<PAGE>
PRUDENTIAL INCOMEVERTIBLE-REGISTERED TRADEMARK- FUND, INC.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
--------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
--------------
To our Shareholders:
Notice is hereby given that a Special Meeting of Shareholders of Prudential
IncomeVertible-Registered Trademark- Fund, Inc.
(IncomeVertible-Registered Trademark- Fund) will be held at 9:00 A.M. on
September 6, 1995, at 199 Water Street, New York, N.Y. 10292, for the following
purposes:
1. To approve an Agreement and Plan of Reorganization and Liquidation
whereby all of the assets of IncomeVertible-Registered Trademark- Fund will be
transferred to the Conservatively Managed Portfolio (the Portfolio) of
Prudential Allocation Fund (Allocation Fund) in exchange for shares of the
Portfolio and the assumption of the liabilities, if any, of
IncomeVertible-Registered Trademark- Fund.
2. To consider and act upon any other business as may properly come before
the Meeting or any adjournment thereof.
Only shares of common stock of IncomeVertible-Registered Trademark- Fund of
record at the close of business on June 16, 1995, are entitled to notice of and
to vote at this Meeting or any adjournment thereof.
S. JANE ROSE
SECRETARY
Dated: July 26, 1995
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE SIGN AND PROMPTLY
RETURN THE ENCLOSED PROXY IN THE ENCLOSED SELF-ADDRESSED ENVELOPE. IN ORDER
TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK YOUR
COOPERATION IN MAILING IN YOUR PROXY PROMPTLY.
<PAGE>
PRUDENTIAL ALLOCATION FUND
PROSPECTUS
AND
PRUDENTIAL INCOMEVERTIBLE-REGISTERED TRADEMARK- FUND, INC.
PROXY STATEMENT
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(800) 225-1852
--------------
Prudential IncomeVertible-Registered Trademark- Fund, Inc.
(IncomeVertible-Registered Trademark- Fund) is an open-end, diversified,
management investment company. Prudential Allocation Fund (Allocation Fund) is
an open-end, diversified, management investment company comprised of two
separate portfolios, one of which is the Conservatively Managed Portfolio (the
Portfolio). Both IncomeVertible-Registered Trademark- Fund and Allocation Fund
(collectively, the Funds) are managed by Prudential Mutual Fund Management, Inc.
(PMF or the Manager) and have the same office address. The investment objective
of IncomeVertible-Registered Trademark- Fund is both high current income and
capital appreciation. The investment objective of the Portfolio is to achieve a
high total investment return consistent with moderate risk.
This Prospectus and Proxy Statement is being furnished to shareholders of
IncomeVertible-Registered Trademark- Fund in connection with an Agreement and
Plan of Reorganization and Liquidation (the Plan), whereby the Portfolio will
acquire all of the assets of IncomeVertible-Registered Trademark- Fund and
assume the liabilities, if any, of IncomeVertible-Registered Trademark- Fund. If
the Plan is approved by IncomeVertible-Registered Trademark- Fund's
shareholders, all such shareholders will be issued shares of the Portfolio in
place of the shares of IncomeVertible-Registered Trademark- Fund held by them,
and IncomeVertible-Registered Trademark- Fund will be liquidated. Shareholders
of the Portfolio are not being asked to vote on the Plan.
This Prospectus and Proxy Statement sets forth concisely information about
Allocation Fund that prospective investors should know before investing. This
Prospectus and Proxy Statement is accompanied by the Prospectus of Allocation
Fund, dated September 29, 1994, as supplemented, which Prospectus is
incorporated by reference herein, and the Annual Report to Shareholders of
IncomeVertible-Registered Trademark- Fund for the fiscal year ended December 31,
1994. The Prospectus of IncomeVertible-Registered Trademark- Fund, dated March
1, 1995, including March 1, 1995 and June 15, 1995 Supplements thereto, and the
Statement of Additional Information of Allocation Fund, dated September 29,
1994, as supplemented, have been filed with the Securities and Exchange
Commission (SEC), are incorporated herein by reference and are available without
charge upon written request to Prudential Mutual Fund Services, Inc., Raritan
Plaza One, Edison, New Jersey 08837 or by calling the toll-free number shown
above. Additional information, contained in a Statement of Additional
Information, dated July 24, 1995, forming a part of Allocation Fund's
Registration Statement on Form N-14, has been filed with the SEC, is
incorporated herein by reference and is available without charge upon request to
the address or telephone number shown above.
Investors are advised to read and retain this Prospectus and Proxy Statement
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.
The date of this Prospectus and Proxy Statement is July 24, 1995.
<PAGE>
PRUDENTIAL ALLOCATION FUND
PRUDENTIAL INCOMEVERTIBLE-REGISTERED TRADEMARK- FUND, INC.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
--------------
PROSPECTUS AND PROXY STATEMENT DATED JULY 24, 1995
--------------
SYNOPSIS
The following synopsis is a summary of certain information contained
elsewhere in this Prospectus and Proxy Statement and the Agreement and Plan of
Reorganization and Liquidation and is qualified by reference to the more
complete information contained herein as well as in the
IncomeVertible-Registered Trademark- Fund Prospectus and the enclosed Allocation
Fund Prospectus. Shareholders should read the entire Prospectus and Proxy
Statement carefully.
GENERAL
This Proxy Statement is furnished by the Board of Directors of Prudential
IncomeVertible-Registered Trademark- Fund, Inc.
(IncomeVertible-Registered Trademark- Fund), in connection with the solicitation
of Proxies for use at a Special Meeting of Shareholders of
IncomeVertible-Registered Trademark- Fund (the Meeting) to be held at 9:00 A.M.
on September 6, 1995 at 199 Water Street, New York, New York 10292,
IncomeVertible-Registered Trademark- Fund's principal executive office. The
purpose of the Meeting is to approve or disapprove an Agreement and Plan of
Reorganization and Liquidation (the Plan) whereby all of the assets of
IncomeVertible-Registered Trademark- Fund will be acquired by, and the
liabilities of IncomeVertible-Registered Trademark- Fund, if any, will be
assumed by, the Conservatively Managed Portfolio (the Portfolio) of Prudential
Allocation Fund (Allocation Fund) and such other business as may properly come
before the Meeting or any adjournment thereof. The Plan is attached to this
Prospectus and Proxy Statement as Appendix B. The transactions contemplated by
the Plan are set forth herein and in summary provide that the Portfolio will
acquire the assets, in exchange solely for shares of beneficial interest of the
Portfolio, and assume the liabilities of IncomeVertible-Registered Trademark-
Fund.
Approval of the Plan requires the affirmative vote of a majority of shares
of IncomeVertible-Registered Trademark- Fund outstanding and entitled to vote.
Shareholders vote in the aggregate and not by separate class. Approval of the
Plan by the shareholders of the Portfolio is not required and the Plan is not
being submitted for their approval.
THE PROPOSED REORGANIZATION AND LIQUIDATION
The Board of Directors of IncomeVertible-Registered Trademark- Fund and the
Board of Trustees of Allocation Fund have approved the Plan, which provides for
the transfer of all of the assets of IncomeVertible-Registered Trademark- Fund
in exchange solely for shares of beneficial interest of the Portfolio and the
assumption by the Portfolio of the liabilities, if any, of
IncomeVertible-Registered Trademark- Fund. Following shareholder approval, if
obtained, and the exchange, Class A, Class B and Class C shares of the Portfolio
will be distributed to Class A, Class B and Class C shareholders, respectively,
of IncomeVertible-Registered Trademark- Fund, and
IncomeVertible-Registered Trademark- Fund will be liquidated. The reorganization
will become effective as soon as practicable after the Meeting. Each
IncomeVertible-Registered Trademark- Fund Class A, Class B
2
<PAGE>
and Class C shareholder will receive the number of full and fractional Class A,
Class B and Class C shares of the Portfolio equal in value (rounded to the third
decimal place) to such shareholder's Class A, Class B and Class C shares of
IncomeVertible-Registered Trademark- Fund as of the closing date.
For the reasons set forth below under "--Reasons for the Proposed
Reorganization and Liquidation" and "The Proposed Transaction--Reasons for the
Reorganization and Liquidation," the Board of Directors of
IncomeVertible-Registered Trademark- Fund and the Board of Trustees of
Allocation Fund, including those Directors or Trustees who are not "interested
persons" thereof (Independent Directors or Trustees) as that term is defined in
the Investment Company Act of 1940, as amended (Investment Company Act), have
concluded that the reorganization would be in the best interests of the
shareholders of IncomeVertible-Registered Trademark- Fund and Allocation Fund
and that the interests of shareholders of each Fund will not be diluted as a
result of the proposed transaction. Accordingly, the Board of Directors of
IncomeVertible-Registered Trademark- Fund and the Board of Trustees of
Allocation Fund each recommends approval of the Plan.
REASONS FOR THE PROPOSED REORGANIZATION AND LIQUIDATION
The Board of Directors of IncomeVertible-Registered Trademark- Fund has
concluded, based on information presented by Prudential Mutual Fund Management,
Inc. (PMF or the Manager), that the reorganization and liquidation is in the
best interests of the IncomeVertible-Registered Trademark- Fund's shareholders.
The following are among the reasons for the proposed reorganization and
liquidation:
THE INCOMEVERTIBLE-REGISTERED TRADEMARK- FUND HAS EXPERIENCED A SUBSTANTIAL
DECLINE IN NET ASSETS. IncomeVertible-Registered Trademark- Fund commenced
investment operations in June 1980 as a money market fund and twice terminated
such operations. IncomeVertible-Registered Trademark- Fund recommenced
investment operations on December 5, 1985. Despite numerous attempts to refine
IncomeVertible-Registered Trademark- Fund's investment strategy,
IncomeVertible-Registered Trademark- Fund has, in the market environment of the
past several years, been unable to attract sufficient new assets to offset
redemptions, which has resulted in increased expense ratios. As of December 31,
1994, IncomeVertible-Registered Trademark- Fund had approximately $243 million
in total net assets, which represents a 57.4% decline from total net assets of
approximately $571 million at December 31, 1989. As of December 31, 1994, the
Portfolio had total net assets of approximately $468 million, which represents a
13.9% increase in total net assets of approximately $411 million at December 31,
1993.
Convertible funds were popular when the performance of convertible
securities was exceptionally strong. Over the last five years, the average
convertible security actually outperformed the Standard & Poor's 500 Stock
Index, a result of an ideal combination of falling interest rates, rising stock
prices and a strong new issue market. Returns have been more modest recently,
and that trend is expected to continue. IncomeVertible-Registered Trademark-
Fund's Manager also believes that convertible funds appeal to only a small
segment of investors.
INCOMEVERTIBLE-REGISTERED TRADEMARK- FUND'S INVESTMENT STRATEGY HAS CHANGED
SIGNIFICANTLY OVER THE LAST SEVERAL YEARS, AS THE RESULT OF MARKET CHANGES. THE
FUND NOW HAS REDUCED FLEXIBILITY TO RESPOND TO SIGNIFICANT MISPRICINGS IN THE
CONVERTIBLE MARKET. IncomeVertible-Registered Trademark- Fund was designed to
invest in "synthetic convertibles" (combinations of non-convertible debt and
call options) as well as in traditional convertible securities. The Fund used
the synthetic strategy quite heavily in its early years, a strategy which
enabled the Fund to avoid a general overvaluation of traditional convertibles.
Partly because of the turmoil in the derivatives markets which has made
synthetics unattractive, the Fund recently has invested almost entirely in
traditional convertibles and in other equity and debt securities. The Fund now
has less flexibility to avoid another overpricing in convertibles.
3
<PAGE>
THE PORTFOLIO HAS A VERY SIMILAR INVESTMENT OBJECTIVE AND HAS GREATER
FLEXIBILITY TO RESPOND TO MARKET CHANGE. There are a number of similarities
between the IncomeVertible-Registered Trademark- Fund and the Portfolio that led
to consideration of the Plan. Each is an open-end, diversified, management
investment company (or portfolio thereof). Each invests in equity, debt and
money market securities. Both the IncomeVertible-Registered Trademark- Fund and
the Portfolio provide investors with a "balanced" combination of current income
and capital appreciation potential. The Portfolio can invest in convertible
securities but has greater flexibility to invest in non-convertible equity and
fixed-income securities.
Each is managed by PMF. Gregory P. Goldberg is the portfolio manager of both
the IncomeVertible-Registered Trademark- Fund and the Portfolio.
AFTER IMPLEMENTATION OF THE PLAN, THE FORMER SHAREHOLDERS OF THE
INCOMEVERTIBLE-REGISTERED TRADEMARK- FUND AND THE PORTFOLIO'S SHAREHOLDERS
SHOULD BENEFIT FROM REDUCED EXPENSES RESULTING FROM GREATER ECONOMIES OF
SCALE. The Board of Directors of IncomeVertible-Registered Trademark- Fund and
the Trustees of Allocation Fund believe that the reorganization may achieve
certain economies of scale that IncomeVertible-Registered Trademark- Fund alone
cannot realize because of its diminishing size, and the Portfolio would realize
the benefits of a larger asset base in exchange for its shares of beneficial
interest. The combination of the IncomeVertible-Registered Trademark- Fund and
the Portfolio would eliminate certain duplicate expenses, such as Directors' or
Trustees' fees and those incurred in connection with separate audits and the
preparation of separate financial statements for
IncomeVertible-Registered Trademark- Fund and the Portfolio.
The ratios of total expenses to average net assets for the Class A, Class B
and Class C shares of IncomeVertible-Registered Trademark- Fund for the fiscal
year ended December 31, 1994 were 1.34%, 2.09% and 2.09% (annualized),
respectively, whereas the ratios of total expenses to average net assets for
Class A and Class B shares of IncomeVertible-Registered Trademark- Fund for the
fiscal year ended December 31, 1993 (when shares of only these two classes were
outstanding) were 1.29% and 2.09%, respectively. The expense ratios for
IncomeVertible-Registered Trademark- Fund's shares will increase if the number
of outstanding shares, and therefore total net assets under management, continue
to diminish, which the Manager expects will occur if the Plan is not approved.
For the fiscal year ended July 31, 1994, the ratios of total expenses to average
net assets for the Class A and Class B shares of the Portfolio were 1.23% and
2.00%, respectively, and for the six-month period ended January 31, 1995, the
ratios were 1.16%, 1.91% and 1.91% (in each case annualized) for the Class A,
Class B and Class C shares, respectively. Following the reorganization the
actual expense ratios of the Portfolio are expected to be more favorable than
those for the fiscal year ended July 31, 1994 and the six month period ended
January 31, 1995. See "Fees and Expenses--Expense Ratios" below.
THE PORTFOLIO HAS ACHIEVED GENERALLY HIGHER TOTAL RETURNS THAN
INCOMEVERTIBLE-REGISTERED TRADEMARK- FUND. For the fiscal years ended July 31,
1993 and 1994 and the six-month period ended January 31, 1995, with respect to
the Portfolio, and the fiscal years ended December 31, 1992, 1993 and 1994, with
respect to IncomeVertible-Registered Trademark- Fund, the Portfolio has achieved
generally higher total returns on Class A, Class B and Class C shares than
IncomeVertible-Registered Trademark- Fund has achieved on Class A, Class B and
Class C shares, respectively. The following table, derived from the "Financial
Highlights" of each Fund, reflects their respective total returns on Class A,
Class B and Class C shares for the periods indicated. "Financial Highlights" for
the Portfolio are set forth in Allocation Fund's Prospectus, which accompanies
this Prospectus and Proxy Statement, and below under "Information about the
Portfolio--Financial Information." "Financial Highlights" for
IncomeVertible-Registered Trademark- Fund are set forth in
IncomeVertible-Registered Trademark- Fund's Annual Report and its Prospectus,
which are available without charge upon written request to Prudential Mutual
Fund Services, Inc., Raritan Plaza One, Edison, New Jersey 08837 or by calling
toll free (800) 225-1852.
4
<PAGE>
<TABLE>
<CAPTION>
CLASS A CLASS C
----------------------------------------------------- CLASS B -------------
JANUARY 22, ------------------------------------------------ AUGUST 1,
1990** 1994***
YEAR ENDED DECEMBER 31, THROUGH YEAR ENDED DECEMBER 31, THROUGH
-------------------------------------- DECEMBER 31, ------------------------------------------------ DECEMBER 31,
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1994
-------- -------- -------- -------- ------------- -------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
IncomeVertible-Registered Trademark-
Fund*....... (3.58)% 12.60% 8.31% 20.55% (1.18)% (4.22)% 11.77% 7.43% 19.76% (6.10)% (2.49)%
</TABLE>
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------
SIX MONTHS JANUARY 22,
ENDED 1990**
JANUARY 31, YEAR ENDED JULY 31, THROUGH
1995 ------------------------------------- DECEMBER 31,
(UNAUDITED) 1994 1993 1992 1991 1990
------------ ------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Conservatively Managed Portfolio*......... (4.25)% 2.39% 15.15% 12.29% 11.99% 6.59%
<CAPTION>
CLASS C
CLASS B ------------
--------------------------------------------------------------- AUGUST 1,
SIX MONTHS 1994***
ENDED THROUGH
JANUARY 31, YEAR ENDED JULY 31, JANUARY 31,
1995 ------------------------------------------------- 1995
(UNAUDITED) 1994 1993 1992 1991 1990 (UNAUDITED)
------------ --------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Conservatively Managed Portfolio*......... (5.00)% 1.61% 14.27% 11.48% 11.13% 6.44% (1.71)%
</TABLE>
- ---------------
* 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.
** Commencement of offering of Class A shares.
*** Commencement of offering of Class C shares.
The proposed transaction would give the Portfolio the opportunity to
increase its assets by acquiring securities consistent with its investment
objective and policies in exchange for the issuance of its shares of beneficial
interest.
The Board of Directors of IncomeVertible-Registered Trademark- Fund has
determined that approval of the Plan would be in the best interests of
IncomeVertible-Registered Trademark- Fund and its shareholders for the reasons
discussed above. See, also, "The Proposed Transaction--Reasons for the
Reorganization and Liquidation" below.
CERTAIN DIFFERENCES BETWEEN THE PORTFOLIO AND
INCOMEVERTIBLE-REGISTERED TRADEMARK- FUND
There are a number of differences between
IncomeVertible-Registered Trademark- Fund and the Portfolio. First, although
similar, the investment objective of each is different.
IncomeVertible-Registered Trademark- Fund's investment objective is both high
current income and capital appreciation. The Portfolio's investment objective is
a high total investment return consistent with moderate risk. Second, their
management fees are different. The management fee for the Portfolio is charged
at an annual rate of .65 of 1% of the Portfolio's average daily net assets. The
management fee for IncomeVertible-Registered Trademark- Fund is charged at an
annual rate of .75 of 1% of the first $500 million of average daily net assets,
.70 of 1% of the next $250 million of average daily net assets, .65 of 1% of the
next $250 million of average daily net assets and .60 of 1% thereafter of that
Fund's average daily net assets. The management fee currently being paid by
IncomeVertible-Registered Trademark- Fund is at an annual rate of .75 of 1% of
IncomeVertible-Registered Trademark- Fund's average daily net assets. See "Fees
and Expenses--Management Fees" below. Third, the credit quality of the
lower-rated debt instruments in which the IncomeVertible-Registered Trademark-
Fund and the Portfolio may invest differs. IncomeVertible-Registered Trademark-
Fund may invest without limit in fixed-income securities rated BBB or Baa or
lower by Standard & Poor's Ratings Group (S&P) or Moody's Investors Service,
Inc. (Moody's), respectively, or in non-rated fixed-income securities of
comparable quality. The Portfolio may invest in fixed-income securities rated in
the four highest rating categories by S&P or Moody's or in non-rated
fixed-income securities of comparable quality. It may also invest up to 10% of
its total assets in securities rated BB or Ba or lower by S&P or Moody's,
respectively, or a similar nationally recognized statistical rating
organization, or in non-rated fixed-income securities of comparable quality.
Securities rated BBB by S&P or Baa by Moody's have speculative characteristics
and changes in economic conditions or
5
<PAGE>
other circumstances could lead to a weakened capacity to make principal and
interest payments. Securities rated BB or lower by S&P or Ba or lower by
Moody's, commonly known as "junk bonds," are generally considered to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. See "Principal Risk Factors--High Yield Securities" below.
Fourth, IncomeVertible-Registered Trademark- Fund may invest no more than 10% of
its net assets in illiquid securities. Although the Trustees of Allocation Fund
have authorized the Portfolio to invest up to 10% of its net assets in illiquid
securities, currently the Portfolio may invest only up to 5% of its net assets
in illiquid securities.
STRUCTURE OF THE PORTFOLIO AND INCOMEVERTIBLE-REGISTERED TRADEMARK- FUND
The Portfolio is authorized to issue an unlimited number of shares of
beneficial interest and IncomeVertible-Registered Trademark- Fund is authorized
to issue two billion shares of common stock, in each case divided into three
classes, designated Class A, Class B and Class C. Each class of shares
represents an interest in the same assets of the Portfolio and
IncomeVertible-Registered Trademark- Fund, respectively, 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 each Fund has agreed with the Securities and Exchange
Commission (SEC), in connection with the conversion feature on Class B shares,
to submit any amendment of the Class A plan of distribution 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. The distribution systems for
Class A, Class B and Class C shares of each Fund are identical. Each Fund has
received an order from the SEC permitting the issuance and sale of multiple
classes of shares. Currently, each Fund is offering three classes, designated
Class A, Class B and Class C shares. Pursuant to
IncomeVertible-Registered Trademark- Fund's Articles of Incorporation and
Allocation Fund's Declaration of Trust, each Fund's Board of Directors/Trustees
may authorize the creation of additional series of shares, and classes within
such series, with such preferences, privileges, limitations and voting and
dividend rights as that Fund's Board of Directors/Trustees may determine.
The Board of Directors/Trustees of each Fund may increase or decrease the
number of authorized shares of its respective Fund without approval by the
shareholders. Shares of each 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 each Fund under certain circumstances. Each share of
each class of each Fund is equal as to earnings, assets and voting privileges,
except as noted above, and each class bears the expenses of each Fund 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 Fund is entitled to its
portion of all of that Fund's assets after all debt and expenses of that 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. Neither Fund's shares have cumulative voting rights for the
election of Directors/ Trustees.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Portfolio is a high total investment return
consistent with moderate risk. The Portfolio seeks to achieve this objective by
investing in a diversified portfolio of money market instruments, debt
obligations and equity securities (including securities convertible into equity
securities). The specific asset mix of the Portfolio will be determined by
Allocation Fund's investment adviser, and, effective upon the reorganization, at
least 25% of the value of the Portfolio's assets must be invested in fixed-
income securities. There can be no assurance that this objective will be
achieved. Debt obligations in which the Portfolio may invest will be rated
primarily Baa/BBB or better by Moody's or S&P, respectively (or a
6
<PAGE>
similar nationally recognized rating service). Up to 10% of the Portfolio's
total assets may be invested in fixed-income securities rated Ba or lower by
Moody's or BB or lower by S&P (or a similar nationally recognized rating
service) or in non-rated fixed-income securities of comparable quality. Like
IncomeVertible-Registered Trademark- Fund, the Portfolio may also invest up to
30% of its assets in foreign securities, make short sales against-the-box and
may engage in various hedging and income enhancement strategies, including the
purchase and sale of derivatives. These strategies include the purchase and sale
of call options, the purchase of put options and related short-term trading. See
"Principal Risk Factors--Hedging and Income Enhancement Activities" below.
Although the Trustees of Allocation Fund have authorized the Portfolio to invest
up to 10% of its net assets in illiquid securities, currently the Portfolio may
invest only 5% of its net assets in illiquid securities.
IncomeVertible-Registered Trademark- Fund's investment objective is both
high current income and capital appreciation.
IncomeVertible-Registered Trademark- Fund seeks to achieve this objective by
investing primarily in convertible securities and/or in combinations of
securities, comprised of non-convertible fixed-income securities and warrants or
call options, which resemble convertible securities in some, but not all,
respects (synthetic securities). There can be no assurance that such objective
will be achieved. IncomeVertible-Registered Trademark- Fund may invest up to 30%
of its assets in foreign securities and may make short sales against-the-box.
IncomeVertible-Registered Trademark- Fund may also engage in various hedging and
income enhancement strategies, including the purchase and sale of derivatives.
These strategies include the purchase and sale of put and call options and
related short-term trading. IncomeVertible-Registered Trademark- Fund may invest
no more than 10% of its net assets in illiquid securities.
FEES AND EXPENSES
MANAGEMENT FEES. PMF, the Manager of each Fund and a wholly-owned
subsidiary of The Prudential Insurance Company of America (Prudential), is
compensated, pursuant to a management agreement with
IncomeVertible-Registered Trademark- Fund, at an annual rate of .75 of 1% of the
first $500 million of the average daily net assets of
IncomeVertible-Registered Trademark- Fund, .70 of 1% of the next $250 million of
the average daily net assets of IncomeVertible-Registered Trademark- Fund, .65
of 1% of the next $250 million of the Fund's average daily net assets, and .60
of 1% thereafter of the average daily net assets of
IncomeVertible-Registered Trademark- Fund and, pursuant to a management
agreement with Allocation Fund, at an annual rate of .65 of 1% of the average
daily net assets of the Portfolio. For the fiscal year ended December 31, 1994,
IncomeVertible-Registered Trademark- Fund paid PMF management fees of .75 of 1%
of IncomeVertible-Registered Trademark- Fund's average daily net assets. For the
fiscal year ended July 31, 1994, and the six-month period ended January 31,
1995, Allocation Fund paid PMF management fees at an annual rate of .65 of 1% of
the Portfolio's average daily net assets.
Under subadvisory agreements between PMF and The Prudential Investment
Corporation (PIC or the Subadviser), the Subadviser provides investment advisory
services for the management of the respective Funds. Each subadvisory agreement
provides that PMF will reimburse PIC for its reasonable costs and expenses in
providing investment advisory services. PMF continues to have responsibility for
all investment advisory services pursuant to the management agreements for both
Funds and supervises the Subadviser's performance of its services.
DISTRIBUTION FEES. Prudential Mutual Fund Distributors, Inc. (PMFD), a
wholly-owned subsidiary of PMF, serves as the distributor of the Class A shares
for both Funds. Prudential Securities Incorporated (Prudential Securities), a
wholly-owned subsidiary of Prudential, serves as the distributor of Class B and
Class C shares for both Funds.
Under separate Distribution and Service Plans adopted by each Fund (the
Class A Plan, Class B Plan and Class C Plan, collectively, the Plans) pursuant
to Rule 12b-1 under the Investment Company Act, and
7
<PAGE>
under separate distribution agreements, PMFD incurs the expenses of distributing
the Class A shares for each Fund and Prudential Securities incurs the expenses
of distributing the Class B and Class C shares for each Fund. These expenses
include (i) commissions and account servicing fees, (ii) advertising expenses,
(iii) the cost of printing and mailing prospectuses, and (iv) indirect and
overhead costs associated with the sale of each Fund's shares.
Under the Class A Plans, each Fund may pay PMFD for distribution expenses at
an annual rate of up to .30 of 1% of the average daily net assets of the Class A
shares. PMFD has advised the Funds that distribution fees under the Class A
Plans will not exceed .25 of 1% of the average daily net assets of the Class A
shares for the fiscal year ending December 31, 1995 for
IncomeVertible-Registered Trademark- Fund and the fiscal year ending July 31,
1996 for the Portfolio. For the fiscal year ended December 31, 1994, PMFD
received $29,311 under IncomeVertible-Registered Trademark- Fund's Class A Plan
and $24,000 in initial sales charges from sales of
IncomeVertible-Registered Trademark- Fund's Class A shares. For the fiscal year
ended July 31, 1994 and the six-month period ended January 31, 1995, PMFD
received $69,380 and $49,271, respectively, from the Portfolio under Allocation
Fund's Class A Plan and $561,000 and $127,600, respectively, in initial sales
charges from sales of the Portfolio's Class A shares.
Under the Class B and Class C Plans, each Fund pays Prudential Securities
for distribution expenses at an annual rate of 1% of the average daily net
assets of the Class B and Class C shares, respectively, consisting, in each
case, of an asset-based sales charge of .75 of 1% of the average daily net
assets of the Fund's Class B and Class C shares and a service fee of .25 of 1%
of the average daily net assets of the Fund's Class B and Class C shares. For
the fiscal year ended December 31, 1994, Prudential Securities received
$2,704,958 under IncomeVertible-Registered Trademark- Fund's Class B Plan and
approximately $354,300 in contingent deferred sales charges from redemptions of
IncomeVertible-Registered Trademark- Fund's Class B shares. For the period
August 1, 1994 (commencement of offering of Class C shares) through December 31,
1994, Prudential Securities did not receive any proceeds under
IncomeVertible-Registered Trademark- Fund's Class C Plan or from contingent
deferred sales charges from redemptions of IncomeVertible-Registered Trademark-
Fund's Class C shares. For the fiscal year ended July 31, 1994, and the
six-month period ended January 31, 1995, Prudential Securities received
$3,921,335 and $2,208,226, respectively, from the Portfolio under Allocation
Fund's Class B Plan and approximately $641,000 and $449,700, respectively, in
contingent deferred sales charges from redemptions of the Portfolio's Class B
shares. For the period August 1, 1994 (commencement of offering of Class C
shares) through January 31, 1995, Prudential Securities received $2,614 under
Allocation Fund's Class C Plan and did not receive any proceeds from contingent
deferred sales charges from redemptions of the Portfolio's Class C shares.
For the fiscal year ended December 31, 1994 for
IncomeVertible-Registered Trademark- Fund and the six-month period ended January
31, 1995 for the Portfolio, the Fund and the Portfolio paid distribution
expenses of .25%, 1.00% and 1.00% (annualized) of the average daily net assets
of their Class A, Class B and Class C shares, respectively. The Funds record all
payments made under the Plans as expenses in the calculation of net investment
income. Prior to August 1, 1994, the Class A and Class B Plans of each Fund
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.
Effective August 1, 1994, the Class A and Class B Plans of each Fund became
compensation plans. The Class C Plan of each Fund is also a compensation plan.
Under each such compensation plan, each Fund is obligated to pay distribution
and/or service fees to its Distributor as compensation for distribution and
service activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, that Fund will
not be obligated to pay any additional expenses. If the
8
<PAGE>
Distributor's expenses are less than such distribution and service fees, it will
retain its full fees and realize a profit. The Class A Plan, Class B Plan and
Class C Plan of each Fund is identical to the Class A Plan, Class B Plan and
Class C Plan of the other Fund.
OTHER EXPENSES. Each Fund also pays certain other expenses in connection
with its operation, including accounting, custodian, legal, audit, transfer
agency and registration expenses. Although the basis for calculating these fees
and expenses is the same for the Fund and the Portfolio, the per share effect on
shareholder returns is affected by their relative size. Combining the
IncomeVertible-Registered Trademark- Fund with the Portfolio will eliminate
duplication of certain expenses. For example, only one annual audit of the
combined Fund will be required rather than separate audits of
IncomeVertible-Registered Trademark- Fund and the Portfolio as currently
required.
EXPENSE RATIOS. For its fiscal year ended December 31, 1994, total expenses
stated as a percentage of average net assets of the
IncomeVertible-Registered Trademark- Fund were 1.34%, 2.09% and 2.09%
(annualized) for the Class A, Class B and Class C shares, respectively. For the
fiscal year ended July 31, 1994, total expenses stated as a percentage of
average net assets of the Portfolio were 1.23% and 2.0% for the Class A and
Class B shares, respectively, and for the six-month period ended January 31,
1995 (unaudited), total expenses stated as a percentage of average net assets of
the Portfolio were 1.16%, 1.91% and 1.91% (in each case annualized) for the
Class A, Class B and Class C shares, respectively.
Following the reorganization, the actual expense ratios of the Portfolio are
expected to be more favorable than those for the fiscal year ended July 31, 1994
and the six-month period ended January 31, 1995. Set forth below is a comparison
of the Fund's and the Portfolio's operating expenses for, in the case of
IncomeVertible-Registered Trademark- Fund, the fiscal year ended December 31,
1994 and, in the case of the Portfolio, the fiscal year ended July 31, 1994. For
the six-month period ended January 31, 1995, the annualized Total Fund Operating
Expenses were 1.16%, 1.91% and 1.91% of the average net assets of the Class A,
Class B and Class C shares, respectively, of the Portfolio. The ratios are also
shown on a pro forma (estimated) combined basis, giving effect to the
reorganization.
<TABLE>
<CAPTION>
ANNUAL FUND INCOMEVERTIBLE-REGISTERED TRADEMARK- PRO FORMA
OPERATING EXPENSES (AS A FUND PORTFOLIO COMBINED
PERCENTAGE OF ---------------------------- ---------------------------- ----------------------------
AVERAGE NET ASSETS) CLASS A CLASS B CLASS C+ CLASS A CLASS B CLASS C+ CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees............... .75% .75% .75% .65% .65% .65% .65% .65% .65%
12b-1 Fees.................... .25 1.00 1.00 .25 1.00 1.00 .25 1.00 1.00
Other Expenses................ .34 .34 .34 .35 .35 .35 .24 .24 .24
--- --- --- --- --- --- --- --- ---
Total Fund Operating
Expenses..................... 1.34% 2.09% 2.09% 1.25% 2.00% 2.00% 1.14% 1.89% 1.89%
--- --- --- --- --- --- --- --- ---
--- --- --- --- --- --- --- --- ---
+Class C shares commenced being offered on August 1, 1994. The ratios for Class C shares of the Portfolio are estimated
based upon expenses expected to have been incurred if Class C shares had been in existence during the fiscal year
ended July 31, 1994. The ratios for Class C shares of IncomeVertible-Registered Trademark- Fund have been restated for
the fiscal year ended December 31, 1994.
</TABLE>
9
<PAGE>
Set forth below is an example which shows the expenses that an investor in
the combined Fund would pay on a $1,000 investment, based upon the pro forma
ratios set forth above.
<TABLE>
<CAPTION>
EXAMPLE 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.................................................................. $ 61 $ 84 $ 110 $ 182
Class B.................................................................. $ 69 $ 89 $ 112 $ 192
Class C.................................................................. $ 29 $ 59 $ 102 $ 221
You would pay the following expenses on the same investment,
assuming no redemption
Class A.................................................................. $ 61 $ 84 $ 110 $ 182
Class B.................................................................. $ 19 $ 59 $ 102 $ 192
Class C.................................................................. $ 19 $ 59 $ 102 $ 221
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
PURCHASES AND REDEMPTIONS
Purchases of shares of the Portfolio and
IncomeVertible-Registered Trademark- Fund are made through Prudential
Securities, Pruco Securities Corporation (Prusec) or directly from the
respective Fund, through their transfer agent, Prudential Mutual Fund Services,
Inc. (PMFS or the Transfer Agent), at the net asset value per share next
determined after receipt of a 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).
The minimum initial investment for Class A and Class B shares of each Fund
is $1,000 per class and $5,000 for Class C shares and the minimum subsequent
investment is $100 for all classes. Class A shares of each Fund are sold with an
initial sales charge of up to 5.00% of the offering price. Class B shares of
each Fund are sold without an initial sales charge but are subject to a
contingent deferred sales charge (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 of each Fund are sold without an initial sales charge
and, for one year after purchase, are subject to a 1% contingent deferred sales
charge 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.
Shares of each Fund may be redeemed at any time at the net asset value next
determined after Prudential Securities or the Transfer Agent receives the sell
order. As indicated above, the proceeds of redemptions of Class B and Class C
shares may be subject to a contingent deferred sales charge. For purposes of
determining any applicable contingent deferred sales charges,
IncomeVertible-Registered Trademark- Fund shareholders receiving Class B or
Class C shares of the Portfolio pursuant to the Plan will be credited with the
time they held Class B or Class C shares of IncomeVertible-Registered Trademark-
Fund, as the case may be, in calculating the contingent deferred sales charge
with respect to such shares of the Portfolio so received. No contingent deferred
sales charges will be imposed in connection with the reorganization.
10
<PAGE>
EXCHANGE PRIVILEGES
The exchange privileges available to shareholders of the Portfolio are
identical to the exchange privileges of shareholders of
IncomeVertible-Registered Trademark- Fund. Shareholders of both
IncomeVertible-Registered Trademark- Fund and the Portfolio have an exchange
privilege with certain other Prudential Mutual Funds, 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 of each Fund may be exchanged
for Class A, Class B and Class C shares, respectively, of another fund on the
basis of relative net asset value. No sales charge will be imposed at the time
of the exchange. Any applicable contingent deferred sales charge 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 of either Fund 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. An exchange will be treated as a redemption and purchase for
tax purposes.
DIVIDENDS AND DISTRIBUTIONS
Each Fund expects to pay dividends of net investment income, if any,
quarterly and make distributions at least annually of any net capital gains.
Shareholders of both Funds receive dividends and other distributions in
additional shares of the Fund (or the Portfolio) unless they elect to receive
them in cash. An IncomeVertible-Registered Trademark- Fund shareholder's
election with respect to reinvestment of dividends and distributions in
IncomeVertible-Registered Trademark- Fund will be automatically applied with
respect to the Portfolio shares he or she receives pursuant to the
reorganization.
FEDERAL TAX CONSEQUENCES OF PROPOSED REORGANIZATION
The Funds have received an opinion of Fulbright & Jaworski L.L.P. to the
effect that the proposed reorganization will constitute a tax-free
reorganization within the meaning of Section 368(a)(1)(C) of the Internal
Revenue Code of 1986, as amended (the Internal Revenue Code). Accordingly, no
gain or loss will be recognized to either Fund upon the transfer of assets and
assumption of liabilities, if any, or to shareholders of
IncomeVertible-Registered Trademark- Fund upon their receipt of shares of the
Portfolio. The tax basis for the shares of the Portfolio received by
IncomeVertible-Registered Trademark- Fund shareholders will be the same as their
tax basis for the shares of IncomeVertible-Registered Trademark- Fund to be
constructively surrendered in exchange therefor. In addition, the holding period
of the shares of the Portfolio to be received pursuant to the reorganization
will include the period during which the shares of
IncomeVertible-Registered Trademark- Fund to be constructively surrendered in
exchange therefor were held, provided the latter shares were held as capital
assets by the shareholders on the date of the exchange. See "The Proposed
Transaction--Tax Considerations."
PRINCIPAL RISK FACTORS
HIGH YIELD SECURITIES
The Portfolio may invest up to 10% of its total assets in fixed-income
securities rated Ba or lower by Moody's or BB or lower by S&P or in non-rated
fixed-income securities of comparable quality. Subsequent to its purchase by the
Portfolio, a fixed-income obligation may be assigned a lower rating or cease to
be rated. Such an event would not require the elimination of the issue from the
portfolio, but the investment adviser will consider such an event in determining
whether the Portfolio should continue to hold the security in its portfolio.
Securities rated BB or lower by S&P or Ba or lower by Moody's, commonly known as
"junk bonds," are generally considered to be predominantly speculative with
respect to the issuer's capacity to pay
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<PAGE>
interest and repay principal. A description of security ratings is contained in
Appendix A to Allocation Fund's Prospectus, which accompanies this Prospectus
and Proxy Statement. The Portfolio may also invest in unrated fixed-income
securities which, in the opinion of its investment adviser, are of a quality
comparable to rated securities in which the Portfolio may invest.
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.
IncomeVertible-Registered Trademark- Fund may invest significantly in
fixed-income securities rated Baa or lower by Moody's or BBB or lower by S&P, or
in non-rated fixed-income securities which, in the opinion of the Fund's
investment adviser, are of comparable quality.
