<PAGE>
As filed with the Securities and Exchange Commission on July 24, 1995
Securities Act Registration No. 33-12531
Investment Company Act Registration No. 811-5055
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 14 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 16 /X/
(CHECK APPROPRIATE BOX OR BOXES)
--------------
PRUDENTIAL ALLOCATION FUND
(Exact name of registrant as specified in charter)
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 214-1250
S. JANE ROSE, ESQ.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(NAME AND ADDRESS OF AGENT FOR SERVICE)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.
--------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/X/ on September 29, 1995 pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant
has previously registered an indefinite number of shares of beneficial interest,
par value $.01 per share. The Registrant will file a notice for its fiscal year
ending July 31, 1995 on or before September 29, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------------------------------------------------------------------ -------------------------------------------
<S> <C> <C> <C>
PART A
Item 1. Cover Page.................................................. Cover Page
Item 2. Synopsis.................................................... Fund Expenses
Item 3. Condensed Financial Information............................. Fund Expenses; Financial Highlights;
General Information
Item 4. General Description of Registrant........................... Cover Page; How the Fund Invests; General
Information
Item 5. Management of the Fund...................................... Financial Highlights; How the Fund is
Managed; General Information
Item 6. Capital Stock and Other Securities.......................... Taxes, Dividends and Distributions; General
Information
Item 7. Purchase of Securities Being Offered........................ Shareholder Guide; How the Fund Values its
Shares
Item 8. Redemption or Repurchase.................................... Shareholder Guide; General Information
Item 9. Pending Legal Proceedings................................... Not Applicable
PART B
Item 10. Cover Page.................................................. Cover Page
Item 11. Table of Contents........................................... Table of Contents
Item 12. General Information and History............................. General Information; Organization and
Capitalization
Item 13. Investment Objectives and Policies.......................... Investment Objectives and Policies;
Investment Restrictions
Item 14. Management of the Fund...................................... Trustees and Officers; Manager; Distributor
Item 15. Control Persons and Principal Holders of Securities......... Not Applicable
Item 16. Investment Advisory and Other Services...................... Manager; Distributor; Custodian, Transfer
and Dividend Disbursing Agent and
Independent Accountants
Item 17. Brokerage Allocation and Other Practices.................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities.......................... Not Applicable
Item 19. Purchase, Redemption and Pricing of Securities Being Purchase and Redemption of Fund Shares;
Offered..................................................... Shareholder Investment Account; Net Asset
Value
Item 20. Tax Status.................................................. Taxes
Item 21. Underwriters................................................ Distributor
Item 22. Calculation of Performance Data............................. Performance Information
Item 23. Financial Statements........................................ Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C of
this Registration Statement.
</TABLE>
<PAGE>
PRUDENTIAL ALLOCATION FUND
- --------------------------------------------------------------------------------
PROSPECTUS DATED SEPTEMBER 29, 1995
- --------------------------------------------------------------------------------
Prudential Allocation Fund (the Fund) is an open-end, diversified, management
investment company comprised of two separate portfolios -- the Balanced
Portfolio (formerly called the Conservatively Managed Portfolio) and the
Strategy Portfolio (the Portfolios). The investment objective of the Balanced
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 Balanced
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 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 Balanced Portfolio. There can be no
assurance that the Portfolios' investment objectives will be achieved. See "How
the Fund Invests -- Investment Objectives and Policies." The Fund's address is
One Seaport Plaza, New York, New York 10292, and its telephone number is (800)
225-1852.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated September 29, 1995, which information
is incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL ALLOCATION FUND?
Prudential Allocation Fund is a mutual fund. A mutual fund pools the resources
of investors by selling its shares to the public and investing the proceeds of
such sale in a portfolio of securities designed to achieve its investment
objective. Technically, the Fund is an open-end, diversified, management
investment company.
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES AND RISKS?
The Fund is comprised of two separate portfolios -- the Balanced Portfolio
(formerly called the Conservatively Managed Portfolio) and the Strategy
Portfolio. The investment objective of the Balanced 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 Balanced Portfolio. Each
Portfolio will seek to achieve its objective by investing in a diversified
portfolio of equity securities, debt obligations and money market instruments.
There can be no assurance that the Portfolios' objectives will be achieved. See
"How the Fund Invests -- Investment Objectives and Policies" at page 9.
RISK FACTORS AND SPECIAL CHARACTERISTICS
The Balanced Portfolio may invest up to 10% of its total assets in securities
rated Ba or lower by Moody's Investors Service (Moody's) or BB or lower by
Standard & Poor's Ratings Group (S&P). The Strategy Portfolio, under normal
conditions, will purchase debt securities of a lesser quality that will, in the
aggregate, have a weighted average maturity greater than that of the Balanced
Portfolio. The Strategy Portfolio may invest up to 25% of its total assets in
securities rated Ba or lower by Moody's or BB or lower by S&P. Each Portfolio
will also purchase equity securities of smaller, faster growing companies which
are subject to greater price volatility than equity securities of major,
established companies. See "How the Fund Invests -- Investment Objectives and
Policies" at page 9. In addition, each Portfolio may engage in various hedging
strategies, including utilizing derivatives. These activities may be considered
speculative and may result in higher risks and costs to the Portfolios. See "How
the Fund Invests -- Hedging Strategies -- Risks of Hedging Strategies" at page
16.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager of
the Fund and is compensated for its services at an annual rate of .65 of 1% of
the average net assets of each Portfolio. As of August 31, 1995, PMF served as
manager or administrator to investment companies, including mutual funds, with
aggregate assets of approximately $ billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Fund under a Subadvisory Agreement with
PMF. See "How the Fund is Managed -- Manager" at page 19.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Fund's Class A shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .25 of 1% of the average daily
net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class B and Class C shares and is paid an annual
distribution and service fee at the rate of 1% of the average daily net assets
of each of the Class B and Class C shares.
See "How the Fund is Managed -- Distributor" at page 20.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder Guide -- How
to Buy Shares of the Fund" at page 26 and "Shareholder Guide -- Shareholder
Services" at page 34.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at
the net asset value per share (NAV) next determined after receipt of your
purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). See "How the Fund
Values its Shares" at page 22 and "Shareholder Guide -- How to Buy Shares of the
Fund" at page 26.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers three classes of shares:
- Class A Shares: Sold with an initial sales charge of up to 5% of the
offering price.
- Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from
5% to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class
B shares will automatically convert to Class A shares
(which are subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
- Class C Shares: Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to higher
ongoing distribution-related expenses than Class A shares
but do not convert to another class.
See "Shareholder Guide -- Alternative Purchase Plan" at page 27.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide -- How to Sell Your Shares" at page 29.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
Each Portfolio expects to pay dividends of net investment income, if any,
quarterly and make distributions of any net capital gains at least annually.
Dividends and distributions will be automatically reinvested in additional
shares of the Portfolio at NAV without a sales charge unless you request that
they be paid to you in cash. See "Taxes, Dividends and Distributions" at page
23.
3
<PAGE>
FUND EXPENSES
(FOR EACH PORTFOLIO)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- ------------------------------ --------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)... 5% None None
Maximum Sales Load or Deferred Sales
Load Imposed on Reinvested
Dividends............................. None None None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)......... None 5% during the first year, 1% on redemptions made within
decreasing by 1% annually to one year of purchase
1% in the fifth and sixth
years and 0% the seventh year*
Redemption Fees........................ None None None
Exchange Fee........................... None None None
</TABLE>
<TABLE>
<CAPTION>
BALANCED PORTFOLIO STRATEGY PORTFOLIO
------------------------------ --------------------------------
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
(as a percentage of average net assets) SHARES SHARES SHARES SHARES SHARES SHARES
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Management Fees......................................... .65% .65% .65% .65% .65% .65%
12b-1 Fees.............................................. .25++ 1.00 1.00 .25++ 1.00 1.00
Other Expenses..........................................
--- --- --- --- --- ---
Total Fund Operating Expenses........................... % % % % % %
--- --- --- --- --- ---
--- --- --- --- --- ---
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE (BALANCED PORTFOLIO) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of
each time period:
Class A........................................................ $ $ $ $
Class B........................................................ $ $ $ $
Class C**...................................................... $ $ $ $
You would pay the following expenses on the same investment,
assuming no redemption:
Class A........................................................ $ $ $ $
Class B........................................................ $ $ $ $
Class C**...................................................... $ $ $ $
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE (STRATEGY PORTFOLIO) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
Class A.................................................................. $ $ $ $
Class B.................................................................. $ $ $ $
Class C.................................................................. $ $ $ $
You would pay the following expenses on the same investment, assuming no
redemption:
Class A.................................................................. $ $ $ $
Class B.................................................................. $ $ $ $
Class C.................................................................. $ $ $ $
The above example is based on data for the Fund's fiscal year ended July 31, 1995. THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various costs and expenses that an investor in each
Portfolio of the Fund will bear, whether directly or indirectly. For more complete descriptions of the various costs and
expenses, see "How the Fund is Managed." "Other Expenses" includes operating expenses of the Fund, such as Trustees' and
professional fees, registration fees, reports to shareholders and transfer agency and custodian fees.
<FN>
- ---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide -- Conversion Feature
-- Class B Shares."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Fund may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation is
imposed on each class of a Portfolio of the Fund rather than on a per
shareholder basis. Therefore, long-term shareholders of the Fund may pay
more in total sales charges than the economic equivalent of 6.25% of such
shareholders' investment in such shares. See "How the Fund is Managed --
Distributor."
++ Although the Class A Distribution and Service Plan provides that the Fund
may pay a distribution fee of up to .30 of 1% per annum of the average
daily net assets of the Class A shares of each Portfolio, the Distributor
has agreed to limit its distribution fees with respect to the Class A
shares of each Portfolio to no more than .25 of 1% of the average daily
net assets of the Class A shares for the fiscal year ending July 31, 1996.
Total Fund Operating Expenses without such limitation would be % and %
of the Balanced Portfolio and Strategy Portfolio, respectively. See "How
the Fund is Managed -- Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)
The following financial highlights, with respect to the five year period
ended July 31, 1995, have been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The financial highlights
contain selected data for a Class A share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. The information is based on data contained in the financial
statements.
BALANCED PORTFOLIO (1)
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------
JANUARY 22,
1990*
YEAR ENDED JULY 31, THROUGH
------------------------------------------------- JULY 31,
1995 1994 1993 1992 1991 1990
------- ------------ ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................... $ 11.75 $ 11.00 $ 10.73 $ 10.23 $ 9.83
------- ------------ ------- ------- ------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................. .33 .43 .44 .44 .26
Net realized and unrealized gain
(loss) on investment transactions.... (.05) 1.16 .81 .73 .38
------- ------------ ------- ------- ------- -----------
Total from investment operations.... .28 1.59 1.25 1.17 .64
------- ------------ ------- ------- ------- -----------
LESS DISTRIBUTIONS
Dividends from net investment
income............................... (.37) (.37) (.44) (.44) (.24)
Distributions paid to shareholders
from net realized gains on investment
transactions......................... (.54) (.47) (.54) (.23) --
------- ------------ ------- ------- ------- -----------
Total distributions................. (.91) (.84) (.98) (.67) (.24)
------- ------------ ------- ------- ------- -----------
Net asset value, end of period........ $ 11.12 $ 11.75 $ 11.00 $ 10.73 $10.23
------- ------------ ------- ------- ------- -----------
------- ------------ ------- ------- ------- -----------
TOTAL RETURN++:....................... 2.39% 15.15% 12.29% 11.99% 6.59%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....... $37,512 $22,605 $10,944 $4,408 $1,944
Average net assets (000).............. $29,875 $15,392 $ 7,103 $2,747 $1,047
Ratios to average net assets:
Expenses, including distribution
fees............................... 1.23% 1.17% 1.29% 1.38% 1.29%+
Expenses, excluding distribution
fees............................... 1.00% .97% 1.09% 1.18% 1.09%+
Net investment income............... 2.84% 3.88% 3.97% 4.44% 5.04%+
Portfolio turnover rate............... 108% 83% 105% 137% 106%
<FN>
- ----------------------------------
(1) Prior to September 29, 1995, the Balanced Portfolio was called the
Conservatively Managed Portfolio.
* 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>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B AND CLASS C SHARES)
The following financial highlights, with respect to the five year period
ended July 31, 1995, have been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The financial highlights
contain selected data for a Class B and Class C share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. The information is based on data contained in
the financial statements.
BALANCED PORTFOLIO (1)
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------------------------------------------------
SEPTEMBER 15,
1987*
YEAR ENDED JULY 31, THROUGH
------------------------------------------------------------------------------ JULY 31,
1995 1994 1993 1992 1991 1990 1989 1988**
------------ ------------ -------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 11.72 $ 10.98 $ 10.71 $ 10.22 $ 10.21 $ 9.43 $10.00
------------ ------------ -------- -------- -------- -------- -------- -------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .24 .34 .35 .36 .45 .52 .32
Net realized and unrealized
gain (loss) on investment
transactions................. (.05) 1.16 .82 .73 .18 .73 (.62)
------------ ------------ -------- -------- -------- -------- -------- -------------
Total from investment
operations................. .19 1.50 1.17 1.09 .63 1.25 (.30)
------------ ------------ -------- -------- -------- -------- -------- -------------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.28) (.29) (.36) (.37) (.52) (.47) (.25)
Distributions paid to
shareholders from net
realized gains on investment
transactions................. (.54) (.47) (.54) (.23) (.10) -- (.02)
------------ ------------ -------- -------- -------- -------- -------- -------------
Total distributions......... (.82) (.76) (.90) (.60) (.62) (.47) (.27)
------------ ------------ -------- -------- -------- -------- -------- -------------
Net asset value, end of
period....................... $ 11.09 $ 11.72 $ 10.98 $ 10.71 $ 10.22 $ 10.21 $ 9.43
------------ ------------ -------- -------- -------- -------- -------- -------------
------------ ------------ -------- -------- -------- -------- -------- -------------
TOTAL RETURN++:............... 1.61% 14.27% 11.48% 11.13% 6.44% 13.73% (2.95)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $445,609 $321,831 $225,995 $162,281 $154,917 $132,631 $149,472
Average net assets (000)...... $392,133 $267,340 $189,358 $149,907 $143,241 $139,009 $113,774
Ratios to average net assets:
Expenses, including
distribution fees.......... 2.00% 1.97% 2.09% 2.16% 2.07% 2.09% 2.08%+
Expenses, excluding
distribution fees.......... 1.00% .97% 1.09% 1.16% 1.08% 1.08% 1.11%+
Net investment income....... 2.08% 3.04% 3.25% 3.55% 4.42% 5.47% 4.22%+
Portfolio turnover rate....... 108% 83% 105% 137% 106% 137% 112%
<CAPTION>
CLASS C
-------------
AUGUST 1,
1994***
THROUGH
JULY 31,
1995
-------------
<S> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period.......................
-------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.........
Net realized and unrealized
gain (loss) on investment
transactions.................
-------------
Total from investment
operations.................
-------------
LESS DISTRIBUTIONS
Dividends from net investment
income.......................
Distributions paid to
shareholders from net
realized gains on investment
transactions.................
-------------
Total distributions.........
-------------
Net asset value, end of
period.......................
-------------
-------------
TOTAL RETURN++:...............
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................
Average net assets (000)......
Ratios to average net assets:
Expenses, including
distribution fees..........
Expenses, excluding
distribution fees..........
Net investment income.......
Portfolio turnover rate.......
<FN>
- ----------------------------------
(1) Prior to September 29, 1995, the Balanced Portfolio was called the
Conservatively Managed Portfolio.
* Commencement of offering of Class B shares.
** On March 1, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
*** Commencement of offering of Class C 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>
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)
The following financial highlights, with respect to the five year period
ended July 31, 1995, have been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The financial highlights
contain selected data for a Class A share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. The information is based on data contained in the financial
statements.
STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------
JANUARY 22,
1990*
YEAR ENDED JULY 31, THROUGH
--------------------------------------------------- JULY 31,
1995 1994 1993 1992 1991 1990
---------- ---------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 11.82 $ 12.03 $ 11.45 $ 10.50 $10.16
---------- ---------- ------- ------- ------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .30 .42 .35 .38 .25
Net realized and unrealized
gain on investment and
foreign currency
transactions................. .05 .70 1.02 .98 .33
---------- ---------- ------- ------- ------- -----------
Total from investment
operations................. .35 1.12 1.37 1.36 .58
---------- ---------- ------- ------- ------- -----------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.22) (.37) (.37) (.35) (.24)
Dividends in excess of net
investment income............ (.01) -- -- -- --
Distributions paid to
shareholders from net
realized gains on investment
and foreign currency
transactions................. (.34) (.96) (.42) (.06) --
---------- ---------- ------- ------- ------- -----------
Total distributions......... (.57) (1.33) (.79) (.41) (.24)
---------- ---------- ------- ------- ------- -----------
Net asset value, end of
period....................... $ 11.60 $ 11.82 $ 12.03 $ 11.45 $10.50
---------- ---------- ------- ------- ------- -----------
---------- ---------- ------- ------- ------- -----------
TOTAL RETURN++:............... 2.88% 10.02% 12.36% 13.42% 5.83%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $ 32,485 $28,641 $20,378 $10,765 $5,073
Average net assets (000)...... $ 30,634 $24,216 $15,705 $ 6,694 $2,928
Ratios to average net assets:
Expenses, including
distribution fees.......... 1.26% 1.21% 1.26% 1.33% 1.51%+
Expenses, excluding
distribution fees.......... 1.03% 1.01% 1.06% 1.13% 1.26%+
Net investment income....... 2.52% 3.61% 3.05% 3.89% 4.58%+
Portfolio turnover rate....... 96% 145% 241% 189% 159%
<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>
7
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B AND CLASS C SHARES)
The following financial highlights, with respect to the five year period
ended July 31, 1995, have been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The financial highlights
contain selected data for a Class B and Class C share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. The information is based on data contained in
the financial statements.
STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------------------------
SEPTEMBER 15,
1987*
YEAR ENDED JULY 31, THROUGH
---------------------------------------------------------------------------- JULY 31,
1995 1994 1993 1992 1991 1990 1989 1988**
----------- ----------- -------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 11.79 $ 12.01 $ 11.43 $ 10.49 $ 10.85 $ 9.52 $10.00
----------- ----------- -------- -------- -------- -------- -------- -------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .21 .34 .26 .30 .37 .42 .23+
Net realized and unrealized
gain on investment and
foreign currency
transactions................. .05 .70 1.02 .97 .03 1.30 (.53)
----------- ----------- -------- -------- -------- -------- -------- -------------
Total from investment
operations................. .26 1.04 1.28 1.27 .40 1.72 (.30)
----------- ----------- -------- -------- -------- -------- -------- -------------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.16) (.30) (.28) (.27) (.40) (.39) (.18)
Dividends in excess of net
investment income............ (.01) -- -- -- -- -- --
Distributions paid to
shareholders from net
realized gains on investment
and foreign currency
transactions................. (.34) (.96) (.42) (.06) (.36) -- --
----------- ----------- -------- -------- -------- -------- -------- -------------
Total distributions......... (.51) (1.26) (.70) (.33) (.76) (.39) (.18)
----------- ----------- -------- -------- -------- -------- -------- -------------
Net asset value, end of
period....................... $ 11.54 $ 11.79 $ 12.01 $ 11.43 $ 10.49 $ 10.85 $ 9.52
----------- ----------- -------- -------- -------- -------- -------- -------------
----------- ----------- -------- -------- -------- -------- -------- -------------
TOTAL RETURN+++:.............. 2.11% 9.21% 11.53% 12.49% 3.59% 18.53% (2.92)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $ 351,140 $357,287 $314,771 $219,983 $176,078 $ 62,651 $55,671
Average net assets (000)...... $ 362,579 $339,225 $267,525 $190,913 $127,360 $ 57,326 $44,717
Ratios to average net assets:
Expenses, including
distribution fees.......... 2.03% 2.01% 2.06% 2.11% 2.10% 2.33%+ 2.40%+/++
Expenses, excluding
distribution fees.......... 1.03% 1.01% 1.06% 1.11% 1.14% 1.34%+ 1.43%+/++
Net investment income....... 1.77% 2.79% 2.27% 2.95% 3.61% 4.26%+ 3.13%+/++
Portfolio turnover rate....... 96% 145% 241% 189% 159% 132% 93%
<CAPTION>
CLASS C
-------------
AUGUST 1,
1994***
THROUGH
JULY 31,
1995
-------------
<S> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period.......................
-------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.........
Net realized and unrealized
gain on investment and
foreign currency
transactions.................
-------------
Total from investment
operations.................
-------------
LESS DISTRIBUTIONS
Dividends from net investment
income.......................
Dividends in excess of net
investment income............
Distributions paid to
shareholders from net
realized gains on investment
and foreign currency
transactions.................
-------------
Total distributions.........
-------------
Net asset value, end of
period.......................
-------------
-------------
TOTAL RETURN+++:..............
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................
Average net assets (000)......
Ratios to average net assets:
Expenses, including
distribution fees..........
Expenses, excluding
distribution fees..........
Net investment income.......
Portfolio turnover rate.......
<FN>
- ----------------------------------
* Commencement of offering of Class B shares.
** On March 1, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
*** Commencement of offering of Class C shares.
+ Net of expense subsidy or reimbursement.
++ Annualized.
+++ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
8
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVES AND POLICIES
THE FUND IS COMPRISED OF TWO SEPARATE DIVERSIFIED PORTFOLIOS -- THE BALANCED
PORTFOLIO (FORMERLY CALLED THE CONSERVATIVELY MANAGED PORTFOLIO) AND THE
STRATEGY PORTFOLIO -- EACH OF WHICH IS, IN EFFECT, A SEPARATE FUND ISSUING ITS
OWN SHARES. THE INVESTMENT OBJECTIVE OF THE BALANCED 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 BALANCED PORTFOLIO. THERE CAN BE
NO ASSURANCE THAT SUCH OBJECTIVES WILL BE ACHIEVED. See "Investment Objectives
and Policies" in the Statement of Additional Information.
