shares
placed with the Distributor by investors or registered and qualified securities
dealers and other financial institutions (selected dealers). The price which
the Distributor shall pay for the Class C shares so purchased from the Fund
shall be the net asset value, determined as set forth in the Prospectus.
3.2 The Class C shares are to be resold by the Distributor or
selected dealers, as described in Section 6.4 hereof, to investors at the
offering price as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of its Class C
shares at times when redemption is suspended pursuant to the conditions in
Section 4.3 hereof or at such other times as may be determined by the Trustees.
The Fund shall also have the right to suspend the sale of its Class C shares if
a banking
2
<PAGE>
moratorium shall have been declared by federal or New York authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class C shares
received by the Distributor. Any order may be rejected by the Fund; provided,
however, that the Fund will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class C shares. The Fund (or
its agent) will confirm orders upon their receipt, will make appropriate book
entries and upon receipt by the Fund (or its agent) of payment therefore, will
deliver deposit receipts for such Class C shares pursuant to the instructions of
the Distributor. Payment shall be made to the Fund in New York Clearing House
funds or federal funds. The Distributor agrees to cause such payment and such
instructions to be delivered promptly to the Fund (or its agent).
Section 4. REPURCHASE OR REDEMPTION OF CLASS C SHARES BY THE FUND
4.1 Any of the outstanding Class C shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class C
shares so tendered in accordance with its Declaration of Trust as amended from
time to time, and in accordance with the applicable provisions of the
Prospectus. The price to be paid to redeem or repurchase the Class C shares
shall be equal to the net asset value determined as set forth in the Prospectus.
All payments by the Fund hereunder shall be made in the manner set forth in
Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Class C shares
shall be paid by the Fund as follows: (a) any applicable contingent deferred
sales charge shall be paid to the Distributor and (b) the balance shall be paid
to or for the account of the redeeming shareholder, in each case in accordance
with applicable provisions of the Prospectus.
4.3 Redemption of Class C shares or payment may be suspended at times
when the New York Stock Exchange is closed for other than customary weekends and
holidays, when trading on said Exchange is restricted, 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 during any other period when the
Securities and Exchange Commission, by order, so permits.
3
<PAGE>
Section 5. DUTIES OF THE FUND
5.1 Subject to the possible suspension of the sale of Class C shares
as provided herein, the Fund agrees to sell its Class C shares so long as it has
Class C shares available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class C shares, and this
shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Trustees and the shareholders, all necessary action to
fix the number of authorized Class C shares and such steps as may be necessary
to register the same under the Securities Act, to the end that there will be
available for sale such number of Class C shares as the Distributor reasonably
may expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Class C shares for sales under
the securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Declaration of Trust
or By-Laws to comply with the laws of any state, to maintain an office in any
state, to change the terms of the offering of its Class C shares in any state
from the terms set forth in its Registration Statement, to qualify as a foreign
corporation in any state or to consent to service of process in any state other
than with respect to claims arising out of the offering of its Class C shares.
Any such qualification may be withheld, terminated or withdrawn by the Fund at
any time in its discretion. As provided in Section 9.1 hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualifications.
4
<PAGE>
Section 6. DUTIES OF THE DISTRIBUTOR
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Class C shares of the Fund, but shall not be obligated to sell any
specific number of Class C shares. Sales of the Class C shares shall be on the
terms described in the Prospectus. The Distributor may enter into like
arrangements with other investment companies. The Distributor shall compensate
the selected dealers as set forth in the Prospectus.
6.2 In selling the Class C shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of the National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of Class C shares, provided
that the Fund shall approve the forms of such agreements. Within the United
States, the Distributor shall offer and sell Class C shares only to such
selected dealers as are members in good standing of the NASD. Class C shares
sold to selected dealers shall be for resale by such dealers only at the
offering price determined as set forth in the Prospectus.
Section 7. PAYMENTS TO THE DISTRIBUTOR
The Distributor shall receive and may retain any contingent deferred
sales charge which is imposed with respect to repurchases and redemptions of
Class C shares as set forth in the Prospectus, subject to the limitations of
Article III, Section 26 of the NASD Rules of Fair Practice. Payment of these
amounts to the Distributor is not contingent upon the adoption or continuation
of the Plan.