FOREIGN INVESTMENTS
The Portfolio may invest up to 30% of its assets in securities of foreign
companies and countries, which involve additional risks and considerations not
typically associated with investing in U.S. Government securities and securities
of domestic issuers. Investments in obligations of foreign issuers 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. In addition, there may be less publicly available information
about foreign issuers than about domestic issuers and foreign issuers are
generally not subject to the same accounting, auditing and financial
recordkeeping standards and requirements as domestic issuers. Investment in
foreign securities also involves currency risk, I.E., the risk that shifts in
foreign exchange rates may lessen the dollar value of international investments.
In the event of a default with respect to any foreign debt obligations, it may
be more difficult for the Portfolio to obtain or enforce a judgment against the
issuer of such securities. IncomeVertible-Registered Trademark- Fund may also
invest up to 30% of its assets in securities of foreign companies and countries
and thus is subject to the same types of risks as the Portfolio described above.
HEDGING AND INCOME ENHANCEMENT ACTIVITIES
The Portfolio may also engage in various portfolio strategies, including the
purchase and sale of derivatives, to reduce certain risks of its investments and
to attempt to enhance income. These strategies include (1) the purchase and
writing (I.E., sale) of put and call options on stocks and currencies, (2) the
purchase and sale of futures contracts on interest-bearing securities, interest
rate and financial indices and the purchase and sale of options thereon and (3)
entering into forward foreign currency exchange contracts.
Participation in the options or futures markets and in currency exchange
transactions involves investment risks and transaction costs to which the
Portfolio would not be subject absent the use of these strategies. If the
investment adviser's predictions 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 skills needed to use these strategies are
different from those needed to select portfolio securities; (4) the possible
absence of
12
<PAGE>
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 the 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 the Portfolio to sell a portfolio security at a
disadvantageous time, due to the need for the Portfolio to maintain "cover" or
to segregate securities in connection with hedging transactions.
IncomeVertible-Registered Trademark- Fund may also engage in various
portfolio strategies, including the purchase and sale of derivatives. These
strategies include the purchase and writing (I.E., sale) of put and call options
on stocks, stock indices and debt securities and the purchase and sale of stock
index futures and options thereon. IncomeVertible-Registered Trademark- Fund's
participation in the options and futures markets subjects
IncomeVertible-Registered Trademark- Fund to the same types of risks as
described above for the Portfolio.
BORROWING
The Portfolio may borrow up to 20% of the value of its total assets
(computed at the time the loan is made) for temporary, extraordinary or
emergency purposes or for the clearance of transactions. The Portfolio may
pledge up to 20% of its total assets to secure such borrowings.
IncomeVertible-Registered Trademark- Fund may borrow up to 20% of the value of
its total assets (computed at the time the loan is made) for temporary,
extraordinary or emergency purposes or for the clearance of transactions and may
pledge up to 20% of its total assets to secure these borrowings. Neither
IncomeVertible-Registered Trademark- Fund nor the Portfolio will purchase
portfolio securities if its borrowings exceed 5% of its net assets.
REALIGNMENT OF INVESTMENT PORTFOLIO
The portfolio manager of the Portfolio anticipates selling certain
securities in the investment portfolio of the combined Fund following the
consummation of the transaction. The portfolio manager of the Portfolio expects
that the sale of less than 50% of the assets acquired from
IncomeVertible-Registered Trademark- Fund and the purchase of other securities
may affect the aggregate amount of taxable gains and losses generated by the
Portfolio as well as increase the amount of brokerage commissions paid by the
Fund. Thus, the reorganization may subject IncomeVertible-Registered Trademark-
Fund shareholders to expenses to which they would not have been subject had the
reorganization not occurred.
THE PROPOSED TRANSACTION
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION
The terms and conditions under which the proposed transaction may be
consummated are set forth in the Plan. Significant provisions of the Plan are
summarized below; however, this summary is qualified in its entirety by
reference to the Plan, a copy of which is attached as Appendix B to this
Prospectus and Proxy Statement.
The Plan contemplates (i) the Portfolio acquiring all of the assets of
IncomeVertible-Registered Trademark- Fund in exchange solely for Class A, Class
B and Class C shares of the Portfolio and the assumption by the Portfolio of
IncomeVertible-Registered Trademark- Fund's liabilities, if any, as of the
Closing Date (hereafter defined) and (ii) the constructive distribution on the
date of the exchange, expected to occur on or about September 29, 1995 (the
Closing Date) of such Class A, Class B and Class C shares of the Portfolio to
the Class A, Class B and Class C shareholders of
IncomeVertible-Registered Trademark- Fund, respectively, as provided for by the
Plan.
13
<PAGE>
The assets of IncomeVertible-Registered Trademark- Fund to be acquired by
the Portfolio shall include, without limitation, all cash, cash equivalents,
securities, receivables (including interest and dividends receivable) and other
property of any kind owned by IncomeVertible-Registered Trademark- Fund and any
deferred or prepaid assets shown as assets on the books of
IncomeVertible-Registered Trademark- Fund. The Portfolio will assume from
IncomeVertible-Registered Trademark- Fund all debts, liabilities, obligations
and duties of IncomeVertible-Registered Trademark- Fund of whatever kind or
nature, if any; provided, however, that IncomeVertible-Registered Trademark-
Fund will utilize its best efforts, to the extent practicable, to discharge all
of its known debts, liabilities, obli gations and duties prior to the Closing
Date. The Portfolio will deliver to IncomeVertible-Registered Trademark- Fund
Class A, Class B and Class C shares in the Portfolio, which
IncomeVertible-Registered Trademark- Fund will then distribute to its Class A,
Class B and Class C shareholders, respectively.
The value of IncomeVertible-Registered Trademark- Fund assets to be acquired
and liabilities to be assumed by the Portfolio and the net asset value of a
share of the Portfolio will be determined as of 4:15 P.M., New York time, on the
Closing Date. Securities and other assets and liabilities for which market
quotations are not readily available will be valued at fair value as determined
in good faith by or under the direction of the Trustees of Allocation Fund.
As soon as practicable after the Closing Date,
IncomeVertible-Registered Trademark- Fund will liquidate and distribute PRO RATA
to its shareholders of record the shares of the Portfolio received by
IncomeVertible-Registered Trademark- Fund in exchange for such shareholders'
interest in IncomeVertible-Registered Trademark- Fund evidenced by their shares
of common stock of IncomeVertible-Registered Trademark- Fund. Such liquidation
and distribution will be accomplished by opening accounts on the books of the
Portfolio in the names of IncomeVertible-Registered Trademark- Fund shareholders
and by transferring thereto the shares of the Portfolio previously credited to
the account of IncomeVertible-Registered Trademark- Fund on those books. Each
shareholder account shall represent the respective PRO RATA number of the
Portfolio shares due to such IncomeVertible-Registered Trademark- Fund
shareholder. Fractional shares of the Portfolio will be rounded to the third
decimal place.
Accordingly, every shareholder of IncomeVertible-Registered Trademark- Fund
will own Class A, Class B and Class C shares of the Portfolio immediately after
the reorganization that, except for rounding, will be equal to the value of that
shareholder's Class A, Class B or Class C shares of
IncomeVertible-Registered Trademark- Fund immediately prior to the
reorganization. Moreover, because shares of the Portfolio will be issued at net
asset value in exchange for net assets of IncomeVertible-Registered Trademark-
Fund that, except for rounding, will equal the aggregate value of those shares,
the net asset value per share of the Portfolio will be unchanged. Thus, the
reorganization will not result in a dilution of the value of any shareholder
account. However, in general, the reorganization will substantially reduce the
percentage of ownership of each IncomeVertible-Registered Trademark- Fund
shareholder below such shareholder's current percentage of ownership of
IncomeVertible-Registered Trademark- Fund because, while such shareholder will
have the same dollar amount invested initially in the Portfolio that he or she
had invested in IncomeVertible-Registered Trademark- Fund, his or her investment
will represent a smaller percentage of the combined net assets of the Portfolio
and IncomeVertible-Registered Trademark- Fund.
Any transfer taxes payable upon issuance of shares of the Portfolio in a
name other than that of the registered holder of the shares on the books of
IncomeVertible-Registered Trademark- Fund as of that time shall be paid by the
person to whom such shares are to be issued as a condition of such transfer. Any
reporting responsibility of IncomeVertible-Registered Trademark- Fund will
continue to be the responsibility of IncomeVertible-Registered Trademark- Fund
up to and including the Closing Date and such later date on which
IncomeVertible-Registered Trademark- Fund is liquidated.
On the effective date of the reorganization, the name of the Portfolio will
be changed to the Balanced Portfolio, and, as such, the Portfolio will be
required to maintain at least 25 percent of the value of its assets in
fixed-income senior securities.
14
<PAGE>
The consummation of the proposed transaction is subject to a number of
conditions set forth in the Plan, some of which may be waived by the Board of
Directors of IncomeVertible-Registered Trademark- Fund and the Trustees of
Allocation Fund. The Plan may be terminated and the proposed transaction
abandoned at any time, before or after approval by the shareholders of
IncomeVertible-Registered Trademark- Fund, prior to the Closing Date. In
addition, the Plan may be amended in any mutually agreeable manner, except that
no amendment may be made subsequent to the Meeting of shareholders of
IncomeVertible-Registered Trademark- Fund that would detrimentally affect the
value of the Portfolio shares to be distributed.
REASONS FOR THE REORGANIZATION AND LIQUIDATION
The Board of Directors of IncomeVertible-Registered Trademark- Fund,
including a majority of the Independent Directors, has determined that the
interests of IncomeVertible-Registered Trademark- Fund shareholders will not be
diluted as a result of the proposed transaction and that the proposed
transaction is in the best interests of the shareholders of
IncomeVertible-Registered Trademark- Fund. In addition, the Trustees of
Allocation Fund, including a majority of the Independent Trustees, has
determined that the interests of Portfolio shareholders will not be diluted as a
result of the proposed transaction and that the proposed transaction is in the
best interests of the shareholders of the Portfolio.
The reasons for the proposed transaction are described above under
"Synopsis--Reasons for the Proposed Reorganization and Liquidation." The Board
of Directors of IncomeVertible-Registered Trademark- Fund and the Trustees of
Allocation Fund based their decisions to approve the Plan on an inquiry into a
number of factors, including the following:
(1) the relative past growth in assets and investment performance and
future prospects of the Funds;
(2) the effect of the proposed transaction on the expense ratios of each
Fund;
(3) the costs of the reorganization, which will be paid for by each Fund
in proportion to their respective asset levels;
(4) the tax-free nature of the reorganization to the Funds and their
shareholders;
(5) the compatibility of the investment objectives, policies and
restrictions of the Funds; and
(6) other options to the reorganization, including a continuance of
IncomeVertible-Registered Trademark- Fund in its present form, a change of
Manager or investment objective or a liquidation of
IncomeVertible-Registered Trademark- Fund with the distribution of the cash
proceeds to IncomeVertible-Registered Trademark- Fund shareholders.
If the Plan is not approved by IncomeVertible-Registered Trademark- Fund
shareholders, the IncomeVertible-Registered Trademark- Fund Board of Directors
may consider other appropriate action, such as the liquidation of
IncomeVertible-Registered Trademark- Fund or a merger or other business
combination with an investment company other than the Portfolio.
DESCRIPTION OF SECURITIES TO BE ISSUED
The Portfolio's shares represent shares of beneficial interest with $.01 par
value per share. Class A, Class B and Class C shares of the Portfolio will be
issued to IncomeVertible-Registered Trademark- Fund shareholders on the Closing
Date. Each share represents an equal and proportionate interest in the Portfolio
with each other share of the same class. The Portfolio's authorized capital
consists of an unlimited number of shares of beneficial interest. Shares entitle
their holders to one vote per full share and fractional votes for fractional
shares held. Each share of the Portfolio has equal voting, dividend and
liquidation rights with other shares, except that each class has exclusive
voting rights with respect to its distribution plan, as noted under
"Synopsis--Structure of the Portfolio and IncomeVertible-Registered Trademark-
Fund" above.
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<PAGE>
TAX CONSIDERATIONS
IncomeVertible-Registered Trademark- Fund has received an opinion from
Fulbright & Jaworski L.L.P. to the effect that (1) the proposed transaction
described above will constitute a reorganization within the meaning of Section
368(a)(1)(C) of the Internal Revenue Code; (2) no gain or loss will be
recognized by shareholders of IncomeVertible-Registered Trademark- Fund upon
liquidation of that Fund and the distribution of shares of the Portfolio
constructively in exchange for their shares of
IncomeVertible-Registered Trademark- Fund (Internal Revenue Code Section
354(a)(1)); (3) no gain or loss will be recognized by
IncomeVertible-Registered Trademark- Fund upon the transfer of its assets to the
Portfolio in exchange solely for shares of the Portfolio and the assumption by
the Portfolio of IncomeVertible-Registered Trademark- Fund's liabilities, if
any, and the subsequent distribution of those shares to its shareholders in
liquidation thereof (Internal Revenue Code Sections 361(a) and 357(a)); (4) no
gain or loss will be recognized by the Portfolio upon the receipt of such assets
in exchange solely for the Portfolio's shares and its assumption of
IncomeVertible-Registered Trademark- Fund's liabilities, if any (Internal
Revenue Code Section 1032(a)); (5) the Portfolio's basis for the assets received
pursuant to the reorganization will be the same as the basis thereof in the
hands of IncomeVertible-Registered Trademark- Fund immediately before the
reorganization, and the holding period of those assets in the hands of the
Portfolio will include the holding period thereof in
IncomeVertible-Registered Trademark- Fund hands (Internal Revenue Code Sections
362(b) and 1223(2)); (6) IncomeVertible-Registered Trademark- Fund shareholders'
basis for the shares of the Portfolio to be received by them pursuant to the
reorganization will be the same as their basis for the shares of
IncomeVertible-Registered Trademark- Fund to be constructively surrendered in
exchange therefor (Internal Revenue Code Section 358(a)(1)); and (7) the holding
period of the shares of the Portfolio to be received by the shareholders of
IncomeVertible-Registered Trademark- Fund pursuant to the reorganization will
include the period during which the shares of
IncomeVertible-Registered Trademark- Fund to be constructively surrendered in
exchange therefor were held, provided the latter shares were held as capital
assets by the shareholders on the date of the exchange (Internal Revenue Code
Section 1223(1)).
CERTAIN COMPARATIVE INFORMATION ABOUT THE FUNDS
IncomeVertible-Registered Trademark- Fund is a Maryland corporation and the
rights of its shareholders are governed by its Articles of Incorporation,
By-Laws and the Maryland General Corporation Law. Allocation Fund is a
Massachusetts business trust and the rights of its shareholders are governed by
its Declaration of Trust, By-Laws, and applicable Massachusetts law. Certain
relevant differences between the two forms of organization are summarized below.
CAPITALIZATION. IncomeVertible-Registered Trademark- Fund has issued shares
of beneficial interest, par value $.10 per share. Its Articles of Incorporation
authorize IncomeVertible-Registered Trademark- Fund to issue two billion shares
of common stock divided into three classes, consisting of 666,666,666 2/3
authorized Class A shares, 666,666,666 2/3 authorized Class B shares and
666,666,666 2/3 authorized Class C shares. Allocation Fund has issued shares of
beneficial interest, par value $.01 per share. Its Declaration of Trust
authorizes Allocation Fund to issue an unlimited number of shares of beneficial
interest, divided into three classes, also designated Class A, Class B and Class
C. The Board of Directors/Trustees of each Fund may authorize an increase in the
number of authorized shares and may reclassify unissued shares to authorize
additional classes of shares having terms and rights determined by its Board of
Directors/Trustees, all without shareholder approval.
SHAREHOLDER MEETINGS AND VOTING RIGHTS. Generally, neither Fund is required
to hold annual meetings of its shareholders. Each Fund is required to call a
meeting of shareholders for the purpose of voting upon the question of removal
of a Director/Trustee when requested in writing to do so by the holders of at
least 10% of the Fund's outstanding shares. In addition, each Fund is required
to call a meeting of shareholders for the purpose of electing Directors/Trustees
if, at any time, less than a majority of the Directors/Trustees holding office
at the time were elected by shareholders.
16
<PAGE>
Under the Declaration of Trust, Allocation Fund shareholders are entitled to
vote only with respect to the following matters: (1) the election or removal of
Trustees if a meeting is called for such purpose; (2) the adoption of any
contract for which shareholder approval is required by the Investment Company
Act; (3) any amendment of the Declaration of Trust, other than amendments to
change Allocation Fund's name, authorize additional series of shares, supply any
omission or cure, correct or supplement any ambiguity or defective or
inconsistent provision contained therein; (4) any termination or reorganization
of Allocation Fund to the extent and as provided in the Declaration of Trust;
(5) a determination as to whether a court action, proceeding or claim should or
should not be brought or maintained derivatively or as a class action on behalf
of Allocation Fund or its shareholders, to the same extent as the shareholders
of a Massachusetts business corporation would be entitled to vote on such a
determination; (6) with respect to any plan of distribution adopted pursuant to
Rule 12b-1 under the Investment Company Act; and (7) such additional matters
relating to Allocation Fund as may be required by law, the Declaration of Trust,
the Fund's By-Laws, or any registration of Allocation Fund with the SEC or any
state securities commission, or as the Trustees may consider necessary or
desirable. Allocation Fund shareholders also vote upon changes in fundamental
investment policies or restrictions.
The Declaration of Trust provides that a "Majority Shareholder Vote" of
Allocation Fund is required to decide any question. "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 Investment Company 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.
Shareholders in IncomeVertible-Registered Trademark- Fund are entitled to
one vote for each share on all matters submitted to a vote of its shareholders
under Maryland law. Approval of certain matters, such as an amendment to the
charter, a merger, consolidation or transfer of all or substantially all assets,
dissolution and removal of a Director, requires the affirmative vote of a
majority of the votes entitled to be cast. A plurality of votes cast is required
to elect Directors. Other matters require the approval of the affirmative vote
of a majority of the votes cast at a meeting at which a quorum is present.
Allocation Fund's and IncomeVertible-Registered Trademark- Fund's By-Laws
each provide that a majority of the outstanding shares shall constitute a quorum
for the transaction of business at a shareholders' meeting. Matters requiring a
larger vote by law or under the organization documents for either Fund are not
affected by such quorum requirements.
SHAREHOLDER LIABILITY. Under Maryland law,
IncomeVertible-Registered Trademark- Fund's shareholders have no personal
liability as such for IncomeVertible-Registered Trademark- Fund's acts or
obligations.
Under Massachusetts law, Allocation Fund shareholders, under certain
circumstances, could be held personally liable for Allocation Fund's
obligations. However, the Declaration of Trust disclaims shareholder liability
for acts or obligations of Allocation Fund and requires that notice of such
disclaimer be given in each note, bond, contract, order, agreement, obligation
or instrument entered into or executed by Allocation Fund or its Trustees. The
Declaration of Trust provides for indemnification out of Allocation Fund's
property for all losses and expenses of any shareholder held personally liable
for Allocation Fund's obligations solely by reason of his or her being or having
been an Allocation Fund shareholder and not because of
17
<PAGE>
his or her acts or omissions or some other reason. Thus, Allocation Fund
considers the risk of a shareholder incurring financial loss on account of
shareholder liability to be remote since it is limited to circumstances in which
a disclaimer is inoperative or Allocation Fund itself would be unable to meet
its obligations.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND TRUSTEES. Under
IncomeVertible-Registered Trademark- Fund's Articles of Incorporation and
Maryland law, a Director or officer of IncomeVertible-Registered Trademark- Fund
is not liable to IncomeVertible-Registered Trademark- Fund or its shareholders
for monetary damages for breach of fiduciary duty as a Director or officer
except to the extent such exemption from liability or limitation thereof is not
permitted by law, including the Investment Company Act.
Under the Investment Company Act, a Director may not be protected against
liability to IncomeVertible-Registered Trademark- Fund and its security holders
to which he or she would otherwise be subject as a result of his willful
misfeasance, bad faith or gross negligence in the performance of his duties, or
by reason of reckless disregard of his obligations and duties. The staff of the
SEC interprets the Investment Company Act to require additional limits on
indemnification of Directors and officers.
Under Allocation Fund's Declaration of Trust, a Trustee is entitled to
indemnification against all liability and expenses reasonably incurred by him or
her in connection with the defense or disposition of any threatened or actual
proceeding by reason of his or her being or having been a Trustee, unless such
Trustee shall have been adjudicated to have acted with bad faith, willful
misfeasance, gross negligence or in reckless disregard of his or her duties.
The foregoing is only a summary of certain differences between
IncomeVertible-Registered Trademark- Fund, its Articles of Incorporation,
By-Laws and Maryland law, and Allocation Fund, its Declaration of Trust, By-Laws
and Massachusetts law. It is not a complete list.
PRO FORMA CAPITALIZATION AND RATIOS
The following table shows the capitalization of
IncomeVertible-Registered Trademark- Fund and the Portfolio as of December 31,
1994 and the pro forma combined capitalization as if the reorganization had
occured on that date.
<TABLE>
<CAPTION>
INCOMEVERTIBLE-REGISTERED TRADEMARK-
FUND PORTFOLIO PRO FORMA COMBINED
---------------------------- ----------------------------- -----------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Assets (000)......... $12,364 $230,914 $ 189* $39,528 $ 427,475 $ 882 $51,892 $ 658,389 $ 882
Net Asset Value per
share................... $ 10.87 $ 10.88 $ 10.88 $ 10.64 $ 10.63 $ 10.63 $ 10.66 $ 10.63 $ 10.63
Shares Outstanding
(000)................... 1,138 21,232 17* 3,715 40,214 83 4,877 61,937 83
<FN>
- ---------------
* Actual number not rounded.
</TABLE>
The following table shows the ratio of expenses to average net assets and
the ratio of net investment income to average net assets of
IncomeVertible-Registered Trademark- Fund for the fiscal year ended December 31,
1994 and of the Portfolio for the six-month period ended January 31, 1995
(annualized). The ratios are also shown on a pro forma combined basis, assuming
the reorganization occurs on or about September 29, 1995.
<TABLE>
<CAPTION>
INCOMEVERTIBLE-REGISTERED TRADEMARK-
FUND PORTFOLIO PRO FORMA COMBINED
---------------------------- ---------------------------- ----------------------------
CLASS A CLASS B CLASS C+ CLASS A CLASS B CLASS C+ CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of expenses to
average net assets...... 1.34% 2.09% 2.09% 1.16% 1.91% 1.91% 1.14% 1.89% 1.89%
Ratio of net investment
income to average net
assets.................. 3.45% 2.70% 2.92% 3.42% 2.66% 2.80% 3.91% 3.16% 3.16%
</TABLE>
+ Class C shares commenced investment operations on August 1, 1994. The ratios
for Class C shares of the Portfolio are based upon restated information for
the period August 1, 1994 through January 31, 1995 (annualized).
18
<PAGE>
INFORMATION ABOUT THE PORTFOLIO
FINANCIAL INFORMATION
FINANCIAL HIGHLIGHTS
(UNAUDITED)
For additional condensed financial information for the Portfolio, see
"Financial Highlights" in the Allocation Fund Prospectus, which accompanies this
Prospectus and Proxy Statement. The following financial highlights contain
selected data for a Class A, Class B and Class C share outstanding, total
return, ratios to average net assets and other supplemental data for the period
presented.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------ ------------ ------------
SIX MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED
JANUARY 31, JANUARY 31, JANUARY 31,
1995 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 11.12 $ 11.09 $ 11.12
------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................... .19 .14 .14
Net realized and unrealized gain on
investment and foreign currency
transactions........................... (.30) (.30) (.33)
------------ ------------ ------------
Total from investment operations.... (.11) (.16) (.19)
------------ ------------ ------------
LESS DISTRIBUTIONS:
Dividends from net investment income.... (.15) (.11) (.11)
Distributions paid to shareholders from
net realized gains on investment
transactions........................... (.20) (.20) (.20)
------------ ------------ ------------
Total distributions................. (.35) (.31) (.31)
------------ ------------ ------------
Net asset value, end of period.......... $ 10.66 $ 10.62 $ 10.62
------------ ------------ ------------
------------ ------------ ------------
TOTAL RETURN:#.......................... (4.25)% (5.00)% (1.71)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $39,555 $420,015 $ 1,161
Average net assets (000)................ $34,095 $438,050 $ 524
Ratios to average net assets:
Expenses, including distribution
fees................................. 1.16%* 1.91%* 1.91%*
Expenses, excluding distribution
fees................................. .91%* .91%* .91%*
Net investment income................. 3.42%* 2.66%* 2.80%*
Portfolio turnover...................... 68 % 68 % 68 %
</TABLE>
- ------------
* 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.
19
<PAGE>
GENERAL
For a discussion of the organization, classification and sub-classification
of the Portfolio, see "General Information" and "Fund Highlights" in the
Allocation Fund Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of the Portfolio's investment objective and policies and
risk factors associated with an investment in the Portfolio, see "How the Fund
Invests" in the Allocation Fund Prospectus. The Trustees have approved three
changes to the Portfolio's investment policies that will become effective on or
about the Closing Date: (i) the name of the Portfolio will become the "Balanced
Portfolio" and the Portfolio will thereafter be required to maintain at least
25% of the value of its assets in fixed-income securities, (ii) the Portfolio
will be permitted to invest in the common stock and common stock equivalents of
smaller, faster growing companies in addition to those of major, established
companies, and (iii) the limitation on the average maturity of the debt
securities held by the Portfolio to ten years will be replaced with a limitation
on such securities' average duration to ten years.
TRUSTEES
For a discussion of the responsibilities of Allocation Fund's Trustees, see
"How the Fund is Managed" in the Allocation Fund Prospectus.
MANAGER AND PORTFOLIO MANAGER
For a discussion of Allocation Fund's Manager and Subadviser and the
Portfolio's portfolio manager, see "How the Fund is Managed--Manager" in the
Allocation Fund Prospectus.
PERFORMANCE
For a discussion of the Portfolio's performance during the fiscal year ended
July 31, 1994, see Appendix A hereto.
THE PORTFOLIO'S SHARES
For a discussion of the Portfolio's Class A, Class B and Class C shares,
including voting rights, exchange rights and the conversion feature of Class B
shares, and how the shares may be purchased and redeemed, see "Shareholder
Guide" and "How the Fund is Managed" in the Allocation Fund Prospectus.
NET ASSET VALUE
For a discussion of how the offering price of the Portfolio's Class A, Class
B and Class C shares is determined, see "How the Fund Values its Shares" in the
Allocation Fund Prospectus.
TAXES, DIVIDENDS AND DISTRIBUTIONS
For a discussion of Allocation Fund's policy with respect to dividends and
distributions and the tax consequences of an investment in Class A, Class B or
Class C shares, see "Taxes, Dividends and Distributions" in the Allocation Fund
Prospectus.
OTHER CONSIDERATIONS
Allocation Fund is subject to the informational requirements of the
Investment Company Act and in accordance therewith files reports and other
information with the Securities and Exchange Commission. Proxy material, reports
and other information filed by Allocation Fund can be inspected and copied at
the public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices in New
York (7 World Trade Center, Suite 1300, New York, New York 10048) and Chicago
(Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois
20
<PAGE>
60661-2511). Copies of such material can be obtained at prescribed rates from
the Public Reference Branch, Office of Consumer Affairs and Information
Services, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
INFORMATION ABOUT INCOMEVERTIBLE-REGISTERED TRADEMARK- FUND
FINANCIAL INFORMATION
For condensed financial information for IncomeVertible-Registered Trademark-
Fund, see "Financial Highlights" in the IncomeVertible-Registered Trademark-
Fund Prospectus and the IncomeVertible-Registered Trademark- Fund Annual Report
to Shareholders for the fiscal year ended December 31, 1994, which accompanies
this Prospectus and Proxy Statement.
GENERAL
For a discussion of the organization, classification and sub-classification
of IncomeVertible-Registered Trademark- Fund, see "General Information" and
"Fund Highlights" in the IncomeVertible-Registered Trademark- Fund Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of IncomeVertible-Registered Trademark- Fund's investment
objective and policies and risk factors associated with an investment in
IncomeVertible-Registered Trademark- Fund, see "How the Fund Invests" in the
IncomeVertible-Registered Trademark- Fund Prospectus.
DIRECTORS
For a discussion of the responsibilities of
IncomeVertible-Registered Trademark- Fund's Board of Directors, see "How the
Fund is Managed" in the IncomeVertible-Registered Trademark- Fund Prospectus.
MANAGER AND PORTFOLIO MANAGER
For a discussion of IncomeVertible-Registered Trademark- Fund's Manager and
Subadviser and portfolio manager, see "How the Fund is Managed--Manager" in the
IncomeVertible-Registered Trademark- Fund Prospectus.
PERFORMANCE
For a discussion of IncomeVertible-Registered Trademark- Fund's performance
during the fiscal year ended December 31, 1994, see the
IncomeVertible-Registered Trademark- Fund Annual Report to Shareholders for the
fiscal year ended December 31, 1994, which accompanies this Prospectus and Proxy
Statement.
INCOMEVERTIBLE-REGISTERED TRADEMARK- FUND'S SHARES
For a discussion of IncomeVertible-Registered Trademark- Fund's Class A,
Class B and Class C shares, including voting rights, exchange rights and the
conversion feature of Class B shares, and how the shares may be purchased and
redeemed, see "Shareholder Guide" and "How the Fund is Managed" in the
IncomeVertible-Registered Trademark- Fund Prospectus.
NET ASSET VALUE
For a discussion of how the offering price of
IncomeVertible-Registered Trademark- Fund's Class A, Class B and Class C shares
is determined, see "How the Fund Values its Shares" in the
IncomeVertible-Registered Trademark- Fund Prospectus.
TAXES, DIVIDENDS AND DISTRIBUTIONS
For a discussion of IncomeVertible-Registered Trademark- Fund's policy with
respect to dividends and distributions and the tax consequences of an investment
in Class A, Class B or Class C shares, see "Taxes, Dividends and Distributions"
in the IncomeVertible-Registered Trademark- Fund Prospectus.
21
<PAGE>
ADDITIONAL INFORMATION
Additional information concerning IncomeVertible-Registered Trademark- Fund
is incorporated herein by reference from IncomeVertible-Registered Trademark-
Fund's current Prospectus dated March 1, 1995, including March 1, 1995 and June
15, 1995 Supplements thereto, and IncomeVertible-Registered Trademark- Fund's
Annual Report to Shareholders for the fiscal year ended December 31, 1994.
Copies of IncomeVertible-Registered Trademark- Fund's Prospectus and the Annual
Report are available without charge upon oral or written request from
IncomeVertible-Registered Trademark- Fund. To obtain
IncomeVertible-Registered Trademark- Fund's Prospectus and Annual Report, call
(800) 225-1852 or write to Prudential Mutual Fund Services, Inc., Raritan Plaza
One, Edison, New Jersey 08837.
Reports and other information filed by IncomeVertible-Registered Trademark-
Fund can be inspected and copied at the public reference facilities maintained
by the Securities and Exchange Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the SEC's regional offices in New York (7 World
Trade Center, Suite 1300, New York, New York 10048) and Chicago (Citicorp
Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511).
Copies of such material can also be obtained at prescribed rates from the Public
Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549.
VOTING INFORMATION
If the accompanying form of Proxy is executed properly and returned, shares
represented by it will be voted at the Meeting in accordance with the
instructions on the Proxy. However, if no instructions are specified, shares
will be voted for the proposal. A Proxy may be revoked at any time prior to the
time it is voted by written notice to the Secretary of
IncomeVertible-Registered Trademark- Fund or by attendance at the Meeting. If
sufficient votes to approve the proposal are not received, the persons named as
proxies may propose one or more adjournments of the Meeting to permit further
solicitation of Proxies. Any such adjournment will require the affirmative vote
of a majority of those shares present at the Meeting or represented by proxy.
When voting on a proposed adjournment, the persons named as proxies will vote
for the proposed adjournment all shares that they are entitled to vote, unless
directed to disapprove the proposal, in which case such shares will be voted
against the proposed adjournment. Any questions as to an adjournment of the
Meeting will be voted on by the persons named in the enclosed Proxy in the same
manner that the Proxies are instructed to be voted. In the event that the
Meeting is adjourned, the same procedures will apply at a later Meeting date.
If a Proxy that is properly executed and returned is accompanied by
instructions to withhold authority to vote (an abstention) or represents a
broker "non-vote" (that is, a Proxy from a broker or nominee indicating that
such person has not received instructions from the beneficial owner or other
person entitled to vote shares on a particular matter with respect to which the
broker or nominee does not have discretionary power), the shares represented
thereby, with respect to matters to be determined by a majority of the votes
cast on such matters, will be considered present for purposes of determining the
existence of a quorum for the transaction of business but, not being cast, will
have no effect on the outcome of such matters. With respect to matters requiring
the affirmative vote of a majority of the total shares outstanding, an
abstention or broker non-vote will be considered present for purposes of
determining the existence of a quorum but will have the effect of a vote against
such matters.
The close of business on June 16, 1995 has been fixed as the record date for
the determination of shareholders entitled to notice of, and to vote at, the
Meeting. On that date, IncomeVertible-Registered Trademark- Fund had 13,220,499
Class A shares, 6,704,819 Class B shares and 245 Class C shares outstanding and
entitled to vote.
22
<PAGE>
Each share of IncomeVertible-Registered Trademark- Fund will be entitled to
one vote at the Meeting. It is expected that the Notice of Special Meeting,
Prospectus and Proxy Statement and form of Proxy will be mailed to shareholders
on or about July 28, 1995.
As of June 16, 1995, the beneficial owners, directly or indirectly, of more
than 5% of the outstanding shares of any class of beneficial interest of the
Fund were: Prudential Mutual Fund Services, Audit Account, P O Box 15025, New
Brunswick, NJ 08906-5025, who held 17 Class C shares of the Fund (6.9%); William
G. Burns, Cynthia E. Burns JT TEN, 5695 Sandstone Drive, Oxford, MI 48371-5645,
who held 91 Class C shares of the Fund (37.2%); and National Marine
Underwriters, RP 3 401K Plan DTD 01-01-90, Robert Robinson Trustee, 410 Severn
Ave. Suite #207, Annapolis, MD 21403-2524, who held 135 Class C shares of the
Fund (55.3%).
The expenses of reorganization and solicitation will be borne by
IncomeVertible-Registered Trademark- Fund and the Portfolio in proportion to
their respective assets and will include reimbursement to brokerage firms and
others for expenses in forwarding proxy solicitation material to shareholders.
The Board of Directors of IncomeVertible-Registered Trademark- Fund has retained
Shareholder Communications Corporation, a proxy solicitation firm, to assist in
the solicitation of Proxies for the Meeting. The fees and expenses of
Shareholder Communications Corporation are not expected to exceed $43,000,
excluding mailing and printing costs. The solicitation of Proxies will be
largely by mail but may include telephonic, telegraphic or oral communication by
regular employees of Prudential Securities and its affiliates, including
Prudential Mutual Fund Management, Inc. This cost, including specified expenses,
also will be borne by IncomeVertible-Registered Trademark- Fund and the
Portfolio in proportion to their respective assets.
OTHER MATTERS
No business other than as set forth herein is expected to come before the
Meeting, but should any other matter requiring a vote of shareholders of
IncomeVertible-Registered Trademark- Fund arise, including any question as to an
adjournment of the Meeting, the persons named in the enclosed Proxy will vote
thereon according to their best judgment in the interests of
IncomeVertible-Registered Trademark- Fund, taking into account all relevant
circumstances.
SHAREHOLDERS' PROPOSALS
An IncomeVertible-Registered Trademark- Fund shareholder proposal intended
to be presented at any subsequent meeting of the shareholders of
IncomeVertible-Registered Trademark- Fund must be received by
IncomeVertible-Registered Trademark- Fund a reasonable time before the Board of
Directors' solicitation relating to such meeting is made in order to be included
in IncomeVertible-Registered Trademark- Fund's Proxy Statement and form of Proxy
relating to that meeting. In the event that the Plan is approved at this
Meeting, it is not expected that there will be any future shareholder meetings
of IncomeVertible-Registered Trademark- Fund.
It is the present intent of the Boards of Directors/Trustees of
IncomeVertible-Registered Trademark- Fund and Allocation Fund not to hold annual
meetings of shareholders unless the election of Directors/Trustees is required
under the Investment Company Act.
S. JANE ROSE
SECRETARY
Dated: July 26, 1995
23
<PAGE>
APPENDIX A
PERFORMANCE OVERVIEW
LETTER TO
SHAREHOLDERS
-------------------------------
SEPTEMBER 1, 1994
DEAR SHAREHOLDER:
The Prudential Allocation Fund (formerly, the Prudential FlexiFund) is
comprised of the Conservatively Managed Portfolio and the Strategy Portfolio.
Each Portfolio invests in a combination of stocks and bonds, as well as cash
and money market instruments. They allocate assets according to prevailing
market conditions. Both Portfolios seek a high total return, but with
different degrees of risk.
ALLOCATION FUND TOTAL RETURNS
FUND PERFORMANCE
<TABLE>
<CAPTION>
HISTORICAL RETURNS(1) AVERAGE ANNUAL RETURNS(2)
AS OF 7/31/94 AS OF 6/30/94
SINCE SINCE
1 YEAR 5 YEARS INCEP.* 1 YEAR 5 YEARS INCEP.*
<S> <C> <C> <C> <C> <C> <C>
Cons. Man
Class A +2.4% N/A +58.0% -4.3% N/A +9.1%
Class B
+1.6% +53.1% +69.0% -4.8% +9.1% +7.7%
<FN>
Past performance is no guarantee of future results. Principal value and
investment return will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost.
(1) Source: Lipper Analytical Services, Inc. These figures do not take into
account sales charges. The Fund charges a maximum front-end sales load of 5.25%
(Class A). Class B shares are subject to a declining contingent deferred sales
charge of 5%, 4%, 3%, 2%, 1% and 1% for the first 6 years.
(2) Source: Prudential Mutual Fund Management Inc. These averages take into
account applicable sales charges. The Fund charges a maximum front-end sales
load of 5.25% for Class A shares and a contingent deferred sales charge of 5%,
4%, 3%, 2%, 1% and 1% for six years, for Class B shares. Commencing February
1995, Class B shares will automatically convert to Class A shares seven years
after the date of purchase.
*Inception dates: 1/22/90 Class A; 9/15/87 Class B.
</TABLE>
GOOD TIMES, BAD TIMES
For the year ended July 31, 1994, U.S. stocks were up 5.2%, as measured by
the Standard & Poor's 500 Index. Both stocks and bonds closed out 1993 with
some of the strongest gains reported in many years. Even fixed income
A-1
<PAGE>
investors saw double-digit returns as investors rode a wave of good news in the
markets: low inflation, modest growth and a falling federal deficit.
What a difference six months makes. In 1994, rising interest rates and the
declining dollar dominated the financial news as both the stock and bond
markets reversed course to produce negative total returns for the first seven
months of the year. The Federal Reserve moved to raise short-term rates in
February for the first time in five years, and then increased rates three more
times in as many months, attempting to dampen economic growth and stave off
inflation. The spike in rates sent bond prices plunging and upset the stock
market, sending it down sharply for the first quarter.
CONSERVATIVELY MANAGED PORTFOLIO
ASSET ALLOCATION
THE DOLLAR'S IMPACT ON FINANCIAL MARKETS
U.S. stocks rebounded slightly during the second quarter of 1994, once
investors felt the Federal Reserve's actions were keeping inflation under
control and there could be stability in rates going forward. The stock market
stumbled again in mid-June, however, as the growing U.S. trade deficit and
faltering worldwide confidence in trade talks triggered a steep decline in the
U.S. dollar against other currencies.
The decline of the dollar led to speculation the Federal Reserve would raise
interest rates to support the falling currency, which hurt U.S. stocks and sent
the dollar even lower. In this environment, corporate, mortgage-backed and
government bonds all suffered negative total returns.