EACH PORTFOLIO'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE,
MAY NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE
PORTFOLIO'S OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY
ACT OF 1940, AS AMENDED (THE INVESTMENT COMPANY ACT). POLICIES OF A PORTFOLIO
THAT ARE NOT FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
EACH PORTFOLIO PURSUES ITS OBJECTIVE THROUGH THE INVESTMENT POLICIES DESCRIBED
BELOW. WHILE EACH PORTFOLIO WILL SEEK TO ACHIEVE ITS OBJECTIVE BY INVESTING IN A
DIVERSIFIED PORTFOLIO OF EQUITY SECURITIES (INCLUDING SECURITIES CONVERTIBLE
INTO EQUITY SECURITIES), DEBT OBLIGATIONS AND MONEY MARKET INSTRUMENTS, THE
PORTFOLIOS WILL DIFFER WITH RESPECT TO THE DEGREE OF RISK INVOLVED. THE BALANCED
PORTFOLIO WILL BE SUBJECT TO MODERATE RISK, IN THE OPINION OF THE FUND'S
INVESTMENT ADVISER, AND THE STRATEGY PORTFOLIO WILL BE SUBJECT TO RELATIVELY
HIGHER RISK. These differences in risks will be evidenced in the proportions of
investments in debt and equity securities, the quality and maturity of debt
securities purchased and the price volatility and the type of issuer of equity
securities. The following table summarizes the differences in the types of
investments in which each Portfolio may generally invest in seeking to achieve
its objective:
<TABLE>
<CAPTION>
BALANCED STRATEGY
DEBT SECURITIES PORTFOLIO PORTFOLIO
- ------------------ ----------------------------- -----------------------------
<S> <C> <C>
Quality Investment grade debt Investment grade debt
securities AND up to 10% of securities AND up to 25% of
its assets in debt securities its assets in debt securities
rated below investment grade rated below investment grade
Percent of At least 25% of its assets in No specific limitation
Portfolio's fixed-income senior
assets securities
Average duration Less than 10 years; weighted More than 10 years; weighted
average maturity will exceed average maturity will exceed
the average duration the average duration
EQUITY SECURITIES
- ------------------
Type of issuer Common stock and common stock Common stock and common stock
equivalents of major, equivalents of major,
established companies AND established companies AND a
smaller, faster growing greater proportion of its
companies assets in smaller, faster
growing companies
</TABLE>
Lower-rated debt securities, as well as debt securities with longer maturities
or with a longer duration, typically provide a higher return and are subject to
a greater degree of risk of loss and price volatility than higher-rated
securities and securities with shorter maturities or a shorter duration. Equity
securities of smaller companies are generally subject to a greater degree of
risk and price
9
<PAGE>
volatility than those of major companies. Finally, it is anticipated that the
money market instruments held by the Balanced Portfolio will be substantially of
the same quality and have generally the same maturities as those held by the
Strategy Portfolio. A more complete description of the Portfolios' investment
policies is set forth below.
The Fund's investment adviser determines the allocation of assets among the
different investment vehicles available (asset mix) to each Portfolio on a
regular basis (at least monthly). The determination of asset mix will result in
decisions with respect to: (1) the proportion of investments among the various
financial instruments available (money market instruments, bonds and other
indebtedness and equity securities, including convertible securities); (2) the
distribution of debt securities among short, intermediate and long-term
maturities; and (3) the distribution of equity and convertible securities
between those of major, established companies and those of smaller, faster
growing companies, the prices of which are typically more volatile. The
determination of asset mix for each Portfolio is based on technical, qualitative
and fundamental analyses and forecasts made by the investment adviser,
prevailing interest rates and general economic factors. In addition, the
investment adviser considers the relative risk objectives of the Portfolios in
making asset mix determinations.
BALANCED PORTFOLIO
THE BALANCED PORTFOLIO WILL INVEST IN A DIVERSIFIED PORTFOLIO COMPRISED
GENERALLY OF EQUITY SECURITIES, DEBT OBLIGATIONS AND MONEY MARKET INSTRUMENTS.
The specific asset mix of the Portfolio will be determined by the Fund's
investment adviser. The Portfolio will maintain at least 25% of the value of its
assets in fixed-income securities. Although there is no other limitation on the
percentage of assets invested in the various investment categories (money market
instruments, debt obligations and equity securities), it is anticipated that the
Balanced Portfolio will generally have a smaller percentage of its assets
invested in equity securities and a larger percentage invested in money market
instruments than the Strategy Portfolio. In addition, the average duration of
the debt securities purchased by the Balanced Portfolio will generally be
shorter than that of the debt securities purchased by the Strategy Portfolio.
(Duration is a measure of the price sensitivity of a debt instrument to interest
rate changes; it incorporates a bond's yield, coupon interest payments, final
maturity, call and put features and prepayment exposure into one measure.) The
weighted average maturity of the debt securities purchased by the Balanced
Portfolio will generally be shorter than that of the Strategy Portfolio and a
greater proportion of the equity securities held by the Balanced Portfolio will
be those of larger, more mature companies, which are subject to less price
volatility, than those held by the Strategy Portfolio. Based upon its asset mix,
the Balanced Portfolio is expected to be subject to a relatively lower risk of
loss (and offer a correspondingly lower potential return) than the Strategy
Portfolio.
MONEY MARKET INSTRUMENTS. The Balanced Portfolio may invest in the following
money market instruments generally maturing in one year or less:
1. U.S. Treasury bills and other obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities.
2. Obligations (including certificates of deposit, bankers' acceptances and
time deposits) of commercial banks, savings banks and savings and loan
associations having, at the time of acquisition by the Portfolio of such
obligations, total assets of not less than $1 billion or its equivalent. The
Portfolio may invest in obligations of domestic banks, foreign banks, and
branches and offices thereof. The term "certificates of deposit" includes both
Eurodollar certificates of deposit, for which there is generally a market, and
Eurodollar time deposits, for which there is generally not a market.
"Eurodollars" are dollars deposited in banks outside the United States.
3. Commercial paper, variable amount demand master notes, bills, notes and
other obligations issued by a U.S. company, a foreign company or a foreign
government, its agencies, instrumentalities or political subdivisions,
maturing in one year or less, denominated in U.S. dollars, and, at the date of
investment, rated at least A or A-2 by Standard & Poor's Ratings Group (S&P)
or A or Prime-2 by Moody's Investors Service (Moody's), or, if not rated,
issued by an entity having an outstanding unsecured debt issue rated at least
A or A-2 by S&P, or A or Prime-2 by Moody's. If such obligations are
guaranteed or supported by a letter of credit issued by a bank, the bank
(including a foreign bank) must meet the requirements set forth in
10
<PAGE>
paragraph (2) above. If such obligations are guaranteed or insured by an
insurance company or other non-bank entity, the insurance company or other
non-bank entity must represent a credit of high quality, as determined by the
Fund's investment adviser under the supervision of the Fund's Trustees.
DEBT OBLIGATIONS. IN ADDITION TO MONEY MARKET INSTRUMENTS DESCRIBED ABOVE,
THE BALANCED PORTFOLIO MAY INVEST IN LONGER-TERM DEBT SECURITIES. It is
anticipated that the average duration of the debt securities held by the
Portfolio will not exceed 10 years. Duration is a measure of the expected life
of a fixed-income security on a present value basis. Duration takes the length
of time intervals between the present time and the time that the interest and
principal payments are scheduled or, in the case of a mortgage-backed,
asset-backed or callable bond, EXPECTED to be received, and weights them by the
present values of the cash to be received at each future point in time. For any
fixed-income security with interest payments occurring prior to the payment of
principal, duration is ordinarily less than maturity. In general, all other
things being equal, the lower the stated or coupon rate of interest of a
fixed-income security, the longer the duration of the security; conversely, the
higher the stated or coupon rate of interest of a fixed-income security, the
shorter the duration of the security. There are some situations where even the
standard duration calculation does not properly reflect the interest rate
exposure of a security. In these and other similar situations, the investment
adviser will use more sophisticated analytical techniques that incorporate the
economic life of a security into the determination of its interest rate
exposure. The computation of duration is based on estimated rather than known
factors. Thus, there can be no assurance that the average duration will at all
times be achieved by the Portfolio.
Debt securities acquired by the Portfolio will generally be rated at the time
of purchase within the four highest categories determined by S&P, Moody's or a
similar nationally recognized rating service, or, if not rated, be of comparable
quality in the opinion of the investment adviser. However, the Portfolio may
invest up to 10% of its total assets in securities rated at the time of purchase
BB or Ba or lower by S&P or Moody's, respectively (or a similar nationally
recognized rating service), or, if not rated, of comparable quality in the
opinion of the investment adviser, all of which are commonly known as "junk
bonds." See "Investment Policies Applicable to All Portfolios -- Risks of
Investing in High Yield Securities" below.
THE PORTFOLIO MAY ALSO INVEST IN OBLIGATIONS OF THE U.S. GOVERNMENT AND ITS
AGENCIES AND INSTRUMENTALITIES. These securities include U.S. Treasury
obligations (including bills, notes and bonds) and securities issued or
guaranteed by U.S. Government agencies (such as the Export-Import Bank of the
United States, Federal Housing Administration and Government National Mortgage
Association) or by U.S. Government instrumentalities (such as the Federal Home
Loan Bank, Federal Intermediate Credit Banks and Federal Land Bank). Except for
U.S. Treasury securities, these obligations, even those that are guaranteed by
federal agencies or instrumentalities, may or may not be backed by the "full
faith and credit" of the United States. In the case of securities not backed by
the full faith and credit of the United States, the Portfolio must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment, and may not be able to assert a claim against the United States
itself in the event the agency or instrumentality does not meet its commitments.
THE PORTFOLIO MAY INVEST IN MORTGAGE-BACKED SECURITIES INCLUDING THOSE
REPRESENTING AN UNDIVIDED OWNERSHIP INTEREST IN A POOL OF MORTGAGES, E.G., GNMA,
FNMA AND FHLMC CERTIFICATES. The mortgages backing these securities include
conventional thirty-year fixed rate mortgages, fifteen-year fixed rate
mortgages, graduated payment mortgages and adjustable rate mortgages. The U.S.
Government or the issuing agency guarantees the payment of interest and
principal of these securities; however, the guarantees do not extend to the
securities' yield or value, which are likely to vary inversely with fluctuations
in interest rates, nor do the guarantees extend to the yield or value of the
Portfolio's shares. These certificates are in most cases "pass-through"
instruments, through which the holder receives a share of all interest and
principal payments from the mortgages underlying the certificate, net of certain
fees. Because the prepayment characteristics of the underlying mortgages vary,
it is not possible to predict accurately the average life or realized yield of a
particular issue of pass-through certificates. Mortgage-backed securities are
often subject to more rapid repayment than their stated maturity date would
indicate as a result of the pass-through of prepayments of principal on the
underlying mortgage obligations. While the timing of prepayments of graduated
payment mortgages differs somewhat from that of conventional mortgages, the
prepayment experience of graduated payment mortgages is basically the same as
that of the conventional mortgages of the same maturity dates over the life of
the pool. During periods of declining interest rates, prepayment of mortgages
underlying mortgage-backed securities can be
11
<PAGE>
expected to accelerate. When the mortgage obligations are prepaid, the Portfolio
reinvests the prepaid amounts in securities the yields of which reflect interest
rates prevailing at the time. Therefore, the Portfolio's ability to maintain a
portfolio containing high-yielding mortgage-backed securities will be adversely
affected to the extent that prepayments of mortgages must be reinvested in
securities which have lower yields than the prepaid mortgages. Moreover,
prepayments of mortgages which underlie securities purchased at a premium could
result in capital losses.
THE PORTFOLIO MAY ALSO INVEST IN ASSET-BACKED SECURITIES. Through the use of
trusts and special purpose corporations, various types of assets, primarily
automobile and credit card receivables and home equity loans, have been
securitized in pass-through structures similar to the mortgage pass-through
structures or in a pay-through structure similar to the collateralized mortgage
structure. The Portfolio may invest in these and other types of asset-backed
securities that may be developed in the future. Asset-backed securities present
certain risks that are not presented by mortgage-backed securities. Primarily,
these securities do not have the benefit of the same security interest in the
related collateral. Credit card receivables are generally unsecured and debtors
are entitled to the protection of a number of state and federal consumer credit
laws, some of which may reduce the ability to obtain full payment. In the case
of automobile receivables, the security interests in the underlying automobiles
are often not transferred when the pool is created, with the resulting
possibility that the collateral could be resold. In general, these types of
loans are of shorter average life than mortgage loans and are less likely to
have substantial prepayments.
EQUITY SECURITIES. THE EQUITY SECURITIES IN WHICH THE BALANCED PORTFOLIO WILL
PRIMARILY INVEST ARE COMMON STOCKS OF MAJOR, ESTABLISHED CORPORATIONS WHICH, IN
THE OPINION OF THE INVESTMENT ADVISER, HAVE PROSPECTS OF PRICE APPRECIATION
GREATER THAN THAT OF THE S&P 500 STOCK INDEX. The Portfolio may also invest in
preferred stocks or debt securities that either have warrants attached or are
otherwise convertible into such common stocks. See "Investment Policies
Applicable to All Portfolios -- Convertible Securities." In addition, the
Portfolio may invest in common stocks and common stock equivalents of smaller,
faster growing companies, although to a lesser extent than the Strategy
Portfolio.
OTHER. The Balanced Portfolio may also make other kinds of investments as
described under "Investment Policies Applicable to All Portfolios" below.
STRATEGY PORTFOLIO
THE STRATEGY PORTFOLIO WILL INVEST IN A DIVERSIFIED PORTFOLIO OF EQUITY
SECURITIES, DEBT OBLIGATIONS AND MONEY MARKET INSTRUMENTS. The specific asset
mix of the Portfolio will be determined by the Fund's investment adviser.
Although there is no limitation on the percentage of assets invested in the
various investment categories (money market instruments, debt obligations and
equity securities), it is anticipated that the Strategy Portfolio will generally
have a greater percentage of its assets invested in long-term bonds and equity
securities than the Balanced Portfolio. In addition, under normal conditions the
debt securities purchased by the Strategy Portfolio will be of lesser quality
and will, in the aggregate, have an average duration that is higher than that of
the Balanced Portfolio and a greater proportion of the equity securities will be
of smaller, faster growing companies and subject to greater price volatility
than those of the Balanced Portfolio. The Strategy Portfolio is expected to be
subject to a relatively higher risk of loss (and offer a correspondingly higher
potential return) than the Balanced Portfolio.
MONEY MARKET INSTRUMENTS. The Strategy Portfolio may invest in the same money
market instruments permitted for the Balanced Portfolio.
DEBT OBLIGATIONS. IN ADDITION TO MONEY MARKET INSTRUMENTS DESCRIBED ABOVE,
THE STRATEGY PORTFOLIO MAY INVEST IN LONG-TERM DEBT SECURITIES. It is
anticipated that the average duration of the debt securities held by the
Portfolio in the aggregate will normally be greater than 10 years. See "Balanced
Portfolio -- Debt Obligations" above. Such securities will generally be rated at
the time of purchase within the four highest categories determined by S&P,
Moody's or a similar nationally recognized rating service, or, if not rated,
will be of comparable quality in the opinion of the investment adviser. However,
the Portfolio may invest up to 25% of its total assets in securities rated at
the time of purchase BB or Ba or lower by S&P or Moody's, respectively (or a
similar nationally recognized rating service), or, if not rated, of comparable
quality in the opinion of the investment adviser, all of which are commonly
known as "junk bonds." See "Investment Policies Applicable to All Portfolios --
Risks of Investing in High Yield Securities" below.
12
<PAGE>
THE PORTFOLIO MAY INVEST IN OBLIGATIONS OF THE U.S. GOVERNMENT AND ITS
AGENCIES AND INSTRUMENTALITIES AND IN ASSET-BACKED SECURITIES. See "Balanced
Portfolio -- Debt Obligations" above.
EQUITY SECURITIES. LIKE THE BALANCED PORTFOLIO, THE STRATEGY PORTFOLIO MAY
INVEST IN COMMON STOCKS OF MAJOR, ESTABLISHED CORPORATIONS WHICH, IN THE OPINION
OF THE INVESTMENT ADVISER, HAVE PROSPECTS OF PRICE APPRECIATION GREATER THAN
THAT OF THE S&P 500 STOCK INDEX. THE STRATEGY PORTFOLIO MAY ALSO INVEST A
GREATER PROPORTION OF ITS ASSETS IN COMMON STOCKS OF SMALLER, FASTER GROWING
COMPANIES. These equity securities will typically have more volatile market
values and thus may be subject to a greater risk of decline in market value than
the equity securities of major, established corporations.
The Portfolio may invest in preferred stocks or debt securities that either
have warrants attached or are otherwise convertible into such common stocks.
OTHER. The Strategy Portfolio may also make other kinds of investments as
described under "Investment Policies Applicable to All Portfolios" below.
INVESTMENT POLICIES APPLICABLE TO ALL PORTFOLIOS
GENERAL. IN PURSUIT OF ITS INVESTMENT OBJECTIVE, EACH PORTFOLIO MAY (I)
INVEST IN CONVERTIBLE SECURITIES, (II) PURCHASE AND WRITE (I.E., SELL) OPTIONS
ON EQUITY SECURITIES AND STOCK INDICES FOR HEDGING PURPOSES AND TO REALIZE
INCOME, (III) PURCHASE AND SELL FINANCIAL AND STOCK INDEX FUTURES CONTRACTS AND
PURCHASE AND WRITE (I.E., SELL) OPTIONS THEREON FOR HEDGING PURPOSES OR, WITH
RESPECT TO WRITING OPTIONS ON FUTURES CONTRACTS, TO REALIZE A GREATER RETURN,
(IV) PURCHASE SECURITIES ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS, (V) MAKE
SHORT SALES AGAINST-THE-BOX, (VI) INVEST IN FOREIGN SECURITIES AND (VII) ENTER
INTO REPURCHASE AGREEMENTS.
CONVERTIBLE SECURITIES. EACH PORTFOLIO MAY INVEST IN PREFERRED STOCKS OR DEBT
SECURITIES THAT EITHER HAVE WARRANTS ATTACHED OR ARE OTHERWISE CONVERTIBLE INTO
COMMON STOCKS. A convertible security is typically a fixed-income security (a
bond or preferred stock) that may be converted at a stated price within a
specified period of time into a specified number of shares of common stock of
the same or a different issuer. Convertible securities are generally senior to
common stocks in a corporation's capital structure but are usually subordinated
to similar non-convertible securities. While providing a fixed income stream
(generally higher in yield than the income derivable from a common stock but
lower than that afforded by a similar non-convertible security), a convertible
security also affords an investor the opportunity, through its conversion
feature, to participate in capital appreciation attendant upon a market price
advance in the common stock underlying the convertible security.
In general, the market value of a convertible security is at least the higher
of its "investment value" (I.E., its value as a fixed-income security) or its
"conversion value" (I.E., its value upon conversion into its underlying common
stock). As a fixed-income security, a convertible security tends to increase in
market value when interest rates decline and tends to decrease in value when
interest rates rise. However, the price of a convertible security is also
influenced by the market value of the security's underlying common stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
FOREIGN SECURITIES. EACH PORTFOLIO MAY INVEST UP TO 30% OF ITS TOTAL ASSETS
IN FOREIGN MONEY MARKET INSTRUMENTS AND DEBT AND EQUITY SECURITIES. For purposes
of this limitation, American Depositary Receipts, Yankee bonds (I.E., U.S.
dollar denominated bonds issued by foreign companies in the United States) and
global bonds which are U.S. dollar denominated are not deemed to be foreign
securities. In many instances, foreign securities may provide higher yields but
may be subject to greater fluctuations in price than securities of domestic
issuers which have similar maturities or quality.
INVESTING IN SECURITIES OF FOREIGN COMPANIES AND COUNTRIES INVOLVES CERTAIN
CONSIDERATIONS AND RISKS WHICH ARE NOT TYPICALLY ASSOCIATED WITH INVESTING IN
U.S. GOVERNMENT SECURITIES AND SECURITIES OF DOMESTIC COMPANIES. There may be
less publicly available information about a foreign issuer than a domestic one,
and foreign companies are not generally subject to
13
<PAGE>
uniform accounting, auditing and financial standards and requirements comparable
to those applicable to U.S. companies. There may also be less government
supervision and regulation of foreign securities exchanges, brokers and listed
companies than exists in the United States. Interest and dividends paid by
foreign issuers may be subject to withholding and other foreign taxes, which may
decrease the net return on such investments as compared to dividends and
interest paid to the Portfolio by domestic companies or the U.S. Government.
There may be the possibility of expropriations, seizure or nationalization of
foreign deposits, confiscatory taxation, political, economic or social
instability or diplomatic developments which could affect assets of the
Portfolio held in foreign countries. Finally, the establishment of exchange
controls or other foreign governmental laws or restrictions could adversely
affect the payment of obligations.
To the extent a Portfolio's currency exchange transactions do not fully
protect the Portfolio against adverse changes in currency exchange rates,
decreases in the value of currencies of the foreign countries in which the
Portfolio will invest relative to the U.S. dollar will result in a corresponding
decrease in the U.S. dollar value of the Portfolio's assets denominated in those
currencies (and possibly a corresponding increase in the amount of securities
required to be liquidated to meet distribution requirements). Conversely,
increases in the value of currencies of the foreign countries in which a
Portfolio invests relative to the U.S. dollar will result in a corresponding
increase in the U.S. dollar value of the Portfolio's assets (and possibly a
corresponding decrease in the amount of securities to be liquidated).
There may be less publicly available information about foreign companies and
governments compared to reports and ratings published about U.S. companies.
Foreign securities markets have substantially less volume than the New York
Stock Exchange and securities of some foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Brokerage commissions and
other transaction costs on foreign securities exchanges are generally higher
than in the United States.
RISKS OF INVESTING IN HIGH YIELD SECURITIES
Securities rated Baa by Moody's, although considered to be investment grade,
lack outstanding investment characteristics and in fact have speculative
characteristics as well. Securities rated BB or Ba or lower by S&P or Moody's,
respectively, are generally considered to be predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal. The prices
of debt securities vary inversely with interest rates. In addition, lower-rated
debt obligations typically provide a higher yield than higher-rated obligations
of similar maturity. However, lower-rated obligations are also subject to a
greater degree of risk with respect to the ability of the issuer to meet the
principal and interest payments on the obligations and may also be subject to
greater price volatility due to the market's perceptions of the creditworthiness
of the issuer. A description of security ratings is contained in Appendix A.
FIXED-INCOME SECURITIES ARE SUBJECT TO THE RISK OF AN ISSUER'S INABILITY TO
MEET PRINCIPAL AND INTEREST PAYMENTS ON THE OBLIGATIONS (CREDIT RISK) AND MAY
ALSO BE SUBJECT TO PRICE VOLATILITY DUE TO SUCH FACTORS AS INTEREST RATE
SENSITIVITY AND THE MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER
(MARKET RISK). Lower-rated or unrated (I.E., high yield) securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general level
of interest rates. The investment adviser considers both credit risk and market
risk in making investment decisions for the Portfolios. See "Investment
Objectives and Policies -- Risk Factors Relating to High Yield Securities" in
the Statement of Additional Information.
HEDGING STRATEGIES
EACH PORTFOLIO MAY ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING UTILIZING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN. THESE STRATEGIES CURRENTLY INCLUDE THE USE OF OPTIONS, FORWARD
CURRENCY EXCHANGE CONTRACTS AND FUTURES CONTRACTS AND OPTIONS THEREON. Each
Portfolio's ability to use these strategies may be limited by market conditions,
regulatory limits and tax considerations and there can be no assurance that any
of these strategies will succeed. See "Investment Objectives and Policies" in
the Statement of Additional Information. New financial products and risk
management techniques continue to be developed, and each Portfolio may use these
new investments and techniques to the extent consistent with its investment
objective and policies.