Section 8. PAYMENT OF THE DISTRIBUTOR UNDER THE PLAN
8.1 The Fund shall pay to the Distributor as compensation for
services under the Distribution and Service Plan and this Agreement a fee of 1%
(including an asset-based sales charge of .75 of 1% and a service fee of .25 of
1%) per annum of
5
<PAGE>
the average daily net assets of the Class C shares of each Portfolio of the
Fund. Amounts payable under the Plan shall be accrued daily and paid monthly or
at such other intervals as the Trustees may determine. Amounts payable under
the Plan shall be subject to the limitations of Article III, Section 26 of the
NASD Rules of Fair Practice.
8.2 So long as the Plan or any amendment thereto is in effect, the
Distributor shall inform the Trustees of the commissions (including trailer
commissions) and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and financial institutions
which have selected dealer agreements with the Distributor. So long as the Plan
(or any amendment thereto) is in effect, at the request of the Trustees or any
agent or representative of the Fund, the Distributor shall provide such
additional information as may reasonably be requested concerning the activities
of the Distributor hereunder and the costs incurred in performing such
activities.
8.3 Expenses of distribution with respect to the Class C shares of
the Fund include, among others:
(a) sales commissions (including trailer commissions) paid to,
or on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated
with performance of distribution activities, including
central office and branch expenses;
(c) amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor
for sale of Class C shares of the Fund, including sales
commissions and trailer commissions paid to, or on account
of, agents and indirect and overhead costs associated with
distribution activities;
(d) sales commissions (including trailer commissions) paid to,
or on account of, broker-dealers and financial institutions
(other than Prusec) which have entered into selected dealer
agreements with the Distributor with respect to Class C
shares of the Fund;
(e) amounts paid to, or an account of, account executives of the
Distributor or of other broker-dealers or financial
institutions for personal service and/or the maintenance of
6
<PAGE>
shareholder accounts; and
(f) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing
Fund Prospectuses, and periodic financial reports and sales
literature to persons other than current shareholders of the
Fund.
Indirect and overhead costs referred to in clauses (b) and (c) of the
foregoing sentence include (i) lease expenses, (ii) salaries and benefits of
personnel including operations and sales support personnel, (iii) utility
expenses, (iv) communications expenses, (v) sales promotion expenses, (vi)
expenses of postage, stationery and supplies and (vii) general overhead.
Section 9. ALLOCATION OF EXPENSES
9.1 The Fund shall bear all costs and expenses of the continuous
offering of its Class C shares, including fees and disbursements of its counsel
and auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and preparing and mailing annual and periodic reports and
proxy materials to shareholders (including but not limited to the expense of
setting in type any such Registration Statements, Prospectuses, annual or
periodic reports or proxy materials). The Fund shall also bear the cost of
expenses of qualification of the Class C shares for sale, and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer,
in such states of the United States or other jurisdictions as shall be selected
by the Fund and the Distributor pursuant to Section 5.4 hereof and the cost and
expense payable to each such state for continuing qualification therein until
the Fund decides to discontinue such qualification pursuant to Section 5.4
hereof. As set forth in Section 8 above, the Fund shall also bear the expenses
it assumes pursuant to the Plan with respect to Class C shares, so long as the
Plan is in effect.
Section 10. INDEMNIFICATION
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and Directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, Directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus
7
<PAGE>
or arising out of or based upon any alleged omission to state a material fact
required to be stated in either thereof or necessary to make the statements in
either thereof not misleading, except insofar as such claims, demands,
liabilities or expenses arise out of or are based upon any such untrue statement
or omission or alleged untrue statement or omission made in reliance upon and in
conformity with information furnished in writing by the Distributor to the Fund
for use in the Registration Statement or Prospectus; provided, however, that
this indemnity agreement shall not inure to the benefit of any such officer,
Director or controlling person unless a court of competent jurisdiction shall
determine in a final decision on the merits, that the person to be indemnified
was not liable by reason of willful misfeasance, bad faith or gross negligence
in the performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement (disabling conduct), or, in the absence of such
a decision, a reasonable determination, based upon a review of the facts, that
the indemnified person was not liable by reason of disabling conduct, by (a) a
vote of a majority of a quorum of Trustees who are neither "interested persons"
of the Fund as defined in Section 2(a)(19) of the Investment Company Act nor
parties to the proceeding, or (b) an independent legal counsel in a written
opinion. The Fund's agreement to indemnify the Distributor, its officers and
Directors and any such controlling person as aforesaid is expressly conditioned
upon the Fund's being promptly notified of any action brought against the
Distributor, its officers or Directors, or any such controlling person, such
notification to be given in writing addressed to the Fund at its principal
business office. The Fund agrees promptly to notify the Distributor of the
commencement of any litigation or proceedings against the Fund or any of its
officers or Trustees in connection with the issue and sale of any Class C
shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Trustees and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any counsel fees incurred in connection therewith) which the Fund, its
officers and Trustees or any such controlling person may incur under the
Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its Trustees or officers or such
controlling person resulting from such claims or demands shall arise out of or
be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state a material fact in connection with such information
required to be stated in the Registration Statement or Prospectus or necessary
to make such information not misleading. The Distributor's agreement
8
<PAGE>
to indemnify the Fund, its officers and Trustees and any such controlling person
as aforesaid, is expressly conditioned upon the Distributor's being promptly
notified of any action brought against the Fund, its officers and Trustees or
any such controlling person, such notification to be given to the Distributor in
writing at its principal business office.