THE CONSERVATIVELY MANAGED PORTFOLIO
THE CONSERVATIVELY MANAGED PORTFOLIO SEEKS A HIGH TOTAL RETURN CONSISTENT
WITH MODERATE RISK. The weighted average maturity of the Portfolio's debt
securities is usually shorter than that of the Strategy Portfolio. In addition,
the equity and debt securities are generally those of larger, more mature
companies and are subject to less price volatility than those held in the
Strategy Portfolio.
The Portfolio paid dividends and distributions totalling $0.91 per Class A
share and $0.82 per Class B share, in the past year.
BALANCING CAUTION AND GAIN
During the first six months of the reporting period, we looked for times when
bond prices were rising and used those opportunities to sell bonds that had
appreciated. The proceeds went into stocks, because strong and improving
corporate earnings lead us to believe that stocks were undervalued. By the end
of January, however, we adopted a slightly more cautious stance, raising the
Portfolio's cash level to 15%. This reduced the stock position to 47% of net
assets (from over 50% earlier in the year), and our bond exposure stood at
about 38% of net assets.
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As rates continued to climb in 1994, we let our cash holdings move even
higher to 24% of net assets on July 31, 1994. On that date, the percentage of
net assets in stocks was down to 46% and bonds had been reduced to 30%, since
the bond market also fell victim to rising rates and the dollar's woes. And
after rates increased about 130 basis points across the board, we continued to
expect more action from the Federal Reserve.
We underperformed funds that were more fully invested in stocks and those
that had foreign exposure (where some markets like Japan have done well this
year). But our investment process is based on sound fundamentals and we believe
many of our key holdings should show good gains as the economy kicks into high
gear. We rely on our disciplined process in an attempt to add value over the
long haul.
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NAME CHANGE
Effective August 1, 1994 the name of your Fund was changed to the Prudential
Allocation Fund Conservatively Managed Portfolio and Prudential Allocation
Fund Strategy Portfolio by the Board of Trustees. This was done to more
accurately reflect the Fund's investment strategy of allocating assets
primarily among common stocks, bonds and money market instruments.
The investment objectives and direction of each Portfolio remain unchanged.
OUTLOOK
After this year's market volatility, Greg Smith remains optimistic that the
U.S. economy will grow and U.S. stocks will rebound. It seems unlikely the Fed
will act to significantly raise rates as a way of supporting the U.S. dollar,
which may make world currency markets unhappy -- perhaps hurting the U.S.
dollar in the near future. Economic signs in the U.S. seem to point to
inflation being under control, which means slowly rising interest rates and a
stable or slightly higher U.S. stock market for the remainder of the year.
As always, it is a pleasure to have you as a Prudential Allocation Fund
shareholder and we remain committed to managing the Portfolios for your
benefit.
SINCERELY,
/s/ Lawrence C. McQuade
LAWRENCE C. MCQUADE
PRESIDENT
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Past performance is not predictive of future performance and an investor's
shares may be worth more or less than their original cost.
[GRAPHS]
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in the Prudential Allocation Fund (Conservative
Portfolio; Class A and Class B) with similar investments in the Lehman
Government/Corporate Index (Gov't/Corp. Bond Index) and the Standard & Poor's
500 Index (S&P 500) by portraying the initial account values at the commencement
of operations of each class and subsequent account values at the end of each
fiscal year (July 31), on a quarterly basis, beginning in 1990 for Class A
shares and in 1987 for Class B shares. For purposes of the graphs and, unless
otherwise indicated, the accompanying tables, it has been assumed that (a) the
maximum sales charge was deducted from the initial $10,000 investment in Class A
Shares; (b) the maximum applicable contingent deferred sales charge was deducted
from the value of the investment in Class B shares assuming full redemption on
July 31, 1994; (c) all recurring fees (including management fees) were deducted;
and (d) all dividends and distributions were reinvested.
The Gov't/Corp. Bond Index is a weighted index comprised of public, fixed
rate, non-convertible domestic corporate debt securities that are rated at least
investment grade (BBB/Baa or higher) and public obligations of the U.S.
Treasury. The S&P 500 is a capital-weighted index, representing the aggregate
market value of the common equity of 500 stocks primarily traded on the New York
Stock Exchange. The Gov't/Corp. Bond Index and the S&P 500 are unmanaged indices
and both include the reinvestment of all dividends. The securities in these
indices may differ substantially from the securities in each of the Fund's
portfolios. The Gov't/Corp. Index and the S&P 500 are not the only indexes which
may be used to characterize performance of balanced funds and other indexes may
portray different comparative performance. The graph does not reflect the
conversion feature applicable to Class B shares, as described in the August 1,
1994 prospectus.
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APPENDIX B
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION
Agreement and Plan of Reorganization and Liquidation (Agreement) made as of
the 30th day of June, 1995, by and between Prudential
IncomeVertible-Registered Trademark- Fund, Inc.
(IncomeVertible-Registered Trademark- Fund) and Prudential Allocation Fund
(Allocation Fund) (collectively, the Funds and each individually, a Fund).
IncomeVertible-Registered Trademark- Fund is a corporation organized under the
laws of the State of Maryland; Allocation Fund is a Massachusetts business
trust; each Fund maintains its principal place of business at One Seaport Plaza,
New York, New York 10292. Shares of each Fund are divided into three classes,
designated Class A, Class B and Class C.
This Agreement is intended to be, and is adopted as, a plan of
reorganization pursuant to Section 368(a)(1)(C) of the Internal Revenue Code of
1986, as amended (Internal Revenue Code). The reorganization will comprise the
transfer of the assets of IncomeVertible-Registered Trademark- Fund, in exchange
solely for shares of beneficial interest of the Conservatively Managed Portfolio
(the Portfolio) of Allocation Fund, Class A shares for Class A shares, Class B
shares for Class B shares and Class C shares for Class C shares, and the
Portfolio's assumption of IncomeVertible-Registered Trademark- Fund's
liabilities, if any, incurred in the ordinary course of business and the
constructive distribution, after the Closing Date hereinafter referred to, of
such shares of the Portfolio to the shareholders of
IncomeVertible-Registered Trademark- Fund and liquidation of
IncomeVertible-Registered Trademark- Fund as provided herein, all upon the terms
and conditions as hereinafter set forth.
In consideration of the premises and of the covenants and agreements set
forth herein, the parties covenant and agree as follows:
1. TRANSFER OF ASSETS OF INCOMEVERTIBLE-REGISTERED TRADEMARK- FUND IN EXCHANGE
FOR SHARES OF ALLOCATION FUND AND ASSUMPTION OF LIABILITIES, IF ANY, OF
INCOMEVERTIBLE-REGISTERED TRADEMARK- FUND
1.1 Subject to the terms and conditions herein set forth and on the basis of
the representations and warranties contained herein,
IncomeVertible-Registered Trademark- Fund agrees to sell, assign, transfer and
deliver its assets, as set forth in paragraph 1.2, to Allocation Fund, and
Allocation Fund agrees (a) to issue and deliver to
IncomeVertible-Registered Trademark- Fund in exchange therefor (i) the number of
Class A shares of beneficial interest in the Portfolio determined by dividing
the net asset value of IncomeVertible-Registered Trademark- Fund allocable to
shares of Class A Common Stock (computed in the manner and as of the time and
date set forth in paragraph 2.2) by the net asset value allocable to a share of
the Portfolio's Class A shares of beneficial interest (computed in the manner
and as of the time and date set forth in paragraph 2.2); (ii) the number of
shares of Class B shares of beneficial interest in the Portfolio determined by
dividing the net asset value of IncomeVertible-Registered Trademark- Fund
allocable to shares of Class B Common Stock (computed in the manner and as of
the time and date set forth in paragraph 2.2) by the net asset value allocable
to a share of the Portfolio's Class B shares of beneficial interest (computed in
the manner and as of the time and date set forth in paragraph 2.2); and (iii)
the number of shares of Class C shares of beneficial interest in the Portfolio
determined by dividing the net asset value of
IncomeVertible-Registered Trademark- Fund allocable to shares of Class C Common
Stock (computed in the manner and as of the time and date set forth in paragraph
2.2) by the net asset value allocable to a share of the Portfolio's Class C
shares of beneficial interest (computed in the manner and as of the time and
date set forth in paragraph 2.2); and (b) to assume all of
IncomeVertible-Registered Trademark- Fund's liabilities, if any, as set forth in
paragraph 1.3. Such transactions shall take place at the closing provided for in
paragraph 3 (Closing).
1.2 The assets of IncomeVertible-Registered Trademark- Fund to be acquired by
Allocation Fund shall include without limitation all cash, cash equivalents,
securities, receivables (including interest and dividends receivable) and other
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property of any kind owned by IncomeVertible-Registered Trademark- Fund and any
deferred or prepaid expenses shown as assets on the books of
IncomeVertible-Registered Trademark- Fund on the closing date provided in
paragraph 3 (Closing Date). [The Portfolio has no plan or intent to sell or
otherwise dispose of any assets of IncomeVertible-Registered Trademark- Fund.]
1.3 Except as otherwise provided herein, the Portfolio will assume from
IncomeVertible-Registered Trademark- Fund all debts, liabilities, obligations
and duties of IncomeVertible-Registered Trademark- Fund of whatever kind or
nature, whether absolute, accrued, contingent or otherwise, whether or not
determinable as of the Closing Date and whether or not specifically referred to
in this Agreement; provided, however, that IncomeVertible-Registered Trademark-
Fund agrees to utilize its best efforts to discharge all of its known debts,
liabilities, obligations and duties prior to the Closing Date.
1.4 On or immediately prior to the Closing Date,
IncomeVertible-Registered Trademark- Fund will declare and pay to its
shareholders of record dividends and/or other distributions so that it will have
distributed substantially all (and in any event not less than ninety-eight
percent) of its investment company taxable income (computed without regard to
any deduction for dividends paid), net tax-exempt interest income, if any, and
realized net capital gains, if any, for all taxable years through its
liquidation.
1.5 On a date (Liquidation Date) as soon after the Closing Date as is
conveniently practicable, IncomeVertible-Registered Trademark- Fund will file
Articles of Dissolution with the State Department of Assessments and Taxation of
the State of Maryland and distribute pro rata to its Class A, Class B and Class
C shareholders of record, determined as of the close of business on the Closing
Date, the Class A, Class B and Class C shares of the Portfolio, respectively,
received by IncomeVertible-Registered Trademark- Fund pursuant to paragraph 1.1
in exchange for their interest in IncomeVertible-Registered Trademark- Fund.
Such distribution will be accomplished by opening accounts on the books of
Allocation Fund in the names of IncomeVertible-Registered Trademark- Fund
shareholders and transferring thereto the shares credited to the account of
IncomeVertible-Registered Trademark- Fund on the books of Allocation Fund. Each
account opened shall be credited with the respective pro rata number of the
Portfolio's Class A, Class B and Class C shares due each
IncomeVertible-Registered Trademark- Fund Class A, Class B and Class C
shareholder, respectively. Fractional shares of the Portfolio shall be rounded
to the third decimal place.
1.6 The Portfolio shall not issue certificates representing its shares in
connection with such exchange. With respect to any
IncomeVertible-Registered Trademark- Fund shareholder holding
IncomeVertible-Registered Trademark- Fund stock certificates as of the Closing
Date, until Allocation Fund is notified by the
IncomeVertible-Registered Trademark- Fund transfer agent that such shareholder
has surrendered his or her outstanding IncomeVertible-Registered Trademark- Fund
stock certificates or, in the event of lost, stolen or destroyed stock
certificates, posted adequate bond or submitted a lost certificate form, as the
case may be, Allocation Fund will not permit such shareholder to (1) receive
dividends or other distributions on the Portfolio's shares in cash (although
such dividends and distributions shall be credited to the account of such
shareholder established on Allocation Fund's books pursuant to paragraph 1.5, as
provided in the next sentence), (2) exchange the Portfolio's shares credited to
such shareholder's account for shares of other Prudential Mutual Funds, or (3)
pledge or redeem such shares. In the event that a shareholder is not permitted
to receive dividends or other distributions on the Portfolio's shares in cash as
provided in the preceding sentence, the Portfolio shall pay such dividends or
other distributions in additional Portfolio shares, notwithstanding any election
such shareholder shall have made previously with respect to the payment of
dividends or other distributions on shares of
IncomeVertible-Registered Trademark- Fund. IncomeVertible-Registered Trademark-
Fund will, at its expense, request its shareholders to surrender their
outstanding IncomeVertible-Registered Trademark- Fund stock certificates, post
adequate bond or submit a lost certificate form, as the case may be.
1.7 Ownership of Portfolio shares will be shown on the books of the Allocation
Fund's transfer agent. Shares of the Portfolio will be issued in the manner
described in Allocation Fund's then-current prospectus and statement of
additional information.
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1.8 Any transfer taxes payable upon issuance of shares of the Portfolio in a
name other than the registered holder of the shares on the books of
IncomeVertible-Registered Trademark- Fund as of that time shall be paid by the
person to whom such shares are to be issued as a condition to the registration
of such transfer.
1.9 Any reporting responsibility with the Securities and Exchange Commission
(SEC) or any state securities commission of IncomeVertible-Registered Trademark-
Fund is and shall remain the responsibility of
IncomeVertible-Registered Trademark- Fund up to and including the Liquidation
Date.
1.10 All books and records of IncomeVertible-Registered Trademark- Fund,
including all books and records required to be maintained under the Investment
Company Act of 1940 (Investment Company Act) and the rules and regulations
thereunder, shall be available to Allocation Fund from and after the Closing
Date and shall be turned over to Allocation Fund on or prior to the Liquidation
Date.
2. VALUATION
2.1 The value of IncomeVertible-Registered Trademark- Fund's assets and
liabilities to be acquired and assumed, respectively, by the Portfolio shall be
the value computed as of 4:15 p.m., New York Time, on the Closing Date (such
time and date being hereinafter called the Valuation Time), using the valuation
procedures set forth in IncomeVertible-Registered Trademark- Fund's then-current
prospectus and statement of additional information.
2.2 The net asset value of a share of the Portfolio shall be the net asset
value per such share computed on a class-by-class basis as of the Valuation
Time, using the valuation procedures set forth in Allocation Fund's then-current
prospectus and statement of additional information.
2.3 The number of Portfolio shares to be issued (including fractional shares,
if any) in exchange for IncomeVertible-Registered Trademark- Fund's net assets
shall be calculated as set forth in paragraph 1.1.
2.4 All computations of net asset value shall be made by or under the direction
of Prudential Mutual Fund Management, Inc. (PMF) in accordance with its regular
practice as manager of the Funds.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be September 29, 1995 or such later date as the
parties may agree in writing. All acts taking place at the Closing shall be
deemed to take place simultaneously as of the close of business on the Closing
Date unless otherwise provided. The Closing shall be at the office of Allocation
Fund or at such other place as the parties may agree.
3.2 State Street Bank and Trust Company (State Street), as custodian for
IncomeVertible-Registered Trademark- Fund, shall deliver to Allocation Fund at
the Closing a certificate of an authorized officer of State Street stating that
(a) IncomeVertible-Registered Trademark- Fund's portfolio securities, cash and
any other assets have been transferred in proper form to the Portfolio on the
Closing Date and (b) all necessary taxes, if any, have been paid, or provision
for payment has been made, in conjunction with the transfer of portfolio
securities.
3.3 In the event that immediately prior to the Valuation Time (a) the New York
Stock Exchange (NYSE) or other primary exchange is closed to trading or trading
thereon is restricted or (b) trading or the reporting of trading on the NYSE or
other primary exchange or elsewhere is disrupted so that accurate appraisal of
the value of the net assets of IncomeVertible-Registered Trademark- Fund and of
the net asset value per share of the Portfolio is impracticable, the Closing
Date shall be postponed until the first business day after the date when such
trading shall have been fully resumed and such reporting shall have been
restored.
3.4 IncomeVertible-Registered Trademark- Fund shall deliver to Allocation Fund
on or prior to the Liquidation Date the names and addresses of its shareholders
and the number of outstanding shares owned by each such shareholder, all
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as of the close of business on the Closing Date, certified by the Secretary or
Assistant Secretary of IncomeVertible-Registered Trademark- Fund. Allocation
Fund shall issue and deliver to IncomeVertible-Registered Trademark- Fund at the
Closing a confirmation or other evidence satisfactory to
IncomeVertible-Registered Trademark- Fund that shares of the Portfolio have been
or will be credited to IncomeVertible-Registered Trademark- Fund's account on
the books of Allocation Fund. At the Closing each party shall deliver to the
other such bills of sale, checks, assignments, share certificates, receipts and
other documents as such other party or its counsel may reasonably request to
effect the transactions contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1 IncomeVertible-Registered Trademark- Fund represents and warrants as
follows:
4.1.1 IncomeVertible-Registered Trademark- Fund is a corporation duly organized
and validly existing under the laws of the State of Maryland;
4.1.2 IncomeVertible-Registered Trademark- Fund is an open-end management
investment company duly registered under the Investment Company Act, and such
registration is in full force and effect;
4.1.3 IncomeVertible-Registered Trademark- Fund is not, and the execution,
delivery and performance of this Agreement will not result, in violation of any
provision of the Articles of Incorporation or By-Laws of
IncomeVertible-Registered Trademark- Fund or of any material agreement,
indenture, instrument, contract, lease or other undertaking to which
IncomeVertible-Registered Trademark- Fund is a party or by which
IncomeVertible-Registered Trademark- Fund is bound;
4.1.4 All material contracts or other commitments of
IncomeVertible-Registered Trademark- Fund except this Agreement will be
terminated on or prior to the Closing Date without
IncomeVertible-Registered Trademark- Fund or Allocation Fund incurring any
liability or penalty with respect thereto;
4.1.5 No material litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or to its
knowledge threatened against IncomeVertible-Registered Trademark- Fund or any of
its properties or assets. IncomeVertible-Registered Trademark- Fund knows of no
facts that might form the basis for the institution of such proceedings, and
IncomeVertible-Registered Trademark- Fund is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental body
that materially and adversely affects its business or its ability to consummate
the transactions herein contemplated;
4.1.6 The Portfolio of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, and Financial
Highlights of IncomeVertible-Registered Trademark- Fund at December 31, 1994 and
for the year then ended (copies of which have been furnished to Allocation Fund)
have been audited by Deloitte & Touche LLP, independent accountants, in
accordance with generally accepted auditing standards. Such financial statements
are prepared in accordance with generally accepted accounting principles and
present fairly, in all material respects, the financial condition, results of
operations, changes in net assets and financial highlights of
IncomeVertible-Registered Trademark- Fund as of and for the period ended on such
date, and there are no material known liabilities of
IncomeVertible-Registered Trademark- Fund (contingent or otherwise) not
disclosed therein;
4.1.7 Since December 31, 1994, there has not been any material adverse change
in IncomeVertible-Registered Trademark- Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary course of
business, or any incurrence by IncomeVertible-Registered Trademark- Fund of
indebtedness maturing more than one year from the date such indebtedness was
incurred, except as otherwise disclosed to and accepted by Allocation Fund. For
the purposes of this paragraph 4.1.7, a decline in net asset value, net asset
value per share or change in the number of shares outstanding shall not
constitute a material adverse change;
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4.1.8 At the date hereof and at the Closing Date, all federal and other tax
returns and reports of IncomeVertible-Registered Trademark- Fund required by law
to have been filed on or before such dates shall have been timely filed, and all
federal and other taxes shown as due on said returns and reports shall have been
paid insofar as due, or provision shall have been made for the payment thereof,
and, to the best of IncomeVertible-Registered Trademark- Fund's knowledge, all
federal or other taxes required to be shown on any such return or report have
been shown on such return or report, no such return is currently under audit and
no assessment has been asserted with respect to such returns;
4.1.9 For each past taxable year since it commenced operations,
IncomeVertible-Registered Trademark- Fund has met the requirements of Subchapter
M of the Internal Revenue Code for qualification and treatment as a regulated
investment company and intends to meet those requirements for the current
taxable year; and, for each past calendar year since it commenced operations,
IncomeVertible-Registered Trademark- Fund has made such distributions as are
necessary to avoid the imposition of federal excise tax or has paid or provided
for the payment of any excise tax imposed;
4.1.10 All issued and outstanding shares of
IncomeVertible-Registered Trademark- Fund are, and at the Closing Date will be,
duly and validly authorized, issued and outstanding, fully paid and
non-assessable. All issued and outstanding shares of
IncomeVertible-Registered Trademark- Fund will, at the time of the Closing, be
held in the name of the persons and in the amounts set forth in the list of
shareholders submitted to Allocation Fund in accordance with the provisions of
paragraph 3.4. IncomeVertible-Registered Trademark- Fund does not have
outstanding any options, warrants or other rights to subscribe for or purchase
any of its shares, nor is there outstanding any security convertible into any of
its shares, except for the Class B shares which have the conversion feature
described in IncomeVertible-Registered Trademark- Fund's Prospectus dated March
1, 1995;
4.1.11 At the Closing Date, IncomeVertible-Registered Trademark- Fund will have
good and marketable title to its assets to be transferred to Allocation Fund
pursuant to paragraph 1.1, and full right, power and authority to sell, assign,
transfer and deliver such assets hereunder free of any liens, claims, charges or
other encumbrances, and, upon delivery and payment for such assets, Allocation
Fund will acquire good and marketable title thereto;
4.1.12 The execution, delivery and performance of this Agreement has been duly
authorized by the Board of Directors of IncomeVertible-Registered Trademark-
Fund and by all necessary corporate action, other than shareholder approval, on
the part of IncomeVertible-Registered Trademark- Fund, and this Agreement
constitutes a valid and binding obligation of
IncomeVertible-Registered Trademark- Fund, subject to shareholder approval;
4.1.13 The information furnished and to be furnished by
IncomeVertible-Registered Trademark- Fund for use in applications for orders,
registration statements, proxy materials and other documents that may be
necessary in connection with the transactions contemplated hereby is and shall
be accurate and complete in all material respects and is in compliance and shall
comply in all material respects with applicable federal securities and other
laws and regulations; and
4.1.14 On the effective date of the registration statement filed with the SEC
by Allocation Fund on Form N-14 relating to the shares of the Portfolio issuable
hereunder, and any supplement or amendment thereto (Registration Statement), at
the time of the meeting of the shareholders of
IncomeVertible-Registered Trademark- Fund and on the Closing Date, the Proxy
Statement of IncomeVertible-Registered Trademark- Fund, the Prospectus of
Allocation Fund and the Statements of Additional Information of both Funds to be
included in the Registration Statement (collectively, Proxy Statement) (i) will
comply in all material respects with the provisions and regulations of the
Securities Act of 1933 (1933 Act), Securities Exchange Act of 1934 (1934 Act)
and the Investment Company Act and the rules and regulations thereunder and (ii)
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein in light of the circumstances under
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which they were made or necessary to make the statements therein not misleading;
provided, however, that the representations and warranties in this paragraph
4.1.14 shall not apply to statements in or omissions from the Proxy Statement
and Registration Statement made in reliance upon and in conformity with
information furnished by Allocation Fund for use therein.
4.2 Allocation Fund represents and warrants as follows:
4.2.1 Allocation Fund is a business trust duly organized and validly existing
under the laws of the State of Massachusetts;
4.2.2 Allocation Fund is an open-end management investment company duly
registered under the Investment Company Act, and such registration is in full
force and effect;
4.2.3 Allocation Fund is not, and the execution, delivery and performance of
this Agreement will not result, in violation of any provision of the Declaration
of Trust or By-Laws of Allocation Fund or of any material agreement, indenture,
instrument, contract, lease or other undertaking to which Allocation Fund is a
party or by which Allocation Fund is bound;
4.2.4 No material litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or threatened
against Allocation Fund or any of its properties or assets, except as previously
disclosed in writing to IncomeVertible-Registered Trademark- Fund. Allocation
Fund knows of no facts that might Form the basis for the institution of such
proceedings, and Allocation Fund is not a party to or subject to the provisions
of any order, decree or judgment of any court or governmental body that
materially and adversely affects its business or its ability to consummate the
transactions herein contemplated;
4.2.5 The Portfolio of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, and Financial
Highlights of Allocation Fund at July 31, 1994 and for the fiscal year then
ended (copies of which have been furnished to
IncomeVertible-Registered Trademark- Fund) have been audited by Deloitte &
Touche LLP, independent auditors, in accordance with generally accepted auditing
standards. Such financial statements are prepared in accordance with generally
accepted accounting principles and present fairly, in all material respects, the
financial condition, results of operations, changes in net assets and financial
highlights of Allocation Fund as of and for the period ended on such date, and
there are no material known liabilities of Allocation Fund (contingent or
otherwise) not disclosed therein;
4.2.6 Since July 31, 1994, there has not been any material adverse change in
Allocation Fund's financial condition, assets, liabilities or business other
than changes occurring in the ordinary course of business, or any incurrence by
Allocation Fund of indebtedness maturing more than one year from the date such
indebtedness was incurred, except as otherwise disclosed to and accepted by
IncomeVertible-Registered Trademark- Fund. For the purposes of this paragraph
4.2.6, a decline in net asset value per share or a decrease in the number of
shares outstanding shall not constitute a material adverse change;
4.2.7 At the date hereof and at the Closing Date, all federal and other tax
returns and reports of Allocation Fund required by law to have been filed on or
before such dates shall have been filed, and all federal and other taxes shown
as due on said returns and reports shall have been paid insofar as due, or
provision shall have been made for the payment thereof, and, to the best of
Allocation Fund's knowledge, all federal or other taxes required to be shown on
any such return or report are shown on such return or report, no such return is
currently under audit and no assessment has been asserted with respect to such
returns;
4.2.8 For each past taxable year since it commenced operations, Allocation Fund
has met the requirements of Subchapter M of the Internal Revenue Code for
qualification and treatment as a regulated investment
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company and intends to meet those requirements for the current taxable year;
and, for each past calendar year since it commenced operations, Allocation Fund
has made such distributions as are necessary to avoid the imposition of federal
excise tax or has paid or provided for the payment of any excise tax imposed;
4.2.9 All issued and outstanding shares of the Portfolio are, and at the
Closing Date will be, duly and validly authorized, issued and outstanding, fully
paid and non-assessable. Except as contemplated by this Agreement, Allocation
Fund does not have outstanding any options, warrants or other rights to
subscribe for or purchase any of its shares nor is there outstanding any
security convertible into any of its shares, except for the Class B shares which
have the conversion feature described in Allocation Fund's Prospectus dated
September 29, 1994;
4.2.10 The execution, delivery and performance of this Agreement has been duly
authorized by the Board of Trustees of Allocation Fund and by all necessary
corporate action on the part of Allocation Fund, and this Agreement constitutes
a valid and binding obligation of Allocation Fund;
4.2.11 The shares of the Portfolio to be issued and delivered to
IncomeVertible-Registered Trademark- Fund pursuant to this Agreement will, at
the Closing Date, have been duly authorized and, when issued and delivered as
provided in this Agreement, will be duly and validly issued and outstanding
shares of the Portfolio, fully paid and non-assessable;
4.2.12 The information furnished and to be furnished by Allocation Fund for use
in applications for orders, registration statements, proxy materials and other
documents which may be necessary in connection with the transactions
contemplated hereby is and shall be accurate and complete in all material
respects and is and shall comply in all material respects with applicable
federal securities and other laws and regulations; and
4.2.13 On the effective date of the Registration Statement, at the time of the
meeting of the shareholders of IncomeVertible-Registered Trademark- Fund and on
the Closing Date, the Proxy Statement and the Registration Statement (i) will
comply in all material respects with the provisions of the 1933 Act, the 1934
Act and the Investment Company Act and the rules and regulations under such
Acts, (ii) will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading and (iii) with respect to the Registration
Statement, at the time it becomes effective, it will not contain an untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein in the light of the circumstances under which they were
made, not misleading; provided, however, that the representations and warranties
in this paragraph 4.2.13 shall not apply to statements in or omissions from the
Proxy Statement and the Registration Statement made in reliance upon and in
conformity with information furnished by IncomeVertible-Registered Trademark-
Fund for use therein.
5. COVENANTS OF ALLOCATION FUND AND INCOMEVERTIBLE-REGISTERED TRADEMARK- FUND
5.1 IncomeVertible-Registered Trademark- Fund and Allocation Fund each
covenants to operate its respective business in the ordinary course between the
date hereof and the Closing Date, it being understood that the ordinary course
of business will include declaring and paying customary dividends and other
distributions and such changes in operations as are contemplated by the normal
operations of the Funds, except as may otherwise be required by paragraph 1.4
hereof.
5.2 IncomeVertible-Registered Trademark- Fund covenants to call a shareholders'
meeting to consider and act upon this Agreement and to take all other action
necessary to obtain approval of the transactions contemplated hereby (including
the determinations of its Board of Directors as set forth in Rule 17a-8(a) under
the Investment Company Act).
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<PAGE>
5.3 IncomeVertible-Registered Trademark- Fund covenants that Portfolio shares
to be received by IncomeVertible-Registered Trademark- Fund in accordance
herewith are not being acquired for the purpose of making any distribution
thereof other than in accordance with the terms of this Agreement.
5.4 IncomeVertible-Registered Trademark- Fund covenants that it will assist
Allocation Fund in obtaining such information as Allocation Fund reasonably
requests concerning the beneficial ownership of
IncomeVertible-Registered Trademark- Fund's shares.
5.5 Subject to the provisions of this Agreement, each Fund will take, or cause
to be taken, all action, and will do, or cause to be done, all things,
reasonably necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement.
5.6 IncomeVertible-Registered Trademark- Fund covenants to prepare the Proxy
Statement in compliance with the 1934 Act, the Investment Company Act and the
rules and regulations under each Act.
5.7 IncomeVertible-Registered Trademark- Fund covenants that it will, from time
to time, as and when requested by Allocation Fund, execute and deliver or cause
to be executed and delivered all such assignments and other instruments, and
will take or cause to be taken such further action, as Allocation Fund may deem
necessary or desirable in order to vest in and confirm to Allocation Fund title
to and possession of all the assets of IncomeVertible-Registered Trademark- Fund
to be sold, assigned, transferred and delivered hereunder and otherwise to carry
out the intent and purpose of this Agreement.
5.8 Allocation Fund covenants to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the Investment Company
Act (including the determinations of its Trustees as set forth in Rule 17a-8(a)
thereunder) and such of the state Blue Sky or securities laws as it may deem
appropriate in order to continue its operations after the Closing Date.
5.9 Allocation Fund covenants that it will, from time to time, as and when
requested by IncomeVertible-Registered Trademark- Fund, execute and deliver or
cause to be executed and delivered all such assignments and other instruments,
and will take and cause to be taken such further action, as
IncomeVertible-Registered Trademark- Fund may deem necessary or desirable in
order to (i) vest in and confirm to IncomeVertible-Registered Trademark- Fund
title to and possession of all the shares of the Portfolio to be transferred to
IncomeVertible-Registered Trademark- Fund pursuant to this Agreement and (ii)
assume all of IncomeVertible-Registered Trademark- Fund's liabilities in
accordance with this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF INCOMEVERTIBLE-REGISTERED TRADEMARK-
FUND
The obligations of IncomeVertible-Registered Trademark- Fund to consummate
the transactions provided for herein shall be subject to the performance by
Allocation Fund of all the obligations to be performed by it hereunder on or
before the Closing Date and the following further conditions:
6.1 All representations and warranties of Allocation Fund contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date.
6.2 Allocation Fund shall have delivered to
IncomeVertible-Registered Trademark- Fund on the Closing Date a certificate
executed in its name by the President or a Vice President of Allocation Fund, in
form and substance satisfactory to IncomeVertible-Registered Trademark- Fund and
dated as of the Closing Date, to the effect that the representations and
warranties of Allocation Fund in this Agreement are true and correct at and as
of the Closing Date, except as they may be affected by the transactions
contemplated by this Agreement, and as to such other matters as
IncomeVertible-Registered Trademark- Fund shall reasonably request.
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<PAGE>
6.3 IncomeVertible-Registered Trademark- Fund shall have received on the
Closing Date a favorable opinion from Gardner, Carton & Douglas, counsel to
Allocation Fund, dated as of the Closing Date, to the effect that:
6.3.1 Allocation Fund is a business trust duly organized and validly existing
under the laws of the Commonwealth of Massachusetts with power under its
Declaration of Trust to own all of its properties and assets and, to the
knowledge of such counsel, to carry on its business as presently conducted;
6.3.2 This Agreement has been duly authorized, executed and delivered by
Allocation Fund and, assuming due authorization, execution and delivery of the
Agreement by IncomeVertible-Registered Trademark- Fund, is a valid and binding
obligation of Allocation Fund enforceable in accordance with its terms, except
to the extent that enforcement thereof may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general equity
principles (regardless of whether enforcement is sought in a proceeding at law
or in equity), and further subject to the qualifications set forth in the next
succeeding sentence. Such counsel may state that they express no opinion as to
the validity or enforceability of any provision regarding choice of New York Law
to govern this Agreement;
6.3.3 The shares of Allocation Fund to be distributed to
IncomeVertible-Registered Trademark- Fund shareholders under this Agreement,
assuming their due authorization and delivery as contemplated by this Agreement,
will be validly issued and outstanding and fully paid and non-assessable, and no
shareholder of Allocation Fund has any pre-emptive right to subscribe therefor
or purchase such shares;
6.3.4 The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, (i) conflict with
Allocation Fund's Declaration of Trust or By-Laws or (ii) result in a default or
a breach of (a) the Management Agreement dated March 1, 1988 between Allocation
Fund and Prudential Mutual Fund Management, Inc., (b) the Custodian Contract
dated February 16, 1990 between Allocation Fund and State Street Bank and Trust
Company, (c) the Distribution Agreement (Class A shares) dated August 1, 1994
between Allocation Fund and Prudential Mutual Fund Distributors, Inc., (d) the
Distribution Agreement (Class B shares) dated August 1, 1994 between Allocation
Fund and Prudential Securities Incorporated (Prudential Securities), (e) the
Distribution Agreement (Class C shares) dated August 1, 1994 between Allocation
Fund and Prudential Securities and (f) the Transfer Agency and Service Agreement
dated January 1, 1988 as amended on January 1, 1990; provided, however, that
such counsel may state that they express no opinion in their opinion pursuant to
this paragraph 6.3.4 with respect to federal or state securities laws, other
antifraud laws and fraudulent transfer laws; provided further that insofar as
performance by Allocation Fund of its obligations under this Agreement is
concerned, such counsel may state that they express no opinion as to bankruptcy,
insolvency, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights;
6.3.5 To the knowledge of such counsel, no consent, approval, authorization,
filing or order of any court or governmental authority is required for the
consummation by Allocation Fund of the transactions contemplated herein, except
such as have been obtained under the 1933 Act, the 1934 Act and the Investment
Company Act and such as may be required under state Blue Sky or securities laws;
6.3.6 Allocation Fund has been registered with the SEC as an investment
company, and, to the knowledge of such counsel, no order has been issued or
proceeding instituted to suspend such registration; and
6.3.7 To the knowledge of such counsel, (a) no litigation or administrative
proceeding or investigation of or before any court or governmental body is
presently pending or threatened against Allocation Fund or any of
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<PAGE>
its properties or assets, and (b) Allocation Fund is not a party to or subject
to the provision of any order, decree or judgment of any court or governmental
body, which materially and adversely affects its business, except as otherwise
disclosed.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF ALLOCATION FUND
The obligations of Allocation Fund to complete the transactions provided for
herein shall be subject to the performance by
IncomeVertible-Registered Trademark- Fund of all the obligations to be performed
by it hereunder on or before the Closing Date and the following further
conditions:
7.1 All representations and warranties of IncomeVertible-Registered Trademark-
Fund contained in this Agreement shall be true and correct in all material
respects as of the date hereof and, except as they may be affected by the
transactions contemplated by this Agreement, as of the Closing Date with the
same force and effect as if made on and as of the Closing Date.
7.2 IncomeVertible-Registered Trademark- Fund shall have delivered to
Allocation Fund on the Closing Date a statement of its assets and liabilities,
which statement shall be prepared in accordance with generally accepted
accounting principles consistently applied, together with a list of its
portfolio securities showing the adjusted tax bases of such securities by lot,
as of the Closing Date, certified by the Treasurer of
IncomeVertible-Registered Trademark- Fund.
7.3 IncomeVertible-Registered Trademark- Fund shall have delivered to
Allocation Fund on the Closing Date a certificate executed in its name by the
President or a Vice President of IncomeVertible-Registered Trademark- Fund, in
form and substance satisfactory to Allocation Fund and dated as of the Closing
Date, to the effect that the representations and warranties of
IncomeVertible-Registered Trademark- Fund made in this Agreement are true and
correct at and as of the Closing Date except as they may be affected by the
transactions contemplated by this Agreement, and as to such other matters as
Allocation Fund shall reasonably request.
7.4 On or immediately prior to the Closing Date,
IncomeVertible-Registered Trademark- Fund shall have declared and paid to its
shareholders of record one or more dividends and/or other distributions so that
it will have distributed substantially all (and in any event not less than
ninety-eight percent) of its investment company taxable income (computed without
regard to any deduction for dividends paid), net tax-exempt interest income, if
any, and realized net capital gain, if any, for all taxable years through its
liquidation.
7.5 Allocation Fund shall have received on the Closing Date a favorable opinion
from Fulbright & Jaworski, L.L.P., counsel to
IncomeVertible-Registered Trademark- Fund, dated as of the Closing Date, to the
effect that:
7.5.1 IncomeVertible-Registered Trademark- Fund has been duly incorporated and
is an existing corporation in good standing under the laws of the State of
Maryland;
7.5.2 This Agreement has been duly authorized, executed and delivered by
IncomeVertible-Registered Trademark- Fund and constitutes a valid and legally
binding obligation of IncomeVertible-Registered Trademark- Fund enforceable in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles;
7.5.3 The execution and delivery of the Agreement did not, and the performance
by IncomeVertible-Registered Trademark- Fund of its obligations hereunder will
not, (i) violate IncomeVertible-Registered Trademark- Fund's Articles of
Incorporation or By-Laws or (ii) result in a default or a breach of the
Management Agreement, dated May 2, 1988 as amended January 22, 1990, between
IncomeVertible-Registered Trademark- Fund and Prudential Mutual Fund Management,
Inc., the Custodian Agreement, dated June 6, 1990, between
IncomeVertible-Registered Trademark- Fund and State Street Bank and Trust
Company, the Distribution Agreement (Class A shares), dated August 1, 1994,
between IncomeVertible-Registered Trademark- Fund and Prudential Mutual Fund
Distributors, Inc., the Distribution Agreement (Class B shares), dated
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<PAGE>
August 1, 1994, between IncomeVertible-Registered Trademark- Fund and Prudential
Securities Incorporated (Prudential Securities), the Distribution Agreement
(Class C shares), dated August 1, 1994, between
IncomeVertible-Registered Trademark- Fund and Prudential Securities and the
Transfer Agency and Service Agreement, dated January 1, 1988 as amended January
1, 1990 between IncomeVertible-Registered Trademark- Fund and Prudential Mutual
Fund Services, Inc.; provided, however, that such counsel may state that they
express no opinion in their opinion pursuant to this paragraph 7.5.3 with
respect to federal or state securities laws, other antifraud laws and fraudulent
transfer laws; provided further that insofar as performance by
IncomeVertible-Registered Trademark- Fund of its obligations under this
Agreement is concerned, such counsel may state that they express no opinion as
to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
and to general equity principles;
7.5.4 All regulatory consents, authorizations and approvals required to be
obtained by IncomeVertible-Registered Trademark- Fund under the federal laws of
the United States, the laws of the State of New York and the General Corporation
Law of the State of Maryland for the consummation of the transactions
contemplated by this Agreement have been obtained;
7.5.5 Such counsel knows of no litigation or any governmental proceeding
instituted or threatened against IncomeVertible-Registered Trademark- Fund that
would be required to be disclosed in the Registration Statement and is not so
disclosed; and
7.5.6 IncomeVertible-Registered Trademark- Fund has been registered with the
SEC as an investment company, and, to the knowledge of such counsel, no order
has been issued or proceeding instituted to suspend such registration.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF ALLOCATION FUND AND
INCOMEVERTIBLE-REGISTERED TRADEMARK- FUND
The obligations of each Fund hereunder are subject to the further conditions
that on or before the Closing Date:
8.1 This Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of (a) the Board of Directors of the
IncomeVertible-Registered Trademark- Fund and the Trustees of Allocation Fund,
as to the determinations set forth in Rule 17a-8(a) under the Investment Company
Act, (b) the Trustees of Allocation Fund as to the assumption by the Portfolio
of the liabilities of IncomeVertible-Registered Trademark- Fund and (c) the
holders of the outstanding shares of IncomeVertible-Registered Trademark- Fund
in accordance with the provisions of IncomeVertible-Registered Trademark- Fund's
Articles of Incorporation, and certified copies of the resolutions evidencing
such approvals shall have been delivered to Allocation Fund and
IncomeVertible-Registered Trademark- Fund.