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OPTIONS TRANSACTIONS
EACH PORTFOLIO MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON
SECURITIES AND CURRENCIES THAT ARE TRADED ON SECURITIES EXCHANGES OR IN THE
OVER-THE-COUNTER MARKET TO ENHANCE RETURN OR TO HEDGE THEIR PORTFOLIOS. These
options will be on equity securities, financial indices (E.G., S&P 500) and
foreign currencies. Each Portfolio may write covered put and call options to
generate additional income through the receipt of premiums, purchase put options
in an effort to protect the value of a security that it owns against a decline
in market value and purchase call options in an effort to protect against an
increase in the price of securities it intends to purchase. Each Portfolio may
also purchase put and call options to offset previously written put and call
options of the same series. See "Investment Objectives and Policies -- Risks of
Transactions in Options" in the Statement of Additional Information.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE RIGHT,
FOR A SPECIFIED PERIOD OF TIME, TO PURCHASE THE SECURITIES SUBJECT TO THE OPTION
AT A SPECIFIED PRICE (THE EXERCISE PRICE OR STRIKE PRICE). The writer of a call
option, in return for the premium, has the obligation, upon exercise of the
option, to deliver, depending upon the terms of the option contract, the
underlying securities or a specified amount of cash to the purchaser upon
receipt of the exercise price. When a Portfolio writes a call option, the
Portfolio gives up the potential for gain on the underlying securities in excess
of the exercise price of the option during the period that the option is open.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES SUBJECT TO THE OPTION TO THE
WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of the put option,
in return for the premium, has the obligation, upon exercise of the option, to
acquire the securities underlying the option at the exercise price. A Portfolio
might, therefore, be obligated to purchase the underlying securities for more
than their current market price.
EACH PORTFOLIO WILL WRITE ONLY "COVERED" OPTIONS. An option is covered if, so
long as the Portfolio is obligated under the option, it owns an offsetting
position in the underlying security or maintains cash, U.S. Government
securities or other liquid high-grade debt obligations with a value sufficient
at all times to cover its obligations. See "Investment Objectives and Policies
- -- Options on Stock Indices" in the Statement of Additional Information.
THERE IS NO LIMITATION ON THE AMOUNT OF CALL OPTIONS THE PORTFOLIOS MAY WRITE.
The Fund has undertaken with certain state securities commissions that, so long
as shares of the Fund are registered in those states, neither Portfolio will
purchase (i) put options on stocks not held by the Portfolio, (ii) put options
on indices or (iii) call options on stock or stock indices if, after any such
purchase, the total premiums paid for such options would exceed 10% of the
Portfolio's total assets; provided, however, that the Portfolio may purchase put
options on stocks held by the Portfolio if after such purchase the aggregate
premiums paid for such options do not exceed 20% of the Portfolio's total net
assets. In addition, the aggregate value of the securities that are the subject
of the put options will not exceed 50% of the Portfolio's net assets.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
EACH PORTFOLIO MAY ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO
PROTECT THE VALUE OF ITS PORTFOLIO AGAINST FUTURE CHANGES IN THE LEVEL OF
CURRENCY EXCHANGE RATES. Each Portfolio may enter into such contracts on a spot,
I.E., cash, basis at the rate then prevailing in the currency exchange market or
on a forward basis, by entering into a forward contract to purchase or sell
currency. A forward contract on foreign currency is an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
agreed upon by the parties from the date of the contract at a price set on the
date of the contract.
EACH PORTFOLIO'S DEALINGS IN FORWARD CONTRACTS WILL BE LIMITED TO HEDGING
INVOLVING EITHER SPECIFIC TRANSACTIONS OR PORTFOLIO POSITIONS. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Portfolio generally arising in connection with
the purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Portfolio expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a currency bearing a substantial correlation to
the value of that currency
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(cross hedge). Although there are no limits on the number of forward contracts
which a Portfolio may enter into, a Portfolio may not position hedge with
respect to a particular currency for an amount greater than the aggregate market
value (determined at the time of making any sale of forward currency) of the
securities held in its portfolio denominated or quoted in, or currently
convertible into, such currency.
FUTURES CONTRACTS AND OPTIONS THEREON
EACH PORTFOLIO MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE FOR CERTAIN
HEDGING, RETURN ENHANCEMENT AND RISK MANAGEMENT PURPOSES IN ACCORDANCE WITH
REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION. These futures contracts
and options thereon will be on interest-bearing securities, financial indices
and interest rate indices. A financial futures contract is an agreement to
purchase or sell an agreed amount of securities at a set price for delivery in
the future.
A PORTFOLIO MAY NOT PURCHASE OR SELL FUTURES CONTRACTS AND OPTIONS THEREON FOR
RETURN ENHANCEMENT OR RISK MANAGEMENT PURPOSES IF, IMMEDIATELY THEREAFTER, THE
SUM OF THE AMOUNT OF INITIAL MARGIN DEPOSITS ON THE PORTFOLIO'S FUTURES
POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON WOULD EXCEED 5% OF THE
LIQUIDATION VALUE OF THE PORTFOLIO'S TOTAL ASSETS. ALTHOUGH THERE ARE NO OTHER
LIMITS APPLICABLE TO FUTURES CONTRACTS, THE VALUE OF ALL FUTURES CONTRACTS SOLD
WILL NOT EXCEED THE TOTAL MARKET VALUE OF THE PORTFOLIO.
A PORTFOLIO'S SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET AND
INTEREST RATES AND REQUIRES SKILLS AND TECHNIQUES DIFFERENT FROM THOSE USED IN
SELECTING PORTFOLIO SECURITIES. The correlation between movements in the price
of a futures contract and movements in the price of the securities being hedged
is imperfect, and there is a risk that the value of the securities being hedged
may increase or decrease at a greater rate than the related futures contracts,
resulting in losses to the Portfolio. Certain futures exchanges or boards of
trade have established daily limits on the amount that the price of futures
contracts or options thereon may vary, either up or down, from the previous
day's settlement price. These daily limits may restrict each Portfolio's ability
to purchase or sell certain futures contracts or options thereon on any
particular day.
EACH PORTFOLIO'S ABILITY TO ENTER INTO FUTURES CONTRACTS AND OPTIONS THEREON
IS LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED
(THE INTERNAL REVENUE CODE), FOR QUALIFICATION AS A REGULATED INVESTMENT
COMPANY. See "Taxes" in the Statement of Additional Information.
RISKS OF HEDGING STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY EXCHANGE
TRANSACTIONS INVOLVES INVESTMENT RISKS AND TRANSACTION COSTS TO WHICH A
PORTFOLIO WOULD NOT BE SUBJECT AND TRANSACTION COSTS FROM WHICH NO FUTURE
BENEFIT MAY BE DERIVED ABSENT THE USE OF THESE STRATEGIES. If the investment
adviser's prediction of movements in the direction of the securities, foreign
currency and interest rate markets are inaccurate, the adverse consequences to
the Portfolio may leave the Portfolio in a worse position than if such
strategies were not used. Risks inherent in the use of options, foreign currency
and futures contracts and options on futures contracts include (1) dependence on
the investment adviser's ability to predict correctly movements in the direction
of interest rates, securities prices and currency markets; (2) imperfect
correlation between the price of options and futures contracts and options
thereon and movements in the prices of the securities being hedged; (3) the fact
that the skills needed to use these strategies are different from those needed
to select portfolio securities; (4) the possible absence of a liquid secondary
market for any particular instrument at any time; (5) the possible need to defer
closing out certain hedged positions to avoid adverse tax consequences; and (6)
the possible inability of a Portfolio to purchase or sell a portfolio security
at a time that otherwise would be favorable for it to do so, or the possible
need for a Portfolio to sell a portfolio security at a disadvantageous time, due
to the need for a Portfolio to maintain "cover" or to segregate securities in
connection with hedging transactions. See "Taxes" and "Investment Objectives and
Policies" in the Statement of Additional Information.
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OTHER INVESTMENTS AND POLICIES
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each Portfolio may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Portfolio with payment and delivery
taking place in the future in order to secure what is considered to be an
advantageous price and yield to the Portfolio at the time of entering into the
transaction. The Fund's Custodian will maintain, in a segregated account of the
Fund, cash, U.S. Government securities or other liquid high-grade debt
obligations having a value equal to or greater than the Fund's purchase
commitments; the Custodian will likewise segregate securities sold on a delayed
delivery basis. The securities so purchased are subject to market fluctuation
and no interest accrues to the purchaser during the period between purchase and
settlement. At the time of delivery of the securities, the value may be more or
less than the purchase price and an increase in the percentage of the
Portfolio's assets committed to the purchase of securities on a when-issued or
delayed delivery basis may increase the volatility of the Portfolio's net asset
value.
SHORT SALES AGAINST-THE-BOX
The Portfolios may make short sales of securities or maintain a short
position, provided that at all times when a short position is open, the
Portfolio owns an equal amount of such securities or securities convertible into
or exchangeable for, with or without payment of any further consideration, such
securities; provided that if further consideration is required in connection
with the conversion or exchange, cash or U.S. Government securities in an amount
equal to such consideration must be put in a segregated account, for an equal
amount of the securities of the same issuer as the securities sold short (a
short sale against-the-box). Not more than 25% of a Portfolio's net assets
(determined at the time of the short sale) may be subject to such sales. Short
sales will be made primarily to defer realization of gain or loss for federal
income tax purposes.
INTEREST RATE SWAPS
Each Portfolio may enter into interest rate swap transactions with respect to
up to 5% of its total assets. Interest rate swaps are used to hedge the value of
existing portfolio assets or assets a Portfolio intends to acquire. Interest
rate swaps involve the exchange by a Portfolio with another party of their
respective commitments to pay or receive interest (E.G., an exchange of
floating-rate payments for fixed-rate payments). Each Portfolio enters into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against any increase in the
price of securities it anticipates purchasing at a later date. The Portfolios
use interest rate swaps for hedging purposes and not as a speculative
investment.
The use of interest rate swaps is a highly speculative activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the investment adviser were incorrect in
its forecast of market values, interest rates and other applicable factors, the
investment performance of a Portfolio would diminish compared to what it would
have been if this investment technique were never used. Interest rate swaps do
not involve the delivery of securities or other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate swaps is limited to
the net amount of interest payments that a Portfolio is contractually obligated
to make. If the other party to an interest rate swap defaults, a Portfolio's
risk of loss consists of the net amount of interest payments that the Portfolio
is contractually entitled to receive. Since interest rate swaps are individually
negotiated, each Portfolio expects to achieve an acceptable degree of
correlation between its rights to receive interest on its portfolio securities
and its rights and obligations to receive and pay interest pursuant to interest
rate swaps.
REPURCHASE AGREEMENTS
Each Portfolio may on occasion enter into repurchase agreements whereby the
seller of a security agrees to repurchase that security from the Portfolio at a
mutually agreed-upon time and price. The repurchase date is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Portfolio's
money is invested in the repurchase agreement. Each Portfolio's repurchase
agreements will at all times be fully collateralized in an amount at least equal
to the purchase price, including accrued interest earned on the underlying
securities. The instruments held as collateral are valued daily, and if the
value of the instruments declines, the Portfolio will require additional
collateral. If the seller defaults and the value of the
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collateral securing the repurchase agreement declines, the Portfolio may incur a
loss. The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Mutual Fund Management, Inc. pursuant to an
order of the Securities and Exchange Commission (SEC).
BORROWING
Each Portfolio may borrow up to 20% of the value of its total assets
(calculated when the loan is made) for temporary, extraordinary or emergency
purposes or for the clearance of transactions. A Portfolio may pledge up to 20%
of its total assets to secure these borrowings.
ILLIQUID SECURITIES
Each Portfolio may invest up to 10% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities markets
either within or outside of the United States. Restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933, as amended
(the Securities Act), and privately placed commercial paper that have a readily
available market are not considered illiquid for purposes of this limitation.
Each Portfolio intends to comply with any applicable state blue sky laws
restricting the Portfolio's investments in illiquid securities. See "Investment
Restrictions" in the Statement of Additional Information. The investment adviser
will monitor the liquidity of such restricted securities under the supervision
of the Trustees. Repurchase agreements subject to demand are deemed to have a
maturity equal to the applicable notice period.
The staff of the SEC has taken the position that purchased over-the-counter
options and the assets used as "cover" for written over-the-counter options are
illiquid securities unless a Portfolio and the counterparty have provided for
the Portfolio, at the Portfolio's election, to unwind the over-the-counter
option. The exercise of such an option ordinarily would involve the payment by
the Portfolio of an amount designed to reflect the counterparty's economic loss
from an early termination, but does allow the Portfolio to treat the assets used
as "cover" as "liquid."
PORTFOLIO TURNOVER
The portfolio turnover rate for each Portfolio is not expected to exceed 200%.
The portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of each
Portfolio's securities, excluding securities having a maturity at the date of
purchase of one year or less. High portfolio turnover may involve
correspondingly greater brokerage commissions and other transaction costs, which
will be borne directly by the Portfolio. See "Portfolio Transactions and
Brokerage" in the Statement of Additional Information. In addition, high
portfolio turnover may result in increased short-term capital gains which, when
distributed to shareholders, are treated as ordinary income. See "Taxes,
Dividends and Distributions."
INVESTMENT RESTRICTIONS
Each Portfolio is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies may
not be changed without the approval of the holders of a majority of the
Portfolio's outstanding voting securities, as defined in the Investment Company
Act. See "Investment Restrictions" in the Statement of Additional Information.
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HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended July 31, 1995, total expenses as a percentage of
average net assets were %, % and % of the Class A, Class B and Class C
shares, respectively, of the Strategy Portfolio and were %, % and % of the
Class A, Class B and Class C shares, respectively, of the Balanced Portfolio.
See "Financial Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .65 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF EACH PORTFOLIO. It was incorporated in May 1987 under the laws of the State
of Delaware. For the fiscal year ended July 31, 1995, the Fund paid management
fees to PMF of .65% of average net assets of both the Strategy Portfolio and the
Balanced Portfolio. See "Manager" in the Statement of Additional Information.
As of August 31, 1995, PMF served as the manager to open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to closed-end investment companies with aggregate assets of
approximately $ billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS AFFAIRS. See
"Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The Balanced Portfolio is managed by Gregory Goldberg, a Vice President of
Prudential Investment Advisors, a unit of PIC. The Strategy Portfolio is managed
by PIC using a team of portfolio managers under the supervision of Mr. Goldberg.
Mr. Goldberg has had responsibility for the day-to-day management of the
Portfolios since January 1995. Mr. Goldberg was previously employed by Daiwa
International Capital Management (January 1988-December 1993) as a portfolio
manager for institutional clients. Mr. Goldberg joined PIC on January 11, 1994
and is also the portfolio manager of Prudential Multi-Sector Fund, Inc.
In making equity investments, Mr. Goldberg generally focuses on stocks with a
potential for capital appreciation. He utilizes a "bottom-up" approach,
selecting stocks that, in his opinion, have strong fundamentals regardless of
industry performance. He evaluates a company's earnings and balance sheet to
find companies that, in his view, are leaders in their fields and have strong
growth potential. With respect to fixed-income securities, Mr. Goldberg
generally focuses on issues with a potential for total return, selecting
securities that, in his opinion, compare favorably in terms of price and yield
relative to maturity.
THE FUND'S SUBADVISER HAS ENTERED INTO A CONSULTING ARRANGEMENT WITH GREG A.
SMITH WITH RESPECT TO THE STRATEGY PORTFOLIO, PURSUANT TO WHICH MR. SMITH MAKES
RECOMMENDATIONS TO PIC WITH RESPECT TO THE ALLOCATION OF ASSETS. Mr. Smith is a
consultant to Prudential Securities Incorporated, an affiliate of both the
Subadviser and the Fund, and the President of Greg A. Smith Asset Management
Corporation, a registered investment adviser. Mr. Smith is a consultant to PIC
with respect to the allocation of assets for Prudential Multi-Sector Fund, Inc.
Mr. Smith is recognized in the financial community as a leading asset allocation
strategist. Since 1983, he has been named by INSTITUTIONAL INVESTOR magazine as
a member of its All-America Research Team.
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PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE FUND. IT IS
A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND CLASS C
SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE FUND'S CLASS A, CLASS B AND
CLASS C SHARES. These expenses include commissions and account servicing fees
paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential Securities and Prusec associated with the sale
of Fund shares, including lease, utility, communications and sales promotion
expenses. The State of Texas requires that shares of the Fund may be sold in
that state only by dealers or other financial institutions which are registered
there as broker-dealers.
Under the Plans, the Fund is obligated to pay distribution and/or service fees
to the Distributor as compensation for its distribution and service activities,
not as reimbursement for specific expenses incurred. If the Distributor's
expenses exceed its distribution and service fees, the Fund will not be
obligated to pay any additional expenses. If the Distributor's expenses are less
than such distribution and service fees, it will retain its full fees and
realize a profit.
UNDER THE CLASS A PLAN, THE FUND MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF EACH PORTFOLIO. The
Class A Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1% of the
average daily net assets of the Class A shares. PMFD has agreed to limit its
distribution-related fees payable under the Class A Plan to .25 of 1% of the
average daily net assets of the Class A shares for the fiscal year ending July
31, 1996.
UNDER THE CLASS B AND CLASS C PLANS, EACH PORTFOLIO PAYS PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF
THE CLASS B AND CLASS C SHARES OF THE PORTFOLIO. The Class B and Class C Plans
provide for the payment to Prudential Securities of (i) an asset-based sales
charge of .75 of 1% of the average daily net assets of each of the Class B and
Class C shares and (ii) a service fee of .25 of 1% of the average daily net
assets of each of the Class B and Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities also receives contingent deferred sales charges from certain
redeeming shareholders. See "Shareholder Guide -- How to Sell Your Shares --
Contingent Deferred Sales Charges."
For the fiscal year ended July 31, 1995, the Fund paid distribution expenses
of .25%, 1.00% and 1.00% of the average daily net assets of the Class A, Class B
and Class C shares of each Portfolio, respectively. The Fund records all
payments made under
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the Plans as expenses in the calculation of net investment income. Prior to
August 1, 1994, the Class A and Class B Plans operated as "reimbursement type"
plans and, in the case of Class B, provided for the reimbursement of
distribution expenses incurred in current and prior years. See "Distributor" in
the Statement of Additional Information.
Distribution expenses attributable to the sale of shares of each Portfolio
will be allocated to each class based upon the ratio of sales of each class to
the sales of all shares of the Portfolio other than expenses allocable to a
particular class. The distribution fee and sales charge of one class will not be
used to subsidize the sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to a Portfolio at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Portfolio. The Portfolios will not be obligated to pay distribution and
service fees incurred under any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by each Portfolio of the
Fund under the Class A, Class B and Class C Plans, the Manager (or one of its
affiliates) may make payments out of its own resources to dealers and other
persons who distribute shares of the Portfolios. Such payments may be calculated
by reference to the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI's settlement with the
state securities regulators included an agreement to pay a penalty of $500,000
per jurisdiction. PSI has agreed to provide additional funds, if necessary, for
the purpose of the settlement fund. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three-year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If, on the other hand, during the course of
the three-year period, PSI violates the terms of the agreement, the U.S.
Attorney can elect to pursue these charges. Under the terms of the agreement,
PSI agreed, among other things, to pay an additional $330,000,000 into the fund
established by the SEC to pay restitution to investors who purchased certain PSI
limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
21
<PAGE>
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may also act as a broker or futures commission merchant
for the Fund, provided that the commissions, fees or other remuneration it
receives are fair and reasonable. See "Portfolio Transactions and Brokerage" in
the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, 02171, serves as Custodian for the Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting books
and records pursuant to an agreement with the Fund. Its mailing address is P.O.
Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
EACH PORTFOLIO'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING
ITS LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF EACH PORTFOLIO TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Fund's Trustees. See "Net Asset Value" in the Statement of
Additional Information.
Each Portfolio will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Portfolio or days on which changes in
the value of the portfolio securities do not materially affect the NAV. The New
York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different net asset
values and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. It is
expected, however, that the NAV of the three classes will tend to converge
immediately after the recording of dividends, if any, which will differ by
approximately the amount of the distribution-related expense accrual
differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME EACH PORTFOLIO OF THE FUND MAY ADVERTISE ITS TOTAL RETURN
(INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) AND YIELD
IN ADVERTISEMENTS OR SALES LITERATURE. TOTAL RETURN AND YIELD ARE CALCULATED
SEPARATELY FOR CLASS A, CLASS B AND CLASS C SHARES. THESE FIGURES ARE BASED ON
HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The
"total return" shows how much an investment in the Portfolio would have
increased (decreased) over a specified period of time (I.E., one, five or ten
years or since inception of the Portfolio) assuming that all distributions and
dividends by the Portfolio were reinvested on the reinvestment dates during the
period and less all recurring fees. The "aggregate" total return reflects actual
performance over a stated period of time. "Average annual" total return is a
22
<PAGE>
hypothetical rate of return that, if achieved annually, would have produced the
same aggregate total return if performance had been constant over the entire
period. "Average annual" total return smooths out variations in performance and
takes into account any applicable initial or contingent deferred sales charges.
Neither "average annual" total return nor "aggregate" total return takes into
account any federal or state income taxes which may be payable upon redemption.
The "yield" refers to the income generated by an investment in a Portfolio over
a one-month or 30-day period. This income is then "annualized;" that is, the
amount of income generated by the investment during that 30-day period is
assumed to be generated each 30-day period for twelve periods and is shown as a
percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. Each Portfolio
of the Fund also may include comparative performance information in advertising
or marketing its shares. Such performance information may include data from
Lipper Analytical Services, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. The Fund will include
performance data for each class of shares of a Portfolio in any advertisement or
information including performance data of the Portfolio. Further performance
information is contained in the Fund's annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder Guide --
Shareholder Services -- Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
EACH PORTFOLIO HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, EACH
PORTFOLIO WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT
INCOME AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. See
"Taxes" in the Statement of Additional Information.
Under the Internal Revenue Code, special rules apply to the treatment of
certain options and futures contracts (Section 1256 contracts). At the end of
each year, such investments held by a Portfolio will be required to be "marked
to market" for federal income tax purposes; that is, treated as having been sold
at market value. Sixty percent of any gain or loss recognized on these "deemed
sales" and on actual dispositions will be treated as long-term capital gain or
loss, and the remainder will be treated as short-term capital gain or loss. See
"Taxes" in the Statement of Additional Information.
Each Portfolio may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). PFICs are foreign corporations which derive a majority of
their income from passive sources. For tax purposes, a Portfolio's investments
in PFICs may subject the Portfolio to federal income taxes on certain income and
gains realized by the Portfolio. Certain gains or losses from fluctuations in
foreign currency exchange rates (Section 988 gains or losses) will affect the
amount of ordinary income a Portfolio will be able to pay as dividends. See
"Taxes" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
Any dividends out of net investment income, together with distributions of net
short-term gains (I.E., the excess of net short-term capital gains over net
long-term capital losses) distributed to shareholders will be taxable as
ordinary income to the shareholder whether or not reinvested. Any net capital
gains (I.E., the excess of net long-term capital gains over net short-term
capital losses) distributed to shareholders will be taxable as long-term capital
gains to the shareholders, whether or not reinvested and regardless of the
length of time a shareholder has owned his or her shares. The maximum long-term
capital gains rate for corporate shareholders currently is the same as the
maximum tax rate for ordinary income. The maximum long-term capital gains rate
for individual shareholders is 28%.
Both regular and capital gains dividends are taxable to shareholders in the
year in which received, whether they are received in cash or in additional
shares. In addition, certain dividends declared by a Portfolio will be treated
as received by shareholders on
23
<PAGE>
December 31 of the year the dividends are declared. This rule applies to
dividends declared by a Portfolio in October, November or December of a calendar
year, payable to shareholders of record on a date in any such month, if such
dividends are paid during January of the following calendar year.
Dividends received by corporate shareholders are eligible for a dividends
received deduction of 70% to the extent a Portfolio's income is derived from
qualified dividends received by the Portfolio from domestic corporations.
Dividends attributable to foreign dividends, interest income, capital gain net
income, gain or loss from Section 1256 contracts and from some other sources
will not be eligible for the corporate dividends received deduction. Corporate
shareholders should consult their tax advisers regarding other requirements
applicable to the dividends received deduction.