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Trustees of the Fund, or by the vote of a majority of
the outstanding voting securities of the Class C shares of the Fund, and (b) by
the vote of a majority of those Trustees who are not parties to this Agreement
or interested persons of any such parties and who have no direct or indirect
financial interest in this Agreement or in the operation of the Fund's Plan or
in any agreement related thereto (Rule 12b-1 Trustees), cast in person at a
meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the Rule 12b-1 Trustees or by vote of a
majority of the outstanding voting securities of the Class C shares of the Fund,
or by the
Distributor, on sixty (60) days' written notice to the other party. This
Agreement shall automatically terminate in the event of its assignment.
11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. AMENDMENTS TO THIS AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Trustees of the Fund, or by the vote of a
majority of the outstanding voting securities of the Class C shares of the Fund,
and (b) by the vote of a majority of the Rule 12b-1 Trustees cast in person at a
meeting called for the purpose of voting on such amendment.
Section 13. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
9
<PAGE>
latter shall control.
Section 14. LIABILITIES OF THE FUND
The name "Prudential Allocation Trust" is the designation of the
Trustees under a Declaration of Trust dated February 23, 1987, as amended, and
all persons dealing with the Fund must look solely to the property of the Fund
for the enforcement of any claims against the Fund, and neither the Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Securities
Incorporated
By: /s/ Robert F. Gunia
-----------------------
Robert F. Gunia
Senior Vice President
Prudential Allocation Fund
By: /s/ Lawrence C. McQuade
-----------------------
Lawrence C. McQuade
President
[mc]clb-comp.agr
10
<PAGE>
Exhibit 99 B.11
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 13 to Registration
Statement No. 33-12531 of Prudential Allocation Fund of our report dated
September 14, 1994, appearing in the Statement of Additional Information,
which is a part of such Registration Statement, and to the references to us
under the headings "Financial Highlights" in the Prospectus, which is a part
of such Registration Statement, and "Custodian, Transfer and Dividend
Disbursing Agent and Independent Accountants" in the Statement of Additional
Information.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
New York, New York
September 26, 1994
<PAGE>
EXHIBIT 99.B 15(a)
PRUDENTIAL ALLOCATION FUND
(formerly Prudential FlexiFund)
Distribution and Service Plan
(Class A Shares)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential Allocation Fund (the Fund) and by
Prudential Mutual Fund Distributors, Inc., the Fund's distributor (the
Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class A shares issued by the Fund
(Class A shares). Under the Distribution Agreement, the Distributor will be
entitled to receive payments from investors of front-end sales charges with
respect to the sale of Class A shares. Under the Plan, the Fund intends to pay
to the Distributor, as compensation for its services, a distribution and service
fee with respect to Class A shares.
A majority of the Trustees of the Fund, including a majority of those
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 this Plan or
<PAGE>
any agreements related to it (the Rule 12b-1 Trustees), have determined by votes
cast in person at a meeting called for the purpose of voting on this Plan that
there is a reasonable likelihood that adoption of this Plan will benefit the
Fund and its shareholders. Expenditures under this Plan by the Fund for
Distribution Activities (defined below) are primarily intended to result in the
sale of Class A shares of the Fund within the meaning of paragraph (a)(2) of
Rule 12b-1 promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class A shares of the
Fund and to service shareholder accounts using all of the facilities of the
distribution networks of Prudential Securities Incorporated (Prudential
Securities) and Pruco Securities Corporation (Prusec), including sales personnel
and branch office and central support systems, and also using such other
qualified broker-dealers and financial institutions as the Distributor may
select. Services provided and activities
<PAGE>
undertaken to distribute Class A shares of the Fund are referred to herein as
"Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class A shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class A
shares of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Trustees may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services a
distribution fee, together with the service fee (described in Section 2 hereof),
of .30 of 1% per annum of the average daily net assets of the Class A shares of
the Fund for the performance of Distribution Activities. The Fund shall
calculate and accrue daily amounts payable by the Class A shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Trustees may determine. Amounts payable under the Plan shall be subject to the
limitations of Article III, Section 26 of the NASD Rules of Fair Practice.