8.2 Any proposed change to Allocation Fund's operations that may be approved by
the Trustees of Allocation Fund subsequent to the date of this Agreement but in
connection with and as a condition to implementing the transactions contemplated
by this Agreement, for which the approval of Allocation Fund shareholders is
required pursuant to the Investment Company Act or otherwise, shall have been
approved by the requisite vote of the holders of the outstanding shares of
Allocation Fund in accordance with the Investment Company Act and the provisions
of the Law of Voluntary Associations and Trusts of the Commonwealth of
Massachusetts, and certified copies of the resolution evidencing such approval
shall have been delivered to IncomeVertible-Registered Trademark- Fund.
8.3 On the Closing Date no action, suit or other proceeding shall be pending
before any court or governmental agency in which it is sought to restrain or
prohibit, or obtain damages or other relief in connection with, this Agreement
or the transactions contemplated herein.
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<PAGE>
8.4 All consents of other parties and all consents, orders and permits of
federal, state and local regulatory authorities (including those of the SEC and
of state Blue Sky or securities authorities, including "no-action" positions of
such authorities) deemed necessary by Allocation Fund or
IncomeVertible-Registered Trademark- Fund to permit consummation, in all
material respects, of the transactions contemplated hereby shall have been
obtained, except where failure to obtain any such consent, order or permit would
not involve a risk of a material adverse effect on the assets or properties of
Allocation Fund or IncomeVertible-Registered Trademark- Fund, provided that
either party hereto may for itself waive any part of this condition.
8.5 The Registration Statement shall have become effective under the 1933 Act,
and no stop orders suspending the effectiveness thereof shall have been issued,
and to the best knowledge of the parties hereto, no investigation or proceeding
under the 1933 Act for that purpose shall have been instituted or be pending,
threatened or contemplated.
8.6 IncomeVertible-Registered Trademark- Fund and Allocation Fund shall have
received on or before the Closing Date an opinion of Fulbright & Jaworski
L.L.P., counsel to IncomeVertible-Registered Trademark- Fund, satisfactory to
IncomeVertible-Registered Trademark- Fund and to Allocation Fund, substantially
to the effect that for federal income tax purposes:
8.6.1 The acquisition by Allocation Fund of the assets of
IncomeVertible-Registered Trademark- Fund in exchange solely for voting shares
of Allocation Fund and the assumption by Allocation Fund of
IncomeVertible-Registered Trademark- Fund's liabilities, if any, followed by the
distribution of Allocation Fund's voting shares by
IncomeVertible-Registered Trademark- Fund pro rata to its shareholders, pursuant
to its liquidation and constructively in exchange for their
IncomeVertible-Registered Trademark- Fund shares, will constitute a
reorganization within the meaning of Section 368(a)(1)(C) of the Internal
Revenue Code, and IncomeVertible-Registered Trademark- Fund and Allocation Fund
each will be "a party to a reorganization" within the meaning of Section 368(b)
of the Internal Revenue Code;
8.6.2 IncomeVertible-Registered Trademark- Fund's shareholders will recognize
no gain or loss upon the constructive exchange of all of their shares of
IncomeVertible-Registered Trademark- Fund solely for shares of Allocation Fund
in complete liquidation of IncomeVertible-Registered Trademark- Fund;
8.6.3 No gain or loss will be recognized to
IncomeVertible-Registered Trademark- Fund upon the transfer of its assets to
Allocation Fund in exchange solely for shares of Allocation Fund and the
assumption by Allocation Fund of IncomeVertible-Registered Trademark- Fund's
liabilities, if any, and the subsequent distribution of those shares to
IncomeVertible-Registered Trademark- Fund shareholders in complete liquidation
of IncomeVertible-Registered Trademark- Fund;
8.6.4 No gain or loss will be recognized to Allocation Fund upon the
acquisition of IncomeVertible-Registered Trademark- Fund's assets in exchange
solely for shares of Allocation Fund and the assumption of
IncomeVertible-Registered Trademark- Fund's liabilities, if any;
8.6.5 Allocation Fund's basis for those assets will be the same as the basis
thereof when held by IncomeVertible-Registered Trademark- Fund immediately
before the transfer, and the holding period of such assets acquired by
Allocation Fund will include the holding period thereof when held by
IncomeVertible-Registered Trademark- Fund;
8.6.6 The IncomeVertible-Registered Trademark- Fund shareholders' basis for the
shares of Allocation Fund to be received by them pursuant to the reorganization
will be the same as their basis for the shares of
IncomeVertible-Registered Trademark- Fund to be constructively surrendered in
exchange thereof; and
8.6.7 The holding period of Allocation Fund shares to be received by
IncomeVertible-Registered Trademark- Fund shareholders will include the period
during which IncomeVertible-Registered Trademark- Fund shares to be
constructively surrendered in exchange therefor were held; provided such
IncomeVertible-Registered Trademark- Fund shares were held as capital assets by
those shareholders on the date of the exchange.
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9. FINDER'S FEES AND EXPENSES
9.1 Each Fund represents and warrants to the other that there are no finder's
fees payable in connection with the transactions provided for herein.
9.2 The expenses incurred in connection with the entering into and carrying out
of the provisions of this Agreement shall be allocated to the Funds pro rata in
a fair and equitable manner in proportion to their respective assets.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 This Agreement constitutes the entire agreement between the Funds.
10.2 The representations, warranties and covenants contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith shall
survive the consummation of the transactions contemplated hereunder.
11. TERMINATION
Either Fund may at its option terminate this Agreement at or prior to the
Closing Date because of:
11.1 A material breach by the other of any representation, warranty or covenant
contained herein to be performed at or prior to the Closing Date; or
11.2 A condition herein expressed to be precedent to the obligations of either
party not having been met and it reasonably appearing that it will not or cannot
be met; or
11.3 A mutual written agreement of IncomeVertible-Registered Trademark- Fund
and Allocation Fund.
In the event of any such termination, there shall be no liability for
damages on the part of either Fund (other than the liability of the Funds to pay
their allocated expenses pursuant to paragraph 9.2) or any Director/Trustee or
officer of Allocation Fund or IncomeVertible-Registered Trademark- Fund.
12. AMENDMENT
This Agreement may be amended, modified or supplemented only in writing by
the parties; provided, however, that following the shareholders' meeting called
by IncomeVertible-Registered Trademark- Fund pursuant to paragraph 5.2, no such
amendment may have the effect of changing the provisions for determining the
number of shares of Allocation Fund to be distributed to
IncomeVertible-Registered Trademark- Fund shareholders under this Agreement to
the detriment of such shareholders without their further approval.
13. NOTICES
Any notice, report, demand or other communication required or permitted by
any provision of this Agreement shall be in writing and shall be given by hand
delivery, or prepaid certified mail or overnight service addressed to Prudential
Mutual Fund Management, Inc., One Seaport Plaza, New York, New York 10292,
Attention: S. Jane Rose.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
14.1 The paragraph headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which will be deemed an original.
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14.3 This Agreement shall be governed by and construed in accordance with the
laws of the State of New York.
14.4 This Agreement shall bind and inure to the benefit of the parties and
their respective successors and assigns, and no assignment or transfer hereof or
of any rights or obligations hereunder shall be made by either party without the
written consent of the other party. Nothing herein expressed or implied is
intended or shall be construed to confer upon or give any person, firm or
corporation other than the parties and their respective successors and assigns
any rights or remedies under or by reason of this Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by the President or Vice President of each Fund.
Prudential IncomeVertible-Registered Trademark-
Fund, Inc.
By /s/__ROBERT F. GUNIA_________________________
PRESIDENT/VICE PRESIDENT
Prudential Allocation Fund
By /s/__ROBERT F. GUNIA_________________________
PRESIDENT/VICE PRESIDENT
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<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
SYNOPSIS................................................................................................... 2
General................................................................................................ 2
The Proposed Reorganization and Liquidation............................................................ 2
Reasons for the Proposed Reorganization and Liquidation................................................ 3
Certain Differences Between the Portfolio and IncomeVertible-Registered Trademark- Fund................ 5
Structure of the Portfolio and IncomeVertible-Registered Trademark- Fund............................... 6
Investment Objectives and Policies..................................................................... 6
Fees and Expenses...................................................................................... 7
Management Fees.................................................................................... 7
Distribution Fees.................................................................................. 7
Other Expenses..................................................................................... 9
Expense Ratios..................................................................................... 9
Purchases and Redemptions.............................................................................. 10
Exchange Privileges.................................................................................... 11
Dividends and Distributions............................................................................ 11
Federal Tax Consequences of Proposed Reorganization.................................................... 11
PRINCIPAL RISK FACTORS..................................................................................... 11
High Yield Securities.................................................................................. 11
Foreign Investments.................................................................................... 12
Hedging and Income Enhancement Activities.............................................................. 12
Borrowing.............................................................................................. 13
Realignment of Investment Portfolio.................................................................... 13
THE PROPOSED TRANSACTION................................................................................... 13
Agreement and Plan of Reorganization and Liquidation................................................... 13
Reasons for the Reorganization and Liquidation......................................................... 15
Description of Securities to be Issued................................................................. 15
Tax Considerations..................................................................................... 16
Certain Comparative Information About the Funds........................................................ 16
Capitalization..................................................................................... 16
Shareholder Meetings and Voting Rights............................................................. 16
Shareholder Liability.............................................................................. 17
Liability and Indemnification of Directors and Trustees............................................ 18
Pro Forma Capitalization and Ratios.................................................................... 18
INFORMATION ABOUT THE PORTFOLIO............................................................................ 19
INFORMATION ABOUT INCOMEVERTIBLE-Registered Trademark- FUND................................................ 21
VOTING INFORMATION......................................................................................... 22
OTHER MATTERS.............................................................................................. 23
SHAREHOLDERS' PROPOSALS.................................................................................... 23
APPENDIX A--Performance Overview........................................................................... A-1
APPENDIX B--Agreement and Plan of Reorganization and Liquidation........................................... B-1
TABLE OF CONTENTS
ENCLOSURES
Prospectus of Prudential Allocation Fund dated September 29, 1994 including November 23, 1994, January
16, 1995, May 5, 1995 and July 3, 1995 supplements thereto.
Annual Report of Prudential IncomeVertible-Registered Trademark- Fund, Inc. for the Fiscal Year ended
December 31, 1994.
</TABLE>
<PAGE>
PRUDENTIAL ALLOCATION FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED JULY 24, 1995
ACQUISITION OF ASSETS OF
PRUDENTIAL INCOMEVERTIBLE-REGISTERED TRADEMARK- FUND, INC.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(800) 225-1852
------------------------
BY AND IN EXCHANGE FOR THE SHARES OF
THE CONSERVATIVELY MANAGED PORTFOLIO OF PRUDENTIAL ALLOCATION FUND
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(800) 225-1852
This Statement of Additional Information, relating specifically to the
proposed transfer of all the assets and the assumption of all the liabilities,
if any, of Prudential IncomeVertible-Registered Trademark- Fund, Inc. (the
Acquired Fund) by the Conservatively Managed Portfolio of Prudential Allocation
Fund (the Acquiring Fund) consists of this cover page, the following page which
supplements the Acquiring Fund's Statement of Additional Information dated
September 29, 1994, the attached pro forma financial statements and the
following described documents, each of which is attached hereto and incorporated
herein by reference.
1. The Statement of Additional Information of the Acquiring Fund dated
September 29, 1994, as supplemented by a supplement dated November 1,
1994.
2. The Semi-Annual Report to Shareholders of the Acquiring Fund for the
six-month period ended January 31, 1995.
3. The Annual Report to Shareholders of the Acquired Fund for the fiscal
year ended December 31, 1994.
The Statement of Additional Information is not a prospectus. A Prospectus
and Proxy Statement dated July 24, 1995 relating to the above referenced matter
may be obtained from the Acquiring Fund without charge by writing or calling
Prudential Allocation Fund at the address or telephone number listed above. This
Statement of Additional Information relates to, and should be read in
conjunction with, the Prospectus and Proxy Statement.
1
<PAGE>
The following information supplements the Prudential Allocation Fund
Statement of Additional Information dated September 29, 1994. It responds to
Item 14 of Form N-1A, which was amended effective January 23, 1995.
The following table sets forth the aggregate compensation paid by Prudential
Allocation Fund (the Fund) for the fiscal year ended July 31, 1994 to the
Trustees who are not affiliated with Prudential Mutual Fund Management, Inc.,
the Fund's Manager, and the aggregate compensation paid to such Trustees for
service on the Fund's Board and the Board of any other investment companies
managed by Prudential Mutual Fund Management, Inc. (Fund Complex) for the
calendar year ended December 31, 1994.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM FUND
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID
NAME AND POSITION FROM FUND EXPENSES RETIREMENT TO TRUSTEES
- --------------------------------------------------------- ------------- ----------------- ------------------- -------------
<S> <C> <C> <C> <C>
Edward D. Beach, Trustee $ 8,500 None N/A $ 159,000(20)*
Donald D. Lennox, Trustee $ 8,500 None N/A $ 90,000(10)*
Douglas H. McCorkindale, Trustee $ 8,500 None N/A $ 60,000 (7)*
Thomas T. Mooney, Trustee $ 8,500 None N/A $ 114,000(15)*
Louis A. Weil III, Trustee $ 8,500 None N/A $ 97,500(12)*
<FN>
- ------------
* Indicates number of funds in Fund Complex (including the Fund) to which
aggregate compensation relates.
</TABLE>
2
<PAGE>
FINANCIAL STATEMENTS
The following are pro forma financial statements which give effect to the
proposed transaction whereby all the assets of Prudential
IncomeVertible-Registered Trademark- Fund, Inc. will be exchanged for shares of
Prudential Allocation Fund (Conservatively Managed Portfolio) and Prudential
Allocation Fund (Conservatively Managed Portfolio) will assume the liabilities,
if any, of Prudential IncomeVertible-Registered Trademark- Fund, Inc.
Immediately thereafter, the shares of Prudential Allocation Fund (Conservatively
Managed Portfolio) will be distributed to the shareholders of Prudential
IncomeVertible-Registered Trademark- Fund, Inc. in a total liquidation of
Prudential IncomeVertible-Registered Trademark- Fund, Inc., which will
subsequently be dissolved. The following pro forma financial statements include
a pro forma Portfolio of Investments at January 31, 1995, a pro forma Statement
of Assets and Liabilities at January 31, 1995, a pro forma Statement of
Operations for the six months ended January 31, 1995, and a pro forma Statement
of Operations for the year ended July 31, 1994.
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------------------------------------------------ -----------------------------------------------------
PRUDENTIAL PRUDENTIAL
CONSERVATIVELY INCOMEVERTIBLE CONSERVATIVELY INCOMEVERTIBLE
MANAGED -REGISTERED TRADEMARK- MANAGED -REGISTERED TRADEMARK- PRO FORMA
PORTFOLIO FUND, INC. TOTAL DESCRIPTION PORTFOLIO FUND, INC. COMBINED
-------------- ----------------------- ------- -------------------- -------------- ----------------------- ------------
<C> <C> <C> <S> <C> <C> <C>
LONG-TERM INVESTMENTS--73.8%
COMMON STOCKS--36.1%
AEROSPACE/DEFENSE--0.8%
Banner Aerospace,
214,800 214,800 Inc.*............. $ 912,900 $ $ 912,900
116,400 116,400 Gencorp, Inc........ 1,484,100 1,484,100
Litton Inds.,
45,100 45,100 Inc............... 1,601,050 1,601,050
Rockwell
International
43,900 43,900 Corp.............. 1,651,737 1,651,737
-------------- ------------ ------------
5,649,787 0 5,649,787
-------------- ------------ ------------
AUTOMOTIVE--1.4%
Coltec Inds.,
36,500 36,500 Inc.*............. 565,750 565,750
80,000 108,000 188,000 Ford Motor Co....... 2,020,000 2,727,000 4,747,000
General Motors
42,200 42,200 Corp., Class E.... 1,629,975 1,629,975
General Motors
80,800 80,800 Corp., Class H.... 2,727,000 2,727,000
-------------- ------------ ------------
6,942,725 2,727,000 9,669,725
-------------- ------------ ------------
CEMENT--0.1%
Giant Cement
78,500 78,500 Holding, Inc.*.... 922,375 922,375
-------------- ------------ ------------
922,375 0 922,375
-------------- ------------ ------------
CHEMICALS--1.4%
114,100 114,100 Ferro Corp.......... 2,681,350 2,681,350
18,300 18,300 FMC Corp.*.......... 1,059,113 1,059,113
80,500 80,500 Hanna(M.A), Co...... 1,942,062 1,942,062
Imperial Chemical
57,300 57,300 Inds. (ADR)....... 2,671,612 2,671,612
62,100 62,100 Om Group Inc........ 1,397,250 1,397,250
-------------- ------------ ------------
9,751,387 0 9,751,387
-------------- ------------ ------------
</TABLE>
3
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------------------------------------------------ -----------------------------------------------------
PRUDENTIAL PRUDENTIAL
CONSERVATIVELY INCOMEVERTIBLE CONSERVATIVELY INCOMEVERTIBLE
MANAGED -REGISTERED TRADEMARK- MANAGED -REGISTERED TRADEMARK- PRO FORMA
PORTFOLIO FUND, INC. TOTAL DESCRIPTION PORTFOLIO FUND, INC. COMBINED
-------------- ----------------------- ------- -------------------- -------------- ----------------------- ------------
<C> <C> <C> <S> <C> <C> <C>
COMPUTER & RELATED EQUIPMENT--2.4%
Compaq Computer
50,000 50,000 Corp.*............ $ 1,787,500 $ $ 1,787,500
Seagate
65,000 65,000 Technology*....... 1,649,375 1,649,375
160,000 160,000 Verifone, Inc.*..... 3,480,000 3,480,000
Cisco Systems,
100,000 100,000 Inc.*............. 3,337,500 3,337,500
Computer Associates
65,000 65,000 Int'l, Inc........ 3,241,875 3,241,875
125,000 125,000 Cyrix Corp.......... 3,062,500 3,062,500
-------------- ------------ ------------
3,436,875 13,121,875 16,558,750
-------------- ------------ ------------
CONGLOMERATES--0.7%
Canadian Pacific
250,000 250,000 Limited........... 3,406,250 3,406,250
75,000 75,000 Hanson PLC (ADR).... 1,378,125 1,378,125
-------------- ------------ ------------
0 4,784,375 4,784,375
-------------- ------------ ------------
CONSUMER
PRODUCTS--0.8%
59,900 59,900 Eastman Kodak Co.... 2,935,100 2,935,100
158,500 158,500 Whitman Corp........ 2,575,625 2,575,625
-------------- ------------ ------------
5,510,725 0 5,510,725
-------------- ------------ ------------
CONTAINERS &
PACKAGING--0.5%
Owens-Illinois
96,100 96,100 Hldgs. Corp.*..... 997,038 997,038
Stone Container
160,000 160,000 Corp.*............ 2,720,000 2,720,000
-------------- ------------ ------------
3,717,038 0 3,717,038
-------------- ------------ ------------
DRUG & HEALTH
CARE--2.9%
Columbia Healthcare
60,000 60,000 Corp.............. 2,407,500 2,407,500
Forest Laboratories,
32,000 32,000 Inc.*............. 1,584,000 1,584,000
Glaxo Holdings PLC
93,900 93,900 (ADR)............. 1,838,750 1,838,750
National Medical
Enterprises,
290,000 290,000 Inc............... 4,241,250 4,241,250
Schering Plough
50,300 50,300 Corp.............. 3,948,550 3,948,550
St. Jude Medical,
40,300 40,300 Inc............... 1,531,400 1,531,400
U.S. Healthcare
55,000 55,000 Inc............... 2,516,250 2,516,250
50,000 50,000 Zeneca Group PLC.... 2,093,750 2,093,750
-------------- ------------ ------------
20,161,450 0 20,161,450
-------------- ------------ ------------
ELECTRONICS--1.1%
109,100 109,100 ADT Ltd.*........... 1,091,000 1,091,000
93,000 93,000 Belden, Inc......... 2,046,000 2,046,000
60,000 60,000 Loral Corp.......... 2,332,500 2,332,500
Mark IV Industries,
108,400 108,400 Inc............... 2,086,700 2,086,700
-------------- ------------ ------------
7,556,200 0 7,556,200
-------------- ------------ ------------
</TABLE>
4
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------------------------------------------------ -----------------------------------------------------
PRUDENTIAL PRUDENTIAL
CONSERVATIVELY INCOMEVERTIBLE CONSERVATIVELY INCOMEVERTIBLE
MANAGED -REGISTERED TRADEMARK- MANAGED -REGISTERED TRADEMARK- PRO FORMA
PORTFOLIO FUND, INC. TOTAL DESCRIPTION PORTFOLIO FUND, INC. COMBINED
-------------- ----------------------- ------- -------------------- -------------- ----------------------- ------------
<C> <C> <C> <S> <C> <C> <C>
FINANCIAL
SERVICES--5.1%
70,000 70,000 Citicorp............ $ 2,843,750 $ $ 2,843,750
Dean Witter Discover
124,500 124,500 & Co.............. 4,653,187 4,653,187
Federal National
Mortgage
45,700 45,700 Association....... 3,267,550 3,267,550
First Bank System,
79,400 79,400 Inc............... 2,868,325 2,868,325
First Interstate
50,000 50,000 Bank Corp......... 3,700,000 3,700,000
Kansas City Southern
65,000 65,000 Inds., Inc........ 2,331,875 2,331,875
162,600 162,600 Keycorp............. 4,512,150 4,512,150
70,000 125,000 195,000 MBNA Corp........... 1,785,000 3,187,500 4,972,500
191,000 191,000 Norwest Corp........ 4,584,000 4,584,000
Westen National
166,600 166,600 Corp.............. 1,978,375 1,978,375
-------------- ------------ ------------
32,524,212 3,187,500 35,711,712
-------------- ------------ ------------
FOOD &
BEVERAGE--0.06%
17,900 17,900 Sbarro, Inc......... 413,938 413,938
-------------- ------------ ------------
413,938 0 413,938
-------------- ------------ ------------
FREIGHT
TRANSPORTATION--0.7%
Chicago & North
Western
Transportation
116,500 116,500 Corp.*............ 2,490,188 2,490,188
Illinois Central
76,300 76,300 Corp.............. 2,508,362 2,508,362
-------------- ------------ ------------
4,998,550 0 4,998,550
-------------- ------------ ------------
FURNITURE--0.1%
Leggett & Platt,
22,800 22,800 Inc............... 820,800 820,800
-------------- ------------ ------------
820,800 0 820,800
-------------- ------------ ------------
HOME
IMPROVEMENTS--0.9%
Owens-Corning
Fiberglas
115,000 115,000 Corp.*............ 3,536,250 3,536,250
Ply Gem Inds.,
119,400 119,400 Inc............... 2,462,625 2,462,625
-------------- ------------ ------------
5,998,875 0 5,998,875
-------------- ------------ ------------
INSURANCE--2.8%
Berkley (W.R.)
32,100 32,100 Corp.............. 1,195,725 1,195,725
Emphesys Financial
57,300 57,300 Group, Inc.,...... 1,812,113 1,812,113
Equitable of Iowa
90,000 90,000 Cos............... 2,655,000 2,655,000
70,500 70,500 National Re Corp.... 1,947,562 1,947,562
Penncorp Financial
111,200 111,200 Group, Inc........ 1,515,100 1,515,100
Reinsurance Group
82,400 82,400 America, Inc...... 2,049,700 2,049,700
90,000 90,000 SunAmerica, Inc..... 3,555,000 3,555,000
70,000 70,000 Travelers Corp...... 2,581,250 2,581,250
Trenwick Group,
48,900 48,900 Inc............... 2,114,925 2,114,925
-------------- ------------ ------------
19,426,375 0 19,426,375
-------------- ------------ ------------
</TABLE>
5
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------------------------------------------------ -----------------------------------------------------
PRUDENTIAL PRUDENTIAL
CONSERVATIVELY INCOMEVERTIBLE CONSERVATIVELY INCOMEVERTIBLE
MANAGED -REGISTERED TRADEMARK- MANAGED -REGISTERED TRADEMARK- PRO FORMA
PORTFOLIO FUND, INC. TOTAL DESCRIPTION PORTFOLIO FUND, INC. COMBINED
-------------- ----------------------- ------- -------------------- -------------- ----------------------- ------------
<C> <C> <C> <S> <C> <C> <C>
MACHINERY &
EQUIPMENT--1.9%
Applied Power Inc.,
83,000 83,000 Class A........... $ 2,023,125 $ $ 2,023,125
Donaldson Co.
85,900 85,900 Inc............... 1,986,437 1,986,437
Gardner Denver
132,100 132,100 Machinery Inc.*... 1,494,381 1,494,381
Imo Industries
143,200 143,200 Inc.*............. 1,145,600 1,145,600
Parker-HanniFin
23,700 23,700 Corp.............. 1,116,862 1,116,862
Regal Beloit
144,100 144,100 Corp.............. 1,765,225 1,765,225
Smith (A.O.)
83,000 83,000 Corp.............. 1,826,000 1,826,000
Smith International,
149,300 149,300 Inc.*............. 1,735,613 1,735,613
-------------- ------------ ------------
13,093,243 0 13,093,243
-------------- ------------ ------------
MEDIA--1.0%
American Publishing
85,900 85,900 Co. Class A....... 1,030,800 1,030,800
Tele-Communications,
152,800 152,800 Inc.*............. 3,247,000 3,247,000
The Times Mirror
75,000 75,000 Co................ 2,428,125 2,428,125
-------------- ------------ ------------
6,705,925 0 6,705,925
-------------- ------------ ------------
MINING--1.0%
90,000 90,000 Cominco Ltd......... 2,304,595 2,304,595
144,000 144,000 INDRESCO, Inc.*..... 1,692,000 1,692,000
Santa Fe Pacific
300,000 300,000 Gold Corp......... 3,037,500 3,037,500
-------------- ------------ ------------
7,034,095 0 7,034,095
-------------- ------------ ------------
MISCELLANEOUS--1.3%
BWIP Holding,
61,500 61,500 Inc............... 968,625 968,625
Federal Express
45,000 45,000 Corp.............. 2,733,750 2,733,750
110,000 110,000 Hanson PLC (ADR).... 2,021,250 2,021,250
Titan Wheel
International,
77,400 77,400 Inc............... 2,147,850 2,147,850
York International
32,800 32,800 Corp.............. 1,143,900 1,143,900
-------------- ------------ ------------
9,015,375 0 9,015,375
-------------- ------------ ------------
NON-FERROUS
METALS--0.2%
Pegasus Gold,
150,000 150,000 Inc.*............. 1,556,250 1,556,250
-------------- ------------ ------------
0 1,556,250 1,556,250
-------------- ------------ ------------
OIL &
GAS--INTERNATIONAL--2.3%
Basin Exploration,
95,300 95,300 Inc.*............. 667,100 667,100
Cabot Oil & Gas
106,200 106,200 Corp.............. 1,327,500 1,327,500
113,200 113,200 Mascotech, Inc...... 1,344,250 1,344,250
148,000 148,000 Mesa, Inc.*......... 721,500 721,500
33,400 33,400 Murphy Oil Corp..... 1,452,900 1,452,900
157,300 157,300 Oryx Energy Co...... 1,631,987 1,631,987
Parker & Parsley
44,700 44,700 Petroleum Co...... 815,775 815,775
Seagull Energy
89,000 89,000 Corp.*............ 1,424,000 1,424,000
Societe Nationale
Elf Aquitaine,
45,000 45,000 ADR............... 1,620,000 1,620,000
</TABLE>
6
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------------------------------------------------ -----------------------------------------------------
PRUDENTIAL PRUDENTIAL
CONSERVATIVELY INCOMEVERTIBLE CONSERVATIVELY INCOMEVERTIBLE
MANAGED -REGISTERED TRADEMARK- MANAGED -REGISTERED TRADEMARK- PRO FORMA
PORTFOLIO FUND, INC. TOTAL DESCRIPTION PORTFOLIO FUND, INC. COMBINED
-------------- ----------------------- ------- -------------------- -------------- ----------------------- ------------
<C> <C> <C> <S> <C> <C> <C>
OIL &
GAS--INTERNATIONAL
(CONTINUED)
YPF Sociedad Anonima
125,000 125,000 (ADS)............. $ 2,578,125 $ $ 2,578,125
130,700 130,700 BJ Services Co*..... 2,238,237 2,238,237
-------------- ------------ ------------
13,583,137 2,238,237 15,821,374
-------------- ------------ ------------
PAPER & FOREST
PRODUCTS--0.8%
44,300 44,300 Mead Corp........... 2,209,463 2,209,463
76,350 76,350 Pentair, Inc........ 3,130,350 3,130,350
-------------- ------------ ------------
5,339,813 0 5,339,813
-------------- ------------ ------------
PETROLEUM
SERVICES--0.9%
106,100 106,100 BJ Services Co.*.... 1,816,963 1,816,963
75,000 75,000 Exxon Corp.......... 4,687,500 4,687,500
-------------- ------------ ------------
6,504,463 0 6,504,463
-------------- ------------ ------------
RAILROADS--0.3%
Burlington Northern,
45,500 45,500 Inc............... 2,161,250 2,161,250
-------------- ------------ ------------
2,161,250 0 2,161,250
-------------- ------------ ------------
RETAIL--0.8%
Best Products,
216,300 216,300 Inc.*............. 1,243,725 1,243,725
58,700 58,700 Caldor Corp......... 1,232,700 1,232,700
Harcourt General,
50,000 50,000 Inc............... 1,668,750 1,668,750
Sears Roebuck &
31,500 31,500 Co................ 1,389,938 1,389,938
-------------- ------------ ------------
5,535,113 0 5,535,113
-------------- ------------ ------------
STEEL & METALS--1.4%
Material Sciences
112,500 112,500 Corp.*............ 1,645,312 1,645,312
National Steel
150,000 142,500 292,500 Corp.*............ 2,250,000 2,137,500 4,387,500
Trinity Industries,
70,000 70,000 Inc............... 2,310,000 2,310,000
Wolverine Tube,
60,300 60,300 Inc.*............. 1,469,813 1,469,813
-------------- ------------ ------------
7,675,125 2,137,500 9,812,625
-------------- ------------ ------------
TECHNOLOGY
SECTOR--0.1%
Aspen Technology,
42,000 42,000 Inc.*............. 766,500 766,500
-------------- ------------ ------------
0 766,500 766,500
-------------- ------------ ------------
TELECOMMUNICATIONS--1.8%
AirTouch
62,100 62,100 Communications*... 1,707,750 1,707,750
96,400 96,400 Frontier Corp....... 2,024,400 2,024,400
NEXTEL
Communications
200,000 200,000 Inc............... 1,925,000 1,925,000
Telefonos de Mexico
75,000 75,000 S.A. (ADR)........ 2,653,125 2,653,125
115,000 115,000 Comsat Corp......... 2,271,250 2,271,250
Nextel
Communications,
225,000 225,000 Inc.*............. 2,165,625 2,165,625
-------------- ------------ ------------
8,310,275 4,436,875 12,747,150
-------------- ------------ ------------
</TABLE>
7
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------------------------------------------------ -----------------------------------------------------
PRUDENTIAL PRUDENTIAL
CONSERVATIVELY INCOMEVERTIBLE CONSERVATIVELY INCOMEVERTIBLE
MANAGED -REGISTERED TRADEMARK- MANAGED -REGISTERED TRADEMARK- PRO FORMA
PORTFOLIO FUND, INC. TOTAL DESCRIPTION PORTFOLIO FUND, INC. COMBINED
-------------- ----------------------- ------- -------------------- -------------- ----------------------- ------------
<C> <C> <C> <S> <C> <C> <C>
TEXTILES--0.5%
Fruit of the Loom,
140,000 140,000 Inc.*............. $ 3,447,500 $ $ 3,447,500
-------------- ------------ ------------
3,447,500 0 3,447,500
-------------- ------------ ------------
TRUCKING &
SHIPPING--0.2%
Carolina Freight
140,000 140,000 Corp.............. 0 1,452,500 1,452,500
-------------- ------------ ------------
0 1,452,500 1,452,500
-------------- ------------ ------------
Total common stock
(cost
$257,329,597)..... 216,236,626 36,408,612 252,645,238
-------------- ------------ ------------
PREFERRED
STOCKS--9.1%
AUTOMOTIVE--0.2%
Masco Tech, Inc.
Conv. Pfd.
100,000 100,000 Stock............. 0 1,300,000 1,300,000
-------------- ------------ ------------
0 1,300,000 1,300,000
-------------- ------------ ------------
BANKS--2.1%
Citicorp, Conv. Pfd.
38,000 38,000 Stock............. 4,246,500 4,246,500
First Commerce
Corp., Conv. Pfd.
63,900 63,900 Stock............. 1,785,206 1,785,206
2,292,500 2,292,500
65,500 65,500 Nacional Financiera,
Conv. Pfd. Stock
(ADR).............
6,303,625 6,303,625
119,500 119,500 Republic New York
Corp., Conv. Pfd.
Stock.............
-------------- ------------ ------------
0 14,627,831 14,627,831
-------------- ------------ ------------
COMPUTER & RELATED EQUIPMENT--0.9%
General Motors Corp.
Series E, Conv.
115,000 115,000 Pfd. Stock........ 6,598,125 6,598,125
-------------- ------------ ------------
0 6,598,125 6,598,125
-------------- ------------ ------------
ENGINEERING--1.0%
McDermott
International,
Inc., Conv. Pfd.
92,000 92,000 Stock............. 3,829,500 3,829,500
National
Semiconductor
Corp., Conv. Pfd.
48,200 48,200 Stock............. 3,301,700 3,301,700
-------------- ------------ ------------
0 7,131,200 7,131,200
-------------- ------------ ------------
FOOD &
BEVERAGE--0.8%
RJR Nabisco Holdings
Corp., Conv. Pfd.
896,000 896,000 Stock............. 5,600,000 5,600,000
-------------- ------------ ------------
0 5,600,000 5,600,000
-------------- ------------ ------------
GAS PIPELINES--0.7%
Tejas Gas Corp.
Conv. Pfd.
54,900 54,900 Stock............. 2,237,175 2,237,175
Transco Energy Co.,
Conv. Pfd.
58,000 58,000 Stock............. 2,856,500 2,856,500
-------------- ------------ ------------
0 5,093,675 5,093,675
-------------- ------------ ------------
</TABLE>
8
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------------------------------------------------ -----------------------------------------------------
PRUDENTIAL PRUDENTIAL
CONSERVATIVELY INCOMEVERTIBLE CONSERVATIVELY INCOMEVERTIBLE
MANAGED -REGISTERED TRADEMARK- MANAGED -REGISTERED TRADEMARK- PRO FORMA
PORTFOLIO FUND, INC. TOTAL DESCRIPTION PORTFOLIO FUND, INC. COMBINED
-------------- ----------------------- ------- -------------------- -------------- ----------------------- ------------
<C> <C> <C> <S> <C> <C> <C>
HOSPITAL
MANAGEMENT--0.8%
FHP International
Corp, Conv. Pfd.
225,000 225,000 Stock............. $ $ 5,428,125 $ 5,428,125
-------------- ------------ ------------
0 5,428,125 5,428,125
-------------- ------------ ------------
INTEGRATED
PRODUCERS--1.2%
Atlantic Richfield
Co., Conv. Pfd.
186,300 186,300 Stock............. 0 4,378,050 4,378,050
Occidental Petroleum
Corp., Conv. Pfd.
89,100 89,100 Stock............. 4,299,075 4,299,075
-------------- ------------ ------------
0 8,677,125 8,677,125
-------------- ------------ ------------
NON-FERROUS
METALS--1.0%
Alumax, Inc., Conv.
62,400 62,400 Pfd. Stock........ 6,801,600 6,801,600
-------------- ------------ ------------
0 6,801,600 6,801,600
-------------- ------------ ------------
OIL &
GAS--INTERNATIONAL--0.3%
Reading & Bates
Corp., Conv. Pfd.
89,700 89,700 Stock............. 1,995,825 1,995,825
-------------- ------------ ------------
0 1,995,825 1,995,825
-------------- ------------ ------------
RAILROADS--0.8%
Burlington Northern,
Inc., Conv. Pfd.
106,600 106,600 Stock............. 5,796,375 5,796,375
-------------- ------------ ------------
0 5,796,375 5,796,375
-------------- ------------ ------------
Total preferred
stock
(cost
$70,163,519)...... 0 69,049,881 69,049,881
-------------- ------------ ------------
<CAPTION>
PRINCIPAL
AMOUNT
--------------------------------
<C> <C> <C> <S> <C> <C> <C>
DEBT
OBLIGATIONS--27.9%
CORPORATE
BONDS--20.4%
AEROSPACE/DEFENSE--0.5%
GenCorp, Inc., Conv.
Sub. Deb
$ 3,649 $ 3,649 8.00%, 8/1/02..... 0 3,457,428 3,457,428
-------------- ------------ ------------
0 3,457,428 3,457,428
-------------- ------------ ------------
</TABLE>
9
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
MOODY'S --------------------------------------------- --------------------------------------------------
RATING PRUDENTIAL DESCRIPTION PRUDENTIAL
------------ CONSERVATIVELY INCOMEVERTIBLE -------------------- CONSERVATIVELY INCOMEVERTIBLE
MANAGED -REGISTERED TRADEMARK- MANAGED -REGISTERED TRADEMARK- PRO FORMA
PORTFOLIO FUND, INC. TOTAL PORTFOLIO FUND, INC. COMBINED
-------------- ---------------------- ------- -------------- ---------------------- ------------
<C> <C> <C> <C> <S> <C> <C> <C>
AIRLINES--1.0%
AMR Corp., Conv.
Bond
$ 5,000 $ 5,000 6.125%, 11/1/24... $ $ 4,275,000 $ 4,275,000
Delta Air Lines,
Inc.,
Ba1 $ 1,200 1,200 10.375%, 2/1/11... 1,184,112 1,184,112
Ba1 1,900 1,900 9.75%, 5/15/21.... 1,769,375 1,769,375
-------------- ------------ ------------
2,953,487 4,275,000 7,228,487
-------------- ------------ ------------
COMMUNICATIONS
EQUIPMENT--0.5%
General Instrument
Corp., Conv. Bond
2,802 2,802 5.00%, 6/15/00.... 3,446,880 3,446,880
-------------- ------------ ------------
0 3,446,880 3,446,880
-------------- ------------ ------------
COMPUTER HARDWARE--1.9%
LSI Logic Corp.,
Conv. Sub. Deb.