Any gain or loss realized upon a sale or redemption of Fund shares by a
shareholder who is not a dealer in securities will generally be treated as
long-term capital gain or loss if the shares have been held more than one year
and otherwise as short-term capital gain or loss. Any such loss with respect to
shares that are held for six months or less, however, although otherwise treated
as a short-term capital loss, will be treated as long-term capital loss to the
extent of any capital gain distributions received by the shareholder with
respect to those shares.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund is required to withhold and remit to
the U.S. Treasury 31% of dividends, capital gain income and redemption proceeds
on the accounts of those shareholders who fail to furnish their tax
identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of certain
foreign shareholders). Withholding at this rate is also required from dividends
and capital gains distributions (but not redemption proceeds) payable to
shareholders who are otherwise subject to backup withholding. Dividends of net
investment income and short-term capital gains paid to a foreign shareholder
will generally be subject to a U.S. withholding rate of 30% (or lower treaty
rate).
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY, QUARTERLY
AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY CAPITAL GAINS IN EXCESS OF
CAPITAL LOSSES. Dividends paid by the Fund with respect to each class of shares,
to the extent any dividends are paid, will be calculated in the same manner, at
the same time, on the same day and will be in the same amount except that each
class will bear its own distribution charges, generally resulting in lower
dividends for Class B and Class C shares. Distributions of net capital gains, if
any, will be paid in the same amount for each class of shares. See "How the Fund
Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES BASED ON
THE NAV OF EACH CLASS ON THE RECORD DATE, OR SUCH OTHER DATE AS THE TRUSTEES MAY
DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS
DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN
CASH. Such election should be submitted to Prudential Mutual Fund Services,
Inc., Attention: Account Maintenance, P.O. Box 15015, New Brunswick, New Jersey
08906-5015. If you hold shares through Prudential Securities, you should contact
your financial adviser to elect to receive dividends and distributions in cash.
The Fund will notify each shareholder after the close of the Fund's taxable year
both of the dollar amount and the taxable status of that year's dividends and
distributions on a per share basis.
WHEN THE FUND GOES "EX-DIVIDEND," THE NAV OF EACH CLASS IS REDUCED BY THE
AMOUNT OF THE DIVIDEND OR DISTRIBUTION ALLOCABLE TO EACH CLASS. IF YOU BUY
SHARES JUST PRIOR TO THE EX-DIVIDEND DATE (WHICH GENERALLY OCCURS FOUR BUSINESS
24
<PAGE>
DAYS PRIOR TO THE RECORD DATE), THE PRICE YOU PAY WILL INCLUDE THE DIVIDEND OR
DISTRIBUTION AND A PORTION OF YOUR INVESTMENT WILL BE RETURNED TO YOU AS A
TAXABLE DIVIDEND OR DISTRIBUTION. YOU SHOULD, THEREFORE, CONSIDER THE TIMING OF
DIVIDENDS AND DISTRIBUTIONS WHEN MAKING YOUR PURCHASES.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND IS AN OPEN-END, MANAGEMENT INVESTMENT COMPANY WHICH WAS ORGANIZED
UNDER THE LAWS OF MASSACHUSETTS ON FEBRUARY 23, 1987 AS AN UNINCORPORATED
BUSINESS TRUST, A FORM OF ORGANIZATION THAT IS COMMONLY KNOWN AS A MASSACHUSETTS
BUSINESS TRUST. THE FUND WAS FORMERLY KNOWN AS PRUDENTIAL FLEXIFUND, THE
BALANCED PORTFOLIO WAS FORMERLY KNOWN AS THE CONSERVATIVELY MANAGED PORTFOLIO
AND THE STRATEGY PORTFOLIO WAS FORMERLY KNOWN AS THE AGGRESSIVELY MANAGED
PORTFOLIO. THE FUND IS AUTHORIZED TO ISSUE AN UNLIMITED NUMBER OF SHARES OF
SEPARATE SERIES OR PORTFOLIOS, DIVIDED INTO THREE CLASSES, DESIGNATED CLASS A,
CLASS B AND CLASS C SHARES. Each class of shares represents an interest in the
same assets of the Portfolio and is identical in all respects except that (i)
each class bears different distribution expenses, (ii) each class has exclusive
voting rights with respect to its distribution and service plan (except that the
Fund has agreed with the SEC in connection with the offering of a conversion
feature on Class B shares to submit any amendment of the Class A Plan to both
Class A and Class B shareholders), (iii) each class has a different exchange
privilege and (iv) only Class B shares have a conversion feature. See "How the
Fund is Managed -- Distributor." The Fund has received an order from the SEC
permitting the issuance and sale of multiple classes of shares. Currently, each
Portfolio is offering only three classes, designated Class A, Class B and Class
C shares. In accordance with the Fund's Declaration of Trust, the Trustees may
authorize the creation of additional series of shares and classes of shares
within such series, with such preferences, privileges, limitations and voting
and dividend rights as the Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide -- How to Sell Your Shares." Each share of each class
is equal as to earnings, assets and voting privileges, except as noted above,
and each class of shares bears the expenses related to the distribution of its
shares. Except for the conversion feature applicable to the Class B shares,
there are no conversion, preemptive or other subscription rights. In the event
of liquidation, each share of each Portfolio of the Fund is entitled to its
portion of all of the Fund's assets after all debt and expenses of the Fund have
been paid. Since Class B and Class C shares generally bear higher distribution
expenses than Class A shares, the liquidation proceeds to shareholders of those
classes are likely to be lower than to Class A shareholders. The Fund's shares
do not have cumulative voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
25
<PAGE>
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares. The minimum subsequent investment is $100 for all classes. All
minimum investment requirements are waived for certain retirement and employee
savings plans or custodial accounts for the benefit of minors. For purchases
made through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. The minimum initial investment requirement is
waived for purchases of Class A shares effected through an exchange of Class B
shares of The BlackRock Government Income Trust. See "Shareholder Services"
below.
THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Allocation Fund, specifying on the wire the account number
assigned by PMFS and your name and identifying the sales charge alternative
(Class A, Class B or Class C shares) and the name of the Portfolio.
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value" in the
Statement of Additional Information.
26
<PAGE>
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Allocation Fund,
the name of the Portfolio, Class A, Class B or Class C shares and your name and
individual account number. It is not necessary to call PMFS to make subsequent
purchase orders utilizing Federal Funds. The minimum amount which may be
invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C SHARES)
WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE FOR YOUR
INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH OF TIME
YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES (ALTERNATIVE
PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 5% of .30 of 1% (Currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .25 of 1%)
CLASS B Maximum contingent deferred sales 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% Shares do not convert to another class
the amount invested or the redemption
proceeds on redemptions made within
one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of a Portfolio and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information -- Description of Shares"), and
(iii) only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Portfolios
will receive different compensation for selling Class A, Class B and Class C
shares and will generally receive more compensation initially for selling Class
A and Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion Feature
- -- Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Portfolios:
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<PAGE>
If you intend to hold your investment in a Portfolio for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 5% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 7 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed the
initial sales charge plus cumulative annual distribution-related fees on Class A
shares. This does not take into account the time value of money, which further
reduces the impact of the higher Class B or Class C distribution-related fee on
the investment, fluctuations in net asset value, the effect of the return on the
investment over this period of time or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50 4.71 4.25
$50,000 to $99,999 4.00 4.17 3.75
$100,000 to $249,999 3.25 3.36 3.00
$250,000 to $499,999 2.50 2.56 2.40
$500,000 to $999,999 2.00 2.04 1.90
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares -- Reduction and Waiver of Initial Sales Charges -- Class A Shares" in
the Statement of Additional Information.
BENEFIT PLANS. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (Benefit Plans), provided that the plan has existing assets of at
least $1 million invested in shares of Prudential Mutual Funds (excluding money
market funds other than those acquired pursuant to the exchange privilege) or
1,000 eligible employees or participants. In the case of Benefit Plans whose
28
<PAGE>
accounts are held directly with the Transfer Agent or Prudential Securities and
for which the Transfer Agent or Prudential Securities does individual account
recordkeeping (Direct Account Benefit Plans) and Benefit Plans sponsored by PSI
or its subsidiaries (PSI or Subsidiary Prototype Benefit Plans), Class A shares
may be purchased at NAV by participants who are repaying loans made from such
plans to the participant.
PRUARRAY PLANS. Class A shares may be purchased at NAV by certain retirement
and deferred compensation plans, qualified or non-qualified under the Internal
Revenue Code, including pension, profit-sharing, stock-bonus or other employee
benefit plans under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Code that
participate in the Transfer Agent's PruArray Program (a benefit plan
recordkeeping service) (hereafter referred to as a PruArray Plan); provided (i)
that the plan has at least $1 million in existing assets or 1,000 eligible
employees or participants and (ii) that Prudential Mutual Funds constitute at
least one-half of the plan's investment options. The term "existing assets" for
this purpose includes stock issued by a PruArray Plan sponsor and shares of
non-money market Prudential Mutual Funds and shares of certain unaffiliated
non-money market mutual funds that participate in the PruArray Program
(Participating Funds). "Existing assets" also include shares of money market
funds acquired by exchange from a Participating Fund.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a Benefit Plan or
PruArray Plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
Trustees and officers of the Fund and other Prudential Mutual Funds, (b)
employees of Prudential Securities and PMF and their subsidiaries and members of
the families of such persons who maintain an "employee related" account at
Prudential Securities or the Transfer Agent, (c) employees and special agents of
Prudential and its subsidiaries and all persons who have retired directly from
active service with Prudential or one of its subsidiaries, (d) registered
representatives and employees of dealers who have entered into a selected dealer
agreement with Prudential Securities provided that purchases at NAV are
permitted by such person's employer and (e) investors who have a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm, provided that (i) the purchase is made within 90 days
of the commencement of the financial adviser's employment at Prudential
Securities, (ii) the purchase is made with proceeds of a redemption of shares of
any open-end, non-money market fund sponsored by the financial adviser's
previous employer (other than a fund which imposes a distribution or service fee
of .25 of 1% or less) and (iii) the financial adviser served as the client's
broker on the previous purchase.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares acquired upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares -- Reduction and Waiver of Initial
Sales Charges -- Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your Shares --
Contingent Deferred Sales Charges."
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV NEXT DETERMINED
AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE TRANSFER AGENT OR
PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES." In certain cases,
however, redemption proceeds will be reduced by the amount of any applicable
contingent deferred sales charge, as described below. See "Contingent Deferred
Sales Charges" below.
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<PAGE>
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM
YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST, EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the SEC, by
order, so permits; provided that applicable rules and regulations of the SEC
shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from a Portfolio, in lieu of cash,
in conformity with applicable rules of the SEC. Securities will be readily
marketable and will be valued in the same manner as a regular redemption. See
"How the Fund Values its Shares." If your shares are redeemed in kind, you would
incur transaction costs in converting the assets into cash. The Fund, however,
has elected to be governed by Rule 18f-1 under the Investment Company Act, under
which the Fund is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund during any 90-day period for
any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. No sales charge will apply to such repurchases. You will
receive PRO RATA credit for any contingent deferred sales charge paid in
connection with the redemption of Class B or Class C
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<PAGE>
shares. You must notify the Fund's Transfer Agent, either directly or through
Prudential Securities or Prusec, at the time the repurchase privilege is
exercised, that you are entitled to credit for the contingent deferred sales
charge previously paid. Exercise of the repurchase privilege will generally not
affect federal income tax treatment of any gain realized upon redemption. If the
redemption results in a loss, some or all of the loss, depending on the amount
reinvested, will generally not be allowed for federal income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed -- Distributor" and "Waiver of
the Contingent Deferred Sales Charges -- Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS
YEAR SINCE PURCHASE INVESTED
PAYMENT MADE OR REDEMPTION PROCEEDS
- ------------------------------------------------ ---------------------------------
<S> <C>
First......................................... 5.0%
Second........................................ 4.0%
Third......................................... 3.0%
Fourth........................................ 2.0%
Fifth......................................... 1.0%
Sixth......................................... 1.0%
Seventh....................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Fund shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
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<PAGE>
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES -- CLASS B SHARES. The CDSC
will be waived in the case of a redemption following the death or disability of
a shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include (i) in the case of a tax-deferred
retirement plan, a lump-sum or other distribution after retirement; (ii) in the
case of an IRA or Section 403(b) custodial account, a lump-sum or other
distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (I.E.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
In addition, the CDSC will be waived on redemptions of shares held by a
Trustee of the Fund.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares -- Waiver of the Contingent Deferred Sales Charge -- Class B Shares"
in the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares -- Quantity
Discount -- Class B Shares Purchased Prior to August 1, 1994" in the Statement
of Additional Information.
CONVERSION FEATURE -- CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
The first conversion of Class B shares occurred in February 1995, when the
conversion feature was first implemented.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
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<PAGE>
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Portfolios will continue to be subject, possibly indefinitely,
to their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
PORTFOLIO OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES, RESPECTIVELY,
OF ANOTHER PORTFOLIO OR ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV. No sales
charge will be imposed at the time of the exchange. Any applicable CDSC payable
upon the redemption of shares exchanged will be calculated from the first day of
the month after the initial purchase, excluding the time shares were held in a
money market fund. Class B and Class C shares may not be exchanged into money
market funds other than Prudential Special Money Market Fund. For purposes of
calculating the holding period applicable to the Class B conversion feature, the
time period during which Class B shares were held in a money market fund will be
excluded. See "Conversion Feature -- Class B Shares" above. An exchange will be
treated as a redemption and purchase for tax purposes. See "Shareholder
Investment Account -- Exchange Privilege" in the Statement of Additional
Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON
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<PAGE>
INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER THE FOREGOING PROCEDURES.
All exchanges will be made on the basis of the relative NAV of the two funds
next determined after the request is received in good order. The Exchange
Privilege is available only in states where the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV. See "Alternative
Purchase Plan -- Class A Shares -- Reduction and Waiver of Initial Sales
Charges" above. Under this exchange privilege, amounts representing any Class B
and Class C shares (which are not subject to a CDSC) held in such a
shareholder's account will be automatically exchanged for Class A shares on a
quarterly basis, unless the shareholder elects otherwise. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities or Prusec that
they are eligible for this special exchange privilege.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder of the Fund, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including a
Command Account). For additional information about this service, you may contact
your Prudential Securities financial adviser, Prusec representative or the
Transfer Agent directly.
- TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these
34
<PAGE>
plans, the administration, custodial fees and other details is available from
Prudential Securities or the Transfer Agent. If you are considering adopting
such a plan, you should consult with your own legal or tax adviser with respect
to the establishment and maintenance of such a plan.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares -- Contingent Deferred Sales Charges."
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at One Seaport
Plaza, New York, New York 10292. In addition, monthly unaudited financial data
is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
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<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than Aaa bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade-obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
P-1: Issuers rated "Prime-1" or "P-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
A-1
<PAGE>
P-2: Issuers rated "Prime-2" or "P-2" (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations.
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher-rated categories.
BB, B, CCC, CC and C: Debt rated BB, B, CCC, CC and C is regarded, on balance,
as having predominantly speculative characteristics with respect to capacity to
pay interest and repay principal. BB indicates the least degree of speculation
and C the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
COMMERCIAL PAPER RATINGS
S&P's commercial paper ratings are current assessments of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: The A-1 designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-2
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds designed
to meet your individual needs. We welcome you to review the investment options
available through our family of funds. For more information on the Prudential
Mutual Funds, including charges and expenses, contact your Prudential Securities
financial adviser or Prusec representative or telephone the Funds at (800)
225-1852 for a free prospectus. Read the prospectus carefully before you invest
or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-Registered Trademark- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
-TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
-TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
-COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
-INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell, or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
----------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS........................................................... 2
Risk Factors and Special Characteristics................................ 2
FUND EXPENSES............................................................. 4
FINANCIAL HIGHLIGHTS...................................................... 5
HOW THE FUND INVESTS...................................................... 9
Investment Objectives and Policies...................................... 9
Hedging Strategies...................................................... 14
Other Investments and Policies.......................................... 17
Investment Restrictions................................................. 18
HOW THE FUND IS MANAGED................................................... 19
Manager................................................................. 19
Distributor............................................................. 20
Portfolio Transactions.................................................. 22
Custodian and Transfer and Dividend Disbursing Agent.................... 22
HOW THE FUND VALUES ITS SHARES............................................ 22
HOW THE FUND CALCULATES PERFORMANCE....................................... 22
TAXES, DIVIDENDS AND DISTRIBUTIONS........................................ 23
GENERAL INFORMATION....................................................... 25
Description of Shares................................................... 25
Additional Information.................................................. 26
SHAREHOLDER GUIDE......................................................... 26
How to Buy Shares of the Fund........................................... 26
Alternative Purchase Plan............................................... 27
How to Sell Your Shares................................................. 29
Conversion Feature -- Class B Shares.................................... 32
How to Exchange Your Shares............................................. 33
Shareholder Services.................................................... 34
DESCRIPTION OF SECURITY RATINGS........................................... A-1
THE PRUDENTIAL MUTUAL FUND FAMILY......................................... B-1
</TABLE>
----------------------------------------------
MF134A 44414OE
<TABLE>
<S> <C> <C>
Balanced: Class A: 74429R108
Class B: 74429R207
CUSIP Nos.: Class C: 74429R306
Strategy: Class A: 74429R405
Class B: 74429R504
Class C: 74429R603
</TABLE>
Prudential
Allocation Fund
(Balanced Portfolio)
(Strategy Portfolio)
-------------------------
[LOGO]
<PAGE>
PRUDENTIAL ALLOCATION FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED SEPTEMBER 29, 1995
Prudential Allocation Fund (the Fund), is an open-end, diversified
management investment company. The Fund is comprised of two separate
portfolios--the Balanced Portfolio (formerly called the Conservatively Managed
Portfolio) and the Strategy Portfolio. The investment objective of the Balanced
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 Balanced
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 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 Balanced 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, 1995, a copy
of which may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
---- ---------------
<S> <C> <C>
General Information............................... B-2 25
Investment Objectives and Policies................ B-2 9
Investment Restrictions........................... B-10 18
Trustees and Officers............................. B-12 19
Manager........................................... B-14 19
Distributor....................................... B-16 20
Portfolio Transactions and Brokerage.............. B-19 22
Purchase and Redemption of Fund Shares............ B-21 26
Shareholder Investment Account.................... B-24 34
Net Asset Value................................... B-27 22
Taxes............................................. B-28 23
Performance Information........................... B-30 22
Organization and Capitalization................... B-31 25
Custodian, Transfer and Dividend Disbursing Agent
and Independent Accountants...................... B-33 22
Financial Statements.............................. B-34 --
Independent Auditors' Report...................... B-57 --
Appendix I........................................ A-1 --
Appendix II....................................... A-2 --
</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. On
May 3, 1995, the Trustees approved a change in the name of the Conservatively
Managed Portfolio to the Balanced Portfolio, effective September 29, 1995.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Balanced 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 Balanced 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
Balanced 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 duration of the debt
securities held by the Balanced Portfolio will be shorter than that of the
Strategy Portfolio, and a greater proportion of the equity securities held by
the Balanced Portfolio will typically be less volatile securities of larger and
more mature companies than the equity securities held by 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
B-2
<PAGE>
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an 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.
B-3
<PAGE>
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.
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 OPTIONS ON FOREIGN CURRENCIES
Because there are two currencies involved, developments in either or both
countries can affect the values of options on foreign currencies. Risks include
those described in the Prospectus under "How the Fund Invests--Investment
Objectives and Policies," including government actions affecting currency
valuation and the movements of currencies from one country to another. The
quantities of currency underlying option contracts represent odd lots in a
market dominated by transactions between banks; this can mean extra transaction
costs upon exercise. Option markets may be closed while round-the-clock
interbank currency markets are open, and this can create price and rate
discrepancies.
RISKS RELATED TO FORWARD CURRENCY EXCHANGE CONTRACTS
A Portfolio may enter into forward foreign currency exchange contracts in
several circumstances. When the Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when the
Portfolio anticipates the receipt in a foreign currency of dividends or interest
payments on a security which it holds, the Portfolio may desire to "lock-in" the
U.S. dollar price of the security or the U.S. dollar equivalent of such dividend
or interest payment, as the case may be. By entering into a forward contract for
a fixed amount of dollars, for the purchase or sale of the amount of foreign
currency involved in the underlying transactions, the Portfolio will be able to
protect itself against a possible loss resulting from an adverse change
B-4
<PAGE>
in the relationship between the U.S. dollar and the subject foreign currency
during the period between the date on which the security is purchased or sold,
or on which the dividend or interest payment is declared, and the date on which
such payments are made or received.
Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, a Portfolio may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of the portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of those securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. A Portfolio does not intend to enter into
such forward contracts to protect the value of its portfolio securities on a
regular or continuous basis. A Portfolio will also not enter into such forward
contracts or maintain a net exposure to such contracts where the consummation of
the contracts would obligate the Portfolio to deliver an amount of foreign
currency in excess of the value of the portfolio securities or other assets
denominated in that currency. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the long-term
investment decisions made with regard to overall diversification strategies.
However, the Fund believes that it is important to have the flexibility to enter
into such forward contracts when it determines that the best interests of the
Portfolio will thereby be served. The Fund's Custodian will place cash or liquid
equity or debt securities into a segregated account of the Portfolio in an
amount equal to the value of the Portfolio's total assets committed to the
consummation of forward foreign currency exchange contracts. If the value of the
securities placed in the segregated account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will equal the amount of the Portfolio's commitments with respect to
such contracts.
A Portfolio generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Portfolio may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly, it
may be necessary for the Portfolio to purchase additional foreign currency on
the spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency that the Portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.
If the Portfolio retains the portfolio security and engages in an offsetting
transaction, the Portfolio will incur a gain or a loss to the extent that there
has been movement in forward contract prices. Should forward contract prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent that the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
contract prices increase, the Portfolio will suffer a loss to the extent that
the price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
A Portfolio's dealings in forward foreign currency exchange contracts will
be limited to the transactions described above. Of course, the Portfolio is not
required to enter into such transactions with regard to its foreign
currency-denominated securities. It also should be realized that this method of
protecting the value of the portfolio securities against a decline in the value
of a currency does not eliminate fluctuations in the underlying prices of the
securities which are unrelated to exchange rates. Additionally, although such
contracts tend to minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time they tend to limit any potential gain which
might result should the value of such currency increase.
Although each Portfolio values its assets daily in terms of U.S. dollars, it
does not intend physically to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the spread) between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate, while offering a lesser rate of exchange should
the Portfolio desire to resell that currency to the dealer.
B-5
<PAGE>
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 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.
B-6
<PAGE>
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 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.
B-7
<PAGE>
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.
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
B-8
<PAGE>
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.
ILLIQUID SECURITIES
The Fund may not invest more than 10% 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).
B-9
<PAGE>
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 Balanced Portfolio for the fiscal years ended July 31, 1994 and
1995 were 108% and %, respectively. The portfolio turnover rates for the
Strategy Portfolio for the fiscal years ended July 31, 1994 and 1995 were 96%
and %, 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
B-10
<PAGE>
thereto, the purchase and sale of options, financial futures contracts, options
on such contracts and collateral arrangements with respect thereto and with
respect to interest rate swap transactions and obligations of the Fund to
Trustees pursuant to deferred compensation arrangements are not deemed to be the
issuance of a senior security or a pledge of assets.