Amounts paid to the Distributor by the Class A shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class A shares according to the
ratio of the sales of Class A shares to the total sales of the Fund's shares
3
<PAGE>
over the Fund's fiscal year or such other allocation method approved by the
Trustees. The allocation of distribution expenses among classes will be subject
to the review of the Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) amounts paid to Prudential Securities for performing services under
a selected dealer agreement between Prudential Securities and the
Distributor for sale of Class A shares of the Fund, including sales
commissions and trailer commissions paid to, or on account of,
account executives and indirect and overhead costs associated with
Distribution Activities, including central office and branch
expenses;
(b) amounts paid to Prusec for performing services under a selected
dealer agreement between Prusec and the Distributor for sale of
Class A shares of the Fund, including sales commissions and trailer
commissions paid to, or on account of, agents and indirect and
overhead costs associated with Distribution Activities;
(c) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund
prospectuses, statements of additional information and periodic
financial reports and sales literature to persons other than current
shareholders of the Fund; and
(d) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and financial institutions (other than
Prudential Securities and Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class A
shares of the Fund.
4
<PAGE>
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Trustees of the
Fund for review, at least quarterly, a written report specifying in reasonable
detail the amounts expended for Distribution Activities (including payment of
the service fee) and the purposes for which such expenditures were made in
compliance with the requirements of Rule 12b-1. The Distributor will provide to
the Trustees of the Fund such additional information as the Trustees shall from
time to time reasonably request, including information about Distribution
Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Trustees of the Fund of the commissions
and account servicing fees to be paid by the Distributor to account executives
of the Distributor and to broker-dealers and financial institutions which have
selected dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities
of the Class A shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Trustees of the Fund and a majority of the Rule
5
<PAGE>
12b-1 Trustees by votes cast in person at a meeting called for the purpose of
voting on the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Trustees, or by vote of a majority of the outstanding voting securities
(as defined in the Investment Company Act) of the Class A shares of the Fund.
7. AMENDMENTS
The Plan may not be amended to change the combined service and
distribution fees to be paid as provided for in Sections 2 and 3 hereof so as to
increase materially the amounts payable under this Plan unless such amendment
shall be approved by the vote of a majority of the outstanding voting securities
(as defined in the Investment Company Act) of the Class A shares of the Fund.
All material amendments of the Plan shall be approved by a majority of the
Trustees of the Fund and a majority of the Rule 12b-1 Trustees by votes cast in
person at a meeting called for the purpose of voting on the Plan.
8. RULE 12B-1 TRUSTEES
While the Plan is in effect, the selection and nomination of the Rule
12b-1 Trustees shall be committed to the discretion of the Rule 12b-1 Trustees.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at
6
<PAGE>
least the first two years in an easily accessible place.
10. ENFORCEMENT OF CLAIMS
The name "Prudential Allocation Trust" is the designation of the Trustees
under a Declaration of Trust dated February 23, 1987, as amended, and all
persons dealing with the Fund must look solely to the property of the Fund for
the enforcement of any claims against the Fund, and neither the Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
Dated: January 22, 1990, amended and restated as of August 1,
1994
[mc]cla-comp.pln
7
<PAGE>
EXHIBIT 99.B 15(b)
PRUDENTIAL ALLOCATION FUND
(formerly Prudential FlexiFund)
Distribution and Service Plan
(Class B Shares)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which
is designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential Allocation Fund, (the Fund) and by
Prudential Securities Incorporated (Prudential Securities), the Fund's
distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which
the Fund will continue to employ the Distributor to distribute Class B shares
issued by the Fund (Class B shares). Under the Plan, the Fund wishes to pay to
the Distributor, as compensation for its services, a distribution and service
fee with respect to Class B shares.
A majority of the Trustees of the Fund including a majority 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 this Plan
or any agreements related to it (the Rule 12b-1 Trustees), have determined by
votes cast in person at a meeting called for the purpose of voting on this Plan
that there is a reasonable likelihood that adoption of this Plan will benefit
the Fund and its shareholders. Expenditures
<PAGE>
under this Plan by the Fund for Distribution Activities (defined below) are
primarily intended to result in the sale of Class B shares of the Fund within
the meaning of paragraph (a)(2) of Rule 12b-1 promulgated under the Investment
Company Act.