700 700 5.00%, 3/15/001... 1,218,000 1,218,000
Quantum Corp., Conv.
Bond
7,680 7,680 6.375%, 4/1/02.... 7,219,200 7,219,200
SiliconGaphics,
Inc., Zero Coupon
Conv. Bond
8,800 8,800 11/12/13.......... 4,730,000 4,730,000
-------------- ------------ ------------
0 13,167,200 13,167,200
-------------- ------------ ------------
CONGLOMERATES--1.4%
Mark IV Inds., Inc.,
Conv. Sub. Deb.
1,717 1,717 6.25%, 2/15/07.... 2,324,663 2,324,663
Nippon Denro Ispat,
Ltd. Conv. Bond,
(ADR) (India)
3,245 3,245 3.00%, 4/1/01..... 1,979,450 1,979,450
Stone Container
Corp., Conv. Bond
3,175 3,175 8.875%, 7/15/00... 5,286,375 5,286,375
-------------- ------------ ------------
0 9,590,488 9,590,488
-------------- ------------ ------------
DRUGS & HEALTH
CARE--0.5%
Columbia Healthcare
Corp.
A3 950 950 8.85% 1/1/07...... 969,000 969,000
Alza Corp., Zero
Coupon Bond
7,500 7,500 7/14/14........... 2,803,125 2,803,125
-------------- ------------ ------------
969,000 2,803,125 3,772,125
-------------- ------------ ------------
</TABLE>
10
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
MOODY'S --------------------------------------------- --------------------------------------------------
RATING PRUDENTIAL DESCRIPTION PRUDENTIAL
------------ CONSERVATIVELY INCOMEVERTIBLE -------------------- CONSERVATIVELY INCOMEVERTIBLE
MANAGED -REGISTERED TRADEMARK- MANAGED -REGISTERED TRADEMARK- PRO FORMA
PORTFOLIO FUND, INC. TOTAL PORTFOLIO FUND, INC. COMBINED
-------------- ---------------------- ------- -------------- ---------------------- ------------
<C> <C> <C> <C> <S> <C> <C> <C>
ELECTRONICS--0.06%
Westinghouse
Electric Corp.,
Ba1 $ 450 $ $ 450 8.70%, 6/20/96.... $ 453,110 $ $ 453,110
-------------- ------------ ------------
453,110 0 453,110
-------------- ------------ ------------
EXPLORATION &
PRODUCTION--0.5%
Oryx Engergy Co.,
Conv. Sub. Deb.
2,600 2,600 7.50%, 5/15/14.... 1,813,500 1,813,500
Cross Timbers Oil
Co., Conv. Deb.
2,275 2,275 5.25%, 11/1/03.... 1,797,250 1,797,250
-------------- ------------ ------------
0 3,610,750 3,610,750
-------------- ------------ ------------
FINANCIAL
SERVICES--5.6%
Associates Corp. of
North America,
A1 750 750 6.875% ,1/15/97..... 737,347 737,347
A1 200 200 8.375%, 1/15/98..... 201,518 201,518
A1 6,000 6,000 8.25%, 12/1/99...... 6,031,440 6,031,440
Banco Del Estado
Chile,
Baa2 700 700 8.39%, 8/1/01....... 664,580 664,580
Banco Nacionale de
Mexico Conv. Bond
3,750 3,750 7.00% 12/15/99...... 2,512,500 2,512,500
Banco Ganadero S.A.
NR 1,300 1,300 9.75%, 8/26/99...... 1,222,000 1,222,000
Chrysler Financial
Corp.,
Baa2 1,100 1,100 5.39%, 8/27/96...... 1,064,481 1,064,481
A3 3,300 3,300 6.1875%, 11/15/96... 3,312,078 3,312,078
Controladora
Commerce Mexicana,
NR 950 950 8.75%, 4/21/98...... 693,500 693,500
Financiera
Engergetica
Nacional,
NR 900 900 6.625%, 12/13/96.... 855,000 855,000
NR 500 500 9.00%, 11/8/99...... 476,250 476,250
First Union Corp.,
A3 1,000 1,000 9.45%, 6/15/99...... 1,042,980 1,042,980
Fomento Economico
Mexicano
NR 1,500 1,500 9.50%, 7/22/97...... 1,308,750 1,308,750
Ford Motor Credit
Co.,
9.00%, 9/15/01,
A2 600 600 Class A........... 619,866 619,866
A2 650 650 7.75%, 11/15/02..... 627,471 627,471
General Motors
Acceptance Corp.,
Baa1 2,000 2,000 6.50%, 6/10/96...... 1,970,520 1,970,520
Baa1 1,750 1,750 7.80%, 11/7/96...... 1,747,305 1,747,305
Baa1 600 600 7.85%, 3/5/97....... 597,816 597,816
</TABLE>
11
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
MOODY'S --------------------------------------------- --------------------------------------------------
RATING PRUDENTIAL DESCRIPTION PRUDENTIAL
------------ CONSERVATIVELY INCOMEVERTIBLE -------------------- CONSERVATIVELY INCOMEVERTIBLE
MANAGED -REGISTERED TRADEMARK- MANAGED -REGISTERED TRADEMARK- PRO FORMA
PORTFOLIO FUND, INC. TOTAL PORTFOLIO FUND, INC. COMBINED
-------------- ---------------------- ------- -------------- ---------------------- ------------
<C> <C> <C> <C> <S> <C> <C> <C>
FINANCIAL SERVICES
(CONTINUED)
Baa1 $ 2,000 $ $ 2,000 7.50%, 11/4/97...... $ 1,968,480 $ $ 1,968,480
Baa1 850 850 7.375%, 7/20/98..... 827,849 827,849
Grupo Embotelladora
Mexicana
Baa2 1,480 1,480 10.75%, 11/19/97.... 1,258,000 1,258,000
Kansallis-Osake-Pankki
Bank
A3 1,000 1,000 6.125%, 5/15/98..... 947,140 947,140
Kansallis-Osake-Pankki
Bank
Ba1 1,000 1,000 8.65%, 12/29/49..... 973,750 973,750
Korea Development
Bank
A1 1,800 1,800 9.25%, 6/15/98...... 1,847,988 1,847,988
A1 340 340 5.875%, 12/1/98..... 312,943 312,943
A1 1,600 1,600 6.75%, 12/1/05...... 1,368,000 1,368,000
PT Alatief Freeport
Finance
Ba2 1,400 1,400 9.75%, 4/15/01...... 1,365,000 1,365,000
Union Bank Finland,
Ltd.
A3 2,600 2,600 5.25% 6/15/96....... 2,508,220 2,508,220
Westinghouse Credit
Corp
Ba1 400 400 8.75%, 6/3/96....... 403,000 403,000
-------------- ------------ ------------
36,953,272 2,512,500 39,465,772
-------------- ------------ ------------
FOOD &
BEVERAGE--0.07%
Coca Cola
Enterprises, Inc.,
A3 500 500 6.50%, 11/15/97..... 483,135 483,135
-------------- ------------ ------------
483,135 0 483,135
-------------- ------------ ------------
HOUSING
RELATED--0.4%
Owens-Corning
Fiberglass Corp.,
Conv. Jr. Sub.
Deb.
2,300 2,300 8.00%, 12/30/05..... 2,484,000 2,484,000
-------------- ------------ ------------
0 2,484,000 2,484,000
-------------- ------------ ------------
INDUSTRIALS--0.6%
Cemex, Conv. Bond
3,673 3,673 4.25%, 11/1/97...... 2,571,100 2,571,100
Empresas Ica
Sociedad Control,
Conv. Sub. Deb.
(ADR) (Mexico)
3,051 3,051 5.00%, 3/15/04...... 1,357,695 1,357,695
-------------- ------------ ------------
0 3,928,795 3,928,795
-------------- ------------ ------------
</TABLE>
12
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
MOODY'S --------------------------------------------- --------------------------------------------------
RATING PRUDENTIAL DESCRIPTION PRUDENTIAL
------------ CONSERVATIVELY INCOMEVERTIBLE -------------------- CONSERVATIVELY INCOMEVERTIBLE
MANAGED -REGISTERED TRADEMARK- MANAGED -REGISTERED TRADEMARK- PRO FORMA
PORTFOLIO FUND, INC. TOTAL PORTFOLIO FUND, INC. COMBINED
-------------- ---------------------- ------- -------------- ---------------------- ------------
<C> <C> <C> <C> <S> <C> <C> <C>
INSURANCE--0.4%
USF&G Corp Zero
Coupon, Conv. Sub.
Deb.
$ $ 5,375 $ 5,375 5.00%, 3/3/09....... $ $ 2,640,469 $ 2,640,469
-------------- ------------ ------------
0 2,640,469 2,640,469
-------------- ------------ ------------
INTEGRATED
PRODUCERS--2.2%
Amoco Canada
Petroleum Corp.
Conv. Bond
8,810 8,810 7.375%, 9/1/13...... 10,006,398 10,006,398
Pennzoil Co., Conv.
Sub. Deb.
4,608 4,608 6.50%, 1/15/03...... 5,212,800 5,212,800
-------------- ------------ ------------
0 15,219,198 15,219,198
-------------- ------------ ------------
MEDIA--2.1%
Grupo Televisa Sa De
Euro (MTN),
Ba2 2,250 2,250 10.00%, 11/9/97..... 1,980,000 1,980,000
News America
Holdings, Inc.
Ba1 800 800 7.75%, 1/20/24...... 661,504 661,504
Tele-Communications,
Inc.
Baa3 750 750 8.25%, 1/15/03...... 715,065 715,065
Baa3 1,200 1,200 7.875%, 8/1/13...... 1,004,256 1,004,256
Baa3 1,200 1,200 9.875%, 6/15/22..... 1,195,632 1,195,632
Comcast Corp., Zero
Coupon, Conv. Sub.
Note
4,869 4,869 9/9/05.............. 3,809,992 3,809,992
News America Hldgs.
Inc., Zero Coupon
Conv. Sr. Deb.
10,000 10,000 3/11/13............. 3,737,500 3,737,500
Time Warner, Inc.,
Conv. Sub. Deb.
1,578 1,578 8.75%, 1/10/15...... 1,520,798 1,520,798
-------------- ------------ ------------
5,556,457 9,068,290 14,624,747
-------------- ------------ ------------
MISCELLANEOUS--0.08%
Federal Express
Corp.,
Baa3 500 500 10.05%, 6/15/99..... 526,800 526,800
-------------- ------------ ------------
526,800 0 526,800
-------------- ------------ ------------
OIL &
GAS--INTERNATIONAL--
0.8%
Arkla, Inc.,
Ba1 1,000 1,000 9.30%, 1/15/98...... 1,007,980 1,007,980
</TABLE>
13
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
MOODY'S --------------------------------------------- --------------------------------------------------
RATING PRUDENTIAL DESCRIPTION PRUDENTIAL
------------ CONSERVATIVELY INCOMEVERTIBLE -------------------- CONSERVATIVELY INCOMEVERTIBLE
MANAGED -REGISTERED TRADEMARK- MANAGED -REGISTERED TRADEMARK- PRO FORMA
PORTFOLIO FUND, INC. TOTAL PORTFOLIO FUND, INC. COMBINED
-------------- ---------------------- ------- -------------- ---------------------- ------------
<C> <C> <C> <C> <S> <C> <C> <C>
OIL & GAS--INTERNATIONAL
(CONTINUED)
Oryx Energy Co.,
Ba3 2,000 2,000 6.05%, 2/1/96....... 1,940,000 1,940,000
Seacor Holdings,
Inc. Conv. Sub.
Note
$ $ 3,038 $ 3,038 6.00%, 7/15/03...... $ $ 2,764,580 $ 2,764,580
-------------- ------------ ------------
2,947,980 2,764,580 5,712,560
-------------- ------------ ------------
PAPER & FOREST
PRODUCTS-- 0.3%
Avenor Inc.,
Ba 2,000 2,000 9.375%, 2/15/04..... 1,916,400 1,916,400
-------------- ------------ ------------
1,916,400 0 1,916,400
-------------- ------------ ------------
PETROLEUM
SERVICES--0.2%
Empresa De Petroleos
NR 1,500 1,500 7.25%, 7/8/98....... 1,350,000 1,350,000
-------------- ------------ ------------
1,350,000 0 1,350,000
-------------- ------------ ------------
RETAIL--0.7%
Pier 1 Imports,
Inc., Conv. Sr.
Sub. Deb.
1,895 1,895 6.875%, 4/1/02...... 1,847,625 1,847,625
Price/Costco, Inc.,
Conv. Sub. Deb.
3,127 3,127 6.75%, 3/1/01....... 2,884,658 2,884,658
-------------- ------------ ------------
0 4,732,283 4,732,283
-------------- ------------ ------------
SHIPPING--0.2%
Compania
SudAmericana De
Vapores,
NR 1,750 1,750 7.375%, 12/8/03..... 1,435,000 1,435,000
-------------- ------------ ------------
1,435,000 0 1,435,000
-------------- ------------ ------------
SPECIALTY
CHEMICALS--0.4%
RPM, Inc., Zero
Coupon Conv. Deb.
7,000 7,000 9/30/12........... 2,747,500 2,747,500
-------------- ------------ ------------
2,747,500 2,747,500
-------------- ------------ ------------
TOBACCO--0.06%
RJR Nabisco, Inc.,
Baa3 450 450 8.75%, 8/15/05...... 421,961 421,961
-------------- ------------ ------------
421,961 0 421,961
-------------- ------------ ------------
</TABLE>
14
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
MOODY'S --------------------------------------------- --------------------------------------------------
RATING PRUDENTIAL DESCRIPTION PRUDENTIAL
------------ CONSERVATIVELY INCOMEVERTIBLE -------------------- CONSERVATIVELY INCOMEVERTIBLE
MANAGED -REGISTERED TRADEMARK- MANAGED -REGISTERED TRADEMARK- PRO FORMA
PORTFOLIO FUND, INC. TOTAL PORTFOLIO FUND, INC. COMBINED
-------------- ---------------------- ------- -------------- ---------------------- ------------
<C> <C> <C> <C> <S> <C> <C> <C>
UTILITIES--0.05%
Korea Electric Power
Corp.,
A1 $ 425 $ 425 7.75% 4/1/13........ $ 364,688 $ $ 364,688
-------------- ------------ ------------
364,688 0 364,688
-------------- ------------ ------------
Total Corporate Bond
(cost
$155,020,893)..... 56,331,290 86,448,486 142,779,776
-------------- ------------ ------------
SOVEREIGN
BONDS--1.0%
Columbia Republic,
Ba1 525 525 7.125%, 5/11/98..... 484,312 484,312
Ba1 375 375 8.75%, 10/6/99...... 359,063 359,063
Ba1 1,000 1,000 7.25%, 2/23/04...... 825,000 825,000
Grupo Condumex S.A.
de C.V., (MTN)
NR 700 700 6.25%, 7/27/96...... 623,000 623,000
South Africa
Republic,
Baa3 1,500 1,500 9.625%, 12/15/99.... 1,466,250 1,466,250
Trinadad & Tobago
Republic,
Ba2 1,700 1,700 11.75%, 10/3/04..... 1,700,000 1,700,000
United Mexican
States,
Ba2 400 400 6.97%, 8/12/00...... 280,000 280,000
Ba2 250 250 5.82%, 6/28/01...... 157,500 157,500
Ba2 1,225 1,225 8.50%, 9/15/02...... 869,750 869,750
-------------- ------------ ------------
Total Sovereign
Bonds
(cost
$5,150,300)....... 6,764,875 0 6,764,875
-------------- ------------ ------------
ASSET BACKED
SECURITIES--0.9%
Bank One Credit Card
Trust
A2 900 900 7.75%, 12/15/99..... 896,344 896,344
Ford Credit Grantor
Trust
Aaa 3,786 3,786 7.30% 10/15/99...... 3,751,765 3,751,765
Class A
Standard Credit Card
Trust
A2 1,000 1,000 9.375%, 3/10/96..... 1,005,312 1,005,312
Class B
Aaa 850 850 5.95%, 10/7/04...... 736,313 736,313
-------------- ------------ ------------
Total Asset Backed
Securities
(cost
$6,500,875)....... 6,389,734 0 6,389,734
-------------- ------------ ------------
U.S. GOVERNMENT SECURITIES--5.6%
United States
Treasury Notes,
15,800 15,800 6.00%, 11/30/97..... 15,242,102 15,242,102
11,700 11,700 5.125%, 3/31/98..... 10,950,498 10,950,498
8,500 8,500 7.50%, 10/31/99..... 8,485,380 8,485,380
</TABLE>
15
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
MOODY'S --------------------------------------------- --------------------------------------------------
RATING PRUDENTIAL DESCRIPTION PRUDENTIAL
------------ CONSERVATIVELY INCOMEVERTIBLE -------------------- CONSERVATIVELY INCOMEVERTIBLE
MANAGED -REGISTERED TRADEMARK- MANAGED -REGISTERED TRADEMARK- PRO FORMA
PORTFOLIO FUND, INC. TOTAL PORTFOLIO FUND, INC. COMBINED
-------------- ---------------------- ------- -------------- ---------------------- ------------
<C> <C> <C> <C> <S> <C> <C> <C>
U.S. GOVERNMENT SECURITIES
(CONTINUED)
$ 1,000 $ 1,000 7.25%, 8/15/04...... $ 977,812 $ $ 977,812
0 3,646,500 3,646,500
$ 51,000 51,000 Federal National
Mortgage
Association.......
-------------- ------------ ------------
Total U.S.
Government
Securities
(cost
$40,964,232)...... 35,655,792 3,646,500 39,302,292
-------------- ------------ ------------
Total Debt
Obligations
(cost
$2,034,401,923)... 105,141,691 90,094,986 195,236,677
-------------- ------------ ------------
Total long-term
investments (cost
$535,129,416)..... 321,378,317 195,553,479 516,931,796
-------------- ------------ ------------
SHORT-TERM INVESTMENTS--24.4%
CORPORATE
NOTES--0.8%
Cemex S.A.,
NR 750 750 6.25%, 10/25/95..... 690,000 690,000
Citicorp
A2 1,000 1,000 7.80%, 3/24/95...... 1,002,250 1,002,250
Comdisco, Inc.,
Baa2 3,000 3,000 8.95%, 5/15/95...... 3,014,940 3,014,940
Time Warner, Inc.,
Ba1 1,000 1,000 6.05%, 7/1/95....... 994,370 994,370
-------------- ------------ ------------
Total Corporate
Notes
(cost
$5,963,916)....... 5,701,560 0 5,701,560
-------------- ------------ ------------
REPURCHASE AGREEMENT--23.5%
Joint Repurchase
Agreement Account
5.78%, 2/1/95 (cost
134,183 30,776 164,959 $164,959,000)..... 134,183,000 30,776,000 164,959,000
-------------- ------------ ------------
Total short-term
investments
(cost
$170,922,916)..... 139,884,560 30,776,000 170,660,560
-------------- ------------ ------------
Total
Investments--98.2%
(cost
$706,052,332)..... 461,262,877 226,329,479 687,592,356
-------------- ------------ ------------
(Liabilities in
excess of other
assets)
Other assets in
excess of
liabilities....... (531,599) 13,148,592 12,616,993
-------------- ------------ ------------
Net Assets--100%.... $ 460,731,278 $ 239,478,071 $700,209,349
-------------- ------------ ------------
-------------- ------------ ------------
</TABLE>
- ------------
* Non-income producing security.
ADR--American Depository Receipt.
ADS--American Depository Shares.
MTN--Medium Term Note.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Prospectus contains a description of Moody's ratings.
16
<PAGE>
PRO FORMA STATEMENT OF ASSETS AND LIABILITIES
JANUARY 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRUDENTIAL
INCOMEVERTIBLE
CONSERVATIVELY -REGISTERED TRADEMARK- PRO FORMA
MANAGED PORTFOLIO FUND, INC. COMBINED
----------------- ----------------------- ------------
<S> <C> <C> <C>
ASSETS
Investments, at value (cost $465,253,675
and $240,798,657, respectively)....... $ 461,262,877 $ 226,329,479 $687,592,356
Cash.................................... 134,343 134,343
Dividends & Interest receivable......... 2,463,808 1,630,344 4,094,152
Receivable for investments sold......... 27,995,095 8,031,513 36,026,608
Receivable for Fund and Series shares
sold, respectively.................... 627,504 8,530,973 9,158,477
Deferred expenses and other assets...... 6,675 11,454 18,129
----------------- ------------ ------------
Total assets............................ 492,490,302 244,533,763 737,024,065
----------------- ------------ ------------
LIABILITIES
Payable for investments purchased....... 29,808,484 3,309,060 33,117,544
Payable for shares reaquired............ 1,324,503 1,144,977 2,469,480
Accrued expenses and other
liabilities........................... 0 249,963 249,963
Dividends payable....................... 369,348 369,348
Management fee payable.................. 256,689 154,473 411,162
Distribution fee payable................ 197,219 197,219
----------------- ------------ ------------
Total liabilities....................... 31,759,024 5,055,692 36,814,716
----------------- ------------ ------------
Net Assets.............................. $ 460,731,278 $ 239,478,071 $700,209,349
----------------- ------------ ------------
----------------- ------------ ------------
Net assets were comprised of:
Common stock/shares of beneficial
interest at par.................... 433,646 2,228,896 2,662,542
Paid in capital in excess of par.... 459,078,257 244,865,621 703,943,878
----------------- ------------ ------------
459,511,903 247,094,517 706,606,420
----------------- ------------ ------------
Undistributed net investment income..... 3,456,087 883,296 4,339,383
Accumulated net realized gain on
investment............................ 1,753,079 5,969,436 7,722,515
Net unrealized depreciation of
investments........................... (3,989,791) (14,469,178) (18,458,969)
----------------- ------------ ------------
Net assets as of November 30, 1994...... $ 460,731,278 $ 239,478,071 $700,209,349
----------------- ------------ ------------
----------------- ------------ ------------
Class A:
Net asset value and redemption price
per share......................... $10.66 $10.74 $10.66
Maximum sales charge (5.00% of
offering price).................... 0.56 0.57 .56
----------------- ------------ ------------
$11.22 $11.31 $11.22
----------------- ------------ ------------
----------------- ------------ ------------
Class B:
Net asset value, offering price and
redemption price per share........ $10.62 $10.74 $10.62
----------------- ------------ ------------
----------------- ------------ ------------
Class C
Net asset value, offering price and
redemption price per share........ $10.62 $10.74 $10.62
----------------- ------------ ------------
----------------- ------------ ------------
</TABLE>
17
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED JULY 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PRUDENTIAL
CONSERVATIVELY INCOMEVERTIBLE
MANAGED -REGISTERED TRADEMARK- PRO FORMA PRO FORMA
PORTFOLIO FUND, INC. ADJUSTMENTS COMBINED
----------------- ----------------------- -------------- ------------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME
Income
Dividends (net of foreign witholding
taxes of $83,494).................. $ 3,341,833 $ 9,643,396 $ $ 12,985,229
Interest (net of foreign witholding
taxes of $41,159).................. 13,871,237 5,149,161 19,020,398
----------------- ----------- ------------
Total Income..................... 17,213,070 14,792,557 32,005,627
----------------- ----------- ------------
Expenses
Distribution Fee--Class A.......... 69,380 28,763 98,143
Distribution Fee--Class B.......... 3,921,335 2,987,175 6,908,510
Management fee..................... 2,743,056 2,335,271 (311,369)(a) 4,766,958
Transfer agent's fees & expenses... 795,000 471,000 -- 1,266,000
Reports to shareholders............ 300,000 186,000 (93,000)(b) 393,000
Directors & Trustees fees.......... 22,300 34,000 (34,000)(b) 22,300
Custodian's fees & expenses........ 220,000 178,000 (89,000)(b) 309,000
Registration fees.................. 90,000 51,000 -- 141,000
Legal fees......................... 20,000 51,000 (46,000)(b) 25,000
Audit fee.......................... 14,000 41,000 (36,000)(b) 19,000
Insurance expense.................. 10,400 10,000 (5,000)(b) 15,400
Miscellaneous...................... 8,748 19,786 (12,500)(b) 16,034
Franchise Taxes.................... 79,000 (79,000)(b)
----------------- ----------- -------------- ------------
Total Expenses................... 8,214,219 6,471,995 (705,869) 13,980,345
----------------- ----------- -------------- ------------
Net investment income................ 8,998,851 8,320,562 705,869 18,025,282
----------------- ----------- -------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain
Investment transactions.............. 8,825,011 28,686,956 37,511,967
Financial futures contracts.......... 29,426 29,426
----------------- ----------- ------------
8,854,437 28,686,956 37,541,393
Net change in unrealized
appreciation....................... (13,575,563) (30,711,593) (44,287,156)
----------------- ----------- ------------
Net gain (loss) on investments....... (4,721,126) (2,024,637) (6,745,763)
----------------- ----------- ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.......... $ 4,277,725 $ 6,295,925 $ 705,869 $ 11,279,519
----------------- ----------- -------------- ------------
----------------- ----------- -------------- ------------
</TABLE>
- ------------
(a) Adjustment to reflect reduction in management fees of Conservatively Managed
Portfolio.
(b) Adjustment to reflect elimination of duplicative expenses.
18
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JANUARY 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRUDENTIAL
CONSERVATIVELY INCOMEVERTIBLE
MANAGED -REGISTERED TRADEMARK- PRO FORMA AD- PRO FORMA
PORTFOLIO FUND, INC. JUSTMENTS COMBINED
-------------- ----------------------- ----------------- -------------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME
Income
Dividends (net of foreign witholding
taxes of $39,623).................. $ 1,886,382 $ 2,736,914 $ $ 4,623,296
Interest (net of foreign witholding
taxes of $16,014).................. 9,110,492 4,922,445 14,032,937
-------------- ----------- -------------
Total Income..................... 10,996,874 7,659,359 18,656,233
-------------- ----------- -------------
Expenses
Distribution Fee--Class A.......... 49,271 14,931 64,202
Distribution Fee--Class B.......... 2,208,226 1,261,566 3,469,792
Distribution Fee--Class C.......... 2,614 1 2,615
Management fee..................... 1,565,151 990,967 (132,129)(a) 2,423,989
Transfer agent's fees & expenses... 382,900 178,000 -- 560,900
Reports to shareholders............ 36,100 100,000 (50,000)(b) 86,100
Directors & Trustees fees.......... 11,200 17,000 (17,000)(b) 11,200
Custodian's fees & expenses........ 104,600 50,000 (25,000)(b) 129,600
Registration fees.................. 44,400 25,000 69,400
Legal fees......................... 7,900 29,000 (25,000)(b) 11,900
Audit fee.......................... 7,000 20,000 (15,000)(b) 12,000
Insurance expense.................. 5,000 -- 5,000
Miscellaneous...................... 11,016 3,910 (2,500)(b) 12,426
Taxes.............................. 19,000 (19,000)(b)
-------------- ----------- -------- -------------
Total Expenses................... 4,430,378 2,714,375 (285,629) 6,859,124
-------------- ----------- -------- -------------
Net investment income................ 6,566,496 4,944,984 285,629 11,797,109
-------------- ----------- -------- -------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss)
Investment transactions.............. 7,436,974 9,062,938 16,499,912
Financial futures contracts.......... (8,701) (8,701)
-------------- ----------- -------------
7,428,273 9,062,938 16,491,211
Net change in unrealized
appreciation....................... (20,926,181) (22,056,314) (42,982,495)
-------------- ----------- -------------
Net gain (loss) on investments... (13,497,908) (12,993,376) (26,491,284)
-------------- ----------- -------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.......... $ (6,931,412) $ (8,048,392) $ 285,629 $ (14,694,175)
-------------- ----------- -------- -------------
-------------- ----------- -------- -------------
</TABLE>
- ------------
(a) Adjustment to reflect reduction in management fees of Conservatively Managed
Portfolio.
(b) Adjustment to reflect elimination of duplicative expenses.
19
<PAGE>
NOTES TO PRO FORMA 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 POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
SECURITIES VALUATION: Any security for which the primary market is on an
exchange (including NASDAQ National Market System equity securities) is valued
at the last sale price on such exchange on the day of valuation or, if there was
no sale on such day, the mean between the last bid and asked prices quoted on
such day. Corporate bonds (other than convertible debt securities) and U.S.
Government and agency securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued on the basis of valuations
provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, agency ratings, market
transactions in comparable securities and various relationships between
securities in determining value. Convertible debt securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued at the mean
between the most recently quoted bid and asked prices provided by principal
market makers. Forward currency exchange contracts are valued at the current
cost of offsetting the contract on the day of valuation. Options are valued at
the mean between the most recently quoted bid and asked prices. Futures and
options thereon are valued at their last sales price as of the close of the
commodities exchange or board of trade.
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.
OPTIONS: The Fund may either purchase or write options in order to hedge
against adverse market movements or fluctuations in value caused by changes in
prevailing interest rates with respect to securities which the Fund currently
owns or intends to purchase. When the Fund purchases an option, it pays a
premium and an amount equal to that premium is recorded as an investment. When
the Fund writes an option, it receives a premium and an amount equal to that
premium is recorded as a liability. The investment or liability is valued daily
to reflect the current market value of the option. If an option expires
unexercised, the Fund realizes a gain or loss to the extent of the premium
received or paid. If an option is exercised, the premium received or paid is
added to the proceeds from the sale or the cost of the purchase in determining
whether the Fund has realized a gain or loss. The difference between the premium
and the amount received or paid on effecting a closing purchase or sale
transaction is also treated as a realized gain or loss. Gain or loss on
purchased options is included in net realized gain (loss) on investment
transactions. Gain or loss on written options is presented separately as net
realized gain (loss) on written option transactions.
The Fund, as writer of an option, may have no control over whether the
underlying securities may be sold (called) or purchased (put). As a result, the
Fund bears the market risk of an unfavorable change in the price of the security
underlying the written option.
20
<PAGE>
FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at
the closing daily rate of exchange.
(ii) purchases and sales of investment securities, income and expenses--at
the rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the fiscal period, the Fund does not
isolate that portion of the results of operations arising as a result of changes
in the foreign exchange rates from the fluctuations arising from changes in the
market prices of long-term securities held at the end of the fiscal period.
Similarly, the Fund does not isolate the effect of changes in foreign exchange
rates from the fluctuations arising from changes in the market prices of long-
term portfolio securities sold during the fiscal period. Accordingly, realized
foreign currency gains (losses) are included in the reported net realized gains
on investment transactions.
Net realized gains on foreign currency transactions represent net foreign
exchange gains from the holding of foreign currencies, currency gains or losses
realized 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.
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.
Following the reorganization, the Fund may sell some of the securities in
the investment portfolio. The sale of less than 50% of the assets acquired from
IncomeVertible-Registered Trademark- Fund and the purchase of other securities
may affect the aggregate amount of taxable gains and losses generated by the
Fund, as well as increase the amount of brokerage commissions paid by the Fund.
Thus, the reorganization may subject IncomeVertible-Registered Trademark- Fund
shareholders to expenses to which they would not have been subject had the
reorganization not occurred.
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.
REORGANIZATION AND SOLICITATION EXPENSES: The expenses of reorganization and
solicitation will be borne by IncomeVertible-Registered Trademark- Fund and the
Conservatively Managed Portfolio in proportion to their respective assets and
will include reimbursement to brokerage firms and others for expenses in
forwarding proxy solicitation material to shareholders.
21
<PAGE>
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.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. ("PMFD"), which acts as the distributor of the Class A shares
of the Fund, and with Prudential Securities Incorporated ("PSI"), which acts as
distributor of the Class B and Class C shares of the Fund (collectively the
"Distributors"). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the "Class A, B and C Plans") regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the
Distributors for distribution-related activities at an annual rate of up to .30
of 1%, 1% and 1% of the average daily net assets of the Class A, B and C shares
of each portfolio, respectively. Such expenses under the Plans were .25 of 1%,
1% and 1% of the average daily net assets of the Class A, B and C shares of each
portfolio, respectively, for the six months ended January 31, 1995.
PMFD has advised the Fund that it has received approximately $236,400
($127,600--Conservatively Managed Portfolio and $108,800--Strategy Portfolio) in
front-end sales charges resulting from sales of Class A shares during the six
months ended January 31, 1995. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons.
PSI advised the Fund that for the six months ended January 31, 1995 it
received approximately $822,000 ($449,700-- Conservatively Managed Portfolio and
$372,300--Strategy Portfolio) in contingent deferred sales charges imposed upon
certain redemptions by Class B and C shareholders.
PMFD is a wholly-owned subsidiary of PMF. PSI, PIC and PFM are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
22
<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>
PRUDENTIAL MUTUAL FUNDS
Supplement dated November 1, 1994
The following information supplements the Statement of Additional
Information of each of the Funds listed below effective November 1, 1994. For
those Funds having only one class of shares, all references herein to "Class A
shares" shall be deemed to refer to "shares."
PURCHASE AND REDEMPTION OF FUND SHARES
The minimum initial investment requirement is waived for purchases of Class
A shares of each of the Funds listed below effected through an exchange of Class
B shares of The BlackRock Government Income Trust.
Listed below are the names of the Prudential Mutual Funds and the dates of
the Statement of Additional Information to which this supplement relates.
<TABLE>
<CAPTION>
NAME OF FUND PROSPECTUS DATE
- ----------------------------------------------------------------------- -------------------
<S> <C>
Prudential Adjustable Rate Securities Fund, Inc. May 1, 1994
Prudential Allocation Fund September 29, 1994
Prudential California Municipal Fund
California Series August 1, 1994
California Income Series August 1, 1994
Prudential Equity Fund, Inc. August 1, 1994
Prudential Equity Income Fund, Inc. August 1, 1994
Prudential Europe Growth Fund, Inc. July 11, 1994
Prudential Global Fund, Inc. August 1, 1994
Prudential Global Genesis Fund, Inc. August 1, 1994
Prudential Global Natural Resources Fund, Inc. August 1, 1994
Prudential GNMA Fund, Inc. August 1, 1994
Prudential Government Income Fund, Inc. August 1, 1994
Prudential Growth Opportunity Fund, Inc. August 1, 1994
Prudential High Yield Fund, Inc. August 1, 1994
Prudential IncomeVertible(R) Fund, Inc. August 1, 1994
Prudential Intermediate Global Income Fund, Inc. August 1, 1994
Prudential Multi-Sector Fund, Inc. August 1, 1994
Prudential Municipal Bond Fund August 1, 1994
High Yield Series
Insured Series
Modified Term Series
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Prudential Municipal Series Fund
Arizona Series August 1, 1994
Florida Series August 1, 1994
Hawaii Income Series September 19, 1994
Georgia Series August 1, 1994
Maryland Series August 1, 1994
Massachusetts Series August 1, 1994
Michigan Series August 1, 1994
Minnesota Series August 1, 1994
New Jersey Series August 1, 1994
New York Series August 1, 1994
North Carolina Series August 1, 1994
Ohio Series August 1, 1994
Pennsylvania Series August 1, 1994
Prudential Pacific Growth Fund, Inc. August 1, 1994
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio August 1, 1994
Short-Term Global Income Portfolio August 1, 1994
Prudential Strategist Fund, Inc. August 1, 1994
Prudential Structured Maturity Fund, Inc.
Income Portfolio August 1, 1994
Prudential U.S. Government Fund August 1, 1994
Prudential Utility Fund, Inc. August 1, 1994
Global Utility Fund, Inc. August 1, 1994
Nicholas-Applegate Fund, Inc. August 1, 1994
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
-----------------------------------------
MARCH 1, 1995
DEAR SHAREHOLDER:
The last six months have been tough on the U.S. stock and bond markets,
principally because of rising U.S. interest rates. The Federal Reserve
has raised interest rates seven times in the past 12 months -- the latest
on February 1, 1995 -- sending stock and bond prices down through a good
portion of the past year.
U.S. stock and bond markets received more bad news in late December when
the Mexican peso was suddenly devalued. This hurt the Fund's holdings in
peso-denominated stocks and bonds.
As a result of this tough investment environment, we are disappointed to
report that the Prudential Allocation Fund Strategy and Conservatively
Managed Portfolios posted losses for the six months ended January 31,
1995, and that those losses were greater than that of the average flexible
portfolio fund as measured by Lipper Analytical Services, Inc.
FUND PERFORMANCE
CUMULATIVE TOTAL RETURNS
As of 1/31/95
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS SINCE INCEPTION(2)
CONSERVATIVELY MANAGED PORTFOLIO
<S> <C> <C> <C>
Class A -4.25% 57.11% 56.47%
Class B -5.00 51.26% 66.52%
Class C N/A N/A -1.71
<CAPTION>
STRATEGY PORTFOLIO
<S> <C> <C> <C>
Class A -6.61% 51.76% 50.57%
Class B -7.33 45.91% 64.16%
Class C N/A N/A -2.16
Lipper Flexible -4.1 56.7 68.6
Portfolio Avg.(3)
</TABLE>
-1-
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
Period Ended 1/31/95(1)
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS SINCE INCEPTION(2)
CONSERVATIVELY MANAGED PORTFOLIO
<S> <C> <C> <C>
Class A - 9.03% 8.34% 8.21%
Class B -10.00 8.49 7.16
Class C N/A N/A -5.34
<CAPTION>
STRATEGY PORTFOLIO
<S> <C> <C> <C>
Class A -11.28% 7.59% 7.38%
Class B -12.33 7.70 6.95
Class C N/A N/A -6.21
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. PRINCIPAL AND
INVESTMENT RETURN WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
(1) SOURCE: PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. AND LIPPER ANALYTICAL
SERVICES, INC. THE CUMULATIVE TOTAL RETURNS DO NOT TAKE INTO ACCOUNT SALES
CHARGES. THE AVERAGE ANNUAL RETURNS DO TAKE INTO ACCOUNT APPLICABLE SALES
CHARGES. THE FUND CHARGES A MAXIMUM FRONT-END SALES LOAD OF 5% FOR CLASS
A SHARES AND A CONTINGENT DEFERRED SALES CHARGE OF 5%, 4%, 3%, 2%, 1% AND 1%
FOR SIX YEARS, FOR CLASS B SHARES. CLASS C SHARES HAVE A 1% CDSC FOR ONE
YEAR. CLASS B SHARES WILL AUTOMATICALLY CONVERT TO CLASS A SHARES AFTER
APPROXIMATELY SEVEN YEARS.
(2) INCEPTION DATES: 1/22/90 CLASS A; 9/15/87 CLASS B; 8/1/94 CLASS C.
(3) LIPPER ANALYTICAL SERVICES, INC. AVERAGE RETURNS ARE FOR 108 FUNDS FOR ONE
YEAR, 39 FUNDS FOR FIVE YEARS AND 16 FUNDS SINCE INCEPTION OF CLASS B SHARES
ON 9/15/87.
</TABLE>
ON THE HILL:
IN 1995, CONGRESS IS SET TO CONSIDER AN
INITIATIVE THAT WOULD RESTORE FULL INCOME
TAX DEDUCTIBILITY FOR INDIVIDUAL RETIREMENT
ACCOUNT CONTRIBUTIONS FOR MIDDLE-INCOME
WAGE EARNERS. IN ADDITION, CONGRESS WILL
ALSO DEBATE CREATION OF A NEW TAX-DEFERRED
SAVINGS ACCOUNT, CALLED "THE AMERICAN DREAM
SAVINGS ACCOUNT." PRUDENTIAL MUTUAL FUNDS
SUPPORTS BOTH OF THESE PROPOSALS, AND WE URGE
YOU TO SHARE YOUR OPINION WITH YOUR CONGRESSIONAL
REPRESENTATIVES. WE WILL KEEP YOU UPDATED ON THE
PROPOSALS AS THEY MAKE THEIR WAY THROUGH THE
LEGISLATIVE PROCESS.