4. Purchase any security (other than obligations of the U.S. Government,
its agencies or instrumentalities) if as a result: (i) with respect to 75% of
the Portfolio's assets, more than 5% of the total assets of the Portfolio
(determined at the time of investment) would then be invested in securities of a
single issuer or (ii) more than 25% of the total assets of the Portfolio
(determined at the time of investment) would be invested in a single industry.
As to utility companies, gas, electric and telephone companies will be
considered as separate industries.
5. Purchase any security if as a result the Portfolio would then hold more
than 10% of the outstanding voting securities of an issuer.
6. Purchase any security if as a result the Portfolio would then have more
than 5% of its total assets (determined at the time of investment) invested in
securities of companies (including predecessors) less than three years old,
except that the Portfolio may invest in the securities of any U.S. Government
agency or instrumentality, and in any security guaranteed by such an agency or
instrumentality.
7. Buy or sell real estate or interests in real estate, except that it may
purchase and sell securities which are secured by real estate, securities of
companies which invest or deal in real estate and publicly traded securities of
real estate investment trusts.
8. Buy or sell commodities or commodity contracts, except that it may
purchase and sell futures contracts and options thereon. (For purposes of this
restriction, a forward foreign currency exchange contract is not deemed to be a
commodity or commodity contract.)
9. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws.
10. Make investments for the purpose of exercising control or management.
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
B-11
<PAGE>
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, ADDRESS AND AGE THE FUND DURING PAST 5 YEARS
- ------------------------------ ----------------------- --------------------------------------------------------------
<S> <C> <C>
Edward D. Beach (70) Trustee President and Director of BMC Fund, Inc., a closed-end
c/o Prudential Mutual Fund investment company; formerly Vice Chairman of Broyhill
Management, Inc. Furniture Industries, Inc.; Certified Public Accountant;
One Seaport Plaza Secretary and Treasurer of Broyhill Family Foundation, Inc.;
New York, NY President, Treasurer and Director of First Financial Fund,
Inc. and The High Yield Plus Fund, Inc.; President and
Director of Global Utility Fund, Inc.; Director of The Global
Government Plus Fund, Inc. and The Global Total Return Fund,
Inc.
Donald D. Lennox (76) Trustee Chairman (since February 1990) and Director (since April 1989)
c/o Prudential Mutual Fund of International Imaging Materials, Inc.; Retired Chairman,
Management, Inc. Chief Executive Officer and Director of Schlegel Corporation
One Seaport Plaza (industrial manufacturing) (March 1987-February 1989);
New York, NY Director of Gleason Corporation, Personal Sound Technologies,
Inc., The Global Government Plus Fund, Inc. and The High
Yield Income Fund, Inc.
Douglas H. McCorkindale (56) Trustee Vice Chairman, Gannett Co. Inc. (publishing and media) (since
c/o Prudential Mutual Fund March 1984); Director of Continental Airlines, Inc., Gannett
Management, Inc. Co. Inc., Frontier Corporation and The Global Government Plus
One Seaport Plaza Fund, Inc.
New York, NY
Thomas T. Mooney (53) 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,
New York, NY Inc., 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 Total Return Fund, Inc. and The
High Yield Plus Fund, Inc.
*Richard A. Redeker (51) President and Trustee President, Chief Executive Officer and Director (since October
One Seaport Plaza 1993), Prudential Mutual Fund Management, Inc. (PMF);
New York, NY Executive Vice President, Director and Member of Operating
Committee (since October 1993), Prudential Securities
Incorporated (Prudential Securities); Director (since October
1993) of Prudential Securities Group, Inc.; Executive Vice
President, The Prudential Investment Corporation (since
January 1994); Director (since January 1994), Prudential
Mutual Fund Distributors, Inc. (PMFD) and Director (since
January 1994), Prudential Mutual Fund Services, Inc. (PMFS);
formerly Senior Executive Vice President and Director of
Kemper Financial Services, Inc. (September 1978-September
</TABLE>
- ------------------------
* "Interested" Trustee, as defined in the investment Company Act, by reason of
his affiliation with Prudential Securities and PMF.
B-12
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE THE FUND DURING PAST 5 YEARS
- ------------------------------ ----------------------- --------------------------------------------------------------
1993); President and Director of The Global Government Plus
Fund, Inc., The Global Total Return Fund, Inc. and The High
Yield Income Fund, Inc.
<S> <C> <C>
Louis A. Weil, III (54) Trustee Publisher and Chief Executive Officer, Phoenix Newspapers,
c/o Prudential Mutual Fund Inc. (since August 1991); Director of Central Newspapers,
Management, Inc. Inc. (since September 1991); prior thereto, Publisher of Time
One Seaport Plaza Magazine (May 1989-March 1991); formerly President, Publisher
New York, NY and Chief Executive Officer of The Detroit News (February
1986-August 1989); formerly member of the Advisory Board,
Chase Manhattan Bank-Westchester; Director of The Global
Government Plus Fund, Inc.
Robert F. Gunia (48) Vice President Chief Administrative Officer (since July 1990), Director
One Seaport Plaza (since January 1989) and Executive Vice President, Treasurer
New York, NY and Chief Financial Officer (since June 1987) of PMF; Senior
Vice President (since March 1987) of Prudential Securities;
Executive Vice President, Treasurer, Comptroller and Director
(since March 1991) of PMFD; Director (since June 1987) of
PMFS; Vice President and Director (since May 1989) of The
Asia Pacific Fund, Inc.
Susan C. Cote (40) Treasurer and Principal Chief Operating Officer and Managing Director, Prudential
751 Broad Street Financial and Investment Advisors, and Vice President, The Prudential
Newark, NJ Accounting Officer Investment Corporation (since February 1995); Senior Vice
President (January 1989-January 1995) of PMF; Senior Vice
President (January 1992-January 1995) and Vice President
(January 1986-December 1991) of Prudential Securities.
Stephen M. Ungerman (42) Assistant Treasurer First Vice President of PMF (since February 1993); prior
One Seaport Plaza thereto, Senior Tax Manager of Price Waterhouse (1981-January
New York, NY 1993).
S. Jane Rose (49) Secretary Senior Vice President (since January 1991), Senior Counsel
One Seaport Plaza (since June 1987) and First Vice President (June
New York, NY 1987-December 1990) of 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 (39) Assistant Secretary Vice President and Associate General Counsel (since June 1991)
One Seaport Plaza of PMF; Vice President and Associate General Counsel of
New York, NY Prudential 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
B-13
<PAGE>
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.
Pursuant to the terms of the Management Agreement with the Fund, the Manager
pays all compensation of officers and employees of the Fund as well as the fees
and expenses of all Trustees of the Fund who are affiliated persons of the
Manager. The following table sets forth the aggregate compensation paid by the
Fund to the Trustees who are not affiliated with the Manager for the fiscal year
ended July 31, 1995 and the aggregate compensation paid to such Trustees for
service on the Fund's Board and the Boards of any other investment companies
managed by PMF (Fund Complex) for the calendar year ended December 31, 1994.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM FUND AND
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FUND COMPLEX
COMPENSATION AS PART OF FUND BENEFITS UPON PAID TO
NAME AND POSITION FROM FUND EXPENSES RETIREMENT 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 to which aggregate compensation
relates.
</TABLE>
As of July 14, 1995, 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 July 14, 1995, Prudential Bank &Trust Co.
C/F The IRA of Clarence A. Lukeski, P.O. Box 2, Hamlin, PA 18427-0002 and Marvel
Food Stores #3 Inc., 429 West Lockeford Street, Lodi, California 95240-2035 were
the beneficial owners of 26% and 74%, respectively, of the Class C outstanding
voting securities of the Balanced Portfolio. As of July 14, 1995, Prudential
Bank & Trust Co C/F the IRA of Henry W. Anthony, RR1 Box 92, Fryeburg, ME
04037-9709, Steven N. Hehdel, 7 Brown Terrace, Cranford, NJ 07016-1501,
Prudential Securities C/F Dennis Gushue IRA DTD 12/29/94, P.O. Box 33418, Las
Vegas, NV 89133-3418, Prudential Bank & Trust C/F The IRA of Homer R. O'Connor,
#2 Front Drive, Little Hocking, OH 45742-9710, James P. Solari Jr. & Jennifer L.
Solari Ten Com, 906 9th Street, Lake Charles, LA 70601-6223, and Robert & Sharon
Rabbiosi, Rev. Liv. TR V/A DTD 7/21/93, 811 College Dr., San Jose, CA,
95128-3204 were the beneficial owners of 13%, 9.7%, 10.7%, 7.8%, 5.9% and 5.1%
of the Class C outstanding voting securities of the Strategy Portfolio.
As of July 19, 1995, Prudential Securities was record holder for other
beneficial owners of 3,124,978 Class A shares (or 31% of the outstanding Class A
shares) of the Balanced Portfolio and 2,738,357 Class A shares (or 39% of the
outstanding Class A shares) of the Strategy Portfolio, 9,553,944 Class B shares
(or 29% of the outstanding Class B shares) of the Balanced Portfolio and
1,413,991 Class B shares (or 6.2% of the outstanding Class B shares) of the
Strategy Portfolio and 20,502 Class C shares (or 74% of the outstanding Class C
shares) of the Balanced Portfolio and 13,650 Class C shares (or 59% of the
outstanding Class C 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, 1995, PMF managed and/or administered open-end and
closed-end management investment companies with assets of approximately $
billion. According to the Investment Company Institute, as of December 31, 1994,
the Prudential Mutual Funds were the 12th largest family of mutual funds in the
United States.
B-14
<PAGE>
PMF is a subsidiary of Prudential Securities Incorporated and The Prudential
Insurance Company of America (Prudential). PMF has three wholly-owned
subsidiaries: Prudential Mutual Fund Distributors, Inc., Prudential Mutual Fund
Services, Inc. (PMFS or the Transfer Agent) and Prudential Mutual Fund
Investment Management, Inc. PMFS serves as the transfer agent for the Prudential
Mutual Funds and, in addition, provides customer service, record keeping and
management and administration services to qualified plans.
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 PMFS,
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, 1995. Currently, the Fund believes that the most restrictive expense
limitation of state securities commissions is 2 1/2% of a Portfolio'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.
B-15
<PAGE>
The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act. The Management Agreement
was last approved by the Trustees of the Fund, including a majority of the
Trustees who are not parties to the contract or interested persons of any such
party, as defined in the Investment Company Act, on May 3, 1995 and by
shareholders of each Portfolio of the Fund on February 19, 1988.
For the fiscal year ended July 31, 1995, PMF received management fees of
$ and $ on behalf of the Balanced Portfolio and Strategy Portfolio,
respectively. For the fiscal year ended July 31, 1994, PMF received management
fees of $2,743,056 and $2,555,883 on behalf of the Balanced 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 Balanced
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,
1995, 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. Prudential is one of the largest diversified
financial services institutions in the world and, based on total assets, the
largest insurance company in North America as of December 31, 1994. Its primary
business is to offer a full range of products and services in three areas:
insurance, investments and home ownership for individuals and families;
health-care management and other benefit programs for employees of companies and
members of groups; and asset management for institutional clients and their
associates. Prudential (together with its subsidiaries) employs nearly 100,000
persons worldwide, and maintains a sales force of approximately 19,000 agents,
3,400 insurance brokers and 6,000 financial advisors. It insures or provides
other financial services to more than 50 million people worldwide. Prudential is
a major issuer of annuities, including variable annuities. Prudential seeks to
develop innovative products and services to meet consumer needs in each of its
business areas. [According to , Prudential provided pension services
for one in three Fortune 500 firms as of December 31, 1994.] Prudential has been
engaged in the insurance business since 1875. In July 1994, INSTITUTIONAL
INVESTOR ranked Prudential the second largest institutional money manager of the
300 largest money management organizations in the United States as of December
31, 1993.
From time to time, portfolio managers and other investment professionals
associated with the Manager and the Subadviser are cited and/or quoted in
national and regional publications and other media. Additionally, individual
mutual fund portfolios are frequently cited in surveys conducted by national and
regional publications and media organizations such as THE WALL STREET JOURNAL,
THE NEW YORK TIMES, BARRON'S and USA TODAY.
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 or PSI), One Seaport
Plaza, New York, New York 10292, acts as the distributor of the Class B and
Class C shares of the Fund.
B-16
<PAGE>
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
(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, 1995. The Class A
Plan, as amended, was approved by Class A and Class B shareholders of each
Portfolio, and the Class B Plan, as amended, was approved by Class B
shareholders of each Portfolio 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, 1995, PMFD received
payments of $ and $ on behalf of the Balanced 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, 1995, PMFD
also received approximately $ and $ on behalf of the Balanced Portfolio
and Strategy Portfolio, respectively, in initial sales charges.
CLASS B PLAN. For the fiscal year ended July 31, 1995, Prudential Securities
received $ and $ from the Balanced 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>
Balanced Portfolio....... $ $ $ $ $ $
Strategy Portfolio.......
<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
B-17
<PAGE>
Prospectus. For the fiscal year ended July 31, 1995, Prudential Securities
received approximately $ and $ on behalf of the Balanced Portfolio and
Strategy Portfolio, respectively, in contingent deferred sales charges
attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended July 31, 1995, Prudential Securities
received $ and $ on behalf of the Balanced Portfolio and Strategy
Portfolio, respectively, under the Class C Plan and spent approximately $
and $ , respectively, in distributing Class C shares. It is estimated that
the latter amount was spent on (i) payments of commissions and account servicing
fees to financial advisers ( % or $ ) and (ii) an allocation of overhead and
other branch office distribution related expenses for payments of related
expenses ( % or $ ). Prudential Securities also 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. For the fiscal year ended July 31,
1995, Prudential Securities received approximately $ and $ on behalf of
the Balanced Portfolio and Strategy Portfolio, respectively, in contingent
deferred sales charges attributable to Class C shares.
The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Trustees, including a majority vote of the Rule 12b-1 Trustees, cast in
person at a meeting called for the purpose of voting on such continuance. The
Plans may each be terminated at any time, without penalty, by the vote of a
majority of the Rule 12b-1 Trustees or by the vote of the holders of a majority
of the outstanding shares of the applicable class on not more than 30 days'
written notice to any other party to the Plans. The Plans may not be amended to
increase materially the amounts to be spent for the services described therein
without approval by the shareholders of the applicable class (by both Class A
and Class B shareholders, voting separately, in the case of material amendments
to the Class A Plan), and all material amendments are required to be approved by
the Trustees in the manner described above. Each Plan will automatically
terminate in the event of its assignment. The Fund will not be contractually
obligated to pay expenses incurred under any Plan if it is terminated or not
continued.
Pursuant to each Plan, the Trustees will review at least quarterly a written
report of the distribution expenses incurred on behalf of each class of shares
of the Portfolios by the Distributor. The report includes an itemization of the
distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of the Rule
12b-1 Trustees shall be committed to the Rule 12b-1 Trustees.
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, 1995.
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.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the SEC
in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10 million civil
penalty; and (iii) required PSI to adopt certain remedial measures including the
establishment of a Compliance Committee of its Board of Directors. Pursuant to
the terms of the SEC settlement, PSI established a settlement fund in the amount
of $330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide
B-18
<PAGE>
additional funds, if necessary, for that purpose. PSI's settlement with the
state securities regulators included an agreement to pay a penalty of $500,000
per jurisdiction. PSI consented to a censure and to the payment of a $5,000,000
fine in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 3, 1990. Without
admitting or denying the allegations, PSI consented to a reprimand, agreed to
cease and desist from future violations, and to provide voluntary donations to
the State of Texas in the aggregate of $1,500,000. The firm agreed to suspend
the creation of new customer accounts, the general solicitation of new accounts,
and the offer for sale of securities in or from PSI's North Dallas office to new
customers during a period of twenty consecutive business days, and agreed that
its other Texas offices would be subject to the same restrictions for a period
of five consecutive business days. PSI also agreed to institute training
programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. (PSG) and PSI entered
into agreements with the United States Attorney deferring prosecution (provided
PSI complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or instances
of criminal conduct and material improprieties every three months for a
three-year period.
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
B-19
<PAGE>
selected for the execution of transactions of such other accounts, whose
aggregate assets are far larger than the Fund's, and the services furnished by
such brokers, dealers or futures commission merchants may be used by the Manager
in providing investment management for the Fund. Commission rates are
established pursuant to negotiations with the broker, dealer or futures
commission merchant based on the quality and quantity of execution services
provided by the broker, dealer or futures commission merchant in the light of
generally prevailing rates. The policy of the Manager is to pay higher
commissions to brokers, other than Prudential Securities, for particular
transactions than might be charged if a different broker had been selected, on
occasions when, in the Manager's opinion, this policy furthers the objective of
obtaining best price and execution. In addition, the Manager is authorized to
pay higher commissions on brokerage transactions for the Fund to brokers other
than Prudential Securities in order to secure research and investment services
described above, subject to review by the Fund's Trustees from time to time as
to the extent and continuation of this practice. The allocation of orders among
brokers and the commission rates paid are reviewed periodically by the Fund's
Trustees. Portfolio securities may not be purchased from any underwriting or
selling syndicate of which Prudential Securities (or any affiliate), during the
existence of the syndicate, is a principal underwriter (as defined in the
Investment Company Act), except in accordance with rules of the SEC. This
limitation, in 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, 1995:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund.................................. $ 906,929 $ 714,203
Total brokerage commissions paid to Prudential
Securities................................................................... $ 49,834 $ 38,171
Percentage of total brokerage commissions paid to Prudential
Securities................................................................... 5.5% 5.3%
</TABLE>
The Fund effected approximately % of the total dollar amount of its
transactions involving the payment of commissions to Prudential Securities
during the year ended July 31, 1995. Of the total brokerage commissions paid
during such period,
B-20
<PAGE>
$ and $ (or % and %), respectively, were paid to firms which provide
research, statistical or other services to PMF on behalf of the Balanced
Portfolio and Strategy Portfolio, respectively. PMF has not separately
identified a portion of such brokerage commissions as applicable to the
provision of such research, statistical or other services.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of each Portfolio of the Fund may be purchased at a price equal to
the next determined net asset value per share plus a sales charge which, at the
election of the investor, may be imposed either (i) at the time of purchase
(Class A shares) or (ii) on a deferred basis (Class B or Class C shares). See
"Shareholder Guide--How to Buy Shares of the Fund" in the Prospectus.
Each class of shares represents an interest in the same portfolio of
investments of each Portfolio of the Fund and has the same rights, except that
(i) each class bears the separate expenses of its Rule 12b-1 distribution and
service plan, (ii) each class has exclusive voting rights with respect to its
plan (except that the Fund has agreed with the SEC in connection with the
offering 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, 1995, the maximum offering price of
the Fund's shares is as follows:
<TABLE>
<CAPTION>
BALANCED STRATEGY
PORTFOLIO PORTFOLIO
--------- -------
<S> <C> <C>
CLASS A
Net asset value and redemption price per Class A share..... $ $
Maximum sales charge (5% of offering price)................
--------- ------
Maximum offering price to public........................... $ $
--------- ------
--------- ------
CLASS B
Net asset value, offering price and redemption price to
public per Class B share*................................ $ $
--------- ------
--------- ------
CLASS C
Net asset value, offering price and redemption price to
public per Class C share*................................ $ $
--------- ------
--------- ------
<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.
</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);
B-21
<PAGE>
(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;
(g) one or more employee benefits plans of a company controlled by an
individual; and
(h) (i) a client of a Prudential Securities financial adviser who gives such
financial adviser discretion to purchase the Prudential Mutual Funds for his or
her account only in connection with participation in a market timing program and
for which program Prudential Securities receives a separate advisory fee or (ii)
a client of an unaffiliated registered investment adviser which is a client of a
Prudential Securities financial adviser, if such unaffiliated adviser has
discretion to purchase the Prudential Mutual Funds for the accounts of his or
her customers but only if the client of such unaffiliated adviser participates
in a market timing program conducted by such unaffiliated adviser; provided such
accounts in the aggregate have assets of at least $15 million invested in the
Prudential Mutual Funds.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in any
retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
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), including retirement and group plans,
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, except in the case of retirement and group plans where the employer
or plan sponsor will be responsible for paying any applicable sales charge. 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, except in
the case of retirement and group plans.
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 (or the employer or
plan sponsor, in the case of any retirement or group plan) 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
B-22
<PAGE>
qualifies for a lower sales charge, a price adjustment is made by refunding to
the purchaser the amount of excess sales charge, if any, paid during the
thirteen-month period. Investors electing to purchase Class A shares of a
Portfolio pursuant to a Letter of Intent should carefully read such Letter of
Intent.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide--How to Sell Your Shares--Waiver of
the Contingent Deferred Sales Charges--Class B Shares" in the Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit the
supporting documentation set forth below.
<TABLE>
<S> <C>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death
certificate or, in the case of a trust,
a copy of the grantor's death
certificate, plus a copy of the trust
agreement identifying the grantor.
Disability - An individual 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 purchased 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.
B-23
<PAGE>
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of any Portfolio, a Shareholder
Investment Account is established for each investor under which the shares are
held for the investor by the Transfer Agent. If a share certificate is desired,
it must be requested in writing for each transaction. Certificates are issued
only for full shares and may be redeposited in the Account at any time. There is
no charge to the investor for issuance of a certificate. The Fund makes
available to its shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of a Portfolio. An
investor may direct the Transfer Agent in writing not less than five full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payment will be made directly to the dealer. Any
shareholder who receives a cash payment representing a dividend or distribution
may reinvest such dividend or distribution at net asset value by returning the
check or the proceeds to the Transfer Agent within 30 days after the payment
date. The investment will be made at the net asset value per share next
determined after receipt of the check or proceeds by the Transfer Agent. Such
shareholders will receive credit for any contingent deferred sales charge paid
in connection with the amount of proceeds being reinvested.
EXCHANGE PRIVILEGE
Each Portfolio of the Fund makes available to its shareholders the privilege
of exchanging their shares for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
Mutual Funds may also be exchanged for shares of a Portfolio. All exchanges are
made on the basis of relative net asset value next determined after receipt of
an order in proper form. 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
B-24
<PAGE>
upon the redemption of the Class B and Class C shares acquired as a result of an
exchange. The applicable sales charge will be that imposed by the fund in which
shares were initially purchased and the purchase date will be deemed to be the
first day of the month after the initial purchase, rather than the date of the
exchange.
Class B and Class C shares of each Portfolio may also be exchanged for
shares of an eligible money market fund without imposition of any CDSC at the
time of exchange. Upon subsequent redemption from such money market fund or
after re-exchange into the Fund, such shares will be subject to the CDSC
calculated without regard to the time such shares were held in the money market
fund. In order to minimize the period of time in which shares are subject to a
CDSC, shares exchanged out of the money market fund will be exchanged on the
basis of their remaining holding periods, with the longest remaining holding
periods being transferred first. In measuring the time period shares are held in
a money market fund and "tolled" for purposes of calculating the CDSC holding
period, exchanges are deemed to have been made on the last day of the month.
Thus, if shares are exchanged into the Fund from a money market fund during the
month (and are held in the Fund at the end of month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C Exchange Privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of each Portfolio, respectively, without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C Exchange Privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.