The purpose of the Plan is to create incentives to the Distributor
and/or other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class B shares of the
Fund and to service shareholder accounts using all of the facilities of the
Prudential Securities distribution network including sales personnel and branch
office and central support systems, and also using such other qualified
broker-dealers and financial institutions as the Distributor may select,
including Pruco Securities Corporation (Prusec). Services provided and
activities undertaken to distribute Class B shares of the Fund are referred to
herein as "Distribution Activities."
2
<PAGE>
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class B shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class B
shares of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Trustees may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class B shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class B shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Trustees may determine. Amounts payable under the Plan shall be subject
to the limitations of Article III, Section 26 of the NASD Rules of Fair
Practice.
Amounts paid to the Distributor by the Class B shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class B shares according to the
ratio of the sale of Class B shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Trustees.
The allocation of distribution expenses among classes
3
<PAGE>
will be subject to the review of the Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or
on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prusec for performing services under a selected
dealer agreement between Prusec and the Distributor for sale of
Class B shares of the Fund, including sales commissions and trailer
commissions paid to, or on account of, agents and indirect and
overhead costs associated with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund
prospectuses, statements of additional information and periodic
financial reports and sales literature to persons other than current
shareholders of the Fund; and
(e) sales commissions (including trailer commissions) paid to, or
on account of, broker-dealers and other financial institutions
(other than Prusec) which have entered into selected dealer
agreements with the Distributor with respect to Class B shares of
the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Trustees of the
Fund for review, at least quarterly, a written report specifying in reasonable
detail the amounts expended for Distribution Activities (including payment of
the service fee) and the purposes for which such expenditures were made in
compliance with the requirements of Rule 12b-1. The Distributor will provide to
the Trustees of the Fund such additional information as they shall from time to
time reasonably request, including information
4
<PAGE>
about Distribution Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Trustees of the Fund of the commissions
and account servicing fees to be paid by the Distributor to account executives
of the Distributor and to broker-dealers and other financial institutions which
have selected dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities
of the Class B shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Trustees of the Fund and a majority of the Rule 12b-1 Trustees
by votes cast in person at a meeting called for the purpose of voting on the
continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Trustees, or by vote of a majority of the outstanding voting securities
(as defined in the Investment Company Act) of the Class B shares of the Fund.
5
<PAGE>
7. AMENDMENTS
The Plan may not be amended to change the combined service and
distribution fees to be paid as provided for in Sections 2 and 3 hereof so as to
increase materially the amounts payable under this Plan unless such amendment
shall be approved by the vote of a majority of the outstanding voting securities
(as defined in the Investment Company Act) of the Class B shares of the Fund.
All material amendments of the Plan shall be approved by a majority of the
Trustees of the Fund and a majority of the Rule 12b-1 Trustees by votes cast in
person at a meeting called for the purpose of voting on the Plan.
8. RULE 12B-1 TRUSTEES
While the Plan is in effect, the selection and nomination of the Rule
12b-1 Trustees shall be committed to the discretion of the Rule 12b-1 Trustees.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
10. ENFORCEMENT OF CLAIMS
The name "Prudential Allocation Fund" is the designation of the Trustees
under a Declaration of Trust dated February 23, 1987, as amended, and all
persons dealing with the Fund must look solely to the property of the Fund for
the enforcement of any claims against the
6
<PAGE>
Fund, and neither the Trustees, officers, agents or shareholders assume any
personal liability for obligations entered into on behalf of the Fund.
Dated: January 22, 1990, amended and restated as of August 1,
1994
[mc]clb-comp.pln
7
<PAGE>
EXHIBIT 99.B 15(c)
PRUDENTIAL ALLOCATION FUND
(formerly Prudential FlexiFund)
Distribution and Service Plan
(Class C Shares)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which
is designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential Allocation Fund (the Fund) and by
Prudential Securities Incorporated (Prudential Securities), the Fund's
distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which
the Fund will continue to employ the Distributor to distribute Class C shares
issued by the Fund (Class C shares). Under the Plan, the Fund wishes to pay to
the Distributor, as compensation for its services, a distribution and service
fee with respect to Class C shares.