THE MARKETS
Since February 1994, the stock and bond markets have spiraled both upward and
downward. This volatility was primarily in response to the Federal Reserve,
which raised interest rates six times in 1994 and once thus far this year, to
slow U.S. economic growth. The central bank feared that an economy growing at
more than 4% would re-ignite inflation.
The reaction of the stock and bond markets was negative: U.S. stocks, as
measured by the Standard & Poor's 500, ended the year up just 1.3%. The
strongest performing sectors were technology and consumer growth stocks,
which returned 20.4% and 7.5%, respectively, for the year. Consumer cyclical
and finance stocks performed poorest, down 12.2% and 3.2%, respectively.
Large concentrations in financial stocks, coupled with light exposure to
technology issues, contributed to the sub-par performance experienced by
both of the Fund's portfolios for the last six months and the year.
The bond market also took its fair share of lumps. The Lehman Brothers U.S.
Government Bond Index lost 2.9% and the Lehman Brothers Corporate Bond Index
fell 3.8% on a total return basis for the 12 months ending January 31, 1995.
-2-
<PAGE>
The domestic markets started off 1995 more optimistically, with stocks
returning 2.6% in January, as measured by the S&P 500. Bonds returned 1.9%,
as measured by the Lehman Government/Corporate Bond Index.
THE CONSERVATIVELY MANAGED PORTFOLIO
THE CONSERVATIVELY MANAGED PORTFOLIO SEEKS HIGH TOTAL INVESTMENT RETURN,
CONSISTENT WITH MODERATE RISK. It invests in a diversified portfolio of
money market instruments, debt obligations and equity securities (including
securities convertible into equity securities). The weighted average
maturity of the Portfolio's holdings is usually shorter than that of the
Strategy Portfolio. Moreover, the equity and debt securities are generally
those of larger, more mature companies and are subject to less price
volatility than those held by the Strategy Portfolio.
STILL COMMITTED TO OUR THEMES
As interest rates continued to climb throughout 1994 and early 1995, we added
to our cash position, letting it rise to 30% of total net assets as of January
31. We slightly reduced the percentage of assets in stocks, and cut back our
bond position even more so. In the belief that the worldwide economic
recovery and expansion will continue to fuel higher prices, we have
concentrated on industrial and finance issues, such as Stone Container
(0.59% of assets), National Steel (0.49% of assets) and SunAmerica (0.77%
of assets), which should benefit from economic expansion. We have also
added to our energy holdings, another probable beneficiary of economic
growth. Our holdings include Exxon (1.02% of assets), the Portfolio's
largest single position.
The Portfolio benefited from its fairly large holdings in consumer growth
stocks -- 7.8% of assets on January 31 -- since consumer growth was 1994's
second best performing area. Here, we own companies like Fruit of the Loom,
which comprise 0.75% of assets. These gains helped offset losses in
industrial and finance issues, which lost ground. In bonds, we hold a
smaller percentage of assets than our guidelines suggest, because U.S.
interest rates rose for most of the year, depressing prices. As of January
31, the portfolio held 23% of its assets in bonds -- primarily Corporate bonds
and U.S. Treasury securities, which generally declined for the year.
[GRAPH] CONSERVATIVELY MANAGED
PORTFOLIO ASSET ALLOCATION
-3-
<PAGE>
THE STRATEGY PORTFOLIO
THE STRATEGY PORTFOLIO SEEKS HIGH TOTAL INVESTMENT RETURN, CONSISTENT WITH
RELATIVELY HIGHER RISK THAN THE CONSERVATIVELY MANAGED PORTFOLIO. The
Portfolio invests in equity securities of major corporations, as well as
smaller, faster growing companies, which are subject to a greater degree of
risk and price volatility than stocks of major corporations. The Portfolio
also invests in a combination of investment grade, high yield and foreign
securities. Please note there are special risks associated with foreign
investing, such as economic, political and social developments, along
with currency fluctuations. Greg A. Smith, chief investment strategist
of Prudential Securities Incorporated, provides sector allocation advice
and furnishes economic commentary on the equity and fixed income markets
to the Prudential Investment Corp., the Portfolio's investment adviser,
pursuant to a consulting agreement.
Both portfolios may invest in debt securities rated below investment grade,
commonly known as "junk bonds," which are subject to greater risk of loss of
principal and interest, including default risk, than higher-rated bonds.
The portfolios may also engage in various strategies to reduce certain
investment risks and to attempt to enhance income, such as the use of
options, forward currency exchange contracts and futures contracts.
FACTORS DRIVING PORTFOLIO PERFORMANCE
Over the last six months, we made minor allocation adjustments to the
portfolio to benefit from economic trends occurring around the globe.
These adjustments included reducing our stock and international debt
positions, while steadily increasing our cash levels throughout much of
the year.
PORTFOLIO PERFORMANCE WAS MIXED
Since our last report to you, we sold our entire bond position in Canada
and reduced most of it in Argentina. We also closed our stock position in
the Mexican telecommunications company Telefonos de Mexico, after the peso
devaluation by the Mexican government on December 20. In January, we renewed
our position in Telefonos because long-term we believe this stock offers the
potential for growth. We chose to retain our holdings in Tesobonos in hopes
of selling them later when prices rise. Mexican Tesobonos, which are
short-term, dollar-indexed securities, currently represent 9.4% of the
Portfolio. Their relatively large representation had a substantial influence
on our performance during this reporting period.
The Portfolio's stock component performed in line with the Lipper Growth Fund
Average in 1994. This helped offset the negative impact of our Mexican bond
holdings. Our 7% position in agriculture/fertilizer stocks performed
extremely well during the fourth quarter, as worldwide economic
[GRAPH] STRATEGY PORTFOLIO
ASSET ALLOCATION
-4-
<PAGE>
growth increased demand while grain inventories were at 20-year lows. We also
expanded our positions in health care with purchases of Pfizer and Schering
Plough, which performed well after it became apparent that Congress would not
enact President Clinton's health-care proposals.
The Fund's positions in industrial and financial company stocks held back
performance, as investors became concerned that these sectors would suffer
as the economy slows while interest rates rise. We believe that the stocks
of these companies will benefit from the economic growth we see ahead.
FUND UPDATE:
BEGINNING IN FEBRUARY 1995, CLASS B SHAREHOLDERS
SHOULD BEGIN TO NOTICE A CHANGE IN THEIR FUND HOLDINGS.
THAT'S WHEN CLASS B SHARES WILL BEGIN TO CONVERT TO
CLASS A SHARES, ON A QUARTERLY BASIS, APPROXIMATELY
SEVEN YEARS AFTER PURCHASE. AS YOU MAY KNOW, CLASS A
SHARES GENERALLY CARRY LOWER ANNUAL DISTRIBUTION
EXPENSES THAN CLASS B SHARES. ACCORDINGLY, AFTER
CONVERSION, YOU WILL EARN HIGHER TOTAL RETURNS ON
YOUR INVESTMENT THAN YOU WOULD HAVE AS A CLASS B
SHAREHOLDER. THIS CONVERSION WILL BE PROCESSED
AUTOMATICALLY AND WON'T REQUIRE ANY FURTHER ACTION
ON YOUR PART.
OUR OUTLOOK
Despite the volatility of the last six months, we remain optimistic that the
U.S. economy will continue to grow and that U.S. stocks will rebound. The
American stock market should have an average year, with returns in the
high single digits. And if inflation remains relatively low, market returns
after inflation is discounted will be close to historical averages. We
believe that interest rates should soon stabilize, which should prove
beneficial for both stock and bond markets.
As always, it is a pleasure to work for you. We appreciate the confidence
you have shown in us by choosing the Prudential Allocation Fund.
Sincerely,
/S/ LAWRENCE C. McQUADE
Lawrence C. McQuade
President
-5-
<PAGE>
PORTFOLIO Q&A
(PICTURE)
Greg Goldberg
NEW PORTFOLIO MANAGER: GREG GOLDBERG
On January 16, 1995, Greg Goldberg was named Portfolio Manager of the
Prudential Allocation Fund -- Conservatively Managed and Strategy Portfolios.
In the Prudential Allocation Fund, Prudential Securities Chief Investment
Strategist Greg Smith makes the asset allocation recommendations, while
Portfolio Manager Greg Goldberg actually selects the portfolios' individual
securities. Greg Goldberg and Greg Smith also share this type of arrangement
in the Prudential Multi-Sector Fund Inc. In addition to the Prudential
Allocation and Multi-Sector Funds, Greg Goldberg also manages the Prudential
IncomeVertible-Registered Trademark- Fund. Inc
We asked Greg Goldberg for his thoughts on the stock and bond markets in 1995.
Q. WHAT IS YOUR MANAGEMENT STYLE?
A. I'm a growth investor. I look for companies with the potential for
significant long-term growth. As far as growth managers are concerned,
I tend to fall a bit more on the conservative side. I look for companies
with two- to three-year sustainable growth rates -- BUT AT BARGAIN PRICES.
Q. WHAT SECTORS OF THE BOND MARKET LOOK MOST ATTRACTIVE TO YOU AND WHY?
A. On the bond side, I believe long-term Treasurys offer
the potential for greatest value in 1995. The Federal Reserve Board last
raised interest rates on February 1, 1995 -- its seventh intervention in the
last 12 months. And while I believe the Federal Reserve may raise rates once
more in 1995, U.S. economic growth appears to have slowed to a healthy -- not
recessionary -- level. Stabilization of U.S. interest rates could be around
the corner, which would support bond prices. Our optimism towards Treasurys
has made us somewhat more neutral towards corporate bonds, however, because
the yield differential between Treasurys and corporate securities is
extremely narrow from an historical perspective.
Q. WHAT IS YOUR OUTLOOK FOR THE STOCK MARKET IN 1995 AND WHAT SECTORS LOOK
MOST COMPELLING TO YOU?
A. In general, I'm relatively optimistic about stocks in 1995. I'm looking
for returns in the high single digits. This would be the result of stable
U.S. interest rates, and continued healthy corporate earnings growth.
I continue to believe stocks in the industrial and technology sectors will
benefit during this period of global economic expansion, but I've shifted
some assets into more interest rate-sensitive stocks and health care issues.
I believe these issues will benefit most as U.S. interest rates stabilize.
Recent purchases in these areas include insurance giant SunAmerica, the
Federal National Mortgage Association, National Medical Enterprises and U.S.
Healthcare.
-6-
<PAGE>
PRUDENTIAL ALLOCATION FUND PORTFOLIO OF INVESTMENTS
CONSERVATIVELY MANAGED PORTFOLIO JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--69.7%
COMMON STOCKS--46.9%
Aerospace/Defense--1.2%
214,800 Banner Aerospace, Inc.*.... $ 912,900
116,400 Gencorp, Inc............... 1,484,100
45,100 Litton Inds., Inc.......... 1,601,050
43,900 Rockwell International
Corp..................... 1,651,737
------------
5,649,787
------------
AUTOMOTIVE--1.5%
36,500 Coltec Inds., Inc.*........ 565,750
80,000 Ford Motor Co.............. 2,020,000
42,200 General Motors Corp., Class
E........................ 1,629,975
80,800 General Motors Corp., Class
H........................ 2,727,000
------------
6,942,725
------------
CEMENT--0.2%
78,500 Giant Cement Holding Inc.*.. 922,375
------------
CHEMICALS--2.1%
114,100 Ferro Corp................. 2,681,350
18,300 FMC Corp.*................. 1,059,113
80,500 Hanna (M. A.) Co........... 1,942,062
57,300 Imperial Chemical Inds.
(ADR).................... 2,671,612
62,100 Om Group Inc............... 1,397,250
------------
9,751,387
------------
COMPUTER & RELATED EQUIPMENT--0.7%
50,000 Compaq Computer Corp.*..... 1,787,500
65,000 Seagate Technology*........ 1,649,375
------------
3,436,875
------------
CONSUMER PRODUCTS--1.2%
59,900 Eastman Kodak Co........... 2,935,100
158,500 Whitman Corp............... 2,575,625
------------
5,510,725
------------
CONTAINERS & PACKAGING--0.8%
96,100 Owens-Illinois Hldgs
Corp.*................... 997,038
160,000 Stone Container Corp.*..... 2,720,000
------------
3,717,038
------------
DRUGS & HEALTH CARE--4.4%
60,000 Columbia Healthcare Corp... $ 2,407,500
32,000 Forest Laboratories, Inc.*. 1,584,000
93,900 Glaxo Holdings PLC (ADR)... 1,838,750
290,000 National Medical
Enterprises, Inc......... 4,241,250
50,300 Schering Plough Corp....... 3,948,550
40,300 St. Jude Medical, Inc...... 1,531,400
55,000 U.S. HealthCare Inc........ 2,516,250
50,000 Zeneca Group PLC........... 2,093,750
------------
20,161,450
------------
ELECTRONICS--1.6%
109,100 ADT Ltd.*.................. 1,091,000
93,000 Belden, Inc................ 2,046,000
60,000 Loral Corp................. 2,332,500
108,400 Mark IV Industries, Inc.... 2,086,700
------------
7,556,200
------------
FINANCIAL SERVICES--7.1%
70,000 Citicorp................... 2,843,750
124,500 Dean Witter Discover & Co.. 4,653,187
45,700 Federal National Mortgage
Association.............. 3,267,550
79,400 First Bank System, Inc..... 2,868,325
50,000 First Interstate Bank
Corp..................... 3,700,000
65,000 Kansas City Southern Inds.,
Inc...................... 2,331,875
162,600 Keycorp.................... 4,512,150
70,000 MBNA Corp.................. 1,785,000
191,000 Norwest Corp............... 4,584,000
166,600 Western National Corp...... 1,978,375
------------
32,524,212
------------
FOOD & BEVERAGE--0.1%
17,900 Sbarro, Inc................ 413,938
------------
FREIGHT TRANSPORTATION--1.1%
116,500 Chicago & North Western
Transportation Corp.*.... 2,490,188
76,300 Illinois Central Corp...... 2,508,362
------------
4,998,550
------------
</TABLE>
-7- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL ALLOCATION FUND
CONSERVATIVELY MANAGED PORTFOLIO
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
FURNITURE--0.2%
22,800 Leggett & Platt, Inc....... $ 820,800
------------
HOME IMPROVEMENTS--1.3%
115,000 Owens-Corning Fiberglas
Corp.*................... 3,536,250
119,400 Ply Gem Inds., Inc......... 2,462,625
------------
5,998,875
------------
INSURANCE--4.2%
32,100 Berkley (W. R.) Corp....... 1,195,725
57,300 Emphesys Financial Group,
Inc...................... 1,812,113
90,000 Equitable of Iowa Cos...... 2,655,000
70,500 National Re Corp........... 1,947,562
111,200 Penncorp Financial Group,
Inc...................... 1,515,100
82,400 Reinsurance Group America,
Inc...................... 2,049,700
90,000 SunAmerica, Inc............ 3,555,000
70,000 Travelers Corp............. 2,581,250
48,900 Trenwick Group, Inc........ 2,114,925
------------
19,426,375
------------
MACHINERY & EQUIPMENT--2.8%
83,000 Applied Power Inc., Class A 2,023,125
85,900 Donaldson Co. Inc.......... 1,986,437
132,100 Gardner Denver Machinery
Inc.*.................... 1,494,381
143,200 Imo Industries Inc.*....... 1,145,600
23,700 Parker-HanniFin Corp....... 1,116,862
144,100 Regal Beloit Corp.......... 1,765,225
83,000 Smith (A.O.) Corp.......... 1,826,000
149,300 Smith International, Inc.*. 1,735,613
------------
13,093,243
------------
MEDIA--1.5%
85,900 American Publishing Co.,
Class A.................. 1,030,800
152,800 Tele-Communications, Inc.*. 3,247,000
75,000 The Times Mirror Co........ 2,428,125
------------
6,705,925
------------
MINING--1.5%
90,000 Cominco Ltd................ 2,304,595
144,000 INDRESCO, Inc.*............ 1,692,000
300,000 Santa Fe Pacific Gold
Corp.*................... $ 3,037,500
------------
7,034,095
------------
MISCELLANEOUS--1.9%
61,500 BWIP Holding, Inc.......... 968,625
45,000 Federal Express Corp....... 2,733,750
110,000 Hanson PLC (ADR)........... 2,021,250
77,400 Titan Wheel International,
Inc...................... 2,147,850
32,800 York International Corp.... 1,143,900
------------
9,015,375
------------
OIL & GAS - INTERNATIONAL--2.9%
95,300 Basin Exploration, Inc.*... 667,100
106,200 Cabot Oil & Gas Corp....... 1,327,500
113,200 Mascotech, Inc............. 1,344,250
148,000 Mesa, Inc.*................ 721,500
33,400 Murphy Oil Corp............ 1,452,900
157,300 Oryx Energy Co............. 1,631,987
44,700 Parker & Parsley Petroleum
Co....................... 815,775
89,000 Seagull Energy Corp.*...... 1,424,000
45,000 Societe Nationale Elf
Aquitaine, ADR........... 1,620,000
125,000 YPF Sociedad Anonima
(ADS).................... 2,578,125
------------
13,583,137
------------
PAPER & FOREST PRODUCTS--1.2%
44,300 Mead Corp.................. 2,209,463
76,350 Pentair, Inc............... 3,130,350
------------
5,339,813
------------
PETROLEUM SERVICES--1.4%
106,100 BJ Services Co.*........... 1,816,963
75,000 Exxon Corp................. 4,687,500
------------
6,504,463
------------
RAILROADS--0.5%
45,500 Burlington Northern Inc.... 2,161,250
------------
RETAIL--1.2%
216,300 Best Products, Inc.*....... 1,243,725
58,700 Caldor Corp.*.............. 1,232,700
</TABLE>
-8- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL ALLOCATION FUND
CONSERVATIVELY MANAGED PORTFOLIO
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
RETAIL--(CONT'D)
50,000 Harcourt General, Inc...... $ 1,668,750
31,500 Sears Roebuck & Co......... 1,389,938
------------
5,535,113
------------
STEEL & METALS--1.7%
112,500 Material Sciences Corp.*... 1,645,312
150,000 National Steel Corp.*...... 2,250,000
70,000 Trinity Industries, Inc.... 2,310,000
60,300 Wolverine Tube, Inc.*...... 1,469,813
------------
7,675,125
------------
TELECOMMUNICATIONS--1.8%
62,100 AirTouch Communications*... 1,707,750
96,400 Frontier Corp.............. 2,024,400
200,000 NEXTEL Communications
Inc.*.................... 1,925,000
75,000 Telefonos de Mexico S.A.
(ADR).................... 2,653,125
------------
8,310,275
------------
TEXTILES--0.8%
140,000 Fruit of the Loom, Inc.*... 3,447,500
------------
Total common stocks
(cost $215,828,106)...... 216,236,626
------------
<CAPTION>
PRINCIPAL
MOODY'S AMOUNT
RATING (000) DEBT OBLIGATIONS--22.8%
- ------------ ---------
<C> <C> <S> <C>
CORPORATE BONDS--13.7%
AIRLINES--0.7%
Delta Air Lines,
Inc.,
Ba1 $ 1,200 10.375%, 2/1/11...... 1,184,112
Ba1 1,900 9.75%, 5/15/21....... 1,769,375
------------
2,953,487
------------
DRUGS & HEALTH CARE--0.2%
Columbia Healthcare
Corp.,
A3 950 8.85%, 1/1/07........ 969,000
------------
ELECTRONICS--0.1%
Westinghouse Electric
Corp.,
Ba1 $ 450 8.70%, 6/20/96....... $ 453,110
------------
FINANCIAL SERVICES--8.0%
Associates Corp. of
North America,
A1 750 6.875%, 1/15/97...... 737,347
A1 200 8.375%, 1/15/98...... 201,518
A1 6,000 8.25%, 12/1/99....... 6,031,440
Banco Del Estado
Chile,
Baa2 700 8.39%, 8/1/01........ 664,580
Banco Ganadero S.A.,
NR 1,300 9.75%, 8/26/99....... 1,222,000
Chrysler Financial
Corp.,
Baa2 1,100 5.39%, 8/27/96....... 1,064,481
A3 3,300 6.1875%, 11/15/96.... 3,312,078
Controladora Commerce
Mexicana,
NR 950 8.75%, 4/21/98....... 693,500
Financiera Energetica
Nacional,
NR 900 6.625%, 12/13/96..... 855,000
NR 500 9.00%, 11/8/99....... 476,250
First Union Corp.,
A3 1,000 9.45%, 6/15/99....... 1,042,980
Fomento Economico
Mexicano,
NR 1,500 9.50%, 7/22/97....... 1,308,750
Ford Motor Credit
Co.,
A2 600 9.00%, 9/15/01, Class
A.................. 619,866
A2 650 7.75%, 11/15/02...... 627,471
General Motors Acceptance Corp.,
Baa1 2,000 6.50%, 6/10/96....... 1,970,520
</TABLE>
-9- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL ALLOCATION FUND
CONSERVATIVELY MANAGED PORTFOLIO
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S AMOUNT VALUE
RATING (000) DESCRIPTION (NOTE 1)
<C> <C> <S> <C>
FINANCIAL SERVICES--(CONT'D)
General Motors
Acceptance Corp.,
Baa1 $ 1,750 7.80%, 11/7/96....... $ 1,747,305
Baa1 600 7.85%, 3/5/97........ 597,816
Baa1 2,000 7.50%, 11/4/97....... 1,968,480
Baa1 850 7.375%, 7/20/98...... 827,849
Grupo Embotelladora
Mexicana,
Ba2 1,480 10.75%, 11/19/97..... 1,258,000
Kansallis-Osake-Pankki Bank,
A3 1,000 6.125%, 5/15/98...... 947,140
Ba1 1,000 8.65%, 12/29/49...... 973,750
Korea Development
Bank,
A1 1,800 9.25%, 6/15/98....... 1,847,988
A1 340 5.875%, 12/1/98...... 312,943
A1 1,600 6.75%, 12/1/05....... 1,368,000
PT Alatief Freeport
Finance,
Ba2 1,400 9.75%, 4/15/01....... 1,365,000
Union Bank Finland,
Ltd.,
A3 2,600 5.25%, 6/15/96....... 2,508,220
Westinghouse Credit
Corp.,
Ba1 400 8.75%, 6/3/96........ 403,000
------------
36,953,272
------------
FOOD & BEVERAGE--0.1%
Coca Cola
Enterprises, Inc.,
A3 500 6.50%, 11/15/97...... 483,135
------------
MEDIA--1.2%
Grupo Televisa Sa De
Euro (MTN),
Ba2 2,250 10.00%, 11/9/97...... 1,980,000
News America Holdings, Inc.,
Ba1 800 7.75%, 1/20/24....... 661,504
Tele-Communications,
Inc.,
Baa3 750 8.25%, 1/15/03....... 715,065
Baa3 1,200 7.875%, 8/1/13....... 1,004,256
Baa3 1,200 9.875%, 6/15/22...... 1,195,632
------------
5,556,457
------------
MISCELLANEOUS--0.1%
Federal Express
Corp.,
Baa3 $ 500 10.05%, 6/15/99...... $ 526,800
------------
OIL & GAS - INTERNATIONAL--0.6%
Arkla, Inc.,
Ba1 1,000 9.30%, 1/15/98....... 1,007,980
Oryx Energy Co.,
Ba3 2,000 6.05%, 2/1/96........ 1,940,000
------------
2,947,980
------------
PAPER & FOREST PRODUCTS--0.4%
Avenor Inc.,
Ba1 2,000 9.375%, 2/15/04...... 1,916,400
------------
PETROLEUM SERVICES--0.3%
Empresa De Petroleos,
NR 1,500 7.25%, 7/8/98........ 1,350,000
------------
SHIPPING--0.3%
Compania SudAmericana
De Vapores,
NR 1,750 7.375%, 12/8/03...... 1,435,000
------------
SOVEREIGN BONDS--1.5%
Columbia Republic,
Ba1 525 7.125%, 5/11/98...... 484,312
Ba1 375 8.75%, 10/6/99....... 359,063
Ba1 1,000 7.25%, 2/23/04....... 825,000
Grupo Condumex S.A.
de C.V., (MTN),
NR 700 6.25%, 7/27/96....... 623,000
South Africa
Republic,
Baa3 1,500 9.625%, 12/15/99..... 1,466,250
Trinadad & Tobago
Republic,
Ba2 1,700 11.75%, 10/3/04...... 1,700,000
United Mexican
States,
Ba2 400 6.97%, 8/12/00....... 280,000
Ba2 250 5.82%, 6/28/01....... 157,500
Ba2 1,225 8.50%, 9/15/02....... 869,750
------------
6,764,875
------------
</TABLE>
-10- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL ALLOCATION FUND
CONSERVATIVELY MANAGED PORTFOLIO
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S AMOUNT VALUE
RATING (000) DESCRIPTION (NOTE 1)
<C> <C> <S> <C>
TOBACCO--0.1%
RJR Nabisco, Inc.,
Baa3 $ 450 8.75%, 8/15/05....... $ 421,961
------------
UTILITIES--0.1%
Korea Electric Power
Corp.,
A1 425 7.75%, 4/1/13........ 364,688
------------
Total corporate bonds
(cost
$66,008,923)....... 63,096,165
------------
ASSET BACKED SECURITIES--1.4%
Bank One Credit Card Trust,
A2 900 7.75%, 12/15/99...... 896,344
Ford Credit Grantor
Trust,
Aaa 3,786 7.30%, 10/15/99,
Class A............ 3,751,765
Standard Credit Card
Trust,
A2 1,000 9.375%, 3/10/96,
Class B............ 1,005,312
Aaa 850 5.95%, 10/7/04....... 736,313
------------
Total asset backed
securities
(cost
$6,500,875)........ 6,389,734
------------
U. S. GOVERNMENT SECURITIES--7.7%
United States Treasury Notes,
15,800 6.00%, 11/30/97...... 15,242,102
11,700 5.125%, 3/31/98...... 10,950,498
8,500 7.50%, 10/31/99...... 8,485,380
1,000 7.25%, 8/15/04....... 977,812
------------
Total U. S.
Government
Securities
(cost
$36,768,855)....... 35,655,792
------------
Total debt
obligations
(cost
$109,278,653)...... 105,141,691
------------
Total long-term
investments
(cost
$325,106,759)...... 321,378,317
------------
SHORT-TERM INVESTMENTS--30.4%
CORPORATE NOTES--1.3%
Cemex S.A.,
NR $ 750 6.25%, 10/25/95...... $ 690,000
Citicorp,
A2 1,000 7.80%, 3/24/95....... 1,002,250
Comdisco, Inc.,
Baa2 3,000 8.95%, 5/15/95....... 3,014,940
Time Warner, Inc.,
Ba1 1,000 6.05%, 7/1/95........ 994,370
------------
Total corporate notes
(cost
$5,963,916)........ 5,701,560
------------
REPURCHASE AGREEMENT--29.1%
Joint Repurchase
Agreement Account,
5.78%, 2/1/95, (Note
134,183 5)................. 134,183,000
------------
Total short-term investments
(cost
$140,146,916)...... 139,884,560
------------
TOTAL INVESTMENTS--100.1%
(cost $465,253,675;
Note 4)............ 461,262,877
Liabilities in excess
of
other
assets--(0.1%)..... (531,599)
------------
NET ASSETS--100%..... $460,731,278
------------
------------
<FN>
- ------------------
* Non-income producing security.
ADR--American Depository Receipt.
ADS--American Deposotory Shares.
MTN--Medium Term Note.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Prospectus contains a description of
Moody's ratings.
</TABLE>
-11- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL ALLOCATION FUND
CONSERVATIVELY MANAGED PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS January 31, 1995
----------------
<S> <C>
Investments, at value (cost $465,253,675)............................................... $461,262,877
Cash.................................................................................... 134,343
Receivable for investments sold......................................................... 27,995,095
Dividends and interest receivable....................................................... 2,463,808
Receivable for Fund shares sold......................................................... 627,504
Deferred expenses and other assets...................................................... 6,675
----------------
Total assets........................................................................ 492,490,302
----------------
LIABILITIES
Payable for investments purchased....................................................... 29,808,484
Payable for Fund shares reacquired...................................................... 1,324,503
Distribution fee payable................................................................ 369,348
Management fee payable.................................................................. 256,689
----------------
Total liabilities................................................................... 31,759,024
----------------
NET ASSETS.............................................................................. $460,731,278
----------------
----------------
Net assets were comprised of:
Common stock, at par.................................................................. $ 433,646
Paid-in capital in excess of par...................................................... 459,078,257
----------------
459,511,903
Undistributed net investment income................................................... 3,456,087
Accumulated net realized gains on investments......................................... 1,753,079
Net unrealized depreciation on investments............................................ (3,989,791)
----------------
Net Assets, January 31, 1995............................................................ $460,731,278
----------------
----------------
Class A:
Net asset value and redemption price per share
($39,555,087 / 3,712,069 shares of common stock issued and outstanding)............. $10.66
Maximum sales charge (5.00% of offering price)........................................ .56
----------------
Maximum offering price to public...................................................... $11.22
----------------
----------------
Class B:
Net asset value, offering price and redemption price per share
($420,015,077 / 39,543,197 shares of common stock issued and outstanding)........... $10.62
----------------
----------------
Class C:
Net asset value, offering price and redemption price per share
($1,161,114 / 109,314 shares of common stock issued and outstanding)................ $10.62
----------------
----------------
</TABLE>
See Notes to Financial Statements.
-12-
<PAGE>
PRUDENTIAL ALLOCATION FUND
CONSERVATIVELY MANAGED PORTFOLIO
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JANUARY 31,
NET INVESTMENT INCOME 1995
------------
<S> <C>
Income
Interest (net of foreign withholding taxes of $2,330)..................................... $ 9,110,492
Dividends (net of foreign withholding taxes of $22,522)................................... 1,886,382
------------
Total income............................................................................ 10,996,874
------------
Expenses
Distribution fee--Class A................................................................. 49,271
Distribution fee--Class B................................................................. 2,208,226
Distribution fee--Class C................................................................. 2,614
Management fee............................................................................ 1,565,151
Transfer agent's fees and expenses........................................................ 382,900
Custodian's fees and expenses............................................................. 104,600
Registration fees......................................................................... 44,400
Reports to shareholders................................................................... 36,100
Directors' fees........................................................................... 11,200
Legal fees................................................................................ 7,900
Audit fee................................................................................. 7,000
Miscellaneous............................................................................. 11,016
------------
Total expenses.......................................................................... 4,430,378
------------
Net investment income....................................................................... 6,566,496
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investment transactions................................................................... 7,436,974
Foreign currency transactions............................................................. (8,701)
------------
7,428,273
------------
Net change in unrealized depreciation on:
Investments............................................................................... (20,926,181)
------------
Net loss on investments..................................................................... (13,497,908)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........................................ $ (6,931,412)
------------
------------
</TABLE>
See Notes to Financial Statements.
-13-
<PAGE>
PRUDENTIAL ALLOCATION FUND
CONSERVATIVELY MANAGED PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JANUARY 31, JULY 31,
INCREASE (DECREASE) IN NET ASSETS 1995 1994
------------ ------------
<S> <C> <C>
Operations
Net investment income....................................................... $ 6,566,496 $ 8,998,851
Net realized gain on investments............................................ 7,428,273 8,854,437
Net change in unrealized appreciation (depreciation) of investments......... (20,926,181) (13,575,563)
------------ ------------
Net increase (decrease) in net assets resulting from operations............. (6,931,412) 4,277,725
------------ ------------
Net equalization credits (debits)............................................. (55,610) 1,077,644
------------ ------------
Dividends and distributions (Note 1)
Dividends to shareholders from net investment income
Class A................................................................... (534,262) (970,829)
Class B................................................................... (4,382,497) (9,728,864)
Class C................................................................... (5,687) --
------------ ------------
(4,922,446) (10,699,693)
------------ ------------
Distributions to shareholders from net realized gains on investment
transactions
Class A................................................................... (701,041) (1,247,470)
Class B................................................................... (7,720,336) (16,812,830)
Class C................................................................... (13,746) --
------------ ------------
(8,435,123) (18,060,300)
------------ ------------
Fund share transactions (Note 6)
Net proceeds from shares subscribed......................................... 43,780,193 216,417,990
Net asset value of shares issued to shareholders in reinvestment of
dividends and distributions............................................... 12,496,308 26,617,480
Cost of shares reacquired................................................... (58,320,806) (80,947,022)
------------ ------------
Net increase (decrease) in net assets from Fund shares transactions......... (2,044,305) 162,088,448
------------ ------------
Total increase (decrease)..................................................... (22,388,896) 138,683,824
NET ASSETS
Beginning of period........................................................... 483,120,174 344,436,350
------------ ------------
End of period................................................................. $460,731,278 $483,120,174
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements.
-14-
<PAGE>
PRUDENTIAL ALLOCATION FUND PORTFOLIO OF INVESTMENTS
STRATEGY PORTFOLIO JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--66.2%
COMMON STOCKS--52.3%
AEROSPACE/DEFENSE--1.0%
25,500 Boeing Co.................. $ 1,134,750
30,100 Loral Corp................. 1,170,137
62,400 Martin Marietta, Inc....... 1,146,600
------------
3,451,487
------------
AUTOMOTIVE--1.7%
82,000 Ford Motor Co.............. 2,070,500
75,000 General Motors Corp........ 2,896,875
30,100 Modine Manufacturing Co.... 891,712
------------
5,859,087
------------
COMPUTER & RELATED EQUIPMENT--1.9%
47,350 American Management
Systems, Inc.*........... 890,772
45,000 Compaq Computer Corp.*..... 1,608,750
48,400 First Data Corp............ 2,438,150
60,000 Seagate Technology*........ 1,522,500
------------
6,460,172
------------
DRUGS & HEALTH CARE--6.6%
55,300 Abbott Laboratories........ 1,956,238
64,600 Baxter International Inc... 1,905,700
77,935 Columbia Healthcare Corp... 3,127,142
28,600 Forest Laboratories, Inc.*. 1,415,700
80,600 Glaxo Holdings PLC (ADR)... 1,578,309
63,900 Health Care & Retirement
Corp.*................... 1,869,075
125,000 National Medical
Enterprises, Inc......... 1,828,125
75,000 Ostex International, Inc.*. 721,875
30,000 Pfizer Inc................. 2,452,500
32,000 Schering Plough Corp....... 2,512,000
37,200 St. Jude Medical, Inc...... 1,413,600
50,000 U.S. HealthCare Inc........ 2,287,500
------------
23,067,764
------------
ELECTRONICS--1.9%
124,100 ADT Ltd.*.................. $ 1,241,000
45,100 Belden, Inc................ 992,200
70,300 General Electric Co........ 3,620,450
61,100 Westinghouse Electric
Corp..................... 855,400
------------
6,709,050
------------
ENTERTAINMENT--1.1%
179,800 Carnival Cruise Lines, Inc. 3,775,800
------------
FINANCIAL SERVICES--8.1%
146,100 Bank of New York, Inc...... 4,383,000
70,000 Citicorp................... 2,843,750
88,300 Dean Witter Discover & Co.. 3,300,212
36,700 Federal Home Loan Mortgage
Corp..................... 2,055,200
44,300 Federal National Mortgage
Association.............. 3,167,450
14,520 First Financial Management
Corp..................... 896,610
65,000 Kansas City Southern
Industries, Inc.......... 2,331,875
75,000 Keycorp.................... 2,081,250
70,000 MBNA Corp.................. 1,785,000
49,600 Norwest Corp............... 1,190,400
20,000 Republic New York Corp..... 952,500
65,000 Travelers Corp............. 2,396,875
40,100 Washington Mutual
Incorporated............. 706,763
------------
28,090,885
------------
FOOD & BEVERAGE--1.5%
250,000 Archer-Daniels-Midland Co.. 5,031,250
11,000 Sbarro, Inc................ 254,375
------------
5,285,625
------------
FREIGHT TRANSPORTATION--0.6%
65,000 Illinois Central Corp...... 2,136,875
------------
HOME IMPROVEMENTS--0.9%
65,000 Owens-Corning Fiberglas
Corp.*................... 1,998,750
50,000 Ply Gem Industries, Inc.... 1,031,250
------------
3,030,000
------------
INSURANCE--4.0%
40,100 American Int'l Group, Inc.. 4,175,413
24,400 Chubb Corp................. 1,976,400
34,900 General Reinsurance
Corp..................... 4,506,462
</TABLE>
-15- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL ALLOCATION FUND
STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
INSURANCE--(CONT'D)
80,000 SunAmerica, Inc............ $ 3,160,000
------------
13,818,275
------------
MACHINERY & EQUIPMENT--0.4%
134,300 Smith International, Inc.*. 1,561,238
------------
MEDIA--0.8%
40,000 Gannett Co., Inc........... 2,035,000
40,100 TCA Cable TV, Inc.......... 897,238
------------
2,932,238
------------
MINING--2.8%
91,000 Cominco Ltd................ 2,330,202
86,200 Placer Dome, Inc........... 1,616,250
76,100 Potash Corp. of
Saskatchewan Inc......... 2,673,012
300,000 Santa Fe Pacific Gold Corp.* 3,037,500
------------
9,656,964
------------
MISCELLANEOUS--1.9%
45,000 Federal Express Corp.*..... 2,733,750
82,000 Tyco International LTD..... 3,966,750
------------
6,700,500
------------
MISCELLANEOUS INDUSTRIAL--0.6%
110,000 Hanson PLC (ADR)........... 2,021,250
------------
OIL & GAS - DOMESTIC--1.6%
105,900 Mesa, Inc.*................ 516,262
52,400 Seagull Energy Corp.*...... 838,400
62,100 Total SA, (ADR)............ 1,762,088
125,000 YPF Sociedad Anonima (ADS). 2,578,125
------------
5,694,875
------------
PAPER & FOREST PRODUCTS--1.6%
59,900 American Business
Information, Inc.*....... 1,063,225
52,600 Caraustar Inds. Inc........ 1,111,175
25,000 Pentair, Inc............... 1,025,000
140,000 Stone Container Corp.*..... 2,380,000
------------
5,579,400
------------
PETROLEUM SERVICES--3.3%
33,000 Amoco Corp................. 1,914,000
88,600 BJ Services Corp.*......... $ 1,517,275
51,100 Broken Hill Proprietary Co.
Ltd...................... 2,848,825
60,500 Cross Timbers Oil Co....... 877,250
70,000 Exxon Corp................. 4,375,000
------------
11,532,350
------------
RAILROADS--0.7%
50,000 Burlington Northern Inc.... 2,314,625
------------
REAL ESTATE--0.7%
42,700 Crescent Real Estate
Equities................. 1,088,850
51,900 Equity Residential Property
Trust.................... 1,381,838
------------
2,470,688
------------
REALTY INVESTMENT TRUST--0.2%
34,000 Manufactured Home
Communities, Inc......... 548,250
------------
RETAIL--1.0%
48,300 Harcourt General, Inc...... 1,612,012
69,200 Toys ``R'' Us Inc.*........ 2,024,100
------------
3,636,112
------------
STEEL & METALS--2.6%
17,800 Carpenter Technology Corp.. 981,225
86,400 LTV Corp.*................. 1,209,600
150,000 National Steel Corp.*...... 2,250,000
60,000 Trinity Industries, Inc.... 1,980,000
127,000 Worthington Industries, Inc. 2,540,000
------------
8,960,825
------------
TELECOMMUNICATIONS--3.1%
58,500 AirTouch Communications*... 1,608,750
80,100 American Telephone &
Telegraph Co............. 3,994,987
150,000 NEXTEL Communications Inc.* 1,443,750
52,779 Tele Communications, Inc.*. 1,121,554
75,000 Telefonos de Mexico S.A.