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 $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class beginning in 2011, the cost of four years at a
private college could reach $210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- -------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
25 Years.................. $ 110 $ 165 $ 220 $ 275
20 Years.................. 176 264 352 440
15 Years.................. 296 444 592 740
10 Years.................. 555 833 1,110 1,388
5 Years................... 1,371 2,057 2,742 3,428
See "Automatic Savings Accumulation Plan."
<FN>
- ------------------------
(1) Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room and
board for the 1993-1994 academic year.
(2) The chart assumes an effective rate of return of 8% (assuming 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>
B-25
<PAGE>
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of a Portfolio monthly by authorizing his or her bank account
or Prudential Securities account (including a Command Account) to be debited to
invest specified dollar amounts in shares of the Portfolio. The investor's bank
must be a member of the Automatic Clearing House System. Share certificates are
not issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through Prudential
Securities or the Transfer Agent. Such withdrawal plan provides for monthly or
quarterly checks in any amount, except as provided below, up to the value of the
shares in the shareholder's account. Withdrawals of Class B or Class C shares
may be subject to a CDSC. See "Shareholder Guide-- How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment Account--
Automatic Reinvestment of Dividends and/or Distributions."
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
B-26
<PAGE>
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>
INVESTMENT PROGRAMS
From time to time, the Fund (or a portfolio of the Fund) may be included in
an investment program with other Prudential Mutual Funds. Under an investment
program, a group of portfolios will be selected and thereafter promoted
collectively. Typically, these programs are created with an investment theme,
E.G., to seek greater diversification, protection from interest rate movements
or access to different management styles. In the event such a program is
instituted, there may be a minimum investment requirement for the program as a
whole. Investors would be able to invest, however, in equal increments (or any
other ratio) among the individual mutual funds selected for the investment
program. The Fund may waive or reduce the minimum initial investment
requirements in connection with such a program.
The investment ratios selected for the program may not be appropriate for
all investors, so individuals should consult their Prudential Securities
Financial Advisor or Prudential/Pruco Securities Representative to determine the
appropriate blend for them. However, if investors elect to purchase the
individual mutual funds that constitute the investment program in an investment
ratio different from that of the program, the standard minimum investment
requirements for the individual mutual funds will apply.
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 or principal market maker. 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
maker. 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.
Quotations of foreign securities in a foreign currency are converted to U.S.
dollar equivalents at the current rate obtained from a recognized bank or dealer
and forward currency exchange contracts are valued at the current cost of
covering or offsetting such contracts. 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
B-27
<PAGE>
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 more than 60 days, for which market quotations are
readily available, are valued at their current market quotations as supplied by
an independent pricing agent or principal market maker. 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. In the event
the New York Stock Exchange closes early on any business day, the net asset
value of the Portfolio's shares shall be determined at a time between such
closing and 4:15 P.M., New York time.
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 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
B-28
<PAGE>
will generally constitute "Section 1256 contracts" and will be required to be
"marked to market" for federal income tax purposes at the end of each
Portfolio's taxable year; that is, treated as having been sold at market value.
Except with respect to forward foreign currency exchange contracts, 60 percent
of any gain or loss recognized on such "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. The Portfolios' ability to invest in
forward foreign currency exchange contracts, options on equity securities and on
stock indices, futures contracts and options thereon may be affected by the 30%
limitation on gains derived from securities held less than three months,
discussed above.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time a Portfolio accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Portfolio actually collects such receivables or pays such liabilities are
treated as ordinary income or ordinary loss. Similarly, gains or losses on
forward foreign currency exchange contracts or dispositions of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security and the
date of disposition also are treated as ordinary gain or loss. These gains,
referred to under the Internal Revenue Code as "Section 988" gains or losses,
increase or decrease the amount of the Portfolio's investment company taxable
income available to be distributed to its shareholders as ordinary income,
rather than increasing or decreasing the amount of the Portfolio's net capital
gain. If Section 988 losses exceed other investment company taxable income
during a taxable year, the Portfolio would not be able to make any ordinary
dividend distributions, or distributions made before the losses were realized
would be recharacterized as a return of capital to shareholders, rather than as
an ordinary dividend, reducing each shareholder's basis in his or her Portfolio
shares.
Shareholders electing to receive dividends and distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share of the applicable
Portfolio of the Fund on the reinvestment date.
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or distributions, although in effect a return of capital, are
subject to federal income taxes. Therefore, prior to purchasing shares of any
Portfolio of the Fund, the investor should carefully consider the impact of
dividends or capital gains distributions which are expected to be or have been
announced.
Each Portfolio of the Fund is required under the Internal Revenue Code to
distribute 98% of its ordinary income in the same calendar year in which it is
earned. Each Portfolio is also required to distribute during the calendar year
98% of the capital gain net income it earned during the twelve months ending on
October 31 of such calendar year. In addition, each Portfolio must distribute
during the calendar year any undistributed ordinary income and undistributed
capital gain net income from the prior year or the twelve month period ending on
October 31 of such prior year, respectively. To the extent it does not meet
these distribution requirements, a Portfolio will be subject to a nondeductible
4% excise tax on the undistributed amount. For purposes of this excise tax,
income on which a Portfolio pays income tax is treated as distributed.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares and sells or otherwise disposes of such
shares within 90 days of acquisition may not be allowed to include certain sales
charges incurred in acquiring such shares for purposes of calculating gain or
loss realized upon a sale or exchange of shares of the Fund.
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.
B-29
<PAGE>
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,
five year and since inception (January 22, 1990) periods ended July 31, 1995 was
%, % and % for the Balanced Portfolio and %, % and % 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, 1995 was %, % and % for the Balanced Portfolio and
%, % and % for the Strategy Portfolio, respectively. The average annual
total return for the Class C shares for the one year period ended July 31, 1995
was % and % for the Balanced Portfolio and the Strategy Portfolio,
respectively.
AGGREGATE TOTAL RETURN. Each Portfolio may also advertise its aggregate
total return. Aggregate total return is determined separately for Class A, Class
B and Class C shares. See "How the Fund Calculates Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in a Portfolio of the Fund and is computed according to the following
formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1000.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical $1000
payment made at the beginning of the 1, 5 or 10 year periods.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The aggregate total return for Class A shares for the one year, five year
and since inception (January 22, 1990) periods ended July 31, 1995 was %, %
and % for the Balanced Portfolio and %, % and % 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 July
31, 1995 was %, % and % for the Balanced Portfolio and %, % and %
for the Strategy Portfolio, respectively. The aggregate total return for Class C
shares for the one year period ended July 31, 1995 was % and % for the
Balanced Portfolio and the Strategy Portfolio, respectively.
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
<TABLE>
<S> <C> <C>
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.
</TABLE>
B-30
<PAGE>
<TABLE>
<S> <C> <C>
d = the maximum offering price per share on the last day of the
period.
</TABLE>
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, 1995 were % and % for
the Class A shares of the Balanced Portfolio and the Strategy Portfolio,
respectively; and % and % for the Class B shares of the Balanced Portfolio
and the Strategy Portfolio, respectively; and % and % for the Class C shares
of the Balanced Portfolio and the Strategy Portfolio, respectively.
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)
[GRAPH]
(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
B-31
<PAGE>
such liability, the shareholder will be entitled to reimbursement from the
general assets of the appropriate Portfolio of the Fund. The Trustees intend to
conduct the operations of the Fund in such a way as to avoid, to the extent
possible, ultimate liability of the shareholders for liabilities of the Fund.
The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his or her
own bad faith, willful misfeasance, gross negligence, or reckless disregard of
his or her duties. It also provides that all third parties shall look solely to
the Fund property or the property of the appropriate Portfolio for satisfaction
of claims arising in connection with the affairs of the Fund or of the
particular Portfolio of the Fund, respectively. With the exceptions stated, the
Declaration of Trust permits the Trustees to provide for the indemnification of
Trustees, officers, employees or agents of the Fund against all liability in
connection with the affairs of the Fund.
The Fund does not intend to hold annual meetings of shareholders.
The Fund and each Portfolio thereof shall continue without limitation of
time subject to the provisions in the Declaration of Trust concerning
termination by action of the shareholders or by the Trustees by written notice
to the shareholders.
The authorized capital of the Fund consists of an unlimited number of shares
of beneficial interest, $.01 par value, issued in separate Portfolios and
divided into separate classes. Each Portfolio of the Fund, for federal income
tax and Massachusetts state law purposes, will constitute a separate trust which
will be governed by the provisions of the Declaration of Trust. All shares of
any Portfolio issued and outstanding are fully paid and nonassessable by the
Fund. Each share of each Portfolio represents an equal proportionate interest in
that Portfolio with each other share of that Portfolio. The assets of the Fund
received for the issue or sale of the shares of each Portfolio and all income,
earnings, profits and proceeds thereof, subject only to the rights of creditors
of that Portfolio, are specially allocated to the Portfolio and constitute the
underlying assets of the Portfolio. The underlying assets of each Portfolio are
segregated on the books of account and are to be charged with the liabilities in
respect to the Portfolio and with a share of the general liabilities of the
Fund. Under no circumstances would the assets of a Portfolio be used to meet
liabilities that are not otherwise properly chargeable to it. Expenses with
respect to any two or more Portfolios are to be allocated in proportion to the
asset value of the respective Portfolio except where allocations of direct
expenses can otherwise be fairly made. The officers of the Fund, subject to the
general supervision of the Trustees, have the power to determine which
liabilities are allocable to a given Portfolio or which are general. Upon
redemption of shares of a Portfolio of the Fund, the shareholder will receive
proceeds solely of the assets of such Portfolio. In the event of the dissolution
or liquidation of the Fund, the holders of the shares of any Portfolio are
entitled to receive as a class the underlying assets of that Portfolio available
for distribution to shareholders.
Shares of the Fund entitle their holders to one vote per share. Matters will
be acted upon by the vote of the shareholders of each Portfolio separately,
except to the extent otherwise provided in the Investment Company Act. A change
in the investment objective or investment restrictions for a Portfolio would be
voted upon only by shareholders of the Portfolio involved. In addition, approval
of the investment advisory agreement is a matter to be determined separately by
each Portfolio. Approval by the shareholders of a Portfolio is effective as to
that Portfolio whether or not enough votes are received from the shareholders of
the other Portfolio to approve the proposal as to that Portfolio.
Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset value
procedures) with such preferences, privileges, limitations and voting and
dividend rights as the Trustees may determine. All consideration received by the
Fund for shares of any additional series, and all assets in which such
consideration is invested would belong to that series (subject only to the
rights of creditors of that series) 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.
B-32
<PAGE>
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash, and in that capacity maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Subcustodians provide custodial
services for the Fund's foreign assets held outside the United States. See "How
the Fund is Managed--Custodian and Transfer and Dividend Disbursing Agent" in
the Prospectus.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer and Dividend Disbursing Agent of the Fund. It
is a wholly-owned subsidiary of PMF. PMFS provides customary transfer agency
services to the Fund, including the handling of shareholder communications, the
processing of shareholder transactions, the maintenance of shareholder account
records, the payment of dividends and distributions and related functions. For
these services, PMFS receives an annual fee per shareholder account, a new
account set-up fee for each manually established account and a monthly inactive
zero balance account fee per shareholder account. PMFS is also reimbursed for
its out-of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communications expenses and other costs. For the fiscal year
ended July 31, 1995, the Fund incurred fees of approximately $
($ --Balanced Portfolio and $ --Strategy Portfolio) for the services
of PMFS.
Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281,
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.
B-33
<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-34 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-35 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-36 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-37 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-38 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-39 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-40
<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-41
<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-42
<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-43 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-44 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-45 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-46 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-47 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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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>
B-60 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>
B-61 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>
B-62 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>
B-63 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>
B-64 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.
B-65
<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.
B-66
<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.
B-67
<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>
B-68 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>
B-69 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>
B-70 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>
B-71 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>
B-72 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.
B-73
<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.
B-74
<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.
B-75
<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
B-76
<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
B-77
<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.
B-78
<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>
B-79
<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.
B-80
<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.
B-81
<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.
B-82
<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.
B-83
<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.
B-84
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
MARKET TIMING
Market Timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
ASSET ALLOCATION
Asset allocation, like diversification, is a technique for reducing risk,
providing balance. Asset allocation among different types of securities within
an overall investment portfolio helps to reduce risk and to potentially provide
stable returns, while enabling investors to work toward their financial goal(s).
Asset allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
PROFESSIONAL MANAGEMENT
Mutual funds provide investors with professional investment management. As
financial markets become more complex, professional investment management is a
service that many investors may find valuable. Portfolio managers generally
analyze the investment markets and individual securities in a way that few
individuals can. They have access to detailed research, can monitor changing
market conditions and can react quickly to those changing market conditions.
Additionally, mutual funds as institutional investors can often purchase and
sell securities at large volume discounts.
PROFESSIONAL ADVICE
Professional investment counselors, such as financial advisors and
registered representatives, are often valuable to individual investors who need
assistance in evaluating their individual needs and finding appropriate
investment alternatives.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
CHART 1
The following chart shows the long term performance of various asset classes
and the rate of inflation.
GRAPH HERE
Source: "Stocks, Bonds, Bills, and Inflation 1994 yearbook,-TM-" Ibbotson
Associates annually updates work by Roger Ibbotson and Rex Sinquefeld. Used with
permission. This chart is for illustrative purposes only and is not indicative
of the past, present, or future performance of any asset class or any Prudential
Mutual Fund.
Generally, stock returns are attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile than
bond prices over the long-term.
Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.
Long-term government bond returns are represented by a portfolio that
contains only one bond with a maturity of roughly 20 years. At the beginning of
each year a new bond with a then-current coupon replaces the old bond. Treasury
bill returns are for a one-month bill. Treasuries are guaranteed by the
government as to the timely payment of principal and interest; equities are not.
Inflation is measured by the consumer price index (CPI).
IMPACT OF INFLATION. The "real" rate of investment return is that which
exceeds the rate of inflation, the percentage change in the value of consumer
goods and the general cost of living. A common goal of long-term investors is to
outpace the erosive impact of inflation on investment returns.
II-1
<PAGE>
CHART 2
The chart below shows the historical total returns of U.S. Treasury bonds,
U.S. mortgage securities, U.S. corporate bonds, U.S. high yield bonds and world
government bonds on an annual basis from 1987 to May 1995. The total returns of
the indices include accrued interest, plus the price changes (gains or losses)
of the underlying securities during the period mentioned. The data is provided
to illustrate the varying historical total returns of different bond market
sectors and investors should not consider this performance data as an indication
of the future performance of any fund or of any sector in which any fund
invests.
The figures do not reflect the operating expenses and fees of a mutual fund.
See "Fund Expenses" in the Prospectus. The net effect of the deduction of the
operating expenses of a mutual fund on these historical total returns, including
the compounded effect over time, could be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
YTD
YEAR 87 88 89 90 91 92 93 94 5/95
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Bonds 1 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% -3.4% 10.3%
U.S. Government Mortgage Securities 2 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% -1.6% 10.1%
U.S. Investment Grade Corporate Bonds 3 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% -3.9% 12.8%
U.S. High Yield Corporate Bonds 4 5.0% 12.5% 0.8% -9.6% 46.2% 15.8% 17.1% -1.0% 11.7%
World Government Bonds 5 35.2% 2.3% -3.4% 15.3% 16.2% 4.8% 15.1% 6.0% 19.4%
Difference between highest and lowest return
in percent 33.2% 10.2% 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 9.3%
</TABLE>
(1) LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
(2) LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15-and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3) LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
(4) LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by S&P or Fitch Investors
Service). All bonds in this index have maturities of at least one year.
(5) SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON-U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the U.S.,
but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
II-2
<PAGE>
CHART 3
The following chart shows the growth of a hypothetical $10,000 investment
made in the S&P 500 Stock Index with and without reinvested dividends.
GRAPH HERE
Source: Ibbotson & Associates, Chicago. "Stocks, Bonds, Bills & Inflation--1995
Yearbook." Used with permission. All rights reserved. This chart is used for
illustrative purposes only and is not intended to represent the past, present or
future performance of any Prudential Mutual Fund. Common stock total return is
based on the Standard & Poor's 500 Stock Index, a market-value-weighted index
made up of 500 of the largest stocks in the U.S. based upon their stock market
value. Investors cannot invest directly in indices.
II-3
<PAGE>
CHART 4
This chart illustrates the performance of major world stock markets for the
period from 1985 through 1994. It does not represent the performance of any
Prudential Mutual Fund.
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS
(1985-1994) (IN U.S. DOLLARS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
HONG KONG 26.5%
<S> <C>
Belgium 24.9%
Austria 23.3%
Netherlands 22.1%
Sweden 21.4%
Switzerland 21.3%
France 20.8%
Spain 20.1%
Germany 18.7%
United Kingdom 17.7%
Japan 16.8%
United States 14.4%
</TABLE>
Source: Morgan Stanley Capital International. Morgan Stanley Country indices are
unmanaged indices which include those stocks making up the largest two-thirds of
each country's total stock market capitalization. Returns reflect the
reinvestment of all distributions. This chart is for illustrative purposes only
and is not indicative of the past, present or future performance of any specific
investment. Investors cannot invest directly in stock indices.
II-4
<PAGE>
CHART 5
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
WORLD STOCK MARKET CAPITALIZATION BY
REGION
<S> <C>
World Total: $12.4 Trillion
U.S. 35%
Europe 28%
Pacific Basin 35%
Canada 2%
</TABLE>
Source: Morgan Stanley Capital International, December 1994
II-5
<PAGE>
CHART 6
This table shows the total return of the S&P 500 Stock Index and various
stock sectors that are represented in the S&P 500 Stock Index.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
1991 1992 1993 1994
<S> <C> <C> <C> <C>
Consumer
Cyclical 52.4% 20.8% 9.5% -12.2%
Consumer Growth 42.3% 0.0% 0.7% 7.5%
Technology 11.9% 3.9% 23.1% 20.4%
Industrial 28.1% 9.6% 15.6% -0.7%
Energy 7.2% 2.9% 15.8% 3.9%
Finance 48.4% 23.4% 11.2% -3.2%
Utility 19.0% 12.2% 14.4% -7.6%
S&P 500 30.6% 7.6% 10.1% 1.3%
</TABLE>
Source: Prudential Mutual Fund Investment Management. This table is for
illustrative purposes only and is not indicative of the past, present or future
performance of any sector of the market or any Prudential Mutual Fund. The S&P
500 is an unmanaged index made up of 500 of the largest U.S. stocks based on
their market value. Investors cannot invest directly in stock indices.
II-6
<PAGE>
CHART 7
The chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
GRAPH HERE
Source: Ibbotson Associates, "Stocks, Bonds, Bills & Inflation -- 1995
Yearbook." The chart illustrates the historical yields of the long U.S. Treasury
Bond from 1926-1994. This chart is for illustrative purposes and should not be
construed to represent the yields of any Prudential Mutual Fund.
II-7
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
(1) The following financial statements are included in the Prospectus
constituting Part A of this Registration Statement:
Financial Highlights.
(2) The following financial statements are included in the Statement of
Additional Information constituting Part B of this Registration Statement:
Independent Auditors' Report.
Portfolio of Investments at July 31, 1994 and January 31, 1995
(unaudited).
Statement of Assets and Liabilities at July 31, 1994 and January 31,
1995 (unaudited).
Statement of Operations for the year ended July 31, 1994 and for the
six months ended January 31, 1995 (unaudited).
Statement of Changes in Net Assets for the years ended July 31, 1994
and 1993 and for the six months ended January 31, 1995 (unaudited).
Notes to Financial Statements.
Financial Highlights.
(B) EXHIBITS:
1. (a) Amended and Restated Declaration of Trust. Incorporated by
reference to Exhibit No. 1(a) to Post-Effective Amendment No. 13 to
the Registration Statement on Form N-1A filed via EDGAR on September
29, 1994 (File No. 33-12531).
(b) Amended and Restated Certificate of Designation.*
2. By-Laws of the Registrant. Incorporated by reference to Exhibit No.
2 to Post-Effective Amendment No. 13 to the Registration Statement
on Form N-1A filed via EDGAR on September 29, 1994 (File No.
33-12531).
4. (a) Specimen receipt for shares of beneficial interest issued by the
Registrant. Incorporated by reference to Exhibit No. 4 to
Post-Effective Amendment No. 2 to the Registration Statement on Form
N-1A filed on March 1, 1988 (File No. 33-12531).
(b) Specimen receipt for Class A shares of beneficial interest of
the Conservatively Managed Portfolio of the Registrant. Incorporated
by reference to Exhibit No. 4(b) to Post-Effective Amendment No. 7
to the Registration Statement on Form N-1A filed on November 30,
1990 (File No. 33-12531).
C-1
<PAGE>
(c) Specimen receipt for Class A and Class B shares of beneficial
interest of the Strategy Portfolio. Incorporated by reference to
Exhibit No. 4(c) to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed on November 30, 1990 (File
No. 33-12531).
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc. Incorporated by reference to Exhibit
No. 5(a) to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A filed on October 31, 1989 (File No.
33-12531).
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. Incorporated by
reference to Exhibit No. 5(b) to Post-Effective Amendment No.4 to
the Registration Statement on Form N-1A filed on October 31, 1989
(File No. 33-12531).
6. (a) Distribution Agreement for Class A shares. Incorporated by
reference to Exhibit No. 6(a) to Post-Effective Amendment No. 13 to
the Registration Statement on Form N-1A filed via EDGAR on September
29, 1994 (File No. 33-12531).
(b) Distribution Agreement for Class B shares. Incorporated by
reference to Exhibit No. 6(b) to Post-Effective Amendment No. 13 to
the Registration Statement on Form N-1A filed via EDGAR on September
29, 1994 (File No. 33-12531).
(c) Distribution Agreement for Class C shares. Incorporated by
reference to Exhibit No. 6(c) to Post-Effective Amendment No. 13 to
the Registration Statement on Form N-1A filed via EDGAR on September
29, 1994 (File No. 33-12531).
8. (a) Custodian Contract betwen the Registrant and State Street Bank
and Trust Company. Incorporated by reference to Exhibit No. 8 to
Post-Effective Amendment No. 4 to the Registration Statement on Form
N-1A filed on October 31, 1989 (File No. 33-12531).
(b) Amendment to Custodian Contract. Incorporated by reference to
Exhibit No. 8(b) to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed on November 30, 1990 (File
No. 33-12531).
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorporated by reference to
Exhibit No. 9 to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A filed on October 31, 1989 (File No.
33-12531).
10. Opinion of Counsel. Incorporated by reference to Exhibit No. 10 to
Pre-Effective Amendment No. 2 to the Registration Statement on Form
N-1A filed on August 31, 1987 (File No. 33-12531).
11. Consent of Independent Auditors.*
13. Purchase Agreement. Incorporated by reference to Exhibit No. 13 to
Pre-Effective Amendment No. 2 to the Registration Statement on Form
N-1A filed on August 31, 1987 (File No. 33-12531).
15. (a) Distribution and Service Plan for Class A shares. Incorporated
by reference to Exhibit No. 15(a) to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A filed via EDGAR on
September 29, 1994 (File No. 33-12531).
(b) Distribution and Service Plan for Class B shares. Incorporated
by reference to Exhibit No. 15(b) to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A filed via EDGAR on
September 29, 1994 (File No. 33-12531).
C-2
<PAGE>
(c) Distribution and Service Plan for Class C shares. Incorporated
by reference to Exhibit No. 15(c) to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A filed via EDGAR on
September 29, 1994 (File No. 33-12531).