A majority of the Trustees of the Fund including a majority 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 this Plan
or any agreements related to it (the Rule 12b-1 Trustees), have determined by
votes cast in person at a meeting called for the purpose of voting on this Plan
that there is a reasonable likelihood that adoption of this Plan will benefit
the Fund and its shareholders. Expenditures under this Plan by the Fund for
Distribution Activities (defined
<PAGE>
below) are primarily intended to result in the sale of Class C shares of the
Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated under the
Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor
and/or other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class C shares of the
Fund and to service shareholder accounts using all of the facilities of the
Prudential Securities distribution network including sales personnel and branch
office and central support systems, and also using such other qualified
broker-dealers and financial institutions as the Distributor may select,
including Pruco Securities Corporation (Prusec). Services provided and
activities undertaken to distribute Class C shares of the Fund are referred to
herein as "Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts
2
<PAGE>
a service fee of .25 of 1% per annum of the average daily net assets of the
Class C shares (service fee). The Fund shall calculate and accrue daily amounts
payable by the Class C shares of the Fund hereunder and shall pay such amounts
monthly or at such other intervals as the Trustees may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class C shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class C shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Trustees may determine. Amounts payable under the Plan shall be subject
to the limitations of Article III, Section 26 of the NASD Rules of Fair
Practice.
Amounts paid to the Distributor by the Class C shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class C shares according to the
ratio of the sale of Class C shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Trustees.
The allocation of distribution expenses among classes will be subject to the
review of the Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
3
<PAGE>
(a) sales commissions (including trailer commissions) paid to, or
on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prusec for performing services under a selected
dealer agreement between Prusec and the Distributor for sale of
Class C shares of the Fund, including sales commissions and trailer
commissions paid to, or on account of, agents and indirect and
overhead costs associated with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund
prospectuses, statements of additional information and periodic
financial reports and sales literature to persons other than current
shareholders of the Fund; and
(e) sales commissions (including trailer commissions) paid to, or
on account of, broker-dealers and other financial institutions
(other than Prusec) which have entered into selected dealer
agreements with the Distributor with respect to Class C shares of
the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Trustees of the
Fund for review, at least quarterly, a written report specifying in reasonable
detail the amounts expended for Distribution Activities (including payment of
the service fee) and the purposes for which such expenditures were made in
compliance with the requirements of Rule 12b-1. The Distributor will provide to
the Trustees of the Fund such additional information as they shall from time to
time reasonably request, including information about Distribution Activities
undertaken or to be undertaken by the Distributor.
The Distributor will inform the Trustees of the Fund of the
4
<PAGE>
commissions and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class C shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities
of the Class C shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Trustees of the Fund and a majority of the Rule 12b-1 Trustees
by votes cast in person at a meeting called for the purpose of voting on the
continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Trustees, or by vote of a majority of the outstanding voting securities
(as defined in the Investment Company Act) of the Class C shares of the Fund.
7. AMENDMENTS
The Plan may not be amended to change the combined service and
distribution fees to be paid as provided for in Sections 2 and 3 hereof so as to
increase materially the amounts payable under this
5
<PAGE>
Plan unless such amendment shall be approved by the vote of a majority of the
outstanding voting securities (as defined in the Investment Company Act) of the
Class C shares of the Fund. All material amendments of the Plan shall be
approved by a majority of the Trustees of the Fund and a majority of the Rule
12b-1 Trustees by votes cast in person at a meeting called for the purpose of
voting on the Plan.