(ADR).................... 2,653,125
------------
10,822,166
------------
TEXTILES--1.0%
140,000 Fruit of the Loom, Inc.*... 3,447,500
------------
</TABLE>
-16- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL ALLOCATION FUND
STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
TOBACCO--0.7%
39,800 Philip Morris Cos.,
Inc................. $ 2,373,075
------------
Total common stocks
(cost
$178,032,522)....... 181,937,076
------------
<CAPTION>
PRINCIPAL
MOODY'S AMOUNT
RATING (000) DEBT OBLIGATIONS--13.9%
- ------------ ---------
<C> <C> <S> <C>
CORPORATE BONDS--7.5%
AEROSPACE--0.3%
IMO Industries, Inc.,
B3 $ 1,000 12.00%, 11/1/01...... 1,008,750
------------
AUTOMOTIVE--0.3%
Harvard Indusries,
Inc.,
B2 1,000 12.00%, 7/15/04...... 1,007,500
------------
BUILDING & RELATED
INDUSTRIES--0.1%
American Standard,
Inc.,
B1 500 Zero Coupon,
6/1/05............. 330,000
------------
CHEMICALS--0.3%
NL Industries, Inc.,
B1 1,000 11.75%, 10/15/03..... 1,005,000
------------
DRUGS & HEALTH CARE--0.3%
Charter Medical Inc.
B2 1,000 11.25%, 4/15/04...... 1,000,000
------------
ELECTRONICS--0.1%
Bell & Howell Holding
Co.,
B3 1,000 Zero Coupon,
3/1/05............. 500,000
------------
FINANCE--0.2%
GB Property Funding
Corp.
B2 1,000 10.875%, 1/15/04..... 810,000
------------
FOOD & BEVERAGE--1.1%
Del Monte Corp.,
B1 $ 1,500 10.00%, 5/1/03....... $ 937,500
Food 4 Less
Supermarkets, Inc.,
B3 1,000 13.75%, 6/15/01...... 1,065,000
Pathmark Stores,
Inc..
B2 1,000 9.625%, 5/1/03....... 895,000
Pueblo Xtra
International,
B2 1,000 9.50%, 8/1/03........ 840,000
------------
3,737,500
------------
HOTELS & LEISURE--0.1%
Host Marriott Hospitality, Inc.,
B1 328 10.50%, 5/1/06....... 326,360
------------
HOUSEHOLD PRODUCTS--0.5%
Inter-City Prods.
Corp.,
Ba3 1,750 9.75%, 3/1/00........ 1,631,875
------------
INSURANCE--0.2%
Reliance Group
Holdings, Inc.,
B1 1,000 9.75%, 11/15/03...... 885,000
------------
MEDIA--0.8%
Adelphia
Communications
Corp.,
B3 1,000 12.50%, 5/15/02...... 920,000
B3 1,046 9.50%, 2/15/04,
PIK................ 716,585
Cablevision Industries Corp.,
B1 1,000 10.75%, 1/30/02...... 1,015,000
------------
2,651,585
------------
METALS--0.1%
Ucar Global Enterprises, Inc.
B2 500 12.00%, 1/15/05...... 512,500
------------
PAPER & FOREST PRODUCTS--0.7%
Fort Howard Paper
Corp.,
B2 500 12.625%, 11/1/00..... 516,250
</TABLE>
-17- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL ALLOCATION FUND
STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S AMOUNT VALUE
RATING (000) DESCRIPTION (NOTE 1)
<C> <C> <S> <C>
PAPER & FOREST PRODUCTS--(CONT'D)
Malette, Inc.,
Ba3 $ 1,000 12.25%, 7/15/04...... $ 1,010,000
Stone Container Corp.,
B1 1,000 9.875%, 2/1/01....... 937,500
------------
2,463,750
------------
RESTAURANTS--0.7%
Family Restaurants, Inc.,
B1 1,000 9.75%, 2/1/02........ 727,500
B3 1,000 Zero Coupon, 2/1/04.. 450,000
Flagstar Corp.,
B2 1,500 10.875%, 12/1/02..... 1,380,000
------------
2,557,500
------------
RETAIL--0.5%
Hills Stores Co.,
NR 1,000 10.25%, 9/30/03...... 917,500
Thrifty Payless, Inc.,
B3 1,000 12.25%, 4/15/04...... 937,500
------------
1,855,000
------------
STEEL & METALS--0.9%
Geneva Steel Co.,
B1 1,000 11.125%, 3/15/01..... 940,000
Kaiser Aluminum &
Chemical Corp.,
B2 1,000 12.75%, 2/1/03....... 1,027,500
Magma Copper Co.,
Ba3 1,000 12.00%, 12/15/01..... 1,080,000
------------
3,047,500
------------
TEXTILES--0.3%
Westpoint Stevens, Inc.,
B3 1,000 9.375%, 12/15/05..... 897,500
------------
Total corporate bonds
(cost $28,103,730).. 26,227,320
------------
SOVEREIGN BONDS--2.2%
Argentina Government
Bond,
$ 13,950 Zero Coupon, 9/1/97
(cost $8,558,325)... $ 7,602,750
------------
U. S. GOVERNMENT SECURITIES--4.2%
United States
Treasury Bond,
15,000 7.50%, 11/15/24
(cost $14,397,686).. 14,641,350
------------
Total debt
obligations
(cost $51,059,741).. 48,471,420
------------
Total long-term
investments
(cost $229,092,263). 230,408,496
------------
SHORT-TERM INVESTMENTS--35.5%
SOVEREIGN BONDS--9.4%
Mexican Tesobonos
9,331 Zero Coupon,
5/4/95............. 8,807,677
21,525 Zero Coupon,
7/27/95............ 19,423,973
5,460 Zero Coupon,
12/7/95............ 4,657,820
------------
Total sovereign bonds
(cost $34,967,452). 32,889,470
------------
U. S. GOVERNMENT & AGENCY
SECURITIES--13.2%
Federal Home Loan Bank,
6,500 5.35%, 2/1/95........ 6,500,000
United States Treasury Notes,
10,000 4.125%, 5/31/95...... 9,931,200
5,000 Zero Coupon,
2/9/95............. 4,994,600
10,000 Zero Coupon,
11/16/95........... 9,468,400
5,000 7.50%, 12/31/96...... 5,025,000
10,000 7.50%, 1/31/97....... 10,048,400
------------
Total U. S.
Government &
Agency Securities
(cost $45,917,575).. 45,967,600
------------
</TABLE>
-18- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL ALLOCATION FUND
STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
<C> <C> <S> <C>
REPURCHASE AGREEMENT--12.9%
Joint Repurchase
Agreement Account,
$44,759 5.78%, 2/1/95, (Note
5)................. $ 44,759,000
------------
Total short-term
investments
(cost
$125,644,027)...... 123,616,070
------------
Total Investments--101.7%
(cost $354,736,290;
Note 4)............ 354,024,566
Liabilities in excess
of
other
assets--(1.7%)..... (6,042,715)
------------
Net Assets--100%..... $347,981,851
------------
------------
<FN>
- ------------------
* Non-income producing security.
ADR--American Depository Receipt.
ADS--American Depository Share.
PIK--Payment in Kind securities.
NR--Not Rated by Moody's or Standard & Poors.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
</TABLE>
-19- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL ALLOCATION FUND
STRATEGY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS JANUARY 31, 1995
----------------
<S> <C>
Investments, at value (cost $354,736,290)............................................... $354,024,566
Cash.................................................................................... 98,419
Foreign currency, at value (cost $2,512,486)............................................ 2,523,826
Receivable for investments sold......................................................... 20,164,845
Dividends and interest receivable....................................................... 1,692,375
Receivable for Fund shares sold......................................................... 308,156
Forward contracts - amount receivable from counterparties............................... 257,712
Deferred expenses....................................................................... 17,601
----------------
Total assets........................................................................ 379,087,500
----------------
LIABILITIES
Payable for investments purchased....................................................... 29,139,165
Payable for Fund shares reacquired...................................................... 1,416,824
Distribution fee payable................................................................ 276,351
Management fee payable.................................................................. 194,010
Accrued expenses........................................................................ 79,299
----------------
Total liabilities................................................................... 31,105,649
----------------
NET ASSETS.............................................................................. $347,981,851
----------------
----------------
Net assets were comprised of:
Common stock, at par.................................................................. $ 319,450
Paid-in capital in excess of par...................................................... 343,565,983
----------------
343,885,433
Undistributed net investment income................................................... 1,537,918
Accumulated net realized gain on investments.......................................... 2,999,959
Net unrealized depreciation on investments............................................ (441,459)
----------------
Net Assets, January 31, 1995............................................................ $347,981,851
----------------
----------------
Class A:
Net asset value and redemption price per share
($34,924,601 divided by 3,190,103 shares of common stock issued and outstanding).... $10.95
Maximum sales charge (5.00% of offering price)........................................ .58
----------------
Maximum offering price to public...................................................... $11.53
----------------
----------------
Class B:
Net asset value, offering price and redemption price per share
($312,854,692 divided by 28,736,334 common stock issued and outstanding)............ $10.89
----------------
----------------
Class C:
Net asset value, offer price and redemption price per share
($202,558 divided by 18,605 shares of common stock issued and outstanding).......... $10.89
----------------
----------------
</TABLE>
See Notes to Financial Statements.
-20-
<PAGE>
PRUDENTIAL ALLOCATION FUND
STRATEGY PORTFOLIO
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JANUARY 31,
NET INVESTMENT INCOME 1995
------------
<S> <C>
Income
Interest (net of foreign withholding taxes of $29,434).................................... $ 5,407,053
Dividends................................................................................. 2,391,069
------------
Total income............................................................................ 7,798,122
------------
Expenses
Distribution fee--Class A................................................................. 43,938
Distribution fee--Class B................................................................. 1,694,608
Distribution fee--Class C................................................................. 523
Management fee............................................................................ 1,216,074
Transfer agent's fees and expenses........................................................ 574,200
Custodian's fees and expenses............................................................. 126,000
Reports to shareholders................................................................... 43,300
Registration fees......................................................................... 15,800
Legal fees................................................................................ 13,300
Directors' fees........................................................................... 11,200
Audit fee................................................................................. 7,000
Miscellaneous............................................................................. 8,377
------------
Total expenses.......................................................................... 3,754,320
------------
Net investment income....................................................................... 4,043,802
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investment transactions................................................................... 3,958,153
Financial futures contracts............................................................... (1,010,688)
Foreign currency transactions............................................................. 39,095
------------
2,986,560
------------
Net change in unrealized appreciation (depreciation) on:
Investments............................................................................... (12,062,239)
Financial futures contracts............................................................... 467,750
Foreign currencies........................................................................ (2,151,550)
------------
(13,746,039)
------------
Net loss on investments..................................................................... (10,759,479)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........................................ $ (6,715,677)
------------
------------
</TABLE>
See Notes to Financial Statements.
-21-
<PAGE>
PRUDENTIAL ALLOCATION FUND
STRATEGY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JANUARY 31, JULY 31,
INCREASE (DECREASE) IN NET ASSETS 1995 1994
---------------- ------------
<S> <C> <C>
Operations
Net investment income....................................................... $ 4,043,802 $ 7,171,844
Net realized gain on investments............................................ 2,986,560 14,878,620
Net change in unrealized appreciation (depreciation) of investments......... (13,746,039) (13,682,115)
---------------- ------------
Net increase (decrease) in net assets resulting from operations............. (6,715,677) 8,368,349
---------------- ------------
Net equalization credits (debits)............................................. (171,082) 48,191
---------------- ------------
Dividends and distributions (Note 1)
Dividends to shareholders from net investment income
Class A................................................................... (421,882) (549,810)
Class B................................................................... (2,693,050) (4,811,597)
Class C................................................................... (1,110) --
---------------- ------------
(3,116,042) (5,361,407)
---------------- ------------
Dividends to shareholders in excess of net investment income
Class A................................................................... -- (40,192)
Class B................................................................... -- (351,923)
Class C................................................................... -- --
---------------- ------------
-- (392,115)
---------------- ------------
Distributions to shareholders from net realized gains on investments
transactions
Class A................................................................... (1,061,481) (815,586)
Class B................................................................... (9,845,692) (10,082,411)
Class C................................................................... (5,857) --
---------------- ------------
(10,913,030) (10,897,997)
---------------- ------------
Fund share transactions (Note 6)
Net proceeds from shares subscribed......................................... 23,500,501 76,851,235
Net asset value of shares issued to shareholders in reinvestment of
dividends and distributions............................................... 13,486,310 15,914,742
Cost of shares reacquired................................................... (51,713,673) (86,835,010)
---------------- ------------
Net increase (decrease) in net assets from Fund share transactions.......... (14,726,862) 5,930,967
---------------- ------------
Total decrease................................................................ (35,642,693) (2,304,012)
NET ASSETS
Beginning of period........................................................... 383,624,544 385,928,556
---------------- ------------
End of period................................................................. $ 347,981,851 $383,624,544
---------------- ------------
---------------- ------------
</TABLE>
See Notes to Financial Statements.
-22-
<PAGE>
PRUDENTIAL ALLOCATION FUND
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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. Options are valued at
the mean between the most recently quoted bid and asked prices. Futures and
options thereon are valued at their last sales price as of the close of the
commodities exchange or board of trade.
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
-23-
<PAGE>
included in the reported net realized gains on investment transactions.
Net realized gains on foreign currency transactions represent net foreign
exchange gains from the holding of foreign currencies, currency gains or losses
realized 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.
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: The Fund accounts and reports for
distributions to shareholders in accordance with the A.I.C.P.A.'s Statement of
Position 93-2: Determination, Disclosure, and Financial Statement Presentation
of Income; Capital Gain, and Return of Capital Distributions by Investment
Companies. For the six months ended January 31, 1995, the Strategy Portfolio
decreased undistributed net investment income by $765,979, and increased
accumulated net realized gain on investments by $765,979. 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.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. ("PMFD"), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated ("PSI"), which
acts as distributor of the Class B and Class C shares of the Fund (collectively
the "Distributors"). The Fund compensates the Distributors for distributing
and servicing the Fund's Class A, Class B and Class C shares, pursuant to plans
of distribution, (the "Class A, B and C Plans") regardless of expenses
actually incurred by them. The distribution fees are accrued daily and payable
monthly.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B Plans under which the distribution plans became compensation plans,
effective August 1, 1994. Prior thereto, the distribution plans were
reimbursement plans, under which PMFD and PSI were reimbursed for expenses
actually incurred by them up to the amount permitted under the Class A and Class
B Plans, respectively. The Fund is not obligated to pay any prior or
-24-
<PAGE>
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, 1% and
1% of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were .25 of 1%, 1% and 1% of the average daily net
assets of the Class A, B and C shares, respectively, for the six months ended
January 31, 1995.
PMFD has advised the Fund that it has received approximately $236,400
($127,600--Conservatively Managed Portfolio and $108,800--Strategy Portfolio) in
front-end sales charges resulting from sales of Class A shares during the six
months ended January 31, 1995. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons.
PSI advised the Fund that for the six months ended January 31, 1995 it
received approximately $822,000 ($449,700--Conservatively Managed Portfolio and
$372,300--Strategy Portfolio) in contingent deferred sales charges imposed upon
certain redemptions by Class B and C shareholders.
PMFD is a wholly-owned subsidiary of PMF. PSI, PIC and PMF 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 six months ended January 31, 1995, the Fund incurred fees of approximately
$664,000 ($337,000--Conservatively Managed Portfolio and $327,000--Strategy
Portfolio) for the services of PMFS. As of January 31, 1995, approximately
$117,000 ($59,000--Conservatively Managed Portfolio and $58,000--Strategy
Portfolio) of such fees were due to PMFS. Transfer agent fees and expenses in
the Statement of Operations also include certain out of pocket expenses paid to
non-affiliates.
For the six months ended January 31, 1995, PSI received approximately $37,300
($11,100--Conservatively Managed Portfolio and $26,200--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 six months ended
January 31, 1995, were as follows:
<TABLE>
<CAPTION>
PORTFOLIO PURCHASES SALES
- ----------------------------- ------------- -------------
<S> <C> <C>
Conservatively Managed
Portfolio.................. $ 262,946,175 $ 317,142,178
Strategy Portfolio........... $ 260,005,477 $ 244,899,972
</TABLE>
At January 31, 1995, the Strategy Portfolio had outstanding forward currency
contracts to sell foreign currencies, as follows:
<TABLE>
<CAPTION>
FOREIGN CURRENCY VALUE AT CURRENT APPRECIATION/
SALE CONTRACTS SETTLEMENT DATE VALUE (DEPRECIATION)
- --------------------- --------------- ----------- --------------
<S> <C> <C> <C>
Canadian Dollar...... $ 9,928,094 $ 9,725,817 $ 202,277
British Pound
Sterling........... 15,491,525 15,436,090 55,435
--------------
$ 257,712
--------------
--------------
</TABLE>
The cost basis of investments for federal income tax purposes as of January
31, 1995 was $465,421,731 and $354,809,894 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................ $ 15,728,384 $10,421,562
Gross unrealized
depreciation................ (19,887,238) (11,206,890)
-------------- -----------
Net unrealized depreciation... $ (4,158,854) $ (785,328)
-------------- -----------
-------------- -----------
</TABLE>
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 January 31, 1995, the
Fund had a 25.9% (Conservatively Managed Portfolio--19.4% and Strategy
Portfolio--6.5%) undivided interest in the repurchase agreements in the joint
account. The undivided interest for the Fund represented $178,942,000,
(Conservatively Managed Portfolio--$134,183,000 and Strategy
Portfolio--$44,759,000) 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:
Bear, Stearns & Co., Inc., 5.80%, dated 1/31/95, in the principal amount of
$230,000,000, repurchase price $230,037,056, due 2/1/95. The value of the
collateral including accrued interest is $234,694,229.
-25-
<PAGE>
Goldman, Sachs & Co., Inc., 5.78%, dated 1/31/95, in the principal amount of
$230,000,000, repurchase price $230,036,928, due 2/1/95. The value of the
collateral including accrued interest is $234,671,875.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 5.75%, dated 1/31/95, in the
principal amount of $230,000,000 repurchase price $230,036,736 due 2/1/95. The
value of the collateral including accrued interest is $238,666,827.
NOTE 6. CAPITAL Class A shares are sold with a
front-end sales charge of up to 5%. Class B shares
are sold with a contingent deferred sales charge which declines from 5% to zero
depending on the period of time the shares are held. Class C shares are sold
with a contingent deferred sales charge of 1% during the first year. Class B
shares will automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase commencing in February 1995. All
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.
Transactions in shares of beneficial interest for the six months ended
January 31, 1995, and the fiscal year ended July 31, 1994 were as follows:
<TABLE>
<CAPTION>
CONSERVATIVELY MANAGED
PORTFOLIO: STRATEGY PORTFOLIO:
<S> <C> <C> <C> <C>
CLASS A CLASS A
----------------------------- ------------------------------
SIX MONTHS ENDED JANUARY 31, 1995: SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------- ---------- ------------ ----------- ------------
Shares issued..................................... 701,706 $ 7,666,405 788,304 $ 8,911,246
Shares issued in reinvestment of dividends
and distributions............................... 112,593 1,182,733 133,245 1,442,302
Shares reacquired................................. (474,349) (5,156,906) (530,966) (5,948,269)
---------- ------------ ----------- ------------
Increase in shares outstanding.................... 339,950 $ 3,692,232 390,583 $ 4,405,279
---------- ------------ ----------- ------------
---------- ------------ ----------- ------------
<CAPTION>
YEAR ENDED JULY 31, 1994:
- --------------------------------------------------
<S> <C> <C> <C> <C>
Shares issued..................................... 1,936,121 $ 22,068,844 954,118 $ 11,209,754
Shares issued in reinvestment of dividends........ 185,818 2,104,551 115,925 1,362,807
Shares reacquired................................. (673,143) (7,607,829) (693,445) (8,199,850)
---------- ------------ ----------- ------------
Increase in shares outstanding.................... 1,448,796 $ 16,565,566 376,598 $ 4,372,711
---------- ------------ ----------- ------------
---------- ------------ ----------- ------------
<CAPTION>
SIX MONTHS ENDED JANUARY 31, 1995: CLASS B CLASS B
- -------------------------------------------------- ----------------------------- ------------------------------
<S> <C> <C> <C> <C>
Shares issued..................................... 3,201,662 $ 34,894,901 1,275,199 $ 14,379,416
Shares issued in reinvestment of dividends
and distributions............................... 1,080,604 11,294,145 1,120,851 12,037,045
Shares reacquired................................. (4,917,997) (53,115,560) (4,089,045) (45,760,618)
---------- ------------ ----------- ------------
Decrease in shares outstanding.................... (635,731) $ (6,926,514) (1,692,995) $(19,344,157)
---------- ------------ ----------- ------------
---------- ------------ ----------- ------------
<CAPTION>
YEAR ENDED JULY 31, 1994:
- --------------------------------------------------
<S> <C> <C> <C> <C>
Shares issued..................................... 17,006,359 $194,349,146 5,564,589 $ 65,641,481
Shares issued in reinvestment of dividends
and distributions............................... 2,171,273 24,512,929 1,243,606 14,551,935
Shares reacquired................................. (6,463,788) (73,339,193) (6,693,142) (78,635,160)
---------- ------------ ----------- ------------
Increase in shares outstanding.................... 12,713,844 $145,522,882 115,053 $ 1,558,256
---------- ------------ ----------- ------------
---------- ------------ ----------- ------------
<CAPTION>
AUGUST 1, 1994* THROUGH JANUARY 31, 1995: CLASS C CLASS C
- -------------------------------------------------- ----------------------------- ------------------------------
<S> <C> <C> <C> <C>
Shares issued..................................... 111,933 $ 1,218,887 18,399 $ 209,839
Shares issued in reinvestment of dividends
and distributions............................... 1,862 19,430 649 6,963
Shares reacquired................................. (4,481) (48,340) (443) (4,786)
---------- ------------ ----------- ------------
Increase in shares outstanding.................... 109,314 $ 1,189,977 18,605 $ 212,016
---------- ------------ ----------- ------------
---------- ------------ ----------- ------------
<FN>
- ---------------
* Commencement of offering of Class C shares.
</TABLE>
-26-
<PAGE>
NOTE 7. DIVIDENDS On March 16, 1995, the
Board of Trustees of the Fund declared a dividend
from undistributed net investment income of $.10 per share to Class A
shareholders and $.08 per share to Class B shareholders and Class C shareholders
for the Conservatively Managed Portfolio and a dividend from undistributed net
investment income of $.09 per share to Class A shareholders and $.0675 per share
to Class B shareholders, and Class C shareholders for the Strategy Portfolio.
All dividends are payable on March 30, 1995 to shareholders of record on March
23, 1995.
-27-
<PAGE>
PRUDENTIAL ALLOCATION FUND
CONSERVATIVELY MANAGED PORTFOLIO
FINANCIAL HIGHLIGHTS
(UNAUDITED)
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated:
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------
JANUARY 22,
SIX MONTHS 1990@
ENDED YEAR ENDED JULY 31, THROUGH
JANUARY 31, ------------------------------------------- JULY 31,
PER SHARE OPERATING PERFORMANCE: 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
----------- ------- ------- ------- ------- -----------
Net asset value, beginning of period... $ 11.12 $ 11.75 $ 11.00 $ 10.73 $ 10.23 $ 9.83
----------- ------- ------- ------- ------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. .19 .33 .43 .44 .44 .26
Net realized and unrealized gain (loss)
on investment transactions........... (.30) (.05) 1.16 .81 .73 .38
----------- ------- ------- ------- ------- -----------
Total from investment operations..... (.11) .28 1.59 1.25 1.17 .64
----------- ------- ------- ------- ------- -----------
LESS DISTRIBUTIONS
Dividends from net investment income... (.15) (.37) (.37) (.44) (.44) (.24)
Distributions paid to shareholders from
net realized gains on investment
transactions......................... (.20) (.54) (.47) (.54) (.23) --
----------- ------- ------- ------- ------- -----------
Total distributions.................. (.35) (.91) (.84) (.98) (.67) (.24)
----------- ------- ------- ------- ------- -----------
Net asset value, end of period......... $ 10.66 $ 11.12 $ 11.75 $ 11.00 $ 10.73 $ 10.23
----------- ------- ------- ------- ------- -----------
----------- ------- ------- ------- ------- -----------
TOTAL RETURN#:......................... (4.25)% 2.39% 15.15% 12.29% 11.99% 6.59%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........ $39,555 $37,512 $22,605 $10,944 $ 4,408 $ 1,944
Average net assets (000)............... $39,095 $29,875 $15,392 $ 7,103 $ 2,747 $ 1,047
Ratios to average net assets:
Expenses, including distribution
fees............................... 1.16%+ 1.23% 1.17% 1.29% 1.38% 1.29%+
Expenses, excluding distribution
fees............................... .91%+ 1.00% .97% 1.09% 1.18% 1.09%+
Net investment income................ 3.42%+ 2.84% 3.88% 3.97% 4.44% 5.04%+
Portfolio turnover rate................ 68% 108% 83% 105% 137% 106%
<FN>
- ---------------
@ 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.
</TABLE>
See Notes to Financial Statements.
-28-
<PAGE>
PRUDENTIAL ALLOCATION FUND
CONSERVATIVELY MANAGED PORTFOLIO
FINANCIAL HIGHLIGHTS
(UNAUDITED)
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated:
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED JULY 31,
JANUARY 31, ------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE: 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period... $ 11.09 $ 11.72 $ 10.98 $ 10.71 $ 10.22 $ 10.21
----------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. .14 .24 .34 .35 .36 .45
Net realized and unrealized gain (loss)
on investment transactions........... (.30) (.05) 1.16 .82 .73 .18
----------- -------- -------- -------- -------- --------
Total from investment operations..... (.16) .19 1.50 1.17 1.09 .63
----------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income... (.11) (.28) (.29) (.36) (.37) (.52)
Distributions paid to shareholders from
net realized gains on investment
transactions......................... (.20) (.54) (.47) (.54) (.23) (.10)
----------- -------- -------- -------- -------- --------
Total distributions.................. (.31) (.82) (.76) (.90) (.60) (.62)
----------- -------- -------- -------- -------- --------
Net asset value, end of period......... $ 10.62 $ 11.09 $ 11.72 $ 10.98 $ 10.71 $ 10.22
----------- -------- -------- -------- -------- --------
----------- -------- -------- -------- -------- --------
TOTAL RETURN#:......................... (5.00)% 1.61% 14.27% 11.48% 11.13% 6.44%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........ $ 420,015 $445,609 $321,831 $225,995 $162,281 $154,917
Average net assets (000)............... $ 438,050 $392,133 $267,340 $189,358 $149,907 $143,241
Ratios to average net assets:++
Expenses, including distribution
fees............................... 1.91%+ 2.00% 1.97% 2.09% 2.16% 2.07%
Expenses, excluding distribution
fees............................... .91%+ 1.00% .97% 1.09% 1.16% 1.08%
Net investment income................ 2.66%+ 2.08% 3.04% 3.25% 3.55% 4.42%
Portfolio turnover rate................ 68% 108% 83% 105% 137% 106%
<CAPTION>
CLASS C
AUGUST 1, 1994@@
THROUGH
JANUARY 31,
PER SHARE OPERATING PERFORMANCE: 1995
<S> <C>
------
Net asset value, beginning of period... $11.12
------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. .14
Net realized and unrealized gain (loss)
on investment transactions........... (.33)
------
Total from investment operations..... (.19)
------
LESS DISTRIBUTIONS
Dividends from net investment income... (.11)
Distributions paid to shareholders from
net realized gains on investment
transactions......................... (.20)
------
Total distributions.................. (.31)
------
Net asset value, end of period......... $10.62
------
------
TOTAL RETURN#:......................... (1.71)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........ $1,161
Average net assets (000)............... $ 524
Ratios to average net assets:++
Expenses, including distribution
fees............................... 1.91%+
Expenses, excluding distribution
fees............................... .91%+
Net investment income................ 2.80%+
Portfolio turnover rate................ 68%
<FN>
- ---------------
@@ Commencement of offering of Class C shares.
+ Annualized.
++ Because of the recent commencement of its offering, the ratios for the
Class C shares are not necessarily comparable to that of Class A or B
shares and are not necessarily indicative of future ratios.
# 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>
See Notes to Financial Statements.
-29-
<PAGE>
PRUDENTIAL ALLOCATION FUND
STRATEGY PORTFOLIO
FINANCIAL HIGHLIGHTS
(UNAUDITED)
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated:
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------
JANUARY 22,
SIX MONTHS 1990@
ENDED YEAR ENDED JULY 31, THROUGH
JANUARY 31, ------------------------------------------- JULY 31,
PER SHARE OPERATING PERFORMANCE: 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
----------- ------- ------- ------- ------- -----------
Net asset value, beginning of period... $ 11.60 $ 11.82 $ 12.03 $ 11.45 $ 10.50 $ 10.16
----------- ------- ------- ------- ------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. .17 .30 .42 .35 .38 .25
Net realized and unrealized gain on
investment and foreign currency
transactions......................... (.34) .05 .70 1.02 .98 .33
----------- ------- ------- ------- ------- -----------
Total from investment operations..... (.17) .35 1.12 1.37 1.36 .58
----------- ------- ------- ------- ------- -----------
LESS DISTRIBUTIONS
Dividends from net investment income... (.14) (.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) (.34) (.96) (.42) (.06) --
----------- ------- ------- ------- ------- -----------
Total distributions.................. (.48) (.57) (1.33) (.79) (.41) (.24)
----------- ------- ------- ------- ------- -----------
Net asset value, end of period......... $ 10.95 $ 11.60 $ 11.82 $ 12.03 $ 11.45 $ 10.50
----------- ------- ------- ------- ------- -----------
----------- ------- ------- ------- ------- -----------
TOTAL RETURN#:......................... (6.61)% 2.88% 10.02% 12.36% 13.42% 5.83%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........ $34,925 $32,485 $28,641 $20,378 $10,765 $ 5,073
Average net assets (000)............... $34,864 $30,634 $24,216 $15,705 $ 6,694 $ 2,928
Ratios to average net assets:
Expenses, including distribution
fees............................... 1.36%+ 1.26% 1.21% 1.26% 1.33% 1.51%+
Expenses, excluding distribution
fees............................... 1.11%+ 1.03% 1.01% 1.06% 1.13% 1.26%+
Net investment income................ 2.86%+ 2.52% 3.61% 3.05% 3.89% 4.58%+
Portfolio turnover rate................ 85% 96% 145% 241% 189% 159%
<FN>
- ---------------
+ 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.
</TABLE>
See Notes to Financial Statements.
-30-
<PAGE>
PRUDENTIAL ALLOCATION FUND
STRATEGY PORTFOLIO
FINANCIAL HIGHLIGHTS
(UNAUDITED)
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated:
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED JULY 31,
JANUARY 31, ------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE: 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period... $ 11.54 $ 11.79 $ 12.01 $ 11.43 $ 10.49 $ 10.85
----------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. .12 .21 .34 .26 .30 .37
Net realized and unrealized gain on
investment and foreign currency
transactions......................... (.34) .05 .70 1.02 .97 .03
----------- -------- -------- -------- -------- --------
Total from investment operations..... (.22) .26 1.04 1.28 1.27 .40
----------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income... (.09) (.16) (.30) (.28) (.27) (.40)
Dividends in excess of net investment
income............................... -- (.01) -- -- -- --
Distributions paid to shareholders from
net realized gains on investment and
foreign currency transactions........ (.34) (.34) (.96) (.42) (.06) (.36)
----------- -------- -------- -------- -------- --------
Total distributions.................. (.43) (.51) (1.26) (.70) (.33) (.76)
----------- -------- -------- -------- -------- --------
Net asset value, end of period......... $ 10.89 $ 11.54 $ 11.79 $ 12.01 $ 11.43 $ 10.49
----------- -------- -------- -------- -------- --------
----------- -------- -------- -------- -------- --------
TOTAL RETURN#:......................... (7.33)% 2.11% 9.21% 11.53% 12.49% 3.59%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........ $ 312,855 $351,140 $357,287 $314,771 $219,983 $176,078
Average net assets (000)............... $ 336,159 $362,579 $339,225 $267,525 $190,913 $127,360
Ratios to average net assets:++
Expenses, including distribution fees. 2.11%+ 2.03% 2.01% 2.06% 2.11% 2.10%
Expenses, excluding distribution fees. 1.11%+ 1.03% 1.01% 1.06% 1.11% 1.14%
Net investment income................. 2.10%+ 1.77% 2.79% 2.27% 2.95% 3.61%
Portfolio turnover rate................ 85% 96% 145% 241% 189% 159%
<CAPTION>
CLASS C
-----------
AUGUST 1, 1994@@
THROUGH
JANUARY 31,
PER SHARE OPERATING PERFORMANCE: 1995
<S> <C>
------
Net asset value, beginning of period... $11.57
------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. .12
Net realized and unrealized gain on
investment and foreign currency
transactions......................... (.37)
------
Total from investment operations..... (.25)
------
LESS DISTRIBUTIONS
Dividends from net investment income... (.09)
Dividends in excess of net investment
income............................... --
Distributions paid to shareholders from
net realized gains on investment and
foreign currency transactions........ (.34)
------
Total distributions.................. (.43)
------
Net asset value, end of period......... $10.89
------
------
TOTAL RETURN#:......................... (2.16)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........ $ 203
Average net assets (000)............... $ 105
Ratios to average net assets:++
Expenses, including distribution fees. 2.11%+
Expenses, excluding distribution fees. 1.11%+
Net investment income................. 2.36%+
Portfolio turnover rate................ 85%
<FN>
- ---------------
+ Annualized.
++ Because of the recent commencement of its offering, the ratios for the
Class C shares are not necessarily comparable to that of Class A or B
shares and are not necessarily indicative of future ratios.
@@ Commencement of offering of Class C 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.
</TABLE>
See Notes to Financial Statements.
-31-
<PAGE>
DIRECTORS
Edward D. Beach
Donald D. Lennox
Douglas H. McCorkindale
Lawrence C. McQuade
Thomas C. Mooney
Richard A. Redeker
Louis A. Weil, III
OFFICERS
Lawrence C. McQuade, President
Robert F. Gunia, Vice President
Susan C. Cote, Treasurer
S. Jane Rose, Secretary
Marguerite E.H. Morrison, Assistant Secretary
MANAGER
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
INVESTMENT ADVISER
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
DISTRIBUTORS
Prudential Mutual Fund Distributors, Inc.
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
CUSTODIAN
State Street Bank and Trust Company
One Heritage Drive
North Qunicy, MA 02171
TRANSFER AGENT
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
2 World Financial Center
New York, NY 10281
LEGAL COUNSEL
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 06010-4795
PRUDENTIAL MUTUAL FUNDS
ONE SEAPORT PLAZA
NEW YORK, NY 10292
TOLL FREE (800) 225-1852, COLLECT (908) 417-7555
The accompanying financial statements as of January 31, 1995, were not audited
and, accordingly no opinion is expressed on them.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
SEMI ANNUAL REPORT
JANUARY 31, 1995
PRUDENTIAL ALLOCATION FUND
[Graphic]
CONSERVATIVELY MANAGED PORTFOLIO
STRATEGY PORTFOLIO
PRUDENTIAL MUTUAL FUNDS
BUILDING YOUR FUTURE ON OUR STRENGTH-SM- [Logo]
<PAGE>
PRUDENTIAL
INCOMEVERTIBLE-REGISTERED TRADEMARK-
FUND, INC.
AT A GLANCE
The Prudential IncomeVertible-REGISTERED TRADEMARK- Fund, Inc. seeks both
current income and capital appreciation. It invests primarily in convertible
securities and/or in combinations of securities, comprising nonconvertible
fixed-income securities and warrants or call options, which resemble convertible
securities in many respects.
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURNS(1)
AS OF 12/31/94
ONE YEAR FIVE YEAR SINCE INCEPTION(2)
<S> <C> <C> <C>
Class A -3.6% N/A +40.3%
Class B -4.2 +29.6% +112.5
Class C N/A N/A -2.5
Lipper Convertible Sec. Avg.(3) -3.8 +57.1 +116.8
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS(1)
AS OF 12/31/94
ONE YEAR FIVE YEAR SINCE INCEPTION(2)
<S> <C> <C> <C>
Class A -8.4% N/A +6.0%
Class B -9.2 +5.2% +8.7
Class C N/A N/A -3.5
<FN>
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their original cost.
(1) Source: Prudential Mutual Fund Management Inc. and Lipper Analytical
Services, Inc. The cumulative total returns do not take into account sales
charges. The average annual returns do take into account applicable sales
charges. The Fund charges a maximum front-end sales load of 5% for Class A
shares and a contingent deferred sales charge (CDSC) of 5%, 4%, 3%, 2%, 1%
and 1% for six years, for Class B shares. Class C shares have a 1% CDSC for
one year. Beginning in February 1995, Class B shares will automatically
convert to Class A shares on a quarterly basis, after approximately
seven years.
(2) Inception dates: 1/22/90 Class A; 12/5/85 Class B; 8/1/94 Class C.
(3) Lipper average returns are for 24 funds for one year, 18 funds for
five years and 8 funds since inception of Class B shares on 12/5/85.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIVE LARGEST HOLDINGS
% OF TOTAL
AS OF 12/31/94 PORTFOLIO
<S> <C>
1. AMOCO CANADA
PETROLEUM CORP. 4.2%
Integrated oil and gas
production
2. U.S. TREASURY BONDS 4.0%
3. SILICON GRAPHICS, INC. 4.0%
Computer hardware and
services
4. NATIONAL SEMICONDUCTOR 3.3%
CORP.
Engineering and construction
5. ALUMAX, INC. 3.1%
Non-ferrous metals
</TABLE>
UNDERSTANDING
PERFORMANCE
HISTORICAL INVESTMENT RESULTS represent the cumulative total returns for
a specified period. These returns assume the reinvestment of dividends and
distributions but do not take into account the applicable sales charges.
AVERAGE ANNUAL TOTAL RETURNS are not actual yearly results but even out
performance so that investors can compare different funds on an equal
basis. These returns take into account sales charges and would produce
the same results as the historic total returns for the same period if
performance had been constant.
Growth of an Assumed
Investment of $10,000 in the
Prudential IncomeVertible-REGISTERED TRADEMARK- Fund, Inc.
Class A
from inception on
1/22/90 through 12/31/94
[GRAPH]
The above chart represents historical performance of Class A shares and
assumes a front-end sales load of 5%. The net amount invested, after
taking into account the front-end sales load, was $9,500.
Class B
from inception on
12/5/85 through 12/31/94
[GRAPH]
The above chart represents historical performance of Class B shares and
does not assume the effects of a contingent deferred sales charge. (Class
B shares are subject to a CDSC of 5%, 4%, 3%, 2%, 1% and 1% during the
first six years.)
Key
/ / Value of shares initially purchased plus shares acquired through
reinvestment of all dividends and distributions.
// Value of shares initially purchased with all distributions taken in cash.
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate and an investor's shares may be worth more
or less than the original amount when redeemed. Performance data for Class
C shares is not included since the share class commenced operations less
than one year ago.
<PAGE>
LETTER TO SHAREHOLDERS
FEBRUARY 1, 1995
DEAR SHAREHOLDER:
Convertible securities had a rough year in 1994, and the main reason was
rising U.S. interest rates. Convertible securities generally act like bonds and
their value declined as rates rose. We are pleased to report that the Prudential
IncomeVertible[REGISTERED TRADEMARK] Fund performed on a comparable level with
other convertible securities funds for the year, according to Lipper Analytical
Services, Inc. Unfortunately, these returns were negative. Still, this is a
marked turnaround in the Fund's overall performance and one we will endeavor to
maintain.