16. (a) Schedule of Computation of Performance Quotations. Incorporated
by reference to Exhibit No. 16 to Post-Effective Amendment No. 4 to
the Registration Statement on Form N-1A filed on October 31, 1989
(File No. 33-12531).
(b) Schedule of Computation of Performance Quotations for Class A
shares. Incorporated by reference to Exhibit No. 16(b) to
Post-Effective Amendment No. 7 to the Registration Statement on Form
N-1A filed on November 30, 1990 (File No. 33-12531).
27. Financial Data Schedules.*
Other Exhibits
Powers of Attorney for: Edward D. Beach, Donald D. Lennox, Douglas H.
McCorkindale, Thomas T. Mooney and Louis A. Weil, III. Executed copies
incorporated by reference to Other Exhibits to Post-Effective Amendment No.
4 to the Registration Statement on Form N-1A filed on October 31, 1989 (File
No. 33-12531).
------------------
* Filed herewith
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
No person is controlled by or under common control with the Registrant.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of July 14, 1995, there were 18,616 Class A shareholders of the
Conservatively Managed Portfolio and 17,883 Class A shareholders of the Strategy
Portfolio; 47,463 Class B shareholders of the Conservatively Managed Portfolio
and 39,522 Class B shareholders of the Strategy Portfolio; and 217 Class C
shareholders of the Conservatively Managed Portfolio and 54 Class C shareholders
of the Strategy Portfolio.
ITEM 27. INDEMNIFICATION.
As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940
(the "1940 Act") and pursuant to Article VI of the Fund's By-Laws (Exhibit 2 to
the Registration Statement), officers, Trustees, employees and agents of the
Registrant will not be liable to the Registrant, any shareholder, officer,
trustee, employee, agent or other person for any action or failure to act,
except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
As permitted by Section 17(i) of the 1940 Act, pursuant to Section 10 of the
Distribution Agreements (Exhibit 6 to the Registration Statement), each
Distributor of the Registrant may be indemnified against liabilities which it
may incur, except liabilities arising from bad faith, gross negligence, willful
misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 ("Securities Act") may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1940 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a trustee, officer, or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless
C-3
<PAGE>
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1940 Act
and will be governed by the final adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
trustees against liabilities, and certain costs of defending claims against such
officers and trustees, to the extent such officers and trustees are not found to
have committed conduct constituting willful misfeasance, bad faith, gross
negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and trustees under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Mutual Fund
Management, Inc. ("PMF") and The Prudential Investment Corporation ("PIC"),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective obligations and duties
under the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretations of Sections 17 (h) and 17 (i) of such Act
remain in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Prudential Mutual Fund Management, Inc.
See "How the Fund is Managed -- Manager" in the Prospectus constituting Part
A of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the executive officers of PMF are
listed in Schedules A and D of Form ADV of PMF as currently on file with the
Securities and Exchange Commission, the text of which is hereby incorporated by
reference (File No. 801-3110, filed on March 30, 1995).
C-4
<PAGE>
The business and other connections of PMF's directors and principal
executive officers are set forth below. The address of each person is One
Seaport Plaza, New York, NY 10292.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- ------------------------------ ------------------------------ --------------------------------------------------
<S> <C> <C>
Brendan D. Boyle Executive Vice President, Executive Vice President, Director of Marketing
Director of Marketing and and Director, PMF; Senior Vice President,
Director Prudential Securities Incorporated (Prudential
Securities); Chairman and Director, Prudential
Mutual Fund Distributors, Inc. (PMFD)
Stephen P . Fisher Senior Vice President Senior Vice President, PMF; Senior Vice President,
Prudential Securities; Vice President, PMFD
Frank W. Giordano Executive Vice President, Executive Vice President, General Counsel,
General Counsel, Secretary and Secretary and Director, PMF; Senior Vice
Director President, Prudential Securities; Director,
PMFD; Director, Prudential Mutual Fund Services,
Inc. (PMFS)
Robert F. Gunia Executive Vice President, Executive Vice President, Chief Financial and
Chief Financial and Administrative Officer, Treasurer and Director,
Administrative Officer, PMF; Senior Vice President, Prudential
Treasurer and Director Securities; Executive Vice President, Treasurer,
Comptroller and Director, PMFD; Director, PMFS
Timothy J. O'Brien Director President, Chief Executive Officer, Chief
Operating Officer and Director, PMFD; Chief
Executive Officer and Director, PMFS; Director,
PMF
Richard A. Redeker President, Chief Executive President, Chief Executive Officer and Director,
Officer and Director PMF; Executive Vice President, Director and
Member of Operating Committee, Prudential
Securities; Director, Prudential Securities
Group, Inc. (PSG); Executive Vice President,
PIC; Director, PMFD; Director, PMFS
S. Jane Rose Senior Vice President, Senior Senior Vice President, Senior Counsel and
Counsel and Assistant Assistant Secretary, PMF; Senior Vice President
Secretary and Senior Counsel, Prudential Securities
</TABLE>
(b) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed -- Manager" in the Prospectus constituting Part
A of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
C-5
<PAGE>
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ------------------------------ ------------------------------ --------------------------------------------------
<S> <C> <C>
William M. Bethke Senior Vice President Senior Vice President, The Prudential Insurance
Two Gateway Center Company of America (Prudential); Senior Vice
Newark, NJ 07102 President, PIC
John D. Brookmeyer, Jr. Senior Vice President Senior Vice President, Prudential; Senior Vice
51 JFK Parkway President, PIC
Short Hills, NJ 07078
Theresa A. Hamacher Vice President Vice President, Prudential; Vice President, PIC
Harry E. Knapp, Jr. President, Chief Executive President, Chief Executive Officer and Director,
Four Gateway Center Officer and Director PIC; Vice President, Prudential
Newark, NJ 07102
William P . Link Senior Vice President Executive Vice President, Prudential; Senior Vice
Four Gateway Center President, PIC
Newark, NJ 07102
Richard A. Redeker Executive Vice President President, Chief Executive Officer and Director,
One Seaport Plaza PMF; Executive Vice President, Director and
New York, NY 10292 Member of Operating Committee, Prudential
Securities; Director, PSG; Executive Vice
President, PIC; Director, PMFD; Director, PMFS
Arthur F. Ryan Director Chairman of the Board, President and Chief
Executive Officer, Prudential; Director, PIC;
Chairman of the Board and Director, PSG
Eric A. Simonson Vice President and Director President and Chief Executive Officer, Prudential
Asset Management Group; Vice President and
Director, PIC; Executive Vice President,
Prudential
Claude J. Zinngrabe, Jr. Executive Vice Vice President, Prudential; Executive Vice
President President, PIC
</TABLE>
C-6
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a)(i) Prudential Securities Incorporated
Prudential Securities is distributor for Prudential Government Securities
Trust (Intermediate Term Series), The Target Portfolio Trust, for Class B shares
of Prudential Adjustable Rate Securities Fund, Inc. and for Class B and Class C
shares of The BlackRock Government Income Trust, Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund),
Prudential Allocation Fund, Prudential California Municipal Fund (California
Series and California Income Series), Prudential Diversified Bond Fund, Inc.,
Prudential Equity Fund, Inc., Prudential Equity Income Fund, Prudential Europe
Growth Fund, Inc., Prudential Global Fund, Inc., Prudential Global Genesis Fund,
Inc., Prudential Global Natural Resources Fund, Inc., Prudential GNMA Fund,
Inc., Prudential Government Income Fund, Inc., Prudential Growth Opportunity
Fund, Inc., Prudential High Yield Fund, Inc., Prudential
IncomeVertible-Registered Trademark- Fund, Inc., Prudential Intermediate Global
Income Fund, Inc., Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond
Fund, Prudential Municipal Series Fund (except Connecticut Money Market Series,
Massachusetts Money Market Series, New York Money Market Series and New Jersey
Money Market Series), Prudential National Municipals Fund, Inc., Prudential
Pacific Growth Fund, Inc., Prudential Short-Term Global Income Fund, Inc.,
Prudential Structured Maturity Fund, Inc., Prudential U.S. Government Fund and
Prudential Utility Fund, Inc. Prudential Securities is also a depositor for the
following unit investment trusts:
The Corporate Income Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(ii) Prudential Mutual Fund Distributors, Inc.
Prudential Mutual Fund Distributors, Inc. is distributor for Command
Government Fund, Command Money Fund, Command Tax-Free Fund, Prudential
California Municipal Fund (California Money Market Series), Prudential
Government Securities Trust (Money Market Series and U.S. Treasury Money Market
Series), Prudential Institutional Liquidity Portfolio, Inc., Prudential-Bache
MoneyMart Assets Inc. (d/b/a Prudential MoneyMart Assets), Prudential Municipal
Series Fund (Connecticut Money Market Series, Massachusetts Money Market Series,
New York Money Market Series and New Jersey Money Market Series), Prudential-
Bache Special Money Market Fund, Inc. (d/b/a Prudential Special Money Market
Fund), Prudential-Bache Tax-Free Money Fund, Inc. (d/b/a Prudential Tax-Free
Money Fund), and for Class A shares of The BlackRock Government Income Trust,
Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate
Growth Equity Fund), Prudential Adjustable Rate Securities Fund, Inc.,
Prudential Allocation Fund, Prudential California Municipal Fund (California
Income Series and California Series), Prudential Equity Fund, Inc., Prudential
Equity Income Fund, Prudential Europe Growth Fund, Inc., Prudential Global Fund,
Inc., Prudential Global Genesis Fund, Inc., Prudential Global Natural Resources
Fund, Inc., Prudential GNMA Fund, Inc., Prudential Government Income Fund, Inc.,
Prudential Growth Opportunity Fund, Inc., Prudential High Yield Fund, Inc.,
Prudential IncomeVertible-Registered Trademark- Fund, Inc., Prudential
Intermediate Global Income Fund, Inc., Prudential Multi-Sector Fund, Inc.,
Prudential Municipal Bond Fund, Prudential Municipal Series Fund (except
Connecticut Money Market Series, Massachusetts Money Market Series, New York
Money Market Series and New Jersey Money Market Series), Prudential National
Municipals Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential
Short-Term Global Income Fund, Inc., Prudential Structured Maturity Fund, Inc.,
Prudential U.S. Government Fund and Prudential Utility Fund, Inc.
C-7
<PAGE>
(b)(i) Information concerning the officers and directors of Prudential
Securities Incorporated is set forth below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ----------------------------------- --------------------------------------------- --------------
<S> <C> <C>
Robert Golden...................... Executive Vice President and Director None
Alan D. Hogan...................... Executive Vice President, Chief None
Administrative Officer and Director
George A. Murray................... Executive Vice President and Director None
Leland B. Paton.................... Executive Vice President and Director None
Vincent T. Pica II................. Executive Vice President and Director None
Richard A. Redeker................. Director President and
Trustee
Gregory W. Scott................... Executive Vice President, Chief Financial None
Officer and Director
Hardwick Simmons................... Chief Executive Officer, President and None
Director
Lee B. Spencer, Jr................. General Counsel, Executive Vice President and None
Director
</TABLE>
(ii) Information concerning the officers and directors of Prudential Mutual
Fund Distributors, Inc. is set forth below.
<TABLE>
<S> <C> <C>
Joanne Accurso-Soto................ Vice President None
Dennis Annarumma................... Vice President, Assistant Treasurer and None
Assistant Comptroller
Phyllis J. Berman.................. Vice President None
Brendan D. Boyle................... Chairman and Director None
Stephen P . Fisher................. Vice President None
Frank W. Giordano.................. Executive Vice President, General Counsel, None
Secretary and Director
Robert F. Gunia.................... Executive Vice President, Treasurer, Vice President
Comptroller and Director
Timothy J. O'Brien................. President, Chief Executive Officer, Chief None
Operating Officer and Director
Richard A. Redeker................. Director President and
Trustee
Andrew J. Varley................... Vice President None
Anita L. Whelan.................... Vice President and Assistant Secretary None
<FN>
- --------------
(1) The address of each person named is One Seaport Plaza, New York, NY 10292 unless otherwise
indicated.
</TABLE>
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, The Prudential Investment Corporation, Prudential Plaza,
751 Broad Street, Newark, New Jersey 07102 the Registrant, One
C-8
<PAGE>
Seaport Plaza, New York, New York 10292, and Prudential Mutual Fund Services,
Inc., Raritan Plaza One, Edison, New Jersey 08837. Documents required by Rules
31a-1 (b)(5), (6), (7), (9), (10) and (11) and 31a-1(f) will be kept at Two
Gateway Center, Newark, New Jersey 07102. Documents required by Rules
31a-1(b)(4) and (11) and 31a-1(d) at One Seaport Plaza and the remaining
accounts, books and other documents required by such other pertinent provisions
of Section 31(a) and the Rules promulgated thereunder will be kept by State
Street Bank and Trust Company and Prudential Mutual Fund Services, Inc.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is Managed --
Manager" and "How the Fund is Managed -- Distributor" in the Prospectus and the
captions "Manager" and "Distributor" in the Statement of Additional Information,
constituting Parts A and B, respectively, of this Registration Statement,
Registrant is not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS
The Registrant hereby undertakes to furnish each person to whom a Prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
and the State of New York, on July 24, 1995.
PRUDENTIAL ALLOCATION FUND
/s/ Richard A. Redeker
-----------------------------------------------------------------------
(RICHARD A. REDEKER, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------- ---------------------------------- ----------------
<S> <C> <C>
/s/ Susan C. Cote Treasurer and Principal Financial July 24, 1995
- --------------------------------- and Accounting Officer
SUSAN C. COTE
/s/ Edward D. Beach Trustee July 24, 1995
- ---------------------------------
EDWARD D. BEACH
/s/ Donald D. Lennox Trustee July 24, 1995
- ---------------------------------
DONALD D. LENNOX
/s/ Douglas H. McCorkindale Trustee July 24, 1995
- ---------------------------------
DOUGLAS H. MCCORKINDALE
/s/ Thomas T. Mooney Trustee July 24, 1995
- ---------------------------------
THOMAS T. MOONEY
/s/ Richard A. Redeker Trustee and President July 24, 1995
- ---------------------------------
RICHARD A. REDEKER
/s/ Louis A. Weil, III Trustee July 24, 1995
- ---------------------------------
LOUIS A. WEIL, III
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- ------------------------------------------------------------------------- ----
<C> <S> <C>
1. (a) Amended and Restated Declaration of Trust. Incorporated by
reference to Exhibit No. 1(a) to Post-Effective Amendment No. 13 to
the Registration Statement on Form N-1A filed via EDGAR on September
29, 1994 (File No. 33-12531).
(b) Amended and Restated Certificate of Designation.*
2. By-Laws of the Registrant. Incorporated by reference to Exhibit No.
2 to Post-Effective Amendment No. 13 to the Registration Statement
on Form N-1A filed via EDGAR on September 29, 1994 (File No.
33-12531).
4. (a) Specimen receipt for shares of beneficial interest issued by the
Registrant. Incorporated by reference to Exhibit No. 4 to
Post-Effective Amendment No. 2 to the Registration Statement on Form
N-1A filed on March 1, 1988 (File No. 33-12531).
(b) Specimen receipt for Class A shares of beneficial interest of
the Conservatively Managed Portfolio of the Registrant. Incorporated
by reference to Exhibit No. 4(b) to Post-Effective Amendment No. 7
to the Registration Statement on Form N-1A filed on November 30,
1990 (File No. 33-12531).
(c) Specimen receipt for Class A and Class B shares of beneficial
interest of the Strategy Portfolio. Incorporated by reference to
Exhibit No. 4(c) to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed on November 30, 1990 (File
No. 33-12531).
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc. Incorporated by reference to Exhibit
No. 5(a) to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A filed on October 31, 1989 (File No.
33-12531).
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. Incorporated by
reference to Exhibit No. 5(b) to Post-Effective Amendment No.4 to
the Registration Statement on Form N-1A filed on October 31, 1989
(File No. 33-12531).
6. (a) Distribution Agreement for Class A shares. Incorporated by
reference to Exhibit No. 6(a) to Post-Effective Amendment No. 13 to
the Registration Statement on Form N-1A filed via EDGAR on September
29, 1994 (File No. 33-12531).
(b) Distribution Agreement for Class B shares. Incorporated by
reference to Exhibit No. 6(b) to Post-Effective Amendment No. 13 to
the Registration Statement on Form N-1A filed via EDGAR on September
29, 1994 (File No. 33-12531).
(c) Distribution Agreement for Class C shares. Incorporated by
reference to Exhibit No. 6(c) to Post-Effective Amendment No. 13 to
the Registration Statement on Form N-1A filed via EDGAR on September
29, 1994 (File No. 33-12531).
8. (a) Custodian Contract betwen the Registrant and State Street Bank
and Trust Company. Incorporated by reference to Exhibit No. 8 to
Post-Effective Amendment No. 4 to the Registration Statement on Form
N-1A filed on October 31, 1989 (File No. 33-12531).
(b) Amendment to Custodian Contract. Incorporated by reference to
Exhibit No. 8(b) to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed on November 30, 1990 (File
No. 33-12531).]
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorpo-
rated by reference to Exhibit No. 9 to Post-Effective Amendment No.
4 to the Registration Statement on Form N-1A
filed on October 31, 1989 (File No. 33-12531).
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
10. Opinion of Counsel. Incorporated by reference to Exhibit No. 10 to
Pre-Effective Amendment No. 2 to the Registration Statement on Form
N-1A filed on August 31, 1987 (File No. 33-12531).
11. Consent of Independent Auditors.*
13. Purchase Agreement. Incorporated by reference to Exhibit No. 13 to
Pre-Effective Amendment No. 2 to the Registration Statement on Form
N-1A filed on August 31, 1987 (File No. 33-12531).
15. (a) Distribution and Service Plan for Class A shares. Incorporated
by reference to Exhibit No. 15(a) to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A filed via EDGAR on
September 29, 1994 (File No. 33-12531).
(b) Distribution and Service Plan for Class B shares. Incorporated
by reference to Exhibit No. 15(b) to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A filed via EDGAR on
September 29, 1994 (File No. 33-12531).
(c) Distribution and Service Plan for Class C shares. Incorporated
by reference to Exhibit No. 15(c) to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A filed via EDGAR on
September 29, 1994 (File No. 33-12531).
16. (a) Schedule of Computation of Performance Quotations. Incorporated
by reference to Exhibit No. 16 to Post-Effective Amendment No. 4 to
the Registration Statement on Form N-1A filed on October 31, 1989
(File No. 33-12531).
(b) Schedule of Computation of Performance Quotations for Class A
shares. Incorporated by reference to Exhibit No. 16(b) to
Post-Effective Amendment No. 7 to the Registration Statement on Form
N-1A filed on November 30,
1990 (File No. 33-12531).
27. Financial Data Schedules.*
<FN>
- --------------
* Filed herewith
</TABLE>
<PAGE>
AMENDED AND RESTATED CERTIFICATE OF DESIGNATION
PRUDENTIAL ALLOCATION FUND
The undersigned, being the Assistant Secretary of Prudential FlexiFund
(hereinafter referred to as the "Trust"), a trust with transferable shares of
the type commonly called a Massachusetts business trust, DOES HEREBY CERTIFY
that, pursuant to the authority conferred upon the Trustees of the Trust by
Section 6.9 and Section 9.3 of the Declaration of Trust dated February 23,
1987, as amended to date (referred to as the "Declaration of Trust"), and by
the affirmative vote of a majority of the Trustees at a meeting duly called
and held on May 3, 1995, the Amended and Restated Establishment and
Designation of Series of Shares of Beneficial Interest, $.01 Par Value, dated
November 16, 1990 and filed with the Secretary of The Commonwealth of
Massachusetts on November 27, 1990, the Certificate of Designation dated
January 11, 1990 and filed with the Secretary of The Commonwealth of
Massachusetts on January 18, 1990, and the Amended and Restated Certificate of
Designation dated July 27, 1994 and filed with the Secretary of The
Commonwealth of Massachusetts on July 28, 1994 amending the Declaration of
Trust are amended and restated effective as of September 29, 1995, as follows:
The shares of beneficial interest of the Trust are divided into two
separate series, each series to have the following special and relative rights:
(1) The series shall be designated as follows:
Balanced Portfolio
Strategy Portfolio
(2) Each series shall be authorized to invest in cash, securities,
instruments and other property as from time to time described in the Trust's
then currently effective registration statement under the Securities Act of
1933. Each share of beneficial interest of each series ("share") shall be
redeemable, shall be entitled to one vote or fraction thereof in respect of a
fractional share on matters on which shares of that series shall be entitled
to vote and shall represent a pro rata beneficial interest in the assets
allocated to that series, and shall be entitled to
<PAGE>
receive its pro rata share of net assets of that series upon
liquidation of that series, all as provided in the Declaration of Trust.
(3) The shares of beneficial interest of each series of the Trust
are classified into three classes, designated "Class A Shares," "Class B
Shares," and "Class C Shares." An unlimited number of each such class of each
such series may be issued. All Class A Shares and Class B Shares of each such
series outstanding on the date on which the amendments provided for herein
become effective shall be and continue to be Class A Shares and Class B Shares,
respectively, of such series.
(4) The holders of Class A Shares, Class B Shares and Class C
Shares of each series having the same shall be considered Shareholders of such
series, and shall have the relative rights and preferences set forth herein
and in the Declaration of Trust with respect to Shares of such series, and
shall also be considered Shareholders of the Trust for all other purposes
(including, without limitation, for purposes of receiving reports and notices
and the right to vote) and, for matters reserved to the Shareholders of one or
more other classes or series by the Declaration of Trust or by any instrument
establishing and designating a particular class or series, or as required by
the Investment Company Act of 1940 and/or the rules and regulations of the
Securities and Exchange Commission thereunder (collectively, as from time to
time in effect, the "1940 Act") or other applicable laws.
(5) The Class A Shares, Class B Shares and Class C Shares of each
series shall represent an equal proportionate interest in the share of such
class in the Trust Property belonging to that series, adjusted for any
liabilities specifically allocable to the Shares of that class, and each Share
of any such class shall have identical voting, dividend, liquidation and other
rights and the same terms and conditions, except that the expenses related
directly or indirectly to the distribution of the Shares of a class, and any
service fees to which such class is subject (as determined by the Trustees),
shall be borne solely by such class, and such expenses shall be appropriately
reflected in the determination of net asset value and the dividend,
distribution and liquidation rights of such class.
-2-
<PAGE>
(6) (a) Class A Shares of each series shall be subject to (i)
a front-end sales charge and (ii) (A) an asset-based sales charge pursuant to
a plan under Rule 12b-1 of the 1940 Act (a "Plan"), and/or (B) a service fee
for the maintenance of shareholder accounts and personal services, in such
amounts as shall be determined from time to time.
(b) Class B Shares of each series shall be subject to
(i) a contingent deferred sales charge and (ii) (A) an asset-based sales
charge pursuant to a Plan, and/or (B) a service fee for the maintenance of
shareholder accounts and personal services, in such amounts as shall be
determined from time to time.
(c) Class C Shares of each series shall be subject to (i)
a contingent deferred sales charge and (ii) (A) an asset-based sales charge
pursuant to a Plan, and/or (B) a service fee for the maintenance of shareholder
accounts and personal services, in such amounts as shall be determined from
time to time.