8. RULE 12B-1 TRUSTEES
While the Plan is in effect, the selection and nomination of the Rule
12b-1 Trustees shall be committed to the discretion of the Rule 12b-1 Trustees.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
10. ENFORCEMENT OF CLAIMS
The name "Prudential Allocation Fund" is the designation of the Trustees
under a Declaration of Trust dated February 23, 1987, as amended, and all
persons dealing with the Fund must look solely to the property of the Fund for
the enforcement of any claims against the Fund, and neither the Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
Dated: August 1, 1994
6
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000811444
<NAME> PRUDENTIAL ALLOCATION FUND
<SERIES>
<NUMBER> 001
<NAME> CONSERVATIVELY MANAGED PORTFOLIO - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
<INVESTMENTS-AT-COST> 476,104,179
<INVESTMENTS-AT-VALUE> 493,040,569
<RECEIVABLES> 8,847,052
<ASSETS-OTHER> 182,081
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 502,069,702
<PAYABLE-FOR-SECURITIES> 16,838,273
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,111,255
<TOTAL-LIABILITIES> 18,949,528
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 461,556,208
<SHARES-COMMON-STOCK> 43,551,047
<SHARES-COMMON-PRIOR> 29,388,407
<ACCUMULATED-NII-CURRENT> 1,867,647
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,759,929
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,936,390
<NET-ASSETS> 483,120,174
<DIVIDEND-INCOME> 3,341,833
<INTEREST-INCOME> 13,871,237
<OTHER-INCOME> 0
<EXPENSES-NET> 8,214,219
<NET-INVESTMENT-INCOME> 8,998,851
<REALIZED-GAINS-CURRENT> 8,854,437
<APPREC-INCREASE-CURRENT> (13,575,563)
<NET-CHANGE-FROM-OPS> 4,277,725
<EQUALIZATION> 1,077,644
<DISTRIBUTIONS-OF-INCOME> (10,699,693)
<DISTRIBUTIONS-OF-GAINS> (18,060,300)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 216,417,990
<NUMBER-OF-SHARES-REDEEMED> (80,947,022)
<SHARES-REINVESTED> 26,617,480
<NET-CHANGE-IN-ASSETS> 138,683,824
<ACCUMULATED-NII-PRIOR> 2,707,799
<ACCUMULATED-GAINS-PRIOR> 11,727,706
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,743,056
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,214,219
<AVERAGE-NET-ASSETS> 422,008,000
<PER-SHARE-NAV-BEGIN> 11.75
<PER-SHARE-NII> 0.33
<PER-SHARE-GAIN-APPREC> (0.05)
<PER-SHARE-DIVIDEND> (0.37)
<PER-SHARE-DISTRIBUTIONS> (0.54)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.12
<EXPENSE-RATIO> 1.23
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<PAGE>
<ARTICLE> 6
<CIK> 0000811444
<NAME> PRUDENTIAL ALLOCATION FUND
<SERIES>
<NUMBER> 001
<NAME> CONSERVATIVELY MANAGED PORTFOLIO - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
[INVESTMENTS-AT-COST] 476,104,179
[INVESTMENTS-AT-VALUE] 493,040,569
[RECEIVABLES] 8,847,052
[ASSETS-OTHER] 182,081
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 502,069,702
[PAYABLE-FOR-SECURITIES] 16,838,273
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 2,111,255
[TOTAL-LIABILITIES] 18,949,528
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 461,556,208
[SHARES-COMMON-STOCK] 43,551,047
[SHARES-COMMON-PRIOR] 29,388,407
[ACCUMULATED-NII-CURRENT] 1,867,647
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 2,759,929
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 16,936,390
[NET-ASSETS] 483,120,174
[DIVIDEND-INCOME] 3,341,833
[INTEREST-INCOME] 13,871,237
[OTHER-INCOME] 0
[EXPENSES-NET] 8,214,219
[NET-INVESTMENT-INCOME] 8,998,851
[REALIZED-GAINS-CURRENT] 8,854,437
[APPREC-INCREASE-CURRENT] (13,575,563)
[NET-CHANGE-FROM-OPS] 4,277,725
[EQUALIZATION] 1,077,644
[DISTRIBUTIONS-OF-INCOME] (10,699,693)
[DISTRIBUTIONS-OF-GAINS] (18,060,300)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 216,417,990
[NUMBER-OF-SHARES-REDEEMED] (80,947,022)
[SHARES-REINVESTED] 26,617,480
[NET-CHANGE-IN-ASSETS] 138,683,824
[ACCUMULATED-NII-PRIOR] 2,707,799
[ACCUMULATED-GAINS-PRIOR] 11,727,706
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 2,743,056