THE FUND'S OBJECTIVE.
The Prudential IncomeVertible[REGISTERED TRADEMARK] Fund seeks both current
income and capital appreciation. It invests primarily in convertible securities
and/or in combinations of securities, comprising nonconvertible fixed-income
securities and warrants or call options, which resemble convertible securities
in many respects. Under normal circumstances, the Fund intends to invest at
least 65% of its total assets in convertible securities and/or synthetic
convertibles.The balance of the Fund's assets may be invested in other debt and
equity securities.
It may also write (i.e., sell) covered calls on debt and equity securities
and on stock indices, and engage in hedging transactions using options and
futures. The Fund also invests significantly in lower-rated and unrated bonds,
commonly known as "junk bonds," which are subject to greater risk of loss of
principal and interest, including default risk, than higher-rated bonds.
THE MARKET.
Since the Federal Reserve began raising short-term interest rates in early
1994, stock and bond markets around the world were hurt. Investors worried about
the effectiveness of the Federal Reserve's monetary policy on the one hand, and
the U.S. economy's ability to maintain growth in the face of it, on the other.
The S&P 500, a weighted index comprising 500 stocks that provide a broad
indicator of stock prices movements, was up 1.3% for the 12 months ended
December 31, 1994.
Convertible securities, along with the rest of the market, suffered. They
also came under increased pressure in the fourth quarter from dealers and hedge
funds looking to reduce their convertible inventories for year-end reporting
purposes. Many dealers sold their positions, increasing supplies in
-1-
<PAGE>
a weak market, which hurt prices. The Merrill Lynch Convertible Index, an
unmanaged index of approximately 500 convertible securities with minimum $25
million par values, was down 7.1% for the 12 months ended December 31, 1994.
Government and corporate bonds, as measured by the Lehman Government Corporate
Bond Index, fell 3.5% over the same time period.
ON THE HILL:
In 1995, Congress is set to consider an initiative that would restore full
income tax deductibility for individual retirement account contributions for
middle-income wage earners. In addition, Congress will also debate creation of a
new tax-deferred savings account, called "the American Dream Savings Account."
Prudential Mutual Funds supports both of these proposals, and we urge you to
share your own opinion with your Congressional representatives. We will keep you
updated on the proposals as they make their way through the legislative process.
WHAT WE DID WELL...
In our last writing, we indicated that we were working towards turning the
Fund's performance around, and that we had begun restructuring the portfolio to
improve performance. As of this writing, it appears our new strategy is working.
While the Fund has generally underperformed the averages since its inception, it
outperformed them in 1994. We attribute the Fund's improved performance to the
following factors:
- - RENEWED EMPHASIS ON COMMON STOCKS. In the beginning of the year, we
restructured the portfolio, shifting a higher percentage of assets to
common stocks. Now at 18%, this represents a significant increase from its
December 1993 level of 5%, and has helped to boost the Fund's performance
relative to its peers. For the one-year period ending December 31, 1994,
the Fund was ranked 12th (Class A) and 15th (Class B) among 26 comparable
funds according to Lipper Analytical Services. For the three-year period
ending December 31, 1994, the Fund was ranked 19th (Class A) and 22nd
(Class B) among 23 funds; for the five-year period, Class B shares were
ranked last among 21 funds.
- - EMPHASIS ON EQUITY-SENSITIVE CONVERTIBLES. In restructuring the portfolio,
we also became focused on equity sensitive convertibles, those which tend
to follow the performance of the stock market. The main reason behind this
focus is the value afforded by such securities. The premiums paid for
equity-sensitive convertibles are generally 25% or less. This is
considerably lower than the premiums paid for convertible securities on
average. Moreover, because these issues were priced attractively when we
bought them, they held up better in 1994's less than robust market.
- - ELIMINATION OF ALL SYNTHETIC CONVERTIBLE POSITIONS. As the final leg of the
Fund's restructuring, we eliminated remaining synthetic convertible
positions. While these securities were attractive at one time, because the
number of opportunities in the convertible market were limited, we no
longer find them advantageous. The convertible market has grown
considerably over the last few years, allowing access to more companies and
far greater diversification than was previously available. What's more,
unlike true convertibles, synthetics have an option attached to them, which
requires the payment of a premium -- an added cost we don't deem necessary
in this environment.
- - STRESSING THE RIGHT SECTORS. We increased our position relative to the S&P
500 in the basic industry and capital spending, technology and energy
sectors. We believe these sectors of the market will continue to benefit
from the worldwide economic recovery/expansion that is now in full swing.
-2-
<PAGE>
..AND WHERE WE COULD HAVE DONE BETTER.
The fourth quarter offered some challenges. Aside from the lackluster
performance of convertibles in general, the last three weeks of December were
particularly difficult for a portion of our international holdings. As of
December 31, 1994 the Fund had a 7% weighting in Mexican convertibles, which
were down 30% to 40% during the month. This fall was prompted by the devaluation
of the peso by the Mexican government, which negatively impacted
peso-denominated investments. However, we expect Mexican securities will bottom
sometime in first quarter 1995, and remain bullish on Mexican stocks long term.
FUND UPDATE:
Beginning in February 1995, Class B shareholders should begin to notice a
change in their Fund holdings. That's when Class B shares will begin to convert
to Class A shares, on a quarterly basis, approximately seven years after
purchase. As you may know, Class A shares generally carry lower annual
distribution expenses than Class B shares. Accordingly, after conversion, you
will earn higher total returns on your investment than you would have as a Class
B shareholder. This conversion will be processed automatically and won't require
any further action on your part.
LOOKING AHEAD TO 1995...
We believe the Fund is well-positioned to benefit from a worldwide economic
recovery that continues to gain steam, and believe true convertible issues and
common stocks will benefit from this growth.
But uncertainty regarding U.S. interest rates may continue to hold back
healthy returns. We expect interest rates to stabilize early in 1995. In the
meantime, we remain focused on issues that meet our criteria for growth.
Moreover, we will continue to pursue investments in the basic industry and
capital spending, technology and energy sectors, as we believe these sectors of
the market offer the greatest potential for long-term growth.
In closing, we remain decidedly optimistic on the markets in 1995. Thank
you for your confidence and we remain committed to improving Fund performance.
Sincerely,
/S/ LAWRENCE C. MCQUADE
Lawrence C. McQuade
President
/S/ GREGORY GOLDBERG
Gregory Goldberg
Portfolio Manager
-3-
<PAGE>
<TABLE>
<CAPTION>
PRUDENTIAL INCOMEVERTIBLE[REGISTERED TRADEMARK] FUND, INC. PORTFOLIO OF INVESTMENTS
DECEMBER 31,1994
PRINCIPAL
AMOUNT VALUE
(000) SHARES DESCRIPTION (NOTE 1)
<C> <C> <S> <C>
LONG-TERM INVESTMENTS--92.1%
AEROSPACE/DEFENSE--1.2%
$ 3,131 GenCorp, Inc., Conv. Sub. Deb., 8.00%, 8/1/02.......................... $ 2,876,606
------------
AIRLINES--1.6%
5,000 AMR Corp., Conv. Bond, 6.125%, 11/1/24................................. 4,012,500
------------
AUTOMOBILES & TRUCKS--2.5%
2,177 Careline, Inc., Conv. Bond, 8.00%, 5/1/01.............................. 1,654,520
108,000 Ford Motor Co., Conv. Pfd. Stock....................................... 3,024,000
100,000 Masco Tech, Inc., Conv. Pfd. Stock..................................... 1,375,000
------------
6,053,520
------------
BANKS--6.4%
3,750 Banco Nacionale de Mexico, Conv. Bond, 7.00%, 12/15/99 (ADR)
(Mexico)............................................................. 2,990,625
38,000 Citicorp, Conv. Pfd. Stock............................................. 4,389,000
63,900 First Commerce Corp., Conv. Pfd. Stock................................. 1,725,300
65,500 Nacional Financiera, Conv. Pfd. Stock (ADR) (Mexico)................... 2,718,250
74,500 Republic New York Corp., Conv. Pfd. Stock.............................. 3,762,250
------------
15,585,425
------------
COMMUNICATIONS EQUIPMENT--1.6%
2,802 General Instrument Corp., Conv. Bond, 5.00%, 6/15/00................... 3,796,710
------------
COMPUTER HARDWARE--8.6%
1,392 LSI Logic Corp., Conv. Sub. Deb., 5.50%, 3/15/01....................... 2,423,820
5,530 Quantum Corp., Conv. Bond, 6.375%, 4/1/02.............................. 5,350,275
18,200 Silicon Graphics, Inc., Zero Coupon Conv. Bond, 11/2/13................ 9,555,000
160,000 Verifone, Inc., Common Stock*.......................................... 3,560,000
------------
20,889,095
------------
COMPUTER SOFTWARE & SERVICES--7.9%
200,000 Cisco Systems, Inc., Common Stock*..................................... 7,025,000
65,000 Computer Associates International, Inc., Common Stock.................. 3,152,500
</TABLE>
-4- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL INCOMEVERTIBLE[REGISTERED TRADEMARK] FUND, INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) SHARES DESCRIPTION (NOTE 1)
<C> <C> <S> <C>
COMPUTER SOFTWARE & SERVICES (CONT'D.)
125,000 Cyrix Corp., Common Stock*............................................. $ 2,453,125
115,000 General Motors Corp., Series E, Conv. Pfd. Stock....................... 6,598,125
------------
19,228,750
------------
CONGLOMERATES--6.2%
250,000 Canadian Pacific Limited, Common Stock (Canada)........................ 3,750,000
75,000 Hanson PLC, Common Stock (ADR) (United Kingdom)........................ 1,350,000
$ 1,717 Mark IV Inds., Inc., Conv. Sub. Deb., 6.25%, 2/15/07................... 2,294,341
3,245 Nippon Denro Ispat, Ltd., Conv. Bond, 3.00%, 4/1/01 (ADR) (India)...... 2,239,050
3,175 Stone Container Corp., Conv. Sub. Deb., 8.875%, 7/15/00................ 5,365,750
------------
14,999,141
------------
DRUG & MEDICAL SUPPLIES--1.0%
7,500 Alza Corp., Conv. Bond, 7/14/14........................................ 2,503,125
------------
ENGINEERING & CONSTRUCTION--4.8%
92,000 McDermott International, Inc., Conv. Pfd. Stock........................ 3,772,000
109,600 National Semiconductor Corp., Conv. Pfd. Stock......................... 7,946,000
------------
11,718,000
------------
EXPLORATION & PRODUCTION--1.5%
2,275 Cross Timbers Oil Co., Conv. Deb., 5.25%, 11/1/03...................... 1,825,687
2,600 Oryx Energy Co., Conv. Bond, 7.50%, 5/15/14............................ 1,807,001
------------
3,632,688
------------
FINANCIAL SERVICES--1.2%
125,000 MBNA Corp., Common Stock............................................... 2,921,875
------------
FOODS--2.2%
896,000 RJR Nabisco Holdings Corp., Conv. Pfd. Stock*.......................... 5,376,000
------------
</TABLE>
-5- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL INCOMEVERTIBLE[REGISTERED TRADEMARK] FUND, INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) SHARES DESCRIPTION (NOTE 1)
<C> <C> <S> <C>
GAS PIPELINES--2.1%
54,900 Tejas Gas Corp., Conv. Pfd. Stock...................................... $ 2,346,975
58,000 Transco Energy Co., Conv. Pfd. Stock................................... 2,639,000
------------
4,985,975
------------
HOSPITAL MANAGEMENT--2.3%
225,000 FHP International Corp., Conv. Pfd. Stock.............................. 5,512,500
------------
HOUSING RELATED--1.0%
$ 2,300 Owens-Corning Fiberglass Corp., Conv. Jr. Sub. Deb., 8.00%, 12/30/05... 2,547,250
------------
INDUSTRIALS--2.3%
3,360 Cemex, Conv. Bond, 4.25%, 11/1/97...................................... 2,688,000
4,300 Empresas Ica Sociedad Control, Conv. Sub. Deb., 5.00%, 3/15/04 (ADR)
(Mexico)............................................................. 2,838,000
------------
5,526,000
------------
INSURANCE--1.0%
5,375 USF&G Corp., Zero Coupon Conv. Sub. Note, 3/3/09....................... 2,472,500
------------
INTEGRATED PRODUCERS--10.8%
8,810 Amoco Canada Petroleum Corp., Conv. Bond, 7.375%, 9/1/13 (Canada)...... 10,131,500
253,500 Atlantic Richfield Co., Conv. Pfd. Stock............................... 6,622,687
89,100 Occidental Petroleum Corp., Conv. Pfd. Stock........................... 4,343,625
4,608 Pennzoil Co., Conv. Sub. Deb., 6.50%, 1/15/03.......................... 5,218,560
------------
26,316,372
------------
MEDIA--3.7%
4,869 Comcast Corp., Conv. Sub. Deb., 3.375%, 9/9/05......................... 3,846,510
10,000 News America Hldgs., Inc., Zero Coupon Conv. Sr. Deb., 3/11/13......... 3,687,500
1,578 Time Warner, Inc., Conv. Sub. Deb., 8.75%, 1/10/15..................... 1,491,210
------------
9,025,220
------------
NON - FERROUS METALS--4.4%
62,400 Alumax, Inc., Conv. Pfd. Stock......................................... 7,534,800
150,000 Pegasus Gold, Inc., Common Stock* (Canada)............................. 1,706,250
31,400 Reynolds Metals Co., Conv. Pfd. Stock.................................. 1,518,975
------------
10,760,025
------------
</TABLE>
-6- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL INCOMEVERTIBLE[REGISTERED TRADEMARK] FUND, INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) SHARES DESCRIPTION (NOTE 1)
<C> <C> <S> <C>
OIL SERVICES--2.8%
130,700 BJ Services Co., Common Stock*......................................... $ 2,205,563
89,700 Reading & Bates Corp., Conv. Pfd. Stock................................ 1,850,063
$ 3,038 Seacor Holdings, Inc., Conv. Deb., 6.00%, 7/15/03...................... 2,813,947
------------
6,869,573
------------
RAILROADS--2.3%
106,600 Burlington Northern, Inc., Conv. Pfd. Stock............................ 5,676,450
------------
RETAIL--1.9%
1,895 Pier 1 Imports, Inc., Conv. Sr. Sub. Deb., 6.875%, 4/1/02.............. 1,771,825
3,127 Price/Costco, Inc., Conv. Sub. Deb., 6.75%, 3/1/01..................... 2,814,300
------------
4,586,125
------------
SPECIALTY CHEMICALS--1.1%
7,000 RPM, Inc., Zero Coupon Conv. Deb., 9/30/12............................. 2,660,000
------------
STEEL--0.4%
61,900 National Steel Corp., Common Stock*.................................... 897,550
------------
TECHNOLOGY--0.3%
42,000 Aspen Technology, Inc., Common Stock*.................................. 824,250
------------
TELECOMMUNICATION SERVICES--2.2%
115,000 Comsat Corp., Common Stock............................................. 2,141,875
225,000 NEXTEL Communications, Inc., Common Stock*............................. 3,234,375
------------
5,376,250
------------
TRUCKING & SHIPPING--1.5%
140,000 Carolina Freight Corp., Common Stock*.................................. 1,347,500
3,000 China Travel International, Conv. Bond, 4.25%, 11/18/98 (ADR) (Hong
Kong)................................................................ 2,197,500
------------
3,545,000
------------
U. S. GOVERNMENT SECURITIES--5.3%
45,000 Federal National Mortgage Association, Common Stock.................... 3,279,375
10,000 U. S. Treasury Bonds, 7.50%, 11/15/24.................................. 9,565,600
------------
12,844,975
------------
Total long-term investments--92.1%
(cost $232,724,544).................................................... 224,019,450
</TABLE>
-7- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL INCOMEVERTIBLE[REGISTERED TRADEMARK] FUND, INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
<C> <S> <C>
SHORT-TERM INVESTMENT--6.9%
$16,843 Joint Repurchase Agreement Account, 5.82%, due 1/3/95 (Note 5)......... $ 16,843,000
------------
TOTAL INVESTMENTS--99.0%
(cost $249,567,544; Note 4)............................................ 240,862,450
Other assets in excess of liabilities--1.0%............................ 2,416,654
------------
NET ASSETS--100%....................................................... $243,279,104
------------
------------
<FN>
- ---------------
* Non-income producing security.
ADR--American Depository Receipt.
</TABLE>
-8- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL INCOMEVERTIBLE[REGISTERED TRADEMARK] FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1994
-----------------
<S> <C>
Investments, at value (cost $249,567,544)............................................. $ 240,862,450
Receivable for investments sold....................................................... 2,004,922
Dividends and interest receivable..................................................... 1,957,819
Receivable for Fund shares sold....................................................... 81,996
Other assets.......................................................................... 9,139
-----------------
Total assets...................................................................... 244,916,326
-----------------
LIABILITIES
Payable for Fund shares reacquired.................................................... 1,027,598
Accrued expenses and other liabilities................................................ 246,781
Distribution fee payable.............................................................. 203,867
Management fee payable................................................................ 158,976
-----------------
Total liabilities................................................................. 1,637,222
-----------------
NET ASSETS............................................................................ $ 243,279,104
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................ $ 2,236,942
Paid-in capital in excess of par.................................................... 245,698,758
-----------------
247,935,700
Undistributed net investment income................................................. 327,996
Accumulated net realized gain on investments........................................ 3,720,502
Net unrealized depreciation on investments.......................................... (8,705,094)
-----------------
Net assets, December 31, 1994......................................................... $ 243,279,104
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($12,364,434 / 1,137,665 shares of common stock issued and outstanding)........... $10.87
Maximum sales charge (5% of offering price)......................................... .57
-----------------
Maximum offering price to public.................................................... $11.44
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($230,914,481 / 21,231,739 shares of common stock issued and outstanding)......... $10.88
-----------------
-----------------
Class C:
Net asset value, offering price and redemption price per share
($188.92 / 17.37 shares of common stock issued and outstanding)................... $10.88
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
-9-
<PAGE>
PRUDENTIAL INCOMEVERTIBLE[REGISTERED TRADEMARK] FUND, INC.
Statement of Operations
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
NET INVESTMENT INCOME 1994
------------
<S> <C>
Income
Interest (net of foreign
withholding
taxes of $37,926)................ $ 8,474,860
Dividends (net of foreign
withholding
taxes of $16,142)................ 5,093,040
------------
Total income..................... 13,567,900
------------
Expenses
Distribution fee--Class A.......... 29,311
Distribution fee--Class B.......... 2,704,958
Management fee..................... 2,116,651
Transfer agent's fees and
expenses........................... 450,000
Reports to shareholders............ 209,000
Custodian's fees and expenses...... 97,000
Legal fees......................... 55,000
Registration fees.................. 51,000
Franchise taxes.................... 47,000
Audit fee.......................... 41,000
Directors' fees.................... 34,000
Insurance expense.................. 10,000
Miscellaneous...................... 7,585
------------
Total expenses................... 5,852,505
------------
Net investment income before
nonrecurring item.................. 7,715,395
Proceeds from litigation
settlement......................... 1,077,504
------------
Net investment income including
nonrecurring item.................. 8,792,899
------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain on investment
transactions....................... 22,871,648
Net change in unrealized depreciation
of investments..................... (42,907,216)
------------
Net loss on investments.............. (20,035,568)
------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS............ $(11,242,669)
------------
------------
See Notes to Financial Statements.
</TABLE>
PRUDENTIAL INCOMEVERTIBLE[REGISTERED TRADEMARK] FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) ------------------------------
IN NET ASSETS 1994 1993
------------- -------------
<S> <C> <C>
Operations
Net investment
income............. $ 8,792,899 $ 10,375,444
Net realized gain on
investments........ 22,871,648 20,730,000
Net change in
unrealized
appreciation/depreciation
of investments..... (42,907,216) 8,209,944
------------- -------------
Net increase
(decrease) in net
assets resulting
from operations.... (11,242,669) 39,315,388
------------- -------------
Net equalization
debits............... (381,058) (319,489)
------------- -------------
Dividends and distributions (Note 1)
Dividends to shareholders from
net investment income
Class A............ (374,482) (435,906)
Class B............ (8,218,618) (9,939,538)
Class C............ (3) --
------------- -------------
(8,593,103) (10,375,444)
------------- -------------
Distributions to
shareholders
from net realized
capital gains
Class A............ (402,007) --
Class B............ (10,141,618) --
Class C............ (8) --
------------- -------------
(10,543,633) --
------------- -------------
Distributions to
shareholders in
excess of net
investment income
Class A............ -- (5,217)
Class B............ -- (118,949)
------------- -------------
-- (124,166)
------------- -------------
Fund share transactions
(Note 5)
Proceeds from shares
sold............... 152,308,757 227,053,576
Net asset value of
shares issued in
reinvestment of
dividends and
distributions...... 16,008,785 8,680,364
Cost of shares
reacquired......... (219,563,960) (282,748,610)
------------- -------------
Net decrease in net
assets from Fund
share
transactions....... (51,246,418) (47,014,670)
------------- -------------
Total decrease......... (82,006,881) (18,518,381)
NET ASSETS
Beginning of year...... 325,285,985 343,804,366
------------- -------------
End of year............ $ 243,279,104 $ 325,285,985
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements.
-10-
<PAGE>
PRUDENTIAL INCOMEVERTIBLE[REGISTERED TRADEMARK] FUND, INC.
NOTES TO FINANCIAL STATEMENTS
Prudential IncomeVertible[REGISTERED TRADEMARK] Fund, Inc. (the "Fund")
is registered under the Investment Company Act of 1940 as a diversified,
open-end management investment company. Investment operations commenced on
December 5, 1985. The investment objective of the Fund is to seek both high
current income and appreciation of capital. The Fund seeks to achieve its
investment objective by investing primarily in convertible securities and/or in
combinations of securities, comprised of non-convertible fixed-income securities
and warrants or call options. The ability of issuers of debt securities held by
the Fund to meet their obligations may be affected by economic and political
developments in a specific industry or region.
NOTE 1. ACCOUNTING The following is a summary
POLICIES of significant accounting pol-
icies followed by the Fund in
the preparation of its financial statements.
SECURITY VALUATION: Any security for which the primary market is on an exchange
and NASDAQ National Market System equity securities are 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 and U.S. Government securities that are actively traded in the
over-the-counter market 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 and market transactions in comparable securities in
determining value. Other securities are valued at the mean between the most
recently quoted bid and asked prices. Securities which are otherwise not readily
marketable or securities for which market quotations are not readily available
are valued in good faith at fair value in accordance with procedures adopted by
the Fund's Board of Directors.
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 repurchase agreement transactions, it is the Fund's
policy that its custodian or designated sub-custodians, 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.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of investments are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and 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 based upon
the relative proportion of net assets of each class at the beginning of the day.
OPTIONS: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates with respect to securities which the Fund currently
owns or intends to purchase. When the Fund purchases an option, it pays a
premium and an amount equal to that premium is recorded as an investment. When
the Fund writes an option, it receives a premium and an amount equal to that
premium is recorded as a liability. The investment or liability is valued daily
to reflect the current market value of the option. If an option expires
unexercised, the Fund realizes a gain or loss to the extent of the premium
received or paid. If an option is exercised, the premium received or paid is
added to the proceeds from the sale or the cost of the purchase in determining
whether the Fund has realized a gain or loss. The difference between the premium
and the amount received or paid on effecting a closing purchase or sale
transaction is also treated as a realized gain or loss. Gain or loss on
purchased options is included in net realized gain (loss) on investment
transactions. Gain or loss on written options is presented separately as net
realized gain (loss) on written option transactions.
The Fund, as writer of an option, may have no control over whether the
underlying securities may be sold (called) or purchased (put). As a result, the
Fund bears the market risk of an unfavorable change in the price of the security
underlying the written option.
DIVIDENDS AND DISTRIBUTIONS: Dividends from net investment income are declared
and paid quarterly. The Fund will distribute at least annually any net capital
gains in excess of
-11-
<PAGE>
loss carryforwards. Dividends and distributions are recorded on the ex-dividend
date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles.
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.
TAXES: It is the Fund's policy 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 shareholders. Therefore, no federal
income tax provision is required.
Withholding taxes on foreign dividends and interest have been provided for
in accordance with the Fund's understanding of the applicable country's tax
rates.
NOTE 2. AGREEMENTS The Fund has a manage-
ment agreement with Pru-
dential 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 cost of the subadviser's services, 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 .75% of the Fund's average daily net assets up to $500 million,
.70% of the next $250 million, .65% of the next $250 million and .60% of the
Fund's average daily net assets in excess of $1 billion.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. ("PMFD"), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated ("PSI"), which
acts as distributor of the Class B shares and Class C shares of the Fund,
(collectively the "Distributors"). The Fund compensates the Distributors for
distributing and servicing the Fund's Class A, Class B and Class C shares,
pursuant to plans of distribution, (the "Class A, B and C Plans") regardless
of expenses actually incurred by them. The distribution fees are accrued daily
and payable monthly.
On July 19, 1994, shareholders of the Fund approved amendments to the Class
A and Class B Plans under which the distribution plans became compensation
plans, effective August 1, 1994. Prior thereto, the distribution plans were
reimbursement plans, under which PMFD and PSI were reimbursed for expenses
actually incurred by them up to the amount permitted under the Class A and Class
B Plans, respectively. The Fund is not obligated to pay any prior or future
excess distribution costs (costs incurred by the Distributors in excess of
distribution fees paid by the Fund or contingent deferred sales charges received
by the Distributors). The rate of the distribution fees charged to Class A and
Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
Pursuant to the Class A, B and C Plans, the Fund compensates the
Distributors for distribution-related activities at an annual rate of up to .30
of 1%, 1% and 1%, of the average daily net assets of the Class A, B and C
shares, respectively. Such expenses under the Plans were .25 of 1%, 1% and 1% of
the average daily net assets of the Class A, B and C shares, respectively, for
the fiscal year ended December 31, 1994.
PMFD has advised the Fund that it has received approximately $24,000 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended December 31, 1994. From these fees, PMFD paid such sales charges to
PSI and Pruco Securities Corporation, affiliated broker-dealers, which in turn
paid commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the fiscal year ended December 31, 1994,
it received approximately $354,300 in contingent deferred sales charges imposed
upon certain redemptions by Class B shareholders.
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 December 31, 1994, the Fund incurred fees
of approximately $370,000 for the services of PMFS. As of December 31, 1994,
approximately $28,000 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations
-12-
<PAGE>
also include certain out-of-pocket expenses paid to non-affiliates.
For the year ended December 31, 1994, PSI earned approximately $25,700 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
NOTE 4. PORTFOLIO Purchases and sales of
SECURITIES investment securities, other
than short-term investments,
for the year ended December 31, 1994, were $195,498,875 and $261,704,193,
respectively.
The cost basis of the Fund's investments for federal income tax purposes,
at December 31, 1994 was substantially the same as for reporting purposes and
accordingly, net unrealized depreciation of investments for federal income tax
purposes was $8,705,094 (gross unrealized appreciation--$15,012,066; gross
unrealized depreciation--$23,717,160).
The Fund utilized its capital loss carryforward of approximately $8,607,500
to offset taxable gains realized and recognized subsequent to December 31, 1993.
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. Treasury or Federal agency obligations. As of
December 31, 1994, the Fund has a 2.2% undivided interest in the joint account.
The undivided interest for the Fund represents $16,843,000 in the principal
amount. As of such date, each repurchase agreement in the joint account and the
collateral therefor were as follows:
Goldman, Sachs & Co., 5.75%, in the principal amount of $250,000,000,
repurchase price $250,159,722, due 1/3/95. The value of the collateral including
accrued interest is $255,000,108.
Lehman Government Securities, Inc., 5.90%, in the principal amount of
$70,000,000, repurchase price $70,045,889, due 1/3/95. The value of the
collateral including accrued interest is $71,379,084.
Morgan Stanley & Co., 5.75%, in the principal amount of $250,000,000,
repurchase price $250,159,722, due 1/3/95. The value of the collateral including
accrued interest is $255,146,220.
Smith Barney, Inc., 5.95%, in the principal amount of $200,000,000,
repurchase price $200,132,222, due 1/3/95. The value of the collateral including
accrued interest is $204,036,161.
NOTE 6. CAPITAL The Fund offers Class A,
Class B and Class C shares.
Class A shares are sold with a front-end sales charge of up to 5%. Class B
shares are sold with a contingent deferred sales charge which declines from 5%
to zero depending on the period of time the shares are held. Class C shares are
sold with a contingent deferred sales charge of 1% during the first year. Class
B shares will automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase commencing on or about February 1995.
The Fund has authorized 2 billion shares of common stock at $.10 par value
per share equally divided into three classes, designated Class A, Class B and
Class C common stock. Transactions in shares of common stock for the years ended
December 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
Class A SHARES AMOUNT
----------- -------------
<S> <C> <C>
Year ended December 31, 1994:
Shares sold................... 8,319,804 $ 98,336,113
Shares issued in reinvestment
of dividends and
distributions............... 65,244 729,890
Shares reacquired............. (8,505,822) (101,128,946)
----------- -------------
Net decrease in shares
outstanding................. (120,774) $ (2,062,943)
----------- -------------
----------- -------------
Year ended December 31, 1993:
Shares sold................... 7,288,701 $ 87,136,035
Shares issued in reinvestment
of dividends and
distributions............... 35,217 422,950
Shares reacquired............. (6,896,685) (82,819,899)
----------- -------------
Net increase in shares
outstanding................. 427,233 $ 4,739,086
----------- -------------
----------- -------------
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
Class B SHARES AMOUNT
----------- -------------
<S> <C> <C>
Year ended December 31, 1994:
Shares sold................... 4,517,035 $ 53,972,444
Shares issued in reinvestment
of dividends and
distributions............... 1,368,841 15,278,889
Shares reacquired............. (9,907,704) (118,435,014)
----------- -------------
Net decrease in shares
outstanding................. (4,021,828) $ (49,183,681)
----------- -------------
----------- -------------
Year ended December 31, 1993:
Shares sold................... 11,741,389 $ 139,917,541
Shares issued in reinvestment
of dividends and
distributions............... 688,770 8,257,414
Shares reacquired............. (16,702,547) (199,928,711)
----------- -------------
Net decrease in shares
outstanding................. (4,272,388) $ (51,753,756)
----------- -------------
----------- -------------
<CAPTION>
Class C
<S> <C> <C>
August 1, 1994* through
December 31, 1994
Shares sold................... 17 $ 200
Shares issued in reinvestment
of dividends and
distributions............... -- 6
----------- -------------
Net increase in shares
outstanding................. 17 $ 206
----------- -------------
----------- -------------
<FN>
- ---------------
* Commencement of offering of Class C shares.
</TABLE>
-14-
<PAGE>
PRUDENTIAL INCOMEVERTIBLE[REGISTERED TRADEMARK] FUND, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------------------------------ ----------------------------------------------------- --------------
JANUARY 22, AUGUST 1,
PER 1990* 1994@
SHARE YEAR ENDED DECEMBER 31, THROUGH YEAR ENDED DECEMBER 31, THROUGH
OPERATING --------------------------------- DECEMBER 31, ----------------------------------------------------- DECEMBER 31,
PERFORMANCE: 1994 1993 1992+ 1991 1990 1994 1993 1992+ 1991 1990 1994
------- ------ ------ ------- ------------ --------- --------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net
asset
value,
beginning
of
period...$ 12.26 $11.33 $11.07 $ 9.87 $10.88 $ 12.27 $ 11.33 $ 11.08 $ 9.87 $ 11.35 $11.90
------- ------ ------ ------- ------------ --------- --------- -------- -------- -------- --------------
INCOME
FROM
INVESTMENT
OPERATIONS
Net
investment
income... 0.46 0.48 0.59 0.66 0.75 0.38 0.38 0.51 0.59 0.66 0.20
Net
realized
and
unrealized
gain
(loss)
on
investment
trans-
actions.. (0.89) 0.93 0.31 1.31 (0.88) (0.89) 0.94 0.30 1.31 (1.35) (0.49)
------- ------ ------ ------- ------------ --------- --------- -------- -------- -------- --------------
Total
from
investment
oper-
ations.. (0.43) 1.41 0.90 1.97 (0.13) (0.51) 1.32 0.81 1.90 (0.69) (0.29)
------- ------ ------ ------- ------------ --------- --------- -------- -------- -------- --------------
LESS
DISTRIBUTIONS
Dividends
from
net
investment
income... (0.46) (0.48) (0.59) (0.66) (0.75) (0.38) (0.38) (0.51) (0.59) (0.66) (0.23)
Distributions
from net
realized
capital
gains... (0.50) -- -- -- (0.09) (0.50) -- -- -- (0.09) (0.50)
Distributions
to
shareholders
in
excess
of net
investment
income... -- -- (0.05) (0.11) (0.04) -- -- (0.05) (0.10) (0.04) --
------- ------ ------ ------- ------------ --------- --------- -------- -------- -------- --------------
Total
Distru-
butions... (0.96) (0.48) (0.64) (0.77) (0.88) (0.88) (0.38) (0.56) (0.69) (0.79) (0.73)
------- ------ ------ ------- ------------ --------- --------- -------- -------- -------- --------------
Net
asset
value,
end
of
period.. $ 10.87 $ 12.26 $ 11.33 $ 11.07 $ 9.87 $ 10.88 $ 12.27 $ 11.33 $ 11.08 $ 9.87 $10.88
------- ------ ------ ------- ------------ --------- --------- -------- -------- -------- --------------
------- ------ ------ ------- ------------ --------- --------- -------- -------- -------- --------------
TOTAL
RETURN#... (3.58)% 12.60% 8.31% 20.55% (1.18)% (4.22)% 11.77% 7.43% 19.76% (6.10)% (2.49)%
RATIOS/SUPPLEMENTAL
DATA:
Net
assets,
end
of
period
(000)... $12,364 $15,432 $ 9,422 $11,475 $7,397 $230,914 $309,854 $334,383 $400,961 $423,390 $189@@
Average
net
assets
(000)... $11,724 $12,954 $11,096 $ 8,486 $5,980 $270,496 $327,995 $357,956 $412,869 $492,335 $200@@
Ratios
to
average
net
assets:##
Expenses,
including
distribution
fees... 1.34% 1.29% 1.34% 1.30% 1.37%** 2.09% 2.09% 2.14% 2.10% 2.12% 1.27%**
Expenses,
excluding
distribution
fees... 1.09% 1.09% 1.14% 1.10% 1.17%** 1.09% 1.09% 1.14% 1.10% 1.12% 0.27%**
Net
investment
income... 3.45%++ 3.85% 5.39% 6.18% 7.05%** 2.70%++ 3.01% 4.64% 5.43% 6.33% 2.92%++/**
Portfolio
turnover... 70% 84% 109% 82% 76% 70% 84% 109% 82% 76% 70%
<FN>
- -----------
* Commencement of offering of Class A shares.
** Annualized.
@ Commencement of offering of Class C shares.
@@ Figures are actual and not rounded to the nearest thousand.
+ Calculated based upon weighted average shares outstanding during the year.
++ The net investment income ratio including nonrecurring item would be 3.84%, 3.09% and 4.13% for the Class
A, B and C shares, respectively.
# 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 one full year are not annualized.
## Because of the event referred to in @ and the timing of such, the ratios for Class C shares are not
necessarily comparable to that of Class A or Class B shares and are not necessarily indicative of future
ratios.
</TABLE>
See Notes to Financial Statements.
-15-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Prudential IncomeVertible[REGISTERED TRADEMARK] Fund, Inc.
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Prudential IncomeVertible[REGISTERED
TRADEMARK] Fund, Inc., as of December 31, 1994, the related statements of
operations for the year then ended and of changes in net assets for each of the
years in the two year period then ended, and the financial highlights for each
of the years in the five year 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
December 31, 1994 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and signficant 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
IncomeVertible[REGISTERED TRADEMARK] Fund, Inc., as of December 31, 1994, the
results of its operations, the changes in its net assets and its financial
highlights for the respective stated periods, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
New York, New York
February 2, 1995
TAX INFORMATION
We are required by the Internal Revenue Code to advise you within 60 days
of the Fund's fiscal year end (December 31, 1994) as to the federal tax status
of dividends paid by the Fund during such fiscal year.
During 1994, the Fund paid aggregate dividends from net investment income
totalling $.46 per share for Class A shares, $.38 per share for Class B shares
and $.23 per share for Class C shares, all of which is taxable as ordinary
income. In addition, the Fund paid a long-term capital gain distribution of $.50
per share (Class A, B and C) which is taxable as such. Further, we wish to
advise you that 62.58% of the dividends paid in 1994 qualified for the corporate
dividends received deduction available to corporate taxpayers.
For the purpose of preparing your annual federal income tax return,
however, you should report the amounts as reflected on the appropriate Form
1099-DIV or substitute Form 1099-DIV.
-16-
<PAGE>
[GRAPHS]
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in Prudential IncomeVertible[REGISTERED TRADEMARK]
Fund (Class A, Class B and Class C) with a similar investment in the Standard &
Poor's 500 Index by portraying the initial account values at the commencement of
operations of each class, and subsequent account values at the end of each
fiscal year (December 31), as measured on a quarterly basis, beginning in 1990
for Class A shares, in 1985 for Class B shares and in 1994 for Class C shares.
For purposes of the graphs, and unless otherwise indicated, in the accompanying
tables it has been assumed (a) that the maximum applicable contingent deferred
sales charge was deducted from the initial $10,000 investment in Class A shares;
(b) the maximum applicable contingent deferred sales charge was deducted from
the value of the investment in Class B and Class C shares, assuming full
redemption on December 31, 1994; (c) all recurring fees (including management
fees) were deducted; and (d) all dividends and distributions were reinvested.
Class B shares will automatically convert to Class A shares, on a quarterly
basis, beginning approximately seven years after purchase. This conversion
feature is not reflected in the graph.
The S&P 500 is a capital-weighted index, representing the aggregate market value
of the common equity of 500 stocks primarily traded on the New York Stock
Exchange. The S&P 500 is an unmanaged index and includes the reinvestment of all
dividends, but does not reflect the payment of transaction costs and advisory
fees associated with an investment in the Fund. The securities in the S&P 500
may differ substantially from the securities in the Fund. The S&P 500 is not the
only index that may be used to characterize performance of convertible bond
funds and other indexes may portray different comparative performance.
-17-
<PAGE>
DIRECTORS
Thomas R. Anderson
Robert R. Fortune
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Lawrence C. McQuade
Thomas A. Owens, Jr.
Richard A. Redeker
Merle T. Welshans
OFFICERS
Lawrence C. McQuade, President
David W. Drasnin, Vice President
Robert F. Gunia, Vice President
Susan C. Cote, Treasurer
S. Jane Rose, Secretary
Marguerite E.H. Morrison, Assistant Secretary
MANAGER
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
INVESTMENT ADVISER
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
DISTRIBUTORS
Prudential Mutual Fund Distributors, Inc.
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
CUSTODIAN
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
TRANSFER AGENT
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
LEGAL COUNSEL
Fulbright & Jaworski, L.L.P.
666 Fifth Avenue
New York, NY 10103-0229
PRUDENTIAL MUTUAL FUNDS
ONE SEAPORT PLAZA
NEW YORK, NY 10292
TOLL FREE (800) 225-1852. COLLECT (908) 417-7555
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
PRUDENTIAL
INCOMEVERTIBLE [REGISTERED TRADEMARK]
FUND, INC.
[GRAPHIC]
ANNUAL REPORT
DECEMBER 31, 1994
PRUDENTIAL MUTUAL FUNDS
BUILDING YOUR FUTURE [LOGO]
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