(7) Subject to compliance with the requirements of the 1940 Act,
the Trustees shall have the authority to provide that holders of Shares of any
series shall have the right to convert said Shares into Shares of one or more
other series of registered investment companies specified for the purpose in
this Trust's Prospectus for the series accorded such right, that holders of any
class of Shares of a series shall have the right to convert such Shares into
Shares of one or more other classes of such series, and that Shares of any
class of a series shall be automatically converted into Shares of another
class of such series, in each case in accordance with such requirements and
procedures as the Trustees may from time to time establish. The requirements
and procedures applicable to such mandatory or optional conversion of Shares
of any such class or series shall be set forth in the Prospectus in effect
with respect to such Shares.
(8) Shareholders of each series and class shall vote as a separate
series or class, as the case may be, on any matter to the extent required by,
and any matter shall be deemed to have been effectively acted upon with
respect to any series or class as provided in, Rule 18f-2, as from time to
time in effect, under the 1940 Act, or any successor rule and by the
Declaration of Trust. Except as otherwise required by the 1940 Act, the
Shareholders of each class of any series having
-3-
<PAGE>
more than one class of Shares, voting as a separate class, shall have sole and
exclusive voting rights with respect to the provisions of any Plan applicable
to Shares of such class, and shall have no voting rights with respect to
provisions of any Plan applicable solely to any other class of Shares of such
series.
(9) The assets and liabilities of the Trust shall be allocated
among the above-referenced series as set forth in Section 6.9 of the
Declaration of Trust, except as provided below.
(a) Costs incurred and payable by the Trust in connection
with its organization and initial registration and public offering of shares
shall be divided equally between the Balanced Portfolio and Strategy Portfolio
and shall be amortized for each such series over the period beginning on the
date that such costs become payable and ending sixty months after the
commencement of operations of the Trust.
(b) The liabilities, expenses, costs, charges or reserves
of the Trust (other than the investment advisory fee or the organization
expenses paid by the Trust) which are not readily identifiable as belonging to
any particular series shall be allocated among the series on the basis of
their relative average daily net assets.
(10) The Trustees (including any successor Trustees) shall have the
right at any time and from time to time to reallocate assets and expenses or
to change the designation of any series now or hereafter created, or to
otherwise change the special and relative rights of any such series provided
that such change shall not adversely affect the rights of holders of shares of
a series.
IN WITNESS WHEREOF, the undersigned has set her hand and seal this
19th day of July, 1995.
/s/ Marguerite E. H. Morrison
____________________________________
Marguerite E. H. Morrison,
Assistant Secretary
-4-
<PAGE>
ACKNOWLEDGMENT
STATE OF NEW YORK )
) SS July 19, 1995
COUNTY OF NEW YORK )
Then personally appeared before me the above named Marguerite
E. H. Morrison, Assistant Secretary, and acknowledged the foregoing instrument
to be her free act and deed.
/s/ Ronald Ambland
______________________________________
Notary Public
-5-
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 14 to Registration
Statement No. 33-12531 of Prudential Allocation Fund of our reports dated
September 14, 1994, appearing in the Statement of Additional Information,
which is a part of such Registration Statement, and to the references to us
under the headings "Financial Highlights" in the Prospectus, which is a part
of such Registration Statement, and "Custodian, Transfer and Dividend
Disbursing Agent and Independent Accountants" in the Statement of Additional
Information.
Deloitte & Touche LLP
New York, New York
July 21, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> CONSERVATIVELY MANAGED PORTFOLIO - CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
<INVESTMENTS-AT-COST> 476,104,179
<INVESTMENTS-AT-VALUE> 493,040,569
<RECEIVABLES> 8,847,052
<ASSETS-OTHER> 182,081
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 502,069,702
<PAYABLE-FOR-SECURITIES> 16,838,273
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,111,255
<TOTAL-LIABILITIES> 18,949,528
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 461,556,208
<SHARES-COMMON-STOCK> 43,551,047
<SHARES-COMMON-PRIOR> 29,388,407
<ACCUMULATED-NII-CURRENT> 1,867,647
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,759,929
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,936,390
<NET-ASSETS> 483,120,174
<DIVIDEND-INCOME> 3,341,833
<INTEREST-INCOME> 13,871,237
<OTHER-INCOME> 0
<EXPENSES-NET> 8,214,219
<NET-INVESTMENT-INCOME> 8,998,851
<REALIZED-GAINS-CURRENT> 8,854,437
<APPREC-INCREASE-CURRENT> (13,575,563)
<NET-CHANGE-FROM-OPS> 4,277,725
<EQUALIZATION> 1,077,644
<DISTRIBUTIONS-OF-INCOME> (10,699,693)
<DISTRIBUTIONS-OF-GAINS> (18,060,300)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 216,417,990
<NUMBER-OF-SHARES-REDEEMED> (80,947,022)
<SHARES-REINVESTED> 26,617,480
<NET-CHANGE-IN-ASSETS> 138,683,824
<ACCUMULATED-NII-PRIOR> 2,707,799
<ACCUMULATED-GAINS-PRIOR> 11,727,706
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,743,056
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,214,219
<AVERAGE-NET-ASSETS> 422,008,000
<PER-SHARE-NAV-BEGIN> 11.75
<PER-SHARE-NII> 0.33
<PER-SHARE-GAIN-APPREC> (0.05)
<PER-SHARE-DIVIDEND> (0.37)
<PER-SHARE-DISTRIBUTIONS> (0.54)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.12
<EXPENSE-RATIO> 1.23
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> CONSERVATIVELY MANAGED PORTFOLIO - CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
<INVESTMENTS-AT-COST> 476,104,179
<INVESTMENTS-AT-VALUE> 493,040,569
<RECEIVABLES> 8,847,052
<ASSETS-OTHER> 182,081
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 502,069,702
<PAYABLE-FOR-SECURITIES> 16,838,273
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,111,255
<TOTAL-LIABILITIES> 18,949,528
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 461,556,208
<SHARES-COMMON-STOCK> 43,551,047
<SHARES-COMMON-PRIOR> 29,388,407
<ACCUMULATED-NII-CURRENT> 1,867,647
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,759,929
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,936,390
<NET-ASSETS> 483,120,174
<DIVIDEND-INCOME> 3,341,833
<INTEREST-INCOME> 13,871,237
<OTHER-INCOME> 0
<EXPENSES-NET> 8,214,219
<NET-INVESTMENT-INCOME> 8,998,851
<REALIZED-GAINS-CURRENT> 8,854,437
<APPREC-INCREASE-CURRENT> (13,575,563)
<NET-CHANGE-FROM-OPS> 4,277,725
<EQUALIZATION> 1,077,644
<DISTRIBUTIONS-OF-INCOME> (10,699,693)
<DISTRIBUTIONS-OF-GAINS> (18,060,300)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 216,417,990
<NUMBER-OF-SHARES-REDEEMED> (80,947,022)
<SHARES-REINVESTED> 26,617,480
<NET-CHANGE-IN-ASSETS> 138,683,824
<ACCUMULATED-NII-PRIOR> 2,707,799
<ACCUMULATED-GAINS-PRIOR> 11,727,706
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,743,056
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,214,219
<AVERAGE-NET-ASSETS> 422,008,000
<PER-SHARE-NAV-BEGIN> 11.72
<PER-SHARE-NII> 0.24
<PER-SHARE-GAIN-APPREC> (0.05)
<PER-SHARE-DIVIDEND> (0.28)
<PER-SHARE-DISTRIBUTIONS> (0.54)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.09
<EXPENSE-RATIO> 2.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> STRATEGY PORTFOLIO - CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
<INVESTMENTS-AT-COST> 374,612,190
<INVESTMENTS-AT-VALUE> 388,040,662
<RECEIVABLES> 5,338,150
<ASSETS-OTHER> 97,665
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 393,476,477
<PAYABLE-FOR-SECURITIES> 8,004,180
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,847,753
<TOTAL-LIABILITIES> 9,851,933
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 358,612,295
<SHARES-COMMON-STOCK> 33,228,879
<SHARES-COMMON-PRIOR> 32,737,228
<ACCUMULATED-NII-CURRENT> 1,547,219
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10,160,450
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,304,580
<NET-ASSETS> 383,624,544
<DIVIDEND-INCOME> 4,897,587
<INTEREST-INCOME> 10,028,623
<OTHER-INCOME> 0
<EXPENSES-NET> 7,754,366
<NET-INVESTMENT-INCOME> 7,171,844
<REALIZED-GAINS-CURRENT> 14,878,620
<APPREC-INCREASE-CURRENT> (13,682,115)
<NET-CHANGE-FROM-OPS> 8,368,349
<EQUALIZATION> 48,191
<DISTRIBUTIONS-OF-INCOME> 5,753,522
<DISTRIBUTIONS-OF-GAINS> 10,897,997
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 76,851,235
<NUMBER-OF-SHARES-REDEEMED> (86,835,010)
<SHARES-REINVESTED> 15,914,742
<NET-CHANGE-IN-ASSETS> 30,999,026
<ACCUMULATED-NII-PRIOR> 3,160,863
<ACCUMULATED-GAINS-PRIOR> 3,092,901
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,555,883
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,754,366
<AVERAGE-NET-ASSETS> 393,213,000
<PER-SHARE-NAV-BEGIN> 11.82
<PER-SHARE-NII> 0.30
<PER-SHARE-GAIN-APPREC> 0.05
<PER-SHARE-DIVIDEND> (0.23)
<PER-SHARE-DISTRIBUTIONS> (0.34)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.60
<EXPENSE-RATIO> 1.26
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> STRATEGY PORTFOLIO - CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
<INVESTMENTS-AT-COST> 374,612,190
<INVESTMENTS-AT-VALUE> 388,040,662
<RECEIVABLES> 5,338,150
<ASSETS-OTHER> 97,665
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 393,476,477
<PAYABLE-FOR-SECURITIES> 8,004,180
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,847,753
<TOTAL-LIABILITIES> 9,851,933
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 358,612,295
<SHARES-COMMON-STOCK> 33,228,879
<SHARES-COMMON-PRIOR> 32,737,228
<ACCUMULATED-NII-CURRENT> 1,547,219
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10,160,450
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,304,580
<NET-ASSETS> 383,624,544
<DIVIDEND-INCOME> 4,897,587
<INTEREST-INCOME> 10,028,623
<OTHER-INCOME> 0
<EXPENSES-NET> 7,754,366
<NET-INVESTMENT-INCOME> 7,171,844
<REALIZED-GAINS-CURRENT> 14,878,620
<APPREC-INCREASE-CURRENT> (13,682,115)
<NET-CHANGE-FROM-OPS> 8,368,349
<EQUALIZATION> 48,191
<DISTRIBUTIONS-OF-INCOME> 5,753,522
<DISTRIBUTIONS-OF-GAINS> 10,897,997
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 76,851,235
<NUMBER-OF-SHARES-REDEEMED> (86,835,010)
<SHARES-REINVESTED> 15,914,742
<NET-CHANGE-IN-ASSETS> 30,999,026
<ACCUMULATED-NII-PRIOR> 3,160,863
<ACCUMULATED-GAINS-PRIOR> 3,092,901
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,555,883
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,754,366
<AVERAGE-NET-ASSETS> 393,213,000
<PER-SHARE-NAV-BEGIN> 11.79
<PER-SHARE-NII> 0.21
<PER-SHARE-GAIN-APPREC> 0.05
<PER-SHARE-DIVIDEND> (0.17)
<PER-SHARE-DISTRIBUTIONS> (0.34)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.54
<EXPENSE-RATIO> 2.03
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000811444
<NAME> PRUDENTIAL ALLOCATION FUND
<SERIES>
<NUMBER> 5
<NAME> PRU ALLOCATION: CONSERVATIVELY MANAGED PORT (CLASS A)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-END> JAN-31-1995
<INVESTMENTS-AT-COST> 46,253,675
<INVESTMENTS-AT-VALUE> 461,262,877
<RECEIVABLES> 31,086,407
<ASSETS-OTHER> 141,018
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 492,490,302
<PAYABLE-FOR-SECURITIES> 1,324,503
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 30,434,521
<TOTAL-LIABILITIES> 31,759,024
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 459,511,903
<SHARES-COMMON-STOCK> 43,364,580
<SHARES-COMMON-PRIOR> 43,178,113
<ACCUMULATED-NII-CURRENT> 3,456,087
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,753,079
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,989,791)
<NET-ASSETS> 460,731,278
<DIVIDEND-INCOME> 1,886,382
<INTEREST-INCOME> 9,110,492
<OTHER-INCOME> 0
<EXPENSES-NET> 4,430,378
<NET-INVESTMENT-INCOME> 6,566,496
<REALIZED-GAINS-CURRENT> 7,428,273
<APPREC-INCREASE-CURRENT> (20,926,181)
<NET-CHANGE-FROM-OPS> (6,931,412)
<EQUALIZATION> (55,610)
<DISTRIBUTIONS-OF-INCOME> (4,922,446)
<DISTRIBUTIONS-OF-GAINS> (8,435,123)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 43,780,193
<NUMBER-OF-SHARES-REDEEMED> (58,320,806)
<SHARES-REINVESTED> 12,496,308
<NET-CHANGE-IN-ASSETS> (22,388,896)
<ACCUMULATED-NII-PRIOR> 1,867,647
<ACCUMULATED-GAINS-PRIOR> 2,759,929
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,565,151
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,430,378
<AVERAGE-NET-ASSETS> 39,095,000
<PER-SHARE-NAV-BEGIN> 11.12
<PER-SHARE-NII> 0.19
<PER-SHARE-GAIN-APPREC> (0.30)
<PER-SHARE-DIVIDEND> (0.15)
<PER-SHARE-DISTRIBUTIONS> (0.20)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.66
<EXPENSE-RATIO> 1.16
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000811444
<NAME> PRUDENTIAL ALLOCATION FUND
<SERIES>
<NUMBER> 6
<NAME> PRU ALLOCATION: CONSERVATIVELY MANAGED PORT (CLASS B)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-END> JAN-31-1995
<INVESTMENTS-AT-COST> 46,253,675
<INVESTMENTS-AT-VALUE> 461,262,877
<RECEIVABLES> 31,086,407
<ASSETS-OTHER> 141,018
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 492,490,302
<PAYABLE-FOR-SECURITIES> 1,324,503
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 30,434,521
<TOTAL-LIABILITIES> 31,759,024
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 459,511,903
<SHARES-COMMON-STOCK> 43,364,580
<SHARES-COMMON-PRIOR> 43,178,113
<ACCUMULATED-NII-CURRENT> 3,456,087
<OVERDISTRIBUTION-NII> 0
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,989,791)
<NET-ASSETS> 460,731,278
<DIVIDEND-INCOME> 1,886,382
<INTEREST-INCOME> 9,110,492
<OTHER-INCOME> 0
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<NET-INVESTMENT-INCOME> 6,566,496
<REALIZED-GAINS-CURRENT> 7,428,273
<APPREC-INCREASE-CURRENT> (20,926,181)
<NET-CHANGE-FROM-OPS> (6,931,412)
<EQUALIZATION> (55,610)
<DISTRIBUTIONS-OF-INCOME> (4,922,446)
<DISTRIBUTIONS-OF-GAINS> (8,435,123)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 43,780,193
<NUMBER-OF-SHARES-REDEEMED> (58,320,806)
<SHARES-REINVESTED> 12,496,308
<NET-CHANGE-IN-ASSETS> (22,388,896)
<ACCUMULATED-NII-PRIOR> 1,867,647
<ACCUMULATED-GAINS-PRIOR> 2,759,929
<OVERDISTRIB-NII-PRIOR> 0
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<AVERAGE-NET-ASSETS> 438,050,000
<PER-SHARE-NAV-BEGIN> 11.09
<PER-SHARE-NII> 0.14
<PER-SHARE-GAIN-APPREC> (0.30)
<PER-SHARE-DIVIDEND> (0.11)
<PER-SHARE-DISTRIBUTIONS> (0.20)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.62
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000811444
<NAME> PRUDENTIAL ALLOCATION FUND
<SERIES>
<NUMBER> 7
<NAME> PRU ALLOCATION: CONSERVATIVELY MANAGED PORT (CLASS C)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-END> JAN-31-1995
<INVESTMENTS-AT-COST> 46,253,675
<INVESTMENTS-AT-VALUE> 461,262,877
<RECEIVABLES> 31,086,407
<ASSETS-OTHER> 141,018
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 492,490,302
<PAYABLE-FOR-SECURITIES> 1,324,503
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 30,434,521
<TOTAL-LIABILITIES> 31,759,024
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 459,511,903
<SHARES-COMMON-STOCK> 43,364,580
<SHARES-COMMON-PRIOR> 43,178,113
<ACCUMULATED-NII-CURRENT> 3,456,087
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,753,079
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,989,791)
<NET-ASSETS> 460,731,278
<DIVIDEND-INCOME> 1,886,382
<INTEREST-INCOME> 9,110,492
<OTHER-INCOME> 0
<EXPENSES-NET> 4,430,378
<NET-INVESTMENT-INCOME> 6,566,496
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<APPREC-INCREASE-CURRENT> (20,926,181)
<NET-CHANGE-FROM-OPS> (6,931,412)
<EQUALIZATION> (55,610)
<DISTRIBUTIONS-OF-INCOME> (4,922,446)
<DISTRIBUTIONS-OF-GAINS> (8,435,123)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 43,780,193
<NUMBER-OF-SHARES-REDEEMED> (58,320,806)
<SHARES-REINVESTED> 12,496,308
<NET-CHANGE-IN-ASSETS> (22,388,896)
<ACCUMULATED-NII-PRIOR> 1,867,647
<ACCUMULATED-GAINS-PRIOR> 2,759,929
<OVERDISTRIB-NII-PRIOR> 0
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<PER-SHARE-NAV-BEGIN> 11.12
<PER-SHARE-NII> 0.14
<PER-SHARE-GAIN-APPREC> (0.33)
<PER-SHARE-DIVIDEND> (0.11)
<PER-SHARE-DISTRIBUTIONS> (0.20)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.62
<EXPENSE-RATIO> 1.91
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000811444
<NAME> PRUDENTIAL ALLOCATION FUND - STRATEGY PORFOLIO
<SERIES>
<NUMBER> 8
<NAME> PRUDENTIAL ALLOCATION - STRATEGY PORTFOLIO (CLASS A)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-END> JAN-31-1995
<INVESTMENTS-AT-COST> 354,736,290
<INVESTMENTS-AT-VALUE> 354,024,566
<RECEIVABLES> 22,165,376
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<OTHER-ITEMS-ASSETS> 0
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<SENIOR-LONG-TERM-DEBT> 0
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<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 343,885,433
<SHARES-COMMON-STOCK> 31,945,042
<SHARES-COMMON-PRIOR> 30,659,235
<ACCUMULATED-NII-CURRENT> 1,537,918
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,999,959
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (441,459)
<NET-ASSETS> 347,981,851
<DIVIDEND-INCOME> 2,391,069
<INTEREST-INCOME> 5,407,053
<OTHER-INCOME> 0
<EXPENSES-NET> 3,754,320
<NET-INVESTMENT-INCOME> 4,043,802
<REALIZED-GAINS-CURRENT> 2,986,560
<APPREC-INCREASE-CURRENT> (13,746,039)
<NET-CHANGE-FROM-OPS> (6,715,677)
<EQUALIZATION> (171,082)
<DISTRIBUTIONS-OF-INCOME> (3,116,042)
<DISTRIBUTIONS-OF-GAINS> (10,913,030)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 23,500,501
<NUMBER-OF-SHARES-REDEEMED> (51,713,673)
<SHARES-REINVESTED> 13,486,310
<NET-CHANGE-IN-ASSETS> (35,642,693)
<ACCUMULATED-NII-PRIOR> 1,547,219
<ACCUMULATED-GAINS-PRIOR> 10,160,450
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,216,074
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,754,320
<AVERAGE-NET-ASSETS> 34,864,000
<PER-SHARE-NAV-BEGIN> 11.60
<PER-SHARE-NII> 0.17
<PER-SHARE-GAIN-APPREC> (0.34)
<PER-SHARE-DIVIDEND> (0.14)
<PER-SHARE-DISTRIBUTIONS> (0.34)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.95
<EXPENSE-RATIO> 1.36
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000811444
<NAME> PRUDENTIAL ALLOCATION FUND - STRATEGY PORFOLIO
<SERIES>
<NUMBER> 9
<NAME> PRUDENTIAL ALLOCATION - STRATEGY PORTFOLIO (CLASS B)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-END> JAN-31-1995
<INVESTMENTS-AT-COST> 354,736,290
<INVESTMENTS-AT-VALUE> 354,024,566
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<SHARES-COMMON-PRIOR> 30,659,235
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<OVERDISTRIBUTION-NII> 0
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (441,459)
<NET-ASSETS> 347,981,851
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<INTEREST-INCOME> 5,407,053
<OTHER-INCOME> 0
<EXPENSES-NET> 3,754,320
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<DISTRIBUTIONS-OF-GAINS> (10,913,030)
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<NUMBER-OF-SHARES-SOLD> 23,500,501
<NUMBER-OF-SHARES-REDEEMED> (51,713,673)
<SHARES-REINVESTED> 13,486,310
<NET-CHANGE-IN-ASSETS> (35,642,693)
<ACCUMULATED-NII-PRIOR> 1,547,219
<ACCUMULATED-GAINS-PRIOR> 10,160,450
<OVERDISTRIB-NII-PRIOR> 0
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<PER-SHARE-NAV-BEGIN> 11.54
<PER-SHARE-NII> 0.12
<PER-SHARE-GAIN-APPREC> (0.34)
<PER-SHARE-DIVIDEND> (0.09)
<PER-SHARE-DISTRIBUTIONS> (0.34)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.89
<EXPENSE-RATIO> 2.11
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000811444
<NAME> PRUDENTIAL ALLOCATION FUND - STRATEGY PORFOLIO
<SERIES>
<NUMBER> 10
<NAME> PRUDENTIAL ALLOCATION - STRATEGY PORTFOLIO (CLASS C)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-END> JAN-31-1995
<INVESTMENTS-AT-COST> 354,736,290
<INVESTMENTS-AT-VALUE> 354,024,566
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<OTHER-ITEMS-LIABILITIES> 1,966,484
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<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 343,885,433
<SHARES-COMMON-STOCK> 31,945,042
<SHARES-COMMON-PRIOR> 30,659,235
<ACCUMULATED-NII-CURRENT> 1,537,918
<OVERDISTRIBUTION-NII> 0
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (441,459)
<NET-ASSETS> 347,981,851
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<INTEREST-INCOME> 5,407,053
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<EXPENSES-NET> 3,754,320
<NET-INVESTMENT-INCOME> 4,043,802
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<APPREC-INCREASE-CURRENT> (13,746,039)
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<NUMBER-OF-SHARES-SOLD> 23,500,501
<NUMBER-OF-SHARES-REDEEMED> (51,713,673)
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<NET-CHANGE-IN-ASSETS> (35,642,693)
<ACCUMULATED-NII-PRIOR> 1,547,219
<ACCUMULATED-GAINS-PRIOR> 10,160,450
<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 1,216,074
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,754,320
<AVERAGE-NET-ASSETS> 336,159,000
<PER-SHARE-NAV-BEGIN> 11.54
<PER-SHARE-NII> 0.12
<PER-SHARE-GAIN-APPREC> (0.34)
<PER-SHARE-DIVIDEND> (0.09)
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<PER-SHARE-NAV-END> 10.89
<EXPENSE-RATIO> 2.11
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