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 8,214,219
[AVERAGE-NET-ASSETS] 422,008,000
[PER-SHARE-NAV-BEGIN] 11.72
[PER-SHARE-NII] 0.24
[PER-SHARE-GAIN-APPREC] (0.05)
[PER-SHARE-DIVIDEND] (0.28)
[PER-SHARE-DISTRIBUTIONS] (0.54)
[RETURNS-OF-CAPITAL] 0.00
[PER-SHARE-NAV-END] 11.09
[EXPENSE-RATIO] 2.00
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<PAGE>
<ARTICLE> 6
<CIK> 0000811444
<NAME> PRUDENTIAL ALLOCATION FUND
<SERIES>
<NUMBER> 002
<NAME> STATEGY PORTFOLIO - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
[INVESTMENTS-AT-COST] 374,612,190
[INVESTMENTS-AT-VALUE] 388,040,662
[RECEIVABLES] 5,338,150
[ASSETS-OTHER] 97,665
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 393,476,477
[PAYABLE-FOR-SECURITIES] 8,004,180
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1,847,753
[TOTAL-LIABILITIES] 9,851,933
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 358,612,295
[SHARES-COMMON-STOCK] 33,228,879
[SHARES-COMMON-PRIOR] 32,737,228
[ACCUMULATED-NII-CURRENT] 1,547,219
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 10,160,450
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 13,304,580
[NET-ASSETS] 383,624,544
[DIVIDEND-INCOME] 4,897,587
[INTEREST-INCOME] 10,028,623
[OTHER-INCOME] 0
[EXPENSES-NET] 7,754,366
[NET-INVESTMENT-INCOME] 7,171,844
[REALIZED-GAINS-CURRENT] 14,878,620
[APPREC-INCREASE-CURRENT] (13,682,115)
[NET-CHANGE-FROM-OPS] 8,368,349
[EQUALIZATION] 48,191
[DISTRIBUTIONS-OF-INCOME] 5,753,522
[DISTRIBUTIONS-OF-GAINS] 10,897,997
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 76,851,235
[NUMBER-OF-SHARES-REDEEMED] (86,835,010)
[SHARES-REINVESTED] 15,914,742
[NET-CHANGE-IN-ASSETS] 30,999,026
[ACCUMULATED-NII-PRIOR] 2,707,799
[ACCUMULATED-GAINS-PRIOR] 11,727,706
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 2,555,883
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 7,754,366
[AVERAGE-NET-ASSETS] 393,213,000
[PER-SHARE-NAV-BEGIN] 11.82
[PER-SHARE-NII] 0.30
[PER-SHARE-GAIN-APPREC] 0.05
[PER-SHARE-DIVIDEND] (0.23)
[PER-SHARE-DISTRIBUTIONS] (0.34)
[RETURNS-OF-CAPITAL] 0.00
[PER-SHARE-NAV-END] 11.60
[EXPENSE-RATIO] 1.26
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<PAGE>
<ARTICLE> 6
<CIK> 0000811444
<NAME> PRUDENTIAL ALLOCATION FUND
<SERIES>
<NUMBER> 002
<NAME> STRATEGY PORTFOLIO - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
[INVESTMENTS-AT-COST] 374,612,190
[INVESTMENTS-AT-VALUE] 388,040,662
[RECEIVABLES] 5,338,150
[ASSETS-OTHER] 97,665
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 393,476,477
[PAYABLE-FOR-SECURITIES] 8,004,180
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1,847,753
[TOTAL-LIABILITIES] 9,851,933
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 358,612,295
[SHARES-COMMON-STOCK] 33,228,879
[SHARES-COMMON-PRIOR] 32,737,228
[ACCUMULATED-NII-CURRENT] 1,547,219
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 10,160,450
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 13,304,580
[NET-ASSETS] 383,624,544
[DIVIDEND-INCOME] 4,897,587
[INTEREST-INCOME] 10,028,623
[OTHER-INCOME] 0
[EXPENSES-NET] 7,754,366
[NET-INVESTMENT-INCOME] 7,171,844
[REALIZED-GAINS-CURRENT] 14,878,620
[APPREC-INCREASE-CURRENT] (13,682,115)
[NET-CHANGE-FROM-OPS] 8,368,349
[EQUALIZATION] 48,191
[DISTRIBUTIONS-OF-INCOME] 5,753,522
[DISTRIBUTIONS-OF-GAINS] 10,897,997
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 76,851,235
[NUMBER-OF-SHARES-REDEEMED] (86,835,010)
[SHARES-REINVESTED] 15,914,742
[NET-CHANGE-IN-ASSETS] 30,999,026
[ACCUMULATED-NII-PRIOR] 2,707,799
[ACCUMULATED-GAINS-PRIOR] 11,727,706
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 2,555,883
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 7,754,366
[AVERAGE-NET-ASSETS] 393,213,000
[PER-SHARE-NAV-BEGIN] 11.79
[PER-SHARE-NII] 0.21
[PER-SHARE-GAIN-APPREC] 0.05
[PER-SHARE-DIVIDEND] (0.17)
[PER-SHARE-DISTRIBUTIONS] (0.34)
[RETURNS-OF-CAPITAL] 0.00
[PER-SHARE-NAV-END] 11.54
[EXPENSE-RATIO] 2.03
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
